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Is Steven Cohen the Lance Armstrong of Wall Street?

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The seven-time Tour de France winner has apologized to Oprah; can we expect the same from the leader of the world's most profitable hedge fund?

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To be the best in the world requires discipline and drive, innate talent and developed skill, laser-like focus and the right connections. On top of it all, it requires an edge beyond all competitors. In the young world of 21st century sports, too often this edge has come in the form of performance-enhancing drugs. Of course, once one competitor adopts an edge, others will follow suit.

Doping has been rampant among professional cyclists: Of the Tour de France winners between 1996 and 2010, 80% of them have had their victories tainted by positive tests for performance-enhancing drugs. The foremost cyclist of them all, Lance Armstrong, after years of adamant denial, has just admitted to doping in an interview with Oprah Winfrey, and has been stripped of his record seven consecutive Tour de France wins.

In another world where edge is crucial -- Wall Street -- competitors have their own unethical, illegal ways of winning. Sitting at the top of the game, much like Armstrong did as a cyclist, is Steven Cohen, the manager of hedge fund SAC Capital Advisors. So, is Steven Cohen the Lance Armstrong of Wall Street?

Left to Right: Steven Cohen, Lance Armstrong
Achievement

Worth $8.8 billion, Steven Cohen is the 106th richest man in the world. An avid art collector, he owns masterpieces by Edvard Munch, Jackson Pollock, Andy Warhol, Jasper Johns, Francis Bacon, Pablo Picasso, and Willem de Kooning.

During the first 10 months of 2012, his hedge fund, SAC Capital, took in $789 million in fees and returns, making it the most profitable hedge fund in the world. Over his 20-year run at SAC, Cohen has averaged 30% returns, and because of it, charges up to 50% in fees, which is among the highest in the business.

Lance Armstrong similarly sat atop the world of cycling. A survivor of testicular cancer which had spread to his lungs and brain, Armstrong won seven Tour de France titles in a row between 1999 and 2005. During that time he had an incredible brand: He was offered endorsements from major companies like Nike (NYSE:NKE), he was given cameos in films such as Dodge Ball, and of course he ran his LiveStrong Company, famous for its once-ubiquitous yellow bracelets (which in turn started that whole colored rubber bracelet craze). It is estimated that he is worth $125 million. That's a lot less than Cohen, but Cohen doesn't have seven Tour de France titles and the reputation as one of the world's greatest athletes. With the doping scandal now mostly behind us, Armstrong no longer has the wins nor the reputation.

Edge

In the world of hedge funds and Wall Street, edge comes from knowing information before anyone else. From an essay published in n+1, Gary Sernovitz, a former analyst, wrote this about Steven Cohen, whom he called the "Art Collector":

The Art Collector wasn't that interested in what we thought about companies or industries, competitive advantages or long-term growth. No, the Art Collector's trading strategy was based on the thesis that one could make money trading stocks by anticipating whether Wall Street's equity research analysts, collectively, were going to increase or decrease their estimates of how much a company was going to make the next quarter

This is the definition of edge on Wall Street. Before the SEC passed Fair Disclosure rules in 2000 which outlawed the selective release of private information, it was a very common practice at hedge funds to use information from consultants and analysts to get the competitive edge in a very competitive field.

Though those rules are in place, if you want to stick around at SAC, you have to have edge, and to have edge, you have to know crucial information before the other guys do. Simply put, the atmosphere Cohen has created is too competitive for legitimate approaches alone. Intense research, knowing a company's financials and history back and forth -- this just is not good enough anymore. Using your brain too much denies the randomness of the market, and that market tends to move when analysts upgrade or downgrade stocks.

In a Bloomberg Businessweek article, a former trader who is now a witness in the government's investigation into insider trading at SAC (more on that below) was asked if he knew of any hedge fund that didn't use illegal information. He answered no -- no hedge fund employee can survive without the edge. As Sheekah Kolhatkar puts it in the article, "In this way, trading on nonpublic material information is similar to doping in professional cycling: Once someone like Lance Armstrong starts doing it, everyone else has to as well."
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