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Assessing Corridor Variance Swap Valuations from Public Filings

Article Quant Q&A · Author: Tom
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Summary

The document examines whether public SEC N-PORT filings contained enough information to assess a fund’s reported valuations of corridor variance swaps. It describes an example position on the EURO STOXX 50, with realized variance counted inside a stated index corridor and a payment tied to a variance strike. The filing also reports the contract’s maturity, notional, currency, and an unrealized valuation figure. The context is a fund manager’s fraudulent overvaluation of variance swaps through inaccurate inputs to a custom pricing model.

The central question is whether an outside observer could independently value the position from the disclosed terms and determine, at the time, that the mark was wrong. The document supplies one filing example and points to regulatory and legal records, but it does not perform a valuation or conclude whether disclosure was sufficient. Repricing would require contract conventions and market inputs not established in the text, so the example raises a due diligence question rather than providing a complete valuation method.

Key ideas

  • The filing example describes a corridor variance swap on a European equity index.
  • Reported terms include the variance corridor, strike, maturity, notional, currency, and unrealized valuation.
  • The author asks whether public position disclosures allow independent valuation checks.
  • The document provides no recalculation or conclusion about whether the reported mark could be verified from the filing alone.

Tags

VolatilityDerivatives pricingRisk managementEquities
Full text
# Fund valuation fraud: Corridor Variance Swap


# Fund valuation fraud: Corridor Variance Swap












Background: Infinity Q was overvaluing variance swaps from 2017-2021 and the fund manager was sentenced to 15 years in prison. They did this by entering inaccurate position data into a Bloomberg Valuations Service "BVAL" custom model. Infinity Q Diversified Alpha Mutual Fund was a public fund and publicly reported their positions four times per year in the SEC's NPort filing.

The question: Could the fact that Infinity Q was overvaluing their positions be determined at the time by looking at their SEC NPort filings? Do they provide sufficient information to value the position?

May 2020 example position from its NPort filing: Index name. EURO STOXX 50 Price EUR Index identifier, if any. EU0009658145 Description of Other Receipts: Vega* realized variance SX5E when between 2631.48 and 4135.18 Description of Other Payments: Vega*16.80% strike Termination or maturity date. 2020-12-18 Notional amount: 350,000 ISO Currency Code. EUR Unrealized appreciation or depreciation. Depreciation shall be reported as a negative number. 6,399,867.56

SEC filing and Justice Department Press Release linked below

https://www.sec.gov/Archives/edgar/data/1261788/000114554920042571/xslFormNPORT-P_X01/primary_doc.xml

https://www.justice.gov/usao-sdny/pr/founder-and-former-chief-investment-officer-infinity-q-sentenced-15-years-prison

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.