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Merrill Lynch Factor Index Fund
September 2011
INVEST | UCITS FUNDS
Important Note
This brochure is supplied for information purposes only to the addressee and is not intended, and may not without the express consent of
Merrill Lynch, be distributed to, and may not be relied upon by, any other party. A Prospectus for Torrus Funds SICAV and an accompanying
As the hedge fund industry has matured, it has become increasingly diffi cult for the
average manager to generate alpha consistently. Additionally, as the asset class has
grown rapidly, beta has become more evident.
The Merrill Lynch Factor Model (“MLFM”) is designed to emulate the beta performance of broad-based
hedge fund indices. The MLFM uses liquid, tradable instruments to achieve this goal.
The creation of the MLFM was motivated by a growing body of academic research demonstrating
that a substantial component of hedge fund returns can be replicated with widely available and
transparent trading instruments.
3
The Merrill Lynch Factor Model
The investment objective of the Merrill Lynch Factor Index Fund (the "Fund") is to
provide investors with a return linked to the performance of the Merrill Lynch Factor
Model, net of fees and expenses.
The Fund allows investors to include hedge fund beta as part of their asset allocation
strategy. Potential uses include:
Core alternative investment holding for outright investors
Hedge fund beta exposure for traditional asset managers and asset allocation funds
Alternative engine in portable alpha strategies
Liquidity management tool for funds of funds
The Merrill Lynch Factor Model - How Does It Work?
The HFRI Index consists of over 2,000 equally
weighted constituent funds. The HFRI Index is
“non-investable”, but is a widely used performance
benchmark.
Merrill Lynch seeks to replicate this “non-investable”
hedge fund index by using a basket of well-known
and liquid index components: the S&P 500, the
Russell 2000, MSCI EAFE, MSCI Emerging Markets,
the Euro/US Dollar Spot Exchange Rate and
one-month LIBOR
1.
Every month the weight of each component is
re-balanced using a discretion-free, rules-based
algorithm that provides the optimal “fit” of the
MLFM to the returns of the HFRI Index. These
weights can be either positive or negative (except
for MSCI Emerging Markets which can only be
positive) yielding either a long or a short position in
the specific component.
Merrill Lynch chose the index components in order
to, in its view, maximize the statistical power,
predictability and stability of the MLFM correlation
with the HFRI Index under a variety of market
conditions.
The MLFM seeks to emulate hedge fund beta performance by replicating the
returns of a major diversified hedge fund index: Hedge Fund Research Inc. Fund
Weighted Composite Index (the “HFRI Index”).
The correlation between the Merrill Lynch Factor Model and the HFRI Index
was 0.90 from June 2006 through August 2011
2
.
1,800 hedge funds
USD400 billion AUM
Equally Weighted
Event Driven
Equity Hedge
Interest Rates
Fixed Income
Macro
Market Timing
Emerging Markets
Commodities
Corporate and
Government Debt
High Yield Debt
Equities
Exotic Examples:
Momentum/Volatility
Currencies
S&P 500
Russell 2000
MSCI EAFE
MSCI EMF
EUR/USD Spot
1One-month LIBOR
HFRI Fund Weighted
Historical Performance
5
3. The performance of the indices shown above is based on information obtained from various third party sources (including Bloomberg L.P.). Merrill Lynch does not
take any responsibility for, or make any express or implied warranties or any representation, as to the accuracy or the completeness of this information and has not
separately verified such information. All performances are calculated in USD. The value of the Merrill Lynch Factor Model can go down as well as up. Past performance
is not a guide to future performance. Please see page 8 of this brochure for additional important information, including a summary of relevant risk factors.
The MLFM returns used for the period from July 2003 through April 2006 are back-tested data. For the period after the MLFM launch in April 2006 actual MLFM
returns are used). The simulated, back-tested results used in these comparisons are not actual results of the MLFM. These results are based upon publicly available
information on the component indexes in the MLFM and retroactive application of a model designed with the benefit of hindsight to the HFRI Index. The back-testing
was based on assumptions made by Merrill Lynch and applied in a manner decided by Merrill Lynch. Back-tested performance numbers are inherently limited and
should not be relied upon as a guarantee of future performance. Results may not reflect the effect that material economic and market factors might have had on Merrill
Lynch’s decision-making had the MLFM actually been offered during the back-tested period. Please see page 8 of this brochure for additional important information,
including a summary of relevant risk factors.
4. Summary descriptions and tickers of the comparative hedge fund indexes can be found in the Important Investor Information section of this brochure, on page 8.
The Merrill Lynch Factor Model has returned 3.5% annualised from June
2006 through August 2011. The annualised standard deviation of the
MLFM has been 6.6%, comparable to levels attained by the benchmark
HFRI Index (7.4%).
HFRI Weighted Composite Index (non-investable) HFRI Fund of Funds Index (non-investable) HFRX Global Hedge Fund Index (investable)
Merrill Lynch Factor Model (investable)
CS Tremont Investable Hedge Fund Index (investable)
Relative performance of the Merrill Lynch Factor Model
3vs Benchmarks
4Source: Bloomberg
140
130
120
110
100
90
80
Jun-06 Dec-06 Jun-07 Dec-08 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11
Performance Metrics
5
Composition of the Index
The Merrill Lynch Factor Model is a dynamically re-balanced basket of
liquid market index components.
Components Descriptions
The following information was taken from publicly
available information and Merrill Lynch takes no
responsibility for the accuracy thereof:
S&P 500 Total Return Index (Bloomberg: SPTR)
is a capitalization-weighted total return index
measuring the performance of 500 U.S. stocks
across all sectors.
Russell 2000 Total Return Index (Bloomberg:
RU20INTR) is composed of 2000 U.S. small
capitalization stocks in the broad-based Russell
3000 stock index.
MSCI EAFE Net Total Return Index (Bloomberg:
NDDUEAFE) is a free float-adjusted market
capitalization stock index that is designed to
measure developed market equity performance,
excluding the United States and Canada.
MSCI Emerging Markets Free Total Return Index
(Bloomberg: NDUEEGF) is a free float-adjusted
market capitalisation index designed to measure
equity performance in the global emerging markets.
Euro/US Dollar (Bloomberg: EUR) is the spot
exchange rate for the US Dollar against the Euro
7.
BBA One-Month USD LIBOR (Bloomberg:
US0001M) is the one-month USD interest rate
fixed on a daily basis by the British Bankers
Association.
Index weights as of August 2011
Index Component
Factor Weight
S&P 500® Total Return Index
12.3%
Russell 2000® Total Return Index
4.2%
MSCIEAFE® US Dollar Net Total Return Index
9.5%
MSCI Emerging Markets Free US Dollar Net
Total Return Index
7.7%
EUR Spot Exchange Rate
4.7%
One-month USD LIBOR
66.3%
Return Metrics
6Investable?
Historical
Annualized
Return
2010 Return
Volatility
Historical
Sharpe Ratio
HFRI Fund Weighted Composite Index
4.2%
10.2%
7.4%
0.30
Merrill Lynch Factor Model
3.5%
5.8%
6.6%
0.24
HFRI Fund of Funds Index
1.0%
5.7%
6.6%
(0.14)
CS Tremont Investable Hedge Fund Index
2.5%
16.5%
8.9%
0.06
HFRIX Global Hedge Fund Index
-0.9%
5.2%
7.5%
(0.38)
Source: Bloomberg, Bank of America Merrill Lynch; monthly data from June 2006 to August 2011
Correlations
Merrill Lynch
High Yield
Bond Index
Merrill Lynch
Corporate &
Government
Bond Index
Merrill Lynch
Commodity
Index Extra
Total Return
S&P 500
Total Return
Index
HFRI Fund
Weighted
Composite
Index
Merrill Lynch Factor Model
0.82
0.19
0.56
0.84
0.90
HFRI Fund Weighted Composite Index
0.80
0.08
0.74
0.78
1.00
Source: Bloomberg, Bank of America Merrill Lynch; monthly data from June 2006 to August 2011
Annualised Standard Deviation, Historical Sharpe Ratio and Correlations are calculated using monthly returns
from 30 June 2006 to 31 August 2011.
The Merrill Lynch Factor Index Fund
The Fund
The Merrill Lynch Factor Index Fund
Issuer
Torrus Funds SICAV, Luxembourg
Share Classes (Institutional)
USD - USD I
EUR - EUR IH (Hedged)
GBP - GBP IH (Hedged)
Launch Date
March 2007
Initial Subscription Price
USD 1,000
Minimum Subscription Amount
USD 1,000,000
Upfront Sales Charge
Nil
Management Fee
0.60% per annum
Expense Fee
0.15% per annum
Total Expense Ratio (TER)
0.75% per annum maximum
Valuation Day
Each Fund “Business Day” (as defined in the
Supplement Prospectus to the Fund)
Subscriptions/Redemptions request deadline
5pm Luxembourg time, two Luxembourg Banking
days prior to the relevant Valuation Day
Redemption Charge
USD - Nil
EUR - 0.50% maximum
GBP - Nil
Index Publication
Bloomberg Page MLEIFCTR <Index>
Index Website
http://gmi.ml.com/factorindex
NAV Publication
http://www.merrillfunds.ml.com
ISIN
USD I LU0291207149
EUR IH LU0291206174
GBP IH LU0291206844
Investment Manager
Merrill Lynch International
A full description of the Merrill Lynch Factor Index
Fund and Torrus Funds SICAV can be found in
the Prospectus of the Torrus Funds SICAV which
is available from [email protected], your local
distributor or from:
Merrill Lynch International, Merrill Lynch Financial
Centre, 2 King Edward Street, London, EC1A 1HQ
7
The Merrill Lynch Factor Index Fund is a sub-fund of the Torrus Funds, a
Luxembourg SICAV platform that is UCITS III compliant.
The investment objective of the Merrill Lynch Factor
Index Fund is to provide investors with a return
linked to the performance of the MLFM, net of fees
and expenses. Summary terms of the Fund are set
forth below.
The Fund utilizes a passive investment management
strategy in seeking to achieve the MLFM return. The
Fund will be invested in two general pools of assets:
one or more total return swaps on the MLFM and
one or more securities repurchase agreements.
Under the total return swaps, the Fund pays a
LIBOR-based return to the swap counterparty and receives
the total return of the MLFM.
Under the securities repurchase agreements, the
Fund purchases from time-to-time a diversified pool
of fixed income and equity securities subject to a
repurchase agreement that effectively pays a
LIBOR-based return to the Fund. The Fund will pay a periodic
Management Fee and a periodic Expense Fee to
Merrill Lynch International (“MLI”) as Investment
Manager of the Fund.
For more details on the Fund, its investment objective,
terms of investment and risk factors, please refer
to the Prospectus for Torrus Funds SICAV and the
Supplement Prospectus for the Fund.
Risk Factors
An investment in the Fund is designated to be a medium to long-term investment. Investors should not expect to obtain short-term gains from such investment. The Fund is suitable for investors who can afford to set aside the capital for the medium to long-term and who seek a medium investment risk. This is a complex product where typical investors are expected to be informed and to especially have a good knowledge of derivative instruments. The Fund is designed to track the performance of the Merrill Lynch Factor Model however investors should be aware that all returns will be reduced by any fees paid at the fund level.
The value of the Fund’s assets is linked to the Merrill Lynch Factor Model, the performance of which may rise and fall. Hence, investors should note that the value of their investment could fall as well as rise and they should accept that there is no guarantee that they will recover their initial investment. Investors may very well lose the whole of their initial investment. As explained under section 1 “Investment Objectives and Strategies” of the Supplement Prospectus for the Fund, the Fund will have to make a payment to MLI as swap counterparty in the event that there is negative performance of the MLFM, such payment being equivalent to the negative performance of the MLFM. This payment will be made from the proceeds received from the repurchase agreement.
Investors should note that the entering by the Fund into the OTC swap transaction with MLI involves a counterparty risk. This risk is however limited to 5% of the net assets of the Sub-Fund in accordance with paragraph 5.2.3 of the Prospectus.
The Merrill Lynch Factor Model is denominated in USD. The performance of the MLFM and subsequently the net asset value of the share classes of the MLFI Fund may be affected by currency exchange rate fluctuations between the USD and the currencies of the MLFI constituents. As the MLFI Fund is available in share classes denominated in USD and other currencies investors may be adversely affected by exchange rate fluctuations. Past performance is not necessarily a guide to future performance. The value of the Shares can go down as well as up.
An investment in the Shares of the Fund may not be suitable for all investors. Investors with any doubts about the suitability of the Fund should consult their independent investment adviser. Prospective investors in the Fund should understand the risks involved and should reach an investment decision after careful consideration, with their advisors, of the suitability of such Fund in light of their particular financial circumstances. Investors with questions regarding the tax treatment of Fund should consult their independent tax adviser.
The securities comprising the MLFM may change substantially over the life of the investment. In particular, it is possible that the initial constituent securities will increase substantially in value but that the MLFM will decline in value. Investors in the Fund should have regard to this when considering the importance of the identity of the initial securities comprising the MLFM No investigation or review of the underlying indices comprising the MLFM from time to time, including without limitation, any public filings made by the issuers of the underlying securities in the indices have been made for the purposes of forming a view as to the merits of an investment linked to the MLFM. Nor is any guarantee or express or implied warranty in respect of the selection of the underlying securities comprised within the MLFM or the methodology of calculating the MLFM made nor is any assurance or guarantee as to the performance of the MLFM given. An extensive outline of the risk factors applicable to the Fund can be found in the Prospectus. Investors considering in the Fund’s offering materials the purchase of Shares in the Fund should consult their own tax and other professional advisors concerning the application of the laws of any state, local or foreign taxing jurisdictions to their particular situations.
Distribution Restrictions
The Fund has been registered for public distribution in Luxembourg, Germany, Italy, Spain and Sweden. The Fund may be registered in other jurisdictions over time. For an up to date list of those jurisdictions contact your distributor. The Fund may only be offered and distributed to investors in accordance with all relevant local laws and regulations.
The distribution of this brochure and the offering or purchase of Shares may be restricted in certain jurisdictions. This brochure does not constitute an offer of or invitation or solicitation to subscribe for or acquire any Shares in any jurisdiction. Persons receiving a copy of this brochure in any jurisdiction may not treat this brochure as constituting an offer, invitation or solicitation to them to subscribe for Shares notwithstanding that, in the relevant jurisdiction, such an offer, invitation or solicitation could lawfully be made to them without compliance with any registration or other legal requirement.
Important Investor Information
The Shares have not been, and will not be, registered under the U.S. Securities Act of 1933 or the securities laws of any of the states of the United States and neither Torrus Funds nor the Fund have been, or will be, registered under the U.S. Investment Company Act of 1940 or the laws of any of the states of the United States. Accordingly the Shares may not be offered, sold directly or indirectly in the United States or to or for the account or benefit of any U.S. Person (as defined in Regulation S under U.S. Securities Act of 1933), except pursuant to an exemption from, or in a transaction not subject to the requirements of, the U.S. Securities Act of 1933 and any applicable US state securities laws.
Merrill Lynch International and/or any of its affiliates has or may have a position or a material interest in any investment referred to in this material, or related investments. Merrill Lynch, as a full service firm, may have, or may have had within the previous 12 months, business relationships, including investment banking relationships, with, or provided significant advice to, companies referred to in this material or related investments.
Past Performance is not necessarily a guide to future performance of the Fund. The value of an investment in the Fund can go down as well as up.
UK Disclosure
This brochure is directed at persons to whom, and is distributed only to persons to whom Merrill Lynch may promote unregulated collective investment schemes in accordance with the rules of FSA, including in particular Rule 3.11 of the conduct of Business sourcebook ("Relevant Persons"). Such investments are available only to, and an invitation, offer or agreement to subscribe, purchase or otherwise acquire such investments will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely solely on this document or any of its contents. Torrus Funds have no place of business in the UK and are not authorized or regulated by the UK Financial Services Authority ("FSA"). The UK rules for the protection of private customers and the UK Financial Services Compensation Scheme do not apply to such business. As against the Torrus Funds, the regulatory regime governing an investor's rights will be different to that of the UK. Investors may, however, be entitled to similar protection in the jurisdiction in which the relevant entity is organized or resident. This brochure is issued in the UK by Merrill Lynch, Pierce, Fenner & Smith Limited, whose Registered Office is at Merrill Lynch Financial Centre, 2 King Edward Street, London, EC1A 1HQ.
Information on Comparative Hedge Fund Indexes
The following information relating to pages 5 and 6of this brochure was taken from publicly available information, and Merrill Lynch takes no responsibility for the accuracy of such information.
The HFRX Global Hedge Fund Index (Bloomberg Ticker HFRXGL <Index>) is designed to be representative of the overall composition of the hedge fund universe. It is comprised of eight strategies; convertible arbitrage, distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage, and relative value arbitrage. The strategies are asset-weighted based on the distribution of assets in the hedge fund industry.
The HFRI Fund Weighted Composite Index (Bloomberg Ticker HFRIFWI <Index>) is an equally weighted index of over 1,800 constituent hedge funds. The HFRI Composite Index includes both U.S. domestic and off-shore funds but excludes any fund of funds.
The HFRI Fund of Funds Index (Bloomberg Ticker HFRIFOF <Index>) represents Fund of Funds that invest with multiple managers through funds or managed accounts. The strategy designs a diversified portfolio of managers with the objective of significantly lowering the risk (volatility) of investing with an individual manager. The investor has the advantage of diversification among managers and styles with significantly less capital than investing with separate managers.
CS Tremont Investable Hedge Fund (Bloomberg Ticker INVXNAV <Index>) Index includes 60 member funds from 10 different sectors chosen among a universe of eligible funds. The 60 member funds are determined in order of size as the largest six eligible funds by AUM in each of the ten Sectors comprising the Original Index. The weight of each member fund is calculated per their AUM in accordance with a predetermined procedure.
