BOSTON/NEW YORK (Reuters) - Steven A. Cohen's embattled hedge fund SAC Capital Advisors is facing a much tougher and less glamorous future, as outside investors pull the bulk of their money from the firm in the wake of an ongoing insider trading probe.
The billionaire trader, who founded SAC in 1992, will have to consider shedding staff, shuttering offices and scaling back some of its trading - something that could cost Wall Street firms hundreds of millions of dollars a year in trading commissions, industry experts said.
An SAC Capital spokesman declined to comment except to confirm that at the moment the firm's assets under management remain about $15 billion.
"There are going to be a lot of tough choices for Steve Cohen to make if he loses the bulk of his outside money, and one of them is probably going to involve trimming his staff," said Daryl Jones, director of research at Hedgeye Risk Management, which lists SAC as one of its clients.
The difficult decisions facing the 56-year-old manager come as outside investors were expected on Monday to redeem between $3 billion and $4 billion from the firm, on top of the $1.7 billion investors asked to get back in the first quarter. The flood of money moving out of SAC Capital comes as the insider trading investigation, now in its sixth year, continues to ensnare more people who once worked for the firm.
And while SAC Capital will continue to manage as much as $8 billion of Cohen's own personal fortune after outside investors are paid back by year's end, industry insiders say it's clear he will not need as big an operation as he once had.
The chief executive officer of an investment fund that invests with many hedge funds said it's likely that Cohen will look to shed much of the firm's "support and ancillary staff." The executive declined to be named.
One area where Cohen could easily cut is marketing and business development, which combined employ about three dozen people, according to firm documents. Other cuts at his 950-employee firm also could come from the finance and accounting departments, which employ 130 people.
Regulatory filings show that just about 400 employees perform "investment advisory functions" like trading and research. Investment advisory includes SAC Capital's roughly 115 portfolio managers, who oversee trading at the hedge fund.
"The immediate implications for investors and employees will be significant, but for the market as a whole they will be small," said Stephen Brown, a professor who focuses on hedge funds at New York University's Stern School of Business.
Industry headhunters said if Cohen is determined to keep his operation going at close to full tilt, the last place he will look to cut are traders and analysts who make money for him. Some headhunters said even with all the firm's legal trouble from the insider-trading probe, SAC Capital is still interviewing people for possible jobs.
One thing that could complicate matters for Cohen in his ability to retain top staff will be the loss of big fees generated from his outside investors' money. By charging outside investors a 3 percent asset management fee and taking 50 percent of the trading profits, SAC Capital long has relied on outside investors to finance much of its operations.
People familiar with SAC Capital said it is this fee structure that has enabled Cohen to build and maintain such a large operation. Still even without this some say Cohen should be able to compensate top staff provided the firm continues to generate above average returns.
"He may have to restructure his business a little but he should be able to generate enough returns to maintain a very large internal investment team to manage his assets," said Don Steinbrugge, managing partner at hedge fund consulting firm Agecroft Partners.
It could also give up offices in New York, London, Hong Kong and Singapore, or take on smaller spaces.
What's unlikely to go is the fund's home office in Stamford, Connecticut, which an entity controlled by SAC Capital paid $19 million for in 2000, according to local property records.
Also some outside money will remain with Cohen's fund. It will continue to manage more than $500 million in assets controlled by SAC Re Ltd., the year-old reinsurance firm the hedge fund set-up in Bermuda.
In fact, as long as SAC Re is operating and continues to keep its money with SAC Capital, the firm Cohen founded some 21 years ago will technically qualify as a hedge fund.
There has been speculation on Wall Street that Cohen might convert to a family office that manages just his own money as outside investors flee. But industry experts note that other than avoiding having to register with the Securities and Exchange Commission, Cohen wouldn't gain much from becoming a family office.
In 2011, billionaire investor George Soros converted his fund to a family office, in part because Soros simply no longer wanted the responsibility of managing other people's money. For Soros, the switch was a rather easy one as the 82-year-old-trader had to return a little under $1 billion to outside investors and employed far fewer people than Cohen did, said a person familiar with Soros' operation.
Both before and after the switch, Soros' operation, which manages over $20 billion, still has a few hundred people on staff. The person familiar with Soros said not many people were let go because of the transition.
There are few precedents for how a firm the size of SAC Capital, which has one of the largest work forces in the $2.2 trillion hedge fund industry, would operate with much less outside capital.
In part because of the uncertainty about the loss of investor money and the ongoing investigation, the mood has turned gloomier at SAC Capital in recent weeks. A hedge fund manager who knows several SAC Capital traders said on Monday he found some of the people he knows at the firm to be uneasy when he called them.
Several headhunters say they have received some resumes from SAC employees and have seen an uptick in queries about whether top talent at the firm are ripe for poaching, but are not yet seeing a rush for the doors by more senior staff.
Reporting by Svea Herbst-Bayliss and Katya Wachtel; additional reporting by Jennifer Ablan; editing by Matthew Goldstein and Leslie Gevirtz