The hedge fund blown up by its bad GameStop bet aims to scale down assets to renew outperformance

Gabe Plotkin's Melvin Capital suffered a 39% loss in 2021, and was down another 21% in the first quarter of 2022.

• Gabe Plotkin is planning to scale down his hedge fund's assets under management after it suffered severe losses from his GameStop short bet.
• Plotkin is in talks with his investors to reduce Melvin Capital's assets under management to $5 billion from more than $8 billion today.
• The plan would essentially be a do-over for Plotkin who has suffered poor performance over the past 18 months.

Melvin Capital's Gabe Plotkin is planning to scale down his fund's assets under management to $5 billion from more than $8 billion after his poor GameStop short-bet led to billions of dollars in losses last year.

Plotkin has been talking with his investors about a plan to reduce his assets under management so the fund can return to a more nimble and flexible trading strategy that led to his success prior to the disastrous GameStop trade.

Aside from giving the hedge fund more trading flexibility in exploiting opportunities in the stock market, the strategy would also allow the hedge fund to erase the high-watermark needed for the fund to begin earning performance fees again, according to a report from CNBC.

The move would essentially give Melvin Capital a do-over after the fund suffered poor performance over the past 18 months due to a number of bad bets that led to emergency funding from Ken Griffin's Citadel and Steve Cohen's Point72.

Both billionaire investors have since wound down their investment in Melvin Capital as Plotkin's underperformance has lingered. The fund was down 21% at the end of the first quarter of 2022, according to CNBC. That's after suffering a 39% loss in 2021. 

In the hedge-fund industry, it is common practice that investors don't pay a performance fee for, well, poor performance. If a hedge fund loses 10% for its investors in a given year, the investor wouldn't pay performance fees until the hedge fund returns to breakeven. 

In Melvin Capital's case, the hedge fund would need to deliver a more than 100% gain in performance to get back to breakeven before it can start to earn performance fees.

If Plotkin moves forward with the plan, it would allow him to earn a performance fee on whatever money his investors decide to reinvest without having to bring them back to breakeven on the losses they suffered from the GameStop short squeeze.

The strategy would also allow Plotkin to better incentivize Melvin Capital's employees, who often rely on a performance fee for their annual bonuses. 

Plotkin's plan is to keep his new fund at about $5 billion in assets with a renewed focus on shorting stocks, which was a well executed strategy prior to his sour bet on GameStop, sources told CNBC.

Whether Melvin Capital's current investors will decide to accept the proposed terms remains to be seen.