By Mark Melin
AlphaMetrix, an investment platform connecting primarily institutional investors with hedge funds and managed futures programs, has suspended paying performance and incentive fees to the funds on its platform and fired its Chief Financial Officer, according to a letter dated October 10 and sent by the firm's CEO Aleks Kins to hedge fund managers.
As of this writing there is no indication customer funds have been illegally transferred and no enforcement actions have been taken, but speculation is an investigation file is not yet closed. Regulators are said to have been in AlphaMetrix's office monitoring the situation.
The letter was the first public manifestation of a firm having difficulty, but previous clues to the problems existed. Sources indicated staff layoffs and a drop in assets under management had provided indications as to the troubles preceding the public letter, as well over $1 million in invoices are said to remain unpaid after their recent Monaco Conference. Several managed futures commodity trading advisors report being owed in the neighborhood of $100,000 in fees while one CTA pegged their number at $2.5 million. It is unclear if cancelation of a technology contract for AlphaMetrix to provide transparency into bank balances of various futures brokerage firms to CMEGroup and National Futures Association (NFA) occurred or if the contract terms had concluded but this, too, played into various reports surrounding the firm's demise. Certain institutional asset managers, including one well known pension fund from Ontario, Canada, pulled assets the weeks before the letter was sent, according to one managed futures fund manager involved in this withdrawal process.
Speculation is AlphaMetrix is currently in negotiations with an investor group who may take controlling interest in the firm, with likely candidates including a large bank who has a significant clearing relationships with AlphaMetrix. Due to the heavy debt load it may be most economically beneficial to a buyer for AlphaMetrix to declare bankruptcy and then sell off the technical platform and rights to its various properties, which is the most probable outcome. But it remains unclear how such a buyout may be structured at this time.
AlphaMetrix entertained several potential buyers during the fall of 2012, according to multiple sources, but failure to come together on valuation of the firm relative to its debt load and lack of a revenue generation model to cover the debt were then cited as reasons for the lack of a sale.
Assets under management at the firm, documented to have been north of $1 billion at their highs, were said to be near $800 million over the summer. However, based on an SEC filing Bloomberg reported assets under management to be closer to $146 million. It is unclear if the SEC filing includes all assets utilizing the platform or just those being managed under the discretion of AlphaMetrix. The firm's discretionary management arm was a much smaller part of the business, as the primary business was providing a neutral third party technical platform to provide transparency into the investment, provide un-bias investment due diligence and operate what had become successful industry conferences.
Background and Significant Successes
AlphaMetrix was founded in 2005 as a platform that was said to combine the benefits of a direct managed futures account (transparency into trade positions and all fees, commissions and expenses) while offering the legal protection of a limited liability partnership. It was registered with the NFA as a Commodity Trading Advisor (CTA) and Commodity Pool Operator (CPO) which meant performance was mandated to be compiled inclusive of all fees and expenses. Offering the benefits of transparency in a direct account and the legal protections of a limited liability partnership structure through a deep technical platform were just the start of significant innovations the firm pioneered, but some clients grew impatient waiting for promised platform technical enhancements. Kins nonetheless had built what was considered among the industry's most significant independent investment platforms. The research team was led by Ranjan Bhaduri, perhaps among a handful of the most respected researchers in managed futures today. The due diligence platform also included David Fisher, a former top official in the Chicago office of the US Secret Service, who conducted extensive background checks of managers, while the technical platform provided day by day, and even minute by minute transparency into the activities of the funds in which institutions had invested.
The firm also built what had become known as a must-attend conferences for the managed futures industry and hedge fund community. The events, which started modestly at the Beverly Country Club on the south side of Chicago, would later migrate to more fashionable destinations such as the South Beach district in Miami and the exclusive kingdom of Monaco. Events would come to include speakers such as former UK Prime Minister Tony Blair and high profile entertainers at night.
Although the firm has been publically criticized for its spending on building the technical platform as well as attracting speakers and entertainers to its events, industry observers note that creating an event that dominates an industry in a few short years and building a robust technical platform and due diligence infrastructure required such spending.