FR 2021-03966

The document in question originates from the Securities and Exchange Commission (SEC) and pertains to the suspension of redemption rights for the Infinity Q Diversified Alpha Fund. This development was made official with an order that temporarily allows the fund to halt investors from redeeming their shares. The fundamental issue leading to this drastic measure is the inability of Infinity Q Capital Management, the fund's investment adviser, to value certain assets accurately.

Summary of the Document

Infinity Q Capital Management discovered irregularities in the valuation of certain swap instruments, which are a specific type of financial derivative. Because these swap instruments could not be properly valued, the fund could not determine its net asset value (NAV)—essentially the market value of its securities minus its liabilities. Consequently, the suspension of redemptions was deemed necessary as the NAV is crucial for determining what each redeeming shareholder is owed.

The SEC endorsed a plan for the fund to liquidate its assets. This liquidation process is intended to ensure that existing and prior shareholders recover the maximum possible returns. Independent oversight will guide this process, ensuring that the liquidation and repayment plans meet regulatory standards and shareholder expectations.

Significant Issues and Concerns

Language Complexity

The document contains a considerable amount of legal and financial terminology. For those unfamiliar with concepts like "swaps" or "net asset value," the pinpoint technicalities of the issue might prove difficult to comprehend.

Unclear Valuation Process

The specifics of why Infinity Q faced challenges with asset valuation are not explicitly detailed, especially concerning how swap instruments are typically evaluated and the exact nature of the discrepancies in the provided pricing model.

Duration Ambiguity

While it is noted that resolving these valuation problems may take days or weeks, the document does not specify any further timeline or contingency plans should the process extend longer.

Potential Conflict of Interest

Given that Infinity Q was initially responsible for the fund's valuations which have now come into question, there are potential concerns about possible conflicts of interest. It is crucial that independent parties thoroughly monitor these processes moving forward to maintain credibility.

Impact on the Public

For the general public and particularly those invested in the fund, this suspension affects liquidity—investors currently cannot retrieve their investments. These actions aim to protect investor interests by waiting until accurate valuations can be assured before settlements occur. Long-term, this intervention strives to foster trust in the market by ensuring that even when problems arise, there are checks and systems to safeguard investor interests.

Impact on Stakeholders

Investors

For shareholders, this order brings immediate inconveniences as their ability to cash out their positions within the fund is on hold. However, the SEC's involvement assures that measures are being taken to rectify the situation with the hope of safeguarding their investments.

Infinity Q Capital Management

For Infinity Q, the suspension order and the scrutiny into their valuation processes are likely to affect their reputation in the investment community adversely. The oversight from third parties and the SEC will call for increased transparency and adherence to regulatory expectations.

Regulatory Bodies

The SEC's handling of the situation underscores its dual role in regulation and the protection of investor interests. Some may critique the lack of public input before the temporary order, but the SEC likely saw this as a necessary measure given the urgency and potential for significant investor harm.

Ultimately, this document and the actions it describes highlight the balancing act faced by regulatory agencies like the SEC, as they ensure market integrity and investor protection while permitting the operational freedom necessary for market participants like Infinity Q.

The document details a situation involving the Infinity Q Diversified Alpha Fund and its inability to accurately value certain financial instruments in its portfolio.

Financial References and Context

One significant financial reference in the document is that as of January 31, 2021, Infinity Q valued its assets under management at approximately $3.0 billion, with roughly $1.8 billion attributable to the Fund. This illustrates the substantial scale of the Fund's holdings, highlighting the potential impact of any valuation inaccuracies on investors’ assets.

Financial Allocations and Issues

• Valuation Concerns: The document raises issues regarding the valuation of swap instruments, constituting about 18% of the Fund's reported net asset value (NAV) as of February 18, 2021. The uncertainty around these valuations stems from adjustments to parameters by the Fund's Chief Investment Officer, calling into question the reliability of the $1.8 billion attributed to the Fund.

• Emergency Measures: Due to the valuation discrepancies, the applicants requested the suspension of redemption rights. This request reflects the financial control and protective measures put into place to prevent further financial harm to investors while addressing the inaccuracies.

• Resource Allocation for Resolution: The document mentions that Infinity Q has engaged an independent valuation expert. This action implies a financial allocation toward solving the valuation issue, although the document does not specify a cost. This allocation suggests a commitment to resolving these issues, albeit without a clear timeline.

Relation to Identified Issues

The document highlights a potential conflict of interest, as Infinity Q's involvement in initially adjusting valuations raises concerns. Financial allocations to engage independent experts could mitigate this conflict, ensuring an unbiased correction process. However, the lack of disclosure about the specific third-party vendors or costs associated with these valuations speaks to a need for transparency.

Moreover, the urgency in imposing a temporary order without a hearing can be seen as necessary to protect the substantial financial interests at stake – namely, the $1.8 billion attributed to the Fund. Yet, it arguably bypasses usual transparency and due process, which are essential to investor confidence, particularly given the size of the funds under management.

In conclusion, the financial references in the document underscore the gravity of the situation for both Infinity Q and its investors. The strategic financial measures taken aim to protect investors, but the complexity and scale of the issues necessitate a delicate balance between immediate protective actions and long-term transparency.