U.K.-based hedge fund firm BlueCrest Capital Management Ltd. has been sanctioned by the U.S. Securities and Exchange Commission (SEC) for failing to disclose that it replaced the top traders on its flagship fund with an underperforming algorithm.
According to the SEC, the firm transferred the best traders on BlueCrest Capital International (BCI) to an internal fund, BSMA Ltd., that was created to manage the assets of the firm’s employees.
Those traders were replaced with an algorithm that sought to replicate their strategies, but delivered weaker returns.
In addition to BlueCrest getting better returns on its internal fund, the SEC noted that the firm captured a greater share of the performance fees generated by the algorithm than by live traders.
“Over more than four years, BlueCrest made inadequate and misleading disclosures concerning BSMA’s existence, the movement of traders from BCI to BSMA, the use of the algorithm in BCI, and associated conflicts of interest,” the SEC said.
The firm agreed to settle charges, without admitting or denying the SEC’s findings, by paying US$132.7 million in disgorgement and a US$37.3 million penalty. All of the money will be returned to investors, the SEC said.
“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,” said Stephanie Avakian, director of the SEC’s division of enforcement.
“This settlement holds BlueCrest responsible for its conduct and furthers the SEC’s goal of returning funds to harmed investors,” Avakian added.
“An adviser’s disclosures to investors and prospective investors in funds they manage must be accurate. BlueCrest investors were marketed a fund with exceptional trading talent but instead got a fund with an undisclosed algorithm that performed worse than those touted traders,” said Adam Aderton, co-chief of the SEC’s asset management unit.