Melvin Capital Management, the hedge fund that suffered the impact of losses from the high prices of heavily sold shares, lost 53% in January, according to people familiar with the company.
Melvin was founded by Gabe Plotkin, a former portfolio manager for hedge fund titan Steven A. Cohen. It started the year with about $ 12.5 billion and now moves over $ 8 billion. The current figure includes $ 2.75 billion in emergency funds Citadel LLC, its partners and Cohen’s Point72 Asset Management injected into the hedge fund last Monday.
As part of the deal, they acquired non-controlling interests in Melvin’s revenue for three years. So far, Citadel, its partners and Point72 have lost money on the deal, although the precise scope of the loss is unclear on Sunday.
Melvin has greatly reduced the risk of his portfolio, said one customer. People familiar with the hedge fund said that its leverage ratio – the value of its assets compared to its investor capital – was the lowest since Melvin’s inception in 2014. They also said that the liquidity of the company’s position level company, or its ability to easily exit securities from its portfolio, has increased significantly.
New and existing customers signed up to invest money in Melvin on February 1, according to people they know. It was not clear how much they would be adding.
Melvin had established himself in recent years as one of the main hedge funds on Wall Street, but a short position on GameStop Corp.
GME 67.87%
hurt the company in recent weeks. The losses extended beyond GameStop, with falls coming from its entire portfolio during a period of market turmoil in January. The positions in which Melvin had publicly disclosed the possession of put options – write-off contracts that normally profit from the fall of the shares – in his last quarterly regulatory record skyrocketed, while the positions in companies he held were sold.
Wall Street is in an uproar over GameStop’s actions this week, after members of Reddit’s popular WallStreetBets forum encouraged gambling at the video game retailer. WSJ explains how options trading is driving action and what is at stake.
Bed Bath & Beyond Inc.,
GSX Techedu, Chinese tutoring company listed in New York Inc.
and national drinks Corp.
rose 78.4%, 62% and 99% at their intra-week highs last week, respectively. Meanwhile, Booking Holdings Inc.
and Expedia Group Inc.
fell 9.9% and 13.4% at their intra-week lows.
Traders say that as GameStop continued to rise – from $ 30 to $ 75 and more – there was a contagion effect. Managers lost confidence that short positions would stop increasing in value and covered heavily sold names, concerned about investors fed by social media who would focus on companies they were sold to. They also began to cut their stakes in companies to reduce risk in their portfolios, harming other investors in those companies. Last week alone, GameStop’s stock soared more than four times.
“Performance pain … has hit a record,” a Morgan Stanley note said to its trading clients last week.
In fact, hedge funds set near-daily records of various types last week for how much they reduced their exposure to the U.S. stock market by covering their short positions and selling their bets on companies, according to notes from Morgan clients Stanley and Goldman Sachs Group Inc.
On Wednesday, this type of degradation contributed to the biggest one-day drop in the use of fund leverage ever recorded, said a Goldman note.
Maplelane Capital, another hedge fund that suffered significant losses this month, ended January with a loss of about 45%, said a person familiar with the fund. He managed about $ 3.5 billion at the beginning of the year.
The frantic negotiation that catapulted GameStop, AMC Entertainment Holdings Inc.
and BlackBerry Ltd.
in the most traded stock classifications in the US market and drew the attention of the White House and regulators also hit the prominent hedge funds Point72 and D1 Capital Partners.
D1, which ended the month with a drop of about 20%, was sold on AMC and GameStop, said people familiar with the fund. One person said that D1 had moved out of both positions on Wednesday morning, but that these were minor causes of losses. A more significant factor was the decline in shares of travel-related companies.
Some fund managers say the episode is likely to change the way the industry works.
Few hedge funds are expected to highlight their bearish positions by publicizing put options, they said. Instead, funds can use the rules of the Securities and Exchange Commission to maintain the confidentiality of these positions, a tool that activist investors have long used to quietly build positions in companies. More funds may also institute rules to avoid under-traded and over-sold stocks.
Write to Juliet Chung at [email protected]
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