Melvin Capital, a hedge fund run by Gabe Plotkin that struggled heavily with losses last year and never quite recovered from the GameStop short squeeze in 2021, is closing its doors.
Melvin Capital was once one of the top-performing funds in the world. The very same fund that made billions betting against GM and medallion while exploiting loopholes in the law is now shutting its doors.
The fund has had a tumultuous two years. The company lost $7B in naked shorting a stock and another $7B in shorting another one. It made money on GME, but the losses ate up those gains.
After losing a significant chunk of money on what it did claim was a good bet on GME, Melvin did everything right. The company hired a top-notch audit firm to examine its books, rechecked the numbers, and found that its initial assessment had been correct.
The London-based hedge fund had used a proprietary strategy that depended on high levels of leverage and technicals. In its heyday, the firm managed closer to $3 billion but was down to less than $300 million at the end of last year after suffering significant losses in 2015 when its most prominent positions fell apart.
Melvin Capital to shut after heavy losses
Melvin Capital made the decision to end it all after months of reassessing its business. It has been struggling with heavy losses, including a 39.3% loss in 2021 and a 23% loss this year through April.
Plotkin said he is closing down his firm after losing billions of dollars in GME. WSB Holdings (WSB) also went bankrupt, and Melvin lost $6.5 billion recently. This figure was one-quarter of their total fund at the time.
A few months ago, Plotkin proposed a plan to cut assets under management by more than a third and slash management fees. This was not likely to win over investors. Yet that’s what he did earlier this year. In a letter addressed to investors, Plotkin said he wanted to cut the firm’s assets by $3 billion to $5 billion, reduce management fees and take a 15 percent stake in the business—an offer that was later rejected.
Melvin Capital’s move has been blamed on poor performance and increased regulation. The fund has decided to suspend its remaining funds. It is currently trying to sell or liquidate all of its assets. The company is facing losses that are higher than anticipated. It had hoped to attract new investors but could not raise sufficient capital from existing investors and clients. Still, the company said it would return all of its assets to investors.
In fact, the company’s executives, as recently as last week, had been asking clients for their thoughts on what new fee arrangements seemed fair to them as they plan to compensate them for the losses incurred by these funds.
Melvin Capital’s history
Melvin Capital was started in 2018 by Gabe Plotkin. The fund that delivered average returns of 30 percent per year until the start of 2021, was widely regarded among the best managers in the hedge fund industry. The fund’s performance had been lagging in recent years after a series of huge losses on a controversial short sale of GameStop shares.
The firm’s alternative would have been to continue operations, but at a very high cost to investors. The company said they were grateful for their trust and support over the years, and they are confident they made the right decision in light of current market conditions. With the closure, Melvin Capital joins others in pulling out of the space, citing ongoing regulatory headwinds as a significant reason for their departure.
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