Behind the Mysterious Demise of a $1.7 Billion Mutual Fund

By Gunjan Banerji25 days ago

A U.S. mutual fund that suffered nearly $500 million of losses appears to have misvalued its large derivatives portfolio, according to an analysis of the funds disclosures by The Wall Street Journal, academics and traders.

The Infinity Q Diversified Alpha Fund disclosed in filings with the Securities and Exchange Commission valuations of investments that in at least three instances were incorrect or inconsistent with market conditions, said traders and academics. One valuation was mathematically impossible, said a former Morgan Stanley managing director who reviewed the disclosures.

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In one instance, the disclosures show, Infinity entered two nearly identical swaps contracts referencing the same index over the same period, yet booked a gain on one that was more than three times as large as the otheran outcome analysts said defied logic. Swaps are bilateral contracts, brokered by banks, that traders use to bet on asset prices, interest rates or other financial trends.

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