According to people who have worked within these seeded Cohen funds the alleged scheme works like this. The non-SAC fund hirs young traders anxious to get into a hedge fund and tells them what names to trade in and out of based on fund research. They are given long or short large buy orders and a day or two after the trade is made they watch it fall apart. That’s because according to traders who’ve been part of the transaction Stevie’s just moved into a sizable position against their trade and the edge he has with inside info proves to be the winning trade.
“We were just there providing liquidity for him. But I had to take the loss on my P&L,” said a trader on condition of he’d never get another job if Stevie Cohen knew he talked to me.
The non-SAC fund, which usually has additional outside investors, figures if the sucker rookie trader is any good they can make up the loss on another trade. This way they make their whale investor (Stevie Cohen), who usually own half the assets under management in the fund, really really happy. It’s kind of like the entry fee for getting Stevie to give you any money at all.
One such fund that’s allegedly done this in the past decade is Scout Capital out of New York. I know this from speaking with people involved in the fund at one time or another. When Scout was just starting out in the early 2000′s they had less than $1 billion of aum and half of it came from Cohen. The Scout founders, Adam Weiss and James Crichton, never worked for SAC Capital (according to their company bios).
“If the intent is to wash trades or manipulate the market, then “NO” it’s not okay,” says Bill Singer former FINRA enforcement lawyer when asked if the scheme was legal. “If he (Cohen) is merely segregating short trades in one subset of accounts and longs in the other, it’s not that an uncommon use of subaccounts albeit via a hedge fund platform.”
These guys have lots of money relative to the average individual retail investor. But they aren't the biggest fish in the investor ocean, and can't stand up to the whole market moving in a specific direction. Because Arena's management keeps making the right moves, a tipping point will be reached when the "market" will decide that Arena is a good investment and the unstoppable flood of capital will drown these small time market manipulators...