STATEMENT OF ADDITIONAL INFORMATION
AQR Funds (Trust) is an open-end management investment company organized as a Delaware statutory trust on September 4,
2008, and is currently composed of thirty-four series including, in part: AQR Diversified Arbitrage Fund, AQR Managed Futures Strategy Fund, AQR Risk Parity Fund, AQR Multi-Strategy Alternative Fund, AQR Risk-Balanced Commodities Strategy
Fund, AQR Risk Parity II MV Fund, AQR Risk Parity II HV Fund, AQR Long-Short Equity Fund, AQR Managed Futures Strategy HV Fund, AQR Style Premia Alternative Fund and AQR Global Macro Fund (each a Fund and collectively,
Funds). Each Fund has distinct investment objectives and strategies. This SAI relates only to the AQR Global Macro Fund, which has the same fiscal year-end of December 31 as the other Funds listed on the cover page of this SAI. The
AQR Global Equity Fund, AQR International Equity Fund, AQR Momentum Fund, AQR Small Cap Momentum Fund, AQR International Momentum Fund, AQR Tax-Managed Momentum Fund, AQR Tax-Managed Small Cap Momentum Fund, AQR Tax-Managed International Momentum
Fund, AQR U.S. Defensive Equity Fund, AQR International Defensive Equity Fund, AQR Emerging Defensive Equity Fund, AQR Core Equity Fund, AQR Small Cap Core Equity Fund and AQR International Core Equity Fund are also series of the Trust and are
described in a separate Statement of Additional Information. The AQR International Small Cap Fund, AQR Emerging Markets Fund, AQR Equity Plus Fund, AQR Small Cap Core Fund, AQR Small Cap Growth Fund and AQR Risk-Balanced Commodities Strategy LV Fund
have not commenced operations as of the date of this SAI.
The Trust and AQR Capital Management, LLC, the Funds
investment adviser (the Adviser), have retained CNH Partners, LLC (Sub-Adviser), an affiliate of the Adviser, to serve as an investment sub-adviser to the AQR Diversified Arbitrage Fund and with respect to certain strategies
of the AQR Multi-Strategy Alternative Fund.
Much of the information contained in this SAI expands on subjects discussed in
each Funds respective Prospectus. No investment in the shares of any of the Funds should be made without first reading the Prospectus. All terms defined in the Prospectus have the same meaning in the SAI.
SECURITIES, INVESTMENT STRATEGIES AND RELATED RISKS
The following descriptions supplement the descriptions of the investment objectives, strategies and related risks of each Fund as set
forth in the Prospectus.
Subject to the investment policies and restrictions as described in the Prospectus and in this SAI,
each Fund may invest in or have exposure to any of the following securities or pursue any of the following investment strategies unless noted otherwise.
Arbitrage Strategies
(AQR Diversified Arbitrage Fund and AQR Multi-Strategy Alternative Fund)
The Funds may use a variety of arbitrage strategies in pursuing their investment strategy. The underlying relationships among securities
in which each Fund takes investment positions may change in an adverse manner, in which case the Fund may realize losses. The expected gain on an individual arbitrage investment is normally considerably smaller than the possible loss should the
transaction be unexpectedly terminated. The expected timing of each transaction is also extremely important since the length of time that the Funds capital must be committed to any given transaction will affect the rate of return realized by
the Fund, and delays can substantially reduce such returns. Therefore, unanticipated delays in timing could cause the Fund to lose money or not achieve the desired rate of return. Trading to seek short-term capital appreciation can be expected to
cause the Funds portfolio turnover rate to be substantially higher than that of the average equity-oriented investment company and, as a result, may involve increased brokerage commission costs which will be borne directly by the Fund and
ultimately by its investors. Certain investments of the Fund may, under certain circumstances, be subject to rapid and sizable losses.
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One type of arbitrage transaction that the Adviser or Sub-Adviser anticipates employing
involves purchasing the shares of an announced acquisition target at a discount from the expected value of such shares upon completion of the acquisition. The size of the discount, or spread, and whether the potential reward justifies the potential
risk are functions of numerous factors affecting the riskiness and timing of the acquisition. Such factors include the status of the negotiations between the two companies (for example, spreads typically narrow as the parties advance from an
agreement in principle to a definitive agreement), the complexity of the transaction, the number of regulatory approvals required, the likelihood of government intervention on antitrust or other grounds, the type of consideration to be received and
the possibility of competing offers for the target company.
Borrowing and Leverage
(all Funds)
Each Fund may borrow money to the extent permitted under the
Investment Company Act of 1940, as amended (the 1940 Act), as such may be interpreted or modified by regulatory authorities having jurisdiction, from time to time. This borrowing may be unsecured. The 1940 Act precludes a fund from
borrowing if, as a result of such borrowing, the total amount of all money borrowed by a fund exceeds 33
1/3
% of the value of its total assets (that is, total assets including borrowings, less liabilities exclusive of borrowings) at the time of such borrowings. This means that the 1940 Act requires a fund to
maintain continuous asset coverage of 300% of the amount borrowed. If the 300% asset coverage should decline as a result of market fluctuations or other reasons, a Fund may be required to sell some of its portfolio holdings within three days to
reduce the debt and restore the 300% asset coverage, even though it may be disadvantageous from an investment standpoint to sell securities at that time, and could cause the Fund to be unable to meet certain requirements for qualification as a
regulated investment company under the Internal Revenue Code (the Code). In addition, certain types of borrowings by a Fund may result in the Fund being subject to covenants in credit agreements relating to asset coverage, portfolio
composition requirements and other matters. It is not anticipated that observance of such covenants would impede the Adviser from managing a Funds portfolio in accordance with the Funds investment objectives and policies. However, a
breach of any such covenants not cured within the specified cure period may result in acceleration of outstanding indebtedness and require the Fund to dispose of portfolio investments at a time when it may be disadvantageous to do so.
Borrowing has a leveraging effect because it tends to exaggerate the effect on a Funds net asset value (NAV) per share
of any changes in the market value of its portfolio securities. Money borrowed will be subject to interest costs and other fees, which may or may not be recovered by earnings on the securities purchased. A Fund also may be required to maintain
minimum average balances in connection with a borrowing or to pay a commitment or other fee to maintain a line of credit. Either of these requirements would increase the cost of borrowing over the stated interest rate. Unless the appreciation and
income, if any, on assets acquired with borrowed funds exceed the costs of borrowing, the use of leverage will diminish the investment performance of a fund compared with what it would have been without leverage.
The SEC takes the position that other transactions that have a leveraging effect on the capital structure of a fund can be viewed as
constituting a form of senior security of the fund for purposes of the 1940 Act. These transactions may include selling securities short, buying and selling certain derivatives (such as futures contracts or swap agreements), selling (or
writing) put and call options, engaging in when-issued, delayed-delivery, forward-commitment or reverse repurchase transactions and other trading practices that have a leveraging effect on the capital structure of a fund or may be viewed as
economically equivalent to borrowing. A borrowing transaction will not be considered to constitute the issuance of a senior security by a Fund if the Fund (1) maintains an offsetting financial position, (2) maintains liquid
assets in a sufficient value to cover the Funds potential obligation under the borrowing transaction not offset or covered as provided in (1) and (3), or (3) otherwise covers the transaction in accordance with applicable
SEC guidance (collectively, covers the transaction). The value of a Funds holdings in such instruments are marked-to-market daily to ensure proper coverage. A Fund may have to buy or sell a security at a disadvantageous time or
price in order to cover such transaction. In addition, assets being maintained to cover such transactions may not be available to satisfy redemptions or for other purposes or obligations.
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Callable Bonds
(AQR Diversified
Arbitrage Fund and AQR Multi-Strategy Alternative Fund)
Some bonds give the issuer the option to call, or redeem, the
bonds before their maturity date. If an issuer calls its bond during a time of declining interest rates, a Fund might have to reinvest the proceeds in an investment offering a lower yield. During periods of market illiquidity or rising
interest rates, prices of a Funds callable issues are subject to increased price fluctuation.
Cash Management/Temporary Investments
(all Funds)
A Fund can hold uninvested cash or can invest
it in cash equivalents such as money market instruments, U.S. treasury bills, interests in short-term investment funds, repurchase agreements, or shares of money market or short-term bond funds. Generally, these securities offer less potential for
gains than other types of securities.
A Fund also may adopt temporary defensive positions by investing up to 100% of its
assets in these instruments, even if the investments are inconsistent with the Funds principal investment strategies, in attempting to respond to adverse market, economic, political or other conditions. To the extent a Fund invests in these
temporary investments in this manner, the Fund may not achieve its investment objective.
Commodities Instruments
(AQR Managed Futures Strategy Fund, AQR Managed Futures Strategy HV Fund, AQR Risk Parity Fund, AQR Multi-Strategy Alternative Fund, AQR Risk-Balanced Commodities Strategy Fund, AQR Risk Parity II MV Fund, AQR
Risk Parity II HV Fund, AQR Style Premia Alternative Fund and AQR Global Macro Fund)
There are several additional
risks associated with transactions in commodity futures contracts, swaps on commodity futures contracts, commodity forward contracts and other commodities instruments. In the commodity instruments markets, producers of the underlying commodity may
decide to hedge the price risk of selling the commodity by selling commodity instruments 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 commodity instrument,
the commodity producer generally must sell the commodity instrument at a lower price than the expected future spot price. Conversely, if most hedgers in the commodity instruments market are purchasing commodity instruments to hedge against a rise in
prices, then speculators will only sell the other side of the commodity instrument at a higher future 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 commodity instruments markets has shifted when it is time for a Fund
to reinvest the proceeds of a maturing contract in a new commodity instrument, the Fund might reinvest at a higher or lower future price, or choose to pursue other investments. The commodities which underlie commodity instruments 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 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 Funds investments to greater volatility than investments in
traditional securities. Also, unlike the financial instruments markets, in the commodity instruments markets there are costs of physical storage associated with purchasing the underlying commodity. The price of the commodity instruments 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
instruments on that commodity, the value of the commodity instrument may change proportionately.
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Commodity-Linked Notes
(AQR Managed Futures Strategy
Fund, AQR Managed Futures Strategy HV Fund, AQR Risk Parity Fund, AQR Multi-Strategy Alternative Fund, AQR Risk-Balanced Commodities Strategy Fund, AQR Risk Parity II MV Fund, AQR Risk Parity II HV Fund, AQR Style Premia Alternative Fund and AQR
Global Macro Fund)
Commodity-linked notes and other related instruments purchased by the Funds are generally
privately negotiated debt obligations where the principal paid to the Fund by the counterparty at maturity or redemption is determined by reference to the performance of a specific reference commodity or group of commodities or commodity index. The
principal amount payable upon maturity or redemption may fluctuate, depending upon changes in the value of the reference commodity or index. The terms of a commodity-linked note may provide that, in certain circumstances where the value of the
reference commodity or index substantially declines, no principal is due to the buyer of the commodity-linked note at maturity and, therefore, may result in a total loss of invested capital by the Fund. The principal payments that may be made on a
commodity-linked note may vary widely, depending on a variety of factors, including the volatility of the reference commodity or index. Commodity-linked notes may be positively or negatively indexed, so the appreciation of the reference commodity
may produce an increase or a decrease in the value of the principal at maturity. The rate of return on commodity-linked notes may be determined by applying a multiplier to the performance or differential performance of reference commodities or
indices. Application of a multiplier involves leverage that will serve to magnify the potential for gain and the risk of loss. The purchase of commodity-linked notes exposes the Fund to the credit risk of the issuer of the commodity-linked product.
Commodity-linked notes may also be more volatile, less liquid, and more difficult to price accurately than less complex securities and instruments or more traditional debt securities.
Convertible Securities
(AQR Diversified Arbitrage Fund and AQR Multi-Strategy
Alternative Fund)
A Fund, subject to its investment strategies and policies, may invest in preferred stocks or
fixed-income securities which are convertible into common stock. Convertible securities are securities that may be converted either at a stated price or rate within a specified period of time into a specified number of shares of common stock.
Traditionally, convertible securities have paid dividends or interest greater than on the related common stocks, but less than fixed income non-convertible securities. By investing in a convertible security, a Fund may participate in any capital
appreciation or depreciation of a companys stock, but to a lesser degree than if it had invested in that companys common stock. Convertible securities rank senior to common stock in a corporations capital structure and, therefore,
entail less risk than the corporations common stock. The value of a convertible security is a function of its investment value (its value as if it did not have a conversion privilege), and its conversion value (the
securitys worth if it were to be exchanged for the underlying security, at market value, pursuant to its conversion privilege). A Fund may attempt to hedge certain of its investments in convertible debt securities by selling short the
issuers common stock.
Corporate Loans
(AQR Diversified Arbitrage
Fund)
The Fund may invest in Corporate Loans, including senior secured floating rate loans and other
types of loans, such as fixed rate unsecured or delayed draw loans (together, Loans). Corporate Loans are made to corporations and other non-governmental entities and issuers. Senior secured Corporate Loans typically hold the most senior
position in the capital structure of the issuing entity, are typically secured with specific collateral and typically have a claim on the assets and/or stock of the borrower that is senior to that held by subordinated debt holders and stockholders
of the borrower. Unsecured Corporate Loans generally are subject to similar risks as those associated with investments in senior secured Corporate Loans. However, because unsecured loans have lower priority in right of payment to any higher ranking
obligations of the borrower and are not backed by a security interest in any specific collateral, they are subject to additional risk that the cash flow of the borrower and available assets may be insufficient to meet scheduled payments after giving
effect to any higher ranking obligations of the borrower. Unsecured Corporate Loans generally have greater price volatility than senior secured Corporate Loans and may be less liquid.
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The proceeds of Corporate Loans primarily are used to finance leveraged buyouts,
recapitalizations, mergers, acquisitions, stock repurchases, dividends, internal growth and for other corporate purposes. Corporate Loans typically have rates of interest that are determined daily, monthly, quarterly or semi-annually by reference to
a base lending rate, plus a premium or credit spread. Base lending rates in common usage today are primarily the London Inter-Bank Offered Rate (LIBOR), and secondarily the prime rate offered by one or more major U.S. banks (the
Prime Rate) and the certificate of deposit (CD) rate or other base lending rates used by commercial lenders. The risks associated with Corporate Loans of below investment grade quality are similar to the risks of bonds rated
below investment grade, although senior secured Corporate Loans are typically senior and secured in contrast to bonds rated below investment grade, which are generally subordinated and unsecured. Senior secured Corporate Loans higher standing
has historically resulted in generally higher recoveries in the event of a corporate reorganization. In addition, because their interest payments are adjusted for changes in short-term interest rates, investments in senior secured Corporate Loans
generally have less interest rate risk than below-investment-grade rated bonds.
An economic downturn generally leads to a
higher non-payment rate, and a debt obligation may lose significant value before a default occurs. Moreover, any specific collateral used to secure a Loan may decline in value or become illiquid, which would adversely affect the Loans value.
Like other debt instruments, Corporate Loans are subject to the risk of non-payment of scheduled interest or principal. Such non-payment would result in a reduction of income to the Fund, a reduction in the value of the investment and a potential
decrease in the net asset value per share of the Fund. There can be no assurance that the liquidation of any collateral securing a Loan would satisfy the borrowers obligation in the event of non-payment of scheduled interest or principal
payments, or that such collateral could be readily liquidated. In the event of bankruptcy of a borrower, the Fund could experience delays or limitations with respect to its ability to realize the benefits of the collateral securing a Corporate Loan.
The collateral securing a Corporate Loan may lose all or substantially all of its value in the event of bankruptcy of a borrower. Some Corporate Loans are subject to the risk that a court, pursuant to fraudulent conveyance or other similar laws,
could subordinate such Corporate Loans to presently existing or future indebtedness of the borrower or take other action detrimental to the holders of Corporate Loans including, in certain circumstances, invalidating such Corporate Loans or causing
interest previously paid to be refunded to the borrower. If interest were required to be refunded, it could negatively affect the Funds performance.
The Fund may purchase and retain in its portfolio Corporate Loans where the borrowers have experienced, or may be perceived to be likely to experience, credit problems, including default, involvement in
or recent emergence from bankruptcy reorganization proceedings or other forms of debt restructuring. At times, in connection with the restructuring of a Corporate Loan either outside of bankruptcy court or in the context of bankruptcy court
proceedings, the Fund may determine or be required to accept equity securities or junior debt securities in exchange for all or a portion of a Corporate Loan. Corporate Loans in which the Fund will invest may not be rated by a nationally recognized
statistical ratings organization (NRSRO), may not be registered with the SEC or any state securities commission, and may not be listed on any national securities exchange. The amount of public information available with respect to
Corporate Loans may be less extensive than available for registered or exchange-listed securities. No active trading market may exist for some Corporate Loans and some Corporate Loans may be subject to restrictions on resale. Secondary markets may
be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods, which may impair the ability to realize full value and thus cause a decline in the Funds net asset value. During periods of limited demand
and liquidity for Corporate Loans, the Funds net asset value may be adversely affected. Other factors (including, but not limited to, rating downgrades, credit deterioration, a large downward movement in stock prices, a disparity in supply and
demand of certain investments or market conditions that reduce liquidity) can reduce the value of Corporate Loans and other debt obligations, impairing the Funds net asset value.
The Fund may purchase Corporate Loans by assignment from a participant in the original syndicate of lenders or from subsequent assignees
of such interests, or can buy a participation in a loan. The Fund may also purchase participations in the original syndicate making Corporate Loans. Loan participations typically represent indirect participations in a loan to a corporate borrower,
and generally are offered by banks or other financial institutions
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or lending syndicates. When purchasing loan participations, the Fund assumes the credit risk associated with the corporate borrower and may assume the credit risk associated with an interposed
bank or other financial intermediary. Economic and other events (whether real or perceived) can reduce the demand for certain Corporate Loans or Corporate Loans generally, which may reduce market prices and cause the Funds net asset value per
share to fall. The frequency and magnitude of such changes cannot be predicted. Loans and other debt instruments are also subject to the risk of price declines due to increases in prevailing interest rates, although floating-rate debt instruments
are less exposed to this risk than fixed-rate debt instruments. Interest rate changes may also increase prepayments of debt obligations and require the Fund to invest assets at lower yields. No active trading market may exist for certain Loans,
which may impair the ability of the Fund to realize full value in the event of the need to liquidate such assets. Adverse market conditions may impair the liquidity of some actively traded Loans.
Debt Obligations
(AQR Diversified Arbitrage Fund, AQR Risk Parity Fund, AQR
Multi-Strategy Alternative Fund, AQR Risk-Balanced Commodities Strategy Fund, AQR Risk Parity II MV Fund, AQR Risk Parity II HV Fund, AQR Style Premia Alternative Fund and AQR Global Macro Fund)
A Fund, subject to its investment strategies and policies, may invest in corporate bonds and other evidences of corporate indebtedness
(debt securities), including debt securities issued by companies involved in publicly announced mergers, takeovers and other corporate reorganizations, including reorganizations undertaken pursuant to Chapter 11 of the U.S. Bankruptcy
Code or may be exposed to debt securities through derivative instruments.
Although generally not as risky as the equity
securities of the same issuer, debt securities may gain or lose value due to changes in interest rates and other general economic conditions, industry fundamentals, market sentiment and the issuers operating results, balance sheet and credit
ratings. The market value of debt securities issued by companies involved in pending corporate mergers and takeovers may be determined in large part by the status of the transaction and its eventual outcome, especially if the debt securities are
subject to change-of-control provisions that entitle the holder to be paid par value or some other specified dollar amount upon completion of the merger or takeover. Accordingly, the principal risk associated with investing in these debt securities
is the possibility that the transaction may not be completed.
Depositary Receipts
(AQR Diversified Arbitrage Fund, AQR Multi-Strategy Alternative Fund, AQR Long-Short Equity Fund, AQR Style Premia Alternative Fund and AQR Global Macro Fund)
A Fund, subject to its investment strategies and policies, may purchase American Depositary Receipts (ADRs), European
Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) and Thailand Non-Voting Depositary Receipts (NVDRs). ADRs, EDRs, GDRs and NVDRs are certificates evidencing ownership of shares of a foreign issuer and
are alternatives to directly purchasing the underlying foreign securities in their national markets and currencies. However, they continue to be subject to many of the risks associated with investing directly in foreign securities. These risks
include the political and economic risks of the underlying issuers country, as well as in the case of depositary receipts traded on non-U.S. markets, exchange risk. ADRs, EDRs, GDRs and NVDRs may be sponsored or unsponsored. The issuer of a
sponsored receipt typically bears certain expenses of maintaining the depositary receipt facility. Unsponsored receipts are established without the participation of the issuer. Unsponsored receipts may involve higher expenses, they may not
pass-through voting or other shareholder rights, and they may be less liquid. Holders of unsponsored receipts generally bear all the costs of the depositary receipt facility. The bank or trust company depositary of an unsponsored depositary receipt
may be under no obligation to distribute shareholder communications.
Distressed
Investments
(AQR Diversified Arbitrage Fund and AQR Multi-Strategy Alternative Fund)
The Fund may invest in
distressed investments, which are issued by companies that are, or might be, involved in reorganizations or financial restructurings, either out of court or in bankruptcy. The Funds investments in
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distressed securities typically may involve the purchase of high-yield bonds, bank debt, corporate loans or other indebtedness of such companies. These investments may present a substantial risk
of default or may be in default at the time of investment. The Fund may incur additional expenses to the extent it is required to seek recovery upon a default in the payment of principal or interest on its portfolio holdings. In any reorganization
or liquidation proceeding relating to an investment, the Fund may lose its entire investment or may be required to accept cash or securities with a value less than its original investment. Among the risks inherent in investments in a troubled issuer
is that it frequently may be difficult to obtain information as to the true financial condition of the issuer. The Advisers or Sub-Advisers judgments about the credit quality of a financially distressed issuer and the relative value of
its securities may prove to be wrong. No active trading market may exist for certain distressed investments, including corporate loans, which may impair the ability of the Fund to realize full value in the event of the need to liquidate such assets.
Adverse market conditions may impair the liquidity of some actively traded distressed investments.
Emerging Markets Investments
(AQR Diversified Arbitrage Fund, AQR Managed Futures Strategy Fund,
AQR Managed Futures Strategy HV Fund, AQR Risk Parity Fund, AQR Multi-Strategy Alternative Fund, AQR Risk Parity II MV Fund, AQR Risk Parity II HV Fund, AQR Style Premia Alternative Fund and AQR Global Macro Fund)
A Fund, subject to its investment strategies and policies, may invest in emerging markets investments, which have exposure to the risks
discussed below relating to foreign instruments more generally, as well as certain additional risks. A high proportion of the shares of many issuers in emerging market countries may be held by a limited number of persons and financial institutions,
which may limit the number of shares available for investment. The prices at which investments may be acquired may be affected by trading by persons with material non-public information and by securities transactions by brokers in anticipation of
transactions by a Fund in particular securities. In addition, emerging market investments are susceptible to being influenced by large investors trading significant blocks of securities.
Emerging market stock markets are undergoing a period of growth and change which may result in trading volatility and difficulties in the
settlement and recording of transactions, and in interpreting and applying the relevant law and regulations. The securities industries in these countries are comparatively underdeveloped. Stockbrokers and other intermediaries in the emerging markets
may not perform as well as their counterparts in the United States and other more developed securities markets.
Political and
economic structures in many emerging market countries are undergoing significant evolution and rapid development, and such countries may lack the social, political and economic stability characteristic of the United States. Certain of such countries
may have, in the past, failed to recognize private property rights and have at times nationalized or expropriated the assets of private companies. As a result, the risks described above, including the risks of nationalization or expropriation of
assets, may be heightened. In addition, unanticipated political or social developments may affect the values of investments in those countries and the availability of additional investments in those countries. The laws of countries in emerging
markets relating to limited liability of corporate shareholders, fiduciary duties of officers and directors, and the bankruptcy of state enterprises are generally less well developed than or different from such laws in the United States. It may be
more difficult to obtain or enforce a judgment in the courts of these countries than it is in the United States. Emerging securities markets are substantially smaller, less liquid and more volatile than the major securities markets in the United
States. Although some governments in emerging markets have instituted economic reform policies, there can be no assurances that such policies will continue or succeed.
Equity Securities
(all Funds)
A Fund, subject to its investment strategies and policies, may purchase equity securities or be exposed to equity securities through derivative instruments. Equity securities may include common and
preferred stock, convertible securities, private investments in public equities, depositary receipts and warrants. Common stock represents an
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equity or ownership interest in a company. This interest often gives a Fund the right to vote on measures affecting the companys organization and operations. Equity securities have a
history of long-term growth in value, but their prices tend to fluctuate in the shorter term. Preferred stock generally does not exhibit as great a potential for appreciation or depreciation as common stock, although it ranks above common stock in
its claim on income for dividend payments.
The market value of all securities, including equity securities, is based upon the
markets perception of value and not necessarily the book value of an issuer or other objective measure of a companys worth.
Exchange-Traded Funds (ETFs)
(all Funds)
A Fund, subject to its investment strategies and policies, may purchase ETFs. ETFs are investment companies whose shares are bought and sold on a securities exchange. An ETF holds a portfolio of
securities designed to track a particular market segment or index. A Fund could purchase an ETF to temporarily gain exposure to a portion of the U.S. or foreign market while awaiting an opportunity to purchase securities directly. The risks of
owning an ETF generally reflect the risks of owning the underlying securities or commodities they are designed to track, although lack of liquidity in an ETF could result in it being more volatile than the underlying portfolio of securities or
commodities and ETFs have management fees that increase their costs versus the costs of owning the underlying securities directly. See also Securities of Other Investment Companies below.
Exchange Traded Notes (ETNs)
(all Funds)
Certain Funds may invest in ETNs. ETNs are generally notes representing debt of the issuer, usually a financial institution. ETNs combine
both aspects of bonds and ETFs. An ETNs returns are based on the performance of one or more underlying assets, reference rates or indexes, minus fees and expenses. Similar to ETFs, ETNs are listed on an exchange and traded in the secondary
market. However, unlike an ETF, an ETN can be held until the ETNs maturity, at which time the issuer will pay a return linked to the performance of the specific asset, index or rate (reference instrument) to which the ETN is linked
minus certain fees. Unlike regular bonds, ETNs do not make periodic interest payments, and principal is not protected.
The
value of an ETN may be influenced by, among other things, time to maturity, level of supply and demand for the ETN, volatility and lack of liquidity in underlying markets, changes in the applicable interest rates, the performance of the reference
instrument, changes in the issuers credit rating and economic, legal, political or geographic events that affect the reference instrument. An ETN that is tied to a reference instrument may not replicate the performance of the reference
instrument. ETNs also incur certain expenses not incurred by their applicable reference instrument. Some ETNs that use leverage can, at times, be relatively illiquid and, thus, they may be difficult to purchase or sell at a fair price. Levered ETNs
are subject to the same risk as other instruments that use leverage in any form. While leverage allows for greater potential return, the potential for loss is also greater. Finally, additional losses may be incurred if the investment loses value
because, in addition to the money lost on the investment, the loan still needs to be repaid.
Because the return on the ETN is
dependent on the issuers ability or willingness to meet its obligations, the value of the ETN may change due to a change in the issuers credit rating, despite no change in the underlying reference instrument. The market value of ETN
shares may differ from the value of the reference instrument. This difference in price may be due to the fact that the supply and demand in the market for ETN shares at any point in time is not always identical to the supply and demand in the market
for the assets underlying the reference instrument that the ETN seeks to track.
There may be restrictions on the Funds
right to redeem its investment in an ETN, which are generally meant to be held until maturity. The Funds decision to sell its ETN holdings may be limited by the availability of a secondary market. An investor in an ETN could lose some or all
of the amount invested.
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Foreign Government Debt Obligations
(AQR Diversified Arbitrage Fund, AQR Risk Parity Fund, AQR Multi-Strategy Alternative Fund, AQR Risk-Balanced Commodities Strategy Fund, AQR Risk Parity II MV Fund, AQR Risk Parity II HV Fund, AQR Style Premia Alternative Fund and AQR Global Macro
Fund)
Investments in sovereign debt obligations involve special risks which are not present in corporate debt
obligations. The foreign issuer of the sovereign debt or the foreign governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal or interest when due, and the Fund may have limited recourse in the
event of a default. During periods of economic uncertainty, the market prices of sovereign debt, and the NAV of the Fund, to the extent it invests in such securities, may be more volatile than prices of U.S. debt issuers. In the past, certain
foreign countries have encountered difficulties in servicing their debt obligations, withheld payments of principal and interest and declared moratoria on the payment of principal and interest on their sovereign debt.
A sovereign debtors willingness or ability to repay principal and pay interest in a timely manner may be affected by, among other
factors, its cash flow situation, the extent of its foreign currency reserves, the availability of sufficient foreign exchange, the relative size of the debt service burden, the sovereign debtors policy toward principal international lenders
and local political constraints. Sovereign debtors may also be dependent on expected disbursements from foreign governments, multilateral agencies and other entities to reduce principal and interest arrearages on their debt. The commitment on the
part of these governments, agencies and others to make such disbursements may be conditioned on the implementation of economic reforms and/or economic performance and the timely service of such debtors obligations. Failure to implement such
reforms, achieve such levels of economic performance or repay principal or interest when due may result in the cancellation of such third parties commitments to lend funds to the governmental entity, which may further impair such debtors
ability or willingness to timely service its debts. Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt may be requested to participate in the rescheduling of such debt and to extend further loans to governmental
entities. In the event of a default by a governmental entity, there may be few or no effective legal remedies for collecting on such debt.
Foreign Investments
(all Funds)
A Fund, subject to its investment strategies and policies, may invest, either directly or via exposure through a derivative instrument, in securities and other investments (which may be denominated in
U.S. dollars or non-U.S. currencies) issued or guaranteed by foreign corporations, certain supranational entities and foreign governments or their agencies or instrumentalities, and in securities issued by U.S. corporations denominated in non-U.S.
currencies. All such investments are referred to as foreign instruments.
Investing in foreign instruments offers
potential benefits not available from investing solely in securities of domestic issuers, including the opportunity to invest in foreign issuers that appear to offer investment potential, or in foreign countries with economic policies or business
cycles different from those of the U.S., or to reduce fluctuations in portfolio value by taking advantage of foreign stock markets that do not move in a manner parallel to U.S. markets. Investments in foreign instruments present additional risks and
considerations not typically associated with investments in domestic securities: reduction of income due to foreign taxes; fluctuation in value of foreign portfolio investments due to changes in currency rates and control regulations (e.g., currency
blockage); transaction charges for currency exchange; lack of public information about foreign issuers; lack of uniform accounting, auditing and financial reporting standards comparable to those applicable to domestic issuers; less trading volume on
foreign exchanges than on U.S. exchanges; greater volatility and less liquidity on foreign markets than in the United States; less regulation of foreign issuers, stock exchanges and brokers than in the United States; greater difficulties in
commencing lawsuits and obtaining judgments in foreign courts; higher brokerage commission rates than in the United States; increased risks of delays in settlement of portfolio transactions or loss of certificates for portfolio securities;
requirement of payment for investments prior to
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settlement possibilities in some countries of expropriation, confiscatory taxation, political, financial or social instability or adverse diplomatic developments; and unfavorable differences
between the United States economy and foreign economies. In the past, U.S. Government policies have discouraged certain investments abroad by U.S. investors, through taxation or other restrictions, and it is possible that such restrictions could be
re-imposed.
Foreign Exchange Risk and Currency Transactions
(all Funds)
The value of foreign assets as measured in U.S. dollars may be affected favorably or unfavorably by changes in foreign
currency rates and exchange control regulations. Currency exchange rates can also be affected unpredictably by intervention by U.S. or foreign governments or central banks, or the failure to intervene, or by currency controls or political
developments in the U.S. or abroad. Foreign currency exchange transactions may be conducted on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market or through entering into derivative currency transactions.
Currency futures contracts are exchange-traded and change in value to reflect movements of a currency or a basket of currencies. Settlement must be made in a designated currency.
Forward foreign currency exchange contracts are individually negotiated and privately traded so they are dependent upon the
creditworthiness of the counterparty. Such contracts may be used to (i) gain exposure to a particular currency or currencies as a part of the Funds investment strategy, (ii) when a security denominated in a foreign currency is
purchased or sold, or (iii) when the receipt in a foreign currency of dividend or interest payments on such a security is anticipated. With respect to subparagraphs (ii) and (iii), a forward contract can then lock in the U.S.
dollar price of the security or the U.S. dollar equivalent of such dividend or interest payment, as the case may be. Additionally, when the Adviser or Sub-Adviser, as appropriate, believes that the currency of a particular foreign country may suffer
a substantial decline against the U.S. dollar, it may enter into a forward contract to sell, for a fixed amount of dollars, the amount of foreign currency approximating the value of some or all of the securities held that are denominated in such
foreign currency. The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible. In addition, it may not be possible to hedge against long-term currency changes. Cross-hedging may be
used by using forward contracts in one currency (or basket of currencies) to hedge against fluctuations in the value of securities denominated in a different currency. Use of a different foreign currency magnifies exposure to foreign currency
exchange rate fluctuations. Forward contracts may also be used to shift exposure to foreign currency exchange rate changes from one currency to another. Short-term hedging provides a means of fixing the dollar value of only a portion of portfolio
assets.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) includes foreign
exchange forwards in the definition of swap as well as over-the-counter derivatives and therefore contemplates that certain of these contracts may be exchange-traded, cleared by a clearinghouse and otherwise regulated by the Commodity
Futures Trading Commission (the CFTC). The CFTC has been granted authority to regulate forward foreign currency contracts and many of the final regulations already adopted by the CFTC will apply to such contracts, however a limited
category of forward foreign currency contracts were excluded from certain of the Dodd-Frank regulations by the Secretary of the U.S. Treasury Department. Therefore, trading by the Funds in forward foreign currency contracts excluded by the Treasury
Department are not subject to the CFTC regulations to which other forward foreign currency contracts are subject.
Currency
transactions are subject to the risk of a number of complex political and economic factors applicable to the countries issuing the underlying currencies. Furthermore, unlike trading in most other types of instruments, there is no systematic
reporting of last sale information with respect to the foreign currencies underlying the derivative currency transactions. As a result, available information may not be complete. In an over-the-counter trading environment, there are no daily price
fluctuation limits. There may be no liquid secondary market to close out options purchased or written, or forward contracts entered into, until their exercise, expiration or maturity. There is also the risk of default by, or the bankruptcy of, the
financial institution serving as a counterparty.
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Currency swaps involve the exchange of rights to make or receive payments in specified
currencies and are individually negotiated. The entire principal value of a currency swap is subject to the risk that the other party to the swap will default on its contractual delivery obligations. A Funds performance may be adversely
affected as the Adviser or Sub-Adviser may be incorrect in its forecasts of market value and currency exchange rates.
Forwards, Futures, Swaps and Options
(all Funds)
As described below, a Fund may purchase and
sell in the U.S. or abroad futures contracts, forward contracts, swaps and put and call options on securities, futures, securities indices, swaps and currencies. In the future, a Fund may employ instruments and strategies that are not presently
contemplated, but which may be subsequently developed, to the extent such investment methods are consistent with such Funds investment objectives, and are legally permissible. There can be no assurance that an instrument, if employed, will be
successful.
A Fund may buy and sell these investments for a number of purposes, including hedging, investment or speculative
purposes. For example, it may do so to try to manage its exposure to the possibility that the prices of its portfolio securities may decline, or to establish a position in the securities market as a substitute for purchasing individual securities.
Some of these strategies, such as selling futures, buying puts and writing covered calls, may be used to hedge a Funds portfolio against price fluctuations. Other hedging strategies, such as buying futures and call options, tend to increase a
Funds exposure to the securities market.
Special Risk Factors Regarding Forwards, Futures, Swaps
and Options (all Funds)
Transactions in derivative instruments (e.g., futures, options, forwards, and swaps)
involve a risk of loss or depreciation due to: unanticipated adverse changes in securities or commodities prices, interest rates, indices, the other financial instruments prices or currency exchange rates; the inability to close out a
position; default by the counterparty; imperfect correlation between a position and the desired hedge (if the derivative instrument is being used for hedging purposes); tax constraints on closing out positions; and portfolio management constraints
on securities subject to such transactions. The loss on derivative instruments (other than purchased options) may substantially exceed the amount invested in these instruments. In addition, the entire premium paid for purchased options may be lost
before they can be profitably exercised. Transaction costs are incurred in opening and closing positions.
The
Funds use of swaps, futures contracts, forward contracts and certain other derivative instruments will have the economic effect of financial leverage. Financial leverage magnifies exposure to the swings in prices of an asset underlying a
derivative instrument and results in increased volatility, which means the Fund will have the potential for greater gains, as well as the potential for greater losses, than if the Fund does not use derivative instruments that have a leveraging
effect. Leveraging tends to magnify, sometimes significantly, the effect of any increase or decrease in the Funds exposure to an asset and may cause the Funds NAV to be volatile. For example, if the Adviser seeks to gain enhanced
exposure to a specific asset through a derivative instrument providing leveraged exposure to the asset and that derivative instrument increases in value, the gain to the Fund will be magnified; however, if that investment decreases in value, the
loss to the Fund will be magnified. A decline in the Funds assets due to losses magnified by the derivative instruments providing leveraged exposure may require the Fund to liquidate portfolio positions to satisfy its obligations, to meet
redemption requests or to meet asset segregation requirements when it may not be advantageous to do so. There is no assurance that the Funds use of derivative instruments providing enhanced exposure will enable the Fund to achieve its
investment objective.
A Funds success in using derivative instruments to hedge portfolio assets depends on the degree
of price correlation between the derivative instruments and the hedged asset. Imperfect correlation may be caused by several factors, including temporary price disparities among the trading markets for the derivative instrument, the assets
underlying the derivative instrument and a Funds assets.
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Over-the-counter (OTC) derivative instruments involve an increased risk that
the issuer or counterparty will fail to perform its contractual obligations. Some derivative instruments are not readily marketable or may become illiquid under adverse market conditions. In addition, during periods of market volatility, a commodity
exchange may suspend or limit trading in an exchange-traded derivative instrument, which may make the contract temporarily illiquid and difficult to price. Commodity exchanges may also establish daily limits on the amount that the price of a futures
contract or futures option can vary from the previous days settlement price. Once the daily limit is reached, no trades may be made that day at a price beyond the limit. This may prevent the closing out of positions to limit losses. Further,
under certain circumstances commodity exchanges or regulators may impose limits that are lower than current open equity in a given futures contract, such limit changes have the potential to cause liquidation of positions and may adversely affect the
Fund. Certain purchased OTC options, and assets used as cover for written OTC options, may be considered illiquid. The ability to terminate OTC derivative instruments may depend on the cooperation of the counterparties to such contracts. For thinly
traded derivative instruments, the only source of price quotations may be the selling dealer or counterparty. The use of derivatives is a highly specialized activity that involves skills different from conducting ordinary portfolio securities
transactions. There can be no assurance that the Advisers or Sub-Advisers use of derivative instruments will be advantageous to a Fund.
Regulatory Matters Regarding Forwards, Futures, Swaps and Options (all Funds)
The Funds and, if applicable, any Cayman Island subsidiary through which they invest are subject to regulation by the CFTC as commodity pools and the Adviser is subject to regulation by the CFTC as a
commodity pool operator (CPO) with respect to the Funds under the Commodity Exchange Act (CEA). The Adviser does not currently rely on an exclusion from the definition of CPO in CFTC Rule 4.5 with respect to any of the Funds.
Transactions in futures and options by any of the Funds are subject to limitations established by futures and option
exchanges governing the maximum number of futures and options that may be written or held by a single investor or group of investors acting in concert, regardless of whether the futures or options were written or purchased on the same or different
exchanges or are held in one or more accounts or through one or more different exchanges or through one or more brokers. Thus the number of futures or options which a Fund may write or hold may be affected by futures or options written or held by
other entities, including other investment companies advised by the Adviser or Sub-Adviser (or an adviser that is an affiliate of the Funds Adviser and Sub-Adviser). An exchange may order the liquidation of positions found to be in violation
of those limits and may impose certain other sanctions.
Forward Contracts (all Funds)
A forward contract is an obligation to purchase or sell a specific security, currency or other instrument for an
agreed price at a future date that is individually negotiated and privately traded by traders and their customers. In contrast to contracts traded on an exchange (such as futures contracts), forward contracts are not guaranteed by any exchange or
clearinghouse and are subject to the creditworthiness of the counterparty of the trade. Forward contracts are highly leveraged and highly volatile, and a relatively small price movement in a forward contract may result in substantial losses to a
Fund. To the extent a Fund engages in forward contracts to generate return, the Fund will be subject to these risks.
Forward contracts are not always standardized and are frequently the subject of individual negotiation between the parties involved. By
contrast, futures contracts are generally standardized and futures exchanges have central clearinghouses which keep track of all positions.
Because there is no clearinghouse system applicable to forward contracts, there is no direct means of offsetting a forward contract by purchase of an offsetting position on the same exchange as one can
with respect to a futures contract. Absent contractual termination rights, a Fund may not be able to terminate a forward contract at a price and time that it desires. In such event, the Fund will remain subject to counterparty risk with respect to
the
12
forward contract, even if the Fund enters into an offsetting forward contract with the same, or a different, counterparty. If a counterparty defaults, the Fund may lose money on the transaction.
Depending on the asset underlying the forward contract, forward transactions can be influenced by, among other things,
changing supply and demand relationships, government commercial and trade programs and policies, national and international political and economic events, weather and climate conditions, insects and plant disease, purchases and sales by foreign
countries and changing interest rates.
Futures Contracts (all Funds)
U.S. futures contracts are traded on organized exchanges regulated by the CFTC. Transactions on such exchanges are cleared through a
clearing corporation, which guarantees the performance of the parties to each contract. The Fund may also invest in non-U.S. futures contracts.
There are several risks in connection with the use of futures by the Funds. In the event futures are used by a Fund for hedging purposes, one risk arises because of the imperfect correlation between
movements in the price of futures and movements in the price of the instruments which are the subject of the hedge. The price of futures may move more than or less than the price of the instruments being hedged. If the price of futures moves less
than the price of the instruments which are the subject of the hedge, the hedge will not be fully effective, but, if the price of the instruments being hedged has moved in an unfavorable direction, a Fund would be in a better position than if it had
not hedged at all. If the price of the instruments being hedged has moved in a favorable direction, this advantage will be partially offset by the loss on the futures. If the price of the futures moves more than the price of the hedged instruments,
the Fund involved will experience either a loss or gain on the futures which will not be completely offset by movements in the price of the instruments which are the subject of the hedge.
To compensate for the imperfect correlation of movements in the price of instruments being hedged and movements in the price of futures
contracts, a Fund may buy or sell futures contracts in a greater dollar amount than the dollar amount of instruments being hedged if the volatility over a particular time period of the prices of such instruments has been greater than the volatility
over such time period of the futures, or if otherwise deemed to be appropriate by the Adviser or Sub-Adviser. Conversely, the Funds may buy or sell fewer futures contracts if the volatility over a particular time period of the prices of the
instruments being hedged is less than the volatility over such time period of the futures contract being used, or if otherwise deemed to be appropriate by the Adviser or Sub-Adviser. It is also possible that, when a Fund sells futures to hedge its
portfolio against a decline in the market, the market may advance and the value of the futures instruments held in the Fund may decline.
Where futures are purchased to hedge against a possible increase in the price of securities before a Fund is able to invest its cash (or cash equivalents) in an orderly fashion, it is possible that the
market may decline instead; if the Fund then concludes not to invest its cash at that time because of concern as to possible further market decline or for other reasons, the Fund will realize a loss on the futures contract that is not offset by a
reduction in the price of the securities that were to be purchased.
Successful use of futures to hedge portfolio securities
protects against adverse market movements but also reduces potential gain. For example, if a particular Fund has hedged against the possibility of a decline in the market adversely affecting securities held by it and securities prices increase
instead, the Fund will lose part or all of the benefit to the increased value of its securities which it has hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if the Fund has insufficient cash,
it may have to sell securities to meet daily variation margin requirements (as described below). Such sales of securities may be, but will not necessarily be, at increased prices which reflect the rising market. The Funds may have to sell securities
at a time when it may be disadvantageous to do so.
13
The Funds may also use futures to attempt to gain exposure to a particular market, index,
security, commodity or instrument or for speculative purposes to increase return. One or more markets, indices or instruments to which a Fund has exposure through futures may go down in value, possibly sharply and unpredictably. This means the Fund
may lose money.
The price of futures may not correlate perfectly with movement in the cash market due to certain market
distortions. Rather than meeting additional margin deposit requirements, investors may close futures contracts through offsetting transactions which could distort the normal relationship between the cash and futures markets. Second, with respect to
financial futures contracts, 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 distortions. 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 also cause temporary price distortions. Due to the possibility of price distortion in the futures market, and because of the imperfect correlation between the movements in the cash market and
movements in the price of futures, a correct forecast of general market trends or interest rate movements by the Adviser or Sub-Adviser, as applicable, may still not result in a successful hedging transaction over a short time frame (in the event
futures are used for hedging purposes).
Positions in futures may be closed out only on an exchange or board of trade which
provides a secondary market for such futures. Although the Funds intend to purchase or sell futures only on exchanges or boards of trade where there appear to be active secondary markets, there is no assurance that a liquid secondary market on any
exchange or board of trade will exist for any particular contract or at any particular time. When there is no liquid market, it may not be possible to close a futures investment position, and in the event of adverse price movements, the Funds would
continue to be required to make daily cash payments of variation margin (as described below). In such circumstances, an increase in the price of the securities, if any, may partially or completely offset losses on the futures contract. However, as
described above, there is no guarantee that the price of the securities will in fact correlate with the price movements in the futures contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market in a futures contract may be adversely affected by daily price
fluctuation limits established by commodities exchanges which limit the amount of fluctuation in a futures contract price during a single trading day. Once the daily limit has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures positions. The trading of futures contracts is also subject to the risk of trading halts, suspensions, exchange or clearing house equipment failures, government intervention,
insolvency of a brokerage firm or clearing house or other disruptions of normal activity, which could at times make it difficult or impossible to liquidate existing positions or to recover equity.
Stock Index Futures (all Funds)
A Fund may invest in stock index futures. A stock index assigns relative values to the common stocks included in the index and fluctuates with the changes in the market value of those stocks.
Stock index futures are contracts based on the future value of the basket of securities that comprise the underlying stock index. The
contracts obligate the seller to deliver and the purchaser to take cash to settle the futures transaction or to enter into an obligation contract. No physical delivery of the securities underlying the index is made on settling the futures
obligation. No monetary amount is paid or received by a Fund on the purchase or sale of a stock index future. At any time prior to the expiration of the future, a Fund may elect to close out its position by taking an opposite position, at which time
a final determination of variation margin is made and additional cash is required to be paid by or released to the Fund. Any gain or loss is then realized by the Fund on the future for tax purposes. Although stock index futures by their terms call
for settlement by the
14
delivery of cash, in most cases the settlement obligation is fulfilled without such delivery by entering into an offsetting transaction. All futures transactions are effected through a clearing
house associated with the exchange on which the contracts are traded.
Futures Contracts on Securities
(all Funds)
The Funds may purchase and sell futures contracts on securities. A futures contract sale creates an
obligation by a Fund, as seller, to deliver the specific type of financial instrument called for in the contract at a specific future time for a specified price. A futures contract purchase creates an obligation by the Fund, as purchaser, to take
delivery of the specific type of financial instrument at a specific future time at a specific price. The specific securities delivered or taken, respectively, at settlement date, would not be determined until or near that date. The determination
would be in accordance with the rules of the exchange on which the futures contract sale or purchase was made.
Although
futures contracts on securities by their terms call for actual delivery or acceptance of securities, in most cases the contracts are closed out before the settlement date without making or taking delivery of securities. A Fund may close out a
futures contract sale by entering into a futures contract purchase for the same aggregate amount of the specific type of financial instrument and the same delivery date. If the price of the sale exceeds the price of the offsetting purchase, the Fund
is immediately paid the difference and thus realizes a gain. If the offsetting purchase price exceeds the sale price, the Fund pays the difference and realizes a loss. Similarly, a Fund may close out of a futures contract purchase by entering into a
futures contract sale. If the offsetting sale price exceeds the purchase price, the Fund realizes a gain, and if the purchase price exceeds the offsetting sale price, the Fund realizes a loss. Accounting for futures contracts will be in accordance
with generally accepted accounting principles.
Swap Agreements (all Funds)
A Fund may enter into swap agreements with respect to securities, futures, currencies, indices, commodities and other instruments. Swap
agreements can be individually negotiated and structured to include exposure to a variety of different types of investments or market factors, including securities, futures, currencies, indices, commodities and other instruments. Depending on their
structure, swap agreements may increase or decrease a Funds exposure to long- or short-term interest rates (in the United States or abroad), foreign currency values, mortgage securities, corporate borrowing rates, or other factors such as
security or commodity prices or inflation rates. Swap agreements can take many different forms and are known by a variety of names.
Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks 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 at a particular interest rate, in a particular foreign currency, or in a basket of securities representing a
particular index. The notional amount of the swap agreement is only a fictive basis on which to calculate the obligations that the parties to a swap agreement have agreed to exchange.
Some swap agreements entered into by a Fund would calculate the obligations of the parties to the agreements on a net basis.
Consequently, a Funds obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement
(the net amount). A Funds obligations under a swap agreement will be accrued daily (offset against any amounts owing to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by the maintenance
of liquid assets in accordance with SEC staff guidance.
15
Forms of swap agreements also include cap, floor and collar agreements. In a typical cap or
floor agreement, one party agrees to make payments only under specified circumstances, usually in return for payment of a fee by the other party. For example, the buyer of an interest rate cap obtains the right to receive payments to the extent that
a specified interest rate exceeds an agreed-upon level, while the seller of an interest rate floor is obligated to make payments to the extent that a specified interest rate falls below an agreed-upon level. An interest rate collar combines elements
of buying a cap and selling a floor.
Swap agreements will tend to shift a Funds investment exposure from one type of
investment to another. For example, if a Fund agreed to pay fixed rates in exchange for floating rates while holding fixed-rate bonds, the swap would tend to decrease the Funds exposure to long-term interest rates. Caps and floors have an
effect similar to buying or writing options. Depending on how they are used, swap agreements may increase or decrease the overall volatility of a Funds investments and its share price and yield. The most significant factor in the performance
of swap agreements is the change in the specific interest rate, currency, or other factors that determine the amounts of payments due to and from a Fund. If a swap agreement calls for payments by a Fund, whether in respect of periodic payments or
margin, the Fund must be prepared to make such payments when due.
A Funds use of swap agreements may not be
successful in furthering its investment objective, as the Adviser or Sub-Adviser, as appropriate, may not accurately predict whether certain types of investments are likely to produce greater returns than other investments. Certain swap agreements
may also be considered to be illiquid. If such instruments are determined to be illiquid, then a Fund will limit its investment in these instruments subject to its limitation on investments in illiquid securities. Moreover, 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. Certain restrictions imposed on the Funds by the Code may limit each of the Funds ability to use swap
agreements. A Fund may be able to eliminate its exposure under a swap agreement either by assignment or other disposition, or by entering into an offsetting swap agreement with the same party or a similarly creditworthy party. It is possible that
developments in the swaps market, including potential government regulation, could adversely affect a Funds ability to terminate existing swap agreements or to realize amounts to be received under such agreements.
Global regulatory changes could adversely affect a Fund by restricting its trading activities and/or increasing the costs or taxes to
which its investors are subject. The Dodd Frank Wall Street Reform and Consumer Protection Act in the U.S., and the European Market Infrastructure Regulation (EMIR) in the European Union (among others), grant the prudential and financial
regulators (notably the SEC and CFTC in the U.S. and European Securities and Markets Authority in the European Union) the jurisdictional and rulemaking authority necessary to impose comprehensive regulations on the OTC and cleared derivatives
markets. These regulations include, but are not limited to, requirements relating to disclosure, trade processing, trade reporting, margin and registration requirements. The implementation of these and other global regulatory initiatives could
adversely impact the Funds by increasing transaction costs and/or regulatory compliance costs, limiting the availability of certain derivatives or otherwise adversely affecting the value or performance of derivatives that each Fund trades. Other
potentially adverse regulatory obligations can develop suddenly and be imposed without notice.
Credit Default Swap Agreement (CDS) and Credit Default Index Swap Agreement Risk (CDX) (AQR
Diversified Arbitrage Fund, AQR Risk Parity Fund, AQR Multi-Strategy Alternative Fund, AQR Style Premia Alternative Fund and AQR Global Macro Fund)
The Funds may enter into credit default swap agreements, credit default index swap agreements and similar agreements as a buyer or as a seller of credit protection. The credit
default swap agreement or similar instruments may have as reference obligations one or more securities that are not then held by the Fund. The protection buyer in a credit default swap agreement is generally obligated to pay the
protection seller a periodic stream of payments over the term of the agreement, provided generally that no credit event on a reference obligation has occurred. In addition, at the inception of the agreement, the protection
buyer may receive or be obligated to pay an additional up-front amount depending on the current market value of the
16
contract. With respect to credit default swap agreements whereby the Fund is a buyer of credit protection and that are contractually required to cash settle, the Fund sets aside
liquid assets in an amount equal to the Funds daily marked-to-market net obligations under the contracts. For credit default swap agreements whereby the Fund is a buyer of credit protection and that are contractually required to
physically settle, or for credit default swap agreements whereby the Fund is deemed to be a seller of credit protection, the Fund sets aside the full notional value of such contracts. If a credit event occurs, an auction process is used
to determine the recovery value of the contract. The seller then must pay the buyer the par value (full notional value) of the swap contract minus the recovery value as determined by the auction process. The Fund
may be either the buyer or seller in the transaction. If the Fund is a buyer and no credit event occurs, the Funds net cash flows over the life of the contract will be the initial up-front amount paid or received minus the sum of the periodic
payments made over the life of the contract. However, if a credit event occurs, the Fund may elect to receive a cash amount equal to the par value (full notional value) of the swap contract minus the recovery value as
determined by the auction process. As a seller of protection, the Fund generally receives a fixed rate of income throughout the term of the swap provided that there is no credit event. In addition, at the inception of the agreement, the Fund may
receive or be obligated to pay an additional up-front amount depending on the current market value of the contract. If a credit event occurs, the Fund will be generally obligated to pay the buyer the par value (full notional value) of
the swap contract minus the recovery value as determined by the auction process. Credit default swaps could result in losses if the Adviser does not correctly evaluate the creditworthiness of the underlying instrument on which the credit
default swap is based. Additionally, if the Fund is a seller of a credit default swap and a credit event occurs, the Fund could suffer significant losses.
Swaps on Equities, Currencies, Commodities and Futures (all Funds)
A Fund may enter into swaps with respect to a security, currency, commodity or futures contract (each, an asset); basket of assets; asset index; or index component (each, a reference
asset). An equity, currency, commodity or futures swap is a two-party contract that generally obligates one party to pay the positive return and the other party to pay the negative return on a specified reference asset during the period of the
swap. The payments based on the reference asset may be adjusted for transaction costs, interest payments, the amount of dividends paid on the referenced asset or other economic factors.
Equity, currency, commodity or futures swap contracts may be structured in different ways. For example, with respect to an equity swap,
when a Fund takes a long position, the counterparty may agree to pay the Fund the amount, if any, by which the notional amount of the equity swap would have increased in value had it been invested in a particular stock (or group of stocks), plus the
dividends that would have been received on the stock. In these cases, the Fund may agree to pay to the counterparty interest on the notional amount of the equity swap plus the amount, if any, by which that notional amount would have decreased in
value had it been invested in such stock.
Therefore, in this case the return to the Fund on the equity swap should be the
gain or loss on the notional amount plus dividends on the stock less the interest paid by the Fund on the notional amount. In other cases, when the Fund takes a short position, a counterparty may agree to pay the Fund the amount, if any, by which
the notional amount of the equity swap would have decreased in value had the Fund sold a particular stock (or group of stocks) short, less the dividend expense that the Fund would have paid on the stock, as adjusted for interest payments or other
economic factors. In these situations, the Fund may be obligated to pay the amount, if any, by which the notional amount of the swap would have increased in value had it been invested in such stock.
Equity, currency, commodity or futures swaps normally do not involve the delivery of securities or other underlying assets. Accordingly,
the risk of loss with respect to these swaps is normally limited to the net amount of payments that a Fund is contractually obligated to make. If the other party to the swap defaults, a Funds risk of loss consists of the net amount of payments
that such Fund is contractually entitled to receive, if any. Inasmuch as these transactions are offset by segregated cash or liquid assets to cover each of the Funds current
17
obligations (or are otherwise covered as permitted by applicable law), the Funds and the Adviser and Sub-Adviser believe that these transactions do not constitute senior securities under the Act.
Equity, currency, commodity or futures swaps are derivatives and their value can be very volatile. To the extent that the
Adviser or Sub-Adviser, as applicable, does not accurately analyze and predict future market trends, the values of assets or economic factors, a Fund may suffer a loss, which may be substantial. The swap markets in which many types of swap
transactions are traded have grown substantially in recent years, with a large number of banks and investment banking firms acting both as principals and as agents. As a result, the markets for certain types of swaps have become relatively liquid.
Total Return and Interest Rate Swaps (all Funds)
In a total return swap, the buyer receives a periodic return equal to the total return of a specified security, securities or index, for a
specified period of time. In return, the buyer pays the counterparty a variable stream of payments, typically based upon short term interest rates, possibly plus or minus an agreed upon spread.
Interest rate swaps are financial instruments that involve the exchange of one type of interest rate for another type of interest rate
cash flow on specified dates in the future. Some of the different types of interest rate swaps are fixed-for floating rate swaps, termed basis swaps and index amortizing swaps. Fixed-for floating rate swaps
involve the exchange of fixed interest rate cash flows for floating rate cash flows. Termed basis swaps entail cash flows to both parties based on floating interest rates, where the interest rate indices are different. Index amortizing swaps are
typically fixed-for floating swaps where the notional amount changes if certain conditions are met. Like a traditional investment in a debt security, a Fund could lose money by investing in an interest rate swap if interest rates change adversely.
For example, if a Fund enters into a swap where it agrees to exchange a floating rate of interest for a fixed rate of interest, the Fund may have to pay more money than it receives. Similarly, if a Fund enters into a swap where it agrees to exchange
a fixed rate of interest for a floating rate of interest, the Fund may receive less money than it has agreed to pay.
Interest rate and total return swaps entered into in which payments are not netted may entail greater risk than a swap entered into on a
net basis. If there is a default by the other party to such a transaction, the Fund will have contractual remedies pursuant to the agreements related to the transaction.
Writing Call Options (AQR Diversified Arbitrage Fund and AQR Multi-Strategy Alternative Fund)
A Fund may write covered calls. When a Fund writes a call on an investment, it receives a premium and agrees to sell the callable
investment to a purchaser of a corresponding call during the call period (usually not more than nine months) at a fixed exercise price (which may differ from the market price of the underlying investment) regardless of market price changes during
the call period. The call may be exercised at any time during the call period. To terminate its obligation on a call it has written, a Fund may purchase a corresponding call in a closing purchase transaction. A profit or loss will be
realized, depending upon whether the net of the amount of option transaction costs and the premium received on the call a Fund has written is more or less than the price of the call such Fund subsequently purchased. A profit may also be realized if
the call lapses unexercised because the Fund retains the underlying investment and the premium received. If a Fund could not effect a closing purchase transaction due to the lack of a market, it would have to hold the callable investment until the
call lapsed or was exercised.
A Fund may also write an uncovered call (i.e. the Fund does not hold the underlying security)
or calls on futures without owning a futures contract on deliverable securities, provided that at the time the call is written, the Fund covers the call with an equivalent dollar value of deliverable securities or liquid assets. Each Fund will cover
with additional liquid assets if the value of the segregated assets drops below 100% of the current market value of the underlying instrument. The seller of an uncovered call option assumes the risk of a theoretically unlimited increase in the
market price of the underlying security above the exercise price of the option. The securities
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necessary to satisfy the exercise of an uncovered call option may be unavailable for purchase, except at much higher prices, thereby reducing or eliminating the value of the premium. Purchasing
securities to cover the exercise price of an uncovered call option can cause the price of the securities to increase, thereby exacerbating the loss. In no circumstances would an exercise notice as to a future put a Fund in a short futures position.
Writing Put Options (AQR Diversified Arbitrage Fund and AQR Multi-Strategy Alternative Fund)
A put option on a security or futures contract gives the purchaser the right to sell, and the writer the obligation to
buy, the underlying investment at the exercise price during the option period. The put may be exercised at any time during the option period. The premium a Fund receives from writing a put option represents a profit, as long as the price of the
underlying investment remains above the exercise price. However, the Fund (as the writer of the put) has also assumed the obligation during the option period to buy the underlying investment from the buyer of the put at the exercise price, even
though the value of the investment may fall below the exercise price. If the put expires unexercised, the Fund (as the writer of the put) realizes a gain in the amount of the premium less transaction costs. If the put is exercised, the Fund must
fulfill its obligation to purchase the underlying investment at the exercise price, which will usually exceed the market value of the investment at that time. In that case, the Fund may incur a loss, equal to the sum of the sale price of the
underlying investment and the premium received minus the sum of the exercise price and any transaction costs incurred.
When
writing put options on securities or futures contracts, to secure its obligation to pay for the underlying security or futures contract, a Fund will either (i) segregate on its records cash or liquid assets equal to the exercise price of the
option less margins or deposits; (ii) sell the underlying security short at a price at least equal to the strike price or (iii) purchase a put option with a strike price at least equal to the strike price of the put option sold. A Fund
therefore may have to forego certain opportunities to invest the assets used to cover the obligation. As long as the obligation of the Fund as the put writer continues, it may be assigned an exercise notice by the exchange or broker-dealer through
whom such option was sold, requiring the Fund to exchange currency at the specified rate of exchange (in the context of puts on currencies) or to take delivery of the underlying security against payment of the exercise price. A Fund may have no
control over when it may be required to purchase the underlying security, since it may be assigned an exercise notice at any time prior to the termination of its obligation as the writer of the put. This obligation terminates upon expiration of the
put, or such earlier time at which the Fund effects a closing purchase transaction by purchasing a put of the same series as that previously sold. Once the Fund has been assigned an exercise notice, it is thereafter not allowed to effect a closing
purchase transaction.
A Fund may effect a closing purchase transaction to realize a profit on an outstanding put option it
has written or to prevent an underlying security from being put. Furthermore, effecting such a closing purchase transaction will permit the Fund to write another put option to the extent that the exercise price thereof is secured by the deposited
assets, or to utilize the proceeds from the sale of such assets for other investments by that Fund. The Fund will realize a profit or loss from a closing purchase transaction if the cost of the transaction is less or more than the premium received
from writing the option.
Purchasing Puts and Calls (AQR Diversified Arbitrage Fund, AQR Multi-Strategy
Alternative Fund, AQR Style Premia Alternative Fund and AQR Global Macro Fund)
A Fund may purchase calls to protect
against the possibility that the Funds portfolio will not participate in an anticipated rise in the securities market. When a Fund purchases a call (other than in a closing purchase transaction), it pays a premium and, except as to calls on
stock indices, has the right to buy the underlying investment from a seller of a corresponding call on the same investment during the call period at a fixed exercise price. In purchasing a call, a Fund benefits only if the call is sold at a profit
or if, during the call period, the market price of the underlying investment is above the sum of the exercise price, transaction costs, and the premium paid, and the call is exercised. If the call is not exercised or sold (whether or not at a
profit), it will become worthless at its expiration date and the Fund will lose its premium payment and the right to purchase the
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underlying investment. When a Fund purchases a call on a stock index, it pays a premium, but settlement is in cash rather than by delivery of the underlying investment to the Fund.
When a Fund purchases a put, it pays a premium and, except as to puts on stock indices, has the right to sell the underlying investment
to a seller of a corresponding put on the same investment during the put period at a fixed exercise price. Buying a put on an investment a Fund owns (a protective put) enables that Fund to attempt to protect itself during the put period
against a decline in the value of the underlying investment below the exercise price by selling the underlying investment at the exercise price to a seller of a corresponding put. If the market price of the underlying investment is equal to or above
the exercise price and, as a result, the put is not exercised or resold, the put will become worthless at its expiration and the Fund will lose the premium payment and the right to sell the underlying investment. However, the put may be sold prior
to expiration (whether or not at a profit).
Puts and calls on securities indices or securities index futures 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 (and thus on price movements in the stock market generally) rather than on price movements of
individual securities or futures contracts. When a Fund buys a call on a securities index or securities index future, it pays a premium. If a Fund exercises the call during the call period, a seller of a corresponding call on the same investment
will pay the Fund an amount of cash to settle the call if the closing level of the securities index or securities index future upon which the call is based is greater than the exercise price of the call. That cash payment is equal to the difference
between the closing price of the call and the exercise price of the call times a specified multiple (the multiplier) which determines the total dollar value for each point of difference. When a Fund buys a put on a securities index or
securities index future, it pays a premium and has the right during the put period to require a seller of a corresponding put, upon the Funds exercise of its put, to deliver cash to the Fund to settle the put if the closing level of the
securities index or securities index future upon which the put is based is less than the exercise price of the put. That cash payment is determined by the multiplier, in the same manner as described above as to calls.
When a Fund purchases a put on a securities index, or on a securities index future not owned by it, the put protects the Fund to the
extent that the index moves in a similar pattern to the securities the Fund holds. The Fund can either resell the put or, in the case of a put on a stock index future, buy the underlying investment and sell it at the exercise price. The resale price
of the put will vary inversely with the price of the underlying investment. If the market price of the underlying investment is above the exercise price, and as a result the put is not exercised, the put will become worthless on the expiration date.
In the event of a decline in price of the underlying investment, the Fund could exercise or sell the put at a profit to attempt to offset some or all of its loss on its portfolio securities.
Options on Futures Contracts (AQR Diversified Arbitrage Fund)
Investments in options on futures contracts involve some of the same considerations that are involved in connection with investments in
future contracts (for example, the existence of a liquid secondary market). In addition, the purchase or sale of an option also entails the risk that changes in the value of the underlying futures contract will not correspond to changes in the value
of the option purchased. Depending on the pricing of the option compared to either the futures contract upon which it is based, or upon the price of the securities being hedged, an option may or may not be less risky than ownership of the futures
contract or such securities. In general, the market prices of options can be expected to be more volatile than the market prices on underlying futures contract. Compared to the purchase or sale of futures contracts, however, the purchase of call or
put options on futures contracts may frequently involve less potential risk to the Fund because the maximum amount at risk is the premium paid for the options (plus transaction costs).
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Privately Negotiated Options (AQR Diversified Arbitrage Fund)
A Fund may also invest in privately negotiated option contracts (each a Private Option). Generally, an
option buyer negotiates with a bank or investment bank to buy a Private Option with contract terms that are more flexible than standardized exchange traded options. Under a Private Option contract, the buyer generally controls the length of the
contract, the notional amount, and the asset or basket of securities comprising the reference portfolio that determines the value of the Private Option.
Private Options will generally have a term ranging from 12 to 60 months. A Fund may buy Private Options that will be based on an asset or a basket of securities (the Basket) selected by the
Adviser or Sub-Adviser in accord with a Funds investment objective and approved by the counterparty (the Counterparty). The Basket may be comprised of securities that include common and preferred stock, government and private
issuer debt (including convertible and non-convertible debt), options and futures contracts, limited partnership interests (including so-called hedge funds) and shares of registered investment companies. During the term of a Private
Option, the Adviser or Sub-Adviser expects to have a limited right to modify the notional amount of the Private Option and the assets that comprise the Basket.
As with more traditional options, a Private Option will allow for the use of economic leverage without incurring risk beyond the amount of premium and related fees (the Premium) paid for the
Private Option. The Private Option will be structured so that it allows a Fund to benefit from an increase in the value of the Basket without owning the assets that comprise the Basket. Upon a decline in the value of the Basket, a Fund may lose all
or a portion of the premium paid for the Private Option. A Funds gain or loss may be magnified by writing the Private Option with reference to a much larger notional amount of the Basket than the Premium being paid by the Fund.
Upon the termination or expiration of a Private Option, a Fund will be entitled to receive from the Counterparty a cash payment (the
Settlement Price), which is based on the change in value of the Basket serving as a benchmark for that Private Option. In no event will a Fund have the right to acquire the assets that comprise the Basket. The Settlement Price may
reflect deductions for fees and an interest-equivalent amount payable to the Counterparty for establishing the Private Option. The Settlement Price will typically be payable to a Fund within a specified number of business days after termination or
expiration of the Private Option. Any Private Option that does not require payment of the Settlement Price within seven calendar days after termination or expiration or that cannot be terminated by a Fund at any time will be treated as an illiquid
asset.
The Counterparty will generally have the right to terminate a Private Option at any time prior to maturity. If the
Basket does not sufficiently increase in value prior to termination or expiration, a Fund may still suffer losses even though the Basket increased in value because of fees and interest-equivalent amounts payable to the Counterparty or because the
increase in value of the Basket has been insufficient to trigger a position settlement value.
The Counterparty to each
Private Option will be a bank, financial institution, or an entity that is affiliated with either a bank or a financial institution with significant experience in the field of alternative investments. Each Counterparty will be one determined by the
Adviser or Sub-Adviser to be creditworthy and approved by the Funds Board, including a majority of the Independent Directors. Neither the Adviser, the Sub-Adviser, nor the Funds will have any control over any hedging or similar techniques used
by the Counterparty to attempt to ensure the Counterpartys ability to perform under each Private Option. Likewise, neither the Adviser, the Sub-Adviser, nor the Funds will have any claim on securities or other property, if any, which may be
purchased by the Counterparty in connection with the Private Option. Should the Counterparty be unable to perform its obligations under a Private Option, then the Company could lose all or a portion of the Premium and the gain, if any, relating to
such Private Option.
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Additional Information Regarding Options (AQR Diversified Arbitrage
Fund, AQR Multi-Strategy Alternative Fund, AQR Style Premia Alternative Fund and AQR Global Macro Fund)
The
Funds Custodian or a securities depository acting for the Custodian, will act as the Funds escrow agent, through the facilities of Options Clearing Corporation (OCC), as to the investments on which the Funds have written
options traded on exchanges or as to other acceptable escrow securities, so that no margin will be required for such transactions. OCC will release the securities on the expiration of the option or upon the Funds entering into a closing
transaction. An option position may be closed out only on a market, which provides secondary trading for options of the same series, and there is no assurance that a liquid secondary market will exist for any particular option.
When a Fund writes an OTC option, it will enter into an arrangement with a primary U.S. Government securities dealer, which would
establish a formula price at which such Fund would have the absolute right to purchase that OTC option.
A Funds option
activities may affect its turnover rate and brokerage commissions. The exercise by a Fund of puts on securities will cause the sale of related investments, increasing portfolio turnover. Although such exercise is within a Funds control,
holding a put might cause a Fund to sell the related investments for reasons which would not exist in the absence of the put. Each Fund will pay a brokerage commission each time it buys a put or call, sells a call, or buys or sells an underlying
investment in connection with the exercise of a put or call. Such commissions may be higher than those which would apply to direct purchases or sales of such underlying investments. Premiums paid for options are small in relation to the market value
of the related investments, and consequently, put and call options offer large amounts of leverage. The leverage offered by trading options could result in a Funds net asset value being more sensitive to changes in the value of the underlying
investments.
Hybrid Instruments (AQR Diversified Arbitrage Fund and AQR Multi-Strategy Alternative
Fund)
A hybrid instrument can combine the characteristics of securities, futures, and options. For example, the
principal amount or interest rate of a hybrid instrument could be tied (positively or negatively) to the price of some currency or securities index or another interest rate (each a benchmark). The interest rate or the principal amount
payable at maturity of a hybrid security may be increased or decreased, depending on changes in the value of the benchmark.
Hybrids can be used as an efficient means of pursuing a variety of investment strategies, including currency hedging, duration
management, 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 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 net asset value of a Fund.
Combined Transactions (all Funds)
A Fund may enter into multiple transactions, including multiple options transactions, multiple futures transactions, multiple currency transactions including forward currency contracts, multiple interest
rate transactions and multiple swap transactions, and any combination of options, futures, currency, interest rate, and swap transactions (component transactions), instead of a single transaction, as part of a single or combined strategy
when, in the opinion of the Adviser or Sub-Adviser, it is in the best interests of a Fund to do so. A combined transaction will usually contain elements of risk that are present in each of its component transactions.
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Although combined transactions are normally entered into based on the Adviser or Sub-Advisers judgment that the combined strategies will reduce risk or otherwise more effectively achieve
the desired portfolio management goal, it is possible that the combination will instead increase such risks or hinder achievement of the portfolio management objective.
Hedging Transactions
(all Funds)
The Adviser and Sub-Adviser, from time to time, employ various hedging techniques.
The success of the Funds hedging strategy will be subject to the Advisers or Sub-Advisers ability to correctly assess
the degree of correlation between the performance of the instruments used in the hedging strategy and the performance of the investments in the portfolio being hedged. Since the characteristics of many securities change as markets change or time
passes, the success of the Funds hedging strategy will also be subject to the Advisers and Sub-Advisers ability to continually recalculate, readjust, and execute hedges in an efficient and timely manner.
Hedging against a decline in the value of a portfolio position does not eliminate fluctuations in the values of those portfolio positions
or prevent losses if the values of those positions decline. Rather, it establishes other positions designed to gain from those same declines, thus seeking to moderate the decline in the portfolio positions value. Such hedging transactions also
limit the opportunity for gain if the value of the portfolio position should increase. For a variety of reasons, the Adviser or Sub-Adviser may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings
being hedged. Such imperfect correlation may prevent the Fund from achieving the intended hedge or expose the Fund to risk of loss. In addition, it is not possible to hedge fully or perfectly against any risk, and hedging entails its own costs. The
Adviser or Sub-Adviser may determine, in its sole discretion, not to hedge against certain risks and certain risks may exist that cannot be hedged. Furthermore, the Adviser or Sub-Adviser may not anticipate a particular risk so as to hedge against
it effectively. Hedging transactions also limit the opportunity for gain if the value of a hedged portfolio position should increase.
High Yield Securities
(AQR Diversified Arbitrage Fund, AQR Risk Parity Fund, AQR Multi-Strategy Alternative Fund, AQR Style Premia Alternative Fund and AQR
Global Macro Fund)
Non-investment grade or high yield fixed income or convertible securities
commonly known to investors as junk bonds are debt securities that are rated below investment grade by the major rating agencies or are unrated securities that the Adviser or Sub-Adviser believes are of comparable quality. While
generally providing greater income and opportunity for gain, non-investment grade debt securities may be subject to greater risks than securities which have higher credit ratings, including a high risk of default, and their yields will fluctuate
over time. High yield securities will generally be in the lower rating categories of recognized rating agencies (rated Ba or lower by Moodys or BB or lower by S&P) or will be non-rated. The credit rating of a high
yield security does not necessarily address its market value risk, and ratings may from time to time change, positively or negatively, to reflect developments regarding the issuers financial condition. High yield securities are considered to
be speculative with respect to the capacity of the issuer to timely repay principal and pay interest or dividends in accordance with the terms of the obligation and may have more credit risk than higher rated securities.
The major risks in high yield bond investments include the following:
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High yield bonds may be issued by less creditworthy companies. These securities are vulnerable to adverse changes in the issuers industry and
to general economic conditions. Issuers of high yield bonds may be unable to meet their interest or principal payment obligations because of an economic downturn, specific issuer developments or the unavailability of additional financing.
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The issuers of high yield bonds may have a larger amount of outstanding debt relative to their assets than issuers of investment grade bonds. If the
issuer experiences financial stress, it may be unable to meet its debt obligations. The issuers ability to pay its debt obligations also may be lessened by specific issuer developments, or the unavailability of additional financing. Issuers of
high yield securities are often in the growth stage of their development and/or involved in a reorganization or takeover.
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High yield bonds are frequently ranked junior to claims by other creditors. If the issuer cannot meet its obligations, the senior obligations are
generally paid off before the junior obligations, which will potentially limit a Funds ability to fully recover principal or to receive interest payments when senior securities are in default. Thus, investors in high yield securities have a
lower degree of protection with respect to principal and interest payments then do investors in higher rated securities.
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High yield bonds frequently have redemption features that permit an issuer to repurchase the security from a Fund before it matures. If an issuer
redeems the high yield bonds, a Fund may have to invest the proceeds in bonds with lower yields and may lose income.
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Prices of high yield bonds are subject to extreme price fluctuations. Negative economic developments may have a greater impact on the prices of high
yield bonds than on those of other higher rated fixed income securities.
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The secondary markets for high yield securities are not as liquid as the secondary markets for higher rated securities. The secondary markets for
high yield securities are concentrated in relatively few market makers and participants in the markets are mostly institutional investors, including insurance companies, banks, other financial institutions and mutual funds. In addition, the trading
volume for high yield securities is generally lower than that for higher rated securities and the secondary markets could contract under adverse market or economic conditions independent of any specific adverse changes in the condition of a
particular issuer. Under certain economic and/or market conditions, a Fund may have difficulty disposing of certain high yield securities due to the limited number of investors in that sector of the market. An illiquid secondary market may adversely
affect the market price of the high yield security, which may result in increased difficulty selling the particular issue and obtaining accurate market quotations on the issue when valuing a Funds assets. Market quotations on high yield
securities are available only from a limited number of dealers, and such quotations may not be the actual prices available for a purchase or sale. When the secondary market for high yield securities becomes more illiquid, or in the absence of
readily available market quotations for such securities, the relative lack of reliable objective data makes it more difficult to value a Funds securities, and judgment plays a more important role in determining such valuations.
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A Fund may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting issuer.
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The high yield bond markets may react strongly to adverse news about an issuer or the economy, or to the perception or expectation of adverse news,
whether or not it is based on fundamental analysis. Additionally, prices for high yield securities may be affected by legislative and regulatory developments. These developments could adversely affect a Funds net asset value and investment
practices, the secondary market for high yield securities, the financial condition of issuers of these securities and the value and liquidity of outstanding high yield securities, especially in a thinly traded market. For example, federal
legislation requiring the divestiture by federally insured savings and loan associations of their investments in high yield bonds and limiting the deductibility of interest by certain corporate issuers of high yield bonds adversely affected the
market in the past.
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The rating assigned by a rating agency evaluates the issuing agencys assessment of the safety of a non-investment grade securitys
principal and interest payments, but does not address market value risk. Because such ratings of the ratings agencies may not always reflect current conditions and events, in addition to using recognized rating agencies and other sources, the
sub-adviser performs its own
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analysis of the issuers whose non-investment grade securities a Fund holds. Because of this, the Funds performance may depend more on the sub-advisers own credit analysis than in the
case of mutual funds investing in higher-rated securities.
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In selecting non-investment grade securities,
the Adviser or Sub-Adviser considers factors such as those relating to the creditworthiness of issuers, the ratings and performance of the securities, the protections afforded the securities and the diversity of the Fund. The Adviser or Sub-Adviser
monitors the issuers of non-investment grade securities held by the Fund for their ability to make required principal and interest payments, as well as in an effort to control the liquidity of the Fund so that it can meet redemption requests.
In the event that a Fund investing in high yield securities experiences an unexpected level of net redemptions, the Fund
could be forced to sell its holdings without regard to the investment merits, thereby decreasing the assets upon which the Funds rate of return is based.
The costs attributable to investing in the high yield bond markets are usually higher for several reasons, such as higher investment research costs and higher commission costs.
Illiquid Securities
(all Funds)
As a non-fundamental investment policy, a Fund may not purchase a security if, as a result, more than 15% of its net assets would be
invested in illiquid securities. If, after the time of acquisition, events cause this limit to be exceeded, the Fund will take steps to reduce the aggregate amount of illiquid securities as soon as reasonably practicable in accordance with SEC and
SEC staff guidance.
Repurchase agreements not entitling the holder to payment of principal in seven days, and certain
restricted securities may be illiquid. A security is restricted if it is subject to contractual or legal restrictions on resale to the general public. A liquid institutional market has developed, however, for certain restricted
securities such as repurchase agreements, commercial paper, foreign securities and corporate bonds and notes. Thus, restrictions on resale do not necessarily indicate a lack of liquidity for the security. For example, if a restricted security may be
sold to certain institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended (the 1933 Act), or another exemption from registration under such Act, the Adviser or Sub-Adviser may determine that the
security is liquid under guidelines adopted by the Board of Trustees. These guidelines take into account trading activity in the securities and the availability of reliable pricing information, among other factors. With other restricted securities,
however, there can be no assurance that a liquid market will exist for the security at any particular time. A Fund might not be able to dispose of such securities promptly or at reasonable prices and might thereby experience difficulty satisfying
redemptions. The Fund treats such holdings as illiquid.
To enable the Funds to sell restricted securities not registered
under the 1933 Act, the Funds may have to cause those securities to be registered. The expenses of registration of restricted securities may be negotiated by a Fund with the issuer at the time such securities are purchased by such Fund, if such
registration is required before such securities may be sold publicly. Securities having contractual restrictions on their resale might limit a Fund s ability to dispose of such securities and might lower the amount realizable upon the sale of
such securities.
In addition to the above, market conditions may cause the Fund to experience temporary mark-to-market
losses, especially in less liquid positions, even in the absence of any selling of investments by the Fund.
Inflation-Linked Bonds
(AQR Risk Parity Fund, AQR Risk Parity II MV Fund and AQR Risk Parity II HV Fund)
The Fund may invest in inflation-linked bonds, which are fixed income securities or other instruments whose principal value is periodically adjusted according to the rate of inflation. Two structures are
common. The U.S.
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Treasury and some other issuers use a structure that accrues inflation into the principal value of the bond. Most other issuers pay out the Consumer Price Index (CPI) accruals as part
of a semi-annual coupon.
Inflation-linked securities issued by the U.S. Treasury have maturities of five, ten or thirty
years, although it is possible that securities with other maturities will be issued in the future. The U.S. Treasury securities pay interest on a semi-annual basis, equal to a fixed percentage of the inflation-adjusted principal amount. For example,
if the Fund purchased an inflation-linked bond with a par value of $1,000 and a 3% real rate of return coupon (payable 1.5% semi-annually), and inflation over the first six months was 1%, the mid-year par value of the bond would be $1,010 and the
first semi-annual interest payment would be $15.15 ($1,010 times 1.5%). If inflation during the second half of the year resulted in the whole years inflation equaling 3%, the end-of-year par value of the bond would be $1,030 and the second
semi-annual interest payment would be $15.45 ($1,030 times 1.5%).
If the periodic adjustment rate measuring inflation falls,
the principal value of inflation-linked bonds will be adjusted downward, and, consequently, the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the original bond principal
upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-linked bonds, even during a period of deflation. However, the current market value of the bonds is not guaranteed, and will fluctuate. The Fund may also
invest in other inflation related bonds which may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond repaid at maturity may be less than the original principal. In addition,
if the Fund purchases inflation-linked bonds offered by foreign issuers, the rate of inflation measured by the foreign inflation index may not be correlated to the rate of inflation in the United States.
The value of inflation-linked bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn,
are tied to the relationship between nominal interest rates and the rate of inflation. Therefore, if inflation were to rise at a faster rate than nominal interest rates, real interest rates might decline, leading to an increase in value of
inflation-linked bonds. In contrast, if nominal interest rates increased at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation-linked bonds. There can be no assurance, however, that the value of
inflation-linked bonds will be directly correlated to changes in interest rates.
While these securities are expected to be
protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest rates rise due to reasons other than inflation (for example, due to changes in currency exchange rates), investors in these
securities may not be protected to the extent that the increase is not reflected in the bonds inflation measure.
In
general, the measure used to determine the periodic adjustment of U.S. inflation-linked bonds is the Consumer Price Index for Urban Consumers (CPI-U), which is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a
measurement of changes in the cost of living, made up of components such as housing, food, transportation and energy. Inflation-linked bonds issued by a foreign government are generally adjusted to reflect a comparable inflation index, calculated by
that government. There can be no assurance that the CPI-U or any foreign inflation index will accurately measure the real rate of inflation in the prices of goods and services. Moreover, there can be no assurance that the rate of inflation in a
foreign country will be correlated to the rate of inflation in the United States.
Any increase in the principal amount of an
inflation-linked bond will be considered taxable ordinary income, even though investors do not receive their principal until maturity.
IPOs and SEOs
(AQR Diversified Arbitrage Fund)
IPOs or New Issues are initial public offerings of U.S. equity securities. SEOs are seasoned (
i.e.
, secondary) equity offerings of U.S. equity securities.
Investments in companies that have recently gone public have the potential to produce substantial gains for the Fund. However, there is no assurance that the Fund will
26
have access to profitable IPOs or SEOs and therefore investors should not rely on any past gains from them as an indication of future performance. Securities issued in IPOs are subject to many of
the same risks as investing in companies with smaller market capitalizations. Securities issued in IPOs have no trading history, and information about the companies may be available for very limited periods. In addition, the prices of securities
sold in IPOs or SEOs may be highly volatile or may decline shortly after the initial public offering or seasoned equity offering. When an initial public offering or seasoned equity offering is brought to the market, availability may be limited and
the Fund may not be able to buy any shares at the offering price, or, if it is able to buy shares, it may not be able to buy as many shares at the offering price as it would like.
Loans of Portfolio Securities
(AQR Diversified Arbitrage Fund, AQR Multi-Strategy
Alternative Fund, AQR Long-Short Equity Fund, and AQR Style Premia Alternative Fund)
To attempt to increase its
income or total return, a Fund may lend its portfolio securities to certain types of eligible borrowers. Each loan will be secured continuously by collateral in the form of cash, high quality money market instruments or securities issued by the U.S.
government or its agencies or instrumentalities. Collateral will be received and maintained by the Funds custodian concurrent with delivery of the loaned securities and kept in a segregated account or designated on the records of the custodian
for the benefit of the Fund. Initial collateral will have a market value at least equal to 105% of the then-current market value of loaned equity securities not denominated in U.S. dollars or Canadian dollars or not primarily traded on a U.S.
exchange, or 102% of the then-current market value of any other loaned securities. For all loaned foreign equity securities, the borrower must increase the collateral on a daily basis if the then-current market value of the collateral becomes
insufficient to meet certain minimum required collateral levels for the type of loaned security. For all other loaned securities, the borrower must increase the collateral only when the market value of the collateral is less than 100% of the
then-current market value of the loaned securities. The borrower pays to the lending Fund an amount equal to any dividends or interest received on loaned securities. The Fund retains all or a portion of the interest received on investment of cash
collateral and/or receives a fee from the borrower; however, the lending Fund will generally pay certain administrative and custodial fees in connection with each loan.
The Fund has a right to call a loan at any time and require the borrower to redeliver the borrowed securities to the Fund within the settlement time specified in the loan agreement or be subject to a
buy in. The Fund will generally not have the right to vote securities while they are being loaned, but it is expected that the Adviser or Sub-Adviser, as applicable, will call a loan in anticipation of any important vote.
The risk in lending portfolio securities, as with other extensions of credit, consists of the possibility of loss to the Fund due to
(i) the inability of the borrower to return the securities, (ii) a delay in receiving additional collateral to adequately cover any fluctuations in the value of securities on loan, (iii) a delay in recovery of the securities, or
(iv) the loss of rights in the collateral should the borrower fail financially. In addition, the Fund is responsible for any loss that might result from its investment of the borrowers collateral.
Securities lending will be conducted by a securities lending agent approved by the Trusts Board of Trustees. The securities lending
agent maintains a list of broker-dealers, banks or other institutions that it has determined to be creditworthy. The Fund will only enter into loan arrangements with borrowers on the approved list.
Margin Deposits and Cover Requirements
(all Funds)
Margin Deposits for Futures Contracts
Unlike the purchase or sale of portfolio securities, no price is paid or received by a Fund upon the purchase or sale of a futures
contract. Initially, the Fund will be required to deposit with the broker an amount of cash or cash equivalents, known as initial margin, based on the value of the contract. The nature of initial margin in futures transactions is different from that
of margin in securities transactions in that futures contract margin does not involve the borrowing of funds by the customer to finance the transactions. Rather, the initial margin is in the
27
nature of a performance bond or good faith deposit on the contract which is returned to the Fund upon termination of the futures contract, assuming all contractual obligations have been
satisfied. Subsequent payments, called variation margin, to and from the broker, will be made on a daily basis as the price of the underlying instruments fluctuates, making the long and short positions in the futures contract more or less valuable,
a process known as marking to the market. For example, when a Fund has purchased a futures contract and the price of the contract has risen in response to a rise in the price of the underlying instruments, that position will have
increased in value and the Fund will be entitled to receive from the broker a variation margin payment equal to that increase in value. Conversely, where the Fund has purchased a futures contract and the price of the futures contract has declined in
response to a decrease in the underlying instruments, the position would be less valuable and the Fund would be required to make a variation margin payment to the broker. At any time prior to expiration of the futures contract, the Adviser or
Sub-Adviser may elect to close the position by taking an opposite position, subject to the availability of a secondary market, which will operate to terminate the Funds position in the futures contract. A final determination of variation
margin is then made, additional cash is required to be paid by or released to the Fund, and the Fund realizes a loss or gain.
Cover Requirements for Forward Contracts, Swap Agreements, Options, Futures and Options on Futures
Each Fund will comply with guidelines established by the SEC with respect to coverage of forwards, futures, swaps and options. These guidelines may, in certain instances, require segregation or ear
marking by the Fund of cash or liquid securities on its books and records or with its custodian or a designated sub-custodian to the extent the Funds obligations with respect to these strategies are not otherwise covered
through ownership of the underlying security, financial instrument or currency or by other portfolio positions or by other means consistent with applicable regulatory policies. Segregated assets cannot be sold or transferred unless equivalent assets
are substituted in their place or it is no longer necessary to segregate them. As a result, there is a possibility that segregation of a large percentage of a Funds assets could impede portfolio management or the Funds ability to meet
redemption requests or other current obligations. Each Subsidiary (as defined below) will comply with these asset segregation requirements to the same extent as the Fund that holds the Subsidiarys securities.
For example, with respect to a futures contract that is cash settled, a Fund will cover (and mark-to-market on a daily basis) liquid
assets that, when added to the amounts deposited with a futures commission merchant as margin, are equal to the market value of the futures contract. When entering into a futures contract that does not need to be settled in cash, a Fund will
maintain with its custodian (and mark to market on a daily basis) liquid assets that, when added to the amounts deposited with a futures commission merchant as margin, are equal to the full notional value of the contract. Alternatively, the Fund may
cover its position by purchasing an option on the same futures contract with a strike price as high or higher than the price of the contract held by the Fund.
Mid Cap Securities Risk
(AQR Diversified Arbitrage Fund, AQR Managed Futures Strategy Fund, AQR Risk Parity Fund, AQR Multi-Strategy Alternative Fund,
AQR Risk Parity II MV Fund, AQR Risk Parity II HV Fund, AQR Managed Futures Strategy HV Fund, AQR Long-Short Equity Fund, AQR Style Premia Alternative Fund and AQR Global Macro Fund)
The prices of securities of mid cap companies generally are more volatile than those of large capitalization companies and are more likely
to be adversely affected than large cap companies by changes in earnings results and investor expectations or poor economic or market conditions, including those experienced during a recession.
Momentum Style Risk
(AQR Managed Futures Strategy Fund, AQR Managed Futures
Strategy HV Fund, AQR Risk Parity Fund, AQR Multi-Strategy Alternative Fund, AQR Risk Parity II MV Fund, AQR Risk Parity II HV Fund, AQR Long-Short Equity Fund, AQR Style Premia Alternative Fund and AQR Global Macro Fund)
Investing in securities with positive momentum entails investing in securities that have had above-average recent returns. These
securities may be more volatile than a broad cross-section of securities. In addition, there may be
28
periods when the momentum style is out of favor, and during which the investment performance of a Fund using a momentum strategy may suffer.
PIPEs
(AQR Diversified Arbitrage Fund)
The Fund may make private investments in public companies whose stocks are quoted on stock exchanges or which trade in the
over-the-counter securities market, a type of investment commonly referred to as a PIPE transaction. PIPE transactions will generally result in the Fund acquiring either restricted stock or an instrument convertible into restricted
stock. As with investments in other types of restricted securities, such an investment may be illiquid. The Funds ability to dispose of securities acquired in PIPE transactions may depend upon the registration of such securities for resale.
Any number of factors may prevent or delay a proposed registration. Alternatively, it may be possible for securities acquired in a PIPE transaction to be resold in transactions exempt from registration in accordance with Rule 144 under the
Securities Act of 1933, as amended, or otherwise under the federal securities laws. There is no guarantee, however, that an active trading market for the securities will exist at the time of disposition of the securities, and the lack of such a
market could hurt the market value of the Funds investments. As a result, even if the Fund is able to have securities acquired in a PIPE transaction registered or sell such securities through an exempt transaction, the Fund may not be able to
sell all the securities on short notice, and the sale of the securities could lower the market price of the securities.
REITs
(AQR Diversified Arbitrage Fund, AQR Multi-Strategy Alternative Fund, AQR
Long-Short Equity Fund and AQR Style Premia Alternative Fund)
In pursuing its investment strategy, a Fund may invest
in shares of real estate investment trusts (REITs). REITs possess certain risks which differ from an investment in common stocks. REITs are financial vehicles that pool investors capital to purchase or finance real estate. REITs
may concentrate their investments in specific geographic areas or in specific property types, i.e., hotels, shopping malls, residential complexes and office buildings.
REITs are subject to management fees and other expenses, and so a Fund that invests in REITs will bear its proportionate share of the costs of the REITs operations. There are three general
categories of REITs: Equity REITs, Mortgage REITs and Hybrid REITs. Equity REITs invest primarily in direct fee ownership or leasehold ownership of real property; they derive most of their income from rents. Mortgage REITs invest mostly in mortgages
on real estate, which may secure construction, development or long-term loans; the main source of their income is mortgage interest payments. Hybrid REITs hold both ownership and mortgage interests in real estate.
Investing in REITs involves certain unique risks in addition to those risks associated with investing in the real estate industry in
general. The market value of REIT shares and the ability of the REITs to distribute income may be adversely affected by several factors, including rising interest rates, changes in the national, state and local economic climate and real estate
conditions, perceptions of prospective tenants of the safety, convenience and attractiveness of the properties, the ability of the owners to provide adequate management, maintenance and insurance, the cost of complying with the Americans with
Disabilities Act, increased competition from new properties, the impact of present or future environmental legislation and compliance with environmental laws, failing to maintain their exemptions from registration under the 1940 Act, changes in real
estate taxes and other operating expenses, adverse changes in governmental rules and fiscal policies, adverse changes in zoning laws and other factors beyond the control of the issuers of the REITs. In addition, distributions received by a Fund from
REITs may consist of dividends, capital gains and/or return of capital. As REITs generally pay a higher rate of dividends (on a pre-tax basis) than operating companies, to the extent application of the Funds investment strategy results in the
Fund investing in REIT shares, the percentage of the Funds dividend income received from REIT shares will likely exceed the percentage of the Funds portfolio which is comprised of REIT shares. Generally, dividends received by a Fund from
REIT shares and distributed to the Funds shareholders will not constitute qualified dividend income eligible for the reduced tax rate applicable to qualified dividend income;
29
therefore, the tax rate applicable to that portion of the dividend income attributable to REIT shares held by the Fund that shareholders of the Fund receive will be taxed at a higher rate than
dividends eligible for the reduced tax rate applicable to qualified dividend income.
REITs (especially mortgage REITs) are
also subject to interest rate risk. Rising interest rates may cause REIT investors to demand a higher annual yield, which may, in turn, cause a decline in the market price of the equity securities issued by a REIT. Rising interest rates also
generally increase the costs of obtaining financing, which could cause the value of a Funds REIT investments to decline. During periods when interest rates are declining, mortgages are often refinanced. Refinancing may reduce the yield on
investments in mortgage REITs. In addition, since REITs depend on payment under their mortgage loans and leases to generate cash to make distributions to their shareholders, investments in REITs may be adversely affected by defaults on such mortgage
loans or leases.
Investing in certain REITs, which often have small market capitalizations, may also involve the same risks
as investing in other small capitalization companies. REITs may have limited financial resources and their securities may trade less frequently and in limited volume and may be subject to more abrupt or erratic price movements than larger company
securities. Historically, small capitalization stocks, such as REITs, have been more volatile in price than the larger capitalization stocks such as those included in the S&P 500 Index. The management of a REIT may be subject to conflicts of
interest with respect to the operation of the business of the REIT and may be involved in real estate activities competitive with the REIT. REITs may own properties through joint ventures or in other circumstances in which the REIT may not have
control over its investments. REITs may incur significant amounts of leverage.
Repurchase
Agreements
(all Funds)
A Fund may acquire securities subject to repurchase agreements. In a
repurchase transaction, a Fund acquires a security from, and simultaneously agrees to resell it to, an approved vendor. An approved vendor is a U.S. commercial bank or the U.S. branch of a foreign bank or a broker-dealer that has been
designated a primary dealer in government securities that meets the Trusts credit requirements. The resale price exceeds the purchase price by an amount that reflects an agreed-upon interest rate effective for the period during which the
repurchase agreement is in effect. If the vendor fails to pay the resale price on the delivery date, the Fund may incur costs in disposing of the collateral and may experience losses if there is any delay in its ability to do so. Repurchase
agreements are considered loans under the 1940 Act, collateralized by the underlying security. There is no limit on the amount of a Funds net assets that may be subject to repurchase agreements.
Reverse Repurchase Agreements
(all Funds)
A Fund, subject to its investment strategies and policies, may enter into reverse repurchase agreements. A Fund may enter 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 to another party and agrees to repurchase them at a particular date and price. A Fund may
enter into a reverse repurchase agreement when it is anticipated that the interest income to be earned from the investment of the proceeds of the transaction is greater than the interest expense of the transaction.
At the time a Fund enters into a reverse repurchase agreement, it will segregate (i.e., designate on the Funds books and records)
liquid assets with a value not less than the repurchase price (including accrued interest). The use of reverse repurchase agreements may be regarded as leveraging and, therefore, speculative. Furthermore, reverse repurchase agreements involve the
risks that (i) the interest income earned in the investment of the proceeds will be less than the interest expense, (ii) the market value of the securities retained in lieu of sale by a Fund may decline below the price of the securities
the Fund has sold but is obligated to repurchase, (iii) the market value of the securities sold will decline below the price at which the Fund is required to repurchase them and (iv) the securities will not be returned to the Fund.
30
In addition, 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 Funds obligations to repurchase the securities and the Funds use of the proceeds of the reverse
repurchase agreement may effectively be restricted pending such decision.
Rights
and Warrants
(AQR Diversified Arbitrage Fund, AQR Multi-Strategy Alternative Fund, AQR Long-Short Equity Fund and AQR Style Premia Alternative Fund)
Warrants essentially are options to purchase equity securities at specific prices valid for a specific period of time. Their prices do not necessarily move parallel to the prices of the underlying
securities. Investments in warrants involve certain risks, including the possible lack of a liquid market for the resale of the warrants, potential price fluctuations as a result of speculation or other factors, and failure of the price of the
underlying security to reach a level at which the warrant can be prudently exercised (in which case the warrant may expire without being exercised, resulting in the loss of a Funds entire investment therein).
Rights are similar to warrants, but normally have a short duration and are distributed directly by the issuer to its shareholders. Rights
and warrants have no voting rights, receive no dividends, and have no rights with respect to the assets of the issuer.
Securities of Other Investment Companies
(all Funds)
A Fund may invest in shares of other
investment companies, including ETFs, money market mutual funds, and closed-end investment companies, to the extent permitted by the 1940 Act. To the extent a Fund invests in shares of an investment company, it will bear its pro rata share of the
other investment companys expenses, such as investment advisory and distribution fees and operating expenses.
Short Sales
(all Funds)
A Fund may engage in short sales, including short sales against the box.
Short sales (other than against the box) are transactions in which a Fund sells an instrument it does not own in anticipation of a decline in the market value of that instrument. A short sale against the box is a short sale where at the time of the
sale, the Fund owns or has the right to obtain instruments equivalent in kind and amounts. To complete a short sale transaction, the Fund must borrow the instrument to make delivery to the buyer. The Fund then is obligated to replace the instrument
borrowed by purchasing it 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 instrument was sold by the Fund. Until the instrument is replaced, the Fund is required to pay to the
lender amounts equal to any interest or dividends which accrue during the period of the loan. To borrow the instrument, the Fund also may be required to pay a premium, which would increase the cost of the instrument sold. There will also be other
costs associated with short sales.
The Fund will incur a loss as a result of the short sale if the price of the instrument
increases between the date of the short sale and the date on which the Fund replaces the borrowed instrument. Unlike taking a long position in an instrument by purchasing the instrument, where potential losses are limited to the purchase price,
short sales have no cap on maximum loss. The Fund will realize a gain if the instrument declines in price between those dates. This result is the opposite of what one would expect from a cash purchase of a long position in an instrument.
Until the Fund replaces a borrowed instrument in connection with a short sale, the Fund will (a) designate on its records as
collateral cash or liquid assets at such a level that the designated assets plus any amount deposited with the broker as collateral will equal the current value of the instrument sold short or (b) otherwise cover its short position in
accordance with applicable law. The amount designated on the Funds records will be marked to market daily. This may limit the Funds investment flexibility, as well as its ability to meet redemption requests or other current obligations.
31
There is no guarantee that the Fund will be able to close out a short position at any
particular time or at an acceptable price. During the time that the Fund is short an instrument, it is subject to the risk that the lender of the instrument will terminate the loan at a time when the Fund is unable to borrow the same instrument from
another lender. If that occurs, the Fund may be bought in at the price required to purchase the instrument needed to close out the short position, which may be a disadvantageous price. Thus, there is a risk that a Fund may be unable to
fully implement its investment strategy due to a lack of available instruments or for some other reason. It is possible that the market value of the instruments a Fund holds in long positions will decline at the same time that the market value of
the instruments a Fund has sold short increases, thereby increasing a Fund potential volatility. Short sales also involve other costs. The Fund must normally repay to the lender an amount equal to any dividends or interest that accrues while the
loan is outstanding. In addition, to borrow the instrument, the Fund may be required to pay a premium. The Fund also will incur transaction costs in effecting short sales. The amount of any ultimate gain for the Fund resulting from a short sale will
be decreased, and the amount of any ultimate loss will be increased, by the amount of premiums, dividends, interest or expenses the Fund may be required to pay in connection with the short sale.
A Fund may enter into short sales on derivative instruments with a counterparty, which will subject the Fund to counterparty risk. See
Counterparty Risk in the Funds Prospectus.
In addition to the short sales discussed above, the Fund may
make short sales against the box, a transaction in which the Fund enters into a short sale of an instrument that the Fund owns or has the right to obtain at no additional cost. The Fund does not immediately deliver the instruments sold
and is said to have a short position in those instruments until delivery occurs. If the Fund effects a short sale of instruments against the box at a time when it has an unrealized gain on the instruments, it may be required to recognize that gain
as if it had actually sold the instruments (as a constructive sale) on the date it effects the short sale. However, such constructive sale treatment may not apply if the Fund closes out the short sale with instruments other than the
appreciated instruments held at the time of the short sale and if certain other conditions are satisfied.
Small Cap Securities Risk
(AQR Diversified Arbitrage Fund, AQR Managed Futures Strategy Fund, AQR Risk Parity Fund, AQR Multi-Strategy Alternative Fund, AQR Risk Parity II MV Fund, AQR Risk Parity II HV Fund, AQR Managed Futures
Strategy HV Fun, AQR Long-Short Equity Fund, AQR Style Premia Alternative Fund and AQR Global Macro Fund)
Investments
in small cap companies involve higher risks in some respects than do investments in stocks of larger companies (including mid cap and large cap companies). For example, prices of such stocks are often more volatile than prices of larger
capitalization stocks. In addition, due to thin trading in some small capitalization stocks, an investment in these stocks may be more illiquid (
i.e.,
harder to sell) than that of larger capitalization stocks. Smaller capitalization companies
also fail more often than larger companies and may have more limited management and financial resources than larger companies.
SPACs
(AQR Diversified Arbitrage Fund)
The Fund may invest in stock, warrants, and other securities of special purpose acquisition companies (SPACs) or similar
special purpose entities that pool funds to seek potential acquisition opportunities. Unless and until an acquisition is completed, a SPAC generally invests its assets (less a portion retained to cover expenses) in U.S. Government securities, money
market fund securities and cash; if an acquisition that meets the requirements for the SPAC is not completed within a pre-established period of time, the invested funds are returned to the entitys shareholders. Because SPACs and similar
entities are in essence blank check companies without an operating history or ongoing business other than seeking acquisitions, the value of their securities is particularly dependent on the ability of the entitys management to identify and
complete a profitable acquisition. Some SPACs may pursue acquisitions only within certain industries or regions, which may increase the volatility of their prices. In addition, these securities, which are typically traded in the over-the-counter
market, may be considered illiquid and/or be subject to restrictions on resale.
32
Structured Notes
(AQR Managed Futures
Strategy Fund, AQR Managed Futures Strategy HV Fund, AQR Risk Parity Fund, AQR Multi-Strategy Alternative Fund, AQR Risk-Balanced Commodities Strategy Fund, AQR Risk Parity II MV Fund, AQR Risk Parity II HV Fund, AQR Style Premia Alternative Fund
and AQR Global Macro Fund)
Structured Notes are derivative debt securities, the interest rate or principal of which is
determined by an unrelated indicator. A structured note may be positively, negatively or both positively and negatively indexed; that is, its value or interest rate may increase or decrease if the value of the reference instrument increases.
Similarly, its value may increase or decrease if the value of the reference instrument decreases. Further, the change in the principal amount payable with respect to, or the interest rate of, a structured note may be a multiple of the percentage
change (positive or negative) in the value of the underlying reference instrument(s). Structured or indexed securities may also be more volatile, less liquid, and more difficult to accurately price than less complex securities or more traditional
debt securities.
Subsidiary Risk
(AQR Managed Futures Strategy Fund,
AQR Managed Futures Strategy HV Fund, AQR Risk Parity Fund, AQR Multi-Strategy Alternative Fund, AQR Risk-Balanced Commodities Strategy Fund, AQR Risk Parity II MV Fund, AQR Risk Parity II HV Fund, AQR Style Premia Alternative Fund and AQR Global
Macro Fund)
Investment in a Subsidiary (as defined below) is expected to provide certain Funds with exposure to the
commodity markets within the limitations of Subchapter M of the Internal Revenue Code and recent Internal Revenue Service revenue rulings. The Subsidiaries are companies organized under the laws of the Cayman Islands, and are overseen by their own
boards of directors. Each Fund is the sole shareholder of its respective Subsidiary, and it is not currently expected that shares of a Subsidiary will be sold or offered to other investors.
It is expected that the Subsidiaries will invest primarily in commodity-linked derivative instruments, such as swap agreements, commodity
futures and swaps on commodity futures but each Subsidiary may also invest in fixed income securities and money market instruments, and cash and cash equivalents, with two years or less term to maturity and other investments intended to serve as
margin or collateral for the Subsidiarys derivative positions. Although a Fund may enter into these commodity-linked derivative instruments directly, each Fund will likely gain exposure to these derivative instruments indirectly by investing
in its Subsidiary. Each Funds investment in its Subsidiary may vary depending on the types of instruments selected by the Adviser to gain exposure to the commodities markets. To the extent that a Fund invests in a Subsidiary, such Fund may be
subject to the risks associated with the abovementioned derivative instruments and other securities, which are discussed elsewhere in its Prospectus and this SAI.
While the Subsidiaries may be considered similar to investment companies, they are not registered under the 1940 Act and, unless otherwise noted in the applicable Prospectuses and this SAI, are not
subject to all of the investor protections of the 1940 Act and other U.S. regulations. Changes in the laws of the United States and/or the Cayman Islands could result in the inability of a Fund and/or the Subsidiaries to operate as described in the
applicable Prospectuses and this SAI and could negatively affect the Funds and their shareholders.
U.S. Government Securities
(all Funds)
U.S. Treasury obligations are backed by the full faith and credit of the United States. Obligations of U.S. Government agencies or
instrumentalities (including certain types of mortgage-backed securities) may or may not be guaranteed or supported 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 supported by discretionary authority of the U.S. Government to purchase the agencies obligations; while still others are supported only by the credit of the instrumentality. If the securities are not backed by the full
faith and credit of the United States, the owner of the securities must look principally to the agency issuing the obligation for repayment and may not be able to assert a claim against the United States in the event that the agency of
instrumentality does not meet its commitment.
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On August 5, 2011, Standard & Poors Ratings Services
(S&P) downgraded U.S. Treasury securities from AAA rating to AA+ rating. A downgrade of the ratings of U.S. government debt obligations, which are often used as a benchmark for other borrowing arrangements, could result in higher
interest rates for individual and corporate borrowers, cause disruptions in the international bond markets and have a substantial negative effect on the U.S. economy. A downgrade of U.S. Treasury securities from another ratings agency or a further
downgrade below AA+ rating by S&P may cause the value of the Funds U.S. Treasury obligations to decline.
Risks Related to the Adviser and to its Quantitative and Statistical Approach
(all Funds)
Trading Judgment
The success of the proprietary
valuation techniques and trading strategies employed by the Funds is subject to the judgment and skills of the Adviser and the research team that it oversees. Additionally, the trading abilities of the portfolio management team with regard to
execution and discipline are important to the return of the Funds. There can be no assurance that the investment decisions or actions of the Adviser will be correct. Incorrect decisions or poor judgment may result in substantial losses.
Model and Data Risk
Given the complexity of the investments and strategies of each Fund, the Adviser relies heavily on quantitative models
(both proprietary models developed by the Adviser, and those supplied by third parties) and information and data supplied by third parties (Models and Data). Models and Data are used to construct sets of transactions and investments, to
provide risk management insights, and to assist in hedging a Funds investments.
When Models and Data
prove to be incorrect or incomplete, any decisions made in reliance thereon expose the Fund to potential risks. For example, by relying on Models and Data, the Adviser may be induced to buy certain investments at prices that are too high, to sell
certain other investments at prices that are too low, or to miss favorable opportunities altogether. Similarly, any hedging based on faulty Models and Data may prove to be unsuccessful.
Some of the models used by the Adviser for one or more Funds are predictive in nature. The use of predictive models has
inherent risks. For example, such models may incorrectly forecast future behavior, leading to potential losses on a cash flow and/or a mark-to-market basis. In addition, in unforeseen or certain low-probability scenarios (often involving a market
disruption of some kind), such models may produce unexpected results, which can result in losses for a Fund. Furthermore, because predictive models are usually constructed based on historical data supplied by third parties, the success of relying on
such models may depend heavily on the accuracy and reliability of the supplied historical data.
All models
rely on correct market data inputs. If incorrect market data is entered into even a well-founded model, the resulting information will be incorrect. However, even if market data is input correctly, model prices will often differ
substantially from market prices, especially for instruments with complex characteristics, such as derivative instruments.
Obsolescence Risk
A Fund is unlikely to be
successful unless the assumptions underlying the models are realistic and either remain realistic and relevant in the future or are adjusted to account for changes in the overall market environment. If such assumptions are inaccurate or become
inaccurate and are not promptly adjusted, it is likely that profitable trading signals will not be generated. If and to the extent that the models do not reflect certain factors, and the Adviser does not successfully address such omission through
its testing and evaluation and modify the models accordingly, major losses may result. The Adviser will continue to test, evaluate and add new
34
models, as a result of which the existing models may be modified from time to time. Any modification of the models or strategies will not be subject to any requirement that shareholders receive
notice of the change or that they consent to it. There can be no assurance as to the effects (positive or negative) of any modification of the models or strategies on a Funds performance.
Crowding/Convergence
There is significant competition among quantitatively-focused managers, and the ability of the Adviser to deliver returns
consistent with a Funds objectives and policies is dependent on its ability to employ models that are simultaneously profitable and differentiated from those employed by other managers. To the extent that the Advisers models used for a
Fund come to resemble those employed by other managers, the risk that a market disruption that negatively affects predictive models will adversely affect the Fund is increased, and such a disruption could accelerate reductions in liquidity or rapid
repricing due to simultaneous trading across a number of funds in the marketplace.
Risk of Programming
and Modeling Errors
The research and modeling process engaged in by the Adviser is extremely complex
and involves financial, economic, econometric and statistical theories, research and modeling; the results of that process must then be translated into computer code. Although the Adviser seeks to hire individuals skilled in each of these functions
and to provide appropriate levels of oversight, the complexity of the individual tasks, the difficulty of integrating such tasks, and the limited ability to perform real world testing of the end product raises the chances that the
finished model may contain an error; one or more of such errors could adversely affect a Funds performance and, depending on the circumstances, would generally not constitute a trade error under the
Trusts
policies.
Involuntary Disclosure Risk
As described above under (Models and Risks and Crowding/Convergence Risk), the ability of the
Adviser to achieve its investment goals for a Fund is dependent in large part on its ability to develop and protect its models and proprietary research. The models and proprietary research and the Models and Data are largely protected by the Adviser
through the use of policies, procedures, agreements, and similar measures designed to create and enforce robust confidentiality, non-disclosure, and similar safeguards. However, public disclosure obligations (or disclosure obligations to exchanges
or regulators with insufficient privacy safeguards) could lead to opportunities for competitors to reverse-engineer the Advisers Models and Data, and thereby impair the relative or absolute performance of a Fund.
Proprietary Trading Methods
Because the trading methods employed by the Adviser on behalf of each Fund are proprietary to the Adviser, a shareholder
will not be able to determine any details of such methods or whether they are being followed.
FUNDAMENTAL POLICIES
The Funds policies set forth below are fundamental policies of each Fund; i.e., they may not be changed with respect to a Fund without shareholder approval. Shareholder approval means approval by
the lesser of (1) more than 50% of the outstanding voting securities of the Fund, or (2) 67% or more of the voting securities present at a meeting if the holders of more than 50% of the outstanding voting securities of the Fund are present
or represented by proxy. Except for those investment policies of a Fund specifically identified as fundamental in the Prospectus and this SAI, the Funds investment objectives as described in the Prospectus, and all other investment policies
and practices described in the Prospectus and this SAI may be changed by the Trusts Board of Trustees without the approval of shareholders.
35
Unless otherwise indicated, all of the percentage limitations below, and in the investment
restrictions recited in the Prospectus, apply to each Fund on an individual basis, and apply only at the time a transaction is entered into.
Each Fund
1.
|
Each of the AQR Diversified Arbitrage Fund and the AQR Long-Short Equity Fund shall be a diversified company as that term is defined in
the 1940 Act, as interpreted or modified by regulatory authorities having jurisdiction, from time to time.
|
2.
|
May borrow money to the extent permitted under the 1940 Act, as interpreted or modified by regulatory authorities having jurisdiction, from time to
time.
|
3.
|
May not concentrate its investments in a particular industry or group of industries, except as permitted under the 1940 Act, as interpreted or
modified by regulatory authorities having jurisdiction, from time to time, provided that, without limiting the generality of the foregoing, this limitation will not apply to a Funds investments in: (i) securities of other investment
companies; (ii) securities issued or guaranteed as to principal and/or interest by the U.S. government, its agencies or instrumentalities; (iii) repurchase agreements (collateralized by the instruments described in Clause (ii)); or
(iv) with respect to the AQR Risk-Balanced Commodities Strategy Fund, investments providing exposure to an industry or groups of industries in commodity sectors.
|
For the purposes of this policy, each Fund may use the industry classifications provided by Bloomberg, L.P., the Morgan
Stanley Capital International/Standard & Poors Global Industry Classification Standard (GICS) or any other reasonable industry classification system. Wholly-owned finance companies will be considered to be in the
industries of their parents if their activities are primarily related to financing the activities of the parents. Utilities will be divided according to their services, for example, gas, gas transmission, electric and gas, electric and telephone
will each be considered a separate industry.
4.
|
May not purchase or sell real estate or any interest therein, other than as may be acquired as a result of ownership of securities or other
instruments and provided that the Fund shall not be prevented from investing in securities backed by real estate or securities of companies engaged in the real estate business.
|
5.
|
The AQR Diversified Arbitrage Fund, AQR Managed Futures Strategy Fund and AQR Risk Parity Fund may not purchase physical commodities or contracts
relating to physical commodities, except as permitted under the 1940 Act and other applicable laws, rules and regulations, as such may be interpreted or modified by regulatory authorities having jurisdiction, from time to time. The AQR
Multi-Strategy Alternative Fund, AQR Risk-Balanced Commodities Strategy Fund, AQR Risk Parity II MV Fund, AQR Risk Parity II HV Fund, AQR Long-Short Equity Fund, AQR Managed Futures Strategy HV Fund, AQR Style Premia Alternative Fund and AQR Global
Macro Fund, may not purchase commodities or contracts relating to commodities, except as permitted under the 1940 Act and other applicable laws, rules and regulations, as such may be interpreted or modified by regulatory authorities having
jurisdiction, from time to time.
|
6.
|
May make loans to the extent permitted under the 1940 Act, as such may be interpreted or modified by regulatory authorities having jurisdiction,
from time to time.
|
7.
|
May not act as an underwriter of securities within the meaning of the 1933 Act, except as permitted under the 1933 Act, and as interpreted or
modified by regulatory authority having jurisdiction, from time to time. Among other things, to the extent that a Fund may be deemed to be an underwriter within the meaning of the 1933 Act, this would permit a Fund to act as an underwriter of
securities in connection with the purchase and sale of its portfolio securities in the ordinary course of pursuing its investment objective, investment policies and investment program.
|
8.
|
May not issue any senior security, except as permitted under the 1940 Act, and as interpreted or modified by regulatory authority having
jurisdiction, from time to time. Among other things, this would permit a Fund to: (a) enter into commitments to purchase securities in accordance with a Funds investment program, including, without limitation, reverse repurchase
agreements, delayed delivery securities and when-issued
|
36
|
securities, to the extent permitted by its investment program and other restrictions; (b) engage in short sales of securities to the extent permitted in its investment program and other
restrictions; and (c) purchase or sell derivative instruments to the extent permitted by its investment program and other restrictions.
|
The following notations are not considered to be part of the Funds fundamental policies and are subject to change without shareholder approval.
If a percentage limitation is satisfied at the time of investment, a later increase or decrease in such percentage resulting from a
change in the value of the Funds investments will not constitute a violation of such limitation, except that any borrowing by the Fund that exceeds the fundamental investment limitations stated above must be reduced to meet such limitations
within the period required by the 1940 Act (currently three days). In addition, if the Funds holdings of illiquid securities exceed 15% of net assets because of changes in the value of the Funds investments, the Fund will take action to
reduce its holdings of illiquid securities within a time frame deemed to be in the best interest of the Fund. Otherwise, the Fund may continue to hold a security even though it causes the Fund to exceed a percentage limitation because of fluctuation
in the value of the Funds assets.
With respect to the fundamental policy relating to the concentration set forth in
(3) above, a Fund intends to include the Funds investments in securities of other industry specific investment companies for purposes of calculating such Funds industry concentration to the extent practicable.
NON-FUNDAMENTAL INVESTMENT POLICIES RELATED TO FUND NAMES
Certain Funds have names that suggest that the Fund will focus on a type of investment, within the meaning of Rule 35d-1 under the 1940
Act. The Trust has adopted a non-fundamental policy for each Fund with such a name to invest under normal market conditions at least 80% of its net assets (plus any borrowings for investment purposes) in investments of the type suggested by the
Funds name, in each case as set forth in the Funds Prospectus.
With respect to each of these Funds, the Trust has
adopted a policy to provide the Funds shareholders with at least 60 days prior notice of any change in the policy of a Fund to invest at least 80% of its assets in the manner described above.
MANAGEMENT OF THE FUNDS
The overall management of the business and affairs of the Funds is vested with the Board of Trustees. The Board of Trustees consists of six individuals (each, a Trustee), five of whom are not
interested persons of the Trust as defined in the Investment Company Act (the Disinterested Trustees). The Trustees are responsible for the oversight of the operations of the Trust and perform the various duties imposed on
the directors of investment companies by the 1940 Act. The Board of Trustees approves all significant agreements between the Trust and persons or companies furnishing services to it, including the Trusts agreements with its investment
advisers, investment sub-advisers, administrator, custodian and transfer agent. The management of each Funds day-to-day operations is delegated to its officers, the Adviser, the Sub-Adviser (in the case of AQR Diversified Arbitrage Fund and
with respect to certain strategies of the AQR Multi-Strategy Alternative Fund) and the Funds administrator, subject always to the investment objectives and policies of each of the Funds and to general supervision of the Board of Trustees. The
Disinterested Trustees have retained independent legal counsel to assist them in connection with their duties.
37
Listed in the chart below is basic information regarding the Trustees and officers of the
Trust. The address of each officer and Trustee is Two Greenwich Plaza, Greenwich CT 06830.
|
|
|
|
|
|
|
|
|
Name and Year of Birth
|
|
Current Position
with the Trust,
Term of Office
1
and Length of
Time Served
|
|
Principal Occupation(s)
During Past 5
Years
|
|
Number of Funds in
Fund Complex
Overseen by Trustee
|
|
Other Present
or
Past Directorships
Held by Trustee
(during the past 5 years)
|
Disinterested Trustees
2
|
Timothy K. Armour, M.B.A.,
1948
|
|
Chairman of the Board since 2010 and Trustee,
since 2008
|
|
Interim Chief Executive Officer of Janus Capital Group (2009 to 2010) (financial services)
|
|
34
|
|
Janus Capital Group (since 1998); ETF Securities (2010 to 2013)
|
|
|
|
|
|
L. Joe Moravy,
M.B.A., CPA,
1950
|
|
Trustee, since 2008
|
|
Managing Director, Finance Scholars Group (since 2010) (consulting); Managing Director and Owner, LJM Advisory (2008-2010) (consulting)
|
|
34
|
|
Nuveen Exchange Traded Commodities Funds (since 2012)
|
|
|
|
|
|
William L. Atwell, M.B.A.,
1950
|
|
Trustee, since 2011
|
|
Managing Director, Atwell Partners LLC (since 2012) (consulting); President (CIGNA International), CIGNA (2008 to 2012) (insurance)
|
|
34
|
|
None
|
|
|
|
|
|
Gregg D. Behrens, M.M.,
1952
|
|
Trustee, since 2011
|
|
Chief Executive Officer and Executive Vice President (Asia-Pacific Region), Northern Trust Company (1974 to 2009) (banking)
|
|
34
|
|
None
|
|
|
|
|
|
Brian Posner,
M.B.A.,
1961
|
|
Trustee, since 2011
|
|
President, Point Rider Group LLC (since 2008) (consulting)
|
|
34
|
|
Biogen Idec (since 2008); Arch Capital Group (since 2011); BG Medicine (since 2012); RiverPark Funds Trust (2010 to
2012)
|
38
|
|
|
|
|
|
|
|
|
Name and Year of Birth
|
|
Current Position
with the Trust,
Term of Office
1
and Length of
Time Served
|
|
Principal Occupation(s)
During Past 5
Years
|
|
Number of Funds in
Fund Complex
Overseen by Trustee
|
|
Other Present
or
Past Directorships
Held by Trustee
(during the past 5 years)
|
Interested Trustee
3
|
David Kabiller,
CFA,
1963
|
|
Trustee, since 2010
|
|
Founding Principal, AQR Capital Management, LLC (since 1998)
|
|
34
|
|
None
|
Officers
|
|
|
|
|
|
Marco Hanig,
Ph.D.,
1958
|
|
Chief Executive Officer, since 2009; President, since 2008
|
|
Principal, AQR Capital Management, LLC (since 2008)
|
|
N/A
|
|
N/A
|
|
|
|
|
|
H.J. Willcox, J.D.,
1966
|
|
Chief Compliance Officer, since 2013
|
|
Chief Compliance Officer, AQR Capital Management, LLC (since 2013); Global Head of Compliance and Counsel, KKR & Co., L.P. (2008-2013)
|
|
N/A
|
|
N/A
|
|
|
|
|
|
John Howard, CPA,
1969
|
|
Chief Financial Officer, since 2013
|
|
Principal, Chief Operating Officer and Chief Financial Officer, AQR Capital Management, LLC (since 2011); Chief Financial Officer, AllianceBernstein (2010-2011);
Principal, Chief Operating Officer and Chief Financial Officer, AQR Capital Management, LLC (2007-2010)
|
|
N/A
|
|
N/A
|
39
|
|
|
|
|
|
|
|
|
Name and Year of Birth
|
|
Current Position
with the Trust,
Term of Office
1
and Length of
Time Served
|
|
Principal Occupation(s)
During Past 5
Years
|
|
Number of Funds in
Fund Complex
Overseen by Trustee
|
|
Other Present
or
Past Directorships
Held by Trustee
(during the past 5 years)
|
Aaron Masek, CPA,
1974
|
|
Vice President and Treasurer, since 2010
|
|
Vice President, AQR Capital Management, LLC (since 2010); prior thereto Audit Manager, Cohen Fund Audit Services, Ltd. (2008 to 2009)
|
|
N/A
|
|
N/A
|
|
|
|
|
|
Bradley Asness, J.D., M.B.A.,
1969
|
|
Vice President and Chief Legal Officer, since 2009
|
|
Principal and Chief Legal Officer, AQR Capital Management, LLC (since 1998)
|
|
N/A
|
|
N/A
|
|
|
|
|
|
Brendan R. Kalb, J.D.,
1975
|
|
Executive Vice President, since 2009; Secretary, since 2008
|
|
General Counsel, AQR Capital Management, LLC (since 2004)
|
|
N/A
|
|
N/A
|
|
|
|
|
|
Nicole DonVito, J.D.,
1979
|
|
Vice President, since 2009
|
|
Senior CounselHead of Registered Products, AQR Capital Management, LLC (since 2007)
|
|
N/A
|
|
N/A
|
1
|
Each Trustee serves until the election and qualification of a successor, or until death, resignation or removal as provided in the Trusts
Declaration of Trust. A Disinterested Trustee may not hold office beyond December 31 of the year in which he turns 72.
|
2
|
A Disinterested Trustee is any Trustee that is not an interested person of the Trust within the meaning of Section 2(a)(19) of the
1940 Act.
|
3
|
An Interested Trustee is a Trustee that is an interested person of the Trust within the meaning of Section 2(a)(19) of the 1940
Act. Mr.
Kabiller is an interested person of the Trust because of his position with the Adviser.
|
Leadership Structure of the Board of Trustees
Overall responsibility for oversight of the Trust and its Funds rests
with the Board of Trustees (the Board). The Trust, on behalf of the Funds, has engaged the Adviser and for the AQR Diversified Arbitrage Fund and AQR Multi-Strategy Alternative Fund, has also engaged the Sub-Adviser, to manage the Funds
on a day-to day basis. The Board is responsible for overseeing the Adviser and the Sub-Adviser and any other service providers in the operations of the Funds in accordance with the provisions of the 1940 Act, applicable provisions of state and other
laws, the Trusts Declaration of Trust and By-laws, and each Funds investment objectives and strategies. The Board is presently composed of six members, five of whom are Disinterested Trustees. The Board currently conducts regular
in-person meetings and holds special telephonic meetings, or informal conference calls, to discuss specific matters that may arise or require action between regular Board meetings. The Disinterested
40
Trustees also meet in executive session, at which no trustees who are interested persons of the Funds are present. The Disinterested Trustees have engaged independent legal counsel to assist them
in performing their oversight responsibilities.
The Board has appointed Mr. Armour, a Disinterested Trustee, to serve as
Chairman of the Board. The Chairmans role is to preside at all meetings of the Board and to act as a liaison with service providers, including the Adviser, officers, attorneys, and other Trustees generally, between meetings. The Chairman may
also perform such other functions as may be delegated by the Board from time to time. The Board has established two committees,
i.e.
, Audit Committee and Nominating and Governance Committee (each, a Committee) to assist the Board
in the oversight and direction of the business and affairs of the Funds, and from to time may establish informal working groups to review and address the policies and practices of the Funds with respect to certain specified matters. The Committee
system facilitates the timely and efficient consideration of matters by the Trustees, and facilitates effective oversight of compliance with legal and regulatory requirements and of the Funds activities and associated risks. The standing
Committees currently conduct an annual review of their charters, which includes a review of their responsibilities and operations. The Nominating and Governance Committee and the Board as a whole also conduct an annual evaluation of the performance
of the Board, including consideration of the effectiveness of the Boards committee structure. The Board has determined that the Boards leadership structure is appropriate because it allows the Board to exercise informed and independent
judgment over the matters under its purview and it allocates areas of responsibility among the Committees and the full Board in a manner that enhances efficient and effective oversight.
The Funds are subject to a number of risks, including, among others, investment, compliance, operational and valuation risks. Risk
oversight forms part of the Boards general oversight of the Funds and is addressed as part of various Board and Committee activities. Day-to-day risk management functions are subsumed within the responsibilities of the Adviser, who carries out
the Funds investment management and business affairs, and also by the Sub-Adviser with respect to the AQR Diversified Arbitrage Fund and the AQR Multi-Strategy Alternative Fund, and other service providers in connection with the services they
provide to the Funds. Each of the Adviser, the Sub-Adviser and other service providers have their own, independent interest in risk management, and their policies and methods of risk management will depend on their functions and business models. As
part of its regular oversight of the Funds, the Board, directly and/or through a Committee, interacts with and reviews reports from, among others, the Adviser, the Sub-Adviser and the Funds other service providers (including the Funds
distributor, servicing agent and transfer agent), the Funds Chief Compliance Officer, the independent registered public accounting firm for the Funds, and legal counsel to the Funds. The Board recognizes that it may not be possible to identify
all of the risks that may affect the Funds or to develop processes and controls to eliminate or mitigate their occurrence or effects. The Board may, at any time and in its discretion, change the manner in which it conducts risk oversight.
Board of Trustees and Committees
Among the attributes common to all Trustees are their ability to review critically, evaluate, question and discuss information provided to
them, to interact effectively with the other Trustees, the Adviser, the Sub-Adviser, other service providers, legal counsel and the independent registered public accounting firm, and to exercise effective business judgment in the performance of
their duties as Trustees. A Trustees ability to perform his duties effectively may have been attained, as set forth below, through the Trustees executive, business, consulting, and/ or academic positions; experience from service as a
Trustee of the Trust (and/or in other capacities), other investment funds, public companies, or non-profit entities or other organizations; educational background or professional training; and/or other life experiences.
Timothy K. Armour, M.B.A. Mr. Armour has served as a Trustee of the Trust since 2008. In addition, he has more than 31 years of
business and executive experience, specifically in the mutual fund industry. Mr. Armour has held senior positions with Morningstar, Inc. and Janus Capital Group. Mr. Armour also has corporate governance experience serving as a
director/trustee of other entities, including Janus Capital Group, ETF Securities and AARP Services.
41
L. Joe Moravy, M.B.A., CPA. Mr. Moravy has served as a Trustee of the Trust since
2008. In addition, he has more than 40 years of business and executive experience primarily in the auditing and accounting area. Mr. Moravy has more than 35 years of audit and accounting related experience as a certified public accountant at
leading accounting firms where he provided audit and accounting-related services to financial services companies. As a certified public accountant, Mr. Moravy also has gained corporate governance experience through working with the boards of
directors and audit committees of public and private corporations. He also serves on the independent committee of Nuveen Exchange Traded Commodity Funds and has served as a director of several not-for-profit organizations.
William L. Atwell, M.B.A. Mr. Atwell has served as a Trustee of the Trust since 2011. In addition, he has more than 41 years of
business experience in financial services. Mr. Atwell has extensive experience in various executive and other positions with CIGNA, Charles Schwab and Citibank. Mr. Atwell also has corporate governance experience serving as a
director/trustee of several not-for-profit organizations and has served as a director/trustee of USI Holdings Corporation.
Gregg D. Behrens, M.M. Mr. Behrens has served as a Trustee of the Trust since 2011. In addition, he has more than 40 years of
business experience in financial services. Mr. Behrens has extensive experience in various executive and other positions with Northern Trust Company, including his executive experience in London and Singapore. Mr. Behrens also has
corporate governance experience serving as a director/trustee of several not-for-profit organizations.
Brian S. Posner,
M.B.A. Mr. Posner has served as a Trustee of the Trust since 2011. In addition, he has more than 26 years of business experience in financial services. Mr. Posner has extensive experience in various executive and other positions with Point
Rider Group LLC, ClearBridge Advisors, Hygrove Partners LLC/Hygrove Management LLC, Warburg Pincus Asset Management and Fidelity Management and Research Company. Mr. Posner also has corporate governance experience serving as a director/trustee
of other entities, including BG Medicine, Biogen Idec, Arch Capital Group, Anadys Pharmaceuticals, Inc., the Mutual Fund Store and the River Park Funds.
David Kabiller, CFA. Mr. Kabiller has served as a Trustee of the Trust since 2010. In addition, he has more than 26 years of business and executive experience and is a Founding Principal of the
Adviser. He has been with the Adviser since its inception in 1998. Prior to cofounding the Adviser, Mr. Kabiller was associated with Goldman Sachs & Co. where he served as a Vice President (1987 1998). Mr. Kabiller also has
corporate governance experience serving as a director/trustee of several not-for-profit organizations.
Committees of the Board of Trustees
As discussed above, the Board of Trustees currently has two standing committees:
(1) an Audit Committee, and (2) a Nominating and Governance Committee. Currently, each Disinterested Trustee serves on each committee. Mr. Kabiller, as an Interested Trustee, is not a member of either committee. Each committee has
adopted a written charter setting forth its duties and responsibilities. The Audit Committee met three times and the Nominating and Governance Committee met once during the 12-months ended December 31, 2012.
Audit Committee.
L. Joe Moravy, M.B.A., CPA, serves as the Chairman of the Audit Committee. The Audit Committee is required
to meet at least twice a year and:
|
|
|
oversees the accounting, auditing and financial reporting processes of each of the Funds;
|
|
|
|
hires (and fires, if needed) the Funds independent registered public accounting firm (subject to the ratification of the Board of Trustees);
|
42
|
|
|
pre-approves all audit, audit-related and non-audit services to be provided by the independent registered public accounting firm to the Funds and
certain Fund affiliates if these non-audit services relate directly to the operations and financial reporting of the Funds;
|
|
|
|
reviews with the independent registered public accounting firm the proposed scope of, and fees for, their audit, the registered public accounting
firms independence, and the staffing of the audit team of the Funds;
|
|
|
|
receives and considers a report from the independent registered public accounting firm concerning their conduct of the audit, including any comments
or recommendations they might want to make in that connection;
|
|
|
|
considers all critical accounting policies and practices to be used by each of the Funds and any proposed alternative treatments thereof; and
|
|
|
|
investigates any improprieties or suspected improprieties in connection with the Funds accounting or financial reporting.
|
Nominating and Governance Committee.
William L. Atwell, M.B.A., serves as the Chairman
of the Nominating and Governance Committee. The Nominating and Governance Committee normally meets once a year and as necessary to address governance issues and:
|
|
|
reviews and assesses the adequacy of the Boards ongoing adherence to industry corporate governance best practices and makes recommendations as
to any appropriate changes;
|
|
|
|
reviews and makes recommendations to the Board regarding Trustee compensation and expense reimbursement policies;
|
|
|
|
undertakes periodically to coordinate and facilitate evaluations of the Board and recommend improvements, as appropriate; and
|
|
|
|
meets with the Funds management to review reports and other information concerning the status of the Funds operations, procedures, and
processes.
|
If there is a vacancy on the Board, the Nominating and Governance Committee will:
|
|
|
identify and evaluate potential candidates to fill any such vacancy on the Board;
|
|
|
|
select from among the potential candidates a nominee to be presented to the full Board for its consideration; and
|
|
|
|
recommend to the Board a nominee to fill any such vacancy.
|
When seeking suggestions for nominees to serve as independent trustees, the Nominating and Governance Committee may consider suggestions
from anyone it deems appropriate. When seeking to fill a position on the Board previously held by an Interested Trustee, the Nominating and Governance Committee will consider the views and recommendations of the Adviser. The Nominating and
Governance Committee will not normally consider Trustee nominations submitted by shareholders.
43
Fund Ownership of the Trustees
The following table sets forth, for each Trustee, the dollar range of shares owned in a Fund as of December 31, 2012, as well as the
aggregate dollar range of shares owned by the Trustee in the Trust as of the same date:
|
|
|
|
|
|
|
|
|
|
|
Name of Trustee
|
|
Dollar Range of Equity Securities in the
Fund
|
|
|
Aggregate Dollar Range of
Equity Securities in All
Registered Investment
Companies
Overseen by
Director in Family of
Investment Companies
|
|
|
|
Name of Fund
|
|
Dollar Range
|
|
|
|
|
Timothy K. Armour, M.B.A.
|
|
AQR Multi-Strategy Alternative Fund
|
|
|
Over $100,000
|
|
|
|
Over $100,000
|
|
|
|
|
|
L. Joe Moravy, M.B.A., CPA
|
|
AQR Diversified Arbitrage Fund
|
|
|
$10,001-50,000
|
|
|
|
Over $100,000
|
*
|
|
|
AQR Managed Futures Strategy Fund
|
|
|
$50,001-100,000
|
|
|
|
|
|
|
|
AQR Risk Parity Fund
|
|
|
Over $100,000
|
|
|
|
|
|
|
|
AQR Multi-Strategy Alternative Fund
|
|
|
Over $100,000
|
|
|
|
|
|
|
|
AQR Risk-Balanced Commodities Strategy Fund
|
|
|
$10,001-50,000
|
|
|
|
|
|
|
|
|
|
William L. Atwell, M.B.A.
|
|
AQR Diversified Arbitrage Fund
|
|
|
$10,001-50,000
|
|
|
|
Over $100,000
|
*
|
|
|
AQR Managed Futures Strategy Fund
|
|
|
$10,001-50,000
|
|
|
|
|
|
|
|
AQR Risk Parity Fund
|
|
|
$50,001-100,000
|
|
|
|
|
|
|
|
|
|
Gregg D. Behrens, M.M.
|
|
N/A
|
|
|
N/A
|
|
|
|
Over $100,000
|
*
|
|
|
|
|
Brian Posner, M.B.A.
|
|
AQR Risk Parity Fund
|
|
|
Over $100,000
|
|
|
|
Over $100,000
|
|
|
|
|
|
David Kabiller, CFA
|
|
AQR Diversified Arbitrage Fund
|
|
|
$10,001-50,000
|
|
|
|
Over $100,000
|
*
|
|
|
AQR Multi-Strategy Alternative Fund
|
|
|
Over $100,000
|
|
|
|
|
|
|
|
AQR Risk Parity Fund
|
|
|
Over $100,000
|
|
|
|
|
|
|
|
AQR Risk Parity II HV Fund
|
|
|
Over $100,000
|
|
|
|
|
|
*
|
Trustee holds equity securities in other series of the Trust which are described in a separate Statement of Additional Information.
|
Fund Ownership of the Trustees and Officers
As of February 28, 2014, the Trustees and Officers of the Trust owned an aggregate of:
|
|
|
less than 1% of the AQR Diversified Arbitrage Fund
|
|
|
|
less than 1% of the AQR Managed Futures Strategy Fund
|
|
|
|
less than 1% of the AQR Risk Parity Fund
|
|
|
|
less than 1% of the AQR Multi-Strategy Alternative Fund
|
|
|
|
less than 1% of the AQR Risk-Balanced Commodities Strategy Fund
|
|
|
|
approximately 5.19% of the AQR Risk Parity II HV Fund
|
44
|
|
|
less than 1% of the AQR Risk Parity II MV Fund
|
|
|
|
approximately 2.35% of the AQR Managed Futures Strategy HV Fund
|
|
|
|
approximately 3.31% of the AQR Long-Short Equity Fund
|
|
|
|
less than 1% of the AQR Style Premia Alternative Fund
|
Compensation of Trustees and Certain Officers
Officers of the Trust and Trustees who are interested persons of the Trust do not receive any compensation from the Trust. For fiscal year
2012, the annual retainer paid to Disinterested Trustees was $45,000 and the Disinterested Trustees also received a $6,000 per meeting fee for regularly scheduled meetings, plus $2,500 per extraordinary telephonic meeting. The Chairman of the Board
received an additional $12,000 annual retainer and the Chairman of the Audit Committee received an additional $7,000 annual retainer. All Trustees are reimbursed for their travel expenses and other reasonable out-of-pocket expenses incurred in
connection with attending Board meetings (these other expenses are subject to Board review to ensure that they are not excessive). The Trust does not pay any pension or retirement benefits.
The table below shows the compensation that was paid to the Disinterested Trustees for the fiscal year ended December 31, 2012:
COMPENSATION TABLE
|
|
|
|
|
|
|
|
|
Name of Person, Position
|
|
Estimated Annual Benefits
upon Retirement
|
|
|
Aggregate Compensation
from the Trust
|
|
Timothy K. Armour, M.B.A., Disinterested Trustee, Chairman of the Board
|
|
|
None
|
|
|
$
|
86,000
|
|
L. Joe Moravy, M.B.A., CPA, Disinterested Trustee, Audit Committee Chairman
|
|
|
None
|
|
|
$
|
81,000
|
|
William L. Atwell, M.B.A., Disinterested Trustee, Chairman of the Nominating and Governance
Committee
|
|
|
None
|
|
|
$
|
71,500
|
|
Gregg D. Behrens, M.M., Disinterested Trustee
|
|
|
None
|
|
|
$
|
71,500
|
|
Brian Posner, M.B.A., Disinterested Trustee
|
|
|
None
|
|
|
$
|
74,000
|
|
Personal Trading
The Trust, Adviser and Sub-Adviser have each adopted a code of ethics, which puts restrictions on the timing of personal trading in
relation to trades by the Funds and other advisory clients of the Adviser, Sub-Adviser and their affiliates. The codes of ethics, which were adopted in accordance with Rule 17j-1 under the 1940 Act and Rule 204A-1 under the Investment Advisers Act
of 1940, as amended (the Investment Advisers Act), as appropriate, describe the fiduciary duties owed to shareholders of the Funds and to other advisory accounts by all Trustees, officers, members and employees of the Trust, and by the
Adviser and Sub-Adviser; establish procedures for personal investing; and restrict certain transactions.
The Funds
distributor, ALPS Distributors, Inc. (the Distributor) has also adopted a code of ethics governing the personal trading activities of its directors, officers and employees, which contains comparable restrictions.
45
Proxy Voting Policies and Procedures
The Adviser and Sub-Adviser have adopted joint written proxy voting policies and procedures (Proxy Policies) as required by
Rule 206(4)-6 under the Investment Advisers Act, consistent with their fiduciary obligations. The Trust has delegated proxy voting responsibilities with respect to each Fund to the Adviser, subject to the general oversight of the Board. The
Proxy Policies have been approved by the Trust as the policies and procedures that the Adviser and Sub-Adviser will use when voting proxies on behalf of the Funds. A copy of the Proxy Policies is attached as Appendix A to this SAI.
Information about how each Fund voted proxies relating to portfolio securities held during the most recent
12-month
period ended June 30 will be available no later than August 31, of each year: (i) on the Funds website at www.aqrfunds.com; (ii) without charge, upon request, by calling
1-866-290-2688 or (iii) on the SECs website at http://www.sec.gov.
Portfolio
Holdings Disclosure
Within 15 days following the end of each calendar month, each Fund, other than the AQR Diversified
Arbitrage Fund, will make available a complete uncertified schedule of its portfolio holdings as of the end of the month. Within 15 days following the end of each calendar quarter, the AQR Diversified Arbitrage Fund will make available a complete
uncertified schedule of its portfolio holdings as of the end of the quarter. Each Fund will make its portfolio holdings information available to the general public on the Funds website at
www.aqrfunds.com
. Portfolio holdings of each
Fund will also be disclosed on a quarterly basis no later than sixty (60) days following the end of the preceding quarter on forms required to be filed with the SEC as follows: (i) portfolio holdings as of the end of each fiscal year will
be filed as part of the annual report filed on
Form N-CSR;
(ii) portfolio holdings as of the end of the first and third fiscal quarters will be filed on Form N-Q; and (iii) portfolio holdings as
of the end of the six month period will be filed as part of the semi-annual report filed on Form N-CSR. The Trusts Forms N-CSR and Forms N-Q will be available on the SEC website at
http://www.sec.gov
.
Non-public information regarding a Fund, including portfolio holdings information, may be disclosed more frequently or in advance of the
website posting or its filing with the SEC on the EDGAR filing system to agents, service providers, analysts, rating agencies, pricing services, proxy voting services or others including the following: advisers and sub-advisers to the Funds,
independent registered public accountants, counsel, administrator, transfer agent or custodian, who require access to such information in order to fulfill their contractual duties to the Funds, or consultants, data aggregators, mutual fund
evaluation services, due diligence departments of broker dealers and wirehouses that regularly analyze the portfolio holdings and calculate information derived from holdings of the Funds, and which supply their analyses (but not the holdings
themselves) to their clients. Such parties, either by law, agreement or by the nature of their duties, are required to keep the nonpublic portfolio holdings information received from the Funds confidential. In addition, in connection with the
purchase and sale of portfolio securities and in the course of seeking best execution, the Adviser and Sub-Adviser provide information regarding individual portfolio holdings to broker-dealers who may be selected to execute trades for the Funds. The
Securities Exchange Act of 1934, as amended, and the rules of the Financial Industry Regulatory Authority (FINRA) provide limitations on a broker-dealers ability to trade for its own accounts or the accounts of others on the basis
of such information. In addition, in connection with a redemption in kind, the redeeming shareholder may be required to agree to keep the information about the securities to be so distributed confidential, except to the extent necessary to dispose
of the securities.
The Adviser also may make available certain information about each Funds portfolio prior to the
public dissemination of portfolio holdings, including, but not limited to, the Funds portfolio characteristics data; the Funds country, currency and sector exposures; and a Funds performance attribution, including contributors/
detractors to Fund performance, by posting such information to the Funds website (www.aqrfunds.com) or upon reasonable request made to the Fund or the Adviser.
46
Nonpublic portfolio holdings information may be disclosed to certain third parties (other
than as noted above) by written request (which may be completed via email) prior to its being posted on the Funds website or filed with the SEC through the EDGAR filing system, upon the preapproval of the president or a vice president of the
Trust and a member of the Advisers Legal Department after making a good faith determination that the disclosure would serve a legitimate business propose of the Fund and is in the best interest of the Fund and its shareholders. In addition,
the recipient must agree to maintain the confidentiality of the portfolio holdings information. The Trusts Chief Compliance Officer and the executive officers of the Trust monitor the release of non-public information regarding the Trust. In
order to assess whether there are any conflicts between the interests of the Funds shareholders and the interests of the Adviser, the Sub-Adviser or their affiliates, the Trustees will review at each regular meeting of the Board of Trustees
the information related to any such written approvals that have been approved by the president or a vice president of the Trust and a member of the Advisers Legal Department since the last regular meeting of the Board of Trustees. As noted
above, pre-approval by the president or a vice president of the Trust and a member of the Advisers Legal Department is not necessary with respect to the disclosure of certain nonpublic portfolio holdings information to certain third parties or
with respect to the disclosure of certain other information about a Funds portfolio prior to the public dissemination of portfolio holdings information.
The Adviser manages other accounts such as separate accounts, unregistered products and funds sponsored by companies other than the Adviser. These other accounts may be managed in a similar fashion to
certain Funds and thus may have similar portfolio holdings. Such accounts may make disclosures at different times than the Funds portfolio holdings are disclosed. Additionally, clients of such accounts have access to their portfolio holdings,
and may not be subject to the foregoing restrictions.
The Chief Compliance Officer of the Trust is responsible for ensuring
that the Funds have adopted and implemented policies and procedures reasonably designed to ensure compliance with the Trusts portfolio holdings disclosure policy and, to the extent necessary, the Chief Compliance Officer and/or his or her
designee shall monitor the Funds compliance with this policy.
Any exceptions to the policy may be made only if approved by
the Chief Compliance Officer of the Trust upon determining that the exception is in the best interests of the Funds and their shareholders. The Chief Compliance Officer must report any exceptions made to the policy to the Trustees at its next
regularly scheduled meeting.
Each violation of the disclosure policy must be reported to the Chief Compliance Officer. If the
Chief Compliance Officer, in the exercise of his or her duties, deems that such violation constitutes a Material Compliance Matter within the meaning of Rule 38a-1 under the Investment Company Act, he or she shall report it to the
applicable Trustees, as required by Rule 38a-1.
The Trustees reserve the right to amend the Trusts policies and
procedures regarding the disclosure of portfolio holdings at any time and from time to time without prior notice and in their sole discretion. The Board of Trustees also considers the reports and recommendations of the Trusts Chief Compliance
Officer regarding any material compliance matters that may arise with respect to the disclosure of portfolio holdings information and periodically, as required under the circumstances, considers whether to approve or ratify any amendment to the
Trusts policies and procedures regarding the dissemination of portfolio holdings information.
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Adviser
The Adviser, AQR Capital Management, LLC, Two Greenwich Plaza, Greenwich, CT 06830, serves as the investment adviser to each of the Funds pursuant to an Investment Management Agreement entered into by the
Trust, on behalf of each of the Funds (the Advisory Agreement). Subject to the general supervision of the
47
Board of Trustees, under the terms of the Advisory Agreement, the Adviser furnishes a continuous investment program for each Funds portfolio, makes day-to-day investment decisions for each
Fund, and manages each of the Funds investments in accordance with the stated policies of the Fund. The Adviser is also responsible for selecting brokers and dealers to execute purchase and sale orders for the portfolio transactions of each
Fund, subject to its obligation to seek best execution. The Adviser provides persons satisfactory to the Trustees to serve as officers of the Funds. Such officers, as well as certain other employees and Trustees of the Trust, may be directors,
officers, or employees of the Adviser.
The Adviser also serves as the investment adviser to each of the AQR Managed
Futures Strategy Offshore Fund Ltd., a wholly-owned and controlled subsidiary of the AQR Managed Futures Strategy Fund; the AQR Managed Futures Strategy HV Offshore Fund Ltd., a wholly-owned and controlled subsidiary of the AQR Managed Futures
Strategy HV Fund; the AQR Risk Parity Offshore Fund Ltd., a wholly-owned and controlled subsidiary of the AQR Risk Parity Fund; the AQR Multi-Strategy Alternative Offshore Fund Ltd., a wholly-owned and controlled subsidiary of the AQR Multi-Strategy
Alternative Fund; the AQR Risk-Balanced Commodities Strategy Offshore Fund Ltd., a wholly-owned and controlled subsidiary of the AQR Risk-Balanced Commodities Strategy Fund; the AQR Risk Parity II MV Offshore Fund Ltd., a wholly-owned and controlled
subsidiary of the AQR Risk Parity II MV Fund; the AQR Risk Parity II HV Offshore Fund Ltd., a wholly-owned and controlled subsidiary of the AQR Risk Parity II HV Fund; the AQR Style Premia Alternative Offshore Fund Ltd., a wholly-owned and
controlled subsidiary of the AQR Style Premia Alternative Fund and the AQR Global Macro Offshore Fund Ltd., a wholly-owned and controlled subsidiary of the AQR Global Macro Fund, each organized under the laws of the Cayman Islands as an exempted
company (each, a Subsidiary), pursuant to a separate investment advisory agreement with each Subsidiary. The Adviser does not receive additional compensation for its management of each Subsidiary.
The Adviser is a wholly-owned subsidiary of AQR Capital Management Holdings, LLC (AQR Holdings), which has no activities
other than holding the interests of the Adviser. AQR Holdings is a subsidiary of AQR Capital Management Group, L.P. (AQR LP) which has no activities other than holding the interests of AQR Holdings. Clifford Asness, Ph.D., M.B.A., may be
deemed to control the Adviser indirectly through his significant ownership of AQR LP.
Under the Advisory Agreement, the Funds
pay the Adviser a management fee on a monthly basis in an amount equal to the following amounts annually of the average daily net assets of each of the Funds:
|
|
|
Fund:
|
|
Management Fee
|
AQR Diversified Arbitrage Fund
|
|
1.00%
|
AQR Managed Futures Strategy Fund
|
|
1.05%
|
AQR Risk Parity Fund
|
|
0.75% on the first $1 billion of net assets
|
|
|
0.70% on net assets in excess of $1 billion
|
AQR Multi-Strategy Alternative Fund
|
|
1.85% on the first $1 billion of net assets
|
|
|
1.80% on net assets in excess of $1 billion
|
AQR Risk-Balanced Commodities Strategy Fund
|
|
0.60% on the first $1 billion of net assets
|
|
|
0.575% on net assets in excess of $1 billion up to $3 billion
|
|
|
0.55% on net assets in excess of $3 billion
|
AQR Risk Parity II MV Fund
|
|
0.50% on the first $1 billion of net assets
|
|
|
0.475% on net assets in excess of $1 billion up to $3 billion
|
|
|
0.45% on net assets in excess of $3 billion
|
48
|
|
|
Fund:
|
|
Management Fee
|
AQR Risk Parity II HV Fund
|
|
0.70% on the first $1 billion of net assets
|
|
|
0.675% on net assets in excess of $1 billion up to $3 billion
|
|
|
0.65% on net assets in excess of $3 billion
|
AQR Long-Short Equity Fund
|
|
1.10%
|
AQR Managed Futures Strategy HV Fund
|
|
1.45%
|
AQR Style Premia Alternative Fund
|
|
1.35%
|
AQR Global Macro Fund
|
|
1.25%
|
For the fiscal year ended December 31, 2010, the Trust paid the Adviser management fees (after
waivers), and the Adviser waived management fees and reimbursed expenses, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
|
|
Fees Paid
(After Waivers
and
Reimbursements)
|
|
|
Waivers
|
|
|
Reimbursements
|
|
AQR Diversified Arbitrage Fund
|
|
$
|
5,480,605
|
|
|
$
|
0
|
|
|
$
|
0
|
|
AQR Managed Futures Strategy Fund
1
|
|
$
|
2,884,035
|
|
|
$
|
96,550
|
|
|
$
|
0
|
|
AQR Risk Parity Fund
2
|
|
$
|
0
|
|
|
$
|
36,242
|
|
|
$
|
97,341
|
|
AQR Multi-Strategy Alternative Fund
3
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Risk-Balanced Commodities Strategy Fund
3
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Risk Parity II MV Fund
3
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Risk Parity II HV Fund
3
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Long-Short Equity Fund
3
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Managed Futures Strategy HV Fund
3
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Style Premia Alternative Fund
3
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Global Macro Fund
3
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
1
|
For the period January 6, 2010 through December 31, 2010.
|
2
|
For the period September 30, 2010 through December 31, 2010.
|
3
|
The Fund paid no advisory fees during the period because the Fund had not yet commenced operations.
|
For the fiscal year ended December 31, 2011, the Trust paid the Adviser management fees (after waivers), and the Adviser waived
management fees and reimbursed expenses, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
|
|
Fees Paid
(After Waivers
and
Reimbursements)
|
|
|
Waivers
|
|
|
Reimbursements
|
|
AQR Diversified Arbitrage Fund
|
|
$
|
15,977,606
|
|
|
$
|
1,170,872
|
|
|
$
|
0
|
|
AQR Managed Futures Strategy Fund
|
|
$
|
13,355,825
|
|
|
$
|
737,986
|
|
|
$
|
0
|
|
AQR Risk Parity Fund
|
|
$
|
1,041,326
|
|
|
$
|
241,718
|
|
|
$
|
0
|
|
AQR Multi-Strategy Alternative Fund
1
|
|
$
|
920,154
|
|
|
$
|
382,473
|
|
|
$
|
0
|
|
AQR Risk-Balanced Commodities Strategy Fund
2
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Risk Parity II MV Fund
2
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Risk Parity II HV Fund
2
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Long-Short Equity Fund
2
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
|
|
Fees Paid
(After Waivers
and
Reimbursements)
|
|
|
Waivers
|
|
|
Reimbursements
|
|
AQR Managed Futures Strategy HV Fund
2
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Style Premia Alternative Fund
2
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Global Macro Fund
2
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
1
|
For the period July 18, 2011 through December 31, 2011.
|
2
|
The Fund paid no advisory fees during the period because the Fund had not yet commenced operations.
|
For the fiscal year ended December 31, 2012, the Trust paid the Adviser management fees (after waivers), and the Adviser waived
management fees and reimbursed expenses, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
|
|
Fees Paid
(After Waivers
and
Reimbursements)
|
|
|
Waivers
|
|
|
Reimbursements
|
|
AQR Diversified Arbitrage Fund
|
|
$
|
23,728,985
|
|
|
$
|
227,590
|
|
|
$
|
0
|
|
AQR Managed Futures Strategy Fund
|
|
$
|
19,072,714
|
|
|
$
|
77,598
|
|
|
$
|
0
|
|
AQR Risk Parity Fund
|
|
$
|
5,253,636
|
|
|
$
|
34,933
|
|
|
$
|
0
|
|
AQR Multi-Strategy Alternative Fund
|
|
$
|
9,839,032
|
|
|
$
|
505,508
|
|
|
$
|
0
|
|
AQR Risk-Balanced Commodities Strategy Fund
1
|
|
$
|
0
|
|
|
$
|
97,255
|
|
|
$
|
63,132
|
|
AQR Risk Parity II MV Fund
2
|
|
$
|
0
|
|
|
$
|
10,888
|
|
|
$
|
99,563
|
|
AQR Risk Parity II HV Fund
2
|
|
$
|
0
|
|
|
$
|
14,027
|
|
|
$
|
96,888
|
|
AQR Long-Short Equity Fund
3
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Managed Futures Strategy HV Fund
3
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Style Premia Alternative Fund
3
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Global Macro Fund
3
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
1
|
For the period July 9, 2012 through December 31, 2012.
|
2
|
For the period November 5, 2012 through December 31, 2012.
|
3
|
The Fund paid no advisory fees during the period because the Fund had not yet commenced operations.
|
In addition to the payments to the Adviser under the Advisory Agreement described above, each Fund pays certain other costs of its
operations including (a) custody, transfer agency and dividend disbursing expenses, (b) certain amounts paid to intermediaries in recognition of the transfer agency costs avoided by the Funds as a result of the customer recordkeeping
activities of the intermediaries, (c) distribution related fees for the Class N shares, (d) fees of Trustees who are not affiliated with the Adviser, (e) legal and auditing expenses, (f) litigation expenses, (g) clerical,
accounting and other office costs, (h) costs of printing the Funds Prospectuses and shareholder reports for current shareholders, (i) costs of maintaining the Trusts existence, (j) interest charges, taxes, brokerage fees
and commissions, (k) costs of stationery and supplies, (l) expenses and fees related to registration and/or filing with the SEC, the CFTC and with other federal and state regulatory authorities, and (m) upon the approval of the Board
of Trustees, costs of personnel of the Adviser or its affiliates rendering clerical, accounting and other office services.
The Adviser may, from time to time, make payments to financial intermediaries for certain distribution, sub-administration, sub-transfer
agency or other shareholder services provided to Class I and Class N shareholders of the Funds whose shares are held of record in certain omnibus accounts and other group accounts (e.g., a fund supermarket account). The Adviser may also
make other payments to financial intermediaries as permitted under applicable rules of FINRA, such as the Advisers participation at a financial intermediarys internal events
50
including seminars, due diligence and other meetings. The Adviser makes certain of such payments out of the Advisers own resources (which may come directly or indirectly from fees paid by
the Funds), although in some cases the Adviser is reimbursed by the Funds for certain payments, resulting in an additional cost to the Funds and their shareholders. Payments made by the Adviser are in addition to any distribution or service fees
payable under any Rule 12b-1 or shareholder service agreement of a Fund, any sub-transfer agency or similar fees payable directly by a Fund to certain financial intermediaries for performing those services, and any sales charges, commissions,
non-cash compensation arrangements permitted under applicable rules of FINRA, or other concessions described in the fee table or elsewhere in a Funds Prospectus or the SAI as payable to financial intermediaries.
The payments to financial intermediaries are intended to compensate financial intermediaries for, among other things: marketing shares of
the Funds, which may consist of payments relating to Funds included on preferred or recommended fund lists or in certain sales programs from time to time sponsored by the intermediaries; due diligence examination and/or review of the
Funds from time to time; access to the financial intermediaries registered representatives or salespersons, including at conferences and other meetings; assistance in training and education of personnel; finders or referral
fees for directing investors to the Funds; marketing support fees for providing assistance in promoting the sale of Fund shares (which may include promotions in communications with the intermediaries customers, registered representatives
and salespersons); and/or other specified services intended to assist in the distribution and marketing of the Funds. These payments to financial intermediaries may exceed amounts earned on these assets by the Adviser for the performance of these or
similar services. The payments are negotiated with each financial intermediary based on a range of factors, including but not limited to the financial intermediarys ability to attract and retain assets (including particular classes of Fund
shares), target markets, customer relationships, quality of service and industry reputation.
The presence of these payments
to financial intermediaries, the varying fee structure and the basis on which a financial intermediary compensates its registered representatives or salespersons may create an incentive for a particular intermediary, registered representative or
salesperson to highlight, feature or recommend funds, including the Funds, or other investments based, at least in part, on the level of compensation paid. Additionally, if one mutual fund sponsor makes greater distribution payments than another, a
financial intermediary may have an incentive to recommend one fund complex over another. Similarly, if a financial intermediary receives more distribution assistance for one share class versus another, that financial intermediary may have an
incentive to recommend that share class. Because financial intermediaries may be paid varying amounts per class for sub-transfer agency and related recordkeeping services, the service requirements of which also may vary by class, this may create an
additional incentive for financial firms and their financial advisors to favor one fund complex over another, or one fund class over another. You should consider whether such incentives exist when evaluating any recommendations from a financial
intermediary to purchase or sell shares of the Funds and when considering which share class is most appropriate for you.
Investment Sub-Adviser
The Trust and Adviser have retained the Sub-Adviser, CNH Partners, LLC, Two Greenwich Plaza, Greenwich, CT 06830, to serve as the investment sub-adviser to the AQR Diversified Arbitrage Fund and the AQR
Multi-Strategy Alternative Fund, each appointment pursuant to an investment sub-advisory agreement (each, a Sub-Advisory Agreement). Subject to the general supervision of the Board of Trustees and the Adviser, under the terms of each
Sub-Advisory Agreement, the Sub-Adviser furnishes a continuous investment program for the AQR Diversified Arbitrage Funds portfolio and for certain strategies of the AQR Multi-Strategy Alternative Funds portfolio, makes day-to-day
investment decisions for the AQR Diversified Arbitrage Fund and certain strategies of the AQR Multi-Strategy Alternative Funds portfolio, and manages each Funds investments in accordance with the stated policies of the Fund. The
Sub-Adviser is also responsible for selecting brokers and dealers to execute purchase and sale orders for the portfolio transactions of the AQR Diversified Arbitrage Fund and with respect to the portfolio transactions for the strategies it manages
of the AQR Multi-Strategy Alternative Fund, subject to its obligation to seek best execution.
51
For managing the assets of the AQR Diversified Arbitrage Fund, the Adviser compensates the
Sub-Adviser out of the management fee the Adviser receives for managing the Fund. Effective October 1, 2010, the Sub-Adviser received from the Adviser a fee payable monthly equal to 1.00% annually of the average daily net assets for the AQR
Diversified Arbitrage Fund. Prior to October 1, 2010, the Sub-Adviser received from the Adviser a fee payable monthly equal to 0.70% annually of the average daily net assets for the AQR Diversified Arbitrage Fund.
For managing assets allocable to certain strategies of the AQR Multi-Strategy Alternative Fund, the Adviser compensates the Sub-Adviser
out of the management fee the Adviser receives for managing the Fund. The Sub-Adviser will receive from the Adviser a fee payable monthly equal to 0.35% annually of the average daily net assets for the AQR Multi-Strategy Alternative Fund.
For the fiscal years ended December 31, 2010, December 31, 2011 and December 31, 2012, the Adviser paid
the Sub-Adviser, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
|
|
Year Ended
December 31, 2010
|
|
|
Year Ended
December 31, 2011
|
|
|
Year Ended
December 31, 2012
|
|
AQR Diversified Arbitrage Fund
|
|
$
|
5,480,605
|
|
|
$
|
17,148,478
|
|
|
$
|
23,956,575
|
|
AQR Multi-Strategy Alternative Fund
1
|
|
$
|
N/A
|
|
|
$
|
246,443
|
|
|
$
|
1,957,178
|
|
1
|
Commenced operations on July 18, 2011.
|
Portfolio Manager Compensation
Compensation for Portfolio Managers that are Principals:
The compensation for each of the portfolio managers that are a
Principal of the Adviser or Sub-Adviser, as applicable, is in the form of distributions based on the revenues generated by the Adviser or Sub-Adviser, as the case may be. Distributions to each portfolio manager are based on cumulative research,
leadership and other contributions to the Adviser or Sub-Adviser. Revenue distributions are also a function of assets under management and performance of the Funds. There is no direct linkage between performance and compensation. However, there is
an indirect linkage in that superior performance tends to attract assets and thus increase revenues.
Compensation for
Portfolio Managers that are not Principals:
The compensation for the portfolio managers that are not Principals of the Adviser primarily consists of a fixed base salary and a discretionary bonus. Under the Advisers salary
administration system, salary increases are granted on a merit basis, and in this regard, salaries are reviewed at least annually under a formal review program. Job performance contributes significantly to the determination of any salary increase;
other factors, such as seniority and contributions to the Adviser are also considered. Discretionary bonuses are determined by the portfolio managers individual performance, including efficiency, contributions to the Adviser and quality of
work performed. A portfolio managers performance is not based on any specific funds or strategys performance, but is affected by the overall performance of the firm.
52
Portfolio Manager Holdings
The dollar range of equity securities of each Fund listed below beneficially owned by the portfolio managers of such Fund as of
December 31, 2012, unless noted otherwise, is as follows:
|
|
|
|
|
|
|
Portfolio Manager
|
|
Name of Fund
|
|
Dollar Range of Equity
Securities Beneficially
Owned
|
|
Clifford S. Asness, Ph.D., M.B.A.
|
|
AQR Managed Futures Strategy Fund
|
|
|
$50,001 - 100,000
|
|
|
|
AQR Managed Futures Strategy HV Fund
|
|
|
None
|
|
|
|
|
John M. Liew, Ph.D., M.B.A.
|
|
AQR Managed Futures Strategy Fund
|
|
|
None
|
|
|
|
AQR Risk Parity Fund
|
|
|
$100,001 - 500,000
|
|
|
|
AQR Multi-Strategy Alternative Fund
|
|
|
$100,001 - 500,000
|
|
|
|
AQR Risk Parity II MV Fund
|
|
|
Over $1,000,000
|
|
|
|
AQR Risk Parity II HV Fund
|
|
|
$100,001 - 500,000
|
|
|
|
AQR Managed Futures Strategy HV Fund
|
|
|
None
|
|
|
|
AQR Global Macro Fund
|
|
|
None
|
+
|
|
|
|
Jacques A. Friedman, M.S.
|
|
AQR Multi-Strategy Alternative Fund
|
|
|
$50,001 - 100,000
|
|
|
|
AQR Long-Short Equity Fund
|
|
|
None
|
|
|
|
AQR Style Premia Alternative Fund
|
|
|
None
|
^
|
|
|
|
Brian K. Hurst
|
|
AQR Managed Futures Strategy Fund
|
|
|
$100,001 - 500,000
|
|
|
|
AQR Risk Parity Fund
|
|
|
$100,001 - 500,000
|
|
|
|
AQR Risk-Balanced Commodities Strategy Fund
|
|
|
$100,001 - 500,000
|
|
|
|
AQR Risk Parity II MV Fund
|
|
|
None
|
|
|
|
AQR Risk Parity II HV Fund
|
|
|
None
|
|
|
|
AQR Managed Futures Strategy HV Fund
|
|
|
None
|
|
|
|
|
Ronen Israel, M.A.
|
|
AQR Diversified Arbitrage Fund
|
|
|
$50,001 - 100,000
|
|
|
|
AQR Multi-Strategy Alternative Fund
|
|
|
$100,001 - 500,000
|
|
|
|
AQR Style Premia Alternative Fund
|
|
|
None
|
^
|
Michael A. Mendelson, M.B.A., S.M.
|
|
AQR Risk Parity Fund
|
|
|
$500,001 - 1,000,000
|
|
|
|
AQR Risk Parity II MV Fund
|
|
|
None
|
|
|
|
AQR Risk Parity II HV Fund
|
|
|
None
|
|
Mark L. Mitchell, Ph.D.
|
|
AQR Diversified Arbitrage Fund
|
|
|
$100,001 - 500,000
|
|
|
|
AQR Multi-Strategy Alternative Fund
|
|
|
None
|
|
Lars N. Nielsen, M.Sc.
|
|
AQR Diversified Arbitrage Fund
|
|
|
$50,001 - 100,000
|
|
|
|
AQR Multi-Strategy Alternative Fund
|
|
|
$50,001 - 100,000
|
|
|
|
AQR Long-Short Equity Fund
|
|
|
None
|
|
|
|
AQR Global Macro Fund
|
|
|
None
|
+
|
Yao Hua Ooi
|
|
AQR Managed Futures Strategy Fund
|
|
|
$50,001 - 100,000
|
|
|
|
AQR Risk Parity Fund
|
|
|
$50,001 - 100,000
|
|
|
|
AQR Risk-Balanced Commodities Strategy Fund
|
|
|
$100,001 - 500,000
|
|
53
|
|
|
|
|
|
|
Portfolio Manager
|
|
Name of Fund
|
|
Dollar Range of Equity
Securities Beneficially
Owned
|
|
|
|
AQR Risk Parity II MV Fund
|
|
|
None
|
|
|
|
AQR Risk Parity II HV Fund
|
|
|
None
|
|
|
|
AQR Managed Futures Strategy HV Fund
|
|
|
None
|
|
Todd C. Pulvino, Ph.D., A.M., M.S.
|
|
AQR Diversified Arbitrage Fund
|
|
|
$100,001 -500,000
|
|
|
|
AQR Multi-Strategy Alternative Fund
|
|
|
None
|
|
Andrea Frazzini, Ph.D., M.S.
|
|
AQR Long-Short Equity Fund
|
|
|
None
|
|
|
|
AQR Style Premia Alternative Fund
|
|
|
None
|
^
|
Michael Katz, Ph.D., A.M.
|
|
AQR Style Premia Alternative Fund
|
|
|
None
|
^
|
|
|
AQR Global Macro Fund
|
|
|
None
|
+
|
Ari Levine, M.S.
|
|
AQR Risk-Balanced Commodities Strategy Fund
|
|
|
$10,001 -50,000
|
|
Jordan Brooks, Ph.D., M.A.
|
|
AQR Global Macro Fund
|
|
|
None
|
+
|
David Kupersmith, M.B.A.
|
|
AQR Global Macro Fund
|
|
|
None
|
+
|
|
The Fund commenced operations on July 17, 2013.
|
^
|
The Fund commenced operations on October 30, 2013.
|
+
|
The Fund has not commenced operations as of the date of this SAI.
|
Other Accounts Managed
Each of the portfolio managers is also responsible for managing other accounts in addition to the respective Fund or Funds which the portfolio manager manages, including other accounts of the Adviser, the
Sub-Adviser, or their affiliates. Other accounts may include, without limitation, separately managed accounts for foundations, endowments, pension plans, and high net-worth families; registered investment companies; unregistered investment companies
relying on either Section 3(c)(1) or Section 3(c)(7) of the 1940 Act (such companies are commonly referred to as hedge funds); foreign investment companies; and may also include accounts or investments managed or made by the
portfolio managers in a personal or other capacity (Proprietary Accounts). Management of other accounts in addition to the Funds can present certain conflicts of interest, as described below.
From time to time, potential conflicts of interest may arise between a portfolio managers management of the investments of a Fund,
on the one hand, and the management of other accounts, on the other. The other accounts might have similar investment objectives or strategies as the Funds, or otherwise hold, purchase, or sell securities that are eligible to be held, purchased or
sold by the Funds. Because of their positions with the Funds, the portfolio managers know the size, timing and possible market impact of a Funds trades. It is theoretically possible that the portfolio managers could use this information to the
advantage of other accounts they manage and to the possible detriment of a Fund.
A potential conflict of interest may arise
as a result of the portfolio managers management of a number of accounts (including Proprietary Accounts) with similar investment strategies. Often, an investment opportunity may be suitable for both a Fund and other accounts, but may not be
available in sufficient quantities for both the Fund and the other accounts to participate fully. Similarly, there may be limited opportunity to sell an investment held by a Fund and another account. In addition, different account guidelines and/or
differences within particular investment strategies may lead to the use of different investment practices for portfolios with a similar investment strategy. The Adviser or Sub-Adviser will not necessarily purchase or sell the same securities at the
same time, same direction, or in the same proportionate amounts for all eligible accounts, particularly if different accounts have materially different amounts of capital under management by the Adviser or Sub-Adviser, different amounts of
investable cash available, different strategies, or different risk tolerances. As a result,
54
although the Adviser and Sub-Adviser manage numerous accounts and/or portfolios with similar or identical investment objectives, or may manage accounts with different objectives that trade in the
same securities, the portfolio decisions relating to these accounts, and the performance resulting from such decisions, may differ from account to account.
Whenever decisions are made to buy or sell securities by the Fund and one or more of the other accounts (including Proprietary Accounts) simultaneously, the Adviser, Sub-Adviser or portfolio manager may
aggregate the purchases and sales of the securities and will allocate the securities transactions in a manner that it believes to be equitable under the circumstances. To this end, the Adviser and Sub-Adviser have adopted policies and procedures
that are intended to ensure that investment opportunities are allocated equitably among accounts over time. As a result of the allocations, there may be instances where a Fund will not participate in a transaction that is allocated among other
accounts or a Fund may not be allocated the full amount of the securities sought to be traded. While these aggregation and allocation policies could have a detrimental effect on the price or amount of the securities available to the Fund from time
to time, it is the opinion of the Adviser or Sub-Adviser, as applicable, that the overall benefits outweigh any disadvantages that may arise from this practice. Subject to applicable laws and/or account restrictions, the Adviser or Sub- Adviser may
buy, sell or hold securities for other accounts while entering into a different or opposite investment decision for the Funds.
The Adviser, Sub-Adviser and the Funds portfolio managers may also face a conflict of interest where some accounts pay higher fees
to the Adviser or Sub-Adviser than others, such as by means of performance fees. Specifically, the entitlement to a performance fee in managing one or more accounts may create an incentive for the Adviser or Sub-Adviser to take risks in managing
assets that it would not otherwise take in the absence of such arrangements. Additionally, since performance fees reward the Adviser or Sub-Adviser for performance in accounts which are subject to such fees, the Adviser or Sub-Adviser may have an
incentive to favor these accounts over those that have only fixed asset-based fees with respect to areas such as trading opportunities, trade allocation, and allocation of new investment opportunities.
The Adviser and Sub-Adviser have implemented specific policies and procedures (e.g., a code of ethics and trade allocation policies) that
seek to address potential conflicts of interest that may arise in connection with the management of the Funds and other accounts and that are designed to ensure that all client accounts are treated fairly and equitably over time.
55
The following table indicates the number of accounts and assets under management (in
millions) for each type of account managed as of February 28, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FUNDS
MANAGED BY
PORTFOLIO
MANAGER
|
|
|
NUMBER OF OTHER ACCOUNTS MANAGED AND
ASSETS BY ACCOUNT TYPE
|
|
PORTFOLIO
MANAGER
|
|
|
REGISTERED
INVESTMENT
COMPANY
|
|
|
OTHER POOLED
INVESTMENT
VEHICLES
|
|
|
OTHER
ACCOUNTS
|
|
|
|
|
|
|
# of
Accts.
|
|
|
Assets Under
Management
|
|
|
# of
Accts.
|
|
|
Assets Under
Management
|
|
|
# of
Accts.
|
|
|
Assets Under
Management
|
|
Clifford Asness
|
|
$
|
50,819,124,364
|
|
|
|
31
|
|
|
|
17,015,256,292
|
|
|
|
36
|
|
|
|
10,677,798,865
|
|
|
|
56
|
|
|
|
23,126,069,208
|
|
Andrea Frazzini
|
|
$
|
7,673,569,881
|
|
|
|
16
|
|
|
|
2,881,213,945
|
|
|
|
3
|
|
|
|
912,756,107
|
|
|
|
9
|
|
|
|
3,879,599,829
|
|
Jacques Friedman
|
|
$
|
52,427,938,244
|
|
|
|
30
|
|
|
|
10,710,796,146
|
|
|
|
26
|
|
|
|
7,639,926,478
|
|
|
|
79
|
|
|
|
34,077,215,619
|
|
Brian Hurst
|
|
$
|
48,778,348,980
|
|
|
|
13
|
|
|
|
14,358,426,579
|
|
|
|
35
|
|
|
|
22,483,748,015
|
|
|
|
22
|
|
|
|
11,936,174,386
|
|
Ronen Israel
|
|
$
|
44,222,446,809
|
|
|
|
26
|
|
|
|
11,427,508,754
|
|
|
|
35
|
|
|
|
11,665,607,974
|
|
|
|
48
|
|
|
|
21,129,330,082
|
|
Michael Katz
|
|
$
|
2,270,768,330
|
|
|
|
1
|
|
|
|
606,216,397
|
|
|
|
6
|
|
|
|
1,549,929,947
|
|
|
|
1
|
|
|
|
114,621,987
|
|
Ari Levine
|
|
$
|
14,287,241,061
|
|
|
|
4
|
|
|
|
2,470,298,504
|
|
|
|
31
|
|
|
|
10,368,459,659
|
|
|
|
3
|
|
|
|
1,448,482,898
|
|
John Liew
|
|
$
|
35,289,215,812
|
|
|
|
18
|
|
|
|
14,930,491,618
|
|
|
|
29
|
|
|
|
7,962,416,441
|
|
|
|
26
|
|
|
|
12,396,307,753
|
|
Michael Mendelson
|
|
$
|
23,485,796,896
|
|
|
|
6
|
|
|
|
6,501,299,230
|
|
|
|
22
|
|
|
|
16,067,691,340
|
|
|
|
2
|
|
|
|
916,806,327
|
|
Mark Mitchell
|
|
$
|
7,395,656,340
|
|
|
|
3
|
|
|
|
4,440,621,387
|
|
|
|
9
|
|
|
|
2,340,990,925
|
|
|
|
1
|
|
|
|
614,044,028
|
|
Lars Nielsen
|
|
$
|
47,327,646,262
|
|
|
|
29
|
|
|
|
11,321,363,311
|
|
|
|
36
|
|
|
|
8,980,521,734
|
|
|
|
59
|
|
|
|
27,025,761,218
|
|
Yao Hua Ooi
|
|
$
|
31,874,576,564
|
|
|
|
13
|
|
|
|
14,358,426,579
|
|
|
|
27
|
|
|
|
17,136,091,867
|
|
|
|
2
|
|
|
|
380,058,118
|
|
Todd Pulvino
|
|
$
|
7,395,656,340
|
|
|
|
3
|
|
|
|
4,440,621,387
|
|
|
|
9
|
|
|
|
2,340,990,925
|
|
|
|
1
|
|
|
|
614,044,028
|
|
Jordan Brooks
|
|
$
|
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
David Kupersmith
|
|
$
|
60,496,247
|
|
|
|
0
|
|
|
|
|
|
|
|
1
|
|
|
|
60,496,247
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NUMBER OF OTHER ACCOUNTS AND ASSETS FOR
WHICH THE ADVISORY FEE IS BASED ON
PERFORMANCE
|
|
PORTFOLIO
MANAGER
|
|
REGISTERED
INVESTMENT
COMPANY
|
|
|
OTHER POOLED
INVESTMENT
VEHICLES
|
|
|
OTHER
ACCOUNTS
|
|
|
|
# of
Accts.
|
|
|
Assets Under
Management
|
|
|
# of
Accts.
|
|
|
Assets Under
Management
|
|
|
# of
Accts.
|
|
|
Assets Under
Management
|
|
Clifford Asness
|
|
|
0
|
|
|
|
|
|
|
|
35
|
|
|
|
10,379,952,509
|
|
|
|
16
|
|
|
|
6,895,431,802
|
|
Andrea Frazzini
|
|
|
0
|
|
|
|
|
|
|
|
3
|
|
|
|
912,756,107
|
|
|
|
1
|
|
|
|
190,049,488
|
|
Jacques Friedman
|
|
|
0
|
|
|
|
|
|
|
|
25
|
|
|
|
7,258,723,089
|
|
|
|
24
|
|
|
|
8,554,108,731
|
|
Brian Hurst
|
|
|
0
|
|
|
|
|
|
|
|
32
|
|
|
|
21,380,970,322
|
|
|
|
6
|
|
|
|
3,978,281,242
|
|
Ronen Israel
|
|
|
0
|
|
|
|
|
|
|
|
33
|
|
|
|
10,891,459,834
|
|
|
|
14
|
|
|
|
7,057,414,534
|
|
Michael Katz
|
|
|
0
|
|
|
|
|
|
|
|
5
|
|
|
|
1,168,726,558
|
|
|
|
0
|
|
|
|
|
|
Ari Levine
|
|
|
0
|
|
|
|
|
|
|
|
31
|
|
|
|
10,368,459,659
|
|
|
|
1
|
|
|
|
614,044,028
|
|
John Liew
|
|
|
0
|
|
|
|
|
|
|
|
27
|
|
|
|
7,157,485,104
|
|
|
|
8
|
|
|
|
3,816,298,511
|
|
Michael Mendelson
|
|
|
0
|
|
|
|
|
|
|
|
18
|
|
|
|
14,445,523,519
|
|
|
|
1
|
|
|
|
614,044,028
|
|
Mark Mitchell
|
|
|
0
|
|
|
|
|
|
|
|
9
|
|
|
|
2,340,990,925
|
|
|
|
1
|
|
|
|
614,044,028
|
|
Lars Nielsen
|
|
|
0
|
|
|
|
|
|
|
|
34
|
|
|
|
8,301,471,990
|
|
|
|
16
|
|
|
|
6,913,398,105
|
|
Yao Hua Ooi
|
|
|
0
|
|
|
|
|
|
|
|
24
|
|
|
|
15,811,770,402
|
|
|
|
1
|
|
|
|
77,295,819
|
|
Todd Pulvino
|
|
|
0
|
|
|
|
|
|
|
|
9
|
|
|
|
2,340,990,925
|
|
|
|
1
|
|
|
|
614,044,028
|
|
Jordan Brooks
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
David Kupersmith
|
|
|
0
|
|
|
|
|
|
|
|
1
|
|
|
|
60,496,247
|
|
|
|
0
|
|
|
|
|
|
Administrator and Fund Accountant
On behalf of the Funds, the Trust has entered into an Administration Agreement (the JPM Administration Agreement) with
JPMorgan Chase Bank, N.A. (the JPM Administrator) located at One Beacon Street, Boston, Massachusetts 02108. The JPM Administration Agreement initially took effect on (1) September 12, 2010 with
56
respect to the AQR Managed Futures Strategy Fund, and (2) September 19, 2010 with respect to the AQR Diversified Arbitrage Fund (collectively referred to as the JPM Effective
Date). The JPM Administration Agreement also took effect with respect to the other current series of the Trust described in this SAI, and takes effect with respect to each new series of the Trust, upon the Funds inception. The JPM
Administrator also serves as the administrator to the AQR Managed Futures Strategy Offshore Fund Ltd., the AQR Managed Futures Strategy HV Offshore Fund Ltd., the AQR Risk Parity Offshore Fund Ltd., the AQR Multi-Strategy Alternative Offshore Fund
Ltd., the AQR Risk-Balanced Commodities Strategy Offshore Fund Ltd., the AQR Risk Parity II MV Offshore Fund Ltd., the AQR Risk Parity II HV Offshore Fund Ltd, the AQR Style Premia Alternative Offshore Fund Ltd. and AQR Global Macro Offshore Fund
Ltd. Under the JPM Administration Agreement, the JPM Administrators services include, but are not limited to, the following: preparing minutes of meetings of the Board of Trustees and assisting the Secretary of the Trust in preparing for
quarterly meetings of the Board of Trustees; performing certain compliance tests for the Trust; participating in the annual update of the Trusts registration statement and coordinating in the preparation and filing of certain other Trust
filings and documents; preparing federal and state income tax returns for the Trust; performing NAV calculations; establishing appropriate expense accruals, maintaining expense files and coordinating the payment of invoices for the Trust. For the
period from the JPM Effective Date to December 31, 2010, the Trust paid JPM Administrator fees of $317,969. For the fiscal years ended December 31, 2011 and December 31, 2012, the Trust paid JPM Administrator fees of $1,609,638 and
$2,220,064, respectively.
The JPM Administration Agreement was in effect for the initial term of three years and
automatically renewed upon the expiration of the initial term in September 2013. Either party may terminate the agreement upon not less than six months prior written notice to the other party.
Prior to the JPM Effective Date, the Trust, on behalf of the AQR Diversified Arbitrage Fund and AQR Managed Futures Strategy Fund entered
into a Fund Administration and Accounting Agreement (the BNY Administration Agreement) with the Bank of New York Mellon (BNY Administrator) located at 101 Barclay Street, New York, NY 10286. Under the BNY Administration
Agreement, the BNY Administrators services included, but were not limited to, the following: preparing minutes of meetings of the Board of Trustees and assisting the Secretary of the Trust in preparing for quarterly meetings of the Board of
Trustees; performing certain compliance tests for the Trust; participating in the periodic update of the Trust s registration statement and coordinating in the preparation, filing, printing and dissemination of certain other Trust filings and
documents; preparing workpapers supporting the preparation of federal, state and local income tax returns for the Trust; establishing appropriate expense accruals, maintaining expense files and coordinating the payment of invoices for the Trust. For
the period January
1, 2010 through the JPM Effective Date, the Trust paid BNY Administrator $634,975.
Distributor
The Trust has entered into a Distribution Agreement, on behalf of each Fund, with the Distributor,
ALPS Distributors, Inc., pursuant to which the Distributor acts as distributor for each Fund and acts as agent for each Fund in selling its shares to the public. ALPS Distributors, Inc. is located at 1290 Broadway, Suite 1100, Denver, CO 80203. The
Distributor offers shares of the Funds on a continuous basis and may engage in advertising and solicitation activities in connection therewith. The Distributor is not obligated to sell any certain number of shares of the Funds. The Distributor also
reviews advertisements and acts as liaison for broker-dealer relationships. Investors purchasing or redeeming shares of a Fund through another financial institution should read any materials and information provided by the financial institution to
acquaint themselves with its procedures and any fees that the institution may charge. The Distribution Agreement continues in effect for successive one-year periods ending each
December 7
th
provided such continuance is
specifically approved at least annually by (i) the Board of Trustees or (ii) the vote of a majority of outstanding shares of the Fund, and provided that in either event the continuance is also approved by a majority of the Trusts
Board of Trustees who are not interested persons (as defined in the 1940 Act) of any party to the Distribution Agreement.
57
Distribution Plan
The Board has adopted a Distribution Plan pursuant to Rule 12b-1 under the 1940 Act with respect to the Class N shares of each Fund (the
12b-1 Plan). Under the 12b-1 Plan, the Class N shares of each Fund pay a distribution fee of 0.25% to the Distributor as compensation for distribution activities related to Class N shares of each Fund. Because these fees are paid out of
each Funds assets on an on-going basis, over time these fees will increase the cost of an investment and may cost a shareholder more than paying other types of sales charges. The 12b-1 Plan provides that the distribution fees are payable to
the Distributor regardless of the amounts actually expended by the Distributor.
Authorized distribution expenses include the
Distributors interest expense and profit. The Distributor anticipates that actual expenditures on distribution will substantially exceed the distribution fees received by it during the early years of the operation of the 12b-1 Plan. In later
years, its expenditures may be less than the distribution fees, thus enabling the Distributor to realize a profit in those years.
If the 12b-1 Plan is terminated with respect to a Fund, the Fund will owe no payments to the Distributor other than fees accrued but unpaid on the termination date. The 12b-1 Plan may be terminated only
by specific action of the Trustees or shareholders.
The 12b-1 Plan shall continue in effect from year to year with respect to
each Fund, provided such continuance is approved at least annually by the Trustees or by a vote of a majority of the outstanding voting securities of the Fund (as defined in the 1940 Act and the rules thereunder) and, in either case, by a majority
of the Disinterested Trustees. The 12b-1 Plan may not be amended to increase materially the amount to be spent for the services described therein without approval of the shareholders of the Class N shares of a Fund, and all material amendments of a
12b-1 Plan must also be approved by the Trustees in the manner described above. The 12b-1 Plan may be terminated with respect to a Fund at any time, without payment of any penalty, by vote of a majority of the Disinterested Trustees, or by a vote of
a majority of the outstanding voting securities of the affected Fund (as defined in the 1940 Act) on not more than 60 days written notice to any other party to the 12b-1 Plan. So long as the 12b-1 Plan is in effect, the selection and
nomination of Disinterested Trustees has been committed to the Disinterested Trustees.
Pursuant to the 12b-1 Plan, the
Distributor shall provide the Trust for review by the Trustees, and the Trustees shall review and consider at least quarterly, a written report of the amounts expended under the 12b-1 Plan and the purposes for which such expenditures were made. The
Trustees have determined that, in their judgment, there is a reasonable likelihood that the 12b-1 Plan will benefit the respective Funds and their shareholders.
The table below provides information for the period ended December 31, 2010 about the 12b-1 fees each Fund paid to the Distributor under the Trusts 12b-1 Plan.
|
|
|
|
|
Funds
|
|
Fees Paid
|
|
AQR Diversified Arbitrage Fund
|
|
$
|
580,768
|
|
AQR Managed Futures Strategy Fund
1
|
|
$
|
160,102
|
|
AQR Risk Parity Fund
2
|
|
$
|
5,890
|
|
AQR Multi-Strategy Alternative Fund
3
|
|
|
N/A
|
|
AQR Risk-Balanced Commodities Strategy Fund
3
|
|
|
N/A
|
|
AQR Risk Parity II MV Fund
3
|
|
|
N/A
|
|
AQR Risk Parity II HV Fund
3
|
|
|
N/A
|
|
AQR Long-Short Equity Fund
3
|
|
|
N/A
|
|
AQR Managed Futures Strategy HV Fund
3
|
|
|
N/A
|
|
AQR Style Premia Alternative Fund
3
|
|
|
N/A
|
|
AQR Global Macro Fund
3
|
|
|
N/A
|
|
58
1
|
For the period January 6, 2010 through December 31, 2010.
|
2
|
For the period September 30, 2010 through December 31, 2010.
|
3
|
The Fund paid no 12b-1 fees during the period because the Fund had not yet commenced operations.
|
The table below provides information for the period ended December 31, 2011 about the 12b-1 fees each Fund paid to the Distributor
under the Trusts 12b-1 Plan.
|
|
|
|
|
Funds
|
|
Fees Paid
|
|
AQR Diversified Arbitrage Fund
|
|
$
|
1,227,046
|
|
AQR Managed Futures Strategy Fund
|
|
$
|
1,065,682
|
|
AQR Risk Parity Fund
|
|
$
|
110,899
|
|
AQR Multi-Strategy Alternative Fund
1
|
|
$
|
24,772
|
|
AQR Risk-Balanced Commodities Strategy Fund
2
|
|
|
N/A
|
|
AQR Risk Parity II MV Fund
2
|
|
|
N/A
|
|
AQR Risk Parity II HV Fund
2
|
|
|
N/A
|
|
AQR Long-Short Equity Fund
2
|
|
|
N/A
|
|
AQR Managed Futures Strategy HV Fund
2
|
|
|
N/A
|
|
AQR Style Premia Alternative Fund
2
|
|
|
N/A
|
|
AQR Global Macro Fund
2
|
|
|
N/A
|
|
1
|
For the period July 18, 2011 through December 31, 2011.
|
2
|
The Fund paid no 12b-1 fees during the period because the Fund had not yet commenced operations.
|
The table below provides information for the period ended December 31, 2012 about the 12b-1 fees each Fund paid to the Distributor
under the Trusts 12b-1 Plan.
|
|
|
|
|
Funds
|
|
Fees Paid
|
|
AQR Diversified Arbitrage Fund
|
|
$
|
1,784,883
|
|
AQR Managed Futures Strategy Fund
|
|
$
|
1,129,440
|
|
AQR Risk Parity Fund
|
|
$
|
276,893
|
|
AQR Multi-Strategy Alternative Fund
|
|
$
|
79,960
|
|
AQR Risk-Balanced Commodities Strategy Fund
1
|
|
$
|
1,476
|
|
AQR Risk Parity II MV Fund
2
|
|
$
|
749
|
|
AQR Risk Parity II HV Fund
2
|
|
$
|
1,095
|
|
AQR Long-Short Equity Fund
3
|
|
|
N/A
|
|
AQR Managed Futures Strategy HV Fund
3
|
|
|
N/A
|
|
AQR Style Premia Alternative Fund
3
|
|
|
N/A
|
|
AQR Global Macro Fund
3
|
|
|
N/A
|
|
1
|
For the period July 9, 2012 through December 31, 2012.
|
2
|
For the period November 5, 2012 through December 31, 2012.
|
3
|
The Fund paid no 12b-1 fees during the period because the Fund had not yet commenced operations.
|
Custodian
The Custodian for the Funds is JPMorgan Chase Bank, N.A. (JPM Custodian), located at 1 Chase Manhattan Plaza, New York, NY 10005. State Street Bank and Trust Company (State Street
Custodian and, together with
59
the JPM Custodian, the Custodian), located at One Lincoln Street, Boston, MA 02111, also serves as a Custodian of AQR Style Premia Alternative Fund. The JPM Custodian also serves as
the custodian of the AQR Managed Futures Strategy Offshore Fund Ltd., the AQR Managed Futures Strategy HV Offshore Fund Ltd., the AQR Risk Parity Offshore Fund Ltd., the AQR Multi-Strategy Alternative Offshore Fund Ltd., the AQR Risk-Balanced
Commodities Strategy Offshore Fund Ltd., the AQR Risk-Balanced Commodities Strategy LV Offshore Fund Ltd., the AQR Risk Parity II MV Offshore Fund Ltd., the AQR Risk Parity II HV Offshore Fund Ltd., the AQR Style Premia Alternative Offshore Fund
Ltd. and the AQR Global Macro Offshore Fund Ltd. The Custodian has no part in determining the investment policies of the Funds or which securities are to be purchased or sold by the Funds. Under a custody agreement with the Trust, on behalf of the
Funds, the Custodian holds each Funds securities and maintains all necessary accounts and records.
Transfer Agent and Dividend Disbursing Agent
ALPS Fund Services, Inc., located at 1290 Broadway, Suite 1100, Denver,
CO 80203, has been retained to serve as the Funds transfer agent and dividend disbursing agent.
Shareholder Services Agreement
The Trust has entered into a Shareholder Services Agreement with respect to each Class
of Shares of the AQR Diversified Arbitrage Fund, AQR Risk-Balanced Commodities Strategy Fund, AQR Risk Parity II MV Fund and AQR Risk Parity HV Fund. Effective October 1, 2010, the Trust, on behalf of the AQR Diversified Arbitrage Fund,
terminated the Shareholder Services Agreement with respect to the Class N and I Shares of the Fund. Under the Shareholder Services Agreement, each of the AQR Risk-Balanced Commodities Strategy Fund, the AQR Risk Parity II MV Fund and the AQR Risk
Parity II HV Fund pays the Adviser a fee of up to 0.25% annually of the Funds average daily net assets for Class I Shares and Class N Shares; for providing or arranging for the provision of certain services to shareholders of each Fund.
For the fiscal year ended December 31, 2010, the Trust paid the Adviser shareholder services fees as follows:
|
|
|
|
|
|
|
|
|
Funds
|
|
Fees Paid
(After Waivers)
|
|
|
Waivers
|
|
AQR Diversified Arbitrage Fund
|
|
$
|
947,520
|
|
|
$
|
235,386
|
|
AQR Risk-Balanced Commodities Strategy Fund
1
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Risk Parity II MV Fund
1
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Risk Parity II HV Fund
1
|
|
|
N/A
|
|
|
|
N/A
|
|
1
|
The Fund paid no shareholder services fees during the period because the Fund had not yet commenced operations.
|
For the fiscal year ended December 31, 2011, the Trust paid the Adviser shareholder services fees as follows:
|
|
|
|
|
|
|
|
|
Funds
|
|
Fees Paid
(After Waivers)
|
|
|
Waivers
|
|
AQR Diversified Arbitrage Fund
1
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Risk-Balanced Commodities Strategy Fund
2
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Risk Parity II MV Fund
2
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Risk Parity II HV Fund
2
|
|
|
N/A
|
|
|
|
N/A
|
|
1
|
Effective October 1, 2010, the Trust, on behalf of the AQR Diversified Arbitrage Fund, terminated the Shareholder Services Agreement with
respect to the Class N and I Shares of the Fund.
|
2
|
The Fund paid no shareholder services fees during the period because the Fund had not yet commenced operations.
|
60
For the fiscal year ended December 31, 2012, the Trust paid the Adviser shareholder
services fees as follows:
|
|
|
|
|
|
|
|
|
Funds
|
|
Fees Paid
(After Waivers)
|
|
|
Waivers
|
|
AQR Diversified Arbitrage Fund
1
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Risk-Balanced Commodities Strategy Fund
2
|
|
$
|
0
|
|
|
$
|
40,523
|
|
AQR Risk Parity II MV Fund
3
|
|
$
|
0
|
|
|
$
|
5,444
|
|
AQR Risk Parity II HV Fund
3
|
|
$
|
0
|
|
|
$
|
5,010
|
|
1
|
Effective October 1, 2010, the Trust, on behalf of the AQR Diversified Arbitrage Fund, terminated the Shareholder Services Agreement with
respect to the Class N and I Shares of the Fund.
|
2
|
For the period from July 9, 2012 through December 31, 2012.
|
3
|
For the period from November 5, 2012 through December 31, 2012.
|
DETERMINATION OF NET ASSET VALUE
Each Funds NAV is computed as of the scheduled close of trading on the New York Stock Exchange (the NYSE) (normally
4:00 p.m. Eastern time) on each day during which the NYSE is open for trading. If the NYSE closes at any other time, or if an emergency exists, transaction deadlines and NAV calculations may occur at different times. The NAV per share of each
Fund is computed by dividing the total current value of the assets of the Fund attributable to a class, less class liabilities, by the total number of shares of that class of the Fund outstanding at the time such computation is made.
The Funds portfolio securities are valued as of the close of business of the regular session of trading on the NYSE (normally
4:00 p.m. Eastern time). Securities traded on a national stock exchange or quoted by NASDAQ are valued at the NASDAQ Official Closing Price. Securities traded in the over-the-counter market, and which are not quoted by NASDAQ, are valued at the
last sale price, if available, otherwise at the last quoted bid price. Futures contracts are generally valued at the last quoted sales price on the applicable valuation date.
The Funds normally value equity securities and futures contracts primarily traded on North American, Central American, South American and Caribbean markets as described above. However, the Funds have
implemented and normally use fair value pricing on a daily basis for all equity securities that are not primarily traded on North American, Central American, South American and Caribbean markets because trading in these securities typically is
completed at times that vary significantly from the closing of the NYSE. This fair value pricing process for foreign equity securities uses the quotations of an independent pricing service to value each such security unless (i) the pricing
service does not provide prices for the security, in which event the Fund may use market value or fair value in accordance with the valuation procedures approved by the Board of Trustees (the Trusts Valuation Procedures) or
(ii) the Adviser determines that (a) a quote provided by the service does not accurately reflect the value of the security and (b) the use of another fair valuation methodology is appropriate.
Futures contracts that are not primarily traded on North American, Central American, South American and Caribbean markets are normally
valued at the settlement price of the exchange on which it is traded. If the Fund or the Adviser determine that the settlement price of the foreign exchange is not reliable, the futures contract will be valued based on its fair value as determined
in accordance with the Trusts Valuation Procedures.
Investments in open-end investment companies are valued at such
investment companys current day closing NAV per share. ETFs and closed-end investment companies are valued at the last quoted sales price. Equity, total return and commodity swap contracts are valued at fair value, based on the price of the
underlying referenced instrument. Credit default swaps are valued daily primarily using independent pricing services or market makers. Interest rate swap contracts are valued at fair value as determined by an independent pricing service based on
61
various valuation models which consider the terms of underlying contracts and market data inputs received from third parties.
Securities for which market quotations or independent pricing service quotations are not readily available or which are not readily
marketable and all other assets of the Funds are valued at fair value using the Trusts Valuation Procedures. The Board of Trustees has authorized the Adviser to establish a valuation committee for the Funds (the Valuation
Committee) to serve as its formal oversight body for the valuation of the Funds portfolio holdings in accordance with the Trusts Valuation Procedures. The Trusts Valuation Procedures require that the Valuation Committee meet
on an as-needed basis to value any securities or other assets for which (i) prices or valuations are not readily determinable by the Funds pricing agent, (ii) a market quotation is determined by the Adviser not to be reliable, or
(iii) trading in the security has been halted. The Valuation Committee considers time-sensitive valuation issues, including those relating to market closures, changes in illiquid security values and other events that may have a potentially
material impact on security values. At each regular meeting of the Board of Trustees held during a quarter following a meeting of the Valuation Committee, the Valuation Committee presents a written report for the Boards review and discusses
the procedures and practices employed in connection with any action taken by the Valuation Committee during the prior period. In addition, the Valuation Committee reviews all the valuation methodologies used by the Funds at least annually and takes
any actions necessary to ensure that appropriate procedures and internal controls are in place to address valuation issues. A written report of this review is presented annually to the Board of Trustees for its review. There can be no assurance that
the fair value of an asset is the price at which the asset could have been sold during the period in which the particular fair value was used in determining the Funds NAV.
In determining the value of portfolio investments, the Fund may employ independent third party pricing services, which may use, without
limitation, a matrix or formula method that takes into consideration market indexes, matrices, yield curves and other specific adjustments. This may result in the securities being valued at a price different from the price that would have been
determined had the matrix or formula method not been used. Prices obtained from independent third party pricing services to value each Funds securities and other assets and liabilities are based on information available at the time the Fund
values its assets and liabilities. In the event that a pricing service quotation is revised or updated subsequent to the day on which the Fund valued such security, the revised pricing service quotation generally will be applied prospectively. Such
determination shall be made considering pertinent facts and circumstances surrounding such revision.
Calculation of Offering Price
An illustration of the calculation of the offering price for the outstanding shares of
each Fund (Class I for each of the AQR Diversified Arbitrage Fund, AQR Managed Futures Strategy Fund, AQR Risk Parity Fund, AQR Multi-Strategy Alternative Fund, AQR Risk-Balanced Commodities Strategy Fund, AQR Risk Parity II MV Fund
and AQR Risk Parity II HV Fund) based on the value of that Funds net assets and number of shares outstanding on December 31, 2012 is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AQR Diversified
Arbitrage Fund
|
|
|
AQR Managed
Futures
Strategy Fund
|
|
|
AQR Risk
Parity Fund
|
|
|
AQR Multi-Strategy
Alternative Fund
|
|
Net Assets
|
|
$
|
1,752,723,858
|
|
|
$
|
2,136,959,054
|
|
|
$
|
868,660,662
|
|
|
$
|
808,261,775
|
|
Number of Shares Outstanding
|
|
|
158,688,997
|
|
|
|
218,555,645
|
|
|
|
75,596,068
|
|
|
|
81,626,174
|
|
Net Asset Value Per Share (net assets divided by number of shares outstanding)
|
|
$
|
11.05
|
|
|
$
|
9.78
|
|
|
$
|
11.49
|
|
|
$
|
9.90
|
|
Sales Charge
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Offering Price
|
|
$
|
11.05
|
|
|
$
|
9.78
|
|
|
$
|
11.49
|
|
|
$
|
9.90
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AQR Risk Parity II
MV Fund
|
|
|
AQR Risk Parity II
HV Fund
|
|
|
AQR Risk-Balanced
Commodities
Strategy
Fund
|
|
Net Assets
|
|
$
|
29,993,223
|
|
|
$
|
16,253,630
|
|
|
$
|
63,330,812
|
|
Number of Shares Outstanding
|
|
|
2,950,196
|
|
|
|
1,591,812
|
|
|
|
6,413,854
|
|
Net Asset Value Per Share (net assets divided by number of shares outstanding)
|
|
$
|
10.17
|
|
|
$
|
10.21
|
|
|
$
|
9.87
|
|
Sales Charge
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Offering Price
|
|
$
|
10.17
|
|
|
$
|
10.21
|
|
|
$
|
9.87
|
|
ADDITIONAL INFORMATION ABOUT PURCHASES AND REDEMPTION OF SHARES
Cut-Off Time for Purchase and Redemption Orders
Orders to purchase or redeem shares received by the Transfer Agent, or by a financial intermediary authorized to receive such orders, by
the cut-off time indicated in the Funds Prospectus will be processed at the NAV next calculated after the order is received by the Transfer Agent or the financial intermediary that is an authorized agent of the Funds. Under a variety of
different types of servicing agreements, financial intermediaries that are authorized to receive purchase and redemption orders from investors are permitted to transmit those orders that are received by the financial intermediary before the cut-off
time in the Prospectus to the Transfer Agent by the cut-off times stated in those agreements, which are generally later than the cut-off time stated in the Prospectus. Financial intermediaries are prohibited by law from transmitting orders received
after the cut-off time stated in the Prospectus to the Transfer Agent for processing at that days NAV. Any order otherwise received after the cut-off time stated in the Prospectus will be specifically identified for processing on the next day
on which a NAV is computed.
Purchases In-Kind
The Trust may permit purchases of any of the Funds shares by means of in-kind contributions of portfolio securities under limited
circumstances in accordance with procedures approved by the Trusts Board of Trustees. In-kind purchases of Fund shares may only be permitted if the Adviser or Sub-Adviser, as appropriate, determines that acceptance of the in-kind securities
will not adversely affect the purchasing Fund, does not favor a shareholder of the purchasing Fund to the detriment of another shareholder of the purchasing Fund, and conforms with the purchasing Funds fundamental investment objectives,
policies and restrictions. In-kind securities will be valued in the same manner as they would be valued for purposes of computing a Funds NAV. The Fund will not be liable for any brokerage commission or fee (except for customary transfer fees)
in connection with an in-kind purchase of Fund shares.
Your broker may impose a fee in connection with processing your
in-kind purchase of Fund shares. An investor contemplating an in-kind purchase of Fund shares should consult his or her tax adviser to determine the tax consequences under federal and state law of making such a purchase.
Redemptions In-Kind
Payment of the redemption price for shares redeemed may be made either in cash or in portfolio securities (selected in the discretion of the Board of Trustees and taken at their value used in determining
a Funds NAV per share as described under Determination of Net Asset Value), or partly in cash and partly in portfolio securities. However, unless otherwise requested by the shareholder, payments will be made wholly in cash unless
the Board of Trustees believes that economic conditions exist which would make such a practice detrimental to the best interests of a Fund. Moreover, the Trust has elected to be governed by Rule 18f-1 under the 1940 Act,
63
under which the Funds are obligated to redeem their shares solely in cash up to the lesser of $250,000 or 1% of their net asset value during any 90-day period for one shareholder. This election
is irrevocable unless the SEC permits its withdrawal. If payment for shares redeemed is made wholly or partly in portfolio securities, brokerage costs may be incurred by the investor in converting the securities to cash. The Funds may redeem shares
held by affiliates in kind as long as neither the affiliated shareholder nor any other party with the ability and pecuniary incentive to influence the redemption in kind selects, or influences the selection of the distributed securities and as long
as the redemption in kind is approved by the Board of Trustees, including a majority of the Trustees who are not interested persons of the Trust, in a manner consistent with SEC rules, regulations and interpretive positions.
Involuntary Redemptions
Each Fund reserves the right to involuntarily redeem any shareholders account, subject to applicable law, if:
|
|
|
the Fund or a class of its shares are to be terminated;
|
|
|
|
the value of the account falls below any investment minimum for the account set by the Trust, provided that (1) the Trust provides a written
notice of redemption to the shareholder at least 15 days before the redemption date, and (2) any policies adopted by the Board with respect to the redemption of small accounts have been disclosed to shareholders at least 60 days prior to the
mailing of the written notice of redemption;
|
|
|
|
the shareholder fails to pay when due the full purchase price of shares issued to him;
|
|
|
|
it appears appropriate to do so in connection with a failure of the appropriate person(s) to furnish certified taxpayer identification numbers,
other tax-related certifications, or if the Fund is unable to verify the account holders identity;
|
|
|
|
the Fund otherwise determines it appropriate to do so in light of the Funds responsibilities under the Investment Company Act or other
applicable law or necessary to prevent harm to the Trust or its shareholders.
|
If a shareholders
account is involuntarily redeemed, a check for the redemption proceeds payable to the shareholder will be mailed to the shareholder at the shareholders address of record.
Other Purchase and Redemption Information
Each Fund reserves the right to reject any purchase order for its shares in its sole discretion.
Each of the Funds reserves the right to suspend or postpone redemptions during any period when: (a) trading on the NYSE is
restricted by applicable rules and regulations of the SEC; (b) the NYSE is closed other than for customary weekend and holiday closings; (c) the SEC has by order permitted such suspension or postponement for the protection of the
shareholders or (d) an emergency, as determined by the SEC, exists making disposal of portfolio securities or valuation of net assets of a Fund not reasonably practicable. Upon the occurrence of any of the foregoing conditions, each of the
Funds may also suspend or postpone the recording of the transfer of its shares.
In addition, each of the Funds may compel the
redemption of, reject any order for, or refuse to give effect on the Funds books to the transfer of, its shares where the relevant investor or investors have not furnished the Fund with valid, certified taxpayer identification numbers and such
other tax-related certifications or other necessary documentation as the Fund may request.
Brokers or other financial
intermediaries may charge their customers a processing or service fee in connection with the purchase or redemption of the Funds shares. The amount and applicability of such a fee is determined
64
and disclosed to its customers by each individual broker or financial intermediary. Processing or service fees typically are fixed, nominal dollar amounts and are in addition to the charges
described in the Prospectus and this SAI. An investors broker will provide them with specific information about any processing or service fees they will be charged.
PORTFOLIO TURNOVER
The frequency of portfolio
transactions is generally expressed in terms of a portfolio turnover rate. For example, an annual turnover rate of 100% would occur if all of the securities in a Fund were replaced once a year.
The Adviser or Sub-Adviser for a Fund may engage in active short-term trading to rebalance the Funds portfolio or for other
reasons. It is anticipated that the portfolio turnover may vary greatly from year to year as well as within a particular year, and may be affected by changes in the holdings of specific issuers, changes in country and currency weightings, cash
requirements for redemption of shares and by requirements which enable a Fund to receive favorable tax treatment. The Funds are not restricted by policy with regard to their portfolio turnover rates. Higher portfolio turnover rates, such as rates in
excess of 100%, and short-term trading involve correspondingly greater commission expenses and transaction costs.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser and Sub-Adviser, as applicable, are responsible for decisions to buy
and sell securities for the Funds, the selection of brokers and dealers to effect the transactions, and the negotiation of brokerage commissions. Purchases and sales of securities on a securities exchange are effected through brokers who charge a
commission for their services. Brokerage commissions on U.S. securities exchanges are subject to negotiation between the Adviser or Sub-Adviser, as appropriate, and the broker. In the over-the-counter market, securities are sometimes traded on a
net basis with dealers acting as principal for their own accounts without a stated commission, although the price of the security usually includes a profit to the dealer. Trades of NASD listed securities may be made on an agency basis
and a commission is added to such trades. In underwritten offerings, securities are purchased at a fixed price, which includes an amount of compensation to the underwriter, generally referred to as the underwriters concession or discount. On
occasion, certain money market instruments may be purchased directly from an issuer, in which case no commissions or discounts are paid.
When decisions are made to purchase or sell the same securities simultaneously for a number of client accounts, the Adviser or Sub-Adviser may aggregate into a single trade order (a bunched
trade) several individual contemporaneous client trade orders for a single security if the Adviser or Sub-Adviser deems this to be appropriate and in the best interests of the client accounts involved. Bunched trades may be used to facilitate best
execution, including negotiating more favorable prices, obtaining more timely or equitable execution, or reducing overall commission charges. Accounts that are eligible to purchase shares in initial public offerings may participate in aggregated
orders for such shares. The Adviser or Sub-Adviser, as appropriate, seeks to aggregate trade orders in a manner that is consistent with its duty to: (1) seek best execution of client orders, (2) treat all clients fairly, and (3) not
systematically advantage or disadvantage any single client.
When an aggregated order is filled in its entirety, each
participating client account will participate at the average share price for the aggregated order, and transaction costs shall be shared pro rata based on each clients participation in the aggregated order. If an order cannot be completely
filled and the investment opportunity is determined to be equally suitable and appropriate for more than one account, allocations will generally be made pro rata, subject to rounding to achieve round lots, based upon the initial amount requested for
an account participating in the aggregated order. Each account participating in a particular aggregated or bunched trade will receive the share price with respect to that aggregated order or, as appropriate, the average share price for
all executed bunched trades on that trading day. The Adviser or Sub-Adviser may allocate on a basis other than
65
pro rata, if, under the circumstances, such other method of allocation is reasonable, does not result in any improper or undisclosed advantage or disadvantage to other accounts, and results in
fair access over time to trading opportunities for all eligible managed accounts. For example, the Adviser or Sub-Adviser may identify investment opportunities that are appropriate for certain accounts and not others, based on such factors as
investment objectives, style, risk/return parameters, regulatory and client restrictions, tax status, account size, sensitivity to turnover, available cash and cash flows. Consequently, the Adviser or Sub-Adviser may decide it is more appropriate to
place a given security in one account rather than another account. Other non-pro rata methods include rotation allocation or random allocation. Alternative methods of allocation are appropriate, for example, when the transaction size is too limited
to be effectively allocated pro rata among all eligible accounts.
On occasion, the Adviser or Sub-Adviser will purchase a new
issue, shares in an IPO, or shares in a secondary equity offering (SEO) for accounts/Funds and the Adviser or Sub-Adviser may be unable to obtain sufficient securities to fill the orders for all the participating accounts/Funds. For
those accounts/Funds participating in the purchase the Adviser or Sub-Adviser will use a method that ensures the fair treatment of all participating accounts/Funds.
IPOs or SEOs will be allocated pro rata based on the participating portfolios estimated NAV targeting the IPO or SEO strategy. The IPO and SEO allocation is subject to an accounts/Funds
investment objective. The Adviser or Sub-Advisers equity IPO/SEO allocation methodology may exclude accounts/Funds from receiving IPO/SEO allocations if/when (i) an account/Fund does not trade individual stocks; (ii) an IPO/SEO
allocation is inconsistent with the investment objectives of the account/Fund (e.g. certain IPOs or SEOs may be illiquid, of a small deal size, or an incompatible security type); (iii) an IPO/SEO allocation cannot be properly hedged in the
account/Fund using standard hedging techniques; (iv) an IPO/SEO allocation would add too much volatility to an account/Fund, thereby altering the risk profile of the account/Fund; (v) an IPO/SEO allocation would change the portfolio
composition weighting in such a way as to corrupt the modeling process for that account/Fund; (vi) the account/Fund is a proprietary account; and/or (vii) the account/Fund has a policy of not engaging in a specific or all IPO/SEOs.
Benchmark driven accounts/Funds would normally be precluded from participation in an IPO/ SEO allocation because of one or a combination of items (ii), (iii), (iv), and/or (v) above. Deviations from this policy must be approved by the Adviser
or Sub-Advisers Chief Compliance Officer or designee in advance of a purchase. As with IPOs and SEOs, convertible security new issues will not be allocated to accounts/Funds that do not trade convertible securities and where a particular
convertible security is inconsistent with the account/Funds investment objective (e.g. convertible security may be illiquid or of a small deal size).
New issue convertible securities will be allocated in a fair manner for eligible accounts/Funds that avoids the number of odd-lots held by particular accounts/Funds. Desired appetites for new issue
convertible securities may vary among account/Funds and are influenced by the following: (i) if the issuance is inconsistent with the investment objectives of the account/Fund; (ii) if the issuance cannot be properly hedged in the
account/Fund using standard hedging techniques; (iii) if the issuance adds too much volatility to the account/Fund, thereby altering the risk profile of the account/Fund; (iv) if the issuance changes the account/Funds composition and
position weighting in such a way as to corrupt the desired characteristics of that account/Fund; (v) if the account/Fund has cash available; (vi) if there are tax considerations that could negatively impact the account/Fund; and/or
(vii) if there are leverage constraints on the account/Fund.
In placing orders for portfolio securities of the Funds,
the Adviser and Sub-Adviser are required to give primary consideration to obtaining the most favorable price and efficient execution. Within the framework of this policy, the Adviser and Sub-Adviser each will consider the research and investment
services provided by brokers or dealers who effect, or are parties to, portfolio transactions of the Funds or the Advisers or Sub-Advisers (as applicable) other clients. Such research and investment services are those which brokerage
houses customarily provide to institutional investors and include statistical and economic data and research reports on particular companies and industries. Such services are used by the Adviser and Sub-Adviser in connection with all of their
investment activities, and some of such services obtained in connection with the execution of transactions for the Funds may be used in managing other investment accounts. Conversely, brokers furnishing such services may be
66
selected for the execution of transactions of such other accounts, and the services furnished by such brokers may be used by the Adviser or Sub-Adviser in providing investment management for the
Funds. Commission rates are established pursuant to negotiations with the broker based on the quality and quantity of execution services provided by the broker in light of generally prevailing rates. The Advisers and Sub-Advisers policy
is to pay higher commissions to brokers for particular transactions than might be charged if a different broker had been selected on occasions when, in the Advisers or Sub-Advisers opinion (as applicable), this policy furthers the
objective of obtaining the most favorable price and execution. In addition, the Adviser and Sub-Adviser are authorized to pay higher commissions on brokerage transactions for the Funds to brokers in order to secure research and investment services
described above, subject to review by the Board of Trustees from time to time as to the extent and continuation of the practice. The distribution of orders among brokers and the commission rates paid are reviewed periodically by the Board of
Trustees.
The following table shows the dollar amount of brokerage commissions paid to brokers and the approximate dollar
amount of the transactions involved for the period ended December 31, 2010. The provision of third party research services was not necessarily a factor in the placement of all brokerage business with such brokers.
|
|
|
|
|
|
|
|
|
Funds
|
|
Brokerage
Commissions
|
|
|
Amount of
Transactions
Involved
|
|
AQR Diversified Arbitrage Fund
|
|
$
|
1,985,940
|
|
|
$
|
3,928,252,772
|
|
AQR Managed Futures Strategy Fund
1
|
|
$
|
67,388
|
|
|
$
|
6,603,038,425
|
|
AQR Risk Parity Fund
2
|
|
$
|
747
|
|
|
$
|
25,812,627
|
|
AQR Multi-Strategy Alternative Fund
3
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Risk-Balanced Commodities Strategy Fund
3
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Risk Parity II MV Fund
3
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Risk Parity II HV Fund
3
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Long-Short Equity Fund
3
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Managed Futures Strategy HV Fund
3
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Style Premia Alternative Fund
3
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Global Macro Fund
3
|
|
|
N/A
|
|
|
|
N/A
|
|
1
|
For the period January 6, 2010 through December 31, 2010.
|
2
|
For the period September 30, 2010 through December 31, 2010.
|
3
|
The Fund paid no brokerage commissions during the period because the Fund had not yet commenced operations.
|
There were no brokerage commissions paid to any affiliated brokers or dealers of the Adviser during the fiscal year ended
December 31, 2010.
The following table shows the dollar amount of brokerage commissions paid to brokers and the
approximate dollar amount of the transactions involved for the period ended December 31, 2011. The provision of third party research services was not necessarily a factor in the placement of all brokerage business with such brokers.
|
|
|
|
|
|
|
|
|
Funds
|
|
Brokerage
Commissions
|
|
|
Amount of
Transactions
Involved
|
|
AQR Diversified Arbitrage Fund
|
|
$
|
2,278,595
|
|
|
$
|
4,835,049,213
|
|
AQR Managed Futures Strategy Fund
|
|
$
|
780,947
|
|
|
$
|
82,630,486,860
|
|
AQR Risk Parity Fund
|
|
$
|
13,106
|
|
|
$
|
523,818,467
|
|
67
|
|
|
|
|
|
|
|
|
Funds
|
|
Brokerage
Commissions
|
|
|
Amount of
Transactions
Involved
|
|
AQR Multi-Strategy Alternative Fund
1
|
|
$
|
112,686
|
|
|
$
|
2,660,449,213
|
|
AQR Risk-Balanced Commodities Strategy Fund
2
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Risk Parity II MV Fund
2
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Risk Parity II HV Fund
2
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Long-Short Equity Fund
2
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Managed Futures Strategy HV Fund
2
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Style Premia Alternative Fund
2
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Global Macro Fund
2
|
|
|
N/A
|
|
|
|
N/A
|
|
1
|
For the period July 18, 2011 through December 31, 2011.
|
2
|
The Fund paid no brokerage commissions during the period because the Fund had not yet commenced operations.
|
The increase in brokerage commissions for the AQR Managed Futures Fund and AQR Risk Parity Fund from 2010 to 2011 was primarily the
result of significant increased positive cash flows into the Funds, which resulted in increased trading activity.
There were
no brokerage commissions paid to any affiliated brokers or dealers of the Adviser during the fiscal year ended December 31, 2011.
The following table shows the dollar amount of brokerage commissions paid to brokers and the approximate dollar amount of the transactions involved for the period ended December 31, 2012. The
provision of third party research services was not necessarily a factor in the placement of all brokerage business with such brokers.
|
|
|
|
|
|
|
|
|
Funds
|
|
Brokerage
Commissions
|
|
|
Amount of
Transactions
Involved
|
|
AQR Diversified Arbitrage Fund
|
|
$
|
1,742,042
|
|
|
$
|
4,230,439,711
|
|
AQR Managed Futures Strategy Fund
|
|
$
|
955,022
|
|
|
$
|
107,584,718,896
|
|
AQR Risk Parity Fund
|
|
$
|
102,956
|
|
|
$
|
8,304,801,548
|
|
AQR Multi-Strategy Alternative Fund
|
|
$
|
754,922
|
|
|
$
|
25,041,364,498
|
|
AQR Risk-Balanced Commodities Strategy Fund
1
|
|
$
|
0
|
|
|
$
|
0
|
|
AQR Risk Parity II MV Fund
2
|
|
$
|
1,281
|
|
|
$
|
93,291,196
|
|
AQR Risk Parity II HV Fund
2
|
|
$
|
1,821
|
|
|
$
|
117,743,626
|
|
AQR Long-Short Equity Fund
3
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Managed Futures Strategy HV Fund
3
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Style Premia Alternative Fund
3
|
|
|
N/A
|
|
|
|
N/A
|
|
AQR Global Macro Fund
3
|
|
|
N/A
|
|
|
|
N/A
|
|
1
|
For the period from July 9, 2012 through December 31, 2012.
|
2
|
For the period from November 5, 2012 to December 31, 2012.
|
3
|
The Fund paid no brokerage commissions during the period because the Fund had not yet commenced operations.
|
68
The decrease in brokerage commissions for the AQR Diversified Arbitrage Fund from 2011 to
2012 was generally the result of, on average, lower transaction costs per trade and less trading activity as the Fund ceased to offer Class I and N Shares for purchase or exchange by certain new investors, as of June 29, 2012. See Closed
Fund Policies in the Funds prospectus.
The increase in brokerage commissions for the AQR Multi-Strategy
Alternative Fund and AQR Risk Parity Fund from 2011 to 2012 was primarily the result of significant increased positive cash flows into the Funds, which resulted in increased trading activity.
There were no brokerage commissions paid to any affiliated brokers or dealers of the Adviser during the fiscal year ended
December 31, 2012.
The value of the AQR Diversified Arbitrage Funds aggregate holdings of the securities of its
regular brokers or dealers (as defined in Rule 10b-1 under the Investment Company Act) if any portion of such holdings were purchased during the period ended December 31, 2012 are as follows:
|
|
|
|
|
|
|
|
|
Regular Broker-Dealer
|
|
Debt (D)/Equity (E)
|
|
|
Aggregate Holdings
(000s)
|
|
Jefferies & Co., Inc.
|
|
|
E
|
|
|
$
|
6,660
|
|
Jefferies & Co., Inc.
|
|
|
D
|
|
|
$
|
3,145
|
|
The value of the AQR Multi-Strategy Alternative Funds aggregate holdings of the securities of its
regular brokers or dealers (as defined in Rule 10b-1 under the Investment Company Act) if any portion of such holdings were purchased during the period ended December 31, 2012 are as follows:
|
|
|
|
|
|
|
|
|
Regular Broker-Dealer
|
|
Debt (D)/Equity (E)
|
|
|
Aggregate Holdings
(000s)
|
|
Bank of TokyoMitsubishi UFJ Ltd.
|
|
|
E
|
|
|
$
|
7,923
|
|
Citigroup
|
|
|
E
|
|
|
$
|
1,082
|
|
Jefferies & Co., Inc.
|
|
|
D
|
|
|
$
|
477
|
|
Warburg Dillon Read Secs
|
|
|
E
|
|
|
$
|
23
|
|
ORGANIZATION OF THE TRUST AND
A DESCRIPTION OF THE SHARES
The Trust was established on September 4, 2008 as a Delaware statutory trust and is authorized to issue an unlimited number of par shares of beneficial interest which may be issued in any number of
series and classes. The Trust currently has thirty-four series. On December 4, 2013, the Board of Trustees approved the creation of the AQR Global Macro Fund. Each Fund described in this SAI offers Class I and Class N shares. Other series of
the Trust, which are described in a separate Statement of Additional Information, may offer different classes of shares.
All
shares of each Fund have equal voting rights and each shareholder is entitled to one vote for each full share held and fractional votes for fractional shares held and will vote on the election of Trustees and any other matter submitted to a
shareholder vote. The Trust is not required, and does not intend, to hold annual meetings of shareholders. The Trust will call such special meetings of shareholders as may be required under the 1940 Act (e.g., to approve a new investment advisory
agreement or to change the fundamental investment policies) or by the Declaration of Trust. A meeting of shareholders shall, however, be called by the Secretary upon the written request of the holders of not less than 10% of the outstanding shares
of a Fund. The Fund will assist shareholders wishing to communicate with one another for the purpose of requesting such a meeting. Shares of each Fund
69
will, when issued, be fully paid and non-assessable and have no preemptive or conversion rights. Each share is entitled to participate equally in dividends and distributions declared by the
relevant Fund and in the net assets of such Fund on liquidation or dissolution after satisfaction of outstanding liabilities.
On the launch date of the AQR Global Macro Fund (the New Fund), it is anticipated that the Adviser will make a seed money investment in the New Fund in an amount in excess of 25% of the New
Funds outstanding voting securities. Assuming it does so, the Adviser would become a controlling person of the New Fund, and should an item be presented for shareholder consideration, which is not currently contemplated, the Adviser could
determine the outcome of the vote. The Adviser may decide to redeem its investment once third-party assets invested in the New Fund reach a level whereby, in the judgment of the Adviser, portfolio management of the New Fund would not be negatively
impacted by the redemption. The Advisers address is: Two Greenwich Plaza, Greenwich, CT 06830.
The following is a list
of shareholders of each Fund who owned (beneficially or of record) 5% or more of a class of a Funds shares as of February 28, 2014.
|
|
|
|
|
Name and Address
|
|
Percentage
Ownership
|
|
AQR Diversified Arbitrage FundClass I
|
|
|
|
|
National Financial Services LLC
|
|
|
31.19
|
%
|
200 Liberty Street
|
|
|
|
|
One World Financial Center
|
|
|
|
|
New York, NY 10281-1003
|
|
|
|
|
Charles Schwab & Co. Inc.
|
|
|
24.87
|
%
|
ATTN: Mutual Funds
|
|
|
|
|
101 Montgomery Street
|
|
|
|
|
San Francisco, CA 94101-4151
|
|
|
|
|
Merrill Lynch, Pierce, Fenner & Smith
|
|
|
10.61
|
%
|
4800 Deer Lake Drive East
|
|
|
|
|
Jacksonville, FL 32246-6484
|
|
|
|
|
Pershing LLC
|
|
|
6.27
|
%
|
1 Pershing Plaza
|
|
|
|
|
Jersey City, NJ 07399-0001
|
|
|
|
|
LPL Financial
|
|
|
6.07
|
%
|
9785 Towne Center Drive
|
|
|
|
|
San Diego, CA 92121-1968
|
|
|
|
|
AQR Diversified Arbitrage FundClass N
|
|
|
|
|
Raymond James
|
|
|
51.63
|
%
|
880 Carillon Parkway
|
|
|
|
|
St. Petersburg, FL 33716-1102
|
|
|
|
|
Charles Schwab & Co. Inc.
|
|
|
12.24
|
%
|
ATTN: Mutual Funds
|
|
|
|
|
101 Montgomery Street
|
|
|
|
|
San Francisco, CA 94101-4151
|
|
|
|
|
National Financial Services LLC
|
|
|
10.81
|
%
|
499 Washington Blvd Floor 5
|
|
|
|
|
Jersey City, NJ 07310-2010
|
|
|
|
|
70
|
|
|
|
|
Name and Address
|
|
Percentage
Ownership
|
|
Assetmark Trust Company
|
|
|
7.42
|
%
|
3200 N. Central Ave., 7th Floor
|
|
|
|
|
Phoenix, AZ 85012-2468
|
|
|
|
|
Pershing LLC
|
|
|
7.15
|
%
|
1 Pershing Plaza
|
|
|
|
|
Jersey City, NJ 07303-2052
|
|
|
|
|
TD Ameritrade Inc.
|
|
|
5.72
|
%
|
P.O. Box 2226
|
|
|
|
|
Omaha, NE 68103-2226
|
|
|
|
|
AQR Long-Short Equity FundClass I
|
|
|
|
|
National Financial Services LLC
|
|
|
22.14
|
%
|
200 Liberty Street
|
|
|
|
|
One World Financial Center
|
|
|
|
|
New York, NY 10281-1003
|
|
|
|
|
AQR Capital Management, LLC
|
|
|
17.02
|
%
|
Two Greenwich Plaza
|
|
|
|
|
Greenwich, CT 06830-6353
|
|
|
|
|
Clifford S. Asness
|
|
|
10.93
|
%
|
Two Greenwich Plaza
|
|
|
|
|
Greenwich, CT 06830-6353
|
|
|
|
|
Bank of America
|
|
|
10.35
|
%
|
FBO IA R Forest & and Elizabeth Felvey
|
|
|
|
|
PO Box 843869
|
|
|
|
|
Dallas, TX 75283-0001
|
|
|
|
|
AQR Investment Fund LLC
|
|
|
10.19
|
%
|
Two Greenwich Plaza
|
|
|
|
|
Greenwich, CT 06830-6353
|
|
|
|
|
SEI Private Trust Company
|
|
|
9.20
|
%
|
1 Freedom Valley Drive
|
|
|
|
|
Oaks, PA 19456-9989
|
|
|
|
|
AQR Long-Short Equity FundClass N
|
|
|
|
|
AQR Capital Management, LLC
|
|
|
92.08
|
%
|
Two Greenwich Plaza
|
|
|
|
|
Greenwich, CT 06830-6353
|
|
|
|
|
AQR Managed Futures Strategy HV FundClass I
|
|
|
|
|
Charles Schwab & Co. Inc.
|
|
|
33.27
|
%
|
ATTN: Mutual Funds
|
|
|
|
|
101 Montgomery Street
|
|
|
|
|
San Francisco, CA 94101-4151
|
|
|
|
|
Key Bank NA
|
|
|
14.54
|
%
|
FBO Allen B & Batzer JTWROS
|
|
|
|
|
Cleveland, OH 44101-4871
|
|
|
|
|
71
|
|
|
|
|
Name and Address
|
|
Percentage
Ownership
|
|
AQR Capital Management, LLC
|
|
|
12.16
|
%
|
Two Greenwich Plaza
|
|
|
|
|
Greenwich, CT 06830-6353
|
|
|
|
|
National Financial Services LLC
|
|
|
10.95
|
%
|
200 Liberty Street
|
|
|
|
|
One World Financial Center
|
|
|
|
|
New York, NY 10281-1003
|
|
|
|
|
Clifford S. Asness
|
|
|
8.42
|
%
|
Two Greenwich Plaza
|
|
|
|
|
Greenwich, CT 06830-6353
|
|
|
|
|
AQR Investment Fund LLC
|
|
|
7.86
|
%
|
Two Greenwich Plaza
|
|
|
|
|
Greenwich, CT 06830-6353
|
|
|
|
|
AQR Managed Futures Strategy HV FundClass N
|
|
|
|
|
Charles Schwab & Co. Inc.
|
|
|
52.49
|
%
|
ATTN: Mutual Funds
|
|
|
|
|
101 Montgomery Street
|
|
|
|
|
San Francisco, CA 94101-4151
|
|
|
|
|
National Financial Services LLC
|
|
|
28.66
|
%
|
200 Liberty Street
|
|
|
|
|
One World Financial Center
|
|
|
|
|
New York, NY 10281-1003
|
|
|
|
|
TD Ameritrade Inc.
|
|
|
18.52
|
%
|
P.O. Box 2226
|
|
|
|
|
Omaha, NE 68103-2226
|
|
|
|
|
AQR Managed Futures Strategy FundClass I
|
|
|
|
|
Charles Schwab & Co. Inc.
|
|
|
22.11
|
%
|
ATTN: Mutual Funds
|
|
|
|
|
101 Montgomery Street
|
|
|
|
|
San Francisco, CA 94101-4151
|
|
|
|
|
National Financial Services LLC
|
|
|
16.54
|
%
|
200 Liberty Street
|
|
|
|
|
One World Financial Center
|
|
|
|
|
New York, NY 10281-1003
|
|
|
|
|
Wells Fargo Bank NA
|
|
|
9.86
|
%
|
P.O. Box 1533
|
|
|
|
|
733 Marquette Ave, 4th Fl
|
|
|
|
|
Minneapolis, MN 55480-1533
|
|
|
|
|
Morgan Stanley Smith Barney LLC
|
|
|
9.24
|
%
|
Harborside Financial Center, Plaza 2, 3rd Floor
|
|
|
|
|
Jersey City, N J 07311
|
|
|
|
|
72
|
|
|
|
|
Name and Address
|
|
Percentage
Ownership
|
|
TD Ameritrade Inc.
|
|
|
8.74
|
%
|
P.O. Box 2226
|
|
|
|
|
Omaha, NE 68103-2226
|
|
|
|
|
Pershing LLC
|
|
|
7.39
|
%
|
1 Pershing Plaza
|
|
|
|
|
Jersey City, NJ 07399-0001
|
|
|
|
|
First Clearing, LLC
|
|
|
5.27
|
%
|
2801 Market Street
|
|
|
|
|
Saint Louis, MO 63103-2523
|
|
|
|
|
AQR Managed Futures Strategy FundClass N
|
|
|
|
|
Raymond James
|
|
|
34.37
|
%
|
880 Carillon Parkway
|
|
|
|
|
St. Petersburg, FL 33716-1102
|
|
|
|
|
National Financial Services LLC
|
|
|
20.22
|
%
|
200 Liberty Street
|
|
|
|
|
One World Financial Center
|
|
|
|
|
New York, NY 10281-1003
|
|
|
|
|
UBS WM USA
|
|
|
18.76
|
%
|
ATTN Department Manager
|
|
|
|
|
1000 Harbor Blvd 5th Floor
|
|
|
|
|
Weehawken, NJ 07086-6761
|
|
|
|
|
Charles Schwab & Co. Inc.
|
|
|
15.03
|
%
|
ATTN: Mutual Funds
|
|
|
|
|
101 Montgomery Street
|
|
|
|
|
San Francisco, CA 94101-4151
|
|
|
|
|
AQR Multi-Strategy Alternative FundClass I
|
|
|
|
|
Charles Schwab & Co. Inc.
|
|
|
38.68
|
%
|
ATTN: Mutual Funds
|
|
|
|
|
101 Montgomery Street
|
|
|
|
|
San Francisco, CA 94101-4151
|
|
|
|
|
National Financial Services LLC
|
|
|
21.57
|
%
|
200 Liberty Street
|
|
|
|
|
One World Financial Center
|
|
|
|
|
New York, NY 10281-1003
|
|
|
|
|
Cornerstone Advisors Public Alternatives Fund
|
|
|
8.51
|
%
|
1 Freedom Valley Drive
|
|
|
|
|
Oaks, PA 19456-9989
|
|
|
|
|
AQR Multi-Strategy Alternative FundClass N
|
|
|
|
|
National Financial Services LLC
|
|
|
37.82
|
%
|
200 Liberty Street
|
|
|
|
|
One World Financial Center
|
|
|
|
|
New York, NY 10281-1003
|
|
|
|
|
73
|
|
|
|
|
Name and Address
|
|
Percentage
Ownership
|
|
Charles Schwab & Co. Inc.
|
|
|
31.88
|
%
|
ATTN: Mutual Funds
|
|
|
|
|
101 Montgomery Street
|
|
|
|
|
San Francisco, CA 94101-4151
|
|
|
|
|
UBS WM USA
|
|
|
18.73
|
%
|
ATTN Department Manager
|
|
|
|
|
1000 Harbor Blvd 5th Floor
|
|
|
|
|
Weehawken, NJ 07086-6761
|
|
|
|
|
TD Ameritrade Inc.
|
|
|
6.15
|
%
|
P.O. Box 2226
|
|
|
|
|
Omaha, NE 68103-2226
|
|
|
|
|
AQR Risk Parity FundClass I
|
|
|
|
|
National Financial Services LLC
|
|
|
35.61
|
%
|
200 Liberty Street
|
|
|
|
|
One World Financial Center
|
|
|
|
|
New York, NY 10281-1003
|
|
|
|
|
Charles Schwab & Co. Inc.
|
|
|
15.59
|
%
|
ATTN: Mutual Funds
|
|
|
|
|
101 Montgomery Street
|
|
|
|
|
San Francisco, CA 94101-4151
|
|
|
|
|
Wells Fargo Bank NA
|
|
|
12.34
|
%
|
733 Marquette Ave
|
|
|
|
|
Minneapolis, MN 55402-2309
|
|
|
|
|
SEI Private Trust Company
|
|
|
6.25
|
%
|
1 Freedom Valley Drive
|
|
|
|
|
Oaks, PA 19456-9989
|
|
|
|
|
Fifth Third Bank Trustee
|
|
|
5.25
|
%
|
5001 Kingsley Drive
|
|
|
|
|
Department 3385
|
|
|
|
|
Cincinnati, OH 45263-0001
|
|
|
|
|
AQR Risk Parity FundClass N
|
|
|
|
|
Charles Schwab & Co. Inc.
|
|
|
23.22
|
%
|
ATTN: Mutual Funds
|
|
|
|
|
101 Montgomery Street
|
|
|
|
|
San Francisco, CA 94101-4151
|
|
|
|
|
UBS WM USA
|
|
|
18.02
|
%
|
ATTN Department Manager
|
|
|
|
|
1000 Harbor Blvd 5th Floor
|
|
|
|
|
Weehawken, NJ 07086-6761
|
|
|
|
|
National Financial Services LLC
|
|
|
17.68
|
%
|
200 Liberty Street
|
|
|
|
|
One World Financial Center
|
|
|
|
|
New York, NY 10281-1003
|
|
|
|
|
74
|
|
|
|
|
Name and Address
|
|
Percentage
Ownership
|
|
Raymond James
|
|
|
10.82
|
%
|
880 Carillon Parkway
|
|
|
|
|
St. Petersburg, FL 33716-1102
|
|
|
|
|
TD Ameritrade Inc.
|
|
|
7.53
|
%
|
P.O. Box 2226
|
|
|
|
|
Omaha, NE 68103-2226
|
|
|
|
|
Vanguard Brokerage Services
|
|
|
7.21
|
%
|
PO Box 1170
|
|
|
|
|
Valley Forge, PA 19482-1170
|
|
|
|
|
AQR Risk Parity II HV FundClass I
|
|
|
|
|
Clifford S. Asness Trustee
|
|
|
22.18
|
%
|
Two Greenwich Plaza
|
|
|
|
|
Greenwich, CT 06830-6353
|
|
|
|
|
MCI Two Investment Limited Partnership
|
|
|
20.50
|
%
|
NEPC 255 State Street
|
|
|
|
|
Boston, MA 02109
|
|
|
|
|
National Financial Services LLC
|
|
|
13.67
|
%
|
200 Liberty Street
|
|
|
|
|
One World Financial Center
|
|
|
|
|
New York, NY 10281-1003
|
|
|
|
|
Pershing LLC
|
|
|
11.13
|
%
|
1 Pershing Plaza
|
|
|
|
|
Jersey City, NJ 07399-0001
|
|
|
|
|
John Liew Trustee
|
|
|
8.25
|
%
|
Two Greenwich Plaza
|
|
|
|
|
Greenwich, CT 06830-6353
|
|
|
|
|
AQR Capital Management, LLC
|
|
|
6.85
|
%
|
Two Greenwich Plaza
|
|
|
|
|
Greenwich, CT 06830-6353
|
|
|
|
|
David G. Kabiller
|
|
|
6.79
|
%
|
Two Greenwich Plaza
|
|
|
|
|
Greenwich, CT 06830-6353
|
|
|
|
|
AQR Risk Parity II HV FundClass N
|
|
|
|
|
Charles Schwab & Co. Inc.
|
|
|
49.21
|
%
|
ATTN: Mutual Funds
|
|
|
|
|
101 Montgomery Street
|
|
|
|
|
San Francisco, CA 94101-4151
|
|
|
|
|
UBS WM USA
|
|
|
23.02
|
%
|
ATTN Department Manager
|
|
|
|
|
1000 Harbor Blvd 5th Floor
|
|
|
|
|
Weehawken, NJ 07086-6761
|
|
|
|
|
75
|
|
|
|
|
Name and Address
|
|
Percentage
Ownership
|
|
National Financial Services LLC
|
|
|
15.50
|
%
|
200 Liberty Street
|
|
|
|
|
One World Financial Center
|
|
|
|
|
New York, NY 10281-1003
|
|
|
|
|
Pershing LLC
|
|
|
10.43
|
%
|
1 Pershing Plaza
|
|
|
|
|
Jersey City, NJ 07399-0001
|
|
|
|
|
AQR Risk Parity II MV FundClass I
|
|
|
|
|
Merrill Lynch, Pierce, Fenner & Smith
|
|
|
23.77
|
%
|
4800 Deer Lake Drive East
|
|
|
|
|
Jacksonville, FL 32246-6484
|
|
|
|
|
Wells Fargo Bank NA
|
|
|
23.57
|
%
|
P.O. Box 1533
|
|
|
|
|
Minneapolis, MN 55480-1533
|
|
|
|
|
Charles Schwab & Co. Inc.
|
|
|
22.53
|
%
|
ATTN: Mutual Funds
|
|
|
|
|
101 Montgomery Street
|
|
|
|
|
San Francisco, CA 94101-4151
|
|
|
|
|
National Financial Services LLC
|
|
|
14.49
|
%
|
200 Liberty Street
|
|
|
|
|
One World Financial Center
|
|
|
|
|
New York, NY 10281-1003
|
|
|
|
|
TD Ameritrade Inc.
|
|
|
8.69
|
%
|
P.O. Box 2226
|
|
|
|
|
Omaha, NE 68103-2226
|
|
|
|
|
AQR Risk Parity II MV FundClass N
|
|
|
|
|
UBS WM USA
|
|
|
60.95
|
%
|
ATTN Department Manager
|
|
|
|
|
1000 Harbor Blvd 5th Floor
|
|
|
|
|
Weehawken, NJ 07086-6761
|
|
|
|
|
Charles Schwab & Co. Inc.
|
|
|
21.60
|
%
|
ATTN: Mutual Funds
|
|
|
|
|
101 Montgomery Street
|
|
|
|
|
San Francisco, CA 94101-4151
|
|
|
|
|
Raymond James
|
|
|
7.12
|
%
|
880 Carillon Parkway
|
|
|
|
|
St. Petersburg, FL 33716-1102
|
|
|
|
|
National Financial Services LLC
|
|
|
6.67
|
%
|
200 Liberty Street
|
|
|
|
|
One World Financial Center
|
|
|
|
|
New York, NY 10281-1003
|
|
|
|
|
76
|
|
|
|
|
Name and Address
|
|
Percentage
Ownership
|
|
AQR Risk-Balanced Commodities Strategy FundClass I
|
|
|
|
|
Charles Schwab & Co. Inc.
|
|
|
75.86
|
%
|
ATTN: Mutual Funds
|
|
|
|
|
101 Montgomery Street
|
|
|
|
|
San Francisco, CA 94101-4151
|
|
|
|
|
TD Ameritrade Inc.
|
|
|
7.95
|
%
|
P.O. Box 2226
|
|
|
|
|
Omaha, NE 68103-2226
|
|
|
|
|
National Financial Services LLC
|
|
|
6.98
|
%
|
200 Liberty Street
|
|
|
|
|
One World Financial Center
|
|
|
|
|
New York, NY 10281-1003
|
|
|
|
|
Vanguard Brokerage Services
|
|
|
5.14
|
%
|
PO Box 1170
|
|
|
|
|
Valley Forge, PA 19482-1170
|
|
|
|
|
AQR Risk-Balanced Commodities Strategy FundClass N
|
|
|
|
|
Charles Schwab & Co. Inc.
|
|
|
51.70
|
%
|
ATTN: Mutual Funds
|
|
|
|
|
101 Montgomery Street
|
|
|
|
|
San Francisco, CA 94101-4151
|
|
|
|
|
Pershing LLC
|
|
|
21.73
|
%
|
1 Pershing Plaza
|
|
|
|
|
Jersey City, NJ 07399-0001
|
|
|
|
|
National Financial Services LLC
|
|
|
21.17
|
%
|
200 Liberty Street
|
|
|
|
|
One World Financial Center
|
|
|
|
|
New York, NY 10281-1003
|
|
|
|
|
TD Ameritrade Inc.
|
|
|
5.21
|
%
|
P.O. Box 2226
|
|
|
|
|
Omaha, NE 68103-2226
|
|
|
|
|
AQR Style Premia Alternative FundClass I
|
|
|
|
|
UAW Retiree Medical Benefits Trust
|
|
|
84.72
|
%
|
110 Miller Ave, #100
|
|
|
|
|
Ann Arbor, MI 48104-1305
|
|
|
|
|
National Financial Services LLC
|
|
|
10.31
|
%
|
200 Liberty Street
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|
|
|
|
One World Financial Center
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|
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|
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New York, NY 10281-1003
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|
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AQR Style Premia Alternative FundClass N
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|
|
|
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National Financial Services LLC
|
|
|
65.26
|
%
|
200 Liberty Street
|
|
|
|
|
One World Financial Center
|
|
|
|
|
New York, NY 10281-1003
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|
|
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77
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|
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Name and Address
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|
Percentage
Ownership
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|
Charles Schwab & Co. Inc.
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|
|
26.09
|
%
|
ATTN: Mutual Funds
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|
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|
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101 Montgomery Street
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|
|
|
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San Francisco, CA 94101-4151
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|
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Pershing LLC
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|
|
5.37
|
%
|
1 Pershing Plaza
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|
|
|
|
Jersey City, NJ 07399-0001
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|
|
|
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TAXATION
Taxation of the Funds
Each Fund intends to qualify annually and to elect to be treated as a regulated investment company under the Code. To qualify as a regulated investment company, each Fund must, among other things,
(a) derive in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to securities loans, net income from certain publicly traded partnerships (i.e., partnerships that are traded on an established
securities market or tradable on a secondary market, other than partnerships that derive 90% of their income from interest, dividends, capital gains, and other traditionally permitted mutual fund income) and gains from the sale or other disposition
of stock, securities or foreign currencies or other income (including, but not limited to, gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or currencies;
(b) diversify its holdings so that, at the end of each quarter of the taxable year, (i) at least 50% of the market value of that Funds assets is represented by cash and cash items (including receivables), U.S. Government securities,
the securities of other regulated investment companies and other securities, with such other securities of any one issuer limited for the purposes of this calculation to an amount not greater than 5% of the value of that Funds total assets and
not greater than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its total assets is invested in (1) the securities of any one issuer (other than U.S. Government securities or the
securities of other regulated investment companies), or (2) the securities (other than securities of other regulated investment companies) of two or more issuers of which a Fund holds 20% or more of the voting stock in the same or similar or
related trades or businesses, or (3) the securities of one or more qualified publicly traded partnerships; and (c) distribute at least 90% of its investment company taxable income (which includes, among other items, dividends, interest,
income inclusions from wholly-owned subsidiaries and net short-term capital gains in excess of net long-term capital losses) each taxable year.
A Fund may be able to cure a failure to derive 90% of its income from the sources specified above or a failure to diversify its holdings in the manner described above by paying a tax, by disposing of
certain assets, or by paying a tax and disposing of assets. If, in any taxable year, a Fund fails one of these tests and does not timely cure the failure, that Fund will be taxed in the same manner as an ordinary corporation and distributions to its
shareholders will not be deductible by such Fund in computing its taxable income.
The U.S. Treasury is authorized to issue
regulations providing that foreign currency gains that are not directly related to a Funds principal business of investing in stock or securities (or options and futures with respect to stock or securities) will be excluded from the income
which qualifies for purposes of the 90% gross income requirement described above. To date, however, no such regulations have been issued.
Certain of a Funds investments in master limited partnerships (MLPs) may be considered qualified publicly traded partnerships and, therefore, the extent to which a Fund may invest in
MLPs is limited by that Funds intention to qualify as a regulated investment company under the Code. In addition, although in general the passive loss rules of the Code do not apply to regulated investment companies, such rules do apply to a
regulated
78
investment company with respect to items attributable to an interest in a qualified publicly traded partnership. Fund investments in partnerships, including in qualified publicly traded
partnerships, may result in a Funds being subject to state, local or foreign income, franchise or withholding tax liabilities.
For a Fund with a non-U.S. subsidiary, any annual net profit of the subsidiary will be recognized as ordinary income by the Fund, but any net annual loss of the subsidiary will not be recognized and will
not carry forward.
As regulated investment companies, the Funds generally will not be subject to U.S. federal income tax on
their investment company taxable income and net capital gains (the excess of net long-term capital gains over net short-term capital losses), if any, that they distribute to shareholders. The Funds intend to distribute to their shareholders, at
least annually, substantially all of their investment company taxable income and net capital gains. Amounts not distributed on a timely basis in accordance with a calendar year distribution requirement are subject to a nondeductible 4% excise tax.
To prevent imposition of the excise tax, each Fund must distribute during each calendar year an amount equal to the sum of (1) at least 98% of its ordinary income (not taking into account any capital gains or losses) for the calendar year,
(2) at least 98.2% of its capital gains in excess of its capital losses (adjusted for certain ordinary losses) for the one-year period ending on October 31 of the calendar year, and (3) any ordinary income and capital gains for
previous years that was not distributed or taxed to the Fund during those years. A distribution will be treated as paid December 31 of the current calendar year if it is declared by a Fund in October, November or December with a record date in
such a month and paid by such Fund during January of the following calendar year. Such distributions will be taxable to shareholders in the calendar year in which the distributions are declared, rather than the calendar year in which the
distributions are received. To prevent application of the excise tax, each Fund currently intends to make its distributions in accordance with the calendar year distribution requirement.
Distributions
Dividends paid out of a Funds investment company taxable income (including net short-term capital gains) will be taxable to a U.S. shareholder as ordinary income. If a portion of a Funds
income consists of dividends paid by corporations, a portion of the dividends paid by such Fund may be eligible for the dividends-received deduction for corporations and the long-term capital gain rates on qualified dividends for individuals,
provided that the Fund and shareholders satisfy applicable holding period requirements. Distributions of net capital gains, if any, reported as capital gain dividends are taxable as long-term capital gains (the excess of net long-term capital gains
over net short-term capital losses), regardless of how long the shareholder has held the relevant Funds shares, and are not eligible for the dividends-received deduction. Shareholders receiving distributions in the form of additional shares,
rather than cash, generally will have a cost basis in each such share equal to the NAV of a share of the relevant Fund on the reinvestment date. Long-term capital gains and qualified dividend income are generally eligible for taxation at a maximum
rate of 15% for noncorporate shareholders with incomes below $400,000 ($450,000 if married filing jointly) and 20% for individuals with any income above these amounts that is long-term capital gain or qualified dividend income.
Shareholders will be notified annually as to the U.S. federal income tax status of distributions, and shareholders receiving
distributions in the form of additional shares will receive a report as to the NAV of those shares. Any distributions received in the form of additional shares will be taxed as if received in cash.
Each Fund intends to distribute annually to its shareholders substantially all of its investment company taxable income, and any net
realized long-term capital gains in excess of net realized short-term capital losses (including any capital loss carryovers). However, if a Fund retains for investment an amount equal to all or a portion of its net long-term capital gains in excess
of its net short-term capital losses (including any capital loss carryovers), it will be subject to a corporate tax (currently at a maximum rate of 35%) on the amount retained. In that event, the Fund will designate such retained amounts as
undistributed capital gains in a notice to its shareholders who (a) will be required to include in income for U.S. federal income tax purposes, as long-term capital gains, their proportionate shares of the undistributed amount, (b) will be
entitled to credit their proportionate shares of the
79
35% tax paid by the fund on the undistributed amount against their U.S. federal income tax liabilities, if any, and to claim refunds to the extent their credits exceed their liabilities, if any,
and (c) will be entitled to increase their tax basis, for U.S. federal income tax purposes, in their shares by an amount equal to 65% of the amount of undistributed capital gains included in the shareholders income. Organizations or
persons not subject to U.S. federal income tax on such capital gains will be entitled to a refund of their pro rata share of such taxes paid by the fund upon timely filing of appropriate returns or claims for refund with the IRS.
A distribution of an amount in excess of a Funds current and accumulated earnings and profits will be treated by a shareholder as a
return of capital, which is applied against and reduces the shareholders basis in his or her shares. To the extent that the amount of any such distribution exceeds the shareholders basis in his or her shares, the excess will be treated
by the shareholder as gain from a sale or exchange of the shares.
A 3.8% Medicare contribution tax is imposed on net
investment income, including, among other things, interest, dividends, and net gain, of U.S. individuals with income exceeding $200,000 (or $250,000 if married filing jointly), and of estates and trusts.
Sale of Shares
The exchange of shares of a Fund for shares of another class of the same Fund is not considered a taxable event and should not result in capital gain or loss.
Upon the sale or other disposition of shares of a Fund, a shareholder may realize a capital gain or loss, which will be long-term or
short-term, generally depending upon the shareholders holding period for the shares. Any loss realized on a sale or exchange will be disallowed to the extent the shares disposed of are replaced within a period of 61 days beginning 30 days
before and ending 30 days after disposition of the shares. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. Any loss realized by a shareholder on a disposition of shares of a Fund held by the
shareholder for six months or less will be treated as a long-term capital loss to the extent of any distributions of net capital gains received by the shareholder with respect to such shares. Individual taxpayers may generally offset capital losses
against capital gains and also against up to $3,000 of ordinary income, with any excess carried over to future years. Corporations may generally offset capital losses against capital gains and the excess may be carried to certain other years.
If a shareholder has different bases for different shares of a Fund in the same account, that Fund will by default report the
basis of the shares sold or exchanged using the average basis method, under which the basis per share is the average of the bases of all the shareholders shares in the account. A shareholder may instruct a Fund to use another method of basis
calculation. Shareholders who hold shares through a service agent should contact the service agent for information regarding the service agents default method for calculating basis and procedures for electing to use an alternative method.
The 3.8% Medicare contribution tax (discussed above) applies to gains from the sale or exchange of Fund shares.
Original Issue Discount Securities
Investments by a Fund in zero coupon or other discount securities will result in income to such Fund equal to a portion of the excess of
the face value of the securities over their issue price (the original issue discount) each year that the securities are held, even though such Fund receives no cash interest payments. This income is included in determining the amount of
income which that Fund must distribute to maintain its status as a regulated investment company and to avoid the payment of federal income tax and the 4% excise tax. In addition, if a Fund invests in certain high yield original issue discount
securities issued by corporations, a portion of the original issue discount accruing on any such obligation may be eligible for the deduction for dividends received by corporations. In such event, dividends of investment company taxable income
received from such Fund by its
80
corporate shareholders, to the extent attributable to such portion of accrued original issue discount, may be eligible for this deduction for dividends received by corporations if so reported by
that Fund in a written notice to shareholders.
Market Discount Bonds
Gains derived by a Fund from the disposition of any market discount bonds (i.e., bonds purchased other than at original issue, where the
face value of the bonds exceeds their purchase price) held by such Fund will be taxed as ordinary income to the extent of the accrued market discount of the bonds, unless such Fund elects to include the market discount in income as it accrues.
Futures, Options and Hedging Transactions
The taxation of equity options and over-the-counter options on debt securities is governed by Code section 1234. Pursuant to Code section
1234, the premium received by a Fund for selling a put or call option is not included in income at the time of receipt. If the option expires, the premium is short-term capital gain to a Fund. If a Fund enters into a closing transaction, the
difference between the amount paid to close out its position and the premium it received is short-term capital gain or loss. If a call option written by a Fund is exercised, thereby requiring such Fund to sell the underlying security, the premium
will increase the amount realized upon the sale of such security and any resulting gain or loss will be capital gain or loss, and will be long-term or short-term depending upon the holding period of the security. With respect to a put or call option
that is purchased by a Fund, if the option is sold, any resulting gain or loss will be a capital gain or loss, and will be long-term or short-term, depending upon the holding period of the option. If the option expires, the resulting loss is a
capital loss and is long-term or short-term depending upon the holding period of the option. If the option is exercised, the cost of the option, in the case of a call option, is added to the basis of the purchased security and, in the case of a put
option, reduces the amount realized on the underlying security in determining gain or loss.
Certain U.S. exchange-traded
options, futures contracts and certain forward currency contracts in which the Funds may invest are section 1256 contracts. Gains or losses on section 1256 contracts generally are considered 60% long-term and 40% short-term capital gains
or losses; however, foreign currency gains or losses (as discussed below) arising from certain section 1256 contracts may be treated as ordinary income or loss. Also, section 1256 contracts held by a Fund or a wholly-owned subsidiary of a Fund at
the end of each taxable year (and, generally, for purposes of the 4% excise tax, on October 31 of each year) are marked-to-market (that is, treated as sold at fair market value), resulting in unrealized gains or losses being treated
as though they were realized.
Generally, the hedging transactions undertaken by the Funds may result in straddles
for U.S. federal income tax purposes. The straddle rules may affect the character of gains (or losses) realized by a Fund. In addition, losses realized by a Fund on positions that are part of a straddle may be deferred under the straddle rules,
rather than being taken into account in calculating the taxable income for the taxable year in which the losses are realized. Because only a few regulations implementing the straddle rules have been promulgated, the tax consequences to a Fund of
engaging in hedging transactions are not entirely clear. Hedging transactions may increase the amount of short-term capital gain realized by a Fund, which is taxed as ordinary income when distributed to shareholders.
The Funds may make one or more of the elections available under the Code, which are applicable to straddles. If a Fund makes any of the
elections, the amount, character and timing of the recognition of gains or losses from the affected straddle positions will be determined under rules that vary according to the election(s) made. The rules applicable under certain of the elections
may operate to accelerate the recognition of gains or losses from the affected straddle positions.
81
Because the straddle rules may affect the character of gains or losses, defer losses and/or
accelerate the recognition of gains or losses from the affected straddle positions, the amount which may be distributed to shareholders, and which will be taxed to them as ordinary income or long-term capital gain, may be increased or decreased as
compared to a fund that did not engage in such hedging transactions.
Notwithstanding any of the foregoing, a Fund may
recognize gain (but not loss) from a constructive sale of certain appreciated financial positions if the Fund enters into a short sale, offsetting notional principal contract, futures or forward contract transaction with respect to the
appreciated position or substantially identical property. Appreciated financial positions subject to this constructive sale treatment are interests (including options, futures and forward contracts and short sales) in stock, partnership interests,
certain actively traded trust instruments and certain debt instruments. Constructive sale treatment does not apply to certain transactions closed in the 90-day period ending with the close of the taxable year, if certain conditions are met.
Currency FluctuationsSection 988 Gains or Losses
Under the Code, gains or losses attributable to fluctuations in exchange rates which occur between the time a Fund accrues receivables or
liabilities denominated in foreign currency and the time such Fund actually collects such receivables, or pays such liabilities, generally are treated as ordinary income or ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency, and on disposition of certain options, futures and foreign currency contracts, gains or losses attributable to fluctuations in the value of foreign currency between the date of acquisition of the security or contract and the date
of disposition also are treated as ordinary gain or loss. These gains or losses, referred to under the Code as section 988 gains or losses, may increase or decrease the amount of a Funds investment company taxable income to be
distributed to its shareholders as ordinary income. A Fund may elect to treat certain foreign currency gains/losses as capital gain or loss rather than as ordinary gain or loss.
Short Sales
Unless certain constructive sale rules (discussed more fully above) apply, a Fund will not realize gain or loss on a short sale of a security until it closes the transaction by delivering the borrowed
security to the lender. All or a portion of any gain arising from a short sale may be treated as short-term capital gain, regardless of the period for which a Fund held the security used to close the short sale. In addition, a Funds holding
period for any security which is substantially identical to that which is sold short may be reduced or eliminated as a result of the short sale. In many cases, as described more fully under Futures, Options and Hedging Transactions
above, a Fund is required to recognize gain (but not loss) upon entering into a short sale with respect to an appreciated security that such Fund owns, as though such Fund constructively sold the security at the time of entering into the short sale.
Similarly, if a Fund enters into a short sale of property that becomes substantially worthless, the Fund will recognize gain at that time as though it had closed the short sale. Future Treasury regulations may apply similar treatment to other
transactions with respect to property that becomes substantially worthless.
Swaps
As a result of entering into swap contracts, a Fund may make or receive periodic net payments. A Fund may also make or
receive a payment when a swap is terminated prior to maturity through an assignment of the swap or other closing transaction. Periodic net payments will generally constitute ordinary income or deductions, while termination of a swap will generally
result in capital gain or loss (which will be a long-term capital gain or loss if a Fund has been a party to the swap for more than one year). With respect to certain types of swaps, a Fund may be required to currently recognize income or loss with
respect to future payments on such swaps or may elect under certain circumstances to mark such swaps to market annually for tax purposes as ordinary income or loss.
82
Post-October Loss Deferral
In certain situations, a Fund may, for a taxable year, defer all or a portion of its net capital loss realized after October and its
late-year ordinary loss (defined as the excess of post-October foreign currency and PFIC losses and other post-December ordinary losses over post-October foreign currency and PFIC gains and other post-December ordinary income) until the next taxable
year in computing its investment company taxable income and net capital gain, which will defer the recognition of such realized losses. Such deferrals and other rules regarding gains and losses realized after October (or December) may affect the tax
character of shareholder distributions.
Passive Foreign Investment Companies
If a Fund invests in stock of certain passive foreign investment companies, such Fund may be subject to U.S. federal income taxation on a
portion of any excess distribution with respect to, or gain from the disposition of, such stock. The tax would be determined by allocating such distribution or gain ratably to each day of such Funds holding period for the stock.
The distribution or gain so allocated to any taxable year of a Fund, other than the taxable year of the excess distribution or disposition, would be taxed to such Fund at the highest ordinary income tax rate in effect for such year, and the tax
would be further increased by an interest charge to reflect the value of the tax deferral deemed to have resulted from the ownership of the foreign companys stock. Any amount of distribution or gain allocated to the taxable year of the
distribution or disposition would be included in such Funds investment company taxable income and, accordingly, would not be taxable to that Fund to the extent distributed by such Fund as a dividend to its shareholders.
A Fund may be able to make an election, in lieu of being taxable in the manner described above, to include annually in income its pro
rata share of the ordinary earnings and net capital gain of the passive foreign investment company, regardless of whether it actually received any distributions from the foreign company. These amounts would be included in a Funds investment
company taxable income and net capital gain which, to the extent distributed by such Fund as ordinary or capital gain dividends, as the case may be, would not be taxable to that Fund. In order to make this election, such Fund would be required to
obtain certain annual information from the foreign investment companies in which it invests, which in many cases may be difficult to obtain. Alternatively, a Fund may be able to elect to mark to market its passive foreign investment company stock,
resulting in the stock being treated as sold at fair market value on the last business day of each tax year. Any resulting gain would be reported as ordinary income; any resulting loss and any loss from an actual disposition of the stock would be
reported as ordinary loss to the extent of any net marked-to-market gains reported in prior years.
Foreign Withholding Taxes
Income received by a Fund from sources within foreign countries may be subject to withholding and other taxes imposed by such countries. If more than 50% of the value of a Funds total assets at the
close of its taxable year consists of securities of foreign corporations, the Fund will be eligible to elect to pass-through to the Funds shareholders the amount of foreign income and similar taxes paid by the Fund. If this
election is made, a shareholder generally subject to tax will be required to include in gross income (in addition to taxable dividends actually received) his or her pro rata share of the foreign taxes paid by the Fund, and may be entitled either to
deduct (as an itemized deduction) his or her pro rata share of foreign taxes in computing his taxable income or to use it (subject to limitations) as a foreign tax credit against his or her U.S. federal income tax liability. No deduction for foreign
taxes may be claimed by a shareholder who does not itemize deductions. Each shareholder will be notified after the close of the Funds taxable year if the foreign taxes paid by the Fund will pass-through for that year.
Generally, a credit for foreign taxes is subject to the limitation that it may not exceed the shareholders U.S. tax attributable to
his or her total foreign source taxable income. For this purpose, if the pass-through election is made, the source of a Funds income will flow through to the Funds shareholders. With respect to such Fund,
83
gains from the sale of securities will be treated as derived from U.S. sources and certain currency fluctuation gains, including fluctuation gains from foreign currency-denominated debt
securities, receivables and payables will be treated as ordinary income derived from U.S. sources. The limitation on the foreign tax credit is applied separately to foreign source passive income, and to certain other types of income. Shareholders
may be unable to claim a credit for the full amount of their proportionate share of the foreign taxes paid by the Fund. Various other limitations, including a minimum holding period requirement, apply to limit the credit and/or deduction for foreign
taxes for purposes of regular U.S. federal tax and/or alternative minimum tax.
Backup
Withholding
A Fund may be required to withhold U.S. federal income tax at the rate of 28% of all taxable distributions
payable to shareholders who fail to provide such Fund with their correct taxpayer identification number or to make required certifications, or who have been notified by the Internal Revenue Service that they are subject to backup withholding.
Corporate shareholders and certain other shareholders specified in the Code generally are exempt from such backup withholding. Backup withholding is not an additional tax. Any amounts withheld may be credited against the shareholders U.S.
federal income tax liability.
Foreign Shareholders
U.S. taxation of a shareholder who, as to the United States, is a nonresident alien individual, a foreign trust or estate, a foreign
corporation or foreign partnership (foreign shareholder) depends on whether the income of a Fund is effectively connected with a U.S. trade or business carried on by the shareholder.
Income Not Effectively Connected.
If the income from the Fund is not effectively connected with a U.S. trade or
business carried on by the foreign shareholder, distributions of investment company taxable income and short-term capital gains will be subject to a U.S. tax of 30% (or lower treaty rate, except in the case of any excess inclusion income allocated
to the shareholder), which tax is generally withheld from such distributions.
Distributions of long-term capital gains and
any amounts retained by a Fund which are reported as undistributed long-term capital gains will not be subject to U.S. tax at the rate of 30% (or lower treaty rate) unless the foreign shareholder is a nonresident alien individual and is physically
present in the United States for more than 182 days during the taxable year and meets certain other requirements. However, this 30% tax on capital gains of nonresident alien individuals who are physically present in the United States for more than
the 182 day period only applies in exceptional cases because any individual present in the United States for more than 182 days during the taxable year is generally treated as a resident for U.S. income tax purposes; in that case, he or she would be
subject to U.S. income tax on his or her worldwide income at the graduated rates applicable to U.S. citizens, rather than the 30% U.S. tax. In the case of a foreign shareholder who is a nonresident alien individual, a Fund may be required to
withhold U.S. income tax at a rate of 30% of distributions of net capital gains unless the foreign shareholder certifies his or her non-U.S. status under penalties of perjury or otherwise establishes an exemption. See Backup Withholding,
above. If a foreign shareholder is a nonresident alien individual, any gain such shareholder realizes upon the sale or exchange of such shareholders shares of a Fund in the United States will ordinarily be exempt from U.S. tax unless
(i) the gain is U.S. source income and such shareholder is physically present in the United States for more than 182 days during the taxable year and meets certain other requirements, or is otherwise considered to be a resident alien of the
United States, or (ii) at any time during the shorter of the period during which the foreign shareholder held shares of a Fund and the five year period ending on the date of the disposition of those shares, such Fund was a U.S. real
property holding corporation and the foreign shareholder held more than 5% of the shares of that Fund, in which event the gain would be taxed in the same manner as for a U.S. shareholder, as discussed above, and a 10% U.S. withholding tax
would be imposed on the amount realized on the disposition of such shares to be credited against the foreign shareholders U.S. income tax liability on such disposition. A corporation is a U.S. real property holding corporation if
the fair market value of its U.S. real property interests equals or exceeds 50% of the fair market value of such interests plus its interests in real property located outside the United States plus any other assets used or held for use in a
84
business. In the case of a Fund, U.S. real property interests include interests in stock in U.S. real property holding corporations and certain participating debt securities.
A 30% withholding tax on U.S.-source dividends, interest and other income items paid after June 30, 2014, and proceeds from the sale
of property producing U.S.-source dividends and interest paid after December 31, 2016, to (i) foreign financial institutions including non-U.S. investment funds unless they agree to collect and disclose to the IRS information regarding
their direct and indirect U.S. account holders and (ii) certain other foreign entities, unless they certify certain information regarding their direct and indirect U.S. owners. To avoid withholding, foreign financial institutions will need to
(i) enter into agreements with the IRS that state that they will provide the IRS information, including the names, addresses and taxpayer identification numbers of direct and indirect U.S. account holders, comply with due diligence procedures
with respect to the identification of U.S. accounts, report to the IRS certain information with respect to U.S. accounts maintained, agree to withhold tax on certain payments made to non-compliant foreign financial institutions or to account holders
who fail to provide the required information, and determine certain other information as to their account holders, or (ii) in the event that an applicable intergovernmental agreement and implementing legislation are adopted, provide local
revenue authorities with similar account holder information. Other foreign entities will need to either provide the name, address, and taxpayer identification number of each substantial U.S. owner or certifications of no substantial U.S. ownership
unless certain exceptions apply or agree to provide certain information to other revenue authorities for transmittal to the IRS. Shareholders should consult their own tax advisors regarding the possible implications of these requirements on their
own investment in the Fund.
For taxable years beginning before January 1, 2014, properly reported dividends are
generally exempt from U.S. federal withholding tax where they (i) are paid in respect of a Funds qualified net interest income (generally, a Funds U.S. source interest income, other than certain contingent interest and
interest from obligations of a corporation or partnership in which a Fund is at least a 10% shareholder, reduced by expenses that are allocable to such income) or (ii) are paid in respect of a Funds qualified short-term capital
gains (generally, the excess of a Funds net short-term capital gain over a Funds long-term capital loss for such taxable year). However, depending on its circumstances, a Fund may report all, some or none of its potentially
eligible dividends as such qualified net interest income or as qualified short-term capital gains and/or treat such dividends, in whole or in part, as ineligible for this exemption from withholding. In order to qualify for this exemption from
withholding, a non-U.S. shareholder will need to comply with applicable certification requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN or substitute form). In the case of shares held through an
intermediary, the intermediary may withhold even if a Fund reports the payment as qualified net interest income or qualified short-term capital gain. Non-U.S. shareholders should contact their intermediaries with respect to the application of these
rules to their accounts.
In general, U.S. federal withholding tax will not apply to any gain or income realized by a non-U.S.
shareholder in respect of any distributions of net long-term capital gains over net short-term capital losses, exempt-interest dividends, or upon the sale or other disposition of shares of a Fund.
Provided that 50% or more of the value of a Funds stock is held by U.S. shareholders, distributions of U.S. real property interests
(including securities of a U.S. real property holding corporation, unless such corporation is regularly traded on an established securities market and such Fund has held 5% or less of such corporations outstanding shares during the five-year
period ending on the date of distribution) occurring on or before December 31, 2013, in redemption of a foreign shareholders shares of such Fund will cause the Fund to recognize gain. If a Fund is required to recognize such gain, the
amount of gain recognized will be equal to the fair market value of such Funds interests over the Funds adjusted basis in such interests to the extent of the greatest foreign ownership percentage of such Fund during the five-year period
ending on the date of redemption.
Income Effectively Connected.
If the income from a Fund is effectively
connected with a U.S. trade or business carried on by a foreign shareholder, then distributions of investment company taxable income and capital gain dividends, any amounts retained by a Fund which are designated as undistributed capital gains
and any gains
85
realized upon the sale or exchange of shares of a Fund will be subject to U.S. federal income tax at the graduated rates applicable to U.S. citizens, residents and domestic corporations. Foreign
corporate shareholders may also be subject to the branch profits tax imposed by the Code.
The tax consequences to a foreign
shareholder entitled to claim the benefits of an applicable tax treaty might differ from those described herein. Foreign shareholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an
investment in a Fund.
Shares of a Fund held by a non-U.S. shareholder at death will be considered situated within the United
States and subject to U.S. estate tax.
Other Taxation
Fund shareholders may be subject to state, local and foreign taxes on their Fund distributions. Shareholders are advised to consult their
own tax advisers with respect to the particular tax consequences to them of an investment in a Fund.
COUNSEL AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Legal matters in connection with the issuance of the shares
of each Fund offered hereby will be passed on by Willkie Farr & Gallagher LLP, 787 Seventh Avenue, New York, New York 10019.
PricewaterhouseCoopers LLP, 300 Madison Avenue, New York, NY 10017, has been appointed as the independent registered public accounting firm for the Funds and the AQR Managed Futures Strategy Offshore Fund
Ltd., the AQR Managed Futures Strategy HV Offshore Fund Ltd., the AQR Risk Parity Offshore Fund Ltd., the AQR Multi-Strategy Alternative Offshore Fund Ltd., the AQR Risk-Balanced Commodities Strategy Offshore Fund Ltd., the AQR Risk Parity II MV
Offshore Fund Ltd., the AQR Risk Parity II HV Offshore Fund Ltd., the AQR Style Premia Alternative Offshore Fund Ltd. and the AQR Global Macro Offshore Fund Ltd..
REGISTRATION STATEMENT
The Prospectus and this
Statement of Additional Information are not an offering of the securities herein described in any state in which such offering may not be lawfully made. No salesman, dealer, or other person is authorized to give any information or make any
representation other than those contained in the Prospectus and this Statement of Additional Information.
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