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DEXION ABSOLUTE LTD - December Monthly Report 2015

Dexion Absolute Limited (the “Company”)

December Final Net Asset Values

Ordinary Shares

The final net asset value of the Company’s Ordinary Shares as of 31 December 2015 is as follows:-

Share Class NAV MTD
Performance
YTD
Performance
GBP Shares 189.44p -1.41% +3.02%

2011 Redeemed Shares

The net asset value of the Company’s 2011 Redemption Portfolio was $0.47 million as of 31 December 2015. This was attributed to the Redeemed Share class as follows:-

Share Class NAV per Redeemed Share*
EUR Shares US$ 0.0085

* As adjusted for the payment for 2011 Redeemed EUR Shares of US$ 0.011048 per Redeemed EUR Share on 31 December 2015.

All of the Redeemed Shares have been cancelled. Accordingly, the “NAV per Redeemed Share” represents the amount then owed by the Company in respect of such Redeemed Shares at the relevant date.

2012 Redeemed Shares

The net asset value of the Company’s 2012 Redemption Portfolio was $1.62 million as of 31 December 2015. Shares redeemed pursuant to the 2012 Redemption Offer have a single USD net asset value based upon exchange rates at the relevant date. This was attributed between Redeemed Share classes as follows:-

Share Class NAV per Redeemed Share*
EUR Shares US$ 0.0124
USD Shares US$ 0.0137

* As adjusted for the payment for 2012 Redeemed EUR Shares of US$ 0.005473 per Redeemed EUR Share and Redeemed USD Shares of US$ 0.006019 per Redeemed USD Share on 31 December 2015.

All of the Redeemed Shares have been cancelled. Accordingly, the “NAV per Redeemed Share” represents the amount then owed by the Company in respect of such Redeemed Shares at the relevant date.

2013 Redeemed Shares

The net asset value of the Company’s 2013 Redemption Portfolio was $2.01 million as of 31 December 2015. Shares redeemed pursuant to the 2013 Redemption Offer have a single USD net asset value based upon exchange rates at the relevant date. This was attributed between Redeemed Share classes as follows:-

Share Class NAV per Redeemed Share*
GBP Shares US$ 0.0151
EUR Shares US$ 0.0186
USD Shares US$ 0.0213

* As adjusted for the payment for 2013 Redeemed GBP Shares of US$ 0.006136 per Redeemed GBP Share, Redeemed EUR Shares of US$ 0.007524 per Redeemed EUR Share and Redeemed USD Shares of US$ 0.008646 per Redeemed USD Share on 31 December 2015.

All of the Redeemed Shares have been cancelled. Accordingly, the “NAV per Redeemed Share” represents the amount then owed by the Company in respect of such Redeemed Shares at the relevant date.

2015 Redeemed Shares

The net asset value of the Company’s 2015 Redemption Portfolio was $54.91 million as of 31 December 2015. Shares redeemed pursuant to the 2015 Redemption Offer have a single USD net asset value based upon exchange rates at the relevant date. This was attributed between Redeemed Share classes as follows:-

Share Class NAV per Redeemed Share
GBP Shares US$ 2.8734
EUR Shares US$ 2.9384
USD Shares US$ 4.0133

All of the Redeemed Shares have been cancelled. Accordingly, the “NAV per Redeemed Share” represents the amount then owed by the Company in respect of such Redeemed Shares at the relevant date.

These valuations, which have been prepared in good faith by the Company's administrator, are for information purposes only and are based on the unaudited estimated valuations supplied to the Company's investment adviser, Aurora Investment Management L.L.C. (“Aurora”), by the administrators or managers of the Company's underlying investments and such valuations may not be considered independent or may be subject to potential conflicts of interest. Both weekly manager estimates and monthly valuations may be produced as at valuation dates which do not co-incide with valuation dates for the Company, may be based on valuations provided as of a significantly earlier date, may differ materially from the actual value of the Company's portfolio and are unaudited or may be subject to little verification or other due diligence and may not comply with generally accepted accounting practices or other generally accepted valuation principles. The Company's investment adviser, investment manager and administrator may not have sufficient information to confirm or review the completeness or accuracy of information provided by those managers or administrators of the Company's investments. In addition, those entities may not provide estimates of the value of the underlying funds in which the Company invests on a regular or timely basis or at all with the result that the values of such investments may be estimated by the Aurora. Since 1 April 2013 the Company has been transitioning to becoming a feeder fund of Aurora Offshore Fund Ltd II ("AOFL II"). AOFL II's investment manager is also the investment adviser to the Company and so valuations of the Company's investment in AOFL II may be subject to potential conflicts of interest. As at 1 January 2016 approximately 99.26% of the Continuing Portfolio (by NAV) was invested in AOFL II. The value of designated investments as at 1 January 2016 equates to approximately 1.10% of the Continuing Portfolio NAV. Certain other risk factors which may be relevant to these valuations are set out in the Company's prospectus dated 17 October 2007 and the Company's circulars dated 15 April 2011, 5 April 2012, 22 February 2013, 27 May 2013 and 26 August 2015.

Immediately following the payments made on 31 December 2015 from the 2011 Redemption Portfolio, the 2012 Redemption Portfolio and the 2013 Redemption Portfolio and in determining all NAVs stated above, the Directors have valued the designated investments held in the Company's portfolios at 70% of the valuations reported to the Company as at 31 December 2015.

Net asset values for Redeemed Shares include only those costs and expenses attributable to Redeemed Shares which have been accrued as at the relevant NAV date.

Monthly Portfolio Review

Investment adviser portfolio outlook

Uncertainty remains high entering 2016 with economic and monetary policy divergence between the US, Europe, Japan and China remaining in focus. Market volatility will likely remain elevated until there is a stabilisation of Chinese economic growth, a bottoming in commodities prices, and further clarity on US, European and Japanese interest rate policies. Against this backdrop we continue to favour Long/Short Equities managers with less market exposure who can extract alpha from security selection within and across sectors. We also continue to believe that the Macro strategy stands to benefit from increased market volatility related to global economic divergence and central bank policy differentiation, and can serve as an effective hedge during periods in which market dynamics create a more challenging, micro-oriented, security selection environment. The Portfolio Hedge strategy should serve an important role as we enter a period that is likely to be punctuated by heightened uncertainty and greater differentiation among securities. A combination of both direct and derivative exposures across equity, currency and fixed income markets presents a compelling platform for constructing asymmetric hedges designed to minimise portfolio losses during times of market stress. Despite the near-term economic uncertainty, we expect corporate management teams to continue to pursue value enhancing events and believe that share price weakness across a number of sectors may create an attractive backdrop for the Even Driven managers to add exposure to high conviction opportunities.  Finally, the allocation to the Long/Short Credit strategy is expected to remain near the lower end of its historical range as expectations of rising default rates, coupled with lower market liquidity, have created a more challenging backdrop for the strategy. We are actively monitoring opportunities across the credit universe and stand ready to deploy capital in the event that a favourable opportunity set emerges.

In focus³

In December, financial markets witnessed what was a long-awaited moment as the US Federal Reserve (the “Fed”) raised interest rates for the first time since 2006.  Whether the 0.25% hike in the Federal Funds target rate was more symbolic than substantive is open for discussion. Many view the raising of rates as an indication of the market entering a “new normal”. With the Fed’s policy having been very accommodating since the global financial crisis, it is easy to forget what markets were like before this period of easy credit, abundant liquidity and government support across many risk assets. We would like to provide a few thoughts regarding the likely rising interest rate regime.

First and foremost, we have already begun to witness a steady upward trend in realised volatility in equity markets, which began ascending in the back half of 2015. Not surprisingly, realised equity volatility has steadily increased as the artificial suppression induced by Fed policy fades away. Second, a stark contrast in interest rate policy has begun with the Fed hiking rates while central banks in other developed economies, like Europe and Japan, continue with monetary policy easing. These diverging paths of central bank policy around the globe give us optimism that pockets of currency and interest rate trading opportunities will unfold as capital flows from one region to another. We believe that the Fed’s tightening cycle has ushered in a more judicious market psychology, whereby investors may prove more discerning about the relative quality and value of risk assets. In a market where the rising tide no longer lifts all boats, underlying business fundamentals should resume as the key driver of single-stock returns. This dynamic should improve the return potential from stock selection strategies such as Long/Short Equities and Short-Selling.

We would also like to briefly address what we are hearing from our managers regarding their expectations for Fed action in 2016. While opinions vary, a handful of our most skilled macroeconomic prognosticators have noted that while the Fed has pencilled in four rate increases in 2016, futures markets are currently pricing in one or two. Managers have suggested that this difference in expectation could signal complacency in the forecasts of futures market participants. Furthermore, given the continued improvement in US economic data, the potential exists that the market is meaningfully mispricing the hiking cycle in the US, meaning large adjustments in expectations could be in store as the year progresses. If the market is indeed underestimating the Fed’s hiking schedule, the resulting impact may mean further increased volatility across asset classes, as well as potentially heightened downside risk and increased dispersion in corporate credit and equity markets.

Market overview

  • Global equity markets limped into year end as losses were seen across most regions and sectors, with Europe exhibiting some of the weakest performance, followed by the US.
  • In the US, smaller-capitalisation equities generally lost more than larger-capitalisation peers while energy equities fell on declining prices of energy commodities. Conversely, consumer staples and large-capitalisation healthcare stocks offered some defense in an otherwise difficult environment as these sectors experienced gains on the month.
  • Within the fixed income space, the US Federal Reserve in December announced a long-anticipated interest rate hike - the first since 2006 - raising the Federal Funds target rate to 0.25%. Naturally, this caused shorter-term US treasury yields to rise, especially as the US Federal Reserve set expectations for additional rate hikes in 2016.
  • With the confluence of rising interest rates and widening credit spreads, the US credit complex - including high yield, investment grade, and leveraged loans - generated negative returns. These headwinds were further exacerbated by news that a prominent credit mutual fund was halting redemptions on account of there being insufficient liquidity in credit markets.
  • Currencies were mixed in December, with the US dollar weakening against the euro and Japanese yen. However, the Chinese renminbi continued to slide amid speculation that the People's Bank of China intends to let the currency weaken materially in 2016.
  • Finally, commodities once again served as a key driver of market performance during the month, led by tumbling prices in crude oil and energy distillates. Similarly, precious metals continued to struggle, led by gold and silver experiencing their third consecutive year of negative returns.

Long/short credit¹: -1.54%

  • Losses were largely attributable to the strategy’s long energy exposure as oil prices continued to decline on the back of oversupply concerns. Notable detractors included the bonds of several exploration and production (“E&P”) companies, as well as equity holdings in a liquefied natural gas company and an E&P servicer.
  • Long credit exposure to a New York-based financial services company that filed for bankruptcy added further to losses. 
  • Offsetting a portion of the losses during the month were equity index hedges, as well as tactical exposure to currencies and fixed income futures.

Long/short equities¹: +0.09%

  • The strategy was generally flat for the month, protecting well amid a sell-off in equity markets.
  • The generalists produced gains from long holdings in consumer-oriented companies and short investments in technology-related companies.
  • The sector specialists saw modest gains in December as profits from positions in the energy and technology, media, and telecommunications sectors outweighed meaningful losses from positions in the healthcare sector.
  • The bulk of the losses for the geographic specialists were driven by long investments in industrials and European consumer goods companies.

Opportunistic¹: -2.00%

  • Losses emanated predominantly from long exposure to single name credit and equity positions. 
  • Losses were led by holdings in a New York-based financial services firm that was unable to avoid insolvency and ultimately declared bankruptcy during the month. 
  • Additional losses stemmed from holdings in a liquefied natural gas company that experienced pressure from energy sector headwinds and tax loss harvesting by investors. 
  • Long credit holdings in a for-profit education company and a fabric retailer also detracted. 
  • Conversely, holdings in a biopharmaceutical company offset a portion of the strategy’s losses as the market continued to digest positive news related to a new drug trial. US equity market hedges were also additive.

Macro¹: -1.20%

  • Losses were largely driven by the strategy’s commodity and currency exposure, particularly oil-sensitive exposure, as prices declined due to oversupply concerns, and short exposure to the euro following the European Central Bank meeting, which disappointed investors.
  • Long exposure to European corporate and sovereign credit also detracted. 
  • Short exposure to the Chinese renminbi and short exposure to UK and Dutch natural gas helped to mitigate losses.

Portfolio hedge¹: +0.98%

  • The strategy yielded a positive return for the month driven by profits from both the tail-risk opportunities investments and short-selling sub-strategies.
  • For the tail-risk opportunities investments, gains were driven by a long volatility position in the Chinese renminbi, long credit volatility positions, and a position designed to profit from widening spreads in investment grade credit. Conversely, a short position in the Japanese yen and a short position in the credit of a media company detracted.
  • The short-sellers benefited from short exposure to the consumer and technology sectors, whereas exposure to the healthcare sector proved costly.

Event driven¹: -2.82%

  • This was the largest strategy loss in December, as both the event driven managers and special opportunities investments yielded negative returns.
  • The majority of the managers delivered negative results, which were largely attributable to long positions in financials, energy and media-related stocks.  Select long holdings in the healthcare sector offset some of the losses.
  • Among the special opportunities investments, equity positions in a midstream natural gas company, a Norwegian online classified ads company and a European bank were the largest detractors. Conversely, an equity position in a renewable energy company was positive during December.
Strategy Allocation
as of 1 January²
(%)
Number of hedge funds as of
1 January²
Performance by
strategy¹ (%)
December YTD
Long/short credit 11 2 -1.54 +0.09
Event driven 14 4 -2.82 -4.77
Long/short equities 31 11 +0.09 +4.64
Opportunistic 16 4 -2.00 -7.17
Macro 15 5 -1.20 -3.90
Portfolio hedge 8 2 +0.98 +4.54
Special opportunities investments 6 n/a n/a n/a
Total 100 28

¹Effective 31 May 2011, 31 May 2012, 28 February 2013 and 30 September 2015, DAL created separate redemption portfolios for redeeming shareholders from the EUR (for 2011, 2012, 2013 and 2015), USD (for 2012, 2013 and 2015) and GBP (for 2013 and 2015) share classes. All information presented herein is for the Continuing Portfolio only. Strategy returns are presented for AOFL II, are calculated in USD, are net only of the fees and expenses of the underlying managers and are gross of the fees of DAL’s investment manager and investment adviser and the operating expenses of DAL and AOFL II. The investment adviser implements the ‘Modified Dietz’ methodology for calculating the DAL portfolio hedge strategy returns, which takes into account the amount of time an investment is held. Under unusual market circumstances, there are certain limitations to the Modified Dietz methodology and under such circumstances the investment adviser may modify, adjust or apply a different methodology if it determines in its reasonable discretion that doing so will more accurately reflect the rate of return of the DAL Portfolio hedge strategy.

²Allocations are presented for the Continuing Portfolio and reflect the allocations of AOFL II, which are based on 31 December 2015 results and 1 January 2016 capital allocations, net of cash effect and including, for Portfolio hedge only, the delta-adjusted exposure derived from option hedges, the notional value of futures hedges, and dedicated notional gold exposure, if any. The Company classifies all managers by reference to only one of the core trading strategies provided in the chart (which include several strategies whose nature is multi-strategy). In certain instances, and over time, a manager may utilise multiple trading strategies. Consequently, it is possible that the Company’s determination of a manager’s primary trading strategy may change over time and may differ from how others may classify such manager’s primary trading strategy. Strategy allocations may vary over time. Prior to 1 January 2016, the Special opportunities investments strategy was included as part of the Event driven strategy.  Effective 1 January 2016, the Special opportunities investments allocation became a stand-alone strategy and is no longer a sub-strategy of the Event driven strategy. Accordingly, total Event driven performance includes Special opportunities investments performance for the periods prior to 1 January 2016. These changes do not reflect any changes in our underlying investment philosophy or manager selection process. Numbers may not sum to 100% due to rounding.

Manager count reflects the managers in AOFL II. For purposes of determining manager count, the manager treats investments in different hedge funds managed by the same manager using the same strategy as a composite and does not include any “Excluded Managers”. An Excluded Manager is any manager (1) for which the Company has submitted a full redemption request or (2) that manages only “Market Opportunities Investments” within the strategy. Market Opportunities Investments represent an aggregation of a select set of unique, concentrated, and opportunistic investments that may be added to the Continuing Portfolio to benefit from compelling and timely risk seeking and risk limiting investment opportunities. The Company’s investment adviser classifies all of the Company’s managers by reference to only one of the core trading strategies provided in the chart (which include several strategies whose nature is multi-strategy). In certain instances, and over time, a manager may utilise multiple trading strategies. Consequently, it is possible that the Company’s investment adviser’s determination of a manager’s primary trading strategy may change over time and may differ from how others may classify such manager’s primary trading strategy.

³The In focus section of this report is for information purposes only. Any opinion expressed in this report, including with respect to the market events and potential investment opportunities that may arise, is purely the opinion of the Company’s Investment Adviser, may be speculative, and is subject to change without notice. This report should not be considered investment advice or relied upon as such. This report should be not be considered an indication of the future investment decisions that the Company’s Investment Adviser will make for the Company. Statements that are made in this report that are not based on historical facts are forward-looking statements. Although such statements are based on the Investment Adviser’s current estimates and expectations, and currently available competitive, financial, and economic data, forward-looking statements are inherently uncertain. There can be no assurance that the estimates and expectations made in connection with any forward-looking statement will prove accurate, and actual results may differ materially. The Investment Adviser makes no representations or warranties regarding the accuracy or completeness of the information included in this report and is not liable in any way as a result of its use. Exposure information is as of the specific dates. Please see the important information included in the General Disclaimers and Endnotes section of AOFL II’s exposure report, which can be found on Aurora’s secure website at www.aurorallc.com.

Supplementary Information

Click on, or paste the following link into your web browser, to view a full review of the Dexion Absolute Limited portfolio.

http://content.prnewswire.com/documents/PRNUK-0302161357-6A3E_DAL_MPR_2015_Dec_CC.pdf


Source: PR Newswire (February 3, 2016 - 9:04 AM EST)

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