Follow Bloomberg on Telegram for all the investment news and analysis you need.
For once, main Street beats Wall Street.
In a matter of weeks, two hedge fund legends – Steve Cohen and Dan Sundheim – have suffered heavy losses as amateur traders banded together to take on some of the world’s most advanced investors. In Cohen’s case, he and Ken Griffin rushed to the rescue of a third, Gabe Plotkin, whose company was knocked down.
Driven by the insane trade in GameStop Corp. and other stocks against which hedge funds have bet, the losses of recent days would be among the worst in the storied careers of some of these money managers. Cohen’s Point72 Asset Management is down 10% to 15% so far this month, while Sundheim’s D1 Capital Partners, one of last year’s best-performing funds, is down about 20%. Melvin Capital, Plotkin’s firm, had lost 30% through Friday.
It’s a humble turnaround for the hedge fund titans, who made a comeback in 2020 by attacking the wild markets triggered by the Covid-19 pandemic. But that crisis propelled thousands if not millions of retailers into the U.S. stock market, creating a new force that the professionals seem powerless to fight for now.
Their attackers are a collection of traders who use Reddit’s wallstreetbets thread to coordinate their attacks, which appear to be targeting stocks known to be held short by hedge funds. The most prominent is GameStop, the beleaguered brick-and-mortar retailer that is up more than 1,700% this month, but other targets include AMC Entertainment Holdings Inc. and Bed Bath & Beyond Inc.
Read more: GameStop Frenzy reached Biden and Powell as Hedge Funds Squeezed
The pain is likely spreading across the hedge fund industry, with trader rumors of heavy losses at multiple companies. The Goldman Sachs Hedge Industry VIP ETF, which tracks the most popular hedge fund stocks, plunged 4.3% on Wednesday for its worst day since September.
GameStop is up more than 1,700% this month.
Photographer: David Paul Morris / Bloomberg
Fund managers covered their money-losing short sales as they cut back bullish bets for a fourth straight session on Tuesday. Over that trajectory, their total outflows from the market reached their highest level since October 2014, according to data collected by Goldman’s prime brokerage unit.
Founded in 2018 and having about $ 20 billion in assets at the start of the year, D1 is plagued to some extent by the attacks as private companies represent about a third of its assets and the company has reduced its exposure, according to people who be familiar with the case. The fund is closed to new investment and has no plans to open additional capital, said one of the people, who asked not to be named as such decisions are confidential.
D1’s loss, described by those briefed on the situation, contrasts with a 60% gain for Sundheim, 43, during last year’s pandemic turmoil.
Melvin received an unheard of cash injection from his colleagues on Monday, receiving $ 2 billion from Griffin, his partners and the hedge funds he runs at Citadel, and $ 750 million from his former boss, Cohen.
Read more: Reddit Bludgeons Melvin Capital crowd in warning to the industry
“The social media reports of Melvin Capital’s bankruptcy are absolutely false,” said a representative. “Melvin Capital is focused on generating high quality 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 track records among hedge fund stock pickers. He had worked for Cohen for eight years and had been one of his biggest money makers before leaving to found Melvin. According to an investor, it has achieved an annualized return of 30% since opening and increased by more than 50% last year.
Another fund, the $ 3.5 billion Maplelane Capital, Investors said it lost about 33% this month through Tuesday due to a short position on GameStop.
Representatives from Point72, D1 and Maplelane all declined to comment.
Problems at some of the largest hedge funds may have contributed to Wednesday’s 2.6% drop in the S&P 500, the worst drop since October. One theory behind the decline is that funds are selling long bets to get the money 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 won 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 tweeting only about the Mets. “Hey stock jockeys keep bringing it up,” he wrote on the social media platform.
– With the help of David Gillen