In the wake of negotiations with the US government to settle insider trading charges, SAC Capital Advisors is planning to scale back its operations, including shutting down its London operations by year end, as senior investment professionals leave the firm.
New Plans Emerge
According to an internal memo recently sent to staff, SAC management said they plan to shutter their London office by year end. SAC currently employs more than 50 staff in London. In addition, the firm has announced the elimination of six portfolio management teams based in the US.
The recent announcement is contrary to SAC management’s initial assurances to staff that the insider trading investigation would not affect its business.
SAC’s president, Tom Conheeney, explained this shift in the internal memo to staff, “As our negotiations with the government have unfolded, it has become clear to us that the outcome the government is demanding is likely to have a greater than first anticipated impact on the firm.”
Coheeny added, “We have concluded that we must operate as a simpler firm and reduce our capital allocations.”
Settlement Negotiation Continues
The primary reason for SAC’s change in plans has been the settlement the firm is currently negotiating with the government over insider trading charges. People with knowledge of these discussions suggest that SAC may be forced to plead guilty to criminal misconduct, pay a $1.8 bln fine and be barred from managing other people’s money.
Since the government indicted SAC founder Steve Cohen in July for “failure to supervise” outside investors have sped up their withdrawals from the hedge fund. At the beginning of 2013, SAC managed approximately $15 billion. Now, almost all outside clients have withdrawn their money, leaving the firm managing $9 billion in assets – primarily belonging to Cohen and various senior staff.
Some Heed Writing On The Wall
Since Cohen’s indictment in July, many employees at SAC have been sending out resumes in the hopes of landing jobs next year after bonuses are paid out. As of Sept. 20, SAC employed 950 people globally, according to a regulatory filing, about 50 fewer than it did in April.
One reason SAC could have decided to shutter the London operations is because that office has been particularly hard hit with defections in the past few months. Some of the most notable losses include:
- In June, Andres Anker, a portfolio manager at SAC, joined Millennium Capital.
- In September, Thomas Corns, joined Graham Capital as a director.
- In October, Johan Levavasseur, a portfolio manager in the long/short equity team, joined Millennium Capital.
- Also in October, Alidod Shirinbekov, a portfolio manager at SAC, joined BlueCrest Capital Management.
- Most recently, Lia Forcina, a trader at SAC who ran $700 mln in funds, also joined BlueCrest Capital.
Impact of Retrenchment
One big question that remains is how many employees Steve Cohen will decide to shed once the firm reaches a settlement with the US government. Clearly the firm will not need anywhere close to the 950 employees it currently has on the rolls. This is partially due to the fact that Cohen won’t be receiving the hundreds of millions of dollars in management fees that SAC earns today, meaning he will have to pay for the overhead for operating the business directly from his own pocket.
Of course, the scaling back of SAC will also have a profound negative impact on Wall Street. At the firm’s peak, SAC paid out hundreds of millions in dollars of annual trading commissions. The firm was also a top prime brokerage client of major Wall Street banks like Goldman Sachs and Morgan Stanley, which provided financing services to the fund.
Lastly, the independent research industry will be negatively impacted by SAC’s scaling back – at least in the near term. SAC has traditionally been a big user of independent research firms of all types. Consequently, a loss in AUM and the number of investment professionals will result in a reduction in SAC’s spend on independent research.
Some IRPs may find that over time they actually pick up business as their users purchase their services once again after they find jobs at other money management firms. However, this will depend on being able to track their former customers from SAC to wherever they land next, and whether their current users are able to find new positions at other hedge funds.