MEDIOLANUM FUND OF HEDGE FUNDS ANNUAL REPORT & AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012

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1 ANNUAL REPORT & AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012

2 AUDITED FINANCIAL STATEMENTS Contents 1 Trust Information 2 Statement of Manager s Responsibilities 4 Trustee s Report 5 Independent Auditor s Report 6-7 Investment Manager s Report 8-9 Statement of Net Assets 10 Income Statement 11 Statement of Changes in Net Assets Attributable to Holders of Redeemable Participating Units 12 Statement of Cash Flows 13 Notes to the Financial Statements Schedule of Investments Fund of Funds Disclosure (unaudited)

3 TRUST INFORMATION MANAGER TRUSTEE DIRECTORS OF THE MANAGER ADMINISTRATOR, REGISTRAR AND TRANSFER AGENT INVESTMENT MANAGER Mediolanum International Funds Limited 2 Shelbourne Buildings Shelbourne Road Ballsbridge Dublin 4 Ireland Northern Trust Fiduciary Services (Ireland) Limited Georges Court Townsend Street Dublin 2 Ireland Andrew Bates (Chairperson)** Furio Pietribiasi (Managing Director)* Corrado Bocca** John L Mahon*** Vittorio Gaudio** Wyndham Williams*** Bronwyn Wright*** Northern Trust International Fund Administration Services (Ireland) Limited Georges Court Townsend Street Dublin 2 Ireland Mediolanum Asset Management Limited 2 Shelbourne Buildings Shelbourne Road Ballsbridge Dublin 4 Ireland DELEGATE INVESTMENT MANAGER Duemme Hedge Sgr S.p.A. (For Mediolanum High Volatility Fund and Via Dante 16 Mediolanum Low Volatility Fund) Milan Italy DELEGATE INVESTMENT MANAGER Trea Capital Partners, S.V, S.A (For Mediolanum Low Volatility Fund) Agustina Saragossa Barcelona Spain GLOBAL DISTRIBUTOR Mediolanum International Funds Limited 2 Shelbourne Buildings Shelbourne Road Ballsbridge Dublin 4 Ireland * Executive Director ** Non-executive Directors ***Independent Directors 2

4 TRUST INFORMATION (CONTINUED) IRISH LEGAL ADVISORS INDEPENDENT AUDITORS Dillon Eustace 33 Sir John Rogerson's Quay Dublin 2 Ireland Deloitte & Touche Deloitte & Touche Chartered Accountants and Statutory Audit Firm Earlsfort Terrace Dublin 2 Ireland 3

5 STATEMENT OF MANAGER S RESPONSIBILITIES The Manager is required to prepare financial statements for each financial year, which give a true and fair view of the state of affairs of the Trust and of the profit or loss of the Trust for that period. In preparing those financial statements the Manager is required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Trust will continue in business. The Manager is responsible for keeping proper books of account which disclose with reasonable accuracy at any time the financial position of the Trust and to enable it to ensure that the financial statements are prepared in accordance with accounting standards generally accepted in Ireland and comply with the Trust Deed and the Unit Trust Act, The Manager is also responsible for safeguarding the assets of the Trust and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Corporate Governance Statement On 14 December 2011, The Irish Funds Industry Association ( IFIA ) published a corporate governance code ( IFIA Code ) that may be adopted on a voluntary basis by Irish authorised collective investment schemes. Mediolanum International Funds Limited, as Manager of the Trust, has adopted the code. On behalf of the Manager: Director Director 24 April

6 TRUSTEE S REPORT TO THE UNITHOLDERS OF MEDIOLANUM FUND OF HEDGE FUNDS Report of the Trustee to the Unitholders We have enquired into the conduct of the Manager in respect of the Mediolanum Fund of Hedge Funds ( the Trust ) for the year ended 31 December 2012, in our capacity as Trustee to the Trust. This report including the opinion, has been prepared for and solely for the unitholders in the Trust as a body, in accordance with the Central Bank s Non - UCITS Notice 7 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown. Responsibilities of the Trustee Our duties and responsibilities are outlined in the Central Bank s Non - UCITS Notice 7. One of those duties is to enquire into the conduct of the Trust in each annual accounting period and report thereon to the unitholders. Our report shall state whether, in our opinion, the Trust has been managed, in that year, in accordance with the provisions of the Trust s Trust Deed and the Non UCITS Notices. It is the overall responsibility of the Manager to comply with these provisions. If the Manager has not so complied, we as Trustee must state why this is the case and outline the steps which we have taken to rectify the situation. Basis of Trustee Opinion The Trustee conducts such reviews as it, in its reasonable opinion, considers necessary in order to comply with its duties as outlined in Non - UCITS Notice 7 and to ensure that, in all material respects, the Trust has been managed (i) in accordance with the limitations imposed on its investment and borrowing powers by the provisions of its constitutional documentation and the appropriate regulations and (ii) otherwise in accordance with the Trust s constitutional documentation and the appropriate regulations. Opinion In our opinion, the Mediolanum Fund of Hedge Funds has been managed during the year, in all material respects: (i) in accordance with the limitations imposed on the investment and borrowing powers of the Trust by the trust deed and by the Central Bank under the powers granted to the Central Bank by the Units Trusts Act, 1990; and (ii) otherwise in accordance with the provisions of the Trust Deed and the Unit Trusts Act, On behalf of Northern Trust Fiduciary Services (Ireland) Limited Georges Court Townsend Street Dublin 2 Ireland 24 April

7 INDEPENDENT AUDITOR S REPORT TO THE UNIT HOLDERS OF MEDIOLANUM FUND OF HEDGE FUNDS We have audited the financial statements of Mediolanum Fund of Hedge Funds for the year ended 31 December 2012 which comprise the Statement of Net Assets, the Income Statement, the Statement of Changes in Net Assets Attributable to Holders of Participating Redeemable Units, the Statement of Cash Flows and the related notes 1 to 17. The financial reporting framework that has been applied in their preparation is Irish law and accounting standards issued by the Accounting Standards Board and published by the Institute of Chartered Accountants in Ireland (Generally Accepted Accounting Practice in Ireland). This report is made solely to the Fund's unit holders, as a body in accordance with the requirements of Unit Trusts Act, 1990 and the Trust Deed. Our audit work has been undertaken so that we might state to the unit holders those matters we are required to state to them in an auditors report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Fund s unit holders as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of the Trustee, the Manager and the Auditors As explained more fully in the Statement of Manager s Responsibilities, the manager is responsible for the preparation of the financial statements giving a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with Irish law and accounting standards issued by the Accounting Standards Board and published by the Institute of Chartered Accountants in Ireland (Generally Accepted Accounting Practice in Ireland). Those standards require us to comply with the Auditing Practices Board s (APB s) Ethical Standards for Auditors. The Trustee is responsible for safeguarding the assets of the Fund. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Fund s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report and Audited Financial Statements to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. 6

8 INDEPENDENT AUDITOR S REPORT TO THE UNIT HOLDERS OF MEDIOLANUM FUND OF HEDGE FUNDS (continued) Opinion In our opinion the financial statements: give a true and fair view, in accordance with Generally Accepted Accounting Practice in Ireland, of the state of the affairs of the Fund as 31 December 2012 and of the loss for the year ended; and have been properly prepared in accordance with the Unit Trusts Act, 1990 and the Trust Deed. Deloitte & Touche Chartered Accountants and Statutory Audit Firm Dublin 2 24 April

9 INVESTMENT MANAGER S REPORT Mediolanum Low Volatility Fund Performance Fund* 30/12/11 31/12/ % * Performance is stated in euro, net of management fee, performance fee and costs and it is based on the NAV of the Mediolanum SA Class. The Mediolanum Low Volatility Fund closed 2012 with a performance of 3.20%. In the first quarter of 2012, positive contributions came particularly from Credit and Event Driven strategies. Macro funds had mixed performance and CTAs, after a good January, gave negative returns in February and March. The second quarter was negative overall but performances were quite diversified among the different target fund within the sub-fund allocation which explains the resilience of the portfolio even in a very negative market environment and the low drawdown reported. Strong performance came in May 2012 from the CTA component, which was offset though by the losses reported on the Macro side by funds like Covepoint, active in the Emerging Market FX and rates strategies. Losses were quickly recovered by a very good July, with positive returns coming from all the strategies in portfolio. The rest of the year was positive with the exception of the month of October Credit and Event Driven Funds reported the best performance of 2012, managing to exploit very successfully the enormous opportunities on the market. Higher returns were related to riskier strategies, as the most speculative fixed income instruments performed the best and the lowest-risk instruments lagged. Nevertheless, the allocation to Fixed Income Strategies, especially to the Long/Short Credit managers, contributed the most to performance during the year. The Long/Short Equity bucket was the one which witnessed the most turnover in terms of managers due to the dispersion of the returns; however, the overall contribution to the portfolio s performance was quite positive. The Corporate Bond portion of the portfolio was liquidated at the beginning of July 2012 delivering a strong positive performance during the period. The exposures to European financials, both senior and subordinated debt were the main contributors to the funds positive performance. The portfolios risk was reduced considerably during the month of February taking profit due to the strong year to date performance which was mainly due to the LTRO programme launched by the ECB. Mediolanum Asset Management Limited March

10 INVESTMENT MANAGER S REPORT (continued) Mediolanum High Volatility Fund Performance Fund* 30/12/11 31/12/ % * Performance is stated in euro, net of management fee, performance fee and costs and it is based on the NAV of the Mediolanum SA Class. The portfolio delivered a return of 2.17% in The first quarter was very positive and mainly propelled forward by the Event Driven strategy. Good returns came also from the US Long/Short Managers, while the European and Asian ones could not profit as well from the positive environment witnessed across markets. Among the long/short component an extraordinary return came from Nevsky. The second quarter turned out to be extremely difficult for both the Event Driven and Long Short Equity strategies. This was particularly true for those with an exposure to the financial sector. Among these, Paulson and Algebris target funds suffered the most. May 2012 was an exceptional month, with losses reported by almost all the target funds in portfolio and with significant losses marked again by the Algebris that focuses on the financial sector. In June, the macroeconomic scenario started to improve and this translated in a better environment for Hedge Funds. Summer was positive for the portfolio with very good performance coming from US and Asian managers, with the European ones keeping a very conservative and therefore subdued profile. An important review of the portfolio took place during the summer and new target funds replaced those that impacted more negatively the portfolio performance in the previous months. The final part of 2012 was positive, thanks to less macroeconomic uncertainties and positive developments in Europe. The overall performance of 2012 ended up being mainly attributable to the strong negative impact of the exposure to the financial sector in the first half of the year and to the slow reaction of some target funds to the positive environment starting in summer. Mediolanum Asset Management Limited March

11 STATEMENT OF NET ASSETS as at 31 December 2012 Mediolanum Mediolanum Mediolanum Mediolanum High Volatility High Volatility Low Volatility Low Volatility Fund Fund Fund Fund Total Total Assets Note EUR EUR EUR EUR EUR EUR Cash at bank 4 3,798,776 7,593,073 2,879,523 10,240,035 6,678,299 17,833,108 Financial assets at fair value through profit or loss 84,500, ,692, ,910, ,392, ,410, ,085,049 Accrued interest receivable , ,260 Sundry receivables and prepayments 6 1,062 1,954, ,327 1,062 2,725,224 Total assets 88,300, ,240, ,789, ,656, ,090, ,896,641 Liabilities Financial liabilities at fair value through profit or loss 12,899 3,976,552 19,661 2,040,230 32,560 6,016,782 Redemptions payable 3,865 55,899 8,359 31,841 12,224 87,740 Administration fee payable 3 2,898 13,145 3,569 15,996 6,467 29,141 Management fee payable 3 225, , , , , ,785 Investment manager fee payable 3 43,772 62,498 55,658 76,059 99, ,557 Trustee fee payable 3 2,175 2,764 2,678 2,516 4,853 5,280 Auditors remuneration payable 10,455 20,828 10,455 21,475 20,910 42,303 Accrued interest payable - - 2,801-2,801 - Sundry payables and accrued expenses 7 42,111 42,170 43,926 43,221 86,037 85,391 Total liabilities 343,601 4,486, ,747 2,611, ,348 7,097,979 Net assets attributable to holders of redeemable participating units 87,956, ,753, ,356, ,044, ,312, ,798,662 On behalf of the Manager Director 24 April 2013 Director The accompanying notes form an integral part of the financial statements 10

12 INCOME STATEMENT Mediolanum Mediolanum Mediolanum Mediolanum High Volatility High Volatility Low Volatility Low Volatility Fund Fund Fund Fund Total Total Income Note EUR EUR EUR EUR EUR EUR Interest income , , , ,205 Miscellaneous income ,012 24, ,012 24,855 Net realised (loss)/gain on financial assets and liabilities at fair value through profit or loss and foreign exchange (5,241,350) 6,685, ,793 (3,619,630) (4,436,557) 3,065,875 Net realised gain/(loss) on forward foreign exchange contracts 258,340 3,012,330 (419,979) 548,853 (161,639) 3,561,183 Net change in unrealised gain/(loss): - financial assets and liabilities at fair value through profit or loss and foreign exchange 3,846,245 (16,657,872) 3,570, ,422 7,417,062 (15,671,450) - open forward foreign exchange contracts 4,586,051 (3,290,571) 2,399,565 (2,020,324) 6,985,616 (5,310,895) Total investment income/(expense) 3,449,286 (10,250,124) 6,716,767 (3,646,103) 10,166,053 (13,896,227) Expenses Management fee 3 1,581,375 2,316,100 2,033,808 2,407,082 3,615,183 4,723,182 Investment management fee 3 307, , , , , ,126 Administration fee 3 39,347 55,030 50,594 57,053 89, ,083 Trustee fee 3 29,136 39,949 37,476 41,440 66,612 81,389 Interest expenses ,218-24,508 - Auditors remuneration 10,455 22,146 10,455 21,619 20,910 43,765 Other expenses 65,689 94,597 76,678 90, , ,126 Total expenses 2,033,355 2,977,541 2,628,143 3,085,130 4,661,498 6,062,671 Increase/(Decrease) in net assets from operations attributable to holders of redeemable participating units 1,415,931 (13,227,665) 4,088,624 (6,731,233) 5,504,555 (19,958,898) All profit and loss account items arose solely from continuing operations. The Trust has no recognized gains and losses other than the results for the financial year above and therefore, no statements of total recognised gains and losses has been presented. On behalf of the Manager Director 24 April 2013 Director The accompanying notes form an integral part of the financial statements 11

13 STATEMENT OF CHANGES IN NET ASSETS ATTRIBUTABLE TO HOLDERS OF REDEEMABLE PARTICIPATING UNITS Mediolanum Mediolanum Mediolanum Mediolanum High Volatility High Volatility Low Volatility Low Volatility Fund Fund Fund Fund Total Total EUR EUR EUR EUR EUR EUR Net assets attributable to holders of redeemable participating units at start of year 120,753, ,447, ,044, ,238, ,798, ,685,864 Increase/(Decrease) in net assets from opeations attributable to holders of redeemable participating units 1,415,931 (13,227,665) 4,088,624 (6,731,233) 5,504,555 (19,958,898) Proceeds from the issue of units 9, ,818 9,788 22,818 Payments on the redemption of units (34,222,468) (35,466,339) (39,777,560) (9,484,783) (74,000,028) (44,951,122) Net assets attributable to holders of redeemable participating units at end of year 87,956, ,753, ,356, ,044, ,312, ,798,662 The accompanying notes form an integral part of the financial statements 12

14 STATEMENT OF CASH FLOWS Cash flows from operating activities Mediolanum Mediolanum Mediolanum Mediolanum High Volatility High Volatility Low Volatility Low Volatility Fund Fund Fund Fund Total Total EUR EUR EUR EUR EUR EUR Change in net assets attributable to holders of redeemable participating shares from operations 1,415,931 (13,227,665) 4,088,624 (6,731,233) 5,504,555 (19,958,898) Adjustments to reconcile to net cash generated by operating activities Movement in financial assets and liabilities at fair value through profit or loss 27,227,708 42,315,399 27,462,155 20,171,747 54,689,863 62,487,146 Movement in receivables and prepaid investments 1,953,835 2,875,021 1,023,587 1,584,886 2,977,422 4,459,907 Movement in payables and accrued expenses (179,091) (4,234,281) (157,318) (4,145,541) (336,409) (8,379,822) Net cash generated by operating activities 30,418,383 27,728,474 32,417,048 10,879,859 62,835,431 38,608,333 Cash flow from financing activities Proceeds from issue of redeemable participating shares 9, ,818 9,788 22,818 Payments on redemption of redeemable participating shares (34,222,468) (35,466,339) (39,777,560) (9,484,783) (74,000,028) (44,951,122) Net cash used in financing activities (34,212,680) (35,466,339) (39,777,560) (9,461,965) (73,990,240) (44,928,304) Net (decrease)/increase in cash and cash equivalents (3,794,297) (7,737,865) (7,360,512) 1,417,894 (11,154,809) (6,319,971) Opening cash and cash equivalents 7,593,073 15,330,938 10,240,035 8,822,141 17,833,108 24,153,079 Ending cash and cash equivalents 3,798,776 7,593,073 2,879,523 10,240,035 6,678,299 17,833,108 The accompanying notes form an integral part of the financial statements 13

15 NOTES TO THE FINANCIAL STATEMENTS 1. General Mediolanum Fund of Hedge Funds (the Trust ), constituted on 11 April 2005, is an open-ended umbrella unit trust and is authorised by the Central Bank pursuant to the provisions of the Unit Trusts Act, The Trust is structured as an umbrella scheme and the following Sub-Funds have been authorised by the Central Bank as at 11 April 2005: Mediolanum High Volatility Fund Mediolanum Low Volatility Fund Mediolanum Medium Volatility Fund Of the 3 Sub-Funds only Low and High Volatility have been actively trading as at 31 December The investment objective of Mediolanum High Volatility Fund is to achieve medium to long term capital appreciation while attempting to limit investment risk and the year-on-year volatility rate to less than that of the global equity markets. In seeking to achieve the Sub-Fund s investment objective, the Sub-Fund invests primarily in open-ended regulated and non-regulated collective investment schemes which pursue a range of alternative investment strategies thus allowing diversification by investment manager, investment strategy and/or financial assets held, with the aim of lowering overall risk. The annualised volatility of the Hedge Funds is expected to range between 2.00% and 30.00%. The average is expected to be 12.00%. The investment objective of Mediolanum Low Volatility Fund is to achieve medium to long term capital appreciation while attempting to limit investment risk and the year-on-year volatility rate to less than that of the global bond markets. In seeking to achieve the Sub-Fund s investment objective, the Sub-Fund invests primarily in bonds, open-ended regulated and non-regulated collective investment schemes which pursue a range of alternative investment strategies thus allowing diversification by investment manager, investment strategy and/or financial assets held, with the aim of lowering overall risk. The annualised volatility of the Hedge Funds is expected to range between 2.00% and 15.00%. The average is expected to be 6.00%. SA Units automatically reinvest all earnings, dividend and other distributions of whatever kind and SB Units may distribute earnings back to unitholders. 2. Principal accounting policies (a) Accounting convention These Financial Statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and liabilities held at fair value through profit or loss. 14

16 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 2. Principal accounting policies (continued) (b) Basis of preparation The Financial Statements have been prepared in accordance with accounting standards generally accepted in Ireland and Irish statute comprising the Unit Trusts Act, Accounting standards generally accepted in Ireland in preparing Financial Statements giving a true and fair view are those published by the Institute of Chartered Accountants in Ireland and issued by the Financial Reporting Council. The preparation of financial statements in conformity with Generally Accepted Accounting Practice in Ireland requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. Actual results could differ from those estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimate is revised if the revision affects only that year or in the year of the revision and future years if the revision affects both current and future years. (c) Valuation of investments Investments which are quoted, listed or normally dealt in on a regulated market are valued at the last traded price. Where the last traded price is not available, the latest bid price is used for long positions and offer in the case of short positions. If an investment is quoted, listed or normally dealt in on more than one market, the Manager may, in its absolute discretion select any one of such markets for the foregoing purposes and once selected, this market shall be used for future calculations of the Net Asset Value unless the Manager otherwise determines. In the case of any investment which is quoted, listed or normally dealt in on a market but in respect of which for any reason, prices on that market may not be available, the value is the probable realisable value, estimated by a person, firm or associate making a market in such investment, appointed by the Manager and approved by the Trustee. The value of any investment which is not quoted, listed or normally dealt in a regulated market is the probable realisable value, estimated by a competent person, firm or associate making a market in such investment, appointed by the Manager and approved by the Trustee. The fair value of investments in collective investment schemes is based on the latest available net asset value provided by the relevant fund manager or administrator. (d) Accounting for investments Investment transactions are accounted for on the trade date. Realised gains and losses on investment disposals are calculated using the first-in, first-out (FIFO) method. 15

17 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 2. Principal accounting policies (continued) (e) Foreign Currency Translation (i) Functional and presentation currency Items included in the Trust s financial statements are measured using the Euro as, in the opinion of the Directors of the Manager; the Euro best represents the economic effects of the underlying transactions, events and conditions applicable to the Trust. The Trust has also adopted the Euro as its presentation currency. (ii) Transactions and balances Monetary assets and liabilities denominated in currencies other than the presentation currency are translated to the presentation currency at the closing rates of exchange at year end. Transactions during the year, including purchases and sales of securities, income and expenses, are translated at the rate of exchange prevailing on the date of the transaction. Foreign currency transaction gains and losses are included in the Income Statement. (f) Income Income arising from investments is accounted for on an accruals basis and is shown gross of irrecoverable withholding taxes, where applicable. (g) Forward Currency Contracts The unrealised gain or loss on open forward currency contracts is calculated as the difference between the original contracted rate and the rate to close out the contract. Realised gains or losses on currency as reflected in the Income Statement include net gains and losses on forward currency contracts that have not settled. (h) Taxation The Trust qualifies as an investment undertaking as defined in Section 739B (1) of the Taxes Act. Under current Irish Law and practice, it is not chargeable to Irish tax on its income and capital gains. Tax may arise on the happening of a chargeable event. A chargeable event includes any distribution payments to Unitholders or any encashment, redemption or transfer of units. No tax will arise on the Trust in respect of chargeable events in respect of: (i) (ii) (iii) a Unitholder who is not Irish resident and not ordinarily resident in Ireland for tax purposes at the time of the chargeable event, or certain exempted Irish resident investors who have provided the Trust with the necessary signed statutory declarations, or units held in a recognised clearing system as designed by the order of the Irish Revenue Commissioners. Distributions and interest on securities issued in countries other than Ireland may be subject to taxes including withholding taxes imposed by such countries. The Trust may not be able to benefit from a reduction in the rate of withholding tax by virtue of the double taxation agreement in operation between Ireland and other countries. The Trust may not, therefore, be able to reclaim withholding tax suffered by it in particular countries. To the extent that a chargeable event arises in respect of an Irish Unitholder, the Trust may be required to deduct tax in connection with that chargeable event and pay the tax to the Irish Revenue Commissioners. A chargeable event can include dividend payments to unitholders, appropriation, cancellation, redemption, repurchase or transfer of units, or a deemed disposal of units every 8 years beginning from the date of acquisition of those units. Certain exemptions can apply to tax exempt Irish investors to the extent that these Unitholders have appropriate tax declarations in place with the Trust in which case there may be no requirement to deduct tax. 16

18 NOTES TO THE FINANCIAL STATEMENTS (continued) 2. Principal accounting policies (continued) (i) Equalisation on Investments Many investment funds operate an equalisation policy that applies to the purchase of shares made on a dealing day during the accounting year. When the net asset value per share is more than the value at the beginning of the accounting year ( peak net asset value ), the offering price of shares in the Fund is the sum of the net asset value per share and the equalisation factor. The Trust does not operate an equalisation policy on the issue and redemption of units to its unitholders. (j) Redeemable Participating Units Redeemable Participating Units are redeemable at the unitholder s option and are classified as financial liabilities. Any distributions on these participating units are recognised in the Income Statements as finance costs. (k) Classification of Redeemable Participating Units The Funds provides its Unitholders with the right to redeem their interest in the Funds at any dealing date for cash equal to their proportionate share of the net asset value of the Funds. Under Financial Reporting Standards Financial Instruments: Disclosure and presentation (FRS 25), this right represents in substance a liability of the Funds to Unitholders. 3. Fees and expenses (a) Management fees Mediolanum International Funds Limited, the Manager, is entitled to an annual fee accrued and payable monthly in arrears of 1.50% of the Net Asset Value of each relevant Sub-Fund. The Manager is also entitled to be repaid all of its Administration Expenses out of the assets of each Sub-Fund, which include an annual fee accrued at each valuation point and payable monthly in arrears of up to 0.045% of the Net Asset Value of each relevant Sub-Fund. A fee of 10 is charged (gross of any relevant taxes) per Class in which a Unitholder holds less than 25 Units. The appropriate number of Units of each such Unitholder will be automatically redeemed to pay these administrative charges. If a Unitholder holds a number of Units in any class with a value of less than 10 (gross of any relevant taxes), then his/her entire administrative charge shall be automatically redeemed and paid to the Manager. This administrative charge shall be adjusted periodically in accordance with the Eurostat All Items Harmonised Index of Consumer Prices (HICP). This administrative charge is chargeable on the first Dealing Day in December of each year. The Manager received management fees of 3,615,183 (2011: 4,723,182) for the year ended 31 December (b) Investment Manager fees Mediolanum Asset Management Limited, the Investment Manager, is entitled to receive out of the assets of each relevant Sub-Fund an annual fee, accrued at each Valuation Point and payable monthly in arrears of 0.30% of the Net Asset Value of the relevant Sub-Fund (plus VAT, if any), subject to a minimum annual fee of 75,000 per Sub-Fund. The Investment Manager received management fees of 701,977 (2011: 917,126) for the year ended 31 December The Investment Manager is not entitled to be repaid for any out-of pocket expenses out of the assets of a Sub-Fund. 17

19 NOTES TO THE FINANCIAL STATEMENTS (continued) 3. Fees and expenses (continued) (b) Investment Manager fees (continued) The fees relating to the Delegate Investment Manager appointed in respect of the Sub-Fund shall be borne by the Investment Manager and shall not be charged to the Sub-Fund. A Delegate Manager shall not be entitled to be repaid for any out of pocket expenses out of the assets of the Sub-Fund. (c) Performance fees The Investment Manager is also entitled to a performance fee of up to 10% of the increase in the Net Asset Value of each Sub-Fund, calculated on a monthly basis. The calculation of the performance fee will be verified by the trustee. The Investment Manager received no performance fees for the year ended 31 December 2012 and 31 December (d) Administration fees Northern Trust International Fund Administration Services (Ireland) Limited, the Administrator is entitled to receive out of the assets of the Fund an annual fee accrued at each Valuation Point at the following rates million the fee shall be 0.04% per annum of the Net Asset Value of the Fund, million the fee shall be 0.03% per annum of the Net Asset Value of the Fund, in excess of 400 million the fee shall be 0.025% per annum of the Net Asset Value of the Fund and payable monthly in arrears. Such fee is subject to a minimum monthly fee of 3,000 per Sub-Fund or, where the relevant Sub-Fund has multiple Classes a minimum monthly fee of 3,250. If at any time during a calendar year there are ten or more Unitholders in the Fund, the following transfer agency fees will apply: i) an annual Unitholder register fee of 25 per Unitholder; and ii) a transaction fee of 25 for each subscription, conversion, redemption or transfer of Units. The Administrator is entitled to be repaid out of the assets of each Sub-Fund all of its reasonable outof-pocket expenses incurred on behalf of each Sub-Fund which shall include legal fees, couriers fees and telecommunications costs and expenses. Each Sub-Fund will bear its proportion of the fees and expenses of the Administrator. The Administrator received fees of 89,941 (2011: 112,083) for the year ended 31 December (e) Trustee fees Northern Trust Fiduciary Services (Ireland) Limited, the Trustee, is entitled to receive out of the assets of the Fund an annual fee accrued at each Valuation Point at the following rates million and the fee shall be 0.03% per annum of the Net Asset Value of the Fund, in excess of 200 million the fee shall be 0.02% per annum of the Net Asset Value of the Fund and payable monthly in arrears. The Trustee is entitled to a transaction charge of 150 per Fund of Hedge Fund investment transaction and 60 in respect of investments in daily dealing Collective Investment schemes and telegraphic transfer charge of 25 per transaction. Each Sub-Fund is responsible for sub-custodian fees and charges (which will be charged at normal commercial rates). 18

20 NOTES TO THE FINANCIAL STATEMENTS (continued) 3. Fees and expenses (continued) (e) Trustee fees (continued) The Trustee is entitled to be repaid out of the assets of each Sub-Fund all of its reasonable out-ofpocket expenses incurred on behalf of each Sub-Fund which shall include legal fees, couriers fees and telecommunications costs and expenses. Each Sub-Fund will bear its proportion of the fees and expenses of the Trustee. The Trustee received fees of 66,612 (2011: 81,389) for the year ended 31 December (f) Underlying fund fees Both the Mediolanum Low Volatility Fund and Mediolanum High Volatility Fund are invested in underlying funds which incur their own fees. The details of the fees charged by the underlying funds are detailed in the Fund of Funds Disclosure on pages 34 to Bank balances The Trustee to the Funds is Northern Trust Fiduciary Services (Ireland) Limited, an indirect whollyowned subsidiary of Northern Trust Corporation ("TNTC"). TNTC is publicly traded and a constituent of the S&P 500. TNTC has a credit rating of A+ from Standard & Poors. Northern Trust Company ("TNTCO") is also wholly owned by TNTC. TNTCO has a credit rating of AA- from Standard & Poors and Aa3 from Moodys. As at 31 December 2012, other bank balances are held with Banca Mediolanum. Banca Mediolanum is not rated. As at 31 December 2012, none of the sub-funds had a cash balance greater than 10% of Net Assets. As at 31 December 2011, other bank balances were held with Northern Trust Company and Banca Mediolanum. As at 31 December 2011, none of the sub-funds had a cash balance greater than 10% of Net Assets. 19

21 NOTES TO THE FINANCIAL STATEMENTS (continued) 5. Redeemable Participating Units Participating units in issue Mediolanum Mediolanum Mediolanum Mediolanum High Volatility High Volatility Low Volatility Low Volatility Fund Fund Fund Fund Class SA Euro Units At beginning of period 8,249,606 11,604,488 7,713,803 8,740,514 Units issued ,428 Units redeemed (2,404,587) (3,354,882) (1,054,048) (1,029,139) Units at end of period 5,846,003 8,249,606 6,659,755 7,713,803 Class SB Euro Units At beginning of period 4,253,187 4,253,187 9,290,778 9,290,778 Units issued Units redeemed (1,179,920) - (3,568,176) - Units at end of period 3,073,267 4,253,187 5,722,602 9,290,778 Units of each Fund are all freely transferable, designated as A or B units and, subject to such designation, are all entitled to participate equally in the profits and distributions (if any) of that Fund and in its assets in the event of termination. The Units, which are of no par value and which must be fully paid for upon issue, carry no preferential or pre-emptive rights. Fractions of Units may be issued up to three decimal places. A Unit in a Fund represents the beneficial ownership of one undivided share in the assets of the relevant Fund attributable to the relevant Class. The Trust is made up of the two Funds, each Fund being a single pool of assets. The Manager may, whether on the establishment of a Fund or from time to time, create more than one Class of Units in a Fund to which different levels of subscription fees and expenses (including the management fee), minimum subscription, minimum holding, designated currency, hedging strategy (if any) applied to the designated currency of the Class, distribution policy and such other features as the Manager may determine may be applicable. Units shall be issued to investors as Units in a Class. The net assets attributable to holders of redeemable participating units are at all times equal to the net asset value of the Fund. The participating units are in substance a liability of the Fund to Unitholders under FRS 25 as they can be redeemed at the option of the Unitholder. 20

22 NOTES TO THE FINANCIAL STATEMENTS (continued) 6. Sundry receivables and prepayments Mediolanum Mediolanum Mediolanum Mediolanum High High Low Low Volatility Volatility Volatility Volatility Fund Fund Fund Fund Total Total EUR EUR EUR EUR EUR EUR Receivable for sale of investment - 1,954, ,954,897 Prefunded trades , ,327 Sundry debtors 1, ,062-1,062 1,954, ,327 1,062 2,725, Sundry payables and accrued expenses Mediolanum Mediolanum Mediolanum Mediolanum High High Low Low Volatility Volatility Volatility Volatility Fund Fund Fund Fund Total Total EUR EUR EUR EUR EUR EUR Legal fee payale 17,500 34,456 17,500 34,820 35,000 69,277 Other payables 24,611 6,217 26,426 6,905 51,037 13,121 42,111 40,673 43,926 41,725 86,037 82, Distributions The income and gains will be accumulated and reinvested in the Sub-Fund on behalf of Unitholders. The Manager may make distributions in respect of SB units out of that proportion of the Net Asset value of the Sub-Fund attributable to SB Units. No distributions were paid to Class SB unitholders for the years ended 31 December 2012 and 31 December Derivatives and other financial instruments Risks for the Sub-Funds arise both directly from the investment in financial instruments and indirectly from investing in underlying funds. Therefore all risks listed below may arise not only at Sub-Fund level but also at the underlying fund level. Market price risk Market Price risk arises mainly from uncertainty about future prices of financial instruments held. It represents the potential loss the relevant Sub-Fund might suffer through holding market positions in the face of price movements. The Investment Manager and the Delegate Investment Manager consider the asset allocation of the portfolio of invested funds in order to minimize the risk associated with particular countries to follow the relevant Sub-Fund s investment objective. The fair value of the nonlisted collective investment schemes in funds are valued on the basis of the latest available unaudited net asset value provided by the relevant fund manager or independent administrators. 21

23 NOTES TO THE FINANCIAL STATEMENTS (continued) 9. Derivatives and other financial instruments (continued) Credit risk Financial assets which potentially expose the relevant Sub-Fund to credit risk consist principally of investments and cash balances held with the Trustee. The extent of the relevant Sub-Fund s exposure to credit risk in respect of these financial assets approximates their carrying value as recorded in the relevant Sub-Fund s balance sheet. The relevant Sub-Fund will be exposed to a credit risk on parties with whom it trades and will also bear the risk of settlement default. Credit risk exposure can also arise indirectly through the investment in financial instruments at the underlying fund level. Such risk is to a certain extent diversified away by investing in number of underlying funds that can be diversified in terms of investment style, asset selection, geographic allocation etc. It is important to note that by investing in underlying funds that can have brokerage and custody accounts that are not segregated; the Sub-Funds can be indirectly exposed to additional credit and custody risks. Substantially all of the cash assets are held with Northern Trust (Guernsey) Limited (NTGL). Cash deposited with NTGL is deposited as banker and is held on its Balance Sheet. Accordingly, in accordance with usual banking practice, NTGL s liability to the Fund in respect of such cash deposits shall be that of debtor and the Fund will rank as a general creditor of NTGL. The financial assets are held with the Custodian, Northern Trust Fiduciary Services (Ireland) Limited. These assets are held distinct and separately from the proprietary assets of the Custodian. Securities are clearly recorded to ensure they are held on behalf of the Fund. Bankruptcy or insolvency of the Custodian and or one of its agents or affiliates may cause the Fund s rights with respect to the securities held by the Custodian to be delayed. Both Northern Trust Fiduciary Services (Ireland) Limited and Northern Trust (Guernsey) Limited are wholly owned subsidiaries of Northern Trust Corporation. As at 31 December 2012 Northern Trust Corporation had a long term rating from Standard & Poor s of A+. Risk is managed by monitoring the credit quality and financial positions of the Custodian the Fund uses. Northern Trust acts as its own sub-custodian in the U.S., the U.K., Ireland and Canada. In all other markets Northern Trust appoints a local sub - custodian. Northern Trust continually reviews its sub-custodian network to ensure clients have access to the most efficient, creditworthy and costeffective provider in each market. There were no significant concentrations of credit risk to counterparties at 31 December 2012 or 31 December 2011 other than to Northern Trust (Guernsey) Limited. Foreign currency risk The relevant Sub-Fund invests in securities denominated in currencies other than its reporting currency (Euro). Consequently, the relevant Sub-Fund is exposed to risks that the exchange rate of its currency relative to other currencies may change in a manner which has an adverse effect on the value of that portion of the relevant Sub-Fund s assets or shares which are denominated in currencies other than its own currency. The Investment Manager and the Delegate Investment Manager follow a policy of hedging its foreign currency exposure of the portfolio into Euro in order to limit the risk of this exposure. 22

24 NOTES TO THE FINANCIAL STATEMENTS (continued) 9. Derivatives and other financial instruments (continued) Foreign currency risk (continued) The foreign currency risk listed below is substantially made up of foreign currency denominated securities. A positive balance represents a net asset foreign currency exposure while a negative balance represents a net liability foreign currency exposure. As at 31 December 2012 and 31 December 2011 the total exposure to foreign currency risk was: Mediolanum Mediolanum Mediolanum Mediolanum High High Low Low Volatility Volatility Volatility Volatility Fund Fund Fund Fund Total Total EUR EUR EUR EUR EUR EUR UK Pound - - 5, , US Dollar 530,025 1,005, , ,461 1,475,662 1,863, ,025 1,005, , ,137 1,481,553 1,864,396 Foreign currency forward exchange contracts As at 31 December 2012, the Mediolanum High Volatility Fund held the following foreign currency forward exchange contracts: Purchase Amount Sale Amount Maturity date Value Currency Currency EUR 17,741,780 USD (23,000,000) 03/01/ ,535 EUR 7,687,340 USD (10,000,000) 04/02/ ,459 EUR 19,187,229 USD (25,000,000) 04/03/ ,769 EUR 17,418,304 USD (23,000,000) 03/04/2013 (12,899) USD 21,800,000 EUR (16,523,914) 03/01/ , ,009 As at 31 December 2011: Purchase Amount Sale Amount Maturity date Value Currency Currency EUR 33,761,468 USD (46,000,000) 04/01/2012 (1,673,345) EUR 23,584,400 USD (33,000,000) 02/02/2012 (1,831,467) EUR 10,269,444 USD (13,900,000) 02/02/2012 (436,027) EUR 766,419 USD (1,000,000) 02/02/2012 (3,759) EUR 30,041,596 USD (39,000,000) 03/04/ ,509 USD 42,750,000 EUR (32,963,220) 04/01/2012 (31,953) (3,952,042) 23

25 NOTES TO THE FINANCIAL STATEMENTS (continued) 9. Derivatives and other financial instruments (continued) Foreign currency forward exchange contracts (continued) As at 31 December 2012, the Mediolanum Low Volatility Fund held the following foreign currency forward exchange contracts: Purchase Amount Sale Amount Maturity date Value Currency Currency EUR 774,084 USD (1,000,000) 03/01/ ,595 EUR 13,875,650 USD (18,050,000) 04/02/ ,549 EUR 786,355 USD (1,000,000) 03/01/ ,866 EUR 393,456 USD (500,000) 03/01/ ,212 EUR 3,799,071 USD (4,950,000) 04/03/ ,484 EUR 6,171,054 USD (8,000,000) 03/01/ ,143 EUR 3,407,929 USD (4,500,000) 03/04/2013 (2,524) USD 1,000,000 EUR (767,195) 03/01/2013 (8,706) USD 4,300,000 EUR (3,259,304) 03/01/2013 2,198 EUR 1,109,362 USD (1,466,188) 04/01/2013 (2,716) EUR 2,147,240 GBP (1,746,243) 04/01/2013 (5,715) 378,386 As at 31 December 2011 Purchase Amount Sale Amount Maturity date Value Currency Currency EUR 9,541,284 USD (13,000,000) 04/01/2012 (472,902) EUR 10,362,842 USD (14,500,000) 02/02/2012 (804,735) EUR 17,509,771 USD (23,700,000) 02/02/2012 (743,442) EUR 6,162,379 USD (8,000,000) 03/04/2012 5,027 USD 8,650,000 EUR (6,669,751) 04/01/2012 (6,465) EUR 4,443,345 USD (5,750,000) 05/01/ ,022 EUR 3,788,195 GBP (3,175,000) 05/01/2012 (12,684) (2,021,179) Liquidity risk Under certain circumstances the markets in which the portfolios of each Sub-Fund will trade may become illiquid making it difficult to acquire or sell contracts at the price quoted on different markets. Many of the schemes in which the portfolios shall invest do not provide for frequent redemptions. Accordingly, the portfolios ability to respond to market movements may be impaired, and the portfolios may experience adverse price movements upon liquidation of its investments. At the 31 December 2012 and 31 December 2011, the Trust was advised of the following investments in collective investment schemes which may be illiquid and subject to restrictions on redemptions. 24

26 NOTES TO THE FINANCIAL STATEMENTS (continued) 9. Derivatives and other financial instruments (continued) Liquidity risk (continued) Total % of Total % of EUR Nav EUR Nav Medolanum High Volatility Fund Investments with suspended/gated redemptions 1,128, ,686, Investments in side pockets 635, , ,763, ,306, Total % of Total % of EUR Nav EUR Nav Medolanum Low Volatility Fund Investments with suspended/gated redemptions , Investments in side pockets , Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair values of financial instruments. Interest rate risk in the fund arises from cash balances held and fixed income securities held in Low Volatility. The majority of the Sub-Fund s financial assets and liabilities are non-interest bearing and as a result the Sub-Fund is not subject to significant amounts of risk due to fluctuations in the prevailing levels of market interest rates. Any excess cash and cash equivalents of the Sub-Fund are invested at short-term market interest rates. Layering of Fees The Sub-Funds portfolios are subject to a level of fees payable both directly by the portfolios and by the portfolios as an investor in other schemes. 10. Related parties The Trust operates under a management agreement with Mediolanum International Funds Limited and an Investment Management agreement with Mediolanum Asset Management Limited and received the fees as noted in Note 3. Northern Trust Fiduciary Services (Ireland) Limited is the Trustee of the Trust and received the fees as noted in Note 3. Northern Trust International Fund Administration Services (Ireland) Limited is the Administrator of the Trust and received the fees as noted in Note 3. The underlying Unitholders in both Sub-funds, Mediolanum International Life Limited & Banca Mediolanum are connected to the Investment Manager. Mediolanum International Life Limited holds 100% (2011: 100%) of the Class SA units in both Sub-funds & Banca Mediolanum holds 100% (2011: 100%) of the Class SB units in both Sub-Funds. The Low Volatility Fund has invested in the DUEMME Coco Credit Fund EUR. The fair value of this investment is stated on page 31 of the Low Volatility Fund Schedule of Investments. During the year total legal fees paid to Dillon Eustace were 44,884 25