For proof that even the most regulated corners of the asset management space can be circumvented with enough effort, look no further than the $1.8 billion Infinity Q Diversified Alpha Investor Fund (IQDAX), which has halted investor redemptions in the mutual fund due to alleged portfolio manager fraud.
On Monday, Infinity Q Innovative Investments informed investors in the fund that it had received approval from the Securities and Exchange Commission to “suspend redemptions and postpone the date of redemption payments beyond seven days” because it is “unable to value certain assets held in the fund.”
The SEC’s order states that the fund learned on Feb. 18 that Infinity Q chief investment officer and company founder James Velissaris had been tweaking the methodology for counting certain asset valuations, which raised doubts about the accuracy of the reported fair value of those fund holdings.
Infinity Q could not be reached for comment for this story.
The company posted on its website confirming the SEC findings on Feb. 19 stating that “it could not value the assets for purposes of calculating the fund’s net asset value.”
According to the company statement, Velissaris “has been relieved of his duties,” effective Feb. 21.
As an open-end mutual fund, the alternative strategy fund is required to be able to redeem its shares at the net asset value every business day.
The company stated that it intends to proceed with a liquidation plan and distribution to shareholders, both of which will be presented to the SEC for approval. There is no estimate as to when the liquidation and distribution will be completed.
Morningstar analyst Bobby Blue described the multi-strategy alternative fund as “pretty complex, and not something you will see in most retail investor portfolios,” but also doesn’t see a reason the underlying assets would have been so difficult to track.
“It’s a complex model, but the variance and volatility swaps they were using are based on the volatility of the underlying instruments,” he said. “Those pricing numbers are available and they should have been able to price them.”
The six-year-old fund, which has a four-star performance rating from Morningstar, is up less than 1% so far this year, and gained 5.9% last year.
By comparison, the S&P 500 Index is up 3.3% this year and gained more than 16% last year.
Todd Rosenbluth, director of mutual fund and ETF research at CFRA, said the Infinity Q fund is an example of how “alternative strategies can often be opaque making it hard for advisors to assess the risk and reward potential.”
“However, it is extremely rare for any fund to halt redemptions,” he added. “We don’t think this alone should steer advisers away from alternatives.”
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