HSBC Holdings Plc’s private bank advised clients to not add money to Steven A. Cohen’s SAC Capital Advisors LP amid a U.S. government insider-trading investigation into the hedge fund, according to a person with knowledge of the matter.
The bank made the recommendation to some clients last month after SAC disclosed that regulators may file civil fraud claims against it, said the person, who asked not to be named because the information is private. Stamford, Connecticut-based SAC has told some employees and outside advisers that it expects investors to withdraw at least $1 billion, or 17 percent of the money it manages for outside clients, according to a person familiar with the discussions.
Citigroup Inc.’s private bank last month suggested clients not add to their SAC investments after the November arrest of a former portfolio manager and disclosure that the U.S. Securities and Exchange Commission is considering suing the $14 billion hedge fund. The investigation marks the first time government officials have linked Cohen to trades at the center of an insider-trading case.
Medard Schoenmaeckers, a Zurich-based spokesman for HSBC’s private bank, declined to comment yesterday on investments in SAC.
It’s “far too early to speculate about redemptions, and we do not expect redemptions to have a significant impact on our funds,” Jonathan Gasthalter, a spokesman for SAC, said yesterday.
Cohen’s SAC Capital International rose 13 percent last year, according to a person briefed on the returns. The fund has produced average annual gains of about 30 percent since its 1992 inception.
HSBC, based in London, advises SAC investors and separately manages client investments in the hedge fund through its fund-of-funds business, the person said. The recommendation to not add money directly wouldn’t apply to the fund-of-funds investments, in which HSBC charges fees to pick hedge funds on behalf of clients. HSBC’s private bank facilitates more than $500 million of SAC investments across both businesses, the person said.
Clients can pull 25 percent of their investment every quarter from SAC after giving the firm 45 days’ notice, meaning it would take them a year to redeem in full. The next deadline for putting in a redemption notice is mid-February.
The fund-of-funds units at HSBC and New York-based Blackstone Group LP are monitoring how the government proceeds regarding SAC and haven’t decided whether to pull any money from the hedge fund, people with direct knowledge of the firms’ thinking said. Peter Rose, a spokesman for Blackstone, declined to comment.
Prosecutors in November charged Mathew Martoma, the former SAC employee, with what they called a record-setting insider-trading scheme that netted as much as $276 million in profits and averted losses for the hedge fund in 2008.
Martoma traded on tips about clinical trials of a drug intended to treat Alzheimer’s disease, prosecutors said in their criminal complaint. Martoma allegedly advised Cohen to sell shares of Wyeth LLC and Elan Corp., the companies that were developing the drug, before negative news about its performance was announced. The SEC told SAC after Martoma’s arrest that the agency may sue the hedge fund over his trading.
Martoma pleaded not guilty to illegal trading at a court hearing in New York this month. Cohen and SAC are confident they acted appropriately and will continue to cooperate with the government’s inquiry, Gasthalter said in November. Cohen hasn’t been accused by the government of any wrongdoing.
SAC has contacted investors to ask whether they plan to redeem, according to the Wall Street Journal, which earlier reported the firm’s estimates of client withdrawals. Outside money accounts for about $6 billion of SAC’s assets under management; the rest is from Cohen and his employees.
SAC has told portfolio managers it will raise their bonuses by 3 percentage points to help retain employees amid the probe by regulators, a person familiar with the matter said earlier this week. The managers are typically paid an annual bonus of about 15 percent to 25 percent of the profits they generate from their trades, another person said.