Day Trading Disrupts Credit Investing, Fund Managers Say

The rush of day trading is proving to have shaken up the world of credit investing, a new Bloomberg report says.

According to fund managers quoted by the news outlet, retail traders have shaken up the market and helped to prop up firms not doing so well, which has had adverse effects on investment opportunities.

AMC was one of the flagship examples. But others include companies like retail apparel chain Express, prison operator Geo Group and coal mining firm Peabody Energy. Those companies, like AMC, utilized their popularity among day traders to look into the previously unavailable equity financing options.

Because of that, credit funds have seen trouble. Corporate failure is a key part of their investment thesis, and Bloomberg writes that their strategies can usually center around looking into companies short on options. They then provide last-resort financing and make decisions throughout the ensuing workout process. The tactics of credit funds can be controversial though — reports have them leaving workers bearing the most pain. But their results can include huge payoffs like outright owning the companies in question.

Even when companies do go bankrupt, retail traders have changed things in that department, too, per the report, with heightened volatility making restructuring negotiations a headache, forcing money managers to start from scratch if things changed for the companies.

The problem, Bloomberg notes, could be traced back to the fiscal and monetary stimulus, which has boosted funding and given even the riskiest companies funding to easily clear debt hurdles. Before this, many companies would’ve likely hit walls and defaulted.

The “meme stock” surge got big in early 2021 as retail traders flocked to GameStop, AMC and others as a way to disrupt the predictions of big hedge funds.

But in recent weeks, the trend has seemed to start to slow, with numerous companies favored by the day traders starting to dip in percentage points.