Combined Prospectus and Statement of Additional Information for the Direxion Indexed Commodity Strategy Fund, Direxion Indexed Managed Futures
Strategy Fund, Direxion/Wilshire Dynamic Fund and the Direxion Long/Short Global Currency Fund; and
STATEMENT OF ADDITIONAL INFORMATION
1301 Avenue of the Americas (6
th
Avenue),
35
th
Floor New York, New York 10019 (800) 851-0511
Direxion Indexed Commodity
Strategy Fund
Class A (DXCTX)
Class C (DXSCX)
Institutional
Class (DXCIX)
Direxion Indexed Managed Futures Strategy Fund
Class A (DXMAX)
Class C
(DXMCX)
Institutional Class (DXMIX)
Direxion/Wilshire Dynamic Fund
Class A (DXDWX)
Class C
(DXWCX)
Institutional Class (DXDIX)
Direxion Long/Short Global Currency Fund
Class A (DXAFX)
Class C
(DXCFX)
Institutional Class (DXIFX)
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 Class A, Class C and Institutional Class shares of four of those portfolios: the Direxion Indexed Commodity Strategy Fund, Direxion Indexed Managed
Futures Strategy Fund, Direxion/Wilshire Dynamic Fund and Direxion Long/Short Global Currency Fund
(
each a “Fund” and collectively the “Funds”).
This SAI, dated February 28, 2014, is not a prospectus. It should be read in conjunction with the Funds’ Prospectus dated February 28, 2014
(“Prospectus”). This SAI is incorporated by reference into the Prospectus. In other words, it is legally part of the Prospectus. To receive a copy of the Prospectus, without charge, write or call the Trust at the address or telephone
number listed above.
Dated: February 28, 2014
TABLE OF CONTENTS
i
ii
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 (the “1940 Act”). The Trust currently consists of numerous separate series, four of which are included in this SAI. Effective April 28,
2006, the Trust changed its name to Direxion Funds. Prior to that date, the Trust was known as Potomac Funds.
Prior to February 1, 2012, the
Direxion Indexed Commodity Strategy Fund pursued a different investment strategy under the former fund name, Commodity Trends Strategy Fund.
This SAI
relates to the Class A shares, Class C shares and Institutional Class shares of the Funds.
Each Fund offers Class A, Class C and Institutional
Class shares. Class A and Class C shares are made available through your registered investment adviser, financial planner, broker-dealer or other financial intermediary (“Financial Advisor”). Institutional Class shares are made
available through investment advisers, banks, trust companies or other authorized representatives without a sales charge. The Class A and Class C shares are subject to a Rule 12b-1 fee. The Institutional Class shares pay no Rule 12b-1 fees. The
Funds are not suitable for purchase by active investors. The Funds are intended for long-term investment purposes only and, except for Class C shares, impose a 1.00% redemption fee on Fund shares redeemed within thirty (30) days of the date of
purchase.
CLASSIFICATION OF THE FUNDS
Each Fund is a “non-diversified” series of the Trust pursuant to the 1940 Act. Each 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 a 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.
Each Fund intends to continue to meet certain tax-related diversification standards
for each quarter of its taxable year.
INVESTMENT POLICIES AND TECHNIQUES
This section provides a detailed description of the securities in which a Fund may invest to achieve its investment objective, the strategies it may employ
and the corresponding risks of such securities and strategies. The greatest risk of investing in a mutual fund is that its returns will fluctuate and you could lose money. Recent events in the financial sector have resulted, and may continue to
result, in an unusually high degree of volatility in the financial markets. Both domestic and foreign equity markets could experience increased volatility and turmoil, with issuers that have exposure to the real estate, mortgage and credit markets
particularly affected, and it is uncertain whether or for how long these conditions could continue. The U.S. government has already taken a number of unprecedented actions designed to support certain financial institutions and segments of the
financial markets that have experienced extreme volatility, and in some cases a lack of liquidity.
Reduced liquidity in equity, credit and fixed-income
markets may adversely affect many issuers worldwide. This reduced liquidity may result in less money being available to purchase raw materials, goods and services from emerging markets, which may, in turn, bring down the prices of these economic
staples. It may also result in emerging market issuers having more difficulty obtaining financing, which may, in turn, cause a decline in their stock prices. These events and possible continued market turbulence may have an adverse effect on the
Funds.
The Direxion Indexed Commodity Strategy Fund and Direxion Indexed Managed Futures Strategy Fund have invested in wholly owned subsidiaries
organized under the laws of the Cayman Islands (the “CTS Subsidiary” and the “MFS Subsidiary”, respectively, each a “Subsidiary” and collectively the “Subsidiaries”), the registered offices of which are
located at Walkers SPV Limited, Walker House, 87 Mary Street, George Town, Grand Cayman KY1-
1
9002, Cayman Islands. The Direxion Indexed Commodity Strategy Fund and Direxion Indexed Managed Futures Strategy Fund are currently the sole shareholders of the CTS Subsidiary and the MFS
Subsidiary, respectively, and do not expect shares of the CTS Subsidiary or MFS Subsidiary to be offered or sold to other investors. The Direxion Indexed Commodity Strategy Fund and Direxion Indexed Managed Futures Strategy Fund’s investment in
the CTS Subsidiary and the MFS Subsidiary, respectively, may not exceed 25% of the value of their total assets (ignoring any subsequent market appreciation in the CTS Subsidiary’s and the MFS Subsidiary’s value), which limitation is
imposed by the Code and is measured at the end of each quarter of its taxable year.
The Direxion Indexed Commodity Strategy Fund and Direxion Indexed
Managed Futures Strategy Fund may invest in the CTS Subsidiary and MFS Subsidiary, respectively, in order to gain exposure to the investment returns of the commodities markets within the limitations of the federal tax law requirements applicable to
RICs. Each Subsidiary invests principally in commodity and financial futures, options and swap contracts, as well as certain fixed-income investments intended to serve as margin or collateral for a Subsidiary’s derivatives positions. Unlike the
Direxion Indexed Commodity Strategy Fund and Direxion Indexed Managed Futures Strategy Fund, each Subsidiary may invest without limitation in commodity-linked derivatives, though a Subsidiary will comply with the same 1940 Act asset coverage
requirements with respect to its investments in commodity-linked derivatives that apply to the Direxion Indexed Commodity Strategy Fund and Direxion Indexed Managed Futures Strategy Fund’s transactions in those instruments. To the extent
applicable, each Subsidiary otherwise is subject to the same fundamental and non-fundamental investment restrictions as the Direxion Indexed Commodity Strategy Fund and Direxion Indexed Managed Futures Strategy Fund and, in particular, to the same
requirements relating to portfolio leverage, liquidity, and the timing and method of valuation of portfolio investments and Fund shares. (Accordingly, references in this SAI to the Direxion Indexed Commodity Strategy Fund and Direxion Indexed
Managed Futures Strategy Fund may also include their respective Subsidiaries.) By investing in their respective Subsidiaries, the Direxion Indexed Commodity Strategy Fund and Direxion Indexed Managed Futures Strategy Fund may be considered to be
investing indirectly in the same investments as their respective Subsidiaries and are indirectly exposed to the risks associated with those investments.
Each Subsidiary is not registered with the SEC as an investment company under the 1940 Act and is not subject to the investor protections of the 1940 Act. As
an investor in a Subsidiary, the Direxion Indexed Commodity Strategy Fund and Direxion Indexed Managed Futures Strategy Fund will not have the same protections offered to shareholders of registered investment companies. However, because each
Subsidiary is wholly owned and controlled by the Direxion Indexed Commodity Strategy Fund and Direxion Indexed Managed Futures Strategy Fund and all are managed by Rafferty Asset Management, LLC (“Rafferty” or the “Adviser”), it
is unlikely that a Subsidiary will take action in any manner contrary to the interest of the Direxion Indexed Commodity Strategy Fund and Direxion Indexed Managed Futures Strategy Fund or their shareholders. Because each Subsidiary has the same
investment objective and, to the extent applicable, will comply with the same investment policies as their respective Fund, Rafferty manages each Subsidiary’s portfolio in a manner similar to that of the Direxion Indexed Commodity Strategy Fund
and Direxion Indexed Managed Futures Strategy Fund.
Each Subsidiary has a board of directors that oversees its activities. Each Subsidiary has
entered into a separate investment advisory agreement with Rafferty and pays Rafferty a fee for its services. Each Subsidiary also has entered into agreements with the Funds’ service providers for the provision of administrative, accounting,
transfer agency and custody services.
The Direxion Indexed Commodity Strategy Fund and Direxion Indexed Managed Futures Strategy Fund and their
respective Subsidiary may not be able to operate as described in this SAI in the event of changes to the laws of the United States or the Cayman Islands. If the laws of the Cayman Islands required a Subsidiary to pay taxes to a governmental
authority, its respective Fund would be likely to suffer decreased returns.
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American Depositary Receipts (“ADRs”)
A Fund may invest in ADRs. 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 Funds.
Asset-Backed Securities
A 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 Funds 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 Funds 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 a Fund’s
ability to resell when it deems advisable to do so.
A Fund may invest in foreign money market instruments, which typically involve more risk that
investing in U.S. money market instruments. See “Foreign Securities” below. These risks include, among others, higher brokerage commissions, less public information, and less liquid markets in which to sell and meet large shareholder
redemption requests.
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.
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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 $250,000 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 $250,000 or more without regard to the interest rate ceilings on other deposits. To remain fully insured, these investments must be limited to $250,000 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. A Fund may invest in commercial paper rated
A-l
or
A-2
by Standard & Poor’s
®
Ratings Group (“S&P
®
”) or
Prime-1
or
Prime-2
by Moody’s Investors Service, Inc. (“Moody’s”), and in other lower quality commercial paper.
Corporate Debt Securities
A Fund may invest in investment grade corporate debt securities of any rating or maturity. 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. See Appendix A for a description of corporate bond ratings. A Fund may also invest in unrated securities.
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 a 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
. A 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.
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Convertible Securities
. A Fund may invest in convertible securities that may be considered high yield
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, a Fund may invest
in the lowest credit rating category.
Preferred Stock
. A 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, a Fund may invest in the lowest credit rating category.
Warrants and Rights
. A Fund may purchase
warrants and rights, which are instruments that permit a 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 Currencies
A Fund may invest directly and indirectly in foreign currencies. Investments in foreign currencies are subject to numerous risks not least being the
fluctuation of foreign currency exchange rates with respect to the U.S. Dollar. Exchange rates fluctuate for a number of reasons.
Inflation
.
Exchange rates change to reflect changes in a currency’s buying power. Different countries experience different inflation rates
due to different monetary and fiscal policies, different product and labor market conditions, and a host of other factors.
Trade Deficits.
Countries with trade deficits tend to experience a depreciating currency. Inflation may be the cause of a trade deficit, making a country’s goods more expensive and less competitive and so reducing demand for its currency.
Interest Rates.
High interest rates may raise currency values in the short term by making such currencies more attractive to investors. However,
since high interest rates are often the result of high inflation, long-term results may be the opposite.
Budget Deficits and Low Savings
Rates.
Countries that run large budget deficits and save little of their national income tend to suffer a depreciating currency because they are forced to borrow abroad to finance their deficits. Payments of interest on this debt can
inundate the currency markets with the currency of the debtor nation. Budget deficits also can indirectly contribute to currency depreciation if a government chooses inflationary measure to cope with its deficits and debt.
Political Factors.
Political instability in a country can cause a currency to depreciate. Demand for a certain currency may fall if a country
appears a less desirable place in which to invest and do business.
5
Government Control.
Through their own buying and selling of currencies, the world’s central
banks sometimes manipulate exchange rate movements. In addition, governments occasionally issue statements to influence people’s expectations about the direction of exchange rates, or they may instigate policies with an exchange rate target as
the goal.
The value of a Fund’s investments is calculated in U.S. Dollars each day that the New York Stock Exchange is open for business. As a
result, to the extent that the a Fund’s assets are invested in instruments denominated in foreign currencies and the currencies appreciate relative to the U.S. Dollar, a Fund’s NAV per share as expressed in U.S. Dollars (and, therefore,
the value of your investment) should increase. If the U.S. Dollar appreciates relative to the other currencies, the opposite should occur.
The
currency-related gains and losses experienced by a Fund will be based on changes in the value of portfolio securities attributable to currency fluctuations only in relation to the original purchase price of such securities as stated in U.S. Dollars.
Gains or losses on shares of a Fund will be based on changes attributable to fluctuations in the NAV of such shares, expressed in U.S. Dollars, in relation to the original U.S. Dollar purchase price of the shares. The amount of appreciation or
depreciation in a Fund’s assets also will be affected by the net investment income generated by the money market instruments in which each Fund invests and by changes in the value of the securities that are unrelated to changes in currency
exchange rates.
A Fund may incur currency exchange costs when it sells instruments denominated in one currency and buy instruments denominated in
another.
Currency Transactions.
A Fund conducts currency exchange transactions on a spot basis. Currency transactions made on a spot
basis are for cash at the spot rate prevailing in the currency exchange market for buying or selling currency. A Fund also enters into forward currency contracts. See “Options, Futures and Other Derivative Strategies” below. A forward
currency contract is an obligation to buy or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are
entered into on the interbank market conducted directly between currency traders (usually large commercial banks) and their customers.
A Fund may invest
in a combination of forward currency contracts and U.S. Dollar-denominated market instruments in an attempt to obtain an investment result that is substantially the same as a direct investment in a foreign currency-denominated instrument. This
investment technique creates a “synthetic” position in the particular foreign-currency instrument whose performance the Adviser is trying to duplicate. For example, the combination of U.S. Dollar-denominated instruments with
“long” forward currency exchange contracts creates a position economically equivalent to a money market instrument denominated in the foreign currency itself. Such combined positions are sometimes necessary when the money market in a
particular foreign currency is small or relatively illiquid.
A Fund may invest in forward currency contracts to hedge either specific transactions
(transaction hedging) or portfolio positions (position hedging). Transaction hedging is the purchase or sale of forward currency contracts with respect to specific receivables or payables of a Fund in connection with the purchase and sale of
portfolio securities. Position hedging is the sale of a forward currency contract on a particular currency with respect to portfolio positions denominated or quoted in that currency.
A Fund may use forward currency contracts for position hedging if consistent with its policy of trying to expose its net assets to foreign currencies. A Fund
is not required to enter into forward currency contracts for hedging purposes, and it is possible that a Fund may not be able to hedge against a currency devaluation that is so generally anticipated that a Fund is unable to contract to sell the
currency at a price above the devaluation level it anticipates. It also is possible, under certain circumstances, that a Fund may have to limit its currency transactions to qualify as a RIC, a “regulated investment company” under
Subchapter M of Chapter 1 of Subtitle A of the Code (“RIC”).
A Fund currently does not intend to enter into a forward currency contract with a
term of more than one year, or to engage in position hedging with respect to the currency of a particular country to more than the aggregate market value (at the time the hedging transaction is entered into) of its portfolio securities denominated
in (or quoted in or
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currently convertible into or directly related through the use of forward currency contracts in conjunction with money market instruments to) that particular currency.
At or before the maturity of a forward currency contract, a Fund may either sell a portfolio security and make delivery of the currency, or retain the
security and terminate its contractual obligation to deliver the currency by buying an “offsetting” contract obligating it to buy, on the same maturity date, the same amount of the currency. If a Fund engages in an offsetting transaction,
it may later enter into a new forward currency contract to sell the currency.
If a Fund engages in an offsetting transaction, it will incur a gain or
loss to the extent that there has been movement in forward currency contract prices. If forward prices go down during the period between the date a Fund enters into a forward currency contract for the sale of a currency and the date it enters into
an offsetting contract for the purchase of the currency, a Fund will realize a gain to the extent that the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to buy. If forward prices go up, a Fund will
suffer a loss to the extent the price of the currency it has agreed to buy exceeds the price of the currency it has agreed to sell.
Since a Fund
invests in money market instruments denominated in foreign currencies, it may hold foreign currencies pending investment or conversion into U.S. Dollars. Although a Fund values its assets daily in U.S. Dollars, it does not convert its holdings of
foreign currencies into U.S. Dollars on a daily basis. A Fund will convert its holdings from time to time, however, and incur the costs of currency conversion. Foreign exchange dealers do not charge a fee for conversion, but they do realize a profit
based on the difference between the prices at which they buy and sell various currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at one rate, and offer to buy the currency at a lower rate if a Fund tries to resell the currency
to the dealer.
Foreign Currency Options.
A Fund may invest in foreign currency-denominated securities and may buy or sell put and call
options on foreign currencies. A Fund may buy or sell put and call options on foreign currencies either on exchanges or in the over-the-counter market. A put option on a foreign currency gives the purchaser of the option the right to sell a foreign
currency at the exercise price until the option expires. A call option on a foreign currency gives the purchaser of the option the right to purchase the currency at the exercise price until the option expires. Currency options traded on U.S. or
other exchanges may be subject to position limits which may limit the ability of a Fund to reduce foreign currency risk using such options. Over-the-counter options differ from traded options in that they are two-party contracts with price and other
terms negotiated between buyer and seller, and generally do not have as much market liquidity as exchange-traded options.
Foreign Currency
Exchange-Related Securities.
Foreign currency warrants
. Foreign currency warrants such as Currency Exchange Warrants
SM
(“CEWs
SM
”) are warrants which entitle the holder to receive from their issuer an amount of cash (generally, for warrants issued in the
United States, in U.S. Dollars) which is calculated pursuant to a predetermined formula and based on the exchange rate between a specified foreign currency and the U.S. Dollar as of the exercise date of the warrant. Foreign currency warrants
generally are exercisable upon their issuance and expire as of a specified date and time. Foreign currency warrants have been issued in connection with U.S. Dollar-denominated debt offerings by major corporate issuers in an attempt to reduce the
foreign currency exchange risk which, from the point of view of prospective purchasers of the securities, is inherent in the international fixed-income marketplace. Foreign currency warrants may attempt to reduce the foreign exchange risk assumed by
purchasers of a security by, for example, providing for a supplemental payment in the event that the U.S. Dollar depreciates against the value of a major foreign currency such as the Japanese yen or the Euro. The formula used to determine the amount
payable upon exercise of a foreign currency warrant may make the warrant worthless unless the applicable foreign currency exchange rate moves in a particular direction (
e.g.,
unless the U.S. Dollar appreciates or depreciates against the
particular foreign currency to which the warrant is linked or indexed). Foreign currency warrants are severable from the debt obligations with which they may be offered, and may be listed on exchanges. Foreign currency warrants may be exercisable
only in certain minimum amounts, and an investor wishing to exercise warrants who possesses less than the minimum number required for exercise may be required either to sell the warrants or to purchase additional warrants, thereby incurring
additional transaction costs. In the case of any exercise of warrants, there may be a time delay between the time a holder of warrants gives instructions to exercise and the time the exchange rate relating to exercise is determined, during which
time the exchange rate could change significantly, thereby affecting both the market and
7
cash settlement values of the warrants being exercised. The expiration date of the warrants may be accelerated if the warrants should be delisted from an exchange or if their trading should be
suspended permanently, which would result in the loss of any remaining “time value” of the warrants (
i.e.,
the difference between the current market value and the exercise value of the warrants), and, in the case the warrants were
“out-of-the-money,” in a total loss of the purchase price of the warrants.
Warrants are generally unsecured obligations of their issuers and
are not standardized foreign currency options issued by the Options Clearing Corporation (“OCC”). Unlike foreign currency options issued by OCC, the terms of foreign exchange warrants generally will not be amended in the event of
governmental or regulatory actions affecting exchange rates or in the event of the imposition of other regulatory controls affecting the international currency markets. The initial public offering price of foreign currency warrants is generally
considerably in excess of the price that a commercial user of foreign currencies might pay in the interbank market for a comparable option involving significantly larger amounts of foreign currencies. Foreign currency warrants are subject to
significant foreign exchange risk, including risks arising from complex political or economic factors.
Principal exchange rate linked
securities
. Principal exchange rate linked securities (“PERLs
SM
”) are debt obligations the principal on which is payable at maturity in an amount that may vary based on the exchange
rate between the U.S. Dollar and a particular foreign currency at or about that time. The return on “standard” principal exchange rate linked securities is enhanced if the foreign currency to which the security is linked appreciates
against the U.S. Dollar, and is adversely affected by increases in the foreign exchange value of the U.S. Dollar; “reverse” principal exchange rate linked securities are like the “standard” securities, except that their return is
enhanced by increases in the value of the U.S. Dollar and adversely impacted by increases in the value of foreign currency. Interest payments on the securities are generally made in U.S. Dollars at rates that reflect the degree of foreign currency
risk assumed or given up by the purchaser of the notes (
i.e.,
at relatively higher interest rates if the purchaser has assumed some of the foreign exchange risk, or relatively lower interest rates if the issuer has assumed some of the foreign
exchange risk, based on the expectations of the current market). Principal exchange rate linked securities may in limited cases be subject to acceleration of maturity (generally, not without the consent of the holders of the securities), which may
have an adverse impact on the value of the principal payment to be made at maturity.
Performance indexed paper
. Performance indexed paper
(“PIPs
SM
”) is U.S. Dollar-denominated commercial paper the yield of which is linked to certain foreign exchange rate movements. The yield to the investor on performance indexed paper is
established at maturity as a function of spot exchange rates between the U.S. Dollar and a designated currency as of or about that time (generally, the index maturity two days prior to maturity). The yield to the investor will be within a range
stipulated at the time of purchase of the obligation, generally with a guaranteed minimum rate of return that is below, and a potential maximum rate of return that is above, market yields on U.S. Dollar-denominated commercial paper, with both the
minimum and maximum rates of return on the investment corresponding to the minimum and maximum values of the spot exchange rate two business days prior to maturity.
Foreign Securities
A
Fund may have both direct and indirect exposure through investments in stock index futures contracts, options on stock index futures contracts and options on securities and on stock indices to foreign securities. 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 a 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.
8
Brazil.
Investing in Brazil involves certain considerations not typically associated with
investing in the United States. Additional considerations include: (i) investment and repatriation controls, which could affect a Fund’s ability to operate and to qualify for the favorable tax treatment afforded to RICs;
(ii) fluctuations in the rate of exchange between the Brazilian Real and the U.S. Dollar; (iii) the generally greater price volatility and lesser liquidity that characterize Brazilian securities markets, as compared with U.S. markets;
(iv) the effect that balance of trade could have on Brazilian economic stability and the Brazilian government’s economic policy; (v) potentially high rates of inflation; (vi) governmental involvement in and influence on the
private sector; (vii) Brazilian accounting, auditing and financial standards and requirements, which differ from those in the United States; (viii) political and other considerations, including changes in applicable Brazilian tax laws; and
(ix) restrictions on investments by foreigners. While the economy of Brazil has enjoyed substantial economic growth in recent years there can be no guarantee this growth will continue.
China.
Investing in China involves special considerations not typically associated with investing in countries with more democratic governments
or more established economies or currency markets. These risks include: (i) the risk of nationalization or expropriation of assets or confiscatory taxation; (ii)greater governmental involvement in and control over the economy, interest rates
and currency exchange rates; (iii) controls on foreign investment and limitations on repatriation of invested capital; (iv) greater social, economic and political uncertainty (including the risk of war); (v) dependency on exports and
the corresponding importance of international trade; (vi) currency exchange rate fluctuations; and (vii) the risk that certain companies in which the Fund may invest may have dealings with countries subject to sanctions or embargoes
imposed by the U.S. government or identified as state sponsors of terrorism. The government of China maintains strict currency controls in support of economic, trade and political objectives and regularly intervenes in the currency market. The
government’s actions in this respect may not be transparent or predictable. As a result, the value of the Yuan, and the value of securities designed to provide exposure to the Yuan, can change quickly and arbitrarily. Furthermore, it is
difficult for foreign investors to directly access money market securities in China because of investment and trading restrictions. While the economy of China has enjoyed substantial economic growth in recent years there can be no guarantee this
growth will continue. These and other factors may decrease the value and liquidity of a Fund’s investments.
Developing and Emerging
Markets.
Emerging and developing markets abroad may offer special opportunities for investing but may have greater risks than more developed foreign markets, such as those in Europe, Canada, Australia, New Zealand and Japan. There may be
even less liquidity in their securities markets, and settlements of purchases and sales of securities may be subject to additional delays. They are subject to greater risks of limitations on the repatriation of income and profits because of currency
restrictions imposed by local governments. Those countries may also be subject to the risk of greater political and economic instability, which can greatly affect the volatility of prices of securities in those countries.
Investing in emerging market securities imposes risks different from, or greater than, risks of investing in foreign developed countries. These risks include:
smaller market capitalization of securities markets, which may suffer periods of relative illiquidity; significant price volatility; restrictions on foreign investment; possible repatriation of investment income and capital. In addition, foreign
investors may be required to register the proceeds of sales; future economic or political crises could lead to price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization, or creation of government monopolies.
The currencies of emerging market countries may experience significant declines against the U.S. Dollar. Inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets
of certain emerging market countries. Additional risks of emerging markets securities may include: greater social, economic and political uncertainty and instability; more substantial governmental involvement in the economy; less governmental
supervision and regulation; unavailability of currency hedging techniques; companies that are newly organized and small; differences in auditing and financial reporting standards, which may result in unavailability of material information about
issuers; and less developed legal systems. In addition, emerging securities markets may have different clearance and settlement procedures, which may be unable to keep pace with the volume of securities transactions or otherwise make it difficult to
engage in such transactions.
India.
Investments in India involve special considerations not typically associated with investing in
countries with more established economies or currency markets. Political and economic conditions and changes in regulatory, tax, or economic policy in India could significantly affect the market in that country and in surrounding or related
countries and have a negative impact on a Fund’s performance. Agriculture occupies a prominent position in the
9
Indian economy and the Indian economy therefore may be negatively affected by adverse weather conditions. The Indian government has exercised and continues to exercise significant influence over
many aspects of the economy, and the number of public sector enterprises in India is substantial. While the Indian government has implemented economic structural reform with the objective of liberalizing India’s exchange and trade policies,
reducing the fiscal deficit, controlling inflation, promoting a sound monetary policy, reforming the financial sector, and placing greater reliance on market mechanisms to direct economic activity, there can be no assurance that these policies will
continue or that the economic recovery will be sustained. While the government of India is moving to a more liberal approach, it still places restrictions on the capability and capacity of foreign investors to access and trade Rupee directly.
Foreign investors in India still face burdensome taxes on investments in income producing securities. While the economy of India has enjoyed substantial economic growth in recent years there can be no guarantee this growth will continue. These and
other factors may decrease the value and liquidity of a Fund’s investments.
Latin America.
Investments in Latin American countries
involve special considerations not typically associated with investing in the United States. Most Latin American countries have experienced, at one time or another, severe and persistent levels of inflation, including, in some cases, hyperinflation.
This has, in turn, led to high interest rates, extreme measures by governments to keep inflation in check, and a generally debilitating effect on economic growth. Although inflation in many countries has lessened, there is no guarantee it will
remain at lower levels. In addition, the political history of certain Latin American countries has been characterized by political uncertainty, intervention by the military in civilian and economic spheres, and political corruption. Such
developments, if they were to reoccur, could reverse favorable trends toward market and economic reform, privatization, and removal of trade barriers, and result in significant disruption in securities markets. Certain Latin American countries may
also have managed currencies which are maintained at artificial levels to the U.S. Dollar rather than at levels determined by the market. This type of system can lead to sudden and large adjustments in the currency which, in turn, can have a
disruptive and negative effect on foreign investors. For example, in late 1994 the value of the Mexican peso lost more than one-third of its value relative to the dollar. Certain Latin American countries also restrict the free conversion of their
currency into foreign currencies, including the U.S. Dollar. There is no significant foreign exchange market for many currencies and it would, as a result, be difficult for the Fund to engage in foreign currency transactions designed to protect the
value of the Fund’s interests in securities denominated in such currencies. Finally, a number of Latin American countries are among the largest debtors of developing countries. There have been moratoria on, and reschedulings of, repayment with
respect to these debts. Such events can restrict the flexibility of these debtor nations in the international markets and result in the imposition of onerous conditions on their economies.
Russia.
Investing in Russia involves risks and special considerations not typically associated with investing in United States. Since the
breakup of the Soviet Union at the end of 1991, Russia has experienced dramatic political and social change. The political system in Russia is emerging from a long history of extensive state involvement in economic affairs. The country is undergoing
a rapid transition from a centrally-controlled command system to a market-oriented, democratic model. As a result, relative to companies operating in Western economies, companies in Russian are characterized by a lack of: (i) management with
experience of operating in a market economy; (ii) modern technology; and, (iii) a sufficient capital base with which to develop and expand their operations. It is unclear what will be the future effect on Russian companies, if any, of
Russia’s continued attempts to move toward a more market-oriented economy. Russia’s economy has experienced severe economic recession, if not depression, since 1990 during which time the economy has been characterized by high rates of
inflation, high rates of unemployment, declining gross domestic product, deficit government spending, and a devaluing currency. The economic reform program has involved major disruptions and dislocations in various sectors of the economy, and those
problems have been exacerbated by growing liquidity problems. Further, Russia presently receives significant financial assistance from a number of countries through various programs. To the extent these programs are reduced or eliminated in the
future, Russian economic development may be adversely impacted. The laws and regulations in Russia affecting Western investment business continue to evolve in an unpredictable manner. Russian laws and regulations, particularly those involving
taxation, foreign investment and trade, title to property or securities, and transfer of title, which may be applicable to the Fund’s activities are relatively new and can change quickly and unpredictably in a manner far more volatile than in
the United States or other developed market economies. Although basic commercial laws are in place, they are often unclear or contradictory and subject to varying interpretation, and may at any time be amended, modified, repealed or replaced in a
manner adverse to the interest of the Fund.
10
Hybrid Instruments
A Fund may invest in hybrid instruments. A hybrid instrument is a type of potentially high-risk derivative that combines a traditional stock, bond, or
commodity with an option or forward contract. Generally, the principal amount, amount payable upon maturity or redemption, or interest rate of a hybrid is tied (positively or negatively) to the price of some commodity, currency or securities index
or another interest rate or some other economic factor (each a “benchmark”). The interest rate or (unlike most fixed income securities) the principal amount payable at maturity of a hybrid security may be increased or decreased, depending
on changes in the value of the benchmark. A hybrid could be, for example, a bond issued by an oil company that pays a small base level of interest, in addition to interest that accrues when oil prices exceed a certain predetermined level. Such a
hybrid instrument would be a combination of a bond and a call option on oil.
Hybrids can be used as an efficient means of pursuing a variety of
investment goals, including currency hedging, and increased total return. Hybrids may not bear interest or pay dividends. The value of a hybrid or its interest rate may be a multiple of a benchmark and, as a result, may be leveraged and move (up or
down) more steeply and rapidly than the benchmark. These benchmarks may be sensitive to economic and political events, such as commodity shortages and currency devaluations, which cannot be readily foreseen by the purchaser of a hybrid. Under
certain conditions, the redemption value of a hybrid could be zero. Thus, an investment in a hybrid may entail significant market risks that are not associated with a similar investment in a traditional, U.S. Dollar-denominated bond that has a fixed
principal amount and pays a fixed rate or floating rate of interest. The purchase of hybrids also exposes a Fund to the credit risk of the issuer of the hybrids. These risks may cause significant fluctuations in the NAV of a Fund.
Certain hybrid instruments may provide exposure to the commodities markets. These are derivative securities with one or more commodity-linked components that
have payment features similar to commodity futures contracts, commodity options, or similar instruments. Commodity-linked hybrid instruments may be either equity or debt securities, and are considered hybrid instruments because they have both
security and commodity-like characteristics. A portion of the value of these instruments may be derived from the value of a commodity, futures contract, index or other economic variable.
Certain issuers of structured products such as hybrid instruments may be deemed to be investment companies as defined in the 1940 Act. As a result, a
Fund’s investment in these products may be subject to limits applicable to investments in investment companies and may be subject to restrictions contained in the 1940 Act.
Illiquid Investments and Restricted Securities
Each Fund may purchase and hold illiquid investments. No Fund or Subsidiary will 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 has determined under Board-approved
guidelines are liquid. No Fund or Subsidiary, however, currently anticipates 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 a 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 a Fund will be considered illiquid unless the OTC options are sold to qualified dealers who agree that a 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.
11
A Fund may not be able to sell illiquid investments when Rafferty 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. 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 a Fund, however, could affect adversely the marketability of such portfolio
securities, and a Fund may be unable to dispose of such securities promptly or at reasonable prices.
Indexed Securities
A 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.
Investment in the Subsidiary
(Direxion Indexed Commodity Strategy Fund and Direxion
Indexed Managed Futures Strategy Fund)
The Direxion Indexed Commodity Strategy Fund and Direxion Indexed Managed Futures Strategy Fund
have invested in wholly owned subsidiaries organized under the laws of the Cayman Islands CTS Subsidiary and the MFS Subsidiary, respectively, the registered offices of which are located at Walkers SPV Limited, Walker House, 87 Mary Street, George
Town, Grand Cayman KY1-9002, Cayman Islands. The Direxion Indexed Commodity Strategy Fund and Direxion Indexed Managed Futures Strategy Fund are currently the sole shareholders of the CTS Subsidiary and the MFS Subsidiary, respectively, and do not
expect shares of the CTS Subsidiary or MFS Subsidiary to be offered or sold to other investors. The Direxion Indexed Commodity Strategy Fund and Direxion Indexed Managed Futures Strategy Fund’s investment in the CTS Subsidiary and the MFS
Subsidiary, respectively, may not exceed 25% of the value of their total assets (ignoring any subsequent market appreciation in the CTS Subsidiary’s and the MFS Subsidiary’s value), which limitation is imposed by the Code and is measured
at the end of each quarter of its taxable year.
The Direxion Indexed Commodity Strategy Fund and Direxion Indexed Managed Futures Strategy Fund
invest in their Subsidiary in order to gain exposure to the investment returns of the commodities markets within the limitations of the federal tax law requirements applicable to RICs. Each Subsidiary invests principally in commodity and financial
futures, options and swap contracts, as well as certain fixed-income investments intended to serve as margin or collateral for the Subsidiary’s derivatives positions. Unlike the Direxion Indexed Commodity Strategy Fund and Direxion Indexed
Managed Futures Strategy Fund, each Subsidiary may invest without limitation in commodity-linked derivatives, though a Subsidiary will comply with the same 1940 Act asset coverage requirements with respect to its investments in commodity-linked
derivatives that apply to a Fund’s transactions in those instruments. To the extent applicable, each Subsidiary otherwise is subject to the same fundamental and non-fundamental investment restrictions as the Funds and, in particular, to the
same requirements relating to portfolio leverage, liquidity, and the timing and method of valuation of portfolio investments and Fund shares. (Accordingly,
12
references in this SAI to the Direxion Indexed Commodity Strategy Fund and Direxion Indexed Managed Futures Strategy Fund may also include their respective Subsidiary.) By investing in their
respective Subsidiaries, the Direxion Indexed Commodity Strategy Fund and Direxion Indexed Managed Futures Strategy Fund may be considered to be investing indirectly in the same investments as their respective Subsidiaries and are indirectly exposed
to the risks associated with those investments.
Each Subsidiary is not registered with the SEC as an investment company under the 1940 Act and is
not subject to the investor protections of the 1940 Act. As an investor in a Subsidiary, the Direxion Indexed Commodity Strategy Fund and Direxion Indexed Managed Futures Strategy Fund will not have the same protections offered to shareholders of
registered investment companies. However, because each Subsidiary is wholly owned and controlled by each Fund and all are managed by Rafferty, it is unlikely that a Subsidiary will take action in any manner contrary to the interest of the Direxion
Indexed Commodity Strategy Fund and Direxion Indexed Managed Futures Strategy Fund or their shareholders. Because each Subsidiary has the same investment objective and, to the extent applicable, will comply with the same investment policies as their
respective Fund, Rafferty manages each Subsidiary’s portfolio in a manner similar to that of their respective Fund.
Each Subsidiary has a board of
directors that oversees its activities. Each Subsidiary has entered into a separate investment advisory agreement with Rafferty and pays Rafferty a fee for its services. Each Subsidiary also has entered into agreements with the Funds’ service
providers for the provision of administrative, accounting, transfer agency and custody services.
The Direxion Indexed Commodity Strategy Fund and
Direxion Indexed Managed Futures Strategy Fund and their Subsidiary may not be able to operate as described in this SAI in the event of changes to the laws of the United States or the Cayman Islands. If the laws of the Cayman Islands required a
Subsidiary to pay taxes to a governmental authority, their respective Fund would be likely to suffer decreased returns.
Interest Rate Swaps
A Fund may enter into interest rate swaps for hedging purposes and non-hedging purposes. Since swaps are entered into for
good faith hedging purposes or are offset by a segregated account maintained by an approved custodian, Rafferty believes that swaps do not constitute senior securities as defined in the 1940 Act and, accordingly, will not treat them as being subject
to a Fund’s borrowing restrictions. The net amount of the excess, if any, of a Fund’s obligations over its entitlement with respect to each interest rate swap will be accrued on a daily basis and an amount of cash or other liquid
securities having an aggregate NAV at least equal to such accrued excess will be maintained in a segregated account by each Fund’s custodian. A Fund will not enter into any interest rate swap unless Rafferty believes that the other party to the
transaction is creditworthy. If there is a default by the other party to such a transaction, a Fund will have contractual remedies pursuant to the agreement. 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. In addition, some interest rate swaps are, and more in the future may be, centrally cleared. As a result, the swap market has become
relatively liquid in comparison with the markets for other similar instruments which are traded in the interbank market.
Junk Bonds
A Fund
may invest in lower-rated debt securities, including securities in the lowest credit rating category, of any maturity, otherwise known as “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
13
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 issues generally is thinner and less active than that for higher quality securities, which may limit a 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. Changes by recognized rating services in their ratings of a fixed-income security may affect the value of these investments. A Fund will not necessarily dispose of a security when its rating is reduced below its
rating at the time of purchase. However, Rafferty will monitor the investment to determine whether continued investment in the security will assist in meeting a Fund’s investment objective.
Mortgage-Backed Securities
A Fund may invest in 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 or not 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
accrues on all classes of the CMOs on a monthly, quarterly or semi-annual 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. A Fund will only invest in SMBS that are obligations backed by the full faith and credit of the U.S. government. SMBS are usually
14
structured with two classes that receive different proportions of the interest and principal distributions from a pool of mortgage assets. A 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, each 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 or not 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 a Fund invested in such securities wishing to sell them may find it
difficult to find a buyer, which may in turn decrease the price at which they may be sold. Credit risk reflects the risk that a 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.
Municipal Obligations
A Fund may invest in municipal obligations. In addition to the usual risks associated with investing for income, the value of municipal obligations can be
affected by changes in the actual or perceived credit quality of the issuers. The credit quality of a municipal obligation can be affected by, among other factors: a) the financial condition of the issuer or guarantor; b) the issuer’s future
borrowing plans and sources of revenue; c) the economic feasibility of the revenue bond project or general borrowing purpose; d) political or economic developments in the region or jurisdiction where the security is issued; and e) the liquidity of
the security. Because municipal obligations are generally traded OTC, the liquidity of a particular issue often depends on the willingness of dealers to make a market in the security. The liquidity of some municipal issues can be enhanced by demand
features, which enable a Fund to demand payment from the issuer or a financial intermediary on short notice.
Options, Futures and Other Derivative Strategies
General
.
A Fund may use certain options (traded on an exchange or 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 a Fund’s position,
to create a synthetic money market position, for certain tax-related purposes or 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 (the “CFTC”). In addition, a 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, a Fund is not deemed to be a commodity pool operator or a commodity pool under the Commodity
Exchange Act (the “CEA”). However, the registration exclusion was amended in February 2012, and such amendments took effect on April 24, 2012. Under these amendments, if a Fund uses commodity interests (such as futures contracts,
options on futures contracts and swaps) other than for
bona fide
hedging purposes (as defined by the CFTC) the aggregate initial margin and premiums required to establish these positions (after taking into account unrealized profits and
unrealized losses on
15
any such positions and excluding the amount by which options that are “in-the-money” at the time of purchase) may not exceed 5% of a fund’s NAV, or alternatively, the aggregate net
notional value of those positions, as determined at the time the most recent position was established, may not exceed 100% of the fund’s NAV (after taking into account unrealized profits and unrealized losses on any such positions).
Accordingly, the Direxion Indexed Commodity Strategy Fund, Direxion Indexed Managed Futures Strategy Fund and the Direxion Long/Short Global Currency Fund have registered as commodity pools, and the Adviser has registered as a commodity pool
operator with the National Futures Association.
The Funds are subject to the risk that a change in U.S. law and related regulations will impact the way
each Fund operates, increase the particular costs of each Fund’s operations and/or change the competitive landscape. In this regard, any further amendment to the CEA or its related regulations that subject each Fund to additional regulation may
have adverse impacts on each Fund’s operations and expenses.
In addition to the instruments, strategies and risks described below and in the
Prospectus, Rafferty may discover additional opportunities in connection with Financial Instruments and other similar or related techniques. These new opportunities may become available as Rafferty develops new techniques, as regulatory authorities
broaden the range of permitted transactions and as new Financial Instruments or other techniques are developed. Rafferty may utilize these opportunities to the extent that they are consistent with a Fund’s investment objective and permitted by
a Fund’s investment limitations and applicable regulatory authorities. A 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 Rafferty’s 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 Rafferty may still not result in a successful transaction. Rafferty may be
incorrect in its expectations as to the extent of market movements or the time span within which the movements take place, which, 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, a 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 a Fund were 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 a Fund’s ability to sell a portfolio security or make an investment when it would otherwise be
favorable to do so or require that a Fund sell a portfolio security at a disadvantageous time. A 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 a 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 a Fund on options transactions.
16
Cover
.
Transactions using Financial Instruments, other than purchased options, expose a Fund to an
obligation to another party. A 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. Each 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. The CTS Subsidiary and MFS Subsidiary will comply with SEC guidelines regarding cover
for Financial Instruments to the same extent as the Direxion Indexed Commodity Strategy Fund and Direxion Indexed Managed Futures Strategy Fund, respectively.
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 a Fund’s assets to cover or accounts could impede portfolio management or a 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 NYSE MKT LLC
®
(the “AMEX
®
”) and other exchanges, as well as the OTC markets.
By buying a call option on a security, a
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, a 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, a 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, a
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 a 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.
A Fund may effectively terminate its right or obligation under an option by entering into a closing transaction. For example, a 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, a 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 a Fund to realize profits or limit losses on an option position prior to its exercise or expiration.
Risks of Options on Currencies, Securities and Commodities.
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 a Fund and its counterparty (usually a securities dealer or
a bank) with no clearing organization guarantee. Thus, when a Fund purchases an OTC option, it relies on the counterparty from which 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 a Fund as well as the loss of any expected benefit of the transaction.
A
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 a 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, a Fund might be unable to close out an OTC option position at any time prior to its expiration.
If a 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
17
written by a Fund could cause material losses because a 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 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 a 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 a 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 a 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 each point of such difference. When a Fund buys a call on an index, it pays a premium and has the same rights to such call as are indicated above. When a Fund buys a put on an index, it pays a premium and has the same rights as above,
prior to the expiration date, to require the seller of the put, upon a Fund’s exercise of the put, to deliver to a 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 a 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 a 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 a 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, a 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 a 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.
Forward Contracts
. The Funds may enter into equity, equity index or interest rate forward contracts for purposes of
attempting to gain exposure to an index or group of securities without actually purchasing these securities, or to hedge a position. Forward contracts are two-party contracts pursuant to which one party agrees to pay the counterparty a fixed price
for an agreed upon amount of commodities, securities, or the cash value of the commodities, securities or the securities index, at an agreed upon date. Because they are two-party contracts and because they may have terms greater than seven days,
forward contracts may be considered to be illiquid for the Fund’s illiquid investment limitations. A Fund will not enter into any forward contract unless Rafferty believes that the other party to the transaction is creditworthy. A Fund bears
the risk of loss of the amount expected to be received under a forward contract in the event of the default or bankruptcy of a counterparty. If such a default occurs, a Fund will have contractual remedies pursuant to the forward contract, but such
remedies may be subject to bankruptcy and insolvency laws which could affect the Fund’s rights as a creditor.
18
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 a 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 a Fund writes a call, it assumes a short futures position. If it writes a put, it assumes a long futures position. When a 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 a Fund realizes a gain or loss from futures activities depends upon movements in the underlying security or index. The extent of a Fund’s loss
from an unhedged short position in futures contracts or from writing unhedged call options on futures contracts is potentially unlimited. A 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 a 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 a Fund at the termination of the transaction if all contractual obligations have
been satisfied. Under certain circumstances, such as periods of high volatility, a 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 a Fund’s obligations to or from a futures commission merchant. When a Fund
purchases an option on a futures contract, the premium paid plus transaction costs is all that is at risk. In contrast, when a 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 a 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 a 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. A Fund would continue to be subject to market risk with respect to the
position. In addition, except in the case of purchased options, a 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.
19
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.
Risks Associated with Commodity Futures Contracts.
Commodity
futures contracts are agreements pursuant to which one party agrees to purchase an asset from the other party at a price and quantity agreed-upon when the contract is made. In addition to the risks associated with futures contracts, there are
certain additional risks associated with transactions in commodity futures contracts.
Storage.
Unlike the financial futures markets, in the
commodity futures markets there are costs of physical storage associated with purchasing the underlying commodity. The price of the commodity futures contract will reflect the storage costs of purchasing the physical commodity, including the time
value of money invested in the physical commodity. To the extent that the storage costs for an underlying commodity change while a Fund is invested in futures contracts on that commodity, the value of the futures contract may change proportionately.
Reinvestment.
In the commodity futures markets, producers of the underlying commodity may decide to hedge the price risk of selling the
commodity by selling futures contracts today to lock in the price of the commodity at delivery tomorrow. In order to induce speculators to purchase the other side of the same futures contract, the commodity producer generally must sell the futures
contract at a lower price than the expected future spot price. Conversely, if most hedgers in the futures market are purchasing futures contracts to hedge against a rise in prices, then speculators will only sell the other side of the futures
contract at a higher futures price than the expected future spot price of the commodity. The changing nature of the hedgers and speculators in the commodity markets will influence whether futures prices are above or below the expected future spot
price, which can have significant implications for a Fund. If the nature of hedgers and speculators in futures markets has shifted when it is time for a Fund to reinvest the proceeds of a maturing contract in a new futures contract, the Fund might
reinvest at higher or lower futures prices, or choose to pursue other investments.
Other Economic Factors.
The commodities which underlie
commodity futures contracts may be subject to additional economic and non-economic variables, such as drought, floods, weather, livestock disease, embargoes, tariffs, and international economic, political and regulatory developments. These factors
may have a larger impact on commodity prices and commodity-linked instruments, including futures contracts, than on traditional securities. Certain commodities are also subject to limited pricing flexibility because of supply and demand factors.
Others are subject to broad price fluctuations as a result of the volatility of the prices for certain raw materials and the instability of supplies of other materials. These additional variables may create additional investment risks which subject
a Fund’s investments to greater volatility than investments in traditional securities.
Combined Positions
.
A Fund may purchase and
write options in combination with each other. For example, a 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.
20
Other Investment Companies
Open-End and Closed-End Investment Companies
. Each Fund may invest in the securities of other investment companies, including open- and closed-end funds
and exchange-traded funds. Investments in the securities of other investment companies may involve duplication of advisory fees and certain other expenses. By investing in another investment company, a Fund becomes a shareholder of that investment
company. As a result, Fund shareholders indirectly will bear a Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses Fund shareholders directly bear in connection with a
Fund’s own operations.
Each 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 a 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 a 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 a 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’ shareholders with regard to the voting of all proxies and vote in accordance with such instructions, or vote the shares held by the Fund in the same proportion as 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.
Shares of another investment company or ETF that has received exemptive relief from the SEC to permit other funds to invest in the shares without these
limitations are excluded from such restrictions to the extent that a Fund has complied with the requirements of such orders. To the extent that a Fund invests in open-end or closed-end investment companies that invest primarily in the securities of
companies located outside the United States, see the risks related to foreign securities set forth above
Repurchase
Agreements
A Fund may enter into repurchase agreements with banks that are members of the Federal Reserve System or securities dealers who 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, a 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 a 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. No Fund may 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.
21
A 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 a Fund in each repurchase agreement. In the event of default or bankruptcy by the seller, a Fund will liquidate those securities (whose market value, including accrued interest,
must be at least 100% of the amount invested by a Fund) held under the applicable repurchase agreement, which securities constitute collateral for the seller’s obligation to repurchase the security. If the seller defaults, a 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 a Fund may be delayed or limited.
Reverse Repurchase
Agreements
A 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, a Fund sells securities and agrees to repurchase them at a mutually agreed to price. At the time a 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 a Fund may decline below the price of the securities a 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 a Fund’s obligation to repurchase the securities. During that time, a 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 a Fund’s limitation on borrowing.
Short Sales
A Fund may
engage in short sale transactions under which a Fund sells a security it does not own. To complete such a transaction, a Fund must borrow the security to make delivery to the buyer. A Fund then is obligated to replace the security borrowed by
purchasing the security at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by a Fund. Until the security is replaced, a 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 a Fund closes its short position or replaces the borrowed stock, a 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 a Fund’s short position.
Swap Agreements
A Fund
may enter into swap agreements. Swap agreements are generally 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. Some swaps are, and more in the future will be, centrally
cleared. Swaps that are centrally-cleared are subject to the creditworthiness of the clearing organizations involved in the transaction. For example, an investor could lose margin payments it has deposited with the clearing organization as well as
the net amount of gains not yet paid by the clearing organization if it breaches its agreement with the investor or becomes insolvent or goes into bankruptcy. In the event of bankruptcy of the clearing organization, the investor may be entitled to
the net amount of gains the investor is entitled to receive plus the return of margin owed to it only in proportion to the amount received by the clearing organization’s other customers, potentially resulting in losses to the investor.
22
An interest rate swap is an agreement between two parties to exchange interest payments on a designated amount of
two different securities for a designated period of time. For example, two parties may agree to exchange interest payments on variable and fixed rate instruments. A Fund may enter into interest rate swap transactions to preserve a return or spread
on a particular investment or a portion of its bond portfolio.
A total return swap is a contract whereby one party agrees to make a series of payments to
another party based on the change in the market value of the assets underlying such contract (which can include a security, commodity, index or baskets thereof) during the specified period. In exchange, the other party to the contract agrees to make
a series of payments calculated by reference to an interest rate and/or some other agreed-upon amount (including the change in market value of other underlying assets). A Fund may use total return swaps to gain exposure to an asset without owning it
or taking physical custody of it. For example, a Fund investing in total return commodity swaps will receive the price appreciation of a commodity, commodity index or portion thereof in exchange for payment of an agreed-upon fee.
In a credit default swap, the credit default protection buyer makes periodic payments, known as premiums, to the credit default protection seller. In return
the credit default protection seller will make a payment to the credit default protection buyer upon the occurrence of a specified credit event. A credit default swap can refer to a single issuer or asset, a basket of issuers or assets or index of
assets, each known as the reference entity or underlying asset. A Fund may act as either the buyer or the seller of a credit default swap. A Fund may buy or sell credit default protection on a basket of issuers or assets, even if a number of the
underlying assets referenced in the basket are lower-quality debt securities. In an unhedged credit default swap, a Fund buys credit default protection on a single issuer or asset, a basket of issuers or assets or index of assets without owning the
underlying asset or debt issued by the reference entity. Credit default swaps involve greater and different risks than investing directly in the referenced asset, because, in addition to market risk, credit default swaps include liquidity,
counterparty and operational risk.
Credit default swaps allow a fund to acquire or reduce credit exposure to a particular issuer, asset or basket of
assets. If a swap agreement calls for payments by a fund, the Fund must be prepared to make such payments when due. If a Fund is the credit default protection seller, the Fund will experience a loss if a credit event occurs and the credit of the
reference entity or underlying asset has deteriorated. If a Fund is the credit default protection buyer, the Fund will be required to pay premiums to the credit default protection seller.
Most swap agreements entered into by a Fund calculate the obligations of the parties to the agreement on a “net basis.” Consequently, a Fund’s
current obligations (or rights) under a swap agreement generally will be equal 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, a Fund’s risk of loss consists of the net amount of payments that such Fund is contractually entitled
to receive, if any.
The net amount of the excess, if any, of a 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. A Fund also will 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 a
Fund’s investment restriction concerning senior securities.
Because they are generally two-party contracts and may have terms of greater than seven
days, swap agreements may be considered to be illiquid for a Fund’s illiquid investment limitations. A Fund will not enter into any swap agreement unless Rafferty believes that the other party to the transaction is creditworthy. A 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.
23
A Fund may enter into a swap agreement with respect to an index in circumstances where Rafferty believes that it
may be more cost effective or practical than buying the underlying securities represented by such index or a futures contract or an option on such index. The counterparty to any swap agreement will typically be a bank, investment banking firm or
broker-dealer. The counterparty will generally agree to pay a 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. A 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 a 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 a 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. In addition, as discussed above, some swaps currently are, and more in the future will be, centrally cleared, which affects how swaps are transacted. 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.
Unrated Debt Securities
A Fund may also invest in unrated debt securities. Unrated debt, while not necessarily lower in quality than rated securities, may not have as broad a market.
Because of the size and perceived demand for the issue, among other factors, certain issuers may decide not to pay the cost of getting a rating for their bonds. The creditworthiness of the issuer, as well as any financial institution or other party
responsible for payments on the security, will be analyzed to determine whether to purchase unrated bonds.
U.S.
Government Securities
A 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 they employ, 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, 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
©
”).
24
In September 2008, the U.S. Treasury Department (“U.S. Treasury”) and the Federal Housing Finance
Agency (“FHFA”) announced that Fannie Mae
©
and Freddie Mac
®
had been placed in conservatorship. Since that time, Fannie Mae
©
and Freddie Mac
®
have received significant capital support through U.S. Treasury preferred stock purchases, as well as U.S. Treasury and
Federal Reserve purchases of their mortgage backed securities (“MBS”). The FHFA and the U.S. Treasury (through its agreement to purchase Fannie Mae
©
and Freddie Mac
®
preferred stock) have imposed strict limits on the size of their mortgage portfolios. While the MBS purchase programs ended in 2010, the U.S. Treasury continued its support for the entities’
capital as necessary to prevent a negative net worth through at least 2012. Since the end of 2007, Fannie Mae
®
and Freddie Mac
®
have
received U.S. Treasury support of approximately $187.5 billion through draws under the preferred stock purchase agreements. However, they have repaid approximately $185 billion in dividends and Fannie
Mae
®
and Freddie Mac
®
have not required a draw from the U.S. Treasury since the fourth quarter of 2011, or the first quarter of 2012,
respectively. Fannie Mae
®
and Freddie Mac
®
ended the third quarter of 2013 with positive net worth and, as a result, neither required a
draw from the U.S. Treasury. Nonetheless, no assurance can be given that the Federal Reserve or the U.S. Treasury will ensure that Fannie Mae
©
and Freddie Mac
®
will remain successful in meeting their obligations with respect to the debt and mortgage-backed securities that they issue.
In addition, the problems faced by Fannie Mae
©
and Freddie Mac
®
, resulting in their being placed into federal conservatorship and receiving significant U.S. government support, have sparked serious debate among federal policy makers regarding the continued
role of the U.S. government in providing liquidity for mortgage loans. The Obama Administration produced a report to Congress on February 11, 2011, outlining a proposal to wind down Fannie
Mae
©
and Freddie Mac
®
by increasing their guarantee fees, reducing their conforming loan limits (the maximum amount of each loan they
are authorized to purchase), and continuing progressive limits on the size of their investment portfolio. In December 2011, Congress enacted the Temporary Payroll Tax Cut Continuation Act (“TCCA”) of 2011 which, among other provisions,
requires that Fannie Mae
©
and Freddie Mac
©
increase their single-family guaranty fees by at least 10 basis points and remit this
increase to the U.S. Treasury with respect to all loans acquired by Fannie Mae
©
and Freddie Mac
©
on or after April 1, 2012 and
before January 1, 2022. Serious discussions among policymakers continue, however, as to whether Fannie Mae
©
and Freddie Mac
®
should be nationalized, privatized, restructured, or eliminated altogether. Fannie Mae
©
and Freddie Mac
®
also are the subject of
several continuing legal actions and investigations over certain accounting, disclosure or corporate governance matters, which (along with any resulting financial restatements) may continue to have an adverse effect on the guaranteeing entities.
Importantly, the future of Fannie Mae
©
and Freddie Mac
®
is in question as the U.S. government considers multiple options.
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 a Fund’s portfolio investments in U.S.
government securities, while a decline in interest rates generally would increase the market value of a Fund’s portfolio investments in these securities.
U.S. Government Sponsored Enterprises (“GSEs”)
GSE securities are issued or guaranteed by the U.S. government or its agencies or instrumentalities. Some obligations issued by GSEs and instrumentalities are
supported by the full faith and credit of the U.S. Treasury; others by the right of the issuer to borrow from the U.S. Treasury; others by discretionary authority of the U.S. government to purchase certain obligations of the agency or
instrumentality; and others only by the credit of the agency or instrumentality. Those securities bear fixed, floating or variable rates of interest. Interest may fluctuate based on generally recognized reference rates or the relationship of rates.
While the U.S. government currently provides financial support to such GSEs or instrumentalities, no assurance can be given that it will always do so, since it is not so obligated by law.
Certain U.S. government debt securities, such as securities of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S.
Treasury. Others, such as securities issued by the Fannie Mae
©
and Freddie Mac
©
, are supported only by the credit of the corporation.
In the case of securities not backed by the full faith and credit of the United States, a fund must look principally to the agency issuing or guaranteeing the
25
obligation in the event the agency or instrumentality does not meet its commitments. The U.S. government may choose not to provide financial support to GSEs or instrumentalities if it is not
legally obligated to do so. A fund will invest in securities of such instrumentalities only when Rafferty is satisfied that the credit risk with respect to any such instrumentality is comparatively minimal.
When-Issued Securities
A Fund may enter into firm commitment agreements for the purchase of securities on a specified future date. A Fund may purchase, for example, new issues of
fixed-income instruments on a when-issued basis, whereby the payment obligation, or yield to maturity, or coupon rate on the instruments may not be fixed at the time of transaction. A Fund will not purchase securities on a when-issued basis if, as a
result, more than 15% of its net assets would be so invested. If a Fund enters into a firm commitment agreement, liability for the purchase price and the rights and risks of ownership of the security accrue to a Fund at the time it becomes obligated
to purchase such security, although delivery and payment occur at a later date. Accordingly, if the market price of the security should decline, the effect of such an agreement would be to obligate a Fund to purchase the security at a price above
the current market price on the date of delivery and payment. During the time a Fund is obligated to purchase such a security, it will be required to segregate assets with an approved custodian in an amount sufficient to settle the transaction.
Zero-Coupon, Payment-In-Kind and Strip Securities
A Fund may invest in zero-coupon, payment-in-kind and strip securities of any rating or maturity. Zero-coupon securities make no periodic interest payment but
are sold at a deep discount from their face value, otherwise known as “original issue discount” or “OID.” The buyer earns 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, a Fund may not
receive any return on its investment. Because zero-coupon securities bear no interest and compound semi-annually 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 security holders do not receive interest payments, when interest rates rise, zero-coupon securities fall more dramatically in value than securities paying interest on a current basis. When interest rates fall, zero-coupon securities rise
more rapidly in value because the securities reflect a fixed rate of return. Payment-in-kind securities allow the issuer, at its option, to make current interest payments either in cash or in additional debt obligations of the issuer. Both
zero-coupon securities and payment-in-kind securities allow an issuer to avoid the need to generate cash to meet current interest payments.
An
investment in zero-coupon securities and delayed interest securities (which do not make interest payments until after a specified time) may cause a Fund to recognize income and be required to make distributions thereof to shareholders before it
receives any cash payments on its investment. Moreover, even though payment-in-kind securities do not pay current interest in cash, a Fund nonetheless is required to accrue interest income on these investments and to distribute the interest income
at least annually to shareholders. See “Dividends, Other Distributions and Taxes – Income from Zero Coupon and Payment-in-Kind Securities.” Thus, a Fund could be required at times to liquidate other investments to satisfy distribution
requirements.
A Fund may also invest in strips, which are debt securities whose interest coupons are taken out and traded separately after the securities
are issued but otherwise are comparable to zero-coupon securities. Like zero-coupon securities and payment-in-kind securities, strips are generally more sensitive to interest rate fluctuations than interest paying securities of comparable term and
quality.
Other Investment Risks and Practices
Borrowing
. A Fund may borrow money to facilitate management of a Fund’s portfolio by enabling a Fund to meet redemption requests when the
liquidation of portfolio instruments would be inconvenient or disadvantageous. Such borrowing is not for investment purposes and will be repaid by the borrowing Fund promptly.
As required by the 1940 Act, a 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
26
value of the required asset coverage declines as a result of market fluctuations or other reasons, a 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. The Subsidiaries will comply with these asset coverage requirements to the
same extent as the Direxion Indexed Commodity Strategy Fund and the Direxion Indexed Managed Futures Strategy Fund.
Borrowing
(Direxion Indexed Commodity Strategy Fund and Direxion Indexed Managed Futures Strategy Fund)
.
A 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 a Fund’s NAV and on a Fund’s 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 a Fund. To the extent the income derived from securities purchased with borrowed funds
exceeds the interest the Fund will have to pay, a Fund’s net income will be greater that 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 a 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.
Lending Portfolio Securities
. Each 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 a Fund by depositing any combination of short-term government
securities and cash as collateral with a 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 a Fund’s portfolio securities are on loan, a 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. A Fund may invest the interest received and the collateral, thereby
earning additional income. Loans would be subject to termination by the lending Fund on a four-business days’ notice or by the borrower on a 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 lending Fund and that Fund’s shareholders. A lending Fund may pay reasonable finders, borrowers, administrative and custodial fees in connection
with a loan. Each Fund currently has no intention of lending its portfolio securities.
Portfolio Turnover
. The Trust anticipates that each
Fund’s annual portfolio turnover will vary.
A Fund’s portfolio turnover rate is calculated by 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 that have
terms-to-maturity of less than 397 days are excluded from the portfolio turnover rate. Such instruments generally would include futures contracts and options, since such contracts generally have terms-to-maturity of less than 397 days. In any given
period, all of a Fund’s investments may have terms-to-maturity of less than 397 days; in that case, the portfolio turnover rate for that period would be equal to zero. However, each Fund’s portfolio turnover rate, calculated with all
securities that have terms-to-maturity of less than 397 days is anticipated to be unusually high.
High portfolio turnover involves correspondingly
greater expenses to a 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 a Fund’s
shareholders from the Fund’s distributions to them of any net capital gains recognized as a result of the sales. The trading costs and tax effects associated with portfolio turnover may adversely affect a Fund’s after-tax performance.
Index Correlation and Tracking Risk
(Direxion Indexed Commodity Strategy Fund and
Direxion Indexed Managed Futures Strategy Fund)
Several factors may affect the ability of the Direxion Indexed Commodity Strategy Fund and the
Direxion Indexed Managed Futures Strategy Fund to correlate to the performance of their underlying indices. Among these factors are: (1) Fund expenses, including brokerage expenses and commissions (which may be increased by high portfolio
27
turnover); (2) less than all of the securities in the underlying index being held by a Fund and securities not included in the underlying index being held by a Fund; (3) an imperfect
correlation between the performance of instruments held by a Fund, such as futures contracts and options, and the performance of the underlying securities in the cash market comprising an index; (4) bid-ask spreads (the effect of which may be
increased by portfolio turnover); (5) a Fund holding instruments that are illiquid or the market for which becomes disrupted; (6) the need to conform a Fund’s portfolio holdings to comply with that Fund’s investment restrictions
or policies, or regulatory or tax law requirements; and (7) market movements that run counter to a leveraged Fund’s investments (which will cause divergence between a Fund and its underlying index over time due to the mathematical effects
of leveraging).
While index futures and options contracts closely correlate with the applicable indices over long periods, shorter-term deviation, such
as on a daily basis, does occur with these instruments. As a result, a Fund’s short-term performance will reflect such deviation from its underlying index.
28
INVESTMENT RESTRICTIONS
In addition to the investment policies and limitations described above and described in the Prospectus, the Trust, on behalf of each 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 that Fund. Under the 1940 Act, a “vote of the majority of the outstanding voting
securities” of a Fund means the affirmative vote of the lesser of: (1) more than 50% of the outstanding shares of a Fund; or (2) 67% or more of the shares of a 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 a 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.
To the extent applicable, each Subsidiary is subject to the same fundamental and non-fundamental investment restrictions as the Direxion
Indexed Commodity Strategy Fund and the Direxion Indexed Managed Futures Strategy Fund.
Direxion Indexed Commodity Strategy Fund and Direxion
Indexed Managed Futures Strategy Fund
Each 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.
|
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.
|
|
5.
|
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.
|
|
6.
|
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 Limitation 4 above and 7 below; and (3) the Fund may make short sales of securities.
|
|
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) to enter into reverse repurchase
agreements; or (3) 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.
|
29
|
8.
|
Invest more than 25% of the value of its net 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.
|
Direxion/Wilshire Dynamic Fund
The Fund shall not:
|
1.
|
Make loans, except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
|
2.
|
Underwrite securities issued by others, except to the extent that a Fund may be considered an underwriter within the meaning of the 1933 Act in the disposition of restricted securities or other investment company
securities.
|
|
3.
|
Purchase, hold, or deal in real estate or oil and gas interests.
|
|
4.
|
Purchase or sell commodities or commodity contracts unless acquired as a result of ownership of securities or other instruments issued by persons that purchase or sell commodities or commodities contracts; but this
shall not prevent a Fund from purchasing, selling and entering into financial futures contracts (including futures contracts on indices of securities, interest rates and currencies), and options on financial futures contracts (including futures
contracts on indices of securities, interest rates and currencies), warrants, swaps, forward contracts, foreign currency spot and forward contracts and other financial instruments.
|
|
5.
|
Issue senior securities, except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
|
6.
|
Borrow money, except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
|
7.
|
Purchase the securities of any issuer (other than securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities) if, as a result, 25% or more of the Fund’s total assets would be
invested in the securities of companies whose principal business activities are in the same industry.
|
Direxion Long/Short Global
Currency Fund
The Fund shall not:
|
1.
|
Make loans, except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
|
2.
|
Underwrite securities issued by others, except to the extent that the Fund may be considered an underwriter within the meaning of the 1933 Act in the disposition of restricted securities or other investment company
securities.
|
|
3.
|
Purchase, hold, or deal in real estate or oil and gas interests.
|
|
4.
|
Purchase or sell commodities or commodity contracts unless acquired as a result of ownership of securities or other instruments issued by persons that purchase or sell commodities or commodities contracts; but this
shall not prevent the Fund from purchasing, selling and entering into financial futures contracts (including futures contracts on indices of securities, interest rates and currencies), and options on financial futures contracts (including futures
contracts on indices of securities, interest rates and currencies), warrants, swaps, forward contracts, foreign currency spot and forward contracts and other financial instruments.
|
|
5.
|
Issue senior securities, except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
30
|
6.
|
Borrow money, except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
|
7.
|
Purchase the securities of any issuer (other than securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities) if, as a result, 25% or more of the Fund’s total assets would be
invested in the securities of companies whose principal business activities are in the same industry.
|
Each Fund has adopted the
following fundamental investment policy
that enables it to invest in another investment company or series thereof that has substantially similar investment objectives and policies:
Notwithstanding any other limitation, a Fund may invest all of its investable assets in an open-end management investment company with
substantially the same investment objectives, policies and limitations as a Fund. For this purpose, “all of a 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 Trustees, Rafferty is responsible for decisions to buy and sell securities for each Fund, the selection of
broker-dealers to effect the transactions, and the negotiation of brokerage commissions, if any. Rafferty expects that a 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.
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.
In effecting portfolio
transactions for a 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 a 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. Each Fund believes that
the requirement always to seek the lowest possible commission cost could impede effective portfolio management and preclude a Fund and Rafferty 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 may use research and services provided to it by brokers in servicing all Funds; however, not
all such services may be used by Rafferty in connection with a 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, this
information and these services are of indeterminable value and would not reduce Rafferty’s investment advisory fee to be paid by a Fund.
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 each Fund for the fiscal periods shown are set forth in the tables below. Consistent with its investment strategy, the
Direxion/Wilshire Dynamic Fund is dynamically managed, while
31
utilizing a tactical overlay to manage risk exposure. Such strategy may, but does not always, result in frequent trading of portfolio securities. As a result, brokerage commissions paid by the
Direxion/Wilshire Dynamic Fund may vary significantly from year to year.
|
|
|
|
|
|
|
Direxion Indexed Commodity Strategy Fund
|
|
Brokerage Fees Paid
|
|
|
Year Ended October 31, 2013
|
|
$
|
24,582
|
|
|
Year Ended October 31, 2012
|
|
$
|
15,472
|
*
|
|
Year Ended October 31, 2011
|
|
$
|
150,292
|
|
|
*
|
In 2011, the Fund shifted its investment style from investments that primarily do not incur brokerage charges to those which incur customary brokerage charges. This shift was consistent with the Fund’s investment
strategy.
|
|
|
|
|
|
|
|
Direxion Indexed Managed Futures Strategy Fund
|
|
Brokerage Fees Paid
|
|
|
Year Ended October 31, 2013
|
|
$
|
114,777
|
|
|
February 1, 2012 to October 31, 2012
|
|
$
|
29,627
|
|
|
|
|
|
|
|
|
Direxion/Wilshire Dynamic Fund
|
|
Brokerage Fees Paid
|
|
|
Year Ended October 31, 2013
|
|
$
|
23,793
|
|
|
Year Ended October 31, 2012
|
|
$
|
7,259
|
|
|
Year Ended October 31, 2011
|
|
$
|
11,530
|
|
|
|
|
|
|
|
|
Direxion Long/Short Global Currency Fund
|
|
Brokerage Fees Paid
|
|
|
September 30, 2013 to October 31, 2013
(1)
|
|
$
|
0
|
|
|
(1)
|
For the period from the Fund’s commencement of operations on September 30, 2013 to October 31, 2013.
|
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 a Fund’s portfolio investments to ensure that such disclosure is in the best interests of a 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 a Fund. Disclosure of a 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 S&P
®
and Morningstar, Inc. may
request complete portfolio holdings information in connection with rating a 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 a
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, a 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, a 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 a 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, a 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 a Fund. In no event shall the Advisers, their affiliates or employees, or a Fund receive any direct or indirect compensation in connection with the
disclosure of information about a Fund’s portfolio holdings.
32
In the event a portfolio holdings disclosure made pursuant to the policies presents a conflict of interest
between a Fund’s shareholders and Rafferty, the distributor and their affiliates or employees and any affiliated person of a Fund, the disclosure will not be made unless a majority of the Independent Trustees approves such disclosure.
MANAGEMENT OF THE TRUST
The Board of Trustees
The Trust is governed by its Board of Trustees (the “Board”). The Board is responsible for and oversees the overall management and operations of the
Trust and the Funds, which includes the general oversight and review of the Funds’ investment activities, in accordance with federal law and the law of the Commonwealth of Massachusetts, as well as the stated policies of the Funds. The Board
oversees the Trust’s officers and service providers, including Rafferty, which is responsible for the management of the day-to-day operations of the Funds based on policies and agreements reviewed and approved by the Board. In carrying out
these responsibilities, the Board regularly interacts with and receives reports from senior personnel of service providers, including personnel from Rafferty and U.S. Bancorp Fund Services, LLC (“USBFS”) . The Board also is assisted by the
Trust’s independent auditor (who reports directly to the Trust’s Audit Committee), independent counsel and other professionals as appropriate.
Risk Oversight
Consistent with its responsibility for oversight of the Trust and the Funds, the Board oversees the management of risks relating to the administration and
operation of the Trust and the Funds. Rafferty, as part of its responsibilities for the day-to-day operations of the Funds, is responsible for day-to-day risk management for the Funds. The Board, in the exercise of its reasonable business judgment
performs its risk management oversight directly and, as to certain matters, through its committees (described below) and through the Independent Trustees. The following provides an overview of the principal, but not all, aspects of the Board’s
oversight of risk management for the Trust and the Funds.
The Board has adopted, and periodically reviews, policies and procedures designed to address
risks to the Trust and the Funds. In addition, under the general oversight of the Board, Rafferty and other service providers to the Funds have themselves adopted a variety of policies, procedures and controls designed to address particular risks to
the Funds. Different processes, procedures and controls are employed with respect to different types of risks.
The Board also oversees risk
management for the Trust and the Funds through review of regular reports, presentations and other information from officers of the Trust and other persons. The Trust’s Chief Compliance Officer (“CCO”) and senior officers of Rafferty
and USBFS regularly report to the Board on a range of matters, including those relating to risk management. The Board also regularly receives reports from Rafferty and USBFS with respect to the Funds’ investments. In addition to regular reports
from these parties, the Board also receives reports regarding other service providers to the Trust, either directly or through Rafferty, USBFS or the CCO, on a periodic or regular basis. At least annually, the Board receives a report from the CCO
regarding the effectiveness of the Funds’ compliance program. Also, on an annual basis, the Board receives reports, presentations and other information from Rafferty in connection with the Board’s consideration of the renewal of each of
the Trust’s agreements with Rafferty and the Trust’s distribution plan under Rule 12b-1 under the 1940 Act.
The CCO also reports regularly
to the Board on Fund valuation matters. In addition, the Audit Committee receives regular reports from the Trust’s independent registered public accounting firm on internal control and financial reporting matters. On at least a quarterly basis,
the Independent Trustees meet with the CCO to discuss matters relating to the Funds’ compliance program.
33
Board Structure and Related Matters
Board members who are not “interested persons” of the Funds as defined in Section 2(a)(19) of the 1940 Act (“Independent Trustees”)
constitute two-thirds of the Board. The Trustees discharge their responsibilities collectively as a Board, as well as through Board committees, each of which operates pursuant to a charter approved by the Board that delineates the specific
responsibilities of that committee. The Board has established three standing committees: the Audit Committee, the Nominating Committee and the Qualified Legal Compliance Committee. For example, the Audit Committee is responsible for specific matters
related to oversight of the Fund’s independent auditors, subject to approval of the Audit Committee’s recommendations by the Board. The members and responsibilities of each Board committee are summarized below.
The Board periodically evaluates its structure and composition as well as various aspects of its operations. The Chairman of the Board is not an Independent
Trustee and the Board has chosen not to have a lead Independent Trustee. However, the Board believes that its leadership structure, including its Independent Trustees and Board committees, is appropriate for the Trust in light of, among other
factors, the asset size and nature of the Funds the number of Funds overseen by the Board, the arrangements for the conduct of the Funds’ operations, the number of Trustees, and the Board’s responsibilities. On an annual basis, the Board
conducts a self-evaluation that considers, among other matters, whether the Board and its committees are functioning effectively and whether, given the size and composition of the Board and each of its committees, the Trustees are able to oversee
effectively the number of Funds in the complex.
The Trust is part of the Direxion Family of Investment Companies, which is comprised of the 5
portfolios within the Direxion Insurance Trust, 20 portfolios within the Direxion Funds and 125 portfolios within Direxion Shares ETF Trust. The same persons who constitute the Board also constitute the Board of Trustees of the Direxion Insurance
Trust. In addition, the Independent Trustees constitute two-thirds of the Board of Trustees of the Direxion Shares ETF Trust.
The Board holds four
regularly scheduled in-person meetings each year. The Board may hold special meetings, as needed, either in person or by telephone, to address matters arising between regular meetings. During a portion of each in-person meeting, the Independent
Trustees meet outside of management’s presence. The Independent Trustees may hold special meetings, as needed, either in person or by telephone.
The Trustees of the Trust are identified in the tables below, which provide information regarding 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 as of December 31, 2013. Each of the
Independent Trustees of the Trust also serve on the Board of the Direxion Insurance Trust and Direxion Shares ETF Trust, the other registered investment companies in the Direxion mutual fund complex. In addition, Mr. Rafferty serves on the
Board of the Direxion Insurance Trust. Unless otherwise noted, an individual’s business address is 1301 Avenue of the Americas (6
th
Avenue),
35
th
Floor, New York, New York 10019.
34
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
Direxion
Family
of
Investment
Companies
Overseen by
Trustee
(2)
|
|
Other Trusteeships/
Directorships Held by
Trustee
During Past
Five Years
|
|
Lawrence C. Rafferty
(1)
Age: 71
|
|
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.
|
|
25
|
|
Board of Trustees, Fairfield University; Board of Directors, St. Vincent’s Services; Executive Committee, Metropolitan Golf Association
|
|
|
|
|
|
|
|
|
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
Direxion
Family
of
Investment
Companies
Overseen by
Trustee
(2)
|
|
Other Trusteeships/
Directorships Held by
Trustee During
Past
Five Years
|
|
Gerald E. Shanley III
Age: 70
|
|
Trustee
|
|
Lifetime of
Trust until
removal or
resignation;
Since 1997
|
|
Retired, Since 2002; Business Consultant, 1985-present; Trustee of Trust Under Will of Charles S. Payson, 1987-present; C.P.A., 1979-present.
|
|
150
|
|
None.
|
|
|
|
|
|
|
|
|
John Weisser
Age: 72
|
|
Trustee
|
|
Lifetime of
Trust until
removal or
resignation;
Since 2007
|
|
Retired, Since 1995; Salomon Brothers, Inc,
1971-1995,
most recently as Managing Director.
|
|
150
|
|
Director, The MainStay Funds Trust (35 Funds), The MainStay Funds (12 Funds), MainStay VP Fund Series (29 Funds), Mainstay Defined Term Municipal Opportunities Fund (1 Fund); Private Advisors Alternative Strategy
Fund (1 Fund); Private Advisors Alternative Strategies Master Fund (1 Fund).
|
|
(1)
|
Mr. Rafferty is affiliated with Rafferty. Mr. Rafferty is the Chairman and Chief Executive Officer of Rafferty and owns a beneficial interest in Rafferty.
|
|
(2)
|
The Direxion Family of Investment Companies consists of the Direxion Funds which, as of the date of this SAI, offers for sale to the public 20 portfolios, the Direxion Insurance Trust which, as of the date of this SAI,
offers for sale to the public 1 of the 5 funds registered with the SEC, and the Direxion Shares ETF Trust which, as of the date of this SAI, offers for sale to the public 55 of the 125 funds registered with the SEC.
|
35
In addition to the information set forth in the tables above and other relevant qualifications, experience,
attributes or skills applicable to a particular Trustee, the following provides further information about the qualifications and experience of each Trustee.
Lawrence C. Rafferty: Mr. Rafferty has extensive experience in financial services businesses, including as chairman and chief executive officer of
Rafferty. He has served on the boards of both a private university and a childcare agency. He also has multiple years of service as a Trustee.
Gerald E.
Shanley III: Mr. Shanley has audit experience and spent ten years in the tax practice of an international public accounting firm. He is a certified public accountant and has a JD degree. He has extensive business experience as the president of
a closely held manufacturing company, a director of several closely held companies, a business and tax consultant and a trustee of a private investment trust. He has served on the boards of several charitable and not for profit organizations. He
also has multiple years of service as a Trustee.
John Weisser: Mr. Weisser has extensive experience in the investment management business, including
as managing director of an investment bank and a director of other registered investment companies. He also has multiple years of service as a Trustee.
Board Committees
The Trust has an Audit Committee, consisting of Messrs. Weisser and Shanley. The members of the Audit Committee are Independent Trustees. 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 the 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 four times during the Trust’s most recent fiscal year.
The Trust also has a Nominating Committee, consisting of
Messrs. Weisser and Shanley, each of whom is an Independent Trustee. 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 a
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. Weisser and Shanley. The members of the Qualified Legal Compliance Committee are Independent Trustees of the Trust. 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 Trust’s most recent fiscal
year.
36
Principal Officers of the Trust
The officers of the Trust conduct and supervise its daily business. Unless otherwise noted, an individual’s business address is 1301 Avenue of the
Americas (6
th
Avenue), 35
th
Floor, New York, New York 10019. As of the date of this SAI, the officers of the Trust, their ages, their business
address and their principal occupations during the past five years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
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 the Direxion
Family of
Investment
Companies
Overseen
by
Trustee
(2)
|
|
Other Trusteeships/
Directorships Held
by Trustee
During
Past Five Years
|
|
Daniel D. O’Neill
(1)
Age: 45
|
|
Chief
Executive
Officer
and Chief
Investment
Officer
|
|
One Year;
Since 2006
|
|
Managing Director of Rafferty, 1999-present.
|
|
125
|
|
N/A
|
|
|
|
|
|
|
|
|
Eric Falkeis:
Age: 40
|
|
President
|
|
One Year;
Since 2013
|
|
President, Rafferty Asset Management, LLC, since March 2013; formerly, Senior Vice President, USBFS, September 2007 – March 2013; Chief Financial Officer, USBFS, April 2006 – March 2013; Vice
President, USBFS, 1997-2007; formerly, Chief Financial Officer, Quasar Distributors, LLC (2000-2003).
|
|
N/A
|
|
Trustee, Professionally Managed Portfolios (45 Funds)
|
|
|
|
|
|
|
|
|
Patrick J. Rudnick
Age: 40
|
|
Principal
Financial
Officer and
Assistant
Secretary
|
|
One Year;
Since 2010
|
|
Senior Vice President and Principal Financial Officer, Rafferty Asset Management, LLC, since March 2013; formerly Vice President, USBFS (2006-2013); formerly, Manager, PricewaterhouseCoopers LLP (1999-2006).
|
|
N/A
|
|
N/A
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
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 the Direxion
Family of
Investment
Companies
Overseen
by
Trustee
(2)
|
|
Other Trusteeships/
Directorships Held
by Trustee
During
Past Five Years
|
|
Angela Brickl
Age: 37
|
|
Chief
Compliance
Officer
Secretary
|
|
One Year;
Since 2012
One Year;
Since 2011
|
|
General Counsel and Chief Compliance Officer, Rafferty Asset Management, LLC, since October 2010; Summer Associate at Skadden, Arps, Slate, Meagher & Flom, LLP, May – August 2009; Summer
Associate at Foley & Lardner, LLP May – August 2008; Vice President USBFS November 2003 – August 2007.
|
|
N/A
|
|
N/A
|
|
(1)
|
Mr. O’Neill serves as Chairman of the Board of Trustees of the Direxion Shares ETF Trust.
|
|
(2)
|
The Direxion Family of Investment Companies consists of the Direxion Funds which, as of the date of this SAI, offers for sale to the public 20 portfolios, the Direxion Insurance Trust which, as of the date of this SAI,
offers for sale to the public 1 of the 5 funds registered with the SEC and the Direxion Shares ETF Trust which, as of the date of this SAI, offers for sale to the public 55 of the 125 funds registered with the SEC.
|
The following table shows the amount of equity securities owned in each Fund and the Direxion Family of Investment Companies by the Trustees as of the
calendar year ended December 31, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Range of Equity
Securities Owned:
|
|
Interested Trustee:
|
|
|
Disinterested Trustees:
|
|
|
|
|
Lawrence C. Rafferty
|
|
|
Gerald E. Shanley III
|
|
|
John Weisser
|
|
|
Direxion Indexed Commodity Strategy Fund
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
Direxion Indexed Managed Futures Strategy Fund
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
Direxion Wilshire Dynamic Fund
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
Direxion Long/Short Global Currency Fund
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
Aggregate Dollar Range of Equity Securities in the Direxion Family of Investment
Companies
(1)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1 - $10,000
|
|
|
(1)
|
The Direxion Family of Investment Companies consists of the Direxion Funds which, as of the date of this SAI, offers for sale to the public 20 portfolios, the Direxion Insurance Trust which, as of the date of this SAI,
offers for sale to the public 1 of the 5 funds registered with the SEC and the Direxion Shares ETF Trust which, as of the date of this SAI, offers for sale to the public 55 of the 125 funds registered with the SEC.
|
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 Trust for acting as a Trustee or officer of the Trust.
38
The following table shows the compensation earned by each Trustee for the Trust’s fiscal year ended
October 31, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Compensation From the:
|
|
|
Pension or Retirement
|
|
|
Aggregate
Compensation
|
|
|
Name of
Person,
Position
|
|
Direxion
Indexed
Commodity
Strategy
Fund
|
|
|
Direxion
Indexed
Managed
Futures
Strategy
Fund
|
|
|
Direxion/
Wilshire
Dynamic
Fund
|
|
|
Direxion
Long/
Short
Global
Currency
Fund
|
|
|
Benefits
Accrued
As Part
of the
Trust’s
Expenses
|
|
|
Estimated
Annual
Benefits
Upon
Retirement
|
|
|
From the
Direxion Family
of
Investment
Companies Paid
to the Trustees
(1)
|
|
|
Interested Trustees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lawrence C. Rafferty
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
Disinterested Trustees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel J. Byrne
(2)
|
|
$
|
1,090
|
|
|
$
|
973
|
|
|
$
|
1,090
|
|
|
$
|
0
|
|
|
$
|
1,090
|
|
|
$
|
0
|
|
|
$
|
100,000
|
|
|
Gerald E. Shanley III
|
|
$
|
1,090
|
|
|
$
|
973
|
|
|
$
|
1,090
|
|
|
$
|
0
|
|
|
$
|
1,090
|
|
|
$
|
0
|
|
|
$
|
100,000
|
|
|
John Weisser
|
|
$
|
1,090
|
|
|
$
|
973
|
|
|
$
|
1,090
|
|
|
$
|
0
|
|
|
$
|
1,090
|
|
|
$
|
0
|
|
|
$
|
100,000
|
|
|
(1)
|
For the fiscal year ended October 31, 2013, trustees’ fees and expenses in the amount of $50,000 were incurred by the Trust.
|
|
(2)
|
Effective June 24, 2013, Mr.
Byrne resigned as 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 outstanding shares of a
Fund. 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 a Fund. As of January 31, 2014, the following shareholders were considered to be either a control person or principal shareholder of each Fund:
Direxion Indexed Commodity Strategy Fund – Class A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Address
|
|
Parent
Company
|
|
|
Jurisdiction
|
|
|
% Ownership
|
|
|
Type of
Ownership
|
|
|
Charles Schwab & Co. Inc.
211 Main Street
San Francisco, CA 94105-1905
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
5.26
|
%
|
|
|
Record
|
|
39
Direxion Indexed Commodity Strategy Fund – Institutional Class
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Address
|
|
Parent
Company
|
|
|
Jurisdiction
|
|
|
% Ownership
|
|
|
Type of
Ownership
|
|
|
National Financial Services Corp.
One World Financial Center
200 Liberty Street, Floor 5
New York, NY 10281-1003
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
21.77
|
%
|
|
|
Record
|
|
|
Charles Schwab & Co. Inc.
211 Main Street
San Francisco, CA 94105-1905
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
13.37
|
%
|
|
|
Record
|
|
|
Merrill Lynch Pierce Fenner & Smith
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
6.83
|
%
|
|
|
Record
|
|
Direxion Indexed Commodity Strategy Fund – Class C
- None
Direxion Indexed Managed Futures Strategy Fund – Class A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Address
|
|
Parent
Company
|
|
|
Jurisdiction
|
|
|
% Ownership
|
|
|
Type of
Ownership
|
|
|
Charles Schwab & Co. Inc.
211 Main Street
San Francisco, CA 94105-1905
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
23.57
|
%
|
|
|
Record
|
|
|
National Financial Services Corp.
One World Financial Center
200 Liberty Street, Floor 5
New York, NY 10281-1003
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
6.83
|
%
|
|
|
Record
|
|
Direxion Indexed Managed Futures Strategy Fund – Class C
- None
Direxion Indexed Managed Futures Strategy Fund – Institutional Class
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Address
|
|
Parent
Company
|
|
|
Jurisdiction
|
|
|
% Ownership
|
|
|
Type of
Ownership
|
|
|
Charles Schwab & Co. Inc.
211 Main Street
San Francisco, CA 94105-1905
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
10.66
|
%
|
|
|
Record
|
|
|
National Financial Services Corp.
One World Financial Center
200 Liberty Street, Floor 5
New York, NY 10281-1003
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
9.06
|
%
|
|
|
Record
|
|
|
TD Ameritrade
P.O. Box 2226
Omaha, NE 68103-2226
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
5.17
|
%
|
|
|
Record
|
|
40
Direxion/Wilshire Dynamic Fund –Class A
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Address
|
|
Parent Company
|
|
Jurisdiction
|
|
% Ownership
|
|
Type of
Ownership
|
|
|
Charles Schwab & Co. Inc.
211 Main Street
San Francisco, CA 94105-1905
|
|
The Charles Schwab
Corporation
|
|
DE
|
|
39.60%
|
|
|
Record
|
|
|
National Financial Services Corp.
One World Financial Center
200 Liberty Street, Floor 5
New York, NY 10281-1003
|
|
N/A
|
|
N/A
|
|
6.09%
|
|
|
Record
|
|
Direxion/Wilshire Dynamic Fund – Class C
– None
Direxion Long/Short Global Currency Fund – Class A – None
Direxion Long/Short Global Currency Fund – Class C – None
Direxion Long/Short Global Currency Fund – Institutional Class
|
|
|
|
|
|
|
|
|
|
|
Name and Address
|
|
Parent
Company
|
|
Jurisdiction
|
|
% Ownership
|
|
Type of
Ownership
|
|
Morgan Stanley
1585 Broadway
New York, NY 10036-8200
|
|
N/A
|
|
N/A
|
|
24.75%
|
|
Record
|
|
Citigroup Global Markets, Inc.
390 Greenwich St.
New York, NY 10013-2375
|
|
N/A
|
|
N/A
|
|
24.70%
|
|
Record
|
|
Deutsche Bank Securities, Inc.
60 Wall St.
New York, NY 10005-2839
|
|
N/A
|
|
N/A
|
|
24.70%
|
|
Record
|
|
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-2052
|
|
N/A
|
|
N/A
|
|
24.70%
|
|
Record
|
In addition, as of January 31, 2013, the Trustees and Officers as a group owned less than 1% of the outstanding
shares of each Fund.
Investment Adviser
Rafferty Asset Management, LLC, 1301 Avenue of the Americas (6
th
Avenue), 35
th
Floor, New York, New York 10019, provides investment advice to a Fund. Rafferty was organized as a New York limited liability company in June 1997. Lawrence C. Rafferty controls Rafferty through his
ownership in Rafferty Holdings, LLC.
Under an Investment Advisory Agreement (“Advisory Agreement”) between the Trust, on behalf of each
Fund, and Rafferty, Rafferty provides a continuous investment program for each Fund’s assets in accordance with its investment objectives, policies and limitations, and oversees the day-to-day operations of a Fund, subject to the supervision of
the Trustees. Rafferty bears all costs associated with providing these advisory services and the expenses of the Trustees who are affiliated with or interested persons of Rafferty. 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 a Fund may be a party. The Trust also may have an obligation to indemnify its Trustees and officers with respect to any
such litigation.
41
For the Direxion/Wilshire Dynamic Fund, the Advisory Agreement was initially approved with respect to the
Fund by the Trustees (including all Independent Trustees) and Rafferty, as sole shareholder of the Fund, in compliance with the 1940 Act on February 11, 2009, and for the Direxion Indexed Commodity Strategy Fund on June 4, 2008. The
Advisory Agreement with respect to each Fund will continue 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 each 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 the Independent Trustees of the Trust; and (2) by the majority vote of either the full Board or the vote of a
majority of the outstanding shares of a Fund. The Advisory Agreement automatically terminates on assignment and is terminable on a 60-day written notice either by the Trust or Rafferty.
For the Direxion Indexed Managed Futures Strategy Fund, the Advisory Agreement was initially approved by the Trustees (including all Independent Trustees) and
Rafferty, as sole shareholder of the Direxion Indexed Managed Futures Strategy Fund, in compliance with the 1940 Act on November 22, 2011. The Advisory Agreement with respect to the Direxion Indexed Managed Futures Strategy Fund will continue
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 Direxion Indexed Managed Futures Strategy 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 the Independent Trustees of 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 a 60-day written notice either by the Trust or Rafferty.
For the Direxion Long/Short Global Currency Fund, the Advisory Agreement was initially approved by the Trustees (including all Independent Trustees) and
Rafferty, as sole shareholder of the Fund, in compliance with the 1940 Act on February 7, 2013. The Advisory Agreement with respect to the Direxion Long/Short Global Currency Fund will continue 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 Direxion Long/Short Global Currency 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 the Independent Trustees of 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 a 60-day written notice either by the Trust or Rafferty.
Pursuant to the Advisory Agreement,
the Direxion/Wilshire Dynamic Fund and the Direxion Long/Short Global Currency Fund pay Rafferty 0.75% and 0.95%, respectively, at an annual rate based on its average daily net assets. The Direxion Indexed Commodity Strategy Fund and the Direxion
Indexed Managed Futures Strategy Fund pay Rafferty 0.85% and 0.95%, respectively, at an annual rate based on its average daily net assets managed by Rafferty that are not invested in the CTS Subsidiary and MFS Subsidiary, respectively.
The tables below shows the amount of advisory fees incurred by each Fund and the amount of fees waived and/or reimbursed by Rafferty for the fiscal periods
ended October 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direxion Indexed Commodity Strategy Fund
|
|
Advisory Fees Incurred
|
|
|
Waived fees and/or
expenses reimbursed by
Adviser
|
|
|
Net Fees Paid to
Advisor
|
|
|
Year Ended October 31, 2013
|
|
$
|
528,402
|
|
|
$
|
0
|
|
|
$
|
528,402
|
|
|
Year Ended October 31, 2012
|
|
$
|
491,787
|
|
|
$
|
0
|
|
|
$
|
491,787
|
|
|
Year Ended October 31, 2011
|
|
$
|
1,243,936
|
|
|
$
|
0
|
|
|
$
|
1,243,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direxion Indexed Managed Futures Strategy Fund
|
|
Advisory Fees Incurred
|
|
|
Waived fees and/or
expenses reimbursed by
Adviser
|
|
|
Net Fees Paid
to Advisor
|
|
|
Year Ended October 31, 2013
|
|
$
|
837,626
|
|
|
$
|
0
|
|
|
$
|
837,626
|
|
|
February 1, 2012 to October 31, 2012
|
|
$
|
219,911
|
|
|
$
|
0
|
|
|
$
|
219,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direxion/Wilshire Dynamic Fund
|
|
Advisory Fees Incurred
|
|
|
Waived fees and/or
expenses reimbursed by
Adviser
|
|
|
Net Fees Paid to
Advisor
|
|
|
Year Ended October 31, 2013
|
|
$
|
190,575
|
|
|
$
|
0
|
|
|
$
|
190,575
|
|
|
Year Ended October 31, 2012
|
|
$
|
225,115
|
|
|
$
|
0
|
|
|
$
|
225,115
|
|
|
Year Ended October 31, 2011
|
|
$
|
167,232
|
|
|
$
|
0
|
|
|
$
|
167,232
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direxion Long/Short Global Currency Fund
(1)
|
|
Advisory Fees Incurred
|
|
|
Waived fees and/or
expenses reimbursed by
Adviser
|
|
|
Net Fees Paid
to Advisor
|
|
|
September 30, 2013 to October 31, 2013
|
|
$
|
3,681
|
|
|
$
|
0
|
|
|
$
|
3,681
|
|
|
(1)
|
For the period from the Fund’s commencement of operations on September 30, 2013 to October 31, 2013.
|
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.
The CTS Subsidiary and MFS Subsidiary have entered into separate investment advisory agreements with Rafferty. Under this agreement, Rafferty provides to each
Subsidiary the same type of investment advisory services on substantially the same terms as Rafferty provides advisory services to the Direxion Indexed Commodity Strategy Fund and Direxion Indexed Managed Futures Strategy Fund. The Direxion Indexed
Commodity Strategy Fund and Direxion Indexed Managed Futures Strategy Fund (not each Subsidiary) pays Rafferty an advisory fee as described above.
Subadvisers
Under a separate Investment Subadvisory Agreement (“Subadvisory Agreement”) between Rafferty and Wilshire Associates,
Incorporated (“Wilshire” or “Subadviser”), Wilshire
®
, through its Wilshire Funds Management business unit and subject to direction by Rafferty and the Board, will provide
asset allocation advice to the Direxion/Wilshire Dynamic Fund for a fee payable by Rafferty. Then, Rafferty will implement Wilshire’s advice by making 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 Direxion/Wilshire Dynamic Fund, Rafferty will pay Wilshire each month based on the Funds’ prior month’s total net assets at an annualized rate of 0.25%.
The Subadvisory Agreement was initially approved by the Board (including all Independent Trustees and Rafferty, as the sole shareholder of the
Direxion/Wilshire Dynamic Fund, in compliance with the 1940 Act, on February 11, 2009. 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, Wilshire 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 Direxion/Wilshire Dynamic 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 Wilshire. Under the
terms of the Advisory Agreement, Rafferty automatically becomes responsible for the obligations of Wilshire upon termination of the Subadvisory Agreement.
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. FPI 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.
Rafferty has entered into an Operating Services Agreement with each Fund. Under this Operating Service
Agreement, Rafferty, in exchange for an Operating Services Fee paid to Rafferty by each Fund, has contractually agreed to pay all Fund expenses through September 1, 2015 other than the following: management fees, distribution and/or service
fees, shareholder servicing fees, acquired fund fees and expenses, taxes, leverage interest, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization
and extraordinary expenses such as litigation or other expenses outside the typical day-to-day operations of the Funds. This agreement may be terminated at any time by the Board.
43
Pursuant to Section 17(j) of the 1940 Act and Rule 17j-1 thereunder, the Trust, Rafferty, Wilshire and the
distributor have adopted Codes of Ethics. These codes permit portfolio managers and other access persons of a Fund to invest in securities that may be owned by a Fund, subject to certain restrictions.
Portfolio Managers
For the Direxion Indexed Commodity Strategy Fund, Direxion Indexed Managed Futures Fund and Direxion Long/Short Global Currency Fund, Paul Brigandi and Tony Ng
are jointly and primarily responsible for the day-to-day management of the Funds. An investment trading team of Rafferty employees assists Mr. Brigandi and Mr. Ng in the day-to-day management of the Funds subject to their primary
responsibility and oversight. The Portfolio Managers work with the investment trading team to decide the target allocation of each Fund’s investments and on a day-to-day basis, an individual portfolio trader executes transactions for the Funds
consistent with the target allocation. The members of the investment trading team rotate among the various series of the Trust, including the Funds periodically so that no single individual is assigned to a specific Fund for extended periods of
time. Mr. Brigandi also manages the Direxion/Wilshire Dynamic Fund. In addition to the Funds, Mr. Brigandi and Mr. Ng manage the following other accounts as of December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
72
|
|
|
$
|
7.02 billion
|
|
|
|
0
|
|
|
$
|
0
|
|
|
Other Pooled Investment Vehicles
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
Other Accounts
|
|
|
1
|
|
|
$
|
57.7 million
|
|
|
|
0
|
|
|
$
|
0
|
|
Rafferty manages no other accounts with an investment objective similar to that of the Funds. In addition, two or
more funds advised by Rafferty may invest in the same securities but the nature of each investment may be opposite and in different proportions. Rafferty ordinarily executes transactions for a Fund “market-on-close,” in which funds
purchasing or selling the same security receive the same closing price.
Rafferty has not identified any additional material conflicts between a Fund
and other accounts managed by the investment committee. However, other actual or apparent conflicts of interest may arise in connection with the day-to-day management of a Fund and other accounts. The management of a Fund and other accounts may
result in unequal time and attention being devoted to a Fund and other accounts. Rafferty’s management fees for the services it provides to other accounts varies and may be higher or lower than the advisory fees it receives from a Fund. 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.
The investment team’s compensation is paid by Rafferty. Their compensation primarily consists of a fixed base salary and a bonus. The investment
team’s salary is reviewed annually and increases are determined by factors such as performance and seniority. Bonuses are determined by the individual performance of an employee including factors such as attention to detail, process, and
efficiency, and are impacted by the overall performance of the firm. The investment team’s salary and bonus are not based on a Fund’s performance and as a result, no benchmarks are used. Along with all other employees of Rafferty, the
investment team may participate in the firm’s 401(k) retirement plan where Rafferty may make matching contributions up to a defined percentage of their salary.
Mr. Brigandi and Mr. Ng did not own any shares of the Funds as of October 31, 2013.
44
In addition to being managed by Paul Brigandi, the Direxion/Wilshire Dynamic Fund is managed by members of
Wilshire’s portfolio management team, namely lead portfolio manager, Cleo Chang, and co-portfolio manager, James St. Aubin. Wilshire’s portfolio management team conducts its investment decision-making through an investment committee
structure. In addition to the Fund, Ms. Chang manages the following other accounts as of November 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
|
|
Total Number
of Accounts
|
|
|
Total Assets
(in billions)
|
|
|
Total Number of
Accounts with
Performance Based
Fees
|
|
|
Total Assets of
Accounts with
Performance
Based Fees
|
|
|
Registered Investment Companies
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
Other Pooled Investment Vehicles
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
Other Accounts
|
|
|
3
|
|
|
$
|
32.34
|
|
|
|
0
|
|
|
$
|
0
|
|
In addition to the Fund, Mr. St. Aubin manages the following other accounts as of November 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
|
|
Total Number
of Accounts
|
|
|
Total Assets
(in billions)
|
|
|
Total Number of
Accounts with
Performance Based
Fees
|
|
|
Total Assets of
Accounts with
Performance
Based Fees
|
|
|
Registered Investment Companies
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
Other Pooled Investment Vehicles
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
Other Accounts
|
|
|
6
|
|
|
$
|
6.38
|
|
|
|
0
|
|
|
$
|
0
|
|
It is the policy of Wilshire that all investment decisions concerning the Direxion/Wilshire Dynamic Fund based solely on
the best interests of the Direxion/Wilshire Dynamic Fund and its investors, and without regard to any revenue that Wilshire receives, might receive, or has received in the past, directly or indirectly, from portfolio managers or funds for services
provided by any Wilshire business unit.
Accordingly, Wilshire operates Wilshire Funds Management, Wilshire Analytics, Wilshire Consulting and Wilshire
Private Markets as separate business units. Each business unit has its own leadership team and professional and support staff. Moreover, Wilshire has adopted policies and procedures that are designed to provide full disclosure of all potential,
actual or perceived conflicts and to prevent staff from having internal access to information that otherwise might appear to compromise their objectivity.
In addition, personal accounts may give rise to potential conflicts of interest and must be maintained and conducted pursuant to Wilshire’s Code of
Ethics.
Each portfolio manager’s compensation is based on two major components, base salary and performance bonus. The salary is set each year and
is commensurate with the contribution that each portfolio manager makes to his team, the investment process and the firm. The bonus portion of a portfolio manager’s salary is discretionary with no predetermined metrics. This bonus is based on
the overall success of each portfolio manager’s client accounts as well as their overall contributions to the performance of the division and the company as a whole.
45
The members of the portfolio management team did not own any shares of the Direxion/Wilshire Dynamic Fund as
of the date of November 30, 2013.
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 a Fund as part of their investment advisory services, subject to the supervision and oversight of the Board. The Proxy Voting Policies of Rafferty are attached as Appendix B. Notwithstanding
this delegation of responsibilities, however, each 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 a Fund and their shareholders, taking into account the value of a Fund’s investments.
More Information.
The actual voting
records relating to portfolio securities during the most recent 12-month period ended June 30 will be 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 a 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 a 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. The Administrator also
is entitled to certain out-of-pocket expenses.
The tables below show the amount of administrative and management services fees incurred by each Fund to
the Administrator for the fiscal periods ended October 31.
|
|
|
|
|
|
|
Direxion Indexed Commodity Strategy Fund
|
|
Fees paid to the Administrator
|
|
|
Year Ended October 31, 2013
|
|
$
|
34,504
|
|
|
Year Ended October 31, 2012
|
|
$
|
45,508
|
|
|
Year Ended October 31, 2011
|
|
$
|
86,436
|
|
|
|
|
|
|
|
|
Direxion Indexed Managed Futures Strategy Fund
|
|
Fees paid to the Administrator
|
|
|
Year Ended October 31, 2013
|
|
$
|
59,444
|
|
|
February 1, 2012 to October 31, 2012
|
|
$
|
19,289
|
|
|
|
|
|
|
|
|
Direxion/Wilshire Dynamic Fund
|
|
Fees paid to the Administrator
|
|
|
Year Ended October 31, 2013
|
|
$
|
17,709
|
|
|
Year Ended October 31, 2012
|
|
$
|
25,882
|
|
|
Year Ended October 31, 2011
|
|
$
|
17,980
|
|
|
|
|
|
|
|
|
Direxion Long/Short Global Currency Fund
|
|
Fees paid to the Administrator
|
|
|
September 30, 2013 to October 31, 2013
(1)
|
|
$
|
266
|
|
|
(1)
|
The Fund commenced operations on September 30, 2013.
|
Pursuant to a 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. The Fund Accountant also is entitled to certain out-of-pocket expenses, including pricing expenses.
46
Pursuant to a Custodian Agreement, U.S. Bank N.A. serves as the custodian of a Fund’s assets. The
Custodian holds and administers the assets in a Fund’s portfolios. Pursuant to the Custodian Agreement, the Custodian receives an annual fee based on the Trust’s total average daily net assets. The Custodian also is entitled to certain
out-of-pocket expenses. U.S. Bank N.A. and/or its affiliates receive revenue from certain broker-dealers that may receive Rule 12b-1 fees or other payments from mutual funds in which certain of the Funds may invest. In recognition of this revenue,
certain of these Funds may receive a credit from U.S. Bank N.A. and/or its affiliates for fees otherwise payable by the Funds.
Each Subsidiary has
entered into agreements with the Trust’s service providers for the provision of administrative, accounting transfer agency and custody services. Each Subsidiary will bear the expenses associated with these services, which are not expected to be
material in relation to the value of their respective Fund’s assets. It is also anticipated that the Direxion Indexed Commodity Strategy Fund and Direxion Indexed Managed Futures Strategy Fund’s own expenses will be reduced to some extent
as a result of the payment of such expenses at the Subsidiary level. Therefore, it is expected that each Fund’s investment in their respective Subsidiaries will not result in a Fund’s paying duplicative fees for similar services provided
to the Funds and the Subsidiaries.
Distributor
Rafferty Capital Markets, LLC, 1010 Franklin Avenue, 3
rd
Floor, Garden City, New York 11530, serves as the
distributor (“Distributor”) in connection with the continuous offering of each Fund’s shares. The Distributor and participating dealers with whom it has entered into dealer agreements offer shares of a Fund as agents on a best efforts
basis and are not obligated to sell any specific amount of shares. For the fiscal year ended October 31, 2013, the Distributor received $146,172 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, as amended, (the “Rule”) 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 Class A Distribution Plan (“Class A Plan”) and Class C Distribution Plan (“Class C Plan”) for each Fund pursuant to which the
each Fund may pay certain expenses incurred in the distribution of its shares and the servicing and maintenance of existing shareholder accounts. The Distributor, as the Funds’ principal underwriter, and Rafferty may have a direct or indirect
financial interest in the Class A Plan and the Class C Plan or any related agreement.
Pursuant to the Class A Plan, the Class A shares of
each Fund may pay up to 1.00% of the Class A shares’ average daily net assets. The Board has currently authorized each Fund to pay Rule 12b-1 fees of 0.25% of the Class A shares’ average daily net assets.
Pursuant to the Class C Plan, the Class C shares of each Fund may pay up to 1.00% of the Class C shares’ average daily net assets. The Board has
currently authorized each Fund to pay Rule 12b-1 fees of 1.00% of the Class C shares’ average daily net assets.
The Institutional Class shares
do not pay Rule 12b-1 fees.
Under an agreement with the Funds, your Financial Advisor may provide services, as described in the Prospectus, and as
described above, and receive Rule 12b-1 fees from the Funds.
The Class A Plan and the Class C Plan was approved by the Trustees and the
Independent Trustees of the Funds. In approving the Class A Plan and the Class C Plan, the Trustees determined that there is a reasonable likelihood that the Class A Plan and the Class C Plan will benefit each Fund and its shareholders.
The Trustees will review quarterly and annually a written report provided by the Treasurer of the amounts expended under the Class A Plan and the purpose for which such expenditures were made.
47
The Class A Plan and the Class C Plan permit payments to be made by each Fund to the distributor or
other third parties for expenditures incurred in connection with the distribution of Fund shares to investors and 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 each Fund. In addition, the Class A Plan and the Class C Plan authorizes payments by each Fund to the distributor 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 Rule 12b-1 fees incurred and the allocation of such fees by each Fund’s Class A Shares for the fiscal period
ended October 31, 2013.
|
|
|
|
|
|
|
Fund (Class A)
|
|
12b-1 fees Incurred
|
|
|
Direxion Indexed Commodity Strategy Fund
|
|
$
|
93,466
|
|
|
Direxion Indexed Managed Futures Strategy Fund
|
|
$
|
117,211
|
|
|
Direxion/Wilshire Dynamic Fund
|
|
$
|
52,286
|
|
|
Direxion Long/Short Global Currency Fund
(1)
|
|
$
|
9
|
|
|
(1)
|
For the period from the Fund’s commencement of operations on September 30, 2013 to October 31, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund (Class A)
|
|
Advertising and
Marketing
|
|
|
Printing and
Postage
|
|
|
Payment to
Distributor
|
|
|
Payment to
Dealers
|
|
|
Compensation
to Sales
Personnel
|
|
|
Other
Marketing
Expenses
|
|
|
Direxion Indexed Commodity Strategy Fund
|
|
$
|
56,762
|
|
|
$
|
0
|
|
|
$
|
6,599
|
|
|
$
|
10,730
|
|
|
$
|
12,674
|
|
|
$
|
6,701
|
|
|
Direxion Indexed Managed Futures Strategy Fund
|
|
$
|
70,139
|
|
|
$
|
0
|
|
|
$
|
8,263
|
|
|
$
|
14,358
|
|
|
$
|
15,929
|
|
|
$
|
8,522
|
|
|
Direxion/Wilshire Dynamic Fund
|
|
$
|
29,913
|
|
|
$
|
0
|
|
|
$
|
3,430
|
|
|
$
|
9,223
|
|
|
$
|
6,363
|
|
|
$
|
3,357
|
|
|
Direxion Long/Short Global Currency Fund
(1)
|
|
$
|
3
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
4
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
(1)
|
For the period from the Fund’s commencement of operations on September 30, 2013 to October 31, 2013.
|
The tables below show the amount of Rule 12b-1 fees incurred and the allocation of such fees by each Fund’s Class C shares for the fiscal period ended
October 31, 2013.
|
|
|
|
|
|
|
Fund (Class C)
|
|
12b-1 fees Incurred
|
|
|
Direxion Indexed Commodity Strategy Fund
|
|
$
|
40,908
|
|
|
Direxion Indexed Managed Futures Strategy Fund
|
|
$
|
27,914
|
|
|
Direxion/Wilshire Dynamic Fund
|
|
$
|
44,954
|
|
|
Direxion Long/Short Global Currency Fund
(1)
|
|
$
|
4
|
|
|
(1)
|
For the period from the Fund’s commencement of operations on September 30, 2013 to October 31, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund (Class C)
|
|
Advertising and
Marketing
|
|
|
Printing and
Postage
|
|
|
Payment to
Distributor
|
|
|
Payment to
Dealers
|
|
|
Compensation
to Sales
Personnel
|
|
|
Other
Marketing
Expenses
|
|
|
Direxion Indexed Commodity Strategy Fund
|
|
$
|
24,844
|
|
|
$
|
0
|
|
|
$
|
2,888
|
|
|
$
|
4,696
|
|
|
$
|
5,547
|
|
|
$
|
2,933
|
|
|
Direxion Indexed Managed Futures Strategy
Fund
(1)
|
|
$
|
16,704
|
|
|
$
|
0
|
|
|
$
|
1,968
|
|
|
$
|
3,419
|
|
|
$
|
3,794
|
|
|
$
|
2,029
|
|
|
Direxion/Wilshire Dynamic Fund
|
|
$
|
25,718
|
|
|
$
|
0
|
|
|
$
|
2,949
|
|
|
$
|
7,930
|
|
|
$
|
5,471
|
|
|
$
|
2,886
|
|
|
Direxion Long/Short Global Currency Fund
(1)
|
|
$
|
1
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
0
|
|
|
(1)
|
For the period from the Fund’s commencement of operations on September 30, 2013 to October 31, 2013.
|
48
Class A Shares
As described in the Prospectus, Class A shares of the Funds are sold with a maximum up-front sales charge of 5.50%. The actual sales charge that is paid
by an investor on the purchase of Advisor Class A Shares may differ slightly from the sales charge listed above or in the applicable Prospectus due to rounding in the calculations. Contact your broker or dealer for further information. As
described below, no up-front sales charge will be applied to purchases over $1 million. However, other than for Employer Retirement Plans, if the initial purchase is over $1 million and not subject to the up-front charge, a CDSC of 1.00% will
generally be deducted from your redemption proceeds if you redeem within 24 months of your purchase.
Reduction or Waiver of Sales Charge.
The
Funds offer a number of ways to reduce or eliminate the up-front sales charge on Class A shares. Such reductions or waivers may apply for:
|
|
•
|
|
Purchases under a
Right of Accumulation
or
Letter of Intent
;
|
|
|
•
|
|
Certain programs of selected securities dealers and other financial intermediaries that have an agreement with the Distributor or its affiliates;
|
|
|
•
|
|
Certain wrap or other fee-based programs offered by financial intermediaries;
|
|
|
•
|
|
Certain registered representatives or brokers-dealers who act as selling agents;
|
|
|
•
|
|
Certain bank or broker-affiliated trust departments investing funds over which they exercise exclusive discretionary investment authority and that are held in a fiduciary, agency, advisory, custodial or similar
capacity; or
|
|
|
•
|
|
Certain (i) investors purchasing on a periodic fee, asset-based fee or no transaction fee basis through a broker-dealer sponsored mutual fund purchase program; and (ii) clients of investment advisers,
financial planners or other financial intermediaries that charge periodic or asset-based fees for their services.
|
Large Purchases and
Quantity Discounts.
As indicated in the Prospectus, the more Class A shares a shareholder purchases, the smaller the sales charge per share. If a shareholder purchases Class A shares on the same day as his or her spouse or children
under 21, all such purchases will be combined in calculating the sales charges.
Also, if shareholders later purchase additional shares of a Fund, the
purchases will be added together with the amount already invested in that Fund. For example, if a shareholder already owns shares of a Fund with a value at the current NAV of $40,000 and subsequently purchases $10,000 more of that same Fund at the
current NAV, the sales charge on the additional purchase would be 4.75%, not 5.50% as shown in the Prospectus. At the time of purchasing additional purchases, shareholders should inform that Fund in writing that they already own Class A shares
of the Fund.
The policy of waiving the up-front sale charge for certain redemptions may be modified or discontinued, with respect to new shareholders, at
any time.
Signing a Letter of Intent
If investors intend to purchase at least $50,000 of Class A shares over the next 13 months, they should
consider signing a letter of intent (“LOI”) to reduce the sales charge. A letter of intent includes a provision providing for the assessment of the sales charge for each purchase based on the amount you intend to purchase within the
13-month period. It also allows the custodian to hold the maximum sales charge (
i.e.
, 5.75%) in shares in escrow until the purchases are completed. The shares held in escrow in the investor’s account will be released when the 13-month
period is over. If the investor does not purchase the amount stated in the letter of intent, the Fund will redeem the appropriate number of escrowed shares to cover the difference between the sales charge paid and the sales charge applicable to the
individual purchases had the LOI not been in effect. Any remaining escrow shares will be released from escrow.
The letter of intent does not obligate the
investor to purchase shares, but simply allows the investor to take advantage of the lower sales charge applicable to the total amount intended to be purchased. Any shares purchased within 90 days of the date you establish a letter of intent may be
used as credit toward fulfillment of the letter of
49
intent, but the reduced sales charge will only apply to new purchases made on or after that date. The investor’s prior trade prices will not be adjusted.
Class C Shares
As
described in the Prospectus, Class C shares are sold at a Fund’s NAV. There is no up-front sales charge, so that the full amount of your purchase is invested in the Fund. However, if you sell your Class C shares within 12 months of purchase,
you will pay a 1.00% CDSC based on the original purchase price or redemption proceeds, whichever is lower. The CDSC is used to reimburse the Distributor for paying your financial intermediary a sales commission up to a total of 1.00% of the purchase
price of your Class C investment in connection with your initial purchase.
Class C Sales Charge Information
– Sales charges received by the
Distributor of the Funds from shareholders of Class C shares were as follows:
|
|
|
|
|
|
|
Fund (Class C shares)
|
|
CDSC’s Received
|
|
|
Direxion Indexed Commodity Strategy Fund
|
|
$
|
3,251
|
|
|
Direxion Indexed Managed Futures Strategy Fund
|
|
$
|
2,529
|
|
|
Direxion/Wilshire Dynamic Fund
|
|
$
|
3,266
|
|
|
Direxion Long/Short Global Currency Fund
(1)
|
|
$
|
0
|
|
|
(1)
|
For the period from the Fund’s commencement of operations on September 30, 2013 to October 31, 2013.
|
Independent Registered Public Accounting Firm
Ernst & Young LLP (“E&Y”), 5 Times Square New York, New York, 10036 is the independent registered public accounting firm for the Trust.
The Financial Statements of the Funds for the fiscal year ended October 31, 2013 have been audited by E&Y and are incorporated by reference herein, which is given upon their authority as experts in accounting and auditing.
DETERMINATION OF NET ASSET VALUE
The NAV per share of each Fund is determined separately 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 (“Business Day”). The NYSE is open every week, Monday through Friday, except when the following holidays are celebrated: New Year’s Day,
Martin Luther King, Jr. Day, President’s Day, Good Friday, Memorial Day, July 4
th
, Labor Day, Thanksgiving Day and Christmas Day. The NYSE may close early on the business day before each of
these holidays and on the day after Thanksgiving Day. NYSE holiday schedules are subject to change without notice.
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 primarily traded on the NASDAQ Global Market
®
(“NASDAQ
®
”) for which market 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, on a particular day, an exchange-traded security does not trade, then the mean between
the closing bid and asked prices will be used. All equity securities that are not traded on a listed exchange held by a Fund will be valued at the last sales price in the OTC market, or, if no sales price is reported, the mean of the last bid and
asked price is used. 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 by procedures as adopted by the Board.
For purposes of determining NAV per share of a Fund, exchange-traded options and options on futures are valued at the composite price using the National
Best Bid and Offer quotes (“NBBO”). NBBO consists of the highest bid price and lowest asked price across any of the exchanges on which an option is quoted, thus providing a view across the entire U.S. options marketplace. Specifically,
composite pricing looks at the last trades on exchanges where the
50
options are traded. If there are no trades for the option on a given business day, the composite option pricing calculates the mean of the highest bid price and lowest ask price across the
exchanges where the option is traded. Non-exchange traded options are valued at the mean between the last bid and asked quotations.
The prices of futures
contracts are valued either at the settlement prices established each day on the exchange on which they are traded if the settlement price reflects trading prior to the close of regular trading or at the last sales price prior to the close of
regular trading if the settlement prices established by the exchange reflects trading after the close of regular trading.
Swap contracts are valued using
the closing prices of the underlying reference entity or the closing value of the underlying reference index.
Foreign securities, currencies and
other assets denominated in foreign currencies are translated into U.S. Dollars at the exchange rate of such currencies against the U.S. Dollar, as provided by an independent pricing service or reporting agency.
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 as determined by procedures as adopted by the Board. Other debt securities (including credit default swaps)
are valued by using either the closing bid and ask prices provided by the Funds’ pricing service or the mean between the closing bid and ask prices provided by brokers that make markets in such instruments, or if such prices are unavailable, by
a pricing matrix method. U.S. government securities are valued at the mean between the closing bid and asked price provided by an independent third party pricing service.
Dividend income and other distributions are recorded on the ex-distribution 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 a Fund are valued at fair value.
For purposes of calculating their daily NAV, a 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, each Fund is permitted to include same day trades when calculating its
NAV (commonly referred to as “trade date accounting”) on days when a Fund receives substantial redemptions. Such redemptions can result in an adverse impact on a Fund’s NAV when there is a disparity between the trade price and the
closing price of the security. Thus, a Fund’s use of trade date accounting is likely to lessen the impact of substantial redemptions on a Fund’s NAV.
REDEMPTIONS
Redemption In-Kind
The
Trust has filed a notice of election under Rule 18f-1 of the 1940 Act, which obligates a Fund to redeem shares for any shareholder for cash during any 90-day period up to $250,000 or 1% of that 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, a Fund will pay all or a portion of the remainder of the redemption in
portfolio instruments, valued in the same way as each Fund determines NAV. The portfolio instruments will be selected in a manner that the Trustees deem fair and equitable. To the extent that a Fund redeems its shares in this manner, the shareholder
assumes the risk of a subsequent change in the market value of those securities, the cost of liquidating the securities and the possibility of a lack of a liquid market for those securities. Shareholders who receive
51
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 a 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 a 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 should be made by direct wire transfer.
A redemption request will be considered to be received in
“good order” if:
|
|
•
|
|
The number or amount of shares and the class of shares to be redeemed and shareholder account number have been indicated;
|
|
|
•
|
|
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;
|
|
|
•
|
|
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
|
|
|
•
|
|
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 Funds 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 a Fund to fairly determine the value of its net assets or disposal of a
Fund’s securities is not reasonably practicable; or (4)
the SEC has issued an order for the protection of a Fund’s shareholders.
Redemption Fees
The Funds are not suitable for purchase by active investors. The Funds are intended for long-term investment purposes only and discourages shareholders from
engaging in “market-timing” or other types of excessive short-term trading that could adversely affect shareholder returns. Consequently, the Board has adopted policies to prevent frequent purchases and redemptions of shares of the Fund.
In an effort to discourage short-term trading and defray costs related to such trading, the Board has approved a redemption fee of 1.00% on sales and exchanges (collectively “redemptions”) of Fund shares made within thirty (30) days
of the date of purchase (including shares acquired through an exchange).
52
Anti-Money Laundering
A Fund is required to comply with various federal anti-money laundering laws and regulations. Consequently, a 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 a Fund may be required to
transfer the account or proceeds of the account to a government agency. In addition, pursuant to a Fund’s Customer Identification Program, a 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 a 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 a 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 60 days’ notice.
Index Licensor Information
The Trust has entered into a licensing agreement with The McGraw-Hill Companies, Inc. to permit the use of certain servicemarks in connection with its
registration statement and other materials. “Standard & Poor’s
®
,” “S&P
®
,” “S&P 500
®
” and “Standard & Poor’s 500” are trademarks of The McGraw-Hill Companies, Inc. The Funds are not sponsored, endorsed, sold or promoted by Standard &
Poor’s, and Standard
& Poor’s makes no representation regarding the advisability of investing in the Funds.
SHAREHOLDER
AND OTHER INFORMATION
Each share of a Fund gives the shareholder one vote in matters submitted to shareholders for a vote. Each series of each Fund
have equal voting rights, except that, in matters affecting only a particular series, only shares of that 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 a 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
As stated in the Prospectus, each Fund declares and distributes dividends to its shareholders from its net investment income at least annually; for these
purposes, net investment income includes dividends, accrued interest, and accretion of OID and market discount, less amortization of market premium and estimated expenses, and is calculated immediately prior to the determination of a Fund’s NAV
per share. Each Fund also distributes its net short-term capital gain, if any, annually but may make more frequent distributions thereof if necessary to avoid income or excise taxes. Each Fund may realize net capital gain
(i.e.
, the excess of
net long-term capital gain over net short-term capital loss) and thus anticipates making annual distributions thereof. The Trustees may revise this
53
distribution policy, or postpone the payment of distributions, if a Fund has or anticipates any large unexpected expense, loss, or fluctuation in net assets that, in the Trustees’ opinion,
might have a significant adverse effect on its shareholders.
Taxes
Taxation of Shareholders
. Dividends (including distributions of the excess of net short-term capital gain over net long-term capital loss
(“short-term gain”)) a Fund distributes, if any, are taxable to its shareholders as ordinary income, except to the extent they constitute “qualified dividend income” (described in the Prospectus) (“QDI”), regardless of
whether the dividends are reinvested in Fund shares or received in cash. Distributions of a 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 redemption of Fund shares may result in a taxable
gain, depending on whether the redemption proceeds are more or less than the shareholder’s adjusted basis in the shares. An exchange of Fund shares for shares of another Fund (or any other fund advised by Rafferty) generally will have similar
consequences. If Fund shares are redeemed 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 (with the tax consequences described in the Prospectus).
Regulated Investment Company Status
. Each Fund is treated as
a separate corporation for federal tax purposes and intends to continue to qualify for treatment as a RIC. If a Fund so qualifies and satisfies the Distribution Requirement (defined below) for a taxable year, it will not be subject to federal income
tax on the part of its investment company taxable income (generally consisting of net investment income, short-term gain, and net gains and losses from certain foreign currency transactions, all determined without regard to any deduction for
dividends paid) and net capital gain it distributes to its shareholders for that year.
To qualify for treatment as a RIC, a 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. For each Fund, these requirements include the following: (1) the Fund
must derive at least 90% of its gross income each taxable year from the following sources (collectively, “Qualifying Income”): (a) dividends, interest, payments with respect to securities loans, and gains from the sale or other
disposition of securities or foreign currencies, or other income (including gains from options, futures, or forward contracts) derived with respect to its business of investing in securities or those currencies, and (b) net income from an
interest in a “qualified publicly traded partnership” (“QPTP”) (“Income Requirement”); and (2) at the close of each quarter of the Fund’s taxable year, (a) at least 50% of the value of its total assets
must be represented by cash and cash items, 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 (equity securities of QPTPs being considered voting securities for these purposes), and (b) not more than 25% of the value of
its total assets may be invested in (i) securities (other than government securities or the securities of other RICs) of any one issuer, (ii) securities (other than securities of other RICs) of two or more issuers the Fund controls that
are determined to be engaged in the same, similar, or related trades or businesses, or (iii) securities of one or more QPTPs (collectively, “Diversification Requirements”). The Internal Revenue Service (“Service”) has ruled
that income from a derivative contract on a commodity index generally is not Qualifying Income.
Although each Fund intends to continue to satisfy all the
foregoing requirements, there is no assurance that a Fund will be able to do so. The investment by a Fund primarily in options and futures positions entails some risk that it might fail to satisfy one or both of 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 the Funds use, pursuant to which each of them would expect to be treated as satisfying
the Diversification Requirements, would not be accepted in an audit by the Service, which might apply a different method resulting in disqualification of one or more Funds.
54
If a Fund failed to qualify for treatment as a RIC for any taxable year, (1) its taxable income,
including net capital gain, would be taxed at corporate income tax rates (up to 35%), (2) it would not receive a deduction for the distributions it makes to its shareholders, and (3) 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 QDI, which is subject to maximum federal income tax rates for individuals and certain other non-corporate
shareholders described in the Prospectus — to the extent of the Fund’s earnings and profits; those dividends would be eligible for the dividends-received deduction available to corporations under certain circumstances. 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. However, the Regulated Investment Company Modernization Act of 2010 provides certain
savings provisions that enable a RIC to cure a failure to satisfy any of the Income and Diversification Requirements as long as the failure “is due to reasonable cause and not due to willful neglect” and the RIC pays a deductible tax
calculated in accordance with those provisions and meets certain other requirements.
The Direxion Indexed Commodity Strategy Fund and Direxion Indexed
Managed Futures Strategy Fund may invest in commodity-linked instruments. Revenue Ruling 2006-1 (as modified by Revenue Ruling 2006-31) concludes that the income from certain commodity-linked derivative contracts is not Qualifying Income, but
numerous subsequent private letter rulings the Service issued (“PLRs”) treat income from commodity-linked notes (as distinguished from commodity-linked derivatives) similar to those in which those Funds may invest in the future, as well as
income derived from a wholly owned subsidiary similar to the Subsidiaries, as Qualifying Income, in the latter case even if the subsidiary itself invests in commodity-linked derivatives. Although a PLR may only be relied on by the taxpayer(s) that
receives it, and neither of those Funds will seek a PLR regarding its investments in commodity-linked notes and the Subsidiaries, each such Fund intends to treat the income it derives from those investments as Qualifying Income based on the analysis
in the PLRs mentioned above; and each thus will seek to restrict its income from derivatives, such as commodity-linked swaps, and other sources that do not generate Qualifying Income to a maximum of 10% of its annual gross income and will seek to
gain exposure to the commodities markets primarily through investments in commodity-linked notes and its Subsidiaries. Shareholders and potential investors should be aware, however, that, in July 2011, the Service suspended the issuance of such PLRs
pending its re-examination of the policies underlying them, which was still ongoing at the date of this SAI. If, at the end of that re-examination, the Service changes its position with respect to the conclusions reached in those PLRs, and the
changed position was upheld, then the Direxion Indexed Commodity Strategy Fund and/or Direxion Indexed Managed Futures Strategy Fund might be required to restructure its investments to satisfy the Income Requirement or might cease to qualify as a
RIC, with the consequences described in the preceding paragraph.
Excise Tax
.
Each 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.
Income from Foreign Securities
. Dividends and interest a 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.
Gains or losses (1) from the disposition of foreign currencies, including forward currency contracts, (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 a 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 a Fund’s investment company taxable income to be distributed to its shareholders.
Each 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, a 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,
55
“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 a 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 taxable 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 and avoid imposition of the Excise Tax — 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.
Each Fund may elect to “mark to market” its stock in any PFIC. “Marking-to-market,”
in this context, means including in gross income each taxable year (and treating as ordinary income) the excess, if any, of the fair market value of the PFIC’s stock over a Fund’s adjusted basis therein as of the end of that year. Pursuant
to the election, a Fund also would be allowed to deduct (as an ordinary, not a 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. A 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.
Derivatives Strategies
. The use of derivatives strategies, such as writing
(selling) and purchasing options and futures contracts and entering into forward contracts, involves complex rules that will determine for income tax purposes the amount, character, and timing of recognition of the gains and losses a Fund realizes
in connection therewith. Gains from the disposition of foreign currencies (except certain gains therefrom that may be excluded by future regulations), and gains from options, futures, and forward contracts a Fund derives with respect to its business
of investing in securities or foreign currencies, will be treated as Qualifying Income. Each Fund will monitor its transactions, make appropriate tax elections, and make appropriate entries in its books and records when it acquires any foreign
currency, option, futures contract, forward contract, or hedged investment to mitigate the effect of these rules, seek to prevent its disqualification as a RIC, and minimize the imposition of federal income and excise taxes.
Some futures contracts, foreign currency contracts that are traded in the interbank market, and “nonequity options” (
i.e.
, certain listed
options, such as those on a “broad-based” securities index) — except any “securities futures contract” that is not a “dealer securities futures contract” (both as defined in the Code) and any interest rate swap,
currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement — in which a Fund may invest may be subject to Code section 1256 (collectively
“section 1256 contracts”). Section 1256 contracts that a Fund holds at the end of its taxable year must be “marked-to-market” (that is, treated as having been sold at that time 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. These rules may operate to increase the amount that a Fund must distribute to satisfy the Distribution
Requirement (
i.e.
, with respect to the portion treated as short-term capital gain), which will be taxable to its shareholders as ordinary income when distributed to them, and to increase the net capital gain a Fund recognizes, without in
either case increasing the cash available to it. A Fund may elect not to have the foregoing rules apply to any “mixed straddle” (that is, a straddle, which the Fund clearly identifies in accordance with applicable regulations, at least one
(but not all) of the positions of which are section 1256 contracts), although doing so may have the effect of increasing the relative proportion of short-term capital gain (taxable as ordinary income) and thus increasing the amount of dividends it
must distribute. 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, futures, and forward contracts in which a Fund may invest. That section defines a “straddle” as offsetting positions with respect to actively traded personal property; for these purposes, options,
futures, and forward 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
56
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 a 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 a Fund of straddle transactions are not entirely clear.
If a call option written by a 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 a 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 a 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 a 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 a Fund exercises a purchased call option, the premium it paid for the option will be added to the basis in the subject securities or futures contract.
If a Fund has an “appreciated financial position” — generally, an interest (including an interest through an option, futures or forward
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
or forward contract a Fund or a related person enters into 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 Fund’s 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).
Direxion Indexed Commodity Strategy Fund and Direxion Indexed Managed Futures Strategy Fund —
Investment in a Subsidiary
.
The Direxion Indexed Commodity Strategy Fund and Direxion Indexed Managed Futures Strategy Fund will invest up to 25% of its total assets (by value) in the CTS Subsidiary and MFS Subsidiary, respectively, which
are expected to provide their respective Funds with exposure to the commodities markets within the limitations of the Income Requirement. Each Subsidiary will be classified as a corporation for federal tax purposes and, as a foreign corporation,
generally will not be subject to federal income taxation unless it is engaged in a U.S. trade or business. A foreign corporation that is not a dealer in stocks, securities, or commodities may engage in the following activities without being deemed
to be so engaged: (1) trading in stocks or securities (including contracts or options to buy or sell securities) for its own account; and (2) trading in commodities that are “of a kind customarily dealt in on an organized commodity
exchange . . . if the transaction is of a kind customarily consummated at such place” for its own account. It is expected that each Subsidiary will conduct its securities and commodities trading activities to comply with the foregoing.
In general, a foreign corporation that does not conduct a U.S. trade or business is nonetheless subject to federal income tax at a flat rate of 30% (or lower
treaty rate) on the gross amount of certain U.S.-source income, including dividends and certain interest income, that is not effectively connected with a U.S. trade or business. There is no tax treaty in force between the United States and the
Cayman Islands that would reduce the 30% rate. The 30% tax does not apply to U.S.-source capital gains (whether long-term or short-term), interest paid to a foreign corporation on its deposits with U.S. banks, or “portfolio interest”
(which includes interest, including OID, on certain obligations in registered form and, under certain circumstances, interest on bearer obligations).
Each Subsidiary will be a “controlled foreign corporation” (“CFC”) if, on any day of its taxable year, more than 50% of the voting power
or value of its stock is directly, indirectly, or constructively owned by “United States
57
shareholders.” A United States shareholder is defined as a “United States person” (as defined in Code section 957(c)) who directly, indirectly, or constructively owns 10% or more
of the total combined voting power of all classes of a foreign corporation’s voting stock. Because each of the Direxion Indexed Commodity Strategy Fund and Direxion Indexed Managed Futures Strategy Fund is a United States shareholder of its
Subsidiary — it is a United States person that owns and will continue to own at least 10% of the voting power of its Subsidiary’s stock — that owns all of its Subsidiary’s stock, each Subsidiary thus is a CFC. As a United States
shareholder, each such Fund annually is required to include in its gross income all of its Subsidiary’s “subpart F income” — which includes interest, OID, dividends, net gains from the disposition of stocks or securities,
receipts with respect to securities loans, net payments received with respect to equity swaps and similar derivatives, and net gains from transactions (including futures and forwards) in commodities and is expected to constitute all of each
Subsidiary’s income — regardless of whether the Subsidiary distributes that income to the Fund. Each Fund’s recognition of its Subsidiary’s subpart F income increases its tax basis in its stock in the Subsidiary. Distributions by
a Subsidiary to a Fund, if any, will be tax-free, to the extent of its previously undistributed subpart F income, and will correspondingly reduce the Fund’s tax basis in the Subsidiary’s stock. Subpart F income is generally treated as
ordinary income, regardless of the character of a Subsidiary’s underlying income.
Income from Zero-Coupon and Payment-in-Kind
Securities
. A Fund may acquire zero-coupon or other securities (such as strips and delayed interest securities) issued with OID. As a holder of those securities, a Fund must include in its gross income the OID that accrues on the securities
during the taxable year, even if it receives no corresponding payment on them during the year. Similarly, a Fund must include in its gross income securities it receives as “interest” on payment-in-kind securities. With respect to
“market discount bonds” (
i.e.,
bonds purchased at a price less than their issue price plus the portion of OID previously accrued thereon), a Fund may elect to accrue and include in income taxable each year a portion of the
bonds’ market discount. Because each Fund annually must distribute substantially all of its investment company taxable income, including any accrued OID and other non-cash income, to satisfy the Distribution Requirement and avoid imposition of
the Excise Tax, a Fund may be required in a particular year to distribute as a dividend an amount that is greater than the total amount of cash it actually receives. Those distributions will be made from a Fund’s cash assets or from the
proceeds of sales of portfolio securities, if necessary. A Fund may realize capital gains or losses from those sales, which would increase or decrease its investment company taxable income and/or net capital gain.
* * * * *
The foregoing is only a general summary of some of the important federal income tax considerations generally affecting the Funds. No attempt is made to
present a complete explanation of the federal tax treatment of the Funds’ 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 a Fund and to distributions therefrom.
Capital Loss Carryovers
. As of October 31, 2013, the Direxion Indexed Managed Futures Strategy Fund had capital loss carryovers on a tax
basis of:
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Short-Term
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Long-Term
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Total
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Direxion Indexed Managed Futures Strategy Fund (Consolidated)
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($
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632,312
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)
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($
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948,467
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)
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($
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1,580,779
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)
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These capital losses, and capital losses sustained in future taxable years, will not expire and may be carried over
without limitation.
58
FINANCIAL STATEMENTS
The financial statements for the Funds are incorporated by reference in the Fund’s Annual Report to shareholders dated October 31, 2013.
To receive a copy of the Prospectus or Annual or Semi-Annual Report to shareholders, without charge, write to or call the Trust at the address or telephone
number listed below.
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Write to:
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Direxion Funds
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1301 Avenue of the Americas (6th Avenue), 35th Floor
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New York, New York 10019
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Call:
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(800) 851-0511
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By Internet:
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www.direxionfunds.com
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59