Steve Cohen will return to managing money for outside investors as soon as this week with a strategy that’s similar to one he used at his first hedge fund before it collapsed.
At SAC Capital Advisors, which imploded from an insider-trading scandal, Cohen paid employees for their best ideas and leveraged them up in his own portfolio. The government, which banned the trader from the hedge fund industry for two years, said the practice of awarding bonuses for profitable ideas motivated employees to traffic in insider information.
The billionaire will keep cherry-picking the most promising ideas from his managers and analysts when he returns to the big stage, according to people with knowledge of the firm. But at Point72 Asset Management, they don’t receive any extra compensation or capital to manage in return, a firm spokesman said. Cohen is using the practice as he tries to show he still has his mojo after posting an average annual return of 30 percent at SAC.
While Cohen has been restricted from managing outside money at Point72, his Stamford, Connecticut-based family office gained more than 10 percent last year after expenses. That’s a turnaround from 2016, when Point72 was up just 1 percent, Cohen’s second-worst annual performance ever.
Cohen’s Fees
Returns for clients will have to outpace the firm’s higher-than-average fees, including a 2.75 percent management charge and as much as 30 percent of profits for performance. Some expenses will also be passed on to clients.
Industry insiders question if Cohen’s best-ideas practice works without rewarding people for their winning bets.
“I can’t imagine that not paying employees for their best ideas works for very long,” said Brad Balter, head of Boston-based Balter Liquid Alternatives, which invests in hedge funds. “Employees generating outsize profits expect outsize bonuses. You can’t change the rules of the jungle and Cohen knows that better than anyone.”
Executive Turnover
A number of senior executives have left the firm as it prepares to take in outside capital. Since the middle of last year, the departures have included Chris Corrado, chief technology officer, Phil Villhauer, head of global trading, Michael Zea, chief of strategy, Seetharam Gorre, chief information officer, Marc Greenberg, director of research and portfolio manager Qaisar Hasan.
Point72 has hired a number of executives as well, including Sara Vavra, head of global macro, David Loaiza, who leads Aperio, and portfolio managers Jonathan Conway, Tom Hedges and Drew Gillanders.
Back in 2013, it looked like Cohen and his firm might be taken down by an insider-trading investigation that had already spanned seven years. That year, SAC pleaded guilty to securities fraud and agreed to pay a record $1.8 billion fine. Cohen himself was never charged with wrongdoing, but he agreed to return client capital and in 2016 he was banned for two years from managing money for other people. That ban ended on Jan. 1.
Ends ‘Tagging’
In the intervening years, Cohen’s family office, which currently manages about $11 billion in net assets, worked to rehabilitate his reputation.
In November 2014 the firm sent a memo to its staff saying it would stop what it called “tagging,” or paying people for successful investment ideas. The firm stopped the practice because “the Government cited tagging prominently in its case against SAC and the cases brought against its employees, believing tagging created an incentive for an employee to seek improper information in the hope of receiving a ‘tag bonus,’ ” the memo said.
Cohen has also installed a command center in the middle of the trading floor of his new firm. There, a 50-member compliance team is strategically positioned to listen in on traders’ conversations in real time, comb through emails for suspicious language and even veto job candidates.
When the firm opens to outsiders, Cohen’s portfolio, including the best ideas, will account for less than 5 percent of assets, the people said. Even though the percentage is small, it translates into billions of dollars of capital because Point72 oversees about $90 billion when leverage is included, according to a recent Securities and Exchange Commission filing.
As was the case at SAC, Point72’s assets are farmed out to dozens of teams. The new firm has fewer senior portfolio managers running books of $1 billion or more, because many of the most senior people have left the firm in recent years.
Point72 initially anticipated raising as much as $10 billion in outside cash for the new fund, people said. Instead, the firm will start — in one of the most highly anticipated fund launches of the year — with $3 billion to $4 billion of external capital.
This article was provided by Bloomberg News.
