Wall Street hedge funds have reaped massive profits during the pandemic, benefitting from market volatility. Following months of unprecedented growth, ‘novice’ retail traders have threatened their fortune. Has their winning streak come to an end?

Over the past year, the global stock market has been shaken by Covid-19 and the ensuing recession. Conversely, there has been a boom in the number of retail investors- spurred on by stimulus checks, spare time, and the accessibility of online trading platforms. Many such investors have been angered by what they perceive as displays of opulence by Wall Street – especially hedge funds who profited from the Global Financial Crisis.

A hedge fund is a rarely-accessible partnership between investors, who tend to be worth more than $1,000,000 or have an income greater than $200,000, and a fund manager. Such entities usually use unusual strategies to invest in liquid assets (assets which can be quickly converted into cash). One such method is short selling - a practice often employed by hedge funds to profit from a fall in stock price. A short seller borrows a broker’s shares, selling them before repurchasing them at a lower price, returning the stock to the lender and pocketing the difference. Short selling poses a risk to the seller as they could theoretically face infinite losses if the price rises instead of falls, as many internet investors have realised.

Two heavily shorted stocks have unexpectedly risen in price following the actions of a Reddit community, ‘r/WallStreetBets’, an online forum where members discuss aggressive investment strategies. Users have collaborated to boost the prices of AMC and GameStop stock, in particular. GameStop is an American brick-and-mortar video game retailer that has faced an economic downturn due to the advent of online services and store closures caused by Covid-19. It would seem sensible to predict further losses, resulting in a fall in value and stock price – yet this is not the case.

Urged on by billionaires including Elon Musk and Chamath Palihapitiya, these Reddit retail investors have bought shares en masse, driving the price up to $469.42 a share on Thursday, compared to $4.06 a year ago. What is happening with GameStop is a short squeeze; short-sellers are compelled to repurchase the stock, which they have oversold, to return it to their lenders and avoid larger losses as the stock rises above the original fee, raising the price further.

As forecasted, this has negatively impacted hedge funds. Melvin Capital is one such business, who been forced to accept a $2.75 billion bailout from other hedge funds, incurring losses of over 30% after closing their short position. However, plenty of amateur investors feel no pity for the industry responsible for the Great Recession that has undoubtedly moulded their lives.

Despite this, controversy has arisen. Among calls for regulating the ‘casino mentality’, popular brokerage Robinhood (notable for its slogan “Investing for everyone”) has restricted users’ ability to purchase GME shares down to one per account. Accusations of injustice and market manipulation have prompted lawsuits, with many investors worrying that the brokerage holds an ulterior motive and is favouring hedge funds over its customers. Others are concerned for retail traders – after all, they are just regular people, and when the stock eventually crashes, they might lose the hardest.

This exciting saga has raised a lingering question: with both working from home, what really separates investment bankers from cunning retail traders?