Christopher D. Menconi
Washington, D.C. 20006-1806
It is proposed that this filing will become effective (check
appropriate box):
THE INFORMATION IN THIS PROSPECTUS
IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE U.S. SECURITIES
AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER
TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
Neither the Securities and Exchange Commission
nor any state securities commissions has approved or disapproved of these securities or passed upon the accuracy or adequacy of
this Prospectus. Any representation to the contrary is a criminal offense.
Additional Investment Objective, Principal Investment
Strategies, and Principal Risks Information
Investment Objective.
The Fund’s
investment objective is non-fundamental. As a result, the Fund may change its investment objective without shareholder approval.
Principal Investment Strategies.
In
managing the Fund, the Sub-Adviser uses a “passive” investment approach and does not attempt to select securities
based on their individual potential to outperform the market. The Sub-Adviser’s primary objective for the Fund is to correspond
to or correlate as closely as possible with the performance of the Underlying Index. The Sub-Adviser continuously monitors the
Fund, and makes adjustments to its portfolio, as necessary, to minimize tracking error and to maximize liquidity. The Sub-Adviser
does not engage in temporary defensive investing, keeping the Fund fully invested in all market environments.
The Adviser has entered into licensing
arrangements with Thomson Reuters (Markets) LLC (“Thomson Reuters”) and DSC. Pursuant to its licensing arrangement
with Thomson Reuters, the Adviser has been granted a non-exclusive license to use the Underlying Index and its related marks in
connection with the Fund in accordance with the terms of a license agreement. Pursuant to its licensing arrangement with DSC,
DSC has agreed to periodically provide the Adviser with certain information about the theoretical portfolio
.
Principal Risks of Investing in the
Fund.
The following section provides additional information regarding the principal risks summarized under “Principal
Risks” in the Fund’s Summary section.
Counterparty Credit
Risk.
The Fund may invest in financial instruments involving counterparties for the purpose of attempting to gain exposure
to a particular group of securities, index or asset class without actually purchasing those securities or investments, or to hedge
a position. Such financial instruments may include, among others, total return, index, and interest rate swap agreements. The
Fund will use short-term counterparty agreements to exchange the returns (or differentials in rates of return) earned or realized
in particular predetermined investments or instruments. The Fund will not enter into any agreement with a counterparty unless
the Sub-Adviser believes that the other party to the transaction is creditworthy. The use of swap agreements and similar instruments
involves risks that are different from those associated with ordinary portfolio securities transactions. For example, the Fund
bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy
of a swap agreement counterparty. If a counterparty defaults on its payment obligations to the Fund, this default will cause the
value of your investment in the Fund to decrease. In addition, the Fund may enter into swap agreements with a limited number of
counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Sub-Adviser considers factors such
as counterparty credit ratings and financial statements, among others, when determining whether a counterparty is creditworthy.
The Sub-Adviser regularly monitors the creditworthiness of each counterparty that the Fund enters into a transaction with. Swap
agreements also may be considered to be illiquid. Similarly, if the credit quality of an issuer or guarantor of a debt instrument
improves, this change may adversely affect the value of the Fund’s investment.
To the extent the Fund’s
financial instrument counterparties are concentrated in the financial services sector, the Fund bears the risk that those counterparties
may be adversely affected by legislative or regulatory changes, adverse market conditions, increased competition, and/or wide
scale credit losses resulting from financial difficulties or borrowers affecting that economic sector.
Derivatives
Risk.
The Fund’s investments in derivatives may pose risks in addition to and greater than those associated with
investing directly in securities or other investments, including risks relating to leverage, imperfect correlations with underlying
investments or the Fund’s other portfolio holdings, high price volatility, lack of availability, counterparty credit (e.g.,
risk of counterparty default), difficulty in exiting a derivatives position, liquidity, valuation and legal restrictions. Certain
types of derivatives may incur costs to the Fund which can reduce returns. In addition, segregated or earmarked assets and collateral
holdings established in connection with the Fund’s derivatives investments in compliance with SEC guidance may limit the
Fund’s investment flexibility. The use of derivatives is a highly specialized activity that involves investment techniques
and risks different from those associated with ordinary portfolio securities transactions. If the Sub-Adviser is incorrect
about its expectations of market conditions, the use of derivatives could result in a loss to the Fund, which in some cases may
be unlimited. Certain risks also are specific to the derivatives in which the Fund invests.
Swap Agreements Risk.
Swap
agreements are contracts among the Fund and a counterparty to exchange the return of the pre-determined underlying investment
(such as the rate of return of the underlying index). Swap agreements may be negotiated bilaterally and traded OTC between two
parties or, in some instances, must be transacted through a futures commission merchant and cleared through a clearinghouse that
serves as a central counterparty. Risks associated with the use of swap agreements are different from those associated with ordinary
portfolio securities transactions, due in part to the fact they could be considered illiquid and many swaps trade on the OTC market.
Swaps are particularly subject to counterparty credit, correlation, valuation, liquidity and leveraging risks. Certain standardized
swaps are subject to mandatory central clearing. Central clearing is expected to reduce counterparty credit risk and increase
liquidity, but centrally cleared swap transactions will not be risk-free.
Equity
Securities Risk.
The Fund is subject to the risk that the value of the equity securities
or equity-based derivatives in the Fund’s portfolio will decline or fluctuate dramatically from day to day due to volatility
in the equity market. Such volatility could cause equity securities and equity-based derivatives to underperform other segments
of the market as a whole. The equity market is volatile and can experience increased volatility for a variety of reasons, including
as a result of general market and economic conditions, perceptions regarding particular industries represented in the equity market,
or factors relating to specific companies to which the Fund has investment exposure. Equity securities generally have greater
price volatility than fixed income securities.
Investment in Investment
Companies Risk.
The Fund may purchase shares of investment companies, such as ETFs, mutual funds, unit investment trusts,
and closed-end investment companies, which may trade at a discount to their NAV, to gain exposure to a particular portion of the
market while awaiting an opportunity to purchase securities directly or when such investments present a more cost efficient alternative
to investing directly in securities. When the Fund invests in an investment company, in addition to directly bearing the expenses
associated with its own operations, it will bear a pro rata portion of the investment company’s expenses. Further, in part
because of these additional expenses, the performance of an investment company may differ from the performance the Fund would
achieve if it invested directly in the underlying investments of the investment company. In addition, while the risks of owning
shares of an investment company generally reflect the risks of owning the underlying investments of the investment company, the
Fund may be subject to additional or different risks than if the Fund had invested directly in the underlying investments. For
example, shares of an ETF are traded at market prices, which may vary from the NAV of its underlying investments. Also, the lack
of liquidity in an ETF can contribute to the increased volatility of its value in comparison to the value of the underlying portfolio
securities. In addition, the Fund may invest in investment companies or other pooled investment vehicles that are not registered
pursuant to the 1940 Act and therefore, not subject to the regulatory scheme of the 1940 Act.
Exchange-Traded
Fund (ETF) Risk.
The Fund may invest in shares of ETFs to gain exposure to its investment objective. ETFs are pooled investment
vehicles, which may be managed or unmanaged, that generally seek to track the performance of a specific index. Although individual
shares of an ETF are traded on an exchange (such as the NYSE or NASDAQ), large blocks of shares of ETFs are redeemable at NAV.
This ability to redeem large blocks of shares has historically resulted in the market price of individual shares of ETFs being
at or near the NAV of the ETF’s underlying investments. However, shares of ETFs may trade below their NAV. The NAV of shares
will fluctuate with changes in the market value of the ETF’s holdings. The trading prices of shares will fluctuate in accordance
with changes in NAV as well as market supply and demand. The difference between the bid price and ask price, commonly referred
to as the “spread,” will also vary for an ETF depending on the ETF’s trading volume and market liquidity. Generally,
the greater the trading volume and market liquidity, the smaller the spread is and vice versa. Any of these factors may lead to
an ETF’s shares trading at a premium or a discount to NAV. The Fund, from time to time, may invest in exchange-traded investment
funds that are not registered pursuant to the 1940 Act.
Leverage
Risk.
The use of derivatives and borrowings may create leveraging risk. For example, because of the low margin deposits required,
trading in certain derivative instruments involves an extremely high degree of leverage. As a result, a relatively small price
movement in a derivatives contract may result in an immediate and substantial impact on the net asset value of the Fund. Leveraging
may cause the Fund to be more volatile than if it had not been leveraged. To mitigate leveraging risk and otherwise comply with
regulatory requirements, the Fund must segregate or earmark liquid assets to meet its obligations under, or otherwise cover, the
transactions that may give rise to this risk. Applicable law limits the Fund from borrowing in an amount greater than 33
1
/
3
%
of its assets. The Fund is permitted to borrow money for certain purposes. To the extent the Fund purchases securities while it
has outstanding borrowings, it is using leverage, i.e., using borrowed funds for investment. Leveraging will exaggerate the effect
on the net asset value of any increase or decrease in the market value of the Fund’s portfolio. Money borrowed for leveraging
will be subject to interest costs that may or may not be recovered by appreciation of the securities purchased.
Liquidity Risk.
In
certain circumstances, it may be difficult for the Fund to purchase and sell particular investments within a reasonable time at
a fair price. To the extent that there is not an established retail market for instruments in which the Fund may invest, trading
in such instruments may be relatively inactive. In addition, during periods of reduced market liquidity or in the absence of readily
available market quotations for particular investments in the Fund’s portfolio, the ability of the Fund to assign an accurate
daily value to these investments may be difficult and the Adviser may be required to fair value the investments.
Market Risk.
An
investment in the Fund involves risks similar to those of investing in any fund of equity securities, such as market fluctuations
caused by such factors as economic and political developments, changes in interest rates and perceived trends in stock prices.
The values of equity securities could decline generally or could underperform other investments. Different types of equity securities
tend to go through cycles of outperformance and under-performance in comparison to the general securities markets. In addition,
securities may decline in value due to factors affecting a specific issuer, market or securities markets generally.
Passive Investment
Risk.
The Fund is not actively managed. Therefore, unless a specific component is removed from the Fund’s Underlying
Index, the Fund generally would not sell a security because the security’s issuer was in financial trouble. If a specific
component is removed from the Fund’s Underlying Index, the Fund may be forced to sell such security at an inopportune time
or for a price other than the security’s current market value. It is anticipated that the value of Fund shares will decline,
more or less, in correspondence with any decline in value of the Fund’s Underlying Index. The Fund’s Underlying Index
may not contain the appropriate mix of securities for any particular economic cycle, and the timing of movements from one type
of security to another in seeking to replicate the Underlying Index could have a negative effect on the Fund. Unlike with an actively
managed fund, the Sub-Adviser does not generally use techniques or defensive strategies designed to lessen the effects of market
volatility or to reduce the impact of periods of market decline. This means that, based on market and economic conditions, the
Fund’s performance could be lower than other types of mutual funds that may actively shift their portfolio assets to take
advantage of market opportunities or to lessen the impact of a market decline.
Sector Exposure
Risk.
The Fund may concentrate its investments in or have significant exposure to a limited number of issuers conducting business
in the same sector or group of sectors. Market conditions, interest rates, and economic, regulatory, or financial developments
could significantly affect a single sector or a group of sectors, and the securities of companies in that sector or group of sectors
could react similarly to these or other developments. As of the date of this Prospectus, the Fund’s investments may be concentrated
in the Technology and Health Care Sectors. The Fund’s concentration in certain sectors will vary depending on the composition
of the Underlying Index.
Technology
Sector Risk.
Technology companies face intense competition, both domestically and internationally, which may have an adverse
effect on profit margins. Technology companies may have limited product lines, markets, financial resources or personnel. The
products of technology companies may face obsolescence due to rapid technological developments and frequent new product introduction,
unpredictable changes in growth rates and competition for the services of qualified personnel. Companies in the technology sector
are heavily dependent on patent and intellectual property rights. The loss or impairment of these rights may adversely affect
the profitability of these companies.
Health Care Sector Risk.
Companies in the health care sector may be adversely affected by government regulations and government health care programs,
increases or decreases in the cost of medical products and services and product liability claims, among other factors. Companies
in the health care sector are heavily dependent on obtaining and defending patents, which may be time consuming and costly, and
the expiration of patents may also adversely affect the profitability of the companies. Health care companies are subject to competitive
forces that may result in price discounting, and may be thinly capitalized and susceptible to product obsolescence. Many new products
in the health care sector require significant research and development and may be subject to regulatory approvals, all of which
may be time consuming and costly with no guarantee that any product will come to market.
Tracking Error Risk.
Tracking error
refers to the risk that the Fund’s performance may not match or correlate to that of its Underlying Index, either on a daily
or aggregate basis. There are a number of factors that may contribute to the Fund’s tracking error, such as Fund expenses,
imperfect correlation between the Fund’s investments and those of its Underlying Index, and high portfolio turnover rate.
In addition, mathematical compounding may prevent the Fund from correlating with the monthly, quarterly, annual or other period
of performance of its Underlying Index. Tracking error may case the Fund’s performance to be less than expected.
Venture Capital Investing.
The
Fund seeks to generate returns that mimic the returns of the U.S. venture capital industry. Venture capital is a type of equity
financing that addresses the funding needs of entrepreneurial companies that for reasons of size, assets, and stage of development
cannot seek capital from more traditional sources, such as public markets and banks. Additional special risks inherent in investing
in venture capital-funded companies include that little public information exists for such companies, which are frequently private
and thinly traded companies. Such a lack of information may lead to greater tracking error between the Underlying Index and the
Research Index or adversely affect the correlation of the Fund’s performance to that of the U.S. venture capital industry,
generally. In addition, because investing in new or very early companies inherently carries a degree of risk, including the risk
that a company will fail, the returns of the venture capital industry may be subject to greater volatility than the returns of
more established publicly traded companies. As a result, the Fund’s returns also may experience greater volatility than
a direct or indirect investment in more established public companies. The Fund does not invest in venture capital funds nor does
it invest directly in the companies funded by venture capital funds.
Portfolio Holdings Information
A description of the Fund’s policies
and procedures with respect to the disclosure of the Fund’s portfolio securities is available in the Fund’s SAI.
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Buying, Selling and Exchanging Fund Shares
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This section provides important information
about the procedures that you must follow when you buy, sell or exchange shares of the Fund. You may submit transaction orders
to buy, sell or exchange Fund shares on any Business Day. On any day that the NYSE closes early—or as otherwise permitted
by the U.S. Securities and Exchange Commission (the “SEC”)—the Fund reserves the right to advance the time that
NAV is calculated and, correspondingly, the time by which purchase and redemption orders must be received. On any day that the
Fund calculates NAV earlier than normal, Krane reserves the right to advance the time on that day by which shareholder transaction
orders must be received by the Fund’s transfer agent. The NYSE holiday schedule is included in the SAI.
All shareholder transaction orders are
processed at the NAV next determined after your transaction order is received with all of the necessary information, sometimes
referred to as “good order,” by the Fund’s transfer agent, the Distributor, or authorized dealer. Any purchase
transaction that is sent to the Fund’s transfer agent does not constitute a purchase order until the transfer agent processes
the application and receives correct payment by check, wire transfer or ACH.
“
Good Order”
An order is in “good order”
if the Fund’s transfer agent or your selling agent has all of the information and documentation it deems necessary to effect
your order. For example, when you sell shares by letter of instruction, “good order” means that your letter has (i)
complete instructions and the signatures of all account owners, (ii) a Medallion Signature Guarantee (as described below) for amounts
greater than $100,000 and (iii) any other required documents completed and attached. For the documents required for sales by corporations,
agents, fiduciaries, surviving joint owners and other legal entities, call 1-800-XXX-XXXX.
Opening Your Account.
You will
need to open a Krane shareholder account to make share transactions—buy, sell or exchange shares of the Fund directly with
Krane. You can obtain an account application or request more information about opening an account by calling Krane Client Services
at 1-855-573-XXXX. [You also may visit www.kraneshares.com/forms to access “Mutual Fund Forms & Applications.”]
The type of application you will need
depends on the type of account you want to open. For example, if you are opening a retirement account, such as an IRA, you will
need to complete a different application than you would if you were opening a taxable account. When you call Krane to request
an account application, be sure to let the Client Services representative know what type of account you want to open to ensure
that you receive the correct application.
If you open your account through a broker
or other financial intermediary, your financial intermediary will ordinarily assist you in completing the necessary application
to open your account.
Buying Fund Shares
All investments must be
made by check, wire transfer or ACH. All checks must be made payable in U.S. dollars and drawn on U.S. financial institutions.
The Fund does not accept purchases made by third-party checks, credit cards, credit card checks, cash, traveler’s checks,
money orders or cashier’s checks.
The Fund does not generally
accept investments by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Fund subject to the satisfaction of
enhanced due diligence. Please contact Krane Client Services for more information.
By Mail.
You can
open an account with the Fund by sending a check and your account application to the address below. You can add to an existing
account by sending the Fund a check. Be sure your check identifies clearly your name, your account number and the Fund name.
Regular Mail
Address
Krane Funds
P.O. Box XXXXX
Kansas City,
Missouri 64121-9009
Express Mail
Address
Krane Funds
c/o [DST Systems,
Inc.]
[430 West
7th Street]
[Kansas City,
Missouri 64105]
By Wire.
To open an account by wire, call
1-855-XXX-XXXX
for details. To add to an existing account
by wire, wire your money using the wiring instructions set forth below (be sure to include the Fund name and your account number).
Wiring Instructions:
[UMB Bank, N.A.]
[ABA # 101000695]
Krane Funds
DDA Acct. # XXXXXXXXXX
Ref: Fund name/account number/account
name
By Systematic
Investment Plan.
If you have a checking or savings account with a bank, you may purchase A Class Shares automatically
through regular deductions from your account. A systematic investment plan is not available for Institutional Class
Shares.
You may not
open an account via Automated Clearing House (“ACH”). However, once you have established an account, you can set up
an automatic investment plan by mailing a completed application to the Fund. These purchases can be made monthly, quarterly, semi-annually
or annually in amounts of at least $100. To cancel or change a plan, write to the Fund at Krane Funds, [P.O. Box XXXXX, Kansas
City, Missouri 64121-9009
(Express Mail Address: Krane Funds, c/o DST Systems, Inc., 430 West 7th Street, Kansas City,
Missouri 64105)].
Allow up to 15 days to create the plan and three days to cancel or change it.
Minimum Investments.
To purchase shares for the first time, you must invest in the Fund at least:
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Class
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Brokerage
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IRA
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A Class Shares
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$
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2,500
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$
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1,000
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Institutional Class Shares
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$
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1,000,000
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$
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1,000,000
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Your subsequent investments
in A Class Shares of the Fund must be made in amounts of at least [$100]. There is no minimum for subsequent investments in Institutional
Class Shares of the Fund. The Fund may accept initial and subsequent investments of smaller amounts in its sole discretion.
Other Purchase Rules You Should Know.
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•
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Once the Fund’s transfer
agent or your selling agent receives your buy order in “good order,” your
purchase will be made at the next calculated net asset value per share.
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•
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The Distributor and the transfer
agent reserve the right to cancel your order if the Fund doesn’t receive payment
within three business days of receiving your buy order. The Fund will return any payment
received for orders that have been cancelled, but no interest will be paid on that money.
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•
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Selling agents are responsible
for sending your buy orders to the Fund’s transfer agent and ensuring that we receive
your money on time.
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•
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Shares purchased are recorded
on the books of the Fund. The Fund doesn’t issue certificates.
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Selling Fund Shares
When you sell your shares, the Fund is
effectively buying them back from you. This is called a redemption. The Fund
redeems its shares continuously
and shareholders may sell their shares back to the Fund on any Business Day. You may redeem all or any portion of your Fund shares
at the Fund’s next determined NAV calculated after your redemption order is received in good order by the transfer agent
or your financial intermediary. The payment for redeemed shares will be sent within seven days after your request is received
in good order. When you sell you shares, the amount you receive may be more or less than the amount you invested. Please note
that your account may be subject redemption restrictions. Please see “
Frequent Purchases and Redemptions of Fund
Shares” for more information.
The Fund may suspend your
right to redeem your shares during times when trading on the NYSE is suspended or restricted, or otherwise as permitted by the
SEC.
How to Redeem Fund
Shares.
By Mail.
To redeem shares by mail,
you may contact the Fund directly at: Krane Funds, [P.O. Box XXXXXX, Kansas City, Missouri 64121-9009 (Express Mail Address: Krane
Funds, c/o DST Systems, Inc., 430 West 7th Street, Kansas City, Missouri 64105)]. Please send a letter to the Fund signed by all
registered parties on the account specifying:
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•
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The dollar amount or number of
shares you wish to redeem;
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•
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The account name(s); and
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•
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The address to which redemption
(sale) proceeds should be sent.
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All registered shareholders must sign
the letter in the exact name(s) in which their account is registered and must designate any special capacity in which they are
registered.
Certain redemption requests will require
a signature guarantee by an eligible guarantor institution. Eligible guarantors include commercial banks, savings and loans, savings
banks, trust companies, credit unions, member firms of a national stock exchange, or any other member or participant of an approved
signature guarantor program. For example, signature guarantees may be required if your address of record has changed in the last
30 days, you want the proceeds sent to a bank other than the bank of record on your account, or if you ask that the proceeds be
sent to a different person or address. Please note that a notary public is not an acceptable provider of a signature guarantee
and that we must be provided with the original guarantee. Signature guarantees are for the protection of shareholders. Before
it grants a redemption request, the Fund may require a shareholder to furnish additional legal documents to insure proper authorization.
Accounts held by a corporation, trust,
fiduciary or partnership, may require additional documentation along with a signature guaranteed letter of instruction. Please
contact Shareholder Services at 1-855-573-XXXX for more information. The Fund participated in the Paperless Legal Program. Requests
received with a Medallion Signature Guarantee will be reviewed for the proper criteria to meet the guidelines of the Program and
may not require additional documentation.
Medallion Signature Guarantees
A Medallion Signature Guarantee helps assure
that a signature is genuine and not a forgery. The selling agent providing the Medallion Signature Guarantee is financially liable
for the transaction if the signature is a forgery.
By Telephone.
You must first establish
the telephone redemption privilege (and, if desired, the wire redemption privilege) by completing the appropriate sections of
the account application. Call 1-855-573-XXXX to redeem your shares. Based on your instructions, the Fund will mail your proceeds
to you or send them to your bank via wire or ACH.
By Systematic Withdrawal Plan (Via
ACH).
You may transfer as little as $100 per month from your A Class Share account to another financial institution through
a Systematic Withdrawal Plan (via ACH). To participate in this service, you must complete the appropriate sections of the account
application and mail it to the Fund. A Systematic Withdrawal Plan is not available for Institutional Class Shares.
In-Kind Redemptions.
The Fund reserves the right to pay all or part of your redemption proceeds in liquid securities with a market value equal
to the redemption price instead of cash. If the Fund redeems your shares in-kind, you may bear brokerage and transaction costs
associated with converting the portfolio securities you receive into cash. You also will bear market risks until such time as
the portfolio securities received are converted to cash.
Other Redemption Rules You Should Know.
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·
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If
you sell your shares that are held directly with the Fund (through the transfer agent),
we will normally send the redemption proceeds by mail or electronically transfer them
to your bank account of record within three business days after the transfer agent or
your selling agent receives your order in “good order.”
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·
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If
you sell your shares through a selling agent, the Fund will normally send the redemption
proceeds by Fed wire within three business days after the transfer agent or your selling
agent receives your order in “good order.”
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·
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If
you paid for your shares by check or from your bank account as an Automated Clearing
House (ACH) transaction, the Fund will hold the redemption proceeds when you sell those
shares for a period of time after the trade date of the purchase.
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·
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No
interest will be paid on uncashed redemption checks.
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·
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Other
restrictions may apply to retirement accounts. For information about these restrictions,
contact your retirement plan administrator.
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Low Balance Accounts.
To offset
the administrative expense of servicing small accounts, the Fund may impose, without additional notice, an administrative fee
of $15 per year during periods where your account balance falls below the account minimum requirements for any reason. The Fund
also may redeem your shares if the value of your account falls below the required minimum account balance. However, the Funds
will provide you with at least 30 days’ written notice to allow you sufficient time to add to your account and avoid the
redemption of your shares.
Uncashed Check Policy.
Any dividend,
capital gain or partial redemption check that has remained outstanding for a period of 90 days from the issuance date will be
canceled and re-issued. If a re-issued check is not cashed within 90 days, the check will be canceled and the proceeds will be
deposited into the shareholder’s account as of the cancellation date.
For dividend and capital gain checks,
the proceeds will be reinvested into the appropriate share class of the Fund from which such distribution was paid. The account
also will have the distribution payout option adjusted so that all future distributions are reinvested into the appropriate share
class of the Fund from which the distribution would have been paid.
Any full redemption check (one that brings
your account balance to $0.00) that has remained outstanding for a period of 90 days from the issuance date will be cancelled
and re-issued one time.
Any redemption check from a retirement
account (IRA, Roth, SEP, for example) that has remained outstanding for a period of 90 days from the issuance date will be cancelled
and re-issued one time.
For checks returned in the mail, the Fund
will attempt to contact the client. If no contact is made, the check will be processed according to the procedures mentioned above.
Exchanging Fund Shares
An exchange is when you sell shares of
one fund and use the proceeds from that sale to purchase shares of another fund. Shareholders may make exchanges on any Business
Day of A Class Shares or Institutional Class Shares of the Fund for A Class Shares or Institutional Class Shares of any other
Krane Fund within the Krane family of mutual funds on the basis of the respective NAVs of the shares involved. Shares of the Fund
cannot be exchanged for shares of any KraneShares ETF.
Customer Identification Program
Federal law requires the Fund to obtain
and record specific personal information to verify your identity when you open an account. This information may include your name,
address, date of birth (for individuals) and taxpayer or other government issued identification (e.g., social security number
(SSN) or other taxpayer identification number (TIN)). If you fail to provide the requested information, the Fund may need to delay
the date of your purchase or may be unable to open your account, which may result in a return of your investment monies. In addition,
if the Fund is unable to verify your identity after your account is open, the Fund reserves the right to close your account or
take other steps as deemed reasonable. The Fund will not be liable for any loss resulting from any purchase delay, application
rejection or account closure due to a failure to provide proper identifying information.
Information Sharing Agreements
As required by Rule 22c-2 under the 1940
Act, the Fund or certain of its service providers will enter into information sharing agreements with selling agents, including
participating life insurance companies and selling agents that sponsor or offer retirement plans through which shares of the Fund
are made available for purchase. Pursuant to Rule 22c-2, selling agents are required, upon request, to: (i) provide shareholder
account and transaction information and (ii) execute instructions from the Fund to restrict or prohibit further purchases of Fund
shares by shareholders who have been identified by the Fund as having engaged in transactions that violate the Fund’s excessive
trading policies and procedures.
STATEMENT OF ADDITIONAL INFORMATION
_________, 2014
KraneShares Trust (the “Trust”)
is an investment company offering professionally managed investment portfolios. This Statement of Additional Information (“SAI”)
relates to shares of the following portfolio (the “Fund”):
Krane
Thomson Reuters Venture Capital Fund
Class A (XXXX)
Institutional Class (XXXX)
This SAI is not a prospectus and should
be read in conjunction with the current prospectus for the Fund, dated _________, 2014, as it may be revised from time to time
(the “Prospectus”). Capitalized terms used herein that are not defined have the same meaning as in the Prospectus,
unless otherwise noted. A copy of the Prospectus may be obtained, without charge, by calling 1.855.857.2638, visiting www.KraneShares.com,
or writing to the Trust at 1350 Avenue of the Americas, 2nd Floor, New York, New York 10019.
SUBJECT TO COMPLETION
THE INFORMATION HEREIN IS NOT COMPLETE
AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
IS EFFECTIVE. THIS SAI IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION
IN WHICH THE OFFER OR SALE IS NOT PERMITTED.
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GENERAL DESCRIPTION OF THE TRUST AND THE FUND
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1
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INVESTMENT POLICIES, TECHNIQUES AND RISK FACTORS
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1
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INVESTMENT LIMITATIONS
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16
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MANAGEMENT OF THE TRUST
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17
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INVESTMENT ADVISER
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23
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SUB-ADVISER
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PORTFOLIO MANAGER
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24
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CODES OF ETHICS
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25
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PROXY VOTING POLICY
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25
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ADMINISTRATOR
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26
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CUSTODIAN
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26
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transfer agent
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26
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DISTRIBUTOR AND DISTRIBUTION ARRANGEMENTS
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26
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control persons AND PRINCIPAL HOLDERS OF SECURITIES
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28
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BROKERAGE TRANSACTIONS
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28
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PURCHASING AND REDEEMING SHARES
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29
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TAXES
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30
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DETERMINATION OF NAV
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37
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DIVIDENDS AND DISTRIBUTIONS
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38
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OTHER INFORMATION
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38
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DISCLAIMER
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40
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COUNSEL
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40
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INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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financial statements
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APPENDIX A - PROXY VOTING POLICY
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A-1
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Appendix B - description of ratings
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b-1
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GENERAL DESCRIPTION OF THE TRUST AND THE FUND
The Trust was organized as a Delaware statutory
trust on February 3, 2012 and is permitted to offer multiple, separate series (
i.e.
, funds). As of the date of this SAI,
the Trust offers 4 separate funds, including the Fund and other funds not offered in this SAI. The Trust is an open-end management
investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”). The offering of
the Trust’s shares is registered under the Securities Act of 1933, as amended (the “Securities Act”). All payments
received by the Trust for shares of any fund belong to that fund. Each fund will have its own assets and liabilities.
Max Funds LLC (the “Adviser”)
serves as the investment adviser to the Fund and is responsible for making investment decisions for the Fund’s assets and
continuously reviewing, supervising and administering the Fund’s investment program. Index Management Solutions, LLC (the
“Sub-Adviser”) serves as the investment sub-adviser to the Fund and is responsible for trading portfolio securities
on behalf of the Fund. The Adviser and the Sub-Adviser may be referred to together as the “Advisers.” [SEI Investments
Distribution Co.] serves as the distributor (the “Distributor”) of the shares of the Fund.
The Fund is an open-end management investment
company that, upon the demand of the investor, must redeem its shares and pay the investor the next calculated net asset value
(“NAV”) thereof. See “Purchasing and Redeeming Shares” for more information.
INVESTMENT POLICIES, TECHNIQUES AND
RISK FACTORS
General
The Fund seeks to provide investment results
that, before fees and expenses, correspond generally to the price performance of a specific benchmark designed to track the performance
of the U.S. venture capital industry. The Fund’s current benchmark is the Thomson Reuters Venture Capital Index. The Fund’s
investment objective is non-fundamental and may be changed without the consent of the holders of a majority of the Fund’s
outstanding shares. Additional information about the Fund’s investment objective and principal investment strategies is contained
in the Prospectus.
The investment techniques discussed below
and in the Prospectus may, consistent with the Fund’s investment objectives and investment limitations, be used by the Fund
if, in the opinion of the Adviser and/or the Sub-Adviser, they will be advantageous to the Fund. The Fund is free to reduce or
eliminate its activity with respect to any of the investment techniques discussed below without changing the Fund’s fundamental
investment policies and without prior notice to shareholders. However, to the extent any such change represents a material change
to the Fund’s principal investment strategies, the Fund will notify shareholders of the change. There is no assurance that
any of the Fund’s strategies or any other strategies and methods of investment available to the Fund will result in the achievement
of the Fund’s objective.
Principal Investment Policies, Techniques
and Risk Factors –
The investment policies, techniques and risk factors described below are considered to be principal
to the management of the Fund.
Equity Securities
The Fund may invest in equity securities.
Equity securities represent ownership interests in a company or partnership and consist of common stocks, preferred stocks, warrants
to acquire common stock, securities convertible into common stock, and investments in master limited partnerships. Investments
in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in
the value of equity securities in which the Fund invests will cause the NAV of the Fund to fluctuate. Global stock markets, including
the U.S. stock market, tend to be cyclical, with periods when stock prices generally rise and periods when stock prices generally
decline. The Fund may purchase equity securities traded in the U.S. on registered exchanges or the over-the-counter (“OTC”)
market. The Fund may invest in the types of equity securities described in more detail below.
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Common Stock.
Common stock represents an equity or ownership interest in an issuer. In the
event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds and preferred stock take precedence over the
claims of those who own common stock.
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Preferred Stock.
Preferred stock represents an equity or ownership interest in an issuer
that pays dividends at a specified rate and that has precedence over common stock in the payment of dividends. In the event an
issuer is liquidated or declares bankruptcy, the claims of owners of bonds take precedence over the claims of those who own preferred
and common stock.
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Convertible Securities.
Convertible securities are bonds, debentures, notes, preferred stocks
or other securities that may be converted or exchanged (by the holder or by the issuer) into shares of the underlying common stock
(or cash or securities of equivalent value) at a stated exchange ratio. A convertible security may also be called for redemption
or conversion by the issuer after a particular date and under certain circumstances (including a specified price) established upon
issue. If a convertible security held by the Fund is called for redemption or conversion, the Fund could be required to tender
it for redemption, convert it into the underlying common stock, or sell it to a third party.
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Convertible securities generally
have less potential for gain or loss than common stocks. Convertible securities generally provide yields higher than the underlying
common stocks, but generally lower than comparable non-convertible securities. Because of this higher yield, convertible securities
generally sell at a price above their “conversion value,” which is the current market value of the stock to be received
upon conversion. The difference between this conversion value and the price of convertible securities will vary over time depending
on changes in the value of the underlying common stocks and interest rates. When the underlying common stocks decline in value,
convertible securities tend not to decline to the same extent because of the interest or dividend payments and the repayment of
principal at maturity for certain types of convertible securities. However, securities that are convertible other than at the option
of the holder generally do not limit the potential for loss to the same extent as securities convertible at the option of the holder.
When the underlying common stocks rise in value, the value of convertible securities may also be expected to increase. At the same
time, however, the difference between the market value of convertible securities and their conversion value will narrow, which
means that the value of convertible securities will generally not increase to the same extent as the value of the underlying common
stocks. Because convertible securities may also be interest-rate sensitive, their value may increase as interest rates fall and
decrease as interest rates rise. Convertible securities are also subject to credit risk, and are often lower-quality securities.
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Small and Medium Capitalization Issuers.
Investing in equity securities of small and medium
capitalization companies often involves greater risk than is customarily associated with investments in larger capitalization companies.
This increased risk may be due to the greater business risks of smaller size, limited markets and financial resources, narrow product
lines and frequent lack of depth of management. The securities of smaller companies are often traded in the OTC market and even
if listed on a national securities exchange may not be traded in volumes typical for that exchange. Consequently, the securities
of smaller companies are less likely to be liquid, may have limited market stability, and may be subject to more abrupt or erratic
market movements than securities of larger, more established growth companies or the market averages in general.
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Master Limited Partnerships (“MLPs”).
MLPs are limited partnerships in which
the ownership units are publicly traded. MLP units are registered with the SEC and are freely traded on a securities exchange or
in the OTC market. MLPs often own several properties or businesses (or own interests) that are related to real estate development
and oil and gas industries, but they also may finance motion pictures, research and development and other projects. Generally,
a MLP is operated under the supervision of one or more managing general partners. Limited partners are not involved in the day-to-day
management of the partnership.
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The risks of investing in a MLP
are generally those involved in investing in a partnership as opposed to a corporation. For example, state law governing partnerships
is often less restrictive than state law governing corporations. Accordingly, there may be fewer protections afforded investors
in a MLP than investors in a corporation. Additional risks involved with investing in a MLP are risks associated with the specific
industry or industries in which the partnership invests, such as the risks of investing in real estate, or oil and gas industries.
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Warrants.
As a matter of non-fundamental policy, the Fund does not invest in warrants. However,
the Fund may from time to time receive warrants as a result of, for example, a corporate action or some other event affecting one
or more of the companies in which the Fund invests. In such event, the Fund generally intends to hold such warrants until they
expire. The Fund, however, reserves the right to exercise the warrants. Warrants are instruments that entitle the holder to buy
an equity security at a specific price for a specific period of time. Changes in the value of a warrant do not necessarily correspond
to changes in the value of its underlying security. The price of a warrant may be more volatile than the price of its underlying
security, and a warrant may offer greater potential for capital appreciation as well as capital loss. Warrants do not entitle a
holder to dividends or voting rights with respect to the underlying security and do not represent any rights in the assets of the
issuing company. A warrant ceases to have value if it is not exercised prior to its expiration date. These factors can make warrants
more speculative than other types of investments.
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Rights.
A right is a privilege granted to existing shareholders of a corporation to subscribe
to shares of a new issue of common stock before it is issued. Rights normally have a short life of usually two to four weeks, are
freely transferable and entitle the holder to buy the new common stock at a lower price than the public offering price. An investment
in rights may entail greater risks than certain other types of investments. Generally, rights do not carry the right to receive
dividends or exercise voting rights with respect to the underlying securities, and they do not represent any rights in the assets
of the issuer. In addition, their value does not necessarily change with the value of the underlying securities, and they cease
to have value if they are not exercised on or before their expiration date. Investing in rights increases the potential profit
or loss to be realized from the investment as compared with investing the same amount in the underlying securities.
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Derivatives
The Fund may use derivative instruments
as part of its investment strategies. Generally, derivatives are financial contracts the value of which depends upon, or is derived
from, the value of an underlying asset, reference rate or index, and may relate to bonds, interest rates, currencies, commodities,
and related indexes. Examples of derivative instruments include forward currency contracts, currency and interest rate swaps, currency
options, futures contracts, options on futures contracts and swap agreements. The Fund’s use of derivative instruments will
be underpinned by investments in short term, high-quality U.S. money market securities.
With respect to certain kinds of derivative
transactions entered into by the Fund that involve obligations to make future payments to third parties, including, but not limited
to, futures contracts, forward contracts, swap contracts, the purchase of securities on a when-issued or delayed delivery basis,
or reverse repurchase agreements, under applicable federal securities laws, rules, and interpretations thereof, the Fund must “set
aside” (referred to sometimes as “asset segregation”) liquid assets, or engage in other measures to “cover”
open positions with respect to such transactions. For example, with respect to forward foreign currency exchange contracts and
futures contracts that are not contractually required to “cash-settle,” the Fund must cover its open positions by setting
aside liquid assets equal to the contracts’ full, notional value, except that deliverable forward contracts for currencies
that are liquid will be treated as the equivalent of “cash-settled” contracts. As such, the Fund may set aside liquid
assets in an amount equal to the Fund’s daily marked-to-market (net) obligation (
i.e.
, the Fund’s daily net
liability if any) rather than the full notional amount under such deliverable forward foreign currency exchange contracts. With
respect to forward foreign currency exchange contracts and futures contracts that are contractually required to “cash-settle,”
the Fund may set aside liquid assets in an amount equal to the Fund’s daily marked-to-market (net) obligation rather than
the notional value. The Fund reserves the right to modify its asset segregation policies in the future.
Swap Agreements.
The Fund may enter
into swap agreements, including interest rate swaps and total return swaps. A typical interest rate swap involves the exchange
of a floating interest rate payment for a fixed interest payment. Total return swaps are contracts in which one party agrees to
make periodic payments based on the change in market value of the underlying assets, which may include a specified security, basket
of securities or security indexes during the specified period, in return for periodic payments based on a fixed or variable interest
rate of the total return from other underlying assets. Swap agreements may be used to hedge or achieve exposure to, for example,
currencies, interest rates, and money market securities without actually purchasing such currencies or securities. The Fund may
use swap agreements to invest in a market without owning or taking physical custody of the underlying securities in circumstances
in which direct investment is restricted for legal reasons or is otherwise impracticable. Swap agreements will tend to shift the
Fund’s investment exposure from one type of investment to another or from one payment stream to another. Depending on their
structure, swap agreements may increase or decrease the Fund’s exposure to long- or short-term interest rates (in the United
States or abroad), foreign currencies, corporate borrowing rates, or other factors, and may increase or decrease the overall volatility
of the Fund’s investments and its share price.
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Interest Rate Swaps.
The Fund may enter into interest rate swaps. In such an instance, the
Fund may agree to pay a fixed rate (multiplied by a notional amount) while a counterparty agrees to pay a floating rate (multiplied
by the same notional amount). If interest rates rise, resulting in a diminution in the value of the Fund’s portfolio, the
Fund would receive payments under the swap that would offset, in whole or in part, such diminution in value.
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Total Return Swaps.
The Fund may
enter into total return swaps. Total return swaps are contracts in which one party agrees to make periodic payments based on the
change in market value of the underlying assets, which may include a specified security, basket of securities or security indexes
during the specified period, in return for periodic payments based on a fixed or variable interest rate of the total return from
other underlying assets. Total return swap agreements may be used to obtain exposure to a security or market without owning or
taking physical custody of such security or market, including in cases in which there may be disadvantages associated with direct
ownership of a particular security. In a typical total return equity swap, payments made by the Fund or the counterparty are based
on the total return of a particular reference asset or assets (such as an equity security, a combination of such securities, or
an index). That is, one party agrees to pay another party the return on a stock, basket of stocks, or stock index 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. Total return swaps involve not only the risk associated with
the investment in the underlying securities, but also the risk of the counterparty not fulfilling its obligations under the agreement.
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Futures, Options and Options on Futures
Contracts.
The Fund may enter into U.S. or foreign futures contracts and options and options on futures contracts. When the
Fund purchases a futures contract, it agrees to purchase a specified underlying instrument at a specified future date. When the
Fund sells a futures contract, it agrees to sell the underlying instrument at a specified future date. The price at which the purchase
and sale will take place is fixed when the Fund enters into the contract. Futures can be held until their delivery dates, or can
be closed out before then if a liquid secondary market is available. To the extent the Fund uses futures and options, it will do
so only in accordance with Rule 4.5 of the Commodity Exchange Act (“CEA”). The Adviser has filed a notice of eligibility
for exclusion from the definition of the term “commodity pool operator” in accordance with Rule 4.5 so that the Fund
is not subject to registration or regulation as a commodity pool operator under the CEA.
The risk of loss in trading futures contracts
or uncovered call options in some strategies (
e.g.
, selling uncovered stock index futures contracts) is potentially unlimited.
The Fund does not plan to use futures and options contracts in this way. The risk of a futures position may still be large as traditionally
measured due to the low margin deposits required. In many cases, a relatively small price movement in a futures contract may result
in immediate and substantial loss or gain to the investor relative to the size of a required margin deposit. The Fund, however,
intends to utilize futures and options contracts in a manner designed to limit their risk exposure to levels comparable to direct
investment in stocks.
There is also the risk of loss by the Fund
of margin deposits in the event of bankruptcy of a broker with whom the Fund has an open position in the futures contract or option.
The purchase of put or call options will be based upon predictions by the Fund as to anticipated trends, which predictions could
prove to be incorrect.
The potential for loss related to the purchase
of an option on a futures contract is limited to the premium paid for the option plus transaction costs. Because the value of the
option is fixed at the point of sale, there are no daily cash payments by the purchaser to reflect changes in the value of the
underlying contract; however, the value of the option changes daily and that change would be reflected in the NAV of the Fund.
The potential for loss related to writing options is unlimited.
Although the Fund intends to enter into
futures contracts only if there is an active market for such contracts, there is no assurance that an active market will exist
for the contracts at any particular time.
Investments in Other Investment Companies
The Fund may invest in the securities of
other investment companies to the extent that such an investment would be consistent with the requirements of Section 12(d)(1)
of the 1940 Act, or any rule, regulation or order of the SEC or interpretation thereof. Generally, the Fund may invest in the securities
of another investment company (the “acquired company”) provided that the Fund, immediately after such purchase or acquisition,
does not own in the aggregate: (i) more than 3% of the total outstanding voting stock of the acquired company; (ii) securities
issued by the acquired company having an aggregate value in excess of 5% of the value of the total assets of the Fund; or (iii)
securities issued by the acquired company and all other investment companies (other than Treasury stock of the Fund) having an
aggregate value in excess of 10% of the value of the total assets of the Fund. In addition, Section 12(d)(1) prohibits another
investment company from selling its shares to the Fund if, after the sale (i) the Fund owns more than 3% of the other investment
company’s voting stock or (ii) the Fund and other investment companies, and companies controlled by them, own more than 10%
of the voting stock of such other investment company.
If the Fund invests in, and thus, is a
shareholder of, another investment company, the Fund’s shareholders will indirectly bear the Fund’s proportionate share
of the fees and expenses paid by such other investment company, including advisory fees, in addition to both the management fees
payable directly by the Fund to the Fund’s own investment adviser and the other expenses that the Fund bears directly in
connection with the Fund’s own operations.
Consistent with the restrictions discussed
above, the Fund may invest in several different types of investment companies from time to time, including mutual funds, exchange
traded funds (“ETFs”), closed-end funds, and business development companies (“BDCs”), when the Adviser
believes such an investment is in the best interests of the Fund and its shareholders. For example, the Fund may elect to invest
in another investment company when such an investment presents a more efficient investment option than buying securities individually.
The Fund also may invest in investment companies that are included as components of an index, such as BDCs, to seek to track the
performance of that index. A BDC is a less common type of closed-end investment company that more closely resembles an operating
company than a typical investment company. BDCs generally focus on investing in, and providing managerial assistance to, small,
developing, financially troubled, private companies or other companies that may have value that can be realized over time and with
management assistance. Similar to an operating company, a BDC’s total annual operating expense ratio typically reflects all
of the operating expenses incurred by the BDC, and is generally greater than the total annual operating expense ratio of a mutual
fund that does not bear the same types of operating expenses. However, as a shareholder of a BDC, the Fund does not directly pay
for a portion of all of the operating expenses of the BDC, just as a shareholder of computer manufacturer does not directly pay
for the cost of labor associated with producing such computers. As a result, the fees and expenses of the Fund that invests in
a BDC will be effectively overstated by an amount equal to the “Acquired Fund Fees and Expenses.” Acquired Fund Fees
and Expenses are not included as an operating expense of the Fund in the Fund’s financial statements, which more accurately
reflect the Fund’s actual operating expenses.
Investment companies may include index-based
investments, such as ETFs that hold substantially all of their assets in securities representing a specific index. The main risk
of investing in index-based investments is the same as investing in a portfolio of securities comprising the index. The market
prices of index-based investments will fluctuate in accordance with both changes in the market value of their underlying portfolio
securities and due to supply and demand for the instruments on the exchanges on which they are traded (which may result in their
trading at a discount or premium to their NAVs). Index-based investments may not replicate exactly the performance of their specific
index because of transaction costs and because of the temporary unavailability of certain component securities of the index.
U.S. Government Securities
The Fund may invest in U.S. government
securities. Securities issued or guaranteed by the U.S. government or its agencies or instrumentalities include U.S. Treasury securities,
which are backed by the full faith and credit of the U.S. Treasury and which differ only in their interest rates, maturities, and
times of issuance. U.S. Treasury bills have initial maturities of one-year or less; U.S. Treasury notes have initial maturities
of one to ten years; and U.S. Treasury bonds generally have initial maturities of greater than ten years. Certain U.S. government
securities are issued or guaranteed by agencies or instrumentalities of the U.S. government including, but not limited to, obligations
of U.S. government agencies or instrumentalities such as Fannie Mae, Freddie Mac, the government National Mortgage Association
(“Ginnie Mae”), the Small Business Administration, the Federal Farm Credit Administration, the Federal Home Loan Banks,
Banks for Cooperatives (including the Central Bank for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks,
the Tennessee Valley Authority, the Export-Import Bank of the United States, the Commodity Credit Corporation, the Federal Financing
Bank, the National Credit Union Administration and the Federal Agricultural Mortgage Corporation.
Some obligations issued or guaranteed by
U.S. government agencies and instrumentalities, including, for example, Ginnie Mae pass-through certificates, are supported by
the full faith and credit of the U.S. Treasury. Other obligations issued by or guaranteed by federal agencies, such as those securities
issued by Fannie Mae, are supported by the discretionary authority of the U.S. government to purchase certain obligations of the
federal agency, while other obligations issued by or guaranteed by federal agencies, such as those of the Federal Home Loan Banks,
are supported by the right of the issuer to borrow from the U.S. Treasury, while the U.S. government provides financial support
to such U.S. government-sponsored federal agencies, no assurance can be given that the U.S. government will always do so, since
the U.S. government is not so obligated by law. U.S. Treasury notes and bonds typically pay coupon interest semi-annually and repay
the principal at maturity.
On September 7, 2008, the U.S. Treasury
announced a federal takeover of Fannie Mae, and Freddie Mac, placing the two federal instrumentalities in conservatorship. Under
the takeover, the U.S. Treasury agreed to acquire $1 billion of senior preferred stock of each instrumentality and obtained warrants
for the purchase of common stock of each instrumentality (the “Senior Preferred Stock Purchase Agreement” or “Agreement”).
Under the Agreement, the U.S. Treasury pledged to provide up to $200 billion per instrumentality as needed, including the contribution
of cash capital to the instrumentalities in the event their liabilities exceed their assets. This was intended to ensure that the
instrumentalities maintain a positive net worth and meet their financial obligations, preventing mandatory triggering of receivership.
On December 24, 2009, the U.S. Treasury announced that it was amending the Agreement to allow the $200 billion cap on the U.S.
Treasury’s funding commitment to increase as necessary to accommodate any cumulative reduction in net worth until 2012. For
the period during which these Agreements were in effect, the investments of holders, including the Fund, of mortgage-backed securities
and other obligations issued by Fannie Mae and Freddie Mac are protected.
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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 U.S. 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 Fund’s shares.
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Borrowing
The Fund may borrow money to the extent
permitted by the 1940 Act. Borrowing for investment purposes is a form of leverage. Leveraging investments, by purchasing securities
with borrowed money, is a speculative technique that increases investment risk, but also increases investment opportunity. Because
substantially all of the Fund’s assets will fluctuate in value, whereas the interest obligations on borrowings may be fixed,
the NAV of the Fund will increase more when the Fund’s portfolio assets increase in value and decrease more when the Fund’s
portfolio assets decrease in value than would otherwise be the case. Moreover, interest costs on borrowings may fluctuate with
changing market rates of interest and may partially offset or exceed the returns on the borrowed funds. The Fund also may be required
to maintain minimum average balances in connection with a borrowing or to pay a commitment or other fee to maintain a line of credit,
which would further increase the cost of borrowing. Under adverse conditions, the Fund might have to sell portfolio securities
to meet interest or principal payments at a time when investment considerations would not favor such sales. Generally, the Fund
would use this form of leverage during periods when the Adviser believes that the Fund’s investment objective would be furthered.
The Fund also may borrow money to facilitate
management of the Fund’s portfolio by enabling the Fund to meet redemption requests when the liquidation of portfolio instruments
would be inconvenient or disadvantageous. Such borrowing is not for investment purposes and will be repaid by the borrowing Fund
promptly. As required by the 1940 Act, the Fund must maintain continuous asset coverage (total assets, including assets acquired
with borrowed funds, less liabilities exclusive of borrowings) of 300% of all amounts borrowed. If, at any time, the value of the
Fund’s assets should fail to meet this 300% coverage test, the Fund, within three days (not including Sundays and holidays),
will reduce the amount of the Fund’s borrowings to the extent necessary to meet this 300% coverage requirement. Maintenance
of this percentage limitation may result in the sale of portfolio securities at a time when investment considerations otherwise
indicate that it would be disadvantageous to do so.
In addition to the foregoing, the Fund
is authorized to borrow money as a temporary measure for extraordinary or emergency purposes in amounts not in excess of 5% of
the value of the Fund’s total assets. Borrowings for extraordinary or emergency purposes are not subject to the foregoing
300% asset coverage requirement. While the Fund does not anticipate doing so, the Fund is authorized to pledge (
i.e.
, transfer
a security interest in) portfolio securities in an amount up to one-third of the value of the Fund’s total assets in connection
with any borrowing.
Non-Principal Investment Policies, Techniques
and Risk Factors –
The investment policies, techniques and risk factors described below are not considered to be principal
to the management of the Fund. However, the Fund is permitted to, and may from time to time, engage in the investment activities
described below if and when the Adviser and/or Sub-Adviser determines that such activities will help the Fund to achieve its investment
objective. Shareholders will be notified if the Fund’s use of any of the non-principal investment policies, techniques or
instruments described below represents a material change in the Fund’s principal investment strategies.
Fixed Income Securities
The Fund intends to invest primarily in
fixed income securities. The market value of the fixed income securities 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 Fund’s
NAV. Additional information regarding fixed income securities is described below:
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Duration.
Duration is a measure of the expected change in value of a fixed income security
for a given change in interest rates. For example, if interest rates changed by one percent, the value of a security having an
effective duration of two years generally would vary by two percent. Duration takes the length of the time intervals between the
present time and time that the interest and principal payments are scheduled, or in the case of a callable bond, expected to be
received, and weighs them by the present values of the cash to be received at each future point in time.
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Variable and Floating Rate Securities.
Variable and floating rate instruments involve certain
obligations that may carry variable or floating rates of interest, and may involve a conditional or unconditional demand feature.
Such instruments bear interest at rates which are not fixed, but which vary with changes in specified market rates or indices.
The interest rates on these securities may be reset daily, weekly, quarterly, or some other reset period, and may have a set floor
or ceiling on interest rate changes. There is a risk that the current interest rate on such obligations may not accurately reflect
existing market interest rates. A demand instrument with a demand notice exceeding seven days may be considered illiquid if there
is no secondary market for such security.
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Debt Securities.
The Fund intends
to invest primarily in debt securities. A debt security is a security consisting of a certificate or other evidence of a debt (secured
or unsecured) on which the issuing company or governmental body promises to pay the holder thereof a fixed, variable, or floating
rate of interest for a specified length of time, and to repay the debt on the specified maturity date. Some debt securities, such
as zero coupon bonds, do not make regular interest payments but are issued at a discount to their principal or maturity value.
Debt securities include a variety of fixed income obligations, including, but not limited to, corporate bonds, government securities,
municipal securities, convertible securities, mortgage-backed securities, and asset-backed securities. Debt securities include
investment-grade securities, non-investment-grade securities, and unrated securities. Debt securities are subject to a variety
of risks, such as interest rate risk, income risk, call/prepayment risk, inflation risk, credit risk, and (in the case of foreign
securities) country risk and currency risk.
Corporate Debt Securities.
The Fund
may invest in corporate debt securities. Selection will generally not be dependent on independent credit analysis or fundamental
analysis performed by the Adviser. The Fund may invest in all grades of corporate debt securities including below investment grade
as discussed below. See Appendix B for a description of corporate bond ratings. The Fund may also invest in unrated securities.
Corporate debt securities are typically
fixed-income securities issued by businesses to finance their operations, but may also include bank loans to companies. Notes,
bonds, debentures and commercial paper are the most common types of corporate debt securities. The primary differences between
the different types of corporate debt securities are their maturities and secured or un-secured status. Commercial paper has the
shortest term and is usually unsecured. The broad category of corporate debt securities includes debt issued by domestic or foreign
companies of all kinds, including those with small-, mid- and large-capitalizations. Corporate debt may be rated investment-grade
or below investment-grade and may carry variable or floating rates of interest.
Because of the wide range of types, and
maturities, of corporate debt securities, as well as the range of creditworthiness of its issuers, corporate debt securities have
widely varying potentials for return and risk profiles. For example, commercial paper issued by a large established domestic corporation
that is rated investment-grade may have a modest return on principal, but carries relatively limited risk. On the other hand, a
long-term corporate note issued by a small foreign corporation from an emerging market country that has not been rated may have
the potential for relatively large returns on principal, but carries a relatively high degree of risk.
Corporate debt securities carry both credit
risk and interest rate risk. Credit risk is the risk that the Fund could lose money if the issuer of a corporate debt security
is unable to pay interest or repay principal when it is due. Some corporate debt securities that are rated below investment-grade
are generally considered speculative because they present a greater risk of loss, including default, than higher quality debt securities.
The credit risk of a particular issuer’s debt security may vary based on its priority for repayment. For example, higher
ranking (senior) debt securities have a higher priority than lower ranking (subordinated) securities. This means that the issuer
might not make payments on subordinated securities while continuing to make payments on senior securities. In addition, in the
event of bankruptcy, holders of higher-ranking senior securities may receive amounts otherwise payable to the holders of more junior
securities. Interest rate risk is the risk that the value of certain corporate debt securities will tend to fall when interest
rates rise. In general, corporate debt securities with longer terms tend to fall more in value when interest rates rise than corporate
debt securities with shorter terms.
Debt Securities Issued by the World
Bank for Reconstruction and Development (“World Bank”).
The Fund may invest in debt securities issued by the World
Bank. Debt securities issued by the World Bank may include high quality global bonds backed by 185 member governments, including
the United States, Japan, Germany, France and the United Kingdom, as well as in bonds in “non-core” currencies, including
emerging markets and European accession countries with ratings of AAA or Aaa, structured notes, and discount notes represented
by certificates, in bearer form only, or in un-certified form (Book Entry Discount Notes) with maturities of 360 days or less at
a discount, and in the case of Discount Notes, in certified form only and on an interest bearing basis in the U.S. and Eurodollar
markets.
Foreign Issuers
The Fund intends to directly invest in
issuers located outside the United States, but also may invest in financial instruments that are indirectly linked to the performance
of foreign issuers. Examples of such financial instruments include ADRs, Global Depositary Receipts (“GDRs”), European
Depositary Receipts (“EDRs”), International Depository Receipts (“IDRs”), “ordinary shares,”
and “New York shares” issued and traded in the United States. ADRs are U.S. dollar denominated receipts typically issued
by U.S. banks and trust companies that evidence ownership of underlying securities issued by a foreign issuer. The underlying securities
may not necessarily be denominated in the same currency as the securities into which they may be converted. The underlying securities
are held in trust by a custodian bank or similar financial institution in the issuer’s home country. The depositary bank
may not have physical custody of the underlying securities at all times and may charge fees for various services, including forwarding
dividends and interest and corporate actions. Generally, ADRs in registered form are designed for use in domestic securities markets
and are traded on exchanges or over-the-counter in the United States. GDRs, EDRs, and IDRs are similar to ADRs in that they are
certificates evidencing ownership of shares of a foreign issuer, however, GDRs, EDRs, and IDRs may be issued in bearer form and
denominated in other currencies, and are generally designed for use in specific or multiple securities markets outside the United
States. EDRs, for example, are designed for use in European securities markets while GDRs are designed for use throughout the world.
Ordinary shares are shares of foreign issuers that are traded abroad and on a U.S. exchange. New York shares are shares that a
foreign issuer has allocated for trading in the United States. ADRs, ordinary shares, and New York shares all may be purchased
with and sold for U.S. dollars, which protects the Fund from the foreign settlement risks described below.
Depositary receipts may be sponsored or
unsponsored. Although the two types of depositary receipt facilities (unsponsored or sponsored) are similar, there are differences
regarding a holder’s rights and obligations and the practices of market participants. A depository may establish an unsponsored
facility without participation by (or acquiescence of) the underlying issuer; typically, however, the depository requests a letter
of non-objection from the underlying issuer prior to establishing the facility. Holders of unsponsored depositary receipts generally
bear all the costs of the facility. The depository usually charges fees upon the deposit and withdrawal of the underlying securities,
the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance
of other services. The depository of an unsponsored facility frequently is under no obligation to distribute shareholder communications
received from the underlying issuer or to pass through voting rights to depositary receipt holders with respect to the underlying
securities.
Sponsored depositary receipt facilities
are created in generally the same manner as unsponsored facilities, except that sponsored depositary receipts are established jointly
by a depository and the underlying issuer through a deposit agreement. The deposit agreement sets out the rights and responsibilities
of the underlying issuer, the depository, and the depositary receipt holders. With sponsored facilities, the underlying issuer
typically bears some of the costs of the depositary receipts (such as dividend payment fees of the depository), although most sponsored
depositary receipts holders may bear costs such as deposit and withdrawal fees. Depositories of most sponsored depositary receipts
agree to distribute notices of shareholder meetings, voting instructions, and other shareholder communications and information
to the depositary receipt holders at the underlying issuer’s request.
Investing in foreign companies may involve
risks not typically associated with investing in companies domiciled in the United States. The value of securities denominated
in foreign currencies, and of dividends from such securities, can change significantly when foreign currencies strengthen or weaken
relative to the U.S. dollar. Foreign securities markets generally have less trading volume and less liquidity than U.S. markets,
and prices in some foreign markets can be very volatile. Many foreign countries lack uniform accounting and disclosure standards
comparable to those that apply to U.S. companies, and it may be more difficult to obtain reliable information regarding a foreign
issuer’s financial condition and operations. In addition, the costs of foreign investing, including withholding taxes, brokerage
commissions, and custodial fees, generally are higher than for U.S. investments.
Investing in companies located abroad also
carries political and economic risks distinct from those associated with investing in the United States. Foreign investment may
be affected by actions of foreign governments adverse to the interests of U.S. investors, including the possibility of seizure,
expropriation or nationalization of assets, including foreign deposits, confiscatory taxation, restrictions on U.S. investment,
or on the ability to repatriate assets or to convert currency into U.S. dollars. There may be a greater possibility of default
by foreign governments or foreign-government sponsored enterprises. Investments in foreign countries also involve a risk of local
political, economic, or social instability, military action or unrest, or adverse diplomatic developments.
Foreign Securities
The Fund invests a significant portion
of its assets in non-U.S. securities and instruments, or in instruments that provide exposure to such securities and instruments.
Investments in non-U.S. securities involve certain risks that may not be present with investments in U.S. securities. For example,
investments in non-U.S. securities may be subject to risk of loss due to foreign currency fluctuations or to political or economic
instability. There may be less information publicly available about a non-U.S. issuer than a U.S. issuer. Non-U.S. issuers may
be subject to different accounting, auditing, financial reporting and investor protection standards than U.S. issuers. Investments
in non-U.S. securities may be subject to withholding or other taxes and may be subject to additional trading, settlement, custodial,
and operational risks (including restrictions on the transfers of securities). With respect to certain countries, there is the
possibility of government intervention and expropriation or nationalization of assets. Because legal systems differ, there is also
the possibility that it will be difficult to obtain or enforce legal judgments in certain countries.
Non-U.S. securities markets may not be
as developed or efficient as, and may be more volatile than, those in the U.S. While the volume of shares traded on non-U.S. securities
markets generally has been growing, such markets usually have substantially less volume than U.S. markets. Therefore, the Fund’s
investments in non-U.S. securities may be less liquid and subject to more rapid and erratic price movements than comparable securities
listed for trading on U.S. exchanges. Non-U.S. securities may trade at price/earnings multiples higher than comparable U.S. securities
and such levels may not be sustainable. There may be less government supervision and regulation of foreign stock exchanges, brokers,
banks and listed companies abroad than in the U.S. Moreover, settlement practices for transactions in foreign markets may differ
from those in U.S. markets. Such differences may include delays beyond periods customary in the U.S. and practices, such as delivery
of securities prior to receipt of payment, that increase the likelihood of a failed settlement, which can result in losses to the
Fund. Foreign exchanges may be open on days when the Fund does not price its shares, thus, the value of the securities in the Fund’s
portfolio may change on days when shareholders will not be able to purchase or sell the Fund’s shares. Conversely, Fund shares
may trade on days when foreign exchanges are closed. Each of these factors can make investments in the Fund more volatile and potentially
less liquid than other types of investments.
Foreign brokerage commissions, custodial
expenses and other fees are also generally higher than for securities traded in the U.S. This may cause the Fund to incur higher
portfolio transaction costs than domestic equity funds. Fluctuations in exchange rates may also affect the earning power and asset
value of the foreign entity issuing a security, even one denominated in U.S. dollars. Dividend and interest payments may be repatriated
based on the exchange rate at the time of disbursement, and restrictions on capital flows may be imposed.
Economic conditions, such as volatile currency
exchange rates and interest rates, political events and other conditions may, without prior warning, lead to government intervention
and the imposition of “capital controls.” Countries use these controls to restrict volatile movements of capital entering
(inflows) and exiting (outflows) their country to respond to certain economic conditions. Such controls are mainly applied to short-term
capital transactions to counter speculative flows that threaten to undermine the stability of the exchange rate and deplete foreign
exchange reserves. Capital controls include the prohibition of, or restrictions on, the ability to transfer currency, securities
or other assets. Levies may be placed on profits repatriated by foreign entities (such as the Fund). Capital controls may impact
the ability of the Fund to buy, sell or otherwise transfer securities or currency, adversely affect the trading market for shares
of the Fund, and cause the Fund to trade at prices materially different from its NAV. There can be no assurance a country in which
the Fund invests will not impose a form of capital control to the possible detriment of the Fund and its shareholders.
Non-U.S. Government
Securities.
The Fund may invest in short-term securities issued or guaranteed by non-U.S. governments, agencies and instrumentalities.
The Fund also may purchase intermediate and long-term obligations issued or guaranteed by non-U.S. governments, agencies and instrumentalities.
Non-U.S. government securities include direct obligations, as well as obligations guaranteed by a foreign government including
state, territory or local governments.
Bank Deposits and Obligations
The Fund may invest
in deposits and other obligations of U.S. and non-U.S. banks and financial institutions. Deposits and obligations of banks and
financial institutions include certificates of deposit, time deposits, and bankers’ acceptances. Certificates of deposit
and time deposits represent an institution’s obligation to repay funds deposited with it that earn a specified interest rate.
Certificates of deposit are negotiable certificates, while time deposits are non-negotiable deposits. A banker’s acceptance
is a time draft drawn on and accepted by a bank that becomes a primary and unconditional liability of the bank upon acceptance.
Investments in obligations of non-U.S. banks and financial institutions may involve risks that are different from investments in
obligations of U.S. banks. These risks include future unfavorable political and economic developments, seizure or nationalization
of foreign deposits, currency controls, interest limitations or other governmental restrictions that might affect the payment of
principal or interest on the securities held in the Fund.
Commercial
Paper
The Fund may invest
in commercial paper. Commercial paper is an unsecured short-term promissory note with a fixed maturity of no more than 270 days
issued by corporations, generally to finance short-term business needs. The commercial paper purchased by the Fund generally will
be rated in the upper two short-term ratings by at least two NRSROs or, if unrated, deemed to be of equivalent quality by the Adviser
or the Sub-Adviser. If a security satisfies the rating requirement upon initial purchase and is subsequently downgraded, the Fund
is not required to dispose of the security. In the event of such an occurrence, the Adviser or the Sub-Adviser will determine what
action, including potential sale, is in the best interest of the Fund. The Fund also may purchase unrated commercial paper provided
that such paper is determined to be of comparable quality by the Adviser or the Sub-Adviser. Commercial paper issues in which the
Fund may invest include securities issued by corporations without registration under the Securities Act in reliance on the exemption
from such registration afforded by Section 3(a)(3) thereof, and commercial paper issued in reliance on the so-called “private
placement” exemption from registration, which is afforded by Section 4(2) of the Securities Act (“Section 4(2) paper”).
Section 4(2) paper is restricted as to disposition under the federal securities laws in that any resale must similarly be made
in an exempt transaction. Section 4(2) paper is normally resold to other institutional investors through or with the assistance
of investment dealers who make a market in Section 4(2) paper, thus providing liquidity.
Currency Transactions
The Fund may enter into foreign currency
forward and foreign currency futures contracts to facilitate local securities settlements or to protect against currency exposure
in connection with distributions to shareholders. The Fund does not expect to engage in currency transactions for the purpose of
hedging against declines in the value of the Fund’s assets that are denominated in one or more foreign currencies.
Forward Foreign Currency Contracts.
A forward foreign currency exchange contract (“forward contract”) involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are principally traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A forward contract generally has no margin deposit requirement,
and no commissions are charged at any stage for trades.
A non-deliverable forward contract is a
forward contract where there is no physical settlement of two currencies at maturity. Non-deliverable forward contracts are contracts
between parties in which one party agrees to make a payment to the other party (the “Counterparty”) based on the change
in market value or level of a specified currency. In return, the Counterparty agrees to make payment to the first party based on
the return of a different specified currency. Non-deliverable forward contracts will usually be done on a net basis, with the Fund
receiving or paying only the net amount of the two payments. The net amount of the excess, if any, of the Fund’s obligations
over its entitlements with respect to each non-deliverable forward contract is accrued on a daily basis and an amount of cash or
highly liquid securities having an aggregate value at least equal to the accrued excess is maintained in an account at the Trust’s
custodian bank. The risk of loss with respect to non-deliverable forward contracts generally is limited to the net amount of payments
that the Fund is contractually obligated to make or receive.
Foreign Currency Futures Contracts.
A foreign currency futures contract is a contract involving an obligation to deliver or acquire the specified amount of a specific
currency, at a specified price and at a specified future time. Futures contracts may be settled on a net cash payment basis rather
than by the sale and delivery of the underlying currency.
Currency exchange transactions involve
a significant degree of risk and the markets in which currency exchange transactions are effected are highly volatile, highly specialized
and highly technical. Significant changes, including changes in liquidity and prices, can occur in such markets within very short
periods of time, often within minutes. Currency exchange trading risks include, but are not limited to, exchange rate risk, maturity
gap, interest rate risk, and potential interference by foreign governments through regulation of local exchange markets, foreign
investment or particular transactions in foreign currency. If the Fund utilizes foreign currency transactions at an inappropriate
time, such transactions may lower the Fund’s return. The Fund could experience losses if the value of any currency forwards
and futures positions is poorly correlated with its other investments or if it could not close out its positions because of an
illiquid market. Such contracts are subject to the risk that the counterparty will default on its obligations. In addition, the
Fund will incur transaction costs, including trading commissions, in connection with certain foreign currency transactions.
Illiquid Securities
The Fund may invest up to an aggregate
amount of 15% of its net assets in illiquid securities. If the percentage of the Fund’s net assets invested in illiquid securities
exceeds 15% due to market activity, the Fund will take appropriate measures to reduce its holdings of illiquid securities as soon
as reasonably practicable. Appropriate measures may not include the liquidation of an illiquid investment where the Fund would
be disadvantaged by such disposition. The term “illiquid securities” for this purpose means securities that cannot
be disposed of within seven days in the ordinary course of business at approximately the amount at which the Fund has valued the
securities. Illiquid securities include securities subject to contractual or other restrictions on resale and other instruments
that lack readily available markets. The inability of the Fund to readily dispose of illiquid or not readily marketable investments
or at a reasonable price could impair the Fund’s ability to raise cash for redemptions or other purposes. In addition, the
sale of illiquid securities also may require more time and may result in higher dealer discounts and other selling expenses than
does the sale of securities that are not illiquid. Illiquid securities also may be more difficult to value due to the unavailability
of reliable market quotations for such securities, and investment in illiquid securities may have an adverse impact on the Fund’s
NAV. The liquidity of securities purchased by the Fund which are eligible for resale pursuant to Rule 144A will be monitored by
the Fund on an ongoing basis. In the event that such a security is deemed to be no longer liquid, the Fund’s holdings will
be reviewed to determine what action, if any, is required to ensure that the retention of such security does not result in the
Fund having more than 15% of its assets invested in illiquid or not readily marketable securities.
Portfolio Turnover
In general, the Adviser manages the Fund
without regard to restrictions on portfolio turnover. The Fund’s investment strategies may, however, produce relatively high
portfolio turnover rates from time to time. To the extent the Fund invests in derivative instruments, the instruments generally
will have short-term maturities and, thus, be excluded from the calculation of portfolio turnover. The value of portfolio securities
received or delivered as a result of in-kind creations or redemptions of the Fund’s shares also is excluded from the calculation
of the Fund’s portfolio turnover rate. As a result, the Fund’s reported portfolio turnover may be low despite relatively
high portfolio activity which would, in turn, produce correspondingly greater expenses for the Fund, including brokerage commissions
or dealer mark-ups and other transaction costs on the sale of securities and reinvestments in other securities. Generally, the
higher the rate of portfolio turnover of a fund, the higher these transaction costs borne by the fund and its long-term shareholders.
Such sales may result in the realization of taxable capital gains (including short-term capital gains which are generally taxed
to shareholders at ordinary income tax rates) for certain taxable shareholders.
“Portfolio Turnover Rate” is
defined under the rules of the SEC as the lesser of the value of the securities purchased or of the securities sold, excluding
all securities whose maturities at the time of acquisition were one-year or less, divided by the average monthly value of such
securities owned during the year. Based on this definition, instruments with a remaining maturity of less than one-year are excluded
from the calculation of the portfolio turnover rate. Instruments excluded from the calculation of portfolio turnover generally
would include the futures contracts and option contracts in which the Fund invests because such contracts generally have a remaining
maturity of less than one-year.
Real Estate Investment Trusts
The Fund may invest in the securities of
real estate investment trusts (“REITs”) to the extent allowed by law. Risks associated with investments in securities
of REITs include decline in the value of real estate, risks related to general and local economic conditions, overbuilding and
increased competition, increases in property taxes and operating expenses, changes in zoning laws, casualty or condemnation losses,
variations in rental income, changes in neighborhood values, the appeal of properties to tenants, and increases in interest rates.
In addition, equity REITs may be affected by changes in the values of the underlying property owned by the trusts, while mortgage
REITs may be affected by the quality of credit extended. REITs are dependent upon management skills, may not be diversified and
are subject to the risks of financing projects. REITs are also subject to heavy cash-flow dependency, defaults by borrowers, self-liquidation
and the possibility of failing to qualify for the favorable U.S. federal income tax treatment available to REITs under the Internal
Revenue Code of 1986, as amended (the “Internal Revenue Code”), and to maintain exemption from the 1940 Act. If an
issuer of debt securities collateralized by real estate defaults, it is conceivable that the REITs could end up holding the underlying
real estate.
Repurchase Agreements
The Fund may enter into repurchase agreements
with counterparties that are deemed to present acceptable credit risks. A repurchase agreement is a transaction in which the Fund
purchases securities or other obligations from a bank or securities dealer (or its affiliate) and simultaneously commits to resell
them to a counterparty at an agreed-upon date or upon demand and at a price reflecting a market rate of interest unrelated to the
coupon rate or maturity of the purchased obligations. The Fund maintains custody of the underlying obligations prior to their repurchase,
either through its regular custodian or through a special “triparty” custodian or sub-custodian that maintains separate
accounts for both the Fund and its counterparty. Thus, the obligation of the counterparty to pay the repurchase price on the date
agreed to or upon demand is, in effect, secured by such obligations.
Repurchase agreements carry certain risks
not associated with direct investments in securities, including a possible decline in the market value of the underlying obligations.
If their value becomes less than the repurchase price, plus any agreed-upon additional amount, the counterparty must provide additional
collateral so that at all times the collateral is at least equal to the repurchase price plus any agreed-upon additional amount.
The difference between the total amount to be received upon repurchase of the obligations and the price that was paid by the Fund
upon acquisition is accrued as interest and included in its net investment income. Repurchase agreements involving obligations
other than U.S. government securities (such as commercial paper and corporate bonds) may be subject to special risks and may not
have the benefit of certain protections in the event of the counterparty’s insolvency. If the seller or guarantor becomes
insolvent, the Fund may suffer delays, costs and possible losses in connection with the disposition of collateral.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase
agreements, which involve the sale of securities held by the Fund subject to its agreement to repurchase the securities at an agreed-upon
date or upon demand and at a price reflecting a market rate of interest. Reverse repurchase agreements are subject to the Fund’s
limitation on borrowings and may be entered into only with banks or securities dealers or their affiliates. While a reverse repurchase
agreement is outstanding, the Fund will maintain the segregation, either on its records or with the Trust’s custodian, of
cash or other liquid securities, marked to market daily, in an amount at least equal to its obligations under the reverse repurchase
agreement.
Reverse repurchase agreements involve the
risk that the buyer of the securities sold by the Fund might be unable to deliver them when the Fund seeks to repurchase. If the
buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, the buyer or trustee or receiver
may receive an extension of time to determine whether to enforce the Fund’s obligation to repurchase the securities, and
the Fund’s use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision.
Securities Lending
The Fund may lend
portfolio securities to certain creditworthy borrowers. The borrowers provide collateral that is maintained in an amount at least
equal to the current market value of the securities loaned. No securities loan shall be made on behalf of the Fund if, as a result,
the aggregate value of all securities loans of the Fund exceeds one-third of the value of the Fund’s total assets (including
the value of the collateral received). The Fund may terminate a loan at any time and obtain the return of the securities loaned.
The Fund receives the value of any interest or cash or non-cash distributions paid on the loaned securities.
With respect to
loans that are collateralized by cash, the borrower will be entitled to receive a fee based on the amount of cash collateral. The
Fund is compensated by the difference between the amount earned on the reinvestment of cash collateral and the fee paid to the
borrower. In the case of collateral other than cash, the Fund is compensated by a fee paid by the borrower equal to a percentage
of the market value of the loaned securities. Any cash collateral may be reinvested in certain short-term instruments either directly
on behalf of the Fund or through one or more joint accounts or money market funds; such reinvestments are subject to investment
risk. The Adviser may receive compensation for these investments.
Securities lending
involves exposure to certain risks, including operational risk (
i.e.
, the risk of losses resulting from problems in the
settlement and accounting process), “gap” risk (
i.e.
, the risk of a mismatch between the return on cash collateral
reinvestments and the fees the Fund has agreed to pay a borrower), and credit, legal, counterparty and market risk. If a securities
lending counterparty were to default, the Fund would be subject to the risk of a possible delay in receiving collateral or in recovering
the loaned securities, or to a possible loss of rights in the collateral. In the event a borrower does not return the Fund’s
securities as agreed, the Fund may experience losses if the proceeds received from liquidating the collateral do not at least equal
the value of the loaned security at the time the collateral is liquidated, plus the transaction costs incurred in purchasing replacement
securities. This event could trigger adverse tax consequences for the Fund. Substitute payments for dividends received by the Fund
for securities loaned out by the Fund will not be considered qualified dividend income. The Fund may take the tax effects of this
difference into account in its securities lending program.
The Fund pays
a portion of the interest or fees earned from securities lending to a borrower as described above and to a securities lending agent
who administers the lending program in accordance with guidelines approved by the Trust’s Board.
Short Sales
The Fund may engage in short sales transactions
in which the Fund sells a security it does not own. To complete such a transaction, the Fund must borrow or otherwise obtain 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 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 to the lender amounts equal to any dividends
or interest, which 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 Fund may also use repurchase agreements to satisfy delivery obligations
in short sales transactions. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet the
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 Fund’s short position. The Fund may use up to 100% of its portfolio to engage in short sales transactions and collateralize
its open short positions.
INVESTMENT LIMITATIONS
Unless otherwise noted, whenever a fundamental
or non-fundamental investment policy or limitation states a maximum percentage of the Fund’s assets that may be invested
in any security or other asset, or sets forth a policy regarding quality standards, such standard or percentage limitation will
be determined immediately after and as a result of the Fund’s acquisition of such security or other asset. Accordingly, other
than with respect to the Fund’s limitations on borrowings, any subsequent change in values, net assets, or other circumstances
will not be considered when determining whether the investment complies with the Fund’s investment policies and limitations.
Fundamental Policies
The investment limitations below are fundamental
policies of the Fund, and cannot be changed without the consent of the holders of a majority of the Fund’s outstanding shares.
The term “majority of the outstanding shares” means the vote of (i) 67% or more of the Fund’s shares present
at a meeting, if more than 50% of the outstanding shares of the Fund are present or represented by proxy, or (ii) more than 50%
of the Fund’s outstanding shares, whichever is less.
The Fund may not:
|
|
1.
|
Purchase securities of an issuer that would cause the Fund to fail to satisfy the diversification
requirement for a diversified management company under the 1940 Act, the rules or regulations thereunder or any exemption therefrom,
as such statute, rules or regulations may be amended or interpreted from time to time.
|
|
|
2.
|
Issue senior securities, except as permitted under the 1940 Act.
|
|
|
3.
|
Borrow money, except as permitted under the 1940 Act.
|
|
|
4.
|
Act as an underwriter of another issuer’s securities, except to the extent that the Fund
may be considered an underwriter within the meaning of the Securities Act in the disposition of portfolio securities.
|
|
|
5.
|
Purchase the securities of any issuer (other than securities issued or guaranteed by the U.S. government,
or any non-U.S. government, or their respective agencies or instrumentalities) if, as a result, more than 25% of the Fund’s
total assets would be invested in the securities of companies whose principal business activities are in the same industry, except
that the Fund will invest more than 25% of its total assets in securities of the same industry to approximately the same extent
that the Underlying Index concentrates in the securities of a particular industry or group of industries.
|
|
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6.
|
Purchase or sell real estate unless acquired as a result of ownership of securities or other instruments
(but this shall not prevent the Fund from investing in securities or other instruments backed by real estate, real estate investment
trusts or securities of companies engaged in the real estate business).
|
|
|
7.
|
Purchase or sell physical commodities unless acquired as a result of ownership of securities or
other instruments (but this shall not prevent the Fund from purchasing or selling options and futures contracts or from investing
in securities or other instruments backed by physical commodities).
|
|
|
8.
|
Lend any security or make any other loan except as permitted under the 1940 Act. This means that
no more than 33
1
/
3
% of the Fund’s total assets would be lent to other parties. This limitation
does not apply to purchases of debt securities or to repurchase agreements, or to acquisitions of loans, loan participations or
other forms of debt instruments permissible under the Fund’s investment policies.
|
Non-Fundamental Policies
The investment limitations below are non-fundamental
policies of the Fund and may be changed by the Board.
The Fund will:
|
|
1.
|
Not purchase illiquid securities if, in the aggregate, more than 15% of its net assets would be
invested in illiquid securities. If the percentage of the Fund’s net assets invested in illiquid securities exceeds 15% due
to market activity, the Fund will take appropriate measures to reduce its holdings of illiquid securities as soon as reasonably
practicable.
|
MANAGEMENT OF THE TRUST
Board Responsibilities
The Board of Trustees is responsible for
overseeing the management and affairs of the Fund and the Trust. The Board has considered and approved contracts, as described
herein, under which certain companies provide essential management and administrative services to the Trust. Like most mutual funds,
the day-to-day business of the Trust, including the day-to-day management of risk, is performed by third-party service providers,
such as the Advisers, Distributor and Administrator (as defined below). The Board is responsible for overseeing the Trust’s
service providers and, thus, has oversight responsibility with respect to the risk management performed by those service providers.
Risk management seeks to identify and eliminate or mitigate the potential effects of risks,
i.e.
, events or circumstances
that could have material adverse effects on the business, operations, shareholder services, investment performance or reputation
of the Trust or the Fund. Under the overall supervision of the Board and the Audit Committee (discussed in more detail below),
the service providers to the Fund employ a variety of processes, procedures and controls to identify risks relevant to the operations
of the Trust and the Fund to lessen the probability of their occurrence and/or to mitigate the effects of such events or circumstances
if they do occur. Each service provider is responsible for one or more discrete aspects of the Trust’s business (
e.g.
,
the Advisers are responsible for the management of the Fund’s portfolio investments) and, consequently, for managing the
risks associated with that activity.
The Board’s role in risk management
oversight begins before the inception of a fund, at which time the Adviser presents the Board with information concerning the investment
objectives, strategies and risks of the fund. Additionally, the Adviser provides the Board with an overview of, among other things,
its investment philosophy, brokerage practices and compliance infrastructure. Thereafter, the Board oversees the risk management
of the fund’s operations, in part by requesting periodic reports from and otherwise communicating with various personnel
of the fund and its service providers, including the Trust’s Chief Compliance Officer and the fund’s independent accountants.
The Board and, with respect to identified risks that relate to its scope of expertise, the Audit Committee oversee efforts by management
and service providers to manage risks to which the fund may be exposed.
The Board is responsible for overseeing
the nature, extent and quality of the services provided to the Fund by the Adviser and Sub-Adviser and receives information about
those services at its regular meetings. In addition, on at least an annual basis, in connection with its consideration of
whether to renew the Advisory Agreement and Sub-Advisory Agreement with the Adviser and Sub-Adviser, respectively, the Board meets
with the Advisers to review such services. Among other things, the Board regularly considers the Advisers’ adherence to the
Fund’s investment restrictions and compliance with various Fund policies and procedures and with applicable securities regulations.
The Board also reviews information about the Fund’s performance and investments.
The Trust’s Chief Compliance Officer
meets regularly with the Board to review and discuss compliance and other issues. At least annually, the Trust’s Chief Compliance
Officer provides the Board with a report reviewing the adequacy and effectiveness of the Trust’s policies and procedures
and those of its service providers, including the Advisers. The report addresses the operation of the policies and procedures of
the Trust and each service provider since the date of the last report; material changes to the policies and procedures since the
date of the last report; any recommendations for material changes to the policies and procedures; and material compliance matters
since the date of the last report.
The Board receives reports from the Trust’s
service providers regarding operational risks, portfolio valuation and other matters. Annually, an independent registered public
accounting firm reviews with the Audit Committee its audit of the Trust’s financial statements, focusing on major areas of
risk encountered by the Trust and noting any significant deficiencies or material weaknesses in the Trust’s internal controls.
The Board recognizes that not all risks
that may affect the Fund can be identified, that it may not be practical or cost-effective to eliminate or mitigate certain risks,
that it may be necessary to bear certain risks (such as investment-related risks) to achieve the Fund’s goals, and that the
processes, procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover, despite the
periodic reports the Board receives and the Board’s discussions with the service providers to the Fund, it may not be made
aware of all of the relevant information of a particular risk. Most of the Trust’s investment management and business affairs
are carried out by or through the Advisers and other service providers, each of which has an independent interest in risk management
but whose policies and methods by which one or more risk management functions are carried out may differ from the Trust’s
and each other’s in the setting of priorities, the resources available or the effectiveness of relevant controls. As a result
of the foregoing and other factors, the Board’s risk management oversight is subject to substantial limitations.
Members of the Board and Officers
of the Trust
Set forth below are the name, birth year,
position with the Trust, term of office, principal occupations for a minimum of the last five years, number of portfolios overseen
by, and other directorships of each of the persons currently serving as members of the Board and as Executive Officers of the Trust.
The members of the Board serve as Trustees for the life of the Trust or until retirement, removal, or their office is terminated
pursuant to the Trust’s Declaration of Trust.
The Chairman of the Board, Jonathan Krane,
is an interested person of the Trust as that term is defined in the 1940 Act. No single independent Trustee serves as a lead independent
Trustee. The Trust has determined its leadership structure is appropriate given the specific characteristics the Trust and its
operations. The Trust made this determination in consideration of, among other things, the fact that the Trustees who are not interested
persons of the Fund (
i.e.
, “independent Trustees”) constitute at least fifty percent (50%) of the Board, the
fact that the Audit Committee is composed of the independent Trustees, and the number of funds (and classes of shares) overseen
by the Board. The Board also believes that its leadership structure facilitates the orderly and efficient flow of information to
the independent Trustees from Fund management.
Name, Address and
Year of Birth of
Trustee/Officer
|
|
Position(s)
Held with the
Trust, Term of
Office and
Length of
Time Served
|
|
Principal Occupation(s)
During Past 5 Years
|
|
Number of
Portfolios in
Fund Complex
Overseen by
Trustee/Officer
|
|
Other
Directorships
Held by
Trustee
|
|
|
|
|
|
Interested Trustees
|
|
|
|
|
|
Jonathan Krane*
(1968)
1350 Avenue of Americas, 2nd Floor
New York, NY 10019
|
|
Trustee and Chairman of the Board, No set term; served since 2012
|
|
Principal of Krane Capital LLC from June 2009 to present. Chief Executive Officer of Max Funds LLC from April 2014 to present. Chief Executive Officer of Krane Funds Advisors, LLC from May 2011 to present. Chief Executive Officer of Harvest Krane LLC from June 2012 to present. Chief Executive Officer of Emma Entertainment from March 2004 to May 2009.
|
|
4
|
|
None
|
|
Chris Ruppenstein
(1970)
1350 Avenue of Americas, 2nd Floor
New York, NY 10019
|
|
Trustee, No set term; served since 2012
|
|
Managing Director of Krane Funds Advisors, LLC from July 2013 to present. Institutional Sales at TD Securities USA from January 1997 to January 2012.
|
|
4
|
|
None
|
|
|
|
|
|
Independent Trustees
|
|
|
|
Robb T. Doub
(1968)
1350 Avenue of Americas, 2nd Floor
New York, NY 10019
|
|
Trustee, No set term; served since 2013
|
|
General Partner of New Markets Venture Partners from January 2003 to present.
|
|
4
|
|
None
|
Name, Address and
Year of Birth of
Trustee/Officer
|
|
Position(s)
Held with the
Trust, Term of
Office and
Length of
Time Served
|
|
Principal Occupation(s)
During Past 5 Years
|
|
Number of
Portfolios in
Fund Complex
Overseen by
Trustee/Officer
|
|
Other
Directorships
Held by
Trustee
|
|
John Ferguson
(1966)
1350 Avenue of Americas, 2nd Floor
New York, NY 10019
|
|
Trustee, No set term; served since 2012
|
|
President of Alden Global Capital, LLC (hedge fund adviser) from April 2012 to present (formerly, Chief Operating Officer from November 2011 to April 2012). Senior Managing Director and Chief Operating Officer of K2 Advisors, L.L.C. from April 2005 to October 2011.
|
|
4
|
|
None
|
|
Matthew Stroyman
(1968)
1350 Avenue of Americas, 2nd Floor
New York, NY 10019
|
|
Trustee, No set term; served since 2012
|
|
Co-Founder, President and Chief Operating Officer of Arcturus (real estate asset and investment management services firm) from September 2007 to present.
|
|
4
|
|
None
|
|
|
|
|
|
Officers
|
|
|
|
|
|
Jonathan Krane
(1968)
1350 Avenue of Americas, 2nd Floor
New York, NY 10019
|
|
Principal Executive Officer and Principal Financial Officer, No set term; served since 2012
|
|
Principal of Krane Capital LLC from June 2009 to present. Chief Executive Officer of Max Funds LLC from April 2014 to present. Chief Executive Officer of Krane Funds Advisors, LLC from May 2011 to present. Chief Executive Officer of Harvest Krane LLC from June 2012 to present. Chief Executive Officer of Emma Entertainment from March 2004 to May 2009.
|
|
4
|
|
None
|
|
Jennifer Tarleton
(1966)
1350 Avenue of the Americas, 2nd Floor
New York, NY 10019
|
|
Vice President, No set term; served since 2012
|
|
Principal of Krane Capital LLC from June 2009 to present. Vice President of Krane Funds Advisors, LLC from May 2011 to present. Vice President of Max Funds LLC from April 2014 to present. Sole Practitioner of Jennifer Krane, Esq. from March 2001 to June 2009.
|
|
4
|
|
None
|
|
LuAnne Garvey
(1958)
1350 Avenue of the Americas, 2nd Floor
New York, NY 10019
|
|
Chief Compliance Officer, No set term; served since 2014
|
|
Director of Cipperman Compliance Services, LLC from January 2014 to present. Compliance Manager of Foreside Financial Group from April 2012 to December 2013. Compliance Manager of BNY Mellon Distributors 2010 to April 2012. Compliance Manager of PFPC Distributors from 1997 to 2012.
|
|
4
|
|
None
|
Name, Address and
Year of Birth of
Trustee/Officer
|
|
Position(s)
Held with the
Trust, Term of
Office and
Length of
Time Served
|
|
Principal Occupation(s)
During Past 5 Years
|
|
Number of
Portfolios in
Fund Complex
Overseen by
Trustee/Officer
|
|
Other
Directorships
Held by
Trustee
|
|
Peter Rodriguez
(1962)
SEI Investments Company
One Freedom Valley Drive
Oaks, PA 19456
|
|
Assistant Treasurer, No set term; served since 2013
|
|
Director, Fund Accounting of SEI Investments Global Funds Services from 2011 to present, 1997 to 2005. Director, Mutual Fund Trading of SEI Private Trust Company from 2009 to 2011. Director, Asset Data Services of Global Wealth Services from 2006 to 2009; Director, Portfolio Accounting of SEI Investments Global Fund Services from 2005 to 2006.
|
|
4
|
|
None
|
|
|
*
|
Mr. Krane is an “interested” person of the Trust, as that term is defined in the 1940
Act, by virtue of his ownership and controlling interest in the Adviser. Mr. Ruppenstein is an “interested” person
of the Trust, as that term is defined in the 1940 Act, by virtue of his employment with the Adviser.
|
Board Standing Committees
The Board has established the following
standing committees:
Audit Committee.
Each independent
trustee is a member of the Trust’s Audit Committee (the “Audit Committee”). The principal responsibilities of
the Audit Committee are the appointment, compensation and oversight of the Trust’s independent auditors, including the resolution
of disagreements regarding financial reporting between Trust management and such independent auditors. The Audit Committee’s
responsibilities include, without limitation, to (i) oversee the accounting and financial reporting processes of the Trust and
its internal control over financial reporting and, as the Committee deems appropriate, inquire into the internal control over financial
reporting of certain third-party service providers; (ii) oversee the quality and integrity of the Fund’s financial statements
and the independent audits thereof; (iii) oversee, or, as appropriate, assist Board oversight of, the Trust’s compliance
with legal and regulatory requirements that relate to the Trust’s accounting and financial reporting, internal control over
financial reporting and independent audits; (iv) approve prior to appointment the engagement of the Trust’s independent auditors
and, in connection therewith, review and evaluate the qualifications, independence and performance of the Trust’s independent
auditors; and (v) act as a liaison between the Trust’s independent auditors and the full Board. The Board of the Trust has
adopted a written charter for the Audit Committee. The independent trustees’ independent legal counsel assists the Audit
Committee in connection with these duties.
Nominating Committee.
Each independent
trustee is also a member of the Trust’s Nominating Committee. The principal responsibilities of the Nominating Committee
are to (i) oversee Fund governance matters and (ii) identify individuals qualified to serve as independent trustees of the Trust
and to recommend its nominees for consideration by the full Board. While the Nominating Committee is solely responsible for the
selection and nomination of the Trust’s independent trustees, it may consider nominations for the office of Trustee made
by Trust stockholders as it deems appropriate. The Nominating Committee considers nominees recommended by shareholders if such
nominees are submitted in accordance with Rule 14a-8 of the Securities Exchange Act of 1934 (the “1934 Act”), in conjunction
with a shareholder meeting to consider the election of Trustees. Trust stockholders who wish to recommend a nominee should send
nominations to the Secretary of the Trust that include biographical information and set forth the qualifications of the proposed
nominee.
Individual Trustee Qualifications
The Trust has concluded that each of the
Trustees should serve on the Board because of his or her ability to review and understand information about the Trust and the Fund
provided by management, to identify and request other information he or she may deem relevant to the performance of the Trustees’
duties, to question management and other service providers regarding material factors bearing on the management and administration
of the Fund, and to exercise his or her business judgment in a manner that serves the best interests of the Fund’s shareholders.
The Trust has concluded that each of the Trustees should serve as a Trustee based on his or her own experience, qualifications,
attributes and skills as described below.
The Trust has concluded that Mr. Krane
should serve as Trustee because of his knowledge of, and the executive positions he holds in, the financial services industry.
Specifically, Mr. Krane currently serves as Chief Executive Officer of four separate firms within the financial services industry,
including the Adviser, an investment adviser affiliated with the Adviser, a financial consulting firm affiliated with the Adviser,
and a distribution company also affiliated with the Adviser. As Chief Executive Officer of these companies, and in particular as
Chief Executive Officer of the Adviser, Mr. Krane contributes expertise and institutional knowledge relating to the structure of
the “Krane” organization and the way that the “Krane” business operates. Mr. Krane also served as Chief
Executive Officer of the China division of a multinational company, where he gained valuable experience in managing a business
and critical knowledge of business and investment opportunities in China. In addition, he has served on the boards of different
corporations and, in doing so, has first-hand knowledge of the fiduciary duties and responsibilities bestowed upon trustees and
directors. Mr. Krane’s experience as serving as Chief Executive Officer for multiple businesses in the financial services
industry, his familiarity with the “Krane” complex, and his experience in serving on the boards of various companies
qualify him to serve as a Trustee of the Trust.
The Trust has concluded that Mr. Ferguson
should serve as Trustee because of the experience he has gained working in the financial services and legal industries over the
years. In particular, Mr. Ferguson has extensive experience in managing global investment adviser firms, including the management,
creation and success of hedge funds. Prior to that, Mr. Ferguson served as a corporate securities and tax attorney assisting and
counseling clients with the organization and creation of both domestic and offshore funds. In addition, Mr. Ferguson has served
as an officer for two registered investment companies and, in doing so, has gained experience and knowledge regarding the mutual
fund industry. Mr. Ferguson’s experience in the financial services, mutual fund and legal industries and his day-to-day work
in managing successful investment advisory firms, qualify him to serve as a Trustee of the Trust.
The Trust has concluded that Mr. Ruppenstein
should serve as Trustee because of the experience he has gained working in the financial services industry, and specifically in
the brokerage industry, over the past fifteen years. As a seasoned broker, Mr. Ruppenstein has provided expertise to some of the
largest mutual fund companies, pension funds and hedge funds through the U.S. and Europe. He is an experienced trader and has traded,
including but not limited to, a large number of equities, ETFs, and options on both domestic and foreign exchanges. The knowledge
he has gained over the years working in the brokerage industry qualify him to serve as Trustee of the Trust.
The Trust has concluded that Mr. Doub should
serve as Trustee because of the experience he has gained working in the financial services industry over the years. In particular,
Mr. Doub has extensive experience in managing venture capital funds, including sourcing, analyzing, performing due diligence, closing,
managing investment and reporting to limited partners, and is general partner of a venture capital firm that invests in and actively
assists education, information technology and business services companies. He regularly works with portfolio companies on budgeting,
financial reporting, fund raising, acquisition and joint venture strategy, executive recruiting, exit strategy, market strategy,
cash management strategy, and product development. Prior to that, Mr. Doub served as an investment analyst at a large mutual fund
company, where he gained experience and knowledge regarding the mutual fund industry. Mr. Doub serves as director or conflict advisory
board member on a number of different boards, including boards of hedge funds. Mr. Doub’s experience in the financial services
and mutual fund industries, his day-to-day management of venture capital funds, and his leadership positions in a venture capital
firm and on various company boards qualify him to serve as a Trustee of the Trust.
The Trust has concluded that Mr. Stroyman
should serve as Trustee because of the experience he has gained working in the financial services and real estate industries. Working
as an investment banker early in his career, Mr. Stroyman developed a strong base of knowledge regarding corporate finance, structuring,
public and private securities, and company valuations. Through his work in the real estate industry and relationships with large
investment management firms, Mr. Stroyman has gained an understanding of sophisticated financial products. He has advised institutional
clients including pension funds, endowments and other qualified investors in asset management, risk assessment, and repositioning
and disposition of underperforming assets. The knowledge Mr. Stroyman has gained over the years working in the financial services
and real estate industries and his value and understanding of fiduciary duties and responsibilities qualify him to serve as Trustee
of the Trust.
Fund Shares Owned by Board Members
The Fund is new and, therefore, as of the
date of this SAI none of the Trustees beneficially owned shares of the Fund, including the Trust’s other funds not offered
in this SAI. “Beneficial ownership” is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act.
Board Compensation
The Trust and the Fund are new and as of
the date of this SAI, the Board has unanimously voted to forego the receipt of compensation for providing services to the Trust.
Therefore, it is not anticipated that the Trustees will receive compensation for serving on the Board for the fiscal year ending
March 31, 2014.
INVESTMENT ADVISER
Max Funds LLC serves as investment adviser
to the Fund pursuant to an Investment Advisory Agreement dated _________, 2014 between the Trust and the Adviser (the “Advisory
Agreement”). The Adviser is a Delaware limited liability company registered as an investment adviser under the Investment
Advisers Act of 1940, as amended (the “Advisers Act”). The Adviser is primarily owned and controlled by Mr. Jonathan
Krane. The Adviser’s offices are located at 1350 Avenue of the Americas, 2nd Floor, New York, New York 10019.
Under the Advisory Agreement, the Adviser
has overall responsibility for the general management and administration of the Fund. The Adviser provides a continuous investment
program for the Fund. The Adviser also arranges for sub-advisory, transfer agency, custody, fund administration and all other non-distribution-related
services necessary for the Fund to operate. The Fund pays the Adviser a fee equal to [X.XX]% of the Fund’s net assets.
[The Adviser has contractually agreed to
waive fees and/or reimburse expenses to the extent necessary to keep the Fund’s net operating expenses (excluding taxes,
leverage interest, brokerage costs, dividends and interest on securities sold short, acquired fund fees and expenses, expenses
incurred in connection with any merger or reorganization, and extraordinary expenses such as litigation and indemnification expenses
(“Excluded Expenses”)) from exceeding X.XX% and X.XX% of the Fund’s average daily net assets of the Institutional
Class Shares and A Class Shares, respectively, until ______________, 2015. This Agreement may be terminated at any time and for
any reason at the sole discretion of the Fund’s Board of Trustees.]
The Advisory Agreement with respect to
the Fund continues in effect for two years from its effective date, and thereafter is subject to annual approval by (i) the
Board of Trustees of the Trust or (ii) the vote of a majority of the outstanding voting securities (as defined in the 1940
Act) of the Fund, provided that in either event such continuance also is approved by a vote of a majority of the Trustees of the
Trust who are not interested persons (as defined in the 1940 Act) of the Fund, by a vote cast in person at a meeting called for
the purpose of voting on such approval. If the shareholders of the Fund fail to approve the Advisory Agreement, the Adviser may
continue to serve in the manner and to the extent permitted by the 1940 Act and rules and regulations thereunder.
The Advisory Agreement with respect to
the Fund is terminable without any penalty, by vote of the Board of Trustees of the Trust or by vote of a majority of the outstanding
voting securities (as defined in the 1940 Act) of the Fund, or by the Adviser, in each case on not less than sixty (60) days’
prior written notice to the other party; provided that a shorter notice period shall be permitted for the Fund in the event its
shares are no longer listed on a national securities exchange or in such other circumstances where the Fund waives such notice
period. The Advisory Agreement will terminate automatically and immediately in the event of its “assignment” (as defined
in the 1940 Act).
SUB-ADVISER
The Adviser has retained Index Management
Solutions, LLC, located at One Commerce Square, 2005 Market Street, Suite 2020, Philadelphia, PA 19103, to serve as sub-adviser
to the Fund. The Sub-Adviser was established in 2009 and is a wholly-owned subsidiary of VTL Associates, LLC. Pursuant to a Sub-Advisory
Agreement dated December 12, 2012 (the “Sub-Advisory Agreement”), the Sub-Adviser is responsible for trading portfolio
securities on behalf of the Fund, including selecting broker-dealers to execute purchase and sale transactions as instructed by
the Adviser or in connection with any rebalancing or reconstitution of the Underlying Index, subject to the supervision of the
Adviser and the Board of Trustees. Pursuant to the Sub-Advisory Agreement, the Adviser pays the Sub-Adviser a fee, which is calculated
daily and paid monthly, at an annual rate of [X.XX]% on the Fund’s daily average net assets.
The Sub-Advisory Agreement with respect
to the Fund continues in effect for two years from its effective date, and thereafter is subject to annual approval by (i) the
Board of Trustees of the Trust or (ii) the vote of a majority of the outstanding voting securities (as defined in the 1940
Act) of the Fund, provided that in either event such continuance is also approved by a vote of a majority of the Trustees of the
Trust who are not interested persons (as defined in the 1940 Act) of the Fund, by a vote cast in person at a meeting called for
the purpose of voting on such approval.
The Sub-Advisory Agreement with respect
to the Fund is terminable without any penalty, by vote of the Board of Trustees of the Trust or by vote of a majority of the outstanding
voting securities (as defined in the 1940 Act) of the Fund, or by the Adviser or the Trust at any time, and without the payment
of penalty, in each case on sixty (60) days’ prior written notice to the Sub-Adviser. The Sub-Adviser may terminate
the Sub-Advisory Agreement at any time, without the payment of penalty, on sixty (60) days’ prior written notice to the Adviser.
The Sub-Advisory Agreement will terminate automatically and immediately in the event of its “assignment” (as defined
in the 1940 Act) or upon termination of the Advisory Agreement.
PORTFOLIO MANAGER
Denise Krisko (the “Portfolio Manager”)
is responsible for the management of the Fund.
Portfolio Manager
Fund Ownership.
The Fund is required to show the dollar range of the Portfolio Manager’s “beneficial ownership”
of shares of the Fund as of the end of the most recently completed fiscal year. Dollar amount ranges disclosed are established
by the SEC. As of the date of this SAI, the Portfolio Manager did not beneficially own shares of the Fund.
Other Accounts.
The Portfolio Manager
is responsible for the day-to-day management of certain other accounts, as follows:
|
|
|
Registered
Investment
Companies*
|
|
Other Pooled
Investment Vehicles*
|
|
Other Accounts*
|
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Name
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Number
of
Accounts
|
|
Total
Assets
($
millions)
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|
Number of
Accounts
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|
Total Assets
($ millions)
|
|
Number of
Accounts
|
|
Total Assets
($ millions)
|
|
Denise Krisko
|
|
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|
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|
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*
Information provided is as of
[____________].
Portfolio Manager Compensation.
[The Portfolio Manager receives a fixed base salary and incentive awards based on profitability, growth in assets, and long-term
investment performance. Key staff members of the Sub-Adviser are eligible to participate in a deferred compensation plan due to
their high level of accountability and upon demonstrating a successful long-term performance track record. The value of the award
increases during a vesting period based upon the profitability of the firm. Voluntary contributions may be made to a defined contribution
plan.]
Description of Material Conflicts of
Interest. [
The Portfolio Manager’s management of “other accounts” may give rise to potential conflicts of
interest in connection with his or her management of the Fund’s investments, on the one hand, and the investments of the
other accounts, 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 manager could favor one account
over another. Another potential conflict could include the portfolio manager’s knowledge of the size, timing and possible
market impact of Fund trades, whereby the portfolio manager 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.]
CODES OF ETHICS
The Trust and the Advisers have each adopted
a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act. The Codes of Ethics apply to the personal investing activities of trustees,
directors, officers and certain employees (“access persons”). Rule 17j-1 and the Codes of Ethics are designed to prevent
unlawful practices in connection with the purchase or sale of securities by access persons. Under the Codes of Ethics, access persons
are permitted to engage in personal securities transactions, but are required to report their personal securities transactions
for monitoring purposes. In addition, certain access persons are required to obtain approval before investing in private placements
and are prohibited from investing in initial public offerings. Each Code of Ethics is on file with the SEC and is available to
the public.
PROXY VOTING POLICY
The Trust has adopted as its proxy voting
policies for the Fund the proxy voting guidelines of the Sub-Adviser, which are set forth in Appendix A to this SAI. The Trust
has delegated to the Sub-Adviser the authority and responsibility for voting proxies on the portfolio securities held by the Fund.
The Trust is required to disclose annually
the Fund’s complete proxy voting record on Form N-PX covering the period from July 1 of one year through June 30
of the next and to file Form N-PX with the SEC no later than August 31 of each year. When available, the current Form N-PX
for the Fund may be obtained at no charge upon request by calling 1.855.857.2638 or through the Trust’s website at www.KraneShares.com
when available, the Fund’s Form N-PX will also be available on the SEC’s website at www.sec.gov.
ADMINISTRATOR
[SEI Investments Global Funds Services]
(the “Administrator”) serves as administrator for the Fund. SEI Investments Management Corporation (“SIMC”),
a wholly owned subsidiary of SEI Investments Company (“SEI Investments”), is the owner of all beneficial interest in
the Administrator. The principal address of the Administrator is One Freedom Valley Drive, Oaks, Pennsylvania 19456. Under an Administration
Agreement with the Trust dated December 18, 2012, as amended (the “Administration Agreement”), the Administrator provides
necessary administrative and accounting services for the maintenance and operations of the Trust and the Fund. In addition, the
Administrator makes available the office space, equipment, personnel and facilities required to provide such services.]
For its services under the Administration
Agreement, the Administrator is entitled to a fee, based on assets under management, subject to a minimum fee. The Administrator
may be reimbursed by the Fund for its out-of-pocket expenses. The Advisory Agreement provides that the Adviser will pay certain
operating expenses of the Trust, including the fees due to the Administrator under each of the Administration Agreement.
CUSTODIAN
[Brown Brothers Harriman & Co. (“BBH”)
serves as custodian for the Trust. The principal address of BBH is 50 Post Office Square, Boston, Massachusetts 02110. Under a
Custodian Agreement with the Trust dated _____, 2014, BBH maintains in separate accounts cash, securities and other assets of the
Fund, keeps all necessary accounts and records, and provides other services. BBH is required, upon the order of the Trust, to deliver
securities held by it, in its capacity as custodian, and to make payments for securities purchased by the Trust for the Fund.]
TRANSFER AGENT
[DST Systems, Inc. (“DST”)
serves as transfer agent for the Trust. The principal address of DST is 430 West 7th Street, Kansas City, Missouri 64105]. Under
a Transfer Agency Agreement with the Trust dated _______, 2014, DST acts as a transfer agent for the Trust’s authorized and
issued shares of beneficial interest, and as dividend disbursing agent of the Trust.]
DISTRIBUTOR AND DISTRIBUTION ARRANGEMENTS
[SEI Investments Distribution Co., a wholly
owned subsidiary of SEI Investments, and an affiliate of the Administrator, serves as Distributor for the Trust. The principal
address of the Distributor is One Freedom Valley Drive, Oaks, Pennsylvania 19456. The Distributor has entered into a Distribution
Agreement with the Trust dated December 18, 2012, as amended (the “Distribution Agreement”) pursuant to which it distributes
shares of the Fund. The Distribution Agreement will continue for two years from its effective date and is renewable annually. The
Distribution Agreement provides that it may be terminated at any time, without the payment of any penalty, on at least thirty (30) days’
prior written notice to the other party (i) by vote of a majority of the independent trustees or (ii) by vote of a majority
of the outstanding voting securities (as defined in the 1940 Act) of the Fund. The Distribution Agreement will terminate automatically
in the event of its “assignment” (as defined in the 1940 Act).]
The Distributor is a broker-dealer registered
under the 1934 Act and a member of the Financial Industry Regulatory Authority (“FINRA”). The Distributor is not affiliated
with the Advisers or any national securities exchange.
Distribution Plan.
The Fund has
adopted a Distribution Plan applicable to the Fund’s Class A Shares. Under the Distribution Plan, the Distributor, or designated
Service Providers, may receive up to [0.25%]% of the Fund’s assets attributable to Class A Shares as compensation for distribution
services pursuant to Rule 12b-1 of the 1940 Act. The Distributor does not receive any compensation from the Fund for the distribution
of Institutional Class Shares.
Distribution services may include: (i)
services in connection with distribution assistance, or (ii) payments to financial institutions and other financial intermediaries,
such as broker-dealers, mutual fund “supermarkets” and the Distributor’s affiliates and subsidiaries, as compensation
for services or reimbursement of expenses incurred in connection with distribution assistance. The Distributor may, at its discretion,
retain a portion of such payments to compensate itself for distribution services and distribution related expenses such as the
costs of preparation, printing, mailing or otherwise disseminating sales literature, advertising, and prospectuses (other than
those furnished to current shareholders of the Fund), promotional and incentive programs, and such other marketing expenses that
the Distributor may incur. The Trust intends to operate the Plan in accordance with its terms and with the FINRA rules concerning
sales charges.
Dealer Reallowances.
Class A Shares
of the Funds are sold subject to a front-end sales charge as described in the Class A Shares prospectus. Selling dealers are normally
reallowed 100% 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.
|
Fund
|
|
Less than
$50,000
|
|
|
$50,000 but
less than
$100,000
|
|
|
$100,000 but
less than
$250,000
|
|
|
$250,000 but
less than
$500,000
|
|
|
$500,000 but
less than
$1,000,000
|
|
|
$1,000,000
and over
*
|
|
Krane Thomson Reuters Venture Capital Fund
|
|
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5.25%
|
|
|
|
4.25%
|
|
|
|
3.50%
|
|
|
|
2.50%
|
|
|
|
2.00%
|
|
|
None
|
|
|
*
|
Even though you do not pay a front-end sales charge on purchases of $1,000,000 or more, these purchases may be subject to a X.XX% contingent deferred sales charge (“CDSC”) if redeemed within 12 months of purchase.
|
Intermediary Compensation.
The Adviser
or its affiliates, out of their own resources and not out of Fund assets (
i.e.
, without additional cost to the Fund or its
shareholders), may pay certain broker dealers, banks and other financial intermediaries (“Intermediaries”) for certain
activities related to the Fund, including marketing and education support and the sale of Fund shares. These arrangements are sometimes
referred to as “revenue sharing” arrangements. Revenue sharing arrangements are not financed by the Fund and, thus,
do not result in increased Fund expenses. They are not reflected in the fees and expenses listed in the fees and expenses sections
of the Prospectus and they do not change the price paid by investors for the purchase of the Fund’s shares or the amount
received by a shareholder as proceeds from the redemption of Fund shares.
Such compensation may be paid to Intermediaries
that provide services to the Fund, including marketing and education support (such as through conferences, webinars and printed
communications). Such compensation may also be paid to Intermediaries for inclusion of the Fund on a sales list, including a preferred
or select sales list, in other sales programs. The Adviser periodically assesses the advisability of continuing to make these payments.
Payments to an Intermediary may be significant
to the Intermediary, and amounts that Intermediaries pay to your adviser, broker or other investment professional, if any, may
also be significant to such adviser, broker or investment professional. Because an Intermediary may make decisions about what investment
options it will make available or recommend, and what services to provide in connection with various products, based on payments
it receives or is eligible to receive, such payments create conflicts of interest between the Intermediary and its clients. For
example, these financial incentives may cause the Intermediary to recommend the Fund over other investments. The same conflict
of interest exists with respect to your financial adviser, broker or investment professionals if he or she receives similar payments
from his or her Intermediary firm.
Intermediary information is current only
as of the date of this SAI. Please contact your adviser, broker or other investment professional for more information regarding
any payments his or her Intermediary firm may receive. Any payments made by the Adviser or its affiliates to an Intermediary may
create an incentive for the Intermediary to encourage customers to buy shares of the Fund.
CONTROL PERSONS AND PRINCIPAL HOLDERS
OF SECURITIES
The Fund has not yet commenced operations
and, therefore, there were no control persons or principal holders of securities as of the date of this SAI.
BROKERAGE TRANSACTIONS
The Sub-Adviser assumes general supervision
over placing orders on behalf of the Fund for the purchase and sale of portfolio securities. The Sub-Adviser does not expect to
use one particular broker-dealer to effect the Fund’s portfolio transactions. In selecting the brokers or dealers for any
transaction in portfolio securities, the Sub-Adviser’s policy is to make such selection based on factors deemed relevant,
including but not limited to, the breadth of the market in the security, the price of the security, the reasonableness of the commission
or mark-up or mark-down, if any, execution capability, settlement capability, back office efficiency, and the financial condition
of the broker or dealer, both for the specific transaction and on a continuing basis. The overall reasonableness of brokerage commissions
paid is evaluated by the Sub-Adviser based upon its knowledge of available information as to the general level of commissions paid
by other institutional investors for comparable services. Brokers may also be selected because of their ability to handle special
or difficult executions, such as may be involved in large block trades, less liquid securities, broad distributions, or other circumstances.
When one or more broker-dealers is believed
capable of providing the best combination of price and execution, the Sub-Adviser is not required to select a broker-dealer based
on the lowest commission rate available for a particular transaction. In such cases, the Sub-Adviser may pay a higher commission
than otherwise obtainable from other brokers in return for brokerage research services provided to the Sub-Adviser consistent with
Section 28(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). Section 28(e) provides that the Sub-Adviser
may cause a Fund to pay a broker-dealer a commission for effecting a transaction in excess of the amount of commission another
broker or dealer would have charged as long as the Sub-Adviser makes a good faith determination that the amount of commission is
reasonable in relation to the value of the brokerage and research services provided by the broker-dealer. To the extent the Sub-Adviser
obtains brokerage and research services that it otherwise would acquire at its own expense, the Sub-Adviser may have incentive
to place a greater volume of transactions or pay higher commissions than would otherwise be the case.
The Sub-Adviser will only obtain brokerage
and research services from broker-dealers in arrangements that are consistent with Section 28(e) of the Exchange Act. The types
of products and services that the Sub-Adviser may obtain from broker-dealers through such arrangements will 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 Sub-Adviser may use products and services provided by brokers in servicing all of its client accounts and
not all such products and services may necessarily be used in connection with the account that paid commissions to the broker-dealer
providing such products and services. Any advisory or other fees paid to the Sub-Adviser are not reduced as a result of the receipt
of brokerage and research services.
In some cases, the Sub-Adviser may receive
a product or service from a broker that has both a “research” and a “non-research” use. When this occurs,
the Sub-Adviser will make a good faith allocation between the research and non-research uses of the product or service. The percentage
of the service that is used for research purposes may be paid for with brokerage commissions, while the Sub-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 Sub-Adviser faces a potential conflict of interest, but the Sub-Adviser believes that its allocation procedures are reasonably
designed to appropriately allocate the anticipated use of such products and services to research and non-research uses.
The Trust has adopted policies and procedures
that prohibit the consideration of sales of the Fund’s shares as a factor in the selection of a broker or a dealer to execute
its portfolio transactions.
Brokerage Commissions
The Fund is new and therefore has not paid
any brokerage commissions.
Affiliated Brokers
The Fund is new and therefore has not paid
any commissions to any affiliated brokers.
Regular Broker-Dealers
The Fund is required to identify any securities
of its “regular brokers and dealers” (as such term is defined in the 1940 Act) which the Fund may hold at the close
of its most recent fiscal year. “Regular brokers or dealers” of the Fund are the ten brokers or dealers that, during
the most recent fiscal year: (i) received the greatest dollar amounts of brokerage commissions from the Fund’s portfolio
transactions; (ii) engaged as principal in the largest dollar amounts of portfolio transactions of the Fund; or (iii) sold the
largest dollar amounts of the Fund’s shares.
The Fund is new and therefore has not acquired
securities from its regular brokers or dealers (as defined in the 1940 Act) or their parents.
Portfolio Turnover
Portfolio turnover may vary from year to
year, as well as within a year. High turnover rates are likely to result in comparatively greater brokerage expenses. The overall
reasonableness of brokerage commissions is evaluated by the Adviser based upon its knowledge of available information as to the
general level of commissions paid by the other institutional investors for comparable services. The Fund is new and therefore does
not have portfolio turnover rates.
PURCHASING AND REDEEMING SHARES
Purchases and redemptions may be made through
the Transfer Agent on any day the New York Stock Exchange (“NYSE”) is open for business. Shares of the Fund are offered
and redeemed on a continuous basis. Currently, the Trust is closed for business when the following holidays are observed: New Year’s
Day, Martin Luther King Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
It is currently the Trust’s policy
to pay all redemptions in cash. The Trust retains the right, however, to alter this policy to provide for redemptions in whole
or in part by a distribution in-kind of securities held by the Fund in lieu of cash. Shareholders may incur brokerage charges on
the sale of any such securities so received in payment of redemptions. [A shareholder will at all times be entitled to aggregate
cash redemptions from all funds of the Trust up to the lesser of $250,000 or 1% of the Trust’s net assets during any 90-day
period.] [The Trust has obtained an exemptive order from the SEC that permits the Trust to make in-kind redemptions to those shareholders
of the Trust that are affiliated with the Trust solely by their ownership of a certain percentage of the Trust's investment portfolios.]
The Trust reserves the right to suspend
the right of redemption and/or to postpone the date of payment upon redemption for any period on which trading on the NYSE is restricted,
or during the existence of an emergency (as determined by the SEC by rule or regulation) as a result of which disposal or valuation
of the Fund’s securities is not reasonably practicable, or for such other periods as the SEC has by order permitted. The
Trust also reserves the right to suspend sales of shares of the Fund for any period during which the NYSE, the Adviser, the Administrator,
the Transfer Agent and/or the Custodian are not open for business.
The Fund has no current intention to allow
purchases in-kind, but under certain circumstances the Fund may allow investors to purchase shares by contributing securities in-kind
to the Fund, provided that the securities used to purchase Fund shares are appropriate investments for the Fund, are consistent
with the Fund’s investment objective and policies, and meet any other applicable criteria established by the Adviser, such
as liquidity. The Fund will value the securities in accordance with its policies and procedures with respect to the valuation of
portfolio securities, as of the time at which the Fund determines their net asset value per share of a Fund (the “NAV”)
on the day that the securities are contributed to the Fund in-kind. The Adviser has the sole discretion with respect to determining
whether particular securities may be used as payment in-kind for Fund shares.
TAXES
The following discussion of certain U.S.
federal income tax consequences of investing in the Fund is based on the Internal Revenue Code, U.S. Treasury regulations, and
other applicable authority, all as in effect as of the date of the filing of this SAI. These authorities are subject to change
by legislative or administrative action, possibly with retroactive effect. The following discussion is only a summary of some of
the important U.S. federal income tax considerations generally applicable to investments in the Fund. There may be other tax considerations
applicable to particular shareholders. Shareholders should consult their own tax advisers regarding their particular situation
and the possible application of foreign, state, and local tax laws.
Qualification as a RIC
The Fund has elected or intends to elect
to be treated, and intends to qualify each year, as a regulated investment company (a “RIC”) under Subchapter M of
the Internal Revenue Code. In order to qualify for the special tax treatment accorded RICs and their shareholders, the Fund must,
among other things:
(a) derive at least 90% of its gross income
each year from (i) dividends, interest, payments with respect to certain securities loans, gains from the sale or other disposition
of stock or securities or foreign currencies, or 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, and (ii) net income derived
from interests in “qualified publicly traded partnerships” (as defined below);
(b) diversify its holdings so that, at
the end of each quarter of its taxable year, (i) at least 50% of the market value of the Fund’s total assets consists of
cash and cash items, U.S. government securities, securities of other RICs and other securities, with investments in such other
securities limited with respect to any one issuer to an amount not greater than 5% of the value of the Fund’s total assets
and not greater than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of the Fund’s
total assets is invested in (1) the securities (other than those of the U.S. government or other RICs) of any one issuer or two
or more issuers that are controlled by the Fund and that are engaged in the same, similar or related trades or businesses or (2)
the securities of one or more qualified publicly traded partnerships; and
(c) distribute with respect to each taxable
year an amount equal to or greater than 90% of its investment company taxable income (as that term is defined in the Internal Revenue
Code without regard to the deduction for dividends paid – generally taxable ordinary income and the excess, if any, of net
short-term capital gains over net long-term capital losses) and 90% of its net tax-exempt interest income.
In general, for purposes of the 90% of
gross income requirement described in (a) 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 that would be qualifying income if realized directly
by the Fund. However, 100% of the net income derived from an interest in a “qualified publicly traded partnership”
(generally, a partnership (i) interests in which are traded on an established securities market or are readily tradable on a secondary
market or the substantial equivalent thereof, and (ii) that derives less than 90% of its income from the qualifying income
described in (a)(i) of the prior paragraph) will be treated as qualifying income. In addition, although in general the passive
loss rules of the Internal Revenue 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.
The U.S. Treasury Department has authority
to issue regulations that would exclude foreign currency gains from the 90% test described in (a) above if such gains are not directly
related to a fund’s business of investing in stock or securities. Accordingly, regulations may be issued in the future that
could treat some or all of the Fund’s non-U.S. currency gains as non-qualifying income, thereby potentially jeopardizing
the Fund’s status as a RIC for all years to which the regulations are applicable.
Taxation of the Fund
If the Fund qualifies for treatment as
a RIC, the Fund will not be subject to federal income tax on income and gains that are distributed in a timely manner to its shareholders
in the form of dividends.
If, for any taxable year, the Fund was
to fail to qualify as a RIC or were to fail to meet the distribution requirement, it would be taxed in the same manner as an ordinary
corporation and distributions to its shareholders would not be deductible by the Fund in computing its taxable income. In addition,
the Fund’s distributions, to the extent derived from the Fund’s current and accumulated earnings and profits, including
any distributions of net long-term capital gains, would be taxable to shareholders as ordinary dividend income for federal income
tax purposes. However, such dividends would be eligible, subject to any generally applicable limitations, to be treated as qualified
dividend income in the case of shareholders taxed as individuals and for the dividends-received deduction in the case of corporate
shareholders. Moreover, the Fund would be required to pay out its earnings and profits accumulated in that year in order to qualify
for treatment as a RIC in a subsequent year. Under certain circumstances, the Fund may be able to cure a failure to qualify as
a RIC, but in order to do so the Fund may incur significant Fund-level taxes and may be forced to dispose of certain assets. If
the Fund failed to qualify as a RIC for a period greater than two taxable years, the Fund would generally be required to recognize
any net built-in gains with respect to certain of its assets upon a disposition of such assets within ten years of qualifying as
a RIC in a subsequent year.
The Fund intends to distribute at least
annually to its shareholders substantially all of its net taxable income and its net capital gains. Taxable income that is retained
by the Fund will be subject to tax at regular corporate rates. If the Fund retains any net capital gain, that gain will be subject
to tax at corporate rates, but the Fund may designate the retained amount as undistributed capital gains in a notice to its shareholders
who (i) will be required to include in income for federal income tax purposes, as long-term capital gain, their shares of such
undistributed amount, (ii) will be deemed to have paid their proportionate shares of the tax paid by the Fund on such undistributed
amount against their federal income tax liabilities, if any, and (iii) will be entitled to claim refunds on a properly filed U.S.
tax return to the extent the credit exceeds such liabilities. For federal income tax purposes, the tax basis of shares owned by
a shareholder of the Fund will be increased by an amount equal to the difference between the amount of undistributed capital gains
included in the shareholder’s gross income and the tax deemed paid by the shareholder.
If the Fund fails to distribute in a calendar
year an amount at least equal to the sum of 98% of its ordinary income for such year and 98.2% of its capital gain net income for
the one-year period ending October 31 of such year, plus any retained amount from the prior year, the Fund will be subject
to a non-deductible 4% excise tax on the undistributed amount. For these purposes, the Fund will be treated as having distributed
any amount on which it has been subject to corporate income tax in the taxable year ending within the calendar year. The Fund intends
to declare and pay dividends and distributions in the amounts and at the times necessary to avoid the application of the 4% excise
tax, although there can be no assurance that the Fund will be able to do so.
Deferral of Late Year Losses
The Fund may elect to treat part or all
of any “qualified late year loss” as if it had been incurred in the succeeding taxable year in determining the Fund’s
taxable income, net capital gain, net short-term capital gain, and earnings and profits. A “qualified late year loss”
generally includes net capital loss, net long-term capital loss, or net short-term capital loss incurred after October 31 of the
current taxable year, and certain other late-year losses.
Capital Loss Carryovers
If the Fund has a “net capital loss”
(that is, capital losses in excess of capital gains), the excess of the Fund’s net short-term capital losses over its net
long-term capital gains is treated as a short-term capital loss arising on the first day of the Fund’s next taxable year,
and the excess (if any) of the Fund’s net long-term capital losses over its net short-term capital gains is treated as a
long-term capital loss arising on the first day of the Fund’s next taxable year.
Fund Distributions
Distributions are taxable whether shareholders
receive them in cash or reinvest them in additional shares. Moreover, distributions of the Fund’s shares are generally subject
to federal income tax as described herein to the extent they do not exceed the Fund’s realized income and gains, even though
such dividends and distributions may economically represent a return of a particular shareholder’s investment. Investors
may therefore wish to avoid purchasing shares at a time when the Fund’s NAV reflects gains that are either unrealized, or
realized but not distributed. Realized gains must generally be distributed even when the Fund’s NAV also reflects unrealized
losses.
Dividends and other distributions by the
Fund are generally treated under the Internal Revenue Code as received by the shareholders at the time the dividend or distribution
is made. However, if any dividend or distribution is declared by the Fund in October, November or December of any calendar year
and payable to its shareholders of record on a specified date in such a month but is actually paid during the following January,
such dividend or distribution will be deemed to have been received by each shareholder on December 31 of the year in which the
dividend was declared.
Distributions by the Fund of investment
income are generally taxable as ordinary income. Taxes on distributions of capital gains are determined by how long the Fund owned
the investments that generated those gains, rather than how long a shareholder has owned his or her Fund shares. Sales of assets
held by the Fund for more than one year generally result in long-term capital gains and losses, and sales of assets held by the
Fund for one year or less generally result in short-term capital gains and losses. Distributions from the Fund’s net capital
gain (the excess of the Fund’s net long-term capital gain over its net short-term capital loss) that are properly reported
by the Fund as capital gain dividends (“Capital Gain Dividends”) will be taxable as long-term capital gains. Long-term
capital gains are subject to reduced maximum tax rates. In determining its net capital gain for Capital Gain Dividends purposes,
a RIC generally must generally treat any net capital loss or any net long-term capital loss incurred after October 31 as if it
had been incurred in the succeeding year. Distributions of gains from the sale of investments that the Fund owned for one year
or less will be taxable as ordinary income.
Distributions of investment income reported
by the Fund as derived from “qualified dividend income” will be taxable in the hands of individuals at the rates applicable
to long-term capital gains, provided holding period and other requirements are met at both the shareholder and the Fund level.
Qualified dividend income is, in general, dividend income from taxable domestic corporations and certain foreign corporations (
i.e.
,
foreign corporations incorporated in a possession of the United States or in certain countries with a comprehensive tax treaty
with the United States, which countries include China (but not Hong Kong, which is treated as a separate jurisdiction). Dividends
received from foreign corporations may also be treated as qualified dividend income if the stock with respect to which the dividends
are paid is readily tradable on an established securities market in the United States. In order for some portion of the dividends
received by the Fund shareholder to be qualified dividend income, the Fund must meet holding period and other requirements with
respect to some portion of the dividend paying stocks in its portfolio, and the shareholder must meet holding period and other
requirements with respect to the Fund’s shares. If the aggregate qualified dividend income received by the Fund during any
taxable year constitutes 95% or more of the Fund’s gross income (excluding net capital gain), then 100% of the Fund’s
dividends (other than Capital Gain Dividends) will be eligible to be reported as qualified dividend income.
Given the Fund’s investment objective,
it is not expected that corporate shareholders of the Fund will be eligible for the dividends received deduction on Fund distributions
attributable to dividends received because such treatment is available only to distributions made by the Fund from domestic corporations.
To the extent that the Fund makes a distribution
of income received by the Fund in lieu of dividends (a “substitute payment”) with respect to securities on loan pursuant
to a securities lending transaction, such income will not constitute qualified dividend income to individual shareholders and will
not be eligible for the dividends received deduction for corporate shareholders.
If the Fund makes distributions to a shareholder
in excess of the Fund’s current and accumulated earnings and profits in any taxable year, the excess distribution will be
treated as a return of capital to the extent of the shareholder’s tax basis in its shares, and thereafter as capital gain,
assuming the shareholder holds his or her shares as capital assets. A return of capital is not taxable, but reduces a shareholder’s
tax basis in its shares, thus reducing any loss or increasing any gain on a subsequent taxable disposition by the shareholder of
its shares.
Sale or Exchange of Shares
A sale or exchange of shares in the Fund
may give rise to a gain or loss. In general, any gain or loss realized upon a taxable disposition of shares will be treated as
long-term capital gain or loss if the shares have been held for more than 12 months. Otherwise, the gain or loss on the taxable
disposition of shares will be treated as short-term capital gain or loss. However, any loss realized upon a taxable disposition
of shares held for six months or less will be treated as long-term, rather than short-term, to the extent of any long-term capital
gain distributions received (or deemed received) by the shareholder with respect to the shares. All or a portion of any loss realized
upon a taxable disposition of shares will be disallowed if substantially identical shares of the Fund are purchased within 30 days
before or after the disposition. In such a case, the basis of the newly purchased shares will be adjusted to reflect the disallowed
loss.
Medicare Contribution Tax
Beginning in 2013, a Medicare contribution
tax will be imposed at the rate of 3.8% on net investment income, including interest, dividends, and capital gain, of U.S. individuals
with income exceeding specified thresholds, and on undistributed net investment income of certain estates and trusts.
Backup Withholding
The Fund (or financial intermediaries,
such as brokers, through which a shareholder holds Fund shares) generally are required to withhold and to remit to the U.S. Treasury
a percentage of the taxable distributions and sale or redemption proceeds paid to any shareholder who fails to properly furnish
a correct taxpayer identification number, who has under-reported dividend or interest income, or who fails to certify that he,
she or it is not subject to such withholding. The backup withholding tax rate is currently 28%.
Federal Tax Treatment of Certain
Fund Investments
Transactions of the Fund in options, futures
contracts, hedging transactions, forward contracts, swap agreements, straddles and foreign currencies may be subject to various
special and complex tax rules, including mark-to-market, constructive sale, straddle, wash sale and short sale rules. These rules
could affect whether gains and losses recognized by the Fund are treated as ordinary income or capital gain, accelerate the recognition
of income to the Fund and/or defer the Fund’s ability to recognize losses. These rules may in turn affect the amount, timing
or character of the income distributed to shareholders by the Fund.
The Fund is required, for federal income
tax purposes, to mark to market and recognize as income for each taxable year its net unrealized gains and losses as of the end
of such year on certain regulated futures contracts, foreign currency contracts and options that qualify as Section 1256 contracts
in addition to the gains and losses actually realized with respect to such contracts during the year. Except as described below
under “Certain Foreign Currency Tax Issues,” gain or loss from Section 1256 contracts that are required to be marked
to market annually will generally be 60% long-term and 40% short-term capital gain or loss. Application of this rule may alter
the timing and character of distributions to shareholders.
Certain Foreign Currency Tax Issues
The Fund’s gain or loss on foreign
currency denominated debt securities and on certain other financial instruments, such as forward currency contracts and currency
swaps, that is attributable to fluctuations in exchange rates occurring between the date of acquisition and the date of settlement
or disposition of such securities or instruments generally will be treated under Section 988 of the Internal Revenue Code as ordinary
income or loss. Moreover, any gain or loss attributable to fluctuations in exchange rates between the time the Fund accrues income
or gain in a foreign currency and the time the Fund converts such income or gain from the foreign currency to the dollar will also
generally be treated as ordinary income. The Fund may elect out of the application of Section 988 of the Internal Revenue Code
with respect to the tax treatment of each of its foreign currency forward contracts to the extent that (i) such contract is a capital
asset in the hands of the Fund and is not part of a straddle transaction and (ii) the Fund makes an election by the close of the
day the contract is entered into to treat the gain or loss attributable to such contract as capital gain or loss.
The Fund’s forward contracts may
qualify as so-called Section 1256 contracts if the underlying currencies are currencies for which there are futures contracts that
are traded on and subject to the rules of a qualified board or exchange. However, a forward currency contract that is a Section
1256 contract would, absent an election out of Section 988 of the Internal Revenue Code as described in the preceding paragraph,
be subject to Section 988. Accordingly, although such a forward currency contract would be marked to market annually like other
Section 1256 contracts, the resulting gain or loss would be ordinary. If the Fund were to elect out of Section 988 with respect
to forward currency contracts that qualify as Section 1256 contracts, the tax treatment generally applicable to Section 1256 contracts
would apply to those forward currency contracts: that is, the contracts would be marked to market annually and gains and losses
with respect to the contracts would be treated as long-term capital gains or losses to the extent of 60% thereof and short-term
capital gains or losses to the extent of 40% thereof. If the Fund were to elect out of Section 988 with respect to any of its forward
currency contracts that do not qualify as Section 1256 contracts, such contracts will not be marked to market annually and the
Fund will recognize short-term or long-term capital gain or loss depending on the Fund’s holding period therein. The Fund
may elect out of Section 988 with respect to some, all or none of its forward currency contracts.
Finally, regulated futures contracts and
non-equity options that qualify as Section 1256 contracts and are entered into by the Fund with respect to foreign currencies or
foreign currency denominated debt instruments will be subject to the tax treatment generally applicable to Section 1256 contracts
unless the Fund elects to have Section 988 apply to determine the character of gains and losses from all such regulated futures
contracts and non-equity options held or later acquired by the Fund.
Foreign Investments
Income received by the Fund from sources
within foreign countries (including, for example, dividends on securities of non-U.S. issuers) may be subject to withholding and
other taxes imposed by such countries. In the case of Chinese issuers, gain on the sale of shares may also be subject to foreign
tax. Tax treaties between such countries and the U.S. may reduce or eliminate such taxes. Foreign taxes paid by the Fund will reduce
the return from the Fund’s investments.
If more than 50% of the value of the Fund’s
assets at the close of any taxable year consists of stock or securities of foreign corporations, which for this purpose may include
obligations of foreign governmental issuers, the Fund may elect, for U.S. federal income tax purposes, to treat any foreign income
or withholding taxes paid by the Fund as paid by its shareholders. For any year that the Fund is eligible for and makes such an
election, each shareholder of the Fund will be required to include in income an amount equal to his or her allocable share of qualified
foreign income taxes paid by the Fund, and shareholders will be entitled, subject to certain holding period requirements and other
limitations, to credit their portions of these amounts against their U.S. federal income tax due, if any, or to deduct their portions
from their U.S. taxable income, if any. No deductions for foreign taxes paid by the Fund may be claimed, however, by non-corporate
shareholders who do not itemize deductions.
One of the limitations on a shareholder’s
ability to claim a credit for foreign taxes is that the amount of the credit claimed cannot exceed the proportion of the shareholder’s
total liability equal to the ratio of the shareholder’s taxable income from non-U.S. sources to the shareholder’s total
taxable income. In computing that limitation, the portion of Fund distributions that is derived from capital gains on the sale
of securities and from currency exchange gain is treated as income from U.S. sources. As a result, it is possible that shareholders
may have insufficient income from non-U.S. sources to claim a full credit for taxes passed through by the Fund, particularly to
the extent those taxes are imposed on capital gains or on any portion of the Fund’s income attributable to currency exchange
gain.
Passive Foreign Investment Companies
If the Fund holds shares in “passive
foreign investment companies” (“PFICs”), it may be subject to U.S. federal income tax on a portion of any “excess
distribution” or gain from the disposition of such shares even if such income is distributed as a taxable dividend by the
Fund to its shareholders. Additional charges in the nature of interest may be imposed on the Fund in respect of deferred taxes
arising from such distributions or gains. The Fund may be eligible to elect to treat a PFIC as a “qualified electing fund”
under the Internal Revenue Code, in which case, the Fund would generally be required to include in income each year a portion of
the ordinary earnings and net capital gains of the qualified electing fund, even if not distributed to the Fund, and such amounts
would be subject to the 90% and excise tax distribution requirements described above. In order to make this election, the Fund
would be required to obtain certain annual information from the PFICs in which it invests, which may be difficult or impossible
to obtain. Alternatively, the Fund may make a mark-to-market election that would result in the Fund being treated as if it had
sold and repurchased its PFIC stock at the end of each year. In such case, the Fund would report any gains resulting from such
deemed sales as ordinary income and would deduct any losses resulting from such deemed sales as ordinary losses to the extent of
previously recognized gains. The election must be made separately for each PFIC owned by the Fund and, once made, would be effective
for all subsequent taxable years, unless revoked with the consent of the Internal Revenue Service. By making the election, the
Fund could potentially ameliorate the adverse tax consequences with respect to its ownership of shares in a PFIC, but in any particular
year may be required to recognize income in excess of the distributions it receives from PFICs and its proceeds from dispositions
of PFIC stock. The Fund may have to distribute this excess income and gain to satisfy the 90% distribution requirement and to avoid
imposition of the 4% excise tax. In order to distribute this income and avoid a tax at the Fund level, the Fund might be required
to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain
or loss.
Chinese Tax Disclosure
Although China’s enactment of the
Enterprise Income Tax Law, effective January 1, 2008, provided a 10% withholding tax upon non-residents with respect to capital
gains, significant uncertainties remain. Such uncertainties may result in capital gains imposed upon the Fund relative to companies
headquartered, managed or listed in China. While the application and enforcement of this law to the Fund remain subject to clarification,
to the extent that such taxes are imposed on any capital gains of the Fund relative to companies headquartered, managed or listed
in China, the Fund’s NAV or returns may be adversely impacted.
Tax-Exempt Shareholders
Under current law, income of a RIC that
would be treated as unrelated business taxable income (“UBTI”) if earned directly by a tax-exempt entity generally
will not be attributed as UBTI to a tax-exempt entity that is a shareholder in the RIC. Notwithstanding this “blocking”
effect, a tax-exempt shareholder could realize UBTI by virtue of its investment in the Fund if shares in the Fund constitute debt-financed
property in the hands of the tax-exempt shareholder within the meaning of Code Section 514(b).
Non-U.S. Shareholders
In general, dividends other than Capital
Gain Dividends paid by the Fund to a shareholder that is not a “U.S. person” within the meaning of the Internal Revenue
Code (a “foreign person”) are subject to withholding of U.S. federal income tax at a rate of 30% (or lower applicable
treaty rate) even if they are funded by income or gains (such as portfolio interest, short-term capital gains, or foreign-source
dividend and interest income) that, if paid to a foreign person directly, would not be subject to withholding.
A beneficial holder of shares who is a
non-U.S. person is not, in general, subject to U.S. federal income tax on gains (and is not allowed a U.S. income tax deduction
for losses) realized on a sale of shares of the Fund or on Capital Gain Dividends unless (i) such gain or dividend is effectively
connected with the conduct of a trade or business carried on by such holder within the United States or (ii) in the case of an
individual holder, the holder is present in the United States for a period or periods aggregating 183 days or more during the year
of the sale or the receipt of the Capital Gain Dividend and certain other conditions are met.
Ordinary dividends, redemption payments
and certain capital gain dividends paid after December 31, 2013 to a non-U.S. shareholder that fails to make certain required certifications,
or that is a “foreign financial institution” as defined in Section 1471 of the Internal Revenue Code and that does
not meet the requirements imposed on foreign financial institutions by Section 1471, are generally subject to withholding tax at
a 30% rate. Under current IRS guidance, withholding on such payments will begin at different times depending on the type of payment,
the type of payee, and whether the shareholder’s account is opened before or after January 1, 2014. Withholding with respect
to ordinary dividends is currently scheduled to begin on January 1, 2014 for accounts opened on or after that date and on certain
later dates for accounts opened before January 1, 2014. Withholding on redemption payments and certain Capital Gain Dividends is
currently scheduled to begin on January 1, 2017. The extent, if any, to which such withholding tax may be reduced or eliminated
by an applicable tax treaty is unclear.
In order for a non-U.S. investor to qualify
for an exemption from backup withholding, the foreign investor must comply with special certification and filing requirements.
Foreign investors in the Fund should consult their tax advisers in this regard. Backup withholding is not an additional tax. Any
amounts withheld may be credited against the shareholder’s U.S. federal income tax liability, provided the appropriate information
is furnished to the Internal Revenue Service.
A beneficial holder of shares who is a
non-U.S. person may be subject to the U.S. federal estate tax in addition to the federal income tax consequences referred to above.
If a shareholder is eligible for the benefits of a tax treaty, any effectively connected income or gain will generally be subject
to U.S. federal income tax on a net basis only if it is also attributable to a permanent establishment maintained by the shareholder
in the United States.
Section 351
The Trust on behalf of the Fund has the
right to reject an order for a purchase of shares of the Trust if the purchaser (or group of purchasers) would, upon obtaining
the shares so ordered, own 80% or more of the outstanding shares of the Fund and if, pursuant to Section 351 of the Internal Revenue
Code, the Fund would have a basis in the securities different from the market value of such securities on the date of deposit.
The Trust also has the right to require information necessary to determine beneficial share ownership for purposes of the 80% determination.
Certain Reporting Regulations
Under U.S. 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 Internal Revenue Service a disclosure statement on Form 8886. Direct shareholders of portfolio securities are
in many cases excepted from this reporting requirement, but under current guidance, shareholders of a RIC are not excepted. The
fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer’s
treatment of the loss is proper. Shareholders should consult their tax advisers to determine the applicability of these regulations
in light of their individual circumstances.
General Considerations
The federal income tax discussion set forth
above is for general information only. Prospective investors should consult their tax advisers regarding the specific federal income
tax consequences of purchasing, holding and disposing of shares of the Fund, as well as the effect of state, local and foreign
tax law and any proposed tax law changes.
DETERMINATION OF NAV
This information supplements and should
be read in conjunction with the section in the Prospectus entitled “Calculating Net Asset Value.”
The NAV per share of the Fund is computed
by dividing the value of the net assets of the Fund (
i.e.
, the value of its total assets less total liabilities) by the
total number of shares of the Fund outstanding, rounded to the nearest cent. Expenses and fees, including without limitation, the
management, administration and distribution fees, are accrued daily and taken into account for purposes of determining NAV. The
NAV per share for the Fund is calculated by the Custodian and determined as of the close of the regular trading session on the
NYSE (ordinarily 4:00 p.m., Eastern Time) on each day that the Exchange is open.
In calculating the Fund’s NAV, the
Fund’s investments generally are valued based on their last quoted current price. Price information on listed securities
is taken from the exchange where the security is primarily traded. Securities not listed on an exchange or national securities
market, or securities in which there was no last reported sales price, are valued at the most recent bid price. Short-term debt
securities with remaining maturities of 60 days or less generally are valued on the basis of amortized cost, which approximates
fair value. The values of any assets or liabilities denominated in a currency other than the U.S. dollar are converted into U.S.
dollars using an exchange rate deemed appropriate by the Fund.
In certain instances, such as when reliable
market valuations are not readily available or are not deemed to reflect current market values, the Fund’s investments will
be valued in accordance with the Fund’s pricing policy and procedures. Securities that may be valued using “fair value”
pricing may include, but are not limited to, securities for which there are no current market quotations or whose issuer is in
default or bankruptcy, securities subject to corporate actions (such as mergers or reorganizations), securities subject to non-U.S.
investment limits or currency controls, and securities affected by “significant events.” An example of a significant
event is an event occurring after the close of the market in which a security trades but before the Fund’s next NAV calculation
time that may materially affect the value of the Fund’s investment (
e.g.
, government action, natural disaster, or
significant market fluctuation). Price movements in U.S. markets that are deemed to affect the value of foreign securities, or
reflect changes to the value of such securities, also may cause securities to be “fair valued.” When fair-value pricing
is employed, the prices of securities used by the Fund to calculate its NAV may differ from quoted or published prices for the
same securities.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to pay out dividends,
if any, at least quarterly. The Fund distributes its net realized capital gains, if any, to investors annually. The Fund may make
distributions on a more frequent basis. The Fund may occasionally be required to make supplemental distributions at some other
time during the year. Distributions in cash may be reinvested automatically in additional whole shares only if the broker through
whom you purchased shares makes such option available. Your broker is responsible for distributing the income and capital gain
distributions to you.
The Trust reserves the right to declare
special distributions if, in its reasonable discretion, such action is necessary or advisable to preserve the status of the Fund
as a RIC or to avoid imposition of income or excise taxes on undistributed income.
OTHER INFORMATION
Portfolio Holdings
The Board has approved portfolio holdings
disclosure policies and procedures that govern the timing and circumstances of disclosure to shareholders and third parties of
the Fund’s portfolio holdings and the use of material non-public information about the Fund’s holdings. These policies
and procedures, as described below, are designed to ensure that disclosure of portfolio holdings is in the best interests of Fund
shareholders, and address conflicts of interest between the interests of Fund shareholders and those of the Advisers, Distributor,
or any affiliated person of the Fund, the Advisers or the Distributor. The policies and procedures apply to all officers, employees,
and agents of the Fund, including the Advisers.
The Fund may disclose on its website at
the start of each Business Day the identities and quantities of the securities and other assets held by the Fund that will form
the basis of the Fund’s calculation of its NAV on that Business Day. The portfolio holdings so disclosed will be based on
information as of the close of business on the prior Business Day and/or trades that have been completed prior to the opening of
business on that Business Day and that are expected to settle on that Business Day.
Daily access to information concerning
the Fund’s portfolio holdings also is permitted (i) to certain personnel of those service providers that are involved in
portfolio management and providing administrative, operational, risk management, or other support to portfolio management, including
affiliated broker-dealers and/or Authorized Participants, and (ii) to other personnel of the Adviser and other service providers,
such as the Sub-Adviser, administrator, custodian and fund accountant, who deal directly with, or assist in, functions related
to investment management, administration, custody and fund accounting, as may be necessary to conduct business in the ordinary
course in a manner consistent with agreements with the Fund and/or the terms of the Fund’s current registration statement.
From time to time, information concerning
Fund portfolio holdings, other than portfolio holdings information made available in connection with the creation and redemption
process, as discussed above, also may be provided to other entities that provide services to the Fund, including, among others,
rating or ranking organizations, in the ordinary course of business, no earlier than one business day following the date of the
information. Portfolio holdings information made available in connection with the creation and redemption process may be provided
to other entities that provide services to the Fund in the ordinary course of business after it has been disseminated to the NSCC.
The Fund’s chief compliance officer,
or a compliance manager designated by the chief compliance officer, also may grant exceptions to permit additional disclosure of
Fund portfolio holdings information at differing times and with different lag times (the period from the date of the information
to the date the information is made available), if any, in instances where the Fund has legitimate business purposes for doing
so, it is in the best interests of shareholders, and the recipients are subject to a duty of confidentiality, including a duty
not to trade on the nonpublic information and are required to execute an agreement to that effect. The Board will be informed of
any such disclosures at its next regularly scheduled meeting or as soon as is reasonably practicable thereafter. In no event will
the Fund, the Advisers, or any other party receive any direct or indirect compensation in connection with the disclosure of information
about the Fund’s portfolio holdings.
The Board exercises continuing oversight
of the disclosure of the Fund’s portfolio holdings by (1) overseeing the implementation and enforcement of the Trust’s
the portfolio holdings policies and procedures by the Fund’s chief compliance officer and the Fund, (2) considering reports
and recommendations by the chief compliance officer concerning any material compliance matters (as defined in Rule 38a-1 under
the 1940 Act and Rule 206(4)-7 under the Investment Advisers Act of 1940) that may arise in connection with any portfolio holdings
policies and procedures, and (3) considering whether to approve or ratify any amendment to any of the portfolio holdings policies
and procedures. The Board and the Fund reserve the right to amend the policies and procedures in their sole discretion at any time
and from time to time without prior notice to shareholders. For purposes of the policies and procedures, the term “portfolio
holdings” means the equity and debt securities (
e.g.
, stocks and bonds) held by the Fund and does not mean the cash
investments, derivatives, and other investment positions (collectively, other investment positions) held by the Fund, if any, which
are not disclosed.
In addition to the permitted disclosures
described above, the Fund must disclose its complete holdings quarterly within 60 days of the end of each fiscal quarter in the
Annual Report and Semi-Annual Report to Fund shareholders and in the quarterly holdings report on Form N-Q. These reports are available,
free of charge, on the EDGAR database on the SEC’s web site at www.sec.gov.
No person is authorized to disclose the
Fund’s portfolio holdings or other investment positions except in accordance with the Trust’s policies and procedures.
Voting Rights
Each share of the Fund is entitled to one
vote with respect to matters upon which a shareholder vote is required consistent with the requirements of the 1940 Act and the
rules promulgated thereunder. Shareholders receive one vote for every full Fund share owned. At such time as the Trust offers multiple
funds, each fund will vote separately on matters relating solely to that fund. All shares of the Fund are freely transferable.
As a Delaware statutory trust, the Trust
is not required to hold annual shareholder meetings unless otherwise required by the 1940 Act. However, a meeting may be called
by shareholders owning at least 10% of the outstanding shares of the Trust. If a meeting is requested by shareholders, the Trust
will provide appropriate assistance and information to the shareholders who requested the meeting. Shareholder inquiries can be
made by contacting the Trust at the number and website address provided under “Shareholder Inquiries” below.
Shareholder Inquiries
Shareholders may visit the Trust’s
web site at www.KraneShares.com or call 1.855.857.2638 or call to obtain information about account statements, procedures, and
other related information.
DISCLAIMER
The Adviser, the Sub-Adviser and the Fund
make no representation or warranty, express or implied, to the owners of shares of the Fund or any members of the public regarding
the advisability of investing in securities generally or in the Fund particularly.
COUNSEL
Bingham McCutchen LLP, 2020 K Street NW,
Washington, DC 20006, serves as counsel to the Trust.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
[PricewaterhouseCoopers LLP, Two Commerce
Square, 2001 Market Street, Suite 1700, Philadelphia, Pennsylvania 19103], the Trust’s independent registered public accounting
firm, provides audit and tax services and other assurance services with respect to filings with the SEC.
FINANCIAL STATEMENTS
As of the date of this SAI, the Fund has
not yet commenced operations and therefore, does not have any Financial Statements. The Fund’s financial statements will
be available after the Fund has completed a full year of operations.
