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The Steve Cohen SALT Chat: Energy, Risk Management, Fathers, 2012, Compliance, Art, Hitting The Gym

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[The music playing while we wait is a mix of Duran Duran, Journey and U2.]

Anthony Scaramucci: I know this man needs no introduction. Steve and I have gotten to know each other over the years, but most recently in Davos where we had some fun. Steve, SAC has been in the news recently, is there anything you'd like to address on this topic?
Steve Cohen: I'd like to thank you for that softball question--nice way to start the interview.

SC: Listen, we take compliance very seriously, and the reality is we're going to cooperate with the investigations.

AS: How did you first get into all this?
SC: I started when I was 12 years old; used to sit at the dinner table and I'd read the sports page of the Post first then right to the financial page. I'd hang out at the local brokerage firm when I was a little older and just watched the tape.

AS: Did you have anyone you looked up to, who really influenced you?
SC: My father was big in my life. A larger than life type person. I'll tell you a story about my dad, he's 91 years old, to give you a sense of what he's about/meant to me. They used to call him the Sheriff on the golf course. If you played with him and cheated, he'd walk off the course and never talk to you again. If you play with me and cheat I won't walk but I'll definitely call off the bet.

AS: How did you your interests transition from high school to college?
SC: They didn't really. I went to college in Philadelphia…I didn't go to class a lot. I used to hang out outside brokerage firms and look at the tape through the window. They got tired of seeing me hang outside and invited me in. It wasn't a theoretical education, it was a real education.

AS: You have a firm today with almost 800 people and assets of over $12 billion. Did you think you'd get to where you were today.
SC: Starting at $23 million I would have been surprised. But we had a lot of opportunities- especially starting in the bull market of 92- and we took advantage of them.

AS: Any tenents of your firm?
SC: Risk management is really important. Obviously we do an incredible amount of fundamental work. But you have to combine the two because things go wrong and you have to be flexible.

AS: How has the business changed since you were looking through the glass at the brokerage firm?
SC The business is so different. The markets evolve and adapt and you have to go with it.

AS: How do you structure the risk management at the firm?
SC Our PM's have to run under certain constraints- net exposure constraints, beta constraints, liquidity constraints. Liquidity is very important to us.

AS: What is your management philosophy?
SC: I'm pretty good at delegating. I have a team that's been around me for 10 years and have a lot of trust in them. I'm on the floor all day but nothing gets decided unless they put it past me.

AS: What differentiates SAC from other large hedge funds?
SC: A lot have one guy at the top with people under him. We have 100 PMs. I run less than 10% of the capital of the firm. It's a very diversified portfolio.

AS: Now that you're down to 10% of the portfolio what's your day to day like and how has it changed?
SC: I'm still there and investing but i've tried to learn some new things, like i'm involved in macro and trading currencies and commodities. I think it's important. The world has changed and it's a macro world. What happens in China affects what happens in the US.

AS: Can you talk about the different investment strategies you're focused on now?
SC: We're a L/S equity firm and we always will be. But we also do some macro and have a sizable quant department, too.

AS: Why is the focus dedicated to L/S equity strategies?
SC: My father used to say- a shoe maker makes shoes. It's what I do and what I've always done and it's what we'll continue to do.

AS: We talk about the '08 financial crisis often. Can you talk about the lessons that have been learned for the industry and also SAC?
SC: '08 was an incredible year and we learned some lessons- like how important liquidity is. It focused me back into my core competencies. The mistakes people made was being over-levered, being heavily concentrated in positions. I think we're pretty diversified and that's why it helped us.

AS: What makes someone successful at SAC? What do you look for in people to hire?
SC: We see a lot of people and we want someone with an identifiable, repeatable process and has to be able to risk manage, since markets will turn on you. we want guys who can also scale and run more capital and to do that you have to create idea generation. We also look for people who can manage their group.

AS: Once someone's been hired what metrics do you use to determine if they're doing a good job?
SC: We use stats like baseball teams use stats- which you might be familiar with. They're simple stats. Win/loss percentage. When you win, how much money do you make on those positions and how much do you lose when you lose? We try and keep it simple. We hire people and hopefully they're as good as we hoped.

AS: There's been some buzz about your new sector heads, can you shed some light on that?
SC: Like I said we have 300 investment professionals and it was literally impossible for me to get to all of them. It was highly in. The idea was to put a sector head in charge of those sectors. A management professional will tell you you're only supposed to have 8 or 10 points of contact and I had hundreds.

AS: Are you hiring now?
SC: We're always hiring and see opportunities to grow.

AS: What's your out look for 2011 and into 2012?
SC: It's been a pretty good market. We've had a good run and I think we'll see a little pause. Maybe people are worried about a growth scare but we think the second half will be decent. I'm more worried about 2010 as some of the stimulus wear off but we'll worried about it when we get there.

AS: There's been a lot of news about the deficit. How big an issue is it and how should the government address the issue?
SC: I call it the elephant in the room and it can't be ignored. It'll get solved in 2 ways. Dems and Republicans will create a solution otherwise the market will force a solution on them. I prefer the former.

AS: Do you think it's fixable?
SC: I think it's easily fixable. You have to go after entitlement programs and I think people understand that. But it is fixable and it will be fixed because the markets will demand it.

AS: How do you think the environment has been for the industry in the past year.
SC: I think it's been pretty good. Most hedge funds do better when stocks are going up, but correlations between companies have dropped significantly and you can create alpha and make money on both sides of the market.

AS: What sectors do you like right now?
SC: I think energy is an interesting sector. I think the commodities sell-off provides an nice entry point. We're also into the mobility theme. We're going from 3G to 4G and there's many ways to play that in the market.

AS: I know you as one of the most charitable people. You're always so gracious on that front. Can you tell us what you're doing?
SC: My wife Alex and I feel it's really important to give back. We like to focus on children and their education and the military. Where we can help we try to.

AS: How did you get interested in the art world?
SC: I had a portfolio manager who was into Dutch Old Masters and they were really ugly. I said, "I don't like that stuff, but I like this Impressionist stuff." The art world is a place where people will educated you and once I got started I just loved doing it. I've met so many people I never would have met. It's a great way to spend a Saturday, going down to the galleries?

AS: What does the future look like for Steve Cohen?
SC: Investing is what I like to do. I'm going to be 55 years old, I just lost 20 pounds. I work-out three times a week and I see no reason to not continue what I'm doing what I'm doing because I enjoy it.


Art World's Reactions To Steve Cohen Woes Range From "I'm going to begging for change outside the Staples Center" To "NBD"

Time was, Steve Cohen told the Feds where they could go. No matter how much heat they put on him, the Big Guy would not burn. If they wanted to relentlessly circle him in an attempt to find evidence of insider trading, that was fine by Steve. But he wasn't going to act like he gave a rat's ass and he certainly wasn't going to wilt under the scrutiny or draw the blinds at Casa Cohen and curl up in a ball to cry. This time two years ago, despite SAC receiving a subpoena from the government, the FBI raiding the firms of several former SAC employees, and an analyst being asked to wear a wire while chatting him up, Cohen not only hopped on a private plane to attend Art Basel, but he did so with a smile on his face. ("Cohen," the Journal reported, was in "jovial spirits and eager to chat about his fresh art acquisitions," which included a "large-scale map of the world made from tin cans" that he bought in the first five minutes of the fair opening.)  And while one could argue that the heat on Steve has been cranked up quite a bit more since then, we assumed he was dealing with it in typical Steve fashion, and would make it to Miami like always. So it was particularly troubling to hear this: