No one formerly at Melvin Capital is laughing at this meme.
Despite announcing in May that it is shutting down and returning money to investors, the hedge fund’s risk appetite and disclosures are being probed by the Securities and Exchange Commission, according to sources who spoke to The Wall Street Journal. Melvin, you’ll recall, was one of the biggest casualties of last year’s meme stock frenzy, and its name is back in the news just as the stocks that toppled Melvin are surging again.
Meme Some, Lose Some
A refresher on the meme stock phenomenon. A rabid community of individual retail investors on social media — on Reddit they call themselves “apes” — coordinated their stock purchases against the positions of big-time hedge funds and institutional firms. Famously, they focused on three stocks — AMC, GameStop, and Bed Bath & Beyond — that those big firms bet against by short-selling them. The apes sent their stock prices rocketing toward the Karman Line, and firms including Melvin were blindsided because their short positions meant they would profit only if the stocks went down instead of up — and up and up.
It was enough to push Melvin to a $6.8 billion loss in January 2021 – representing more than half its assets under management. Despite a modest recovery, Melvin threw in the towel earlier this year, but that hasn’t stopped regulators from wanting to know more:
- Melvin managed to raise money after its initial disastrous January, although as of May 2022, clients who invested in Melvin to start 2021 were short 57% of their money. Clients who invested after January 2021 made money, a source told the WSJ, but at lower returns than previous years, which led CEO Gabriel Plotkin to say he wanted “to step away from managing external capital.”
- Melvin suffered more losses earlier this year during the tech rout, and the SEC reportedly is investigating what exactly the hedge fund told clients about risks in its investment strategy.
Life’s Short: Perhaps instinctively, Reddit’s apes poured back into their beloved meme stocks this week, driving Bed Bath & Beyond up 60% in the last five days, AMC up 49%, and Gamestop over 6%. Somewhere, somehow a short-seller is crying in his overvalued granola.