Man Arbitrage Strategies Ltd. Report and financial statements

Transcription

1 Report and financial statements

2 Table of contents Page Directory 3 Directors report 4 Statement of financial position 5 Statement of changes in equity 6 Statement of comprehensive income 7 Statement of cash flows 8 Notes to the financial statements 9 Independent Auditors report 23 2

3 Directory Directors of the Company Investment Manager Michael Collins (Until 13 November 2013) Dawn Griffiths Man Investments Limited David Smith Riverbank House 2 Swan Lane Custodian London, EC4R 3AD (Until 13 November 2013) United Kingdom Citco Bank Nederland N.V. Dublin Branch Custom House Plaza Block 3 (From 14 November 2013) International Financial Services Centre FRM Investment Management Limited Dublin 1 P.O. Box 173, Royal Chambers Ireland St Julian s Avenue St Peter Port (From 14 November 2013) Guernsey GY1 4HG JPMorgan Chase Bank, National Association (London Branch) Channel Islands 25 Bank Street Canary Wharf Administrator London E14 5JP (From 1 December 2013) United Kingdom JPMorgan Hedge Fund Services (Ireland) Limited JPMorgan House Registered Office George s Dock Citi Fund Services (Bermuda), Ltd. International Financial Services Centre 5 Reid Street Dublin 1 Hamilton HM 11 Ireland Bermuda Investment Adviser Legal Advisers to the Company Man Investments (CH) AG Conyers Dill & Pearman Huobstrasse 3 Clarendon House CH-8808 Pfäffikon/SZ 2 Church Street Switzerland Hamilton HM 11 Bermuda Services Manager Man Investments AG Auditors Huobstrasse 3 Ernst & Young Ltd. CH-8808 Pfäffikon/SZ 3 Bermudiana Road Switzerland Hamilton HM08 Bermuda Company Secretary Christine Perinchief c/o Citi Fund Services (Bermuda), Ltd. 5 Reid Street Hamilton HM 11 Bermuda 3

4 Directors report The Directors hereby present their annual report and audited financial statements for the year ended 30 June A summary of the results for the year under review is shown on page 7. A review of the business during the year which has been prepared by the Investment Manager and adopted by the Directors is outlined below. Following the strong equity and bond sell-offs in May and June 2013, the US Federal Reserve ( Fed ) sought to reassure markets it would not taper its bond-buying programme until the US economy was on a more stable footing. Over the course of July, statements by Ben Bernanke took an increasingly supportive tone and investors began buying back into risk assets and favouring good news. However market sentiment wavered towards the end of Q as US congress failed to agree on a budget or extend the US debt ceiling. October began with the protracted US government shutdown which unsettled equity markets and raised fears of a sovereign default. Despite this macroeconomic data was largely positive, particularly from the US. While this lifted expectations for the global recovery, it also created some unease that the tapering of US quantitative easing might begin earlier than expected if the US continued to outperform expectations. On the whole, markets weathered these events well and global equities moved ahead strongly until the end of the year opened with jitters in developed risk markets, emerging equity markets and rates and currencies amid weaker job creation numbers and PMI data from the US and China. Risk appetites broadly returned in February with developed market equities and credit rallying back to previous high levels. The market was strained from March through to June by the Russia-Ukraine conflict and emerging markets as they saw outflows prompted in part by political and inflationary worries but also by global allocation decisions driven by the Fed s ongoing taper. Towards the end of the period the prevailing theme was low volatility in markets and high volatility in politics, with significant elections from India to Europe and harsher economic sanctions imposed on Russia. The fund posted a negative return over the period as two styles, equity long-short and relative value, dragged the portfolio down. Equity Long-Short entered the portfolio strong in November 2013 and continued to grow until March and April 2014 when it collapsed. Relative value was down as it suffered a loss in September 2013 it couldn t recover from. Credit was the strongest contributor with consistent returns throughout the period. The other styles were flat. Equity Long-Short contributed the largest loss in March 2014, narrowly avoiding the portfolios worst month since August The style had cut equity beta significantly coming into the month anticipating a market pullback but a reversal of momentum impacted technology and growth stocks. The issues continued into April 2014 as it affected more US stock strategies. Relative value was hurt in September by a short bias as markets rallied and equity edges in the form of indices and sector Exchange-Traded Funds lost. Credit had consistent small returns throughout the period but excelled in September 2013 as the long bias of the portfolio proved to be beneficial as risk assets rallied following the Fed s decision not to reduce quantitative easing. A Japan focussed equity manager also dampened some of the negative contribution by entering the portfolio in November 2013 and seized on the weakening Yen, which spurred investor appetite for equity. Director: Dawn Griffiths Director: David Smith The above Directors report is a commentary for the year 1 July 2013 to 30 June It does not include or take account of any movements, return or market information for subsequent periods. 4

5 Statement of financial position As at 30 June 2014 Notes Current assets: Cash at banks 3 460, ,276 Financial assets at fair value through profit or loss 4 15,953,996 22,838,103 Amounts receivable from sale of financial assets 27,035 55,367 Prepayments and other assets 2,375 46,900 Total current assets 16,443,476 23,442,646 Current liabilities: Amounts payable on redemption of Redeemable Participating Shares (111,452) Accounts payable and accrued expenses 8,9 (233,024) (156,872) Total current liabilities (233,024) (268,324) Net assets attributable to Redeemable Participating Shareholders 16,210,452 23,174,322 Which are represented by: Equity 15,029,513 (2013: 20,835,591) Redeemable Participating Shares with a Net Asset Value per Redeemable Participating Share of (2013: ) 10 16,210,452 23,174,322 16,210,452 23,174,322 Approved and authorised for issue on behalf of the Board on December Director: Dawn Griffiths Director: David Smith The accompanying notes form an integral part of the financial statements. 5

6 Statement of changes in equity Notes Net assets attributable to Redeemable Participating Shareholders at beginning of year 23,174,322 31,474,506 Redemption of 5,806,078 (2013: 8,869,904) Redeemable Participating Shares 10 (6,513,255) (9,595,868) 16,661,067 21,878,638 Net (loss)/gain for the year attributable to Redeemable Participating Shareholders (450,615) 1,295,684 Net assets attributable to Redeemable Participating Shareholders at end of year 16,210,452 23,174,322 The accompanying notes form an integral part of the financial statements. 6

7 Statement of comprehensive income Notes Income Interest income 2 2,994 1,887 Net gain on financial assets at fair value through profit or loss 6 5,223 1,734,993 8,217 1,736,880 Expenses Management and incentive fees 8,9 (158,386) (248,208) Service Manager fees 8,9 (71,782) (78,200) Professional fees and general expenses 8,9 (228,664) (114,788) (458,832) (441,196) Net (loss)/gain for the year attributable to Redeemable Participating Shareholders (450,615) 1,295,684 The accompanying notes form an integral part of the financial statements. 7

8 Statement of cash flows Cash flows from operating activities: Net (loss)/gain for the year attributable to Redeemable Participating Shareholders (450,615) 1,295,684 Net changes in operating assets and liabilities: Financial assets at fair value through profit or loss 6,884,107 4,388,104 Amounts receivable from sale of financial assets 28, ,689 Prepayments and other assets 44,525 (46,900) Accounts payable and accrued expenses 76,152 (63,740) Net cash provided by operating activities 6,582,501 5,723,837 Cash flows from financing activities: Payments on redemption of Redeemable Participating Shares (6,624,707) (9,484,416) Net cash used in financing activities (6,624,707) (9,484,416) Net change in cash and cash equivalents (42,206) (3,760,579) Cash and cash equivalents at beginning of year 502,276 4,262,855 Cash and cash equivalents at end of year 460, ,276 Cash and cash equivalents consist of: Cash at banks 460, , , ,276 Supplemental disclosure of cash flow information: Interest received 2,994 1,887 The accompanying notes form an integral part of the financial statements. 8

9 Notes to the financial statements 1. General Man Arbitrage Strategies Ltd (the Company ) was incorporated under the laws of Bermuda on 6 October 2000 and carries on business as an open-ended mutual fund investment holding company, trading investments in funds which trade arbitrage strategies, focusing on relative mispricings among interrelated instruments. The Company commenced trading on 1 December 2000 and has been listed on the Channel Islands Securities Exchange Authority Limited ( CISEA ) since 15 August The investment objective of the Company is to achieve substantial and steady capital gains over the medium-term. Man Investments Limited (until 13 November 2013) and FRM Investments Management Limited (from 14 November 2013) ( the Investment Managers ) seek to achieve their investment objectives by acquiring exposure to arbitrage strategies. This is primarily achieved by investing through the FRM portfolio of underlying managed funds. 2. Summary of significant accounting policies a) Accounting convention The financial statements are prepared in accordance with International Financial Reporting Standards ( IFRS ) issued by the International Accounting Standards Board ( IASB ). The financial statements have been prepared on the historical cost basis except for financial assets and liabilities at fair value through profit or loss that have been measured at fair value. b) Changes in accounting policy and disclosure New standards, interpretations and amendments adopted by the Company: The accounting policies adopted in the preparation of the financial statements are consistent with those followed in the preparation of the Company s financial statements for the year ended 30 June 2013, except for the adoption of new standards and interpretations effective on the dates described below. IAS 27 Separate Financial Statements (as revised in 2011) As a consequence of the new IFRS 10 and IFRS 12, what remains in IAS 27 is limited to accounting for subsidiaries, jointly controlled entities, and associates in separate financial statements. This amendment became effective for annual periods beginning on or after 1 January 2013 and had no impact on the Company s financial position or performance. Amendments to IFRS 7 Offsetting financial assets and financial liabilities These amendments require an entity to disclose information about rights to set-off and related arrangements (e.g., collateral agreements). The disclosures would provide users with information that is useful in evaluating the effect of netting arrangements on an entity s financial position. The new disclosures are required for all recognised financial instruments that are set off in accordance with IAS 32 Financial Instruments: Presentation. The disclosures also apply to recognised financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are set off in accordance with IAS 32. These amendments became effective for annual periods beginning on or after 1 January As the Company is not setting off financial instruments in accordance with IAS 32 and does not have relevant offsetting arrangements, the amendment did not have an impact on the Company. IFRS 10 Consolidated Financial statements IFRS 10 replaces the portion of IAS 27 Consolidated and Separate Financial Statements that addresses the accounting for consolidated financial statements. It also replaces SIC-12 Consolidation Special Purpose Entities. IFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by IFRS 10 will require management to exercise significant judgement to determine which entities are controlled, and therefore required to be consolidated by a parent, compared with the requirements that were in IAS 27. This standard became effective for annual periods beginning on or after 1 January 2013 and had no impact on the Company s financial position or performance. IFRS 13 Fair Value Measurement IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. This standard became effective for annual periods beginning on or after 1 January The adoption of this standard had an impact on the measurement techniques employed by the Company as described in Note 2 (f). 9

10 2. Summary of significant accounting policies (continued) b) Changes in accounting policy and disclosure (continued) Standards issued but not yet effective: IAS 32 Offsetting financial assets and financial liabilities These amendments clarify the meaning of currently has a legally enforceable right to set-off. The amendments also clarify the application of the IAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. These amendments are not expected to impact the Company s financial position or performance and became effective for annual periods beginning on or after 1 January IFRS 9 Financial Instruments IFRS 9 introduces improvements to the framework applicable to financial instruments, including a logical model for classification and measurement, a single, forward-looking expected loss impairment model and a substantially-reformed approach to hedge accounting. The standard becomes effective for annual periods beginning on or after 1 January 2018, although early adoption is permitted. Management is currently assessing the possible impact of the standard on the financial statements of the Company. Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) These amendments to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities and IAS 27 Separate Financial Statements: provide 'investment entities' (as defined) an exemption from the consolidation of particular subsidiaries and instead require that an investment entity measure the investment in each eligible subsidiary at fair value through profit or loss in accordance with IFRS 9 Financial Instruments or IAS 39 Financial Instruments: Recognition and Measurement; require additional disclosure about why the entity is considered an investment entity, details of the entity's unconsolidated subsidiaries, and the nature of relationship and certain transactions between the investment entity and its subsidiaries; and require an investment entity to account for its investment in a relevant subsidiary in the same way in its consolidated and separate financial statements (or to only provide separate financial statements if all subsidiaries are unconsolidated). These amendments become effective for annual periods beginning on or after 1 January At the date of authorisation of the financial statements there were a number of other Standards and Interpretations which were in issue but not yet effective. Management anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the financial statements of the Company. c) Use of accounting judgements and estimates The preparation of financial statements in accordance with IFRS requires management to make judgements, estimates and assumptions that affect the amounts reported and disclosures made in these financial statements and accompanying notes, including certain valuation assumptions. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities in the future. d) Going concern The Company s management has made an assessment of the Company s ability to continue as a going concern and is satisfied that the Company has resources to continue in business for the foreseeable future. Furthermore, management is not aware of any material uncertainties that may cast significant doubt upon the Company s ability to continue as a going concern, therefore, the financial statements continue to be prepared on a going concern basis. e) Revenue recognition Interest and dividends are recorded on an accruals basis and ex-dividend basis respectively. f) Valuation of investments Financial assets at fair value through profit or loss For Net Asset Value ( NAV ) purposes, the valuation of investments is performed in accordance with the Offering Memorandum. For financial statements purposes, investments have been valued in accordance with IFRS using the policies outlined below. At 30 June 2014 and 30 June 2013, there are no material differences between these valuation methodologies. 10

11 2. Summary of significant accounting policies (continued) f) Valuation of investments (continued) Financial assets at fair value through profit or loss (continued) This category has two sub-categories: (i) financial assets held for trading: Financial assets held for trading are acquired or incurred principally for the purpose of selling or repurchasing in the short term. Derivatives are also categorised as held for trading as the Company does not designate any derivatives as hedges in a hedging relationship. (ii) those designated by management at fair value through profit or loss at initial recognition: These include equity securities that are not held for trading. These financial assets are designated upon initial recognition on the basis that they are part of a group of financial assets which are managed and have their performance evaluated on a fair value basis, in accordance with risk management and investment strategies of the Company. The financial information about these financial assets is provided internally on that basis to the Investment Managers. The Company recognises a financial asset or a financial liability when, and only when, it becomes a party to the contractual provisions of the instrument. Regular-way purchases and sales of investments are recognised on the trade date, which is the date on which the Company commits to purchase or sell the asset. Financial assets and liabilities at fair value through profit or loss are initially recognised at fair value. All transaction costs for such instruments are recognised directly in profit or loss. After initial measurement, the Company measures financial instruments, which are classified as at fair value through profit or loss, at their fair values. The fair value of any financial instruments traded in active markets (such as publicly traded derivatives and trading securities) is based on quoted market prices at the statement of financial position date. Prior to 1 July 2013, the quoted market price used for financial assets held by the Company was the current bid price; the quoted market price for financial liabilities was the current asking price. However, IFRS 13 Fair Value Measurement, became effective for annual periods beginning on or after 1 January 2013, applicable to the Company on 1 July 2013, and as a result of that the Company changed its fair valuation input to utilise the last traded market price for both financial assets and financial liabilities where the last traded price falls within the bid-ask spread. In circumstances where the last traded price is not within the bid-ask spread, management will determine the point within the bid-ask spread that is most representative of fair value. The Company may from time to time invest in financial instruments that are not traded in an active market (for example over-thecounter derivatives). The fair value of these financial instruments is determined based on observable inputs such as current interest and currency rates. Any investments in open-ended managed investment funds with no restrictions to redemptions are carried at their NAV per unit at the statement of financial position date. The Company may from time to time invest in closed-ended managed investment funds or managed investment funds with redemption restrictions. Management has appointed an Independent Pricing Committee ("IPC") to undertake certain services concerning the valuation policies and procedures in relation to these investments of the Company. Investments are derecognised when the rights to receive cash flows from the investments have expired or the Company has transferred substantially all risks and rewards of ownership. g) Loans The Company may utilise loans, which are non-derivative financial liabilities with fixed or determinable payments that are not quoted in an active market. Loans are recognised initially at fair value, being their issue proceeds, net of transaction costs incurred. Loans are subsequently stated at amortised cost. h) Offsetting financial instruments The Company may offset financial assets and liabilities when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the assets and settle the liability simultaneously. Financial assets and liabilities which are offset are reported at their net amount in the statement of financial position. As at 30 June 2014 and 30 June 2013, no financial assets and liabilities are offset in the statement of financial position. 11

12 2. Summary of significant accounting policies (continued) i) Realised and unrealised gains and losses All realised and unrealised gains and losses on securities and derivatives are recognised as net gain/(loss) on financial assets and liabilities at fair value through profit or loss in the statement of comprehensive income. Unrealised gains and losses comprise changes in the fair value of financial instruments for the period and from reversal of prior period s unrealised gains and losses for financial instruments which were realised in the reporting period. Realised gains and losses represent the difference between an instrument s initial carrying amount and disposal amount, or cash payments or receipts made on derivative contracts (excluding payments or receipts on collateral margin accounts for such instruments). The cost of securities sold is accounted for on a first infirst out basis. j) Functional and presentational currency The primary objective of the Company is to generate returns in United States dollars, its capital-raising currency. The liquidity of the Company is managed on a day-to-day basis in United States dollars in order to handle the subscription and redemption of the Company s Redeemable Participating Shares. The Company s performance is also evaluated in United States dollars. Therefore, as United States dollars is considered as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions, the Company s functional and presentational currency is United States dollars. k) Foreign currency Transactions during the year denominated in foreign currencies have been translated at the rates of exchange ruling at the dates of transactions. Assets and liabilities denominated in foreign currencies are translated at the rates of exchange in effect at the date of the statement of financial position. For investment transactions in foreign currencies and foreign currency investments held at the year end, the resulting gains or losses are included in the net gain/(loss) on financial assets at fair value through profit or loss in the statement of comprehensive income. All other foreign currency gains and losses are included in the net gain/(loss) on foreign currency in the statement of comprehensive income. l) Other expenses All expenses are recognised in the statement of comprehensive income on an accruals basis. m) Redeemable Participating Shares Redeemable Participating Shares are classified as equity instruments since they entitle the Redeemable Participating Shareholders to a pro rata share of the Company s net assets in the event of the Company s liquidation and are subordinated to all other classes of instruments and have identical features. The total expected cash flows attributable to the Redeemable Participating Shares over the life of the instruments are based substantially on the profit or loss and the change in the recognised net assets. n) Reclassification of prior year comparative figures Certain prior year comparatives have been reclassified to conform to the current year s presentation. 3. Cash at banks For the purpose of the statement of cash flows, cash and cash equivalents consist of demand deposits, short-term deposits in financial institutions and short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, with original maturities of three months or less, net of outstanding bank overdrafts when applicable. There are no collateral balances held with brokers as at 30 June 2014 or

13 4. Financial assets at fair value through profit or loss The following table summarises financial assets at fair value through profit or loss as at 30 June: 2014 Fair value 2013 Fair value Financial assets at fair value through profit or loss Held for trading Investment in related managed funds Balanced Strategies Fund Limited 347, ,787 BDF Limited 246, ,403 Canyon Value Realization MAC 18 Ltd. 2,742,477 Creation Fund Limited 2,217,688 Fairway Fund Limited 1,987,170 Halcyon MAC 19 Ltd. 1,231,457 Ishin MAC 90 Ltd. 2,615,785 JD Capital Cayman Fund Limited 2,664,665 Laplace Fund Limited 145, ,610 Man GLG Multi-Strategy Fund SICAV 15,173,252 Man Prospect Mountain Ltd. 2,644,154 Miesque Fund Limited 14, ,894 Monarch Cayman Fund Limited 11,605 Pentwater Equity Opportunities Fund Ltd. 1,620,998 Sansome Cayman Fund Limited 2,163,738 Waterstone Market Neutral MAC 51 Ltd. 1,726,985 Investment in third party managed funds Deephaven European Event Fund (USD) Ltd. 20,716 21,146 Deephaven International Volatility Strategies Fund Ltd. 5,621 70,541 Total financial assets at fair value through profit or loss 15,953,996 22,838,103 Fair value of financial assets The Company classifies fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in determining the measurements in line with IFRS 13. The fair value hierarchy has the following levels: Level 1 Quoted market price in an active market for an identical instrument. Level 2 Valuation techniques based on observable inputs. This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data. Level 3 Valuation techniques using significant unobservable inputs. This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs could have a significant impact on the instrument s valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments. When fair values of any listed equity (including listed investments in managed funds) and debt securities at the reporting date, as well as, publicly traded derivatives, are based on quoted market prices or binding dealer price quotations, without any deduction for transaction costs, the instruments are included within Level 1 of the hierarchy. The Company uses widely recognised valuation techniques for determining fair values of over-the-counter derivatives. For these financial instruments, inputs used are market observable and are, therefore, included within Level 2. 13

14 4. Financial assets at fair value through profit or loss (continued) Fair value of financial assets (continued) The Company invests in managed funds which are not quoted in an active market. Investments in managed funds are valued based on the NAV per unit published by the administrator of those funds, adjusted to reflect the effect of the time passed since the calculation date, liquidity risk, limitations on redemptions, bid prices observed in the secondary market and other factors when necessary. Depending on the adjustments needed to the NAV per unit published by that fund, the Company classifies the fair value of that investment as either Level 2 or Level 3. The following is a summary of the classification within the fair value hierarchy for the Company s financial instruments carried at fair value as of 30 June 2014: Level 2 Level 3 Total Fair value Financial assets at fair value through profit or loss Balanced Strategies Fund Limited 347, ,421 BDF Limited 246, ,187 Deephaven European Event Fund (USD) Ltd. 20,716 20,716 Deephaven International Volatility Strategies Fund Ltd. 5,621 5,621 Laplace Fund Limited 145, ,958 Man GLG Multi-Strategy Fund SICAV 15,173,252 15,173,252 Miesque Fund Limited 14,841 14,841 Total financial assets at fair value through profit or loss 15,173, ,744 15,953,996 The following is a summary of the classification within the fair value hierarchy for the Company s financial instruments carried at fair value as of 30 June 2013: Level 2 Level 3 Total Fair value Financial assets at fair value through profit or loss Balanced Strategies Fund Limited 215, ,787 BDF Limited 542, ,403 Canyon Value Realization MAC 18 Ltd. 2,742,477 2,742,477 Creation Fund Limited 2,217,688 2,217,688 Deephaven European Event Fund (USD) Ltd. 21,146 21,146 Deephaven International Volatility Strategies Fund Ltd. 70,541 70,541 Fairway Fund Limited 1,987,170 1,987,170 Halcyon MAC 19 Ltd. 1,231,457 1,231,457 Ishin MAC 90 Ltd. 2,615,785 2,615,785 JD Capital Cayman Fund Limited 2,664,665 2,664,665 Laplace Fund Limited 170, ,610 Man Prospect Mountain Ltd. 2,644,154 2,644,154 Miesque Fund Limited 190, ,894 Monarch Cayman Fund Limited 11,605 11,605 Pentwater Equity Opportunities Fund Ltd. 1,620,998 1,620,998 Sansome Cayman Fund Limited 2,163,738 2,163,738 Waterstone Market Neutral MAC 51 Ltd. 1,726,985 1,726,985 Total financial assets at fair value through profit or loss 21,626,722 1,211,381 22,838,103 As at 30 June 2014 and 30 June 2013 the Company had no Level 1 financial instruments. Investments are reviewed at each financial reporting point to ensure that they are correctly classified between Level 1, 2 and 3 in accordance with the fair value hierarchy outlined above. Where an investments characteristic change during the year and investments no longer meet the criteria of a given level, they are transferred into a more appropriate level at the end of the relevant financial reporting year. For the years ended 30 June 2014 and 30 June 2013 there were no transfers between levels. 14

15 4. Financial assets at fair value through profit or loss (continued) A reconciliation of movements in Level 3 assets for the years ended 30 June 2014 and 2013 is set out below: Balance at beginning of year 1,211,381 6,293,553 Sales (573,630) (5,581,218) Total gain in statement of comprehensive income 142, ,046 Balance at end of year 780,744 1,211,381 Total gain for the year in statement of comprehensive income for financial assets held at end of year 110, ,054 The following table lists underlying fund investments which are subject to redemption restrictions. While NAV, as valued according to the underlying funds' valuation methodology, in most cases is deemed to represent the fair value of the investments, in some cases immediate liquidity could only be achieved on the secondary market at a discounted NAV. The following table lists that indicative range of discounts, bounded by NAV unless described otherwise, as sourced or otherwise estimated by the Investment Manager. Depending on multiple factors, such as supply and demand, high return expectations of prospective liquidity providers and other subjective estimates, as well as transaction considerations and interim distributions, these discounts may be significant. Until an actual trade is executed, however, secondary market bids or estimates remain indicative only and subject to change, may over- or under-represent the price that can be achieved in a structured and competitive process, and may only represent a single and not necessarily sustainable snapshot of the secondary market. Similarly, traded prices may or may not be replicable, depending on multiple factors which are subject to change. Asset description Fair value at 30 June 2014 Valuation technique Unobservable input Range Managed funds 780,744 Discounted NAV Illiquidity discount 0% -11% 780,744 The impact of the range of possible unobservable inputs on the fair value of investments is a decrease of up to 39, Financial risk management The Company s investment activities expose it to the various types of risk which are associated with the financial instruments and markets in which it invests. The most important types of financial risks to which the Company is exposed are market risk, credit risk and liquidity risk. Market risk includes price risk, interest rate risk and currency risk. The Company manages these risks on an aggregate basis along with the risks associated with its investing activities as part of its overall risk management policies. The nature and extent of the financial instruments outstanding at the dates of the statement of the financial position and the risk management policies employed by the Company are discussed below. Overall risk management The Company seeks to generate returns through investing in managed accounts, related funds and/or investments in third party funds. The investments in managed accounts and related funds are affiliated with subsidiaries of Man Group plc, (each, "a Man Subsidiary ) including in many cases the Investment Manager (albeit pursuant to an agreement with such managed account and not pursuant to the investment management agreement with the Company) and investments in third party funds are managed by non-related parties (the Underlying Trading Advisors ). The investments in third party funds are chosen and monitored by the Investment Manager and are managed by third party managers (the Underlying Investment Managers ). The Directors distinguish between two primary risk levels, which are risks at the Company level, and risks at the underlying investment level. Accordingly, the Investment Manager has implemented procedures to manage risks associated with both the Company and its underlying investments. 15

16 5. Financial risk management (continued) At the Company level Risk management at the Company level can be segregated into pre-investment and on-going risk management. Pre-investment risk management involves determining asset allocation and portfolio construction. Thereafter, risk management involves conducting risk and return analysis, monitoring the relevant Company specific portfolio restrictions and investment guidelines and managing currency, interest rate, credit and liquidity risks at the Company level and making relevant adjustments to asset allocation and portfolio construction. Risk considerations or the need to bring the portfolio back in line with the investment strategy and approach may trigger a rebalancing of the portfolio, which is typically reviewed on a monthly basis by the Investment Manager s portfolio management team. At the level of underlying investments FRM Portfolio The FRM Portfolio is managed by a Man Subsidiary and consists of allocations to underlying managers which may be managed accounts or third party investments. Risk management at the level of underlying investments for the FRM Portfolio was segregated into pre-investment risk management and ongoing risk management. Pre-investment risk management involves a due diligence process which seeks to ensure that the underlying managers have a sound trading strategy, a robust operational infrastructure and a suitable risk management process. In the case of ongoing risk management of managed accounts, the Man Subsidiary has full portfolio transparency which encompasses online access to portfolio, position and profit and loss data held at the prime brokers as well as complete portfolio, position and profit or loss data independently re-valued and reconciled from pricing agents. A dedicated risk management team monitors exposures and risk profiles on a daily basis, and additional tools make full use of the higher level of transparency. Daily risk exception reports compare current levels with predefined limits for a whole range of risk measures such as sector and position concentration, leverage, margins, correlations or Value-at-Risk ( VaR ). Market risk Market risk is the risk that fair value or future cash flows of financial instruments will fluctuate due to changes in market variables such as interest rates, foreign exchange rates or underlying investment prices. There are many risk measures used by the Investment Manager, however one generally understood measure is annualised volatility. Annualised volatility is a measure of risk that is calculated as the standard deviation of the returns on the NAV per Redeemable Participating Share for the previous 12 months. As it is based on the NAV per Redeemable Participating Share, annualised volatility incorporates all performance characteristics of the Company including the impact of interest rate movements and currency exchange differences for the previous 12 months. Although the direct investments of the Company may change, the investment strategies employed by its underlying investments will not significantly change, meaning that the risk and return characteristics that the Company is exposed to are broadly consistent. Annualised volatility has limitations as it assumes a normal distribution of monthly returns, which may not be fully representative of hedge fund behaviour. Annualised volatility is based upon historical data. There is no guarantee of trading performance and past performance is no indication of future performance or results., the annualised volatility for the Company was 2.90% (2013: 1.89%). Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is not significantly exposed to interest rate risk, which only applies to cash at banks and accordingly no sensitivity analysis is performed. The underlying strategies of the managed investment funds may expose the Company indirectly to interest rate risk, as part of their trading strategy which is monitored and managed by the a Man Subsidiary, the Underlying Investment Managers and Underlying Trading Advisors to those funds. 16

17 5. Financial risk management (continued) Currency risk Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. As at 30 June 2014 and 2013, the Company s assets and liabilities are predominantly in US Dollars and the Company does not have significant exposure to foreign currency risk. As part of the Company s investment strategy, the Company may periodically hold investments denominated in foreign currencies. The Company may be indirectly exposed to foreign exchange risk through the underlying strategies of the managed investment funds held, where foreign exchange risk trading forms part of the mandated investment strategy. Other price risk Other price risk is the risk that the price of a financial instrument will fluctuate due to changes in market conditions influencing, directly or indirectly, the value of the instrument. The Company is exposed to other price risk from its investments. Due to the nature of the trading strategies followed by these investments, no direct relationship between any market factors and the expected prices of the investments can be reliably established. Other price risk is managed through the overall risk management processes described above. Credit risk Credit risk is the risk that an issuer or counterparty will be unable to meet a commitment that it has entered into with the Company. The Company s maximum exposure to credit risk (not taking into account the value of any collateral or other security held) in the event that the counterparties fail to perform their obligations as of 30 June 2014 in relation to each class of recognised financial assets, including derivatives, is the carrying amount of those assets in the statement of financial position. Credit risk is mitigated through regular monitoring of concentration risk. The exposures are to J.P. Morgan Chase Bank, N.A. and Citibank N.A. (the Banks ). According to Moody s Rating Agency, as of the year ended 30 June 2014, J.P. Morgan Chase Bank, N.A. is rated Aa3 and Citibank N.A. is rated A2. The Investment Manager performs due diligence on all counterparties before they become a service provider or counterparty to the Company, and credit quality checks are part of this process. The credit quality of the Company s Bank and any lenders is regularly monitored and factored into allocation decisions. Liquidity risk Liquidity risk is the risk that the Company will encounter difficulty in meeting the obligation associated with its financial liabilities or equity that are settled by delivering cash or cash equivalents. The Investment Manager monitors the Company s liquidity position on a regular basis with regard to maintaining a reasonable level of liquidity. Investments in the managed investment funds may not be readily realisable due to lock-up periods, extended settlement periods, withdrawal notice periods, or in extraordinary cases periods in which redemptions are suspended due to adverse market conditions. The liquidity risks of the underlying investments are managed by a Man Subsidiary, the Underlying Investment Managers and Underlying Trading Advisors to those funds. 17

18 6. Net gain/(loss) on financial assets at fair value through profit or loss Realised gain/(loss) Change in unrealised gain/loss Total Financial assets at fair value through profit or loss Balanced Strategies Fund Limited 131, ,634 BDF Limited (163,515) 110,891 (52,624) Canyon Value Realization MAC 18 Ltd. 620,453 (532,037) 88,416 Creation Fund Limited 534,260 (592,844) (58,584) Deephaven European Event Fund (USD) Ltd. (429) (429) Deephaven International Volatility Strategies Fund Ltd. 105,449 (11,900) 93,549 Fairway Fund Limited (18,882) 17,065 (1,817) Halcyon MAC 19 Ltd. 25,217 (25,044) 173 Ishin MAC 90 Ltd. 142,985 (118,814) 24,171 JD Capital Cayman Fund Limited 87,606 (65,225) 22,381 Laplace Fund Limited (24,651) (24,651) Man Prospect Mountain Ltd. 266,050 (276,169) (10,119) Man GLG Multi-Strategy Fund SICAV (76,748) (76,748) Miesque Fund Ltd 90,433 (94,919) (4,486) Monarch Cayman Fund Limited 1,983 (1,734) 249 Pentwater Equity Opportunities Fund Ltd. 160,224 (120,998) 39,226 Sansome Cayman Fund Limited (155,699) 97,799 (57,900) Waterstone Market Neutral MAC 51 Ltd. (125,902) 18,684 (107,218) 1,570,662 (1,565,439) 5,223 For the year ended 30 June 2013 Realised gain/(loss) Change in unrealised gain/loss Total Financial assets at fair value through profit or loss Balanced Strategies Fund Limited 25,080 (35,023) (9,943) BDF Limited (670,320) 734,421 64,101 Canyon Value Realization MAC 18 Ltd. 436, ,365 Creation Fund Limited 337,427 5, ,240 Deephaven European Event Fund (USD) Ltd. (1,441) (1,441) Deephaven International Volatility Strategies Fund Ltd. 5,499 5,499 Fairway Fund Limited 171,886 (260,860) (88,974) Five Fifteen Cayman Fund Limited Halcyon MAC 19 Ltd. 25,044 25,044 Halcyon Offshore Asset-Backed Value Fund Ltd. 456,415 (117,406) 339,009 Ishin MAC 90 Ltd. (3,028) 118, ,785 JD Capital Cayman Fund Limited 94,414 (51,585) 42,829 Laplace Fund Limited (239,761) (239,761) Man MAC Gemstock 9B Limited 6,505 6,505 Man Prospect Mountain Ltd. 24, , ,007 Miesque Fund Limited 184,037 (142,641) 41,396 Monarch Cayman Fund Limited 245,770 (40,381) 205,389 Pentwater Equity Opportunities Fund Ltd. 120, ,998 RMF-MGS Arbitrage (Master) Limited 8,400 8,400 Sansome Cayman Fund Limited (97,799) (97,799) Sensato Asia Pacific Offshore Fund, Ltd. 208, ,287 Waterstone Market Neutral MAC 51 Ltd. 93,626 (80,883) 12,743 1,183, ,988 1,734,993 18

19 7. Loan In order to enable the Company to effect its investments, the Company has established a Revolving Loan Agreement with Man Investments AG. The Company is able to borrow, repay and reborrow amounts under the Revolving Loan Agreement, subject to its terms. The Company did not borrow under the Revolving Loan Agreement for the years ended 30 June 2014 and 30 June The Revolving Loan Agreement is an uncommitted Loan Facility, which is renewable annually and may be terminated by Man Investments AG at its sole discretion, upon three months written notice. The Revolving Loan Agreement has a maturity of one year and bears interest at the rate of LIBOR plus a margin, which should not exceed 2%, subject to an annual review. There is no covenant in the Revolving Loan Agreement restricting the amount the Company may borrow. 8. Fees, commissions and other expenses Management and incentive fees FRM Portfolio The FRM Portfolio includes a variety of fund of hedge fund investments. Management fees are payable in arrears on each monthly Dealing Day, at the rate of up to one twelfth of 1% (approximately 1% per annum) of the Investment Exposure at the beginning of the immediately preceding calendar month adjusted by reference to the amount of any redemptions and changes made to the Investment Exposure on the Dealing Day during the calendar month plus the amount of any investment gains and losses arising during such calendar month. A monthly incentive fee of up to 20% will be charged based on the net increase in value attributable to the investment strategies. Incentive fees may only be payable if the net increase in value exceeds a previously highest attained value for such investment strategies. Incentive fees may also be charged prior to the deduction of certain fees and expenses. Service Manager fees Man Investments AG is the Service Manager to the Company and from 1 December 2013 has, in turn, delegated administrative functions (such as maintenance of the financial books and records of the Company, calculating NAV, handling shareholder communications and supervising the payment of expenses by the Company) to JPMorgan Hedge Fund Services (Ireland) Limited (the Administrator ). The Service Manager is responsible to the Company for selecting and appointing (as principal) service providers to provide general shareholder services (which will include maintenance of the Segregated Portfolio's register) and certain accounting and valuation services to the Segregated Portfolio, as well as monitoring the providers of those services. General shareholder services fee The Service Manager is entitled to a general shareholder services fee, which consists of an annual fixed fee of 1,000 plus a variable fee based on the number of investors, based on the following scale: up to 100 investors, 10,000 per annum; 101 to 200 investors, 13,000 per annum; 201 to 400 investors, 16,000 per annum; and 401 to 600 investors, 19,000 per annum; In the event of there being more than 600 investors, the annual fee shall be increased by increments of 3,000 for every additional 200 investors. The Service Manager has sub delegated these services to Citibank Europe plc, the Shareholder Service provider. Valuation fee The Service Manager is entitled to a monthly valuation fee of one twelfth of up to 0.05% of the NAV subject to a minimum fee of 10,000 per annum. The Service Manager has the right to be reimbursed for any reasonable out of pocket expenses incurred in carrying out its responsibilities to the Company. 19

20 8. Fees, commissions and other expenses (continued) Taxation Under current Bermuda law, the Company is not obligated to pay any taxes in Bermuda on either income or capital gains. The Company have received an undertaking from the Minister of Finance in Bermuda pursuant to the provisions of the Exempted Undertaking Tax Protection Act, 1966 which exempts it from any such Bermuda taxes until 28 March In March 2011, the Bermuda Government enacted the Exempted Undertakings Tax Protection Act 2011, allowing the Minister of Finance to grant assurance up to 31 December Related party transactions Master Multi-Product Holdings Ltd, a Bermuda incorporated company, is a related party through its 100% holding of the Management Shares in the Company. The intermediate controlling party of the Company is therefore Master Multi-Product Holdings Ltd, an entity which shares Directors in common with the Company. FRM Investment Management Limited and Man Investments Limited are related parties as they were the Investment Manager of the Company for a portion of the year. Man Investments AG is a related party as it was the Services Manager for the year. These companies are indirect subsidiaries of Man Group plc and therefore all subsidiaries of Man Group plc are also related parties. During the year, the Company has transacted with the following subsidiaries of Man Group plc: FRM Investment Management Limited Man Investments Limited Man Investments AG Man Group plc companies are also involved, in varying capacities, in the management of the companies the Company has invested in, as set out in Note 4. Each of the Directors is or may become involved in other financial investment and professional activities which may cause conflicts of interest with the management of the Company. These activities include management or administration of other companies (including those with investment objectives similar to that of the Company), purchases and sales of securities and other investments, investment and management counselling and serving as Directors, officers, advisers and/or agents of other companies, including companies which the Company may invest and/or which may invest into the Company. Conyers Dill & Pearman Limited is a related party as Dawn Griffiths is a Director of the Company and a partner of the law firm. The following transactions took place between the Company and its related parties. Related party Type of fee Total fees Fees payable Directors Directors fees and related expenses 24,753 16,992 Man Investments Limited Management fees 55,851 FRM Investment Management Limited Management fees 102,535 26,608 Man Investments AG Service Manager fees 71,782 71,782 For the year ended 30 June 2013 Related party Type of fee Total fees Fees payable Directors Directors fees and related expenses 13,411 8,761 Man Investments Limited Management fees 248,208 58,185 Man Investments AG Service Manager fees 78,200 33,336 20