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Exclusive-New York's Infinity Q winds down hedge fund as valuation issues spread

EconomyApr 19, 2021 09:40AM ET
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By Lawrence Delevingne

BOSTON (Reuters) - New York investment firm Infinity Q Capital Management LLC is liquidating its hedge fund as the fallout from a U.S. regulatory probe into its valuation practices spreads, according to a person with knowledge of the matter.

The hedge fund wind-down, first reported by Reuters, may expand the Wall Street firm's client losses and spark further questions over who is to blame for the valuation problems first surfaced by the Securities and Exchange Commission (SEC).

Infinity Q, which is backed by private equity billionaire David Bonderman, said in January that it managed $3 billion in assets.

It was forced to liquidate its mutual funds after the SEC found that chief investment officer James Velissaris made potentially unreasonable adjustments to a pricing model used to value fund investments, according to an SEC February notice https://www.sec.gov/rules/ic/2021/ic-34198.pdf.

The valuation issues also extend to the company's main hedge fund, Infinity Q Volatility Alpha Fund LP, which is now being liquidated too, according to the source.

That fund managed $760 million as of March 31, according to a regulatory filing https://reports.adviserinfo.sec.gov/reports/ADV/164179/PDF/164179.pdf, but the cash value post liquidation was unclear. Its investors include the State Teachers Retirement System of Ohio and the Texas Municipal Retirement System, according to public disclosures.

Meanwhile, the unwinding of the mutual fund Infinity Q Diversified Alpha Fund has so far showed cash of around $1.25 billion as of March 25, nearly $500 million less than on Feb. 18, according to a regulatory filing https://www.infinityqfundliquidation.com/cases/q%20proposal/infinity%20q%20update%203.26.2021v2.pdf. That makes it one of the largest valuation cases in the SEC's history.

Velissaris's attorney Sean Hecker said in a statement that the change in value reflected the mutual fund's forced liquidation and that his client had not misused the pricing tool.

"Any inquiry will determine James used these tools and others when determining appropriate valuations as part of his efforts to act in the best interests of investors," Hecker said.

A spokesman for the SEC declined to comment. Representatives for the above hedge fund investors did not provide comment.

While the SEC's February notice only flagged Velissaris's actions, attorneys said the case resurfaced longstanding questions over whether independent parties tasked with watching over funds' governance do enough to independently confirm portfolio pricing.

"It's really surprising that this was able to happen," said Paul Hastings attorney Vadim Avdeychik, adding complex securities should incur extra scrutiny from fund board directors and auditors.

"I think the SEC will definitely analyze the facts here and determine if there is an example to be made."

GATEKEEPERS QUESTIONS

Infinity Q ran alternative strategies using complex derivatives. Velissaris told Institutional Investor https://www.institutionalinvestor.com/article/b1qphp8ytrkv20/Months-Before-SEC-Investigation-Infinity-Q-s-CIO-Touted-Strong-Performance in June that his portfolios gained in early 2020 even as other volatility funds dropped sharply. The flagship fund posted a 6.27% gain in 2020, nearly double the Morningstar Multialternative benchmark.

“As funds stretch for yield in more esoteric investments, the SEC is likely to make sure traditional valuation gatekeepers are keeping watch," said Michael Birnbaum, a former SEC attorney with Morrison & Foerster LLP.

An investor class action lawsuit filed by New York-based Rosen Law Firm alleges Infinity Q's mutual fund trustees made false or misleading claims about the portfolio’s value due to knowledge or "reckless disregard" of the mispricing.

Infinity Q is also analyzing potential legal claims against its service providers, its liquidators said on April 8, without naming them.

Auditor EisnerAmper LLP certified Infinity Q's mutual fund financial statements as recently as Oct. 29, 2020, which it said in a regulatory filing https://www.sec.gov/Archives/edgar/data/1261788/000110465920122600/tm2033418d2_ncsr.htm includes assessing "the risks of material misstatement of the financial statements, whether due to error or fraud."

EisnerAmper declined to comment. None of Infinity Q's trustees or directors would comment.

While independent third parties have responsibilities for making sure policies are followed, some industry experts said it was a stretch to hold them accountable in cases of deception.

“If someone has malicious intent, they aren’t telling the board. Absent significant additional facts, holding directors accountable for that fraud is unreasonable,” said Carolyn McPhillips, president of trade group Mutual Fund Directors Forum.

Exclusive-New York's Infinity Q winds down hedge fund as valuation issues spread
 

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