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DEXION ABSOLUTE LTD - September Monthly Report 2015

Dexion Absolute Limited (the “Company”)

September Final Net Asset Values

Ordinary Shares

The final net asset values of the Company’s Ordinary Shares as of 30 September 2015 are as follows:-

Share Class NAV MTD
Performance
YTD
Performance
GBP Shares 190.49p -1.88% +3.59%
EUR Shares €2.6434 -1.37% -0.34%
USD Shares $4.0301 -1.90% +2.82%

2011 Redeemed Shares

The net asset value of the Company’s 2011 Redemption Portfolio was $1.40 million as of 30 September 2015. This was attributed to the Redeemed Share class as follows:-

Share Class NAV per Redeemed Share
EUR Shares $0.0250

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 $3.16 million as of 30 September 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 $0.0243
USD Shares $0.0267

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 $3.77 million as of 30 September 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 $0.0284
EUR Shares $0.0349
USD Shares $0.0401

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 October 2015 approximately 95.67% of the Continuing Portfolio (by NAV) was invested in AOFL II. The value of designated investments as at 1 October 2015 equates to approximately 1.56% 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 and 22 February 2013.

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

Looking forward, with returns available from market beta generally expected to be less attractive, we are focused on managers with less market exposure who can extract alpha from security selection within and across sectors. We remain constructive on the environment for corporate activity and are continuing to emphasize our event driven exposure within the portfolio. We expect an abundance of M&A, spin-offs and other value-enhancing events, whether pursued by management alone or spurred on by the involvement of an engaged shareholder, to continue to drive idiosyncratic gains for fundamentally-oriented strategies. We continue to believe that the macro allocation stands to benefit from increased volatility related to shifting global supply/demand characteristics and central bank policy differentiation, and can serve as an effective hedge should market dynamics change and create a more challenging micro-oriented, security selection environment. The allocation to portfolio hedge is expected to marginally increase as options markets in currencies and fixed income are presenting compelling entry points for constructing asymmetric hedges designed to minimise portfolio losses in times of market stress. Finally, the long/short credit allocation will be reduced as relatively unattractive yields, low default rates and lower market liquidity have created a more challenging backdrop for the strategy.  We are actively monitoring the emerging opportunity in the energy and basic materials sectors and stand ready to deploy capital in the event that a favourable opportunity set emerges.

In focus³

Now that our annual Blank Sheet Review (“BSR”) process is complete, we summarise below a number of key outcomes from this year’s exercise. The following is intended to provide a concise overview relative to our multi-strategy portfolios, generally. In the BSR process, we revisit key assumptions in order to move each portfolio in a direction that we believe best reflects the current market environment, choosing to emphasise certain initiatives while also fully re-underwriting both strategy and manager-specific allocations.

First, we continued to reduce manager count and concentrate our portfolios in our highest conviction managers in order to improve risk-adjusted and absolute returns. From a strategy allocation perspective, we continue to favour long/short equities due to a positive market backdrop that includes increased stock dispersion and a robust corporate activity environment. The composition of our long/short equities allocation is shifting to increase exposure to those managers employing a low net exposure approach, as we expect these managers to perform better in a more volatile market that rewards deep fundamental insights. Furthermore, we significantly reduced exposure to the long/short credit strategy, as low yields, unreliable liquidity and low default rates present a less favourable opportunity set. Additionally, we have continued to emphasise uncorrelated macro-oriented strategies, which we believe will benefit from increased volatility related to shifting global supply/demand characteristics and central bank policy differentiation.

With regard to future investments, we continue to emphasise the special opportunities and strategic capital initiatives. As it pertains to the former, these are intended to reflect unique, concentrated and opportunistic investments that are also often amongst the highest conviction trades in our managers’ portfolios. Over time, we would expect this count to grow at a moderate pace as we monetise existing investments while sourcing new and unique opportunities, often at a significant discount to traditional hedge fund manager fees. Regarding the strategic capital initiative, since formal implementation in early 2014 the contributions to performance from our strategic capital managers have been meaningful. We will continue to emphasise this initiative due to the attractive benefits available from the receipt of a percentage of top-line revenue earned by the manager and reduced fees. Aurora remains well positioned to execute due to our scale, scope and experience investing successfully in early stage managers.

Finally, we continue to emphasise the reduction of underlying manager fees, maintaining a bias against the historical hedge fund fee model. While recent initiatives including strategic capital and special opportunities have been a useful mechanism for fee reduction and return enhancement, we are also utilising our size and long-standing relationships to negotiate favourable terms with respect to our traditional hedge fund allocations.

While implementing each of these initiatives above, we remain cognisant of liquidity with managers and at the position level. We value the ability to nimbly manage our portfolios with tactical manager and strategy adjustments.

Market overview

  • For the second straight month, September featured significant de-risking across a number of asset classes driven by a handful of significant economic headlines. Notably, weaker-than-expected economic data out of the US, combined with concerns about growth in China and emerging markets, caused the US Federal Reserve to further delay an interest rate hike.
  • Major equity markets continued to decline both in the US and abroad, particularly smaller capitalisation US equities. From a sector level, energy and basic materials stocks suffered the most significant declines, spurred by concerns over future commodity demand from China's slowing economy. Conversely, more defensively-oriented sectors like consumer staples and utilities outperformed and generated absolute gains.
  • While credit markets generally produced mixed results, the higher yielding US leveraged loan and high yield markets sold off in September as credit spreads widened and investors became increasingly more risk averse.
  • Following the US Federal Reserve's mid-month announcement that it would not be increasing interest rates in September, US treasury markets saw yields decline sharply, including the largest one-day fall in two-year US treasury yields since 2010.
  • In currency markets, the US dollar experienced mixed performance as it appreciated against emerging markets currencies, particularly in Asia, but weakened against the Japanese yen and the Chinese renminbi.
  • Commodities continued to experience weakness related to strong supply and lower global growth, largely driven by concerns out of China. This sell-off was prevalent across the entire energy complex, which saw the prices of crude oil, natural gas and energy distillates fall. Furthermore, both basic metals and precious metals, including gold, silver and platinum, finished the month lower.

Long/short credit¹: -1.17%

  • Losses were primarily driven by exposure to Latin American energy companies and select Asian currencies. 
  • Notable detractors included an Argentine energy company, a Brazilian energy entity and a well-known wireless communications company that experienced a credit rating downgrade during the month. 
  • Losses were mitigated by two liquidation events, one of which surrounded a UK-based mobile phone retailer, as well as US equity index hedges.

Long/short equities¹: -1.56%

  • As equity markets continued to slide in September, gains from the managers’ short books were overwhelmed by losses from their long portfolios.
  • Long exposures to the technology, consumer, energy and healthcare sectors detracted for the generalist managers. Specifically, contributing to losses were holdings in a generic drug producer which traded down along with the healthcare sector more broadly after a prominent presidential candidate released details of a plan to reduce prescription drug prices, and a clothing retailer that declined as sales failed to meet expectations.
  • The geographic specialists benefited from a short position in an Australian liquified natural gas company, as well as long positions in two private technology companies that experienced upward revisions in valuation.
  • For the sector specialists, losses stemming from long exposures to the healthcare and TMT sectors generally offset profits from short energy holdings, where one energy-focused manager was the standout.

Opportunistic¹: -2.30%

  • The opportunistic managers faced a challenging environment as concerns regarding weakening economic growth and declining commodity prices spurred a broad-based sell-off of risk assets.
  • Losses stemmed from long credit holdings in a number of communication-related companies, a New York-based financial firm facing management and liquidity concerns, and a Texas-based retailer that securitised only a portion of its receivables business.
  • Long credit exposure to a customer loyalty company, short credit exposure to a media company and general equity and credit index hedges offset losses.

Macro¹: -0.47%

  • Losses were largely driven by short currency exposure and long equity exposure. 
  • More specifically, within currencies, losses stemmed primarily from bearish exposure to the Chinese renminbi, with short exposure to the euro and the Japanese yen also detracting. 
  • Within equities, losses emanated from long exposure to Europe, Japan, China, and the US, although tactical short exposure, particularly to the European materials and North American energy sectors, offset a portion of losses. 
  • Short exposure to European interest rates and long exposure to Brazilian interest rates also contributed to losses.

Portfolio hedge¹: +2.92%

  • The portfolio hedge strategy produced another positive month, as both short-sellers and tail-risk opportunities investments experienced positive results.
  • The short-sellers benefited from short exposures to the healthcare, technology, and consumer sectors.
  • Notable contributors included short positions in a life sciences firm, a biopharmaceutical company, a developer of artificial sweetener, a digital identity provider and a fibre optic communications firm.
  • The tail-risk opportunities investments benefited from a currency straddle options position on the US dollar and the Chinese renminbi spot price, spread widening in investment grade credit, and long positions in longer-term implied volatility on the Eurostoxx, S&P 500, Nikkei and Hang Seng equity indices. Long currency volatility positions in various emerging market currencies were also additive.

Event driven¹: -5.87%

  • The event driven strategy experienced a difficult month, as both the event driven managers and special opportunities investments produced negative results.
  • For the event driven managers, losses emanated from long holdings in the energy, telecommunications and healthcare sectors.
  • Losses were headlined by positions in a midstream natural gas company that traded down with the broader MLP market, two French telecommunications companies which suffered from significant hedge fund deleveraging, and a specialty drug company that sold-off sharply on drug pricing concerns.
  • Within special opportunities investments, top detractors included a renewable energy company focused on emerging markets and a diversified chemicals company.
Strategy Allocation
as of 1 October²
(%)
Number of hedge funds as of
1 October²
Performance by
strategy¹ (%)
September YTD
Long/short credit 24 3 -1.17 +0.98
Event driven 19 4 -5.87 -3.34
Long/short equities 31 11 -1.56 +1.78
Opportunistic 7 3 -2.30 -6.74
Macro 12 6 -0.47 -2.41
Portfolio hedge 7 2 +2.92 +7.97
Total 100 29

¹Effective 31 May 2011, 31 May 2012 and 28 February 2013, the Company created separate redemption portfolios for redeeming shareholders from the EUR (for 2011, 2012 and 2013), USD (for 2012 and 2013) and GBP (for 2013 only) share classes. All information presented herein is for the Continuing Portfolio only. Strategy returns are in USD, are net only of the fees and expenses of the underlying managers and gross of the fees of Company’s investment manager and investment adviser and the operating expenses of the Company and AOFL II. In addition to the Company’s direct holdings, strategy returns include the underlying manager holdings in AOFL II. The investment adviser implements the ‘Modified Dietz’ methodology for calculating the Company’s 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 Company’s portfolio hedge strategy.

²Allocations for the Continuing Portfolio are based on 30 September 2015 results and 1 October 2015 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. Numbers may not sum to 100% due to rounding.

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.

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-2910150922-54CA_DAL_MPR_2015_September_CC.pdf


Source: PR Newswire (October 29, 2015 - 5:25 AM EDT)

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