Direxion Funds, et al. · 485APOS · On 4/4/07
Filed On 4/4/07 3:59pm ET · SEC Files 333-28697, 811-08243 · Accession Number 894189-7-1021
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
4/04/07 Direxion Funds 485APOS 1:115 Firstar Trust Co
Direxion Funds
Post-Effective Amendment
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 485APOS Post Effective Amendment HTML 533K
This is an EDGAR HTML document rendered as filed. [ Alternative Formats ]
As
filed
with the Securities and Exchange Commission on April 4, 2007
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
N-1A
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REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
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[
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X
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Pre-Effective
Amendment No.
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Post-Effective
Amendment No.
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69
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and/or
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REGISTRATION
STATEMENT UNDER THE INVESTMENT COMPANY ACT OF
1940
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X
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Amendment
No.
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70
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(Check
appropriate box or boxes.)
Direxion
Funds
33
Whitehall Street, 10th
Floor
(Exact
name of Registrant as Specified in Charter)
(Address
of Principal Executive Office) (Zip Code)
Registrant’s
Telephone Number, including Area Code: (646) 572-3390
Daniel
D.
O’Neill
33
Whitehall Street, 10th
Floor
(Name
and
Address of Agent for Service)
Copy
to:
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Angela
L. Pingel
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U.S.
Bancorp Fund Services, LLC
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615
East Michigan
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It
is
proposed that this filing will become effective (check appropriate
box)
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immediately
upon filing pursuant to paragraph (b)
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on
(date) pursuant to paragraph (b)
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[
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X
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60
days after filing pursuant to paragraph (a)(1)
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on
(date) pursuant to paragraph (a)(1)
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75
days after filing pursuant to paragraph (a)(2)
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on
(date) pursuant to paragraph (a)(2) of Rule
485.
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If
appropriate, check the following box:
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This
post-effective amendment designates a new effective date for a previously
filed post- effective amendment.
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DIREXION
FUNDS
CONTENTS
OF REGISTRATION STATEMENT
This
registration document is comprised of the following:
Contents
of Registration Statement:
Prospectus
and Statement of Addition Information for the for the Service Class of the
Spectrum Select Alternative Fund
Part
C of
Form N-1A
Signature
Page
PROSPECTUS
THE
DIREXION FUNDS
SPECTRUM
SELECT
ALTERNATIVE
FUND
33
Whitehall Street, 10th Floor
(800)
851-0511
SERVICE
CLASS
Like
shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission nor has the Securities
and
Exchange Commission passed upon the accuracy or adequacy of this prospectus.
Any
representation to the contrary is a criminal offense.
_________________,
2007
TABLE
OF
CONTENTS
The
Spectrum Funds
| OVERVIEW |
1 |
| |
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| ABOUT THE FUND |
2 |
| |
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|
SPECTRUM
SELECT ALTERNATIVE FUND
|
2 |
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PRINCIPAL
RISK FACTORS
|
3 |
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HISTORICAL
PERFORMANCE
|
6 |
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FEES
AND EXPENSES OF THE FUND
|
8 |
| |
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| ABOUT YOUR INVESTMENT |
10 |
| |
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SHARE
PRICE OF THE FUND
|
10 |
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RULE
12B-1 FEES
|
11 |
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HOW
TO
INVEST IN SERVICE CLASS SHARES OF THE FUND
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12 |
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HOW
TO
EXCHANGE SHARES OF THE FUND
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15 |
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HOW
TO
SELL SERVICE CLASS SHARES OF THE FUND
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15 |
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ACCOUNT
AND TRANSACTION POLICIES
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17 |
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| ADDITIONAL INFORMATION |
20 |
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MANAGEMENT
OF THE FUND
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20 |
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PORTFOLIO
HOLDINGS INFORMATION
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21 |
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DISTRIBUTIONS
AND TAXES
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21 |
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MASTER/FEEDER
OPTION
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22 |
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| FINANCIAL HIGHLIGHTS |
23 |
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| PRIVACY NOTICE(Not a part of the
Prospectus) |
PN-1 |
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| MORE INFORATION ON THE DIREXION FUNDS |
BACK COVER |
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In
deciding whether to invest in the fund described herein, you should rely on
information in this Prospectus or the Statement of Additional Information (the
“SAI”). The Direxion Funds (the “Trust”) has not authorized others to provide
additional information. The Trust does not authorize the use of this Prospectus
in any state or jurisdiction in which such offering may not legally be
made.
OVERVIEW
This
Prospectus describes the Spectrum Select Alternative Fund (the
“Fund”).
Rafferty
Asset Management, LLC (“Rafferty” or “Adviser”) serves as the Fund’s investment
adviser and Hundredfold Advisors LLC (“Hundredfold” or “Subadviser”) serves as
the Fund’s subadviser. (Collectively, Rafferty and Hundredfold are referred to
herein as “Advisers” in certain circumstances.)
The
Fund
is aggressively managed by the Subadviser, which seeks investment opportunities
for the Fund to maximize the Fund’s investment returns. The Subadviser will
attempt to identify changing market conditions based on its analysis of trends,
relative strength and seasonal considerations and will position the Fund’s
assets accordingly.
The
Spectrum Select Alternative Fund (formerly, the Spectrum High Yield Plus Fund)
seeks a moderate total rate of return, including income and capital appreciation
on an annual basis by investing primarily in fixed-income and equity securities,
either directly or indirectly in such securities or through exchange-traded
funds (“ETFs”), other investment companies and derivative
instruments.
The
Fund
may alternate between “long” and “short” investments and investing in cash or
cash equivalents as a temporary defensive measure. In addition, the Fund may
use
derivative instruments, including swaps, futures and options, which enable
the
Subadviser to seek leveraged exposure to target investments - meaning exposure
greater than would be available by purchasing only traditional equity and
fixed-income securities.
The
investment strategy of the Fund may result in the investment of a large portion
or all of the assets of the Fund in cash or cash equivalents to provide security
of principal, current income and liquidity.
There
is
no assurance that the Fund will achieve its objective.
ABOUT
THE FUND
| |
| SPECTRUM
SELECT ALTERNATIVE FUND |
Fund
Objective
The
Spectrum Select Alternative Fund seeks
a
moderate total rate of return (income plus capital appreciation) on an annual
basis.
The
High
Yield Fund’s investment objective is not a fundamental policy and may be changed
by the Trust’s Board of Trustees without shareholder approval.
Portfolio
Investment Strategy
The
Subadviser actively manages the Fund’s portfolio to invest in any combination of
fixed-income and equity securities based on market conditions and trends and
the
Subadviser’s expectations and assessment of risks. (The term “Alternative” in
the Fund’s name simply refers to the fact that the Subadviser may choose from
among many investment alternatives.)
Within
these securities, the Subadviser employs an investment strategy that alternates
between positions designed to profit from market trends, such as entering into
“long” and “short” positions, directly or indirectly through ETFs, other
investment companies and derivatives of fixed-income securities, and investing
in cash or cash equivalents as a temporary defensive measure. The Subadviser
seeks to take “long” positions in or purchase securities prior to or at the
outset of upward trends for such securities and seeks to take “short” positions
in or sell securities prior to or early in downward trends in the value of
such
securities.
The
Subadviser’s decisions are based on a variety of trading models and an analysis
of the overall investment opportunities and risks among categories or sectors
of
equity and fixed-income securities or investment vehicles that represent pools
of such securities, including major market indices, investment companies and
ETFs. The Subadviser’s strategy does not involve fundamental research and
analysis of individual securities. The Subadviser considers elements of market
trends and momentum, including price actions, advance-decline lines, market
highs and lows and the overall direction of market trends. The Subadviser may
reposition the Fund’s portfolio in response to market movements in an attempt to
participate in a developing trend and may attempt to anticipate market moves
and
initiate appropriate action in advance of actual market trends.
The
Subadviser will likely engage in frequent trading of the Fund’s securities in an
attempt to position its portfolio in line with the Subadviser’s expectations for
market trends. In addition, the Subadviser will employ leveraged investment
techniques that allow the Fund to increase its exposure to the market during
times when the Subadviser anticipates a strong market trend. The Subadviser
also
may employ hedging strategies designed to reduce volatility and
risk.
Although
the Fund may invest directly in fixed-income and equity securities, it will
primarily invest in such securities indirectly through securities that invest
in
or are a derivative of such securities, including futures contracts, options
contracts, swap agreements, options on futures contracts, financial instruments
consisting of interests in baskets of fixed-income or equity securities, ETFs
and other investment companies. The Fund’s direct investments may include the
following fixed-income and equity securities in any combination that the
Subadviser believes appropriate:
Ÿ High-yield
bonds (“Junk Bonds”)
Ÿ U.S.
Treasury bonds and notes;
Ÿ U.S.
government-sponsored enterprises;
Ÿ U.S.
dollar-denominated corporate obligations;
Ÿ Mortgage
and asset-backed securities;
Ÿ Corporate
bonds and notes and asset-backed securities;
Ÿ Commercial
paper and other money market instruments;
Ÿ Fixed-income
securities issued by foreign governments and companies that are denominated
in U.S. dollars or foreign currencies, some of which may be issued by
governments
in
emerging market countries;
Ÿ Convertible
securities.
The
Fund
invests in fixed-income securities without any restriction on maturity or
creditworthiness, which could range from government securities to Junk Bonds,
which are debt securities rated below investment grade. With respect to the
Fund’s investments in fixed-income securities, the Subadviser will lengthen and
shorten the average dollar weighted maturity of the portfolio and make shifts
in
quality and sector distribution, according to the Subadviser’s expectations for
the future course of interest rates and the then-prevailing price and yield
levels in the fixed-income market. The Fund invests in equity securities without
consideration to any specific sector or market capitalization
range.
Consistent
with its investment strategy for temporary defensive purposes, up to 100% of
the
Fund’s assets may be invested in cash or cash equivalents. To earn income on
available cash, a large portion or all of the assets of the Fund may be invested
in high quality, U.S. dollar-denominated short-term obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities and
repurchase agreements that are fully collateralized by such obligations. As
a
result of investing in cash and cash equivalents, the Fund may not achieve
its
investment objective.
The
Fund
is a “non-diversified” fund, meaning that a relatively high percentage of its
assets may be invested in a limited number of issuers of
securities.
An
investment in the Fund entails risks. The Fund could lose money, or its
performance could trail that of other investment alternatives. Neither
Hundredfold nor Rafferty can guarantee that the Fund will achieve its objective.
In addition, the Fund presents some risks not traditionally associated with
most
mutual funds. It is important that investors closely review and understand
these
risks before making an investment in the Fund. These and other risks are
described below.
Risks
of the Subadviser’s Investment Strategy
The
Subadviser has limited previous experience advising investment companies. The
principal risk of investing in the Fund is that Hundredfold’s investment
strategy will not be successful. While the Subadviser seeks to take advantage
of
investment opportunities for the Fund that will maximize its investment returns,
there is no guarantee that such opportunities will ultimately benefit the Fund.
The Subadviser will aggressively change the Fund’s portfolio in response to
market conditions that are unpredictable and may expose the Fund to greater
market risk than other mutual funds. There
is
no assurance that the Subadviser’s
investment strategy
will enable the Fund to achieve its investment objective.
Risks
of Aggressive Investment Techniques
The
Fund
uses investment techniques that may be considered aggressive. Risks associated
with securities indices, swap agreements and futures contracts include
potentially dramatic price changes (losses) in the value of the instruments
and
imperfect correlations between the price of the contract and the underlying
security or index. These instruments may increase the volatility of the Fund
and
may involve a small investment of cash relative to the magnitude of the risk
assumed.
High
Portfolio Turnover
The
Fund’s aggressive investment strategy may result in significant portfolio
turnover to take advantage of anticipated changes in market conditions. High
portfolio turnover involves correspondingly greater expenses to the Fund,
including brokerage commissions or dealer mark-ups and other transaction costs
on the sale of securities and reinvestments in other securities. Such sales
also
may result in adverse tax consequences to the Fund’s shareholders. The trading
costs and tax effects associated with portfolio turnover may adversely affect
the Fund’s performance.
Risks
of Investing in Derivatives
The
Fund
may invest in instruments that attempt to track the price movement of stock
indices. Investments in derivatives in general are subject to market risks
that
may cause its prices to fluctuate over time. Investments in derivatives may
not
correctly correlate with the price movements of the underlying instrument.
As a
result, the use of derivatives may expose the Fund to additional risks that
it
would not be subject to if it invested directly in the securities underlying
those derivatives. The use of derivatives may result in larger losses or smaller
gains than otherwise would be the case.
Risks
of Investing in ETFs
An
ETF is
an investment company that seeks to track the performance of an index by holding
in its portfolio either the contents of the index or a representative sample
of
the securities in the index. ETFs are listed on national stock exchanges and
are
traded like stocks listed on an exchange. ETF
shares potentially may trade at a discount or a premium in market price if
there
is a limited market in such shares. Investments
in ETFs are subject to brokerage and other trading costs as the Advisers trade
in and out of a fund, which could result in greater expenses to the Fund. They
also are subject to investment advisory and other expenses, which the Fund
would
directly bear. Finally, because the value of ETF shares depends on the demand
in
the market, the Advisers may not be able to liquidate the Fund’s holdings at the
most optimal time, adversely affecting the Fund’s performance.
Risks
of Investing in Other Investment Companies
The
Fund
may invest in other investment companies, which may, in turn, invest in
equities, bonds, and other financial vehicles. Investments in the securities
of
other investment companies may involve duplication of advisory fees and certain
other expenses. By investing in another investment company, the Fund becomes
a
shareholder of that investment company. As a result, Fund shareholders
indirectly will bear the Fund’s proportionate share of the fees and expenses
paid by shareholders of the other investment company, in addition to the fees
and expenses Fund shareholders directly bear in connection with the Fund’s own
operations. As a shareholder, the Fund must rely on the investment company
to
achieve its investment objective. If the investment company fails to achieve
its
investment objective, the value of the Fund’s investment will decline, adversely
affecting the Fund’s performance.
Swap
Agreement Risks
The
Fund
may enter into swap agreements,
which
are two-party contracts whereby the parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments.
The
risks
associated with swap agreements include the risk that the counterparty to a
swap
agreement may default. If a counterparty defaults, the Fund’s risk of loss will
consist of any payments that the Fund is entitled to receive from the
counterparty under the agreement. In addition, the Fund could suffer losses
with
respect to a swap agreement if the Fund is unable to terminate the agreement
or
reduce its exposure through offsetting transactions.
Credit
Risk and Lower-Quality Debt Securities
The
Fund
could lose money if the issuer of a debt security is unable to meet its
financial obligations or goes bankrupt. Credit risk usually applies to most
debt
securities, but generally is not a factor for U.S. government obligations.
The
Fund will invest a significant portion or all of its assets in securities rated
below investment grade or Junk Bonds. Junk Bonds may be sensitive to economic
changes, political changes, or adverse developments specific to a company.
These
securities generally involve greater risk of default or price changes than
other
types of fixed-income securities and the Fund’s performance may vary
significantly as a result. Therefore, an investment in the Fund is subject
to a
higher risk of loss than an investment in a fund that may not invest in
lower-rated securities.
Interest
Rate Changes
Debt
securities have varying levels of sensitivity to changes in interest rates.
In
general, the price of a debt security will fall when interest rates rise and
will rise when interest rates fall. Securities with longer maturities and
mortgage securities can be more sensitive to interest rate changes. In other
words, the longer the maturity of a security, the greater the impact a change
in
interest rates could have on the security’s price. In addition, short-term and
long-term interest rates do not necessarily move in the same amount or the
same
direction. Short-term securities tend to react to changes in short-term interest
rates, and long-term securities tend to react to changes in long-term interest
rates.
Prepayment
Risk
Many
types of debt securities, including mortgage securities, are subject to
prepayment risk. Prepayment occurs when the issuer of a security can repay
principal prior to the security’s maturity. Securities subject to prepayment can
offer less potential for gains during a declining interest rate environment
and
similar or greater potential for loss in a rising interest rate environment.
In
addition, the potential impact of prepayment features on the price of a debt
security can be difficult to predict and result in greater volatility.
Risk
of Asset-Backed Securities
Payment
of interest and repayment of principal may be impacted by the cash flows
generated by the assets backing these securities. The value of the Fund’s
asset-backed securities also may be affected by changes in interest rates,
the
availability of information concerning the interests in and structure of the
pools of purchase contracts, financing leases or sales agreements that are
represented by these securities, the creditworthiness of the servicing agent
for
the pool, the originator of the loans or receivables, or the entities that
provide any supporting letters of credit, surety bonds, or other credit
enhancements.
Leverage
Risk
The
Fund
may employ leveraged investment techniques, including the use of financial
instruments to produce leverage results as well as borrowing money for
investment purposes. Use of leverage can magnify the effects of changes in
the
value of the Fund and makes it more volatile. The leveraged investment
techniques that the Fund employs could cause investors in the Fund to lose
more
money in adverse environments.
Risks
of Investing in Equity Securities
The
Fund
may invest in publicly issued equity securities, including common stocks.
Investments in common stocks are subject to market risks that may cause their
prices to fluctuate over time. Fluctuations in the value of common stocks in
which the Fund invests will cause the NAV of the Fund to fluctuate.
Risk
of Shorting Securities
The
Fund
may, from time to time, establish short positions designed to profit from the
decline in the price of particular securities, baskets of securities or indices.
In general, when the Fund shorts securities, it borrows the securities from
a
broker and sells the borrowed securities. The Fund is obligated to deliver
to
the broker securities that are identical to the securities sold short and will
be subject to the risk of loss, which may be significant, in the event that
the
market value of the securities sold short plus related transaction costs exceeds
the proceeds to the Fund from the short sale. A short sale involves the
theoretically unlimited risk of an increase in the market price of the security,
basket of securities or index sold short which, except in the case of a short
sale “against the box,” would result in a theoretically unlimited loss. As a
consequence, the Fund will lose value if and when the prices of particular
securities, baskets of securities or indexes rises - a result that is the
opposite from traditional equity mutual funds. The holder of a short position
is
responsible for paying the dividends and interest accruing on the short
position. Because dividends and interest accruing on a short position is an
expense to the Fund, the performance of the Fund may be adversely impacted
by
the cost of maintaining its short positions.
Risk
of Non-Diversification
The
Fund
is non-diversified, which means that it may invest a high percentage of its
assets in a limited number of securities. Since the Fund is non-diversified,
its
NAVs and total returns may fluctuate more or fall further in times of weaker
markets than a diversified mutual fund.
The
bar
chart and performance table below provide some indication of the risks of
investing in the Fund by showing how the performance of the Fund has varied
from
year to year and comparing the Fund’s performance with those of a broad measure
of market performance. The information below also illustrates the risks of
investing in the Fund by showing its highest and lowest quarterly returns.
The
Fund’s past performance (before and after taxes) is not necessarily an
indication of how it will perform in the future.
Spectrum
Select Alternative Fund
Total
Return for the Calendar Year Ended December 31*
|
Fund
|
Highest
Quarterly Return
|
Lowest
Quarterly Return
|
| |
|
|
|
Spectrum
Select Alternative Fund
|
___%
(___ Quarter, 200_)
|
(___%)
(___ Quarter, 200_)
|
|
|
1
Year
|
Since
Inception
|
Inception
Date
|
|
Spectrum
Select Alternative Fund
|
|
|
|
|
|
___%
|
___%
|
9/1/04
|
Return
After Taxes on Distributions(2)
|
___%
|
___%
|
|
Return
After Taxes on Distributions and Sale of Fund Shares(2)(3)
|
___%
|
___%
|
|
Lehman
Aggregate Bond Index
(4)
|
___%
|
___%
|
9/1/04
|
|
|
___%
|
___%
|
9/1/04
|
____________
(1) Prior
to
_________, 2007, the Spectrum Alternative Fund pursued a different investment
objective and had different investment strategies.
(2) After-tax
returns are calculated using the historical highest individual federal marginal
income tax rates and do not reflect the impact of state and local taxes. Actual
after-tax returns depend on your tax situation and may differ from those shown.
Furthermore, the after-tax returns shown are not relevant to those who hold
their shares through tax-deferred arrangements such as 401(k) plans or
individual retirement accounts (“IRAs”).
(3) The
“Return After Taxes on Distributions and Sale of Fund Shares” may be higher than
other return figures because when a capital loss occurs upon redemption of
fund
shares, a tax deduction is provided that benefits the investor.
(4) The
Lehman
U.S. Aggregate Bond Index is an unmanaged, market value weighted index of
investment grade, fixed-rate debt issues, including government, corporate,
asset-backed, and mortgage-backed securities, with maturities of at least one
year. The performance of the index does not reflect deductions for fees,
expenses or taxes.
(5) [EQUITY
INDEX DESCRIPTION]
| |
| FEES
AND EXPENSES OF THE FUND |
The
tables below describe the fees and expenses that you may pay if you buy and
hold
Service Class shares of the Fund. The expenses below are based on actual
expenses incurred for the fiscal period ended August 31, 2006.
Shareholder
Fees (fees
paid directly from your investment)(1)
|
Maximum
Sales Charge Imposed on Purchases (as a % of offering price)
|
None
|
|
Maximum
Deferred Sales Charge (as a % of original purchase price or sales
proceeds,
whichever
is less)
|
None
|
Annual
Operating Expenses
(%) (expenses
that are deducted from Fund assets)
| |
Spectrum
Select
Alternative
Fund
|
|
|
|
|
|
|
1.00%
|
|
|
|
|
|
Distribution
and/or Service (12b-1) Fees
|
1.00%
|
|
|
|
|
|
Acquired
Fund Fees and Expenses(2)
|
%
|
|
|
|
|
|
Other
Expenses(2)
|
0.54%
|
|
|
|
|
|
Total
Annual Fund Operating Expenses(2,
3)
|
2.54%
|
|
|
|
|
(1)
Although
no sales loads or transaction fees are charged, you will be assessed fees for
outgoing wire transfers, returned checks and stop-payment orders at prevailing
rates charged by U.S. Bancorp Fund Services, LLC, the Fund’s transfer agent. If
a shareholder requests that a redemption be made by wire transfer, currently
a
$15.00 fee is charged.
(2)
The
Fund
is required to disclose Acquired Fund Fees and Expenses in the fee table above.
Acquired Fund Fees and Expenses are indirect fees that Fund incurs from
investing in the shares of other mutual funds (“Acquired Fund(s)”). The indirect
fee represents a pro rata portion of the cumulative expenses charged by the
Acquired Fund. Acquired Fund Fees and Expenses are reflected in the Acquired
Fund’s net asset value. Please note that the Total Annual Fund Operating
Expenses in the table above do not correlate to the ratio of Expenses to Average
Net Assets found within the “Financial Highlights” section of this
prospectus.
|
(2)
|
Rafferty
Asset Management, LLC has voluntarily agreed to waive all or a portion
of
its management fee and/or reimburse the Fund for Other Expenses through
August 31, 2007 to the extent that the Fund’s Total Annual Fund Operating
Expenses exceed 2.75% (excluding Acquired Fund Fees and Expenses,
dividends and interest on short positions and extraordinary expenses).
Because this is a voluntary expense waiver, Rafferty may change or
end the
waiver at any time. Any reimbursement of Fund expenses or reduction
in
Rafferty’s management fee is subject to reimbursement by the Fund within
the following three years if overall expenses fall below this percentage
limitation.
|
|
(3)
|
As
part of the Fund’s investment strategy, it may take short positions in
securities. During the fiscal year ended August 31, 2006, the Fund’s did
not enter into short positions and, thus, no additional expenses
associated with these positions are included in the calculation
above.
|
Expense
Example
The
table
below is intended to help you compare the cost of investing in Service Class
shares of the Fund with the cost of investing in other mutual funds. The table
shows what you would have paid if you had invested $10,000 in the Service Class
shares of the Fund over the periods shown and then redeemed all your shares
at
the end of those periods. It also assumes that your investment has a 5% return
each year and the operating expenses remain the same. Although your actual
costs
may be higher or lower, based on these assumptions your costs would
be:
|
Fund:
|
1
Year
|
3
Years
|
5
Years
|
10
Years
|
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Spectrum
Select Alternative Fund
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$___
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$___
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$___
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$___
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ABOUT
YOUR INVESTMENT
The
Fund’s share price is known as its NAV. The Fund’s Service Class share price is
calculated after the close of regular trading, usually as of 4:00 p.m.
Eastern time, each day the New York Stock Exchange (“NYSE”) is open for
business. All shareholder transaction orders received in good form by the Fund’s
transfer agent or an authorized financial intermediary by 4:00 p.m. Eastern
time
will be processed at that day’s NAV. Transaction orders received after 4:00 p.m.
Eastern time will receive the next business day’s NAV.
Share
price is calculated by dividing a class’ net assets by its shares outstanding.
The Fund uses the following methods to price securities held in their
portfolios:
| Ÿ |
Equity
securities, over-the-counter (“OTC”) securities, ETFs, swap agreements,
options, futures and options on futures are valued at their last
sales
price, or if not available, the average of the last bid and ask
price;
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| Ÿ |
Securities
primarily traded in the NASDAQ Global Market®
are valued using the NASDAQ®
Official Closing Price (“NOCP”);
|
| Ÿ |
Short-term
debt securities with a maturity of 60 days or less and money market
securities are valued using the “amortized” cost
method;
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Other
debt securities are valued by using the closing bid and asked prices
provided by the Fund’s pricing service or, if such prices are unavailable,
by a pricing matrix method; and
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| Ÿ |
Securities
for which reliable market quotations are not readily available, the
Fund’s
pricing service does not provide a valuation for such securities,
the
Fund’s pricing service provides a valuation that in the judgment of the
Adviser does not represent fair value, or the Fund or the Adviser
believe
the market price is stale will be valued at fair value estimates
by the
Adviser under the supervision of the Board of Trustees.
|
Fair
Value Pricing
Portfolio
securities and other assets are valued chiefly by market prices from the primary
market in which they are traded. Securities are priced at a fair value as
determined by the Adviser, under the supervision of the Board of Trustees,
when
reliable market quotations are not readily available, the Fund’s pricing service
does not provide a valuation for such securities, the Fund’s pricing service
provides a valuation that in the judgment of the Adviser does not represent
fair
value, the Adviser believes that the market price is stale, or an event that
affects the value of an instrument (a “Significant Event”) has occurred since
the closing prices were established, but before the time as of which the Fund
calculates its NAV. Examples of Significant Events may include: (1) events
that
relate to a single issuer or to an entire market sector; (2) significant
fluctuations in domestic or foreign markets; or (3) occurrences not tied
directly to the securities markets, such as natural disasters, armed conflicts,
or significant government actions. If such Significant Events occur, the Fund
may value the instruments at fair value, taking into account such events when
it
calculates the Fund’s NAV. Fair value determinations are made in good faith in
accordance with procedures adopted by the Board of Trustees. In addition, the
Fund may also fair value an instrument if trading in a particular instrument
is
halted and does not resume prior to the closing of the exchange or other
market.
Attempts
to determine the fair value of securities introduces an element of subjectivity
to the pricing of securities. As a result, the price of a security determined
through fair valuation techniques may differ from the price quoted or published
by other sources and may not accurately reflect the market value of the security
when trading resumes. If a reliable market quotation becomes available for
a
security formerly valued through fair valuation techniques, Rafferty compares
the market quotation to the fair value price to evaluate the effectiveness
of
the Fund’s fair valuation procedures. If any significant discrepancies are
found, Rafferty may adjust the Fund’s fair valuation procedures.
The
Fund
has adopted Service Class distribution plan under Rule 12b-1 which allows
the Fund to charge up to 1.00% of the Fund’s average Service Class daily net
assets to pay for distribution and services provided to Fund shareholders.
Because these fees are paid out of the Service Class assets on an ongoing basis,
over time these fees will increase the cost of your investment and may cost
you
more than paying other types of sales charges.
Under
the
plan, the fees may amount to up to 1.00% of the Service Class’ average daily net
assets. The Direxion Board of Trustees has authorized the Fund to pay Rule
12b-1
fees equal to 1.00% of the average daily net assets of the Service Class. Under
an agreement with the Fund, your financial advisor, including Spectrum
Financial, Inc., may receive these fees from the Fund. In exchange, your
financial advisor or Spectrum Financial, Inc. may provide a number of services,
such as:
| Ÿ |
Placing
your orders and issuing
confirmations;
|
| Ÿ |
Providing
investment advice, research and other advisory
services;
|
| Ÿ |
Handling
correspondence for individual
accounts;
|
| Ÿ |
Acting
as the sole shareholder of record for individual
shareholders;
|
| Ÿ |
Issuing
shareholder statements and reports;
|
| Ÿ |
Executing
daily investment “sweep” functions;
|
| Ÿ |
Recommending
allocation of client account
assets:
|
| Ÿ |
Performing
annual reviews of shareholder
investments;
|
| Ÿ |
Providing
each shareholder with updates on his or her holdings and on current
market
conditions;
|
| Ÿ |
Effecting
all purchase, redemption and exchange transactions in accordance
with
shareholder instructions;
|
| Ÿ |
Responding
to shareholder inquiries;
|
| Ÿ |
Assisting
shareholders in utilizing the Fund’s
website;
|
| Ÿ |
Assisting
with implementing changes in beneficial owners of
accounts;
|
| Ÿ |
Assisting
with changes in account information;
and
|
| Ÿ |
Responding
to questions regarding Fund documents, including tax
forms.
|
For
more
information on these and other services, you should speak directly to your
Financial Advisor. Your Financial Advisor may charge additional account fees
for
services beyond those specified above.
|
|
| HOW
TO INVEST IN SERVICE CLASS SHARES OF THE
FUND |
You
may
invest in the Service Class of the Fund through traditional investment accounts,
IRAs (including Roth IRAs), self-directed retirement plans or company sponsored
retirement plans or other products available from your Financial Advisor.
Applications and descriptions of any service fees for retirement or other
accounts are available from your Financial Advisor.
Shares
of
the Fund have not been registered for sale outside of the United States. The
Fund generally does not sell shares to investors residing outside of the United
States, even if they are United States citizens or lawful permanent residents,
except to investors with United States military APO or FPO
addresses.
Minimum
Investment
The
minimum initial and subsequent investments are set forth.
| |
Minimum
Initial Investment
|
|
Subsequent
Investment
|
|
Regular
Accounts
|
$
25,000
|
|
$
1,000
|
|
Retirement
Accounts
|
$
25,000
|
|
$
0
|
Rafferty
may waive these minimum requirements at its discretion. Contact your Financial
Advisor for further information.
Good
Form
Good
form
means that your purchase (whether direct or through a financial intermediary)
is
complete and contains all necessary information; has all supporting
documentation (such as trust documents, beneficiary designations, proper
signature guarantees, IRA rollover forms, etc.); and is accompanied by
sufficient purchase proceeds. For a purchase request to be in good form, it
must
include (1) the name of the Fund; (2) the dollar amount of shares to
be purchased; and (3) your purchase application or investment stub. An
Account Application that is sent to the transfer agent does not constitute
a
purchase order until the transfer agent processes the Account Application and
receives correct payment by check or wire transfer.
Purchasing
Shares Through Your Financial Advisor
You
may
purchase shares of the Fund through your Financial Advisor, who can help you
complete the necessary paperwork, mail your Account Application to the Direxion
Funds and place your order to purchase shares of the Fund.
Your
Financial Advisor is responsible for placing orders promptly with the Fund
and
forwarding payment promptly, as well as ensuring that you receive copies of
the
Fund’s Prospectus. Financial Advisors may charge fees for the services they
provide to you in connection with processing your transaction order or
maintaining your account with them. Each Financial Advisor also may have its
own
rules about share transactions, limits on the number of share transactions
you
are permitted to make in a given time period, and may have earlier cut-off
times
for processing your transaction. For more information about your Financial
Advisor’s rules and procedures, you should contact your Financial Advisor
directly.
Purchasing
Shares
Through The Fund’s Transfer Agent
You
may
also purchase shares through the Fund’s transfer agent by using the following
instructions:
By
Mail:
| Ÿ
|
Complete
and sign your Account Application.
|
| Ÿ
|
Indicate
the Fund and the amount you wish to
invest.
|
| Ÿ
|
Mail
your check (payable to “Direxion Funds”) along with the completed Account
Application to:
|
|
Regular
Mail
|
|
Express/Overnight
Mail
|
|
Direxion
Funds - Service Class
c/o
U.S. Bancorp Fund Services, LLC
P.O.
Box 1993
|
|
Direxion
Funds - Service Class
c/o
U.S. Bancorp Fund Services, LLC
Mutual
Fund Services - 3rd Floor
615
East Michigan Street
|
The
Fund
does not consider the U.S. Postal Service or other independent delivery services
to be its agents.
| Ÿ |
The
Fund will not accept payment in cash or money orders. The Fund also
does
not accept cashier’s checks in amounts of less than $10,000. In addition,
to prevent check fraud, the Fund does not accept third party checks,
U.S.
Treasury checks, credit card checks, traveler’s checks, or starter checks
for the purchase of shares. The Fund is unable to accept post-dated
checks, post-dated on-line bill pay checks or any conditional order
or
payment.
|
| Ÿ |
All
purchases must be made in U.S. dollars through a
U.S. bank.
|
| Ÿ |
If
your check does not clear, you will be charged a $25.00 fee. In
addition, you may be responsible for losses sustained by the Fund
for any
returned payment.
|
| Ÿ |
You
will receive written confirmation by mail, but we do not issue share
certificates.
|
| Ÿ |
The
Fund’s transfer agent will verify certain information from investors as
part of the Fund’s anti-money laundering
program.
|
The
USA
PATRIOT Act of 2001 requires financial institutions, including the Fund, to
adopt certain policies and programs to prevent money laundering activities,
including procedures to verify the identity of customers opening new accounts.
When completing a new Account Application, you will be required to supply your
full name, date of birth, social security number and permanent street address
to
assist in verifying your identity. Mailing addresses containing only a P.O.
Box
will not be accepted. Until such verification is made, the Fund may temporarily
limit additional share purchases. In addition, the Fund may limit additional
share purchases or close an account if they are unable to verify a shareholder’s
identity. As required by law, the Fund may employ various procedures, such
as
comparing the information to fraud databases or requesting additional
information or documentation from you, to ensure that the information supplied
by you is correct.
If
the
Fund does not have a reasonable belief in the identity of a shareholder, the
account will be rejected or the shareholder will not be allowed to perform
a
transaction on the account until such information is received. The Fund may
also
reserve the right to close the account within five business days if clarifying
information and/or documentation is not received.
By
Bank Wire Transfer:
Initial
Investment - By Wire
|
•
|
If
you are making an initial investment in the Fund, before you wire
funds,
please contact the Fund’s transfer agent by phone to make arrangements
with a telephone service representative to submit your completed
Account
Application via mail, overnight delivery, or facsimile. Upon receipt
of
your Account Application, your account will be established and a
service
representative will contact you within 24 hours to provide an account
number and wiring instructions. You may then contact your bank to
initiate
the wire using the instructions you were
given.
|
For
Subsequent Investments - By Wire
Before
sending your wire, please contact the Fund’s transfer agent to advise them of
your intent to wire funds. This will ensure prompt and accurate credit upon
receipt of your wire.
777
East
Wisconsin Avenue
For
credit to U.S. Bancorp Fund Services, LLC
Account
Number 112-952-137
For
further credit to the Direxion Funds
(Name
of
Fund(s) to purchase) - Service Class
| Ÿ
|
Your
bank may charge a fee for such
services.
|
•
Wired
funds must be received prior to 4:00 p.m., Eastern time to be eligible for
same
day pricing. Neither the Fund nor U.S. Bank, N.A. , the Fund’s custodian, is
responsible for the consequences of delays from the banking or Federal Reserve
wire system or from incomplete wiring instructions.
By
Telephone:
•
Investors
may purchase additional shares of the Fund by calling the Fund at (800)
851-0511. If you elected this option on your account application and your
account has been open for at least 15 days, telephone orders will be accepted
via electronic funds transfer from your bank account through the Automated
Clearing House (“ACH”) network. You must have banking information established on
your account prior to making a purchase. Each telephone purchase order must
be a
minimum of $1,000. Your shares will be purchased at the NAV calculated on the
day your order is placed, provided that your order is received prior to 4 p.m.,
Eastern time.
| |
| HOW
TO EXCHANGE SHARES OF THE FUND |
You
may
exchange Service Class shares of the Fund for Service Class shares of any other
Direxion Funds (including Direxion Funds not offered in this Prospectus) without
any charges.
Exchanging
Shares Purchased Through Your Financial Advisor
If
your
shares of the Fund were purchased through your Financial Advisor, initiate
your
exchange order by contacting your Financial Advisor.
Your
Financial Advisor is responsible for placing orders promptly with the Fund.
Financial Advisors may charge fees for the services they provide to you in
connection with processing your transaction order or maintaining your account
with them. Each Financial Advisor also may have its own rules about share
transactions, limits on the number of share transactions you are permitted
to
make in a given time period, and may have earlier cut-off times for processing
your transaction. For more information about your Financial Advisor’s rules and
procedures, you should contact your Financial Advisor directly.
Exchanging
Shares Purchased Through The Fund’s Transfer
Agent
If
your
shares of the Fund were purchased through the Fund’s transfer agent, initiate
your exchange order by using the following instructions:
| Ÿ
|
Write
or call the Direxion Funds’ transfer
agent.
|
| Ÿ
|
Provide
your name, account number, which Funds are involved, and the number,
percentage or dollar value of shares to be
exchanged.
|
| Ÿ
|
The
Fund can only honor exchanges between accounts registered in the
same name
and having the same address and taxpayer identification
number.
|
| Ÿ
|
You
must exchange at least $1,000 or, if your account value is less than
that,
your entire account balance will be
exchanged.
|
| Ÿ
|
You
may exchange by telephone unless you declined telephone exchange
privileges on your Account Application. If you previously declined
telephone exchange privileges and would like to add this option to
your
account, please
contact the Fund at (800) 851-0511 for
instructions.
|
| Ÿ
|
You
may exchange through the Internet by visiting the Direxion Funds’ website
at www.direxionfunds.com
and activating your account.
|
| |
| HOW
TO SELL SERVICE CLASS SHARES OF THE
FUND |
Selling
Shares Purchased Through Your Financial Advisor
If
your
shares of the Fund were purchased through your Financial Advisor, initiate
your
sales order by contacting your Financial Advisor. Payment is normally directed
to your account with your Financial Advisor three business days after your
Financial Advisor places your order.
Your
Financial Advisor is responsible for placing orders promptly with the Fund.
Financial Advisors may charge fees for the services they provide to you in
connection with processing your transaction order or maintaining your account
with them. Each Financial Advisor also may have its own rules about share
transactions, limits on the number of share transactions you are permitted
to
make in a given time period, and may have earlier cut-off times for processing
your transaction. For more information about your Financial Advisor’s rules and
procedures, you should contact your Financial Advisor directly.
Selling
Shares Purchased Through The Fund’s Transfer
Agent
If
your
shares of the Fund were purchased through the Fund’s transfer agent, initiate
your sales order by using the following instructions:
Generally
| Ÿ
|
You
may sell all or part of your investment in the Fund at the next determined
NAV after we receive your order.
|
| Ÿ
|
You
normally will receive proceeds from any sales of shares within seven
days
from the time the Fund receives your request in good
order.
|
| Ÿ
|
For
investments that have been made by check, payment on sales requests
may be
delayed until the Direxion Funds’ transfer agent is reasonably satisfied
that the purchase payment has been collected by the Fund, which may
require up to 10 calendar
days.
|
| Ÿ
|
Your
proceeds will be sent via check, wire or electronic funds transfer
through
the Automated Clearing House (“ACH”) network using the address or bank
listed on the transfer agent’s
records.
|
| Ÿ
|
Shareholders
who have an IRA or other retirement plan must indicate on their redemption
request whether to withhold federal income tax. Redemption requests
failing to indicate an election not to have tax withheld will generally
be
subject to 10% withholding.
|
| Ÿ
|
The
Fund also offers a Systematic Withdrawal Plan for shareholders who
require
periodic payments, such as those from IRAs. For more information
on this
option, please contact the Fund at (800)
851-0511.
|
By
Telephone or By Mail
| Ÿ
|
Call
or write the Direxion Funds (see the address and telephone number
above).
|
| Ÿ
|
You
may sell shares of the Fund by telephone unless you declined telephone
redemption privileges on your Account Application. If
you previously declined telephone redemption privileges, you may
request
telephone redemption privileges by sending a written request to the
Fund’s
transfer agent with your signature guaranteed. If you have questions,
please contact the Fund at (800)
851-0511.
|
| Ÿ
|
IRA
accounts are not eligible for telephone redemption
privileges.
|
| Ÿ
|
Provide
your name, account number, the Fund’s name and the number, percentage or
dollar value of shares to sell. The
maximum amount that may be redeemed by telephone is
$100,000.
|
By
Wire Transfer
| Ÿ
|
Call
the Direxion Funds.
|
| Ÿ
|
Provide
your name, account number, the Fund’s name and the number, percentage or
dollar value of shares to sell.
|
| Ÿ
|
You
must wire transfer at least $5,000.
|
| Ÿ
|
You
will be charged a wire transfer fee of $15.00, which will be deducted
from
your account balance on dollar specific redemption requests or from
the
proceeds on share specific requests. This fee is in addition to any
fees
that may be imposed by your bank.
|
| Ÿ
|
Your
proceeds will be wired only to the bank listed on the Fund’s transfer
agent’s records.
|
| |
| ACCOUNT
AND TRANSACTION POLICIES |
Order
Policies
There
are
certain times when you may be unable to sell Service Class shares of the Fund
or
proceeds may be delayed. This may occur during emergencies, unusual market
conditions or when the Fund cannot determine the value of its assets or sell
its
holdings. The Fund reserves the right to reject any purchase order or suspend
offering of its shares. Generally, the Fund may reject a purchase if it is
disruptive to the efficient management of the Fund. The Fund may also refuse
purchase requests from individuals or groups who have not been approved by
the
Fund’s Subadviser.
Certain
transactions through a financial intermediary may not be deemed in good form
if
such financial intermediary failed to notify the Fund of such trade or trades
before 4:00 p.m. Eastern time. In particular, financial intermediaries that
transact in shares of the Fund through the Fundserv must, in many cases, notify
the Fund of trades before placing them in the Fundserv system. In the event
that
a financial intermediary transacts in shares of the Fund through the Fundserv
system without notifying the Fund of such trades in advance, such transaction
may be deemed not to have been received in good order. In practice, this means
that a confirmation from a financial intermediary is not binding on the Fund.
In
the event that a trade is deemed not to have been received in good form, for
whatever reason, a purchase, redemption or exchange request may be rejected
or
canceled and, in the event of a redemption which is canceled, the Fund shall
have the right to a return of proceeds. Cancellation of a trade is processed
at
the NAV at which the trade was originally received and is completed as soon
as
practical, ordinarily the next business day. Please contact your financial
intermediary to determine how it processes transactions in shares of the
Fund.
Telephone
Transactions
For
your
protection, the Fund may require some form of personal identification prior
to
accepting your telephone request such as verification of your social security
number, account number or other information. We also may record the conversation
for accuracy. During times of unusually high market activity or extreme market
changes, you should be aware that it may be difficult to place your request
in a
timely manner.
In
addition, once a telephone transaction has been placed, it cannot be canceled
or
modified.
Signature
Guarantees
In
certain instances when you sell Service Class shares of the Fund, we will need
your signature guaranteed. Signature guarantees may be available at your bank,
stockbroker or a national securities exchange.
A notary
public cannot guarantee signatures.
Your
signature must be guaranteed if:
| Ÿ
|
You
are changing your account ownership;
|
| Ÿ
|
Your
account registration or address has changed in the last
30 days;
|
| Ÿ
|
The
proceeds of your sale are mailed to an address other than the one
listed
on record with the Fund;
|
| Ÿ
|
The
proceeds are payable to a third
party;
|
| Ÿ
|
The
sale is greater than $100,000;
|
| Ÿ
|
You
are establishing or modifying certain services on an account;
or
|
| Ÿ
|
There
are other unusual situations as determined by the Fund’s transfer
agent.
|
Low
Balance Accounts
If
your
total account balance falls below $10,000, then we may sell your Service Class
shares of the Direxion Funds. We will inform you in writing 30 days prior
to selling Service Class shares. If you do not bring your total account balance
up to $10,000 within 30 days, we may sell your Service Class shares and
send you the proceeds. We will not sell your Service Class shares if your
account value falls due to market fluctuations.
Redemption
In-Kind
The
Fund
reserves the right to pay redemption proceeds to you in whole or in part by
a
distribution of securities from the Fund’s portfolio. It is not expected that
the Fund would do so except in unusual circumstances. If the Fund pays your
redemption proceeds by a distribution of securities, you could incur brokerage
or other charges in converting the securities to cash and will bear any market
risks associated with such securities until they are converted into
cash.
Excessive
Trading
The
Fund
is intended for long-term investors. Short-term “market-timers” who engage in
frequent purchases and redemptions may disrupt the Fund’s investment program and
create additional transaction costs that are borne by all shareholders. The
Board of Trustees has adopted a policy regarding excessive trading. Hundredfold
generally initiates or has knowledge of, and consents to, all transactions
in
shares of the Fund. As a result, the Fund does not currently impose any trading
restrictions or redemption fees on Fund shareholders.
However,
the Fund discourages excessive, short-term trading and other abusive trading
practices and the Fund may use a variety of techniques to monitor trading
activity and detect abusive trading practices. As approved by the Board of
Trustees, these techniques may change from time to time as determined by the
Fund in its sole discretion.
In
an
effort to discourage abusive trading practices and minimize harm to the Fund
and
its shareholders, the Fund reserves the right, in its sole discretion, to
identify trading practices as abusive. The Fund further reserves the right
to
refuse purchase requests from an account that the Fund has identified as
engaging in abusive trading practices or any individuals or groups who, in
the
Fund’s view, are likely to engage in market timing or excessive trading. In
making such judgments, the Fund seeks to act in a manner that it believes is
consistent with the best interests of shareholders.
Due
to
the complexity and subjectivity involved in identifying abusive trading activity
and the volume of shareholder transactions the Fund handles, there can be no
assurance that the Fund’s efforts will identify all trades or trading practices
that may be considered abusive. In particular, since the Fund receives purchase
and sale orders through financial intermediaries that use group or omnibus
accounts, the Fund cannot always detect frequent trading. As a consequence,
the
Fund’s ability to monitor and discourage abusive trading practices in omnibus
accounts may be limited.
ADDITIONAL
INFORMATION
Rafferty
Asset Management, LLC (“Rafferty”) provides investment services to the Fund.
Rafferty has been managing mutual funds since June 1997. Rafferty is located
at
33 Whitehall Street, 10th
Floor,
New York, New York 10004. As of September 30, 2006, the Adviser had
approximately $1.2 billion in assets under management.
Under
an
investment advisory agreement between the Direxion Funds and Rafferty, the
Fund
pays Rafferty fees at an annualized rate of 1.00% of the Fund’s average daily
net assets.
A
discussion regarding the basis on which the Board of Trustees approved the
investment advisory agreement is included in the Fund’s Annual Report for the
period ended August 31, 2006.
Rafferty
has retained Hundredfold to serve as subadviser to the Fund. Rafferty (not
the
Fund) will pay Hundredfold’s subadvisory fees. Hundredfold is located at 2940 N.
Lynnhaven Road, Suite 210A, Virginia Beach, VA 23452.
Hundredfold
manages the Fund’s assets under the supervision of Rafferty. Under the
subadvisory arrangement,
Hundredfold directs the allocation of Fund’s assets among various investment
vehicles selected by Hundredfold. Rafferty implements Hundredfold’s allocation
decisions for the Fund by placing all brokerage orders for the purchase and
sale
of those securities.
Hundredfold
was
established in 2004 as a registered investment adviser under the Investment
Advisers Act of 1940. Hundredfold was created by a not-for-profit foundation
to
receive as a contribution the professional services of Mr. Ralph J. Doudera
and
to sell those services to unrelated business entities. Hundredfold’s services
are based on research and analysis generated by the portfolio manager, Mr.
Doudera. Mr. Doudera’s history as an investment manager, is discussed below. Mr.
Doudera is not compensated for his research and analysis for
Hundredfold.
Mr.
Doudera is the founder, CEO and investment manager of Spectrum Financial Inc.
(“Spectrum”), a registered investment adviser. He founded Spectrum in 1986.
Prior to founding Spectrum, Mr. Doudera began his financial and estate planning
career with the CIGNA Corporation where he became a Chartered Life Underwriter
and a Chartered Financial Consultant. Mr. Doudera is a graduate of New Jersey
Institute of Technology where he received an undergraduate degree in Mechanical
Engineering (1969) and a master’s of science in Management and Finance (1972).
Mr. Doudera also earned a master’s degree in Biblical studies from Regent
University in 1987.
Mr.
Doudera has served as Portfolio Manager to the Fund since the Fund’s inception.
The Fund’s SAI provides additional information about Mr. Doudera’s compensation,
the other accounts he manages, and his ownership of securities in the
Fund.
| |
| 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 Statement of
Additional Information. Currently, disclosure of the Fund’s holdings is required
to be made 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. The Annual and Semi-Annual Reports will be
available by contacting the Direxion Funds, c/o U.S. Bancorp Fund Services,
LLC,
P.O. Box 701, Milwaukee, Wisconsin 53201-0701 or calling (800)
851-0511.
Distributions
The
Fund
distributes dividends from its net investment income annually and any realized
net capital gains at least annually, though the Fund may make distributions
more
frequently.
Net
investment income generally consists of interest income and dividends received
on investments, less expenses. The Fund has capital gains when it sells its
portfolio assets for a profit. The tax consequences will vary depending on
how
long the Fund has held the assets. Distributions of net gains on sales of assets
held for one year or less are taxed as dividends (that is, ordinary income).
Sales of assets held longer than one year (long-term capital gains) are taxed
at
lower capital gains rates. The Fund does not seek to provide long-term capital
gains.
Dividends
and capital gain distributions (collectively, “distributions”) will be
reinvested automatically at NAV unless you request otherwise in writing.
Normally, distributions are taxable events for shareholders whether the
distributions are received in cash or reinvested. If you elect to receive
distributions from the Fund by check and the post office cannot deliver such
check or your check remains uncashed for six months, the Fund reserves the
right
to reinvest the check in your Direxion Fund account at the Fund’s then current
NAV per share and to reinvest all subsequent distributions in shares of the
Fund
until an updated address is received.
Taxes
The
following table illustrates the potential tax liabilities for taxable
accounts:
|
Type
of Transaction
|
|
Tax
Status*
|
|
Dividend
(other than “qualified dividend income”
(“QDI”))
distribution
|
|
Ordinary
income rate
|
|
Distribution
of QDI (see below)
|
|
Long-term
capital gains rate
|
|
Distribution
of net short-term capital gains
|
|
Ordinary
income rate
|
|
Distribution
of net long-term capital gains
|
|
Long-term
capital gains rate
|
|
Sale
or exchange of Fund shares owned for more than
one
year
|
|
Long-term
capital gains or losses
|
|
Sale
or exchange of Fund shares owned for one year
or
less
|
|
Gains
are taxed at the same rate as ordinary
income;
losses are subject to special rules
|
*Tax
consequences for tax-deferred retirement accounts or non-taxable shareholders
may be different. You should consult your tax specialist for more information
about your personal situation.
QDI
consists of dividends the Fund receives from most U.S. corporations and
“qualified foreign corporations,” provided that the Fund satisfies certain
holding period, debt-financing and other requirements regarding the stock on
which the dividends were paid. The Fund’s dividends attributable to its “QDI”
are subject to the long-term capital gains rate, a maximum federal rate of
15%
for shareholders who are individuals and satisfy those restrictions regarding
their Fund shares. These special rules generally apply to taxable years
beginning before January 1, 2011.
If
you
are a non-retirement account holder, then each year we will send you a
Form 1099 that tells you the amount of Fund distributions you received for
the prior calendar year, the tax status of those distributions and a list of
reportable sale transactions. Normally, distributions are taxable in the year
you receive them. However, any distributions declared in the last three months
of the year and paid in January of the following year generally are taxable
as
if received on December 31 of the year they are declared.
If
you
are a non-corporate shareholder of the Fund and do not provide the Fund with
your correct taxpayer identification number (normally your social security
number), the Fund is required to withhold 28% of all dividends and other
distributions and sale proceeds payable to you. If you are otherwise subject
to
backup withholding, we also are required to withhold and pay to the Internal
Revenue Service (“IRS”) 28% of your dividends and other distributions. Any tax
withheld may be applied against your tax liability when you file your tax
return.
The
Fund
may in the future operate under a master/feeder structure. This means that
the
Fund would be a “feeder” fund that attempts to meet its objective by investing
all its investable assets in a “master” fund with the same investment objective.
The “master” fund would purchase securities for investment. It is expected that
any such investment company would be managed by Rafferty in substantially the
same manner as the Fund. If permitted by law at that time, the Board of Trustees
may approve the implementation of such a structure for the Fund without seeking
shareholder approval. However, the Trustees’ decision will be made only if the
investments in the master funds are in the best interests of the Fund and its
shareholders. In making that determination, the Trustees will consider, among
other things, the benefits to shareholders and/or the opportunity to reduce
costs and achieve operational efficiencies. You also will receive a 30-day
notice prior to the implementation of the master/feeder structure.
FINANCIAL
HIGHLIGHTS
The
financial highlights table is intended to help you understand the financial
performance of the Service Class shares of the Fund for the periods indicated.
The information shown below was audited by_______________ (except for the period
ended February 28, 2007), whose report, along with the Fund’s financial
statements, are included in the Annual Report, which is available upon request.
Certain information reflects financial results for a single Service Class share.
The total returns in the table represent the rate that an investor would have
earned (or lost) on an investment in Fund (assuming reinvestment of all
dividends and distributions).
| |
Spectrum
High Yield Plus Fund
|
| |
Service
Class
|
| |
Period
Ended
|
|
Year
Ended
|
|
|
|
Per
share data:
|
|
|
|
|
|
Net
asset value, beginning of period
|
|
|
$19.96
|
|
$20.00
|
|
Income
(loss) from investment operations:
|
|
|
|
|
|
Net
investment income (loss)4
|
|
|
0.50
|
|
0.48
|
Net
realized and unrealized gain (loss) on investments
|
|
|
0.34
|
|
(0.26)
|
Total
from investment operations
|
|
|
0.84
|
|
0.22
|
|
Less
distributions:
|
|
|
|
|
|
Dividends
from net investment income
|
|
|
(1.26)
|
|
(0.26)
|
Distributions
from realized gains
|
|
|
—
|
|
—
|
|
|
|
|
(1.26)
|
|
(0.26)
|
|
Net
asset value, end of period
|
|
|
$19.54
|
|
$19.96
|
|
|
|
|
4.53%
|
|
1.09%2
|
|
Supplemental
data and ratios:
|
|
|
|
|
|
Net
assets, end of period
|
|
|
$22,724,626
|
|
$33,414,367
|
Ratio
of expenses to average net assets excluding short dividends:
|
|
|
2.54%
|
|
2.38%3
|
Ratio
of net investment income (loss) to average net
assets:
|
|
|
2.57%
|
|
2.44%3
|
|
|
|
|
898%
|
|
759%
|
1 Commencement
of operations.
4 Net
investment income (loss) per share represents net investment income (loss)
divided by the daily average shares of beneficial
interest outstanding throughout each period.
5 Portfolio
turnover ratio is calculated without regard to short-term securities having
a
maturity of less than one year. Investments
in options, swaps, futures contracts and repurchase agreements are deemed
short-term securities. The Fund’s aggressive
investment strategy may result in significant portfolio turnover to take
advantage of anticipated changes in market
position.
PRIVACY
NOTICE
At
the
Direxion Funds, we are committed to protecting your privacy. To open and service
your Direxion accounts, we collect and maintain certain nonpublic personal
information about you, such as your address, phone number, social security
number, purchases, sales, account balances, bank account information and other
personal financial information. We collect this information from the following
sources:
| l |
Account
applications or other forms on which you provide
information,
|
| l |
Mail,
e-mail, the telephone and our website,
and
|
| l |
Your
transactions and account inquiries with
us.
|
We
safeguard the personal information that you have entrusted to us in the
following ways:
| l |
As
a general policy, only those employees who maintain your account
and
respond to your requests for additional services have access to your
account information.
|
| l |
We
maintain physical, electronic, and procedural safeguards to insure
the
security of your personal information and to prevent unauthorized
access
to your information.
|
We
do not
disclose any nonpublic personal information about you or our former shareholders
to anyone, except as permitted or required by law. In the course of conducting
business and maintaining your account we may share shareholder information,
as
allowed by law, with our affiliated companies and with other service providers,
including financial intermediaries, custodians, transfer agents and marketing
consultants. Those companies are contractually bound to use that information
only for the services for which we hired them. They are not permitted to use
or
share our shareholders’ nonpublic personal information for any other purpose.
There also may be times when we provide information to federal, state or local
authorities as required by law.
In
the
event that you hold fund shares of Direxion through a financial intermediary,
including, but not limited to, a broker-dealer, bank, or trust company, the
privacy policy of your financial intermediary would govern how your nonpublic
personal information would be shared with nonaffiliated third parties.
For
questions about our policy, please contact us at (800) 851-0511.
Not
a part of the prospectus.
More
Information on
The
Direxion
Funds
Statement
of Additional Information (“SAI”):
The
Fund’s SAI contains more information on the Fund and its investment policies.
The SAI is incorporated in this Prospectus by reference (meaning it is legally
part of this Prospectus). A current SAI is on file with the Securities and
Exchange Commission (“SEC”).
Annual
and Semi-Annual Reports to Shareholders:
The
Fund’s reports provide additional information on its investment holdings,
performance data and a letter discussing the market conditions and investment
strategies that significantly affected the Fund’s performance during that
period.
To
Obtain the SAI or Fund Reports Free of Charge:
These
documents and other information about the Fund can be reviewed and copied at
the
SEC’s Public Reference Room in Washington, D.C. Information on the operation of
the Public Reference Room may be obtained by calling the Commission at (202)
942-8090. Reports and other information about the Fund may be viewed on-screen
or downloaded from the EDGAR Database on SEC’s Internet web site at
http://www.sec.gov. Copies of these documents may be obtained, after paying
a
duplicating fee, by electronic request at the following e-mail address:
publicinfo@sec.gov, or by writing the SEC’s Public Reference Section,
Washington, D.C. 20549-0102.
Rafferty
Capital Markets, LLC, Distributor
59
Hilton
Avenue
P
R O S P E C T U S
_________,
2007
THE
DIREXION FUNDS
Spectrum
Select Alternative Fund
Service
Class
33
Whitehall Street, 10th
Floor
(800)
851-0511
DIREXION
FUNDS
Spectrum
Select Alternative Fund
STATEMENT
OF ADDITIONAL INFORMATION
33
Whitehall Street, 10th
Floor
(800)
851-0511
The
Direxion Funds (the “Trust”) is a management investment company, or mutual fund
that offers shares of a variety of investment portfolios to the public.
This
Statement of Additional Information (“SAI”) relates to the Service Class of the
Spectrum Select Alternative Fund (the “Fund”).
This
SAI
dated ________, 2007 is not a prospectus. It should be read in conjunction
with
the Fund’s Prospectus dated _________, 2007. This SAI is incorporated herein by
reference into the Fund’s Prospectus. In other words, it is legally part of the
Fund’s Prospectus.
To
receive a copy of the Prospectus, without charge, write or call the Trust at
the
address or telephone number above.
Dated:
______________, 2007
TABLE
OF CONTENTS
Page
| THE DIREXION FUNDS |
1
|
| |
|
| CLASSIFICATION OF THE FUNDS |
1
|
| |
|
| INVESTMENT POLICIES AND TECHNIQUES |
1
|
| |
|
|
American
Depositary Receipts (“ADRs”)
|
1
|
|
Asset-Backed
Securities
|
2
|
|
Bank
Obligations
|
2
|
|
Corporate
Debt Securities
|
3
|
|
Equity
Securities
|
3
|
|
Foreign
Securities
|
4
|
|
Illiquid
Investments and Restricted Securities
|
5
|
|
Indexed
Securities
|
5
|
|
Junk
Bonds
|
6
|
|
Mortgage-Backed
Securities
|
7
|
|
Options,
Futures and Other Strategies
|
8
|
|
Other
Investment Companies
|
13
|
|
Repurchase
Agreements
|
14
|
|
Reverse
Repurchase Agreements
|
14
|
|
Short
Sales
|
15
|
|
Swap
Agreements
|
15
|
|
U.S.
Government Securities
|
16
|
|
Zero-Coupon
Securities
|
17
|
|
Other
Investment Risks and Practices
|
17
|
| |
|
| INVESTMENT RESTRICTIONS |
19
|
| |
|
| PORTFOLIO TRANSACTIONS AND
BROKERAGE |
20
|
| |
|
| PORTFOLIO HOLDINGS INFORMATION |
21
|
| |
|
| MANAGEMENT OF THE TRUST |
22
|
| |
|
|
Trustees
and Officers
|
22
|
|
Principal
Shareholders, Control Persons and Management
Ownership
|
26
|
|
Investment
Adviser and Subadviser
|
27
|
|
Portfolio
Manager
|
29
|
|
Proxy
Voting Policies and Procedures
|
29
|
|
Fund
Administrator, Fund Accountant, Transfer Agent and
Custodian
|
30
|
|
Distributor
|
30
|
|
Distribution
Plan
|
31
|
|
Independent
Registered Public Accounting Firm
|
31
|
| |
|
|
DETERMINATION
OF NET ASSET VALUE
|
32
|
| |
|
| PURCHASES AND REDEMPTIONS |
33
|
| |
|
|
Retirement
Plans
|
33
|
|
Redemption
In-Kind
|
33
|
|
Redemptions
by Telephone
|
34
|
|
Receiving
Payment
|
34
|
|
Anti-Money
Laundering
|
35
|
| |
|
| EXCHANGE PRIVILEGE |
35
|
| |
|
| SHAREHOLDER AND OTHER INFORMATION |
35
|
| |
|
| DIVIDENDS, OTHER DISTRIBUTIONS AND
TAXES |
35
|
| |
|
|
Dividends
and Other Distributions
|
35
|
|
Taxes
|
36
|
| |
|
| FINANCIAL STATEMENTS |
39
|
| |
|
| APPENDIX A |
A-1
|
| |
|
| APPENDIX B |
B-1
|
THE
DIREXION FUNDS
The
Trust
is a Massachusetts business trust organized on June 6, 1997 and is registered
with the Securities and Exchange Commission (“SEC”) as an open-end management
investment company under the Investment Company Act of 1940, as amended (“1940
Act”). The Trust currently consists of numerous separate series, one of which is
currently offered in this SAI. This SAI relates only to the Service Class of
the
Spectrum Select Alternative Fund (formerly, the Spectrum High Yield Plus Fund).
Effective April 28, 2006, the Trust changed its name to the Direxion Funds.
Prior to that date, the Trust was known as the Potomac Funds.
The
Fund
currently offers a single class of shares, the Service Class. Service Class
shares are made available through investment advisers, banks, trust companies
or
other authorized representatives without a sales charge but are subject to
a
1.00% distribution and service fee.
CLASSIFICATION
OF THE FUNDS
The
Fund
is a “non-diversified” series of the Trust pursuant to the 1940 Act. The Fund is
considered “non-diversified” because a relatively high percentage of its assets
may be invested in the securities of a limited number of issuers. To
the
extent that the Fund assumes large positions in the securities of a small number
of issuers, the Fund’s net asset value (“NAV”) may fluctuate to a greater extent
than that of a diversified company as a result of changes in the financial
condition or in the market’s assessment of the issuers, and the Fund may be more
susceptible to any single economic, political or regulatory occurrence than
a
diversified company.
The
Fund’s classification as a “non-diversified” investment company means that the
proportion of its assets that may be invested in the securities of a single
issuer is not limited by the 1940 Act. The Fund, however, intends to meet
certain diversification standards at the end of each quarter of its taxable
year.
INVESTMENT
POLICIES AND TECHNIQUES
The
seeks
a moderate total rate of return, including income and capital appreciation
on an
annual basis by investing primarily in fixed-income and equity securities,
either directly or indirectly in such securities or through exchange-traded
funds (“ETFs”), other investment companies and derivative instruments. The Fund
may engage in the investment strategies discussed below. There is no assurance
that any of these strategies or any other strategies and methods of investment
available to the Fund will result in the achievement of its
objective.
American
Depositary Receipts (“ADRs”)
The
Fund
may invest in ADRs and sell ADRs short. ADRs are U.S. dollar-denominated
receipts representing interests in the securities of a foreign issuer, which
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically issued
by U.S. banks and trust companies that evidence ownership of underlying
securities issued by a foreign corporation. ADRs include ordinary shares and
New
York shares (shares issued by non-U.S. companies that are listed on a U.S.
securities exchange). ADRs may be purchased through “sponsored” or “unsponsored”
facilities. A sponsored facility is established jointly by the issuer of the
underlying security and a depositary, whereas a depositary may establish an
unsponsored facility without participation by the issuer of the depositary
security. Holders of unsponsored depositary receipts generally bear all the
costs of such facilities and the depositary of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited security or to pass through voting
rights to the holders of such receipts of the deposited securities. ADRs are
not
necessarily denominated in the same currency as the underlying securities to
which they may be connected. Generally, ADRs in registered form are designed
for
use in the U.S. securities market and ADRs in bearer form are designed for
use
outside the United States. For investment purposes, ADRs are not considered
to
be foreign securities by the Fund.
Asset-Backed
Securities
The
Fund
may invest in asset-backed securities of any rating or maturity. Asset-backed
securities are securities issued by trusts and special purpose entities that
are
backed by pools of assets, such as automobile and credit-card receivables and
home equity loans, which pass through the payments on the underlying obligations
to the security holders (less servicing fees paid to the originator or fees
for
any credit enhancement). Typically, the originator of the loan or accounts
receivable paper transfers it to a specially created trust, which repackages
it
as securities with a minimum denomination and a specific term. The securities
are then privately placed or publicly offered. Examples include certificates
for
automobile receivables and so-called plastic bonds, backed by credit card
receivables.
The
value
of an asset-backed security is affected by, among other things, changes in
the
market’s perception of the asset backing the security, the creditworthiness of
the servicing agent for the loan pool, the originator of the loans and the
financial institution providing any credit enhancement. Payments of principal
and interest passed through to holders of asset-backed securities are frequently
supported by some form of credit enhancement, such as a letter of credit, surety
bond, limited guarantee by another entity or by having a priority to certain
of
the borrower’s other assets. The degree of credit enhancement varies, and
generally applies to only a portion of the asset-backed security’s par value.
Value is also affected if any credit enhancement has been exhausted.
Bank
Obligations
Money
Market Instruments.
The
Fund may invest in bankers’ acceptances, certificates of deposit, demand and
time deposits, savings shares and commercial paper of domestic banks and savings
and loans that have assets of at least $1 billion and capital, surplus, and
undivided profits of over $100 million as of the close of their most recent
fiscal year, or instruments that are insured by the Bank Insurance Fund or
the
Savings Institution Insurance Fund of the Federal Deposit Insurance Corporation
(“FDIC”). The Fund also may invest in high quality, short-term, corporate debt
obligations, including variable rate demand notes, having a maturity of one
year
or less. Because there is no secondary trading market in demand notes, the
inability of the issuer to make required payments could impact adversely the
Fund’s ability to resell when it deems advisable to do so.
Bankers’
Acceptances.
Bankers’ acceptances generally are negotiable instruments (time drafts) drawn to
finance the export, import, domestic shipment or storage of goods. They are
termed “accepted” when a bank writes on the draft its agreement to pay it at
maturity, using the word “accepted.” The bank is, in effect, unconditionally
guaranteeing to pay the face value of the instrument on its maturity date.
The
acceptance may then be held by the accepting bank as an asset, or it may be
sold
in the secondary market at the going rate of interest for a specified maturity.
Certificates
of Deposit (“CDs”).
The
FDIC is an agency of the U.S. government that insures the deposits of certain
banks and savings and loan associations up to $100,000 per deposit. The interest
on such deposits may not be insured to the extent this limit is exceeded.
Current federal regulations also permit such institutions to issue insured
negotiable CDs in amounts of $100,000 or more without regard to the interest
rate ceilings on other deposits. To remain fully insured, these investments
must
be limited to $100,000 per insured bank or savings and loan
association.
Commercial
Paper.
Commercial paper includes notes, drafts or similar instruments payable on demand
or having a maturity at the time of issuance not exceeding nine months,
exclusive of days of grace or any renewal thereof. The Fund may invest in
commercial paper rated A-l or A-2 by Standard & Poor’s®
(“S&P®”)
or
Prime-1 or Prime-2 by Moody’s Investors Services®,
Inc.
(“Moody’s”), and in other lower quality commercial paper.
Corporate
Debt Securities
The
Fund
may invest in investment
grade corporate debt securities. Investment grade corporate bonds are those
rated BBB or better by S&P®
or Baa
or better by Moody’s. Securities rated BBB by S&P®
are
considered investment grade, but Moody’s considers securities rated Baa to have
speculative characteristics.
Corporate
debt securities are fixed-income securities issued by businesses to finance
their operations, although corporate debt instruments may also include bank
loans to companies. Notes, bonds, debentures and commercial paper are the most
common types of corporate debt securities, with the primary difference being
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.
Equity
Securities
Common
Stocks.
The
Fund may invest in common stocks. Common stocks represent
the residual ownership interest in the issuer and are entitled to the income
and
increase in the value of the assets and business of the entity after all of
its
obligations and preferred stock are satisfied. Common stocks generally have
voting rights. Common stocks fluctuate in price in response to many factors
including historical and prospective earnings of the issuer, the value of its
assets, general economic conditions, interest rates, investor perceptions and
market liquidity.
Convertible
Securities.
The
Fund may invest in convertible securities. Convertible securities include
corporate bonds, notes and preferred stock that can be converted into or
exchanged for a prescribed amount of common stock of the same or a different
issue within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest paid or accrued
on
debt or dividends paid on preferred stock until the convertible stock matures
or
is redeemed, converted or exchanged. While no securities investment is without
some risk, investments in convertible securities generally entail less risk
than
the issuer’s common stock, although the extent to which such risk is reduced
depends in large measure upon the degree to which the convertible security
sells
above its value as a fixed income security. The market value of convertible
securities tends to decline as interest rates increase and, conversely, to
increase as interest rates decline. While convertible securities generally
offer
lower interest or dividend yields than nonconvertible debt securities of similar
quality, they do enable the investor to benefit from increases in the market
price of the underlying common stock. When investing in convertible securities,
the Fund may invest in the lowest credit rating category.
Preferred
Stock.
The
Fund may invest in preferred stock. A preferred stock blends the characteristics
of a bond and common stock. It can offer the higher yield of a bond and has
priority over common stock in equity ownership, but does not have the seniority
of a bond and its participation in the issuer’s growth may be limited. Preferred
stock has preference over common stock in the receipt of dividends and in any
residual assets after payment to creditors if the issuer is dissolved. Although
the dividend is set at a fixed annual rate, in some circumstances it can be
changed or omitted by the issuer. When investing in preferred stocks, the Fund
may invest in the lowest credit rating category.
Warrants
and Rights.
The
Fund may purchase warrants and rights, which are instruments that permit the
Fund to acquire, by subscription, the capital stock of a corporation at a set
price, regardless of the market price for such stock. Warrants may be either
perpetual or of limited duration, but they usually do not have voting rights
or
pay dividends. The market price of warrants is usually significantly less than
the current price of the underlying stock. Thus, there is a greater risk that
warrants might drop in value at a faster rate than the underlying
stock.
Foreign
Securities
The
Fund
may have both direct and indirect exposure to foreign securities through
investments in stock
index futures contracts, options on stock index futures contracts and options
on
securities and on stock indices. In
most
cases, the best available market for foreign securities will be on exchanges
or
in over-the-counter (“OTC”) markets located outside the United
States.
Investing
in foreign securities carries political and economic risks distinct from those
associated with investing in the United States. Investments in foreign
securities also involve the risk of possible adverse changes in investment
or
exchange control regulations, expropriation or confiscatory taxation, limitation
on or delays in the removal of funds or other assets of the Fund, political
or
financial instability or diplomatic and other developments that could affect
such investments. Foreign investments may be affected by actions of foreign
governments adverse to the interests of U.S. investors, including the
possibility of expropriation or nationalization of assets, 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.
Illiquid
Investments and Restricted Securities
The
Fund
may purchase and hold illiquid investments. The Fund will not purchase or
otherwise acquire any security if, as a result, more than 15% of its net assets
(taken at current value) would be invested in investments that are illiquid
by
virtue of the absence of a readily available market or legal or contractual
restrictions on resale. This policy does not include restricted securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933,
as
amended (“1933 Act”), which the Trust’s Board of Trustees (“Board” or
“Trustees”) or Rafferty Asset Management, LLC (“Rafferty”), the Fund’s
investment adviser, has determined under Board-approved guidelines are liquid.
The Fund does not currently anticipate investing in such restricted
securities.
The
term
“illiquid investments” for this purpose means investments 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 investments.
Investments currently considered to be illiquid include: (1) repurchase
agreements not terminable within seven days; (2) securities for which market
quotations are not readily available; (3) OTC options and their underlying
collateral; (4) bank deposits, unless they are payable at principal amount
plus
accrued interest on demand or within seven days after demand; (5) restricted
securities not determined to be liquid pursuant to guidelines established by
the
Board; and (6) in certain circumstances, securities involved in swap, cap,
floor
or collar transactions. The assets used as cover for OTC options written by
the
Fund will be considered illiquid unless the OTC options are sold to qualified
dealers who agree that the Fund may repurchase any OTC option it writes at
a
maximum price to be calculated by a formula set forth in the option agreement.
The cover for an OTC option written subject to this procedure would be
considered illiquid only to the extent that the maximum repurchase price under
the formula exceeds the intrinsic value of the option.
The
Fund
may not be able to sell illiquid investments when Rafferty or Hundredfold
Advisers LLC, (“Hundredfold” or “Subadviser”) considers it desirable to do so or
may have to sell such investments at a price that is lower than the price that
could be obtained if the investments were liquid. (Collectively, Rafferty and
Hundredfold are referred to herein as “Advisers” in certain circumstances.) In
addition, the sale of illiquid investments may require more time and result
in
higher dealer discounts and other selling expenses than does the sale of
investments that are not illiquid. Illiquid investments also may be more
difficult to value due to the unavailability of reliable market quotations
for
such investments, and investment in illiquid investments may have an adverse
impact on NAV.
Rule
144A
establishes a “safe harbor” from the registration requirements of the 1933 Act
for resales of certain securities to qualified institutional buyers.
Institutional markets for restricted securities that have developed as a result
of Rule 144A provide both readily ascertainable values for certain restricted
securities and the ability to liquidate an investment to satisfy share
redemption orders. An insufficient number of qualified institutional buyers
interested in purchasing Rule 144A-eligible securities held by the Fund,
however, could affect adversely the marketability of such portfolio securities
and the Fund may be unable to dispose of such securities promptly or at
reasonable prices.
Indexed
Securities
The
Fund
may purchase indexed securities, which are securities, the value of which varies
positively or negatively in relation to the value of other securities,
securities indices or other financial indicators, consistent with its investment
objective. Indexed securities may be debt securities or deposits whose value
at
maturity or coupon rate is determined by reference to a specific instrument
or
statistic. Recent issuers of indexed securities have included banks,
corporations and certain U.S. government agencies.
The
performance of indexed securities depends to a great extent on the performance
of the security or other instrument to which they are indexed and also may
be
influenced by interest rate changes in the United States and abroad. At the
same
time, indexed securities are subject to the credit risks associated with the
issuer of the security, and their values may decline substantially if the
issuer’s creditworthiness deteriorates. Indexed securities may be more volatile
than the underlying instruments. Certain indexed securities that are not traded
on an established market may be deemed illiquid. See “Illiquid Investments and
Restricted Securities” above.
The
Fund
may invest in Standard & Poor’s Depositary Receipts®
(“SPDRs®”).
SPDRs®
represent ownership in the SPDR Trust Series 1, a unit investment trust that
holds a portfolio of common stocks designed to track the price performance
and
dividend yield of the Standard & Poor’s 500 Composite Stock Price
IndexTM
(“S&P 500®
Index”)
and whose shares trade on the American Stock Exchange®
(“AMEX®”).
The
value of SPDRs®
fluctuates in relation to changes in the value of the underlying portfolio
of
common stocks. The market price of SPDRs®,
however, may not be equivalent to the pro rata value of the S&P
500®
Index.
SPDRs®
are
subject to the risks of an investment in a broadly based portfolio of common
stocks.
The
Fund
may invest in DIAMONDS®.
DIAMONDS®
represent an investment in a unit investment trust (“DIAMONDS®
Trust”)
that owns shares in proportion to the weightings of the stocks comprising the
Dow Jones Industrial Average®
(“DJIA®”).
The
DIAMONDS®
Trust is
structured so that its shares trade at approximately 1/100 (one one-hundredth)
of the value of the DJIA®.
The
DIAMONDS®
Trust’s
shares trade on the AMEX®.
An
investment in DIAMONDS®
is
subject to risks similar to those of other diversified stock portfolios,
including market volatility and that the general level of stock prices may
decline. Although DIAMONDS®
are
designed to provide investment results that generally correspond to the price
and yield performance of the DJIA®,
the
DIAMONDS®
Trust
may not be able to exactly replicate the performance of the DJIA®
because
of trust expenses and other factors.
The
Fund
may invest in NASDAQ-100 Index Tracking Stock®,
often
referred to as QQQQs®.
QQQQs®
represent ownership in the NASDAQ-100 Trust, a unit investment trust that holds
a portfolio of common stocks designed to track the price performance and
dividend yield of the NASDAQ-100 Index®
(“NASDAQ-100®”)
and
whose shares trade on the AMEX®.
The
value of the QQQQs®
fluctuates in relation to changes in the value of the underlying portfolio
of
common stocks. The market price of QQQQs®,
however, may not be equivalent to the pro rata value of the
NASDAQ-100®.
QQQQs®
are
subject to the risks of an investment in a broadly based portfolio of common
stocks.
Investments
in indexed securities, such as SPDRs®,
DIAMONDS®
and
QQQQs®,
are
considered investments in other investment companies discussed
below.
The
Fund
may invest, instead of or in addition to these indexed securities, in shares
of
alternate ETFs tracking the same market indices or other market indices within
the same general market.
Junk
Bonds
The
High
Fund may invest
in
lower-rated debt securities of any maturity, often called “Junk Bonds.”
Junk
Bonds generally offer a higher current yield than that available for
higher-grade issues. However, lower-rated securities involve higher risks,
in
that they are especially subject to adverse changes in general economic
conditions and in the industries in which the issuers are engaged, to changes
in
the financial condition of the issuers and to price fluctuations in response
to
changes in interest rates. During periods of economic downturn or rising
interest rates, highly leveraged issuers may experience financial stress that
could adversely affect their ability to make payments of interest and principal
and increase the possibility of default. In addition, the market for lower-rated
debt securities has expanded rapidly in recent years, and its growth paralleled
a long economic expansion. At times in recent years, the prices of many
lower-rated debt securities declined substantially, reflecting an expectation
that many issuers of such securities might experience financial difficulties.
As
a result, the yields on lower-rated debt securities rose dramatically, but
such
higher yields did not reflect the value of the income stream that holders of
such securities expected, but rather, the risk that holders of such securities
could lose a substantial portion of their value as a result of the issuers’
financial restructuring or default. There can be no assurance that such declines
will not recur.
The
market for lower-rated debt securities generally is thinner and less active
than
that for higher quality securities, which may limit the Fund’s ability to sell
such securities at fair value in response to changes in the economy or financial
markets. Adverse publicity and investor perceptions, whether based on
fundamental analysis, may also decrease the values and liquidity of lower-rated
securities, especially in a thinly traded market.
Mortgage-Backed
Securities
A
mortgage-backed security is a type of pass-through security, which is a security
representing pooled debt obligations repackaged as interests that pass income
through an intermediary to investors. In the case of mortgage-backed securities,
the ownership interest is in a pool of mortgage loans.
Mortgage-backed
securities are most commonly issued or guaranteed by the Government National
Mortgage Association (“Ginnie Mae®
or
“GNMA”), Federal National Mortgage Association (“Fannie Mae©”
or
“FNMA”) or Federal Home Loan Mortgage Corporation (“Freddie Mac©”
or
“FHLMC”), but may also be issued or guaranteed by other private issuers. GNMA is
a government-owned corporation that is an agency of the U.S. Department of
Housing and Urban Development. It guarantees, with the full faith and credit
of
the United States, full and timely payment of all monthly principal and interest
on its mortgage-backed securities. FNMA is a publicly owned,
government-sponsored corporation that mostly packages mortgaged backed by the
Federal Housing Administration, but also sells some non-governmentally backed
mortgages. Pass-through securities issued by FNMA are guaranteed as to timely
payment of principal and interest only by FNMA. The FHLMC is a publicly
chartered agency that buys qualifying residential mortgages from lenders,
re-packages them and provide certain guarantees. The corporation’s stock is
owned by savings institutions across the United States and is held in trust
by
the Federal Home Loan Bank System. Pass-through securities issued by the FHLMC
are guaranteed as to timely payment of principal and interest only by the
FHLMC.
Mortgage-backed
securities issued by private issuers, whether such obligations are subject
to
guarantees by the private issuer, may entail greater risk than obligations
directly or indirectly guaranteed by the U.S. government. The average life
of a
mortgage-backed security is likely to be substantially less than the original
maturity of the mortgage pools underlying the securities. Prepayments of
principal by mortgagors and mortgage foreclosures will usually result in the
return of the greater part of principal invested far in advance of the maturity
of the mortgages in the pool.
Collateralized
mortgage obligations (“CMOs”) are debt obligations collateralized by mortgage
loans or mortgage pass-through securities (collateral collectively hereinafter
referred to as “Mortgage Assets”). Multi-class pass-through securities are
interests in a trust composed of Mortgage Assets and all references in this
section to CMOs include multi-class pass-through securities. Principal
prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates,
resulting in a loss of all or part of the premium if any has been paid. Interest
is paid or accrued on all classes of the CMOs on a monthly, quarterly or
semiannual basis. The principal and interest payments on the Mortgage Assets
may
be allocated among the various classes of CMOs in several ways. Typically,
payments of principal, including any prepayments, on the underlying mortgages
are applied to the classes in the order of their respective stated maturities
or
final distribution dates, so that no payment of principal is made on CMOs of
a
class until all CMOs of other classes having earlier stated maturities or final
distribution dates have been paid in full.
Stripped
mortgage-backed securities (“SMBS”) are derivative multi-class mortgage
securities. The Fund will only invest in SMBS that are obligations backed by
the
full faith and credit of the U.S. government. SMBS are usually structured with
two classes that receive different proportions of the interest and principal
distributions from a pool of mortgage assets. The Fund will only invest in
SMBS
whose mortgage assets are U.S. government obligations. A common type of SMBS
will be structured so that one class receives some of the interest and most
of
the principal from the mortgage assets, while the other class receives most
of
the interest and the remainder of the principal. If the underlying mortgage
assets experience greater than anticipated prepayments of principal, the Fund
may fail to fully recoup its initial investment in these securities. The market
value of any class which consists primarily or entirely of principal payments
generally is unusually volatile in response to changes in interest
rates.
Investment
in mortgage-backed securities poses several risks, including among others,
prepayment, market and credit risk. Prepayment risk reflects the risk that
borrowers may prepay their mortgages faster than expected, thereby affecting
the
investment’s average life and perhaps its yield. Whether a mortgage loan is
prepaid is almost entirely controlled by the borrower. Borrowers are most likely
to exercise prepayment options at the time when it is least advantageous to
investors, generally prepaying mortgages as interest rates fall, and slowing
payments as interest rates rise. Besides the effect of prevailing interest
rates, the rate of prepayment and refinancing of mortgages may also be affected
by home value appreciation, ease of the refinancing process and local economic
conditions. Market risk reflects the risk that the price of a security may
fluctuate over time. The price of mortgage-backed securities may be particularly
sensitive to prevailing interest rates, the length of time the security is
expected to be outstanding, and the liquidity of the issue. In a period of
unstable interest rates, there may be decreased demand for certain types of
mortgage-backed securities, and the Fund may find it difficult to find a buyer
for such securities, which may in turn decrease the price at which they may
be
sold. Credit risk reflects the risk that the Fund may not receive all or part
of
its principal because the issuer or credit enhancer has defaulted on its
obligations. Obligations issued by U.S. government-related entities are
guaranteed as to the payment of principal and interest, but are not backed
by
the full faith and credit of the U.S. government. The performance of private
label mortgage-backed securities, issued by private institutions, is based
on
the financial health of those institutions. With respect to GNMA certificates,
although GNMA guarantees timely payment even if homeowners delay or default,
tracking the “pass-through” payments may, at times, be difficult.
Options,
Futures and Other Strategies
General.
The Fund
may use certain options (traded on an exchange and OTC, or otherwise), futures
contracts (sometimes referred to as “futures”) and options on futures contracts
(collectively, “Financial Instruments”) as a substitute for a comparable market
position in the underlying security, to attempt to hedge or limit the exposure
of the Fund’s position, to create a synthetic money market position, for certain
tax-related purposes and to effect closing transactions.
The
use
of Financial Instruments is subject to applicable regulations of the SEC, the
several exchanges upon which they are traded and the Commodity Futures Trading
Commission (“CFTC”). In addition, the Fund’s ability to use Financial
Instruments will be limited by tax considerations. See “Dividends, Other
Distributions and Taxes.” Pursuant to a claim for exemption filed with the
National Futures Association on behalf of the Fund, the Fund is not deemed
to be
a commodity pool operator or a commodity pool under the Commodity Exchange
Act
and is not subject to registration or regulation as such under the Commodity
Exchange Act.
In
addition to the instruments, strategies and risks described below and in the
Prospectus, the Advisers may discover additional opportunities in connection
with Financial Instruments and other similar or related techniques. These new
opportunities may become available as the Advisers develop new techniques,
as
regulatory authorities broaden the range of permitted transactions and as new
Financial Instruments or other techniques are developed. The Advisers may
utilize these opportunities to the extent that they are consistent with the
Fund’s investment objective and permitted by the Fund’s investment limitations
and applicable regulatory authorities. The Fund’s Prospectus or this SAI will be
supplemented to the extent that new products or techniques involve materially
different risks than those described below or in the Prospectus.
Special
Risks.
The use
of Financial Instruments involves special considerations and risks, certain
of
which are described below. Risks pertaining to particular Financial Instruments
are described in the sections that follow.
(1) Successful
use of most Financial Instruments depends upon the Advisers’ ability to predict
movements of the overall securities markets, which requires different skills
than predicting changes in the prices of individual securities. The ordinary
spreads between prices in the cash and futures markets, due to the differences
in the natures of those markets, are subject to distortion. Due to the
possibility of distortion, a correct forecast of stock market trends by the
Advisers may still not result in a successful transaction. The Advisers may
be
incorrect in their expectations as to the extent of market movements or the
time
span within which the movements take place that, thus, may result in the
strategy being unsuccessful.
(2) Options
and futures prices can diverge from the prices of their underlying instruments.
Options and futures prices are affected by such factors as current and
anticipated short-term interest rates, changes in volatility of the underlying
instrument and the time remaining until expiration of the contract, which may
not affect security prices the same way. Imperfect or no correlation also may
result from differing levels of demand in the options and futures markets and
the securities markets, from structural differences in how options and futures
and securities are traded, and from imposition of daily price fluctuation limits
or trading halts.
(3) As
described below, the Fund might be required to maintain assets as “cover,”
maintain segregated accounts or make margin payments when it takes positions
in
Financial Instruments involving obligations to third parties (e.g.,
Financial Instruments other than purchased options). If the Fund was unable
to
close out its positions in such Financial Instruments, it might be required
to
continue to maintain such assets or accounts or make such payments until the
position expired or matured. These requirements might impair the Fund’s ability
to sell a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that the Fund sell a portfolio
security at a disadvantageous time. The Fund’s ability to close out a position
in a Financial Instrument prior to expiration or maturity depends on the
existence of a liquid secondary market or, in the absence of such a market,
the
ability and willingness of the other party to the transaction (the
“counterparty”) to enter into a transaction closing out the position. Therefore,
there is no assurance that any position can be closed out at a time and price
that is favorable to the Fund.
(4) Losses
may arise due to unanticipated market price movements, lack of a liquid
secondary market for any particular instrument at a particular time or due
to
losses from premiums paid by tThe Fund on options transactions.
Cover.
Transactions using Financial Instruments, other than purchased options, expose
the Fund to an obligation to another party. The Fund will not enter into any
such transactions unless it owns either (1) an offsetting (“covered”) position
in securities or other options or futures contracts or (2) cash and liquid
assets with a value, marked-to-market daily, sufficient to cover its potential
obligations to the extent not covered as provided in (1) above. The Fund will
comply with SEC guidelines regarding cover for these instruments and will,
if
the guidelines so require, set aside cash or liquid assets in an account with
its custodian, U.S. Bank, N.A. (“Custodian”), in the prescribed amount as
determined daily.
Assets
used as cover or held in an account cannot be sold while the position in the
corresponding Financial Instrument is open, unless they are replaced with other
appropriate assets. As a result, the commitment of a large portion of the Fund’s
assets to cover or accounts could impede portfolio management or the Fund’s
ability to meet redemption requests or other current obligations.
Options.
The
value of an option position will reflect, among other things, the current market
value of the underlying investment, the time remaining until expiration, the
relationship of the exercise price to the market price of the underlying
investment and general market conditions. Options that expire unexercised have
no value. Options currently are traded on the Chicago Board Options
Exchange®
(“CBOE®”),
the
AMEX®
and
other exchanges, as well as the OTC markets.
By
buying
a call option on a security, the Fund has the right, in return for the premium
paid, to buy the security underlying the option at the exercise price. By
writing (selling) a call option and receiving a premium, the Fund becomes
obligated during the term of the option to deliver securities underlying the
option at the exercise price if the option is exercised. By buying a put option,
the Fund has the right, in return for the premium, to sell the security
underlying the option at the exercise price. By writing a put option, the Fund
becomes obligated during the term of the option to purchase the securities
underlying the option at the exercise price.
Because
options premiums paid or received by the Fund are small in relation to the
market value of the investments underlying the options, buying and selling
put
and call options can be more speculative than investing directly in
securities.
The
Fund
may effectively terminate its right or obligation under an option by entering
into a closing transaction. For example, the Fund may terminate its obligation
under a call or put option that it had written by purchasing an identical call
or put option; this is known as a closing purchase transaction. Conversely,
the
Fund may terminate a position in a put or call option it had purchased by
writing an identical put or call option; this is known as a closing sale
transaction. Closing transactions permit the Fund to realize profits or limit
losses on an option position prior to its exercise or expiration.
Risks
of Options on Securities.
Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed that,
in
effect, guarantees completion of every exchange-traded option transaction.
In
contrast, OTC options are contracts between the Fund and its counterparty
(usually a securities dealer or a bank) with no clearing organization guarantee.
Thus, when the Fund purchases an OTC option, it relies on the counterparty
from
whom it purchased the option to make or take delivery of the underlying
investment upon exercise of the option. Failure by the counterparty to do so
would result in the loss of any premium paid by the Fund as well as the loss
of
any expected benefit of the transaction.
The
Fund’s ability to establish and close out positions in exchange-traded options
depends on the existence of a liquid market. However, there can be no assurance
that such a market will exist at any particular time. Closing transactions
can
be made for OTC options only by negotiating directly with the counterparty,
or
by a transaction in the secondary market if any such market exists. There can
be
no assurance that the Fund will in fact be able to close out an OTC option
position at a favorable price prior to expiration. In the event of insolvency
of
the counterparty, the Fund might be unable to close out an OTC option position
at any time prior to its expiration.
If
the
Fund were unable to effect a closing transaction for an option it had purchased,
it would have to exercise the option to realize any profit. The inability to
enter into a closing purchase transaction for a covered call option written
by
the Fund could cause material losses because the Fund would be unable to sell
the investment used as cover for the written option until the option expires
or
is exercised.
Options
on Indices.
An index
fluctuates with changes in the market values of the securities included in
the
index. Options on indices give the holder the right to receive an amount of
cash
upon exercise of the option. Receipt of this cash amount will depend upon the
closing level of the index upon which the option is based being greater than
(in
the case of a call) or less than (in the case of a put) the exercise price
of
the option. Some stock index options are based on a broad market index such
as
the S&P 500®
Index,
the NYSE Composite Index or the AMEX Major Market Index, or on a narrower index
such as the Philadelphia Stock Exchange Over-the-Counter Index.
Each
of
the exchanges have established limitations governing the maximum number of
call
or put options on the same index that may be bought or written by a single
investor, whether acting alone or in concert with others (regardless of whether
such options are written on the same or different exchanges or are held or
written on one or more accounts or through one or more brokers). Under these
limitations, option positions of all investment companies advised by Rafferty
are combined for purposes of these limits. Pursuant to these limitations, an
exchange may order the liquidation of positions and may impose other sanctions
or restrictions. These positions limits may restrict the number of listed
options that the Fund may buy or sell.
Puts
and
calls on indices are similar to puts and calls on securities or futures
contracts except that all settlements are in cash and gain or loss depends
on
changes in the index in question rather than on price movements in individual
securities or futures contracts. When the Fund writes a call on an index, it
receives a premium and agrees that, prior to the expiration date, the purchaser
of the call, upon exercise of the call, will receive from the Fund an amount
of
cash if the closing level of the index upon which the call is based is greater
than the exercise price of the call. The amount of cash is equal to the
difference between the closing price of the index and the exercise price of
the
call times a specified multiple (“multiplier”), which determines the total value
for the point of such difference. When the Fund buys a call on an index, it
pays
a premium and has the same rights to such call as are indicated above. When
the
Fund buys a put on an index, it pays a premium and has the right, prior to
the
expiration date, to require the seller of the put, upon the Fund’s exercise of
the put, to deliver to the Fund an amount of cash if the closing level of the
index upon which the put is based is less than the exercise price of the put,
which amount of cash is determined by the multiplier, as described above for
calls. When the Fund writes a put on an index, it receives a premium and the
purchaser of the put has the right, prior to the expiration date, to require
the
Fund to deliver to it an amount of cash equal to the difference between the
closing level of the index and the exercise price times the multiplier if the
closing level is less than the exercise price.
Risks
of Options on Indices.
If the
Fund has purchased an index option and exercises it before the closing index
value for that day is available, it runs the risk that the level of the
underlying index may subsequently change. If such a change causes the exercised
option to fall out-of-the-money, the Fund will be required to pay the difference
between the closing index value and the exercise price of the option (times
the
applicable multiplier) to the assigned writer.
OTC
Options.
Unlike
exchange-traded options, which are standardized with respect to the underlying
instrument, expiration date, contract size and strike price, the terms of OTC
options (options not traded on exchanges) generally are established through
negotiation with the other party to the option contract. While this type of
arrangement allows the Fund great flexibility to tailor the option to its needs,
OTC options generally involve greater risk than exchange-traded options, which
are guaranteed by the clearing organization of the exchanges where they are
traded.
Futures
Contracts and Options on Futures Contracts.
A
futures contract obligates the seller to deliver (and the purchaser to take
delivery of) the specified security on the expiration date of the contract.
An
index futures contract obligates the seller to deliver (and the purchaser to
take) an amount of cash equal to a specific dollar amount times the difference
between the value of a specific index at the close of the last trading day
of
the contract and the price at which the agreement is made. No physical delivery
of the underlying securities in the index is made.
When
the
Fund writes an option on a futures contract, it becomes obligated, in return
for
the premium paid, to assume a position in the futures contract at a specified
exercise price at any time during the term of the option. If the Fund writes
a
call, it assumes a short futures position. If it writes a put, it assumes a
long
futures position. When the Fund purchases an option on a futures contract,
it
acquires the right in return for the premium it pays to assume a position in
a
futures contract (a long position if the option is a call and a short position
if the option is a put).
Whether
the Fund realizes a gain or loss from futures activities depends upon movements
in the underlying security or index. The extent of the Fund’s loss from an
unhedged short position in futures contracts or from writing unhedged call
options on futures contracts is potentially unlimited. The Fund only purchases
and sells futures contracts and options on futures contracts that are traded
on
a U.S. exchange or board of trade.
No
price
is paid upon entering into a futures contract. Instead, at the inception of
a
futures contract the Fund is required to deposit “initial margin” in an amount
generally equal to 10% or less of the contract value. Margin also must be
deposited when writing a call or put option on a futures contract, in accordance
with applicable exchange rules. Unlike margin in securities transactions,
initial margin does not represent a borrowing, but rather is in the nature
of a
performance bond or good-faith deposit that is returned to the Fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility,
the
Fund may be required by an exchange to increase the level of its initial margin
payment, and initial margin requirements might be increased generally in the
future by regulatory action.
Subsequent
“variation margin” payments are made to and from the futures commission merchant
daily as the value of the futures position varies, a process known as
“marking-to-market.” Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund’s obligations to or from a futures
commission merchant. When the Fund purchases an option on a futures contract,
the premium paid plus transaction costs is all that is at risk. In contrast,
when the Fund purchases or sells a futures contract or writes a call or put
option thereon, it is subject to daily variation margin calls that could be
substantial in the event of adverse price movements. If the Fund has
insufficient cash to meet daily variation margin requirements, it might need
to
sell securities at a time when such sales are disadvantageous.
Purchasers
and sellers of futures contracts and options on futures can enter into
offsetting closing transactions, similar to closing transactions in options,
by
selling or purchasing, respectively, an instrument identical to the instrument
purchased or sold. Positions in futures and options on futures contracts may
be
closed only on an exchange or board of trade that provides a secondary market.
However, there can be no assurance that a liquid secondary market will exist
for
a particular contract at a particular time. In such event, it may not be
possible to close a futures contract or options position.
Under
certain circumstances, futures exchanges may establish daily limits on the
amount that the price of a futures contract or an option on a futures contract
can vary from the previous day’s settlement price; once that limit is reached,
no trades may be made that day at a price beyond the limit. Daily price limits
do not limit potential losses because prices could move to the daily limit
for
several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If
the
Fund were unable to liquidate a futures contract or an option on a futures
position due to the absence of a liquid secondary market or the imposition
of
price limits, it could incur substantial losses. The Fund would continue to
be
subject to market risk with respect to the position. In addition, except in
the
case of purchased options, the Fund would continue to be required to make daily
variation margin payments and might be required to maintain cash or liquid
assets in an account.
Risks
of Futures Contracts and Options Thereon.
The
ordinary spreads between prices in the cash and futures markets (including
the
options on futures markets), due to differences in the natures of those markets,
are subject to the following factors, which may create distortions. First,
all
participants in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors may close futures contracts through offsetting transactions, which
could distort the normal relationships between the cash and futures markets.
Second, the liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking delivery. To the
extent participants decide to make or take delivery, liquidity in the futures
market could be reduced, thus producing distortion. Third, from the point of
view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions.
Combined
Positions.
The Fund
may purchase and write options in combination with each other. For example,
the
Fund may purchase a put option and write a call option on the same underlying
instrument, in order to construct a combined position whose risk and return
characteristics are similar to selling a futures contract. Another possible
combined position would involve writing a call option at one strike price and
buying a call option at a lower price, in order to reduce the risk of the
written call option in the event of a substantial price increase. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
Other
Investment Companies
The
Fund
may invest in the securities of other investment companies. Investments in
the
securities of other investment companies may involve duplication of advisory
fees and certain other expenses. By investing in another investment company,
the
Fund becomes a shareholder of that investment company. As a result, Fund
shareholders indirectly will bear the Fund’s proportionate share of the fees and
expenses paid by shareholders of the other investment company, in addition
to
the fees and expenses Fund shareholders directly bear in connection with the
Fund’s own operations.
The
Fund
intends to limit its investments in securities issued by other investment
companies in accordance with the 1940 Act. Section 12(d)(1) of the 1940 Act
precludes the Fund from acquiring (i) more than 3% of the total outstanding
shares of another investment company; (ii) shares of another investment company
having an aggregate value in excess of 5% of the value of the total assets
of
the Fund; or (iii) shares of another registered investment company and all
other
investment companies having an aggregate value in excess of 10% of the value
of
the total assets of the Fund. However, Section 12(d)(1)(F) of the 1940 Act
provides that the provisions of paragraph 12(d) shall not apply to securities
purchased or otherwise acquired by the Fund if (i) immediately after such
purchase or acquisition not more than 3% of the total outstanding shares of
such
investment company is owned by the Fund and all affiliated persons of the Fund;
and (ii) the Fund has not offered or sold, and is not proposing to offer or
sell
its shares through a principal underwriter or otherwise at a public or offering
price that includes a sales load of more than 1 1/2%.
If
the
Fund invests in investment companies pursuant to Section 12(d)(1)(F), it must
comply with the following voting restrictions: when the Fund exercises voting
rights, by proxy or otherwise, with respect to investment companies owned by
the
Fund, the Fund will either seek instruction from the Fund’s shareholders with
regard to the voting of all proxies and vote in accordance with such
instructions, or vote the shares held by the Fund proportionate to the vote
of
all other holders of such security. In addition, an investment company purchased
by the Fund pursuant to Section 12(d)(1)(F) shall not be required to redeem
its
shares in an amount exceeding 1% of such investment company’s total outstanding
shares in any period of less than thirty days.
Repurchase
Agreements
The
Fund
may enter into repurchase agreements with banks that are members of the Federal
Reserve System or securities dealers that are members of a national securities
exchange or are primary dealers in U.S. government securities. Repurchase
agreements generally are for a short period of time, usually less than a week.
Under a repurchase agreement, the Fund purchases a U.S. government security
and
simultaneously agrees to sell the security back to the seller at a mutually
agreed-upon future price and date, normally one day or a few days later. The
resale price is greater than the purchase price, reflecting an agreed-upon
market interest rate during the Fund’s holding period. While the maturities of
the underlying securities in repurchase agreement transactions may be more
than
one year, the term of each repurchase agreement always will be less than one
year. Repurchase agreements with a maturity of more than seven days are
considered to be illiquid investments. The Fund may not enter into such a
repurchase agreement if, as a result, more than 15% of the value of its net
assets would then be invested in such repurchase agreements and other illiquid
investments. See “Illiquid Investments and Restricted Securities”
above.
The
Fund
will always receive, as collateral, securities whose market value, including
accrued interest, at all times will be at least equal to 100% of the dollar
amount invested by the Fund in each repurchase agreement. In the event of
default or bankruptcy by the seller, the Fund will liquidate those securities
(whose market value, including accrued interest, must be at least 100% of the
amount invested by the Fund) held under the applicable repurchase agreement,
which securities constitute collateral for the seller’s obligation to repurchase
the security. If the seller defaults, the Fund might incur a loss if the value
of the collateral securing the repurchase agreement declines and might incur
disposition costs in connection with liquidating the collateral. In addition,
if
bankruptcy or similar proceedings are commenced with respect to the seller
of
the security, realization upon the collateral by the Fund may be delayed or
limited.
Reverse
Repurchase Agreements
The
Fund
may borrow by entering into reverse repurchase agreements with the same parties
with whom it may enter into repurchase agreements. Under a reverse repurchase
agreement, the Fund sells securities and agrees to repurchase them at a mutually
agreed to price. At the time the Fund enters into a reverse repurchase
agreement, it will establish and maintain a segregated account with an approved
custodian containing liquid high-grade securities, marked-to-market daily,
having a value not less than the repurchase price (including accrued interest).
Reverse repurchase agreements involve the risk that the market value of
securities retained in lieu of sale by the Fund may decline below the price
of
the securities the Fund has sold but is obliged to repurchase. If the buyer
of
securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, such buyer or its trustee or receiver may receive an extension of
time to determine whether to enforce the Fund’s obligation to repurchase the
securities. During that time, the Fund’s use of the proceeds of the reverse
repurchase agreement effectively may be restricted. Reverse repurchase
agreements create leverage, a speculative factor, and are considered borrowings
for the purpose of the Fund’s limitation on borrowing.
Short
Sales
The
Fund
may engage in short sale transactions under which the Fund sells a security
it
does not own. To complete such a transaction, the Fund must borrow the security
to make delivery to the buyer. The Fund is then 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 that accrue during
the period of the loan. 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 stock, the Fund will:
(1) maintain an account containing cash or liquid assets at such a level that
(a) the amount deposited in the account plus the amount deposited with the
broker as collateral will equal the current value of the stock sold short and
(b) the amount deposited in the account plus the amount deposited with the
broker as collateral will not be less than the market value of the stock at
the
time the stock was sold short; or (2) otherwise cover the Fund’s short
position.
Swap
Agreements
The
Fund
may enter into equity index swap agreements for purposes of attempting to gain
exposure to equity or debt securities without actually purchasing those
securities, or to hedge a position. Swap agreements are two-party contracts
entered into primarily by institutional investors for periods ranging from
a day
to more than one year. In a standard “swap” transaction, two parties agree to
exchange the returns (or differentials in rates of return) earned or realized
on
particular predetermined investments or instruments. The gross returns to be
exchanged or “swapped” between the parties are calculated with respect to a
“notional amount,” i.e.,
the
return on or increase in value of a particular dollar amount invested in a
“basket” of securities representing a particular index.
Most
swap
agreements entered into by the Fund calculate the obligations of the parties
to
the agreement on a “net basis.” Consequently, the Fund’s current obligations (or
rights) under a swap agreement will generally be equal only to the net amount
to
be paid or received under the agreement based on the relative values of the
positions held by each party to the agreement (the “net amount”). Payments may
be made at the conclusion of a swap agreement or periodically during its
term.
Swap
agreements do not involve the delivery of securities or other underlying assets.
Accordingly, if a swap is entered into on a net basis, if the other party to
a
swap agreement defaults, the Fund’s risk of loss consists of the net amount of
payments that the Fund is contractually entitled to receive, if any.
The
net
amount of the excess, if any, of the Fund’s obligations over its entitlements
with respect to a swap agreement entered into on a net basis will be accrued
daily and an amount of cash or liquid asset having an aggregate NAV at least
equal to the accrued excess will be maintained in an account with the Custodian
that satisfies the 1940 Act. The Fund will also establish and maintain such
accounts with respect to its total obligations under any swaps that are not
entered into on a net basis. Obligations under swap agreements so covered will
not be construed to be “senior securities” for purposes of the Fund’s investment
restriction concerning senior securities.
Because
they are two-party contracts and because they may have terms of greater than
seven days, swap agreements may be considered to be illiquid for the Fund’s
illiquid investment limitations. The Fund will not enter into any swap agreement
unless Rafferty or the Subadviser believes that the other party to the
transaction is creditworthy. 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.
The
Fund
may enter into a swap agreement in circumstances where Rafferty or the
Subadviser believes that it may be more cost effective or practical than buying
the underlying securities or a futures contract or an option on such securities.
The counterparty to any swap agreement will typically be a bank, investment
banking firm or broker/dealer. The counterparty will generally agree to pay
the
Fund the amount, if any, by which the notional amount of the swap agreement
would have increased in value had it been invested in the particular stocks
represented in the index, plus the dividends that would have been received
on
those stocks. The Fund will agree to pay to the counterparty a floating rate
of
interest on the notional amount of the swap agreement plus the amount, if any,
by which the notional amount would have decreased in value had it been invested
in such stocks. Therefore, the return to the Fund on any swap agreement should
be the gain or loss on the notional amount plus dividends on the stocks less
the
interest paid by the Fund on the notional amount.
The
swap
market has grown substantially in recent years with a large number of banks
and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid in comparison with the markets for other similar instruments
that are traded in the OTC market. Rafferty, under the supervision of the Board,
is responsible for determining and monitoring the liquidity of Fund transactions
in swap agreements.
The
use
of equity swaps is a highly specialized activity that involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions.
U.S.
Government Securities
The
Fund
may invest in securities issued or guaranteed by the U.S. government or its
agencies or instrumentalities (“U.S. government securities”) in pursuit of its
investment objective, in order to deposit such securities as initial or
variation margin, as “cover” for the investment techniques it employs, as part
of a cash reserve and for liquidity purposes.
U.S.
government securities are high-quality instruments issued or guaranteed as
to
principal or interest by the U.S. Treasury or by an agency or instrumentality
of
the U.S. government. Not all U.S. government securities are backed by the full
faith and credit of the United States. Some are backed by the right of the
issuer to borrow from the U.S. Treasury; others are backed by discretionary
authority of the U.S. government to purchase the agencies’ obligations; while
others are supported only by the credit of the instrumentality. In the case
of
securities not backed by the full faith and credit of the United States, the
investor must look principally to the agency issuing or guaranteeing the
obligation for ultimate repayment.
U.S.
government securities include Treasury Bills (which mature within one year
of
the date they are issued), Treasury Notes (which have maturities of one to
ten
years) and Treasury Bonds (which generally have maturities of more than 10
years). All such Treasury securities are backed by the full faith and credit
of
the United States.
U.S.
government agencies and instrumentalities that issue or guarantee securities
include the Federal Housing Administration, Fannie Mae©,
the
Farmers Home Administration, the Export-Import Bank of the United States, the
Small Business Administration, Ginnie Mae®,
the
General Services Administration, the Central Bank for Cooperatives, the Federal
Home Loan Banks, Freddie Mac©,
the
Farm Credit Banks, the Maritime Administration, the Tennessee Valley Authority,
the Resolution Funding Corporation and the Student Loan Marketing Association
(“Sallie Mae©”).
Yields
on
short-, intermediate- and long-term U.S. government securities are dependent
on
a variety of factors, including the general conditions of the money and bond
markets, the size of a particular offering and the maturity of the obligation.
Debt securities with longer maturities tend to produce higher capital
appreciation and depreciation than obligations with shorter maturities and
lower
yields. The market value of U.S. government securities generally varies
inversely with changes in the market interest rates. An increase in interest
rates, therefore, generally would reduce the market value of the Fund’s
portfolio investments in U.S. government securities, while a decline in interest
rates generally would increase the market value of the Fund’s portfolio
investments in these securities.
Zero-Coupon
Securities
The
Fund
may invest
in
zero-coupon bonds of any rating or maturity.
Zero-coupon
securities make no periodic interest payments, but are sold at a deep discount
from their face value. The buyer recognizes a rate of return determined by
the
gradual appreciation of the security, which is redeemed at face value on a
specified maturity date. The discount varies depending on the time remaining
until maturity, as well as market interest rates, liquidity of the security,
and
the issuer’s perceived credit quality. If the issuer defaults, the Fund may not
receive any return on its investment. Because zero-coupon securities bear no
interest and compound semiannually at the rate fixed at the time of issuance,
their value generally is more volatile than the value of other fixed-income
securities. Since zero-coupon bondholders do not receive interest payments,
when
interest rates rise, zero-coupon securities fall more dramatically in value
than
bonds paying interest on a current basis. When interest rates fall, zero-coupon
securities rise more rapidly in value because the bonds reflect a fixed rate
of
return. An investment in zero-coupon and delayed interest securities may cause
the Fund to recognize income and make distributions to shareholders before
it
receives any cash payments on its investment.
Other
Investment Risks and Practices
Borrowing.
The
Fund may borrow money for investment purposes, which is a form of leveraging.
Leveraging investments, by purchasing securities with borrowed money, is a
speculative technique that increases investment risk while increasing investment
opportunity. Leverage will magnify changes in the Fund’s NAV and on its
investments. Although the principal of such borrowings will be fixed, the Fund’s
assets may change in value during the time the borrowing is outstanding.
Leverage also creates interest expenses for the Fund. To the extent the income
derived from securities purchased with borrowed funds exceeds the interest
the
Fund will have to pay, the Fund’s net income will be greater than it would be if
leverage were not used. Conversely, if the income from the assets obtained
with
borrowed funds is not sufficient to cover the cost of leveraging, the net income
of the Fund will be less than it would be if leverage were not used, and
therefore the amount available for distribution to shareholders as dividends
will be reduced. The use of derivatives in connection with leverage creates
the
potential for significant loss.
The
Fund
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 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 required asset coverage declines as a result of market fluctuations
or other reasons, the Fund may be required to sell some of its portfolio
investments within three days to reduce the amount of its borrowings and restore
the 300% asset coverage, even though it may be disadvantageous from an
investment standpoint to sell portfolio instruments at that time.
In
addition to the foregoing, the Fund may borrow money from a bank as a temporary
measure for extraordinary or emergency purposes in amounts not in excess of
5%
of the value of its total assets. This borrowing is not subject to the foregoing
300% asset coverage requirement. The Fund may pledge portfolio securities as
Rafferty deems appropriate in connection with any borrowings.
Lending
Portfolio Securities.
The
Fund may lend portfolio securities with a value not exceeding 33 1/3% of its
total assets to brokers, dealers, and financial institutions. Borrowers are
required continuously to secure their obligations to return securities on loan
from the Fund by depositing any combination of short-term government securities
and cash as collateral with the Fund. The collateral must be equal to at least
100% of the market value of the loaned securities, which will be marked to
market daily. While the Fund’s portfolio securities are on loan, the Fund
continues to receive interest on the securities loaned and simultaneously earns
either interest on the investment of the collateral or fee income if the loan
is
otherwise collateralized. The Fund may invest the interest received and the
collateral, thereby earning additional income. Loans would be subject to
termination by the Fund on four-business days notice or by the borrower on
one-day notice. Borrowed securities must be returned when the loan is
terminated. Any gain or loss in the market price of the borrowed securities
that
occurs during the term of the loan inures to the Fund and its shareholders.
The
Fund may pay reasonable finders, borrowers, administrative and custodial fees
in
connection with a loan. The Fund currently has no intention of lending its
portfolio securities.
Portfolio
Turnover.
The
Trust anticipates that the Fund will have very high portfolio turnover due
to
the active management of its portfolio. The Fund’s portfolio turnover rate is
calculated by the lesser of the value of the securities purchased or 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 calculation, instruments with remaining
maturities of less than one year are excluded from the portfolio turnover rate.
Such instruments generally would include futures contracts and options, since
such contracts generally have a remaining maturity of less than one year. In
any
given period, all of the Fund’s investments may have a remaining maturity of
less than one year; in which case, the portfolio turnover rate for that period
would be equal to zero. However, the Fund’s portfolio turnover rate calculated
with all securities whose maturities were one year or less is anticipated to
be
unusually high.
High
portfolio turnover involves correspondingly greater expenses to the Fund,
including brokerage commissions or dealer mark-ups and other transaction costs
on the sale of securities and reinvestments in other securities. Such sales
also
may result in adverse tax consequences to the Fund’s shareholders. The trading
costs and tax effects associated with portfolio turnover may adversely affect
the Fund’s performance.
INVESTMENT
RESTRICTIONS
In
addition to the investment policies and limitations described above and
described in the Prospectus, the Trust, on behalf of the Fund has adopted the
following investment limitations, which are fundamental policies and may not
be
changed without the vote of a majority of the outstanding voting securities
of
the Fund. Under the 1940 Act, a “vote of the majority of the outstanding voting
securities” of the Fund means the affirmative vote of the lesser of: (1) more
than 50% of the outstanding shares of the Fund; or (2) 67% or more of the shares
of the Fund present at a shareholders meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by
proxy.
For
purposes of the following limitations, all percentage limitations apply
immediately after a purchase or initial investment. Except with respect to
borrowing money, if a percentage limitation is adhered to at the time of the
investment, a later increase or decrease in the percentage resulting from any
change in value or net assets will not result in a violation of such
restrictions. If at any time the Fund’s borrowings exceed its limitations due to
a decline in net assets, such borrowings will be reduced promptly to the extent
necessary to comply with the limitation.
The
Fund
shall not:
1. Lend
any
security or make any other loan if, as a result, more than 33 1/3% of the value
of the Fund’s total assets would be lent to other parties, except (1) through
the purchase of a portion of an issue of debt securities in accordance with
the
Fund’s investment objective; policies and limitations; or (2) by engaging in
repurchase agreements with respect to portfolio securities.
2. Underwrite
securities of any other issuer.
3. Purchase,
hold, or deal in real estate or oil and gas interests.
4. Issue
any
senior security (as such term is defined in Section 18(f) of the 1940 Act)
(including the amount of senior securities issued by excluding liabilities
and
indebtedness not constituting senior securities), except: (1) that the Fund
may
issue senior securities in connection with transactions in options, futures,
options on futures and forward contracts, swaps, caps, floors, collars and
other
similar investments; (2) as otherwise permitted herein and in Investment
Limitations Nos. 5 and 7; and (3) the Fund may make short sales of
securities.
5. Pledge,
mortgage, or hypothecate the Fund’s assets, except (1) to the extent necessary
to secure permitted borrowings; (2) in connection with the purchase of
securities on a forward-commitment or delayed-delivery basis or the sale of
securities on a delayed-delivery basis; and (3) in connection with options,
futures contracts, options on futures contracts, forward contracts, swaps,
caps,
floors, collars and other financial instruments.
6. Invest
in
physical commodities, except that the Fund may purchase and sell foreign
currency, options, futures contracts, options on futures contracts, forward
contracts, swaps, caps, floors, collars, securities on a forward-commitment
or
delayed-delivery basis, and other financial instruments.
7. Borrow
money, except (1) to the extent permitted under the 1940 Act (which currently
limits borrowing to no more than 33 1/3% of the value of the Fund’s total
assets); (2) as a temporary measure and then only in amounts not to exceed
5% of
the value of the Fund’s total assets; (3) to enter into reverse repurchase
agreements; and (4) to lend portfolio securities. For purposes of this
investment limitation, the purchase or sale of options, futures contracts,
options on futures contracts, forward contracts, swaps, caps, floors, collars
and other financial instruments shall not constitute borrowing.
8. Invest
more than 25% of the value of its total assets in the securities of issuers
in
any single industry, provided that there shall be no limitation on the purchase
of obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
The
Fund
has adopted the following fundamental investment policy that enables it to
invest in another investment company or series thereof:
Notwithstanding
any other limitation, the Fund may invest all of its investable assets in an
open-end management investment company with the same limitations as the Fund.
For this purpose, “all of the Fund’s investable assets” means that the only
investment securities that will be held by the Fund will be the Fund’s interest
in the investment company.
PORTFOLIO
TRANSACTIONS AND BROKERAGE
Subject
to the general supervision by the Board, Rafferty and/or the Subadviser, as
applicable, are responsible for decisions to buy and sell securities for the
Fund, the selection of broker-dealers to effect the transactions, and the
negotiation of brokerage commissions, if any. Rafferty expects that the Fund
may
execute brokerage or other agency transactions through registered
broker-dealers, for a commission, in conformity with the 1940 Act, the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder. There is generally no stated commission in the case of fixed income
securities, which are commonly traded in the OTC market, but the price paid
by
the Fund usually includes an undisclosed dealer commission or
mark-up.
When
selecting a broker or dealer to execute portfolio transactions, Rafferty
considers many factors, including the rate of commission or the size of the
broker-dealer’s “spread,” the size and difficulty of the order, the nature of
the market for the security, operational capabilities of the broker-dealer
and
the research, statistical and economic data furnished by the broker-dealer
to
Rafferty and/or Subadviser.
In
effecting portfolio transactions for the Fund, Rafferty seeks to receive the
closing prices of securities that are in line with those of the securities
included in the applicable index and seeks to execute trades of such securities
at the lowest commission rate reasonably available. With respect to agency
transactions, Rafferty may execute trades at a higher rate of commission if
reasonable in relation to brokerage and research services provided to the Fund
or Rafferty. Such services may include the following: information as to the
availability of securities for purchase or sale; statistical or factual
information or opinions pertaining to investment; wire services; and appraisals
or evaluations of portfolio securities. The Fund believes that the requirement
always to seek the lowest possible commission cost could impede effective
portfolio management and preclude the Fund, Rafferty and/or the Fund’s
Subadviser, as applicable, from obtaining a high quality of brokerage and
research services. In seeking to determine the reasonableness of brokerage
commissions paid in any transaction, Rafferty relies upon its experience and
knowledge regarding commissions generally charged by various brokers and on
its
judgment in evaluating the brokerage and research services received from the
broker effecting the transaction.
Rafferty
and/or the Fund’s Subadviser may use research and services provided to it by
brokers in servicing the Fund; however, not all such services may be used by
Rafferty and/or the Fund’s Subadviser in connection with the Fund. While the
receipt of such information and services is useful in varying degrees and
generally would reduce the amount of research or services otherwise performed
by
Rafferty and/or the Fund’s Subadviser, this information and these services are
of indeterminable value and would not reduce Rafferty’s investment advisory fee
to be paid by the Fund or the subadvisory fees to be paid by
Rafferty.
Purchases
and sales of U.S. government securities normally are transacted through issuers,
underwriters or major dealers in U.S. government securities acting as
principals. Such transactions are made on a net basis and do not involve payment
of brokerage commissions. The cost of securities purchased from an underwriter
usually includes a commission paid by the issuer to the underwriters;
transactions with dealers normally reflect the spread between bid and asked
prices.
Aggregate
brokerage commissions paid by the Fund for the following fiscal periods are
shown in the table below.
|
Spectrum
Select Alternative Fund
|
Brokerage Fees Paid
|
|
|
$
27,908
|
|
|
$
21,016
|
PORTFOLIO
HOLDINGS INFORMATION
The
Trust
maintains portfolio holdings disclosure policies that govern the timing and
circumstances of disclosure to shareholders and third parties of information
regarding the Fund’s portfolio investments to ensure that such disclosure is in
the best interests of the Fund’s shareholders. In adopting the policies, the
Board considered actual and potential material conflicts that could arise
between the interest of Fund shareholders, the Adviser, distributor, or any
other affiliated person of the Fund. Disclosure of the Fund’s complete holdings
is required to be made 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 website at www.sec.gov.
From
time
to time, rating and ranking organizations such as Standard &
Poor’s®
and
Morningstar®,
Inc.
may request complete portfolio holdings information in connection with rating
the Fund. Similarly, pension plan sponsors, consultants and/or other financial
institutions may request a complete list of portfolio holdings in order to
assess the risks of the Fund’s portfolio along with related performance
attribution statistics. The Trust believes that these third parties have
legitimate objectives in requesting such portfolio holdings information. To
prevent such parties from potentially misusing the complete portfolio holdings
information, the Fund will generally only disclose such information as of the
end of the most recent calendar quarter, with a lag of approximately 60 days.
In
addition, the Fund’s President or Chief Compliance Officer may grant exceptions
to permit additional disclosure of the complete portfolio holdings information
at differing times and with differing lag times to rating agencies and to the
parties noted above, provided that (1) the recipient is subject to a
confidentiality agreement; (2) the recipient will utilize the information to
reach certain conclusions about the investment management characteristics of
the
Fund and will not use the information to facilitate or assist in any investment
program; and (3) the recipient will not provide access to third parties to
this
information. The Chief Compliance Officer shall report any disclosures made
pursuant to this exception to the Board.
In
addition, the Fund’s service providers, such as custodian, administrator,
transfer agent, distributor, legal counsel and independent registered public
accounting firm may receive portfolio holdings information in connection with
their services to the Fund. In no event shall the Advisers, their affiliates
or
employees, or the Fund receive any direct or indirect compensation in connection
with the disclosure of information about the Fund’s portfolio
holdings.
In
the
event a portfolio holdings disclosure made pursuant to the policies presents
a
conflict of interest between the Fund’s shareholders and Rafferty, the
Subadviser, the distributor and their affiliates or employees and any affiliated
person of the Fund, the disclosure will not be made unless a majority of the
Independent Trustees approves such disclosure.
MANAGEMENT
OF THE TRUST
Trustees
and Officers
The
business affairs of the Fund are managed by or under the direction of the Board.
The Trustees are responsible for managing the Fund’s business affairs and for
exercising all of the Fund’s powers except those reserved to the shareholders. A
Trustee may be removed by the other Trustees or by a two-thirds vote of the
outstanding Trust shares.
The
following table is a list of the Trustees and officers of the Trust, their
age,
business address and principal occupation during the past five years including
any affiliation with Rafferty, the length of service to the Trust, and the
position, if any, that they hold on the board of directors of companies other
than the Trust. Each Trustee of the Trust also serves on the Board of the
Direxion Insurance Trust, the other registered investment company in the
Direxion mutual fund complex. Unless otherwise noted, an individual’s business
address is 33 Whitehall Street, 10th
Floor,
New York, New York 10004.
|
Interested
Trustees
|
|
|
|
|
|
|
Name,
Address and
Age
|
Position(s)
Held
with
Fund
|
Term
of
Office
and
Length
of
Time
Served
|
Principal
Occupation(s)
During
Past
Five Years
|
#
of
Portfolios
in
Fund
Complex
Overseen
by
Trustee(2)
|
Other
Trusteeships/
Directorships
Held
by
Trustee
|
|
Lawrence
C. Rafferty(1)
Age:
64
|
Chairman
of
the
Board
of
Trustees
|
Lifetime
of
Trust
until
removal
or resignation;
Since
1997
|
Chairman
and Chief
Executive
Officer of
Rafferty,
1997-present;
Chief
Executive Officer
of
Rafferty Companies,
LLC,
1996-present;
Chief
Executive Officer
of
Rafferty Capital
Markets,
Inc., 1995-
present.
|
102
|
Board
of Trustees,
Fairfield
University;
Board
of Directors,
St.
Vincent’s
Services;
Executive
Committee,
Metropolitan
Golf
Association
|
|
Jay
F. Higgins(1)
Age:
61
|
Trustee
|
Lifetime
of
Trust
until
removal
or resignation;
Since
1997
|
Chairman,
Bengal
Partners,
1998-present
(NASD
Broker-Dealer).
|
102
|
|
|
Non-Interested
Trustees
|
|
|
|
|
|
|
Name,
Address and
Age
|
Position(s)
Held
with
Fund
|
Term
of
Office
and
Length
of
Time
Served
|
Principal
Occupation(s)
During
Past
Five Years
|
#
of
Portfolios
in
Fund
Complex
Overseen
by
Trustee(2)
|
Other
Trusteeships/
Directorships
Held
by
Trustee
|
|
Daniel
J. Byrne
Age:
62
|
Trustee
|
Lifetime
of
Trust
until
removal
or resignation;
Since
1997
|
President
and Chief
Executive
Officer of
Byrne
Securities Inc.,
1992-present;
Trustee,
The
Opening Word
Program,
Wyandanch,
New
York.
|
102
|
None
|
|
Gerald
E. Shanley III
Age:
63
|
Trustee
|
Lifetime
of
Trust
until
removal
or resignation;
Since
1997
|
Business
Consultant,
1985-present;
Trustee of
Trust
Under Will of
Charles
S. Payson,
1987-present;
C.P.A.,
1979-present.
|
102
|
None
|
|
John
Weisser
Age:
__
|
Trustee
|
Lifetime
of
Trust
until
removal
or resignation;
Since
2007
|
___
|
102
|
____
|
|
Officers
|
|
|
|
|
|
|
Name,
Address and Age
|
Position(s)
Held
with
Fund
|
Term
of
Office
and
Length
of
Time
Served
|
Principal
Occupation(s)
During
Past
Five Years
|
#
of
Portfolios
in
Fund
Complex
Overseen
by Trustee(2)
|
Other
Trusteeships/
Directorships
Held
by
Trustee
|
|
Ron
Fernandes
Age:
48
|
Chief
Executive
Officer
|
One
Year;
Since
2006
|
Chief
Executive Officer,
Raven
Holdings, 2003-
2006;
President, SunLife Distributors, Inc. and
Executive
Vice
President,
SunLife
Retirement
Products and
Services,
1999-2002.
|
N/A
|
None
|
|
Daniel
D. O’Neill
Age:
38
|
President;
|
One
Year;
Since
1999
|
Managing
Director of
Rafferty,
1999-present.
|
N/A
|
None
|
|
Chief
Operating
Officer
and
Chief
Investment
Officer
|
One
Year;
Since
2006
|
|
William
Franca
Age:
49
|
Executive
Vice
President
-
Head of
Distribution
|
One
Year;
Since
2006
|
Senior
Vice President-
National
Sales,
Massachusetts
Financial Services/SunLife
Financial
Distributors,
2002-2004;
Executive
Vice
President,
Distribution,
SunLife,
2001-2002.
|
N/A
|
None
|
|
Karin
Louie
Age:
__
|
Chief
Compliance
Officer
|
One
Year;
Since
2007
|
____
|
N/A
|
None
|
| |
|
|
Stephen
P. Sprague
Age:
56
|
Treasurer
and
Controller
|
One
Year;
Since
1999
|
Chief
Financial Officer
of
Rafferty for the past 5
years.
|
N/A
|
None
|
|
Eric
W. Falkeis
615
East Michigan Street
Age:
33
|
Secretary
|
One
Year;
Since
2004
|
Vice
President, U.S.
Bancorp
Fund Services
LLC,
1997-present
|
N/A
|
None
|
(1) Mr.
Rafferty and Mr. Higgins are affiliated with Rafferty. Mr. Rafferty is the
Chairman and Chief Executive Officer of Rafferty and Mr. Higgins owns a
beneficial interest in Rafferty.
(2) The
Direxion Complex consists of the Direxion Funds which currently offers for
sale
to the public __ portfolios of the __ currently registered with the SEC and
the
Direxion Insurance Trust which currently offers for sale 3 portfolios of the
45
currently registered with the SEC.
The
Trust
has an Audit Committee, consisting of Messrs.
Byrne and Shanley. The
members of the Audit Committee are not “interested” persons of the Trust (as
defined in the 1940 Act). The
primary responsibilities of the Trust’s Audit Committee are, as set forth in its
charter, to make recommendations to the Board Members as to: the engagement
or
discharge of the Trust’s independent registered public accounting firm
(including the audit fees charged by auditors); the supervision of
investigations into matters relating to audit matters; the review with the
independent registered public accounting firm of the results of audits; and
addressing any other matters regarding audits. The Audit Committee met three
times during the Fund’s most recent fiscal year.
The
Trust
also has a Nominating Committee, consisting of Messrs. Byrne
and
Shanley,
each of
whom is a disinterested member of the Board. The primary responsibilities of
the
nominating committee are to make recommendations to the Board on issues related
to the composition and operation of the Board, and communicate with management
on those issues. The Nominating Committee also evaluates and nominates Board
member candidates. The Nominating Committee will consider nominees recommended
by shareholders. Such recommendations should be in writing and addressed to
the
Fund with attention to the Nominating Committee Chair. The recommendations
must
include the following Preliminary Information regarding the nominee: (1) name;
(2) date of birth; (3) education; (4) business professional or other relevant
experience and areas of expertise; (5) current business and home addresses
and
contact information; (6) other board positions or prior experience; and (7)
any
knowledge and experience relating to investment companies and investment company
governance. The Nominating Committee did not meet during the Trust’s most recent
fiscal year.
The
Trust
has a Qualified Legal Compliance Committee, consisting of Messrs.
Byrne and Shanley. The
members of the Qualified Legal Compliance Committee are not “interested” persons
of the Trust (as defined in the 1940 Act). The
primary responsibility of the Trust’s Qualified Legal Compliance Committee is to
receive, review and take appropriate action with respect to any report
(“Report”) made or referred to the Committee by an attorney of evidence of a
material violation of applicable U.S. federal or state securities law, material
breach of a fiduciary duty under U.S. federal or state law or a similar material
violation by the Trust or by any officer, director, employee, or agent of the
Trust. The Qualified Legal Compliance Committee did not meet during the most
recent fiscal year.
The
following table shows the amount of equity securities in the Fund owned by
the
Trustees as of the
calendar year ended December 31, 2006:
|
Dollar
Range of
Equity
Securities
Owned:
|
Interested
Trustees:
|
Disinterested
Trustees:
|
| |
Lawrence
C.
Rafferty
|
Jay
F.
Higgins
|
Daniel
J.
Byrne
|
Gerald
E.
Shanley
III
|
John
Weisser
|
|
Spectrum
Select
Alternative
Fund
|
$_
|
$_
|
$_
|
$_
|
$_
|
|
Aggregate
Dollar
Range
of Equity
Securities
in the
Direxion
Complex
|
$_
|
$_
|
$_
|
$_
|
$_
|
The
Trust’s Declaration of Trust provides that the Trustees will not be liable for
errors of judgment or mistakes of fact or law. However, they are not protected
against any liability to which they would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of their office.
No
officer, director or employee of Rafferty receives any compensation from the
Fund for acting as a Trustee or officer of the Trust. The following table shows
the compensation earned by each Trustee for the Trust’s prior fiscal year ended
August 31, 2006.
|
Name
of Person,
Position
|
Aggregate
Compensation
From
the
Fund
|
|
|
Pension
or Retirement Benefits
Accrued
As
Part
of the
Trust’s
Expenses
|
Estimated
Annual
Benefits
Upon
Retirement
|
Aggregate
Compensation
From
the
Direxion
Complex
Paid
to
the Trustees
|
|
Interested
Trustees
|
|
|
|
|
|
|
|
Lawrence
C. Rafferty
|
$0
|
|
|
$0
|
$0
|
$0
|
|
Jay
F. Higgins
|
$650
|
|
|
$0
|
$0
|
$20,000
|
|
Disinterested
Trustees
|
|
|
|
|
|
|
|
Kevin
G. Boyle(1)
|
$650
|
|
|
$0
|
$0
|
$20,000
|
|
Daniel
J. Byrne
|
$650
|
|
|
$0
|
$0
|
$20,000
|
|
Gerald
E. Shanley III
|
$845
|
|
|
$0
|
$0
|
$26,000
|
|
John
Weisser
|
N/A
|
|
|
N/A
|
N/A
|
N/A
|
(1) As
of
_____, 2007, Mr. Boyle is no longer a Trustee of the Trust.
Principal
Shareholders, Control Persons and Management Ownership
A
principal shareholder is any person who owns of record or beneficially 5% or
more of any class of the Fund’s outstanding shares. A control person is a
shareholder that owns beneficially or through controlled companies more than
25%
of the voting securities of a company or acknowledges the existence of control.
Shareholders owning voting securities in excess of 25% may determine the outcome
of any matter affecting and voted on by shareholders of the Fund. As of
________, 2007, the following shareholders were considered to be either a
control person or principal shareholder of the Fund:
Spectrum
Select Alternative Fund
|
Name
and Address
|
%
Ownership
|
| |
|
| |
|
| |
|
| |
|
| |
|
In
addition, as of________, 2007, the Trustees and officers as a group owned less
than 1% of the outstanding shares of the Fund.
Investment
Adviser and Subadviser
Rafferty
Asset Management, LLC, 33 Whitehall Street, 10th
Floor,
New York, New York, 10004, provides investment advice to the Fund. Rafferty
was
organized as a New York limited liability corporation in June 1997. Lawrence
C.
Rafferty controls Rafferty and Rafferty Capital Markets, LLC. through his
ownership in Rafferty Holdings, LLC.
Rafferty
has retained Hundredfold Advisors, LLC, 2940 N. Lynnhaven Road, Suite 210A,
Virginia Beach, VA 23452, to serve as subadviser to the Fund (“Hundredfold” or
“Subadviser”). Through its ownership of the Subadviser, Simply Distribute
Charitable Foundation, a not-for-profit foundation, controls Hundredfold and
was
created as a charitable foundation. Mr. Ralph Doudera and Ms. Mary Collins
are
trustees of the foundation. In addition, as managing members of Hundredfold,
both Mr. Doudera and Ms. Collins control the Subadviser.
Under
an
Investment Advisory Agreement (“Advisory Agreement”) between the Trust, on
behalf of the Fund and Rafferty, Rafferty provides a continuous investment
program for the Fund’s assets in accordance with its investment objective,
policies and limitations, and oversees the day-to-day operations of the Fund,
subject to the supervision of the Trustees. Rafferty bears all costs associated
with providing these advisory services. The Trust bears all other expenses
that
are not assumed by Rafferty as described in the Prospectus. The Trust also
is
liable for nonrecurring expenses as may arise, including litigation to which
the
Fund may be a party. The Trust also may have an obligation to indemnify its
Trustees and officers with respect to any such litigation.
Pursuant
to the Advisory Agreement, the Fund pays Rafferty at an annual rate of 1.00%
based on its average daily net assets.
The
Fund
is responsible for its own operating expenses. Rafferty has voluntarily agreed
to waive its fees and/or reimburse operating expenses (excluding Acquired Fund
Fees and Expenses, dividends and interest on short positions and extraordinary
expenses) to the extent that Fund expenses exceed 2.75% of average daily net
assets for the period ending August 31, 2007. If overall expenses fall below
these percentage limitations, then the Fund may reimburse Rafferty within the
following three years. There is no assurance that Rafferty will continue this
waiver after this date.
The
table
below shows the amount of advisory fees incurred by the Fund and the amount
of
fees waived and/or reimbursed by Rafferty for the following
periods.
|
Spectrum
Select Alternative Fund
|
Advisory
Fees Incurred
|
Waived
fees and/or
expenses
reimbursed
by
Advisor
|
|
|
$226,104
|
$0
|
|
|
$440,650
|
$0
|
The
Advisory Agreement was approved by the Trustees (including all Independent
Trustees) and Rafferty, as sole shareholder of the Fund, in compliance with
the
1940 Act. The Advisory Agreement continues in force for an initial period of
two
years after the date of its approval. The Advisory Agreement is renewable
thereafter from year to year with respect to the Fund, so long as its
continuance is approved at least annually (1) by the vote, cast in person at
a
meeting called for that purpose, of a majority of those Trustees who are not
“interested persons” of Rafferty or the Trust, and (2) by the majority vote of
either the full Board or the vote of a majority of the outstanding shares of
the
Fund. The Advisory Agreement automatically terminates on assignment and is
terminable on 60-day written notice either by the Trust or
Rafferty.
Under
an
Investment Subadvisory Agreement (“Subadvisory Agreement”) between Rafferty and
Hundredfold, Hundredfold, subject to direction by Rafferty and the Board,
provides investment advice and portfolio management services to the Fund for
a
fee payable by Rafferty. An
investment team from Hundredfold will
manage the Fund’s assets, under the supervision of Rafferty. Under the
Subadvisory Agreement,
Hundredfold directs, through Rafferty, the allocation of Fund assets among
various baskets of securities, created by Hundredfold. Then, Rafferty implements
Hundredfold’s investment decisions for the Fund by placing all brokerage orders
for the purchase and sale of those securities. For the investment subadvisory
services
provided to the Fund, Rafferty pays Hundredfold 0.40% for assets under
management of less than $40 million, 0.60% for assets under management between
$40 million and $100 million, 0.70% for assets under management between $100
million and $150 million, 0.75% for assets under management between $150 million
and $200 million, and 0.80% for assets under management if greater than $200
million.
The
Subadvisory Agreement was initially approved by the Board (including all of
the
Trustees who are not “interested persons” of Rafferty or Hundredfold, as defined
under the 1940 Act) and the shareholders of the Fund, in compliance with the
1940 Act. The Subadvisory Agreement provides that it will be in force for an
initial two-year period and it must be approved each year thereafter by (1)
a
vote, cast in person at a meeting called for that purpose, of a majority of
those Trustees who are not “interested persons” of Rafferty, Hundredfold or the
Trust, and by (2) the majority vote of either the full Board or the vote of
a
majority of the outstanding shares of the Fund. The
Subadvisory Agreement automatically terminates on assignment and is terminable
on
not
less than a 60-day written notice by Rafferty or a 90-day written notice by
Hundredfold.
Under
the
terms of the Advisory Agreement, Rafferty automatically becomes responsible
for
the obligations of Hundredfold upon termination of the Subadvisory
Agreement.
Spectrum
Financial Inc., an affiliate of Hundredfold, receives an annualized fee of
1.00%
based on the average daily net assets of the Fund attributable to clients of
Spectrum Financial, Inc. who are shareholders of the Fund.
Rafferty
shall not be liable to the Trust or any shareholder for anything done or omitted
by it, except acts or omissions involving willful misfeasance, bad faith,
negligence or reckless disregard of the duties imposed upon it by its agreement
with the Trust or for any losses that may be sustained in the purchase, holding
or sale of any security.
Hundredfold
shall not be liable to the Trust or any shareholder for anything done or omitted
by it, except acts or omissions involving willful misfeasance, bad faith,
negligence or reckless disregard of the duties imposed upon it by its agreement
with Rafferty or for any losses that may be sustained in the purchase, holding
or sale of any security.
Pursuant
to Section 17(j) of the 1940 Act and Rule 17j-1 thereunder, the Trust, Rafferty,
Hundredfold and
the
distributor have adopted Codes of Ethics (“Codes”). These Codes permit portfolio
managers and other access persons of the Fund to invest in securities that
may
be owned by the Fund, subject to certain restrictions.
Portfolio
Manager
Mr.
Doudera serves as portfolio manager of the Fund. In addition to the Fund, Mr.
Doudera manages the other accounts set forth below. Hundredfold provided the
following information regarding the other accounts managed by the Fund’s
portfolio manager, including the number of accounts, the total assets in those
accounts and the categorization of the accounts as of August 31,
2006.
|
Other
Accounts
|
Total
Number
of
Accounts
|
Total
Assets
|
Total
Number
of
Accounts
with
Performance
Based
Fees
|
Total
Assets
of
Accounts
with
Performance
Based
Fees
|
|
Registered
Investment Companies
|
2
|
$____
|
0
|
$0
|
|
Other
Pooled Investment Vehicles
|
0
|
$0
|
0
|
$0
|
|
Other
Accounts(1)
|
771
|
$141
million
|
0
|
$0
|
(1) Mr.
Doudera is also the founder, CEO and investment manager of Spectrum Financial
Inc., a registered investment adviser. Mr. Doudera manages all of the above
accounts for Spectrum Financial Inc.
Because
the other accounts listed above invest only in mutual funds, Hundredfold and/or
Spectrum Financial Inc. have not identified any material conflicts between
the
Fund and other accounts managed by Mr. Doudera. However, actual or apparent
conflicts of interest may arise in connection with the day-to-day management
of
the Fund and other accounts. The management of the Fund and other accounts
may
result in unequal time and attention being devoted to the Fund and other
accounts. Hundredfold’s management fees for the services it provides to other
accounts varies and may be higher or lower than the subadvisory fees it receives
from Rafferty. This could create potential conflicts of interest in which the
portfolio manager may appear to favor one investment vehicle over another
resulting in an account paying higher fees or one investment vehicle out
performing another.
As
of
August 31, 2006, Mr. Doudera is not compensated for his position as portfolio
manager to the Fund. All of Mr. Doudera’s services are donated to
Hundredfold.
Set
forth
below are the dollar ranges of securities of the Fund beneficially owned by
the
portfolio manager as of August 31, 2006.
|
Fund
|
Dollar
Range of Equity Securities in the
Fund
|
|
Spectrum
Select Alternative Fund
|
None
|
Proxy
Voting Policies and Procedures
The
Board
has adopted proxy voting policies and procedures (“Proxy Policies”) wherein the
Trust has delegated to Rafferty the responsibility for voting proxies relating
to portfolio securities held by the Fund as part of its investment advisory
services, subject to the supervision and oversight of the Board. The Proxy
Voting Policies of Rafferty are attached as Appendix A. Notwithstanding this
delegation of responsibilities, however, the Fund retains the right to vote
proxies relating to its portfolio securities. The fundamental purpose of the
Proxy Policies is to ensure that each vote will be in a manner that reflects
the
best interest of the Fund and its shareholders, taking into account the value
of
the Fund’s investments.
More
Information.
The
actual voting records relating to portfolio securities during the most recent
12-month period ended June 30 is available without charge, upon request by
calling toll-free, 1-800-851-0511 or by accessing the SEC’s website at
www.sec.gov.
Fund
Administrator, Fund Accountant, Transfer Agent and
Custodian
U.S.
Bancorp Fund Services, LLC (“Administrator”), 615 East Michigan Street,
Milwaukee, Wisconsin 53202, provides administrative, fund accounting and
transfer agent services to the Fund. U.S. Bank, N.A., Custody Operations, 1555
N. River Center Drive, Suite 302, Milwaukee, Wisconsin 53202, an affiliate
of
the Administrator, provides custodian services to the Fund.
Pursuant
to an Administration Servicing Agreement (“Service Agreement”) between the Trust
and the Administrator, the Administrator provides the Trust with administrative
and management services (other than investment advisory services). As
compensation for these services, the Trust pays the Administrator a fee based
on
the Trust’s total average daily net assets of 0.05% on assets up to $3 billion
and 0.04% on the remaining balance or a minimum fee of $10,000 per fund. The
Administrator also is entitled to certain out-of-pocket expenses.
The
table
below shows the amount of administrative and management services fees incurred
by the Fund to the Administrator for the following the fiscal periods.
|
Fiscal
Period
|
Spectrum
Select Alternative
Fund
|
|
|
$
17,797
|
|
|
$
32,102
|
Pursuant
to the Fund Accounting Servicing Agreement between the Trust and U.S. Bancorp
Fund Services, LLC (“Fund Accountant”), the Fund Accountant provides the Trust
with accounting services, including portfolio accounting services, tax
accounting services and furnishing financial reports. For these services, the
Trust pays the Fund Accountant a fee based on the Trust’s total average daily
net assets of 0.01% and a minimum fee of $23,000 per fund. The Fund Accountant
also is entitled to certain out-of-pocket expenses, including pricing
expenses.
Pursuant
to a Custodian Agreement, U.S. Bank, N.A. serves as the custodian of the Fund’s
assets. Under the terms of the Custodian Agreement, the Custodian holds and
administers the assets in the Fund’s portfolio. The Custodian receives an annual
fee based on the Trust’s total average daily net assets of 0.02% and a $3,000
minimum fee per fund. The Custodian also is entitled to certain out-of-pocket
expenses.
Distributor
Rafferty
Capital Markets, LLC, 59 Hilton Avenue, Garden City, New York 11530, serves
as
the distributor (“Distributor”) in connection with the continuous offering of
the Fund’s shares. The
Distributor and participating dealers with whom it has entered into dealer
agreements offer shares of the Fund as agents on a best efforts basis and are
not obligated to sell any specific amount of shares. For the fiscal year ended
August 31, 2006, the Distributor received $90,000 as compensation from Rafferty
for distribution services for the Trust. Mr. Rafferty is an affiliated person
of
the Distributor.
Distribution
Plan
Rule
12b-1 under the 1940 Act provides that an investment company may bear expenses
of distributing its shares only pursuant to a plan adopted in accordance with
the Rule. The Trustees have adopted a Rule 12b-1 Plan of Distribution (“Plan”)
for the Service Class Shares of the Fund pursuant to which the Fund may pay
certain expenses incurred in the distribution of the Service Class Shares and
the servicing and maintenance of existing shareholder accounts. Pursuant to
the
Plan, the Fund may pay up to 1.00% of its average daily net assets.
The
Plan
was approved by the Trustees, including the Independent Trustees of the Fund.
In
approving the Plan, the Trustees determined that there is a reasonable
likelihood that the Plan will benefit the Fund and its shareholders. The
Trustees will review quarterly and annually a written report of the amounts
expended under the Plan and the purposes for which such expenditures were made.
The Distributor, as the Fund’s principal underwriter, Rafferty and the
Subadviser may have a direct or indirect financial interest in the Plan or
any
related agreement.
The
Plan
permits payments to be made by the Fund to the distributor or other third
parties for expenditures incurred in connection with the distribution of Fund
shares to investors and/or the provision of certain shareholder services. The
distributor or other third parties are authorized to engage in advertising,
the
preparation and distribution of sales literature and other promotional
activities on behalf of the Fund. In addition, the Plan authorizes payments
by
the Fund to the distributor and/or other third parties for the cost related
to
selling or servicing efforts, preparing, printing and distributing Fund
prospectuses, statements of additional information, and shareholder reports
to
investors.
The
tables below show the amount of 12b-1 fees incurred and the allocation of such
fees by the Fund for the fiscal year ended August 31, 2006.
|
Fund
|
12b-1
fees
incurred
|
|
Spectrum
Select Alternative Fund
|
$
226,104
|
|
Fund
|
Advertising
and
Marketing
|
Printing
and
Postage
|
Payment
to Distributor
|
Payment
to
Dealers
|
Compensation
to
Sales
Personnel
|
Other
Marketing
Expenses
|
|
Spectrum
Select
Alternative
Fund
|
$
0
|
$
0
|
$
0
|
$
159,584
|
$
0
|
$
66,520
|
Independent
Registered Public Accounting Firm
____________,
[address], is the independent registered public accounting firm for the Trust.
The
Financial Statements of the Fund for the fiscal year ended August 31, 2006
have
been audited by ____ and are incorporated by reference herein with reliance
upon
the report of said firm, which is given upon their authority as experts in
accounting and auditing.
DETERMINATION
OF NET ASSET VALUE
The
NAV
per share of the Fund is determined daily, Monday through Friday, as of the
close of regular trading on the New York Stock Exchange (“NYSE”) (normally at
4:00 p.m. Eastern time), each day the NYSE is open for business. The NYSE is
not
open on New Year’s Day, Presidents’ Day, Martin Luther King’s Birthday, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
A
security listed or traded on an exchange, domestic or foreign, is valued at
its
last sales price on the principal exchange on which it is traded prior to the
time when assets are valued. If no sale is reported at that time, the mean
of
the last bid and asked prices is used. Securities traded principally on the
NASDAQ®
Global
Market (“NASDAQ®”)
for
which quotations are readily available shall be valued using the
NASDAQ®
Official
Closing Price (“NOCP”) provided by NASDAQ®
each
business day. The NOCP is the most recently reported price as of 4:00:02 p.m.,
Eastern time, unless that price is outside the range of the “inside” bid and
asked prices; in that case, NASDAQ®
will
adjust the price to equal the inside bid or asked price, whichever is closer.
If
the NOCP is not available, such securities shall be valued at the last sale
price on the day of valuation, or if there has been no sale on such day, at
the
mean between the bid and asked prices.
When
market quotations for options and futures positions held by the Fund are readily
available, those positions will be valued based upon such quotations. Securities
and other assets for which market quotations are not readily available, or
for
which Rafferty has reason to question the validity of quotations received,
are
valued at fair value as determined in good faith by the Board.
For
purposes of determining NAV per share of the Fund, options and futures contracts
are valued at the last sale prices of the exchanges on which they trade. The
value of a futures contract equals the unrealized gain or loss on the contract
that is determined by marking the contract to the last sale price for a like
contract acquired on the day on which the futures contract is being valued.
The
value of options on futures contracts is determined based upon the last sale
price for a like option acquired on the day on which the option is being valued.
A last sale price may not be used for the foregoing purposes if the market
makes
a limit move with respect to a particular instrument.
For
valuation purposes, quotations of foreign securities or other assets denominated
in foreign currencies are translated to U.S. Dollar equivalents using the net
foreign exchange rate in effect at the close of the stock exchange in the
country where the security is issued. Short-term debt instruments having a
maturity of 60 days or less are valued at amortized cost, which approximates
market value. If the Board determines that the amortized cost method does not
represent the fair value of the short-term debt instrument, the investment
will
be valued at fair value by procedures as adopted by the Board. U.S. government
securities are valued at the mean between the closing bid and asked price
provided by an independent third party pricing service (“Pricing
Service”).
Other
debt securities are valued by using the mean between the closing bid and asked
price provided by the Pricing Service. If the closing bid and asked price are
not readily available, the Pricing Service may provide a price determined by
a
matrix pricing method, which is a mathematical technique used to value
fixed-income securities without relying exclusively on quoted prices. In the
absence of market quotations or matrix-derived prices from the Pricing Service,
the debt securities will be valued at fair value as determined in good faith
by
the Board.
OTC
securities held by the Fund will be valued at the last sales price or, if no
sales price is reported, the mean of the last bid and asked price is used.
The
portfolio securities of the Fund that are listed on national exchanges are
valued at the last sales price of such securities; if no sales price is
reported, the mean of the last bid and asked price is used. Dividend income
and
other distributions are recorded on the ex-dividend date.
Illiquid
securities, securities for which reliable quotations or pricing services are
not
readily available, and all other assets not valued in accordance with the
foregoing principles will be valued at their respective fair value as determined
in good faith by, or under procedures established by, the Trustees, which
procedures may include the delegation of certain responsibilities regarding
valuation to Rafferty or the officers of the Trust. The officers of the Trust
report, as necessary, to the Trustees regarding portfolio valuation
determinations. The Trustees, from time to time, will review these methods
of
valuation and will recommend changes that may be necessary to assure that the
investments of the Fund are valued at fair value.
For
purposes of calculating its daily NAV, the Fund typically reflects changes
in
its holdings of portfolio securities on the first business day following a
portfolio trade (commonly known as “T+1 accounting”). However, the Fund is
permitted to include same day trades when calculating its NAV (commonly referred
to as “trade date accounting”) on days when the Fund receives substantial
redemptions. Such redemptions can result in an adverse impact on the Fund’s NAV
when there is a disparity between the trade price and the closing price of
the
security. Thus, the Fund’s use of trade date accounting is likely to lessen the
impact of substantial redemptions on the Fund’s NAV.
PURCHASES
AND REDEMPTIONS
Retirement
Plans
Individuals
who earn compensation and who have not reached age 70½ before the close of the
year generally may establish an individual retirement account (“IRA”). An
individual may make limited contributions to an IRA of up to $4,000 per taxable
year (or $8,000, if such contributions also are made for a nonworking spouse
and
a joint return is filed) through the purchase of shares of the Fund; these
maximum contributions increase by $500 if you attain age 50 before the end
of
the taxable year ($1,000 if both you and your spouse do so). The Internal
Revenue Code of 1986, as amended (“Code”), limits the deductibility of IRA
contributions to taxpayers who are not active participants (and, under certain
circumstances, whose spouses are not active participants, unless their combined
adjusted gross income does not exceed $150,000) in employer-provided retirement
plans or who have adjusted gross income below certain levels. Nevertheless,
the Code permits other individuals to make nondeductible IRA contributions
up to
the same limits as referred to above. In
addition, individuals whose earnings (together with their spouse’s earnings) do
not exceed a certain level may establish a Roth IRA; although contributions
thereto are nondeductible, withdrawals from a Roth IRA will not be taxable
under
certain circumstances. An
IRA
also may be used for certain “rollovers” from qualified benefit plans and from
Section 403(b) annuity plans.
Fund
shares also may be used as the investment medium for qualified plans (defined
benefit or defined contribution plans established by corporations, partnerships
or sole proprietorships). Contributions to qualified plans may be made (within
certain limits) on behalf of the employees, including owner-employees, of the
sponsoring entity.
Redemption
In-Kind
The
Trust
has filed a notice of election under Rule 18f-1 of the 1940 Act which obligates
the Fund to redeem shares for any shareholder for cash during any 90-day period
up to $250,000 or 1% of the Fund’s NAV, whichever is less. Any redemption beyond
this amount also will be in cash unless the Trustees determine that further
cash
payments will have a material adverse effect on remaining shareholders. In
such
a case, the Fund will pay all or a portion of the remainder of the redemption
in
portfolio instruments, valued in the same way as the Fund determines NAV. The
portfolio instruments will be selected in a manner that the Trustees deem fair
and equitable. A redemption in-kind is not as liquid as a cash redemption.
If a
redemption is made in-kind, a shareholder receiving portfolio instruments could
receive less than the redemption value thereof and could incur certain
transaction costs. Shareholders who receive futures contracts or options on
futures contracts in connection with a redemption in-kind may be responsible
for
making any margin payments due on those contracts.
Redemptions
by Telephone
Shareholders
may redeem shares of the Fund by telephone. When acting on verbal instructions
believed to be genuine, the Trust, Rafferty, transfer agent and their trustees,
directors, officers and employees are not liable for any loss resulting from
a
fraudulent telephone transaction request and the investor will bear the risk
of
loss. In
acting
upon telephone instructions, these parties use procedures that are reasonably
designed to ensure that such instructions are genuine, such as (1) obtaining
some or all of the following information: account number, name(s) and social
security number(s) registered to the account, and personal identification;
(2)
recording all telephone transactions; and (3) sending written confirmation
of
each transaction to the registered owner. To
the
extent that the Trust, Rafferty, transfer agent and their trustees, directors,
officers and employees do not employ such procedures, some or all of them may
be
liable for losses due to unauthorized or fraudulent transactions.
Receiving
Payment
Payment
of redemption proceeds will be made within seven days following the Fund’s
receipt of your request (if received in good order as described below) for
redemption. For investments that have been made by check, payment on redemption
requests may be delayed until the transfer agent is reasonably satisfied that
the purchase payment has been collected by the Trust (which may require up
to 10
calendar days). To avoid redemption delays, purchases may be made by direct
wire
transfers.
A
redemption request will be considered to be received in “good order”
if:
| l |
The
number or amount of shares and the class of shares to be redeemed
and
shareholder account number have been
indicated;
|
| l |
Any
written request is signed by a shareholder and by all co-owners of
the
account with exactly the same name or names used in establishing
the
account;
|
| l |
Any
written request is accompanied by certificates representing the shares
that have been issued, if any, and the certificates have been endorsed
for
transfer exactly as the name or names appear on the certificates
or an
accompanying stock power has been attached;
and
|
| l |
The
signatures on any written redemption request in excess of $100,000
or more
and on any certificates for shares (or an accompanying stock power)
have
been guaranteed by a national bank, a state bank that is insured
by the
Federal Deposit Insurance Corporation, a trust company or by any
member
firm of the New York, American, Boston, Chicago, Pacific or Philadelphia
Stock Exchanges. Signature guarantees also will be accepted from
savings
banks and certain other financial institutions that are deemed acceptable
by U.S. Bancorp Fund Services, LLC, as transfer agent, under its
current
signature guarantee program.
|
The
right
of redemption may be suspended or the date of payment postponed for any period
during which (1) the NYSE is closed (other than customary weekend or holiday
closings); (2) trading on the NYSE is restricted; (3) situations where an
emergency exists as a result of which it is not reasonably practicable for
the
Fund fairly to determine the value of its net assets or disposal of the Fund’s
securities is not reasonably practicable; or (4) the SEC has issued an order
for
the protection of Fund shareholders.
Anti-Money
Laundering
The
Fund
is required to comply with various federal anti-money laundering laws and
regulations. Consequently, the Fund may be required to “freeze” the account of a
shareholder if the shareholder appears to be involved in suspicious activity
or
if certain account information matches information on government lists of known
terrorists or other suspicious persons, or the Fund may be required to transfer
the account or proceeds of the account to a government agency. In addition,
pursuant to the Fund’s Customer Identification Program, the Fund’s Transfer
Agent will complete a thorough review of all new opening account applications
and will not transact business with any person or entity whose identity cannot
be adequately verified.
EXCHANGE
PRIVILEGE
An
exchange is effected through the redemption of the shares tendered for exchange
and the purchase of shares being acquired at their respective NAVs as next
determined following receipt by the Fund whose shares are being exchanged of
(1)
proper instructions and all necessary supporting documents; or (2) a telephone
request for such exchange in accordance with the procedures set forth in the
Prospectus and below. Telephone requests for an exchange received by the Fund
before 4:00 p.m. Eastern time will be effected at the close of regular trading
on that day. Requests for an exchange received after the close of regular
trading will be effected on the NYSE’s next trading day. Due
to
the volume of calls or other unusual circumstances, telephone exchanges may
be
difficult to implement during certain time periods.
The
Trust
reserves the right to reject any order to acquire its shares through exchange
or
otherwise to restrict or terminate the exchange privilege at any time. In
addition, the Trust may terminate this exchange privilege upon a 60-day
notice.
SHAREHOLDER
AND OTHER INFORMATION
Each
share of the Fund gives the shareholder one vote in matters submitted to
shareholders for a vote. Each class of the Fund has equal voting rights, except
that, in matters affecting only a particular class or series, only shares of
that class or series are entitled to vote. Share voting rights are not
cumulative, and shares have no preemptive or conversion rights. Shares are
not
transferable. As a Massachusetts business trust, the Trust is not required
to
hold annual shareholder meetings. Shareholder approval will be sought only
for
certain changes in a Trust’s or the Fund’s operation and for the election of
Trustees under certain circumstances. Trustees may be removed by the Trustees
or
by shareholders at a special meeting. A special meeting of shareholders shall
be
called by the Trustees upon the written request of shareholders owning at least
10% of a Trust’s outstanding shares.
DIVIDENDS,
OTHER DISTRIBUTIONS AND TAXES
Dividends
and Other Distributions
Net
investment income and any realized net capital gains are as described in the
Prospectus under “Distributions and Taxes.” All distributions from the Fund
normally are automatically reinvested without charge in additional shares of
that Fund.
Taxes
Regulated
Investment Company Status.
The
Fund
is treated as a separate corporation for Federal
income tax purposes and
intends
to continue to qualify as a regulated investment company (“RIC”) under
Subchapter M of the Code. If the Fund so qualifies and satisfies the
Distribution Requirement (defined below) for a taxable year, the Fund will
not
be subject to Federal income tax on the part of its investment company taxable
income (generally consisting of net investment income and the excess of net
short-term capital gains, over net long-term capital loss (“short-term capital
gain”), all determined without regard to any deduction for dividends paid) and
net capital gain (i.e.,
the
excess of net long-term capital gain over net short-term capital loss) it
distributes to its shareholders for that year.
To
qualify for treatment as a RIC, the Fund must distribute to its shareholders
for
each taxable year at least 90% of its investment company taxable income
(“Distribution Requirement”) and must meet several additional requirements.
These requirements include the following: (1) the Fund must derive at least
90% of its gross income each taxable year from dividends, interest, payments
with respect to securities loans and gains from the sale or other disposition
of
securities, or other income (including gains from options or futures) derived
with respect to its business of investing in securities (“Income Requirement”);
and (2) at the close of each quarter of the Fund’s taxable year,
(i) at least 50% of the value of its total assets must be represented by
cash and cash items, U.S. government securities, securities of other RICs and
other securities, with those other securities limited, in respect of any one
issuer, to an amount that does not exceed 5% of the value of the Fund’s total
assets and that does not represent more than 10% of the issuer’s outstanding
voting securities, and (ii) not more than 25% of the value of its total
assets may be invested in securities (other than U.S. government securities
or
the securities of other RICs) of any one issuer (collectively, “Diversification
Requirements”).
Although
the Fund intends to satisfy all the foregoing requirements, there is no
assurance that the Fund will be able to do so. The investment by the Fund
primarily in options and futures positions entails some risk that it might
fail
to satisfy the Diversification Requirements. There is some uncertainty regarding
the valuation of such positions for purposes of those requirements; accordingly,
it is possible that the method of valuation used by the Fund, pursuant to which
it would be treated as satisfying the Diversification Requirements, would not
be
accepted in an audit by the Internal
Revenue Service, which might apply a different method resulting in
disqualification of the Fund.
If
the
Fund failed to qualify for treatment as a RIC in any taxable year, (1) it would
be taxed on the full amount of its taxable income, including net capital gain,
for that year at corporate income tax rates (up to 35%) without being able
to
deduct the distributions it makes to its shareholders; and (2) the shareholders
would treat all those distributions, including distributions of net capital
gain, as dividends (that is, ordinary income), except for the part of those
dividends that is “qualified dividend income” (described in the Prospectus)
(“QDI”) which is subject to a maximum federal income tax rate of 15%) to the
extent of the Fund’s earnings and profits. In addition, the Fund would be
required to recognize unrealized gains, pay substantial taxes and interest
and
make substantial distributions before requalifying for RIC
treatment.
General.
If Fund
shares are sold at a loss after being held for six months or less, the loss
will
be treated as long-term, instead of short-term, capital loss to the extent
of
any capital gain distributions received on those shares. Investors also should
be aware that if shares are purchased shortly before the record date for any
dividend or capital gain distribution, the shareholder will pay full price
for
the shares and receive some portion of the purchase price back as a taxable
distribution.
The
Fund
will be subject to a nondeductible 4% excise tax (“Excise Tax”) to the extent it
fails to distribute by the end of any calendar year substantially all of its
ordinary income for that year and capital gain net income for the one-year
period ending on October 31 of that year, plus certain other
amounts.
Dividends
distributed by the Fund (including distributions of net short-term capital
gain), if any, are taxable to its shareholders as ordinary income (at rates
up
to 35% for individuals), except to the extent they constitute QDI regardless
of
whether the dividends are reinvested in Fund shares or received in cash.
Distributions of the Fund’s net capital gain, if any, are taxable to its
shareholders as long-term capital gains, regardless of how long they have held
their Fund shares and whether the distributions are reinvested in Fund shares
or
received in cash. A shareholder’s sale (redemption) of Fund shares may result in
a taxable gain, depending on whether the redemption proceeds are more or less
than the adjusted basis for the shares. An exchange of Fund shares for shares
of
another Fund generally will have similar consequences.
Income
from Foreign Securities.
Dividends and interest the Fund receives, and gains it realizes on foreign
securities, may be subject to income, withholding or other taxes imposed by
foreign countries and U.S. possessions that would reduce the yield and/or total
return on its securities. Tax conventions between certain countries and the
United States may reduce or eliminate these foreign taxes, however, and many
foreign countries do not impose taxes on capital gains in respect of investments
by foreign investors.
The
Fund
may invest in the stock of “passive foreign investment companies” (“PFICs”). A
PFIC is any foreign corporation (with certain exceptions) that,
in
general, meets either of the following tests: (1) at least 75% of its gross
income for the taxable year is passive; or (2) an average of at least 50% of
its
assets produce, or are held for the production of, passive income. Under certain
circumstances, the Fund will be subject to federal income tax on a portion
of
any “excess distribution” it receives on the stock of a PFIC or of any gain on
its disposition of the stock (collectively, “PFIC income”), plus interest
thereon, even if the Fund distributes the PFIC income as a dividend to its
shareholders. The balance of the PFIC income will be included in the Fund’s
investment company taxable income and, accordingly, will not be taxable to
it to
the extent it distributes that income to its shareholders. Fund distributions
thereof will not be eligible for the 15% maximum federal income tax rate on
individuals’ QDI.
If
the
Fund invests in a PFIC and elects to treat the PFIC as a “qualified electing
fund” (“QEF”), then, in lieu of the foregoing tax and interest obligation, the
Fund would be required to include in income each year its pro
rata
share of
the QEF’s annual ordinary earnings and net capital gain -- which the Fund
probably would have to distribute to satisfy the Distribution Requirement --
even if the Fund did not receive those earnings and gain from the QEF. In most
instances it will be very difficult, if not impossible, to make this election
because of certain requirements thereof.
The
Fund
may elect to “mark to market” its stock in any PFIC. “Marking-to-market,” in
this context, means including in ordinary income each taxable year the excess,
if any, of the fair market value of the PFIC’s stock over the Fund’s adjusted
basis therein as of the end of that year. Pursuant to the election, the Fund
also would be allowed to deduct (as an ordinary, not capital, loss) the excess,
if any, of its adjusted basis in PFIC stock over the fair market value thereof
as of the taxable year-end, but only to the extent of any net mark-to-market
gains with respect to that stock the Fund included in income for prior taxable
years under the election. The Fund’s adjusted basis in each PFIC’s stock with
respect to which it makes this election would be adjusted to reflect the amounts
of income included and deductions taken thereunder.
Gains
or
losses (1) from the disposition of foreign currencies; (2) on the disposition
of
each foreign-currency-denominated debt security that are attributable to
fluctuations in the value of the foreign currency between the dates of
acquisition and disposition of the security; and (3) that are attributable
to
fluctuations in exchange rates that occur between the time the Fund accrues
dividends, interest or other receivables, or expenses or other liabilities,
denominated in a foreign currency and the time the Fund actually collects the
receivables or pays the liabilities, generally will be treated as ordinary
income or loss. These gains or losses will increase or decrease the amount
of
the Fund’s investment company taxable income to be distributed to its
shareholders.
Derivatives
Strategies.
The use
of derivatives strategies, such as writing (selling) and purchasing options
and
futures contracts, involves complex rules that will determine for income tax
purposes the amount, character and timing of recognition of the gains and losses
the Fund realizes in connection therewith. Gains from options and futures the
Fund derives with respect to its business of investing in securities will be
qualifying income under the Income Requirement.
“Nonequity
options” (i.e.,
certain
listed options,
such as those on “broad-based” stock indices) and
futures in which the Fund may invest may be “section 1256 contracts.” Section
1256 contracts that the Fund holds at the end of each taxable year, other than
section 1256 contracts that are part of a “mixed straddle” with respect to which
the Fund has made an election not to have the following rules apply, must be
“marked-to-market” (that is, treated as sold for their fair market value) for
Federal income tax purposes, with the result that unrealized gains or losses
will be treated as though they were realized. Sixty percent of any net gain
or
loss recognized on these deemed sales, and 60% of any net realized gain or
loss
from any actual sales of section 1256 contracts, will be treated as long-term
capital gain or loss, and the balance will be treated as short-term capital
gain
or loss. Section 1256 contracts also may be marked-to-market for purposes of
the
Excise Tax.
Code
section 1092 (dealing with straddles) also may affect the taxation of options
and futures contracts in which the Fund may invest. That section defines a
“straddle” as offsetting positions with respect to actively traded personal
property; for these purposes, options and futures contracts are positions in
personal property. Under that section, any loss from the disposition of a
position in a straddle may be deducted only to the extent the loss exceeds
the
unrealized gain on the offsetting position(s) of the straddle. In addition,
these rules may postpone the recognition of loss that otherwise would be
recognized under the mark-to-market rules discussed above. The regulations
under
section 1092 also provide certain “wash sale” rules, which apply to transactions
where a position is sold at a loss and a new offsetting position is acquired
within a prescribed period, and “short sale” rules applicable to straddles. If
the Fund makes certain elections, the amount, character, and timing of
recognition of gains and losses from the affected straddle positions would
be
determined under rules that vary according to the elections made. Because only
a
few of the regulations implementing the straddle rules have been promulgated,
the tax consequences to the Fund of straddle transactions are not entirely
clear.
If
a call
option written by the Fund lapses (i.e.,
terminates without being exercised), the amount of the premium it received
for
the option will be short-term capital gain. If the Fund enters into a closing
purchase transaction with respect to a written call option, it will have a
short-term capital gain or loss based on the difference between the premium
it
received for the option it wrote and the premium it pays for the option it
buys.
If such an option is exercised and the Fund thus sells the securities or futures
contract subject to the option, the premium the Fund received will be added
to
the exercise price to determine the gain or loss on the sale. If a call option
purchased by the Fund lapses, it will realize short-term or long-term capital
loss, depending on its holding period for the security or futures contract
subject thereto. If the Fund exercises a purchased call option, the premium
it
paid for the option will be added to the basis of the subject securities or
futures contract.
If
the
Fund has an “appreciated financial position” -- generally, an interest
(including an interest through an option, futures contract or short sale) with
respect to any stock, debt instrument (other than “straight debt”) or
partnership interest the fair market value of which exceeds its adjusted basis
-- and enters into a “constructive sale” of the position, the Fund will be
treated as having made an actual sale thereof, with the result that it will
recognize gain at that time. A constructive sale generally consists of a short
sale, an offsetting notional principal contract, or a futures contract entered
into by the Fund or a related person with respect to the same or substantially
identical property. In addition, if the appreciated financial position is itself
a short sale or such a contract, acquisition of the underlying property or
substantially identical property will be deemed a constructive sale. The
foregoing will not apply, however, to any transaction during any taxable year
that otherwise would be treated as a constructive sale if the transaction is
closed within 30 days after the end of that year and the Fund holds the
appreciated financial position unhedged for 60 days after that closing
(i.e.,
at no
time during that 60-day period is the Fund’s risk of loss regarding that
position reduced by reason of certain specified transactions with respect to
substantially identical or related property, such as having an option to sell,
being contractually obligated to sell, making a short sale or granting an option
to buy substantially identical stock or securities).
The
foregoing is only a general summary of some of the important Federal income
tax
considerations generally affecting the Fund. No attempt is made to present
a
complete explanation of the Federal tax treatment of the Fund’s and their
shareholder activities, and this discussion is not intended as a substitute
for
careful tax planning. Accordingly, potential investors are urged to consult
their own tax advisers for more detailed information and for information
regarding any state, local or foreign taxes applicable to the Fund and to
distributions therefrom.
FINANCIAL
STATEMENTS
The
financial statements for the Fund for the fiscal year ended August 31, 2006,
are
herein incorporated by reference to the Fund’s Annual Report to Shareholders
dated August 31, 2006. To receive a copy of the Prospectus or annual or
semi-annual reports to shareholders, without charge, write to or call the Trust
at the address or telephone number listed above.
Appendix
A
Description
of Corporate Bond Ratings
Moody’s
Investors Service and Standard and Poor’s Corporation are two prominent
independent rating agencies that rate the quality of bonds. Following are
expanded explanations of the ratings shown in the Prospectus and this
SAI.
Moody’s
Investors Service Ratings
Aaa:
Bonds with this rating are judged to be of the best quality. They carry the
smallest degree of investment risk. Interest payments are protected by a large
or exceptionally stable margin and principal is secure.
Aa:
Bonds
with this rating are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may
not
be as large as in Aaa securities or fluctuation of protective elements may
be of
greater amplitude.
A:
Bonds
with this rating possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the
future.
Baa:
Bonds with this rating are considered as medium grade obligations, i.e.;
they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba:
Bonds
with this rating are judged to have speculative elements; their future cannot
be
considered as well-assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both
good
and bad times over the future. Uncertainty of position characterizes bonds
in
this class.
B:
Bonds
with this rating generally lack characteristics of desirable investments.
Assurance of interest and principal payments or of maintenance of other terms
of
the contract over any long period of time may be small.
Caa:
Bonds with this rating are of poor standing. Such issues may be in default
or
there may be present elements of danger with respect to principal or
interest.
Ca:
Bonds
with this rating represent obligations which are speculative to a high degree.
Such issues are often in default or have other marked shortcomings.
C:
Bonds
with this rating are the lowest rated class of bonds. Issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Moody’s
applies numerical modifiers 1, 2 and 3 in each generic rating classification
from Aa through B in its corporate bond rating system. The modifier 1 indicates
that the security ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that
the
issue ranks in the lower end of its generic rating category.
Generally,
investment-grade debt securities are those rated Baa3 or better by
Moody’s.
Standard
& Poor’s Corporation Ratings
AAA:
This
rating is the highest rating assigned by Standard & Poor’s and is indicative
of a very strong capacity to pay interest and repay principal.
AA:
This
rating indicates a very strong capacity to pay interest and repay principal
and
differs from the higher rated issues only by a small degree.
A:
This
rating indicates a strong capacity to pay interest and repay principal, although
it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated
categories.
BBB:
This
rating indicates an adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this category than
in
higher rated categories.
BB,
B,
CCC, CC: These ratings indicate, on balance, a predominantly speculative
capacity of the issuer to pay interest and repay principal in accordance with
the terms of the obligation. BB indicates the lowest degree of speculation
and
CC the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
C:
This
rating is reserved for income bonds on which no interest is being
paid.
D:
This
rating indicates debt in default, and payment of interest and/or repayment
of
principal are in arrears.
The
ratings from AA to B may be modified by the addition of a plus or minus sign
to
show relative standing within the major rating categories, for example A or
B+.
Generally,
investment-grade debt securities are those rated BBB or better by Standard
&
Poor’s.
APPENDIX
B
DIREXION
FUNDS
PROXY
VOTING POLICIES AND PROCEDURES
The
Direxion Funds have adopted the following guidelines (the “Guidelines”) pursuant
to which the Fund’s investment adviser, Rafferty Asset Management (“RAM”), in
the absence of special circumstances, generally shall vote proxies. These
Guidelines are designed to reasonably ensure that proxies are voted in the
best
interest of the shareholders of the Fund.
RAM
views
seriously its responsibility to exercise voting authority over securities that
are owned by the Fund.
A.
It is
the policy of RAM to review each proxy statement on an individual basis and
to
vote exclusively with the goal to best serve the financial interests of the
Fund’s shareholders.
B. To
document that proxies are being voted, RAM will keep a record reflecting when
and how each proxy is voted. RAM will keep and maintain such records consistent
with the requirements of Rule 206(4)-6 under the Investment Advisers Act of
1940, as amended (“Advisers Act”), and other applicable regulations. RAM will
make its proxy voting history and policies and procedures available to
shareholders upon request. The proxy voting history and policies and procedures
will be available via our website, www.direxionfunds.com, or in written form.
If
requested in written form, the proxy voting history and policies and procedures
shall be sent to a shareholder within three business days of such a request.
To
request a written copy, shareholders, or their agents, may contact RAM at (800)
851-0511 or by writing to the Fund at P.O. Box 1993, Milwaukee, Wisconsin
53201.
II. Guidelines
for Voting Proxies
RAM
will
generally vote proxies so as to promote the long-term economic value of the
underlying securities, and generally will follow the Guidelines provided below.
Each proxy proposal should be considered on its own merits, and an independent
determination will be made whether to support or oppose management’s position.
RAM believes that the recommendation of management should be given substantial
weight, but RAM will not support management proposals that may be detrimental
to
the underlying financial value of a stock.
The
Direxion Funds portfolio management department will be responsible for
administrating and overseeing the proxy voting process.
The
Guidelines set forth below deal with the two basic categories of proxy
proposals. While they are not exhaustive, they do provide a good indication
of
RAM’s general approach to a wide range of issues.
RAM
usually will oppose proposals that dilute the economic interest of shareholders,
reduce shareholders’ voting rights, or otherwise limit their authority. Proxies
will be voted in what is believed to be in the fund shareholders’ best interest
and not necessarily always with management. Each situation is considered
individually within the general guidelines. Routine proposals normally are
voted
based on the recommendation of the issuer’s management. Non-routine proposals
that could meaningfully impact the position of existing shareholders are given
special consideration and voted in a manner that is believed to support the
interests of the funds’ shareholders.
Routine
proposals are those that do not propose to change the structure, bylaws, or
operations of the corporation to the detriment of the shareholders. Given the
routine nature of these proposals, proxies will nearly always be voted with
management. Traditionally, routine proposals include:
| l |
Election
of directors and officers of the
corporation
|
| l |
Indemnification
provisions for directors
|
| l |
Liability
limitations of directors
|
| l |
Elimination
of preemptive rights
|
| l |
Incentive
compensation plans
|
| l |
Changing
the date and/or the location of the annual
meetings
|
| l |
Minor
amendments to the articles of
incorporation
|
| l |
Employment
contracts between the company and its executives and remuneration
for
directors
|
| l |
Automatic
dividend reinvestment plans
|
| l |
Retirement
plans, pensions plans and profit sharing plans, creation of and amendments
thereto
|
These
proposals are more likely to affect the structure and operations of the
corporation and, therefore, will have a greater impact on the value of the
stock. The portfolio voting the proxy will review each issue in this category
on
a case-by-case basis. RAM will be especially critical of lavish executive
compensation and highly priced merger acquisition proposals, which would tend
to
lower future corporate earnings potential.
Non-routine
proposals typically include:
| l |
Mergers
and acquisitions
|
| l |
Re-incorporation
or formation
|
| l |
Changes
in capitalization
|
| l |
Increase
or decrease in number of directors
|
| l |
Increase
or decrease in preferred stock
|
| l |
Increase
or decrease in common stock
|
| l |
Stock
option plans or other compensation
plans
|
| l |
Board
classification without cumulative
voting
|
RAM
will
typically accept management’s recommendations on shareholder proposed social
issues, since it does not have the means to either evaluate the economic impact
of such proposals, or determine a consensus among shareholders’ social and
political viewpoints.
III. Conflicts
of Interests
RAM
and
affiliated companies’ business lines, limited to that of investment advisor to
mutual funds and retail broker/dealer, preclude any potential material conflicts
of interests between RAM and Direxion Funds’ shareholders. Neither RAM, nor its
affiliates underwrite securities or own stock shares.
IV. Recordkeeping
and Reporting
RAM
is
required to maintain records of proxies voted pursuant to Section 204(2) of
the
Advisers Act and Rule 204-2(c) thereunder. RAM will maintain and make available
to fund shareholders for review a copy of its proxy voting policies and
procedures, a record of each vote cast, and each written and verbal shareholder
request for proxy voting records. In addition, RAM will maintain appropriate
proxy voting records for the Fund in compliance with applicable regulations
under the Investment Company Act of 1940, as amended.
Proxy
voting books and records are maintained by RAM for five years; the first two
years can be accessed via the Fund’s website, www.direxionfunds.com, or
requested in written form. If requested in written form, the proxy voting
history and policies and procedures shall be sent to a shareholder within three
business days of such a request. To request a written copy, shareholders, or
their agents, may contact RAM at (800) 851-0511 or by writing to the Fund at
P.O. Box 1993, Milwaukee, Wisconsin 53201. A copy of the twelve-month voting
history of the Fund will be made available on the SEC’s website at
http://www.sec.gov beginning August 1, 2004 for the twelve-month period
beginning July 1, 2003, in accordance with applicable regulations under the
1940
Act.
DIREXION
FUNDS
PART
C
OTHER
INFORMATION
| Item
23. |
|
Exhibits. |
| |
|
|
|
(a)
|
(i)
|
|
| |
(ii)
|
Amendment
to the Declaration of Trust dated April 5, 2006 is herein incorporated
by
reference from the Post-Effective Amendment No. 65 to the Trust’s
Registration Statement on Form N-1A, filed with the Securities
and
Exchange Commission on May 1, 2006 via EDGAR, Accession No.
0001144204-06-017581.
|
|
(b)
|
|
|
|
(c)
|
|
Voting
trust agreement - None.
|
|
(d)
|
(i)(A)
|
|
| |
(i)(B)
|
Amendment
to Schedule A of the Investment Advisory Agreement is herein incorporated
by reference from the Post-Effective Amendment No. 68 to the Trust’s
Registration Statement on Form N-1A, filed with the Securities
and
Exchange Commission on December 29, 2006 via EDGAR, Accession No.
0000894189-06-003240.
|
| |
(ii)(A)
|
Form
of Investment Subadvisory Agreement between Portfolio Strategies,
Inc. and
Rafferty Asset Management, LLC is herein incorporated by reference
from
the Post-Effective Amendment No. 46 to the Trust’s Registration Statement
on Form N-1A, filed with the Securities and Exchange Commission
on March
31, 2005 via EDGAR, Accession No. 0000894189-05-000885.
|
| |
(ii)(B)
|
Form
of Investment Subadvisory Agreement between Flexible Plan Investments,
Ltd. and Rafferty Asset Management, LLC is herein incorporated
by
reference from the Post-Effective Amendment No. 21 to the Trust’s
Registration Statement on Form N-1A, filed with the Securities
and
Exchange Commission on January 12, 2004 via EDGAR, Accession No.
0000898432-04-000033.
|
| |
(ii)(C)
|
Amendment
to Schedule A to the Investment Subadvisory Agreement between Flexible
Plan Investments, Ltd. and Rafferty Asset Management, LLC is herein
incorporated by reference from the Post-Effective Amendment No.
62 to the
Trust’s Registration Statement on Form N-1A, filed with the Securities
and
Exchange Commission on January 20, 2006 via EDGAR, Accession No.
0000894189-06- 000097.
|
| |
(ii)(D)
|
Form
of Investment Subadvisory Agreement between Hundredfold Advisors
and
Rafferty Asset Management, LLC is herein incorporated by reference
from
the Post-Effective Amendment No. 32 to the Trust’s Registration Statement
on Form N-1A, filed with the Securities and Exchange Commission
on
September 1, 2004 via EDGAR, Accession No.
0000898432-04-000703.
|
| |
(ii)(E)
|
Form
of Investment Subadvisory Agreement between Horizon Capital Management
Inc. and Rafferty Asset Management, LLC is herein incorporate by
reference
from the Post-Effective Amendment No. 33 to the Trust’s Registration
Statement on Form N-1A, filed with the Securities and Exchange
Commission
on September 2, 2004 via EDGAR, Accession No.
0000894189-04-001808.
|
|
(e)
|
(i)
|
Form
of Distribution Agreement between the Direxion (formerly, Potomac)
Funds
and Rafferty Capital Markets, Inc. is herein incorporated by reference
from the Post-Effective Amendment No. 1 to the Trust’s Registration
Statement on Form N-1A, filed with the Securities and Exchange
Commission
on June 15, 1998 via EDGAR, Accession No.
0000898432-98-000498.
|
| |
(ii)
|
|
|
(f)
|
|
Bonus,
profit sharing contracts - None.
|
|
(g)
|
(i)
|
Custodian
Agreement is
herein incorporated by reference from the Post-Effective Amendment
No. 50
to the Trust’s Registration Statement on Form N-1A, filed with the
Securities and Exchange Commission on June 28, 2005 via EDGAR,
Accession
No. 0000950134-05-001607.
|
| |
(ii)
|
Amendment
to Exhibit C to the Custodian Agreement is
herein incorporated by reference from the Post-Effective Amendment
No. 65
to the Trust’s Registration Statement on Form N-1A, filed with the
Securities and Exchange Commission on May 1, 2006 via EDGAR, Accession
No.
0001144204-06-017581.
|
|
(h)
|
(i)(A)
|
Transfer
Agent Agreement is
herein incorporated by reference from the Post-Effective Amendment
No. 50
to the Trust’s Registration Statement on Form N-1A, filed with the
Securities and Exchange Commission on June 28, 2005 via EDGAR,
Accession
No. 0000950134-05-001607.
|
| |
(i)(B)
|
Amendment
to Exhibit A to the Transfer Agent Agreement
is
herein incorporated by reference from the Post-Effective Amendment
No. 65
to the Trust’s Registration Statement on Form N-1A, filed with the
Securities and Exchange Commission on May 1, 2006 via EDGAR, Accession
No.
0001144204-06-017581.
|
| |
(ii)(A)
< |
