Bloomberg
Reddit crowd strikes Melvin Capital on industry alert
(Bloomberg) – The first sign of trouble for the hedge fund prodigy Gabe Plotkin came in late October: a poster on Reddit’s popular wallstreetbet forum pointed to his highly successful investment company. “GME Squeeze and the end of Melvin Capital,” wrote the user, Stonksflyingup, referring to the GameStop Corp. ticker. and Plotkin’s $ 12.5 billion company. Before long, veryforestgreen weighed in: “Melvin Capital New Short Attack.” So, greekgod1990: “Melvin vs WSB! And GME for the moon. So that’s how the table turned on Wall Street – and a hedge fund star suddenly found himself at the mercy of the Reddit brothers who became one of the most powerful, though unlikely, forces in the stock market today. The attack on Plotkin’s six-year-old Melvin Capital changed the balance of power in a way that would have seemed unimaginable just a few months ago. On Wednesday, the company capitulated to amateurs and covered the short term of GameStop. The explosive growth of retail day-trading, driven by platforms like the Robinhood trading app and forums like wallstreetbets, has turned the old order upside down. Melvin Capital’s mistake, if it can be called that, was to leave footprints in the market. Reddit users were able to identify stocks that Melvin was betting on and then buy them in bulk, triggering a violent price hike that turned Melvin’s winning bet into a loser. So steep were the losses – about 30 percent last week – that Melvin on Monday turned to billionaire hedge fund founders Ken Griffin and Steve Cohen – Plotkin’s former boss – to support the company. On Tuesday, the fund’s losses increased even as the portfolio was repositioned, although investors do not say exactly how much, for fear of angering the money manager, what they hope may still struggle to get back. A company representative declined to comment on the performance, except that the portfolio had been repositioned in the past few days and “the social Media posts about Melvin Capital’s bankruptcy are categorically false. Melvin Capital is focused on generating high quality risk-adjusted returns for our investors and we appreciate your support. ”The risk of trading long is intuitive: buy $ 50 in shares, and if the price goes down, you lose that amount. But losses on bearish bets can be more serious and faster. A classic $ 50 short can lose multiples of that amount if the stock skyrockets. And while the use of options can limit losses, investors can be eliminated quickly if stocks rise. Short sales that were listed in Melvin’s third-quarter regulatory process have skyrocketed in recent weeks. Names include Bed Bath & Beyond Inc., iRobot Corp. and GSX Techedu Inc. GameStop, the stock that appears to have triggered the squeeze, shot up 634% in the month through Tuesday. That night, Elon Musk tweeted a link to the Reddit topic with the caption “Gamestonk !!” And in the middle of Wednesday in New York, the stock more than doubled again. Investors caught in a short squeeze may close bets and eat their losses, or try to overcome the price increase – usually by requiring them to put in more money. The infusion of cash was almost unheard of in hedge fund lands. Griffin, his partners, and the hedge funds he runs at Citadel injected $ 2 billion and Cohen’s Point72 Capital Management, which already had about $ 1 billion invested in Melvin, disbursed another $ 750 million. Cohen, it can be argued, was bailing out his own investment. For Griffin, it was a rare opportunity to invest cheaply in a talented manager. Both firms obtained a minority stake in the firm’s revenue for intervening. Late Tuesday, Cohen broke his habit of just tweeting about his New York Mets. “Hey, stock jockeys, keep bringing it,” he wrote on the social media platform. Until this year, Plotkin, 42, had one of the best records among hedge fund stock selectors. He worked for Cohen for eight years and was one of his biggest money earners before leaving to form Melvin – in honor of his grandfather – in December 2014. So good was Plotkin’s reputation that the company closed to additional investors before that there was even spread that he was leaving alone. Despite a loss in 2018, it posted an annualized return of 30% since opening, ending last year with an increase of more than 50%, according to an investor. Then came January, when Melvin first learned that a Reddit crowd had set a goal in the company’s positions, intensifying an attack on GameStop and other shorts. Exposing positionsWhy they chose Melvin remains a mystery. With regard to hedge fund managers, Plotkin is considered discreet. He does not appear at many conferences or friends at society balls. Former colleagues and current investors say he is a nice, quiet guy – not the type to make enemies. The most obvious explanation is that their positions were, in a sense, knowable. Hedge funds generally go to great lengths to protect their short positions. If they use put options, for example, they buy them over the counter, which means they don’t have to list them in regulatory records. The Plotkin lawsuit in the third quarter showed put options at 17 companies, many of them highly abbreviated names. “There is no segmentation in progress – the WSB is much less organized than all the articles are making it look like,” said Lucas Severyn, a member of wallstreetbets. “From time to time, the WSB becomes obsessed with some stocks, it is now GME and, for the first time, those stocks continue to yield.” Melvin’s losses increased in January and, after exceeding 15% last week, he talked to investors and secured commitments of around $ 1 billion for February 1. By the end of last week, losses had risen to around 30%. On Monday morning, Plotkin struck a deal with Point72 and Citadel to provide him with more liquidity to help put Melvin back on the offensive. That Cohen intervened made sense, given his long-standing relationship with Plotkin – and an initial investment of about $ 200 million in the company that had grown to about $ 1 billion. Griffin, who founded Citadel in 1990, has a history of advances when others are in danger. He hired teams or took on assets from hedge funds like Sowood Capital Management, Visium Asset Management and Amaranth Advisors after they imploded. He may also have liked the chance to invest in the Plotkin fund. Melvin usually manages money for charitable organizations, such as donations and foundations. The new RiskInvestors have expressed faith that Plotkin will come out of that hole. Griffin said on Monday that he and his partners “have great confidence in Gabriel and his team”. Cohen called him “an exceptional investor and leader”. A person familiar with thinking within Plotkin’s company said a lesson is clear: don’t leave a trail and just buy put options at the counter. “This phenomenon of retail investors jumping into one The move to dominate trading activity is a new type of portfolio risk,” said Jay Raffaldini, global head of sales and distribution at UBS O’Connor. “This will make many hedge funds rethink how they approach their long- and short-term investment strategies. ” (Stock updates in the ninth paragraph. An earlier version of this story corrected a title in paragraph 19.) For more articles like this, visit us at bloomberg.comSubscribe now to stay up to date with the most trusted business news source. © 2021 Bloomberg LP