BlueCrest Capital Management has agreed to pay $170 million to settle charges that the U.K. firm misled investors about transferring top traders from a flagship client fund to a fund that managed money for BlueCrest staff, the Securities and Exchange Commission announced Tuesday.
BlueCrest, a macro and multistrategy credit firm founded by Michael Platt, decided to stop managing money for outside investors in 2015 after assets under management declined to roughly $8 billion from a peak of $37 billion following a period of poor performance, Institutional Investor reported in early 2016. The SEC said in an order Tuesday that investor redemptions had left the firm’s main hedge fund, BlueCrest Capital International, with $2.2 billion of assets in December 2015.
Tuesday’s SEC order suggests that performance issues stemmed in part from the firm’s decision to move top traders from BlueCrest Capital International to an internal fund, called BSMA Ltd., that was created to manage employee money in 2011. According to the SEC, BlueCrest replaced those traders with an “underperforming algorithm” which “generated significantly less profit with greater volatility than the live traders.”
“BlueCrest transferred a majority of its highest-performing traders from BCI to BSMA, and assigned many of its most promising newly hired traders, eligible to trade for either fund, to BSMA,” the SEC said in its announcement on the settlement.
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The regulator claimed that BlueCrest failed to disclose these changes to investors. The hedge fund firm also did not disclose “certain material facts” about the trading algorithm to BCI’s independent directors, according to the SEC.
“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 benefitted its own personnel to the detriment of its fund investors,” Stephanie Avakian, director of the SEC’s enforcement division, said in its announcement. “This settlement holds BlueCrest responsible for its conduct and furthers the SEC’s goal of returning funds to harmed investors.”
Under the settlement, BlueCrest neither admitted nor denied the SEC’s charges. The hedge fund firm has agreed to a cease-and-desist order and will pay disgorgement and prejudgement interest of about $133 million, plus a penalty of about $37 million, according to the announcement.
“We are pleased to have resolved this matter which primarily involved disclosures that were made more than five years ago,” a spokesperson for BlueCrest said in an emailed statement. “In 2015, we announced the conversion of our operations into a private investment partnership and since then have not managed the assets of outside investors. As such, today’s order does not relate in any way to our current business operations.”