SAC Preparing for Exodus of Assets

Management at beleaguered hedge fund, SAC Capital Advisors, is preparing for outside investors to pull out most of the remaining assets in the fund.  This is prompting the firm to consider streamlining the organization and reducing the number of staff.  Fortunately, a protective order was signed last week which guarantees the firm’s ability to continue operations until all pending charges have been resolved.


Upcoming Deadline for Client Withdrawals Looms

Next Friday marks another quarterly deadline for SAC’s clients to notify the hedge fund whether they want to withdraw their funds.  Given the recent criminal insider trading charges filed by the Manhattan US Attorney’s office against the hedge fund, most believe that the remaining outside investors will ask to withdraw their assets from the fund.

While it is not public how much in early redemption requests SAC has already received this quarter, over the past few quarters customers have requested the withdrawal of approximately $5.0 billion of a total in $6.0 billion in external client assets.  These funds will be returned to clients on a staged quarterly basis to prevent a mass liquidation of assets from impacting remaining investors.

SAC management anticipates that outside investors will request most of the remaining $1.0 billion in outside client money still in the fund to be withdrawn.  This would mean that once these funds are returned, SAC will manage close to $9.0 billion in assets, with $8.0 bln belonging to founder Steven A. Cohen and $1.0 bln belonging to employees of the fund.


Plans to Streamline Fund Discussed

As a result of these developments, SAC management is said to be in internal discussions about how best to streamline the potentially smaller fund.  Some say that SAC officials have already discussed the possibility of returning all outside capital and transforming SAC into a “family office” that manages Mr. Cohen’s $8.0 bln in wealth.

Others suggest that SAC might merge the various SAC entities like Sigma Capital Management or CR Intrinsic Investors into the parent, and reduce the number of remaining investment professionals in the surviving entity.  While no plans to shrink the firm of close to 1,000 employees have been finalized, most people close to the firm say that such a move is inevitable.

Despite the turmoil surrounding the firm, many of SAC’s investment professionals have chosen to stay on, at least until end of year bonuses are paid out which could total tens of millions of dollars.  Earlier this year, SAC management increased bonuses in order to minimize staff defections given the firm’s uncertain future.


Judge Signs Protective Order

Last Friday, US District Judge Richard Sullivan issued a protective order which enabled the firm to keep operating until all outstanding legal complaints are resolved.  The court said the order serves to preserve the availability of SAC property for civil forfeiture while avoiding undue interference with the legitimate operations of SAC.

The agreement requires SAC to maintain 85% of the assets held by the firm’s management company.  Apparently, this agreement requires that SAC refrain from returning Cohen’s money, though the fund could return money belonging to outside investors.

Based on the estimates of sources close to the discussions, the amount of assets in the firm’s management company is approximately $6 billion.  This would mean SAC would be required to maintain about $5 billion in the firm, in exchange for its ability to continue operating lawfully under the protective order.

While this development was expected, it is likely to provide some relief for many of the banks and brokers that count SAC as a customer, since the hedge fund generates hundreds of millions of dollars in trading commissions every year for these Wall Street firms.  Two major Wall Street investment banks, Goldman Sachs and JP Morgan Chase have both said they plan to continue to conducting business as usual with SAC.


Impact on Indie Research

Despite this news, independent research firms probably won’t fare so well, particularly if SAC decides to slash its headcount in the coming months.  Historically, SAC has been a heavy user of third-party independent research, engaging hundreds of research boutiques.

However, as headcount and assets under management drop, it is highly likely that SAC will also trim back its use of independent research.  This development is a little paradoxical as over the past few years SAC has developed one of the most rigorous compliance due diligence programs for third-party research providers seen at any hedge fund.

Unfortunately for indie research providers, this is not unusual as they are typically the first firms to be cut back when money managers experience falling assets, or reduced headcount.  This is primarily the result of the fact that while these firms might provide great research and trading ideas, they don’t provide other necessary services including trade execution, capital commitment, management access, asset raising, or access to the IPO calendar.

 

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