(Bloomberg) -- Gabe Plotkin’s trading hand was so hot for so long that Steve Cohen, one of Wall Street’s most prominent investors, decided to break his own rule.

Cohen generally doesn’t like staking people who leave his hedge fund, nor does he farm out much of his wealth to other managers, but he did so repeatedly for his one-time protege. Plotkin got a $200 million check from Cohen to start his own firm in 2014, and more last year when he ran into trouble with meme-stock traders.

Cohen and many others on Wall Street assumed that Plotkin’s prowess in markets would translate into the other skills needed to lead a multibillion-dollar money manager serving hundreds of clients. That belief has cost university endowments, pensions and investment managers billions of dollars over the past two years.

After a spurt of losses and fraught talks with clients, Plotkin abruptly announced in May that he’s winding down Melvin Capital Management, a firm that had multiplied his wealth, leaving customers to dwell on years of gains that suddenly gave way to steep declines over the past 17 months. The decision to walk away shocked clients and disappointed some of Plotkin’s own lieutenants. On Wednesday, investors were told the liquidation is done -- locking in a roughly 8% loss for May and bringing the decline since the start of 2021 to about 57%.

In recent days, people close to the firm agreed to talk with Bloomberg about how things unraveled so quickly.

One of their takeaways is a cautionary tale for the industry: Betting on a star investor who drives their own firm can make for a wild ride. Melvin, like many single-manager funds its size, lacked many of the trappings of bigger institutional money managers, such as an operating committee to vote on key decisions. Instead Plotkin, 43, gathered advice and information, discussed his thinking with a tight circle, and once he developed a view, acted swiftly -- sometimes with contrarian moves that caught clients and staff off guard. 

Such stealth, speed and conviction can generate a fortune in markets. But for running a business, it makes life unpredictable.

As returns swung over the past year, some investors hoped Plotkin would stabilize Melvin by beefing up risk management, and even broached the topic to no avail. When investors later submitted a wide range of suggestions for more dramatic overhauls, Plotkin listened but ultimately didn’t follow the advice. 

In Melvin’s final weeks, even employees puzzled as they watched him sell down the portfolio, unsure if the boss was just shifting toward cash like other tech-heavy peers looking to ride out the recent market volatility or if he’d decided to throw in the towel. Now colleagues and investors are trying to come to terms with the closure.

This look at how Plotkin’s decisions unfolded and the impact on Melvin’s associates is based on interviews with a dozen people who asked not to be identified recounting the lead-up and aftermath of Melvin’s downfall.

A spokesperson for Melvin declined to comment.

Surprise Attack

Melvin was the envy of the hedge fund world for a half-decade, posting annualized returns of 30% that let it charge some of the most expensive performance fees in the industry, sometimes up to 30%. As the years passed, more investors tried in vain to get in. 

Plotkin increased his philanthropic giving to support Jewish causes and veterans, for whom he has at times opened his home. He also splurged on big houses and bought a stake in the National Basketball Association’s Charlotte Hornets.

But his fortunes changed when Melvin -- then managing about $12.5 billion -- was ambushed around the start of 2021. An army of amateur investors gathered in online forums and set out to boost meme stocks, including GameStop Corp., that had been beaten down by Wall Street firms such as Melvin. With its short positions brutally squeezed, the firm lost more than 50% that January.

Despite the surprise attack, Plotkin’s investors were heartened by signs he was committed to winning their money back, and that big names believed he could do it. In a matter of hours late that month, Plotkin stitched together a deal for $2.75 billion in fresh capital from Ken Griffin, his partners and Citadel funds, as well as Cohen’s Point72 Asset Management in exchange for a three-year minority piece of Melvin’s revenue. 

It was a particularly striking move for Cohen, who is generally reluctant to play the role of investor in an external fund, ceding control of risk management, asset growth and other business decisions that can hurt performance.

As Plotkin reassured investors, one said he promised to stick to the strategy that had worked for so long, which included shorting equities. But the meme-stock disaster made him more cautious, not only causing him to structure bearish trades more discreetly, but limiting their size. By year-end, he had undone some of the damage, yet was still down 39%.

The lengthy push to earn it all back wore on publicity-shy Plotkin. He had never suffered losses so steep before. When Melvin sustained its first-ever down year -- a 7% decline in 2018 -- it rebounded in just one month, people said. One client said that meant Plotkin had never faced the kind of major setback that forces a firm to mature.

Plotkin told friends he disliked media attention and having so many eyes on him when he dropped his children off at school, according to people familiar with the matter. With more than $1 billion tied up in the firm, the debacle was costing him money, too. He gave up some pay so staff could still earn bonuses. With strangers sending him death threats via social media and texts, he paid for more security for himself and his family.

Griffin’s Advice

Meanwhile, to Griffin’s dismay, Melvin was slow in putting a stop to work-from-home flexibility allowed during the pandemic. The billionaire backer, a staunch advocate of returning to offices, threatened to pull money if Plotkin didn’t summon his team back full-time. Yet Plotkin continued to work mainly out of his waterfront Miami house and a nearby Melvin outpost. Many traders, scattered around the country, came into offices only a couple days a week. Citadel began redeeming its cash around mid-2021.

Early this year, the losses started climbing anew. As Melvin slid 20% in the first quarter, Point72 faced the reality that its bet on Plotkin was dragging its own returns into negative territory. It decided to drastically pare the position. And more recently, Point72 urged Plotkin to bolster his risk team by making additional hires and installing a senior risk officer.

Meanwhile, Plotkin was no longer guaranteeing bonuses this year, and staffers braced for a period of new austerity.

Melvin made $65 million in the first five months, from which it could pay its roughly 40-person staff. That’s a stark contrast to previous years, when it generated hundreds of millions of dollars in fees and landed Plotkin on Bloomberg’s list of the highest-paid hedge fund managers. He personally earned $846 million in 2020, more than half of it from performance fees.

In April, he floated an unusual plan. The firm would attempt a reboot -- shrinking the fund and resuming performance fees even though it was still in the red. “Navigating volatile markets had become more difficult than in the past,” Plotkin wrote in a letter to investors. Some employees were stunned. The proposal was lampooned on Wall Street.

Plotkin reversed course. He apologized to investors in a letter, which circulated on social media. He then had the firm meet with customers to weigh alternatives. He was exhausted.

Talent Poachers

Weeks later, after selling down most of the positions, Plotkin called everyone into Melvin’s offices in New York and Miami, informing them he was shuttering the firm named after his grandfather.

Some at the firm felt it had a duty to try to recoup investors’ losses, but Plotkin’s mind was made up. In a letter to clients on the evening of May 18, he said, “I have given everything I could, but more recently that has not been enough to deliver the returns you should expect.” Melvin’s losses crimped its annualized returns since inception to 12%. The portfolio was unwound so quickly that investors will be getting their money back before the end of June.

In recent weeks, Plotkin has been taking calls from industry contacts, seeking his opinion as they consider bringing on some of his employees. Hedge funds such as Millennium Management and Balyasny Asset Management are among competitors exploring the prospect of scooping up talent. 

In recent days, executives at Blackstone Inc.’s hedge fund arm, which oversees client money in Melvin, have been fielding investor calls about lessons learned and what could be done to avert such a situation in the future, people familiar with the matter said.

Some of Melvin’s investors have discussed its fate among themselves, wondering if they were culpable in making Melvin grow too big, too fast.

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