Gabe Plotkin, chief investment officer and portfolio manager of Melvin Capital Management LP, speaks during the Sohn Investment Conference May 6, 2019 in New York.
Alex Flynn | Bloomberg | Getty Images
Melvin Capital, the embattled hedge fund run by its once high-flying founder Gabe Plotkin, has discussed with its investors a novel plan under which the firm would return their capital while giving them the right to reinvest that capital in what was essentially would be a new fund led by Plotkin.
Under the terms discussed, Plotkin would liquidate his current fund at the end of June. This fund was down 21% at the end of the first quarter.
Plotkin would then launch what is essentially a new fund on July 1 with the money his investors wanted to reinvest, but he would do so without having to bring those investors back to their invested capital before he could earn a performance fee.
That so-called high-water mark, which requires hedge fund managers to repay their investors’ capital at par before earning fees, is for Plotkin with much of the capital in Melvin, given the fund’s 39% losses over the past year virtually impossible and at least 21% so far this year.
Plotkin has committed to keeping his “new” fund at or below $5 billion in capital and refocusing on shorting stocks, a talent he was known for for many years, according to people familiar with his plans. before suffering significant casualties during the meme stock craze of early 2021.
The plan would essentially give Plotkin a replay after 18 months of very poor performance and allow him to retain his staff, many of whom would otherwise choose to leave as he has no performance fees to pay them.
Melvins’ strong track record prior to his dreadful recent performance was often attributed to Plotkin’s ability to generate significant gains by shorting stocks. But as his fund grew in size, that ability was dampened.
Investors, including Point72 founder Steven Cohen, are being offered the prospect of having Plotkin invest his money in a smaller fund that focuses on his strength of shorting stocks but has lost hope forever about him making them work for it, even getting them back on their current funds.
It’s unclear how this plan will be received and how much capital Plotkin’s investors will be willing to reinvest with it.
While a number of well-known hedge fund managers have decided to close a new fund and re-open just a year later in the face of distressing high water marks, this would be a unique transition from one fund to another with the immediate elimination of the high water mark.
Plotkin officials could not be reached for comment, and Point72 officials declined to comment.