Time To Short Melvin's Longs? Citadel To Pull $500 Million From Embattled Hedge Fund

Late January was a memorable time for traders because that's when some of the most profitable trades appeared suddenly, as names shorted by Melvin Capital suddenly exploded higher in the most devastating short squeeze in years, forcing the fund to liquidate its short book consisting of dozens of puts and quickly seek a bailout after suffering billions in losses in days if not hours. Will late August be just as memorable for shorting Melvin's longs?

We ask because Bloomberg reports that just seven months after Citadel swooped in to rescue Melvin Capital, Ken Griffin's fund will redeem about $500 million from its $2 billion January infusion into Gabe Plotkin’s hedge fund after the investment turned just barely positive.

And since Citadel plans to withdraw the money at the end of the third quarter, according to the Bloomberg source, it means that the cash-strapped Melvin will now have to obtain the needed liquidity to satisfy the cash call, which could well mean it would have to sell a substantial portion of its longs.

As a reminder, Citadel made the investment, along with $750 million from Point72 Asset Management, in late January when Melvin’s short positions soared, leading to billions in margin calls. In exchange, the two hedge funds received a three-year minority piece of its revenue. Citadel’s redemption won’t affect that arrangement; Point72’s capital will remain unchanged, Bloomberg notes.

The reason why Citadel is partially cashing out is because the January infusion from Plotkin’s former bosses, billionaires Steve Cohenand Ken Griffin, has finally turned profitable: after being down 3% at the end of June, Melvin gained 5.4% in July, capping off a six-month advance of 25%. That said, cashing out a quarter of one's money simply because it is in-the-money is hardly a vote of confidence by Citadel in Melvin's abilities.

Sure enough, Melvin which manages about $11 billion in assets, is still down about 43% this year as it claws back from a loss of almost 55% in January. The firm raised new funds in March and April and has continued to hire and add office space.

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