Few investment gurus have as controversial a record as Steven Cohen (Trades, Portfolio). He has won acclaim for outstanding returns over the long term, he’s been cursed for the way he does business by other Wall Streeters and he was at the center of an insider trading scandal, one that saw several of his traders convicted.
Cohen himself escaped conviction, but his firm paid out almost $2 billion and accepted a two-year ban on non-family and non-employee trading to settle with the Securities and Exchange Commission.
Who is Cohen?
Cohen was born in 1956 and grew up in Long Island. According to a Business Insider article, he worked at a supermarket as a boy, but quit because he was making more playing poker. He later said he learned to take risks through poker. Poker gave way to stock trading, at least partially, and he is said to have traded between classes while attending the Wharton School of Business at the University of Pennsylvania.
He began his career in 1978 at boutique banking and broker firm Gruntal & Co. In this job, he was a junior trader in the options arbitrage group. Six years later, he was given the greenlight to manage his own group within the firm.
He left that eight years later to launch his own hedge fund firm, SAC Capital Advisors, in the same building Gruntal was based. Among his novel strategies was the hiring of a psychiatrist to coach his traders to help with the stress of trading the market.
In 2013, the SEC charged eight traders at his firm with insider trading, and Cohen personally was charged with failing to prevent insider trading.
All eight were convicted, although two of the convictions were later overturned. Cohen was not charged criminally; in January 2016, he settled with the SEC and neither admitted to nor denied wrongdoing in the case. His firm paid a $1.8 billion fine in January 2016, and Cohen was barred from managing outside investors' money until 2018. Whether he will return to investing the money of others, that is, beyond family and employees remains to be seen.
Cohen appears to have been a natural trader, an extension of his interest in the opportunities and risks connected with poker. However great his skills, knowledge and success, he failed to be an effective manager and stay within the rules of his profession.
What are SAC Capital & Point72
With the settlement of 2016, Cohen shut down SAC Capital Advisors and launched Point72, a “family office” which invests his money and some of his employees’ money (his current net worth is estimated at $13 billion).
As noted, there is speculation Cohen may return to managing the money of others, for which there will undoubtedly be demand. Fortune reports he and his firm generated average annual returns of 29% for 20 years. He has done well out of this performance, too, charging a management fee of 3% and up to 50% of the net on his gains.
At the same time, many will oppose his attempts to make a comeback. Again, to reference Fortune, Cohen said he “did not remember” or “did not recall” 95 times in 18 pages of transcript from testimony before the SEC. Traders at other firms frequently called the SEC tip lines with complaints. Numerous brokers complained Cohen would not trade through them unless they provided him with “intel.” The magazine cites Brad Balter of Balter Liquid Alternatives saying, “Cohen bullied the Street to the point that everyone wanted to see him go down.” Other reports say he also bullied his traders.
The big question is whether Cohen will return to trading for investors beyond his family and employees. Cohen himself is not saying, in part because the SEC frowns on speaking or promoting a firm before it launches.
Cohen’s investing strategy
Because SAC Capital was a hedge fund, Cohen and his firm were not obligated to file the reports mutual funds are.
Some pieces of his strategy have become available, particularly since his conflict with the SEC began. Wikipedia reports the firm's strategy is based on the "mosaic theory of investing," which is described as trading based on information that comes from many sources. Cohen is said to have started by trading liquid large-caps, but then moved on to fundamental and quantitative strategies.
He is the complete opposite of Warren Buffett (Trades, Portfolio), according to Jeremy Lebenbaum, who describes himself as a binary options expert in a Quora answer. Lebenbaum says Cohen has been called a "professional of short-term transactions" and long-time fan of short-term trading, entering as many as 300 transactions per day. Note Cohen did employ a hundred or more traders at a time, and the atmosphere in his firm is often described as ultra-competitive .
According to Investopedia, the firm started with a “rapid investment trading process” in which stocks were traded several times a year. The turnover was so high that SAC reportedly accounted for 3% of the turnover on the New York Stock Exchange in 2003. Cohen is said to have tried to take advantage of the ups and downs of stocks to produce above-average returns without assuming additional risks. He has also been called a hair-trigger trader, someone who opens and closes positions within seconds of getting an idea.
The same Investopedia article reports Cohen often squeezed short sellers. He did this by buying up large blocks of shares over time, forcing short sellers to cover their positions, and further pushing up the price of the stock. At a certain point, he would then sell his stock for a significant profit.
First, Cohen is not a value investor. In fact, quite the opposite as one source says. One might imagine this firm is what those quant shops with traders madly shooting off orders look like. Overall, one likely description of his strategy seems fitting: opportunistic.
Holdings
This GuruFocus chart shows Cohen’s total equity holdings since 2002 (again, in January 2016 he divested the assets of outside investors):
This chart shows his sectoral holdings:
As of June 30, Cohen's top holdings (now for Point72) were:
- Visa Inc. (V, Financial): 1.56%
- Andeavor (ANDV, Financial): 1.48%
- Alphabet Inc. (GOOGL, Financial): 1.37%
- Biogen Inc. (BIIB, Financial): 1.36%
- WPX Energy Inc. (WPX, Financial): 1.11%
- Constellation Brands Inc. (STZ, Financial): 1%
- Comcast Corp. (CMCSA, Financial): 0.8%
- Mastercard Inc. (MA, Financial): 0.79%
- Take-Two Interactive Software Inc. (TTWO, Financial): 0.74%
- Alphabet Inc. (GOOG, Financial): 0.71%
A diverse group of sectors and stocks, perhaps not surprising when a fund holds more than 800 stocks. He has a high degree of confidence in the Google brand, with two holdings in different countries.
Performance
Perhaps because he is so high-profile, we do have a reasonable amount of information about Cohen and his two hedge funds.
In 1998 and 1999, he generated 70% annual returns for his clients. He did it again in 2000, this time by betting against technology stocks, as reported by Business Insider.
For the years between 2002 and 2012, Fortune provides this chart:
As noted above, his returns over 20 years have averaged 29% per year.
Cohen’s historical performance has been exceptional, as he thrived during the dot-com bust, took a hit in the 2008 financial crisis and recovered nicely in the years since then.
Conclusion
That exceptional performance will not be quite as enticing for clients. We have noted he has averaged 29% a year for more than 20 years, but if you are a client paying a 3% management fee and 50% on capital gains, then your net returns will average less than 15% a year.
That is still a striking return, especially over so many years, but is the return worth the extra drama and uncertainty? And this is not just uncertainty about returns, it is also uncertainty about all or significant portions of your equity portfolio. Trading close to the boundaries, on the edge of legal versus illegal, is a risk few investors will want to take.
There are few, if any, lessons to be learned from Cohen, especially not for value investors. For almost all of us, his strategy and process cannot be emulated unless we invest heavily in setting up a quant trading platform.
Disclosure: I do not own shares in any of the companies listed in this article, nor do I expect to purchase any in the next 72 hours.
