Hedge fund that was destroyed by GameStop stock rally to close

In 2021, a remarkable financial story emerged from the r/wallstreetbets— one that saw the subreddit’s stonk memes eventually turn into GameStop’s share rise. It was such a peak and caused such great losses for some that the event was the matter of congressional hearings. Now, one of the hedge funds most impacted by GameStop’s rise in value has told its investors it is closing.

Melvin Capital is run by Gabe Plotkin and has invested heavily in selling GameStop stock (among other theoretically similar stocks such as AMC Entertainment), essentially betting that its stock price would fall as people move away from physical retail.

That position was completely destroyed by GameStop’s share price spike in January 2021, which at one point increased the stock’s value by 2400%: Melvin Capital started 2021 with $12 billion; by the end of January it had lost 53% of its value. There was a $2.75 billion bailout of two hedge funds and an improvement from the rest of the year, but clearly not enough.

The news of Melvin Capital’s closure came in a letter to investors reviewed by New York Times. “The past 17 months have been incredibly difficult for the company and you, our investors,” Plotkin wrote. The “appropriate next step” is for the company to liquidate its still sizable reserves and return cash to investors, while Plotkin himself is promising “to step away from outside capital management”.

It’s an impressive drop for Plotkin, who was a successful Wall Street trader and portfolio manager for more than a decade before founding Melvin Capital, 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 thought he’d be beaten by a bunch of amateur investors brought together by a love of cats, the internet, and GameStop nostalgia. Whatever happened during this phenomenon, a crucial element for it was the coordination of so many thousands of smaller investors against what they saw as the old guard, exemplified by Melvin Capital.

Not sure if this is a story of David and Goliath in the fund, really – tons of smaller investors lost money on this, just like hedge funds. But the fate of Melvin Capital shows that memes can sometimes be serious business.

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