Behind the Mysterious Demise of a $1.7 Billion Mutual Fund

A US mutual fund that suffered about $500 million in losses appears to have mispriced its large derivatives portfolio, according to an analysis of information published by The Wall Street Journal, researchers and traders.

Infinity Q Diversified Alpha Fund disclosed investment valuations that were inaccurate or did not reflect market conditions in at least three instances in Securities and Exchange Commission documents, according to traders and investigators. A valuation was mathematically impossible, said a former Morgan Stanley executive who viewed the disclosure.

In one case, says die Offenlegung, Infinity loses two almost identical Swap-Kontrakte ab, die sich auf denselben Index für denselben Zeitraum bezogen, verbuchte aber bei einem von ihnen einen Gewinn, der mehr als dreimal so hoch war wie der anderen – ein Ergebnis, das Analysten zufolge jeder Logik widersprach. Swaps are bilateral contracts issued by banks and used by customers to purchase securities, shares or other financial instruments.

Im Februar unternahm die Firma den ungewöhnlichen Schritt, den Kauf von Investoren zu stoppen und zu sagen, dass sie ihre Beteiligungen nicht mehr bewerten könne. At least two individuals approached the Securities and Exchange Commission with questions about the fund, and the Aufsichtsbehörde questioned them about whether vertraute individuals with their anchors had said anything.

The SEC notified Infinity that there was evidence that the company’s chief investment officer, James Velissaris, had adjusted the parameters of third-party valuation models used to value derivatives, causing Infinity to improperly value its assets, the company said.

Infinity also said it had imposed a trading ban on Velissaris, sent him on administrative leave and was re-evaluating previous valuations before returning the money to investors.

The Federal Bureau of Investigation and the Manhattan District Attorney’s Office are also investigating, according to people familiar with the case.

A spokesman for Infinity and Wildcat Capital Management, a family office affiliated with the company, said both are working with the SEC and all other government agencies to support the steps being taken to maximize returns for investors.

Mr. Velissaris declined to be interviewed through his press secretary. Sean Hecker, an attorney for Mr. Velissaris, said the two errors described in the Journal were clerical errors that have been corrected, and that Mr. Velissaris is working hard to act in the best interest of investors.

The Journal interviewed a half-dozen equity derivatives traders and academics who examined Infinity’s positions as they appear in regular SEC reports. These discussions and the Journal’s analysis of the Fund’s portfolio revealed deviations from standard practice in the way certain investments are generally valued.

The mutual fund, launched in 2014 and owned by Infinity Q Capital Management LLC, sought returns that were not as closely tied to the returns of other assets such as stocks and bonds, the disclosure showed. An investor in the family office stated that the company views the mutual fund as a hedge of its assets.

This seems to have paid off, especially during last year’s rampage. In March 2020, the mutual fund yielded about 7%, while the S&P 500 fell 12.4%, its worst month since 2008. This month, the fund had the largest inflow of any fund, according to Morningstar Direct.

Infinity raised more than $1 billion last year and has ties to Wildcat, the family office of David Bonderman, one of the founders of private equity giant TPG. Infinity’s archived website states that Infinity Q Capital Management is managed by the family office of David Bonderman.

A spokesman for Wildcat, which also represents Infinity Q, said the company was shocked and disappointed when it learned of the SEC’s allegations against Mr. Velissaris and that Infinity Q is majority owned and controlled by Mr. Velissaris. The Bonderman family’s mutual funds were merely passive investors in Infinity Q Capital Management.

Bonderman declined comment through a spokesman.

Infinity refers to its connection with Wildcat, the family office of David Bonderman, the founding partner of private equity giant TPG.


Javier Rojas/Pi/Zuma Press

Infinity took positions in stocks, currencies and other assets in the markets, but analysts trying to figure out what went wrong have focused on the company’s use of complex Wall Street products, including those known as variation swaps. They allow investors to bet that the price movement of indices such as the S&P 500 will or will not exceed a certain amount during a certain period. The exchanges can be used by users, for example. B. the investors and the banks with which they trade are apt to make net bets on a particular outcome.

The nature of the swaps and Infinity’s disclosures to the SEC help determine how certain investments are valued by traders and academics and whether those valuations are accurate. In some cases, they said not.

Take the swap sold by Infinity Q, which is linked to the MSCI World Index, according to its February 2020 statement. Investors often sell swaps as a way to bet on a drop in volatility.

Traders and analysts estimate that the size of the position got about $600,000 with a small drop in evaporation and what is called the strike, or the amount of volatility the bet is tied to. In this case, it was 17.3%, according to Infinity’s data.

The 29th. In February 2020, Infiniti posted a $5.6 million profit on the deal.

But according to Peter Carr, a former Morgan Stanley executive and chairman of the department of financial and risk engineering at New York University’s Tandon School of Engineering, Infinity could count on $5.2 million at most, given the conditions mentioned. It would be a victory if volatility dropped to zero.

Such a drop would be rare – the volatility of the S&P 500 has not dropped to zero since its inception in 1957.

There is no justification for such a gain, said Carr, who helped write the formulas for determining the value of an incremental trade and has followed them for more than two decades. He looked at the position and said it was mathematically impossible to win.

A few months later, in May 2020, Infinity Q announced two nearly identical swaps linked to the 2000 Russell Index. The buyer, Infinity Q, bet that the volatility of the Russell Index would exceed 22.4% in one case and 22.8% in the other over a comparable 12-month period.

The swap, with a lower trigger point (22.4%), was slightly more aggressive, putting about $250,000 at risk for a small change in volatility, compared to about $150,000 for a higher trigger point. Infinity’s profits increased exponentially as volatility rose above these thresholds.

Yet the fund’s return on the first transaction was more than three times greater than its return on the second transaction, a difference that the researchers said was too large to account for position size or other specific variables. One showed an increase of about $13 million and the other an increase of $4.1 million.

Neither performance can be right, Carr said. In his opinion, at least one of the data points used was incorrect – Infinity should have used the same data point for Russell’s expected volatility on both swaps. That means the valuation of at least one of the swaps was wrong, he said.

Mr. Hecker stated that the two examples given to us both involved administrative errors that had already been identified, corrected and reported.

There are other oddities in the company’s disclosures. According to Paul Stanesky, founder of advisory firm Derivatives Solutions, the company’s warrant swap portfolio was overvalued by tens of millions of dollars in May 2020.

The prices charged by the fund were unusually low and not in line with the market, Staneski said. They are so far away that they are not in the zone of influence [volatility] that we are talking about.


What would be the broader implications of Infinity Q’s death? Join the discussion below.

Of course, volatility expectations may differ between banks offering their customers and data providers, Staneski said. But for some swaps, expected volatility at the time was expected to exceed normal expectations, he said.

In another instance, Infinity said it sold an S&P 500-linked dispersion swap last May at a price that would allow the company to make a profit if volatility fell before the end of the year. Instead, volatility rose as the Covid 19 pandemic spread to the U.S. and crippled markets.

Infiniti reported a loss of $5 million at the end of May. But volatility rose so sharply – the Cboe volatility index rose from 16 in early February, when the swap went into effect, to 37 this month – that Infinity likely ended up with a loss three times what Mr. Staneski and other traders reported. Shortly after the exchange of the 4th. In February, the S&P 500’s 11-year bull market came to an abrupt end.

Hecker said Bloomberg’s interactive pricing tool is intended to be used interactively by users to make informed valuations of assets, and that any investigation would show that James used these and other tools to determine appropriate valuations as part of his efforts to act in the best interests of investors.

Investors say they expect big losses. Infinity recently valued its assets at about $1.2 billion, down about 28% from $1.7 billion on Feb. 18, the last day the company disclosed its net assets.

In a statement to investors, the company stated that the decline in asset values was primarily due to over-the-counter transactions, including variance swaps and other swaps and options it had entered into with a number of banks. Complex items such as swaps accounted for nearly a fifth of the company’s value in February before it began its liquidation, the company said.

Mr. Hecker stated that the latest valuation reflects the non-performing liquidation value, which has been negatively impacted by the Fund’s inability to meet its obligations under the liquidation process.

It is not clear how much investors will be able to recover after deducting court costs. An investor filed a class action lawsuit against the company, alleging that it made misleading statements about its operations and financial results and that management intended to mislead investors. An Infiniti spokesman declined to comment on the ongoing lawsuit.

Infiniti’s launch is scheduled for the 24th. May is submitting a plan to distribute the funds to investors.

-Rebecca Davis O’Brien contributed to this article.

Back to variants exchange

An investor’s return on a variance swap is determined by the actual level of market volatility relative to the level he or she originally expected.

The valuation calculation uses a formula with several inputs that can be found in the Infinity publications of the Securities and Exchange Commission.

These are the volatility level known as the strike or bet, the size of the position known as the vega, and the realized variance or real fluctuation of the stock.

Since the sale of the swap is profitable when volatility decreases, the investor will realize the maximum hypothetical profit when the volatility of this stock falls to zero. Although very unusual, such an assumption sheds light on the maximum possible position gain.

This is the bill.

  • What do we know about Infiniti’s short equity position as of the 29th. February 2020 is known: Vega Understanding (position size) = -$600,000 [negative sign means they are selling a swap]. Strike = 17.3%. Stock decline: Invesco MSCI World UCITS ETF.
  • This is the formula used to determine the exchange value: Value = (Conditional Vega/ (2x Strike)) (Strike²-realized gap²).
  • To charge as much money as possible, you can make a trade sale, attach the zero for that realized difference figure. Estimate = (600,000/(2×17.3)) (17.3²-0²).
  • Estimate = $5.2 million. Indicated valuation of Infinity = $5.6 million.

What you need to know about investing

Write to Gunjan Banerjee at [email protected].

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