cherry picking

Peter Eichler and his firm Aletheia Research and Management seem to have had a good run; Aletheia managed $10 billion and per DealBook “Mr. Eichler’s stellar investment performance attracted the likes of Goldman Sachs and Morgan Stanley, which entrusted him with millions of dollars of their clients’ money.” But now that Aletheia is in bankruptcy everyone’s a critic, and the latest SEC’s complaint makes Aletheia out to be a garden-variety bucket shop with no evident investing abilities.

The SEC’s main complaint here is that Eichler, the sole and unsupervised options trader – and, apparently, everything trader – at the firm, made lots of options trades that he didn’t allocate for an hour or more after making them. Winning trades were allocated to his personal accounts or those of his friends and employees; losing trades were allocated to the accounts of two in-house hedge funds. There were varying degrees of blatancy here, with the worst being 463 trades allocated after the positions were closed, which returned 11% to favored customers, 17% to Aletheia insiders (including 19% to Eichler’s personal account), and negative 1.7% to the in-house hedge funds. The overall result, across all categories of blatancy, was:

Between mid-August 2009 and the end of November 2011, the Favored Aletheia-Related Accounts and Favored Custom Accounts obtained about $4.14 million in profit on option trades allocated more than one hour after execution, or allocated after the position was closed out (including roughly $2 million in trading profits to Eichler himself), while the Disfavored Hedge Funds lost $4.4 million on late-allocated or “perfect information” trades.

So one thing to notice there is that the net profits, firm-wide, on these option trades were negative $260,000-ish, which, I mean, which would anger you more in a manager, (1) allocating you his worst trades or (2) being a money-loser in the aggregate? Read more »