SAC Capital Advisors was founded by Steven A. Cohen in 1992 in Stamford, Connecticut. Although the initial outlay in the fund was a mere 20 million dollars, which was actually a combination of Mr. Cohen’s own money and some of his early investors’ capital, the fund today is worth around a towering 16 billion dollars.
The fund has overall averaged a return of 30% gross over the last two decades, noticeably outperforming the S&P 500 by 22% since its inception. Moreover, in the crisis of 2008 it lost 27.56% thereby outperforming the S&P 500 by more than 1000 beeps, that being the only significant loss faced by the fund in its history
Mr. Cohen was born in 1956 to a dress manufacturing father and a piano teacher mother, both of whom apparently had no connection to or interest in the trading of markets. Instead, it was Mr. Cohen’s penchant for the game of poker that he used to play so fondly in his high school days, which he credits for his astute risk taking and his superior quantitative trading traits.
In 1978, Mr. Cohen earned an economics degree from Wharton Business School of University of Pennsylvania. Following his instinct for calculating odds in cards, the very first job he got after his college was as a junior proprietary trader in the options arbitrage department of Gruntal & Co. Quickly, he climbed the trading ladder to manage 75 million dollars’ worth of a portfolio and a team of six traders to boot. In a short span, by 1984, Mr. Cohen had created his own trading group at the company.
Mr. Cohen stayed loyally with Gruntal & Company to sharpen his trading skills, until he launched his own hedge fund with the rather palpable acronym of SAC. Unlike his singular and consistent career, Mr. Cohen had never held on to any position for a long time while heading the trading team at Gruntal, instead trading in and out frequently as he deemed fit. Similarly, SAC Capital followed an active trading strategy at the start, aggressively trading stocks not long after buying them, but now that strategy has evolved into a multi-strategy investment philosophy that focuses on research and risk management.
Within the current investment scope, many strategies are followed by SAC Capital, some of these being fundamental in nature and others concentrating on technicals of long/short equity portfolios; further expansion has occurred to include global quantitative, fixed income and credit, and global macro strategies, also taking advantage of the convertible bond and, more recently, emerging markets.
Accordingly, the fund is very diverse and has over 1800 positions in different sectors, majority of these positions being in large cap stocks (about half) while the remaining are divided into midcap (35% to 40%) and small cap (10% to 15%).
By virtue of its size and spread across many positions and markets, SAC Capital is today one of the major traders on the Wall Street accounting for about 1% of the total shares traded at NASDAQ and close to 3% at New York Stock Exchange every day, easily trading up to 20 million shares a day. This translates to the fund being one of the ten biggest customers of Wall Street paying 150 million dollars every year in fees and commissions to the brokers.
Indeed, these gargantuan commissions and fees have led to accusations that they play a vital role in SAC Capital’s trading superiority by allowing them to access information before anyone else does. It is apparent that Mr. Cohen got his rapport with the brokers by buying the secondary offerings from the brokers and helping them earn huge commissions, but that these commissions place SAC Capital in a position to garner a lot of primary information unavailable to their peers is at best a conjecture. The firm indeed acknowledges that it tries to take advantage of the information flow from its extensive sell-side relationships, but only to the extent it is public information.
Because of this intimate relationship with Wall Street brokers, Mr. Cohen has had his fair share of controversies about insider trading, which includes a lawsuit from his ex-wife and a probe into his trades by Securities and Exchange Commission. All these allegations, though, have amounted to naught, and only ex-employees of the fund have actually been charged and arrested by SEC for insider trading (with the exception of a technology analyst that was arrested in January 2012).
To be fair, SAC Capital employs and “graduates” so many traders that it cannot be blamed for producing some bad apples. The fund has 40 portfolios and each portfolio is run by up to 15 people, comprising of traders and analysts executing different strategies. The primary strategy followed by most of the portfolios in the fund is long-short equity. Overall, about 800 people are employed by SAC Capital Advisors, 118 are portfolio managers 158 are research analysts and 35 are in trade execution. The managers are given the discretion to invest between $300m to $500m staying in the risk guidelines defined by the fund. Mr. Cohen guides his large team by putting intensive focus on reading the tape and studying the trends to see how money is flowing in and out of the stocks, and his traders are trained to cut the losses by closing positions in the stocks losing value.
Mr. Cohen’s aptitude for trading overall, whether cutting losses or taking profits, has so far shone through allegations of insider trading and earned him the nickname of “the king of hedge funds” for his superior returns. In the final analysis, “Stevie” (as he has been nicknamed on Wall Street, or dubbed as a “Billion Dollar a Year Man” by Wall Street Journal) continues to profit from following good old tape-reading trading strategies that hark back to his poker playing days.
“Hedge funds are bigger than they used to be. Their positions are bigger. I worry that if everyone were to sell, could we get out?”
“I was fascinated when I found out that these numbers were prices and they were changing every day.”
“You could see volume coming into a stock and get the sense that it was going higher.”
“But everything I do today has its roots in those early tape-reading experiences.”