Q2 2020 Commentary

Q2 2020 Commentary

The Variant Alternative Income Fund (the “Fund”) returned +0.95% (institutional share class NICHX) in the second quarter of 2020, during a mostly risk-on recovery across financial markets.  Over the quarter, the Fund trailed investment grade bonds and underperformed high yield corporate debt and hedge fund indices by relatively wide margins.  For year-to-date 2020 and trailing 1-year performance, NICHX outperformed high yield corporate debt and hedge fund indices by wide margins and trailed investment grade bonds.  Over the quarter, the Fund regained its since inception highwater mark along with investment grade bonds, while high yield corporate debt and hedge fund indices have not fully recovered back to peak 2020 levels.

Source:  Bloomberg

Past performance is no guarantee of future results.

Overall, the Fund has performed relatively well during the pandemic stress period in 2020.  Although the Fund experienced its first monthly losses in March and April, the drawdown was limited and quickly recovered relative to public market indices.  While the economic outlook remains highly uncertain, we believe the Fund’s focus on less correlated market niches and structural downside mitigation, such as layers of first loss equity in its credit facilities, will prove beneficial.  Since inception, the Fund has delivered strong absolute returns and displayed limited correlation and beta to public market indices in fixed income and equity markets.

Source:  Bloomberg

Past performance is no guarantee of future results.

In terms of performance attribution, the Fund continued to benefit from less correlated exposures across asset classes, with most individual positions providing positive results generally in line with expectations. The specialty finance bucket provided the largest benefit to returns driven by its exposure to less economically sensitive assets such as government receivables, diamond lending, consumer debt settlements and electricity brokerage commissions.  Next, law firm lending within litigation finance provided the single largest benefit at the position level.  Real estate equity, with its exposure to specialized care facilities in the UK, also provided positive results.

Information is subject to change and is not a guarantee of future results.

Transportation finance, and in particular, exposure to an aircraft leasing strategy, provided the single largest negative impact on quarterly performance. The exposure to CLO (Collateralized Loan Obligation) warehousing also detracted from performance.  A few smaller impacts on performance can be attributed to positions within the secondaries space and a specialty lending fund.

Switching to portfolio positioning, Variant announced its most recent deal completion within the trade finance space focusing on PPE (personal protective equipment).  This expanded the number of asset classes within NICHX to 11, further diversifying underlying exposures.  Capital was opportunistically deployed due to the favorable supply and demand shifts within trade finance.  This investment is structured as a senior secured note with less than a 60-day commitment length.  This deal highlights a broader investment theme of targeting shorter duration opportunities in the current market environment.

In addition to the added exposure within trade finance, the Fund continued to build out current positions across the portfolio.  Additional dollars were deployed across a handful of senior credit facilities including exposures to a private credit manager financing loans to specialty lenders, electricity brokerage commissions and local originators in African countries as well as developing Asia.  Capital was also called to take advantage of the economics within the aircraft leasing space further building out this position within the portfolio.

These additional exposures were partly funded with a call back of one of our short-term credit facilities as well as utilizing our higher cash balance.  Liquidity management remains a key focus given the uncertainties in the current environment.  As of June 30, the fund can access 33% of Fund’s investments over a 12-month period.

In addition to deploying funds over the quarter, 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.

Over the quarter, the Fund benefited from continuous daily inflows with assets under management growing by $23 million, ending the quarter at $395 million.  For current performance and holdings, please click here.

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.


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