Gabe Plotkin’s Melvin Capital Reboots After Crushing String of Losses
(Bloomberg) -- Gabe Plotkin wants a do-over.
A year after amateur traders turned the tables on Wall Street pros with GameStop Corp. and other meme stocks, Plotkin is making an all-in play to salvage his stricken hedge fund firm, Melvin Capital Management.
The plan: Cut Melvin to a more manageable size, but require investors who decide to stay to pay performance fees again even though they’re underwater.
The maneuver -- unheard of in the industry -- adds another chapter to one of the wildest episodes in Wall Street history. Plotkin, 43, shot to fame and fortune at Steve Cohen’s SAC Capital, one of the biggest names in the business, only to be outdone by a herd of day-trading Redditors.
Plotkin’s new plan, outlined in a letter Thursday, is no sure thing. The big question is whether Melvin investors will stick around or simply take what’s left of their money and run.
“Navigating volatile markets had become more difficult than in the past,” Plotkin wrote. “It has become clear to us that to generate the strongest risk-adjusted returns for investors, shrinking our capital base and adjusting our terms should be a priority.”
Other hedge fund managers who ran into trouble have tried to make their comebacks with new funds rather than seeking to crawl out from under heavy losses. Perhaps the most audacious was John Meriwether, who opened JWM Partners in the late 1990s following the collapse of Long-Term Capital Management, of “When Genius Failed” fame. JWM later failed, too. A third Meriwether fund never gained traction.
But no one has tried to rebound as quickly as Plotkin now aims to do.
Plotkin was the most high-profile victim of January 2021’s Reddit-fueled trading frenzy. Individual investors, many of them homebound during pandemic lockdowns, used the social media message board to move in packs and bid up certain stocks, most notably GameStop and AMC Entertainment Holdings Inc.
GameStop, a struggling bricks-and-mortar retailer, was one of Melvin’s bearish bets. Its surge -- along with other stocks Melvin was shorting -- erased about $7 billion of the hedge fund’s capital in January 2021, and the fund plunged 55%. Plotkin would spend the rest of the year trying to dig out of that hole.
Despite improved performance in later months, the fund still ended the year down 39%, and tumbled an additional 21% in the first quarter of 2022.
In the wake of the GameStop debacle, Plotkin said in testimony to the House Financial Services Committee that he would avoid crowded short bets in the future. Bloomberg also reported that he planned to take smaller positions and that Melvin’s data scientists would scour social media and message boards for other companies that retail investors may seek to support.
Plotkin grew up in a middle-class family in Portland, Maine, and didn’t have a flashy start to his money management career. Early on he joined Ken Griffin’s Citadel, where he evaluated new businesses rather than taking a more coveted investment position. After a year, he jumped to Greenwich, Connecticut-based North Sound Capital, where he was a consumer stocks analyst for two years, with limited trading authority. It wasn’t until he joined SAC in 2006 that his trading career began to take off.
There he oversaw a portfolio of mostly consumer stocks and became one of the few portfolio managers to run more than $1 billion. His success made him one of the highest-paid people at Cohen’s firm, keeping about 30% of his profits. Over eight years there, Plotkin won the praise of the billionaire founder, who has described him as an “exceptional investor.”
When Plotkin decided to leave to start his own shop in 2014, Cohen’s new firm, Point72 Asset Management, invested about $200 million. Melvin Capital, named after Plotkin’s late grandfather, would go on to post double-digit gains for years, surging 46% in 2015 and 51% in 2020, quintupling Cohen’s initial investment to $1 billion.
Melvin, which posted annualized returns of about 30% through 2020, was considered one of Point72’s most successful spin-outs. Plotkin himself landed on Bloomberg’s list of the top hedge fund earners for two straight years.
One of the keys to his success was his sizable short wagers. Plotkin has said his firm had an “intense focus” on bearish wagers, with about 70% of profits coming from shorts during its first year.
“I’d rather use all the names in our portfolio to try to make money than use half,” he said at the 2019 Sohn Investment Conference in New York. He’s been critical of mall real estate investment trusts as well as car maker Tesla Inc., and has described Melvin as “a very human-intensive place” with lots of analysts who have modeled more than 500 companies in “significant detail” while a data science group examines trends.
Now as Plotkin seeks to put his recent struggles behind him, he’s making unprecedented demands of investors, the most significant being that they’ll have to pay fees again despite the recent declines. Previously, Plotkin would have had to recoup his losses -- in this case deliver a return of more than 100% -- before charging fees.
Melvin said it would cap the fund at about $5 billion from the current $8.7 billion and won’t allow it to grow beyond $7 billion until at least June 2027, according to the letter. Because of big gains in 2019 and 2020, the fund had gotten too large, making it harder for his short wagers to be as meaningful as they became a smaller proportion of the portfolio, he said.
As of June 1, performance fees will drop to a range of 15% to 25%, and will revert to the current level of 20% to 30% on Jan. 1, 2025. Plotkin will also cut the time it takes to exit the fund to one year, down from the current three, and will wind down Melvin’s long-only product, according to the letter.
It remains to be seen how investors will react to the plans. Cohen’s Point72 and Griffin’s Citadel funds as well as partners of his Chicago-based firm provided a $2.75 billion infusion to Melvin last year, but they’ve been pulling money since.
A spokeswoman for Point72 declined to comment on its future investment in Melvin. Citadel, which wasn’t an investor until last year, subsequently decided to redeem all of its money. Both Citadel and Point72 will still receive their share of performance fees as part of the three-year agreement they made with Plotkin’s firm in early 2021, according to people familiar with the matter.
In Thursday’s letter, Plotkin recalled the strategy he pursued since he started working for Cohen.
“We played offense and were able to ‘move our feet’ when the environment changed,” he wrote. “We also consistently had a short book that could protect us in volatile times. Our goal is to return to that structure.”
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