Steve Cohen, the infamous billionaire hedgie who plead guilty to insider trading back in 2013 and paid a record $1.8 billion penalty, has never been shy about offering up his opinion on the lack of real trading 'talent' in New York. Speaking at the Milken Institute Global Conference last May, Cohen said “Frankly, I’m blown away by the lack of talent...It’s not easy to find great people but we whittle down the funnel to maybe 2 to 4% of the candidates we’re interested in...talent is really thin.”
And while we would be the last to argue that there's a huge pool of people in New York truly worthy of Cohen's coveted 8-digit salaries, we might suggest that in his particular case the pool of applicants may be somewhat limited to the select few people willing to risk jail time for their employer....but that's just pure speculation.
Nevertheless, one way to avoid those pesky insider trading charges going forward, or rather to solve the "thin talent pool" issue as Cohen would say, is to simply develop artificial intelligence to do all of your dirty work. As Bloomberg points out, Cohen's family office, Point72 Asset Management, is currently analyzing years of trading behavior of top traders in an effort to replicate the type of bets that allowed SAC to massively outperform the broader markets for years.
Cohen’s Point72 Asset Management, which oversees his $11 billion fortune, is parsing troves of data from its portfolio managers and testing models that mimic their trades, according to people familiar with the matter.
Using analyst recommendations as an input, the effort involves examining the DNA of trades: the size of positions; the level of risk and leverage; and whether an investment was hedged, said one of the people. It also entails looking at the timing of trades, assessing pricing and liquidity in the market, and the duration over which managers build positions.
The model will identify patterns and relationships based on those analytics and seek to replicate bets, the people said. Point72 is also experimenting with automating the work of its execution traders, who place buy and sell orders with brokers on behalf of money managers.
Of course, Cohen's A.I. strategy is hardly unique in today's market with any number of algo strategies driving random market volatility on any given trading day.
Firms across finance are developing automation technologies to help their business. At Bridgewater Associates, the world’s largest hedge fund, a key project underway involves developing algorithms based on employee data to help automate management decision-making. JPMorgan Chase & Co. is investing in automated technology to streamline systems. One program, called COIN, for Contract Intelligence, interprets commercial-loan agreements that once consumed thousands of hours of work each year by lawyers and loan officers.
“The risk of automation is that the programs could go haywire,” said Jason Kennedy, founder of London recruitment firm Kennedy Associates, which places portfolio managers and analysts at hedge funds. “When you have one computer playing against another, you could end up with something resembling the flash crash.”
Of course, no matter how good Steve's A.I. software becomes, we suspect it will never be able to match the returns of his former SAC team because it will always lack one critical component, namely the ability to call up Dell insiders and get a sneak preview of quarterly earnings...now, that's real 'talent'.