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.

5th July 2013: Felix Salmon on the Winklevii’s Bitcoin Trust Fund

Reuters’ Felix Salmon nails why the Winklevii’s SEC filing for a Bitcoin Trust Fund is a bad idea:


Still, if you want to own bitcoins, and you never want to spend your bitcoins, and if you want to pay the Winklevii for the privilege of looking after your bitcoins on your behalf, and if you trust that the Winklevii, after putting out a huge shingle saying “millions of dollars worth of bitcoins stored here”, won’t get hacked and lose all their coins, — then, well, then I’m afraid I have bad news for you. Which is that the SEC will never, ever, approve this product. After all, this is an asset that senators want to ban, an asset which is probably illegal under US law, and an asset that is mainly known for its ease of facilitating money laundering, tax evasion, and the purchase of contraband material. It’s hard to see why the SEC would do anything whatsoever to legitimize that asset as an investible asset class.


Post-GFC, media pundits are now far more skeptical about new financial innovations and their supposedly disruptive potential.

2nd July 2013: Financial Bloggers vs. Bank Fees

I left freelance journalism in 2004 after a decade of work. My last piece filed was a preview of Google’s initial public offering. I could already see freelance rates were falling: they are now $US12.50 an hour or less. I learned whilst editing and writing for the alternative news website Disinformation about commitment bias, and paid my dues in deliberate practice (or: expectation, framing, hindsight, and outcome biases).


So, I was amused this week to read about how two of my favourite financial bloggers — Slate‘s Matthew Yglesias and Reuters’ Felix Salmon — dealt with ATM fees and cheque account overdrafts. Salmon goes into detail about Citibank and transatlantic differences in bank account management. It’s an elegy for retail banking’s demise. Yglesias and Salmon also illustrate that these little details are important to bloggers and freelance writers who make small incomes from writing. Retail bank fees can detrimentally impact or even wipe out a publisher’s payment.


Keep an eye on your bank account fees. Keep your financial affairs in order. You’ll write more. You’ll feel happier. (Thanks, James Altucher.)


Or, if you’re the Winklevoss twins, you’ll waste investors’ money on a Bitcoin trust fund (belief, hot-hand, irrational escalation and optimism biases). Their SEC filing.

28th June 2013: Snapchat’s VC Deal

Fortune‘s Dan Primack and Reuters’ Felix Salmon have two great post-mortems on this week’s Snapchat venture capital deal. Primack stresses the misalignment of VC (venture capital) and LP (limited partner) interests in how transactions are structured. Salmon points out that VC deals are framed for “growth and exit” rather than “entrepreneurs building for the long-term.” The exchanges between Primack and Salmon — and between their commenters — are an example of what can make blogging a faster learning experience than traditional sources. Time to brush up on your copy of Venture DealsThe Business of Venture Capital, or Term Sheets and Valuations.

5th January 2013: Al Jazeera America


ThomsonReuters’ Felix Salmon and TNR‘s Rebecca Dana have some fascinating postmortems on Al Jazeera’s $US500 million deal to buy Al Gore’s Current TV. Both authors contend the deal gives Al Jazeera ‘soft power’ access to between 40 to 60 million American households and strengthens Qatar’s negotiation position with US cable television distributors. Each credits Gore with facilitating the final negotiations and providing a premium that likely increased the deal value. The potential gridlock is that US cable television distributors are not Current TV fans; Gore’s network did not have a large audience, and many of its programs are up for contract renewal; and the new Al Jazeera America will be kept separate from Al Jazeera English. However, Qatar’s Emir has the capital to possibly acquire other cable television networks. We’ll see if the Current TV deal suffers from the winners curse . . .

20th August 2012: Artistry + Luck

Is success in the arts largely due to luck? Reuters blogger Felix Salmon has argued so in a blog post about why people should choose a different career with better probabilities of success. Salmon was responding to philosopher Nassim Nicholas Taleb’s latest paper on ‘spurious tail’ (luck) dynamics in the investment industry. Taleb argued that new trainees will be out-competed by an existing power elite that has succeeded due to ‘winner-take-all’ effects, fat-tailed randomness, scalability, and luck. Taleb’s insight holds for academia and Salmon felt it was relevant to artists as well. Investment manager Joshua Brown made two counter-arguments: (1) investment banking has survivorship bias; and (2) sustained artistic success usually requires talent. I wish that Salmon had read Nicholas Reschler‘s Luck or was familiar with the innovation case studies in Simon ReynoldsRip It Up And Start Again on the 1978-84 Post-Punk or New Wave period. Reynolds highlights that in many cases the New Wave success was due to a combination of skill; awareness of aesthetic and sociopolitical currents; being in a networked city like London or New York; gaining mentors and producers in the music industry; and using ‘risk ignition’ to proactively deal with novelty.

26th June 2012: How and When To Blog For Academics

Monash colleague and fellow PhD student Andrew Zammit tweeted me about this Felix Salmon piece on Jonah Lehrer, blogging, and self-plagiarism:


Firstly, think of it as reading, rather than writing. Lehrer is a wide-ranging polymath: he is sent, and stumbles across, all manner of interesting things every day. Right now, I suspect, he files those things away somewhere and wonders whether one day he might be able to use them for another Big Idea piece. Make the blog the place where you file them away. Those posts can be much shorter than the things Lehrer’s writing right now: basically, just an excited “hey look at this”, with maybe a short description of why it’s interesting. It’s OK if the meat of what you’re blogging is elsewhere, rather than on your own blog. In fact, that’s kind of the whole point.

Secondly, use links as shorthand. Kouwe and Lehrer were both brought down by the fact that they felt the need to re-write what had already been written elsewhere. On the web, you never need to do that. If you or someone else has already written something well, just link to that, rather than feeling the need to repeat it.

Thirdly, use the blog to interact with your peers, rather than just primary sources. There are hundreds of great science and ideas blogs out there already; start reading them, and be generous about linking to them. Your readers will thank you. When you see an article you wish you’d written, link to it and say so. When someone finds a fantastic paper and writes it up in a slightly incomplete way, credit them with the great find, and then fill in the blanks. When two or three people are all talking about the same thing, sum up what the debate is, and explain where you stand.

Fourthly, iterate. Lehrer is a big-name journalist at a major publication: when he writes stuff, people respond, often on their own blogs, and often with very keen intelligence. Link to those people, learn from them, converse with them via the medium of blog, and use that collaboration and conversation to hone and further develop your own ideas. Treat every blog post as the beginning of a process, rather than as the end of one.


I’ve previously argued that today’s academics should blog. My reasons why mirror Salmon’s observations:


1. Blog to capture initial ‘seed’ ideas. Some academics struggle to get ideas for journal articles. They may follow the route of turning old conference papers into articles or relying on old data-sets. In contrast, I have enough article ideas for the next five years. I looked over unreleased material from the past 10 years and found possible ideas for 80-100 potential articles in various fields: media, foresight, counterterrorism, and technology. In some cases, I have fragments and outlines of these potential articles. In other cases, my online work dwarfs the number of published articles I have. Blogging regularly provides a way to capture these initial ‘seed’ ideas and to see over time whether or not they are worthy enough to become articles or if they just remain fragments. It provides a way to test and play with ideas that can be discarded quickly. Try and ‘fail fast’. It allows further thought than the 140 characters of a Twitter tweet. I sometimes have to remind people that Sir Tim Berners-Lee envisioned the World Wide Web as a communications medium for researchers to share information and not just to share Facebook posts.


Some academics have two counter-arguments that are relevant. First, blogging wastes valuable writing time and has little impact. Second, blogging usually involves half-formed or fragmentary ideas. I argue below that blogging helps academics to write more and can have specific impacts that are not yet measured by promotions committees but that are very real and observable. As a developmental editor the problem I encounter with academics is not the workloads model but rather their lack of a regular writing regimen, time management, and project management skills. I know this is the case because academics with these skills can still work within the constraints of the workloads model to achieve the outputs required by their Minimum Standards of Academic Levels criteria in their job contracts. I suggest that blogs are treated as part of the ideation process — and that the drafting and re-editing of doctoral dissertations and journal articles is treated as a separate, parallel process.


Some academics still don’t take this view seriously. Their focus is on A* and A level journals and perhaps major book publishers. I respect that view and I know how much hard work goes into that material, and the high standards of research design that are required. Unfortunately, some university administrators use this focus as a performance goal without understanding the time and effort involved. I see a big gap between the rhetoric and the academics who can actually achieve these goals. For example, I have seen CVs with many publications that, on closer examination, turn out to be vanity book publishers and questionable international journals: a sucker’s game. I also disagree with the ‘scarcity’ view that underpins some academic publishing. I’m comfortable with showing the ‘messiness’ of research as it unfolds. Academics can still have a minimalist blog or social media presence to alert other researchers and the general public to their work. Many people do not have access to institutional journal subscriptions but might read and value an article version that is deposited in a university repository.


2. Blog to monitor a discipline or epistemic community. Tufts University political scientist Dan Drezner recently joked that political scientists were now more ‘relevant’ because they blogged. Zammit’s own site has an extensive blogroll and interesting articles such as one on jihadism datasets that I wouldn’t probably have known about had he not taken the time to write about them. I now scan Tadas Viskanta’s blog Abnormal Returns on a daily basis when assessing market conditions for my portfolio. I have learned from the Research Whisperer and Thesis Whisperer blogs. I have dialogued with friend and colleague Roy Christopher on writing, rewriting, and how academia can kill writing: an important discussion for professional self development. Spending an hour a week means that I’m across what these experts and communities are up to. Their blogs also capture different kinds of information than the searches I do on the Scopus and Web of Science databases, and in the relevant academic journals in my fields of research.


3. Blog to control your public expertise and also to raise the visibility of published articles. I’m a research administrator so my employer university hasn’t given me a public webpage on their site. Instead, I’ve cobbled together a web presence through this personal site; profiles on Twitter,, Google Scholar; and sites like The Conversation. I comment about research in-progress and post relevant news items. I try to turn each article’s publication into a personal ‘release’ event similar to music and film. Blogging has led to several productive collaborations, to higher article citations by international research teams, and to the opportunity to do blind peer review for several international journals. It enables me to comment on new developments not covered in an article. This is a ‘work around’ for the significant delays in journal publishing and also maintains the ‘currency’ of individual articles.


4. Keep your major projects separate. I try and blog several times a week or spend 10-15 minutes compiling a daily links list. (I did that for eight years at Disinformation — see the 1998-2003 site archives — so I can do so very quickly.) I also have several articles and a PhD draft that are in-progress. For me, the blog serves as a daily exercise to get writing and to capture relevant information that won’t necessarily be included in the articles or PhD. I found that drafting, re-drafting and understanding quality scholarship in a field is pivotal to the PhD, whilst understanding current debates and editorial formats is crucial to journal publishing. It’s OK to keep your major projects separate or ’embargoed’ if it helps you to complete this research. Just use blogging and social media as a tool to develop your writing prowess and to self-promote your expertise and research outputs.