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For once Main street is surpassing Wall Street.
Within weeks, two hedge fund legends, Steve Cohen and Dan Sundheim, have suffered heavy losses as amateur traders teamed up to take on some of the world’s most sophisticated investors. In Cohen’s case, he and Ken Griffin ended up running to the aid of a third party, Gabe Plotkin, whose firm was being defeated.
Driven by the frantic negotiation of GameStop Corp. and other actions against which hedge funds have opted, the losses suffered in recent days would be among the worst in some of the historical careers of these money managers. De Cohen Point72 Asset Management has declined from 10% to 15% so far this month, while Sundheim’s D1 Capital Partners, one of the best-performing funds last year, is down about 20%. Melvin Capital, Plotkin’s firm, had lost 30% by Friday.
This is a humiliating change for hedge fund titans, who in 2020 relaunched themselves in the wild markets caused by the Covid-19 pandemic. But this crisis helped propel thousands, if not millions, of traders into the U.S. stock market, creating a new force that, for now, professionals seem powerless to combat.
Their attackers are a collection of traders who use Reddit’s Walldreetbets thread to coordinate their attacks, which appear to focus on actions known to have been scarce by hedge funds. The highlight is GameStop, the bullying retailer of bricks and mortars that has soared more than 1,700% this month, but other targets include AMC Entertainment Holdings Inc. and Bed Bath & Beyond Inc.
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The pain is likely to spread to the entire hedge fund industry, with rumors among traders of significant losses in several companies. The Goldman Sachs Hedge Industry VIP ETF, which tracks the most popular shares of hedge funds, fell 4.3% on Wednesday during its worst day since September.
GameStop has risen more than 1,700% this month.
Photographer: David Paul Morris / Bloomberg
Fund managers hedged their short sales losing money as they lowered bullish bets for the fourth straight session on Tuesday. During this stretch, its total market outflows reached the highest level since October 2014, according to data compiled by Goldman’s main brokerage unit.
D1, which was founded in 2018 and had assets of about $ 20 billion at the beginning of the year, is affected to some extent by attacks because private companies account for about a third of its holdings and the company has been reducing its exposure, according to people who know the subject. One of the people said the fund is closed for new investments and has no plans to open any additional capital, asking that it not be designated because these decisions are confidential.
The loss of D1, described by people reported on the situation, contrasts with a 60% increase for Sundheim, 43, during the turmoil of last year’s pandemic.
Melvin received an unprecedented cash infusion on Monday from his teammates, receiving $ 2 billion from Griffin, his partners and hedge funds he heads to Citadel and $ 750 million from his former boss, Cohen.
Read more: Reddit Crowd Bludgeons Melvin Capital in industry warning
“Posts on social media about Melvin Capital’s bankruptcy are categorically false,” one representative said. “Melvin Capital is focused on generating risk-adjusted returns for our investors and we appreciate their support.”
Photographer: Scott Eells / Bloomberg
Until this year, Plotkin, 42, had one of the best backgrounds among hedge fund selectors. He had worked for Cohen for eight years and had been one of his biggest money earners before leaving to form Melvin. According to one investor, it has recorded an annualized return of 30% since opening, which ended last year by more than 50%.
Another $ 3.5 billion fund, Maplelane Capital, it lost about 33% this month through Tuesday, in part due to a short position in GameStop, according to investors.
Representatives from Point72, D1 and Maplelane declined to comment.
The struggles of some of the largest 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 sell long bets to get the cash they need to cover their shorts.
Cohen, 64, is perhaps the best-known victim so far of this year’s turmoil. 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.
At the end of Tuesday, Cohen broke his usual habit of tweeting only about the Mets. “Hey, the jockeys keep wearing it,” he wrote on the social media platform.
– With the assistance of David Gillen