2. Significant Accounting Policies (continued)
Distribution of Income and Gains (continued)
The tax character of distributions paid during the tax year ended April 30, 2016, the four months ended April 30, 2015, and the tax year ended December 31, 2014 were as follows:
| Tax Period | | Ordinary | | | Net Capital Gains | |
| Year ended April 30, 2016 | | $ | 45,919,632 | | | $ | 2,302,350 | |
| Four months ended April 30, 2015 | | | - | | | | - | |
| Year ended December 31, 2014 | | | 45,738,839 | | | | - | |
As of April 30, 2016, the components of distributable earnings on a tax basis were as follows:
| Qualified late-year losses | | $ | (28,947,442 | ) |
| Accumulated capital losses | | | (2,110,700 | ) |
| Unrealized depreciation | | | (39,638,544 | ) |
Qualified late-year losses are comprised of capital losses incurred after October 31, 2015, and certain late-year ordinary losses. Late-year ordinary losses represent ordinary losses incurred after December 31, 2015 and specified losses incurred after October 31, 2015. For federal income tax purposes, these losses are deemed to arise on the first day of the Fund’s next taxable year. For the year ended April 30, 2016, the Fund intends to defer to May 1, 2016, qualified late-year losses as follows:
| Late-year ordinary losses | | $ | (11,621,283 | ) |
| Post October short-term capital losses | | | (392,005 | ) |
| Post October long-term capital losses | | | (16,934,154 | ) |
In addition, as of April 30, 2016, the Fund had available for federal income tax purposes unused short-term capital losses that will not expire of $45,333 and long-term capital losses that will not expire of $2,065,367.
Dividend Reinvestment Plan
Each Member will have all income distributions and capital gains distributions automatically reinvested in additional units unless such Member specifically elects to receive all income distributions and capital gains distributions in cash.
3. Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, the investment funds in which the Fund invests trade various financial instruments and enter into various investment activities with off-balance sheet risk. These include, but are not limited to, short selling activities, written option contracts, and swaps.
Ironwood Institutional Multi-Strategy Fund LLC Notes to Consolidated Financial Statements (continued) |
3. Financial Instruments with Off-Balance Sheet Risk (continued)
The Fund’s risk of loss in these investment funds is limited to the value of the Fund’s interest in these investment funds as reported by the Fund.
4. Fair Value of Financial Instruments
The fair value of the Fund’s assets and liabilities that qualify as financial instruments approximates the carrying amounts presented on the consolidated statement of assets and liabilities.
The Fund invests in other investment funds and is permitted, as a practical expedient, to estimate the fair value of its investments in other investment funds based on the Fund’s pro-rata interest in the net assets of each investment fund, as such value is supplied by, or on behalf of, the investment fund’s investment manager, generally on a monthly basis. Some values received from, or on behalf of, the investment funds’ respective investment managers are typically estimates, subject to subsequent revision by such investment managers. Such values are generally net of management fees and incentive fees or allocations payable to the investment funds’ investment managers pursuant to the investment funds’ operating agreements. The investment funds value their underlying investments in accordance with policies established by each investment fund, as described in each of their financial statements or offering memoranda. The investment funds hold positions in readily marketable investments and derivatives that are valued at quoted market values and/or less liquid non-marketable investments and derivatives that are valued at estimated fair value. The mix and concentration of more readily marketable investments and less liquid non-marketable investments varies across the investment funds based on various factors, including the nature of their investment strategy, as described in each of their financial statements or offering memoranda. The Fund’s investments in investment funds are subject to the terms and conditions of the respective operating agreements and offering memoranda, as appropriate.
The Adviser has designed ongoing due diligence processes with respect to investment funds and their investment managers, which assist the Adviser in assessing the quality of information provided by, or on behalf of, each investment fund and in determining whether such information continues to be reliable or whether further investigation is necessary. Such investigation, as applicable, may or may not require the Adviser to forego its normal reliance on the value supplied by, or on behalf of, such investment fund and to independently determine the fair value of the Fund’s interest in such investment fund.
The Adviser has designated a committee to oversee the valuation process of the Fund’s investments (the “Valuation Committee”). The Valuation Committee is comprised of senior personnel, the majority of whom are separate from the Fund’s portfolio management team, and is responsible for developing written valuation policies and procedures, conducting periodic reviews of those policies and procedures, and evaluating the overall fairness and consistent application of the valuation policies and procedures. The Valuation Committee meets on a quarterly basis or more frequently as needed.
Ironwood Institutional Multi-Strategy Fund LLC Notes to Consolidated Financial Statements (continued) |
4. Fair Value of Financial Instruments (continued)
If no value is readily available from an investment fund or if a value supplied by an investment fund is deemed by the Valuation Committee not to be indicative of its fair value, the Valuation Committee would determine, in good faith, the fair value of the investment fund under procedures adopted by the Board and subject to Board supervision. Because of the inherent uncertainty of valuation, the fair values of the investment funds held by the Fund may differ significantly from the values that would have been used had a ready market for the investment funds been available. As of April 30, 2016, and for the year ended, no investments were fair valued by the Valuation Committee.
As of April 30, 2016, approximately 0.31% of the Fund’s net assets were invested in investment funds that do not have set redemption timeframes but are liquidating investments and making distributions as underlying investments are sold. The Adviser cannot estimate the timing of when these investments will be liquidated.
The following is a summary of the investment strategies of the investment funds held by the Fund as of April 30, 2016.
Relative value strategies attempt to capture pricing anomalies between assets that for all economic purposes are identical. Relative value strategies capture these inefficiencies by utilizing a combination of assets including bonds, stocks, swaps, options, exchange traded funds, currencies, futures, etc. One such strategy is capital structure arbitrage which involves the purchase and short sale of different classes of securities of the same issuer where there is a relative mispricing between two classes of securities. An example of this strategy is the purchase of undervalued senior secured debt and the short sale of overvalued subordinated unsecured debt or common equity. Other examples of relative value strategies include fixed income arbitrage, relative value interest rates, convertible bond arbitrage, relative value energy, and quantitative strategies. Generally, investment funds within this strategy require a 30 to 90 day notice period to redeem at the next available redemption date.
Market neutral and low net equity strategies involve the purchase of a stock or basket of stocks that is relatively underpriced as well as selling short a stock or basket of stocks that is relatively overpriced. Depending on the manager’s investment strategy, the determination of whether a stock is overpriced or underpriced can be made through fundamental analysis (a fundamental strategy) or by complex statistical models that examine numerous factors that affect the price of a stock (a quantitative strategy). The Adviser will utilize equity managers that target well-hedged and low net exposures and/or use a balanced approach to investing, i.e., they are short approximately the same dollar value of stocks they are long. Generally, investment funds within this strategy require a 45 to 90 day notice period to redeem at the next available redemption date.
Event-driven strategies involve the assessment of how, when, and if specific transactions will be completed and the effect on corporations and financial assets. A common event-driven strategy is merger arbitrage (also called risk arbitrage). This involves the purchase of the stock of a target company involved in a potential merger and, in the case of a stock-for-stock offer, the short sale
Ironwood Institutional Multi-Strategy Fund LLC Notes to Consolidated Financial Statements (continued) |
4. Fair Value of Financial Instruments (continued)
of the stock of the acquiring company. The target company’s stock would typically trade at a discount to the offer price due to the uncertainty of the completion of the transaction. The positions may be reversed if the manager feels the acquisition may not close. This strategy aims to capture the spread between the value of the security at the close of the transaction and its discounted value at the time of purchase. Other examples of event-driven strategies and opportunities include corporate restructurings, spin-offs, operational turnarounds, activism, asset sales, and liquidations. Generally, investment funds within this strategy require a 60 to 90 day notice period to redeem at the next available redemption date.
Distressed strategies involve the purchase or short sale of debt or equity securities of issuers experiencing financial distress. These securities may be attractive because of the market’s inaccurate assessment of the issuer’s future potential or the values and timing of recoveries. Managers may obtain voting rights or control blocks and actively participate in the bankruptcy or reorganization process while other investors may remain passive investors. Examples of distressed securities trades include bankruptcies, liquidations, post-restructured equities, structured credit, and balance sheet restructurings. Credit strategies involve a variety of strategies intended to exploit inefficiencies in the high-yield and related credit markets. Generally, investment funds within this strategy require a 90 to 120 day notice period to redeem at the next available redemption date.
In accordance with U.S. GAAP, investments in investments funds valued at net asset value, as a practical expedient, are not required to be included in the fair value hierarchy. All investments in investment funds were valued at their respective net asset value as of April 30, 2016, and are excluded from the fair value hierarchy.
5. Investment Transactions
Total purchases of investment funds for the year ended April 30, 2016 were $557,388,003. Total proceeds from redemptions of investment funds for the year ended April 30, 2016 were $342,019,860.
6. Advance Subscriptions to Investment Funds
Advance subscriptions to investment funds represent amounts transferred prior to April 30, 2016 to investment funds to be made effective May 1, 2016, pursuant to each investment fund’s operating agreement.
7. Advisory Fee, Related Party Transactions, and Other Expenses
In consideration of the advisory and other services provided by the Adviser to the Fund, the Fund pays the Adviser a monthly advisory fee of 0.10% (1.20% per annum) of the Fund’s month end net asset value. The advisory fee is an expense paid out of the Fund’s assets and is computed based on the value of the net assets of the Fund as of the close of business on the last calendar
Ironwood Institutional Multi-Strategy Fund LLC Notes to Consolidated Financial Statements (continued) |
7. Advisory Fee, Related Party Transactions, and Other Expenses (continued)
day of each month, before adjustments for any repurchases effective on that day. The advisory fee is payable in arrears as of the last calendar day of the applicable quarter and is in addition to the asset-based management fees and incentive fees or allocations charged by the underlying investment funds and indirectly borne by Members in the Fund. For the year ended April 30, 2016, the Fund incurred advisory fees of $22,018,410, of which $5,799,137 was payable to the Adviser as of April 30, 2016.
Foreside Fund Services, LLC acts as the distributor (the “Distributor”) of the Fund’s units. The Distributor has entered into, and may continue to enter into, selected dealer agreements with various brokers and dealers (“Selling Agents”) that agree to participate in the distribution of the Fund’s units. Investments may be subject to a sales charge (a “Sales Charge”) of up to 2.00%. The Sales Charge is in addition to the subscription price for units and does not form a part of an investor’s investment in the Fund. The Sales Charge relating to units is paid directly to the Selling Agent that assisted in the placement of such units.
The Fund pays all investment expenses, including, but not limited to, brokerage commissions and all other costs of executing transactions, interest expense, commitment fees, custody fees, its share of expenses of the investment funds, including management fees to the investment managers of the investment funds (ranging from 0.00% to 3.50% of net asset value) and incentive fees or allocations to such investment managers (ranging from 0% to 35% of net profits), and all ongoing ordinary administrative and operational costs of the Fund, including (but not limited to) legal costs, accounting costs, fees paid to the Administrator, fees paid to the regulatory and compliance administrator, filing fees, insurance expense, and taxes. The Fund will also directly pay any extraordinary operating expenses. The Adviser will bear all ongoing ordinary administrative and operational costs of the Adviser, including employees’ salaries, office rent, travel costs, quote machine rent, computer and equipment costs, telephone bills, office supplies, research and data costs, legal costs, accounting costs, filing costs, and communication expenses.
The Adviser has entered into an agreement with the Fund (the “Expense Limitation Agreement”) whereby it has contractually agreed to waive its fees and/or reimburse the Fund’s expenses to the extent necessary to ensure that the monthly expenses of the Fund (excluding taxes, brokerage commissions, interest expense and commitment fees incurred in connection with any credit facility, other transaction related expenses, custody fees, any extraordinary expenses of the Fund, any acquired fund fees and expenses, and the advisory fee) will not exceed 0.020833% (0.25% per annum) of the Fund’s net assets as of each month end during the term of the Expense Limitation Agreement (the “Expense Limitation”). The Fund will carry forward, for a period not to exceed 3 years from the date on which a waiver or reimbursement is made by the Adviser, any expenses in excess of the Expense Limitation and repay the Adviser such amounts; provided that the Fund is able to effect such reimbursement and remain in compliance with the Expense Limitation disclosed in the prospectus that was in effect at the time of the original waiver.
Ironwood Institutional Multi-Strategy Fund LLC Notes to Consolidated Financial Statements (continued) |
7. Advisory Fee, Related Party Transactions, and Other Expenses (continued)
No eligible expenses under the Expense Limitation Agreement were recaptured during the year ended April 30, 2016 and no amounts are subject to potential future reimbursement.
Compensation to the independent directors for the year ended April 30, 2016 was $82,083.
As of April 30, 2016, the directors, officers, and the Adviser and its employees, directly or indirectly, held units in the Fund as follows:
| | | Units | | | Percent of Net Assets | |
| | | | | | | |
| Directors | | | 957.95 | | | | 0.05 | % |
| Officers | | | 133.47 | | | | 0.01 | |
| Adviser and its employees | | | 3,015.49 | | | | 0.16 | |
| Total | | | 4,106.91 | | | | 0.22 | % |
8. Commitments
As of April 30, 2016, the Fund has unfunded capital commitments to investment funds of $90,000,000.
9. Indemnification
In the normal course of business, the Fund enters into contracts that provide general indemnifications and that contain a variety of representations and warranties. The Fund’s maximum exposure in connection with these contracts is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. However, no claims have been made under these indemnities in the past, and while there can be no assurances in this regard, the Fund is not aware of any such claims that may be made in the future.
10. Credit Facility
The Fund maintains a secured credit agreement with an unaffiliated bank for a revolving line of credit (the “Credit Facility”). The maximum availability under the Credit Facility is $150,000,000, subject to specific asset-based covenants. Borrowings are collateralized in full by certain assets of the Fund and bear interest at an annual rate of London Interbank Offered Rate plus 1.60% (the “spread”). Interest is accrued daily on any outstanding balance and, if not repaid on the interest accrual date, is automatically added to the principal amount of the loan. The Fund also pays an annual commitment fee of 0.65% based on the amount by which the maximum availability exceeds the outstanding loan balance. Interest expense and commitment fees incurred for the year ended April 30, 2016 are included on the consolidated statement of operations. For the year ended April 30, 2016, the average borrowings and average interest rate were $21,459,169 and 2.03%, respectively. As of April 30, 2016, the interest rate in effect was approximately 2.24%. The contractual maturity of the Credit Facility is April 20, 2018.
Ironwood Institutional Multi-Strategy Fund LLC Notes to Consolidated Financial Statements (continued) |
The Adviser has performed a subsequent events review and determined that there were no subsequent events which would have a significant impact on the Fund’s financial position or results of operations.
