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Infinity Q Capital Management Plans to Return $500 Million to Mutual-Fund Investors
“Infinity Q Capital Management says it plans to return approximately $500 million to investors who were unable to get their money back after the investment firm halted redemptions on a then-$1.7 billion mutual fund earlier this year. It remains unclear how much investors will eventually recoup from the Infinity Q Diversified Alpha Fund. The fund currently has around $1.3 billion on hand—well below where it was last valued in February—and it will keep $750 million in reserve …
“(The) firm unexpectedly halted redemptions in February and said it couldn’t value its holdings. The move stunned market participants, some of whom viewed their investments in the fund as a hedge to their broader portfolios. Infinity held wide-ranging bets across stock, currency and derivatives markets, including over-the-counter positions … Infinity appeared to have misvalued its large derivatives portfolio. Some of the valuations it disclosed were too high and, in one instance, mathematically impossible.”
The fall of the almost $2 billion Infinity Q Diversified Alpha Fund is a reminder to investors about the risks that can lurk in their holdings and the heavy costs and frustrations that liquidating funds bring.
Multi-alternative funds tend to be pricey, complex, and opaque. They may use combinations of various strategies: long/short equity, interest rate/currency bets, derivatives, commodities, arbitrage, etc. Many investors don't understand how these disparate strategies interact or the actual risks involved. To add insult to injury in the IQDAX liquidation, $750M of investor's money is being set aside to cover potential lawsuits.
You are left wondering who is really worse in such situations...the vulture-like lawyers, or the incompetent/negligent/deceptive Fund Mgr? Class action lawsuits eat up a lot of assets.
@Charles, I just said out loud a lot stronger words than your comment!
Was hoping there was a large misunderstanding or misinterpretation or maybe incompentence...but wow, innocent until proven guilty but those are some serious charges!
If the charges are true, Mr. Velissaris has a brazen disregard for the law! I'm somewhat surprised that he was able to avoid prosecution for so long. Mr. Velissaris allegedly engaged in this fraudulent scheme from at least 2017 through February 2021.
What I cannot set straight in my thinking is how could his colleagues not know he allegedly was jaking the numbers? And not challenge him on it?
So let's say one day market gets hit, volatility spikes, fund value goes up according to the ex fund mgr
The analysts must have said, hmm, what's up with that as they are very close to the fund? The point is they know how the fund is positioned and should perform, no?
How can they not know?
Maybe like Ruth Madoff?
Sheet, my wife knows if I stopped for an ice cream cone on the way home from running an errand without me telling her.
Someone on these boards said would never happen at a large fund firm due to potential reputation hit etc. Maybe that's right. Makes me a little suspicious to invest at smaller firms with noticeable amount of monies
"The Verdict Is Infinity Q Diversified Alpha the worst mutual fund ever? Many funds have lost more money. Indeed, three dozen registered mutual funds have 10-year annualized returns worse than negative 20%. (All 36 funds use short strategies, most of them leveraged.) But to my recollection no other fund has so effectively combined marketing arrogance, high fees, investment inscrutability, and failed ethics. That it did so while possessing enough assets to cause real damage only adds to its tally.
For me, Infinity Q Diversified Alpha takes the prize."
We've seen something similar before. Several years ago two funds in another fund family mispricing securities. When the prices were corrected, the funds suffered one day drops of 44.0% and 69.4%.
That mispricing was not done by tweaking computer models as here. Rather, according to the SEC charge the mispricing was aided and abetted by the independent pricing company. Of course the charge included fraud and lack of transparency. Oh, and insider trading.
JR suggests that in order to pull something like this off, the fund has to be investing in esoteric, exotic instruments, otherwise one could just read off market prices. A security doesn't have to be exotic to be thinly traded. The other funds invested in junk munis. Not your run of the mill vanilla bonds, but not exactly esoteric either. WSJ, 2011, Mutual Funds' Muni-Debt Prices Are Questioned
He also says that this could not happen in a fund company with compliance officers and supervisors. Not necessarily. They could be complicit. With these two funds, not only did the SEC charge the CEO and founder, but also the COO, the general counsel, the senior VP of trading, the treasurer, three independent directors and an associated director.
The upshot? The CEO retained that position until he handed it over to his son in 2013. He remains chairman. He's still managing the fund family's original fund. Five years after the charges were filed, the SEC told the parties not to do it again ("cease and desist") and fined the fund family and the CEO a joint amount of $3.5M. Other participants were each fined a lesser amount of $95K or $25K.
The CEO was William J. Nasgovitz. The funds were Heartland High-Yield Municipal Bond Fund and Heartland Short Duration High-Yield Municipal Fund. Given that the board did nothing and allowed Nasgovitz to retain his position for two decades, I will never invest in a Heartland fund.
As part of Heartland Advisors’ succession plan, founder William (“Bill”) J. Nasgovitz intends to transfer a controlling interest in Heartland Advisors to Will Nasgovitz, the Chief Executive Officer of Heartland Advisors, in 2022. The elder Mr. Nasgovitz launched the firm, and the Heartland Value Fund, in 1984.
Not wanting to “step on” all the excellent info from those above who know a lot more than I do …
But the comment by @Observant1,“Multi-alternative funds tend to be pricey, complex, and opaque”, rings true here. IMHO if you’re going to use these types of funds, stick with those from larger established houses with a lot of name recognition and, of course, demonstrated integrity. I track perhaps a dozen similar. But most of my allocation is to TMSRX and BAMBX (purchased recently). Another “black-box” I own is Invesco’s ABRZX - again, putting my faith in an established provider - albeit higher fees.
Why? These large firms have a lot more to loose if they screw up. And, hopefully have better compliance divisions. Also, their profitability isn’t concentrated in just 1, 2 or 3 funds, lessening the incentive to cut corners / play games.
On Tuesday Gal Pal received info on class action suit. To much legal mumbo jumbo so she reached out to financial consult to figure it out. Thinking the lawyers tracked her down to make another $ or 2 ? It seems the person in charge of her IRA at that time had her invested at some % in this fund. @TheShadow : thank you for the update @hank for starting this thread.
I find it insulting to people who actually suffer from mental illness, and many do, when a highly functioning wealthy individual tries to use it as an excuse to avoid jail time:
Velissaris also said that he suffers from mental illness and had "felt hopeless and overwhelmed by pressure from both prosecutors and his prior counsel to accept a plea deal" at the time.
The other aspect of it that is deeply insulting is the idea that he uniquely felt pressured to accept a guilty plea deal. Welcome to America. That happens every day in our justice system to people with far less privilege, some of whom are actually innocent but can't afford costly defense teams, yet they don't claim mental illness.
Excerpted from a CityWire article published on 04/07/2023.
"James Velissaris, the founder, former CIO and lead portfolio manager of Infinity Q Capital Management, was sentenced to 15 years in prison and ordered to pay an unspecified amount of restitution by US District Judge Denise Cote on Friday afternoon in Manhattan."
"Velissaris, 38, of Atlanta, pleaded guilty in November 2022 to one count of securities fraud in a deal with federal prosecutors in the US Attorney’s Office for the Southern District of New York that dropped several other felony charges and required him to forfeit $22m. The charges came about as a result of his role in a $1bn fund overvaluation scheme, with federal officials publicly levying their accusations in early 2022." Link (paywall)
I'm glad that Mr. Velissaris received a lengthy prison sentence for the serious crimes he committed. Hopefully, this case will deter others in the financial industry from engaging in fraudulent schemes.
Comments
What's in your mutual fund? The collapse of Infinity Q is a warning to investors
They may use combinations of various strategies: long/short equity, interest rate/currency bets, derivatives, commodities, arbitrage, etc. Many investors don't understand how these disparate strategies interact or the actual risks involved. To add insult to injury in the IQDAX liquidation, $750M of investor's money is being set aside to cover potential lawsuits.
https://www.sec.gov/news/press-release/2022-29
Was hoping there was a large misunderstanding or misinterpretation or maybe incompentence...but wow, innocent until proven guilty but those are some serious charges!
Baseball Fan
I'm somewhat surprised that he was able to avoid prosecution for so long.
Mr. Velissaris allegedly engaged in this fraudulent scheme from at least 2017 through February 2021.
So let's say one day market gets hit, volatility spikes, fund value goes up according to the ex fund mgr
The analysts must have said, hmm, what's up with that as they are very close to the fund? The point is they know how the fund is positioned and should perform, no?
How can they not know?
Maybe like Ruth Madoff?
Sheet, my wife knows if I stopped for an ice cream cone on the way home from running an errand without me telling her.
Someone on these boards said would never happen at a large fund firm due to potential reputation hit etc. Maybe that's right. Makes me a little suspicious to invest at smaller firms with noticeable amount of monies
Best
Baseball Fan
"The Verdict
Is Infinity Q Diversified Alpha the worst mutual fund ever? Many funds have lost more money. Indeed, three dozen registered mutual funds have 10-year annualized returns worse than negative 20%. (All 36 funds use short strategies, most of them leveraged.) But to my recollection no other fund has so effectively combined marketing arrogance, high fees, investment inscrutability, and failed ethics. That it did so while possessing enough assets to cause real damage only adds to its tally.
For me, Infinity Q Diversified Alpha takes the prize."
That mispricing was not done by tweaking computer models as here. Rather, according to the SEC charge the mispricing was aided and abetted by the independent pricing company. Of course the charge included fraud and lack of transparency. Oh, and insider trading.
JR suggests that in order to pull something like this off, the fund has to be investing in esoteric, exotic instruments, otherwise one could just read off market prices. A security doesn't have to be exotic to be thinly traded. The other funds invested in junk munis. Not your run of the mill vanilla bonds, but not exactly esoteric either.
WSJ, 2011, Mutual Funds' Muni-Debt Prices Are Questioned
He also says that this could not happen in a fund company with compliance officers and supervisors. Not necessarily. They could be complicit. With these two funds, not only did the SEC charge the CEO and founder, but also the COO, the general counsel, the senior VP of trading, the treasurer, three independent directors and an associated director.
The upshot? The CEO retained that position until he handed it over to his son in 2013. He remains chairman. He's still managing the fund family's original fund. Five years after the charges were filed, the SEC told the parties not to do it again ("cease and desist") and fined the fund family and the CEO a joint amount of $3.5M. Other participants were each fined a lesser amount of $95K or $25K.
The CEO was William J. Nasgovitz. The funds were Heartland High-Yield Municipal Bond Fund and Heartland Short Duration High-Yield Municipal Fund. Given that the board did nothing and allowed Nasgovitz to retain his position for two decades, I will never invest in a Heartland fund.
SEC press release detailing charges
SEC complaint
Paragraph summary of SEC administrative action with link to SEC doc
From MFO's briefly noted: https://www.mutualfundobserver.com/2022/01/briefly-noted-63/
But the comment by @Observant1,“Multi-alternative funds tend to be pricey, complex, and opaque”, rings true here. IMHO if you’re going to use these types of funds, stick with those from larger established houses with a lot of name recognition and, of course, demonstrated integrity. I track perhaps a dozen similar. But most of my allocation is to TMSRX and BAMBX (purchased recently). Another “black-box” I own is Invesco’s ABRZX - again, putting my faith in an established provider - albeit higher fees.
Why? These large firms have a lot more to loose if they screw up. And, hopefully have better compliance divisions. Also, their profitability isn’t concentrated in just 1, 2 or 3 funds, lessening the incentive to cut corners / play games.
Thanks @TheShadow for the important update!
https://www.justice.gov/usao-sdny/pr/founder-and-former-chief-investment-officer-infinity-q-pleads-guilty-securities-fraud
@TheShadow : thank you for the update @hank for starting this thread.
https://www.reuters.com/legal/infinity-q-founder-seeks-undo-guilty-plea-ahead-fraud-sentencing-2023-03-27/
"James Velissaris, the founder, former CIO and lead portfolio manager of Infinity Q Capital Management, was sentenced to 15 years in prison and ordered to pay an unspecified amount of restitution by US District Judge Denise Cote on Friday afternoon in Manhattan."
"Velissaris, 38, of Atlanta, pleaded guilty in November 2022 to one count of securities fraud in a deal with federal prosecutors in the US Attorney’s Office for the Southern District of New York that dropped several other felony charges and required him to forfeit $22m. The charges came about as a result of his role in a $1bn fund overvaluation scheme, with federal officials publicly levying their accusations in early 2022."
Link (paywall)
I'm glad that Mr. Velissaris received a lengthy prison sentence for the serious crimes he committed.
Hopefully, this case will deter others in the financial industry from engaging in fraudulent schemes.
https://www.justice.gov/usao-sdny/pr/founder-and-former-chief-investment-officer-infinity-q-sentenced-15-years-prison