Last updated: November 5, 2013 12:09 am

SAC Capital prepares for a second life

Steven "Steve" Cohen, chairman and chief executive officer of SAC Captial Advisors LP, speaks during the Robin Hood Veterans Summit in New York, US©Bloomberg

The admission of insider trading by Steven Cohen’s SAC Capital comes with a promise to return cash to investors and to end his two-decade career managing money for others, but SAC’s fate was sealed earlier when the US Department of Justice first laid criminal charges.

When that happened in July, even Mr Cohen’s staunch supporters felt compelled to pull their funds from the firm and SAC began preparing for its new future as a slimmed-down organisation that manages only the Cohen family money.

That fortune is estimated at between $8bn and $9bn, so the operation will become one of the largest of the US’s estimated 4,000 “single-family offices”, which manage money purely for rich individuals and their heirs. But SAC’s strategy and the number of people it employs are likely to change substantially.

Ed Butowsky, founder of Chapwood Capital, was one of the investors who reluctantly chose to flee. He runs a fund of funds that boasted of being able to get its clients access to SAC.

Mr Cohen made $40bn for his clients since 1992, based on his firm’s 25 per cent average annual returns, Mr Butowsky calculates, and only a fraction of a fraction has been tainted by allegations of insider trading, he said.

“It was a badge of honour to have money with Stevie Cohen,” Mr Butowsky said. “He was the Michael Jordan of hedge funds – and I still believe that.”

Yet Chapwood’s compliance officers concluded the risk of investing was too great after the firm itself was charged.

SAC is already shrivelling as a manager of outside funds, and has been since the prosecutions and guilty pleas of former employees began accumulating in 2009.

The trickle of redemption requests turned into a flood this year, with large investors such as Blackstone Asset Management and Citigroup Private Bank quitting in the first quarter.

Mr Cohen repeatedly loosened restrictions on the rules that limit how much and when investors could withdraw their money.

However, SAC’s publicly reported assets under management remained roughly constant at about $15bn until shortly before its last update at the end of September. The firm does not have to honour redemption requests immediately and it has continued to post strong investment gains, which it has told investors are 16 per cent for the year to date.

SAC is in the process of preparing its transition to a family office, and people familiar with the firm say the vast majority of outside money will be returned by the year-end.

The number of employees slipped below 1,000 earlier this year as SAC began retrenching, and the shrinkage has accelerated since the September update. Then, it employed 950 people around the world, including 400 involved in investment decisions. The majority were in SAC’s Stamford, Connecticut, headquarters, but the firm laid off six portfolio managers and their teams in the US last month and informed the 50 staff in London that their office was being shut.

Meanwhile, other hedge funds have snapped up SAC employees unconnected to the teams where insider trading has been alleged, and Mr Cohen faces the challenge of keeping key staff after 2014 bonuses have been paid.

“The question is whether people will continue to want to work for him,” said Martin Sklar, attorney at Kleinberg Kaplan. “It is not great at cocktail parties any longer to say you are a portfolio manager at SAC. It’s not a great conversation starter.”

Mr Sklar said SAC’s investment strategy as a family office would determine how many staff it ultimately needed.

At its peak, the firm accounted for up to 3 per cent of all trading on the New York Stock Exchange, as its $15bn in assets were magnified by borrowing from prime brokers that swelled its investment firepower to $50bn.

Despite the charges, brokerage firms including Goldman Sachs, Morgan Stanley, Bank of America and JPMorgan Chase have continued to provide services to SAC, and were expected to continue doing so. The settlement includes the appointment of an external monitor to oversee regulatory compliance, which one prime broker said “made all the difference” and should give legal cover to the banks.

Family offices, which do not solicit money from outside investors, are free from most regulatory disclosure requirements, but the large ones are increasingly behaving like hedge funds and employing teams of investment professionals.

It was a badge of honour to have money with Stevie Cohen. He was the Michael Jordan of hedge funds – and I still believe that.

- Ed Butowsky, founder of Chapwood Capital

For now Mr Cohen is still working most days from his trading floor in Connecticut, though his legal distractions have meant he cannot watch the markets as obsessively as he did.

He is also selling artworks from his collection at auctions in New York that begin this week at Sotheby’s and Christie’s.

The value of the art for sale is an estimated $80m, including a depiction of Elizabeth Taylor by Andy Warhol. The sales are said to be unrelated to his legal woes, as he regularly deals at auction.

The DoJ continues to pursue its investigations into Mr Cohen personally and other trades and traders at SAC. The Securities and Exchange Commission has also filed civil charges that he failed to adequately supervise his firm.

SAC has said in the past that Mr Cohen denied any personal wrongdoing. The company declined to comment for this article.

By signing off on a guilty plea to insider trading by SAC, Mr Cohen is signalling the end of his career managing money for others, but it also takes him closer to the start of his next chapter.

As Kleinberg Kaplan’s Mr Sklar said: “Mr Cohen personally is not encumbered with a criminal record and he still has his art collection and most of his wealth; $8bn is still a sizeable hedge fund. There aren’t a lot of legal remedies to stop people trading in the markets with their own money. That would be beyond the pale.”

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