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Business News/ Market / Stock-market-news/  Hedge funds under attack as Steven Cohen says skilled people are scarce
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Hedge funds under attack as Steven Cohen says skilled people are scarce

Cohen's comments come after Buffett said large investors should be frustrated with the hedge fund fees and Daniel Loeb said industry performance this year was catastrophic

A file photo of Steven Cohen, who said the industry has “gotten crowded” with too many managers following similar strategies. Photo: ReutersPremium
A file photo of Steven Cohen, who said the industry has “gotten crowded” with too many managers following similar strategies. Photo: Reuters

Los Angeles: In less than seven days, hedge funds have been subject to a three-pronged attack by some of the biggest names in finance.

Steven Cohen, the billionaire trader whose former hedge fund had racked up average annual returns of 30% before it pleaded guilty to securities fraud in 2013, said he’s astounded by the limited number of skilled people in the industry.

“Frankly, I’m blown away by the lack of talent," Cohen said at the Milken Institute Global Conference in Beverly Hills, California, on Monday. “It’s not easy to find great people. We whittle down the funnel to maybe 2 to 4% of the candidates we’re interested in. Talent is really thin."

Cohen’s comments come after billionaire Warren Buffett said over the weekend that large investors should be frustrated with the fees they pay hedge funds who fail to match the returns of index funds. Daniel Loeb, founder of hedge fund firm Third Point, said last week that industry performance this year was “catastrophic" and that funds were in the early stages of a “washout."

Cohen said the industry has “gotten crowded" with too many managers following similar strategies. He said fund firms seem to think they can hire skilled people and “magically" generate returns.

“It’s very hard to maximize returns and maximize assets," said Cohen, who runs $11 billion Point72 Asset Management. It’s difficult to balance size with carefully managing an organization and delivering good risk-adjusted returns, he added.

Cohen’s SAC Capital Advisors agreed to return outside money to clients as part of an agreement with US prosecutors targeting insider trading on Wall Street. The firm was renamed Point72 and now manages Cohen’s fortune. He wasn’t accused of wrongdoing.

Cohen said one of his biggest worries last year was that his firm might become the victim of an indiscriminate market selloff as other funds endured troubles and reduced risk. He said his worst fears were realized in February when US stocks fell to an almost two-year low and his firm lost 8%.

Earlier Monday, the industry came under criticism at the Milken Conference on the heels of Buffett’s comments at his firm’s annual shareholder meeting in Omaha, Nebraska, on Saturday.

Chris Ailman, who runs investments at the $187 billion California State Teachers’ Retirement System, said in a Bloomberg Television interview from the Milken conference that the hedge fund industry’s two-and-twenty fee model is “broken" and “off the table" for large institutional investors.

Hedge fund managers are among the highest paid in the finance industry, traditionally charging clients 2% of assets as a management fee and taking a 20% cut of profits generated.

New York City’s pension for civil employees voted last month to exit hedge funds, determining that they didn’t perform well enough to justify high fees.

Cohen said he was amazed that investors aren’t more demanding. He said pension plans and endowments tend to follow trends instead of being forward thinking.

The $2.9 trillion hedge fund business is having its worst start to a year in terms of returns and client withdrawals since 2009, when global markets were reeling from the global financial crisis. Managers including Bill Ackman, John Paulson and Crispin Odey posted declines of at least 15% in the first three months in some of their funds.

Loeb said in a quarterly letter that most money managers were “caught offsides at some or multiple points" since August. That month, China’s surprise currency devaluation sent shock waves across global markets.

Cohen said most people at his Stamford, Connecticut-based firm are not very good at timing when to invest or exit markets, though they are adept at picking stocks. He said external hires account for 20% of his firm, which prefers to groom analysts and money managers internally.

The Point72 founder said there are parts of the world where there are opportunities to generate more alpha, or profit above a benchmark index, than in the US. His firm has offices in cities including Hong Kong and London.

Cohen, who under a settlement with regulators could manage outside capital again as soon as 2018, said he didn’t see the industry’s crowding problem easing any time soon.

“This industry has been around in a real way for 25, 30 years and excess profits get competed away in one way or another," he said. “More people are going to enter the business and drive it down. It’s starting to happen now and will probably continue to happen. That’s a normal industry cycle."

Cohen rarely speaks at public industry events. He made the comments in a panel discussion with money managers Cliff Asness and Neil Chriss. Bloomberg

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Published: 03 May 2016, 08:34 PM IST
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