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At once, Main Street is beating Wall Street.
In a matter of weeks, two hedge fund legends – Steve Cohen and Dan Sundheim – suffered staggering losses as amateur brokers came together to face some of the world’s most sophisticated investors. In Cohen’s case, he and Ken Griffin ended up running to help a third party, Gabe Plotkin, whose company was being taken down.
Driven by frantic trade in GameStop Corp. and other actions that hedge funds have been betting on, the losses suffered in recent days would be among the worst in some of the historical careers of these money managers. Cohen’s Point72 Asset Management has dropped 10% to 15% so far this month, while Sundheim’s D1 Capital Partners, one of last year’s best performing funds, fell about 20%. Plotkin’s company Melvin Capital had lost 30% by Friday.
It is a humiliating turnaround for hedge fund titans, who in 2020 staged a comeback by attacking the wild markets caused by the Covid-19 pandemic. But this crisis helped push thousands, if not millions, of retail traders into the US stock market, creating a new force that, for now, professionals seem powerless to fight.
His attackers are a group of brokers who use Reddit’s wallstreetbets line to coordinate their attacks, which appear to be focused on stocks known to be sold by hedge funds. The most prominent is GameStop, the besieged brick and mortar retailer that increased more than 1,700% this month, but other targets include AMC Entertainment Holdings Inc. and Bed Bath & Beyond Inc.
Read More: GameStop Frenzy hits Biden and Powell as squeezed hedge funds
The pain is likely to be spreading across the hedge fund industry, with rumors circulating among the big loss traders at several companies. The Goldman Sachs Hedge Industry VIP ETF, which tracks hedge funds’ most popular shares, fell 4.3% on Wednesday, its worst day since September.
GameStop soared more than 1,700% this month.
Photographer: David Paul Morris / Bloomberg
Fund managers hedged their short sales at a loss as they cut bullish bets for a fourth consecutive session on Tuesday. In this stretch, their total market exits reached the highest level since October 2014, show the data compiled by Goldman’s first-rate brokerage unit.
D1, which was founded in 2018 and had about $ 20 billion in assets at the beginning of the year, is hampered to some degree by the attacks because private companies account for about a third of its stakes, and the company has reduced its exposure, according to people familiar with the subject. The fund is closed to new investments and has no plans to open additional capital, said one person, asking not to be named because such decisions are confidential.
The loss of D1, described by people informed about the situation, contrasts with a 60% gain for Sundheim, 43, during last year’s pandemic turmoil.
On Monday, Melvin received an unprecedented cash injection from his peers, receiving $ 2 billion from Griffin, his partners and the hedge funds he manages at Citadel, and $ 750 million from his former boss, Cohen.
Read More: Reddit Crowd strikes Melvin Capital on industry alert
“The posts on social media about the bankruptcy of Melvin Capital are categorically false,” said a representative. “Melvin Capital is focused on generating high quality risk-adjusted returns for our investors and we appreciate your support.”
Photographer: Scott Eells / Bloomberg
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. He posted an annualized return of 30% since opening, ending last year with an increase of more than 50%, according to an investor.
Another fund, the $ 3.5 billion Maplelane Capital, it lost about 33% this month through Tuesday in part because of a short position on GameStop, according to investors.
Representatives for Point72, D1 and Maplelane declined to comment.
The difficulties of some of the biggest hedge funds may have contributed to the 2.6% drop in the S&P 500 on Wednesday, its worst drop since October. One theory behind the decline is that funds are selling long bets to get the money they need to cover their short positions.
Cohen, 64, is perhaps the best-known victim of this year’s turmoil so far. The new owner of the New York Mets, whose fund gained 16% in 2020, became a national figure after winning the competition from Jennifer Lopez and Alex Rodriguez to buy the ball club.
Late Tuesday, Cohen broke his usual habit of just tweeting about the Mets. “Hey, the stock market jockeys, keep bringing it,” he wrote on the social media platform.
– With the help of David Gillen