Some of Cohen’s investors are reportedly growing uneasy about keeping their money at SAC Capital, fearing the government could crush the firm. But while Cohen has a tough road ahead of him, he might still have an easier time avoiding investor withdrawals than many other hedge fund managers will in the coming weeks. That’s because the suspicion of insider trading isn’t as big a crime in the hedge fund investing world as lousy investment returns—and there are plenty of hedge funds guilty of that these days.
This year has turned into a disaster for many hedge funds. The big hedge fund story of 2012 isn’t insider trading, it’s underperformance—although the two trends might actually be linked. The Bank of America Merrill Lynch investable hedge fund composite index has returned a puny 1.69% this year through November 21. The equity long/short guys are up 3.55%. Hedge Fund Research’s numbers show the average hedge fund returned 4.53% through October. At the same time, ultra-cheap Standard & Poor’s 500 index funds have returned more than 14% so far in 2012.
But hedge fund managers are not just guilty of having one bad year. In fact, this is shaping up to be the second straight year that dumb unmanaged mutual funds that simply track the U.S. stock market have creamed hedge funds. Last year the average hedge fund lost 5% while the S&P 500 eked out a small gain and the Dow Jones Industrial Average returned 5.5%. So for two years many hedge fund investors have been paying rich fees to hedge fund managers for performance that stinks.
By comparison, Cohen has treated his investors pretty well. He provided his investors net returns—after his super rich fees—of 8% in 2011, beating the average hedge fund and the U.S. stock market. His net returns so far in 2012 are in the 11% range. His returns for many previous years were outstanding and massive. In addition, Cohen’s firm months ago moved to indemnify its investors from any legal claims. As one astute cynic sees it, no matter who is going to jail for insider trading, it won’t be any of SAC Capital’s investors.
Earlier this year, Preet Bharara, the U.S. Attorney in Manhattan, who recently brought criminal insider trading charges against Matthew Martoma, a former SAC Capital employee, said that his office is sensitive to the fact that a criminal investigation can undermine confidence in a company. “When smoke is generated, as happens in real life, firefighters show up,” Bharara said. “They’re trained to make sure that you don’t do undue damage. But you’ve got to figure out whether or not there’s a fire. And firefighters sometimes will go into a building to make sure they’re saving lives and putting out the fire, and it turns out it was just smoke, but damage occurs to the building.”
Cohen and his firm, who have not been charged or accused of any wrongdoing and contend they have always acted appropriately, are trying to limit the damage from the legal fire that is blazing around them. At the end of the year, many other hedge fund managers will try to put out the underperformance fire that is threatening to cause investors to flee. It might be a much harder flame to put out.
