Melvin Capital plans to close its funds and return the cash to its investors, capping a stunning reversal for a firm that lost big on the surge in meme stocks last year and on wagers on growth stocks this year.
In a letter to investors that was reviewed by The Wall Street Journal,
Melvin’s founder, wrote that he reached his decision after conferring with Melvin’s board of directors during a monthslong process of reassessing his business.
“The past 17 months has been an incredibly trying time for the firm and you, our investors,” he wrote. “I have given everything I could, but more recently that has not been enough to deliver the returns you should expect. I now recognize that I need to step away from managing external capital.”
Melvin had been, until last year, one of the top-performing hedge funds—its track record of about 30% a year after fees before 2021 was among the best on Wall Street. It was especially known for its prowess in shorting, or betting against, stocks. In 2015, gains from Melvin’s shorts made up two-thirds of the fund’s 67% returns before fees. Mr. Plotkin bought a minority stake in the National Basketball Association’s Charlotte Hornets, plus a $44 million oceanfront mansion in Miami Beach.
But Melvin’s short positions blew up in January 2021 when individual investors on online forums such as Reddit’s WallStreetBets banded together to push up prices of shares, like those of
, that Melvin was betting against. At the worst point that month, Melvin, which managed $12.5 billion at the start of last year, was hemorrhaging more than $1 billion a day.
While Melvin had made up some of those losses by the end of the year, its focus on fast-growing companies dealt it further setbacks this year as investors soured on such stocks in the face of rising interest rates. Stock pickers also have blamed losses this year on macroeconomic factors like inflation and the war in Ukraine that have hit the market, instead of companies’ own fundamentals. Melvin’s losses widened.
Melvin this year through April had lost 23%, on top of a 39.3% loss in 2021—a huge hole investors expected could take years to make up if Mr. Plotkin didn’t shut down in the interim. Since its start, it has averaged an 11.9% return.
Still, several investors on Wednesday said they were surprised by the decision.
Melvin’s executives as recently as last week had been asking clients for their thoughts on what new fee arrangements seemed fair to them and to Melvin, people familiar with the firm said. Mr. Plotkin in April tried to do away with Melvin’s so-called high-water mark, a standard industry arrangement in which hedge funds don’t collect performance fees until their clients are made whole from prior investment losses. The proposal was part of a broader restructuring effort meant in part to retain and motivate his team, but it met with resistance.
Some investors were so incensed by the proposal they said they planned to redeem all their money at the first opportunity. Mr. Plotkin withdrew his plan days later and apologized to investors, saying he would consult with all of Melvin’s clients as the firm worked to figure out a new path forward.
Investors had been sharing various proposals they thought would be fair, including one by which Mr. Plotkin would keep the current terms until the end of the year and then implement a modified high-water mark that would have let Melvin collect lower performance fees, people familiar with the firm said.
Mr. Plotkin wrote in the letter, “I have worked tirelessly for 20 years to try to be the best I could be and to build and lead an exceptional team of professionals…Being a steward of your capital requires an unrelenting focus. I am proud of what our team has accomplished since 2007.”
He wrote he expected to return nearly all of his clients’ money by late July. Firmwide, Melvin managed $7.8 billion as of April.
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Appeared in the May 19, 2022, print edition as ‘Melvin To Close Funds, Pay Back Investors.’