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Blackstone Keeps Most of Its Money With SAC

Friday, 15 Feb 2013 | 7:18 AM ET
Steve Cohen
Scott Eelis | Bloomberg | Getty Images
Steve Cohen

The Blackstone Group, the largest outside investor in the hedge fund SAC Capital Advisors, said it would keep most of its $550 million with the hedge fund for three more months while it monitors developments in the government's insider trading investigation.

Blackstone acted as SAC's clients faced a regularly scheduled quarterly deadline on Thursday to decide whether to continue investing with the hedge fund giant run by Steven A. Cohen.

Despite posting one of the best investment records on Wall Street — returning 30 percent annually over the last two decades — SAC has been fighting to keep investors' money as an investigation into criminal conduct at the fund has intensified. Since November, when prosecutors brought the most recent SAC-related case, against Mathew Martoma, a former SAC employee, clients have been weighing whether to continue their relationship with the fund. Mr. Martoma has denied the charges.

Large hedge fund investors like Blackstone rarely make public pronouncements about their intentions, but given the heightened interest in SAC, the investment firm issued a statement explaining the rationale for its decision.

Blackstone said the money it withdrew was in the normal course of business and was unrelated to any of SAC's problems. Blackstone, which runs the world's largest so-called fund of funds, placing nearly $50 billion with outside managers, is seen as a bellwether in the hedge fund industry.

"While we submitted redemptions for certain accounts as appropriate, BAAM successfully preserved flexibility for our clients by extending our decision timeline," Peter Rose, a Blackstone spokesman, said in a statement, referring to Blackstone Alternative Asset Management, the segment that invests with hedge funds. "We will use this period of time to evaluate all additional information which becomes available."

It was unclear how much money SAC's clients redeemed Thursday. The fund, which is based in Stamford, Conn., had warned its employees that it expected it could face at least $1 billion of withdrawals. A Citigroup unit that manages money for wealthy families has disclosed that it was withdrawing its $187 million investment.

While several other former SAC employees have previously been charged with insider trading crimes, the Martoma prosecution has changed clients' calculus because the trades at the center of the case involve Mr. Cohen. In addition, the Securities and Exchange Commission warned SAC that it might file a civil fraud lawsuit against the fund related to the trades. Mr. Cohen has not been charged and has said that he has acted appropriately at all times.

Federal prosecutors are also nearing a decision on whether to bring criminal charges against Michael Steinberg, a longtime SAC portfolio manager, related to trading in Dell and Nvidia stocks. A lawyer for Mr. Steinberg, Barry Berke, said in a statement that his client did nothing wrong.

Unlike other hedge funds that can be forced to shut down after a wave of client withdrawals, SAC is in an unusual situation. Only about 40 percent of the $14 billion managed by SAC, or about $6 billion, comes from outside clients. The rest belongs to Mr. Cohen and his well-paid staff.

In addition, SAC has policies that limit the amount of money a client may withdraw in any one quarter. Clients may withdraw only 25 percent of their investment every three months. That means if a client put in a so-called redemption request on Thursday, it would receive its money back in quarterly installments beginning March 31, and would get its last dollar out on Dec. 31.

Blackstone negotiated a way to buy itself time without delaying its ability to withdraw its investment from the fund. SAC agreed to a new redemption policy that it will extend to other clients, allowing them to keep their money with SAC for another quarter. After that, if clients decide to end their relationship with SAC, the fund will return their money in three installments.

Under the new policy, SAC is letting clients take a wait-and-see approach, monitoring the investigation for developments that could damage the fund. If they withdraw, they will still have all of their money returned by year-end.

SAC's recent investment results have been solid, but have lagged the Standard & Poor's 500-stock index. The fund returned about 13 percent in 2012 and 2.5 percent last month.

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