Traders at Melvin Capital Management earned a hefty 30% in performance fees for more than half a decade while giving roughly 30% annualized returns to investors. After a string of losses, the fund returns the client capital and moves on.
What’s this all about?
Gabe Plotkin’s decision shut the hedge fund caught some of the investors flat-footed who are complaining privately. They were hopeful that Plotkin’s team could recoup some of his losses made more than a year ago.
Plotkin announced Wednesday that he was winding Melvin’s portfolio, releasing around 40 employees from working below the high-water mark.
New York-based Dynamic Beta Investments managing member Andrew Beer said that only in hedge funds can someone get paid millions of dollars on January 1, burn half of the clients’ capital, try to recoup losses in the next year, fail, and then shut the doors. He said plenty of fund managers were paid a lot for a year, went through difficult times but worked for years to claw their way back. However, Melvin Capital was not one of them.
Melvin’s spokesperson declined to comment as Plotkin, in a letter to the client, said that the last 17 months were trying times, and he appreciated his investor’s trust in him and his fund. He said that he tried giving everything but could not give enough returns that investors were expecting, and now he recognized the need to move away from managing external capital.
One investor said he understood why Plotkin chose to shut down – he made money till the strategy worked. The fund was challenged by rising inflation, growth in retail trading, and tightening monetary policy. Despite that, investors feel that Plotkin will back and again become successful.
The 43-year-old Plotkin decision followed a rapid downfall as someone long viewed as a wunderkind by endowments and family offices, who did rigorous research and used intricated financial models to post reliable gains.
In 2014, Plotkin left Steve Cohen’s fund to chalk out an impressive winning result, posting a 46% gain in the first year of Melvin. Five years later, he bought a piece of Charlotte Hornets, the NBA basketball team.
The winning streak ended abruptly last year when a group of amateur investors drove up stocks such as GameStop Corp. and tightened heavyweights on Wall Street like Melvin Capital. The roller coaster ride began after that for Melvin that saw the fund drop by 55% in a single month, recover later to some extent, and end the year at a 39% drop before piling up more losses later. By April end, Melvin was 23% down.
After the announcement Wednesday, many investors said they had not spoken to Plotkin since then or the day before, leading to the decision. Even Ken Griffin, the billionaire investor whose Citadel Hedge fund had invested in Melvin Capital after last year’s squeeze, said he had not spoken to Plotkin for weeks.
