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Why the GameStop frenzy may hurt retirees along with hedge funds

Jakub Porzycki/NurPhoto via Getty Images

Reddit users and other retail investors who piled into GameStop stock aimed to take down Wall Street.

Pension funds, which support ordinary Americans in retirement, may be an unintended casualty.

Some hedge funds have sustained big losses as a result of bets against GameStop stock. Melvin Capital, for example, lost more than 50% in January.

But pension plans — which invest assets on behalf of workers like teachers and police officers — may hold big positions in hedge funds. That means a financial hit for hedge funds could spill over to workers’ retirement assets.

“Your ‘eat the rich’ mentality just took a bite out of the pension funds of working Americans,” Barbara Roper, director of investor protection at the Consumer Federation of America, said of GameStop investors who targeted Wall Street

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“It’s not a victimless game, and it’s not a Wall Street billionaire who’s going to ultimately pay the price,” Roper added.

Roughly 7% of the $4.5 trillion in state and local pension plans are allocated to hedge funds, according to data published by the Center for Retirement Research at Boston College and the Center for State and Local Government Excellence. These plans (which don’t include plans in the private sector) support 14.7 million workers and 11.2 million retirees.

But many pensions allocate much more, some even north of 20% of their overall portfolio, according to Pensions & Investments.

The top four by overall portfolio share are: The Directors Guild of America-Producer Pension Plans (23%), Eli Lilly & Co. (28%), the Alaska Electrical Pension Fund (30%) and Eastman Kodak Co. (41%), according to P&I, which surveyed the 1,000 largest pension plans about their investments as of September 2019. (The company is publishing 2020 data next week.)  

The California State Teachers’ Retirement System, State of Michigan Retirement Systems and Virginia Retirement System held the largest hedge-fund investments on a dollar basis: $14 billion, $12 billion and $11 billion, respectively, according to P&I. However, those holdings made up less of their overall portfolio relative to other investments (5.8%, 16.3% and 13.2%, respectively).

Of course, pensions with large hedge-fund holdings didn’t necessarily lose money. Those that did bet against GameStop and other stocks like AMC Entertainment and Bed Bath & Beyond.

GameStop short selling

Hedge funds commonly employ a tactic called “short selling,” which makes them money when a stock’s price falls. Retail investors targeted shares in GameStop and other companies heavily shorted by Wall Street in recent weeks — driving up the stock price and causing staggering losses in some hedge funds.

Shares of GameStop were up 400% last week, bringing the stock’s total gain to 1,625% this year. (Shares fell sharply on Monday.)

Losses for some hedge funds — like Candlestick Capital Management, Citron Capital, D1 Capital Partners, Maplelane Capital, Melvin Capital and Point72 — extended into the double digits.

“It absolutely has a ripple effect,” Jim Baird, chief investment officer at Plante Moran Financial Advisors, said of hedge-fund woes extending to pensions. “When these types of things start to happen, it’s not like you can target it to this one firm or fund that’ll be hurt.

“There’s absolutely collateral damage,” he added.

Many plans aimed to increase their allocations to hedge funds and other alternative assets in 2020 to try boosting returns amid lower relative yields from safer assets like cash and bonds.

CNBC’s Annie Nova contributed to this report.

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