(b) Consolidation – The Corbin Fund consolidates its investment in the Domestic Blocker because the Domestic Blocker is a wholly-owned subsidiary of the Corbin Fund. Accordingly, the accompanying consolidated financial statements include the assets and liabilities and results of operations for the Domestic Blocker. Any material intercompany accounts and transactions have been eliminated in consolidation.
(c) Income taxes – The Fund elects to be treated as, and qualifies as, a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code of 1986 as amended (the "Code"), by distributing substantially all of its investment company taxable income and any net realized capital gains (after reduction for capital loss carryforwards) sufficient to relieve it from all, or substantially all, federal income taxes. Accordingly, no provision for federal income tax was required for the Corbin Fund. However, for the Domestic Blocker, an income tax provision was calculated and is disclosed in the Fund's annual financial statements.
In accounting for income taxes, the Fund follows the guidance in FASB ASC 740, as amended by ASU 2009-06, Accounting for Uncertainty in Income Taxes. FASB ASC 740 prescribes the minimum recognition threshold a tax position must meet in connection with accounting for uncertainties in income tax positions taken or expected to be taken by an entity before being measured and recognized in the financial statements. There were no uncertain tax positions as of September 30, 2017.
The Fund utilizes a tax-year end of October 31 and the Fund's income and federal excise tax returns and all financial records supporting the 2014, 2015 and 2016 returns are subject to examination by the federal and Delaware revenue authorities.
At October 31, 2016 (the Fund’s last tax-year end), the Fund held a capital loss carryforward of $8,379,582. The capital loss carryforward is available to offset future realized capital gains, although the utilization of a portion of the capital loss carryforward may be limited under the tax regulations. Capital losses that are carried forward will retain their character as either short-term or long-term capital losses and are not subject to expiration.
(d) Security transactions and investment income – The Fund's transactions are accounted for on a trade-date basis. Realized gains and losses on the Fund's transactions are determined on the average cost basis. Interest income is recognized on the accrual basis. Dividend income is recognized on the ex-dividend date. The Fund will indirectly bear a portion of the Investment Funds' income and expenses, including management fees and incentive fees charged by the Investment Funds. That income and those expenses are recorded in the Fund's consolidated financial statements as unrealized appreciation/(depreciation) in its investments in Investment Funds, not as income or expense on the Consolidated Statement of Operations.
(e) Cash and cash equivalents – The Fund maintains cash in an interest-bearing money market account, which, at times, may exceed federally insured limits. The Fund has not experienced any losses in such account and does not believe it is exposed to any significant credit risk on such bank deposits. All interest income earned will be paid to the Fund.
(f) Foreign currency translation – The Fund does not isolate the portion of the results of operations that is due to the change in foreign currency translation from changes in the market price of investments held or sold during the period. Assets and liabilities denominated in a foreign currency are translated into the U.S. dollar equivalent using the spot foreign currency exchange rate in effect at the time of reporting.
Realized gains and losses from such translation are included in realized gain/(loss) on foreign currency translations on the Consolidated Statement of Operations. Purchases and sales of investments and revenues and expenses denominated in foreign currencies are translated at the daily spot rates in effect at the time of the transaction.
(g) Options purchased – When an option is purchased, an amount equal to the premium paid is recorded as an investment and is subsequently adjusted to the current fair value of the option purchased. Premiums paid for the purchase of options which expire unexercised are treated by the Fund on the expiration date as realized losses. If a purchased put option is exercised, the premium is subtracted from the proceeds of the sale of the underlying security or foreign currency in determining whether the Fund has realized a gain or loss. If a purchased call option is exercised, the premium increases the cost basis of the security or foreign currency purchased by the Fund. Options purchased on an exchange are standardized while options purchased over-the-counter ("OTC") have counterparty risk associated with them.
(h) Options written – When an option is written, an amount equal to the premium received by the Fund is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from written options which expire unexercised are treated by the Fund as realized gains on the expiration date. If a written call option is exercised, the premium is added to the proceeds from the sale of the underlying security or foreign currency in determining whether the Fund has realized a gain or loss. If a written put option is exercised, the premium reduces the cost basis of the security or foreign currency purchased by the Fund.
(i) Futures contracts – The Fund purchases or sells futures contracts to gain exposure to, or economically hedge against, changes in interest rates (interest rate risk), changes in the value of equity securities (equity risk) or foreign currencies (foreign currency exchange rate risk). Futures contracts are agreements between the Fund and counterparty to buy or sell a specific quantity of an underlying instrument at a specified price and at a specified date. Depending on the terms of the particular contract, futures contracts are settled either through physical delivery of the underlying instrument on the settlement date or by payment of a cash settlement amount on the settlement date. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as margin variation and are recorded by the Fund as unrealized appreciation or depreciation. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The use of futures contracts involves the risk of an imperfect correlation in the movements in the price of futures contracts, interest or foreign currency exchange rates and the underlying assets.
(j) Forward foreign currency exchange contracts – The Fund enters into forward foreign currency exchange contracts as an economic hedge against either specific transactions or portfolio instruments (foreign currency exchange rate risk). A forward foreign currency exchange contract is an agreement between two parties to buy and sell a currency at a set exchange rate on a future date. The contract is marked-to-market daily and the change in market value is recorded as an unrealized gain or loss. When the contract is closed, a realized gain or loss is recorded equal to the difference between the value at the time it was opened and the value at the time it was closed.
(k) Credit default swaps – The Fund may enter into credit default swaps to manage its exposure to the market or certain sectors of the market, to reduce its risk exposure to defaults of corporate and/or sovereign issuers or to create exposure to corporate and/or sovereign issuers to which it is not otherwise exposed (credit risk). The Fund enters into credit default swaps to provide a measure of protection against the default of an issuer (as buyer of protection) and/or gain credit exposure to an issuer to which it is not otherwise exposed (as seller of protection). The Fund may either buy or sell (write) credit default swaps on single-name issuers (corporate or sovereign) or traded indices. Credit default swaps on single-name issuers are agreements in which the buyer pays fixed periodic payments to the seller in consideration for a guarantee from the seller to make a specific payment should a negative credit event take place (e.g., bankruptcy, failure to pay, obligation accelerators, repudiation, moratorium or restructuring). Credit default swaps on traded indices are agreements in which the buyer pays fixed periodic payments to the seller in consideration for a guarantee from the seller to make a specific payment should a write-down, principal or interest shortfall or default of all or individual underlying securities included in the index occur. As a buyer, if an underlying credit event occurs, the Fund will either receive from the seller an amount equal to the notional amount of the swap and deliver the referenced security or underlying securities comprising of an index or receive a net settlement of cash equal to the notional amount of the swap less the recovery value of the security or underlying securities comprising of an index. As a seller (writer), if an underlying credit event occurs, the Fund will either pay the buyer an amount equal to the notional amount of the swap and take delivery of the referenced security or underlying securities comprising of an index or pay a net settlement of cash equal to the notional amount of the swap less the recovery value of the security or underlying securities comprising of an index. The Fund may also enter into collateral agreements with certain counterparties to further mitigate counterparty risk on OTC derivative and forward foreign currency contracts. Subject to established minimum levels, collateral is generally determined based on the net aggregate unrealized gain or loss on contracts with a certain counterparty. Collateral pledged to or from the Fund is held in a segregated account by a third-party agent and can be in the form of cash or debt securities issued by the U.S. government or related agencies.
(l) Total return swaps – The Fund may enter into total return swap agreements to exchange one cash return or cash flow for another cash return or cash flow. Swap transactions are stated at fair value with unrealized gains reported as an asset and unrealized losses reported as a liability, netted as appropriate, on the Consolidated Statement of Assets, Liabilities and Net Assets. A realized gain or loss is recorded upon termination or reset of each total return swap transaction on the Consolidated Statement of Operations.
(m) Valuation of derivatives – The Fund has purchased and written index options, forward foreign currency contracts, total return swaps and credit default swaps outstanding as of September 30, 2017. The fair value of purchased and written index options can be determined using unadjusted quoted prices and are generally categorized within Level 1 of the Fund's fair value hierarchy. The fair value of written and purchased OTC currency options, forward foreign currency contracts, total return swaps and credit default swaps can be determined by an independent pricing vendor deemed reliable by management using a pricing model. The pricing models do not entail material subjectivity because the methodologies employed do not necessitate significant judgment, and the pricing inputs are observed from actively quoted markets and/or dealer quotes. The Fund generally categorizes these derivatives within Level 2 of the fair value hierarchy. In instances where significant inputs are unobservable, they would be categorized as Level 3 in the fair value hierarchy.
(n) Collateralized loan obligations – The Fund invests in collateralized loan obligations ("CLOs"), which are a type of asset-backed security. The cash flows of the CLO can be split into multiple segments, called "tranches", which will vary in risk profile and yield. The Fund values CLOs at the "bid" quotes provided by external pricing sources deemed reputable by management and therefore generally categorizes CLOs within Level 2 of the fair value hierarchy. In instances where significant inputs are unobservable, they would be categorized as Level 3 in the fair value hierarchy.
(o) Distributions – Distributions will be paid at least annually in an amount representing substantially all of the net investment income and net capital gains, if any, earned each year. Each investor (each, "Member") will automatically be a participant under the Fund's Dividend Reinvestment Plan ("DRP") and have all income dividends and/or capital gains distributions automatically reinvested in Shares. Election by a Member not to participate in the DRP and to receive all income distributions and/or capital gain distributions, if any, in cash may be made by providing notice to the Member's broker or intermediary.
Distributions to Members from net investment income and net realized gains, if any, are recorded on the ex-dividend date. Such distributions are determined in conformity with income tax regulations, which may differ from GAAP. The timing and character of distributions made during the period from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. To the extent that these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment. Temporary differences do not require reclassifications.
(p) Use of estimates – The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual results could differ from those estimates.
(q) Fund expenses – The Fund bears all expenses incurred in its business and operations, and records them on an accrual basis. Expenses include, but are not limited to, administrative and extraordinary expenses and legal, tax, audit, escrow, fund accounting and printing expenses. Operating expenses also include: (1) certain investment related expenses; (2) interest and commitment expense on any borrowings; and (3) all costs and expenses associated with the registration of the Fund and/or its securities under, and in compliance with, any applicable federal and state laws.
(r) Expense limitation agreement – Through June 30, 2018, the Adviser has contractually agreed to limit the Fund's total annualized fund-wide operating expenses to 2.00%. Members holding Shares designated as Class I ("Class I Shares") have no class-specific expenses. Members holding Shares designated as Class A ("Class A Shares") will pay (in addition to up to 2.00% in fund-wide expenses) an additional annualized amount of up to 0.75% (the "Investor Distribution and Servicing Fee"), for a total of up to 2.75%. Ordinary fund-wide operating expenses exclude the Fund's borrowing and other investment-related costs, Investment Fund and investment manager fees and expenses, taxes, litigation and indemnification expenses, judgments, other extraordinary expenses not incurred in the ordinary course of the Fund's business, and the Investor Distribution and Servicing Fee charged to Class A Shares. Ordinary fund-wide operating expenses include the Fund's management fee, start-up, offering and organizational expenses.
Accordingly, the Adviser is permitted to recover from the Fund expenses it has borne (whether through reduction of its management fee or otherwise) in later periods to the extent that the Fund's ordinary fund-wide operating expenses (exclusive of the Investor Distribution and Servicing Fee charged to Class A Shares) fall below the annualized rate of 2.00% per year. The Fund, however, is not obligated to pay any such amount more than three years after the end of the fiscal year in which the Adviser deferred a fee or reimbursed an expense. Any such recovery by the Adviser will not cause the Fund to exceed the annual limitation rate set forth above. As of September 30, 2017, there was no amount subject to recoupment within three years after the end of the fiscal year in which the Adviser reimbursed the expenses. As of September 30, 2017, there were no expenses reimbursable by the Adviser.
(s) Third party service providers – BNY Mellon Investment Servicing (US) Inc. (the "Administrator") serves as the Administrator to the Fund. Under an agreement made between the Administrator and the Fund, the following annual fee will be calculated based upon the Fund's beginning of the month's net assets and paid monthly:
0.085% of the first $200 million of beginning of month net assets;
0.070% of the next $200 million of beginning of month net assets; and
0.050% of beginning of month net assets in excess of $400 million.
The Fund also pays the Administrator certain fixed fees for consolidated financial statement preparation and other services.
The Bank of New York Mellon (the "Custodian") serves as the Custodian to the Fund. Under an agreement made between the Custodian and the Fund, 0.02% per annum is paid to the Custodian based on gross assets at the end of each month.
The Fund also pays the Custodian certain fixed fees for transactions and other services.
(t) Due from broker – Due from broker includes cash balances held with the broker and receivables from initial margin related to the Fund's derivatives trades. Interest may be earned on balances held by the brokers and interest may be charged on debit balances. At September 30, 2017, amounts due from the broker totaled $130,157.
(u) Recent accounting pronouncements – In October 2016, the Securities and Exchange Commission ("SEC") released its Final Rules on Investment Company Reporting Modernization (the "Rules"). The Rules which introduce two new regulatory reporting forms for investment companies - Form N-PORT and Form N-CEN - also contain amendments to Regulation S-X which require standardized, enhanced disclosures about derivatives in investment company financial statements, as well as other amendments. The compliance date for the Regulation S-X amendments was August 1, 2017 and compliance should be based on the reporting period-end date. The compliance date for Form N-PORT and Form N-CEN is June 1, 2018 and compliance should be based on the reporting period end date. Accordingly, the Fund has adopted the amendments to Regulation S-X and the required additional or enhanced disclosures have been included within the financial statements, however the Fund has concluded that these amendments do not materially impact any amounts disclosed.
3. Related Party Transactions
Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. Fees incurred with related parties during the period are disclosed in the Consolidated Statement of Operations unless otherwise stated and include the following:
(a) Investor Distribution and Servicing Fee – Under the terms of the wholesaling and placement agent agreement between the Fund and Global Alternative Investment Services, Inc. (the "Placement Agent"), the Placement Agent is authorized to retain brokers, dealers and certain financial advisers for distribution services and to provide ongoing investor services and account maintenance services to Members purchasing Class A Shares that are their customers.
The Fund pays an Investor Distribution and Servicing Fee out of the net assets of Class A Shares at the annual rate of 0.75% of the aggregate net asset value of Class A Shares that have been outstanding for more than twelve (12) months, calculated and accrued as of the last day of each calendar month (before any repurchases of Class A Shares) and paid to the Placement Agent quarterly. The Investor Distribution and Servicing Fee is charged on an aggregate class-wide basis, and investors in Class A Shares will be subject to the Investor Distribution and Servicing Fee regardless of how long they have held their Class A Shares. The Investor Distribution and Servicing Fee is paid to the Placement Agent to reimburse it for payments made to investor service providers and for the Placement Agent's ongoing investor servicing. Pursuant to the conditions of an exemptive order issued by the Securities and Exchange Commission ("SEC"), the Investor Distribution and Servicing Fee is paid pursuant to a plan adopted by the Fund in compliance with Rule 12b-1 under the 1940 Act with respect to Class A Shares. Class I Shares are not subject to the Investor Distribution and Servicing Fee.
For the six month period ended September 30, 2017, the Fund expensed Investor Distribution and Servicing Fees of $36,225. As of September 30, 2017, there were $17,157 of Investor Distribution and Servicing Fees payable to the Placement Agent.
(b) Placement fees – Under the terms of the wholesaling and placement agent agreement between the Fund and the Placement Agent, the Placement Agent’s sub-agents are entitled to receive a placement fee based on the net amount of Class A Shares purchased by a Member (the "Class A Share Placement Fee"). In determining the applicable Class A Share Placement Fee at the time of investment in Class A Shares, the amount of a Member's investment in Class A Shares (whether initial or additional) will be aggregated with the value of (i) the Member's investments in shares subject to a placement fee of any collective investment vehicle advised by the Adviser and (ii) investments in shares subject to a placement fee of any collective investment vehicle advised by the Adviser held by the Member's "Immediate Family Members" (as defined in the Fund's subscription agreement). The Member must indicate in the subscription agreement who such "Immediate Family Members" are and the amounts of their investments.
The Class A Share Placement Fee shall be deducted from the initial or additional subscriptions provided by the Member and is as follows:
| | Current Value of Class A Shares | Placement Fee |
| | Less than $500,000 | 2.00% |
| | $500,000 to less than $1,000,000 | 1.00% |
| | $1,000,000 or more | 0.50% |
For the six month period ended September 30, 2017, Class A Share Placement Fees paid to sub-agents of the Placement Agent by Members upon subscription into the Fund were $3,240.
(c) Investment advisory fees – Amounts paid, and payable, to the Adviser for the six month period ended September 30, 2017 are disclosed in Note 4.
(d) Fund Board fees and expenses – For the six month period ended September 30, 2017, the Fund incurred Fund Board fees, including out of pocket expenses, of $49,540, none of which is payable as of September 30, 2017.
4. Investment Advisory Agreement
The Adviser is registered with the SEC as an investment adviser under the Advisers Act. The Adviser also serves as investment adviser to private investment funds, some of which utilize a multi-manager, multi-strategy investment approach. The Adviser is registered with the Commodity Futures Trading Commission ("CFTC") as a commodity pool operator ("CPO") and a commodity trading advisor ("CTA"). Although the Adviser is registered as a CPO it intends to rely on the no-action relief afforded by CFTC Staff Letter No. 12-38 and the exception from CPO registration in CFTC Regulation 4.5. Therefore, the Adviser is not required to deliver a CFTC disclosure document to the Fund’s investors, nor is it required to provide Fund investors certified annual reports that satisfy the requirements of CFTC regulations generally applicable to registered CPOs. As of September 30, 2017, there is no certainty that the Adviser or other parties will be able to rely on these exclusions and exemptions in the future. Additional CFTC regulation (or a decision to no longer use strategies that trigger additional regulation) may cause the Fund to change its investment strategies or to incur additional expenses.
In addition, the CFTC and prudential regulators’ margin requirements for uncleared swap transactions have become effective. These proposed requirements may increase the amount of margin necessary to conduct uncleared swap transactions, limit the types of assets that can be used as collateral for such transactions, and impose other restrictions. Margin requirements may also affect the ability of the Fund to use swap agreements to implement the Fund’s investment strategy and may substantially increase regulatory compliance costs for the Adviser and the Fund. As of September 30, 2017, the ultimate impact of the margin requirements on the Fund is uncertain.
Pursuant to the terms of the advisory agreement between the Fund and the Adviser, the Adviser is responsible for selecting an investment subadviser to manage the Fund’s assets and to monitor such management of the Fund’s assets in accordance with the Fund’s investment objective and related investment policies. Subject to the approval of the Fund’s Board, the Adviser may elect to manage the Fund’s investments and determine the composition of the assets of the Fund.
Pursuant to an agreement with the Adviser and the Fund, the Subadviser is responsible for implementing a continuous investment program for the assets of the Fund, monitoring of the investment activities and holdings of the Fund, and for the selection of Investment Funds as well as direct investments of the Fund, in consultation with the Adviser.
The Fund accrues and pays the Adviser each month a fee ("Management Fee"). Through June 30, 2018, the Adviser has contractually agreed to waive a portion of its Management Fee to prevent it from exceeding one-twelfth of 1.00% of the aggregate net asset value of outstanding Shares of the Fund calculated as of the last day of each month (before any repurchases of Shares). The Management Fee incurred by the Fund for the six month period ended September 30, 2017 was $921,856. As of September 30, 2017, the Management Fee payable to the Adviser was $295,598. The Adviser pays the Subadviser a portion of the Management Fee as described in the subadvisory agreement among the Adviser, Subadviser, and the Fund.
5. Investment Fund Transactions
Purchases of investments in Investment Funds for the six month period ended September 30, 2017 were $202,069. Proceeds from sales of investments in Investment Funds for the six month period ended September 30, 2017 were $40,247,529. Purchases of investments in securities for the six month period ended September 30, 2017 were $1,237,006. Proceeds from sales of investments in securities for the six month period ended September 30, 2017 were $3,445,668.
6. Derivative Transactions
The Fund enters into derivative contracts for risk management purposes such as to manage or hedge the Fund's currency exchange risk, interest rate risk, credit risk and other risks. During the six month period ended September 30, 2017, the Fund entered into derivative contracts to hedge credit exposures of the broader portfolio. The Fund's hedge overlay includes a portfolio of single name credit default swaps to hedge the aggregate risk based on the Subadviser's understanding of the underlying exposures of the applicable Investment Funds. The hedge overlay is used to reduce risk to broad market factors, not exposures to specific securities and it is not necessarily aimed to neutralize exposures, but bring the portfolio in line with the desired posture given the portfolio objectives. All derivative contracts must be fully backed by cash positions and may be OTC and/or exchanged traded. Such derivative contracts may include forwards, futures, options, swaptions, warrants and swaps.
Forwards are a tailored contract between two parties, where payment takes place at a specific time in the future at today's pre-determined price. Futures are contracts to buy or sell an asset on or before a future date at a price specified today. Options are contracts that give the owner the right, but not the obligation, to buy or sell an asset. The price at which the buy or sale takes place is known as the strike price, and is specified at the time the parties enter into the option. The option contract also specifies a maturity date. Warrants are long dated options, usually longer than one year, which are traded OTC. Swaps are agreements to exchange cash flows on or before a specified future date on the underlying value of currency exchange rates, bonds/interest rates, commodities exchange, equities, indices or other assets. Swaptions are options on swap contracts and are similar to options on assets except that instead of selling or purchasing the right to buy or sell an asset, the writer or purchaser of the swaption is granting or buying the right to enter into a previously agreed upon interest rate or credit default swap agreement (interest rate risk and/or credit risk) at any time before the expiration of the option. As of September 30, 2017, the Fund has options and forward contracts, and has entered into total return and credit default swaps. The counterparty for derivative transactions entered into by the Fund is Morgan Stanley Capital Services, Inc.
The monthly average number of open contracts of options was 53 for the six month period ended September 30, 2017. The monthly average notional of total return swap contracts was $1,834,151 for the six month period ended September 30, 2017. The monthly average notional of credit default swaps was $4,088,780 for the six month period ended September 30, 2017. The average number of forward foreign currency exchange contracts was 1 for the six month period ended September 30, 2017.
The Fund's derivatives are not considered to be hedging instruments under GAAP and, therefore, the Fund accounts for derivatives at fair value on the Consolidated Statement of Assets, Liabilities and Net Assets.
Transactions in options contracts for the six month period ended September 30, 2017 were as follows:
Options purchased | | Number of Contracts | | | Cost | |
Balance at April 1, 2017 | | | 48 | | | $ | 68,017 | |
| | | | | | | | | |
Options purchased | | | 437 | | | | 1,157,765 | |
Options terminated in closing buy transactions | | | (37 | ) | | | (87,864 | ) |
Options expired | | | (255 | ) | | | (544,491 | ) |
| | | | | | | | | |
Balance at September 30, 2017 | | | 193 | | | $ | 593,427 | |
| | | | | | | | | |
| | | | | | | | | |
Index options written | | Number of Contracts | | | Premiums Received | |
| | | | | | | | | |
Balance at April 1, 2017 | | | 50 | | | $ | 64,098 | |
| | | | | | | | | |
Options written | | | 815 | | | | 1,146,465 | |
Options terminated in closing sell transactions | | | (311 | ) | | | (323,684 | ) |
Options expired | | | (266 | ) | | | (326,045 | ) |
| | | | | | | | | |
Balance at September 30, 2017 | | | 288 | | | $ | 560,834 | |
The following table presents derivative assets and liabilities net of amounts available for offset under a master netting arrangement and, as applicable, the related collateral and potential loss exposure to the Fund as of September 30, 2017.
| | | | | | | | | Gross Amounts Presented on Consolidated Statement of Assets, Liabilities and Net Assets |
Counterparty | | Form of Master Netting Agreement | | Value of Asset | | | Value of Liability | | | Net Amount Due (to)/from Counterparty | | | Collateral Pledged (Received) by Fund | | | Loss Exposure, After Collateral (not less than $0) | |
Morgan Stanley Capital | | | | | | | | | | | | | | | | | |
| Services Inc. | | ISDA | | $ | 60,932 | | | | (238,307 | ) | | | (177,375 | ) | | | 4,829,255 | | | | 4,651,880 | |
Morgan Stanley Capital | | | | | | | | | | | | | | | | | | | | | | |
| Services Inc. | | OTC | | | 204,496 | | | | (371,046 | ) | | | (166,550 | ) | | | – | | | | – | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Total | | | | $ | 265,428 | | | $ | (609,353 | ) | | $ | (343,925 | ) | | $ | 4,829,255 | | | $ | 4,651,880 | |
7. Investments in Investment Funds
The Adviser and Subadviser monitor the performance of Investment Funds. Such monitoring procedures include, but are not limited to, monitoring market movements and the Investment Funds' portfolio investments, comparing performance to industry benchmarks, in depth conference calls and site visits with Investment Fund portfolio managers.
Complete information about the underlying investments held by the Investment Funds is not readily available, so it is unknown whether the Fund, through its aggregate investment in Investment Funds, holds any single investment whereby the Fund's proportionate share exceeds 5% of the Fund's net assets as of September 30, 2017.
The following table summarizes the Fund's investments in the Investment Funds during the six month period ended September 30, 2017, none of which were related parties. The Fund indirectly bears fees and expenses as an investor in the Investment Funds. Each investor of each Investment Fund will pay the investment manager of the Investment Fund a management fee. The fee rate varies and ranges from 0% to 2.5% per annum of the net asset value of that Investment Fund. Additionally, the investment manager of each Investment Fund will generally receive an incentive fee/allocation from each investor ranging from 0% to 25% of any net new appreciation of that Investment Fund as of the end of each performance period for which an incentive fee/allocation is calculated.
| Investments in Investment Funds | | % of Fund's Total Investments Fair Value | | | Fair Value | | | Net Change in Unrealized Appreciation/ (Depreciation) | | | Realized Gain (Loss) | | Redemptions Permitted* | Primary Geographic Location |
| Redwood Offshore Fund, Ltd. | | | 11.2% | | | $ | 16,298,562 | | | $ | 605,812 | | | $ | — | | Biennial | Cayman Islands |
| D.E. Shaw Composite International Fund | | | 7.8 | | | | 11,353,450 | | | | 832,361 | | | | — | | Quarterly | Cayman Islands |
| Anchorage Capital Partners Offshore, Ltd. | | | 7.7 | | | | 11,192,567 | | | | (346,758 | ) | | | 466,010 | | Annually | Cayman Islands |
| Pelham Long/Short Fund Ltd. | | | 7.0 | | | | 10,184,388 | | | | 672,817 | | | | 346,171 | | Monthly | Bermuda |
| SRS Partners, Ltd. | | | 6.3 | | | | 9,135,748 | | | | 661,397 | | | | 416,692 | | Quarterly | Cayman Islands |
| Cadian Offshore Fund Ltd. | | | 6.1 | | | | 8,834,708 | | | | 710,825 | | | | 1,145,499 | | Quarterly | Cayman Islands |
| Autonomy Global Macro Fund Ltd. | | | 5.6 | | | | 8,103,227 | | | | (265,910 | ) | | | 521,139 | | Monthly | Cayman Islands |
| Serengeti Lycaon Overseas Ltd. | | | 5.1 | | | | 7,513,695 | | | | 198,701 | | | | — | | Quarterly | Cayman Islands |
East Lodge Capital Credit Opportunities Fund Ltd. | | | 4.6 | | | | 6,760,351 | | | | 400,325 | | | | — | | Quarterly | Cayman Islands |
| Tor Asia Credit Fund | | | 4.6 | | | | 6,658,560 | | | | 152,907 | | | | — | | Quarterly | Cayman Islands |
| D.E. Shaw Oculus International Fund | | | 4.4 | | | | 6,469,173 | | | | 339,021 | | | | — | | Quarterly | Cayman Islands |
| Marble Arch Offshore Partners Ltd. | | | 4.4 | | | | 6,442,765 | | | | 8,270 | | | | 149,707 | | Quarterly | Cayman Islands |
| Myriad Opportunities Offshore Fund Ltd. | | | 4.3 | | | | 6,316,529 | | | | 569,082 | | | | — | | Quarterly | Cayman Islands |
Senator Global Opportunity Offshore Fund II Ltd. | | | 3.4 | | | | 4,996,104 | | | | 307,401 | | | | 88,729 | | Quarterly | Cayman Islands |
| Whitebox Asymmetric Opportunities Fund, Ltd. | | | 3.1 | | | | 4,486,287 | | | | 115,769 | | | | — | | Quarterly | Cayman Islands |
| Jet Capital Concentrated Offshore Fund, Ltd. | | | 2.8 | | | | 4,106,635 | | | | (540,227 | ) | | | 583,024 | | Monthly | Cayman Islands |
Jet Capital Select Opportunities Offshore Fund, Ltd. | | | 2.2 | | | | 3,211,261 | | | | 139,027 | | | | — | | Monthly | Cayman Islands |
VPC Offshore Unleveraged Private Debt FundFeeder, LP | | | 2.2 | | | | 3,180,943 | | | | 24,034 | | | | 113,907 | | Not Permitted | Cayman Islands |
| Senator Global Opportunity Offshore Fund Ltd. | | | 1.8 | | | | 2,666,434 | | | | 286 | | | | 239,999 | | Quarterly | Cayman Islands |
| Squadra Equity Fund Ltd. | | | 1.8 | | | | 2,589,191 | | | | 170,494 | | | | — | | Monthly | Cayman Islands |
Kildonan Castle Global Credit Opportunity FundLtd. | | | 1.3 | | | | 1,851,561 | | | | (33,761 | ) | | | 77,493 | | Quarterly | Cayman Islands |
| Perella Weinberg Partners Asset Based Value | | | 0.9 | | | | 1,347,227 | | | | (65,110 | ) | | | 22,125 | | In Liquidation | Cayman Islands |
| Offshore Fund LP | | | | | | | | | | | | | | | | | | |
| SRS Special Opportunities Master II L.P. | | | 0.4 | | | | 604,178 | | | | 182,229 | | | | — | | Quarterly | Cayman Islands |
| West Face Long Term Opportunities Fund, Ltd. | | | 0.4 | | | | 570,948 | | | | 15,307 | | | | — | | Quarterly | Cayman Islands |
| Roystone Capital Offshore Fund, Ltd. | | | 0.3 | | | | 412,047 | | | | (15,081 | ) | | | 90,395 | | Quarterly | Cayman Islands |
Luxor Capital Partners Offshore LiquidatingSPV, Ltd. | | | 0.1 | | | | 212,735 | | | | 62,854 | | | | (3,020 | ) | Not Permitted | Cayman Islands |
| Centerbridge Credit Partners Offshore, Ltd. | | | 0.1 | | | | 156,529 | | | | (5,582 | ) | | | 12,866 | | Biennial | Cayman Islands |
| Redwood Argentina Offshore Fund, Ltd. | | | 0.1 | | | | 135,257 | | | | (30,228 | ) | | | 38,058 | | Not Permitted | Cayman Islands |
| Garrison Special Opportunities Fund LP** | | | 0.0 | | | | 52,020 | | | | (17,048 | ) | | | (2,135 | ) | In Liquidation | United States |
| New Point VII Ltd. | | | 0.0 | | | | 43,208 | | | | (974 | ) | | | — | | Not Permitted | Cayman Islands |
| Investments in Investment Funds | | % of Fund's Total Investments Fair Value | | | Fair Value | | | Net Change in Unrealized Appreciation/ (Depreciation) | | | Realized Gain (Loss) | | Redemptions Permitted* | Primary Geographic Location |
| Ironsides Partners Special Situations Offshore Fund Ltd. | | | 0.0% | | | $ | 31,923 | | | $ | — | | | $ | — | | Not Permitted | Cayman Islands |
| Tyticus Partners II Ltd. | | | 0.0 | | | | 7,716 | | | | (20,663 | ) | | | — | | In Liquidation | Cayman Islands |
| Archer Capital Fund LP** | | | 0.0 | | | | 4,573 | | | | 519 | | | | (2,177 | ) | In Liquidation | United States |
| New Point V Ltd. | | | 0.0 | | | | 4,309 | | | | (31,251 | ) | | | 31,753 | | Not Permitted | Bermuda |
| Drawbridge Special Opportunities Fund, L.P.** | | | — | | | | — | | | | (399,607 | ) | | | 232,438 | | In Liquidation | United States |
| Dymon Asia Macro Fund | | | — | | | | — | | | | (97,254 | ) | | | 52,759 | | Monthly | Cayman Islands |
| Guard Macro Offshore Feeder Fund | | | — | | | | — | | | | 312,179 | | | | (663,119 | ) | Monthly | Cayman Islands |
| JHL Capital Group Fund, Ltd. | | | — | | | | — | | | | 4,618 | | | | (4,667 | ) | Quarterly | Cayman Islands |
| King Street Europe, Ltd. | | | — | | | | — | | | | — | | | | 213 | | Quarterly | British Virgin Islands |
| Merion Capital Offshore L.P. | | | — | | | | — | | | | 7,151 | | | | 130,915 | | Monthly | Cayman Islands |
| Serengeti Segregated Portfolio Company, Ltd. | | | — | | | | — | | | | — | | | | 947 | | Not Permitted | Cayman Islands |
| Tekne Offshore Fund, Ltd. | | | — | | | | — | | | | (430,360 | ) | | | 1,361,460 | | Quarterly | Cayman Islands |
| York Credit Opportunities Unit Trust | | | — | | | | — | | | | (73,550 | ) | | | 105,660 | | Annually | Cayman Islands |
| Total Investments in Investment Funds | | | 100.0% | | | $ | 145,934,809 | | | $ | 4,120,022 | | | $ | 5,552,841 | | | |
* Subject to the terms of the offering memorandums of the Investment Funds.
** Investment Fund held in GAI Special Asset Holdings, Inc.
While redemptions are permitted as noted in the table above for the Investment Funds, such redemptions may be deferred or suspended at any time upon the election of the investment manager of the Investment Fund. Moreover, certain Investment Funds may amend their liquidity provisions or otherwise further restrict the Fund's ability to make withdrawals from those Investment Funds. No such restrictions were in place as of or during the six month period ended September 30, 2017. As of September 30, 2017, the Fund had unfunded capital commitments of $1,962,717.
The following is a summary of the investment strategies of the Investment Funds held in the Fund as of September 30, 2017:
Asset-Backed Securities strategies are those in which the investment thesis is predicated on realization of a spread between related instruments in which one or multiple components of the spread is a fixed income instrument backed by physical collateral or other financial obligations (loans, credit cards) other than those of a specific corporation. Strategies employ an investment process designed to isolate attractive opportunities between a variety of fixed income instruments specifically securitized by collateral commitments which frequently include loans, pools and portfolios of loans, receivables, real estate, machinery or other tangible financial commitments. Investment thesis may be predicated on an attractive spread given the nature and quality of the collateral, the liquidity characteristics of the underlying instruments and on issuance and trends in collateralized fixed income instruments, broadly speaking.
Equity Special Situations strategies generally employ an investment process primarily focused on opportunities in equity and equity related instruments of companies which are currently engaged in a corporate transaction, security issuance/repurchase, asset sales, division spin-off or other catalyst oriented situation. These involve both announced transactions as well as situations which pre-, post-date or situations in which no formal announcement is expected to occur. Strategies employ an investment process focusing broadly on a wide spectrum of corporate life cycle investing, including but not limited to distressed, bankruptcy and post-bankruptcy security issuance, announced acquisitions and corporate division spin-offs, asset sales and other security issuance impacting an individual capital structure focusing primarily on situations identified via fundamental research which are likely to result in a corporate transaction or other realization of shareholder value through the occurrence of some identifiable catalyst. Strategies effectively employ primarily equity but also corporate debt exposure, and in general tend to focus more broadly on post-bankruptcy equity exposure and exit of restructuring proceedings.
Event Driven/Distressed strategies generally include investments in securities of companies involved in identifiable corporate actions, such as mergers, acquisitions, restructurings, spin-offs, shareholder activism, or other special situations which alter a company's financial structure or operating strategy. Risk management and hedging techniques may be employed to protect the portfolio from events that fail to materialize. In addition, accurately forecasting the timing of an event is an important element impacting the realized return. The use of leverage varies considerably.
Global Macro strategies generally involve fundamental, discretionary, directional trading in currencies, commodities, bonds and equities. Investment managers utilizing Macro strategies invest in a wide variety of strategies and instruments, often assuming an aggressive risk posture. Most investment managers rely on macro-economic analyses to invest across countries, markets, sectors and companies, and have the flexibility to invest in numerous financial instruments. Futures, options and other derivative instruments are often used for hedging and speculation and the use of leverage varies considerably.
Long/Short Equity strategies generally involve taking both long and short positions in equity securities that are deemed to be under or overvalued. Although the combination of long and short investing can provide an element of protection against (but not eliminate) directional market exposure, long/short equities investment managers generally do not attempt to neutralize the amount of long and short positions (i.e., they will be net long or net short). Investment managers may specialize in a particular industry or geographic region, or they may diversify holdings across industries or geographic regions. Investment managers in this strategy usually employ a low to moderate degree of leverage.
Relative Value strategies employ multiple arbitrage investment strategies including forms of fixed-income arbitrage, merger arbitrage, convertible arbitrage, pairs trading, index-rebalancing arbitrage and capital structure arbitrage. Generally, investment managers take offsetting long and short positions in similar or related securities when their values, which are mathematically or historically interrelated, are temporarily distorted. In addition, investment managers make decisions regarding which Relative Value strategies offer the best opportunities at any given time and weight strategies accordingly in their overall portfolio.
8. Fair Value Measurements
The Fund measures fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three levels of the fair value hierarchy are:
| | • | Level 1 – Unadjusted quoted prices for identical securities in an active market. Since valuations are based on quoted prices that are readily-accessible at the measurement date, valuation of these securities does not entail a significant degree of judgment. |
| | • | Level 2 – Quoted prices in non-active markets for which all significant inputs are observable either directly or indirectly. Level 2 inputs may also include pricing models whose inputs are observable or derived principally from or corroborated by observable market data. |
| | • | Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value and unobservable. Little if any market activity exists for Level 3 securities. |
Investments in equity securities are included in Level 1 of the fair value hierarchy if an unadjusted price can be obtained from a reputable, independent third party pricing source as of the measurement date.
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. A summary of the inputs used to value the Fund's investments and other financial instruments as of September 30, 2017 is as follows:
Description | | Total Fair Value at September 30, 2017 | | | Level 1 Quoted Prices | | | Level 2 Other Significant Observable | | | | |
Other Financial Instruments | | | | | | | | | | | | |
| Assets | | | | | | | | | | | | |
| Purchased Options | | $ | 204,496 | | | $ | 204,496 | | | $ | – | | | $ | – | |
| Forward Foreign Currency | | | | | | | | | | | | | | | | |
| Exchange Contracts | | | 4,579 | | | | – | | | | 4,579 | | | | – | |
| Total Return Swaps | | | 60,932 | | | | – | | | | 60,932 | | | | – | |
| Liabilities | | | | | | | | | | | | | | | | |
| Written Options | | | (371,046 | ) | | | (371,046 | ) | | | – | | | | – | |
| Credit Default Swaps | | | (86,459 | ) | | | – | | | | (86,459 | ) | | | – | |
| Total Return Swaps | | | (151,848 | ) | | | – | | | | (151,848 | ) | | | – | |
Investments in Securities | | | | | | | | | | | | | | | | |
| Collateralized Loan Obligation | | | 727,500 | | | | – | | | | 727,500 | | | | – | |
| Equity | | | 7,541,301 | | | | 7,541,301 | | | | – | | | | – | |
Investment Funds (1) | | | 145,934,809 | | | | – | | | | – | | | | – | |
| | | | | | | | | | | | | | | | | |
Total Investments | | $ | 153,864,264 | | | $ | 7,374,751 | | | $ | 554,704 | | | $ | – | |
(1) Investment Funds that are measured at fair value using NAV per share (or its equivalent) as a practical expedient have not been categorized in the fair value hierarchy, as ASU 2015-07 removes this requirement. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Statement of Assets, Liabilities and Net Assets.
The Fund recognizes transfers into and out of the levels indicated above at the beginning of the reporting period. There were no transfers between any levels during the six month period ended September 30,
2017.
9. Capital Share Transactions
The Fund offers two separate classes of Shares, Class I Shares and Class A Shares, to investors eligible to invest in the Fund.
The Fund accepts initial and additional subscriptions for Shares on subscription dates, which occur only once each month, effective as of the beginning of the first calendar day of the month at the relevant net asset value per Share of the Fund as of the end of the last calendar day of the prior month. All Class A Share subscriptions accepted into the Fund are received net of Class A Share Placement Fees. The Fund Board may discontinue accepting subscriptions at any time.
To provide a limited degree of liquidity to Members, the Fund may from time to time offer to repurchase Shares pursuant to written tenders by Members. Repurchases will be made at such times, in such amounts and on such terms as may be determined by the Fund Board in its sole discretion. The Adviser expects to recommend ordinarily that the Fund Board authorize the Fund to offer to repurchase Shares from Members quarterly. If the interval between the date of purchase of Shares and repurchase of Shares is less than 180 calendar days, then such repurchase will be subject to a 2% early withdrawal fee.
For the six month period ended September 30, 2017, transactions in the Fund's Shares were as follows:
| | | Subscriptions (in Shares) | | | Subscriptions | | | Reinvestment of Distributions (in Shares) | | | Reinvestment of Distributions | | | Tenders (in Shares) | | | Tenders | |
| Class I | | | 17,644.911 | | | $ | 1,880,000 | | | | – | | | $ | – | | | | (303,374.049 | ) | | $ | (32,674,224 | ) |
| Class A | | | 1,612.065 | | | | 162,000 | | | | – | | | | – | | | | (21,472.516 | ) | | | (2,183,702 | ) |
| | | | 19,256.976 | | | $ | 2,042,000 | | | | – | | | $ | – | | | | (324,846.565 | ) | | $ | (34,857,926 | ) |
10. Contingencies
In the normal course of business, the Fund enters into contracts that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as any such exposure would result from future claims that may be, but have not yet been, made against the Fund based on events which have not yet occurred. However, based on the Adviser's and Subadviser's experience, the Fund believes the risk of loss from these arrangements to be remote.
11. Risk Factors
An investment in the Fund involves various risks. The Fund allocates assets to Investment Funds that invest in and actively trade securities and other financial instruments using a variety of strategies and investment techniques with significant risk characteristics, including the risks arising from the volatility of the equity, fixed income, commodity and currency markets, the risks of borrowings and short sales, the risks arising from leverage associated with trading in the equities, currencies and over-the-counter derivatives markets, the illiquidity of derivative instruments and the risk of loss from counterparty defaults.
The Fund invests in CLOs, that directly or indirectly represent a participation in, or are secured by and payable from asset pools. The collateralized loan obligation held by the Fund is an interest in pools of corporate loans. This security provides a monthly payment which consists of both interest and principal payments. Interest payments may be determined by fixed or adjustable rates. Credit risk on the CLOs reflects the risk that the borrowers on the underlying loans may not be able to make timely payments on the loans or may even default on the loans. The Fund is also exposed to the risk that the debt issuers may fail to fulfill their obligations to the Fund with respect to the CLOs. No such losses have been incurred.
No guarantee or representation is made that the investment program will be successful.
12. Line of Credit Arrangement
The Fund maintains a committed, secured line of credit (the "Facility") with Royal Bank of Canada ("RBC"). The Facility has the following terms: (a) interest rate of applicable LIBOR rate plus 1.40% per annum and (b) a commitment fee of 0.80% per annum and (c) a commitment amount of $20,000,000. For the six month period ended September 30, 2017, the Fund had weighted average borrowings of $459,016. The weighted average interest rate on borrowings for the six month period ended was 0.05972%. As of September 30, 2017, the Fund had outstanding balance of $1,000,000 under the line of credit.
For the six month period ended September 30, 2017, commitment fees of $80,219 were expensed and are included in the accompanying Consolidated Statement of Operations. There were no commitment fees payable to RBC as of September 30, 2017.
The Fund is required to meet certain financial covenants, such as limiting the amount of debt to the lesser of (a) the committed amount and (b) an amount equal to the product of 35% multiplied by the value of the collateral as defined in the line of credit agreement. The Fund met all financial covenants as of and during the six month period ended September 30, 2017.
13. Subsequent Events
The Adviser has evaluated the impact of all subsequent events on the Fund through the date the consolidated financial statements were available to be issued, and has determined that there were no events that required disclosure other than those listed below.
Subsequent to period end, the Fund received additional subscriptions of $1,650,000.
At August 31, 2017 meeting of the Boards of Managers (the “Board”) of the GAI Corbin Multi-Strategy Fund, LLC (the “Corbin Fund”) and GAI Special Asset Holdings, Inc. (the “Domestic Blocker” and together the “Funds”), a plan of liquidation (the “Plan”) for the Domestic Blocker was approved. Per terms of the Plan, the Board and officers of the Funds were authorized to wind-up the business and affairs of the Domestic Blocker, to arrange for the payment or other satisfaction of the liabilities of the Domestic Broker and to arrange for the distribution of the remaining assets, if any, of the Domestic Blocker to the Corbin Fund. The distribution by the Domestic Blocker of its assets shall either (i) be completed within the taxable year of the Domestic Blocker in which this Plan is adopted, or (ii) be made in a series of distributions, the first of which is made after the adoption of the Plan, and which complete the transfer of all of the property of the Domestic Blocker within three years from the date of the close of the taxable year in which the first such distribution is made. The Domestic Blocker transferred all assets and remaining liabilities to the Corbin Fund, and was dissolved by October 31, 2017.
Tax Information
Certain dividends paid by the Fund may qualify for the corporate dividends received deduction. The percentage of ordinary income distributions paid which qualify for the corporate dividends received deduction will be determined as of the Fund’s taxable year end of October 31, 2017.
Board Consideration of the Investment Management Agreement
At an in-person meeting of the Board held on May 4, 2017, the Board, including the Independent Managers, considered and approved the continuation of the investment advisory agreement between the Adviser and the Fund (“Advisory Agreement”) and the subadvisory agreement among the Adviser, the Fund and the Subadviser (“Subadvisory Agreement” and together with the Advisory Agreement, the “Advisory Agreements”). In preparation for review of the agreements, the Board requested the Adviser and Subadviser to provide detailed information which the Board determined to be reasonably necessary to evaluate the investment advisory and subadvisory agreements. On May 4, 2017, the Independent Managers met in-person among themselves to review and discuss aspects of the materials, initially with, and later without, representatives of the Adviser and Subadviser being present.
Representatives of the Adviser and Subadviser made extensive presentations regarding the materials and responded to questions from the Independent Managers. Further, the Board, including the Independent Managers, took into consideration information furnished for the Board’s review and consideration throughout the year at regular Board meetings, as well as the information specifically prepared in connection with the renewal process.
Upon consideration of these presentations, discussions, materials and other factors, the Board determined:
Nature, Extent and Quality of Services Provided to the Fund. The Board reviewed and considered the nature and extent of the investment advisory services provided by the Adviser, including in particular investment decision making, monitoring and oversight, as well as compliance, and subadvisory services provided by the Subadviser under the Advisory Agreements, including the selection of investments, allocation of the Fund’s assets among, and monitoring performance of, underlying Investment Funds, evaluation of risk exposure of underlying Investment Funds, experience of underlying Investment Funds’ managers, management of short-term cash and operations of underlying Investment Funds, and day-to-day portfolio management and general due diligence examination of underlying Investment Funds before and after committing assets of the Fund for investment. The Board also reviewed and considered the nature and extent of the non-advisory and administrative services provided by the Adviser, including, among other things, providing to the Fund office facilities, equipment, and personnel and the Adviser’s interactions with the Subadviser in assisting the Fund in compliance and other non-advisory areas. The Board reviewed and considered the qualifications of the portfolio managers, the senior administrative managers and other key personnel of the Adviser and the Subadviser who would provide the investment advisory, subadvisory, and administrative services to the Fund, including recent changes in such personnel. The Board examined performance of the Fund during the period and previously. The Board determined that the Adviser’s and the Subadviser’s portfolio managers and key personnel are well qualified and perform the services in an efficient and professional manner with acceptable and competitive performance results. The Board also took into account the Adviser’s and the Subadviser’s compliance functions and their roles in determining the fair value of the Fund’s assets. The Board also reflected on the annual audit process and the roles provided by the Adviser and Subadviser, including the time, resources and personnel availability provided by each. The Board concluded that the overall quality of the investment advisory, subadvisory and administrative services was satisfactory.
Cost of the Services Provided, and whether Economies of Scale would be Realized. The Board considered the Fund’s advisory fee and concluded that such fee was reasonable and satisfactory in light of the services to be provided. The Board reviewed the advisory and subadvisory fee rates and total expense ratio of the Fund. The Board compared the advisory fee, subadvisory fee and total expense ratio for the Fund with various comparative data, including a chart prepared by the Adviser comparing the fees payable by the Fund to those payable by comparable funds. The Board noted that the fees payable to the Adviser and the Subadviser were comparable to the fees payable to the investment managers of other similarly situated funds. The Board also considered fees charged by the Subadviser to other accounts managed by the Subadviser. The Board concluded that the advisory fee, the subadvisory fee and total expense ratio of the Fund were reasonable and satisfactory in light of the services provided. The Board also determined that, given the relative size of the Fund, economies of scale were not likely to be present or were not a significant factor at this time.
Profitability of the Adviser and each of its Affiliates. The Board considered and reviewed information concerning the costs incurred and profits realized by the Adviser, including the Adviser’s methodology in allocating costs in determining its profitability. Based on the review of the information they received, the Board members concluded that the profits earned by the Adviser were reasonable. The Board did not consider the costs of the services provided and profits, if any, realized by the Subadviser from the respective relationships with the Fund, noting instead the arm’s-length nature of the relationship between the Adviser and the Subadviser with respect to the subadvisory fee rates on behalf of the Fund and that the Adviser pays the Subadviser from the advisory fee paid to the Adviser.
Benefits Derived by Adviser and/or Subadviser from the Relationship with the Fund. The Board considered the “fall-out” or ancillary benefits that may accrue to the Adviser and/or Subadviser as a result of the advisory relationship with the Fund. In this regard, the Board noted that no soft-dollar research exists or is significant, in light of the investments in Investment Funds, and that “fall-out” benefits, to the extent any exist, are not a material factor with regard to approving the Advisory Agreements.
General Conclusion. Based on its consideration of all factors that it deemed material, the Board, including all of the Independent Managers, determined that the Fund’s advisory fee is fair and reasonable with respect to the quality of services that the Adviser and the Subadviser provide and in light of the other factors that had been discussed and deemed relevant by the Board. The Board noted that it had based its decision on evaluation of all of the factors as a whole and did not consider any one factor as all-important or controlling in determining whether to approve the Advisory Agreements.
The Board of Managers of the Fund
The Fund Board provides broad oversight over the operations and affairs of the Fund, and has overall responsibility to manage and control the business affairs of the Fund, including the complete and exclusive authority to establish policies regarding the management, conduct, and operation of the Fund’s business. The Fund Board exercises the same powers, authority and responsibilities on behalf of the Fund as are customarily exercised by the board of directors of a registered investment company organized as a corporation.
The Members of the Fund’s Board of Managers (“Managers”) are not required to hold Shares of the Fund. A majority of the Managers are persons who are not “interested persons” (as defined in the 1940 Act) of the Fund (collectively, the “Independent Managers”). The Independent Managers perform the same functions for the Fund as are customarily exercised by the non-interested directors of a registered investment company organized as a corporation or trust.
The identity of the Independent Managers and officers of the Fund and brief biographical information regarding each such person during the past five years is set forth below. Each Independent Manager who is deemed to be an “interested person” of the Fund, as defined in the 1940 Act (an “Interested Manager”), is indicated by an asterisk. The business address of each person listed below is 401 South Tryon Street, Charlotte, NC 28202.
Managers
Name and Age(1) | Position(s) With the Fund | Term of Office and Length(2) of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios In Fund Complex(3) Overseen by Managers | Other Directorships Held by Manager During the Last 5 Years |
Adam Taback* (Born 1971) | Manager, President | Since 2010 | Deputy Chief Investment Officer, Wells Fargo Private Bank, a division of Wells Fargo Bank, since 2014; Head of Global Alternative Investments and Executive Vice President, Wells Fargo Investment Institute, Inc., since 2014; President, Wells Fargo Investment Institute, Inc. (formerly known as Alternative Strategies Group, Inc.), 2003-2014; President, Wells Fargo Alternative Asset Management, LLC, 2011; President, Global Alternative Investment Services, Inc., since 2010; President, A.G. Edwards Capital, Inc., 2008-2017. | 2 | Chairman of the Board of Trustees, GAI Agility Income Fund, since 2010; Director of Global Alternative Services, Inc., since 2010; Director, A.G. Edwards Capital, Inc., 2008-2017; Director, Wells Fargo Investment Institute, Inc., 2005-2014; Chairman of the Board of Managers, GAI Mesirow Insight Fund, LLC, 2011-2015; Chairman of the Board of Managers, GAI Aurora Opportunities Fund, LLC, 2010-2016. |
James Dean (Born 1956) | Manager | Since 2010 | Executive Vice Chancellor and Provost, UNC at Chapel Hill, since 2013; Dean, Kenan-Flagler Business School, UNC at Chapel Hill, 1998- 2013. | 2 | Trustee, GAI Agility Income Fund, since 2010; Member of Board of Managers, GAI Mesirow Insight Fund, LLC, 2011-2015; Member of Board of Managers, GAI Aurora Opportunities Fund, LLC, 2010-2016. |
Name and Age(1) | Position(s) With the Fund | Term of Office and Length(2) of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios In Fund Complex(3) Overseen by Managers | Other Directorships Held by Manager During the Last 5 Years |
James Dunn (Born 1973) | Manager | Since 2010 | Chief Executive Officer, Chief Investment Officer, Verger Capital Management LLC, since 2014; Treasurer, James Denmark Loan Fund, since 2013; Vice President, Chief Investment Officer, Wake Forest University, 2009-2014; Managing Director, Chief Investment Officer, Wilshire Associates, 2005-2009. | 2 | Trustee, GAI Agility Income Fund, since 2010; Board Member, Milken Global Capital Markets Advisory Council, since 2009; Board Member, CAPTRUST Advisory Board, since 2011; Board Member, Ronald McDonald House of Winston-Salem Advisory Board, since 2011; Board Member, CFA North Carolina Society's Strategic Advisory Board, since 2012; Member of Board of Managers, GAI Mesirow Insight Fund, LLC, 2011-2015; Member of Board of Managers, GAI Aurora Opportunities Fund, LLC, 2010-2016. |
Stephen Golding (Born 1948) | Manager | Since 2010 | Senior Vice President for Strategic Initiatives, Ohio University, since 2016; Chief Financial Officer, Vice President Finance and Administration, Ohio University, 2010-2016; Executive Vice President, Finance and Administration, Cornell University, 2005-2009. | 2 | Trustee, Washington College, since 2003; Trustee, GAI Agility Income Fund, since 2010; Member of Board of Managers, GAI Mesirow Insight Fund, LLC, 2011-2015; Member of Board of Managers, GAI Aurora Opportunities Fund, LLC, 2010-2016; Trustee, Wells College Board Member, 2012-2015. |
James Hille (Born 1961) | Manager | Since 2010 | Chief Investment Officer, Texas Christian University, since 2006; Chief Investment Officer, Teachers Retirement System of Texas, 1995-2006. | 2 | Board Member, Texas Comptroller's Investment Advisory Board, since 2007; Trustee, Communities Foundation of Texas, since 2012; Trustee, GAI Agility Income Fund, since 2010; Investment Advisory Committee, the Employee Retirement System of Texas, since 2011, Chair since 2015; Trustee, Silver Ventures, Inc., since 2012; Member of Board of Managers, GAI Mesirow Insight Fund, LLC, 2011-2015; Member of Board of Managers, GAI Aurora Opportunities Fund, LLC, 2010-2016. |
Jonathan Hook (Born 1957) | Manager | Since 2010 | Chief Investment Officer, Harry and Jeanette Weinberg Foundation, since 2014; Vice President, Chief Investment Officer, The Ohio State University, 2008-2014; Chief Investment Officer, Baylor University, 2001-2008. | 2 | Trustee, GAI Agility Income Fund, since 2010; Member of the Board of Directors, Research Corporation for Science Advancement (RCSA), since 2011; Member of Board of Managers, GAI Mesirow Insight Fund, LLC, 2011-2015; Member of Board of Managers, GAI Aurora Opportunities Fund, LLC, 2010-2016. |
Name and Age(1) | Position(s) With the Fund | Term of Office and Length(2) of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios In Fund Complex(3) Overseen by Managers | Other Directorships Held by Manager During the Last 5 Years |
Dennis Schmal (Born 1947) | Manager | Since 2011 | Self-employed; Board Director and Consultant. | 2 | Trustee, GAI Agility Income Fund, since 2011; Director, AssetMark GuideMark and Guide Path Mutual Funds (16 funds), since 2006; Director, Owens Realty Mortgage Inc., since 2013; Trustee, Cambria ETF Funds, since 2013; Director, Blue Calypso Inc., since 2015; Director, North Bay Bancorp, 2006-2007; Chairman of the Board of Directors of Pacific Metrics Corporation, 2005-2014; Director and Chairman of the Board, Sitoa Global, Inc., 2012-2013; Director, Varian Semiconductor Equipment Associates, 2004-2011; Director, Merriman Holdings, Inc., 2003-2016; Director, Grail Advisors ETF Trust (5 Funds) 2009-2011; Member of Board of Managers, GAI Mesirow Insight Fund, LLC, 2008-2015; Member of Board of Managers, GAI Aurora Opportunities Fund, LLC, 2011-2016. |
| | * | Indicates an Interested Manager. |
| | | |
| | (1) | As of September 30, 2017. |
| | | |
| | (2) | Each Manager serves until death, retirement, resignation or removal from the Board. Any Manager may be removed with or without cause, at any meeting of the Shareholders by vote of Shareholders owning at least two-thirds of the total outstanding Shares. |
| | | |
| | (3) | The “Fund Complex” is currently comprised of two closed-end registered investment companies. |
Principal Officers who are not Managers:
Name and Age(1) | Position(s) With the Fund | Length of Time Served(2) | Principal Occupation During Past Five Years |
Michael Roman (Born 1980) | Treasurer | Since 2010 | Manager of Global Alternative Investments Finance and Accounting, Wells Fargo Investment Institute, Inc., since 2007; Senior Analyst, Wells Fargo Investment Institute, Inc., 2006; Treasurer, Wells Fargo Alternative Asset Management, LLC, 2011; Senior Financial Analyst, Turbine, Inc.; 2003-2006. |
Britta Perkio (Born 1974) | Secretary | Since 2010 | Senior Vice President and Secretary, Wells Fargo Investment Institute, Inc., since 2008; Director and Chief Administrative Officer, AG Edwards Capital, Inc., 2008-2017; Director (2009-2014), Chief Administrative Officer, Wells Fargo Investment Institute, Inc., 2005-2014; Chief Administrative Officer, Senior Vice President, Wells Fargo Alternative Asset Management, LLC, 2011. |
Jeffrey Minerva (Born 1981) | Assistant Treasurer | Since 2013 | Senior Fund Reporting Analyst, Wells Fargo Investment Institute, Inc., since 2011; Audit Senior, Deloitte & Touche, LLP, 2007-2011; Audit Senior Associate, Deloitte & Touche, LLP, 2006-2007; Audit Associate, Deloitte & Touche, LLP, 2005- 2006. |
Name and Age(1) | Position(s) With the Fund | Length of Time Served(2) | Principal Occupation During Past Five Years |
James Angelos (Born 1947) | Chief Compliance Officer | Since 2014 | Chief Compliance Officer, GAI Registered Funds, since 2014; Chief Compliance Officer, Wells Fargo Investment Institute, Inc., 2014-2016; Chief Compliance Officer, A.G. Edwards Capital, Inc., 2014-2017; Senior Industry Consultant, Mainstay Capital Markets Consultants, Inc., 2013-2014; Surveillance Director, Financial Industry Regulatory Authority, 2011-2013; Vice President, Asset Management Compliance, Ameriprise Financial Services, 2007-2010. |
Sean M. Nicolosi (Born 1973) | Chief Operating Officer | Since 2014 | Director of Alternative Investment Operations, Wells Fargo Investment Institute, Inc., since 2014; Chief Operating Officer and Director, Global Alternative Investment Services, Inc., since 2014; Chief Operating Officer and Director, A.G. Edwards Capital, Inc., 2014-2017; Chief Operating Officer and Director, Wells Fargo Investment Institute, Inc., 2014; Vice President and Operations Manager, Wells Fargo Investment Institute, Inc., 2012-2014; Vice President and Senior Financial Reporting Manager, BNY Mellon Global Investment Services, 2011-2012; Administration Manager, Wells Fargo Investment Institute, Inc., 2005-2011. |
| | (1) | As of September 30, 2017. |
| | | |
| | (2) | Each officer of the Fund serves for an indefinite term until the date his or her successor is elected and qualified, or until he or she sooner dies, retires, is removed or becomes disqualified. |
Form N-Q Filings
The Fund will file its complete schedule of portfolio holdings with the Securities and Exchange Commission ("SEC") for the first and third quarters of each fiscal year on Form N-Q. The Forms N-Q will be available on the SEC's website at www.sec.gov and may also 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.
Proxy Voting Policies
Information on how the Fund voted proxies relating to portfolio securities during the prior twelve month period ending June 30 of each year and a description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities will be available without charge, by request, by calling (866) 440-7460 and on the SEC’s web site at www.sec.gov.
