It’s ‘freaky Friday’ For Retail Investors, Hedge Funds

Recent stock market turbulence cast the same spell on individual investors and hedge funds as fortune cookies put on Lindsay Lohan and Jamie Lee Curtis. The two types of investors are acting like the other used to, the Wall Street Journal reported.

Conventional wisdom once held that individuals investing in the stock market would flee at the signs of a downturn, earning them the nickname “dumb money,” whereas hedge funds would weather the storm. But in recent weeks, retail investors have accelerated their purchases of US stocks, even as the Wall Street suits headed for the exits.

Since President Trump’s tariff announcement in the Rose Garden on April 2, individual investors have poured $30 billion into American stocks and ETFs, according to JPMorgan. And they’re also letting their retirement accounts ride: Vanguard estimated that from April 2 to the middle of the month, 97% of its 401(k) holders did not make trades.

By comparison, hedge funds have sold over $1 trillion more shares than they’ve purchased so far this year, per JPMorgan.

What’s changed?

“Buying the dip” is the new norm for many Americans, who appear to have internalized the idea that, over the long term, stocks typically go up and to the right. But, post-pandemic, retail traders mostly aren’t shotgunning Red Bull while snapping up the meme stock of the week: “The best companies in the world are on sale, many that have survived 1989, 2001, 2008, 2020, et cetera, and thrived,” one such nonprofessional investor told Bloomberg.

However…hedge funds might not be running scared from stocks, per se:

• Professional investors often use stocks as collateral for loans that they secure to make more money (i.e., leverage).
• When the stocks decline, the collateral is no longer as valuable, so they have to sell assets to make up the difference with cash.

Big picture: It’s not clear which strategy–to sell or not to sell–is going to look better in hindsight. As Bloomberg reported, it took a whole seven years for the S&P 500 to recover from its losses from the bursting of the dotcom bubble in early 2000.—HVL