4th Nov 2010 10:23
BLACKROCK ABSOLUTE RETURN STRATEGIES LTD
Interim Management Statement - 3 months to 30 September 2010
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 2010 to 30September 2010, and contains information that covers this period, and up to thedate of publication of this interim management statement. Please note furtherdetailed performance information, including the estimated weekly net assetvalues are available on the Company's website www.blackrockinternational.com/bars/library/literature.BlackRock Absolute Return Strategies Ltd is a diversified fund of hedge fundsinvestment vehicle with exposure to absolute return strategies which seek togenerate absolute returns in excess of the yields on short term LIBORsecurities, while endeavouring to minimise the corresponding level ofvolatility.
The Company aims to generate a target net return of approximately 3 month LIBOR plus 6% per annum with a standard deviation of 8%.
Stock PerformanceCumulative Performance: 30 30 31 31 30 September June March December September Since 2010 2010 2010 2009 2009 Launch* US$ Shares Share Price $8.45 $8.00 $8.35 $7.40 $7.20 -15.5Net Asset Value per share $9.93 $9.59 $9.62 $9.32 $8.95 -0.7Discount 14.90% 16.58% 13.20% 20.60% 19.55% - EUR Shares Share Price €8.20 €7.81 €7.85 €7.31 €7.16 -18.00Net Asset Value per share €9.64 €9.30 €9.35 €9.04 €8.68 -3.6 Discount 14.94% 16.02% 16.04% 19.14% 17.51% - GBP Shares Share Price £7.97 £7.72 £7.88 £7.23 £7.13 -20.3Net Asset Valueper share £9.67 £9.31 £9.35 £9.04 £8.67 -3.3Discount 17.58% 17.08% 15.72% 20.02% 17.76% -
*launch 24 April 2008
Manager's Review
Market and Strategy Commentary
"Uncertainty and expectation are the joys of life. Security is an insipidthing." said William Cowper, the 18th century English poet. If Cowper is right,then the last several months have been particularly joyous for investors, asglobal markets were fraught with uncertainty and expectation. Economic growthhas been positive, but weaker than anticipated. Regulatory authorities haveacted to restore confidence in the financial system (e.g. US financialregulation passed, European banks largely passed stress tests, the Basel IIIframework was established), but capital remains scarce in many areas of themarket. Central banks are maintaining near-zero interest rates and expandingmonetary supply, but unemployment remains high and consumers are discouraged.As a result, asset prices have been volatile, with "risk on, risk off"describing the market's rapid sentiment swings.Though it would be a stretch to state that uncertainty gives us joy, as hedgefund investors we tend to be comfortable with uncertainty, at least as itrelates to general economic and market expectations. Our comfort stems from twobasic notions: (1) returns for the hedge fund strategies in which we invest aretypically not predicated on economic growth; and (2) investment opportunitiesfor our underlying hedge funds are often propelled by uncertainty andcomplexity, and the supply/demand imbalances to which these factors give rise.This second notion was particularly evident during the recent quarter. Wewitnessed a multitude of these supply/demand imbalances, many of which presentattractive opportunities for our hedge fund managers. In the paragraphs thatfollow we offer examples of the environment and opportunities that arose ineach of the four primary hedge fund disciplines to which we allocate capital:Relative value. During the third quarter, one manager noted a supply/demandimbalance created by a regulatory restriction in Australia. Specifically,Australian banks are restricted for regulatory reasons from holding Australiandollar-denominated debt of other Australian banks. As a result, Australianbanks often raise capital denominated in US dollars and then enter intocurrency swaps to convert the exposure back to their native currency. Theotherwise unnatural demand and diminished presence of banks that would normallytake the other side of this trade have contributed to a pricing distortionbetween AUD and USD LIBOR rates from which relative value managers couldcapitalise. In the current environment, we believe that governments around theworld will continue to fuel the supply of relative value opportunities asfunding needs are significant and the regulatory environment rapidly evolves.Event driven. With bank and middle-market lending decimated by the financialcrisis, bond markets are among the few remaining sources for borrowed capital.However, in this environment, bond markets are only meaningfully accessible tolarge and/or high quality corporations. While managers may or may not beinterested in the bonds themselves, we believe this cheap debt may spur a waveof corporate activity that can fuel opportunities for a number of strategies.Many issuers are restructuring balance sheets, buying back shares and makingstrategic acquisitions, all of which provide potential investments for eventdriven managers. We like these trades because they are generally more dependenton company-specific actions than on the overall health of the economy.Fundamental long/short. We believe there is permanence to the thoughtfulinvestor's effort to discriminate between stronger and weaker companies.Moreover, due to long and short positioning that reduces net exposure, theeffect of up and down markets can be less impactful to underlying fund returns.However, favorable market conditions can have a positive secondary impact, ascompanies may be more likely to implement measures such as share buybacks,dividend increases, strategic acquisitions and capital structure changes thatcan be accretive to shareholders. For example, Microsoft recently tookadvantage of the low interest rate environment to issue $4.75 billion of debt,which is expected to fund share repurchases and a dividend boost. As with eventdriven strategies, corporate actions such as this can create catalysts torealise value identified by fundamentally driven long/short managers.Direct sourcing. Middle-market corporations represent another segment of themarket facing a capital imbalance. While larger corporations have been able toaccess credit markets, taking advantage of low rates and high investor demandto refinance existing debt, many middle-market borrowers may be too small toaccess high yield markets. These companies typically have relied upon leveragedloans provided by regional banks or collateralised loan obligations to meetfinancing needs. However, both of these sources of capital have beenmeaningfully impaired. Estimates show that of the over 150 middle-marketlenders competing for transactions in 2007, fewer than 20 are still in businesstoday. In this environment, certain direct sourcing managers have beenunderwriting loans to stressed companies at liquidation value, effectivelypricing in the worst-case scenario based on today's valuations, resulting inpayoff scenarios with a potentially limited downside.In all, while long-only investors may worry about what tomorrow's headlineswill bring, we feel that our approach - focusing on diversifiable idiosyncraticrisks, taking advantage of good and bad news, reducing our reliance on broadermarkets - engenders a welcome respite from the economic uncertainty facinginvestors today.
Investment Outlook
According to financial theory, an investment's expected return is positivelyassociated with its risk. Within this classic framework, the expected returncan be broken down into a "risk-free" rate of return on short-term USTreasurys, plus a risk premium that grows proportionately with the investment'sperceived risks in order to attract risk-averse capital.We believe it is informative to think of the expected return on absolute returnstrategies in these terms. Skilled managers can earn attractive risk premiumsby consistently identifying and taking advantage of situations whereinvestments are unable to attract capital at reasonable risk premiums, and somust increase these premiums to outsized levels.By their nature, these opportunities are usually difficult to find and capture.However, in 2008 and 2009, hedge fund investment returns were dominated by auniversal and dramatic expansion, and subsequent contraction, of risk premiumsat a magnitude that was truly exceptional. As markets continue to recover fromthese stresses, we are making two general observations:First, risk premiums are still not normalising uniformly. Investor preferencesand structural changes in financial markets have created a strong preferencefor more-liquid and less complex assets, leaving a shortage in the supply ofcapital for less-liquid, more complex investments. Skilled managers can help tomitigate the risks to complexity, and manage liquidity to earn thestill-outsized premiums clamoring for capital in these areas of the market.Second, in those areas of the market where risk premiums have generallynormalised, investors may find 2010 and beyond to be more challenging thanprevious cycles. With risk-free rates declining to near-zero, expected nominalreturns on risk investments should fall, resulting in "normal" expected returnslower than those experienced 5-10 years ago.
Investors may be wise to recalibrate their expectations and accept the potential for lower nominal returns in a low risk-free rate environment. The alternative - expecting nominal returns typically associated with higher risk-free rates - may lead to risk taking behavior that is not adequately compensated over time.
Material Events & Transactions
There were no material events or transactions, except as disclosed, during thethree months to 30 September 2010, nor was the Company involved in any othermaterial transactions during the period except the purchase and sale ofsecurities undertaken in the normal course of its business.
Conversion of Shares
June 2010 Conversion
On 12 July 2010 the Company announced that due to an error made by the Company's registrar the share conversions between share classes previously announced on 17 June were incorrect and the correct share conversions for the 30 June 2010 Currency Conversion Calculation Date were:
Shares converting from:
Euro denominated Shares to Sterling denominated shares: 121,964
Euro denominated Shares to US Dollar denominated shares: 733
It was announced on 28 July 2010 that the 30 June conversion had been completedand on the basis of the net asset values of the Company's shares as at 30 June2010, 122,697 Euro denominated shares had converted to 99,763 Sterling and 870US Dollar denominated shares. The currency conversion ratios were:
1.18690314 US Dollar denominated shares for every one Euro denominated share
0.81797088 Sterling denominated share for every one Euro denominated share
The foreign exchange rates used as at 30 June 2010 were:
EUR / USD 1.22
EUR / GBP 1.49
Shareholder CREST accounts for those shareholders for whom conversion requests were received were credited with new shares on 30 July 2010.
99,763 Sterling denominated Shares and 870 1,034 Dollar denominated Shares wereadmitted to the official list of the UK Listing Authority and to trading on theLondon Stock Exchange on 30 July 2010.
September 2010 Share Conversion between Share Classes
The results of the 30 September 2010 Currency Conversion Calculation Date were announced on 17 September 2010. Conversion notices were received from shareholders as follows:
Shares converting from:
Euro denominated Shares to Sterling denominated Shares 29Sterling denominated Shares to Euro denominated Shares 124
US Dollar denominated Shares to Sterling denominated Shares 1,496,110
Sterling denominated Shares to US Dollar denominated Shares 1,041,962
Euro denominated Shares to US Dollar denominated Shares 150,044
It was announced on 28 October 2010 that the 30 September conversion had beencompleted and on the basis of the net asset values of the Company's shares asat 30 September 2010, the following conversions would be undertaken:Currency of Share Total Shares to be converted to be Currency of Share to be converted to from converted US Dollar Sterling Euro US Dollar 1,496,110 - 977,365 - Sterling 1,042,086 1,594,988 - 143 Euro 150,073 198,585 25 - Total 1,793,573 977,390 143
The currency conversion ratios were:
0.86206896551 Sterling denominated share for every one Euro denominated share
1.15322580645 Euro denominated shares for every one Sterling denominated share
0.65327148404 Sterling denominated share for every one US Dollar denominated share
1.53075639994 US Dollar denominated shares for every one Sterling denominated share
1.32351176988 UD Dollar denominated shares for every one Euro denominated share
The foreign exchange rates used as at 30 September 2010 were:
EUR / GBP 0.867432GBP / EUR 1.152828US$ / GBP 0.636274GBP / US$ 1.57165EUR / US$ 1.3633
Shareholder CREST accounts for those shareholders for whom conversion requests were received were credited with new shares on 29 October 2010.
977,390 Sterling denominated Shares, 143 Euro denominated Shares and 1,793,573 US Dollar denominated Shares were admitted to the official list of the UK Listing Authority and to trading on the London Stock Exchange on 29 October 2010.
Reverse Auction Tender Offer
The results of the reverse auction tender offer which had closed on 19 July 2010, for up to 7.5% of each of the Sterling, Euro and US Dollar denominated shares in issue on 30 April 2010 were announced on 20 July 2010.
- 222,158 US Dollar denominated Shares (10.96 per cent of the Company's US
Dollar denominated Shares;
- 341,623 Euro denominated Shares (15.61 per cent of the Company's Euro
denominated Shares; and
- 4,470,458 Sterling denominated Shares (41.86 per cent of the Company's
Sterling denominated Shares in, excluding treasury shares);
were tendered.
The Strike Discounts applied in determining the Strike Price for each of the Company's share classes were:
- US Dollar denominated Shares, 9.00 per cent;
- Euro denominated Shares, 11.00 per cent; and
- Sterling denominated Shares, 14.00 per cent.
Those shareholders who tendered Shares at a discount level narrower than the Strike Discount applied to the relevant share class(es) did not have their Shares repurchased.
Those shareholders who validly tendered Shares at a discount level wider than the Strike Discount had all such shares repurchased in full at the Strike Price.
Shareholders who validly tendered Shares at the Strike Discount were scaled back pro rata in proportion to other Shares tendered for redemption at the Strike Discount with approximately 64.23 per cent of each such tender of US Dollar, 8.61 per cent of each such tender of Euro and 17.46 per cent of each such tender of Sterling denominated Shares tendered accepted.
The Strike Price for each of the share classes was announced on 2 August 2010 as follows:
US Dollar denominated Shares - US$8.62Euro denominated Shares - €8.18; andSterling denominated Shares - £7.91.
165,505 US Dollar denominated Shares, 164,178 Euro denominated Shares and 801,045 Sterling denominated Shares were subsequently repurchased under the Reverse Auction Tender Offer and placed in treasury.
Settlement of the Reverse Auction Redemption Offer consideration was made on 7 September 2010.
Monthly and Quarterly Reports
The Company continued to publish monthly and quarterly updates during the period, copies of which were also submitted to the Document Viewing Facility and more recently the National Storage Mechanism.
Liquidity Update
The following announcement was released on 2 July 2010:
Company Update - Liquidity Profile
The Board of Directors is providing shareholders with an estimate of the current liquidity profile of the Company's portfolio.
The table below sets forth the Company's current estimate of the earliestpossible redemption date schedule for the Company's portfolio. The liquidityanalysis assumes the following: (1) where redemption notices are currentlyplaced, it is assumed redemption proceeds will be received in the normal coursefollowing the applicable redemption date; (2) for portfolio holding for whichredemption is possible, and taking into consideration gates and lock-ups, asapplicable, it is assumed that redemption notices are placed today and proceedswill be received in the normal course following the applicable redemption date,or in the case of gates, redemption dates; (3) for portfolio holdings that areeither in side-pockets, suspended or liquidating, redemption dates areestimated based on the Investment Manager's current understanding of theunderlying fund's targeted date(s) for lifting its suspension or paying outproceeds, as applicable. In each case, actual receipt of proceeds will followthe corresponding redemption date.Date Cumulative Proceeds 30 September 2010 64.47% 31 December 2010 72.43% 31 March 2011 76.56% 30 June 2011 80.73% 30 September 2011 83.39% 31 December 2011 85.96% The above liquidity schedule is based on the Company's portfolio investmentsand related net asset values as of 1 June 2010, and actual or anticipatedchanges in liquidity (gates, side pockets, suspension or liquidation) that havebeen communicated to the Investment Manager by the underlying funds. Actualproceeds would be received following the relevant redemption date in accordancewith the underlying fund's stated terms, generally within 60 days, althoughwhere liquidity is constrained, receipt might be further delayed. Otherfactors, including future events, may affect the availability, amount or timingof receipt of proceeds. Any cash proceeds received may be used for a variety ofpurposes, as deemed necessary or appropriate by the Board of Directors and/orInvestment Manager, including the funding of investments, meeting the Company'shedging and other obligations and share buy backs or redemptions.
Half Yearly Financial Report
The Company announced its half yearly financial results for the period ended 30 June 2010 on 20 August 2010.
The Board is not aware of any material events or transactions, except as disclosed herein, occurring between 1 July 2010 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) Limited
SecretaryDate: 4 November 2010Important Information
AN INVESTMENT IN A FUND IS SPECULATIVE AND INCLUDES A HIGH DEGREE OF RISK,INCLUDING THE RISK OF A TOTAL LOSS OF CAPITAL. A FUND AND/OR ITS UNDERLYINGINVESTMENTS MAY BE ILLIQUID AND SUBJECT TO SIGNIFICANT RESTRICTIONS ONTRANSFER, AND INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THERISKS ASSOCIATED WITH SUCH INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. ALLINVESTORS SHOULD CAREFULLY REVIEW THE CONFIDENTIAL PRIVATE OFFERING MEMORANDUMAND GOVERNING DOCUMENTS FOR A FUND PRIOR TO MAKING AN INVESTMENT DECISION. ANYINVESTMENT DECISION WITH RESPECT TO A FUND MUST BE BASED SOLELY ON THEDEFINITIVE AND FINAL VERSION OF A FUND'S CONFIDENTIAL PRIVATE OFFERINGMEMORANDUM, GOVERNING DOCUMENTS AND SUBSCRIPTION AGREEMENT. THERE IS NOASSURANCE A FUND WILL ACHIEVE ITS OBJECTIVES.This confidential document is for informational purposes only and does notconstitute an offer to sell or a solicitation of an offer to buy any securitiesdescribed herein. Shares of the funds included in the Composite (as definedbelow) cannot be purchased except by way of a fund's Confidential PrivateOffering Memorandum, which contains numerous disclosures concerning the risksof investing in a fund and should be reviewed in its entirety prior toinvestment. Potential investors are urged to consult a professional advisorregarding the possible economic, tax, legal or other consequences of enteringinto any investments or transactions described herein. All investments risk theloss of capital and there is no guarantee or assurance that an investment in afund will achieve its investment objective. An investment in a fund isspeculative and should form only part of a complete investment program, and aninvestor must be able to bear the loss of its entire investment. Thisdiscussion has been prepared solely for the use of the intended recipient (the"Recipient") and is not to be distributed, except to the Recipient'sprofessional experts for purposes of advising the Recipient, without the priorwritten consent of the BlackRock Alternative Advisors business unit ofBlackRock, Inc. ("BAA").
The information in this document is provided solely with respect to consideration of an actual or contemplated investment in a fund and pursuant to the terms of a confidentiality agreement or understanding. No recipient is permitted to use this information in any way that would violate the securities-related laws, rules or regulations of any jurisdiction.
The information contained herein is proprietary and confidential and maycontain commercial or financial information, trade secrets and/or intellectualproperty of BAA and/or its affiliates (together with BAA, "BlackRock"). If thisinformation is provided to an entity or agency that has, or is subject to, openrecords or open meeting laws or similar or related laws, rules, regulations orpolicies that do or may permit disclosure of any portion of this information toany person or entity other than the entity to which it was provided byBlackRock (collectively, "Sunshine Laws"), BlackRock hereby asserts any and allavailable exemption, exception, procedures, rights to prior consultation orother protection from disclosure which may be available to it under theapplicable Sunshine Laws.Q-BLK Appreciation Composite ("QAC" or the "Composite") is a capital-weightedand time-weighted composite reflecting the actual or adjusted US Dollardenominated performance, as described below, of select classes of BAA'sAppreciation Strategy funds. Prior to 1 January 2009, the classes reflected inthe Composite included all US Dollar denominated classes of the constituentfunds; since 1 January 2009, the classes reflected in the Composite include allfee paying classes of the constituent funds. The funds included in theComposite share the same fundamental investment approach. The investmentobjective of each fund is to seek, over time, to achieve net returnscommensurate with the long run return on equities with half the volatility andlow correlation to the equity markets. No assurances can be given that thefunds' objectives will be met. In comparing the Composite's performancerelative to its objectives, it should be noted that the funds' risk and returnobjectives were lowered as of 1 August 2005 and were recharacterised in 2009.The funds included in the Composite each have different inception dates andcertain funds are closed to new investors. Certain other assets managed by BAAare not included in the Composite, as these assets are managed with differentobjectives and/or investment restrictions.
Certain Risk Factors
Past results are not necessarily indicative of future results. Historically,funds of funds and hedge funds have produced gains and losses due to changeswithin the equity, interest rate, credit, currency, commodity and relatedderivative markets. Additionally, gains and losses are impacted to varyingdegrees by investment acumen, market volatility, corporate activity, securitiesselections, regulatory oversight, trading volume and money flows. Theseelements and/or their rate of change may not be present in the future, and thusfuture performance may be impacted. Any investment in a fund involves a highdegree of risk. Investments in funds of funds and hedge funds can be highlyilliquid.The performance of funds of hedge funds will depend on the performance of theunderlying fund investments. There can be no assurance that a multi-managerapproach will be successful or diversified, or that the collective performanceof underlying fund investments will be profitable. Underlying fund managers maybe subject to limited regulation (or may not be registered with any regulatorybody), may experience potential conflicts of interest with respect to theirmanagement of allocated fund assets and from time to time, vis- -vis otherunderlying managers, may take opposing positions with respect to particularsecurities or investments. The funds included in the Composite will rely oninformation provided to it by the underlying fund managers and there may belimited ability to confirm or verify such information.Underlying fund managers may implement a variety of investment strategies andtechniques, including short selling, leverage, hedging (such as derivatives,swaps, forwards, futures and options) and securities lending. Underlying fundmanagers may invest in a wide array of investments, including non-USinvestments, non-US currencies, distressed assets, illiquid investments (suchas those subject to legal or regulatory restrictions on transfer), andcommodities and futures, each of which may have diverse associated risks,including counterparty risk, credit risk and liquidity risk.The secondary market for investments in a fund or its underlying fundinvestments is a recent development and as such may exhibit illiquidity, wideor non-existent bid-offer spreads, and brokerage charges. In addition, theremay be restrictions on transferring fund investments. A fund may be leveraged,which may increase the risk of investment loss, and its performance may bevolatile. Funds of funds and hedge funds may involve complex tax structures;therefore, there may be delays in distributing important tax information. Fundsof funds and hedge funds are not subject to the same regulatory requirements asSEC registered funds or mutual funds and are not required to provide periodicpricing or valuation information to investors. A fund and its underlying fundinvestments may have significant fees and expenses that would reduce returns.
Performance Record
QAC (net) performance numbers are estimates calculated on an accrual basisduring the accounting close process for funds in the Composite and are based onestimated returns provided by each underlying fund manager. These calculationsare based on estimated returns rather than final reported information in orderto provide timely performance return information to investors. As a result, theperformance numbers shown may differ from performance numbers based on thefinal financial information for each underlying fund and adjustments are madeprospectively unless the Investment Manager determines the difference wasmaterial.Estimated performance numbers are particularly susceptible toinaccuracies during period of market volatility or uncertainty, and additionalinformation may become available subsequently that materially alters theseestimates. The Composite is denominated in US Dollars and does not reflectcurrency hedging activities and related costs that would be applicable tonon-USD denominated classes. QAC (net) performance numbers are net of the feesactually paid by the relevant class, with the exception of classes for whichactual fees are calculated in non-USD, in which case a 1% management fee and10% performance fee is applied to the USD-denominated gross performance (net ofexpenses) of the relevant class. Risk is computed as the annualised standarddeviation of monthly returns. The Sharpe Ratio measures the return earned overT-bills per unit of risk taken.This performance information is an estimate that is subject to change and basedin part on estimates received from the underlying funds' administrator orinvestment advisor, in some cases using assumptions that may be complex andsusceptible to significant uncertainty, and may prove incorrect. Estimatedvaluations are particularly susceptible to inaccuracies during periods ofmarket volatility or uncertainty, and additional information may becomeavailable subsequently which materially alters assumptions or other inputs tothe estimates. This may result in a material change to the Composite'sestimated reported net asset value and performance estimate. Should the netasset value materially change, the Composite will retroactively revise allcapital transactions of impacted investors as appropriate.Contribution to return estimates are based upon primary discipline. Theseestimates, as well as the other information contained herein, are beingprovided at the specific request of the recipient and are current as of thedate of this report. As a result, data shown for a particular period may varyfrom one report to another. It is important to note that the contribution toreturn estimates are based on certain opinions and assumptions about primarydiscipline which constitute the judgment of BAA and are subject to change. Inaddition, many fund managers operate under broad investment mandates and investin multiple disciplines and/or strategies. No attempt has been made toattribute single fund manager performance across multiple disciplines. As aresult, the contribution to return estimates provided herein may be of limiteduse.Minor variances in column, row and sectional totals are the result of roundingand have been allowed to maintain the integrity of the underlying financialdata. Information relating to the Composite's performance and its underlyingmanagers' qualifications, strategy exposure or portfolio composition wasprepared by BAA based on information believed to be reliable; however, noassurance of its completeness or accuracy can be made. In some cases, theComposite's underlying managers may manage more than one investment program.The performance information presented herein relates only to the describedinvestment program. BlackRock also advises other portfolios whose historicalrisk/return characteristics may be significantly different.
Indices
Index performance is taken from Bloomberg Financial Markets or the index'sproprietary website and is included for comparison only and, although usefulfor general observations, differences between the composition and constructionof such indices and the Composite's portfolio may limit their usefulness fordirect comparisons. For example, it should be noted that hedge fund indiceswill vary, in some cases significantly, from the composition of the Composite'sportfolio in terms of the number of positions, types of hedge fund strategiesincluded and distribution within such hedge fund strategies and othercharacteristics. Comparison of the Composite's results to indices thatrepresent asset classes other than hedge funds or funds of hedge funds arefurther limited by the significant inherent differences between such assetclasses, for example in terms of risk/return, correlations and othercharacteristics. Moreover, index information may or may not reflect thededuction of fees and expenses (refer to specific definitions), which couldfurther limit the comparative value of such information relative to theComposite.Characteristics of securities included within the indices are subject to changebetween rebalancing periods. These characteristics are applicable whensecurities are evaluated at rebalancing points but may be higher or lowerduring interim periods. Additionally, index providers may have varyingmethodologies for measuring and implementing constituent changes and differingrebalancing periods.S&P 500 Index ("S&P 500 Index") is a capital-weighted index that includes 500stocks representing all major industries. Returns are denominated in USD andinclude dividends. The Index is a proxy of the performance of the broad USeconomy through changes in aggregate market value.Citigroup Government/Corporate Index ("Citigroup Govt./Corp. Index") is amarket value-weighted index that includes fixed-rate US Treasury,government-sponsored, and corporate bonds with a minimum investment-grade ofBaa3, at least one year to maturity and a minimum outstanding of USD 50million. Returns are denominated in USD. The Index is a proxy for the broad USfixed income market.HFRI Fund of Funds Conservative Index ("HFRI FOF Conservative Index") is anequal-weighted index representing funds of funds that invest with multiplemanagers focused on consistent performance and lower volatility via absolutereturn strategies. The Index includes funds of funds tracked by Hedge FundResearch, Inc. and is revised several times each month to reflect updated fundreturn information. The Index is a proxy for the performance of the universe ofconservative funds of funds focused on absolute return strategies. Returns arenet of fees and are denominated in USD. Source: Hedge Fund Research, Inc., ©HFR, Inc. 15 October 2010, www.hedgefundresearch.com.The BofA Merrill Lynch 3-Month US Treasury Bill Auction Index ("BofAML T-billIndex") represents marked-to-market returns for on-the-run three-month USTreasury bills. Returns are denominated in USD. The Index is a proxy for theperformance of the broad US Treasury bill market.Certain statements contained in this document may be forward-lookingstatements. By their nature, forward-looking statements involve a number ofrisks, uncertainties and assumptions that could cause actual results or eventsto differ materially from those expressed or implied by the forward-lookingstatements. These risks, uncertainties and assumptions could adversely affectthe outcome and financial effects of the scenarios and events described herein.Forward-looking statements contained in this document that reference pasttrends or activities should not be taken as a representation that such trendsor activities will necessarily continue in the future. BlackRock undertakes noobligations to update or revise any forward-looking statements, whether as aresult of new information, future events or otherwise. You should not placeundue reliance on forward-looking statements, which speak only as of the dateof this document.Opinions and estimates offered herein constitute the judgment of BlackRock andare subject to change. All opinions and estimates are based on assumptions, allof which are difficult to predict and many of which are beyond the control ofBlackRock. In addition, any calculations used to generate the estimates werenot prepared with a view towards public disclosure or compliance with anypublished guidelines. In preparing this document, BlackRock has relied upon andassumed, without independent verification, the accuracy and completeness ofinformation provided by third parties. BlackRock believes that the informationprovided herein is reliable; however, it does not warrant its accuracy orcompleteness.This is an original unpublished work protected under copyright laws of theUnited States and other countries. All Rights Reserved. Should publicationoccur, then the following notice shall apply: © 2010 by BlackRock. No part ofthis document may be reproduced, stored in a retrieval system or transmitted inany form or by any means, electronic, mechanical, photocopying, recording orotherwise, without the prior written consent of BlackRock.
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