Investors React to SAC’s Battle with Regulators

June 7, 2013

Just days after SAC Capital Advisers announced a claw-back policy designed to monetarily punish those in the firm found complicit in insider trading, Cohen announced to clients he would no longer offer unconditional cooperation with government investigators.

Some have speculated that Mr. Cohen instituted his claw-back policy expecting the government to ease its relentless insider trading investigation. Others, including David Kochanek, publisher of HedgeFundCompensationReport.com, viewed the claw-back policy as largely a PR move.

Regardless of Cohen’s motives and irrespective of his efforts, his $15 billion fund is in danger of bleeding out, if not as a result of fines, which, to date exceed $600 million, then through redemptions.  SAC Capital Advisers reset its May 16th redemption date to June 3rd, concerned, no doubt, with the distinct possibility that redemptions might exceed the $1.7 billion which flowed out from the fund in February.

Investor Reaction Has Been Mixed or Mute

Dallas based Chapwood Capital Investment Management’s Ed Butowsky says, “I’m thinking about putting more money with him. Steve Cohen is the Michael Jordan of hedge fund managers.”  Butowsky’s sentiments are understandable. Cohen’s SAC Capital Adviserhas an impressive record, which touts a 25 percent average return over its 21 years in operation.

Other investors have yet to comment on their intentions.

Cohen, clearly concerned, assured investors that all fines would be paid from his personal funds and as this would preserve any gains  investors may have accrued, they might feel comfortable in remaining with the firm.

What Should Be Made of the Distraction?

Unfortunately, the impact of the government investigation cannot be entirely offset by Cohen’s pledge to absorb the expense of penalties and fines out of pocket. Successful management of a hedge fund requires a laser-like focus and that has to be difficult to maintain in the hostile environment that necessarily arises from a government investigation. Sadly, it is not just Cohen’s attention that is being diverted. It has been reported that subpoenas have been issued for at least four key members of the management team. Those include, Tom Conheeney, SAC Capital’s president, Steve Kessler, compliance chief, head trader, Phillip Vilhauer and COO, SolomonKumin.  This was reported by Bloomberg and attributed to an unnamed source. It has not been verified by SAC Capital or by any government spokesperson. In fairness, it has not been denied either.

It is difficult to accept that SAC Capital Advisers can perform at the apex of its ability given the fact that Stephen A. Cohen and his management team are understandably distracted by these investigations. Such an assumption may be supported by the fact that SAC has delivered gains of around 6 percent, year-to-date, while the S&P has risen some 17 percent.  Of course, the year is not over and these numbers may change.

The Reality

SAC Capital Advisers has $15 billion in assets under management. While that is fairly impressive, the fact is, around $8 billion of that is Cohen’s personal investment. This leaves about $7 billion invested by outsiders that, in theory, could withdraw their investment. If that occurs, fee income will evaporate and the costs of operating the fund will be totally on Cohen’s shoulders. Many speculate that if this scenario develops, Cohen will convert the firm to a family office. It will be interesting to see how this plays out.

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