Melvin Capital Explained

Melvin Capital Management LP
Founder:Gabriel Plotkin
Industry:Investment management
Aum: (Apr. 2022)
Subsid:Melvin Capital II Offshore Ltd
Hq Location:New York City, U.S.

Melvin Capital Management LP was an American investment management firm based in New York City.[1] It was founded in 2014 by Gabriel Plotkin, who named the firm after his late grandfather.

On May 18, 2022, Plotkin announced that the fund would close and return any remaining customer funds by June 2022. Its assets under management (AUM) in April 2022 were about $7.8 billion.[2]

Melvin Capital invested primarily in technology and consumer stocks and was noted for its high annual returns in comparison to other hedge funds.[3] It was reported to have $8billion in AUM as of January 2021.

During the GameStop short squeeze of 2021, it sustained losses of 53% or $6.8 billion, at one point losing more than a billion dollars a day;[4] in Q1 2021, the firm's assets declined 49%, and it finished 2021 down more than 39% on the year, during which the S&P 500 rose 28.7%.[5] [6] Melvin Capital began January 2022 down 17%.

History

Background

After graduating from Northwestern University with a degree in economics in 2001, Gabriel Plotkin joined Ken Griffin's hedge fund Citadel LLC, and later Connecticut-based hedge fund North Sound Capital.[7] Prior to starting Melvin Capital, Plotkin was a trader at Steve Cohen's SAC Capital, where he managed a portfolio of mostly consumer stocks valued at about $1.3 billion.

Plotkin was mentioned in the Securities and Exchange Commission's civil complaint against Michael Steinberg, a fellow SAC portfolio manager who was arrested on charges he traded Dell's earnings based on insider information.[8] During his time at SAC Capital, Plotkin allegedly received emails containing illegal insider information,[9] but was not charged with any wrongdoing.

Foundation and performance before 2021

Plotkin founded Melvin Capital, after leaving SAC in late 2014, naming the fund after his late grandfather who was a small-business owner. He raised nearly $1 billion.[10] [11] Plotkin described the fund to Bloomberg as "a very human-intensive place. We have a lot of analysts, we require a lot out of them."[12] He also said that the fund has an "intense focus" on the short side (i.e. short selling).

The fund was noted for having high returns between 2014 and 2020, averaging 30% annually.[13] In its first full year in operation, Melvin Capital had returns of 47%, ranking it 2nd in Bloomberg's 2015 list of top-performing funds with $1 billion or more in assets under management.[14] [15] These returns were several times that of Steve Cohen's current hedge fund, Point72, in the same year.[16]

In 2015, nearly two-thirds of the fund’s 67% returns (before fees) derived from its short positions. Notable short positions included bets against J.C. Penney Co. and renewable-energy company SunEdison Inc., both of which ultimately went bankrupt.

In 2017, the fund finished up 41%.[17] Notable investments included Chewy.com, Amazon.com, Las Vegas Sands, Alibaba, and shorting GameStop.[18]

The fund had returns of 44% in 2019. According to The Wall Street Journal, about one-third of the gains in 2019 from Point72 came from Melvin Capital Management LP.[19]

At the end of 2020, it was reported to have made returns of 52%, making it one of the highest-performing hedge funds. In September 2020 the name of company showed up in the Polish Short Sale Registry (Polish: Rejestr Krótkiej Sprzedaży) because of a short position in game developers CD Projekt, a net position of 0.55 percent through the Polish stock exchange (GPW).[20] [21]

It consistently remained one of the top performing hedge funds until 2021. Melvin charged investors an annual management fee of 2% and up to 30% of its profits, among the highest fee packages in the hedge fund industry.

2021 losses

See also: GameStop short squeeze. In early 2021 the fund lost over 30% due to numerous short bets that went awry, including GameStop. Users of the subreddit r/WallStreetBets made widespread bets believing that GameStop's stock would increase in value.[22] In January, Citadel and Point72 invested $2.75 billion in Melvin in exchange for non-controlling revenue shares of the fund.[23] [24] [25] [26] CNBC's Andrew Ross Sorkin reported that Melvin Capital had closed (i.e. covered) its short position in GameStop on January 26 in the afternoon, although CNBC could not confirm the amount that Melvin Capital lost. Melvin Capital also refuted rumors that the fund intended to file for bankruptcy.[27] [28] On January 27 Bloomberg News reported that losses had continued past the 30% reported on January 24 by The Wall Street Journal (WSJ).[29] The fund had also repositioned its portfolio according to the source. During the height of the squeeze, Melvin was reportedly losing more than a billion dollars a day.

The short position adopted by Melvin Capital and others resulted in more than 139% of existing shares of GME being shorted, making GameStop stock the most shorted equity in the world.[30] Through the end of January 2021, the fund was down 53%, according to WSJ.[31] In February, Melvin posted a 22% gain; even with this addition, Melvin would need to produce an additional 75% gain for earlier clients before breaking even.[32] At the end of Q1 2021, Melvin reported losses of 49%; at the close Q2 2021, Melvin was reported to be down 46% on the year; and as of November 2021, Melvin was reported to be down 42% on the year.[33] [34] Melvin finished 2021, a year during which the S&P 500 rose 28.7%, down more than 39%.

Subsequent to the GameStop short squeeze event, Melvin Capital disclosed that it was the target of at least nine lawsuits relating to its behavior during that period.[35] Allegations included Melvin's participation in a conspiracy against retail investors, and also that Melvin "made misstatements about their role in the conspiracy to the public." Melvin contended that these lawsuits were "without merit".[35] These lawsuits were later dismissed.[36]

2022

In May 2022, Bloomberg News reported that Melvin Capital planned to close its funds and return the cash to its investors by June 30.[37] [38]

Executives

The fund was led by Founder & CIO Gabriel "Gabe" Plotkin. According to Forbes, Plotkin earned about $300 million in compensation in 2017, making him the 20th-highest-paid hedge fund manager that year.[39] In December 2020, Plotkin purchased two adjacent houses in Florida for $44 million.[40] Plotkin purchased a minority interest in the Charlotte Hornets in 2019 from Michael Jordan.[41] Plotkin led a group of investors who bought Jordan's majority stake in the Hornets in June 2023.[42]

According to Bloomberg, during 2020 Plotkin earned over $800 million in compensation.[43] However, during January 2021, he reportedly lost $460 million due to short squeezes.

David F. Kurd was the firm's COO.

External links

Notes and References

  1. News: Goldstein . Matthew . August 15, 2014 . A Former Top SAC Capital Trader Names New Hedge Fund . . live . July 21, 2019 . https://web.archive.org/web/20191001185558/https://dealbook.nytimes.com/2014/08/15/a-former-top-sac-capital-trader-names-new-hedge-fund/ . October 1, 2019.
  2. 2023-06-20 .
  3. News: Chung . Juliet . Pulliam . Susan . Michaels . Dave . 2022-08-11 . WSJ News Exclusive SEC Investigating Melvin Capital Management . en-US . Wall Street Journal . 2023-08-14 . 0099-9660.
  4. News: Chung. Juliet. 2022-01-28. Hedge Fund Melvin Lost $6.8 Billion in a Month. Winning It Back Is Taking a Lot Longer.. en-US. Wall Street Journal. 2022-01-29. 0099-9660.
  5. 2023-06-20.
  6. 2023-06-20.
  7. News: Kishan . Saijel . Foxman . Simone . January 6, 2015 . Ex-Point72 Manager Plotkin Is Said to Raise $700 Million . live . https://web.archive.org/web/20160731073450/http://www.bloomberg.com/news/articles/2015-01-06/ex-point72-manager-plotkin-said-to-raise-700-million-for-fund . July 31, 2016 . January 27, 2021 . Bloomberg.com.
  8. News: April 3, 2013 . The burden of being SAC Capital's "Portfolio Manager B" . en . Reuters . live . January 27, 2021 . https://web.archive.org/web/20210128171024/https://www.reuters.com/article/idUS310089300120130403 . January 28, 2021.
  9. News: July 19, 2013 . Senior manager at SAC Capital indicted for fraud . live . https://web.archive.org/web/20210126202941/https://www.investmentnews.com/senior-manager-at-sac-capital-indicted-for-fraud-50572 . January 26, 2021 . January 27, 2021 . InvestmentNews . en-US.
  10. News: Saacks . Bradly . June 28, 2019 . One of this year's top hedge funds has been $7 billion Melvin Capital run by a former top money-maker for Steve Cohen . . live . July 15, 2019 . https://web.archive.org/web/20190715193823/https://www.businessinsider.com/gabe-plotkins-fund-melvin-capital-returns-2019-6 . July 15, 2019.
  11. News: Alden . William . Goldstein . Matthew . February 17, 2015 . Seeing Value After a Plunge, Hedge Funds Bet on Energy Stocks . . live . July 15, 2019 . https://web.archive.org/web/20190715193826/https://dealbook.nytimes.com/2015/02/17/hedge-funds-offer-peek-at-their-holdings/ . July 15, 2019.
  12. News: July 19, 2019 . Cohen Cub Gabe Plotkin Sees Fund Surge About 44% This Year . en . Bloomberg.com . live . January 27, 2021 . https://web.archive.org/web/20210127012832/https://www.bloomberg.com./news/articles/2019-07-19/cohen-cub-gabriel-plotkin-sees-fund-surge-about-44-this-year . January 27, 2021.
  13. News: Herbst-Bayliss . Svea . 2022-05-19 . Melvin Capital to shut after heavy losses on meme stocks, market slump . en . Reuters . 2023-08-07.
  14. News: Foxman . Simone . February 23, 2016 . This SAC Alum Stands Out in Hedge Fund Rankings . . July 15, 2019 .
  15. News: February 29, 2016 . Hedge fund rankings 2015 . July 15, 2019 . .
  16. Web site: Kelly . Kate . 2015-11-24 . Up nearly 40%, SAC alum's fund is one of year's best . 2023-08-28 . CNBC . en.
  17. News: Vardi . Nathan . April 17, 2018 . The 25 Highest-Earning Hedge Fund Managers And Traders . . live . July 15, 2019 . https://web.archive.org/web/20190707082630/https://www.forbes.com/sites/nathanvardi/2018/04/17/the-25-highest-earning-hedge-fund-managers-and-traders-3/#4058a0283596 . July 7, 2019.
  18. News: Melvin Capital - Current Investments . live . https://web.archive.org/web/20210205191819/https://fintel.io/i/melvin-capital-management-lp . February 5, 2021 . October 10, 2019 . Fintel.io.
  19. News: Levy . Rachael . August 5, 2019 . An Outside Hedge Fund Is Driving Steve Cohen's Gains . . live . August 10, 2019 . https://web.archive.org/web/20190809071205/https://www.wsj.com/articles/an-outside-hedge-fund-is-driving-steve-cohens-gains-11565004717 . August 9, 2019.
  20. News: Spora aktywność na CD Projekcie na razie bez wpływu na kurs - Stooq . live . https://web.archive.org/web/20210122021801/https://stooq.pl/mol/?id=14901 . January 22, 2021 . September 24, 2020.
  21. News: RSS UKNF . live . https://web.archive.org/web/20201031011229/https://rss.knf.gov.pl/RssOuterView/faces/hspsList.xhtml . October 31, 2020 . October 27, 2020.
  22. News: Wallace . Joe . January 25, 2021 . GameStop Stock Jumps to New Record . en-US . Wall Street Journal . live . January 27, 2021 . https://web.archive.org/web/20210127153034/https://www.wsj.com/articles/gamestop-shares-surge-toward-fresh-record-ahead-of-opening-bell-11611579224 . January 27, 2021 . 0099-9660.
  23. News: Chung . Juliet . January 25, 2021 . Citadel, Point72 to Invest $2.75 Billion Into Melvin Capital Management . . live . subscription . January 25, 2021 . https://archive.today/20210126062245/https://www.wsj.com/articles/citadel-point72-to-invest-2-75-billion-into-melvin-capital-management-11611604340 . January 26, 2021.
  24. News: McCabe . Caitlin . January 14, 2021 . GameStop Stock Soars, and Social-Media Traders Claim Victory . en-US . Wall Street Journal . live . January 23, 2021 . https://web.archive.org/web/20210127043245/https://www.wsj.com/articles/gamestop-stock-soars-and-social-media-traders-claim-victory-11610653679 . January 27, 2021 . 0099-9660.
  25. News: Chung . Juliet . January 22, 2021 . WSJ News Exclusive Short Bets Pummel Hot Hedge Fund Melvin Capital . en-US . Wall Street Journal . live . January 23, 2021 . https://web.archive.org/web/20210127140132/https://www.wsj.com/articles/short-bets-pummel-hot-hedge-fund-melvin-capital-11611349217 . January 27, 2021 . 0099-9660.
  26. News: January 25, 2021 . Ken Griffin's $2 billion bet . live . https://web.archive.org/web/20210126210146/https://www.chicagobusiness.com/finance-banking/ken-griffins-2-billion-bet . January 26, 2021 . January 25, 2021 . Crain's Chicago Business . en.
  27. News: Li . Yun . January 27, 2021 . Melvin Capital, hedge fund targeted by Reddit board, closes out of GameStop short position . live . https://web.archive.org/web/20210128010414/https://www.cnbc.com/2021/01/27/hedge-fund-targeted-by-reddit-board-melvin-capital-closed-out-of-gamestop-short-position-tuesday.html . January 28, 2021 . January 27, 2021 . CNBC . en.
  28. News: Watts . William . Hedge fund Melvin Capital closes out GameStop short: CNBC . live . https://web.archive.org/web/20210205191822/https://www.marketwatch.com/story/hedge-fund-melvin-capital-closes-out-gamestop-short-cnbc-2021-01-27 . February 5, 2021 . January 27, 2021 . MarketWatch . en-US.
  29. News: Burton. Katherine. Parmar. Hema. January 27, 2021. Reddit Traders Bludgeon Melvin Capital in Warning to Wall Street. en. Bloomberg. live. January 27, 2021. https://web.archive.org/web/20210127145141/https://www.bloomberg.com/news/articles/2021-01-27/bros-on-reddit-bludgeon-melvin-capital-in-warning-to-wall-street. January 27, 2021.
  30. News: D'Souza . Deborah . Short Sellers Lose $5.05 Billion in Bet Against GameStop . live . https://web.archive.org/web/20210128104616/https://www.investopedia.com/short-sellers-lose-usd5-05-billion-in-bet-against-gamestop-5097616 . January 28, 2021 . January 29, 2021 . Investopedia . en.
  31. News: Chung . Juliet . January 31, 2021 . WSJ News Exclusive Melvin Capital Lost 53% in January, Hurt by GameStop and Other Bets . en-US . Wall Street Journal . live . January 31, 2021 . https://web.archive.org/web/20210131142830/https://www.wsj.com/articles/melvin-capital-lost-53-in-january-hurt-by-gamestop-and-other-bets-11612103117 . January 31, 2021 . 0099-9660.
  32. News: Burton. Katherine. Parmar. Hema. March 4, 2021. Melvin Capital Dusts Off From GameStop Fiasco With 22% Gain. MSN. Bloomberg. 2021-03-05.
  33. Web site: Porzecanski and Parmar. Katia and Hema. July 8, 2021. Melvin Can't Shake Reddit Attack With 46% Loss in First Half. Bloomberg.
  34. News: Chung. Juliet. 2021-07-10. The Meme Stock Rally Hurt Melvin and Maplelane. It Hasn't Gotten Easier Since.. en-US. Wall Street Journal. 2021-07-12. 0099-9660.
  35. Web site: Celarier . Michelle . March 22, 2021 . Melvin Capital Is Facing Nine Lawsuits Related to the GameStop Frenzy . 2021-03-23 . . en-gb.
  36. News: Godoy . Jody . 2022-01-27 . Court dismisses claims Robinhood wrongly restricted 'meme stock' trades . en . Reuters . 2023-08-28.
  37. News: Plotkin Shuts Melvin Hedge Fund Left Reeling by Redditor Attack . 18 May 2022 . Hema Parmar . . 19 May 2022 . https://archive.today/20220519002753/https://www.bloomberg.com/news/articles/2022-05-18/gabe-plotkin-s-melvin-capital-to-wind-down-funds-after-losses?.
  38. News: Melvin Capital, hedge fund torpedoed by the GameStop frenzy, is shutting down . 18 May 2022 . . Matthew . Goldstein . Kate . Kelly.
  39. News: Gabriel Plotkin . live . https://web.archive.org/web/20210127022555/https://www.forbes.com/profile/gabriel-plotkin/ . January 27, 2021 . January 27, 2021 . Forbes . en.
  40. News: Kallergis. Katherine. December 7, 2020. Gamestop Short Seller Gabe Plotkin Buys Miami Beach Property. en-US. The Real Deal South Florida. live. January 27, 2021. https://web.archive.org/web/20210127024953/https://therealdeal.com/miami/2020/12/07/melvin-capital-founder-revealed-as-buyer-of-44m-miami-beach-property-sources/. January 27, 2021.
  41. News: NBA.com Staff. September 14, 2019. Michael Jordan sells minority stake in Hornets Sports & Entertainment. NBA. live. January 27, 2021. https://web.archive.org/web/20210205191820/https://www.nba.com/news/jordan-hornets-new-partners-retains-majority-official-release. February 5, 2021.
  42. Web site: Lee . Hank . June 16, 2023 . J. Cole, Eric Church among group buying Charlotte Hornets from Jordan . 2023-06-20 . WCNC . en-US.
  43. News: Maloney. Tom. Parmar. Hema. February 10, 2021. Coleman Leads $23 Billion Payday for 15 Hedge Fund Earners. en. Bloomberg. live. February 10, 2021. https://web.archive.org/web/20210210060635/https://www.bloomberg.com/news/articles/2021-02-10/chase-coleman-leads-23-billion-payday-for-15-hedge-fund-earners. February 10, 2021.

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