Melvin Capital Management, which lost more than $6 billion in January, is now down 46% for the year through June, the fund recently told investors. Maplelane Capital is down 39% for the period.
Until Melvin recovers all of those losses, it will not earn any performance fees. This juicy 20% fee is what induces traders to set up hedge funds in the first place.
The average long/short equity hedge fund, the class Melvin belongs to, has returned just 3% annually over the last decade. At that rate, it would take Melvin 21 years to recoup its losses.
Here’s what could come next:
- Manager Gabe Plotkin shuts the fund down, locking in investors’ losses. If he starts over with another fund, he can get performance fees right away.
- Top traders leave the firm for other hedge funds that are earning performance fees, and hence can pay hefty bonuses. Only the B Team remains.
- Melvin and similar funds make increasingly risky bets, desperate to quickly recover what they have lost, thereby losing even more. After all, 21 years is a long time to wait.
I think you will soon see more and more hedge funds either shutting down or getting desperate. If I were invested in any fund that saw big losses in meme stocks, I’d sell now before I lose it all.
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