25th Aug 2011 14:43
BlackRock Absolute Return Strategies Ltd Half Yearly Financial Report 30 June 2011 SummaryStructureBlackRock Absolute Return Strategies Ltd ("BARS", the "Company") wasincorporated in Jersey on 18 March 2008 under the Companies (Jersey) Law 1991as a limited liability registered closed-ended investment company. TheCompany's three classes of shares, US Dollar, Euro and Sterling, were listed onthe London Stock Exchange on 24 April 2008 and commenced unconditional tradingon 29 April 2008.
Investment Objective and Policy (effective from 25 August 2011)
The Company will be managed with the intention of realising all remainingassets in the Portfolio, in a manner consistent with the principles of prudentinvestment management and spread of investment risk, with a view to returninginvested capital to Shareholders in an orderly manner.
Investment Objective and Policy (prior to 25 August 2011)
The Company's investment objective was to generate absolute returns in excess ofthe yields on short-term LIBOR securities, while endeavouring to minimise thecorresponding level of volatility. The Company sought to generate these returnsirrespective of the performance of any particular sector of the global capitalmarkets.Chairman's StatementOver the six month period ended 30 June 2011, the net asset value ("NAV") ofthe Company's US Dollar Shares, Euro Shares and Sterling Shares increased by2.8%, 2.9% and 3.0% per share respectively, with the corresponding share pricesrising by 17.5%, 10.7% and 17.2%.Despite volatility in the broader capital markets, in part caused bygeopolitical turmoil, natural disasters and economic uncertainty, the Companydemonstrated positive NAV performance during the first half of 2011.Performance was driven by managers across all investment disciplines,particularly those pursuing relative value and event driven investmentstrategies. Six months to 30 June Jan Feb Mar Apr May Jun 2011 % % % % % % % BARS - GBP (net) 1.66 0.67 0.53 0.40 0.19 -0.50 2.97BARS - EUR (net) 1.44 0.69 0.52 0.42 0.25 -0.46 2.89BARS - USD (net) 1.52 0.69 0.53 0.46 0.12 -0.53 2.81S&P 500 Index (USD)* 2.37 3.43 0.04 2.96 -1.13 -1.67 0.33FTSE All-Share Index (GBP) -0.53 2.40 -0.81 3.11 -0.72 -0.45 2.96MSCI World Index (USD)* 2.26 3.50 -0.99 4.25 -2.07 -1.58 5.29
HFRI FOF Conservative Index (USD)* 0.62 0.78 0.31 0.78 -0.51 -1.01 0.33 BofAML GBP 3-Month LIBOR (GBP) 0.06 0.05 0.06 0.07 0.07 0.07 0.38
* Where performance of a USD index is shown with non-USD denominated Fund classes, a comparison of returns should include consideration of the fact that the effect of currency exchange rate fluctuations is not included in the returns for USD indices.
Managed Wind-down of the Company
On 31 May 2011, the Company announced that despite the recent strong net assetvalue ("NAV") performance, key investor concerns remained over the wide levelof the share price discount to NAV of each share class. This was due in part tothe relatively small market capitalisation of the Company and the limitedliquidity provided by each share class. For this reason the Board recommendedthat the Company should commence a managed wind-down of its portfolio. On 15July 2011, a shareholder circular was issued setting out the details and givingnotice of the Extraordinary General Meeting and three class meetings at whichapproval would be sought from Shareholders for implementation of the proposalsfor a managed wind-down of the Company, which comprised:
- amending of the Company's investment objective and policy to commence the
managed wind-down process;
- revising the Company's currency hedging programme to permit the Board to
terminate the programme at its sole discretion; and
- amending the articles of association:
- to permit the compulsory redemption of Shares at the discretion of the Board
until the Company's voluntary liquidation; and
- to permit the Board to suspend the right of conversion between Share classes
at its sole discretion at any time during the course of the managed wind-down
process.
On 25 August 2011 Shareholders approved the proposals, including the amendmentof the investment objective and policy so that the Company is now managed withthe intention of realising all remaining assets in the portfolio, in a mannerconsistent with the principles of prudent investment management and spread ofinvestment risk with a view to returning invested capital to shareholders in anorderly manner.
Further announcements regarding the progress of the realisation and the redemption of shares will be made in due course.
Colin MaltbyChairman25 August 2011
Interim Management Report and Responsibility Statement
The Chairman's Statement and the Investment Manager's Report give details of the important events which have occurred during the period to 30 June 2011 and up to the date of this report and their impact on the financial statements.
Principal risks and uncertainties
For the period under review and until 25 August 2011, the date upon which approval was given to commence a managed wind-down, the principal risks faced by the Company could be divided into various areas as follows:
- Strategy/performance;- Regulatory;- Market;- Operational;- Counterparty;- Manager; and- Financial.
A detailed explanation of the risks relating to the Company was set out in theCompany's prospectus dated 4 April 2008 and can be found on pages 4 to 30 ofthe Securities Note. The Board also reported on the principal risks anduncertainties faced by the Company on pages 16 and 17 of the annual report andfinancial statements for the year ended 31 December 2010. Both documents areavailable on the Company's website at www.blackrockinternational.com/bars/Library/Literature.In the view of the Board, during the period 1 January 2011 until 25 August 2011there have not been any changes to the fundamental nature of these risks sincethe publication of the prospectus and the latest annual report.On 15 July 2011 a circular was sent to Shareholders regarding the proposedmanaged wind-down of the Company. Set out on page 9 of the circular were therisks associated with the proposals which were subsequently approved byShareholders at the Extraordinary General Meeting and class meetings of theEuro, Sterling and Dollar shareholders held on 25 August 2011. These includedthe managed wind-down of the Company, amendment to the Company's investmentpolicy and objective, amendment to the Company's currency hedging programme andamendment to the Company's articles of association. These risks are as follows:
- The value of the Portfolio may fluctuate and Shareholders' investment in the
Company could decline substantially.
- The Company's assets may not be realised at their Net Asset Value, and it is
possible that the Company may not be able to realise some assets at any value.
- In a Managed Wind-down, the value of the Portfolio will be reduced and
concentrated in fewer holdings. In addition, as the Portfolio is concentrated
in fewer holdings, the number of underlying managers in respect of Portfolio
assets may be reduced and the Company's exposure to varying management
strategies may be limited.
- Where the Board determines that the Portfolio no longer retains sufficient
liquidity for the Manager to be able to maintain a full currency hedging programme,
it may be appropriate for the Board to decide to terminate the Company's current
currency hedging arrangements. If terminated, holders of Shares denominated in
currencies other than the US Dollar would be exposed to subsequent fluctuations
in the US Dollar/Sterling/Euro exchange rates.
- The liquidity profile of the Portfolio is such that Shareholders may have to
wait a considerable period of time before receiving all their distributions
pursuant to the Managed Wind-down. During that time the Portfolio may not be
managed in a balanced manner which may adversely affect its performance.
- The details of the Company's anticipated liquidity profile during the Managed
Wind-down as set out in this Circular are indicative only and should not under
any circumstances be considered a prediction, forecast or guarantee of the
Company's actual Portfolio liquidity profile or an indication as to the timing
of distributions to Shareholders pursuant to the proposed Managed Wind-down of
the Portfolio for which the Company is seeking Shareholder approval.
- The maintenance of the Company as an ongoing listed vehicle will entail
administrative, legal and listing costs, which will decrease the amount
ultimately distributed to Shareholders. The listing of the Shares may at some
stage during the Managed Wind-down be suspended and subsequently cancelled, at
which point such Shares will no longer be capable of being traded on the London
Stock Exchange.
- It should also be noted that there may be other matters or factors which
affect the availability, amount or timing of receipt of the proceeds of
realisation of some or all of the Company's investments. In particular, ongoing
redemptions will decrease the size of the Company's assets, thereby increasing
the impact of fixed costs incurred by the Company on the remaining assets. In
determining the size of any distributions, the Directors will take into account
the Company's ongoing running costs, however, should these costs be greater
than expected or should cash receipts for the realisations of investments be
less than expected, this will reduce the amount available for Shareholders in
future distributions.
- Redemptions of Shares will be made at the Directors' sole discretion, as and
when they deem that the Company has sufficient assets available to make a
redemption. Shareholders will therefore have little certainty as to when their
Shares will be redeemed.
Following approval of the special resolution at the Extraordinary GeneralMeeting and class meetings, the risks and uncertainties detailed above are, inaddition to those risks set out in the prospectus and the 2010 annual reportand financial statements, applicable to the Company for the remainder of thefinancial year.
Further information is given in relation to financial instruments with off-balance sheet risk in note 4 of the notes to the financial statements.
Related party transactions
The Manager and the Investment Manager are regarded as related parties and details of the investment management and performance fees payable are set out in note 7. Other related party transactions, including the related party transactions with the Directors, are set out in note 9.
Directors' responsibility statement
The Disclosure and Transparency Rules ("DTR") of the UK Listing Authority require the Directors to confirm their responsibilities in relation to the preparation and publication of the Interim Management Report and Financial Statements.
The Directors confirm to the best of their knowledge and belief that:
- the condensed set of financial statements contained within the half yearly
financial report has been prepared in accordance with accounting principles
generally accepted in the United States of America; and
- the Interim Management Report together with the Chairman's Statement and
Investment Manager's Report, include a fair review of the information required
by 4.2.7R and 4.2.8R of the FSA's Disclosure and Transparency Rules.
The half yearly financial report has not been audited or reviewed by the Company's Auditors.
The half yearly financial report was approved by the Board on 25 August 2011 and the above responsibility statement was signed on its behalf by the Chairman.
Colin MaltbyFor and on behalf of the Board25 August 2011Investment Manager's ReportInvestment ReviewThe period under review was generally positive for absolute return strategies,despite choppy markets and mixed macroeconomic signals. Global marketsgenerally benefited from a slow but steady improvement in economic data duringthe first quarter, but re-emerging concerns over peripheral Europe and weakerthan expected US economic growth contributed to a sharp downturn in risk assetsas mid-year approached.The first half of the year contained a menagerie of threatening risks that heldinvestor confidence largely in check. Early in the year, geopolitical turmoilerupted throughout the Middle East as popular uprisings upended (or posedthreats to) governments throughout the region, including Tunisia, Egypt, Libya,and Bahrain, with fears of unknown consequences should disquiet spreadelsewhere in the region. Commodity and energy prices jumped in response,threatening consumer strength and boosting the cost of producing and shippinggoods. The March earthquake in Japan wrought damage on a massive human andeconomic scale, spurring an unprecedented rebuilding effort. In the US, amidststubbornly weak housing markets and elevated unemployment, an emphasis ongovernment budget cuts has emerged with force. In May and June, the market onceagain focused its attention on the fiscal problems in Greece, as the EuropeanCentral Bank stepped up financial and political efforts to preserve investorconfidence in Greek sovereign debt, and by extension hold back financialpressures from other heavily indebted countries, such as Portugal, Spain andItaly, that would be more costly to bail out. While it seems increasinglylikely that some form of debt restructuring is expected for Greece, investorsappear to maintain a gloomy perspective that the turmoil in Greece may only bea test case for other regions in time. China continues to give mixed signals.Economic growth continues to be impressive relative to other regions, butinflationary pressures continue to drive monetary tightening during the quarterand a deceleration in GDP growth rates seems inevitable at some point, butthere appears to be little agreement as to when and how sharply this willoccur.
Relative Value Review
Convergence strategies offered mixed performance during the period, with earlyprofits limited by modest losses during the second quarter. Global convertiblebond supply continued its steady decline, with net issuance registering a US$23.4 billion decline, adding to US$88 billion of accumulated negative net issuance since 2008, according to Bank of America/Merrill Lynch. Despite intermittent spikes, the overall level of equity market volatility, as measured by the VIX index, declined from 17.75 at the beginning of the year to 16.52 as at 30 June. The environment for arbitrage trading in convertibles was further impacted by hedged convertible bonds richening versus theoretical value during the quarter. In the US, bonds were trading 0.27% cheap to theoretical value at the start of the year and richened to end the quarter at 0.42% rich to theoretical value. Global convertibles, which were trading 0.06% rich at the start of the quarter,traded 0.52% rich as of quarter-end. While beneficial for long positions, thesefactors also contributed to difficulties on the short side, as certain managersbuilt short positions in hedged convertibles trading rich relative totheoretical value, or where events such as acquisitions are anticipated topotentially weaken in credit quality.Early on, special situations investments were a notable source of gains forunderlying managers. For example, select German banks tendered for hybridsecurities in January, an undertaking that had previously been prohibited byregulators due to capital strength considerations. Related securities tradedhigher in response. In addition, a new issue from a Swiss bank exhibited robustperformance in secondary market trading, benefiting managers who receivedallocations to the strongly subscribed deal. However, late in the period, longpositions came under pressure, with outright (long-only) buyers of convertiblebonds under pressure from widening credit spreads and falling underlying equityvalues in some cases. Of note, given strong equity market appreciation inrecent quarters, the delta sensitivity of many convertibles has increasedmarkedly. Some outright buyers, particularly coming from the fixed incomecommunity, are hesitant to hold names with increasing equity beta, presenting asource of selling pressure. While this is less of an issue with hedgedconvertible positions, it can be more impactful on select special situationsand catalyst driven trades that may exhibit greater net exposures.Rates based strategies generated relatively steady gains through the period,benefiting from a number of trading opportunities as yield curves and spreadsoscillated amidst headline driven "risk-on/risk-off" market behaviour. The USFederal Reserve's purchases of Treasury securities continued to be a source ofopportunity as it contributed to disparities between on-the-run and off-the-runissues. Managers focused much of their attention on the potential impact ofevents such as the end of the current round of quantitative easing in the USand the events in Japan, which created both opportunities and challenges in thefixed income space. More recently, US federal budget concerns, weak US jobgrowth, a negative S&P outlook on US long term debt, growing potential of aGreek default and the passage of austerity plans, and uncertainty over China'seconomic growth, among other factors, were among the issues being weighed byinvestors. Resultant investor skittishness, between flights-to-safety orchasing yield in riskier assets, can lead to opportunities based on shorterterm price aberrations, while these events can also influence longer termfundamental theses. For example, markets were previously forecasting monetarytightening (ie, rate increases) in Europe as the European Central Bank pursuedits objective of managing inflation. However, expectations shifted with creditrisks arising across multiple sovereignties, as illustrated by German 5-yearrates declining from 2.67% to 2.28% over the course of the quarter.While managers have tended to approach these "headline risk" scenarioscautiously, some have structured trades that may profit under multiplescenarios, or that may benefit from potential negative developments. Forexample, one manager structured basis trades on sovereign bonds in peripheralEurope, taking advantage of differences in prices between cash bonds andcorresponding credit default swaps. Another manager is balancing a longposition in a long term cash bond against a shorter duration credit protection(via CDS) on one particularly risky sovereign credit. The cash bonds trade at asubstantial discount to par due to the extreme market pessimism surrounding thecountry's economic viability. In the event of a default or restructuring, themanager believes the current market value is potentially attractive relative tolonger term recovery value. Meanwhile, restructuring could trigger a payout onthe CDS position, resulting in potential gains from both sides of the tradeover time. In the meantime, the cash yield from the bonds helps to mitigate thecarry cost of the CDS protection.Volatility related strategies generated positive performance for the periodoverall, with gains driven largely by early volatility arbitrage trades whiledirectionally oriented and event driven strategies posted mixed returns.Implied equity volatility levels, as measured by the VIX Index, began the yearat 17.75% and spiked briefly in late January and late February around turmoilin the Middle East, before hitting an intra-quarter higher of 29.4% on 16 Marchfollowing events in Japan. Implied volatility levels quickly tapered, however,and ended the half down at 16.52% as at 30 June. Meanwhile, realised volatilitylevels rose during the period, with headline developments driving risk-on/risk-off trading. The 90-day realised volatility level of the S&P 500 Indexincreased modestly from 13.50% at the end of the first quarter to 13.73% as at30 June.In addition to this ongoing disparity between realised and implied volatilitylevels, managers have also targeted the disparity between realised and impliedequity correlation levels. For example, the 6-month realised correlation ofstocks in the S&P 500 Index is 37%, while the implied correlation is 61%.Managers have targeted this relationship though dispersion related positionsand other trades that expressing a view that implied levels may be too highrelative to realised levels. Elsewhere, managers continue to find opportunitiesin the mispricing of individual options. For example, one manager identified anattractive situation in May; the options of a post-reorganisation packagingcompany that was in the midst of being acquired. A buyer of put options waswilling to pay a meaningful premium over the put's theoretical value,potentially as a hedge against a long equity position, and the manager profitedas the options value normalised relative to associated hedges.
Event Driven Review
Deal activity remained robust for risk arbitrage strategies during the periodwith over US$1.2 trillion of global volume. The pace has accelerated relative tothe same period last year; global deal volume is estimated to have surpassedthe US$1 trillion mark in late May, compared to early July in 2010. Amidst thishealthy activity were other signs of optimism for the deal making environment,including multiple bidding wars over the same target, as well as numeroussituations in which both the potential acquirer and target have traded higherfollowing a deal announcement. A notable example of the latter phenomenon wasfashion conglomerate V.F. Corporation, whose stock rose roughly 10% when itannounced a US$1.8 billion purchase of shoemaker Timberland Co. in early June.Similarly, when Energy Transfer Equity, L.P. announced its intention topurchase pipeline operator Southern Union Co. for over US$4 billion in mid-June,shares in both companies rallied on the news. Shares of Southern Unioncontinued to rally into July, as it subsequently received a superior bid fromWilliams Companies, Inc., inciting a bidding war between the latter and EnergyTransfer Equity that extended into July.Energy and power industries were once again a source of notable deals,including Progress Energy Inc. pursuing Duke Energy Corp. for over US$13.5billion, Ensco PLC's US$7.2 billion offer for Pride International Inc., and AlphaNatural Resources Inc.'s US$7.4 billion bid for Massey Energy Co. Elsewhere, the long running saga in the rental car space involving Dollar Thrifty Automotive Group,Inc. carried on during the second quarter. Its stock jumped from roughly US$70/share to over US$80/share in early May on the news that Hertz Global Holdings,Inc. would offer US$72/share, surpassing the prior bid from Avis Budget Group,Inc. The market appeared to be anticipating that Avis would counter with ahigher bid, particularly as Dollar Thrifty recommended that shareholders rejectthe offer from Hertz. The news in June that Avis would pursue a purchase ofAvis Europe was met with a drop in Dollar Thrifty's share price back to US$72 asit appeared Avis had shifted its focus.The largest deals announced during the first six months were predominantlystrategically motivated, carrying on the trend of corporations taking advantage ofhealthy cash balances and an improving economic environment to consolidatemarket shares and operations heading into the next business cycle. While thesehealthy levels of strategic activity proved beneficial to risk arbitragestrategies, with most managers in the space posting positive year-to-dateperformance, gains for the strategy were somewhat limited by low risk spreads.Across a basket of prominent deals tracked by Barclays Capital in the firstquarter, the average annual spread on 57 outstanding deals was -2.2% as of 1April 2011, implying that, on the whole, most deals are expected to becompleted, while in some cases investors are expecting sweetened offers. Lowerannualised spreads are a product of perceived low risk of deal breaks,heightened expectations for multiple bidders, and lengthened average dealdurations resulting in part from the preponderance of strategic deals that canhave greater regulatory complexities.The themes that have characterised distressed strategies for many monthspersisted throughout the period, with performance largely driven by marketconditions and position specific developments related to existing portfolioholdings, while new default activity remained negligible. During the period, UShigh yield bonds and leveraged loans combined for less than US$2.5 billion worthof defaults in aggregate across 10 issuers. This compares to 22 companies andUS$7.7 billion of defaults for the same period in 2010. According to JP Morgan,the high yield and leveraged loan default rates finished the second quarter at0.8% and 1.0%, respectively, both well below their long term averages of 4.3%and 3.9%. JP Morgan forecasts that with strong market technicals and economicconditions, default rates may remain below 2% for high yield debt and below 3%for loans through 2012.In this environment, gains for distressed strategies were driven by existingportfolio holdings, notably in the financials space. The Lehman Brothers estatewas a notable winner as it was announced in early June that various creditorgroups representing $100 billion in claims in the Lehman Brothers bankruptcyhave reached a settlement on a payout plan. While recoveries vary across claimtypes and Lehman entities, senior bondholders expect to receive 21.1 cents on the dollar, though the plan still faces some dissentersand would be subject to approval by the US bankruptcy court in an Augusthearing. European banks were also a source of gains, including Commerzbank AGfollowing recapitalisation activity, Bayerische Landesbank and Dexia onimproved capital strength leading to expectations of restarting dividendpayments. Select managers continued to identify off-the-run opportunitiesoutside of corporate securities, including residential and commercial realestate paper and other asset backed securities. In another longstandingliquidation situation, claims on Nortel Networks Inc. benefited from approvalby bankruptcy judges in the US and Canada for the company to sell a portfolioof 6,000 patents for US$4.5 billion following a quarter end auction. Finally,though certain more liquid distressed and post reorganisation equity holdingssaw selling pressure in mid-March, events in Japan appeared to have limiteddirect impact on distressed strategies, which tended to have little to noexposure in the region.
Fundamental Long/Short Review
Fundamental long/short equity strategy performance was generally profitable inthe first quarter, and collectively posted modest gains for the second quarter,despite a market correction in May and June. Early appreciation was helped by abroader backdrop of equity gains across many major markets. Corporatefundamentals continued to improve throughout the first quarter, adding toinvestor optimism that the economic recovery is gaining traction. However,later performance cast a gloomier note, characterised by an ongoing battlebetween two forces; strong earnings and corporate fundamentals on the one side,and headline risks and concerns over the future of the economic recovery on theother. The optimism of the former factor faded as negative headlines beganhitting markets in early May, as mediocre employment reports hamstrung USmarkets. From there, a negative outlook for US sovereign creditworthiness andthe emergence of a political battle over the debt ceiling, the re-emergence ofsovereign credit issues in the eurozone, and concern over an economic slowdownin China all contributed to a prolonged painful period that saw markets broadlydrop through most of June, before closing the quarter with a strong rally.Nonetheless, corporate activity remained an important source of opportunity foracross many industries. With high corporate cash levels and prominent strategicactivity, managers are seeking those firms that may be well positioned to addvalue through catalysts such as new capital investment or acquisitions, ornon-core divestments and restructurings. For example, the motivations behind AT&T's proposed acquisition of T-Mobile USA from Deutsche Telekom includepotential synergistic cost savings as well as an upgrade of AT&T'sinfrastructure to meet increasing data transmission needs arising from theproliferation of smart phones. Elsewhere, Williams Companies, Inc. hasundertaken a strategic review of options that may unlock value, including arecent announcement that it would separate its large natural gas explorationand production portfolio from its pipeline assets. Other sources of opportunityhave been driven by developments in the solar industry, where short positioningbenefited performance as valuations broadly declined in the second quarter. Thenuclear crisis in Japan had boosted momentum for solar companies, but anexpected production glut and deterioration of underlying fundamentalscontributed to the subsequent decline.Fundamental long/short credit strategies largely reported positive results forthe first half of the year, with gains throughout most of the period followedby somewhat weaker results in June. The impact of market factors was once againbiased toward long positions. Credit premiums generally followed investorconfidence levels, with strong high yield bond performance generallydecelerating throughout the second quarter on growing evidence of a slowing USeconomic recovery, apprehension over the worries about Greece and the broaderEuropean financial system, and concern that the world current (and seeminglysole) economic engine, China, may have difficulty maintaining their pace ofgrowth. Nonetheless, appetite for new credit issuance remained largely healthy.Demand for new bonds was supported by cash flows into credit focused mutualfunds, with positive monthly flows for high yield bond and institutional loanfunds throughout the first six months with the exception of a brief outflowsfor high yield funds in mid-March in reaction to the Japan earthquake, and amuch stronger outflow in mid-June.Amidst this healthy market backdrop, idiosyncratic credit events have beenrobust, with high yield credit upgrades outpacing downgrades for the period.Meanwhile, companies have been aggressively taking advantage of accommodativemarket conditions to restructure balance sheets. More than half of all highyield bonds currently outstanding have been originated in the post-2008 era,while only 20% were originated during the previous issuance boom years of 2006and 2007. Targeting such refinancings, or working with companies' management toeffectuate such activity, can be a strong source of opportunity for creditfocused managers on the long side. However, with the strong demand for debt,and relatively few defaults in recent quarters, some managers are becomingconcerned that markets are once again growing complacent. As high yield bondsreached all time low yields in May (6.71% vs. 6.74% in November 2004), a numberof traditionally long biased managers have over time executed notable shifts intheir net exposure in an effort to reduce their susceptibility to growingdownside risks in credit and sovereign markets, with a focus on directionalshort positions and careful hedging against their long book, including the useof tail risk hedge exposures. Additionally, within their long books, somemanagers are seeking out catalyst driven special situation positions whoseultimate valuations are less sensitive to external events and more dependent onmore diversifiable issuer specific developments. In part as a result of thismore conservative positioning, managers as a whole performed well relative tolong only portfolios in June, when high yield bonds and loans notched theirworst performance thus far in 2011, and as uncertainty over Greece againpeaked.
Direct Sourcing Review
Direct Sourcing activity generally posted gains during the period, with steadygains throughout April generally followed by mixed performance in May and June.In general, mark-to-market performance on a number of existing credit basedholdings fluctuated to a certain degree as credit premiums narrowed and widenedas the broader market participated in a "risk-on/risk-off" environment.However, performance from more idiosyncratic assets, as well as incomegenerated from manager portfolios, helped to cushion overall results from theresulting price swings.While performance was relatively modest for the period, dislocations drivingmany of direct sourcing opportunities continued to be prominent. Bankdivestitures, small and middle market lending, and transportation assetfinancing are among segments in which our underlying managers have beencollectively active in identifying attractive, highly idiosyncratic deals.Commercial real estate asset activity has also been notable, particularly inrelatively smaller deals (ie, US$10-20 million) in off-the-run markets. Onemanager was able to close 180,000 square feet of US Midwestern retail propertyat a 15-16% cap rate, noting by way of comparison that a larger property salein a metropolitan area had recently been executed at a 4% cap rate. Theprospects for further opportunity in this space appear to be favourable, withone manager estimating a refinancing shortfall of over US$600 billion in US andEuropean commercial real estate debt through 2013.In other activity, one manager has been working to originate a third party loanfor purchasing a tanker backed by a four year lease with a prominent shippingcompany. The loan features a 3-year maturity, 12% interest rate, and 5% upfrontand exit fees. Another acquired a defaulted mortgage on a suburban officecomplex for 35% of its face value, with a projected IRR of over 15% if themanager can increase occupancy and reposition the property for sale. Yetanother noted an investment in the debt of a casino gaming company at US$0.93/dollar and a high teens yield-to-maturity. While junior in the capitalstructure, the issue is slated to mature in late 2012, ahead of senior debt,giving it technical seniority. The company recently applied to regulators toexpand its operations and, if approved, earnings are estimated to increase byroughly one third, in which case the manager anticipates that the junior issuemay be taken out at par. If not approved, the junior debt is anticipated to bethe fulcrum security in a restructuring. In the meantime, the company's debtcoverage remains strong and the debt pays an attractive income yield.Mark WoolleyBlackRock Alternative Advisors25 August 2011Performance and Contribution to ReturnFinancial Summary 30 June 2011 Share Class US$ € £ NAV per Share $10.44 €10.16 £10.18Total Net Assets $7,156,971 €16,984,992 £105,720,960Mid-Market Share Price $9.45 €9.17 £9.22Discount to NAV 9.48% 9.74% 9.43%Monthly Performance 2011 % Jan Feb March April May June 6 months US$ 1.52 0.69 0.53 0.46 0.12 -0.53 2.81€ 1.44 0.69 0.52 0.42 0.25 -0.46 2.89£ 1.66 0.67 0.53 0.40 0.19 -0.50 2.97
All performance statistics are net of management fees and other expenses.
US Dollar contribution to return by primary discipline - six months to 30 June2011 Year to date Relative value 1.47%Event driven 0.96%Fundamental long/short 0.28%Direct sourcing 0.10%Source: BlackRock.Sterling contribution to return by primary discipline - six months to 30 June2011 Year to date Relative value 1.54%Event driven 1.00%Fundamental long/short 0.32%Direct sourcing 0.10%Source: BlackRock.Euro contribution to return by primary discipline - six months to 30 June 2011 Year to date Relative value 1.50%Event driven 0.99%Fundamental long/short 0.30%Direct sourcing 0.10%Source: BlackRock.Asset Allocation
Asset Allocation 30 June 2011
Discipline and Strategy %Relative Value Capital Structure 1.6Convergence 10.5Rates 7.7Statistical 3.4Volatility 3.0 ---- 26.2 ----Event Driven Distressed 16.3Mergers/Acquisitions 5.8Corporate Actions 5.5 ---- 27.5 ----Fundamental Long/Short Equity Selection 17.2Equity Active Value 0.4Credit 24.0 ---- 41.5 ----Direct Sourcing Lending 1.7Equity Financing 2.4Real Estate 0.3Insurance 0.1 ---- 4.4 ----
Discipline allocations may not sum to 100% due to residual allocations to other disciplines such as Directional Trading as well as rounding differences.
Geographic % North America 57.3Western Europe 23.8Developed Asia 9.5Emerging Markets 9.4Statistical Summary Aggregate Leverage of Underlying Managers 1.7xGross US Dollar Long Exposure 167%Gross US Dollar Short Exposure -105%Number of Investment Programs 41% by Top 15 Investment Programs 52.0%Statement of Assets and Liabilities30 June 2011 30 June 30 June 31 December 2011 2010 2010 US$ US$ US$ Notes (unaudited) (unaudited) (audited)Assets Investments in private investment funds, at fair value (cost 30.06.11 $169,173,523; 30.06.10: $175,611,257; 31.12.10: $165,928,648) 3 188,126,590 179,702,605 180,218,133 Unrealised gain on forward foreign currency exchange contracts 813,315 62,868 2,904,682 Receivable on realised forward foreign currency exchange contracts 5 - 961,491 - Cash and cash equivalents 6,134,805 3,211,355 4,696,893 Due from private investment funds 7,924,304 15,549,096 12,117,057 Investments in private investment funds made in advance - - 1,220,000 Other assets 73,549 36,797 79,463 ----------- ----------- ----------- 203,072,563 199,524,212 201,236,228 ----------- ----------- -----------Liabilities Unrealised loss on forward foreign currency exchange contracts - 1,308,256 - Payable on realised forwardforeign currency exchange contracts - 2,592,478 - Management fees payable 7 735,026 718,075 739,004 Performance fees payable 7 601,241 - 489,961 Accounts payable and accrued expenses 233,832 203,189 236,140 Other liabilities - 17,027 - ----------- ----------- ----------- 1,570,099 4,839,025 1,465,105 ----------- ----------- -----------Net assets 201,502,464 194,685,187 199,771,123 =========== =========== ===========Statement of Operationsfor the six months ended 30 June 2011 30 June 30 June 31 December 2011 2010 2010 US$ US$ US$ Notes (unaudited) (unaudited) (audited)Income Interest 977 1,145 1,831 ---------- ---------- ----------Expenses Management fees 7 1,440,520 1,487,669 2,912,081Performance fees 7 601,241 - 489,961Administration and custodyfees 8 50,732 52,331 102,551Other professional fees 261,724 235,108 545,147Interest - 1,538 1,538 ---------- ---------- ---------- 2,354,217 1,776,646 4,051,278 ---------- ---------- ----------Net investment loss (2,353,240) (1,775,501) (4,049,447) ---------- ---------- ----------Net realised gain (loss) on: Investments in privateinvestment funds 1,509,982 516,254 2,157,075 Forward foreign currencyexchange contracts 8,491,656 (14,594,748) (10,047,428) ---------- ---------- ---------- 10,001,638 (14,078,494) (7,890,353) ---------- ---------- ----------Net change in unrealised gain (loss) on: Investments in privateinvestment funds 4,663,582 7,166,277 17,364,414 Forward foreign currency exchange contracts (2,091,367) (1,526,250) 2,623,820 ---------- ---------- ---------- 2,572,215 5,640,027 19,988,234 ---------- ---------- ----------Increase (decrease) in netassets resulting from operations 10,220,613 (10,213,968) 8,048,434 ========== ========== ==========Statement of Changes in Net Assetsfor the six months ended 30 June 2011 Six months Six months Year ended ended ended 30 June 30 June 31 December 2011 2010 2010 US$ US$ US$ (unaudited) (unaudited) (audited) Net assets, beginning of period 199,771,123 204,899,155 204,899,155 ----------- ----------- -----------Increase (decrease) in net assets: From operations Net investment loss (2,353,240) (1,775,501) (4,049,447) Net realised gain on investmentsin private investment funds 1,509,982 516,254 2,157,075 Net realised gain (loss) on
forward foreign currency exchange
contracts 8,491,656 (14,594,748) (10,047,428) Net change in unrealised gain
(loss) on investments in private
investment funds 4,663,582 7,166,277 17,364,414 Net change in unrealised gain(loss) on forward foreign currency exchange contracts (2,091,367) (1,526,250) 2,623,820 ----------- ----------- ----------- 10,220,613 (10,213,968) 8,048,434 ----------- ----------- -----------From capital transactions Conversion to 12,155 (30.06.10:112,416; 31.12.10: 1,906,859) US
Dollar denominated shares 126,876 1,047,608 18,860,618 Conversion to 62,112 (30.06.10:123,731; 31.12.10: 123,874) Euro
denominated shares 891,305 1,562,650 1,564,534 Conversion to 977,783 (30.06.10:264,559; 31.12.10: 1,341,712) Sterling denominated shares 15,927,107 3,774,357 20,014,677 Conversion of 1,549,353 (30.06.10; 235,813 31.12.10:
1,731,923) US Dollar denominated
shares (16,163,703) (2,245,648) (17,097,424) Conversion of 54,467 (30.06.10: 243,036; 31.12.10: 515,806) Euro
denominated shares (781,585) (3,068,692) (6,436,915) Conversion of nil (30.06.10: 73,254; 31.12.10: 1,115,340) Sterling denominated shares - (1,070,275)
(16,905,490)
Buyback of 116,976 (30.06.10: nil; 31.12.10: 165,505) US Dollar
denominated shares (1,021,795) - (1,443,763) Buyback of 87,611 (30.06.10: nil;31.12.10: 164,178) Eurodenominated shares (1,002,932) - (1,753,868) Buyback of 495,731 (30.06.10: nil;31.12.10: 816,045) Sterling
denominated shares (6,464,545) - (9,978,835) ----------- ----------- ----------- (8,489,272) - (13,176,466) ----------- ----------- -----------Net assets, end of period 201,502,464 194,685,187 199,771,123 =========== =========== ===========Statement of Cash Flowsfor the six months ended 30 June 2011 Six months Six months Year ended ended ended 30 June 30 June 31 December 2011 2010 2010 US$ US$ US$ (unaudited) (unaudited) (audited) Cash provided by (used in): Operating activities Increase (decrease) in net assets resulting from operations 10,220,613 (10,213,968)
8,048,434
Adjustments to reconcile increase (decrease) in net assets resulting from operations to cash provided by (used in) operating
activities: Net realised gain on investmentsin private investment funds (1,509,982) (516,254)
(2,157,075)
Net realised loss on forwardforeign currency exchange contracts - 14,594,748 - Net change in unrealised gain on investments in private investment
funds (4,663,582) (7,166,277) (17,364,414) Net change in unrealised (gain)loss on forward foreign currency
exchange contracts 2,091,367 1,526,250 (2,623,820) Purchases of investments in private investment funds (14,982,920) (4,545,595) (18,732,622) Sales of investments in private investment funds 18,660,780 16,373,253 44,095,749 Proceeds from forward foreigncurrency exchange contracts - 1,061,693 - Decrease (increase) in receivable on realised forward foreign currency exchange contracts - - 1,061,693 Payments on forward foreign currency exchange contracts - (13,620,791) - Decrease (increase) in other assets 5,914 (8,619) (51,285) (Decrease) increase in payable on realised forward foreign currency
exchange contracts - - (657,030) Decrease in management fees payable (3,978) (28,182) (7,253) Increase in performance fees payable 111,280 - 489,961 Decrease in accounts payable and accrued expenses (2,308) (47,056) (14,105) Increase in other liabilities - 17,027 - ---------- ---------- ---------- Cash provided by operating activities 9,927,184 (2,573,771) 12,088,233 ---------- ---------- ---------- Financing activities
Payments on redemption of Shares - (1,513,658)
(1,513,658)
Payments on buy backs of Shares (8,489,272) -
(13,176,466)
---------- ----------
---------- Cash used in financing activities (8,489,272) (1,513,658) (14,690,124)
---------- ---------- ---------- Increase (decrease) in cash andcash equivalents 1,437,912 (4,087,429) (2,601,891) ---------- ---------- ---------- Cash and cash equivalents Beginning of period 4,696,893 7,298,784 7,298,784 ---------- ---------- ---------- End of period 6,134,805 3,211,355 4,696,893 ---------- ---------- ----------
Supplemental disclosures of cash
flow information Cash paid during the period for interest - 2,340 2,340 ========== ========== ========== Non-cash transactions:
Conversion to US Dollar, Euro, and Sterling denominated shares 16,945,288 6,384,615 40,439,829
Conversion of US Dollar, Euro, and Sterling denominated shares (16,945,288) (6,384,615) (40,439,829)
---------- ---------- ---------- In-kind purchases of investments 78,502 19,336,152
25,293,275 In-kind sales of investments (78,502) (19,336,152) (25,293,275) ---------- ---------- ---------- Financial Highlightsfor the six months ended 30 June 2011 6 months ended 6 months ended Year ended 30 June 2011 30 June 2010 31 December 2010 Share Class Share Class Share Class (unaudited) (unaudited) (audited) $ € £ $ € £ $ € £Per shareoperatingperformance: Net assetvalue,beginning of
period 10.16 9.87 9.89 9.32 9.04
9.04 9.32 9.04 9.04
----- ----- ----- ----- ----- ----- ----- ----- ----- Income frominvestmentoperationsNetinvestment
loss (0.13) (0.11) (0.13) (0.08) (0.09)
(0.09) (0.19) (0.20) (0.21)
Net realised and unrealised gain on investments and foreign exchange
contracts 0.41 0.40 0.42 0.35 0.35
0.36 1.03 1.03 1.06
----- ----- ----- ----- ----- ----- ----- ----- -----Total from investmentoperations 0.28 0.29 0.29 0.27 0.26
0.27 0.84 0.83 0.85
----- ----- ----- ----- ----- ----- ----- ----- -----Net asset value, endof period 10.44 10.16 10.18 9.59 9.30
9.31 10.16 9.87 9.89
===== ===== ===== ==== ==== ==== ===== ==== ==== Total return* Before management
fees 3.85% 3.87% 4.00% 3.60% 3.69%
3.79% 10.63% 10.91% 11.20%
Management
fees (0.74%) (0.70%) (0.72%) (0.73%) (0.79%) (0.75%) (1.47%) (1.49%) (1.48%)
Performance
fees (0.30%) (0.28%) (0.31%) - - - (0.17%) (0.20%) (0.27%) ----- ----- ----- ----- ----- ----- ----- ----- ----- 2.81% 2.89% 2.97% 2.87% 2.90% 3.04% 8.99% 9.22% 9.45% ----- ----- ----- ----- ----- ----- ----- ----- -----Ratios/ supplementaldata**:Net assets, end ofperiod 7,156,971 16,984,992 105,720,960 21,154,030 20,360,466 99,445,317 23,763,087 17,298,128 97,908,089 --------- ---------- ----------- ---------- ----------
---------- ---------- ---------- ----------
Ratio ofexpensestoaveragenetassetsBeforemanagementfees 0.32% 0.32% 0.32% 0.28% 0.28% 0.28% 0.33% 0.33% 0.33% Managementfees 1.47% 1.39% 1.44% 1.46% 1.58% 1.51% 1.47% 1.50% 1.48% Performancefees 0.45% 0.27% 0.29% - - - 0.19% 0.18% 0.27% ----- ----- ----- ----- ----- ----- ----- ----- ----- 2.24% 1.98% 2.05% 1.74% 1.86% 1.79% 1.99% 2.01% 2.08% ===== ===== ===== ===== ===== ===== ===== ===== ===== Ratio of netinvestmentloss toaverage netassetsBeforemanagementfees (0.32%) (0.32%) (0.32%) (0.28%) (0.28%) (0.28%) (0.33%) (0.33%) (0.33%) Managementfees (1.47%) (1.39%) (1.44%) (1.46%) (1.58%) (1.51%) (1.47%) (1.50%) (1.48%) Performancefees (0.45%) (0.27%) (0.29%) - - - (0.19%) (0.18%) (0.27%) ----- ----- ----- ----- ----- ----- ----- ----- ----- (2.24%) (1.98%) (2.05%) (1.74%) (1.86%) (1.79%) (1.99%) (2.01%) (2.08%) ===== ===== ===== ===== ===== ===== ===== ===== =====
* Total return is calculated for each class of shares.
An individual shareholder's return may vary from this return due to timing of investments.
** The ratios have been calculated for each class as a whole. For the purpose of calculating these ratios, average net assets are calculated before period-end shareholder redemptions, if any.
Notes to Financial Statements
1. The Company
BlackRock Absolute Return Strategies Ltd (the "Company") is a limited liabilityregistered closed ended investment company incorporated in Jersey on 18 March2008. The Company's Shares were listed on the London Stock Exchange on 24 April2008 and commenced unconditional trading on 29 April 2008. With effect from 1January 2009, under the new taxation regime that became effective in Jersey,the Company's tax status changed from that of an exempt company, whereby theCompany's liability to Jersey taxation was generally limited to the exemptcompany fee of £600 per year to a zero tax rate company. Taxes relating tolocal income, profits and capital gains are not levied on the Company.
The Company has been established with an unlimited life and its Board of Directors is independent of the Investment Manager.
Prior to 25 August 2011 the Company's investment objective was to generate absolute returns in excess of the yields on short-term LIBOR securities, while endeavouring to minimise the corresponding level of volatility. The Company sought to generate these returns irrespective of the performance of any particular sector of the global capital markets.
In accordance with the Circular to Shareholders dated 15 July 2011 and theresolution passed at the subsequent Extraordinary General Meeting and classmeetings of the Euro, Sterling and Dollar shareholders held on 25 August 2011,the Company has commenced a managed wind-down in order to enable Shareholdersto realise in an orderly manner their investment in the Company.
The revised investment objective and policy approved by shareholders at the meetings held on 25 August 2011 is as follows:
The Company will be managed with the intention of realising all remainingassets in the Portfolio, in a manner consistent with the principles of prudentinvestment management and spread of investment risk, with a view to returninginvested capital to the Shareholders in an orderly manner.BlackRock Financial Management, Inc. ("BFM"), a Delaware corporation, is theCompany's Investment Manager and BlackRock (Channel Islands) Limited ("BCI") isthe Manager. BCI is responsible for implementing the Company's investmentpolicies and objectives as set forth by the Board of Directors. BlackRockAlternative Advisors ("BAA"), a business unit within BFM, is responsible forthe Company's investment management decisions, including identifying,evaluating, and monitoring independent investment managers, as well asdetermining the allocation of the Company's assets among these managers. BFM isregistered as an investment advisor with the United States Securities andExchange Commission and as a commodity pool operator with the United StatesCommodity Futures Trading Commission. Note 9 gives further details oftransactions with these related parties.
2. Significant accounting policies
The accompanying financial statements have been prepared on a going concernbasis in accordance with accounting principles generally accepted in the UnitedStates of America ("US GAAP"), as discussed in the Statement of Directors'Responsibilities. On 1 July 2009, the Financial Accounting Standards Board("FASB") launched the FASB Accounting Codification (the "Codification") as thesingle source of authoritative non-governmental US GAAP. All existingaccounting standards are superseded by the single source codification forinterim and annual periods ending after 15 September 2009. The financialstatements reflect the following significant accounting policies:
Cash and cash equivalents
Cash and cash equivalents include investments with an original maturity of three months or less. Cash and cash equivalents include all cash which is not under the direction of any independent investment manager. All cash is held with the Sub-Administrator, (Note 8), as custodian of the Company.
Private investment funds
The Company's investments in private investment funds, valued at US$188,126,590(30 June 2010: US$179,702,605; 31 December 2010: US$180,218,133) (93.36% (30June 2010: 92.30%; 31 December 2010: 90.21%) of net assets), are stated at fairvalue, which has been estimated by BAA in the absence of readily ascertainablemarket values. These fair values are based primarily on the net asset value andother financial information provided by the management of each underlyingprivate investment fund and are reflected net of any accrued management andincentive fees due to underlying managers as required by each privateinvestment fund's respective operating agreement. Private investment fund netasset values are generally provided monthly but may also be provided quarterly.The underlying investments of each private investment fund are accounted for atfair value as described in the private investment fund's financial statements.The fair value of certain investments may be estimated by underlying managersin the absence of observable market data. Due to the inherent uncertainty ofthese estimates, these values may differ from the values that would have beenused had a ready market for these investments existed and the differences couldbe material. In addition, the calculated fair value of certain investments,including restricted or illiquid securities, may differ from the values thatwould have been used had a ready market existed. Due to the nature of theseinstruments, an active resale market may not be readily available and pricesobtained on the date of sale may be materially different than the valuerecorded by the private investment funds.If the reported net asset value of a private investment fund is not availableor BAA determines, based on its own due diligence and investment monitoringprocedures, that the reported net asset value of any private investment fund isnot representative of fair value, and the difference between fair value and thereported value is material, BAA shall estimate the fair value of the privateinvestment funds in good faith. For the periods ended 30 June 2011, 30 June2010 and 31 December 2010, no such fair value adjustments were recorded.Investment transactions are accounted for on a trade date basis. Realised gainsand losses on investment transactions are determined using average cost. Gainsand losses from investments in private investment funds, which are net of allfees and allocations to the investment advisors of the funds, are reflected asa net gain or (loss) on investments in the statement of operations.
Fair value of financial instruments
The fair value of the Company's assets and liabilities which qualify as financial instruments under Accounting Standards Codification ("ASC") 825 Financial Instruments approximates the carrying amounts presented in the statement of assets and liabilities.
Forward foreign currency exchange contracts
The Company enters into forward foreign currency exchange contracts for thepurchase or sale of a specific foreign currency at a fixed price on a futuredate for hedging purposes. Risks may arise upon entering into these contractsfrom the potential inability of the counterparty to meet the terms of thecontracts. The gain or loss arising on the foreign currency exchange contractsis recorded for financial statement purposes as unrealised until the contractsettlement date. Upon maturity or early settlement of the contracts, anyapplicable gain or loss is recorded as realised for financial statementpurposes.
Foreign currency translation
The Company's reporting currency is United States dollars. Assets andliabilities originating in non-United States dollar denominated currencies aretranslated into United States dollars at the appropriate rates of exchange ineffect at the date of the financial statements. Income and expense transactionsoriginated in non-United States dollar denominated currencies have beentranslated into United States dollars at the prevailing exchange rates on thedate of the transaction.The Company does not isolate that portion of the operating results arising fromchanges in foreign currency exchange rates from the results arising fromchanges in market prices of investments held. Such fluctuations are includedwithin the net gains or losses on investments in the statement of operations.
Use of estimates
The preparation of financial statements in accordance with US GAAP requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosures of contingent assets and liabilitiesas of the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ fromthose estimates.
Going concern
The Directors are satisfied that the Company has adequate resources to continuein operational existence for the foreseeable future and is financially sound.For this reason, they continue to adopt the going concern basis in preparingthe financial statements. The Company is able to meet all of its liabilitiesfrom its assets and the ongoing expenses are approximately 2.2% (2010: 2.0%) ofthe net assets.Following the approval by Shareholders of the managed wind-down of the Companyon 25 August 2011 the Company will be managed with the intention of realisingall remaining assets in the portfolio.
Comparative figures
Certain of the prior year figures have been reclassified to conform with the current year's presentation.
New accounting pronouncementsOn 21 January 2010, the Financial Accounting Standards Board ("FASB") issuedAccounting Standards Update ("ASU") No 2010-06 which provides amendments to ASCSubtopic 820-10, Fair Value Measurements and Disclosures. This guidancerequires new fair value disclosures, and also clarifies existing fair valuedisclosures. The new disclosures relate to the transfers in and out of Level 1and Level 2 investments, and disclosures about purchases, sales, issuances, andsettlements in the rollforward of activity in Level 3 fair value measurements.The guidance also clarifies existing disclosures regarding the level ofdisaggregation, and disclosures about inputs and valuation techniques. The newdisclosures and clarifications of existing disclosures are effective for annualperiods beginning after 15 December 2009, except for the disclosures aboutpurchases, sales, issuances, and settlements in the rollforward of activity inLevel 3 fair value measurements, which are effective for fiscal years beginningafter 15 December 2010. As the guidance is limited to enhanced disclosures, theadoption did not have a material impact on the financial statements of theCompany.
Income taxes
The Company determines whether a tax position of the Company is more likelythan not to be sustained upon examination by the applicable taxing authority,including resolution of any related appeals or litigation processes, based onthe technical merits of the position. The tax impact to be recognised ismeasured as the largest amount that is greater than 50% likely of beingrealised upon ultimate settlement which could result in the Company recording atax liability that would reduce net assets. The Company invested directly andindirectly in various jurisdictions and is therefore subject to varyingpolicies and statutory time limitations with respect to examination of taxpositions. The Company has reviewed its tax positions and believes it is morelikely than not that they will be sustained upon examination.
3. Investments
As at 30 June 2011, the Company held investments in private investment funds with a total fair value of US$188,126,590 (31 December 2010: US$180,218,133), (93.36% of net assets (31 December 2010: 90.21%)). No investments in private investment funds held by the Company exceeded 5% of the Company's net assets at 30 June 2011 or 31 December 2010. Summary information reflecting the Company's investments in private investment funds as at 30 June 2010 is detailed below. Investments held by the Company which exceed 5% of net assets are individually identified, while smaller investments in other funds are aggregated. The Company is not able to obtain complete investment holding details on each of the private investment funds held within the Company's portfolio in order to determine whether the Company's proportional share of any investments held by the private investment fund exceeds 5% of the net assets of the Company at the end of each period.
30 June 2010 % of Primary Fair Value Company's Primary Geographic RedemptionsInvestment US$ Net Assets Disciplines Location* Permitted North America, Western Citadel Europe, Kensington Emerging Global Markets, Strategies Relative Developed Fund Ltd** 10,190,017 5.23 Value Asia Quarterly Other funds 169,512,588 87.07 ----------- ----- Total 179,702,605 92.30 =========== =====
* Refers to the primary geographic locations of the investments held by the private investment fund.
** Investment made through a master fund managed by BlackRock or its affiliates as discussed in Note 9.
Geographical allocation as a percentage of the Company's net assets at 30 June2011 comprised 53.5% (30 June 2010: 59.6%; 31 December 2010: 54.2%) allocatedto North America, 22.2% (30 June 2010: 16.4%; 31 December 2010: 18.9%) toWestern Europe, 8.9% (30 June 2010: 7.4%: 31 December 2010: 7.9%) to DevelopedAsia, and 8.8% (30 June 2010: 9.0%; 31 December 2010: 9.1%) to EmergingMarkets.The agreements relating to investments in private investment funds provide forcompensation to the investment managers or general partners in the form ofmanagement fees generally ranging from 0% to 2% per annum of net assets orpartners' capital and incentive fees or allocations generally ranging from 0%to 20% of net profits earned. The private investment funds' management fees andincentive fees or allocations are reflected in the increase (decrease) in netassets resulting from operations in the statement of operations.ASC 820, Fair Value Measurements and Disclosures ("ASC 820") (formerly SFAS157), provides a framework for measuring fair value and requires specificdisclosures about financial instruments. ASC 820 permits the Company, as apractical expedient, to estimate the fair value of a private investment fundbased on the net asset value per share or its' equivalent if the net assetvalue of the private investment fund is calculated in a manner consistent withthe measurement principles of ASC Topic 946, Investment Companies - FinancialServices. The Company uses the practical expedient to estimate fair value ofall private investment funds. In addition, ASC 820 includes a hierarchy thatclassifies inputs employed to determine fair value. Investments measured andreported at fair value are classified and disclosed in one of the followingcategories:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 - Quoted prices in markets that are not considered to be active foridentical assets or liabilities, quoted prices in active markets for similarassets or liabilities and inputs other than quoted prices that are directlyobservable or indirectly through corroboration with observable market data. Ifa reporting entity has the ability to redeem its investment with the privateinvestment fund at the net asset value per share (or its equivalent) at themeasurement date or within the near term and there are no other liquidityrestrictions, the Company's investment in the private investment fund shall becategorised as a Level 2;Level 3 - Inputs that are both significant to the fair value measurement andunobservable, including investment specific inputs that are not derived frommarket data and inputs that cannot be corroborated by market data. Thedetermination of fair value for investments included in the level 3 categoryrequires considerable subjectivity and estimation. Investments in privateinvestment funds that are currently subject to liquidity restrictions that willnot be lifted in the near term shall be categorised as a Level 3.The Company's investments in private investment funds not otherwise traded on asecurities exchange are classified within level 2 or level 3 of the fair valuehierarchy as the value of these interests are primarily based on the respectivenet asset value reported by management of each underlying private investmentfund rather than actual market transactions and other observable market data.The determination of whether such investment will be classified in level 2 orlevel 3 is assessed at the partnership or class level and based upon theability to redeem such investment within a reasonable period of time (within 90days of any month-end during the period). If an investment in a privateinvestment fund may be redeemed within 90 days of any month-end during theperiod and the fair value of the investment is based on information provided bymanagement of the underlying fund it is classified as level 2; in all othercases it will be classified as level 3. The Company's investments in foreigncurrency exchange contracts are classified within level 2 of the fair valuehierarchy, because they are valued using directly observable foreign currencyspot rates and forward foreign currency rates.The following tables summarise the valuation of the Company's investments underthe SFAS 157 fair value hierarchy as at 30 June 2011, 30 June 2010 and 31December 2010:30 June 2011 Level 1 Level 2 Level 3 Total US$ US$ US$ US$Assets Investments in private investment funds* Relative Value (a) - 24,325,112 46,601,425 70,926,537Fundamental Long/Short (b) - 22,831,774 26,179,535 49,011,309Event Driven (c) - 28,774,118 36,597,262 65,371,380Direct Sourcing (d) - - 2,817,364 2,817,364 ------- ---------- ----------- -----------Total investments inprivate investment funds - 75,931,004 112,195,586 188,126,590 ------- ---------- ----------- -----------Derivatives Forward foreign currency exchange contracts - 813,315 - 813,315 ------- ---------- ----------- ----------- - 76,744,319 112,195,586 188,939,905 ======= ========== =========== ===========30 June 2010 Level 1 Level 2 Level 3 Total US$ US$ US$ US$ Assets Investments in private investment funds* Relative Value (a) - 23,371,696 52,614,410 75,986,106 Fundamental Long/Short (b) - 28,326,456 20,874,062 49,200,518 Event Driven (c) - 24,205,361 22,693,811 46,899,172 Direct Sourcing (d) - - 7,616,809 7,616,809 ------- ---------- ----------- -----------Total investments in private investment funds - 75,903,513 103,799,092 179,702,605 ------- ---------- ----------- -----------Derivatives Forward foreign currency exchange contracts - 62,868 - 62,868 ------- ---------- ----------- ----------- - 75,966,381 103,799,092 179,765,473 ------- ---------- ----------- -----------Liabilities Derivatives Forward foreign currency exchange contracts - (1,308,256) - (1,308,256) ======= ========== =========== =========== 31 December 2010 Level 1 Level 2 Level 3 Total US$ US$ US$ US$ Assets Investments in private investment funds* Relative Value (a) - 32,534,900 43,108,852 75,643,752 Fundamental Long/Short (b) - 32,944,228 12,796,093 45,740,321 Event Driven (c) - 25,721,822 27,868,742 53,590,564 Direct Sourcing (d) - - 5,243,496 5,243,496 ------- ---------- ----------- -----------Total investments in private investment funds - 91,200,950 89,017,183 180,218,133 ------- ---------- ----------- -----------Derivatives Forward foreign currency exchange contracts - 2,904,682 - 2,904,682 ------- ---------- ----------- ----------- - 94,105,632 89,017,183 183,122,815 ======= ========== =========== =========== * In determining the classification of investments in private investment fundsincluded in the tables above, no consideration was given to the classificationof securities held by each underlying private investment fund.
(a), (b), (c) and (d), see footnotes at the end of Note 3.
The changes in investments measured at fair value using level 3 inputs for thesix months ended 30 June 2011 and 30 June 2010 and the year ended 31 December2010 are reflected below:30 June 2011 Relative Fundamental Event Direct Value(a) Long/Short(b) Driven(c) Sourcing(d) Total US$ US$ US$ US$ US$ Balance, 1 January 2011 43,108,852 12,796,093 27,868,742 5,243,496 89,017,183 Purchases (sales), net 1,259,245 2,990,328 7,872,821 (2,607,360) 9,515,034 Realised and unrealised gain (loss), net 2,233,328 1,871 855,699 181,228 3,272,126Transfers in to level 3* - 10,391,243 - - 10,391,243 Transfers out of level 3 - - - - - ---------- ---------- ---------- --------- ----------- Balance, 30 June 2011 46,601,425 26,179,535 36,597,262
2,817,364 112,195,586
---------- ---------- ---------- --------- ----------- Changes in unrealised gain (loss) related to the Company's level 3 investments held at 30 June 2011 2,417,908 519,963 809,320
149,677 3,896,868
* Transfers in to level 3 occurred due to additional subscriptions into existing share classes of currently held private investment funds, subject to lock up periods of at least 90 days as of 30 June 2011.
30 June 2010 Relative Fundamental Event Direct Value(a) Long/Short(b) Driven(c) Sourcing(d) Total US$ US$ US$ US$ US$ Balance, 1 January 2010 56,713,288 41,696,546 30,608,179 8,989,858 138,007,871Purchases (sales), net (5,711,602) (5,071,400) (9,531,985)
(1,697,363) (22,012,350)Realised and unrealised gain (loss), net 1,612,724 2,339,183 1,617,617 324,314 5,893,838 Transfers in to level 3 - - - - -Transfers out of level 3 - (18,090,267) - - (18,090,267) ---------- ---------- ---------- --------- ----------- Balance, 30 June 2010 52,614,410 20,874,062 22,693,811
7,616,809 103,799,092
---------- ---------- ---------- --------- ----------- Changes in unrealised gain (loss) related to the Company's level 3 investments held at 30 June 2010 2,802,213 1,227,785 5,746,541 (575,050) 9,201,489 ========== ========== ========== ========= ========== 31 December 2010 Relative Fundamental Event Direct Value(a) Long/Short(b) Driven(c) Sourcing(d) Total US$ US$ US$ US$ US$ Balance, 1 January 2010 56,713,288 41,696,546 30,608,179 8,989,858 138,007,871Purchases (sales), net (14,545,299) (6,574,715) (6,089,385)
(4,291,979) (31,501,378)Realised and unrealised gain (loss), net 5,240,599 402,827 3,349,948 545,617 9,538,991
Transfers in to level 3 - - - - - Transfers out of level 3** (4,299,736) (22,728,565) - - (27,028,301) ---------- ---------- ---------- --------- ----------- Balance, 31 December 2010 43,108,852 12,796,093 27,868,742
5,243,496 89,017,183
---------- ---------- ---------- --------- ----------- Changes in unrealised gain (loss) related to the Company's level 3 investments held at 31 December 2010 6,697,117 2,080,420 2,656,984 (238,384) 11,196,137 ========== ========== ========== ========= ==========
** Transfers out of level 3 were due to the expiration of fund level gates and lock up periods during the year ended 31 December 2010.
(a), (b), (c) and (d), see footnotes at the end of Note 3.
The Company recognised transfers in and out of level 3 above at 1 January. Realised and unrealised gains (losses) recorded for level 3 investments are reported as net realised gain on investments in private investment funds and net unrealised gain (loss) on investments in private investment funds, respectively, in the statement of operations.
ASC 820 requires additional disclosure to assist in understanding the natureand risk of the investments by major category. The table below summarises thefair value and other pertinent liquidity information of the underlyinginvestments by major category as at 30 June 2011, 30 June 2010 and 31 December2010:30 June 2011 Illiquid Redemption Fair Value Investments(1) Gates(2) Lock-ups(3) Redemption Notice
Major Category US$ US$ US$
US$ Frequency(4) Period(4)
Relative Value (a) 70,926,537 6,103,040 36,564,948 4,655,311 Monthly, 30-90 days Quarterly, Semi-Annually
Fundamental 49,011,309 4,362,860 3,453,519
6,250,352 Quarterly, 45-90 daysLong/Short(b) Annually Monthly, Quarterly, Annually,
Event Driven (c) 65,371,380 3,896,729 8,584,370 17,190,990 Bi-Annually 30-150 days
Direct Sourcing (d) 2,817,364 2,817,364 -
- Annually 90 days ----------- ---------- ---------- ---------- Total 188,126,590 17,179,993 48,602,837 28,096,653 =========== ========== ========== ==========
(1) Represents private investment funds that cannot be voluntarily redeemed bythe Company at any time. This includes (i) private investment funds that areliquidating and making distribution payments as their underlying assets aresold, (ii) suspended redemptions/withdrawals, and (iii) side pocket holdings.These types of investments may be realised within 1 to 3 years from 30 June2011, depending on the specific investment and market conditions. This does notinclude private investment funds with gates and lock-ups, which are notedabove.
(2) Represents investor level and fund level gates. The gates have been in place for 21 to 24 months at 30 June 2011, and the time at which these restrictions will be lifted cannot be estimated.
(3) Represents investments that cannot be redeemed without a fee due to a lock-up provision. The lock-up period for these investments ranged from 6 months to 21 months at 30 June 2011.
(4) Redemption frequency and redemption notice period reflect general redemption terms, and exclude liquidity restrictions noted above.
Private investment funds that have an investor level gate and are still in the lock-up period are represented in both (2) and (3) in the table above.
(a), (b), (c) and (d), see footnotes at the end of Note 3.
30 June 2010 Illiquid Redemption Fair Value Investments(1) Gates(2) Lock-ups(3) Redemption NoticeMajor Category US$ US$ US$ US$ Frequency(4) Period(4) Monthly, Quarterly, Semi-Annually,
Relative Value (a) 75,986,106 7,773,945 26,560,643
- Bi-Annually 30-90 days Fundamental 49,200,518 3,910,752 12,707,396 2,740,155 Monthly, 30-90 daysLong/Short (b) Quarterly, Annually Monthly, Quarterly, Annually,
Event Driven (c) 46,899,172 4,415,053 6,795,132
7,336,115 Bi-Annually 30-360 days
Direct Sourcing (d) 7,616,809 3,352,799 -
- Quarterly, 360 days Annually ----------- ---------- ---------- ---------- Total 179,702,605 19,452,549 46,063,171 10,076,270 =========== ========== ========== ==========
(1) Represents private investment funds that cannot be voluntarily redeemed bythe Company at any time. This includes (i) private investment funds that areliquidating and making distribution payments as their underlying assets aresold, (ii) suspended redemptions/withdrawals, and (iii) side pocket holdings.These types of investments may be realised within 1 to 3 years from 30 June2010, depending on the specific investment and market conditions. This does notinclude private investment funds with gates and lock-ups, which are notedabove.
(2) Represents investor level and fund level gates. The gates have been in place for 9 to 12 months at 30 June 2010, and the time at which these restrictions will be lifted cannot be estimated.
(3) Represents investments that cannot be redeemed without a fee due to a lock-up provision. The lock-up period for these investments ranged from 18 months to 24 months at 30 June 2010.
(4) Redemption frequency and redemption notice period reflect general redemption terms, and exclude liquidity restrictions noted above.
Private investment funds that have an investor level gate and are still in the lock-up period are represented in both (2) and (3) in the table above.
(a), (b), (c) and (d), see footnotes at the end of Note 3.
31 December 2010 Illiquid Redemption Fair Value Investments(1) Gates(2) Lock-ups(3) Redemption NoticeMajor US$ US$ US$ US$ Frequency(4) Period(4)Category Relative 75,643,752 7,006,484 34,140,923 - Monthly, 30-90 daysValue (a) Quarterly Fundamental 45,740,321 3,562,373 4,997,484 3,025,099 Quarterly, 45-90 daysLong/Short(b) Annually Event Driven (c) 53,590,564 4,004,158 6,155,152 11,835,893 Monthly, 30-150 days Quarterly, Annually, Bi-Annually Direct Sourcing (d) 5,243,496 3,963,270 - - Annually 90 days ----------- ---------- ---------- ---------- Total 180,218,133 18,536,285 45,293,559 14,860,992 =========== ========== ========== ==========
(1) Represents private investment funds that cannot be voluntarily redeemed bythe Company at any time. This includes (i) private investment funds that areliquidating and making distribution payments as their underlying assets aresold, (ii) suspended redemptions/withdrawals, and (iii) side pocket holdings.These types of investments may be realised within 1 to 3 years from 31 December2010 depending on the specific investment and market conditions. This does notinclude private investment funds with gates and lock-ups, which are notedabove.
(2) Represents investor level and fund level gates. The gates have been in place for 15 to 18 months, and the time at which these restrictions will be lifted cannot be estimated.
(3) Represents investments that cannot be redeemed without a fee due to a lock-up provision. The lock-up period for these investments ranged from 6 to 24 months at 31 December 2010.
(4) Redemption frequency and redemption notice period reflect general redemption terms, and exclude liquidity restrictions noted above.
Private investment funds that have an investor level gate and are still in the lock-up period are represented in both (2) and (3) in the table above.
(a) Investment strategies within this category seek to profit from the mispricing of related financial instruments. This discipline utilises quantitative and qualitative analysis to identify securities or spreads between securities that deviate from their theoretical fair value and/or historical returns. The fair values of the investments in this category have been estimated using the net asset values provided by management of the private investment funds.
(b) Investment strategies within this category involve buying and/or selling asecurity or financial instrument believed to be significantly under-orover-priced by the market in relation to its potential value. The fair valuesof the investments in this category have been estimated using the net assetvalues provided by management of the private investment funds.(c) Investment strategies within this category concentrate on companies thatare or may be subject to extraordinary corporate events such as restructurings,takeovers, mergers, liquidations, bankruptcies or other corporate events. Thefair values of the investments in this category have been estimated using thenet asset values provided by management of the private investment funds.(d) Investment strategies within this category seek to profit from theincreasing disintermediation of the financial services sector by entering intodirect transactions with corporations, other institutions or individuals. Thefair values of the investments in this category have been estimated using thenet asset values provided by management of the private investment funds.
4. Financial instruments with off-balance sheet risk
The Company's investments in private investment funds involve varying degreesof interest rate risk, credit and counterparty risk, and market, industry orgeographic concentration risks for the Company. While BAA monitors these risks,the varying degrees of transparency into and potential liquidity of thesecurities in the private investment funds may hinder BAA's ability to manageand mitigate these risks.Market risk
The Company holds certain derivative instruments (see Note 5) that involve varying degrees of off-balance sheet market risk, and changes in the market values of the financial instruments underlying such derivative instruments frequently result in changes in the Company's unrealised gains or (losses) on such derivative instruments as reflected in the statement of operations. Off-balance sheet market risk exists when the maximum potential loss on a particular financial instrument is greater than the carrying value of such financial instrument.
The private investment funds in which the Company is invested utilise a widevariety of financial instruments in their trading strategies includingover-the-counter ("OTC") options, futures, forward and swap agreements andsecurities sold but not yet purchased. Several of these financial instrumentscontain varying degrees of off-balance sheet risk where the maximum potentialloss on a particular financial instrument may be in excess of the amountsrecorded on each private investment fund's balance sheet. The privateinvestment funds are required to account for all investments on a fair valuebasis and recognise changes in unrealised gains and losses in their statementsof operations. In determining the fair values for these instruments, theprivate investment funds will make estimates about future interest rates,default probabilities, volatilities and other pricing factors. These estimatesof fair value could differ from actual results. The Company's maximum exposureto market risks related to the private investment funds is limited to amountsincluded in the Company's investments in private investment funds recorded asassets in the statement of assets and liabilities.
The Company's exposure to market risk is influenced by a number of factors, including the relationships among the derivative instruments held by the Company as well as the volatility and liquidity in the markets in which the derivative instruments are traded.
Credit and counterparty risk
The credit and counterparty risk associated with derivative instruments arises from possible counterparty non-performance and is limited to the derivative instruments in a gain position.
The Company is indirectly subject to certain credit risks arising from theinvestments made by the private investment funds. Credit risk is the amount ofaccounting loss that the private investment funds would incur if a counterpartyfailed to perform its obligations under contractual terms. The Company is alsosubject to the credit risk that the private investment funds fail to performunder their respective agreements.The Company may be directly subject to credit risks arising from OTC derivativefinancial instrument transactions. The Company's direct exposure to credit riskat any point in time is limited to amounts included in the Company's unrealisedgain on derivative financial instruments recorded as assets or liabilities onthe statement of assets and liabilities. The Company enters into OTC derivativefinancial instruments transactions only with major commercial and investmentbanks in an effort to limit its OTC risk.
Liquidity risk
The private investment funds invest in securities and investments with variousdegrees of liquidity and as such the Company is subject to certain redemption/withdrawal provisions, in accordance with the private investment funds'offering agreements. These provisions generally range from monthly to annualredemptions/withdrawals, with 60 to 180 days notice.Certain of the Company's private investment funds have the ability to suspendredemptions/withdrawals, and restrict redemptions/withdrawals through thecreation of side pockets. At 30 June 2011, 1.64% (30 June 2010: 2.53%; 31December 2010: 1.74%) of the Company's net assets were subject to privateinvestment funds that had suspended redemptions/withdrawals (including thoseprivate investment funds undergoing liquidation); and 6.89% (30 June 2010:7.22%; 31 December 2010: 7.53%) of the Company's net assets were investeddirectly in side pockets maintained by private investment funds. The Company'sability to liquidate its investment in a private investment fund that hasimposed such provisions may be adversely impacted. In such cases, until theCompany is permitted to liquidate its interest in a private investment fund,the Company's residual interest remains subject to continued exposure tochanges in valuations.The Company may also invest in closed-end investments that may not permitredemptions/withdrawals or in private investment funds that impose an initial"lock-up" period before a redemption/withdrawal can be made. In addition,certain of the Company's private investment funds have the ability to imposeredemption gates, and in so doing, may reduce the Company's requestedredemption/withdrawal below the requested amount.
5. Derivative financial instruments
On 1 January 2009, the Company adopted SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities ("SFAS 161"). As of 1 July 2009, the disclosures required by SFAS 161 have been included within ASC 815 Derivatives and Hedging ("ASC 815").
SFAS 161 amends and expands the disclosure requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to understand better how those instruments and activities are accounted for, how and why they are used, and their effects on an entity's financial position, financial performance, and cash flows.
The Company periodically executes forward foreign currency exchange contracts.The contracts are designed to hedge against foreign currency exchange raterisks associated with its share classes denominated in currencies other thanUnited States dollars. Gains and losses on forward foreign currency exchangecontracts exclusive to share classes denominated in currencies other thanUnited States dollars are specifically allocated to the respective share class.The contractual amounts of these instruments represent the exposure the Companyhas to the respective currencies associated with these financial instruments.The measurement of the risks associated with forward foreign currency exchangecontracts is meaningful only when all related and offsetting transactions areconsidered.
The following tables summarise the fair value of the Company's derivative instruments and the location on the statement of assets and liabilities:
30 June 2011 Asset derivatives Liability derivatives Derivatives Location Fair value Location Fair value US$ US$ Foreign exchange Unrealised gain 813,315 Unrealised loss - contracts on foreign on foreign exchange exchange contracts contracts Asset derivatives Liability derivatives 30 June 2010 Location Fair value Location Fair valueDerivatives US$ US$ Foreign exchange Unrealised gain 62,868 Unrealised loss (1,308,256)contracts on foreign on foreign exchange exchange contracts contracts 31 December 2010 Asset derivatives Liability derivatives Derivatives Location Fair value Location Fair value US$ US$ Foreign exchange Unrealised gain 2,904,682 Unrealised loss - contracts on foreign on foreign exchange exchange contracts contracts The following tables present the effect of derivative instruments on theCompany's financial performance and the location on the statement ofoperations:30 June 2011 Derivatives Location Gain (loss) on derivatives US$ Foreign exchange Net realised gain on foreign 8,491,656 contracts exchange contracts Foreign exchange Net change in unrealised gain (loss) contracts on foreign exchange contracts (2,091,367) 30 June 2010 Derivatives Location Gain (loss) on derivatives US$ Foreign exchange Net realised loss on foreign (14,594,748)contracts exchange contracts Foreign exchange Net change in unrealised gain contracts (loss) on foreign exchange contracts (1,526,250) 31 December 2010 Derivatives Location Gain (loss) on derivatives US$ Foreign exchange Net realised loss on foreign (10,047,428)contracts exchange contracts Foreign exchange Net change in unrealised gain contracts (loss) on foreign exchange contracts 2,623,820
The obligations under these financial instruments as at 30 June 2011, 30 June 2010 and 31 December 2010 were as follows:
30 June 2011 Contract to Contract to Currency Settlement date Deliver Receive Fair value € 30 September 2011 $24,423,699 €17,050,000 $241,282 £ 30 September 2011 $169,134,860 £105,830,000 $572,032 30 June 2010 Contract to Contract to Currency Settlement date Deliver Receive Fair value € 30 September 2010 $24,949,627 €20,430,000 $62,868 £ 30 September 2010 $150,269,195 £99,680,000 $(1,308,256)31 December 2010 Contract to Contract to Currency Settlement date Deliver Receive Fair value € 31 March 2011 $22,389,108 €17,120,000 $522,422 £ 31 March 2011 $149,147,972 £97,130,000 $2,382,260 It is the Company's general practice to enter into a forward foreign currencyexchange contract for each foreign currency share class for a duration ofapproximately 3 months. In the event of an investor subscription or redemptionin a foreign currency share class, the Company may increase or decrease itshedge by entering into one or more additional forward foreign currency exchangecontracts with the same settlement date.The Company's unrealised gain (loss) relating to forward foreign currencyexchange contract obligations at 31 December 2010 was US$2,904,682, resultingin a net change in unrealised gain (loss) of US$(2,091,367) for the periodended 30 June 2011. The outstanding financial instruments have certain marginprovisions that call for cash payments to the contract counterparties to theextent that the unrealised loss is in excess of certain amounts. Amounts owed,if any, to the counterparty related to these financial instruments are securedby pledging the assets held by the Company, which are attributable toshareholders in classes denominated in currencies other than United Statesdollars.
At 30 June 2011, 30 June 2010 and 31 December 2010 all open forward foreign currency exchange contracts are with a single counterparty.
6. Share Capital, Voting Rights and Share Conversion
Authorised:100 Management SharesUnlimited Shares of any class Net asset Shares in Treasury Shares in Treasury Shares in
Treasury value
issue at Shares at issue at Shares at at issue Shares at per share 30 June 30 June 30 June 30 June 31 December 31 December 30 June 2011 2011 2010 2010 2010 2010 2011 ManagementShares 2 - 2 - 2 - - US Dollar denominated Shares 685,386 282,481 2,206,732 - 2,339,560 165,505 $10.44 Euro denominated Shares 1,672,269 251,789 2,189,040 - 1,752,235 164,178 €10.16 Sterling denominated
Shares 10,381,673 1,642,526 10,680,599 330,750 9,899,621 1,146,795 £10.18
Shareholders have the right to receive notice of and to attend and vote at general meetings of the Company.
Management Shares carry no right to distribution of profits, or except when there are no Shares in issue, to receive notice of or vote at general meetings of the Company.
It is not the intention of the Company to pay dividends, however the Directors have the option to declare a dividend, if deemed appropriate.
Conversion
In March, June, September and December of each year, shareholders may convertshares of any class into shares of any other class, by giving not less than 10business days' notice to the Company in advance of such currency conversioncalculation date.
The following table shows the shares converted and issued during the period:
Currency Date of Number of Shares converted issue of Number of Shares issuedConversion Date US$ € £ new shares US$ € £
31 December 2010 30,964 - - 28 January 2011 - - 20,369 31 March 2011 1,518,389 54,467 - 28 April 2011 12,155 62,112 957,414
No conversion requests were received in respect of the 30 June 2011 currencyconversion calculation date.US Dollar denominated Shares 2011 2010 Number Number of shares of shares In issue on 1 January* 2,339,560 2,330,129 Converted out (1,549,353) (235,813)Converted in 12,155 112,416
Repurchased and placed in treasury (116,976)
- --------- --------- In issue on 30 June* 685,386 2,206,732 --------- --------- * Excluding treasury sharesEuro denominated Shares 2011 2010 Number Number of shares of shares In issue on 1 January* 1,752,235 2,308,345 Converted out (54,467) (243,036)Converted in 62,112 123,731
Repurchased and placed in treasury (87,611)
- --------- --------- In issue on 30 June* 1,672,269 2,189,040 --------- --------- * Excluding treasury sharesSterling denominated Shares 2011 2010 Number Number of shares of shares In issue on 1 January* 9,899,621 10,489,294 Converted out - (73,254)Converted in 977,783 264,559
Repurchased and placed in treasury (495,731)
- ---------- ---------- In issue on 30 June* 10,381,673 10,680,599 ---------- ---------- * Excluding treasury shares
On 20 July 2011, the 282,481 US Dollar, 251,789 Euro and 1,642,526 Sterling denominated shares held in treasury were cancelled. There are no shares held in treasury.
Voting rightsWith effect from 1 January 2011, the voting rights of both the Euro andSterling denominated Shares were re-calculated in accordance with theprovisions of the Articles of Association of the Company and the voting rightsof the Euro denominated Shares changed to 1.3 votes per share and the voting rightsof the Sterling denominated Shares changed to 1.5 votes per share.As at 30 June 2011 and 30 June 2010, the issued share capital and share votingrights were as follows: 2011 2010 Number of shares (excluding Votes Votes treasury per Voting Number of per Voting shares) share rights shares share rights Management Shares 2 - - 2 - - US Dollar
denominated Shares 685,386 1.0 685,386 2,206,732 1.0
2,206,732 Euro denominated Shares 1,672,269 1.3 2,173,949 2,189,040 1.4 3,064,656 Sterling
denominated Shares 10,381,673 1.5 15,572,509 10,680,599 1.6
17,088,958 ---------- ---------- Total voting rights (excluding treasury shares) 18,431,844 22,360,346 ---------- ----------
7. Management and performance fees
The Company entered into a Management Agreement with BCI to provide certaininvestment management services to the Company. Under this agreement, BCI earnsa quarterly investment management fee equal to one quarter of 1.5% of the NAVand an annual performance fee equal to 10% of the amount, if any, by which theNAV at the end of a calculation period exceeds the higher of (i) the NAV at thedate of Admission and (ii) the NAV at the end of any previous calculationperiod. As provided in the registration document, the amount of fees paid toBCI is determined based on the net assets and the performance of the Companyfor the respective calculation period. Management and performance fees arecalculated prior to any adjustments to the NAV of the relevant share class forthe relevant calculation period related to the profits, losses and expenses ofany currency hedging undertaken by the Company. For the year ended 31 December2010 and the periods ended 30 June 2010 and 30 June 2011, the management feesunder this agreement were: Period ended Period ended Year ended 30 June 30 June 31 December Share class 2011 2010 2010 US$ US$ US$
US Dollar denominated Shares 110,292 159,846 320,609 Euro denominated Shares 168,787 212,301 379,341 Sterling denominated Shares 1,161,441 1,115,522
2,212,131 --------- --------- --------- 1,440,520 1,487,669 2,912,081 ========= ========= =========
Following Shareholder approval of the managed wind-down on 25 August 2011, theCompany and the Manager agreed that with effect from that date the ManagementAgreement would be amended to reflect that no management fee would be payablein respect of any cash or distribution received by or on behalf of the Companyas a result of realising any of the Company's assets in connection with themanaged wind-down and held by the Company pending distribution to shareholders.
For the year ended 31 December 2010 and the periods ended 30 June 2010 and 30 June 2011, the performance fees under this agreement were:
Period ended Period ended Year ended 30 June 30 June 31 December Share class 2011 2010 2010 US$ US$ US$
US Dollar denominated Shares 67,969 - 40,862 Euro denominated Shares 65,573 - 45,475 Sterling denominated Shares 467,699 -
403,624 ------- ------- ------- 601,241 - 489,961 ======= ======= =======
As at 30 June 2011, an amount of US$735,026 (30 June 2010: US$718,075; 31 December 2010: US$739,004) was payable in respect of the management fee. As at 30 June 2011, an amount of US$601,241 (30 June 2010: nil; 31 December 2010: US$489,961) was payable in respect of the performance fee.
8. Administration and custody fees
Under the terms of an Administration Agreement, UBS Fund Services (Cayman)Limited (the "Sub-Administrator") has agreed to perform certain financial,custodial, accounting, administrative and other services. For the period ended30 June 2011, US$50,732 (period ended 30 June 2010: US$52,331; year ended 31 December 2010: US$102,551) was incurred for the Sub-Administrator's services in accordance with the Administration Agreement.
9. Related party transactions
During the periods ended 30 June 2011 and 30 June 2010 and the year ended 31 December 2010, there were investment transactions with other entities managedby BFM. The consideration paid and received in connection with each of thesetransactions was based on the prevailing net asset value of the investment atthe date of the transaction. None of these transactions had a material impacton the performance of the Company.The Company may invest in one or more master funds through which the Companyand other funds or accounts managed by BFM or its affiliates may invest for theprimary purpose of consolidating investments by these funds and accounts into asingle investment in one or more private investment funds.
The Directors of the Company consider that all transactions with related parties have been made at values which approximate the values for which such transactions would have been made with third parties.
The Board currently consists of five non-executive Directors. With theexception of Mr Le Feuvre and Mr Ruck Keene, who are BlackRock employees, allare considered to be independent of the Company's Manager and free from anybusiness or other relationship which could interfere materially with theexercise of their independent judgement. Mr Le Feuvre and Mr Ruck Keene, asemployees of BlackRock, are deemed to be interested in the Company's managementagreement. None of the Directors has a service contract with the Company. TheChairman receives an annual fee of £35,000, the Chairman of the Audit andManagement Engagement Committee receives an annual fee of £27,000 and the otherDirector receives an annual fee of £25,000. Mr Le Feuvre and Mr Ruck Keenehave waived the entitlement to their fee.
Two members of the Board hold shares in the Company. Mr Maltby holds 4,366 Euro Shares and Mr Ruck Keene 5,000 Sterling shares.
The total remuneration payable to Directors was US$87,102 for the period ended 30 June 2011 (period ended 30 June 2010: US$77,803; year ended 31 December 2010:US$142,952). This amount includes fees for Directors services, reimbursementfor travel and other out-of-pocket expenses relating to attendance at meetingsand other matters, including any such expenses relating to the performance ofdue diligence for the benefit of the Company.Through its investment in a master fund managed by BlackRock or its affiliates,the Company is invested in R3 Capital Partners (C), Ltd. (the "R3 Fund"), afund vehicle previously managed by R3 Capital Partners ("R3"). Effective 30 April 2009, BlackRock assumed responsibilities for the management of the R3Fund and a number of R3 employees are now employed by BlackRock. In connectionwith this arrangement, the Company's investment advisory fee calculation wasmodified to exclude the amounts invested in the R3 Fund.
10. Line of credit
The Company has entered into an Uncommitted Facility Agreement (the "FacilityAgreement") and related Security Agreement with the Sub-Administrator. Advancesunder the Facility Agreement are secured by all of the Company's investments inprivate investment funds. Under the Facility Agreement, the Company ispermitted to borrow at a rate based on the UBS base rate. The Facility Agreementmay be terminated by either party at their discretion at any time. The borrowingrate on 30 June 2011 was 1.38% (30 June 2010: 1.56%; 31 December 2010: 1.47%).As at 30 June 2011, 30 June 2010 and 31 December 2010, the Company had nooutstanding balance under the Facility Agreement.The Company has also entered into a Committed Facility Agreement and relatedSecurity Agreement with the Sub-Administrator. Advances under the CommittedFacility Agreement are secured by all of the Company's investments in privateinvestment funds. The amount of the Committed Facility is US$10,000,000 and itis subject to renewal on 1 October 2011. The borrowing rate on the CommittedFacility is based on the UBS base rate and on 30 June 2011 the borrowing ratewas 1.38% (30 June 2010: 1.56%; 31 December 2010: 1.47%). There has been noborrowing on the Committed Facility.
11. Indemnifications
The Company enters into contracts that contain a variety of indemnifications. The Company's maximum exposure under these agreements, if any, is unknown. However, the Company has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
12. Subsequent events
Management has evaluated subsequent events occurring up to 25 August 2011, thedate that these financial statements were available to be issued. Allsignificant events that have occurred subsequent to the balance sheet date butprior to 25 August 2011 have been reported in these financial statements.
No significant events other than those reported, occurred subsequent to the balance sheet date but prior to 25 August 2011, that would have a material impact on the financial statements.
13. Publication of non statutory accounts
The financial information contained in this half yearly report does notconstitute statutory accounts as defined in the Companies (Jersey) Law 1991.The financial information for the six months ended 30 June 2011 and 30 June2010 has not been audited. The information for the year ended 31 December 2010has been extracted from the latest published audited financial statements,which have been filed with the Jersey Financial Services Commission. The reportof the Auditor for the year ended 31 December 2010 contains no qualificationand did not contain statements under section 113B(3) or (6) of the Companies(Jersey) Law 1991 (as amended).
14. Approval of the half yearly financial report
The half yearly financial report was approved by the Directors on 25 August 2011.
Copies of the half yearly financial report will be posted to shareholders assoon as practicable. Copies will also be available to the public from theCompany's registered office at Forum House, Grenville Street, St Helier, JerseyJE1 OBR, and on the Company's website at www.blackrockinternational.com/bars.25 August 2011Forum HouseGrenville StreetSt HelierJerseyJE1 OBR
For further information please contact:
Ian Webster,BlackRock (Channel Islands) Limited, Secretary - 015 3460 0802
Emma Phillips, Media & Communications - 020 7743 2922 BlackRock Investment Management (UK) Limited
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