1. Organization
FEG Directional 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 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 oversight of the Fund’s investments, making Portfolio Fund Manager (as 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 manages 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”).
Units of limited liability company interest (“Units”) 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.
UMB Fund Services, Inc., a subsidiary of UMB Financial Corporation, serves as the Fund’s administrator (the “Administrator”). The Fund has entered into an agreement with the
1. Organization (continued)
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.
Calculation of Members’ Capital and Net Asset Value per Unit
The Fund calculates its Members’ capital as of the close of business on the last business day of each calendar month and the last day of each fiscal period. In determining its Members’ capital, the Fund values its investments as of such month-end or as of the end of such fiscal period, as applicable. The Members’ capital of the Fund equals the value of the total assets of the Fund less liabilities, including accrued fees and expenses, each determined as of the date the Fund’s Members’ capital is calculated. The net asset value per unit equals Members’ capital divided by Units outstanding.
Short-Term Investments
Short-term investments represent an investment in a money market fund. Short-term investments are recorded at fair value.
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 the Portfolio Funds, net of management fees and incentive allocations payable to the Portfolio Fund Managers. The underlying investments held by the Portfolio Funds are 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 from the values that would have been used if a ready market existed. The 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 Directional Access Fund LLC
Notes to Financial Statements
September 30, 2014 (continued)
(unaudited)
2. Significant Accounting Policies (continued)
For the six months ended September 30, 2014, the aggregate cost of purchases and proceeds from sales of investments were $16,500,000 and $2,000,000, respectively.
Fair Value of Financial Instruments
In accordance with Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, fair value is defined as the price that the Fund would receive if it were 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 – Fair value of investments in Portfolio Funds with the ability to redeem within one quarter of the measurement date.
Level 3 – Fair value of investments in Portfolio Funds that do not have the ability to redeem within one quarter of the measurement date.
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 within one quarter of the measurement date, subject to further lockups and liquidity provisions, and 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
FEG Directional Access Fund LLC
Notes to Financial Statements
September 30, 2014 (continued)
(unaudited)
2. Significant Accounting Policies (continued)
investments are not redeemable within three months 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 Members’ Capital by level within the valuation hierarchy as of September 30, 2014:
| Investments | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Portfolio Funds | | $ | - | | | $ | 75,359,665 | | | $ | 36,959,823 | | | $ | 112,319,488 | |
| Short-Term Investments | | | 1,272,244 | | | | - | | | | - | | | | 1,272,244 | |
| Total | | $ | 1,272,244 | | | $ | 75,359,665 | | | $ | 36,959,823 | | | $ | 113,591,732 | |
The Schedule of Investments categorizes the aggregate fair value of the Fund’s investments in the Portfolio Funds by domicile, investment strategy, and liquidity.
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, 2014. Investments are transferred between Level 2 and Level 3 when the investment can be liquidated within one quarter or due to changes in side-pocket investments.
The following is a reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining fair value:
| | | Investments in | |
| | | Portfolio Funds | |
| Balance as of March 31, 2014 | | $ | 53,291,583 | |
| Realized gain (loss) | | | 0 | |
| Net change in unrealized appreciation/(depreciation) | | | 140,848 | |
| Purchases | | | 9,125,000 | |
| Sales | | | (0 | ) |
| Net transfers out of Level 3 | | | (25,597,608 | ) |
| Balance as of September 30, 2014 | | $ | 36,959,823 | |
FEG Directional Access Fund LLC
Notes to Financial Statements
September 30, 2014 (continued)
(unaudited)
2. Significant Accounting Policies (continued)
Investment Transactions and Investment Income
Investment transactions are recorded on a trade-date basis. Dividend income is recorded on the ex-dividend dates.
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.
Management has analyzed the Fund’s tax positions for all open tax years, which include the years ended December 31, 2011 through December 31, 2013, and has concluded that as of September 30, 2014, 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, 2014 for which Members’ interests were effective October 1, 2014. Capital contributions received in advance do not participate in the earnings of the Fund until such interests are effective. There was a total of $1,250,000 in capital contributions received in advance as of September 30, 2014. Capital withdrawals are comprised of requests for withdrawals that were effective on September 30, 2014 but were paid subsequent to fiscal period-end.
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 other delays, fees, or restrictions in accordance with the provisions of the respective Portfolio Fund’s agreement.
FEG Directional Access Fund LLC
Notes to Financial Statements
September 30, 2014 (continued)
(unaudited)
3. Investments in Portfolio Funds (continued)
The Portfolio Funds in which the Fund has investments may 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 generally ranging from 1.0% to 3.0% annually of Members’ capital, and incentive allocations that typically range between 10% and 30% of profits, subject to loss carry forward 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 $462,341 for the six months ended September 30, 2014, of which $72,056 was payable at September 30, 2014.
The Investment Manager, not the Fund, pays the Sub-Adviser a monthly fee equal to 10% of the Management Fee received by the Investment Manager from the Fund pursuant to the Investment Management Agreement as of the end of each calendar month.
FEG Directional Access Fund LLC
Notes to Financial Statements
September 30, 2014 (continued)
(unaudited)
4. Management Fee and Related Party Transactions (continued)
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 $2,500 per quarter. 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 Directors’ fees totaled $11,667 for the six months ended September 30, 2014, of which $5,000 was payable at September 30, 2014.
At September 30, 2014, FEG Equity Access Fund Ltd., an affiliated investment fund advised by the Investment Manager, owned 86.35% of the Fund’s outstanding Units, with a value of $92,994,495.
5. Members’ Capital
In accordance with the Fund’s Amended and Restated 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 $50,000, and additional contributions from existing Members may be made in a minimum amount of $25,000, although the Board may waive such minimums in certain cases.
No Member will have the right to require the Fund to redeem its Units. Rather, the Board may, from time to time and in its complete and absolute discretion, cause the Fund to offer to repurchase Units 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 Units 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 Units. The Board also will consider the following factors, among others, in making such determination: (i) whether any Members have requested that the Fund repurchase Units; (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 Units; (vi) the conditions in the securities markets and economic conditions generally; and (vii) the anticipated tax consequences of any proposed repurchases of Units.
FEG Directional Access Fund LLC
Notes to Financial Statements
September 30, 2014 (continued)
(unaudited)
5. Members’ Capital (continued)
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 Units 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 Units (or portions of Units), 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 Units in the Fund, Units 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 Units in the Fund may expect to receive on the repurchase of such Member’s Units 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 Units 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 Units in the Fund, the value of such Units being repurchased will be determined on the Full Repurchase Valuation Date. Within five days of the Repurchase Request Deadline, each Member whose Units have 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 of 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 Units 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 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
FEG Directional Access Fund LLC
Notes to Financial Statements
September 30, 2014 (continued)
(unaudited)
5. Members’ Capital (continued)
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 2.00% 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 Units.
If Members request that the Fund repurchase a greater number of Units 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 Units pursuant to repurchase requests on a pro rata basis, disregarding fractions, according to the portion of the Units 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 Units for repurchase will be required to maintain a minimum capital account balance of $50,000. 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. Credit Facility
Effective September 30, 2013 (the “Closing Date”), the Fund entered into a $10 million credit facility (the “LOC”) used for cash management purposes, such as providing liquidity for investments and repurchases. A fee of 50 basis points (0.50%) per annum is payable monthly in arrears on the unused portion of the facility, while the interest rate charged on borrowings is the 1-month London Interbank Offer Rate plus a spread of 200 basis points (2.00%). The average interest rate and the average daily loan balance for the 67 days the Fund had outstanding borrowings were 2.15% and $5,440,299, respectively, for the six months ended September 30, 2014. At September 30, 2014, the unused amount of the LOC was $5.5 million.
Assets permitted as investment collateral include U.S. marketable obligations, bankers’ acceptance and certificates of deposit, money market accounts and demand deposits and time deposits.
FEG Directional Access Fund LLC
Notes to Financial Statements
September 30, 2014 (continued)
(unaudited)
7. Credit Facility (continued)
The LOC agreement can be terminated on the earliest to occur of (i) the date declared by the lender in respect of the occurrence of an event of default, (ii) a date selected by the Fund upon at least 30 days’ prior written notice to the lender, or (iii) the first anniversary of the Closing Date.
8. Subsequent Events
Management evaluated subsequent events through the date the financial statements were issued, and determined that there were no subsequent events that required disclosure in or adjustment to the Fund’s financial statements.
