Infinity Q Diversified Alpha Fund Suspends Redemptions and Plans to Liquidate Assets

Monday, March 22nd, 2021 and is filed under Alternative Strategy Mutual Funds

What Happened

On Monday, February 22, 2021, the Infinity Q Diversified Alpha Fund (Fund) and its investment adviser, Infinity Q Capital Management (Infinity Q), sought and obtained an order from the Securities and Exchange Commission (SEC) permitting the Fund to suspend redemptions indefinitely. The Fund is expected to liquidate assets and distribute the proceeds to shareholders with the assistance of a third-party valuation service and the oversight of the SEC’s Division of Investment Management[i]. At this time, there is no estimate of when the liquidation and distribution will be completed. Until then, redemptions of Fund shares will remain suspended[ii].

Why It Happened

The Fund invested according to an alternative investment strategy that primarily used complex derivative instruments to derive intended exposures. According to the Fund’s most recent financial statement, this included correlation swaps, dispersion swaps, and variance swaps, among various other contracts. Adding to the complexity, a significant portion of these assets were categorized as Level 3 for which market prices are not readily available[iii]. For such securities, third-party services are required in estimating the fair value for purposes of calculating the Fund’s net asset value (NAV).

Based on information learned by the SEC and shared with Infinity Q, it was determined the Fund’s portfolio manager had been adjusting certain parameters within the third-party pricing model being used to estimate the fair value of the Fund’s swap contracts[iv]. Upon review, Infinity Q released the Fund’s portfolio manager, who is also the firm’s CIO and Founder, and determined that it was unable to value the current positions nor confirm the historical values of the Fund’s swap contracts. Presumably to avoid a “run on the bank” situation, which can lead to depressed prices and further losses for investors, Infinity Q sought the order from the SEC while it enlists the services of an independent valuation firm to calculate an accurate NAV for the fund.

Key Takeaways for Alternative Mutual Fund Investors

Despite the increased regulatory oversight of the mutual fund structure, relative to private funds and hedge funds, financial professionals and investors must exercise caution when using alternative mutual funds (AMFs). This is due to the increased complexity that may be present within the product structure including short positions, derivatives instruments, illiquid investments, and leverage. The complexity broadens the opportunity set of these funds allowing portfolio managers to pursue non-traditional investment strategies that may provide enhanced portfolio diversification, systematic risk reduction, and alternative sources of return. However, they may also increase risk and reduce transparency for investors, as demonstrated by the recent developments in the Infinity Q Diversified Alpha Fund. As such, consider the following:

  • Is the strategy comprehendible? If upon reviewing the fund, you are unclear as to what the fund does and why, exercise extreme caution. An overly complicated strategy that cannot be explained is potentially a red flag. Furthermore, if the fund cannot be understood completely, nor can the inherent risks.
  • Does the fund make heavy use of derivatives? This alone is not a red flag. Derivative instruments increase efficiencies in capital markets and provide increased opportunity for return[v]. However, they also increase the potential for investors bearing risk they do not fully understand. As such, if you are unable to determine why a fund is investing in the types of contracts they do, or what exposures they provide, exercise extreme caution.
  • Alternatives require increased due diligence. The complexity of an AMF calls for increased due diligence[vi]. If research resources are constrained or limited, consider the use of third-party services for education and research surrounding alternative investments. Services may help drive efficiencies in research, improve understanding, and increase regulatory compliance.

iCapital Network[1]

AI Insight by iCapital Network currently offers an AMF platform designed to provide financial firms and advisors a comprehensive tool for research with a focus on education and application (versus an investment rating). The platform is a web-based, subscription service and consists of two main components specific to AMFs:

  • Comprehensive fund-level research reports that focus on a qualitative understanding of team, strategy, and process.
  • A training and education platform inclusive of an extensive AMF module and strategy specific modules.

The platform focuses on mutual funds with alternative investment strategies consistent with the hedge fund industry. Funds covered by the platform are portfolio oriented and will typically have a minimum 2-year track record and $200 million in AUM.

The platform currently covers the Fund on a limited basis. As part of our fund-level research, we have a tiered system that includes full and limited reviews. The former includes investment due diligence summarized within the report while the latter aggregates only the available public data. Considering the Fund’s developments, the platform is actively pursuing ways to improve our process including an increase in our screening parameters for limited reviews, enhancing the existing derivative contract reporting, and summarizing Level 3 assets within each report.

For more information on the platform, please contact AI Insight Customer Care at (877) 794-9448 ext. 710 or via email at customercare@aiinsight.com.

Infinity Q Diversified Alpha Fund

The Fund sought to generate positive absolute returns by combining risk management with diversified alpha strategies. Per the latest summary prospectus, the four primary strategies included Volatility, Equity Long Short, Relative Value, and Global Macro. The investable universe included global markets across equities, fixed income, commodities, credit, and foreign exchange.

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Endnotes

[1] Institutional Capital Network, Inc. and affiliates (herein “iCapital Network”)

[i] Securities and Exchange Commission. https://www.sec.gov/rules/ic/2021/ic-34198.pdf

[ii] Infinity Q Capital Management, LLC. http://www.infinityqfunds.com/

[iii] Financial Accounting Standard 157 (FAS 157). https://www.investopedia.com/terms/f/fasb_157.asp

[iv] Securities and Exchange Commission. https://www.sec.gov/rules/ic/2021/ic-34198.pdf

[v] The Economics of Derivatives. https://www.nber.org/digest/jan05/economics-derivatives

[vi] FINRA Investor Alert. https://www.finra.org/investors/alerts/alternative-funds-are-not-your-typical-mutual-funds

This material is provided for informational purposes only and is not intended as, and may not be relied on in any manner as legal, tax or investment advice, a recommendation, or as an offer to sell, a solicitation of an offer to purchase or a recommendation of any interest in any fund or security offered by Institutional Capital Network, Inc. or its affiliates (together “iCapital Network”). Past performance is not indicative of future results. Alternative investments are complex, speculative investment vehicles and are not suitable for all investors. An investment in an alternative investment entails a high degree of risk and no assurance can be given that any alternative investment fund’s investment objectives will be achieved or that investors will receive a return of their capital. The information contained herein is subject to change and is also incomplete. This industry information and its importance is an opinion only and should not be relied upon as the only important information available. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed, and iCapital Network assumes no liability for the information provided.

This material is confidential and the property of iCapital Network, and may not be shared with any party other than the intended recipient or his or her professional advisors. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of iCapital Network.

Products offered by iCapital Network are typically private placements that are sold only to qualified clients of iCapital Network through transactions that are exempt from registration under the Securities Act of 1933 pursuant to Rule 506(b) of Regulation D promulgated thereunder (“Private Placements”). An investment in any product issued pursuant to a Private Placement, such as the funds described, entails a high degree of risk and no assurance can be given that any alternative investment fund’s investment objectives will be achieved or that investors will receive a return of their capital. Further, such investments are not subject to the same levels of regulatory scrutiny as publicly listed investments, and as a result, investors may have access to significantly less information than they can access with respect to publicly listed investments. Prospective investors should also note that investments in the products described involve long lock-ups and do not provide investors with liquidity.

Securities may be offered through iCapital Securities, LLC, a registered broker dealer, member of FINRA and SIPC and subsidiary of Institutional Capital Network, Inc. (d/b/a iCapital Network). These registrations and memberships in no way imply that the SEC, FINRA or SIPC have endorsed the entities, products or services discussed herein. iCapital and iCapital Network are registered trademarks of Institutional Capital Network, Inc. Additional information is available upon request.

© 2021 Institutional Capital Network, Inc. All Rights Reserved.

Working from home? See our tips help you be successful

Friday, March 27th, 2020 and is filed under AI Insight News

Your daily routine may be in disarray, but it’s business as usual at AI Insight since we have been successfully operating as virtual company for many years. As always, we’re here to help you with your AI Insight needs and anything else that might help you when working remotely.

To be successful working remotely, you need a strategy, focus and a little fun. We’ve compiled some resources that we’ve used in practice to help you accomplish this.

Get Started

It’s important to designate a specific area that you use solely as your workspace to establish your “work zone” not only for your benefit, but for family members who are at home with you. Traveling around your house with your laptop or working where you sleep invites interruption.

Stay Focused

It’s easy to become distracted by the TV, social media or the pile of dishes in the sink. Creating a schedule for yourself – including breaks and lunchtime as you would at the office – can help you concentrate on your work. Setting a specific work schedule will also help you set expectations for other family members who are at home and help you keep a healthy work-life balance.

Industry Resources

You may be used to attending industry conferences or face-to-face group meetings, which have been postponed or cancelled. AI Insight created a central resource to help you stay connected with industry groups such as ADISA, IPA, FINRA and more. Check back frequently as we will continue to post industry webinar events happening in lieu of conferences.

Technology Resources

Having the right equipment is essential to working from home. But, knowing how to make the most of technology tools can be challenging.

  • Cybersecurity Awareness

Stay Connected

We all know that miscommunication can happen over email and text. Convey your tone with a phone call instead of email when you can. Even better, turn on your video during online meetings to express your body language. Remember to test out your video feature before you use it publicly, so you can check your background surroundings and test your microphone.

This is also a good opportunity to get to know your co-workers on a personal level. At AI Insight, we’ve created a social channel within our Microsoft Teams platform to talk about topics unrelated to work and share photos on occasions like Halloween and St. Patrick’s Day. This helps us get to know each other better and stay connected.

Be Mindful

We’ve created a “Get Up & Move” rewards program at AI Insight to encourage everyone to walk away from their computer once an hour. We also host quarterly Lunch & Learns to help our team stay healthy in mind and body such as chair yoga sessions and meditation practices. Taking breaks can boost productivity and rejuvenate you when motivation drops.

Contact Us

From everyone at AI Insight, we want you to be safe and healthy. Again, we’ve been incorporating these practices for many years. If there’s something we can help you with on any of these topics, please reach out to us Monday through Friday from 8:00 a.m. to 6:00 p.m. at 877-794-9448 ext. 710 or any time at customercare@aiinsight.com.

Are you prepared for regulators to tighten restrictions on alternative strategy mutual funds?

Friday, January 24th, 2020 and is filed under Alternative Strategy Mutual Funds

If your firm approves all fund company mutual funds, additional due diligence may be needed based on continued regulatory guidance on alternative strategy mutual funds.

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Some financial firms have raised questions about the need for conducting additional research on alternative mutual funds given their complex structure compared to traditional mutual funds. Both FINRA and the SEC have published supporting regulatory detail to help differentiate the need for additional due diligence on alternative mutual funds.

How are you demonstrating your understanding of the complexities of alternative strategy mutual funds?

According to PwC’s recent report, Alternative asset management 2020-Fast forward to centre stage, “In the light of the attention from regulators, asset management firms should enter this new line of business well-prepared from a compliance and organisational standpoint. This includes:

  • training
  • assessing customer suitability
  • marketing and education
  • building out compliance and surveillance, and
  • robust liquidity risk management.”

Take the first step. Let AI Insight help your firm:

1) Identify potential risk exposure

2) Determine due diligence needs

3) Establish policies and procedures around Alternative Strategy Mutual Funds

Contact us for a complimentary Risk Exposure Analysis to see if your firm may need to conduct additional due diligence on alternative strategy mutual funds.

Related Regulatory References

Training Resources

Are you prepared for a market correction?

Monday, August 19th, 2019 and is filed under AI Insight News

Have you recently reviewed your policies and procedures around Alternative Mutual Funds? Use the resources below to help your advisors better understand your firm’s best practices. It’s always best to address areas for improvement prior to market corrections, which seem to highlight such deficiencies.

How would you answer the following questions?

  1. Does your firm approve all fund company mutual funds?
  2. Is your firm performing the additional due diligence needed based on continued regulatory guidance?
  3. Does your firm have an efficient solution to establish and enforce best practices?

Related Regulatory References

Watch the video and view this checklist to learn more.

 

 

 

 

 

 

How are you evaluating Alternative Mutual Funds?

Tuesday, May 28th, 2019 and is filed under AI Insight News

Improve your research process using AI Insight’s Alternative Mutual Fund Research capabilities. Our alternatives-centric strategy provides comprehensive information covering investment methods to help you apply liquid alternatives in your practice. Watch a short tour

  • Conduct Research: Use reports to research quantitative and qualitative data including fund
    company, strategy and investment advisor overviews.
  • Understand Fund Strategies: Research strategies including managed futures, long-short, market
    neutral and alternative allocation.
  • Track Performance: Stay current with performance using portfolio-oriented peer groups and
    strategy-based benchmarks for comparison insight.
  • Grow Your Business: Use tools to expand your knowledge and track your due diligence efforts
    to more confidently identify and apply alternative investment solutions.

Are advisors prepared for the evolution of Alternative Mutual Funds?

Thursday, February 7th, 2019 and is filed under AI Insight News

More advisors are working with alternatives as they become more accessible to average investors through the recent evolution of Alternative Mutual FundsCerulli’s recent report, “U.S. Alternative Investments 2018: Accessing Evolving Alternative Platforms, focuses on trends in the U.S. alternative asset market. It concludes that more than 37% of advisors are working with alternative mutual funds.

However, other data tells us that advisors may not have the resources they need to research and apply alternative mutual funds in their practices. According to Investment Newsabout 67% of advisors say lack of understanding is one of the main reasons why they don’t use alternatives more frequently in their asset allocation models.

Get started now with 3 easy steps to help advisors understand the complexities of alternative mutual funds and help them remain regulatory-compliant.
  1. First, take 3 minutes to read this Q&A and gain a basic understanding of how Alternative Mutual Funds differ from traditional funds, learn how to address regulatory requirements and view our extensive list of resources.
  2. Next, take the CE course, “Introduction to Alternative Mutual Funds to understand key aspects, benefits and risks of these complex products.
  3. Finally, request a demo customized to your business needs to take a closer look at how an alternative-centered focus on research on various strategies including managed futures, long-short, market neutral and alternative allocation can help create efficiencies in your business.