World’s largest ETF strategist passed off test performance data as real gains, SEC alleges
Investment management firm F-Squared Investments, the world’s largest marketer of index products using exchange-traded funds (ETFs), agreed to pay $35 mn in penalties after an SEC investigation found it misled investors with a false performance history of its flagship product.
Investigators found that F-Squared, which has $28.5 bn invested through its index strategies, falsely told mutual funds and other institutional investors that its ‘AlphaSector’ investment product had a seven-year history of strong performance gains when, in reality, the reported gains stemmed from backtesting using a historical model, the SEC says in a statement on its website.
The SEC separately charged F-Squared’s former CEO, Howard Present, with making false and misleading statements to investors as the public face of the firm.
‘We allege that not only did F-Squared and Present attract clients to this investment strategy by touting a track record they presented as real when it was merely hypothetical, but the hypothetical calculations also were substantially inflated,’ Julie Riewe, co-chief of the SEC enforcement division’s asset management unit, says in the press release.
The SEC says F-Squared specifically advertised the product’s purported historical gain as ‘not backtested’ when it was, in fact, backtested. Investigators also found an error in calculating the hypothetical historical performance that inflated gains by 350 percent.
F-Squared promoted the AlphaSector product using falsified performance data between 2008 and 2013 and it became the firm’s largest source of revenue, turning the company from a loss-maker into a ‘highly profitable investment manager,’ the SEC says. The company agreed to pay a fine of $5 mn and disgorgement of $30 mn.
‘We are pleased to put this matter behind us so we can focus on our clients and continue to invest to ensure that our compliance, research, analytics and operational teams are best in class,’ Laura Dagan, who was appointed CEO of F-Squared last month, says in a separate press release. ‘We greatly appreciate the continued support of our clients who have maintained confidence in F-Squared’s ability to deliver downside protection in down markets and upside participation in rising markets.’
