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Taming the Beast: Wall Street's Imperfect Answers to Making Money by Larry Light

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Chapter 11

Chess Masters: Hedge Funds

Hedge fund mogul Steve Cohen is not the easiest guy to work for. Managers at his SAC Capital know that they can be skewered in an instant. If one loses 5 percent of his peak assets, he can have the rest taken away, according to a Bloomberg Markets article by Katherine Burton and Anthony Effinger. Lose 10 percent, and the manager is out the door. In 2008, 12 of Cohen’s portfolio managers were fired or resigned. Should a manager or analyst not answer a question to the boss’s satisfaction, Cohen likely will ask, “Do you even know how to do this f—ing job?”

Despite or because of this climate of fear, Cohen is one of the best hedge fund operators. Since he started SAC in 1992, Cohen has booked only one unprofitable year, in 2008, when his flagship SAC Capital International fund lost 19 percent. But that negative performance was half what the Standard & Poor’s (S&P) 500 lost then. The following year, Cohen bounced back with a 29 percent gain. Over 18 years through 2009, he averaged 30 percent annually.

Cohen is a whip-cracking meany for a reason: a lot of money is at stake. Hedge funds, lightly regulated pools of capital provided by very wealthy people or big institutions, are to the rest of Wall Street what Delta Force is to the U.S. Army. The people who run these financial special ops teams are out for blood, and they have a zealous knack for it.

Hedge funds aim to provide a special genius that can’t be had from investing in a boring old mutual ...

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