Don’t call it a comeback just yet.
As Bloomberg News reported on Tuesday, hedge fund manager Steven A. Cohen is preparing to raise as much as $10 billion from outside investors in 2018 for a new fund. Combined with his personal fortune of $11 billion, the fund could oversee more than $20 billion, which would make it the largest U.S. hedge fund launch in history.
It would also mark an extraordinary turnaround for Cohen. Just four years ago, he made history in all the wrong ways. His hedge fund firm at the time, SAC Capital Advisors LP, was charged with insider trading. The firm pleaded guilty and paid a record $1.8 billion penalty.
In addition, six current or former SAC employees were convicted of various criminal charges related to insider trading. Cohen was never charged with insider trading, but the Securities and Exchange Commission did accuse him of failing to supervise misbehaving employees. In the ensuing settlement, Cohen agreed not to manage outside money until Jan. 1, 2018.
Theories abound about why Cohen would want to get back in the game of managing other peoples’ money, ranging from ego to boredom. And in the end, he may not go through with it.
Cohen clearly doesn’t need the money. Sure, it would be nice to have outside investors help pay for his 1,000-employee family office, Point72 Asset Management LP. But the profits on his personal investments should more than cover those expenses.
Maybe, as Fortune writer Jen Wieczner put it, “Steve Cohen wants people to believe that he never did anything wrong. So how does he prove that? Well, if he can deliver the highest returns -- at least as high as he always has -- while he literally has people from the government, including a government appointed compliance monitor, in his office, then people are going to believe that he really is just that good.”
But trying to recreate the SAC magic with $20 billion would be a huge gamble. If Cohen falls short, it would only reinforce the suspicions he might be trying to dispel. And generating outsize returns with that much money won’t be easy.
Hedge funds generally don’t disclose their performance to the public, but Frontline published a chart in 2014 showing SAC’s annual returns from 1992 to 2012. Using that chart, I estimated the performance of SAC Capital Management LP -- SAC’s fund for U.S. investors -- during that period.
The fund’s performance over the entire period was spectacular. SAC tripled the return of the broad market with comparable risk. The fund returned roughly 26 percent annually over those 21 years with a standard deviation of 22 percent. Over the same time, the S&P 500 returned just 8 percent annually, including dividends, with a standard deviation of 19 percent. (Standard deviation reflects the performance volatility of an investment; a lower standard deviation indicates a less bumpy ride.)