Duncan Mavin is a former Bloomberg Gadfly columnist.

An internal fund for partners at BlueCrest, Michael Platt's hedge fund, was meant to provide an incentive for high-flying employees to remain with the firm. Now though, it looks like a big headache.

BlueCrest is being investigated by the Securities and Exchange Commission over a potential conflict of interest tied to the partners fund, according to Bloomberg News. The probe, which is at a preliminary stage, doesn't mean an accusation of wrongdoing will follow. But it marks another blow to BlueCrest.

The hedge fund firm's main All Blue fund returned 2.9 percent in 2015, better than the industry as a whole (a Citigroup index of hedge funds fell almost 4 percent that year), but investors have been unimpressed.

BlueCrest's assets have shrunk from $37.4 billion at the firm's peak in 2013 to $8 billion by late last year, even as hedge fund assets across the industry continued to soar to about $3 trillion by the end of 2015. (To be fair, part of that decline stems from last-year's spin off of $9 billion of Bluecrest's quant-trading funds, led by Leda Braga.)

BlueCrest's Funds
Assets have slumped since peaking at $37 billion in 2013
Source: Investor document

BlueCrest said in December it will return all outside money to investors and turn into a private investment partnership overseeing Platt and his employees' money. Declining fees and rising demands for transparency from investors also played a part. Since then, unsurprisingly, a handful of staff have left BlueCrest, and the firm has increased the percentage of profits it pays out to traders.

And so to the SEC probe.

A partners-only internal fund isn't unheard of in the industry, but is far from common either, and raises a potential conflict of interest between the fund and BlueCrest's outside investors. How do partners split their (very expensive) time between the funds? How does the internal pool trade with its own funds? How are costs absorbed? Are there appropriate Chinese walls? How transparent is the setup?

On this last one, BlueCrest's fund documentation is clear about the fund's existence. If investors ignored disclosure about the potential conflict of interest, they've only got themselves to blame. But will this be enough to appease U.S. authorities? Beware a regulator with the bit between its teeth.

With hindsight, BlueCrest's Platt might have chosen a simpler retention policy: he could have paid out more in bonuses to employees, deferring them over time -- or let staff put more of their money into the firm's public funds.

But the entire industry should be watching the SEC probe carefully -- more transparency and increased regulation could seriously raise costs for hedge funds at a time when fees too are coming under pressure and performance is hard to come by. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Duncan Mavin in London at

To contact the editor responsible for this story:
Edward Evans at