Reddit's WallStreetBets' enemy #1, Melvin Capital, ended the first 6 months of 2021 down 46%, thanks to the ruthless attack by the Reddit traders on its short positions in January of this year. The hedge fund rebounded 22% in February but has lost its way in recent months.
Mevlin Capital was founded in 2014 by 42-year-old Gabe Plotkin, a former star portfolio manager for hedge fund titan Steven Cohen. Up until 2021, it had one of the best records on Wall Street: 30%+ annualized returns and 50%+ returns in 2020. The fund's assets under management ballooned to $12.5 billion. In 2019, Plotkin bought a stake in NBA team, Charlotte Hornets and in 2020 he personally made $850 million.
Melvin was known for its aggressive short positions, which made up majority of the fund's gains. Their biggest strength turned into their biggest weakness earlier this year. Melvin Capital had started building a short position in GameStop in 2020 when shares were below $10. On October 27, Melvin Capital's shorts were first mentioned on r/WallStreetBets, in a video titled: “GME Squeeze and the Demise of Melvin Capital." Over the next few months, retail traders declared war on the hedge fund, promising to ride $GME stock price to the moon.
That's exactly what happened and Melvin Capital nearly imploded in the greatest short squeeze of the century. In a short squeeze, heavy buying forces short bettors to buy back shares to limit their losses. On January 27, GameStop shares jumped to $350 and Melvin had to cover its short position to avoid completely wiping out the fund. Melvin Capital lost a cool 53% in a few eventful days in January.
Short Squeez Takeaway: In the new world of meme stocks investing, hedge funds need to be extra careful about their short positions, which can result in uncapped losses. Hedge funds are adapting by hiring data scientists to scour the internet to better gauge retail investor sentiment. One thing is for sure, the short-selling game done changed forever. (In case anyone was wondering, yes, the name of this newsletter was inspired by the infamous Melvin Capital Short Squeez)