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Reddit Crowd crushes Melvin Capital on industry alert
(Bloomberg) – The first sign of trouble for hedge fund prodigy Gabe Plotkin came in late October: A poster on Reddit’s popular wallstreetbets forum targeted his hugely successful investment firm. the user, Stonksflyingup, referring to GameStop Corp’s stock ticker. and Plotkin’s $ 12.5 billion company. Before long, veryforestgreen weighed in: “Melvin Capital New Short Attack.” Then greekgod1990: “Melvin vs WSB! And GME on the moon. This is how things turned out on Wall Street – and a hedge fund star suddenly found himself at the mercy of the Reddit brothers who have become one of the most powerful, albeit unlikely, forces. in the stock market today. The attack on Plotkin’s six-year-old Melvin Capital has shifted the balance of power in ways that would have seemed unimaginable just a few months ago. The firm surrendered to amateurs and covered the GameStop short on Wednesday. The explosive growth in retail day-trading, fueled by platforms like the Robinhood trading app and forums like wallstreetbets, reversed the old order. Melvin Capital’s mistake, if you can call it that, has been to leave footprints in the market. Reddit users were able to identify the stocks Melvin was betting on and then buy them in droves, triggering a violent rise in prices that turned Melvin’s winning bet into a loser.The losses were so steep – around 30% as high as last week – – that Melvin turned to billionaire hedge fund founders Ken Griffin and Steve Cohen – the former Plotkin boss – on Monday to shore up the company. Since Tuesday, the fund’s losses had increased even with the repositioning the portfolio, although investors do not say by how much, for fear of angering the portfolio manager, who they believe can still fight. A representative for the company declined to comment on the performance, other than saying that the portfolio had been repositioned in the past few days and that “the social media reports on the Melvin Capital bankruptcy are categorically false. Melvin Capital is focused on generating high quality risk-adjusted returns for our investors, and we appreciate their support. The risk of being long is intuitive: buy $ 50 of stocks, and if the price drops, you lose that amount. But losses on bearish bets can be more severe and faster. Classic $ 50 shorts can lose multiples of that amount if the stock soars. And while the use of options can limit losses, investors can be quickly wiped out if the stock goes up. The shorts that were on Melvin’s regulatory record from Q3 have all exploded in recent weeks. Names include Bed Bath & Beyond Inc., iRobot Corp. and GSX Techedu Inc. GameStop, the stock that appeared to trigger the short-term squeeze, climbed 634% from the month to Tuesday. That night, Elon Musk tweeted a link to the Reddit thread with the caption “Gamestonk !!” And by mid-Wednesday in New York, the headline more than doubled: Investors caught in short pressure can close bets and eat their losses, or try to weather the price spike, which usually requires putting in more. silver. the injection of liquidity was almost unheard of in the lands of hedge funds. Griffin, his partners, and the hedge funds he runs at Citadel threw in $ 2 billion, and Cohen’s Point72 Capital Management, which had already invested around $ 1 billion in Melvin, racked up an additional $ 750 million. . For Griffin, this was a rare opportunity to invest in a talented manager on the cheap. Last Tuesday, Cohen broke his usual habit of tweeting only about his New York Mets. “Hey jockeys keep bringing it,” he wrote on the social media platform. Until this year, Plotkin, 42, had one of the best results among hedge fund stock pickers. He had worked for Cohen for eight years and had been one of his biggest producers of money before leaving to train Melvin – named after his grandfather – in December 2014. Plotkin’s reputation was so good that the company closed its doors to other investors before word was out. even rumored that he was going alone. Despite a loss in 2018, it has posted an annualized return of 30% since opening, ending last year up more than 50%, according to an investor, and then arrived in January, when Melvin took notice for the The first time a Reddit mob had set a target on the company’s positions, stepping up an attack on GameStop and other shorts. Exposing Positions Why they set Melvin apart remains a mystery. When it comes to hedge fund managers, Plotkin is considered low-key. He does not show up at many conferences or party tables at company balls. Former colleagues and current investors say he’s a nice, calm guy – not the type to make enemies. The most obvious explanation is that his positions were in a sense knowable. Hedge funds usually go to great lengths to keep their positions short. If they use put options, for example, they’re buying them over-the-counter, which means they don’t have to list them in regulatory filings. Plotkin’s third-quarter filing showed puts on 17 companies, many of which are very short-circuited names. from wallstreetbets. “Every now and then WSB gets obsessed with certain actions, now it’s GME, and for the first time, that action keeps giving.” Melvin’s losses increased in January, and after surpassing 15% last week, he had conversations with investors and secured commitments of around $ 1 billion for February 1. By the end of last week, losses had climbed to around 30%. On Monday morning, Plotkin struck a deal with Point72 and Citadel to provide him with more cash to help deliver Melvin. on the offensive. That Cohen steps in in a way, given his long-standing relationship with Plotkin – and an initial investment of around $ 200 million in the company that had grown to around $ 1 billion. Griffin, who founded Citadel in 1990 has a history where others are in distress. He hired teams or took over assets from hedge funds such as Sowood Capital Management, Visium Asset Management and Amaranth Advisors after their implosion. He may also have welcomed the opportunity to invest in Plotkin’s fund. Melvin generally manages the money for charities such as endowments and foundations. New RiskInvestors has expressed faith that Plotkin will come out of this hole. Griffin said Monday that he and his partners “have great faith in Gabe and his team.” Cohen called him “an exceptional investor and leader”. A person familiar with the thinking within Plotkin’s company said one lesson is clear: don’t leave a trace and only buy OTC put options. the move to dominate trading activity is a new kind of portfolio risk, ”said Jay Raffaldini, global sales and distribution manager at UBS O’Connor. “This will cause many hedge funds to rethink the way they approach their long and short investment strategies.” (Updates with actions in ninth paragraph. An earlier version of this story corrected a title in 19th paragraph.) For more articles like this, please visit us at bloomberg.com Subscribe now to stay leading the way with the most trusted source of business news. © 2021 Bloomberg LP
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