SEC Charges New Stream Hedge Fund Managers with Fraud

(February 28, 2013) — A Connecticut-based hedge fund and advisory are at the center of the US Securities and Exchange Commission’s (SEC) latest case.

The complaint alleges that in 2008, David Bryson and Bart Gutekunst, co-owners of New Stream Capital, secretly altered the fund’s capital structure at the behest of its largest investor, Gottex Fund Management. The new structure gave Gottex and certain other offshore investors priority access to fund assets in the event of liquidation, according to the SEC’s documents.

Furthermore, the regulator claims that Bryson and Gutekunst fraudulently raised additional capital after this restructuring by not disclosing the changes to potential investors.

“Hedge fund managers who put greed ahead of full disclosure to investors violate a fundamental trust,” said George Canellos, acting director of the SEC’s Division of Enforcement, in a statement. “Bryson and Gutekunst told investors they were all investing on equal terms when in fact some were investing in a fund that had been secretly restructured to their detriment.”

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New Stream, which filed for bankruptcy in 2011, reportedly managed a $750 million fund focused on illiquid investments in asset-based lending. The complaint indicates that institutions contributed the majority of New Stream’s capital. The claims on New Stream’s assets total approximately $182 million, according to court documents, while only $9.7 million is expected to be recovered—about five cents on the dollar for investors.

An attorney for Bryson did not immediately return a request for comment.

Large US public pensions are, on average, making alpha—but could be making more if they shifted a greater portion of their portfolios to passive investments, researchers say.

(February 28, 2013) – CIOs and their teams at major public pensions in the United States have been doing something right: A study has found these funds average 89 basis points of alpha per year due to asset management decisions.

But, according to a study, that number could be even higher if CIOs made the decision to, well, make fewer decisions. “Pension funds benefit significantly from time series momentum across multiple asset classes,” they wrote. “Our results thus suggest that pension funds, and especially the larger funds, would have done better if they invested in passive mandates without frequent rebalancing across asset classes.”

Authors Aleksandar Andonov, Martijn Cremers, and Rob Bauer (a member of The Professors, aiCIO’s just-released list of the top ten most influential academics in institutional investing) arrived at this finding by analyzing a CEM data set covering 557 US defined benefit plans from 1990 to 2010. Bauer and Andonov, both of Maastricht University, along with Notre Dame’s Cremers, broke down pension fund returns into three components—asset allocation, market timing, and security selection—and found that the second factor contributed a mean of 26 basis points of alpha annually.

Pension funds earned none of this 0.26% alpha through active rebalancing, however. “The 26 basis points abnormal market timing returns can be fully attributed to passive exposure to ‘time series’ momentum,” the authors wrote. “Time series momentum is the phenomenon that past returns in a particular asset class tend to be predictive for the return in the asset class … Combined with the insignificant security selection performance, this suggests that pension funds benefit from simultaneously investing in multiple asset classes, but would do better (after costs and on average) if they would have invested exclusively in passive mandates without frequent rebalancing across asset classes.”

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This call for passivity has been echoing from numerous corners of the institutional investing space beyond academia.

Last week, Lee Partridge of Salient urged the San Diego County Employees Retirement Association to drop certain hedge funds in their portfolio in favor of passive indexes, to take advantage of trend strategies like momentum without paying sky-high fees.

Likewise, Mercer Partner Brian Birnbaum stressed in a recent interview with aiCIO that going passive can be the best way for institutional investors to boost net returns: “What you want to avoid is having clients buy and pay multiple active manager fees to get exposure or access certain markets. You can do the same thing with index funds.”

Read the entire paper here.