09 Apr Q1 2021 Commentary
The Variant Alternative Income Fund (the “Fund”) returned +2.98% (institutional share class NICHX) in the first quarter of 2021, during a period of heightened market volatility across asset classes. Over the quarter, the Fund outperformed investment grade bonds, high yield corporate debt and hedge fund indices by wide margins. For the 1-year returns, NICHX outperformed investment grade bonds but underperformed high yield corporate debt and hedge fund indices.
Source: Bloomberg
At the end of March, the Fund delivered annualized since inception net returns of 8.30%, with relatively limited volatility or correlation to public market indices. The return stream through the first part of 2021 has highlighted the potential value of the Fund’s diversified income producing assets. This coupled with historical performance continued to show how portfolios could benefit from Variant’s alternative exposures and structural downside mitigation.
Source: Bloomberg
In terms of performance attribution, the vast majority of positions held in the portfolio during the quarter continued to deliver positive results. Likewise, most positions met or exceeded expectations, with the overall instances of surprises isolated to a few investments. The fund benefited from less correlated exposures across asset classes, with specialty finance, real estate equity and litigation finance providing the largest impact to return over the quarter. The absolute level of surprise was positive, with a position in the specialty finance space providing the largest benefit to performance followed by a position within real estate equity. Lastly, the Fund proactively adjusted downward the principal balance of its electricity brokerage commissions credit facility which has been negatively affected by weather related events in Texas.
As for portfolio positioning, Variant continued to deploy capital into new positions across asset classes over the quarter. The Fund invested additional dollars into litigation finance through a fund investment focused on the smaller end of the market within law firm lending. Next, a handful of direct investments through credit facilities were completed in the first part of 2021. Within the specialty finance space, an investment was made to provide working capital loans to small businesses in the consumer-packaged goods space. Next, the Fund continued to build out its exposure within income share agreements through a direct facility to a coding school. Lastly, a warehousing facility was completed to provide bridge financing to an ibuyer of residential real estate. Finally, the Fund continued to stay active within trade finance maintaining exposure to this opportunistic investment.
Assets under management grew over the quarter by $157 million and ended the quarter at $796 million. Liquidity management remains a key focus given the underlying private exposures and the current market environment. As of March 31st, the Fund could access 36% of Fund’s investments over a 12-month period.
The Fund paid out its dividend and executed another redemption offering. This redemption offer fulfilled 100% of client requests without proration, as has been the case throughout the Fund’s history.
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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.
PANDEMIC RISK. The continuing spread of an infectious respiratory illness caused by a novel strain of coronavirus (known as COVID-19) has caused volatility, severe market dislocations and liquidity constraints in many markets, including securities the Fund holds, and may adversely affect the Fund’s investments and operations.
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 OR WWW.VARIANTINVESTMENTS.COM. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST. Tnairav20200403 ediserof20200406
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