Citadel To Pull About $500M From Melvin Capital Following Bad Short Bet On GameStop

Griffin's Citadel had invested $2 billion in January into Melvin Capital Management LP, which was at the center of the GameStop Corp GME Short Squeeze.

What Happened: Ken Griffin's Citadel LLC and Citadel partners are planning to redeem about $500 million of the $2 billion they invested in Melvin Capital, the Wall Street Journal reported citing people familiar with the matter.

Citadel funds and firm partners are planning to withdraw the money at the end of the third quarter. However, a person familiar with Citadel said it expected to remain a significant investor.

Citadel and Steven A. Cohen's Point72 Asset Management invested $2.75 billion into Melvin's hedge fund. Point72 alone had invested $750 million earlier this year when Melvin's short positions were under attack on Reddit. 

According to the report, they both received non-controlling revenue shares in Melvin for three years in return. 

Citadel, a more than $38 billion hedge-fund firm that employs teams of traders, rarely has had such a sizable investment with an outside manager before, said people familiar with the firm.

Why It Matters: Melvin had been one of the best-performing hedge funds in recent years until the GameStop trading frenzy earlier this year.

Melvin Capital had lost 46% on its investments during the first three months of 2021.

Melvin Capital's founder Gabe Plotkin had been considered one of Wall Street's most successful traders since starting Melvin in 2014. 

Between 2014 and 2020, Melvin had established itself as a strong performer posting annualized returns of 30%. 

Plotkin had bet GameStop's stock price would tumble, leading to a faced off with retail traders who used online trading apps and exchanged information on Reddit's WallStreetBets forum. 

According to the report, Plotkin has told people he didn't necessarily expect Citadel to keep its entire investment in Melvin long term, according to sources briefed on the conversations. 

Melvin has raised $1 billion in recent months, helping bring its assets under management to more than $11 billion.