15th Nov 2011 16:24
BLACKROCK ABSOLUTE RETURN STRATEGIES LTD
Interim Management Statement - 3 months to 30 September 2011
To the members of BlackRock Absolute Return Strategies Ltd
This interim management statement has been produced solely to provide additional information to shareholders as a body to meet the relevant requirements of the UK Listing Authority's Disclosure & Transparency Rules. It should not be relied on by any other party for any other reason.
This interim management statement relates to the period from 1 July 2011 to 30 September 2011, and contains information that covers this period, and up to the date of publication of this interim management statement. Please note further detailed performance information, including the estimated weekly net asset values are available on the Company's website www.blackrockinternational.com/ bars/library/literature.
Following approval of the Managed Wind-down by Shareholders on 25 August 2011, BlackRock Absolute Return Strategies Ltd is managed with the intention of realising all remaining assets in the Portfolio, in a manner consistent with the principles of prudent investment management and spread of investment risk, with a view to returning invested capital to the Shareholders in an orderly manner.
Stock PerformanceCumulative Performance: 30 30 31 31 30 September June March December September Since 2011 2011 2011 2010 2010 Launch*US$ Shares Share Price $9.45 £9.45 $8.82 $8.04 $8.45 -5.5%Net Asset Value per share $10.23 $10.44 $10.44 $10.16 $9.93 2.3%Discount 7.62% 9.48% 15.52% 20.87% 14.90% EUR Shares Share Price €9.20 €9.17 €8.29 €8.28 €8.20 -8.0%Net Asset Value per share €9.96 €10.16 €10.14 €9.87 €9.64 -0.4%Discount 7.63% 9.74% 18.24% 16.11% 14.94% GBP Shares Share Price £9.23 £9.22 £8.46 £7.87 £7.97 -7.7%Net Asset Value per share £9.98 £10.18 £10.17 £9.89 £9.67 -0.2%Discount 7.51% 9.43% 16.81% 20.42% 17.58% *launch 24 April 2008Manager's Review
Market and Strategy Commentary
A convergence of woes in Europe, Asia and the US continued to dampen investor sentiment in the third quarter, leading to material market declines. European events were once again in focus, as sentiment vacillated between positive developments keeping Greece from insolvency, and fears that a default or restructuring may cause serious harm to Eurozone banks holding Greek debt. While Greece dominated the spotlight, the specter of further bailouts in the European periphery set investors further on-edge.
News out of the US was not comforting either. High unemployment and a decelerating economy promoted a cautious investor sentiment that quickly turned dour. Real GDP grew at an annualized rate of a little over 1% during the second quarter. With few apparent catalysts and strong political divides over governmental roles in the recovery, prospects for substantial near-term improvement seem dim. Further, in China, worries that economic deceleration in the west will cripple export demand, and a potential for corrections in real estate prices and broader lending have spurred concerns that its economic growth may be sputtering, inciting a 20.7% drop in the Hang Seng Index (performance in USD) during the third quarter.
Price movements dominated by macroeconomic news created a difficult investing environment for fundamentally-driven hedge fund managers. The VIX nearly tripled in the third quarter to peaks in the high 40's, and equity markets were broadly down, with the S&P 500 Index posting a 13.9% decline, the MSCI Europe Index falling 22.6%, and the MSCI Pacific Index, representing larger Asia, depreciating 11.7% (all performance in USD).
Relative Value. Performance across relative value managers was mixed across strategies. Rates strategies were a bright spot during the quarter, contributing fairly consistent, modest returns over the three months, while tail hedging strategies generated pronounced gains. Sovereign debt concerns and monetary policy initiatives, such as "Operation Twist", generated actionable dislocations along yield curves, opportunities in bond vs. swap basis trades, and trades surrounding Federal Reserve auctions. Volatility strategies posted dispersed results as volatility and correlation levels reach multi-year highs, but select reversion trades were challenged by their unexpected persistence. Other managers found profits from targeting disparities between safer and riskier markets, or volatility curve dislocations in certain option markets. Convergence strategy results were hurt by widening convertible bond discounts to fair value, a continued decline in convertible bond supply, as well as by idiosyncratic relative value special situation trades that lost ground during the quarter, particularly in European positions where systemic fears had a notable impact on valuations.
Event Driven. Risk arbitrage activity generally detracted over the course of the third quarter, though performance was relatively dispersed across managers. Global deal activity slowed from the second quarter's pace, primarily from a slowdown in activity in Europe as potential acquirers waited for a clearer economic picture. As pessimism gripped markets, deal spreads widened materially in August and September, causing managers to re-adjust their exposures toward safer deals with improved spreads. Notable deals during the quarter included BHP Billiton's bid for Petrohawk Energy, and Berkshire Hathaway's acquisition of Lubrizol, as well as prominent broken deals that included both Hertz and Avis walking away from further bids for Dollar Thrifty, and a withdrawn attempt by ConAgra Foods to purchase Ralcorp Holdings. Distressed managers largely reported modest losses, suffering mark-to-market adjustments in the face of risk spread widening in both credit and equity markets, particularly managers with material exposure to post-reorganization equities. Yet, market stresses introduced new distressed opportunities with default rates ticking up and capital liquidity receding.
Fundamental Long/Short. Long/short managers endured a difficult quarter, as macro-driven volatility pummeled risk asset valuations, in turn generating losses for most managers with materially positive net exposure. However, many equity managers added value relative to broader equity indices through contributions from their short exposures, with notable gains from solar-related names, for-profit education companies and REITs, among many others. Long exposures to defensive names, such as discount retailers, also helped better-performing managers in a difficult environment. The themes were similar on the credit side, as material long exposures to credit risk tended to suffer declines, while short European sovereign and financial exposures helped to hedge systemic concerns. In most cases, managers worked to reduce gross and net exposures until the economic backdrop clears, and performance becomes more differentiated across securities.
Direct Sourcing. Managers generally posted positive performance in July, but gave it back in August and September as investor risk concerns negatively impacted mark-to-market values. However, losses from price declines were softened by cash flows generated by loans and other income-producing assets. Furthermore, the systemic concerns and economic malaise behind the recent sell-off drove an expanded opportunity set as valuations and capital liquidity retreated, including defaulted or stressed commercial real estate-related debt sold by cash-strapped investors, direct lending for high yield borrowers facing tightened access to capital, and companies selling assets to raise capital or strategically reposition themselves.
Investment Outlook
Although a number of themes are affecting financial markets, the overriding concern driving much of the significant day-to-day swings and highly correlated market movements is the state of the European fiscal crisis and the potential secondary effects of this crisis in other parts of the world. While a Greek default (or equivalent) has generally been priced into Greek debt, the unknowns surrounding a potential contagion effect are contributing to ongoing skittishness across the marketplace, with events of 2008 still fresh on the minds of investors.
Recent market volatility has not just been linked to the uncertainty over the debt problems of the Eurozone. The US is maintaining accommodative monetary policies in a battle against weak employment and economic growth. Japan is still dealing with the long-term effects of its recent natural disaster, as well as the impact of a strengthening currency on exports. Investors fear the potential consequences of a Chinese economic slowdown on the global economy. These challenges are significant, but it is important to note that, unlike 2008, recent market volatility thus far appears to be driven by wide oscillations in investor sentiment and economic fundamentals, not a broken financial system (e.g., financing problems with counterparties, extreme market illiquidity, etc.).
While absolute return strategies are not invulnerable to potential systemic stresses, they have features that have historically helped investors weather short-term volatility:
• The ability to hedge residual primary market risks can be a useful advantage in market downturns.• The potential to add value through single-name, idiosyncratic short positions can be helpful when risk aversion increases, as volatility typically impacts fundamentally weaker issuers more than sound issuers.• The investment flexibility to use options and volatility exposure to source relatively cheap downside protection (sometimes referred to as "tail event hedging"), potentially benefiting from volatility spikes and dynamic trading.
In short, we believe that many successful managers are able to control risk in such environments by using these tools to fashion opportunities where downside protection is combined with upside potential. While we have observed that managers have been positioning their portfolios more conservatively in response to building economic and political risks, we also note that environments rich with investor uncertainty, government intervention and lopsided incentives can be an abundant source of pricing inefficiencies that are the foundation of opportunities for skilled managers.
Material Events & Transactions
There were no material events or transactions, except as disclosed, during the three months to 30 September 2011, nor was the Company involved in any other material transactions during the period except as disclosed herein.
Notices of Class Meetings of holders of Euro Shares, Sterling Shares and US Dollar Shares
It was announced on 15 July 2011 that the Company had posted a Circular, including the Notice of an Extraordinary General Meeting and Notices of Class Meetings of holders of Euro Shares, Sterling Shares and US Dollar Shares, and forms of proxy to shareholders in respect of:
proposals for a managed wind-down of the Company; amendment to the Company's investment policy and objective; amendment to the Company's currency hedging programme; and amendmentto the Company's articles of association.
The full text of the circular was reproduced in the announcement and a copy of the circular was sent to the National Storage Mechanism.
Results of Extraordinary General Meetings and Class Meetings
On 18 August 2011 it was announced that the class meetings held on 18 August 2011, in respect of the Euro Shares and the US Dollar Shares had been inquorate. The extraordinary general meeting and class meetings in respect of the Euro, Sterling and US Dollar classes of Shares were therefore adjourned for seven days in accordance with the Company's articles of association.
After the reconvened meetings had been held on 25 August 2011 it was announced that at the Extraordinary General Meeting and the class meetings the following special resolution had been passed at each of the meetings.
THAT:
(a) the Company modify its Investment Objective and Policy in the manner described in the Circular sent by the Company to its Shareholders on 15 July 2011;(b) the Company modify its currency hedging programme in the manner described in the Circular sent by the Company to its Shareholders on 15 July 2011; and(c) the New Articles, which are drafted to effect the Proposals described in the Circular sent by the Company to its Shareholders on 15 July 2011, be approved and adopted as the articles of association of the Company in substitution for and to the exclusion of the existing Articles in the form presented to the meeting and initialed by the Chairman for the purpose of identification.
Votes received in respect of the Meetings were announced as follows:
Extraordinary General For Against TotalMeeting Euro class 408,817 - 408,817 Sterling class 7,209,619 - 7,209,619 US dollar class 140,000 - 140,000 Total 7,758,436 - 7,758,436 Class Meetings For Against Total Euro class 449,147 - 449,147 Sterling class 7,195,292 - 7,195,292 US dollar class 145,250 - 145,250Conversion of Shares
It was announced on 26 October 2011 that the 30 September conversion had been completed and on the basis of the net asset values of the Company's shares as at 30 September 2011, the following conversions would be undertaken:
Currency of Share to be Currency of Share to be Total Shares to be converted to converted from converted US Dollar Sterling Euro Sterling 679,436 1,033,222 - - Euro 6,623 8,635 - - Total - 1,041,857 - - Conversion Ratios
The Currency Conversion Calculation Date was 30 September 2011. On the basis of the net asset values of the Company's Shares as at 30 September 2011 (as previously announced on 24 October 2011) (and using assumed spot currency exchange rates as appropriate at the Currency Conversion Calculation Date), the conversion ratio, calculated in accordance with the Company's Articles of Association, were as follows:
1.520705409 US Dollar denominated Shares for every one Sterling denominated Share
1.303789823 US Dollar denominated Shares for every one Euro denominated Share
The following foreign exchange rates as at 30 September 2011 were used:
GBP / US Dollar 1.5600Euro / US Dollar 1.3388
Shareholder CREST accounts for those shareholders for whom conversion requests had been received were credited with new shares on 28 October 2011.
1,041,857 US Dollar denominated Shares were admitted to the official list of the UK Listing Authority and to trading on the London Stock Exchange on 28 October 2011.
Monthly and Quarterly Reports
The Company continued to publish monthly and quarterly updates during the period, copies of which were also submitted to the National Storage Mechanism.
Liquidity Update
The following announcement was released on 24 October 2011:
Company Update - Liquidity Profile
The Board of Directors is providing shareholders with an estimate of the current liquidity profile of the portfolio of BlackRockAbsolute Return Strategies Ltd (the "Company"). This liquidity profile relates to the availability of funds without taking into consideration issues of portfolio balance. Generally, certain strategies such as Long/Short Equity are more liquid than other strategies such as Distressed investing. In order to maintain portfolio balance, it may be deemed advisable to effectuate liquidity in a balanced manner rather than the most expeditious manner. This may lead to a slower pace of actualized monetizations as compared to the table below.
The table below sets forth the Company's current estimate of the earliest possible redemption date schedule for the Company's portfolio. The liquidity analysis assumes that: (1) where redemption notices are currently placed, it is assumed redemption proceeds will be received in the normal course following the applicable redemption date; (2) for portfolio holdings for which redemption is possible but redemption notices have not yet been placed due to the balanced manner in which the wind-down is being managed, and taking into consideration lock-ups, fund-level gates that are currently implemented and any investor-level gates, as applicable, it is assumed that redemption notices have been placed at 1st October 2011 and proceeds will be received in the normal course following the applicable redemption date(s); (3) for portfolio holdings that are either in side-pockets, suspended or liquidating, redemption dates are estimated based on the Investment Manager's current understanding of the underlying fund's targeted date(s) for lifting its suspension or paying out proceeds, as applicable. In each case, actual receipt of proceeds will follow the corresponding redemption date.
Date Cumulative Proceeds 31st October 2011 40.3% 30th November 2011 40.3% 31st December 2011 78.0% 31st March 2012 81.9% 30th September 2012 93.8% 30th September 2013 95.4%
The above liquidity schedule is based on the Company's portfolio investments and related estimated net asset values as of 1 October 2011(1), and actual or anticipated changes in liquidity (gates, side pockets, suspension or liquidation) that have been communicated to the Investment Manager by the underlying funds.
Actual proceeds would be expected to be received following the relevant redemption date in accordance with the underlying fund's stated terms, generally within 60 days (with the exception of proceeds held back until the completion of the applicable annual audit), although where liquidity is constrained, receipt might be further delayed. Other factors, including future events, may affect the Company's ability to redeem its holdings in accordance with the estimated timeframes set out above, as well as the availability, amount or timing of receipt of redemption proceeds.
The above details of the Company's estimated portfolio liquidity profile 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 managed wind-down of the Company's portfolio which was approved by shareholders on 25 August 2011. In addition, there is no guarantee that the Company's assets will be realized at their net asset value, and it is possible that the Company may not be able to realize some of its assets at any value.
Notes:
(1) The above liquidity schedule is based on the estimated US dollar net asset values communicated to the Investment Manager by the underlying funds. These estimated net asset values do not take into account the potential impact of the Company's currency hedging policy. Currency fluctuations may impact materially the actual redemption proceeds available for distribution to shareholders.
Half Yearly Financial Report
The Company announced its half yearly financial results for the period ended 30 June 2011 on 25 August 2011.
The Board is not aware of any material events or transactions, except as disclosed herein, occurring between 1 July 2011 and the date of publication of this interim management statement which would have a material impact on the financial position of the Company.
BlackRock (Channel Islands) LimitedSecretary
Date: 15 November 2011
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