Gabe Plotkin, chief investment officer and portfolio manager of Melvin Capital Management LP, speaks at the Sohn Investment Conference in New York City, May 6, 2019.
Alex Flynn | Bloomberg | Getty Images
Melvin Capital, the beleaguered hedge fund run by its former founder Gabe Plotkin, discussed a new plan with its investors under which the company would return its capital, while 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 unwind its current fund at the end of June. This fund was down 21% at the end of the first quarter.
Plotkin would then launch what would essentially be a new fund on July 1 with the money its investors decide to reinvest, but it would do so without having to bring those investors back into par on their invested capital before they could earn a performance fee.
This so-called high water mark, which requires hedge fund managers to return their investors’ capital to par before collecting fees, is virtually impossible for Plotkin to meet much of Melvin’s capital, given the losses. of the fund by 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 at or below $5 billion in capital and to focus on short selling stocks, a knack for which he was known for many years before suffering significant losses. during the equity craze of early 2021.
The plan would essentially give Plotkin a hard time after 18 months of very poor performance, allowing him to keep his employees, many of whom might otherwise choose to leave given his lack of performance fees to pay them.
Melvins’ strong track record of success, prior to his horrendous recent performances, was often due to Plotkin’s ability to make significant profits by shorting stocks. But as his fund grew, this ability was reduced.
Investors, including Point72 founder Steven Cohen, are being offered the option of having their money managed by Plotkin in a smaller fund focused on its ability to short sell stocks, but forever giving up hope of doing so. work to get them. return to par on their 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 a number of well-known hedge fund managers, facing onerous high levels, chose to close and then re-open a new fund as early as a year later, this would be a one-time transition from a fund to another with the immediate elimination of the high water mark.
Representatives for Plotkin could not be reached for comment and Point72 officials declined to comment.