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What’s up, everyone? Let’s talk about the real reason why Melvin Capital is shutting down!
Background
Melvin Capital is a fund that started in 2014.
The fund manager of Melvin, Gabe Plotkin, has a fairly good track record. Excluding 2021 and 2022, he has averaged about 30% ROI.
In 2021, retail investors pushed back against Plotkin’s short positions and took him down using memes and reddit!
Melvin was up to $20 billion AUM and then they were hit by a 39% loss!
Today, it’s down an additional 23% and Plotkin just decided to close the fund’s doors.
People think there’s not much to this, but there is!
High-Water Mark
Do you guys remember when we talked about high-water marks? (Check out this link if you need a refresher)
Anyways, Melvin Capital was down a lot. Because of the high-water mark and the fund’s position, Melvin couldn’t charge fees (aka make money) until their fund goes up 150%!
So, Gabe approached his investors and tried to convince them to waive their high-water mark! And of course, they said no!
The Turnaround
So, what does Gabe do next? He apologetically closes the doors of the Melvin fund, then turns around and starts a new one!
He did this to avoid paying the consequences for tanking his fund and disappointing his investors.
Like Lincoln said in his video…
“If I were an LP, I would want an agreement stating that my fund manager could not do that”.
Without any written agreement, there’s nothing to stop a fund manager from doing that! They could just back out on me and start another fund whenever things look bleak.
The REAL Reason
“I believe Melvin Capital is shutting its doors because there’s no incentive anymore for Gabe and his team. That’s the real reason.”
Lincoln Archibald
So, to all LPs out there: beware!
That’s it for me, have a great day!
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DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.
