TIDMFCAP
RNS Number : 7878N
FRM Credit Alpha Limited
24 February 2009
+----------------------------------------------------+
| FRM CREDIT ALPHA LIMITED |
| (Incorporated in Guernsey) |
| INTERIM UNAUDITED FINANCIAL STATEMENTS |
| FOR THE SIX MONTHS ENDED 31 DECEMBER 2008 |
| |
+----------------------------------------------------+
| |
+----------------------------------------------------+
TABLE OF CONTENTSPAGE
DIRECTORS AND OTHER INFORMATION 3-4
DIRECTORS' REPORT5-7
DIRECTORS' RESPONSIBILITY STATEMENT8
CHAIRMAN'S STATEMENT 9-10
INVESTMENT ADVISER'S REPORT11-13
BALANCE SHEET14
INCOME STATEMENT15
STATEMENT OF CHANGES IN NET ASSETS16
STATEMENT OF CASH FLOWS17
NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS18-28
DIRECTORS AND OTHER INFORMATION
DIRECTORS Peter Atkinson (Chairman)*
Richard Hotchkis*
Damian Johnson**
Andrew Duquemin*
* independent non-executive
** non-independent non-executive
REGISTERED OFFICEPO 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
SOLICITORS Herbert Smith LLP
as to English LawExchange House
Primrose Street
London EC2A 2HS
ADVOCATES Carey Olsen
as to Guernsey LawPO Box 98
7 New Street
St. Peter Port
Guernsey GY1 4BZ
REGISTRAR Capita Registrars (Guernsey) Limited
Longue Hougue House
St Sampson
Guernsey GY2 4JN
RECEIVING AGENT AND UK TRANSFER AGENT Capita Registrars Limited
Corporate Actions
The Registry
34 Beckenham Road
Kent BR3 4TU
DIRECTORS AND OTHER INFORMATION (continued)
INDEPENDENT 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
United Kingdom
FINANCIAL ADVISER Winterflood Securities Limited
AND CORPORATE BROKERCannon Bridge House
25 Dowgate Hill
London EC4R 2GA
United Kingdom
LENDERCitibank, N.A.
390 Greenwich Street
4th Floor
New York
NY 10013
DIRECTORS' REPORT FOR THE SIX MONTHS ENDED 31 DECEMBER 2008
The Directors present their report together with the audited financial
statements of FRM Credit Alpha Limited (the "Company") for the six months ended
31 December 2008.
Company Background
The Company, a closed ended investment company, was incorporated on 1 March 2007
under the laws of Guernsey with registered number 46497. The Company began
trading on 27 March 2007 with a listing on the Irish Stock Exchange following
the placing of 46,000,000 Shares of no par value at 100p each. Up until 4
September 2008 the Sterling Shares were listed on the Irish Stock Exchange and
traded on the International Bulletin Board (ITBB) of the London Stock
Exchange. On 4 September 2008 the Sterling Shares were de-listed from the Irish
Stock Exchange and were listed on the Main Market of the London Stock Exchange.
Principal Activities
The Company seeks to deliver better risk-adjusted returns than those achieved by
making passive investments in corporate debt securities, when measured over a
complete market cycle. The Company seeks to achieve its objective by investing
in a portfolio of hedge funds pursuing a variety of different credit and
credit-related trading strategies.
Results
The results for the period are shown in the Income Statement on page 15.
Directors
The Directors of the Company are set out on page 3.
Directors' Interests
As at 31 December 2008, Richard Hotchkis held 30,000 shares in the Company. For
details of directors' fees paid during the period, see note 3.4.
Corporate Governance
Introduction
As a closed-ended investment company registered in Guernsey, the Company is not
obliged to comply with the requirements of the Combined Code (the "Code") which
sets out the principles of good governance and a code of best practice and is
issued by the UK Listing Authority. However, the Directors acknowledge the
importance of sound corporate governance and, where possible, the Directors
adopt best practice. This may involve the Company having regard to the AIC Code
of Corporate Governance produced by the Association of Investment Companies and
the Combined Code, where appropriate. The Company complies with the Combined
Code to the extent that the Directors consider appropriate having regard to the
Company's size, stage of development and resources.
Since the Company's assets are managed by the Manager, the Company does not
adhere to the provisions relating to the setting of the Company's strategic aims
and there is no separate chief executive officer. There is no formal process for
detailed evaluation of the performance of each of the Directors, and the Company
does not have a formal framework for dialogue with Shareholders
The following statement describes how the relevant principles of governance are
applied to the Company.
DIRECTORS' REPORT FOR THE SIX MONTHS ENDED 31 DECEMBER 2008 (continued)
The Board
The Board currently consists of four non-executive directors, three of whom are
independent of the Investment Manager. Dr Johnson is a director of the
Investment Manager and Company Secretary, FRM Investment Management Limited.
The Board meets at least four times a year and between these formal meetings
there is regular contact with the Investment Manager and the Company Secretary.
The directors are kept fully informed of investment and financial controls and
other matters that are relevant to the business of the Company and should be
brought to the attention of the directors. The directors also have access to the
Secretary and, where necessary in the furtherance of their duties, to
independent professional advice at the expense of the Company.
The Board has a breadth of experience relevant to the Company and the directors
believe that any changes to the Board's composition can be managed without undue
disruption. With any new director appointment to the Board, consideration will
be given as to whether an induction process is appropriate.
Audit Committee
An Audit Committee has been established consisting of Mr Duquemin (chairman), Mr
Atkinson and Mr Hotchkis. Dr Johnson was previously on the Audit Committee but
stepped down on 11 September 2008. The Audit Committee examines the
effectiveness of the Company's internal control systems, the annual report and
financial statements and interim report, the auditors' remuneration and
engagement, as well as the auditors' independence and the non-audit services
provided by them. The Audit Committee receives information from the Company
Secretary and the external auditors.
Internal Controls
The Board is ultimately responsible for the Company's system of internal control
and for reviewing its effectiveness. The Board confirms that there is an ongoing
process for identifying, evaluating and managing significant risks faced by the
Company. This process has been in place for the period under review and up to
the date of approval of this annual report and financial statements and is
reviewed by the Board and accords with the Turnbull Guidance. The Code requires
directors to conduct, at least annually, a review of the Company's system of
internal control, covering all controls including financial, operational,
compliance and risk management.
The Board has reviewed the effectiveness of the system of internal control. In
particular, it has reviewed and updated the process for identifying and
evaluating significant risks affecting the Company and the policies by which
these risks are managed.
The internal control systems are designed to meet the Company's particular needs
and the risks to which it is exposed. Accordingly, the internal control systems
are designed to manage rather than eliminate the risk of failure to achieve
business objectives and by their nature can only provide reasonable and not
absolute assurance against misstatement and loss.
DIRECTORS' REPORT FOR THE PERIOD ENDED 31 DECEMBER 2008 (continued)
Going Concern
After making enquiries and given the nature of the Company and its investments,
the directors are satisfied that it is appropriate to continue to adopt the
going concern basis in preparing the financial statements and, after due
consideration, the directors consider that the Company is able to continue as a
going concern in the foreseeable future.
Distribution Facility
Shareholders are entitled to elect to participate in the Distribution Facility
which provides an annual distribution by way of redemption of Shares, subject to
certain limitations and the Directors exercising their discretion to operate the
facility on any relevant occasion. Redemption of Shares on any Distribution Date
will be restricted to a specific percentage of the number of Shares held by a
Shareholder. This percentage will be determined by the Directors in their
discretion when they declare the annual distribution, but it is their intention
to distribute up to two thirds of Total Returns (as defined in the Company's
Prospectus), capped at 3.5 per cent of year-end Net Asset Value.
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, 2008. 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.
As required under the EU Transparency Directive, to the best of our knowledge:
* The financial statements have been prepared in accordance with International
Financial Reporting Standards (IFRS) and give a true and fair view of the
assets, liabilities, financial position and profit of the Company.
* The Investment Adviser's Report which follows includes:
a fair view of the development, performance and position of the Company during
the period; and
a statement of the principal risks and uncertainties the Company faces.
Review of performance, development and position
The Company has operated during the period in accordance with the objectives
outlined in the Prospectus. A review of the Company's performance during the
period is included in the Investment Adviser's Report on pages 11 to 13.
Principal risks and uncertainties
The principal risks and uncertainties are outlined in the Company's Prospectus
and in Note 5 in the Notes to the Financial Statements on pages 21 to 24.
On Behalf of the Board of Directors:
___________________________ ____________________________
Date: 23 February 2009
CHAIRMAN'S STATEMENT
The period has proved extremely challenging for FRM Credit Alpha Limited
including, as it did, the near collapse of the financial system and the worst
ever performance for hedge fund strategies. The Company's net asset value fell
by 23.7%. Over the same period the Merrill Lynch High Yield Master II Index (GBP
hedged) returned -26.7%, JP Morgan Global Government Bonds (GBP Hedged) returned
+7.79% and 1 month Sterling Libor returned +2.64%.
The listed fund of hedge fund universe generally suffered a very poor second
half in 2008. Not only did the underlying assets lose money but many funds have
seen their share prices fall well below their net asset values regardless of
sector focus or specialisation. Your Company was no exception with the share
price falling by 42.7% compared to the fall in net asset value of 23.7%. There
are identifiable reasons for these discounts:
* The fourth quarter of 2008 saw a huge drain on liquidity from capital markets,
often with the most liquid products being sold indiscriminately as investors
sought to reduce risk and raise cash.
* The marginal buyer of hedge fund products disappeared - waiting on the sidelines
until the turmoil had subsided - leaving the market price unsupported on the
bid.
* Some investors were discounting expectations of potential future losses, which
may have been caused by redemption pressures around the year-end.
* Market sentiment reflected the "Madoff scandal" which may have accelerated
losses and increased selling pressure.
Each of these factors has fluctuated in intensity during the recent
difficulties. The Board anticipates these factors are likely to subside to some
degree during 2009 as confidence in the hedge fund industry returns and
investors become less likely to demand liquidity at the expense of long term
returns.
Additional challenges came from our foreign exchange hedging policy. High levels
of volatility in the currency markets increased pressure on short term cash
flow, however we have been able to maintain a fully hedged portfolio throughout
the entire period and we expect to continue to fully hedge our US Dollar
exposure throughout 2009.
The liquidity of the portfolio has also been affected by the market turmoil as
demand for risk assets fell dramatically and previously deep pools of tradeable
assets dried up leaving managers few exit opportunities from positions despite
their requirements for cash. In order to prevent fire sales at unacceptably low
levels many funds have deviated from their standard redemption terms;
suspending, applying gates or issuing side pockets. Analysing and maintaining a
suitable liquidity profile for the portfolio as a whole has required a more
complex, fluid analysis and the investment manager has expended considerable
effort in redesigning their suite of analytical tools.
In a direct reflection of the deteriorating environment for credit the Company
suffered from a worsening of terms offered by its credit provider. In the
Board's opinion the deterioration was sufficient to merit a full review and we
are currently considering alternative providers.
Having regard to the continuing discount in the share price, and having
considered a range of proposals with its advisers and taken account of the
Company's current level of cash and the liquidity of its underlying holdings it
was announced by the Board on 18 February 2009 that it has resolved to take the
following actions:
* To propose a tender offer of up to 20 per cent. of the Company's shares based on
the 30 June 2009 NAV, with payment expected by 30 September 2009.
* Following the completion of the tender offer, to propose to replace the existing
tender offer provisions with an annual redemption facility, to be offered at the
absolute discretion of the Directors.
CHAIRMAN'S STATEMENT (continued)
* To provide shareholders with an opportunity to vote on the Company's
continuation at the Company's annual general meeting to be held in November
2011.
The Board believes the proposals will bring the Company onto a more flexible
capital basis, are a positive step to address some of the structural issues
facing certain closed-ended funds, particularly funds of hedge funds, and should
narrow the discount at which the Company's shares presently trade.
Peter Atkinson
Chairman
23 February 2009
INVESTMENT ADVISER'S REPORT FOR THE SIX MONTHS ENDED 31 DECEMBER 2008
This period brought the worst ever performances for hedge funds when the
effective collapse of the investment banking industry and stress in the retail
banking industry impacted all corners of the financial landscape, including
hedge funds. We have always understood that the integrity of the financial
system was vital for the smooth operation of the hedge fund industry. So when
this was called into question it was not surprising to see that hedge fund
returns were driven less by strategy differences than by a common risk factor.
To make matters worse for the Credit Alpha portfolio the primary cause and
epicentre of the collapse was imbalances within the credit markets.
The scale of current events goes beyond anything experienced by the vast
majority of people currently active in finance and while we feel it is too soon
to draw firm conclusions about the implications for the future of asset
management, we do think a few clearly positive facts are apparent.
The most important is that despite widespread significant losses, the hedge fund
business model looks remarkably robust. Many of the banks are suffering from
size, complexity and the difficulty of drawing in to a common goal the different
objectives of traders, management and shareholders. The effective disappearance
of the US investment banking industry is the most obvious demonstration of this.
By contrast, hedge funds benefit from simplicity. Typically one, or perhaps a
few, key people run the investments and the business and there is a clear
alignment of interests among all stakeholders.
Investment banks have to-date provided the main competition to hedge funds in
the search for attractive absolute return trades. Their effective disappearance
(Morgan Stanley and Goldman Sachs are now banks that must dramatically de-lever
and de-risk) leaves hedge funds with a greatly increased set of opportunities
and the expected return on unlevered capital should increase significantly in
their absence. For all that we read about the range of problems afflicting hedge
funds, it is notable that in contrast to the serial failure of regulated,
listed, audited financial services companies around the world, the largest hedge
funds remain going concerns.
Market Environment
In July the credit market indices celebrated the anniversary of the credit
crunch with a mixed performance. In high yield, there was a marked deterioration
in spreads as the widening trend that started in mid-May continued to drag the
market down but Treasuries ended the month stronger. An intra-month rally failed
to stop high yield indices ending near their monthly lows, with a loss for the
month of -1.6% (ML US HY Master II Index). New issuance was relatively quiet in
July with only 7 new issues worth $3bn pricing during the month, compared to 25
deals worth $9.2bn in June. Meanwhile, defaults continued to increase with seven
defaults in July, including four loan only issuers. Bank loan activity hit a
record high for the number of defaults and dollars affected and rather unusually
given their place in the capital structure market participants expected default
rates to continue rising due to the proportion of the loan market that was
issued in the relatively lax times of 2006 and 2007.
August was a relatively quiet month for the credit markets. High yield credit
spreads barely moved with low volumes traded and lower than average market
liquidity. The ML High Yield Master II Index returned 0.3% with spreads widening
from 800bps to 836bps at month end. Cash loans were marginally down on the month
and government bonds rose 1.2% (JP Morgan Global Government Bond Index LC).
Spreads in cash and synthetic bonds remain below their March highs. Defaults
continue to increase, with seven companies defaulting during the month,
affecting $1.1bn of high yield bonds and $644m of loans. The largest defaulting
company was homebuilder WCI Communities which had $525m of bonds outstanding and
$225m of loans, therefore representing around half of the months defaulted
assets total. Given that value stories tend to develop over longer time periods,
Credit Value managers reduced risk in order to mitigate persistent monthly
drawdowns while the market appeared to be in risk aversion mode. On the short
side of the portfolio, managers were faced with short-covering rallies that
resulted in painful squeezes.
INVESTMENT ADVISER'S REPORT FOR THE SIX MONTHS ENDED 31 DECEMBER 2008
(continued)
Market Environment (continued)
September's environment was characterised by an ever-changing regulatory and
market framework. The failure of Lehman Bros may have been the pinnacle event
that eroded all confidence in market order, but the 'saving' of Fannie Mae,
Freddie Mac, AIG, Washington Mutual and Wachovia sent equally confusing signals.
In spite of having correctly identified the problems at these institutions, and
warned of them for some time, managers were unable to realise gains because
central authority intervention ensured that both short positions and capital
structure arbitrage trades moved irrationally. Risk asset returns collapsed as
hedge fund managers scrambled to set up positions that suited the new world
order, and liquidity evaporated. Instruments traded with liquidity the sole
consideration, resulting in massive dispersion between (amongst other things):
cash bonds and synthetic CDS, bank debt and high yield, and equity and credit.
The ML US HY Master II fell -8.3% while derivatives referencing the same
instruments declined only 2.5%. The S&P LCD Leveraged Loan index was down -6.2%.
High yield bond spreads widened 260 bps; leveraged loan spreads widened 350 bps.
Value opportunities abounded, but managers were unable to take full advantage:
redemption pressure resulting from poor performance across hedge fund strategies
weighed over the market, with even the healthiest funds impacted. As asset
prices spiralled lower, managers were faced with an increasingly difficult task
estimating actual redemptions versus precautionary while balancing the demands
of redeeming investors with those of ongoing investors.
October proved to be the worst month on record in credit markets on all fronts.
The S&P LCD Leveraged Loan Index fell -13.2% while the ML US HY Master II Index
was down -16.3%. Dispersion between asset classes continued to increase: the
differential between cash bonds and CDS (the 'basis') for investment grade and
high yield names widened significantly. Market participants, already reeling
from September's events, were hit by substantial increases in margin
requirements as prime brokers reacted to the increased price volatility. This
triggered a massive wave of forced deleveraging and liquidations across credit
markets, in particular in bank debt, which itself fed a vicious circle of
further price declines. The average leveraged loan priced at 70.9% of par,
implying a 15% annual default rate on conservative assumptions of 50% recovery
(versus 70% historically). Although managers found extreme value in credits they
know well, the technical picture remained poor, with a preponderance of sellers
and very few remaining buyers.
November saw continued investor deleveraging, gloomy economic data and falling
corporate earnings. Whilst managers are intrigued by today's historically wide
spreads (especially on leveraged loans), they are currently unwilling to stand
against the crowd and buy for fear of being trampled like all those that bought
in the aftermath of the July 2007, January 2008, and September 2008 sell-offs.
While it is clear that the price declines of the past three months in particular
have set credit markets up for a period of outsized returns, the timing of these
returns remains uncertain. everaged loans delivered the worst performance (S&P
LCD Leveraged Loan Index -8.5%), underperforming High Yield bonds (ML US HY
Master II Index -8.4%), equities (S&P 500 Index -7.5%), investment grade bonds
(ML US Corporate Index +3.9%) and the 10-year Treasury (+9.1%).
Going into year end markets were impacted strongly by technical and flow driven
factors, with indices behaving inconsistently. The ML US HY Master II Index rose
7.5% while the on the run 5-year synthetic investment grade index returned 2.1%.
Leveraged loans fell -3%, while lower quality equities, as measured by the
Credit Suisse Leveraged Equity Index, rose 2.7%. The basis (which could be
thought of as the difference between bond yields and yields implied by bond
derivatives) continues to remain at record levels. For comparison, from January
2005 to August 2008 the basis averaged at -4bps while in Q4 2008 it averaged at
-600bps. These moves can be directly linked to the unwind of leveraged positions
within banks and hedge funds. December proved to be an extraordinarily bad month
in terms of fundamentals, as 45% of high yield borrowers reported EBITDA numbers
below both previous year's as well as analysts' expectations. This heightened
leverage ratios (debt/EBITDA), putting additional cash flow pressure on
companies and increasing the risk of covenant breaches. Moody's reported the
2008 default rate for US high yield issuers as 4.4% and projected a 15% default
rate by end-2009. Of the 15 defaults during the month, 3 were significant to
hedge fund managers: Trump Entertainment ($1.25bn debt), media company Tribune
($11bn), and chemical company Lyondell Basell ($12bn).
INVESTMENT ADVISER'S REPORT FOR THE SIX MONTHS ENDED 31 DECEMBER 2008
(continued)
Portfolio
As you would expect our dedicated short credit manager in the hedge section of
the portfolio delivered strong performance of approximately +46% as Retail,
Building and Real Estate sector shorts provided outsized returns.
Credit Value and Long-Short managers both lost money, as key themes failed to
generate returns and managers struggled to cope with the combination of
portfolio redemptions and illiquid positions. The difference between price
levels of cash bonds and credit default swaps (CDS) commonly referred to as the
basis continued to widen during the quarter, which is inherently bad for
portfolios that hold long cash bonds hedged by CDS.
The most common theme that led to losses was long bank loans versus short
corporate bonds - a trade which makes sense when one considers the capital
structure and the relative price of the two asset classes, but the relationship
has become more stressed as liquidity in the credit market deteriorated.
2008 has been an extraordinarily bad year for all asset classes, with credit
hedge funds proving to be no exception. What began in July as a reversal of the
commodity bull market and the first of a series of landmark government
interventions has yielded a landscape that is today littered with battered
portfolios, record levels of hedge fund redemptions and a market that for all
intent and purpose has ceased to function. Sadly, our managers do not expect
that the New Year will bring an immediate reprieve from volatility in the asset
class. Managers continued to suffer from long bank loan exposure being hurt by
continued forced selling.
Outlook
The illiquidity of credit markets has resulted in difficulty for hedge funds to
sell enough assets to meet investor redemptions. Accordingly, a number of
managers have implemented a gate, a suspension of redemptions or some
combination thereof. This includes managers with cash on the balance sheet, as
they are hit by the knock on effect of other funds withholding liquidity. Some
of the portfolio's holdings have had to change their liquidity terms, whilst a
few have implemented side pockets or restructurings. These different solutions
reflect varying liquidity and contract terms. The key, as managers have pointed
out, is surviving until the technical overhang is lifted and the market once
again pays attention to fundamentals. If they can survive, as we largely expect
will be the case, there will be significant opportunities for outsized returns.
For now, expect managers to stay close to home until there is more evidence that
a turning point is in sight. Looking forward, the opportunity to benefit from a
'bounce' in the value of bank loans should not be ignored, but it is entirely
dependant on the return of risk capital to the credit space, something which may
not happen for some time yet. The longer term opportunities surrounding the
distressed arena are traditionally very strong for Credit Value managers, but
these funds need to deal with weak investor and prime broker support first
before they can properly capitalise on risk-taking opportunities.
Financial Risk Management Limited
Date: 23 February 2009
BALANCE SHEET AS AT 31 DECEMBER 2008
+------------------------------------------------+----------+--+--------------+-------------+
| | | | 31/12/2008 | 30/06/2008 |
+------------------------------------------------+----------+--+--------------+-------------+
| | Note | | US$ | US$ |
+------------------------------------------------+----------+--+--------------+-------------+
| Assets | | | | |
+------------------------------------------------+----------+--+--------------+-------------+
| Cash and cash equivalents | 2(d) | | 14,962,500 | 7,455,141 |
+------------------------------------------------+----------+--+--------------+-------------+
| Financial assets at fair value through profit | 2(b),13 | | 102,352,237 | 195,874,312 |
| or loss | | | | |
+------------------------------------------------+----------+--+--------------+-------------+
| Interest receivable | 2(c) | | 640 | 3,019 |
+------------------------------------------------+----------+--+--------------+-------------+
| Prepaid expenses | | | 113,344 | 12,791 |
+------------------------------------------------+----------+--+--------------+-------------+
| Purchases in advance | | | - | 4,000,000 |
+------------------------------------------------+----------+--+--------------+-------------+
| Amounts due from lender | | | - | 285,603 |
+------------------------------------------------+----------+--+--------------+-------------+
| Sales awaiting settlement | | | 5,191,408 | - |
+------------------------------------------------+----------+--+--------------+-------------+
| Other assets | | | 13,039 | - |
+------------------------------------------------+----------+--+--------------+-------------+
| Total assets | | | 122,633,168 | 207,630,866 |
+------------------------------------------------+----------+--+--------------+-------------+
| | | | | |
+------------------------------------------------+----------+--+--------------+-------------+
| Liabilities | | | | |
+------------------------------------------------+----------+--+--------------+-------------+
| Financial liabilities at fair value through | 2(b),13 | | 7,007,623 | 1,292,014 |
| profit or loss | | | | |
+------------------------------------------------+----------+--+--------------+-------------+
| Credit Facility | 4 | | 6,600,580 | - |
+------------------------------------------------+----------+--+--------------+-------------+
| Performance fees payable | 3.2 | | - | 1,838,234 |
+------------------------------------------------+----------+--+--------------+-------------+
| Management fees payable | 3.1 | | 186,267 | 164,008 |
+------------------------------------------------+----------+--+--------------+-------------+
| Interest payable | 2(c) | | 358,864 | 216,581 |
+------------------------------------------------+----------+--+--------------+-------------+
| Directors fees payable | 3.4 | | 30,753 | 42,510 |
+------------------------------------------------+----------+--+--------------+-------------+
| Administration & custody fees payable | 3.3 | | 13,435 | 29,245 |
+------------------------------------------------+----------+--+--------------+-------------+
| Audit fees payable | | | 17,384 | 21,749 |
+------------------------------------------------+----------+--+--------------+-------------+
| Sales in advance | | | - | 10,000,000 |
+------------------------------------------------+----------+--+--------------+-------------+
| Commitment fees payable | | | 120,929 | 100,682 |
+------------------------------------------------+----------+--+--------------+-------------+
| Payable for investments in other funds | | | 546,292 | - |
+------------------------------------------------+----------+--+--------------+-------------+
| Organisational costs | | | - | 30,870 |
+------------------------------------------------+----------+--+--------------+-------------+
| Other liabilities | | | 119,537 | 142,568 |
+------------------------------------------------+----------+--+--------------+-------------+
| Total liabilities | | | 15,001,664 | 12,586,447 |
+------------------------------------------------+----------+--+--------------+-------------+
| | | | | |
+------------------------------------------------+----------+--+--------------+-------------+
| Net assets | | | 107,631,504 | 196,336,433 |
+------------------------------------------------+----------+--+--------------+-------------+
| | | | | |
+------------------------------------------------+----------+--+--------------+-------------+
| Represented by: | | | | |
+------------------------------------------------+----------+--+--------------+-------------+
| | | | | |
+------------------------------------------------+----------+--+--------------+-------------+
| Shareholders' capital and reserves | | | | |
+------------------------------------------------+----------+--+--------------+-------------+
| Share capital | | | 174,658,739 | 174,952,713 |
+------------------------------------------------+----------+--+--------------+-------------+
| Reserves | 8 | | (67,027,235) | 21,383,720 |
+------------------------------------------------+----------+--+--------------+-------------+
| Total shareholders' funds | | | 107,631,504 | 196,336,433 |
+------------------------------------------------+----------+--+--------------+-------------+
| | | | | |
+------------------------------------------------+----------+--+--------------+-------------+
| Sterling Shares: | | | | |
+------------------------------------------------+----------+--+--------------+-------------+
| Number of Shares | 7 | | 82,666,926 | 82,790,071 |
+------------------------------------------------+----------+--+--------------+-------------+
| Net Asset Value per Share | | | GBP0.900 | GBP1.191 |
+------------------------------------------------+----------+--+--------------+-------------+
On Behalf of the Board of Directors:
___________________________ ____________________________
Date: 23 February 2009
The accompanying notes on pages 18 to 28 are an integral part of these interim
unaudited financial statements
INCOME STATEMENT FOR THE SIX MONTHS ENDED 31 DECEMBER 2008
+--------------------------------------------------+-------+--------------+-------------+
| | | 31/12/2008 | 31/12/2007 |
+--------------------------------------------------+-------+--------------+-------------+
| | Note | US$ | US$ |
+--------------------------------------------------+-------+--------------+-------------+
| Investment income/(loss) | | | |
+--------------------------------------------------+-------+--------------+-------------+
| Interest income | 2(c) | 29,626 | 74,583 |
+--------------------------------------------------+-------+--------------+-------------+
| Net change in financial assets and financial | 11 | (38,496,041) | 9,577,958 |
| liabilities at fair value through | | | |
| profit or loss | | | |
+--------------------------------------------------+-------+--------------+-------------+
| Net loss on foreign currency transactions | 11 | (48,728,746) | (4,960,739) |
+--------------------------------------------------+-------+--------------+-------------+
| Other income | | 2,339 | - |
+--------------------------------------------------+-------+--------------+-------------+
| Total investment (loss)/income | | (87,192,822) | 4,691,802 |
+--------------------------------------------------+-------+--------------+-------------+
| | | | |
+--------------------------------------------------+-------+--------------+-------------+
| Expenses | | | |
+--------------------------------------------------+-------+--------------+-------------+
| Administration & custodian fees | 3.3 | (60,509) | (58,611) |
+--------------------------------------------------+-------+--------------+-------------+
| Management fees | 3.1 | (733,286) | (621,370) |
+--------------------------------------------------+-------+--------------+-------------+
| Performance fees | 3.2 | - | (717,094) |
+--------------------------------------------------+-------+--------------+-------------+
| Commitment fees | | (24,275) | (77,426) |
+--------------------------------------------------+-------+--------------+-------------+
| Legal fees | | (116,390) | (19,679) |
+--------------------------------------------------+-------+--------------+-------------+
| Audit fees | | (28,436) | (33,657) |
+--------------------------------------------------+-------+--------------+-------------+
| Directors fees | 3.4 | (68,108) | (90,903) |
+--------------------------------------------------+-------+--------------+-------------+
| Printing and postage | | (11,614) | - |
+--------------------------------------------------+-------+--------------+-------------+
| Other operating expenses | | (33,204) | (508,180) |
+--------------------------------------------------+-------+--------------+-------------+
| Total expenses | | (1,075,822) | (2,126,920) |
+--------------------------------------------------+-------+--------------+-------------+
| | | | |
+--------------------------------------------------+-------+--------------+-------------+
| Finance costs | | | |
+--------------------------------------------------+-------+--------------+-------------+
| Interest expense | 2(c) | (142,311) | (169,142) |
+--------------------------------------------------+-------+--------------+-------------+
| | | (142,311) | (169,142) |
+--------------------------------------------------+-------+--------------+-------------+
| | | | |
+--------------------------------------------------+-------+--------------+-------------+
| (Loss)/profit for the period | | (88,410,955) | 2,395,740 |
+--------------------------------------------------+-------+--------------+-------------+
The accompanying notes on pages 18 to 28 are an integral part of these interim
unaudited financial statements
STATEMENT OF CHANGES IN NET ASSETS FOR THE SIX MONTHS ENDED 31 DECEMBER 2008
+-------------------------------------------------------+--------------+-------------+
| | 31/12/2008 | 31/12/2007 |
+-------------------------------------------------------+--------------+-------------+
| | US$ | US$ |
+-------------------------------------------------------+--------------+-------------+
| | | |
+-------------------------------------------------------+--------------+-------------+
| Net assets at the start of the period | 196,336,433 | 94,713,332 |
+-------------------------------------------------------+--------------+-------------+
| | | |
+-------------------------------------------------------+--------------+-------------+
| Proceeds from issue of shares | - | 68,024,058 |
+-------------------------------------------------------+--------------+-------------+
| Redemption of shares | (293,974) | - |
+-------------------------------------------------------+--------------+-------------+
| Net (decrease)/increase from share transactions | (293,974) | 68,024,058 |
+-------------------------------------------------------+--------------+-------------+
| | | |
+-------------------------------------------------------+--------------+-------------+
| (Loss)/profit for the period | (88,410,955) | 2,395,740 |
+-------------------------------------------------------+--------------+-------------+
| Net assets at the end of the period | 107,631,504 | 165,133,130 |
+-------------------------------------------------------+--------------+-------------+
The accompanying notes on pages 18 to 28 are an integral part of these interim
unaudited financial statements
STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED 31 DECEMBER 2008
+--------------------------------------------------------------+--------------+---------------+
| | 31/12/2008 | 31/12/2007 |
+--------------------------------------------------------------+--------------+---------------+
| | US$ | US$ |
+--------------------------------------------------------------+--------------+---------------+
| | | |
+--------------------------------------------------------------+--------------+---------------+
| Cash flows from operating activities | | |
+--------------------------------------------------------------+--------------+---------------+
| | | |
+--------------------------------------------------------------+--------------+---------------+
| (Loss)/profit for the period | (88,410,955) | 2,395,740 |
+--------------------------------------------------------------+--------------+---------------+
| | | |
+--------------------------------------------------------------+--------------+---------------+
| Operating activities: | | |
+--------------------------------------------------------------+--------------+---------------+
| Increase in interest receivable and prepaid expenses | (111,213) | (1,739) |
+--------------------------------------------------------------+--------------+---------------+
| Sales awaiting settlement | (5,191,408) | - |
+--------------------------------------------------------------+--------------+---------------+
| Increase in payable for investments in other funds | 546,292 | - |
+--------------------------------------------------------------+--------------+---------------+
| Increase in receivable for financial assets sold | - | (7,651) |
+--------------------------------------------------------------+--------------+---------------+
| Increase in liabilities and accrued expenses | (1,453,675) | 1,381,729 |
+--------------------------------------------------------------+--------------+---------------+
| Decrease in amounts payable for investments purchased | - | (383,177) |
+--------------------------------------------------------------+--------------+---------------+
| Purchase of investments at fair value through profit or loss | (49,752,134) | (165,338,355) |
+--------------------------------------------------------------+--------------+---------------+
| Sale of investments at fair value through profit or loss | 98,778,168 | 100,453,731 |
+--------------------------------------------------------------+--------------+---------------+
| Realised gain/(loss) on investments at fair value through | 5,923,412 | (11,268,443) |
| profit or loss | | |
+--------------------------------------------------------------+--------------+---------------+
| Unrealised gain/(loss) on investments at fair value through | 32,572,629 | (1,690,485) |
| profit or loss | | |
+--------------------------------------------------------------+--------------+---------------+
| Unrealised gain on forwards | 8,299,637 | - |
+--------------------------------------------------------------+--------------+---------------+
| Net cash inflow/(outflow) from operating activities | 1,200,753 | (74,458,650) |
+--------------------------------------------------------------+--------------+---------------+
| | | |
+--------------------------------------------------------------+--------------+---------------+
| Cash flows from financing activities | | |
+--------------------------------------------------------------+--------------+---------------+
| Loan received | 6,600,580 | 5,600,000 |
+--------------------------------------------------------------+--------------+---------------+
| Issuance of shares | - | 68,024,058 |
+--------------------------------------------------------------+--------------+---------------+
| Redemption proceeds from shares | (293,974) | - |
+--------------------------------------------------------------+--------------+---------------+
| Net cash (outflow)/inflow from financing activities | 6,306,606 | 73,624,058 |
+--------------------------------------------------------------+--------------+---------------+
| | | |
+--------------------------------------------------------------+--------------+---------------+
| Net increase in cash and cash equivalents | 7,507,359 | (834,592) |
+--------------------------------------------------------------+--------------+---------------+
| | | |
+--------------------------------------------------------------+--------------+---------------+
| Cash and cash equivalents at the beginning of the period | 7,455,141 | 1,056,449 |
+--------------------------------------------------------------+--------------+---------------+
| | | |
+--------------------------------------------------------------+--------------+---------------+
| Cash and cash equivalents at the end of the period | 14,962,500 | 221,857 |
+--------------------------------------------------------------+--------------+---------------+
+--------------------------------------------------------------+-----------+-----------+
| Net cash flow from operating activities and financing | | |
| activities includes: | | |
+--------------------------------------------------------------+-----------+-----------+
| | | |
+--------------------------------------------------------------+-----------+-----------+
| Interest received | 32,005 | 61,518 |
+--------------------------------------------------------------+-----------+-----------+
| Interest paid | (28) | (9,745) |
+--------------------------------------------------------------+-----------+-----------+
The accompanying notes on pages 18 to 28 are an integral part of these interim
unaudited financial statements
NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED TO
31 DECEMBER 2008
1.GENERAL INFORMATION
The Company, a closed ended investment company was incorporated in Guernsey on 1
March 2007 under the laws of Guernsey, with registered number 46497. The Company
has three share classes that are authorised for issue; Euro Shares, Sterling
Shares and US Dollar Shares. At 31 December 2008 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.
Up until 4 September 2008 the Sterling Shares were listed on the Irish Stock
Exchange and traded on the International Bulletin Board (ITBB) of the London
Stock Exchange. On 4 September 2008 the Sterling Shares were de-listed from the
Irish Stock Exchange and were listed on the Main Market 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 accounting policies used in these interim
unaudited financial statements are consistent with the accounting policies used
in the last audited financial statements.
* Basis of preparation
The financial statements have been prepared in accordance with International
Financial Reporting Standards (IFRS). The financial records and statements are
maintained and presented in US Dollars.
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 management to exercise its judgement
in the process of applying the Fund's accounting policies.
The following interpretations are mandatory for the Fund's accounting periods
beginning on or after 1 January
2009:
* IFRS 8, Operating Segments
* Amendment to IAS 32 and IAS 1 Financial Instruments Puttable at Fair Value and
Obligations arising on Liquidation
All references to net assets throughout this document refer to net assets
attributable to the Company unless otherwise stated. The balance sheet presents
assets and liabilities in decreasing 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 realised within
one year.
* 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.
NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE SIX
MONTHS ENDED 31 DECEMBER 2008 (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(b)Financial instruments (continued)
(i)Classification (continued)
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. 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 securities, comprising of investments in investment funds, for
which market quotations are not readily available are valued at their fair value
using methods which are in accordance with recognised accounting and financial
principles and which have been approved by the Directors. In this context, other
funds which are not publicly traded are fair valued at unaudited valuations
provided by the administrators or managers of the other funds unless the
Directors are aware of good reasons why such a valuation would not be the most
appropriate indicator of fair value. Such valuations may differ significantly
from the values that would have been used had ready markets existed, and the
difference could be material.
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 exchange contracts are recognised in the income
statement.
(c)Interest income and expense
Interest income and expense are recorded in the income statement using the
effective yield method.
(d) Cash and cash equivalents
For the purpose of the cash flow statement, cash and cash equivalents include
cash in hand, deposits held at call with banks, other short term highly liquid
investments with original maturities of three months or less, and bank
overdrafts.
(e)Functional and presentation currency
The Financial Statements are prepared in US Dollars (US$) this being the
Company's functional currency. Management has chosen US$ as the functional and
presentation currency for the Company unless otherwise stated.
(f) 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.
(g)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.
NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE SIX
MONTHS ENDED 31 DECEMBER 2008 (continued)
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$733,286 (31 December 2007: US$621,370) and the amount outstanding at period
end was US$186,267 (30 June 2008: US$ 164,008).
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 at the end of a
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 had no performance fees for the period (31
December 2007: 717,094). (There was US$1,838,234 payable at 30 June 2008).
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$60,509 (31 December 2007: US$58,611) (30 June 2008: US$11,570) and
US$13,435 remained outstanding at period end (30 June 2008: US$17,675).
Custodian fees are included in administration fees.
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$68,108 (31 December 2007: US$90,903) during
the period and the amount outstanding at the period end was US$30,753 (30 June
2008: US$42,510).
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 the balance sheet date the Company had a US$6,600,580 uncommitted credit
facility from Citibank N.A. The facility is due to expire on 30 June 2009.
NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31
DECEMBER 2008 (continued)
1. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
Strategy in using financial instruments
The Company's long term objective will be to seek to achieve its investment
objective by investing through one or more hedge funds. 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 Company is a floating rate facility referenced to
US 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 have been, for
the most part, positively correlated with LIBOR and as such the increase in the
returns of the investments has more than offset any 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 market risk. 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. For a more detailed analysis of concentrations of
risk refer to note 13.
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 Officer 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 -1.0% to -6.1%.
As at 31 December 2008 the VAR estimate for the Company was -6.1%.
Through the year, as invested fund returns have become more volatile, the VAR of
the portfolio has risen. In response to this the portfolio composition has been
adjusted to lower the risk level. These actions are occurring on an ongoing
basis and over a period of time we expect the VAR levels to fall towards the
expected values.
NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31
DECEMBER 2008 (continued)
5. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS (continued)
Market risk (continued)
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 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.
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 occasions, losses will be greater and might be
substantially greater than the calculated VAR.
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 Company 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
Liquidity risk is the risk that the Company is unable to meet its obligations as
and when they fall due. 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.
NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED
31 DECEMBER 2008 (continued)
5. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS (continued)
Liquidity risk (continued)
At December 31, 2008, 0% (30 June 2008: 37%) of the net assets of the Company
were held in investment funds allowing monthly withdrawals, 44% (30 June 2008:
22%) were held in investment funds allowing quarterly withdrawals, 15% (30 June
2008: 3%) were held in investment funds allowing semi-annual withdrawals, 15%
were held in investment funds allowing annual withdrawals and 7% (30 June 2008:
17%) were held in investment funds allowing withdrawals in periods greater than
two years or on liquidation. This liquidity profile is based upon the terms as
set out in the underlying funds' offering documents.
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 Portfolio Management team is responsible for constructing portfolios to
achieve liquidity profiles, which may be specified directly by clients or by
third party credit providers. The liquidity impact of any given trade or
corporate action is considered by the portfolio managers who will seek advice
from the respective sector analyst when making trading decisions. When trades
are requested by the Portfolio Management team, the Investment Administration
team will review the proposed to trade to ensure that it complies with any
specified liquidity constraints. Trades which do not comply with portfolio
liquidity constraints are not executed and referred back to the respective
portfolio manager.
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. The amounts in the table are the contractual
undiscounted cash flows. 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 | 1 to 3 | 3 to 7 | Total |
| | Month | Months | Months | |
+--------------------------------------+-----------+----------+-----------+--------------+
| Financial liabilities at fair value | 7,007,623 | - | - | 7,007,623 |
| through profit and loss | | | | |
+--------------------------------------+-----------+----------+-----------+--------------+
| Interest Payable | 358,864 | - | - | 358,864 |
+--------------------------------------+-----------+----------+-----------+--------------+
| Management fees payable | 186,267 | - | - | 186,267 |
+--------------------------------------+-----------+----------+-----------+--------------+
| Administration & custody fees | 13,435 | - | - | 13,435 |
| payable | | | | |
+--------------------------------------+-----------+----------+-----------+--------------+
| Audit fees payable | 17,384 | - | - | 17,384 |
+--------------------------------------+-----------+----------+-----------+--------------+
| Directors fees payable | 30,753 | - | - | 30,753 |
+--------------------------------------+-----------+----------+-----------+--------------+
| Credit facility | - | - | 6,600,580 | 6,600,580 |
+--------------------------------------+-----------+----------+-----------+--------------+
| Commitment fees payable | 120,929 | - | - | 120,929 |
+--------------------------------------+-----------+----------+-----------+--------------+
| Payable for investments in other | 546,292 | - | - | |
| funds | | | | 546,292 |
+--------------------------------------+-----------+----------+-----------+--------------+
| Other liabilities | 119,537 | - | - | 119,537 |
+--------------------------------------+-----------+----------+-----------+--------------+
| Total Liabilities | 8,401,084 | - | 6,600,580 | 15,001,664 |
+--------------------------------------+-----------+----------+-----------+--------------+
NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31
DECEMBER 2008 (continued)
5. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS (continued)
Credit risk
Credit Risk is the risk that an issuer or counterparty will be unable or
unwilling to meet a commitment that it has entered into with the Company. Assets
held by the Company which potentially expose the Company to credit risk,
comprise cash balances and receivables in respect of redeemed investments in
underlying hedge funds. The Company's cash balances are held by its custodian.
From time to time the Company may additionally place cash deposits with banks,
limited to those rated AA or higher.
The Company will not have direct exposure to credit instruments or derivatives,
other than to foreign currency hedging transactions. As a consequence of such
hedging the Company is exposed to the daylight exposure on settlement of such
transactions, which is however mitigated under a netting agreement, and to
unrealised profits on foreign exchange hedges. Foreign exchange transactions are
executed solely with Citibank N.A., with whom the Company has borrowing and
foreign exchange trading lines under a committed credit facility. The facility
inclusively provides for margin on forward foreign exchange contracts which,
rather than being paid as cash is treated as a notional drawing.
Receivables for redeemed investments in underlying hedge funds are typically
received within one month of the redemption date. Before initial investments are
made in hedge funds they are subject to due diligence review by the Fund Manager
which includes an assessment of the principal service providers to the hedge
fund including administrator, auditors and prime brokers. These service
providers are then reviewed annually to eighteen months.
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 GBP600.
From January 1, 2008, the Income Tax Authority in Guernsey abolished the exempt
regime for some entities. At the same time the standard rate of income tax was
reduced from 20% to 0%. Therefore some entities previously exempt from tax under
the Income Tax (Exempt Bodies) (Guernsey) ordinance 1989 are now taxed at 0%,
however the Income Tax Authority has confirmed that collective investment
schemes such as FRM Credit Alpha Limited can continue to apply for exempt
status.
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 2008 only Sterling Shares were in issue.
+--------------------------------------------------+--+------------+------------+
| | | 31/12/2008 | 30/06/2008 |
+--------------------------------------------------+--+------------+------------+
| | | | |
+--------------------------------------------------+--+------------+------------+
| Number of shares as at start of the period/year | | 82,790,071 | - |
+--------------------------------------------------+--+------------+------------+
| Redemptions | | (123,145) | 82,790,071 |
+--------------------------------------------------+--+------------+------------+
| Number of shares as at end of the period/year | | 82,666,926 | 82,790,071 |
+--------------------------------------------------+--+------------+------------+
NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31
DECEMBER 2008 (continued)
7. SHARE CAPITAL (continued)
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
+----------------------------------------------+--+---+--------------+-------------+
| | | | | 30/06/2008 |
| | | | 31/12/2008 | |
+----------------------------------------------+--+---+--------------+-------------+
| | | | US$ | US$ |
+----------------------------------------------+--+---+--------------+-------------+
| Opening balance at start of the period | | | 21,383,720 | - |
+----------------------------------------------+--+---+--------------+-------------+
| Net realised loss on investments at fair | | | (5,923,412) | 13,135,884 |
| value through profit or loss | | | | |
+----------------------------------------------+--+---+--------------+-------------+
| Unrealised loss on investments at fair value | | | (32,572,629) | 14,540,527 |
| through profit or loss | | | | |
+----------------------------------------------+--+---+--------------+-------------+
| Realised loss on forwards and foreign | | | (36,598,188) | (3,681,291) |
| currency transactions | | | | |
+----------------------------------------------+--+---+--------------+-------------+
| Unrealised loss on forwards and foreign | | | (12,130,558) | 2,117,096 |
| currency transactions | | | | |
+----------------------------------------------+--+---+--------------+-------------+
| Net expenses for the period | | | (1,186,168) | (4,728,496) |
+----------------------------------------------+--+---+--------------+-------------+
| Closing balance at end of the period | | | (67,027,235) | 21,383,720 |
+----------------------------------------------+--+---+--------------+-------------+
9. EXCHANGE RATES
The following exchange rates were used as at 31 December 2008 versus US Dollar:
British Pound0.6910
10. RELATED PARTY TRANSACTIONS
The Fund Manager and the Investment Adviser are regarded as related parties. The
amount charged by the Fund Manager during the period was US$733,286 in relation
to Management fees and US$Nil in relation to Performance fees. Fees payable to
the Fund Manager are US$186,267 in relation to Management fees and US$Nil in
relation to Performance fees at the period end.
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 2008: Employees of Financial Risk Management Limited (the
"Investment Adviser") held 1,178,384 (30 June 2008: 1,203,384) shares in the
Company;
As at 31 December 2008, Richard Hotchkis, a Director of the Company, held 30,000
(30 June 2008: 30,000) shares in the Company.
NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31
DECEMBER 2008 (continued)
10. RELATED PARTY TRANSACTIONS (continued)
FRM Credit Alpha Limited invested in the following funds, which have the same
Investment Manager as FRM Credit Alpha Limited (FRM Investment Management
Limited (the "Manager")) at 31 December 2008.
+--------------------------------------------------------------+--------------+
| | Value |
+--------------------------------------------------------------+--------------+
| Fund | US$ |
+--------------------------------------------------------------+--------------+
| FRM Conduit Fund SPC - Cerberus International | 11,451,207 |
+--------------------------------------------------------------+--------------+
| FRM Conduit Fund SPC - Plainfield Special Situations Class A | 12,541,990 |
+--------------------------------------------------------------+--------------+
| FRM Conduit Fund SPC - Plainfield Special Situations Class B | 802,180 |
+--------------------------------------------------------------+--------------+
| FRM Conduit Fund SPC - Harbinger | 7,672,668 |
+--------------------------------------------------------------+--------------+
| FRM Conduit Fund SPC - Harbinger Special Situations | 4,565,890 |
+--------------------------------------------------------------+--------------+
11.NET REALISED AND UNREALISED GAIN/(LOSS) ON FINANCIAL ASSETS AT FAIR VALUE
THROUGH PROFIT OR LOSS AND FOREIGN CURRENCY TRANSACTIONS
+-------------------------------------------------------+--------------+-------------+
| | 31/12/2008 | 31/12/2007 |
+-------------------------------------------------------+--------------+-------------+
| | US$ | US$ |
+-------------------------------------------------------+--------------+-------------+
| Realised (loss)/gain on investments at fair value | (5,923,412) | 11,268,443 |
| through profit or loss | | |
+-------------------------------------------------------+--------------+-------------+
| , Unrealised loss on investments at fair value | (32,572,629) | (1,690,485) |
| through profit or loss | | |
+-------------------------------------------------------+--------------+-------------+
| Net realised and unrealised (loss)/gain on | (38,496,041) | 9,577,958 |
| investments at fair value through profit or loss | | |
+-------------------------------------------------------+--------------+-------------+
| | | |
+-------------------------------------------------------+--------------+-------------+
| Realised loss on foreign currency transactions | (36,598,188) | (7,073,286) |
+-------------------------------------------------------+--------------+-------------+
| Unrealised (loss)/gain on forwards and foreign | (12,130,558) | 2,112,547 |
| currency transactions | | |
+-------------------------------------------------------+--------------+-------------+
| Net realised and unrealised loss on foreign currency | (48,728,746) | (4,960,739) |
| transactions | | |
+-------------------------------------------------------+--------------+-------------+
| | | |
+-------------------------------------------------------+--------------+-------------+
| Total | (87,224,787) | 4,617,219 |
+-------------------------------------------------------+--------------+-------------+
The total gains/(losses) recognised in relation to investments held via the FRM
Conduit Fund SPC are in total: unrealised loss US$27,423,668 and realised gain
US$3,557,821.
12. DISTRIBUTIONS
Shareholders are entitled to elect to participate in the Distribution Facility
which provides an annual distribution by way of redemption of Shares, subject to
certain limitations and the Directors exercising their discretion to operate the
facility on any relevant occasion. Redemption of Shares on any Distribution Date
will be restricted to a specific percentage of the number of Shares held by a
Shareholder. This percentage will be determined by the Directors in their
discretion when they declare the annual distribution, but it is their intention
to distribute up to two thirds of Total Returns (as defined in the Company's
Prospectus), capped at 3.5 per cent of year-end Net Asset Value. The 2008 annual
distribution by way of redemption of 123,145 Shares was made on 3 September
2008.
NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31
DECEMBER 2008 (continued)
13. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
As at the 31 December 2008 the portfolio of financial assets and financial
liabilities at fair value through profit or loss comprised the following
investments held in other investment companies:
+--------------------------------------------------+-------------+----+------------+
| Investments by Strategy | Fair | | % of |
| | Value | | |
+--------------------------------------------------+-------------+----+------------+
| | 31/12/08 | | Total Net |
| | US$ | | Assets |
+--------------------------------------------------+-------------+----+------------+
| | | | |
+--------------------------------------------------+-------------+----+------------+
| Strategy - US Dollar | | | |
+--------------------------------------------------+-------------+----+------------+
| Relative Value Strategy Funds | 3,268,081 | | 3.04% |
+--------------------------------------------------+-------------+----+------------+
| , Specialist Credit Strategy Funds | 91,398,664 | | 84.91% |
+--------------------------------------------------+-------------+----+------------+
| Hedge Strategy Funds | 7,685,492 | | 7.14% |
+--------------------------------------------------+-------------+----+------------+
| Total US Dollar investments | 102,352,237 | | 95.09% |
+--------------------------------------------------+-------------+----+------------+
+------------+--------------+---------------+----------------+-------------+----+------------+
| The following forward currency contracts were unsettled at the | | |
| period end: | | |
+--------------------------------------------------------------------------+----+------------+
| Maturity | Counterparty | Amount | Amount Sold | Unrealised | | |
| Date | | Bought | | Gain/(Loss) | | |
| | | | | US$ | | |
+------------+--------------+---------------+----------------+-------------+----+------------+
| 30/01/2009 | Citibank | GBP82,569,107 | US$126,500,000 | (7,111,595) | | (6.61%) |
+------------+--------------+---------------+----------------+-------------+----+------------+
| 30/01/2009 | Citibank | US$4,893,000 | GBP3,312,095 | 103,972 | | 0.10% |
+------------+--------------+---------------+----------------+-------------+----+------------+
+--------------------------------------------------+-------------+----+------------+
| Total unrealised loss on forward currency | (7,007,623) | | (6.51%) |
| contracts | | | |
+--------------------------------------------------+-------------+----+------------+
| | | | |
+--------------------------------------------------+-------------+----+------------+
| Other assets | 12,286,890 | | 11.42% |
+--------------------------------------------------+-------------+----+------------+
| | | | |
+--------------------------------------------------+-------------+----+------------+
| Total net assets | 107,631,504 | | 100.00% |
+--------------------------------------------------+-------------+----+------------+
+--------------------------------------------------+-------------+----+------------+
| Geographical Exposure | Fair | | |
| | Value | | |
+--------------------------------------------------+-------------+----+------------+
| | 31/12/08 | | |
| | US$ | | |
+--------------------------------------------------+-------------+----+------------+
| Other Regions | 52,015,740 | | 48.33% |
+--------------------------------------------------+-------------+----+------------+
| Europe | 18,668,192 | | 17.34% |
+--------------------------------------------------+-------------+----+------------+
| North America | 31,668,305 | | 29.42% |
+--------------------------------------------------+-------------+----+------------+
| Total US Dollar | 102,352,237 | | 95.09% |
+--------------------------------------------------+-------------+----+------------+
The portfolio of financial assets at fair value through profit or loss includes
positions held via FRM Conduit Fund SPC with a total market value of
US$37,033,935. The cost value amounts to US$51,703,157.
NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31
DECEMBER 2008 (continued)
14. SIGNIFICANT EVENTS SINCE THE PERIOD END
On 18 February 2009 it was announced by the Board that it has resolved, to take
the following actions:
* To propose a tender offer of up to 20 per cent of the Company's shares based on
the 30 June 2009 NAV, with payment expected by 30 September 2009.
* Following the completion of the tender offer, to propose to replace the existing
tender offer provisions with an annual redemption facility, to be offered at the
absolute discretion of the Directors.
* To provide shareholders with an opportunity to vote on the Company's
continuation at the Company's annual general meeting to be held in November
2011.
15. APPROVAL OF UNAUDITED FINANCIAL STATEMENTS
The interim unaudited financial statements for the six months ended 31 December
2008 were approved by the Board of Directors on 23 February 2009.
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
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