Monday, March 22nd, 2021 and is filed under Alternative Strategy Mutual Funds
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.
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 firstname.lastname@example.org.
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.
 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.
Tuesday, December 22nd, 2020 and is filed under AI Insight News
AI Insight CEO Sherri Cooke discusses her key reflections for 2020 including how alternative investments played an important role in portfolios and the impacts of Reg BI. She also shares what’s anticipated in 2021. Read the narrative below or listen to the podcast here.
Sherri formed AI Insight in 2005 with the primary goal of providing the financial planning community with a more efficient and consistent way to access factual information on alternative investment programs – and from that vision the AI Insight database was born.
Q: What are some of the key reflections you have about 2020 and some points of interest for the coming year?
SC: I would say as a ADISA Board member, I was fortunate to be able to spend quite a bit of time this year collaborating with others in the alternative investment industry focusing on some of the things we can do to make the industry better – and to increase the awareness and understanding of these products within a growing audience. I believe we all have to work together to bring this space to a whole new level. Also, as Reg BI requirements continue, we’re looking at ways to partner with compliance and technology workflow companies that are helping to support these needed processes. We’re also looking to connect with other companies – both inside and outside the traditional alternatives space to further increase consistency and transparency in the industry with an ultimate goal of making it easier to conduct alts business.
Q: How do you think alternative investments played an important role in portfolios this past year, especially given the pandemic?
SC: We’re always looking for ways to give more to people – who are of course qualified – access to alternative investments to help them really diversify their portfolio in a meaningful way. Our belief is that a person isn’t fully diversified if all of their underlying investments are either in some way tied to the markets or are invested in a fixed income security – which is effectively still tied to the market.
Despite the pandemic – and in some cases as a result of – there are a lot of really solid opportunities to invest in real assets, interesting investment structures, and institutionally supported opportunities through alternative investments that really provide true diversification.
That said, alternatives can certainly be complex and they need to be factually understood and appropriately sold. This industry really needs to educate financial professionals and investors in so many different ways. One of those has to be around creating realistic expectations about what these investments are intended to bring to a diversified investment portfolio…and what they are not. Stocks lose value all the time and there will be alts that don’t perform. As an industry, we really need to do our very best to ensure that these products are properly sold and positioned within client portfolios. And – as with all investments – we support conducting the best possible research and diligence to allow firms and advisors to select best of class – and help the vested financial firms and producers drive product sponsors toward best of class practices.
Q: We know that compliance is often an issue for advisors in considering alternative investments – and regulatory scrutiny continues to increase. The SEC’s Regulation Best Interest implementation took place on June 30. How does AI Insight help streamline Reg BI requirements?
SC: Compliance is one of the things that motivated me to create AI Insight in the first place. I wanted to build capabilities to facilitate due diligence and proper compliance along with education and documentation of these efforts when selling complex products – those products that the regulators have called out as needing heightened supervision or training.
From an audit perspective, we’ve found in any situation of which we’re aware with our clients, if a firm has stayed up-to-date on the requirements around selling different types of investments – and makes sure everyone involved is aware of their obligations, adheres to the processes, and documents their efforts – then the regulators are generally satisfied. If you fail to make these efforts up front and you’re inconsistent in how you conduct your business from a compliance perspective….you’re just leaving yourself open to trouble.
Reg BI – within the BD community – and I think even though the fiduciary standard has always applied RIA space – we’re going see a whole new layer of extra scrutiny in this regard. The processes that have been central to our platform for years can help support Reg BI requirements and help financial firms and professionals demonstrate the “good faith and reasonable efforts” that Reg BI requires on an ongoing basis. Specifically, we’ve created a comprehensive Reg BI Guide that steps through the Compliance and Care Obligations and correlates the AI Insight support resource to that particular SEC requirement. Again, this is just another way that we help to create efficient and consistent educational and compliance workflows that can help firms at both the product and the firm level.
Q: What is your focus for 2021?
SC: From a business owner’s perspective, ensuring that our team and our product continues to maintain consistent integrity of value and exceptional service; this is the backbone of our business – and making sure that our AI Insight team is challenged and fulfilled in their roles within our company.
From an industry perspective – we believe that there is a tremendous amount of value for advisors to differentiate themselves and bring really great opportunities through the thoughtful and diligent understanding of alternative products. We provide this value by building and bringing together our network of broker-dealers, advisors, RIAs, alternative investment firms and industry partners. Therefore, as in past years, I am always grateful for how far we’ve been able to come and to everyone who has helped us be successful in our efforts to support this industry – and I look forward to working with all of our business partners to explore new possibilities and find what more we can bring to the table for our customers in the new year.
Tuesday, November 3rd, 2020 and is filed under AI Insight News
NASAA’s Reg BI Implementation Committee conducted an examination initiative to evaluate key industry changes as financial firms seek to comply with the SEC’s Regulation Best Interest requirements.
NASAA – Phase 1 National Exam Initiative 2020
NASAA recently published a report on Phase One of this initiative. The top 10 priority areas included:
- Variations in the types of products sold
- Policies, procedures, and practices related to the sale of alternative investments or complex products types
- Cost comparison due diligence and disclosure practices
NASAA’s report states, “[Prior to Reg BI], few firms had policies and procedures governing specific product sales (26%) or used tools to assist agents/representatives and investors in comparing investment opportunities (19%).
||Top 10 BD Products
||Top 10 IA Products
||Mutual funds (66%)
||Mutual funds (77%)
||Debt/Fixed income (57%)
||Debt/Fixed income (67%)
||Standard ETFs (52%)
||Standard ETFs (67%)
||Municipal funds (50%)
||Listed REITs (39%)
||Variable annuities (49%)
||No-load products (37%)
||Listed REITs (44%)
||Municipal funds (33%)
||No-load products (38%)
||Variable annuities (15%)
||Leveraged- or inverse-ETFs (15%)
Chart Source: NASAA Reg BI National Examination Initiative Phase One
Sales of complex products
“NASAA has focused much of its Reg BI examination focus on complex and high-risk products, namely, private securities, variable annuities, non-traded REITs, and leverage- or inverse-ETFs, due to investor confusion and harm emanating from these products.”
||All firms combined
|Leveraged- or Inverse-ETFs
Chart Source: NASAA Reg BI National Examination Initiative Phase One
NASAA will conduct a second examination initiative in 2021 to continue their evaluation of key industry changes.
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.
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.
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.
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.
Having the right equipment is essential to working from home. But, knowing how to make the most of technology tools can be challenging.
- Zoom is a remote video conferencing and web conferencing service.
- Microsoft Teams is a unified communication and collaboration platform that combines workplace chat, video meetings, file storage, and application integration.
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.
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.
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 email@example.com.
Wednesday, February 12th, 2020 and is filed under AI Insight News
FINRA recently issued its 2020 Risk Monitoring and Examination Priorities Letter along with its 2019 Report on Examination Findings and Observations. As expected, Regulation Best Interest (Reg BI) takes the lead in this discussion. These reports also highlight, among other things, the continued focus on sales practices regarding supervision and client suitability.
Specifically, the 2020 Priorities Letter states,
“In the first part of the year, FINRA will review firms’ preparedness for Reg BI to gain an understanding of implementation challenges they face and, after the compliance date, will examine firms’ compliance with Reg BI, Form CRS and related SEC guidance and interpretations. FINRA staff expects to work with SEC staff to ensure consistency in examining broker-dealers and their associated persons for compliance with Reg BI and Form CRS.”
The 2019 Findings Report stated,
“Some firms did not have adequate systems of supervision to review that recommendations were suitable in light of a customer’s individual financial situation and needs, investment experience, risk tolerance, time horizon, investment objectives, liquidity needs and other investment profile factors. This report shares some new suitability-related findings, as well as additional nuances on prior years’ findings.”
At the end of the letter, FINRA addresses firm operations, technology and cybersecurity noting, “FINRA recognizes that there is no one-size-fits-all approach to cybersecurity, but expects firms to implement controls appropriate to their business model and scale of operations.”
- See this checklist, which explains key differences between FINRA rules and Reg BI and Form CRS.
- Carefully review and understand the specific suitability requirements for each non-traded or private placement program utilized and ensure that your firm has a documented process in place to monitor the compliance with suitability requirements.
- Document the due diligence process – remember, if it isn’t documented, it was never done.
- Review how regulators look at cybersecurity and key strategies to be compliant. Click here for additional resources and take the CE Course, “Cybersecurity Awareness for Financial Professionals”.
Let AI Insight help you stay compliant
- Discover how you can create efficiencies in your due diligence review process using our database of 350+ alternative investments to source new products as well as analyze and compare hundreds of alternative investment programs, including non-traded programs, private placements, and alternative mutual funds.
- Demonstrate your due diligence by conducing product-specific training on the features, risks and suitability for hundreds of offerings.
- Document what you’re doing to support your firm’s regulatory requirements in a transparent way. AI Insight captures all of the activity you and your firm members complete within the platform including training modules, offering document reviews and research conducted.
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.
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:
- 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
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 Funds. Cerulli’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 News, about 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.
- 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.
- Next, take the CE course, “Introduction to Alternative Mutual Funds“ to understand key aspects, benefits and risks of these complex products.
- 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.
Tuesday, June 12th, 2018 and is filed under AI Insight News
It was great to connect with many of our industry partners at the recent FINRA Annual Conference in Washington, D.C. to discuss regulatory topics relevant to our industry. Here are three key takeaways to consider:
- The industry continues moving forward with a new approach to the standard of care registered representatives must undertake when working with clients. SEC Chairman Clayton was adamant about having industry stakeholders submit comments to help shape the actual outcome of the proposal. He was also quite vocal on the confusion people seem to have around the term “fiduciary” and that he was very much against using it in this proposal. The SEC’s Brett Redfearn provided an overview of Regulation Best Interest and enhancing the standard of conduct for broker-dealers. Read more
- On a suitability panel, “inadequate training relative to products and risks” was noted by FINRA as a common weakness found.
- Heightened diligence and advisor education are needed for the increasingly complex products being offered through traditional ’40 Act structures such as Alternative Mutual Funds and Interval Funds. FINRA mentioned their guidance on complex products as a resource when working with Alternative Mutual Funds, leveraged ETFs, Interval Funds and other alternative investments.