Hedge funds facing perilous times: SAC's Steve Cohen is getting nervous

With so much money slogging around in the hands of hedge funds and private equity funds, and all of them sniffing around for ways to put those vast sums to work, it's inevitable that the bets are getting bigger and that they're gonna start tripping over one another in the same names.  And now one of the biggest swinging dicks in the hedge fund business is admitting that he's nervous.  In an excellent front page must-read interview in Saturday's Wall Street Journal, last year's fourth highest paid hedge fund manager, 50 year old Steve Cohen of SAC capital, laid it on the line: "There will be a real decline that may devastate hedge funds that have crowded into the same stocks", though he doesn't think it happens this year.  The "media shy" Cohen is now making larger bets and holding on to them for far longer than he's done in the past.

"It's hard to find ideas that aren't picked over, and harder to get real returns and differentiate yourself," Cohen admitted. "We're entering a new environment. The days of big returns are gone."

The 20,000-square-foot trading room at SAC Capital Advisors, chilled to 70 degrees to keep traders alert, was hushed. Mr. Cohen, who sits at its center, likes it that way. Phones blink rather than ring. Computer hard drives had been moved off the trading floor to eliminate hum. Rows of traders wearing SAC fleece jackets watched Mr. Cohen nervously, waiting for an order to sell shares.

But Mr. Cohen wasn't budging. Less than an hour before the stock markets closed, Mr. Cohen, biting his nails, compared his sinking stocks to a plunging department-store elevator. "There goes ladies lingerie," he said, to no one in particular. By day's end, his firm had lost $150 million, or 1.5% of its assets -- one of its worst one-day showings ever....

Mr. Cohen says he is now making bigger bets and holding the stocks longer. The throng of rival hedge funds could create a dangerous logjam, he says. Mr. Cohen worries that some of his largest holdings are also favored by other hedge funds. A rush for the exit could spell trouble. He says he expects that eventually there will be a sudden and sharp reversal in the stock market -- but he's not worried about that happening this year. "There will be a real decline that may devastate hedge funds that have crowded into the same stocks," he predicts....

For years, the relentless trading was highly effective. SAC Capital Management LP, Mr. Cohen's largest and oldest fund, launched in 1992, has generated an average annual return to investors of 43.5%, after he takes a sizable cut of profits. He and his partners keep 50% of that fund's gains, along with a 3% annual fee, far more than the 20% and 2% charged by most managers....

In 1998, Mr. Cohen and his second wife, Alex, 42, bought his gated 1920s fieldstone estate for $14.8 million. They added a 12,000-square-foot annex with a basketball court and an indoor pool, and an outdoor skating rink. They constructed a 20-seat movie theater and decorated the ceiling of its lobby with the pattern of stars on their wedding night 16 years ago. Outside, they laid out a two-hole golf course, formal gardens and an organic vegetable plot.

They bought $700 million of art and adorned the estate with some of the pieces. A Keith Haring sculpture of three painted aluminum dancing figures stands out front. A $52 million Jackson Pollock hangs in the library. A Van Gogh and a Gauguin, both bought recently for a total of $100 million, grace the living room. An Andy Warhol and a Roy Lichtenstein hang in the foyer.

The spending spree fueled carping that new hedge-fund wealth was altering the fabric of Greenwich, long a home for the very rich. Mr. Cohen's inclination to keep to himself caused people to brand him a recluse.

Mr. Cohen, a self-described cynic, is given to self-deprecating humor. He describes himself as a regular guy who just wants to be left alone. He says he likes to eat grilled-chicken sandwiches at Top Dog, a local hot-dog stand, and to kick back at night in front of reality television shows. "I'm not reclusive," he says. "I'm out and about. I have seven kids. That takes time...I'm not an introvert. I'm media shy. They turn what should be an admirable trait into something bad."....

The Hedge-Fund King Is Getting Nervous - Wall Street Journal