Was it easier to make money in the ’90s than it is today?
Absolutely. I always tell my guys, “You would have loved the ’90s.” It was different, and everyone was smaller. Plus the markets worked a lot better. When I started, the S&P 500 was up 20 percent a year for seven years. And there was the technology boom besides. So you had a lot of tailwinds. It was a good time to be in the markets. And we were managing a lot less money, so you could move it around a lot more easily.
How has SAC evolved during the past 16 years?
We started out as traders. Frankly, we didn’t do a lot of fundamental work. And then, in the mid- to late ’90s, we started transitioning from being a trading firm to a fundamentally driven firm. That continued over the years. As our assets grew, to effectively manage that type of capital, we had to do real fundamental work and analysis. Today we have probably 150 analysts and 85 portfolio managers covering Asia, Europe and the United States.
How has your role changed?
When we were smaller, the firm needed my P&L to survive. Today I still trade, but because the firm is now so diversified, the impact of my trading on the firm’s P&L is not what it was. I actually take more pride now in the building of this firm than I do in whether I make money in my own trading. I take more pride in the fact that this firm is now a real business.
How much time do you spend trading?
Between 9:00 a.m. and 4:00 p.m., I’m usually on the trading floor. I think there’s a dimension in having me out there that provides value for the firm. I’m in the bunker with the troops. Occasionally, I’ll take meetings during the day, but most of the time I’m on the floor. And then, after 4:00, I conduct business meetings.
Has your trading style changed?
In the early days it was a little bit more like trading the tape. The New York Stock Exchange had quotes of blocks of 500,000 to a million shares that were trading, and you could see the price action as it developed. Now, because everything is traded electronically a few hundred shares at a time, you don’t see large blocks trading. So the way I used to do it is really gone. But I could see that happening ten years ago, which is why I reinvented the firm.
Can investors create alpha by trading around positions, buying or selling to take advantage of price moves?
There’s no question that the whole point is to create alpha, and there are lots of ways to do it. And the reality is, if you have a great idea, you may want to trade around the position a little bit. But I wouldn’t do it a lot, because ultimately, how many great ideas does anybody really have? You’ve got to make a high-conviction bet when you feel like you have a great idea. That’s really the only way to outperform today.
A decade ago you brought in a psychiatrist, Ari Kiev, to coach SAC traders. Has his role become less important as you’ve moved to more-fundamental investing?
Ari is still an important part of the firm. It was somewhat innovative at the time to bring in someone like him. Investing and trading is a mental game. There’s always something people can work on to improve what they do. Ari’s job is to try to help them identify that and get them thinking about how to do things better. Part of being successful in the markets is being in control of your emotions and making decisions for the right reasons, not the wrong reasons. And the more you can stay in touch with that and what’s going on in your head, then I think the more successful you can be.
Can traders and investors get better over time?
Yes, I think so. But the real question is, Are they wired to adapt? The ones who can adapt are probably the ones who are going to end up being successful, because markets change. I think one of the reasons SAC has been successful over the years is because I’ve been very flexible.
Will SAC continue to evolve?
I assume that the game is always changing, and we’ve got to keep adapting to what the markets allow. The world has changed a lot in the past five years. So if you had asked me five, six years ago, “Would you have an office in Hong Kong?” the answer would have been, “I doubt it.” And now I do have one there.
Have you been to China?
I was there about three years ago, and I was just blown away by it. I could start to understand why certain industries and certain stocks have been acting the way they are. Of course, you can read about the growth that’s happening in China, but when you see it, it forces you to think about things differently. China is very far away from Connecticut. And you need to see it to understand it.
How much does SAC invest outside the U.S.?
Probably 15 to 20 percent of our activity is outside the U.S. There’s a lot of opportunity for growth in both Europe and Asia. The game is changing. Stock markets are starting to develop all over the world, and that creates opportunity.
Is the lack of information in new markets a problem?
Those markets are more inefficient. And consequently, you can probably do better over there in the sense that if you do good analysis, you probably create a better edge there than you can here. In a perfect world you would want to transplant some of your own people so that the culture sort of happens over there like it happens here. We try to do that. We’re pretty careful about putting people in places that we’re not sure about. We’re going to grow these businesses slowly and develop a good foundation.
How would you describe the SAC culture?
Entrepreneurial, collegial and independent-minded. We want people who are self-starters and people who know what they want to do and how to execute on their strategy. I tend to be a guy who gives people a lot of autonomy. I tend to believe in human nature. I also believe that if you give people enough rope and enough room, they’re going to create something that’s unique to them. I’ve learned as much from my people or more than they’ve learned from me. These young guys, they’re smart, they’re inquisitive, and they teach me stuff.
How do you keep employees happy?
Pay them well. I also think it helps that I give people a lot of autonomy. The vast majority of people who have come to this firm have had a really good experience. We usually don’t lose people to other firms. We tend to lose them if they start their own firms. So you’re going to have some turnover. That’s inevitable. I started my own firm, so I understand that. And that’s why I try to keep this firm well diversified, so when and if people leave, the firm just keeps going, which I think is the mark of an institution as opposed to just a one-hit wonder.
Do you think the huge sums made by hedge fund managers are justified?
I don’t think any of us got into this business thinking we would make the money we’ve ended up making. But that’s the American way. These are small businesses, and with the amount of hours that people put in to be successful, they ought to be applauded, not criticized. I’m not forcing anybody to invest with me. And the reality is, I have a lot of my own capital at risk in the firm. So if I make good investments, I ought to make a lot of money. And when I lose money, I’m losing my own money too.
How does collecting art fit into your life?
On a Saturday, rather than play golf, I’ll go to a gallery and look at art. Art collecting brings in some of my skills as an investor — my ability to assess risk and figure out what something is worth. I’ve also learned a lot and gotten to know many people who I would never have met in the normal course of doing business.
— Interview by Michael Peltz
