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It should be noted that Melvin Capital returned over 50% in 2020[1], 44% in 2019[2], and has averaged above 30% annual returns since inception[3]. In other wor

• fractionalhare 6y ago
  > It should be noted that Melvin Capital returned over 50% in 2020[1], 44% in 2019[2], and has averaged above 30% annual returns since inception[3]. And those returns are all net of fees.
  • runako 6y ago
    I'm curious; do you know that from some document from the fund? The linked source doesn't appear to support that conclusion.
    • fractionalhare 6y ago
      It's included in the WSJ article about the Point72 and Citadel investment.
      • runako 6y ago
        Thanks!
• autokad 6y ago
  if I gained 50%, 44%, followed by a 53% loss with a 2% fee, I'd be under water for the last 3 years, but the sp500 would have yielded me a 37% gain - virtually no fees. I'd rather the sp500 over these guys
  • graeme 6y ago
    Yeah equivalent percentage losses cost more than gains. Starting from 100, if you swing 50% up 50% down you get: 150, 75, 112.5, 56.25, 84.375, 42.18, 63.28, 31.64.... You need a 100% gain to make up for a 50% loss.
  • fractionalhare 6y ago
    Those are net of fees. They averaged over 30% annually over 5 years, net of fees. Investors with them since the beginning received a cumulative total return of nearly 400%. That puts you far ahead of SPY over the same time period. And of course, the risk profile may be different. Equal returns can be more or less appealing depending on the risk profile.
  • autokad 6y ago
    alternatively, you could invest with arkk and not relying on a fund that shorts a gme 140% :P
  • mledu 6y ago
    This is the point Nassim Nicholas Taleb makes in his book Fooled by Randomness. In a long enough timeline luck plays a big part in performance. People or firms like Melvin can perform well in a short timeline but when you stretch the timeline out the reality becomes clearer.
    • cpascal 6y ago
      This reminds me of a metaphor made by Burton G. Malkiel in “A Random Walk Down Wall Street”. He attempts to give a possible explanation to why there are star traders or funds that greatly outperform the market. It’s something I like to remind myself of from time-to-time. The metaphor was a coin flipping tournament. You have a bracket of players who flip a coin against an opponent. In each matchup, the player that flips a heads advances to the next round to face another opponent who won a parallel matchup in the previous round. Suppose this is a 100 round tournament, that would mean the eventual winner would have had to flip a heads 100 times to win. You might look at this coin flipper and think they are an extraordinary coin flipper. That they have some innate ability to flip a coin and make sure it lands with the head sides up. In reality, it was just random chance that they flipped the coin correctly, they do not posses any more coin flipping talent than anyone else. They just got really lucky. You can potentially look at a successful hedge fund or trader through this same lens. They have survived the proverbial coin flipping tournament and random chance was on their side.
• 0xy 6y ago
  Considering other hedge funds reloaded shorts after getting decimated, there's no indication their losses will stay at 53%. Like a bankrupt gambler returning to the casino after getting bailed out by their parents, Melvin will be back to the shorting slot machines soon enough.
  • gruez 6y ago
    ...except that unlike slot machines, the probability of you winning does increase the second time around. It costs more money (in aggregate) to pump from $20 to $200, than from $200 to $2000. I'd also imagine that the buy side will gradually lose steam once meme fatigue starts to set in.
    • 0xy 6y ago
      TSLA's valuation can only be described as extremely optimistic, hedging on "huge bubble" status. I don't think we've seen the brakes on the buy side at all, considering the buy side has been artificially constrained by limits and restrictions. Is $2,000 GME possible? Of course it is. It's not even unprecedented considering the other businesses valued at billions of dollars with shaky business models.
      • blackrock 6y ago
        At $2000, GME can reinvent itself and become a software/hardware tech company.
        • gruez 6y ago
          ...only if they issue shares, which would surely tank prices.
          • deleted 6y ago
            [deleted]
          • adflux 6y ago
            As AMC wisely did in the past week. They are saved by this hype
• runako 6y ago
  Context is important, so the Nasdaq 100 (as represented by the QQQ ETF) returned ~49% in 2020, 39% in 2019, and 24% over the last 5 years. Beating the indexes by 5-6 points consistently is very good, but it's important to keep in mind that most equities were doing really well over that period. (Edit: It's been reported elsewhere that these numbers are net of fees. However, it's entirely possible that for taxable accounts, tax considerations still narrow the performance gap. And of course, the QQQ offers instant liquidity and did not drop 53% this month.) Either way, the money currently in there is very likely to underperform the indexes over the next 5 years (because they need to return 100% to get back to the pre-GME position).
  • dcolkitt 6y ago
    The correct benchmark for a hedge fund is T-bills, not the S&P or the Nasdaq. That's because hedge funds are an absolute return product that offers an income stream uncorrelated to the market. This may sound counterintuitive, but it's the basis of modern portfolio theory. The price that an investor should be willing to pay for an investment has to do with its beta to the broader market. Think of it this way, imagine you could access the S&P 500 in a parallel universe. It has the same return characteristics as the normal S&P 500, but in any given year moves independently. How much does this improve your portfolio? Intuitively you'd think it's not worth anything. It's only as good as your current investments, so what's the point. But in fact modern portfolio theory tells us that it's a huge improvement. Investing 50/50 in S&P and Bizarro-S&P, substantially improves the amount of return you can access for the same risk. That's because the two diversify each other, and the blend either reduces risk by 30% or lets you leverage up and increase expected returns by 30%. You're saying, "maybe Melvin isn't a good investment, because it seems about equal to the S&P". But the point is an investment that's about equal to the S&P, yet uncorrelated to the S&P is massively valuable. Even if it has big drawdowns, you typically don't care as long as those drawdowns tend to occur during times when the rest of your portfolio is doing fine. This is the same reason that a 60/40 stock-bond portfolio has massively outperformed 100% stocks historically. Even though bonds themselves return less than stocks.
    • letsgoyeti 6y ago
• jabberwcky 6y ago
  It should also be noted Melvin would not have achieved these results without leverage, which is precisely why a single holding almost destroyed the fund. Comparing unlevered benchmark index return to ultra-levered fund return simply doesn't work. The S&P most certainly outperformed Melvin on a risk-adjusted basis due to this single drawdown alone.
  • dcolkitt 6y ago
    > The S&P most certainly outperformed Melvin on a risk-adjusted basis due to this single drawdown alone. The S&P had a 54% drawdown in 2008.
    • jabberwcky 6y ago
      Which could have been anywhere between an 81% to 810% drawdown in a typical leveraged strategy. Very few levered positions would have survived it without stopping out or completely blowing up, but an unlevered position absolutely could have -- and most (long term buy and hold) did
      • dcolkitt 6y ago
        I'm not sure what you're talking about. Most hedge funds did significantly better than the S&P in 2008. They were down, but nowhere to the same degree.
• antman 6y ago
  Have they been succesful using the tactic that now backfired? Eager to see how what returns they will have in the future.