Melvin Capital, ranked by Bloomberg as “The Worst Performing” hedge fund in 2021, is seeking a one-of-a-kind plan with its investors. The firm would return their capital while giving them the option to reinvest it in what would essentially be a new fund run by Plotkin.
CNBC reported the story first.
Plotkin’s current fund would be unwinded at the end of June under the terms being discussed. At the end of the first quarter, that fund was down 21%. Since February 2021, the company losses have steadily increased, totaling 41% through November and at least 21% so far in 2022.
Plotkin would then launch what would essentially be a new fund on July 1 with whatever money his investors decided to reinvest, but he would do so without having to bring those investors back to break even before earning a performance fee.
Given Melvin’s losses, this so-called high water mark, which requires hedge fund managers to return their investors’ capital to par before earning fees, is virtually impossible for Plotkin to meet on much of its capital.
According to people familiar with his plans, Plotkin has committed to keeping his “new” fund’s capital at or below $5 billion and returning to a focus on stock shorting.
Short Selling – Gabe Plotkin’s Strength
Plotkin’s skill is in making large profits by shorting stocks. However, as his fund grew in size, his ability waned.
Melvin Capital returned 47% in its first full year of operation, placing it second on Bloomberg’s 2015 list of top-performing funds with $1 billion or more in assets under management.
In 2015, the fund’s short positions accounted for nearly two-thirds of its 67 percent return (before fees). Bets against J.C. Penney Co. and renewable-energy company SunEdison Inc. went bankrupt and were notable short positions.
In 2017, the fund returned 41%. Chewy.com, Amazon.com, Las Vegas Sands, Alibaba, and shorting GameStop were notable investments.
According to The Wall Street Journal, Melvin Capital Management LP accounted for roughly one-third of the gains in 2019 from Steve Cohen’s current hedge fund, Point72.
The company’s name appeared in the Polish Short Sale Registry in September 2020 due to a short position in-game developers CD Projekt, a net position of 0.55% via the Polish stock exchange (GPW). They benefited greatly from the difficulties encountered during the launch of Cyberpunk 2077.
Melvin charges investors an annual management fee of 2% plus up to 30% of profits, which is one of the highest fee packages in the hedge fund industry.
Shorting king’s downfall – Meme Stock Frenzy
Melvin Capital was at the epicenter of the GameStop frenzy, which resulted in SEC investigations and Congressional hearings. In January, Reddit traders forced them to close their short positions. As a result, its CEO, Mr. Gabe Plotkin, and his investors lost billions of dollars in days.
Melvin Capital Management was losing more than $1 billion per day at its worst in January 2021. The damage, on the other hand, was severe. Melvin’s loss that month was 54.5%, or approximately $6.8 billion, one of the most rapid and steep declines for a hedge fund since the 2008 financial crisis.
Short on Funds
In January, Reddit traders forced Plotkins to close his short positions in AMC and GME at a loss of 55%. As a result, its CEO, Mr. Gabe Plotkin, and his investors lost billions of dollars in days. Citadel and its affiliates invested $2 billion during that period, with $750 million coming from Steven A. Cohen’s Point72 Asset Management in exchange for a share of Melvin’s charges over the next three years.
However, following “massive losses,” the infusion from Citadel and Point72 is “likely gone.” Furthermore, according to the Wall Street Journal, Citadel LLC reduced its $2 billion stakes in Melvin Capital Management in February 2022.
Gabe Plotkin founded Melvin Capital Management in 2014. Melvin was one of Wall Street’s leading hedge funds until it lost $6.8 billion in January 2021, accounting for more than half of its holdings.
