Marshall Glickman is a careful investor who says he works too hard to take chances with his nest egg.
Back in 2016, his research identified the Infinity Q mutual fund as a holding that could do well even if the stock market didn't. He slowly built up his stake in the fund, watching its performance, and felt comfortable enough to place 30 percent of his substantial savings into the fund.
"I spoke to management multiple times, including people at the fund who told me they had all their net worth in it," Glickman said. "These guys had an incredible pedigree. This looked like a total A-team."
Now, Glickman's investment in the fund is frozen amid questions about how its manager valued a large swath of its assets. Facing a substantial loss, Glickman, owner of an online bookseller in Vermont, is experiencing that bull market rarity — a mutual fund collapse.
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. Glickman, for one, is especially upset that the fund's trustees have set aside $750 million of investors' money to cover potential costs associated with lawsuits against the fund and its officials.
At least one expert said he is not surprised that the Infinity Q flop involved a portfolio loaded with exotic and hard-to-value investments. In recent years, some mutual funds have increased their stakes in such instruments, posing significant risks to investors. Infinity Q's holdings included complex bets on interest rates, commodities, currencies and corporate defaults.
"There are few things as important to investors as knowing the value of what they own, and the [Securities and Exchange Commission] has rules designed to ensure that funds accurately reflect the real values of their financial instruments," said Tyler Gellasch, executive director of Healthy Markets, a nonprofit organization that promotes best practices in capital markets. "Unfortunately, less than a year ago, the SEC fundamentally weakened those rules."
The rules were changed in the waning weeks of the Trump administration. One let fund managers increase their exposure to the riskier investments favored by Infinity Q, and the other allowed for relaxed oversight of mutual fund boards when valuing those arcane investments.
There is no evidence that the rule changes triggered Infinity Q's valuation issues.
The Infinity Q mutual fund began operations in 2014, aiming to generate returns that did not move in tandem with the overall stock and bond markets. It had A-list connections: A major investor in the fund's manager was the family of David Bonderman, the billionaire co-founder of TPG Capital, a mammoth private-equity firm that may soon sell shares to the public for the first time.
The Bonderman ties were a selling point for Infinity Q; a presentation from last September boasted that its investors would gain access to the same "alternative investment strategies originally created" for the prosperous family.
The strategies involved bets on esoteric instruments broadly known as derivatives, because they're derived from other securities. The chief investment officer, James Velissaris, worked for the Bonderman family before he co-founded Infinity Q Capital Management.
Infinity Q said its analysis was "grounded in economic intuition" and "in-depth private-equity style due diligence." As of last September, the strategy had generated annual returns of 9.5 percent since inception, according to a document from the presentation.
All appeared to be fine until late February, when investors were suddenly unable to redeem shares in the fund. In allowing the fund to bar redemptions, the SEC reported that the fund had claimed that Velissaris, Infinity Q's top manager, had been "adjusting" independent pricing models used to assess 18 percent of the fund's assets and that those values could not be verified.
Velissaris stepped down from the fund, which began liquidating amid a government inquiry. The difference between what its holdings had been valued at and what they fetched when sold was about $500 million; $1.2 billion in cash remained.
An Infinity Q Capital Management spokesman said the Bonderman family was a passive investor in the firm and had no control over its investments. The family lost "a substantial amount" in the collapse, he added, and will be "treated exactly as every other investor in the plan of distribution."
Mark Schonfeld, a lawyer at Gibson Dunn who represents Velissaris, said in a statement that Velissaris "always acted in good faith with commonly used approaches to value complicated derivatives and determine that fund positions were fairly valued in accordance with the disclosed procedures." Schonfeld added that Velissaris has not been involved in the liquidation of the fund, which has resulted in sales of "complex positions at distressed prices."
Six months after the problems arose, the fund's overseers, known as trustees, are still trying to figure out the extent of the improperly valued positions and when the practices began. They have hired an outside valuation consultant to analyze the fund's portfolio and warned that investors may have to wait over a year to get final payouts after all its obligations have been met.
In the meantime, investors are being charged fees for the fund's wind-down. On Aug. 23, the fund's trustees told investors that Infinity Q Capital Management had not responded to demands that it pay the liquidation costs rather than investors, as required under its contract. The firm's spokesman said it "has not received an accounting or a request for the payment" from the trustees "for any specific amounts related to the liquidation."
As investors in the fund's investment adviser, Infinity Q Capital Management, the Bonderman family stood to receive profits from its operation, the spokesman confirmed. "They have agreed to return those distributions to the fund to help pay the expenses of the liquidation," he said.
The trustees are also withholding $750 million in investors' money to cover potential costs of lawsuits filed against them and the fund as a result of the mess. That is necessary, they say, because insurance held to cover lawsuit costs may be insufficient, and it does not cover certain expenses, including those associated with the liquidation and government investigations.
That angers Glickman, the investor. He questioned why those who have already been hurt should also have to absorb legal costs for the fund and its officials.
"It's maddening," Glickman said.
'Detriment of retail investors'
Right now, the fund trustees' distribution plan, proposed in early June, awaits approval by the SEC. Glickman hopes it will make the trustees design a fairer plan for investors.
The SEC declined to comment.
Many holders are retail investors; accounts at Charles Schwab held 52 percent of the mutual fund's shares, according to an SEC filing from a year ago. Unlucky institutions were also investors. The State Teachers Retirement System of Ohio, a $95 billion fund, held a $53 million investment in an Infinity Q hedge fund as of January, its spokesman said by email.
Rudy Fichtenbaum, a newly elected trustee of the Ohio teachers' pension fund, said it appears to have lost $22 million in Infinity Q. "The problem with these illiquid private investments is the opaqueness which removes pension boards from exercising the appropriate level of oversight," he said. "I don't know who's equipped to vet these things, but I don't think these kinds of investments are where pensions want to be."
The Infinity Q mutual fund prospectus did note that not all risks "can be identified nor can controls be developed to eliminate or mitigate their occurrence or effects." As a result, "the fund's ability to manage risk is subject to substantial limitations."
Esoteric and hard-to-value investments in mutual funds like Infinity Q have been on the regulatory radar for years. In 2015, the SEC proposed rules to limit the investments mutual funds could make using complex derivatives; the proposal was not adopted.
Then, late last year, the SEC implemented the rule that let mutual fund managers expand their exposures to risky derivatives and another that let independent fund overseers, on hand to protect investors, delegate valuation of the complex instruments to others, including to the fund's investment adviser overseeing the portfolio.
The SEC declined to comment on the rule changes. But the rule involving derivatives drew a long dissent from Allison Herren Lee, an SEC commissioner, who said it increased risk and reduced transparency, "all to the detriment of retail investors."
'Errors or misallocations'
Even before its recent woes, the Infinity Q fund had stumbled over valuations, securities filings show. In 2016, the fund was late with a regulatory filing because an independent pricing service had been unable to "support" some of its valuations. The stakes had to be revalued, the document said, but no reimbursement to investors was necessary.
Infinity Q fund had a valuation committee overseen by its trustees, the fund's prospectus said. It reviewed the fund investment adviser's assessment of securities "for which current and reliable market quotations are not readily available."
After the 2016 incident, the fund's trustees noted that they had "worked closely" with Infinity Q Capital Management "to ensure that the appropriate source documentation for its valuation determinations are maintained, and the adviser's trade allocation oversight was enhanced to better identify any errors or misallocations."
Then, late last year, another valuation error occurred. It caused the fund to halt new investments as it corrected the mistake, the Infinity Q spokesman said.
Like those at other mutual funds, the Infinity Q fund's trustees oversaw its operation on behalf of investors. All are affiliated with a Milwaukee-based entity called Trust for Advised Portfolios, which oversees 30 other funds, securities filings show.
A lawyer who represents the trustees said they declined to comment or answer questions about their oversight.
Three of the trustees are considered independent overseers, regulatory filings say: John Chrystal, founder of a financial services consulting firm; the Rev. Albert DiUlio, treasurer of the Midwest Province and Wisconsin Province of the Society of Jesus; and Harry E. Resis, a private investor.
The four other trustees are not considered independent, because they work for U.S. Bancorp Fund Services, which receives revenues for custodian and other services provided to the fund. The fund's lead trustee, Christopher E. Kashmerick, a senior vice president of U.S. Bancorp Fund Services, declined to comment.
Investor lawsuits have been filed against the fund, its officials and the trustees who signed fund documents alleging that participants violated securities laws by making misrepresentations or omissions in the fund's filings and other statements.
Glickman, the investor, said the trustees should step aside from the liquidation of the fund because lawsuits accusing them of misconduct mean their interests and those of shareholders have diverged.
An additional challenge: The trustees say investors who sold their shares before the collapse may have gotten inflated values for their holdings. If so, the trustees may try to claw those back.
Over time, for example, the Bonderman family bought and sold "incremental" amounts of its Infinity Q fund holdings, the spokesman said. The redemptions were unrelated to the valuation concerns, he said, and were made to free up capital for other uses. The family's investments in the fund "far exceeded its redemptions," he said.