Gabe Plotkin’s Melvin Capital has been short GameStop since the fund’s inception six years ago, the hedge fund manager told members of the House Committee on Financial Services during a hearing Thursday on the turmoil surrounding trading in the stock last month.
GameStop’s stock was trading at around $40 a share when Melvin first shorted it in 2014, Plotkin told the committee. When asked what he thought GameStop was worth at the time, Plotkin said, “I don’t recall.”
Last year, when the shares fell as low as $2.57, however, Plotkin held onto his GameStop short. Even after members of Reddit’s WallStreetBets forum started attacking Melvin for its GameStop short last fall, the hedge fund was adding to the position. Melvin’s quarterly filing of its publicly traded equities, which became public Tuesday, shows that Melvin had increased its listed put options in GameStop during the final quarter of 2020.
Melvin shorted an additional 600,000 shares via put options, for a total position valued at more than $113 million at the end of the quarter, according to the disclosure. The puts reportedly expired before news of Melvin’s initial losses were made public in a January 22 report in the Wall Street Journal. Following the Journal’s story, GameStop stock began to soar, and Melvin said it closed out the entire short position on Jan. 26, one day before the stock hit its peak closing price.
That month, Plotkin said in his House testimony, he began receiving “profane and racist text messages.” Those messages followed posts on Reddit that “were laced with antisemitic slurs directed at me and others,” Plotkin said. “The posts said things like ‘it’s very clear we need a second holocaust, the jews can’t keep getting away with this.’”
During the hearing, Reddit CEO Steve Huffman said the company had searched “high and low” for the antisemitic comment Plotkin referenced and “the closest thing we can find received no comments and was deleted within five minutes.”
After the group on Reddit began to make posts about Melvin’s specific investments, Plotkin said GameStop’s stock rose from $17 to a peak of $483 during a “frenzy” related to the postings.
“When this frenzy began, Melvin started closing out its position in GameStop at a loss, not because our investment thesis had changed but because something unprecedented was happening,” he said. “We also reduced many other Melvin positions at significant losses — both long and short — that were the subject of similar posts.”
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House members asked few questions of Plotkin, focusing more on market maker Citadel Securities and Robinhood, the retail trading app that temporarily restricted investors from buying more GameStop shares. But when Congressional representatives asked Plotkin if there should be more disclosure of short sales, he sidestepped the question. “It’s not for me to decide, but if those are the rules, I’d certainly abide by them,” he said.
Plotkin similarly declined to answer if the high level of short interest in GameStop — which at one point hit 140 percent of the stock’s float — was problematic. Instead, Plotkin simply said his firm followed all regulations governing short selling. In the future, he said, “I don’t think you’re going to see stocks with these kinds of short interest levels,” adding that he wouldn’t want to be subjected to such an event again.
Robinhood CEO Vladimir Tenev took a firmer stance. “The ability of the same share to be shorted an indefinite number of times is a pathology and that should be fixed,” he said. “We don’t have the ability to track how many shares have been shorted and how many times.” Such re-lending is what allows the short to grow beyond 100 percent, which has been cited as a reason for the short squeeze in GameStop that led the shares to skyrocket.
Despite Melvin’s losses in GameStop, Plotkin said that the firm believed and continues to believe that GameStop’s business model of selling new and used games in physical stores “is being overtaken” by digital downloads of video games.
“That trend only accelerated in 2020, when, because of the pandemic, people were downloading video games at home,” Plotkin continued. “As a result, the gaming industry had its best year ever. But GameStop had significant losses.”
Plotkin also denied reports that Melvin was “bailed out” during the fracas when Citadel — whose CEO Ken Griffin is also expected to speak at the hearing — invested $2 billion in the hedge fund.
“Citadel proactively reached out to become a new investor, similar to the investments others make in our fund. It was an opportunity for Citadel to ‘buy low’ and earn returns for its investors if and when our fund’s value went up,” Plotkin said.
The Melvin Capital Master Fund fell 54.4 percent in January, according to a letter to investors seen by Institutional Investor. The fund had assets of $6.26 billion as of February 1, according to the letter. Total firm assets were approximately $8.26 billion at that time, it added.