Steven A. Cohen got rich by going with his gut on big trades. Now the billionaire trader is experimenting with another path: automating the decisions of his best money managers.
Cohen’s Point72 Asset Management, which oversees his $11 billion fortune, is parsing troves of data from its portfolio managers and testing models that mimic their trades, according to people familiar with the matter.
The wave of automation that’s sweeping finance, initially relegated to taking over mundane tasks, is starting to encroach the ranks of prized money managers who are among the industry’s highest paid. Cohen is pursuing this effort after producing his second-worst year as a trader and as he prepares to return to the hedge fund industry at a time of intense investor pressure on fees.
Unabashed in his view that the industry is short of talent, Cohen has ramped up the project over the past year or so, said the people, who asked not to be named discussing internal matters.
Using analyst recommendations as an input, the effort involves examining the DNA of trades: the size of positions; the level of risk and leverage; and whether an investment was hedged, said one of the people. It also entails looking at the timing of trades, assessing pricing and liquidity in the market, and the duration over which managers build positions.
The model will identify patterns and relationships based on those analytics and seek to replicate bets, the people said. Point72 is also experimenting with automating the work of its execution traders, who place buy and sell orders with brokers on behalf of money managers.
Machines will never get the big paychecks Cohen has doled out. At his former hedge fund, SAC Capital Advisors, portfolio managers earned about 15 percent to 25 percent of profits they generated. Top performers took home as much as 30 percent -- which routinely translated into eight-figure payouts annually. Last year, Cohen changed the bonus structure with Point72 managers earning as much as 25 percent but only on the money they make above a market benchmark, or so-called alpha.
SAC had a quant group that sought to amplify the firm’s profits by using algorithms that replicated the trades of its best-performing managers. The model used leverage to help boost profits and managers were able to take a cut of the money made. Billionaire Paul Tudor Jones introduced a similar process last year at his hedge fund. He told investors in August he would use a chief investment officer tool to replicate trades of his best managers and planned to scale up the process over a period of six months.
Mark Herr, a spokesman for Stamford, Connecticut-based Point72, declined to comment on the automation project.
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