Melvin Capital, the embattled hedge fund run by its once high-flying founder Gabe Plotkin, has been discussing a novel plan with its investors under which the firm would return their capital, while giving them the right to reinvest that capital in what would essentially be a new fund run by Plotkin.
Under the terms being discussed, Plotkin would unwind his current fund at the end of June. That fund was down 21% at the end of the first quarter.
Plotkin would then start what would essentially be a new fund on July 1 with whatever money his investors decided to reinvest, but he would do so without having to bring those investors back to even on their invested capital before he could earn a performance fee.
This so-called high water mark, which requires hedge fund managers to return their investors’ capital to par prior to earning fees, is virtually impossible for Plotkin to meet on much of the capital in Melvin, given the fund’s losses of 39% last year and at least 21% so far this year.
Plotkin, according to people familiar with his plans, has committed to keeping his “new” fund at or below $5 billion in capital and returning to a focus on shorting stocks, a talent for which he was known for many years prior to suffering significant losses during the meme stock craze of early 2021.
The plan would essentially give Plotkin a do over 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 from which to pay them.
Melvins’ strong track record of success, prior to its horrid recent performance, was often due to Plotkin’s ability to make significant profits by shorting stocks. But as his fund grew in size that ability was muted.
Investors, who include Point72 founder Steven Cohen, are being presented with the prospect of getting a chance to have Plotkin run their money in a smaller fund focused on his strength of shorting stocks, but forever giving up the hope of having him work to get them back to even on their current funds.
It’s unclear how that plan will be received and how much capital Plotkin’s investors will be willing to reinvest with him.
While a number of well-known hedge fund managers, faced with onerous high water marks have chosen to shut down and then re-opened a new fund as soon as a year later, this would be a unique transition from one fund to another with the immediate elimination of the high water mark.
Representatives for Plotkin could not be reached for comment and officials at Point72 declined comment.
Plotkin has committed to keeping his “new” fund at or below $5 billion in capital and returning to a focus on shorting stocks, sources told CNBC.