15 Jan Q4 2020 Commentary
The Variant Alternative Income Fund (the “Fund”) returned +2.25% (institutional share class NICHX) in the fourth quarter of 2020, during a period in which risk assets performed well. Over the quarter, the Fund outperformed investment grade bonds and underperformed high yield corporate debt and hedge fund indices. For year-to-date 2020, NICHX trailed investment grade bonds, high yield corporate debt and hedge fund indices.
At the end of December, the Fund delivered annualized net returns of 7.98%, with relatively limited volatility or correlation to public market indices. This year tested the Fund’s strategy and showed the potential benefits of Variant’s alternative income exposures and structural downside mitigation. We believe this continued approach will prove to be beneficial in the year ahead.
In terms of performance attribution, the vast majority of positions held in the portfolio during the quarter delivered 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, litigation finance and trade finance providing the largest impact to return over the quarter. The absolute level of surprise was positive, with a position in the litigation finance space providing the largest benefit to performance. The Fund continued to be negatively affected from its real estate exposure within the secondaries bucket that was impacted by the current health crisis.
As for portfolio positioning, Variant continued to deploy capital into new positions over the quarter. The Fund made a significant investment in an invoice and supplier financier in Australia. This is a direct investment and falls into the specialty finance bucket. Next, the Fund has provided a warehouse credit facility to finance residential real estate transactions. This exposure lands within real estate equity in the form of a senior credit facility. In the Royalties space, the Fund made a private fund commitment to gain exposure to music, film and television and digital media financing. Broadly, the Fund continued to expand its direct exposure within the portfolio through new and current credit facilities. Lastly, the Fund has maintained its exposure within the trade finance space to continue to take advantage of this tactical opportunity.
Assets under management continued to grow over the quarter by $115 million and ended the year at $638 million. Liquidity management remains a key focus given the underlying private exposures and the current market environment. As of December 31st, the Fund could access 46% 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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