Melvin Capital Lost 53% in January, Hurt by GameStop and Other Bets

Citadel, its partners and Point72 took losses from their investment in the hedge fund

Wall Street is in an uproar over GameStop shares this week, after members of Reddit’s popular WallStreetBets forum encouraged bets on the video game retailer. WSJ explains how options trading is driving the action and what’s at stake.

Melvin Capital Management, the hedge fund that has borne the brunt of losses from the soaring stock prices of heavily shorted stocks recently, lost 53% on its investments in January, according to people familiar with the firm.

Melvin’s losses are the most visible wound in an extraordinary tussle playing out between professional hedge-fund investors and amateur traders congregating on forums such as Reddit’s WallStreetBets. The amateurs have made Melvin their principal enemy and have gleefully seized the upper hand. “Only 47% left to go!!” one user posted Sunday. They are exhorting one another to keep buying GameStop stock and call options.

The frenetic trading is almost certain to continue Monday and into the week. Brokerages restricted purchases of GameStop and other hot stocks last week, pulling volumes down. But more than 50 million GameStop shares still changed hands Friday; a year ago volume was just a few million a day. On the other side, while Melvin has ceased betting against GameStop, and other funds have exited or trimmed their bets, the stock remains heavily shorted.

Melvin was founded by Gabe Plotkin, a former star portfolio manager for hedge-fund titan Steven A. Cohen. It started the year with about $12.5 billion and now runs more than $8 billion. The current figure includes $2.75 billion in emergency funds Citadel LLC, its partners and Mr. Cohen’s Point72 Asset Management injected into the hedge fund on Jan. 25.

As part of the deal, they got noncontrolling revenue shares in Melvin for three years. So far, Citadel, its partners and Point72 have lost money on the deal, though the precise scope of the loss was unclear Sunday. Citadel’s Melvin investment had an immaterial impact on its flagship multistrategy hedge funds, said a person familiar with the Chicago firm, who added that it made up a tiny fraction, about 1%, of Kensington’s and Wellington’s 3% loss for January.

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