Gabe Plotkin’s Melvin Capital Management, targeted by the Reddit army of day traders for its bearish GameStop bets, ended the first half of the year with a 46% loss, Bloomberg reported.
The New York-based hedge fund, which suffered a stunning 53% loss in January from the Reddit-trader short squeeze, gained 1% in June. But it is still struggling to recover, Bloomberg said in the Thursday report, citing sources familiar with the matter.
Melvin Capital, founded by star portfolio manager Plotkin, did manage to stage something of a comeback with a 22% gain in February. But its overall first-quarter loss stood at 49%, Insider understands.
Melvin Capital lost a chunk of its assets in the trading frenzy, ending January with $8 billion in assets, down from $12.5 billion at the start of the year. Its assets had risen to $11 billion as of June 1, the Financial Times and Bloomberg reported.
After the January hit, the fund has somewhat recovered. It is up 18% for the five months between February and June, Insider understands. It gained 5.4% in the second quarter.
The hedge fund is understood to be taking smaller-sized positions to limit its exposure to single companies. It exited its public short positions against GameStop, AMC and other stocks in the first quarter, but may have still held non-public, more traditional short positions.
Founder Gabe Plotkin has also asked a team of data scientists to comb through social media and day-trader forums for stock names of interest to retail traders, Bloomberg reported.
A spokesperson for Melvin Capital declined to comment.
Melvin Capital, the hedge fund that dug itself into a hole during the GameStop saga, extended its first-quarter losses to 49%, according to a Bloomberg report.
The firm, founded by portfolio manager Gabe Plotkin, saw a 53% decline in January, reversed some of that loss by gaining 22% in February, but slid another 7% in March, Bloomberg said, citing sources.
Melvin was among a handful of short-sellers that got torched by the Wall Street Bets army that bid up GameStop’s shares, leading to massive losses for those that wagered bearish bets against the video-game retailer.
The fund closed its short position against GameStop on January 27. It started out this year with $12.5 billion in assets under management, but ended January with about $8 billion. Steve Cohen’s Point 72 and Ken Griffin’s Citadel injected a $2.75 billion investment in Melvin to support its battle against the Reddit army.
Plotkin racked up about $860 million through 2020 after his firm returned 53%, but January’s deep decline left him with an estimated personal loss of $460 million, Bloomberg reported.
Plotkin was grilled before a congressional panel in February, where he defended his short position and said it was never part of an effort to “artificially depress, or manipulate downward, the price of a stock.”
A spokesperson for Melvin didn’t immediately respond to Insider’s request for comment.
Gabe Plotkin’s hedge fund Melvin Capital gained a chunky 22% in February, according to reports, but the investment firm remained in a deep hole after being battered during the GameStop saga.
The 22% gain, reported by numerous outlets, well outstripped the 2.6% rise in the S&P 500 across the month.
Yet Melvin Capital lost 53% in January after hemorrhaging money on its bet against video-game store GameStop, which skyrocketed when amateur traders organizing themselves on social media website Reddit got behind the stock.
The $8 billion fund needs to produce gains of 75% before earlier clients break even, Bloomberg reported. That is a tall task, even for a fund that posted average yearly returns of around 30% from 2014 to 2020.
However, hundreds of millions of dollars have flowed into the fund from investors who are confident in Plotkin’s abilities, Bloomberg said. Insider has contacted a media spokesperson for Melvin Capital for comment.
Melvin’s February gains are in part due to tweaks to Plotkin’s trading strategy. In testimony to Congress on the GameStop saga in February, Plotkin said he had “learned” from the episode. “I am taking steps to protect our investors from anything like this happening in the future,” he said.
For example, Plotkin has stopped using exchange-traded puts – contracts that allow investors to make money if a stock falls – which show up on regulatory filings and allowed his bets to be singled out by day-traders, Bloomberg reported.
The fund took an injection of $2.75 billion in cash from hedge funds Citadel and Point72, the latter run by Plotkin’s mentor Steve Cohen, as the day-trading frenzy rocked the firm.
He also said in his Congressional testimony he would avoid situations where lots of investors are betting heavily against a stock.
Crowded shorts are vulnerable to the types of so-called short squeezes that battered Melvin in January. Squeezes happen when short-sellers are forced to buy back the stock to cover their positions, driving the stock price upwards.
The Reddit-fueled market mania that sent GameStop and other heavily-shorted stocks soaring last month has often been described as a perfect example of retail investors sticking it to the Wall Street establishment.
But not everyone on Wall Street was betting against GameStop.
New York-based hedge fund Senvest Management started investing in GameStop before it caught fire with much of the r/WallStreetBets crowd, and by October 2020, it owned more than 5% of the company, The Wall Street Journal reported Wednesday.
Senvest paid under $10 for most of its shares, and after GameStop stock peaked at more than $400, the hedge fund walked away with a $700 million profit, one of the biggest winners, according to The Journal.
By contrast, Reddit user r/DeepF—ingValue, who has largely been credited with igniting the GameStop rally, claims to have made a $48 million profit.
While Senvest got in on GameStop after a compelling presentation by its new CEO George Sherman and the involvement of investor and Chewy founder Ryan Cohen, it got out because of a tweet fired off by Elon Musk, The Journal reported.
On January 26, after the market closed, Musk simply tweeted “Gamestonk!!“
The US stock market is witnessing the biggest “short squeeze” in 25 years, forcing hedge funds to withdraw from their positions on stocks at the fastest rate since 2009, according to Goldman Sachs.
Last month saw GameStop shares rise more than 1,700%, “squeezing” hedge funds and others who had “shorted” the stock, costing them billions of dollars. A short position is a bet that a share price will fall.
Goldman Sachs analysts this weekend shed some light on the situation in a note. “The past 25 years have witnessed a number of sharp short squeezes in the US equity market, but none as extreme as has occurred recently,” they said.
The equity analysts said a basket of the most-shorted US stocks has rallied 98% in the last three months. Estimates by data provider Ortex on Friday showed that short-sellers were sitting on losses of around $19 billion just on GameStop in 2021 so far.
Hedge funds and short-sellers who had made losing bets were forced to withdraw from the market rapidly at the fastest pace since 2009, in what is known as “de-grossing”.
They had to buy shares in companies such as GameStop and movie theater chain AMC to close their short positions, and sell other stocks to cover their losses.
“This week represented the largest active hedge fund de-grossing since February 2009,” Goldman analysts including David Kostin and Ben Snider said. “Funds in their coverage sold long positions and covered shorts in every sector.”
Melvin Capital Management lost over half its assets after GameStop burned short-selling funds this month.
The hedge fund, which was at the heart of the GameStop frenzy, lost 53% in January, sources close to the fund told Insider. The Wall Street Journal first reported the loss.
Melvin Capital, founded by star portfolio manager Gabe Plotkin, started the year with $12.5 billion in assets and ended the month with more than $8 billion in assets under management after current investors committed additional capital, the source said. Billionaire investors Steve Cohen and Ken Griffin invested $2.75 billion into the hedge fund earlier this week.
New and existing clients signed up to invest additional funds into Melvin Capital on February 1, the Journal reported, but the firm would not disclose how much.
Citron Research also closed its short position on GameStop after covering a 100% loss. Citron Research managing partner Andrew Left, a target for impassioned investors on Wall Street Bets, announced the firm would stop publishing “short reports.”
You know that financial markets have gotten truly out of hand when people start quoting the Bible. Unfortunately, I’m going to have to do that to start this column.
Proverbs 17:28 notes that “Even fools are thought wise if they keep silent, and discerning if they hold their tongues.” And yet an absolute litany of pundits, market commentators, and social media personalities haven’t followed that advice this week.
GameStop’s short squeeze, explained
GameStop’s stock has been the cause celèbre of our collective madness over the last few days, and it’s understandable why it’s gotten a lot of attention.
The basic story is this: a struggling but well-known company had large bets placed against it in the equity market by short sellers. Investors borrowed shares and sold them, hoping to gain by buying the shares back at a lower price. Unfortunately, the price didn’t drop, because a lot of enthusiastic small traders with high risk tolerance piled into the stock.
This crowd of retail traders learned about the opportunity and loosely coordinated their activities via Reddit’s r/wallstreetbets community, and were empowered by low cost, easy to use trading platforms like Robinhood. Some added call options, hoping that the people they bought the options from would buy the underlying stock to hedge and keep pushing the price up.
With shorts underwater, they had to offload their bets against GameStop’s stock. But of course, that creates a problem: they need to buy shares to get out. The resulting parabolic price action – as shorts bought shares to close their trade while the Reddit-fueled masses continued to pile in – is known as a “short squeeze” and the 1744% year-to-date gain for GameStop is an especially acute version.
Losses were so large for one specific fund that they were forced to sell part of their business to a pair of private investors: Citadel (which operates a securities business that helps facilitate the commission free trading on Robinhood that helped start this whole situation) and Point72, the family office run by Mets owner Steve Cohen.
This all would have been very interesting to stock market nerds. But of course, we can’t just let a story like this be interesting and mechanically unique. Instead, it’s got to become a morality play.
Cui bono sponsionibus?
The idea that a group of message board traders could take down a multi-billion dollar hedge fund led to an instant proliferation of cheering for little guys “Sticking It To The Man.” But of course, there’s a problem with that logic.
The WallStreetBets poster that initially identified GameStop and drove interest in the stock invested $50,000 of his cash in stock and call options, and the position is now worth over $50 million. While that poster is to be commended for such an impressive return, anybody with $50,000 to throw into an extremely high-risk equity market trade doesn’t fit a reasonable definition of “the little guy.”
While WallStreetBets likes to position itself as a bunch of misfits and outcasts, the actual identities of the folks who populate the board (to say nothing of who have benefitted from the GameStop surge) are unknown. What we can say is that the single largest individual holder of GME is Donald Foss, a billionaire pioneer of subprime auto finance. He owns 5% of the company. This is not the little guy you’re looking for.
As for Melvin Capital, the hedge fund that has reportedly lost as much as 70% in its ruinous effort to short GameStop, there should be no tears shed. Business television anchors crying foul that the fund could be run over or the CEO of the NASDAQ calling for regulators to step in are making fools of themselves trying to defend a firm whose professional investors made the bed they are lying in today.
The derivatives are where the real pain is
As bad as some of the first order commentary about GameStop was, things got much worse as prices continued to roar and the spiral of “takes” moved out of stock markets and into the collective cultural narrative.
A marketing professor tried to claim that this was all womens’ fault because the “young men, in a basement, not at work, not having sex, not forming connection, with an RH account, a phone and stimulus…[are] the perfect storm of volatility”. After Discord suspended the WallStreetBets channel on its service for content violations, a columnist declared a crisis of free speech. A former media company president demanded brokers who manage risk by restricting what securities their clients trade be jailed.
This explosion of half-baked and cockamamie takes is incredibly tiresome, and it’s ultimately a reflection of what has happened with GameStop’s stock. What started out as an interesting stock market quirk got turned into a melodrama that sucked in all sorts of people who have no business being involved, and those new entrants immediately mishandled the situation to their or others’ detriment.
Narratives simplify and obscure
There are real lessons to be learned from GameStop. Late arrivals to the party will inevitably learn the hard way that past gains are no indication of future returns, and that large, aggressive bets work both ways. Sophisticated investors have been reminded that being short a stock creates some unique risk management challenges.
But this is a mechanical short squeeze in the stock market. Not class war, an Orwell novel, or an event with broader societal implications. For non-investors, and especially out-of-depth pundits, Proverbs 17:28 is the way to go.