A high-frequency trading firm set up by two hedge funds sued Merrill Lynch because a tax-arbitrage strategy linked to French stocks didn’t turn out to be as profitable as expected.
The strategy, which took advantage of a French tax treaty enabling arbitrage, became less profitable after a rule change in 2012, shortly after Lycalopex and Bank of America Merrill Lynch started the trades. The lawsuit comes as hedge funds face scrutiny over their returns, and authorities debate banks’ roles in helping wealthy individuals and companies avoid taxes. Tudor Investment Corp., the $11.6bn firm run by billionaire Paul Tudor Jones, is reducing fees as hedge funds face a growing backlash over their lackluster performance.
Lycalopex appointed Merrill Lynch as prime broker because the bank promised to deliver profits of about $15m from $10m committed by the two hedge funds, according to court documents from May released by the court on Tuesday.
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