Sheelah Kolhatkar is a former hedge fund analyst who later became a journalist at Bloomberg Businessweek. Now a writer at the The New Yorker, she recently authored the New York Times bestseller, Black Edge: Inside Information, Dirty Money and the Quest to Bring Down the Most Wanted Man on Wall Street.
Of course, the most-wanted man in question is ultra-wealthy hedge fund boss Steven Cohen of SAC Capital Advisors. AKA the man who inspired Damien Lewis' character Bobby Axelrod in Sky Atlantic's fantastic show Billions.
In episode 135 of Chat With Traders podcast, Sheelah discusses the experience of researching and writing about the infamous trader with host Aaron Fifield. Read below for some extracts from the interview, or listen to the full episode here...
I just loved that my one face-to-face interaction with him involved him telling me he was there to sell (art), but he was in fact there to buy, and I just thought that was sort of perfect.Sheelah Kolhatkar
On being an analyst...
I was a risk arbitrage analyst for 5 years at two small hedge funds. I was not terribly happy doing that, but it was a very interesting start to my career. I kind of fell into it by accident, but that did teach me about hedge funds. I came to completely understand that industry through my job, just trying to research arbitrage opportunities for these two small funds. It was fascinating.
I am just temperamentally not well suited to the kinds of quick decision making that you really have to do when you're a hedge fund trader and analyst. Especially doing the kind of investing we were doing. Often something would be announced, some piece of news would come out and you had to make a trading decision pretty quickly. And I'm the kind of person who likes to study, read books and talk to people before making a big decision. I'm not good at doing a quick scan of the market and then going with my gut and just going for it, it's not my personality.
On going into journalism...
I left the hedge fund world and went into journalism, and ended up in 2012 working at Bloomberg Businessweek. That was a very fun and interesting job. The government had started investigating this big insider trading gig and they were making arrests periodically and it would be in the news and the Wall Street Journal. But then at the end of 2012 there was a break in the case and some FBI agents went down to Florida and they arrested a former portfolio manager named Mathew Martoma, who has worked for Steve Cohen.
And that was kind of a big deal, because Steve Cohen's hedge fund SAC Capital was one of the biggest, most well-known hedge funds in the world. There was a lot of envy of his success on Wall Street, he was just a very famous, well known wealthy investor. So when the government went and arrested this former employee of his, accusing him of insider trading, it was really clear from the government's filing and what they disclosed about the case that they were kind of interested in Steve Cohen himself.
My editor at Businessweek, said to me, "Sheelah, this is going to be a really big story and you should get on it, it’s perfect for you, it’s about hedge funds" And I was reluctant at first, because it seemed really hard, but I started to follow the story and it just got more and more interesting.
On meeting Steve Cohen...
I knew it was very unlikely he would agree to do an interview with me. He was under a tremendous amount of legal pressure, there was a possibility most of the time I was writing this book that he might be charged or go to jail possibly. I’m sure he was very nervous and there was no way his lawyers would have allowed him to sit down with this author and speak openly about what happened. But even though he had been sort of saying no and avoiding me, I felt that I had to kind of make a final pitch to him in person about the book, just to hear it directly from him that he didn’t want to participate.
So I knew he was going to be at an art auction at Christmas on a particular night. It was a very high profile auction, and he’s a big major art collector. He has one of the most well-known private art collections in the world, it's valued at over a billion dollars. It was known he was going to be selling a painting at this particular auction, so I knew he would come. I just waited for him in the lobby and I had my business card and a little notepad, and I saw him coming and jumped right into his path and I introduced myself.
As soon as he heard my name, he knew who I was. He said "oh god, I can’t talk to you". I said I have a really good story to tell and I want to hear your side and I want to hear about how you’re changing your firm and trying to improve the culture of the company, and he said "oh I’ll think about it". He was sort of trying to get away from me as quickly as possible. And I said "are you going to be buying art tonight or selling?" and he said "I’m selling, I’m selling".
I knew that he was selling this one piece and then kind of disappeared into the crowd. Literally 30 minutes later he bought a Giacometti sculpture for $141 million. So I just loved that my one face to face interaction with him involved him telling me he was there to sell, but he was in fact there to buy, and I just thought that was sort of perfect.
On Cohen's early trading days...
So his first job was at a small, not terribly well respected brokerage firm, called Gruntal And Company. And it was located right close to the actual Wall Street, in lower Manhattan. It was a place where there were a load of misfits, it wasn’t sort of a slick establishment and corporate environment, it was a little bit wild.
He developed a reputation as a tape reader, someone who could look at the physical ticker tape and somehow be able to tell which way a stock price was going to move and he started day trading this way. He was also very good at determining how pieces of news would affect stock prices and also very good at managing risk. He didn’t get emotionally attached to his trades, he was very good at pulling the plug and selling something if it started to go against you. He was, according to everyone who worked with him at the time, very good at being dispassionate and analysing risk in this very cool, detached way. And he just started to make a lot of money, millions of dollars very quickly.
On starting SAC Capital...
When it began it was just a tiny one room operation. They had an office in Manhattan where they were in the same room and would all kind of day trade together. Steve would often set the trading plan for the day and all his traders sitting around him would all just follow along what he was doing.
But eventually as SAC grew he made more and more money, his reputation start to grow on Wall Street, and people started to watch what he was doing because he was known to be somebody who was always on the right side of a trade. Traders I spoke with all had stories of hearing about how a company announced disappointing earnings and the stock would get killed, and, oh it turns out that Steve was short right before that earnings announcement. There were constantly things like this going on, where it seemed somehow he got in at the right time, before some event or news event moved the stock price.
So people started to try copy him and I think it was really frustrating for him because obviously when everyone was trying to imitate your trades, all the profit you were hoping to scoop up for yourself gets consumed by all these other people imitating you. So he became very secretive and spent a lot of time trying to prevent the rest of the Wall Street community from imitating what he was doing. But very quickly his fund grew to over a billion dollars.
On SAC's performance...
It performed extremely well, almost from the get go. In the early years, returns were higher than it tended to be later when the fund became so huge; at its peak it had over 15 billion of assets under management. So that’s a very large fund, and it’s hard to post double digit returns when you’re managing that much money. But when the fund was small, he was posting 50/60/70% returns easily every year.
Over time, when investors learnt about this, they used to fight to get in. He then started charging higher fees than most hedge funds; instead of taking 20% of the profits he would take 50%. But investors didn’t mind paying because the returns were so good; you just couldn’t find those sort of returns anywhere else. And he was very consistent, I think in its entire life time, SAC Capital only had one year where it lost money, and that was 2008.
On using insider information...
Some people believe there was possibly illegal activity going on there from early on. There are others who believe it became more of a problem in the later years when the fund got so big and started expanding into other strategies that were more vulnerable to that type of thing.
One thing I do admire about Steve Cohen is his ability. He was a businessman, an entrepreneur, and he was very good at anticipating changes in the hedge fund world and adjusting what he was doing and changing SAC Capital’s strategy to respond and try and keep that bit ahead of what the market was doing. At one point in the early 2000’s he made the decision to become a much more research-intensive shop and he did not want to rely on outside sources to get good research information on stocks. To that point they had been speaking to a lot of analysts, the big banks. He said wanted his own in-house team of analysts.
And especially as he started to make more investments in bio-tech and technology stock, it’s very hard to understand all these industries. So he went on a real hiring spree, to hire ambitious, well-educated traders and analysts who could really understand and research and become experts in the different industries and the different stocks they were trading.
During that period when the firm was switching directions a little bit to move into this more research intensive direction, I do think a lot of the people who got into trouble, legally, a lot of them joined during this era. Although not all of them, but there was definitely an influx of new people who started to really look for edge in tech stocks in particular, and that led them into some activities that they weren’t supposed to be involved in. Certainly the documented problems tended to happen later. But there were people with suspicions going all the way back.
On the grey area...
There’s definitely some grey area in insider trading law. My sense from the cases I was able to study closely, there were signs the people involved did know what they were doing was wrong. They would try and hide it for example. Many of them argued that the line wasn’t entirely clear and it's true insider trading is a little complicated to prove. And you have to prove that the person who traded the information has to have known it was leaked by somebody who was not supposed to leak it, usually a company insider who has a duty to keep that information confidential.
So they have to leak it out and the person who receives that information also has to receive some sort of benefit for it, they can’t just share it as a gift, they need to receive something in return, either money or maybe some other insider information if they’re trading information. But you have to prove all these elements to make a case in court.
So a lot of people were able to avoid charges, by saying "I didn’t really know, the line is unclear". And I think in some cases that was true, there is some grey area in this. If you’re a hedge fund manager of any reputation, you know it when you see it. And if a piece of information, "Black Edge" as I call it, comes your way, you should know it when you see it if you’re running a big hedge fund.
Follow Sheelah on Twitter at @SheelahK