Gabe Plotkin, chief investment officer and portfolio manager at Melvin Capital Management LP, speaks at the Sohn Investment Conference in New York, May 6, 2019.
Alex Flynn | Bloomberg | Getty Images
Melvin Capital, the embattled hedge fund run by its founder Gabe Plotkin, has been discussing a new plan with its investors under which the company would return their capital, while also giving them the right to reinvest that capital in what would essentially be a new fund managed by Plotkin.
Under the terms being discussed, Plotkin would release its current fund at the end of June. That fund was down 21% at the end of the first quarter.
Plotkin would then start what would essentially be a new fund on July 1 with whatever money his investors decided to reinvest, but he would do so without having to bring those investors back to the same invested capital before he could earn a performance fee.
This so-called high watermark, which requires hedge fund managers to return their investors’ capital at par before receiving fees, is virtually impossible for Plotkin to fulfill much of the equity in Melvin, given the fund’s losses of 39 % last year. and at least 21% so far this year.
Plotkin, according to people familiar with his plans, has pledged to keep his “new” fund of $5 billion or less in capital and return to a focus on short stocks, a talent he was known for for many years before suffer significant losses. during the meme stock craze in early 2021.
The plan would essentially give Plotkin a re-read after 18 months of very poor performance, allowing him to keep his employees, many of whom could choose to leave due to a lack of performance fees to pay them.
Melvins’ strong track record of success, prior to his horrific recent performance, was often due to Plotkin’s ability to make significant profits by selling stocks short. But as his fund grew in size, that ability was muted.
Investors, which include Point72 founder Steven Cohen, are being presented with the prospect of having the chance to have Plotkin manage his money in a smaller fund focused on his strength to sell stock, but always giving up hope of having it. working to get them. back to the same in your current funds.
It is unclear how this plan will be received and how much capital Plotkin investors will be willing to reinvest with it.
While several well-known hedge fund managers faced with costly watermarks chose to close and reopen a new fund a year later, this would be a one-time transition from one fund to another with the immediate elimination of the high watermark.
Plotkin representatives could not be reached for comment and Point72 officials declined to comment.