Axonic Alternative Income Fund
01/10/2025 | Press release | Distributed by Public on 01/10/2025 16:10
Annual Report by Investment Company (Form N-CSR)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-23385
Axonic Alternative Income Fund
(exact name of registrant as specified in charter)
520 Madison Avenue, 42nd Floor
New York, NY 10022
(Address of principal executive offices) (Zip code)
Clayton DeGiacinto, President
c/o Axonic Capital
520 Madison Avenue, 42nd Floor
New York, New York 10022
(Name and Address of Agent for Service)
Copies of information to:
Jeffrey Skinner
Kilpatrick Townsend & Stockton LLP
1001 West Fourth Street
Winston-Salem, NC 27101
Registrant's telephone number, including area code: (212) 259-0430
Date of fiscal year end: October 31
Date of reporting period: October 31, 2024
Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.
| Item 1. | Report to Stockholders. |
| (a) |
AXONIC ALTERNATIVE INCOME FUND
ANNUAL REPORT
October 31, 2024
TABLE OF CONTENTS
| Shareholder Letter | 1 |
| Portfolio Update | 3 |
| Consolidated Schedule of Investments | 5 |
| Consolidated Statement of Assets and Liabilities | 10 |
| Consolidated Statement of Operations | 11 |
| Consolidated Statements of Changes in Net Assets | 12 |
| Consolidated Statement of Cash Flows | 13 |
| Consolidated Financial Highlights | 14 |
| Notes to Consolidated Financial Statements | 16 |
| Report of Independent Registered Public Accounting Firm | 25 |
| Additional Information | 26 |
| Trustees and Officers | 27 |
| Privacy Policy | 29 |
| Axonic Alternative Income Fund | Shareholder Letter |
October 31, 2024 (Unaudited)
"This time" has been different - perhaps even more so than we had supposed in last year's letter. The lingering, beneficial impacts of trillions of dollars in pandemic-era policy action, including direct stimulus deposits, ERCs (Employee Retention Credits), the Bipartisan Infrastructure Law (BIL), the CHIPS & Science Act, and the subsequent IRA (aka the "Inflation Reduction Act") enabled borrowers to repair credit scores, increase credit lines, delay rents, and defer student loan payments.1,2 This created substantial excess consumer savings and enabled the elimination and extension of debt obligations. While the pandemic-era savings windfall has dissipated and some students are once again paying off their loans, nearly one-and-a-half years after the pandemic's official end, the U.S. deficit-to-GDP ratio remains above six percent - a level historically only reserved for recessions.
Persistent fiscal stimulus has helped promote exceedingly loose financial conditions for some consumers and corporations.3 Supported by buoyant equity markets, tighter spreads have helped many companies avoid default through debt amendments and extensions. Another dynamic has also been of considerable importance. Because interest rates remained near zero for over a decade, homeowners opted for low-rate 30-year mortgages, and speculative-grade companies liberally extended low-coupon debt maturities (sometimes up to ten years). This "terming out" has created structural stability for individual and corporate debtors that was absent during previous economic cycles. These more favorable dynamics almost certainly extended the "long and variable" lags with which monetary policy typically works (through interest rate impacts). In hindsight, it is now clear that if tighter monetary policy negatively impacts the economy and markets at all, it will be much later than usual.
While the economy seemed to be rapidly slowing as recently as August, since then, the narrative has flipped. Pockets of weakness clearly remain, but the significant late-August downgrade to the payrolls data has not yet been confirmed by significant weakness in jobless claims or other hard employment data. Recession seems unlikely any time "soon." Recession typically (on average) follows the 3-month 10-year yield curve's initial inversion after fifteen months; it has now been twenty-five months. Moreover, almost invariably, when the yield curve finally begins to normalize on the heels the first few Fed cuts - and there have now been two cuts totaling 75bps - the economy begins to slow. The normal lag to that slowdown is about six months. Were this time to square with history, it would mean recession sometime in the second quarter of 2025 - but maybe this time is different.
Perhaps most interesting this past year was just how wildly the narrative swung between recession and no landing. The volatility in Fed funds futures throughout 2024 reflected it. For example, 1-month 1-year ATM swaptions volatility doubled in August, but it has steadily bled lower since then. With the policies of the incoming administration being titled towards tax cuts and deregulation, a continued tailwind may finally blow away any lingering risks of recession. The strongest consensus we have observed in years would have us believe so. Are conditions so different this time that a slowdown or recession can be completely avoided? Perhaps.
There may still be a price to pay for this fiscal largesse that even the father of Modern Monetary Theory, Warren Mosler, has acknowledged, namely sticky inflation.4 While the Fed has characterized the path to two percent inflation as bumpy, a closer look at core inflation reveals that inflation has remained stickier than the Fed might want to admit. Supercore services inflation, which excludes housing, has remained at 4.4%; even core CPI has remained above 3% (3.3% as of October). This does not feel like the time to declare victory, especially when considering the bite from a 9.1% price jump in 2022; prices remain high and are not coming down. Five-year breakevens, which had dipped below two percent, are now closing back in on 2.5%. As a proxy for expectations for future inflation, this is the opposite of progress.
High asset prices are also a likely biproduct of this continued fiscal impulse. Home price appreciation has made homes the least affordable since data going back to 1987. This benefits Axonic through our participation in the Freddie SBL (small balance loan) program and our involvement in the residential transitional loan (RTL) market, as would-be homeowners seek alternatives to a home purchase. While the narrative around earnings and employment remains bullish - particularly post-election - few speak about whether prices in various markets fully reflect fundamental expectations. Most public corporate risk-asset markets (i.e., equities, preferreds, bonds, and loans) are overvalued and do not appropriately reflect fundamental performance risk.5 Recently, corporate high yield bond spread (CDX HY) has been around 300bps, implying a forward 1-year default rate of about 3% versus the 4.4% LTM default rate. Importantly, high yield and investment grade corporate spreads remain rich versus equivalently rated structured credit bonds.
| 1 | According to McKinsey & Company: "The Bipartisan Infrastructure Law (BIL), the CHIPS & Science Act, and IRA have partially overlapping priorities and together introduce $2 trillion in new federal spending over the next ten years." |
| 2 | Student loan payment deferrals ended in October 2023, but the Biden administration's new, replacement SAVE program, which is currently held up in court after an injunction in late October, puts repayments on an interest-free pause for six months pending further developments from the 8th Circuit Court of Appeals. |
| 3 | We have noticed a pronounced capital access bifurcation between large and small companies as well as between high-income and low-income consumers (as well as between homeowners and renters). The former have capital access while the latter struggle to find it. |
| 4 | "Seven percent is like drunken sailor level of government spending." 7/8/2024, "Mosler Says US Is Spending Like a 'Drunken Sailor'", Bloomberg News, Arafat Jolaoso-Perry, Joe Weisenthal and Tracy Alloway. |
| 5 | "We estimate the S&P 500 will deliver an annualized nominal total return of 3% during the next 10 years (7th percentile since 1930) and roughly 1% on a real basis"- Goldman Sachs, Kostin 10/18/2024. An S&P 500 valuation of approximately 24x 2024 forward earnings - alongside a negative equity risk premium - seems to matter little to equity market participants, but if history is a guide, as Goldman implicitly suggested, five-year forward equity returns are unfavorable when these extreme valuation conditions exist. |
| Annual Report | October 31, 2024 | 1 |
| Axonic Alternative Income Fund | Shareholder Letter |
October 31, 2024 (Unaudited)
Despite the overall tightening of spreads in 2024, Axonic's funds have been benefitting from structured credit markets whose yields have tightened more slowly and are better compensating investors for risk than corporates. We systematically track and measure risk-adjusted returns of structured credit bonds on a rating's equivalent basis versus corporates.6 Owning hard real estate assets, SASB CMBS, and select front-pay ABS consumer bonds will continue to provide a margin of safety and risk-adjusted return profile available in few other asset classes. In October 2023, as 10-year yields approached five percent, we started becoming comfortable with modestly extending portfolio duration, and we remain so. We continue to run the portfolio without the use of leverage and hold a healthy cash position, which allows us to be nimble in shifting portfolio positioning to take advantage of future dislocations across the structured credit market.
The Axonic Alternative Income Fund ("the Fund") - Class I was up +13.00% for the fiscal year ended October 31, 2024, on a price-per-share performance basis that compares to the Fund's benchmark, the Bloomberg U.S. Aggregate Bond Index, having returned +10.55% for the year to date ended October 31, 2024. The Fund returned positive performance on a relative dollar basis of approximately +$23,377,498.
We remain convinced that this environment is well suited to our investment style and asset class expertise. Housing market dynamics have changed little, so we continue to remain constructive on multifamily workforce housing assets. Housing remains unaffordable and in short supply. Consequently, we believe multifamily rents will continue to be strong. A bifurcated consumer is also providing opportunities for selective investments in consumer ABS as the low-end consumer continues to struggle. Commercial real estate will remain a source of interesting opportunities as asset values continue to reprice. As more vulnerable parts of the capital markets continue to suffer and are lost or forgotten by others, this may allow us to acquire cash-flowing assets at even more compelling valuations.
We continue to believe the Fund will represent an attractive solution for income-oriented investors in a challenging environment for traditional fixed income and equity strategies.
Thank you for your continued support.
Clayton DeGiacinto
Managing Partner, Co-Chief Investment Officer
Axonic Capital LLC
Matthew Weinstein
Partner, Co-Chief Investment Officer
Axonic Capital LLC
An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. To obtain a prospectus containing this and other information, please call (212) 259-0430 or download the file from www.AxonicFunds.com. Please read the prospectus carefully before you invest.
| 6 | Please see Axonic's Spread Tracker - available upon request - that compares structured credit bond spreads to corporates of equivalent ratings. |
| 2 | www.axonicfunds.com |
| Axonic Alternative Income Fund | Portfolio Update |
October 31, 2024 (Unaudited)
Average Annual Total Returns (as of October 31, 2024)
| 1 Month | Quarter | 6 Month | YTD | 1 Year | 3 Year | 5 Year |
Since Inception* |
|
| Axonic Alternative Income Fund - Class I NAV | 0.57% | 2.74% | 5.97% | 10.26% | 13.00% | 6.47% | 4.10% | 4.46% |
| Bloomberg US Aggregate Bond Index(a) | -2.48% | 0.25% | 5.31% | 1.86% | 10.55% | -2.20% | -0.23% | 1.30% |
Past performance does not guarantee future results. Investment returns, and principal value of the Fund will fluctuate so that shares may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted above. For current performance information, please call 1-833-429-6642. Performance information is reported net of the Fund's fees and expenses. Class I gross expenses are 2.83% and net expenses are 2.83% (as reported in the February 28, 2024 Prospectus). The Adviser has contractually agreed to waive its fees and/or reimburse certain expenses (inclusive of organizational and offering costs, but exclusive of any taxes, interest on borrowings, dividends on securities sold short, brokerage commissions, 12b-1 fees, acquired fund fees and expenses, expenses incurred in connection with any merger or reorganization and extraordinary expenses ) to limit the Fund's Total Annual Fund Operating Expenses after Fee Waiver/Expense Reimbursement to 2.00% of the Fund's average daily net assets (the "Expense Limit") through February 28, 2025.
| * | Fund's inception date is December 31, 2018. |
| (a) | The Bloomberg US Aggregate Bond Index is an unmanaged index which represents the U.S. investment-grade fixed-rate bond market (including government and corporate securities, mortgage pass-through securities and asset-backed securities). Investors cannot invest directly in an index or benchmark. |
Excludes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value and total return for shareholder transactions reported to the market may differ from the net asset value for financial reporting purposes.
Performance of $10,000 Initial Investment (as of October 31, 2024)
Performance data quoted represents past performance, which is not a guarantee of future results. Current performance may be lower or higher than the performance quoted. The principal value and investment return of an investment will fluctuate so that your shares, if repurchased, may be worth more or less than their original cost. Total return measures net investment income and capital gain or loss from portfolio investments. All performance shown assumes reinvestment of dividends and capital gains distributions. For the most current month-end performance please call 1-833-429-6642 (833-4Axonic) or visit at www.axonicfunds.com.
The Axonic Alternative Income Fund (the "Fund") is a continuously offered, non-diversified, closed-end management investment company that is operated as an interval fund. The Fund is suitable only for investors who can bear the risks associated with the Fund's limited liquidity and should be viewed as a long-term investment. The Fund's shares have no history of public trading, nor is it intended that our shares will be listed on a national securities exchange at this time, if ever. Investing in the Fund's shares may be speculative and involves a high degree of risk, including the risks associated with leverage. There is also the risk that shareholders may receive little or no return on their investment or that shareholders may lose part or all of their investment.
The graph shown above represents historical performance of a hypothetical investment of $10,000 in the Fund since inception. Past performance does not guarantee future results. All returns reflect reinvested dividends, but do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the repurchase of Fund shares.
| Annual Report | October 31, 2024 | 3 |
| Axonic Alternative Income Fund | Portfolio Update |
October 31, 2024 (Unaudited)
Top Ten Holdings (as a % of Net Assets)*
| GSF 2023-1 Investor, LLC | 13.66% |
| Rivertree Landing Apartments, LLC | 6.37% |
| Multifamily Structured Credit Risk, Series 2023-SN1, Class B | 6.03% |
| MCR Mortgage Trust, Series 2024-TWA, Class HRR | 5.74% |
| 4-10 West 108th Owners LLC | 5.43% |
| FRESB Mortgage Trust, Series 2024-SB114, Class B | 4.54% |
| FREMF Mortgage Trust, Series 2018-KF44, Class C | 3.23% |
| THPT Mortgage Trust, Series 2023-THL, Class F | 3.15% |
| FRESB Mortgage Trust, Series 2022-SB100, Class B | 3.14% |
| FRESB Mortgage Trust, Series 2023-SB106, Class B | 2.79% |
| Top Ten Holdings | 54.13% |
Portfolio Composition (as a % of Net Assets)*
| Commercial Mortgage-Backed Securities | 56.15% |
| Corporate Bonds | 1.25% |
| Investment in Joint Venture | 13.66% |
| Loans | 16.27% |
| Residential Mortgage-Backed Securities | 1.74% |
| Asset Backed Securities | 9.65% |
| Financials | 2.99% |
| Cash, Cash Equivalents, & Other Net Assets | -1.71% |
| 100.00% |
| * | Holdings are subject to change and may not reflect the current or future position of the portfolio. Tables present indicative values only. |
| 4 | www.axonicfunds.com |
| Axonic Alternative Income Fund | Consolidated Schedule of Investments |
October 31, 2024
| Description | Shares | Value | ||||||
| COMMON STOCKS (0.06%) | ||||||||
| United States (0.06%) | ||||||||
| Financials (0.06%) | ||||||||
| Redwood Trust, Inc. REIT | 21,780 | $ | 159,429 | |||||
| TOTAL COMMON STOCKS | ||||||||
| (Cost $246,801) | 159,429 |
| Rate | Shares | Value | ||||||||
| PREFERRED STOCKS (2.93%) | ||||||||||
| United States (2.93%) | ||||||||||
| Financials (2.93%) | ||||||||||
| ACRES Commercial Realty Corp., Series D(a) | 7.88% | 43,074 | 1,000,609 | |||||||
| Granite Point Mortgage Trust, Inc., Series A(a)(b) | 1D US SOFR + 5.83% | 13,105 | 220,557 | |||||||
| TCG Hunstville JV LLC(a) | 11.80% | 6,294,646 | 6,293,387 | |||||||
| TOTAL PREFERRED STOCKS | ||||||||||
| (Cost $7,604,604) | 7,514,553 |
| Rate |
Maturity Date |
Principal Amount |
Value | |||||||||
| ASSET-BACKED SECURITIES (9.65%) | ||||||||||||
| Bermuda (0.39%) | ||||||||||||
| MAPS 2018-1, Ltd., Series 2018-1A, Class C(c) | 6.41% | 05/15/43 | $ | 1,034,234 | $ | 1,003,207 | ||||||
| Cayman Islands (0.43%) | ||||||||||||
| Horizon Aircraft Finance II, Ltd., Series 2019-1, Class C(c) | 6.90% | 07/15/26 | 1,094,517 | 467,140 | ||||||||
| Thunderbolt III Aircraft Lease, Ltd., Series 2019-1, Class B(c) | 4.75% | 11/15/26 | 939,102 | 644,976 | ||||||||
| United States (8.83%) | ||||||||||||
| Castlelake Aircraft Structured Trust, Series 2017-1R, Class C(c) | 6.50% | 08/15/25 | 758,027 | 555,103 | ||||||||
| Castlelake Aircraft Structured Trust, Series 2021-1A, Class B(c) | 6.66% | 07/15/27 | 253,788 | 246,403 | ||||||||
| FAT Brands GFG Royalty I LLC, Series 2021-1A, Class A2(c)(d) | 7.00% | 07/25/51 | 1,337,700 | 1,249,679 | ||||||||
| FAT Brands GFG Royalty I LLC, Series 2022-1A, Class A2(c) | 7.00% | 07/25/51 | 812,663 | 766,666 | ||||||||
| FAT Brands Twin Peaks I LLC, Series 2021-1A, Class A2(c) | 8.00% | 01/25/25 | 3,081,000 | 2,976,862 | ||||||||
| GSF 2023-1, Class D | 7.66% | 12/15/28 | 7,177,575 | 6,180,822 | ||||||||
| ME Funding LLC, Series 2024-1A, Class A2(c)(e) | 8.10% | 04/30/27 | 3,812,948 | 3,759,948 | ||||||||
| Sapphire Aviation Finance II, Ltd., Series 2020-1A, Class C(c) | 6.78% | 03/15/27 | 3,044,876 | 1,563,848 | ||||||||
| Sprite, Ltd., Series 2021-1, Class C(c) | 8.84% | 09/15/26 | 486,065 | 471,386 | ||||||||
| Stonepeak 2021-1 ABS, Series 2021-1A, Class C(c) | 5.93% | 05/15/28 | 2,485,908 | 2,281,815 | ||||||||
| Unison Trust, Series 2023-2, Class A(c) | 6.50% | 11/25/53 | 2,742,596 | 2,616,075 | ||||||||
| TOTAL ASSET-BACKED SECURITIES | ||||||||||||
| (Cost $23,997,709) | 24,783,930 | |||||||||||
| COMMERCIAL MORTGAGE-BACKED SECURITIES (56.15%) | ||||||||||||
| United States (56.15%) | ||||||||||||
| Credit Suisse Commercial Mortgage Trust 2020-FACT E(b)(c) | 10.32% | 10/15/25 | 1,678,000 | 1,558,526 | ||||||||
| BCP Trust, Series 2021-330N, Class C(b)(c) | 1M CME TERM SOFR +1.71% | 06/15/38 | 4,111,000 | 3,378,009 | ||||||||
| FREMF Mortgage Trust, Series 2018-KF44, Class C(b)(c) | 30D US SOFR + 8.61% | 02/25/25 | 8,277,656 | 8,260,273 | ||||||||
| FREMF Mortgage Trust, Series 2022-K748, Class D(c) | 0.00% | 02/25/29 | 2,995,082 | 2,033,062 | ||||||||
| FREMF Mortgage Trust, Series 2022-K748, Class X2B(c)(f) | 0.10% | 02/25/29 | 12,739,389 | 43,314 | ||||||||
| FREMF Mortgage Trust, Series 2022-K748, Class X2A(c)(f) | 0.10% | 01/25/29 | 47,145,551 | 160,295 |
See Notes to Consolidated Financial Statements.
| Annual Report | October 31, 2024 | 5 |
| Axonic Alternative Income Fund | Consolidated Schedule of Investments |
October 31, 2024
| Rate |
Maturity Date |
Principal Amount |
Value | |||||||||
| FREMF Mortgage Trust, Series 2022-KF144, Class CS(b)(c) | 30D US SOFR + 6.00% | 09/25/32 | $ | 4,304,403 | $ | 4,304,403 | ||||||
| FRESB Mortgage Trust, Series 2017-SB28, Class B(b)(c) | 30D US SOFR + 7.93% | 01/25/27 | 1,389,424 | 1,431,106 | ||||||||
| FRESB Mortgage Trust, Series 2017-SB32, Class B(b)(c) | 5.13% | 04/25/27 | 1,914,257 | 1,923,828 | ||||||||
| FRESB Mortgage Trust, Series 2017-SB38, Class B(b)(c) | 4.06% | 08/25/27 | 319,443 | 308,263 | ||||||||
| FRESB Mortgage Trust, Series 2017-SB42, Class B(b)(c) | 5.96% | 10/25/27 | 2,185,186 | 2,010,371 | ||||||||
| FRESB Mortgage Trust, Series 2020-SB74, Class B(b)(c) | 3.16% | 04/25/30 | 1,234,363 | 1,194,247 | ||||||||
| FRESB Mortgage Trust, Series 2020-SB76, Class B(b)(c) | 7.50% | 05/25/30 | 421,425 | 405,621 | ||||||||
| FRESB Mortgage Trust, Series 2020-SB81, Class B(b)(c)(e) | 7.50% | 10/25/30 | 2,439,836 | 2,323,943 | ||||||||
| FRESB Mortgage Trust, Series 2021-SB83, Class X1(b)(f) | 0.87% | 01/25/41 | 9,129,229 | 272,654 | ||||||||
| FRESB Mortgage Trust, Series 2021-SB90, Class B(b) | 7.50% | 07/25/41 | 3,043,939 | 2,801,641 | ||||||||
| FRESB Mortgage Trust, Series 2021-SB93, Class B(b) | 7.50% | 10/25/41 | 4,173,211 | 3,899,031 | ||||||||
| FRESB Mortgage Trust, Series 2022-SB100, Class B(b) | 7.50% | 05/25/42 | 8,748,372 | 8,026,631 | ||||||||
| FRESB Mortgage Trust, Series 2022-SB95, Class B(b)(c) | 7.50% | 12/25/31 | 5,212,320 | 4,821,396 | ||||||||
| FRESB Mortgage Trust, Series 2022-SB98, Class B(b)(c) | 7.50% | 04/25/42 | 6,089,150 | 5,677,524 | ||||||||
| FRESB Mortgage Trust, Series 2023-SB106, Class B(b)(e) | 7.73% | 05/25/33 | 8,025,804 | 7,142,966 | ||||||||
| FRESB Mortgage Trust, Series 2023-SB109, Class B(b) | 7.50% | 07/25/43 | 7,354,730 | 6,443,479 | ||||||||
| FRESB Mortgage Trust, Series 2024-SB114, Class B(b) | 7.50% | 05/25/34 | 13,134,940 | 11,615,227 | ||||||||
| FRESB Multifamily Structured Pass Through Certificates, Series 2021-SB86, Class B(b)(c) | 7.50% | 03/25/41 | 2,820,931 | 2,581,152 | ||||||||
| GAM RE-REMIC Trust, Series 2022-FRR3, Class EK41(c)(e) | 0.00% | 10/27/47 | 2,444,000 | 2,428,114 | ||||||||
| Hudsons Bay Simon JV Trust 2015-HBS, Series 2015-HB10, Class A10(c) | 4.15% | 08/05/25 | 4,677,207 | 4,500,409 | ||||||||
| Hudsons Bay Simon JV Trust 2015-HBS, Series 2015-HB10, Class C10(b)(c) | 5.45% | 08/05/25 | 5,152,596 | 4,767,697 | ||||||||
| JP Morgan Chase Commercial Mortgage Securities Trust, Series 2008-C2, Class AM(b)(e) | 6.83% | 02/15/51 | 3,726,803 | 2,053,841 | ||||||||
| JP Morgan Chase Commercial Mortgage Securities Trust, Series 2022-NLP, Class G(b)(c) | 1M US SOFR + 4.27% | 04/15/27 | 1,386,317 | 1,144,405 | ||||||||
| MCR Mortgage Trust, Series 2024-TWA, Class F(c) | 10.38% | 06/12/27 | 2,600,000 | 2,621,320 | ||||||||
| MCR Mortgage Trust, Series 2024-TWA, Class HRR(c) | 14.74% | 06/12/27 | 14,700,000 | 14,694,120 | ||||||||
| Multifamily Structured Credit Risk, Series 2023-SN1, Class B(b)(c) | 30D US SOFR + 7.00% | 07/25/42 | 15,216,234 | 15,433,826 | ||||||||
| NCMF Trust, Series 2022-MFP, Class G(b)(c)(e) | 1M CME TERM SOFR + 5.13% | 03/15/27 | 2,400,000 | 2,334,720 | ||||||||
| SMR 2022-IND Mortgage Trust, Series 22-IND, Class G(b)(c)(e) | 1M CME TERM SOFR + 7.50% | 02/15/39 | 4,120,547 | 3,567,570 | ||||||||
| THPT Mortgage Trust, Series 2023-THL, Class F(b)(c)(e) | 7.19% | 12/10/26 | 8,630,000 | 8,052,653 | ||||||||
| TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES | ||||||||||||
| (Cost $144,293,786) | 144,215,637 | |||||||||||
| CORPORATE BONDS (1.25%) | ||||||||||||
| United States (1.25%) | ||||||||||||
| GKN Subordinated CTL Pass-Through Trust/Auburn MI(b)(c) | 0.00% | 03/15/30 | 5,399,179 | 3,195,234 | ||||||||
| TOTAL CORPORATE BONDS | ||||||||||||
| (Cost $3,444,843) | 3,195,234 |
See Notes to Consolidated Financial Statements.
| 6 | www.axonicfunds.com |
| Axonic Alternative Income Fund | Consolidated Schedule of Investments |
October 31, 2024
| Rate |
Maturity Date |
Principal Amount |
Value | |||||||||
| INVESTMENT IN JOINT VENTURE (13.66%) | ||||||||||||
| United States (13.66%) | ||||||||||||
| GSF 2023-1 Investor, LLC(j)(k) | $ | 35,086,820 | ||||||||||
| TOTAL INVESTMENT IN JOINT VENTURE | ||||||||||||
| (Cost $35,086,820) | 35,086,820 | |||||||||||
| LOANS (16.27%) | ||||||||||||
| United States (16.27%) | ||||||||||||
| 4-10 West 108th Owners LLC(h)(i) | 1M US SOFR | 11/09/27 | $ | 13,900,000 | 13,891,660 | |||||||
| Portofino Mezz Partners, LLC | 14.00% | 07/01/29 | 7,000,000 | 6,997,900 | ||||||||
| Rivertree Landing Apartments LLC(h)(i) | 30D US SOFR + 3.90% | 09/06/28 | 16,315,000 | 16,311,737 | ||||||||
| Surfrider Montauk | 1M US SOFR + 10.00% | 04/09/27 | 4,611,639 | 4,587,658 | ||||||||
| TOTAL LOANS | ||||||||||||
| (Cost $41,782,776) | 41,788,955 | |||||||||||
| RESIDENTIAL MORTGAGE-BACKED SECURITIES (1.74%) | ||||||||||||
| United States (1.74%) | ||||||||||||
| Countrywide Home Loans Mortgage Pass-Through Trust, Series 2006-21, Class A6(b) | 1M CME TERM SOFR + 0.48% | 02/25/37 | 61,258 | 20,735 | ||||||||
| Lehman Mortgage Trust, Series 2007-5, Class 4A2(b) | 1M CME TERM SOFR + 0.43% | 08/25/36 | 153,745 | 99,763 | ||||||||
| LHOME Mortgage Trust, Series 2022-RTL2, Class M(c)(d) | 8.00% | 04/25/27 | 2,042,000 | 2,038,483 | ||||||||
| LHOME Mortgage Trust, Series 2024-RTL1, Class M(c)(d) | 11.95% | 01/25/29 | 2,250,000 | 2,296,592 | ||||||||
| MASTR Asset Securitization Trust, Series 2006-1, Class 2A1(b) | 1M CME TERM SOFR + 0.57% | 05/25/36 | 106,601 | 19,988 | ||||||||
| TOTAL RESIDENTIAL MORTGAGE-BACKED SECURITIES | ||||||||||||
| (Cost $4,558,392) | 4,475,561 |
| 7-Day | ||||||||||
| Yield | Shares | Value | ||||||||
| SHORT TERM INVESTMENTS - COMMON SHARES (14.95%) | ||||||||||
| Money Market Fund (14.95%) | ||||||||||
| Dreyfus Government Cash Management | 4.75% | 4,691,998 | 4,691,998 | |||||||
| First American Government Obligations Fund | 4.79% | 33,715,119 | 33,715,119 | |||||||
| 38,407,117 | ||||||||||
| TOTAL SHORT TERM INVESTMENTS | ||||||||||
| (Cost $38,407,117) | 38,407,117 | |||||||||
| TOTAL INVESTMENTS (116.66%) | ||||||||||
| (Cost $299,422,848) | $ | 299,627,236 | ||||||||
| Liabilities in Excess of Other Assets (-16.66%) | (42,791,938 | ) | ||||||||
| NET ASSETS (100.00%) | $ | 256,835,298 |
See Notes to Consolidated Financial Statements.
| Annual Report | October 31, 2024 | 7 |
| Axonic Alternative Income Fund | Consolidated Schedule of Investments |
October 31, 2024
| (a) | Perpetual maturity. |
| (b) | Floating or variable rate security. The Reference Rates are described below. Interest rate shown reflects the rate in effect at October 31, 2024. For securities based on a published reference rate and spread, the reference rate and spread are indicated in the description above. Certain variable rate securities are not based on a published reference rate and spread but are determined by the issuer or agent and are based on current market conditions. These securities do not indicate a reference rate and spread in their description above. |
| (c) | Security exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may normally be sold to qualified institutional buyers in transactions exempt from registration. The total value of Rule 144A securities amounts to $128,093,581, which represents 49.87% of net assets as of October 31, 2024. |
| (d) | Step bond. Coupon changes periodically based upon a predetermined schedule. Interest rate disclosed is that which is in effect at October 31, 2024. |
| (e) | On October 31, 2024, securities valued at $31,660,492 were pledged as collateral for reverse repurchase agreements. |
| (f) | Interest only securities. |
| (g) | As a result of the use of significant unobservable inputs to determine fair value, these investments have been classified as Level 3 assets. |
| (h) | On October 31, 2024, securities valued at $30,203,397 were pledged as collateral for mortgage loan warehouse agreements. |
| (i) | The Fund's interest in this loan is held through a wholly-owned LLC of the Fund. See Notes 1 and 2 to the Consolidated Financial Statements. |
| (j) | Affiliated company. See Notes to the Consolidated Financial Statements. |
| (k) | Security considered restricted and illiquid. As of October 31, 2024, the value of this investment was $35,086,820 or 13.66% of the Fund's net assets. |
Investment Abbreviations:
REIT - Real Estate Investment Trust
SOFR - Secured Overnight Financing Rate
Reference Rates:
1D US SOFR - 1 Day US SOFR as of October 31, 2024 was 4.90%
1M US SOFR - 1 Month US SOFR as of October 31, 2024 was 4.85%
30D US SOFR - 30 Day US SOFR as of October 31, 2024 was 4.85%
1M CME Term SOFR - 1 Month CME SOFR as of October 31, 2024 was 4.66%
REVERSE REPURCHASE AGREEMENTS
| Counterparty | Interest Rate | Acquisition Date | Maturity Date | Amount | ||||||
| Bank of America Merrill Lynch | 6.71% | 08/02/2024 | 11/25/2024 | $ | 5,040,000 | |||||
| Bank Of America Merrill Lynch | 6.36% | 09/24/2024 | 12/26/2024 | 1,420,000 | ||||||
| Bank Of America Merrill Lynch | 6.36% | 09/24/2024 | 12/26/2024 | 1,506,000 | ||||||
| Barclays | 6.96% | 08/06/2024 | 11/06/2024 | 4,678,000 | ||||||
| Barclays | 6.34% | 10/02/2024 | 01/03/2025 | 1,480,000 | ||||||
| Barclays | 6.34% | 10/02/2024 | 01/03/2025 | 2,250,000 | ||||||
| Barclays | 6.34% | 10/02/2024 | 01/03/2025 | 1,385,000 | ||||||
| Barclays | 5.69% | 10/03/2024 | 01/06/2025 | 2,898,000 | ||||||
| $ | 20,657,000 |
All agreements can be terminated by either party on demand at value plus accrued interest.
See Notes to Consolidated Financial Statements.
| 8 | www.axonicfunds.com |
| Axonic Alternative Income Fund | Consolidated Schedule of Investments |
October 31, 2024
MORTGAGE LOAN WAREHOUSE
| Counterparty | Interest Rate | Acquisition Date | Maturity Date | Amount | ||||||
| UBS AG | 1M SOFR + 2.65% | 08/30/2023 | 10/01/2025 | $ | 12,236,250 | |||||
| UBS AG | 1M SOFR + 2.65% | 01/05/2024 | 10/01/2025 | 10,842,000 | ||||||
| $ | 23,078,250 |
See Notes to Consolidated Financial Statements.
| Annual Report | October 31, 2024 | 9 |
| Axonic Alternative Income Fund | Consolidated Statement of Assets and Liabilities |
October 31, 2024
| ASSETS: | ||||
| Investments, at fair value (Cost $264,336,028) | $ | 264,540,416 | ||
| Investments in affiliates, at fair value (Cost $35,086,820) | 35,086,820 | |||
| Cash | 8,096 | |||
| Interest receivable | 1,811,501 | |||
| Deferred offering cost | 54,157 | |||
| Prepaid loan commitment fee | 327,953 | |||
| Receivable for fund shares sold | 365,899 | |||
| Prepaid expenses and other assets | 1,805 | |||
| Total Assets | 302,196,647 | |||
| LIABILITIES: | ||||
| Payable for reverse repurchase agreements (Cost $20,657,000) | 20,657,000 | |||
| Payable for mortgage loan warehouse (Cost $23,078,250) | 23,078,250 | |||
| Interest payable on reverse repurchase agreements and mortgage loan warehouse | 284,337 | |||
| Income distribution payable | 982,034 | |||
| Accrued legal and audit fees payable | 63,818 | |||
| Due to Adviser | 200,611 | |||
| Accrued fund accounting and administration fees payable | 53,341 | |||
| Distribution and shareholder service fees payable | 54 | |||
| Accrued Chief Compliance Officer fee payable | 2,916 | |||
| Other payables and accrued expenses | 38,988 | |||
| Total Liabilities | 45,361,349 | |||
| Net Assets | $ | 256,835,298 | ||
| COMPOSITION OF NET ASSETS: | ||||
| Paid-in capital | $ | 259,228,285 | ||
| Total distributable earnings (accumulated deficit) | (2,392,987 | ) | ||
| Net Assets | $ | 256,835,298 | ||
| PRICING OF SHARES: | ||||
| Class A | ||||
| Net Assets | $ | 157,003 | ||
| Shares of beneficial interest outstanding (unlimited number of shares, no par value common share authorized) | 7,772 | |||
| Net Asset Value and redemption price per share | $ | 20.20 | ||
| Class I | ||||
| Net Assets | $ | 256,678,295 | ||
| Shares of beneficial interest outstanding (unlimited number of shares, no par value common share authorized) | 12,626,040 | |||
| Net Asset Value and redemption price per share | $ | 20.33 |
See Notes to Consolidated Financial Statements.
| 10 | www.axonicfunds.com |
| Axonic Alternative Income Fund | Consolidated Statement of Operations |
For the Year Ended October 31, 2024
| INVESTMENT INCOME: | ||||
| Dividends | $ | 1,294,051 | ||
| Interest | 22,126,903 | |||
| Interest from affiliates | 2,365,906 | |||
| Other income | 7,341 | |||
| Total Investment Income | 25,794,201 | |||
| EXPENSES: | ||||
| Advisory fees (Note 4) | 2,416,785 | |||
| Audit and tax fees | 29,675 | |||
| Chief Compliance Officer fee (Note 4) | 45,962 | |||
| Custodian fees | 65,200 | |||
| Distribution fees | ||||
| Class A | 171 | |||
| Fund accounting and administration fees (Note 4) | 281,026 | |||
| Insurance expenses | 5,224 | |||
| Interest on reverse repurchase agreements and mortgage loan warehouse | 4,619,454 | |||
| Legal fees | 494,117 | |||
| Printing expenses | 59,572 | |||
| Registration expenses | 49,792 | |||
| Shareholder service fees | ||||
| Class A | 85 | |||
| Transfer agent fees (Note 4) | 105,970 | |||
| Trustees' fees and expenses (Note 4) | 70,466 | |||
| Total expenses before waiver/reimbursement | 8,243,499 | |||
| Recoupment of previously waived fees (Note 4) | 78,203 | |||
| Net expenses | 8,321,702 | |||
| Net Investment Income | 17,472,499 | |||
| REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS: | ||||
| Net realized gain on investments | 1,083,283 | |||
| Net change in unrealized appreciation on investments | 4,821,716 | |||
| Net Realized and Unrealized Gain on Investments | 5,904,999 | |||
| Net Increase in Net Assets from Operations | $ | 23,377,498 |
See Notes to Consolidated Financial Statements.
| Annual Report | October 31, 2024 | 11 |
| Axonic Alternative Income Fund | Consolidated Statements of Changes in Net Assets |
|
For the Year Ended October 31, 2024 |
For the Year Ended October 31, 2023 |
|||||||
| FROM OPERATIONS: | ||||||||
| Net investment income | $ | 17,472,499 | $ | 9,813,456 | ||||
| Net realized gain/(loss) | 1,083,283 | (2,901,804 | ) | |||||
| Net change in unrealized appreciation | 4,821,716 | 1,033,843 | ||||||
| Net Increase in Net Assets from Operations | 23,377,498 | 7,945,495 | ||||||
| DISTRIBUTIONS TO SHAREHOLDERS: | ||||||||
| From distributable earnings | ||||||||
| Class A | (3,091 | ) | - | |||||
| Class I | (17,446,750 | ) | (10,207,372 | ) | ||||
| From tax return of capital | ||||||||
| Class A | - | - | ||||||
| Class I | - | (940,304 | ) | |||||
| Decrease in Net Assets from Distributions to Shareholders | (17,449,841 | ) | (11,147,676 | ) | ||||
| CAPITAL SHARE TRANSACTIONS: | ||||||||
| Class A | ||||||||
| Proceeds from sale of shares of beneficial interest | 153,510 | - | ||||||
| Distributions reinvested | 3,088 | - | ||||||
| Disbursements for redemption of shares of beneficial interest | (235 | ) | - | |||||
| Class I | ||||||||
| Proceeds from sale of shares of beneficial interest | 106,873,955 | 67,689,315 | ||||||
| Distributions reinvested | 7,745,663 | 4,814,832 | ||||||
| Disbursements for redemption of shares of beneficial interest | (23,876,755 | ) | (9,802,645 | ) | ||||
| Net Increase from Capital Share Transactions | 90,899,226 | 63,421,502 | ||||||
| Net Increase in Net Assets | 96,826,883 | 60,219,321 | ||||||
| NET ASSETS: | ||||||||
| Beginning of period | 160,008,415 | 99,789,094 | ||||||
| End of period | $ | 256,835,298 | $ | 160,008,415 | ||||
| OTHER INFORMATION: | ||||||||
| CAPITAL SHARE TRANSACTIONS: | ||||||||
| Class A | ||||||||
| Beginning shares | - | - | ||||||
| Issued | 7,630 | - | ||||||
| Distributions reinvested | 154 | - | ||||||
| Redeemed | (12 | ) | - | |||||
| Net increase in capital shares | 7,772 | - | ||||||
| Ending shares | 7,772 | - | ||||||
| Class I | ||||||||
| Beginning shares | 8,128,479 | 4,917,274 | ||||||
| Issued | 5,306,343 | 3,428,366 | ||||||
| Distributions reinvested | 384,989 | 244,231 | ||||||
| Redeemed | (1,193,771 | ) | (461,392 | ) | ||||
| Net increase in capital shares | 4,497,561 | 3,211,205 | ||||||
| Ending shares | 12,626,040 | 8,128,479 |
See Notes to Consolidated Financial Statements.
| 12 | www.axonicfunds.com |
| Axonic Alternative Income Fund | Consolidated Statement of Cash Flows |
For the Year Ended October 31, 2024
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||
| Net increase/(decrease) in net assets from operations | $ | 23,377,498 | ||
| Adjustments to reconcile net increase in net assets from operations to net cash used in operating activities: | ||||
| Purchases of investments | (171,364,564 | ) | ||
| Proceeds from disposition of investments and paydowns on investment securities | 78,532,467 | |||
| Net purchases of short-term securities | (18,210,392 | ) | ||
| Amortization of premium and accretion of discount on investments | (3,164,079 | ) | ||
| Net realized (gain)/loss on investments | (1,083,283 | ) | ||
| Net change in unrealized (appreciation)/depreciation on investments | (4,821,716 | ) | ||
| (Increase)/decrease in assets: | ||||
| Deferred offering cost | (9,517 | ) | ||
| Dividend receivable | 19,509 | |||
| Interest receivable | (928,411 | ) | ||
| Prepaid loan commitment fee | 57,125 | |||
| Prepaid expenses and other assets | 331,786 | |||
| Increase/(decrease) in liabilities: | ||||
| Due to adviser | 2,307 | |||
| Distribution fees payable | 54 | |||
| Accrued legal and audit fees payable | 27,344 | |||
| Accrued fund accounting and administration fees payable | 24,605 | |||
| Accrued chief compliance officer fee payable | 834 | |||
| Other payables and accrued expenses | (12,483 | ) | ||
| Net cash used in operating activities | (97,220,916 | ) | ||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||
| Cash payments from reverse repurchase agreements and mortgage loan warehouse | 197,337,000 | |||
| Cash payments for reverse repurchase agreements and mortgage loan warehouse | (175,077,000 | ) | ||
| Interest payable on reverse repurchase agreements and mortgage loan warehouse | 199,067 | |||
| Proceeds from shares sold | 107,242,588 | |||
| Cost of shares redeemed | (23,876,990 | ) | ||
| Cash distributions paid | (9,374,649 | ) | ||
| Net cash from financing activities | 96,450,016 | |||
| NET DECREASE IN CASH FOR THE PERIOD | (770,900 | ) | ||
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | $ | 778,996 | ||
| CASH AND CASH EQUIVALENTS, END OF YEAR | $ | 8,096 | ||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||
| Non-cash financing activities not included herein consist of reinvestment of distributions of: | $ | 7,748,751 | ||
| Cash paid for interest on reverse repurchase agreements and mortgage loan warehouse: | $ | 4,420,387 |
See Notes to Consolidated Financial Statements.
| Annual Report | October 31, 2024 | 13 |
| Axonic Alternative Income Fund | |
| Institutional Class | Consolidated Financial Highlights |
For a Share Outstanding Throughout the Period Presented
|
For the Year Ended October 31, 2024 |
For the Year Ended October 31, 2023 |
For the Year Ended October 31, 2022 |
For the Year Ended October 31, 2021 |
For the Year Ended October 31, 2020 |
||||||||||||||||
| OPERATING PERFORMANCE: | ||||||||||||||||||||
| Net asset value - beginning of period | $ | 19.68 | $ | 20.29 | $ | 22.54 | $ | 21.02 | $ | 25.69 | ||||||||||
| INCOME/(LOSS) FROM INVESTMENT OPERATIONS: | ||||||||||||||||||||
| Net investment income(a) | 1.81 | 1.56 | 1.64 | 2.57 | 0.53 | |||||||||||||||
| Net realized and unrealized gain/(loss) on investments | 0.65 | (0.40 | ) | (1.46 | ) | 0.85 | (3.80 | ) | ||||||||||||
| Total Income/(Loss) from Investment Operations | 2.46 | 1.16 | 0.18 | 3.42 | (3.27 | ) | ||||||||||||||
| DISTRIBUTIONS TO SHAREHOLDERS: | ||||||||||||||||||||
| From net investment income | (1.81 | ) | (1.62 | ) | (2.10 | ) | (1.90 | ) | (0.76 | ) | ||||||||||
| From net realized gains | - | - | (0.18 | ) | - | (0.64 | ) | |||||||||||||
| From tax return of capital | - | (0.15 | ) | (0.15 | ) | - | - | |||||||||||||
| Total Distributions to Shareholders | (1.81 | ) | (1.77 | ) | (2.43 | ) | (1.90 | ) | (1.40 | ) | ||||||||||
| Net asset value - end of period | $ | 20.33 | $ | 19.68 | $ | 20.29 | $ | 22.54 | $ | 21.02 | ||||||||||
| Total Investment Return - Net Asset Value(b) | 13.00 | % | 6.08 | % | 0.74 | % | 16.72 | % | (13.22 | %) | ||||||||||
| RATIOS AND SUPPLEMENTAL DATA: | ||||||||||||||||||||
| Net assets end of period (000s) | $ | 256,678 | $ | 160,008 | $ | 99,789 | $ | 33,456 | $ | 12,869 | ||||||||||
| Including Interest Expense | ||||||||||||||||||||
| Ratio of expenses to average net assets excluding reimbursement and recoupment of expenses(c) | 4.26 | % | 2.45 | % | 2.22 | % | 2.54 | % | N/A | |||||||||||
| Ratio of expenses to average net assets including reimbursement and recoupment of expenses(c) | 4.30 | % | 2.76 | % | 2.49 | % | 2.35 | % | N/A | |||||||||||
| Excluding Interest Expense | ||||||||||||||||||||
| Ratio of expenses to average net assets excluding reimbursement and recoupment of expenses(c) | 1.96 | % | 1.72 | % | 1.73 | % | 2.19 | % | 12.00 | % | ||||||||||
| Ratio of expenses to average net assets including reimbursement and recoupment of expenses(c) | 2.00 | % | 2.03 | % | 2.00 | % | 2.00 | % | 2.00 | % | ||||||||||
| Ratio of net investment income to average net assets(c) | 9.06 | % | 7.89 | % | 7.70 | % | 11.51 | % | 2.55 | % | ||||||||||
| Portfolio turnover rate | 35 | % | 39 | % | 50 | % | 41 | % | 56 | % | ||||||||||
| BORROWINGS AT END OF PERIOD | ||||||||||||||||||||
| Aggregate Amount Outstanding (000s) | $ | 43,735 | $ | 21,475 | $ | 14,927 | $ | 8,607 | N/A | |||||||||||
| Asset Coverage Per $1,000 (000s)(d) | $ | 6,865 | $ | 8,451 | $ | 7,685 | $ | 4,887 | N/A |
| (a) | Calculated using average shares method. |
| (b) | Total returns would have been lower had certain expenses not been reimbursed during the period. Total returns would have been higher had certain expenses not been recouped during the period. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Returns shown exclude applicable sales charges. |
| (c) | Expenses and net investment income/(loss) amounts used to calculate the ratios above include amounts allocated to investors. An individual investor's results may vary based on a variety of factors and the timing of capital transactions. |
| (d) | The asset coverage ratio is calculated as the Fund's total assets, less prepaid expenses and other asset amounts, divided by the indebtedness of the Fund. |
See Notes to Consolidated Financial Statements.
| 14 | www.axonicfunds.com |
| Axonic Alternative Income Fund | |
| Class A | Consolidated Financial Highlights |
For a Share Outstanding Throughout the Period Presented
|
For the Period November 1, 2024 (Commencement of Operations) to October 31, 2024 |
||||
| OPERATING PERFORMANCE: | ||||
| Net asset value - beginning of period | $ | 19.71 | ||
| INCOME/(LOSS) FROM INVESTMENT OPERATIONS: | ||||
| Net investment income(a) | 1.57 | |||
| Net realized and unrealized gain/(loss) on investments | 0.71 | |||
| Total Income from Investment Operations | 2.28 | |||
| DISTRIBUTIONS TO SHAREHOLDERS: | ||||
| From net investment income | (1.79 | ) | ||
| Total Distributions to Shareholders | (1.79 | ) | ||
| Net asset value - end of period | $ | 20.20 | ||
| Total Investment Return - Net Asset Value(b) | 12.01 | %(c) | ||
| RATIOS AND SUPPLEMENTAL DATA: | ||||
| Net assets end of period (000s) | $ | 157 | ||
| Including Interest Expense | ||||
| Ratio of expenses to average net assets excluding reimbursement and recoupment of expenses(d) | 5.05 | % | ||
| Ratio of expenses to average net assets including reimbursement and recoupment of expenses(d) | 5.05 | % | ||
| Excluding Interest Expense | ||||
| Ratio of expenses to average net assets excluding reimbursement and recoupment of expenses(d) | 2.80 | %(e) | ||
| Ratio of expenses to average net assets including reimbursement and recoupment of expenses(d) | 2.80 | %(e) | ||
| Ratio of net investment income to average net assets(d) | 7.81 | %(e) | ||
| Portfolio turnover rate | 35 | %(c) | ||
| BORROWINGS AT END OF PERIOD | ||||
| Aggregate Amount Outstanding (000s) | 43,735 | |||
| Asset Coverage Per $1,000 (000s)(f) | 6,865 |
| (a) | Calculated using average shares method. |
| (b) | Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Returns shown exclude applicable sales charges. |
| (c) | Not annualized. |
| (d) | Expenses and net investment income/(loss) amounts used to calculate the ratios above include amounts allocated to investors. An individual investor's results may vary based on a variety of factors and the timing of capital transactions. |
| (e) | Annualized. |
| (f) | The asset coverage ratio is calculated as the Fund's total assets, less prepaid expenses and other asset amounts, divided by the indebtedness of the Fund. |
See Notes to Consolidated Financial Statements.
| Annual Report | October 31, 2024 | 15 |
| Axonic Alternative Income Fund | Notes to Consolidated Financial Statements |
October 31, 2024
1. ORGANIZATION
Axonic Alternative Income Fund (the "Fund") is registered under the Investment Company Act of 1940, as amended ("1940 Act"), as a non-diversified, closed-end management investment company. The Fund was organized as a Delaware statutory trust on September 26, 2018 pursuant to a Declaration of Trust governed by the laws of the State of Delaware. The Fund engages in a continuous offering of shares and operates as an interval fund and makes quarterly offers to repurchase its shares at their net asset value (the "NAV") in accordance with Rule 23c-3 under the 1940 Act. Axonic Capital LLC (the "Adviser") acts as the Fund's investment adviser. The Adviser is a registered investment adviser and is responsible for making the investment decisions for the Fund's portfolio. The Fund's investment objective is to seek total return. The Fund's portfolio will be deemed to be non-diversified under the 1940 Act, meaning it may invest a greater percentage of its assets in a single or limited number of issuers than a diversified fund. Under normal circumstances, the Fund will concentrate its investments (i.e., invest 25% or more of its total assets (measured at the time of purchase)) in mortgage-related assets issued by government agencies or other governmental entities or by private originators or issuers.
The Fund currently offers Class A and Class I shares. Class I shares commenced operations on December 31, 2018 and Class A shares commenced operations on November 1, 2023. Class A shares are offered subject to a maximum sales charge of 2.50%. Class I shares are offered at NAV per share and are not subject to sales charges. The Fund may offer additional classes of shares in the future. The Fund has received exemptive relief from the Securities and Exchange Commission ("SEC") that permits the Fund to issue multiple classes of shares.
The Fund's assets may be invested in two wholly-owned and controlled subsidiaries of the Fund (collectively, the "Subsidiaries"), each of which has the same investment objective as the Fund. Both of the Subsidiaries, AAIDX Seller (U) LLC and GSF 23 Quad 2 LLC are Delaware limited liabilities companies. To the extent permitted by the 1940 Act, the Fund may make investments through the Subsidiaries, which are pass-through entities.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the Fund in preparation of its consolidated financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("GAAP"). The Fund is considered an investment company for financial reporting purposes under GAAP. The Fund follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board ("FASB") Accounting Standard Codification ("ASC") Topic 946 "Financial Services - Investment Companies". The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses for the period. Actual results could differ from those estimates.
Consolidation of Subsidiary - The consolidated financial statements include the financial position and the results of operations of the Fund and its Subsidiary. As of October 31, 2024, the total value of investments held by the Subsidiary is $16,311,737, or approximately 6.37% of the Fund's net assets.
All intercompany accounts and transactions have been eliminated in these consolidated financial statements.
Securities Valuation - The Fund values its investments at fair value. The Fund's Board of Trustees (the "Board") has approved pricing policies and procedures and fair valuation policies and procedures pursuant to which the Fund will value its investments. The Adviser has appointed an independent Administrator of the Fund, pursuant to the administration agreement, under which the Administrator independently calculates the daily NAV per share of the Fund. In doing so, the Administrator, on a daily basis, in compliance with the policies and procedures described above, independently values the investment positions within the Fund's portfolio. The Administrator, at its discretion, may notify the Fund or the Board of any valuation conflicts and/or non-compliance with the policies and procedures. The Administrator and the Adviser include in quarterly written reports to the Board, confirmation that the policies and procedures provide fair and accurate prices. Securities listed on an exchange, including common stocks, are valued at the last reported sale price at the close of the regular trading session of the exchange on the business day the value is being determined. Investments in shares of funds, including money market funds, that are not traded on an exchange, are valued at the end of day NAV per share of such fund.
Securities for which market prices are not "readily available" are valued in good faith by the Fund's Adviser as "valuation designee" under the oversight of the Fund's Board. The Adviser has adopted written policies and procedures for valuing securities and other assets in circumstances where market quotes are not readily available. In the event that market quotes are not readily available, and the security or asset cannot be valued pursuant to one of the valuation methods, the value of the security or asset will be determined in good faith by the Adviser pursuant to its policies and procedures. On a quarterly basis, the Adviser's fair valuation determinations will be reviewed by the Fund's Board. The Advisor may, in turn and subject to its oversight, delegate pricing of securities for which market prices are readily available to the Fund's administrator. All fair valuation determinations shall be made by the Fair Value Committee (the "Committee"), in accordance with policies and procedures established by the Adviser. Some of the more common reasons that may necessitate that a security be valued using Fair Value Procedures include: the security's trading has been halted or suspended; the security has been de-listed from a national exchange; the security's primary trading market is temporarily closed at a time when under normal conditions it would be open; the security has not been traded for an extended period of time; the security's primary pricing source is not able or willing to provide a price; a significant event with respect to a security or securities has occurred after the close of the market or exchange on which the security or securities principally trades and before the time the Fund calculates net asset value; or trading of the security is subject to local government-imposed restrictions. When a security is valued in accordance with the Fair Value Procedures, the Committee will determine the value after taking into consideration relevant information reasonably available to the Committee.
| 16 | www.axonicfunds.com |
| Axonic Alternative Income Fund | Notes to Consolidated Financial Statements |
October 31, 2024
Structured credit and other similar debt securities including, but not limited to, asset-backed securities, collateralized debt obligations, collateralized loan obligations, collateralized mortgage obligations, mortgage-backed securities, commercial mortgage-backed security, and other securitized investments backed by certain debt or other receivables (collectively, "Structured Credit Securities"), are valued on the basis of valuations provided by independent pricing services and/or dealers in those instruments recommended by the Adviser and approved by the Board. In determining fair value, pricing services and dealers will generally use information with respect to transactions in the securities being valued, quotations from other dealers, market transactions in comparable securities, analyses and evaluations of various relationships between securities, and yield to maturity information. The Adviser will, based on its reasonable judgment, select the pricing services or dealer quotations that most accurately reflect the fair market value of the Structured Credit Security while taking into account the information utilized by the pricing services or dealers to formulate the quotation in addition to any other relevant factors.
When price quotations for certain securities are not readily available, or if the available quotations are not believed to be reflective of market value by the Adviser, those securities will be valued at "fair value" as determined in good faith by the Adviser's Valuation Committee using the fair valuation policies and procedures adopted by, and under the supervision of, the Board. There can be no assurance that the Fund could purchase or sell a portfolio security at the price used to calculate the Fund's NAV.
The fair valuation policies and procedures may be used to value a substantial portion of the assets of the Fund. The Fund may use the fair value of a security to calculate its NAV when, for example, (1) a portfolio security is not traded in a public market or the principal market in which the security trades is closed, (2) trading in a portfolio security is suspended and has not resumed prior to the normal market close, (3) a portfolio security is not traded in significant volume for a substantial period, or (4) the Adviser determines that the quotation or price for a portfolio security provided by an independent pricing service and broker-dealer is inaccurate.
The "fair value" of securities may be difficult to determine and thus judgment plays a greater role in the valuation process. The fair valuation methodology may include or consider the following guidelines, as appropriate: (1) evaluation of all relevant factors, including but not limited to, pricing history, current market level and supply and demand of the respective security; (2) comparison to the values and current pricing of securities that have comparable characteristics; (3) knowledge of historical market information with respect to the security; and (4) other factors relevant to the security which would include, but not be limited to, duration, yield, fundamental analytical data, the Treasury yield curve and credit quality.
Fair Value Measurements - A three-tier hierarchy has been established to classify fair value measurements for disclosure purposes. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability that are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability that are developed based on the best information available. In accordance with the authoritative guidance on fair value measurements and disclosure under GAAP, the Fund discloses the fair value of its investments in a hierarchy that prioritizes the inputs to valuation techniques used to measure the fair value.
Various inputs are used in determining the value of the Fund's investments as of the reporting period end. These inputs are categorized in the following hierarchy under applicable financial accounting standards:
| Level 1 - | Unadjusted quoted prices in active markets for identical, unrestricted assets or liabilities that the Fund has the ability to access at the measurement date; |
| Level 2 - | Quoted prices which are not active, quoted prices for similar assets or liabilities in active markets or inputs other than quoted prices that are observable (either directly or indirectly) for substantially the full term of the asset or liability at the measurement date; and |
| Level 3 - | Significant unobservable prices or inputs (including the Fund's own assumptions in determining the fair value of investments) where there is little or no market activity for the asset or liability at the measurement date. |
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
| Annual Report | October 31, 2024 | 17 |
| Axonic Alternative Income Fund | Notes to Consolidated Financial Statements |
October 31, 2024
An investment level within the fair value hierarchy is based on the lowest level input, individually or in the aggregate, that is significant to fair value measurement. To the extent practicable, the Adviser generally endeavors to maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that the most observable inputs are to be used when available.
The inputs or methodologies used for valuing securities are not necessarily an indication of the risk or liquidity associated with investing in those securities. The following is a summary of the inputs used in valuing the Fund's investments as of October 31, 2024:
| Investments in Securities at Value(a)(b) |
Level 1 - Quoted Prices |
Level 2 - Other Significant Observable Inputs |
Level 3 - Significant Unobservable Inputs |
Total | ||||||||||||
| Common Stocks | $ | 159,429 | $ | - | $ | - | $ | 159,429 | ||||||||
| Preferred Stocks | 1,221,166 | 6,293,387 | - | 7,514,553 | ||||||||||||
| Asset-Backed Securities | - | 24,783,930 | - | 24,783,930 | ||||||||||||
| Commercial Mortgage-Backed Securities | - | 144,215,637 | - | 144,215,637 | ||||||||||||
| Corporate Bonds | - | 3,195,234 | - | 3,195,234 | ||||||||||||
| Investment In Joint Venture | - | - | 35,086,820 | 35,086,820 | ||||||||||||
| Loans | - | 41,788,955 | - | 41,788,955 | ||||||||||||
| Residential Mortgage-Backed Securities | - | 4,475,561 | - | 4,475,561 | ||||||||||||
| Short Term Investments | 38,407,117 | - | - | 38,407,117 | ||||||||||||
| Total | $ | 39,787,712 | $ | 224,752,704 | $ | 35,086,820 | $ | 299,627,236 |
| (a) | For detailed descriptions of industries, see the accompanying Schedule of Investments. |
| (b) | For liabilities arising from reverse repurchase agreements, the carrying amount approximates fair value due to the relatively short-term maturity of these financial instruments. |
The following table discloses the purchase of Level 3 portfolio investments as well as the value of transfers into or out of Level 3 for the year ended October 31, 2024 of the Fund's Level 3 portfolio investments:
| Investment in Joint Venture | Total | |||||||
| Balance as of October 31, 2023 | $ | - | $ | - | ||||
| Accrued discount/ premium | - | - | ||||||
| Return of Capital | - | - | ||||||
| Realized Gain/(Loss) | - | - | ||||||
| Change in Unrealized Appreciation/(Depreciation) | - | - | ||||||
| Purchases | 35,086,820 | 35,086,820 | ||||||
| Sales Proceeds | - | - | ||||||
| Transfer into Level 3 | - | - | ||||||
| Transfer out of Level 3 | - | - | ||||||
| Balance as of October 31, 2024 | $ | 35,086,820 | $ | 35,086,820 | ||||
| Net change in unrealized appreciation/(depreciation) | ||||||||
| included in the Statements of Operations attributable | ||||||||
| to Level 3 investments held a October 31, 2024 | $ | - | $ | - |
| 18 | www.axonicfunds.com |
| Axonic Alternative Income Fund | Notes to Consolidated Financial Statements |
October 31, 2024
The table below provides additional information about Level 3 Fair Value Measurements as of October 31, 2024:
Quantitative Information about Level 3 Fair Value Measurements
| Asset Class | Fair Value | Valuation Technique | Unobservable Inputs | Value/Range | ||||||||
| Investment in Joint Venture | $ | 35,086,820 | Discounted cash flow / income approach | Duration | 2.11 - 3.91 | |||||||
| Weighted average life | 2.17 - 5.04 | |||||||||||
| Yield | 3.5 - 14 |
Securities Transactions and Investment Income - Investment security transactions are accounted for on a trade date basis. Cost is determined and gains and losses are based upon the specific identification method for both financial statement and federal income tax purposes. Dividend income is recorded on the ex-dividend date and interest income is recorded on the accrual basis. Dividend income from REITs is recognized on the ex-dividend date. It is common for distributions from REITs to exceed taxable earnings and profits, resulting in the excess portion of such dividends being designated as a return of capital. The calendar year-end amounts of ordinary income, capital gains, and return of capital included in distributions received from the Fund's investment in REITs are reported to the Fund after the end of the calendar year; accordingly, the Fund estimates these amounts for accounting purposes until the characterization of REIT distributions is reported to the Fund after the end of the calendar year. Estimates are based on the most recent REIT distribution information available.
Premium and Discount Amortization/Paydown Gains and Losses - All premiums and discounts on fixed-income securities are amortized/accreted over the estimated lives of such securities for financial statement purposes using the effective interest method. Gains and losses realized on principal payments of mortgage-backed securities (paydown gains and losses) are classified as part of interest income.
Concentration of Credit Risk - The Fund places its cash with two banking institutions, which are insured by Federal Deposit Insurance Corporation ("FDIC"). The FDIC limit is $250,000. At various times throughout the year, the amount on deposit may exceed the FDIC limit and subject the Fund to a credit risk. The Fund does not believe that such deposits are subject to any unusual risk associated with investment activities.
Federal and Other Taxes - No provision for income taxes is included in the accompanying consolidated financial statements, as the Fund intends to distribute to shareholders all taxable investment income and realized gains and otherwise comply with Subchapter M of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies.
The Fund evaluates tax positions taken (or expected to be taken) in the course of preparing the Fund's tax provisions to determine whether these positions meet a "more-likely-than-not" standard that, based on the technical merits, have a more than fifty percent likelihood of being sustained by a taxing authority upon examination. A tax position that meets the "more-likely-than-not" recognition threshold is measured to determine the amount of benefit to recognize in the financial statements.
As of and for the year ended October 31, 2024, the Fund did not have a liability for any unrecognized tax benefits. The Fund recognizes interest and penalties, if any, related to tax liabilities as income tax expense in the Consolidated Statement of Operations. The Fund files U.S. federal, state and local tax returns as required. The Fund's tax returns are subject to examination by the relevant tax authorities until expiration of the applicable statute of limitations which is generally three years after the filing of the tax return for federal purposes and four years for most state returns. Tax returns for all open tax years since inception have incorporated no uncertain tax positions that require a provision for income taxes.
Distributions to Shareholders - Distributions from the Fund's net investment income were accrued daily and paid quarterly through February 28, 2021. Effective March 1, 2021, distributions are accrued daily and paid monthly. However, there can be no assurances that the Fund will achieve any level of distribution to its Shareholders. The Fund intends to make sufficient distributions of its ordinary taxable income and capital gain net income prior to the end of each calendar year to avoid liability for the excise tax. The character of income and gains to be distributed is determined in accordance with income tax regulations, which may differ from GAAP.
Indemnification - The Fund indemnifies its officers and trustees for certain liabilities that may arise from the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of representations and warranties which provide general indemnities. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. However, the Fund expects the risk of loss due to these warranties and indemnities to be remote.
| Annual Report | October 31, 2024 | 19 |
| Axonic Alternative Income Fund | Notes to Consolidated Financial Statements |
October 31, 2024
3. REVERSE REPURCHASE AGREEMENTS & MORTGAGE LOAN WAREHOUSE
The Fund may engage in reverse repurchase agreements. Reverse repurchase agreements are agreements that involve the sale of securities held by the Fund to financial institutions such as banks and broker-dealers, with an agreement that the Fund will repurchase the securities at an agreed upon price and date. During the reverse repurchase agreement period, the Fund continues to receive interest and principal payments on the securities sold. The Fund may employ reverse repurchase agreements (i) for temporary emergency purposes or to meet repurchase requests so as to avoid liquidating other portfolio securities during unfavorable market conditions; (ii) to cover short-term cash requirements resulting from the timing of trade settlements; or (iii) to take advantage of market situations where the interest income to be earned from the investment of the proceeds of the transaction is greater than the interest expense of the transaction.
Reverse repurchase agreements involve the risk that the market value of securities to be purchased by the Fund may decline below the price at which the Fund is obligated to repurchase the securities, or that the other party may default on its obligation, so that the Fund is delayed or prevented from completing the transaction. At the time the Fund enters into a reverse repurchase agreement, it will segregate, and maintain, liquid assets having a dollar value equal to the repurchase price. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund's use of the proceeds from the sale of the securities may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce the Fund's obligations to repurchase the securities. Reverse repurchase agreements are considered borrowings by the Fund under the 1940 Act.
Cash received in exchange for securities delivered plus accrued interest payments to be made by the Fund to counterparties are reflected as a liability on the Consolidated Statement of Assets and Liabilities. Interest payments made by the Fund to counterparties are recorded as a component of interest expense on the Consolidated Statement of Operations. In periods of increased demand for the security, the Fund may receive a fee for use of the security by the counterparty, which may result in interest income to the Fund. The Fund will segregate assets determined to be liquid to cover its obligations under reverse repurchase agreements. The segregated assets are found on the Fund's Consolidated Schedule of Investments as full or partially pledged securities. The total amount of securities pledged at October 31, 2024, was $31,660,492. As all agreements can be terminated by either party on demand, face value approximates fair value at October 31, 2024. This fair value is based on Level 2 inputs under the three-tier fair valuation hierarchy described above. For the year ended October 31, 2024, the average amount of reverse repurchase agreements outstanding was $35,826,917, at a weighted average interest rate of 7.21%.
The following table indicates the total amount of reverse repurchase agreements, reconciled to gross liability as October 31, 2024:
Remaining contractual maturity of lending agreement
|
Overnight & Continuous |
Up to 30 days | 30-90 days |
Greater than 90 days |
Total | ||||||||||||||||
| Asset-Backed Securities | $ | - | $ | - | $ | 3,759,948 | $ | - | $ | 3,759,948 | ||||||||||
| Commercial Mortgage-Backed Securities | - | 15,195,619 | 12,708,188 | - | 27,903,807 | |||||||||||||||
| Gross Amount of unrecognized liabilities for reverse repurchase agreements | $ | - | $ | 15,195,619 | $ | 16,468,136 | $ | - | $ | 31,663,755 |
Offsetting Arrangements - Reverse repurchase agreements are executed under standardized netting agreements. A netting arrangement creates an enforceable right of set-off that becomes effective, and affects the realization of settlement on individual assets, liabilities and collateral amounts, only following a specified event of default or early termination. Default events may include the failure to make payments or deliver securities timely, material adverse changes in financial condition or insolvency, the breach of minimum regulatory capital requirements, or loss of license, charter or other legal authorization necessary to perform under the contract. These agreements mitigate counterparty credit risk by providing for a single net settlement with a counterparty of all financial transactions covered by the agreement in an event of default as defined under such agreement.
| 20 | www.axonicfunds.com |
| Axonic Alternative Income Fund | Notes to Consolidated Financial Statements |
October 31, 2024
Offsetting of Reverse Repurchase Agreements
|
Gross Amounts Not Offset in the Statements of Assets and Liabilities |
||||||||||||||||||||||||
|
Gross Amounts of Recognized Liabilities |
Gross Amounts Offset in the Statements of Assets and Liabilities |
Net Amounts Presented in the Statements of Assets and Liabilities |
Financial Instruments Available for Offset(a) |
Cash Collateral Pledged(a) |
Net Amount Payable |
|||||||||||||||||||
| Axonic Alternative Income Fund | ||||||||||||||||||||||||
| Reverse repurchase agreements | $ | (20,657,000 | ) | $ | - | $ | (20,657,000 | ) | $ | 20,657,000 | $ | - | $ | - | ||||||||||
| Total | $ | (20,657,000 | ) | $ | - | $ | (20,657,000 | ) | $ | 20,657,000 | $ | - | $ | - |
| (a) | These amounts are limited to the derivatives asset/liability balance and, accordingly, do not include excess collateral received/pledged. |
On August 28, 2023, the Fund, as Guarantor, and the Subsidiary, as Seller, entered into a commercial real estate debt financing facility (the "Warehouse") to finance floating rate senior commercial mortgage loans secured by first mortgage liens with UBS AG. The maximum amount of the Warehouse is $100,000,000 and the termination date is three years from the closing date, renewable annually in advance. Interest is payable in arrears and calculated as the sum of 30-day term SOFR plus an agreed upon rate based on the applicable property type and cash flow classification. The total amount of borrowings at October 31, 2024 was $23,078,250 at a weighted average rate of 9.39%.
4. ADVISORY FEES AND OTHER TRANSACTIONS WITH SERVICE PROVIDERS
Advisory Fees - Pursuant to the investment advisory agreement by and between the Fund and the Adviser (the "Investment Advisory Agreement"), and in consideration of the advisory services provided by the Adviser to the Fund, the Adviser is entitled to a management fee equal to 1.25% of the Fund's average daily net assets. For the year ended October 31, 2024, the Fund incurred $2,416,785 in Advisory Fees.
The Adviser has contractually agreed to waive its fees and/or reimburse certain expenses (inclusive of organizational and offering costs, but exclusive of any taxes, interest on borrowings, dividends on securities sold short, brokerage commissions, 12b-1 fees, acquired fund fees and expenses, expenses incurred in connection with any merger or reorganization and extraordinary expenses) to limit the Fund's expenses after Fee Waiver/Expense Reimbursement to 2.00% of the Fund's average daily net assets (the "Expense Limit") through February 28, 2025. The Expense Limit excludes certain expenses and, consequently, the Fund's expenses after Fee Waiver/Expense Reimbursement may be higher than the Expense Limit. The contractual waiver and expense reimbursement may be changed or eliminated at any time by the Board of Trustees, on behalf of the Fund, upon 60 days' written notice to the Adviser. The contractual fee waiver and expense reimbursement may not be terminated by the Adviser without the consent of the Board. The Adviser may recoup from the Fund any waived amount or reimbursed expenses pursuant to this agreement if such recoupment does not cause the Fund to exceed the current Expense Limit or the Expense Limit in place at the time of the waiver or reimbursement (whichever is lower) and the recoupment is made within three years after the end of the month in which the Adviser incurred the expense. During the year ended October 31, 2024, the Fund repaid the Adviser previously waived fees and expenses of $78,203. As of October 31, 2024, the Adviser does not have any amounts available for recoupment.
Chief Compliance Officer ("CCO")/Compliance Services - The CCO is an affiliate of the Fund. For the year ended October 31, 2024, the total related amounts paid by the Fund for CCO fees are reflected in Chief Compliance Officer fees on the Fund's Consolidated Statement of Operations.
Fund Accounting and Administration Fees and Expenses - ALPS Fund Services, Inc. ("ALPS") serves as the Fund's administrator and accounting agent (the "Administrator") and receives customary fees from the Fund for such services.
Transfer Agent - DST Systems Inc., an affiliate of ALPS, serves as transfer, dividend paying and shareholder servicing agent for the Fund ("Transfer Agent").
Distributor - The Fund has entered into a distribution agreement with ALPS Distributors, Inc. (the "Distributor") to provide distribution services to the Fund. There are no fees paid to the Distributor pursuant to the distribution agreement.
The Distributor acts as the Fund's principal underwriter in a continuous public offering of the Fund's shares. The Distributor is an affiliate of ALPS. During the year ended October 31, 2024, no fees were retained by the Distributor.
| Annual Report | October 31, 2024 | 21 |
| Axonic Alternative Income Fund | Notes to Consolidated Financial Statements |
October 31, 2024
Trustees - Officers of the Trust and the Trustees who are 'interested persons' of the Trust or the Adviser receive no salary from the Trust. The Independent Trustees also serve as independent trustees on the Board of Trustees of Axonic Funds, an open-end investment company for which Axonic Capital LLC also serves as the investment adviser. For their service on the Board and the Board of Trustees of Axonic Funds, the Independent Trustees receive the following fees, which are split between the Fund and the Axonic Strategic Income Fund pro rata based on assets under management: $55,000 annual retainer for each Independent Trustee, $10,000 annually for each of the Valuation Committee Chair, Audit Committee Chair and Nominating and Governance Committee Chair, $5,000 for each quarterly meeting, and $1,000 for each special meeting. The Fund reimburses each Trustee and officer of the Trust for his or her travel and other expenses relating to attendance at Board or committee meetings.
5. INVESTMENT TRANSACTIONS
The cost of purchases and proceeds from the sale of securities, other than short-term securities, for the year ended October 31, 2024, amounted to $171,364,564 and $78,791,924, respectively.
6. TAX BASIS INFORMATION
Distributions are determined in accordance with federal income tax regulations, which differ from GAAP, and, therefore, may differ significantly in amount or character from net investment income and realized gains for financial reporting purposes. Financial reporting records are adjusted for permanent book/tax differences to reflect tax character but are not adjusted for temporary differences.
For the year ended October 31, 2024, there were permanent differences that resulted in adjustments to accumulated deficit and additional paid-in capital. These differences are primarily attributed to return of capital distributions received from underlying securities.
| Paid-in capital | Total distributable earnings/(accumulated deficit) |
| $(42,245) | $42,245 |
The tax character of distributions paid for the year ended October 31, 2024, was as follows:
| 2024 | ||||
| Distributions Paid From: | ||||
| Ordinary Income | $ | 17,449,841 | ||
| Return of Capital | - | |||
| Total | $ | 17,449,841 |
The tax character of distributions paid for the year ended October 31, 2023, was as follows:
| 2023 | ||||
| Distributions Paid From: | ||||
| Ordinary Income | $ | 10,207,372 | ||
| Return of Capital | 940,304 | |||
| Total | $ | 11,147,676 |
As of October 31, 2024, the components of distributable earnings (accumulated deficit) on a tax basis were as follows:
| Accumulated net investment income | $ | - | ||
| Accumulated net realized loss | (2,308,679 | ) | ||
| Net unrealized appreciation | 897,726 | |||
| Dividends payable | (982,034 | ) | ||
| Total | $ | (2,392,987 | ) |
| 22 | www.axonicfunds.com |
| Axonic Alternative Income Fund | Notes to Consolidated Financial Statements |
October 31, 2024
Under current law, capital losses maintain their character as short-term or long-term and are carried forward to the next year without expiration. As of the current fiscal year end, the following amounts are available as carry forwards to the next tax year:
| Short Term | Long Term |
| $- | $2,308,679 |
Capital loss carryovers used during the year ended October 31, 2024 were $781,289.
As of October 31, 2024, net unrealized appreciation/(depreciation) of investments based on the federal tax cost were as follows:
| Cost of investments for income tax purposes | $ | 298,729,510 | ||
| Gross appreciation (excess of value over tax cost) | $ | 4,720,492 | ||
| Gross depreciation (excess of tax cost over value) | (3,822,766 | ) | ||
| Net unrealized appreciation | $ | 897,726 |
The difference between book and tax basis cost of investments and net unrealized appreciation (depreciation) are primarily attributable to wash sales and other tax timing differences from Partnerships.
7. REPURCHASE OFFERS
Pursuant to Rule 23c-3 under the 1940 Act, the Fund offers shareholders on a quarterly basis the option of redeeming shares, at NAV, of no less than 5% and no more than 25% of its issued and outstanding shares as of the close of regular business hours on the New York Stock Exchange on the Repurchase Pricing Date. If shareholders tender for repurchase more than the Repurchase Offer Amount for a given repurchase offer, the Fund may, but is not required to, repurchase an additional amount of shares not to exceed 2.00% of the outstanding shares on the Repurchase Request Deadline. If the Fund determines not to repurchase more than the Repurchase Offer Amount, or if shareholders tender shares in an amount exceeding the Repurchase Offer Amount plus 2.00% of the outstanding shares on the Repurchase Request Deadline, the Fund will repurchase shares on a pro rata basis. However, the Fund may accept all shares tendered for repurchase by shareholders who own less than one hundred shares and who tender all of their shares, before prorating other amounts tendered. There can be no assurance that the Fund will be able to repurchase all shares that each shareholder has tendered, even if all of the shares in a shareholder's account are tendered. In the event of an oversubscribed offer, you may not be able to tender all shares that you wish to tender and you may have to wait until the next quarterly repurchase offer to tender the remaining shares, subject to any proration. Subsequent repurchase requests will not be given priority over other shareholder requests.
During the year ended October 31, 2024, the Fund completed four quarterly repurchase offers. The results of the repurchase offers were as follows:
| Repurchase Offer | Repurchase Offer | Repurchase Offer | Repurchase Offer | |
| Commencement Date | November 22, 2023 | February 23, 2024 | May 24, 2024 | August 23, 2024 |
| Repurchase Request Deadline | December 20, 2023 | March 22, 2024 | June 21, 2024 | September 20, 2024 |
| Repurchase Pricing Date | December 20, 2023 | March 22, 2024 | June 21, 2024 | September 20, 2024 |
| Net Asset Value as of Repurchase Offer Date | ||||
| Class I | $19.85 | $20.00 | $20.17 | $20.35 |
| Class A | $19.85 | $19.97 | $20.09 | $20.23 |
| Amount Repurchased | ||||
| Class I | $8,846,179 | $8,450,912 | $5,120,300 | $1,459,363 |
| Class A | $- | $235 | $- | $- |
8. LINE OF CREDIT
On May 17, 2022, the Fund entered into a $15,000,000 uncommitted, secured, revolving line of credit agreement ("Credit Agreement") with U.S. Bank National Association for redemption purposes, subject to annual renewal and other limitations of the 1940 Act for borrowings. The revolving line of credit agreement sets the maximum borrowing amount to the lesser of (i) $15,000,000, (ii) 15% of the gross market value of the Fund, and (iii) 33.33% of the market value of the unencumbered assets of the Fund. On April 6, 2024, the Credit Agreement was amended to extend the termination date to April 5, 2025. Borrowings under the Credit Agreement bear interest of the lender's prime rate minus 1% at the time of borrowing. Borrowings under the Credit Agreement are secured by a perfected, first priority security interest in the assets of the Fund. The Fund had no borrowings during the year ended October 31, 2024.
| Annual Report | October 31, 2024 | 23 |
| Axonic Alternative Income Fund | Notes to Consolidated Financial Statements |
October 31, 2024
9. INVESTMENTS IN AFFILIATED COMPANIES
The Fund may invest in certain securities that are considered securities issued by affiliated companies. As defined by the 1940 Act, an affiliated person, including an affiliate company, is one in which a Fund owns 5% or more of the outstanding voting securities, or which is under common ownership or control with the Fund. The purchases, sales, interest income, capital gains, and value of investment in affiliated companies for the year ended October 31, 2024 were as follows:
| Security Name |
Fair Value as of November 1, 2024 |
Purchases | Sales |
Change in Unrealized Gain (Loss) |
Realized Gain/Loss |
Fair Value as of October 31, 2024 |
Interest Income |
||||||||||||||||||||
| GSF 2023-1 Investor, LLC | $ | - | $ | 35,086,820 | $ | - | $ | - | $ | - | $ | 35,086,820 | $ | 2,365,906 |
The Fund's ownership in the above in the above investment is held through a wholly-owned special purpose vehicle, and is restricted from withdrawal until liquidation. The Fund owns approximately 65% of the underlying investment, which qualifies as a REIT for U.S. tax purposes.
10. SIGNIFICANT SHAREHOLDERS
The beneficial ownership, either directly or indirectly, of more than 25% of the voting securities of a Fund creates a presumption of control of the Fund under Section 2(a)(9) of the 1940 Act. As of October 31, 2024, the following entities owned beneficially more than 25% of the Fund's outstanding shares. The shares may be held under omnibus accounts (whereby the transactions of two or more shareholders are combined and carried in the name of the originating broker rather than designated separately). Any transaction by these investors could have a material impact on the share class.
| Name | Percentage |
| National Financial Services LLC | 37.28% |
11. SUBSEQUENT EVENTS
Subsequent events after the date of the Consolidated Statement of Assets and Liabilities have been evaluated through the date the consolidated financial statements were issued.
The Fund completed a quarterly repurchase offer on December 20, 2024, which resulted in 706,834 shares being repurchased for $14,398,212.
Management has determined that there were no other subsequent events to report through the issuance of these consolidated financial statements.
| 24 | www.axonicfunds.com |
| Report of Independent Registered | |
| Axonic Alternative Income Fund | Public Accounting Firm |
To the Shareholders and Board of Trustees of
Axonic Alternative Income Fund
Opinion on the Financial Statements
We have audited the accompanying consolidated statement of assets and liabilities, including the consolidated schedule of investments, of Axonic Alternative Income Fund (the "Fund") as of October 31, 2024, the related consolidated statements of operations and cash flows for the year then ended, the consolidated statement of changes in net assets for each of the two years in the period then ended, the consolidated financial highlights for each of the five years in the period then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of October 31, 2024, the results of its operations and its cash flows for the year then ended, the changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Fund's management. Our responsibility is to express an opinion on the Fund's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of October 31, 2024, by correspondence with the custodian and counterparties. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Fund's auditor since 2019.
COHEN & COMPANY, LTD.
Cleveland, Ohio
December 30, 2024
| Annual Report | October 31, 2024 | 25 |
| Axonic Alternative Income Fund | Additional Information |
October 31, 2024 (Unaudited)
PROXY VOTING POLICIES AND VOTING RECORD
A description of the policies and procedures that the Fund uses to vote proxies relating to portfolio securities is available without charge upon request by calling toll-free 888-926-2688, or on the SEC's website at http://www.sec.gov. Information regarding how the Fund voted proxies relating to its portfolio securities during the most recent 12-month period ended June 30th is available without charge upon request by calling toll-free 833-429-6642 (833-4Axonic), or on the SEC's website at http://www.sec.gov.
QUARTERLY PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT; the Fund's Form N-PORT reports are available on the Fund's website at https://www.axonicfunds.com and the SEC's Website at http://www.sec.gov.
| 26 | www.axonicfunds.com |
| Axonic Alternative Income Fund | Trustees and Officers |
October 31, 2024 (Unaudited)
The shareholders of the Fund, pursuant to a written consent to action, elected Mr. Joshua M. Barlow, Mr. Charles D. Mires and Mr. Thomas S. Vales to the Board of Trustees of the Trust effective April 15, 2020. The Board is responsible for the oversight of the management of the Fund, including general supervision and review of the service providers that perform the investment activities of the Fund. The Board, in turn, elects the officers of the Fund, who are responsible for administering the day-to-day operations of the Fund. Unless otherwise indicated in the table below, the address of each Trustee and officer of the Fund is c/o Axonic Capital LLC, 520 Madison Avenue, 42nd Floor, New York, New York 10022. Information about the Trustees and officers of the Fund is provided in the table below. Additional information about members of the Board of Trustees and Officers of the Trust is available in the Statement of Additional Information, which is available, without charge, upon request, by calling the Funds (toll-free) at 1-833-429-6642 (833-4Axonic).
|
Name and Year of Birth |
Position(s) Held with the Fund |
Term of Office and Length of Time Served |
Principal Occupation(s) During Past 5 Years |
Number of Portfolios in Fund Complex* Overseen |
Other Directorships During the Past 5 Years |
| INDEPENDENT TRUSTEES | |||||
| Joshua M. Barlow (1978) | Independent Trustee | Indefinite Term; Since April 15, 2020 | Managing Director, Valhalla Fiduciary (June 2018 - present); Head of Operational Due Diligence and Accounting and other positions, PAAMCO (Pacific Alternative Asset Management Company, LLC) (March 2006 - June 2018). | 2 | Axonic Funds |
| Charles D. Mires (1960) | Independent Trustee | Indefinite Term; Since April 15, 2020 | Director, CIB Marine Bancshares, Inc. (2010 - present); Retired from full time employment December, 2015; Director of Fixed Income, Alternative Strategies, and Third Party Mandates, Franklin Street Partners (2011 - 2015). | 2 | Axonic Funds; CIB Marine Bancshares, Inc. |
| Thomas S. Vales (1964) | Independent Trustee | Indefinite Term; Since April 15, 2020 | Chief Executive Officer, TMC Bonds LLC (an alternative trading system for fixed income) (2000 - 2019); Member, FINRA Fixed Income Advisory Committee (2016 - 2018). | 2 | Axonic Funds |
| INTERESTED TRUSTEE** | |||||
| Clayton DeGiacinto** (1972) | Trustee, President (Principal Executive Officer) | Indefinite Term; Since Inception | Managing Member and Chief Investment Officer, Axonic Capital LLC (2010 - present) | 2 | Axonic Funds |
| Annual Report | October 31, 2024 | 27 |
| Axonic Alternative Income Fund | Trustees and Officers |
October 31, 2024 (Unaudited)
|
Name and Year of Birth |
Position(s) Held with the Fund |
Term of Office and Length of Time Served |
Principal Occupation(s) During Past 5 Years |
Number of Portfolios in Fund Complex* Overseen |
Other Directorships During the Past 5 Years |
| OTHER EXECUTIVE OFFICERS | |||||
| John Kelly (1978) | Treasurer (Principal Financial Officer) | Indefinite Term; Since 2019 | Chief Financial Officer, Axonic Capital LLC (2017 - present). | N/A | N/A |
| Chris Hughes (1980) | Secretary | Indefinite Term; Since May 2024 | Chief Operating Officer (2019- present) and Director of Operations (2011-2019), Axonic Capital LLC. | N/A | N/A |
| Theodore Uhl (1974) | Chief Compliance Officer | Indefinite Term; Since May 2024 | Vice President and Fund Chief Compliance Officer, SS&C Registered Fund Services, Inc. (2010- present). | N/A | N/A |
| * | The Fund Complex consists of the Fund and the Axonic Strategic Income Fund, the sole series of the Axonic Funds, a registered open-end investment company for which Axonic Capital LLC also serves as the investment adviser. |
| ** | The Interested Trustee is an Interested Trustee because he is the Managing Member and Chief Investment Officer of the Axonic Capital LLC. |
| 28 | www.axonicfunds.com |
| Axonic Alternative Income Fund | Privacy Policy |
October 31, 2024 (Unaudited)
DATA PRIVACY POLICY AND PROCEDURE
Policy Statement:
Axonic Alternative Income Fund (the "Fund") has in effect the following policy (the "Data Privacy Policy") with respect to nonpublic personal information about its customers.
The Fund collects nonpublic personal information about its customers1 from the following sources:
| · | account applications and other forms, which may include a customer's name, address, social security number, and information about a customer's investment goals and risk tolerance; |
| · | account history, including information about the transactions and balances in a customer's account; and |
| · | correspondence, written, or telephonic, between a customer and the Fund or service providers to the Fund. |
In addition, the Fund may obtain consumer information about its customers from consumer reports.
The Fund will not release nonpublic personal or consumer information about its customers or their accounts unless one of the following conditions is met:
| · | Prior written consent is received. |
| · | The Fund believes the recipient to be the customer of the Fund or such Fund customer's authorized representative. |
| · | The Fund is required by law to release information to the recipient. |
The Fund does not give or sell nonpublic personal or consumer information about its customers or their fund accounts to any other company, individual, or group.
The Fund will only use nonpublic personal or consumer information about its customers and their accounts to attempt to better serve their investment needs or to suggest services or educational materials that may be of interest to them.
The Fund restricts access to nonpublic personal and consumer information about customers to those employees who need to know that information in order to provide products or services. The Fund may also share personal information with companies that it hires to provide support services. When the Fund or its Transfer Agent shares nonpublic personal or consumer information with other service providers, it protects that information with a strict confidentiality agreement. The Fund also maintains reasonable physical, electronic and procedural safeguards that comply with federal standards to protect against unauthorized access to and properly dispose of customers' nonpublic personal and consumer information.
The Fund will adhere to the policies and practices described in this notice for current and former shareholders of the Fund.
II. Physical, Electronic and Procedural Safeguards
The following includes a list of the primary physical, electronic and procedural safeguards employed by the Transfer Agent to ensure against unauthorized access and proper disposal of customers' nonpublic personal and consumer information.
| · | The Fund shall distribute this Data Privacy Policy annually to shareholders through the Fund's annual report to shareholders to ensure compliance with shareholder notification requirements mandated by Regulation S-P. |
| · | Should a change in this Data Privacy Policy occur during the year that requires a change to this Data Privacy Policy, the Principal Underwriter or Transfer Agent will provide existing customers of the Fund with an updated Data Privacy Policy. |
| · | The Transfer Agent shall maintain a third-party list that identifies any non-affiliated third-parties that do business with the Transfer Agent, the type(s) of service(s) provided, whether there is an exchange of non-public personal information, and whether these relationships fall outside of any exceptions and/or exemptions to the opt-out requirements afforded under Regulation S-P. Appropriate confidentiality language must exist in the contractual arrangements with each of these relations. |
| 1 | For purposes of this Data Privacy Policy, the terms "customer" or "customers" includes both shareholders of the Fund and individuals who provide nonpublic personal information to the Fund, but do not invest in Fund shares. |
| Annual Report | October 31, 2024 | 29 |
| Axonic Alternative Income Fund | Privacy Policy |
October 31, 2024 (Unaudited)
| · | The Transfer Agent, the Administrator, the Fund Accounting Agent, the Principal Underwriter, and Investment Adviser shall maintain procedures related to the security of nonpublic personal information and consumer information (including physical, electronic and procedural safeguards) and properly disposal of such information. |
| · | Any data privacy related questions, concerns or breaches will be brought to the attention of the Fund's CCO. |
Procedures:
| 1. | The Fund's CCO will determine that the policies and procedures of the Transfer Agent, Principal Underwriter and the Fund's other service providers are reasonably designed to safeguard customer information and require only appropriate and authorized access to, and use of, customer information through the application of appropriate administrative, technical, physical, and procedural safeguards that comply with applicable federal standards and regulations. |
| 2. | The Fund's CCO will continually monitor applicable regulations that may cause policies of the Fund and/or its service providers subject to the requirements of Regulation S-P to change. |
| 3. | Annually, the Fund's CCO will review any independent reviews applicable to data security at its service providers who have access to or otherwise obtain nonpublic personal information in fulfilling their obligations to the Fund. |
| 4. | Annually, the Fund's CCO will inquire and review, where applicable, any related data privacy issues reported by the Fund's service providers who have access to or otherwise obtain nonpublic personal information in fulfilling their obligations to the Fund. |
Adopted: December 19, 2018
| 30 | www.axonicfunds.com |
Page Intentionally Left Blank
AXONIC ALTERNATIVE INCOME FUND
ANNUAL REPORT
October 31, 2024
| (b) | Not applicable. |
| Item 2. | Code of Ethics. |
| (a) | As of the end of the period covered by this report, the registrant has adopted a code of ethics, as defined in Item 2(b) of Form-CSR, that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller or any persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party (the "Code of Ethics"). |
| (b) | Not applicable. |
| (c) | During the period covered by this report, no amendments were made to the provisions of the Code of Ethics. |
| (d) | During the period covered by this report, the registrant did not grant a waiver, including an implicit waiver, from a provision of the Code of Ethics. |
| (e) | Not applicable. |
| (f) | A copy of the Code of Ethics is filed as an exhibit pursuant to Item 19(a)(1) of this Form N-CSR. |
| Item 3. | Audit Committee Financial Expert. |
The registrant's board of trustees has determined that the registrant has at least one audit committee financial expert serving on its audit committee. Joshua M. Barlow is the "audit committee financial expert" and is "independent", as each term is defined in Item 3 of Form N-CSR.
| Item 4. | Principal Accountant Fees and Services. |
| (a) | Audit Fees: For the registrant's last two fiscal years ended October 31, 2023 and October 31, 2024, the aggregate fees billed for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements were $23,000 and $23,000, respectively. |
| (b) | Audit-Related Fees: For the registrant's last two fiscal years ended October 31, 2023 and October 31, 2024, there were no fees billed for assurances and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of this Item. |
| (c) | Tax Fees: For the registrant's last two fiscal years ended October 31, 2023 and October 31, 2024, the aggregate fees billed for professional services rendered by the principal accountant for tax compliance, tax advice and tax planning, which were comprised of the preparation of excise filings and income tax returns for the registrant, were $6,000 and $6,000 respectively. |
| (d) | All Other Fees: For the registrant's last two fiscal years ended October 31, 2023 and October 31, 2024, there were no fees billed for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) of this Item. |
| (e)(1) | Audit Committee Pre-Approval Policies and Procedures: Before an accountant is engaged by the registrant or its subsidiaries to render audit or non-audit services or by the registrant's investment adviser to render non-audit services, the engagement must be pre-approved by the registrant's audit committee. |
| (e)(2) | There were no non-audit services approved or required to be approved by the registrant's audit committee pursuant to (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. |
| (f) | Not applicable. |
| (g) | There were no non-audit fees billed by the registrant's accountant for services rendered to the registrant, and rendered to the registrant's investment adviser, and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant for the last two fiscal years ended October 31, 2023 and October 31, 2024. |
| (h) | Not applicable. |
| (i) | Not applicable. |
| (j) | Not applicable. |
| Item 5. | Audit Committee of Listed Registrants. |
Not applicable to registrant.
| Item 6. | Investments. |
| (a) | Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the Report to Stockholders filed under Item 1(a) of this Form N-CSR. |
| (b) | Not applicable. |
| Item 7. | Financial Statements and Financial Highlights for Open-End Management Investment Companies. |
Not applicable to registrant.
| Item 8. | Changes in and Disagreements with Accountants for Open-End Management Investment Companies. |
Not applicable to registrant.
| Item 9. | Proxy Disclosures for Open-End Management Investment Companies. |
Not applicable to registrant.
| Item 10. | Remuneration Paid to Directors, Officers, and Others of Open-End Management Investment Companies. |
Not applicable to registrant.
| Item 11. | Statement Regarding Basis for Approval of Investment Advisory Contract. |
Not applicable during the period covered by this report.
| Item 12. | Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. |
The Board has adopted Proxy Voting Policies and Procedures (the "Policies") on behalf of the Fund, which delegate the responsibility for voting proxies to the Adviser, subject to the Board's continuing oversight. The Policies require that the Adviser vote proxies received in a manner consistent with the best interests of the Fund and its shareholders. The Policies also require the Adviser to present to the Board, at least annually, the Adviser's Proxy Policies (as defined below) and a record of each proxy voted by the Adviser on behalf of the Fund, including a report on the resolution of all proxies identified by the Adviser as involving a conflict of interest. The Adviser has also adopted the following Proxy Voting Policies and Procedures ("Adviser's Proxy Policies").
In its role as investment adviser to the Fund, the Adviser has adopted those proxy voting policies adopted by the Fund. To the extent that the Fund's policies do not cover potential voting issues with respect to proxies received by the Fund, the Fund has delegated to the Adviser the authority to act on its behalf to promote the Fund's investment objective, subject to the provisions of the Trust's policies regarding resolution of a conflict of interest with respect to the Adviser.
The Adviser will vote proxies in the best interests of the Fund. The Adviser will generally vote in favor of routine corporate housekeeping proposals such as the election of directors and the selection of auditors, absent conflicts of interest (e.g., an auditor's provision of non-audit services). The Adviser will generally vote against proposals that cause board members to become entrenched or cause unequal voting rights. In reviewing proposals, the Adviser may also consider the opinion of management, the effect on management, the effect on shareholder value and the issuer's business practices.
The Adviser recognizes that under certain circumstances it may have a conflict of interest in voting proxies on behalf of the Fund. A "conflict of interest," means any circumstance when the Adviser (including officers, directors, agents and employees) knowingly does business with, receives compensation from, or sits on the board of, a particular issuer or closely affiliated entity, and, therefore, may appear to have a conflict of interest between its own interests and the interests of Fund shareholders in how proxies of that issuer are voted. The Adviser has adopted the Fund's procedures as they relate to the resolution of conflicts of interest with respect to voting shares of the Fund.
| Item 13. | Portfolio Managers of Closed-End Management Investment Companies. |
(a)(1) Portfolio Managers
As of the date of filing this report, the individuals listed below have primary responsibility for the day-to-day management of the registrant's portfolio.
Clayton DeGiacinto,
Managing Partner, Co-Chief Investment Officer
Length of Service: Since Inception of the Registrant
Prior to forming Axonic in 2010, Mr. DeGiacinto was responsible for building out the mortgage investment platform at Tower Research Capital LLC and was the Senior Portfolio Manager for Split Level LLC, the predecessor fund to the Axonic Credit Opportunities Funds. He previously led a mortgage trading desk in the Fixed Income, Currency and Commodities division at Goldman Sachs & Co. Mr. DeGiacinto's duties included the securitization and retention of bonds backed by adjustable rate and negatively amortizing residential mortgages. He was also responsible for running the RMBS credit book for all prime, alt-A and negatively amortizing structures. Mr. DeGiacinto previously served as a Captain in the U.S. Army in the 25th Infantry Division (Hawaii) after completing the U.S. Army Ranger School, Airborne School and Air Assault Course. He is a graduate of the United States Military Academy at West Point and holds an M.B.A. from the Wharton School at the University of Pennsylvania.
Matthew Weinstein
Partner, Co-Chief Investment Officer
Length of Service: Since Inception of the Registrant
Mr. Weinstein joined Axonic in 2012 and oversees the Firm's investment team. In his role, alongside the CIO, Mr. Weinstein oversees Axonic's asset allocation, sector allocation, trading and investment management. Mr. Weinstein was responsible for the firm's build out of its commercial mortgage-backed securities ("CMBS") and commercial real estate equity and debt businesses, and he serves as Head of the Real Estate Investment Committee. Prior to joining the Firm, Mr. Weinstein was a Vice President at Macquarie Capital where he managed a CMBS principal investment strategy from 2010 through 2012. From 2003 to 2008, he was an Associate Director in the CMBS group at Bear Stearns & Co. Mr. Weinstein received his MBA in Finance at the New York University Stern School of Business and graduated from Cornell University with a BS in Industrial Labor Relations.
(a)(2) As of October 31, 2024, the Portfolio Managers listed above are also responsible for the day-to-day management of the following other accounts:
Clayton DeGiacinto
| Number and Assets of Other Accounts |
Number and Assets of Accounts for which Advisory Fee is Performance Based |
||||
| Registered Investment Companies |
Other Pooled Investment Vehicles |
Other Accounts |
Registered Investment Companies |
Other Pooled Investment Vehicles |
Other Accounts |
| 1 | 15 | 0 | 1 | 15 | 0 |
| $1,947,006,574 | $8.163.970,792 | $0 | $1,947,006,574 | $8.163.970,792 | $0 |
Matthew Weinstein
| Number and Assets of Other Accounts |
Number and Assets of Accounts for which Advisory Fee is Performance Based |
||||
| Registered Investment Companies |
Other Pooled Investment Vehicles |
Other Accounts |
Registered Investment Companies |
Other Pooled Investment Vehicles |
Other Accounts |
| 1 | 15 | 0 | 1 | 15 | 0 |
| $1,947,006,574 | $8.163.970,792 | $0 | $1,947,006,574 | $8.163.970,792 | $0 |
Potential Conflicts of Interest: Actual or apparent conflicts of interest may arise when a portfolio manager has day-to-day management responsibilities with respect to more than one fund or other account. For example, the management of multiple accounts may result in a portfolio manager devoting unequal time and attention to the management of each account. Investment decisions for client accounts are also made consistent with a client's individual investment objective and needs. Accordingly, there may be circumstances when purchases or sales of securities for one or more client accounts will have an adverse effect on other clients. The Adviser may seek to manage such competing interests by: (1) having a portfolio manager focus on a particular investment discipline; (2) utilizing a quantitative model in managing accounts; and/or (3) reviewing performance differences between similarly managed accounts on a periodic basis to ensure that any such differences are attributable to differences in investment guidelines and timing of cash flows. The Adviser also maintains a Code of Ethics to establish standards and procedures for the detection and prevention of activities by which persons having knowledge of the investments and investment intentions of the Fund may abuse their fiduciary duties to the Fund.
If a portfolio manager identifies a limited investment opportunity that may be suitable for more than one client, the Fund may not be able to take full advantage of that opportunity due to an allocation of filled purchase or sale orders across all eligible accounts. To deal with these situations, the Adviser has adopted procedures for allocating investment opportunities across multiple accounts in a manner that is fair and equitable over time.
With respect to securities transactions for clients, the Adviser determines which broker to use to execute each order. However, the Adviser may direct securities transactions to a particular broker/dealer for various reasons including receipt of research or participation interests in initial public offerings that may or may not benefit the Fund. To deal with these situations, the Adviser has adopted procedures to help ensure best execution of all client transactions.
Finally, the appearance of a conflict of interest may arise where the Adviser has an incentive, such as a performance-based management fee that relates to the management of one but not all accounts for which a portfolio manager has day-to-day management responsibilities.
(a)(3) Portfolio Manager Compensation as of October 31, 2024
Each Portfolio Manager is compensated solely based on their ownership interest in the Adviser. As owners of the Adviser, each Portfolio Manager receives a guaranteed payment from the Adviser and may receive distributions from the Adviser which may come from profits generated by the Adviser.
(a)(4) Dollar Range of Securities Owned as of October 31, 2024
| Portfolio Manager | Dollar Range of Equity Securities in the Fund |
| Clayton DeGiacinto | $500,000-$1,000,000 |
| Matthew Weinstein | $100,001-$500,000 |
| Item 14. | Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. |
None.
| Item 15. | Submission of Matters to a Vote of Security Holders. |
There have been no material changes to the procedures by which shareholders may recommend nominees to the registrant's board of trustees, where those changes were implemented after the registrant last provided disclosure in response to the requirements of Item 407(c)(2)(iv) of Regulation S-K, or this Item.
| Item 16. | Controls and Procedures. |
| (a) | The registrant's principal executive officer and principal financial officer have concluded that the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended) are effective as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on the evaluation of these controls and procedures required by Rule 30a-3(b) under the Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Exchange Act (17 CFR 240.13a-15(b) or 240.15d-15(b)).. |
| (b) | There was no change in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940, as amended) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. |
| Item 17. | Disclosure of Securities Lending Activities for Closed-End Management Investment Companies. |
Not applicable to registrant.
| Item 18. | Recovery of Erroneously Awarded Compensation. |
| (a) | Not applicable. |
| (b) | Not applicable. |
| Item 19. | Exhibits. |
| (a)(1) | The Code of Ethics that is the subject of the disclosure required by Item 2 of Form N-CSR is attached hereto. |
| (a)(2) | Not applicable. |
| (a)(3) | The certifications required by Rule 30a-2(a) of the Investment Company Act of 1940, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto as Exhibit 99.Cert. |
| (a)(4) | Not applicable. |
| (a)(5) | Not applicable. |
| (b) | The certifications by the Registrant's principal executive officer and principal financial officer, as required by Rule 30a-2(b) of the Investment Company Act of 1940, as amended, and Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto as Exhibit 99.906Cert. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Axonic Alternative Income Fund
| By: | /s/ Clayton DeGiacinto | |
| Clayton DeGiacinto (Principal Executive Officer) | ||
| Chief Executive Officer and President | ||
| Date: | January 10, 2025 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Axonic Alternative Income Fund
| By: | /s/ Clayton DeGiacinto | |
| Clayton DeGiacinto (Principal Executive Officer) | ||
| Chief Executive Officer and President | ||
| Date: | January 10, 2025 |
| By: | /s/ John R. Kelly | |
| John R. Kelly (Principal Financial Officer) | ||
| Treasurer and Chief Financial Officer | ||
| Date: | January 10, 2025 |