Steve Cohen and the law of big numbers

February 23, 2011

By Matthew Goldstein

All too often the bigger an investment fund gets, the more difficult it is to continue to generate blowout returns.

Maybe the best example of a fund getting so popular and ultimately unwieldy is Fidelity’s Magellan fund.  One has to wonder if on a smaller scale, the same phenomena is happening to Steven Cohen’s SAC Capital Advisors.

As the below chart shows, Cohen’s now $13 billion hedge fund posted it most eye-popping performance numbers during its first decade of existence. Back then, SAC Capital had a fraction of the assets under management it has today and was considerably more nimble. It was back in those days when Cohen earned the reputation as the best trader of his generation.

However, more recently, as assets at SAC Capital have swelled, the returns churned out by Cohen & Co. have started to come back down earth. Overall, Cohen’s fund is still exceeding the industry standard. But the numbers SAC Capital is now putting up pale compared to Cohen’s track record.

There are, of course, good reasons for returns at SAC Capital to have come back some. Cohen is taking less risk in the wake of the financial crisis, which limits his ability to “kill it” as they say on Wall Street. Also,  the fees he deducts are far higher than most other managers. So in some ways, you can argue the 16 percent return SAC Capital generated in 2010 is better than a fund posting similar return after deducting a more modest fee.

But remember, this is Steve Cohen, who for years has been a performance leader—not just another manager.

You can read more about Cohen, his fund and why both keep coming up in the ongoing insider trading investigation in our Special Report: Is Steven Cohen the Feds’ Moby Dick?

 To read the special report in multimedia PDF format, click here.

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