The hedge fund giant SAC Capital Advisors is preparing for a possible wave of withdrawal requests from its clients amid the intensifying regulatory scrutiny over its trading practices.
Investors have about a month to decide whether to pull out money from SAC, the $ 14 billion fund owned by the billionaire investor Steven A. Cohen.
While posting one of the best investment track records on Wall Street across two decades, SAC has attracted billions of dollars from pension funds, wealthy families and other money management firms. But since late November, when the government brought its latest criminal insider trading charge against a former SAC employee — a case that it calls the most lucrative insider trading scheme ever uncovered — those clients are weighing whether continuing their relationship with the fund is worth the reputational risk.
The fund has a standard quarterly redemption deadline, and the next one will fall on Feb. 15. Already, several of SAC’s clients, including Lyxor Asset Management and Titan Advisors, have notified the fund that they intend to withdraw their money. Others, like Skybridge Capital, have told SAC they will continue to invest with the fund.
Questions remain about the intentions of several of SAC’s well-known investors, including the Blackstone Group. With about $ 550 million invested in SAC, Blackstone is one of the fund’s largest outside investors. A Blackstone spokesman declined to comment on Friday.
The fund has told its employees that it could face at least $ 1 billion of withdrawals, according to a report in The Wall Street Journal on Friday. A spokesman for SAC said it was premature to speculate about redemptions.
While a spate of redemptions can have a crippling effect on a hedge fund – forcing it to sell its holdings at unfavorable prices – SAC is more insulated than most of its competitors from the ill effects of client withdrawals. That is because of the $ 14 billion that SAC manages, only about 40 percent of that comes from outside clients. The rest — a fortune of about $ 8 billion — belongs to Mr. Cohen and his employees.
Also, SAC has protected itself with a stringent redemption policy. The fund’s clients can redeem only 25 percent of their investment each quarter. So, for example, if a client has $ 200 million invested with SAC, and asks for its money back by the Feb. 15 deadline, SAC would return $ 50 million every three months beginning in March. That way, SAC is protected from having a forced liquidation of its investment portfolio.
Still, an investor exodus can have a crippling effect on a hedge fund, often causing it to shut down. Last month, Diamondback Capital Management, another hedge fund that became ensnared in the government’s insider trading investigation, closed after its investors sought to pull out roughly one-quarter of the fund’s assets.
Diamondback’s management decided that the most prudent course of action was to wind down rather than lay off employees and restructure the firm to manage the reduced amount of money.
Like Diamondback, SAC has become embroiled in the government’s broad crackdown on insider trading at hedge funds. At least seven former SAC traders and analysts have been tied to illegal trading while at the fund. And the SEC has warned SAC that it might filed a civil action against the fund for failing to properly supervise its employees.
Mr. Cohen has told his employees that he believe that he and his fund have at all times acted appropriately, and that the fund has fully cooperated with the government’s investigation.
In recent weeks, SAC has gone on a charm offensive in an attempt to hold on to clients. The fund has told its investors that they would not be responsible for any penalties incurred as a result of any of the government’s legal. Instead, SAC has told them, Mr. Cohen and his management company would pick up the tab.
Though Mr. Cohen has told his friends and employees that he remains committed to managing money for outside clients, he could ultimately decide to follow in the footsteps of several fellow billionaire hedge fund managers.
A number of star investors – having already amassed billions in personal wealth – have decided to get out of the business of managing other people’s money. In recent years, for example, both George Soros and his onetime protégé, Stanley Druckenmiller, returned money to clients and set up so-called “family offices” in which they manage their own fortunes.