“A U.S. mutual fund that suffered nearly $500 million of losses appears to have misvalued its large derivatives portfolio, according to an analysis of the fund’s disclosures by The Wall Street Journal, academics and traders.
The Infinity Q Diversified Alpha Fund disclosed in filings with the Securities and Exchange Commission valuations of investments that in at least three instances were incorrect or inconsistent with market conditions, said traders and academics. One valuation was mathematically impossible, said a former Morgan Stanley managing director who reviewed the disclosures. In one instance, the disclosures show, Infinity entered two nearly identical swaps contracts referencing the same index over the same period, yet booked a gain on one that was more than three times as large as the other—an outcome analysts said defied logic.
The SEC informed Infinity of evidence that the firm’s chief investment officer, James Velissaris, was adjusting parameters of third-party pricing models used to value its derivatives, leaving Infinity unable to accurately value its holdings, the firm has said. ... The Federal Bureau of Investigation and prosecutors at the Manhattan U.S. attorney’s office are also investigating, the people familiar with the matter said ...
The mutual fund, which launched in 2014 and is a part of Infinity Q Capital Management LLC, sought to generate returns that weren’t as tied to the returns of other assets like stocks and bonds, its disclosures showed ... It appeared to pay off, particularly during the brunt of last year’s selloff. In March 2020, the mutual fund posted a return of about 7%, while the S&P 500 fell 12.4%, its worst month since 2008. That month, the fund drew its highest inflows ever, according to Morningstar Direct data.” Excerpted / (Edited for Brevity) from
The Wall Street Journal, April 21, 2021
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