Between record dip-buying and the roller coaster in Robinhood Markets Inc., the meme-stock army is running wild across Wall Street again—making life harder for institutional pros trading popular quant strategies.

With amateurs now commanding roughly one-fifth of U.S. equity volume, a cohort of systematic players suspect the retail billions are undermining time-tested trades like short selling and low-volatility investing.

The industry is in better shape compared to the dark days of the pandemic, and quant portfolios are more diversified than those run by human stock pickers. Yet there’s a palpable fear that the Reddit generation is getting powerful enough to disrupt the market patterns underpinning math-powered allocations.

Quants at the likes of UBS Group AG and Campbell & Company are trying to ride the retail-spurred market waves by incorporating trading activity in their models. But the day-trader penchant for chasing seemingly random companies and moving fast as a herd mean it’s not so easy to divine systematic method in the madness.

“As households start owning more and more equities, there are definitely different patterns in the marketplace,” said Mani Mahjouri, chief investment officer at quant hedge fund Blueshift Asset Management. “The retail investors coming in for whatever reason have a higher utility for risk than typical institutional investors.”

Trading activity from stocks to options surged last year as a new horde of investors flush with stimulus cash signed up for commission-free platforms like Robinhood. While their participation has dipped since the GameStop Inc. frenzy in January, it remains above pre-pandemic levels even as the stimulus check giveaway fades and the stay-at-home era peaks.

To Mahjouri, the retail appetite for volatile names like Tesla Inc. is contributing to the big underperformance in a popular investing style known as low volatility, which has fallen out of favor in the risk-on reopening. A Dow Jones market-neutral index for the defensive strategy dropped for five straight quarters through June, falling 33% in its worst run of declines in more than a decade.

While quant fund performance has improved this year as a stronger risk appetite buoyed trades like value shares, the worry is whether the Reddit cohort is fueling a lasting change in market patterns.

Take short selling. Received wisdom in quantland has it that short sellers know something others don’t—and the more willing they are to pay for their bets, the better their information probably is.

Yet a Goldman Sachs basket of the most-shorted U.S. shares has surged like never before to outperform the broader market by 31 percentage points this year. Retail buying of names most-shorted by hedge funds in 2021 like AMC Entertainment Holdings Inc. and GameStop is upending the once-popular quant trade.

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