The REAL Reason Why Melvin Capital Is Shutting Down

What's up, guys? In today's video, we're going to talk about the real reason why Melvin Capital is closing its doors and nobody is talking about it. Seriously, I've been shocked that people aren't pointing to the real reasons why they're actually closing their shop. But let's, let's give a little background on Melvin Capital to start off and let's get right into it. Melvin Capital is probably not one of the most famous funds. It was last year, which we'll get into in a sec, but they actually opened up in 2014. They opened shop and, you know, they've actually done really well. It's ran by a guy named Gabe Plotkin. He's the CIO, and he has a great track record. He was a star at Steven A. Cohen's hedge fund. He worked with Ken Griffith closely. They both love him. And again, he opened shop in 2014. And 2014 to date, excluding 2021 and this year, he returned about a 30% return to investors year over year. Pretty solid. And then 2021 hit. So I should mention that he specializes in short selling. You know, that's where you're betting on a stock going down instead of up. Instead of bullish, like two-thirds of his portfolio is almost always in short positions. But 2021 came around, and the meme frenzy, right, with AMC and GMC and all these meme stocks—he just got hammered. Like it was totally unconventional, but the retail investors came in and pushed back against all of his short positions with the whole Reddit thing. Like that's what was going on, and Melvin was a big player. He was one of those. Big hedge funds that people were trying to bring down. They succeeded. So Melvin was up to almost more than $20 billion assets under management. And then in 2021, he had a 39% loss. Okay? That's a lot of money. That's like $8 billion. This year to date, 2022, he's down an additional 23%. So not doing good. And he just came and he decided that he's going to close its doors. And a lot of people are just saying, oh yeah, it's natural. He lost so much money that he's just going to close up shop. What people aren't talking about that I think is extremely important is that in April— well, okay. So, first up is that first and foremost, so Citadel and Point72 gave Melvin Capital some liquidity during this kind of meme frenzy. They extended, you know, an additional $2.75 billion in exchange for a profit agreement. So Citadel and Point72 are now like basically stakeholders in Melvin Capital. Now, how do funds make money, right? They make money from management fees and performance fees. So in hedge funds, there's something called a high-water mark where if you lose money, uh, so, you know, if you lose some money, you don't get to collect performance fees Until investors have recouped their money. So if you look at it right now, Melvin Capital is in a position where they're not going to make any money off of performance fees, or Citadel, or Point72, because until they return an additional— they're down like almost 150%, so they have to go up about 150% until they are back to where they should be. 150%. So, you know, if you're sitting here in Gabe's spot, you know, you're managing this team, you're trying to incentivize your employees, you have to gain 150% before you and your other investors that are breathing down your neck really start to make money. So, Gabe actually approached his investors and asked them and tried to convince them to waive their high watermark. Because once it's in the original offering documents, You have to get like either LPAC or LP approval to make some sort of changes like that. And they were appalled. They were like, what the hell, man? Like, you know, like you've lost so much money. Now you're trying to waive the only thing that protects us. And so he immediately backpedaled and he's like, well, think about it. Let us know. The investors came back to him and they were like, you know, maybe if you reach these milestones, we'll lower the high watermark a little bit so you don't have to get Quite up to where you were. So then, as you're sitting there and you're Gabe and you've got this team of investors and they're like, "Look, we're probably not going to make any money from performance over the next." I mean, if he's averaged 30% per year, the next five years, right? He's not going to make. They're not going to make any money off of performance fees. So the other option is close doors, close up shop, then start a new fund. And start over again. And he's basically said that's what he's doing. He said, "Hey, I'm going to close doors. I'm going to return capital to investors." He issued this letter. I've tried my best. Very apologetic for investors that want to stay with me. I'm going to be starting a new fund. But that's why he's starting a new fund. It's because there's no incentive for him or his team members to stick around. It kind of exposes a gap in the fund space. I think there needs to be. If I were an LP investing into hedge funds, I would want additional concessions and requirements written into the memorandum that prohibit, you know, fund managers, if they're gonna close this fund, then they can't start a new one within, I don't know, 5 or 10 years or something like that. But, you know, there's constantly these gaps and that's how these legal frameworks evolve. It's because, you know, stuff like this happens where, you know, he's down and he's just gonna close shop and start over. And he's probably well networked enough. He's got obviously friends like Stephen Cohen and Ken Griffith that'll at least fund a portion of it. And not to mention he's made billions over the years or hundreds of millions. So yeah, I mean, it's just kind of this false positive, but that is why I believe Melvin Capital is closing its doors. It's because there's no incentive anymore for his team members or for Citadel or Point72 or himself. So it's easier just to close doors. And investors have been, yeah, it's looked pretty bad because he's also said, look, I'm gonna charge fees All the way up until June 1st, in which like the last month or two, he hasn't really been trading all that much. It's been more like been deciding if you're gonna close your doors. And listen, 2% on $1 billion is $20 million bucks. And then, you know, he's got $8 billion right now, divide that by 12, it's a good chunk of change that he's been, you know, collecting over the past couple of months. So he's been getting some heat for that. But overall, this is the real reason why Melvin's Capital is shutting down, and you should be wary of it. Hope you guys enjoyed this video. Talk to you soon.