Advisor bought something I don't understand

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Ryan_Colorado
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Advisor bought something I don't understand

Post by Ryan_Colorado »

Thank you in advance for your time. Two years ago I was dealing with some anxiety in my life. My wife and I made the decision to enlist an advisor to manage a portion of our holdings. That turned out not to be the right thing to do and he did not serve us well. We have terminated his contract and now I am working to reallocate our accounts into more appropriate funds.

He invested a not-insignificant amount of funds into a Variant Alternative Income Fund (NICHX). I guess it's considered an "interval fund." That I can only exit quarterly. The price-per-share has been flat, but it pays a decent quarterly dividend that is automatically reinvested. An initial investment of $103k in late 2022 has paid over $15k in dividends over six quarters (545 new shares).

This of course triggers the very anxiety I struggle with. My intention was to get to a 70/30 AA. I guess my options are:

1) Get out of the fund as soon as the next quarterly-sell period opens.
2) Keep all or some and attribute it either to the equity side or the bond/cash side of my AA.
3) Keep all or some of it, but leave it outside of my AA (meaning pretend it's not there).

Your wisdom is welcome.
placeholder
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Re: Advisor bought something I don't understand

Post by placeholder »

It appears to be a closed end fund so all the oddities that come with those.
Overview
The Variant Alternative Income Fund, a closed-end interval fund, offers investors efficient access to a diversified portfolio of unconventional income-generating assets. The Fund invests in niche market opportunities with strong cash flow characteristics and low correlations to public equity and bond markets. The Fund’s primary objective is to provide a high level of current income. Capital appreciation will be considered a secondary objective. Variant, an innovator in alternative income investing, is led by an investment team with decades of experience investing in market niches. Interval funds provide investors such features as daily pricing, 1099 tax reporting, and quarterly liquidity with a fund-level gate of 5-25% of NAV. The interval fund structure allows accredited investors the opportunity to access less liquid, potentially higher yielding alternative investments.
https://funds.variantinvestments.com/
gotoparks
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Re: Advisor bought something I don't understand

Post by gotoparks »

What is the expense ratio? Do you need an income fund? If you don't know an advisor will put you in a fund that makes them money. I don't see you list your age but an income fund is good if you are in need to supplement your income in retirement. I don't see the point for young people.
Last edited by gotoparks on Wed Apr 10, 2024 11:44 am, edited 1 time in total.
billfromct
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Re: Advisor bought something I don't understand

Post by billfromct »

According to the link that placeholder provided, the net expense ratio is 1.67%.

bill
Topic Author
Ryan_Colorado
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Re: Advisor bought something I don't understand

Post by Ryan_Colorado »

gotoparks wrote: Wed Apr 10, 2024 1:45 am What is the expense ratio? Do you need an income fund? If you don't know advisor will put you in a fund that makes them money. I don't see you list your age but an income fund is good if you are in need to supplement your income in retirement. I don't see the point for young people.
I'm 47. This is in an IRA, so I'm not taking the income now.
gavinsiu
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Re: Advisor bought something I don't understand

Post by gavinsiu »

Have you question your advisor on why it was invested in this fund? Ask for the reasoning. Just because you hire an advisor does not mean you checkout on your vigilance.

How is the advisor paid? Does he get kickback from the funds?
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mhc
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Re: Advisor bought something I don't understand

Post by mhc »

I would get out of it. I would not buy or hold anything I don't understand. I have found that broad market, low cost, index funds meet all my needs.
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j.click
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Re: Advisor bought something I don't understand

Post by j.click »

If ever you wonder why an 'advisor' put you into something you don't understand then look at the financial incentive for the advisor. 99% of the time that will be your answer......
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Re: Advisor bought something I don't understand

Post by bradinsky »

gavinsiu wrote: Wed Apr 10, 2024 8:26 am Have you question your advisor on why it was invested in this fund? Ask for the reasoning. Just because you hire an advisor does not mean you checkout on your vigilance.

How is the advisor paid? Does he get kickback from the funds?
They have terminated the relationship.
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Ryan_Colorado
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Re: Advisor bought something I don't understand

Post by Ryan_Colorado »

Thanks everyone. I sent an email to the company and a real person got back to me immediately. I spent 30 minutes on the phone with a rep who answered all of my questions and helped me understand what the fund was and how it worked. For the time being, I'm going to keep it. It has consistently paid a good dividend. I may redirect how that dividend is reinvested until I get to my desired AA. And now I know the process to divest from it. But overall, I'm not as concerned as I was 12 hours ago. Thank you.
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Re: Advisor bought something I don't understand

Post by Jack FFR1846 »

It pays a good dividend but you're still paying an enormous 1.67% expense ratio.
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exodusNH
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Re: Advisor bought something I don't understand

Post by exodusNH »

Ryan_Colorado wrote: Wed Apr 10, 2024 11:09 am Thanks everyone. I sent an email to the company and a real person got back to me immediately. I spent 30 minutes on the phone with a rep who answered all of my questions and helped me understand what the fund was and how it worked. For the time being, I'm going to keep it. It has consistently paid a good dividend. I may redirect how that dividend is reinvested until I get to my desired AA. And now I know the process to divest from it. But overall, I'm not as concerned as I was 12 hours ago. Thank you.
I would turn off dividend reinvestment. Closed-end funds can be tricky to exit. Interval funds are tricky to exit. No reason to keep digging.
Last edited by exodusNH on Wed Apr 10, 2024 3:40 pm, edited 2 times in total.
bberris
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Re: Advisor bought something I don't understand

Post by bberris »

mhc wrote: Wed Apr 10, 2024 9:36 am I would get out of it. I would not buy or hold anything I don't understand. I have found that broad market, low cost, index funds meet all my needs.
There's the rub. It's an interval fund. You can tender all your shares each quarter, but the fund may only buy 5 % or so of the outstanding shares. I don't know the specifics here, but I own a different interval fund that converted from a closed end fund. They buy 5 % of outstanding shares each quarter. I tender all of them and end up selling about 10 %. So each year I can unload about 35 %. I will end up owning a little forever.

But OP can certainly turn off dividend reinvestment.
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Re: Advisor bought something I don't understand

Post by bberris »

exodusNH wrote: Wed Apr 10, 2024 11:52 am
Ryan_Colorado wrote: Wed Apr 10, 2024 11:09 am Thanks everyone. I sent an email to the company and a real person got back to me immediately. I spent 30 minutes on the phone with a rep who answered all of my questions and helped me understand what the fund was and how it worked. For the time being, I'm going to keep it. It has consistently paid a good dividend. I may redirect how that dividend is reinvested until I get to my desired AA. And now I know the process to divest from it. But overall, I'm not as concerned as I was 12 hours ago. Thank you.
I would turn off dividend reinvestment. Closed-end funds can be tricky to exit. No reason to keep digging.
It's an interval fund, not closed-end. Closed end funds can be sold whenever the market is open. Interval funds can only be sold in limited amount back to the fund operator.
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Re: Advisor bought something I don't understand

Post by Elysium »

Ryan_Colorado wrote: Wed Apr 10, 2024 11:09 am Thanks everyone. I sent an email to the company and a real person got back to me immediately. I spent 30 minutes on the phone with a rep who answered all of my questions and helped me understand what the fund was and how it worked. For the time being, I'm going to keep it. It has consistently paid a good dividend. I may redirect how that dividend is reinvested until I get to my desired AA. And now I know the process to divest from it. But overall, I'm not as concerned as I was 12 hours ago. Thank you.
I'd be curious to learn what's the source of their income stream and what are the risks they are exposed to. Did they answer how the fund navigates different market conditions without getting impacted, or more aptly put, by shielding the investor from those conditions? For instance, I noticed the fund had an almost smooth return distributions year over year, how do they manage this? how did they manage years like 2021, 2022, and 2024 when all fixed income investments other than money markets and stable value are having a tough time. Are they selling the shares to meet the dividend payout, if so what are the risks involved when they may actually have an year of losing money with negative returns. If you can't get answer to how an investment can have a negative year then your knowledge is not complete.
bberris
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Re: Advisor bought something I don't understand

Post by bberris »

It's very common for closed end funds and interval funds to return capital so that dividends are much higher that the investment return. There are some that pay 20 % dividends, and their portfolio mirrors the sp500.
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Re: Advisor bought something I don't understand

Post by nisiprius »

I think you should seriously consider getting out of it, because you don't understand it, and because it may be such a slow process. One thing to note is that since it is an interval fund, you don't actually know how it is performing because it doesn't have a true market value in between quarterly opportunities. The number you see some kind of guessimate or appraisal.

You can not classify it either as equity or fixed income. It invests in "alts," alternatives. Proponents and defenders would say that's the whole point--it doesn't behave like either of them. Since it is actively managed, you won't find any realistic index to compare it to, or any other fund to compare it to. According to their website, this is what it is investing in:

Image

Unlike a bond fund, this is not an asset you can mentally consider to have a known value that can be tapped if needed.
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bberris
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Re: Advisor bought something I don't understand

Post by bberris »

There's an unusual allocation to "litigation finance". I guess this is an advance payment against a future settlement. That is the kind of speculation that only a closed end, interval, or hedge fund can engage in.
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Re: Advisor bought something I don't understand

Post by Silverado »

Jack FFR1846 wrote: Wed Apr 10, 2024 11:19 am It pays a good dividend but you're still paying an enormous 1.67% expense ratio.
Unfathomably enormous. Think of the kickback this _____ advisor must have gotten.

As noted, OP turn off reinvestment and start the process of extracting yourself.

Good luck, you seem to understand the situation.
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Re: Advisor bought something I don't understand

Post by tibbitts »

bberris wrote: Wed Apr 10, 2024 12:09 pm
exodusNH wrote: Wed Apr 10, 2024 11:52 am
Ryan_Colorado wrote: Wed Apr 10, 2024 11:09 am Thanks everyone. I sent an email to the company and a real person got back to me immediately. I spent 30 minutes on the phone with a rep who answered all of my questions and helped me understand what the fund was and how it worked. For the time being, I'm going to keep it. It has consistently paid a good dividend. I may redirect how that dividend is reinvested until I get to my desired AA. And now I know the process to divest from it. But overall, I'm not as concerned as I was 12 hours ago. Thank you.
I would turn off dividend reinvestment. Closed-end funds can be tricky to exit. No reason to keep digging.
It's an interval fund, not closed-end. Closed end funds can be sold whenever the market is open. Interval funds can only be sold in limited amount back to the fund operator.
Can all of these funds be sold directly back to the operator or it is necessary to go through a broker?
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Re: Advisor bought something I don't understand

Post by nisiprius »

Ryan_Colorado wrote: Wed Apr 10, 2024 11:09 am Can all of these funds be sold directly back to the operator or it is necessary to go through a broker?
Interval funds generally do not trade on the secondary market and therefore can't be sold through a broker even if you wanted to. They can only be sold to the issuer, only during a short quarterly window, and only as much as the issuer is willing to buy. From the prospectus for NICHX, right on page 1. Note point #4, which I underlined:
Shares are an illiquid investment.
  1. You should generally not expect to be able to sell your Shares (other than through the repurchase process), regardless of how the Fund performs.
  2. Although the Fund has implemented a Share repurchase program, only a limited number of Shares will be eligible for repurchase by the Fund.
  3. If you are permitted to sell your Shares to a third party rather than through the repurchase process, you may receive less than your purchase price.
  4. The Fund does not intend to list the Shares on any securities exchange and the Fund does not expect a secondary market in the Shares to develop.
  5. You should consider that you may not have access to the money you invest for an indefinite period of time.
  6. An investment in the Shares is not suitable for you if you need foreseeable access to the money you invest.
  7. Because you will be unable to sell your Shares or have them repurchased immediately, you will find it difficult to reduce your exposure on a timely basis during a market downturn.
Investing in Shares may be considered speculative and involves a high degree of risk. Please review the “Principal Risk Factors” starting on page 13 of this Prospectus.
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spacemanspif
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Re: Advisor bought something I don't understand

Post by spacemanspif »

The things I have learned on this forum. Just when I thought I was starting to get a pretty good grasp on things in wanders a "closed end fund" of alternative assets.

I am very much in the shoes of the OP in that I have absolutely no idea what this fund is, how it works, or what it even invests in, none whatsoever. And for that very reason, I would be looking to get out of it. Expense ratio of 1.67, invests in "alternatives", and I cannot get out when I want? That sure seems antithetical to Bogle's mission of keep it simple and keep costs low.

This is another great illustration of the genius of a simple 3 or 4 fund index portfolio. Simple, cheap, and it beats 90+ percent of all other options out there.
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Re: Advisor bought something I don't understand

Post by exodusNH »

spacemanspif wrote: Wed Apr 10, 2024 3:05 pm The things I have learned on this forum. Just when I thought I was starting to get a pretty good grasp on things in wanders a "closed end fund" of alternative assets.

I am very much in the shoes of the OP in that I have absolutely no idea what this fund is, how it works, or what it even invests in, none whatsoever. And for that very reason, I would be looking to get out of it. Expense ratio of 1.67, invests in "alternatives", and I cannot get out when I want? That sure seems antithetical to Bogle's mission of keep it simple and keep costs low.

This is another great illustration of the genius of a simple 3 or 4 fund index portfolio. Simple, cheap, and it beats 90+ percent of all other options out there.
If I were OP, I'd be selling as much as possible as often as possible. Not being able to sell on a whim is enough of a reason to get out while you don't need the income.

Since your only options are for the company to do the buybacks (which are probably pretty limited) or finding some sucker to buy them directly from you, it will probably take years to unload.
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Ryan_Colorado
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Re: Advisor bought something I don't understand

Post by Ryan_Colorado »

OP here - thanks for all the feedback. When I spoke to the company rep today, we did discuss the limited liquidity and the possibility that you can't unload all at one time. It's within their policies. However, he informed me that redemption is typically low and they haven't ever NOT done full redemption requests.

This is not something I ever would have bought. I've spent a good chunk of today checking my AA math and getting back into boring index funds. It'll take me another day to dial it in. That's the priority.

Now that I know the redemption schedule, I'll be able to revaluate this incrementally. I realize that keeping it runs counter to the tested wisdom of the 3-4 fund portfolio. I'm not trying to justify or rationalize. It just is what this is. I can't do anything with it for two months anyways.

And going back to my original post, I shared how this all started was rooted in personal anxiety. I don't need to divulge my life story here, but I'm looking at today as a mark of personal growth. I "handled" this much better than I would have 24 months ago. So if anyone with anxiety happens to read this, I know how you feel. Name it to tame it.

Healthy, wealthy, joyful.

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exodusNH
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Re: Advisor bought something I don't understand

Post by exodusNH »

Ryan_Colorado wrote: Wed Apr 10, 2024 10:32 pm OP here - thanks for all the feedback. When I spoke to the company rep today, we did discuss the limited liquidity and the possibility that you can't unload all at one time. It's within their policies. However, he informed me that redemption is typically low and they haven't ever NOT done full redemption requests.
It's been a pretty good market over the past decade.

The rest will come when EVERYONE is wants out. It's easy to make vague promises when there is no pressure.

I would plan to divest some at each opportunity. (And turn off dividend reinvestment.)
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Re: Advisor bought something I don't understand

Post by dogagility »

Ryan_Colorado wrote: Wed Apr 10, 2024 10:32 pm I realize that keeping it runs counter to the tested wisdom of the 3-4 fund portfolio. I'm not trying to justify or rationalize. It just is what this is. I can't do anything with it for two months anyways.

And going back to my original post, I shared how this all started was rooted in personal anxiety.
Another reason to divest your holding and put the assets into liquid investments is to reduce the anxiety of holding a fund with low liquidity and a price that is a guesstimate. It might make me anxious too.

Plus, an expense ratio of 1.67% is outrageous.
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bberris
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Re: Advisor bought something I don't understand

Post by bberris »

Yet another gotcha with limited liquidity investments in an IRA.
When it comes to RMD time, you may not be able to sell enough to satisfy the RMD. Then you would have to withdraw the shares in kind to a taxable account to satisfy the RMD. Now you owe taxes on the value of the withdrawal that didn't generate any cash, so you have to pay the tax from another source.
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Re: Advisor bought something I don't understand

Post by bonesly »

Jack FFR1846 wrote: Wed Apr 10, 2024 11:19 am It pays a good dividend but you're still paying an enormous 1.67% expense ratio.
+1 for this... A Total US Bond Market Index Fund would likely be < 0.10% (Van, Fido, and Schwab TBMs are all < 0.05%).

Now if this very expensive closed-end fund is paying 14-15% post-fee return to investors consistently, then I'd see why you want to keep it despite the high cost. Usually such future results are not guaranteed, but that high cost most certainly will be paid regardless of performance.
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