Melvin Capital Management, the hedge fund that has borne the brunt of losses from the soaring stock prices of heavily shorted stocks recently, lost 53% in January, according to people familiar with the firm.
Melvin was founded by Gabe Plotkin, a former star portfolio manager for hedge-fund titan Steven A. Cohen. It started the year with about $12.5 billion and now runs more than $8 billion. The current figure includes $2.75 billion in emergency funds Citadel LLC, its partners and Mr. Cohen's Point72 Asset Management injected into the hedge fund last Monday.
As part of the deal, they got non-controlling revenue shares in Melvin for three years. So far, Citadel, its partners and Point72 have lost money on the deal, though the precise scope of the loss was unclear Sunday.
Melvin has massively de-risked its portfolio, said a client. People familiar with the hedge fund said its leverage ratio -- the value of its assets compared with its capital from investors -- was the lowest it has been since Melvin's 2014 start. They also said the firm's position-level liquidity, or its ability to exit securities in its portfolio easily, had increased significantly.
New and existing clients have signed up to invest money into Melvin on Feb. 1, according to the people familiar. It was unclear how much they would be adding.
Melvin had established itself in recent years as one of the top hedge funds on Wall Street, but a short position in GameStop Corp. hurt the firm in recent weeks. Losses extended beyond GameStop, with declines coming from throughout its portfolio during a period of market turmoil in January. Positions in which Melvin had publicly disclosed owning put options -- bearish contracts that typically profit as stocks fall -- in its last quarterly regulatory filing soared, while positions in companies it held sold off.
Bed Bath & Beyond Inc., New York-listed Chinese tutoring company GSX Techedu Inc. and National Beverage Corp. were up 78.4%, 62% and 99% at their intraweek highs last week, respectively. Meanwhile, Booking Holdings Inc. and Expedia Group Inc. were down 9.9% and 13.4% at their intraweek lows.
Traders say as GameStop continued to soar -- f rom $30 to $75 and higher -- there was a contagion effect. Managers lost confidence short positions would stop rising in value and covered heavily shorted names, worried social media-fueled investors would focus on companies they were short. They also started cutting their stakes in companies to reduce the risk in their portfolios, hurting other investors in those companies. Last week alone, GameStop shares soared more than four times.
"The performance pain...has been record breaking," read a note from Morgan Stanley to its trading clients last week.
Indeed, hedge funds set near-daily records of various sorts last week for how much they pulled back their exposure to the U.S. stock market by covering their shorts and selling out of their wagers on companies, according to client notes from Morgan Stanley and Goldman Sachs Group Inc. On Wednesday, this type of so-called degrossing contributed to the largest one-day drop in funds' use of leverage on record, said a Goldman note.
Maplelane Capital, another hedge fund that has sustained significant losses this month, ended January with a roughly 45% loss, said a person familiar with the fund. It managed about $3.5 billion at the start of the year.
The frenetic trading that catapulted GameStop, AMC Entertainment Holdings Inc. and BlackBerry Ltd. into the ranks of the most traded stocks in the U.S. market and captured the attention of the White House and regulators also hit prominent hedge funds Point72 and D1 Capital Partners.
D1, which ended the month down about 20%, was short AMC and GameStop, said people familiar with the fund. One of the people said D1 had exited both positions by Wednesday morning but that those were small drivers of losses. A more significant factor was shares of travel-related companies declining.
Some fund managers say the episode is likely to change how the industry works.
Fewer hedge funds are likely to highlight their bearish positions by disclosing put options, they said. Instead, funds may use Securities and Exchange Commission rules to keep confidential those positions, a tool activist investors have long used to build positions in companies quietly. More funds also may institute rules about avoiding thinly traded, heavily shorted stocks.