The Hatteras PE Intelligence Fund (“the “Fund”) is a series of HCIM Trust (the “Trust”), which was organized as a Delaware statutory trust on May 13, 2013 and is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end non-diversified management investment company
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The Fund commenced operations on November 12, 2013, and as of December 31, 2013, was the only operational series within the Trust. A second series of the trust, the Hatteras Disciplined Opportunity Fund, had not yet commenced operations as of December 31, 2013. Information regarding that series is therefore omitted from this annual report. The Fund consists of a single class with no front-end or back-end sales charges, no 12b-1 fees and no redemption fee.
The Fund is managed by Hatteras Capital Investment Management, LLC (“HCIM” or the “Adviser”), an investment adviser registered with the Securities and Exchange Commission (the “SEC”) under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The Fund’s distributor, an affiliate of the Adviser, is Hatteras Capital Distributors, LLC (the “Distributor”).
The Trust had an organizational meeting on August 21, 2013. At the organizational meeting, a Board of Trustees (the “Board”) was elected. The Board has overall responsibility for the management and supervision of the business operations of the Fund on behalf of the shareholders of the Fund, including authority to oversee and establish policies regarding the management, conduct and operation of the Fund’s business.
Investment Objective
The Fund seeks investment results, before fees and expenses, comparable to the returns of the Nomura QES Modeled Private Equity Returns Index (the “Reference Index”).
Principal Investment Strategies
The Fund seeks to track the Reference Index and therefore, to provide a return similar to that of a broad-based global investment in private equity buyout funds, calculated based on the amounts investors commit to private equity buyout funds, without directly or indirectly investing in private equity funds. The Reference Index is provided by Nomura International plc (the “Index Provider”). The Reference Index is based on a quantitative model (the “PERI Model”) developed by Quantitative Equity Strategies, LLC (“QES”), using data provided by Preqin Ltd.
The Fund seeks to achieve its investment objective by investing primarily in a combination of equity securities, total return swaps, notional cash deposits in various currencies and derivatives that, as a whole, are expected to produce returns that track the price performance of the Reference Index. The Fund may invest in equity securities of companies of any capitalization. The Fund will generally buy securities and hold notional currency positions that the Adviser expects will give the Fund economic exposure similar to that of the respective constituents of the Reference Index and sell securities whose exposure is greater than that of the corresponding constituents of the Reference Index.
The Reference Index is rebalanced weekly. The Adviser expects that the Fund’s active or frequent trading of portfolio securities may result in a portfolio turnover rate in excess of 100% on an annual basis.
The equity securities in which the Fund invests include common stocks and shares of non-affiliated investment companies (such as exchange-traded funds (“ETFs”)) that invest primarily in the constituent equity securities of broad-based U.S. equity indices that focus on specific market sectors (e.g., the S&P 500 Energy Total Return Index).
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2.
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Summary of Significant Accounting Policies
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These financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of increase and decrease in net assets from operations during the period. Actual amounts could differ from those estimates. The following is a summary of the significant accounting policies of the Fund:
Cash
– Cash may include short-term interest bearing deposit accounts. At times, such deposits may be in excess of federally insured limits.
HCIM Trust
NOTES TO FINANCIAL STATEMENTS
Period From November 12, 2013 (Commencement of Operations) to December 31, 2013
Security Valuation --
Investments by the Fund are valued in the following manner:
Exchange-traded and over-the-counter securities are valued at the closing price of the applicable exchange on the day the valuation is made. Listed securities and put and call options for which no sale was reported on a particular day and securities traded over-the-counter are valued at the mean between the last bid and ask prices. Fixed income securities (other than obligations having a maturity of 60 days or less) are valued on the basis of values obtained from pricing services or from brokers, which take into account appropriate factors such as institutional sized trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. Fixed income securities purchased with remaining maturities of 60 days or less are valued at amortized cost, which approximates fair value.
Securities and other assets for which market quotations are not readily available (including restricted securities) will be valued in good faith at fair value under the supervision of the Board. In determining the fair value of a security, the Adviser and the Board shall take into account the relevant factors and surrounding circumstances, which may include: (i) the nature and pricing history (if any) of the security; (ii) whether any dealer quotations for the security are available; (iii) possible valuation methodologies that could be used to determine the fair value of the security; (iv) the recommendation of the portfolio manager of the Fund with respect to the valuation of the security; (v) whether the same or similar securities are held by other funds managed by the Adviser or other funds and the method used to price the security in those funds; (vi) the extent to which the fair value to be determined for the security will result from the use of data or formula produced by third parties independent of the Adviser; and (vii) the liquidity or illiquidity of the market for the security. When a furnished price is significantly different from the previous day’s price, the Adviser will review the price to determine if it is appropriate. When prices are not readily available, or are determined to not reflect fair value, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund may value its securities or fair value as determined in accordance with procedures approved by the Board of Trustees.
A summary of the inputs used to value the Fund’s net assets as of December 31, 2013 is located in a table following the Schedule of Investments in these financial statements. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
GAAP establishes an authoritative definition of fair value and sets out a hierarchy for measuring fair value. GAAP also requires additional disclosures about the various inputs used to develop the measurements of fair value. These inputs are summarized in the three broad levels listed below:
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• Level 1 -
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Quoted prices in active markets for identical securities.
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• Level 2 -
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Other significant observable inputs (including quoted prices for similar securities or the identical security on an active market, interest rates, prepayment speeds, credit risk, etc.).
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• Level 3 -
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Significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments).
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As of December 31, 2013, all of the securities held by the Fund were considered Level 1 investments.
There were no transfers between levels during the period ended December 31, 2013. Transfers between levels are recognized at the end of the reporting period.
Security Transactions, Investment Income and Realized Gain and Loss
-- Investment and shareholder transactions in the Fund are recorded on trade date. Realized gains and losses on the sale of investments are calculated on the identified cost basis. Dividend income is recorded on the ex-dividend date and interest income is recognized on an accrual basis. All premiums and discounts, including original issue discounts, are amortized/accreted using the interest method. Long-term capital gain distributions received are recorded as capital gains.
HCIM Trust
NOTES TO FINANCIAL STATEMENTS
Period From November 12, 2013 (Commencement of Operations) to December 31, 2013
Foreign Currency Translations and Transactions --
The Fund may engage in foreign currency transactions. Foreign currency transactions are translated into U.S. dollars on the following basis: (i) market value of investment securities, assets and liabilities at the daily rates of exchange, and (ii) purchases and sales of investment securities, dividend and interest income and certain expenses at the rates of exchange prevailing on the respective dates of such transactions. For financial reporting purposes, the Fund does not isolate changes in the exchange rate of investment securities from the fluctuations arising from changes in the market prices of securities for unrealized gains and losses. However, for federal income tax purposes, the Fund does isolate and treat as ordinary income the effect of changes in foreign exchange rates on realized gain or loss from the sale of investment securities and payables and receivables arising from trade-date and settlement-date differences.
The Fund may enter into forward currency exchange contracts obligating the Fund to deliver and receive a currency at a specified future date. The Fund is subject to foreign currency exchange rate risk in the normal course of pursuing its investment objectives. The Fund may use forward currency exchange contracts to gain exposure to, and to hedge against changes in the value of foreign currencies. With forward currency exchange contracts, there is minimal counter-party credit risk to the Fund since forward currency exchange contracts are exchange traded and the exchange’s clearinghouse, as counterparty to all exchange traded forward currency exchange contracts, guarantees the forward currency exchange contracts against default. Unrealized appreciation or depreciation is recorded daily as the difference between the contract exchange rate and the closing forward rate applied to the face amount of the contract. A realized gain or loss is recorded at the time the forward contract is closed.
Taxes and Distributions to Shareholders –
The Fund intends to qualify and elect to be treated as a regulated investment company under Subchapter M of the Internal Revenue Code. The Fund intends to distribute the requisite investment company net taxable income and net capital gains to shareholders. Therefore, no federal income tax provision is recorded.
The Fund has reviewed all open tax years and major jurisdictions and concluded that there is no tax liability resulting from unrecognized tax benefits relating to uncertain income tax positions taken or expected to be taken on the tax return for the fiscal year-end December 31, 2013. The Fund is also not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change significantly.
Dividends from net investment income and distributions of net realized capital gains, if any, are declared and paid at least annually. Distributions to shareholders are recorded on the ex-dividend date.
Permanent differences are generally due to differing treatment of net investment losses. To the extent these differences are permanent, they are charged or credited to paid-in capital, accumulated net realized gain (loss), or accumulated net investment income (loss), as appropriate, in the period in which the differences arise. These reclassifications have no effect on net assets or net asset value per share of the Fund.
Guarantees and Indemnifications
-- Under the Fund’s organizational documents, its officers and trustees are indemnified by the Fund against certain liabilities arising out of the performance of their duties to the Fund. In the normal course of business, the Fund enters into contracts with service providers that contain general indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote.
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3.
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Derivative Transactions
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The Fund may utilize derivative instruments to implement its investment strategies. The Fund may use total return swaps, credit default swaps and currency forward contracts to implement its strategy of seeking investment results, before fees and expenses, that correspond generally to the overall performance of the Reference Index. Total return swaps may be used to gain exposure to certain broad based market sectors, instead of purchasing the underlying constituents of the sector directly. Currency forward contacts may be used to gain exposure to certain foreign equity markets that are components of the Reference Index.
A description of the potential benefits and risks with each type of derivative that may be used by the Fund is summarized below:
HCIM Trust
NOTES TO FINANCIAL STATEMENTS
Period From November 12, 2013 (Commencement of Operations) to December 31, 2013
Total Return Swaps -
A total return swap agreement (TRS) is a financial contract between two parties, where one party makes payments based on a set rate, either fixed or variable, while the other party makes payments based on the return of an underlying asset, which includes both the income it generates and any capital gains. In total return swaps, the underlying asset, referred to as the reference asset, is usually an equity index, loans, or bonds. This is owned by the party receiving the set rate payment.
Credit Default Swaps
- Credit default swaps have two primary risks: counterparty risk and liquidity risk. Counterparty risk is the risk that the other party to the transaction will not honor its contractual obligation. Liquidity risk is the risk that buyers and sellers may become scarcer in periods of market volatility, making it difficult to close the position.
Forwards -
A forward contract specifies the exchange of goods (generally a pre-determined amount of a foreign currency) for a specified price at a specified future date. However, forward contracts are not standardized nor traded on an exchange. Therefore, forward contracts are subject to counterparty risk, or the risk that the other party to the transaction will not honor its contractual obligation.
In addition, as the principals who deal in the forward markets are not required to continue to make markets in the currencies or commodities they trade, these markets can experience periods of illiquidity, sometimes of significant duration. Disruptions can occur in any currency market traded by a portfolio due to unusually high trading volume, political intervention or other factors. The imposition of controls by governmental authorities might also limit such forward trading, to the possible detriment of a portfolio. Market illiquidity or disruption could result in significant losses.
As of the period ended December 31, 2013, the Fund had not entered into any derivative instruments.
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4.
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Investment Adviser and Other Affiliates
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The Adviser is responsible for the management and operation of the Fund and the investment of the Fund’s assets, subject to the ultimate supervision of and subject to any policies established by the Board, pursuant to the terms of an investment advisory agreement (the “Investment Advisory Agreement”) with the Fund. Under the terms of the Investment Advisory Agreement, the Adviser is responsible for developing, implementing and supervising the Fund’s investment programs and is entitled to receive a monthly management fee based upon the average daily net assets of the Fund at the annual rate of 1.50%. The Adviser will remit a portion of the management fee to the Index Provider.
Certain officers of the Trust are employees of the Adviser. Each member of the Board who is not an “interested person” of the Fund, as defined by Section 2(a)(19) of the 1940 Act (each an “Independent Manager”), receives an annual retainer from the Fund for his or her services on the Board and for his or her services as a member of the audit committee of the Fund.
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5.
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Organization and Offering Costs
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The Trust incurred organizational costs in connection with its formation, its initial registration as an investment company under the 1940 Act, and the initial shareholder offering. In accordance with FASB ASC 720-15-25-1, organization costs were charged to expense when incurred. Organization costs allocated to the Fund for the period from August 21, 2013 to December 31, 2013 totaled $3,000, and are included in the statement of operations under organizational fees.
Offering costs allocated to the Fund are accounted for as a deferred charge until operations begin and thereafter amortized to expense over 12 months on a straight-line basis. For the period from November 12, 2013 (commencement of operations) to December 31, 2013, the Fund incurred offering costs totaling $30,931.
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6.
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Investment Transactions
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Costs of purchases and proceeds from sales of securities for the period ended December 31, 2013 for the Fund (excluding short-term investments) are as follows:
HCIM Trust
NOTES TO FINANCIAL STATEMENTS
Period From November 12, 2013 (Commencement of Operations) to December 31, 2013
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PE
Intelligence
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Purchases of securities
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$
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39,380,317
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Sales of securities
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15,245,063
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There were no purchases or sale of U.S. Government Securities during the period ended December 31, 2013.
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7.
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Capital Share Transactions
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Transactions in shares of the Fund were as follows:
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PE
Intelligence
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Shares outstanding, November 12, 2013
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(inception of Fund)
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-
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Shares sold
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2,510,998
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Shares issued to shareholders
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in reinvestment of distributions
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-
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Shares redeemed
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(10,998
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)
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Shares outstanding, December 31, 2013
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2,500,000
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8.
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Ownership By Affiliated Parties
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As of December 31, 2013, one affiliated party owned 2,500,000 shares of the Fund, which represented 100.0% of total outstanding shares.
The cost basis of investments for federal income tax purposes at December 31, 2013 was as follows:
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PE
Intelligence
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Cost of Investments
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$
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24,691,334
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Gross tax unrealized appreciation
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972,432
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Gross tax unrealized depreciation
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(429,401
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)
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Net tax unrealized appreciation
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$
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543,031
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At December 31, 2013 the components of distributable earnings/(losses) on a tax basis were as follows:
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PE
Intelligence
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Net unrealized appreciation
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$
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543,031
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Undistributed ordinary income
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-
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Undistributed long-term capital gain
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479
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Accumulated other gain
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159,272
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Total distributable earnings
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$
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702,782
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No distribution was required from the Fund for the period ended December 31, 2013.
HCIM Trust
NOTES TO FINANCIAL STATEMENTS
Period From November 12, 2013 (Commencement of Operations) to December 31, 2013
As of December 31, 2013 the Fund did not have any accumulated capital loss carryovers.
In preparing these financial statements, the Fund has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.
On October 1, 2013, RCS Capital Corporation (the “Company”) and Scotland Acquisition, LLC (the “Purchaser”), a newly formed wholly-owned subsidiary of RCS Advisory Services, LLC, which is an operating subsidiary of the Company, entered into an asset purchase agreement (the “Purchase Agreement”) with certain principals of the Adviser and its affiliates. Pursuant to the terms of the Purchase Agreement, the Purchaser will purchase from the Adviser and its affiliates substantially all the assets related to the business and operations of the Adviser and its affiliates (the “Purchase”).
The Purchase Agreement is subject to various conditions. When consummated, the Purchase will result in a change in control of the Adviser and, therefore, constitute an “assignment” within the meaning of the 1940 Act of the existing investment management agreement between the Adviser and the Fund. An investment management agreement automatically terminates upon its assignment pursuant to certain provisions of the 1940 Act. The new investment management agreement was approved by the shareholders of the Fund on January 21, 2014. The Purchase is expected to be consummated in the first quarter of 2014.
