Seven days in the life of Castlestone

In the short space of a week, market rumblings about Castlestone Investment Management (IM) came to a head with a coordinated raid on Wednesday morning, led by the FSA and flanked by the City of London Police.

Castlestone IM first drew media attention at the beginning of June when the Central Bank of Ireland released a statement saying new subscriptions into the Aliquot Commodity, Aliquot Agriculture and Intelligent Portfolio (IQ) Asset Allocation funds had been suspended in the absence of paperwork that apparently relates to the EU’s new Ucits IV funds directive.

Eight days later these suspensions were lifted but investors and the press alike remain mystified as to the reasons behind them in the absence of any conclusive explanation from either party.

As the story of the FSA “visit” has gained traction, it is these suspensions which have been touted as the obvious cause for the investigation.

Quite why it would have taken the FSA over a month to organise an investigation, especially after the regulator was apparently satisfied with their findings, is a little confusing.

Last Friday, however, we informed Castlestone we would be running a story about what we perceived to be unusual leveraging techniques applied to Castlestone’s fund of funds, the Intelligent Portfolio.

Although this fund is able to invest in any funds it sees fit, four of the top five funds are Castlestone’s own in-house funds. Additionally, it appears to have sourced a large amount of money from an undisclosed source for the purposes of investing in its own funds.

The fund, based in the British Virgin Islands, does not list this as among its grounds for leveraging in its prospectus. After reading an excerpt from the prospectus, an analyst who works on British Virgin Island funds at Morningstar confirmed the fund should not be leveraging up for these purposes.

While the fund suspensions do require more information, it is the source of the leveraging that we think requires the real explanation. The fund’s 191.7% gross exposure indicates it has effectively borrowed a seven-figure sum for the purposes of investing in Castlestone funds that are not listed or traded on an exchange.

It is important to stress that no arrests have been made and, while there is an investigation underway, no proof that any wrongdoing has occurred behind the doors of 86 Duke of York Square. But investors still need some answers.