According to the New York Times, the Spruce Alpha hedge fund was pitched to investors as providing large returns in periods of market turbulence through the implementation of a complex trading strategy. According to the Spruce Alpha fund, during the 2008 financial crisis investors should have had made gains of more than 600 percent. But what Wall Street pitches in theory almost always goes wrong in practice. Thus when markets turned volatile in August 2015, Spruce Alpha, which had only just started up in April 2014, did not turn the volatility into gains for investors. Instead, the fund turned in one of the worst performances losing 48 percent of their money.
The fund’s holdings at the time were under $100 million and was managed by the $1.5 billion Spruce Investment Advisors. Spruce Investment specializes in managing money for the wealthy and institutional investors. According to the New York Times, half of Spruce Investment’s assets under management come from three family offices, a corporation, and a pension plan. The Spruce Alpha fund was the asset management firm’s first direct hedge fund trading fund that was intended to raise a $500 million portfolio.
After the collapse the Spruce Alpha moved its positions into cash and told investors that they can redeem what remains of their money. The Spruce Alpha tale is only the latest example of how managers market hedge funds and complex investment products to investors that often turn out to be too good to be true. Using back-tested results in hedge fund marketing materials are fantasy recreations with all the benefits of hindsight knowledge that are then advertised as likely future performance. However, back-tested results are derived assuming optimum trading conditions, not what the fund will encounter in real life.
Spruce Alpha also showcases the risks of relying on exchange-traded funds (ETFs) and derivatives to profit from short-term turmoil in the stock markets. While it is not clear what caused the largest losses in Spruce Alpha, the fund used a trading strategy involving derivatives to increase returns from ETF trades and sought to make money off of stock market volatility. The New York Times postulated that August’s losses were the result of the VIX volatility. The VIX index measures volatility in the market and can be traded through ETFs. However, the VIX is a mean reverting index, meaning that gains can only be made during periods of volatility and that as soon as markets calm the VIX returns to its long-term average.
Gana Weinstein LLP represents investors who have suffered investment losses due to brokerage firm wrongdoing, such as unsuitable investments and conflicts of interests. The majority of these claims may be brought in securities arbitration before FINRA. Our consultations are free of charge and the firm is only compensated if you recover.