BlueCrest Capital, the investment firm led by billionaire trader Mike Platt, will return $170m to its former investors after the US Securities and Exchange Commission said it prioritised an internal hedge fund over the flagship fund they had invested in.
The London-based firm had transferred its top traders from the flagship fund to an internal entity that managed only the personal fortunes of its founders, while leaving outside investors to rely on an underperforming algorithm, the SEC said.
The settlement announced on Tuesday — in which BlueCrest neither admitted nor denied the SEC’s claims — highlighted the conflicts of interest that can arise when investment firms have separate funds for their employees and external investors.
“BlueCrest repeatedly failed to act in the best interests of its investors, including by not disclosing that it was transferring its highest-performing traders to a fund that benefited its own personnel to the detriment of its fund investors,” said Stephanie Avakian, director of the SEC’s division of enforcement.
BlueCrest managed $36bn at its peak but stopped managing outside money in 2015. The misleading disclosures at issue in the SEC case occurred between 2011, when BlueCrest created its internal fund, and the end of 2015.
“We are pleased to have resolved this matter which primarily involved disclosures that were made more than five years ago,” BlueCrest said in a statement, adding that it had generated returns of $22bn for investors in the 15 years that it managed outside money.
“Today’s order does not relate in any way to our current business operations,” it added.
The internal fund at issue, called BSMA, was set up in 2011 to manage money for BlueCrest employees and to serve as an incentive for its staff to remain at the firm. According to the SEC, BlueCrest moved its best traders to BSMA and away from the firm’s flagship outside fund, BCI.
At the same time, BlueCrest began managing significant chunks of the BCI portfolio through an algorithm that replicated the trades of live traders on a one-day delay. The algorithm was called “Rates Management Trading” or RMT, and allowed BlueCrest to make bigger profits because it did not have to pay traders performance fees on money managed that way.
The SEC said that RMT’s next-day trading caused it to “perform especially poorly in volatile markets because RMT waited too long to respond to sudden market moves”, such as the 2013 taper tantrum.
Despite these significant changes in its operations, BlueCrest made only vague disclosures to investors about its internal BSMA fund before 2014, when it was discovered by an outside due diligence consultant, according to the SEC.
BlueCrest also allegedly failed to tell its independent directors until 2015 about the amount of capital managed through its RMT system, which at times was as high as half the money in BCI.
Significant investor withdrawals from BCI after the discovery of BSMA drove the closure of BCI in 2015, according to the SEC’s order.