Inside billionaire
Steven Cohen's hidden world of massive trading and lavish art. Is the party
over? At home with Van Gogh, Gauguin and a skating rink
STAMFORD, Conn.
-- It was the kind of day that can give a hedge-fund tycoon nightmares. As
stocks fell on the afternoon of June 12, the largest holdings of Steven Cohen's
more than $10 billion hedge fund were falling even harder.
Mr. Cohen, whose
trading acumen, monumental compensation and sprawling art-laden home had made
him a trailblazing star of the hedge-fund boom, watched the carnage unfold
on eight computer screens arrayed around his desk. From time to time, he leaned
back and rubbed his face. "Oh, boy," he said to himself.
The 20,000-square-foot
trading room at SAC Capital Advisors, chilled to 70 degrees to keep traders
alert, was hushed. Mr. Cohen, who sits at its center, likes it that way. Phones
blink rather than ring. Computer hard drives had been moved off the trading
floor to eliminate hum. Rows of traders wearing SAC fleece jackets watched
Mr. Cohen nervously, waiting for an order to sell shares.
But Mr. Cohen
wasn't budging. Less than an hour before the stock markets closed, Mr. Cohen,
biting his nails, compared his sinking stocks to a plunging department-store
elevator. "There goes ladies lingerie," he said, to no one in particular.
By day's end, his firm had lost $150 million, or 1.5% of its assets -- one
of its worst one-day showings ever.
In years past,
Mr. Cohen might have sold frantically as the market fell. He had achieved
celebrity status in the hedge-fund world, overshadowing such influential managers
as George Soros and Julian Robertson Jr., with a hair-trigger approach to
trading that was extraordinarily profitable. When stocks appeared to be mispriced,
Mr. Cohen would pounce, then he would bail out as soon as they ticked in the
right direction. His success had inspired a generation of scrappy Wall Streeters
-- some of them with no experience whatsoever handling other people's money
-- to open their own hedge funds.
That quick-trading game is now over, says Mr. Cohen. With about 7,000 hedge
funds competing for investment ideas, good stock investments are getting more
scarce. "It's hard to find ideas that aren't picked over, and harder
to get real returns and differentiate yourself," he says. "We're
entering a new environment. The days of big returns are gone."
To make matters
worse, the stock market, he says, is no longer as forgiving for investors.
The tailwind of low interest rates, low inflation and strong corporate profits,
he says, has been lost. There are no more easy pickings, he says. ...
Mr. Cohen says
he is now making bigger bets and holding the stocks longer. The throng of
rival hedge funds could create a dangerous logjam, he says. Mr. Cohen worries
that some of his largest holdings are also favored by other hedge funds. A
rush for the exit could spell trouble. He says he expects that eventually
there will be a sudden and sharp reversal in the stock market -- but he's
not worried about that happening this year. "There will be a real decline
that may devastate hedge funds that have crowded into the same stocks,"
he predicts.
"Hedge
funds are bigger than they used to be. Their positions are bigger," he
says. "I worry that if everyone were to sell, could we get out?"
Hedge funds,
private investment pools for institutions and well-heeled individuals, now
hold about $1.2 trillion in assets, more than twice what they had five years
ago. Fat returns are becoming more elusive. In 2005, the average hedge fund
returned 9.3%, below the 11.4% average for the past decade, according to Hedge
Fund Research Inc., a Chicago consultant. By comparison, the S&P 500 index
returned 7.7% last year. A record 848 hedge funds closed up shop in 2005,
many of them hobbled by poor performance, according to Hedge Fund Research.
Mr. Cohen's
reputation rests on an investing style altogether different from the buy-and-hold
strategy espoused by influential investors such as Warren Buffett. Mr. Cohen
believes that by scrutinizing trading patterns of a stock -- by "watching
the tape" -- it is often possible to predict how the stock will move
in the coming hours or even days. For years, he jumped in and out of stocks
-- sometimes without any knowledge of a company's fundamentals, or even what
it did. It was akin to picking out rocks in a river by watching the currents
swirl around them.
Classic "value"
investors such as Mr. Buffett insist that what other traders are thinking
and doing is of no consequence to sound investing. Mr. Cohen is his polar
opposite. He spends long days at the office in black jeans and worn sweaters,
glued to his computer screens as he personally trades upwards of 300 stocks.
SAC's trading floor bombards him with information about what's going on in
the market. He soaks it all up. His eyes are often rimmed with fatigue.
On a typical
day, SAC's trading accounts for 2% of overall stock-market activity. SAC pays
securities firms an average of one cent for each share it trades, which adds
up to more than $400 million in trading commissions each year, making SAC
one of Wall Street's best clients.
For years, the
relentless trading was highly effective. SAC Capital Management LP, Mr. Cohen's
largest and oldest fund, launched in 1992, has generated an average annual
return to investors of 43.5%, after he takes a sizable cut of profits. He
and his partners keep 50% of that fund's gains, along with a 3% annual fee,
far more than the 20% and 2% charged by most managers.
Mr. Cohen's
colossal compensation inspired cocky traders who figured they could do the
same, and dismayed others who disdained the frenetic momentum-style investing
that underpinned the bull market of the 1990s. His net worth is estimated
at about $3 billion, which SAC does not dispute. ...
Although SAC
now employs more than 600, Mr. Cohen still spends much of his time at the
office trading. By 8 a.m., he is usually planted at his trading station, where
he stays glued for most of the day. He monitors stock, bond, commodity and
currency markets on his screens and taps out email and instant messages to
some of SAC's 225 portfolio managers and analysts, as well as to traders outside
SAC. Mr. Cohen's own trading still accounts for 15% of the firm's profits.
Portfolio managers feed him investment ideas and fill him in on chatter about
what other hedge funds are doing. "He is in the center and cherry-picks
the best ideas," says a former SAC manager.
A video camera
and microphone stay trained on Mr. Cohen so traders and managers who don't
sit nearby can pick up what he is saying and doing, including his frequent
sarcastic comments, known as "Steve-isms." Often the traders mimic
his trades in their own portfolios. ...
In 1999 and
2000, during the technology boom, SAC generated returns to investors of 68.1%
and 73.4%, respectively, and copycat funds began to spring up.
Mr. Cohen and
the growing hordes of rapid in-and-out speculators sparked debate. Shareholders
who bailed at the first sign of trouble forced companies to focus on short-term
performance. When hedge funds bought and sold huge blocks, small investors
sometimes got whipsawed -- leaving some with the impression that a mysterious
game was being played outside of their view.
Muttering began
that fast-trading managers like Mr. Cohen enjoyed an unfair advantage over
Main Street investors -- that they were, in essence, playing cards with a
rigged deck. The substantial business they brought to Wall Street trading
desks, critics speculated, gave them access to morsels of information unavailable
to small-time investors -- confidential information about what companies and
other investors were planning to do.
As Mr. Cohen's
star was rising, some established hedge funds, including Mr. Robertson's Tiger
Management and Mr. Soros's Quantum Fund, were losing their luster. They had
prospered by making large bets on stocks, bonds and currencies based on deep
research. Now they were eclipsed by a new breed of speculators. In 2000, Mr.
Robertson returned money to investors, and Mr. Soros scaled back his involvement
with his fund.
"The old
guard wasn't crazy about me," says Mr. Cohen. "I used to hear it
all the time." Some old-school managers disdained any investing that
wasn't based on corporate fundamentals. "We were trading more than investing,
and people frowned on it," Mr. Cohen says. "They looked at it and
didn't want to partake. Finally, they said, 'Shoot. He's making money.' And
they started copying me." ...
In the bear
market that followed the technology-stock bust, the air of invincibility that
had hovered over Mr. Cohen began to disperse. The stock market was tumbling.
It was getting harder and harder to make a quick profit by darting in and
out of stocks. Eventually, he found himself at a turning point.
The catalyst
was an enormous loss. In October 2002, SAC lost $100 million on Tenet Healthcare
after it bet that the company's regulatory problems concerning its Medicare
pricing weren't as severe as perceived by the market. When Tenet disclosed
it had overcharged the government for Medicare services, its stock tumbled
to $15 from $50 within days. SAC's flagship fund notched a return of 11.5%
in 2002, its lowest annual return ever.
The number of
hedge funds was mushrooming, and many were pursuing short-term trading strategies
similar to SAC's. To make matters worse, in 2001, the New York Stock Exchange
began trading all stocks in one-cent increments, abandoning the fractional
system in which stock prices moved in larger increments of 1/8 and 1/16 of
a dollar. Mr. Cohen says the change made it more difficult to make money with
rapid-fire trading because it got rid of some of the inefficiencies that traders
had exploited.
One morning,
Mr. Cohen woke up with numbness in his arm. A doctor told him he needed surgery
on his neck, and in September 2003, he had a disk removed. After the operation,
he says, he briefly stopped breathing. He was saved, he says, after a private
nurse he had hired to be in his room noticed the problem.
"I think
there was a change after his surgery," recalls Mrs. Cohen, who says her
husband "came out and looked at everything differently." Mr. Cohen
says he has since grown closer to his siblings, and for his 50th birthday,
he and his wife took their first lengthy vacation without their kids.
Over the years,
many styles of investing have proven to have finite shelf lives. When too
many investors start doing the same thing, that tactic often stops working
well.
SAC's difficulties,
particularly its ill-fated Tenet investment, led Mr. Cohen to rethink his
approach. As he recuperated at home, he says, he decided to move more decisively
away from short-term trading. He set up an SAC unit called "Intrinsic"
and staffed it with 30 analysts to hunt for longer-term investment ideas.
Mr. Cohen began investing in small- and mid-cap companies in the health care,
energy and technology sectors.
SAC took a big
position in Google Inc., betting that its profits would grow faster than Wall
Street expected. The investment, begun in late 2004, netted SAC a $100 million
profit. SAC now owns just $11 million of the stock, according to a recent
regulatory filing. In January, SAC bet that Arcelor SA, a Luxembourg steel
company that trades in the U.S. as American depositary receipts, would be
acquired. The wager made SAC $75 million when Arcelor announced on July 7
that it had agreed to be acquired by Mittal Steel Co. NV.
SAC now hangs
onto stocks for an average of six to twelve months. That might not qualify
as long-term investing to Mr. Buffett, but it far exceeds the norm of several
years ago -- often just a few weeks.
The payoff,
thus far, has been solid, although not as dazzling as in the boom years. In
2003, SAC's flagship fund yielded 18.1% for investors, less than the 19.6%
average hedge-fund return reported by Hedge Fund Research. In 2004, the fund
returned 22.9%, far exceeding the 9% industry average, and in 2005, it returned
18%, compared to 9.3% for the industry. Through August of this year, despite
the market turmoil that cost the firm $150 million on June 12, the SAC fund
notched an 18% return. The average hedge fund was up 7% over that period,
while the S&P 500 rose 2.7%. ...
Mr. Cohen concedes
that holding investments longer and betting bigger could lead to lower returns.
A year ago, SAC told investors the fund was aiming to return between 10% and
15% a year, people familiar with the matter say. ...
Mr. Cohen says
he worries about whether SAC's investments are beginning to look like those
of any other hedge fund. What's worked for SAC in recent years, he says, may
not work going forward.
On June 9, around
midday, Mr. Cohen walked off SAC's trading floor and slumped into a chair.
The markets had been choppy all week. He was growing more certain that stocks
were in for a significant decline, but ventured that it was more than a year
away.
"The hedge-fund
run is not over," he said. "I think the game is changing, and if
it is, I have to react. We won't go off the ledge with everyone else."
.
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