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UPDATE 1-SAC Capital's Plotkin to leave firm by year's end -source

(Adds details about firm, insider trading case, seed capital)

March 20 (Reuters) - Billionaire investor Steven A. Cohen will lose one of his top portfolio managers when Gabriel Plotkin sets up his own hedge fund, a person familiar with his plans said on Thursday.

Plotkin, who managed roughly $1 billion in positions at Cohen's SAC Capital Advisors, is expected to leave before the end of the year and Cohen is likely to invest some of his money in the new venture, said the person who is not authorized to publicly discuss personnel matters at the private firm.

News of Plotkin's planned departure comes just four months after SAC, once one of the world's biggest hedge funds, pleaded guilty to settle criminal insider trading charges. As part of the deal, SAC agreed to pay a $1.2 billion fine and stop managing money for outside clients.

Plotkin had been one of Cohen's top consumer traders and his name previously surfaced in the government's insider trading investigation after he received an email from former SAC analyst Jon Horvath, who pleaded guilty to insider trading.

Neither Cohen nor Plotkin have been accused of wrongdoing but the U.S. government brought criminal and civil cases against 10 former SAC employees and said insider trading was "pervasive" and "rampant" at the hedge fund.

In an effort to move on, SAC Capital Advisors is shedding its name, based on founder Steven A. Cohen's initials. Starting next month, the firm will be called Point72 Asset Management, in a nod to the address of its headquarters in Stamford, Connecticut. It also plans to hire a chief surveillance officer and told employees on Wednesday that it will now employ a Silicon Valley data analytics firm to keep closer watch on them.

"We will continue to look for other ways we can strengthen our surveillance efforts," SAC President Tom Conheeney wrote in Wednesday's memo. "The steps I have outlined to you over the past several weeks show we are matching our words with actions."

SAC managed $14 billion at the start of 2013 but has shrunk in personnel and assets. Plotkin's planned exit is the most high-profile defection since the firm's guilty plea last year, industry analysts said.

SAC has roughly 850 employees, down from about 1,000 in early 2013. The firm shut down its London office, which prompted a string of employees to move to rival hedge fund BlueCrest. More recently two managers quit to join Highbridge Capital.

From now on, the firm will function as a so-called family office, managing money only for Cohen, his family and a few top lieutenants. People familiar with the firm said that Point72 will likely manage roughly $9 billion, still a very sizable sum in the $2.6 trillion hedge fund world.

The fact that Cohen plans to invest some of his money with Plotkin underscores just how valuable he had been to the firm.

The news of Plotkin's planned departure was first reported by the Wall Street Journal.

Over the years many successful hedge fund managers including Julian Robertson, who ran Tiger Management, made a practice of giving some of their best former employees an initial investment when they set off on their own.

But Cohen, who employed hundreds of managers during his roughly two decades at SAC, bestowed investments on only a few of his former colleagues.

And even as Cohen was highly selective in handing out starting capital, many of the portfolio managers who spun out of SAC with Cohen's held either shut down completely or lost so much money that they stopped reporting their numbers to would-be investors.

(Reporting by Svea Herbst-Bayliss; Editing by Richard Chang)