In a double shot of news announcements on Wednesday, F-Squared Investments said it has filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of Delaware. In tandem with that filing, Broadmeadow Capital said it signed an agreement to acquire F-Squared's intellectual property, investment strategies and investment management contracts, pending court approval and the okay from F-Squared clients.
F-Squared, a Wellesley, Mass.-based investment manager, created a sizable book of business through its quantitative, algorithm-based AlphaSector Premium Index that builds an index portfolio comprised of exchange-traded funds tracking nine U.S. equity sectors, as well as a short-term U.S. Treasury ETF as a cash equivalent.
F-Squared’s track record made it popular with financial advisors, but the firm got into hot water over bogus performance reporting that cast doubt about its track record and its integrity. Last December, the U.S. Securities and Exchange Commission announced that F-Squared agreed to pay $35 million and admit wrongdoing regarding falsifying performance numbers in advertising and marketing materials for its flagship AlphaSector Premium Index strategy.
Specifically, the SEC said F-Squared falsely advertised a successful track record based on the actual performance of real investments for real clients between the years 2001 and 2008. In reality, the agency said, the algorithm didn’t even exist during that seven-year period.
Furthermore, the SEC said it wasn’t until September 2008 that F-Squared started to receive the algorithm-based buy and sell signals from a third-party data provider that became the AlphaSector Premium Index.
In addition, the data featured in F-Squared’s advertising was actually derived through hypothetical backtesting even though F-Squared specifically advertised the investment strategy as “not backtested.” Meanwhile, the hypothetical data contained a large performance calculation error that boosted the results by roughly 350 percent.
The agency charged F-Squared’s co-founder and ex-CEO, Howard Present, with making false and misleading statements to investors regarding the strategy, which has underpinned ETF-based separately managed accounts used by many financial advisors.
Present left F-Squared in November 2014 and was replaced as CEO by Laura Dagan, who previously was chairman and CEO of Dwight Asset Management Company.
In a video clip on F-Squared’s website that features Dagan and key executives from Broadmeadow Capital and its parent company, Cedar Capital, Dagan says the proposed purchase of F-Squared’s strategies by Broadmeadow will “preserve the continuity of certain F-Squared employees, including key investment, research and relationship professionals who will join the Broadmeadow Capital team when the transaction is completed.”
In that video, Broadmeadow president David Cabot praises F-Squared’s AlphaSector strategies as having delivered “attractive returns over their live track record.”