So good was Plotkin’s reputation that the firm closed to additional investors before word had even spread that he was setting out on his own. Despite a loss in 2018, he’s posted an annualized return of 30% since opening, ending last year up more than 50%, according to an investor.
Then came January, when Melvin first became aware that a Reddit crowd had put a target on the firm’s positions, ramping up an attack on GameStop and other shorts.
Exposing Positions
Why they singled out Melvin remains a mystery. As far as hedge fund managers go, Plotkin is considered low key. He doesn’t show up at many conferences or hobnob at society balls. Former colleagues and current investors say he’s a nice, quiet guy — not the type to make enemies.
The most obvious explanation is that his positions were in some sense knowable. Hedge funds generally go to great lengths to guard their short positions. If they use put options, for example, they buy them over the counter, which means they don’t have to list them in regulatory filings. Plotkin’s filing in the third quarter showed put options on 17 companies, many of them highly shorted names.
“There’s no targeting going on - WSB is far less organized than all the articles are making it out to be,” said Lucas Severyn, moderator for wallstreetbets. “From time to time, WSB gets obsessed with some stock, now it’s GME, and for the first time ever this stock just keeps giving,”
Melvin’s losses mounted in January, and after they passed 15% last week, it had conversations with investors and got commitments of about $1 billion for Feb. 1. By the end of last week, losses had mounted to about 30%.
On Monday morning, Plotkin reached a deal with Point72 and Citadel to provide him with more liquidity to help put Melvin back on the offensive. That Cohen would step in made sense, given his longstanding relationship with Plotkin — and an initial investment of about $200 million in the firm that had grown to about $1 billion.
Griffin, who started Citadel in 1990, has a history of swooping in when others are in distress. He’s hired teams or took on assets from hedge funds such as Sowood Capital Management, Visium Asset Management and Amaranth Advisors after they imploded. He may also have welcomed the chance to invest in Plotkin’s fund. Melvin generally manages money for charitable organizations like endowments and foundations.
New Risk
Investors have been expressing faith that Plotkin will climb out of this hole.
Griffin said Monday that he and his partners “have great confidence in Gabe and his team.” Cohen called him “an exceptional investor and leader.”
A person familiar with the thinking inside Plotkin’s firm said one lesson is clear: Don’t leave a trace and only buy put options over the counter.
“This phenomenon of retail investors jumping on a bandwagon to dominate trading activity is a new kind of portfolio risk,” said Jay Raffaldini, global head of sales and distribution at UBS O’Connor. “It’s going to cause a lot of hedge funds to rethink how they approach their long and short investment strategies.”
—With assistance from Sarah Ponczek, Spencer Norris and Misyrlena Egkolfopoulou.
This article was provided by Bloomberg News.