Hedge fund Melvin sustains 53% loss after Reddit onslaught

Melvin Capital, the hedge fund that was wrongfooted by retail traders who drove up shares in GameStop and other companies it had bet against, lost 53 per cent in January, according to people familiar with the firm’s results. 

The New York-based hedge fund sustained a $4.5bn fall in its assets from the end of last year to $8bn, even after a $2.75bn cash injection from Steve Cohen’s Point72 Asset Management and Ken Griffin’s Citadel.

Melvin became the target of retail traders who co-ordinated to drive up the share price of GameStop on online message boards such as Reddit, after the firm disclosed its bet against the company in regulatory filings. 

The short squeeze on Melvin has been taken by some as a victory over a broken system they see as benefiting the country’s elite, and the trading strategies used to pressure hedge funds have shot from the fringes of the internet to the heart of the zeitgeist. 

On Wednesday Melvin said it had exited its bet against GameStop and repositioned its portfolio. The firm moved to reduce risk in its investments following a turbulent start to January when it lost 30 per cent in the first three weeks. Melvin’s leverage ratio is at the lowest it has been since the firm’s founding in 2014, said a source familiar with the firm. The news of Melvin’s January performance was first reported by The Wall Street Journal.

The GameStop saga marks a fall from grace for Melvin, which gained 52 per cent last year, ranking it among the best performing hedge funds. Founder Gabe Plotkin was one of Mr Cohen’s most prominent traders at SAC Capital, until it shut down amid an insider trading scandal.

A Melvin spokesperson declined to comment on the firm’s January performance.

The rally in GameStop shares has captivated Wall Street and forced many hedge funds to rethink risk management practices. On Monday and Tuesday last week, other long-short hedge funds cut their exposure to the market by covering short bets and selling out of stocks.

“The market action has been a wake-up call and retail traders are likely to continue to be a force to be reckoned with, which will probably permanently affect the business models of institutional investors,” said Maneesh Deshpande, a strategist at Barclays.

US securities regulators said last week they would review trading for signs of manipulation, as well as restrictions put in place by brokerages such as Robinhood and Charles Schwab to see if they disadvantaged investors.

Shares of GameStop have climbed more than 1,625 per cent this year, and last week both shares and options on the company whipsawed in value as retail investors piled in. 

While members of the popular Reddit community WallStreetBets had focused their attention on GameStop, they have broadened their gaze to other down-on-their-luck companies, with shares of apparel retailer Express and cinema owner AMC both more than tripling in value last week.