Robo-Investing: Bluecrest's Smart Strategy For Financial Success

BlueCrest Capital Management is a British-American investment firm founded by billionaire Michael Platt and William Reeves in 2000. The firm has offices in London, Jersey, Singapore, and New York. In 2015, BlueCrest transitioned into a family office, managing money for its partners and employees.

Robo-advisors are software platforms that use algorithms to create and manage investment portfolios for clients. They are known for their low fees, automated investment management, and personalized advice. While robo-advisors have become an increasingly popular alternative to traditional financial advisors, it is unclear if BlueCrest utilizes robo-investing for its clients.

BlueCrest's $170 million settlement with the U.S. Securities and Exchange Commission

On December 8, 2020, the U.S. Securities and Exchange Commission (SEC) announced that BlueCrest Capital Management Limited had agreed to pay $170 million to settle charges arising from misleading investors. The SEC alleged that BlueCrest made inadequate disclosures, material misstatements, and misleading omissions regarding its transfer of top traders from its flagship client fund, BlueCrest Capital International (BCI), to an internal proprietary fund, BSMA Limited, which managed the personal capital of the firm's employees.

According to the SEC, BlueCrest created BSMA to trade the personal capital of BlueCrest personnel using primary trading strategies that overlapped with BCI's. The SEC's order finds that BlueCrest, over a period of more than four years, made misleading and inadequate disclosures regarding BSMA's existence, the movement of traders from BCI to BSMA, and the use of an underperforming algorithm in BCI. The algorithm generated significantly less profit with greater volatility than the live traders, allowing BlueCrest to keep more of the performance fees.

The SEC's order also finds that BlueCrest failed to disclose conflicts of interest associated with the transfer of traders and the use of the algorithm. Members of BlueCrest's governing body, which made the relevant decisions, had a significant ownership interest in BSMA that was much higher than their ownership interest in BCI.

As a result of these findings, the SEC charged BlueCrest with violating antifraud provisions of the Securities Act of 1933 and the Investment Advisers Act of 1940, as well as the Advisers Act's compliance rule. BlueCrest agreed to settle the charges without admitting or denying the allegations, and the $170 million will be distributed to harmed investors. This settlement underscores the SEC's commitment to protecting investors and ensuring that investment advisers provide accurate and complete disclosures.

In a statement, BlueCrest noted that the matter primarily involved disclosures made more than five years ago and does not relate to its current business operations, as the firm no longer manages external assets.

BlueCrest's transition to a family office

BlueCrest Capital Management, a British-American investment firm, was founded in 2000 as a hedge fund by Michael Platt and William Reeves, former senior proprietary traders at JPMorgan Chase. In 2015, BlueCrest transitioned into a family office, returning all outside capital to investors.

A family office is a private investment partnership that manages money for its partners and employees. BlueCrest's transition to a family office was likely influenced by its desire to have more control over its investment strategies and focus on generating returns for its partners and employees rather than outside investors.

Following the transition, BlueCrest continued to generate strong returns. In 2016, the fund generated a return of 50%, followed by 54% in 2017 and 25% in 2018, a year when the average hedge fund lost money. In 2019, BlueCrest generated another 50% return.

The transition to a family office allowed BlueCrest to make investment decisions independently and focus on generating returns for its partners and employees. It also enabled the firm to have more flexibility in its investment strategies and take on more risk, as it was no longer answerable to outside investors.

In summary, BlueCrest's transition to a family office gave the firm more autonomy and flexibility in its investment strategies, allowing it to focus solely on generating returns for its partners and employees. The move away from managing outside capital likely contributed to the firm's strong performance in the years following the transition.

BlueCrest's spin-off of $8.2 billion in assets into Systematica Investments

BlueCrest Capital Management, a British-American investment firm founded by billionaire Michael Platt and William Reeves in 2000, spun off $8.2 billion worth of assets into a new company, Systematica Investments, in 2014. The new company was led by BlueCrest's current head of systematic trading, Leda Braga, who CNBC has referred to as "the most powerful woman in Hedge Funds", earning over $50 million annually.

The spin-off created a separate entity to focus on BlueCrest's computer-driven hedge funds, which use complex computer models to evaluate risk, pricing, and timing in markets. Systematica Investments started with $8.3 billion in assets under management, including the management of the BlueTrend programme and the BlueMatrix quantitative equity market neutral fund.

The decision to spin off these funds was made to allow BlueCrest to focus on its flagship products and discretionary trading strategies. BlueCrest retained a stake in Systematica, ensuring a continued connection between the two firms.

Following the spin-off, Systematica competed in a shrinking market for computer-driven hedge funds, facing challenges such as investor flight and poor performance since 2011. Despite this, the company was efficient in growing its business, and BlueCrest's funds continued to generate significant returns in the following years.

BlueCrest's relative-value trading book reduction

BlueCrest Capital Management is a British-American investment firm founded by Michael Platt and William Reeves in 2000. The company is headquartered in London, with additional offices in Jersey, Singapore, and New York.

In March 2020, BlueCrest reduced the size of its relative-value trading book, which focuses on exploiting anomalies in related securities. This move was part of a broader risk reduction strategy, with the company cutting risk across the firm by about $1 billion. The decision to reduce the relative-value trading book came in the wake of losses incurred by the company.

The relative-value trading strategy involves attempting to profit from small differences in the prices of similar assets, such as different Treasury bonds or a bond versus a future. To enhance profitability, portfolio managers often employ substantial leverage, relying on steady access to financing and stable relationships between securities. However, this strategy is susceptible to sharp increases in volatility, which can lead to rapid losses.

The reduction in BlueCrest's relative-value trading book was accompanied by the departure of traders Raymond Wang and Romain Denis, whose portfolios had underperformed. This downsizing was a response to the challenges posed by the volatile market conditions at the time, particularly the impact of the spreading coronavirus disease on global financial markets.

Despite the losses, BlueCrest's investment fund remained positive for the year through the close of trading on March 11, 2020. The company's performance highlights the delicate balance between risk and reward in complex debt-trading strategies and the importance of effective risk management in mitigating potential losses.

BlueCrest's discretionary equities strategy

BlueCrest Capital Management, a British-American investment firm founded by billionaire Michael Platt and William Reeves in 2000, launched a new discretionary equities strategy in July 2013. This move marked BlueCrest's return to the discretionary equities trading space after exiting in 2007.

To lead this strategy, co-founder Michael Platt and BlueCrest management hired their former colleague from J.P. Morgan, Christian Dalban, as the head of discretionary equities. BlueCrest provided approximately $700 million in seed capital for Dalban and his team to manage in the first year. Dalban swiftly began building the necessary infrastructure, hiring talent, and expanding the business.

The discretionary equities strategy has been a success, meeting its targets with strong performance. While 2015 was challenging for the discretionary equity space, with some of the most established equity hedge fund managers reporting double-digit losses, Dalban's strategy delivered returns of approximately 10% net that year.

The strategy is well ahead of potential benchmarks, including multi-strategy or equity market-neutral hedge funds, equity long-short funds, and event-driven funds. Dalban's approach does not expect to be more than 20% net long or net short and does not foresee returns exceeding 20% from factor exposures.

BlueCrest has developed proprietary systems to identify factor exposures, including country, currency, sector, industry, and styles such as growth, value, momentum, and quality. Dalban's strategy avoids significant factor tilts over time, and their systems calculate that over 80% of returns are pure alpha.

The fee structure on Dalban's teams is designed to attract and retain top talent, offering a competitive deal where teams share performance-based compensation after covering their share of infrastructure costs.

With a strong focus on risk-adjusted returns, Dalban expects individual managers to achieve gross Sharpe ratios above 1.5, and the overall net Sharpe ratio for the equity strategy to exceed 2. This strategy's volatility target is aligned with its return target.

The success of BlueCrest's discretionary equities strategy can be attributed to its combination of talented managers, effective risk management, and a performance-oriented culture.

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