Wall Street's Obsession: SAC's Redemption Total
Wall Street is obsessed with the fate of SAC Capital Advisors, at least that’s the message conveyed by a story in today’s New York Times. Monday was the deadline for investors in SAC Capital Advisors hedge funds to notify the firm plagued by insider trading investigations if they wanted to withdraw their money.
Earlier this year investors had withdrawn about $1.7 billion of the total $15 billion managed by the firm.
Suspense has been building around the withdrawal deadline because Monday was the last day in the quarter for clients to request redemptions from the firm, which is now facing more intense insider trading investigations. After SAC’s senior executives — including the chief compliance officer and head trader – received grand jury subpoenas, the firm told its clients that it was no longer cooperating with the government and would no longer provide them with updates.
Part of the stress for investors is whether the government will file charges against Cohen, who has not been accused of wrongdoing. Nine former SAC employees tied to insider trading and four have pleaded guilty. An insider trading case against Matthew Martoma, a former senior portfolio manager, is pending. As a result of this bad karma, The Blackstone Group, its largest outside investors is reportedly pulling billions of dollars from SAC Capital Advisers after its senior executives received a grand jury summons. Another investor, Ironwood Capital Management is reportedly terminating its relationship.
Depending on the magnitude of the investor exodus, SAC could be left with $1 billion in outside money, sources told the New York Times. Of the $15 billion in assets managed by SAC, an estimated $8 billion belongs to Cohen and $1 billion belongs to employees. If there were a massive exodus, this would hurt SAC Capital since the firm relies on its investment fees to support its sprawling infrastructure and staff of 1,000 employees. As compared to the standard “2 and 20” fees charged by most hedge funds, SAC charges investors a 3 percent management fee and takes 50 percent of the profit, which are among the most expensive in the industry. Investors were supposedly happy to pay these high fees because SAC has delivered stellar returns, on average of 30 percent for the past two decades, reports the Times.
But if the investor asset base were to drop significantly, there is talk that Cohen could return the outside money left and convert the firm into a family office that manages his own wealth.
The potential departure of SAC Capital Advisors from the hedge fund universe could spell trouble for Wall Street firms that rely on its trading volumes and hefty appetite for leverage.
A major reason for all the attention is that a severely diminished SAC could take away revenues from brokerage firms that cater to SAC. If SAC founder Steve Cohen decides to return all outside money to investors and manage his own fortune, that move could have consequences for trading volumes, borrowing and prime brokerage, according to the article. For instance, while most hedge funds have two prime brokers, SAC reportedly employs five prime brokers.
From The New York Times article:
To juice its investment returns, SAC borrows heavily from banks, which earn big fees on the loans. The fund borrows, on average, about $3 for every dollar in the fund. At $15 billion managed, SAC had a staggering $45 billion in buying power.In the current low-volume environment, banks would be reluctant to lose a lucrative customer like SAC with its aggressive, high turnover style of trading, which makes it a huge generator of commissions.
But sales traders also see a “silver lining.” If SAC were to close its hedge fund operations, then Cohen would manage his own fortune and continue to funnel trades through the street. And if layoffs were to happen, many of the SAC portfolio managers would start their own hedge funds, though the stigma from insider trading allegations is unknown. And as one commentator told the New York Times, surely those investors exiting SAC will invest their money with other hedge funds, so Wall Street wins either way.
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