A mutual fund manager agreed to pay over $10 Million to settle charges that it did not observe its own risk management practices, which ultimately resulted in the fund losing 20% of its value. The fund, part of a larger series trust and converted from a private fund in 2013, invested in S&P 500 index futures contracts. The fund’s marketing materials described significant risk management procedures that would limit downside through hedged positions and stop-loss triggers. The SEC alleges that the portfolio manager ignored the risk mitigation limits and that the CEO failed to supervise him. The SEC charges several violations of the Advisers Act including the antifraud provisions. A federal lawsuit continues against the portfolio manager, and the CFTC also settled charges with the respondents.
Don’t allow your portfolio managers to play regulatory Jenga. Very often, former private fund managers have a hard time abiding by the strictures imposed by the Advisers Act and the Investment Company Act. Firms should impose heightened supervision and training to ensure that hedge fund PMs understand the limitations.