Hedge fund billionaire Steven A. Cohen is feeling the pinch from the US federal government's insider trading probe as outside investors in his SAC Capital Advisors submitted requests to withdraw a total of $US1.68 billion from the firm by year's end.
The amount of the investor redemption notices exceeds the $US1 billion figure Cohen had been telling the 900 employees at his $US14 billion hedge fund to expect. The firm was bracing for withdrawals as the insider trading investigation increasingly focuses on the activities of former employees of Cohen's fund.
But the redemptions likely will not impede SAC Capital's operation in the near term, because they will be made in quarterly payments to the investors. And roughly 60 per cent of the money managed by Cohen's firm is either his or his employees'.
Approximately $US660 million in redemptions will be paid out on March 31, an amount that includes some prior redemptions received in 2012. The remaining roughly $US1 billion of the new redemption request will be paid in out in the subsequent three quarters.
A representative for one of Cohen's outside investors said even if all of the roughly $US6 billion in outside money was withdrawn from SAC Capital, the hedge fund would still be able to operate.
An employee of SAC Capital who did not want to be identified said, "SAC could handily cover all costs for operation," in the unlikely event all the outside money were withdrawn.
A person familiar with the firm said SAC's trading profits will help offset losses from the $US1.68 billion investors are redeeming.
SAC's deadline for outside investors to request redemptions in the first quarter was Thursday night, even though the redemptions will be paid out quarterly over the course of this year.
SAC's biggest outside investor, Blackstone Group, is keeping most of its $US550 million with the firm. The asset management arm of the private equity firm decided to stay with Cohen's firm after negotiating more flexible redemption terms on behalf of all of the firm's investors.
Cohen, after negotiating with Blackstone, decided to treat investors who wait to redeem until the second quarter no differently than those who redeem now - meaning those who redeem next quarter will also get all their money out by the end of 2013, instead of over four quarters.
Until now, Cohen's outside investors generally had stood by him as the government investigated allegations of insider trading at SAC Capital for at least six years.
One reason investors have stuck with Cohen is because he has delivered annualized average returns of about 25 per cent since his firm was launched in 1992. SAC Capital's flagship fund gained 13 per cent last year, when hedge funds on average only returned 6 per cent.
In January, SAC Capital was up 2.5 per cent, about in line with peers.
But following last November's arrest of former SAC portfolio manager Mathew Martoma, in what is alleged to be one of the most lucrative insider trading schemes on record, some investors are losing patience. Citi's private bank, for example, is withdrawing $US187 million from SAC this quarter.
That said, many investors, which include high net worth individuals and firms that manage money for small groups of wealthy families, will not say what they are doing.
Wall Street investment bank Morgan Stanley, which is invested in SAC through a fund of funds unit, declined to comment on whether it was part of the group of investors pulling money from SAC in the first quarter. British-based HSBC, which also has an allocation to Cohen's fund, said in an email, "We do not comment on our positions in individual funds."
Some high net worth and family offices are said to have been reassured by Cohen's pledge that investors would not pay for any legal fees incurred by the firm in relation to the insider trading probe. Also, because SAC trades in highly liquid stocks, investors have said that if the firm were forced to unwind it could be done relatively quickly.
As for Cohen's staff, for the moment his senior managers are staying put, according to several headhunters who work in the hedge fund space. One recruiter acknowledged that there has been departures, but it is Cohen's most junior people heading for the doors.