What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing. You may remember, a hedge fund called melvin capital run by gabe plotkin, founded in 2014. Melvin grew to be one of the most successful hedge funds on wall street, growing its assets under management to 13 billion dollars and making plotkin an estimated fortune in excess of 300 million dollars. Despite its growing importance in the financial markets, the secretive nature of the hedge fund industry meant that very few regular people had heard of this now massive company.

But this all started to change. In late 2020 internet sleuths on the wall street vets forum started to notice peculiarities in the trading activity of gamestop stock in a post called the real greatest short burn of the century wall street bets user. Jeff amazon pointed out an interesting statistic. After adjusting for ryan cohen's strategic stake in the company, more than 100 of gamestop's free-floating shares were sold short.

If enough, individual investors start buying the stock, they could push up the price enough to induce a short squeeze. Of course, they did this with incredible success. In a matter of days, gamestop's share price increased 20 fold, as short sellers scramble to cover their positions at massive losses, as it turns out, gabe plotkin was one of the biggest game. Stop short sellers by the time the dust settled: melvin had lost more than 50 percent of its portfolio value or almost 7 billion, making it one of the fastest destructions of value in history.

After incurring such a horrific loss, many thought that melvin was reaching the end of his road, but like two knights in shining armor fellow hedge fund billionaires, stephen cohen, and ken griffin, injected 2.75 billion dollars into melvin effectively giving the embattled firm a second chance. With 8 billion dollars in capital blocking was given the tall order of building back his track record as a star fund manager. Unfortunately, the gamestop saga was only the beginning of melvin's troubles. The past 16 months have been a complete disaster for them, with the fun continuing to bleed money at an alarming rate in may of 2022 more than one year after the gamestop losses, melvin's investors finally reached their limits.

The once mighty firm is shutting down and returning to investors what little remains of their capital after graduating from northwestern university in 2001, gabe plotkin landed a job at citadel. The hedge fund, founded by now billionaire ken griffin, after making a name for himself as a star trader at citadel, he moved to sac capital named after its founder, steve, cohen's initials sat capital was one of the biggest and most successful hedge funds of the 2000s reaching 40 billion dollars of assets under management plotkin was extremely successful, eventually rising the ranks to be a top portfolio manager for the consumer sector at sac capital. He was one of the most important people at the firm responsible for more than one billion dollars worth of assets. In 2014, sat capital pled guilty to a 700 million insider trading scandal and was forced to shut down as a hedge fund.

Now out of a job, lotkin thought he'd start his own hedge fund, which he named melvin capital. He decided to focus on two areas of the stock market technology and consumer companies. He ran a long short strategy where he would buy shares in undervalued or high growth companies. He would also sell short shares of dying companies that failed to keep up with the times.

Almost immediately after its founding in 2014, melvin started massively outperforming the market posting a 47 gain in his first year of operation. His outsized gains came in a big part from his short positions. Plotkin saw that many brick and mortar retailers were losing market share to e-commerce companies like amazon, which enjoyed a cost advantage and offered greater selection to consumers. While many of the brick and mortar retail stocks looked cheap based on their current earnings, pluck and viewed them as value traps, and many of them would eventually go bankrupt.

He had many successful plays on this theme. Shorting shares of jcpenney before the company eventually went bankrupt. Almost immediately after starting his hedge fund, a video game, retailer called gamestop, came across his radar with thousands of retail locations across the globe. Gamestop was the go-to destination to buy new games and sell your old ones.

However, with increases in memory, storage and internet speeds, more and more gamers were downloading their games directly to their consoles. This disintermediated retailers, like gamestop since 2015 game stops revenue and profitability started a clear downtrend and the company shrank as they started, closing down underperforming stores, while old habits die slowly. It wasn't a stretch to say that gamestop has lost its reason for existence from 2014. Gamestop's share price declined from around fifty dollars to three dollars in 2019, and it looked like it was on its way to zero melvin had shorted shares on and off during this whole period and likely made hundreds of millions in profits.

Of course, we all know what eventually happened when the epic short squeeze happened in january of 2021, melvin was perhaps the biggest loser, losing fifty percent of their portfolio value or almost seven billion dollars, and it wasn't even just gamestop that melvin made losses on. In addition to short selling shares, melvin would also buy put options which increase in value as the stock price goes down because of the technicalities of u.s securities laws. Hedge funds are required to publicly disclose their put option positions, even though they don't have to disclose their short positions. At this point, many hedge funds feared retail investors would be emboldened by the success of the gamestop apes and target other stocks, which they were short.

This fear was likely even greater with melvin, given how high profile their involvement with gamestop had become not wanting to become a target again melvin closed out all of its put positions in the first quarter of 2021. At the time, many of his short put option positions were in the same stocks that bill huang was pumping up, including the allegedly fraudulent chinese education company gsx. He likely suffered enormous losses. Closing these positions at the highs in the first quarter of 2021 gabe plotkin, may have been the most unlucky hedge fund manager in history.

None of his fundamental research was wrong. Had it not been for the short squeezes, his positions probably would have ended up being profitable, at least that's what two of plotkin's former employers thought almost immediately after the gamestop disaster, ken griffin and steve cohen, injected 2.75 billion dollars into melvin. Both men had known plotkin for decades as he used to be employed by their own hedge funds. Citadel and sat capital throughout the remainder of 2021 melvin focused more on its long positions and made somewhat of a comeback, but still ended the year down 39.

They focused their attention on high growth technology stocks, the type that had done well during the post 2008 bull run going into 2022. There were massively overweight, high valuation technology stocks which had benefited from the fed's pandemic era: money printing, for example. One of their biggest positions was accounting software company bill.com, which had been more than cut in half from its highs. It's a similar story with datadog, which has a price earnings ratio of 19, 000 snowflake and others.

The few value stocks that they owned were also disasters. Their third largest position was a specialty retailer. Bath and body works. Optimism around government stimulus, as well as a general bubble environment, caused the stock to quadruple from its pre-pandemic levels, despite the fact that its revenues are still below 2019 levels.

Predictably, the stock was almost cut in half from the highs by the end of the first quarter. Melvin was down 23, bringing the total losses to more than 50 percent. In light of the disastrous performance, plotkin thought of an idea, he would shut down melvin and start a new fund. Some of the old melvin investors would transition to the new fund.

Very little would change besides the name on the building, but why would he do this? How would this change anything it all has to do with money and specifically the fees that they charge their investors? Let's say you invested 100 in melvin in 2019.. If they had a good year in 2020, your investment may have increased by 50 to 150 dollars, but you also have to consider the fees they charge. A two percent management fee per year, plus a performance fee equal to 30 of the gains. After deducting the fees, you only have about 130 dollars in 2021, they had a disastrous year with gamestop and their other short positions.

Your 130 dollars has declined to just 77 in future years, even if they make gains, they don't charge. You management fees until you at least make back your initial investment of 100. This is called the high water mark and is meant to protect investors from excessive fees. If gabe shut down melvin and started a new hedge fund, he would clearly slate it would get rid of the high water mark and he could start charging performance fees again immediately.

Of course, melvin's investors were furious after gabe had incinerated half of their capital. They were already near the end of their patients. Now he was trying to pull a gimmick to make them pay more fees. Speaking to the new york post, one of his investors said quote: melvin ceo, who made 800 million dollars in 2020, lost me even more money.

In april and wants to make himself more fees, it's shameful disgusting, horrible, behavior, unquote. Another investor said: if melvin really needs more money, plotkin should sell his 44 million beachfront mansion in miami before increasing fees on their investors, after being one of the worst performing hedge funds. In 2021, the investors were giving plotkin a second chance and trying to take away. The high watermark was how he proposed repaying their loyalty.

Of course, the investors were not having any of it. Once it became clear to plotkin that he had lost the confidence of his investors, he had no choice but to shut down the fund for good and not start a new one. He said quote: the past 17 months has been an incredibly trying time for the firm, and you are investors. I have given everything i could, but more recently that has not been enough to deliver the returns that you should expect.

I now recognize that i need to step away from managing external capital unquote and with that melvin is no more while the gamestop saga happened more than a year ago. Its effects are still being felt to this day. In this david versus goliath, struggle between individual investors and a multi-billion dollar hedge fund, it looks like the little guy finally won, alright guys that wraps it up for this video. What do you think about melvin? Are you surprised that they are shutting down for good? Let us know in the comments section below, as always.

Thank you so much for watching and we'll see in the next one wall, street millennial signing out.