Managed account platforms' marketing materials to face greater scrutiny

Operational Risk
26 Nov, 2013

The marketing materials of managed account platforms will likely be subject to greater scrutiny amid concerns that some providers are inflating their Assets under Management (AuM) on their pools, it has been said.

This comes as court filings by the Commodity Futures Trading Commission’s (CFTC) against AlphaMetrix indicated the recently liquidated Chicago-based managed account platform had just $700 million in AuM on its pool, despite the firm’s marketing material claiming it oversaw $6.9 billion in 2012.  AlphaMetrix even boasted in one industry survey conducted in 2013 that it had $8.4 billion on its pool while confidently predicting a further $2 billion of inflows by early 2014.

“The money managed by AlphaMetrix was tiny in comparison to the number they put out into the marketplace through industry surveys, and this is quite prevalent among independent providers as opposed to the long-established or bank-backed platforms. A lot of managed account platforms with other business lines such as risk management or fund administration, in attempts to inflate their AuM, will include those Assets under Administration (AuA) or assets under risk management as part of their AuM. Investors didn’t question these numbers but if they were to review legal documents or regulatory filings, they would find the numbers to be different,” said John Godden, founder of IGS Advisory, a UK-based consultancy.

These exaggerated AuM figures supplied by some managed account platforms are likely to give managers false hope that they will accrue substantial distribution benefits, while investors could be misled into believing the platforms are of institutional standard. 

Nonetheless, it also illustrates the copious lack of operational due diligence that a number of managers and investors have conducted on these managed account platforms. “The lack of operational due diligence on managed account platforms is telling. Investors and managers should be asking these platforms for audits and financial statements and not just relying on industry surveys or marketing material,” said John Craig, chief operating officer at Camomille, a UK-based asset manager with more than $200 million in AuM.

“If a hedge fund inflated its AuM in marketing materials, it would certainly incur the wrath of financial regulators. I believe managed account platforms will increasingly be treated in a similar fashion,” added Craig.

There is speculation as to how long AlphaMetrix may have been in financial difficulty with some experts suggesting the firm could have been insolvent since 2010. Its woes came to light at the beginning of October 2013 when CME Group and the National Futures Association (NFA), a self-regulatory organisation for the US futures industry, announced they had terminated their relationship with AlphaMetrix 360, the firm’s fund administration business, which had been recruited to perform daily checks on the balances that futures brokers were holding in customer accounts in order to bolster customer protections following the defaults of Peregrine Financial Group in 2012 and MF Global in 2011. CME Group and the NFA cited concerns about the financial stability of the AlphaMetrix group as a whole as being the key driver behind their decision to terminate the contract. 

A letter subsequently penned by Aleks Kins, AlphaMetrix’s CEO, to the firm’s commodity pool participants admitted the firm was suffering from cash flow issues as a result  of liabilities at its parent company “greatly exceeding” its liquid assets. This admission sealed its fate prompting a deluge of investor redemptions and a consequent announcement that it would enter into an orderly liquidation.  However, the CFTC is alleging AlphaMetrix misappropriated $2.8 million in fees due to managers in order to cross-subsidise its parent company.

“Investors and managers are going to be asking tougher questions of these platforms. Who are the auditors? Where are assets held in custody? Not to mention obtaining a better understanding of the flow of funds,” said Craig.

Events at AlphaMetrix are unlikely to lead to diminished investor confidence in managed accounts platforms as a whole, which have historically marketed themselves as being liquid, transparent and subject to high levels of governance, nor are regulators going to intervene as no investor assets have been lost or stolen as they were not held by AlphaMetrix but at custodians and futures commissions merchants (FCMs). The managers on the AlphaMetrix commodity pool also traded in highly liquid futures contracts so the likelihood of a fire-sale of assets leading to a precipitate drop in value is minimal. However, managers on the pool are likely to be left short-changed.

Investor interest in managed accounts platforms has been muted since the financial crisis, something even the most ardent proponents of these vehicles concede. Deutsche Bank Markets Prime Finance’s 2013 Alternative Investment Survey (AIS) said 44% of investors used managed accounts, although added this number had stayed relatively consistent since 2011. 

AlphaMetrixmanaged accountsDeutsche BankCamomilleCME GroupNFACFTCIGS AdvisoryMF GlobalPeregrine Financial GroupFCMs