Interim Report 31.12.08

RNS Number : 7878N

FRM Credit Alpha Limited

24 February 2009

 

FRM CREDIT ALPHA LIMITED (Incorporated in Guernsey) INTERIM UNAUDITED FINANCIAL STATEMENTS  FOR THE SIX MONTHS ENDED 31 DECEMBER 2008

TABLE OF CONTENTS    PAGE

DIRECTORS AND OTHER INFORMATION    3-4

DIRECTORS' REPORT    5-7

DIRECTORS' RESPONSIBILITY STATEMENT    8

CHAIRMAN'S STATEMENT                    9-10    

INVESTMENT ADVISER'S REPORT    11-13

BALANCE SHEET    14

INCOME STATEMENT    15

STATEMENT OF CHANGES IN NET ASSETS                      16

STATEMENT OF CASH FLOWS    17

NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS    18-28

  DIRECTORS AND OTHER INFORMATION

DIRECTORS    Peter Atkinson (Chairman)*    

    Richard Hotchkis*

    Damian Johnson**

    Andrew Duquemin*

    * independent non-executive

    ** non-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

SOLICITORS     Herbert Smith LLP

as to English Law    Exchange House

    Primrose Street

    London EC2A 2HS

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

RECEIVING AGENT AND UK TRANSFER AGENT    Capita Registrars Limited

    Corporate Actions

    The Registry

    34 Beckenham Road

    Kent BR3 4TU

DIRECTORS AND OTHER INFORMATION (continued)

INDEPENDENT AUDITORS    PricewaterhouseCoopers CI LLP

    PO Box 321

    National Westminster House

    Le Truchot

    St. Peter Port

    Guernsey GY1 4ND

ADMINISTRATOR    JPMorgan Hedge Fund Services (Ireland) Limited

    Newenham House

    Northern Cross

    Malahide Road

    Dublin 17 

    Ireland

CUSTODIAN    JPMorgan Chase Bank, National Association 

    (London Branch)

    125 London Wall

    London EC2Y 5AJ

    United Kingdom

FINANCIAL ADVISER    Winterflood Securities Limited

AND CORPORATE BROKER    Cannon Bridge House

    25 Dowgate Hill

    London EC4R 2GA

    United Kingdom

LENDER                            Citibank, N.A.

                            390 Greenwich Street

                            4th Floor

                            New York

                            NY 10013

  DIRECTORS' REPORT FOR THE SIX MONTHS ENDED 31 DECEMBER 2008

The Directors present their report together with the audited financial statements of FRM Credit Alpha Limited (the 'Company') for the six months ended 31 December 2008.

Company Background

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

Principal Activities

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

Results 

The results for the period are shown in the Income Statement on page 15. 

Directors

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

Directors' Interests

As at 31 December 2008, Richard Hotchkis held 30,000 shares in the Company. For details of directors' fees paid during the period, see note 3.4.

Corporate Governance

Introduction

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

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

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

  DIRECTORS' REPORT FOR THE SIX MONTHS ENDED 31 DECEMBER 2008 (continued)

The Board

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

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

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

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

Audit Committee

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

Internal Controls

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

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

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

  DIRECTORS' REPORT FOR THE PERIOD ENDED 31 DECEMBER 2008 (continued)

Going Concern 

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

Distribution Facility

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

  DIRECTORS' RESPONSIBILITY STATEMENT

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

• select suitable accounting policies and then apply them consistently;

• make judgements and estimates that are reasonable and prudent;

• state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.  

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

The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with The Companies (Guernsey) Law, 2008. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are also responsible for the maintenance and integrity of the website on which these financial statements can be published.  

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

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

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

• The Investment Adviser's Report which follows includes:

    a fair view of the development, performance and position of the Company during the period; and

    a statement of the principal risks and uncertainties the Company faces.

Review of performance, development and position

The Company has operated during the period in accordance with the objectives outlined in the Prospectus. A review of the Company's performance during the period is included in the Investment Adviser's Report on pages 11 to 13. 

Principal risks and uncertainties

The principal risks and uncertainties are outlined in the Company's Prospectus and in Note 5 in the Notes to the Financial Statements on pages 21 to 24. 

On Behalf of the Board of Directors:

___________________________    ____________________________

Date: 23 February 2009

CHAIRMAN'S STATEMENT

The period has proved extremely challenging for FRM Credit Alpha Limited including, as it did, the near collapse of the financial system and the worst ever performance for hedge fund strategies. The Company's net asset value fell by 23.7%. Over the same period the Merrill Lynch High Yield Master II Index (GBP hedged) returned -26.7%, JP Morgan Global Government Bonds (GBP Hedged) returned +7.79% and 1 month Sterling Libor returned +2.64%.

The listed fund of hedge fund universe generally suffered a very poor second half in 2008. Not only did the underlying assets lose money but many funds have seen their share prices fall well below their net asset values regardless of sector focus or specialisation. Your Company was no exception with the share price falling by 42.7% compared to the fall in net asset value of 23.7%.  There are identifiable reasons for these discounts:

• The fourth quarter of 2008 saw a huge drain on liquidity from capital markets, often with the most liquid products being sold indiscriminately as investors sought to reduce risk and raise cash.

• The marginal buyer of hedge fund products disappeared - waiting on the sidelines until the turmoil had subsided - leaving the market price unsupported on the bid.

• Some investors were discounting expectations of potential future losses, which may have been caused by redemption pressures around the year-end. 

• Market sentiment reflected the 'Madoff scandal' which may have accelerated losses and increased selling pressure.

Each of these factors has fluctuated in intensity during the recent difficulties. The Board anticipates these factors are likely to subside to some degree during 2009 as confidence in the hedge fund industry returns and investors become less likely to demand liquidity at the expense of long term returns.  

Additional challenges came from our foreign exchange hedging policy. High levels of volatility in the currency markets increased pressure on short term cash flow, however we have been able to maintain a fully hedged portfolio throughout the entire period and we expect to continue to fully hedge our US Dollar exposure throughout 2009.

The liquidity of the portfolio has also been affected by the market turmoil as demand for risk assets fell dramatically and previously deep pools of tradeable assets dried up leaving managers few exit opportunities from positions despite their requirements for cash. In order to prevent fire sales at unacceptably low levels many funds have deviated from their standard redemption terms; suspending, applying gates or issuing side pockets. Analysing and maintaining a suitable liquidity profile for the portfolio as a whole has required a more complex, fluid analysis and the investment manager has expended considerable effort in redesigning their suite of analytical tools.

In a direct reflection of the deteriorating environment for credit the Company suffered from a worsening of terms offered by its credit provider. In the Board's opinion the deterioration was sufficient to merit a full review and we are currently considering alternative providers.

Having regard to the continuing discount in the share price, and having considered a range of proposals with its advisers and taken account of the Company's current level of cash and the liquidity of its underlying holdings it was announced by the Board on 18 February 2009 that it has resolved to take the following actions:

• To propose a tender offer of up to 20 per cent. of the Company's shares based on the 30 June 2009 NAV, with payment expected by 30 September 2009.

• Following the completion of the tender offer, to propose to replace the existing tender offer provisions with an annual redemption facility, to be offered at the absolute discretion of the Directors.

CHAIRMAN'S STATEMENT (continued)

• To provide shareholders with an opportunity to vote on the Company's continuation at the Company's annual general meeting to be held in November 2011.

The Board believes the proposals will bring the Company onto a more flexible capital basis, are a positive step to address some of the structural issues facing certain closed-ended funds, particularly funds of hedge funds, and should narrow the discount at which the Company's shares presently trade. 

Peter Atkinson 

Chairman

23 February 2009

INVESTMENT ADVISER'S REPORT FOR THE SIX MONTHS ENDED 31 DECEMBER 2008

This period brought the worst ever performances for hedge funds when the effective collapse of the investment banking industry and stress in the retail banking industry impacted all corners of the financial landscape, including hedge funds. We have always understood that the integrity of the financial system was vital for the smooth operation of the hedge fund industry. So when this was called into question it was not surprising to see that hedge fund returns were driven less by strategy differences than by a common risk factor. To make matters worse for the Credit Alpha portfolio the primary cause and epicentre of the collapse was imbalances within the credit markets.

The scale of current events goes beyond anything experienced by the vast majority of people currently active in finance and while we feel it is too soon to draw firm conclusions about the implications for the future of asset management, we do think a few clearly positive facts are apparent.

The most important is that despite widespread significant losses, the hedge fund business model looks remarkably robust. Many of the banks are suffering from size, complexity and the difficulty of drawing in to a common goal the different objectives of traders, management and shareholders. The effective disappearance of the US investment banking industry is the most obvious demonstration of this. By contrast, hedge funds benefit from simplicity. Typically one, or perhaps a few, key people run the investments and the business and there is a clear alignment of interests among all stakeholders. 

Investment banks have to-date provided the main competition to hedge funds in the search for attractive absolute return trades. Their effective disappearance (Morgan Stanley and Goldman Sachs are now banks that must dramatically de-lever and de-risk) leaves hedge funds with a greatly increased set of opportunities and the expected return on unlevered capital should increase significantly in their absence. For all that we read about the range of problems afflicting hedge funds, it is notable that in contrast to the serial failure of regulated, listed, audited financial services companies around the world, the largest hedge funds remain going concerns.

Market Environment

In July the credit market indices celebrated the anniversary of the credit crunch with a mixed performance. In high yield, there was a marked deterioration in spreads as the widening trend that started in mid-May continued to drag the market down but Treasuries ended the month stronger. An intra-month rally failed to stop high yield indices ending near their monthly lows, with a loss for the month of -1.6% (ML US HY Master II Index).  New issuance was relatively quiet in July with only 7 new issues worth $3bn pricing during the month, compared to 25 deals worth $9.2bn in June. Meanwhile, defaults continued to increase with seven defaults in July, including four loan only issuers. Bank loan activity hit a record high for the number of defaults and dollars affected and rather unusually given their place in the capital structure market participants expected default rates to continue rising due to the proportion of the loan market that was issued in the relatively lax times of 2006 and 2007. 

August was a relatively quiet month for the credit markets. High yield credit spreads barely moved with low volumes traded and lower than average market liquidity. The ML High Yield Master II Index returned 0.3% with spreads widening from 800bps to 836bps at month end. Cash loans were marginally down on the month and government bonds rose 1.2% (JP Morgan Global Government Bond Index LC). Spreads in cash and synthetic bonds remain below their March highs. Defaults continue to increase, with seven companies defaulting during the month, affecting $1.1bn of high yield bonds and $644m of loans. The largest defaulting company was homebuilder WCI Communities which had $525m of bonds outstanding and $225m of loans, therefore representing around half of the months defaulted assets total. Given that value stories tend to develop over longer time periods, Credit Value managers reduced risk in order to mitigate persistent monthly drawdowns while the market appeared to be in risk aversion mode. On the short side of the portfolio, managers were faced with short-covering rallies that resulted in painful squeezes.  

INVESTMENT ADVISER'S REPORT FOR THE SIX MONTHS ENDED 31 DECEMBER 2008 (continued)

Market Environment (continued)

September's environment was characterised by an ever-changing regulatory and market framework. The failure of Lehman Bros may have been the pinnacle event that eroded all confidence in market order, but the 'saving' of Fannie Mae, Freddie Mac, AIG, Washington Mutual and Wachovia sent equally confusing signals. In spite of having correctly identified the problems at these institutions, and warned of them for some time, managers were unable to realise gains because central authority intervention ensured that both short positions and capital structure arbitrage trades moved irrationally. Risk asset returns collapsed as hedge fund managers scrambled to set up positions that suited the new world order, and liquidity evaporated. Instruments traded with liquidity the sole consideration, resulting in massive dispersion between (amongst other things): cash bonds and synthetic CDS, bank debt and high yield, and equity and credit. The ML US HY Master II fell -8.3% while derivatives referencing the same instruments declined only 2.5%. The S&P LCD Leveraged Loan index was down -6.2%. High yield bond spreads widened 260 bps; leveraged loan spreads widened 350 bps. Value opportunities abounded, but managers were unable to take full advantage: redemption pressure resulting from poor performance across hedge fund strategies weighed over the market, with even the healthiest funds impacted. As asset prices spiralled lower, managers were faced with an increasingly difficult task estimating actual redemptions versus precautionary while balancing the demands of redeeming investors with those of ongoing investors. 

October proved to be the worst month on record in credit markets on all fronts. The S&P LCD Leveraged Loan Index fell -13.2% while the ML US HY Master II Index was down -16.3%. Dispersion between asset classes continued to increase: the differential between cash bonds and CDS (the 'basis') for investment grade and high yield names widened significantly. Market participants, already reeling from September's events, were hit by substantial increases in margin requirements as prime brokers reacted to the increased price volatility. This triggered a massive wave of forced deleveraging and liquidations across credit markets, in particular in bank debt, which itself fed a vicious circle of further price declines. The average leveraged loan priced at 70.9% of par, implying a 15% annual default rate on conservative assumptions of 50% recovery (versus 70% historically). Although managers found extreme value in credits they know well, the technical picture remained poor, with a preponderance of sellers and very few remaining buyers.

November saw continued investor deleveraging, gloomy economic data and falling corporate earnings. Whilst managers are intrigued by today's historically wide spreads (especially on leveraged loans), they are currently unwilling to stand against the crowd and buy for fear of being trampled like all those that bought in the aftermath of the July 2007, January 2008, and September 2008 sell-offs. While it is clear that the price declines of the past three months in particular have set credit markets up for a period of outsized returns, the timing of these returns remains uncertain. everaged loans delivered the worst performance (S&P LCD Leveraged Loan Index -8.5%), underperforming High Yield bonds (ML US HY Master II Index -8.4%), equities (S&P 500 Index -7.5%), investment grade bonds (ML US Corporate Index +3.9%) and the 10-year Treasury (+9.1%).

Going into year end markets were impacted strongly by technical and flow driven factors, with indices behaving inconsistently. The ML US HY Master II Index rose 7.5% while the on the run 5-year synthetic investment grade index returned 2.1%. Leveraged loans fell -3%, while lower quality equities, as measured by the Credit Suisse Leveraged Equity Index, rose 2.7%. The basis (which could be thought of as the difference between bond yields and yields implied by bond derivatives) continues to remain at record levels. For comparison, from January 2005 to August 2008 the basis averaged at -4bps while in Q4 2008 it averaged at -600bps. These moves can be directly linked to the unwind of leveraged positions within banks and hedge funds. December proved to be an extraordinarily bad month in terms of fundamentals, as 45% of high yield borrowers reported EBITDA numbers below both previous year's as well as analysts' expectations. This heightened leverage ratios (debt/EBITDA), putting additional cash flow pressure on companies and increasing the risk of covenant breaches. Moody's reported the 2008 default rate for US high yield issuers as 4.4% and projected a 15% default rate by end-2009. Of the 15 defaults during the month, 3 were significant to hedge fund managers: Trump Entertainment ($1.25bn debt), media company Tribune ($11bn), and chemical company Lyondell Basell ($12bn). 

INVESTMENT ADVISER'S REPORT FOR THE SIX MONTHS ENDED 31 DECEMBER 2008 (continued)

Portfolio

As you would expect our dedicated short credit manager in the hedge section of the portfolio delivered strong performance of approximately +46% as Retail, Building and Real Estate sector shorts provided outsized returns.  

Credit Value and Long-Short managers both lost money, as key themes failed to generate returns and managers struggled to cope with the combination of portfolio redemptions and illiquid positions. The difference between price levels of cash bonds and credit default swaps (CDS) commonly referred to as the basis continued to widen during the quarter, which is inherently bad for portfolios that hold long cash bonds hedged by CDS.

The most common theme that led to losses was long bank loans versus short corporate bonds - a trade which makes sense when one considers the capital structure and the relative price of the two asset classes, but the relationship has become more stressed as liquidity in the credit market deteriorated.  

2008 has been an extraordinarily bad year for all asset classes, with credit hedge funds proving to be no exception. What began in July as a reversal of the commodity bull market and the first of a series of landmark government interventions has yielded a landscape that is today littered with battered portfolios, record levels of hedge fund redemptions and a market that for all intent and purpose has ceased to function. Sadly, our managers do not expect that the New Year will bring an immediate reprieve from volatility in the asset class. Managers continued to suffer from long bank loan exposure being hurt by continued forced selling.

Outlook

The illiquidity of credit markets has resulted in difficulty for hedge funds to sell enough assets to meet investor redemptions. Accordingly, a number of managers have implemented a gate, a suspension of redemptions or some combination thereof. This includes managers with cash on the balance sheet, as they are hit by the knock on effect of other funds withholding liquidity. Some of the portfolio's holdings have had to change their liquidity terms, whilst a few have implemented side pockets or restructurings. These different solutions reflect varying liquidity and contract terms. The key, as managers have pointed out, is surviving until the technical overhang is lifted and the market once again pays attention to fundamentals. If they can survive, as we largely expect will be the case, there will be significant opportunities for outsized returns. For now, expect managers to stay close to home until there is more evidence that a turning point is in sight. Looking forward, the opportunity to benefit from a 'bounce' in the value of bank loans should not be ignored, but it is entirely dependant on the return of risk capital to the credit space, something which may not happen for some time yet. The longer term opportunities surrounding the distressed arena are traditionally very strong for Credit Value managers, but these funds need to deal with weak investor and prime broker support first before they can properly capitalise on risk-taking opportunities.

Financial Risk Management Limited

Date: 23 February 2009

  BALANCE SHEET AS AT 31 DECEMBER 2008

			31/12/2008	30/06/2008
	Note		US$	US$
Assets
Cash and cash equivalents	2(d)		14,962,500	7,455,141
Financial assets at fair value through profit or loss	2(b),13		102,352,237	195,874,312
Interest receivable	2(c)		640	3,019
Prepaid expenses			113,344	12,791
Purchases in advance			-	4,000,000
Amounts due from lender			-	285,603
Sales awaiting settlement			5,191,408	-
Other assets			13,039	-
Total assets			122,633,168	207,630,866
Liabilities
Financial liabilities at fair value through profit or loss	2(b),13		7,007,623	1,292,014
Credit Facility	4		6,600,580	-
Performance fees payable	3.2		-	1,838,234
Management fees payable	3.1		186,267	164,008
Interest payable	2(c)		358,864	216,581
Directors fees payable	3.4		30,753	42,510
Administration & custody fees payable	3.3		13,435	29,245
Audit fees payable			17,384	21,749
Sales in advance			-	10,000,000
Commitment fees payable			120,929	100,682
Payable for investments in other funds			546,292	-
Organisational costs			-	30,870
Other liabilities			119,537	142,568
Total liabilities			15,001,664	12,586,447
Net assets			107,631,504	196,336,433
Represented by:
Shareholders' capital and reserves
Share capital			174,658,739	174,952,713
Reserves	8		(67,027,235)	21,383,720
Total shareholders' funds			107,631,504	196,336,433
Sterling Shares:
Number of Shares	7		82,666,926	82,790,071
Net Asset Value per Share			GBP0.900	GBP1.191

On Behalf of the Board of Directors:

___________________________    ____________________________

Date:  23 February 2009

The accompanying notes on pages 18 to 28 are an integral part of these interim unaudited financial statements

INCOME STATEMENT FOR THE SIX MONTHS ENDED 31 DECEMBER 2008 

		31/12/2008	31/12/2007
	Note	US$	US$
Investment income/(loss)
Interest income	2(c)	29,626	74,583
Net change in financial assets and financial liabilities at fair value through profit or loss	11	(38,496,041)	9,577,958
Net loss on foreign currency transactions	11	(48,728,746)	(4,960,739)
Other income		2,339	-
Total investment (loss)/income		(87,192,822)	4,691,802
Expenses
Administration & custodian fees	3.3	(60,509)	(58,611)
Management fees	3.1	(733,286)	(621,370)
Performance fees	3.2	-	(717,094)
Commitment fees		(24,275)	(77,426)
Legal fees		(116,390)	(19,679)
Audit fees		(28,436)	(33,657)
Directors fees	3.4	(68,108)	(90,903)
Printing and postage		(11,614)	-
Other operating expenses		(33,204)	(508,180)
Total expenses		(1,075,822)	(2,126,920)
Finance costs
Interest expense	2(c)	(142,311)	(169,142)
		(142,311)	(169,142)
(Loss)/profit for the period		(88,410,955)	2,395,740

The accompanying notes on pages 18 to 28 are an integral part of these interim unaudited financial statements

STATEMENT OF CHANGES IN NET ASSETS FOR THE SIX MONTHS ENDED 31 DECEMBER 2008

	31/12/2008	31/12/2007
	US$	US$
Net assets at the start of the period	196,336,433	94,713,332
Proceeds from issue of shares	-	68,024,058
Redemption of shares	(293,974)	-
Net (decrease)/increase from share transactions	(293,974)	68,024,058
(Loss)/profit for the period	(88,410,955)	2,395,740
Net assets at the end of the period	107,631,504	165,133,130

The accompanying notes on pages 18 to 28 are an integral part of these interim unaudited financial statements

STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED 31 DECEMBER 2008 

	31/12/2008	31/12/2007
	US$	US$
Cash flows from operating activities
(Loss)/profit for the period	(88,410,955)	2,395,740
Operating activities:
Increase in interest receivable and prepaid expenses	(111,213)	(1,739)
Sales awaiting settlement	(5,191,408)	-
Increase in payable for investments in other funds	546,292	-
Increase in receivable for financial assets sold	-	(7,651)
Increase in liabilities and accrued expenses	(1,453,675)	1,381,729
Decrease in amounts payable for investments purchased	-	(383,177)
Purchase of investments at fair value through profit or loss	(49,752,134)	(165,338,355)
Sale of investments at fair value through profit or loss	98,778,168	100,453,731
Realised gain/(loss) on investments at fair value through profit or loss	5,923,412	(11,268,443)
Unrealised gain/(loss) on investments at fair value through profit or loss	32,572,629	(1,690,485)
Unrealised gain on forwards	8,299,637	-
Net cash inflow/(outflow) from operating activities	1,200,753	(74,458,650)
Cash flows from financing activities
Loan received	6,600,580	5,600,000
Issuance of  shares	-	68,024,058
Redemption proceeds from shares	(293,974)	-
Net cash (outflow)/inflow from financing activities	6,306,606	73,624,058
Net increase in cash and cash equivalents	7,507,359	(834,592)
Cash and cash equivalents at the beginning of the period	7,455,141	1,056,449
Cash and cash equivalents at the end of the period	14,962,500	221,857

Net cash flow from operating activities and financing activities includes:
Interest received	32,005	61,518
Interest paid	(28)	(9,745)

The accompanying notes on pages 18 to 28 are an integral part of these interim unaudited financial statements

NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED TO 31 DECEMBER 2008

1.    GENERAL INFORMATION

The Company, a closed ended investment company was incorporated in Guernsey on 1 March 2007 under the laws of Guernsey, with registered number 46497. The Company has three share classes that are authorised for issue; Euro Shares, Sterling Shares and US Dollar Shares. At 31 December 2008 only Sterling Shares were in issue. 

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

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

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies applied in the preparation of financial statements are set out below. The accounting policies used in these interim unaudited financial statements are consistent with the accounting policies used in the last audited financial statements.

•     Basis of preparation

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

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

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

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

2009: 

• IFRS 8, Operating Segments  

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

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

•     Financial Instruments

(i)    Classification

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

  NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2008 (continued)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(b)    Financial instruments (continued)

(i)    Classification (continued)

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

(ii)    Recognition/derecognition

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

(iii)    Valuation of investments

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

Forward foreign exchange contracts are valued at the forward rate at the closing date through the residual period of the contracts. Realised and unrealised gains or losses resulting from forward exchange contracts are recognised in the income statement.

(c)    Interest income and expense

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

(d)    Cash and cash equivalents

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

(e)    Functional and presentation currency

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

(f)    Transactions and balances

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

(g)    Statement of cash flows

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

  NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2008 (continued)

3.    FEES AND EXPENSES

3.1      Management Fee

The Company pays the Manager a management fee together with reimbursement of reasonable out of pocket expenses incurred by it in the performance of its duties. The management fee in respect of the Sterling Shares is at the rate of 1% per annum of the Company's net assets attributable to the Sterling Shares (before deduction of accruals in respect of the management fee for the current month and any performance fee) as at the first Business Day of each calendar month payable monthly in arrears. The management fee for the period was US$733,286 (31 December 2007: US$621,370) and the amount outstanding at period end was US$186,267 (30 June 2008: US$ 164,008).

3.2    Performance Fee

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

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

If the performance hurdle and high water mark for a performance period are met then a performance fee will be calculated and payable to the Manager equal to 10% of the total increase in Net Asset Value per Share at the end of the relevant performance period over the performance hurdle multiplied by the weighted average number of Shares in issue at the end of the relevant performance period.  The Company had no performance fees for the period (31 December 2007: 717,094). (There was US$1,838,234 payable at 30 June 2008).

3.3    Administration and Custodian Fee

    The Administrator and Custodian are entitled to receive from the Company an aggregate annual fee equivalent to 0.07% of the Company's Net Asset Value, such fee to be payable generally pro-rata monthly in arrears, plus other transaction costs and out of pocket expenses. The Company's administration fee for the period was US$60,509 (31 December 2007: US$58,611) (30 June 2008: US$11,570) and US$13,435 remained outstanding at period end (30 June 2008: US$17,675). Custodian fees are included in administration fees.

3.4    Directors' fees

Each Director (other than the Chairman) is entitled to receive a fee from the Company at such rate as may be determined in accordance with the Articles of Association. The current fees are GBP20,000 per annum for each Director and GBP25,000 for the Chairman. All of the Directors are entitled to be paid all reasonable expenses properly incurred by them in attending general meetings, board or committee meetings or otherwise in connection with the performance of their duties. Directors earned US$68,108 (31 December 2007: US$90,903) during the period and the amount outstanding at the period end was US$30,753 (30 June 2008: US$42,510).

4.    BORROWING

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

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

At the balance sheet date the Company had a US$6,600,580 uncommitted credit facility from Citibank N.A. The facility is due to expire on 30 June 2009.

NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2008 (continued)

• RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS

Strategy in using financial instruments    

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

Interest rate risk

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

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

In practice the returns of the Company's underlying investments have been, for the most part, positively correlated with LIBOR and as such the increase in the returns of the investments has more than offset any increased borrowing costs over the long term, thereby neutralising any long term interest rate risk.

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

Market risk

The Company is not directly exposed to any market risk. However, the underlying managers that the Company invests in may take exposure to a wide range of market factors including equity, credit, FX, interest rate, emerging and commodity markets. Additionally they may make use of complex derivative instruments to take and manage these exposures. FRM analysts monitor the underlying managers on a continuing basis on behalf of the Company to ensure that managers have the correct operational controls, systems and skills to manage these risks. Additionally, FRM has an automated fund performance exception reporting process to identify funds that are performing out of line with expectations (which will include relative analysis to their historic track record and their peer group). Exceptions are discussed at a monthly meeting with the Chief Investment Officer and recorded by the risk team. For a more detailed analysis of concentrations of risk refer to note 13.

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

These estimates are produced on a monthly basis by FRM's risk management team and compared against a set of limits. If the actual values exceed these limits then deviation is discussed with the relevant portfolio manager to agree a relevant course of action. Courses of action may include reducing certain positions, hedging certain factor exposures or changing the limit. Limits are reviewed and signed off by the Chief Investment Officer and Head of Portfolio Management on a quarterly basis.  Currently these expected maximums are set at a value of -2%. Since inception, the actual values for the portfolio have ranged from -1.0% to -6.1%.

As at 31 December 2008 the VAR estimate for the Company was -6.1%. 

Through the year, as invested fund returns have become more volatile, the VAR of the portfolio has risen. In response to this the portfolio composition has been adjusted to lower the risk level. These actions are occurring on an ongoing basis and over a period of time we expect the VAR levels to fall towards the expected values.

NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2008 (continued)

5.    RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS (continued)

Market risk (continued) 

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

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

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

Limitations of the VAR methodology include the following:

• The measure is a point-in-time calculation, reflecting positions as recorded at that date, which do not necessarily reflect the risk positions held at any other time;

• That VAR is a statistical estimation and therefore it is possible that there could be, in any period, a greater number of days in which losses could exceed the calculated VAR than implied by the confidence level; and

• That although losses are not expected to exceed the calculated VAR on, say 95% of occasions, on the other 5% of occasions, losses will be greater and might be substantially greater than the calculated VAR.

Currency Risk

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

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

Liquidity risk

Liquidity risk is the risk that the Company is unable to meet its obligations as and when they fall due. The Company invests in alternative investment products, which can be highly illiquid. With some hedge funds, the Company can only sell their units at certain dates, which may occur monthly, quarterly, annually or worse. A lack of liquidity may also result from limited trading opportunities in alternative investment products.

  NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2008 (continued)

5.    RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS (continued)

Liquidity risk (continued)

At December 31, 2008, 0% (30 June 2008: 37%) of the net assets of the Company were held in investment funds allowing monthly withdrawals, 44% (30 June 2008: 22%) were held in investment funds allowing quarterly withdrawals, 15% (30 June 2008: 3%) were held in investment funds allowing semi-annual withdrawals, 15% were held in investment funds allowing annual withdrawals and 7% (30 June 2008: 17%) were held in investment funds allowing withdrawals in periods greater than two years or on liquidation. This liquidity profile is based upon the terms as set out in the underlying funds' offering documents.

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

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

The Portfolio Management team is responsible for constructing portfolios to achieve liquidity profiles, which may be specified directly by clients or by third party credit providers. The liquidity impact of any given trade or corporate action is considered by the portfolio managers who will seek advice from the respective sector analyst when making trading decisions. When trades are requested by the Portfolio Management team, the Investment Administration team will review the proposed to trade to ensure that it complies with any specified liquidity constraints. Trades which do not comply with portfolio liquidity constraints are not executed and referred back to the respective portfolio manager.

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

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

	Up to 1 Month	1 to 3  Months	3 to 7 Months	Total
Financial liabilities at fair value through profit and loss	7,007,623	-	-	7,007,623
Interest Payable	358,864	-	-	358,864
Management fees payable	186,267	-	-	186,267
Administration & custody  fees payable	13,435	-	-	13,435
Audit fees payable	17,384	-	-	17,384
Directors fees payable	30,753	-	-	30,753
Credit facility	-	-	6,600,580	6,600,580
Commitment fees payable	120,929	-	-	120,929
Payable for investments in other funds	546,292	-	-	546,292
Other liabilities	119,537	-	-	119,537
Total Liabilities	8,401,084	-	6,600,580	15,001,664

NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2008 (continued)

5.    RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS (continued)

Credit risk 

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

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

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

6.    TAXATION

The Company has applied for and has been granted exempt status for Guernsey tax purposes. A company that has exempt status for Guernsey tax purposes is exempt from Guernsey income tax under the provisions of the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 and is charged an annual exemption fee of £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 31 December 2008 only Sterling Shares were in issue.

		31/12/2008	30/06/2008
Number of shares as at start of the period/year		82,790,071	-
Redemptions		(123,145)	82,790,071
Number of shares as at end of the period/year		82,666,926	82,790,071

NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2008 (continued)

7.     SHARE CAPITAL (continued)

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

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

8.     RESERVES

			31/12/2008	30/06/2008
			US$	US$
Opening balance at start of the period			21,383,720	-
Net realised loss on investments at fair value through profit or loss			(5,923,412)	13,135,884
Unrealised loss on investments at fair value through  profit or loss			(32,572,629)	14,540,527
Realised loss on forwards and foreign currency transactions			(36,598,188)	(3,681,291)
Unrealised loss on forwards and foreign currency transactions			(12,130,558)	2,117,096
Net expenses for the period			(1,186,168)	(4,728,496)
Closing balance at end of the period			(67,027,235)	21,383,720

9.     EXCHANGE RATES

The following exchange rates were used as at 31 December 2008 versus US Dollar:

British Pound            0.6910

10.     RELATED PARTY TRANSACTIONS

The Fund Manager and the Investment Adviser are regarded as related parties. The amount charged by the Fund Manager during the period was US$733,286 in relation to Management fees and US$Nil in relation to Performance fees. Fees payable to the Fund Manager are US$186,267 in relation to Management fees and US$Nil in relation to Performance fees at the period end.

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

As at 31 December 2008: Employees of Financial Risk Management Limited (the 'Investment Adviser') held 1,178,384 (30 June 2008: 1,203,384) shares in the Company;

As at 31 December 2008, Richard Hotchkis, a Director of the Company, held 30,000 (30 June 2008: 30,000) shares in the Company.

NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2008 (continued)

10.     RELATED PARTY TRANSACTIONS (continued)

FRM Credit Alpha Limited invested in the following funds, which have the same Investment Manager as FRM Credit Alpha Limited (FRM Investment Management Limited (the 'Manager')) at 31 December 2008.

	Value
Fund	US$
FRM Conduit Fund SPC - Cerberus International	11,451,207
FRM Conduit Fund SPC - Plainfield Special Situations Class A	12,541,990
FRM Conduit Fund SPC - Plainfield Special Situations Class B	802,180
FRM Conduit Fund SPC - Harbinger	7,672,668
FRM Conduit Fund SPC - Harbinger Special Situations	4,565,890

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

	31/12/2008	31/12/2007
	US$	US$
Realised (loss)/gain on investments at fair value through profit or loss	(5,923,412)	11,268,443
, Unrealised loss on investments at fair value through profit or loss	(32,572,629)	(1,690,485)
Net realised and unrealised (loss)/gain on investments at fair value through profit or loss	(38,496,041)	9,577,958
Realised loss on foreign currency transactions	(36,598,188)	(7,073,286)
Unrealised (loss)/gain on forwards and foreign currency transactions	(12,130,558)	2,112,547
Net realised and unrealised loss on foreign currency transactions	(48,728,746)	(4,960,739)
Total	(87,224,787)	4,617,219

The total gains/(losses) recognised in relation to investments held via the FRM Conduit Fund SPC are in total: unrealised loss US$27,423,668 and realised gain US$3,557,821.

12.    DISTRIBUTIONS

Shareholders are entitled to elect to participate in the Distribution Facility which provides an annual distribution by way of redemption of Shares, subject to certain limitations and the Directors exercising their discretion to operate the facility on any relevant occasion. Redemption of Shares on any Distribution Date will be restricted to a specific percentage of the number of Shares held by a Shareholder. This percentage will be determined by the Directors in their discretion when they declare the annual distribution, but it is their intention to distribute up to two thirds of Total Returns (as defined in the Company's Prospectus), capped at 3.5 per cent of year-end Net Asset Value. The 2008 annual distribution by way of redemption of 123,145 Shares was made on 3 September 2008.

NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2008 (continued)

13.    FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

    As at the 31 December 2008 the portfolio of financial assets and financial liabilities at fair value through profit or loss comprised the following investments held in other investment companies:

Investments by Strategy	Fair Value		% of
	31/12/08 US$		Total Net Assets
Strategy - US Dollar
Relative Value Strategy Funds	3,268,081		3.04%
, Specialist Credit Strategy Funds	91,398,664		84.91%
Hedge Strategy Funds	7,685,492		7.14%
Total US Dollar investments	102,352,237		95.09%

The following forward currency contracts were unsettled at the period end:
Maturity Date	Counterparty	Amount Bought	Amount Sold	Unrealised Gain/(Loss) US$
30/01/2009	Citibank	GBP82,569,107	US$126,500,000	(7,111,595)		(6.61%)
30/01/2009	Citibank	US$4,893,000	GBP3,312,095	103,972		0.10%

Total unrealised loss on forward currency contracts	(7,007,623)		(6.51%)
Other assets	12,286,890		11.42%
Total net assets	107,631,504		100.00%

Geographical Exposure	Fair Value
	31/12/08 US$
Other Regions	52,015,740		48.33%
Europe	18,668,192		17.34%
North America	31,668,305		29.42%
Total US Dollar	102,352,237		95.09%

The portfolio of financial assets at fair value through profit or loss includes positions held via FRM Conduit Fund SPC with a total market value of US$37,033,935. The cost value amounts to US$51,703,157.

NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2008 (continued)

14.    SIGNIFICANT EVENTS SINCE THE PERIOD END

On 18 February 2009 it was announced by the Board that it has resolved, to take the following actions: 

• To propose a tender offer of up to 20 per cent of the Company's shares based on the 30 June 2009 NAV, with payment expected by 30 September 2009.

• Following the completion of the tender offer, to propose to replace the existing tender offer provisions with an annual redemption facility, to be offered at the absolute discretion of the Directors.

• To provide shareholders with an opportunity to vote on the Company's continuation at the Company's annual general meeting to be held in November 2011.

15.    APPROVAL OF UNAUDITED FINANCIAL STATEMENTS

The interim unaudited financial statements for the six months ended 31 December 2008 were approved by the Board of Directors on 23 February 2009.

This announcement has been issued through the Companies Announcement Service of

the Irish Stock Exchange.

 

END

 

 

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