How Extreme Bets Fueled An $11.4 Billion Fortune

(Bloomberg) -- Michael Platt made his first billion charging hedge fund clients fees until ditching them seven years ago. Now, without the same constraints, he’s spun that bundle into one of the biggest fortunes in the world..But just how much Platt commands — and how much he deploys into markets — remains a source of intrigue across Wall Street. He stoked it a few years ago by sliding into the backseat of New York’s “cabbie to the stars” and boasting he was the highest-earning person in finance. Platt later dismissed the viral social-media interview as spoof..Remarkably, the absurd episode was close to the truth..Platt’s BlueCrest Capital Management has been generating annualized returns surpassing 60% since he decided to hand back investors’ cash in 2015 and converted the firm into a quasi family office investing money for himself and his partners. That run culminated with a record 153% gain last year that added $3 billion to his net worth, bringing the total to $11.4 billion and making him one of the richest people in the UK, according to the Bloomberg Billionaires Index..What makes Platt, 54, stand out in an industry known for 10-figure windfalls is how he does it: He constrains the size of his fund and multiplies its capital with leverage, doling it out to an army of about 110 trading teams that hunt for outsize returns..To most in finance, BlueCrest is an enviable money machine, specializing in interest rates, emerging markets and commodities trading — and feasting last year as inflation surged. But exactly how it makes money and the risk it takes is known to only a tight circle of insiders. The firm's operations are opaque with no outside investors to brief and fewer requirements to report to regulators..But at least twice Platt has come harrowingly close to disaster..A spokesperson for the billionaire and his firm declined to comment..Inside Look.One breakthrough in understanding how BlueCrest operates comes from an ongoing dispute with UK tax authorities over Platt’s treatment of employees as “partners.” Last year, a judge issued a 59-page ruling dissecting the firm’s operations..The document describes how BlueCrest, with some $3.9 billion under management, allocated $15 billion in firepower to an army of traders and closely tracks their hits and misses. Years of Bloomberg reporting on the firm’s risk appetite, wagers and returns show how that’s played out..In the constellation of noteworthy private investment firms across Wall Street, the look inside BlueCrest makes clear that Platt’s operation goes to extremes like few others. .BlueCrest has managed to outperform Stan Druckenmiller’s gravity-defying Duquesne Family Office in recent years. Platt’s firm limits the size of its war chest more stringently than Jim Simons’ $15 billion Medallion fund, avoiding dilution of returns. And unlike Bill Hwang’s Archegos Capital Management, the shop has so far managed to supercharge its wagers with leverage without imploding..Eschewing Clients.Platt, the son of a teacher and a university administrator, was raised in Preston in northwestern England. He studied at the London School of Economics and was a proprietary trader at JPMorgan Chase & Co. before co-founding BlueCrest in 2000 with William Reeves..His 15-year run managing cash for clients peaked with more than $37 billion in assets under management. Then it all unraveled for BlueCrest after rocky returns, concerns about conflicts of interest and an exodus of clients..Those pressures began building in 2013 when the firm’s two largest funds posted uncharacteristic annual losses. .The next year, investment consultant Albourne Partners said that a little-known internal fund for BlueCrest’s employees, dubbed BSMA, could pose a conflict of interest. Months later, another consultant, Aksia, cut its rating on the firm to uninvestable..The secrecy around BSMA would eventually prove costly: The US Securities and Exchange Commission opened an investigation that ultimately forced the firm to hand over $170 million to compensate clients. The agency accused BlueCrest of leaving customers in the dark as it assigned some of its top-performing traders and most promising hires to the internal fund. The firm didn’t admit or deny wrongdoing.. Read more: Clients got B-team traders. BlueCrest kept best for itself.BlueCrest suffered another blow at the start of 2015, when the Swiss National Bank abruptly removed a cap on its currency, jolting markets and taking another bite out of BlueCrest’s portfolio. By the end of that year, with assets down to $8 billion, Platt decided to hand clients their cash back. .“We would like to be our own investors now,” he said at the time..And with that, he made a jump that would one day be followed by Louis Bacon, Leon Cooperman and John Paulson — hedge fund managers who decided to eschew the demands and constraints of handling outsiders’ money to focus on tending to their own..“It releases the ability to take on bigger bets, to be more concentrated and to trade a multitude of asset classes,” said Kevin Mirabile, who teaches at Fordham University’s Gabelli School of Business and was an executive at Barclays Plc when he encountered Platt in the early 2000s. “It allows you to not be distracted because most of the money is your own.”.By early 2016, the Bloomberg Billionaires Index estimates Platt was worth about $1.5 billion, mostly consisting of the portion of BlueCrest’s assets credited to him after returning clients’ cash..Harrowing Moments.From the start, BlueCrest wasn’t like other family offices. Most allocate lumps of money to hedge funds, private equity managers or venture capital firms. Platt had a fully developed markets operation, which would seek vastly higher returns..“These guys have got the investment side sorted from day one,” Tayyab Mohamed, co-founder of family office recruitment firm Agreus Group, said of hedge fund billionaires' family offices. “They know what their risk appetite is.”.The newly private business ramped up leverage to levels that its contracts with former customers had forbidden, according to the court filing. Such a borrowing binge can amplify returns if things go well. But if they don’t, leverage can magnify losses and turn them iinto an existential threat..One such episode arose at the start of the Covid pandemic. In March 2020, a popular trade designed to profit on the price dislocation between bonds and their futures started imploding — a dire situation for firms using leverage. The Federal Reserve had to pledge an unprecedented $5 trillion to keep markets running smoothly..In a span of five days, BlueCrest lost over $850 million out of a cash reserve of about $1 billion, according to the court document. .“If the US Federal Reserve had not intervened over the course of the weekend, the fund would have been in real financial difficulty on the following Monday,” the judge wrote in his order..That wasn’t the only scare. In late 2021, government bond yields abruptly started moving against some of BlueCrest’s trades amid speculation that central banks were about to accelerate interest rate increases to contain inflation. As the losses piled up, BlueCrest took an extraordinary step, stopping some traders from making bets..The firm lost nearly $500 million in “a very short period of time,” the judge wrote, citing testimony from BlueCrest Chief Executive Officer Peter Cox. “Had it lost the same again, the fund would have been insolvent.” Cox was underscoring that his firm didn’t enjoy infinite leverage.. Read more: Balyasny, BlueCrest, ExodusPoint ground traders over losses.Ironically, BlueCrest’s transformation into a firm that took much greater risks also spared it outside oversight..Long gone are the regulatory disclosures and contact details once available on its now-inactive website..For banks, BlueCrest’s avid borrowing and betting make the firm one of the most important clients on the planet. So was Hwang’s Archegos, until it melted down in March 2021, inflicting more than $10 billion in losses on lenders. That prompted an outcry around the world for more oversight of private investment firms..Promises for sweeping changes by authorities in the US and Europe have yet to materialize..In the meantime, Platt’s firm has invoked exemptions from US transparency requirements for overseas investment advisers with little presence or few clients in America. And in the UK, such private wealth managers aren’t subject to most reporting requirements, either..‘A Risk Tamed’.As the financial crisis loomed in September 2007, Platt appeared in a CME Group advertisement holding a leash on a lion. The headline: “A risk tamed is a reward captured.” BlueCrest thrived in the chaos that ensued..Platt is known to obsess over monitoring risks and avoiding losses. As one former colleague put it, even if Platt is raking in billions, he would pay attention to a £20 ($25) expenditure..He gets directly involved in hiring top traders and personally handles relationships with a handful of key counterparties that lend money and settle trades. He monitors risk management and oversees regular reviews that are conducted in Jersey, people close to the firm said..“Essentially we have one client, which is Mike,” the judge’s ruling quoted Nicholas Moore, a former portfolio manager at BlueCrest, as saying. “He is the CEO, he’s the CIO.”.The firm now operates in hubs around the world — London, New York and Singapore — and after traders asked to move to Dubai, it quickly built an outpost there, too. The aim is to offer flexibility for employees, who in turn generate big profits..New arrivals at BlueCrest are usually given at least a year to acclimate and prove themselves. Once they’ve earned the boss’s trust, they can start taking bigger risks on their own. .Portfolio managers typically start with a capital allocation between $100 million and $1 billion, depending on their experience and strategy, according to people with knowledge of its inner workings. .They’re granted unusual amounts of freedom to design and execute wagers, pocketing up to 30% of their profits, one of the highest rates in the industry. Seventeen of the firm’s 110 teams generated more than $100 million last year..But if their losses reach 5%, BlueCrest typically reins in their capital. Such declines can lead to dismissal..Pocketing Profits.Bloomberg’s estimate of Platt’s wealth assumes that after taxes, he has been able to take more than $450 million a year in investing profits from the firm. That would have left him with about $2 billion in BlueCrest last year, or about half of the firm’s assets at the time..It’s unclear what Platt does with all of the money he extracts and whether he’s found other ways to grow it..But the art-collecting billionaire has hardly shied away from displaying some of his trophies..His screen saver at BlueCrest has featured a picture of his Bombardier private jet. He’s registered his residency in a number of enclaves favored by the super wealthy, including Switzerland and Jersey, where capital gains aren’t taxed. He made an appearance in the popular TV series Billions..In 2015, Platt became an indirect owner of a Pilatus PC-12 turboprop, a single-engine aircraft that’s typically capable of flying about a half-dozen passengers more than 1,500 miles. For more than half a decade, he had a stake in Leda Braga’s Systematica Investments, the remainder of which was sold about a year ago. He’s an investor in London-based biotech startup Engitix Ltd. and co-founded a private fund for sponsoring artists that he’s said is more about pursuing hobbies than adding to his fortune..That's a far cry from Preston, but Platt has long been immersed in the world of investing, ever since his grandmother taught him the basics..“When I was a kid, I used to go round to her house, and she’d be sitting there working out what she was going to buy and at what profit levels,” Platt once told Bloomberg. “She wasn’t like most grandmothers.”.At the time, he picked trust savings banks that were selling stock to the public. His grandmother helped him buy the stocks at £0.50, and they watched the price double in value at the open. Now he does it with billions at stake..--With assistance from ..More stories like this are available on bloomberg.com.©2023 Bloomberg L.P.

How Extreme Bets Fueled An $11.4 Billion Fortune

A look inside BlueCrest reveals Michael Platt's many acts — including outsize returns and some harrowing losses

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