AlphaMetrix owes $600,000 in fee rebates

Executives at managed futures managers, commodity trading advisers and hedge funds are furious and stymied over non-payment of fee rebates owed to them by AlphaMetrix Group LLC.

“We were continuously chasing them for their payment,” said Bruce Mumford, director of marketing/investor relations, 2100 Xenon Group LLC, Chicago, a fund manager that traded in futures for clients that placed investments through AlphaMetrix. Mr. Mumford said AlphaMetrix is still four to five months behind on paying his fee rebates.

The firm has just five days to pay $600,000 of management and incentive fees owed to some of the fund managers on its managed account platform.

Payment might not be forthcoming, despite the relatively tiny amount in contention, sources said.

AlphaMetrix Group has “recently encountered significant cash flow issues” and has been unable to provide cash to its commodity pool operator subsidiary that manages the investment platform, according to an Oct. 10 letter to investors from Aleks Kins, AlphaMetrix Group CEO and president. Pensions & Investments obtained a copy of Mr. Kins' letter.

The National Futures Association ordered Chicago-based AlphaMetrix to pay the managers by 5 p.m. CST Nov. 1 or face prohibitions on trading within the underlying manager pools, or disbursing or transferring assets from client and fund manager accounts without NFA approval.

In the meantime, AlphaMetrix is forbidden from soliciting or accepting any new assets until the fund managers are paid in full.

The result of the firm's cash crunch is that the commodity pool operator has not been able to pay fee rebates it owes to some of the external hedge fund managers on the platform. Those fees should have been reinvested into various funds on the platform and the fact that they were not “may have an impact on the pools' net asset values,” Mr. Kins' letter said.

“Given that AlphaMetrix's and the CPO's liabilities greatly exceed their liquid assets,” both companies are working to improve the company's financial position, Mr. Kins wrote in his letter.

Mr. Kins said AlphaMetrix terminated George Brown, the company's chief financial officer and Mr. Kins' brother-in-law, and has brought in alternative investment specialist accounting firm Arthur Bell CPAs to review and help with improving internal financial controls.

The NFA, the managed futures industry's self-regulating body, issued the order against AlphaMetrix, an association member, on Oct. 21, according to a copy of the member responsibility action case, which is available at www.pionline.com/nfa-action.

The NFA document said the association took the action “deemed necessary to protect AlphaMetrix's pool participants because AlphaMetrix has withdrawn management and incentive fees from various pools that were earned or owed to third-party money managers.” AlphaMetrix also did not reinvest about $600,000 of fee rebates, the document said.

The withdrawal and non-investment of these fees constitute a direct and an indirect loan, the NFA said.

“AlphaMetrix has and will continue to cooperate with NFA,” according to a company statement provided by Conor Shea, a company spokesman.

Mr. Shea said Mr. Kins was not available for an interview by press time.

Managers using AlphaMetrix's platform to distribute their funds say they have been stiff-armed by the company when it comes to information about what's going on at the firm, much less when they might receive their incentive and management fees.

“AlphaMetrix owes us money, and my phone calls have not been returned. The situation is remarkable for its opaqueness and is extremely frustrating,” said an executive at one of the managed futures funds on AlphaMetrix's investment platform who requested anonymity.

AlphaMetrix has not communicated with the source's firm or other managers with strategies being run on the platform, although for fund managers who traded on behalf of AlphaMetrix's investor clients, it's been clear for months that there was trouble at the firm.

Xenon Group's Mr. Mumford said he hopes AlphaMetrix's financial distress doesn't cost investors money. While he would be dismayed by losing fees on the “tiny” amount of money he managed through AlphaMetrix, he said it would be more distressing to him if investor money were affected, after the black eye that customer losses at futures brokers MF Global Inc. and Peregrine Financial Group Inc. inflicted on the industry.

“My primary concern is that there's no issue with the clients' money,” Mr. Mumford said.

Once well-regarded as one of the most innovative financial technology companies that had built a system designed to give institutional and other investors easy, safe access to specialist futures and CTA hedge funds, AlphaMetrix has run into a financial brick wall.

Assets managed through AlphaMetrix's investment platform totaled about $7 billion in mid-2012, but just $700 million remained as of Aug. 31, according to a recent NFA examination of the company's books and records.

Sources said the root of AlphaMetrix's problems might lie in its conference business, rather than in hedge fund administration or its money management businesses. It hosted fund managers and investors in Monaco and Florida for speed-dating sessions at parties, boat outings and dinners.

“Our assumption is that they spent all the money on these conferences,” said the unidentified hedge fund source, noting “the cash flow issue that has gone beyond the point of no return.”

Sources said AlphaMetrix is desperately seeking a buyer to shore up its finances.

“Within the industry, AlphaMetrix has always been considered an innovator, and it has assets that are attractive,” said Douglas Hart, managing director, Cortland Capital Market Services LLC, Chicago.

AlphaMetrix might have difficulty figuring out how its business can be carved up for a sale, Mr. Hart said. It has competitors in all of its businesses, but none encompasses all of those businesses, he said. Still, Mr. Hart expects there will be multiple bidders for its assets.

Lynne Marek, a senior reporter at sister publication Crain's Chicago Business, contributed to this story.