On the surface, the downfall of SAC Capital appears to be a “them” problem: A group of audaciously rich hedge managers, led by Wall Street titan Steven A. Cohen, left with just their own money to play with. Looking closer though, it may be a “we” problem. A healthy SAC leaves billions of dollars in crumbs for brokerage firms and others that do business with the hedge fund giant. That money is likely to dry up, too.
The Wall Street Journal estimates that SAC generates as much as $1 billion a year for its partners – brokers and bankers that process trades, set up client meetings and lend it money. With clients reportedly pulling most of the $4 billion that they hadn’t already marked for redemptions due to the government’s ongoing insider trading investigation, “fear and anxiety” have hit Wall Street trading desks.
“This is going to have a significant impact to the Street, full stop,” one exec told the New York Times.
One key benefit SAC has delivered to Wall Street is its aggressive borrowing strategy. The Connecticut hedge fund reportedly borrows roughly $3 for every $1 in the fund. That activity will likely stop, as will the veracity of its trading strategy, lowering fees collected by brokers. While it’s unlikely SAC will sack any analysts and traders who are capable of making the firm money, other cuts to the 950-person staff are possible.
Cohen will be just fine, as long as he continues to evade the government’s grasp. It’s his foot soldiers and external partners that will be left dangling.
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