NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2013 (Unaudited)
The
Altegris Managed Futures Strategy Fund (the Fund) is a diversified series of shares of beneficial interest of Northern
Lights Fund Trust (the Trust), a statutory trust organized under the laws of the State of Delaware on January 19,
2005, and is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as an open-end management
investment company. The Funds primary investment objective is to achieve positive absolute returns in rising and falling
equity markets. The Funds secondary investment objective is to achieve its primary investment objective with less volatility
than major equity market indices.
On
September 1, 2013, the partnership of Aquiline Capital Partners LLC and Genstar Capital, LLC, closed a transaction with Genworth
Financial, Inc. (Genworth) the former parent company of Altegris, in the acquisition of the Genworths wealth
management business, including Altegris. All customary closing conditions were met with approval at the shareholder meeting held
on July 19, 2013, whereby the shareholders approved the new investment advisory agreement. Results of the proxy are included in
the renewal of the advisory agreement.
The
Fund offers Class A, Class C, Class O and Class I shares. The Fund launched Class O shares on March 13, 2013. Class A shares are
offered at net asset value plus a maximum sales charge of 5.75%.
Investors that purchase $1,000,000
or more of the Funds Class A shares will not pay any initial sales charge on the purchase. However, purchases of $1,000,000 or
more of Class A shares may be subject to a contingent deferred sales charge (CDSC) on shares redeemed during the first
18 months after their purchase in the amount of the commissions paid on the shares redeemed. Class C, Class O and Class I shares
are offered at net asset value (NAV) without an initial sales charge. Class C shares are subject to a deferred sales
charge of up to 1% on shares redeemed within 12 months of purchase. Class I shares of the Fund are offered at NAV without an initial
sales charge and are not subject to 12b-1 distribution fees, but have a higher minimum initial investment than Class A, Class
O and Class C shares. All classes are subject to a 1% redemption fee on redemptions made within 30 days of the original purchase.
Each share class represents an interest in the same assets of the Fund and classes are identical except for differences in their
sales charge structures and ongoing service and distribution charges. All classes of shares have equal voting privileges except
that each class has exclusive voting rights with respect to its service and/or distribution plans. The Funds income, expenses
(other than class specific distribution fees) and realized and unrealized gains and losses are allocated proportionately each
day based upon the relative net assets of each class.
Consolidation
of Subsidiaries –
The consolidated financial statements of the Fund include AMFS Fund Limited. AMFS a
wholly-owned and controlled Foreign Corporation (CFC) of which the Fund may invest up to 25% of its total assets.
The Fund consolidates the results of subsidiaries in which the Fund holds a controlling economic interest (greater than 50%).
All
inter-company accounts and transactions have been eliminated.
A
summary of the Funds investment in AMFS is as follows:
|
Inception
Date of
AMFS
|
AMFS
Net Assets at
December 31, 2013
|
%
Of Total Net Assets at
December 31, 2013
|
AMFS
|
09/11/10
|
$
88,678,547
|
22.5%
|
|
2.
|
SIGNIFICANT
ACCOUNTING POLICIES
|
The
following is a summary of significant accounting policies followed by the Fund in preparation of its consolidated financial statements.
The policies are in conformity with U.S. generally accepted accounting principles (GAAP). The preparation of the
consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of income and expenses for the year ended. Actual results could differ from those estimates.
Altegris
Managed Futures Strategy Fund
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December
31, 2013 (Unaudited)
Security
Valuation –
Securities listed on an exchange are valued at the last reported sale price at the close of the regular
trading session of the exchange
on the business day the value is being determined, or in the case of
securities listed on NASDAQ at the NASDAQ Official Closing Price. In the absence of a sale such securities shall be valued at
the mean between the current bid and bid prices on the day of valuation. Debt securities (other than short-term obligations) are
valued each day by an independent pricing service approved by the Board of Trustees (the Board) using methods which
include current market quotations from a major market maker in the securities and based on methods which include the consideration
of yields or prices of securities of comparable quality, coupon, maturity and type.
Short-term debt obligations with remaining
maturities in excess of sixty days are valued at current market prices by an independent pricing service approved by the Board.
Short-term debt obligations having 60 days or less remaining until maturity, at time of purchase, are valued at amortized cost.
AMFS
gains exposure to the global derivatives markets through investment in the unaffiliated trading companies of Alternative Strategies
Limited (ASL). ASL is incorporated as an exempted company under the Companies Law of the Cayman Islands on July
7, 2010. ASL uses one or more proprietary managed futures trading programs (managed futures programs
),
in one or more private investment vehicles or commodity pools (unaffiliated trading companies) advised by one or
more commodity trading advisors (CTAs).
Managed futures programs attempt to earn profits in a variety of
markets by employing long and short trading algorithms applied to futures, options, forward contracts, and other derivative instruments
The
Advisor fair values ASL daily based on the underlying commodity trading advisors (CTAs) current position
information on a next-trading day basis.
The Advisor applies current day pricing to the CTA positions calculating an estimated profit and loss which is then used to determine
a daily fair value NAV for each CTA. The Advisor receives a daily CTA estimated profit and loss figure from the CTA which is compared
to the Advisors estimated profit and loss. If the difference of these estimates exceeds the Advisors threshold, additional
procedures are conducted by the Advisor which may include, but are not limited to reviewing current prices and speaking with the
CTA. The Advisor then makes a final determination on the fair value NAV for each CTA, using either the Advisors estimate
or the CTAs estimate. These CTA prices are used to value the Funds swaps and structured note holdings. The Advisors fair
value NAV is back tested daily and reviewed by the Funds fair valuation committee on a regular basis.
For financial
reporting purposes, at December 31, 2013, the NAV is calculated using the current market values of the CTAs total assets
as of the close of the regular trading session of the exchange or the close price at 4 pm eastern time.
A
Fund may hold securities, such as private placements, interests in commodity pools, other non-traded securities or temporarily
illiquid securities, for which market quotations are not readily available or are determined to be unreliable. These securities
will be valued at their fair market value as determined using the fair value procedures approved by the Board. The
Board has delegated execution of these procedures to a fair value team composed of one or more representatives from each of the
(i) Trust, (ii) administrator, and (iii) advisor and/or sub-advisor. The team may also enlist third party consultants such as
an audit firm or financial officer of a security issuer on an as-needed basis to assist in determining a security-specific fair
value. The Board reviews and ratifies the execution of this process and the resultant fair value prices at least quarterly to
assure the process produces reliable results.
Fair
Value Team and Valuation Process
–
This team is composed of one or more representatives from each of the (i) Trust, (ii) administrator,
and (iii) advisor and/or sub-advisor. The applicable investments are valued collectively via inputs from each of these groups.
For example, fair value determinations are required for the following securities: (i) securities for which market quotations are
insufficient or not readily available on a particular business day (including securities for which there is a short and temporary
lapse in the provision of a price by the regular pricing source), (ii) securities for which, in the judgment of the advisor or
sub-advisor, the prices or values available do not represent the fair value of the instrument. Factors which may cause the advisor
or sub-advisor to make such a judgment include, but are not limited to, the following: only a bid price or an asked price is available;
the spread between bid and asked prices is substantial; the frequency of sales; the thinness of the market; the size of reported
trades; and actions of the securities markets, such as the suspension or limitation of trading; (iii) securities determined to
be illiquid; (iv) securities with respect to which an event that will affect the value thereof has occurred since the closing
prices were established on the principal exchange on which they are traded, but prior to a Funds calculation of its NAV.
Specifically, interests in commodity pools or managed futures pools are valued on a daily basis by reference to the closing market
prices of each futures contract or other asset held by a pool, as adjusted for pool expenses. Restricted or illiquid securities,
such as private placements or non-traded securities are valued via inputs from the advisor or sub-advisor based upon the current
bid for the security from two or more independent dealers or other parties
Altegris
Managed Futures Strategy Fund
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December
31, 2013 (Unaudited)
reasonably familiar with the facts and circumstances
of the security (who should take into consideration all relevant factors as may be appropriate under the circumstances). If the
advisor or sub-advisor is unable to obtain a current bid from such independent dealers or other independent parties, the fair
value team shall determine the fair value of such security using the following factors: (i) the type of security; (ii) the cost
at date of purchase; (iii) the size and nature of the Funds holdings; (iv) the discount from market value of unrestricted securities
of the same class at the time of purchase and subsequent thereto; (v) information as to any transactions or offers with respect
to the security; (vi) the nature and duration of restrictions on disposition of the security and the existence of any registration
rights; (vii) how the yield of the security compares to similar securities of companies of similar or equal creditworthiness;
(viii) the level of recent trades of similar or comparable securities; (ix) the liquidity characteristics of the security; (x)
current market conditions; and (xi) the market value of any securities into which the security is convertible or exchangeable.
Swap
Agreements –
The Fund is subject to equity price risk and/or interest rate risk in the normal course of pursuing their
respective investment objectives. The Fund may hold fixed-rate bonds, the value of which may decrease if interest rates rise and
equities subject to equity price risk. The Fund may enter into various swap transactions for investment purposes or to manage
interest rate, equity, foreign exchange (currency) or credit risk. These would be two-party contracts entered into primarily to
exchange the returns (or differentials in rates of returns) earned or realized on particular pre-determined investments or instruments.
The
gross returns to be exchanged or swapped between 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 or market segment. Changes in the value of
swap agreements are recognized as unrealized gains or losses in the Consolidated Statement of Operations by marking to
market on a daily basis to reflect the value of the swap agreement at the end of each trading day. Payments received or
paid at the beginning of the agreement are reflected as such on the Consolidated Statements of Assets and Liabilities and may
be referred to as upfront payments. The Fund amortizes upfront payments and/or accrues for the fixed payment stream on swap agreements
on a daily basis with the net amount recorded as a component of unrealized gain or loss on the Consolidated Statement of Operations.
A liquidation payment received or made at the termination of the swap agreement is recorded as a realized gain or loss on the
Consolidated Statement of Operations. The Fund segregates liquid securities having a value at least equal to the amount of its
current obligation under any swap transaction. Entering into these agreements involves, to varying degrees, lack of liquidity
and elements of credit, market, and counterparty risk in excess of amounts recognized on the Consolidated Statement of Assets
and Liabilities. The Funds maximum risk of loss from counterparty credit risk is the discounted net value of the cash flows
to be received from the counterparty over the contracts remaining life, to the extent that that amount is positive.
Structured
Notes –
Structured notes are marked-to-market daily based upon market quotations and fair value estimates of the value
of the reference asset, and in accordance with the Funds valuation policies. This valuation is a function of the valuation
of the reference assets, adjusted for any accruals and financing charges. The change in note value, if any, is recorded as unrealized
gain or loss. Payments received or made upon note redemption or maturity are typically based on independent valuations of the
reference asset(s) and are recorded as realized gain or loss. Purchasing such structured notes involves, to varying degrees, elements
of credit, market, and documentation risk. Such risks involve the possibility that there will be no independent valuation of the
reference asset(s), that the issuer may default on its obligation to perform (possibly leading to a loss of principal) or disagree
as to the meaning of contractual terms in the note documents, and that the return of the reference asset less the floating and/or
fixed rate may be below expectations.
The
amounts of derivative instruments disclosed on the Consolidated Portfolio of Investments at December 31, 2013 are a reflection
of the volume of derivative activity for the Fund.
Fair
Value -
The Fund utilizes various methods to measure the fair value of all of its investments on a recurring basis. GAAP establishes
a hierarchy that prioritizes inputs to valuation methods. The three levels of input are:
Level
1
– Unadjusted quoted prices in active markets for identical assets and liabilities.
Level
2
– Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either
directly or indirectly. These inputs may include quoted prices for the identical instrument in an inactive market, prices for
similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates and similar data.
Altegris
Managed Futures Strategy Fund
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December
31, 2013 (Unaudited)
Level
3
– Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available; representing
the Funds own assumptions about the assumptions a market participant would use in valuing the asset or liability, and would
be based on the best information available.
The
availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including,
for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets,
and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less
observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment
exercised in determining fair value is greatest for instruments categorized in Level 3.
The
inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes,
the level in the fair value hierarchy within which the fair value measurement falls in its entirety, is determined based on the
lowest level input that is significant to the fair value measurement in its entirety.
The
inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those
securities. The following tables summarize the inputs used as of December 31, 2013 for the Funds assets and liabilities
measured at fair value:
Assets *
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated Trading Companies
|
|
$
|
—
|
|
|
$
|
15,367,208
|
|
|
$
|
—
|
|
|
$
|
15,367,208
|
|
Structured Notes
|
|
|
—
|
|
|
|
22,567,732
|
|
|
|
—
|
|
|
|
22,567,732
|
|
Notes and Bonds
|
|
|
—
|
|
|
|
139,214,131
|
|
|
|
—
|
|
|
|
139,214,131
|
|
Certificates of Deposit
|
|
|
—
|
|
|
|
35,700,000
|
|
|
|
—
|
|
|
|
35,700,000
|
|
Commercial Paper
|
|
|
—
|
|
|
|
48,898,308
|
|
|
|
—
|
|
|
|
48,898,308
|
|
Discount Agency Notes
|
|
|
—
|
|
|
|
58,904,488
|
|
|
|
—
|
|
|
|
58,904,488
|
|
Total:
|
|
$
|
—
|
|
|
$
|
320,651,867
|
|
|
$
|
—
|
|
|
$
|
320,651,867
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
$
|
—
|
|
|
$
|
1,112,372
|
|
|
$
|
—
|
|
|
$
|
1,112,372
|
|
Total Assets:
|
|
$
|
—
|
|
|
$
|
321,764,239
|
|
|
$
|
—
|
|
|
$
|
321,764,239
|
|
|
*
|
Refer
to the Consolidated Portfolio of Investments for security classification.
|
The
Fund did not hold any Level 1 or Level 3 securities during the six months ended December 31, 2013.
There
were no transfers into or out of Level 2 during the six months ended December 31, 2013. It is the Funds policy to recognize
transfers into or out of Levels at the end of the reporting period.
Security
Transactions and Related Income
– Security transactions are accounted for on trade date basis. Interest income is recognized
on an accrual basis. Discounts are accreted and premiums are amortized on securities purchased over the lives of the respective
securities. Dividend income is recorded on the ex-dividend date. Realized gains or losses from sales of securities are determined
by comparing the identified cost of the security lot sold with the net sales proceeds.
Dividends
and Distributions to Shareholders –
Dividends from net investment income are declared and paid at least annually. Distributable
net realized capital gains are declared and distributed annually. Dividends from net investment income and distributions from
net realized gains are recorded on ex dividend date and determined in accordance with federal income tax regulations, which may
differ from GAAP. These book/tax differences are considered either temporary (i.e., deferred losses, capital loss
carry forwards) or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified
within the composition of net assets based on their federal tax-basis treatment; temporary differences do not require reclassification.
Federal
Income Taxes
– It is the Funds policy to continue to qualify as a regulated investment company by complying with
the provisions of the Internal Revenue Code that are applicable to regulated investment companies and to distribute substantially
all of its taxable income and net realized gains to shareholders. Therefore, no federal income tax provision has been recorded.
Altegris
Managed Futures Strategy Fund
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December
31, 2013 (Unaudited)
The
Fund recognizes the tax benefits of uncertain tax positions only where the position is more likely than not to be
sustained assuming examination by tax authorities. Management has analyzed the Funds tax positions, and has concluded that
no liability for unrecognized tax benefits should be recorded related to uncertain tax positions expected to be taken on returns
filed for open tax years 2011 and 2012 or expected to be taken in the Funds 2013 tax return. The Fund identifies its major
tax jurisdictions as U.S. Federal and foreign jurisdictions where the Fund makes significant investments. The Fund is not aware
of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially
in the next twelve months.
For
tax purposes, AMFS is an exempted Cayman investment company. AMFS has received an undertaking from the Government of the Cayman
Islands exempting it from all local income, profits and capital gains taxes. No such taxes are levied in the Cayman Islands at
the present time. For U.S. income tax purposes, AMFS is a Controlled Foreign Corporation and as such is not subject to
U.S.
income tax.
Expenses
– Expenses of the Trust that are directly identifiable to a specific Fund are charged to that Fund. Expenses, which
are not readily identifiable to a specific Fund, are allocated in such a manner as deemed equitable, taking into consideration
the nature and type of expense and the relative sizes of the Funds in the Trust.
Indemnification
–
The Trust indemnifies its officers and trustees for certain liabilities that may arise from the performance of their
duties to the Trust. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of
representations and warranties and which provide general indemnities. The Funds maximum exposure under these arrangements
is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on
experience, the risk of loss due to these warranties and indemnities appears to be remote.
|
3.
|
INVESTMENT
TRANSACTIONS
|
For
the six months ended
December 31, 2013
, cost of purchases and proceeds from sales of portfolio
securities, other than short-term
investments amounted to $136,165,349 and $209,049,711, respectively.
During
the normal course of business, the Fund purchases and sells various financial instruments, which may result in market, counterparty,
liquidity and currency risks, the amount of which is not apparent from the consolidated financial statements.
Market
Risk
:
Market risk is the risk that changes in interest rates, foreign exchange rates or equity
prices will affect the positions held by the Fund. The Fund is exposed to market risk on financial instruments that are valued
at market prices as disclosed in the consolidated portfolio of investments. The prices of derivative instruments, including options,
forwards and futures prices, can be highly volatile. Price movements of derivative contracts in which the Funds assets may
be invested are influenced by, among other things, interest rates, changing supply and demand relationships, trade, fiscal, monetary
and exchange control programs and policies of governments, and national and international political and economic events and policies.
The Fund is exposed to market risk on derivative contracts in that the Fund may not be able to readily dispose of its holdings
when it chooses and also that the price obtained on disposal is below that at which the investment is included in Funds
consolidated financial statements. All financial instruments are recognized at fair value, and all changes in market conditions
directly affect net income. The Funds investments in derivative instruments are exposed to market risk and are disclosed
in the consolidated portfolio of investments.
Counterparty
Risk
:
The Fund invests in derivative instruments issued for the Fund by Barclays Bank PLC
(Barclays), a Barclays Product (Product). If Barclays becomes insolvent, Barclays may not be able to make
any payments under the Product and investors may lose their capital invested in the Product. A decline in Barclays financial
standing is likely to reduce the market value of the Product and therefore the price an investor may receive for the Product if
they sell it in the market.
Liquidity
Risk:
Liquidity risk is the risk that the Fund will encounter difficulty in raising funds to meet commitments. Liquidity risk
may result in an inability to sell investments quickly at close to fair value. The Funds financial instruments include
investments in securities which are not traded on organized public exchanges and which generally may be illiquid. As a result
the Fund may not be able to quickly liquidate its investments in these instruments at an amount close to its fair value in order
to meet its liquidity requirements. The Fund does not anticipate any material losses as a result of liquidity risk.
Altegris
Managed Futures Strategy Fund
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December
31, 2013 (Unaudited)
|
4.
|
OFFSETTING
OF FINANCIAL ASSETS AND DERIVATIVE ASSETS
|
The
Funds policy is to recognize
a net asset or liability equal to the unrealized on swap contracts
and the gross amount of reverse repurchase agreements.
During the six months ended December 31, 2013, the Portfolio was
not subject to any master netting arrangements.
|
5.
|
INVESTMENT
ADVISORY AGREEMENT, TRANSACTIONS WITH AFFILIATES AND OTHER FEES
|
Altegris
Advisors, L.L.C., serves as the Funds investment advisor (the Advisor).
The Funds
Advisor delegates managements of the Funds Fixed Income strategy portfolio to J.P. Morgan Investment Management, Inc.,
who serves as the Sub-Advisor (the Sub-Advisor).
The Fund employs Gemini Fund Services, LLC (GFS)
to provide administration, fund accounting, and transfer agent services. A Trustee and certain officers of the Funds are also
officers of GFS.
Pursuant
to an advisory agreement with The Trust on behalf of the Fund, the Advisor, under the oversight of the Board, directs the daily
operations of the Fund and supervises the performance of administrative and professional services provided by others. As compensation
for its services and the related expenses borne by the Advisor, the Fund pays the Advisor a fee computed and accrued daily and
paid monthly, based on the Funds average daily net assets and is computed at the following annual rates: 1.50% on the first
$1 billion of net assets, 1.40% on net assets greater than $1 billion and less than or equal to $1.5 billion, 1.30% on net assets
greater than $1.5 billion and less than or equal to $2 billion, 1.20% on net assets greater than $2 billion and less than or equal
to $2.5 billion, 1.10% on net assets greater than $2.5 billion and less than or equal to $3 billion and 1.00% on net assets greater
than $3 billion. Pursuant to a sub-advisory agreement between the Advisor and Sub-Advisor, the Sub-Advisor is entitled to receive,
on a monthly basis, an annual sub-advisory fee on the fixed income portion of the Funds average daily net assets. The Sub-Advisor
is paid by the Advisor, not the Fund.
The
Advisor has contractually agreed to reduce its fees and/or absorb expenses of the Fund, until at least January 31, 2015,
to
ensure that Total Annual Fund Operating Expenses After Fee Waiver and/or Reimbursement (exclusive of any taxes, front end or contingent
deferred loads, brokerage fees and commissions, front end or contingent deferred loads, borrowing costs (such as interest and
dividend expense on securities sold short). Acquired Fund Fees and Expenses or extraordinary expenses such as litigation) will
not exceed 1.90%, 2.65%, 1.90% and 1.65% of
the daily average net assets attributable to each
of the Class A, Class C, Class O and Class I shares, respectively. The Advisor may seek reimbursement only for expenses waived
or paid by it during the three fiscal years prior to such reimbursement; provided, however, that such expenses may only be reimbursed
to the extent they were waived or paid after the date of the Waiver Agreement (or any similar agreement). The Board may terminate
this expense reimbursement arrangement at any time.
For the six months ended December 31, 2013, the
Advisor waived its fees in the amount of $284,370. As of December 31, 2013, expenses of $284,370 were waived by the advisor of
which $284,370 is subject to recapture though June 30, 2016.
The
Trust, on behalf of the Fund, has adopted the Trusts Distribution and Shareholder Serving Plans for Class A, Class C, and
Class O shares, respectively pursuant to Rule 12b-1 under the 1940 Act (the Plan or 12b-1 Plans).
The Plans provide that a monthly service and/or distribution fee is calculated by the Fund at an annual rate of 0.25%, 1.00% and
0.25% of the average daily net assets attributable to Class A, Class C and Class O shares, respectively. The fee is paid to Northern
Lights Distributors, LLC (the Distributor) to provide compensation for ongoing distribution-related activities or
services and/or maintenance of the Funds shareholder accounts, not otherwise required to be provided
by
the Advisor. During the six months ended December 31, 2013, pursuant to the Plans, Class A, Class C and Class O shares paid $272,219,
$114,119 and $893, respectively.
The
Distributor acts as the Funds
principal underwriter in a continuous public offering of the Funds
Class A, Class C, Class O and Class I shares. The Distributor is an affiliate of GFS. During the six months ended December 31,
2013, the Distributor received $54,792 and $35,601 in underwriting commissions for sales of Class A and Class C shares, respectively,
of which $7,847 and 7,335 was retained by the principal underwriter or other affiliated broker-dealers.
The
Fund is part of a series of Altegris Funds or (Family) comprised of, Altegris Macro Strategy Fund, Altegris Futures
Evolution Strategy Fund,
Altegris Equity Long Short Fund, Altegris
Fixed Income Long Short Fund, Altegris Multi Strategy Alternative Fund and
Altegris/AACA Real Estate
Long Short Fund
.
The Family shares the minimum annual fees based on a
Altegris
Managed Futures Strategy Fund
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December
31, 2013 (Unaudited)
percentage of the average
net assets of each fund. Pursuant to separate servicing agreements with GFS, the Funds pay GFS customary fees for providing administration,
fund accounting and transfer agency services to the Family. GFS provides a Principal Executive Officer and a Principal Financial
Officer to each Fund.
In
addition, certain affiliates of GFS provide ancillary services to the Fund(s) as follows:
Northern
Lights Compliance Services, LLC (
NLCS)
NLCS,
an affiliate of GFS, provides a Chief Compliance Officer to the Trust, as well as related compliance services, pursuant to a consulting
agreement between NLCS and the Trust. Under the terms of such agreement, NLCS receives customary fees from the Fund.
Gemcom,
LLC
(Gemcom)
Gemcom,
an affiliate of GFS, provides EDGAR conversion and filing services as well as print management services for the Fund on an ad-hoc
basis. For the provision of these services, Gemcom receives customary fees from the Fund.
The
Fund may assess a short-term redemption fee of 1.00% of the total redemption amount if a shareholder sells their shares after
holding them for less than 30 days on all classes. Class C shares are also subject to a deferred sales charge of up to 1% on shares
redeemed within 12 months of purchase. The redemption fee is paid directly to the Fund
. For the six
months ended December 31, 2013, Class A, Class C, Class I and Class O assessed redemption fees in the amounts of $2,051, $224,
$3,189 and $8, respectively.
Subsequent
events after the date of the Consolidated Statement of Assets and Liabilities have been evaluated through the date the financial
statements were issued. Management has concluded that there is no impact requiring adjustment or disclosure in the consolidated
financial statements.
Altegris
Managed Futures Strategy Fund
EXPENSE
EXAMPLES (Unaudited)
December
31, 2013
As
a shareholder of the Altegris Managed Futures Strategy Fund, you incur two types of costs: (1) transaction costs, including sales
charges (loads) on purchases, contingent deferred sales charges (CDSCs) and redemption fees; and (2) ongoing costs, including
management fees; distribution and/or service (12b-1) fees; and other Fund expenses. This example is intended to help you understand
your ongoing costs (in dollars) of investing in the Altegris Managed Futures Strategy Fund and to compare these costs with the
ongoing costs of investing in other mutual funds.
The
example is based on an investment of $1,000 invested at the beginning of the period and held for the six-month period beginning
July 1, 2013 and ended December 31, 2013.
Table
1. Actual Expenses
Table
1 Actual Expenses provides information about actual account values and actual expenses. You may use the information
below; together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number provided
under the heading Expenses Paid During Period.
Table
2. Hypothetical Example for Comparison Purposes
Table
2 below provides information about hypothetical account values and hypothetical expenses based on the Altegris Managed Futures
Strategy Funds actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Funds
actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balances or
expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of other funds.
Please
note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional
costs, such as sales charges (loads), or redemption fees. Therefore, the table is useful in comparing ongoing costs only, and
will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
Table 1.
|
Annualized
|
Beginning
|
Ending
|
Expenses Paid
|
Actual
|
Expense
|
Account Value
|
Account Value
|
During Period *
|
Expenses
|
Ratio
|
7/1/2013
|
12/31/2013
|
7/1/2013 – 12/31/13
|
Class A
|
1.90%
|
$1,000.00
|
$1,004.50
|
$9.60
|
Class C
|
2.65%
|
$1,000.00
|
$1,001.10
|
$13.37
|
Class I
|
1.65%
|
$1,000.00
|
$1,005.50
|
$8.34
|
Class O
|
1.90%
|
$1,000.00
|
$1,004.50
|
$9.60
|
Table 2.
|
|
|
|
|
|
|
Beginning
|
Ending
|
Expenses Paid
|
Hypothetical
|
|
Account Value
|
Account Value
|
During Period *
|
(5% return before expenses)
|
|
7/1/2013
|
12/31/2013
|
7/1/2013 – 12/31/13
|
Class A
|
1.90%
|
$1,000.00
|
$1,015.63
|
$9.65
|
Class C
|
2.65%
|
$1,000.00
|
$1,011.85
|
$13.44
|
Class I
|
1.65%
|
$1,000.00
|
$1,016.89
|
$8.39
|
Class O
|
1.90%
|
$1,000.00
|
$1,015.63
|
$9.65
|
|
*
|
Expenses
are equal to the Funds annualized expense ratio, multiplied by the number of days in the period (184) divided by the number
of days in the fiscal year (365).
|
Altegris
Managed Futures Strategy Fund (Adviser – Altegris Advisors, LLC)*
In
connection with the April 24, 2013 special meeting of the Board of Trustee (the Trustees or the Board)
of the Northern Lights Fund Trust (the Trust), including a majority of the Trustees who are not interested
persons, as that term is defined in the Investment Company Act of 1940, as amended, the Trustees discussed the approval
of a new investment advisory agreement (the Advisory Agreement) between Altegris Advisors, LLC (Altegris)
and the Trust, on behalf of Altegris Managed Futures Strategy Fund (the Fund), upon reacquisition of Altegris
parent company. In considering the approval of the Advisory Agreement, the Board received materials specifically relating to the
Advisory Agreement.
The
Board was assisted by independent legal counsel throughout the Advisory Agreement review process. The Board relied upon the advice
of independent legal counsel and their own business judgment in determining the material factors to be considered in evaluating
the Advisory Agreement and the weight to be given to each such factor. The conclusions reached by the Trustees were based on a
comprehensive evaluation of all of the information provided and were not the result of any one factor. Moreover, each Trustee
may have afforded different weight to the various factors in reaching his conclusions with respect to the Advisory Agreement.
Nature,
Extent and Quality of Service.
The Trustees revisited their discussions regarding Altegris over the last 12 months, and considered
their familiarity with key advisory personnel and that each has approximately 20 years of industry experience. The Trustees also
considered that Altegris has a strong infrastructure with qualified personnel that provides research, operational, sales and marketing,
and legal and compliance services to the Funds. The Trustees also considered that Altegris provides due diligence around asset
allocation, sourcing, evaluation of investment managers, investment monitoring, risk management, along with the supervision of
sub-advisers. A representative of Trust management noted that Altegris is professional and proactive in its interactions with
management and fund service providers. The Trustees noted that Altegris manages a robust marketing and distribution plan for the
Funds that includes marketing the Funds to Altegris affiliated broker-dealers, independent broker-dealers, and making the
Funds available for sale on approximately 20 mutual fund supermarket platforms. During their discussion, the Trustees
recognized that Altegris has a good fund-raising track record that they expect will continue. The Trustees remarked that they
and the Trusts Chief Compliance Officer (CCO) have had a good working relationship with Altegris personnel
since the commencement of the Altegris/Trust
relationship. The Trusts
CCO confirmed that he and his staff had not found any material compliance issues at Altegris in the last year, and that Altegris
compliance team had developed a strong infrastructure for monitoring overall compliance. The Trusts CCO noted that Altegris
current CCO is also its general counsel. The Altegris CCO explained that Altegris is in the process of evaluating those responsibilities
and is considering the addition of a fully dedicated CCO. With respect to daily monitoring, the Trustees noted that Altegris has
developed internal tools to handle the daily monitoring of compliance and Fund operations to ensure the prospectus and 1940 Act
guidelines are adhered to. The Trustees were pleased that existing key Altegris personnel will continue to have responsibility
for managing the business, and that a subset of those will have an equity stake in the firm. Finally, they noted that a representative
of Altegris had confirmed that Altegris could see no reason why the reorganization would impact the firm or Fund shareholders
negatively, in fact, Altegris believes it will have a positive impact due to the additional expertise and resources Altegris will
have access to. Based on its previous history with Altegris, the Trustees concluded that Altegris has the capacity to provide
the Board and shareholders with high quality services for the Fund.
Performance.
The Trustees reviewed the one year and since inception performance information for the Fund, and reviewed their deliberations
related to the Funds performance from the June 2012 meeting of the Board. They noted favorably that the Fund had outperformed
its peer group and the Managed Futures Morningstar category during the last one year and the Morningstar category since inception,
while slightly underperforming the peer group since inception. They noted the Funds positive one year performance (0.42%)
as compared to negative returns for both the peer group (-1.30%) and the Morningstar category (-6.87%). They further noted the
Funds improved performance since June 2012. After discussion, the Trustees concluded that Altegris appeared to be achieving
its objective in the managed futures area, and performing reasonably well relative to other funds in the category.
Fees
and Expenses.
The Trustees noted that they had recently considered the approval of the advisory agreement between the Trust
and Altegris with respect to the Fund at the June 20, 2012 meeting of the Board. Because of the relatively brief time since their
last review of the Fund, the Trustees revisited their deliberations from that meeting. They noted the Funds fee of 1.50%
is higher than the Morningstar category average of 1.24%, but within the high-low range of fees charged by funds in the category
(0.59% - 2.99%). They further noted the advisory fee is in line with the fees charged by other funds in its peer group which average
1.56% and range 1.40% to 1.80%. They noted the approved break points in place that take the fee to as low as 1.0% at the highest
breakpoint. After evaluating the materials provided, and revisiting their deliberations from the June 2012 meeting of the Board,
the Trustees concluded that the fee was acceptable.
Economies
of Scale.
The Trustees considered the expense limitation agreement in place for the Funds, and the proposed breakpoints included
in the Advisory Agreement with respect to the Fund. After discussion, the Boards consensus was that in consideration of
the expense limitation agreement, the proposed breakpoints continue to be appropriate, and the shareholders will benefit appropriately
from the economies of scale.
Profitability.
The Trustees considered the profits realized by Altegris over the last 12 months in connection with the operation of the Fund,
and noted the profits earned by Altegris in connection with its relationship with the Fund. The Trustees noted Altegris
commitment to reinvest its legitimate profits in improvements for the Fund and adviser. Additionally, the Trustees considered
the Funds investment returns, particularly in light of the challenging nature of the managed futures markets, and the benefits
the shareholders have realized from such returns. The Trustees concluded, therefore, that Altegris level of profitability
from its relationship with the Fund was not excessive.
Conclusion.
Having requested and received such information from the Adviser as the Board believed to be reasonably necessary to evaluate
the terms of the Advisory Agreement, and as assisted by the advice of Counsel, the Board concluded that the advisory fee structure
is reasonable and that approval of the Advisory Agreement is in the best interests of the shareholders of the Altegris Managed
Futures Strategy Fund.
|
*
|
Due
to the timing of the contract renewal schedule, these deliberations may or may not relate to the current performance results of
the Fund.
|
Altegris
Managed Futures Strategy Fund (Sub-Adviser – J.P. Morgan Investment Management, Inc.)
In
connection with the April 24, 2013 special meeting of the Board of Trustees (the Trustees or the Board)
of the Northern Lights Fund Trust (the Trust), including a majority of the Trustees who are not interested
persons, as that term is defined in the Investment Company Act of 1940, as amended (the Independent Trustees),
the Trustees discussed the approval of a sub-advisory agreement (the Sub-Advisory Agreement) between Altegris and
J.P. Morgan Investment Management, Inc. (JPM), on behalf of Altegris Managed Futures Strategy Fund (the Fund),
upon reacquisition of Altegris parent company.
The Trustees noted that JPM previously had
provided the Trustees with materials related to its proposed Sub-Advisory Agreement, including information on the firms investment
strategies executed for its existing clients.
In considering the approval of the Sub-Advisory Agreement, the Board received
materials specifically relating to the Sub-Advisory Agreement.
The
Board was assisted by independent legal counsel throughout the Sub-Advisory Agreement review process. The Board relied upon the
advice of independent legal counsel and their own business judgment in determining the material factors to be considered in evaluating
the Sub-Advisory Agreement and the weight to be given to each such factor. The conclusions reached by the Trustees were based
on a comprehensive evaluation of all of the information provided and were not the result of any one factor. Moreover, each Trustee
may have afforded different weight to the various factors in reaching his conclusions with respect to the Sub-Advisory Agreement.
Nature,
Extent, and Quality of Services.
The Trustees took into consideration that that JPM has over $1.4 trillion in assets under
management, providing a wide range of investment solutions and products to individuals, advisers and institutions. The Trustees
discussed the extensive research conducted by JPM, the impressive background of the professionals servicing the Fund, and the
sub-advisers culture of compliance. The Trustees discussed JPMs responses and concluded that the nature, extent,
and quality of services provided by the Sub-adviser were very satisfactory.
Performance.
The Trustees considered JPMs outperformance, relative to benchmarks, over the last 1 year and since inception (June
24, 2011) with returns of 0.18% and 0.16%, respectively, as compared to 0.12% and 0.11%, respectively, for the BofA ML 3-Month
T-Bill index. After discussion, the Trustees concluded that JPMs performance is reasonable.
Fees
and Expenses.
The Trustees evaluated JPMs sub-advisory fee paid by the advisor, and compared it to management fees
charged by JPM to other mutual funds, pooled investment vehicles or private account with investment objectives and strategies
comparable to the Fund. The Trustees noted that sub-advisory fees charged were identical to the management fees it charged for
other similar services. After evaluating the materials provided, the Trustees concluded that the sub-advisory fee was more than
acceptable.
Economies
of Scale.
The Trustees considered whether there will be economies of scale with respect to the management of the Fund. The
Trustees agreed that this was an adviser level issue and should be considered with respect to the overall advisory contract, taking
into consideration the impact of the sub-advisory expense. After discussion, it was the consensus of the Trustees that based on
the competitive fee charged by JPM, the lack of breakpoints was acceptable.
Profitability.
The Trustees considered the profits realized by JPM in connection with the operation of the Fund and whether the amount of
profit is a fair entrepreneurial profit with respect to the services provided to the Fund. The Trustees noted that no additional
benefits were realized by the Sub-adviser from other activities related to the Fund. After further discussion, the Trustees concluded
that JPMs anticipated profits from the Fund were not excessive.
Conclusion.
Having requested and received such information from the Sub-Adviser as the Board believed to be reasonably necessary to evaluate
the terms of the Sub-Advisory Agreement, and as assisted
by
the advice of counsel, the Board concluded that the fee structure is reasonable and that approval of the Sub-Advisory Agreement
is in the best interests of the shareholders of the Altegris managed Futures Strategy Fund.
|
*
|
Due
to the timing of the contract renewal schedule, these deliberations may or may not relate to the current performance results of
the Fund.
|
Altegris
Managed Futures Strategy Fund
SUPPLEMENTAL
INFORMATION (Unaudited)
December
31, 2013