June 3 (Bloomberg) -- Steven A. Cohen may be left with less than $1 billion from outside investors, down from $6 billion at the start of the year, after today’s deadline for withdrawals from his SAC Capital Advisors LP, according to four people with knowledge of the situation.
SAC employees expect clients to say they will take back most of the $4 billion they haven’t already marked for redemptions by early next year, according to the people, who asked not to be identified because the information is private. The withdrawal requests, which would be met over the rest of this year, come after clients said in the first quarter they would pull $1.68 billion.
Investors are exiting as the U.S. government intensifies its probe of insider trading at the Stamford, Connecticut-based firm, once one of the most successful in the hedge-fund industry, with returns averaging 25 percent since 1992. The withdrawals increase the odds that Cohen will convert SAC into a family office managing his own fortune. He has about $7.5 billion in SAC’s funds, while employees account for $1.5 billion of assets, according to data compiled by Bloomberg.
“I’d put the odds at pretty good for him to go private,” said Jay Rogers, president of Irvine, California-based Alpha Strategies Investment Consulting Inc., which advises hedge-fund clients as well as managers seeking to raise money. “His performance has been great for many years, but this case is becoming so much of a distraction to him, and investors are saying there’s too much headline risk to be involved.”
Few insiders expected this outcome as recently as six weeks ago, when Cohen, 56, attended a marketing event at New York’s Yankee Stadium to attract new clients, and employees were telling outsiders that the risk facing SAC was minimal, according to the people. The mood has darkened in the weeks since as Cohen and five other senior staffers were subpoenaed to appear before a grand jury. Some workers have started putting out feelers for new jobs, and Cohen has reduced his own trading to spend more time with lawyers, said the people.
In late May, after the subpoenas arrived, Cohen held a companywide conference call in an effort to calm his 1,000 employees, two people familiar with the situation said. He was joined by SAC President Tom Conheeney, who urged colleagues not to be distracted by the investigation. An outside attorney addressed speculation that prosecutors may go after Cohen and the hedge-fund firm using federal racketeering charges, according to the people.
The pep talk failed to boost morale.
Blackstone Group LP, one of Cohen’s biggest clients and supporters, plans to redeem most of the money it has left at SAC, according to two people familiar with the New York-based company. Blackstone had about $550 million with the firm at the start of the year, the people said. Ironwood Capital Management Corp., a San Francisco-based investment company, will withdraw all of its $100 million, a person with knowledge of the matter said last week.
Spokesmen for Blackstone and Ironwood declined to comment on redemption plans.
“It’s very difficult to go in front of an investment committee and defend why you are staying when others are leaving,” said Brad Balter, head of Balter Capital Management LLC, a Boston-based firm that invests in hedge funds on behalf of its clients.
Employee expectations for withdrawals were reported yesterday by the Wall Street Journal. Final withdrawal amounts may change by tonight’s deadline.
A few investors have called to SAC asking to put money into its funds, according to two people familiar with the situation. A spokesman for SAC declined to comment on any internal matters.
Cohen has discussed offering the government a deal in which his firm would pay a fine, admit wrongdoing and close to outside investors to avoid prosecution, a person familiar with his thinking said last month.
Turning SAC into a private family office would be costly. The higher-than-average annual fees SAC charges clients -- as much as 3 percent of assets and 50 percent of profits -- cover the expenses of running his hedge funds, including employee compensation, and generate profits for Cohen as the principal owner. Under a family office structure, he’d have to pay portfolio managers, who now get 15 percent to 25 percent of investment profits, from his own pocket.
The scrutiny on Cohen and his firm grew in November when former portfolio manager Mathew Martoma was charged in what U.S. prosecutors called the biggest insider-trading scheme in history. It was the first time the SAC founder was directly linked to trades that allegedly used inside information.
The five-year statute of limitations covering the 2008 trades, in which SAC netted $276 million in profits and averted losses from alleged inside information concerning a drug trial, expires in late July. Cohen hasn’t been accused of any wrongdoing. Martoma has pleaded not guilty and awaits trial.
The U.S. Securities and Exchange Commission, which won a record $602 million civil settlement with SAC over the trades in March, also must move by July if it decides to sue Cohen personally.
After Cohen was subpoenaed, SAC told clients in a May 17 letter that it was no longer cooperating unconditionally with the government.
News coverage sparked by the letter prompted Cohen to address his employees in the May 22 call, according to the people with knowledge of the situation. Conheeney thanked employees for their hard work and urged them to stay focused, and the attorney directed them to the Department of Justice’s website for more information on the Racketeer Influenced and Corrupt Organizations law, known as RICO, the people said.
Cohen, who typically manages $2 billion to $3 billion in what is known as the Cohen Account, has cut his trading to the lower end of that range and has given more money to deputies who help him run the portfolio, three of the people said. The main fund is up about 6 percent this year through May, according to a person briefed on the returns.
Hedge-fund firms and talent recruiters said they haven’t seen a mass exodus from SAC’s employee ranks. Some say they’re starting to get unsolicited calls from workers inquiring about job opportunities.
“SAC was always a net buyer of candidates, but now for the first time we’re seeing SAC employees look for jobs outside the firm,” said Jason Kennedy, chief executive officer of Kennedy Group, a recruitment firm based in London.
Hedge-fund firms whose trading includes equities may eventually seek to hire SAC portfolio managers, the people said. They said the list of potential landing spots for SAC employees could include such firms as New York-based Millennium Management LLC; Citadel LLC and Balyasny Asset Management LP, both based in Chicago; and London-based BlueCrest Capital Management LLP, which is building up its stocks team.
SAC has about 400 employees focused on investing, according to an April 19 filing with the SEC. Only a few oversee $1 billion or more, including Nick Tiller, who focuses on energy, and Jim Haber, who trades financial stocks, the people said.
Cohen would still employ some portfolio managers and traders even if SAC becomes a family office, the people familiar with the firm said. With assets potentially dropping by half, Cohen would need fewer of them. He also would no longer need some non-investment functions, such as investor relations and marketing.
Some potential employers are concerned they could get entangled in an insider-trading case if they were to hire a former member of Cohen’s firm, recruiters said.
Those who work in SAC’s technology and health-care groups may be deemed especially risky: of nine former or current employees linked to insider-trading allegations while at the hedge-fund firm, seven focused on those industries. Hedge funds Diamondback Capital Management LLC and FrontPoint Partners LLC were forced to liquidate after a single employee was convicted of insider trading.
“I’ve spoken with companies that say they will not entertain hiring people from SAC or SAC spinoffs,” said Sandy Gross, founder of Pinetum Partners LLC in Greenwich, Connecticut, a recruiting firm specializing in financial services. Gross said that firms that are open to interviewing Cohen’s employees would probably ask tough questions about how those employees managed their portfolio and went about researching companies.
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