The returns, and Mr. Cohen’s secretiveness, have fed the firm’s mystique and led competitors to question whether it bends the rules. But the former employees say the firm’s success rests on a relatively simple formula. Because its returns have been so high, SAC can charge investors hefty fees. It charges an annual fee of 3 percent of assets under management, and keeps 50 percent of the profits. Typical hedge funds charge 2 percent of assets and keep 20 percent of profits annually.
Those huge fees allow it to poach talented people from other funds. The firm gives new hires a pool of money and the implicit promise that if they do well, they will eventually be able to start their own funds, former employees say.
“They provide a great platform for people who have been in the business for a while and want to become a portfolio manager,” said a former employee who now has his own fund. “And they are very generous.”
Once they join SAC, managers find a relentlessly competitive environment. No matter the firm’s overall profitability, managers are paid based on their own results. Essentially, portfolio managers are paid a percentage of the profits they generate — a percentage determined in the contracts they sign when they are hired. That pay structure allows SAC to avoid the year-end fights over bonuses that rack other firms.
At the same time, the firm’s managers have little reason to cooperate with one another. “It is an absolutely intense environment — eat what you kill — and the compensation environment does not encourage you to share,” a former SAC executive said.
The internal competition can verge on the absurd. At breakout sessions at investment conferences, where corporate executives meet with fund managers to talk about their businesses, the executives must sometimes meet with SAC managers one by one, because managers do not want others at the firm to hear their questions.
Over time, managers who perform well are given more money to run. Eventually, many leave to start their own funds, which often receive investments from SAC. The firm has little patience with poor performers, who are usually encouraged to leave if they do not begin making money within a year of being hired.
So SAC effectively operates as a group of small hedge funds, rather than a single huge fund that makes very large bets to generate its returns. Because SAC knows that a single charge of insider trading could devastate the firm, it vigorously enforces securities rules, former employees said.
Analysts and fund managers are told to ask SAC’s lawyers for approval before trading in cases when they receive corporate tips that might fall into the category of inside information. If the lawyers decide that the tips indeed qualify as inside information, they place the company’s stock on a “restricted list,” blocking any manager at SAC from buying or selling its shares.
“There was a process, you were expected to run those facts and circumstances up the ladder,” one former portfolio manager said.
While SAC has never been charged with wrongdoing, authorities appear to be looking at SAC in the current investigation into insider trading, which began at least two years ago and became public in October. Since then, prosecutors have charged more than 20 fund managers, analysts, lawyers, and corporate executives from Wall Street to Silicon Valley in several related cases. The list is expected to grow.
Mr. Lee, who worked as an analyst at SAC from 1999 until 2004, is the closest connection to SAC. Mr. Lee pleaded guilty in October to two counts of trading on inside information when he managed his own hedge fund in California. He did not plead to any infractions at SAC.
Even so, prosecutors directed Mr. Lee to disclose any insider trading he committed at SAC, or “a conspiracy to commit the same,” as part of his plea agreement. Earlier this year, while cooperating with prosecutors, Mr. Lee tried to rejoin SAC, but to no avail.
Jeffrey L. Bornstein, Mr. Lee’s lawyer and a partner at K&L Gates, said last month that Mr. Lee was cooperating with the authorities but declined to say whether they had asked him to build a case against SAC.
In 2008, as markets tumbled, SAC had its worst year ever, with its main fund down 19 percent. This year, the firm has recovered, gaining 26 percent through Nov. 30, net of fees — though that figure is less impressive than it seems, since the S.& P. 500-stock index is up about 24 percent.
Like some other major hedge funds, SAC spent much of the last decade diversifying from its core business of trading stocks into other markets, including commodities, bonds and emerging markets. Mr. Cohen hoped eventually to create a global money-management firm.
But since early 2008, SAC has retrenched. While large by hedge fund standards, it is tiny compared with publicly traded investment banks like Goldman Sachs, and competing directly with them would have required SAC to borrow many billions of dollars to build its balance sheet.
Even before last fall’s market upheaval, Mr. Cohen concluded that his firm would be best served by avoiding that leverage and sticking to its core business of stock trading, former employees said.