Steve Cohen’s Black Edge

Steve Cohen (Forbes)
Steve Cohen (Forbes)

On 19th July 2013, the Securities & Exchange Commission filed an Enforcement Notice (PDF) against SAC’s Steve Cohen, alleging failure to supervise the hedge fund’s investment managers. The SEC has targeted Cohen for over a year. Its pre-case featured in Charles Gasparino’s book Circle of Friends (New York: HarperBusiness, 2013). Veteran business journalist Bryan Burrough interviewed Cohen in 2010, and then looked at the US prosecution case in 2013. Cohen’s lawyers later released a ‘white paper’ rebuttal of the SEC’s claims (PDF).

 

Cohen has a fearsome reputation as a trader. He hired the late performance psychologist Ari Kiev to mentor traders, and featured in Kiev’s book The Mental Strategies of Top Traders: The Psychological Determinants of Trading Success (Hoboken, NJ: John Wiley & Sons, 2010). But now the SEC claims that Cohen’s trading prowess comes from ‘black edge’: insider trading based on material, non-public information from expert networks and other sources.

 

The case is filled with interesting details for hedge fund and trading watchers. It might become a PhD case study or academic paper for me.

 

Reuters’ Felix Salmon has a great overview of Cohen’s influence and why the SEC’s case may shake up hedge funds:

 

Cohen has never been easy to invest with. He deliberately charges some of the highest fees in the industry — his 3-and-50 makes the standard 2-and-20 seem downright generous. And even then it has historically been very hard to get him to agree to manage your money. Cohen makes his fund inaccessible for a reason: he knows how hard it is to scale the astonishing results he’s been posting, year after year, and that at the margin, the bigger he gets, the lower the returns he’s likely to see.

But at the same time, there’s no way that he can run a $15 billion trading book on his own. He has roughly 1,000 employees, of which about 300 are investment professionals. And if you’re one of those professionals, you have one of the hardest jobs in the business.

The way that SAC works is that Cohen gives his individual traders, and teams, their own trading accounts, with millions or billions of dollars: the traders who make the most money get the biggest allocations. Traders get paid a percentage of the profits they make, which makes them compete against each other: in order to be successful at SAC it isn’t good enough to make good profits. Instead, you have to make better profits than any of the other traders — who themselves are some of the best in the business. If you can’t do that, you get fired. If you can do that, you get to manage ever-increasing amounts of money — plus, Cohen will mirror your positions in his own account, the largest at the firm, giving you a shot at extra profits over and above the ones generated by your own positions. In the immortal words of David Mamet, first prize is a Cadillac El Dorado. Second prize is a set of steak knives. Third prize is you’re fired.