SAC Capital becomes Point 72 but can it sustain the exceptional 30% p.a. returns?

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It seems that our old friend “Stevie” Steve Cohen of SAC Capital is back! Retaining his current headquarters at 72 Cummings Point Road but under the new name of “Point72” – a sop to the firms physical address.

Ten years after the SEC’s crackdown on SAC’s portfolio managers started, the eponymous hedge fund was forced to close its doors to external investors and become a de facto “family office”. Prosecutors have brought numerous charges against SAC’s former portfolio managers and analysts (in this case curiously less of an “anal”-yst than the norm!), with the latest being Matthew Martoma who was ultimately convicted of both conspiracy and securities fraud earlier this year and is presently in the unfortunate position of awaiting his final sentence.

While there have been, incredibly, more than 20 stocks involved in the insider trading cases against SAC, the case in which Martoma was implicated was by far the biggest.

Martoma was said to receive insider information from a so called “network of experts” which led him to, timeously (!), not only go long on behalf of SAC in positions in drugs firms Wyeth and Elan but, in the ultimate display of greed and hubris, and which ultimately incriminated him  – going short just ahead of poor news. These trades delivered $276m in ill-gotten profits to the company with several million to Martoma as a bonus.

In the end, prosecutors were able to force a deal with SAC in which the company would close its business to outside investors and agree to pay a whopping $900m in civil penalties to settle several insider trading cases against the company.

While the Feds were happy to have success in bringing to the court cases against SAC, justice may still be at stake as, while Martoma is himself awaiting sentence, Steve Cohen has not, thus far, been directly implicated either in that case nor in any other in more than 20 years of business. Prosecutors have seemingly not been able to “scare” Martoma at any point into “turning canary” and so the chances of the Feds pinning something concrete on Steve Cohen seem to be vanishing.

And so, SAC starts again as a new business under the name Point72. Billion dollar question however is – can the new Point72 track the 30% average returns recorded by SAC over the last 20 years..?

There are two big issues. First of all, if the number of past convictions the SEC brought against SAC can be used to track, let’s say, the “degree of illicitness” of past returns, then with a decreased “degree of illicitness” returns may very likely fall to earth. It is doubtful that there will be any “sailing close to the wind” by the new outfit given the recent “heat” by the Fed’s of course. However, if future returns are much more muted than they have been, then the “answer” many people have been looking for as to just how these returns could have been generated will be largely out there.

The second issue is that in the past SAC was able to obtain huge leverage on its own assets which contributed to the exceptional returns. The last statement disclosed by the firm shows the company was holding $12b in assets while having a total exposure around $41.5b, or almost four times its assets. Can the new Point72 get the same kind of leverage? Only time will tell. However, reduced leverage will supply a convenient excuse for more muted returns…

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