An Outside Hedge Fund Is Driving Steve Cohen’s Gains As the hedge-fund billionaire’s returns have dropped, he’s bet big on ex-employee Gabe Plotkin Steven A. Cohen, shown in May 2016, manages Point72, which has trailed the S&P 500 this year. PHOTO: LUCY NICHOLSON/REUTERS By Rachael Levy Updated Aug. 5, 2019 11:15 am ET Billionaire Steven A. Cohen’s hedge fund is up about 10% this year. But a significant part of that return has come from a money manager who doesn’t work at Mr. Cohen’s fund. Mr. Cohen is widely viewed on Wall Street as one of the best traders of all time. From 1993 through 2011, his firm trailed the S&P 500 only once, according to a Wall Street Journal calculation. Mr. Cohen’s former firm, SAC Capital Advisors, used to make more than 60% in some years, a client document shows. But in 2013, Mr. Cohen’s SAC pleaded guilty to insider trading. A civil settlement he reached restricted him from serving as the supervisor of a registered fund until last year. He didn’t admit or deny wrongdoing as part of the civil settlement. SHARE YOUR THOUGHTS What do you think of Cohen’s changed approach to hedge fund management? Is he leading the industry or responding to the same forces as other money managers? Join the conversation below. His return to managing other people’s money, Point72 Asset Management LP, has trailed the S&P 500 this year, which is up about 20% through July. Moreover, about one-third of Point72’s gains this year come from an external fund called Melvin Capital Management LP, according to people familiar with the matter. Point72 spokesman Mark Herr said the Journal’s description of Melvin’s impact on performance is overstated. Mr. Herr declined to elaborate. Melvin was started by Gabriel Plotkin, who oversaw one of Mr. Cohen’s largest portfolios before leaving in 2014 to start his own firm. Mr. Plotkin now oversees more than $1 billion from Point72, people familiar say. Melvin has been one of the top funds in recent years. It is up about 47% this year through July, according to people familiar with the numbers. The unusual arrangement says a lot about how much Mr. Cohen’s firm has changed since it reopened following its insider-trading scandal. Before the settlement, Mr. Cohen consistently made some of the top returns in the hedge-fund business. Yearly returnsSources: FactSet (S&P 500, VBINX); client documents and people familiar with Point72*Vanguard Balanced Index Fund Investor Shares Note: Data for 2019 are through July. Cohen'sfirm Point72 Asset Management was previously known as SAC Capital Advisors. Steve Cohen's firmVanguard 60/40 fund*S&P 5001994’96’982000’02’04’06’08’10’12’14’16’18-50-250255075 Now, Mr. Cohen is telling investors that he is looking to provide gains of 10% to 15% a year. He has also changed how his employees trade and how they are paid. He has directed portfolio managers to take on a more rigorous research process rather than volatile stock trading, according to current and former employees. Portfolio managers used to keep 4% of gains made on stock ideas they pitched to Mr. Cohen, a potentially lucrative incentive, but Mr. Cohen has done away with that model, people familiar say. The restructuring isn’t unique to Mr. Cohen. Many hedge-fund managers that focus on stocks have increasingly contended that it has become tougher to make money. In part, they blame the rise of exchange-traded funds, which they say distort stock valuations. Representatives for Mr. Cohen’s Stamford, Conn. firm have presented a variety of explanations. Among them: It is harder to bet against stocks in a long-running bull market, and there are fewer public companies to trade. Mr. Cohen has also said it is tougher to find talent. Last year, Mr. Cohen raised about $6 billion as part of his relaunch.Blackstone Group Inc., a big backer of Mr. Cohen’s previous firm, opted not to invest, according to people familiar with the decision. In more prosperous times, Mr. Cohen had a strong hand, particularly when it came to talent. More than a decade ago, he saw a way to hurt longtime rival and fellow billionaire hedge-fund founder Kenneth Griffin. In 2008, Mr. Griffin’s Citadel LLC nearly collapsed, losing $8 billion. Sensing an opportunity, Mr. Cohen traveled to Chicago, Mr. Griffin’s home base, to interview Citadel employees for a new office he was planning. This irked Mr. Griffin, who caught wind of Mr. Cohen’s plans and called him, people familiar say. Citadel has since surged. It now manages about $32 billion, more than double Point72’s size of $14 billion. In recent months, Citadel poached some of Mr. Cohen’s longest-tenured money managers, upsetting Mr. Cohen. “Steve and his team have built a formidable firm and we wish them continued success,” Citadel’s spokesman Zia Ahmed said. He added that Messrs. Griffin and Cohen have known each other for three decades, and that “Citadel’s only mission continues to be delivering strong risk-adjusted returns” to its clients. “We have nothing but respect for Citadel, but our emphasis isn’t on other funds,” Mr. Herr, Point72’s spokesman, said. Mr. Herr said the firm has retained its best portfolio managers since reopening in 2018, including 19 of its “top” 20 stock pickers. He added that nearly half of the firm’s portfolio managers have worked there for seven years or longer and a third for 10 years or longer. Still, some employees have left for rivals in part because of better pay, former employees say. After the settlement, Mr. Cohen brought on a former McKinsey consultant, Douglas Haynes, to change the company’s culture. Mr. Haynes became unpopular among some money managers after he instituted rules that effectively reduced their pay, former employees say. Mr. Haynes declined to comment on the matter. Mr. Herr said that overall compensation levels haven’t changed over the past several years. Mr. Haynes left last year after a female manager filed a wide-ranging gender discrimination lawsuit against Point72 and named him as a defendant. Mr. Haynes has since filed a defamation complaint over the accusations. Point72 has denied the allegations and previously said it would defend itself “in a more appropriate venue than the media.” In recent weeks, Mr. Cohen has discussed new contracts that would potentially raise pay, though the contracts require portfolio managers to stay at Point72 for about three years. In another shift, Mr. Cohen earlier this year moved some staff to Hudson Yards, a massive new development on Manhattan’s west side. Still, some things haven’t changed. The 63-year-old billionaire remains an avid art collector. He recently spent $91 million on a Jeff Koons rabbit sculpture. His offices are still kept chilly to keep employees alert. Some wear cashmere sweaters in August. —Rob Copeland contributed to this article. Write to Rachael Levy at rachael.levy@wsj.com