Hedge fund that got wrecked by the GameStop stock surge to close
Melvin Capital held a big short position on GameStop stock, and suffered badly for it.
In 2021, a remarkable financial story emerged from r/wallstreetbets—one that saw the subreddit's stonk memes eventually turning into the GameStop stock surge. It was such a spike, and caused such huge losses for some, that the event has been the subject of Congressional hearings. Now, one of the hedge funds most impacted by GameStop's surge in value has told its investors it's shutting down.
Melvin Capital is run by Gabe Plotkin, and was heavily invested in shorting GameStop stock (among other theoretically similar stocks such as AMC Entertainment), essentially betting that its share price would fall as people moved away from bricks-and-mortar retail.
This position was completely blown apart by the surge in GameStop's stock price in January 2021, which at one point had increased the value of the stock by 2400%: Melvin Capital began 2021 with $12 billion; by the end of January it had lost 53% of its value. There was a $2.75 billion bailout from two fellow hedge funds, and an improvement over the rest of the year, but clearly it wasn't enough.
The news of Melvin Capital's closure came in a letter to investors reviewed by the New York Times. "The past 17 months has been an incredibly trying time for the firm and you, our investors," Plotkin wrote. The "appropriate next step" is for the firm to liquidate its still-considerable reserves and return cash to investors, while Plotkin himself is pledging to "step away from managing external capital."
It's a stunning fall from grace for Plotkin, who'd been a successful Wall Street trader and portfolio manager for over a decade before founding Melvin Capital, which is named after his late grandfather. Prior to GameStop, the hedge fund had a reputation for extremely good returns, which Plotkin credited to its "intense focus" on short-selling.
I'm not sure Plotkin ever thought he'd be outmanoeuvred by a bunch of amateur investors brought together by a love of cats, the internet, and nostalgia for GameStop. Whatever happened during this phenomenon, a crucial element to it was the coordination of so many thousands of smaller investors against what they saw as the old guard, exemplified by Melvin Capital.
I'm not sure this is a David and Goliath story at bottom, really—tonnes of smaller investors lost money on this, as well as hedge funds. But the fate of Melvin Capital does go to show that memes, sometimes, can be serious business.