Annual Financial Report

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 £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. On 23 January 2012 the Company resolved to return £4,500,000 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 £2,700,000 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 £15.2million and there remained as at 30 June 2012 £10.3million 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 through profit or loss	2(c), 4		15,616,339		19,697,200
Sales awaiting settlement	2(h)		304,185		3,649,862
Current assets
Financial assets at fair value through profit or loss	2(c), 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

	Notes	Year ended 30 June 2012		Year ended 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 30 June 2012		Year ended 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 30 June 2012		Year ended 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 £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.

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 2012   % of	30 June 2011   % 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 £31,000,000. On 14 July 2011, the Company resolved to make a second distribution of approximately £8,000,000. On 23 January 2012 the Company resolved to make a third distribution of approximately £4,500,000. On 11 May 2012 the Company resolved to make a fourth distribution of approximately £2,700,000. 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 Month	1 to 3 Months	3 to 6 Months	Total
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 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

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http://www.rns-pdf.londonstockexchange.com/rns/0432P_-2012-10-18.pdf 

 

 

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