BlueCrest Fined $170MM For Secretly Replacing Top Traders Managing Outside Money With Underperformin
- Thread starter Banjo
- Start date
Sorry, where do you see front-running?
They moved their best strategies from the public fund to the prop pool - there is nothing illegal about that. Everyone does that. Then they used "alpha capture", i.e. piggybacking on the trades by their best performers outside of their portfolio. Also nothing illegal though super shady with regards to the PMs (e.g. I'd never work for a fund that does that, as it deteriorates your alpha). The complaint is that they did so without disclosing both facts to the investors, which is very illegal.
The article literally calls it front running. The prop fund trader would buy and then the client fund would buy the same positions. Seems like the definition of front running.
The actual definition of front running is buying ahead of a large trade based on the advance knowledge of the trade (i.e. material non-public information). The advance knowledge is key here. If I tell you that I am long Tesla and you buy because I own it, it's not front running.
when the time came to manage client money, BlueCrest basically used a simply copycat algo to piggyback on its top trades but only after the management team was already in the positions, thus giving it substantial firepower to generate alpha simply by having billions in fund flows rush into the same trades it had already put on, creating a feedback loop.
So basically the internal funds get into the trades first and then let the algo copy their trades for their clients (that's front-running), pushing the price higher/lower and then close the positions of the internal funds at profit at the expense of the client funds.
Not really. Front-running (as defined by the SEC as opposed to zerohedge
) very specifically has to take advantage of material non-public information about specific upcoming transaction(s). That's why guys who do fraud studies or recommend trades in the media, for example, are not considered frontrunners. Even though they do trades ahead of the crowd and benefit from others piggybacking on their trades, they do not have advance knowledge of the exact transactions. Same with prop PMs at Bluecrest, they did not know about the alpha-capture process in the public fund.Alpha capture is a pretty common practice in large multi-manager funds. The whole idea of is to do the same trade without paying the PM for the results - one of the reasons PMs hate it and one of the reason why you should never go with a capacity-constrained strategy to a place like that. However, the clients that get the dubious benefit (usually there is some, but it's diluted) are supposed to know what they are getting into. Here they did not.