Exclusive: F-Squared Investments cutting 25% of staff

F-Squared Investments Inc., the largest ETF-based portfolio builder, is cutting up to 25% of its workforce Thursday as the firm reels from an admission it misled investors about its performance, a source with knowledge of the plans told InvestmentNews.
The 40 layoffs across the 161-staff firm come three months after the money manager publicly admitted to touting a false track record in its “AlphaSector” strategy and agreed to pay $35 million to settle the charges.
Since then, Wellesley, Mass.-based F-Squared has reorganized its leadership under a new CEO, Laura P. Dagan, and worked to retain the business of financial advisers and institutions who invested clients’ money directly through the firm as well as through mutual funds sold by Virtus Investment Partners Inc.
“A detailed analysis of our business revealed the need for a more streamlined organizational structure that positions F-Squared for a sustainable future of growth,” the firm said in a statement. “We have created a more agile operating structure that better aligns our extraordinary people with the needs of our clients, including the elimination of redundancies in our operations. Regretfully, this includes an unavoidable and substantial reduction in headcount.”
F-Squared lost billions to investor withdrawals in anticipation of regulators’ charges, but first-quarter data on the firm’s assets aren’t yet available. Brokerages, including Wells Fargo Advisors, have sent up warning flags to advisers about F-Squared since the Securities and Exchange Commission inquiry began. Others, such as RBC Wealth Management and Raymond James Financial Inc., required advisers to rein in client exposures to products managed by F-Squared.
RESULTS MISCALCULATED
F-Squared routinely promoted seven years of pre-2008 results for AlphaSector, despite launching the product that year. In fact, those results were hypothetical and miscalculated in a way that made them look more favorable.
The firm reported the discrepancies to clients and adjusted its marketing materials after the SEC launched an investigation in 2013. The track record of products it actually manages have not been called into question.
F-Squared’s claim that its rules-based strategy could sidestep violent market swings — by opportunistically trading in and out of nine industrial-sector ETFs — appealed to advisers stung by the 2008 free-fall of stock markets. The firm built itself from a virtual nonentity in 2008 to the force behind a $28.5 billion strategy, as of last June.
F-Squared indexes were responsible for $21.8 billion in late December, shortly after the SEC charges were announced, the most recent figure available, according to Morningstar Inc.
For the SEC, the settlement with F-Squared highlighted a signature investigation. But the agency still faces the possibility of a protracted battle against F-Squared’s co-founder, Howard B. Present.
Unable to reach an agreement with Mr. Present last year, the SEC is suing him. The regulator is attempting to claw back some of the millions of dollars Mr. Present, who resigned as F-Squared chief executive officer in November, earned and may also try to bar him from the industry. He’s due to answer the allegations by March 23.
Virtus (VRTS) — a $57 billion money manager — has seen the value of its publicly traded shares trimmed 22.5% over the 12 months that ended Wednesday, when they closed at $140.09.
Three of the five top ETF strategists lost assets last year, according to a Morningstar ranking. They include Charles Schwab Corp.-owned Windhaven Investment Management, whose founder left last year, and Good Harbor Financial, whose performance faltered.