TIDMFCAP
RNS Number : 0432P
FRM Credit Alpha Limited
18 October 2012
FRM Credit Alpha Limited
Annual Report and Financial Statements for the year ended 30
June 2012
Copies of the annual report and financial statements have been
submitted to the National Storage Mechanism and will shortly be
available for inspection at www.hemscott.com/nsm.do
A copy of the annual report and financial statements will also
be available to download from the Company's website,
www.frmcredit.com
For further information please contact:
Chris Brierley
Financial Risk Management Limited
020 7144 2810
DIRECTORS' REPORT FOR THE YEAR ENDED 30 JUNE 2011
Managed Wind-Down
On 4 February 2011 a circular recommending proposals for a
managed wind-down of the Company and giving notice of an
Extraordinary General Meeting to be held on 17 March 2011 was sent
to Shareholders. At the Extraordinary General Meeting held on 17
March 2011 the special resolution that the Company modify its
investment policy in order to effect a managed wind-down was
approved by 100% of voting members. Subsequent to that date the
necessary steps have been put in place to begin the managed
wind-down of the Company. On 11 May 2011 the Company resolved to
return GBP31,000,000 by way of a compulsory partial redemption of
shares at a price of 88.6 pence per share, the Company's NAV per
share as at 31 March 2011. On 14 July 2011 the Company resolved to
return GBP8,003,806 by way of a further compulsory partial
redemption of shares at a price of 88.9 pence per share, the
Company's NAV per share as at 30 June 2011. On 23 January 2012 the
Company resolved to return GBP4,500,000 by way of a compulsory
partial redemption of shares at a price of 82.0 pence per share,
the Company's NAV per share as at 31 December 2011. On 11 May 2012,
the Company resolved to return approximately GBP2,700,000 by way of
a compulsory partial redemption of shares at a price of 79.1 pence
per share, the Company's NAV per share as at 31 May 2012. The
remainder of the net assets attributable to holders of shares will
be returned in line with the Company's modified investment policy
of realising the Company's existing investments in an orderly and
timely manner, with a view to distributing cash to Shareholders (in
accordance with their rights to distributions on a winding-up as
set out in the Articles) at appropriate times as sufficient
investments are realised. The Company will not make any new
investments other than in cash or cash equivalents pending
distribution of cash to Shareholders.
Independent Auditors
The Company's Independent Auditors, PricewaterhouseCoopers CI
LLP, have indicated their willingness to continue in office, and a
resolution reappointing them and authorising the Directors to agree
their remuneration was agreed at the Annual General Meeting. Audit
fees charged during the year are disclosed in the statement of
comprehensive income on page 16.
DIRECTORS' RESPONSIBILITY STATEMENT
The Directors are responsible for preparing the annual report
for each financial year which gives 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 year. In preparing this
year-end annual report, the Directors are required to:
-- Make judgements and estimates that are reasonable and prudent;
-- Prepare the annual report on the going concern basis unless
it is inappropriate to presume that the Company will continue in
business. Given the decision to wind down the Company, this
financial report has been prepared on a break up basis of
accounting;
-- Select suitable accounting policies and then apply them consistently and
-- State whether applicable accounting standards have been
followed, subject to any material departures disclosed and
explained in the annual financial report.
The Directors confirm that they have complied with the above
requirements in preparing the year-end annual report and there is
no relevant audit information of which the Company's auditors are
unaware.
The Directors are responsible for keeping proper accounting
records that disclose with reasonable accuracy at any time the
financial position of the Company and to enable them to ensure that
the year-end annual report complies with The Companies (Guernsey)
Law, 2008 and the Prospectus. 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.
Legislation in Guernsey governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
As required under the Disclosure and Transparency Rules of the
United Kingdom's Financial Services Authority, the Directors
confirm, to the best of their knowledge:
-- The annual report has been prepared in accordance with
International Financial Reporting Standards (IFRS) and gives a true
and fair view of the assets, liabilities, financial position and
loss of the Company;
-- The Management Report which follows includes;
- A fair view of the development, performance and position of
the Company during the year; and
- A statement of the principal risks and uncertainties the Company faces.
CHAIRMAN'S STATEMENT
In accordance with the procedure adopted for the managed
wind-down, there have been distributions during the year amounting
to GBP15.2million and there remained as at 30 June 2012
GBP10.3million of net assets.
It is anticipated that a further distribution will be made
shortly and before the end of this calendar year.
As I mentioned in my Chairman's Statement last year, whilst the
Directors have not had cause to adjust the valuations attributed to
the value of the assets as detailed in the annual financial report,
the Board continues to draw attention to the fact that the
reduction of the number and liquidity of the remaining assets
increases the risk of variation in or changes to the valuations as
the redemptions take place.
Whilst the Board, and the Investment Manager continue to
progress the managed wind-down and the liquidation of the
portfolio, the Board will be reviewing options in respect of the
probable winding-up of the Company. The timing of the appointment
of liquidators will depend upon the progress made with the
realisation of the remaining assets. It is possible that proposals
for the liquidation of the Company will be put to shareholders
during the latter part of 2013.
STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2012
Notes 30 June 2012 30 June 2011
US$ US$
Assets
Non-current assets
Financial assets at fair value 2(c),
through profit or loss 4 15,616,339 19,697,200
Sales awaiting settlement 2(h) 304,185 3,649,862
Current assets
Financial assets at fair value 2(c),
through profit or loss 4 - 5,586,432
Sales awaiting settlement 2(h) - 9,965,856
Interest receivable - 60
Prepaid expenses 7,887 10,088
Cash and cash equivalents 2(d) 382,276 5,622,127
Total assets 16,310,687 44,531,625
------------ ------------
Liabilities
Current liabilities
Management fees payable 3(a) 19,023 52,322
Administration & custodian fees
payable 3(c) 8,028 10,257
Audit fees payable 35,517 40,653
Directors fees payable 3(d) 8,499 -
Other payables 29,374 14,805
------------ ------------
Total liabilities 100,441 118,037
------------ ------------
Represented by:
Shareholders' premium and accumulated
deficit
Share premium 8 76,186,653 100,196,180
Accumulated deficit 9 (59,976,407) (55,782,592)
------------ ------------
Total Shareholders' funds 16,210,246 44,413,588
============ ============
Number of Shares 8 13,229,007 31,135,739
Net Asset Value per Sterling Share GBP0.781 GBP0.889
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE
2012
Year ended Year ended
Notes 30 June 2012 30 June 2011
US$ US$
Income
Interest income 2(g) 969 1,381
Other income 11,667 63
Net foreign currency (loss)/gains (349,974) 1,995,332
Other net changes in fair value on
financial assets and financial liabilities
at fair value through profit or loss 5 (3,359,322) 1,861,620
Total net (loss)/income (3,696,660) 3,858,396
------------- -------------
Expenses
Management fees 3(a) (158,287) (802,636)
Administration & custodian fees 3(c) (32,367) (77,907)
Legal fees (16,452) (221,372)
Audit fees (34,491) (47,471)
Directors fees 3(d) (126,721) (135,276)
Printing and postage (128,837) (134,664)
Other operating expenses (497,155) (1,419,326)
------------- -------------
Total operating expenses (32,367) (77,907)
------------- -------------
Operating profit/(loss) (4,193,815) 2,439,070
Profit/(loss) for the year from operations 2(j) (4,193,815) 2,439,070
============= =============
Basic and diluted earnings per Sterling
Share GBP(0.138) GBP0.027
Items in the above statement are derived from continuing
operations.
There were no other elements of comprehensive income in the year
(30 June 2011: Nil).
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE
2012
Year ended Year ended
30 June 2012 30 June 2011
US$ US$
Net assets at start of the year 44,413,588 91,713,037
Redemptions of Shares (24,009,527) (49,738,519)
------------- -------------
Net decrease from Share transactions (24,009,527) (49,738,519)
------------- -------------
(Loss)/profit for the year from operations (4,193,815) 2,439,070
Net assets at end of the year 16,210,246 44,413,588
============= =============
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2012
Note Year ended Year ended
30 June 2012 30 June 2011
US$ US$
Cash flows from operating activities
(Loss)/profit for the year from operations (4,193,815) 2,439,070
Adjusted for:
Interest income (969) (1,381)
(4,194,784) 2,437,689
Operating activities:
Net decrease in prepaid expenses 2,201 3,390
Net decrease/(increase) in sales awaiting
settlement 13,311,533 (7,599,148)
Net decrease in liabilities and accrued
expenses (17,596) (121,759)
Net decrease in financial assets at fair
value through
profit or loss 9,667,293 54,281,694
Cash provided by operating activities 18,768,647 49,001,866
------------- -------------
Interest received 1,029 1,321
Net cash provided by operating activities 18,769,676 49,003,187
------------- -------------
Cash flows used in financing activities
Redemption of Shares 1,029 (49,738,519)
Net cash used in financing activities 18,769,676 (49,738,519)
------------- -------------
Net decrease in cash and cash equivalents (735,332)
(24,009,527)
Cash and cash equivalents at the start
of the year (24,009,527) 6,357,459
Cash and cash equivalents at the end of
the year 2(d) (5,239,851) 5,622,127
============= =============
NOTES TO THE ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 JUNE
2012
1. GENERAL INFORMATION
FRM Credit Alpha Limited, 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 30 June 2012 only Sterling Shares were in
issue.
The Company was launched with the objective of seeking 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 believed that volatility and peak-to-trough
drawdowns would be lower than those typically delivered by
long-only approaches. The Company sought to achieve its objective
by investing in a portfolio of underlying investee funds pursuing a
variety of different credit and credit-related trading strategies.
In addition, the Company could invest in a wide variety of
financial instruments. The Company has entered into a managed
wind-down phase following the approval of proposals that were put
to Shareholders at an EGM of the Company held on 17 March 2011, and
the objective was modified to focus on realising the underlying
assets whilst at the same time maximising the level of capital
being returned to investors.
The Sterling Shares are listed on the Main Market of the London
Stock Exchange.
The Company has no employees (30 June 2011: none).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies applied in the preparation of
this annual financial report are set out below. These policies have
been consistently applied to all years presented, unless otherwise
stated. As detailed in notes 1 and 15, the Company has now entered
into a managed wind-down phase and so these accounting policies and
the notes that follow should be read in the context of the Company
being in managed wind-down and of the Company's objective now being
to focus on realising the underlying assets whilst at the same time
maximising the level of capital being returned to investors.
(a) Basis of preparation
The annual financial report has been prepared in accordance with
International Financial Reporting Standards ("IFRS") and the
Disclosure and Transparency rules of the Financial Services
Authority. The annual financial report has been prepared under the
historical cost convention as modified by the revaluation of
financial assets and financial liabilities at fair value through
profit or loss.
The preparation of the annual financial report in conformity
with IFRS requires the use of certain critical accounting
estimates. It also requires the Board of Directors to exercise its
judgement in the process of applying the Company's accounting
policies. The areas involving a higher degree of judgement or
complexity or areas where assumptions and estimates are significant
to the annual financial report are disclosed in note 2(k). This
annual financial report is prepared on a break-up basis since the
Company has entered into a managed wind-down phase.
New standards issued but not yet effective and not yet early
adopted are detailed below:
IFRS 9 "Financial Instruments" is effective for periods
beginning on or after 1 January 2015. IFRS 9 specifies how an
entity should classify and measure financial assets, including some
hybrid contracts. They require all financial assets to be:
-- Classified on the basis of the entity's business model for
managing the financial assets and the contractual cash flow
characteristics of the financial asset.
-- Initially measured at fair value plus, in the case of a
financial asset not at fair value through profit or loss,
particular transaction costs.
-- Subsequently measured at amortised cost or fair value.
These requirements improve and simplify the approach for
classification and measurement of financial assets compared with
the requirements of IAS 39. They apply a consistent approach to
classifying financial assets and replace the numerous categories of
financial assets in IAS 39, each of which had its own
classification criteria. They also result in one impairment method,
replacing the numerous impairment methods in IAS 39 that arise from
the different classification categories.
The Company is currently in the process of evaluating the
potential effect of this standard. The standard is not expected to
have a significant impact on the financial statements since the
majority of the financial assets of the Company are at fair value
through profit or loss.
IFRS 10, 'Consolidated financial statements', effective for
annual periods beginning on or after 1 January 2013, builds on
existing principles by identifying the concept of control as the
determining factor in whether an entity should be included within
the consolidated financial statements of the parent company. The
standard provides additional guidance to assist in the
determination of control where this is difficult to assess. The new
standard is not expected to have any impact on the Company's
financial position or performance.
IFRS 12, 'Disclosures of interests in other entities', effective
for annual periods beginning on or after 1 January 2013, includes
the disclosure requirements for all forms of interests in other
entities, including joint arrangements, associates, special purpose
vehicles and other off balance sheet vehicles. The new standard is
not expected to have any impact on the Company's financial position
or performance.
IFRS 13, 'Fair value measurement' is effective for annual
periods beginning on or after 1 January 2013. The standard improves
consistency and reduces complexity by providing a precise
definition of fair value and a single source of fair value
measurement and disclosure requirements for use across IFRSs. The
requirements do not extend the use of fair value accounting but
provide guidance on how it should be applied where its use is
already required or permitted by other standards within IFRS. If an
asset or a liability measured at fair value has a bid price and an
ask price, the standard requires valuation to be based on a price
within the bid-ask spread that is most representative of fair value
and allows the use of mid-market pricing or other pricing
conventions that are used by market participants as a practical
expedient for fair value measurement within a bid-ask spread. The
new standard is not expected to have any impact on the Company's
financial position or performance.
There are no other standards, interpretations or amendments to
existing standards that are effective that would be expected to
have a significant impact on the Company.
(b) Foreign currency translation
(i) Functional and presentation currency
The annual financial report is prepared in US dollars ("US$"),
this being the Company's functional and presentational currency.
Management has chosen US$ as the functional and presentation
currency for the Company to reflect the fact that most of the
Company's investments are denominated in US$.
(ii) 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
year-end exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognised in the statement
of comprehensive income. Foreign exchange gains and losses relating
to cash and cash equivalents are presented in the statement of
comprehensive income within "net foreign currency (losses)/gains".
Foreign exchange gains and losses relating to the financial assets
and liabilities carried at fair value through profit or loss are
presented in the statement of comprehensive income within "other
net changes in fair value on financial assets and financial
liabilities at fair value through profit or loss".
(c) 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 near term or derivatives. The Company does
not classify any derivatives as hedges in a hedging relationship.
All underlying investee funds held by the Company have been
designated by the Board of Directors as held at fair value through
profit or loss.
(ii) Recognition/de-recognition
The Company recognises financial assets and financial
liabilities at fair value through profit or loss on the trade date
- the date it commits to purchase or sell short 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 cash flows from the
investments have expired or the Company has transferred
substantially all risks and rewards of ownership.
(iii) Valuation of investments
Investments in underlying investee funds are valued at fair
value, as determined by each underlying investee fund's independent
administrator or Investment Manager. In determining fair value, the
administrator or Investment Manager utilises the valuations of the
underlying investee funds to determine the fair value of its fund
interests. The underlying investee 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
investee funds may include private placements and other securities
for which prices are not readily available.
These estimated fair values are determined by the administrators
or Investment Managers of the respective underlying investee funds
and may not reflect amounts that could be realised upon immediate
sale, or 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 and the differences could be
material. A number of underlying investee funds changed their
redemption terms so as to restrict investor redemptions by gating
redemptions, suspending redemptions or creating side pockets,
extending notice periods, delaying redemption payments and
introducing or extending lock periods.
It is the view of the Board of Directors that despite these
redemption restrictions the Net Asset Value ("NAV") provided by the
underlying investee fund managers or their administrators
represents the most appropriate basis for fair value of these
assets. As such no adjustments have been made to the value of the
assets in the annual financial report.
(d) Cash and cash equivalents
Cash and cash equivalents include cash in hand.
(e) Expenses
Expenses are accounted for on an accruals basis and are charged
to the statement of comprehensive income in the year in which they
are incurred.
(f) Redemption of shares
Subject to the Directors exercising their discretion to operate
the Redemption Facility on any given occasion, Shareholders may
request to have some or all of their Sterling Shares redeemed for
cash in a Redemption Offer. Depending on the liquidity within the
Company's portfolio, the Directors may elect to pay redemption
proceeds either: (i) at a value equal to the prevailing Net Asset
Value per Share as at the relevant Redemption Facility Date less
costs of redemption; or (ii) at a value equal to the prevailing Net
Asset Value per Share as at 31 March of the following year less the
costs of redemption (each a "Redemption Facility Calculation
Date").
(g) Interest income and expense
Interest income and expense is recognised in the statement of
comprehensive income on an accruals basis.
(h) Sales awaiting settlement
Sales awaiting settlement represent receivables that have been
contracted for but not yet settled on the statement of financial
position date. These amounts are recognised initially at fair value
and subsequently measured at amortised cost using the effective
interest method, less provision for impairment. A provision for
impairment is established when there is objective evidence that the
Company will not be able to collect all amounts due from the
relevant counterparty. Significant financial difficulties of the
counterparty, probability that the counterparty will enter
bankruptcy or financial reorganisation and default in payments are
considered indicators that the amount is impaired.
(i) 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 1 January 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 the Company can continue to apply for
exempt status.
The Directors intend that the Company be managed and controlled
in such a way that it should not be deemed resident in the United
Kingdom for tax purposesconfirmed that collective investment
schemes such as the Company can continue to apply for exempt
status.
(j) Profit/(loss) for the year from operations
(Deficit)/income not distributed is included in (loss)/profit
for the year from operations.
(k) Critical accounting estimates and judgements in applying accounting policies
The Company makes estimates and assumptions that affect the
reported amounts of assets and liabilities within the next
financial year. Estimates are continually evaluated and based on
historical experience and other factors, including expectations of
future events that are believed to be reasonable under the current
circumstances.
(l) Statement of cash flows
The cash amount shown on the statement of cash flows is the net
amount reported in the statement of financial position as cash and
cash equivalents. The indirect method has been applied in the
preparation of the statement of cash flows.
(m) Operating Segments
Operating segments are reported in a manner consistent with the
internal reporting used by the Chief Operating Decision-Maker
("CODM"). The CODM, who is responsible for allocation of resources
and assessing the performance of the operating segment, has been
identified as the Board of Directors. The Board of Directors makes
the strategic resource allocations on behalf of the Company. The
Company is managed as one operating segment.
6. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
The Board of Directors is ultimately responsible for the
Company's system of internal control and for reviewing its
effectiveness. The Board of Directors has established an ongoing
process for identifying, evaluating and managing significant risks
faced by the Company which involves the Directors conducting, 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 of Directors 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.
The Company is exposed to a number of risks as a result of the
financial instruments it holds. The Company's investment activities
expose it to various types of risk taken by the Company and the
managers of the underlying investee 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.
Market risk
The Company can be exposed to market risks by virtue of the
underlying investee funds that the Company invests in. Those
underlying investee funds may take exposure to a wide range of
market factors including equity, credit, foreign exchange, 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 investee fund
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 measure
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 underlying investee funds portfolio level
are controlled via the use of diversification across a wide range
of underlying investee fund styles and holdings. This
diversification is monitored and controlled via the use of a Value
at Risk ("VaR") system.
The broad characteristics of the methodology used to calculate
the VaR are as follows:
Using return data for the underlying investee funds in each
portfolio a return distribution for each fund is estimated. This
distribution captures the pertinent features of each of the
underlying investee fund's returns, including return, volatility
and any downside risk inherent in the Company. In particular it
captures any "fat" tailed effects that a fund may possess. A
maximum of five years data is used in this calculation. For funds
with short histories, statistical methods are used to backfill the
data to a period of sixty months.
Statistical methods are then used to simulate a range of
possible outcomes for the entire portfolio. These methods not only
take into account the correlation between funds (as measured by a
covariance matrix), but also the likelihood of tail events
happening together. Using this distribution of portfolio returns
the overall VaR of the portfolio can then be estimated.
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 on a quarterly
basis. Currently these expected maximums are set at a value of -2%
(30 June 2011: -2%), which means that 95% of the time the maximum
monthly loss suffered by the portfolio is not expected to be worse
than -2% (30 June 2011: -2%). Since inception, the actual values
for the portfolio have ranged from -1% to -6.1% (30 June 2011: -1%
to -6.1%).
As at 30 June 2012 the VaR estimate for the Company was -3.40%
(30 June 2011: -2.55%).
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.
30 Jun 12 30 Jun 11
US$ US$
Financial assets carrying market
risk 15,920,524 38,899,350
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 functional currency. Similarly, shareholders in
the Company can be directly exposed to foreign exchange risks when
investing in share classes of the Company that are not denominated
in the Company's functional currency.
With effect from 30 December 2010, the Company announced that
its currency hedging programme had ceased with immediate effect. It
is possible that the underlying investee funds within the portfolio
will incur foreign currency risk as an intentional or unintentional
part of their investment strategies.
The currency risk profile of the Company's financial assets and
liabilities as at 30 June 2012 was:
Monetary Non-Monetary Total
US$ US$ US$
186,130 53 186,183
--------- ------------- --------
Total 186,130 53 186,183
========= ============= ========
The currency risk profile of the Company's financial assets and
liabilities as at 30 June 2011 was:
Monetary Non-Monetary Total
US$ US$ US$
3,763,991 54 3,764,045
---------- ------------- ----------
Total 3,763,991 54 3,764,045
========== ============= ==========
Interest Rate Risk
Interest rate risk is the risk that the fair value or future
cash flows of a financial instrument will fluctuate because of
changes in market interest rates.
The majority of the Company's financial assets and liabilities
are non-interest bearing and, as a result, the Company is not
subject to significant amounts of risk due to fluctuations in the
prevailing levels of market interest rates, though the Company may
be exposed to interest rate risk at the underlying investee fund
level at which the Company invests. The influence of changes in the
market rates of interest is not expected to be significant.
The Company currently has no credit facility in place.
The interest rate risk profile of the Company's financial assets
and liabilities as at 30 June 2012 and 30 June 2011 was:
30 June 2012 30 June 2011
US$ US$
Financial assets not carrying
interest rate risk 15,928,411 38,909,498
Financial liabilities not carrying
interest rate risk 100,441 118,037
Financial assets carrying interest
rate risk 382,276 5,622,127
Credit risk
Credit risk relates to the extent to which failures by
counterparties to discharge their obligations could reduce the
amount of future cash flows from financial assets on hand as at the
statement of financial position date. The Company minimises its
exposure to credit risk by only dealing with counterparties with
high credit ratings and the Manager monitors credit concentrations
to reduce associated risk. At the statement of financial position
date the Company had all of its cash and cash equivalents held with
its Custodian, although from time to time the Company may
additionally place cash deposits with banks, limited to those rated
AA or higher.
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 investee funds. The Company is
also exposed indirectly at underlying investee fund level and seeks
to actively manage this exposure by performing due diligence checks
on each of the underlying investee fund managers.
In the event of a default by the Custodian, whether or not the
Company could continue would be dependent upon the level of cash
lost. Once cash balances within the Company build up to significant
levels they are only held for a short time before being distributed
to Shareholders. On this basis, it would be expected that the
Company would be able to continue in operation.
The current ratings of J.P. Morgan are: S&P A+/A-1; Moody's
Aa3/ P-1; and Fitch A+/F1 (30 June 2011: S&P AA-/A-1; Moody's
Aa1/ P-1; and Fitch AA- /F1+).
The credit risk profile of the Company's financial assets as at
30 June 2012 and 30 June 2011 was:
30 Jun 12 30 Jun 11
US$ US$
Cash and cash equivalents 382,276 5,622,127
Sales awaiting settlement 304,185 13,615,718
Interest receivable - 60
All underlying investee fund redemption proceeds are actively
monitored by both the Investment Adviser and the Custodian. When
underlying investee fund redemptions are placed, the Custodian will
follow up with the underlying investee fund administrator to ensure
that the redemption request has been received and actioned. They
will also ascertain when redemption proceeds are due and will
follow up with the administrator if redemption proceeds are not
received by this date.
Additionally, the Investment Adviser will follow up with the
underlying investee fund administrator and/or manager if redemption
proceeds are not received by the dates specified in the underlying
investee funds' offering documentation. All outstanding receivables
are tracked and monitored on a regular basis and escalated where
necessary.
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 underlying investee funds, the
Company can only sell their units at certain dates, which may occur
monthly, quarterly, annually or less frequently. A lack of
liquidity may also result from limited trading opportunities in
alternative investment products.
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 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 Company is closed ended and therefore, save for the
operation of the Redemption Facility or a distribution being
declared by the Directors as part of the managed wind down process,
the Shareholders cannot redeem their holdings. Liquidity risk is
therefore mitigated as the Board of Directors and Investment
Manager are able to manage liquidity risk with respect to the
liquidity of the underlying assets held.
The Portfolio Management team is responsible for constructing
portfolios with appropriate 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 review the proposed 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.
As at 30 June 2012 a number of underlying investee funds in
which the Company invests had restructured so as to restrict
investor redemptions. Restructured funds are defined as those
underlying investee funds that have undertaken various levels of
restructuring which have generally altered the original liquidity
terms per their offering documents. These changes have included
creating new share classes (such as continuing and/or liquidating
share classes), implementing redemption gates, suspending
redemptions, creating side pockets, extending notice periods,
delaying redemption payments and introducing or extending lock
periods. There have been no changes in respect of these underlying
investee funds subsequent to the year end.
Having factored in these redemption restrictions and taking into
account redemption requests already submitted to underlying
investee fund managers prior to the year end it is estimated that
as at 30 June 2012 and 30 June 2011 the liquidity profile of the
Company was as follows:
30 June 30 June 2011
2012 %
of
% of
Total Assets Total Assets
Up to one month liquidity 2.39% 29.20%
One to three months liquidity - 6.82%
Three to six months liquidity - 1.91%
Up to annual liquidity 1.87% 9.64%
Liquidity of more than one year 95.74% 52.43%
Total 100.00% 100.00%
============= =============
The Company entered a managed wind-down phase with effect from
17 March 2011. The portfolio manager is liquidating the portfolio
under the supervision of the Board with a view to maximising the
capital returned to shareholders. On 11 May 2011, the Company
resolved to make an initial distribution of GBP31,000,000. On 14
July 2011, the Company resolved to make a second distribution of
approximately GBP8,000,000. On 23 January 2012 the Company resolved
to make a third distribution of approximately GBP4,500,000. On 11
May 2012 the Company resolved to make a fourth distribution of
approximately GBP2,700,000. As the liquidation of the portfolio
progresses and capital is distributed to shareholders the portfolio
will become progressively more concentrated in a small number of
illiquid investments. This is reflected by the fact that
approximately 98% of the portfolio as at 30 June 2012 is invested
in assets with a liquidity profile of greater than six months.
It is the view of the Directors that despite these redemption
restrictions the NAV provided by the underlying investee fund
managers or their administrators represents the most appropriate
basis for fair value of these assets. As such no adjustments have
been made to the value of these assets in the annual financial
report.
The table below analyses the Company's financial liabilities
into relevant maturity groupings based on the remaining year at the
financial reporting 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 to 3 months and 3 to 6 months:
30 June 2012 (US$)
Up to 1 1 to 3 3 to 6 Total
Month Months Months
Accrued expenses and other
liabilities payable 64,924 35,517 - 100,441
----------- ----------- ----------- -----------
Total Liabilities 64,924 35,517 - 100,441
=========== =========== =========== ===========
30 June 2011 (US$)
Up to 1 Month 1 to 3 3 to 6
Months Months Total
Accrued expenses and other
liabilities payable 62,579 55,458 - 118,037
Total Liabilities 62,579 55,458 - 118,037
================= =========== =========== ===========
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This information is provided by RNS
The company news service from the London Stock Exchange
END
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