2021: The year when memes humbled hedge funds

From 4 Jan to 27 Jan alone, GameStop surged 1,900%, however, a string of trading platforms, including Robinhood, eventually stopped users from investing for a short time after a spike in volatility. Photo: Nick Zieminski/Reuters

The coronavirus pandemic has brought a new generation of investors to the stock market, with rising interest in cryptocurrencies, non-fungible tokens (NFTs), ethical investing, and more recently the metaverse.

Another area that proved popular with new retail traders in 2021 was “meme stocks”, as social-media-fuelled trading led to wild swings in the market.

Earlier this year GameStop (GME) and AMC (AMC), among others, saw a dramatic surge in value as Wall Street short-sellers and reddit WallStreetBets users clashed, causing a short squeeze on the stock.

A short squeeze forces those who bet against the stock to buy in order to forestall bigger losses, sending the stock price much higher.

This left Wall Street institutions such as hedge fund Melvin Capital, sitting on billions of dollars in losses, highlighting the new power and weight of retail investors in the market.

The New York-based investment management firm closed out of its GameStop short position on 27 January, ending month with $8bn (£6bn) in assets under management, compared to the $12.5bn it started the year with.

Interest in meme stocks continued to rise thanks to the fear of missing out, or FOMO, driven by traders sharing their returns on social media and touting the stock.

Watch: YouTube star trader Matt Kohrs: Wall Street 'permanently changed' by meme stocks and retail trading

From 4 Jan to 27 Jan alone, GameStop surged 1,900%, however, a string of trading platforms, including Robinhood, eventually stopped users from investing for a short time after a spike in volatility.

The buying ban sparked a furious backlash on social media platforms as it left them no choice but to either hold their position or sell. Meanwhile, hedge funds were free to trade those same stocks, without restrictions.

Robinhood’s decision to halt trading led to class action lawsuits, which claimed that the trading platform rigged the market against them and in favour of the Wall Street bigwigs.

GameStop is still up more than 700% year-to-date, despite a fall of around 70% off its 2021 highs. According to the latest figures, November's daily average trading volume was down more than 75% from last December, before the meme stock frenzy took off.

READ MORE: Hargreaves Lansdown boosted by surge in young people trading stocks

Meanwhile AMC has rocketed 1,100% since the start of the year, hitting an all-time high in mid-June. Earlier that month AMC warned investors not to “buy our stock right now”, sending the price down as much as 30% before it pared back some losses.

In a filing it said: "We believe that the recent volatility and our current market prices reflect market and trading dynamics unrelated to our underlying business, or macro or industry fundamentals, and we do not know how long these dynamics will last.

"Under the circumstances, we caution you against investing in our Class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment."

However, retail investors continued to buy up the stock, with AMC often trending on Twitter and promoted on YouTube by growing communities.

AMC stock over the last year. Chart: Yahoo Finance
AMC stock over the last year. Chart: Yahoo Finance

Investment platform Freetrade said in June that buy orders for AMC were up almost 300% in June, and became the most traded stock on the platform at the time. But trading volumes have since fallen an average of 64% from their highs.

Shares of Bed, Bath and Beyond (BBBY), Express (EXPR) and Koss (KOSS), which were all heavily shorted by Wall Street’s elite, were also caught up in the retail frenzy, as well as Sundial Growers (SNDL) and Blackberry (BB).

Experts cautioned on the meme-stock buying, warning traders that they could be left holding the bag if the price drops.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown said at the time: “We would advise investors to proceed with caution and avoid following the herd into hot stocks which are the subject of frenzied speculation. It is a highly risky strategy and people should only dabble at the edges of their portfolio with money they can afford to lose.’’

Watch: GME stock and AMC stock struggling but remain up big in 2021

Adam Aron, chief executive of AMC, and CFO Sean Goodman sold significant portions of the stock this month, with the former selling another $9.65m as part of his estate planning, after selling 625,000 shares of the company for around $25m in November.

AMC has also since announced plans to deepen its relationship with shareholders, revealing a new shareholder platform that will offer investors perks including offering free popcorn to investors that go back to the movies.

The company also got into the NFT space at the end of November when it offered 86,000 digital tokens to the first buyers of tickets to the new Spider-Man premiere. The offering helped generate the movie chain's second best one-day sales.

Read more: UK investors at risk as Brits pile into meme stock AMC

According to research from Nutmeg earlier this year, six in 10 people aged 25-34 have put more money in investments over the last year, compared to 38% of the population, with another notable interest from this group in stock picking.

As the rise in the DIY investor emerges, 21% of young investors admitted to being more likely to make and manage investments for themselves since the start of the pandemic.

The research discovered that 22% were also much more likely to invest in specific companies they see or hear about.

James McManus, chief investment officer at Nutmeg, said: “The Covid pandemic has caused financial difficulties for many people across the UK, but it’s pleasantly surprising to see the extent to which many young adults look set to emerge from the pandemic in a stronger financial position, and how much financial attitudes have been changed by the pandemic.

“Given millennials represent the largest age group in the UK, after baby boomers, these shifts in behaviour and attitudes towards investing are particularly significant and represent a huge opportunity for wealth creation - at both an individual and national level.”

Watch: What are SPACs?