Adviser Winds Down Funds After a Valuation Fallout

Reuters and other media are reporting that a hedge fund and mutual fund adviser is shutting its hedge funds several weeks after liquidating mutual funds in the wake of findings that its chief investment officer made potentially unreasonable adjustments to a pricing model used to value fund investments. Reuters reports that the Infinity Q case raises questions over whether independent parties that oversee funds do enough to independently confirm portfolio pricing. In February, the Trust and the adviser of the Infinity Q mutual funds requested a temporary order from the SEC to permit the Infinity Q Diversified Alpha Fund to suspend the right of redemption of its outstanding redeemable securities. That fund’s portfolio included swap instruments for which Infinity Q calculated fair value using models provided by a third-party pricing vendor. According to the SEC filing, Infinity Q informed the fund that the CIO had been adjusting certain parameters within the third-party pricing model that affected the valuation of the swaps and that the adviser was unable to conclude that these adjustments were reasonable, or to verify that the values it had previously determined for the swaps were reflective of fair value.  The Reuters report describes the fund’s escalating woes and quotes industry lawyers who caution that complex securities should incur extra scrutiny from fund boards and auditors. The Reuters report notes, however, that while independent third parties have responsibilities for making sure policies are followed, “it was a stretch to hold them accountable in cases of deception.” MFDF President Carolyn McPhillips told Reuters in the report: “If someone has malicious intent, they aren’t telling the board. Absent significant additional facts, holding directors accountable for that fraud is unreasonable.”