Melvin Capital Management LP is shutting down, according to a report from Bloomberg that broke last night.
The once highflying hedge fund was badly burned by short positions in meme stocks like AMC Entertainment Holdings, Inc. and GameStop Corp in 2021. This year, it lost a further 20% of its capital in bad bets.
Founder Gabe Plotkin sounded positively high-minded in a final note to his investors. From the New York Times:
Mr. Plotkin wrote to his investors that he had decided that the “appropriate next step” was to liquidate the fund’s assets and return cash to all investors.
Mr. Plotkin, who founded Melvin in 2014, also wrote that he recognized he needed to “step away from managing external capital.”
But let’s ignore the sound bites and dig into why Melvin is really shutting down.
Just last month, Melvin tried to remove a crucial provision in its agreement with investors: the “high-water mark.” This provision only lets the fund earn performance fees if it makes back prior losses.
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Hedge funds like Melvin usually charge a 2% management fee and 20% of all gains. The management fee pays for offices and staff, but the 20% performance fee is the real prize for hedge fund managers.
Melvin had lost most of its capital, so it would have to more than double in order to get back to its high-water mark. This would be quite difficult, especially with losses mounting by the day.
So Melvin made a bold request to investors: remove the high-water mark so we can charge you even more fees to make back the money we lost. Such a move is highly unusual and, predictably, investors balked.
Facing many years without that juicy performance fee, Plotkin decided to shut down Melvin rather than try honorably to win back the investor money he’d lost. I find this conduct deranged and disgraceful.
On top of its huge losses, Melvin faces another problem: a federal investigation. The Justice Department is currently scrutinizing its short sales.
No fat fees and a federal investigation. No wonder Melvin is shutting down.
But Plotkin could have at least been honest about the real reasons behind his firm’s ignominious end.
On April 26 on this blog, I predicted that Melvin would shut down. It took just 23 days.
With major losses stinging funds from Melvin to Tiger and beyond, I suspect Melvin will be just the first of many.
Who do you think is the next fund to fall? Leave a comment at the bottom and let me know!
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