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For once, Main Street beats Wall Street.
Within weeks, two hedge fund legends – Steve Cohen and Dan Sundheim – suffered deadly losses as amateur traders banded together to take on some of the world’s most sophisticated investors. In Cohen’s case, he and Ken Griffin ended up rushing to the aid of a third, Gabe Plotkin, whose company was being beaten.
Driven by rampant trade GameStop Corp. and other stocks that hedge funds have bet against, the losses suffered in the past few days would be among the worst in the historical careers of these fund managers. Cohen’s Point72 Asset Management has fallen 10% to 15% so far this month, while Sundheim D1 Capital Partners, one of the best performing funds last year, is down around 20%. Melvin Capital, Plotkin’s firm, had lost 30% until Friday.
It’s a humiliating turnaround for the hedge fund titans, who staged a comeback in 2020 by throwing themselves into the wild markets caused by the Covid-19 pandemic. But this crisis has helped push thousands, if not millions of retail traders into the US stock market, creating a new force that so far professionals seem powerless to combat.
Their attackers are a collection of traders using Reddit’s wallstreetbets thread to coordinate their attacks, who appear to focus on stocks known to be held short by hedge funds. Most prominent is GameStop, the besieged brick-and-mortar retailer that has climbed more than 1,700% this month, but other targets include AMC Entertainment Holdings Inc. and Bed Bath & Beyond Inc.
Read more: GameStop Frenzy reached and Powell as hedge funds in a hurry
The pain is probably spreading in the hedge fund industry, with rumors among traders of heavy losses at several companies. The Goldman Sachs Hedge Industry VIP ETF, which tracks the most popular hedge fund stocks, fell 4.3% on Wednesday for its worst day since September.
Fund managers hedged their losing short sales while reducing bullish bets for a fourth straight session on Tuesday. During that time, their total market exits hit their highest level since October 2014, according to data compiled by Goldman’s senior brokerage unit.
D1, which was founded in 2018 and had around $ 20 billion in assets at the start of the year, is to some extent shaken by the attacks as private companies account for around a third of its holdings and the company reduced its exposure, according to people familiar with the matter. The fund is closed to new investment and has no plans to open additional capital, one of the people said, asking not to be named as such decisions are confidential.
The loss of D1, described by people familiar with the situation, contrasts with a 60% gain for Sundheim, 43, during last year’s pandemic crisis.
Melvin received an unheard-of infusion of cash from his peers on Monday, receiving $ 2 billion from Griffin, his partners and the hedge funds he runs at Citadel, and $ 750 million from his former boss, Cohen.
Read more: Reddit Crowd crushes Melvin Capital on industry alert
“The social media posts about the Melvin Capital bankruptcy are categorically false,” a representative said. “Melvin Capital is focused on generating high quality risk-adjusted returns for our investors, and we appreciate their support.”
Until this year, Plotkin, 42, had one of the best track records among hedge fund security selectors. He had worked for Cohen for eight years and had been one of his biggest producers of money before he left to train Melvin. It has posted a 30% annualized return since opening, ending last year up more than 50%, according to one investor.
Another fund, the $ 3.5 billion Maplelane Capital, lost about 33% this month to Tuesday in part due to a short position on GameStop, according to investors.
Representatives for Point72, D1 and Maplelane all declined to comment.
Difficulties at some of the largest hedge funds may have contributed to the S&P 500’s 2.6% decline on Wednesday, its worst drop since October. One theory behind this decline is that funds are selling long bets to get the cash they need to cover their shorts.
Cohen, 64, is perhaps the most well-known victim of this year’s unrest to date. The new owner of the New York Mets, whose fund gained 16% in 2020, has become a national figure after beating competition from Jennifer Lopez and Alex Rodriguez to buy the ball club.
Late Tuesday, Cohen broke his usual habit of tweeting only about the Mets. “Hey jockeys keep bringing it,” he wrote on the social media platform.
– With the help of David Gillen