{"id":45597,"date":"2014-12-23T07:59:32","date_gmt":"2014-12-23T12:59:32","guid":{"rendered":"http:\/\/www.hedgeco.net\/news\/?p=45597"},"modified":"2014-12-23T09:07:35","modified_gmt":"2014-12-23T14:07:35","slug":"f-squared-settles-sec-etf-case-by-paying-35-million","status":"publish","type":"post","link":"https:\/\/hedgeco.net\/news\/12\/2014\/f-squared-settles-sec-etf-case-by-paying-35-million.html","title":{"rendered":"F-Squared Settles ETF Case by Paying $35 Million"},"content":{"rendered":"

\"SEC\"<\/a>New York (HedgeCo.Net) – Investment management firm F-Squared Investments has agreed to pay $35 million and admit wrongdoing to settle charges that it defrauded investors through false performance advertising about its flagship product.<\/p>\n

The SEC separately charged the firm\u2019s co-founder and former CEO Howard Present with making false and misleading statements to investors as the public face of F-Squared.<\/p>\n

According to the SEC\u2019s order instituting a settled administrative proceeding against Massachusetts-based F-Squared, which is the largest marketer of index products using exchange-traded funds (ETFs), the firm began receiving signals from a third-party data provider in September 2008 indicating when to buy or sell an investment.<\/p>\n

The signals were based on an algorithm, and F-Squared and Present used the signals to create a model portfolio of sector ETFs that could be rebalanced periodically as the signals changed. They named the new product \u201cAlphaSector\u201d and launched the first index a month later. AlphaSector\u2019s indexes quickly became the firm\u2019s largest revenue source, and F-Squared went from losing money to becoming a highly profitable investment manager.<\/p>\n

The SEC alleges that while marketing AlphaSector into the largest active ETF strategy in the market, F-Squared falsely advertised a successful seven-year track record for the investment strategy based on the actual performance of real investments for real clients. In reality, the algorithm was not even in existence during the seven years of purported performance success.<\/p>\n

The data used in F-Squared\u2019s advertising was actually derived through backtesting, which is the application of a quantitative model to historical market data to generate a hypothetical performance during a prior period. F-Squared and Present specifically advertised the investment strategy as \u201cnot backtested.\u201d Furthermore, the hypothetical data contained a substantial performance calculation error that inflated the results by approximately 350 percent.<\/p>\n

\u201cInvestors must be able to trust that performance advertisements are accurate,\u201d said Andrew Ceresney, Director of the SEC\u2019s Division of Enforcement. \u201cF-Squared has admitted that it misled its clients over a number of years about the existence and success of its core strategy.\u201d<\/p>\n

The SEC further alleges that the F-Squared analyst who calculated the backtested AlphaSector performance inadvertently applied the buy\/sell signals to the week preceding any ETF price change that the signals were based on. The mistake carried the model portfolio\u2019s backtested buy and sell decisions back in time one week, enabling the model to buy an ETF just before the price rose and sell an ETF just before the price fell.<\/p>\n

\u201cWe allege that not only did F-Squared and Present attract clients to this investment strategy by touting a track record they presented as real when it was merely hypothetical, but the hypothetical calculations also were substantially inflated,\u201d said Julie M. Riewe, co-chief of the Enforcement Division\u2019s Asset Management Unit.<\/p>\n

Editing by Alex Akesson
\nFor HedgeCo.net<\/a>
\nalex@hedgeco.net<\/a>
\nHedgeCo.Net<\/a> is a premier hedge fund database<\/a> and community for qualified and accredited investors only. Membership in HedgeCo.net<\/a> is FREE and EASY. We also offer FREE LISTINGS for Hedge Funds<\/a>!<\/p>\n","protected":false},"excerpt":{"rendered":"

New York (HedgeCo.Net) – Investment management firm F-Squared Investments has agreed to pay $35 million and admit wrongdoing to settle charges that it defrauded investors through false performance advertising about its flagship product. The SEC separately charged the firm\u2019s co-founder […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[12,3],"tags":[],"class_list":["post-45597","post","type-post","status-publish","format-standard","hentry","category-hedge-fund-regulation","category-hedgeco-news"],"_links":{"self":[{"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/posts\/45597","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/comments?post=45597"}],"version-history":[{"count":4,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/posts\/45597\/revisions"}],"predecessor-version":[{"id":45601,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/posts\/45597\/revisions\/45601"}],"wp:attachment":[{"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/media?parent=45597"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/categories?post=45597"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/tags?post=45597"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}