Steve Cohen’s SAC Capital Hedge Fund In Trouble Again

Matthew Martoma

SAC Capital, the hedge fund company owned by Wall St trader Steven Cohen is falling further into trouble as investors ready to pull their capital out of his funds on real concerns about his company ultimately being prosecuted by US authorities on recurrent insider trading scandals.

US authorities have, in recent years, successfully prosecuted several former SAC fund managers for insider trading. The SEC found a damning trail of illegal trading and in November last year brought a new case against Mr Matthew Martoma – a former SAC portfolio manager. Martoma is accused of illegally trading in the shares of two pharmaceuticals companies – Elan and Wyeth and which delivered several hundred million dollars of profits to SAC Capital. Mr. Martoma allegedly traded on material non-public information about impending drug-trials, opening long positions before those companies reported better than expected results on the drug trials and, perhaps putting the nail in his coffin, then reverting to short positions on alleged information surrounding problems during the trials. Elan and Wyeth dropped 42% and 12% respectively on the trial announcements. In the same year Martoma took home $9 million in bonuses…

Insider trading scandals within SAC have been many over the last few years and it looks to us as if the US authorities are finally about to get their man. Investors are right to be concerned with top management being charged over insider trading and, if this is the case, SAC eventually falling apart.

SAC has generated average annual returns of 30% since its inception in 1992. That’s more than 20 years of beating the market and over the years, many people have asked questions about the ability to generate such substantial returns. The company currently manages $14bn in assets and a large part of this is actually Steve Cohen and his family and employee’s so the likelihood of a full scale forced liquidation and potential market disruption looks slim but still the probability of rising assets under management and outsized returns going forward look to be diminishing by the day.

Still, companies like Societe Generale, Titan Advisors and possibly Citibank (not confirmed), have already began pulling out funds from the company. SAC imposes restrictions on the amount of redemptions – allowing for a 25% redemption per quarter.

We will watch developments here with interest, as one of the biggest “alpha” generators of the last 20 years may be about to have his myth exploded.