PRINCIPAL INVESTMENT RISKS:
The
risk descriptions below provide a more detailed explanation of the principal investment risks that correspond to the risks described in the Fund Summary section of this Prospectus. In general, the Funds investment strategies involve greater
risks than the strategies used by a typical mutual fund. The following describes the common risks of the Fund.
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Campbell Program Strategy Risk
The profitability of any Fund investment in the Campbell Program depends primarily on the ability of Campbell to anticipate price movements in the relevant markets and underlying derivative instruments and futures
contracts. Such price movements are influenced by, among other things:
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changes in interest rates;
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governmental, agricultural, trade, fiscal, monetary and exchange control programs and policies;
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weather and climate conditions;
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natural disasters, such as hurricanes;
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changing supply and demand relationships;
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changes in balances of payments and trade;
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U.S. and international rates of inflation and deflation;
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currency devaluations and revaluations;
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U.S. and international political and economic events; and
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changes in philosophies and emotions of various market participants.
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The Campbell Program may not take all of these factors into account.
The Campbell Program involves actively trading
derivative instruments using a variety of strategies and investment techniques that involve significant risks. Such derivative instruments may include commodities, currencies, futures, options and forward contracts and other derivative instruments
that have inherent leverage and price volatility that result in greater risk than instruments used by a typical mutual fund, and the systematic programs used to trade them may rely on proprietary investment strategies that are not fully disclosed,
which may in turn result in risks that are not anticipated. In addition, investments in the Campbell Program will typically be subject to relatively high management fees and performance-based fees which further reduce the potential return of the
Funds or the Subsidiarys investments. These costs are in addition to the operating expenses associated with the Fund. The combined impact of these costs will have the effect of reducing the performance of the Fund. Furthermore,
performance-based fees may create an incentive for Campbell to make investments that are riskier or more speculative than they might have made in the absence of such arrangements. The Adviser anticipates that any investment in the Campbell Program
will be subject to (i) management fees of 1.25% of notional exposure, and (ii) performance-based incentive fees of 20.0% of new high net trading profits. The Fund, Subsidiary or any trading company is also subject to certain derivative
trading costs, including brokerage commissions and various exchange fees.
The use of futures contracts, forward contracts and derivative instruments
will have the economic effect of financial leverage. Financial leverage magnifies exposure to the swings in prices of an asset class underlying an investment and results in increased volatility, which means the Campbell Program (and indirectly the
Fund through its investment in a derivative instrument or trading company) will have the potential for greater losses, as well as the potential for greater gains, than if the Campbell Program did not employ leverage in its investment activity.
Leveraging tends to magnify, sometimes significantly, the effect of any increase or decrease in the Campbell Programs exposure to an asset class and may cause the value of the Funds investment to be volatile. Accordingly, the Funds
NAV may be volatile because of its investment exposure to the Campbell Program.
The notional value of exposure achieved by the Fund, its Subsidiary or a
trading company to the Campbell Program is expected to be leveraged and such exposure may be by a multiple of more than four times the assets of the Subsidiary.
There is no assurance that the Funds investment in a derivative instrument or trading company with leveraged exposure to certain investments and markets will enable the Fund to achieve its investment
objective.
Commodities Risk
Exposure to the
commodities markets (including financial futures markets) may subject the Fund through its investment in the Subsidiary to greater volatility than investments in traditional securities. The values of commodities and commodity-linked investments are
affected by events that might have less impact on the values of stocks and bonds and have recently experienced periods of significant volatility. Prices of commodities and related contracts may fluctuate significantly over short periods for a
variety of reasons, including: changes in interest rates, supply and demand relationships and balances of payments and trade; weather and natural disasters; governmental, agricultural, trade, fiscal, monetary and exchange control programs and
policies; acts of terrorism, tariffs and U.S. and international economic, political, military and regulatory developments.
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The commodity markets are subject to temporary distortions or other disruptions. U.S. futures exchanges and some
foreign exchanges have regulations that limit the amount of fluctuation in futures contract prices, which may occur during a single business day. Once a limit price has been reached in a particular contract, no trades may be made at a different
price. Limit prices have the effect of precluding trading in a particular contract or forcing the liquidation of contracts at disadvantageous times or prices. These circumstances could adversely affect the value of the Funds commodity-linked
investments.
Derivatives Risk
Derivatives
include instruments and contracts that are based on, and are valued in relation to, one or more underlying securities, financial benchmarks or indices, such as futures, options, swap agreements and forward contracts. The value of a derivative
depends largely upon price movements in the underlying instrument. Many of the risks applicable to trading the underlying instrument are also applicable to derivatives trading. However, derivatives trading is subject to a number of additional risks.
Transactions in certain derivatives are subject to clearance on a U.S. national exchange and to regulatory oversight, while other derivatives are subject to risks of trading in the over-the-counter markets or on non-U.S. exchanges. A small
investment in derivative instruments could have a potentially large impact on the Funds performance.
Liquidity of Futures
Contracts
. The Fund may use futures as part of its strategy. Futures positions may be illiquid because certain commodity exchanges limit fluctuations in certain futures contract prices during a single day by regulations
referred to as daily price fluctuation limits or daily limits. Under such daily limits, during a single trading day no trades may be executed at prices beyond the daily limits. Once the price of a particular futures contract
has increased or decreased by an amount equal to the daily limit, positions in that contract can neither be entered into nor liquidated unless traders are willing to effect trades at or within the limit. Futures prices have occasionally moved beyond
the daily limits for several consecutive days with little or no trading. OTC instruments generally are not as liquid as instruments traded on recognized exchanges. These constraints could prevent the Fund from promptly liquidating unfavorable
positions, thereby subjecting the Fund to substantial losses. In addition, the Commodity Futures Trading Commission (CFTC) and various exchanges limit the number of positions that the Fund may indirectly hold or control in particular
commodities.
Non-U.S. Futures Transactions
. Foreign futures transactions involve the execution and clearing of trades on a
foreign exchange. This is the case even if the foreign exchange is formally linked to a domestic exchange, whereby a trade executed on one exchange liquidates or establishes a position on the other exchange. No domestic organization
regulates the activities of a foreign exchange, including the execution, delivery, and clearing of transactions on such an exchange, and no domestic regulator has the power to compel enforcement of the rules of the foreign exchange or the laws of
the foreign country. Moreover, such laws or regulations will vary depending on the foreign country in which the transaction occurs. For these reasons, the Fund may not be afforded certain of the protections that apply to domestic transactions. In
particular, funds received to margin foreign futures transactions may not be provided the same protections as funds received to margin futures transactions on domestic exchanges. In addition, the price of any foreign futures or option contract and,
therefore, the resulting potential profit or loss, may be affected by any fluctuation in the foreign exchange rate between the time the order is placed and the foreign futures contract is liquidated or the foreign option contract is liquidated or
exercised.
Forward Contracts
. The Fund may enter into forward contracts that are not traded on exchanges and may not be
regulated. There are no limitations on daily price movements of forward contracts. Banks and other dealers with which the Fund maintains accounts may require that the Fund deposit margin with respect to such trading. The Funds counterparties
are not required to continue making markets in such contracts. There have been periods during which certain counterparties have refused to continue to quote prices for forward contracts or have quoted prices with an unusually wide spread (the price
at which the counterparty is prepared to buy and that at which it is prepared to sell). Arrangements to trade forward contracts may be made with only one or a few counterparties, and liquidity problems therefore might be greater than if such
arrangements were made with numerous counterparties. The imposition of credit controls by governmental authorities might limit such forward trading to less than the amount that the Adviser would otherwise recommend, to the possible detriment of the
Fund.
Swap Agreements
. The Fund may enter into swap agreements. Swap agreements can be individually negotiated and
structured to include exposure to a variety of different types of investments or market factors. Depending on their structure, swap agreements may increase or decrease the Funds exposure to long-term or short-term interest rates, foreign
currency values, corporate borrowing rates, or other factors such as security prices, baskets of securities, or inflation rates. Swap agreements can take many different forms and are known by a variety of names. The Fund is not limited to any
particular form of swap agreement if the Adviser determines that other forms are consistent with the Funds investment objective and policies.
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Swap agreements will tend to shift the Funds investment exposure from one type of investment to another. For
example, if the Fund agrees to exchange payments in dollars for payments in foreign currency, the swap agreement would tend to decrease the Funds exposure to U.S. interest rates and increase its exposure to foreign currency and interest rates.
Depending on how they are used, swap agreements may increase or decrease the overall volatility of the Funds portfolio. The most significant factor in the performance of swap agreements is the change in the specific interest rate, currency,
individual equity values or other factors that determine the amounts of payments due to and from the Fund. If a swap agreement calls for payments by the Fund, the Fund must be prepared to make such payments when due. In addition, the value of a swap
agreement is likely to decline if the counterpartys creditworthiness declines. Such a decrease in value might cause the Fund to incur losses.
Recent market developments related to swaps have prompted increased scrutiny with respect to these instruments. As a result of the Dodd-Frank Act, swaps may in the
future be subject to increased regulation. Such regulation may limit the Funds ability to use swaps and increase the cost of using swaps.
Fixed-Income Risk
A substantial portion of the Funds
assets may be invested in U.S. Treasuries or other short-term debt obligations. When interest rates change, the value of the Funds fixed-income investments will be affected. Prices of fixed income securities tend to move inversely with changes
in interest rates. Typically, a rise in rates will adversely affect fixed income security prices and, accordingly, the Funds share price. The longer the effective maturity and duration of the Funds portfolio, the more the Funds
share price is likely to react to interest rates. Some fixed income securities give the issuer the option to call, or redeem, the securities before their maturity dates. If an issuer calls its security during a time of declining interest rates, the
Fund might have to reinvest the proceeds in an investment offering a lower yield, and therefore might not benefit from any increase in value as a result of declining interest rates. During periods of market illiquidity or rising interest rates,
prices of callable issues are subject to increased price fluctuation. In addition, the Fund may be subject to extension risk, which occurs during a rising interest rate environment because certain obligations will be paid off by an issuer more
slowly than anticipated, causing the value of those securities held by the Fund to fall.
Fixed income investments are also subject to Credit
Risk discussed below.
Counterparty Risk
Many of the derivatives entered into by the Fund, the Subsidiary or a trading company are not traded on an exchange but instead will be privately negotiated in the
over-the-counter market. This means that these instruments are traded between counterparties based on contractual relationships. As a result, the Fund is subject to the risk that a counterparty will not perform its obligations under the related
contract. If a privately negotiated over-the-counter contract calls for payments by the Fund, the Subsidiary or a trading company, the Fund, the Subsidiary or trading company must be prepared to make such payments when due. In addition, if a
counterpartys creditworthiness declines, the Fund, the Subsidiary or a trading company may not receive payments owed under the contract, or such payments may be delayed under such circumstances and the value of agreements with such
counterparty can be expected to decline, potentially resulting in losses by the Fund. There can be no assurance that a counterparty will not default and that the Fund will not sustain a loss on a transaction as a result.
In situations in which the Fund is required to post margin or other collateral with a counterparty, including with a futures commission merchant or a clearing
organization for futures or other derivative contracts, the counterparty may fail to segregate the collateral or may commingle the collateral with the counterpartys own assets. As a result, in the event of the counterpartys bankruptcy or
insolvency, the Funds collateral may be subject to the conflicting claims of the counterpartys creditors and the Fund may be exposed to the risk of being treated as a general unsecured creditor of the counterparty, rather than as the
owner of the collateral.
The Fund is subject to the risk that issuers of the instruments in which it invests and trades may default on their
obligations, and that certain events may occur that have an immediate and significant adverse effect on the value of those instruments. There can be no assurance that an issuer will not default, or that an event that has an immediate and significant
adverse effect on the value of an instrument will not occur, and that the Fund will not sustain a loss on a transaction as a result.
Transactions
entered into by the Fund may be executed on various U.S. and non-U.S. exchanges, and may be cleared and settled through various clearing houses, custodians, depositories and prime brokers throughout the world. A failure by any such entity may lead
to a loss to the Fund.
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Credit Risk
Credit risk refers to the possibility that the issuer of the security will not be able to make principal and interest payments when due. Changes in an issuers
credit rating or the markets perception of an issuers creditworthiness may also affect the value of the Funds investment in that issuer. The degree of credit risk depends on both the financial condition of the issuer and the terms
of the obligation. Securities rated in the four highest categories (Standard & Poors (S&P) (AAA, AA, A and BBB), Fitch Ratings (Fitch) (AAA, AA, A and BBB) or Moodys Investors Service, Inc.
(Moodys) (Aaa, Aa, A and Baa)) by the rating agencies are considered investment grade but they may also have some speculative characteristics, meaning that they carry more risk than higher rated securities and may have problems
making principal and interest payments in difficult economic climates. Investment grade ratings do not guarantee that bonds will not lose value or default.
If a security issuer defaults on its payment obligations to the Fund, this default will cause the value of an investment in the Fund to decrease. Lower credit quality may lead to greater volatility in the price of
a security and in shares of the Fund. Lower credit quality also may affect liquidity and make it difficult to sell the security. Default, or the markets perception that an issuer is likely to default, could reduce the value and liquidity of
securities, thereby reducing the value of your investment in Fund shares. In addition, default may cause the Fund to incur expenses in seeking recovery of principal or interest on its portfolio holdings.
When the Fund or any trading company invests in over-the-counter derivatives (including options), it is assuming a credit risk with regard to the party with which
it trades and also bears the risk of settlement default. These risks may differ materially from risks associated with transactions effected on an exchange, which generally are backed by clearing organization guarantees, daily mark-to-market and
settlement, segregation and minimum capital requirements applicable to intermediaries. Transactions entered into directly between two counterparties generally do not benefit from such protections. Relying on any counterparty exposes the Fund to the
risk that such counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms of the contract (whether or not bona fide) or because of a credit or liquidity problem, thus causing the Fund
to suffer a loss. If any counterparty defaults on its payment obligations to the Fund, this default will cause the value of an investment in the Fund to decrease.
In addition, to the extent the Fund or any trading company deals with a limited number of counterparties, it will be more susceptible to the credit risks associated with those counterparties. The Fund is neither
restricted from dealing with any particular counterparty nor from concentrating any or all of its transactions with one counterparty. The ability of the Fund to transact business with any one or number of counterparties and the absence of a
regulated market to facilitate settlement may increase the potential for losses by the Fund.
High Indirect fees and expenses
Your cost of investing in the Fund may be higher than the cost of investing in other mutual funds that invest directly in the types of instruments traded by the
Campbell Program. In addition to the Funds direct fees and expenses, you will indirectly bear fees and expenses paid by the Subsidiary and by a trading company, including management fees and performance-based fees associated with the Campbell
Program, commodity brokerage commissions and operating expenses. Further, any investment in the Campbell Program is expected to be subject to management and performance-based fees. Management fees typically are based on the leveraged account size or
the notional exposure of the Fund to the Campbell Program and not the actual cash invested.
Performance fees
The performance-based fees indirectly paid to Campbell may create an incentive for Campbell to make investments that are riskier or more speculative than those they
might have made in the absence of such performance-based fees. In addition, because performance-based fees will generally be calculated on a basis that includes unrealized trading profits of the Campbell Program, the fee may be greater than if it
were based solely on realized gains. Positive performance of the Funds investments in the Campbell Program is expected to result in performance-based compensation being paid to Campbell, which will be borne indirectly by the Fund, even if the
Funds overall returns are negative. Further, because performance fees are frequently calculated on a quarterly basis (and, in some cases, upon a withdrawal of capital from a trading company), it is possible that Campbell could earn a
performance fee in a year in which its overall performance for the whole year was negative.
Currency Risk
The Funds indirect and direct exposure to foreign currencies subjects the Fund to the risk that those currencies will decline in value relative to the
U.S. Dollar, or, in the case of short positions, that the U.S. Dollar will decline in value relative to the currency that the Fund is short. Currency rates in foreign countries may fluctuate significantly over short periods of time for a
number of reasons, including changes in interest rates and the imposition of currency controls or other political developments in the U.S. or abroad. In addition, the Fund may incur transaction costs in connection with conversions between various
currencies.
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Emerging Market Risk
The Fund intends to have exposure to emerging markets. Investing in emerging markets will, among other things, expose the Fund to all the risks described below in the Foreign Market Risk section, and you should
review that section carefully. However, there are greater risks involved in investing in emerging market countries and/or their financial markets than there are in more developed countries and/or markets. Generally, economic structures in these
countries are less diverse and mature than those in developed countries, and their political systems are less stable. Investments in emerging market countries may be affected by national policies that restrict foreign investment in certain issuers
or industries. The small size of their financial markets and low trading volumes can make investments illiquid and more volatile than investments in developed countries and such securities may be subject to abrupt and severe price declines. The Fund
may be required to establish special custody or other arrangements before investing. In addition, because the securities settlement procedures are less developed in these countries, the Fund may be required to deliver securities before receiving
payment and may also be unable to complete transactions during market disruptions. The possible establishment of exchange controls or freezes on the convertibility of currency might adversely affect an investment in assets traded in foreign markets.
Foreign Market Risk
A substantial portion of
the trades of the Campbell Program are expected to take place on markets or exchanges outside the United States. There is no limit to the amount of assets of the Fund that may be committed to trading on foreign markets. The risk of loss in trading
foreign futures and options on futures contracts can be substantial. Participation in foreign futures and options on futures contracts involves the execution and clearing of trades on, or subject to the rules of, a foreign board of trade or
exchange. Some of these foreign markets, in contrast to U.S. exchanges, are so-called principals markets in which performance is the responsibility only of the individual counterparty with whom the trader has entered into a commodity interest
transaction and not of the exchange or clearing corporation. In these kinds of markets, there is risk of bankruptcy or other failure or refusal to perform by the counterparty.
Some foreign markets present additional risk, because they are not subject to the same degree of regulation as their U.S. counterparts. No U.S. regulatory agency or any domestic exchange regulates activities on any
foreign boards of trade or exchanges (such as the execution, delivery and clearing of transactions) or has the power to compel enforcement of the rules of a foreign board of trade or exchange or of any applicable foreign laws. Similarly, the rights
of market participants, in the event of the insolvency or bankruptcy of a foreign market or broker are also likely to be more limited than in the case of U.S. markets or brokers. As a result, in these markets, there is less legal and regulatory
protection than that available domestically.
Additionally, trading on foreign exchanges is subject to the risks presented by exchange controls,
expropriation, increased tax burdens and exposure to local economic declines and political instability. An adverse development with respect to any of these variables could reduce the profit or increase the loss earned on trades in the affected
international markets. International trading activities are subject to foreign exchange risk.
General Market Risk
The Funds NAV and investment return will fluctuate based upon changes in the value of its portfolio securities. The market value of securities in which the
Fund or the Subsidiary invests is based upon the markets perception of value and is not necessarily an objective measure of a securitys value. There is no assurance that the Fund will realize its investment objective, and an investment
in the Fund is not, by itself, a complete or balanced investment program. You could lose money on your investment in the Fund, or the Fund could underperform other investments.
Government Intervention and Regulatory Changes
The recent instability in financial markets has led government
to take a number of unprecedented actions designed to support certain financial institutions and segments of the financial markets that are exposed to extreme volatility and in some cases lack of liquidity. For example, the Dodd-Frank Act
significantly revises and expands the rulemaking, supervisory and enforcement authority of federal bank, securities and commodities regulators. It is unclear how these regulators will exercise these revised and expanded powers and whether they will
undertake rulemaking, supervisory or enforcement actions that would adversely affect the Fund or investments made by the Fund. Possible regulatory actions taken under these revised and expanded powers may include actions related to financial
consumer protection, proprietary trading and derivatives. There can be no assurance that future regulatory actions authorized by the Dodd-Frank Act will not adversely impact the Fund. Legislators and regulators in the United States are currently
considering a wide range of proposals beyond the Dodd-Frank Act that, if enacted, could result in major changes to the way banking operations are regulated. Some of these major changes could materially affect the profitability of the Fund or the
value of investments made by the Fund or force the Fund to revise its investment strategy or divest certain of its investments. Any of these developments could expose the Fund to additional costs, taxes, liabilities, enforcement actions and
reputational risk.
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In addition, the Dodd-Frank Act established a new regulatory structure for derivatives. The new legislation requires
regulators to set minimum capital requirements and minimum initial and variation margin requirements, repeals prior regulatory exemptions for OTC derivatives, provides substantial authority to the SEC and the CFTC with respect to position limits for
certain swaps and may change the standards for determining manipulation. Much of the required rulemaking and regulations have yet to be implemented. Accordingly, the effect of the new legislation and its impact on the Fund and any trading companies
cannot yet be known. If more restrictive position limits are imposed on investors in the commodity futures and other derivative markets, the managed futures programs in which trading companies invest, and as a result, the Fund, may be adversely
affected. Similarly, changes in the regulation of foreign currency-related trading arising from the Dodd-Frank Act may make it more expensive for the Fund and otherwise limit the Funds ability to engage in such trading, which could adversely
affect the Fund.
In 2012, the CFTC adopted certain rule amendments that significantly affected the exemptions from CFTC regulations that were available
to the Fund and its Subsidiary. Effective January 1, 2013, the Fund and its Subsidiary are subject to CFTC regulations because of these changes. At the time of the CFTCs adoption of the rule amendments, Equinox was (and continues to be)
registered as a commodity pool operator and, accordingly, is subject to CFTC regulations. The on-going compliance implications of these amendments are not yet fully effective and their scope of application is still uncertain. CFTC-mandated
disclosure, reporting and recordkeeping obligations will apply with respect to the Fund once the CFTC proposal that seeks to harmonize these obligations with overlapping SEC regulations is finalized. The effects of these regulatory
changes could increase Fund expenses, reduce investment returns or limit the Funds ability to implement its investment strategy.
Leverage/Volatility Risk
The Fund may employ leverage and
may invest in leveraged instruments. The more the Fund invests in leveraged instruments, the more this leverage will magnify any losses on those investments. Leverage will cause the value of the Funds shares to be more volatile than if the
Fund did not use leverage. This is because leverage tends to exaggerate the effect of any increase or decrease in the value of the Funds portfolio securities or other investments. The Fund or any trading company may engage in transactions or
purchase instruments that give rise to forms of leverage. Such transactions and instruments may include the investment of collateral from loans of portfolio securities, or the use of when issued, delayed-delivery or forward commitment transactions.
Derivative contracts ordinarily have leverage inherent in their terms. The use of leverage may also cause the Fund or a trading company to liquidate portfolio positions when it would not be advantageous to do so in order to satisfy its obligations
or to meet segregation requirements. Certain types of leveraging transactions could theoretically be subject to unlimited losses in cases where the Fund or a trading company, for any reason, is unable to close out the transaction.
Furthermore, derivative contracts are highly volatile and are subject to occasional rapid and substantial fluctuations. Consequently, you could lose all or
substantially all of your investment in the Fund should the trading positions of the Fund or any trading company suddenly turn unprofitable.
Liquidity Risk
The Fund may be subject to liquidity risk
primarily due to investments in derivatives. The Fund may invest up to 15% of its net assets in illiquid securities or instruments. Derivatives, such as swaps, options and warrants, may not be readily marketable and, therefore, may be deemed to be
illiquid. An asset is not readily marketable if it cannot be sold within seven business days in the ordinary course of business for approximately the amount at which it is valued. Investments in illiquid assets involve the risk that the Fund may be
unable to sell the asset or sell it at a reasonable price. In addition, the Fund may be required to liquidate positions or close out derivatives on unfavorable terms at a time contrary to the interests of the Fund in order to raise cash to pay
redemptions.
An investment in derivatives is also subject to the risk that the Fund may not be able to terminate the derivatives effective on whatever
date it chooses, or that the settlement of any early termination may depend on subsequent market movements. As a result, the Fund may be exposed to the risk of additional losses due to such delays.
Management Risk
The Advisers judgments about the
attractiveness, value and potential positive or negative performance of the Campbell Program or any particular security or derivative in which the Fund invests or sells short may prove to be inaccurate and may not produce the desired results.
Non-Diversification Risk
The Fund is a
non-diversified investment company, which means that more of the Funds assets may be invested in the securities of a single issuer than could be invested in the securities of a single issuer by a diversified investment company.
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This may make the value of the Funds shares more susceptible to certain risks than shares of a diversified investment company. As a non-diversified fund, the Fund has a greater potential to
realize losses upon the occurrence of adverse events affecting a particular issuer.
OTC Trading Risk
Certain of the derivatives in which the Fund may invest, including swap agreements, may be traded (and privately negotiated) in the OTC market. While the OTC
derivatives market is the primary trading venue for many derivatives, it is largely unregulated and lacks transparency with respect to the terms of OTC transactions. OTC derivatives are complex and often valued subjectively. Improper valuations can
result in increased cash payment requirements to counterparties or a loss of value to the Fund. In addition, such derivative instruments are often highly customized and tailored to meet the needs of the counterparties. If a derivative transaction is
particularly large or if the relevant market is illiquid, it may not be possible to initiate a transaction or liquidate a position at an advantageous time or price. As a result and similar to other privately negotiated contracts, the Fund is subject
to counterparty credit risk with respect to such derivative contracts.
Portfolio Turnover Risk
The Fund may frequently buy and sell portfolio securities and other assets to rebalance the Funds exposure to various market sectors. Higher portfolio
turnover may result in the Fund paying higher levels of transaction costs and generating greater tax liabilities for shareholders. Portfolio turnover risk may cause the Funds performance to be less than you expect.
Regulatory Risk
Governments, agencies or other regulatory
bodies may adopt or change laws or regulations that could adversely affect the issuer, or market value, of an instrument held by the Fund or the Funds performance.
Subsidiary Risk
The Subsidiary is not registered under the Investment Company Act of 1940 and, unless
otherwise noted in this Prospectus, is not subject to all of the investor protections of the Investment Company Act of 1940. Thus, the Fund, as an investor in the Subsidiary, will not have all of the protections offered to investors in registered
investment companies. However, the Fund wholly owns and controls the Subsidiary, and the Fund and the Subsidiary are both managed by the Adviser, making it unlikely that the Subsidiary will take action contrary to the interests of the Fund or its
shareholders. While the Subsidiary has an independent board of directors that is responsible for overseeing the operations of the Subsidiary, the Funds Board has oversight responsibility for the investment activities of the Fund, including its
investment in the Subsidiary, and the Funds role as the sole shareholder of the Subsidiary. Also, to the extent they are applicable to the investment activities of the Subsidiary, the Adviser will be subject to the same fundamental investment
restrictions that apply to the management of the Fund in managing the Subsidiarys portfolio. It is not currently expected that shares of the Subsidiary will be sold or offered to investors other than the Fund.
Changes in the laws of the United States and/or the Cayman Islands, under which the Fund and the Subsidiary, respectively, are organized, could result in the
inability of the Fund and/or the Subsidiary to operate as described in this Prospectus and could negatively affect the Fund and its shareholders. For example, Cayman Islands law does not currently impose any income, corporate or capital gains tax,
estate duty, inheritance tax, gift tax or withholding tax on the Subsidiary. If Cayman Islands law changes such that the Subsidiary must pay Cayman Islands governmental authority taxes, Fund shareholders would likely suffer decreased investment
returns.
TEMPORARY INVESTMENTS
To respond to adverse market, economic, political or other conditions, the Fund may invest up to 100% of total assets, without limitation, in high-quality short-term debt securities and money market instruments or
any derivative instrument meant to track the return of any such instrument. These short-term debt securities and money market instruments include shares of other mutual funds, commercial paper, certificates of deposit, bankers acceptances,
U.S. Government securities and repurchase agreements. While the Fund is in a defensive position, the opportunity to achieve its investment objective will be limited. Furthermore, to the extent that the Fund invests in money market mutual funds for
cash positions, there will be some duplication of expenses because the Fund will bear its pro-rata portion of such money market funds advisory fees and operational fees. The Fund may also invest a substantial portion of its assets in such
instruments at any time to maintain liquidity or pending selection of investments in accordance with its policies.
PORTFOLIO HOLDINGS DISCLOSURE
A
description of the Funds policies regarding the release of portfolio holdings information is available in the Funds Statement of Additional Information (SAI) and can also be found on the Funds website at
www.EquinoxFundManagement.com.
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HOW SHARES ARE PRICED
The Funds NAV and offering price (NAV plus any
applicable sales charges) is determined at 4:00 p.m. (Eastern Time) on each day the New York Stock Exchange (NYSE) is open for business (a Business Day). NAV is computed by determining the aggregate market value of all assets
of the Fund, less its liabilities, divided by the total number of shares outstanding ((assets-liabilities)/number of shares = NAV). The NYSE is closed on weekends and New Years Day, Martin Luther King, Jr. Day, Presidents Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The NAV takes into account the expenses and fees of the Fund, including management, administration, and distribution fees, which are accrued daily. The
determination of NAV for a particular day is applicable to all applications for the purchase of shares, as well as all requests for the redemption of shares, received by the Fund (or an authorized broker or agent, or its authorized designee) before
the close of trading on the NYSE on that day.
If available, the Funds investments in securities and other exchange traded assets are generally
valued based on market quotations. If market prices are unavailable or the Fund thinks that they are unreliable, the Fund prices those securities or other assets at fair value as determined in good faith using methods approved by the Board of
Trustees. For example, market prices may be unavailable if trading in a particular portfolio security was halted during the day and did not resume prior to the Funds NAV calculation. The Fund may view market prices as unreliable when the value
of a security has been materially affected by events occurring after the market closes, but prior to the time as of which the Fund calculates NAV. The Fund will regularly value its investments in derivative instruments, including swaps, at fair
value. The use of fair valuation in pricing a portfolio holding involves the consideration of a number of subjective factors and therefore, is susceptible to the unavoidable risk that the valuation may be higher or lower than the price at which the
portfolio holding might actually trade if a reliable market price were readily available.
The Fund may use independent pricing services to assist in
calculating the value of the Funds portfolio holdings.
With respect to any portion of the Funds assets that are invested in one or more
open-end management investment companies registered under the 1940 Act, each Funds net asset value is calculated based upon the net asset values of those open-end management investment companies, and the prospectuses for these companies
explain the circumstances under which those companies will use fair value pricing and the effects of using fair value pricing.
Applicable federal tax
requirements generally limit the degree to which the Fund may invest in the Subsidiary to an amount not exceeding 25% of its total assets. The Subsidiary prices its portfolio investments pursuant to the same pricing and valuation methodologies and
procedures employed by the Fund. The Subsidiary offers to redeem all or a portion of its shares at the current net asset value per share every day the Fund is open for business. The value of shares of the Subsidiary will fluctuate with the value of
the Subsidiarys portfolio investments.
More information about the valuation of the Funds holdings is provided in the SAI.
HOW TO PURCHASE SHARES
SHARE CLASSES
Presently, the Fund offers three classes of shares, Class A, Class I and Class P. Class A shares are designed for individual and retail investors. Class I
shares are designed for institutional investors. Class P shares are offered through certain asset allocation, wrap fee and other similar programs offered by broker-dealers and other intermediaries. You should weigh the impact of all potential costs
over the life of your investment before making your initial investment. Each share class is available to all investors who meet the investment minimum for the class, as described below.
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Class A
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Class I
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Class P
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Initial sales charge of 5.75% or less
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No initial sales charge
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No initial sales charge
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Deferred sales charge may apply
(1)
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No deferred sales charge
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No deferred sales charge
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Higher annual expenses than Class I shares
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Lower annual expenses than Class A shares and Class P
(2)
shares due to no distribution fee and no shareholder service fees
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Higher annual expenses than Class I shares
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(1)
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A 1.00% CDSC may apply for investments of $1 million or more of Class A Shares (and therefore no initial sales charge was paid) and shares are redeemed within 12 months
after initial purchase. The CDSC shall not apply to those purchases of Class A shares of $1 million or more where the Distributor did not pay a commission to the selling broker-dealer. Investors should inquire with their financial intermediary
regarding whether the CDSC is applicable to them.
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(2)
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The Fund is not currently making payments under the Rule 12b-1 Plan with respect to Class P shares.
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20
INVESTMENT MINIMUMS
Shares representing interests in the Fund are offered continuously for sale by the Distributor. You can purchase Class A shares, Class I shares or Class P shares of the Fund through certain broker-dealers or
directly through the transfer agent of the Fund, as discussed below. Shares of the Fund are offered only to residents of states in which the shares are registered or qualified. No share certificates are issued in connection with the purchase of Fund
shares. Listed below are the minimum investment amounts for Class A shares, Class I shares and Class P shares. The Fund reserves the right to waive the minimum initial investment requirement for any investor.
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Purchase Amounts
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Class A
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Class I
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Class P
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Minimum initial investment
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$
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2,500
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$
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100,000
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$
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2,500
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Minimum subsequent investment
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$
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500
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No Minimum
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No Minimum
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SHARE CLASSES
CLASS A SHARES
Distribution
Plan.
The Board of Trustees, on behalf of the Funds Class A shares, has adopted a plan pursuant to Rule 12b-1 under the 1940 Act that allows the Fund to pay distribution and service fees for the sale and
distribution of its shares and for services provided to its shareholders. Because these fees are paid out of the Funds assets on an ongoing basis, over time, these fees will increase the cost of your investment and may cost more than paying
other types of sales charges. The distribution plan for Class A shares provides for payments of up to 0.25% of the average daily net assets of the Funds Class A shares.
Shareholder Service Plan.
The Fund may enter into shareholder services arrangements with broker-dealers, banks, trust companies, and other financial services firms under which such
firms agree to provide certain support services to Class A shareholders for a fee of up to 0.25% of the Funds average daily net assets attributable to Class A shares. Because service fees are paid out of Fund assets on an ongoing
basis, they will, over time, increase the cost of investment.
Front-End Sales Charge.
Class A shares of the Fund are
offered at their public offering price, which is net asset value per share plus the applicable sales charge. The minimum initial investment in Class A shares is $2,500 and the minimum subsequent investment is $500. The sales charge varies,
depending on how much you invest. There are no sales charges on reinvested distributions. The following sales charges apply to your purchases of Class A shares of the Fund, at net asset value with the following front end sales charges
(FESC) based on the amount of purchase:
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Amount Invested
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Sales Charge as a % of
Offering Price
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Sales Charge as a % of
Amount Invested
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Dealer
Reallowance
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Under $25,000
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5.75
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%
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6.10
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%
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5.00
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%
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$25,000 to $49,999
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5.00
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%
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5.26
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%
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4.25
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%
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$50,000 to $99,999
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4.75
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%
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4.99
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%
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4.00
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%
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$100,000 to $249,999
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3.75
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%
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3.90
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%
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3.25
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%
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$250,000 to $499,999
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2.50
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%
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2.56
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%
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2.00
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%
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$500,000 to $999,999
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2.00
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%
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2.04
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%
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1.75
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%
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$1,000,000 and above
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0.00
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%
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0.00
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%
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See Below
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Northern Lights Distributors, LLC is the Funds distributor. Authorized dealers may receive commissions on purchases of
Class A shares of $1 million calculated as follows: For sales of $1 million or more, payments may be made to those broker-dealers having at least $1 million of assets invested in the Fund, a fee of up to 1% of the offering price of such shares
up to $2.5 million, 0.50% of the offering price from $2.5 million to $5 million, and 0.25% of the offering price over $5 million. The commission rate is determined based on the purchase amount combined with the current market value of existing
investments in Class A shares.
As shown, investors that purchase $1,000,000 or more of the Funds Class A shares will not pay any initial
sales charge on the purchase. However, purchases of $1,000,000 or more of Class A shares may be subject to a 1% CDSC on shares redeemed during the first 12 months after their purchase in the amount of the commissions paid on those shares
redeemed.
You may qualify for reduced sales charges or sales charge waivers. If you believe that you may qualify for a reduction or waiver of the sales
charge, you should discuss this matter with your broker or other financial intermediary. To qualify for these reductions or waivers, you or your financial intermediary must provide sufficient information at the time of purchase to verify that your
purchase qualifies for such treatment. This information could be used to aggregate, for
21
example, holdings in retirement accounts, Fund shares owned by your immediate family members, and holdings in accounts at other brokers or financial intermediaries. In addition to breakpoint
discounts, the following sections describe other circumstances in which sales charges are waived or otherwise may be reduced. See Reduced Sales Charges below.
WAIVER OF FRONT-END SALES CHARGE CLASS A SHARES
The front-end sales charge will be waived on
Class A Shares purchased:
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through reinvestment of dividends and distributions;
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through an asset allocation account advised by the adviser or one of its affiliates;
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by persons repurchasing shares they redeemed within the last 90 days (see Repurchase of Class A Shares);
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by employees, and members of their immediate family, of the adviser and its affiliates;
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by employees and retirees of the Funds administrator or distributor;
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by Trustees and officers of Equinox Funds Trust;
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by participants in certain wrap-fee or asset allocation programs or other fee based arrangements sponsored by broker-dealers and other financial
institutions that have entered into agreements with the distributor;
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by clients of registered investment advisers that have entered into arrangements with the distributor providing for the shares to be used in particular
investment products made available to such clients and for which such registered investment advisers may charge a separate fee;
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by persons investing an amount less than or equal to the value of an account distribution when an account for which a bank affiliated with the adviser acted in a
fiduciary, administrative, custodial or investment advisory capacity is closed; or
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through dealers, retirement plans, asset allocation programs and financial institutions that, under their dealer agreements with the Funds distributor or
otherwise, do not receive any portion of the front-end sales charge.
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REPURCHASE OF CLASS A SHARES
You may repurchase any amount of Class A Shares of the Fund at NAV (without the normal front-end sales charge), up to the limit of the value of any amount of
Class A Shares (other than those which were purchased with reinvested dividends and distributions) that you redeemed within the past 90 days. In effect, this allows you to reacquire shares that you may have had to redeem, without repaying the
front-end sales charge. To exercise this privilege, the Fund must receive your purchase order within 90 days of your redemption. In addition, you must notify the Fund when you send in your purchase order that you are repurchasing shares. Certain tax
rules may limit your ability to recognize a loss on the redemption of your Class A Shares, and you should consult your tax advisor if recognizing such a loss is important to you.
REDUCED SALES CHARGE CLASS A SHARES
In addition to the above described reductions in initial sales
charges for purchases over a certain dollar size, you may also be eligible to participate in one or more of the programs described below to lower your initial sales charge. To be eligible to participate in these programs, you must inform your
broker-dealer or financial advisor at the time you purchase shares that you would like to participate in one or more of the programs and provide information necessary to determine your eligibility to participate, including the account number(s) and
names in which your accounts are registered at the time of purchase. In addition, the Fund or its agent may request account statements if it is unable to verify your account information.
RIGHTS OF ACCUMULATION
In calculating the appropriate sales charge rate, this right allows you to add the
value of the Class A Shares you already own to the amount that you are currently purchasing. The Fund will combine the value of your current purchases with the current value of any Class A Shares you purchased previously for (i) your
account, (ii) your spouses account, (iii) a joint account with your spouse, or (iv) your minor childrens trust or custodial accounts. A fiduciary purchasing shares for the same fiduciary account, trust or estate may also
use this right of accumulation. If your investment qualifies for a reduced sales load due to accumulation of purchases, you must notify the Funds transfer agent at the time of purchase of the existence of other accounts and/or holdings
eligible to be aggregated to reduce or eliminate the sales load. You may be required to provide records, such as account statements, regarding the Fund shares held by you or related accounts at the Fund or at other financial intermediaries in order
to verify your eligibility for a breakpoint discount. You will receive the reduced sales load only on the additional purchases and not retroactively on previous purchases. The Fund may amend or terminate this right of accumulation at any time.
22
LETTER OF INTENT
You may purchase Class A Shares at the sales charge rate applicable to the total amount of the purchases you intend to make over a 13-month period. In other words, a Letter of Intent allows you to purchase
Class A Shares of the Fund over a 13-month period and receive the same sales charge as if you had purchased all the shares at the same time. The Fund will only consider the value of Class A Shares sold subject to a sales charge. As a
result, shares of the Class A Shares purchased with dividends or distributions will not be included in the calculation. To be entitled to a reduced sales charge on the purchase of Class A Shares based on shares you intend to purchase over
the 13-month period, you must send the Fund a Letter of Intent. In calculating the total amount of purchases, you may include in your Letter purchases made up to 90 days before the date of the Letter. Purchases resulting from the reinvestment of
dividends and capital gains do not apply toward fulfillment of the Letter. The 13-month period begins on the date of the first purchase, including those purchases made in the 90-day period before the date of the Letter. Please note that the purchase
price of these prior purchases will not be adjusted.
You are not legally bound by the terms of your Letter of Intent to purchase the amount of your
shares stated in the Letter. The Letter does, however, authorize the Fund to hold in escrow 5% of the total amount you intend to purchase. If you do not complete the total intended purchase of Class A Shares at the end of the 13-month period,
the Funds transfer agent will redeem the necessary portion of the escrowed shares to make up the difference between the reduced rate sales charge (based on the amount you intended to purchase) and the sales charge that would normally apply
(based on the actual amount you purchased).
COMBINED PURCHASE/QUANTITY DISCOUNT PRIVILEGE
When calculating the appropriate sales charge rate, the Fund will, upon written notification at the time of purchase, combine same-day purchases of Class A
Shares (that are subject to a sales charge) made by you, your spouse and your minor children (under age 21). This combination also applies to Class A Shares you purchase with a Letter of Intent.
PURCHASERS QUALIFYING FOR REDUCTIONS IN INITIAL SALES CHARGES
Only certain persons or groups are eligible for the reductions in initial sales charges described in the preceding section. These qualified purchasers include the
following:
Individuals
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an individual, his or her spouse, or children residing in the same household;
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any trust established exclusively for the benefit of an individual;
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Trustees and Fiduciaries
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a trustee or fiduciary purchasing for a single trust, estate or fiduciary account; and
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Other Groups
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any organized group of persons, whether or not incorporated, purchasing Fund shares, provided that (i) the organization has been in existence for at least
six months; and (ii) the organization has some purpose other than the purchase at a discount of redeemable securities of a registered investment company.
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Investors or dealers seeking to qualify orders for a reduced initial sales charge must identify such orders at the time of purchase and, if necessary, support their qualification for the reduced charge with
appropriate documentation. Appropriate documentation includes, without limitation, account statements regarding shares of the Fund held in all accounts (
e.g
., retirement accounts) by the investor, and, if applicable, his or her spouse and
children residing in the same household, including accounts at broker-dealers or other financial intermediaries different than the broker-dealer of record for the current purchase of Fund shares. The distributor reserves the right to determine
whether any purchaser is entitled, by virtue of the foregoing, to the reduced initial sales charge. No person or entity may distribute shares of the Fund without payment of the applicable sales charge other than to persons or entities who qualify
for a reduction in the sales charge as provided herein.
The Fund does not provide additional information on reduced sales charges on its website because
the information is contained in its Prospectus, which will be available on the Funds website at www.EquinoxFundManagement.com.
CLASS I SHARES
Sales of the Funds Class I shares are not subject to a front-end sales charge, contingent deferred sales charge or a Rule 12b-1 fee. The
minimum initial investment in the Class I shares is $100,000 and subsequent investments may be made in any amount.
23
CLASS P SHARES
Sales of the Funds Class P shares are not subject to a front-end sales charge or contingent deferred sales charge. The minimum initial investment in the Class
P shares is $2,500 and subsequent investments may be made in any amount.
Distribution Plan.
The Board of Trustees, on
behalf of the Funds Class P shares, has adopted a plan pursuant to Rule 12b-1 under the 1940 Act that allows the Fund to pay distribution fees for the sale and distribution of its shares and for services provided to its shareholders. Because
these fees are paid out of the Funds assets on an ongoing basis, over time, these fees will increase the cost of your investment and may cost more than paying other types of sales charges. The distribution plan for Class P shares provides for
payments of up to 0.25% of the average daily net assets of the Funds Class P shares. Currently, the Fund is not making payments under the Rule 12b-1 Plan with respect to Class P shares.
Shareholder Service Plan.
The Fund may enter into shareholder services arrangements with broker-dealers, banks, trust companies, and other financial services firms under which such
firms agree to provide certain support services to Class P shareholders for a fee of up to 0.25% of the Funds average daily net assets attributable to Class P shares. Because service fees are paid out of Fund assets on an ongoing basis, they
will, over time, increase the cost of investment.
FACTORS TO CONSIDER WHEN CHOOSING A SHARE CLASS
When deciding which class of shares of the Fund to purchase, you should consider your investment goals, present and future amounts you may invest in the Fund, and
the length of time you intend to hold your shares. To help you make a determination as to which class of shares to buy, please refer back to the tables disclosing Shareholder Fees and Annual Fund Operating Expenses and the Expense Example in the
Fees and Expenses of the Fund
section of this Prospectus. You also may wish to consult with your financial adviser for advice with regard to which share class would be most appropriate for you.
PURCHASING SHARES
You may purchase shares of the Fund by
sending a completed application form to the following address by either regular or overnight mail:
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Address for Regular Mail:
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Address for Overnight Mail:
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Equinox Campbell Strategy Fund
c/o Gemini
Fund Services, LLC
P.O. Box 541150
Omaha, Nebraska
68154-1150
1-888-643-3431
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|
Equinox Campbell Strategy Fund
c/o
Gemini Fund Services, LLC
17605 Wright Street, Suite 2
Omaha, Nebraska 68130
1-888-643-3431
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MINIMUM AND ADDITIONAL INVESTMENT AMOUNTS
The minimum initial investment to open an account is $2,500 for Class A Shares and Class P shares and $100,000 for Class I Shares and the minimum subsequent investment is $500 for Class A Shares. There is
no minimum subsequent investment amount for Class I shares and Class P shares and there is no minimum investment requirement when you are buying shares by reinvesting dividends and distributions from the Fund. The Fund and the Adviser reserve the
right to waive or reduce the investment minimums under certain circumstances. The Fund may change the investment minimums at any time.
The Fund,
however, reserves the right, in its sole discretion, to reject any application to purchase shares. Applications will not be accepted unless they are accompanied by a check drawn on a U.S. bank, savings and loan, or credit union in U.S. funds for the
full amount of the shares to be purchased. After you open an account, you may purchase additional shares by sending a check together with written instructions stating the name(s) on the account and the account number, to the above address.
Make
all checks payable to the name of the Fund.
The Fund will not accept payment in cash, including cashiers checks or money orders. Also, to prevent check fraud, the Fund will not accept third party checks, U.S. Treasury checks, credit card
checks, or starter checks for the purchase of shares.
Note: Gemini Fund Services, LLC (GFS), the Funds transfer agent, will charge a
$25 fee against a shareholders account, in addition to any loss sustained by the Fund, for any check returned to the transfer agent for insufficient funds.
The USA PATRIOT Act requires financial institutions, including the Fund, to adopt certain policies and programs to prevent money-laundering activities, including procedures to verify the identity of customers
opening new accounts. As requested on the application, you should supply your full name, date of birth, social security number, and permanent street address. Mailing addresses containing a P.O. Box will not be accepted. This information will assist
the Fund in verifying your identity. Until such verification is made, the Fund may temporarily limit additional share purchases. In
24
addition, the Fund may limit additional share purchases or close an account if it is unable to verify a shareholders identity. As required by law, the Fund may employ various procedures,
such as comparing the information to fraud databases or requesting additional information or documentation from you, to ensure that the information supplied by you is correct.
When Order is Processed
All shares will be purchased at the NAV, plus any applicable sales charges, per
share next determined after the Fund receives your application or request in good order. All requests received in good order by the Fund before 4:00 p.m. (Eastern time) will be executed on that same day. Requests received after 4:00 p.m. will be
processed on the next business day.
Good Order:
When making a purchase request, make sure your request is in good order.
Good order means your purchase request includes:
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the dollar amount of shares to be purchased;
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a completed purchase application or investment stub; and
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a check payable to the Fund.
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PURCHASES
THROUGH BROKERS
You may invest in the Fund through brokers or agents who have entered into selling agreements with the Funds distributor.
These brokers and agents are authorized to designate other intermediaries to receive purchase and redemption orders on behalf of the Fund. The Fund will be deemed to have received a purchase or redemption order when an authorized broker or its
designee receives the order. The broker or agent may set its own initial and subsequent investment minimums. You may be charged a fee if you use a broker or agent to buy or redeem shares of the Fund. Finally, various servicing agents use procedures
and impose restrictions that may be in addition to, or different from those applicable to investors purchasing shares directly from the Fund. You should carefully read the program materials provided to you by your servicing agent.
PURCHASES BY WIRE
If you wish to wire money to make an
investment in the Fund, please call the Fund at 1-888-643-3431 for wiring instructions and to notify the Fund that a wire transfer is coming. Any commercial bank can transfer same-day funds via wire. The Fund will normally accept wired funds for
investment on the day received if they are received by the Funds designated bank before the close of regular trading on the NYSE. Your bank may charge you a fee for wiring same-day funds.
HOW TO REDEEM SHARES
REDEMPTION REQUESTS
You will be entitled to redeem all or any portion of the shares credited to your accounts by submitting a written request for redemption by regular, express or
overnight mail to:
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Address for Regular Mail:
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Address for Overnight Mail:
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|
Equinox Campbell Strategy Fund
c/o Gemini
Fund Services, LLC
P.O. Box 541150
Omaha, Nebraska
68154-1150
1-888-643-3431
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|
Equinox Campbell Strategy Fund
c/o
Gemini Fund Services, LLC
17605 Wright Street, Suite 2
Omaha, Nebraska 68130
1-888-643-3431
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REDEEMING BY TELEPHONE
The
telephone redemption privilege is automatically available to all new accounts, except retirement accounts. If you do not want the telephone redemption privilege, you must indicate this in the appropriate area on your account application or you must
write to the Fund and instruct it to remove this privilege from your account.
25
The proceeds will be sent by mail to the address designated on your account or wired directly to your existing account
in any commercial bank or brokerage firm in the United States as designated on your application. To redeem by telephone, call 1-888-643-3431. The redemption proceeds normally will be sent by mail or by wire within three business days after receipt
of your telephone instructions. IRA accounts are not redeemable by telephone.
The Fund reserves the right to suspend the telephone redemption privileges
with respect to your account if the name(s) or the address on the account has been changed within the previous 30 days. None of the Fund, GFS, or their respective affiliates will be liable for complying with telephone instructions they reasonably
believe to be genuine or for any loss, damage, cost or expenses in acting on such telephone instructions and you will be required to bear the risk of any such loss. The Fund, GFS, or both, will employ reasonable procedures to determine that
telephone instructions are genuine. If the Fund and/or GFS do not employ these procedures, they may be liable to you for losses due to unauthorized or fraudulent instructions. These procedures may include, among others, requiring forms of personal
identification prior to acting upon telephone instructions, providing written confirmation of the transactions and/or tape recording telephone instructions.
WIRE REDEMPTIONS
If you request your redemption by wire transfer, you will be required to pay a $15.00 wire
transfer fee to GFS to cover costs associated with the transfer but GFS does not charge a fee when transferring redemption proceeds by electronic funds transfer. In addition, your bank may impose a charge for receiving wires.
SYSTEMATIC WITHDRAWAL PLAN
If your individual account, IRA,
or other qualified plan account has a current account value of at least $10,000, you may adopt a Systematic Withdrawal Plan to provide for monthly, quarterly or other periodic checks for any designated amount of $100 or more. If you wish to open a
Systematic Withdrawal Plan, please indicate on your application or contact the Fund at 1-888-643-3431.
REDEMPTIONS IN KIND
The Fund reserves the right to honor requests for redemption or repurchase orders by making payment in whole or in part in readily marketable securities
(redemption in kind) if the amount is greater than (the lesser of) $250,000 or 1% of the Funds assets. The securities will be chosen by the Fund and valued under the Funds net asset value procedures. A shareholder will be
exposed to market risk until these securities are converted to cash and may incur transaction expenses, including taxes, in converting these securities to cash.
WHEN REDEMPTIONS ARE SENT
Once the Fund receives your redemption request in good order (as
described below), it will issue a check based on the next determined NAV following your redemption request. Before selling recently purchased shares, please note that if the Funds transfer agent has not yet collected payment for the shares you
are selling, it may delay sending the proceeds until the payment is collected, which may take up to 10 calendar days from the purchase date. This procedure is intended to protect the Fund and its shareholders from loss.
GOOD ORDER
Your redemption request will be processed if it
is in good order. To be in good order, the following conditions must be satisfied:
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The request should be in writing, unless redeeming by telephone, indicating the number of shares or dollar amount to be redeemed;
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The request must identify your account number;
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The request should be signed by you and any other person listed on the account, exactly as the shares are registered; and
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If you request that the redemption proceeds to be sent to an address other than that of record, or if the address was changed within the last 30 days, or if the
proceeds of a requested redemption exceed $50,000, the signature(s) on the request must be medallion signature guaranteed by an eligible signature guarantor.
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26
WHEN YOU NEED MEDALLION SIGNATURE GUARANTEES
A medallion signature guarantee assures that a signature is genuine and protects you from unauthorized account transfers. You will need your signature guaranteed if:
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you wish to change the bank or brokerage account that you have designated on your account;
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|
you request a redemption to be made payable to a person not on record with the Fund;
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|
|
you request that a redemption be mailed to an address other than that on record with the Fund;
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|
|
the proceeds of a requested redemption exceed $50,000; or
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|
|
any redemption is transmitted by federal wire transfer to a bank other than the bank of record; or
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|
|
your address was changed within 30 days of your redemption request.
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Signatures may be guaranteed by any eligible guarantor institution (including banks, brokers and dealers, credit unions, national securities exchanges, registered securities associations, clearing agencies, and
savings associations) or by completing a supplemental telephone redemption authorization form. Contact the Fund to obtain this form. Further documentation will be required to change the designated account if shares are held by a corporation,
fiduciary, or other organization.
A notary public cannot guaranty signatures
.
Where shares are held in the name of an accredited bank, Medallion
Signature Guarantee requirements may be waived at the discretion of the Fund.
REDEEMING THROUGH BROKERS
If shares of the Fund are held by a broker-dealer, financial institution, or other servicing agent, you must contact that servicing agent to redeem shares of the
Fund. The servicing agent may charge a fee for this service.
LOW BALANCES
For regular accounts, if at any time your account balance falls below $1,000 or there has been no shareholder activity in the account for the past 12 months, the Fund may notify you that, unless the account is
brought up to at least $1,000 or you initiate activity in the account within 60 days of the notice; your account could be closed. After the notice period, the Fund may redeem all of your shares and close your account by sending you a check to the
address of record. Your account will not be closed if the account balance drops below $1,000 due to a decline in NAV.
EXCHANGING SHARES
At no charge, you may exchange Class A Shares of the Fund for the same share class of another fund in the Equinox family of funds, which are
offered through a separate prospectus or prospectuses, by writing to or calling the funds. You may only exchange shares between accounts with identical registrations (i.e., the same names and addresses).
The exchange privilege is not intended as a vehicle for short-term or excessive trading. The Fund may suspend or terminate your exchange privilege if you engage in
a pattern of exchanges that is excessive, as determined in the sole discretion of the Fund. For more information about the Funds policy on excessive trading, refer to Frequent Purchases and Redemptions of Fund Shares.
STATEMENT OF ADDITIONAL INFORMATION
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March 1, 2013
EQUINOX CAMPBELL STRATEGY FUND
EQUINOX FUNDS TRUST
Class I Shares: EBSIX
Class A Shares: EBSAX
Class P Shares: EBSPX
Investment Adviser:
Equinox Fund Management, LLC
This
Statement of Additional Information (SAI) is not a prospectus. It is intended to provide additional information about the activities and operations of Equinox Funds Trust (the Trust) and the Equinox Campbell Strategy Fund
(the Fund), a series of the Trust. The Fund is being offered pursuant to a prospectus dated March 1, 2013, as amended or supplemented from time to time (the Prospectus). This SAI should be read in conjunction with the
Funds Prospectus.
This SAI has been incorporated by reference in its entirety into the Funds Prospectus. A copy of the Prospectus and annual
report to shareholders (when available) may be obtained without charge, upon request, by calling toll-free 1-888-643-3431 or by visiting the Funds website at www.EquinoxFundManagement.com.
TABLE OF CONTENTS
THE TRUST
The Trust is an open-end management investment company
established under Delaware law as a statutory trust, and was organized on June 2, 2010. The Fund is a newly established, separate series of the Trust. The Trust may offer other mutual fund series in addition to the Fund. The Fund issues Class I
shares, Class A shares and Class P shares. The Trust is governed by its Board of Trustees (the Board or Trustees). The Fund is classified as a non-diversified investment company under the Investment Company
Act of 1940, as amended (1940 Act), meaning it may invest in fewer companies than diversified investment companies. Each share of the Fund represents an equal proportionate interest in such Fund. See Capital Stock and Other
Securities.
DESCRIPTION OF PERMITTED INVESTMENTS
The Fund will only invest in any of the following
instruments or engage in any of the following investment practices if such investment or activity is consistent with the Funds investment objective and permitted by the Funds stated investment policies.
Subsidiary.
Generally, the Fund may invest in a wholly-owned and controlled Cayman Islands subsidiary (the Subsidiary),
which is expected to invest primarily in (i) pooled investment vehicles, including those that are not registered under the 1940 Act, (ii) commodity futures, option and swap contracts, (iii) financial futures, option and swap
contracts; (iv) fixed income securities, (v) structured notes; and (vi) other investments intended to serve as margin or collateral for the Subsidiarys derivatives positions. As a result, the Fund may be considered to be
investing indirectly in these investments through the Subsidiary. For that reason, and for the sake of convenience, references in this SAI to the Fund may also include the Subsidiary. Applicable federal tax requirements generally limit the degree to
which the Fund may invest in the Subsidiary to an amount not exceeding 25% of the Funds total assets.
The Subsidiary is a company organized under
the laws of the Cayman Islands, whose registered office is located at the offices of Northern Lights SPC, c/o Maples and Calder, PO Box 309, Ugland House, South Church Street, George Town, Grand Cayman KY1-1104, Cayman Islands. The Subsidiarys
affairs are overseen by a board of directors consisting of two directors. The Fund is the sole shareholder of the Subsidiary. It is not currently expected that shares of the Subsidiary will be sold or offered to other investors. If, at any time, the
Subsidiary proposes to offer or sell its shares to any investor other than the Fund, the Funds shareholders will receive 60 days prior notice of such offer or sale.
The Subsidiary has entered into a separate contract with the Adviser for the management of the Subsidiarys portfolio pursuant to which the Subsidiary pays the Adviser a management fee for its services. The
Adviser has contractually agreed to waive the management fee it receives from the Fund in an amount equal to the management fee paid to the Adviser by the Funds Subsidiary. This undertaking will continue in effect for so long as the Fund
invests in the Subsidiary, and may not be terminated by the Adviser unless the adviser first obtains the prior approval of the Funds Board of Trustees for such termination. The Subsidiary will bear the fees and expenses incurred in connection
with the custody, transfer agency, and audit services that it receives. The Fund expects that the expenses borne by the Subsidiary will not be material in relation to the value of the Funds assets. It is also anticipated that the Funds
own expense will be reduced to some extent as a result of the payment of such expenses at the Subsidiary level. It is therefore expected that the Funds investment in the Subsidiary will not result in the Fund paying duplicative fees for
similar services provided to the Fund and the Subsidiary. Please refer to the section in this SAI entitled
Taxes Taxation of the Subsidiary
for information about certain tax aspects of the Funds investment in the
Subsidiary.
The Subsidiary will not be registered under the 1940 Act but will be subject to certain of the investor protections of that Act, as noted in
this SAI. The Fund, as the sole shareholder of the Subsidiary, will not have all of the protections offered to investors in registered investment companies. However, since the Fund wholly owns and controls the Subsidiary, and the Fund and the
Subsidiary are both managed by the Adviser, it is unlikely that the Subsidiary will take action contrary to the interests of the Fund or its shareholders. The Trusts Board has oversight responsibility for the investment activities of the Fund,
including its investment in the Funds Subsidiary, and the Funds role as the sole shareholder of the Subsidiary. Also, in managing the Subsidiarys portfolio, the Adviser will be subject to the same investment restrictions and
operational guidelines that apply to the management of the Fund, including any collateral or segregation requirements in connection with various investment strategies.
Changes in the laws of the United States and/or the Cayman Islands, under which the Fund and the Subsidiary, respectively, are organized, could result in the inability of the Fund and/or the Subsidiary to operate
as described in this
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Statement of Additional Information and could negatively affect the Fund and its shareholders. For example, the Cayman Islands does not currently impose any income, corporate or capital gains
tax, estate duty, inheritance tax, gift tax or withholding tax on the Subsidiary. If Cayman Islands law changes such that the Subsidiary must pay Cayman Islands taxes, the Funds shareholders would likely suffer decreased investment returns.
The Fund, as a regulated investment company (RIC) under the Internal Revenue Code of 1986, as amended (the IRC), is required to
derive at least 90 percent of its annual gross income from investment-related sources, specifically from dividends, interest, proceeds from securities lending, gains from the sales of stock, securities and foreign currencies, other income
(including, but not limited to, gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or currencies, or certain types of publicly traded partnerships (referred to as qualifying
income). Direct investments by a RIC in certain commodity-related instruments do not, under published Internal Revenue Service (IRS) rulings, produce qualifying income. However, the IRS has in the past issued private letter rulings to
other RICs in which it concluded that income from certain commodity index-linked notes is qualifying income and that income derived from subsidiaries similar to the Subsidiary will be qualifying income whether received in the form of current
distributions or as undistributed subpart F income. There is no law or authority directly addressing some of the issues of the law considered in these rulings. There can be no assurance that the IRS will not change its position with respect to some
or all of these issues or, if the IRS did so, that a court would not sustain, such contrary positions. If the IRS were to change its position on some or all of these issues, and if such contrary positions were upheld, the Fund might cease to qualify
as a RIC. A private letter ruling may only be relied upon by the taxpayer to whom it was provided. The Fund does not plan to seek a private letter ruling. Therefore, to the extent the Fund invests directly in commodity-index-linked derivative
instruments or in the Subsidiary, the IRS may contest the Funds characterization of the income produced by such assets as qualifying income which, if successful, could cause the Fund to fail to qualify as a RIC. The Fund and its Adviser plan
to direct investments of the Funds assets in conformance with Revenue Ruling 2006-31, IRS guidance, and the advice of counsel. A more detailed description of the risks and tax consequences associated with the Funds investment in the
Subsidiary is included in the section entitled
Taxes Taxation of the Subsidiary
below.
The Subsidiary intends to conduct its
affairs in a manner such that it will not be subject to U.S. federal income tax. It will, however, be considered a controlled foreign corporation, and the Fund will be required to annually include in its income amounts earned by the Subsidiary
during that year, whether or not distributed by the Subsidiary. Furthermore, the Fund will be subject to the RIC qualification distribution requirements with respect to the Subsidiarys income, whether or not the Subsidiary makes a distribution
to the Fund during the taxable year; and, thus, the Fund may not have sufficient cash on hand to make such required distribution. As a result, the Fund may need to make untimely sales of its investments, borrow funds or risk losing its status as a
RIC.
Derivatives.
Derivatives are financial instruments whose value is based on an underlying asset, such as a stock or a
bond, or an underlying economic factor, such as an interest rate or a market benchmark. Unless otherwise stated in the Funds prospectus, the Fund may use derivatives to gain exposure to the asset classes and for risk management purposes,
including to gain exposure to various markets in a cost efficient manner, to reduce transaction costs or to remain fully invested. The Fund may also invest in derivatives to protect from broad fluctuations in market prices, interest rates or foreign
currency exchange rates (a practice known as hedging). When hedging is successful, the Fund will offset any depreciation in the value of its portfolio securities by the appreciation in the value of the derivative position. Although
techniques other than the sale and purchase of derivatives could be used to control the exposure of the Fund to market fluctuations, the use of derivatives may be a more effective means of hedging this exposure. To the extent that the Fund engages
in hedging, there can be no assurance that any hedge will be effective or that there will be a hedge in place at any given time.
Because many
derivatives have a leverage or borrowing component, adverse changes in the value or level of the underlying asset, reference rate, or index can result in a loss substantially greater than the amount invested in the derivative itself. Certain
derivatives have the potential for unlimited loss, regardless of the size of the initial investment. Accordingly, certain derivative transactions may be considered to constitute borrowing transactions for purposes of the 1940 Act. Such a derivative
transaction will not be considered to constitute the issuance of a senior security by the Fund, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by the Fund, if
the Fund covers the transaction or segregates sufficient liquid assets in accordance with the 1940 Act requirements or the rules and SEC interpretations thereunder.
Types of Derivatives:
Futures
.
A futures contract is an agreement between
two parties whereby one party sells and the other party agrees to buy a specified amount of a commodity or financial instrument at an agreed upon price and time. The financial instrument underlying a futures contract may be a stock, stock index,
bond, bond index, interest rate, foreign exchange
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rate or other similar instrument. Agreeing to buy the underlying commodity or financial instrument is called buying a futures contract or taking a long position in the contract. Likewise,
agreeing to sell the underlying commodity or financial instrument is called selling a futures contract or taking a short position in the contract.
Futures contracts are traded in the U.S. on commodity exchanges or boards of trade known as contract markets approved for such trading and
regulated by the CFTC. These contract markets standardize the terms, including the maturity date and underlying financial instrument, of all futures contracts.
Unlike other securities or instruments, the parties to a futures contract do not have to pay for or deliver the underlying commodity or financial instrument until some future date (the delivery date). Contract
markets require both the purchaser and seller to deposit initial margin with a futures broker, known as a futures commission merchant or custodian bank, when they enter into the contract. Initial margin deposits are typically equal to a
percentage of the contracts value. After they open a futures contract, the parties to the transaction must compare the purchase price of the contract to its daily market value. If the value of the futures contract changes in such a way that a
partys position declines, that party must make additional variation margin payments so that the margin payment is adequate. On the other hand, the value of the contract may change in such a way that there is excess margin on
deposit, possibly entitling the party that has a gain to receive all or a portion of this amount. This process is known as marking to the market.
Although the actual terms of a futures contract calls for the actual delivery of and payment for the underlying commodity or security, in many cases the parties may close the contract early by taking an opposite
position in an identical contract. If the sale price upon closing out the contract is less than the original purchase price, the person closing out the contract will realize a loss. If the sale price upon closing out the contract is more than the
original purchase price, the person closing out the contract will realize a gain. If the purchase price upon closing out the contract is more than the original sale price, the person closing out the contract will realize a loss. If the purchase
price upon closing out the contract is less than the original sale price, the person closing out the contract will realize a gain.
The Fund may incur
commission expenses when it opens or closes a futures position.
Options
.
An option is a contract between two
parties for the purchase and sale of a financial instrument for a specified price (known as the strike price or exercise price) at any time during the option period. Unlike a futures contract, an option grants a right (not an
obligation) to buy or sell a financial instrument. Generally, a seller of an option can grant a buyer two kinds of rights: a call (the right to buy the security) or a put (the right to sell the security). Options have various
types of underlying instruments, including specific securities, indices of securities prices, foreign currencies, interest rates and futures contracts. Options may be traded on an exchange (exchange-traded-options) or may be customized agreements
between the parties (over-the-counter or OTC options). Like futures, a financial intermediary, known as a clearing corporation, financially backs exchange-traded options. However, OTC options have no such intermediary and are subject to
the risk that the counterparty will not fulfill its obligations under the contract.
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Purchasing Put and Call Options
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When
the Fund purchases a put option, it buys the right to sell the instrument underlying the option at a fixed strike price. In return for this right, the Fund pays the current market price for the option (known as the option premium). The
Fund may purchase put options to offset or hedge against a decline in the market value of its securities (protective puts) or to benefit from a decline in the price of securities that it does not own. The Fund would ordinarily realize a
gain if, during the option period, the value of the underlying securities decreased below the exercise price sufficiently to cover the premium and transaction costs. However, if the price of the underlying instrument does not fall enough to offset
the cost of purchasing the option, a put buyer would lose the premium and related transaction costs.
Call options are similar to put options, except
that the Fund obtains the right to purchase, rather than sell, the underlying instrument at the options strike price. The Fund would normally purchase call options in anticipation of an increase in the market value of securities it owns or
wants to buy. The Fund would ordinarily realize a gain if, during the option period, the value of the underlying instrument exceeded the exercise price plus the premium paid and related transaction costs. Otherwise, the Fund would realize either no
gain or a loss on the purchase of the call option.
The purchaser of an option may terminate its position by:
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Allowing it to expire and losing its entire premium;
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Exercising the option and either selling (in the case of a put option) or buying (in the case of a call option) the underlying instrument at the strike price; or
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Closing it out in the secondary market at its current price.
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Selling (Writing) Put and Call Options
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When the Fund writes a call option, it assumes an obligation to sell specified securities to the holder of the option at a specified price if the option is
exercised at any time before the expiration date. Similarly, when the Fund writes a put option, it assumes an obligation to purchase specified securities from the option holder at a specified price if the option is exercised at any time before the
expiration date. The Fund may terminate its position in an exchange-traded put option before exercise by buying an option identical to the one it has written. Similarly, it may cancel an over-the-counter option by entering into an offsetting
transaction with the counterparty to the option.
The Fund could try to hedge against an increase in the value of securities it would like to acquire by
writing a put option on those securities. If security prices rise, the Fund would expect the put option to expire and the premium it received to offset the increase in the securitys value. If security prices remain the same over time, the Fund
would hope to profit by closing out the put option at a lower price. If security prices fall, the Fund may lose an amount of money equal to the difference between the value of the security and the premium it received. Writing covered put options may
deprive the Fund of the opportunity to profit from a decrease in the market price of the securities it would like to acquire.
The characteristics of
writing call options are similar to those of writing put options, except that call writers expect to profit if prices remain the same or fall. The Fund could try to hedge against a decline in the value of securities it already owns by writing a call
option. If the price of that security falls as expected, the Fund would expect the option to expire and the premium it received to offset the decline of the securitys value. However, the Fund must be prepared to deliver the underlying
instrument in return for the strike price, which may deprive it of the opportunity to profit from an increase in the market price of the securities it holds.
The Fund is permitted only to write covered options. At the time of selling the call option, the Fund may cover the option by owning, among other things:
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The underlying security (or securities convertible into the underlying security without additional consideration) or index, interest rate, foreign currency or
futures contract;
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A call option on the same security or index with the same or lesser exercise price;
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A call option on the same security or index with a greater exercise price and segregating cash or liquid securities in an amount equal to the difference between
the exercise prices;
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Cash or liquid securities equal to at least the market value of the optioned securities, interest rate, foreign currency or futures contract; or
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In the case of an index, the portfolio of securities that corresponds to the index.
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At the time of selling a put option, the Fund may cover the put option by, among other things:
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Entering into a short position in the underlying security;
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Purchasing a put option on the same security, index, interest rate, foreign currency or futures contract with the same or greater exercise price;
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Purchasing a put option on the same security, index, interest rate, foreign currency or futures contract with a lesser exercise price and segregating cash or
liquid securities in an amount equal to the difference between the exercise prices; or
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Maintaining the entire exercise price in liquid securities.
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Options on Securities Indices
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Options
on securities indices are similar to options on securities, except that the exercise of securities index options requires cash settlement payments and does not involve the actual purchase or sale of securities. In addition, securities index options
are designed to reflect price fluctuations in a group of securities or segment of the securities market rather than price fluctuations in a single security.
An option on a
futures contract provides the holder with the right to buy a futures contract (in the case of a call option) or sell a futures contract (in the case of a put option) at a fixed time and price. Upon exercise of the option by the holder, the contract
market clearing house establishes a corresponding short position for the writer of the option (in the case of a call option) or a corresponding long position (in the case of a put option). If the option is exercised, the parties will be subject to
the futures contracts. In addition, the writer of an option on a futures contract is subject to initial and variation margin requirements on the option position. Options on futures contracts are traded on the same contract market as the underlying
futures contract.
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The buyer or seller of an option on a futures contract may terminate the option early by purchasing or selling an
option of the same series (
i.e.
, the same exercise price and expiration date) as the option previously purchased or sold. The difference between the premiums paid and received represents the traders profit or loss on the transaction.
The Fund may purchase put and call options on futures contracts instead of selling or buying futures contracts. The Fund may buy a put option on a
futures contract for the same reasons it would sell a futures contract. It also may purchase such put options in order to hedge a long position in the underlying futures contract. The Fund may buy call options on futures contracts for the same
purpose as the actual purchase of the futures contracts, such as in anticipation of favorable market conditions.
The Fund may write a call option on a
futures contract to hedge against a decline in the prices of the instrument underlying the futures contracts. If the price of the futures contract at expiration were below the exercise price, the Fund would retain the option premium, which would
offset, in part, any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the purchase of
the futures contracts, except that, if the market price declines, the Fund would pay more than the market price for the underlying instrument. The premium received on the sale of the put option, less any transaction costs, would reduce the net cost
to the Fund.
The Fund may
purchase and write options in combination with each other, or in combination with futures or forward contracts, to adjust the risk and return characteristics of the overall position. For example, the Fund could construct a combined position whose
risk and return characteristics are similar to selling a futures contract by purchasing a put option and writing a call option on the same underlying instrument. Alternatively, the Fund could write a call option at one strike price and buy a call
option at a lower price to reduce the risk of the written call option in the event of a substantial price increase. Because combined options positions involve multiple trades, they result in higher transaction costs and may be more difficult to open
and close out.
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Forward Foreign Currency Exchange Contracts
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A forward foreign currency contract involves an obligation to purchase or sell a specific amount of currency at a future date or date range at a specific price. In the case of a cancelable forward contract, the
holder has the unilateral right to cancel the contract at maturity by paying a specified fee. Forward foreign currency exchange contracts differ from foreign currency futures contracts in certain respects. Unlike futures contracts, forward
contracts:
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Do not have standard maturity dates or amounts (i.e., the parties to the contract may fix the maturity date and the amount).
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Are traded in the inter-bank markets conducted directly between currency traders (usually large commercial banks) and their customers, as opposed to futures
contracts which are traded only on exchanges regulated by the CFTC.
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Do not require an initial margin deposit.
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May be closed by entering into a closing transaction with the currency trader who is a party to the original forward contract, as opposed to a commodities
exchange.
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Foreign Currency Hedging Strategies
. A settlement hedge or transaction
hedge is designed to protect the Fund against an adverse change in foreign currency values between the date a security is purchased or sold and the date on which payment is made or received. Entering into a forward contract for the purchase or
sale of the amount of foreign currency involved in an underlying security transaction for a fixed amount of U.S. dollars locks in the U.S. dollar price of the security. The Fund may also use forward contracts to purchase or sell a
foreign currency when it anticipates purchasing or selling securities denominated in foreign currency, even if it has not yet selected the specific investments.
The Fund may use forward contracts to hedge against a decline in the value of existing investments denominated in foreign currency. Such a hedge, sometimes referred to as a position hedge, would tend to
offset both positive and negative currency fluctuations, but would not offset changes in security values caused by other factors. The Fund could also hedge the position by selling another currency expected to perform similarly to the currency in
which the Funds investment is denominated. This type of hedge, sometimes referred to as a proxy hedge, could offer advantages in terms of cost, yield, or efficiency, but generally would not hedge currency exposure as effectively as
a direct hedge into U.S. dollars. Proxy hedges may result in losses if the currency used to hedge does not perform similarly to the currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the underlying prices of the securities that the Fund owns or intends to purchase or sell. They simply establish a rate of exchange that one can
achieve at some future
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point in time. Additionally, these techniques tend to minimize the risk of loss due to a decline in the value of the hedged currency and to limit any potential gain that might result from the
increase in value of such currency.
The Fund may enter into forward contracts to shift its investment exposure from one currency into another. Such
transactions may call for the delivery of one foreign currency in exchange for another foreign currency, including currencies in which its securities are not then denominated. This may include shifting exposure from U.S. dollars to a foreign
currency, or from one foreign currency to another foreign currency. This type of strategy, sometimes known as a cross-hedge, will tend to reduce or eliminate exposure to the currency that is sold, and increase exposure to the currency
that is purchased. Cross-hedges may protect against losses resulting from a decline in the hedged currency, but will cause the Fund to assume the risk of fluctuations in the value of the currency it purchases. Cross hedging transactions also involve
the risk of imperfect correlation between changes in the values of the currencies involved.
It is difficult to forecast with precision the market value
of portfolio securities at the expiration or maturity of a forward or futures contract. Accordingly, the Fund may have to purchase additional foreign currency on the spot market if the market value of a security it is hedging is less than the amount
of foreign currency it is obligated to deliver. Conversely, the Fund may have to sell on the spot market some of the foreign currency it received upon the sale of a security if the market value of such security exceeds the amount of foreign currency
it is obligated to deliver.
To the extent that the Fund engages in foreign currency hedging, there can be no assurance that any hedge will be effective
or that there will be a hedge in place at any given time.
Swaps, Caps, Collars and Floors
Swap Agreements
. A swap is a financial instrument that typically involves the exchange of cash flows between two parties on specified
dates (settlement dates), where the cash flows are based on agreed-upon prices, rates, indices, etc. The nominal amount on which the cash flows are calculated is called the notional amount. Swaps are individually negotiated and structured to include
exposure to a variety of different types of investments or market factors, such as interest rates, foreign currency rates, mortgage securities, corporate borrowing rates, security prices or inflation rates.
Swap agreements may increase or decrease the overall volatility of the investments of the Fund and its share price. The performance of swap agreements may be
affected by a change in the specific interest rate, currency, or other factors that determine the amounts of payments due to and from the Fund. If a swap agreement calls for payments by the Fund, the Fund must be prepared to make such payments when
due. In addition, if the counterpartys creditworthiness declined, the value of a swap agreement would be likely to decline, potentially resulting in losses.
Generally, swap agreements have a fixed maturity date that will be agreed upon by the parties. The agreement can be terminated before the maturity date under certain circumstances, such as default by one of the
parties or insolvency, among others, and can be transferred by a party only with the prior written consent of the other party. The Fund may be able to eliminate its exposure under a swap agreement either by assignment or by other disposition, or by
entering into an offsetting swap agreement with the same party or a similarly creditworthy party. If the counterparty is unable to meet its obligations under the contract, declares bankruptcy, defaults or becomes insolvent, the Fund may not be able
to recover the money it expected to receive under the contract.
A swap agreement can be a form of leverage, which can magnify the Funds gains or
losses. In order to reduce the risk associated with leveraging, the Fund may cover its current obligations under swap agreements according to guidelines established by the U.S. Securities and Exchange Commission (SEC). If the Fund enters
into a swap agreement on a net basis, it will segregate assets with a daily value at least equal to the excess, if any, of the Funds accrued obligations under the swap agreement over the accrued amount the Fund is entitled to receive under the
agreement. If the Fund enters into a swap agreement on other than a net basis, it will segregate assets with a value equal to the full amount of the Funds accrued obligations under the agreement.
Total return swaps
are contracts in which one party agrees to make payments of the total return from the underlying asset during the specified period, in return for payments equal to a fixed or floating rate of interest or the total return from another underlying
asset. The total return includes appreciation or depreciation on the underlying asset, plus any interest or dividend payments. Payments under the swap are based upon an agreed upon principal amount but since the principal amount is not exchanged, it
represents neither an asset nor a liability to either counterparty, and is referred to as notional. Total return swaps are marked to market daily using different sources, including quotations from counterparties, pricing services, brokers or market
makers. The unrealized appreciation (depreciation) related to the change in the valuation of the notional amount of the swap is combined with the amount due to the Fund at termination or settlement. The primary risks associated with total returns
swaps are credit risks (if the counterparty fails to meet its obligations) and market risk (if there is no liquid market for the agreement or unfavorable changes occur to the underlying asset).
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In a typical equity swap,
one party agrees to pay another party the return on a stock, stock index or basket of stocks in return for a specified interest rate. By entering into an equity index swap, for example, the index receiver can gain exposure to stocks making up the
index of securities without actually purchasing those stocks. Equity index swaps involve not only the risk associated with investment in the securities represented in the index, but also the risk that the performance of such securities, including
dividends, will not exceed the return on the interest rate that the Fund will be committed to pay.
Interest rate swaps
are financial instruments that involve the exchange of one type of interest rate for another type of interest rate cash flow on specified dates in the future. Some of the different types of interest rate swaps are fixed-for floating rate
swaps, termed basis swaps and index amortizing swaps. Fixed-for floating rate swaps involve the exchange of fixed interest rate cash flows for floating rate cash flows. Termed basis swaps entail cash flows to both
parties based on floating interest rates, where the interest rate indices are different. Index amortizing swaps are typically fixed-for floating swaps where the notional amount changes if certain conditions are met.
Like a traditional investment in a debt security, the Fund could lose money by investing in an interest rate swap if interest rates change adversely. For example,
if the Fund enters into a swap where it agrees to exchange a floating rate of interest for a fixed rate of interest, the Fund may have to pay more money than it receives. Similarly, if the Fund enters into a swap where it agrees to exchange a fixed
rate of interest for a floating rate of interest, the Fund may receive less money than it has agreed to pay.
A currency swap is an
agreement between two parties in which one party agrees to make interest rate payments in one currency and the other promises to make interest rate payments in another currency. The Fund may enter into a currency swap when it has one currency and
desires a different currency. Typically the interest rates that determine the currency swap payments are fixed, although occasionally one or both parties may pay a floating rate of interest. Unlike an interest rate swap, however, the principal
amounts are exchanged at the beginning of the contract and returned at the end of the contract. Changes in foreign exchange rates and changes in interest rates, as described above may negatively affect currency swaps.
Caps, Collars and Floors
. Caps and floors have an effect similar to buying or writing options. In a typical cap or floor agreement,
one party agrees to make payments only under specified circumstances, usually in return for payment of a fee by the other party. For example, the buyer of an interest rate cap obtains the right to receive payments to the extent that a specified
interest rate exceeds an agreed-upon level. The seller of an interest rate floor is obligated to make payments to the extent that a specified interest rate falls below an agreed-upon level. An interest rate collar combines elements of buying a cap
and selling a floor.
Risks of Derivatives:
While transactions in derivatives may reduce certain risks, these transactions themselves entail certain other risks. For example, unanticipated changes in interest
rates, securities prices or currency exchange rates may result in a poorer overall performance of the Fund than if it had not entered into any derivatives transactions. Derivatives may magnify the Funds gains or losses, causing it to make or
lose substantially more than it invested.
When used for hedging purposes, increases in the value of the securities the Fund holds or intends to acquire
should offset any losses incurred with a derivative. Purchasing derivatives for purposes other than hedging could expose the Fund to greater risks.
Correlation of Prices
. The Funds ability to hedge its securities through derivatives depends on the degree to which price
movements in the underlying index or instrument correlate with price movements in the relevant securities. In the case of poor correlation, the price of the securities the Fund is hedging may not move in the same amount, or even in the same
direction as the hedging instrument. The Adviser will try to minimize this risk by investing only in those contracts whose behavior it expects to resemble with the portfolio securities it is trying to hedge. However, if the Funds prediction of
interest and currency rates, market value, volatility or other economic factors is incorrect, the Fund may lose money, or may not make as much money as it expected.
Derivative prices can diverge from the prices of their underlying instruments, even if the characteristics of the underlying instruments are very similar to the derivative. Listed below are some of the factors that
may cause such a divergence:
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current and anticipated short-term interest rates, changes in volatility of the underlying instrument, and the time remaining until expiration of the contract;
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7
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a difference between the derivatives and securities markets, including different levels of demand, how the instruments are traded, the imposition of daily price
fluctuation limits or trading of an instrument stops; and
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differences between the derivatives, such as different margin requirements, different liquidity of such markets and the participation of speculators in such
markets.
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Derivatives based upon a narrow index of securities, such as those of a particular industry group, may present greater risk
than derivatives based on a broad market index. Since narrower indices are made up of a smaller number of securities, they are more susceptible to rapid and extreme price fluctuations because of changes in the value of those securities.
While currency futures and options values are expected to correlate with exchange rates, they may not reflect other factors that affect the value of the investments
of the Fund. A currency hedge, for example, should protect a yen-denominated security from a decline in the yen, but will not protect the Fund against a price decline resulting from deterioration in the issuers creditworthiness. Because the
value of the Funds foreign-denominated investments changes in response to many factors other than exchange rates, it may not be possible to match the amount of currency options and futures to the value of the Funds investments precisely
over time.
Lack of Liquidity
. Before a futures contract or option is exercised or expires, the Fund can terminate it only
by entering into a closing purchase or sale transaction. Moreover, the Fund may close out a futures contract only on the exchange on which the contract was initially traded. If there is no secondary market for the contract, or the market is
illiquid, the Fund may not be able to close out its position. In an illiquid market, the Fund may:
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have to sell securities to meet its daily margin requirements at a time when it is disadvantageous to do so;
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have to purchase or sell the instrument underlying the contract;
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not be able to hedge its investments; and
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not be able to realize profits or limit its losses.
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Derivatives may become illiquid (i.e., difficult to sell at a desired time and price) under a variety of market conditions. For example:
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an exchange may suspend or limit trading in a particular derivative instrument, an entire category of derivatives or all derivatives, which sometimes occurs
because of increased market volatility;
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unusual or unforeseen circumstances may interrupt normal operations of an exchange;
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the facilities of the exchange may not be adequate to handle current trading volume;
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equipment failures, government intervention, insolvency of a brokerage firm or clearing house or other occurrences may disrupt normal trading activity; or
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investors may lose interest in a particular derivative or category of derivatives.
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Management Risk
. If the Adviser incorrectly predicts stock market and interest rate trends, the Fund may lose money by investing in derivatives. For example, if the Fund were to write
a call option based on the Advisers expectation that the price of the underlying security would fall, but the price were to rise instead, the Fund could be required to sell the security upon exercise at a price below the current market price.
Similarly, if the Fund were to write a put option based on the Advisers expectation that the price of the underlying security would rise, but the price were to fall instead, the Fund could be required to purchase the security upon exercise at
a price higher than the current market price.
Pricing Risk.
At times, market conditions might make it hard to value some
investments. For example, if the Fund has valued its securities too highly, you may end up paying too much for Fund shares when you buy into the Fund. If the Fund underestimates its price, you may not receive the full market value for your Fund
shares when you sell.
Margin.
Because of the low margin deposits required upon the opening of a derivative position, such
transactions involve an extremely high degree of leverage. Consequently, a relatively small price movement in a derivative may result in an immediate and substantial loss (as well as gain) to the Fund and it may lose more than it originally invested
in the derivative.
If the price of a futures contract changes adversely, the Fund may have to sell securities at a time when it is disadvantageous to do
so to meet its minimum daily margin requirement. The Fund may lose its margin deposits if a broker with whom it has an open futures contract or related option becomes insolvent or declares bankruptcy.
8
Volatility and Leverage.
The prices of derivatives are volatile (i.e., they may change
rapidly, substantially and unpredictably) and are influenced by a variety of factors, including:
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actual and anticipated changes in interest rates;
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fiscal and monetary policies; and
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national and international political events.
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Most exchanges limit the amount by which the price of a derivative can change during a single trading day. Daily trading limits establish the maximum amount that
the price of a derivative may vary from the settlement price of that derivative at the end of trading on the previous day. Once the price of a derivative reaches this value, the Fund may not trade that derivative at a price beyond that limit. The
daily limit governs only price movements during a given day and does not limit potential gains or losses. Derivative prices have occasionally moved to the daily limit for several consecutive trading days, preventing prompt liquidation of the
derivative.
Because of the low margin deposits required upon the opening of a derivative position, such transactions involve an extremely high degree of
leverage. Consequently, a relatively small price movement in a derivative may result in an immediate and substantial loss (as well as gain) to the Fund and it may lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, the Fund may have to sell securities at a time when it is disadvantageous to do so to meet its minimum daily
margin requirement. The Fund may lose its margin deposits if a broker-dealer with whom it has an open futures contract or related option becomes insolvent or declares bankruptcy.
Tax Risk
. The Fund intends to qualify annually to be treated as a RIC under the IRC. To qualify as a RIC under the IRC, the Fund must invest in assets which produce the types of income
specified in the IRC and the Treasury regulations (Qualifying Income). Whether the income from certain derivatives, swaps, commodity-linked derivatives and other commodity/natural resource-related securities, including income from the
Funds investment in its subsidiary, is Qualifying Income is unclear. If the Fund invests in these types of securities and the income is determined to not be Qualifying Income, it may cause the Fund to fail to qualify as a RIC under the IRC.
See
Taxes
below for additional information related to these restrictions.
Exchange-Traded Funds
(ETFs). ETFs are investment companies or grantor trusts whose shares are bought and sold on a securities exchange. An ETF holds a portfolio of securities designed to track a particular market segment or index. Some
examples of ETFs are SPDRs
®
, streetTRACKS, DIAMONDS
SM
, NASDAQ 100 Index Tracking Stock
SM
(QQQs
SM
), and iShares
®
. The Fund could purchase an ETF to temporarily gain exposure to a portion of the U.S. or foreign market while awaiting an opportunity to purchase securities directly.
The risks of owning an ETF generally reflect the risks of owning the underlying securities they are designed to track, although lack of liquidity in an ETF could result in it being more volatile than the underlying portfolio of securities, and ETFs
have management fees that increase their costs versus the costs of owning the underlying securities directly. See also Investment Company Shares below.
Fixed Income Securities.
Fixed income securities include bonds, notes, debentures and other interest-bearing securities that represent indebtedness. The market value of the fixed
income investments in which the Fund invests will change in response to interest rate changes and other factors. During periods of falling interest rates, the values of outstanding fixed income securities generally rise. Conversely, during periods
of rising interest rates, the values of such securities generally decline. Moreover, while securities with longer maturities tend to produce higher yields, the prices of longer maturity securities are also subject to greater market fluctuations as a
result of changes in interest rates. Changes by recognized agencies in the rating of any fixed income security and in the ability of an issuer to make payments of interest and principal also affect the value of these investments. Changes in the
value of these securities will not necessarily affect cash income derived from these securities but will affect the Funds net asset value.
Investment Company Shares.
The Fund may invest in shares of other investment companies. Such investments are subject to limitations
prescribed by the 1940 Act, the rules thereunder and applicable SEC staff interpretations thereof, or applicable exemptive relief granted by the SEC. These investment companies typically incur fees that are separate from those fees incurred directly
by the Fund. The Funds purchases of such investment company securities results in the layering of expenses, such that shareholders would indirectly bear a proportionate share of the operating expenses of such investment companies, including
advisory fees, in addition to paying the Funds expenses. Under the 1940 Act, unless an exception is available, the Fund is prohibited from acquiring the securities of another investment company if, as a result of such acquisition: (1) the
Fund owns more than 3% of the total voting stock of the other company; (2) securities issued by any one investment company represent more than 5% of the Funds total assets; or (3) securities (other than treasury stock) issued by all
investment companies represent more than 10% of the total assets of the Fund.
For hedging or other purposes, the Fund may invest in investment companies
that seek to track the composition and/or performance of specific indexes or portions of specific indexes. Certain of these investment companies, known as
9
ETFs, are traded on a securities exchange. (See Exchange-Traded Funds above). The market prices of index-based investments will fluctuate in accordance with changes in the underlying
portfolio securities of the investment company and also due to supply and demand of the investment companys shares on the exchange upon which the shares are traded. Index-based investments may not replicate or otherwise match the composition
or performance of their specified index due to transaction costs, among other things. Pursuant to an order issued by the SEC to
iShares
®
Funds and procedures approved by the Board, the Fund may invest in
iShares
®
Funds in excess of the 5% and 10% limits described above, provided that the Fund has described ETF investments in
its prospectus and otherwise complies with the conditions of the SEC, as it may be amended, and any other applicable investment limitations. iShares
®
is a registered trademark of BlackRock, Inc. (BR). Neither BR nor the iShares
®
Funds makes any representations regarding the advisability of investing in the iShares
®
Funds.
Money Market Securities.
Money
market securities include short-term U.S. government securities; custodial receipts evidencing separately traded interest and principal components of securities issued by the U.S. Treasury; commercial paper rated in the highest short-term rating
category by a nationally recognized statistical ratings organization (NRSRO), such as Standard & Poors or Moodys, or determined by the Adviser to be of comparable quality at the time of purchase; short-term bank
obligations (certificates of deposit, time deposits and bankers acceptances) of U.S. commercial banks with assets of at least $1 billion as of the end of their most recent fiscal year; and repurchase agreements involving such securities. Each
of these money market securities are described below. For a description of ratings, see Appendix A Ratings to this SAI.
U.S.
Government Securities.
Examples of types of U.S. government obligations in which the Fund may invest include U.S. Treasury Obligations and the obligations of U.S. government agencies such as Federal Home Loan Banks,
Federal Farm Credit Banks, Federal Land Banks, the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United States, Small Business Administration, Federal National Mortgage Association, Government National
Mortgage Association, General Services Administration, Student Loan Marketing Association, Central Bank for Cooperatives, Freddie Mac (formerly Federal Home Loan Mortgage Corporation), Federal Intermediate Credit Banks, Maritime Administration, and
other similar agencies. Whether backed by the full faith and credit of the U.S. Treasury or not, U.S. government securities are not guaranteed against price movements due to fluctuating interest rates.
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U.S. Treasury Obligations.
U.S. Treasury obligations consist of bills, notes and bonds issued by the U.S. Treasury and separately
traded interest and principal component parts of such obligations that are transferable through the federal book-entry system known as Separately Traded Registered Interest and Principal Securities (STRIPS) and Treasury Receipts
(TRs).
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Receipts.
Interests in separately traded interest and principal component parts of U.S. government obligations that are issued by
banks or brokerage firms and are created by depositing U.S. government obligations into a special account at a custodian bank. The custodian holds the interest and principal payments for the benefit of the registered owners of the certificates or
receipts. The custodian arranges for the issuance of the certificates or receipts evidencing ownership and maintains the register. TRs and STRIPS are interests in accounts sponsored by the U.S. Treasury. Receipts are sold as zero coupon securities.
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U.S. Government Zero Coupon Securities.
STRIPS and receipts are sold as zero coupon securities, that is, fixed income securities
that have been stripped of their unmatured interest coupons. Zero coupon securities are sold at a (usually substantial) discount and redeemed at face value at their maturity date without interim cash payments of interest or principal. The amount of
this discount is accreted over the life of the security, and the accretion constitutes the income earned on the security for both accounting and tax purposes. Because of these features, the market prices of zero coupon securities are generally more
volatile than the market prices of securities that have similar maturity but that pay interest periodically. Zero coupon securities are likely to respond to a greater degree to interest rate changes than are non-zero coupon securities with similar
maturity and credit qualities.
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U.S. Government Agencies.
Some obligations issued or guaranteed by agencies of the U.S. government are supported by the full faith
and credit of the U.S. Treasury, others are supported by the right of the issuer to borrow from the Treasury, while still others are supported only by the credit of the instrumentality. Guarantees of principal by agencies or instrumentalities of the
U.S. government may be a guarantee of payment at the maturity of the obligation, so that in the event of a default prior to maturity, there might not be a market and thus no means of realizing on the obligation prior to maturity. Guarantees as to
the timely payment of principal and interest do not extend to the value or yield of these securities nor to the value of the Funds shares.
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Commercial Paper.
Commercial paper is the term used to designate unsecured short-term promissory notes issued by corporations and other entities. Maturities on these issues vary from a
few to 270 days.
10
Obligations of Domestic Banks, Foreign Banks and Foreign Branches of U.S. Banks.
The
Fund may invest in obligations issued by banks and other savings institutions. Investments in bank obligations include obligations of domestic branches of foreign banks and foreign branches of domestic banks. Such investments in domestic branches of
foreign banks and foreign branches of domestic banks may involve risks that are different from investments in securities of domestic branches of U.S. banks. These risks may include future unfavorable political and economic developments, possible
withholding taxes on interest income, seizure or nationalization of foreign deposits, currency controls, interest limitations, or other governmental restrictions which might affect the payment of principal or interest on the securities held by the
Fund. Additionally, these institutions may be subject to less stringent reserve requirements and to different accounting, auditing, reporting and recordkeeping requirements than those applicable to domestic branches of U.S. banks. Bank obligations
include the following:
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Bankers Acceptances.
Bankers acceptances are bills of exchange or time drafts drawn on and accepted by a commercial
bank. Corporations use bankers acceptances to finance the shipment and storage of goods and to furnish dollar exchange. Maturities are generally six months or less.
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Certificates of Deposit.
Certificates of deposit are interest-bearing instruments with a specific maturity. They are issued by
banks and savings and loan institutions in exchange for the deposit of funds and normally can be traded in the secondary market prior to maturity. Certificates of deposit with penalties for early withdrawal will be considered illiquid.
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Time Deposits.
Time deposits are non-negotiable receipts issued by a bank in exchange for the deposit of funds. Like a certificate
of deposit, it earns a specified rate of interest over a definite period of time; however, it cannot be traded in the secondary market. Time deposits with a withdrawal penalty or that mature in more than seven days are considered to be illiquid
securities.
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Repurchase Agreements.
The Fund may enter into repurchase agreements with financial
institutions. The Fund follows certain procedures designed to minimize the risks inherent in such agreements. These procedures include effecting repurchase transactions only with creditworthy financial institutions whose condition will be
continually monitored by the Adviser. The repurchase agreements entered into by the Fund will provide that the underlying collateral at all times shall have a value at least equal to 102% of the resale price stated in the agreement (the Adviser
monitors compliance with this requirement). Under all repurchase agreements entered into by the Fund, the custodian or its agent must take possession of the underlying collateral. In the event of a default or bankruptcy by a selling financial
institution, the Fund will seek to liquidate such collateral. However, the exercising of the Funds right to liquidate such collateral could involve certain costs or delays and, to the extent that proceeds from any sale upon a default of the
obligation to repurchase were less than the repurchase price, the Fund could suffer a loss. It is the current policy of the Fund, not to invest in repurchase agreements that do not mature within seven days if any such investment, together with any
other illiquid assets held by the Fund, amounts to more than 15% of the Funds total assets. The investments of the Fund in repurchase agreements, at times, may be substantial when, in the view of the Adviser, liquidity or other considerations
so warrant.
Securities Lending.
The Fund may lend portfolio securities to brokers, dealers and other financial
organizations that meet capital and other credit requirements or other criteria established by the Funds Board of Trustees. These loans, if and when made, may not exceed 33 1/3% of the total asset value of the Fund (including the loan
collateral). The Fund will not lend portfolio securities to its investment adviser or affiliates unless they have applied for and received specific authority to do so from the SEC. Loans of portfolio securities will be fully collateralized by cash,
letters of credit or U.S. government securities, and the collateral will be maintained in an amount equal to at least 100% of the current market value of the loaned securities by marking to market daily. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for the account of the Fund.
The Fund may pay a part of the interest earned from
the investment of collateral, or other fee, to an unaffiliated third party for acting as the Funds securities lending agent.
By lending its
securities, the Fund may increase its income by receiving payments from the borrower that reflect the amount of any interest or any dividends payable on the loaned securities as well as by either investing cash collateral received from the borrower
in short-term instruments or obtaining a fee from the borrower when U.S. government securities or letters of credit are used as collateral. The Fund will adhere to the following conditions whenever its portfolio securities are loaned: (i) the
Fund must receive at least 100% cash collateral or equivalent securities of the type discussed in the preceding paragraph from the borrower; (ii) the borrower must increase such collateral whenever the market value of the securities rises above
the level of such collateral; (iii) the Fund must be able to terminate the loan on demand; (iv) the Fund must receive reasonable interest on the loan, as well as any dividends, interest or other distributions on the loaned securities and
any increase in market value; (v) the Fund may pay only reasonable fees in
11
connection with the loan (which fees may include fees payable to the lending agent, the borrower, the Funds administrator and the custodian); and (vi) voting rights on the loaned
securities may pass to the borrower, provided, however, that if a material event adversely affecting the investment occurs, the Fund must terminate the loan and regain the right to vote the securities. The Board has adopted procedures reasonably
designed to ensure that the foregoing criteria will be met. Loan agreements involve certain risks in the event of default or insolvency of the borrower, including possible delays or restrictions upon the Funds ability to recover the loaned
securities or dispose of the collateral for the loan, which could give rise to loss because of adverse market action, expenses and/or delays in connection with the disposition of the underlying securities.
Illiquid Securities.
Illiquid securities are securities that cannot be sold or disposed of in the ordinary course of business (within
seven days) at approximately the prices at which they are valued. Because of their illiquid nature, illiquid securities must be priced at fair value as determined in good faith pursuant to procedures approved by the Trusts Board of Trustees.
Despite such good faith efforts to determine fair value prices, the Funds illiquid securities are subject to the risk that the securitys fair value price may differ from the actual price which the Fund may ultimately realize upon their
sale or disposition. Difficulty in selling illiquid securities may result in a loss or may be costly to the Fund. Under the supervision of the Trusts Board of Trustees, the Adviser determines the liquidity of the Funds investments. In
determining the liquidity of the Funds investments, the Adviser may consider various factors, including (1) the frequency and volume of trades and quotations, (2) the number of dealers and prospective purchasers in the marketplace,
(3) dealer undertakings to make a market, and (4) the nature of the security and the market in which it trades (including any demand, put or tender features, the mechanics and other requirements for transfer, any letters of credit or other
credit enhancement features, any ratings, the number of holders, the method of soliciting offers, the time required to dispose of the security, and the ability to assign or offset the rights and obligations of the security). The Fund will not invest
more than 15% of its net assets in illiquid securities.
Restricted Securities
. Restricted securities are securities that
may not be sold freely to the public absent registration under the Securities Act of 1933, as amended (1933 Act) or an exemption from registration. As consistent with the Funds investment objectives, the Fund may invest in
Section 4(2) commercial paper. Section 4(2) commercial paper is issued in reliance on an exemption from registration under Section 4(2) of the Act and is generally sold to institutional investors who purchase for investment. Any
resale of such commercial paper must be in an exempt transaction, usually to an institutional investor through the issuer or investment dealers who make a market in such commercial paper. The Trust believes that Section 4(2) commercial paper is
liquid to the extent it meets the criteria established by the Board of Trustees of the Trust. The Trust intends to treat such commercial paper as liquid and not subject to the investment limitations applicable to illiquid securities or restricted
securities.
Short Sales.
As consistent with the Funds investment objectives, the Fund may engage in short sales that
are either uncovered or against the box. A short sale is against the box if at all times during which the short position is open, the Fund owns at least an equal amount of the securities or securities convertible
into, or exchangeable without further consideration for, securities of the same issue as the securities that are sold short. A short sale against the box is a taxable transaction to the Fund with respect to the securities that are sold short.
Uncovered short sales are transactions under which the Fund sells a security it does not own. To complete such a transaction, the Fund must borrow the
security to make delivery to the buyer. The Fund then is obligated to replace the security borrowed by purchasing the security at the market price at the time of the replacement. The price at such time may be more or less than the price at which the
security was sold by the Fund. Until the security is replaced, the Fund is required to pay the lender amounts equal to any dividends or interest that accrue during the period of the loan. To borrow the security, the Fund also may be required to pay
a premium, which would increase the cost of the security sold. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet margin requirements, until the short position is closed out.
Until the Fund closes its short position or replaces the borrowed security, the Fund will: (a) maintain a segregated account containing cash or liquid
securities at such a level that (i) the amount deposited in the account plus the amount deposited with the broker as collateral will equal the current value of the security sold short; and (ii) the amount deposited in the segregated
account plus the amount deposited with the broker as collateral will not be less than the market value of the security at the time the security was sold short, or (b) otherwise cover the Funds short position.
12
INVESTMENT LIMITATIONS
The following investment limitations are in addition to
those described in the Prospectus. These investment limitations are fundamental and may be changed with respect to the Fund only with the approval of the holders of a majority of the Funds outstanding voting securities
as defined in the 1940 Act. Except with respect to the asset coverage requirement under Section 18(f)(1) of the 1940 Act with respect to borrowing, if a percentage limitation is adhered to at the time of investment, a later increase or decrease
in percentage resulting from a change in value of portfolio securities or amount of net assets will not be considered a violation of the investment limitation. In the case of borrowing, however, the Fund will promptly take action to reduce the
amount of the Funds borrowings outstanding if, because of changes in the net asset value of the Fund due to market action, the amount of such borrowings exceeds one-third of the value of the Funds net assets.
The Fund will not:
1.
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Invest 25% or more of the value of the Funds total assets in the securities of one or more issuers conducting their principal business activities in the same industry or
group of industries. This limit does not apply to securities issued or guaranteed by the U.S. government, its agencies or instrumentalities.
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Borrow money or issue senior securities (as defined under the 1940 Act), except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption
therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
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Make loans, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be
amended or interpreted from time to time.
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4.
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Purchase or sell commodities or real estate, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute,
rules or regulations may be amended or interpreted from time to time.
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5.
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Underwrite securities issued by other persons, except to the extent permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such
statute, rules or regulations may be amended or interpreted from time to time.
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When engaging in options, futures and forward currency
contract strategies, the Fund will either: (1) earmark or set aside cash or liquid securities in a segregated account with the custodian in the prescribed amount; or (2) hold securities or other options or futures contracts whose values
are expected to offset (cover) its obligations thereunder. Securities, currencies or other options or futures contracts used for cover cannot be sold or closed out while the strategy is outstanding, unless they are replaced with similar
assets.
THE ADVISER
General.
Equinox Fund
Management, LLC (the Adviser), is a Delaware limited liability company, formed in 2003 as a commodity pool operator and registered with the SEC as a registered investment adviser in 2007. The Advisers principal place of business is
located at 1775 Sherman Street, Suite 2500 Denver, CO 80203. The Adviser may be deemed to be controlled by Plimpton Capital, LLC through such entitys ownership interest in the Adviser. The Adviser manages and supervises the investment of the
Funds assets on a discretionary basis. As of December 31, 2012, the Adviser had approximately $1.365 billion in assets under management.
Advisory Agreement with the Trust.
The Trust and the Adviser have entered into an investment advisory agreement with respect to the
Fund (the Advisory Agreement). Under the Advisory Agreement, the Adviser serves as the investment adviser and makes the investment decisions for the Fund and continuously reviews, supervises and administers the Funds investment
program, subject to the supervision of, and policies established by, the Trustees of the Trust. After its initial two-year term, the continuance of the Advisory Agreement must be specifically approved at least annually (i) by the vote of the
Trustees or by a vote of the shareholders of the Fund and (ii) by the vote of a majority of the Trustees who are not parties to the Advisory Agreement or interested persons of any party thereto, cast in person at a meeting called
for the purpose of voting on such approval. The Advisory Agreement will terminate automatically in the event of its assignment, and is terminable at any time without penalty by the Trustees of the Trust or, with respect to the Fund, by a majority of
the outstanding shares of the Fund, on not less than 60 days written notice to the Adviser,
13
or by the Adviser on 60 days written notice to the Trust. The Advisory Agreement provides that the Adviser shall not be protected against any liability to the Trust or its shareholders by reason
of willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard of its obligations or duties thereunder.
Advisory Fees Paid to the Adviser.
For its services, the Adviser is entitled to an investment advisory fee, which is calculated daily and paid monthly, at an annual rate of 0.75% of
the Funds average daily net assets. The Adviser has contractually agreed that from commencement of the Funds operations through January 31, 2014, it will reduce its compensation and/or reimburse certain expenses for the Fund, to the
extent necessary to ensure that the Funds total operating expenses, excluding taxes, any class-specific fees and expenses (such as Rule 12b-1 distribution fees, shareholder service fees, or transfer agency fees), interest, extraordinary items,
Acquired Fund fees and expenses and brokerage commissions, do not exceed, on an annual basis, 1.10% of the Funds average daily net assets. The Adviser shall be entitled to recover, subject to approval by the Board of Trustees of
the Trust, such waived or reimbursed amounts for a period of up to three (3) years from the year in which the Adviser reduced its compensation and/or assumed expenses for the Fund.
PORTFOLIO MANAGERS
This section supplements the information about Richard Bornhoft, Brian Bell, Ajay Dravid and Rufus Rankin, the Funds portfolio management team, provided in
the Prospectus under the heading Portfolio Managers, and includes information about other accounts managed, the dollar range of Fund shares owned and compensation., the Funds portfolio managers, provided in the Prospectus under the
heading Portfolio Managers, and includes information about other accounts managed, the dollar range of Fund shares owned and compensation.
Compensation (as of September 30, 2012).
Mr. Bornhoft is the controlling principal of The Bornhoft Group Corporation, an
owner of the Adviser. Mr. Bell is also a principal of The Bornhoft Group Corporation. Mr. Bornhoft and Mr. Bell are compensated through their indirect ownership stake in the Adviser. Mr. Bornhoft, Mr. Bell, Dr. Dravid
and Mr. Rankin are each paid a fixed salary and discretionary bonus by the Adviser, which is contingent upon the overall performance of the Adviser and each individuals contribution to the Advisers performance, and is not directly
contingent upon the performance of the Fund.
Fund Shares Owned by the Portfolio Managers.
None of Mr. Bornhoft,
Mr. Bell, Dr. Dravid or Mr. Rankin own shares of the Fund as of the date of this SAI.
Other Accounts.
In
addition to the Fund, Mr. Bornhoft, Mr. Bell, Dr. Dravid and Mr. Rankin are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of September 30, 2012.
Richard Bornhoft
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Account Type
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Number of
Accounts by
Account Type
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Total Assets By
Account Type
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Number of
Accounts by Type
Subject to a
Performance Fee
|
|
|
Total Assets By
Account Type
Subject to a
Performance Fee
|
|
Registered Investment Companies
|
|
|
11
|
|
|
$
|
930,735,000
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Other Pooled Investment Vehicles
|
|
|
4
|
|
|
$
|
582,878,000
|
|
|
|
4
|
|
|
$
|
582,878,000
|
|
Other Accounts
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Brian Bell
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account Type
|
|
Number of
Accounts by
Account Type
|
|
|
Total Assets By
Account Type
|
|
|
Number of
Accounts by Type
Subject to a
Performance Fee
|
|
|
Total Assets By
Account Type
Subject to a
Performance Fee
|
|
Registered Investment Companies
|
|
|
11
|
|
|
$
|
930,735,000
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Other Pooled Investment Vehicles
|
|
|
4
|
|
|
$
|
582,878,000
|
|
|
|
4
|
|
|
$
|
582,878,000
|
|
Other Accounts
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
14
Ajay Dravid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account Type
|
|
Number of
Accounts by
Account Type
|
|
|
Total Assets By
Account Type
|
|
|
Number of
Accounts by Type
Subject to a
Performance Fee
|
|
|
Total Assets By
Account Type
Subject to a
Performance Fee
|
|
Registered Investment Companies
|
|
|
11
|
|
|
$
|
930,735,049
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Other Pooled Investment Vehicles
|
|
|
1
|
|
|
$
|
345,925,403
|
|
|
|
N/A
|
|
|
$
|
345,925,403
|
|
Other Accounts
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Rufus Rankin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account Type
|
|
Number of
Accounts by
Account Type
|
|
|
Total Assets By
Account Type
|
|
|
Number of
Accounts by Type
Subject to a
Performance Fee
|
|
|
Total Assets By
Account Type
Subject to a
Performance Fee
|
|
Registered Investment Companies
|
|
|
11
|
|
|
$
|
930,735,049
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Other Pooled Investment Vehicles
|
|
|
1
|
|
|
$
|
345,925,403
|
|
|
|
N/A
|
|
|
$
|
345,925,403
|
|
Other Accounts
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Conflicts of Interests (as of September 30, 2012).
The portfolio managers management of
other accounts may give rise to potential conflicts of interest in connection with their management of the Funds investments, on the one hand, and the investments of the other accounts referenced above, on the other. The other
accounts may have the same investment objective as the Fund. Therefore, a potential conflict of interest may arise as a result of the identical investment objectives, whereby the portfolio managers could favor one account over another. Another
potential conflict could include the portfolio managers knowledge about the size, timing and possible market impact of the Funds trade, whereby the portfolio managers could use this information to the advantage of other accounts and to
the disadvantage of the Fund. However, the Adviser has established policies and procedures to ensure that the purchase and sale of securities among all accounts it manages are fairly and equitably allocated.
Proxy Voting Policies.
The Board has adopted Proxy Voting Policies and Procedures (Policies) on behalf of the Trust, which
delegate the responsibility for voting proxies of securities held by the Fund to the Adviser, subject to the Boards continuing oversight. The Policies require that the Adviser vote proxies received in a manner consistent with the best
interests of the Fund and its shareholders. The Policies also require the Adviser to present to the Board, at least annually, the Advisers Proxy Policies and a record of each proxy voted by the Adviser on behalf of the Fund, including a report
on the resolution of all proxies identified by the Adviser as involving a conflict of interest. A copy of the Advisers Proxy Voting Policies is attached hereto as Appendix B.
More information.
Information regarding how the Fund voted proxies relating to portfolio securities held by the Fund during the most recent 12-month period ending June 30th will
be available (1) without charge, upon request, by calling the Fund at 1-888-643-3431; and (2) on the SECs website at http://www.sec.gov. In addition, a copy of the Funds proxy voting policies and procedures are also available
by calling 1-888-643-3431; and will be sent within three business days of receipt of a request, or by visiting the Funds website at www.EquinoxFundManagement.com.
THE DISTRIBUTOR
Northern Lights Distributors, LLC, located at 17605 Wright Street, Omaha, NE 68130 (the Distributor) serves as the principal underwriter and national distributor for the shares of the Fund pursuant to
an Underwriting Agreement with the Trust (the Underwriting Agreement). The Distributor is registered as a broker-dealer under the Securities Exchange Act of 1934 and each states securities laws and is a member of the Financial
Industry Regulatory Authority, Inc. (FINRA). The offering of the Funds shares is continuous. The Underwriting Agreement provides that the Distributor, as agent in connection with the distribution of Fund shares, will use its best
efforts to distribute the Funds shares.
The Underwriting Agreement provides that, unless sooner terminated, it will continue in effect for two
years initially and thereafter shall continue from year to year, subject to annual approval by (a) the Board or a vote of a majority of the outstanding shares, and (b) by a majority of the Trustees who are not interested persons of the
Trust or of the Distributor by vote cast in person at a meeting called for the purpose of voting on such approval.
15
The Underwriting Agreement may be terminated by the Fund at any time, without the payment of any penalty, by vote of a
majority of the entire Board of the Trust or by vote of a majority of the outstanding shares of the Fund on 60 days written notice to the Distributor, or by the Distributor at any time, without the payment of any penalty, on 60 days written notice
to the Fund. The Underwriting Agreement will automatically terminate in the event of its assignment.
The Distributor may enter into selling agreements
with broker-dealers that solicit orders for the sale of shares of the Fund and may allow concessions to dealers that sell shares of the Fund. If a class of the Fund charges a sales charge, the Distributor receives the portion of the sales charge on
all direct initial investments in the Fund and on all investments in accounts with no designed dealer of record. If a class of the Fund has a contingent deferred sales charge, the Distributor retains the contingent deferred sales charge on
redemptions of shares of the Fund that are subject to a contingent deferred sales charge. The Distributor will be compensated for distribution services according to the Rule 12b-1 Plan (defined below) applicable to a specific class regardless of the
Distributors expenses. If such compensation exceeds the Distributors expenses, the Distributor may realize a profit from these arrangements.
Rule 12b-1 Plan and Agreement
.
The Trust has adopted a distribution plan and related agreement pursuant to Rule 12b-1 under the
1940 Act with respect to Class A shares and Class P shares of the Fund (the Rule 12b-1 Plan) pursuant to which the Fund is authorized to pay fees to the Distributor for providing distribution and other services to the Fund with
respect its Class A shares and Class P shares such as public relations services, telephone services, sales presentations, media charges, preparation, printing and mailing advertising and sales literature, data processing necessary to support a
distribution effort and printing and mailing of prospectuses to prospective shareholders. Additionally, the Distributor may pay certain financial institutions such as banks or broker-dealers who have entered into servicing agreements with the
Distributor and other financial institutions for distribution and shareholder servicing activities.
With respect to Class A shares, the Rule 12b-1
Plan allows for the payment of a distribution fee of up to 0.25% of average daily net assets of the Class A shares of the Fund to pay for distribution activities and expenses primarily intended to result in the sale of Class A shares.
With respect to Class P shares, the Rule 12b-1 Plan allows for the payment of a distribution fee of up to 0.25% of average daily net assets of the Class
P shares of the Fund to pay for distribution activities and expenses primarily intended to result in the sale of Class P shares. Currently, the Fund is not making payments under the Rule 12b-1 Plan with respect to Class P shares.
Under the Rule 12b-1 Plan, if any payments made by the Adviser out of its advisory fee, not to exceed the amount of that fee, to any third parties (including
banks), including payments for shareholder servicing and transfer agent functions, were deemed to be indirect financing by the Fund of the distribution of its Class A shares, such payments are authorized. The Fund may execute portfolio
transactions with and purchase securities issued by depository institutions that receive payments under the Rule 12b-1 Plan. No preference for instruments issued by such depository institutions is shown in the selection of investments.
Dealer Reallowances.
Class A shares of the Fund are sold subject to a front-end sales charge as described in the prospectus.
Selling dealers are normally reallowed a portion of the sales charge by the Distributor. The following table shows the amount of the front-end sales charge that is reallowed to dealers as a percentage of the offering price of Class A shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Invested
|
|
Sales Charge as a %
of Offering Price
|
|
|
Sales Charge as a %
of Amount Invested
|
|
|
Dealer Reallowance
|
|
Under $25,000
|
|
|
5.75
|
%
|
|
|
6.10
|
%
|
|
|
5.00
|
%
|
$25,000 to $49,999
|
|
|
5.00
|
%
|
|
|
5.26
|
%
|
|
|
4.25
|
%
|
$50,000 to $99,999
|
|
|
4.75
|
%
|
|
|
4.99
|
%
|
|
|
4.00
|
%
|
$100,000 to $249,999
|
|
|
3.75
|
%
|
|
|
3.90
|
%
|
|
|
3.25
|
%
|
$250,000 to $499,999
|
|
|
2.50
|
%
|
|
|
2.56
|
%
|
|
|
2.00
|
%
|
$500,000 to $999,999
|
|
|
2.00
|
%
|
|
|
2.04
|
%
|
|
|
1.75
|
%
|
$1,000,000 and above
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
See Below
|
|
Northern Lights Distributors, LLC is the Funds distributor. Authorized dealers may receive commissions on purchases of
Class A shares over $1 million calculated as follows: For sales of $1 million or more, payments may be made to those broker-dealers having at least $1 million of assets invested in the Fund, a fee of up to 1% of the offering price of such
shares up to $2.5 million, 0.5% of the offering price from $2.5 million to $5 million, and 0.25% of the offering price over $5 million. The commission rate is determined based on the purchase amount combined with the current market value of existing
investments in Class A shares.
16
Shareholder Services Fees
The Fund may enter into shareholder services arrangements with broker-dealers, banks, trust companies, and other financial services firms under which such firms agree to provide certain support services to
Class A and Class P shareholders for a fee of up to 0.25% of the Funds average daily net assets attributable to Class A shares and Class P shares, respectively.
PAYMENTS TO FINANCIAL INTERMEDIARIES
The Adviser and/or its affiliates, at their discretion, may make payments from their own resources and not from Fund assets to affiliated or unaffiliated brokers,
dealers, banks (including bank trust departments), trust companies, registered investment advisers, financial planners, retirement plan administrators, insurance companies, and any other institution having a service, administration, or any similar
arrangement with the Fund, its service providers or their respective affiliates, as incentives to help market and promote the Fund and/or in recognition of their distribution, marketing, administrative services, and/or processing support.
These additional payments may be made to financial intermediaries that sell Fund shares or provide services to the Fund, the Distributor or shareholders
of the Fund through the financial intermediarys retail distribution channel and/or fund supermarkets. Payments may also be made through the financial intermediarys retirement, qualified tuition, fee-based advisory, wrap fee bank trust,
or insurance (e.g., individual or group annuity) programs. These payments may include, but are not limited to, placing the Fund in a financial intermediarys retail distribution channel or on a preferred or recommended fund list; providing
business or shareholder financial planning assistance; educating financial intermediary personnel about the Fund; providing access to sales and management representatives of the financial intermediary; promoting sales of Fund shares; providing
marketing and educational support; maintaining share balances and/or for sub-accounting, administrative or shareholder transaction processing services. A financial intermediary may perform the services itself or may arrange with a third party to
perform the services.
The Adviser and/or its affiliates may also make payments from their own resources to financial intermediaries for costs associated
with the purchase of products or services used in connection with sales and marketing, participation in and/or presentation at conferences or seminars, sales or training programs, client and investor entertainment and other sponsored events. The
costs and expenses associated with these efforts may include travel, lodging, sponsorship at educational seminars and conferences, entertainment and meals to the extent permitted by law.
Revenue sharing payments may be negotiated based on a variety of factors, including the level of sales, the amount of Fund assets attributable to investments in the Fund by financial intermediaries customers,
a flat fee or other measures as determined from time to time by the Adviser and/or its affiliates. A significant purpose of these payments is to increase the sales of Fund shares, which in turn may benefit the Adviser through increased fees as Fund
assets grow.
THE ADMINISTRATOR
The Administrator for the Fund is Gemini Fund Services,
LLC, (GFS), which has its principal office at 450 Wireless Blvd., Hauppauge, New York 11788, and is primarily in the business of providing administrative, fund accounting and transfer agent services to retail and institutional mutual
funds. GFS is an affiliate of the Distributor.
Pursuant to the Fund Services Agreement with the Trust, GFS provides administrative services to the Fund,
subject to the supervision of the Board. GFS may provide persons to serve as officers of the Fund. Such officers may be directors, officers or employees of the Administrator or its affiliates.
The Fund Services Agreement was initially approved by the Board at a meeting held on December 20, 2010. The Agreement shall remain in effect for two years from the effective date of the Fund, and subject to
annual approval of the Board for one-year periods thereafter. The Fund Services Agreement is terminable at the end of the initial term or subsequent renewal period by the Board or GFS on ninety days written notice. The Fund Services Agreement
provides that, in the absence of GFS lack of good faith, negligence, willful misconduct or reckless disregard of its duties with respect to GFSs performance under or in connection with this Agreement, GFS shall be without liability for
any action taken or omitted pursuant to this Agreement.
Under the Fund Services Agreement, the GFS provides facilitating administrative services,
including: (i) providing services of persons competent to perform such administrative and clerical functions as are necessary to provide effective
17
administration of the Fund; (ii) facilitating the performance of administrative and professional services to the Fund by others, including the Funds Custodian; (iii) preparing,
but not paying for, the periodic updating of the Funds Registration Statement, Prospectuses and Statement of Additional Information in conjunction with Fund counsel, including the printing of such documents for the purpose of filings with the
SEC and state securities administrators, and preparing reports to the Funds shareholders and the SEC; (iv) preparing in conjunction with Fund counsel, but not paying for, all filings under the securities or Blue Sky laws of
such states or countries as are designated by the Distributor, which may be required to register or qualify, or continue the registration or qualification, of the Fund and/or its shares under such laws; (v) preparing notices and agendas for
meetings of the Board and minutes of such meetings in all matters required by the 1940 Act to be acted upon by the Board; and (vi) monitoring daily and periodic compliance with respect to all requirements and restrictions of the 1940 Act, the
IRC and the Prospectus.
For the services rendered to the Fund by GFS, the Fund pays GFS an asset based fee for fund administration services. The Fund
also pays GFS for any out-of-pocket expenses.
FUND ACCOUNTING
GFS pursuant to the Fund Services Agreement, provides the
Fund with accounting services, including: (i) daily computation of net asset value; (ii) maintenance of security ledgers and books and records as required by the 1940 Act; (iii) production of the Funds listing of portfolio
securities and general ledger reports; (iv) reconciliation of accounting records; (v) calculation of yield and total return for the Fund; (vi) maintaining certain books and records described in Rule 31a-1 under the 1940 Act, and
reconciling account information and balances among the Funds custodian or Adviser; and (vii) monitoring and evaluating daily income and expense accruals, and sales and redemptions of shares of the Fund.
For the services rendered to the Fund by GFS, the Fund pays GFS an asset based fee for fund accounting services. The Fund also pays GFS for any out-of-pocket
expenses.
TRANSFER AGENT
GFS, 17605 Wright Street, Suite 2, Omaha, NE 68130, acts
as transfer, dividend disbursing, and shareholder servicing agent for the Fund pursuant to a written agreement with the Fund. Under the agreement, GFS is responsible for administering and performing transfer agent functions, dividend distribution,
shareholder administration, and maintaining necessary records in accordance with applicable rules and regulations.
THE
CUSTODIAN
Union Bank, N.A., 350 California
Street, 6th Floor, San Francisco, CA 94104, acts as custodian (the Custodian) of the Fund. The Custodian holds cash, securities and other assets of the Fund as required by the 1940 Act.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
McGladrey LLP, located at 555 Seventeenth Street, Suite
1000, Denver, Colorado 80202, serves as independent registered public accounting firm for the Fund. McGladrey LLP performs annual audits of the Funds financial statements and provides other audit, tax and related services for the Fund.
LEGAL COUNSEL
Pepper Hamilton LLP, 3000 Two Logan Square 18th &
Arch Streets, Philadelphia, PA 19103-2799, serves as the Trusts legal counsel.
18
COMPLIANCE SERVICES
Northern Lights Compliance Services, LLC
(NLCS), an affiliate of GFS and the Distributor, provides a Chief Compliance Officer to the Trust as well as related compliance services pursuant to a consulting agreement between NLCS and the Trust. The Fund pays a compliance service
fee to NLCS.
TRUSTEES AND OFFICERS OF THE TRUST
The following tables present certain information regarding
the Board of Trustees and officers of the Trust. Each person listed under Interested Trustees below is an interested person of the Trust, the Adviser, or the Distributor, within the meaning of the 1940 Act. Each person who is
not an interested person of the Trust, the Adviser or the Distributor within the meaning of the 1940 Act is referred to as an Independent Trustee and is listed under such heading below. Unless otherwise noted, the address of
each Trustee and Officer is P.O. Box 541150, Omaha, Nebraska 68154-1150.
|
|
|
|
|
|
|
|
|
|
|
Name, Address and Age
|
|
Position(s)
Held/Term
of Office*
|
|
Principal Occupation
During the Past Five Years
|
|
Number
of
Portfolios in Fund
Complex**
Overseen by
Trustee
|
|
|
Other Directorships*** held by
Trustee During Last 5 Years
|
|
|
|
|
Independent Trustees
|
|
|
|
|
|
|
|
|
David P. Demuth
Date of Birth: 9/1945
|
|
Trustee
Since
December
2010
|
|
Consultant, CFO Consulting
Partners, LLC from May
2006 to present.
|
|
|
14
|
|
|
None
|
Kevin R. Green
Date of Birth: 7/1954
|
|
Trustee
Since
December
2010
|
|
Founding Managing
Director, TripleTree, LLC
(investment banking
consulting firm) from 1997
to present.
|
|
|
14
|
|
|
Director of BlueCross BlueShield of Minnesota (healthcare services).
|
Jay Moorin
Date of Birth: 7/1951
|
|
Trustee
Since
December
2010
|
|
Managing Partner,
ProQuest Management,
LLC from September 1998
to present.
|
|
|
14
|
|
|
Director of Novacea Inc. (pharmaceutical company; now Transcept Pharmaceuticals, Inc.) from May 2006 to October 2008.
|
|
|
|
|
Interested Trustee
|
|
|
|
|
|
|
|
|
Robert J. Enck
Date of Birth: 9/1962
|
|
Chairman,
Trustee,
President and
Principal
Executive
Officer
Since
December
2010
|
|
President and Chief
Executive Officer, Equinox
Fund Management, LLC
from March 2007 to
present; and Sr. Managing
Director, The
Hermes
Group, LLC from July 2004
to March 2007.
|
|
|
14
|
|
|
Executive Committee Member of The Frontier Fund (commodity pool).
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
Name, Address and Age
|
|
Position(s)
Held/Term
of
Office*
|
|
Principal Occupation
During the Past Five Years
|
|
Number
of
Portfolios in Fund
Complex**
Overseen by
Trustee
|
|
|
Other Directorships*** held by
Trustee During Last 5 Years
|
|
|
|
|
|
Executive Officers
|
|
|
|
|
|
|
|
|
|
|
Vance J. Sanders
Date of Birth: 3/1967
|
|
Treasurer and Principal Financial Officer
Since December 2010
|
|
Controller and Chief Technology Officer, Equinox Fund Management (since 2008); Consultant, Ajilon Consulting (2007); Senior Manager/Consultant,
K-Financial (2005 2007).
|
|
|
N/A
|
|
|
|
N/A
|
|
Philip Liu
Date of Birth: 3/1973
|
|
Secretary
Since December 2010
|
|
General Counsel, Equinox Fund Management, LLC (since 2009); Sr. Vice President, HSBC Bank USA, N.A. from (2007 2009); Attorney-at-Law,
Cadwalader LLP from (2006 2007); Attorney-at-Law, Shearman & Sterling LLP (2001 2006).
|
|
|
N/A
|
|
|
|
N/A
|
|
Kevin E. Wolf
Date of Birth: 11/1969
|
|
Assistant Treasurer
Since December 2010
|
|
Director of Fund Administration, Gemini Fund Services, LLC (since 2006); Vice President, Fund Administration, Gemini Fund Services, LLC (2004
2006); Vice-President, GemCom, LLC (since 2004).
|
|
|
N/A
|
|
|
|
N/A
|
|
James P. Ash
Date of Birth: 9/1976
|
|
Assistant Secretary Since December 2010
|
|
Director of Legal Administration, Gemini Fund Services, LLC (since 2009); Assistant Vice President of Legal Administration, Gemini Fund Services, LLC
(2006 2008).
|
|
|
N/A
|
|
|
|
N/A
|
|
Emile R. Molineaux
Date of Birth: 9/1962
|
|
Chief Compliance Officer and Anti-Money Laundering Officer Since December 2010
|
|
General Counsel, CCO and Senior Vice President, Gemini Fund Services, LLC; Secretary and CCO, Northern Lights Compliance Services, LLC; (since
2003).
|
|
|
N/A
|
|
|
|
N/A
|
|
*
|
Each Trustee and Officer shall serve until death, resignation or removal.
|
**
|
The term Fund Complex refers to the Equinox Funds Trust.
|
***
|
Directorships are held in a company with a class of securities registered pursuant to section 12 of the Securities Exchange Act or subject to the requirements of section 15(d) of
the Securities Exchange Act or a company registered as an investment company under the 1940 Act.
|
20
As of the date of this SAI, none of the Independent Trustees or any of their immediate family members (i.e., spouse
or dependent children) serves as an officer or trustee or is an employee of the Trust, the Adviser or the Distributor, or of any of their respective affiliates. Nor do any of such persons serve as an officer or director or is an employee of any
company controlled by or under common control with such entities.
Leadership Structure and Responsibilities of the Board and Its
Committees.
Under Delaware law, the Trusts Board of Trustees is responsible for establishing the Funds policies and for overseeing
the management of the Fund. The Board also elects the Trusts officers who conduct the daily business of the Fund.
Currently the Board is comprised
of four individuals, one of whom is considered an interested person of the Trust as defined by the 1940 Act. The remaining Trustees are Independent Trustees.
The Board has adopted a Statement of Policy on the Qualifications for Selection as Chairman of the Board that sets forth the following required skills of a Chairman in addition to the basic qualifications for all
members of the Board: (i) the ability to exercise leadership among the Trustees; (ii) the ability to chair Board meetings in an evenhanded and open manner; (iii) the ability to communicate effectively with the Funds
shareholders, service providers, regulatory agencies, the press and other relevant parties; (iv) the ability to represent the Funds interests effectively in all dealings with the Funds adviser and other service providers; and
(v) the ability to evaluate and prioritize issues for consideration by the Board. Independent Trustees exercise their informed business judgment to appoint an individual of their choosing to serve as Chairman, regardless of whether the Trustee
happens to be independent or a member of management.
Mr. Enck, an interested person (as such term is defined in the 1940 Act) currently
serves as the Chairman of the Board. The Trustees have determined that Mr. Enck satisfies the principles set forth in the statement of policy and that Mr. Encks service as Chairman is appropriate and benefits shareholders due to his
personal and professional stake in the quality of services provided to the Fund. The Independent Trustees have determined that they can act independently and effectively without having an Independent Trustee serve as Chairman. Nonetheless, as
currently composed, the Independent Trustees constitute a substantial majority of the Board.
Each Trustee was appointed to serve on the Board because of
his experience, qualifications, attributes and/or skills as set forth in the subsection Trustee Qualifications, below. Based on a review of the Board and its function, the Trustees have determined that the leadership structure of the
Board is appropriate and that the Boards role in the risk oversight of the Trust, a discussed below, allows the Board to effectively administer its oversight function. Currently, the Board has an Audit Committee and a Nominating and Governance
Committee. The responsibilities of each committee and its members are described below.
The Audit Committee is comprised of Messrs. DeMuth, Green and
Moorin, each an Independent Trustee. Mr. DeMuth serves as the chairman of the Committee. Pursuant to its charter, the Audit Committee has the responsibility, among other things, to: (1) approve in advance the appointment, compensation and
oversight of the Trusts independent registered public accounting firm; (2) review and approve the scope of the independent registered public accounting firms audit activity; (3) review the financial statements which are the
subject of the independent registered public accounting firms certifications; and (4) review with such independent registered public accounting firm the adequacy of the Trusts basic accounting system and the effectiveness of the
Trusts internal accounting controls. During the fiscal year ended September 30, 2012, the Audit Committee met twice
The Nominating and
Governance Committee is comprised of Messrs. DeMuth, Green and Moorin, each an Independent Trustee. Pursuant to its charter, the Nominating and Governance Committee is responsible for assessing the size, structure and composition of the Board;
determining trustee qualification guidelines as well as compensation, insurance and indemnification of trustees; and identifying qualified candidates to serve as Trustee candidates. Since the formation of the Trust and as of the date of this SAI,
there have been no meetings of the Nominating and Governance Committee. The Nominating and Governance Committee will consider nominee candidates recommended by shareholders. Shareholders who wish to recommend individuals for consideration by the
Committee as nominee candidates may do so by submitting a written recommendation to the Secretary of the Trust at: Equinox Funds Trust, P.O. Box 541150, Omaha, Nebraska 68154-1150. Submissions must include sufficient biographical information
concerning the recommended individual, including age, at least twenty years of employment history with employer names and a description of the employers business, and a list of board memberships (if any). The submission must be accompanied by
a written consent of the individual to stand for election if nominated by the Board and to serve if elected. Recommendations must be received in a sufficient period of time, as determined by the Committee in its sole discretion, prior to the date
proposed for the consideration of nominee candidates by the Board. Upon the written request of shareholders holding at least 10% of the Trusts shares in the aggregate, the Secretary shall present to any special meeting of shareholders such
nominees for election as Trustees as specified in such written request.
21
The Trust does not have a lead Independent Trustee. As noted above, the Boards leadership structure features all
of the Independent Trustees serving as members of each Board Committee. Inclusion of all Independent Trustees in the Committees allows them to participate in the full range of the Boards oversight duties, including oversight of the risk
management process. In addition, although the Independent Trustees recognize that having a lead Independent Trustee may in some circumstances help coordinate communications with management and otherwise assist a board in the exercise of its
oversight duties, the Independent Trustees believe that because of the relatively small size of the Board, the ratio of Independent Trustees to Interested Trustees and the good working relationship among the Board members, it has not been necessary
to designate a lead Independent Trustee.
Trustee Qualifications
The following is a brief discussion of the experience, qualifications, attributes and/or skills that led to the Board of Trustees conclusion that each
individual identified below is qualified to serve as a Trustee of the Trust. In determining that a particular Trustee was qualified to serve as a Trustee, the Board has considered a variety of criteria, none of which was controlling. The Board
believes that the Trustees ability to review critically, evaluate, question and discuss information provided to them, to interact effectively with the Adviser, other service providers, counsel and independent auditors, and to exercise
effective business judgment in the performance of their duties, support the conclusion that each Trustee is qualified to serve as a Trustee of the Trust. In addition, the following specific experience, qualifications, attributes and/or skills apply
as to each Trustee:
Mr. David P. DeMuth, CPA/MBA
, is a Co-Founder of CFO Consulting Partners LLC, a consulting firm
that provides interim CFO services to public and private companies. Mr. DeMuth has held senior financial positions with companies in a wide range of industries, including real estate development, financial services, specialty chemicals, global
manufacturing/distribution, graphic arts and consumer products. Mr. DeMuth also has held positions with KPMG, LLP and other auditing firms.
Mr. Kevin R. Green, MBA
, is the Founding Managing Director of TripleTree, LLC, an investment bank providing merger and acquisition, principal investing and strategic advisory services. Prior to
co-founding TripleTree, Mr. Green held several senior executive roles at private and public companies within the healthcare and technology industries.
Mr. Jay Moorin
is a founding General Partner at ProQuest Management, LLC. He is a healthcare executive with senior management experience in biotech, investment banking and pharmaceutical industry. Prior
to founding ProQuest, Mr. Moorin served as CEO of Magainin Pharmaceuticals. Previously, he was Managing Director of Health Care Banking at Bear, Stearns & Co. Mr. Moorin has also held various positions in strategy and general
management at E.R. Squibb & Sons Pharmaceuticals. He has served on the Board of Directors of ACMI, Aires Pharmaceuticals, Epic Therapeutics, Gloucester Pharmaceuticals, Guava Technologies, Mersana Therapeutics, MethylGene, Novacea (now
Transcept Pharmaceuticals, Inc.) and Pharmion. Currently, Mr. Moorin serves on the Board of Directors of Acurian, Eagle Pharmaceutical and Predictive Biosciences. He is also an observer on the Board for Clovis Oncology. Mr. Moorin holds
the position of Adjunct Senior Fellow of the Leonard Davis Institute of Health Economics at the University of Pennsylvania. He received a B.A. in economics with distinction from the University of Michigan.
Mr. Robert J. Enck, MBA
, is the President and Chief Executive Officer of the Adviser. Before joining the Adviser, Mr. Enck
held senior management positions at companies within the merchant banking and pharmaceutical services industries.
In its periodic self-assessment of the
effectiveness of the Board, the Board considers the complementary individual skills and experience of the individual Trustees primarily in the broader context of the Boards overall composition so that the Board, as a body, possesses the
appropriate (and appropriately diverse) skills and experience to oversee the business of the Trust. The summaries set forth above as to the experience, qualifications, attributes and/or skills of the Trustees do not constitute holding out the Board
or any Trustee as having any special expertise or experience, and do not impose any greater responsibility or liability on any such person or on the Board as a whole than would otherwise be the case.
Risk Oversight
Through its
direct oversight role, and indirectly through its Committees, of officers and service providers, the Board performs a risk oversight function for the Fund consisting, among other things, of the following activities: (1) at regular and special
Board meetings, and on an ad hoc basis as needed, receiving and reviewing reports related to the performance and operations of the Fund; (2) reviewing and approving, as applicable, the compliance policies and procedures of the Trust;
(3) meeting with the portfolio management team to review investment strategies, techniques
22
and the processes used to manage related risks; (4) meeting the representatives of key service providers, including the investment adviser, administrator, the distributor, the transfer
agent, the custodian and the independent registered public accounting firm of the Fund, to review and discuss the activities of the Fund and to provide direction with respect thereto; and (5) engaging the services of the Chief Compliance
Officer of the Fund to test the compliance procedures of the Trust and its service providers.
Compensation
Each Trustee who is not affiliated with the Trust or Adviser will receive an annual retainer of $20,000 (payable quarterly), as well as
reimbursement for any reasonable expenses incurred attending the meetings. The interested persons who serve as Trustees of the Trust receive no compensation for their services as Trustees. None of the executive officers receive
compensation from the Trust. The table below details the amount of compensation received by Trustees from the Trust for the fiscal year ended September 30, 2012. The Trust does not have a bonus, profit sharing, pension or retirement plan.
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Name of Trustee
|
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Estimated
Aggregate
Compensation
From
Trust
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Estimated
Pension or Retirement
Benefits Accrued as
Part of Fund
Expenses
|
|
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Estimated Annual
Benefits Upon
Retirement
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Estimated
Total Compensation
From
Fund
Complex** Paid to
Trustees
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David P. DeMuth
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$
|
20,000
|
|
|
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None
|
|
|
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None
|
|
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$
|
20,000
|
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Robert J. Enck*
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|
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None
|
|
|
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None
|
|
|
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None
|
|
|
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None
|
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Kevin R. Green
|
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$
|
20,000
|
|
|
|
None
|
|
|
|
None
|
|
|
$
|
20,000
|
|
Jay Moorin
|
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$
|
20,000
|
|
|
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None
|
|
|
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None
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|
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$
|
20,000
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*
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Interested Trustee by virtue of his position with the Trusts investment adviser.
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**
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The term Fund Complex refers to the Equinox Funds Trust.
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Trustee Ownership
The following table indicates the dollar
range of equity securities that each Trustee beneficially owned in the Fund as of December 31, 2011.
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Name of Trustee
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Dollar Range of Equity
Securities in the Fund
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Aggregate Dollar Range of Equity Securities
in All Registered
Investment Companies
Overseen by Trustee in Family of Investment
Companies
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David P. DeMuth
|
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None
|
|
None
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Robert J. Enck*
|
|
None
|
|
None
|
Kevin R. Green
|
|
None
|
|
None
|
Jay Moorin
|
|
None
|
|
None
|
*
|
Interested Trustee by virtue of his position with the Trusts investment adviser.
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Management Ownership
As of
the date of this SAI, the Trustees or officers of the Trust as a group owned less than 1% of any class of outstanding shares of the Fund.
Control Persons and Principal Holders
A principal shareholder is any person who owns (either of record or
beneficially) 5% or more of the outstanding shares of the Fund. A control person is one who owns, either directly or indirectly more than 25% of the voting securities of a company or acknowledges the existence of control. As of December 1,
2012, the Fund could be deemed under control of the Adviser, which had voting authority with respect to approximately 100% of the value of the outstanding interests in the Fund on such date. However, it is expected that the Advisers control
will be diluted over time until the Fund is controlled by its unaffiliated shareholders.
As of December 1, 2012, other than the Adviser and its
affiliates, no shareholders of record owned 5% or more of the outstanding shares of any class of the Fund.
23
PURCHASE, REDEMPTION AND PRICING OF SHARES
Calculation of Share Price
.
The following
information supplements and should be read in conjunction with the section in the Prospectus entitled How Shares are Priced. The NAV of the Fund serves as the basis for the purchase and redemption price of the Funds shares. The NAV
of the Fund is calculated by dividing the market value of the Funds securities, including the market value of the Subsidiarys securities, plus the value of the Funds other assets, less all liabilities, by the number of outstanding
shares of the Fund. If market quotations are not readily available for any security in the Funds or the Subsidiarys portfolio, the security will be valued at fair value by the Adviser using methods established or ratified by the Board.
Options on securities and indices purchased by the Fund generally are valued at their last bid price in the case of exchange-traded options or, in the
case of options traded in the over-the-counter (OTC) market, the average of the last bid price as obtained from two or more dealers unless there is only one dealer, in which case that dealers price is used. Futures contracts and
options on futures contracts are valued at the last trade price prior to the end of the Funds pricing cycle.
The Fund will regularly value its
investments in structured notes at fair value and other investments at market prices.
OTC securities, if any, held by the Fund shall be valued at the
NASDAQ Official Closing Price (NOCP) on the valuation date or, if no NOCP is reported, the last reported bid price is used, and quotations shall be taken from the market/exchange where the security is primarily traded. Securities listed
on the Nasdaq Global Select Market and Nasdaq Global Market shall be valued at the NOCP; which may differ from the last sales price reported. The portfolio securities of the Fund that are listed on national exchanges, if any, are taken at the last
sales price of such securities on such exchange; if no sales price is reported, the last reported bid price is used. For valuation purposes, all assets and liabilities initially expressed in foreign currency values will be converted into
U.S. Dollar values at the rate at which local currencies can be sold to buy U.S. Dollars as last quoted by any recognized dealer. If these quotations are not available, the rate of exchange will be determined in good faith by the Adviser based
on guidelines adopted by the Board. Dividend income and other distributions are recorded on the ex-dividend date, except for certain dividends from foreign securities which are recorded as soon as the Trust is informed after the ex-dividend date.
The value of domestic equity index and credit default swap agreements entered into by the Fund are accounted for using the unrealized gain or loss on
the agreements that is determined by marking the agreements to the last quoted value of the index that the swap pertains to at the close of the NYSE, usually 4:00 p.m., Eastern Time. The swaps market value is then adjusted to include dividends
accrued, financing charges and/or interest associated with the swap agreement. The value of foreign equity index and currency index swap agreements entered into by the Fund are accounted for using the unrealized gain or loss on the agreements that
is determined by marking the agreements to the price at which orders are being filled at the close of the NYSE, usually 4:00 p.m., Eastern Time. In the event that no order is filled at 4:00 p.m., Eastern Time, the Fund values a swap based on a quote
provided by a dealer in accordance with the Funds pricing procedures. The swaps market value is then adjusted to include dividends accrued, financing charges and/or interest associated with the swap agreements.
Illiquid securities, securities for which reliable quotations or pricing services are not readily available, and all other assets will be valued either at the
average of the last bid price of the securities obtained from two or more dealers or otherwise at their respective fair value as determined in good faith by, or under procedures established by the Board. The Board has adopted fair valuation
procedures for the Fund and has delegated responsibility for fair value determinations to the Fair Valuation Committee. The members of the Fair Valuation Committee report, as necessary, to the Board regarding portfolio valuation determination. The
Board, from time to time, will review these methods of valuation and will recommend changes which may be necessary to assure that the investments of the Fund are valued at a fair value.
The Trust expects that the holidays upon which the New York Stock Exchange will be closed are as follows: New Years Day, Martin Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Purchase of Shares
.
Orders for shares received by the Fund in good order
prior to the close of business on the NYSE on each day during such periods that the NYSE is open for trading are priced at NAV per share or offering price (NAV plus a sales charge, if applicable) computed as of the close of the regular session of
trading on the NYSE. Orders received in good order after the close of the NYSE, or on a day it is not open for trading, are priced at the close of such NYSE on the next day on which it is open for trading at the next determined NAV or offering price
per share.
24
Redemption of Shares.
The Fund will redeem all or any portion of a shareholders shares in the Fund when
requested in accordance with the procedures set forth in the Redemptions section of the Prospectus. Under the 1940 Act, a shareholders right to redeem shares and to receive payment therefore may be suspended at times:
(a)
|
when the NYSE is closed, other than customary weekend and holiday closings;
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(b)
|
when trading on that exchange is restricted for any reason;
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(c)
|
when an emergency exists as a result of which disposal by the Fund of securities owned by it is not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, provided that applicable rules and regulations of the SEC (or any succeeding governmental authority) will govern as to whether the conditions prescribed in (b) or (c) exist; or
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(d)
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when the SEC by order permits a suspension of the right to redemption or a postponement of the date of payment on redemption.
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In case of suspension of the right of redemption, payment of a redemption request will be made based on the NAV next determined after the termination of the
suspension.
Supporting documents in addition to those listed under Redemptions in the Prospectus will be required from executors,
administrators, Trustees, or if redemption is requested by someone other than the shareholder of record. Such documents include, but are not restricted to, stock powers, Trust instruments, certificates of death, appointments as executor,
certificates of corporate authority and waiver of tax required in some states when settling estates.
The Trust reserves the right to honor requests for
redemption or repurchase orders by making payment in whole or in part in readily marketable securities (redemption in kind) if the amount is greater than (the lesser of) $250,000 or 1% of the Funds assets. The securities will be
chosen by the Fund and valued under the Funds net asset value procedures. A shareholder will be exposed to market risk until these securities are converted to cash and may incur transaction expenses in converting these securities to cash.
Use of Third-Party Independent Pricing Agents.
Pursuant to contracts with the Administrator, market prices for most
securities held by the Fund are provided daily by third-party independent pricing agents that are approved by the Board. The valuations provided by third-party independent pricing agents are reviewed daily by the Administrator.
TAXES
The following discussion summarizes certain U.S. federal income tax considerations affecting the Fund and its shareholders. This discussion is for general
information only and does not purport to consider all aspects of U.S. federal income taxation that might be relevant to beneficial owners of shares of the Fund. Therefore, the summary discussion that follows may not be considered to be individual
tax advice and may not be relied upon by any shareholder. The summary is based upon current provisions of the IRC, applicable U.S. Treasury Regulations promulgated thereunder (the Regulations), and administrative and judicial
interpretations thereof, all of which are subject to change, which change could be retroactive, and may affect the conclusions expressed herein. The summary applies only to beneficial owners of the Funds shares in whose hands such shares are
capital assets within the meaning of Section 1221 of the IRC, and may not apply to certain types of beneficial owners of the Funds shares, including, but not limited to insurance companies, tax-exempt organizations, shareholders holding
the Funds shares through tax-advantaged accounts (such as an individual retirement account (an IRA), a 401(k) plan account, or other qualified retirement account), financial institutions, pass-through entities, broker-dealers,
entities that are not organized under the laws of the United States or a political subdivision thereof, persons who are neither a citizen nor resident of the United States, shareholders holding the Funds shares as part of a hedge, straddle or
conversion transaction, and shareholders who are subject to the alternative minimum tax. Persons who may be subject to tax in more than one country should consult the provisions of any applicable tax treaty to determine the potential tax
consequences to them.
The Fund has not requested an advance ruling from the Internal Revenue Service (the IRS) as to the federal income tax
matters described below. The IRS could adopt positions contrary to those discussed below and such positions could be sustained. In addition, the following discussion applicable to shareholders of the Fund addresses only some of the federal income
tax considerations generally affecting investments in the Fund.
Shareholders are urged and advised to consult their own tax advisor with respect to the tax consequences of the ownership, purchase and disposition of an investment in the Fund
including, but not limited to, the applicability of state, local, foreign and other tax laws affecting the particular shareholder and to possible effects of changes in federal or other tax laws.
25
GENERAL
.
For federal tax purposes, the Fund is treated as a separate corporation.
The Fund will elect, and intends to qualify for, taxation as a RIC under the IRC. By qualifying as a RIC, the Fund (but not the shareholders) will not be subject to federal income tax on that portion of its investment company taxable income and net
realized capital gains that it distributes to its shareholders.
Shareholders should be aware that investments made by the Fund, some of which are
described below, may involve complex tax rules some of which may result in income or gain recognition by a shareholder without the concurrent receipt of cash. Although the Fund seeks to avoid significant noncash income, such noncash income could be
recognized by the Fund, in which case it may distribute cash derived from other sources in order to meet the minimum distribution requirements described below. Cash to make the required minimum distributions may be obtained from sales proceeds of
securities held by the Fund (even if such sales are not advantageous) or, if permitted by its governing documents and other regulatory restrictions, through borrowing the amounts required to be distributed.
QUALIFICATION AS REGULATED INVESTMENT COMPANY
. Qualification as a RIC under the IRC requires, among other things, that the Fund:
(a) derive at least 90% of its gross income for each taxable year from dividends, interest, payments with respect to securities loans and gains from the sale or other disposition of stock, securities or foreign currencies, or other income
(including but not limited to gains from options, futures and forward contracts) derived with respect to its business of investing in such stock, securities or currencies (the Qualifying Income Requirement), and net income from certain
qualified publicly traded partnerships; (b) diversify its holdings so that, at the close of each quarter of the taxable year: (i) at least 50% of the value of its assets is comprised of cash, cash items (including receivables), U.S.
government securities, securities of other RICs and other securities, with those other securities limited, in respect of any one issuer, to an amount that does not exceed 5% of the value of its total assets and that does not represent more than 10%
of the outstanding voting securities of such issuer; and (ii) not more than 25% of the value of its assets is invested in the securities (other than U.S. government securities or securities of other RICs) of any one issuer or the securities
(other than the securities of other RICs) of two or more issuers controlled by it and engaged in the same, similar or related trades or businesses, or one or more qualified publicly traded partnerships (together with (i) the
Diversification Requirement); and (c) distribute for each taxable year the sum of (i) at least 90% of its investment company taxable income (which includes dividends, taxable interest, taxable original issue discount income,
market discount income, income from securities lending, net short-term capital gain in excess of net long-term capital loss, certain net realized foreign currency exchange gains, and any other taxable income other than net capital gain
as defined below and is reduced by deductible expenses all determined without regard to any deduction for dividend paid); and (ii) 90% of its tax-exempt interest, if any, net of certain expenses allocable thereto (net tax-exempt
interest).
The Treasury Department is authorized to promulgate regulations under which gains from foreign currencies (and options, futures, and
forward contracts on foreign currency) would constitute qualifying income for purposes of the Qualifying Income Requirement only if such gains are directly related to the principal business of the Fund in investing in stock or securities or options
and futures with respect to stock or securities. To date, such regulations have not been issued.
As a RIC, the Fund generally will not be subject to
U.S. federal income tax on the portion of its income and capital gains that it distributes to its shareholders in any taxable year for which it distributes, in compliance with the IRCs timing and other requirements at least 90% of its
investment company taxable income and at least 90% of its net tax-exempt interest). The Fund may retain for investment all or a portion of its net capital gain (i.e., the excess of its net long-term capital gain over its net short-term capital
loss). If the Fund retains any investment company taxable income or net capital gain, it will be subject to tax at regular corporate rates on the amount retained. If the Fund retains any net capital gain, it may designate the retained amount as
undistributed net capital gain in a notice to its shareholders, who will be (i) required to include in income for federal income tax purposes, as long-term capital gain, their shares of such undistributed amount; and (ii) entitled to
credit their proportionate shares of tax paid by the Fund against their federal income tax liabilities, if any, and to claim refunds to the extent the credit exceeds such liabilities. For federal income tax purposes, the tax basis of the shares
owned by a shareholder of the Fund will be increased by the amount of undistributed net capital gain included in the shareholders gross income and decreased by the federal income tax paid by the Fund on that amount of capital gain.
The qualifying income and asset requirements that must be met under the IRC in order for the Fund to qualify as a RIC, as described above, may limit the extent to
which the Fund will be able to engage in derivative transactions. As described in the Prospectus, the Fund seeks to provide investment results that correspond to a particular managed futures program indirectly through the investment in the
Subsidiary, directly in certain commodity-linked derivative instruments and indirectly through the Subsidiary by its investment in the securities of one or more private investment vehicles or commodity pools that have access to a particular trading
program. Rules governing the federal income tax
26
aspects of derivatives, including swap agreements, are not entirely clear in certain respects, particularly in light of two IRS revenue rulings issued in 2006. Revenue Ruling 2006-1 held that
income from a derivative contract with respect to a commodity index is not qualifying income for a RIC. Accordingly, the Funds ability to invest in commodity related derivatives is limited to a maximum of 10% of its gross income. This
limitation, however, will not protect the Fund against the risk of losing its RIC status should any other income be reclassified as non-qualifying income. In Revenue Ruling 2006-31, the IRS stated that the holding in Revenue Ruling 2006-1 was
not intended to preclude a conclusion that the income from certain instruments (such as certain structured notes) that create a commodity exposure for the holder is qualifying income.
As described above in this SAI, generally, the Fund intends to invest in the Subsidiary. As described below, the Subsidiary will be classified as a controlled foreign corporation (CFC) for federal
income tax purposes. As a result, the Fund will be required to include in its gross income for federal income tax purposes all or a significant portion of the income of the Subsidiary, referred to as subpart F income, whether or not the Subsidiary
makes a distribution to the Fund. Distributions by the Subsidiary to the Fund will not be taxable to the Fund to the extent that the Fund has previously recognized subpart F income. This subpart F income is generally treated as ordinary income,
regardless of the character of the Subsidiarys underlying income.
Prior to July 2011, the IRS issued private letter rulings in which it concluded
that income from certain commodity index-linked notes is qualifying income and that income derived from subsidiaries similar to the Subsidiary will be qualifying income whether received in the form of current distributions or as undistributed
subpart F income. In July 2011, the IRS announced that it would no longer issue private letter rulings regarding whether income from subsidiaries similar to the Subsidiary is qualifying income. Public statements of IRS officials indicate that the
IRS is reviewing its positions underlying these private letter rulings. It is not known as of the date hereof whether the IRS will resume issuing private letter rulings, issue more broadly applicable guidance or change its position underlying the
issuance of such rulings. There is no law or other authority directly addressing some of the issues of law considered in these rulings. There can be no assurance that the IRS will not change its position with respect to some or all of these issues
or, if the IRS did so, that a court would not sustain, such contrary positions. If the IRS were to change its position on some or all of these issues, and if such contrary positions were upheld, the Fund might cease to qualify as a RIC. A private
letter ruling may only be relied upon by the taxpayer to whom it was provided. As a result, the prior private letter rulings issued by the IRS may not be relied upon by the Fund. The Fund does not plan to seek a private letter ruling. Therefore, to
the extent the Fund invests directly in commodity-index-linked derivative instruments or in the Subsidiary, the IRS may contest the Funds characterization of the income produced by such assets as qualifying income which, if successful, could
cause the Fund to fail to qualify as a RIC. The Fund and its Adviser plan to direct investments of the Funds assets in conformance with Revenue Ruling 2006-31, IRS guidance, and the advice of counsel.
In addition, the Fund may not have more than 25% of the value of its assets invested in the Subisidary to meet the Diversification Requirement. The value of the
Subsidiary may be volatile and it may be difficult for the Fund to continue to have less than 25% of the value of its assets in the Subsidiary.
In
general, for purposes of the Qualifying Income Requirement described above, income derived from a partnership will be treated as qualifying income only to the extent such income is attributable to items of income of the partnership which would be
qualifying income if realized directly by the RIC. However, all of the net income of a RIC derived from an interest in a qualified publicly traded partnership (defined as a partnership (x) the interests in which are traded on an established
securities market or are readily tradable on a secondary market or the substantial equivalent thereof, and (y) that derives less than 90% of its income from the qualifying income described in claus (i) of the Qualifying Income Requirement
described above) will be treated as qualifying income. In general, such entities will be treated as partnerships for federal income tax purposes if they meet the passive income requirement under Section 7704(c)(2) of the Code. In addition,
although in general the passive loss rules of the Code do not apply to RICs, such rules do apply to a RIC with respect to items attributable to an interest in a qualified publicly traded partnership. For puroses of the Diversification Requirement
described above, the term outstanding voting securities of such issuer will include the equity securities of a qualified publicly traded partnership.
If the Fund fails to satisfy the Qualifying Income Requirement or the Diversification Requirement in any taxable year, the Fund may be eligible for relief provisions if the failures are due to reasonable cause and
not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements. Additionally, relief is provided for certain de minimis failures to satisfy the Diversification Requirements where the Fund
corrects the failure within a specified period of time. If the applicable relief provisions are not available or cannot be met, the Fund will be subject to tax in the same manner as an ordinary corporation subject to tax on a graduated basis with a
maximum tax rate of 35% and all distributions from earnings and profits (as determined under the U.S. federal income tax principles) to its shareholders will be taxable as ordinary dividend income eligible for the % non-corporate long-term capital
gain
27
shareholder rate (for taxable years beginning prior to January 1, 2013. After January 1, 2013, the long-term capital gain rate is 20% for non-corporate shareholders with taxable income
in excess of $400,000 ($450,000 if married and filing jointly) and 15% for non-corporate shareholders with taxable income of less than the threshold amounts.
EXCISE TAX
. If the Fund fails to distribute by December 31 of each calendar year an amount equal to the sum of (1) at least 98% of its taxable ordinary income (excluding
capital gains and losses) for such year, (2) at least 98.2% of the excess of its capital gains over its capital losses (as adjusted for certain ordinary losses) for the twelve month period ending on October 31 of such year, and
(3) all taxable ordinary income and the excess of capital gains over capital losses for the prior year that were not distributed during such year and on which it did not pay federal income tax, the Fund will be subject to a nondeductible 4%
excise tax (the Excise Tax) on the undistributed amounts. A distribution will be treated as paid on December 31 of the calendar year if it is declared by the Fund in October, November, or December of that year to shareholders of
record on a date in such month and paid by it during January of the following year. Such distributions will be taxable to shareholders (other than those not subject to federal income tax) in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received. The Fund generally intends to actually distribute or be deemed to have distributed substantially all of its net income and gain, if any, by the end of each calendar year in
compliance with these requirements so that it will generally not be required to pay the Excise Tax. The Fund may in certain circumstances be required to liquidate its investments in order to make sufficient distributions to avoid the Excise Tax
liability at a time when its Adviser might not otherwise have chosen to do so. Liquidation of investments in such circumstances may affect the ability of the Fund to satisfy the requirements for qualification as a RIC. However, no assurances can be
given that the Fund will not be subject to the Excise Tax and, in fact, in certain instances if warranted, the Fund may choose to pay the Excise Tax as opposed to making an additional distribution.
CAPITAL LOSS CARRYFORWARDS
. The Fund may carry forward capital losses indefinitely. The excess of the Funds net short-term
capital losses over its net long-term capital gain is treated as short-term capital losses arising on the first day of the Funds next taxable year and the excess of the Funds net long-term capital losses over its net short-term capital
gain is treated as long-term capital losses arising on the first day of the Funds net taxable year. Capital gains arising in subsequent years are offset by carried forward capital losses and are not subject to Fund-level federal income
taxation, regardless of whether they are distributed to shareholders. The Fund cannot carry back or carry forward any net operating losses.
TAXATION
OF THE SUBSIDIARY
. Foreign corporations, such as the Subsidiary, will generally not be subject to U.S. federal income taxation unless they are deemed to be engaged in a U.S. trade or business. It is expected that the
Subsidiary will conduct its activities in a manner so as to meet the requirements of a safe harbor under IRC Section 864(b)(2) pursuant to which the Subsidiary may engage in trading in stocks or securities or certain commodities without being
deemed to be engaged in a U.S. trade or business. However, if certain of the Subsidiarys activities were determined not to be of the type described in the safe harbor, then the activities of the Subsidiary may constitute a U.S. trade or
business, or be taxed as such.
In general, foreign corporations, such as the Subsidiary, that do not conduct a U.S. trade or business are nonetheless
subject to tax at a flat rate of 30 percent (or lower tax treaty rate), generally payable through withholding, on the gross amount of certain U.S.-source income that is not effectively connected with a U.S. trade or business. There is presently no
tax treaty in force between the U.S. and the Cayman Islands that would reduce this rate of withholding tax. The 30% tax does not apply to U.S.-source capital gains (whether long-term or short-term) or to interest paid to a foreign corporation on its
deposits with U.S. banks. The 30% tax also does not apply to interest which qualifies as portfolio interest. The term portfolio interest generally includes interest (including original issue discount) on an obligation in
registered form issued after July 18, 1984 and with respect to which the person, who would otherwise be required to deduct and withhold the 30% tax, received the required statement that the beneficial owner of the obligation is not a U.S.
person as defined by the IRC. Under certain circumstances, interest on bearer obligations may also be considered portfolio interest. It is not expected that the Subsidiary will derive income subject to such withholding tax.
As described above, the Subsidiary will be treated as a CFC. The Fund will be treated as a U.S. shareholder of the Subsidiary. As a result, the Fund
will be required to include in gross income for U.S. federal income tax purposes all of the Subsidiarys subpart F income, whether or not such income is distributed by the Subsidiary. It is expected that all of the Subsidiarys
income will be subpart F income. Subpart F income generally includes interest, original issue discount, dividends, net gains from the disposition of stocks or securities, receipts with respect to securities loans and net
payments received with respect to equity swaps and similar derivatives. Subpart F income also includes the excess of gains over losses from transactions (including futures, forward and similar transactions) in any commodities. The
Funds recognition of the Subsidiarys subpart F income will increase the Funds tax basis in the Subsidiary. Distributions by the Subsidiary to the Fund will be tax-free, to the extent of its previously undistributed
subpart F income,
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and will correspondingly reduce the Funds tax basis in the Subsidiary. Subpart F income is generally treated as ordinary income, regardless of the character of the
Subsidiarys underlying income. If a net loss is realized by the Subsidiary, such loss is not generally available to offset the income earned by the Fund.
In general, each U.S. Shareholder is required to file IRS Form 5471 with its U.S. federal income tax (or information) returns providing information about its ownership of the CFC and the CFC. In
addition, a U.S. Shareholder may in certain circumstances be required to report a disposition of shares in the Subsidiary by attaching IRS Form 5471 to its U.S. federal income tax (or information) return that it would normally file for
the taxable year in which the disposition occurs. In general, these filing requirements will apply to a shareholder of the Fund if such shareholder is a U.S. person who owns directly, indirectly or constructively (within the meaning of Sections
958(a) and (b) of the IRC) 10% or more of the total combined voting power of all classes of voting stock of a foreign corporation that is a CFC for an uninterrupted period of 30 days or more during any tax year of the foreign corporation, and
who owned that stock on the last day of that year. Whether a shareholder of the Fund is a U.S. Shareholder with respect to the Subsidiary depends on an application of the constructive ownership rules of the IRC. You are urged and advised
to consult your own tax advisor with respect to whether you are a U.S. Shareholder.
ORIGINAL ISSUE DISCOUNT AND MARKET
DISCOUNT.
The Fund may acquire debt securities that are treated as having original issue discount (OID) (generally a debt obligation with a purchase price less than its principal amount). Generally, the
Fund will be required to include the OID in income over the term of the debt security, even though it will not receive cash payments for such OID until a later time, usually when the debt security matures. The Fund may make one or more of the
elections applicable to debt securities having OID which could affect the character and timing of recognition of income. Inflation-protected bonds generally can be expected to produce OID income as their principal amounts are adjusted upward for
inflation. A portion of the OID includible in income with respect to certain high-yield corporate debt securities may be treated as a dividend for federal income tax purposes if the securities are characterized as equity for federal income tax
purposes.
A debt security acquired in the secondary market by the Fund may be treated as having market discount if acquired at a price below redemption
value or adjusted issue price if issued with original issue discount. Market discount generally is accrued ratably, on a daily basis, over the period from the date of acquisition to the date of maturity even though no cash will be received. Absent
an election by the Fund to include the market discount in income as it accrues, gain on its disposition of such an obligation will be treated as ordinary income rather than capital gain to the extent of the accrued market discount.
In addition, pay-in-kind securities will give rise to income which is required to be distributed and is taxable even though the Fund holding such securities
receives no interest payments in cash on such securities during the year.
The Fund generally will be required to make distributions to shareholders
representing the income accruing on the debt securities, described above, that is currently includable in income, even though cash representing such income may not have been received by the Fund. Cash to pay these distributions may be obtained from
sales proceeds of securities held by the Fund (even if such sales are not advantageous) or, if permitted by the Funds governing documents, through borrowing the amounts required to be distributed. In the event the Fund realizes net capital
gains from such transactions, its shareholders may receive a larger capital gain distribution, if any, than they would have in the absence of such transactions. Borrowing to fund any distribution also has tax implications, such as potentially
creating unrelated business taxable income (UBTI).
OPTIONS, FUTURES AND FORWARD CONTRACTS
. The writing
(selling) and purchasing of options and futures contracts and entering into forward currency contracts, involves complex rules that will determine for income tax purposes the amount, character and timing of recognition of the gains and losses the
Fund realizes in connection with such transactions.
Gains and losses on the sale, lapse, or other termination of options and futures contracts, options
thereon and certain forward contracts (except certain foreign currency options, forward contracts and futures contracts) will generally be treated as capital gains and losses. Some regulated futures contracts, certain foreign currency contracts, and
certain non-equity options (such as certain listed options or options on broad based securities indexes) held by the Fund (Section 1256 contracts), other than contracts on which it has made a mixed-straddle election, will be
required to be marked-to-market for federal income tax purposes, that is, treated as having been sold at their market value on the last day of the Funds taxable year. These provisions may require the Fund to recognize income or
gains without a concurrent receipt of cash. Any gain or loss recognized on actual or deemed sales of Section 1256 contracts will be treated as 60% long-term capital gain or loss and 40% short-term capital gain or loss, although certain foreign
currency gains and losses from such contracts may be treated as ordinary income or loss as described below. Transactions that qualify as designated hedges are exempt from the mark-to-market rule, but may require the Fund to defer the recognition of
losses on futures contracts, foreign currency contracts and certain options to the extent of any unrecognized gains on related positions held by it.
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The tax provisions described above applicable to options, futures and forward contracts may affect the amount, timing,
and character of the Funds distributions to its shareholders. For example, the Section 1256 rules described above may operate to increase the amount the Fund must distribute to satisfy the minimum distribution requirement for the portion
treated as short-term capital gain which will be taxable to its shareholders as ordinary income, and to increase the net capital gain it recognizes, without, in either case, increasing the cash available to the Fund. The Fund may elect to exclude
certain transactions from the operation of Section 1256, although doing so may have the effect of increasing the relative proportion of net short-term capital gain (taxable as ordinary income) and thus increasing the amount of dividends it must
distribute. Section 1256 contracts also may be marked-to-market for purposes of the Excise Tax.
When a covered call option written (sold) by the
Fund expires the Fund will realize a short-term capital gain equal to the amount of the premium it received for writing the option. When the Fund terminates its obligations under such an option by entering into a closing transaction, it will realize
a short-term capital gain (or loss), depending on whether the cost of the closing transaction is less than (or exceeds) the premium received when it wrote the option. When a covered call option written by the Fund is exercised, the Fund will be
treated as having sold the underlying security, producing long-term or short-term capital gain or loss, depending upon the holding period of the underlying security and whether the sum of the option price received upon the exercise plus the premium
received when it wrote the option is more or less than the basis of the underlying security.
STRADDLES
. Section 1092
deals with the taxation of straddles which also may affect the taxation of options in which the Fund may invest. Offsetting positions held by the Fund involving certain derivative instruments, such as options, futures and forward currency contracts,
may be considered, for federal income tax purposes, to constitute straddles. Straddles are defined to include offsetting positions in actively traded personal property. In certain circumstances, the rules governing straddles override or
modify the provisions of Section 1256, described above. If the Fund is treated as entering into a straddle and at least one (but not all) of its positions in derivative contracts comprising a part of such straddle is governed by
Section 1256, then such straddle could be characterized as a mixed straddle. The Fund may make one or more elections with respect to mixed straddles. Depending on which election is made, if any, the results with respect to the Fund
may differ. Generally, to the extent the straddle rules apply to positions established by the Fund, losses realized by it may be deferred to the extent of unrealized gain in any offsetting positions. Moreover, as a result of the straddle rules,
short-term capital loss on straddle positions may be characterized as long-term capital loss, and long-term capital gain may be characterized as short-term capital gain. In addition, the existence of a straddle may affect the holding period of the
offsetting positions and cause such sales to be subject to the wash sale and short sale rules. As a result, the straddle rules could cause distributions that would otherwise constitute qualified dividend income to
fail to satisfy the applicable holding period requirements, described below, and therefore to be taxed as ordinary income. Further, the Fund may be required to capitalize, rather than deduct currently, any interest expense and carrying charges
applicable to a position that is part of a straddle. Because the application of the straddle rules may affect the character and timing of gains and losses from affected straddle positions, the amount which must be distributed to shareholders, and
which will be taxed to shareholders as ordinary income or long-term capital gain, may be increased or decreased substantially as compared to the situation where the Fund had not engaged in such transactions.
In circumstances where the Fund has invested in certain pass-through entities, the amount of long-term capital gain that it may recognize from certain derivative
transactions with respect to interests in such pass-through entities is limited under the IRCs constructive ownership rules. The amount of long-term capital gain is limited to the amount of such gain the Fund would have had if it directly
invested in the pass-through entity during the term of the derivative contract. Any gain in excess of this amount is treated as ordinary income. An interest charge is imposed on the amount of gain that is treated as ordinary income.
CONSTRUCTIVE SALES
. Certain rules may affect the timing and character of gain if the Fund engages in transactions that reduce or
eliminate its risk of loss with respect to appreciated financial positions. If the Fund enters into certain transactions (including a short sale, an offsetting notional principal contract, a futures or forward contract, or other transactions
identified in Treasury regulations) in property while holding an appreciated financial position in substantially identical property, it will be treated as if it had sold and immediately repurchased the appreciated financial position and will be
taxed on any gain (but not loss) from the constructive sale. The character of gain from a constructive sale will depend upon the Funds holding period in the appreciated financial position. Loss from a constructive sale would be recognized when
the position was subsequently disposed of, and its character would depend on the Funds holding period and the application of various loss deferral provisions of the IRC.
In addition, if the appreciated financial position is itself a short sale or such a contract, acquisition of the underlying property or substantially identical property by the Fund will be deemed a constructive
sale. The foregoing will not apply, however, to the Funds transaction during any taxable year that otherwise would be treated as a constructive sale if the
30
transaction is closed within 30 days after the end of that year and the Fund holds the appreciated financial position unhedged for 60 days after that closing (i.e., at no time during that 60-day
period is the Funds risk of loss regarding the position reduced by reason of certain specified transactions with respect to substantially identical or related property, such as having an option to sell, being contractually obligated to sell,
making a short sale or granting an option to buy substantially identical stock or securities).
WASH SALES.
The Fund may in
certain circumstances be impacted by special rules relating to wash sales. In general, the wash sale rules prevent the recognition of a loss by the Fund from the disposition of stock or securities at a loss in a case in which identical
or substantially identical stock or securities (or an option to acquire such property) is or has been acquired by it within 30 days before or 30 days after the sale.
SHORT SALES
. The Fund may make short sales of securities. Short sales may increase the amount of short-term capital gain realized by the Fund, which is taxed as ordinary income when
distributed to its shareholders. Short sales also may be subject to the Constructive Sales rules, discussed above.
SWAPS AND
DERIVATIVES.
As a result of entering into swap or derivative agreements, the Fund may make or receive periodic net payments. The Fund may also make or receive a payment when a swap or derivative is terminated prior to
maturity through an assignment of the swap, derivative or other closing transaction. Periodic net payments will generally constitute ordinary income or deductions, while termination of a swap or derivative will generally result in capital gain or
loss (which will be a long-term capital gain or loss if the Fund has been a party to a swap or derivative for more than one year). The Funds transactions in swaps or other derivatives may be subject to one or more of the special tax rules
(e.g., notional principal contract, straddle, constructive sales, wash sales, and short sale rules). These rules may affect whether gains and losses recognized by the Fund are treated as ordinary or capital or as short-term or long-term, accelerate
the recognition of income or gains to the Fund, defer losses to the Fund, and cause adjustments in the holding periods of the Funds securities. These rules could therefore affect the amount, timing and/or character of distributions to
shareholders.
With respect to certain types of swap agreements or derivative securities, the Fund may be required to currently recognize income or loss
with respect to future payments on such swaps or derivatives or may elect under certain circumstances to mark to market such swaps or derivatives annually for tax purposes as ordinary income or loss.
The applicability of these rules to swap agreements or other derivative securities is not entirely clear in certain respects under current law. In addition, whether
income generated from swaps and other derivatives is Qualifying Income is not entire certain. Accordingly, while the Fund intends to account for such transactions in a manner it deems appropriate, the IRS might not accept such treatment. If the IRS
did not accept such treatment, the status of the Fund as a RIC might be adversely affected. The Fund intends to monitor developments in this area. Certain requirements that must be met under the IRC in order for the Fund to qualify as a RIC may
limit the extent to which the Fund will be able to engage in swap agreements and certain other derivatives securities.
PASSIVE FOREIGN INVESTMENT
COMPANIES
. The Fund may invest in a non-U.S. corporation, which could be treated as a passive foreign investment company (PFIC) or become a PFIC under the IRC. A PFIC is generally defined as a foreign
corporation that meets either of the following tests: (1) at least 75% of its gross income for its taxable year is income from passive sources (such as interest, dividends, certain rents and royalties, or capital gains); or (2) an average
of at least 50% of its assets produce, or are held for the production of, such passive income. If the Fund acquires any equity interest in a PFIC, the Fund could be subject to federal income tax and interest charges on excess
distributions received with respect to such PFIC stock or on any gain from the sale of such PFIC stock (collectively PFIC income), plus interest thereon even if the Fund distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the Funds investment company taxable income and, accordingly, will not be taxable to it to the extent it distributes that income to its shareholders. The Funds
distributions of PFIC income will be taxable as ordinary income even though, absent the application of the PFIC rules, some portion of the distributions may have been classified as capital gain.
The Fund will not be permitted to pass through to its shareholders any credit or deduction for taxes and interest charges incurred with respect to a PFIC. Payment
of this tax would therefore reduce the Funds economic return from its investment in PFIC shares. To the extent the Fund invests in a PFIC, it may elect to treat the PFIC as a qualified electing fund (QEF), then instead
of the tax and interest obligation described above on excess distributions, the Fund would be required to include in income each taxable year its pro rata share of the QEFs annual ordinary earnings and net capital gain. As a result of a QEF
election, the Fund would likely have to distribute to its shareholders an amount equal to the QEFs annual ordinary earnings and net capital gain to satisfy the IRCs minimum distribution requirement described herein and avoid imposition
of the Excise Tax even if the QEF did not distribute those earnings and gain to the Fund. In most instances it will be very difficult, if not impossible, to make this election because of certain requirements in making the election.
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The Fund may elect to mark-to-market its stock in any PFIC. Marking-to-market, in this
context, means including in ordinary income each taxable year the excess, if any, of the fair market value of the PFIC stock over the Funds adjusted basis therein as of the end of that year. Pursuant to the election, the Fund also may deduct
(as an ordinary, not capital, loss) the excess, if any, of its adjusted basis in the PFIC stock over the fair market value thereof as of the taxable year-end, but only to the extent of any net mark-to-market gains with respect to that stock it
included in income for prior taxable years under the election. The Funds adjusted basis in its PFIC stock subject to the election would be adjusted to reflect the amounts of income included and deductions taken thereunder. In either case, the
Fund may be required to recognize taxable income or gain without the concurrent receipt of cash.
FOREIGN CURRENCY
TRANSACTIONS
. Foreign currency gains and losses realized by the Fund in connection with certain transactions involving foreign currency-denominated debt instruments, certain options, futures contracts, forward contracts,
and similar instruments relating to foreign currency, foreign currencies, and foreign currency-denominated payables and receivables are subject to Section 988 of the IRC, which causes such gains and losses to be treated as ordinary income or
loss and may affect the amount and timing of recognition of the Funds income. In some cases elections may be available that would alter this treatment, but such elections could be detrimental to the Fund by creating current recognition of
income without the concurrent recognition of cash. If a foreign currency loss treated as an ordinary loss under Section 988 were to exceed the Funds investment company taxable income (computed without regard to such loss) for a taxable
year the resulting loss would not be deductible by it or its shareholders in future years. The foreign currency income or loss will also increase or decrease the Funds investment company income distributable to its shareholders.
FOREIGN TAXATION
. Income received by the Fund from sources within foreign countries may be subject to foreign withholding and other
taxes. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. If more than 50% of the Funds total assets at the close of any taxable year consist of stock or securities of foreign corporations and
it meets the distribution requirements described above, the Fund may file an election (the pass-through election) with the IRS pursuant to which shareholders of the Fund would be required to (i) include in gross income (in addition
to taxable dividends actually received) their pro rata shares of foreign income taxes paid by the Fund even though not actually received by such shareholders; and (ii) treat such respective pro rata portions as foreign income taxes paid by
them. The Fund will furnish its shareholders with a written statement providing the amount of foreign taxes paid by the Fund that will pass-through for the year, if any.
Generally, a credit for foreign taxes is subject to the limitation that it may not exceed the shareholders U.S. tax attributable to his or her total foreign source taxable income. For this purpose, if the
pass-through election is made, the source of the Funds income will flow through to shareholders. The limitation on the foreign tax credit is applied separately to foreign source passive income, and to certain other types of income.
Shareholders may be unable to claim a credit for the full amount of their proportionate share of the foreign taxes paid by the Fund. Various limitations, including a minimum holding period requirement, apply to limit the credit and deduction for
foreign taxes for purposes of regular federal tax and alternative minimum tax.
DISTRIBUTIONS
. Distributions paid out of
the Funds current and accumulated earnings and profits (as determined at the end of the year), whether reinvested in additional shares or paid in cash, are generally taxable and must be reported by each shareholder who is required to file a
federal income tax return. Distributions in excess of the Funds current and accumulated earnings and profits, as computed for federal income tax purposes, will first be treated as a return of capital up to the amount of a shareholders
tax basis in his or her Fund shares and then as capital gain.
For federal income tax purposes, distributions of investment company taxable income are
generally taxable as ordinary income, and distributions of gains from the sale of investments that the Fund owned for one year or less will be taxable as ordinary income. Distributions designated by the Fund as capital gain dividends
(distributions from the excess of net long-term capital gain over short-term capital losses) will be taxable to shareholders as long-term capital gain regardless of the length of time they have held their shares of the Fund. Such dividends do not
qualify as dividends for purposes of the dividends received deduction described below.
Noncorporate shareholders of a Fund may be eligible for the 15%
long-term capital gain rate applicable to distributions of qualified dividend income received by such noncorporate shareholders in taxable years beginning before January 1, 2013. After January 1, 2013, the long-term capital
gain rate is 20% for non-corporate shareholders with taxable income in excess of $400,000 ($450,000 if married and filing jointly), 15% for non-corporate shareholders with taxable income of less than the threshold amounts and 0% for non-corporate
shareholders in lower brackets. A Funds distribution will be treated as qualified dividend income and therefore eligible for the long-term capital gain rate to the extent it receives dividend income from taxable domestic corporations and
certain qualified foreign corporations, provided that certain holding periods and other requirements are met. A corporate shareholder of a Fund may be eligible for the dividends received deduction on such Funds distributions attributable to
dividends received by such Fund from
32
domestic corporations, which, if received directly by the corporate shareholder, would qualify for such a deduction. For eligible corporate shareholders, the dividends received deduction may be
subject to certain reductions, and a distribution by a Fund attributable to dividends of a domestic corporation will be eligible for the deduction only if certain holding period and other requirements are met.
Under current law, beginning in 2013, a new 3.8% Medicare contribution tax on net investment income including interest (but not tax-exempt interest), dividends, and
capital gains of U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) and of estates and trusts.
The Fund will
furnish a statement to shareholders providing the federal income tax status of its dividends and distributions including the portion of such dividends, if any, that qualifies as long-term capital gain.
Different tax treatment, including penalties on certain excess contributions and deferrals, certain pre-retirement and post-retirement distributions, and certain
prohibited transactions, is accorded to accounts maintained as qualified retirement plans.
Shareholders are urged and advised to consult their own tax advisors for more information.
PURCHASES OF FUND SHARES.
Prior to purchasing shares in the Fund, the impact of dividends or distributions which are expected to be or have been declared, but not paid, should be
carefully considered. Any dividend or distribution declared shortly after a purchase of shares of the Fund prior to the record date will have the effect of reducing the per share net asset value by the per share amount of the dividend or
distribution, and to the extent the distribution consists of the Funds taxable income, the purchasing shareholder will be taxed on the taxable portion of the dividend or distribution received even though some or all of the amount distributed
is effectively a return of capital.
SALES, EXCHANGES OR REDEMPTIONS
. Upon the disposition of shares of the Fund (whether
by redemption, sale or exchange), a shareholder may realize a capital gain or loss. Such capital gain or loss will be long-term or short-term depending upon the shareholders holding period for the shares. The capital gain will be long-term if
the shares were held for more than 12 months and short-term if held for 12 months or less.
If a shareholder sells or exchanges Fund shares within 90
days of having acquired such shares and if, before January 31 of the calendar year following the calendar year of the sale or exchange, as a result of having initially acquired those shares, the shareholder subsequently pays a reduced sales
charge on a new purchase of shares of the Fund or another Fund, the sales charge previously incurred in acquiring the Funds shares generally shall not be taken into account (to the extent the previous sales charges do not exceed the reduction
in sales charges on the new purchase) for the purpose of determining the amount of gain or loss on the disposition, but generally will be treated as having been incurred in the new purchase. Any loss realized on a disposition will be disallowed
under the wash sale rules to the extent that the shares disposed of by the shareholder are replaced by the shareholder within a period of 61 days beginning 30 days before and ending 30 days after the date of disposition. In such a case,
the basis of the shares acquired will be adjusted to reflect the disallowed loss. Any loss realized by a shareholder on a disposition of shares held by the shareholder for six months or less will be treated as a long-term capital loss to the extent
of any distributions of capital gain dividends received by the shareholder and disallowed to the extent of any distributions of tax-exempt interest dividends received by the shareholder with respect to such shares. Capital losses are generally
deductible only against capital gains except that individuals may deduct up to $3,000 of capital losses against ordinary income.
The 3.8% Medicare
contribution tax (described above) will apply to gains from the sale or exchange of the Funds shares.
BACKUP
WITHHOLDING
. The Fund generally is required to withhold, and remit to the U.S. Treasury, subject to certain exemptions, an amount equal to 28% of all distributions and redemption proceeds paid or credited to a shareholder
of the Fund if (i) the shareholder fails to furnish the Fund with the correct taxpayer identification number (TIN) certified under penalties of perjury, (ii) the shareholder fails to provide a certified statement that the
shareholder is not subject to backup withholding, or (iii) the IRS or a broker has notified the Fund that the number furnished by the shareholder is incorrect or that the shareholder is subject to backup withholding as a result of failure to
report interest or dividend income. If the backup withholding provisions are applicable, any such distributions or proceeds, whether taken in cash or reinvested in shares, will be reduced by the amounts required to be withheld. Backup withholding is
not an additional tax. Any amounts withheld may be credited against a shareholders U.S. federal income tax liability.
STATE AND LOCAL
TAXES.
State and local laws often differ from federal income tax laws with respect to the treatment of specific items of income, gain, loss, deduction and credit.
Shareholders are urged and advised to consult their own tax advisors as to the state and local tax rules affecting investments in the Fund.
33
NON-U.S. SHAREHOLDERS
. Distributions made to non-U.S. shareholders attributable to net
investment income generally are subject to U.S. federal income tax withholding at a 30% rate (or such lower rate provided under an applicable income tax treaty). Notwithstanding the foregoing, if a distribution described above is effectively
connected with the conduct of a trade or business carried on by a non-U.S. shareholder within the United States (or, if an income tax treaty applies, is attributable to a permanent establishment in the United States), federal income tax withholding
and exemptions attributable to foreign persons will not apply and such distribution will be subject to the federal income tax, reporting and withholding requirements generally applicable to U.S. persons described above.
Under U.S. federal tax law, a non-U.S. shareholder is not, in general, subject to federal income tax or withholding tax on capital gains (and is not allowed a
deduction for losses) realized on the sale of shares of the Fund and on long-term capital gains dividends, provided that the Fund obtains a properly completed and signed certificate of foreign status, unless (i) such gains or distributions are
effectively connected with the conduct of a trade or business carried on by the non-U.S. shareholder within the United States (or, if an income tax treaty applies, are attributable to a permanent establishment in the United States of the non-U.S.
shareholder); (ii) in the case of an individual non-U.S. shareholder, the shareholder is present in the United States for a period or periods aggregating 183 days or more during the year of the sale and certain other conditions are met; or
(iii) the shares of the Fund constitute U.S. real property interests (USRPIs).
Distributions of the Fund when at least 50% of its assets are
USRPIs, as defined in the IRC and Treasury regulations, to the extent the distributions are attributable to gains from sales or exchanges of USRPIs (including gains on the sale or exchange of shares in certain U.S. real property holding
corporations, which may include certain REITs, among other entities, and certain REIT capital gain dividends) generally will cause a non-U.S. shareholder to treat such gain as income effectively connected to a trade or business within the
United States, subject to tax at the graduated rates applicable to U.S. shareholders. Such distributions may be subject to U.S. withholding tax and may require the non-U.S. shareholder to file a U.S. federal income tax return. Subject to the
additional rules described herein, federal income tax withholding will apply to distributions attributable to dividends and other investment income distributed by the Fund. The federal income tax withholding rate may be reduced (and, in some cases,
eliminated) under an applicable tax treaty between the United States and the non-U.S. shareholders country of residence or incorporation. In order to qualify for treaty benefits, a non-U.S. shareholder must comply with applicable certification
requirements relating to its foreign status (generally by providing the Fund with a properly completed Form W-8BEN).
All non-U.S. shareholders are urged and advised to consult their own tax advisors as to the tax consequences of an investment in
the Fund.
Recently enacted rules require the reporting to the IRS of direct and indirect ownership of foreign financial accounts and foreign
entities by U.S. persons. The IRS has issued final guidance with respect to these new rules. However, since they have been recently promulgated, all aspects of their application and scope are not yet clear as to their implementation in certain
respects. Pursuant to that guidance, a 30% withholding tax will be imposed on dividends paid after December 31, 2013 and redemption proceeds paid after December 31, 2014, to (i) foreign financial institutions including non-U.S.
investment funds unless they agree to collect and disclose to the IRS information regarding their direct and indirect U.S. account holders and (ii) certain other foreign entities unless they certify certain information regarding their direct
and indirect U.S. owners. To avoid withholding, a foreign financial institution will need to enter into agreements with the IRS regarding providing the IRS information including the name, address and taxpayer identification number of direct and
indirect U.S. account holders, to comply with due diligence procedures with respect to the identification of U.S. accounts, to report to the IRS certain information with respect to U.S. accounts maintained, to agree to withhold tax on certain
payments made to non-compliant foreign financial institutions or to account holders who fail to provide the required information, and to determine certain other information as to their account holders. Other foreign entities will need to provide the
name, address, and TIN of each substantial U.S. owner or certifications of no substantial U.S. ownership unless certain exceptions apply. Shareholders are urged and advised to consult their own tax advisor regarding the application of this new
reporting and withholding regime to their own tax situation.
FOREIGN BANK AND FINANCIAL ACCOUNTS AND FOREIGN FINANCIAL ASSETS REPORTING REQUIREMENTS.
A shareholder that owns directly or indirectly more than 50% by vote or value of the Fund,
is urged and advised to consult its own tax adviser regarding its filing obligations with respect to IRS Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts.
Also, under recently enacted rules, subject to exceptions, individuals (and, to the extent provided in forthcoming future U.S. Treasury regulations, certain domestic entities) must report annually their interests
in specified foreign financial assets on their U.S. federal income tax returns. It is currently unclear whether and under what circumstances shareholders would be required to report their indirect interests in the Funds
specified foreign financial assets (if any) under these new rules.
Shareholders may be subject to substantial penalties for failure
to comply with these reporting requirements.
Shareholders are urged and advised to consult their own tax advisers to determine whether these reporting requirements are applicable to them.
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TAX-EXEMPT SHAREHOLDERS
. A tax-exempt shareholder could realize UBTI by virtue of its
investment in the Fund as a result of the Funds investments and if shares in the Fund constitute debt financed property in the hands of the tax-exempt shareholder within the meaning of IRC Section 514(b).
Any investment in a residual interest of a CMO that has elected to be treated as a REMIC can create complex tax consequences, especially if the Fund has state or
local governments or other tax-exempt organizations as shareholders.
All tax-exempt shareholders are urged to consult their tax advisors as to the
tax consequences of an investment in the Fund.
TAX SHELTER REPORTING REGULATIONS
. Under Treasury regulations, if a
shareholder recognizes a loss of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on Form 8886. The fact that a loss is reportable
under these regulations does not affect the legal determination of whether the taxpayers treatment of the loss is proper. Shareholders are urged and advised to consult their own tax advisors to determine the applicability of these regulations
in light of their individual circumstances.
Shareholders are urged and advised to consult their own tax advisor with respect to the tax consequences
of an investment in the Fund including, but not limited to, the applicability of state, local, foreign and other tax laws affecting the particular shareholder and to possible effects of changes in federal or other tax laws.
BROKERAGE ALLOCATION AND OTHER FUND BROKERAGE PRACTICES
Brokerage
Transactions.
Generally, equity securities are bought and sold through brokerage transactions for which commissions are payable. Purchases from underwriters will include the underwriting commission or concession, and
purchases from dealers serving as market makers will include a dealers mark-up or reflect a dealers mark-down. The purchase price for securities bought from dealers serving as market makers will similarly include the dealers mark
up or reflect a dealers mark down. When the Fund executes transactions in the over-the-counter market, it will generally deal with primary market makers unless prices that are more favorable are otherwise obtainable.
In addition, the Adviser may place a combined order for two or more accounts it manages, including the Fund, engaged in the purchase or sale of the same security
if, in its judgment, joint execution is in the best interest of each participant and will result in best price and execution. Transactions involving commingled orders are allocated in a manner deemed equitable to each account or the Fund. Although
it is recognized that, in some cases, the joint execution of orders could adversely affect the price or volume of the security that a particular account or the Fund may obtain, it is the opinion of the Adviser that the advantages of combined orders
outweigh the possible disadvantages of separate transactions. Nonetheless, the Adviser believes that the ability of the Fund to participate in higher volume transactions will generally be beneficial to the Fund.
Brokerage Selection.
The Trust does not expect to use one particular broker or dealer, and when one or more brokers is believed
capable of providing the best combination of price and execution, the Funds Adviser may select a broker based upon brokerage or research services provided to the Adviser. The Adviser may pay a higher commission than otherwise obtainable from
other brokers in return for such services only if a good faith determination is made that the commission is reasonable in relation to the services provided.
Section 28(e) of the Securities Exchange Act of 1934 (the 1934 Act) permits the Adviser, under certain circumstances, to cause the Fund to pay a broker or dealer a commission for effecting a
transaction in excess of the amount of commission another broker or dealer would have charged for effecting the transaction in recognition of the value of brokerage and research services provided by the broker or dealer. In addition to agency
transactions, the Adviser may receive brokerage and research services in connection with certain riskless principal transactions, in accordance with applicable SEC guidance. Brokerage and research services include: (1) furnishing advice as to
the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (2) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, Fund strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions incidental thereto (such as clearance, settlement, and custody). In the case of research
services, the Adviser believes that access to independent investment research is beneficial to its investment decision-making processes and, therefore, to the Fund.
To the extent that research services may be a factor in selecting brokers, such services may be in written form or through direct contact with individuals and may include information as to particular companies and
securities as well
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as market, economic, or institutional areas and information which assists in the valuation and pricing of investments. Examples of research-oriented services for which the Adviser might utilize
Fund commissions include research reports and other information on the economy, industries, sectors, groups of securities, individual companies, statistical information, political developments, technical market action, pricing and appraisal
services, credit analysis, risk measurement analysis, performance and other analysis. The Adviser may use research services furnished by brokers in servicing all client accounts and not all services may necessarily be used in connection with the
account that paid commissions to the broker providing such services. Information so received by the Adviser will be in addition to and not in lieu of the services required to be performed by the Funds Adviser under the Advisory Agreement. Any
advisory or other fees paid to the Adviser are not reduced as a result of the receipt of research services.
In some cases the Adviser may receive a
service from a broker that has both a research and a non-research use. When this occurs, the Adviser makes a good faith allocation, under all the circumstances, between the research and non-research uses of the service. The
percentage of the service that is used for research purposes may be paid for with client commissions, while the Adviser will use its own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith
allocation, the Adviser faces a potential conflict of interest, but the Adviser believes that its allocation procedures are reasonably designed to ensure that it appropriately allocates the anticipated use of such services to their research and
non-research uses.
From time to time, the Fund may purchase new issues of securities in a fixed price offering. In these situations, the seller may be a
member of the selling group that will, in addition to selling securities, provide the Adviser with research services. FINRA has adopted rules expressly permitting these types of arrangements under certain circumstances. Generally, the seller will
provide research credits in these situations at a rate that is higher than that which is available for typical secondary market transactions. These arrangements may not fall within the safe harbor of Section 28(e).
Brokerage with Fund Affiliates.
The Fund may execute brokerage or other agency transactions through registered broker-dealer
affiliates of either the Fund, the Adviser or the Distributor for a commission in conformity with the 1940 Act, the 1934 Act and rules promulgated by the SEC. These rules further require that commissions paid to the affiliate by the Fund for
exchange transactions not exceed usual and customary brokerage commissions. The rules define usual and customary commissions to include amounts which are reasonable and fair compared to the commission, fee or other
remuneration received or to be received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time. The Trustees, including those
who are not interested persons of the Fund, have adopted procedures for evaluating the reasonableness of commissions paid to affiliates and review these procedures periodically.
Portfolio Turnover.
The Funds portfolio turnover rate is calculated by dividing the lesser of purchases or sales of portfolio securities for the fiscal year by the monthly
average of the value of the portfolio securities owned by the Fund during the fiscal year. The calculation excludes from both the numerator and the denominator securities with maturities at the time of acquisition of one year or less. High portfolio
turnover rate involves correspondingly greater brokerage commissions and other transaction costs, which will be borne directly by the Fund. A 100% turnover rate would occur if all of the Funds portfolio securities were replaced once within a
one-year period.
PORTFOLIO HOLDINGS DISCLOSURE
The Trust has adopted policies and procedures that govern
the disclosure of the Funds portfolio holdings. These policies and procedures are designed to ensure that such disclosure is in the best interests of Fund shareholders.
The Fund will disclose its portfolio holdings by mailing its annual and semi-annual reports to shareholders approximately two months after the end of the fiscal year and semi-annual period. The Fund may also
disclose its portfolio holdings by mailing a quarterly report to its shareholders. In addition, the Fund will disclose its portfolio holdings in reports filed with the Securities and Exchange Commission (SEC) on Forms N-CSR and N-Q two
months after the end of each quarter/semi-annual period.
The Fund will publish a schedule of its 10 largest portfolio holdings, which shall include its
holding of the Subsidiary. Such schedule shall be published as of the most recent calendar month-end on the Funds website at www.EquinoxFundManagement.com generally within 10 business days after the end of the calendar month. This information
will remain on the website until new information for the next month is posted, or at least until the Fund files its Form N-Q or Form N-CSR for the period that includes the dates of the posted holdings.
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The Fund may choose to make its holdings available to rating agencies such as Lipper, Morningstar or Bloomberg more
frequently on a confidential basis.
Under limited circumstances, as described below, the Funds portfolio holdings may be disclosed to, or known
by, certain third parties in advance of their filing with the SEC on Form N-CSR or Form N-Q. In each case, a determination has been made that such advance disclosure is supported by a legitimate business purpose and that the recipient is subject to
a duty to keep the information confidential.
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The Adviser
. Personnel of the Adviser, including personnel responsible for managing the Funds portfolio, may have full daily
access to Fund portfolio holdings since that information is necessary in order for the Adviser to provide its management, administrative, and investment services to the Fund. As required for purposes of analyzing the impact of existing and future
market changes on the prices, availability, demand and liquidity of such securities, as well as for the assistance of portfolio managers in the trading of such securities, Adviser personnel may also release and discuss certain portfolio holdings
with various broker-dealers.
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Gemini Fund Services, LLC.
Gemini Fund Services, LLC is the transfer agent, fund accountant and administrator for the Fund;
therefore, its personnel have full daily access to the Funds portfolio holdings since that information is necessary in order for them to provide the agreed-upon services for the Fund.
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Union Bank, N. A.
Union Bank is the custodian for the Fund; therefore, its personnel have full daily access to the Funds
portfolio holdings since that information is necessary in order for them to provide the agreed-upon services for the Fund.
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McGladrey LLP.
McGladrey LLP is the Funds registered independent public accounting firm; therefore, its personnel have access
to the Funds portfolio holdings in connection with auditing of the Funds annual financial statements and providing assistance and consultation in connection with SEC filings.
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Counsel. Pepper Hamilton, LLP
is counsel to the Fund; therefore its personnel have access to the Funds portfolio holdings in
connection with the review of the Funds annual and semi-annual shareholder reports and SEC filings.
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Additions to List
of Approved Recipients.
The Trusts Chief Compliance Officer is the person responsible, and whose prior approval is required, for any disclosure of the Funds portfolio securities at any time or to any persons
other than those described above. In such cases, the recipient must have a legitimate business need for the information and must be subject to a duty to keep the information confidential. There are no ongoing arrangements in place with respect to
the disclosure of portfolio holdings. In no event shall the Fund, the Adviser or any other party receive any direct or indirect compensation in connection with the disclosure of information about the Funds portfolio holdings.
Compliance with Portfolio Holdings Disclosure Procedures.
The Trusts Chief Compliance Officer will report periodically to the
Board with respect to compliance with the portfolio holdings disclosure procedures, and from time to time will provide the Board any updates to the portfolio holdings disclosure policies and procedures.
There is no assurance that the Trusts policies on disclosure of portfolio holdings will protect the Fund from the potential misuse of holdings information by
individuals or firms in possession of that information.
CAPITAL STOCK AND OTHER SECURITIES
The Trust issues and offers Class A Shares, Class I
Shares and Class P Shares of the Fund. The shares of the Fund, when issued and paid for in accordance with the Prospectus, will be fully paid and non-assessable shares, with equal voting rights and no preferences as to conversion, exchange,
dividends, redemption or any other feature.
The separate classes of shares of the Fund represent interests in the same portfolio of investments, have
the same rights and are identical in all respects, except that Class A shares and Class P shares bear distribution and/or service fees and have exclusive voting rights with respect to their respective Rule 12b-1 Plan pursuant to which the
distribution fee may be paid. Currently, the Fund is not making payments under the Rule 12b-1 Plan with respect to Class P shares.
The net income
attributable to a class of shares and the dividends payable on such shares will be reduced by the amount of any applicable shareholder service or Rule 12b-1 distribution fees. Accordingly, the NAV of the Class A Shares and Class P Shares of the
Fund will be reduced by such amount to the extent the Fund has undistributed net income.
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Shares of the Fund entitle holders to one vote per share and fractional votes for fractional shares held. Shares have
non-cumulative voting rights, do not have preemptive or subscription rights and are transferable. Each share class of the Fund takes separate votes on matters affecting only that class.
The Trust does not hold annual meetings of shareholders. The Trustees are required to call a meeting of shareholders for the purpose of voting upon the question of removal of any Trustee when requested in writing
to do so by the shareholders of record owning not less than 10% of the Funds outstanding shares.
ANTI-MONEY
LAUNDERING PROGRAM
The Trust has
established an Anti-Money Laundering Compliance Program (the Program) as required by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT
Act). To ensure compliance with this law, the Trusts Program provides for the development of internal practices, procedures and controls, designation of anti-money laundering compliance officers, an ongoing training program and an
independent audit function to determine the effectiveness of the Program. The Trusts Secretary serves as its Anti-Money Laundering compliance officer.
Procedures to implement the Program include, but are not limited to, determining that the Funds Distributor and Transfer Agent have established proper anti-money laundering procedures, reported suspicious
and/or fraudulent activity and a complete and thorough review of all new opening account applications. The Trust will not transact business with any person or entity whose identity cannot be adequately verified under the provisions of the USA
PATRIOT Act.
As a result of the Program, the Trust may be required to freeze the account of a shareholder if the shareholder appears to be
involved in suspicious activity or if certain account information matches information on government lists of known terrorists or other suspicious persons, or the Trust may be required to transfer the account or proceeds of the account to a
governmental agency.
LIMITATION OF TRUSTEES LIABILITY
The Trusts Declaration of Trust provides that a
Trustee shall be liable only for his or her own willful defaults and, if reasonable care has been exercised in the selection of officers, agents, employees or investment advisers, shall not be liable for any neglect or wrongdoing of any such person.
The Declaration of Trust also provides that the Fund will indemnify its Trustees and officers against liabilities and expenses incurred in connection with actual or threatened litigation in which they may be involved because of their offices with
the Trust unless it is determined in the manner provided in the Declaration of Trust that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the Trust. However, nothing in the Declaration of
Trust shall protect or indemnify a Trustee against any liability for his or her willful misfeasance, bad faith, gross negligence or reckless disregard of his or her duties. Nothing contained in this section attempts to disclaim a Trustees
individual liability in any manner inconsistent with the federal securities laws.
CODES OF ETHICS
The Trust, the Adviser and the Distributor each have
adopted codes of ethics under Rule 17j-1 under the 1940 Act that govern the personal securities transactions of their board members, officers and employees who may have access to current trading information of the Trust. Under the code of ethics,
the Trustees are permitted to invest in securities that may also be purchased by the Fund.
In addition, the Trust has adopted a code of ethics, which
applies only to the Trusts executive officers to ensure that these officers promote professional conduct in the practice of corporate governance and management. The purpose behind these guidelines is to promote i) honest and ethical conduct,
including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; ii) full, fair, accurate, timely, and understandable disclosure in reports and documents that a registrant files with, or
submits to, the SEC and in other public communications made by the Fund; iii) compliance with applicable governmental laws, rule and regulations; iv) the prompt internal reporting of violations of this Code to an appropriate person or persons
identified in the Code; and v) accountability for adherence to the Code.
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