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Variant Alternative Income - NICHX

edited December 2021 in Fund Discussions

This fund has fantastic risk adjusted returns. I am invested in it through a RIA. Would love to hear takes from other investors in this fund


  • This fund has a $1 million minimum investment and is an interval fund that only allows quarterly redemptions. Do you have any business or financial relationship with this fund?
  • This fund is classified as an interval closed-end fund, available to accredited investors only , with a minimum investment of $1 million.
  • edited December 2021
    I do not have any business relationship with this fund or any other fund. I'm invested in this via Schwab at a significantly lower amount through a financial advisor. I don't have $1M to invest into a single fund.

    No proof of accreditation was sought by Schwab at purchase. I was able to buy just like any other mutual fund.
  • Were you invested in the Class A shares (UNIQX) which were merged into the Inst. shares (NICHX). I ownded UNIQX previously at Schwab as well.
  • edited December 2021
    Have never owned UNIQX because I bought NICHX after UNIQX closed. NICHX is just a few years old but the Sharpe and Sortino ratios are extremely high and max DD is quite low.

    The fund does buy "exotic" stuff so jockey experience is key.
  • @stayCalm : You mentioned jockey experience. So I have to ask, do they invest in horses?
  • edited December 2021
    For a bit of humor, I clicked on the fund symbols above and chose the Morningstar link. The message from M* was: “404 Error, Like guarantees of future returns, this page doesn’t exist.” The Schwab site does not recognize either symbol when I entered them for a quote.

  • edited December 2021
    Since this doesn't seem to be a fund normally listed on tracking sites like Morningstar or investable by retail investors, how did you find out about it?
  • edited December 2021
    Well, the name “Variant” seems a bit unfortunate in an era of Covid. As others note, there’s not a lot of information on this fund. Here’s one description:

    “Under normal market conditions, the fund will seek to achieve its investment objective by investing, directly or indirectly through a wide range of investment vehicles (“underlying funds”), a majority of its net assets (plus any borrowings for investment purposes) in alternative income-generating investments. It may also invest in public securities, including public debt, master limited partnerships, business development companies, and preferred stock. The fund is non-diversified.” Source

    Everybody’s looking for yield - including me. There just isn’t much to be found today without taking a lot of risk. So “niche” funds, “exotic” funds, “jockey” funds are in vogue. @Derf - The fund appears to have substantial real estate investments. No doubt there’s a track in there somewhere.:)
  • edited December 2021
    NICHX/UNIQX has interval structure and that means that you can buy it anytime but redemptions are limited to small % per redemption window (5-25% of NAV per quarter).
  • @LewisBraham - the OP stated earlier that they were placed in the fund through a financial advisor. That seems to be the link if one doesn't have a million to play with.
  • edited December 2021
    I used the term jockey as a synonym for manager skill which is key to this fund because it invests in a broad array of non-mainstream asset classes.

    Interesting to know that neither ticker appears on Schwab public sites. So either Schwab shows fund only if one is logged in or is eligible to purchase fund(via RIA).

    I was introduced to the fund through an investment club that I am a member of. Also ran across it in one of my saved searches on MFO Premium.

    This fund is very much an alt -- high risk, high reward. Strays quite far from the usual stocks/bonds/options stuff.
  • edited December 2021
    @Mark -- yes that is correct. I am invested through a RIA. Minimums will vary depending on RIA arrangement with Schwab but can be as low as $1.

    Before anybody asks, to be clear I am not hawking my RIA and have no intent to share my RIA's name here in the public forum or in private messages.

    I edited my original post and called out RIA.
  • edited December 2021
    It seems like an interesting fund, but the lack of liquidity and high fees--1.85% expense ratio on a debt fund--could prove problematic down the road. Often funds with illiquid assets mask hidden risks, as the prices of their portfolios seems very stable as the portfolio essentially doesn't trade with the rest of the market. In other words, the prices of these securities can be stale and not reflect sometimes the underlying reality of the portfolio or the external reality of the world. If there is a sudden liquidity crunch and investors start to withdraw money from such funds, those stale prices can suddenly become live in painful ways as managers are forced to sell and take significant markdowns on illiquid assets. We saw this happen with non-agency mortgage bonds last year. The interval structure can help deal with a flood of redemption requests in volatile markets but it can also facilitate the masking of stale prices. It is a bit of a double-edged sword in this particular case if you ask me.
  • msf
    edited December 2021
    Regarding the 1.85% fee - there's actually a cap in place of 1.45%. But this excludes the cost of acquired funds (0.57%). That's enough to drop the remaining expenses below the cap which in turn allows the fund to claw back previously waived fees. This is why on the fact sheet that Lewis linked to the gross ER is 1.78% while the net ER is higher, at 1.85%. (Usually net is lower than gross because of fee waivers.)

    Regarding stale and stable prices - this likely goes a long way in explaining where the high Sharpe ratio comes from. Sort of like looking at a Madoff portfolio. I'm not suggesting anything improper here (unlike with Madoff), just agreeing with Lewis that the pricing can be misleading. It's doubly risky here because for the acquired funds, this fund relies on the acquired funds' managers to price their own illiquid investments and suggest their NAVs. From the prospectus:
    The Fund bases its NAV on valuations of its interests in Underlying Funds provided by the managers of the Underlying Funds and/or their agents. These valuations involve significant judgment by the managers of the Underlying Funds and may differ from their actual realizable value. ... The Board, the Investment Manager and the Valuation Committee may have limited ability to assess the accuracy of these valuations.
    It wasn't that many years ago when a number of posters were complaining about fair market valuations, which often meant valuing foreign securities with prices stale by hours, not days or weeks. Pricing here is much more uncertain.
  • @rsorden, if you do not mind sharing, why did you liquidate your holdings in this fund? How many quarters did it take you to get out completely?

    The fund holds nearly 9% in money market funds, which is a drag on its performance and investors are paying an ER on. Not sure why the managers can not buy short term treasuries themselves, rather than pay an ER to a MM manager.
  • edited December 2021
    @msf, Fund of funds like CTFAX use funds from their own family and as such no duplication of fees. I have never studied fees calcs for funds that acquire external funds. Also, while every fund that waives fees mentions about potential claw backs, I have never seen before any fund apply claw back to understand how the mechanics work.

    If you do not mind, perhaps, explain to us the ER again. If there is a cap of 1.45% plus acquired fund level ER of 0.57%, that is a total of 2.02%. How do I get to 1.85%?

    How does the current waiver impact future ER, especially if the fund loses AUM?
  • edited December 2021
    Un-Intuitively, the fund did not lose until March 23, 2020 when both monetary and fiscal stimulus was announced. It lost about 1% TR Which it did not recover from until sometime in May 2020 - it was down for 2 months.

    At inception, each manager invested between $5 and 15 million. Forms 4 are posted on the fund website. May be they started the fund to invest their own money and then must have attracted clients from their previous job where all three managers worked concurrently for a number of years. Manager bios are on the fund website - seems they have always been outsourcing managers, rather than being selectors of securities and trading them.
  • CTFAX is an example of a fund that tacks a management fee (0.10%) on top of its expenses including its acquired fund expenses (0.40%). It has put a temporary cap of 0.50% on fees excluding the acquired fund fees. When you add back the acquired fund fees of 0.40% to the capped expenses of 0.50% (including 0.10% for the second layer of management), you get to 0.90%. That's the current ER.

    Absent that cap, the fees (excluding acquired fund fees) would be 0.56% and the total ER would be 0.96%.

    Columbia Thermostat Summary prospectus

    Extra management fees can be instead added surreptitiously by using an excessively costly share class of underlying funds. That's what Vanguard does with its funds of funds (e.g. STAR). Instead of utilizing Admiral or Institutional class shares, these funds purchase more expensive investor class shares of underlying funds. In fact, Vanguard eliminated the more expensive investor class shares of its index funds except for use in its funds of funds.

    An expense cap usually reduces current expenses. In order to satisfy a cap, a fund's management company waives some of its fees. Later, the fund may operate more efficiently (e.g. economies of scale) or a cap may still be in place but with a higher expense limit. Either way, it can happen that actual expenses are below the stated cap. At that point, the cap appears to be moot.

    But then the management is allowed to "claw back", i.e. recover, the fees that it originally waived. At least so long as the actual expenses plus the claw back don't exceed the current expense cap. Usually a claw back is limited to three years - management can only recover fees that it waived in the past three years.

    Your question about how ERs work with caps is where the twist comes in. Total expenses of NICHX are 1.78% (per prospectus). Excluding the expenses that don't count toward the cap (such as acquired fund expenses) brings the ER well below 1.45%. So the management is allowed to claw back previously waived fees.

    The annual report shows that the clawback for the year ending April 2021 amounted to 0.07%. That plus the prospectus' 1.78% ER (including underlying fund expenses) gets one to 1.85%.

    Finally, it may be worth noting that the way NICHX handles fees of underlying funds that are affilitates is to disclose the conflict of interest rather than to adjust for double dipping. Again from the prospectus (Conflicts of Interest section):
    The Fund may also invest ... in affiliated entities or accounts that may directly or indirectly benefit the Investment Manager or its affiliates, including Underlying Funds managed by affiliates of the Investment Manager.
  • edited December 2021
    Excellent reply @msf. Thanks.

    The only fund of funds I ever considered buying was CTFAX (but did not buy). During my review, I called the fund and asked among other things about duplication of management fees and the rep who I spoke with said NONE. We can forgive him for a 10 bps error. I have found most reps are limited in their knowledge - may be they are over worked or may be they hold temporary jobs to invest their time! Talking to the managers / fund investment professional is the best but usually one has to be an RIA or a big investor in the fund before that access is given.

    Good to know this year NICHX expenses have come under the cap - efficiencies of scale I suppose going from $550M AUM at Oct 2020 to $1.35B at Nov 2021. Nice of them not to use up the disclosed cap. (I used to work in professional services and my team never gave any part of the fee cap back to the clients!) Given the current year claw back was only 0.07% and the charged expenses were below the cap, is it reasonable to assume that all the previous waivers are now clawed back and no claw back of historic waiver would be needed in the future years? I am guessing yes, but thought I would ask in case you know the answer off hand.

    More importantly, thank you for bringing to light Vanguard's clever way to charge fees (I am sure they disclosed!), considering how much chest thumping it does about fees. Thankfully, I never invest at Vanguard for their presumed low fees; high fees never stopped me from an investment, though I like to know / understand how much I am paying.
  • @BaluBalu It didn't take long to exit, 2 quarters is all. I liked the fund, justdecided to play in other spaces by investing in similar products with Yieldstreet. In fact, the Variant fund has actually held various Yieldstreet investments in the past, I think ship deconstruction, art, litigation finance investments.
  • You're correct that the management completed clawing back its fees. From the annual report:
    For the year ended April 30, 2021, the Investment Manager has fully recovered all of its previously waived fees totaling $401,308. For a period not to exceed three years from the date on which a Waiver is made, the Investment Manager may recoup amounts waived or assumed, provided it is able to effect such recoupment and remain in compliance with the Expense Limitation.
  • In over 6 years, NICHX (interval fund) has only had 2 negative months of performance. Stale pricing may or may not be an issue with these types of funds (illiquid fund holdings).

    I have access via Schwab PCRA acct and am liking the 9% per year average returns. Hate the withdrawal issues with interval funds, but can manage.

    Any other pitfalls here?
  • edited May 12
    What is a PCRA account?
  • edited May 12
    Believe it means "Personal Choice Retirement Account". Schwab advertises it has a PCRA.
  • edited May 12
    After re-reading some of @Lewis Abrahams other postings regarding interval funds, starting to re-think this idea. At the end of the day, these vehicles probably do not properly mark-to-market their investments, so it appears that valuations are smoother than reality would normally dictate.

    And yes, PCRA is Schwab's "Personal Choice Retirement Account", which resides in an employer-sponsored plan.
  • edited May 25
    There are two main risks in this fund
    - Manager skill at picking positions and risk management (concentration risk)
    - MTM pricing. This fund has an external auditor but an investor is relying on manager judgement and integrity for Level 3 pricing.

    I'm still a happy camper in this one and like the steady cash flow. I'm also invested in their newer offering IMPCX.
  • stayCalm said:

    There are two main risks in this fund
    - Manager skill at picking positions and risk management (concentration risk)
    - MTM pricing. This fund has an external auditor but an investor is relying on manager judgement and integrity for Level 3 pricing.

    I'm still a happy camper in this one and like the steady cash flow. I'm also invested in their newer offering IMPCX.

    At which brokerage do you access these funds? Are these available on the retail (not adviser) platforms?
  • I'm with Schwab and afaik one needs an RIA to access any interval fund.

    **Not investment advice, buyer beware.
  • NICHX was -4.00% yesterday. Doesn't look like a distribution, timing wise. Maybe a price misprint (NAV error)?
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