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Summary Tekla Life Sciences Investors Fund has a solid long-term performance record. But HQL and its dividends can be volatile. Still, if you like healthcare and are willing to take on some biotech risk, you might want to take a look at this CEF. Tekla Life Sciences Investors Fund (NYSE: HQL ) has an impressive long-term performance record, which is probably why a frequent reader asked me to take a look at it. However, what it doesn’t offer is a consistent distribution. Although that might scare off income-oriented investors, it’s still worth a deep dive for anyone thinking about investing in the life sciences space. But risk is the key word here. What the fund does HQL is a closed-end fund, or CEF, that invests in the life sciences arena. What exactly does that mean, particularly since the fund’s siblings invest in similar securities? Well, according to the fund, it can invest in areas such as biotechnology, pharmaceutical, diagnostics, managed healthcare, medical equipment, hospitals, healthcare information technology and services, devices and supplies, and agriculture and environmental management industries. Up until the last two, the fund sounds like your run-of-the-mill healthcare offering. The thing is, siblings Tekla Healthcare Investors (NYSE: HQH ) and Tekla Healthcare Opportunities Fund (NYSE: THQ ) have broad enough mandates that there’s some overlap in what each invests in and there’s notable overlap in their top holdings. So it’s hard to suggest that HQL is a massively differentiated fund within the family. But that doesn’t mean it isn’t different. For example, at the end of March, HQL had the heaviest weighting of the three funds in biotech and biopharmaceuticals at roughly 60% of assets. Its siblings HQH and THQ had around 50% and 35%, respectively. That really makes THQ the most aggressive of the trio, something that has been a boon to performance over the last few years. For example, the fund’s net asset value, or NAV, total return was 42% over the last 12 months through the end of May. (Total return includes the reinvestment of distributions). Over the trailing three- and five-year periods, its annualized total return was roughly 35% and 31%, respectively. That’s a heck of a showing. In fact, in March, management made note of the strong performance, warning investors that: “…we are favorable on the fundamentals of the healthcare and biotech sectors. However, we also want to express a note of caution. After several years of outperformance, valuations in the healthcare and biotech sectors, while reasonable relative to other sectors on a growth adjusted (P/E divided by G) basis, they are high on a trailing twelve month Price/Earnings basis.” In other words, we like the space, but don’t be surprised if there’s a pullback. Some things to note It’s also worth noting that the fund has the leeway to invest up to 40% of assets in “restricted” securities. Such illiquid investments are usually, though not exclusively, start-ups that need cash but aren’t publicly traded. These securities have to be valued by management, even though there’s no ready market for them. This is a risk you should keep in the back of your mind if there is a notable downturn. That said, the fund doesn’t make use of leverage, which means a downdraft wouldn’t be exacerbated by debt. The fund doesn’t use options, either, so it is a pure-play stock fund. Taking these facts a step further, it means that the fund’s distributions have to be covered by dividends, interest, and trading activities. The fund’s distribution policy is to pay 2% of its net asset value per quarter to shareholders. On an annual basis, that means a roughly 8% distribution target. That’s high enough to be meaningful, but low enough that you can probably expect long-term performance to make up for difficult periods that may require distributions to be paid out of capital. Clearly, with such solid performance, that hasn’t been an issue of late. In fact, since 2010, the fund’s NAV has done nothing but go up every year. And in a big way, too. At the start of the decade, the NAV was roughly $11.30, while more recently, the NAV was in the $29 range. That’s even more impressive when you consider that it’s paid out around $7 a share in distributions over that span. The only problem here is that the distribution isn’t a reliable figure; it bounces around with the fund’s NAV because of the 2% per quarter policy. In other words, you can’t count on the distributions paid over the past year to be any indication of what will be paid in the future. And, perhaps more important, just when you may be most in need of stable income, like during a market downdraft, the fund’s distribution is likely to shrink. For income-focused investors, then, this is a big risk to note. Expense-wise, HQL’s costs are currently running at around 1.25% of assets. That’s down from a few years ago, when the number was 1.7%. So it’s not overly expensive to own today, but it has been in the past considering that it doesn’t use leverage or options. To be fair, however, it was a much smaller fund in the past than it is today. Own it, don’t own it? On the whole, HQL is a decent fund. At present, it’s heavily focused on the biotech space, but for an aggressive investor, that might be exactly what’s desired. However, that brings the issue of risk to the fore, which is the big-picture consideration here. Despite a solid performance record over the past few years, this fund isn’t for the faint of heart. Biotech is an often volatile space and HQL is heavily invested there. What’s this mean? Vanguard Health Care Fund (MUTF: VGHCX ), a more broadly diversified mutual fund, had a standard deviation, a measure of volatility, of around 9 over the trailing three- and five-year periods. HQL’s standard deviation over those spans was 15. These two funds aren’t apples to apples, nor are they apples to oranges. For investors looking at the healthcare sector, HQL is a risky option. Moreover, anyone looking specifically for income shouldn’t be expecting a steady flow of distributions from HQL. Indeed, the fund’s policy specifically builds in distribution cuts during bad times. If you can stomach those two risks, HQL’s shares currently trade at an around 2% discount to NAV. That’s not particularly large, but is in line with its recent past. The discount has been much wider, coming in at an average of more than 5% over the trailing five years, according to the Closed-End Fund Association . Over the trailing 10 years, the average discount was nearly 8%. So while investors aren’t bidding the shares up beyond NAV, there’s room for negative sentiment to push them down further than they are at present if history is any guide. And if biotech goes out of favor, I’d expect that to happen. Would I buy HQL? No. I would be more comfortable with a fund that’s more diversified. However, that doesn’t mean it’s a bad fund for someone with a more aggressive bent. Just make sure you know what you are buying when you go in. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.