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GameStop Stock: Melvin Capital Defeated By The Apes

Melvin Capital’s winding down of its fund represents a stunning defeat - and that defeat has widely been attributed to GameStop shareholders.

Hedge fund Melvin Capital, notoriously known for betting against GameStop  (GME) - Get GameStop Corporation Report stock, has announced that it is winding down its activities and returning capital to its clients.

Melvin has succumbed to gigantic successive losses, in large part thanks to retail investor-provoked short squeezes.

Figure 1: GameStop Stock: Melvin Capital Defeated By The Apes

Figure 1: GameStop Stock: Melvin Capital Defeated By The Apes

(Read more from Wall Street Memes: Will AMC Initiate a Stock Buyback Program?)

Squeezed By The Apes

News of Melvin Capital’s fund closing shouldn’t come as much of a surprise to those watching the space. Since early May, there have been reports that fund manager Gabriel Plotkin has been looking to make just such a move.

Melvin Capital’s short-heavy portfolio has been in a downward spiral ever since early 2021.

Melvin famously had significant short positions in companies such as GameStop and AMC Entertainment  (AMC) - Get AMC Entertainment Holdings Inc. Class A Report, though they also shorted plenty of other, less-meme-y stocks, including Cryoport, Viatris, and Invesco’s Solar ETF. Their fund was absolutely battered in 2021 - while the markets saw a banner year, Melvin Capital saw a negative return of 39%.

And the losses still haven’t stopped. In the first four months of 2022, Melvin has lost another 23%, according to internal fund sources. At the beginning of February, Melvin Capital announced that it would create a new long-only fund to regain investors’ trust, but it seems that move was too little too late.

After attempts to move the fund forward - including steps such as reorganizing it, downsizing it to only $5 billion in assets, and charging lower fees - Melvin finally threw in the towel, admitting that the next step would be to wind down the fund.

"The appropriate next step is to wind down the Funds by fully liquidating the Funds' assets and accounts and returning cash to all investors," Plotkin wrote in a letter on Wednesday, May 18.

Melvin Capital's Bad Pick

Melvin Capital had been betting against GameStop since 2014. It saw GME as having both weak fundamentals and an outdated business model. Through 2020, the fund had seemingly made a great bet - Melvin Capital was counting on returns of about 30% with its short position in GME.

Then came the GME frenzy of early 2021. Retail investors buying GameStop shares caused an enormous short squeeze, driving the price of GME shares from $15 up into the $300 range.

Melvin took a massive hit that they were never fully able to recoup. GameStop’s retail shareholders largely held on to their positions, which allowed GameStop's share price to remain elevated throughout 2021. Even today, shares are trading near the $100 mark.

Melvin Capital lost about $7 billion betting against GME. And their short bets on some of the other high-flying meme stocks of 2021, such as AMC, dug them deeper in the hole.

Short Sellers Under Scrutiny

GameStop shareholders – aka “Apes” – celebrated the news of Melvin Capital's closure. The fund was seen as one of the leading nemeses of GameStop - they became a poster child for a group of hedge funds that were thought to be driving down the stock price of GME, AMC, and many other stocks through shady, unfair, or outright illegal means.

Earlier this year, The Department of Justice revealed that it was investigating short sellers' alleged illegal trading practices involving "spoofing" and "scalping." About 30 short-selling firms are under investigation,with Melvin Capital among them.

Although the probe is still ongoing, no definitive conclusions have been reached so far, and the DOJ has offered few updates.

Meanwhile, GameStop stock continues to be a strong target for short-sellers.

At present, short interest stands at over 20% of the float. The latest data, available at the end of April, suggests that 13.54 million shares are being shorted. That’s a 10% increase compared to mid-April. It seems, perhaps, that some funds have not learned much from Melvin Capital’s woeful tale.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)