Business|Citadel to take back $500 million of its cash infusion into Melvin Capital.
https://www.nytimes.com/2021/08/21/business/citadel-melvin-gamestop.html
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Melvin, a hedge fund that had bet that GameStop’s share price would fall, received a $2 billion infusion from Citadel after the stock skyrocketed.
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Hedge Fund Chief Defends His Firm’s Bet Against GameStop
In a House Financial Services Committee hearing, Gabriel Plotkin, founder and chief executive of the hedge fund Melvin Capital, defended his firm’s long-term strategy in betting that GameStop shares would fall.
Contrary to many reports, Melvin Capital was not bailed out in the midst of these events. Citadel proactively reached out to become a new investor, similar to the investments others make in our fund. It was an opportunity for Citadel to buy low and earn returns for its investors if and when our fund’s value went up. To be sure, Melvin was managing through a difficult time, but we always had margin access and we were not seeking a cash infusion. And absolutely none of Melvin’s short positions are part of any effort to artificially depress or manipulate downward the price of the stock. Nothing about our short position prevents a company from achieving its objectives. It is just Melvin’s view about whether it will. Specific to GameStop, we had a research-supported view well before the recent events. In fact, we’ve been short GameStop since Melvin’s inception six years earlier, because we believed and still believe that its business model, selling new and used video games in physical stores, is being overtaken by digital downloads through the internet. And that trend only accelerated in 2020 when, because of the pandemic, people were downloading video games at home. As a result, the gaming industry had its best year ever, but GameStop had significant losses. In January 2021, a group on Reddit began to make posts about Melvin’s specific investments. They took information contained in our S.E.C. filings and encouraged others to trade in the opposite direction. Many of these posts were laced with anti-Semitic slurs directed at me and others. Ordinary investors who were convinced by a misleading frenzy to buy GameStop at $100, $200, or even $483 have now lost significant amounts. When this frenzy began, Melvin started closing out its position at GameStop at a loss, not because our investment thesis had changed but because something unprecedented was happening. We also reduced many other Melvin positions at significant losses, both long and short, that were the subject of similar posts.
By Kate Kelly
The hedge fund Citadel pumped billions of dollars into Melvin Capital after that fund’s bet against GameStop went bad, leading to huge losses. Now, Citadel is taking some of its money back.
Citadel has notified Melvin of its plans to retrieve $500 million of the $2 billion it injected in late January, according to two people briefed on the matter, who were not authorized to speak publicly about it. Under the terms of Citadel’s investment, the money will be returned at the end of September, the people said, as the third quarter draws to a close.
Citadel’s plan was first reported by The Wall Street Journal.
The cash infusion came in late January as Melvin was grappling with a huge turnaround in its short bet of GameStop. GameStop’s shares flatlined in recent years as it struggled to refashion itself from a brick-and-mortar video-game retailer into a more modern e-commerce company. But the company’s stock skyrocketed in January, after new directors from Chewy.com, which sells pet products, were named and as small investors piled into the stock, goaded on by the WallStreetBets forum on Reddit.
Melvin took heavy losses as it scrambled to cover the costs of its wrong-way trade. Some of its other short positions, including its bet against the movie-theater company AMC Entertainment, were hurting it, too.
Citadel, which is based in Chicago, and Point72 Asset Management — a fund based in Stamford, Conn., that Melvin’s founder, Gabriel Plotkin, once worked at — stepped in with a combined $2.75 billion in cash on Jan. 25. The injections helped stabilize Melvin, which has generated double-digit-percentage returns since Feb. 1, according to one of the people, who was briefed on its performance.
Melvin is still down 41 percent for this year through July, according to an investor letter reviewed by The New York Times, because of its heavy losses from January.
As part of its investment, Citadel receives a cut of Melvin’s revenue, in addition to the returns it gets on its money, the two people said. Citadel was also given the right to pull out at least some of its cash as early as the third quarter of this year, these people added — a right it is now exercising. (Hedge fund investors are typically required to leave their capital invested for a longer period.) Citadel, which manages $38 billion in assets, is itself up about 9 percent through mid-August, according to one of the people, who had been briefed on the firm’s returns.
Mr. Plotkin declined to comment. Kenneth C. Griffin, Citadel’s founder, did not respond to requests for comment.
Point72 is staying put.
“I have the same deal as Ken,” said Point72’s chief executive, Steven Cohen, “and no plans to redeem.”
Kate Kelly is a business reporter, covering big banks, trading and key financial-policy players. She is also the co-author of “The Education of Brett Kavanaugh” and the author of “Street Fighters.” More about Kate Kelly
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