The adviser to a pair of American Independence funds in the Alps Series Trust handed in its resignation earlier this month after a brief and fraught tenure marked by sharply declining assets and returns.

Manifold Partners will cease as adviser of the American Independence Global Tactical Allocation Fund and the American Independence Kansas Tax Exempt Bond Fund on Sept. 12, according to a July 16 sticker.

The board has not yet decided what will happen to the funds and is "reviewing potential options to determine the actions that are in the funds' and shareholders' best interests going forward," the filing says.

A spokesperson for Alps said the firm would not comment on the funds' future. Manifold managing partner, executive chairman and acting CEO Donald Putnam did not respond to questions by deadline, including why the firm resigned as adviser and whether the resignation signaled the firm is no longer interested in '40 Act products. A Manifold spokesman and an executive at an affiliated business did not respond to a request for comment.

Industry attorneys and independent directors say the sticker is an unusual way for an adviser to proceed after deciding to quit and that it indicates a conflict with the board over how the funds should be handled following the resignation. Those options would generally include liquidating the funds, finding another adviser to run them or merging them with similar products. The filing sets Sept. 12 as the deadline for directors to make a call.

"Essentially what this does is Manifold is putting a gun to the board's head," says David Hearth, a partner at Paul Hastings.

The Global Tactical Allocation and the Kansas Tax Exempt Bond funds are the last remaining American Independence products Manifold is responsible for after it closed a deal in 2017 to acquire their adviser, RiskX Investments. Manifold Partners bought 75% of the ownership of RiskX, then formed Manifold Fund Advisors to advise the seven-fund complex. The deal also came with a second complex of funds RiskX advised, the AI Fund Series, marketed as "artificial intelligence based funds."

Shortly after the closing date, Manifold recommended and the board approved liquidating two of the seven American Independence funds. Then in February 2018, directors approved a management plan to reorganize the remaining five funds into multiple series trusts.

Four were to go to Alps. An inflation-protected fund would merge with a similar product in the Advisors' Inner Circle Fund III trust. That fund was run by BNP Paribas, which was also subadvising the American Independence fund.

Directors listed Manifold's "limited financial resources," "loss of certain key personnel," and dwindling assets under management as reasons for approving the reorganizations, filings show.

Two months later, the board approved liquidating two more of the funds. That left just three products to be transferred, and shareholders approved the plan to move the tactical allocation fund and the Kansas bond fund to Alps.

Four days after the scheduled shareholder meeting, Manifold told the board it "strongly recommended" that directors liquidate the TIPS fund, because shareholders probably wouldn't approve the merger, but the board said no. Manifold quit as adviser to that fund in response and the board liquidated it.

Back when Manifold bought the funds, it said it would use artificial intelligence and machine learning techniques developed over a decade by "scientists from various fields of study" to manage its new products. It would use "algorithms similar to neural networks to parse data, learn from it, and then draw conclusions about elements in that data set," according to a press release announcing the acquisition.

"The unique line-up of portfolio strategists, which includes macroeconomics, behavioral finance and ETF allocations for the American Independence Funds, along with the AI Funds, provides the firms' clients with a full set of products to meet their clients' needs," the firm said in the release.

Manifold's chief investment officer, Jim Creighton, said that it was a direction the firm saw traditional fund managers moving in and that it amounted to "a unique opportunity for our science to integrate with new and existing distribution, so that a wider variety of users and clients can access our capabilities."

That didn't pan out. The tactical allocation fund's assets dropped from $144.8 million in 2017, a seven-year high, to $27.9 million by the end of the following year and $13.3 million by the end of last month, data from Morningstar Direct show.

The fund's returns were also downwardly mobile, disclosures show, falling from 17.48% in 2017 to 2.9% last year.

The story has been similar for the Kansas bond fund's assets, which Morningstar data show also dwindled, though they had an uptick at the end of June. The product held $172.2 million in 2017 and $133.2 million the following year. At the end of June, the fund's assets had risen past both years to $181.9 million.

Like the other product, its returns fell, from 3% in 2017 to 1.05% last year, according to disclosures.

Fund attorneys say that none of the options available for the board are easy to complete in the allotted 60 days. And practically speaking, the timeline isn't really that long to make a decision, says Rajib Chanda, a partner at Simpson Thacher, because the investment strategy is completely different for a fund about to liquidate compared to one seeking a new investment adviser.

"The investment strategy on day 35, if you're going to liquidate in 30 days, is going to be different if you're not going to liquidate. You shouldn't be buying anything if you're going to liquidate. You should be in the mode of finding the best time to sell the securities that you have so people can get the maximum amount of their money back," he says. "But if you're going to transition, you should manage it consistent with your long-term strategy."

Then there's the complication of preparing for and conducting a shareholder vote, which also can take significant time.

Finding a new adviser to run the products by the deadline is another tall order and would be in any situation, attorneys say. But this one has the added encumbrance of the filing, which suggests something is amiss, they say.

"If a manager is looking to unload a fund, it would approach potentially interested acquirers quietly," Hearth says. "Filing a sticker would have an opposite effect. If you're an investor, you see this, you say, 'Gee, these funds are falling apart.'"

It's likely the board will decide to liquidate the funds, attorneys say. But they note that the Kansas tax-exempt bond fund is a unique product that certain investors may miss greatly, so directors may try to find a new adviser to take over. There are only three others, according to Morningstar Direct: a $260.7 million Nuveen fund, a $158 million Commerce Investment Advisors fund, and a $58.5 million Viking Fund Managers product.

They also note that Manifold's fiduciary duty to the funds remains until Sept. 12 and that directors may spend their time now holding them to that, especially over outstanding bills.

"One of the things [directors] worry about is, are there going to be unpaid expenses of the fund after Sept. 12? Administration, transfer agent, lawyers – do they have outstanding accounts? Will Manifold be walking away?" says Hearth, noting that unpaid bills will come out of investors' pockets.

"There are things for the board to think about besides an orderly liquidation. Not only how do they sell the assets, but have all the bills been paid and have vendors discharged their service obligations?"

Manifold Dumps Last Two American Independence Funds

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