Infinity Q: Too Much Alpha

Volatility and Shockwaves

The suspension of redemptions and planned liquidation of the Infinity Q Diversified Alpha fund (IQDNX, IQDAX) – a $1.8 billion hedge fund-like multi-strategy liquid alternatives mutual fund that was started by investment staff from the family office of a private equity titan – has sent shockwaves through the fund management industry. It is the latest episode to have investors checking their assumptions about the behavior of their alternatives managers, reviewing plans to increase allocations to alts as fixed income allocations have taken losses amid rates’ recent liftoff and generally wondering if their portfolios need to be simplified and return expectations trimmed.

On February 22^nd, the SEC announced that James Velissaris – the founder and CIO of Infinity Q Capital Management, which was funded by and spun out of Wildcat Capital Management, the family office belonging to David Bonderman, co-founder of top five private equity firm TPG Capital – had been “adjusting certain parameters” of the third-party pricing models that value the swaps and other derivatives reportedly comprising 18% of the Infinity Q Diversified Alpha fund portfolio, a strategy that was “launched to offer the investment strategies managed by Wildcat to external investors”.

Infinity Q confirmed Velissaris had accessed and altered the models and that “it was unable to conclude that these adjustments were reasonable, and, further, that it was unable to verify that the values it had previously determined for the Swaps were reflective of fair value”.

Warning Signs

While shocking, warning signs had been in the air. In December, according to Bloomberg News, shareholders were sent notice that the Infinity Q Diversified Alpha fund would hard close the fund to new money at the end of 2020. While soft closes are common for funds mindful of capacity issues, hard closures are rare.

Additionally, Jeffrey Ptak, Head of Global Manager Research at Morningstar, found a pattern of tardiness in Diversified Alpha’s annual report filings due to audit delays. Their independent auditor BDO had this to say in 2015: “While performing our audit, we became aware that the Fund did not have adequate controls over trade allocations and trade corrections, including procedures to notify the Fund’s administrator when trade errors occurred.  We believe this condition is a material weakness in internal control over financial reporting.”

Digging In

An investigation is underway and the findings should ultimately tell for how long management had been “adjusting certain parameters” of the external pricing provider’s models to determine the value of Tier 3 swap assets. These swaps reportedly accounted for 18% of the portfolio so it remains to be seen what impact it had on returns, as well as the extent of losses that Infinity Q Diversified investors will face.

There is a lot yet to emerge and much that is unknown at present. But the episode inspired us to take a look at the Diversified Alpha Fund.