Recent headlines have reflected the extraordinary behavior of GameStop Corp.; the company’s stock rose from $18.84 at year-end 2020 to $325 at the close on Jan. 29, 2021, then declined to $90 in the first two trading days of February. At year-end, GameStop was the 314th largest stock in the S&P SmallCap 600®. By the end of January it had risen to #1. GameStop had been heavily shorted by hedge funds, and its rise was partly fueled by retail traders hoping to profit from a short squeeze.
Even a casual reader of our SPIVA reports will realize that most active managers underperform most of the time. One reason for this is that there is no natural source of outperformance, or “alpha.” The outperformers’ positive alpha depends entirely on the underperformers’ negative alpha.
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