1. Organization
FEG Equity Access Fund LLC (the Fund) was formed on February 3, 2010, and is a Delaware limited liability company that commenced operations on April 1, 2010. The Fund registered with the U.S. Securities and Exchange Commission (the SEC) on April 2, 2012, under the Investment Company Act of 1940, as amended (the 1940 Act), as a non-diversified, closed-end management investment company. The Fund’s Board of Directors (the Board) has overall responsibility for the management and supervision of the Fund’s operations. To the extent permitted by applicable law, the Board may delegate any of its respective rights, powers and authority to, among others, the officers of the Fund, any committee of the Board, or the Investment Manager (as such term is defined below). Under the supervision of the Board and pursuant to an investment management agreement, FEG Investors, LLC serves as the investment manager (the Investment Manager) to the Fund. The Investment Manager is a registered investment adviser with the SEC under the Investment Advisers Act of 1940, as amended (the Advisers Act).
Pursuant to a sub-advisory agreement with the Investment Manager and the Fund, InterOcean Capital, LLC, an investment adviser registered under the Advisers Act, serves as the Fund’s sub-adviser (in such capacity, the Sub-Adviser). The Sub-Adviser participates by appointing a member of the Investment Manager’s investment policy committee, thereby assisting in providing for oversight of the Fund’s investments, making Portfolio Fund Manager (as such term is defined below) selection and termination recommendations and approving significant and strategic asset allocation changes.
The Fund’s primary investment objective is to meet or exceed the return of the broad equity markets over a full market cycle with less volatility than the equity markets as measured by the S&P 500 Index, although there can be no assurance that the Fund will achieve this objective. The Fund was formed to capitalize on the experience of the Investment Manager’s principals by creating a fund-of-funds product, which offers professional portfolio fund manager due diligence, selection and monitoring, consolidated reporting, risk monitoring, and access to portfolio fund managers for a smaller minimum investment than would be required for direct investment. The Investment Manager will manage the Fund by allocating its capital among a number of independent general partners or investment managers (the Portfolio Fund Managers) acting through pooled investment vehicles and/or managed accounts (collectively, the Portfolio Funds).
FEG Equity Access Fund LLC
Notes to Financial Statements (continued)
(unaudited)
1. Organization (continued)
Limited liability company interests (Interests) of the Fund are offered only to investors (Members) that represent that they are an “accredited investor” within the meaning of Rule 501 under the Securities Act of 1933, as amended.
JD Clark and Company, a division of UMB Fund Services, Inc. and a subsidiary of UMB Financial Corporation, serves as the Fund’s administrator (the Administrator). The Fund has entered into an agreement with the Administrator to perform general administrative tasks for the Fund, including but not limited to maintenance of books and records of the Fund and the capital accounts of the Members of the Fund.
2. Significant Accounting Policies
The financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.
Short-Term Investments
Short-term investments represent an investment in a money market fund, which is held in custody at the Administrator. Short-term investments are recorded at fair value. Dividend income is recorded on an accrual basis.
Investments in Portfolio Funds
The Fund values its investments in Portfolio Funds at fair value, which generally represents the Fund’s pro rata interest in the Members’ capital of these entities, net of management fees and incentive allocations payable to the Portfolio Funds’ Portfolio Fund Managers. The underlying investments held by the Portfolio Funds are generally valued at fair value in accordance with the policies established by the Portfolio Funds, as described in their respective financial statements and agreements. Due to the inherent uncertainty of less liquid investments, the value of certain investments held by the Portfolio Funds may differ significantly from the values that would have been used if a ready market existed, and the differences could be material. The underlying Portfolio Funds may hold investments for which market quotations are not readily available and are thus valued at their fair value, as determined in good faith by their respective Portfolio Fund Managers. Net realized and unrealized gains and losses from investments in Portfolio Funds are reflected in the statement of operations. Realized gains and losses from Portfolio Funds are recorded on the average cost basis.
FEG Equity Access Fund LLC
Notes to Financial Statements (continued)
(unaudited)
2. Significant Accounting Policies (continued)
For the period April 1, 2012 through September 30, 2012, the aggregate cost of purchases and proceeds from sales/withdrawals of investments were $3,500,000 and $3,368,727, respectively.
Certain of the Portfolio Funds may hold a portion of their assets as side-pocket investments (the Side-pockets), which have restricted liquidity, potentially extending over a much longer period of time than the typical liquidity an investment in an investment fund may provide. Should the Fund seek to liquidate its investments in the Side-pockets, the Fund might not be able to fully liquidate its investment without delay, and such delay could be considerable. In such cases, until the Fund is permitted to fully liquidate its interest in the Side-pockets, the value of its investment could fluctuate based on adjustments to the fair value of the Side-pockets. At September 30, 2012, the Fund held no Side-pocket investments.
Fair Value of Financial Instruments
In accordance with Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures (formerly Statement of Financial Accounting Standards (SFAS) No. 157), fair value is defined as the price that the Fund would receive to sell an investment or pay to transfer a liability in a timely transaction with an independent buyer in the principal market, or in the absence of a principal market, the most advantageous market for the investment or liability. ASC 820 establishes a three-tier hierarchy to distinguish between (1) inputs that reflect the assumptions that market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the reporting entity (observable inputs), and (2) inputs that reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability developed based on the best information available in the circumstances (unobservable inputs) and to establish classification of fair value measurements for disclosure purposes. Various inputs are used in determining the fair value of the Fund’s investments.
The inputs are summarized in the three broad levels listed below:
Level 1 – Quoted prices in active markets for identical investments.
Level 2 – Other significant observable inputs (including quoted prices for similar investments).
Level 3 – Significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments).
FEG Equity Access Fund LLC
Notes to Financial Statements (continued)
(unaudited)
2. Significant Accounting Policies (continued)
The inputs or methodology used for valuing investments are not necessarily an indication of the risk associated with investing in those investments.
The units of account that are valued by the Fund are its interests in the Portfolio Funds and not the underlying holdings of such Portfolio Funds. Thus, the inputs used by the Fund to value its investments in each of the Portfolio Funds may differ from the inputs used to value the underlying holdings of such Portfolio Funds.
Investments in Portfolio Funds are classified within Level 2 of the fair value hierarchy if the Fund has the ability to redeem the investments at the measurement dates or if the investments are redeemable in the near term in accordance with the normal operating protocols in the Portfolio Funds’ agreements. Investments in Portfolio Funds are classified within Level 3 of the fair value hierarchy if the Fund does not know when it will have the ability to redeem its investments or the investments are not redeemable in the near term under the normal operating protocols of the Portfolio Funds’ agreements.
The following table represents the investments carried at fair value on the Statement of Assets, Liabilities and Member’s Capital by level within the valuation hierarchy as of September 30, 2012:
| Investments | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Portfolio Funds | | $ | - | | | $ | 67,043,254 | | | $ | 16,836,733 | | | $ | 83,879,987 | |
| Short-Term Investments | | | 1,737,648 | | | | - | | | | - | | | | 1,737,648 | |
| Total | | $ | 1,737,648 | | | $ | 67,043,254 | | | $ | 16,836,733 | | | $ | 85,617,635 | |
The Schedule of Investments categorizes the aggregate fair value of the Fund’s investments in the Portfolio Funds by domicile, investment strategy, and liquidity.
FEG Equity Access Fund LLC
Notes to Financial Statements (continued)
(unaudited)
2. Significant Accounting Policies (continued)
The Fund discloses transfers between levels based on valuations at the end of the reporting period. There were no transfers between Levels 1 or 2 as of September 30, 2012, based on levels assigned to investments on March 31, 2012. The following table includes a rollforward of the amounts for the six month period ended September 30, 2012, for investments classified within Level 3. Investments are transferred from Level 3 into Level 2 when the investment can be liquidated within one year:
| | | Investments in | |
| | | Portfolio Funds | |
| Balance as of April 1, 2012 | | $ | 25,719,235 | |
| Realized gain (loss) | | | - | |
| Net change in unrealized appreciation/depreciation | | | 41,020 | |
| Purchases | | | 3,500,000 | |
| Sales | | | - | |
| Net transfers in to Level 3 | | | - | |
| Net transfers out of Level 3 | | | (12,423,522 | ) |
| Balance as of September 30, 2012 | | $ | 16,836,733 | |
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04 “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements” in the U.S. GAAP and the International Financial Reporting Standards (IFRSs). ASU No. 2011-04 amends FASB ASC Topic 820, Fair Value Measurements and Disclosures, to establish common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with the U.S. GAAP and IFRSs. ASU No. 2011-04 requires reporting entities to disclose quantitative information about the unobservable inputs used in the fair value measurements categorized within Level 3 of the fair value hierarchy. In addition, ASU No. 2011-04 requires reporting entities to make disclosures about amounts and reasons for all transfers in and out of Levels 1 and 2 of the fair value hierarchy. The new and revised disclosure requirements are effective for the Fund’s interim and annual reporting periods beginning after December 15, 2011.
FEG Equity Access Fund LLC
Notes to Financial Statements (continued)
(unaudited)
2. Significant Accounting Policies (continued)
The following is a summary of quantitative information about significant unobservable valuation inputs for Level 3 Fair Value Measurements for investments held as of September 30, 2012:
Investments in Portfolio Funds | | Fair Value as of September 30, 2012 | | Valuation Technique | Liquidity of Investments | Adjustments to Net Asset Value ** |
| United States – Hedged Equity | | $ | 16,836,733 | | Net Asset Value as Practical Expedient * | Greater than 90 days | None |
| Total Investments | | $ | 16,836,733 | | | | |
*Unobservable valuation input
**Amounts represent adjustments, if any, made to net asset value provided by the investment manager or administrator of the Portfolio Funds. Adjustments to the net asset value as practical expedient may be made under certain circumstances including, but not limited to, the following:
| | • | The practical expedient net asset value received is not as of the Fund’s measurement date. |
| | • | It is probable that the Portfolio Fund will be sold at a value significantly different than the reported expedient net asset value. |
| | • | It is determined by the Investment Manager that the Portfolio Fund is not being valued at fair value by the Portfolio Fund. |
Investment Income
Investment transactions are recorded on a trade-date basis. Dividend income is accrued as earned.
Taxation
The Fund is treated as a partnership for federal income tax purposes and therefore is not subject to U.S. federal income tax. For income tax purposes, the individual Members will be taxed upon their distributive shares of each item of the Fund’s profit and loss. The only taxes payable by the Fund are withholding taxes applicable to certain investment income.
FEG Equity Access Fund LLC
Notes to Financial Statements (continued)
(unaudited)
2. Significant Accounting Policies (continued)
Management has analyzed the Fund’s tax positions for all open tax years, which include the years ended December 31, 2010 through December 31, 2011, and has concluded that as of September 30, 2012, no provision for income taxes is required in the financial statements. Therefore, no additional tax expense, including any interest and penalties, was recorded in the current year and no adjustments were made to prior periods. To the extent the Fund recognizes interest and penalties, they are included in net change in unrealized appreciation (depreciation) on investments in Portfolio Funds in the Statement of Operations.
Capital Contributions Received in Advance and Capital Withdrawals Payable
Capital contributions received in advance are comprised of cash received on or prior to September 30, 2012 for which Members’ interests were effective October 1, 2012. Capital contributions received in advance do not participate in the earnings of the Fund until such interests are effective. Capital withdrawals are comprised of requests for withdrawals that were effective on September 30, 2012 but were paid subsequent to fiscal year-end.
Recent Accounting Pronouncements
In December 2011, the FASB issued ASU No. 2011-11 related to disclosures about offsetting assets and liabilities. The amendments in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The ASU is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The guidance requires retrospective application for all comparative periods presented. Management is currently evaluating the impact ASU No. 2011-11 will have on the Fund’s financial statement disclosures.
3. Investments in Portfolio Funds
The Investment Manager utilizes due diligence processes with respect to the Portfolio Funds and their Portfolio Fund Managers, which are intended to assist management in determining that financial information provided by the underlying Portfolio Fund Managers is reasonably reliable.
The Fund has the ability to liquidate its investments in Portfolio Funds periodically in accordance with the provisions of the respective Portfolio Fund’s agreement; however, these withdrawal requests may be subject to certain lockup periods such as gates, suspensions, and the Side-pockets, or other delays, fees, or restrictions in accordance with the provisions of the respective Portfolio Fund’s agreement.
FEG Equity Access Fund LLC
Notes to Financial Statements (continued)
(unaudited)
3. Investments in Portfolio Funds (continued)
The Portfolio Funds in which the Fund has investments utilize a variety of financial instruments in their trading strategies, including equity and debt securities of both U.S. and foreign issuers, options and futures, forwards, and swap contracts. These financial instruments contain various degrees of off-balance-sheet risk, including both market and credit risk. Market risk is the risk of potentially adverse changes to the value of the financial instruments and their derivatives because of the changes in market conditions, such as interest and currency rate movements and volatility in commodity or security prices. Credit risk is the risk of the potential inability of counterparties to perform the terms of the contracts, which may be in excess of the amounts recorded in the Portfolio Funds’ respective statements of financial condition. In addition, several of the Portfolio Funds sell securities sold, not yet purchased, whereby a liability is created for the repurchase of the security at prevailing prices. Such Portfolio Funds’ ultimate obligations to satisfy the sales of securities sold, not yet purchased may exceed the amount recognized on their respective statements of financial condition. However, due to the nature of the Fund’s interest in these investment entities, the Fund’s risk with respect to such transactions is limited to its investment in each Portfolio Fund.
The Fund is also subject to liquidity risks, including the risk that the Fund may encounter difficulty in generating cash to meet obligations associated with tender requests. Liquidity risk may result from an inability of the Fund to sell an interest in a Portfolio Fund on a timely basis at an amount that approximates its fair value. The Portfolio Funds require advance notice for withdrawal requests, generally only permit withdrawals at specified times, and have the right in certain circumstances to limit or delay withdrawals.
The Portfolio Funds provide for compensation to the respective Portfolio Fund Managers in the form of management fees ranging from 1.0% to 3.0% annually of Members’ capital, and incentive allocations typically range between 10% and 30% of profits, subject to loss carryforward provisions, as defined in the respective Portfolio Funds’ agreements.
4. Management Fee and Related Party Transactions
The Investment Manager receives from the Fund a monthly management fee (the Management Fee) equal to 1/12 of 0.85% of the Fund’s month-end Members’ capital balance, prior to reduction for the Management Fee then being calculated (a 0.85% annual rate). The Management Fee is paid monthly in arrears and is prorated with respect to investments in the Fund made other than at the beginning of a month. The Management Fee totaled $361,432 for the six months ended September 30, 2012, of which $175,574 was payable at September 30, 2012.
FEG Equity Access Fund LLC
Notes to Financial Statements (continued)
(unaudited)
4. Management Fee and Related Party Transactions (continued)
The Investment Manager, not the Fund, pays the Sub-Adviser a monthly fee equal to 10% of any Management Fee received by the Investment Manager from the Fund pursuant to the Investment Management Agreement as of the end of each calendar month.
Each member of the Board who is not an “interested person” of the Fund (the Independent Directors), as defined by the 1940 Act, receives a fee of $10,000 per year. In addition, all Independent Directors are reimbursed by the Fund for all reasonable out-of-pocket expenses incurred by them in performing their duties. The Independent Director fees totaled $10,000 for the six months ended September 30, 2012, of which $0 was payable at September 30, 2012.
At September 30, 2012, FEG Equity Access Fund Ltd., an affiliated investment fund advised by the Investment Manager, had ownership interests in the Fund of 81.42%, with a value of $69,204,458.
5. Members’ Capital
In accordance with the Fund’s Limited Liability Company Operating Agreement (the Operating Agreement), net profits or net losses are allocated to the Members in proportion to their respective capital accounts.
Members may be admitted when permitted by the Board. Generally, Members will only be admitted as of the beginning of a calendar month but may be admitted at any other time at the discretion of the Board. The minimum initial investment is $250,000, and additional contributions from existing Members may be made in a minimum amount of $100,000, although the Board may waive such minimums in certain cases.
No Member will have the right to require the Fund to redeem its Interest. Rather, the Board may, from time to time and in its complete and absolute discretion, cause the Fund to offer to repurchase Interests from Members pursuant to written requests by Members on such terms and conditions as it may determine. In determining whether the Fund should offer to repurchase Interests from Members pursuant to written requests, the Board will consider, among other things, the recommendation of the Investment Manager. The Investment Manager expects that it will recommend such repurchase offers twice a year, effective as of June 30th and December 31st each year. The repurchase amount will be determined by the Board in its complete and absolute discretion, but is expected to be no more than approximately 25% of the Fund’s outstanding Interests. The Board also will consider the following factors, among others, in making such determination: (i) whether any Members have requested that the Fund repurchase Interests; (ii) the liquidity of the Fund’s assets; (iii) the investment plans and working capital requirements of the Fund; (iv) the relative economies of scale with respect to the size of the Fund; (v) the history of the Fund in repurchasing Interests; (vi) the conditions in the securities
FEG Equity Access Fund LLC
Notes to Financial Statements (continued)
(unaudited)
5. Members’ Capital (continued)
markets and economic conditions generally; and (vii) the anticipated tax consequences of any proposed repurchases of Interests.
The Fund’s Operating Agreement provides that the Fund will be dissolved if any Member that has submitted a written request, in accordance with the terms of the Operating Agreement, to tender all of such Member’s Interest for repurchase by the Fund has not been given the opportunity to so tender within a period of two (2) years after the request (whether in a single repurchase offer or multiple consecutive offers within the two-year period).
When the Board determines that the Fund will offer to repurchase Interests (or portions of Interests), written notice will be provided to Members that describes the commencement date of the repurchase offer, and specifies the date on which repurchase requests must be received by the Fund (the Repurchase Request Deadline).
For Members tendering all of their Interests in the Fund, Interests will be valued for purposes of determining their repurchase price as of a date approximately 65 days after the Repurchase Request Deadline (the Full Repurchase Valuation Date). The amount that a Member who is tendering all of its Interest in the Fund may expect to receive on the repurchase of such Member’s Interest will be the value of the Member’s capital account determined on the Full Repurchase Valuation Date, and the Fund will generally not make any adjustments for final valuations based on adjustments received from the Portfolio Funds, and the withdrawing Member (if such valuations are adjusted upwards) or the remaining Members (if such valuations are adjusted downwards) will bear the risk of change of any such valuations.
Members who tender a portion of their Interest in the Fund (defined as a specific dollar value in their repurchase request), and which portion is accepted for repurchase by the Fund, will receive such specified dollar amount. For Members tendering all of their Interest in the Fund, the value of such Interest being repurchased will be determined on the Full Repurchase Valuation Date. Within five days of the Repurchase Request Deadline, each Member whose Interest has been accepted for repurchase will be given a non-interest bearing, non-transferable promissory note by the Fund entitling the Member to be paid an amount equal to 100% of the unaudited net asset value such Member’s capital account (or portion thereof) being repurchased, determined as of the Full Repurchase Valuation Date (after giving effect to all allocations to be made as of that date to such Member’s capital account). The note will entitle the Member to be paid within 30 days after the Full Repurchase Valuation Date, or ten business days after the Fund has received at least 90% of the aggregate amount withdrawn by the Fund from the Portfolio Funds, whichever is later (either such date, a Payment Date). Notwithstanding the foregoing, if a Member has requested the repurchase of 90% or more of the Interest held by such Member, such Member shall receive (i) a non-interest bearing, non-transferable promissory note, which need not bear interest, in an amount equal to 90% of the estimated unaudited net asset value of such
FEG Equity Access Fund LLC
Notes to Financial Statements (continued)
(unaudited)
5. Members’ Capital (continued)
Member’s capital account (or portion thereof) being repurchased, determined as of the Full Repurchase Valuation Date (after giving effect to all allocations to be made as of that date to such Member’s capital account) (the Initial Payment), which will be paid on or prior to the Payment Date; and (ii) a promissory note entitling the holder thereof to the balance of the proceeds, to be paid within 30 days following the completion of the Fund’s next annual audit, which is expected to be completed within 60 days after the end of the Fund’s fiscal year.
In the event that a Member requests a repurchase of a capital account amount that had been contributed to the Fund within 18 months of the date of the most recent repurchase offer, the Board may require payment of a repurchase fee payable to the Fund in an amount equal to 2% of the repurchase price, which fee is intended to compensate the Fund for expenses related to such repurchase. Contributions shall be treated on a “first-in, first-out basis.” Otherwise, the Fund does not intend to impose any charges on the repurchase of Interests. If Members request that the Fund repurchase a greater number of Interests than the repurchase offer amount as of the Repurchase Request Deadline, as determined by the Board in its complete and absolute discretion, the Fund shall repurchase the Interests pursuant to repurchase requests on a pro rata basis, disregarding fractions, according to the portion of the Interest requested by each Member to be repurchased as of the Repurchase Request Deadline.
A Member who tenders some but not all of the Member’s Interest for repurchase will be required to maintain a minimum capital account balance of $250,000. The Fund reserves the right to reduce the amount to be repurchased from a Member so that the required capital account balance is maintained.
6. Indemnifications
The Fund enters into contracts that contain a variety of indemnifications. The Fund’s maximum exposure under these arrangements is not known. However, the Fund has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
7. Financial Highlights
The following represents the ratios to average Members’ capital and total return information for the six months ended September 30, 2012 and the years ended March 31, 2012 and 2011:
FEG Equity Access Fund LLC
Notes to Financial Statements (continued)
(unaudited)
7. Financial Highlights (continued)
| | | Six Months Ended September 30, | | | Year Ended March 31, | |
| | | 2012 | | | 2012 | | | 2011 | |
| Ratios to average members’ capital: | | | | | | | | | |
| Expenses | | | 1.31 | %(1) | | | 0.91 | % | | | 0.82 | % |
| Net investment loss | | | (1.31 | %)(1) | | | (0.91 | %) | | | (0.81 | %) |
| Total Return | | | (0.62 | %)(2) | | | (1.63 | %) | | | 2.27 | % |
| Portfolio turnover | | | 4.07 | %(2) | | | 4.37 | % | | | 7.12 | % |
| | | | | | | | | | | | | |
| Members' Capital end of period (000's) | | $ | 85,000 | | | $ | 86,874 | | | $ | 74,811 | |
The financial highlights are calculated for all the Members taken as a whole. An individual Member’s return may vary from these returns based on the timing of capital transactions. The ratios do not include investment income or expenses of the Portfolio Funds in which the Fund invests.
8. Subsequent Events
At a Board meeting held on October 4, 2012, the Board approved a proposal to modify the early repurchase fee for the Fund. Beginning with the Fund’s December 31, 2012 tender offer, in the event that a Member requests a repurchase of a capital account that had been contributed to the Fund within 18 months of the date of the most recent repurchase offer, the Board may require payment of a repurchase fee payable to the Fund in an amount of 2% of the repurchase price (the “Early Repurchase Fee”), which fee is intended to compensate the Fund for expenses related to such repurchase. The Early Repurchase Fee had previously been 5% of the repurchase price.
At the Fund’s regular quarterly Board meeting on November 8, 2012, the Board approved a proposal to change the Fund’s name to “FEG Directional Access Fund.”
Management evaluated subsequent events through the date the financial statements were issued, and determined that, other than the events noted above, there were no subsequent events that required disclosure in or adjustment to the Fund’s financial statements.
From October 1, 2012 to November 29, 2012, the Fund recorded subscriptions of $2,250,000, of which $0 was received in advance of October 1, 2012.
FEG Equity Access Fund LLC
Other Information
(unaudited)
Information on Proxy Voting
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge, upon request, by calling 1-888-268-0333. It is also available on the SEC’s website at http://www.sec.gov.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge, upon request, by calling 1-888-268-0333, and on the SEC's website at http://www.sec.gov.
Availability of Quarterly Report Schedule
The Fund files 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 are available on the SEC’s website at http://www.sec.gov. The Fund’s Forms N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Approval of Investment Management and Sub-Advisory Agreements
At a meeting of the Board of the Fund held on February 15, 2012, by a unanimous vote, the Board, including a majority of the Directors who are not “interested persons” within the meaning of Section 2(a)(19) of the 1940 Act (the Independent Directors), approved the investment management agreement (the Investment Management Agreement) between the Investment Manager and the Fund and the sub-advisory agreement among the Investment Manager, Sub-Adviser and the Fund (the Sub-Advisory Agreement, together with the Investment Management Agreement, the Advisory Agreements).
In advance of the meeting, the Directors requested and received extensive materials from the Investment Manager and Sub-Adviser to assist them in considering the approval of the Advisory Agreements. The materials provided by the Investment Manager and Sub-Adviser contained information including detailed comparative information relating to the performance, advisory fees and other expenses of the Fund.
The Board engaged in a detailed discussion of the materials with management of the Investment Manager and Sub-Adviser. The Board then met in executive session with the counsel to the Fund for a full review of the materials. Following this session, the meeting reconvened and after further discussion the Board determined that the information presented provided a sufficient basis upon which to approve the Advisory Agreements.
Discussion of Factors Considered
The Board considered, among other things: (1) the nature and quality of the investment management services expected to be rendered, including, the complexity of the services expected to be provided; (2) the experience and qualifications of the personnel that will be providing such services; (3) the proposed fee structure and the expense ratios in relation to those of other investment companies having comparable investment policies and limitations; (4) the direct and indirect costs that may be incurred by the Investment Manager, Sub-Adviser and their affiliates in performing advisory services for the Fund, the basis of determining and allocating these costs, and the estimated profitability to the Investment Manager and its affiliates in performing such services; (5) possible economies of scale arising from any anticipated growth of the Fund and the extent to which these would be passed on to members of the Fund; (6) other compensation or possible benefits to the Investment Manager, Sub-Adviser and their affiliates arising from their advisory and other relationships with the Fund; (7) possible alternative fee structures or bases for determining fees; (8) the fees charged by the Investment Manager and other investment managers to similar clients and in comparison to industry fees for similar services. It was noted that the Sub-Adviser does not perform similar services for other clients; (9) the allocation of total fees between the Investment Manager and the Sub-Adviser; (10) possible conflicts of interest that the Investment Manager and Sub-Adviser may have with respect to the Fund; and (11) the entrepreneurial risk borne by the Investment Manager, Sub-Adviser or their affiliates (e.g., because a Fund is in a start-up mode or for other reasons, the Investment Manager’s, Sub-Adviser’s or affiliates’ revenues may be less or their expenses greater than anticipated).
The Board concluded that the nature, extent and quality of the services to be provided by the Investment Manager and Sub-Adviser to the Fund are appropriate and consistent with the terms of the Fund’s LLC Agreement, that the quality of those services are anticipated to be consistent with industry norms and that the Fund is likely to benefit from the Investment Manager’s and Sub-Adviser’s management of the Fund’s investment program.
The Board considered the historic performance of the Fund and the Investment Manager’s other clients and concluded that the performance was in line with its relative peer group.
The Board also concluded that the Investment Manager and Sub-Adviser had sufficient personnel, with the appropriate education and experience, to serve the Fund effectively and have demonstrated their continuing ability to attract and retain qualified personnel.
The Board considered the anticipated costs of the services provided by the Investment Manager, and the compensation and benefits received by the Investment Manager in providing services to the Fund. The Board concluded that the Investment Manager’s anticipated fees and profits to be derived from its relationship with the Fund in light of the Fund’s expenses, were reasonable in relation to the nature and quality of the services provided, taking into account the fees charged by other investment managers for managing comparable funds. The Board also concluded that the overall expense ratio of the Fund was reasonable, taking into account the projected size of the Fund and the quality of services to be provided by the Investment Manager.
The Board considered the extent to which economies of scale could be realized, and whether fee levels would reflect those economies, noting that because the Fund was small, there were currently no economies of scale.
The Board considered all factors and no one factor alone was deemed dispositive.
Conclusion
After receiving full disclosure of relevant information of the type described above, the Board of the Fund concluded that the compensation and other terms of the Advisory Agreements were in the best interests of the Fund’s Members.
