Melvin Capital was down 53% in January hurt by GameStop and other bets

As part of the deal, they were given non-controlling income shares in Melvin for three years. So far, Citadel, its partners and Point72 have lost money through the deal, although the exact magnitude of the loss was unclear on Sunday.

Melvin has greatly reduced his portfolio, one client said. People familiar with the hedge fund said the leverage ratio – the value of the assets compared to the capital of investors – was the lowest since Melvin’s inception in 2014. They also said the firm’s position-level liquidity, or equity to easily exit securities in the portfolio had increased significantly.

According to the famous people, new and existing customers have signed up to invest money in Melvin on February 1st. It was unclear how much they would add.

Melvin had established herself as one of the top hedge funds on Wall Street in recent years, but a short position on GameStop Corp.

GME 67.87%

has hurt the company in recent weeks. Losses stretched beyond GameStop, with declines across the portfolio during a January market turmoil. Positions in which Melvin had disclosed owning put options – bearish contracts that are typically profitable when stocks fall – in the latest quarterly regulatory filing surged, while positions in companies it held were sold.

Bed Bath & Beyond Inc.,

New York-listed Chinese tutoring company GSX Techedu Inc.

and National Beverage Corp.

were up 78.4%, 62% and 99% respectively during their intraweek highs last week. Meanwhile, Booking Holdings Inc.

and Expedia Group Inc.

were down 9.9% and 13.4% at their week lows.

Traders say that as GameStop continued to rise – from $ 30 to $ 75 and up – there was a contagion effect. Managers lost faith that short positions would no longer appreciate in value and names would hedge heavily on the short position, concerned that social media-driven investors would focus on companies where they were short. They also began to lower their stakes in companies to reduce risk in their portfolios, which hurt other investors in those companies. Last week alone, GameStop’s stock rose more than four times.

“The performance pain … is record-breaking,” Morgan Stanley read a note to his trading clients last week.

Indeed, hedge funds last week set nearly daily records of various kinds for how much they withdrew their exposure to the U.S. stock market by covering their shorts and selling their bets on companies, according to client notes from Morgan Stanley and Goldman Sachs. Group Inc.

On Wednesday, this kind of so-called degrossing contributed to the largest one-day drop in fund leverage use ever, according to a note from Goldman.

Maplelane Capital, another hedge fund that has taken significant losses this month, ended January with a loss of about 45%, a person familiar with the fund said. It managed about $ 3.5 billion at the beginning of this year.

The frenetic trading that catapulted GameStop, AMC Entertainment Holdings Inc.

and BlackBerry Ltd.

among the most traded stocks in the US market and caught the attention of the White House and regulators, prominent hedge funds Point72 and D1 Capital Partners also hit.

D1, which ended the month down about 20%, was short AMC and GameStop, people familiar with the fund said. One of the people said that D1 had left both positions on Wednesday morning, but these were small losses. A more important factor was the decline in the share of travel-related companies.

Some fund managers say the episode is likely to change how the industry works.

Fewer hedge funds are likely to emphasize their bearish positions by disclosing put options, they said. Instead, funds can use the rules of the Securities and Exchange Commission to keep those positions confidential, a tool that activist investors have long used to quietly build positions in companies. More funds can also introduce rules to avoid thinly traded, heavily shorted stocks.

Write to Juliet Chung at [email protected]