Interim Statements

FRM Credit Alpha Limited 27 February 2008 FRM CREDIT ALPHA LIMITED (Incorporated in Guernsey) INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JULY 2007 TO 31 DECEMBER 2007 TABLE OF CONTENTS PAGE DIRECTORS AND OTHER INFORMATION 3-4 DIRECTORS' RESPONSIBILITY STATEMENT 5 INVESTMENT ADVISER'S REPORT 6-8 BALANCE SHEET 9 INCOME STATEMENT 10 STATEMENT OF CHANGES IN NET ASSETS 11 STATEMENT OF CASH FLOWS 12 NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS 13-20 DIRECTORS AND OTHER INFORMATION DIRECTORS Peter Atkinson (Chairman) * Richard Hotchkis * Damian Johnson Andrew Duquemin (appointed 11 September 2007)* * independent non-executive REGISTERED OFFICE PO Box 173 Trafalgar Court Admiral Park St. Peter Port Guernsey GY1 4HG MANAGER AND COMPANY SECRETARY FRM Investment Management Limited PO Box 173 Trafalgar Court Admiral Park St. Peter Port Guernsey GY1 4HG INVESTMENT ADVISER Financial Risk Management Limited 15 Adam Street London WC2N 6AH IRISH LISTING SPONSOR McCann Fitzgerald Listing Services Limited Riverside One Sir John Rogerson's Quay Dublin 2 Ireland SOLICITORS Herbert Smith LLP as to English Law Exchange House Primrose Street London EC2A 2HS as to Irish Law McCann Fitzgerald Riverside One Sir John Rogerson's Quay Dublin 2 Ireland SOLICITORS Carey Olsen As to Guernsey Law PO Box 98 7 New Street St. Peter Port Guernsey GY1 4BZ REGISTRAR Capita Registrars (Guernsey) Limited 2nd Floor No 1 Le Truchot St. Peter Port Guernsey GY1 4AE DIRECTORS AND OTHER INFORMATION (continued) AUDITORS PricewaterhouseCoopers CI LLP PO Box 321 National Westminster House Le Truchot St. Peter Port Guernsey GY1 4ND ADMINISTRATOR JPMorgan Hedge Fund Services (Ireland) Limited Newenham House Northern Cross Malahide Road Dublin 17 Ireland CUSTODIAN JPMorgan Chase Bank, National Association (London Branch) 125 London Wall London EC2Y 5AJ FINANCIAL ADVISOR Winterflood Securities Limited AND CORPORATE BROKER Cannon Bridge House 25 Dowgate Hill London EC4R 2GA LENDER Citibank, N.A. 390 Greenwich Street 4th Floor New York NY 10013 DIRECTORS' RESPONSIBILITY STATEMENT The Directors are responsible for preparing financial statements for each financial period which give a true and fair view, in accordance with applicable Guernsey law and International Financial Reporting Standards, of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing those financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors confirm that they have complied with the above requirements in preparing the financial statements. The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with The Companies (Guernsey) Law, 1994 and The Collective Investment Schemes (Class B) Rules, 1990. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are also responsible for the maintenance and integrity of the website on which these financial statements can be published. Legislation in Guernsey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. INVESTMENT ADVISER'S REPORT FOR THE PERIOD FROM 1 JULY 2007 TO 31 DECEMBER 2007 Performance This period has been extremely positive for FRM Credit Alpha Limited during which time the company's shares have gained 9.31%. During the same period the net asset value increased from 103.1 pence to 111.80 pence; an increase of 8.44%. This return compares favourably with the returns provided by similar asset classes: for the same period the Merrill Lynch High Yield Master II Index (GBP hedged) returned -0.40%, JP Morgan Global Government Bonds (GBP Hedged) returned 12.06% and 1 month Sterling Libor returned 3.14%. This is a very pleasing result in an environment that proved extremely hostile to credit investments generally. Points to note include: • Most managers reported positive returns over the period • Net exposure to the credit markets averaged 45% • The portfolio as a whole was approximately 23% net short sub-prime related securities Market Environment During July the market witnessed a major re-pricing on the back of sub prime fears and oversupply in the leveraged loan market. The Merrill Lynch HY Master II dropped -3.1%, the largest fall in 5 years. Financial markets were hit by a substantial rise in volatility, and the extremely high leverage in the system was under pressure as risk reduction began to take hold. Several levered credit hedge funds were caught in the liquidity squeeze, with Basis Capital and Sowood being the best-known of those that had to close down. Other credit related instruments were also hit; the S&P/LSTA Leveraged Loan Index was down -3.35%; the previous maximum drawdown was September 2001, when it fell -1.52%. Credit markets continued to be in disarray in August. Although the Merrill Lynch HY Master II returned +1.12%, high yield spreads rose 35bps, to 462bps. Given this confused backdrop hedge fund managers found it difficult to return positive numbers: hedges did not pay off and value positions were pushed into negative territory. Risk reduction and deleveraging, as well as the expectation of new supply, all contributed to increased dislocation and market volatility. The announcement by President Bush on the last day of the month that homeowners in trouble would be helped, resulted in a 5% rally across mortgage related securities. Notably August saw managers in all strategies reduce net exposure levels from around 40 % in June to 30%. In September credit spreads tightened as fears of a liquidity-driven crisis abated, largely due to the aggressive 50bps Fed Funds cut to 4.75%. The Merrill Lynch HY Master II returned 2.4% as high yield and distressed bonds moved a little higher. That said credit spreads in some sectors widened dramatically and some 'levered carry' hedge funds continued to be under pressure, with many reporting negative returns in spite of the market's rally. Managers expected continued choppiness, and shifted exposures to senior levels of the capital structure in older, less levered transactions, as well as into smaller, niche companies which are finding financing more difficult as banks have their balance sheets squeezed. High yield indices ended October in positive territory, with the Merrill Lynch HY Master II up 0.6%. However, spreads rose 17bps to close at +436bps, having been as low as +381bps during the month. There were mixed messages within credit markets: Both GDP and 3Q company data pointed to stable fundamentals, and the month had sizable new issuance in both investment grade ($82bn) and high yield ($19bn). These deals saw strong demand and were both upsized and placed at better than anticipated levels. The loan market successfully absorbed $13.5bn 1st Lien paper by Texas Electric which was issued along with $7.5bn of bonds, as financing for a KKR buyout. Moody's downgraded $33bn of 2006 sub prime 1st lien asset backed securities, put $24bn Aaa- and Aa- rated securities on watch, and downgraded homebuilders such as Centex, Pulte and Lennar on disappointing results. Financials and bond insurers began to acknowledge the impact of the credit crisis on their businesses: Citigroup, Bank of America and Washington Mutual reported significantly weaker results, with many others admitting to large losses from securitised products. Finally, housing starts fell in September by an astonishing 10% to a 14-year low. At month-end the Fed cut by 25bps in response to weakness in capital markets and declining investor confidence. INVESTMENT ADVISER'S REPORT FOR THE PERIOD FROM 1 JULY 2007 TO 31 DECEMBER 2007 (continued) Market Environment (continued) Credit spreads deteriorated significantly in November. The Investment Grade market underperformed Treasuries by 270bps, its worst month on record, whilst High Yield spreads rose to a four year high of almost 600bps, before rallying to 575bps. The Merrill Lynch HY Master II fell 2%. New issue activity in both High Yield and Leveraged Loans ground to a halt. One indication of the market deterioration that occurred during month was that three months ago, only 20 issues yielded above 13% whilst in November there were over 170. The strategy of buying any asset with a high yield, irrespective of fundamentals, no longer appealed. Investors avoided highly levered companies, both in debt and equity markets. Distressed names and post-reorganisation equity sold off, particularly in consumer-related sectors. An index of Homebuilder sentiment was at its lowest point since inception in 1985. In High Yield, the Home Construction sector fell 9% while Construction Machinery was down 6%. The estimated losses from investment in sub prime mortgages ranged from $400bn to $1 trillion. Bank loans continued to suffer weakness as credit investors priced in a recession. At the same time, the amount of 'fallen angel' (former investment grade debt) nearly doubled during the year, to $130bn. The final month of 2007 ended up being another tortuous one for high yield investors. Though the market managed to post a positive gain of +0.29% (as measured by the Merrill Lynch High Yield Master II Index), this was entirely attributable to income and average bond prices were actually down. Rising oil prices, weak economic data, deteriorating corporate earnings prospects, and the market perception of an insufficiently accommodative Fed all combined to place further downward pressure on risky asset prices during December. The primary high yield market remains closed to all but the highest quality issuers- only six new issues priced in December for a total of $1.9bn, the lowest figure since August 2002. Portfolio Our dedicated short credit manager in the hedge section of the portfolio delivered a strong performance helped by a substantial position in the Banking & Financial sectors. A number of positions in the Home Equity Loan sector also paid off as fears of a consumer credit crash grew. The Credit Value section of the portfolio performed strongly. The best performing position is a high conviction manager in which we have holdings in their core fund plus their concentrated special situations fund. The manager profited from a substantial short position in the sub-prime mortgage sector. Our worst performing manager suffered from a number of unrelated events in his post reorganisation equity book. Our core Credit Long Short managers were also profitable albeit more modestly than Credit Value. Shorts in Emerging Markets and Investment Grade securities were less profitable than the High Yield positions exploited by Value managers. It seems our managers are now beginning to be rewarded for their bearish stance. Outlook We hear from many of our managers that credit has now 're-priced' to sensible levels, and that there are many names they find fundamentally attractive. However, they are cautious because the technical backdrop is still very uncertain. Demand is low as High Yield mutual funds are seeing redemptions; Prime Brokers have raised margin requirements for some low quality credit hedge funds and some credit hedge funds have been facing redemptions. Meanwhile on the supply side, the forward calendar of debt issuance is significantly large. It seems it will take some time for this imbalance to clear but expectations are that the issuance will ultimately get digested, with higher spreads, less balance sheet leverage, and more lender friendly structures including fewer PIK, Toggle and 'Cov-lite' issues. While we don't have consensus on the exact number, our Managers agree that the default rate will increase in 2008; bringing the market one step closer to the distressed cycle. They are also united in a belief that the market volatility of the past six months will continue. INVESTMENT ADVISER'S REPORT FOR THE PERIOD FROM 1 JULY 2007 TO 31 DECEMBER 2007 (continued) Outlook We believe strongly that our Managers will be able to capitalize upon such a scenario. As in previous cycles, periods of stress result in reduced liquidity and investors get paid to be more discerning. It is in these environments where those with skills at building balanced portfolios that target both long and short opportunities tend to perform best. Such balanced exposures are a feature of our portfolio, and despite potentially turbulent times ahead, we are confident that our Managers will be able to weather the storm Financial Risk Management Limited Date: 12 February 2008 . BALANCE SHEET AS AT 31 DECEMBER 2007 Note US$ Assets Financial assets at fair value through profit or loss 2(a) 172,593,691 Receivable for financial assets sold 7,651 Interest receivable 2(b) 41,998 Prepaid expenses 32,222 Cash and cash equivalents 2(c) 221,857 Total assets 172,897,419 Liabilities Loan payable 4 5,600,000 Performance fees payable 3.2 1,020,121 Management fees payable 3.1 146,774 Interest payable 2(b) 159,397 Commitment fees payable 4 61,030 Directors fees payable 3.4 42,308 Administration & Custody fees payable 3.3 31,379 Audit fees payable 6,706 Other liabilities 696,574 Total liabilities 7,764,289 Net assets 165,133,130 Represented by: Shareholders' funds and reserves Share capital 7 157,406,209 Reserves 8 7,726,921 Total shareholders' funds 165,133,130 Sterling Shares: Number of Shares 7 75,263,701 Net Asset Value per Share 1.118 GBP The accompanying notes on pages 13 to 20 are an integral part of these interim unaudited financial statements INCOME STATEMENT FOR THE PERIOD FROM 1 JULY TO 31 DECEMBER 2007 Note US$ Investment income Interest income 2(b) 74,583 Net realised and unrealised gain on financial assets at fair value through profit or loss and foreign currency transactions 11 4,617,219 Total investment income 4,691,802 Expenses Interest expense (169,142) Administration & Custody fees 3.3 (58,611) Management fees 3.1 (621,370) Performance fees 3.2 (717,094) Commitment fees (77,426) Audit fees (33,657) Directors fees 3.4 (90,903) Legal fees (19,679) Other operating expenses (508,180) Total expenses (2,296,062) Profit for the period from operations 2,395,740 The accompanying notes on pages 13 to 20 are an integral part of these interim unaudited financial statements STATEMENT OF CHANGES IN NET ASSETS FOR THE PERIOD FROM 1 JULY 2007 TO 31 DECEMBER 2007 US$ Net assets at the start of the period 94,713,332 Proceeds from issue of shares 68,024,058 Net increase from share transactions 68,024,058 Profit for the period from operations 2,395,740 Net assets at the end of the period 165,133,130 The accompanying notes on pages 13 to 20 are an integral part of these interim unaudited financial statements STATEMENT OF CASH FLOWS FOR THE PERIOD FROM 1 JULY 2007 TO 31 DECEMBER 2007 US$ Cash flows from operating activities Profit for the period from operations 2,395,740 Operating activities: Increase in interest receivable and prepaid expenses (1,739) Increase in receivable for financial assets sold (7,651) Increase in liabilities and accrued expenses 1,381,729 Decrease in amounts payable for investments purchased (383,177) Purchase of investments at fair value through the profit or loss (165,338,355) Sale of investments at fair value through the profit or loss 100,453,731 Realised gain on investments at fair value through the profit or loss (11,268,443) Unrealised gain investments at fair value through the profit or loss (1,690,485) Net cash outflow from operating activities (74,458,650) Cash flows from financing activities Loan received 5,600,000 Issuance of participating shares 68,024,058 Net cash inflow from financing activities 73,624,058 Net decrease in cash and cash equivalents (834,592) Cash and cash equivalents at the beginning of the period 1,056,449 Cash and cash equivalents at the end of the period 221,857 Net cash flow from operating activities and financing activities includes: Interest received 61,518 Interest paid (9,745) The accompanying notes on pages 13 to 20 are an integral part of these interim unaudited financial statements NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JULY 2007 TO 31 DECEMBER 2007 1. GENERAL INFORMATION FRM Credit Alpha Limited (the 'Company'), a closed ended investment company, was incorporated on 1 March 2007 under The Companies (Guernsey) Law, 1994, of Guernsey with registered number 46497. The Company has three share classes that are authorized for issue; Euro Shares, Sterling Shares and US Dollar Shares. At 31 December 2007 only Sterling Shares were in issue. The Company seeks to generate significant returns over cash, with low volatility and beta to global credit markets, when measured over a market cycle. By investing in a combination of investee Funds managed by managers who adopt research-based value/event driven or long-short approaches, the Company believes that volatility and peak-to-through drawdowns will be lower than those typically delivered by long-only approaches. The Company will seek to achieve its objective by investing in a portfolio of hedge funds pursuing a variety of different credit and credit-related trading strategies. In addition, the Company may invest in a wide variety of financial instruments. The Sterling Shares are listed on the Irish Stock Exchange and traded on the International Bulletin Board (ITBB) of the London Stock Exchange. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of financial statements are set out below. The Company is in its first period of operations and therefore no comparative figures are available. The accounting polices and presentation for the interim figures are consistent with those applied in the latest audited financial statements. The Company's financial statements have been prepared in accordance with International Financial Reporting Standards ('IFRS'). The financial statements have been prepared under the historical-cost convention, as modified by the revaluation of financial assets and financial liabilities held at fair value through profit or loss. The preparation of financial statements in conformity with IFRS requires the use of accounting estimates. It also requires the Board of Directors to exercise its judgement in the process of applying the Company's accounting policies. The Balance Sheet presents assets and liabilities in increasing order of liquidity and does not distinguish between current and non-current items. All the Company's assets and liabilities are held for the purpose of being traded or are expected to be traded within one period. All references to net assets throughout this document refer to net assets attributable to holders of redeemable participating shares. (a) Financial Instruments (i) Classification In accordance with IAS 39, the Company classifies its investments as financial assets and liabilities at fair value through profit or loss. These financial assets and liabilities are classified as held for trading or designated by the Board of Directors at fair value through profit or loss at inception. Financial assets or financial liabilities held for trading are those acquired or incurred principally for the purposes of selling or repurchasing in the short term or derivatives. The Company does not classify any derivatives as hedges in a hedging relationship. All investments held by the Company have been designated by the Board of Directors as held for trading. (ii) Recognition/derecognition The Company recognises financial assets and financial liabilities at fair value through profit or loss on the trade date; that is the date it commits to purchase the instruments. From this date any gains and losses arising from changes in fair value of the assets or liabilities are recognised. Investments are derecognised when the rights to receive cashflows from the investments have expired or the Company has transferred substantially all risks and rewards of ownership. (iii) Valuation of investments Investments in funds are valued at fair value, as determined by the Company's independent administrator. In determining fair value, the administrator utilises the valuations of the underlying funds to determine the fair NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JULY 2007 TO 31 DECEMBER 2007 (continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (a) Financial Instruments (continued) (iii) Valuation of investments (continued) value of its fund interests. The underlying funds-of-funds in which the Company is invested value securities and other financial investments on a mark-to-market or fair value basis of accounting. The estimated fair values of certain of the investments of the underlying investment funds may include private placements and other securities for which prices are not readily available. These estimated fair values are determined by the administrators of the respective underlying investment funds and may not reflect amounts that could be realised upon immediate sale, nor amounts that ultimately may be realised. Accordingly, the estimated fair values may differ significantly from the values that would have been used had a ready market existed for these investments. Forward foreign exchange contracts are valued at the forward rate at the closing date through the residual period of the contracts. Realised and unrealised gains or losses resulting from forward foreign exchange contracts are recognised in the Income Statement. (b) Interest income and expense Interest income and expense are recorded in the Income Statement using the effective yield method. (c) Cash and cash equivalents Cash and cash equivalents includes deposits with original maturities of three months or less and include amounts held at the Company's Custodian. (d) Functional and presentation currency Items included in the Company's financial statements are measured using the currency of the primary economic environment in which it operates (the ' functional currency'). This is US$ reflecting the denomination in which majority of the Company's investments are held. The financial statements are also presented in US$. (e) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Income Statement. (f) Statement of cash flows The cash amount shown on the Statement of Cash Flows is the net amount reported in the Balance Sheet as cash and cash equivalents. The indirect method has been applied in the preparation of the Statement of Cash Flows. 3. FEES AND EXPENSES 3.1 Management Fee The Company pays the Manager a management fee together with reimbursement of reasonable out of pocket expenses incurred by it in the performance of its duties. The management fee in respect of the Sterling Shares is at the rate of 1% per annum of the Company's net assets attributable to the Sterling Shares (before deduction of accruals in respect of the management fee for the current month and any performance fee) as at the first Business Day of each calendar month payable monthly in arrears. The management fee for the period was US$621,370 and the amount outstanding at period end was US$146,774. 3.2 Performance Fee The Company pays the Manager a performance fee if the Net Asset Value of a Share at the end of a performance period (a) exceeds its Net Asset Value at the start of the performance period by more than the performance hurdle and (b) exceeds the highest previously recorded Net Asset Value per Share as a the end of a NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JULY 2007 TO 31 DECEMBER 2007 (continued) 3. FEES AND EXPENSES (continued) 3.2 Performance Fee (continued) performance period in respect of which a performance fee was last paid. The performance hurdle applicable in respect of a performance period is one month LIBOR of the currency of the corresponding Share class, compounded monthly and is pro-rated where the performance period is greater or shorter than one period. The performance period is each 12 month period ending on 30 June in each period. If the performance hurdle and high water mark for a performance period are met then a performance fee will be calculated and payable to the Manager equal to 10% of the total increase in Net Asset Value per Share at the end of the relevant performance period over the performance hurdle multiplied by the weighted average number of Shares in issue at the end of the relevant performance period. The Company's performance fees for the period were US$717,094 and the amount outstanding at period end was US$1,020,121. 3.3 Administration and Custodian Fee The Administrator and Custodian are entitled to receive from the Company an aggregate annual fee equivalent to 0.07% of the Company's Net Asset Value, such fee to be payable generally pro-rata monthly in arrears, plus other transaction costs and out of pocket expenses. The Company's administration fee for the period was US$49,921 and the amount outstanding at period end was US$19,899. The Company's custodian fee for the period was US$8,690 and the amount outstanding at period end was US$11,480. 3.4 Directors' fees Each Director (other than the Chairman) is entitled to receive a fee from the Company at such rate as may be determined in accordance with the Articles of Association. The current fees are GBP20,000 per annum for each Director and GBP25,000 for the Chairman. All of the Directors are entitled to be paid all reasonable expenses properly incurred by them in attending general meetings, board or committee meetings or otherwise in connection with the performance of their duties. Directors earned US$90,903 during the period and the amount outstanding at the period end was US$42,308. 4. BORROWING As and when required for operational reasons, including, without limitation, for managing cash flow, settling foreign exchange transactions, funding conversions and taking advantage of short-term investment opportunities, the Company may borrow money, provide leverage and give guarantees, and mortgage, pledge or charge all or part of its property or assets as security for any liability or obligation. Any leverage which arises in the Company is not intended to be permanent and will be repaid over a short time frame. Such borrowing is subject always to the availability of a credit line facility on such terms as the Directors deem acceptable in their sole and absolute discretion. In aggregate, therefore, the total borrowings of the Company will not exceed 35% of the Net Asset Value at the point of drawdown. At 31 December 2007, the Company had entered into a credit agreement dated 27 March 2007 with Citibank N.A. as Lender ('Lender'), which allows up to a maximum of US$35,000,000 to be borrowed. Interest accrues at an annual variable rate of 5.59% per annum. In addition, a commitment fee shall accrue at a rate of 0.25% per annum. The maturity date of the credit facility is 25 March 2008. US$5,600,000 had been drawn down at 31 December 2007, being 3.35% of the net asset value. 5. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS The Company's investment activities expose it to various types of risk taken by the Company and the managers of the underlying funds, which are associated with the financial instruments and markets in which they invest. The following summary is not intended to be a comprehensive list of all risks and investors should refer to the Prospectus for a more detailed discussion of the risks inherent to investing in the Company. These risks apply to each class of Shares in varying degrees. Interest rate risk The Company by virtue of its borrowing facility can be directly exposed to interest rate risks when this facility is in use. In practice, whilst borrowing is constrained by the offering memorandum to be less than 35% of the net asset value of the Company, it is unlikely that borrowing levels of more than 10% of Net Asset Value will occur for any sustained period. The borrowing facility for the fund is a floating rate facility referenced to US NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JULY 2007 TO 31 DECEMBER 2007 (continued) 5. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS (continued) Interest rate risk (continued) Dollar LIBOR and as such a 1% increase in the LIBOR rate could potentially detract up to 0.35% per annum from the gross returns of the portfolio in the extreme scenario that the facility was fully utilised throughout the financial period. In practice the returns of the Company's underlying investments are, for the most part likely to be positively correlated with LIBOR and as such it is likely that the increase in the returns of the investments will more than offset their increased borrowing costs over the long term, thereby neutralising any long term interest rate risk. It is however possible that underlying investments within the portfolio will incur interest rate risk as an intentional or unintentional part of their investment strategies. Market risk The Company is not directly exposed to any markets risks. However, the underlying managers that the Company invests in may take exposure to a wide range of market factors including equity, credit, FX, interest rate, emerging and commodity markets. Additionally they may make use of complex derivative instruments to take and manage these exposures. FRM analysts monitor the underlying managers on a continuing basis on behalf of the Company to ensure that managers have the correct operational controls, systems and skills to manage these risks. Additionally, FRM has an automated fund performance exception reporting process to identify funds that are performing out of line with expectations (which will include relative analysis to their historic track record and their peer group). Exceptions are discussed at a monthly meeting with the Chief Investment Officer and recorded by the risk team. Market risks at the funds of funds portfolio level are controlled via the use of diversification across a wide range of Hedge Fund styles and holdings. This diversification is monitored and controlled via the use of a Value at Risk (VAR) system. This system uses a proprietary methodology to estimate the monthly loss that will happen one month in twenty using the current portfolio holdings. The methodology takes into account underlying funds with short track records and places greater weight on more recent information to ensure that the estimates are representative of current conditions. The VAR system is also used to identify concentrations of risk within the portfolio. These estimates are produced on a monthly basis by FRM's risk management team and compared against a set of limits. If the actual values exceed these limits then deviation is discussed with the relevant portfolio manager to agree a relevant course of action. Courses of action may include reducing certain positions, hedging certain factor exposures or changing the limit. Limits are reviewed and signed off by the Chief Investment Officier and Head of Portfolio Management on a quarterly basis. Currently these expected maximums are set at a value of -2%. Since inception, the actual values for the portfolio have ranged from -0.96% to -1.85%. As at 31 December 2007 the VAR estimate for the Company was -1.6%. The assumptions for this calculation are as follows: The VAR at risk is calculated using a proprietary methodology, the broad characteristics are as follows: Using return data for the funds in each portfolio, estimates for the covariance matrix and means of returns of each fund are calculated. A maximum of five years data is used in this calculation. For the covariance calculation, in the event of less than 24 months data being available data for a fund, the covariance is estimated using strategy performance data from the FRM's Hedge Fund database. An estimate of the mean return of each fund is also calculated, with a requirement for at least twelve months data to be available. Again for funds with short histories the data is replaced with strategy estimates. Both statistics are calculated using an exponentially smoothing methodology with a decay factor of 0.97. To take into account effects such as fat tailed distributions, the VAR estimate does not use a normal distribution. Instead a proprietary distribution, the ' theta' distribution is used. This models the fat tailed distribution of hedge funds, whilst still accurately representing the body of the return distribution. NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JULY 2007 TO 31 DECEMBER 2007 (continued) 5. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS (continued) Market risk (continued) Limitations of the VAR methodology include the following: • The measure is a point-in-time calculation, reflecting positions as recorded at that date, which do not necessarily reflect the risk positions held at any other time; • That VAR is a statistical estimation and therefore it is possible that there could be, in any period, a greater number of days in which losses could exceed the calculated VAR than implied by the confidence level; and • That although losses are not expected to exceed the calculated VAR on, say 95% of occasions, on the other 5% of occasion's losses will be greater and might be substantially greater than the calculated VAR. Counterparty risk Counterparty risk represents the potential loss that the Company would incur if the counterparties failed to perform pursuant to the terms of their obligations to the Company. The Company has all of its cash and cash equivalents held with its Custodian. Currency Risk The Company can be directly exposed to foreign exchange risks by virtue of investments in share classes of funds that are not denominated in its base currency. When such investments are made, the investment manager has a policy of hedging the capital value of such exposure using a rolling program of currency swaps initiated on a monthly basis. In addition there is a secondary policy to adjust the hedge, where possible, for material movements in the intra-month profit and loss of the underlying investment. Where intra-month performance data is available for a non-base currency denominated investment, and the estimated Net Asset Value movement of the investment exceeds 0.9% of the total net asset value of the fund, additional non-deliverable forwards that mature at the expiry of the relevant swap are executed to hedge these movements. In view of this policy, it is unlikely that the fund will be intentionally, directly exposed to any material FX risk. It is however possible that the underlying investments within the portfolio will incur FX risk as an intentional or unintentional part of their investment strategies. In accordance with the Company's policy, the Investment Manager monitors the Company's currency exposure twice a month. Liquidity risk The Company invests in alternative investment products, which can be highly illiquid. With some hedge funds, the Company can only sell their units at certain dates, which may occur monthly, quarterly, annually or worse. A lack of liquidity may also result from limited trading opportunities in alternative investment products. At December 31 2007, 56% of the net assets of the Company were held in investment funds allowing monthly withdrawals, 23% were held in investment funds allowing quarterly withdrawals, 5% were held in investment funds allowing semi-annual withdrawals, and 19% were held in investment funds allowing withdrawals in periods greater than two years or on liquidation. The Company may, from time to time, invest in derivative contracts traded over the counter, which are not traded in an organised market and may be illiquid. As a result, the Company may not be able to liquidate quickly its investments in these instruments at an amount close to their fair value to meet its liquidity requirements or to respond to specific events. In accordance with the Company's policy, the Investment Manager monitors the Company's liquidity position on a regular basis with regard to maintaining a reasonable level of liquidity. Significant variation from reasonable levels will result in notification to the board of directors. The table below analyses the Company's financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JULY 2007 TO 31 DECEMBER 2007 (continued) 5. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS (continued) Liquidity risk (continued) The amounts in the table are the contractual undiscounted cashflows. Balances due within 12 months equal their carrying balances, as the impact of discounting is not significant. There follows a table to split the liabilities into periods of up to 1 month, 1 - 3 months, 3 - 7 months and 'no stated maturity'. Up to 1 Month 1 to 3 3 to 7 No stated Maturity Months Months Total Loan payable - - 5,600,000 - 5,600,000 Interest payable 159,397 - - - 159,397 Accrued expenses and other - - 2,004,892 2,004,892 liabilities payable - Total Liabilities 159,397 - 5,600,000 2,004,892 7,764,289 6. TAXATION The Company has applied for and has been granted exempt status for Guernsey tax purposes. A company that has exempt status for Guernsey tax purposes is exempt from Guernsey income tax under the provisions of the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 and is charged an annual exemption fee of £600. 7. SHARE CAPITAL The Company has an authorised share capital of a minimum of two shares and up to an unlimited number of shares of no par value. The Company has three share classes that are authorised for issue: Euro Shares, Sterling Shares and US Dollar Shares. At 31 December 2007 only Sterling Shares were in issue. 31 December 2007 Sterling Shares Number of shares as at 30 June 2007 46,000,000 Subscriptions 29,263,701 Number of shares as at 31 December 2007 75,263,701 All Shares have the right to receive, in proportion to their holdings, all the revenue profits of the Company (including accumulated net income plus the net of accumulated realised and unrealised capital gains and accumulated realised and unrealised capital losses). Shareholders have the right to receive notice of and to attend and vote at annual and extraordinary general meetings of the Company and each holder of Shares being present in person or represented by a duly authorised representative (if a corporation) at a meeting shall upon a show of hands have one vote. 8. RESERVES Total US$ Balance at 30 June 2007 5,331,181 Net realised gain on investments at fair value through profit or loss 11,268,443 Unrealised loss on investments at fair value through profit or loss (1,690,485) Realised loss on foreign currency transactions (7,073,286) Unrealised gain on foreign currency transactions 2,112,547 Net expenses for the period (2,221,479) Balance at 31 December 2007 7,726,921 NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JULY 2007 TO 31 DECEMBER 2007 (continued) 9. RELATED PARTY TRANSACTIONS Damian Johnson, a Director of the Company, is also a director of FRM Investment Management Limited (the 'Manager'), see note 3.4 for details of amounts earned by the Directors during the period. As at 31 December 2007: (a) Employees of Financial Risk Management Limited (the 'Investment Adviser') held 995,600 shares in the Company; (b) FRM Holdings Limited, the parent company of the Manager and the Investment Adviser held 677,000 shares in the Company under the nominee name Roy Nominees Limited 22607 Account. As at 31 December 2007, Richard Hotchkis, a Director of the Company, held 30,000 shares in the Company. FRM Credit Alpha held 566,998 shares in various segregated portfolios of FRM Conduit Fund SPC, a fund with the same investment manager as FRM Credit Alpha (FRM Investment Management Limited (the 'Manager')) at 31 December 2007. 10. EXCHANGE RATES The following exchange rates were used as at 31 December 2007 versus US Dollar: British Pound 0.5095 11. NET REALISED AND UNREALISED GAIN ON FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS AND FOREIGN CURRENCY TRANSACTIONS US$ Realised gain on investments at fair value through profit or loss 11,268,443 , Unrealised loss on investments at fair value through profit or loss (1,690,485) Net realised and unrealised gain on investments at fair value through profit or 9,577,958 loss Realised loss on foreign currency transactions (7,073,286) Unrealised gain on foreign currency transactions 2,112,547 Net realised and unrealised loss on foreign currency transactions (4,960,739) Total 4,617,219 12. DISTRIBUTIONS It is the intention of the Directors that the Company should pay an annual dividend to holders of Shares of two thirds of total returns, capped at 3.5% of year end Net Asset Value, available as cash or scrip. Dividends will be paid out of income recognised in the Income Statement which includes realised and unrealised capital gains. There were no distributions made during the period ended 31 December 2007. NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD FROM 1 JULY 2007 TO 31 DECEMBER 2007 (continued) 13. SIGNIFICANT EVENTS DURING THE PERIOD On 31 October 2007, a final version of the prospectus was filed with the Irish Stock Exchange in relation to the placing of new shares of no par value in the capital of the Company designated as Sterling Shares, Euro Shares and Dollar Shares. 14. APPROVAL OF INTERIM UNAUDITED FINANCIAL STATEMENTS The interim unaudited financial statements for the period from 1 July 2007 to 31 December 2007 were approved by the Board of Directors on 22 February 2008. This announcement has been issued through the Companies Announcement Service of The Irish Stock Exchange. This information is provided by RNS The company news service from the London Stock Exchange

Companies

Cavendish Financial (CAV)
UK 100
FTSE quotes by TradingView

Latest directors dealings

All directors dealings today