Man who said no to Soros builds BlueCrest into hedge fund empire

Used $750 million in loans to hire equity traders

When BlueCrest Capital Management LLP founder Michael Platt expanded into stocks this year to compete with Millennium Management LLC and SAC Capital Advisors LLP for traders, he tapped an unusual funding source: his banks.

He received a $750 million loan from 16 banks in July, enabling his hedge-fund firm, which oversees $34.2 billion, to hire at least 25 equity money managers and provide them with capital to start trading immediately, said two people with knowledge of the loan, who asked not to be identified because it isn’t public. Typically, hedge funds need to persuade clients to invest in new ventures and expand gradually, the people said.

HSBC Holdings Plc, Citigroup Inc., JPMorgan Chase & Co. were among the banks eager to burnish their relationship with Europe’s third-biggest hedge-fund firm, which pays banks tens of millions of dollars a year in fees for trading and other services. The loan shows Platt’s clout as one of Wall Street’s most coveted clients and how aggressive he is to keep gathering assets and add new investing strategies, investors and executives at other funds said.

“I can’t think of any other examples like this,” said Daniel Celeghin, a partner at Casey Quirk & Associates LLC, a Darien, Connecticut-based firm that advises hedge funds on fundraising. “It’s just the nature of finance where if you are big and successful, people want to do business with you. If you are small and struggling, then it’s wait and see.”

Soros Rebuffed

Bankers and former colleagues describe Platt, 45, as a tough negotiator. He’s also loathe to cut deals that might cost him money, even when the person sitting on the other side of the table is hedge-fund royalty. After George Soros decided in 2011 to stop managing money for outside clients and turn his hedge- fund firm into a family office, the billionaire investor went to other money managers to ask whether they would oversee some of his $25.5 billion of assets.

Among those Soros spoke to was Platt, saying he would like him to take on more than $1 billion, while paying BlueCrest a 0.5 percent management fee and a 10 percent performance fee, according to a person with knowledge of their discussion. Platt thanked Soros, 83, for the meeting and declined the offer, saying plenty of investors were willing to pay BlueCrest 2- and-20, the industry standard of charging a 2 percent management fee and 20 percent of any profits, the person said.

Michael Vachon, a spokesman for Soros, and BlueCrest declined to comment on the meeting.

Assets Double

BlueCrest, which before its push into equities focused on trading interest rates and using computers to capture trends in bonds and commodities, has more than doubled its assets over the past five years. The growth has been fueled by Platt’s drive to build an investment empire and money raised from pension funds, which are drawn to the fact that the two biggest hedge funds at Guernsey-based BlueCrest have never posted an annual loss, even in the 2008 market meltdown.

The decade-long winning streak is at risk of ending this year, as both funds lost money through November, according to investors. For BlueTrend, the firm’s computer-driven hedge fund, the poor performance has continued in December, as it lost 6.7 percent, or about $886 million of investors’ money, in the first 13 days of the month, a company performance report shows.

It’s not guaranteed that BlueCrest’s expansion into equities will succeed, as hedge funds often struggle when they step outside their expertise. The firm shut an earlier stock fund in 2007 after it posted losses that year. Brevan Howard Capital Management LP, started in 2002 by former Credit Suisse Group AG fixed-income trader Alan Howard, closed a $569 million equities fund in May 2011, in part because the asset class strayed from the firm’s skill making wagers on interest rates based on global macro-economic trends.

Outside Investors

“The questions I have when firms expand beyond their knitting is whether they are really committed to this and do they have the expertise,” said Larry Chiarello, a partner at SkyView Investment Advisors LLC in Shrewsbury, New Jersey, which invests in hedge funds.

BlueCrest plans to raise money from outside investors for the equity fund if it posts good performance and has the “capacity” for more capital, Andrew Dodd, the firm’s chief financial officer, said in an interview. Platt declined to comment for this article.

In the past 24 months, Platt and BlueCrest have been hard to miss, adding traders fleeing increasingly regulated Wall Street banks and raising money from public retirement plans from London to Texas and Missouri.

BlueCrest Expanding

BlueCrest has boosted its global headcount by 75 percent to more than 580 people since the start of 2010. In New York, the number of employees has increased to about 110 from 40 over the past 18 months, and the firm is relocating to a bigger space in the General Motors building from its current digs one block away. The firm also added an office in Sao Paulo last month.

Within eight months, BlueCrest has become a chief competitor to Millennium, a $19.6 billion firm that Israel Englander started 24 years ago, in hiring equity traders, according to recruiters who spoke on condition of anonymity because the firms’ hiring practices are private. While Platt has been hiring, Brevan Howard, Europe’s biggest hedge-fund manager, has cut more than a dozen traders this year after its main hedge fund underperformed its historical returns, said two people with direct knowledge of the matter.

Spokesmen for Millennium and Brevan declined to comment.

SAC Hires

Platt made his first hire for stocks in March, adding Nomura Holdings Inc.’s Christian Dalban to build and oversee teams of traders that would be based in London. Jonathan Larkin joined from Nomura in April to do the same in New York.

BlueCrest also added at least three money managers and two analysts from Stamford, Connecticut-based SAC, which is turning itself into a family office to manage founder Steven A. Cohen’s $9 billion fortune.

Manhattan U.S. Attorney Preet Bharara’s description of SAC as a “veritable magnet for market cheaters,” and the record $1.8 billion it agreed to pay last month to settle an insider- trading probe have prompted some firms to stay clear of hiring its employees to avoid scrutiny from investors, said recruiters and executives at other hedge funds. For now, BlueCrest’s equity fund doesn’t have outside clients.

Equities Gain

“We have high standards whenever we hire anyone,” Dodd said. “We would not have different standards whether it’s our money or our investors’ money.”

Adding equities gives the firm a path to keep growing at a time when its biggest funds are facing fundraising constraints and Pacific Management Co.’s Bill Gross said the 30-year bull market for bonds may be over. The BlueCrest stock fund has gained about 4.5 percent this year since it started trading in August, according to a person with knowledge of the matter, who asked not to be identified because the hedge fund is private.

“Hedge funds can’t seem to get their money into equities fast enough,” said Zack White, a partner at Attica Executives Ltd. in London who recruits money managers and analysts for hedge funds. “Larger firms with capital to deploy and a reputable brand name will clearly have an advantage in attracting established portfolio managers.”

BlueCrest, which U.K. regulatory filings show collected almost $1 billion of management and performance fees from its investors last year, is due to pay back the $750 million it borrowed from banks in 2016, according to the people with knowledge of the matter. Dodd and spokesmen for HSBC, Citigroup and JPMorgan all declined to comment on the loan.

Performance Slumps

Amid the activity, BlueCrest is having one of its worst investing years, hurt by a lack of market trends, surprise comments by central bankers that have whipsawed bond and currency markets and the firm’s skepticism of the strength of the global economy, particularly in Europe, investors said.

BlueCrest Capital International, the firm’s $14 billion hedge fund that primarily trades interest rates, was down 1 percent for the first 11 months of 2013, while BlueTrend, a $13.2 billion fund that relies on computer signals to follow trends in more than 150 markets, fell 8.7 percent, performance reports sent to investors show. Hedge funds on average gained 8.3 percent this year through November, according to data compiled by Chicago-based Hedge Fund Research Inc.

BCI, which Platt manages, has produced an average return of 12 percent a year after fees since it started in December 2000, according to company performance reports. BlueTrend, run by former JPMorgan quantitative analyst Leda Braga, 47, has risen 11 percent annually since its founding in April 2004.

Investors’ Returns

Put another way, a $1 million investment in BCI at its beginning would now be valued at $4.36 million, compared with $1.77 million over the same time period from the Standard & Poor’s 500 Index with dividends reinvested. A $1 million investment in BlueTrend when it started would be worth $2.81 million, compared with $1.96 million from the S&P 500.

“In markets, you have rich years and you have less rich years,” said Arpad Busson, whose Nyon, Switzerland-based EIM SA has invested in BlueCrest for more than a decade. “They are not having their best year, but Mike has paid off handsomely over his career, especially in the years when we really needed him like 2008.”

Platt is a board member of Absolute Return for Kids, an organization Busson founded that raises money for U.K. charter schools and for child vaccinations in Africa.

Bearish Bets

U.S. Federal Reserve Chairman Ben S. Bernanke’s indication in May that the central bank might curtail fixed-income purchases as the economy improves hurt performance. BCI’s fund managers have also been bearish on Europe, saying economies in the region haven’t improved enough to justify the optimism of “many asset prices,” according to an August client letter.

Most investors disagree, as the MSCI Europe Index of stocks is up 13 percent this year and bond yields have narrowed between Germany and debt-laden countries such as Spain and Greece.

“The opportunity set for fixed income has been reduced -- that’s not a secret for anyone,” Dodd said. “What’s been difficult this year is unpredictable actions from central banks. That’s been the biggest driver more than any directional macro views that our traders might have had.”

Investment Opportunities

Another concern is a dearth of profitable trades, according to Mercer LLC, which advises its clients on investing in hedge funds. BlueCrest’s multi-strategy fund, which diversifies returns and risk for clients by investing in six of the company’s underlying hedge funds, has been pulling capital from BCI this year because of few investment opportunities in the “relative-value fixed-income space,” according to an August report that Mercer prepared for a U.K. pension fund.

Relative-value bets often involve wagering on the relationship between different interest rates, such as borrowing levels on two-year U.S. Treasury bonds and 10-year notes. Such trades have become more difficult because central banks have kept interest rates at historic lows and growth has been muted around the world without much disparity among different economies, said Anthony Lawler, who oversees $6 billion invested in hedge funds at GAM in London.

The lack of trades has prompted BlueCrest to stop raising money for BCI, according to Mercer. The firm has been hiring money managers who invest in convertible bonds and mortgage securities, a sign BlueCrest may be “moving further down the liquidity spectrum in order to seek out returns,” Mercer wrote in its report.

Trend Following

BlueCrest is banking on a comeback for BlueTrend, which has cumulatively lost money over the past three years, according to Mercer. It and other trend-following hedge funds have fallen 7 percent on average since the end of 2010, the Newedge CTA Index shows. The losses have prompted investors to question whether computer-driven funds can profit in an environment where drawn- out moves in asset prices are lacking and market sentiment swings based on statements by politicians and central bankers.

David Harding, one of BlueCrest’s chief competitors in using computer models to profit from market moves, said the best explanation for why trend-following has underperformed in recent years may be that too much capital has flowed into the space chasing too few investment opportunities. Systematic hedge funds have increased their assets under management by almost $100 billion to $260.7 billion since 2008, according to BarclayHedge Ltd., a Fairfield, Iowa-based data provider.

BlueCrest’s System

“There’s a lot of talk saying trend following isn’t working as well because of government intervention,” Harding, whose London-based Winton Capital Management Ltd. manages $25 billion, said in an October interview with Bloomberg Television. “A more reasonable accusation would be that trend following isn’t working so well because so much money has gone into it.”

BlueCrest’s discretionary hedge funds function like proprietary trading desks at a Wall Street bank, with the best performers receiving more capital to invest as long as they keep making money, according to former BlueCrest employees, who asked not to be identified because they weren’t authorized to speak publicly about the firm.

Its senior investment team includes Igal Amzallag, a former Credit Suisse interest-rates trader, Andrew Silver, who oversees credit trading, and John Roach, who joined this year from Deutsche Bank AG to run BlueCrest’s mortgages desk, according to marketing documents.

At the end of the year, money managers can typically expect to take home at least 12 percent of the profits on their individual trading books, the former employees said.

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