The liquidation of a hedge fund run by troubled manager Infinity Q Capital Management LLC could impact some asset owners because of potential losses from the same mispricing suffered in the firm's mutual fund, said investment consultants who asked not to be named.
The New York-based manager has already liquidated a mutual fund tainted by mispricing of swaps by the firm's CIO but has not publicly disclosed the planned liquidation of its $760 million hedge fund, Infinity Q Volatility Alpha Fund, which the consultants said was also subject to inaccurate valuations.
The consultants said they've received liquidation notices on behalf of institutional clients invested in the hedge fund.
Infinity Q declined to comment on the liquidation of the hedge fund, said Tom Johnson, a spokesman for the firm, in an email.
Infinity Q was forced to liquidate its mutual fund, the Infinity Q Diversified Alpha Fund, after the Securities and Exchange Commission told Infinity Q it had learned that James Velissaris, the firm’s founder, majority owner and CIO, “had been adjusting certain parameters within the third-party model that affected the valuation of the swaps,” a Feb. 22 notice from the SEC said.
Mr. Velissaris was placed on leave.
On Feb. 22, the SEC said it approved the firm's request to stop redemptions from the $1.7 billion mutual fund because the company was unable to calculate net asset value because it couldn't accurately value the swaps in the fund, according to a temporary order filing. The SEC also required the company to submit a liquidation plan.
In a March 26 statement on its website, Infinity Q said the mutual fund was completely liquidated on March 19 and assets totaling $1.2 billion in cash and cash equivalents were transferred to the fund's custodian.
The total AUM of the fund as of March 31 was down $478 million from Feb. 18, the last day the firm calculated the NAV, the firm's statement said.
The firm's total assets as of Jan. 31 were about $3 billion.
Returns of the Infinity Q mutual fund as of Jan. 31, before the firm began to implode, were 7.1% for one year, an annualized 5.99% for five years and annualized 5.3% since inception on Sept. 30, 2014, according to data from the Schwab Mutual Fund Report Card. Returns for Infinity Q's volatility arbitrage hedge fund were not available.
Mr. Velissaris' attorney, Sean Hecker, a partner at Kaplan, Hecker & Fink LLP, New York, said in an email: "Bloomberg's interactive pricing tool is designed to be used interactively by users to make reasonable estimates of asset valuations and any inquiry will determine James used these tools and others when determining appropriate valuations as part of his efforts to act in the best interests of investors."
Infinity Q is affiliated with Wildcat Capital Management LLC, the New York-based family office of David Bonderman, chairman and founding partner of private equity manager TPG, San Francisco. Mr. Velissaris worked for Wildcat Capital before launching Infinity Q in 2014 with backing from the $4.2 billion family office.
Infinity Q was launched "to offer the investment strategies managed by Wildcat to external investors," the firm said in a in a 2020 marketing presentation obtained by P&I from a consultant.
"Bonderman family investment vehicles have been only passive investors in Infinity Q Capital Management and the funds it manages," said Mr. Johnson, who also is a spokesman for Wildcat, in an email.
"Wildcat and Infinity Q both are working cooperatively with the SEC and all other government agencies and are supportive of the steps now being taken to maximize returns to investors," Mr. Johnson added.
One of the consultants interviewed said, "the CIO's mismarking of valuations in the mutual fund very likely also applies to the hedge fund. There are a lot of questions to be answered about the CIO, Mr. Velissaris, and his valuations. It is really a messy situation."
Another consultant confirmed that a client received the liquidation notice.
Both sources declined to provide specifics of Infinity Q's wind down of the hedge fund or to identify their clients invested in the hedge fund.
Infinity Q described the Infinity Q Volatility Alpha Fund as "quantamental" in the marketing presentation.
The firm said the hedge fund was launched in 2017 to offer investors "uncorrelated alpha opportunities in volatility trading" and described the fund's strategy as "combining fundamental and quantitative disciplines in a global volatility approach that is dynamically adjusted to capture alpha while mitigating risks."
The $34.5 billion Texas Municipal Retirement System, Austin, invested $125 million in the Infinity Q volatility hedge fund in 2019.
Michelle Mellon-Werch, the system's spokeswoman, declined to comment about the investment.
The $89.5 billion State Teachers Retirement System of Ohio, Columbus, listed Infinity Q as one of its managers in its 2020 annual report, but did not say what strategy the system invested in.
John D. Morrow, Ohio Teachers' deputy executive director investments and CIO, did not respond to telephone and email requests for comment about Infinity Q.
One thing is clear to one consultant: "There will be lawsuits over the hedge fund valuations just as there have been a slew of class-action lawsuits regarding the mutual fund."
Multiple law firms nationwide have filed class-action lawsuits regarding the mutual fund, seeking damages for investors.
Bloomberg contributed to this story.