Reverse Midas: SAC Spin-Offs Fail Even When They Succeed

Reading this report about SAC Capital by Reuters, I was struck by a few things.

But first, here’s the chronology (skip below for my argument):

  • 1980s: Steven Cohen allegedly involved in insider trading at Gruntal
  • 1999-2004, 2004-2007, 2007-2009: Insider trading at Spherix (ex-SAC trader Richard Lee’s own firm); and possibly at Stratix (founded by Goodman and Grodin in 2004, also ex-SAC traders, with SAC as a sizable investor); and (again, possibly) at SAC itself, by Richard Lee and Ali Far, also an alum of SAC.
  • 2006: SEC investigates SAC and two other firms for manipulation of Fairfax Financial stock. Investigation dropped in 2007
  • 2007-2009: Agent Kang investigates 20 hedge funds for insider trading
  • 2007: SEC investigates SAC over Andrew Tong’s sex charges. Case sealed in 2008. Reopened in Nov. 2009, this time focusing on insider trading. About this time, Richard Grodin’s and Ian Goodman’s firm Stratix (where Lee and Far worked) closes. Grodin then begins Quadrum, which also closes
  • Oct-Nov 2009: Galleon Group charged by Kang with insider trading and 14 traders arrested, including former SAC traders, Richard Lee and Ali Far
  • Nov-Dec 2009: Cohen’s ex-wife alleges insider trading when Cohen was at Gruntal & Co. in the 1980s
  • Dec. 2009: Ex-SAC trader and founder of Stratix Richard Grodin subpoenaed

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Now that you have that in mind, here are the things that struck me:

1. The high number of SAC traders who seem to have gone off into their own businesses.

You’d think with all that money and the fund’s record as the most consistently successful in the business (only one bad year on record), their traders would stay forever. Quite the opposite.  People seem to have been leaving all the time to form their own businesses.

But SAC was also said to be a very tough environment. You produced, or you left.

So maybe that’s why Lee and Far, Grodin and Goodman, all left to found their own firms?
Could be. But I’m not convinced.

2. None of the spin-off firms seems to have been very successful.

Why not? Why couldn’t these hot-shot traders make money on their own?

The Reuters piece suggests that perhaps the SAC experience didn’t foster business ability. And that perhaps SAC traders flounder without SAC’s huge supporting cast.

But those things are likely to be true of other firms as well, not solely SAC.

Still not convinced.

Furthermore, consider this.

3. A spin-off fund that didn’t get money from Cohen ended up quite successful:

“Healthcor, a healthcare industry focused fund, had raised $3.2 billion by June 2009 since launching four years ago. The fund returned 25 percent in 2006, 18 percent in 2007, and was up 4 percent last year, when the average hedge fund lost 19 percent. In the first 10 months of 2009, Healthcor was up 7 percent.

Healthcor, founded by Arthur Cohen and Joseph Healey, opened without any financial support from SAC. In fact, soon after Cohen and Healey struck out on their own, SAC sued the pair, accusing them of breaching their employment contracts. The matter ultimately was settled. (Healthcor’s Cohen is not related to SAC’s Cohen).”

4. Even spin-offs that were doing well were shut down.

When Stratix started in 2004, it had $60 million given to it by SAC. When it shut down, in 2007, it was up 17% and had $530 million under management. Yet it shut down. Why did it shut down? Those numbers sound pretty good.

Another spin-off, Fontana Capital, started out in 2005 with $50 million of SAC money. It grew to $325 million by 2006.  But sometime in 2007, Cohen pulled out all his money. And in 2009, Fontana was down to $16.1 million, despite being down only 7.69%, compared to the average S&P Financial index loss of 57%. Again, that sounds like it wasn’t doing all that bad.

Reuters quotes someone familiar with the record of ex-SAC traders:

“So many of the ex-SAC people seem to have this model where they attract you with fantastic returns in the first year but in year two or three or four you get annihilated,” said a person who is familiar with several former SAC employees’ records.

Shades of Bernie Madoff….

Someone need to look closely at what happened to the money at these firms…

One thought on “Reverse Midas: SAC Spin-Offs Fail Even When They Succeed

  1. Pingback: Steve Cohen, the anti-Midas | Deep Capture: exposing the crime of naked short selling

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