DEXION ABSOLUTE LTD – November Monthly Report 2015

Dexion Absolute Limited (the “Company”)

November Final Net Asset Values

Ordinary Shares

The final net asset value of the Company’s Ordinary Shares as of 30 November 2015 is as follows:-

2011 Redeemed Shares

The net asset value of the Company’s 2011 Redemption Portfolio was $1.39 million as of 30 November 2015. This was attributed to the Redeemed Share class as follows:-

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 $3.24 million as of 30 November 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:-

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 $3.89 million as of 30 November 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:-

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 $55.62 million as of 30 November 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:-

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 December 2015 approximately 96.51% of the Continuing Portfolio (by NAV) was invested in AOFL II. The value of designated investments as at 1 December 2015 equates to approximately 1.62% 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.

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

Heading into year end, we note the outperformance in 2015 of equity markets versus high yield credit as credit investors view markets more cautiously while the S&P 500 Index is near all-time highs. Interestingly, 2015 is on track to be the first year since 1994 during which the Merrill Lynch High Yield Index finishes the year negative, while the S&P 500 Index finishes positive.

We are actively monitoring these markets to determine whether increasing spreads in high yield bonds are foreshadowing equity market weakness or creating an attractive entry point in select credit instruments.  Utilising our top-down framework for evaluating strategy allocations, in conjunction with our annual Blank Sheet Review, we have observed both impending headwinds in credit markets and relatively full valuations in equity markets. As a result, we have reduced the Long/Short Credit strategy allocation target, while re-orienting our Long/Short Equities strategy towards managers employing a low net approach, as we expect these managers to perform well in a more volatile market that rewards deep, company-specific fundamental research.

Altogether, we are confident that our strategy allocation shifts made this year will position the portfolio to succeed in a less certain and more fully-valued market environment.

In focus³

Given recent headlines relating to the corporate credit markets, we thought we might share our views on the matter.

For some time, Aurora has recognised that credit focused hedge fund strategies face challenges from the impending headwinds of rising rates and liquidity in credit markets. Utilising our top-down strategy allocations framework in conjunction with our annual Blank Sheet Review process, these factors have resulted in a significant reduction in our Long/Short Credit strategy allocation target in most portfolios over the past several years.

Furthermore, our credit specialists in their own portfolios have also been opportunistically investing in other asset classes in recent years as they reduced credit exposure dynamically in the face of these market shifts. For AOFL II, total look-through exposure to credit is modest compared to historical norms, with net credit exposure at approximately 7% of NAV as of 1 November 2015. By comparison, net credit exposure was approximately 8% of NAV as of 1 November 2014 and 15% of NAV as of 1 November 2012.

Given our experience investing in credit strategies successfully over nearly 28 years, we have grown increasingly vigilant with regard to liquidity mismatches in the asset class. In the post-2008 environment, Dodd-Frank regulation has severely limited the amount of credit inventory that a bank may hold on its balance sheet, inhibiting what had been a market cushion during previous credit sell-offs. In addition, the “mirage” of daily liquidity in many sizeable credit-oriented ETFs and mutual funds is particularly concerning given the difficulty in trading certain securities (high yield bonds and bank loans) in challenging, less liquid market environments. As such, we have recognised that the microstructure of credit markets created a risk of more extreme drawdowns.

We are pleased with our credit-focused managers’ navigation of the challenging market environment and preservation of capital (for reference, AOFL II’s Long/Short Credit strategy has returned +1.67% year-to-date through November). Furthermore, our credit-focused managers have not reported meaningful redemption pressures or liquidity issues.

We do anticipate that the current credit market environment, while extremely uncertain and volatile, could create compelling opportunities for managers that have largely abstained from risky credits in the face of credit market uncertainty and built up cash balances in expectation of a sell-off. We continue to closely monitor the opportunity set, including the liquidity backdrop, in credit markets to identify a potential broader opportunity to invest actively and offensively in this segment of the market.

Market overview

• In November, the prospect for monetary policy divergence re-emerged as the likelihood of a December rate hike by the US Federal Reserve increased (which has since occurred) while the European Central Bank suggested more stimulus could be imminent.  Together, this caused US treasury yields to rise while eurozone yields fell.
• Consequently, the US dollar rallied versus major currencies, causing equity markets with less dollar-sensitivity, such as US small caps, to perform well relative to emerging markets, which suffered.
• US equities gains were led by financials companies, which are likely to benefit from a higher interest rate regime, while the higher yielding and commodity-sensitive utility and energy sectors sold off.
• High yield bonds were generally weaker due in part to the prospect of higher rates and uncertainty related to credit market liquidity. 
• Commodities experienced another meaningful sell-off, led by crude oil, with precious metals such as gold and silver also finishing the month lower.

Long/short credit¹: +0.26%

• Gains were largely attributable to short currency exposure and long equity exposure, while managers generally side-stepped the sell-off in high yield corporate credit.
• More specifically, short exposure to the euro, the Chinese renminbi and the Saudi riyal contributed positively, as did short exposure to US treasuries and eurodollar futures. 
• Within equities, single name holdings and index exposure yielded profits.  However, as weakness in the oil markets continued, long exposure to energy-related securities offset a portion of profits.

Long/short equities¹: +0.25%

• The Long/Short Equities strategy continued its positive performance in November, as the geographic specialists produced the largest gains.
• The geographic specialists saw gains emanate from long positions in the industrials, healthcare and technology sectors. Notably, individual contributors included long positions in a Denmark-based healthcare company, a Dublin-based information services firm, a US-based internet media company and a Swiss agribusiness.
• The sector specialists also experienced a positive result, as gains largely stemmed from a long position in an oilfield services firm, several short energy positions, and long positions in select pharmaceutical companies and hospitals. Short positions in technology, media and telecommunications companies offset a portion of the gains.
• The generalists saw losses due to weak results from long holdings in consumer and media-related companies. A long holding in a renewable energy company was a large individual detractor. Conversely, long holdings in the technology sector, including a Chinese internet company and a software design and services companies, helped to offset a portion of the losses.

Opportunistic¹: +2.27%

• Gains emanated predominantly from long equity holdings within the healthcare and consumer discretionary sectors. Holdings in a biopharmaceutical company contributed notably as the company moved further along in its clinical trial process for a new drug. 
• Holdings in an enterprise software company that reported earnings that exceeded expectations also were additive. 
• As oil markets continued to weaken during the month, losses from long energy exposure were partially offset by short energy equity and commodity exposure.

Macro¹: +0.97%

• Profits were largely driven by short currency exposure and long equity exposure, while offsetting losses stemmed primarily from exposure to energy-related commodities and fixed income. 
• Short exposure to the euro, the South African rand, the Japanese yen, the Chinese renminbi, the New Zealand dollar and the Australian dollar was profitable.
• Furthermore, long equity exposure – primarily to Chinese technology companies – yielded gains.
• Conversely, as oil markets continued to weaken during the month, exposure to gasoline and Brent crude time spreads detracted.

Portfolio hedge¹: +0.16%

• The Portfolio Hedge strategy generated a small gain as negative performance from the short sellers was exceeded by gains from the tail-risk opportunities investments.
• Short sellers experienced losses from short equity positions in the technology and healthcare sectors, while gains from short holdings in the consumer sector helped offset losses.
• The tail-risk opportunities investments produced a robust return for the month, as a short position in a media company expressed through cash bond shorts and credit default swaps as well as short positions in the euro and Japanese yen, were large contributors.

Event driven¹: -0.33%

• The Event Driven strategy experienced a modest loss in November, primarily driven by negative results from the special opportunities investments.
• Among the special opportunities investments, equity positions in a renewable energy company focused on emerging markets, an aerospace components and systems supplier/manufacturer and a midstream natural gas company were the largest detractors. Conversely, an investment in a Nordic online classified ads business was the largest contributor.
• Within our traditional manager allocations, losses from long positions in consumer, healthcare and media-related companies exceeded gains from long positions in the financials, materials and technology sectors.

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 30 November 2015 results and 1 December 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.

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.

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