Kenneth Grace appeared to have found the secret sauce. Boasting annualized investing returns of over 20% in his Goldsky Global Alpha Fund, the self-described quantitative investment manager had professional athletes as clients, “convinced” a prestigious hedge fund publication to honor him with the HFM AsiaHedge Award in 2017 and had his own charitable foundation despite not being well known in the Australian hedge fund community. The fund manager claimed to have near $100 million under management while working with some of the top service providers and major banks.
There was one problem, however. The cornerstone of his financial success was all a lie, according to charges leveled against the hedge fund in September by the US Securities and Exchange Commission.
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The “Perfect” Year
After claiming to have “a perfect year” in 2017, with gains of 24.22% in the Goldsky Global Access Fund, Grace boasted that the fund’s “efficient use of machine learning” was at play along with other generic algorithmic platitudes, including claiming to achieve the rare feat of attaining “quantamential” success integrating algorithmic and fundamental thought processes.
“Goldsky’s management principle is grounded on the belief that superior long-term results can be achieved by systematically exploiting information that is not obvious,” Grace said in a February 2018 press release sent to ValueWalk’s editor.
What wasn’t obvious, however, was exactly how the fund generated such stunning quantitative performance. After a limited quantitative review, ValueWalk mentioned the fund in a February 2018 article on the difficulty of conducting due diligence on strategies using artificial intelligence with little transparency. The fund’s “machine learning” strategy secrets could become clear if the SEC charges that fund was really “a multi-year fraudulent scheme perpetrated by Goldsky… and Grace” are proven accurate.
The scathing allegations from the world’s top securities regulator note that from September 2016 to August 2018, when Goldsky was claiming to manage up to $100 million in assets, but “in fact, (fund management) knew that Goldsky managed no assets during the Relevant Period.” The stunning investment performance claims, as well, were questionable. “In fact, the Goldsky Fund had engaged in no investment activity at all, and had not achieved any investment returns,” the SEC charged.
But how could this be with the hedge fund claiming such outstanding performance with results reviewed by blue-chip auditors? That, too, was questionable. “Goldsky had not retained and/or received any services from any outside firms at all during the Relevant Period.”
While the fund boasted a New York City location, in fact, it was only a virtual location and it operated primarily out of Australia where the SEC says it “actively sought to avoid scrutiny from the Australian regulatory authorities by knowingly and falsely claiming that Goldsky and Grace had no Australian investors.”
The investment did not have an Australian Financial Services License, which should be a caution flag for investors. In a 73-page information memorandum labeled “for Australian investors” dated March 2017 and reviewed by the Australian publication Financial Review, the fund listed as its prime broker Morgan Stanley and its administrator as Citco, both of whom denied the charges.
With such blatant abuses being charged, the question remains: how could such a fraud be perpetrated?
Goldsky Finalist In Upcoming Hedge Funds Awards Competition
Grace formerly worked at a car dealership and a painting business, among other activities, before embracing machine learning and quantitative finance, the Financial Review first noted, citing regulatory filings. Jack Bow, the fund’s “Behavior Sediment Data Specialist” and marketing manager was really a former bar manager, his Linkedin profile reveals. He currently lists his status as “unemployed.”
Grace, for his part, claimed the SEC charges were “not factual” and the charges were “unwarranted.” The good news for Goldsky Asset Management is that they are a finalist in the upcoming 2018 AsiaHedge awards gala in Hong Kong, which is sponsored, in part, by Citco, which had previously denied providing services to Goldsky.
“The AsiaHedge award is a testament to what we have been able to achieve on behalf of investors, that is ensuring the highest possible returns combined with the lowest risk profile,” Grace said in a February 2018 statement.
There is no word if the Australian Securities and Investments Commission or the SEC will be waiting at this year’s ceremony with handcuffs ready if Goldsky ascends to the stage to claim another performance award. What is clear is that the fund remains undeterred and plans on opening offices in Hong Kong and Singapore, a move it claims is “in tune” with a “sophisticated, fundamental, technical and sentiment-based” process.
This article first appeared on ValueWalk Premium