Yet one fund stood out. BlueCrest Capital, the firm co-founded by billionaire bond trader Michael Platt, reportedly posted a return of 153% in the year. The performance marks the latest in a table-topping run. If you’d invested $1,000 with Platt at the beginning of 2016, your investment would be worth almost $28,000 today, reflecting an annualized return of 60%.
The only problem: Platt didn’t want your money then — and he doesn’t want it now. At the end of 2015, Platt returned all outside money to investors, reorienting his fund into a private investment partnership. “We are going from earning 2 and 20 on clients’ money to earning 0 and 100 on our own,” he said, referring to the management fees firms typically levy on third-party funds and the share of investment performance they get to keep.
Platt founded BlueCrest in April 2000 after a career at JPMorgan Chase & Co., where he had been responsible for relative value proprietary trading. Starting with $117 million of assets under management, he grew it to a peak of $37.4 billion in May 2013, launching new strategies across a range of asset classes. In 2006, he floated an investment trust on the London Stock Exchange called AllBlue, which opened his suite of funds to retail investors.
While the firm posted strong numbers, they were nothing like what Platt would show after he kicked investors out at the end of 2015. His flagship international fund performed well initially, generating 30% in its first full year of trading in 2001 and 17% the year after. But apart from a stellar 2009 (+45%), it didn’t post those kinds of returns again. AllBlue returned an average of 7.7% a year in the nine years following its launch.
One reason for the upturn in fortunes after he returned outside investors’ cash was the amount of leverage the firm assumed. When it managed other people’s money, the firm limited the notional capital it allocated to funds to around 1.5 times assets under management.
The outside chairman of AllBlue explained the benefits. “The key is to avoid losing money when times are difficult rather than to shoot the lights out only to slump later,” he wrote in his final shareholder letter. “In that regard, the very low levels of volatility in our net asset value have continued to prevail and BlueCrest can continue to state that AllBlue has never lost money over any rolling 12 month period of its history.”
But Platt’s own risk tolerance was greater than that. In 2011, he and his management team bought back a minority stake that Man Group Plc held in the firm. A few months later, they launched an internal fund to manage partners’ wealth. Seeded with $500 million on behalf of 14 partners, it quadrupled in four years. It deployed greater leverage than the external funds – its ratio of notional capital to assets under management averaging about 10 times.
Under its more favorable economics, BlueCrest’s management team started spending more time on the internal fund than the external funds. Portfolio managers were reallocated accordingly. This gave rise to conflicts of interest that were later challenged by regulators in the US and the UK. In 2020, BlueCrest agreed to pay $170 million to former clients to settle the US allegations and the following year was fined by the UK watchdog. (His appeal of the UK decision is still pending).
Meanwhile, Platt was growing weary of the business side of managing the firm. “Recent developments in the industry, including, among other things, downward pressure on fee levels, the increasing cost of hiring the best portfolio management talent and the difficulty in tailoring investment products to meet the individual needs and constraints of a large number of diverse investors, have all significantly reduced industry profitability and flexibility,” he wrote in his December 2015 letter to clients.
Platt had already resisted bowing to fee pressures in 2011. When he wound up his own hedge fund firm, George Soros approached Platt to manage some of his personal wealth. Soros offered BlueCrest a 0.5% management fee and a 10% share of the performance upside. Platt declined, saying the fees were too low.
The divergent performance record of BlueCrest as a private investment vehicle and BlueCrest as a manager of other people’s money highlights the impact of incentives in generating returns. But Platt may find that he is not entirely free of constraints. Since the implosion of Archegos, regulators have been looking more closely at how private vehicles operate. Last week, the European Central Bank told banks they need to be more selective with customers that make risky bets on financial markets.
For now, though, Platt is riding high. In 2019, he was filmed in the back of a taxi. “I’m the highest earning person in the world in finance,” he told the cab driver — a remark he later called a joke. If he wasn’t then, he certainly is now.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Marc Rubinstein is a former hedge fund manager. He is author of the weekly finance newsletter Net Interest.
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