Gabe Plotkin

Gabe Plotkin is an American hedge fund manager, best known as the founder of the now-defunct Melvin Capital Management. A celebrated protégé of billionaire investor Steve Cohen, Plotkin built a reputation as one of Wall Street's sharpest traders, particularly in consumer discretionary stocks. He launched Melvin Capital in 2014 and delivered stellar returns for years, growing his fund to over $12 billion in assets under management (AUM). However, Plotkin's name became etched in financial history for a different reason: his fund's catastrophic implosion during the 2021 GameStop short squeeze. Melvin Capital had taken a massive short position against the video game retailer GameStop (GME), betting its price would fall. Instead, a coordinated effort by retail investors on social media platforms like Reddit sent the stock soaring, inflicting devastating losses on the fund. The event served as a stark lesson on the modern risks of short selling and the newfound power of retail traders, ultimately leading to Melvin Capital's closure in 2022.

Gabe Plotkin's career began under the tutelage of one of the industry's most prominent figures, Steve Cohen. After graduating from Northwestern University, he joined Cohen's firm, S.A.C. Capital Advisors (now Point72 Asset Management), where he honed his skills. He quickly distinguished himself, eventually managing a portfolio of over $1 billion and earning a reputation as a highly talented trader. His strategy focused on a long/short equity model, taking long positions in companies he believed were undervalued and short positions in those he saw as overvalued, with a particular knack for the consumer sector. In 2014, he spun out to launch his own fund, Melvin Capital, named in honor of his late grandfather. The fund was an immediate success. It posted impressive annual returns, including 47% in its first full year, attracting billions in capital from investors and making Plotkin a star in the hedge fund world. His success was built on deep fundamental analysis and aggressive, high-conviction bets.

The downfall of Melvin Capital is a classic tale of risk, leverage, and the unpredictable nature of modern markets. The fund's strategy relied heavily on short selling, and one of its highest-conviction bets was against GameStop, a brick-and-mortar video game seller whose business model appeared obsolete in the age of digital downloads.

In early 2021, users on the Reddit forum r/wallstreetbets noticed that GameStop had an extraordinarily high short interest—meaning a huge number of institutional investors, including Melvin Capital, were betting against it. These retail investors saw an opportunity. They believed that by buying shares and call options en masse, they could create a short squeeze.

A short squeeze is a short seller's worst nightmare. Here’s how it works:

• The Bet: A short seller borrows shares of a stock and sells them, hoping to buy them back later at a lower price and pocket the difference.
• The Problem: If the stock price rises instead of falls, the short seller starts losing money.
• The Squeeze: To cut their losses, they are forced to buy back the shares they borrowed. This buying pressure, however, drives the stock price even higher, creating a feedback loop. The losses for a short seller are theoretically unlimited, as a stock's price can rise indefinitely.

Retail investors executed this strategy perfectly. The price of GME, along with other “meme stocks” heavily shorted by institutions, skyrocketed. Melvin Capital was caught in the squeeze. In January 2021 alone, the fund lost 53% of its value, a blow amounting to over $6 billion. The fund was only saved from immediate collapse by a $2.75 billion emergency infusion from Plotkin's mentor, Steve Cohen of Point72, and Ken Griffin's Citadel LLC. Despite attempts to recover, the fund never regained its footing and ultimately announced it would wind down and return all capital to investors in May 2022.

The story of Gabe Plotkin and Melvin Capital offers several powerful, if painful, lessons for every investor.

• The Peril of Short Selling: While tempting, short selling carries asymmetric risk. Your maximum gain is 100% (if the stock goes to zero), but your maximum loss is infinite. For value investors who prize capital preservation and margin of safety, concentrated short positions represent a dangerous departure from core principles.
• Risk Management is King: Plotkin was widely considered a brilliant stock picker. Yet, his incredible success was wiped out by a single, catastrophic failure of risk management. It's a humbling reminder that no amount of analytical skill can protect you if you don't have strict rules in place to limit your downside. A single bad bet should never be allowed to sink the entire ship.
• Markets Aren't Always Rational: The GameStop saga was driven less by fundamentals and more by a powerful narrative, social media momentum, and a desire to challenge Wall Street. It shows that in the short term, market sentiment can completely overwhelm a company's underlying value. A value investor must be prepared for such irrationality and ensure their portfolio can withstand it.