Finance

How hedge funds are tracking Reddit posts to protect their portfolios after the WallStreetBets crowd tanked Melvin Capital’s short positions

  • Hedge funds and data companies are closely tracking the infamous WallStreetBets Reddit forum.
  • The subreddit’s users have helped drive GameStop’s soaring stock, wreaking havoc on short-sellers like Gabe Plotkin’s Melvin Capital and Maple Lane Capital. 
  • Hedge funds, data companies, and even Reddit users are building out web-scraping tools to track chatter on the subreddit.
  • Visit Business Insider’s homepage for more stories.

Retail investors — especially from the infamous subreddit WallStreetBets — helped force one of the top-performing hedge funds of the last half-decade to secure billions in emergency funding from two ultra-competitive peers. 

Now, funds are planning to keep as close of an eye as possible on the social media platform, angling to not just avoid getting burned but also to extract insights and capitalize on other shifts in stocks in the Reddit crowd’s crosshairs. 

One data scientist at a fund told Insider they created a scraping tool this weekend to monitor tickers being discussed on the site to make sure their fund’s short book isn’t caught in the next YOLO trade. Thinknum, the web-scraping data provider, is in the process of building a Reddit-specific dataset after “insane client demand,” according to cofounder Justin Zhen. The new tool will track ticker mentions in certain subreddits including WallStreetBets.

The rapidly growing subreddit, now with over 2.4 million members, maintains a dashboard of data insights, and other users have created tools of their own to make sense of the metadata from Reddit’s stock-investing community. 

Eagle Alpha, which connects hedge-fund clients to alternative-data providers, meanwhile has noticed an increase in demand for data on retail investors this month, with a specific focus on Reddit. Interest in this data originally started in the fourth quarter of last year, in part because Robinhood cut off the trading data that many funds were using, but Hugh O’Connor, the firm’s global director of data sourcing and partnerships, said “there’s been a surge in interest in requests that have come in the last month.” 

See more: Bloomberg just paid more than $100 million for an upstart alt-data player. Here’s why that marks a huge turning point for a once-fringe business.

The talk of Wall Street this week has been the meteoric rise of shares in GameStop, the video-game retailer that had been struggling thanks to the pandemic and a shift to buying games directly on consoles, and a big stumble by Melvin Capital, led by one-time golden boy Gabe Plotkin.

Plotkin’s fund had big bets against GameStop, which became a favorite of the WallStreetBets crowd thanks in part to Chewy.com founder Ryan Cohen’s addition to the company board. Melvin’s puts against GameStop were revealed in regulatory filings, putting his fund and select others like short-seller Citron Research in the crosshairs of the subreddit. GameStop has soared, and Cohen personally has seen his 12.9% stake in the company swell to more than $1.3 billion as of Tuesday’s trading close. 

Melvin is down at least 30% this year, according to the Wall Street Journal, thanks in part to GameStop but also a slew of other losing short bets, including National Beverage and Bed Bath & Beyond.

Plotkin, whose fund made more than 50% last year and managed $12.5 billion heading into the year, received $2.75 billion on Monday for a non-voting revenue stake in his manager from Citadel founder Ken Griffin and Plotkin’s former boss Steve Cohen. 

The swift reversal of fortunes for Melvin at the hands of a horde of contrarian day traders has captivated the investment community, which is now looking to profit from a new stream of alternative data: which stocks Redditors are coalescing around and plowing their growing pile of capital toward. 

The WallStreetBets ranks have ballooned this year, especially as its wager on GameStop has produced eye-popping returns — the stock is up over 750% in 2021 — and upended pedigreed finance professionals. The subreddit has added more than half a million members in January, growing from 1.8 million to 2.4 million as of Tuesday. 

It has added more than 25,000 users in the past 24 hours, according to the metadata dashboard ran by the subreddit, which shows insights on the most-discussed companies, comments and posts, and top users posting about individual companies. 

Another live feed dashboard created months ago by Reddit user Eric Schwelgin, whose handle on the website is weare808, monitors stock ticker mentions across the website and filters them by shifts in popularity and includes a drop-down menu for each stock showing the latest Reddit comments about the company.

Schwelgin, a developer based outside of Cleveland, Ohio, told Insider he first built the tool, called “Dayminer,” back in October as a quarantine side project, receiving positive initial reviews and feedback from the Reddit community. He refreshed the app about a month ago and added requested features, the most demanded being toggles to filter out the noise coming from WallStreetBets.

“It takes a lot of comments and a lot of upvotes to hit the top spots,” said Schwelgin, whose scoring formula accounts for the number of comments, the age of the comments, and how many upvotes or downvotes the comments receive. 

Before the GameStop saga took off in mid-January, he was seeing a hundred visitors a day; now on some days he’s seeing spikes of nearly 2,000 users. Dayminer has even caught the attention of some hedge fund professionals eager to keep tabs on community’s trading sentiment, industry sources told Insider. 

See more: Albourne Village — a quirky online hedge fund community — is getting ready for a revamp. We took a look at the 20-year history of a site that lists billionaire founding fathers like Izzy Englander.

Alternative data — a booming industry thanks to hedge funds desperate for an edge — has become the lifeblood of many managers, and changes to data streams and feeds can throw models and algorithms off. This month, Vista-owned 7Park Data shut down its feeds to clients abruptly after it was folded into another Vista portfolio company. 

Steve Cohen’s fund, Point72, was sent scrambling last year, as reported by Insider, when day-trading app Robinhood limited access to data on the most popular stocks on their platform. Data on the mood of WallStreetBets users, many of whom trade on Robinhood, may be the next best thing. 

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