February 15, 2021 – In the great investment style debate between value investing and growth investing, a new challenger has recently emerged – meme investing.
In January, so-called “meme stocks” emerged as a type of investment favoured largely by millennial-aged, inexperienced market participants. Meme stocks (sometimes referred to as “stonks”) are not driven by fundamentals nor move based on rational analysis. Still, they are more akin to speculative gambling vehicles prone to bouts of incredible volatility. Meme stocks can exhibit extreme fluctuations above intrinsic value based on engineered short squeezes, speculative thoughts of future potential or YOLO-induced bursts of frenzied “just for fun” day trading promoted on the WallStreetBets Reddit chat forum.
Meme stocks generally share the same two characteristics. They tend to be beaten-down companies with heavily shorted shares.
Some of the most popular meme stocks to emerge over the past month include:
- GameStop – the beleaguered retailer’s stock started the year below $20.00 per share and sky-rocketed nearly 2,500% before dropping -90% in a speculation-fuelled rally amidst no news from the company. Despite the drop, it remains up almost 200% year-to-date.
- AMC – the movie theatre chain’s future was bleak, as the coronavirus forced its theatres to close and its debt to become overwhelming. Nonetheless, an unexpected 10x surge in share price allowed the company to be saved from bankruptcy by capitalizing on the frenzy in its stock and issue shares in the open market to raise much needed capital to survive. AMC’s stock has declined -73% from its peak in January, however, it is still up 164% year-to-date, with an improved balance sheet and a significantly better chance of survival.
While irrational and somewhat of a joke, meme stocks had real-world consequences, whether it be saving a company from insolvency or nearly blowing up hedge funds that were caught short.
Some fundamental long-short hedge funds and short sellers were hit hard by the meme stock rally.
Quantitative long-short hedge funds, which generally stay away from shorting heavily shorted names, were mostly unaffected by the episode.
Nonetheless, the birth of meme investing presents new risks and opportunities for investors. While we advise investors stay far away from meme stocks, long or short, they are worthwhile paying close attention to, given the wide-ranging knock-on effects they can cause.
Accelerate manages five alternative ETFs, each with a specific mandate:
- Accelerate Arbitrage Fund (TSX: ARB): SPAC and merger arbitrage
- Accelerate Absolute Return Hedge Fund (TSX: HDGE): Long-short equity
- Accelerate Enhanced Canadian Benchmark Alternative Fund (TSX: ATSX): Buffered index
- Accelerate OneChoice Alternative Portfolio ETF (TSX; ONEC): Alternatives portfolio solution
- Accelerate Private Equity Alpha Fund (TSX: ALFA): Private equity replication
In a somewhat unexpected trend, the Accelerate Arbitrage Fund’s 6.4% gain in November, its best monthly performance in the strategy’s 7-year track record, was beaten in December with a 9.2% gain. January’s 10.4% gain for ARB set a new monthly record, one which we believe is unlikely to be beaten in the future.
ARB’s net asset valued surged last month due to a number of successful business combination announcements in SPAC positions built up last year, along with the 64.2% increase in Cisco’s offer for Acacia, which was ARB’s largest position.
Given the rally in the SPAC market, the ARB portfolio management team has dramatically paired back SPAC positions. ARB is now the most conservatively positioned since its inception.
2020 was a challenging year for hedged funds and strategies with meaningful short positions. Specifically, quant long-short funds were severely impacted in Q4, and HDGE was not spared from the pain enacted by the rally in low quality “junk” stocks.
In January, fundamental long-short hedge funds were hit hard from the meme stock rally, but quant long-short funds largely sailed through the recent crisis unharmed.
HDGE had no positions affected by the meme stock short squeeze and finished January up 1.5% with low volatility.
ATSX did have one short position that was unexpectedly caught up in the meme stock short squeeze – BlackBerry.
BlackBerry, a long held short position in ATSX, has been a perennial underperformer and checked the boxes for a great short position, including abysmal fundamentals, negative technicals and poor factor rankings on a host of alternative risk premia.
It was a surprising stock to be caught in the meme stock short squeeze as its short interest was not extreme. Nonetheless, the dramatic surge in BlackBerry’s share price triggered our automatic risk reduction algorithm, and the position was paired back to limit the damage.
ATSX finished the month with slight underperformance compared with the index, given the BlackBerry short position.
Accelerate announced the closure of ALFA last month, and it will be wound up and funds delivered to investors in March.
Despite a novel approach to offering low-cost (in this case, 0% fee) access to private equity, ALFA was not commercially successful. Ironically, it is one of the better performing funds recently, with a 34.4% gain over the past 3 months.
While we continue to believe strongly in low-cost private equity replication, the market is not there yet. In the hundreds of conversations we’ve had regarding private equity replication, we discovered one truth about private equity – investors are in it for the lack of mark-to-market accounting. Traditional private equity’s mark-to-model accounting artificially smooths returns, which assuages investor concern regarding the extreme volatility of this high-risk asset class. Unfortunately, investors pay through the nose for this accounting trickery.
Nonetheless, we believe the fundamental basis for ALFA is strong and will continue to offer institutional investors the strategy via our managed account platform.
The Accelerate OneChoice Alternative Portfolio ETF, the first alternatives portfolio solution ETF, was officially launched on January 27th. Offering 6 alternative asset classes and 10 alternative strategies in an easy-to-use, “one choice” ETF that charges just a 0.20% management fee, ONEC is a true portfolio diversifier. An innovative investment solution, it is the first ETF in Canada to hold bitcoin, which was not an easy feat. We believe ONEC can help smooth the ride for investors, given its uncorrelated underlying return streams.
Have questions about Accelerate’s investment strategies? Book a call with me.
Disclaimer: This distribution does not constitute investment, legal or tax advice. Data provided in this distribution should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. The information in this distribution is based on current market conditions and may fluctuate and change in the future. No representation or warranty, expressed or implied, is made on behalf of Accelerate Financial Technologies Inc. (“Accelerate”) as to the accuracy or completeness of the information contained herein. Accelerate does not accept any liability for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on all or any part of this research and any liability is expressly disclaimed. Past performance is not indicative of future results. Visit www.AccelerateShares.com for more information.