Rogue traders are not found only in prop desk

The Financial Services Authority (FSA) has banned and fined Mr Loic Albert Antoine Montserret, a former portfolio manager at BlueCrest Capital Management Limited (BlueCrest), £35,000 for deliberately mismarking his positions in an attempt to avoid losing his job over losses he was making on his trading book according to an FSA’s press release dated April 29th, 2009.

According to the final notice, the FSA makes no criticism of BlueCrest in this notice. In fact, no harm was caused to the Bluecrest Credit fund’s shareholders since the misvaluation occurred only from April 22nd, 2008 to May 1st, 2008 and therefore no transactions (subscription/redemption) occurred based on the wrong price. As mentioned in the notice, at the end of each month, all the positions in the Fund are valued by an independent administrator. The misvaluation would have been probably caught by the administrator anyway.

Also it is the first case, I heard of, involving a price manipulation by a hedge fund’s trader it is for us a reminder that hedge fund are not very different from banks’ prop desk. The Kerviel case at Societe Generale is probably the most well-known but the banking history had other similar cases. The hedge funds are at a disadvantage compared to banks since they rarely have the resources to invest in expensive trading and risk systems that may detect this type of frauds (this was not the case at Bluecrest).

Investors have to investigate very closely the pricing policy used at hedge funds using OTC derivatives. The requirement for an independent pricing agent, at least for month end valuation, is mandatory. The investment manager should also have a strong internal pricing policy to ensure that he has a correct assessment of the risk in the fund portfolio.