Melvin Capital has been on a rocky road for over a year now. Last year in 2021 Melvin Capital was down 39%, after the firm lost big time on its bet agains GME. The firm has been continuing on a downward trend in the first quarter of 2022, down another 21%.
To make things even rockier, Melvin Capital had written to investors just last week with plans to remove the high-water mark. The high-water mark is what prevents a fund from charging a performance fee until the losses have been recovered. As one could probably guess, investors were not pleased with this plan and CEO Gabe Plotkin quickly admitted to being “tone deaf” regarding the announcement. It’s hard to imagine that Melvin Capital truly thought that investors would be okay with removing the high-water mark. Especially after the fund has already subjected them with damaging losses of 39% last year and 21% this year.
WHAT IS A HIGH WATER MARK?
High-water marks act as protection for investors. High-water marks stop a fund from charging performance fees when they’ve already lost money for investors and are in the process of making gains back. Essentially, hedge funds are not able to charge the performance fees until the initial losses have been recovered. Typically a hedge fund would charge a client 2% of assets per year, as well as an additional 20% of gains as a “performance fee”.
The purpose of the high-water mark is so funds do not purposefully lose money, only to charge performance fees as they make it back. The thought that Melvin Capital was wanting to remove the high-water mark and charge it’s investors “performance fees” as it “made back” the millions and billions they had already lost investors over the last year and half is laughable.
WHAT DO MELVIN’S INVESTORS THINK?
Just as expected Melvin’s investors are not accepting of removing the high-water mark. In fact it’s aggravated investors even more on top of the blow of the fund already losing their money. Since investors aren’t willing to remove the high water mark, it means that it could be months, or years before the hedge fund is able to charge and collect performance fees again. Melvin Capital has already been under fire and probed by the SEC and DOJ for other suspicious trading activities and now stirring the pot directly with their own investors could make things even worse for the already struggling fund. If we didn’t know any better, it would seem as though the hedge fund is on the verge of shutting down.