Embattled hedge fund Melvin Capital weighs unwinding current fund to start new one, sources say

cnbc.com:

Melvin Capital, the embattled hedge fund run by its once high-flying founder Gabe Plotkin, has been discussing a novel plan with its investors under which the firm would return their capital, while giving them the right to reinvest that capital in what would essentially be a new fund run by Plotkin.

Under the terms being discussed, Plotkin would unwind his current fund at the end of June. That fund was down 21% at the end of the first quarter.

Plotkin would then start what would essentially be a new fund on July 1 with whatever money his investors decided to reinvest, but he would do so without having to bring those investors back to even on their invested capital before he could earn a performance fee.

This so-called high water mark, which requires hedge fund managers to return their investors' capital to par prior to earning fees, is virtually impossible for Plotkin to meet on much of the capital in Melvin, given the fund's losses of 39% last year and at least 21% so far this year.

Plotkin, according to people familiar with his plans, has committed to keeping his «new» fund at or below $5 billion in capital and returning to a focus on shorting stocks, a talent for which he was known for many years prior to suffering significant losses during the meme stock craze of early 2021.

The plan would essentially give Plotkin a do over after 18 months of very poor performance, allowing him to keep his employees, many of whom might otherwise choose to leave given his lack of performance fees from which to pay them.

Melvins' strong track record of success, prior to its horrid recent performance, was often due to Plotkin's ability to make significant profits by shorting stocks. But as his fund grew in size that ability was muted.

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