Do Over? Melvin Capital Considers Unwinding Fund Before Asking Investors To Reinvest

Melvin Capital, the hedge fund that earned instant infamy during the January 2021 meme stock rally, has come up with a “novel” proposal that would benefit its founder, Gabe Plotkin, and its employees (who otherwise might jump ship), at the expense of LPs. 

The plan? Returning capital to investors with an option for them to reinvest in a new fund to be started on July 1. By essentially asking investors to forgive all his losses and give him another chance, Plotkin and his employees would be freed from the impossible burden of returning their investors to par. The fund lost 39% last year and has lost more than 20% so far this year, making it very difficult for the fund to get back to even before it can start collecting performance fees again. 

According to CNBC’s David Faber, the reporter who broke the story, Plotkin has pledged to keep the new fund at or below $5 billion in assets, making it easier for the fund to focus on what Plotkin is best-known for: shorting stocks. The plan would give Plotkin something that’s extremely rare in life: a ‘do-over’ after 18 months of abysmal performance. 

Plotkin, according to people familiar with his plans, has committed to keeping his “new” fund at or below $5 billion in capital and returning to a focus on shorting stocks, a talent for which he was known for many years prior to suffering significant losses during the meme stock craze of early 2021.

The plan would essentially give Plotkin a do over after 18 months of very poor performance, allowing him to keep his employees, many of whom might otherwise choose to leave given his lack of performance fees from which to pay them.

According to CNBC, Plotkin had a strong reputation as short-seller before he stepped on the landmine that was his Gamestop short. 

Plotkin and his employees are honing their pitch. But whether Steve Cohen – who bailed out Plotkin after his Gamestop short went sideways – or any other investors will step up remains to be seen. 

Investors, who include Point72 founder Steven Cohen, are being presented with the prospect of getting a chance to have Plotkin run their money in a smaller fund focused on his strength of shorting stocks, but forever giving up the hope of having him work to get them back to even on their current funds.

It’s unclear how that plan will be received and how much capital Plotkin’s investors will be willing to reinvest with him.

News of Melvin’s plans was met with jeers on social media, a reflection of the fact that retail traders once accused Citadel of conspiring with Robinhood and other retail platforms to pull the plug on meme-stock trading during the January 2021 rally to protect funds like Melvin that had been caught wrong-footed and were getting mercilessly pummeled.

As one Twitter user quipped…

Must be nice to lose other people’s money then start a new fund to lose even more people’s moneyhttps://t.co/oPvHuONdpf

— Jackson Hunter (@jhuntermav) April 21, 2022