Melvin Capital, the highest-profile hedge fund casualty from last year’s meme-stock rally, has rapidly backtracked on a controversial plan to start charging performance fees again in the face of an investor backlash.
The US-based firm, which lost 53 per cent in January last year after betting against retail investor favourite GameStop, had written to investors only last week with plans to remove a so-called high-water mark, which stops a fund charging performance fees until losses have been recovered.
But within a matter of days, after receiving “candid” feedback from some investors, founder Gabe Plotkin has admitted he was “initially tone deaf”.
“I am sorry. I got this one wrong. I made a mistake. I apologise,” wrote Plotkin, a former protégé of billionaire trader Steve Cohen, in a letter to investors seen by the Financial Times.
“Some of you feel that we were not being a good partner. Upon reflection, you are right,” added Plotkin, who said the firm will come up with a new plan after taking two to three weeks to process feedback from investors.
Melvin, which has also told investors that it would aim to reduce its assets from about $8.7bn at the end of March to about $5bn, declined to comment.
The U-turn is the latest mis-step by Melvin, which finished last year down 39 per cent after recovering only some of the losses suffered on GameStop and has lost a further 20.6 per cent in the first quarter of this year during a tough period for equity markets.
It also highlights how sensitive the $4tn hedge fund industry’s investors have become to paying hedge funds’ fees after years of often lacklustre returns. Whereas before the financial crisis many investors were wealthy individuals or family offices ready to pay handsomely to back a perceived star manager, the sector has increasingly been dominated by large institutions such as pension funds keen to protect their own investors from overpaying.
Hedge fund performance fees on average fell from 16.35 per cent to 16.1 per cent last year, their lowest level since at least 2008 when data group HFR began publishing these figures.
While removing high-water marks is controversial and rare, managers who have suffered a large loss may claim they find themselves short of cash to pay and keep top traders, while the need to get back to a high-water mark can also encourage traders to take overly risky bets.
To earn large fees, then “immediately incinerate billions of dollars in client capital, then claim poverty a year later is brazen, to say the least”, said Andrew Beer, managing member at investment firm Dynamic Beta.
Investors “tend to be wise to such actions”, said Patrick Ghali, managing partner at Sussex Partners, which advises clients on hedge fund investments. “This can backfire on managers attempting such changes,” he added.
Plotkin said that there had been “sufficient” interest to move ahead with the original plan, which also included making it easier for investors to exit the fund, but added “that’s now completely irrelevant to me”.
Melvin hit the headlines last year when it suffered large losses on its short position in video game retailer GameStop. The shares rocketed as much as 2,400 per cent amid a frenzy of buying by retail investors, some of whom had co-ordinated their actions on Reddit and directly targeted hedge funds.
The fund, which had been managing about $13bn in assets prior to the meme stock debacle, eventually had to exit its bet against GameStop and crystallise losses. During that month it took an emergency cash injection of $2.75bn from Ken Griffin’s Citadel and Cohen’s Point72.
Melvin’s move was first reported by the New York Post.