Manager Monday: Melvin Capital

When a SAC Capital alum launches a fund, the industry takes notice. With his late 2014 launch of Melvin Capital, Gabriel Plotkin is one of the latest ex-SAC managers to attract attention. A strong track record trading Consumer names at SAC and an initial capital raise of $700 million set Plotkin up as an emerging manager to watch. At Melvin, he follows a domestic long/short equity strategy with a focus on the Consumer Discretionary sector. The data from Melvin’s 13F filings (albeit limited to four quarters) show the fund has done quite well since its launch, returning over 9% on its US equity book. Mentions in the press say the fund is up nearly 40% in 2015, suggesting their short book has performed very well. Leveraging Melvin Capital’s public data through the Novus platform allows us to analyze Plotkin’s skills at choosing and allocating to outperforming names as well as gain insight into notable portfolio changes.

Data

As usual for our Manager Mondays, everything mentioned in this post is sourced exclusively from public data, including the manager’s profile, simulated performance and all other analysis and commentary. The data used here omits the short side, non-equity securities, many non-US securities and all non-public information such as actual fund performance. To simulate performance and determine portfolio attributes such as liquidity, we combine public holdings data with market and pricing data and make simple assumptions. The period analyzed is January 1st 2015 through January 31st 2016.

Performance

Since December 2014, Melvin’s simulated returns outperformed the S&P 500 and MSCI World by 13% and 16% respectively. The fund’s simulated returns has them up 8% in Q4 alone, while other funds experienced record losses.

As we’ve discussed before, many factors worked against hedge funds in 2015, but a few opportunities were available, such as select mega cap names and the FANG trade. Allocating heavily to mega cap stocks was a particularly successful strategy for Melvin Capital. While mega cap names made up about 25% of the portfolio on average, they contributed over 900 bps to portfolio performance—a great return on capital. Looking to the FANG trade specifically, Amazon (AMZN), Alphabet (GOOGL), and Facebook (FB) made up 11.6% of the portfolio on average and contributed over 400 bps in 2015.

As seen in the chart below, Melvin’s mega cap names outperformed the mega cap universe by 900 bps, with outperformance spread across a few top positions: Amazon, McDonalds (MCD), Nike (NKE), and Facebook. In an environment where winners were hard to come by, Melvin found the select few to size up.

As we alluded to, Plotkin has not only chosen winning names but also sized them aggressively. The portfolio holds 60 securities on average, and concentration is on the rise, with 44% of the filed market value invested in the top ten securities and 65% in the top twenty. In the chart below, we can see that concentration in Plotkin’s high conviction bets has paid off— there has been a positive relationship between position size and return on capital.

Looking to other attribution statistics confirms this observation: the batting average was 83% and win/loss was 14x for positions between 5% and 7.5%. This means that they are more often right than wrong and on average make more when they’re right than they lose when they’re wrong.

Turning to the Novus Changes feature, we can quickly dig into turnover in Melvin’s top positions. Between Q2 and Q3, Plotkin’s top moves include a sizeable increase in Lululemon (LULU), and significant decreases to TJX, Facebook, and CTrip (CTRIP).

Other major moves include new stakes in Lowe’s (LOW), McDonalds, and Alphabet and an exit from Deere (DE) – a once top position turned top detractor.

In the chart below, we see that many of the new adds and increases have not only been profitable, but they have outperformed their relevant sector benchmarks and the market. The Lululemon stake has added 61 bps of security selection alpha since Q3, while the top new entries have similarly earned their place as top alpha generators.

Melvin Capital’s short history suggests Plotkin has the skill to pick both profitable and outperforming names as well as the conviction to make sizable bets. As Melvin continues to grow and evolve, the industry will scrutinize Plotkin’s management of asset growth as well as his ability to navigate the turbulent markets and apparent dearth of alpha opportunities– at least in 2015 they seem to have managed this environment well.

The Novus Guide to Crowding

As the hedge fund industry matures, crowding is emerging as one of, if not the, most important of investor concerns. With an influx of new investment talent and innovation in information technology, coupled with declining market breadth, alpha is getting squeezed from all directions. The proof is in the pudding – crowding wildly moved the markets in the last quarter of 2015 and continues to expose pockets of illiquidity at the start of this year.

The most forward-looking investors are staying ahead of the trend and away from the herd.

Managers, now aware of crowding as a serious risk factor, are finding ways of measuring this phenomenon, and investors armed with the right data and tools can now reliably estimate their exposure to crowding as a factor.

This guide focus on three important aspects of crowding: 1. Why it’s important, 2. How to measure it and avoid it, and 3. What it means for a sector near and dear to hedge funds: Information Technology. If there is anything you read this month, read this practical guide to the most relevant factor moving your portfolio today.

Download our latest guide to learn more.