By Katie Benner
May 24, 2011

Unlike other hedge funds tied to insider trading investigations, Steven Cohen’s $14 billion trading empire hasn’t been hit by redemption requests.

FORTUNE — Last week I wrote that, with the Raj Rajaratnam trial out of the way, investigators would turn their attention to Steven A. Cohen, the hedge fund titan and founder of SAC Capital.

So it seems that politicians and regulators are turning up the heat under the man who Reuters called the government’s Moby Dick. The Wall Street Journal broke news that Senator Charles Grassley’s probe of the fund had indeed turned up some “suspicious trading.” The Financial Industry Regulatory Authority (FINRA) provided Senator Grassley’s office and the Securities and Exchange Commission with 20 instances when employees at SAC may have traded on inside information, according to the Journal; and representatives from SAC met with Congressional representatives this month to discuss the investigation.

The SEC and FINRA declined to comment. A representative from Senator Grassley’s office said that it was pursuing its investigation. An SAC spokesman says: “We welcomed the opportunity to meet with the [Senate] staff to educate them about the firm and our compliance efforts. We will continue to cooperate in any way we can.”

Two of Cohen’s traders and a handful of former SAC employees have pleaded guilty to illegal insider trading, including ex-SAC trader Choo Beng Lee, who attempted to get rehired at SAC so that he could secretly tape phone calls with coworkers for the government.

Similar insider trading investigations and allegations have sunk hedge funds run by Level Global Investors, Loch Capital Management, and FrontPoint Partners, but the news hasn’t hit SAC funds. Investors have yet to head for the exits, and business is great. The $14 billion firm is up about 8% through the end of April and has taken in about $1.5 billion over the last year, according to people familiar with the firm’s finances. And newspaper reports say that Cohen is thinking of closing his flagship fund to new money and that he plans to launch a quant fund in the third quarter of this year.

One reason SAC has been so resilient in the face of bad news is that Cohen and his top lieutenants have been openly discussing the government’s interest in SAC with investors and reiterating that they and the firm are fully cooperating with the government, says one person who has knowledge of these conversations.

In face-to-face meetings and on conference calls, Cohen has reassured investors that SAC is using the investigations to show that it has some of the best compliance in the business. It’s a big about face for a firm that was once known for being uncommunicative and keeping investors out of the loop.

Another reason is that, for now, the government hasn’t focused on Cohen, but on traders who worked at the firm and broke the law. Neither SAC nor Cohen have been accused of any wrongdoing. Cohen and his employees also account for about half of the firm’s capital, making for an exceptionally stable investor base.

Finally, several fund of fund managers point out that it doesn’t behoove anyone to pull their money out now. SAC has one of the best investing records of all time, netting about 30% annualized since inception. Even if the whole firm collapsed under the weight of insider trading indictments and had to liquidate, most everyone would get their principle back and then some.

It would be foolish, said one investment advisor, to withdraw cash and damage the fund only to have the goose who lays the golden eggs be completely exonerated. And so it makes sense for investors, as SAC continues to print money, to stand by Cohen and hope for the best.

You May Like