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Wall Street Transfixed by SAC Deadline

SAC Capital Advisors
Douglas Healey | Bloomberg | Getty Images
SAC Capital Advisors

For most of the day Monday, a report about the investor exodus at SAC Capital Advisors was the most-viewed article on the Bloomberg data terminals that permeate Wall Street trading floors.

In part, the story's cliffhanger element drove its popularity. How much money will SAC investors pull out by a withdrawal deadline that expired late Monday? Will its billionaire owner, Steven A. Cohen, buffeted by the wave of so-called redemptions, shut the fund to outside investors and manage only his fortune? Will the government bring additional criminal charges as the insider trading investigation of the firm intensifies?

But a major reason for the intense interest on Wall Street, senior brokerage firm officials say, is a commercial one: SAC has generated billions of dollars in revenues for brokerage firms over the years. Several executives — all citing client confidentiality — said that the prospect of a severely diminished SAC would hurt their bottom line, which has created fear and anxiety on trading desks across Wall Street.

(Read More: SAC Capital Investors Could Pull Billions in Quarter)

"This is going to have a significant impact to the Street, full stop," said a senior executive at a brokerage firm that counts SAC as one of its largest clients. "It's like that line in 'Bonfire of the Vanities': a lot of golden little crumbs have fallen off of SAC, and now it looks like there will be less of them."

SAC employees — and the armies of brokers and stock salesmen that service the firm — are expecting outside investors to take back several billion dollars more by Monday's regularly scheduled quarterly deadline, according to people with direct knowledge of the firm. The Blackstone Group, SAC's largest outside investor, is expected to withdraw most of its money; another fund, Ironwood Capital Management, will also terminate its relationship with the firm.

Combined with the $1.7 billion that outside investors took out earlier this year, the withdrawals could leave SAC and Mr. Cohen with only about $1 billion of other people's money. The fund could announce to its clients as soon as Tuesday the amount of money that investors asked to withdraw.

Investors are fleeing during the continuing government inquiry into insider trading at SAC. The firm, which had been giving investors regular updates on the investigation, recently told investors — after its senior executives received grand jury subpoenas — that it was no longer fully cooperating with the government and would not be providing further updates. That announcement heightened investors' concerns, leading to an increase in withdrawal requests. At least nine former SAC employees have been tied to insider trading; four of them have pleaded guilty. Mr. Cohen has not been accused of any wrongdoing.

Given the substantial outflows, Mr. Cohen and SAC officials are discussing the possibility of returning all outside capital and transforming SAC into a "family office" that manages Mr. Cohen's wealth, said people with knowledge of the firm's thinking. Of the $15 billion that SAC managed at the beginning of the year, about $8 billion is Mr. Cohen's, with about $1 billion more in employees' money.

The loss of investors will cost SAC dearly and most likely will force it to reduce its staff of more than 1,000 employees. SAC, which is based in Stamford, Conn., pays for its large infrastructure by charging its investors some of the most expensive annual fees in the industry — as much as a 3 percent management fee and 50 percent of the profits. It commands those fees because of its nearly unparalleled investment track record, posting returns that have averaged nearly 30 percent a year over the last two decades.

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While Mr. Cohen's investors have benefited from the superior performance, so have the Wall Street brokerage firms that have catered to Mr. Cohen's firm. The main reason, they say, boils down to one word: leverage. To juice its investment returns, SAC borrows heavily from banks, which earn big fees on the loans. The fund borrows, on average, about $3 for every dollar in the fund. At $15 billion managed, SAC had a staggering $45 billion in buying power.

People close to Mr. Cohen said that without outside investors, he would most likely run the business more conservatively and substantially reduce his borrowings.

SAC's billions of dollars in buying power, combined with the fund's aggressive trading style, have made it one of the top commission payers on Wall Street. Several executives said that the firm is a top trading client at most of the large banks, including Goldman Sachs and Morgan Stanley, paying out several hundred million dollars a year in stock trading commissions annually. The fund is also a highly profitable and important customer for the banks because it is among the most active buyers of the lucrative initial public offerings and secondary offerings that they underwrite.

(Read More: SAC Capital Braces for $3.5 Billion in Redemptions)

"In these soft years for stocks, where margins have grown very thin, trading volume has become the lifeblood of the brokerage business," said Matt Samelson, principal at Woodbine Associates, a capital markets consulting and research firm. "When you've got a major player like SAC either going away or downsizing, this just erodes the trading volume that the big Wall Street firms have been fighting so hard to get."

Other areas of the large banks that generate big revenue from SAC are the so-called prime brokerage units, which provide a number of services to hedge funds, including lending money, clearing trades and introducing them to prospective investors. Most hedge funds use one or two prime brokers, but SAC has historically spread the wealth around, employing at least five, including Credit Suisse and JPMorgan Chase.

Wall Street officials note that despite the prospective loss in business, there are a number of silver linings. The impact of a diminished SAC would be buffered by the fact that Mr. Cohen would continue to manage billions of dollars. Another potential positive is that, should the fund reduce its head count, a number of leading SAC portfolio managers would be expected to start their own firms. The concern, however, was that their affiliation with SAC, whose reputation has been stained by the insider trading scandals, could hurt them in raising money.

By Peter Lattman of The New York Times

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