Washington, D.C. 20549
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, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.
Item 1. Reports to Stockholders.
ADVISORSHARES TRUST
Letter from the CEO of AdvisorShares Investments, LLC
December 31, 2010
Thank you for being a shareholder in AdvisorShares ETFs. We are please to provide you with this report. Thanks to your support, we have been able to offer a variety of actively managed ETFs, each with their own unique investment strategy. Our goal is to continue to offer you quality investment managers in a structure that provides transparency, intra-day liquidity, and better overall operating efficiency. In addition to this report, we encourage you to visit www.advisorshares.com to learn more about the other exciting actively managed ETFs offered by AdvisorShares. There you will find detailed information on the investment strategies, along with manager commentary from each ETF’s portfolio management team.
Thank you again for being an investor in AdvisorShares ETFs. We value the trust and confidence you have put in our firm, our employees and our portfolio manager partners.
Sincerely,
![[GRAPHIC MISSING]](https://capedge.com/proxy/N-CSRS/0001144204-11-013454/sig_noah-hamman.jpg)
Noah Hamman
CEO, AdvisorShares Investments
An investment in the Fund is subject to risk, including the possible loss of principal amount invested. Other Fund risks include asset allocation risk, trading risk, early closing risk, turnover risk and temporary defensive positions risk which can increase Fund expenses and may decrease Fund performance. The Fund is, also, subject to the risks associated with the underlying ETFs that comprise this “fund of funds”. The underlying ETFs’ risks, as detailed in the prospectus, include small and large cap company risk, real estate investment trusts (REITs) risk, interest rate risk, credit risk, fixed income risk, foreign securities and currency risks, emerging markets risk, derivative risk, and commodity-linked derivative investment risk.
The views in this report were those of the Fund’s CEO as of December 31, 2010 and may not reflect his views on the date that this report is first published or anytime thereafter. These views are intended to assist shareholders in understanding their investments and do not constitute investment advice.
ADVISORSHARES TRUST
Shareholder Expense Examples
As a shareholder of the Fund, you incur transaction cost and ongoing costs, including management fees and other Fund expenses. The following example is intended to help you understand your ongoing costs (in dollars and cents) of investing in the Fund and to compare these costs with the ongoing costs of investing in other funds. The examples are based on an initial investment of $1,000 invested at the beginning of the period and held for the period ended December 31, 2010.
Actual Expenses
The first line under each Fund in the table below provides information about actual account values and actual expenses. You may use the information, together with the amount you invested, to estimate the expenses that you incurred over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number under the heading entitled “Expenses Paid” to estimate the expenses attributable to your account during this period.
Hypothetical Example for Comparison Purposes
The second line under each Fund in the table provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses for the period. You may use this information to compare the ongoing costs of investing in the Funds and other ETF funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the hypothetical example is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds.
In addition, if these transactional costs were included, your costs would have been higher.
 | | | | | | | | |
| Fund Name | | Beginning Account
Value | | Ending
Account Value
12/31/2010 | | Annualized Expense Ratio
for the Period* | | Expenses
Paid |
Dent Tactical ETF
| | | | | | | | | | | | | | | | |
| Actual | | $ | 1,000.00 | | | $ | 1,092.00 | | | | 1.49 | % | | $ | 7.86 | |
| Hypothetical (assuming a 5% return before expenses) | | $ | 1,000.00 | | | $ | 1,017.69 | | | | 1.49 | % | | $ | 7.58 | |
Mars Hill Global Relative Value ETF
| | | | | | | | | | | | | | | | |
| Actual | | $ | 1,000.00 | | | $ | 1,016.00 | | | | 2.85 | % | | $ | 13.77 | (1) |
| Hypothetical (assuming a 5% return before expenses) | | $ | 1,000.00 | | | $ | 1,010.31 | | | | 2.85 | % | | $ | 13.73 | (1) |
Cambria Global Tactical ETF
| | | | | | | | | | | | | | | | |
| Actual | | $ | 1,000.00 | | | $ | 1,025.60 | | | | 1.18 | % | | $ | 2.16 | (2) |
| Hypothetical (assuming a 5% return before expenses) | | $ | 1,000.00 | | | $ | 1,009.04 | | | | 1.18 | % | | $ | 2.14 | (2) |
WCM/BNY Mellon Focused Growth ADR ETF
| | | | | | | | | | | | | | | | |
| Actual | | $ | 1,000.00 | | | $ | 1,010.30 | | | | 1.25 | % | | $ | 5.61 | (3) |
| Hypothetical (assuming a 5% return before expenses) | | $ | 1,000.00 | | | $ | 1,022.33 | | | | 1.25 | % | | $ | 5.64 | (3) |
ADVISORSHARES TRUST
Notes to Financial Statements
December 31, 2010
(unaudited)
1. Organization
AdvisorShares Trust (the “Trust”) was organized as a Delaware statutory trust on July 30, 2007 and has authorized capital of unlimited shares. The Trust is an open-end management investment company, registered under the Investment Company Act of 1940, as amended (the “Act”). The Trust is comprised of 5 active funds (the “Funds” or “ETFs” and individually, the “Fund” or “ETF”): Dent Tactical ETF, Mars Hill Global Relative Value ETF, Cambria Global Tactical ETF, WCM/BNY Mellon Focused ADR ETF and Peritus High Yield ETF. Operations commenced on September 16, 2009 for Dent Tactical ETF, July 9, 2010 for the Mars Hill Global Relative Value ETF, October 26, 2010 for the Cambria Global Tactical ETF, July 21, 2010 for the WCM/BNY Mellon Focused ADR ETF and December 1, 2010 for the Peritus High Yield ETF.
The Dent Tactical ETF seeks long term capital growth of capital by investing primarily in other exchange-traded funds (the “Underlying ETFs”).
Mars Hill Global Relative Value ETF seeks average annual returns in excess of the MSCI World Index by investing in both long and short positions in Underlying ETFs that offer diversified exposure to global regions. The Fund may also use derivatives tied to the broad market indices when establishing net long and net short exposure on top of the core long/short portfolio.
Cambria Global Tactical ETF seeks to preserve and grow capital by investing primarily in other Underlying ETFs that offer diversified exposure to global regions, countries, styles or sectors and exchange-traded products.
WCM/BNY Mellon Focused ADR ETF seeks long-term capital appreciation by investing primarily in other Underlying ETFs, American Depository Receipts (ADRs) included in the BNY Mellon Classic ADR Index, the Fund’s primary index, and swap contracts.
Peritus High Yield ETF seeks high current income by investing in a focused portfolio of high yield debt securities commonly referred to as “junk bonds”. The Fund does not have any portfolio maturity limitation and may invest in instruments with short-term, medium-term or long-term maturities.
2. Summary of Significant Accounting Policies
These financial statements are prepared in accordance with U.S. generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Investment Valuation
In computing each Fund’s NAV, the Fund’s securities holdings are valued based on their last readily available market price. Price information on listed securities, including Underlying ETFs, is taken from the exchange where the security is primarily traded. Securities regularly traded in an OTC market are valued at the latest quoted sales price on the primary exchange or national securities market on which such securities are traded. Securities not listed on an exchange or national securities market, or securities in which there was no last reported sales price, are valued at the most recent bid price. Other portfolio securities and assets for which market quotations are not readily available are valued based on fair value as determined in good faith by the Board of Trustees of the Trust.
ADVISORSHARES TRUST
Notes to Financial Statements
December 31, 2010
(unaudited)
2. Summary of Significant Accounting Policies - (continued)
Investment Transactions
Investment transactions are accounted for on the trade date. Realized gains and losses on sales of investment securities are calculated using the identified cost method. Dividend income and distributions to shareholders are recognized on the ex-dividend date and expenses are recognized on the accrual basis.
Equity Swaps
The Mars Hills Global Relative Value ETF Fund invest in equity swaps to obtain exposure to the underlying referenced security, obtain leverage or enjoy the returns from ownership without actually owning equity. Equity swaps are two-party contracts that generally obligate one party to pay the positive return and the other party to pay the negative return on a specified reference security, basket of securities, security index or index component during the period of the swap. Equity swap contracts are marked to market daily based on the value of the underlying security and the change, if any, is recorded as an unrealized gain or loss. Equity swaps normally do not involve the delivery of securities or other underlying assets. Accordingly, the risk of loss with respect to equity swaps is normally limited to the net amount of payments that a Fund is contractually obligated to make. If the other party to an equity swap defaults, a Fund’s risk of loss consists of the net amount of payments that such Fund is contractually entitled to receive, if any. Equity swaps are derivatives and their value can be very volatile. To the extent that the Adviser or Sub-Adviser, as applicable, do not accurately analyze and predict future market trends, the values of assets or economic factors, a Fund may suffer a loss, which may be substantial. The swap markets in which many types of swap transactions are traded have grown substantially in recent years, with a large number of banks and investment banking firms acting both as principals and as agents. As a result, the markets for certain types of swaps have become relatively liquid. Periodic payments received or paid by the Funds are recorded as realized gains or losses.
Short Sales
The Mars Hills Global Relative Value ETF Fund sells securities it does not own as a hedge against some of its long positions and/or in anticipation of a decline in the market value of that security (short sale). When the Fund makes a short sale, it must borrow the security sold short and deliver it to the broker-dealer through which it made the short sale. The Fund may have to pay a fee to borrow the particular security and may be obligated to remit any interest or dividends received on such borrowed securities. Dividends declared on short positions open are recorded on the ex-date as an expense. A gain, limited to the price at which the Fund sold the security short, or a loss, unlimited in magnitude, will be recognized upon the termination of a short sale if the market price at termination is less than or greater than, respectively, the proceeds originally received. The Fund is also subject to the risk that it may be unable to reacquire a security to terminate a short position except at a price substantially in excess of the last quoted price.
The Fund is required to pledge cash or securities to the broker as collateral for the securities sold short. Collateral requirements are calculated daily based on the current market value of the short positions. Cash deposited with broker for collateral for securities sold short is recorded as an asset on the Statement of Assets and Liabilities and securities segregated as collateral are denoted in the Schedule of Investments. The Fund may receive or pay the net of the following amounts: (i) a portion of the income from the investment of cash collateral; (ii) the broker’s fee on the borrowed securities; and (iii) a financing charge for the difference in the market value of the short position and cash collateral deposited with the broker. This income or fee is calculated daily based upon the market value of each
ADVISORSHARES TRUST
Notes to Financial Statements
December 31, 2010
(unaudited)
2. Summary of Significant Accounting Policies - (continued)
borrowed security and a variable rate that is dependent on the availability of the security. The net amounts of income or fees of $265,870 are included as interest income in the Statement of Operations.
Deposits with brokers and segregated cash for securities sold short represent cash balances on deposit with the Fund’s prime brokers and custodian. The Fund is subject to credit risk should the prime brokers be unable to meet its obligations to the Fund.
Futures Contracts
Each Fund may invest in futures contracts (“futures”), may invest in futures in order to hedge its investments against fluctuations in value caused by changes in prevailing interest rates or market conditions. The Funds may invest in futures as a primary investment strategy. Investments in futures may increase or leverage exposure to a particular market risk, thereby increasing price volatility of derivative instruments a Fund holds. No monies are paid or received by a Fund upon the purchase or sale of a futures contract. Initially, a Fund will be required to deposit with the broker an amount of cash or cash equivalents, known as initial margin, based on the value of the contract. Subsequent payments, called variation margin, to and from the broker, will be made on a daily basis as the price of the underlying instruments fluctuates, making the long and short positions in the futures contract more or less valuable, a process known as `marking-to-the-market.’ Once a final determination of variation margin is made, additional cash is required to be paid by or released to a Fund, and a Fund will realize a loss or gain. The Funds may be subject to the risk that the change in the value of the futures contract may not correlate perfectly with the underlying index. Use of long futures contracts subjects the Funds to risk of loss in excess of the amounts shown on the Statements of Assets and Liabilities, up to the notional value of the futures contracts. Use of short futures contracts subjects the Funds to unlimited risk of loss. The Funds may enter into futures contracts only on exchanges or boards of trade. The exchange or board of trade acts as the counterparty to each futures contract; therefore, the Funds’ credit risk is limited to failure of the exchange or board of trade. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, which could effectively prevent liquidation of unfavorable positions.
Options
The Funds are authorized to write and purchase put and call options. When a Fund writes an option, an amount equal to the premium received by the Fund is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked to market to reflect the current market value of the option written. When a security is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the security acquired or deducted from (or added to) the proceeds of the security sold. When an option expires (or the Fund enters into a closing transaction), the Fund realizes a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premium paid or received). The Fund, as writer of an option, bears the market risk of an unfavorable change in the price of the security underlying the written option. Written and purchased options are non-income producing investments.
Short-Term Investments
Each Fund may invest in high-quality short-term debt securities and money market instruments on an ongoing basis to maintain liquidity or pending selection of investments in accordance with its policies.
ADVISORSHARES TRUST
Notes to Financial Statements
December 31, 2010
(unaudited)
2. Summary of Significant Accounting Policies - (continued)
These short-term debt securities and money market instruments include shares of other mutual funds, commercial paper, certificates of deposit, bankers’ acceptances, U.S. Government securities and repurchase agreements.
Dividends and Distributions
Each Fund will generally pay out dividends to shareholders at least annually. Each Fund will distribute its net capital gains, if any, to shareholders annually. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from U.S generally accepted accounting principles. Distributions are recorded on ex-dividend date.
Indemnifications
In the normal course of business, each Fund enters into contracts that contain a variety of representations which provide general indemnifications. The Trust’s maximum exposure under these arrangements cannot be known; however, the Trust expects any risk of loss to be remote.
3. Investment Advisory Agreement and Other Agreements
Investment Advisory Agreement
Each Fund has entered into an Investment Advisory Agreement with AdvisorShares Investments, LLC (the “Advisor”). The Advisor acts as the Fund’s investment adviser pursuant to an advisory agreement with the Trust on behalf of each Fund. Pursuant to the Advisory Agreement, the Advisor has overall supervisory responsibility for the general management and investment of each Fund’s securities portfolio, and has ultimate responsibility (subject to oversight by the Trust’s Board of Trustees) for oversight of the Trust’s sub-advisers. For its services, each Fund pays the Advisor an annual management fee and such fees do not include breakpoints. From time to time, the Advisor may waive all or a portion of its fee.
The Advisor’s annual management fee for each Fund is as follows:
| | |
| Fund: | | Rate: |
| Dent Tactical ETF | | | 0.95 | % |
| Mars Hills Global Relative Value ETF | | | 1.35 | % |
| Cambria Global Tactical ETF | | | 0.90 | % |
| WCM/BNY Mellon Focused Growth ADR ETF | | | 0.75 | % |
| Peritus High Yield ETF | | | 1.10 | % |
ADVISORSHARES TRUST
Notes to Financial Statements
December 31, 2010
(unaudited)
3. Investment Advisory Agreement and Other Agreements - (continued)
Sub-Advisory Agreements
Each Fund’s investment sub-advisor provides investment advice and management services to the Fund. AdvisorShares supervises the day-to-day investment and reinvestment of the assets in the Fund and is responsible for monitoring the Fund’s adherence to its investment mandate. Pursuant to an investment sub-advisory agreement (“Investment Sub-Advisory Agreement”) between the sub-advisor and the Advisor, the sub-advisor receives an annual fee equal to the average daily net assets of the Fund.
H.S. Dent Investment Management, LLC. serves as investment sub-advisor to Dent Tactical ETF. They receive a sub-advisory fee at an annual fee equal to the average daily net assets of the Fund as follows:
| | |
| AUM Schedule | | Rate |
| $0 – $100,000,000 | | | 0.40 | % |
| $100,000,001 – $250,000,000 | | | 0.45 | % |
| $250,000,001 – $500,000,000 | | | 0.50 | % |
| $500,000,001 – $1,000,000,000 | | | 0.55 | % |
| $1,000,000,001 + | | | 0.60 | % |
Mars Hill Partner, LLC. serves as investment sub-advisor to Mars Hill Global Relative Valuel ETF. They receive a sub-advisory fee at an annual fee equal to the average daily net assets of the Fund as follows:
| | |
| AUM Schedule | | Rate |
| $0 – $100,000,000 | | | 0.90 | % |
| $100,000,001 – $400,000,000 | | | 0.95 | % |
| $500,000,001 + | | | 1.00 | % |
Cambria Investment Management, Inc. serves as investment sub-advisor to Cambria Global Tactical ETF. They receive a sub-advisory fee at an annual fee equal to the average daily net assets of the Fund as follows:
| | |
| AUM Schedule | | Rate |
| $0 – $250,000,000 | | | 0.45 | % |
| $250,000,001 – $750,000,000 | | | 0.40 | % |
| $750,000,001 – $4,000,000,000 | | | 0.35 | % |
| $4,000,000,001 + | | | 0.30 | % |
WCM Investment Management serves as the investment sub-advisor to WCM/BNY Mellon Focused Growth ADR ETF. They receive a sub-advisory fee at an annual fee of 0.25% based on the average daily net assets.
Peritus Asset I Management, LLC serves as the investment sub-advisor to Peritus High Yield ETF. They receive a sub-advisory fee at an annual fee of 0.75% based on the average daily net assets.
From time to time, each sub-adviser may waive all or a portion of its fee.
Expense Limitation Agreement
The Advisor has contractually agreed to reduce their fees and reimburse expenses in order to keep net expenses (excluding interest, taxes, brokerage commissions, acquired fund fees and expenses, and extraordinary expenses) from exceeding a specified for each Fund’s average daily net assets. The
ADVISORSHARES TRUST
Notes to Financial Statements
December 31, 2010
(unaudited)
3. Investment Advisory Agreement and Other Agreements - (continued)
expense limitation agreement will be terminated upon termination of the investment advisory agreement between the Advisor and the Fund. The investment advisory agreement may only be terminated with the approval of the Fund’s Board. The expense caps in effect for each Fund during the period ended December 31, 2010 were as follows:
| | |
| Fund: | | Rate: |
| Dent Tactical ETF | | | 1.50 | % |
| Mars Hills Global Relative Value ETF | | | 1.50 | % |
| Cambria Global Tactical ETF | | | 1.35 | % |
| WCM/BNY Mellon Focused Growth ADR ETF | | | 1.25 | % |
| Peritus High Yield ETF | | | 1.35 | % |
For the period ended December 30, 2010, the Advisor waived fees and reimbursed expenses for each Fund as follows. Each Fund may recoup such waivers until the date indicated.
| | | | | | |
| Fund: | | Expenses
Reimbursed: | | Recoupment
Amount: | | Recoupment Expiration: |
| Dent Tactical ETF | | $ | 176,554 | | | $ | 175,554 | | | | 6/30/2013 | |
| | | | 95,579 | | | | 95,579 | | | | 6/30/2014 | |
| Mars Hills Global Relative Value ETF | | | 26,111 | | | | 26,111 | | | | 6/30/2014 | |
| WCM/BNY Mellon Focused Growth ADR ETF | | | 63,989 | | | | 63,989 | | | | 6/30/2014 | |
| Peritus High Yield ETF | | | 6,692 | | | | 6,692 | | | | 6/30/2014 | |
Administrator, Custodian, Fund Accountant and Transfer Agent
The Bank of New York Mellon (“BNYM”) (in each capacity, the “Administrator”, “Custodian”, “Fund Accountant” or “Transfer Agent”), serves as the Fund’s Administrator, Custodian, Fund Accountant and Transfer Agent pursuant to a certain Fund Administration and Accounting Agreement, a Custody Agreement or a Transfer Agency and Service Agreement, as the case may be.
Distribution and Service (12b-1) Plan
Foreside Fund Services, LLC (the “Distributor”) serves as the Fund’s distributor of Creation Units for the Fund pursuant to the distribution agreement. The Distributor does not maintain any secondary market shares.
The Fund has adopted a Distribution and Service Plan (“Plan”) pursuant to Rule 12b-1 under the 1940 Act. In accordance with its Plan, the Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year for certain distribution-related activities. No fees are currently paid by the Fund under a Plan, and there are no current plans to impose these fees. However, in the event Rule 12b-1 fees were charged, over time they would increase the cost of an investment in a Fund.
4. Organization and Offering Cost
Expenses incurred in organizing of the Trust and Dent Tactical ETF are approximately $241,000. The Trust and the Fund will reimburse AdvisorShares for organizational expenses paid on their behalf. Offering costs were capitalized and are being amortized over a twelve month period.
ADVISORSHARES TRUST
Notes to Financial Statements
December 31, 2010
(unaudited)
5. Creation and Redemption Transactions
The Fund issues and redeems shares on a continuous basis at NAV in groups of 25,000 shares called “Creation Units.” Except when aggregated in Creation Units, shares are not redeemable securities of a Fund.
Only “Authorized Participants” may purchase or redeem shares directly from the Fund. An Authorized Participant is either (i) a broker-dealer or other participant in the clearing process through the Continuous Net Settlement System of the National Securities Clearing Corporation or (ii) a DTC participant and, in each case, must have executed a Participant Agreement with the Distributor. Most retail investors will not qualify as Authorized Participants or have the resources to buy and sell whole Creation Units. Therefore, they will be unable to purchase or redeem the shares directly from the Fund. Rather, most retail investors will purchase shares in the secondary market with the assistance of a broker and will be subject to customary brokerage commissions or fees.
6. Summary of Fair Value Disclosure
The Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC”) 820-10, Fair Value Measurements and Disclosures, defines fair value, establishes an authoritative framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosure about fair value measurements. Various inputs are used in determining the value of the Fund’s investments. These inputs are summarized in the three broad levels listed below:
Level 1 — quoted prices in active markets for identical securities
Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)
Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)
Investments that use Level 2 or Level 3 inputs may include, but are not limited to: (i) an unlisted security related to corporate actions; (ii) a restricted security (e.g., one that may not be publicly sold without registration under the Securities Act of 1933 as amended); (iii) a security whose trading has been suspended or which has been de-listed from its primary trading exchange; (iv) a security that is thinly traded; (v) a security in default or bankruptcy proceedings for which there is no current market quotation; (vi) a security affected by currency controls or restrictions; and (vii) a security affected by a significant event (e.g. an event that occurs after the close of the markets on which the security is traded but before the time as of which a Fund’s net asset value is computed and that may materially affect the value of the Fund’s investment). Examples of events that may be “significant events” are government actions, natural disasters, armed conflicts and acts of terrorism.
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
ADVISORSHARES TRUST
Notes to Financial Statements
December 31, 2010
(unaudited)
6. Summary of Fair Value Disclosure - (continued)
The following is a summary of the inputs used as of December 31, 2010 in valuing the Funds’ assets carried at fair value:
| | | | | | | | | | |
| | Dent
Tactical
ETF | | Mars Hill Global
Relative Value ETF | | Cambria Global
Tactical ETF | | WCM/BNY Mellon Focused Growth
ADR ETF | | Peritus High Yield ETF |
Level 1
| | | | | | | | | | | | | | | | | | | | |
| Exchange Traded Funds | | $ | 18,218,209 | | | $ | 15,673,368 | | | $ | 67,661,135 | | | $ | — | | | $ | — | |
| Common Stock | | | — | | | | — | | | | — | | | | 7,882,009 | | | | — | |
| Money Market Fund | | | 4,116,834 | | | | 914,383 | | | | 3,096,780 | | | | 243,540 | | | | 222,623 | |
Level 2
| | | | | | | | | | | | | | | | | | | | |
| Corporate Bonds | | | — | | | | — | | | | — | | | | — | | | | 11,711,173 | |
| Foreign Bonds | | | — | | | | — | | | | — | | | | — | | | | 3,099,300 | |
| Other Investments | | | — | | | | 195,010 | † | | | — | | | | — | | | | — | |
| Level 3 | | | — | | | | — | | | | — | | | | — | | | | — | |
| Total | | $ | 22,335,043 | | | $ | 16,782,761 | | | $ | 70,757,916 | | | $ | 8,180,507 | | | $ | 15,033,096 | |
| * | The Funds did not hold any Level 3 securities during the period reported. |
| † | Derivative instruments, including swap contracts, are valued at the net unrealized gain (loss) on the instrument. |
7. VALUATION OF DERIVATIVE INSTRUMENTS
The Funds have adopted authoritative standards of accounting for derivative instruments which establish disclosure requirement for derivative instruments. These standards improve financial reporting for derivative instruments by requiring enhanced disclosures that enables investors to understand how and why a fund uses derivatives instruments, how derivatives instruments are accounted for and how derivative instruments affect a fund’s financial position and results of operations.
The Funds use derivative instruments as part of their principal investment strategy to achieve their investment objective. As of December 31, 2010, a Fund invested in equity swap contracts.
At December 31, 2010, the fair value of derivative instruments were as follows:
Statement of Assets and Liabilities
| | |
| Fund: | | Liability Derivative |
| Mars Hills Global Relative Value ETF | | | | |
| Equity Swaps at Value | | $ | 15,678,691 | |
Transactions in derivative instruments during the period ended December 31, 2010, were as follows:
Statement of Operations
| | | | |
| Fund: | | Realized Loss: | | Equity Risk |
| Mars Hills Global Relative Value ETF | | | Futures Contracts | | | $ | (1,647,187 | ) |
| Mars Hills Global Relative Value ETF | | | Swaps Contracts | | | | (9,982 | ) |
| | | | | | | | 1,657,169 | |
| | | | Unrealized Gain: | |
| Mars Hills Global Relative Value ETF | | | Swaps Contracts | | | $ | 195,010 | |
ADVISORSHARES TRUST
Notes to Financial Statements
December 31, 2010
(unaudited)
7. VALUATION OF DERIVATIVE INSTRUMENTS - (continued)
For the period ended December 31, 2010, the volume of the derivatives held by the Fund was as follows:
| | | | |
| Fund: | | Long Equity
Swap Contracts | | Short Equity
Swap Contracts |
| Mars Hills Global Relative Value ETF | | | 770,415 | | | $ | 1,471,791 | |
8. Federal Income Tax
The Fund intends to qualify as a “regulated investment company” under Sub-chapter M of the Internal Revenue Code of 1986, as amended. If so qualified, the Fund will not be subject to Federal income tax to the extent it distributes substantially all of its net investment income and net capital gains to its shareholders.
Accounting for Uncertainty in Income Taxes provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements, and requires the evaluation of tax positions taken or expected to be taken in the course of preparing a Fund’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-than-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Interest and penalty related to income taxes would be recorded as income tax expense.
The differences between book and tax basis of cost of investments and net unrealized appreciation (depreciation) are primarily attributable to wash sale loss deferrals.
Dent Tactical ETF has a capital loss carryforward of $92,718 available to offset future realized gains through June 30, 2018.
At December 31, 2010, the cost of investments and net unrealized appreciation (depreciation) for federal income tax purposes was as follows:
| | | | | | | | |
| Fund | | Cost | | Gross
Unrealized Appreciation | | Gross
Unrealized Depreciation | | Net Unrealized Appreciation |
| Dent Tactical ETF | | $ | 20,886,951 | | | $ | 1,448,092 | | | $ | — | | | $ | 1,448,092 | |
| Mars Hills Global Relative Value ETF | | | 15,778,099 | | | | 2,086,412 | | | | (1,276,760 | ) | | | 809,652 | |
| Cambria Global Tactical ETF | | | 68,737,140 | | | | 2,176,887 | | | | (159,111 | ) | | | 2,020,776 | |
| WCM/BNY Mellon Focused Growth ADR ETF | | | 7,663,755 | | | | 549,835 | | | | (88,041 | ) | | | 461,794 | |
| Peritus High Yield ETF | | | 14,932,155 | | | | 135,458 | | | | (34,517 | ) | | | 100,941 | |
ADVISORSHARES TRUST
Notes to Financial Statements
December 31, 2010
(unaudited)
9. Investment Transactions
Purchases and sales of investments for the period ended December 31, 2010 are as follows:
| | | | | | | | |
| Fund | | Purchases | | Sales | | Purchases In-Kind | | SalesIn-Kind |
| Dent Tactical ETF | | $ | 39,551,001 | | | $ | 35,556,165 | | | $ | 1,569,269 | | | $ | 2,319,701 | |
| Mars Hills Global Relative Value ETF | | | 151,371,427 | | | | 156,450,883 | | | | 50,302,772 | | | | 13,010,654 | |
| Cambria Global Tactical ETF | | | 33,004,459 | | | | 30,678,159 | | | | 64,143,720 | | | | — | |
| WCM/BNY Mellon Focused Growth ADR ETF | | | 2,996,282 | | | | 542,298 | | | | 6,693,743 | | | | 2,001,411 | |
| Peritus High Yield ETF | | | 14,909,337 | | | | 203,300 | | | | — | | | | — | |
10. Risks Involved with Investing in the Fund
The Fund is subject to the principal risks described below, some or all of these risks may adversely affect the Fund’s NAV, trading price, yield, total return and ability to meet its investment objective. As with any investment, an investment in a Fund could result in a loss or the performance of the Fund could be inferior to that of other investments.
Fund of Funds Risk
The Fund’s investment performance, because it is a fund of funds, depends on the investment performance of the Underlying ETFs in which it invests. An investment in this Fund is subject to the risks associated with the Underlying ETFs that comprise its Underlying Index. This Fund will indirectly pay a proportional share of the asset-based fees, if any, of the Underlying ETFs in which it invests.
Tracking Error Risk
The Fund’s performance may not match its Underlying Index during any period of time. Although the Fund attempts to track the performance of its Underlying Index, the Fund may not be able to duplicate its exact composition or return for any number of reasons, including but not limited to risk that the strategies used by the Advisor and Sub-Advisor to match the performance of the Underlying Index may fail to produce the intended results, liquidity risk and new fund risk, as well as the incurring of Fund expenses, which the Underlying Index does not incur.
New Fund Risk
The Fund is a new fund. As a new fund, there can be no assurance that the Fund will grow to or maintain an economically viable size, in which case the Fund may experience greater tracking error to its Underlying Index than it otherwise would be at higher asset levels or it could ultimately liquidate.
10. Subsequent Events
The Funds have adopted authoritative standards of accounting for, and disclosure of events that occur after the Statements of Asset and Liabilities date but before financial statements are issued or are available to be issued. These standards require the Fund to recognize in the financial statements the effects of all recognized subsequent events that provide additional evidence about conditions that existed at the date of Statement.
ADVISORSHARES TRUST
DENT TACTICAL ETF
Investment Advisor
AdvisorShares Investments, LLC
3 Bethesda Metro Center, Suite 700
Bethesda, Maryland 20814
Sub-Adviser
H.S. Dent investment Management, LLC
15310 Amberly Drive, Suite 390
Tampa, Florida 33647
Distributor
Foreside Fund Services, LLC
Three Canal Plaza, Suite 100
Portland, ME 04101
www.foreside.com
Custodian/Fund Administrator/Transfer Agent
The Bank of New York Mellon
101 Barclay Street
New York, NY 10286
Legal Counsel
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Ave, N.W.
Washington, D.C. 20004
Independent Registered Public Accounting Firm
Tait, Weller & Baker LLP
1818 Market Street
Philadelphia, PA 19103
This report is submitted for the general information of the shareholders of the Fund. It is not authorized for distribution to prospective investors unless preceded or accompanied by an effective prospectus, which includes information regarding the Fund’s risks, objectives, fees and expenses, experience of management and other information.
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Item 2. Code of Ethics.
Not Applicable for the semi-annual reporting period.
Item 3. Audit Committee Financial Expert.
Not Applicable for the semi-annual reporting period.
Item 4. Principal Accountant Fees and Services.
Not Applicable for the semi-annual reporting period.
Item 5. Audit Committee of Listed Registrants.
Not Applicable for the semi-annual reporting period.
Item 6. Schedule of Investments.
| | (a) | Schedule 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.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not Applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company & Affiliated Purchasers.
Not Applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
Not Applicable.
Item 11. Controls and Procedures.
(a) The Chief Executive Officer and Treasurer have evaluated the Registrant's disclosure controls and procedures within 90 days of the filing date of this report and have concluded that these controls and procedures are effective.
(b) There were no significant changes in the Registrant's internal controls over financial reporting or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
Item 12. Exhibits.
(a) 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 the Item 2 requirements through filing of an exhibit: Not applicable at this time.
(b) Certifications for each Principal Executive Officer and Principal Financial Officer of the Registrant as required by Rule 30a-2(a) under the 1940 Act (17CFR 270.30a-(a)).
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: AdvisorShares Trust
By: /s/ Noah Hamman
Noah Hamman, Chief Executive Officer
Date: March 8 2011
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.
Registrant: AdvisorShares Trust
By: /s/ Noah Hamman
Noah Hamman, Chief Executive Officer
Date: March 8 2011
By: /s/ Dan Ahrens
Dan Ahrens, Treasurer
Date: March 8 2011
