BlueCrest Capital Management LLP, Michael Platt’s $32 billion hedge-fund firm, has a potential conflict of interest over a fund that it runs for the benefit of its partners, according to a report by one of the world’s largest advisers to institutional investors.
Albourne Partners Ltd., whose clients include pension plans, endowments and family offices, issued a report this month that said it recently became aware that BlueCrest has a $1.5 billion internal fund called BSMA Ltd., according to two people with knowledge of the report, who asked not to be identified. BlueCrest said the fund has existed for years to retain talent and the firm has procedures in place to protect against conflicts of interest.
Albourne said it’s concerned that BSMA, which oversees some employees’ deferred compensation, may lead to management interests not being aligned with those of the firm’s investors, according to a passage of the report that was read to Bloomberg News.
“We also do not feel that BlueCrest has provided appropriate disclosure to Albourne or to external investors, as far as we are aware,” said the report, which was written by Jane Hughes, an Albourne analyst who focuses on researching fixed-income and credit hedge funds. “Nor have they been sufficiently open with Albourne when we have tried to discuss the possible conflicts.”
BlueCrest, based in Guernsey, requires that its senior partners invest in BSMA, which stands for BlueCrest Staff Managed Account, said Andrew Dodd, the firm’s chief financial officer. The fund invests in BlueCrest strategies as well as external strategies, and has existed for years to help ensure the firm retains top talent, he said yesterday in an interview.
It’s designed so that participants get their money back when they retire, said Dodd, who declined to comment on the Albourne report or on the internal fund’s performance.
BlueCrest has procedures in place to protect against conflicts of interest across all of its hedge funds, including making sure funds don’t trade with each other and that one investment vehicle doesn’t trade ahead of another one, he said. Those procedures apply to BSMA, Dodd said. While BlueCrest employees invest in BSMA, they have put more money in funds that clients invest in, he said.
“Staff at BlueCrest have more than $2 billion invested in our funds,” Dodd said. “We feel that makes our interests aligned.”
“Adequate disclosures” have been made to BlueCrest investors about BSMA, he added.
The report adds to pressure on BlueCrest, Europe’s second-largest closely held hedge-fund firm, after its two biggest funds posted their first annual losses in 2013. Consultants such as London-based Albourne, which says its clients have more than $350 billion in hedge funds, private equity and other assets, serve as gatekeepers for investment firms, because institutions use the company’s research in deciding where to put their money.
Hughes didn’t respond to a phone call and an e-mail seeking comment on the report. Albourne doesn’t comment on the existence or content of its research, which the firm prepares exclusively for its clients, Albourne General Counsel Richard Allnutt said in an e-mail.
Hedge-fund firms normally run employee and investor money pari passu, or equally, said Vidak Radonjic, managing partner at Beryl Consulting Group LLC in Jersey City, New Jersey, which advises clients on investing in hedge funds.
A separate fund “is not common,” Radonjic said. “Usually employee money is co-mingled with investor money.”
Hedge-fund firms with an internal fund include Renaissance Technologies Corp., the East Setauket, New York-based firm founded by James Simons. It only allows employees to invest in its best-performing $10 billion Medallion fund, which stopped accepting new money from clients in 1993 and had returned outside money to its investors by 2006.
Albourne made its comments about BSMA in an analysis of BlueCrest Capital International, a BlueCrest hedge fund made up of teams of traders overseen by Platt, 45, that manages $12.9 billion. The fund primarily invests in fixed-income based on Platt’s background trading interest-rate swaps at JPMorgan Chase & Co. before he founded BlueCrest 14 years ago.
BCI declined 1.57 percent last year, compared with an average return of 9.16 percent for the broader hedge-fund industry, according to BlueCrest performance reports and data compiled by Chicago-based Hedge Fund Research Inc. The BlueCrest fund has produced an average annual gain of 11.9 percent since it started trading in December 2000, compared with a 6.18 percent rise for other hedge funds.
BCI’s assets have almost tripled since the end of 2009, driven by investments from pension plans and endowments. The fundraising surge came after BCI posted gains in 2008, when most hedge funds suffered losses, and it then surged 45 percent in 2009 when many competitors were still hesitant to take on riskier investments following the global financial crisis. Like most hedge funds, BCI charges a 2 percent fee to manage client assets, while pocketing 20 percent of any investment gains.
BlueTrend, another BlueCrest hedge fund with $12.5 billion of assets, dropped 11.5 percent in 2013. The computer-driven fund, which uses algorithms to follow profitable trends in asset prices, had previously made money every year since it started trading in 2004.
Albourne described BSMA as a “partner retention vehicle” that assists BlueCrest in paying and keeping its talent. A company called BSMA Ltd. was incorporated in the Cayman Islands in July 2011, according to a government filing. BSMA was previously called the Bluestar Master Fund Ltd. and has a principal business address at BlueCrest’s headquarters in Guernsey, according to Avox Ltd., a unit of the Depository Trust & Clearing Corp. that researches corporate structures.
BlueCrest has more than 600 employees, according to its marketing documents. Its discretionary hedge funds function like a proprietary trading desk at a bank, where the best performers get more money to manage and those who post losses potentially having capital taken away from them, according to people with knowledge of the matter. The average number of partners at BlueCrest in 2012 was 134, according to a September filing with the U.K.’s Companies House.
Albourne advises 270 institutional investors, including the Utah Retirement System, Lockheed Martin Corp.’s employee pension plan and the Regents of the University of California, according to its website.
Its “universal fee,” which includes unlimited due diligence of hedge funds, bespoke training sessions and customized portfolio planning is $400,000 a year per client, the website shows. HFMWeek, an industry trade publication, ranked Albourne as the world’s biggest hedge-fund investment consultant in an April 2013 article.