See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
1. Organization
Ironwood Institutional Multi-Strategy Fund LLC (the “Fund”) was organized under the laws of the state of Delaware as a limited liability company on August 25, 2010 and commenced operations on January 1, 2011. The Fund is registered under the Investment Company Act of 1940 (the “1940 Act”) as a closed-end, non-diversified management investment company. The Fund is also registered under the Securities Act of 1933, as amended (the “1933 Act”). The Fund currently complies, and intends to continue to comply with the diversification requirements of Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), as such requirements are described in more detail below.
The Fund’s investment objective is capital appreciation with limited variability of returns. The Fund attempts to achieve this objective by allocating capital among a number of pooled investment vehicles that are generally organized in non-U.S. jurisdictions and classified as corporations for U.S. federal income tax purposes. Each is managed by an independent investment manager pursuant to various alternative investment strategies, including relative value; market neutral and low net equity; event-driven; and distressed and credit securities.
The Fund is a master fund in a master-feeder structure whereby Ironwood Multi-Strategy Fund LLC (the “Feeder Fund”) invests substantially all of its assets in the Fund. As of April 30, 2017, the Feeder Fund owned 59.21% of the Fund’s net assets. Other eligible investors (referred to as “Members”) in the Fund include high net worth individuals, foundations, pensions, and other institutions.
Ironwood Capital Management serves as the Fund’s investment adviser (the “Adviser”) and is responsible for providing day-to-day investment management services to the Fund, subject to the oversight of the Fund’s Board of Directors (the “Board”). The Adviser is registered as an investment adviser under the U.S. Investment Advisers Act of 1940 (the “Advisers Act”). The Adviser is also registered as a Commodity Pool Operator with the U.S. Commodity Futures Trading Commission and is a member of the National Futures Association. The Board has overall responsibility for monitoring and overseeing the Fund’s investment program and its management and operations. A majority of the members of the Board are not “interested persons” (as defined by the 1940 Act) of the Fund or the Adviser.
The Fund utilizes State Street Bank and Trust Company (the “Administrator”) as its independent administrator.
The Bank of New York Mellon (the “Custodian”) serves as custodian for the Fund.
Ironwood Institutional Multi-Strategy Fund LLC
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies
Basis of Presentation
The following significant accounting policies are in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Such policies are consistently followed by the Fund in the preparation of its consolidated financial statements. The consolidated financial statements are expressed in U.S. dollars.
The Fund is an investment company. As such, these consolidated financial statements have applied the guidance set forth in Accounting Standards Codification (“ASC”) Topic 946, Financial Services-Investment Companies.
Use of Estimates
The preparation of these consolidated financial statements in conformity with U.S. GAAP requires the Adviser to make estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements, including the estimated fair value of investments. Actual results could differ from those estimates.
Basis of Consolidation
The consolidated financial statements include the financial position and the results of operations of the Fund and its wholly owned subsidiaries, Ironwood Multi-Strategy Fund Ltd. (“CFC”), a Cayman Islands controlled foreign corporation and Ironwood Multi-Strategy Fund LP (“IMSLP”), a Delaware limited partnership. The wholly owned subsidiaries have the same investment objective as the Fund. CFC is primarily used to invest in investment funds which do not allow U.S. entities to invest directly. IMSLP is used when the Fund has determined that owning certain investment funds within a domestic limited partnership structure would be beneficial. As of April 30, 2017 no investment funds were held by the wholly owned subsidiaries.
Net Asset Value Determination
The net asset value of the Fund is determined as of the close of business at the end of any fiscal period, generally monthly, in accordance with the valuation principles set forth below or as determined pursuant to policies established by the Board.
Portfolio Valuation
The Fund values its investments in investment funds at fair value in accordance with ASC Topic 820, Fair Value Measurement (“ASC 820”). See Note 4 for more information.
Ironwood Institutional Multi-Strategy Fund LLC
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
Cash and cash equivalents
The Fund defines cash equivalents as short-term, highly liquid investments with original maturities of three months or less at the date of acquisition. The Fund places its cash and cash equivalents in accounts with entities that are affiliated with the Custodian and the Administrator and, at times, such balances may be in excess of the Federal Deposit Insurance Corporation insurance limits. The Fund also maintains money market investments with other U.S. financial institutions. The Adviser monitors the financial condition of such entities and does not anticipate any losses from these counterparties. As of April 30, 2017, cash equivalents of $126,550,693 consist of investments in money market funds. These investments are valued at their respective net asset value per share and are categorized as Level 1 in the fair value hierarchy, as defined in ASC 820.
Income Recognition and Expenses
The Fund recognizes income and expenses on an accrual basis. Income, expenses, and realized and unrealized gains and losses are recorded monthly. The changes in investment funds’ fair values are included in net change in unrealized appreciation/depreciation on investments in investment funds on the consolidated statement of operations. Realized gain (loss) from investments in investment funds is calculated using the specific identification methodology.
Income Taxes
The Fund currently complies, and intends to continue to comply with the requirements of Subchapter M of the Code applicable to Regulated Investment Companies (“RICs”) and distributes substantially all of its taxable income to its Members. Therefore, no provision for federal income taxes is required. The Fund files tax returns with the U.S. Internal Revenue Service and various states. The Fund has concluded there are no significant uncertain tax positions that would require recognition in the consolidated financial statements as of April 30, 2017. If applicable, the Fund recognizes interest accrued related to liabilities for unrecognized tax in interest expense and penalties in other expenses on the consolidated statement of operations. The open tax years under potential examination vary by jurisdiction, but in general tax authorities can examine all tax returns filed for the last three tax years.
The Fund has a tax year that ends on April 30.
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.
Ironwood Institutional Multi-Strategy Fund LLC
Notes to Consolidated Financial Statements (continued)
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. 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 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
Ironwood Institutional Multi-Strategy Fund LLC
Notes to Consolidated Financial Statements (continued)
4. Fair Value of Financial Instruments (continued)
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.
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 oversight. 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 and for the year ended April 30, 2017, no investments were fair valued by the Valuation Committee.
As of April 30, 2017, approximately 0.34% 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, 2017.
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
Ironwood Institutional Multi-Strategy Fund LLC
Notes to Consolidated Financial Statements (continued)
4. Fair Value of Financial Instruments (continued)
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 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 investment 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, 2017, and are excluded from the fair value hierarchy.
5. Investment Transactions
Total purchases of investment funds for the year ended April 30, 2017 were $335,683,317. Total proceeds from redemptions of investment funds for the year ended April 30, 2017 were $446,192,604.
Ironwood Institutional Multi-Strategy Fund LLC
Notes to Consolidated Financial Statements (continued)
6. Subscriptions and Redemptions
The minimum initial investment by Members is $50,000 and the minimum subsequent investment is $10,000, both subject to waiver by the Adviser. Members may purchase units as of the first business day of the month.
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 a Member’s investment in the Fund. Generally, the Sales Charge relating to units is paid directly to the Selling Agent that assisted in the placement of such units.
The Board, in its sole and absolute discretion, may authorize the Fund to make a tender offer to repurchase Members’ units (an “Offer”).
A 5% early repurchase fee is charged on repurchased units that have been held less than one year, payable to the Fund. The Board, in its sole discretion, may waive the imposition of the early repurchase fee.
In determining whether the Fund should make an Offer to repurchase units from Members, the Board will consider, among other things, the recommendation of the Adviser. The Adviser expects that it will recommend to the Board that the Fund make an Offer to repurchase units from Members semi-annually on June 30 and December 31. While there can be no guarantee that it will continue this practice, to date, the Fund has offered to repurchase 10 – 20% of its units at each of its June 30 and December 31 tender offers.
In addition to the Fund’s June 30 and December 31 offers, the Board authorized the Feeder Fund to offer to repurchase its units on December 31, 2016 in exchange for the underlying units of the Fund held by the Feeder Fund (“In-Kind Tender Offer”). Members of the Feeder Fund who participated in the In-Kind Tender Offer received Fund units valued as of December 31, 2016 in an amount equal to the value of the Feeder Fund member’s tendered Feeder Fund units. The total amount of in-kind exchanges was $9,986,409.
Transactions in units were as follows:
| | | Year Ended | | | Year Ended | |
| | | April 30, 2017 | | | April 30, 2016 | |
| Units outstanding, beginning of year | | | 1,865,988.22 | | | | 1,445,985.52 | |
| Units issued | | | 157,352.70 | | | | 448,032.31 | |
| Units issued for reinvestment of distributions | | | 26,800.71 | | | | 42,289.14 | |
| Units redeemed | | | (273,609.35 | ) | | | (70,318.75 | ) |
| Units outstanding, end of year | | | 1,776,532.28 | | | | 1,865,988.22 | |
Ironwood Institutional Multi-Strategy Fund LLC
Notes to Consolidated Financial Statements (continued)
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 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, 2017, the Fund incurred advisory fees of $24,048,190, of which $5,903,168 was payable to the Adviser as of April 30, 2017.
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, risk monitoring fees, 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.
No eligible expenses under the Expense Limitation Agreement were recaptured during the year ended April 30, 2017 and no amounts are subject to potential future reimbursement.
Compensation to the independent directors for the year ended April 30, 2017 was $105,000.
Ironwood Institutional Multi-Strategy Fund LLC
Notes to Consolidated Financial Statements (continued)
7. Advisory Fee, Related Party Transactions, and Other Expenses (continued)
As of April 30, 2017, 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 | | | 971.66 | | | | 0.05 | % |
| Officers | | | 135.48 | | | | 0.01 | |
| Adviser and its employees | | | 3,060.86 | | | | 0.17 | |
| Total | | | 4,168.00 | | | | 0.23 | % |
8. 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, 2017 are included on the consolidated statement of operations. For the year ended April 30, 2017, the average borrowings and average interest rate were $4,179,848 and 2.49%, respectively. As of April 30, 2017, the interest rate in effect was approximately 2.77%. The contractual maturity of the Credit Facility is April 20, 2018.
9. Income Taxes
The Fund generally invests in investment funds organized outside the United States that are treated as corporations for U.S. tax purposes and are expected to be classified as passive foreign investment companies (“PFICs”). Certain PFICs provide information regarding the amount of U.S. taxable income and gain. For such PFICs, the Fund has made Qualified Electing Fund (“QEF”) elections for tax purposes.
For other PFICs that do not provide information regarding taxable income and gain, the Fund has made mark-to-market (“MTM”) elections which convert any unrealized gain to ordinary taxable income.
The Fund also invests in investment funds organized in the U.S. that are treated as partnerships for U.S. income tax purposes.
Net investment income (loss) and net realized gain (loss) from investments in investment funds may not be treated the same for financial statement and for U.S. tax purposes. Temporary book-
Ironwood Institutional Multi-Strategy Fund LLC
Notes to Consolidated Financial Statements (continued)
9. Income Taxes (continued)
tax differences result when the Fund holds an investment in an investment fund, and such temporary book-tax differences generally become permanent upon disposal of the investment fund.
As of April 30, 2017, the aggregate cost and related gross unrealized appreciation and depreciation for tax purposes were as follows:
| Cost of investments for tax purposes | | $ | 1,854,193,167 | |
| | | | | |
| Gross tax unrealized appreciation | | $ | 10,162,451 | |
| Gross tax unrealized depreciation | | | (6,398,600 | ) |
| Net tax unrealized appreciation on investments | | $ | 3,763,851 | |
Permanent differences, primarily due to the sale of MTM and QEF PFICs resulted in the following reclassifications among the Fund’s components of net assets as of April 30, 2017:
| Accumulated net investment loss | | $ | 12,005,063 | |
| Accumulated net realized loss | | | (12,005,063 | ) |
Distribution of Income and Gains
The Fund declares and pays dividends annually from net investment income. Net realized gains, if any, are distributed at least annually. Distributions from net realized gains for book purposes may include short-term capital gains, which are included as ordinary income for tax purposes.
The tax character of distributions paid during the tax years ended April 30, 2017 and April 30, 2016 were as follows:
Tax Character | | April 30, 2017 | | | April 30, 2016 | |
| Ordinary income | | $ | 30,844,765 | | | $ | 45,919,632 | |
| Long-term capital gain | | | - | | | | 2,302,350 | |
As of April 30, 2017, the components of distributable earnings on a tax basis were as follows:
| Undistributed ordinary income | | $ | 34,467,320 | |
| Accumulated capital losses | | | (1,476,045 | ) |
| Unrealized appreciation | | | 3,763,851 | |
For the year ended April 30, 2017, the Fund utilized $634,656 of prior year capital loss carryforwards. As of April 30, 2017, the Fund had available for federal income tax purposes unused short-term capital losses that will not expire of $437,338 and long-term capital losses that will not expire of $1,038,707.
Ironwood Institutional Multi-Strategy Fund LLC
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies
As of April 30, 2017, the Fund had unfunded capital commitments to investment funds of $41,789,000.
11. 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.
12. Subsequent Events
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, other than as disclosed below.
Effective May 1, 2017, the Bank of New York Mellon replaced State Street Bank and Trust Company as administrator to the Fund.
