Hedge-Fund Titans Lose Billions to Reddit Traders Running Amok
For once, Main Street is beating Wall Street.
In a matter of weeks, two hedge-fund legends -- Steve Cohen and Dan Sundheim -- have suffered bruising losses as amateur traders banded together to take on some of the world’s most sophisticated investors. In Cohen’s case, he and Ken Griffin ended up rushing to the aid of a third, Gabe Plotkin, whose firm was getting beaten down.
Driven by the frenzied trading in GameStop Corp. and other stocks that hedge funds have bet against, the losses suffered over the past few days would rank among the worst in some of these money managers’ storied careers. Cohen’s Point72 Asset Management declined 10% to 15% so far this month, while Sundheim’s D1 Capital Partners, one of last year’s top-performing funds, is down about 20%. Melvin Capital, Plotkin’s firm, had lost 30% through Friday.
It’s a humbling turnaround for the hedge fund titans, who in 2020 staged a comeback by pouncing on the wild markets caused by the Covid-19 pandemic. But that crisis helped push thousands if not millions of retail traders into the U.S. stock market, creating a new force that for now the professionals seem powerless to combat.
And it’s not just the big names: Jack Woodruff’s $2.8 billion Candlestick Capital has fallen 10 to 15% in January on its short wagers, while the $3.5 billion Maplelane Capital lost about 33% through Tuesday in part because of a short position on GameStop, according to investors. By end of day Wednesday, Maplelane was down 45%.
The firm, which was previously closed to new cash, is in conversations with current and prospective investors to raise additional capital, people familiar said. Since its inception in 2010, Maplelane has produced annualized gains of 30% and has never had a down year.
The hedge funds’ assailants are a collection of traders using Reddit’s wallstreetbets thread to coordinate their attacks, which seem to be focused on stocks known for being held short by hedge funds. The most prominent is GameStop, the beleaguered brick-and-mortar retailer that’s soared more than 1,700% this month, but other targets include AMC Entertainment Holdings Inc. and Bed Bath & Beyond Inc.
Read more: GameStop Frenzy Reaches and Powell as Hedge Funds Squeezed
The pain is likely spreading across the hedge fund industry, with rumors swirling among traders of heavy losses at multiple firms. The Goldman Sachs Hedge Industry VIP ETF, which tracks hedge funds’ most-popular stocks, tumbled 4.3% on Wednesday for its worst day since September.
Fund managers covered their money-losing short sales while trimming bullish bets for a fourth straight session Tuesday. Over that stretch, their total outflows from the market reached the highest level since October 2014, data compiled by Goldman’s prime-brokerage unit show.
D1, which was founded in 2018 and had about $20 billion in assets at the start of the year, is buffeted to some degree from the attacks because private companies account for roughly a third of its holdings, and the firm has been reducing its exposure, according to people familiar with the matter. The fund is closed to new investments and has no plans to open for additional capital, one of the people said, asking not to be named because such decisions are confidential.
D1’s loss, described by people briefed on the situation, contrasts with a 60% gain for Sundheim, 43, during last year’s pandemic turmoil.
Melvin on Monday took an unheard-of cash infusion from its peers, receiving $2 billion from Griffin, his partners and the hedge funds he runs at Citadel, and $750 million from his former boss, Cohen.
“The social media posts about Melvin Capital going bankrupt are categorically false,” a representative said. “Melvin Capital is focused on generating high-quality, risk-adjusted returns for our investors, and we are appreciative of their support.”
Until this year, Plotkin, 42, had one of the best track records among hedge fund stock pickers. He’d worked for Cohen for eight years and had been one of his biggest money makers before leaving to form Melvin. He’s posted an annualized return of 30% since opening, ending last year up more than 50%, according to an investor.
Representatives for Point72, D1, Maplelane, and Candlestick all declined to comment.
The struggles at some of the biggest hedge funds may have contributed to Wednesday’s 2.6% drop in the S&P 500, its worst decline since October. One theory behind the decline is that funds are selling long bets to get the cash they need to cover their shorts.
Cohen, 64, is perhaps the best-known victim of this year’s turmoil so far. The new owner of the New York Mets, whose fund gained 16% in 2020, has become a national figure after beating competition from Jennifer Lopez and Alex Rodriguez to buy the ball club.
Late Tuesday, Cohen broke his usual habit of only tweeting about the Mets. “Hey stock jockeys keep bringing it,” he wrote on the social media platform.
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