Gabe Plotkin is going back to the drawing board.
After facing vocal criticism from some investors over an ill-conceived plan to reboot his beleaguered hedge fund, the founder of Melvin Capital Management now must figure out a fresh strategy to compensate his traders and revitalize the firm’s fortunes. He also offered something rare in an industry known for its big personalities and hubris: a mea culpa.
“I am sorry. I got this one wrong. I made a mistake. I apologize,” Plotkin wrote in a note to clients Sunday. “In hindsight and despite our intentions, we recognize now that we focused on future returns and team continuity without sufficient consideration of your investment losses.”
What got Plotkin in trouble was last week’s audacious announcement that investors who wanted to keep their funds with his firm would have to pay performance fees again even though staggering losses had left them deep in the red.
He conceded in his letter that some Day One clients were candid in their complaints, saying “we were not being a good partner.” Even with the 43-year-old’s change of heart, it’s unclear whether a new plan will assuage investors.
Plotkin’s initial solution raised ire in the industry that has long been criticized for getting paid handsomely in good times, but avoiding much damage in bad times.
‘Reputational Risk’
“Managers abolishing or resetting high watermarks at new higher levels is not aligned with best practice or industry standards,” said Patrick Ghali, managing partner at Sussex Partners, which selects hedge fund investments on behalf of clients, adding that such moves could “severely restrict the pool of investors willing to engage with them” and cause “reputational risk for the industry as a whole.”
Melvin Capital had tumbled 52% since the start of last year, battered by a Reddit-fueled short squeeze against GameStop Corp. and other shares in January 2021, and then smacked by another big loss in the first quarter of this year. To get the firm back on track, Plotkin had announced an unheard-of maneuver that involved cutting the fund’s size by about 40% and requiring remaining clients to pay lucrative fees for any investment gains.
The move would have allowed Plotkin to more easily pay his 30 investment professionals without reaching into his own pocket. Under the old rules, he would have had to return more than 100% before he was able to collect performance fees again.
Last year, Plotkin agreed to pay his employees on performance from February to year end, a time when the fund climbed about 33%.
Plotkin and other insiders accounted for about $1 billion of the $8.7 billion the firm held at the end of March, according to Bloomberg calculations based on a regulatory filing. Generally, the founder provides the lion’s share of the internal capital.
NBA Investment
In the past few years, Plotkin had started to make more of a splash with his wealth. In 2019, he bought a stake in the Charlotte Hornets basketball team from Michael Jordan, and the next year he paid $44 million for two adjacent homes in Miami Beach, Florida.
Plotkin wrote in Sunday’s missive that even though there was “sufficient interest and critical mass” to move forward with the plan, he was set on finding a more “balanced” solution in the next two to three weeks.
A spokesman for Melvin Capital declined to comment.
–With assistance from Nishant Kumar.
This article was provided by Bloomberg News.
