The founder of SAC Capital, whose first losing year was 2008, is taking in new money as hedge funds around him collapse.
By Katherine Burton and Anthony Effinger Bloomberg Markets, April 2010
In late January, billionaire Steven A. Cohen hosted a golf outing for two dozen people at the Bear Lakes Country Club in West Palm Beach, Florida.
Most of his guests were investors in his hedge fund firm, SAC Capital Advisors LP, plus a few prospects. The party played the Lakes Course -- so named because 12 holes out of 18 have a water hazard -- as 30-mile-per-hour gusts blew off the Atlantic Ocean, says Jeffrey Vale, director of research at Infinity Capital Partners LLC, who was one of Cohen’s guests.
Cohen, who’s proud of his 10-stroke handicap, hit shot after shot straight down the fairways, Vale says.
The outing was unusual for Cohen, Bloomberg Markets reports in its April issue. Cohen, 53, spends most days trading stocks on his 180-person trading floor in Stamford, Connecticut. He and 100 portfolio managers buy and sell 100 million shares a day, about 1 percent of all shares traded on U.S. exchanges.
Two years ago, Cohen didn’t need to take his investors golfing. He let his record -- a 30 percent average annual return for 18 years -- speak for itself.
“There was a perception that Steve was the wizard behind the curtain,” says Vale, an SAC client since 2001. “Performance was so good, most investors probably didn’t care.”
Cohen has become more sociable because he sees an opportunity to grow as the hedge fund industry shrinks, investors say. SAC, an acronym of its founder’s name, now manages $12 billion, down from $16 billion at its mid-2008 peak.
First Loss Ever
The firm’s flagship SAC Capital International Ltd. fund suffered a 19 percent loss in 2008 -- its first ever -- amid a stampede out of hedge funds by panicked investors. The financial crisis and subsequent recession killed off 2,300 funds in 2008 and 2009, according to Chicago-based Hedge Fund Research Inc.
Cohen, one of the survivors, is raising money so he can hire and mentor new investment professionals to keep the firm going after he retires.
The new openness may put current investors at ease. Two former employees of SAC have been linked to the Galleon Group LLC scandal, the largest insider-trading probe ever to shake the $1.6 trillion hedge fund industry. Neither is accused of engaging in insider trading while working for SAC.
Cohen is lifting the veil because he must, says Peter Rup, chief investment officer at Artemis Wealth Advisors LLC, a New York-based company that manages $352 million for wealthy families. He says investors stopped tolerating SAC-type secrecy after New York investment manager Bernard Madoff was exposed as a fraud.
More Investor-Friendly
“After Bernie Madoff, nobody will invest in an operation that is very clandestine,” Rup says. “Even the most crass and abrasive managers are more investor-friendly now.”
Rup considered investing in SAC in 2005, he says, then balked when neither Cohen nor any of his analysts would meet with him.
Cohen, who lives on a 14-acre (6-hectare) estate in Greenwich, Connecticut, which he bought for $14.8 million in 1998, allowed a reporter to visit his offices in Stamford. He declined to comment for this article.
Though Cohen attends more golf and other outings than he once did, most days the balding, blue-eyed, stocky investment manager does what he knows best: He trades. He has a perch in the middle of the Stamford floor, and his bets account for about 10 percent of profits -- down from more than 50 percent 10 years ago.
He doesn’t like noise, so the phones on the floor don’t ring; they light up. He prefers jeans and sweaters to suits and looks more like a tax accountant on casual Friday than a trading titan running a $12 billion hedge fund firm.
Picasso to Warhol
Near the trading floor hang pieces from Cohen’s extensive art collection, which includes works by Vincent Van Gogh, Pablo Picasso and Andy Warhol.
Cohen maintains the temperature on the trading floor at 69 degrees Fahrenheit (21 degrees Celsius) to make sure no one dozes. If a portfolio manager or analyst can’t answer a question about a stock, Cohen is likely to lash out. “Do you even know how to do this f---ing job?” is a standard barb, current and former employees say.
Portfolio managers make money, or they’re fired. They usually last about four years.
Cohen snapped back from his 2008 loss in 2009. The $6 billion SAC Capital International fund, open to investors outside the U.S. and to tax-exempt institutions within the country, was up 29 percent, after fees, according to investors. The gain was about the same at Cohen’s main onshore fund, the $3 billion SAC Capital Management LP.
Bad Credit Bets
It was a return to form after the 2008 loss, which was mostly due to credit investments that went bad. While a 19 percent downturn was about average for hedge funds, according to HFR, Cohen has since turned his focus back to what he has done for most of his career: buying stocks and selling them short.
Cohen doesn’t so much own stocks as rent them: He typically holds positions for 2 to 30 days, although some might remain on the books for six months or more, according to a document sent to potential investors in early 2009.
The 2008 loss could have been much worse. Months before Lehman Brothers Holdings Inc. went bankrupt in September 2008, Cohen saw trouble coming in the credit markets and sold off as much as $7.5 billion of bonds, primarily debt issued by banks and finance companies, along with related securities, according to four people familiar with the situation.
Amid the wreckage of the market crash, SAC and other survivors are trying to vacuum up money from pension funds and other institutions that must chase higher returns to meet obligations. Many of those investors are choosing big hedge funds with long track records such as SAC.
Pitching Goldman Clients
During his January visit to Florida, Cohen pitched prospective investors at Morgan Stanley’s annual conference on hedge funds, people who attended say. He spoke at a similar conference in May that Goldman Sachs Group Inc. organized for its clients, and recently made a marketing trip to Europe, according to people familiar with his fundraising efforts.
The campaign has worked. During the last six months of 2009, investors poured $1.3 billion into SAC, about 10 percent of the $15 billion raised by all hedge funds during the period. Investors are handing Cohen their money even though he collects some of the highest fees in the industry -- a 3 percent management fee and as much as 50 percent of profits.
Most managers charge 2 percent and 20 percent.
Links to Galleon
The new investments are flooding in despite the fact that SAC’s name cropped up in the Galleon probe. That investigation goes back to at least 2007, when the Justice Department used wiretaps in an insider-trading case for the first time and recorded phone conversations that led in October to the arrest of Galleon founder Raj Rajaratnam and five others.
Another 15 people have been charged since, and nine have pleaded guilty. Rajaratnam managed $7 billion at Galleon’s peak.
Two people linked to the Galleon case have ties to SAC. Richard C.B. Lee pleaded guilty on Oct. 13 to charges that he traded on insider information at Spherix Capital LLC, a San Jose, California-based firm he co-founded in 2008.
Lee worked at SAC from 1999 to 2004. He’s cooperating with authorities. No one has alleged that Lee engaged in insider trading while at SAC.
Portfolio manager Richard Grodin left SAC to start New York-based Stratix Asset Management LLC in 2004, taking Lee with him. Last year, his new firm, New York-based Quadrum Capital Management LLC, received a subpoena regarding its trading, according to a person familiar with the investigation. He hasn’t been charged. Grodin didn’t return calls seeking comment.
Tapping ‘Tippee 1’
A third former employee, analyst Jonathan Hollander, was allegedly involved in another insider-trading ring while he was employed by Cohen at SAC, according to two people familiar with the matter.
In January 2009, the SEC filed a civil complaint against Ramesh Chakrapani, then a Blackstone Group LP managing director. The SEC alleged that in January 2006 Chakrapani told a person identified as “Tippee 1” that supermarket chain Albertsons was about to be purchased. About a week later, a consortium that included the private-equity firm Cerberus Capital Management LP announced the buyout.
Tippee 1 used the information to reap $18,000 in a personal account and to generate $3.5 million for his employer, who wasn’t identified. Hollander is Tippee 1, the two people say.
Neither Hollander, who left SAC in late 2008, nor SAC is accused of wrongdoing in the Chakrapani suit.
SEC Probes
After the suit was filed, SAC examined Hollander’s trades, SAC spokesman Jonathan Gasthalter says, and the firm continues to cooperate with the U.S. inquiry. Hollander didn’t return a call seeking comment. His lawyer, Aitan Goelman, also declined to comment.
The Securities and Exchange Commission and the Justice Department are looking into the trading patterns of even larger players than Rajaratnam, according to a person familiar with the case. The SEC and the Justice Department declined to comment.
At least one agent at the Federal Bureau of Investigation, B.J. Kang, has been inquiring about SAC’s trading for several years, according to a person who’s been interviewed by him. Kang was the lead agent in the Galleon investigation and is pictured in photos taking Rajaratnam into custody on Oct. 16.
No one at SAC has been accused of wrongdoing, and the firm has received no subpoenas. Kang didn’t return a call seeking comment. FBI spokesman James Margolin declined to comment.
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