Shareholder Letter for Annual Report:
We are pleased to provide the annual report for the FSI Low Beta Absolute Return Fund (the “Fund”) for the twelve month reporting period ended August 31, 2017 (the “Period”). Please read on for Fund performance and a brief overview of the economic and market conditions during the Fund’s reporting period.
For the Period, the Fund posted a 2.96% return, compared to 5.48% for its benchmark, the HFRI Fund of Funds Diversified Index (the “Benchmark”). In the second half of the Period, Fund performance was in line with the Benchmark’s performance of 2.6% compared to the Benchmark return of 2.5%. Since the Fund’s inception in July 2013, it has posted a cumulative return of 14.3%, compared to 13.9% for the Benchmark.
During the Period, we saw a continued bull market across major asset classes driven by a multitude of global economic factors. In the U.S. markets, investors responded to the 2016 presidential election with increased optimism. The Federal Reserve is treading softly in their stated long term goal of balance sheet reduction and rate normalization. Manager surveys are showing that the majority believes that there will be above trend growth and below trend inflation – an environment that has been deemed a Goldilocks situation. This opinion is not currently being confirmed by the 10 year US Treasury which at a 2.38% yield is not predicting significantly improved GDP performance going forward.
Most of the movements in global interest rates during the Period have been driven by actions and comments from global central banks and not by economic fundamentals. This is a critical area we are watching in the period ahead for impact on the overall portfolio.
In Europe, the ECB has nearly exhausted their ability to continue QE with current market realities forcing the authority to reduce bond purchases from $60 to $20B per month. Recent comments have positioned the bank as more dovish and continue to fuel equity market sentiment. A recovery in commodity prices benefited emerging economies, and China has largely remained out of local headlines.
Throughout the year, markets have tried to navigate the uncertainty surrounding the path forward for U.S. monetary policy. During the current eight year bull cycle, excessive liquidity created by global quantitative easing has been the primary asset market driver. According to the Shiller PE Ratio, current US equity market valuation is as high as pre-Great Depression 1929 and is exceeded only by the 2000 technology bubble. As a result, the path ahead remains unclear.
As we look forward, we anticipate a choppier, more dislocated global investment environment. Correlations have already come down and any increase in volatility in the current environment will present opportunities for hedge funds, and particularly the hedge funds we deploy in the Fund.
We have witnessed one of the longest expansions in U.S. history. If conventional wisdom holds, we should expect an economic slowdown in the next 12-24 months and stocks are likely to struggle in the period that follows. We believe the Fund is well positioned to take advantage of what we foresee as a strong hedge fund environment going forward. Specifically, the variety of hedge fund managers that we employ, and the various alternative investment strategies utilized by the Fund should be able to benefit from opportunities across asset classes.
AN INVESTMENT IN THE FUND SHOULD BE CONSIDERED A SPECULATIVE INVESTMENT THAT ENTAILS A HIGH DEGREE OF RISK AND UNITS OF THE FUND ARE ONLY AVAILABLE FOR PURCHASE BY CERTAIN ELIGIBLE INVESTORS. IT IS POSSIBLE THAT AN INVESTOR MAY LOSE SOME OR ALL OF ITS INVESTMENT AND THAT THE FUND MAY NOT ACHIEVE ITS INVESTMENT OBJECTIVE. FOR A COMPLETE DESCRIPTION OF THE RISKS INVOLVED AND THE ELIGILIBITY CRITERIA FOR INVESTORS, PLEASE REFER TO THE FUND’S CURRENT PROSPECTUS.
A FUND UNITHOLDER DOES NOT HAVE THE RIGHT TO REQUIRE THE FUND TO REDEEM OR REPURCHASE ITS UNITS AND MAY NOT HAVE ACCESS TO THE MONEY IT INVESTS FOR AN INDEFINITE PERIOD OF TIME. REPURCHASES WILL BE MADE AT SUCH TIMES, AND IN SUCH AMOUNTS, AND ON SUCH TERMS AS MAY BE DETERMINED BY THE FUND’S BOARD OF TRUSTEES, IN ITS SOLE DISCRETION. FUND UNITS ARE NOT, AND ARE NOT EXPECTED TO BE, LISTED FOR TRADING ON ANY SECURITIES EXCHANGE AND, TO THE FUND’S KNOWLEDGE, THERE IS NO, NOR WILL THERE BE, A SECONDARY TRADING MARKET FOR THE UNITS. UNITS ARE SUBJECT TO SUBSTANTIAL RESTRICTIONS ON TRANSFERABILITY AND RESALE, AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE FUND’S AGREEMENT AND DECLARATION OF TRUST, AS MAY BE AMENDED OR AMENDED AND RESTATED FROM TIME TO TIME. A UNITHOLDER SHOULD NOT EXPECT TO BE ABLE SELL ITS UNITS REGARDLESS OF HOW THE FUND PERFORMS. BECAUSE A UNITHOLDER MAY BE UNABLE TO SELL ITS UNITS, THE UNITHOLDER WILL BE UNABLE TO REDUCE ITS EXPOSOSURE TO THE FUND ON ANY MARKET DOWNTURN.
THE PAST PERFORMANCE OF ANY INVESTMENT, INVESTMENT STRATEGY, OR INVESTMENT STYLE IS NOT INDICATIVE OF FUTURE PERFORMANCE. RESULTS OF AN INVESTMENT IN THE FUND MADE TODAY MAY DIFFER SUBSTANTIALLY FROM THE FUND'S HISTORICAL PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S UNITS, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. TOTAL RETURN FIGURES FOR THE FUND INCLUDE THE REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS, AS APPLICABLE, AND ARE NET OF FEES. REFERENCES TO THE BENCHMARK ARE FOR COMPARATIVE PURPOSES ONLY.
THE VIEWS IN THIS REPORT ARE THOSE OF FINANCIAL SOLUTIONS, INC. (“FSI”), THE FUND’S INVESTMENT ADVISER. THESE VIEWS ARE FOR THE PERIOD ENDED AUGUST 31, 2017 AND MAY NOT REFLECT FSI’S VIEWS ON THE DATE THIS REPORT IS FIRST PUBLISHED OR ANYTIME THEREAFTER.
THE HFRI FUND OF FUNDS DIVERSIFIED INDEX REPRESENTS FUND OF FUNDS THAT EXHIBIT ONE OR MORE OF THE FOLLOWING CHARACTERISTICS: INVESTS IN A VARIETY OF STRATEGIES AMONG MULTIPLE MANAGERS; HISTORICAL ANNUAL RETURN AND/OR A STANDARD DEVIATION GENERALLY SIMILAR TO THE HFRI FUND OF FUND COMPOSITE INDEX; DEMONSTRATES GENERALLY CLOSE PERFORMANCE AND RETURNS DISTRIBUTION CORRELATION TO THE HFRI FUND OF FUND COMPOSITE INDEX. A FUND IN THE HFRI FUND OF FUND DIVERSIFIED INDEX TENDS TO SHOW MINIMAL LOSS IN DOWN MARKETS WHILE ACHIEVING SUPERIOR RETURNS IN UP MARKETS. FUND OF FUNDS INVEST WITH MULTIPLE MANAGERS THROUGH FUNDS OR MANAGED ACCOUNTS. THE STRATEGY DESIGNS A DIVERSIFIED PORTFOLIO OF MANAGERS WITH THE OBJECTIVE OF SIGNIFICANTLY LOWERING THE RISK (VOLATILITY) OF INVESTING WITH AN INDIVIDUAL PORTFOLIO MANAGER. THE FUND OF FUNDS MANAGER HAS DISCRETION IN CHOOSING WHICH STRATEGIES TO INVEST IN FOR THE PORTFOLIO.
BETA IS A QUANTITATIVE MEASURE OF VOLATILITY OF A SECURITY OR STRATEGY RELATIVE TO A MARKET INDEX. AN INVESTMETN WITH A BETA LESS THAN 1.0 IS LESS VOLATILE THAN THE MARKET WHILE AN INVESTMENT WITH A BETA GREATER THAN 1.0 IS MORE VOLATILE THAN THE MARKET.
FSI LOW BETA ABSOLUTE RETURN FUND
SCHEDULE OF INVESTMENTS
August 31, 2017
| Shares | | Private Funds (a) - 87.1% | | Value | |
| | | | | | |
| Event Driven Strategies - 15.8% | | | |
| | 1,202 | | Corre Opportunities Offshore Fund, Ltd., Series AU 2015-05 | | $ | 1,605,307 | |
| | 808 | | HBK Merger Strategies Offshore Fund Ltd., Class A, Subclass A, Series 08-16 | | | 1,087,607 | |
| | 3,374 | | Pluscios Offshore Fund, SPC, Class F, Series 2013-07 (b) | | | 3,642,738 | |
| | 900 | | Pluscios Offshore Fund, SPC, Class F, Series 2014-06 (b) | | | 869,218 | |
| | 1,135 | | Pluscios Offshore Fund, SPC, Class F, Series 2017-01 (b) | | | 1,194,481 | |
| | | | | | | 8,399,351 | |
| Global Macro Strategies - 4.2% | | | | |
| | 2,146 | | Centennial Global Macro Fund Segregated Portfolio, Series D Initial (c) | | | 2,072,972 | |
| | 200 | | Centennial Global Macro Fund Segregated Portfolio, Series D 1116 (c) | | | 189,941 | |
| | | | | | | 2,262,913 | |
| Long/Short Equity Strategies - 12.9% | | | | |
| | 638 | | Brenham Capital Offshore Fund, Ltd. | | | 820,105 | |
| | 2,894 | | Eminence Fund, Ltd., Class A, Initial Series | | | 2,541,853 | |
| | 619 | | Marcato International Ltd., Class A, Sub Class A1 Initial Series | | | 1,090,641 | |
| | 270 | | Miura Global Fund, Ltd., Class AA Sub Class II, Initial Series | | | 1,235,302 | |
| | 1,100 | | Tide Point Offshore Fund, Ltd., Class 1, Sub-Class A, June 2014 | | | 1,197,745 | |
| | | | | | | 6,885,646 | |
| Multi Strategies - 41.6% | | | | |
| | 1,051 | | Atlas Enhanced Fund, Ltd., Class B, Initial Series 0311 | | | 1,678,253 | |
| | 69,335 | | Lanx Offshore Partners, Ltd., Class A, Series 0114 III R8 | | | 8,115,644 | |
| | 2,930 | | Lanx Offshore Partners, Ltd., Class A, Series 1115 III R8 | | | 311,020 | |
| | 1,303 | | Millenium International, Ltd., Class EE Sub Class III, Series 01A | | | 2,693,434 | |
| | 32,607 | | Titan Masters International Fund, Ltd., Series D1-5 | | | 6,726,568 | |
| | 2,754 | | Titan Masters International Fund, Ltd., Series D10-15 | | | 272,480 | |
| | 3,500 | | Titan Masters International Fund, Ltd., Series D1-16 | | | 344,515 | |
| | 9,105 | | Titan Masters International Fund, Ltd., Series D3-16 | | | 945,777 | |
| | 1,000 | | Verition International Multi-Strategy Fund Ltd., Class C, Series 1 (2016.12) | | | 1,057,170 | |
| | | | | | | 22,144,861 | |
See accompanying notes to financial statements.
FSI LOW BETA ABSOLUTE RETURN FUND
SCHEDULE OF INVESTMENTS (Continued)
August 31, 2017
| Shares | | Private Funds (a) - 87.1% (Continued) | | Value | |
| | | | | | |
| Relative Value Strategies: Fixed Income Hedge and Fixed Income Arbitrage - 7.0% | | | |
| | 7,073 | | Greylock Global Opportunity Fund (Offshore), Ltd., Class A, Series 1 | | $ | 1,494,588 | |
| | 75 | | Napier Park European Credit Global Feeder Ltd., Class A, Series 23 | | | 875,775 | |
| | 50 | | Napier Park European Credit Global Feeder Ltd., Class A, Series 28 | | | 543,317 | |
| | 750 | | Varadero International, Ltd., Class A-2, Series 0516 | | | 835,727 | |
| | | | | | | 3,749,407 | |
| Relative Value Strategies: General - 5.6% | | | | |
| | 114 | | Hildene Opportunities Offshore Fund, Ltd., Series 1 August 2008 | | | 748,476 | |
| | 750 | | Hutchin Hill Capital Offshore Fund, Ltd., Progressive Class C, Series 0516 | | | 750,405 | |
| | 40 | | Kawa Off-Shore Feeder Fund, Ltd., Ordinary Shares, Lead Series | | | 1,328,549 | |
| | 247 | | Pine River Fixed Income Fund, Ltd., Class A, Series 60 | | | 164,515 | |
| | | | | | | 2,991,945 | |
| | | | | | | | |
| | | | Total Private Funds (Cost $40,861,425) | | $ | 46,434,123 | |
| | | | | | | | |
| Shares | | Money Market Funds - 12.3% | | Value | |
| | | | | | | | |
| | 3,982,085 | | BlackRock Liquidity Funds - T-Fund, Institutional Shares, 0.89% (d) | | $ | 3,982,085 | |
| | 2,588,831 | | Goldman Sachs Financial Square Government Fund - FST Shares, 0.91% (d) | | | 2,588,831 | |
| | | | Total Money Market Funds (Cost $6,570,916) | | $ | 6,570,916 | |
| | | | | | | | |
| | | | Total Investments - 99.4% (Cost $47,432,341) (Note 2) | | $ | 53,005,039 | |
| | | | | | | | |
| | | | Other Assets in Excess of Liabilities - 0.6% | | | 296,947 | |
| | | | | | | | |
| | | | Net Assets - 100.0% | | $ | 53,301,986 | |
| (a) | Private Funds include investment funds that are organized outside of the United States and are not registered under the Investment Company Act of 1940, as amended (the "1940 Act"), (each a "Private Fund") and Private Funds that invest in other investment funds that are not registered under the 1940 Act. All are non-income producing securities. |
| (b) | Managed by Pluscios Management LLC, an investment sub-adviser to the Fund (a "Sub-Adviser"). |
| (c) | Managed by Meritage Capital, LLC, a Sub-Adviser. |
| (d) | The rate shown is the 7-day effective yield as of August 31, 2017. |
See accompanying notes to financial statements.
FSI LOW BETA ABSOLUTE RETURN FUND
SCHEDULE OF INVESTMENTS (Continued)
August 31, 2017
Value (e) | | Strategy | Redemption Frequency | | Redemption Notice (Days) | | | Unfunded Commitments as of August 31, 2017 | |
| $ | 8,399,351 | | Event Driven Strategies (f) | Quarterly | | | 60-90 | | | $ | - | |
| | 2,262,913 | | Global Macro Strategies (g) | Monthly | | | 35 | | | | - | |
| | 6,885,646 | | Long/Short Equity Strategies (h) | Quarterly- Semi-Annually | | | 45-95 | | | | - | |
| | 22,144,861 | | Multi Strategies (i) | Monthly- Quarterly | | | 45-90 | | | | - | |
| | 3,749,407 | | Relative Value Strategies: Fixed Income Hedge and Fixed Income Arbitrage (j) | Monthly- Quarterly | | | 30-90 | | | | - | |
| | 2,991,945 | | Relative Value Strategies: General (k) | Monthly- Quarterly | | | 45-180 | | | | - | |
| (e) | Values of Private Funds have been estimated using the net asset value per share (practical expedient) as of August 31, 2017 (Note 2). |
| (f) | Event Driven Strategies include strategies that invest in: (1) equity and/or fixed income securities of U.S. and/or foreign issuers based on how certain events such as mergers, consolidations, acquisitions, transfers of assets, tender offers, exchange offers, re-capitalizations, liquidations, divestitures, spin-offs and other similar transactions are expected to affect the value of such securities (Merger/Risk Arbitrage Strategy); and/or (2) equity and/or fixed income securities of financially troubled U.S. and/or foreign issuers (i.e., companies involved in bankruptcy proceedings, financial reorganizations or other similar financial restructurings) (Bankruptcy/Distressed Strategy). These strategies may utilize long and short positions and portfolios typically have a long or short bias. 1% of the value of the Private Funds employing these strategies cannot be redeemed within 12 months of purchase without payment of a redemption penalty equal to 3% of the net asset value of the interests being liquidated. The remaining restriction period for these investments is 2 months as of August 31, 2017. The remaining Private Funds employing these strategies can be redeemed with no restrictions as of August 31, 2017. |
| (g) | Global Macro Strategies include strategies that: (1) invest across a variety of securities and financial instruments of U.S. and foreign issuers based on interpretations of the global macro economy and changes therein on the valuation of such securities and financial instruments; and/or (2) trade futures contracts and options on futures contracts as either buyers or sellers of contracts representing real assets such as gold, silver, wheat, coffee, sugar, heating oil, as well as financial assets such as government bonds, equity market indices and currencies to take advantage of investment opportunities in the global equity, fixed income, currency and commodity markets (Managed Futures Strategy). Long and short positions may be utilized. 100% of the value of the Private Funds employing these strategies can be redeemed with no restrictions as of August 31, 2017. |
See accompanying notes to financial statements.
FSI LOW BETA ABSOLUTE RETURN FUND
SCHEDULE OF INVESTMENTS (Continued)
August 31, 2017
| (h) | Long/Short Equity Strategies include strategies that purchase long and sell short equity securites of U.S. and foreign issuers. Investments may focus on specific regions, sectors or types of equity securities. Long and short positions may not be invested in equal amounts and, as such, may not seek to neutralize general market risk. Portfolios typically have a long or short bias. 12% of the value of the Private Funds employing these strategies cannot be redeemed within 12 months of purchase without payment of a redemption penalty equal to 3% of the net asset value of the interests being liquidated. The remaining restriction period for these investments is 4 months as of August 31, 2017. The remaining Private Funds employing these strategies can be redeemed with no restrictions as of August 31, 2017. |
| (i) | Multi Strategies include strategies that dynamically allocate capital among several different strategies typically employed by unregistered (private) funds (i.e. Relative Value Strategies (see (k) below), Long/Short Equity Strategies (see (h) above) and Global Macro Strategies (see (g) above)). 12% of the value of the Private Funds employing these strategies can be redeemed with no restrictions but are subject to a quarterly 25% investor level gate as of August 31, 2017. The remaining Private Funds employing these strategies can be redeemed with no restrictions as of August 31, 2017. |
| (j) | Relative Value Strategies: Fixed Income Hedge and Fixed Income Arbitrage include strategies that: (1) generally purchase fixed income securities of U.S. and foreign issuers including corporations, governments and financial institutions as well as mortgage-related securities that are perceived to be undervalued and sell short such fixed income securities that are perceived to be overvalued (Fixed Income Hedge Strategy); and/or (2) purchase and sell short fixed income securities issued by U.S. and/or foreign issuers such as banks, corporations, governments and financial institutions as well as mortgage-backed securities to capitalize on perceived pricing discrepancies within and across types of fixed income securities (Fixed Income Arbitrage Strategy). 14% of the value of the Private Funds employing these strategies cannot be redeemed within 12 months of purchase without payment of a redemption penalty equal to 5% of the net asset value of the interests being liquidated. The remaining restriction period for these investments is 1 month as of August 31, 2017. 22% of the value of the Private Funds employing these strategies can be redeemed with no restrictions but are subject to a quarterly 25% investor level gate. The remaining Private Funds employing these strategies can be redeemed with no restrictions as of August 31, 2017. |
| (k) | Relative Value Strategies: General include strategies that: (1) employ Fixed Income Hedge or Fixed Income Arbitrage Strategies (see (j) above); and/or (2) simultaneously purchase convertible securities of U.S. and foreign issuers and then sell short the corresponding underlying common stocks (or equivalent thereof) to capitalize on perceived pricing discrepancies between the convertible securities and the underlying common stocks (Convertible Arbitrage Strategy). 31% of the value of the Private Funds employing these strategies can be redeemed with no restrictions, but are subject to a 25% quarterly investor level gate as of August 31, 2017. The remaining Private Funds employing these strategies can be redeemed with no restrictions as of August 31, 2017. |
See accompanying notes to financial statements.
FSI LOW BETA ABSOLUTE RETURN FUND
SCHEDULE OF FUTURES CONTRACTS
August 31, 2017
| FUTURES CONTRACTS | | Contracts | | Expiration Date | | Notional Value and Aggregate Market Value of Contracts | | | Unrealized Apprecation | |
| 2-Year U.S. Treasury Note Future | | | 65 | | 12/19/2017 | | $ | 14,060,312 | | | $ | 5,664 | |
| 5-Year U.S. Treasury Note Future | | | 84 | | 12/29/2017 | | | 9,954,000 | | | | 23,066 | |
| 10-Year U.S. Treasury Note Future | | | 55 | | 12/29/2017 | | | 6,984,141 | | | | 30,566 | |
| U.S. Treasury Long Bond Future | | | 59 | | 12/19/2017 | | | 9,209,531 | | | | 72,426 | |
| Total Futures Contracts | | | | | | | $ | 40,207,984 | | | $ | 131,722 | |
The average monthly notional amount of futures contracts purchased during the year ended August 31, 2017 was $38,756,600 (Note 2).
See accompanying notes to financial statements.
FSI LOW BETA ABSOLUTE RETURN FUND
STATEMENT OF ASSETS AND LIABILITIES
August 31, 2017
| ASSETS | | | |
| Investments in securities: | | | |
| At acquisition cost | | $ | 47,432,341 | |
| At value (Note 2) | | $ | 53,005,039 | |
| Margin deposits for futures contracts (Notes 2 and 5) | | | 263,279 | |
| Net unrealized appreciation on futures contracts (Notes 2 and 5) | | | 131,722 | |
| Dividends receivable | | | 6,009 | |
| Other assets | | | 17,092 | |
| Total assets | | | 53,423,141 | |
| | | | | |
| LIABILITIES | | | | |
| Payable to Adviser (Note 4) | | | 99,325 | |
| Accrued fund services fees (Note 4) | | | 5,075 | |
| Other accrued expenses | | | 16,755 | |
| Total liabilities | | | 121,155 | |
| | | | | |
| NET ASSETS | | $ | 53,301,986 | |
| | | | | |
| NET ASSETS CONSIST OF: | | | | |
| Paid-in capital | | $ | 53,095,936 | |
| Accumulated net investment loss | | | (4,546,119 | ) |
| Accumulated net realized losses from investments and futures contracts | | | (952,251 | ) |
| Net unrealized appreciation on: | | | | |
| Investments | | | 5,572,698 | |
| Futures contracts (Notes 2 and 5) | | | 131,722 | |
| NET ASSETS | | $ | 53,301,986 | |
| | | | | |
UNITS OUTSTANDING (unlimited units authorized, $0.001 par value) | | | 522,857 | |
| | | | | |
NET ASSET VALUE PER UNIT (Note 2) | | $ | 101.94 | |
See accompanying notes to financial statements.
FSI LOW BETA ABSOLUTE RETURN FUND
STATEMENT OF OPERATIONS
For the Year Ended August 31, 2017
| INVESTMENT INCOME | | | |
| Dividends | | $ | 41,549 | |
| | | | | |
| EXPENSES | | | | |
| Investment adviser fees (Note 4) | | | 597,544 | |
| Professional fees | | | 100,038 | |
| Fund services fees (Note 4) | | | 61,029 | |
| Trustees' fees and expenses (Note 4) | | | 32,280 | |
| Custodian fees | | | 25,940 | |
| Insurance expense | | | 23,705 | |
| Registration and filing fees | | | 13,051 | |
| Postage and supplies | | | 3,001 | |
| Total expenses | | | 856,588 | |
| | | | | |
| NET INVESTMENT LOSS | | | (815,039 | ) |
| | | | | |
| REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS AND FUTURES CONTRACTS | | | | |
| Net realized losses from: | | | | |
| Investments | | | (104,361 | ) |
| Futures contracts (Notes 2 and 5) | | | (525,232 | ) |
| Net change in unrealized appreciation (depreciation) on: | | | | |
| Investments | | | 2,800,467 | |
| Futures contracts (Notes 2 and 5) | | | 199,632 | |
| NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS AND FUTURES CONTRACTS | | | 2,370,506 | |
| | | | | |
| NET INCREASE IN NET ASSETS FROM OPERATIONS | | $ | 1,555,467 | |
See accompanying notes to financial statements.
FSI LOW BETA ABSOLUTE RETURN FUND
STATEMENTS OF CHANGES IN NET ASSETS
| | | Year Ended August 31, 2017 | | | Year Ended August 31, 2016 | |
| FROM OPERATIONS | | | | | | |
| Net investment loss | | $ | (815,039 | ) | | $ | (815,187 | ) |
| Net realized gains (losses) on investments and futures contracts | | | (629,593 | ) | | | 440,238 | |
| Net change in unrealized appreciation (depreciation) on investments and futures contracts | | | 3,000,099 | | | | (672,867 | ) |
| Net increase (decrease) in net assets from operations | | | 1,555,467 | | | | (1,047,816 | ) |
| | | | | | | | | |
| DISTRIBUTIONS TO UNITHOLDERS (Note 2) | | | | | | | | |
| In excess of net investment income | | | - | | | | (405,653 | ) |
| From net realized gains from investment transactions | | | - | | | | (99,038 | ) |
| Decrease in net assets from distributions to unitholders | | | - | | | | (504,691 | ) |
| | | | | | | | | |
| CAPITAL UNIT TRANSACTIONS | | | | | | | | |
| Proceeds from units sold | | | 1,610,000 | | | | 5,035,430 | |
| Net asset value of units issued in reinvestment of distributions to unitholders (Notes 2 and 6) | | | - | | | | 295,763 | |
| Payments for units tendered (Note 6) | | | (3,232,018 | ) | | | - | |
| Increase (decrease) in net assets from capital unit transactions | | | (1,622,018 | ) | | | 5,331,193 | |
| | | | | | | | | |
| NET INCREASE (DECREASE) IN NET ASSETS | | | (66,551 | ) | | | 3,778,686 | |
| | | | | | | | | |
| NET ASSETS | | | | | | | | |
| Beginning of year | | | 53,368,537 | | | | 49,589,851 | |
| End of year | | $ | 53,301,986 | | | $ | 53,368,537 | |
| | | | | | | | | |
| ACCUMULATED NET INVESTMENT LOSS | | $ | (4,546,119 | ) | | $ | (3,978,510 | ) |
| | | | | | | | | |
| UNIT TRANSACTIONS | | | | | | | | |
| Units sold | | | 16,269 | | | | 50,572 | |
| Units reinvested | | | - | | | | 2,993 | |
| Units redeemed (Note 6) | | | (32,455 | ) | | | - | |
| Net increase (decrease) in units outstanding | | | (16,186 | ) | | | 53,565 | |
| Units outstanding at beginning of year | | | 539,043 | | | | 485,478 | |
| Units outstanding at end of year | | | 522,857 | | | | 539,043 | |
See accompanying notes to financial statements.
FSI LOW BETA ABSOLUTE RETURN FUND
STATEMENT OF CASH FLOWS
For the Year Ended August 31, 2017
CASH FLOWS FROM OPERATING ACTIVITIES
| Net increase in net assets from operations | | | | | $ | 1,555,467 | |
| Adjustments to reconcile net increase in net assets from operations to net cash provided by operating activites: | | | | | | | |
| Net realized losses from investment transactions | | $ | 104,361 | | | | | |
| Purchase of long-term investments | | | (3,100,000 | ) | | | | |
| Proceeds from sales of long-term investments | | | 4,285,456 | | | | | |
| Net sales of short-term investments | | | 1,295,707 | | | | | |
| Net change in unrealized appreciation on investments | | | (2,800,467 | ) | | | | |
| Net change in unrealized appreciation on futures contracts | | | (199,632 | ) | | | | |
| (Increase) decrease in operating assets: | | | | | | | | |
| Margin deposits for futures contracts | | | 132,232 | | | | | |
| Receivable for investment securities sold | | | 348,061 | | | | | |
| Dividends receivable | | | (4,589 | ) | | | | |
| Other assets | | | 915 | | | | | |
| Increase in operating liabilitites: | | | | | | | | |
| Payable to Adviser | | | 1,761 | | | | | |
| Accrued fund services fees | | | 535 | | | | | |
| Other accrued expenses | | | 2,211 | | | | | |
| Total adjustments | | | | | | | 66,551 | |
| | | | | | | | | |
| NET CASH PROVIDED BY OPERATING ACTIVITIES | | | | | | | 1,622,018 | |
| | | | | | | | | |
| CASH FLOWS USED IN FINANCING ACTIVITIES | | | | | | | | |
| Payment for units tendered, net of proceeds for units sold | | | | | | | (1,622,018 | ) |
| | | | | | | | | |
| NET INCREASE IN CASH | | | | | | $ | - | |
| Cash, beginning of year | | | | | | | - | |
| Cash, end of year | | | | | | $ | - | |
See accompanying notes to financial statements.
FSI LOW BETA ABSOLUTE RETURN FUND
FINANCIAL HIGHLIGHTS
Per Unit Data for a Unit Outstanding Throughout Each Period
| | | Year Ended August 31, 2017 | | | Year Ended August 31, 2016 | | | Year Ended August 31, 2015 | | | Year Ended August 31, 2014 | | | Period Ended August 31, 2013 (a) | | |
| | | | | | | | | | | | | | | | | |
| Net asset value, beginning of period | | $ | 99.01 | | | $ | 102.15 | | | $ | 109.47 | | | $ | 100.61 | | | $ | 100.00 | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | | | | | | | |
Net investment loss (b) | | | (1.51 | ) | | | (1.58 | ) | | | (1.63 | ) | | | (1.67 | ) | | | (0.27 | ) | |
| Net realized and unrealized gains (losses) on investments and futures contracts | | | 4.44 | | | | (0.56 | ) | | | 2.76 | | | | 13.14 | | | | 0.88 | | |
| Total from investment operations | | | 2.93 | | | | (2.14 | ) | | | 1.13 | | | | 11.47 | | | | 0.61 | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Less distributions: | | | | | | | | | | | | | | | | | | | | | |
| In excess of net investment income | | | - | | | | (0.80 | ) | | | (4.16 | ) | | | (2.61 | ) | | | - | | |
| From net realized gains from investment transactions | | | - | | | | (0.20 | ) | | | (4.29 | ) | | | - | | | | - | | |
| Total distributions | | | - | | | | (1.00 | ) | | | (8.45 | ) | | | (2.61 | ) | | | - | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Net asset value, end of period | | $ | 101.94 | | | $ | 99.01 | | | $ | 102.15 | | | $ | 109.47 | | | $ | 100.61 | | |
| | | | | | | | | | | | | | | | | | | | | | |
Total return (c) | | | 2.96 | % | | | (2.09 | %) | | | 1.04 | % | | | 11.59 | % | | | 0.61 | % | (d) |
| | | | | | | | | | | | | | | | | | | | | | |
| Ratios/supplementary data: | | | | | | | | | | | | | | | | | | | | | |
| Net assets at end of period (000's omitted) | | $ | 53,302 | | | $ | 53,369 | | | $ | 49,590 | | | $ | 48,895 | | | $ | 13,165 | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Ratios to average net assets: | | | | | | | | | | | | | | | | | | | | | |
| Net investment loss | | | (1.52 | %) | | | (1.61 | %) | | | (1.55 | %) | | | (1.57 | %) | | | (1.59 | %) | (f) |
Total expenses (e) (g) | | | 1.59 | % | | | 1.63 | % | | | 1.55 | % | | | 1.73 | % | | | 2.46 | % | (f) |
Net expenses (e) | | | 1.59 | % | | | 1.63 | % | | | 1.55 | % | | | 1.58 | % | | | 1.60 | % | (f) |
| Portfolio turnover rate | | | 7 | % | | | 16 | % | | | 10 | % | | | 0 | % | | | 0 | % | |
| (a) | Represents the period from the commencement of operations (July 1, 2013) through August 31, 2013. |
| (b) | Calculated based on average units outstanding during the period. |
| (c) | Total return is a measure of the change in value of an investment in the Fund over the periods covered, which assumes any dividends or capital gain distributions are reinvested in units of the Fund. The returns shown do not reflect the deduction of taxes a unitholder would pay on Fund distributions, if any, or the redemption of Fund units. |
| (e) | Does not include the expenses of the Private Funds in which the Fund invests. |
| (g) | Reflects the expense ratio prior to any advisory fee reductions and/or expense reimbursements (Note 4). |
See accompanying notes to financial statements.
FSI LOW BETA ABSOLUTE RETURN FUND
NOTES TO FINANCIAL STATEMENTS
August 31, 2017
1. Organization
The FSI Low Beta Absolute Return Fund (the “Fund”) is a continuously offered, non-diversified, closed-end management investment company, organized as a Delaware statutory trust on August 3, 2011. The Fund is authorized to issue an unlimited number of units at the net asset value per unit (“NAV”). The Fund’s investment objective is to seek attractive risk-adjusted rates of return, “Alpha,” with a risk profile and volatility similar to that of the Bloomberg Barclays U.S. Aggregate Bond Index. The Fund commenced operations on July 1, 2013.
2. Significant Accounting Policies
In October 2016, the U.S. Securities and Exchange Commission (the “SEC”) adopted amendments to Regulation S-X which impact financial statement presentation, particularly the presentation of derivative investments. The Fund has adopted these amendments, which were effective August 1, 2017, with these financial statements.
The following is a summary of the Fund’s significant accounting policies. The policies are in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Fund follows accounting and reporting guidance under Financial Accounting Standards Board Accounting Standards Codification Topic 946, “Financial Services – Investment Companies.”
Security Valuation – The Fund computes its net asset value as of the last business day of each month. In determining its net asset value, the Fund values its investments as of such month-end. The Board of Trustees (the “Board”) has approved procedures pursuant to which the Fund’s Valuation Committee will value the Fund’s investments in Private Funds at fair value. As a general matter, the fair value of the Fund’s interest in a Private Fund will represent the amount that the Fund could reasonably expect to receive from a Private Fund if the Fund’s interest was redeemed at the time of valuation, based on information reasonably available at the time the valuation is made and that the Fund believes to be reliable. In accordance with these procedures, fair value as of each month-end ordinarily will be the value determined as of such month-end for each Private Fund in accordance with the Private Fund’s valuation policies and reported at the time that the Valuation Committee values the Private Fund. In the unlikely event that a Private Fund does not report a month-end value to the Fund on a timely basis, the Valuation Committee would determine the fair value of such Private Fund based on the most recent value reported by the Private Fund, as well as any other relevant information available at the time the Fund values its portfolio. Using the nomenclature of the hedge fund industry, any value reported as “estimated” or “final” values will reasonably reflect market values of securities for which market quotations are available or fair value as of the date the Valuation Committee values the Private Fund.
Consistent with the Fund’s valuation procedures, futures contracts which are traded on a commodities exchange are valued at their closing settlement price on the exchange on which they are primarily traded and over-the-counter futures contracts for which market quotations are readily available are valued based on quotes received from third party pricing services or one or more dealers that make markets in such securities. If quotes are not available from a third party pricing service or one or more dealers, quotes shall be determined based on the fair value of such securities as determined by the Valuation Committee in accordance with the Fund’s valuation procedures.
GAAP establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and requires additional disclosures about fair value measurement.
Various inputs are used in determining the value of the Fund’s investments. These inputs are summarized in the three broad levels listed below:
FSI LOW BETA ABSOLUTE RETURN FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
| · | Level 1 – quoted prices in active markets for identical assets |
| · | Level 2 – other significant observable inputs (including quoted prices of similar securities, interest rates, prepayment speeds, credit risk, etc.) |
| · | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
The inputs or methodology used for valuing securities are not necessarily an indication of the risks associated with investing in those securities. The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety is determined based on the lowest level input that is significant to the fair value measurement.
The following is a summary of the inputs used to value the Fund’s investments by security type and other financial instruments, as of August 31, 2017:
| | | | | | Fair Value Measurements at the End of the Reporting Period Using | |
| | | 8/31/2017 | | | Level 1 | | | Level 2 | | | Level 3 | |
| Investments in Securities: | | | | | | | | | | | | |
| Private Funds* | | | | | | | | | | | | |
| Event Driven Strategies | | $ | 8,399,351 | | | $ | - | | | $ | - | | | $ | - | |
| Global Macro Strategies | | | 2,262,913 | | | | - | | | | - | | | | - | |
| Long/Short Equity Strategies | | | 6,885,646 | | | | - | | | | - | | | | - | |
| Multi Strategies | | | 22,144,861 | | | | - | | | | - | | | | - | |
| Relative Value Strategies: Fixed Income | | | | | | | | | | | | | | | | |
| Hedge and Fixed Income Arbitrage | | | 3,749,407 | | | | - | | | | - | | | | - | |
| Relative Value Strategies: General | | | 2,991,945 | | | | - | | | | - | | | | - | |
| Money Market Funds | | | 6,570,916 | | | | - | | | | 6,570,916 | | | | - | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 53,005,039 | | | $ | - | | | $ | 6,570,916 | | | $ | - | |
| | | | | | | | | | | | | | | | | |
| Other Financial Instruments: | | | | | | | | | | | | | | | | |
| Futures Contracts | | $ | 131,722 | | | $ | 131,722 | | | $ | - | | | $ | - | |
| * | Investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy in accordance with ASU 2015-07. |
FSI LOW BETA ABSOLUTE RETURN FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
As of August 31, 2017, the Fund did not have any transfers into or out of any Level. In addition, the Fund did not hold any assets or liabilities that were measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of August 31, 2017. It is the Fund’s policy to recognize transfers into or out of any Level at the end of the reporting period.
Unit Valuation – The NAV per unit of the Fund is calculated monthly by dividing the total value of the Fund’s assets, less liabilities, by the number of units outstanding. The offering price and redemption price per unit of the Fund is equal to the NAV per unit.
Investment Income – Dividend income is recorded on the ex-dividend date.
Investment Transactions – Investment transactions are accounted for on the trade date. Realized gains and losses on securities sold are determined on a specific identification basis.
Distributions to Unitholders – Distributions to unitholders arising from net investment income and net realized capital gains, if any, are declared and paid at least annually. The amount of distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations, which may differ from GAAP. These differences are due primarily to differing treatments of income and gains on various investment securities held by the Fund, timing differences and differing characterizations of distributions made by the Fund. Dividends and distributions to unitholders are recorded on the ex-dividend date. The tax character of distributions paid to unitholders during the years ended August 31, 2017 and August 31, 2016 was as follows:
| | | Ordinary | | | Long-Term | | | | |
| Years Ended | | Income | | | Capital Gains | | | Total | |
| August 31, 2017 | | $ | - | | | $ | - | | | $ | - | |
| August 31, 2016 | | $ | 443,533 | | | $ | 61,158 | | | $ | 504,691 | |
Futures Contracts – The Fund invests in U.S. Treasury futures to provide exposure to the market value change of a high quality fixed income portfolio and to seek to mitigate volatility attributable to investments in the Private Funds. When the Fund purchases or sells a futures contract, no price is paid to or received by the Fund. Instead, the Fund is required to deposit with the futures commission merchant an amount of cash or qualifying securities currently ranging from 5% to 10% of the contract amount. This is called the “initial margin deposit.” Subsequent payments, known as “variation margin,” are made or received by the Fund, depending on the fluctuations in the fair value of the futures contract. The Fund recognizes an unrealized gain or loss equal to the variation margin. If market conditions move unexpectedly, the Fund may not achieve the anticipated benefits of the futures contracts and may realize a loss. The initial margin deposits for futures contracts and the variation margin receivable or payable, if any, are reported on the Statement of Assets and Liabilities. Additionally, the Fund is required to maintain, on a daily basis, cash or liquid securities in an amount equal to the current market value of the futures in which it invests minus any amounts paid to brokers toward such position.
Estimates – The preparation of 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 as of the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
FSI LOW BETA ABSOLUTE RETURN FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
Federal Income Tax – The Fund has qualified and intends to continue to qualify as a “regulated investment company” under Subchapter M of the Internal Revenue Code of 1986 (the “Code”). Qualification generally will relieve the Fund of liability for federal income taxes to the extent 100% of its net investment income and net realized capital gains are distributed in accordance with the Code.
In order to avoid imposition of the excise tax applicable to regulated investment companies, it is also the Fund's intention to declare as dividends in each calendar year at least 98% of its net investment income (earned during the calendar year) and 98.2% of its net realized capital gains (earned during the twelve months ended October 31) plus undistributed amounts from prior years.
The following information is computed on a tax basis for each item as of August 31, 2017:
| Tax cost of portfolio investments | | $ | 53,399,104 | |
| Gross unrealized appreciation | | $ | - | |
| Gross unrealized depreciation | | | (394,065 | ) |
| Net unrealized depreciation | | | (394,065 | ) |
| Undistributed ordinary income | | | 1,420,644 | |
| Accumulated capital and other net losses | | | (820,529 | ) |
| Accumulated earnings | | $ | 206,050 | |
The difference between the federal income tax cost of portfolio investments and the financial statement cost is due to certain timing differences in the recognition of capital gains or losses under income tax regulations and GAAP. These “book/tax” differences are temporary in nature and are primarily due to holdings classified as passive foreign investment companies (“PFICs”).
As of August 31, 2017, the Fund has a short-term capital loss carryforward of $129,178 and a long-term capital loss carryforward of $691,351 for federal income tax purposes. These capital loss carryforwards, which do not expire, may be utilized in future years to offset net realized capital gains, if any, prior to distributing such gains to shareholders.
For the year ended August 31, 2017, the following reclassification was made on the Statement of Assets and Liabilities for the Fund:
| Accumulated net investment loss | | $ | 247,430 | |
| Accumulated net realized losses from investments and futures contracts | | | (247,430 | ) |
Such reclassification, the result of permanent differences between the financial statement and income tax reporting requirements, had no effect on the Fund’s net assets or NAV per unit.
FSI LOW BETA ABSOLUTE RETURN FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
The Fund recognizes the tax benefits or expenses of uncertain tax positions only when the position is “more likely than not” to be sustained assuming examination by tax authorities. Management has reviewed the Fund’s tax positions for all open tax years (tax years ended August 31, 2014 through August 31, 2017) and has concluded that no provision for unrecognized tax benefits or expenses is required in these financial statements.
3. Investment Transactions
During the year ended August 31, 2017, cost of purchases and proceeds from sales of investment securities, other than short-term investments, were $3,100,000 and $4,285,445, respectively.
4. Transactions with Related Parties and Other Service Providers
INVESTMENT ADVISORY AGREEMENT
The Fund’s investments are managed by Financial Solutions, Inc. (the “Adviser”) pursuant to the terms of an Investment Advisory Agreement. Under the Investment Advisory Agreement, the Adviser receives an advisory fee from the Fund at an annual rate of 1.11% of the Fund’s average monthly net assets and pays any sub-advisory fees out of the fees it receives.
SUB-ADVISERS
Meritage Capital, LLC (“Meritage”) and Pluscios Management LLC (“Pluscios”) serve as sub-advisers to the Fund. The Adviser pays Meritage and Pluscios any sub-advisory fees out of the fees it receives pursuant to the Investment Advisory Agreement.
Meritage and Pluscios serve as investment managers of Centennial Global Macro Fund Segregated Portfolio, Series D and Pluscios Offshore Fund, SPC, Class F, respectively. The Fund maintained investment interests in these Private Funds during the year ended August 31, 2017. During the year ended August 31, 2017, the Fund’s purchases of these Private Funds were as follows:
| Centennial Global Macro Fund Segregated Portfolio, Series D Initial | | $ | 200,000 | |
| Pluscios Offshore Fund, SPC, Class F, Series 2017-01 | | | 100,000 | |
TRUSTEE COMPENSATION
Each Trustee who is not an “interested person” of the Fund (“Independent Trustee”) receives annual compensation of $15,000 from the Fund. Each Independent Trustee is also reimbursed for travel and related expenses incurred in attending Board meetings. No officer of the Fund is compensated by the Fund.
FUND SERVICES AGREEMENT
Ultimus Fund Solutions, LLC (“Ultimus”) provides administration, fund accounting, compliance and transfer agency services to the Fund. Ultimus also provides a Principal Financial Officer, a Chief Compliance Officer and an Anti-Money Laundering Compliance Officer to the Fund, as well as certain additional compliance support functions. The Fund pays Ultimus fees in accordance with a Services Agreement for such services. In addition, the Fund pays out-of-pocket expenses including, but not limited to, postage and supplies.
FSI LOW BETA ABSOLUTE RETURN FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
DISTRIBUTION AGREEMENT
Effective January 1, 2017, Ultimus Fund Distributors, LLC (the “Distributor”) serves as the Fund’s principal underwriter. Prior to January 1, 2017, Foreside Fund Services, LLC served as the Fund’s principal underwriter. The Distributor is a wholly-owned subsidiary of Ultimus.
PRINCIPAL HOLDERS OF FUND UNITS
As of August 31, 2017, the following unitholders owned of record 5% or more of the outstanding units of the Fund:
| Name of Record Owner | % Ownership |
| The Helmerich Trust | 40% |
| Vernon Investment Fund LLC | 21% |
| Chapman Charitable Trust | 18% |
| Alta Trust Company | 9% |
| Capital Management Corporation | 6% |
A beneficial owner of 25% or more of the Fund’s outstanding units may be considered a controlling person. That unitholder’s vote could have a more significant effect on matters presented at a unitholders’ meeting.
5. Derivatives Risk and Transactions
In seeking risk adjusted rates of return, the Fund invests in U.S. Treasury futures to provide exposure to the market value change of a high quality fixed income portfolio. The price of a futures contract may change rapidly in response to changes in the markets and the general economic environment as well as in response to changes in the value of the underlying U.S. Treasury securities. Futures may entail investment exposures that are greater than their cost would suggest, meaning that a small investment in futures could have a large potential effect on the performance of the Fund. Changes in the liquidity of U.S. Treasury futures (due to, among other things, price fluctuation or position limitations imposed by U.S. commodity exchanges) and rising interest rates may cause the value of U.S. Treasury futures to decline.
If the Fund invests in U.S. Treasury futures at inopportune times or the Adviser misjudges market conditions, the Fund’s investment in the U.S. Treasury futures may lower the Fund’s return or result in a loss to the Fund. The Fund could also experience losses if the U.S. Treasury futures do not offset losses incurred by the Fund on its investment in the Private Funds or if the Fund is not able to timely liquidate its position in U.S. Treasury futures due to an illiquid secondary market. It is also possible that the U.S. Commodity Futures Trading Commission may suspend trading in a particular contract, order immediate liquidation and settlement of a particular contract or order that trading in a particular contract be conducted for liquidation only.
FSI LOW BETA ABSOLUTE RETURN FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
The Fund’s positions in derivative instruments as of August 31, 2017 are recorded in the following locations in the Statement of Assets and Liabilities:
| | | | Fair Value | | | Average Monthly Notional Amount during the Year Ended August 31, 2017 | |
| Type of Derivative | Risk | Location | | Asset Derivatives | | | Liability Derivatives | | | |
| Futures contracts purchased | Interest rate | Net unrealized appreciation on futures contracts | | $ | 131,722 | | | $ | - | | | $ | 38,756,600 | |
The Fund’s transactions in derivative instruments during the year ended August 31, 2017 are recorded in the following locations in the Statement of Operations:
| Type of Derivative | Risk | Location | | | | Location | | Net Change in Unrealized Appreciation (Depreciation) | |
| Futures contracts purchased | Interest rate | Net realized losses from futures contracts | | $ | (525,232 | ) | Net change in unrealized appreciation/depreciation on futures contracts | | $ | 199,632 | |
6. Offering of Fund Units; Repurchase Offers
Fund units may be purchased by investors who meet certain eligibility requirements set forth in the Fund’s current prospectus as of the first business day of each calendar month; however, Fund units may be offered more or less frequently as determined by the Board in its sole discretion. Fund units are sold at the current NAV per unit. Generally, the minimum initial investment in the Fund is $50,000 and the minimum additional investment is $5,000. The Fund may accept investments for lesser amounts under certain circumstances, including where a unitholder has significant assets under the management of the Adviser or an affiliate and other special circumstances that may arise. There are no initial or subsequent investment minimums for accounts maintained by financial institutions for the benefit of their clients who purchase units through investment programs such as employee benefit plans. Certain selling broker-dealers and financial advisers may impose higher minimums.
Unless a unitholder elects to receive a distribution in the form of cash, all distributions are reinvested in full and fractional units at the NAV per unit next determined on the payable date of such distributions. A unitholder may elect to receive a distribution in the form of cash by submitting a written request to the Fund no later than 90 days prior to the payable date of such distribution.
FSI LOW BETA ABSOLUTE RETURN FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
Because the Fund is a closed-end fund, unitholders do not have the right to require the Fund to redeem any or all of their units. To provide a limited degree of liquidity to unitholders, the Fund may from time to time offer to repurchase units pursuant to written repurchase offers, but is not obligated to do so. Repurchases will be made at such times, in such amounts and on such terms as may be determined by the Board, in its sole discretion, pursuant to written repurchase offers. In determining whether the Fund should offer to repurchase units, the Board will consider a variety of operational, business and economic factors. The Board convenes quarterly to consider whether or not to authorize a repurchase offer. The Board expects that repurchase offers, if authorized, will be made no more frequently than on a quarterly basis and will typically have a valuation date as of March 31, June 30, September 30 or December 31 (or, if any such date is not a business day, on the last business day of such calendar quarter).
During the year ended August 31, 2017, the Board authorized and the Fund completed four quarterly repurchase offers. In these offers, the Fund offered to repurchase up to 25% of the number of its outstanding shares as of the Repurchase Pricing Dates. The results of those repurchase offers were as follows:
| | | Repurchase | | | Repurchase | | | Repurchase | | | Repurchase | |
| | | Offer #1 | | | Offer #2 | | | Offer #3 | | | Offer #4 | |
| Commencement Date | | May 17, 2016 | | | August 30, 2016 | | | November 29, 2016 | | | March 1, 2017 | |
| Repurchase Request Deadline | | June 30, 2016 | | | September 30, 2016 | | | December 30, 2016 | | | March 29, 2017 | |
| Repurchase Pricing Date | | September 30, 2016 | | | December 30, 2016 | | | March 31, 2017 | | | June 30, 2017 | |
| Amount Repurchased | | $ | - | | | $ | - | | | $ | 1,715,624 | | | $ | 1,516,394 | |
| Shares Repurchased | | | - | | | | - | | | | 17,276 | | | | 15,179 | |
| % of Shares Tendered | | | - | | | | - | | | | 3.11 | % | | | 2.82 | % |
7. Principal Investment Risks
An investment in the Fund should be considered a speculative investment that entails a high degree of risk and units of the Fund are only available for purchase by certain eligible investors. It is possible that an investor may lose money and that the Fund may not achieve its investment objective.
The Fund is non-diversified and the Fund’s investment in the securities of a limited number of issuers exposes the Fund to greater market risk and potentially greater market losses than if its investments were diversified in securities issued by a greater number of issuers.
The Private Funds invest in a variety of different assets and employ a number of different strategies which in turn subject their investors, including the Fund, to certain risks including those associated with: (1) investing in equities, fixed income securities and convertible securities of U.S. and foreign issuers, derivatives, commodities and currencies; (2) participating in short sale transactions; and (3) employing arbitrage and leverage. The Fund may also implement leverage and invest directly in derivatives which will directly expose the Fund to the risks associated with the employment of leverage and investments in derivatives.
The Fund may not be able to withdraw its investment in a Private Fund promptly after it has made a decision to do so. Fund unitholders do not have the right to require the Fund to redeem or repurchase its units and may not have access to the money they invest for an indefinite period of time. Repurchases will be made at such times, and in such amounts, and on such terms as may be determined by the Board, in its sole discretion.
FSI LOW BETA ABSOLUTE RETURN FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
The units are not, and are not expected to be, listed for trading on any securities exchange and, to the Fund’s knowledge, there is no secondary trading market for the units, nor is there expected to be in the future. Units are subject to substantial restrictions on transferability and resale, and may not be transferred or resold except as permitted under the Fund’s Agreement and Declaration of Trust, as may be amended from time to time. A unitholder should not expect to be able to sell its units regardless of how the Fund performs. Because a unitholder may be unable to sell his units, the unitholder will be unable to reduce its exposure on any market downturn.
For a complete description of the principal risks involved and the eligibility criteria for investors, please refer to the Fund’s current prospectus.
8. Contingencies and Commitments
The Fund indemnifies its officers and Trustees for certain liabilities that might arise from the performance of their duties to the Fund. Additionally, 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 this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote.
9. Subsequent Events
The Fund is required to recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed as of the date of the Statement of Assets and Liabilities. For non-recognized subsequent events that must be disclosed to keep the financial statements from being misleading, the Fund is required to disclose the nature of the event as well as an estimate of its financial effect, or a statement that such an estimate cannot be made. Management has evaluated subsequent events through the issuance of these financial statements and has noted no such events, except as reflected in the following paragraph:
In two separate tender offers, the Board has authorized the Fund to repurchase up to 25% of the number of its outstanding shares as of each stated Repurchase Pricing Date. The following table describes the details of such outstanding tender offers:
| | Repurchase | | Repurchase |
| | Offer #1 | | Offer #2 |
| Commencement Date | June 2, 2017 | | August 29, 2017 |
| Repurchase Request Deadline | June 30, 2017 | | September 26, 2017 |
| Repurchase Pricing Date | September 29, 2017 | | December 29, 2017 |
| % of Shares to be Tendered | 25.00% | | 20.01% |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Unitholders and the Board of Trustees of FSI Low Beta Absolute Return Fund
We have audited the accompanying statement of assets and liabilities of FSI Low Beta Absolute Return Fund, (the “Fund”) including the schedule of investments, as of August 31, 2017, and the related statements of operations and cash flows for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended and the financial highlights for each of the years in the four-year period then ended and for the period July 1, 2013 (commencement of operations) through August 31, 2013. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of August 31, 2017 by correspondence with the custodian, individual underlying investment companies and other appropriate parties. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of FSI Low Beta Absolute Return Fund as of August 31, 2017, and the results of its operations and cash flows for the year then ended, the changes in its net assets for each of the years in the two-year period then ended and its financial highlights for each of the years in the four-year period then ended and for the period July 1, 2013 through August 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
BBD, LLP
Philadelphia, Pennsylvania
October 30, 2017
FSI LOW BETA ABSOLUTE RETURN FUND
OTHER INFORMATION (Unaudited)
A description of the policies and procedures that the Fund uses to vote proxies relating to portfolio securities is available without charge upon request by calling toll-free 1-877-379-7380, or on the SEC’s website at http://www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge upon request by calling toll-free 1-877-379-7380, or on the SEC’s website at http://www.sec.gov.
The Fund files a complete listing of portfolio holdings for the Fund with the SEC as of the end of the first and third quarters of each fiscal year on Form N-Q. These filings are available upon request by calling 1-877-379-7380. Furthermore, you may obtain a copy of the filings on the SEC's website at http://www.sec.gov. The Trust's Forms N-Q may also be reviewed and copied at the SEC's Public Reference Room in Washington, DC, and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
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DIVIDEND REINVESTMENT PLAN (Unaudited)
Under the Fund’s Dividend Reinvestment Plan (the “Plan”), all unitholders of the Fund are automatically enrolled in the Plan. The Fund’s annual distributions, if any, are reinvested in full and fractional Units at the NAV per unit next determined on the payable date of such annual distributions. There is no sales load or other charge for reinvestment. The Fund’s unitholders may elect to receive an annual distribution in the form of cash by submitting a written request to the Fund no later than 90 days prior to the payable date of such annual distribution. Any such cash payment will be made by check, ACH or wire as soon as practicable after the last calendar day of the calendar year in which the annual distribution is declared.
The automatic reinvestment of annual distributions does not relieve unitholders of any U.S. federal income tax that may be payable (or required to be withheld) on such annual distributions. A unitholder that receives units pursuant to a distribution generally has a tax basis in such units equal to the amount of cash that would have been received instead of units as described above and a holding period in such units that begins on the Business Day following the payment date for the distribution.
A unitholder may terminate its participation in the Plan at any time by sending a written notice to the Fund’s administrator, who, upon receipt of such notice, will cause the unitholder to receive both income dividends and capital gain distributions, if any, in cash. A unitholder holding units through an intermediary may elect to receive cash by notifying the intermediary (who should be directed to inform the Fund). A unitholder is free to change this election at any time. If, however, a unitholder requests to change its election within 90 days prior to a distribution, the request will be effective only with respect to distributions after the 90 day period. The administrator’s service fee for handling distributions will be paid by the Fund.
Questions regarding the Fund’s Plan should be directed to the Fund’s transfer agent at 1-877-379-7380 or by mail as follows:
| Regular Mail: | Overnight Delivery: |
| | |
| FSI Low Beta Absolute Return Fund | FSI Low Beta Absolute Return Fund |
| PO Box 46707 | c/o Ultimus Fund Solutions, LLC |
| Cincinnati, OH 45246 | 225 Pictoria Dr, Suite 450 |
| | Cincinnati, OH 45246 |
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BOARD OF TRUSTEES AND EXECUTIVE OFFICERS (Unaudited)
The 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 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.
Trustees are not required to invest in the Fund or to hold units of the Fund or an interest in the Fund. A majority of the Trustees are persons who are not “interested persons” (as defined in the Investment Company Act of 1940) of the Fund (each an “Independent Trustee”). The Independent Trustees perform the same functions for the Fund as are customarily exercised by the non-interested directors of a registered income company organized as a corporation.
The identity of the Trustees and executive officers of the Fund and brief biographical information regarding each Trustee and officer during the past five years is set forth below. The address for each Trustee and officer is c/o Ultimus Fund Solutions, LLC, 225 Pictoria Drive, Suite 450, Cincinnati, OH 45246. Each Trustee serves until his or her retirement, resignation or removal from the Board. Trustees may be removed in accordance with the Declaration of Trust with or without cause by written instrument signed by a majority of the Trustees, or by a vote of a majority of the unitholders at a meeting at which at least two-thirds (2/3) of outstanding units are present.
| Name and Age | Position(s) Held with Fund
and Length of Time Served | Principal Occupation(s) During Past 5 Years and Directorships of Public Companies | Number of Funds in Complex Overseen by Trustee |
Interested Trustee: | | | |
Gary W. Gould* Age: 60 | Principal Executive Officer and Trustee since 2011 | Managing Principal of Financial Solutions, Inc. from 1998 to present and of Corporate Consulting Group, Inc. (an investment advisor) from 1985 to present | 1 |
| * | Mr. Gould is considered an “interested person” of the Fund and thus an Interested Trustee because of his position as Managing Principal of Financial Solutions, Inc., the Fund’s investment adviser. |
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BOARD OF TRUSTEES AND EXECUTIVE OFFICERS (Unaudited) (Continued)
| Name and Age | Position(s) Held with Fund
and Length of Time Served | Principal Occupation(s) During Past 5 Years and Directorships of Public Companies | Number of Funds in Complex Overseen by Trustee |
Independent Trustees: | | | |
Carol Befanis O’Donnell Age: 60 | Trustee since 2012 | Chief Executive Officer and Chief Compliance Officer of Protégé Partners, LLC and MOV37, LLC (both investment advisory firms) from 2017 to present; General Counsel and Chief Compliance Officer of Protégé Partners, LLC from 2016 to 2017; Director of Legal and Compliance and Secretary of Dara Capital U.S., Inc. (wealth advisory) from 2013 to 2016; Trustee of The Geiger Trust from 1989 to present; Trustee of The Tors Trust from 2013 to present; Trustee of Old Beach Trust from 2015 to present | 1 |
William S. Reeser Age: 62 | Trustee since 2012 | Chief Executive Officer and Chief Investment Officer of the University of Florida Investment Corporation from 2014 to present; Chief Investment Officer of American Lebanese Syrian Associated Charities, Inc. from 2006 to 2014; President of Reeser Advisory Services, Inc. from 1997 to present | 1 |
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BOARD OF TRUSTEES AND EXECUTIVE OFFICERS (Unaudited) (Continued)
| Name, Address and Age | Position(s) Held with Fund
and Length of Time Served | Principal Occupation(s) During Past 5 Years |
Executive Officers: | | |
Michael Ciotola Age: 49 | Treasurer and Principal Financial Officer since 2017 | Vice President - Director of Middle Office of Ultimus Fund Solutions, LLC (investment company service provider) from 2015 to present; Senior Vice President of Citigroup from 2008 to 2015 |
Simon Berry Age: 46 | Secretary since 2017 | Senior Attorney of Ultimus Fund Solutions, LLC from 2016 to present; Staff Attorney Supervisor, Kentucky Department of Financial Institutions from 2009 to 2016 |
Martin R. Dean Age: 54 | Chief Compliance Officer since 2016 | Vice President, Director of Fund Compliance of Ultimus Fund Solutions, LLC (2016 to present); Senior Vice President and Compliance Group Manager, Huntington Asset Services, Inc. (2013 to 2015); Director of Fund Accounting and Fund Administration Product at Citi Fund Services (2008 to 2013) |
Additional information about members of the Board and executive officers is available in the Fund’s Statement of Additional Information (“SAI”). To obtain a free copy of the SAI, please call 1-877-379-7380.
As of the end of the period covered by this report, the registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party. Pursuant to Item 13(a)(1), a copy of registrant’s code of ethics is filed as an exhibit to this Form N-CSR. During the period covered by this report, the code of ethics has not been amended, and the registrant has not granted any waivers, including implicit waivers, from the provisions of the code of ethics.
The registrant’s board of trustees has determined that the registrant has at least one audit committee financial expert serving on its audit committee. The name of the audit committee financial expert is Carol Befanis O’Donnell. Ms. Befanis O’Donnell is “independent” for purposes of this Item.
In addition, the Audit Committee reviews and approves in advance all “permissible non-audit services” to be provided to the Registrant’s investment adviser (other than a Sub-Adviser), or any entity controlling, controlled by or under common control with the Registrant’s investment adviser that provides on-going services to the Registrant (“Affiliate”), by the Registrant’s principal accountant if the engagement relates directly to the operations and financial reporting of the Registrant. Pre-approval by the Audit Committee of permissible non-audit services rendered to the Registrant’s investment adviser or an Affiliate is not required if the aggregate amount of all such services constitutes no more than 5% of the total amount of expenses paid by the Registrant, the Registrant’s investment adviser and its Affiliates to the Registrant’s principal accountant during the fiscal year in which the permissible non-audit services are provided. The Audit Committee considers whether fees paid by the Registrant’s investment adviser or an Affiliate to the Registrant’s principal accountant for audit and permissible non-audit services are consistent with the principal accountant’s independence.
The Registrant’s proxy voting procedures are filed under Item 13(a)(5) hereto. The Registrant delegates proxy voting decisions to its investment adviser and each Sub-Adviser with respect to the Registrant’s assets allocated to each for investment. The proxy voting procedures of the Registrant’s investment adviser and each Sub-Adviser are filed under Items 13(a)(6)-(8).
No account is charged an advisory fee based on the performance of the account.
The investment activities of the Portfolio Manager with respect to the Registrant and with respect to each other account he manages may give rise to conflicts of interest that may disadvantage the Registrant. For example, the Portfolio Manager manages other accounts with like investment strategies and fees earned by the Portfolio Manager could differ between the Registrant and the other accounts. Thus, the Portfolio Manager could favor one account over another in allocating new investment opportunities that have limited supply or in the order in which it places orders to redeem identical investments. The Registrant’s investment adviser believes that these risks are mitigated by the fact that accounts with like investment strategies managed by the Portfolio Manager are generally managed in a similar fashion and the investment adviser has a policy that seeks to allocate opportunities on a fair and equitable basis and redeem investments proportionally. Although not expected, the Registrant’s investment adviser or a Sub-Adviser may use leverage to increase the amount of the Registrant’s assets and consequently, the advisory fee it receives. As a result, the Registrant’s investment adviser or Sub-Adviser is paid more if it uses leverage which creates an incentive for the investment adviser or Sub-Adviser to use leverage when it may otherwise not be prudent. The Registrant’s investment adviser and a Sub-Adviser also have a corresponding incentive not to deleverage the Registrant when it would otherwise be appropriate to do so.
The Registrant does not accept nominees to the Board of Trustees from unitholders.
(a) Based on their evaluation of the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) as of a date within 90 days of the filing date of this report, the registrant’s principal executive officer and principal financial officer have concluded that such disclosure controls and procedures are reasonably designed and are operating effectively to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which this report is being prepared, and that the information required in filings on Form N-CSR is recorded, processed, summarized, and reported on a timely basis.
(b) There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) that occurred during the second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.
File the exhibits listed below as part of this Form. Letter or number the exhibits in the sequence indicated.
(a)(1) Any code of ethics, or amendment thereto, that is the subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy the Item 2 requirements through filing of an exhibit: Attached hereto
(a)(2) A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(a) under the Act (17 CFR 270.30a-2(a)): Attached hereto
(a)(3) Any written solicitation to purchase securities under Rule 23c-1 under the Act (17 CFR 270.23c-1) sent or given during the period covered by the report by or on behalf of the registrant to 10 or more persons: Not applicable
(a)(4) Change in the registrant’s independent public accountant: Not applicable.
(b) Certifications required by Rule 30a-2(b) under the Act (17 CFR 270.30a-2(b)): Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
