On the Black Edge

Fiscal Cliff

Topic: Investments, Wealth Planning

Alexandra Jemetz CIM

April 17, 2018

Image used with permission: iStock/DNY59


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On the Black Edge

Being fortunate enough to have a blog due not long after a relaxing March break, I didn’t have to look far for a topic to write about. Not intending to keep picking on hedge funds, alerting our dear readers to the book Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street, by Sheelah Kolhatkar, was just too tempting.

Similar to well-known plots such as Bonfire of the VanitiesWall Street and the Wolf of Wall StreetBlack Edge was written not so much for investment professionals as to engage the non-financial masses. And, also like the above, it has all the intrigue of brazen fraudsters, massive deception and hemorrhaging of money to captivate readers. If you’ve ever watched Showtime’s drama Billions, the story will be familiar.

Unlike the others, however, it’s 100% non-fiction.

Sheelah Kolhatkar has an interesting background herself. A native Torontonian, she fell into the world of finance after graduating with a media studies degree from Stanford and started her career as a hedge fund analyst. The 1990s was the wild west in the burgeoning hedge fund industry, and there was no shortage of content for a budding author. Kolhatkar’s ability to write, and the detail of the account, make this story simply irresistible.

Black Edge delves deep into the insider trading scandal which brought down S.A.C. Capital, and along with it (at least temporarily), it’s owner, billionaire and “Hedge Fund King” Stephen Cohen. Cohen came from humble beginnings, but he knew he liked money at an early age. He parlayed his sharp skills and grit into membership in the Three-Comma Club, with a net worth of $14 billion (USD). One of the reasons hedge funds – and their billionaire managers – are more often discredited than their plain vanilla, boring, long-only peers, perhaps is best reflected by this insight offered by Kolhatkar:

“The economics of hedge funds are extremely favorable to the people running them, largely due to the exorbitant fee structure that they employ. Cohen made the decision early on to exploit this as much as he could. If investors wanted the best—him—they were going to have to pay for it. SAC was doing so well that he was able to charge higher fees than almost any other fund, keeping 50 percent of the profits at the end of the year. Most hedge funds charged 20 percent. But Cohen’s investors did not complain. In fact, they fought to get in.”

For an “average” Nexus client who pays less than 1% in management fees – with no sharing of the profit – a hedge fund’s typical 2% management fee and 20% cut of the profits seems a bit selfish. Taking 50% of the profit, as Cohen did, seems downright egregious.

So, as you prepare your reading lists for your spring or summer vacations, Black Edge is an absolute must to include. And, if you, as I, followed along with the headlines as it was all “going down”, you know how this story ended. <SPOILER ALERT> If you’re currently in the market for a hedge fund manager, you also might be interested to know that Cohen’s back in business after a two-year ban imposed by the Securities and Exchange Commission. However, his name, once again, is in the negative spotlight. This time, his new firm, Point72, is being sued for rampant sexism and gender discrimination. As I mentioned at the start of this blog, we’re not deliberately “out to get” hedge funds. But so many of their managers are the bad boys of the finance world. And, who doesn’t like a good bad boy story? There always seems to be one in the making. AOJ

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