The GameStop reminder: What’s your exposure, right now?

Do you know what you own in your portfolio right now - at the precise moment you’re reading this? How much does it matter?

The events of late January demonstrate all too well the importance of being able to clearly and quickly know your underlying exposures.

The market drama surrounding heavily shorted stocks such as GameStop and AMC Entertainment reached a fever pitch in late January, when swarms of online traders banded together to drive the prices of these shares to stratospheric levels. Case-in-point: Shares in GameStop were up 400% at one point during the week. This, of course, resulted in steep and significant losses for hedge funds and others who had bet on the stocks’ decline, with Melvin Capital Management reporting a 53% loss, while Maplelane Capital lost 45%.¹

Let those numbers sink in for a moment. 45%. 53%. Half of a portfolio’s value wiped out in a matter of days. That’s not just a friendly wake-up call reminding you of the value in knowing what securities you own, it’s an angry alarm clock blaring the message to you on repeat: Know what you own when you need to know. Know what you own when you need to know.

In other words, it’s imperative to have on-demand knowledge of what’s in your portfolio - down to the specific security level. Detailed, real-time knowledge of what you own isn’t just a nice-to-have in today’s world. It’s an absolute must. Markets move on a dime, not on a quarterly cycle. Three-month reviews of your portfolio holdings are woefully insufficient, if not detrimental, as the events of last week illustrate. Imagine waiting until the end of March to learn of your exposure to GameStop. Or worse yet, to the wrong hedge fund. Talk about too little, too late - and then some.

This is why, at Russell Investments, we’ve long been firm believers in the benefits of a dynamic, actively managed portfolio. When we manage a multi-asset portfolio, we see all the holdings on a daily basis. And because we believe in transparency, we can answer exposure questions for our clients immediately. Daily, if necessary. Not just on a quarterly basis. And we can respond to market changes just as fast. Every year, we invest heavily in data systems and analysis that informs our portfolio managers on where their portfolios are positioned, down to the single-security level. We can judge whether our positions are consistent with what we think will happen and, furthermore, we can fine-tune the size of the positions to make sure we are not risking too much on any single market outcome.

We believe that proper risk management requires this sort of multi-scenario analysis - yet it’s only possible if there’s a clear view of a portfolio’s current exposures. At Russell Investments, our set of proprietary tools allow us to see straight through to the very bottom.

Case study: GameStop

When the GameStop trading mania erupted last week, markets panicked. But we didn’t. We knew what we owned, and we knew we were well-positioned. At our fingertips, we had data from all of our small and mid cap portfolio managers, showing our exposure to every small and mid cap stock that had risen over 40% in the past week, allowing us to effectively evaluate any unintended risk. There were no short positions. Our careful, time-tested risk management approach had effectively eliminated the risks of a short squeeze, ensuring our portfolio remained in line with our desired exposures. 

Importantly, effective risk management necessitates not only visibility, but execution. Supported by a global trading desk and team of implementation specialists, our visibility into the GameStop market frenzy was backed by the tools necessary to effect portfolio modifications, should the need arise. Today, our portfolio managers remain keenly aware of daily price changes across our entire portfolio, ready to tackle the next unforeseen market event of the future.

The bottom line

Markets don’t operate on quarterly cycles. Security prices can rise or plunge at a moment’s notice, impacting broad sectors of the market with little to no warning. The only way to effectively mitigate this risk is by keeping a vigilant, 24/7 watch on markets and having the ability to make adjustments on the fly. We do both. Let us know how we can help.

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.