As filed with the Securities and Exchange Commission on December 7, 2017
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-21963
City National Rochdale High Yield Alternative Strategies Master Fund, LLC
(Exact name of registrant as specified in charter)
(Exact name of registrant as specified in charter)
400 Park Avenue
New York, NY 10022-4406
(Address of principal executive offices) (Zip code)
Michael Gozzillo
400 Park Avenue
New York, NY 10022-4406
(Name and address of agent for service)
(800) 245-9888
Registrant's telephone number, including area code
Date of fiscal year end: March 31
Date of reporting period: September 30, 2017
Item 1. Reports to Stockholders.
City National Rochdale High Yield Alternative Strategies Fund LLC
City National Rochdale High Yield Alternative Strategies Fund TEI LLC
Semi-Annual Report
September 30, 2017
Dear Fellow Shareholders,
The City National Rochdale High Yield Alternative Strategies Fund LLC (“Taxable Fund”) and City National Rochdale High Yield Alternative Strategies Fund TEI LLC (“TEI Fund”), (collectively “RHYAS”) seek to diversify clients’ traditional stock and bond only portfolios through inclusion of less traditional strategies focusing on the fixed income markets. For the six-month period ending September 30, 2017, the Taxable Fund returned +3.97% and the TEI Fund returned +3.88% net of fees and expenses. The benchmark of this strategy, the Credit Suisse Leveraged Loan Index returned +1.82% over the previous six months. Year to date ended September 30, 2017, the Taxable Fund returned +4.78% and the TEI Fund returned +4.60% net of fees and expenses, with the benchmark returning +3.04% over the same period.
The strong performance of the asset classes over the past few years has been due to a rebound and strong performance in the overall Economy and Bank Loan market as well as strong investment decisions in the space. Spreads have tightened to very low levels in 2017, investors have returned to the leveraged loan space, and default levels are at very low levels across the board.
Collateralized Loan Obligations are the main investment vehicle of this fund and we believe they are a stable long-term investment, central to many small to middle sized corporations in the United States and Europe. Most notably, the investments are typically interest rate risk neutral. In this period of rate uncertainty and likely additional Fed hikes, our preference is to take risk on the credit or spread side of the equation.
The specific CLO market continues moving in the correct direction with new issues of CLOs increasing relative to the previous periods and more firms entering the structured credit market. During the first quarter the funds returns were a little low due to the need to hold some cash in the fund while we worked through a tender offer. We are now where we consider fully invested, but we will work through liquidity needs of our clients where necessary.
Outlook
The U.S. economy remains on a positive track, with modest but steady growth continuing through year end. Underlying economic fundamentals remain strong and we continue to see sentiment oscillate between pessimism and optimism. The swings in sentiment are understandable, considering underlying U.S. trend growth has been frustratingly slow, while quarterly GDP has been particularly volatile. Yet, through all the ups and downs, the U.S. economy has proven to be relatively durable, especially in the face of ongoing global headwinds.
The Federal Reserve has raised short-term interest rates four times since 2015, with the Federal Funds Target Rate moving from 0.25% to 1.25%. We expect this to continue and is expected to do so again in the near future (we view a 90% outcome of a December 2017 rate increase). The consumer has been leading the growth in the economy. With wages rising and the labor market continuing to add jobs at a good pace, we expect consumer expenditures to advance at a solid 2%+ rate in the fourth quarter, we feel the Fed is more comfortable with an increase.
When rates rise, we continue to view this portfolio as well positioned to adapt. The portfolio consists of Fixed Income based asset classes that are less sensitive to rising rates and more dependent on the macroeconomic landscape. We do believe there will continue to be bouts of volatility in the High Yield market over the next 12 months, and we see the portfolio taking advantage of this potential volatility. For those investors willing to take on the higher risk for higher return, we believe City National Rochdale High Yield Alternative Strategies Fund is an appropriate addition to client portfolios, relative to Core Fixed Income.
Sincerely,
Garrett R. D’Alessandro, CFA, CAIA, AIF®
Chief Executive Officer & President
City National Rochdale LLC
Important Disclosures
The performance returns presented may contain figures estimated by the underlying manager which, if subsequently revised by the underlying manager, may change the returns indicated for the applicable period.
The unsubsidized total annual fund operating expense ratio for the City National Rochdale High Yield Alternative Strategies Fund and the City National Rochdale High Yield Alternative Strategies Fund TEI is 1.78% and 1.81%, respectively. Cumulative Return at POP (Public Offering Price, reflecting maximum front end sales charge of 2.00%) since inception of July 1, 2007 for the City National Rochdale High Yield Alternative Strategies Fund and the City National Rochdale High Yield Alternative Strategies Fund TEI is 3.96% and 3.86%, respectively. Performance quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate, so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. The most recent month-end performance can be obtained by calling 800-245-9888.
An investor should consider carefully the Funds’ investment objectives, risks, charges, and expenses. The prospectus contains this and other important information about the investment company, and it may be obtained by calling 800-245-9888. Please read it carefully before investing. RIM Securities LLC, the affiliated broker dealer for City National Rochdale LLC, 400 Park Avenue, New York, NY 10022.
The views expressed herein represent the opinions of City National Rochdale LLC and are subject to change without notice at anytime. This information should not in any way be construed to be investment, financial, tax, or legal advice or other professional advice or service, and should not be relied on in making any investment or other decisions. Hedge fund investments are speculative and may entail substantial risks. Investing in small and medium-size companies may carry additional risks such as limited liquidity and increased volatility. Investing in international companies carries risks such as currency fluctuation, interest rate fluctuation, and economic and political instability. Short sales may increase volatility and potential for loss. As with all investments, there is no guarantee that investment objectives will be met.
City National Rochdale LLC, its affiliated companies, or their respective shareholders, directors, officers and/or employees may have long or short positions in the securities discussed herein.
City National Rochdale High Yield Alternative Strategies
Master Fund LLC
Financial Statements
September 30, 2017 (Unaudited)
City National Rochdale High Yield Alternative Strategies Master Fund LLC
Financial Statements
September 30, 2017 (Unaudited)
TABLE OF CONTENTS
Page | |
Financial Statements | |
Statement of Assets, Liabilities and Members' Capital | 2 |
Statement of Operations | 3 |
Statements of Changes in Members' Capital | 4 |
Statement of Cash Flows | 5 |
Schedule of Investments | 6 - 7 |
Strategy Allocation Breakdown | 8 |
Notes to Financial Statements | 9 - 18 |
Financial Highlights | 19 |
Approval of Investment Management Agreement
Additional Information
1
City National Rochdale High Yield Alternative Strategies Master Fund LLC | ||||
Statement of Assets, Liabilities and Members' Capital | ||||
September 30, 2017 (Unaudited) | ||||
ASSETS | ||||
Investments, at fair value (cost $30,495,758) | $ | 33,550,604 | ||
Receivable for fund investments sold | 364,188 | |||
Interest receivable | 1,007 | |||
Total Assets | 33,915,799 | |||
LIABILITIES AND MEMBERS' CAPITAL | ||||
Liabilities | ||||
Management fees payable | 41,873 | |||
Contributions received in advance | 50,000 | |||
Professional fees payable | 29,875 | |||
Directors' fees payable | 3,118 | |||
Accrued expenses and other liabilities | 43,520 | |||
Total Liabilities | 168,386 | |||
Total Members' Capital | $ | 33,747,413 | ||
The accompanying notes are an integral part of these financial statements. |
2
City National Rochdale High Yield Alternative Strategies Master Fund LLC | ||||
Statement of Operations | ||||
Six Months Ended September 30, 2017 (Unaudited) | ||||
INVESTMENT INCOME | ||||
Interest income | $ | 25,379 | ||
Investment Income | 25,379 | |||
EXPENSES | ||||
Management fees (see Note 4) | 125,038 | |||
Professional fees | 60,600 | |||
Administration fees | 51,332 | |||
Directors' fees | 3,248 | |||
Other expenses | 4,392 | |||
Total Expenses | 244,610 | |||
Net Investment Loss | (219,231 | ) | ||
REALIZED AND UNREALIZED GAIN (LOSS) | ||||
ON INVESTMENTS | ||||
Net realized gain on investments | 2,416,436 | |||
Net change in unrealized appreciation/depreciation on investments | (806,795 | ) | ||
Net Realized and Unrealized Gain on Investments | 1,609,641 | |||
Net Increase in Members' Capital Resulting from Operations | $ | 1,390,410 | ||
The accompanying notes are an integral part of these financial statements. |
3
City National Rochdale High Yield Alternative Strategies Master Fund LLC | ||||||||
Statements of Changes in Members' Capital | ||||||||
Six Months Ended | ||||||||
September 30, 2017 | Year Ended | |||||||
(Unaudited) | March 31, 2017 | |||||||
FROM OPERATIONS | ||||||||
Net investment loss | $ | (219,231 | ) | $ | (674,156 | ) | ||
Net realized gain on investments | 2,416,436 | 3,416,208 | ||||||
Net change in unrealized appreciation/depreciation on investments | (806,795 | ) | 1,960,292 | |||||
Net Increase in Members' Capital | ||||||||
Resulting From Operations | 1,390,410 | 4,702,344 | ||||||
DECREASE FROM TRANSACTIONS | ||||||||
IN MEMBERS' CAPITAL | ||||||||
Proceeds from sales of members' interests (see Note 2) | 2,800,000 | - | ||||||
Capital transfers to feeder funds | (8,820,878 | ) | (965,902 | ) | ||||
Net Decrease from Transactions in Members' Capital | (6,020,878 | ) | (965,902 | ) | ||||
Total Increase (Decrease) in Members' Capital | (4,630,468 | ) | 3,736,442 | |||||
MEMBERS' CAPITAL | ||||||||
Beginning of year | 38,377,881 | 34,641,439 | ||||||
End of period/year | $ | 33,747,413 | $ | 38,377,881 | ||||
The accompanying notes are an integral part of these financial statements. |
4
City National Rochdale High Yield Alternative Strategies Master Fund LLC | ||||
Statement of Cash Flows | ||||
Six Months Ended September 30, 2017 (Unaudited) | ||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||
Net increase in members' capital resulting from operations | $ | 1,390,410 | ||
Adjustments to reconcile net increase in members' capital | ||||
resulting from operations to net cash from operating activities: | ||||
Purchases of investments | (9,500,000 | ) | ||
Sales of investments | 9,290,882 | |||
Purchases of money market fund | (28,745,173 | ) | ||
Sales of money market fund | 34,899,267 | |||
Net change in unrealized appreciation/depreciation on investments | 806,795 | |||
Net realized gain on investments | (2,416,436 | ) | ||
Change in Operating Assets and Liabilities: | ||||
Receivable for fund investments sold | 275,987 | |||
Interest receivable | 2,327 | |||
Management fees payable | 18,073 | |||
Contributions received in advance | 50,000 | |||
Directors' fees payable | (7,982 | ) | ||
Professional fees payable | (54,394 | ) | ||
Accrued expenses and other liabilities | 11,122 | |||
Net Cash from Operating Activities | 6,020,878 | |||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||
Proceeds from sales of members' interests (see Note 2) | 2,800,000 | |||
Capital transfers to feeder funds | (8,820,878 | ) | ||
Net Cash from Financing Activities | (6,020,878 | ) | ||
Net Change in Cash and Cash Equivalents | - | |||
CASH AND CASH EQUIVALENTS | ||||
Beginning of year | - | |||
End of period | $ | - | ||
The accompanying notes are an integral part of these financial statements. |
5
City National Rochdale High Yield Alternative Strategies Master Fund LLC | ||||||||||||||||||||
Schedule of Investments | ||||||||||||||||||||
September 30, 2017 (Unaudited) | ||||||||||||||||||||
Redemptions | ||||||||||||||||||||
Percentage of | Notice Period | |||||||||||||||||||
Members' Capital | Cost | Fair Value | Frequency | # of Days | ||||||||||||||||
Long-Term Alternative Investment Funds: (1) | ||||||||||||||||||||
Structured Credit - CLO: | ||||||||||||||||||||
CIFC CLO Opportunity Holdings Fund II LP | 14.9 | % | $ | 5,000,000 | $ | 5,009,156 | * | * | ||||||||||||
(Purchased: 7/1/2017 and 8/1/2017) | ||||||||||||||||||||
Clareant Structured Credit Opportunity Fund II | 31.7 | 8,677,270 | 10,671,131 | Quarterly | 90 | |||||||||||||||
(Purchased: 5/1/2014, 7/1/2014, 8/1/2014, 9/1/2014, | ||||||||||||||||||||
10/1/2014, 11/1/2014, 5/1/2017, and 9/1/2017) | ||||||||||||||||||||
Great Lakes III, LP | 17.9 | 6,188,072 | 6,039,014 | Quarterly | 90 | |||||||||||||||
(Purchased: 5/1/2013, 9/1/2013, 10/1/2013, 12/1/2013, | ||||||||||||||||||||
1/1/2014, 2/1/2014, 5/1/2014, and 7/1/2014) | ||||||||||||||||||||
SEIX CLO Management LP | 28.1 | 8,923,724 | 9,484,722 | ** | ** | |||||||||||||||
(Purchased: 10/1/2016) | ||||||||||||||||||||
92.6 | 28,789,066 | 31,204,023 | ||||||||||||||||||
Liquidating Positions: | ||||||||||||||||||||
GoldenTree Partners LP (2) | 2.8 | 294,785 | 934,674 | *** | *** | |||||||||||||||
(Acquired: 7/2/2007, 8/1/2007, 11/1/2007, 12/3/2007, | ||||||||||||||||||||
2/1/2008, 7/1/2012, and 8/1/2012) | ||||||||||||||||||||
Total Long-Term Alternative Investment Funds: | 95.4 | 29,083,851 | 32,138,697 | |||||||||||||||||
Short-Term Investment: | ||||||||||||||||||||
Money Market Fund: | ||||||||||||||||||||
First American Government Obligations Fund - Class Z, 0.09% (3) | 4.2 | 1,411,907 | 1,411,907 | |||||||||||||||||
Total Investments | 99.6 | % | $ | 30,495,758 | $ | 33,550,604 |
(1) All investments are non-income producing. | ||||||||||
(2) Remaining value represents side pocket interests. | ||||||||||
(3) 7-day yield. | ||||||||||
* Fund is accepting investments through the final closing date, which is targeted for the first quarter of 2018, after which a 2 year investment | ||||||||||
period will begin. The term of the fund is 5 years after the end of the investment period with up to two 1-year extensions. This investment is | ||||||||||
long-term and illiquid. | ||||||||||
** SEIX CLO Management LP has a five year re-investment period and a subsequent wind down. This investment is long-term and illiquid. | ||||||||||
*** A side pocket investment has been established for GoldenTree Partners LP. This investment is long-term and illiquid. | ||||||||||
The investments in Alternative Investments Funds shown above, representing 95.4% of net assets, have been fair valued in accordance with procedures established by the Board of Directors. | ||||||||||
The accompanying notes are an integral part of these financial statements. |
6
City National Rochdale High Yield Alternative Strategies Master Fund LLC
Schedule of Investments, Continued
September 30, 2017 (Unaudited)
Structured Credit. Structured credit strategy invests in stressed/distressed non-corporate fixed income asset classes in non-traditional markets such as residential real estate, commercial real estate and asset backed lending that have become distressed and/or undergoing structural changes, with anticipated improvement in the fundamental value of the underlying asset. Economic downturns and fundamental uncertainties can cause forced selling of securitized assets associated with such markets. In general, profits are made by identifying and investing in securities priced significantly below their intrinsic values where the strategy can maximize long-term capital appreciation from earning interest income and cash flows from current amortizing principal payments, cash flows from liquidations and from the fundamental appreciation of the underlying assets. Investing in structured credit requires deep fundamental analysis of the underlying assets and the behavior of the borrowers. Managers may invest in structured credit securities at deep discounts to fair value. Profits are realized as these securities converge to or above fair value with fundamental improvements in underlying borrowers, assets or improved technical behavior. Typically, structured credit managers will take positions in both agency and non-agency RMBS, CMBS, CLO, and other consumer and commercial loan ABS. At times, the strategy may also entail positions in other income generating assets such as life settlements and annuities, trade finance, legal settlements, whole loans, etc.
Liquidating Positions. Liquidating positions from former investment strategies remain in the Fund due to redemption restrictions placed on them by Hedge Fund Managers either at their sole discretion or for other factors. Such factors include the magnitude of redemptions requested, portfolio valuation issues or market conditions.
7
City National Rochdale High Yield Alternative Strategies Master Fund LLC | |||||||||
Schedule of Investments, Continued | |||||||||
September 30, 2017 (Unaudited) | |||||||||
Strategy Allocation Breakdown | |||||||||
(as a % of total investments) |
The accompanying notes are an integral part of these financial statements. |
8
City National Rochdale High Yield Alternative Strategies Master Fund LLC
Notes to Financial Statements
September 30, 2017 (Unaudited)
1. | Organization |
City National Rochdale High Yield Alternative Strategies Master Fund LLC (the "Master Fund") is a closed-end, non-diversified management investment company that was organized as a limited liability company under the laws of the State of Delaware on September 11, 2006 and serves as a master fund in a master feeder structure. City National Rochdale High Yield Alternative Strategies Fund LLC and City National Rochdale High Yield Alternative Strategies Fund TEI LLC (the “Feeder Funds”) serve as the feeder funds in the master feeder structure. Interests in the Master Fund are issued solely in private placement transactions that do not involve any "public offering" within the meaning of Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act"). Investments in the Master Fund may be made only by U.S. and foreign investment companies, common or commingled trust funds, organizations or trusts described in Sections 401(a) or 501(a) of the Internal Revenue Code of 1986, as amended, or similar organizations or entities that are "accredited investors" within the meaning of Regulation D under the 1933 Act. The Master Fund is a registered investment company under the Investment Company Act of 1940, as amended (the “1940 Act”).
City National Rochdale, LLC (the “Manager” or "Adviser") is the investment adviser to the Master Fund. City National Rochdale, LLC is a subsidiary of City National Bank, and each are wholly-owned subsidiaries of RBC USA Holdco Corporation, a wholly-owned indirect subsidiary of Royal Bank of Canada.
The Master Fund seeks to achieve its objective by investing substantially all of its assets in the securities of privately placed investment vehicles, typically referred to as hedge funds (“Hedge Funds" or "Investment Funds”) that pursue a variety of high yield income generating strategies.
The Master Fund’s investment objective is to generate income from investments in higher yielding investments with lower credit quality and higher volatility than investment grade fixed income securities. “Lower credit quality” in this objective means investments rated below BBB, and “higher volatility” means the fluctuations in principal will be greater than the fluctuations in price associated with investment grade fixed income securities. Under normal circumstances, at least 80% of the Master Fund’s total assets will be invested either directly, or indirectly through Investment Funds, in a variety of high yield income generating investments.
9
City National Rochdale High Yield Alternative Strategies Master Fund LLC
Notes to Financial Statements
September 30, 2017 (Unaudited)
2. | Significant Accounting Policies |
The following is a summary of significant accounting policies followed by the Master Fund.
Basis of Presentation and Use of Estimates
The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”). The Fund is an investment company and follows accounting and reporting guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, “Financial Services-Investment Companies”. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Investments Valuation
Investments in Investment Funds are stated and recorded at fair value as determined in good faith by the Fair Value Committee in accordance with US GAAP using the Net Asset Value (“NAV”) as reported by the management of each respective alternative investment fund. Financial Accounting Standards Board (FASB) guidance provides for the use of NAV as a “Practical Expedient” for estimating fair value of alternative investments which (a) do not have a readily determinable fair value and (b) either have the attributes of an investment company or prepare their financial statements consistent with the measurement principles of an investment company. Such values generally represent the Master Fund's proportionate share of the net assets of the Investment Funds as reported by the Hedge Fund Managers. Accordingly, the value of the investments in Investment Funds are generally increased by additional contributions to the Investment Funds and the Master Fund's share of net earnings from the Investment Funds, and decreased by distributions from the Investment Funds and the Master Fund's share of net losses from the Investment Funds.
10
City National Rochdale High Yield Alternative Strategies Master Fund LLC
Notes to Financial Statements
September 30, 2017 (Unaudited)
2. | Significant Accounting Policies (continued) |
Investment Valuations (continued)
The Adviser reviews the details of the reported information obtained from the Hedge Fund Managers and considers: (i) the measurement date of the NAV provided, (ii) the basis of accounting and, (iii) in instances where the basis of accounting is other than fair value, fair valuation information provided by the Hedge Fund Managers. The Adviser may make adjustments to the NAV of various Investment Funds to obtain the best estimate of fair value, which is consistent with the measurement principles of an investment company. Any determinations made by the Adviser will be reviewed and approved by the Adviser’s Fair-Value Committee, which has been designated by the Board to make all necessary fair value determinations.
The Master Fund has not maintained any positions in derivative instruments or directly engaged in hedging activities.
Fair Value Measurements
The Master Fund follows fair valuation accounting standards which establish an authoritative definition of fair value and set out a hierarchy for measuring fair value. These standards require additional disclosures about the various inputs and valuation techniques used to develop the measurements of fair value and a discussion in changes in valuation techniques and related inputs during the year. These standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy is organized into three levels based upon the assumptions (referred to as “inputs”) used in pricing the asset or liability. These standards state that “observable inputs” reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from independent sources and “unobservable inputs” reflect an entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability. These inputs are summarized in the three broad levels listed below:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the Master Fund has the ability to access.
Level 2 - Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates and similar data.
11
City National Rochdale High Yield Alternative Strategies Master Fund LLC
Notes to Financial Statements
September 30, 2017 (Unaudited)
2. | Significant Accounting Policies (continued) |
Fair Value Measurements (continued)
Level 3 - Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available, representing the Master Fund’s own assumptions about the assumptions a market participant would use in valuing the asset or liability, and would be based on the best information available.
Investments measured using the NAV as a practical expedient are not classified within the fair value hierarchy.
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. See Note 3 – Investments.
Investment Income Recognition
Purchases and sales of securities are recorded on a trade-date basis. Realized gains and losses on Investment Funds are recognized using the specific identification method. Interest income is recorded on the accrual basis and dividends are recorded on the ex-dividend date. Realized and unrealized gains and losses are included in the determination of income.
Fund Expenses
The expenses of the Master Fund include, but are not limited to, the following: legal fees; accounting and auditing fees; custodial fees; management fees; costs of computing the Master Fund's net asset value; costs of insurance; registration expenses; due diligence, including travel and related expenses; expenses of meetings of the Board and officers; all costs with respect to communications to Members; and other types of expenses as may be approved from time to time by the Board.
Income Taxes
The Master Fund’s tax year end is December 31. The Master Fund is treated as a partnership for Federal income tax purposes. Each Member is responsible for the tax liability or benefit relating to such Member’s distributive share of taxable income or loss. Accordingly, no provision for Federal income taxes is reflected in the accompanying financial statements.
The Master Fund has adopted authoritative guidance on uncertain tax positions. The Master Fund recognizes the effect of tax positions when they are more likely than not of being sustained. Management is not aware of any exposure to uncertain tax positions that could require accrual or which could affect its liquidity or future cash flows. As of September 30, 2017, the Master Fund’s tax years 2015 through 2017 remain open and subject to examination by relevant taxing authorities.
12
City National Rochdale High Yield Alternative Strategies Master Fund LLC
Notes to Financial Statements
September 30, 2017 (Unaudited)
2. | Significant Accounting Policies (continued) |
Subsequent Events
The Master Fund has adopted financial reporting rules regarding subsequent events, which requires an entity to recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet. Management has evaluated the Master Fund’s related events and transactions through the date the financial statements were available to be issued and determined that there were no significant subsequent events that would require adjustment to or additional disclosure in these financial statements.
Capital Accounts
Net profits or net losses of the Master Fund for each month are allocated to the capital accounts of Members as of the last day of each month in accordance with Members' respective investment percentages of the Master Fund. Net profits or net losses are measured as the net change in the value of the net assets of the Master Fund during a fiscal period, before giving effect to any repurchases of interest in the Master Fund, and excluding the amount of any items to be allocated to the capital accounts of the Members of the Master Fund, other than in accordance with the Members' respective investment percentages.
Prior to the end of each quarter, the Master Fund receives Member contributions with an effective subscription date of the first day of the following month.
The Master Fund, in turn, makes contributions to certain Hedge Funds, which have effective subscription dates of the first day of the following month. These amounts are reported as "Contributions received in advance" and "Investments made in advance", respectively.
13
City National Rochdale High Yield Alternative Strategies Master Fund LLC
Notes to Financial Statements
September 30, 2017 (Unaudited)
3. | Investments |
The following are the classes of investments grouped by the fair value hierarchy for those investments measured at fair value on a recurring basis at September 30, 2017:
Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | ||||||||||||||
Description | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
Alternative Investment Funds ^ | $ | - | $ | - | $ | - | $ | 32,138,697 | ||||||||
Short-Term Investment - Money Market Funds | 1,411,907 | - | - | 1,411,907 | ||||||||||||
Total Investments | $ | 1,411,907 | $ | - | $ | - | $ | 33,550,604 |
^ The alternative investments were valued using the practical expedient and have not been classified in the fair value hierarchy.
The Fund did not invest in any Level 3 securities and there were no transfers into or out of Level 1, Level 2 or Level 3 fair value measurements at September 30, 2017, as compared to their classification from the previous annual report.
The following table presents additional information for investments measured using the NAV practical expedient:
Alternative Investment Funds | Fair Value at September 30, 2017 | Unfunded Commitments | Redemption Frequency | Redemption Notice Period | ||||||||||||
Structured Credit – CLO | $ | 5,009,156 | - | * | * | |||||||||||
Structured Credit – CLO | 16,710,145 | - | Quarterly | 90 | ||||||||||||
Structured Credit – CLO | 9,484,722 | - | ** | ** | ||||||||||||
Liquidating Positions | 934,674 | - | *** | *** | ||||||||||||
Total | $ | 32,138,697 | $ | - | ||||||||||||
* Fund is accepting investments through the final closing date, which is targeted for the first quarter of 2018, after which a 2 year investment period will begin. The term of the fund is 5 years after the end of the investment period with up to two 1-year extensions. This investment is long-term and illiquid.
** SEIX CLO Management LP has a five year re-investment period and a subsequent wind down. This investment is long-term and illiquid.
*** A Special Investment has been established for GoldenTree Partners LP. This investment is long-term and illiquid.
14
City National Rochdale High Yield Alternative Strategies Master Fund LLC
Notes to Financial Statements
September 30, 2017 (Unaudited)
4. | Commitments and Other Related Party Transactions |
Management Fees
Under the supervision of the Master Fund’s Board and pursuant to an investment management agreement (“Investment Management Agreement”), City National Rochdale LLC, an investment adviser registered under the Investment Advisers Act of 1940, as amended, serves as the Manager for the Master Fund. The Manager is authorized, subject to the approval of the Master Fund’s Board, to retain one or more other organizations, including its affiliates, to provide any or all of the services required to be provided by the Manager to the Master Fund or to assist in providing these services.
The Master Fund paid the Manager an investment management fee at an annual rate equal to 0.75% of the Master Fund’s month-end net assets, including assets attributable to the Manager (or its affiliates) and before giving effect to any repurchases by the Master Fund of Member interests. The investment management fee is accrued monthly and paid to the Manager out of the Master Fund’s assets.
Administration Fee
U.S. Bancorp Fund Services, LLC (the “Administrator”) acts as the Funds’ Administrator under an Administration Agreement. The Administrator prepares various federal and state regulatory filings, reports and returns for the Funds; prepares reports and materials to be supplied to the Members of the Feeder Funds; monitors the activities of the Funds’ custodian, transfer agent and accountants; coordinates the preparation and payment of the Funds’ expenses and reviews the Funds’ expense accruals. For its services, the Administrator receives a monthly fee from the Master Fund at an annual rate of 0.12% for the first $150 million, 0.10% for the next $150 million and 0.08% thereafter of average net assets, with a minimum annual fee of $100,000.
Expense Reimbursement
The Manager has contractually agreed to waive and/or reimburse the Master Fund’s expenses to the extent needed to limit the Master Fund’s annual operating expenses combined with the annual operating expenses of the Feeder Funds. From April 1, 2016 through December 31, 2016 the annual operating expenses of each Feeder Fund were limited to 2.25% of net assets. Beginning January 1, 2017 the annual operating expenses of each Feeder Fund were limited to 1.75% of net assets. To the extent that the Manager reimburses or absorbs fees and expenses, it may seek payment of such amounts for three years after the year in which the expenses were reimbursed or absorbed. A Feeder Fund will make no such payment, however, if its total annual operating expenses exceed the expense limits in effect at the time the expenses are to be reimbursed or at the time these payments are proposed.
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City National Rochdale High Yield Alternative Strategies Master Fund LLC
Notes to Financial Statements
September 30, 2017 (Unaudited)
4. | Commitments and Other Related Party Transactions (continued) |
The following is a schedule of when fees may be recouped by the Manager with respect to the Feeder Funds:
City National Rochdale High Yield Alternative Strategies Fund LLC | City National Rochdale High Yield Alternative Strategies Fund TEI LLC | Expiration | ||||||
$ | 8,893 | $ | 10,803 | March 31, 2018 | ||||
35,122 | 37,704 | March 31, 2019 | ||||||
33,547 15,120 | 38,225 18,456 | March 31, 2020 March 31, 2021 | ||||||
$ | 92,682 | $ | 105,188 |
No accrual has been made for such contingent liability because of the uncertainty of the reimbursement from the Feeder Funds.
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City National Rochdale High Yield Alternative Strategies Master Fund LLC
Notes to Financial Statements
September 30, 2017 (Unaudited)
5. | Investment Risks and Uncertainties |
Alternative Investments consist of non-traditional, not readily marketable investments, some of which may be structured as offshore limited partnerships, venture capital funds, hedge funds, private equity funds and common trust funds. The underlying investments of such funds, whether invested in stock or other securities, are generally not currently traded in a public market and typically are subject to restrictions on resale. Values determined by investment managers and general partners of underlying securities that are thinly traded or not traded in an active market may be based on historical cost, appraisals, a review of the investees’ financial results, financial condition and prospects, together with comparisons to similar companies for which quoted market prices are available or other estimates that require varying degrees of judgment.
Investments are carried at fair value provided by the respective alternative investment’s management. Because of the inherent uncertainty of valuations, the estimated fair values may differ significantly from the values that would have been used had a ready market for such investments existed or had such investments been liquidated, and those differences could be material.
6. | Concentration, Liquidity and Off-Balance Sheet Risk |
The Master Fund invests primarily in Hedge Funds that are not registered under the 1940 Act and invest in and actively trade securities and other financial instruments using different strategies and investment techniques, including leverage, which may involve significant risks. These Hedge Funds may invest a high percentage of their assets in specific sectors of the market in order to achieve a potentially greater investment return. As a result, the Hedge Funds may be more susceptible to economic, political, and regulatory developments in a particular sector of the market, positive or negative, and may experience increased volatility of the Hedge Funds' net asset value.
Various risks are also associated with an investment in the Master Fund, including risks relating to the multi-manager structure of the Master Fund, risks relating to compensation arrangements and risks relating to limited liquidity, as described below.
Redemption restrictions exist for Hedge Funds whereby the Hedge Fund Managers may suspend redemptions either in their sole discretion or other factors. Such factors include the magnitude of redemptions requested, portfolio valuation issues or market conditions.
Redemptions are currently restricted for two Hedge Funds with fair value of $10,419,396 at September 30, 2017 as noted in the Schedule of Investments.
17
City National Rochdale High Yield Alternative Strategies Master Fund LLC
Notes to Financial Statements
September 30, 2017 (Unaudited)
6. | Concentration, Liquidity and Off-Balance Sheet Risk (continued) |
In the normal course of business, the Hedge Funds in which the Master Fund invests trade various financial instruments and enter into various investment activities with off-balance sheet risk. These include, but are not limited to, short selling activities, writing option contracts, contracts for differences, and interest rate, credit default and total return equity swap contracts. The Master Fund's risk of loss in these Hedge Funds is limited to the value of its own investments reported in these financial statements by the Master Fund. The Master Fund itself does not invest directly in securities with off-balance sheet risk.
7. | Investment Transactions |
For the six months ended September 30, 2017 (excluding short-term securities), the aggregate purchases and sales of investments were $9,500,000 and $9,290,882, respectively.
8. | Tender Offer |
On March 31, 2017, the Master Fund offered to purchase up to $12,000,000 of Members’ interests in the Master Fund properly tendered at a price equal to the net asset value of such interests as of April 30, 2017. For Members’ interests tendered, each security holder received a promissory note entitling the security holder to a cash amount equal to the net asset value of their interests calculated as of April 30, 2017, upon the terms and subject to the conditions set forth in the Offer to Purchase dated March 30, 2017. The offer terminated at 5:00 p.m., Eastern Time, on April 28, 2017. Pursuant to the Offer to Purchase, Members’ interests of $7,137,817 were tendered and accepted by the Master Fund.
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City National Rochdale High Yield Alternative Strategies Master Fund LLC | ||||||||||||||||||||||||
Financial Highlights | ||||||||||||||||||||||||
Six Months Ended | ||||||||||||||||||||||||
September 30, 2017 | Year Ended | Year Ended | Year Ended | Year Ended | Year Ended | |||||||||||||||||||
(Unaudited) | March 31, 2017 | March 31, 2016 | March 31, 2015 | March 31, 2014 | March 31, 2013 | |||||||||||||||||||
TOTAL RETURN - NET | 4.08% | (1) | 13.53% | (6.80% | ) | 3.39% | 5.01% | (0.58% | ) | |||||||||||||||
RATIOS/SUPPLEMENTAL DATA | ||||||||||||||||||||||||
Net Assets, end of period ($000's) | $ | 33,747 | $ | 38,378 | $ | 34,641 | $ | 6,798 | $ | 34,701 | $ | 24,970 | ||||||||||||
Portfolio Turnover | 32.94% | 31.93% | 0.15% | 20.10% | 23.29% | 7.98% | ||||||||||||||||||
Ratio of Net Investment | ||||||||||||||||||||||||
Loss to Average Net Assets | (1.30%) | (2) | (1.81%) | (2.01% | ) | (1.86% | ) | (2.14% | ) | (1.79% | ) | |||||||||||||
Ratio of Expenses to | ||||||||||||||||||||||||
Average Net Assets | 1.45% | (2) | 1.86% | 2.02% | 1.86% | 2.14% | 1.79% | |||||||||||||||||
(1) Not annualized | ||||||||||||||||||||||||
(2) Annualized | ||||||||||||||||||||||||
Total return is calculated for all Members taken as a whole and an individual Member's return may vary from these Master Fund returns based on the timing of capital transactions. | |||||||||||||||
Total returns do not include the effect of any sales load. | |||||||||||||||
The ratios of expenses to average net assets do not include expenses of the Hedge Funds in which the Master Fund invests. | |||||||||||||||
The expense ratios are calculated for all Members taken as a whole. The computation of such ratios based on the amount of expenses assessed to anindividual Member's capital may vary from these ratios based on the timing of capital transactions. | |||||||||||||||
The ratios above do not include the proportionate share of income or loss from their investments in other funds. | |||||||||||||||
The accompanying notes are an integral part of these financial statements. | |||||||||||||||
* * * * * * |
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Additional Information
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Master Fund uses to determine how to vote proxies relating to portfolio securities, as well as information relating to how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30, will be available (i) without charge, upon request, by calling 1-800-245-9888; and (ii) on the SEC’s website at www.sec.gov.
Portfolio Holdings Disclosure
The Master Fund will file its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q will be available on the SEC’s website at www.sec.gov, and may also be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-732-0330.
BOARD APPROVAL OF ADVISORY AGREEMENT (UNAUDITED)
The Board of Directors of each of City National Rochdale High Yield Alternative Strategies Master Fund LLC (the “Master Fund”), City National Rochdale High Yield Alternative Strategies Fund TEI LLC (the “TEI Fund”) and City National Rochdale High Yield Alternative Strategies Fund LLC (together with the TEI Fund, the “Feeder Funds,” and together with the Master Fund and the TEI Fund the “Funds”) is comprised of six Directors, five of whom are independent of the Funds’ investment adviser (the “Independent Directors”). During the six months ended September 30, 2017, the Board and the Independent Directors approved renewal of the Funds’ advisory agreement (the “Agreement”) with City National Rochdale, LLC (the “Adviser”), as described below.
General Information
The following information summarizes the Board’s considerations associated with its review of the Agreement. In connection with its deliberations, the Board considered such information and factors as the Board members believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. As described below, the Board considered the nature, quality and extent of the various investment advisory and administrative services performed by the Adviser. In considering these matters, the Independent Directors discussed the approval of the Agreement with management and in private sessions with their independent counsel at which no representatives of the Adviser were present.
The Board reviewed extensive materials regarding investment results of the Adviser with respect to the Funds, advisory fee and expense comparisons, financial information with respect to the Adviser, descriptions of various functions such as compliance monitoring and portfolio trading practices, and information about the personnel providing investment management and administrative services to the Funds. The Board also took into account information they received at past meetings of the Board and its committees with respect to these matters.
In deciding to renew the Agreement, the Board and the Independent Directors did not identify a single factor as controlling and this summary does not describe all of the matters considered. In addition, each Board member did not necessarily attribute the same weight to each matter. However, the Board and the Independent Directors concluded that each of the various factors referred to below favored such approval.
Nature, Extent and Quality of Services
In reviewing the services provided by the Adviser to the Funds, the Board considered a variety of matters, including the background, education and experience of the Adviser’s personnel; its overall financial strength and stability; its resources and efforts to retain, attract and motivate capable personnel to serve the Funds; and the overall general quality and depth of its organization. The Board also took into account the experience, capability and integrity of the Adviser’s senior management; its investment philosophy and processes; its portfolio trading and soft dollar practices; its commitment to compliance with applicable laws and regulations and the systems in place to ensure compliance with those requirements; and its disaster recovery, cybersecurity and contingency planning practices. The Board found all of these matters to be satisfactory.
Investment Performance
The Board assessed the performance of the Feeder Funds compared with their relevant benchmark index for the one- and three-year and since inception periods ended May 31, 2017. The Board members observed that for the one-year period, the total returns of the Feeder Funds were higher than the return of the Funds’ benchmark, the Credit Suisse Leveraged Loan Index. The Board members considered that the annualized total returns of the Funds for the three-year and since inception periods were lower than the returns of the Funds’ benchmark by 0.65% or less and 0.35% or less, respectively. The Board noted that the investment results of the Funds were generally competitive; that the Adviser had given reasonable explanations for the underperformance of the Funds for the three-year and since inception periods; and that consideration of returns of market indexes needed to take into account that indexes do not reflect the expenses of operating funds. The Board members also noted that the Adviser was satisfied with the Feeder Funds’ one-year returns, both of which were over 11%. The Board concluded that the Adviser continued to provide high quality management and oversight services to the Funds.
Advisory Fees and Fund Expenses
The Board reviewed information regarding the advisory fees charged by the Adviser to the Funds and the total expenses of the Funds (as a percentage of average annual net assets). The Board noted that it was difficult to gather a peer group for comparison due to the unique investment strategy of the Funds and lack of public information regarding the Funds’ competitors. The Board reviewed fee and expense information from samples of similarly structured closed-end funds and private funds with alternative investment strategies compiled by U.S. Bancorp Fund Services, LLC, the Funds’ administrator, in consultation with the Adviser, using data from Morningstar, Inc.
The Board observed that the Funds, which have annual advisory fee rates of 0.75%, compared favorably to a sample of 504 peer alternative investment funds, which had a median advisory fee rate of 1.50%. The Board also observed that the Funds’ advisory fee rate was 0.75% lower than the 1.50% median fee rate of 92 peer funds employing a similar fund-of-funds strategy. The Board members noted the recent changes to the Funds, including the removal of the sub-adviser, the reduction of the management fee rate and annual expense caps, and that the Funds are no longer subject to a performance-based allocation in addition to an asset-based advisory fee. The Board considered that the Adviser does not manage assets of any other clients that have similar investment objectives and policies as those of the Funds, and therefore they did not have a good basis for comparing the Funds’ advisory fees with those of other clients of the Adviser.
The Board next considered the total expense ratios of the Funds compared with those of a peer sample of 42 alternative investment funds that voluntarily report their annual net expense ratios. The Board members noted that the total expense ratios of the Feeder Funds (1.75%) were 0.54% higher than the peer group median and 0.35% higher than the peer group mean.
The Board concluded that the advisory fees charged by the Adviser to the Funds were fair and reasonable in relation to the value of services provided, and the total expenses of each Fund continued to be reasonable in light of the services provided.
Profitability, Benefits to the Adviser and Economies of Scale
The Board considered information prepared by the Adviser relating to its costs and profits with respect to the Funds, noting that the Adviser was waiving a portion of its fees with respect to the Funds pursuant to an expense limitation agreement. The Board members determined that the level of profitability with respect to the Funds was reasonable.
The Board also considered the benefits received by the Adviser and its affiliates as a result of the Adviser’s relationship with the Funds (other than investment advisory fees paid to the Adviser), including fees paid to the Adviser’s affiliate, RIM Securities, LLC, for providing distribution services to the Funds; benefits to the Adviser’s general wealth management business as a result of the availability of the Funds to its customers; and the intangible benefits of the Adviser’s association with the Funds. The Board noted the Adviser’s representation that no significant economies of scale with respect to the Funds had been realized in the past year. The Board also noted that although there were no advisory fee breakpoints, based on the Adviser’s operations significant economies of scale were not likely to be realized until the asset levels of the Funds were substantially higher than their current levels.
Conclusions
Based on their review, including their consideration of each of the factors referred to above, the Board and the Independent Directors concluded that the compensation payable to the Adviser under the Agreement is fair and reasonable in light of the nature and quality of the services being provided by the Adviser to the Funds and their shareholders, and that renewal of the Agreement was in the best interest of the Funds and their shareholders.
Item 2. Code of Ethics.
Not applicable for semi-annual reports.
Item 3. Audit Committee Financial Expert.
Not applicable for semi-annual reports.
Item 4. Principal Accountant Fees and Services.
Not applicable for semi-annual reports.
Item 5. Audit Committee of Listed Registrants.
Not applicable to registrants who are not listed issuers (as defined in Rule 10A-3 under the Securities Exchange Act of 1934).
Item 6. Investments.
Schedule of Investments is included as part of the report to shareholders filed under Item 1 of this Form.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable for semi-annual reports.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable for semi-annual reports.
Item 9. Purchases of Equity Securities by Closed‑End Management Investment Company and Affiliated Purchasers.
Not applicable
Item 10. Submission of Matters to a Vote of Security Holders.
The registrant’s nominating committee charter does not contain any procedures by which shareholders may recommend nominees to the registrant’s board of directors.
Item 11. Controls and Procedures.
(a) | The registrant’s President/Chief Executive Officer and Treasurer/Chief Financial Officer have reviewed the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the “Act”)) as of a date within 90 days of the filing of this report, as required by Rule 30a-3(b) under the Act and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934. Based on their review, such officers have concluded that the disclosure controls and procedures are effective in ensuring that information required to be disclosed in this report is appropriately recorded, processed, summarized and reported and made known to them by others within the registrant and by the registrant’s service provider. |
(b) | There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the second fiscal quarter of 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 12. Disclosure of Securities Lending Activities for Closed-End Management Investment Companies
The registrant did not engage in securities lending activities during the fiscal period reported on this Form N-CSR.
Item 13. Exhibits.
(a) | (1) Any code of ethics or amendment thereto, that is the subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy Item 2 requirements through filing an exhibit. Not applicable. |
(2) A separate certification for each principal executive and principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
(3) Any written solicitation to purchase securities under Rule 23c-1 under the Act sent or given during the period covered by the report by or on behalf of the registrant to 10 or more persons. Not applicable during the period.
(4) Change in the registrant’s independent public accountant. There was no change in the registrant’s independent public accountant for the period covered by this report.
(b) | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. |
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.
(Registrant) City National Rochdale High Yield Alternative Strategies Master Fund LLC
By (Signature and Title)* /s/ Garrett R. D’Alessandro
Garrett R. D’Alessandro, President
Date November 27, 2017
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.
By (Signature and Title)* /s/ Garrett R. D’Alessandro
Garrett R. D’Alessandro, President
Date November 27, 2017
By (Signature and Title)* /s/ Mitchell Cepler
Mitchell Cepler, Treasurer
Date November 27, 2017
* Print the name and title of each signing officer under his or her signature.