RNS Number:8980O
FRM Credit Alpha Limited
27 February 2008
FRM CREDIT ALPHA LIMITED
(Incorporated in Guernsey)
INTERIM UNAUDITED FINANCIAL STATEMENTS
FOR THE PERIOD FROM 1 JULY 2007
TO 31 DECEMBER 2007
TABLE OF CONTENTS
PAGE
DIRECTORS AND OTHER INFORMATION
3-4
DIRECTORS' RESPONSIBILITY STATEMENT
5
INVESTMENT ADVISER'S REPORT
6-8
BALANCE SHEET
9
INCOME STATEMENT
10
STATEMENT OF CHANGES IN NET ASSETS
11
STATEMENT OF CASH FLOWS
12
NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS
13-20
DIRECTORS AND OTHER INFORMATION
DIRECTORS
Peter Atkinson (Chairman) *
Richard Hotchkis *
Damian Johnson
Andrew Duquemin (appointed 11
September 2007)*
* independent non-executive
REGISTERED OFFICE
PO Box 173
Trafalgar Court
Admiral Park
St. Peter Port
Guernsey GY1 4HG
MANAGER AND COMPANY SECRETARY FRM
Investment Management Limited
PO Box 173
Trafalgar Court
Admiral Park
St. Peter Port
Guernsey GY1 4HG
INVESTMENT ADVISER
Financial Risk Management Limited
15 Adam Street
London WC2N 6AH
IRISH LISTING SPONSOR
McCann Fitzgerald Listing Services Limited
Riverside One
Sir John Rogerson's Quay
Dublin 2
Ireland
SOLICITORS
Herbert Smith LLP
as to English Law
Exchange House
Primrose Street
London EC2A 2HS
as to Irish Law
McCann Fitzgerald
Riverside One
Sir John Rogerson's Quay
Dublin 2
Ireland
SOLICITORS
Carey Olsen
As to Guernsey Law
PO Box 98
7 New Street
St. Peter Port
Guernsey GY1 4BZ
REGISTRAR
Capita Registrars (Guernsey) Limited
2nd Floor
No 1 Le Truchot
St. Peter Port
Guernsey GY1 4AE
DIRECTORS AND OTHER INFORMATION (continued)
AUDITORS
PricewaterhouseCoopers CI LLP
PO Box 321
National Westminster House
Le Truchot
St. Peter Port
Guernsey GY1 4ND
ADMINISTRATOR
JPMorgan Hedge Fund Services (Ireland) Limited
Newenham House
Northern Cross
Malahide Road
Dublin 17
Ireland
CUSTODIAN
JPMorgan Chase Bank, National Association (London
Branch)
125 London Wall
London EC2Y 5AJ
FINANCIAL ADVISOR
Winterflood Securities Limited
AND CORPORATE BROKER
Cannon Bridge House
25 Dowgate Hill
London EC4R 2GA
LENDER
Citibank, N.A.
390 Greenwich Street
4th Floor
New York
NY 10013
DIRECTORS' RESPONSIBILITY STATEMENT
The Directors are responsible for preparing financial statements for each
financial period which give a true and fair view, in accordance with applicable
Guernsey law and International Financial Reporting Standards, of the state of
affairs of the Company and of the profit or loss of the Company for that period.
In preparing those financial statements, the Directors are required to:
* select suitable accounting policies and then apply them consistently;
* make judgements and estimates that are reasonable and prudent;
* state whether applicable accounting standards have been followed, subject
to any material departures disclosed and explained in the financial
statements; and
* prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in business.
The Directors confirm that they have complied with the above requirements in
preparing the financial statements.
The Directors are responsible for keeping proper accounting records that
disclose with reasonable accuracy at any time the financial position of the
Company and enable them to ensure that the financial statements comply with The
Companies (Guernsey) Law, 1994 and The Collective Investment Schemes (Class B)
Rules, 1990. They are also responsible for safeguarding the assets of the
Company and hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities.
The Directors are also responsible for the maintenance and integrity of the
website on which these financial statements can be published.
Legislation in Guernsey governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
INVESTMENT ADVISER'S REPORT FOR THE PERIOD FROM 1 JULY 2007 TO 31 DECEMBER 2007
Performance
This period has been extremely positive for FRM Credit Alpha Limited during
which time the company's shares have gained 9.31%. During the same period the
net asset value increased from 103.1 pence to 111.80 pence; an increase of
8.44%. This return compares favourably with the returns provided by similar
asset classes: for the same period the Merrill Lynch High Yield Master II Index
(GBP hedged) returned -0.40%, JP Morgan Global Government Bonds (GBP Hedged)
returned 12.06% and 1 month Sterling Libor returned 3.14%. This is a very
pleasing result in an environment that proved extremely hostile to credit
investments generally. Points to note include:
* Most managers reported positive returns over the period
* Net exposure to the credit markets averaged 45%
* The portfolio as a whole was approximately 23% net short sub-prime related
securities
Market Environment
During July the market witnessed a major re-pricing on the back of sub prime
fears and oversupply in the leveraged loan market. The Merrill Lynch HY Master
II dropped -3.1%, the largest fall in 5 years. Financial markets were hit by a
substantial rise in volatility, and the extremely high leverage in the system
was under pressure as risk reduction began to take hold. Several levered credit
hedge funds were caught in the liquidity squeeze, with Basis Capital and Sowood
being the best-known of those that had to close down. Other credit related
instruments were also hit; the S&P/LSTA Leveraged Loan Index was down -3.35%;
the previous maximum drawdown was September 2001, when it fell -1.52%.
Credit markets continued to be in disarray in August. Although the Merrill
Lynch HY Master II returned +1.12%, high yield spreads rose 35bps, to 462bps.
Given this confused backdrop hedge fund managers found it difficult to return
positive numbers: hedges did not pay off and value positions were pushed into
negative territory. Risk reduction and deleveraging, as well as the expectation
of new supply, all contributed to increased dislocation and market volatility.
The announcement by President Bush on the last day of the month that homeowners
in trouble would be helped, resulted in a 5% rally across mortgage related
securities. Notably August saw managers in all strategies reduce net exposure
levels from around 40 % in June to 30%.
In September credit spreads tightened as fears of a liquidity-driven crisis
abated, largely due to the aggressive 50bps Fed Funds cut to 4.75%. The Merrill
Lynch HY Master II returned 2.4% as high yield and distressed bonds moved a
little higher. That said credit spreads in some sectors widened dramatically
and some "levered carry" hedge funds continued to be under pressure, with many
reporting negative returns in spite of the market's rally. Managers expected
continued choppiness, and shifted exposures to senior levels of the capital
structure in older, less levered transactions, as well as into smaller, niche
companies which are finding financing more difficult as banks have their balance
sheets squeezed.
High yield indices ended October in positive territory, with the Merrill Lynch
HY Master II up 0.6%. However, spreads rose 17bps to close at +436bps, having
been as low as +381bps during the month. There were mixed messages within
credit markets: Both GDP and 3Q company data pointed to stable fundamentals, and
the month had sizable new issuance in both investment grade ($82bn) and high
yield ($19bn). These deals saw strong demand and were both upsized and placed
at better than anticipated levels. The loan market successfully absorbed
$13.5bn 1st Lien paper by Texas Electric which was issued along with $7.5bn of
bonds, as financing for a KKR buyout. Moody's downgraded $33bn of 2006 sub
prime 1st lien asset backed securities, put $24bn Aaa- and Aa- rated securities
on watch, and downgraded homebuilders such as Centex, Pulte and Lennar on
disappointing results. Financials and bond insurers began to acknowledge the
impact of the credit crisis on their businesses: Citigroup, Bank of America and
Washington Mutual reported significantly weaker results, with many others
admitting to large losses from securitised products. Finally, housing starts
fell in September by an astonishing 10% to a 14-year low. At month-end the Fed
cut by 25bps in response to weakness in capital markets and declining investor
confidence.
INVESTMENT ADVISER'S REPORT FOR THE PERIOD FROM 1 JULY 2007 TO 31 DECEMBER 2007
(continued)
Market Environment (continued)
Credit spreads deteriorated significantly in November. The Investment Grade
market underperformed Treasuries by 270bps, its worst month on record, whilst
High Yield spreads rose to a four year high of almost 600bps, before rallying to
575bps. The Merrill Lynch HY Master II fell 2%. New issue activity in both
High Yield and Leveraged Loans ground to a halt. One indication of the market
deterioration that occurred during month was that three months ago, only 20
issues yielded above 13% whilst in November there were over 170. The strategy
of buying any asset with a high yield, irrespective of fundamentals, no longer
appealed. Investors avoided highly levered companies, both in debt and equity
markets. Distressed names and post-reorganisation equity sold off, particularly
in consumer-related sectors. An index of Homebuilder sentiment was at its
lowest point since inception in 1985. In High Yield, the Home Construction
sector fell 9% while Construction Machinery was down 6%. The estimated losses
from investment in sub prime mortgages ranged from $400bn to $1 trillion. Bank
loans continued to suffer weakness as credit investors priced in a recession.
At the same time, the amount of "fallen angel" (former investment grade debt)
nearly doubled during the year, to $130bn.
The final month of 2007 ended up being another tortuous one for high yield
investors. Though the market managed to post a positive gain of +0.29% (as
measured by the Merrill Lynch High Yield Master II Index), this was entirely
attributable to income and average bond prices were actually down. Rising oil
prices, weak economic data, deteriorating corporate earnings prospects, and the
market perception of an insufficiently accommodative Fed all combined to place
further downward pressure on risky asset prices during December. The primary
high yield market remains closed to all but the highest quality issuers- only
six new issues priced in December for a total of $1.9bn, the lowest figure since
August 2002.
Portfolio
Our dedicated short credit manager in the hedge section of the portfolio
delivered a strong performance helped by a substantial position in the Banking &
Financial sectors. A number of positions in the Home Equity Loan sector also
paid off as fears of a consumer credit crash grew.
The Credit Value section of the portfolio performed strongly. The best
performing position is a high conviction manager in which we have holdings in
their core fund plus their concentrated special situations fund. The manager
profited from a substantial short position in the sub-prime mortgage sector.
Our worst performing manager suffered from a number of unrelated events in his
post reorganisation equity book.
Our core Credit Long Short managers were also profitable albeit more modestly
than Credit Value. Shorts in Emerging Markets and Investment Grade securities
were less profitable than the High Yield positions exploited by Value managers.
It seems our managers are now beginning to be rewarded for their bearish stance.
Outlook
We hear from many of our managers that credit has now "re-priced" to sensible
levels, and that there are many names they find fundamentally attractive.
However, they are cautious because the technical backdrop is still very
uncertain. Demand is low as High Yield mutual funds are seeing redemptions;
Prime Brokers have raised margin requirements for some low quality credit hedge
funds and some credit hedge funds have been facing redemptions. Meanwhile on
the supply side, the forward calendar of debt issuance is significantly large.
It seems it will take some time for this imbalance to clear but expectations are
that the issuance will ultimately get digested, with higher spreads, less
balance sheet leverage, and more lender friendly structures including fewer PIK,
Toggle and 'Cov-lite' issues.
While we don't have consensus on the exact number, our Managers agree that the
default rate will increase in 2008; bringing the market one step closer to the
distressed cycle. They are also united in a belief that the market volatility
of the past six months will continue.
INVESTMENT ADVISER'S REPORT FOR THE PERIOD FROM 1 JULY 2007 TO 31 DECEMBER 2007
(continued)
Outlook
We believe strongly that our Managers will be able to capitalize upon such a
scenario. As in previous cycles, periods of stress result in reduced liquidity
and investors get paid to be more discerning. It is in these environments where
those with skills at building balanced portfolios that target both long and
short opportunities tend to perform best. Such balanced exposures are a feature
of our portfolio, and despite potentially turbulent times ahead, we are
confident that our Managers will be able to weather the storm
Financial Risk Management Limited
Date: 12 February 2008
.
BALANCE SHEET AS AT 31 DECEMBER 2007
Note US$
Assets
Financial assets at fair value through profit or loss 2(a) 172,593,691
Receivable for financial assets sold 7,651
Interest receivable 2(b) 41,998
Prepaid expenses 32,222
Cash and cash equivalents 2(c) 221,857
Total assets 172,897,419
Liabilities
Loan payable 4 5,600,000
Performance fees payable 3.2 1,020,121
Management fees payable 3.1 146,774
Interest payable 2(b) 159,397
Commitment fees payable 4 61,030
Directors fees payable 3.4 42,308
Administration & Custody fees payable 3.3 31,379
Audit fees payable 6,706
Other liabilities 696,574
Total liabilities 7,764,289
Net assets 165,133,130
Represented by:
Shareholders' funds and reserves
Share capital 7 157,406,209
Reserves 8 7,726,921
Total shareholders' funds 165,133,130
Sterling Shares:
Number of Shares 7 75,263,701
Net Asset Value per Share 1.118 GBP
The accompanying notes on pages 13 to 20 are an integral part of these interim
unaudited financial statements
INCOME STATEMENT FOR THE PERIOD FROM 1 JULY TO 31 DECEMBER 2007
Note US$
Investment income
Interest income 2(b) 74,583
Net realised and unrealised gain on financial assets at fair
value through
profit or loss and foreign currency transactions 11 4,617,219
Total investment income 4,691,802
Expenses
Interest expense (169,142)
Administration & Custody fees 3.3 (58,611)
Management fees 3.1 (621,370)
Performance fees 3.2 (717,094)
Commitment fees (77,426)
Audit fees (33,657)
Directors fees 3.4 (90,903)
Legal fees (19,679)
Other operating expenses (508,180)
Total expenses (2,296,062)
Profit for the period from operations 2,395,740
The accompanying notes on pages 13 to 20 are an integral part of these interim
unaudited financial statements
STATEMENT OF CHANGES IN NET ASSETS FOR THE PERIOD FROM 1 JULY 2007 TO 31
DECEMBER 2007
US$
Net assets at the start of the period 94,713,332
Proceeds from issue of shares 68,024,058
Net increase from share transactions 68,024,058
Profit for the period from operations 2,395,740
Net assets at the end of the period 165,133,130
The accompanying notes on pages 13 to 20 are an integral part of these interim
unaudited financial statements
STATEMENT OF CASH FLOWS FOR THE PERIOD FROM 1 JULY 2007 TO 31 DECEMBER 2007
US$
Cash flows from operating activities
Profit for the period from operations 2,395,740
Operating activities:
Increase in interest receivable and prepaid expenses (1,739)
Increase in receivable for financial assets sold (7,651)
Increase in liabilities and accrued expenses 1,381,729
Decrease in amounts payable for investments purchased (383,177)
Purchase of investments at fair value through the profit or loss (165,338,355)
Sale of investments at fair value through the profit or loss 100,453,731
Realised gain on investments at fair value through the profit or loss (11,268,443)
Unrealised gain investments at fair value through the profit or loss (1,690,485)
Net cash outflow from operating activities (74,458,650)
Cash flows from financing activities
Loan received 5,600,000
Issuance of participating shares 68,024,058
Net cash inflow from financing activities 73,624,058
Net decrease in cash and cash equivalents (834,592)
Cash and cash equivalents at the beginning of the period 1,056,449
Cash and cash equivalents at the end of the period 221,857
Net cash flow from operating activities and financing activities
includes:
Interest received 61,518
Interest paid (9,745)
The accompanying notes on pages 13 to 20 are an integral part of these interim
unaudited financial statements
NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JULY
2007 TO 31 DECEMBER 2007
1. GENERAL INFORMATION
FRM Credit Alpha Limited (the "Company"), a closed ended investment company, was
incorporated on 1 March 2007 under The Companies (Guernsey) Law, 1994, of
Guernsey with registered number 46497. The Company has three share classes that
are authorized for issue; Euro Shares, Sterling Shares and US Dollar Shares. At
31 December 2007 only Sterling Shares were in issue.
The Company seeks to generate significant returns over cash, with low volatility
and beta to global credit markets, when measured over a market cycle. By
investing in a combination of investee Funds managed by managers who adopt
research-based value/event driven or long-short approaches, the Company believes
that volatility and peak-to-through drawdowns will be lower than those typically
delivered by long-only approaches. The Company will seek to achieve its
objective by investing in a portfolio of hedge funds pursuing a variety of
different credit and credit-related trading strategies. In addition, the Company
may invest in a wide variety of financial instruments.
The Sterling Shares are listed on the Irish Stock Exchange and traded on the
International Bulletin Board (ITBB) of the London Stock Exchange.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies applied in the preparation of financial
statements are set out below. The Company is in its first period of operations
and therefore no comparative figures are available.
The accounting polices and presentation for the interim figures are consistent
with those applied in the latest audited financial statements.
The Company's financial statements have been prepared in accordance with
International Financial Reporting Standards ("IFRS"). The financial statements
have been prepared under the historical-cost convention, as modified by the
revaluation of financial assets and financial liabilities held at fair value
through profit or loss.
The preparation of financial statements in conformity with IFRS requires the use
of accounting estimates. It also requires the Board of Directors to exercise its
judgement in the process of applying the Company's accounting policies.
The Balance Sheet presents assets and liabilities in increasing order of
liquidity and does not distinguish between current and non-current items. All
the Company's assets and liabilities are held for the purpose of being traded or
are expected to be traded within one period.
All references to net assets throughout this document refer to net assets
attributable to holders of redeemable participating shares.
(a) Financial Instruments
(i) Classification
In accordance with IAS 39, the Company classifies its investments as financial
assets and liabilities at fair value through profit or loss. These financial
assets and liabilities are classified as held for trading or designated by the
Board of Directors at fair value through profit or loss at inception. Financial
assets or financial liabilities held for trading are those acquired or incurred
principally for the purposes of selling or repurchasing in the short term or
derivatives. The Company does not classify any derivatives as hedges in a
hedging relationship. All investments held by the Company have been designated
by the Board of Directors as held for trading.
(ii) Recognition/derecognition
The Company recognises financial assets and financial liabilities at fair value
through profit or loss on the trade date; that is the date it commits to
purchase the instruments. From this date any gains and losses arising from
changes in fair value of the assets or liabilities are recognised. Investments
are derecognised when the rights to receive cashflows from the investments have
expired or the Company has transferred substantially all risks and rewards of
ownership.
(iii) Valuation of investments
Investments in funds are valued at fair value, as determined by the Company's
independent administrator. In determining fair value, the administrator utilises
the valuations of the underlying funds to determine the fair
NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JULY
2007 TO 31 DECEMBER 2007 (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(a) Financial Instruments (continued)
(iii) Valuation of investments (continued)
value of its fund interests. The underlying funds-of-funds in which the Company
is invested value securities and other financial investments on a mark-to-market
or fair value basis of accounting. The estimated fair values of certain of the
investments of the underlying investment funds may include private placements
and other securities for which prices are not readily available. These estimated
fair values are determined by the administrators of the respective underlying
investment funds and may not reflect amounts that could be realised upon
immediate sale, nor amounts that ultimately may be realised.
Accordingly, the estimated fair values may differ significantly from the values
that would have been used had a ready market existed for these investments.
Forward foreign exchange contracts are valued at the forward rate at the closing
date through the residual period of the contracts. Realised and unrealised gains
or losses resulting from forward foreign exchange contracts are recognised in
the Income Statement.
(b) Interest income and expense
Interest income and expense are recorded in the Income Statement using the
effective yield method.
(c) Cash and cash equivalents
Cash and cash equivalents includes deposits with original maturities of three
months or less and include amounts held at the Company's Custodian.
(d) Functional and presentation currency
Items included in the Company's financial statements are measured using the
currency of the primary economic environment in which it operates (the "
functional currency"). This is US$ reflecting the denomination in which
majority of the Company's investments are held. The financial statements are
also presented in US$.
(e) Transactions and balances
Foreign currency transactions are translated into the functional currency using
the exchange rates prevailing at the dates of the transactions. Foreign exchange
gains and losses resulting from the settlement of such transactions and from the
translation at period-end exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognised in the Income Statement.
(f) Statement of cash flows
The cash amount shown on the Statement of Cash Flows is the net amount reported
in the Balance Sheet as cash and cash equivalents. The indirect method has been
applied in the preparation of the Statement of Cash Flows.
3. FEES AND EXPENSES
3.1 Management Fee
The Company pays the Manager a management fee together with reimbursement of
reasonable out of pocket expenses incurred by it in the performance of its
duties. The management fee in respect of the Sterling Shares is at the rate of
1% per annum of the Company's net assets attributable to the Sterling Shares
(before deduction of accruals in respect of the management fee for the current
month and any performance fee) as at the first Business Day of each calendar
month payable monthly in arrears. The management fee for the period was
US$621,370 and the amount outstanding at period end was US$146,774.
3.2 Performance Fee
The Company pays the Manager a performance fee if the Net Asset Value of a Share
at the end of a performance period (a) exceeds its Net Asset Value at the start
of the performance period by more than the performance hurdle and (b) exceeds
the highest previously recorded Net Asset Value per Share as a the end of a
NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JULY
2007 TO 31 DECEMBER 2007 (continued)
3. FEES AND EXPENSES (continued)
3.2 Performance Fee (continued)
performance period in respect of which a performance fee was last paid.
The performance hurdle applicable in respect of a performance period is one
month LIBOR of the currency of the corresponding Share class, compounded monthly
and is pro-rated where the performance period is greater or shorter than one
period. The performance period is each 12 month period ending on 30 June in each
period.
If the performance hurdle and high water mark for a performance period are met
then a performance fee will be calculated and payable to the Manager equal to
10% of the total increase in Net Asset Value per Share at the end of the
relevant performance period over the performance hurdle multiplied by the
weighted average number of Shares in issue at the end of the relevant
performance period. The Company's performance fees for the period were
US$717,094 and the amount outstanding at period end was US$1,020,121.
3.3 Administration and Custodian Fee
The Administrator and Custodian are entitled to receive from the
Company an aggregate annual fee equivalent to 0.07% of the Company's Net Asset
Value, such fee to be payable generally pro-rata monthly in arrears, plus other
transaction costs and out of pocket expenses. The Company's administration fee
for the period was US$49,921 and the amount outstanding at period end was
US$19,899. The Company's custodian fee for the period was US$8,690 and the
amount outstanding at period end was US$11,480.
3.4 Directors' fees
Each Director (other than the Chairman) is entitled to receive a fee from the
Company at such rate as may be determined in accordance with the Articles of
Association. The current fees are GBP20,000 per annum for each Director and
GBP25,000 for the Chairman. All of the Directors are entitled to be paid all
reasonable expenses properly incurred by them in attending general meetings,
board or committee meetings or otherwise in connection with the performance of
their duties. Directors earned US$90,903 during the period and the amount
outstanding at the period end was US$42,308.
4. BORROWING
As and when required for operational reasons, including, without
limitation, for managing cash flow, settling foreign exchange transactions,
funding conversions and taking advantage of short-term investment opportunities,
the Company may borrow money, provide leverage and give guarantees, and
mortgage, pledge or charge all or part of its property or assets as security for
any liability or obligation. Any leverage which arises in the Company is not
intended to be permanent and will be repaid over a short time frame. Such
borrowing is subject always to the availability of a credit line facility on
such terms as the Directors deem acceptable in their sole and absolute
discretion.
In aggregate, therefore, the total borrowings of the Company will not
exceed 35% of the Net Asset Value at the point of drawdown.
At 31 December 2007, the Company had entered into a credit agreement
dated 27 March 2007 with Citibank N.A. as Lender ("Lender"), which allows up to
a maximum of US$35,000,000 to be borrowed. Interest accrues at an annual
variable rate of 5.59% per annum. In addition, a commitment fee shall accrue at
a rate of 0.25% per annum. The maturity date of the credit facility is 25 March
2008. US$5,600,000 had been drawn down at 31 December 2007, being 3.35% of the
net asset value.
5. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
The Company's investment activities expose it to various types of risk taken by
the Company and the managers of the underlying funds, which are associated with
the financial instruments and markets in which they invest. The following
summary is not intended to be a comprehensive list of all risks and investors
should refer to the Prospectus for a more detailed discussion of the risks
inherent to investing in the Company. These risks apply to each class of Shares
in varying degrees.
Interest rate risk
The Company by virtue of its borrowing facility can be directly exposed to
interest rate risks when this facility is in use. In practice, whilst borrowing
is constrained by the offering memorandum to be less than 35% of the net asset
value of the Company, it is unlikely that borrowing levels of more than 10% of
Net Asset Value will occur for any sustained period. The borrowing facility for
the fund is a floating rate facility referenced to US
NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JULY
2007 TO 31 DECEMBER 2007 (continued)
5. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS (continued)
Interest rate risk (continued)
Dollar LIBOR and as such a 1% increase in the LIBOR rate could potentially
detract up to 0.35% per annum from the gross returns of the portfolio in the
extreme scenario that the facility was fully utilised throughout the financial
period. In practice the returns of the Company's underlying investments are, for
the most part likely to be positively correlated with LIBOR and as such it is
likely that the increase in the returns of the investments will more than offset
their increased borrowing costs over the long term, thereby neutralising any
long term interest rate risk.
It is however possible that underlying investments within the portfolio will
incur interest rate risk as an intentional or unintentional part of their
investment strategies.
Market risk
The Company is not directly exposed to any markets risks. However, the
underlying managers that the Company invests in may take exposure to a wide
range of market factors including equity, credit, FX, interest rate, emerging
and commodity markets. Additionally they may make use of complex derivative
instruments to take and manage these exposures. FRM analysts monitor the
underlying managers on a continuing basis on behalf of the Company to ensure
that managers have the correct operational controls, systems and skills to
manage these risks. Additionally, FRM has an automated fund performance
exception reporting process to identify funds that are performing out of line
with expectations (which will include relative analysis to their historic track
record and their peer group). Exceptions are discussed at a monthly meeting with
the Chief Investment Officer and recorded by the risk team.
Market risks at the funds of funds portfolio level are controlled via the use of
diversification across a wide range of Hedge Fund styles and holdings. This
diversification is monitored and controlled via the use of a Value at Risk (VAR)
system. This system uses a proprietary methodology to estimate the monthly loss
that will happen one month in twenty using the current portfolio holdings. The
methodology takes into account underlying funds with short track records and
places greater weight on more recent information to ensure that the estimates
are representative of current conditions. The VAR system is also used to
identify concentrations of risk within the portfolio.
These estimates are produced on a monthly basis by FRM's risk management team
and compared against a set of limits. If the actual values exceed these limits
then deviation is discussed with the relevant portfolio manager to agree a
relevant course of action. Courses of action may include reducing certain
positions, hedging certain factor exposures or changing the limit. Limits are
reviewed and signed off by the Chief Investment Officier and Head of Portfolio
Management on a quarterly basis. Currently these expected maximums are set at a
value of -2%. Since inception, the actual values for the portfolio have ranged
from -0.96% to -1.85%.
As at 31 December 2007 the VAR estimate for the Company was -1.6%. The
assumptions for this calculation are as follows:
The VAR at risk is calculated using a proprietary methodology, the broad
characteristics are as follows:
Using return data for the funds in each portfolio, estimates for the covariance
matrix and means of returns of each fund are calculated. A maximum of five years
data is used in this calculation. For the covariance calculation, in the event
of less than 24 months data being available data for a fund, the covariance is
estimated using strategy performance data from the FRM's Hedge Fund database. An
estimate of the mean return of each fund is also calculated, with a requirement
for at least twelve months data to be available. Again for funds with short
histories the data is replaced with strategy estimates. Both statistics are
calculated using an exponentially smoothing methodology with a decay factor of
0.97.
To take into account effects such as fat tailed distributions, the VAR estimate
does not use a normal distribution. Instead a proprietary distribution, the "
theta" distribution is used. This models the fat tailed distribution of hedge
funds, whilst still accurately representing the body of the return distribution.
NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JULY
2007 TO 31 DECEMBER 2007 (continued)
5. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS (continued)
Market risk (continued)
Limitations of the VAR methodology include the following:
* The measure is a point-in-time calculation, reflecting positions as
recorded at that date, which do not necessarily reflect the risk positions held
at any other time;
* That VAR is a statistical estimation and therefore it is possible that
there could be, in any period, a greater number of days in which losses could
exceed the calculated VAR than implied by the confidence level; and
* That although losses are not expected to exceed the calculated VAR on,
say 95% of occasions, on the other 5% of occasion's losses will be greater and
might be substantially greater than the calculated VAR.
Counterparty risk
Counterparty risk represents the potential loss that the Company would incur if
the counterparties failed to perform pursuant to the terms of their obligations
to the Company. The Company has all of its cash and cash equivalents held with
its Custodian.
Currency Risk
The Company can be directly exposed to foreign exchange risks by virtue of
investments in share classes of funds that are not denominated in its base
currency. When such investments are made, the investment manager has a policy of
hedging the capital value of such exposure using a rolling program of currency
swaps initiated on a monthly basis. In addition there is a secondary policy to
adjust the hedge, where possible, for material movements in the intra-month
profit and loss of the underlying investment. Where intra-month performance data
is available for a non-base currency denominated investment, and the estimated
Net Asset Value movement of the investment exceeds 0.9% of the total net asset
value of the fund, additional non-deliverable forwards that mature at the expiry
of the relevant swap are executed to hedge these movements. In view of this
policy, it is unlikely that the fund will be intentionally, directly exposed to
any material FX risk. It is however possible that the underlying investments
within the portfolio will incur FX risk as an intentional or unintentional part
of their investment strategies.
In accordance with the Company's policy, the Investment Manager monitors the
Company's currency exposure twice a month.
Liquidity risk
The Company invests in alternative investment products, which can be highly
illiquid. With some hedge funds, the Company can only sell their units at
certain dates, which may occur monthly, quarterly, annually or worse. A lack of
liquidity may also result from limited trading opportunities in alternative
investment products.
At December 31 2007, 56% of the net assets of the Company were held in
investment funds allowing monthly withdrawals, 23% were held in investment funds
allowing quarterly withdrawals, 5% were held in investment funds allowing
semi-annual withdrawals, and 19% were held in investment funds allowing
withdrawals in periods greater than two years or on liquidation.
The Company may, from time to time, invest in derivative contracts traded over
the counter, which are not traded in an organised market and may be illiquid. As
a result, the Company may not be able to liquidate quickly its investments in
these instruments at an amount close to their fair value to meet its liquidity
requirements or to respond to specific events.
In accordance with the Company's policy, the Investment Manager monitors the
Company's liquidity position on a regular basis with regard to maintaining a
reasonable level of liquidity. Significant variation from reasonable levels
will result in notification to the board of directors.
The table below analyses the Company's financial liabilities into relevant
maturity groupings based on the remaining period at the balance sheet date to
the contractual maturity date.
NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JULY
2007 TO 31 DECEMBER 2007 (continued)
5. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS (continued)
Liquidity risk (continued)
The amounts in the table are the contractual undiscounted cashflows. Balances
due within 12 months equal their carrying balances, as the impact of discounting
is not significant.
There follows a table to split the liabilities into periods of up to 1 month, 1
- 3 months, 3 - 7 months and 'no stated maturity'.
Up to 1 Month 1 to 3 3 to 7 No stated
Maturity
Months Months Total
Loan payable - - 5,600,000 - 5,600,000
Interest payable 159,397 - - - 159,397
Accrued expenses and other - - 2,004,892 2,004,892
liabilities payable
-
Total Liabilities 159,397 - 5,600,000 2,004,892 7,764,289
6. TAXATION
The Company has applied for and has been granted exempt status for Guernsey tax
purposes. A company that has exempt status for Guernsey tax purposes is exempt
from Guernsey income tax under the provisions of the Income Tax (Exempt Bodies)
(Guernsey) Ordinance, 1989 and is charged an annual exemption fee of �600.
7. SHARE CAPITAL
The Company has an authorised share capital of a minimum of two shares and up to
an unlimited number of shares of no par value. The Company has three share
classes that are authorised for issue: Euro Shares, Sterling Shares and US
Dollar Shares. At 31 December 2007 only Sterling Shares were in issue.
31 December 2007
Sterling Shares
Number of shares as at 30 June 2007 46,000,000
Subscriptions 29,263,701
Number of shares as at 31 December 2007 75,263,701
All Shares have the right to receive, in proportion to their holdings, all the
revenue profits of the Company (including accumulated net income plus the net of
accumulated realised and unrealised capital gains and accumulated realised and
unrealised capital losses).
Shareholders have the right to receive notice of and to attend and vote at
annual and extraordinary general meetings of the Company and each holder of
Shares being present in person or represented by a duly authorised
representative (if a corporation) at a meeting shall upon a show of hands have
one vote.
8. RESERVES
Total
US$
Balance at 30 June 2007 5,331,181
Net realised gain on investments at fair value through profit or loss 11,268,443
Unrealised loss on investments at fair value through profit or loss (1,690,485)
Realised loss on foreign currency transactions (7,073,286)
Unrealised gain on foreign currency transactions 2,112,547
Net expenses for the period (2,221,479)
Balance at 31 December 2007 7,726,921
NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JULY
2007 TO 31 DECEMBER 2007 (continued)
9. RELATED PARTY TRANSACTIONS
Damian Johnson, a Director of the Company, is also a director of FRM Investment
Management Limited (the "Manager"), see note 3.4 for details of amounts earned
by the Directors during the period.
As at 31 December 2007:
(a) Employees of Financial Risk Management Limited (the "Investment Adviser")
held 995,600 shares in the Company;
(b) FRM Holdings Limited, the parent company of the Manager and the Investment
Adviser held 677,000 shares in the Company under the nominee name Roy Nominees
Limited 22607 Account.
As at 31 December 2007, Richard Hotchkis, a Director of the Company, held 30,000
shares in the Company.
FRM Credit Alpha held 566,998 shares in various segregated portfolios of FRM
Conduit Fund SPC, a fund with the same investment manager as FRM Credit Alpha
(FRM Investment Management Limited (the "Manager")) at 31 December 2007.
10. EXCHANGE RATES
The following exchange rates were used as at 31 December 2007 versus US Dollar:
British Pound 0.5095
11. NET REALISED AND UNREALISED GAIN ON FINANCIAL ASSETS AT FAIR VALUE
THROUGH PROFIT OR LOSS AND FOREIGN CURRENCY TRANSACTIONS
US$
Realised gain on investments at fair value through profit or loss 11,268,443
, Unrealised loss on investments at fair value through profit or loss (1,690,485)
Net realised and unrealised gain on investments at fair value through profit or 9,577,958
loss
Realised loss on foreign currency transactions (7,073,286)
Unrealised gain on foreign currency transactions 2,112,547
Net realised and unrealised loss on foreign currency transactions (4,960,739)
Total 4,617,219
12. DISTRIBUTIONS
It is the intention of the Directors that the Company should pay an annual
dividend to holders of Shares of two thirds of total returns, capped at 3.5% of
year end Net Asset Value, available as cash or scrip. Dividends will be paid out
of income recognised in the Income Statement which includes realised and
unrealised capital gains. There were no distributions made during the period
ended 31 December 2007.
NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JULY
2007 TO 31 DECEMBER 2007 (continued)
13. SIGNIFICANT EVENTS DURING THE PERIOD
On 31 October 2007, a final version of the prospectus was filed with the Irish
Stock Exchange in relation to the placing of new shares of no par value in the
capital of the Company designated as Sterling Shares, Euro Shares and Dollar
Shares.
14. APPROVAL OF INTERIM UNAUDITED FINANCIAL STATEMENTS
The interim unaudited financial statements for the period from 1 July 2007 to 31
December 2007 were approved by the Board of Directors on 22 February 2008.
This announcement has been issued through the Companies Announcement Service of
The Irish Stock Exchange.
This information is provided by RNS
The company news service from the London Stock Exchange
END
ISEPUUPWPUPRGQM
Finncap (LSE:FCAP)
Historical Stock Chart
From Jun 2024 to Jul 2024
Finncap (LSE:FCAP)
Historical Stock Chart
From Jul 2023 to Jul 2024
