Billionaire Steve Cohen has gone retail, despite insider trading hangover

It looks like Steve Cohen has gone retail.

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FOX Business has learned that the controversial investor—who recently returned to the hedge fund business after a regulatory suspension related to insider trading—has been offering his new hedge fund on at least one brokerage platform of a major bank, and is looking for other possible outlets to pitch his investments.

The once ultra-exclusive Cohen opened his Point72 Asset Management hedge fund on the wealth management unit of UBS Group AG, according to people with direct knowledge of the matter. Clients needed to invest a minimum of $250,000 to gain access to Cohen’s hedge fund that was included as part of a portfolio of fund offerings, sources tell FOX Business. UBS confirmed that it recently stopped offering Point72 to its clients after the fund hit what was described as a "capacity limit."

Not every retail investor made the cut to gain access to Point72 or any similar fund offered by UBS brokers. In addition to the fairly hefty minimum investment, clients must be classified as “qualified investors,” meaning they must also have a net worth of at least $5 million.

Still, the move says a lot about the state of the money management business and how so-called active managers, whether its hedge funds or brokerage houses managing money are finding it increasingly difficult to compete with “passive investments” like exchange traded funds, and index funds, that are producing strong returns at much lower fees.

“The regulators are sensitive to these investments and performance is down at many hedge funds but this is one way to gain access to assets even if it raises a few eyebrows,” said one brokerage executive at a major bank.

Indeed, for most of his nearly three decade career in the hedge fund business, Cohen’s business model relied heavily on the super-rich who needed to invest a minimum of $25 million in the fund to participate, in addition to so-called “fund-of-funds,” billion-dollar investment pools that allocate money to various hedge fund managers, and a smattering of public pension funds that could afford his high fees that were accompanied by outside market gains. More recently he has suffered from relatively weak performance and more tepid interest from investors.

UBS, meanwhile, is one of the smallest of the Wall Street brokerage houses, employing around 6,500 financial advisers dealing with individual or “retail” investors, compared to the 15,600 advisers at Morgan Stanley, and the 17,000 broker army at Bank of America’s Merrill Lynch unit.

TickerSecurityLastChangeChange %
UBSUBS GROUP AG12.27+0.11+0.90%
MSMORGAN STANLEY50.24-0.45-0.89%
BACBANK OF AMERICA CORP.34.44-0.24-0.69%

One way UBS is looking to compete with these behemoths is through hedge fund sales to its client. The effort underscores a recently aggressive—and some would say risky—business decision by UBS management to offer complex investments to retail investors at a time when hedge fund performance remains weak and regulatory scrutiny remains. Especially after the government’s recent crackdown on insider-trading abuses landed some top hedge fund executives in jail, and forced the closure of some of the biggest funds in the business.

FOX Business has learned, for example, that UBS is also selling a complex, math-driven fund to its retail investors that’s a joint venture between hedge fund giant Millennium Management and the WorldQuant Fund. WorldQuant’s founder and main portfolio manager Igor Tulchinsky is a former Millennium executive and is regarded as one of the best managers in the business of tracking algorithms and crunching data for market bets.

UBS continues to offer the WorldQuant-Millennium fund under the same conditions as Point72 for clients with $250,000 to invest and a net worth of $5 million. People at the WorldQuant fund recently boasted to brokers looking to sell Tulchinsky's portfolio that Tulchinsky and his team were able to predict that Chipotle Mexican Grill would miss same-store sales expectations for the third quarter by crunching data from Foursquare, an app that offers data on location discovery to determine customer traffic at restaurants.

Brokers walked away impressed by Tulchinsky’s presentation, and people at UBS say there are strict regulatory guidelines to gain access to the firm’s brokerage platform. During the meeting, Tulchinsky was flanked by body guards as he explained his use of complex formulas to make trades as brokers listened intently.

But many investors are unimpressed. WorldQuant’s joint-venture fund with Millennium is just slightly outperforming its relative index this year. It’s unclear how well the WorldQuant fund is selling inside UBS.

“Whenever you see hedge funds like this on retail platforms you have to ask yourself ‘why isn’t a major pension fund taking this capacity?’” said the senior brokerage executive. “From the brokerage standpoint, you have to ask yourself if the extra compliance to sell these funds to retail is worth the effort.”

A spokesman for Millennium and WorldQuant had no comment. An official at UBS also confirmed the relationship between its brokerage department and Cohen, but added that Point 72’s portfolio with the firm has reached its capacity and is no longer taking additional investors. The UBS official declined to say if the brokerage firm would open another retail portfolio with Cohen’s fund.

A spokesman for Point72 would not comment on the UBS relationship other than to say: “Our investors receive equal access to the firm, including information related to our compliance program.” The spokesman declined to elaborate.

Even with all the pressures to find new investors, Cohen’s move into retail is startling since he largely eschewed retail platforms in the past. Traditionally, hedge funds have been marketed to the super wealthy—those who have at least $1 million of investable assets, and Cohen was among the most-picky, with the highest minimums in the industry.

That was fine with securities regulators who believed these “qualified investors” were able to easily afford hedge funds’ high fee structures and stomach the additional risk these managers took to achieve above market returns.

And for most of the past two decades, this was money well spent as the best hedge fund managers such as Cohen regularly beat the market averages. But in recent years, just as hedge fund performance has lagged, the definition of what constitutes a qualified investor has shifted.

Brokerage firms began offering hedge funds on their platforms to investors at smaller minimums and lower net worth. Millennium, a $35.5 billion hedge fund run by long-time investor Israel “Izzy” Englander, is one of the top funds on brokerage platforms such as Morgan Stanley’s and now UBS.

Despite Cohen’s largely successful investing track record during his long career, tapping into this investor base won’t be easy, some hedge fund executives say. Point72, with $12.4 billion under management, opened its services to outside money in January and began raising new money but managed to glean just $3 billion after seeking as much as $10 billion, people with direct knowledge of the matter tell FOX Business. The performance of his fund has been flat since the beginning of the year, compared to a modest 2.3 percent increase in the Dow Jones Industrial Average as of Tuesday.

In addition to lagging returns, Cohen was at the top of the regulatory hit list as his former firm, SAC Capital was the target of a wide-ranging insider trading crackdown. Neither Millennium nor Tulchinsky were charged in the recent insider trading crackdown, but in 2014, SAC was indicted and closed down over insider-trading charges. Cohen himself wouldn’t be criminally charged, but he faced a two-year regulatory-imposed hiatus before opening his new fund, Point72 to investors early this year.

It was sometime after the capital raise failed to live up to expectations that Cohen and UBS reached their agreement to sell Point72 as part of a broader portfolio open to investors, these people add. Neither Point72 nor UBS would say how much money Cohen raised through the brokerage relationship.

People with knowledge of UBS operations said Cohen had to take extra compliance efforts to prove to the firm that his shop complies with insider trading laws, given its past problems. Cohen is now said to have some of the strictest compliance standards in the hedge fund business.

“SAC was never ever on wealth platforms like that,” said one hedge fund executive. “It will help him raise assets, but it is funny that due diligence would clear a manager whose firm is walking around with a virtual ‘ankle bracelet’ on.”