A stonking headache for pension funds

News and media outlets have recently caught on to the stock trading activities of members of the Reddit online forum website.

Participants were buying up shares in struggling businesses (most prominently, the GameStop retail chain), dramatically increasing their value on the stock market (or “stonking” as they refer to it) and scuppering the best-laid plans of hedge fund managers who had bet against them.

If these mischievous traders planned their exit strategies carefully, or were downright lucky, they were even able to walk away with a significant profit.

For many, this movement was considered “payback” to Wall Street and its ultra-rich investors for causing the credit crunch in 2008.

In a bleak and Covid-impacted January, the news was generally well received by the wider public. Everyone loves a good Robin Hood story - even if in this case the money that is taken from the rich is kept by the ‘Merry Men’.

However, this romantic characterisation ignores the fundamental truth that the majority of hedge fund investors are pension schemes.

That means many of the real victims here are pension scheme members - not the Wall Street boogeymen, but the participants themselves, their parents and their grandparents.

In the UK investments are an ever more challenging area for trustees to navigate, what with the government’s recent focus on ESG investing and the increasing investment disclosure obligations on pension schemes.

This cautionary tale should serve as yet another stark warning for trustees and sponsoring employers on the unpredictability of investments and the importance of appointing investment advisers you trust.

Even if all the logic in the world points to an investment being a safe bet, sometimes the universe has other ideas.

To pension scheme trustees, while we would not necessarily recommend that you add “vigilante trading” to your risk registers just yet, it may be worth asking your investment advisers about the impact this kind of activity could have on your portfolio - and whether any steps can be taken to mitigate the risk of a repeat in the future.

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