Melvin Capital Management made Wall Street history in January 2021 when its massive bet against GameStop and several other ‘meme stocks’ (although that sobriquet had yet to be coined) blew up in its face, saddling the fund with nearly $7 billion in losses. Its LPs were extremely miffed, and fund manager Gabe Plotkin later claimed to have been bombarded with mean-spirited messages (including threats) from strangers angry about his firm’s wager.
But somehow, Plotkin’s sudden turn in the limelight ended in salvation: his mentor Steve Cohen put up hundreds of millions of dollars to save Melvin from insolvency. And Citadel’s hedge fund business pumped in another $2 billion, giving Plotkin a chance to try and win back his losses. Unfortunately, this is proving much more difficult than Plotkin and the firm – which still has $12.5 billion AUM – had expected.
After Melvin lost billions on its disastrous shorts, it decided to open some long positions for some badly needed diversification. Still, Melvin’s post-GME short performance wasn’t exactly spectacular, and in August, Citadel withdrew $500MM from its $2 billion loan after its position turned just barely positive. At the time, we suggested that it might be time to short Melvin’s longs: “Will late August be just as memorable for shorting Melvin’s longs?”
Turns out, we were on to something with that: Per a WSJ report published Friday, Melvin is now down 17% YTD as its positions have gotten caught up in the brutal market rout that has placed small caps in bear market territory and the S&P 500 not far behind.
The 17% loss comes on top of a 39.3% drop last year. Melvin managed to erase a portion of its meme stock losses, but not nearly enough to cover even half of those losses. And now, for the second year in a row, the firm is about to post a double-digit (percentage-wise) loss in January for the second year in a row.
Of course, Melvin is hardly alone. This has been a catastrophic month for the “smart money”. Plotkin and Melvin will forever be associated with WSB’s preferred narrative – that the firm is part of a cabal of evil capitalists bent on destroying companies like GME and AMC for their own personal profit. But he’s no longer the paramount Wall Street villain – that position has been usurped by Cathie Wood and her massive ARKK losses.
According to WSJ, Plotkin has told friends he’s constantly trying to ignore the massive tally of winnings he must earn before he can start charging performance fees again. At the very least, he has his winnings from the years 2014 to 2020, when he returned an average of 30% annually riding the nearly decade-long bull market engineered by the Federal Reserve in the wake of the financial crisis.
Of course, it’s much easier to produce alpha in a torrid bull market. It becomes much more difficult when the entire market is in free fall.
It’s hard to believe, but WSJ claims that Plotkin still has some admirers on Wall Street, who regarded Melvin as “especially gifted” at shorting (that is, before they took on what must have been one of the worst shorts in the history of the American securities markets). Steve Cohen himself has said that among the hundreds of portfolio managers who had worked for him, Plotkin was one of the most ” disciplined and process-oriented” – whatever that means.
This praise isn’t just talk for the press. Cohen and Citadel’s Ken Griffin have put their money where their mouths are: in the wake of Melvin’s GME losses, they agreed to inject a combined $2.75 billion into Melvin in exchange for a large chunk of the firm’s revenues over the next three years.
The deal is redolent of when a loanshark offers to “stake” a skilled poker player in exchange for a share in their winnings. Except usually the loan sharks aren’t on the hook for the borrower’s losses.
For the most part, Melvin’s LPs have agreed to keep their money with the firm. Between February andDecember, Melvin notched a 33.2% return which beat most other funds. But the firm’s winnings weren’t nearly enough to cover the massive losses it had to eat after closing its GME short, which it said it was out of by Jan. 26.
But if the firm doesn’t find a new way to make money in an environment where markets are heading down, not up, LPs are likely to lose their patience.
Speaking on a podcast hosted by his personal trainer, Plotkin described the GME losses as “humbling”.
“One of the great things about, whether it’s sports or the stock market, you’re knocked down a lot,” he said. “I mean, it’s tough. You’re going to go through some good times and some bad times. It’s a very humbling game.”
That sounds nice. We’re sure the experience would be great grist for Plotkin’s post-Wall Street career as a motivational speaker.
According to the most recent filings available, Melvin’s biggest long position was a reopening play: live-music giant Live Nation. But the public won’t know how the January market rout impacted Melvin’s portfolio until mid-May.