The conversion of embattled US hedge fund SAC Capital into a family office could damage the reputation of the industry and prompt authorities to reconsider family offices’ exemption from the Dodd-Frank Act, a wealth sector expert says.
Worth around $15 billion (€11.6 billion), SAC Capital – founded by Steve Cohen and based in Connecticut and New York – is currently the subject of a Securities and Exchange Commission insider trading investigation, with nine former or current employees charged or implicated in the scandal.
There is growing speculation Cohen, who has not been accused of wrongdoing, will announce within the next few weeks that outsider money will be removed from the fund and his remaining wealth – a reported $9 billion – will be used to establish a single family office.
Those familiar with the case say Cohen may try to negotiate a deferred prosecution agreement with the government, whereby the firm would admit wrongdoing but charges against it would be dropped after a set time – if no further crimes were committed.
Family office expert Charles Lowenhaupt, chairman and chief executive of Lowenhaupt Global Advisors, said single family offices lobbied hard to be exempt from SEC registration required by the Dodd-Frank Act, which passed into federal law in 2010, but Cohen’s possible move could undermine these efforts.
“When someone like Cohen, whose firm is under investigation for insider trading, talks about starting a family office, the observer is left with the impression that he wants the single family office because he doesn’t want SEC examination into the kind of trading his firm doing,” he said.
Lowenhaupt reckons that the SEC might reexamine that exemption if family offices are perceived to be a safe haven for hedge funds that have been involved in insider trading, money laundering or similar activities.
In March SAC Capital and one of its subsidiaries were ordered to pay a $600 million fine by the SEC – the largest ever for insider trading. Five executives from the firm – including Cohen – have been subpoenaed to appear before a grand jury as part of the government’s ongoing investigation into the firm.
Regarded by some as one of the top traders of his era, Cohen charges investors a reported 3% management fee plus 50% on annual returns, where typically hedge funds charge 2% management fees and 20-30% on returns.
Cohen had been able to demand these fees due to the high rates of return on the fund; however, there has been an outflow of funds in light of the investigation. Private equity firm Blackstone’s is reportedly set to remove a share of its roughly $550 million investment at the next redemption request deadline on June 3.
Since the passing of the Dodd-Frank Act, several large hedge funds have transitioned into family offices. George Soros’ Soros Fund Management closed in 2011, and Millbrook Capital Management, which became a family office for its founder, John Dyson, closed last year – however, unlike SAC Capital, neither had been investigated for breaking federal laws.