The first sign of trouble for hedge fund wunderkind Gabe Plotkin came in late October: A poster on Reddit’s popular wallstreetbets forum was taking aim at his wildly successful investment firm.
“GME Squeeze and the demise of Melvin Capital,” wrote the user, Stonksflyingup, referring to stock ticker of GameStop Corp. and Plotkin’s $12.5 billion firm. Before long, veryforestgreen weighed in: “Melvin Capital New Short Attack.” Then, greekgod1990: “Melvin vs WSB! And GME to the moon.”
So it was that the tables turned on Wall Street — and a hedge fund star suddenly found himself at the mercy of the day-trading Reddit bros who have become one of the most powerful, if improbable, forces in the stock market today. The attack on Plotkin’s six-year-old Melvin Capital shifted the balance of power in ways that would have seemed unimaginable only months ago. By Wednesday, the firm had capitulated to the amateurs and covered the GameStop short.
The explosive growth in retail day-trading, powered by platforms like the Robinhood trading app and forums like wallstreetbets, has turned the old order on its head. Melvin Capital’s mistake, if it can be called that, was leaving footprints behind in the marketplace. Reddit users were able to identify stocks that Melvin was wagering against and then buy those en masse, unleashing a violent run-up in prices that turned Melvin’s winning bet into a loser.
So steep were the losses — about 30% through last week — that Melvin on Monday turned to billionaire hedge fund founders Ken Griffin and Steve Cohen — Plotkin’s former boss — to shore up the firm.
As of Tuesday, the fund’s losses had increased even with the portfolio repositioning, though investors wouldn’t say by exactly how much for fear of angering the money manager, which they expect can still fight its way back.
A representative for the firm declined to comment on performance, other than saying the portfolio had been repositioned in the past few days and “the social media posts about Melvin Capital going bankrupt are categorically false. Melvin Capital is focused on generating high-quality, risk-adjusted returns for our investors, and we are appreciative of their support.”
The risk of going long is intuitive: Buy $50 of shares, and if the price drops you lose that amount. But losses on bearish bets can be more severe and swift. A classic $50 short can lose multiples that amount if the stock soars. And while using options may limit losses, investors can get wiped out quickly if the stock rises.
The shorts that were listed in Melvin’s regulatory filing from the third quarter all rocketed in recent weeks. Names include Bed Bath & Beyond Inc., iRobot Corp. and GSX Techedu Inc. GameStop, the stock that seemed to set off the short squeeze, soared 634% in the month through Tuesday and an additional 31% in post-market trading after Elon Musk tweeted a link to the Reddit thread with the caption “Gamestonk!!”
Investors caught in a short squeeze can close out bets and eat their losses, or try to ride out the price surge — typically requiring they put up more money.
Melvin’s cash infusion was almost unheard of in hedge fund land. Griffin, his partners and the hedge funds he runs at Citadel threw in $2 billion and Cohen’s Point72 Capital Management, which already had about $1 billion invested in Melvin, ponied up another $750 million.
Cohen, one might argue, was bailing out his own investment. For Griffin, it was a rare opportunity to invest in a talented manager on the cheap. Both firms got a minority revenue share from the firm for stepping in.
Late Tuesday, Cohen broke his usual habit of only tweeting about his New York Mets. “Hey stock jockeys keep bringing it,” he wrote on the social media platform.
Until this year, Plotkin, 42, had one of the best track records among hedge fund stock pickers. He’d worked for Cohen for eight years and had been one of his biggest money makers before leaving to form Melvin — named after his grandfather — in December 2014.