The hedge fund giant SAC Capital Advisors is steeling itself for a possible wave of withdrawal requests from clients amid the government’s intensifying scrutiny of its trading practices.
Investors have about a month to decide whether to pull 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 federal prosecutors brought their latest criminal insider trading charge against a former SAC employee — a case they call the most lucrative insider trading scheme ever uncovered — those clients have been 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 in the fund.
Questions remain about the intentions of several of SAC’s well-known clients, including the Blackstone Group, one of the world’s largest and most influential allocators to hedge funds. Blackstone has about $550 million invested in SAC, making it one of the fund’s largest outside investors. A Blackstone spokesman declined to comment.
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 “far too early to speculate about redemptions, and we do not expect redemptions to have a significant impact on our funds.”
Any withdrawals from clients would come after a year of decent performance for SAC. In 2012 the firm returned about 13 percent net of fees, which, while slightly underperforming the Standard & Poor’s 500-stock index, was superior to the results of the average hedge fund.
While a spate of redemptions can have a crippling effect on a hedge fund by 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 only about 40 percent of the $14 billion that SAC manages 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. Its clients can redeem only 25 percent of their investment each quarter. So, for example, if a client had $200 million invested with SAC and asked 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 a forced liquidation of its investment portfolio.
Still, an investor exodus can cause a hedge fund 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 to reorganize 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 Securities and Exchange Commission has warned SAC that it might file a civil action against the fund for failing to properly supervise its employees.
Mr. Cohen has told his employees that he believes he and the 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 effort to hold on to clients. It has told its investors that they will not be responsible for any penalties incurred as a result of any of the government’s legal inquiries. Instead, SAC has said, Mr. Cohen and his management company will pick up any costs.
There have also been changes at the fund. SAC told its staff last week that it was closing its office in Chicago, which is home to about a dozen employees. Such a move is not unusual, as the fund has closed offices before, like one in San Francisco, where it saw limited opportunities.
A spokesman said it did not make sense to have an office in Chicago. SAC has more than 1,000 employees — portfolio managers, analysts, traders and support staff — in five offices around the globe, with its headquarters in Stamford, Conn.
Though Mr. Cohen has told his friends and employees that he remains committed to managing money for outside clients, he could 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 to manage their own fortunes.
DealBook: Possible Client Redemptions Weigh on SAC Capital
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DealBook: Possible Client Redemptions Weigh on SAC Capital
