The wildly successful hedge fund SAC Capital Advisors typically heads into the end of the year in a position of strength, promising market-beating returns for its investors and outsize paydays for its owner, Steven A. Cohen.
But as it looks to the final months of 2013, SAC’s prospects are grim as the fund, while operating under a criminal indictment, prepares to become leaner with virtually no outside investors.
With a regularly scheduled deadline of midnight on Friday for SAC investors to ask for their money back, the fund expects to lose virtually all its outside capital. Already this year, investors have requested $5 billion of the $6 billion in outside capital from the $15 billion that the fund had at the start of the year. That money will be paid out in installments over the coming months.
The Blackstone Group, the influential hedge fund investor that once had more than $500 million with SAC, has pulled its entire investment from the firm, according to people briefed on the matter, speaking only on the condition of anonymity.
The news of a final wave of withdrawals comes days after SAC quietly closed Parameter Capital, one of its trading units, and disclosed in a securities filing that it had reduced its stock positions by $2 billion as of June 30 in anticipation of having to fulfill its investors’ withdrawal requests.
Jonathan Gasthalter, a spokesman for the fund, declined to comment on investors’ requests to withdraw funds.
As Wall Street watches SAC shrink, it hopes that the fund, which for years has been a lucrative client at many of the large banks, continues to operate as a firm that manages Mr. Cohen’s fortune. The roughly $9 billion left in the fund at the end of the year will be mostly Mr. Cohen’s, with a small percentage belonging to his employees.
SAC has told employees that it can endure the wave of client withdrawals and operate the fund as a “family office” that mostly manages Mr. Cohen’s money. But the government’s continuing investigation into SAC and Mr. Cohen continues to raise questions about the fund’s future.
The firm is fighting a criminal indictment issued on July 25 that charged SAC with carrying out a vast insider trading conspiracy. At least 10 former employees have been implicated in illegal trading while at the fund; five have admitted guilt.
Federal prosecutors said SAC’s misconduct “resulted in insider trading that was substantial, pervasive and on a scale without known precedent in the hedge fund industry.”
Prosecutors have separately filed a civil forfeiture complaint stating that the government could seek “any and all” assets in the fund.
While the government has taken an aggressive prosecutorial stance against SAC, it has also proceeded cautiously to try to limit the collateral damage from the indictment. Prosecutors decided not to try to freeze SAC’s assets or prevent it from trading, a move that could have saddled outside investors with losses and hurt the Wall Street banks that do business with it.
While the government stopped short of bringing criminal charges against Mr. Cohen, it has not absolved him of responsibility for his firm’s suspected wrongdoing. In a civil action, the Securities and Exchange Commission accused Mr. Cohen of failing to supervise his employees, a case that could result in Mr. Cohen being barred from the securities industry.
“The government has a wide variety of potential penalties it can choose from,” said Steven Nadel, a hedge fund lawyer at Seward & Kissel, “ranging from monetary fines to some sort of ban on trading.”
Mr. Cohen has already paid a hefty penalty to securities regulators. This year, SACagreed to pay a record $616 million fine to settle two civil insider trading lawsuits — money that effectively comes out of Mr. Cohen’s pocket. The penalty surpassed fines handed down during the 1980s for Wall Street scandals involving Michael R. Milken and Ivan F. Boesky.
For now, banks have continued to trade with SAC even while it operates under the cloud of an indictment. And while SAC employees are quietly exploring other job opportunities, most are sticking around for their year-end bonuses, which for top portfolio managers can reach into the tens of millions of dollars.
Even as accusations and charges continued to emerge, some people on Wall Street have stood by the hedge fund. This month, Gary D. Cohn, the president of Goldman Sachs, announced publicly that his firm remained in business with SAC.
Under the deal that SAC lawyers reached with the government that allows the fund to continue trading, called a protective order, the fund is required to hold a set amount of its assets equal to $5 billion, a person briefed on the matter said.
In response to a question about whether one Wall Street bank would end its relationship with SAC in light of recent revelations, one analyst asked rhetorically, “How many $9 billion hedge funds are out there?”