SAC set to pay out billions

After an insider trading case, SAC Capital is set to shell out cash to investors looking to exit the troubled hedge fund run by Steven Cohen. Here’s the story from the Wall Street Journal.

Clients of SAC Capital Advisors LP moved to pull $1.7 billion from the hedge-fund firm, or roughly a quarter of outside investors’ money, as an insider-trading investigation weighed on confidence in the money manager.

SAC will pay out about $660 million next month to investors who had requested withdrawals ahead of Thursday’s deadline, people familiar with the matter said, adding that the firm will return the remaining money over the course of 2013. SAC manages roughly $6 billion in outside capital, according to people familiar with its operation.

A federal insider-trading investigation has ensnared six former SAC employees, and the firm said in November it might face civil charges from securities regulators. SAC has said that both the firm and its founder, Steven A. Cohen, have acted appropriately and that it will cooperate with the probe.

The scrutiny has tested clients’ loyalty and pressed one of the world’s top-performing hedge-fund firms to adapt. Shortly before redemption requests were due, SAC offered clients more time to decide whether to pull their money.

A representative of one investor said SAC can easily manage returning $660 million next month, with little or no noticeable impact on its operations. Still, the exodus was seen by some clients as remarkable for a single quarter considering SAC’s extraordinary track record. SAC has posted average annual returns of about 30%, according to investors.

“Redemptions breed redemptions, and what they have to be careful of is the momentum shifting so people start putting in redemptions regardless of whether they think [regulatory scrutiny] is going to go further or not,” said Brad Balter, an investment manager who oversees more than $1 billion in client money in hedge funds and hasn’t placed any of it with SAC.

Money from outside investors accounts for less than half of the Stamford, Conn.-based firm’s total assets. Mr. Cohen and his employees have around $9 billion of their own money in SAC funds, according to the people close to the firm.

The legal troubles for the fund are far from over. The New York Times reported last week that the government is considering filing charges against another high-ranking employee.

Federal prosecutors are nearing a decision whether to bring criminal charges against Michael Steinberg, a longtime portfolio manager at SAC Capital Advisors, the giant hedge fund owned by the billionaire investor Steven A. Cohen.

In recent months, a former SAC analyst who worked directly for Mr. Steinberg has met with authorities and provided them with information about his former boss, according to a person with direct knowledge of the investigation. The analyst, Jon Horvath, has been cooperating with the government since pleading guilty in September to insider trading charges.

Mr. Horvarth admitted to being part of an insider trading ring that illegally traded the technology stocks Dell and Nvidia. As part of his guilty plea, he implicated Mr. Steinberg, saying that he gave the secret data to his SAC boss and that they traded based on secret financial data about those two companies.

If prosecutors file a criminal case against him, Mr. Steinberg, 40, would be the most senior SAC employee charged in the government’s investigation of the hedge fund, which is based in Stamford, Conn. Including Mr. Steinberg, at least eight current or former SAC employees have been tied to allegations of insider trading while working there. Four have pleaded guilty to federal charges.

Another interesting turn of events is that large investor Blackstone pushed SAC to alter its redemption terms. Here are the details according to Bloomberg.

Clients account for about 40 percent of SAC’s assets under management and the rest is from Cohen and his employees. SAC this week reached a deal with Blackstone Group LP that gives all clients three more months to decide whether to stay in the fund.

The hedge fund was told by the U.S. Securities and Exchange Commission in November that the agency is considering pursuing civil fraud claims against it, related to alleged insider trading in two drugmakers by former portfolio manager Mathew Martoma. Blackstone, one of the biggest investors in SAC, with about $550 million in the fund, will leave most of the money in place for at least another quarter under the new liquidity agreement, it said yesterday in a statement.

The new terms give SAC investors time to see if the fund and its billionaire founder are charged as part of a multiyear government probe that has already linked at least eight current or former employees to allegations of insider trading at the firm.

Clients faced a deadline of yesterday to tell SAC, which is based in Stamford, Connecticut, if they wanted to start the process of withdrawing all their money by the end of the year. Under existing rules, they could redeem 25 percent of their assets from the firm each quarter.

Now, SAC is telling investors they can wait until mid-May to make the decision. At that time, they can redeem a third of their money each in the second, third and fourth quarters.

That leaves the fund in a state of flux and uncertainty, making it hard to make investments or show returns. And funds that can’t post outsized returns typically end up returning investors’ cash anyway.