The Naked Dollar has has written in the past about how insider trading laws are poorly written and there's a lot of gray area. But what of SAC? Is this an unfair government vendetta of some sort?
I don't think so.
The most damning evidence against SAC is, ironically, their track record. Not evidence that you can use in a court, mind you, but common sense evidence that they're not playing by the rules. I have seen their monthly numbers, going back 20 years, and to be blunt, they're not possible. SAC has averaged about a 30% return for 20 years. This, in and of itself, is remarkable, far exceeding the likes of Buffett or Soros. But what most observers miss is what SAC's gross returns have to be to achieve this.
SAC charges the highest fees I've ever encountered: a 3% management fee and a 50% incentive fee. To demonstrate how much these fees slash off the top, let's say they have a 10% year before fees, not bad result. But then subtract 3 points for the management fee and 3.5 points for the incentive fee, and the investor is left with a paltry 3.5% net return. Not so great, although SAC is presumably content because they have pocketed 65% of the return for themselves.
To produce a net return of 30% requires a gross return of...wait for it...63%. While this is not impossible to believe for a single year, or even two, it is wholly unbelievable for twenty. We're talking many standard deviations better than Soros, Buffett, Lynch, or anyone you care to measure against. More damning, they are doing this with billions of dollars, meaning much of their trading activity has to be restricted to highly liquid stocks, which are by their nature more efficient, i.e. less prone to the sort of mispricings that money managers can exploit.
I don't think so.
The most damning evidence against SAC is, ironically, their track record. Not evidence that you can use in a court, mind you, but common sense evidence that they're not playing by the rules. I have seen their monthly numbers, going back 20 years, and to be blunt, they're not possible. SAC has averaged about a 30% return for 20 years. This, in and of itself, is remarkable, far exceeding the likes of Buffett or Soros. But what most observers miss is what SAC's gross returns have to be to achieve this.
SAC charges the highest fees I've ever encountered: a 3% management fee and a 50% incentive fee. To demonstrate how much these fees slash off the top, let's say they have a 10% year before fees, not bad result. But then subtract 3 points for the management fee and 3.5 points for the incentive fee, and the investor is left with a paltry 3.5% net return. Not so great, although SAC is presumably content because they have pocketed 65% of the return for themselves.
To produce a net return of 30% requires a gross return of...wait for it...63%. While this is not impossible to believe for a single year, or even two, it is wholly unbelievable for twenty. We're talking many standard deviations better than Soros, Buffett, Lynch, or anyone you care to measure against. More damning, they are doing this with billions of dollars, meaning much of their trading activity has to be restricted to highly liquid stocks, which are by their nature more efficient, i.e. less prone to the sort of mispricings that money managers can exploit.
Cohen operates his business by lording over dozens of isolated trading groups, each pursuing their own strategies. Make the company money, and you are paid well. Lose money, and you're shown the door pretty quickly. It is speculated that Cohen has insulated himself from potential charges by having plausible deniability about the actions of the individual groups.Yes, they can go after him on something called "failure to supervise," but this is sometimes hard to make stick.
But here's the thing. The trade in question, the one Martomo has been charged with, was massive. The profit alone was $276 million. There's no way Martomo executed a trade of this size without approval from Cohen.
No way.
I hope SAC is innocent, I really do. The hedge fund industry doesn't need this kind of publicity when the vast majority of its players are law abiding citizens. But I don't know how it's possible to legally produce the returns they do, for as long as they do, with as much money as they do. Heck, it would be hard to nail returns like these even with inside information.
And there's this:
It's not illegal to own a big house, of course, and nor is it illegal buy stupid, overpriced art. But the Obama administration has created toxic atmosphere of class envy, bordering on hatred, and sustaining such a zeitgeist requires putting faces on your enemies. Guilty or innocent, Stevie Cohen makes for a very compelling villain.
This is why, one way or another, the feds will bring Cohen down. They may get a conviction, they may not, but no matter. Death of a thousand subpoenas is still death. Investors will bail. Personally, I can't believe they haven't already, but I guess 30% is hard to walk away from.
But here's the thing. The trade in question, the one Martomo has been charged with, was massive. The profit alone was $276 million. There's no way Martomo executed a trade of this size without approval from Cohen.
No way.
I hope SAC is innocent, I really do. The hedge fund industry doesn't need this kind of publicity when the vast majority of its players are law abiding citizens. But I don't know how it's possible to legally produce the returns they do, for as long as they do, with as much money as they do. Heck, it would be hard to nail returns like these even with inside information.
And there's this:
The Cohen Spread, Greenwich
And this... 
A $12 Million Stuffed Shark
It's not illegal to own a big house, of course, and nor is it illegal buy stupid, overpriced art. But the Obama administration has created toxic atmosphere of class envy, bordering on hatred, and sustaining such a zeitgeist requires putting faces on your enemies. Guilty or innocent, Stevie Cohen makes for a very compelling villain.
This is why, one way or another, the feds will bring Cohen down. They may get a conviction, they may not, but no matter. Death of a thousand subpoenas is still death. Investors will bail. Personally, I can't believe they haven't already, but I guess 30% is hard to walk away from.
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ReplyDeleteIf they are not and have not been playing by the rules, yes please bring them down and tell us how they did it, so that we can too.
ReplyDeleteLet's start leveling the playing field.
Wow! Such a grossly written article.
ReplyDeleteI find it borderline madness on writer's part to proclaim someone guilty of insider trading - just because his track record is great. Probably Scott doesn't know that Renaissance Medallion fund track record is better than SAC, and that is also for 20 yrs.
It is clear that author has a personal vendatta against Cohen, maybe he couldn't get the job when he applied to SAC.
@Anonymous - I am, indeed, familiar with Renaissance Medallion, and if you knew it well you would be aware that they only charge a 2/20 fee structure, the industry standard, which means their GROSS returns are far, far below what SAC is doing.
ReplyDeleteSecond, my point is not simply that they have high returns. There have been six indictments, the latest one being devastating. The high returns by themselves do not constitute proof, but they are so far outside the distribution of all other managers that they are suggestive of something misconduct.
Lastly, I have never applied for a job at SAC and I have never met Cohen. As I stated, I would prefer it turn out that I am somehow wrong, because the industry does not need any more villains.
medallion fund actually charges 5% management and above 30% performance fees.....
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