GameStop case shows ‘mystique’ of hedge funds
Cohen departed Twitter after criticism over market upheaval
— Steven Cohen has spoken publicly more in the past three months than he did in the previous three years.
But the dialogue that the billionaire hedge fund manager launched when he ignited his Twitter account late last year to engage with New York Mets fans following his acquisition of the team ended abruptly last week when he deactivated his account. In a subsequent statement, he said “misinformation unrelated to the Mets that led to our family getting personal threats. So I’m going to take a break for now.”
His departure from Twitter came after Cohen and his Stamford-based hedge fund, Point72, faced attacks on social media for their alleged role in the market upheaval involving heavily traded stocks such as GameStop. The saga showed the widespread resentment and mistrust of hedge funds, a frequently misunderstood group of investment firms that comSTAMFORD
prise a crucial part of the financial-services industry.
“I do believe that a mystique has grown up around hedge fund managers and that the public has endowed them with all-knowing, superpowers that they, in fact, do not possess,” said Bruce McGuire, president of the Connecticut Hedge Fund Association. “They are private, however, because the law requires them to be private. But when you read about them in the news, that fact is often overlooked, and they just seem sneaky and secretive.”
Social media controversy
Greenwich resident Cohen became a target on social media late last month after brokerages, including Greenwich-based Interactive Brokers Group and others such as Robinhood, announced trading restrictions affecting GameStop and other companies caught in the market frenzy.
The restrictions — which the brokerages would start reversing only a day later — angered many customers. Those critics argued that the brokerages were penalizing retail investors while indulging investment firms such as hedge funds that had “shorted” the stocks in the expectation that their prices would decline.
Point72 drew further scrutiny after announcing last week a $750 million investment in hedge fund Melvin Capital. Also last week, Melvin closed its short position in GameStop after sustaining a major loss.
The firm had previously invested about $1 billion in Melvin, according to a number of reports. Another hedge fund, Citadel, made a $2 billion investment in Melvin.
The founder and CEO of Melvin is Gabriel Plotkin, who worked as a portfolio manager at Point72’s predecessor firm, SAC Capital Advisors.
Dave Portnoy, founder of the sports-and-popular culture website Barstool Sports, waded into the controversy by tweeting Jan. 28 a call for “prison time” for the culprits of the market roller coaster. In the same tweet, he lamented the “untouchable” status of Cohen, Point72, Robinhood and Citadel.
“You bailed out Melvin cause he’s your boy along with Citadel,” Portnoy said in one tweet. “I think you had (a) strong hand in today’s criminal events to save hedge funds at the cost of ordinary people. Do you unequivocally deny that?”
“What are you talking about? I unequivocally deny that accusation,” Cohen replied. “I had zero to do with what happened today. BTW, if I want to make an additional investment in somebody, that is my right if it’s in the best interest of my investors. Chill out.”
Cohen and Portnoy appeared to reach a detente later in their exchange, but the unrest over the week’s events did not subside. Cohen deactivated his Twitter account a day later. Portnoy condemned the threats against Cohen and his family.
Widespread fallout
The market turmoil has reverberated through the courts and Congress.
A group of plaintiffs filed a class-action lawsuit this past week in a federal court in Florida alleging that Point72, Citadel and Robinhood had targeted “mom and pop” retail investors.
“Knowing the volume of trades on its platforms in these securities, Robinhood knew its actions would result in the restricted stock’s prices to plummet,” the complaint said in part. “By doing so, they were looking out for Wall Street hedge funds at the expense of the individuals who were customers of Robinhood.”
“The allegations against Point72 are baseless,” Point72 said in a statement.
“Point72 had no involvement in Robinhood’s or any retail broker’s decision to limit or restrict trading in any security and never asked or pressured any retail brokerage firm to restrict trading in any security.”
At the same time, a number of Congress members have called for investigations, with some wanting to probe the dealings between hedge funds and brokerages.
“For years, the same hedge funds, private equity firms, and wealthy investors dismayed by the GameStop trades have treated the stock market like their own personal casino while everyone else pays the price,” Sen. Elizabeth Warren, D-Massachusetts, said in a tweet sent Jan. 27.
The long-term impact of the market turmoil on hedge funds’ investment strategies is debatable.
“They’re going to be a little more wary of taking short positions in the future,” said Lawrence J. White, a professor of economics in New York University’s Stern School of Business. “There’s nothing inherently problematic with short positions. If you believe something is overpriced, then having a market-based mechanism for you to express that opinion seems like a perfectly reasonable way for markets to function.”
Industry resilience
Despite its recent travails, Point72 is still attracting new investments. It has raised $1.5 billion, after losing 10 percent of its value in January, the Financial Times reported this week, citing “a person familiar with the company.”
Company officials declined to comment on the fundraising or the firm’s recent performance.
The fundraising could be unrelated to the market’s fluctuations, as firms such as Point72 often accrue capital to help them pursue new opportunities.
Point72 had nearly $19 billion in assets under management as of Oct. 1, 2020, according to its website.
Connecticut has seen hedge fund liquidations exceed fund launches in recent years, but it remains a hub for alternative-investment firms like Point72.
Among the states, Connecticut hosted the thirdlargest number of active hedge fund managers — 211 — according to a 2018 report from Preqin, a data and analytics provider for the alternative-investments industry.
McGuire said he thinks hedge funds could better communicate to the general public how they operate. Hedge funds invest in a variety of assets including stocks, bonds, currencies, derivatives, and real estate.
The Yale University endowment, General Electric pension trust, and United Technologies’ pension fund rank as the largest investors in Connecticut hedge funds, according to Preqin.
“These pension funds only invest in the highestquality managers, best performing managers — and if the managers fail to deliver, they get fired,” said McGuire, who is also cofounder of the Greenwich Economic Forum. “Also remember that the hedge fund makes that big money through performance fees — so no performance, no fee. And the clients may leave whenever they choose. There's nobody forcing them to invest.”
Point72 now employs more than 1,600. Several hundred are based at the firm’s headquarters at 72 Cummings Point Road in Stamford’s Waterside section. In the third quarter of last year, it employed about 550 in Stamford, ranking as the city’s 14th-largest employer, according to Stamford’s Office of Economic Development.
Point72 also maintains offices in Manhattan; Palo Alto, Calif.; San Francisco; London; Paris; Tokyo; Hong Kong; Singapore; Sydney; and Warsaw. The latter was the most recent opening, with the firm expanding last year to the Polish capital.
“As alternatives to them become more widespread, the lure of the incumbents becomes a little less shiny,” White said. “But the hedge funds are not going away — that’s for sure.”