Melvin Capital, the hedge fund at the center of the retail investor revolution, lost 53% on its investments in January, WSJ reports.
Why It Matters: “Melvin’s losses are the most visible wound in an extraordinary tussle playing out between professional hedge-fund investors and amateur traders congregating on forums such as Reddit’s WallStreetBets. The amateurs have made Melvin their principal enemy and have gleefully seized the upper hand.”
Who Is Melvin? The hedge fund had built a reputation as one of the top hedge funds on Wall Street. Losses have been piling up thanks to a period of market turmoil in January, but the GameStop fiasco dealt them a sharp blow.
Numbers To Consider:
- More than 50 million GameStop shares traded hands Friday, which was only a few million a day a year ago.
- Melvin began the year with roughly $12.5 billion. It currently runs more than $8 billion, which includes $2.75 billion in emergency funds raised on Jan. 25.
As A Result: Melvin has significantly “de-risked its portfolio.” It’s also raised its liquidity level. The shop’s leverage ratio was the lowest it has been since Melvin launched in 2014, according to people familiar with the matter.
- Melvin signed up new investment clients Monday, but it is unclear how much they’re putting in.
Looking Ahead: Melvin, and other hedge funds, are likely to take advantage of SEC rules to keep their short plays confidential. Funds may also enact rules on “avoiding thinly traded, heavily shorted stocks.”
As a professional in this industry, I wonder if Gabriel Plotkin will be able to recover from this fiasco and rebuild his massive hedge fund. If I were to take a guess, I would say yes…
The tough reality that I learned in my career is that connections matter as much (and arguably more) than skill, talent, and performance.
To those asking why I personally haven’t started a fund yet (and trust me, it’s something I’ve thought about), the real answer is because it takes $50 million in assets under management (AUM) to even support the administrative and team costs of running a fund.
In order to raise that kind of money, you need to know very wealthy individuals, be connected with institutional asset managers, or somehow have access to the public markets.
In the meantime, we’ll be building our own community, research team, and “hedge fund for the people” at Cents and ROIC with all the transparency and honesty that the market deserves. I hope you can join us for the ride as we deliver the optimal investing content for the group.