01/18/2012

Mount Lucas Sues Rival Over Quant Model

Mount Lucas Management, well known for its quantitative approach to futures trading, has filed a patent-infringement lawsuit against rival quant manager Alpha Financial Technologies.

In a complaint filed last month in New York, the Newtown, Pa., firm accuses Alpha Financial of using a Mount Lucas program to manage a proprietary index called ATF Diversified Trends Indicator. Both Mount Lucas and Alpha Financial, a Grapevine, Texas, firm headed by famed futures trader Victor Sperandeo, manage hedge funds based on proprietary indexes that track commodity and financial futures.

“I’m comfortable we’re in the right,” said Sperandeo, better known as “Trader Vic.” His firm has yet to file a formal response.

What prompted the lawsuit? A routine review of competitors’ funds by Mount Lucas’ law firm, Leason Ellis of White Plains, N.Y.

Lawyer David Leason insists Mount Lucas isn’t out to damage Alpha Financial’s business. “Mount Lucas’ interest is that it receives a fair royalty,” he said.

Although Mount Lucas has been in business for 25 years, its patent was filed three years later than a similar patent held by Alpha Financial, founded in 2000. But patent law can be counter-intuitive, said Bernard Rhee, a patent attorney at Technology and Business Law Advisors of Baltimore. If someone builds a better mousetrap, he said, the newer patent can nullify the effect of an earlier one.

But when the patents involve an idea such as an investment process, disputes are notoriously hard to resolve. “Those types of patents — method or process patents — are usually not too difficult to get and very difficult to enforce,” Rhee said.

Mount Lucas is best known for its MLM Index, which tracks 22 liquid financial futures contracts traded on U.S. and foreign exchanges. Alpha Financial’s AFT Diversified index is a portfolio of 24 liquid commodity and financial futures. The MLM index rose 1.6% last year, while components of the AFT index fell 5-6%.

Alpha Financial maintains four indexes overall, including Commodity Trends Indicator and Financial Futures Indicator, which it licenses to S&P and other data providers. The firm also manages some $3 billion of client capital in vehicles tied to those indexes.

This wouldn’t be the first time that a quantitative manager has sued another fund operator claiming patent infringement. In 2004, for example, Renaissance Technologies sued Millennium Management after two Renaissance traders jumped ship to Millennium. Millennium subsequently fired the two traders and paid Renaissance a reported $20 million to settle the matter.

Mount Lucas was founded in 1986 by Timothy Rudderow and the late Frank Vannerson, who had worked together at Commodities Corp., a pioneering commodity shop in Princeton, N.J., co-founded by Nobel Laureate Paul Samuelson. Goldman Sachs bought Commodities Corp. in 1997.

Before launching Alpha Financial, Sperandeo worked for the likes of George Soros and Leon Cooperman. He first made a name for himself by predicting the 1987 stock market crash.

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