There is a fascinating cover story in the April Bloomberg Markets magazine about Steve Cohen, head of the firm whose name bears his initials: SAC Capital.

You may have missed this when it was at Bloomberg online, unfortunately titled as “Cohen Trades Secrecy for Golf With Investors Lured by 30% Gains.” The magazine’s cover story is more appropriately “Steve Cohen’s Trade Secrets.” Unlike the Bloomberg.com piece, its chock full of great photos and charts.

Some of the details revealed in the article about Cohen’s firm:

• Its Stamford, Connecticut trading floor houses 180-people;
• The firm has 800 employees, including 100 portfolio managers;
• The trading floor is kept at precisely 69 degrees year round;
• SAC Capital buys and sells 100 million shares a day — 1% of total US market volume;
• Typical holding periods: 2-30 days;
• SAC’s fees are unusually high: 3/50, versus the industry standard 2/20;
• Cohen dislikes noise, so the phones on the floor don’t ring; they light up;
• SAC has averaged 30% annual returns for 18 years;
• The fund’s leverage is (rumored to be) about 4 to 1;
• 2008 was his lone negative year at -19%;
• SAC manages $12 billion, down from $18 billion at its peak;
• Numerous small teams manage $300-500 million each
• Cohen accounts for 10% of the firm’s profits — years ago, he did all the heavy lifting, accounting for 50% of SAC’s gains.

The entire article — especially the dead tree version — is worth a read.

>

Source:
Steve Cohen’s Trade Secrets
Katherine Burton and Anthony Effinger
Bloomberg Markets, April 2010
Online version: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a0dqXyjnQ6dg

Category: Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

42 Responses to “SAC: 30% Gains Annually for 18 Years”

  1. bsneath says:

    This is exactly why the equities markets have turned into casino gambling. $12 billion leveraged at 4x means that SAC has enough fire power to move the markets for self fulfilling gains. It is best to not even attempt to trade against them.

  2. budhak0n says:

    And he won’t answer your or my call, oh well I guess he didn’t see the blip.

    In other words, this and a buck at the Wawa will get me a cup of coffee but have no fear I’m not that negative, just extraordinarily jaded.

    Haha

  3. Chief Tomahawk says:

    30% per year gain is incredible. That said, I wonder why he was down 19% in 2008? Was he fearing money markets were going to collapse so it was better just to maintain an ownership stake in companies rather than go all cash? Just seems a little off how someone could so accurately trade the markets for so long yet take a beating when a lot of educated people saw a lending bubble (yes I know there were folks about like Ken Fisher of Fisher Investments with buy and hold philosophies…)

  4. Marcus Aurelius says:

    Yes, Chief Tomahawk: “incredible” is the word.

    We’ll be reading more about this when the expertise or good luck or a combination of the two turns out to be something a little less savory.

    My basis for this?

    Madoff and Mark McGuire.

    Something ain’t kosher.

  5. Marcus Aurelius and Chief Tomahawk:

    You are drawing the wrong conclusion from the various scandals

    If you cannot tell the difference between a guy who used a 82 year old accountant in the middle of Podunk, Nowheresville, who hired no one but immediate family, who never executed a single trade . . .

    Versus

    A heavily audited, highly visible trader wtih a real audited track record —

    Then you best stay out of any field that requires comparisons or any nunace.

  6. Chrisbo says:

    How can they average 30% per year for the last 18 years, yet be managing 33% less than at their peak. They supposedly only had a bad year in 2008. Why would people leave that record? Or is the 30% “gain” before they grab 18% of it for themselves?

  7. Chrisbo

    He is notoriously secretive, and following Madoff scandal, many people pulled their money out of anything that wasn’t totally transparent.

    You sound as if you are presuming some rationality on the part of scared, wealthy humans. That would be an analytical error on your part . . .

  8. dead hobo says:

    Pardon my ignorance, but I have a question about the 2/20 and 3/50 commission structure.

    My elderly relative was asked to pay a 2% flat fee on average balance, up or down. I really don’t know about the 20% of gains because I thought the 2% fee in this market for a person over 80 years old is high risk. There’s likely no capital gains potential in bonds or stocks except possibly long term for stocks (bonds are at a bubble peak) and an immoral scam. Asking a person over 80 to plan long term for capital gains just for commission is theft.

    About the 20: I understand that the masters of investment want to claim 20% of customer gains for their own. Do they issue credits for 20% of losses to be applied against possible later gains if they lose money? In other words is a part of the gain taken as a right, but is the loss all the customer’s responsibility?

  9. alfred e says:

    IMHO, SAC is doing exactly what Cramer discussed in a video someone recently posted. They are pumping the market to their gain.

    Don’t suppose it’s an issue for those dumb enough to play against him in the stock anf bond games.

    But when it’s commodities you pump you are stealing from the poor and defenseless.

  10. MayorQuimby says:

    If it sounds too good to be true, it probably is.

  11. MayorQuimby

    I am not sure if that cliche is applicable — that presumes some fraud or misreporting of returns, which is not the case here.

    Unlike Madoff, we have tons of evidence he actually trades: SAC is audited, and accounts for a substantial % of actual daily trading volume (thru GS, MS, JPM).

    You may be conflating “Good returns” with “Too Good to be True.”

  12. dead hobo says:

    alfred e Says:
    March 7th, 2010 at 10:10 am

    IMHO, SAC is doing exactly what Cramer discussed in a video someone recently posted. They are pumping the market to their gain.

    reply:
    —————
    Them and a few others. When you control 1% of the market, it’s not spread broadly. It’s concentrated and money + velocity = inflation. Presto! Pumped stocks via empty calories. Since it appears most sellers are gone and only appear when it’s a gameful opportunity or things look very toppy, the tendency is for a market with sticky prices that resist falling far or abruptly. They create an artificial market and an artificial floor. A day or very short term trader could use these characteristics to make money on a range bound market. Someone who is protecting family wealth would be stupid to confuse what these players do with a normal and functioning market.

    Incidentally, the concept of missing sellers means there are few buyers with new money jumping in. Computers are mostly playing greater fool with each other and extracting middle man profits from the remaining 401k money that still manages to go in every week.

  13. budhak0n says:

    Jimmy Conway’s wife used to spit on her own floor. I never understood that.

    Better to be polite and call the lawyer.

  14. He seems to show up in reverse merger / PIPE garbage …..I have no answers but many questions

    COMMENT FLAGGED FOR REVIEW BY LEGAL COUNSEL

    This is the 3rd attempt on your part to publish unsubstantiated accusations. And, you keep attempting to publish these same questionable comments, some of which may be actionable.

    At the insistence of common sense and the lawyers, all of your comments are now moderated.

    -EDITOR

  15. dead hobo says:

    BR stated:

    SAC Capital buys and sells 100 million shares a day — 1% of total US market volume

    reply:
    ————
    ZH uses to publish stats that stated GS was regularly 25% of programmed trading on the NYSE with the other major players contributing more. Talk about manufacturing a market.

  16. MayorQuimby says:

    BR:

    You read the article right?! There are implications of insider trading here.

  17. constantnormal says:

    “Cohen has become more sociable because he sees an opportunity to grow as the hedge fund industry shrinks, investors say.”

    Hmmmm. There are many ways to grow.

    Is FusionIQ on the block?

    3-and-50 beats 2-and-20 any day of the week.

  18. flipspiceland says:

    The NASDAQ was at 350 18 years ago and rose as high as 5,000 and change at the top about 15 X growth. It looks like most of his gains tracked that pretty well.

  19. farmera1 says:

    Man there is a lot of smoke here. My thinking is where there is smoke there is usually fire.

    If he has returned 30% annually, and he keeps 50%, those that mean he makes 60%? Wow, what a deal.

  20. Fredbela says:

    Phones don’t ring??? When I was a trader, in NY, London, Hong Kong, and elsewhere, the phones never rang. There might be fifty lines blinking at the same time–why would you want them to ring?

  21. • The trading floor is kept at precisely 69 degrees year round;
    • Cohen dislikes noise, so the phones on the floor don’t ring; they light up;

    Cohen is wise to keep the ‘environmentals’ tamped-down..
    It’s a tremendous aid to concentration..

    and, this • Numerous small teams manage $300-500 million each

    is intelligent, as well..fund sizes can get too large–that range seems to be about right.

  22. cognos says:

    A few things to note:

    - the 30% returns per year is AFTER fees… so pre-fee returns are >60%/yr since 1992 (That’s why Stevie is probably worth $20B personal or more.)

    - during the best 7 years (the “hey-day” of SAC) they had 92% avg annual gross ret, NO year under 40% return, and only 5 down months. the WORST month was -2%!

    - they are mainly MARKET NEUTRAL so this silly talk of them “pumping the market” is silly, stupid, or naive. for every $1 ‘long’ they are roughly $1 ‘short’ the market

    - they are NOT concentrated at all. the largest positions are 1-2%.

    ~~~

    BR: I am not sure its 30% long term after fees . . .

  23. Darkness says:

    After reading the dead pixel version, my thoughts are: a) a scam would have a hard time cashing out 33% of its investors without the house of cards collapsing. b) cohen sounds like a true secular investor, open to any ideas about why a stock may move.

  24. Pete from CA says:

    “Typical holding periods: 2-30 days”

    That says it all. “Secular investor”, don’t make me laugh, this has nothing to do with investing.

    It’s time to increase taxes on short term capital gains.

  25. torrie-amos says:

    good for him, he does his job very well

    4-1 leverage for day trading is standard

  26. panchog says:

    Just read Harry Markopolos’ “No One Would Listen.” It’s about Madoff who had 4% losing months, and what, 12-15% annualized gain?

    I am not implying this guy is doing anything illegal, but his gain is “extraordinary.” I wonder if any fund can be so good for so long, when the game is all about zero-sum competition???

    Help me out here, BR!

  27. cognos says:

    panchog —

    One major difference from Madoff-style stupidity… Cohen employs 300 investment professionals. About a dozen guys have spun-out (some $B aires) and run very successful $1-7B funds of their own.

    Another difference… he really doesnt grow assets (Madoff was a fake “$40B”) and so most of the money belongs to the partners. The fund “spins off” large amounts of cash in most years. (Opposite of a ponzi).

    Its just professional investing at its best.

  28. Mannwich says:

    “Professional INVESTING”? LOL cognos. This has nothing to do with “investing”. Great “trading” of paper assets perhaps, if it’s legit. I question the legitimacy of EVERYTHING now, as we all should.

  29. Simon says:

    The great investing myth continues to expand and attract. I think we are all believers here in one way or another. Otherwise we would be visiting site like this instead.

    http://geospatial.blogs.com/geospatial/2008/06/engineering-des.html

  30. MayorQuimby says:

    What I find most suspicious is the volume.

    The more volume you trade, the harder it is to beat the overall market ROI because you hurt your own price.

    It’s one thing to move 5,000 shares of AA and quite another to move 5 million such that you minimize hurting your sale price. The bid stack will collapse if you put many shares on the ask etc.

  31. RC says:

    Cognos points out:
    “- the 30% returns per year is AFTER fees… so pre-fee returns are >60%/yr since 1992 (That’s why Stevie is probably worth $20B personal or more.)”

    So if he is worth $20B then at 30% returns annually he should be the richest man in the world in the next 4 years. (30% compound growth of $20B wealth). Thats astonishing.. if true.

  32. mister_x says:

    Here are the annual returns:
    http://www.mediafire.com/i/?yjmrlj2yzmz

    Snagged it from DB a while back. The tech bubble was very good to SAC.

  33. sjtall says:

    Maybe my math and my assumptions are wrong, but the 3/50 fee structure kills the net returns and actually results in SAC’s fees and performance bonus being LOWER than if they charged 2/20. When a portfolio has such enormous returns, the opportunity cost of high fees is amplified and the fee structure is sub-optimized for the manager (besides being a really bad deal for the client).

    If you want to check my spreadsheet, I would be happy to share it.

  34. Mike in Nola says:

    Certainly sounds like another socially useful enterprise. i seem to remember when stock markets were justified by their ability to raise capital for businesses to use for investment and expansion; mow tje capital is used for bets.

  35. cognos says:

    sjtall -

    Your math or assumptions are wrong. There is no “sub-optimal” fee structure. Imagine if I charged 100% of performance as fees. This doesnt affect the overall performance of the total portfolio at all. It does not affect total AUM at all. It just affects the allocation btw fund principals and the investors. Your entire conclusions are driven by your assumptions, not the fees.

  36. ashpelham2 says:

    There are a few here who have their suspicions, and they are free to do that. In fact, we all should be more skeptical anytime we read a story such as this. However, there are people in this world who are good at what they do.

    It’s sad we’ve all become so jaded. I include myself in that group. Recent history and mass media all the time has contributed to the overall sense of malaise that we share. I look forward to a revolution one day where we don’t doubt the results of one man and his company, and we have no reason to.

    I’ll give him the benefit of the doubt, and try to scrape together some pennies for him to manage for me!

  37. sjtall says:

    cognos –

    When fees are deducted from the portfolio, both the manager and the client incur an opportunity cost. If the fee is not deducted and remains in principle, the principle is re-invested. However, when the fee is deducted (after all, the manager has to pay staff, rent, and operations expenses), the principle is reduced and therefore can not be reinvested. As a result, future returns are lost.

  38. Sanjay Bigglesworth says:

    It’s one thing if Mr Cohen hit those numbers by himself, because then you would think that he had somehow found the secret sauce. But I find it hard to imagine that aggregating numerous investment teams can produce those numbers. But who knows?

    ~~~

    BR: Two words: Renaissance Technologies

  39. cognos says:

    sjtall –

    Man! Why do “staff, rent, operations” expenses increase with fees? Most fees are deferred right back into the fund. Duh.

    Clearly, there are some tax and compensation issues with this… but there are other benefits (staff rentention?) AND dont make the assumption that many investors dont make withdrawals for tax / rebalancing purposes.

    As I said, your conclusions are SIMPLY driven by your assumptions and have nothing to do with some “sub-optimal” fee structure. That idea makes no sense.

  40. sjtall says:

    cognos -

    As your thoughtful response points out, I have over-simplified my analysis, and so perhaps my conclusion is wrong that there is such thing as a sub-optimal fee structure.

    Nonetheless, for deductions made from the portfolio, whether they are fees not re-invested or client withdrawals, the opportunity cost to future returns is substantial. And, when the returns are as high as those at SAC, the opportunity cost is exceptionally high in proportion to net returns and manager fees.

    This is a zero-sum game among three parts. When the final accounting is done after many years invested, the client makes some, the manager takes some, and the rest is lost investment opportunity for both the client and the manager. The proportion that goes to each of the three “pots” is not a simple division that coincides with the manager’s fee, but is also affected by the gross return, the hurdle rate, and the timing of the client and manager deductions. The more that is withdrawn by the client and the manager in the early years, the more is lost in the out years.

    If, as you say, most fees are deferred right back into the fund, then the opportunity cost is greater for the client than for the manager, and the manager’s overall compensation (including their fees reinvested in the fund) is greater than the return earned by the client. Somehow, given that it is the client’s capital originally, that outcome doesn’t seem fair. And I doubt that most clients understand that math.

    btw – I wasn’t suggesting that staff, rent and operations expenses increase in proportion to fees, but that since the firm has expenses, there are fees deducted from the portfolio on a regular basis, and this contributes to the opportunity cost. (I point out that payroll expense is variable, however, and a function of revenue. You may be right that this is a driver of performance rather than a drain on performance.) You are correct that I did not account for re-investment of fees in my analysis. But, as I point out earlier, reinvested fees inure to the benefit of the manager and not the client.

  41. Sanjay Bigglesworth says:

    —>BR: Two words: Renaissance Technologies

    RenTech is the secret sauce. But SAC has never been a quant shop. So you’re telling me that SAC’s traders and portfolio managers are that much better than ANYONE on in the hedge fund universe?

  42. all I know is that when I hear yoo-hoos using “the secret sauce”-phrase, I run the other way..

    and, really, if more peep understood simple Covered Call-Writing, employing pedestrian 2:1 leverage, they wouldn’t, automatically, jump to the conclusion that a string of ~30+% returns is, somehow, crooked..

    If you(pl.) bothered with the OIC, then, you, too, might say O, IC!..
    http://www.optionseducation.org/