General. SIMC is a wholly owned subsidiary of SEI (NASDAQ: SEIC), a leading global provider of outsourced asset management, investment processing and investment operations solutions. The principal business address of SIMC and SEI is One Freedom Valley Drive, Oaks, Pennsylvania 19456. SEI was founded in 1968 and is a leading provider of investment solutions to banks, institutional investors,
investment advisers and insurance companies. As of September 30, 2014, SIMC had approximately $147.17 billion in assets under management.
Creation and Management of the Composite. The Fund will take long and short positions in an attempt to emulate the return of the Composite, which is constructed by SIMC. SIMC will leverage its experience in researching and selecting hedge fund managers for certain institutional accounts and alternative investment products to select and weight hedge funds within the Composite. SIMC will construct the Composite based on (i) an evaluation of the macroeconomic environment and expected performance of different hedge fund equity focused investment strategies, and (ii) a qualitative and quantitative analysis of each hedge fund’s investment and risk management process, investment team background and experience, and past investment performance. SIMC will actively manage and may frequently change the Composite.
Manager of Managers Structure. SIMC is the investment adviser for the Fund and operates as a “manager of managers.” SIMC and the Trust have obtained an exemptive order from the SEC that permits SIMC, with the approval of the Board, to retain unaffiliated investment sub-advisers for the Fund without submitting the sub-advisory agreements to a vote of the Fund’s shareholders. Among other things, the exemptive relief permits the non-disclosure of amounts payable by SIMC under such sub-advisory agreements. The Trust will notify shareholders in the event of any change in the identity of the sub-advisers. Subject to Board review, SIMC allocates and, when appropriate, reallocates the Fund’s assets to the Sub-Adviser, monitors and evaluates the Sub-Adviser’s performance and oversees the Sub-Adviser’s compliance with the Fund’s investment objectives, policies and restrictions. The sub-advisers are selected based primarily upon the research and recommendation of SIMC, which evaluates quantitatively and qualitatively a sub-adviser’s skills and investment results in managing assets for specific asset classes, investment styles and strategies. SIMC has ultimate responsibility for the investment performance of the Fund due to its responsibility to oversee the Sub-Adviser and recommend the sub-adviser’s hiring, termination and replacement.
Advisory and Sub-Advisory Agreements. The Trust and SIMC have entered into an investment advisory agreement (the “Advisory Agreement”). Pursuant to the Advisory Agreement, SIMC oversees the investment advisory services provided to the Fund and, as described below, may directly manage a portion of the Fund’s assets under certain circumstances. Pursuant to a separate sub-advisory agreement (the “Sub-Advisory Agreement” and, together with the Advisory Agreement, the “Investment Advisory Agreements”) with SIMC, and under the supervision of SIMC and the Board, the Sub-Adviser is responsible for the day-to-day investment management of all or a distinct portion of the assets of the Fund. The Sub-Adviser is also responsible for managing its employees who provide services to the Fund.
The Investment Advisory Agreements provide that SIMC (or the Sub-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. In addition, the Sub-Advisory Agreement provides that the Sub-Adviser shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or negligence on its part in the performance of its duties or from reckless disregard of its obligations or duties thereunder.
After its initial two year term, the continuance of each Investment Advisory Agreement must be specifically approved at least annually: (i) by the vote of a majority of the outstanding shares of the Fund or by the Trustees; and (ii) by the vote of a majority of the Trustees who are not parties to such Investment Advisory Agreement or “interested persons” (as defined under the 1940 Act) of any party thereto, cast in person at a meeting called for the purpose of voting on such approval. Each Investment 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 30 days’ nor more than 60 days’ written notice to SIMC or the Sub-Adviser, as applicable, or by SIMC or the Sub-Adviser, as applicable, on 90 days’ written notice to the Trust.
Advisory and Sub-Advisory Fees. For these advisory services, SIMC receives a fee, which is calculated daily and paid monthly at the following annual rates (shown as a percentage of the average daily net assets of the Fund):
Long/Short Alternative Fund . . . 0.80% SIMC pays the Sub-Adviser a fee out of its advisory fee, which is based on a percentage of the average monthly market value of the assets managed by the Sub-Adviser.
The Sub-Adviser.
BEACHHEAD CAPITAL MANAGEMENT, LLC—Beachhead Capital Management, LLC (“Beachhead”)
serves as a Sub-Adviser to a portion of the assets of the Long/Short Alternative Fund. Beachhead, a Delaware limited liability company, was founded in 2012 when it acquired substantially all of the assets of its predecessor firm, Belenos Capital Management LLC.
Portfolio Management SIMC
Compensation. The portfolio manager’s compensation consists of a combination of a fixed annual salary, a discretionary annual bonus, and in some instances an annual long-term incentive grant. Twenty percent of the portfolio manager’s compensation is tied to the corporate performance of SEI (SIMC’s ultimate parent company), as measured by the earnings per share earned for a particular year. This percentage is set at the discretion of SEI and not SIMC.
Other Accounts. As of November 30, 2014, in addition to the Long/Short Alternative Fund, the portfolio manager was responsible for the day-to-day management of certain other accounts, as follows: Registered Investment Other Pooled
Companies Investment Vehicles Other Accounts
Number Total Assets Number Total Assets Number Total Assets Portfolio Manager of Accounts (in millions) of Accounts (in millions) of Accounts (in millions) Radoslav Koitchev . . . 1 $510 2 $1,737 0 $0
No account listed above is subject to a performance-based advisory fee.
Conflicts of Interest. The portfolio manager’s management of registered investment companies, other pooled investment vehicles or other accounts may give rise to actual or potential conflicts of interest in connection with the portfolio manager’s day-to-day management of the Long/Short Alternative Fund’s investments. The other accounts might have similar investment objectives as the Long/Short Alternative Fund or hold, purchase or sell securities that are eligible to be held, purchased or sold by the Long/Short Alternative Fund.
While the portfolio manager’s management of the other accounts may give rise to the following potential conflicts of interest, SIMC does not believe that the conflicts, if any, are material or, to the extent any such conflicts are material, SIMC believes that it has designed policies and procedures that are reasonably designed to manage such conflicts in an appropriate way.
Knowledge of the Timing and Size of Fund Trades. A potential conflict of interest may arise as a result of the portfolio manager’s day-to-day management of the Long/Short Alternative Fund. Because of the portfolio manager’s position with the Long/Short Alternative Fund, the portfolio manager knows the size, timing and possible market impact of Long/Short Alternative Fund trades. It is theoretically possible that the portfolio manager could use this information to the advantage of the other accounts and to the possible detriment of the Long/Short Alternative Fund. However, SIMC has adopted policies and procedures reasonably designed to allocate investment opportunities on a fair and equitable basis over time.
Investment Opportunities. A potential conflict of interest may arise as a result of the portfolio manager’s management of the Long/Short Alternative Fund and other accounts, which, in theory, may
allow the portfolio manager to allocate investment opportunities in a way that favors the other accounts over the Long/Short Alternative Fund. This conflict of interest may be exacerbated to the extent that SIMC or the portfolio manager receive, or expect to receive, greater compensation from their management of the other accounts than the Long/Short Alternative Fund. Notwithstanding this theoretical conflict of interest, it is SIMC’s policy to manage each account based on its investment objectives and related restrictions and, as discussed above, SIMC has adopted policies and procedures reasonably designed to allocate investment opportunities on a fair and equitable basis over time and in a manner consistent with each account’s investment objectives and related restrictions. For example, while the portfolio manager may buy for other accounts securities that differ in identity or quantity from securities bought for the Long/Short Alternative Fund, such an approach might not be suitable for the Long/Short Alternative Fund given its investment objectives and related restrictions.
Beachhead
Compensation. SIMC pays Beachhead a fee based on the assets under management of the
Long/Short Alternative Fund as set forth in the respective investment sub-advisory agreement between Beachhead and SIMC. Beachhead pays its investment professionals out of its total revenues and other resources, including the sub-advisory fees earned with respect to the Fund. The following information relates to the period ended September 30, 2014.
Beachhead does not receive performance-based compensation with respect to the Fund or any other Beachhead-advised fund or client account.
Ownership of Fund Shares. As of September 30, 2014, Beachhead’s portfolio managers did not beneficially own any shares of the Long/Short Alternative Fund.
Other Accounts. As of September 30, 2014, in addition to the Long/Short Alternative Fund, the portfolio managers were also responsible for the management of certain other accounts, as follows: Registered Investment Other Pooled
Companies Investment Vehicles Other Accounts
Number Total Assets Number Total Assets Number Total Assets Portfolio Manager of Accounts (in millions) of Accounts (in millions) of Accounts (in millions) Andrew Beer . . . 0 $0 1 $2.04 5 $24.88 Mathias Mamou-Mani . . . 0 $0 1 $2.04 5 $24.88
No account listed above is subject to a performance-based advisory fee.
Conflicts of Interest. The co-portfolio managers’ management of other pooled investment vehicles or other accounts may give rise to actual or potential conflicts of interest in connection with their day-to- day management of the Long/Short Alternative Fund’s investments. Such other accounts may have investment objectives similar to the Long/Short Alternative Fund or may hold, purchase or sell securities that are eligible to be held, purchased or sold by the Long/Short Alternative Fund.
While the portfolio managers’ management of the other accounts may give rise to potential conflicts of interest, Beachhead does not believe that the conflicts, if any, are material or, to the extent any such conflicts are material, Beachhead believes that it has designed policies and procedures that reasonably manage such conflicts in an appropriate way.