AlphaMetrix Group LLC announced that it will begin an “orderly liquidation” of its sponsored funds, citing “recent redemption requests.” The company has been in trouble since at least earlier this month when it came out that it had been unable to reinvest approximately $600,000 in rebate fees because of cash-flow problems, reports Tom Polansek for Reuters.


AlphaMetrix’s failure to reinvest the rebate fees

Following AlphaMetrix’s failure to reinvest the rebate fees, industry-financed watchdog group The National Futures Association (NFA) found that AlphaMetrix had borrowed money in violation of regulations and ordered it to repay the $600,000. The NFA also reported that the investment firm had taken out loans, but underreported the total amount by $2 million because one of AlphaMetrix’s creditors agreed to defer payments. This underreporting gave people the impression that AlphaMetrix’s cashflow problems were much less severe than they actually are.

AlphaMetrix was hired by the NFA

Investigations into AlphaMetrix are still pending, but what’s more troubling is the NFA’s second major lapse in about a year. In 2012, Peregrine Financial Group went under and more than $200 million went missing, despite NFA audits showing that everything was fine. Ironically, AlphaMetrix was hired by the NFA in the wake of the Peregrine scandal to make sure that nothing like that could happen in the future. NFA board member James Koutoulas had previously raised concerns about AlphaMetrix, saying that it had a tendency to “spend money like a drunken sailor,” reports Lynne Marek for Crain’s Chicago Business. At the time, Koutoulas said the only damage done to NFA would be “reputational,” but it’s no small matter for regulators to have a damaged reputation.

If a regulatory agency can’t be trusted either to spot massive fraud or to give clear and honest information to investors, then it’s hard to see what purpose they serve. The argument for self-regulation is that no one understands the industry as well as the people working in it, and that self-regulation can avoid expensive, unnecessary rules. No one wants to see traders bogged down and margins pressured by clumsy regulations from people who don’t really know what’s going on, but if self-regulation continues to deliver such poor results it may be time to find a different model.