UK-based hedge fund chief fires warning shot to vigilante traders

The chief economist of a major UK hedge fund has said it is ‘ludicrous’ to suggest small investors managed to subvert the financial system during a trading frenzy this week. 

Savvas Savouri, of Toscafund, dismissed the stock market events of recent days as a one-off ‘lottery win’ for small investors. 

It began when traders banded together on social media site Reddit and started buying into certain US stocks – primarily Gamestop, a struggling chain of video game stores. 

Gamestop was being heavily shorted, or short-sold, by hedge funds – meaning they would benefit if the shares fell, but stood to make heavy losses if they climbed. 

In an unprecedented display of vigilante-style trading, small investors encouraged each other on Reddit to buy shares in Gamestop, causing the share price to rise and the hedge funds to bleed money. For many investors, this was a way of getting revenge on the faceless Wall Street fat-cats they blamed for their own financial woes. 

Commentators heralded the moment as a step-change in the world of trading. Justin Urquhart Stewart, cofounder of investment firm 7IM, said it showed just how social media could ‘corral the power’ of savers.

But Savouri  told the Mail: ‘There were people saying: ‘You boys have had your comeuppance.’ I have been doing this for 30 years and the only thing I can compare it to is the third round of the FA Cup in football, when the smaller clubs come up against big players. 

‘In all the history of the FA Cup, it has eventually been won by big clubs. And that’s what will happen here too – the hedge funds will come out on top. For small investors, this is their lottery win.’ Several hedge funds have suffered heavy losses following the Reddit traders’ attack. New York firm Melvin Capital, has reportedly lost more than £3billion so far this year. 

There were signs that the trend may have crossed the Atlantic to the UK earlier this week too, as heavily shorted stocks such as Cineworld, Hammerson and Pearson appeared to climb for no apparent reason although that fizzled out towards the end of the week. But the Gamestop hype has continued. Shares were up by another 74 per cent yesterday. 

Toscafund was not shorting any of the stocks involved, Savouri said. But he added that any traders who thought the Gamestop attack could be repeated were in for a rude awakening. He said: ‘They think they’ve slapped us on the a**e and they’re going to be able to keep doing it – that’s ludicrous. 

‘You only get one chance to blindside the professionals. They were lazy this time, partly because it seemed like an easy short – this is a bricks-and-mortar chain selling video games in the US, which is like trying to breathe life into a dead dog.’ 

Savouri also rubbish claims that this was a ‘democratisation’ of the financial world. ‘How many small-town Americans will think this is a new normal and destroy themselves, spending all their money just to lose it all? It will cause divorces, mental health issues, and I think the bravado will destroy entire communities.’ 

• Bitcoin was sent soaring after Tesla billionaire Elon Musk added a cryptic update to his Twitter page. The digital currency shot up from around $33,000 to more than $38,000 at one point yesterday, as Musk changed his Twitter profile to simply say ‘#bitcoin’. By the end of the day, bitcoin had pared some of its earlier gains but was still up more than 14 per cent at $38,082.