Hedge funds historically have great success with shorting stocks. However within the past year we’ve seen even some of the largest firms take some significant losses due to betting on the wrong stocks. Hedge Funds like Melvin Capital got stuck in the line of fire when the online frenzy of meme stocks took off in 2021. Between the twitter and reddit communities for GME and AMC, the retail investors forced many hedge funds to close their short positions at record losses. The short positions ultimately caused billions of dollars worth of losses.
HOW MUCH DID MELVIN CAPITAL LOSE ON GME?
Hedge Fund firm Melvin Capital has been shorting GameStop since 2014. Melvin Capital continually shorted GME in part because of its outdated business model and failure to keep up with the times. The hedge fund had great success with this short position through 2020, however in 2021 GME short squeezed and Melvin Capital lost just about $7 billion. At the peak of the losses, Melvin Capital was losing more than 1 billion dollars a day. Following the extreme short position loss, the firm announced that they will limit their stock shorting strategies and move into creating a new long-only fund to try to avoid such losses again. Found Gabe Plotkin spoke to employees via Zoom saying,
“We were in a terrible position. Stared death in the face. But we’ve made it through”.
After Melvin Capital reported a shocking 41% loss for 2021, Bloomberg listed Melvin Capital as “The Worst Performing” hedge fund of 2021. The firm continues to struggle at the start of this year as well, though arguably not as bad as last year yet.
HEDGE FUNDS REACH DOUBLE DIGIT LOSS SO FAR IN 2022
While Melvin Capital struggled with short positions, we’ve seen many other hedge funds struggling to keep their own losses at a minimum. Hedge Funds, Tiger Global, Light Street Capital, Pershing Square Holdings have all seen declines since January of this year. Perishing Square Holdings portfolio was down 13.8% in January, Tiger Global was down 14.8%, and Melvin Capital was also down 15% at the beginning of the year.
Tiger Global hedge fund points to its six largest stock holdings as a part of the problem. They hold JD.com Inc, and Microsoft, which both have declined drastically. The firm said,
“In hindsight, we should have sold more shares across our portfolio in 2021 than we did. We are reassessing and refining our models using all the inputs available to us.”