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Axa Rosenberg: a $217 million bug.

The American quantitative management firm is struggling to get over a scandal that originated from an IT error and which lead 600 of its clients to lose money.

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How to explain the unexplainable to scalded investors? By using incomplete and narrow formulas as demonstrated by Dominique Carrel-Billard, the managing director of Axa Investment Management, during the presentation of the 2011 results. “Our job consists in managing a bathtub whose plughole is not closed and over which there is an open tap. If the tap is closed, we face fund outflows” he explained to Reuters last autumn.

The whole point was about justifying 29 billion dollars worth of outflow from its American subsidiary, Axa Rosenberg, during 2010. This subsidiary has faced its second consecutive difficult year.

The reason? An IT coding error with uncontrolled consequences. It is not so much the coding error which is the problem in itself but the reluctance to communicate on it. This has caused a serious crisis of confidence among investors.

During that time, the FED explained, Axa Rosenberg has deliberately lied to its clients by telling them that underperformance of IT model concerned by the coding error was linked to market volatility and other diverse factors

It can however be argued in Axa Rosenberg’s favour that the firm has made amends by agreeing with Securities and Exchange Commission) to refund the 217 million dollars to the victims and pay a 2.5 million dollar fine. 608 of Axa Rosenberg’s 1421 had been impacted.

The SEC inquiry revealed that the firm’s director, Barr Rosenberg, had been informed of the shortcoming 9 months before an SEC control revealed the origins of the underperformances. What did this error represent? “A key component in risk measurement” describes the FED. It was already there during the past two years and the managers knew about it back in June 2009. Their reaction amounts professional misconduct since they chose to leave the error in the system. They asked the employees to remain calm and tried to buy time in order to find a solution that in the end was never able to clear the colossal losses. Barr Rosenberg himself asked the employees “not to inform anyone of this error”.

All of that finally lead the firm’s founder, Barr Rosenberg, to quit in June 2010. The inquiry had just revealed that this pioneer in risk management IT programmes had violated the group’s ethical codes by trying to cover up the unpleasant information. The head of research, Tom Mead, and the chief investment officer, Agustin Sevilla, also headed to the exit.

Following those events, Axa Rosenberg is having a hard time getting back up. The French insurer AXA, the parent company of Axa Investment Management which in turn oversees Axa Rosenberg, has turned over a new leaf by forcing the firm’s founder to head towards the exit and increased its holding from 75% to 100%.

From an initial 70 billion dollar holding back in 2007, the assets managed by Axa Rosenberg fell to a current 20 billion in value. That’s very small compared to the 514 billion euros managed overall by Axa Investment Managed and valued at the end of September 2011.

Following those events, Axa Rosenberg is having a hard time getting back up. The French insurer AXA, the parent company of Axa Investment Management which in turn oversees Axa Rosenberg, has turned over a new leaf by forcing the firm’s founder to head towards the exit and increased its holding from 75% to 100%.

From an initial 70 billion dollar holding back in 2007, the assets managed by Axa Rosenberg fell to a current 20 billion in value. That’s very small compared to the 514 billion euros managed overall by Axa Investment Managed and valued at the end of September 2011. The prejudice on the firm’s image is not easily quantified but is probably more significant.

On its official website, Axa Rosenberg continues to indicate that its “approach is based on reliable, intensive and objective database which is applied with its own technology. The latter allows us to assess a vast range of actions more efficiently and more quickly than any human can. Besides, our approach is shielded from natural mistakes linked to less disciplined processes.”

But the trauma is deep and goes well beyond the firm as was explained by the co-director of the surveillance section of fund managers at the SEC, Brice Karpati. “It is a warning to all quant managers” he said “they cannot rely on their complex and opaque IT structures to manage investor information”.

Johann Harscoët January 2012

Article also available in : English EN | français FR

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