SAC Rips It In 2006: I Told You So!

Remember in mid-September, when Stevie Cohen was the subject of a big story in the Wall Street Journal in which he was practically pessimistic about the likelihood of putting up big returns given the increasingly crowded and competitive environment? I posted on this two days later, in which I basically said: this is a load of crap. Steve and his team at SAC are a bunch of forward-looking rock stars with great brains, great technology and the resources and vision necessary to stay a step ahead. Don't believe me? Here are excerpts of what I wrote on September 18th, 2006:

This does not sound like a multi-billionaire running an eleven figure sum for some of the most powerful investors in the world. Where's the hubris? What has changed? Is he right that the easy money has been made and it will be tougher sledding from this point forward?

I'm not buying any of this. SAC and its team is way, way too smart to be pigeon-holed by a single strategy. If there is too much money chasing too few ideas, invariably there is a lot of dumb money out there that can be exploited by someone smarter and more experienced. I mean, come on, he is up 18% YTD on a big, big number. That is pretty good based upon the stats I've seen.

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Given the trend towards more and better data and information being put out there on the Internet, it will be those with the vision, the brains and the tools to take advantage of this alternative data set that will establish a true edge on the competition. Again, SAC is a very forward-looking organization with the resources and trading acumen necessary to exploit the massive opportunity for discovery that is the Internet, so I am also certain that they will lever their expertise into this area as well.

So, from my vantage point things don't seem so bad for Stevie. Maybe he is showing his soft side so we'll all get complacent and he'll clean our clocks! That seems far more likely than the defeatist attitude on display in the WSJ article.

So now the numbers are in: Stevie and Co. put up 34% (on $10+ very, very large) during 2006 vs. 12%-14% for most of the hedge fund indexes.  So who was right - me or Stevie? Answer? ME! But he's taking home 10 figures and I'm taking home - well, let's just leave it there. I appreciated his humility and willingness to let us all inside the tent a bit, but at the end of the day he is a smart, resourceful, competitive performer at the top of his game, and there is no doubt in my mind that he is ultimately confident in his ability to find new and improved ways to make money, regardless of the environment (and regardless of what he says). Thought he shaded it during his interview, I called bullshit. Hooray for me. And hooray for him.

 

Comments

[Yaser Anwar]

EC, thanks for the correction! Too much rap music for me (For the unaware, Russell Simons is considered the CEO of hip hop).

SAC has a good recruiting policy- mostly by referral. This way they get only the best, even if it means poaching from other firms, though they would be glad they didn't get Brian Hunter. Then again, he wouldn't have been able to trade like he did at Amaranth.

[EC]

Thanks, I appreciate the opinions.

I heard RIEF is having some growing pains. They claim it isn't a problem with the total AUM, but the "throughput" of sorts-- that they accepted so much new money at the start that it was diluting returns enough that they decided it would be most prudent to lower the rate of capital put into the fund.

I was surprised to hear how low the fees were on RIEF. 50 basis points and 10% of profits. My belief is that will become more relevant as Simons scales up.

Yaser, I think you meant Jim Simons.

Jason, I agree with you. The most interesting thing I took away from the aggregate performance of the various strategies was how small the dispersion was from the S&P. I also wasn't aware that Sigma was the vehicle for Stevie Cohen's personal assets-- interesting. Their play on Foamex was a work of art and a perfect example of the paradigm shift that has occurred regarding the fundamental value of equity in distressed situations.

[Yaser Anwar]

As far as I know, SAC has been right on 3 mergers, had knowledge of lots of PIPEs and much more. I guess the 200+ million in Wall St. commissions has its benefits.

My guess is besides US markets, they are increasingly investing in Global Markets, where gains have been a lot higher than home. This year's Inst. Investor most $$ made list would probably have the same candidates, just diff order

1) Steven Cohen

2) Russell Simons

3) Eddie Lampart (Sears stock!)

4) Maybe someone from GS prop teams? All those 100 mill pound bonuses.

5) Soros

etc etc

RE- Tx for the clarification. I thought they would just start a 100bn fund and not grow into that much.

[Jason Wood]

Roger,

SAC's success in 2006 was notable for a lot of reasons:

1. Size of the fund (you mentioned this)
2. Consistency of outperformance (you mentioned this)
3. Relative outperformance (you mentioned this)

...but you may have left off the most impressive part of their 2006 showing. The VIX has basically been a historic lows for most of the last 12 months, theoretically making it much more difficult to generate alpha.

Damn impressive.

[Roger]

EC, my belief for SAC as well as Renaissance is that reported returns only relate to LP (read: external) capital. Therefore, the 34% for SAC is net of the 50% performance fee, and that Renaissance's reported returns are net of the 5%/44% fee structure on the small amount of external capital remaining.

Yaser, I believe Renaissance's institutional fund (the one he said has a $100 billion capacity) has something approaching $20 billion in assets and posted a 20%+ return. As usual, Jim Simons is making it happen. Big surprise - not.

[Yaser Anwar]

Does anybody have any knowledge as to how successful has Renaissance's ambition to start a 100 billion fund been?

[Jason Wood]

EC...I'm not sure of the breakdown between outside AUM and SAC assets; but I do know that the $12B thrown out for SAC doesn't include Sigma, which is Steve Cohen's personal assets. Sigma, last time I heard, was north of $6B in its own right.

[EC]

No matter how one cuts it, 34% is extremely impressive. I assume that's a net number. The question I have is what else is packed into that figure. 50% incentive fee-- I assume that's only applicable to outside money, not his own investment in the fund, or that of his employees?

Funny example. I tend to think this "normalization" is more applicable to Renaissance Tech's Medallion Fund. I heard that part of the reason RIEF was launched (in addition to the obvious) was the fact that Renaissance simply doesn't have that much room left to allow employees to invest in the fund, and could no longer use Medallion itself as an incentive mechanism. Alex Magaro, the head of their Mendocino value fund, jokingly said one of the reasons he joined Renaissance in the first place was so that he could invest in Medallion. The implication, though, is that even though Medallion is notorious for its extremely high fees, those fees are probably less applicable given the increasingly small proportion of AUM that outside money occupies.

Thoughts appreciated.
-EC

[Yaser Anwar]

You're right Sir, load of crap indeed. He just lowered expectations and BANG, in his usual style, over delivered.

Too bad SAC is a firm we can't go long on!

[David]

Not only did he do 34% but isn't that after his 50% incentive fee? Yeah it seems as though he has not lost any touch at all.