Annual Financial Report

RNS Number : 2488R

FRM Credit Alpha Limited

01 November 2011

 



FRM Credit Alpha Limited

Annual Report and Financial Statements for the year ended 30 June 2011

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 7968 6136

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 £31,000,000 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 £8,003,806 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.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 will be proposed at the Annual General Meeting.

DIRECTORS' RESPONSIBILITY STATEMENT

The Directors are responsible for preparing the financial report for each financial period 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 period. In preparing this year-end financial report, 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 annual financial report; and

·     prepare the financial report on the going concern basis unless it is inappropriate to presume that the Company will continue in business. Given the proposal for winding down the Company, this financial report was prepared on a break up basis of accounting.

The Directors confirm that they have complied with the above requirements in preparing the year-end financial report.

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 year-end financial 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 statement 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 financial 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 profit of the Company;

·     The Management 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.

CHAIRMAN'S STATEMENT

Proposals for the managed wind down of the Company were considered and approved at the Extraordinary General Meeting held on 17 March 2011.

Since that date the Investment Manager has been liquidating positions in order to enable the Company to return funds to its Shareholders.

In May 2011, the Company returned the sum of £31,000,000 by way of a compulsory partial redemption of Sterling Shares being 52.92% of the issued share capital as at the date of redemption.

On 22 July 2011, a further £8,003,806 was returned to Shareholders representing 28.92% of the Company's then issued share capital.

The Investment Manager is continuing to liquidate the portfolio and it is anticipated that a further distribution will be made towards the end of 2011.  This will as always be dependent upon the liquidity of the underlying investee funds.  It is not possible at the time of this Statement to give any indication of the date of any possible distribution in 2012.

As the liquidation of the portfolio proceeds and capital is distributed to Shareholders, the portfolio becomes progressively more concentrated in a small number of illiquid investments. Substantially all of the assets now remaining have a liquidity profile of more than six months.  Whilst the Directors have not had cause to adjust the valuations attributed to the value of these assets as detailed in the annual financial report, the Board draws attention to the fact that the reduction in the number and liquidity of the remaining assets increases the risk of variation in or changes to the valuations as redemptions take place.

Dr Damian Johnson has indicated that he will not be standing for re-election at the forthcoming AGM and the Board of Directors wishes to express its thanks to him for his services to the Company since incorporation.

STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2011

	Notes		30 June 2011		30 June 2010
			US$		US$
Assets
Non-current assets
Financial assets at fair value through profit or loss	2(c), 4		19,697,200		38,178,816
Sales awaiting settlement			3,649,862		-
Current assets
Financial assets at fair value through profit or loss	2(c), 4		5,586,432		41,386,510
Sales awaiting settlement	2(h)		9,965,856		6,016,570
Interest receivable			60		-
Prepaid expenses			10,088		13,478
Cash and cash equivalents	2(d)		5,622,127		6,357,459
Total assets			44,531,625		91,952,833
Liabilities
Current liabilities
Management fees payable	3(a)		52,322		151,560
Administration & custodian fees payable	3(c)		10,257		14,620
Audit fees payable			40,653		30,665
Other payables			14,805		42,951
Total liabilities			118,037		239,796
Total net assets			44,413,588		91,713,037
Represented by:
Shareholders' premium and accumulated deficit
Share premium	8		100,196,180		149,934,699
Accumulated deficit	9		(55,782,592)		(58,221,662)
Total Shareholders' funds			44,413,588		91,713,037
Number of Shares	8		31,135,739		66,133,577
Net Asset Value per Sterling Share			GBP0.889		GBP0.926

STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2011

	Notes	Year ended 30 June 2011		Year ended 30 June 2010
		US$		US$
Income
Interest income	2(g)	1,381		978
Other income		63		-
Net foreign currency gains		1,995,332		674,560
Other net changes in fair value on financial assets and financial liabilities at fair value through profit or loss	5	1,861,620		(6,404,782)
Total net income/(loss)		3,858,396		(5,729,244)
Expenses
Management fees	3(a)	(802,636)		(971,645)
Administration & custodian fees	3(c)	(77,907)		(84,322)
Legal fees		(221,372)		(66,819)
Audit fees		(47,471)		(41,708)
Directors fees	3(d)	(135,276)		(134,601)
Printing and postage		-		41,531
Other operating expenses		(134,664)		(198,184)
Total operating expenses		(1,419,326)		(1,455,748)
Operating profit/(loss)		2,439,070		(7,184,992)
Profit/(loss) for the year from operations	2(j)	2,439,070		(7,184,992)
Basic and diluted earnings per Sterling Share		GBP0.027		GBP(0.069)

Items in the above statement are derived from continuing operations.

There were no other elements of comprehensive income in the year (30 June 2010: Nil).

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2011

	Year ended 30 June 2011		Year ended 30 June 2010
	US$		US$
Net assets at start of the year	91,713,037		123,633,764
Redemptions of Shares	(49,738,519)		(24,735,735)
Net decrease from Share transactions	(49,738,519)		(24,735,735)
Profit/(loss) for the year from operations	2,439,070		(7,184,992)
Net assets at end of the year	44,413,588		91,713,037

STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2011

	Note	Year ended 30 June 2011		Year ended  30 June 2010
		US$		US$
Cash flows from operating activities
Profit/(loss) for the year from operations		2,439,070		(7,184,992)
Adjusted for:
Interest income		(1,381)		(978)
		2,437,689		(7,185,970)
Operating activities:
Net decrease in prepaid expenses		3,390		177,283
Net (increase)/decrease in sales awaiting settlement		(7,599,148)		10,866,678
Net decrease in liabilities and accrued expenses		(121,759)		(186,014)
Net decrease/(increase) in financial assets at fair value through profit or loss		54,281,694		(8,565,133)
Net decrease in financial liabilities at fair value through profit or loss		-		(127,506)
Cash provided by/(used in) operating activities		49,001,866		(5,020,662)
Interest received		1,321		978
Net cash provided by/(used in) operating activities		49,003,187		(5,019,684)
Cash flows used in financing activities
Redemption of  Shares		(49,738,519)		(24,735,735)
Net cash used in financing activities		(49,738,519)		(24,735,735)
Net decrease in cash and cash equivalents		(735,332)		(29,755,419)
Cash and cash equivalents at the start of the year		6,357,459		36,112,878
Cash and cash equivalents at the end of the year	2(d)	5,622,127		6,357,459

 

 

 

NOTES TO THE ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 JUNE 2011

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 2011 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 2010: none).

2.             SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The principle 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.

Standards, amendments and interpretations that are not yet effective but relevant to the Company's operations:

IFRS 9 "Financial Instruments" is effective for periods beginning on or after 1 January 2013. IFRS 9 specifies how an entity should classify and measure financial assets, including some hybrid contracts. It requires 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 transactions 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 annual financial report since the majority of the financial assets of the Company are at fair value through profit or loss.

All references to net assets throughout this document refer to the net assets attributable to holders of Sterling Shares unless otherwise stated.

(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 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 in financial assets and 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 these in the annual financial report.

Forward foreign exchange contracts are valued at the forward rate at the closing date throughout the life of the residual period of the contract. Realised and unrealised gains or losses resulting from foreign exchange contracts are recognised in the Statement of Comprehensive Income within "other net changes in fair value on financial assets or financial liabilities at fair value through profit or loss".

(d)   Cash and cash equivalents

Cash and cash equivalents include cash in hand, deposits held at call with banks and short-term investments in an active market with original maturities of three months or less.

(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 using the effective interest method.

(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 £600. 

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.

(j) Profit/(loss) for the year from operations

      Income not distributed is included in profit/(loss) 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 further 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 are ultimately responsible for the Company's system of internal control and for reviewing its effectiveness. The Board of Directors have 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 2010: -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 2010: -2%). Since inception, the actual values for the portfolio have ranged from -1% to -6.1% (30 June 2010: -1% to -6.1%).

As at 30 June 2011 the VaR estimate for the Company was -2.55% (30 June 2010: -2.7%).

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 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.  In order to mitigate the foreign exchange risk arising from either of these types of exposures, the Manager had a policy until 30 December 2010 of hedging the capital value of such exposures using a rolling program of currency forwards initiated on a monthly basis. In addition there was a secondary policy to adjust the hedge, where possible, for material movements in the intra-month profit and loss of the underlying investee funds and/or the Company.

Where intra-month performance data was available, and the estimated NAV movement of the investments and/or Company exceeded 0.9% of the NAV of the Company, additional non-deliverable forwards that mature at the expiry of the relevant swap were executed to hedge these movements.  This was done by the Manager's investment administration team.  They compared the NAV at the time that the initial forward was placed (e.g. 25 May for settlement end June) against any estimates that were generated for May month end and the May month end final NAV and then if at any point there had been a movement of more than 0.9% since the NAV at the time the initial forward was placed they instructed additional forwards to expire at June month end. 

In accordance with the Company's policy, the Manager monitored the Company's currency exposure twice a month.

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.

Interest Rate Risk

The Company, by virtue of its credit facility as detailed in note 10 on page 34, could have been directly exposed to interest rate risks when this credit facility was in use. The credit facility for the Company was a floating rate facility referenced to US Dollar LIBOR and as such any movement in the LIBOR rate will have impacted on the gross returns of the portfolio. However, any impact was not significant given the nature of the credit facility in place. 

In practice the returns of the Company's underlying investee funds are, for the most part likely to be positively correlated with LIBOR and as such it is likely that the increase in the returns of the investments will have 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 investee funds within the portfolio will incur interest rate risk as an intentional or unintentional part of their investment strategies.

The interest rate risk profile of the Company's financial assets and liabilities as at 30 June 2011 and 30 June 2010 was:

		30 June 2011	30 June 2010
		US$	US$
Financial assets not carrying interest		38,909,498	85,595,374
Financial liabilities not carrying interest		118,037	239,796
Financial assets carrying interest		5,622,127	6,357,459

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.

The Company's Custodian is J.P.Morgan Chase Bank, National Association (London Branch). Underlying investee fund holdings are registered in J.P.Morgan nominee accounts which specifically relate to the Company. In respect of cash held by the Custodian, the Company may rank as an unsecured creditor in the event of the Custodian's insolvency and any such cash balances may not be recoverable. Client money is segregated and stored in designated client money accounts within J.P.Morgan Chase Bank, National Association (London Branch). 

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. Generally cash balances within the Company are kept at a minimum level necessary to meet operational requirements so as to keep the Company fully invested in underlying investee fund assets. On this basis, it would be expected that the Company would be able to continue in operation.

The current ratings of J.P.Morgan Chase Bank, N.A. are: S&P AA+/A-1+; Moody's Aa1 / P-1; and Fitch AA- /F1+.

The Manager also keeps track of any sizeable cash balances that build up in the Company and then places these in money market funds or on deposit with other banks to ensure that the exposure to any one financial institution is minimised.

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 2011 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 2011 and 30 June 2010 the liquidity profile of the Company was as follows:

	30 June 2011 % of	30 June 2010   % of
	Total Assets	Total Assets
Up to one month liquidity	29.20%	25.05%
One to three months liquidity	6.82%	23.59%
Three to six months liquidity	1.91%	9.84%
Up to annual liquidity	9.64%	7.94%
Liquidity of more than one year	52.43%	33.58%
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 £31,000,000. On 14 July 2011, the Company resolved to make a second distribution of approximately £8,000,000. 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 78% of the portfolio as at 30 June 2011 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.

Liquidity risk (continued)

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 2011 (US$)

	Up to 1 Month	1 to 3  Months	3 to 6 Months	Total
Accrued expenses and other liabilities payable	62,579	55,458	-	118,037
Total Liabilities	62,579	55,458	-	118,037

30 June 2010 (US$)

	Up to 1 Month	1 to 3 Months	3 to 6 Months	Total
Accrued expenses and other liabilities payable	29,611	210,185	-	239,796
Total Liabilities	29,611	210,185	-	239,796

 

END

 

 

FR FSAFSFFFSEIF