F-Squared files for bankruptcy

Firm struggled to get back on its feet after a settlement with regulators over bogus performance claims

Jul 8, 2015 @ 11:12 am

By Trevor Hunnicutt

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.

“The opportunity presented itself,” said Paul R. Ingersoll, chief executive officer at Cedar Capital and Good Harbor. “For all the things that F-Squared has gone through and however unfortunately some of their materials have been represented, there are a significant amount of their clients that like their approach to investing and like their strategy.”

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.


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.

Those burdens have made it increasingly hard for the firm to change the subject: One wholesaler for the firm recently described his company as being in a “penalty box” with investors.

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.

F-Squared also lists claims by two law firms totaling $827,328, a credit-card bill for $115,537 and hundreds of thousands of dollars in employee contracts.


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).

F-Squared said it will “continue operating in ordinary course throughout the sale process,” paying its employees on “a timely basis.” Company officials declined to comment further.

“This is probably a little bit of a fresh start for the algorithm,” said Greg M. Vigrass, president and chief executive officer of FOLIOfn Institutional, whose investing platform includes F-Squared strategies and is used by financial advice firms. “It's potentially good news for investors and those that were fans of the F-Squared business model and investing approach.”

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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