The Most Powerful Trader on Wall Street You've Never Heard Of
Meet Steve Cohen. Even his enemies admit he's the best stock trader around, routinely trouncing the market with his $4 billion hedge fund. Just how does he do it?
July 21, 2003
A gunmetal-gray BMW 745 Li sedan slips out of Steven A. Cohen's 14-acre walled estate. The chauffeured car races along the winding backcountry hills of ultrawealthy Greenwich, Conn. At around 8 a.m., it powers into the parking lot of SAC Capital Advisors. Cohen quickly emerges and darts into the front entrance of his gleaming steel and terra-cotta-slabbed Stamford (Conn.) headquarters. His driver swings the car around to the back and parks in a space with a simple reserved sign amid a sea of testosterone-exuding cars belonging to his traders: Mercedes S600s, Lexus sport-utility vehicles, and Porsche Carrera 4s. Cohen will soon be sitting at what one trader calls "command central" -- his desk with its numerous screens, perched in the midst of a football field-length trading floor. In the next few hours he is likely to earn several million dollars.
Cohen, 47, is the most powerful trader on Wall Street you've never heard of. The founder of SAC Capital Advisors, a highly secretive and stupendously successful $4 billion group of hedge funds that bears his initials, is considered to be a market genius by even his harshest critics. His firm routinely accounts for as much as 3% of the New York Stock Exchange's average daily trading, plus up to 1% of the NASDAQ's -- a total of at least 20 million shares a day. And while most of his rivals struggle to keep their trading costs down, "Stevie," as he's known on Wall Street, is one of the few to pay full freight. He hands over about $150 million a year in commissions to Wall Street, making him one of its 10-largest customers.
The payments grease the superpowerful information machine that Cohen has built at SAC. The firm's credo, says a former SAC trader, is to "try to get the information before anyone else." The torrent of commissions wins Cohen the clout that often makes him privy to trading and analyst information ahead of rivals. Says one analyst: "I call Stevie personally when I have any insight or news tidbit on a company. I know he'll put the info to use and actually trade off it." Cohen expects to get the first call when an analyst upgrades or downgrades a stock, and if he doesn't, offenders have been known to get a tongue-lashing from SAC traders. Brokers lavish plenty of other privileges on him. For instance, SAC was a big beneficiary of allocations of red-hot initial public offering shares during the Internet boom, according to several former SAC traders.
Cohen manages less money than hedge-fund titans such as George Soros or Julian Robertson did at the height of their powers, but his sheer trading prowess leaves them in the dust. At the heart of his empire are 40 "portfolios." Each has between one and 15 traders and analysts who execute various strategies. The primary focus is a long-short equity strategy, but more recently the firm has branched out into convertible and statistical arbitrage, quantitative strategies, and big bets on interest rates. Investors' money is channeled through seven different "portfolio companies" or funds -- including a core fund, a global diversified fund, and a health-care fund, each with an offshore counterpart. One fund, Sigma, consists mainly of his personal money, say insiders.
But Cohen's reach, and power, extend well beyond the seven funds. The billionaire, who earned an estimated $128 million last year and $428 million in 2001, according to Institutional Investor, has a finger in funds other than his own. Top SAC traders have contracts that contain provisions giving Cohen the right to fund up to half their capital if they leave to start their own funds, as many have done. He sometimes gets more favorable terms than other investors, such as being able to pull out his money early. Says a former SAC trader: "Cohen's presence, and market-moving capability, is probably the largest of anyone on the Street."
So is the fear Cohen inspires on Wall Street. Says a trading executive at a brokerage house: "It's great if you're in the Stevie camp that day or that month. But he can turn against you in the blink of an eye and redirect his capital somewhere else if he gets pissed off." Few of the several dozen people -- including former and current employees, other hedge-fund traders, Wall Street analysts, and proprietary traders -- that BusinessWeek interviewed over a three-month period would speak on the record about Cohen or SAC. Cohen, who's "almost as secretive as Howard Hughes," according to one source, declined to be interviewed or photographed. An insider describes him as "incredibly camera-shy and publicity-averse." He requires employees to sign dense confidentiality agreements. SAC officials would not comment on the record for this story.
Colleagues praise Cohen for his intensity and singular focus on reading the tape -- identifying trends by studying money flowing in and out of stocks. He teaches his traders a strict discipline of cutting losses by bailing out of losing positions fast. His own ability to acquire and distill bits of seemingly innocuous information and then apply them to his trading is unparalleled. "He has incredible instinct and the uncanny ability, when faced with 100 facts, [of] knowing which one to pay attention to," says Jack D. Schwager, author of Stock Market Wizards, a book about world-class traders. Adds Laszlo Birinyi, president of Birinyi Associates Inc., an investment research firm in Westport, Conn.: "Cohen can absorb this huge amount of input and come out with music when most of us just come out with noise."
Cohen started picking up these skills at an early age. He grew up in Great Neck, N.Y., in a strictly middle-class family, with a father who worked in the dress manufacturing business and a homemaker mother. As a child, he followed sports scores assiduously in the New York Post that his father would bring home every evening. He started noticing that the financial pages were also filled with numbers. "I was fascinated when I found out that these numbers were prices and they were changing every day," he told author Schwager. By his early teens, Cohen was hanging out at a local brokerage office, watching stock quotes. "You could see volume coming into a stock and get the sense that it was going higher," he told Schwager. These days the action in the stock market is so fast that it's difficult to follow the tape so closely, "but everything I do today has its roots in those early tape-reading experiences," Cohen told Schwager.
By the time he attended the University of Pennsylvania's Wharton School, where he earned a bachelor's in economics, Cohen was so obsessed with stocks that he traded between classes, according to a college friend. He was also a mean poker player at Wharton. "I thought that I was quite the poker player, but Steve cleaned house on me," says a longtime friend and SAC investor. After Wharton, Cohen headed to Wall Street, where he landed a job as a junior trader in the options arbitrage department at Gruntal & Co. in 1978. His very first day, he made an $8,000 profit, and eventually was netting around $100,000 a day for the firm, says his former boss there, Ronald Aizer. "He learned early on how to use the block-trading ability of the big firms" by watching their trades, says Aizer. By 1984, Cohen was running his own trading group at Gruntal, which he did until he set up SAC.
Friends say Cohen, though now immensely wealthy, has never been driven entirely by money. "He loves what he does. The money is merely his scoreboard," says one longtime friend. His stats are impressive. Armed with hot information and an ironclad trading discipline, Cohen has posted blowout returns throughout his firm's 12-year history. He has been up an average of at least 40% annually before his eye-popping 50% performance fee. (Most hedge funds charge 20%.) Last year, his worst ever, Cohen gained 13%, according to investors. "It was quite a disappointing year for him," says George Fox, an SAC investor and president of Titan Advisors Inc., a fund that invests in other hedge funds. Still, with the Standard & Poor's 500-stock index down 23%, it was almost like turning water into vintage Bordeaux. In the first half of this year, SAC is up 14% before fees, vs 11% for the S&P 500. Says Fox: "Steve trades very actively. That's one way he controls risk. He won't let a losing position sit there." Cohen and his business partners are the biggest investors in the fund, comprising some 60% of its assets. The remaining investors are typically other big-money, largely anonymous Wall Streeters. In the past three years, Cohen has returned most of the pension money that his funds managed, says a former trader.
Cohen's single-minded focus puts enormous pressure on SAC's 200 or so traders and analysts. "If you can't cut it within a few months of starting, Stevie will blow you out like that," says a former trader, who says he was fired for losing a substantial amount in one trade. Another says he left to escape the "ulcers and night sweats" he suffered while working there. SAC traders, who often earn $2 million-plus, are paid according to what they make on their individual trades, not on the overall performance of the fund, as at most hedge funds. "You eat what you kill," says one former trader. Adds another: "At SAC, you either perform or you're dead."
Earlier this year, the Securities & Exchange Commission launched a wide-ranging investigation into the $500 billion hedge-fund industry, including whether some of its practices represent conflicts of interest. "Few hedge managers are out-and-out fraudsters, but there are no doubt thousands who have convinced themselves that crossing some lines is O.K.," says Randy Shain, president of BackTrack Reports Inc., a business investigator. BusinessWeek didn't turn up any records of disciplinary action against Cohen or SAC by regulators at the SEC or the National Association of Securities Dealers.
Some of Cohen's investors see the criticism as sour grapes. "People on Wall Street tend to get jealous of anyone with a terrific track record," says one. Adds Columbia University securities law professor John C. Coffee Jr.: "If you are a market force that's very successful, you're going to have some vocal enemies."
Because he practices what a former SAC trader calls "active trading on steroids," there's little doubt that Cohen and his traders are very aggressive in seeking an edge. On Dec. 27, 2001, the day after ImClone Systems Chief Executive Samuel D. Waksal found out that the Food & Drug Administration had rejected an approval application for the company's cancer drug, Erbitux, an SAC trader named Jason Bonadio was one of a handful of investors to call Waksal that day. Former traders say SAC noticed a price movement, though the news wouldn't be publicly released until the next day. Domestic diva Martha Stewart placed her now infamous call to Waksal 17 minutes after SAC's, according to Waksal's phone log obtained by a congressional committee investigating ImClone. Sources familiar with the firm say Bonadio's call was forwarded to ImClone's investor relations department and never returned. SAC lost "millions" on a long position on ImClone, they say. Bonadio, who has left SAC, declined to comment.
Recently, the whispers about how Cohen and SAC operate evolved into full-fledged buzz. In January, one of SAC's star traders, Michael Zimmerman, came under SEC scrutiny for allegedly trading on information in company reports written by his wife, Holly B. Becker, a noted Lehman Brothers Internet analyst, before they were published. Both Becker and Zimmerman were served in late January with Wells Notices -- documents warning of a possible civil action by the SEC relating to stock trading. Their lawyers declined comment. Sources familiar with the company say SAC is not under investigation by the SEC. They add that if anything untoward occurred, it took place before Zimmerman joined SAC. Because Zimmerman still works at the firm, the affair has brought a great deal of unwelcome publicity to the fund and Cohen himself.
BusinessWeek has learned of a situation that has the appearance of a conflict of interest. Glenn Tatarsky, a trader at Sigma, one of Cohen's funds, had been actively trading the stock of retailer American Eagle Outfitters Inc. in 2001 and 2002. He was then living at the same address as Kindra Devaney, a retail analyst at Fulcrum Global Partners, who is now his wife. At the time she was negative on American Eagle. On Jan. 28, 2002, she issued the only "sell" rating among the 21 analysts then covering the company, according to Bloomberg Financial Services. BusinessWeek found no evidence that she ever shared information with Tatarsky about American Eagle before publishing her report or that he traded on anything he heard from her. However, he did buy stock on each of the three days leading up to Devaney's sell recommendation, sources familiar with the matter say. Either way, the incident raises questions about how SAC handles potential conflicts of interest when employees trade stocks that their partners analyze at other firms. Sources familiar with the company say it has one of the most stringent codes of conduct in the industry. Fulcrum's CEO Michael C. Petrycki says: "We were unaware of the situation, but our policy prohibits only immediate family from trading stocks we cover."
Physically, Cohen doesn't live up to his image as the Rambo of traders. The bespectacled, balding billionaire, about 5 ft. 8 in., looks like a slightly more hip version of George Costanza -- the Seinfeld character played by actor Jason Alexander. "He's low-key and self-deprecating -- he definitely has an awkwardness about him," says Schwager. Even when Cohen is executing a multimillion-dollar trade, adds Schwager, he exhibits such zenlike calm, it's "like he's ordering a sandwich." Says Ari Kiev, a psychiatrist and trading coach who has worked with Cohen and his traders for more than 10 years: "As the market evolves, Steve keeps recreating himself and never rests on his laurels. He always asks himself, 'what more can I do, what did I do wrong, how can I do better?"'
Calm and self-reflective he may appear, but Cohen is not averse to using sharp elbows to get to the head of the line. For instance, several industry insiders say SAC sometimes tries to suss out what other hedge funds plan to do and beat them to the punch.
To stop rivals from riding its coattails, SAC sometimes makes head-fake trades to camouflage its own intentions, say former SAC traders. It's a tactic, they say, Cohen learned soon after setting up SAC in 1992 with $20 million of his own and investors' money. Says a former assistant to Cohen: "In the beginning, things were so disorganized that a trader would be selling off shares of a stock just when Stevie wanted to buy. Stevie would stand up and yell at the trader." But Cohen also noticed the stock would drop like a rock if the other SAC trader sold first. Then, Cohen could buy back the block, then some more, at a cheaper price. Critics claim that Cohen operates what they call a "reverse desk." Former traders say it works like this: The firm purchases a relatively small amount of the stock, then starts selling it off through various Wall Street brokers. "When word gets out that SAC is selling, the Street goes nuts and also starts unloading big blocks," says one. Then Cohen swoops to buy. Sources familiar with SAC say that this type of trading or a reverse desk have never existed. Even if it does, it wouldn't pose any legal problems. Says Columbia's Coffee: "There's nothing wrong with making inconsistent orders in order to prevent your competitors from knowing what you're doing."
In another tactic, Cohen and his core group of traders sometimes "take the Street," according to former traders. SAC buys large blocks of a particular stock through a handful of major brokers simultaneously in an attempt to clean out their inventories. Often, the big investment banks have to buy back shares on the open market to replenish the inventories they need to hold as market makers, thus causing a pop in the price. Says a former SAC trader, "Stevie can take 8 desks in 10 minutes. The more guys he has doing what he's doing, the more he can move stocks." Once the stock has risen, SAC might even sell the same shares back to the brokers, making a tidy profit. Sources familiar with SAC say the firm doesn't engage in the practice. Says Coffee: "There's nothing wrong with trying to clean out market makers to get a lot of stock quickly at a reasonable price. If a large hedge fund buys slowly, the word gets out and that drives the price up more."
SAC also sometimes orchestrates "short squeezes," say former traders and rival fund managers. When there's a large short position in a stock, SAC will start buying it, causing shorts to cover, thus driving up the price -- at which point SAC sells. Sources familiar with the firm say SAC has never done this. Experts say the practice is legal.
What makes Stevie mad? Simple: Not getting preferential treatment. Several analysts say that SAC traders often pressure them for upgrades, downgrades, information, or insight into trading flow. And sometimes getting the information first doesn't seem to be enough. Says one analyst: "There was one day when I had at least 15 voicemail messages from two different SAC traders about how I was rating a particular stock. They don't exactly say, 'change your rating or else,' but they give you a hypercharged sales pitch on why you should change it." Sources familiar with SAC say that the firm expects employees to conduct themselves in a professional manner and doesn't condone such behavior.
Of course, Cohen usually makes nice with the Street. For example, former traders and rivals say one way he built his business and his relationships with brokers was by buying secondary offerings -- when public companies decide to bring more shares to market -- on which brokers receive around 40 cents to $2 a share on a built-in sales commission. "If you take down a million shares of a secondary, you've just paid your broker $1.5 million," says a fund manager. "That's how Stevie started off paying the Street."
Cohen's home life seems a far cry from the frenzied pace of SAC. He met his wife, Alexandra, who grew up in the Bronx and is described by a friend as "dark-haired and pretty in a petite way," through a dating service after divorcing his first wife. "From the time she was a child, Alex always said she wanted to marry a millionaire. She struck out," jokes a family friend. "She got a billionaire." Cohen has seven children and stepchildren.
In 1998, the Cohen family bought a 30-room Greenwich mansion built in 1930 for around $15 million. It was quite a move up from their previous $2 million house. They put millions of dollars more into an elaborate renovation and extension, say friends. Says one: "Steve told me, 'We took a beautiful old house and basically ruined it."' It is completely obscured from the street by a roughly 12-foot-high wall. Cohen is so secretive that he installed an extensive alarm system that beeps whenever someone walks into a room or out, say acquaintances.
The grounds, which some neighbors call Chelsea Piers -- after the mammoth Manhattan sports complex on the Hudson River -- include a basketball court that becomes an ice-skating rink in winter, several golf holes, and a bubble-enclosed swimming pool. "For kids, getting invited to the Cohens is one of the most coveted invitations in Greenwich," says a neighbor. Still, neighbors complained about massive, lengthy renovations at the house.
Cohen may not be impressed by his own billions, but Alex has coaxed him into "lavish entertaining, round-the-world art-buying trips, white-gloved butlers, that sort of thing," says an old acquaintance. For a housewarming party, she sent out an invitation she thought of herself: a deck of playing cards with a photograph of Steve as the king in a velvet robe and crown, herself as the queen, the children, and various and sundry household help as other cards.
Still, friends say Alex is a driving force behind the Cohen's generous charitable giving. In 2002, they gave $15 million to the Robin Hood Foundation, a charity founded by hedge-fund icons Paul Tudor Jones II and Stanley Druckenmiller. And they've given millions to aid families of World Trade Center victims and funded a walk-in clinic at Greenwich Hospital, among other activities. Cohen is also on the board of the Michael J. Fox Foundation, a nonprofit that fights Parkinson's disease.
The flow of charitable donations isn't likely to dry up anytime soon. SAC is having yet another good year, by most standards. But those 14% gains may not be setting well with Cohen. No doubt he wants to return to his mammoth 40%-plus gains. That may explain, in part, why he has branched out into multiple strategies recently. Indeed, in the wake of Wall Street scandals and the increased scrutiny of analysts, SAC is trying to live down its barracuda-like image. It recently hired a public-relations firm to assist it. "They know the spotlight is on them and they're really trying to clean up their act," says a former Sigma trader.
Cohen's active trading is now mainly focused on the firm's core fund that he manages. He continues to prune back the amount of capital he trades -- making the fund a lot more nimble -- while at the same time expanding his palette of trading strategies. Says a rival hedge-fund manager: "He seems to be trying everything to get that old magic back." Not that Stevie ever really lost it.
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