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Hedge fund chief defends his company’s bet against GameStop
At a House Financial Services Committee hearing, Gabriel Plotkin, founder and CEO of hedge fund Melvin Capital, defended his company’s long-term strategy by betting that GameStop shares would fall.
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Contrary to many reports, Melvin Capital was not bailed out in the midst of these events. Citadel has proactively reached out to become a new investor, similar to the investments others make in our fund. It was an opportunity for Citadel to buy cheaply and generate returns for its investors if and when the value of our fund increased. Granted, Melvin was going through a rough patch, but we always had access to the margin and we weren’t looking for an injection of cash. And absolutely none of Melvin’s shorts are part of an effort to artificially lower or manipulate the share price downwards. Nothing in our short position prevents a business from achieving its goals. It’s just Melvin’s take on whether that will be the case. Specific to GameStop, we had a research-backed view long before recent events. In fact, we’ve been running out of GameStop since Melvin’s inception six years earlier, as we believed and still believe its business model of selling new and used video games in physical stores is being overtaken by digital downloads via the Internet. And that trend only accelerated in 2020 when, due to the pandemic, people were downloading video games at home. As a result, the gaming industry had its best year, but GameStop suffered significant losses. In January 2021, a group on Reddit began posting about Melvin’s specific investments. They took the information in our files with the SEC and encouraged others to trade in the opposite direction. Many of these messages were riddled with anti-Semitic slurs directed at me and others. Ordinary investors who were convinced by a deceptive frenzy to buy GameStop for $ 100, $ 200, or even $ 483 have now lost significant sums. When this frenzy started, Melvin started closing his position at GameStop at a loss, not because our investment thesis had changed, but because something new was happening. We have also reduced many other Melvin positions to significant losses, both long and short, which have been the subject of similar publications.
Hedge fund Citadel injected billions of dollars into Melvin Capital after that fund’s bet against GameStop went awry, resulting in huge losses. Now, the Citadel recovers some of its money.
The Citadel has informed Melvin of its intention to recoup $ 500 million of the $ 2 billion it injected in late January, according to two people briefed on the matter, who were not authorized to speak publicly. Under the terms of Citadel’s investment, the money will be returned in late September, people said, as the third quarter draws to a close.
Citadel’s plan was first reported by the Wall Street Journal.
The cash injection came in late January as Melvin struggled with a huge turnaround in his short GameStop bet. GameStop’s shares have stalled in recent years as it struggled to reshape itself from a traditional video game retailer into a more modern e-commerce company. But the company’s shares soared in January, after new directors at Chewy.com, which sells pet products, were named and small investors piled into the shares, encouraged by the WallStreetBets forum on Reddit.
Melvin suffered heavy losses as he struggled to cover the costs of his trade in the wrong direction. Some of his other short positions, including his bet against movie company AMC Entertainment, also hurt him.
Citadel, which is based in Chicago, and Point72 Asset Management – a Stamford, Connecticut-based fund where Melvin founder Gabriel Plotkin previously worked – intervened with $ 2.75 billion in cash on January 25. . The injections helped. stabilize Melvin, which has generated double-digit returns since Feb. 1, according to one of the people, who was briefed on his performance.
Melvin is still down 41% for this year through July, according to an investor letter reviewed by The New York Times, due to his heavy losses from January.
As part of its investment, Citadel perceives a reduction in Melvin’s revenue, in addition to the return on his money, the two said. Citadel has also been granted the right to withdraw at least some of its cash as early as the third quarter of this year, the people added – a right it now exercises. (Hedge fund investors are generally required to leave their capital invested for a longer period.) Citadel, which manages $ 38 billion in assets, is itself up about 9% through the mid-point. August, according to one of the people, who had been briefed on the company’s performance.
Mr. Plotkin declined to comment. Kenneth C. Griffin, founder of Citadel, did not respond to requests for comment.
Point72 remains in place.
“I have the same deal as Ken,” Point72 CEO Steven Cohen said, “and I have no plans to buy back.”
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