14 Jan Q4 2019 Commentary
The Fund (NICHX) returned +2.67% in the fourth quarter of 2019, outperforming investment grade bonds and performing in line with high yield corporate debt and hedge fund indices. For the full year 2019, the Fund was up +12.22%, outperforming investment grade bond and hedge fund indices, but somewhat behind high yield corporate debt.
Past performance does not guarantee future results
Source: Bloomberg
The Fund’s positive performance in Q4 was largely unrelated to the movements in interest rates, credit markets and other risk assets, but rather driven by events in individual portfolio exposures. Over the quarter and since inception, the Fund has displayed limited correlation or beta to public market indices in fixed income and equity markets.
Past performance does not guarantee future results
Source: Bloomberg
In terms of performance attribution, most positions performed at or near expectations. A few of the largest positive drivers of performance include a credit facility backed by law firm loans, specialized care in the UK and a partial recovery on a senior credit facility related to small business receivables financing that had been previously written down. In addition, a secondary market acquisition of an LP interest in a real estate fund and origination points on two relatively new credit facilities supported performance. MLPs were the largest detractor, although the negative impact was modest at the overall Fund level.
New exposures to the portfolio over the quarter include a re-up with a law firm lending fund manager, a diamond financing strategy, two separate warehouse lines backed by income share agreements and life settlements, a special situations lending fund, a secondary market purchase of an LP interest in a real estate fund as well as a few other smaller-sized deals that are expected to grow over time. A variety of existing investment relationships were upsized over the quarter, particularly in specialized care in the UK, a credit facility backed by law firm loans and a credit facility to a lender focused on merchant cash advances to the ecommerce community. The addition of the new investments served to further diversify the portfolio, which now holds 54 different positions across ten asset classes.
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Inception date is October 2, 2017. Returns are net total returns. Between October 2017 and September 2018, performance is quoted for the Variant Alternative Income Fund LP, the predecessor private fund that converted into the interval fund. The predecessor fund was, in all material respects, equivalent to the interval fund. The private fund track record was adjusted to reflect the interval fund’s estimated expenses and expense limitations. Specifically, it reflects a management fee of 0.95% and fund expenses capped at 0.50%. The track record uses geometric returns and reflects the reinvestment of earnings. Results are unaudited.
Correlation is the performance relationship between the Fund and the reference indices on a monthly basis over the period. Beta measures the volatility of the Fund relative to the reference indices over the period.
“IG bonds” & “BBG Agg ” refer to the Bloomberg Barclays U.S. Aggregate Index, which is a broad-based flagship benchmark that measures the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market. “High yield” & “BBG HY” refer to the Bloomberg Barclays U.S. High Yield Index, which measures the U.S. dollar-denominated, high yield, fixed-rate corporate bond market. “Hedge funds” & “HFRXGL” refer to the HFRX Global Hedge Fund Index, which is designed to be representative of the overall composition of the hedge fund universe. “Equity” & “S&P 500” refer to the S&P 500® Index, which is a market-value weighted index of equity securities. Please note: The referenced indices are shown for general market comparisons. Investors cannot directly invest in an index and unmanaged index returns do not reflect any fees, expenses or transaction costs. Reference indices are provided for illustrative purposes only. There are no known published benchmarks or indices comparable to the investment strategies of the Fund.
The Variant Alternative Income Fund is a continuously-offered, non-diversified, registered closed-end fund with limited liquidity. There is no guarantee the Fund will achieve its objective. An investment in the Fund should only be made by investors who understand the risks involved, who are able to withstand the loss of the entire amount invested and who can bear the risks associated with the limited liquidity of Shares. A prospective investor must meet the definition of “accredited investor” under Regulation D under the Securities Act of 1933.
Important Risks: Shares are an illiquid investment. You should generally not expect to be able to sell your Shares (other than through the repurchase process), regardless of how the Fund performs. Although the Fund is required to implement a Share repurchase program only a limited number of Shares will be eligible for repurchase by the Fund.
An investment in the Fund is speculative, involves substantial risks, including the risk that the entire amount invested may be lost, and should not constitute a complete investment program. The Fund may leverage its investments by borrowing, use of swap agreements, options or other derivative instruments. The Fund is a newly-organized closed-end management investment company that has limited operating history and no public trading of its shares. The Fund is a non-diversified management investment company, meaning it may be more susceptible to any single economic or regulatory occurrence than a diversified investment company. In addition, the fund is subject to investment related risks of the underlying funds, general economic and market condition risk.
Alternative investments provide limited liquidity and include, among other things, the risks inherent in investing in securities, futures, commodities and derivatives, using leverage and engaging in short sales. The Fund’s investment performance depends, at least in part, on how its assets are allocated and reallocated among asset classes and strategies. Such allocation could result in the Fund holding asset classes or investments that perform poorly or underperform. Investments and investment transactions are subject to various counterparty risks. The counterparties to transactions in over the-counter or “inter-dealer” markets are typically subject to lesser credit evaluation and regulatory oversight compared to members of “exchange-based” markets. This may increase the risk that a counterparty will not settle a transaction because of a credit or liquidity problem, thus causing the Fund to suffer losses. The Fund and its service providers may be prone to operational and information security risks resulting from breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause the Fund to lose proprietary information, suffer data corruption, or lose operational capacity.
BEFORE INVESTING YOU SHOULD CAREFULLY CONSIDER THE FUND’S INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES. THIS AND OTHER INFORMATION IS IN THE PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED FROM (877) 770-7717. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST.
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