The U.S. Securities and Exchange Commission is investigating Melvin Capital Management’s risk controls and investor disclosure after the hedge fund was crippled by last year’s meme backlash, people familiar with the matter said. the matter
The regulator has been reaching out to the hedge fund’s investors in recent months as part of an investigation into what Melvin founder Gabriel Plotkin and other senior executives told them after the rally meme-stock in January 2021, and whether it misled investors when it raised money last year.
The SEC obtained from Melvin, who has largely returned his clients’ money, his general communications with investors and sought information about what the firm disclosed to clients about the risks of its investment strategy, they said. say the people
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The investigation is in its early stages and may not result in any formal allegations of wrongdoing. It is being managed by the asset management unit of the enforcement division in Washington DC, the people said. The SEC and other law enforcement authorities have been investigating the frenetic trading in early 2021 that sent shares of GameStop and others soaring. It was not immediately clear whether the broader inquiries are related to the SEC’s investigation of Melvin.
Melvin lost $6.8 billion in January 2021, or more than half of its assets under management, as retail investors and others came together to target the fund’s short positions. The meme stock frenzy died down in late January and Melvin raised new money from investors.
Plotkin and other executives told clients in virtual meetings that he planned to continue and that the company had strengthened its risk management practices after surviving an unpredictable market phenomenon, clients said. Several other hedge funds suffered losses during that period and made adjustments afterward.
While Melvin recouped some of its January 2021 losses last year, it suffered additional losses as growth stocks sold off in the market rout earlier this year. Plotkin surprised investors in May by announcing he was returning their money. It told clients it had failed to deliver the returns they should expect and acknowledged it needed to “get away from external capital management”.
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People familiar with Plotkin said the investigation played no role in his decision to return customers’ money.
As Melvin was hit again by the sale of technology and other fast-growing businesses this year, Plotkin tried to start charging incentive fees before completing his clients. He quickly backtracked on that proposal, calling it “a mistake,” and later told customers of his decision to return their money. The continued losses made it difficult for Melvin to find new terms acceptable to clients that would also motivate Plotkin’s team, people familiar with the matter said. Continued focus was also placed on Plotkin.
Founded in 2014 by Plotkin, a former portfolio manager of hedge fund titan Steven A. Cohen, Melvin was one of the top-performing hedge funds through 2021.
His recent struggles saw Melvin’s track record drop from an average annual return of 30% after fees from the fund’s inception in 2014 through 2020 to 11.9% since inception until April 2022.
By the end of May 2022, clients who invested in Melvin in early 2021 had lost about 57% of their money, meaning that Plotkin would have had to earn more than 132% to get the entire clients. Most clients who invested in Melvin after January 2021 made money, a person familiar with the matter said.
Write to Juliet Chung at juliet.chung@wsj.com, Susan Pulliam at susan.pulliam@wsj.com, and Dave Michaels at dave.michaels@wsj.com
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