As filed with the Securities and Exchange Commission on April 14, 2000
1933 Act Registration No. 333 - ______
1940 Act Registration No. 811 - 09901
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
Pre-Effective Amendment No. _____ [ ]
Post-Effective Amendment No. _____ [ ]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. _____ [ ]
HILLVIEW INVESTMENT TRUST II
(Exact name of registrant as specified in charter)
1055 Washington Boulevard
Third Floor
Stamford, Connecticut 06901
(Address of principal executive offices)
Registrant's telephone number, including area code: (203) 778-6600
M. KATHLEEN WOOD
1055 Washington Boulevard
Third Floor
Stamford, Connecticut 06901
(Name and Address of Agent for Service)
Copies to:
ARTHUR J. BROWN, ESQ.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Ave., N.W.
Washington, D.C. 20036-1800
Telephone: (202) 778-9000
Approximate date of proposed public offering: As soon as practicable after the
effective date of this Registration Statement.
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Title of Securities Being Registered: Class Y Shares of Beneficial Interest of
Hillview Alpha Fund and Hillview International Alpha Fund.
<PAGE>
Hillview Investment Trust II
Contents of Registration Statement
This Registration Statement consists of the following papers and documents.
Cover Sheet
Contents of Registration Statement
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
HILLVIEW INVESTMENT TRUST II
Hillview Alpha Fund
Hillview International Alpha Fund
----------------------
PROSPECTUS
_________, 2000
----------------------
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the funds' shares or determined whether this prospectus
is complete or accurate. To state otherwise is a crime.
<PAGE>
------Hillview Alpha Fund------
Hillview International Alpha Fund
Contents
-----------------------------------------
Hillview Alpha Fund..................................................... 1
Hillview International Alpha Fund....................................... 6
More About Investment Strategies and Risks..............................10
Management..............................................................11
Dividends and Taxes.....................................................14
Shareholder Information.................................................15
Purchasing Shares
Selling Shares
Exchanging Shares
Other Information about Purchases and Redemptions
Shareholder Reports and Inquiries
i
<PAGE>
------Hillview Alpha Fund------
HILLVIEW ALPHA FUND
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
INVESTMENT OBJECTIVE
Long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the fund intends to be primarily invested in common
stocks of U.S. small- and mid-capitalization companies (i.e., companies whose
stock market capitalization is no larger than the largest company in the S&P 400
Index of mid cap stocks or less at the time of investment). The fund typically
will focus its investments in stocks of companies that are outside the S&P 500
Index. The fund may invest in large-capitalization companies when the
sub-adviser(s) feel such companies are undervalued or present significant
potential for growth. The fund may also invest in other equity securities, such
as convertible preferred stock, debt securities convertible into or exchangeable
for common stock and warrants or rights that are convertible into common stock.
The fund's investment manager, Hillview Capital Advisors, LLC ("Hillview
Advisors"), selects sub-advisers to manage specified portions of the fund.
Hillview Advisors anticipates that, under normal circumstances, the fund's
portfolio will be allocated among four to six sub-advisers. Hillview Advisors
selects sub-advisers with complimentary investment styles which are intended to
bring the fund enhanced portfolio and style diversification as well as excess
return relative to a market benchmark over time. Hillview Advisors seeks
sub-advisers with distinguished track records, specific investment processes and
experienced firm personnel. More specifically, Hillview Advisors seeks managers
with definable, sustainable advantages over their peers that, when applied in
less efficient market sectors, can result in superior returns.
The fund has adopted a "concentrated equity" approach for management of the
majority of its assets. Under a concentrated equity approach, a sub-adviser
invests only in its "best investment ideas," that is, the securities in which it
has the highest confidence for investment success at any given time. A
sub-adviser will typically invest in a portfolio that has substantially fewer
securities than other accounts it manages with similar styles, or invest at
least 75% of its portion of the fund in no more than 15 equity securities. By
focusing on the "best investment ideas" of each sub-adviser, the fund seeks to
create a portfolio with increased overall performance when compared to a more
broadly diversified portfolio of securities selected by a single sub-adviser. At
the same time, the use of multiple sub-advisers with distinct styles is intended
to provide a prudent level of diversification of securities and result in
reduced volatility, as compared to each individual sub-adviser. The fund may
permit one or more sub-advisers to manage their portions of the assets without
adherence to the concentrated equity approach.
Harris Associates L.P. ("Harris"), Nevis Capital Management, Inc. ("Nevis
Capital"), Shaker Investments, Inc. ("Shaker Investments"); Pzena Investment
Management LLC ("Pzena") and Frontier Capital Management Company, LLC
<PAGE>
------Hillview Alpha Fund------
("Frontier") currently serve as sub-advisers to the fund.
Harris employs a value-oriented, long-term investment philosophy and a
fundamental research driven stock selection process for equity investing. Harris
attempts to minimize risk and preserve capital by identifying companies whose
securities trade at a substantial discount to Harris' calculation of the
companies' true business values. Harris' concentrated approach focuses on
securities it believes reflect at least a 30-50% discount to Harris' calculation
of the value of the underlying companies.
Nevis Capital's investment philosophy is premised on the belief that the
performance of a company's stock will track its earnings growth over the
long-term. Consistent with that belief, the firm typically selects companies for
investment that, during a comparable period, had annual earnings growth greater
than 20% of their prior year's earnings. Rather than focusing on companies whose
reported earnings growth may be attributable to investment income, extraordinary
gains or specialized, one time accounting techniques, the firm concentrates on
companies with sustainable earnings. Therefore, the firm selects companies that
generate high returns on invested capital and have strong, positive cash flows.
Shaker Investments' investment focus is on maximizing returns while trying to
minimize the long term risk, through investing in high-quality U.S. growth
companies. The firm's investment process encompasses three analytical phases:
top down view, identifying superior companies, and buying at the right price.
Shaker Investments evaluates significant macroeconomics, demographic and
industry trends to determine which sectors are growing at above average rates
and are likely to continue growing at such rates for the next three to five
years or longer. The firm then evaluates specific growth companies within these
sectors, measuring them against eleven different criteria, focusing on an
analysis of the sustainability of a company's strong, proprietary advantage over
the ensuing three years. Shaker Investments selects companies that have stable
and above average profit margins and whose three year sustainable growth rate
exceed their projected price to earnings multiple.
Pzena employs a "value equity" approach which involves in-depth fundamental
analysis to identify companies whose long-term earnings prospects are not
reflected in the current share price. Pzena attempts to capitalize on investment
opportunities that may develop when investors over-react to adverse business
conditions, resulting in excessive undervaluation of specific securities.
Pzena's research focus is on forecasting what a business should earn over a
normal business cycle. The firm believes this approach will identify value
opportunities for the fund since most equity managers ignore value opportunities
because they are concentrating more on predicting near-term earnings.
Frontier seeks capital appreciation by investing in companies expected to
generate above-average earnings growth in a concentrated portfolio of no more
than 40 stocks. The investment process is driven by internal research, seeking
growth companies at reasonable valuations. Frontier attempts to achieve excess
return by utilizing the research capabilities of the entire Frontier research
team of ten research analysts. Each analyst selects up to four stocks and has
full discretion over investment ideas, buys and sells, and weightings for his or
2
<PAGE>
------Hillview Alpha Fund------
her portion of the portfolio. The team leader is responsible for certain overall
decisions, including sector and industry weightings.
PRINCIPAL RISKS
An investment in the fund is not guaranteed, you may lose money by investing in
the fund.
The fund is not a complete investment program. It has been designed to provide
exposure to small to mid-capitalization securities, and is typically used in
conjunction with a variety of other investments to provide clients with a full
and appropriate asset allocation.
The fund is newly organized and has no operating history as a registered
investment company. The fund follows the same investment objective and
strategies as an unregistered investment company advised by Hillview Advisors
which operated from September 4, 1997 to the date of this prospectus.
An investment in the fund is subject to a number of risks, including (1) the
risk that stock prices may decline over short or even extended periods; (2) the
risk that the sub-advisers will not perform as anticipated; (3) the risk of
increased volatility that may result from the "concentrated equity" approach;
and (4) certain risks, including increased volatility, associated with
investment in small- and mid-capitalization company securities.
Stock prices in general rise and fall as a result of investors' perceptions of
the market as a whole. If the stock market drops in value, the value of the
fund's portfolio investments is also likely to decrease in value. The increase
or decrease in the value of the fund's investments, in percentage terms, may be
more or less than the increase or decrease in the value of the market.
The fund's investment success depends on the skill of Hillview Advisors in
evaluating, selecting and monitoring sub-advisers and on the investment
management expertise of each sub-adviser and its personnel responsible for
managing the fund's assets. An investment in the fund is subject to the risks
that Hillview Advisors will not effectively maintain a group of sub-advisers
that can meet the fund's objective and that one or more sub-advisers may not
perform as anticipated.
The fund's concentrated approach involves the risk of increased volatility due
to fewer holdings. Because each sub-adviser may invest in a limited number of
securities, changes in the market value of a single issuer could affect the
fund's performance and net asset value more severely than if its holding were
more diversified. The fund seeks to reduce such risk through the use of multiple
sub-advisers.
Investments in securities of companies with smaller revenues and market
capitalizations present greater risks than securities of larger, typically more
established companies. Small capitalization companies can be more volatile in
price than larger capitalization companies due to the generally lower degree of
liquidity in the markets for such securities, the greater sensitivity of smaller
companies to changes in or failure of management, and to other changes in
competitive, business, industry and economic conditions, including risks
associated with limited product lines, markets, management depth, or financial
resources. In addition, some of the companies in which the fund may invest may
3
<PAGE>
------Hillview Alpha Fund------
be in the early stages of development and have limited operating histories.
There may be less publicly available information about small or early stage
companies, and it may take a longer period of time for the prices of such
securities to reflect the full value of their issuers' underlying earnings
potential or assets.
The fund should not be considered suitable for investors who are unable or
unwilling to assume the risks of loss inherent in such a program, nor should
investment in the fund be considered a balanced or complete investment program.
4
<PAGE>
------Hillview Alpha Fund------
EXPENSES AND FEE TABLES
FEES AND EXPENSES: These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.
SHAREHOLDER TRANSACTION EXPENSES (fees paid directly from your investment)
Maximum Sales Charges.....................None
Maximum Redemption Charge.................None
Exchange Fee..............................None
ANNUAL OPERATING EXPENSES (expenses that are deducted from assets)
Management Fee %
Sub-Advisory Fee %(1)
Distribution (12b-1) Fee %
OTHER EXPENSES %(2)
-------------- ---------
Total Operating Expenses %
WAIVED FEES %
----------- ---------
Net Operating Expenses %(3)
- --------------------------
(1) The sub-advisory fee shown represents a composite of the fees to be paid to
each sub-adviser assuming a target allocation of assets among the current
sub-advisers which assumes that no sub-adviser manages more than 25% of the
assets. The contractual sub-advisory fee rates may vary based on the amount
of assets managed by each sub-adviser, and the allocations to each
sub-adviser will vary over time.
(2) Other Expenses are based on estimated amounts for the current fiscal year.
(3) Hillview has voluntarily agreed to make payments to limit the expenses of
the fund so that Other Expenses (I.E. those expenses other than Management
Fee and Sub-Advisory Fee) shall not exceed 0.25% of the fund's average
annual assets. Hillview may be reimbursed the amount of any such payments
in the future provided that the payments are reimbursed within [three]
years of the payment being made and the combination of the fund's Other
Expenses and such reimbursements do not exceed 0.25% of the fund's average
annual assets. If actual Other Expenses are less than 0.25%, and Hillview
has recouped any eligible previous payments made, the fund will be charged
such lower expenses.
EXAMPLE:
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
This example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods unless
otherwise stated. The example also assumes that your investment has a 5% return
each year and that the fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions, your cost would
be:
1 Year..................$____
3 Years.................$____
5
<PAGE>
Hillview International Alpha Fund
HILLVIEW INTERNATIONAL ALPHA FUND
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
FUND OBJECTIVE
Long-term growth of capital.
PRINCIPAL INVESTMENT STRATEGIES
The fund invests primarily in stocks of companies in countries outside the
United States that are represented in the MSCI Europe, Australia and Far East
Index ("EAFE Index"). The EAFE Index reflects stocks in most developed countries
outside North America. The fund also invests in stocks of issuers in other
countries, including emerging markets, as represented in the MSCI Emerging
Markets Index.
Hillview Advisors selects sub-advisers to manage specified portions of the fund.
Hillview Advisors anticipates that, under normal circumstances, the fund's
portfolio will be allocated among three to six sub-advisers. Hillview Advisors
selects sub-advisers with complimentary investment styles which are intended to
bring the fund enhanced portfolio and style diversification as well as excess
return relative to a market benchmark over time. Hillview Advisors seeks
sub-advisers with distinguished track records, specific investment processes and
experienced firm personnel. More specifically, Hillview Advisors seeks managers
with definable, sustainable advantages over their peers that, when applied in
less efficient market sectors, can result in superior returns.
The fund seeks to:
o combine the efforts of several experienced, international money managers, all
with superior track records,
o access the favorite stock-picking ideas of each manager at any point in time,
o deliver a portfolio that is prudently diversified in terms of stocks and
industries while still allowing each manager to run portfolio segments
focused on only his or her favorite stocks, and
o further diversify across different-sized companies, countries, industries and
styles by including managers with a variety of investment disciplines.
The fund may invest in securities traded in both developed and emerging markets.
Emerging market exposure could be expected to be as much as 20% of the fund's
assets, invested through a combination of emerging market specialist manager(s),
as well as emerging markets components of any of the sub-adviser's portfolios.
The remainder of the fund's assets will be invested in stocks of companies
listed and domiciled in developed countries. There are no limits on the fund's
geographic asset distribution, but to provide adequate diversification, the fund
6
<PAGE>
Hillview International Alpha Fund
ordinarily invests in the securities markets of at least five countries outside
of the United States. During abnormal market conditions, the fund may invest in
U.S. issuers and it may, at times, invest all of its assets in fewer than five
countries.
Each manager has a distinct investment approach. As a group, the managers invest
in stocks with a range of market capitalization. Although each manager has the
flexibility to invest on a worldwide basis in companies with market
capitalization of any size, it is expected that the fund will primarily invest
in small- and mid-capitalization foreign companies under normal market
conditions.
BPI Global Asset Management, LP ("BPI"), Deutsche Asset Management, Inc.
("Deutsche Asset Management") and [another sub-adviser to be determined]
currently serve as sub-advisers to the fund.
BPI's investment approach utilizes bottom-up analysis to identify stocks for
purchase. The firm bases valuations on global industry valuation trends, as
opposed to country valuations, and focuses on what it believes to be quality
companies with sustainable, competitive advantages. Portfolios are expected to
be relatively concentrated, consisting of approximately 15 securities. Country
allocations are residual of stock selection.
Deutsche Asset Management invests its portfolio according to the firm's
International Selection style, which results in a relatively concentrated
portfolio of 30 to 40 equally weighted positions. The investment approach
focuses on stock selection as opposed to sector selection as the best
opportunity to add value. Each company's growth characteristics are evaluated,
with an emphasis on company fundamentals and sustainable net cash flows. The
investment process is supported by a team of over 240 investment professionals
worldwide.
PRINCIPAL RISKS
An investment in the fund is not guaranteed, you may lose money by investing in
the fund. The fund is not a complete investment program.
The fund is newly organized and has no operating history. The adviser has not
previously managed or advised an international mutual fund.
An investment in the fund is subject to a number of risks, including (1) the
risk that stock prices may decline over short or even extended periods; (2) the
risk that the sub-advisers will not perform as anticipated; and (3) certain
risks associated with investment in foreign company securities.
Stock prices in general rise and fall as a result of investors' perceptions of
the market as a whole. If the stock markets drop in value, the value of the
fund's portfolio investments is also likely to decrease in value. The increase
or decrease in the value of the fund's investments, in percentage terms, may be
more or less than the increase or decrease in the value of the global markets.
The fund's investment success depends on the skill of Hillview Advisors in
evaluating, selecting and monitoring sub-advisers and on the investment
management expertise of each sub-adviser and its personnel responsible for
7
<PAGE>
Hillview International Alpha Fund
managing the fund's assets. An investment in the fund is subject to the risks
that Hillview Advisors will not effectively maintain a group of sub-advisers
that can meet the fund's objectives and that one or more of the sub-advisers may
not perform as anticipated.
Foreign securities involve additional risks that normally are not associated
with securities of U.S. issuers. These include risks relating to political,
social and economic contributions and developments abroad and differences
between U.S. and foreign regulatory requirements and market practices. When
securities are denominated in foreign currencies, they also are subject to
currency risk. Currency risk is the risk that the value of a foreign currency in
which one or more of a fund's investments are denominated will fall in relation
to the U.S. dollar. Currency exchange rates can be volatile and can be affected
by, among other factors, the general economics of a country, the actions of the
U.S. and foreign governments or central banks, the imposition of currency
controls, and speculation.
Sector allocation risk is the risk that sub-advisers may not be successful in
choosing the best allocation among geographic or other market sectors. A fund
that allocates its assets among market sectors is more dependent on its
investment adviser's or sub-adviser's ability to successfully assess the
relative values in each sector than are funds that do not do so.
Securities of issuers located in emerging market countries are subject to all of
the risks of other foreign securities. However, the level of those risks often
is higher due to the fact that political, legal and economic systems in emerging
market countries may be less fully developed and less stable than those in
developed countries. Emerging market securities also may be subject to
additional risks, such as lower liquidity and larger or more rapid changes in
value.
8
<PAGE>
Hillview International Alpha Fund
EXPENSES AND FEE TABLES
FEES AND EXPENSES: These tables describe the fees and expenses that you may pay
if you buy and hold shares of the fund.
SHAREHOLDER TRANSACTION EXPENSES (fees paid directly from your investment)
Maximum Sales Charges.....................None
Maximum Redemption Charge.................None
Exchange Fee..............................None
ANNUAL OPERATING EXPENSES (expenses that are deducted from assets)
Management Fee %
Sub-Advisory Fee %(1)
Distribution (12b-1) Fee %
OTHER EXPENSES %(2)
-------------- --------
Total Operating Expenses %
WAIVED FEES %
-------------- --------
Net Operating Expenses %(3)
- -------------------------
(1) The sub-advisory fee shown represents a composite of the fees to be paid to
each sub-adviser assuming a generally equal allocation of assets among the
current sub-advisers. The contractual sub-advisory fee rates vary based on
the amount of assets managed by each sub-adviser, and the allocations to
each sub-adviser will vary over time.
(2) Other Expenses are based on estimated amounts for the current fiscal year.
(3) [Hillview has voluntarily agreed to make payments to limit the expenses of
the fund so that Other Expenses (I.E. those expenses other than Management
Fee and Sub-Advisory Fee) shall not exceed ____% of the fund's average
annual assets. Hillview may be reimbursed the amount of any such payments
in the future provided that the payments are reimbursed within [three]
years of the payment being made and the combination of the fund's Other
Expenses and such reimbursements do not exceed ____% of the fund's average
annual assets. If actual Other Expenses are less than ____%, and Hillview
has recouped any eligible previous payments made, the fund will be charged
such lower expenses.]
EXAMPLE:
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
This example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods unless
otherwise stated. The example also assumes that your investment has a 5% return
each year and that the fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions, your cost would
be:
1 Year..................$____
3 Years.................$____
9
<PAGE>
------Hillview Alpha Fund------
Hillview International Alpha Fund
More About Investment Strategies and Risks
CASH AND CASH EQUIVALENTS. Each sub-adviser normally may invest no more than 10%
of its portion of the fund in cash or cash equivalent investments. This
restriction will not apply when economic or market conditions are such that a
sub-adviser determines that a temporary defensive position is appropriate, or
during periods when excess cash is generated through new purchases or when a
sub-adviser is unable to identify suitable investments. The management of such
cash and cash equivalent securities may be performed by each sub-adviser or by
Hillview.
The cash equivalent investments that may be purchased by the funds include short
term, high quality debt securities, money market instruments such as bills,
notes and bonds that are issued, sponsored or guaranteed by the U.S. Government,
its agencies or instrumentalities ("U.S. Government Securities"), commercial
paper or floating rate debt instruments. Cash equivalent securities other than
U.S. Government Securities purchased by the funds must have received one of the
two highest ratings from a nationally recognized securities rating organization
or be of comparable quality. The funds may also purchase shares of money market
mutual funds or interests in collective accounts maintained by banks or
financial institutions, which hold the types of securities described above. In
addition, cash not invested in equities may be invested in fixed income
securities ("Bonds") pending investment in equity securities, as well as to
maintain liquidity. Bonds and money market securities, while generally less
volatile than equity securities, are subject to interest rate and credit risks.
OPTIONS. The funds may also purchase options on individual equity securities,
rather than, or in addition to buying the underlying equity securities, as a
means of limiting its capital at risk in the market. The purchase of an option
risks a total loss of the premium paid for the option if the price of the
underlying security does not increase or decrease sufficiently to justify
exercise.
PORTFOLIO TURNOVER. Each fund is expected to have an annual turnover of less
than 100%.
INTEREST RATE RISK. The value of bonds generally can be expected to fall when
interest rates rise and to rise when interest rates fall. Interest rate risk is
the risk that interest rates will rise, so that the value of a fund's
investments in bonds will fall. Because interest rate risk is the primary risk
presented by U.S. government and other very high quality bonds, changes in
interest rates may actually have a larger effect on the value of those bonds
than on lower quality bonds.
CREDIT RISK. Credit risk is the risk that the issuer of a bond will not make
principal or interest payments when they are due. Even if an issuer does not
default on a payment, a bond's value may decline if the market believes that the
issuer has become less able, or less willing, to make payments on time. Even
high quality bonds are subject to some credit risk. However, credit risk is
higher for lower quality bonds. Low quality bonds involve high credit risk and
are considered speculative. Some low quality bonds may be in default when
purchased by a fund.
10
<PAGE>
------Hillview Alpha Fund------
Hillview International Alpha Fund
MANAGEMENT
INVESTMENT MANAGER
Hillview Advisors serves as the investment manager for the funds under the terms
of its investment advisory agreement with the Trust ("Hillview Agreement").
Officers of Hillview Advisors serve as the Executive Officers of the funds
and/or as members of the Board of Trustees. For its services under the Hillview
Agreement, Hillview Advisors receives an annual fee of ____% of each fund's
average daily assets. The principal offices of Hillview Advisors are located at
1055 Washington Boulevard, Stamford, Connecticut 06901. Hillview Advisors had
over $700 million in assets under management as of December 31, 1999.
Hillview Advisors evaluates and selects leading investment management firms to
sub-advise specified portions of each fund. Hillview Advisors also monitors the
performance and operations of the sub-advisers as well as any changes in the
sub-advisers' organizations or business operations that may affect a
sub-adviser's future performance. Hillview Advisors oversees the services
provided to the Trust by its administrator, custodian and other service
providers. Hillview Advisors is authorized to adjust the percentage of each fund
that is allocated to any sub-adviser from time to time, and may select
additional or replacement sub-advisers (subject to the approval of the Board of
Trustees) in the event a sub-adviser is no longer able to manage all or part of
its portion of a fund, Hillview Advisors determines to terminate a sub-advisory
relationship, or if an additional sub-adviser is selected by Hillview Advisors.
Hillview has no prior experience managing a registered investment company.
Several employees of Hillview, however, have been officers of companies which
have managed registered and unregistered multi-adviser investment vehicles
including the predecessor to the Alpha Fund. David M. Spungen has primary
responsibility for evaluating and selecting sub-advisers. Mr. Spungen is a
co-founder and President of Hillview Advisors, which commenced operations in
April 1999. Prior to that, he was a principal of CMS Companies where he served
in a similar capacity in the management of the Alpha Fund's predecessor fund.
ALPHA FUND SUB-ADVISERS
Harris was founded in 1976 and managed approximately $___ billion in assets as
of March 31, 2000. Harris is located at Two North LaSalle Street, Suite 500,
Chicago, Illinois 60602. Michael Mangan has primary responsibility for
sub-advising the portion of the Alpha Fund's assets managed by Harris. Mr.
Mangan is a Partner and Portfolio Manager of Institutional Accounts and has been
with the firm for eighteen years. Harris receives an annual sub-advisory fee of
____% of the average daily assets on the first $20 million of the portion of the
fund's portfolio it manages, and ____% of the average daily assets of the rest
of the portion of the fund's assets it manages.
Nevis Capital was established in 1991 and managed approximately $1.5 billion in
assets as of March 31, 2000. Nevis Capital is located at 1119 St. Paul Street,
Baltimore, Maryland 21202. Jon C. Baker and David R. Wilmerding, III have
primary responsibility for sub-advising the portion of the Alpha Fund's assets
11
<PAGE>
------Hillview Alpha Fund------
Hillview International Alpha Fund
managed by Nevis Capital. Mr. Baker and Mr. Wilmerding, both principals of the
firm, founded Nevis Capital in 1991. Nevis Capital receives an annual
sub-advisory fee of ____% of the average daily assets of the portion of the
fund's portfolio it manages.
Shaker Investments was established in 1991 and managed approximately $1.4
billion in assets as of March 31, 2000. Shaker Investments is located at 20600
Chagrin Avenue, Cleveland, OH 44122. Edward Hemmelgarn, has primary
responsibility for sub-advising the portion of the Alpha Fund's assets managed
by Shaker Investments. Mr. Hemmelgarn is the founder, President and Chief
Investment Officer of Shaker Investments. Shaker Investments receives an annual
sub-advisory fee of _____% of the average daily assets of the portion of the
fund's portfolio it manages.
Pzena was founded in 1995 and managed approximately $609 million in assets as of
March 31, 2000. Pzena is located at 830 Third Avenue, New York, NY 10022.
Richard Pzena has primary responsibility for sub-advising the portion of the
Alpha Fund's assets managed by Pzena. Mr. Pzena founded the firm in 1995. Prior
to that he was the Director, U.S. Equity Investments and Chief Research Officer
of Sanford Bernstein & Company, Inc. from __________ to ___________. Pzena
receives an annual sub-advisory fee of _____% of the average daily assets of the
first $30 million of the portion of the fund's portfolio it manages and ____% of
the average daily assets of the rest of the portion of the fund's assets it
manages thereafter.
Frontier was founded in 1980 and managed over $5.7 billion in assets as of March
31, 2000. Frontier is located at 99 Summer Street, Boston, MA 02110. Michael A.
Cavarretta, CFA has primary responsibility for sub-advising the portion on of
the Alpha Fund's assets managed by Frontier. Mr. Cavarretta is a Senior Vice
President of Frontier, and has had portfolio management and research analyst
responsibilities with the firm since 1988. Frontier receives an annual
sub-advisory fee of ____% of the average daily assets of the portion of the
fund's portfolio it manages.
INTERNATIONAL ALPHA FUND SUB-ADVISERS
BPI was founded in 1997 and managed approximately $___ billion in assets as of
March 31, 2000. BPI is located at 1900 Summit Tower Boulevard, Orlando, Florida
32810. Daniel Jaworski, CFA, and Pablo Salas have primary responsibility for
sub-advising the portion of the International Alpha Fund's assets managed by
BPI. Prior to co-founding BPI in 1997, Messrs. Jaworski and Salas served in
similar investment management and research capacities with STI Capital
Management. BPI receives an annual sub-advisory fee of ____% of the average
daily assets on the first $20 million of the portion of the fund's portfolio it
manages, and ____% of the average daily assets of the rest of the portion of the
fund's assets it manages.
Deutsche Asset Management was founded in [________] and managed approximately
$_____ billion in assets as of March 31, 2000. Deutsche Asset Management is
located at 885 Third Avenue, New York, NY 10022. ___________ has primary
responsibility for sub-advising the portion of fund's assets managed by Deutsche
Asset Management. [Give five year history] Deutsche Asset Management receives an
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------Hillview Alpha Fund------
Hillview International Alpha Fund
annual sub-advisory fee of _____% of the average daily assets of the portion of
the fund's portfolio it manages.
OTHER INFORMATION
The funds have applied for an order from the Securities and Exchange Commission
that would permit their Board of Trustees to appoint and replace sub-advisers
and to amend sub-advisory contracts without obtaining shareholder approval. If
the funds obtain the order they will be able to appoint and replace sub-advisers
and to amend sub-advisory contracts without obtaining shareholder approval.
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------Hillview Alpha Fund------
Hillview International Alpha Fund
DIVIDENDS AND TAXES
DIVIDENDS
Each fund normally declares and pays income dividends and distributes any
realized capital gains annually.
Distributions are made on a per share basis regardless of how long you have
owned your shares. Therefore, if you invest shortly before the distribution
date, some of your investment will be returned to you in the form of a
distribution. You will receive dividends in additional shares of your fund
unless you elect to receive them in cash. Contact Hillview Advisors if you
prefer to receive dividends in cash.
TAXES
The dividends that you receive from the funds generally are subject to federal
income tax regardless of whether you receive them in additional fund shares or
in cash. Each fund expects that its dividends will include distributions of both
capital gain and ordinary income. A distribution of capital gains will be taxed
at a lower rate than ordinary income dividends. Each year, your fund will tell
you how you should treat its dividends for tax purposes. If you hold fund shares
through a tax-exempt account or plan, such as an IRA or 401(k) plan, dividends
on your shares generally will not be subject to tax.
When you sell fund shares, you generally will be subject to federal income tax
on any gain you realize. If you exchange a fund's shares for shares of another
Hillview mutual fund, the transaction will be treated as a sale of a fund's
shares, and any gain will be subject to federal income tax.
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------Hillview Alpha Fund------
Hillview International Alpha Fund
SHAREHOLDER INFORMATION
PURCHASING SHARES
You may purchase shares of a fund only if you are a client of Hillview Advisors.
Shares of each fund are sold at its net asset value per share ("NAV") next
calculated after your purchase order is accepted by the Trust. The minimum
initial investment is $100,000 and subsequent investments must be at least
$10,000. The Board of Trustees may waive any minimum investment amounts, as well
as authorize the acceptance of purchases by additional persons including
employees of Hillview Advisors and its affiliated companies.
Each fund's NAV is determined at the close of regular trading on the New York
Stock Exchange, (normally at 4:00 p.m. Eastern time) on days the Exchange is
open.
The NAV is calculated by adding the total value of a fund's investments and
other assets, subtracting its liabilities and then dividing that figure by the
number of outstanding shares of the fund:
NAV = TOTAL ASSETS - LIABILITIES
--------------------------
number of shares outstanding
The value of a fund's investments is generally determined by current market
quotations. If market quotations are not available, prices will be based on fair
value as determined by the Board of Trustees. Short-term obligations with
maturities of 60 days or less are valued at amortized cost, which constitutes
fair value as determined by the Board of Trustees.
Payment for purchases of fund shares may be made by wire transfer or by check
drawn on a U.S. bank. All purchases must be made in U.S. dollars. Each fund
reserves the right to reject any purchase order. Purchase orders may be received
by the funds' transfer agent on any regular business day.
SELLING SHARES
You may redeem your shares in any fund on any regular business day. Shares will
be redeemed at the NAV next computed after receipt of your redemption order by
the Trust. The value of securities that are primarily listed on foreign
exchanges may change on days when the New York Stock Exchange is closed and the
NAV of the fund is not calculated. You will receive redemption proceeds within 7
days after receipt of your redemption order by the Trust. Redemption proceeds
may be wired to an account that you have predesignated and which is on record
with the Trust. Shares purchased by check will not be redeemed until that
payment has cleared -- normally, within 15 days of receipt of the check by the
Trust.
As a mutual fund shareholder, you are technically selling shares when you
request a withdrawal in cash. This is also know as redeeming shares or a
redemption of shares.
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------Hillview Alpha Fund------
Hillview International Alpha Fund
Redemption requests must be in writing and must be signed by the shareholder(s)
named on the account. If you wish to redeem shares of the fund valued at $25,000
or more, each signature must be guaranteed.
Please direct all communication regarding purchase and redemption of Shares to:
Hillview Capital Advisors
1055 Washington Boulevard
Stamford, CT 06901
EXCHANGES
You may exchange shares of a fund for shares of the other Hillview fund. There
are no fees for such exchanges. You may exchange shares of one fund for shares
of another fund only after the first purchase has settled and the first fund has
received your payment.
OTHER INFORMATION ABOUT PURCHASES AND REDEMPTIONS
You will not be able to purchase or redeem your shares on days when the New York
Stock Exchange is closed. The Trust may permit investors to purchase shares of a
fund "in kind" by exchanging securities for shares of the fund. This is known as
an "in-kind" purchase. Shares acquired in an in-kind transaction will not be
redeemed until the transfer of securities to the Trust has settled -- usually
within 15 days following the in-kind purchase. The Trust may also redeem shares
in-kind. This means that all or a portion of the redemption amount would be paid
by distributing to the redeeming shareholder securities held in the fund's
investment portfolio. Investors will incur brokerage charges on the sale of
these portfolio securities. In kind purchases and sales will be permitted solely
at the discretion of the Trust.
If at any time when a request for transfer or redemption of shares of a fund is
received by a fund, your account falls below $500, the fund may ask you to
increase your balance. If it is still below $500 after 30 days, the fund may
close your account and send you the proceeds at the current NAV.
SHAREHOLDER REPORTS AND INQUIRIES
Shareholders will receive semi-annual reports containing unaudited financial
statements as well as annual reports containing financial statements which have
been audited by their fund's independent accountants. Each shareholder will be
notified annually as to the Federal tax status of distributions made by their
fund. Shareholders may contact their fund by calling the telephone number shown
on the back cover of this prospectus.
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If you want more information about the funds, the following document is
available free upon request:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the fund and is
incorporated by reference into this prospectus.
You may discuss your questions about a fund by contacting Hillview
Advisors. You may obtain free copies of the SAI by contacting the fund directly
at 1-888-342-6280.
You may review and copy information about the fund, including the SAI, at
the Public Reference Room of the Securities and Exchange Commission. You can get
text-only copies of reports and other information about the funds and
information about the operations of the SEC's Public Reference Room:
* For a fee, by writing to or calling the SEC's Public Reference Room,
Washington, D.C. 20549-6009
Telephone: 1-800-SEC-0330
* Free, from the SEC's Internet website at: http://www.sec.gov
Hillview Investment Trust II
Investment Company Act File No. 811-09901
Hillview Alpha Fund
Hillview International Alpha Fund
(COPYRIGHT)2000 Hillview ____________
<PAGE>
HILLVIEW ALPHA FUND
HILLVIEW INTERNATIONAL ALPHA FUND
1055 Washington Boulevard
Stamford, Connecticut 06901
STATEMENT OF ADDITIONAL INFORMATION
Hillview Alpha Fund and Hillview International Alpha Fund are
diversified series of Hillview Investment Trust II ("Trust"), a professionally
managed, open-end management investment company.
The investment manager for the funds is Hillview Capital Advisors, LLC
("Hillview Advisors"), an asset management subsidiary of Value Asset Management,
Inc ("VAM"). PFPC Inc. ("PFPC") serves as the funds' administrator and transfer
agent, PFPC Trust Company serves as custodian, and Provident Distributors, Inc.,
an affiliate of PFPC, serves as distributor for the funds.
This Statement of Additional Information ("SAI") is not a prospectus
and should be read only in conjunction with the funds' current Prospectus, dated
___________, 2000. A copy of the Prospectus may be obtained by calling Hillview
Advisors toll-free 1-888-342-6280. This SAI is dated ___________, 2000. Shares
of the funds are currently available only to investment advisory clients of
Hillview Capital Advisors, as described in the prospectus.
TABLE OF CONTENTS
Page
The Funds and Their Investment Policies..................................... 2
The Funds' Investments, Related Risks and Limitations....................... 6
Strategies Using Derivative Instruments..................................... 19
Organization; Board Members, Officers and Principal Holders of Securities... 27
Investment Advisory and Distribution Arrangements........................... 28
Portfolio Transactions...................................................... 31
Additional Exchange and Redemption Information
and Other Services.......................................................... 32
Valuation of Shares......................................................... 33
Performance Information..................................................... 34
Taxes....................................................................... 35
Other Information........................................................... 38
<PAGE>
THE FUNDS AND THEIR INVESTMENT POLICIES
No fund's investment objective may be changed without shareholder
approval. Except where noted, the other investment policies of each fund may be
changed by its board without shareholder approval. As with other mutual funds,
there is no assurance that a fund will achieve its investment objective.
Hillview Advisors selects sub-advisers to manage specified portions of
the funds. Hillview Advisors anticipates that, under normal circumstances, the
Alpha Fund's portfolio will be allocated among four to six sub-advisers, and the
International Alpha Fund's portfolio will be allocated among three to six
sub-advisers. Hillview Advisors selects sub-advisers with complimentary
investment styles which are intended to bring the funds enhanced portfolio and
style diversification as well as excess return relative to a market benchmark
over time. Hillview Advisors seeks sub-advisers with distinguished track
records, specific investment processes and experienced firm personnel. More
specifically, Hillview Advisors seeks managers with definable, sustainable
advantages over their peers that, when applied in less efficient market sectors,
can result in superior returns.
ALPHA FUND. The Alpha Fund's investment objective is long-term capital
appreciation.
Under normal circumstances, the fund intends to invest at least 65% of
its assets in common stocks of U.S. small- and mid-capitalization companies
(i.e., companies whose stock market capitalization is no larger than the largest
company in the S&P 400 Index of mid cap stocks at the time of investment). The
fund typically will focus its investments in stocks of companies that are
outside the S&P 500 Index. The fund may invest in large-capitalization companies
when the sub-adviser(s) feel such companies are undervalued or present
significant potential for growth. The fund may also invest in other equity
securities with the characteristics of common stocks or which are convertible
into common stocks. Examples of allowable securities with an equity component
include convertible preferred stock, debt securities convertible into or
exchangeable for common stock and warrants or rights that are convertible into
common stock. The fund may invest up to 10% of its assets in foreign securities.
The fund has adopted a "concentrated equity" approach for management of
the majority of its assets. Under a concentrated equity approach, a sub-adviser
is limited to investing only its "best investment ideas," or the securities in
which it has the highest confidence for success from an investment return point
of view at any given time. A sub-adviser typically will invest in a portfolio
that has substantially fewer securities than other accounts it manages with
similar styles, or invest at least 75% of its portion of the fund in no more
than 15 equity securities. By focusing only on the "best investment ideas" of
each sub-adviser, the fund seeks to concentrate its investments in equity
securities that can reflect increased overall performance when compared to a
more broadly diversified portfolio of securities selected by a single
sub-adviser. At the same time, the use of multiple sub-advisers with distinct
styles is intended to provide a prudent level of diversification of securities
and result in reduced volatility, as compared to each individual sub-adviser.
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<PAGE>
The fund may permit one or more sub-advisers to manage its portion of the assets
without adherence to the concentrated equity approach.
The "concentrated equity" approach is premised on the following
investment philosophy:
FIRST, it is possible to identify investment management firms which can
deliver superior performance and investment returns relative to their peer
group. Hillview evaluates, selects and monitors the activities of such
investment management firms.
SECOND, many equity managers have identified only a limited number of
equity securities which they are most confident will perform well from an
investment return point of view during any given time period, and which
represent their "best investment ideas" at that time. However, in order to
provide prudent diversification of their clients' securities portfolios, and in
view of the often large amounts of money which they manage, most such managers
purchase a larger number of equity securities for their mutual fund or separate
account clients. The long-term performance of managers with demonstrated stock
picking abilities who focus their efforts only on their "best investment ideas"
will generally exceed the performance of larger, more diversified portfolios,
albeit with increased volatility.
THIRD, a "concentrated equity" approach combined with the use of
multiple sub-advisers, has the potential to provide increased performance
through concentration, together with prudent diversification among both
securities and investment styles.
Harris Associates L.P. ("Harris"), Nevis Capital Management, Inc.
("Nevis Capital"), Shaker Investments, Inc. ("Shaker Investments"); Pzena
Investment Management LLC ("Pzena") and Frontier Capital Management Company, LLC
("Frontier") currently serve as sub-advisers to the fund.
Harris employs a value-oriented, long-term investment philosophy and a
fundamental research driven stock selection process for equity investing. Harris
attempts to minimize risk and preserve capital by identifying companies whose
securities trade at a substantial discount to Harris' calculation of the
companies' true business values. Harris' concentrated approach focuses on
securities it believes reflect at least a 30-50% discount to Harris' calculation
of the value of the underlying companies.
Nevis Capital's investment philosophy is premised on the belief that
the performance of a company's stock will track its earnings growth over the
long-term. Consistent with that belief, the firm typically selects companies for
investment that, during a comparable period, had annual earnings growth greater
than 20% of their prior year's earnings. Rather than focusing on companies whose
reported earnings growth may be attributable to investment income, extraordinary
gains or specialized, one time accounting techniques, the firm concentrates on
companies with sustainable earnings. Therefore, the firm selects companies that
generate high returns on invested capital and have strong, positive cash flows.
Shaker Investments' investment focus is on maximizing returns while
trying to minimize the long term risk, through investing in high-quality U.S.
growth companies. The firm's investment process encompasses three analytical
phases: top down view, identifying superior companies, and buying at the right
price. Shaker Investments evaluates significant macroeconomics, demographic and
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industry trends to determine which sectors are growing at above average rates
and are likely to continue growing at such rates for the next three to five
years or longer. The firm then evaluates specific growth companies within these
sectors, measuring them against eleven different criteria, focusing on an
analysis of the sustainability of a company's strong, proprietary advantage over
the ensuing three years. Shaker Investments selects companies that have stable
and above average profit margins and whose three year sustainable growth rate
exceed their projected price to earnings multiple.
Pzena employs a "value equity" approach which involves in-depth
fundamental analysis to identify companies whose long-term earnings prospects
are not reflected in the current share price. Pzena attempts to capitalize on
investment opportunities that may develop when investors over-react to adverse
business conditions, resulting in excessive undervaluation of specific
securities. Pzena's research focus is on forecasting what a business should earn
over a normal business cycle. The firm believes this approach will identify
value opportunities for the fund since most equity managers ignore value
opportunities because they are concentrating more on predicting near-term
earnings.
Frontier seeks capital appreciation by investing in companies expected
to generate above-average earnings growth in a concentrated portfolio of no more
than 40 stocks. The investment process is driven by internal research, seeking
growth companies at reasonable valuations. Frontier attempts to achieve excess
return by utilizing the research capabilities of the entire Frontier research
team of ten research analysts. Each analyst selects up to four stocks and has
full discretion over investment ideas, buys and sells, and weightings for his or
her portion of the portfolio. The team leader is responsible for certain overall
decisions, including sector and industry weightings.
Each sub-adviser shall identify sufficient equity investments so that
the securities of any one company shall not exceed 20% of the current market
value of the sub-adviser's portion of the fund at the time the security is
acquired. In addition, no sub-adviser shall invest more than 40% of the current
market value of its portion in securities of issuers from any single industry as
defined by Standard & Poor's, Inc. However, these limitations are applicable to
each sub-adviser separately, so it is possible that more than one sub-adviser
could select the same security for investment, or invest in the same industries,
resulting in less diversification among securities or industries. Hillview
Advisors will monitor compliance with these and other percentage limitations,
and if they are exceeded, will request that sub-advisers take reasonable steps
to comply.
The fund is designed for investors seeking capital appreciation from an
all-equity portfolio. The fund is not a market-timing vehicle and not a complete
investment program.
INTERNATIONAL ALPHA FUND. The International Alpha Fund's investment
objective is long-term growth of capital.
The fund invests primarily in equity securities issued by companies
outside the United States. Under normal circumstances, the fund invests at least
65% of its total assets in stocks of companies in countries represented in the
MSCI Europe, Australia and Far East Index ("EAFE Index"). The EAFE Index
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reflects stocks in most developed countries outside of North America. The fund
may invest up to 35% of its total assets in securities of issuers located in
other countries (for example, Canada, United States and emerging markets, as
represented in the MSCI Emerging Markets Index). Emerging market exposure could
be expected to be as much as 20% of the fund's assets, invested through a
combination of emerging market specialist manager(s), as well as emerging
markets components of any of the sub-adviser's portfolios.
There are no limits on the fund's geographic asset distribution, but to
provide adequate diversification, the fund ordinarily invests in the securities
markets of at least five countries outside of the United States. In most periods
it is expected that the fund will hold securities in more than five countries;
however, during abnormal market conditions, the fund may invest in U.S. issuers
and it may, at times, invest all of its assets in fewer than five countries. The
fund considers an issuer to be located in the country in which the issuer (a) is
organized, (b) derives at least 50% of its revenues or profits from goods
produced or sold, investments made or services performed, (c) has at least 50%
of its assets situated, or (d) has the principal trading market for its
securities.
The fund also may use futures contracts and forward currency contracts
to adjust its exposure to foreign stock markets. The Sub-advisers, in
consultation with Hillview Advisors, determine the extent to which the fund uses
futures contracts and forward currency contracts for this purpose and is
responsible for implementing such transactions.
The fund seeks to:
o combine the efforts of several experienced, international money
managers, all with superior track records,
o access the favorite stock-picking ideas of each manager at any
point in time,
o deliver a portfolio that is prudently diversified in terms of
stocks and industries while still allowing each manager to run
portfolio segments focused on only his or her favorite stocks, and
o further diversify across different-sized companies, countries,
industries and styles by including managers with a variety of
investment disciplines.
Each manager has a distinct investment approach. As a group, the
managers invest in stocks with a range of market capitalization. Although each
manager has the flexibility to invest on a worldwide basis in companies with
market capitalization of any size, it is expected that the fund will primarily
invest in small- and mid-capitalization foreign companies under normal market
conditions.
BPI Global Asset Management, LP ("BPI"), Deutsche Asset Management,
Inc. ("Deutsche Asset Management") and [another sub-adviser to be determined]
currently serve as sub-advisers to the fund.
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<PAGE>
BPI's investment approach utilizes bottom-up analysis to identify
stocks for purchase. The firm bases valuations on global industry valuation
trends, as opposed to country valuations, and focuses on what it believes to be
quality companies with sustainable, competitive advantages. Portfolios are
expected to be relatively concentrated, consisting of approximately 15
securities. Country allocations are residual of stock selection.
Deutsche Asset Management invests its portfolio according to the firm's
International Selection style, which results in a relatively concentrated
portfolio of 30 to 40 equally weighted positions. The investment approach
focuses on stock selection as opposed to sector selection as the best
opportunity to add value. Each company's growth characteristics are evaluated,
with an emphasis on company fundamentals and sustainable net cash flows. The
investment process is supported by a team of over 240 investment professionals
worldwide.
THE FUNDS' INVESTMENTS, RELATED RISKS AND LIMITATIONS
The following supplements the information contained in the Prospectus
and above concerning the funds' investments, related risks and limitations.
Except as otherwise indicated in the Prospectus or the Statement of Additional
Information, the funds have established no policy limitations on its ability to
use the investments or techniques discussed in these documents.
The funds' investment success depends on the skill of Hillview Advisors
in evaluating, selecting and monitoring sub-advisers and on the investment
management expertise of each sub-adviser and its personnel responsible for
managing the funds' assets. An investment in a fund is subject to the risk that
a sub-adviser may not perform as anticipated.
The Alpha Fund's concentrated approach involves the risk of increased
volatility due to fewer holdings. Because each sub-adviser invests in a limited
number of securities, changes in the market value of a single issuer could
affect the funds' performance and net asset value more severely than is its
holdings were more diversified. The fund seeks to reduce such risk through the
use of multiple sub-advisers.
Hillview Advisors has no prior experience managing a registered
investment company. The Alpha Fund follows the same investment objectives and
strategies as an unregistered investment company advised by Hillview Advisors,
which operated from September 4, 1997 to the date of this statement of
additional information.
EQUITY SECURITIES. Equity securities include common stocks, most
preferred stocks and securities that are convertible into them, including common
stock purchase warrants and rights, equity interests in trusts, partnerships,
joint ventures or similar enterprises and depository receipts. Common stocks,
the most familiar type, represent an equity (ownership) interest in a
corporation.
Preferred stock has certain fixed income features, like a bond, but is
actually equity in a company, like common stock. Convertible securities may
include debentures, notes and preferred equity securities, that may be converted
into or exchanged for a prescribed amount of common stock of the same or a
different issuer within a particular period of time at a specified price or
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<PAGE>
formula. Depository receipts typically are issued by banks or trust companies
and evidence ownership of underlying equity securities.
While past performance does not guarantee future results, equity
securities historically have provided the greatest long-term growth potential in
a company. However, their prices generally fluctuate more than other securities
and reflect changes in a company's financial condition and in overall market and
economic conditions. Common stocks generally represent the riskiest investment
in a company. It is possible that a fund may experience a substantial or
complete loss on an individual equity investment.
SMALLER AND MID-SIZED COMPANIES. The Alpha Fund may invest a
substantial portion of its assets in securities issued by small- and
mid-capitalization companies. Investments in securities of companies with
smaller revenues and market capitalizations present greater risks than
securities of larger, more established companies. Small- and mid-capitalization
companies can be more volatile in price than larger capitalization companies due
generally to the lower degree of liquidity in the markets for such securities,
and the greater sensitivity of small- and mid-capitalization companies to
changes in or failure of management, and to other changes in competitive,
business, industry and economic conditions, including risks associated with
limited product lines, markets, management depth, or financial resources. In
addition, some of the companies in which the fund may invest may be in the early
stages of development and have limited operating histories. There may be less
publicly available information about small or early stage companies, and it may
take a longer period of time for the prices of such securities to reflect the
full value of their issuers' underlying earnings potential or assets.
The fund should not be considered suitable for investors who are unable
or unwilling to assume the risks of loss inherent in such a program, nor should
investment in the fund be considered a balanced or complete investment program.
CONVERTIBLE SECURITIES. A convertible security is a bond, debenture,
note, preferred stock or other security that may be converted into or exchanged
for a prescribed amount of common stock of the same or a different issuer within
a particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted or exchanged. Before conversion, convertible securities
ordinarily provide a stream of income with generally higher yields than those of
common stocks of the same or similar issuers, but lower than the yield of
non-convertible debt. Convertible securities are usually subordinated to
comparable-tier nonconvertible securities but rank senior to common stock in a
corporation's capital structure.
The value of a convertible security is a function of (1) its yield in
comparison with the yields of other securities of comparable maturity and
quality that do not have a conversion privilege and (2) its worth, at market
value, if converted into the underlying common stock. The price of a convertible
security often reflects variations in the price of the underlying common stock
in a way that non-convertible debt does not. A convertible security may be
subject to redemption at the option of the issuer at a price established in the
convertible security's governing instrument, which may be less than the ultimate
conversion value.
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<PAGE>
Many convertible securities are rated below investment grade or, if
unrated, are considered of comparable quality.
WARRANTS. Warrants are securities permitting, but not obligating,
holders to subscribe for other securities. Warrants do not carry with them the
right to dividends or voting rights with respect to the securities that they
entitle their holder to purchase, and they do not represent any rights in the
assets of the issuer. As a result, warrants may be considered more speculative
than certain other types of investments. In addition, the value of a warrant
does not necessarily change with the value of the underlying securities, and a
warrant ceases to have value if it is not exercised prior to its expiration
date.
ILLIQUID SECURITIES. The sub-advisers will not invest more than 15% of
their portions of the funds in securities which may be considered illiquid, by
virtue of the absence of a readily available market, legal or contractual
restrictions on resale, longer maturities, or other factors limiting the
marketability of the security. Generally, an illiquid security is any security
that cannot be disposed of within seven days in the ordinary course of business
at approximately the amount at which the fund has valued the security. This
policy does not apply to the acquisition of restricted securities eligible for
resale to qualified institutional buyers pursuant to Rule 144A under the
Securities Act or commercial paper issued privately under section 4(2) of the
Securities Act, when such investments are considered to be liquid by Hillview
Advisors or the sub-advisers.
CASH AND CASH EQUIVALENTS. In order to ensure that the funds remain
substantially invested in equity securities, each sub-adviser is limited such
that no more than 10% of its portion of a fund may be invested in cash or cash
equivalent investments. This restriction will not apply when economic or market
conditions are such that a sub-adviser determines that a temporary defensive
position is appropriate, or during temporary periods when excess cash is
generated through new purchases or when a sub-adviser is unable to identify
suitable investments.
The cash equivalent investments that may be purchased by the funds
include money market instruments such as bills, notes and bonds that are issued,
sponsored or guaranteed by the U.S. Government, its agencies or
instrumentalities ("U.S. Government Securities"). The funds may also purchase
short term, high quality debt securities such as time deposits, certificates of
deposit or bankers acceptances issued by commercial banks or savings and loan
associations, and may buy commercial paper or floating rate debt instruments.
Cash equivalent securities other than U.S. Government Securities must have
received one of the two highest ratings from a nationally recognized securities
rating organization or be of comparable quality. The funds may also purchase
shares of money market mutual funds or interests in collective accounts
maintained by banks or financial institutions, which hold the types of
securities described above.
FIXED INCOME SECURITIES. Cash not invested in equities may be invested
in fixed income securities pending investment in equity securities, as well as
to maintain liquidity. Fixed income securities are debt obligations, including
notes, debentures, and similar instruments and securities and money market
instruments. Mortgage- and asset-backed securities are types of fixed income
securities, and certain types of income-producing, non-convertible preferred
stocks may be treated as debt securities for investment purposes. Fixed income
8
<PAGE>
securities generally are used by corporations and governments to borrow money
from investors. The issuer pays the investor a fixed rate of interest and
normally must repay the amount borrowed on or before maturity. Many preferred
stocks and some bonds are "perpetual" in that they have no maturity date.
Fixed income securities are subject to interest rate risk and credit
risk. Interest rate risk is the risk that interest rates will rise and that, as
a result, bond prices will fall, lowering the value of a fund's investments in
fixed income securities. In general, fixed income securities having longer
durations are more sensitive to interest rate changes than are fixed income
securities with shorter durations. Credit risk is the risk that an issuer may be
unable or unwilling to pay interest and/or principal on the fixed income
security. Credit risk can be affected by many factors, including adverse changes
in the issuer's own financial condition or in economic conditions.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
fund purchases securities or other obligations from a bank or securities dealer
(or its affiliate) and simultaneously commits to resell them to the counterparty
at an agreed-upon date or upon demand and at a price reflecting market rate of
interest unrelated to the coupon rate or maturity of the purchased obligations.
The fund maintains custody of the underlying obligations prior to their
purchase, either through its regular custodian or through a special "tri-party"
custodian or sub-custodian that maintains separate accounts for both the fund
and its counterparty. Thus, the obligation of the counterparty to pay the
repurchase price on the date agreed to or upon demand associated with direct
investments in securities, including a possible decline in the market value of
the underlying obligations. If their value becomes less than the repurchase
price, plus any agreed-upon additional amount, the counterparty must provide
additional collateral sot hat at all times the collateral is at least equal to
the repurchase price plus any agreed-upon additional obligations and the price
that was paid by the fund upon acquisition is accrued as interest and U.S.
government securities (such as commercial paper and corporate bonds) may be
subject to special risks and may not have the benefit of certain protections in
the event of the counterparty's insolvency. If the seller or guarantor becomes
insolvent, a fund may suffer delays, costs and possible losses in connection
with the disposition of collateral. The funds intend to enter into repurchase
agreements only with counterparties in transactions belived by Hillview Advisors
to present minimum credit risks.
INVESTING IN FOREIGN SECURITIES. Investing in foreign securities
involves more risks than investing in the United States. The value of foreign
securities is subject to economic, social and political developments in the
countries where the companies operate and to changes in foreign currency values.
Investments in foreign securities involve risks resulting from the differences
between the regulations to which U.S. and foreign issuers and markets are
subject. These risks may include expropriation, confiscatory taxation,
withholding taxes on interest and/or dividends, limitations on the use or
transfer of fund assets and political or social instability or diplomatic
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developments. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position. Securities of many foreign companies may be less
liquid and their prices more volatile than securities of comparable U.S.
companies. While the funds generally invest in securities that are traded on
recognized exchanges or over-the-counter, from time to time foreign securities
may be difficult to liquidate rapidly without significantly depressing the price
of such securities. Transactions in foreign securities may be subject to less
efficient settlement practices. Foreign securities trading practices, including
those involving securities settlement where fund assets may be released prior to
receipt of payment, may expose the funds to increased risk in the event of a
failed trade or the insolvency of a foreign broker-dealer. Legal remedies for
defaults and disputes may have to be pursued in foreign courts, whose procedures
differ substantially from those of U.S. courts. Additionally, the costs of
investing outside the United States frequently are higher than those in the
United States. These costs include relatively higher brokerage commissions and
foreign custody expenses.
Securities of foreign issuers may not be registered with the Securities
and Exchange Commission ("SEC"), and the issuers thereof may not be subject to
its reporting requirements. Accordingly, there may be less publicly available
information concerning foreign issuers of securities held by the funds than is
available concerning U.S. companies. Foreign companies are not generally subject
to uniform accounting, auditing and financial reporting standards or to other
regulatory requirements comparable to those applicable to U.S. companies.
The funds may invest in foreign securities by purchasing depository
receipts, including American Depository Receipts ("ADRs"), European Depository
Receipts ("EDRs") and Global Depository Receipts ("GDRs"), or other securities
convertible into securities of issuers based in foreign countries. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically issued
by a U.S. bank or trust company evidencing ownership of the underlying
securities. They generally are in registered form, are denominated in U.S.
dollars and are designed for use in the U.S. securities markets. EDRs are
European receipts evidencing a similar arrangement, may be denominated in other
currencies and are designed for use in European securities markets. GDRs are
similar to EDRs and are designed for use in several international financial
markets. For purposes of each fund's investment policies, depository receipts
generally are deemed to have the same classification as the underlying
securities they represent. Thus, a depository receipt representing ownership of
common stock will be treated as common stock.
ADRs are publicly traded on exchanges or over-the-counter in the United
States and are issued through "sponsored" or "unsponsored" arrangements. In a
sponsored ADR arrangement, the foreign issuer assumes the obligation to pay some
or all of the depositary's transaction fees, whereas under an unsponsored
arrangement, the foreign issuer assumes no obligations and the depositary's
transaction fees are paid directly by the ADR holders. In addition, less
information is available in the United States about an unsponsored ADR than
about a sponsored ADR.
The funds anticipate that their brokerage transactions involving
foreign securities of companies headquartered in countries other than the United
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States will be conducted primarily on the principal exchanges of such countries.
Although each fund will endeavor to achieve the best net results in effecting
its portfolio transactions, transactions on foreign exchanges are usually
subject to fixed commissions that are generally higher than negotiated
commissions on U.S. transactions. There is generally less government supervision
and regulation of exchanges and brokers in foreign countries than in the United
States.
Investment income on certain foreign securities in which the funds may
invest may be subject to foreign withholding or other taxes that could reduce
the return on these securities. Tax treaties between the United States and
foreign countries, however, may reduce or eliminate the amount of foreign taxes
to which the funds would be subject. In addition, substantial limitations may
exist in certain countries with respect to the funds' ability to repatriate
investment capital or the proceeds of sales of securities.
SPECIAL CONSIDERATIONS RELATING TO EMERGING MARKET INVESTMENTS. The
International Alpha Fund may invest in issuers located in emerging markets.
Investing in securities of issuers located in emerging market countries involves
additional risks. For example, many of the currencies of Asia Pacific Region
countries recently have experienced significant devaluations relative to the
U.S. dollar, and major adjustments have been made periodically in various
emerging market currencies. Emerging market countries typically have economic
and political systems that are less fully developed and can be expected to be
less stable than those of developed countries. Emerging market countries may
have policies that restrict investment by foreigners, and there is a higher risk
of government expropriation or nationalization of private property. The
possibility of low or nonexistent trading volume in the securities of companies
in emerging markets also may result in a lack of liquidity and in price
volatility. Issuers in emerging markets typically are subject to a greater
degree of change in earnings and business prospects than are companies in
developed markets.
INVESTMENT AND REPATRIATION RESTRICTIONS. Foreign investment in the
securities markets of several emerging market countries is restricted or
controlled to varying degrees. These restrictions may limit a fund's investment
in these countries and may increase its expenses. For example, certain countries
may require governmental approval prior to investments by foreign persons in a
particular company or industry sector or limit investment by foreign persons to
only a specific class of securities of a company, which may have less
advantageous terms (including price) than securities of the company available
for purchase by nationals. Certain countries may restrict or prohibit investment
opportunities in issuers or industries deemed important to national interests.
In addition, the repatriation of both investment income and capital from some
emerging market countries is subject to restrictions, such as the need for
certain government consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect certain
aspects of a fund's operations. These restrictions may in the future make it
undesirable to invest in the countries to which they apply. In addition, if
there is a deterioration in a country's balance of payments or for other
reasons, a country may impose restrictions on foreign capital remittances
abroad. The fund could be adversely affected by delays in, or a refusal to
grant, any required governmental approval for repatriation, as well as by the
application to it of other restrictions on investments.
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Currency restrictions imposed by the Malaysian government may impose a
significant exit levy on repatriated investments.
If, because of restrictions on repatriation or conversion, the fund
were unable to distribute substantially all of its net investment income and
capital gains within applicable time periods, the fund could be subject to
federal income and excise taxes that would not otherwise be incurred and could
cease to qualify for the favorable tax treatment afforded to regulated
investment companies under the Internal Revenue Code. In such case, it would
become subject to federal income tax on all of its income and net gains. To
avoid these adverse consequences, the fund would be required to distribute as
dividends amounts that are greater than the total amount of cash it actually
receives. These distributions must be made from the fund's cash assets or, if
necessary, from the proceeds of sales of portfolio securities. The fund will not
be able to purchase additional securities with cash used to make such
distributions and its current income and the value of its shares may ultimately
be reduced as a result.
DIFFERENCES BETWEEN THE U.S. AND EMERGING MARKET SECURITIES MARKETS.
Most of the securities markets of emerging market countries have substantially
less volume than the New York Stock Exchange, and equity securities of most
companies in emerging market countries are less liquid and more volatile than
equity securities of U.S. companies of comparable size. Some of the stock
exchanges in emerging market countries are in the earliest stages of their
development. As a result, security settlements may in some instances be subject
to delays and related administrative uncertainties. Many companies traded on
securities markets in emerging market countries are smaller, newer and less
seasoned than companies whose securities are traded on securities markets in the
United States. Investments in smaller companies involve greater risk than is
customarily associated with investing in larger companies. Smaller companies may
have limited product lines, markets or financial or managerial resources and may
be more susceptible to losses and risks of bankruptcy. Additionally,
market-making and arbitrage activities are generally less extensive in such
markets, which may contribute to increased volatility and reduced liquidity of
such markets. Accordingly, each of these markets may be subject to greater
influence by adverse events generally affecting the market, and by large
investors trading significant blocks of securities, than is usual in the United
States. To the extent that an emerging market country experiences rapid
increases in its money supply and investment in equity securities for
speculative purposes, the equity securities traded in that country may trade at
price-earnings multiples higher than those of comparable companies trading on
securities markets in the United States, which may not be sustainable.
GOVERNMENT SUPERVISION OF EMERGING MARKET SECURITIES MARKETS; LEGAL
SYSTEMS. There is also less government supervision and regulation of securities
exchanges, listed companies and brokers in emerging market countries than exists
in the United States. Therefore, less information may be available to the fund
than with respect to investments in the United States. Further, in certain
countries, less information may be available to the fund than to local market
participants. Brokers in other countries may not be as well capitalized as those
in the United States, so that they are more susceptible to financial failure in
times of market, political or economic stress. In addition, existing laws and
regulations are often inconsistently applied. As legal systems in some of the
emerging market countries develop, foreign investors may be adversely affected
by new laws and regulations, changes to existing laws and regulations and
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preemption of local laws and regulations by national laws. In circumstances
where adequate laws exist, it may not be possible to obtain swift and equitable
enforcement of the law.
FINANCIAL INFORMATION AND STANDARDS. Issuers in emerging market
countries generally are subject to accounting, auditing and financial standards
and requirements that differ, in some cases significantly, from those applicable
to U.S. issuers. In particular, the assets and profits appearing on the
financial statements of an emerging market issuer may not reflect its financial
position or results of operations in the way they would be reflected had the
financial statements been prepared in accordance with U.S. generally accepted
accounting principles. In addition, for an issuer that keeps accounting records
in local currency, inflation accounting rules may require, for both tax and
accounting purposes, that certain assets and liabilities be restated on the
issuer's balance sheet in order to express items in terms of currency of
constant purchasing power. Inflation accounting may indirectly generate losses
or profits. Consequently, financial data may be materially affected by
restatements for inflation and may not accurately reflect the real condition of
those issuers and securities markets.
SOCIAL, POLITICAL AND ECONOMIC FACTORS. Many emerging market countries
may be subject to a greater degree of social, political and economic instability
than is the case in the United States. Changes in the leadership or policies of
these countries may halt the expansion of foreign investment or reverse any
liberalization of foreign investment policies now occurring. Such instability
may result from, among other things, the following: (i) authoritarian
governments or military involvement in political and economic decision making,
and changes in government through extra-constitutional means; (ii) popular
unrest associated with demands for improved political, economic and social
conditions; (iii) internal insurgencies; (iv) hostile relations with neighboring
countries; and (v) ethnic, religious and racial disaffection. Such social,
political and economic instability could significantly disrupt the financial
markets in those countries and elsewhere and could adversely affect the value of
a fund's assets. In addition, there could be asset expropriations or
confiscatory levels of taxation that could affect the fund.
Emerging markets include formerly communist countries of Eastern
Europe, Russia and the other countries that once formed the Soviet Union, and
China. Upon the accession to power of communist regimes approximately 50 to 80
years ago, the governments of a number of these countries seized a large amount
of property. The claims of many property owners against those governments were
never finally settled. There can be no guarantee that the fund's investments in
these countries, if any, would not also be seized or otherwise taken away, in
which case the fund could lose its entire investment in the country involved.
Few of the Asia Pacific Region countries have Western-style or fully
democratic governments. Some governments in the region are authoritarian in
nature and influenced by security forces. For example, during the course of the
last 25 years, governments in the region have been installed or removed as a
result of military coups, while others have periodically demonstrated repressive
police state characteristics. In several Asia Pacific Region countries, the
leadership ability of the government has suffered as a result of recent
corruption scandals. Disparities of wealth, among other factors, have also led
to social unrest in some of the Asia Pacific Region countries, accompanied, in
certain cases, by violence and labor unrest. Ethnic, religious and racial
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disaffection have created social, economic and political problems. Such problems
also have occurred in other emerging markets throughout the world. As in some
other regions, several Asia Pacific Region countries have or in the past have
had hostile relationships with neighboring nations or have experienced internal
insurgency.
The fund may invest in Hong Kong, which reverted to Chinese
administration on July 1, 1997. Although China has committed by treaty to
preserve the economic and social freedoms enjoyed in Hong Kong for 50 years
after regaining control, business confidence and market and business performance
in Hong Kong could be significantly affected by adverse political developments.
The fund's investments in Hong Kong may be subject to the same or similar risks
as an investment in China.
The economies of most of the Asia Pacific Region countries and many
other emerging markets are heavily dependent upon international trade and are
accordingly affected by protective trade barriers and the economic conditions of
their trading partners, principally the United States, Japan, China and the
European Union. The enactment by the United States or other principal trading
partners of protectionist trade legislation, reduction of foreign investment in
the local economies and general declines in the international securities markets
could have a significant adverse effect upon the securities markets of these
countries. In addition, the economies of some countries are vulnerable to
weakness in world prices for their commodity exports.
Starting in mid-1997, some Asia Pacific Region countries began to
experience currency devaluations that resulted in high interest rate levels and
sharp reductions in economic activity. Emerging markets outside the Asia Pacific
Region, such as Latin American countries or Russia and other former members of
the Soviet Union, also are susceptible to diminished prospects for corporate
earnings growth and political, social or economic instability as a result of
currency crises or related events.
Several European countries are in the process of adopting a single
currency, the euro. Effective January 1, 1999, exchange rates for countries
participating in the Economic and Monetary Union became irrevocably fixed. A
newly created European Central Bank (ECB) will attempt to manage monetary policy
for this region. Pre-existing national currencies will continue to be valid
until they are replaced by euro coins and bank notes, which is expected to occur
by sometime in 2002. The participating countries are Austria, Belgium, Finland,
France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and
Spain.
These changes may significantly impact European capital markets, and
related risks may increase volatility in world capital markets. This, in turn,
may impact the fund's share price. Risks include:
o The completion of currency unification could be delayed. This could
cause uncertainty in world markets and create unanticipated expenses
as a result of having to undo changes made in anticipation of the
timely completion of different stages of currency unification;
o Exchange rates between the U.S. dollar and European currencies may
become more volatile and unstable;
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o European entities may face substantial conversion costs which may not
be accurately anticipated and could impact issuer profitability and
creditworthiness;
o Institutional investors may shift assets away from certain European
currencies because of the uncertainty, making markets less liquid;
o Some major European countries, including the United Kingdom, Sweden
and Denmark, initially are not participating in currency unification,
and it is not known whether they will participate in the future. This
non-participation could lead to greater volatility in exchange rates
between the currencies of countries participating in the euro and
those that are not;
o There is a risk that some contracts (e.g., bank loan agreements,
derivatives contracts, and foreign exchange contracts) may become
unenforceable when the currencies are unified. Certain political
units, including The European Council and the State of New York, have
enacted laws or regulations designed to ensure that financial
contracts will continue to be enforceable after the euro's
introduction; however, it is possible that these laws will not be
completely effective in preventing disputes from arising. Disputes and
litigation could negatively impact a fund's portfolio holdings and may
create uncertainties in the valuation of financial contracts a fund
could hold;
o Suitable clearing, settlement and operational systems may not be ready
for various stages of the euro conversion;
o European interest rates and exchange rates could become more volatile
as the ECB and market participants search for a common understanding
of policy targets and instruments; and
o A participating country will no longer be able to use monetary policy
changes to address economic or political concerns that affect only
that country.
CURRENCY-LINKED INVESTMENTS. International Alpha Fund may invest in
securities that are indexed to specific foreign currency exchange rates. The
principal amount of these securities may be adjusted up or down (but not below
zero) at maturity to reflect changes in the exchange rate between currencies.
The fund may experience loss of principal due to these adjustments.
FOREIGN CURRENCY TRANSACTIONS. A significant portion of International
Alpha Fund assets may be invested in foreign securities, and substantially all
related income may be received by the fund in foreign currencies. Currency risk
is the risk that changes in foreign exchange rates may reduce the U.S. dollar
value of a fund's foreign investments. The fund's share value may change
significantly when its investments are denominated in foreign currencies.
Generally, currency exchange rates are determined by supply and demand in the
foreign exchange markets and the relative merits of investments in different
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countries. Currency exchange rates also can be affected by the intervention of
the U.S. and foreign governments or central banks, the imposition of currency
controls, speculation, devaluation or other political or economic developments
inside and outside the United States.
The International Alpha Fund values its assets daily in U.S. dollars
and does not intend to convert its holdings of foreign currencies to U.S.
dollars on a daily basis. From time to time the fund's foreign currencies may be
held as "foreign currency call accounts" at foreign branches of foreign or
domestic banks. These accounts bear interest at negotiated rates and are payable
upon relatively short demand periods. If a bank became insolvent, the fund could
suffer a loss of some or all of the amounts deposited. The fund may convert
foreign currency to U.S. dollars from time to time.
The value of the assets of a fund as measured in U.S. dollars may be
affected favorably or unfavorably by fluctuations in currency rates and exchange
control regulations. Further, the fund may incur costs in connection with
conversions between various currencies. Currency exchange dealers realize a
profit based on the difference between the prices at which they are buying and
selling various currencies. Thus, a dealer normally will offer to sell a foreign
currency to the fund at one rate, while offering a lesser rate of exchange
should the fund desire immediately to resell that currency to the dealer.
International Alpha Fund conducts its currency exchange transactions either on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through entering into forward, futures or options contracts
to purchase or sell foreign currencies.
INDEX SECURITIES. Each fund may invest in Standard and Poor's
Depositary Receipts, Standard and Poor's MidCap 400 Depositary Receipts, and
other similar index securities ("Index Securities"). Index Securities represent
interests in a fixed portfolio of common stocks designed to track the price and
dividend yield performance of a broad-based securities index, such as the
Standard & Poor's 500 Composite Stock Price ("S&P" 500 Index"), but are traded
on an exchange like shares of common stock. The value of Index Securities
fluctuates in relation to changes in the value of the underlying portfolio of
securities. However, the market price of Index Securities may not be equivalent
to the pro rata value of the index it tracks. Index Securities are subject to
the risks of an investment in a broadly based portfolio of common stocks. Index
Securities are considered investments in other investment companies.
INVESTMENT COMPANIES. Each fund may invest in the securities of other
investment companies to the extent that such an investment would be consistent
with the requirements of the 1940 Act. Investments in the securities of other
investment companies may involve duplication of advisory fees and certain other
expenses. By investing in another investment company, a fund becomes a
shareholder of that investment company. As a result, a fund's shareholders
indirectly bear the fund's proportionate share of the fees and expenses paid by
the shareholders of the other investment company, in addition to the fees and
expenses fund shareholders directly bear in connection with the fund's own
operations.
SEGREGATED ACCOUNTS. When the funds enter into certain transactions
that involve obligations to make future payments to third parties, it will
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maintain with an approved custodian in a segregated account cash or liquid
securities, marked to market daily, in an amount at least equal to the fund's
obligation or commitment under such transactions. As described below under
"Strategies Using Derivative Instruments," segregated accounts may also be
required in connection with certain transactions involving futures.
INVESTMENT LIMITATIONS OF THE FUNDS
FUNDAMENTAL LIMITATIONS. The following fundamental investment
limitations cannot be changed for a fund without the affirmative vote of the
lesser of (a) more than 50% of the outstanding shares of the fund or (b) 67% or
more of the shares of the fund present at a shareholders' meeting if more than
50% of the outstanding shares are represented at the meeting in person or by
proxy. If a percentage restriction is adhered to at the time of an investment or
transaction, later changes in percentage resulting from a change in values of
portfolio securities or amount of total assets will not be considered a
violation of any of the following limitations.
Each fund will not:
(1) purchase securities of any one issuer if, as a result, more than 5%
of the fund's total assets would be invested in securities of that issuer or the
fund would own or hold more than 10% of the outstanding voting securities of
that issuer, except that up to 25% of the fund's total assets may be invested
without regard to this limitation, and except that this limitation does not
apply to securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities or to securities issued by other investment companies.
The following interpretation applies to, but is not a part of, this fundamental
restriction: Mortgage- and asset-backed securities will not be considered to
have been issued by the same issuer by reason of the securities having the same
sponsor, and mortgage- and asset-backed securities issued by a finance or other
special purpose subsidiary of that are not guaranteed by the parent company will
be considered to be issued by a separate issuer from the parent company.
(2) purchase any security if, as a result of that purchase, 25% or more
of the fund's total assets would be invested in securities of issuers having
their principal business activities in the same industry, except that this
limitation does not apply to securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities or to municipal securities.
The following interpretation applies to, but is not a part of, this fundamental
limitation: (a) domestic and foreign banking will be considered to be different
industries and (b) asset-backed securities will be grouped in industries based
upon their underlying assets and not treated as constituting a single, separate
industry.
(3) issue senior securities or borrow money, except as permitted under
the Investment Company Act and then not in excess of 33 1/3% of the fund's total
assets (including the amount of the senior securities issued but reduced by any
liabilities not constituting senior securities) at the time of the issuance or
borrowing, except that the fund may borrow up to an additional 5% of its total
assets (not including the amount borrowed) for temporary or emergency purposes.
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(4) make loans, except through loans of portfolio securities or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers' acceptances or
similar instruments will not be considered the making of a loan.
(5) engage in the business of underwriting securities of other issuers,
except to the extent that the fund might be considered an underwriter under the
federal securities laws in connection with its disposition of portfolio
securities.
(6) purchase or sell real estate, except that investments in securities
of issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by interests
in real estate are not subject to this limitation, and except that the fund may
exercise rights under agreements relating to such securities, including the
right to enforce security interests and to hold real estate acquired by reason
of such enforcement until that real estate can be liquidated in an orderly
manner.
(7) purchase or sell physical commodities unless acquired as a result
of owning securities or other instruments, but the fund may purchase, sell or
enter into financial options and futures, forward and spot currency contracts,
swap transactions and other financial contracts or derivative instruments.
NON-FUNDAMENTAL LIMITATIONS. The following investment restrictions are
non-fundamental and may be changed by the vote of the appropriate board without
shareholder approval.
Each fund will not:
(1) invest more than 15% of its net assets in illiquid securities, a
term which means securities that cannot be disposed of within seven days in the
ordinary course of business at approximately the amount at which the fund has
valued the securities and includes, among other things, repurchase agreements
maturing in more than seven days.
(2) purchase securities on margin, except for short-term credit
necessary for clearance of portfolio transactions and except that the fund may
make margin deposits in connection with its use of financial options and
futures, forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments.
(3) engage in short sales of securities or maintain a short position,
except that the fund may (a) sell short "against the box" and (b) maintain short
positions in connection with its use of financial options and futures, forward
and spot currency contracts, swap transactions and other financial contracts or
derivative instruments.
(4) purchase securities of other investment companies, except to the
extent permitted by the Investment Company Act and except that this limitation
does not apply to securities received or acquired as dividends, through offers
of exchange, or as a result of reorganization, consolidation, or merger (and
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except that the fund will not purchase securities of registered open-end
investment companies or registered unit investment trusts in reliance on
Sections 12(d)(1)(F) or 12(d)(1)(G) of the Investment Company Act).
(5) purchase portfolio securities while borrowings in excess of 5% of
its total assets are outstanding.
STRATEGIES USING DERIVATIVE INSTRUMENTS
OPTIONS AND FUTURES. Each fund may invest in certain options, futures
contracts (sometimes referred to as "futures") and options on futures contracts
(collectively, "Financial Instruments") to attempt to enhance the fund's income
or yield or to attempt to hedge the fund's investments.
Generally, a fund may purchase and sell any type of Financial
Instrument. However, as an operating policy, each fund will only purchase or
sell a particular Financial Instrument if the fund is authorized to invest in
the type of asset by which the return on, or value of, the Financial Instrument
is primarily measured.
Hedging strategies can be broadly categorized as "short hedges" and
"long hedges." A short hedge is a purchase or sale of a Financial Instrument
intended partially or fully to offset potential declines in the value of one or
more investments held in a fund's portfolio. Thus, in a short hedge a fund takes
a position in a Financial Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged.
Conversely, a long hedge is a purchase or sale of a Financial
Instrument intended partially or fully to offset potential increases in the
acquisition cost of one or more investments that a fund intends to acquire.
Thus, in a long hedge, a fund takes a position in a Financial Instrument whose
price is expected to move in the same direction as the price of the prospective
investment being hedged. A long hedge is sometimes referred to as an
anticipatory hedge. In an anticipatory hedge transaction, a fund does not own a
corresponding security and, therefore, the transaction does not relate to a
security the fund owns. Rather, it relates to a security that the fund intends
to acquire. If the fund does not complete the hedge by purchasing the security
it anticipated purchasing, the effect on the fund's portfolio is the same as if
the transaction were entered into for speculative purposes.
Financial Instruments on securities generally are used to attempt to
hedge against price movements in one or more particular securities positions
that a fund owns or intends to acquire. Financial Instruments on indices, in
contrast, generally are used to attempt to hedge against price movements in
market sectors in which a fund has invested or expects to invest. Financial
Instruments on debt securities may be used to hedge either individual securities
or broad debt market sectors.
The use of Financial Instruments is subject to applicable regulations
of the SEC, the several exchanges upon which they are traded and the Commodity
Futures Trading Commission (the "CFTC"). In addition, each fund's ability to use
Financial Instruments may be limited by tax considerations. See "Additional Tax
Information."
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In addition to the instruments, strategies and risks described below,
the adviser expects to discover additional opportunities in connection with
Financial Instruments and other similar or related techniques. These new
opportunities may become available as the adviser develops new techniques, as
regulatory authorities broaden the range of permitted transactions and as new
Financial Instruments or other techniques are developed. The adviser may utilize
these opportunities to the extent that they are consistent with a fund's
investment objective and permitted by the fund's investment limitations and
applicable regulatory authorities. A fund might not use any of these strategies,
and there can be no assurance that any strategy used will succeed. Each fund's
Prospectus or SAI will be supplemented to the extent that new products or
techniques involve materially different risks than those described below or in
the Prospectus.
SPECIAL RISKS. The use of Financial Instruments involves special
considerations and risks, certain of which are described below. In general,
these techniques may increase the volatility of a fund and may involve a small
investment of cash relative to the magnitude of the risk assumed. Risks
pertaining to particular Financial Instruments are described in the sections
that follow.
(1) Successful use of most Financial Instruments depends upon the
adviser's ability to predict movements of the overall securities, currency and
interest rate markets, which requires different skills than predicting changes
in the prices of individual securities. There can be no assurance that any
particular strategy will succeed, and use of Financial Instruments could result
in a loss, regardless of whether the intent was to reduce risk or increase
return.
(2) There might be imperfect correlation, or even no correlation,
between price movements of a Financial Instrument and price movements of the
investments being hedged. For example, if the value of a Financial Instrument
used in a short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the investments being
hedged, such as speculative or other pressures on the markets in which Financial
Instruments are traded. The effectiveness of hedges using Financial Instruments
on indices will depend on the degree of correlation between price movements in
the index and price movements in the securities being hedged.
Because there are a limited number of types of exchange-traded options
and futures contracts, it is likely that the standardized contracts available
will not match a fund's current or anticipated investments exactly. A fund may
invest in options and futures contracts based on securities with different
issuers, maturities or other characteristics from the securities in which it
typically invests, which involves a risk that the options or futures position
will not track the performance of a fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match a fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
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and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts. Each fund may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in a fund's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.
(3) If successful, the above-discussed strategies can reduce risk of
loss by wholly or partially offsetting the negative effect of unfavorable price
movements. However, such strategies can also reduce opportunity for gain by
offsetting the positive effect of favorable price movements. For example, if a
fund entered into a short hedge because the adviser projected a decline in the
price of a security in the fund's portfolio, and the price of that security
increased instead, the gain from that increase might be wholly or partially
offset by a decline in the price of the Financial Instrument. Moreover, if the
price of the Financial Instrument declined by more than the increase in the
price of the security, the fund could suffer a loss. In either such case, the
fund would have been in a better position had it not attempted to hedge at all.
(4) As described below, a fund might be required to maintain assets as
"cover," maintain accounts or make margin payments when it takes positions in
Financial Instruments involving obligations to third parties (i.e., Financial
Instruments other than purchased options). If the fund were unable to close out
its positions in such Financial Instruments, it might be required to continue to
maintain such assets or accounts or make such payments until the position
expired or matured. These requirements might impair the fund's ability to sell a
portfolio security or make an investment at a time when it would otherwise be
favorable to do so, or require that the fund sell a portfolio security at a
disadvantageous time.
(5) The funds' ability to close out a position in a Financial
Instrument prior to expiration or maturity depends on the existence of a liquid
secondary market or, in the absence of such a market, the ability and
willingness of the other party to the transaction (the "counterparty") to enter
into a transaction closing out the position. Therefore, there is no assurance
that any position can be closed out at a time and price that is favorable to the
fund.
COVER. Transactions using Financial Instruments, other than purchased
options, expose a fund to an obligation to another party. Neither fund will
enter into any such transactions unless it owns either (1) an offsetting
("covered") position in securities, currencies or other options, futures
contracts or forward contracts, or (2) cash and liquid assets with a value,
marked-to-market daily, sufficient to cover its potential obligations to the
extent not covered as provided in (1) above. The funds will comply with SEC
guidelines regarding cover for these instruments and will, if the guidelines so
require, set aside cash or liquid assets in an account with its custodian in the
prescribed amount as determined daily.
Assets used as cover or held in an account cannot be sold while the
position in the corresponding Financial Instrument is open, unless they are
replaced with other appropriate assets. As a result, the commitment of a large
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<PAGE>
portion of a fund's assets to cover in accounts could impede portfolio
management or the fund's ability to meet redemption requests or other current
obligations.
OPTIONS. A call option gives the purchaser the right to buy, and
obligates the writer to sell, the underlying investment at the agreed-upon price
during the option period. A put option gives the purchaser the right to sell,
and obligates the writer to buy, the underlying investment at the agreed-upon
price during the option period. Purchasers of options pay an amount, known as a
premium, to the option writer in exchange for the right under the option
contract.
The purchase of call options can serve as a long hedge, and the
purchase of put options can serve as a short hedge. Writing put or call options
can enable the funds to enhance income or yield by reason of the premiums paid
by the purchasers of such options. However, if the market price of the security
underlying a put option declines to less than the exercise price of the option,
minus the premium received, the funds would expect to suffer a loss.
Writing call options can serve as a limited short hedge, because
declines in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security or
currency appreciates to a price higher than the exercise price of the call
option, it can be expected that the option will be exercised and a fund will be
obligated to sell the security or currency at less than its market value. If the
call option is an OTC option, the securities or other assets used as cover would
be considered illiquid to the extent described under "Illiquid and Restricted
Investments."
Writing put options can serve as a limited long hedge because increases
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option. However, if the security or currency
depreciates to a price lower than the exercise price of the put option, it can
be expected that the put option will be exercised and a fund will be obligated
to purchase the security or currency at more than its market value. If the put
option is an OTC option, the securities or other assets used as cover would be
considered illiquid to the extent described under "Illiquid and Restricted
Investments."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options that expire unexercised have
no value.
Each fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, a fund may terminate
its obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit a fund to realize profits or limit
losses on an option position prior to its exercise or expiration.
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RISKS OF OPTIONS ON SECURITIES. Options offer large amounts of
leverage, which will result in a fund's net asset value being more sensitive to
changes in the value of the related instrument. A fund may purchase or write
both exchange-traded and OTC options. Exchange-traded options in the United
States are issued by a clearing organization affiliated with the exchange on
which the option is listed that, in effect, guarantees completion of every
exchange-traded option transaction. In contrast, OTC options are contracts
between a fund and its counterparty (usually a securities dealer or a bank) with
no clearing organization guarantee. Thus, when a fund purchases an OTC option,
it relies on the counterparty from whom it purchased the option to make or take
delivery of the underlying investment upon exercise of the option. Failure by
the counterparty to do so would result in the loss of any premium paid by a fund
as well as the loss of any expected benefit of the transaction.
The funds' ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. However,
there can be no assurance that such a market will exist at any particular time.
Closing transactions can be made for OTC options only by negotiating directly
with the counterparty, or by a transaction in the secondary market if any such
market exists. There can be no assurance that the funds will in fact be able to
close out an OTC option position at a favorable price prior to expiration. In
the event of insolvency of the counterparty, a fund might be unable to close out
an OTC option position at any time prior to its expiration.
If a fund was unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by a fund could cause material losses because the fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.
OPTIONS ON INDICES. Puts and calls on indices are similar to puts and
calls on securities or futures contracts except that all settlements are in cash
and gain or loss depends on changes in the index in question rather than on
price movements in individual securities or futures contracts. When a fund
writes a call on an index, it receives a premium and agrees that, prior to the
expiration date, the purchaser of the call, upon exercise of the call, will
receive from the fund an amount of cash if the closing level of the index upon
which the call is based is greater than the exercise price of the call. The
amount of cash is equal to the difference between the closing price of the index
and the exercise price of the call times a specified multiple ("multiplier"),
which determines the total dollar value for each point of such difference. When
a fund buys a call on an index, it pays a premium and has the same rights to
such call as are indicated above. When a fund buys a put on an index, it pays a
premium and has the right, prior to the expiration date, to require the seller
of the put, upon the fund's exercise of the put, to deliver to the fund an
amount of cash if the closing level of the index upon which the put is based is
less than the exercise price of the put, which amount of cash is determined by
the multiplier, as described above for calls. When a fund writes a put on an
index, it receives a premium and the purchaser of the put has the right, prior
to the expiration date, to require the fund to deliver to it an amount of cash
equal to the difference between the closing level of the index and exercise
price times the multiplier if the closing level is less than the exercise price.
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RISKS OF OPTIONS ON INDICES. The risks of investment in options on
indices may be greater than options on securities. Because index options are
settled in cash, when a fund writes a call on an index it cannot provide in
advance for its potential settlement obligations by acquiring and holding the
underlying securities. A fund can offset some of the risk of writing a call
index option by holding a diversified portfolio of securities similar to those
on which the underlying index is based. However, a fund cannot, as a practical
matter, acquire and hold a portfolio containing exactly the same securities as
underlie the index and, as a result, bears a risk that the value of the
securities held will vary from the value of the index.
Even if a fund could assemble a portfolio that exactly reproduced the
composition of the underlying index, it still would not be fully covered from a
risk standpoint because of the "timing risk" inherent in writing index options.
When an index option is exercised, the amount of cash that the holder is
entitled to receive is determined by the difference between the exercise price
and the closing index level on the date when the option is exercised. As with
other kinds of options, a fund as the call writer will not learn that the fund
has been assigned until the next business day at the earliest. The time lag
between exercise and notice of assignment poses no risk for the writer of a
covered call on a specific underlying security, such as common stock, because
there the writer's obligation is to deliver the underlying security, not to pay
its value as of a fixed time in the past. So long as the writer already owns the
underlying security, it can satisfy its settlement obligations by simply
delivering it, and the risk that its value may have declined since the exercise
date is borne by the exercising holder. In contrast, even if the writer of an
index call holds securities that exactly match the composition of the underlying
index, it will not be able to satisfy its assignment obligations by delivering
those securities against payment of the exercise price. Instead, it will be
required to pay cash in an amount based on the closing index value on the
exercise date. By the time it learns that it has been assigned, the index may
have declined, with a corresponding decline in the value of its portfolio. This
"timing risk" is an inherent limitation on the ability of index call writers to
cover their risk exposure by holding securities positions.
If a fund has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the fund will be required to pay the
difference between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer.
OTC OPTIONS. Unlike exchange-traded options, which are standardized
with respect to the underlying instrument, expiration date, contract size, and
strike price, the terms of OTC options (options not traded on exchanges)
generally are established through negotiation with the other party to the option
contract. While this type of arrangement allows a fund great flexibility to
tailor the option to its needs, OTC options generally involve greater risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded.
Generally, OTC foreign currency options used by the funds are
European-style options. This means that the option is only exercisable
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immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The purchase of
futures or call options on futures can serve as a long hedge, and the sale of
futures or the purchase of put options on futures can serve as a short hedge.
Writing call options on futures contracts can serve as a limited short hedge,
using a strategy similar to that used for writing call options on securities or
indices. Similarly, writing put options on futures contracts can serve as a
limited long hedge. Futures contracts and options on futures contracts can also
be purchased and sold to attempt to enhance income or yield.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a fund is required to deposit "initial margin"
in an amount generally equal to 10% or less of the contract value. Margin must
also be deposited when writing a call or put option on a futures contract, in
accordance with applicable exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does not represent a
borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, a fund may be required by an exchange to
increase the level of its initial margin payment, and initial margin
requirements might be increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking-to-market." Variation margin does not involve borrowing, but rather
represents a daily settlement of a fund's obligations to or from a futures
broker. When a fund purchases an option on a futures contract, the premium paid
plus transaction costs is all that is at risk. In contrast, when a fund
purchases or sells a futures contract or writes a call or put option thereon, it
is subject to daily variation margin calls that could be substantial in the
event of adverse price movements. If a fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on futures can
enter into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument purchased or sold. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
However, there can be no assurance that a liquid secondary market will exist for
a particular contract at a particular time. In such event, it may not be
possible to close a futures contract or options position.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a futures contract or an option on a
futures contract can vary from the previous day's settlement price; once that
limit is reached, no trades may be made that day at a price beyond the limit.
Daily price limits do not limit potential losses because prices could move to
the daily limit for several consecutive days with little or no trading, thereby
preventing liquidation of unfavorable positions.
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If a fund was unable to liquidate a futures contract or an option on a
futures position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The fund would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the fund would continue to be required
to make daily variation margin payments and might be required to maintain the
position being hedged by the future or option or to maintain cash or securities
in a segregated account.
RISKS OF FUTURES CONTRACTS AND OPTIONS THEREON. The ordinary spreads
between prices in the cash and futures markets (including the options on futures
market), due to differences in the natures of those markets, are subject to the
following factors, which may create distortions. First, all participants in the
futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal relationship between the cash and futures markets. Second, the liquidity
of the futures market depends on participants entering into offsetting
transactions rather than making or taking delivery. To the extent participants
decide to make or take delivery, liquidity in the futures market could be
reduced, thus producing distortion. Third, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct forecast of general
interest rate, currency exchange rate or stock market trends by the adviser may
still not result in a successful transaction. The adviser may be incorrect in
its expectations as to the extent of various interest rate, currency exchange
rate or stock market movements or the time span within which the movements take
place.
INDEX FUTURES. The risk of imperfect correlation between movements in
the price of an index futures and movements in the price of the securities that
are the subject of the hedge increases as the composition of a fund's portfolio
diverges from the securities included in the applicable index. The price of the
index futures may move more than or less than the price of the securities being
hedged. If the price of the index futures moves less than the price of the
securities that are the subject of the hedge, the hedge will not be fully
effective but, if the price of the securities 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 securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the futures
contract. If the price of the futures contract moves more than the price of the
securities, a fund will experience either a loss or a gain on the futures
contract that will not be completely offset by movements in the price of the
securities that are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of the index futures, a fund may buy or sell index
futures in a greater dollar amount than the dollar amount of the securities
being hedged if the historical volatility of the prices of such securities being
hedged is more than the historical volatility of the prices of the securities
included in the index. It is also possible that, where a fund has sold index
futures contracts to hedge against decline in the market, the market may advance
and the value of the securities held in the portfolio may decline. If this
occurred, the fund would lose money on the futures contract and also experience
a decline in value of its portfolio securities. However, while this could occur
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for a very brief period or to a very small degree, over time the value of a
diversified portfolio of securities will tend to move in the same direction as
the market indices on which the futures contracts are based.
Where index futures are purchased to hedge against a possible increase
in the price of securities before a fund is able to invest in them in an orderly
fashion, it is possible that the market may decline instead. If the fund then
concludes not to invest in them at that time because of concern as to possible
further market decline or for other reasons, it will realize a loss on the
futures contract that is not offset by a reduction in the price of the
securities it had anticipated purchasing.
To the extent that a fund enters into futures contracts, options on
futures contracts and options on foreign currencies traded on a CFTC-regulated
exchange, in each case that are not for bona fide hedging purposes (as defined
by the CFTC), the aggregate initial margin and premiums required to establish
these positions (excluding the amount by which options are "in-the-money" at the
time of purchase) may not exceed 5% of the liquidation value of the fund's
portfolio, after taking into account unrealized profits and unrealized losses on
any contracts the fund has entered into. (In general, a call option on a futures
contract is "in-the-money" if the value of the underlying futures contract
exceeds the strike, i.e., exercise, price of the call; a put option on a futures
contract is "in-the-money" if the value of the underlying futures contract is
exceeded by the strike price of the put.) This policy does not limit to 5% the
percentage of a fund's assets that are at risk in futures contracts, options on
futures contracts and currency options.
TURNOVER. A fund's options and futures activities may affect its
turnover rate and brokerage commission payments. The exercise of calls or puts
written by a fund, and the sale or purchase of futures contracts, may cause it
to sell or purchase related investments, thus increasing its turnover rate. Once
a fund has received an exercise notice on an option it has written, it cannot
effect a closing transaction in order to terminate its obligation under the
option and must deliver or receive the underlying securities at the exercise
price. The exercise of puts purchased by a fund may also cause the sale of
related investments, also increasing turnover; although such exercise is within
a fund's control, holding a protective put might cause it to sell the related
investments for reasons that would not exist in the absence of the put. A fund
will pay a brokerage commission each time it buys or sells a put or call or
purchases or sells a futures contract. Such commissions may be higher than those
that would apply to direct purchases or sales.
ORGANIZATION; BOARD MEMBERS, OFFICERS AND PRINCIPAL HOLDERS OF
SECURITIES
The Trust is governed by a board of trustees which oversees its
operations and which is authorized to establish additional series and to issue
an unlimited number of shares of beneficial interest of the Trust as applicable,
for each existing or future series.
The trustees ("board members") and executive officers of the Trust,
their ages, business addresses and principal occupations during the past five
years are:
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<TABLE>
<CAPTION>
Name and Address*; Age Position with Business Experience; Other Directorships
- ---------------------- Trust ----------------------------------------
-----
<S> <C> <C>
M. Kathleen Wood** Trustee, President, Ms. Wood is Director of Investment Operations
Age: 38 Secretary of Hillview Advisors and Vice President of
Value Asset Management, Inc. Prior to
September 1997, she was Vice President of The
Managers Funds.
David M. Spungen Vice President Mr. Spungen is President of Hillview
Age: 38 Advisors. Prior to April 1999, he was a
Principal of CMS Investment Resources, Inc.
Mr. Spungen was a Trustee of Hirtle
Callaghan Trust from July 1995 to March 2000.
Joseph A. Bracken Assistant Secretary Mr. Bracken is Director of Client Services of
Age: 33 and Treasurer Hillview Advisors. Prior to April 1999, he
was Director of Client Services of CMS
Companies.
</TABLE>
- -------------
* Unless otherwise indicated, the business address of each listed person is
1055 Washington Boulevard, Stamford, CT 06901.
** Ms. Wood is an "interested person" of the fund as defined in the Investment
Company Act by virtue of her position with Hillview Advisors.
The Trust pays trustees who are not "interested persons" of the Trust
("disinterested trustees") $____ annually. The Trust pays such board members up
to $___ for each board meeting and each separate meeting of a board committee.
The Trust presently pays each such trustee $_____ annually, plus any additional
annual amounts due for board or committee meetings. All board members are
reimbursed for any expenses incurred in attending meetings. Board members and
officers own in the aggregate less than 1% of the shares of each fund. Because
Hillview Advisors and PFPC perform substantially all of the services necessary
for the operation of the Trust and each fund, the Trust requires no employees.
No officer, director or employee of Hillview Advisors or VAM presently receives
any compensation from the Trust for acting as a trustee or officer.
As of the date of this Statement of Information, no shareholder owned
5% or more of the Alpha Fund's or the International Alpha Fund's shares.
INVESTMENT ADVISORY AND DISTRIBUTION ARRANGEMENTS
INVESTMENT ADVISORY ARRANGEMENTS. Hillview Advisors acts as the
investment adviser and sponsor of the funds pursuant to an advisory contract
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("Advisory Contract") with the Trust. Under the Advisory Contract, each fund
pays Hillview Advisors a fee, computed daily and paid monthly, at the annual
rate of ______% of its average daily net assets.
Under the terms of the Advisory Contract, each fund bears all expenses
incurred in its operation that are not specifically assumed by Hillview
Advisors. Expenses borne by the funds include the following: (1) the cost
(including brokerage commissions, if any) of securities purchased or sold by a
fund and any losses incurred in connection therewith; (2) fees payable to and
expenses incurred on behalf of a fund by Hillview Advisors; (3) organizational
expenses; (4) filing fees and expenses relating to the registration and
qualification of each fund's shares under federal and state securities laws and
maintenance of such registrations and qualifications; (5) fees and salaries
payable to trustees who are not interested persons of the funds or Hillview
Advisors; (6) all expenses incurred in connection with the trustees' services,
including travel expenses; (7) taxes (including any income or franchise taxes)
and governmental fees; (8) costs of any liability, uncollectible items of
deposit and other insurance or fidelity bonds; (9) any costs, expenses or losses
arising out of a liability of or claim for damages or other relief asserted
against a fund for violation of any law; (10) legal, accounting and auditing
expenses, including legal fees of special counsel for the independent trustees;
(11) charges of custodians, transfer agents and other agents; (12) costs of
preparing share certificates; (13) expenses of setting in type and printing
prospectuses and supplements thereto, statements of additional information and
supplements thereto, reports and proxy materials for existing shareholders and
costs of mailing such materials to existing shareholders; (14) any extraordinary
expenses (including fees and disbursements of counsel) incurred by a fund; (15)
fees, voluntary assessments and other expenses incurred in connection with
membership in investment company organizations; (16) costs of mailing and
tabulating proxies and costs of meetings of shareholders, the board and any
committees thereof; (17) the cost of investment company literature and other
publications provided to trustees and officers; and (18) costs of mailing,
stationery and communications equipment.
Under the Advisory Contract, Hillview Advisors will not be liable for
any error of judgment or mistake of law or for any loss suffered by a fund in
connection with the performance of the Advisory Contract, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Hillview Advisors in the performance of its duties or from reckless disregard of
its duties and obligations thereunder. The Advisory Contract terminates
automatically upon its assignment and is terminable at any time without penalty
by the board or by vote of the holders of a majority of the fund's outstanding
voting securities, on 60 days' written notice to Hillview Advisors or by
Hillview Advisors on 60 days' written notice to the Trust.
INVESTMENT SUB-ADVISORY AGREEMENTS. Each sub-adviser serves as an
investment adviser pursuant to a separate Investment Sub-Advisory Agreement
among itself, the Trust, on behalf of each fund, and Hillview Advisors (each a
"Sub-Advisory Agreement" and collectively, the "Sub-Advisory Agreements"). All
of the Sub-Advisory Agreements have substantially similar terms. The Alpha Fund
pays sub-advisory fees to the sub-advisers based on annual percentage rates of
the value of the portion of the Alpha Fund's portfolio managed by each
sub-adviser. Harris receives an annual sub-advisory fee of ______% of the
average daily assets on the first $20 million of the portion of the fund's
portfolio it manages, and ______% of the average daily assets of the rest of the
portion of the fund's assets it manages. Nevis Capital receives an annual
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sub-advisory fee of ______% of the average daily assets of the portion of the
fund's portfolio it manages. Shaker Investments receives an annual sub-advisory
fee of _____% of the average daily assets of the portion of the fund's portfolio
it manages. Pzena receives an annual sub-advisory fee of _____% of the average
daily assets of the first $30 million of the portion of the fund's portfolio it
manages and _____% of the average daily assets of the rest of the portion of the
fund's assets it manages thereafter. Frontier receives an annual sub-advisory
fee of _____% of the average daily assets of the portion of the fund's portfolio
it manages.
The International Alpha Fund pays sub-advisory fees to the sub-advisers
based on annual percentage rates of the value of the portion of the
International Alpha Fund's portfolio by each sub-adviser. BPI receives an annual
sub-advisory fee of _____% of the average daily assets on the first $20 million
of the portion of the fund's portfolio it manages and _____% of the average
daily assets on the rest of the portion of the fund's portfolio it manages.
Deutsche Asset Management receives an annual sub-advisory fee of ______% of the
average daily assets of the portion of the fund's portfolio it manages.
Under the terms of the Sub-Advisory Agreements, the sub-advisers bear
all expenses they incur in connection with the services provided under the
contract other than the cost of securities (including brokerage commissions, if
any) provided for a fund.
The Sub-Advisory Agreements are approved by the Trust's Board of
Trustees for an initial two year period. Thereafter, they are renewable
annually. Under the Sub-Advisory Agreements, The sub-advisors will not be liable
for any error of judgment or mistake of law or for any loss suffered by a fund
in connection with the performance of the Sub-Advisory Agreements, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
the sub-advisors in the performance of their duties or from reckless disregard
of their duties and obligations thereunder. The Sub-Advisory Agreements
terminate automatically upon their assignment and are terminable (1) by any
party immediately upon written notice if there is a material breach by another
party, (2) by any party at any time without penalty upon 30 days' written notice
to the other two parties, and (3) by the Trust or Hillview Advisors immediately
if, in the reasonable judgment of either, the sub-adviser becomes unable to
discharge its duties under its Sub-Advisory Agreement.
PERSONAL TRADING POLICIES. Hillview Advisors personnel may invest in
securities for their own accounts pursuant to a code of ethics that describes
the fiduciary duty owed to shareholders of Hillview mutual funds and other
Hillview Advisors advisory accounts by all Hillview Advisors' trustees, officers
and employees, establishes procedures for personal investing and restricts
certain transactions. For example, personal trades in most securities require
pre-clearance and short-term trading and participation in initial public
offerings generally are prohibited. In addition, the code of ethics puts
restrictions on the timing of personal investing in relation to trades by
Hillview funds and other Hillview Advisors advisory clients.
DISTRIBUTION ARRANGEMENTS. Provident Distributors, Inc., an affiliate
of PFPC, acts as the distributor of shares of the funds under a distribution
contract with the Trust ("Distribution Contracts"). The Distribution Contract
requires PFPC to use its best efforts, consistent with its other businesses, to
sell shares of the funds. Shares of the funds are offered continuously.
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PORTFOLIO TRANSACTIONS
Subject to policies established by the board, the sub-advisers are
responsible for the execution of a fund's portfolio transactions and the
allocation of brokerage transactions. In executing portfolio transactions, the
sub-advisers seek to obtain the best net results for the funds, taking into
account such factors as the price (including the applicable brokerage commission
or dealer spread), size of order, difficulty of execution and operational
facilities of the firm involved. While the sub-advisers generally seek
reasonably competitive commission rates, payment of the lowest commission is not
necessarily consistent with obtaining the best net results. Prices paid to
dealers in principal transactions generally include a "spread," which is the
difference between the prices at which the dealer is willing to purchase and
sell a specific security at the time. The funds may invest in securities traded
in the over-the-counter market and will engage primarily in transactions
directly with the dealers who make markets in such securities, unless a better
price or execution could be obtained by using a broker.
Transactions in futures contracts are executed through futures
commission merchants ("FCMs"), who receive brokerage commissions for their
services. The funds' procedures in selecting FCMs to execute its transactions in
futures contracts are similar to those in effect with respect to brokerage
transactions in securities.
In selecting brokers, the sub-advisers will consider the full range and
quality of a broker's services. Consistent with the interests of the funds and
subject to the review of the board, the sub-advisers may cause a fund to
purchase and sell portfolio securities through brokers who provide the
sub-advisers with brokerage or research services. A fund may pay those brokers a
higher commission than may be charged by other brokers, provided that the
sub-advisers determine in good faith that the commission is reasonable in terms
either of that particular transaction or of the overall responsibility of the
sub-advisers to the fund and their other clients.
Research services obtained from brokers may include written reports,
pricing and appraisal services, analysis of issues raised in proxy statements,
educational seminars, subscriptions, portfolio attribution and monitoring
services, and computer hardware, software and access charges which are directly
related to investment research. Research services may be received in the form of
written reports, online services, telephone contacts and personal meetings with
security analysts, economists, corporate and industry spokespersons, and
government representatives.
For purchases or sales with broker-dealer firms that act as principal,
the sub-advisers seeks best execution. Although the sub-advisers may receive
certain research or execution services in connection with these transactions,
the sub-advisers will not purchase securities at a higher price or sell
securities at a lower price than would otherwise be paid if no weight was
attributed to the services provided by the executing dealer. The sub-advisers
may engage in agency transactions in over-the-counter securities in return for
research and execution services. These transactions are entered into only
pursuant to procedures that are designed to ensure that the transaction
(including commissions) is at least as favorable as it would have been if
effected directly with a market-maker that did not provide research or execution
services.
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Research services and information received from brokers or dealers are
supplemental to the sub-advisers' own research efforts and, when utilized, are
subject to internal analysis before being incorporated into its investment
processes. Information and research services furnished by brokers or dealers
through which or with which a fund effects securities transactions may be used
by the sub-advisers in advising other funds or accounts and, conversely,
research services furnished to the sub-advisers by brokers or dealers in
connection with other funds or accounts that it advises may be used in advising
the funds.
Investment decisions for the funds and for other investment accounts
managed by the sub-advisers are made independently of each other in light of
differing considerations for the various accounts. However, the same investment
decision may occasionally be made for a fund and one or more accounts. In those
cases, simultaneous transactions are inevitable. Purchases or sales are then
averaged as to price and allocated between that fund and the other account(s) as
to amount according to a formula deemed equitable to the fund and the other
account(s). While in some cases this practice could have a detrimental effect
upon the price or value of the security as far as the funds are concerned, or
upon their ability to complete their entire order, in other cases it is believed
that coordination and the ability to participate in volume transactions will be
beneficial to the funds.
PORTFOLIO TURNOVER. The funds' annual portfolio turnover rates may vary
greatly from year to year, but they will not be a limiting factor when
management deems portfolio changes appropriate. The portfolio turnover rate is
calculated by dividing the lesser of a fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of securities in the portfolio during the year. Each fund is
expected to have an annual turnover rate less than 100%.
ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION AND OTHER SERVICES
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION. As discussed in the
Prospectus, shares of a fund may be exchanged for shares of another Hillview
mutual fund. Shareholders will receive at least 60 days' notice of any
termination or material modification of the exchange offer, except no notice
need be given if, under extraordinary circumstances, either redemptions are
suspended under the circumstances described below or the fund temporarily delays
or ceases the sales of its shares because it is unable to invest amounts
effectively in accordance with the funds' investment objectives, policies and
restrictions.
If conditions exist that make cash payments undesirable, each fund
reserves the right to honor any request for redemption by making payment in
whole or in part in securities chosen by the fund and valued in the same way as
they would be valued for purposes of computing the fund's net asset value. Any
such redemption in kind will be made with readily marketable securities, to the
extent available. If payment is made in securities, a shareholder may incur
brokerage expenses in converting these securities into cash.
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The funds may suspend redemption privileges or postpone the date of
payment during any period (1) when the New York Stock Exchange is closed or
trading on the New York Stock Exchange is restricted as determined by the SEC,
(2) when an emergency exists, as defined by the SEC, that makes it not
reasonably practicable for a fund to dispose of securities it owns or to fairly
determine the value of its assets or (3) as the SEC may otherwise permit. The
redemption price may be more or less than the shareholder's cost, depending on
the market value of a fund's portfolio at the time.
SERVICE ORGANIZATIONS. A fund may authorize service organizations, and
their agents, to accept on its behalf purchase and redemption orders that are in
"good form." A fund will be deemed to have received these purchase and
redemption orders when a service organization or its agent accepts them. Like
all customer orders, these orders will be priced based on the fund's net asset
value next computed after receipt of the order by the service organizations or
their agents. Service organizations may include retirement plan service
providers who aggregate purchase and redemption instructions received from
numerous retirement plans or plan participants.
VALUATION OF SHARES
Each fund determines its net asset value per share, normally as of the
close of regular trading (usually 4:00 p.m., Eastern time) on the New York Stock
Exchange on each Business Day, which is defined as each Monday through Friday
when the New York Stock Exchange is open. Prices will be calculated earlier when
the New York Stock Exchange closes early because trading has been halted for the
day. Currently the New York Stock Exchange is closed on the observance of the
following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
Securities that are listed on exchanges normally are valued at the last
sale price on the day the securities are valued or, lacking any sales on such
day, at the last available bid price. In cases where securities are traded on
more than one exchange, the securities are generally valued on the exchange
considered by Hillview Advisers as the primary market. Securities traded in the
over-the-counter market and listed on the Nasdaq Stock Market ("Nasdaq")
normally are valued at the last available sale price on Nasdaq prior to
valuation; other over-the-counter securities are valued at the last bid price
available prior to valuation. Where market quotations are readily available,
portfolio securities are valued based upon market quotations, provided those
quotations adequately reflect, in the judgment of Hillview Advisers, the fair
value of the security. Where those market quotations are not readily available,
securities are valued based upon appraisals received from a pricing service
using a computerized matrix system or based upon appraisals derived from
information concerning the security or similar securities received from
recognized dealers in those securities. All other securities and other assets
are valued at fair value as determined in good faith by or under the direction
of the board. It The amortized cost method of valuation generally is used to
value debt obligations with 60 days or less remaining until maturity, unless the
board determines that this does not represent fair value.
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PERFORMANCE INFORMATION
TOTAL RETURN CALCULATIONS. Average annual total return quotes
("Standardized Return") used in each fund's Performance Advertisements are
calculated according to the following formula:
n
P(1 + T) = ERV
where: P = a hypothetical initial payment of $1,000 to purchase
shares of a specified class
T = average annual total return of shares of that class
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment at the beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the advertisement for
publication. Total return, or "T" in the formula above, is computed by finding
the average annual change in the value of an initial $1,000 investment over the
period. All dividends and other distributions are assumed to have been
reinvested at net asset value.
The funds also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). The funds calculate Non-Standardized Return
for specified periods of time by assuming an investment of $1,000 in fund shares
and assuming the reinvestment of all dividends and other distributions. The rate
of return is determined by subtracting the initial value of the investment from
the ending value and by dividing the remainder by the initial value.
OTHER INFORMATION. In Performance Advertisements, the funds may compare
their Standardized Return and/or their Non-Standardized Return with data
published by Lipper Inc. ("Lipper"), CDA Investment Technologies, Inc. ("CDA"),
Wiesenberger Investment Companies Service ("Wiesenberger"), Investment Company
Data, Inc. ("ICD") or Morningstar Mutual Funds ("Morningstar"), or with the
performance of recognized stock, bond and other indices, including the Lehman
Bond Index, the Standard & Poor's 500 Composite Stock Price Index ("S&P 500"),
the Dow Jones Industrial Average, the Morgan Stanley Capital International World
Index, the Lehman Brothers Treasury Bond Index, and changes in the Consumer
Price Index as published by the U.S. Department of Commerce. The funds also may
refer in these materials to mutual fund performance rankings and other data,
such as comparative asset, expense and fee levels, published by Lipper, CDA,
Wiesenberger, ICD or Morningstar. Performance Advertisements also may refer to
discussions of the funds and comparative mutual fund data and ratings reported
in independent periodicals, including THE WALL STREET JOURNAL, MONEY Magazine,
FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW YORK TIMES,
THE CHICAGO TRIBUNE, THE WASHINGTON POST and THE KIPLINGER LETTERS. Comparisons
in Performance Advertisements may be in graphic form.
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The funds may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on a fund investment are reinvested in
additional fund shares, any future income or capital appreciation of the fund
would increase the value, not only of the original fund investment, but also of
the additional fund shares received through reinvestment. As a result, the value
of a fund investment would increase more quickly than if dividends or other
distributions had been paid in cash.
The funds may also compare their performance with the performance of
bank certificates of deposit (CDs) as measured by the CDA Certificate of Deposit
Index, the Bank Rate Monitor National Index and the averages of yields of CDs of
major banks published by Banxquote(R) Money Markets. In comparing the funds'
performance to CD performance, investors should keep in mind that bank CDs are
insured in whole or in part by an agency of the U.S. government and offer fixed
principal and fixed or variable rates of interest, and that bank CD yields may
vary depending on the financial institution offering the CD and prevailing
interest rates. Shares of the funds are not insured or guaranteed by the U.S.
government and returns and net asset values will fluctuate. An investment in any
fund involves greater risks than an investment in either a money market fund or
a CD.
TAXES
BACKUP WITHHOLDING. Each fund is required to withhold 31% of all
taxable dividends, capital gain distributions and redemption proceeds payable to
individuals and certain other non-corporate shareholders who do not provide the
funds or Hillview Advisors with a correct taxpayer identification number.
Withholding at that rate also is required from dividends and capital gain
distributions payable to those shareholders who otherwise are subject to backup
withholding.
SALE OR EXCHANGE OF FUND SHARES. A shareholder's sale (redemption) of
shares may result in a taxable gain or loss, depending on whether the
shareholder receives more or less than his or her adjusted basis for the shares.
An exchange of any fund's shares for shares of another Hillview mutual fund
generally will have similar tax consequences. In addition, if a fund's shares
are bought within 30 days before or after selling other shares of the fund
(regardless of class) at a loss, all or a portion of that loss will not be
deductible and will increase the basis of the newly purchased shares.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY. Each fund intends to
qualify as a regulated investment company ("RIC") under the Internal Revenue
Code of 1986, as amended. If a fund failed to qualify for treatment as a RIC for
any taxable year, (i) it would be taxed at corporate rates on the full amount of
its taxable income for that year without being able to deduct the distributions
it makes to its shareholders and (ii) the shareholders would treat all those
distributions including distributions of net capital gain (i.e., the excess of
net long-term capital gain over net short-term capital loss), as dividends (that
is, ordinary income) to the extent of the fund's earnings and profits. To
qualify for treatment as a RIC under the Code, a fund must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income and net short-term
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capital gain) and must meet several additional requirements. These requirements
include the following: (1) the fund must derive at least 90% of its gross income
each taxable year from dividends, interest, payments with respect to securities
loans and gains from the sale or other disposition of securities, or other
income (including gains from options or futures) derived with respect to its
business of investing in securities ("Income Requirement"); (2) at the close of
each quarter of the fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. government securities,
securities of other RICs and other securities that are limited, in respect of
any one issuer, to an amount that does not exceed 5% of the value of the fund's
total assets; and (3) at the close of each quarter of the fund's taxable year,
not more than 25% of the value of its total assets may be invested in securities
(other than U.S. government securities or the securities of other RICs) of any
one issuer. If a fund failed to qualify for treatment as a RIC for any taxable
year, it would be taxed as an ordinary corporation on its taxable income for
that year (even if that income was distributed to its shareholders) and all
distributions out of its earnings and profits would be taxable to its
shareholders as dividends (that is, ordinary income).
OTHER INFORMATION. Dividends and other distributions declared by a fund
in October, November or December of any year and payable to shareholders of
record on a date in any of those months will be deemed to have been paid by the
fund and received by the shareholders on December 31 of that year if the
distributions are paid by the fund during the following January.
A portion of the dividends from a fund's investment company taxable
income (whether paid in cash or in additional shares) may be eligible for the
dividends-received deduction allowed to corporations. The eligible portion may
not exceed the aggregate dividends received by the fund from U.S. corporations.
However, dividends received by a corporate shareholder and deducted by it
pursuant to the dividends-received deduction are subject indirectly to the
federal alternative minimum tax.
If fund shares are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain distributions received thereon.
Investors also should be aware that if shares are purchased shortly
before the record date for a capital gain distribution, the shareholder will pay
full price for the shares and receive some portion of the price back as a
taxable distribution.
Dividends and interest received, and gains realized, by a fund on
foreign securities may be subject to income, withholding or other taxes imposed
by foreign countries and U.S. possessions (collectively "foreign taxes") that
would reduce the return on its securities. Tax conventions between certain
countries and the United States, however, may reduce or eliminate foreign taxes,
and many foreign countries do not impose taxes on capital gains in respect of
investments by foreign investors. If more than 50% of the value of a fund's
total assets at the close of its taxable year consists of securities of foreign
corporations, it will be eligible to, and may, file an election with the
Internal Revenue Service that will enable its shareholders, in effect, to
receive the benefit of the foreign tax credit with respect to any foreign taxes
paid by it. Pursuant to the election, the fund would treat those taxes as
dividends paid to its shareholders and each shareholder (1) would be required to
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include in gross income, and treat as paid by him or her, his or her
proportionate share of those taxes, (2) would be required to treat his or her
share of those taxes and of any dividend paid by the fund that represents income
from foreign or U.S. possessions sources as his or her own income from those
sources, and (3) could either deduct the foreign taxes deemed paid by him or her
in computing his or her taxable income or, alternatively, use the foregoing
information in calculating the foreign tax credit against his or her federal
income tax. Each fund will report to its shareholders shortly after each taxable
year its respective shares of foreign taxes paid and the income from sources
within, and taxes paid to, foreign countries and U.S. possessions if it makes
this election. Individuals who have no more than $300 ($600 for married persons
filing jointly) of creditable foreign taxes included on Forms 1099 and all of
whose foreign source income is "qualified passive income" may elect each year to
be exempt from the extremely complicated foreign tax credit limitation, in which
event they would be able to claim a foreign tax credit without having to file
the detailed Form 1116 that otherwise is required.
Each fund will be subject to a nondeductible 4% excise tax to the
extent it fails to distribute by the end of any calendar year substantially all
of its ordinary (taxable) income for the calendar year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
The use of hedging strategies, such as writing (selling) and purchasing
futures contracts, involves complex rules that determine for income tax purposes
the amount, character and timing of recognition of the gains and losses a fund
realizes in connection therewith. Gains from options and futures contracts
derived by a fund with respect to its business of investing in securities,
qualify as permissible income under the Income Requirement.
If a fund has an "appreciated financial position"-- generally, an
interest (including an interest through a futures contract) with respect to any
stock, debt instrument (other than "straight debt") or partnership interest the
fair market value of which exceeds its adjusted basis--and enters into a
"constructive sale" of the position, the fund will be treated as having made an
actual sale thereof, with the result that gain will be recognized at that time.
A constructive sale generally consists of a short sale, an offsetting notional
principal contract or a futures or forward currency contract entered into by a
fund or a related person with respect to the same or substantially identical
property. In addition, if the appreciated financial position is itself a short
sale or such a contract, acquisition of the underlying property or substantially
identical property will be deemed a constructive sale. The foregoing will not
apply, however, to a fund's transaction during any taxable year that otherwise
would be treated as a constructive sale if the transaction is closed within 30
days after the end of that year and the fund holds the appreciated financial
position unhedged for 60 days after that closing (i.e., at no time during that
60-day period is the fund's risk of loss regarding that position reduced by
reason of certain specified transactions with respect to substantially identical
or related property, such as having an option to sell, being contractually
obligated to sell, making a short sale or granting an option to buy
substantially identical stock or securities).
The foregoing is only a general summary of some of the important
federal income tax considerations generally affecting the funds and their
shareholders. No attempt is made to present a complete explanation of the
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federal tax treatment of each fund's activities, and this discussion is not
intended as a substitute for careful tax planning. Accordingly, potential
investors are urged to consult their own tax advisers for more detailed
information and for information regarding any state, local or foreign taxes
applicable to the funds and to dividends and distributions therefrom.
OTHER INFORMATION
DELAWARE BUSINESS TRUSTS. The Trust is a Delaware business trust
organized on April 14, 2000. The Declaration of Trust permits the Trustees to
issue an unlimited number of full and fractional shares of beneficial interest.
The Board of Trustees has created two series of shares, Hillview Alpha Fund and
Hillview International Alpha Fund, and may create additional series in the
future, with the separate rights and liabilities.
Each share of a fund represents an interest in the corresponding fund
proportionately equal to the interest of each other share. Each share is
entitled to one vote for the election of trustees and any other matter submitted
to a vote of the fund shareholders. Fractional shares have fractional voting
rights. Voting rights are not cumulative. All shares of a fund are fully paid
and non-assessable and have no preemptive or conversion rights. The Board of
Trustees may create additional classes of shares in the future, with the
separate rights and liabilities.
Shareholder meetings will not be held except where the 1940 Act
requires a shareholder vote on certain matters (including election of trustees
and changes to a fund's fundamental investment policies), as the Board of
Trustees from time to time deems appropriate. A special meeting may be called
solely for the purpose of removing one or more Trustees when requested in
writing by the recordholders of 10% or more of the outstanding shares of the
Trust.
Shareholders of funds could, under certain circumstances, be held
personally liable for the obligations of the fund or its Trust. However, the
Trust's Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust or the funds and requires that notice of such
disclaimer be given in each note, bond, contract, instrument, certificate or
undertaking made or issued by the board members or by any officers or officer by
or on behalf of the Trust or the funds, the board members or any of them in
connection with the Trust. The Declaration of Trust provides for indemnification
from each fund's property for all losses and expenses of any shareholder held
personally liable for the obligations of that fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the funds themselves would be unable to meet
their obligations, a possibility that Hillview Advisers believes is remote and
not material. Upon payment of any liability incurred by a shareholder solely by
reason of being or having been a shareholder, the shareholder paying such
liability would be entitled to reimbursement from the general assets of the
applicable fund. The board members intend to conduct the funds' operations in
such a way as to avoid, as far as possible, ultimate liability of the
shareholders for liabilities of the funds.
VOTING RIGHTS. Shareholders of each fund are entitled to one vote for
each full share held and fractional votes for fractional shares held. Voting
rights are not cumulative and, as a result, the holders of more than 50% of all
the shares of a fund (or the Trust, which has more than one series) may elect
all of the board members of that fund or Trust. The shares of the funds will be
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voted together. The shares of each series of the Trust will be voted separately,
except when an aggregate vote of all the series of the Trust is required by law.
The funds do not hold annual meetings. Shareholders of record of no
less than two-thirds of the outstanding shares of the Trust or a fund (as
applicable) may remove a board member through a declaration in writing or by
vote cast in person or by proxy at a meeting called for that purpose. A meeting
will be called to vote on the removal of a board member at the written request
of holders of 10% of the outstanding shares of the Trust.
CUSTODIAN AND RECORDKEEPING AGENT; TRANSFER AND DIVIDEND AGENT. PFPC
Trust Company, a subsidiary of PNC Bank and located at 200 Stevens Drive,
Lester, Pennsylvania, serves as custodian and recordkeeping agent for the funds.
PFPC Inc., a subsidiary of PNC Bank, N.A., serves as the funds' transfer and
dividend disbursing agent.
It is located at 400 Bellevue Parkway, Wilmington, DE 19809.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, serves as counsel to the funds.
Kirkpatrick & Lockhart LLP also acts as counsel to VAM and Hillview Advisors in
connection with other matters.
AUDITORS. PricewaterhouseCoopers, located at 2400 Eleven Penn Center,
Philadelphia, PA 19103-2962, serves as independent auditors for the funds.
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You should rely only on the information
contained or referred to in the Hillview
Prospectus and this Statement of Alpha Fund
Additional Information. The funds and International Alpha Fund
their distributor have not authorized
anyone to provide you with information
that is different. The Prospectus and
this Statement of Additional Information
are not an offer to sell shares of the
funds in any jurisdiction where the
funds or distributor may not lawfully
sell those shares.
------------
------------------------------------
Statement of Additional Information
-----------, 2000
------------------------------------
Hillview
(COPYRIGHT)2000 Hillview ___________
<PAGE>
PART C: OTHER INFORMATION
23. Exhibits:
(1) Agreement and Declaration of Trust (to be filed)
(2) By-laws (to be filed)
(3) Instruments Defining Rights of Security Holders
(a) Agreement and Declaration of Trust (to be filed)
(b) Bylaws (to be filed)
(4) (a) Advisory Agreement (to be filed)
(b) Sub-Advisory Agreement with Harris Associates, L.P.
for Hillview Alpha Fund (to be filed)
(c) Sub-Advisory Agreement with Nevis Capital Management,
Inc. for Hillview Alpha Fund (to be filed)
(d) Sub-Advisory Agreement with Shaker Investments, Inc.
for Hillview Alpha Fund (to be filed)
(e) Sub-Advisory Agreement with Pzena Investment
Management LLC for Hillview Alpha Fund (to be filed)
(f) Sub-Advisory Agreement with Frontier Capital
Management Company LLC for Hillview Alpha Fund (to be
filed)
(g) Sub-Advisory Agreements with BPI Global Asset
Management, L.P. for Hillview International Alpha Fund
(to be filed)
(h) Sub-Advisory Agreements with Deutsche Asset
Management, Inc. for Hillview International Alpha Fund
(to be filed)
(5) Underwriting Agreement (to be filed)
(6) Bonus or Profit Sharing Contracts - none
(7) Custodian Agreement (to be filed)
(8) Other Material Contracts
(a) Administration and Accounting Services Agreement (to
be filed)
(b) Transfer Agency Services Agreement (to be filed)
(9) Legal Opinion (to be filed)
(10) Other Opinions
Accountants' Consent (to be filed)
(11) Omitted Financial Statements - not applicable
(12) Initial Capital Agreement (to be filed)
(13) Distribution Plan pursuant to Rule 12b-1 - none
(14) Multiple Class Plan Pursuant to Rule 18f-3 - none
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
Item 25. INDEMNIFICATION
To be supplied.
Item 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISERS
Hillview Capital Advisors, LLC, a Delaware Limited Liability Company, is a
registered investment adviser and offers investment management services to
investment companies and other types of investors. Information as to its
officers and directors is included in its Form ADV filed on February 4, 2000
with the Securities and Exchange Commission (registration number 801-256284) and
is incorporated herein by reference.
Harris Associates L.P., an Illinois Limited Partnership, is a registered
investment adviser and offers investment management services to investment
companies and other types of investors. Information as to its officers and
directors is included in its Form ADV filed on March 31, 2000 with the
<PAGE>
Securities and Exchange Commission (registration number 801-50333) and is
incorporated herein by reference.
Nevis Capital Management, Inc., a Maryland Corporation, is a registered
investment adviser and offers investment management services to investment
companies and other types of investors. Information as to its officers and
directors is included in its Form ADV filed on April 6, 2000 with the Securities
and Exchange Commission (registration number 801-39504) and is incorporated
herein by reference.
Shaker Investments, Inc., an Ohio Corporation, is a registered investment
adviser and offers investment management services to investment companies and
other types of investors. Information as to its officers and directors is
included in its Form ADV filed on August 12, 1999 with the Securities and
Exchange Commission (registration number 801-40315) and is incorporated herein
by reference.
Pzena Investment Management LLC, a Delaware Limited Liability Company, is
a registered investment adviser and offers investment management services to
investment companies and other types of investors. Information as to its
officers and directors is included in its Form ADV filed on March 24, 2000 with
the Securities and Exchange Commission (registration number 801-50838) and is
incorporated herein by reference.
Frontier Capital Management Company LLC, a Massachusetts Limited Liability
Company, is a registered investment adviser and offers investment management
services to investment companies and other types of investors. Information as to
its officers and directors is included in its Form ADV filed on January 24, 2000
with the Securities and Exchange Commission (registration number 801-15724) and
is incorporated herein by reference.
BPI Global Asset Management, L.P., a Delaware Limited Liability
Partnership, is a registered investment adviser and offers investment management
services to investment companies and other types of investors. Information as to
its officers and directors is included in its Form ADV filed on March 27, 2000
with the Securities and Exchange Commission (registration number 801-53972) and
is incorporated herein by reference.
Deutsche Asset Management, Inc., a Delaware Corporation, is a registered
investment adviser and offers investment management services to investment
companies and other types of investors. Information as to its officers and
directors is included in its Form ADV filed on March 31, 2000 with the
Securities and Exchange Commission (registration number 801-27291) and is
incorporated herein by reference.
Item 27. PRINCIPAL UNDERWRITER
(a) Provident Distributors, Inc. (the "Distributor") acts as principal
underwriter for the following investment companies as of 2/1/00:
International Dollar Reserve Fund I, Ltd.
Provident Institutional Funds Trust
Columbia Common Stock Fund, Inc.
Columbia Growth Fund, Inc.
Columbia International Stock Fund, Inc.
Columbia Special Fund, Inc.
Columbia Small Cap Fund, Inc.
Columbia Real Estate Equity Fund, Inc.
Columbia Balanced Fund, Inc.
Columbia Daily Income Company
Columbia U.S. Government Securities Fund, Inc.
Columbia Fixed Income Securities Fund, Inc.
Columbia Municipal Bond Fund, Inc.
Columbia High Yield Fund, Inc.
Columbia National Municipal Bond Fund, Inc.
GAMNA Series Funds, Inc.
WT Investment Trust
Kalmar Pooled Investment Trust
The RBB Fund, Inc.
<PAGE>
Robertson Stephens Investment Trust
HT Insight Funds, Inc.
Harris Insight Funds Trust
Hilliard-Lyons Government Fund, Inc
Hilliard-Lyons Growth Fund, Inc.
Hilliard-Lyons Research Trust
Warburg Pincus Trust
ABN AMRO Funds
Alleghany Funds
BT Insurance Funds Trust
First Choice Funds Trust
Forward Funds, Inc.
IAA Trust Asset Allocation Fund, Inc.
IAA Trust Growth Fund, Inc.
IAA Trust Tax Exempt Bond Fund, Inc.
IAA Trust Taxable Fixed Income Series Fund, Inc.
IBJ Funds Trust
Light Index Funds, Inc.
LKCM Funds
Matthews International Funds
McM Funds
Metropolitan West Funds
New Covenant Funds, Inc.
Panorama Trust
Smith Breeden Series Funds
Smith Breeden Trust
Stratton Growth Fund, Inc.
Stratton Monthly Dividend REIT Shares, Inc.
The Stratton Funds, Inc.
The Galaxy Fund
The Galaxy VIP Fund
Galaxy Fund II
The Govett Funds, Inc.
Trainer, Wortham First Mutual Funds
Undiscovered Managers Funds
Wilshire Target Funds, Inc.
Weiss, Peck & Greer Funds Trust
Weiss, Peck & Greer International Fund
WPG Growth and Income Fund
WPG Growth Fund
WPG Tudor Fund
RWB/WPG U.S. Large Stock Fund
Tomorrow Funds Retirement Trust
The BlackRock Funds, Inc. (Distributed by BlackRock Distributors, Inc.
a wholly owned subsidiary of Provident Distributors, Inc.)
Northern Funds Trust and Northern Institutional Funds Trust (Distributed
by Northern Funds Distributors, LLC. a wholly owned subsidiary of
Provident Distributors, Inc.)
The Offit Investment Fund, Inc. (Distributed by Offit Funds Distributor,
Inc. a wholly owned subsidiary of Provident Distributors, Inc.)
The Offit Variable Insurance Fund, Inc. (Distributed by Offit Funds
Distributor, Inc. a wholly owned subsidiary of Provident Distributors,
Inc.)
<PAGE>
Provident Distributors, Inc. is registered with the Securities and
Exchange Commission as a broker-dealer and is a member of the National
Association of Securities Dealers. Provident Distributors, Inc. is located at
Four Falls Corporate Center, Suite 600, West Conshohocken, Pennsylvania
19428-2961.
(b) Provident Distributors, Inc.
(Principal Business Address,
unless otherwise noted, is: Four Falls Corporate Center,
Suite 600, West Conshohocken, Pennsylvania 19428-2961)
Name and Positions and Positions and
Principal Business Offices With Offices With
ADDRESS UNDERWRITER REGISTRANT
Philip H. Rinnander President and Treasurer None
Jane Haegele Secretary and Sole Director None
Jason A. Greim Vice President None
Barbara A. Rice Vice President None
Jennifer K. Rinnander Vice President None
Lisa M. Buono Vice President and None
Compliance Officer
Item 28. LOCATION OF ACCOUNTS AND RECORDS
The books and other documents required by paragraph (b)(4) of Rule 31a-1
under the Investment Company Act of 1940 are maintained in the physical
possession of Registrant's adviser, Hillview Capital Advisors, LLC, 1055
Washington Boulevard, Third Floor, Stamford, Connecticut 06901. All other
accounts, books and other documents required by Rule 31a-1 are maintained in the
physical possession of Registrant's transfer agent and portfolio accounting
service provider, PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware, 19809.
Item 29. MANAGEMENT SERVICES
Not applicable
Item 30. UNDERTAKINGS
The registrant undertakes to file an amendment to this registration
statement with certified financial statements showing the initial capital
received before accepting subscriptions from more than 25 persons.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, Hillview Investment Trust II,
has duly caused this Registration Statement on Form N-1A to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Stamford
and State of Connecticut, on the 13th day of April, 2000.
HILLVIEW INVESTMENT TRUST II
By: /s/ M. Kathleen Wood
----------------------------
M. Kathleen Wood, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following person in the
capacity and on the date indicated:
Signature Title Date
- --------- ----- ----
/s/ M. Kathleen Wood Trustee April 13, 2000
- ---------------------------------
M. Kathleen Wood