Fund’s Chief Risk Officer Failed to Manage Risks
The Chief Risk Officer of a defunct registered fund agreed to pay penalties, incur an industry bar, and cooperate with a further SEC investigation into his former firm and its portfolio managers in connection with misrepresenting portfolio risk management practices.
The respondents marketed the registered fund, as well as affiliated private funds, as a risk-managed S&P 500 futures trading strategy with limited downside based on historical stress testing and internal risk parameters. According to the SEC, the respondents ignored the data from historical stress-testing and did not limit portfolio managers. The SEC accuses the respondent of lying to both investors and the board of the third-party series trust. As the market’s volatility increased in 2017 and 2018, the firm increased risk rather than reduce risk tolerances. When the market declined in February 2018, the fund incurred losses in excess of $1 Billion and ultimately liquidated.
On who can investors rely when a fund manager lies about portfolio and risk management? They can’t rely on the Board, whose information comes from the manager. They can’t rely on the series trust sponsor who runs the back office. Counsel won’t know. Neither will the auditor. As we have argued in the past, the most effective way to uncover this type of wrongdoing is to require either an independent Chief Compliance Officer or, at least, an independent compliance review.
Read SEC complaint here.