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Would you invest with Steve Cohen?

Steve Cohen is planning to launch a $20 billion hedge fund — and many institutional investors are planning to steer clear of it.

Cohen has been managing his own fortune at Point72 Asset Management, the family office he created in 2014 after his hedge fund firm, SAC Capital Advisors, pleaded guilty to insider-trading charges in the largest securities fraud case ever brought against a hedge fund. As part of the settlement, Cohen closed SAC and paid $1.8 billion in fines. In 2016, the Securities and Exchange Commission announced that Cohen would be barred from managing outside money until January 2018 to settle separate charges that he failed to supervise a former portfolio manager who had engaged in insider trading at SAC.

Cohen himself was never charged with insider trading, and the brevity of his ban sparked immediate speculation about when, not if, he would open a hedge fund after the order expired — not least of all because SAC delivered astonishing annual returns of 29 percent for 21 years. Sure enough, a Wall Street Journal report in late May said Cohen is planning to launch a new hedge fund open to outsiders as early as next year.

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Cohen may have to rely on a network of rich hedge fund managers and friends, as well as his own money, to get it off the ground, as institutional investors — including corporate and public pension funds, endowments, and foundations — are not likely to pony up money. Of course, Cohen may not need institutional money to reach $20 billion, which is more money than he oversaw at SAC, but he may miss the imprimatur that managing money for a nationally known pension fund or an Ivy League endowment can lend. A representative for Cohen declined to comment.

Institutions won't necessarily stay away because they are skeptical of Cohen's ability to generate returns. Rather, they fear bad publicity. Even talking on the record about possibly investing in Cohen's hedge fund comes with some reputational risk. Almost all of the institutional investors interviewed for this story agreed to speak only on condition of anonymity.

One chief investment officer of a corporate pension plan expects few, if any, pension plans to invest with Cohen. "I can't see anybody with a corporate plan doing something like this. Sooner or later, you have to report to the board," says the CIO. "There's infinite career risk for the CIO who tries to go down that path."

The CIO of a large U.S. public pension fund says underfunded plans could clearly use Cohen's returns, but trustees wouldn't want to expose themselves to the potential bad press. "It's hard to justify the headline risk, which could suck up an enormous amount of time and emotional energy."

Some industry watchers think sovereign wealth funds could be a big source of funds for Cohen, as many are not subject to the kinds of transparency requirements that pensions must adhere to. Endowments, too, could invest with Cohen, as they generally are more secretive about the underlying managers in their portfolios and have historically invested in asset classes and firms that are off the beaten path.

At the same time, endowments are facing political and governance issues, such as calls for divestment from fossil fuels. "It wouldn't look great to get out of something like Exxon stock and then plow money into Cohen, whose former firm was the poster child for bad hedge fund behavior," notes one executive at an asset management firm.

Others have reservations for more traditional reasons. An active manager with $20 billion is too big to be able to outperform in the current market environment, says Jim Dunn, CEO and CIO of Verger Capital Management, which manages money for endowments, including that of Wake Forest University. "There aren't that many good ideas out there," he explains. "It's going to be hard to put that money to work given how low rates are and given fund flows from passive managers that are driving everything up."

Cohen has taken steps to make even his family office more institutional. He has invested in a range of businesses, including crowdsourced quantitative manager Quantopian; spent heavily on compliance for Point72; and brought in a new team with gold-plated pedigrees, including McKinsey executive Doug Haynes, Point72's president.

Though Cohen's reputation may have been tarnished by his regulatory woes, his status as a hedge fund legend remains firmly intact. Even outside finance, the name Point72 evokes prestige. And even if institutional investors give Cohen's new fund a pass, there is one group of potential investors who may not be able to resist it. "He'll get big checks from hedge fund managers," says a former hedge fund executive. "It's their way to give a giant f– you to regulators."