Gabe Plotkin, founder of Melvin Capital, described the last 17 months as “incredibly difficult times.”


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Alex Flynn / Bloomberg News

Melvin Capital plans to close its funds and return the cash to its investors, completing a stunning turnaround for the firm, which lost heavily from rising stock memes in the early days of the pandemic.

In a letter to investors reviewed by The Wall Street Journal, Gabe Plotkin, founder of Melvin, described the liquidation, saying: “The last 17 months have been incredibly difficult times.”

Until last year, Melvin was one of the most effective hedge funds in the industry.

Its executives as early as last week asked customers for their views on what new payment arrangements seem fair to them and to Melvin in the future. Earlier, Mr. Plotkin tried to end Melvin’s so-called honors, a standard industry arrangement in which hedge funds do not collect performance fees until their clients are exhausted from past investment losses. The offer met resistance from many of Melvin’s clients, and Mr. Plotkin withdrew the plan and apologized to investors.

Investors shared a variety of proposals they considered fair, including Mr. Plotkin maintaining the firm’s current terms until the end of the year and then introducing a modified high level that would allow Melvin to collect lower performance fees in the interim, acquaintances with the firm said. . Hopes for a higher salary help motivate and keep investment teams intact, fund managers say.

While Melvin covered part of his huge losses in January 2021 from a rally at GameStop Corp.

and other so-called stock memes, his focus on fast-growing companies has brought him further setbacks this year as investors have grown tired of such stocks and losses have increased. By April of this year, Melvin had lost 23%. Since its inception, profitability has averaged 11.9%.

His track record of about 30% a year after fees until 2021 was one of the best on Wall Street.

Write Juliet Chung at juliet.chung@wsj.com

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