Reading Steve A. Cohen’s White Paper in the SAC Insider Trading Case

I’ve followed hedge funds – pooled fund structures that engage in active management often uncorrelated with financial markets – for about a decade.


Almost 12 years ago I wrote a Masters paper on Long-Term Capital Management (PDF) in Swinburne University’s Strategic Foresight program. I read Sebastian Mallaby’s history More Money Than God (PDF) and MIT’s Andrew Lo. Hedge funds appeared to be exemplars of Richard Slaughter‘s Institutes of Foresight thesis. More recently, I have thought of hedge funds as possible examples of meso-level, organisational strategic subcultures.


Today, I re-watched the PBS Frontline documentary ‘To Catch A Trader‘ (2014) and read the white paper (PDF) from SAC founder Steve A. Cohen’s lawyers in the now-notorious Elan and Wyeth insider trading case. Cohen’s portfolio manager Matthew Martoma was convicted of insider trading and sentenced to jail. Cohen’s SAC was fined millions and is now basically a family office.


I’ve had the white paper for over a year but only today got a chance to have a close read of it with an eye on how Cohen’s lawyers describe his trading strategies. I learned to do this when studying strategic foresight methodologies.


Some of my summary notes from the white paper:

  • Back of envelope estimate of Steve Cohen’s trading portfolio size in July 2013: $US1,253,000,000.
  • Cohen trades over 80 individual securities a day.
  • Algorithms, direct market access, and dark pools are routinely used for trade execution.
  • The PBS Frontline documentary describes Edge as an informational advantage about market activity.
  • The white paper describes the following as Events: (1) corporate access (competitor announcements; adverse developments); (2) market moving (catalysts, technical analysis); (3) analyst convergence (broker-deal reports; ratings such as downgrades); and (4) market rumours (false market).
  • SAC portfolio managers develop a Company Investment Thesis. This may involve: (1) trimming positions whilst going into earnings announcements; (2) using option hedges to offset long/short positions using a market neutral strategy; (3) anticipating slippage: incremental shifts in share prices due to the timing of executed trades; and (4) responding to risk reviews of large positions.
  • Market price-psychology patterns that Cohen has identified: (1) increases in individual share prices versus S&P 500 declines (deteriorating market) over specific time periods; (2) tests of if positive market reaction is sustainable (possible mean reversion); (3) company news that is ambiguous or less-than-spectacular information that will trigger a decline; and (4) rapid stock appreciation that creates high expectations and the probability of a price decline.


The Steve A. Cohen white paper illustrates how to potentially reverse engineer a hedge fund’s trading strategy – as a strategic foresight example – and to not be a Muppet-like naive retail trader.

U2′s Songs of Innocence

U2 released its thirteenth album Songs of Innocence for free on Apple’s iTunes service today.


U2′s decision echoes the free digital download strategy used previously by Nine Inch Nails (The Slip) and Radiohead (In Rainbows). My 2008 conference paper and presentation slides found that each band adopted the strategy during a period of heightened conflict with their labels, and leveraged their audiences to negotiate better contracts.


U2′s espoused reason for the strategy is to raise global awareness of specific charities. Other reasons may emerge . . . (One of them being a surge in back catalogue sales.)

Monash SPS Symposium: Aum Shinrikyo’s Failed Strategic Subculture

Each year I do a 20-minute presentation to the SPS Symposium in Monash University’s School of Political and Social Inquiry on my in-progress PhD research. Below is the outline for this year’s proposed presentation due to occur in October:


Aum Shinrikyo’s Failed Strategic Subculture

Alex Burns (


Key Words: Aum Shinrikyo; strategic culture; terrorist groups


In 1977, RAND’s Jack Snyder proposed strategic subcultures as a unit of analysis to understand distinct beliefs, analytical traditions, institutions, and socialisation norms in a strategic community. Recently, the so-called fourth generation of strategic culture scholarship has – via Alan Bloomfield, David Haglund, Jeffrey Lantis, and others – applied Snyder’s unit of analysis to examine new foreign policy actors. This presentation applies Snyder’s strategic subcultures to advance a new understanding of the militant Japanese religious sect Aum Shinrikyo, and its 1995 sarin gas attack on Tokyo’s subway system. I use narrative analysis and qualitative thematic coding to re-examine two theory-building explanations about Aum Shinrikyo’s decision-making: Robert Jay Lifton’s psychohistory (Destroying the World to Save It) and Haruki Murakami’s oral history interviews (Underground). I also develop a new strategic subculture explanation of Aum Shinrikyo’s failure that builds on Frederick M. Smith’s research into South Asian deity and spirit possession experiences (The Self Possessed).


Paper Type: Full Paper

Working Title: Terrorist Groups as Strategic Subcultures

Degree: PhD

Supervisor: Luke Howie

Recent Advances in PTSD Treatment

I’m working on integrating some different streams in my personal research program. One deals with the clinical treatment of complex PTSD. Today, I looked at 15 years of published books on PTSD treatment. What I found:


  • In the past five years there is much greater integration with neuroscience models and research, particularly for comorbid disorders.
  • There are now evidence-based, lifespan targeted interventions for children and adolescents who have PTSD symptoms.
  • Complex trauma, post-traumatic growth, and resilience are new specialist niches of PTSD research.
  • There is a heavy emphasis on Cognitive Behavioural Therapy models for the clinical treatment of PTSD.
  • Bereavement, grieving, culture, memory, empathy, and body/sensorimotor-oriented therapies are specialist topics in the recent literature, notably as guidance for new therapists and for trans-cultural researchers.
  • There appears to be a convergence to Trauma-Focused CBT and EMDR as evidence-based treatments in which meta-analysis and randomised controlled trials have been done.


There are specialist publishers including Guilford Press for therapist training and the Routledge Psychosocial Stress series (Routledge appears to have published a lot of overview books for clinical researchers).


I’m looking forward to adding academic books like The Oxford Handbook of Traumatic Stress Disorders (New York: Oxford University Press, 2012) to my long-term research library. There are also interesting specialist titles like The Alchemy of Wolves and Sheep: A Relational Approach to Internalized Perpetration in Complex Trauma Survivors (New York: Routledge, 2013), on child soldiers.

The Acorn Metaphor

The existential psychotherapist Irvin Yalom recounts in  his book The Gift of Therapy (New York: HarperCollins, 2009) how he encountered Karen Horney’s Neurosis and Human Growth as a “young psychotherapy student” (p. 1). What motivated Yalom was Horney’s insight that human like is like an acorn that has the potential to grow into a tree, if the obstacles can be removed. The acorn metaphor was a guiding principle for Yalom to develop insights and action strategies for clients to consider. James Hillman also uses the acorn metaphor in his book The Soul’s Code: In Search of Character and Calling (New York: Random House, 1996).

New Books on Al Qaeda’s Strategic Culture

In 2011, my PhD supervisors asked me about a planned case study on Al Qaeda’s strategic culture. Now, there are two books out that address this issue:


  • Michael W.S. Ryan’s Decoding Al Qaeda’s Strategy: The Deep Battle Against America (New York: Columbia University Press, 2013).
  • Donald Holbrook’s The Al-Qaeda Doctrine: The Framing and Evolution of the Leadership’s Public Discourse (New York: Bloomsbury Press, 2014).


There are now some case studies and further analysis to answer this initial query.


Alastair Iain Johnston’s third generation of strategic culture focused on organisational studies. A relevant book that may link this third generation to the study of terrorist organisations is Vahid Brown and Don Rassler’s Fountainhead of Jihad: The Haqqani Nexus, 1973-2012 (New York: Oxford University Press, 2013).


I’m also looking at Peter Bergen’s reportage on Al Qaeda – so his forthcoming book United States of Jihad: The Untold Story of Al-Qaeda in America (New York: Crown, 2015) may also be relevant.

Australia’s Strategic Culture

Deakin University’s Ben Eltham and I have a new paper out in Contemporary Security Policy journal that draws on my PhD research. Taylor & Francis has the electronic copy available online now to journal and institutional subscribers; the print version is due out 23rd July.


Here’s the article’s abstract:


This article draws on fourth generation strategic culture debates to show the gap between the rhetoric of Australian defence and the more modest reality. Our analysis shows that these limits derive from tensions between national strategic culture and organizational strategic subcultures. There are serious debates in the nation regarding the preferred course of the Australian military and security policy. This article frames these debates by examining the ‘keepers’ of Australia’s national strategic culture, the existence of several competing strategic subcultures, and the importance of norm entrepreneurs in changing defence and national security thinking. Strategic subcultures foster compartmentalization, constraints, and bureaucratic silos that narrow national conceptions of security threats and opportunities, and impinge on the formation of coherent foreign and defence policy in relation to the Asia-Pacific region. This analysis shows that a distinct national strategic culture and organizational strategic subcultures endure beyond individual governments, placing potential limits on Australia’s interface with other Asia-Pacific strategic cultures in the future.


My thanks to Wooster College’s Jeffrey Lantis for organising the CSP special issue on strategic culture; the three anonymous and extremely helpful reviewers; and CSP‘s editorial and production staff.

Nowhere Place

Richard Cooke in Australia’s Monthly magazine:


In the United States, what you might call the “bore in the bar” theory of democracy – that it’s all bullshit – is starting to look more persuasive. In academia, it’s called the “Economic Elite Domination” model: the unhappy idea that democracies are oligarchies in drag. This theory was once unpopular but is now resurging, partly on the back of disquieting research by two American political scientists, Martin Gilens and Benjamin Page. After an analysis of 1779 legislative outcomes over a 20-year period, the researchers determined that “economic elites and organised groups representing business interests have substantial independent impacts on US government policy, while mass-based interest groups and average citizens have little or no independent influence”.

Little or no independent influence. Stew on that for a moment. [emphasis added]


Several years ago I read Jeffrey A. Winters‘ book Oligarchy (New York: Cambridge University Press, 2011). For Winters, economic elites rely on “wealth defense” via finance and tax advisers who establish low-tax, offshore structures to circumvent national tax codes. The United States and Australia are examples of Winters’ civil oligarchies in which a surface layer of democratic rhetoric hides the “wealth defense” reality. In some ways Winters updates arguments that I read two decades ago in the left-wing writings of Bertram Gross and Noam Chomsky.


Cooke acknowledges that news polls of politicians now rarely work. The asylum seeker / refugees issue is used by the major parties as wedge politics, and by the Greens as an identity-defining cause. Privatisation is opposed in news polls but remains popular when political advisers learn from asset management firms. Social issues such as gay marriage and voluntary euthanasia have undergone a progressive shift. Cooke notes that Australia is now caught in a temporal weirdness like Picnic At Hanging Rock:


It’s a strange contradiction. In economic terms, most of us value a vision of an Australia from the past, protected from the uncertainties of deregulation, more closed to immigration, and with the government more heavily involved in the economy. On the social side, our vision seems decades into the future. Taken together, they describe a place that’s nowhere to be seen. [emphasis added]



This “nowhere place” is a flux of different beliefs, values systems, and visions of preferred national futures.


Cooke finds a source of political renewal in independent candidates and the micro-parties. This appears reassuring but viewed through Winters’ analysis it is largely noise. One of the underlying reasons — and why Thomas Piketty’s Capital in the Twenty-First Century (Boston, MA: Harvard University Press, 2014) is a global bestseller — is that there is a growing wealth inequality between the political class and the Australian electorate that they represent. Cooke ends his piece noting the mutual derision that elite politicians and the general public hold each-other in. There’s no way out: it’s a closed system with little prospect of real change. In Winters’ world the oligarchs simply buy out or play off the independent candidates and micro-parties whilst retaining control of the real power and resources.


The potential way out of this is not necessarily what Cooke advocates but rather a Nineteen Eighty-Four Matrix / Zizek-ian awakening from these fantasies into the Real. Cooke’s Australians have a protectionist vision because economic growth for many has been based on speculative asset bubbles, and consumer debt that hedges low wage growth and rising inflation on food and living costs. In other words, as Winters would predict, the economic gains of the oligarchical class have not translated to the general populace in terms of owing wealth-generating assets with high return compositions (a useful primer on asset class returns). Cooke’s Australians rely on taxable salaries; the oligarchical class relies on capital gains income and legal tax minimisation structures.


Cooke would do his Monthly readers a greater service if he explained the oligarchs’ strategies and how the legal tax minimisation strategies worked. For that, there’s always the annual CCH Australian Master Tax Guide and Tax Institute membership. The rest of us can start to cultivate greater financial sovereignty through tracking what we spend our money on, and what wealth-creating assets we create or can invest in.

Joining the Secret Club That Runs the World


In my finance sociology research I’m interested in the life transition that some people make into trading and funds management. Kate Kelly’s new book The Secret Club That Runs The World: Inside the Fraternity of Commodities Traders (New York: Portfolio, 2014) features a narrative about the formative years of BlueGold Capital Management’s chief investment officer Pierre Andurand.


Andurand’s background features the kind of background noted in Ari Kiev, Brett N. Steenbarger, Doug Hirschorn, and Mike Bellafiore’s analysis of proprietary and hedge fund traders. Andurand was a champion local swimmer who joined France’s Institut National des Sciences Appliquees in Tolouse (p. 21). During the early dotcom speculative bubble Andurand studied “both market psychology and quantitative skills” (p. 23). Then, Andurand translated this skills-set into a series of jobs with Goldman Sachs, the Bank of America, and Vitol (pp. 26-30). On the surface this is a story about mental toughness, the ability to read markets, and finding your right organisational niche as a trader.


Kelly’s reportage also suggests other reasons for Andurand’s success. Andurand benefited from Goldman Sachs’ hiring practices to screen individuals and interview questions (pp. 24-25); Bank of America’s bonus culture (p. 27), and the lack of clawback provisions for when Andurand lost $US40 million due to the SARS outbreak in 2003-04 (p. 28). Whilst at Vitol, Andurand benefited from the firm’s data collection and market intelligence about commodities trade flows (pp. 30 and 33).  Andurand’s career coincided with a secular bull cycle in commodities (p. 32). Andurand left Vitol in May 2007 and founded BlueGold Capital Management in February 2008 (pp. 34-35).


There are thus two different narratives about Andurand’s life transition:


(1) The first narrative emphasises preparation and skills cultivation as the way to get selected into a hedge fund elite. This is the narrative found in most popular trading books that are aimed at retail traders. Kelly’s reportage reveals that Andurand benefited also from institutional capabilities, luck, and the right choices made relatively early on in his trading career.


(2) The second narrative emphasises the fit within the trader niche and the commodities supercycle that was underway during Andurand’s early career. Andurand again benefited from institutional capabilities, luck, and a decision pathway that led him eventually to found BlueGold Capital Management.


There are some commonalities in both narratives:


  • Making a series of decisions that have an edge / positive expectancy, and that compound over an extended time period (at least 8-10 years).
  • Harnessing institutional capabilities to gain asymmetric information and to create a sustainable niche in a competitive ecosystem.
  • Chance and luck emerging from financial markets as complex adaptive systems (in which funds and traders make decisions that interact across specific asset classes).
  • The role of allies in removing barriers and opening doorways.


That’s in part how elites sustain themselves: how to join the secret club that runs the world.

Martin Zweig’s Foresight on the 1987 Stockmarket Crash


This past week I read Josh Brown and Jeff Macke’s new book Clash of the Financial Pundits (New York: McGraw-Hill, 2014).


One of the most interesting chapters was about when investment manager Martin Zweig appeared on Louis Rukseyser’s Wall Street Week on Friday, 16th October 1987, and predicted a stockmarket crash. You can see Zweig’s prediction in the above clip, 6:38 to 8:36 minutes. In the clip Zweig uses a combination of analogical reasoning about past market crashes, and observational studies on current market events and money flows.


Black Monday occurred on Monday, 19th October 1987.


Zweig was a PhD graduate and econometrics expert who also influenced the trend-following trading subculture. Zweig coined two phrases — “Don’t fight the Fed” (Federal Reserve) and “The trend is your friend” — which influenced momentum and trend-followers. George Soros trader Victor Sperandeo adopted the first phrase; popular trading culture adopted the second phrase — often without original attribution. This is how rumours work through virality and social contagion.


The difference is that Zweig had expertise and skills that set him apart from retail traders, and from momentum / trend-followers.


A few years ago I found a copy of Zweig’s book Winning on Wall Street (New York: Grand Central, 1986 / 1990). It’s an interesting artifact from the Masters of the Universe period (Tom Wolfe) of 1980s Wall Street. I rank it alongside George Soros (The Alchemy of Finance) and Peter Lynch (One Up on Wall Street) as a personal theory of financial markets and a codified trading methodology.