The investment objective of the Fund is primarily income and secondarily capital appreciation.
FUND OVERVIEW
The Denali Structured Return Strategy Fund seeks to provide investors with income and capital appreciation through direct and indirect investments of a substantial majority of its assets in income-generating investments of domestic issuers and through a modest (approximately one and a half to three percent of total assets) investment in call option spreads on the S&P 500® Index. Income-generating investments may be publicly traded or privately offered, and typically make interest, dividend, or other periodic payments, distributions, and/or accruals.
The Fund utilizes the income from the diversified pool of income-generating investments to systematically purchase quarterly S&P 500 call option spreads, providing defined exposure to potential market gains from the S&P 500 Index. Each quarter, the Fund resets its exposure with the goal of harvesting any realized equity upside. The Fund is structured as a continuously offered, non-diversified, closed-end interval fund. The Fund offers daily subscriptions and will offer to make quarterly repurchases at NAV (net asset value), subject to the Fund's repurchase offer policies and limitations. There is no guarantee that shareholders will be able to sell all shares they desire to sell in any particular repurchase offer.
U.S. equities rebounded sharply in Q2, with the S&P 500 Total Return Index up 15.20%, the Nasdaq Composite up 21.60%, and the Dow Jones Industrial Average Total Return Index up 13.38%. Since the Nasdaq Composite's history began in 1971, there have been only two prior quarters in which all three indexes posted returns above those levels: Q4 1998 and Q2 2020.
While Q2 2020 was an outlier given the global COVID-19 shutdowns in the preceding quarter, Q4 1998 offers a more useful comparison to today's market environment. In both periods, equities were driven by enthusiasm surrounding a transformative technology theme—the internet in 1998 and artificial intelligence (AI) today. In both cases, investors largely shrugged off geopolitical conflict in the Middle East and other macroeconomic risks that could have otherwise tempered the rally.
VAL = cumulative total return | Past performance does not guarantee future results.
According to Polymarket, an increasingly utilized tool for market-implied probabilities, the likelihood of at least one Fed rate hike in 2026 currently stands at 48%. The rise in those odds has coincided with the sharp increase in oil prices earlier this year, as investors appeared to connect higher energy costs with renewed inflation pressure that puts more pressure on the Fed to raise rates. From the beginning of the year through oil's peak on April 7, the correlation between West Texas Intermediate (WTI) crude oil prices and Fed hike odds was approximately +73%. However, the relationship changed dramatically after oil peaked. From April 7 through June 30, oil prices declined, but Fed hike odds remained elevated, causing the correlation to invert to -59%. This suggests that while the initial move in hike odds was closely tied to the oil shock, investors continued to price in inflation and rate-hike concerns even after crude prices came down. This likely reflects the lagged impact of energy prices on inflation expectations and broader concerns about the persistence of inflation. The chart below illustrates this relationship.
West Texas Intermediate (WTI) crude oil prices and Polymarket-implied odds of at least one Fed rate hike in 2026, January 1–June 30, 2026. Polymarket figures reflect market-implied probabilities, not a forecast or a prediction by the Adviser. Past performance is no guarantee of future results.
Altogether, the quarter was defined by a tension between AI-driven equity momentum, re-emerging inflation concerns, and geopolitical risks, with the first overpowering the latter two.
Q2 showed the tradeoff that comes with any strategy built with an upside cap, including the Denali Structured Return Strategy Fund. The S&P 500 Total Return Index gained 15.20% for the quarter, while Denali returned 4.38% (net of fees). That gap is large, but it is the inherent nature of the strategy. Denali is not designed to match the S&P 500 in a quarter where the index moves far beyond the Fund’s call spread cap. It is designed to provide a defined amount of equity participation, supported by the income generated from the credit portfolio.
We addressed this dynamic in the March 31 commentary. In the “Looking Ahead” section, I wrote:
“On March 31, 2026, we closed the Q1 call spread and opened a new 6,535 | 6,860 S&P 500 call spread for Q2. This spread provides for approximately 4.97% of upside participation from the starting level. One important contextual note is that the cost of purchasing this quarter’s spread was higher than that of previous quarters due to the rise in implied volatility and therefore higher options prices. When the cost of the call spread increases, stronger performance from the credit side of the portfolio is required to fund that higher amount. If that performance does not materialize, the Fund may be prone to lagging the S&P 500 benchmark should it increase during the quarter.”
That is largely what occurred. The Q2 spread gave the Fund the ability to capture approximately 5% of upside from the March 31 starting level. Denali finished the quarter up only 4.38% (net of fees), as mentioned earlier, roughly 60 basis points below the available upside. The shortfall was driven primarily by the higher cost of options at the start of the quarter. Because implied volatility was elevated when the spread was purchased, the Fund needed more contribution from the credit portfolio to fully fund the cost of that exposure. Credit performance was positive, but not enough to offset the entire option expense.
Denali participated in the rally, but the S&P 500 moved well beyond the portion of upside the Fund had structured for the period. In a market environment like Q2, the cost of the cap shows itself. That is the tradeoff of the strategy: it can lag sharply in unusually strong equity quarters, but it does so as part of a structure intended to pair defined equity participation with credit income and provide a very different risk profile than full S&P 500 exposure.
Since the Fund’s first full-quarter options period began on March 31, 2024, Denali has returned 32.64% cumulatively, net of fees, compared to the S&P 500’s 46.91%, resulting in just shy of 70% capture during this period. Just last quarter, the capture rate of the cumulative return since 3/31/24 was 98%, which helps show the significance of the Q2 return on total performance.
| Strategy/Index | Since Inception* | 1 Year | 3 Months | 1 Month |
| Denali Structured Return Strategy Fund (DNLIX) | 33.30% | 11.09% | 4.38% | 0.73% |
| S&P 500 Total Return (SPXTR) | 49.94% | 22.32% | 15.20% | -0.95% |
*Inception date of March 12, 2024 | net of fees | Source: Ycharts Past performance is no guarantee of future results.
In down quarters, represented by Q1 of 2025 and Q1 of 2026, the Fund's structure contained losses to a fraction of the index's decline. The results to date have provided evidence of downside mitigation relative to the index.
The private credit portfolio continued to diversify during the quarter, both through the addition of new managers and through increased exposure across a larger number of underlying credits. As of quarter-end, Denali held exposure to nearly 50 different positions across more than 10,000 underlying loans, with a weighted average loan-to-value ratio (LTV) of 57.22%. We view that continued diversification as important to the long-term health and strength of the private credit section of the portfolio.
During the quarter, the Fund also had several successful exits across different loan participations and exposures. These exits are worth noting because they reflect the portfolio continuing to turn over and recycle capital into new opportunities as underlying loans mature or are repaid.
For Denali, the income component matters even more in periods where options costs are elevated. As discussed in the prior section, higher implied volatility made the Q2 call spread more expensive to purchase, which increased the burden on the credit portfolio to help fund the option exposure. Having a well-diversified, strong credit portfolio is a major factor in the long-term performance of the Fund.
Unlike the beginning of Q2, Q3 started with a more normalized (relative to historical implied volatility) cost for the call spread package. This lowers the hurdle rate that our private credit portfolio is required to meet to attain the objectives desired from the strategy regarding upside participation and downside mitigation. We were able to purchase a full 5%-wide call spread for the quarter. At the start of the quarter, the spread had an approximate delta of 29, meaning that for every $1 move in the S&P 500 Index, the value of the spread would be expected to move by roughly $0.29, before accounting for other market factors. Delta will change throughout the quarter as the index level, implied volatility, and time to expiration change.
The goal for the quarter and every quarter is to establish a defined range of participation while allowing the credit portfolio to continue generating income beneath it to fund its purchase. With the new call spread in place, Denali enters the quarter with a defined upside profile and a structure that seeks to allow participation if equities continue to move higher while seeking to maintain a downside profile similar to that of the private credit portfolio. There is no assurance the strategy will be successful or that downside will be limited.
Citations:
Y-charts
deseret.com/1998/12/19/19419383/stocks-advance-despite-hearings-iraq-bombing
polymarket.com/event/fed-rate-hike-in-2026
fred.stlouisfed.org/series/DCOILWTICO
DISCLOSURES
The Fund's shares require a minimum initial investment of $1,000 and $100 for subsequent investments. Distributions are not guaranteed. As a regulated investment company, the Fund generally must distribute at least 90% of its investment company taxable income annually. Distributions may include a return of capital. A return of capital is a return of a portion of an investor's original investment and should not be confused with "yield" or "income." There is no assurance a change in market conditions or other factors will not result in a change in future distributions.
Total annual fund operating expenses are 3.25%. Total annual fund operating expenses after fee waiver and expense reimbursement are 2.47%. The management fee is 1.65%, and the Adviser has contractually agreed to an expense limitation (cap) of 1.99%. The Adviser and the Fund have entered into an Expense Limitation Agreement under which the Adviser has agreed to waive its management fees and to pay or absorb the ordinary operating expenses of the Fund (excluding borrowing costs, dividends, and interest on securities sold short, brokerage commissions, acquired fund fees and expenses and extraordinary expenses), to the extent that its management fees plus the Fund's ordinary annual operating expenses exceed 1.99% per annum of the Fund's average daily net assets. Such Expense Limitation Agreement will continue in effect through November 21, 2027 and may not be terminated by the Adviser, but it may be terminated by the Board of Trustees, upon 60 days written notice to the Adviser. Any waiver and reimbursement by the Adviser is subject to repayment by the Fund within the three years from the date the Adviser waived such payment, if the Fund is able to make the repayment without exceeding the lesser of the expense limitation in place at the time of the waiver and reimbursement or the current expense limitation and the repayment is approved by the Board of Trustees.
See “Management of the Fund.” The Adviser uses call option spreads to capture a portion of positive equity market returns without exposing the Fund to significant equity market losses. Generally, when the Fund purchases a call option, the Fund has the right, but not the obligation, to buy an asset at a specified price (strike price) within a specific time period or at the end of a time period. Call options can expire worthless in a flat or down equity market, but are not further linked to equity losses. The Adviser anticipates investing in call spreads on a quarterly basis by investing in call options primarily with three-month maturities and strike prices that are near (within one percent above) the then-current level of the S&P 500® Index while writing the same amount of call options with three-month maturities and strike prices that are approximately 5% higher than the then-current level the index. The purchased call options are commonly referred to as being at-the-money if the strike price is at the then-current level of the index, or out-of-the money if the strike price is above the then-current level of the index. Investment options involve risk and are not suitable for all investors. Prior to buying or selling options, an investor should read and understand the standardized options disclosure document, "Characteristics and Risks of Standardized Options," which is available from The Options Clearing Corporation at www.theocc.com or by calling 1-888-678-4667.
Advisory services are provided through Liquid Strategies, LLC located at 3550 Lenox Rd NE, Ste 2550 Atlanta, GA 30326.
The statements contained herein are based upon the opinions of Liquid Strategies and the data available at the time of publication and are subject to change at any time without notice. This communication does not constitute investment advice and is for informational purposes only, is not intended to meet the objectives or suitability requirements of any specific individual or account, and does not provide a guarantee that the investment objective of any model will be met. An investor should assess his/her own investment needs based on his/her own financial circumstances and investment objectives. Neither the information nor any opinions expressed herein should be construed as a solicitation or a recommendation by Liquid Strategies or its affiliates to buy or sell any securities or investments or hire any specific manager. Any offering may only be made pursuant to the securities laws, an offering document and related subscription materials all of which must be read and completed in their entirety. Liquid Strategies prepared this update utilizing information from a variety of sources that it believes to be reliable.
It is important to remember that there are risks inherent in any investment and that there is no assurance that any investment, asset class, style or index will provide positive performance over time. Diversification and strategic asset allocation do not guarantee a profit or protect against a loss in a declining markets. Past performance is not a guarantee of future results. All investments are subject to risk, including the loss of principal. Index comparisons are provided for illustrative purposes only; indices are unmanaged, do not reflect the deduction of fees or expenses, and you cannot invest directly in an index.
RISK FACTORS:
An investment in the Fund’s shares is subject to risks. The value of the Fund’s investments will increase or decrease based on changes in the prices of the investments it holds. This will cause the value of the Fund’s shares to increase or decrease. You could lose money by investing in the Fund. By itself, the Fund does not constitute a complete investment program. Before investing in the Fund, you should consider carefully the following risks the Fund faces, together with the other information contained in the prospectus.
Since the Fund is non-diversified, it is subject to a higher reduction of capital and volatility than a fund more proportionately allocated among a large number of securities. An investment in the Fund involves risk. The Fund is new with no significant operating history by which to evaluate its potential performance. There can be no assurance that the Fund’s strategy will be successful. The Fund may leverage its investments by “borrowing.” The use of leverage increases both the risk of loss and profit potential.
Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus contains this and other important information about the investment company. For a prospectus with this and other important information about the Fund, please visit the Documents section at www.LSfunds.com/DNLIX or call 1-800-632-4027. Read the prospectus carefully before investing.
Shareholder Services: 1-800-632-4027
Investment Professionals: 770-350-8700 or info@LSfunds.com
Distributed by Foreside Fund Services, LLC, which is not affiliated with the Adviser.