Melvin Capital plans to close its funds and return the money to its investors, capping a stunning reversal for a company who lost big on soaring meme stocks last year and betting on growth stocks this year.
In a letter to investors that was reviewed by The Wall Street Journal, Gabe Plotkin, Melvin’s founder, wrote that he made his decision after speaking with Melvin’s board of directors during a month-long process of re-evaluating his company.
“The last 17 months have been an incredibly trying time for the company and you, our investors,” he wrote. “I gave it my all, but more recently it hasn’t been enough to deliver the returns you’ve come to expect. I now recognize that I need to move away from managing external capital.”
Melvin was, until last year, one of the best performing hedge funds – its track record of around 30% per year after fees before 2021 was among the best on Wall Street. He was best known for his prowess at shorting or betting against stocks. In 2015, Melvin’s short-selling gains accounted for two-thirds of the fund’s 67% returns before fees. Mr. Plotkin bought a minority stake in the Charlotte Hornets from the National Basketball Association, as well as a $44 million oceanfront mansion in Miami Beach.
But Melvin’s short positions exploded in January 2021 when individual investors on online forums such as Reddit’s WallStreetBets banded together to drive up stock prices, like those of
, against which Melvin was betting. At the worst time of the month, Melvin, who managed $12.5 billion at the start of last year, was bleeding more than $1 billion a day.
Although Melvin made up for some of those losses at the end of the year, his focus on fast-growing companies has caused him further setbacks this year as investors chafe at these stocks in the face of rising interest rates. ‘interest. Stock pickers also blamed this year’s losses on macroeconomic factors such as inflation and the war in Ukraine that hit the market, rather than companies’ own fundamentals. Melvin’s losses have widened.
Melvin this year to April had lost 23%, on top of a 39.3% loss in 2021 – a huge hole that investors expected to fill could take years if Mr Plotkin does not close in the meantime. weather. Since its launch, it has posted an average return of 11.9%.
Still, several investors said Wednesday they were surprised by the decision.
Just last week, Melvin executives asked customers what they thought of new pricing deals that seemed fair to them and Melvin, people familiar with the company said. Mr. Plotkin in April tried to remove Melvin’s so-called high water mark, an industry standard arrangement in which hedge funds do not receive performance fees until their clients are compensated for past investment losses. The proposal was part of a larger restructuring effort intended in part to retain and motivate his team, but it was met with resistance.
Some investors were so infuriated by the proposal that they said they planned to redeem all their money at the first opportunity. Mr. Plotkin withdrew his plan days later and apologized to investors, saying he would consult with all of Melvin’s clients as the company struggled to find a new way forward.
Investors had shared various proposals they thought were fair, including one whereby Mr Plotkin would keep the current terms until the end of the year and then implement a modified upper limit that would have allowed Melvin to collect commissions substandard performance, people familiar with the company said.
Mr Plotkin wrote in the letter: “I have worked tirelessly for 20 years to try to be the best I can be and to build and lead an outstanding team of professionals…Being a steward of your capital requires relentless focus. I am proud of what our team has accomplished since 2007.”
He wrote that he expected to return almost all of his clients’ money by the end of July. Company-wide, Melvin managed $7.8 billion in April.
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Appeared in the print edition of May 19, 2022 under the title “Melvin To Close Funds, Pay Back Investors”.
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