F-Squared Investments Inc. filed for bankruptcy protection
Wednesday and arranged for its investment strategies to be managed by a new
firm, capping the rise-and-fall story of an exchange-traded fund manager once
popular with financial advisers. The firm filed documents seeking Chapter 11
bankruptcy protection, and asked the court to allow it to sell its investment
strategies, contracts to manage money and other intellectual property to a
competing, Chicago-based money manager.
The move will likely allow the firm's flagship AlphaSector
strategy to live on, managed by the buyer, Broadmeadow Capital, which is
affiliated with F-Squared rival Good Harbor Financial. He said their primary
goal, if the deal closes as expected within 45 days, is to “maintain the client
relationships.” F-Squared had been unable to do that. In December the firm agreed
to pay $35 million to settle charges it made false claims about the
performance of its AlphaSector index.
BLEEDING ASSETS
The settlement far from ended the firm's problems. It
started bleeding assets. Lawyers and investors went after the firm, its
mutual-fund distribution partner and financial-advice firms that sold the
products. At least one broker-dealer, Wells Fargo Advisors, is currently
facing claims challenging those sales in arbitration. One of the firm's former
executives also filed a lawsuit against the firm.
F-Squared's filings on Wednesday with the U.S. Bankruptcy
Court for the District of Delaware offered new insight into the firm's
challenges in recent months. The Wellesley, Mass.-based firm lists as its
largest creditor its co-founder and former chief executive, Howard B. Present,
who it says is owed nearly $2 million.
The former Putnam Investments executive was the
force behind F-Squared's attempt to capitalize on adviser interest in ETFs as
well as exposures to the stock market that manage risk. Mr. Present left the
firm in November and has been fighting the Securities and Exchange
Commission in federal court to prevent being barred from the industry and
having some of the money he earned clawed back.
CEO WON'T BE STAYING
As part of the deal, Broadmeadow Capital will enter into
agreements with F-Squared employees necessary to manage the investment strategy
and client relationships. Operations responsibilities will be handled mostly by
existing Broadmeadow staff. Mr. Ingersoll said he could not yet estimate how
many F-Squared employees would be brought over; Laura P. Dagan, the chief
executive, will not be among them.
In March, the firm cut 25% of its workforce, leaving it
with about 121 employees. It's also trimmed and reorganized its executive
ranks. F-Squared routinely promoted seven years of pre-2008 results for its
AlphaSector strategy, despite launching the product that year. The results were
hypothetical and miscalculated in a way that made them look more favorable,
according to a statement of facts the firm signed as part of the settlement
process.
F-Squared's claim that its rules-based strategy could
sidestep violent market swings — by opportunistically trading in and out of
nine industrial-sector ETFs — appealed to advisers stung by the 2008 free-fall
of stock markets. The firm built itself from a virtual nonentity in 2008 to the
force behind a $28.5 billion strategy, as of June 2014.
Those assets have fallen significantly: The firm saw nearly
$8 billion in asset declines in its ETF strategies in the year ended March 31, Morningstar
Inc. said. The mutual fund distributor Virtus Investment Partners Inc.
also cut F-Squared as a manager on five of its products with some
$5.7 billion in assets, including Virtus Premium AlphaSector (VAPAX).
Broadmeadow, which reports $15 million in assets under
management, said it expected to be in a position to close the deal within 45
days. Broadmeadow owner Cedar Capital also owns Good Harbor, another ETF
strategist that's struggled to retain assets after performance challenges.
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