Gabe Plotkin’s hedge fund Melvin Capital gained a chunky 22% in February, according to reports, but the investment firm remained in a deep hole after being battered during the GameStop saga.
The 22% gain, reported by numerous outlets, well outstripped the 2.6% rise in the S&P 500 across the month.
Yet Melvin Capital lost 53% in January after hemorrhaging money on its bet against video-game store GameStop, which skyrocketed when amateur traders organizing themselves on social media website Reddit got behind the stock.
The $8 billion fund needs to produce gains of 75% before earlier clients break even, Bloomberg reported. That is a tall task, even for a fund that posted average yearly returns of around 30% from 2014 to 2020.
However, hundreds of millions of dollars have flowed into the fund from investors who are confident in Plotkin’s abilities, Bloomberg said. Insider has contacted a media spokesperson for Melvin Capital for comment.
Melvin’s February gains are in part due to tweaks to Plotkin’s trading strategy. In testimony to Congress on the GameStop saga in February, Plotkin said he had “learned” from the episode. “I am taking steps to protect our investors from anything like this happening in the future,” he said.
For example, Plotkin has stopped using exchange-traded puts – contracts that allow investors to make money if a stock falls – which show up on regulatory filings and allowed his bets to be singled out by day-traders, Bloomberg reported.
The fund took an injection of $2.75 billion in cash from hedge funds Citadel and Point72, the latter run by Plotkin’s mentor Steve Cohen, as the day-trading frenzy rocked the firm.
He also said in his Congressional testimony he would avoid situations where lots of investors are betting heavily against a stock.
Crowded shorts are vulnerable to the types of so-called short squeezes that battered Melvin in January. Squeezes happen when short-sellers are forced to buy back the stock to cover their positions, driving the stock price upwards.