Financial Statements

RNS Number : 3533G

FRM Credit Alpha Limited

21 October 2008

FRM CREDIT ALPHA LIMITED

(Incorporated in Guernsey)

AUDITED FINANCIAL STATEMENTS

FOR THE PERIOD FROM 1 MARCH 2007

(DATE OF INCORPORATION) TO 30 JUNE 2008

TABLE OF CONTENTS PAGE

DIRECTORS AND OTHER INFORMATION 3-4

DIRECTORS' REPORT 5-7

DIRECTORS' RESPONSIBILITY STATEMENT 8-9

CHAIRMAN'S STATEMENT 10

INVESTMENT ADVISER'S REPORT 11-14

INDEPENDENT AUDITOR'S REPORT 15

BALANCE SHEET 16

INCOME STATEMENT 17

STATEMENT OF CHANGES IN NET ASSETS 18

STATEMENT OF CASH FLOWS 19

NOTES TO THE AUDITED FINANCIAL STATEMENTS 20-28

DIRECTORS AND OTHER INFORMATION

DIRECTORS Peter Atkinson (Chairman) (appointed 1 March 2007)* Richard Hotchkis (appointed 1 March 2007)*

Damian Johnson (appointed 1 March 2007)

Andrew Duquemin (appointed 11 September 2007)*

* independent non-executive

REGISTERED OFFICE PO Box 173

Trafalgar Court

Admiral Park

St. Peter Port

Guernsey GY1 4HG

MANAGER AND COMPANY SECRETARY FRM Investment Management Limited

PO Box 173

Trafalgar Court

Admiral Park

St. Peter Port

Guernsey GY1 4HG

INVESTMENT ADVISER Financial Risk Management Limited

15 Adam Street

London WC2N 6AH

IRISH LISTING SPONSOR McCann Fitzgerald Listing Services Limited

Riverside One

Sir John Rogerson's Quay

Dublin 2

Ireland

SOLICITORS Herbert Smith LLP

as to English Law Exchange House

Primrose Street

London EC2A 2HS

as to Irish Law McCann Fitzgerald

Riverside One

Sir John Rogerson's Quay

Dublin 2

Ireland

ADVOCATES Carey Olsen

as to Guernsey Law PO Box 98

7 New Street

St. Peter Port

Guernsey GY1 4BZ

REGISTRAR Capita Registrars (Guernsey) Limited

Longue Hougue House

St Sampson

Guernsey GY2 4JN

DIRECTORS AND OTHER INFORMATION (continued)

INDEPENDENT AUDITORS PricewaterhouseCoopers CI LLP

PO Box 321

National Westminster House

Le Truchot

St. Peter Port

Guernsey GY1 4ND

ADMINISTRATOR JPMorgan Hedge Fund Services (Ireland) Limited

Newenham House

Northern Cross

Malahide Road

Dublin 17

Ireland

CUSTODIAN JPMorgan Chase Bank, National Association (London

Branch)

125 London Wall

London EC2Y 5AJ

FINANCIAL ADVISER Winterflood Securities Limited

AND CORPORATE BROKER Cannon Bridge House

25 Dowgate Hill

London EC4R 2GA

LENDER Citibank, N.A.

390 Greenwich Street

4th Floor

New York

NY 10013

DIRECTORS' REPORT FOR THE PERIOD FROM 1 MARCH 2007 (DATE OF INCORPORATION) TO 30 JUNE 2008

The Directors present their report together with the audited financial statements of FRM Credit Alpha Limited (the 'Company') for the period from 1 March 2007 (date of incorporation) to 30 June 2008.

Fund Background

The Company, a closed ended investment company, was incorporated on 1 March 2007 under the laws of Guernsey with registered number 46497. The Company began trading on 27 March 2007 with a listing on the Irish Stock Exchange following the placing of 46,000,000 Shares of no par value at 100p each. Up until 4 September 2008 the Sterling Shares were listed on the Irish Stock Exchange and traded on the International Bulletin Board (ITBB) of the London Stock Exchange. On 4 September 2008 the Sterling Shares were de-listed from the Irish Stock Exchange and were listed on the Main Market of the London Stock Exchange.

Principal Activities

The Company seeks to deliver better risk-adjusted returns than those achieved by making passive investments in corporate debt securities, when measured over a complete market cycle. The Company seeks to achieve its objective by investing in a portfolio of hedge funds pursuing a variety of different credit and credit-related trading strategies.

Results

The results for the period are shown in the Income Statement on page 17.

Directors

The Directors of the Company are set out on page 3.

Directors' Interests

As at 30 June 2008, Richard Hotchkis held 30,000 shares in the Company. For details of directors' fees paid during the period, see note 3.4.

Corporate Governance

Introduction

As a closed-ended investment company registered in Guernsey, the Company is not obliged to comply with the requirements of the Combined Code (the 'Code') which sets out the principles of good governance and a code of best practice and is issued by the UK Listing Authority. However, the Directors acknowledge the importance of sound corporate governance and, where possible, the Directors adopt best practice. This may involve the Company having regard to the AIC Code of Corporate Governance produced by the Association of Investment Companies and the Combined Code, where appropriate. The Company complies with the Combined Code to the extent that the Directors consider appropriate having regard to the Company's size, stage of development and resources.

Since the Company's assets are managed by the Manager, the Company does not adhere to the provisions relating to the setting of the Company's strategic aims and there is no separate chief executive officer. There is no formal process for detailed evaluation of the performance of each of the Directors, and the Company does not have a formal framework for dialogue with Shareholders

The following statement describes how the relevant principles of governance are applied to the Company.

DIRECTORS' REPORT FOR THE PERIOD FROM 1 MARCH 2007 (DATE OF INCORPORATION) TO 30 JUNE 2008 (continued)

The Board

The Board currently consists of four non-executive directors, three of whom are independent of the Investment Manager. Dr Johnson is a director of the Investment Manager and Company Secretary, FRM Investment Management Limited.

The Articles of Association provide that one third of the directors retire by rotation at each annual general meeting. If their number is not three or a multiple of three, the number nearest to but not exceeding one third shall retire from office. A director who retires at an annual general meeting may, if willing to act, be re-appointed. The directors are not subject to automatic re-appointment. Mr Hotchkis submits himself for re-election at the second annual general meeting. In addition, any director who is not independent must retire at each annual general meeting. Dr Johnson will retire and submit himself for re-election at the second annual general meeting accordingly.

The Board meets at least four times a year and between these formal meetings there is regular contact with the Investment Manager and the Company Secretary.

The directors are kept fully informed of investment and financial controls and other matters that are relevant to the business of the Company and should be brought to the attention of the directors. The directors also have access to the Secretary and, where necessary in the furtherance of their duties, to independent professional advice at the expense of the Company.

The Board has a breadth of experience relevant to the Company and the directors believe that any changes to the Board's composition can be managed without undue disruption. With any new director appointment to the Board, consideration will be given as to whether an induction process is appropriate.

Audit Committee

An Audit Committee has been established consisting of Mr Duquemin (chairman), Mr Atkinson and Mr Hotchkis. Dr Johnson was previously on the Audit Committee but stepped down on 11 September 2008. The Audit Committee examines the effectiveness of the Company's internal control systems, the annual report and financial statements and interim report, the auditors' remuneration and engagement, as well as the auditors' independence and the non-audit services provided by them. The Audit Committee receives information from the Company Secretary and the external auditors.

Internal Controls

The Board is ultimately responsible for the Company's system of internal control and for reviewing its effectiveness. The Board confirms that there is an ongoing process for identifying, evaluating and managing significant risks faced by the Company. This process has been in place for the period under review and up to the date of approval of this annual report and financial statements and is reviewed by the Board and accords with the Turnbull Guidance. The Code requires directors to conduct, at least annually, a review of the Company's system of internal control, covering all controls including financial, operational, compliance and risk management.

The Board has reviewed the effectiveness of the system of internal control. In particular, it has reviewed and updated the process for identifying and evaluating significant risks affecting the Company and the policies by which these risks are managed.

The internal control systems are designed to meet the Company's particular needs and the risks to which it is exposed. Accordingly, the internal control systems are designed to manage rather than eliminate the risk of failure to achieve business objectives and by their nature can only provide reasonable and not absolute assurance against misstatement and loss.

DIRECTORS' REPORT FOR THE PERIOD FROM 1 MARCH 2007 (DATE OF INCORPORATION) TO 30 JUNE 2008 (continued)

Going Concern

After making enquiries and given the nature of the Company and its investments, the directors are satisfied that it is appropriate to continue to adopt the going concern basis in preparing the financial statements and, after due consideration, the directors consider that the Company is able to continue as a going concern in the foreseeable future.

Conversion between Classes

The Company's Articles incorporate provisions to enable Shareholders of any one class of Shares to convert all or part of their holding into any other class of Shares in issue on a twice-yearly basis in accordance with the detailed provisions of the Articles.

At the NAV Calculation Dates referable to the months of March and September in each year, Shareholders may convert Shares of any class in issue into Shares of another class in issue by giving not less than 30 calendar days' notice in advance of such Conversion Calculation Date to the Company via the Registrar/UK Transfer Agent.

It is a condition to the conversion right described above that such conversions will only be permitted where they would not cause a class to fail to meet the Minimum Class Requirements. If notices are received from Shareholders for conversions of Shares such that any one class of Shares would fail to meet the Minimum Class Requirements, requests for conversion will be scaled back on a pro rata basis so that no class of Shares fails to meet the Minimum Class Requirements. The Company currently only has Sterling denominated Ordinary Shares in issue.

Distribution Facility

Shareholders are entitled to elect to participate in the Distribution Facility which provides an annual distribution by way of redemption of Shares, subject to certain limitations and the Directors exercising their discretion to operate the facility on any relevant occasion. Redemption of Shares on any Distribution Date will be restricted to a specific percentage of the number of Shares held by a Shareholder. This percentage will be determined by the Directors in their discretion when they declare the annual distribution, but it is their intention to distribute up to two thirds of Total Returns, capped at 3.5 per cent of year-end Net Asset Value.

DIRECTORS' RESPONSIBILITY STATEMENT

The Directors are responsible for preparing financial statements for each financial period which give a true and fair view, in accordance with applicable Guernsey law and International Financial Reporting Standards, of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing those financial statements, the Directors are required to:

select suitable accounting policies and then apply them consistently;
make judgements and estimates that are reasonable and prudent;
state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors confirm that they have complied with the above requirements in preparing the financial statements.

The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with The Companies (Guernsey) Law, 1994 and The Collective Investment Schemes (Class B) Rules, 1990. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are also responsible for the maintenance and integrity of the website on which these financial statements can be published. The work the auditors have carried out does not include consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements presented on the website.

Legislation in Guernsey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

As required under the EU Transparency Directive, to the best of our knowledge:

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and give a true and fair view of the assets, liabilities, financial position and profit of the Company.

The 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.

DIRECTORS' RESPONSIBILITY STATEMENT (continued)

MANAGEMENT REPORT

Review of performance, development and position

The Company has operated during the period in accordance with the objectives outlined in the prospectus. A review of the Company's performance during the period is included in the Investment Advisers Report on pages 11 to 14. A review of the business and future developments, results for the period and events since the period end have been described in the body of this Directors' Report and Chairman's Report on page 10.

Principal risks and uncertainties

The principal risks and uncertainties are outlined in the Company's prospectus and in Note 5 in the Notes to the Financial Statements on pages 20 to 28.

On Behalf of the Board of Directors:

___________________________ ____________________________

Andrew Duquemin Peter Atkinson

Date: 14 October 2008

CHAIRMAN'S REPORT

I am pleased to present Shareholders with the first Annual Report and Accounts for FRM Credit Alpha Limited for the period ended 30 June 2008.

On 27 March 2007 the Company's Ordinary Shares were admitted to the listing on the Irish Stock Exchange and to trading on the International Bulletin Board of the London Stock Exchange having raised gross proceeds of £46,000,000 (net proceeds of £45,195,000) through the issue of 46,000,000 Shares of no par value of 100p each. Subsequently further proceeds were raised on 27 November 2007 of £32,823,817 for 29,263,701 shares and on 22 February 2008 of £8,507,808 for 7,526,370 shares. These issues were fully subscribed and represented a pleasing endorsement of the company's performance.

With effect from 4 September 2008 the Shares of the Company were delisted from the Irish Stock Exchange and were admitted to the Official List of the UK Listing Authority to trade on the Main Market of the London Stock Exchange.

The proceeds have been actively invested in the period which has produced positive results for FRM Credit Alpha Limited during which the Company's shares have gained 22% since launch, being the increase in the net asset value which increased from 98.25 pence (after the expenses associated with the initial share issue) to 119.91 pence. This return compares favourably with the returns provided by similar asset classes: for the same period the Merrill Lynch High Yield Master II Index (GBP hedged) returned -0.21%, JP Morgan Global Government Bonds (GBP Hedged) returned 8.95% and 1 month Sterling Libor returned 7.55%. This is a very pleasing result in an environment that proved extremely hostile to credit investments generally.

Despite the continued deterioration of investment markets throughout the summer of 2008 the combination of resilient performance and increased opportunities within the distressed credit space continues to fuel demand for our shares.

As well as being active in the capital markets we took steps to broaden the experience of the board through the appointment of an additional director, Andrew Duquemin, who joined us in September 2007. Andrew is Chairman of Elysium Fund Management Limited, a company providing fund management and corporate finance services to a range of funds and trading companies and as such has extensive experience in the listing of companies on both the London and Channel Islands Stock Exchanges.

Shareholders are entitled to elect to receive redemption of shares as set out in the prospectus, the Directors' Report and Note 12 in the Notes to the Financial Statements. A payment of £147,651 was made in September 2008 in respect of 123,145 shares held by investors who elected to accept the distribution.

In line with the view held by our Investment Adviser I am confident that given our position of strength and the wealth of opportunities arising in the credit markets through increased defaults, increased volatility and increased activity, the Company is positioned to serve shareholders well throughout the next year.

Peter Atkinson

Date: 14 October 2008

INVESTMENT ADVISER'S REPORT FOR THE PERIOD FROM 1 MARCH 2007 (DATE OF INCORPORATION) TO 30 JUNE 2008

Performance

This period since launch has been extremely positive for FRM Credit Alpha Limited. During the period the net asset value increased from 98.25 pence (after the expenses associated with the initial share issue) to 119.91 pence; an increase of 22%. This return compares favourably with the returns provided by similar asset classes: for the same period the Merrill Lynch High Yield Master II Index (GBP hedged) returned -0.21%, JP Morgan Global Government Bonds (GBP Hedged) returned 8.95% and 1 month Sterling Libor returned 7.55%. This is a very pleasing result in an environment that proved extremely hostile to credit investments generally. Points to note include:

11 of 14 names contributed positively to performance
Net exposure to the credit markets averaged 39%
The portfolio was net short sub-prime related securities

Market Environment

The high yield sector rose strongly in April, with the Merrill Lynch High Yield Master II returning +1.32%. Solid news on corporate earnings combined with a lower than recent (US$12billion) new issue calendar pushed high yield cash spreads to less than +300bps. Issues surrounding problems in the sub-prime mortgage sector moved out of focus, as it became clear that the S&P500 was in line to deliver an unprecedented fifteenth consecutive quarter of double-digit earnings growth. Relative Value managers had a solid month, assisted by the ongoing rush of LBO and M&A activity. High yield new issuance quality continued to deteriorate, with those rated split B or below accounting for 37% of the year to date total. Last year's comparable number (which was also a record) was closer to 21%.

The high yield sector continued its climb in May, with the Merrill Lynch High Yield Master II returning +0.72% however the majority of this return (+0.64%) was attributable to income, rather than price appreciation. High yield credit spreads ended the month at 269 bps, the lowest level ever in the 20+ year history of the index. Interestingly, homebuilders were one of the best performing sectors in both investment grade and high yield markets. Although many recently received downgrades, their spreads were seen as cheap to other similarly rated credits by pure ratings driven buyers. Hedge funds considered this as a selling opportunity, believing that fundamental value metrics will eventually triumph. After a slow April, May saw a surge of supply into the high yield market, with US$25billion of new issues. In the loan market, similar numbers were seen, with EUR37billion of primary issue in European leveraged loans, and US$50billion in the US. Pricing was at ever higher debt ratios, while covenant protections were increasingly weaker. The launch on 22 May of the LCDX Index (an index of credit derivatives on 100 1st lien loans) provided funds with another trading and arbitrage opportunity.

In June the high yield market began a long anticipated decline leading to the current financial crisis. The Merrill Lynch High Yield Master II fell -1.69%, the worst return since the GM/Ford crisis began in March 2005. The fall was due to a combination of factors including: contagion from dramatic declines in the sub-prime market, increases in Treasury yields and heavy selling by high yield mutual funds.

The market witnessed a major re-pricing on the back of subprime fears and oversupply in the leveraged loan market. The Merrill Lynch HY Master II dropped -3.1%, the largest fall in 5 years. Volatility hit all financial markets hard, and the extremely high leverage in the system was under pressure as risk reduction began to take hold. Several levered credit hedge funds were caught in the liquidity squeeze, with Basis Capital and Sowood being the best-known of those that had to close down. Other credit related instruments were also hit; the S&P/LSTA Leveraged Loan Index was down -3.35%; the previous low was September 2001, when it fell -1.52%.

INVESTMENT ADVISER'S REPORT FOR THE PERIOD FROM 1 MARCH 2007 (DATE OF INCORPORATION) TO 30 JUNE 2008 (continued)

Market Environment (continued)

Credit markets continued to be in disarray in August last year. Although the Merrill Lynch HY Master II returned +1.12%, high yield spreads rose 35bps, to 462bps. Given this confused backdrop hedge fund managers found it difficult to return positive numbers: hedges did not pay off and value positions were pushed into negative territory. Risk reduction and deleveraging, as well as the expectation of new supply, all contributed to increased dislocation and market volatility. The announcement by President Bush on the last day of the month that homeowners in trouble would be helped, resulted in an approximate 5% rally across mortgage related securities. Notably August saw managers in all strategies reduce net exposure levels from around 40 % in June to 30%.

In September credit spreads tightened as fears of a liquidity-driven crisis abated, largely due to the aggressive 50bps Fed Funds cut to 4.75%. The Merrill Lynch HY Master II returned 2.4% as high yield and distressed bonds moved a little higher. That said, credit spreads in some sectors widened dramatically and some 'levered carry' hedge funds continued to be under pressure, with many printing negative returns in spite of the market's rally. Managers expected continued choppiness, and shifted exposures to senior levels of the capital structure in older, less levered transactions, as well as into smaller, niche companies which are finding financing more difficult as banks have their balance sheets squeezed.

High yield indices ended October in positive territory, with the Merrill Lynch HY Master II up 0.6%. However, spreads rose 17bps to close at +436bps, having been as low as +381bps during the month. There were mixed messages within credit markets: Both GDP and 3Q company data pointed to stable fundamentals, and the month had sizable new issuance in both investment grade (US$82bn) and high yield (US$19bn). These deals saw strong demand and were both upsized and placed at better than anticipated levels. The loan market was tested, and successfully passed the test, as US$13.5bn 1st Lien paper by Texas Electric was issued along with US$7.5bn of bonds, as financing for a KKR buyout. Moody's downgraded US$33bn of 2006 subprime 1st lien asset backed securities, put US$24bn Aaa- and Aa- rated securities on watch, and downgraded homebuilders such as Centex, Pulte and Lennar on negative numbers. Financials and bond insurers began to acknowledge the impact of the credit crisis on their businesses: Citigroup, Bank of America and Washington Mutual reported significantly weaker results, with many others admitting to large losses from securitised products. Finally, housing starts began to print bad numbers: in September they fell by over 10% to a 14-year low. At month-end the Fed cut by 25bps in response to weakness in capital markets and declining investor confidence.

Credit spreads deteriorated significantly in November. The Investment Grade market underperformed Treasuries by 270bps, its worst month on record, whilst High Yield spreads rose to a four year high of almost 600bps, before rallying to 575bps. The Merrill Lynch HY Master II fell 2%. New issue activity in both High Yield and Leveraged Loans ground to a halt. One indication of the market deterioration that occurred during the month was that three months ago only 20 issues yielded above 13% whilst in November there were over 170. The strategy of buying any asset with a high yield, irrespective of fundamentals, no longer appealed. Investors avoided highly levered companies, both in debt and equity markets. Distressed names and post-reorganisation equity sold off, particularly in consumer-related sectors. An index of Homebuilder sentiment was at its lowest point since inception in 1985. In High Yield, the Home Construction sector fell 9% while Construction Machinery was down 6%. The estimated losses from investment in subprime mortgages ranged from US$400bn to US$1 trillion. Bank loans continued to suffer weakness as credit investors priced in a recession. At the same time, the amount of 'fallen angel' (former investment grade debt) nearly doubled during the year, to approximately US$130bn.

The final month of 2007 ended up being another tortuous one for high yield investors. Though the market managed to post a positive gain of +0.29% (as measured by the Merrill Lynch High Yield Master II Index), this was entirely attributable to income and average bond prices were actually down. Rising oil prices, weak economic data, deteriorating corporate earnings prospects, and the market perception of an insufficiently accommodative Fed all combined to place further downward pressure on risky asset prices during December. The primary high yield market remains closed to all but the highest quality issuers only six new issues priced in December for a total of US$1.9bn, the lowest figure since August 2002.

INVESTMENT ADVISER'S REPORT FOR THE PERIOD FROM 1 MARCH 2007 (DATE OF INCORPORATION) TO 30 JUNE 2008 (continued)

Market Environment (continued)

Risk assets started 2008 poorly amidst negative macro-economic data, additional bank write downs, concerns of possible downgrades of the monoline insurers and disappointing earnings reports. Flight to quality was evident throughout the broader markets, as high yield bonds, leveraged loans and equities vastly underperformed investment grade bonds and Treasuries. 125 bps of interest rate cuts by the Federal Reserve during the last week of the month helped recoup a small portion of the losses.

Much to investors' chagrin, January's dismal returns were a presage for February, as the credit markets failed to stabilise despite the backdrop of easing fiscal and monetary policy. In fact, the credit crunch intensified its grasp during the month with short-term auction rate securities being the latest to suffer from the ongoing contraction in liquidity. Bank loan spreads traded as wide as Libor +742 bps before recovering into the Libor +600 bps range; still wider than at any point during the previous economic downturn of 2001/2002. Distressed debt increased materially in February with levels hitting US$7.4bn, compared to US$4.2bn and US$8.5bn in the entirety of 2007 and 2006 respectively.

In March, mounting evidence of a slowing economy coupled with continued liquidity and funding problems in the financials sector led credit spreads wider, only for the Fed to aggressively intervene halfway through the month with a series of coordinated policy actions. Bailing out Bear Stearns, cutting the Fed Funds target rate by 75 bps, cutting the discount rate by 100 bps, establishing new lending facilities with longer terms and a broader range of collateral, and opening the discount window for the first time to pure play broker dealers dramatically improved market sentiment and led to a sharp rally in spread levels during the second half of the month. The investment grade universe, home to the vast majority of financials, was the prime beneficiary of Fed intervention. High yield bond and leveraged loan default rates continued to climb in with $150mn of bonds and $1.3bn of loans defaulting during the month, taking the 12 month rolling default rates (by dollar volume) to 0.71% for bonds and 1.07% for loans. While these numbers were still low relative to the long-term historical average, they were close to 2yr highs. Primary market activity remained muted, although it appeared that banks were seeking to offload material amounts of legacy leveraged loan and bond exposures at sharply discounted prices.

In April, appetite for risk assets returned with a vengeance, enabling many equity and credit indices to post their best monthly gains for several years. The strong performance was driven by a large reduction in the leveraged loan and high yield new issue backlog, well-received first quarter corporate earnings and guidance, and a general willingness by investors to revisit higher yielding assets given that market volatility had subsided toward normal levels. High yield spreads at +688bps were only 100 bps higher than levels at the beginning of the year and leveraged loan prices, which bottomed in mid-March at 86 cents recovered to an average price of 92.5 cents. That said, the economic picture remained bleak with consumer-related data in particular portending tougher times ahead.

The credit spread rally that began in the second half of March held strong through the first half of May before petering out in the second half of the month. Leveraged loan markets continued their recent good performance amid further amelioration of the hung bridge loan backlog; estimated to be US$73bn in the US down from US$156bn at the start of the year. The stabilisation in market conditions facilitated a re-opening of the primary market, but only to the higher quality high yield issuers. US$14bn of issuance priced in May, the highest monthly volume since October 2007 with 93% of this issuance rated single B or better. Nevertheless, new credit facilities at the high yield end of the market remained difficult to come by with banks in retrenchment mode and many other market participants cautious of high yield spread levels still materially tighter than at the bottom of previous credit cycles. Reduced credit availability typically leads to increased default activity and while headline default rates were still well below historical averages, the trend upwards was expected to gather momentum.

INVESTMENT ADVISER'S REPORT FOR THE PERIOD FROM 1 MARCH 2007 (DATE OF INCORPORATION) TO 30 JUNE 2008 (continued)

Market Environment (continued)

A number of factors combined to push credit markets lower in June, wiping out the gains made from mid March. Persistent moves higher in commodity prices, growing hawkishness from both the ECB and the Fed in the face of undeniable inflationary pressures, further funding problems amongst the monoline insurers, starkly negative news from the US auto sector and a growing consensus that analysts' estimates for company earnings are still significantly optimistic, all contributed to the fall. In fact, this was a much more fundamentally driven sell-off than in July 2007, November 2007 or January 2008 - with the top of the capital structure outperforming the bottom, and higher quality credits outperforming those of lower quality. New issue activity remained elevated into June, with US$9.2bn of high yield bond issuance pricing, versus a total of US$12.8bn in the first four months of the year and US$14.3bn of issuance in May. The market appeared more receptive to new supply, but only from higher quality borrowers in defensive sectors.

Portfolio

Our dedicated short credit manager in the hedge section of the portfolio delivered strong performance. Substantial positions in the Banking & Financial sectors helped boost returns. A number of positions in the Home Equity Loan space also paid off as fears of a consumer credit crash grew.

The Credit Value section of the portfolio performed strongly with considerable help from our best performing position. This is a high conviction manager with which we hold a core fund plus a concentrated special situations fund. The manager profited from a substantial short position in the sub-prime mortgage sector. Our worst performing manager suffered from an unsuccessful macro trade that overshadowed his credit based returns. The manager's persistence with the uncharacteristic trading profile led us to redeem.

Our core Credit Long-Short managers were also profitable albeit more modestly than Credit Value. Shorts in Emerging Markets and Investment Grade securities were less profitable than the High Yield positions exploited by Value managers. It seems however that 2008 is proving more rewarding to those with a bearish stance.

Outlook

We hear from many of our managers that credit has 're-priced' to sensible levels, and that there are many names they find fundamentally attractive. However, they remain cautious in the face of a weakening macro economic environment and unpredictable reactions of governments in dealing with extended financial crises. Demand remains low as borrowing terms have stiffened and some hedge funds are facing significant redemptions. Meanwhile on the supply side, the forward calendar of debt issuance is still significantly large. It seems it will take some time for this imbalance to clear but expectations are that the issuance will ultimately get digested, with higher spreads, less balance sheet leverage, and more lender friendly structures.

While we don't have consensus on the exact number, our managers agree that the default rate will continue to increase through 2008 and 2009. They are also united in a belief that the market volatility of the past year will continue.

We have high conviction that our managers will be able to capitalize upon such a scenario. As in previous cycles, periods of stress result in reduced liquidity and investors paid to be more discerning. It is in these environments where those with skills at building balanced portfolios that target both long and short opportunities tend to perform best. Such balanced exposures are a feature of our portfolio, and despite potentially turbulent times ahead, we are confident that our managers will be able to weather the storm.

Financial Risk Management Limited

Date: 5 August 2008

BALANCE SHEET AS AT 30 JUNE 2008

	Note	US$
Assets
Financial assets at fair value through profit or loss	2(b),13	197,166,326
Interest receivable	2(c)	3,019
Prepaid expenses		12,791
Cash and cash equivalents	2(d)	7,455,141
Purchases in advance		4,000,000
Amounts due from lender		285,603
Total assets		208,922,880

Liabilities
Performance fees payable	3.2	1,838,234
Management fees payable	3.1	164,008
Interest payable	2(c)	216,581
Directors fees payable	3.4	42,510
Administration & custody fees payable	3.3	29,245
Audit fees payable		21,749
Other liabilities		142,568
Sales in advance		10,000,000
Commitment fees payable		100,682
Organisational costs		30,870
Total liabilities		12,586,447

Net assets		196,336,433

Represented by:

Shareholders' funds and reserves
Share capital		174,952,713
Reserves	8	21,383,720
Total shareholders' funds		196,336,433

Sterling Shares:
Number of Shares	7	82,790,071
Net Asset Value per Share		GBP1.191

On Behalf of the Board of Directors:

___________________________ ____________________________

Andrew Duquemin Peter Atkinson

Date: 14 October 2008

The accompanying notes on pages 20 to 28 are an integral part of these audited financial statements

INCOME STATEMENT FOR THE PERIOD FROM 1 MARCH 2007 (DATE OF INCORPORATION) TO 30 JUNE 2008

	Note	US$
Investment income
Interest income	2(c)	182,219
Net realised and unrealised gain on financial assets at fair value through
profit or loss and foreign currency transactions	11	26,112,216
Total investment income		26,294,435

Expenses
Interest expense		226,177
Administration & custody fees	3.3	143,532
Management fees	3.1	1,779,022
Performance fees	3.2	1,838,234
Commitment fees		97,955
Legal fees		86,182
Audit fees		64,165
Directors fees	3.4	207,242
Printing and postage		266,817
Other operating expenses		201,389
Total expenses		4,910,715


Profit for the period from operations		21,383,720

On Behalf of the Board of Directors:

___________________________ ____________________________

Andrew Duquemin Peter Atkinson

Date: 14 October 2008

The accompanying notes on pages 20 to 28 are an integral part of these audited financial statements

STATEMENT OF CHANGES IN NET ASSETS FOR THE PERIOD FROM 1 MARCH 2007 (DATE OF INCORPORATION) TO 30 JUNE 2008

	US$

Net assets at the start of the period	-

Proceeds from issue of shares	174,952,713
Redemption of shares	-
Net increase from share transactions	174,952,713

Profit for the period from operations	21,383,720

Net assets at the end of the period	196,336,433

The accompanying notes on pages 20 to 28 are an integral part of these audited financial statements

STATEMENT OF CASH FLOWS FOR THE PERIOD FROM 1 MARCH 2007 (DATE OF INCORPORATION) TO 30 JUNE 2008

	US$

Cash flows from operating activities

Profit for the period from operations	21,383,720

Operating activities:
Increase in interest receivable and prepaid expenses	(15,810)
Increase in liabilities and accrued expenses	2,586,447
Purchase of investments at fair value through profit or loss	(382,283,393)
Sale of investments at fair value through profit or loss	218,672,753
Realised gain on investments at fair value through profit or loss	(13,135,885)
Unrealised gain on investments at fair value through profit or loss	(14,419,801)
Net cash outflow from operating activities	(167,211,969)

Cash flows from financing activities
Loan facility drawn	11,400,000
Loan facility paid	(11,685,603)
Issuance of participating shares	174,952,713
Net cash inflow from financing activities	174,667,110

Net increase in cash and cash equivalents	7,455,141

Cash and cash equivalents at the beginning of the period	-

Cash and cash equivalents at the end of the period	7,455,141

Net cash flow from operating activities and financing activities includes:

Interest received	179,200
Interest paid	(9,596)

The accompanying notes on pages 20 to 28 are an integral part of these audited financial statements

NOTES TO THE AUDITED FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 MARCH 2007 (DATE OF INCORPORATION) TO 30 JUNE 2008

1. GENERAL INFORMATION

FRM Credit Alpha Limited (the 'Company'), a closed ended investment company, was incorporated in Guernsey on 1 March 2007 under The Companies (Guernsey) Law, 1994, 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 2008 only Sterling Shares were in issue.

The Company seeks to generate significant returns over cash, with low volatility and beta to global credit markets, when measured over a market cycle. By investing in a combination of investee Funds managed by managers who adopt research-based value/event driven or long-short approaches, the Company believes that volatility and peak-to-through drawdowns will be lower than those typically delivered by long-only approaches. The Company will seek to achieve its objective by investing in a portfolio of hedge funds pursuing a variety of different credit and credit-related trading strategies. In addition, the Company may invest in a wide variety of financial instruments.

Up until 4 September 2008 the Sterling Shares were listed on the Irish Stock Exchange and traded on the International Bulletin Board (ITBB) of the London Stock Exchange. On 4 September 2008 the Sterling Shares were de-listed from the Irish Stock Exchange and were listed on the Main Market of the London Stock Exchange.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies applied in the preparation of financial statements are set out below. These are the first set of Financial Statements prepared for a June period end, therefore no comparative figures are available.

Basis of preparation

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). The financial records and statements are maintained and presented in US Dollars.

The financial statements have been prepared under the historical cost convention as modified by the revaluation of financial assets and financial liabilities held at fair value through profit or loss.

The preparation of financial statements in conformity with IFRS requires the use of accounting estimates. It also requires management to exercise its judgement in the process of applying the Fund's accounting policies.

The following interpretations are mandatory for the Fund's accounting periods beginning on or after 1 January

2009

IFRS 8, Operating Segments (effective 1 January 2009)

Amendment to IAS 32 and IAS 1 Financial Instruments Puttable at Fair Value and Obligations arising on Liquidation

All references to net assets throughout this document refer to net assets attributable to the Company unless otherwise stated.The balance sheet presents assets and liabilities in decreasing order of liquidity and does not distinguish between current and non-current items. All the Company's assets and liabilities are held for the purpose of being traded or are expected to be realised within one year.

Financial Instruments

(i) Classification

In accordance with IAS 39, the Company classifies its investments as financial assets and liabilities at fair value through profit or loss. These financial assets and liabilities are classified as held for trading or designated by the Board of Directors at fair value through profit or loss at inception.

NOTES TO THE AUDITED FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 MARCH 2007 (DATE OF INCORPORATION) TO 30 JUNE 2008 (continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(b) Financial instruments (continued)

(i) Classification (continued)

Financial assets or financial liabilities held for trading are those acquired or incurred principally for the purposes of selling or repurchasing in the short term. The Company does not classify any derivatives as hedges in a hedging relationship. All investments held by the Company have been designated by the Board of Directors as held for trading.

(ii) Recognition/derecognition

The Company recognises financial assets and financial liabilities at fair value through profit or loss on the trade date; that is the date it commits to purchase the instruments. From this date any gains and losses arising from changes in fair value of the assets or liabilities are recognised. Investments are derecognised when the rights to receive cashflows from the investments have expired or the Company has transferred substantially all risks and rewards of ownership.

(iii) Valuation of investments

Investments in securities, comprising of investments in investment funds, for which market quotations are not readily available are valued at their fair value using methods which are in accordance with recognised accounting and financial principles and which have been approved by the Directors. In this context, other funds which are not publicly traded are fair valued at unaudited valuations provided by the administrators or managers of the other funds unless the Directors are aware of good reasons why such a valuation would not be the most appropriate indicator of fair value. Such valuations may differ significantly from the values that would have been used had ready markets existed, and the difference could be material.

Interest income and expense are recorded in the income statement using the effective yield method.

(d) Cash and cash equivalents

For the purpose of the cash flow statement, cash and cash equivalents include cash in hand, deposits held at call with banks, other short term highly liquid investments with original maturities of three months or less, and bank overdrafts.

(e) Functional and presentation currency

The Financial Statements are prepared in US Dollars (US$) this being the Company's functional currency. Management has chosen US$ as the functional and presentation currency for the Company unless otherwise stated.

(f) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Income Statement.

(g) Statement of cash flows

The cash amount shown on the Statement of Cash Flows is the net amount reported in the Balance Sheet as cash and cash equivalents. The indirect method has been applied in the preparation of the Statement of Cash Flows.

NOTES TO THE AUDITED FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 MARCH 2007 (DATE OF INCORPORATION) TO 30 JUNE 2008 (continued)

3. FEES AND EXPENSES

3.1 Management Fee

The Company pays the Manager a management fee together with reimbursement of reasonable out of pocket expenses incurred by it in the performance of its duties. The management fee in respect of the Sterling Shares is at the rate of 1% per annum of the Company's net assets attributable to the Sterling Shares (before deduction of accruals in respect of the management fee for the current month and any performance fee) as at the first Business Day of each calendar month payable monthly in arrears. The management fee for the period was US$1,779,022 and the amount outstanding at period end was US$164,008.

3.2 Performance Fee

The Company pays the Manager a performance fee if the Net Asset Value of a Share at the end of a performance period (a) exceeds its Net Asset Value at the start of the performance period by more than the performance hurdle and (b) exceeds the highest previously recorded Net Asset Value per Share as at the end of a performance period in respect of which a performance fee was last paid.

The performance hurdle applicable in respect of a performance period is one month LIBOR of the currency of the corresponding Share class compounded monthly and is pro-rated where the performance period is greater or shorter than one period. The performance period is each 12 month period ending on 30 June in each period.

If the performance hurdle and high water mark for a performance period are met then a performance fee will be calculated and payable to the Manager equal to 10% of the total increase in Net Asset Value per Share at the end of the relevant performance period over the performance hurdle multiplied by the weighted average number of Shares in issue at the end of the relevant performance period. The Company's performance fees for the period were US$1,838,234 and the whole amount remained outstanding at period end.

3.3 Administration and Custodian Fee

The Administrator and Custodian are entitled to receive from the Company an aggregate annual fee equivalent to 0.07% of the Company's Net Asset Value, such fee to be payable generally pro-rata monthly in arrears, plus other transaction costs and out of pocket expenses. The Company's administration fee for the period was US$125,252 and US$11,570 remained outstanding at period end. The Company's custodian fee for the period was US$18,280 and US$17,675 remained outstanding at period end.

3.4 Directors' fees

Each Director (other than the Chairman) is entitled to receive a fee from the Company at such rate as may be determined in accordance with the Articles of Association. The current fees are GBP20,000 per annum for each Director and GBP25,000 for the Chairman. All of the Directors are entitled to be paid all reasonable expenses properly incurred by them in attending general meetings, board or committee meetings or otherwise in connection with the performance of their duties. Directors earned US$207,242 during the period and the amount outstanding at the period end was US$42,510.

4. BORROWING

As and when required for operational reasons, including, without limitation, for managing cash flow, settling foreign exchange transactions, funding conversions and taking advantage of short-term investment opportunities, the Company may borrow money, provide leverage and give guarantees, and mortgage, pledge or charge all or part of its property or assets as security for any liability or obligation. Any leverage which arises in the Company is not intended to be permanent and will be repaid over a short time frame. Such borrowing is subject always to the availability of a credit line facility on such terms as the Directors deem acceptable in their sole and absolute discretion.

In aggregate, therefore, the total borrowings of the Company will not exceed 35% of the Net Asset Value at the point of drawdown.

NOTES TO THE AUDITED FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 MARCH 2007 (DATE OF INCORPORATION) TO 30 JUNE 2008 (continued)

5. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS

The Company's investment activities expose it to various types of risk taken by the Company and the managers of the underlying funds, which are associated with the financial instruments and markets in which they invest. The following summary is not intended to be a comprehensive list of all risks and investors should refer to the Prospectus for a more detailed discussion of the risks inherent to investing in the Company. These risks apply to each class of Shares in varying degrees.

Interest rate risk

The Company by virtue of its borrowing facility can be directly exposed to interest rate risks when this facility is in use. In practice, whilst borrowing is constrained by the Offering Memorandum to be less than 35% of the Net Asset Value of the Company, it is unlikely that borrowing levels of more than 10% of Net Asset Value will occur for any sustained period.

The borrowing facility for the Company is a floating rate facility referenced to US Dollar Dollar LIBOR and as such a 1% increase in the LIBOR rate could potentially detract up to 0.35% per annum from the gross returns of the portfolio in the extreme scenario that the facility was fully utilised throughout the financial period.

In practice the returns of the Company's underlying investments are, for the most part likely to be positively correlated with LIBOR and as such it is likely that the increase in the returns of the investments will more than offset their increased borrowing costs over the long term, thereby neutralising any long term interest rate risk.

It is, however, possible that underlying investments within the portfolio will incur interest rate risk as an intentional or unintentional part of their investment strategies.

Market risk

The Company is not directly exposed to any market risk. However, the underlying managers that the Company invests in may take exposure to a wide range of market factors including equity, credit, FX, interest rate, emerging and commodity markets. Additionally they may make use of complex derivative instruments to take and manage these exposures. FRM analysts monitor the underlying managers on a continuing basis on behalf of the Company to ensure that managers have the correct operational controls, systems and skills to manage these risks. Additionally, FRM has an automated fund performance exception reporting process to identify funds that are performing out of line with expectations (which will include relative analysis to their historic track record and their peer group). Exceptions are discussed at a monthly meeting with the Chief Investment Officer and recorded by the risk team.

Market risks at the funds of funds portfolio level are controlled via the use of diversification across a wide range of Hedge Fund styles and holdings. This diversification is monitored and controlled via the use of a Value at Risk (VAR) system. This system uses a proprietary methodology to estimate the monthly loss that will happen one month in twenty using the current portfolio holdings. The methodology takes into account underlying funds with short track records and places greater weight on more recent information to ensure that the estimates are representative of current conditions. The VAR system is also used to identify concentrations of risk within the portfolio.

These estimates are produced on a monthly basis by FRM's risk management team and compared against a set of limits. If the actual values exceed these limits then deviation is discussed with the relevant portfolio manager to agree a relevant course of action. Courses of action may include reducing certain positions, hedging certain factor exposures or changing the limit. Limits are reviewed and signed off by the Chief Investment Officer and Head of Portfolio Management on a quarterly basis. Currently these expected maximums are set at a value of -2%. Since inception, the actual values for the portfolio have ranged from -1.99% to -0.96%.

As at 30 June 2008 the VAR estimate for the Company was -1.81%. The assumptions for this calculation are as follows:

NOTES TO THE AUDITED FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 MARCH 2007 (DATE OF INCORPORATION) TO 30 JUNE 2008 (continued)

5. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS (continued)

Market risk (continued)

The VAR at risk is calculated using a proprietary methodology, the broad characteristics are as follows:

Using return data for the funds in each portfolio, estimates for the covariance matrix and means of returns of each fund are calculated. A maximum of five years data is used in this calculation. For the covariance calculation, in the event of less than 24 months data being available for a fund, the covariance is estimated using strategy performance data from the FRM's Hedge Fund database. An estimate of the mean return of each fund is also calculated, with a requirement for at least twelve months data to be available. Again for funds with short histories the data is replaced with strategy estimates. Both statistics are calculated using an exponentially smoothing methodology with a decay factor of 0.97.

To take into account effects such as fat tailed distributions, the VAR estimate does not use a normal distribution. Instead a proprietary distribution, the 'theta' distribution is used. This models the fat tailed distribution of hedge funds, whilst still accurately representing the body of the return distribution.

Limitations of the VAR methodology include the following:

The measure is a point-in-time calculation, reflecting positions as recorded at that date, which do not necessarily reflect the risk positions held at any other time;
That VAR is a statistical estimation and therefore it is possible that there could be, in any period, a greater number of days in which losses could exceed the calculated VAR than implied by the confidence level; and
That although losses are not expected to exceed the calculated VAR on, say 95% of occasions, on the other 5% of occasions, losses will be greater and might be substantially greater than the calculated VAR.

Counterparty risk

Counterparty risk represents the potential loss that the Company would incur if the counterparties failed to perform pursuant to the terms of their obligations to the Company. The Company has all of its cash and cash equivalents held with its Custodian.

Currency Risk

The Company can be directly exposed to foreign exchange risks by virtue of investments in share classes of funds that are not denominated in its base currency. When such investments are made, the Investment Manager has a policy of hedging the capital value of such exposure using a rolling program of currency swaps initiated on a monthly basis. In addition there is a secondary policy to adjust the hedge, where possible, for material movements in the intra-month profit and loss of the underlying investment. Where intra-month performance data is available for a non-base currency denominated investment, and the estimated Net Asset Value movement of the investment exceeds 0.9% of the total net asset value of the fund, additional non-deliverable forwards that mature at the expiry of the relevant swap are executed to hedge these movements. In view of this policy, it is unlikely that the Company will be intentionally, directly exposed to any material FX risk. It is however possible that the underlying investments within the portfolio will incur FX risk as an intentional or unintentional part of their investment strategies.

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

Liquidity risk

The Company invests in alternative investment products, which can be highly illiquid. With some hedge funds, the Company can only sell their units at certain dates, which may occur monthly, quarterly, annually or worse. A lack of liquidity may also result from limited trading opportunities in alternative investment products.

NOTES TO THE AUDITED FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 MARCH 2007 (DATE OF INCORPORATION) TO 30 JUNE 2008 (continued)

5. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS (continued)

Liquidity risk(continued)

At June 30 2008, 37% of the net assets of the Company were held in investment funds allowing monthly withdrawals, 22% were held in investment funds allowing quarterly withdrawals, 3% were held in investment funds allowing semi-annual withdrawals, 21% were held in investment funds allowing annual withdrawals and 17% were held in investment funds allowing withdrawals in periods greater than two years or on liquidation.

The Company may, from time to time, invest in derivative contracts traded over the counter, which are not traded in an organised market and may be illiquid. As a result, the Company may not be able to liquidate quickly its investments in these instruments at an amount close to their fair value to meet its liquidity requirements or to respond to specific events.

In accordance with the Company's policy, the Investment Manager monitors the Company's liquidity position on a regular basis with regard to maintaining a reasonable level of liquidity. Significant variation from reasonable levels will result in notification to the Board of Directors.

The table below analyses the Company's financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances, as the impact of discounting is not significant.

There follows a table to split the liabilities into periods of up to 1 Month, 1-3 months, 3-7 months and 'no stated maturity'.

	Up to 1 Month	1 to 3 Months	3 to 7 Months	Total
Interest Payable	216,581	-	-	216,581
Accrued Expenses and other liabilities payable	10,000,000	2,327,356	42,510	12,369,866
Total Liabilities	10,216,581	2,327,356	42,510	12,586,447

Credit risk

Credit Risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Fund. Assets held by the Fund which potentially expose the Fund to credit risk, comprise cash balances and receivables in respect of redeemed investments in underlying hedge funds. The Fund's cash balances are held by its custodian. From time to time the fund may additionally place cash deposits with banks, limited to those rated AA or higher.

The Fund will not have direct exposure to credit instruments or derivatives, other than to foreign currency hedging transactions. As a consequence of such hedging the Fund is exposed to the daylight exposure on settlement of such transactions, which is however mitigated under a netting agreement, and to unrealised profits on foreign exchange hedges. Foreign exchange transactions are executed solely with Citibank N.A., with whom the Fund has borrowing and foreign exchange trading lines under a committed credit facility. The facility inclusively provides for margin on forward foreign exchange contracts which, rather than being paid as cash is treated as a notional drawing.

Receivables for redeemed investments in underlying hedge funds are typically received within one month of the redemption date. Before initial investments are made in hedge funds they are subject to due diligence review by the Fund Manager which includes an assessment of the principal service providers to the hedge fund including administrator, auditors and prime brokers. These service providers are then reviewed annually to eighteen months.

NOTES TO THE AUDITED FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 MARCH 2007 (DATE OF INCORPORATION) TO 30 JUNE 2008 (continued)

6. TAXATION

The Company has applied for and has been granted exempt status for Guernsey tax purposes. A company that has exempt status for Guernsey tax purposes is exempt from Guernsey income tax under the provisions of the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 and is charged an annual exemption fee of £600.

From January 1, 2008, the Income Tax Authority in Guernsey abolished the exempt regime for some entities. At the same time the standard rate of income tax was reduced from 20% to 0%. Therefore some entities previously exempt from tax under the Income Tax (Exempt Bodies) (Guernsey) ordinance 1989 are now taxed at 0%, however the Income Tax Authority has confirmed that collective investment schemes such as FRM Credit Alpha Limited can continue to apply for exempt status.

7. SHARE CAPITAL

The Company has an authorised share capital of a minimum of two shares and up to an unlimited number of shares of no par value. The Company has three share classes that are authorised for issue: Euro Shares, Sterling Shares and US Dollar Shares. At 30 June 2008 only Sterling Shares were in issue.

30 June 2008

		Sterling Shares

Subscriptions		82,790,071
Number of shares as at 30 June 2008		82,790,071

All Shares have the right to receive, in proportion to their holdings, all the revenue profits of the Company (including accumulated net income plus the net of accumulated realised and unrealised capital gains and accumulated realised and unrealised capital losses).

Shareholders have the right to receive notice of and to attend and vote at annual and extraordinary general meetings of the Company and each holder of Shares being present in person or represented by a duly authorised representative (if a corporation) at a meeting shall upon a show of hands have one vote.

8. RESERVES

				Total
				US$
Opening balance				-
Net realised gain on investments at fair value through profit or loss				13,135,884
Unrealised gain on investments at fair value through profit or loss				14,540,527
Realised loss on foreign currency transactions				(3,681,291)
Unrealised gain on foreign currency transactions				2,117,096
Net expenses for the period				(4,728,496)
Balance at 30 June 2008				21,383,720

9. EXCHANGE RATES

The following exchange rates were used as at 30 June 2008 versus US Dollar:

British Pound 0.5022

NOTES TO THE AUDITED FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 MARCH 2007 (DATE OF INCORPORATION) TO 30 JUNE 2008 (continued)

10. RELATED PARTY TRANSACTIONS

The Fund Manager and the Investment Adviser are regarded as related parties. The amount charged by the Fund Manager during the period was US$1,779,022 in relation to Management fees and US$1,838,234 in relation to Performance fees. Fees payable to the Fund Manager are US$164,008 in relation to Management fees and US$1,838,234 in relation to Performance fees at the period end.

Damian Johnson, a Director of the Company, is also a director of FRM Investment Management Limited (the 'Manager'), see note 3.4 for details of amounts earned by the Directors during the period.

As at 30 June 2008: Employees of Financial Risk Management Limited (the 'Investment Adviser') held 1,203,384 shares in the Company;

As at 30 June 2008, Richard Hotchkis, a Director of the Company, held 30,000 shares in the Company.

FRM Credit Alpha held 609,451.66 shares in FRM Conduit Fund SPC, a fund with the same Investment Manager as FRM Credit Alpha (FRM Investment Management Limited (the 'Manager')) at 30 June 2008.

11. NET REALISED AND UNREALISED GAIN ON FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS AND FOREIGN CURRENCY TRANSACTIONS

		US$
Realised gain on investments at fair value through profit or loss		13,135,884
, Unrealised gain on investments at fair value through profit or loss		14,540,527
Net realised and unrealised gain on investments at fair value through profit or loss		27,676,411

Realised loss on foreign currency transactions		(3,681,291)
Unrealised gain on foreign currency transactions		2,117,096
Net realised and unrealised gain on foreign currency transactions		(1,564,195)

Total		26,112,216

The total gains recognised in relation to other FRM investment companies are in total: unrealised US$12,754,447.

12. DISTRIBUTIONS

NOTES TO THE AUDITED FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 MARCH 2007 (DATE OF INCORPORATION) TO 30 JUNE 2008 (continued)

13. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

As at the 30 June 2008 the portfolio of financial assets at fair value through profit or loss comprised long positions in other investment companies as follows:

Investments by Strategy	Fair Value	% of
	30/06/08	Total Net Assets
	US$
Strategy - US Dollar
Relative Value Strategy Funds	38,522,825	19.62%
, Specialist Credit Strategy Funds	123,573,349	62.94%
Hedge Strategy Funds	33,778,138	17.20%
Total US Dollar investments	195,874,312	99.76%

The following forward currency contracts were unsettled at the period end:
Maturity Date	Counterparty	Amount Bought	Amount Sold	Unrealised Gain
				US$
31/07/2008	Citibank	GBP98,636,900	US$194,600,000	1,292,014	0.66%

Total unrealised gain on forward currency contracts	1,292,014	0.66%

Other liabilities	(829,893)	(0.42%)

Total net assets	196,336,433	100.00%

Geographical Exposure	Fair Value	% of
	30/06/08 US$	Total Net Assets
Other Regions	141,025,442	71.83%
Europe	21,048,699	10.72%
North America	33,800,171	17.21%
Total US Dollar	195,874,312	99.76%

The portfolio of financial assets at fair value through profit or loss includes positions in other FRM investment funds with a total market value of US$74,168,941. The cost value amounts to US$61,414,494.

14. SIGNIFICANT EVENTS SINCE THE PERIOD END

15. APPROVAL OF AUDITED FINANCIAL STATEMENTS

The audited financial statements for the period from 1 March 2007 to 30 June 2008 were approved by the Board of Directors on 14 October 2008.