Goldman Sachs – Short Bets Pummel Hot Hedge Fund Melvin Capital
Melvin Capital Management is down 15% just three weeks into 2021, thanks to a series of wrong-way bets that stocks including GameStop Corp. would slump.
Founded by 42-year-old
a former star portfolio manager for hedge-fund titan
Steven A. Cohen,
Melvin bets on and against stocks and managed about $12.5 billion at the start of the year. Its short book, or array of bets against companies, has driven losses so far this year, said people familiar with the matter. Melvin’s losses were broad-based and not driven by losses on GameStop or any other specific stock, some of them said.
The stumble by one of the best-performing hedge funds in recent years underscores the heavy losses being suffered by short sellers at a time when major indexes have soared to records. The market is as exuberant as many traders and portfolio managers say they have seen since the tech bust 20 years ago.
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Many investors have complained about short squeezes that have left them nursing losses. In a short squeeze, heavy buying forces short bettors to buy back shares to limit their losses.
A sign of the pain short sellers are experiencing:
Goldman Sachs Group Inc.’s
basket of the 50 stocks with the highest short interest as a share of market capitalization was up a total 25% for the year through Friday, compared with a total-return of 2.4% by the S&P 500.
Many hedge funds have simply gotten out of the way as markets have surged since March on the back of low interest rates and massive fiscal stimulus. A Nov. 19 Goldman report said the outstanding short interest in the median S&P 500 stock equaled just 1.6% of its market capitalization, “the lowest level in our 16-year data history.”
In contrast, Melvin is known for running an expansive and aggressive short book that has sometimes made up the bulk of the fund’s gains, an uncommon dynamic in the industry. The firm has returned an average 30% a year since it started in 2014, despite charging performance fees that range up to 30% on investment gains.
A double-digit loss so early in the year creates a large hole Melvin will need to climb out of before it can start charging performance fees.
One stock that has dinged Melvin and significantly hurt New York hedge fund Maplelane Capital, which is also down for the year, is videogame retailer GameStop Corp.
GameStop’s stock has soared 245% this year through Friday—including a 57% gain on Jan. 13. Its share price doubled from its Jan. 12 close to its Jan. 14 close. It was up almost 70% midday Friday from its Thursday close before stock exchanges temporarily paused trading in the stock to rein in volatility.
Analysts said previously that GameStop’s rapid gains were partly spurred by an announced deal to add
to its board
Mr. Cohen, who has been building a stake in GameStop, has urged the company to shift away from its bricks-and-mortar focus.
But members of Reddit’s popular WallStreetBets forum, who have been touting the stock and noting its substantial short interest, have taken victory laps as shares surged, The Wall Street Journal reported. Some of the posts specifically call out Melvin, which disclosed in its most recent quarterly regulatory filing that it held put options on GameStop. Put options are contracts that give investors the right to sell stock at a specific price by a certain date and limit an investor’s potential losses.
A person familiar with Melvin said its GameStop puts expired last week.
Fund managers say the influx of millions of new individual investors into markets last year has distorted some stock prices. Individual investors have drawn notice for their use of short-dated options that magnify their clout.
The relative outperformance this year of small- and midcap stocks, compared with megacap tech stocks that have been favored by hedge funds, also has hurt—making gains from funds’ long bets less likely to mitigate their losses from shorts.
In recent days, Mr. Plotkin has been calling clients with chief operating officer
to inform them of and explain the losses thus far. One client said Melvin’s message was that the fund still liked its portfolio and that it had rebounded from past losses.
In October 2018 Melvin lost 15%, then lost more money the next month, ending the year down 6%. It made nearly 50% the following year, after fees.
Melvin plunged intra-month in March 2020 but ended the month and year up. Last year it made a little more than 50% after fees, a client said. The firm took in more money from investors shortly after each of those periods, citing opportunities to take advantage of market dislocations.
Melvin expects to take in more than $1 billion in February, people familiar with its plans said. Clients can only get all of their money out of Melvin in three years’ time, meaning Melvin typically can expect to ride out market turbulence.
One client said he wasn’t worried about Melvin’s troubles given Mr. Plotkin’s record. Mr. Plotkin’s buys of big slugs of retailer
L Brands Inc.,
Hyatt Hotels Corp.
in March captured other traders’ attention last year. The share prices have all since climbed.
Mr. Plotkin previously ran one of the biggest portfolios at Mr. Cohen’s former hedge-fund firm, SAC Capital Advisors, before leaving to start Melvin in 2014. The fund is named after Mr. Plotkin’s late grandfather.
Mr. Cohen was a Day 1 investor in Melvin, a signal that helped the fledgling fund attract interest from other clients. By 2019, Mr. Plotkin was overseeing more than $1 billion for Mr. Cohen’s current firm, Point72 Asset Management. Mr. Plotkin bought part of the N(BA) basketball team the Charlotte Hornets that year.
Write to Juliet Chung at [email protected]
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