Tag Archives: Melvin Capital

The Real Reasons Melvin Is Shutting Down: No Fat Fees and a Federal Investigation

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!

More on markets:

Melvin Capital Faces Investor Revolt

Citadel Adds Millions to AMC Options Bet

Melvin Capital Under Federal Investigation

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Citadel Adds Millions to AMC Options Bet

Citadel LLC added tens of millions of dollars to its option bet on AMC Entertainment Holdings, Inc. in the most recent quarter.

Its net bullish position increased from $90 million to $125 million, according to an SEC report released yesterday. It also built a bullish position in GameStop Corp. options during the period.

The hedge fund giant held $245 million in call options and $120 million in puts, versus $191 million and $101 million respectively in February.


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This bullish position is ironic given that Citadel was a major backer of Melvin Capital Management LP. Melvin lost billions shorting AMC, Gamestop Corp., and other meme stocks last year, and may have imploded had Citadel not rescued them.

Perhaps Citadel’s patience with Melvin’s investing style has run out. Citadel has pulled out most of its $2 billion investment in the failing firm, and began adding to its AMC options position around the same time.

The SEC report doesn’t specify the strike prices or duration of the options, so we don’t know exactly what Citadel’s strategy is. It could be expecting lower prices in the short term and higher ones in the long term, or vice versa.

But I find it fascinating that this archvillain of the meme stock saga has capitulated and placed bullish bets on the same companies. It seems Citadel’s losses in Melvin’s hedge fund taught it a lesson.

What do you think Citadel’s strategy is? Leave a comment at the bottom and let me know!

More on markets:

Hedge Fund Giant Tiger Global Losing $28 Million an Hour

Melvin Capital Faces Investor Revolt

Hedge Funds Could Lose Nearly Half of Assets Under Proposed SEC Rule

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Photo: Citadel LLC CEO Kenneth Griffin

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Melvin Capital Faces Investor Revolt

Just after announcing plans to re-institute performance fees, failing hedge fund Melvin Capital has backtracked. From the Financial Times:

The US-based firm, which lost 53 per cent in January last year after betting against retail investor favourite GameStop, had written to investors only last week with plans to remove a so-called high-water mark, which stops a fund charging performance fees until losses have been recovered.

But within a matter of days, after receiving “candid” feedback from some investors, founder Gabe Plotkin has admitted he was “initially tone deaf”. 

After being shellacked last January, Melvin was down 39% for 2021. It lost another 21% in the first quarter of this year.

That puts the fund down approximately 52%, or more than half its capital.

Hedge funds generally charge 2% of assets a year in management fees. They also take 20% of all gains as a performance fee.

The performance fee is the real prize. But there’s a catch: the fee is governed by something called a “high-water mark.”

This means you can’t lose money, then charge investors a performance fee as you make it back.

High-water marks exist for a very good reason. Without them, a fund could be incentivized to repeatedly lose money then earn it back, collecting fat fees every time while investors make nothing.

To attempt to remove the high water mark, and charge people a fortune to make back the billions you lost, is the height of hubris.

Plotkin’s investors seem to be as affronted by his proposal as I am. So where does that leave Melvin Capital?

Since investors won’t let them remove the high-water mark, it could be years before Melvin can charge performance fees again, if ever. Their better traders are likely to leave for greener pastures.

Meanwhile, the fund is also caught up in a federal investigation of improper activity by short sellers.

With angry investors, no juicy fees in sight, and a federal investigation looming, I expect Melvin to shut down soon. This would leave Plotkin free to create a new fund and start earning fees again while distancing himself from the Melvin dumpster fire.

For those who will be tempted to invest with Plotkin again, remember these wise words:

What do you think is next for Melvin Capital and Gabe Plotkin? Leave a comment at the bottom and let me know!

More on markets:

Melvin Capital Under Federal Investigation

Melvin Capital Down 21% in Q1

Mass Firings at Citadel Right Before Federal Probe

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