Steve Cohen – America’s Most Profitable Day Trader

Steve Cohen – America’s Most Profitable Day Trader
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Criminal Empire

TV monitors stacked possessed incriminating tapes of some of the world’s most powerful and wealthiest men. Epstein could potentially have used them as leverage for blackmail, thereby financing his ever-expanding criminal empire. Given that his sources of income were likely dubious, he might have also needed to launder his vast wealth, utilizing his unique set of skills.

Epstein, however, had a compelling almost rags-to-riches story. He grew up very middle class in Great Neck, Long Island, which was an affluent town. His family had relatively less money than many others around him. From an early age, he felt a hunger to become rich. Although Cohen wasn’t born into money, he had a glimpse into what money can buy. Living in Manhattan, Cohen’s grandparents were very wealthy, often taking him to fancy restaurants and shows. As a child, Cohen was impressionable, and his grandparents’ lifestyle had a huge impact on him, showing him the kind of life that money could buy.

At home, however, Cohen saw a sharp contrast to the living conditions of his family. Born in the summer of 1956, Cohen was the third of eight children in Great Neck. The Cohen family was on the low end of the financial spectrum. Everyone in the family felt that Steve would be special. Their mother remembered treating him differently, cooking steak for little Steve while making hot dogs for the other children. There was a real sense that Steve was smart and destined to make a lot of money.

Incredible Talent

Desperate for money, even while still in high school, Steve Cohen found a sneaky way to make extra cash. As a young man, Cohen showed incredible talent for playing poker, teaching him how to deal with probabilities and uncertainties, which are integral to life. He spent nights playing poker, frequently making thousands of dollars.

Despite his focus on poker, Cohen still managed to achieve good grades, eventually helping him get accepted to Wharton. In college, socially rejected, Cohen resorted to playing poker for joy. However, he soon grew dissatisfied with the money and wanted to try his hand at a bigger casino—the financial market.

While still in college, Cohen accepted a job at the notorious trading firm Gruntal. His first job was at a small, not terribly well-respected brokerage firm located close to Wall Street in Lower Manhattan. Gruntal was a place for misfits, and Cohen was hired by a family friend who had started an options arbitrage desk. Cohen, with natural talent and intuition, proved himself by making a meaningful profit in his first trade.

Now labeled as an intuitive trader, Cohen had a sense of risk and reward, often described as a tape reader. He could scan the market, look at available news, and make money trading. It was obvious to his colleagues that Cohen was the most talented trader they had ever seen.

U.S Markets

During the mid-1980s, the American stock market was dominated by mergers and acquisitions, and Cohen was making $10 million a year by building positions around events like takeovers and IPOs. However, the Black Monday stock market crash of October 1987 saw U.S. markets fall 20 percent in a single day, putting many firms out of business.

Despite the chaos, Cohen actively traded to recoup losses and survived the crash. Tired of Gruntal, he wanted to start his own shop. In 1993, Cohen started SAC with around $23 million in capital and nine employees. He believed that investing was all about smart risk-taking, a principle he learned from playing poker.

With the hedge fund structure, Cohen had the potential to make more money with fewer restrictions. Cohen’s trading strategy was hard to emulate, but he followed essential principles, always emphasizing smart risk-taking.

Crisis looming

He didn’t get emotionally attached to his trades. He was very good about pulling the plug and selling something if it just started to go against him. In situations where many people would end up losing more money because they don’t want to acknowledge a mistake, he, according to everyone who worked with him at the time, was very good at being dispassionate and analyzing risk in a cool, detached way. He started to make a lot of money, millions of dollars, very quickly. Within three years, SAC had quadrupled in size to almost $100 million. Cohen started buying mansions and expensive art. He may have been on top of the world, but he failed to see a crisis looming.

The late ’90s and early 2000s saw the biggest growth of hedge funds. By 2012, there were more hedge funds than public companies. Right at the top of the hedge fund kingdom was SAC, one of the most profitable shops ever. Born and raised in a middle-class family, Steve Cohen built SAC Capital from scratch, making billions in the process. The success of SAC drew admiration and envy from Wall Street and unexpected places.

Anyone working at any hedge fund involved in short-term trading, meaning they trade in and out of stocks every day, wants an edge. This is a common term in the industry. There’s white edge, which is kind of useless for their purposes; there’s the gray zone, and then there’s black edge, which is clearly inside information. Since the advent of the internet, information has become widely accessible, making it tougher to beat the market. Many hedge fund managers resort to insider trading.

By 2008, SAC managed $14 billion in equity, recovering from the housing recession and growing faster than before. In that year, SAC portfolio manager Matthew Martoma started building large positions in two pharmaceutical companies, Elan and Wyeth, developing promising drug trials for Alzheimer’s. Despite bearish sentiments from other analysts and traders, Martoma and Cohen built substantial unhedged positions based on Martoma’s information from Dr. Sidney Gilman.

Drug Companies

The two drug companies were scheduled to announce the final results of the trial on July 28, 2008. Through Dr. Sidney Gilman, Martoma knew the trial was a disappointment. SAC aggressively unwound its large positions in Elan and Wyeth and ended up going short on those two stocks. Cohen made $276 million betting against the two companies. However, this incredible profit marked the beginning of his downfall.

Martoma was convicted in 2014 for the most profitable insider trading conspiracy in history. The SEC brought charges against several other SAC employees. Cohen himself was charged by the SEC for his failure to supervise his employees. Cohen settled his civil case with regulators in January 2016 and was banned from managing outside money until 2018.

Fortunately, with the help of his team of prestigious lawyers, Cohen avoided any criminal indictment. This was a devastating blow, but Cohen refused to give up. Now, he had to look for a new edge that allowed him to continue making great profits. By 2014, SAC closed its doors and converted to 0.72, a family office. Cohen himself was able to avoid any criminal indictment.

Melvin Capital

Running his family office allowed Cohen to control his investments and cash flow without every other big firm knowing about it. Cohen realized he could stake other hedge funds run by his former employees. The majority of the return came from the investment at Melvin Capital, which made 47 percent in 2020. Without the black edge enabled by insider trading, 0.72 has not been able to make large returns like SAC used to.

Cohen’s only hope is allocating his money to other hedge funds that may possess the black edge. Gabe Plotkin, known for audacious bets and crazy returns, was a superstar portfolio manager at SAC. Reminiscent of OG Steve Cohen, Plotkin consistently outperformed the market. Neither Cohen nor Plotkin could anticipate a group of amateur traders from Reddit would bring them down to their knees. Hedge funds, including Cohen’s, were raking billions for their wealthy investors. However, they faced a threat from a group of amateur traders from Reddit, led by Cohen himself, who turned a small-time fund into a $50 billion empire, almost doubling every year. It turned out his secret was insider trading. After being dismantled by the authorities, Steve Cohen was forced to think of new ways to make money. Point 72, his new firm, started to make high returns after allocating to other hedge funds.

 

GameStop

Started by his students, Point 72 was regaining its past glory, but Cohen’s newfound success would soon be challenged by the most unlikely group of people. On January 22, 2021, approximately 140 percent of GameStop’s public shares had been shorted. With such a large amount of shares being shorted, there was a risk of triggering a short squeeze that could bring down the stock market due to the wild actions in stocks like GameStop.

GameStop, a retailer selling video games and hardware, became the center of attention as enthusiastic traders drove its stock higher and higher. By the end of January 2021, Melvin Capital, facing a loss of 53 percent of its investments, was struggling for survival. Cohen partnered with Citadel, putting $2.75 billion to bail out Melvin Capital. Both hedge funds suffered significant losses during this incident, surprising the entire hedge fund industry.

It is safe to say that 0.72 had lost its edge. In recent years, Cohen has expanded his investments into venture capital, quant strategies, and more, searching for new alpha. However, with regulators constantly watching them and a negative public sentiment against hedge funds, Cohen has essentially retired from an active role.

Cohen’s philosophy now emphasizes following one’s passion, highlighting that success comes from being passionate about something and then doing it to the best of one’s ability, irrespective of the financial gains.

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