WSJ on SAC

Stevie Cohen is profiled in this long WSJ article. He's had an uncanny intuition for predicting short term market movements. But he seems uneasy about the future...

On a typical day, SAC's trading accounts for 2% of overall stock-market activity...

SAC is among the most widely watched investment firms in the world. Mr. Cohen, who is 50 years old, has always guarded his privacy fiercely, keeping mum as attention was heaped upon his trading tactics, his voracious art collecting, and his expanding Greenwich, Conn., estate. Recently, in a series of interviews at his Stamford office, Mr. Cohen discussed the rise of SAC Capital, the suspicions of improper trading that have dogged his firm, and the big shift in his view of investing.

Mr. Cohen says he is now making bigger bets and holding the stocks longer. The throng of rival hedge funds could create a dangerous logjam, he says. Mr. Cohen worries that some of his largest holdings are also favored by other hedge funds. A rush for the exit could spell trouble. He says he expects that eventually there will be a sudden and sharp reversal in the stock market -- but he's not worried about that happening this year. "There will be a real decline that may devastate hedge funds that have crowded into the same stocks," he predicts.

"Hedge funds are bigger than they used to be. Their positions are bigger," he says. "I worry that if everyone were to sell, could we get out?"

Hedge funds, private investment pools for institutions and well-heeled individuals, now hold about $1.2 trillion in assets, more than twice what they had five years ago. Fat returns are becoming more elusive. In 2005, the average hedge fund returned 9.3%, below the 11.4% average for the past decade, according to Hedge Fund Research Inc., a Chicago consultant. By comparison, the S&P 500 index returned 7.7% last year. A record 848 hedge funds closed up shop in 2005, many of them hobbled by poor performance, according to Hedge Fund Research.

Mr. Cohen's reputation rests on an investing style altogether different from the buy-and-hold strategy espoused by influential investors such as Warren Buffett. Mr. Cohen believes that by scrutinizing trading patterns of a stock -- by "watching the tape" -- it is often possible to predict how the stock will move in the coming hours or even days. For years, he jumped in and out of stocks -- sometimes without any knowledge of a company's fundamentals, or even what it did. It was akin to picking out rocks in a river by watching the currents swirl around them.

Classic "value" investors such as Mr. Buffett insist that what other traders are thinking and doing is of no consequence to sound investing. Mr. Cohen is his polar opposite. He spends long days at the office in black jeans and worn sweaters, glued to his computer screens as he personally trades upwards of 300 stocks. SAC's trading floor bombards him with information about what's going on in the market. He soaks it all up. His eyes are often rimmed with fatigue.

On a typical day, SAC's trading accounts for 2% of overall stock-market activity. SAC pays securities firms an average of one cent for each share it trades, which adds up to more than $400 million in trading commissions each year, making SAC one of Wall Street's best clients.

For years, the relentless trading was highly effective. SAC Capital Management LP, Mr. Cohen's largest and oldest fund, launched in 1992, has generated an average annual return to investors of 43.5%, after he takes a sizable cut of profits. He and his partners keep 50% of that fund's gains, along with a 3% annual fee, far more than the 20% and 2% charged by most managers.

Mr. Cohen's colossal compensation inspired cocky traders who figured they could do the same, and dismayed others who disdained the frenetic momentum-style investing that underpinned the bull market of the 1990s. His net worth is estimated at about $3 billion, which SAC does not dispute.

In 1998, Mr. Cohen and his second wife, Alex, 42, bought his gated 1920s fieldstone estate for $14.8 million. They added a 12,000-square-foot annex with a basketball court and an indoor pool, and an outdoor skating rink. They constructed a 20-seat movie theater and decorated the ceiling of its lobby with the pattern of stars on their wedding night 16 years ago. Outside, they laid out a two-hole golf course, formal gardens and an organic vegetable plot.

They bought $700 million of art and adorned the estate with some of the pieces. A Keith Haring sculpture of three painted aluminum dancing figures stands out front. A $52 million Jackson Pollock hangs in the library. A Van Gogh and a Gauguin, both bought recently for a total of $100 million, grace the living room. An Andy Warhol and a Roy Lichtenstein hang in the foyer.

The spending spree fueled carping that new hedge-fund wealth was altering the fabric of Greenwich, long a home for the very rich.

...Mr. Cohen says he worries about whether SAC's investments are beginning to look like those of any other hedge fund. What's worked for SAC in recent years, he says, may not work going forward.

On June 9, around midday, Mr. Cohen walked off SAC's trading floor and slumped into a chair. The markets had been choppy all week. He was growing more certain that stocks were in for a significant decline, but ventured that it was more than a year away.

"The hedge-fund run is not over," he said. "I think the game is changing, and if it is, I have to react. We won't go off the ledge with everyone else."