Former Hedge Fund Giant Melvin Capital Shutters Doors After Meme Stock Failure — What It Means for Investors
On May 18, Hedge Fund Melvin Capital announced that it was closing operations after losing billions following the meme stock saga and recent market slump, Reuters reported.
Melvin Capital was one of the key players in the meme stock saga of 2021, where trading platform Robinhood shut down trading for GameStop, AMC and a few other stocks as shares skyrocketed. Melvin famously shorted GameStop, losing undisclosed billions when retail traders drove the stock price up. Hedge fund Citadel subsequently bailed out Melvin with a $25 billion investment. But it apparently wasn’t enough to save the struggling fund in the long term.
CNN reported that Melvin ended 2021 down by 39%, losing another 23% between January and April 2022. In January 2021, Melvin Capital was worth $13 billion, according to a GOBankingRates report at the time. It held just $7.8 billion in assets at the end of April 2022.
Melvin’s major assets in the first quarter included Datadog, Amazon, Hilton Worldwide Holdings, and Live Nation Entertainment. All four stocks have fallen sharply in the past month, with Amazon dropping from over $3,000 to just over $2,100 in the past 30 days.
In the months following the GameStop stock saga, experts predicted many hedge funds would close or declare bankruptcy. In fact, some — including London-based hedge fund White Square Capital — did close that summer.
Although Melvin Capital held on after the storm, investors may be wondering what will happen to their money now that the fund is closing.
“The appropriate next step is to wind down the Funds by fully liquidating the Funds’ assets and accounts and returning cash to all investors,” Melvin Capital’s Gabe Plotkin wrote in a letter reviewed by Reuters on Wednesday.
When a hedge fund liquidates, it sells all its assets, often at a loss. If the fund has embedded capital gains, however, investors may be forced to pay taxes on the sale of that stock.
As stocks that make up Melvin Capital’s fund have already dropped, this could indicate liquidation had already started prior to the announcement, according to CNN. In the article, Plotkin said liquidation had begun and that the fund would cease charging management fees as of June 1.
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The hedge fund had previously showed gains of 11.9% per year, on average. Plotkin told investors he had “given everything” he could, but it was not enough to deliver the expected returns, CNN reported.