- General
- February 1, 2022
- 5 minutes read
Gabe Plotkin’s Melvin Capital Is Raising Money For A “Long Only” Fund
Melvin Capital, a multi-billion dollar hedge fund that suffered significantly from the “meme stock” saga last year, is making a…
Melvin Capital, a multi-billion dollar hedge fund that suffered significantly from the “meme stock” saga last year, is making a new play. It’s raising a new fund that will focus on “long-only” bets instead of the short-selling strategy that brought it notoriety and significant losses during the “meme stock” reign.
Gabe Plotkin, a star investor on Wall Street, leads Melvin Capital. Since starting in 2014, the hedge fund enjoyed successive years of stellar profits under his leadership until 2021, when meme stocks like GameStop arose (in a seemingly irrational market), and Melvin’s short-selling strategy backfired. In January that year, Melvin reportedly lost more than half of its asset value ($6.8bn, precisely).
- According to a new SEC filing, Melvin is raising capital for a new fund called “Melvin Capital Long Only LP.” The “long only” denotes that the fund will focus on long-term bets instead of short-term, as Melvin is known for. This switch from short-term to long-term isn’t surprising given the hedge fund’s predicament from meme stocks pushed by retail investors.
Melvin had a habit of shorting the stocks of specific companies, e.g., GameStop (NYSE: GME), whose businesses were trending downwards and making money as they fell. However, the tides turned in 2021. Suddenly, a glut of retail traders had an urging to “stick it to the man” and began pumping up companies they believed hedge funds like Melvin were shorting. These companies became known as “meme stocks” due to their popularity based on internet memes.
On online forums like Reddit and Twitter, individual investors pushed one another to buy meme stocks like GameStop and AMC Entertainment (NYSE: AMC) and drove their prices sky-high with little regard for their underlying financials. Melvin Capital and some hedge fund peers lost big time as the stocks they had shorted rose rapidly. It was more brutal for Melvin, which ended the first half of 2021 with a 46% loss.
In January 2021, when Melvin was down 55% (according to the Wall Street Journal), the Plotkin-led hedge fund took an urgent $2.8bn cash infusion from Citadel and Point72, two more prominent players in the hedge fund world. Many characterized the infusion as a “bailout,” though Melvin pushed back against using the term.
- Citadel and Point72 are two of Wall Street’s most successful hedge funds, managing around $60bn of assets between them. Point72 is led by Steve Cohen, a legendary hedge fund manager who Plotkin worked for before starting Melvin Capital.
Given its hefty losses, we can understand why Plotkin is adjusting Melvin’s strategy to build a “long only” fund. The name denotes that it’ll only bet on stocks to rise, not fall. Melvin didn’t disclose how much it intends to raise for the new fund in the SEC filing. The filing also shows that it has not yet taken any capital for the fund. What’s clear is that Plotkin is trying to win back investors’ trust with a new strategy.
- This year, Melvin Capital has suffered significant losses but not due to any meme stock saga. According to Reuters, the Plotkin-led fund lost 17% of its asset value in the first three weeks of January as the equity markets generally staggered.
