Melvin Capital, formerly one of Wall Street’s most successful hedge funds before losing billions in the meme stock debacle, will close after being stung by the market fall, again and again, this year.
After years of double-digit profits, Gabe Plotkin, generally considered one of the industry’s greatest traders, told investors that the previous 17 months had been “an incredibly trying time.” Plotkin has been attempting to turn around the company after being caught out betting on retail favourite GameStop (GME) in early 2021 and again this year by plummeting markets.
In a letter accessed by Reuters on Wednesday, Plotkin said, “The appropriate next step is to wind down the Funds by fully liquidating the Funds’ assets and accounts and returning cash to all investors”.
Melvin Capital had $7.8 billion in assets at the end of April. According to a person acquainted with the firm’s finances, the fund lost 23% in the first four months of 2022. Melvin Capital’s losses this year follow significant losses in 2021 when the company lost 39% of its value. The business predicted that GameStop’s price would fall, but the thought was crushed when retail investors drove the stock up.
At the beginning of 2021, the company had $12.5 billion in assets.
Plotkin claimed in the letter that he had previously raised a large sum of money and reduced the funds’ risk. Plotkin’s representative remained silent. During the massive stock losses in early 2021, major investors such as Citadel LLC and Point72 Asset Management, where Plotkin used to work, continued to back Melvin, spending billions in emergency funds.
Plotkin informed investors earlier this year that he planned to restructure and reduce assets to $5 billion from $8.7 billion, while also charging them lower fees. Investors responded angrily to the ideas, prompting Plotkin to issue an apology and admit that he had made a mistake.
Plotkin announced on Wednesday that he had started the process of selling the portfolio and will stop charging management fees on June 1. He also stated that while he had “given everything” he could, it was not enough to “deliver the returns you should expect.” Melvin’s largest investments at the end of the first quarter included Live Nation Entertainment (LYV), Hilton Worldwide Holdings (HLT), Amazon (AMZN), and Datadog (DDOG). Their stock prices have plummeted in recent weeks, prompting rumours that a hedge fund is attempting to unwind positions.
Plotkin was a prominent investor at Steven A. Cohen’s hedge fund, SAC Capital Advisors, until leaving in 2014 to start his own business after SAC pled guilty to criminal insider trading charges. Melvin Capital immediately drew the attention of influential investors, and by 2020, the year the epidemic began, the company had gained 52.5 per cent.
Melvin generated average annualised returns of 30% from 2014 through 2020. The fund has returned an average of 11.9 per cent every year since its inception.
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