Annual trading report
Dear Partners and Shareholders
This report reflects your Fund’s reporting period ended December 31, 2018. The following review is intended to provide you with additional market perspective over the past 12 months. In this 12 months, stocks posted solid performance, while bonds delivered mixed results. Solid corporate profits drove the equity market, while rising interest rates constrained bond returns.The largest global economies experienced sustained and synchronized growth for the first time since the financial crisis, which led to strong equity performance worldwide. Emerging market stocks posted the strongest performance, as accelerating growth in China, the second-largest economy in the world, improved the outlook for corporate profits in most developing nations.
The board remains convinced that a well diversified portfolio of hedge funds can deliver attractive, risk adjusted returns, associated with a manageable degree of discount volatility. We will continue our efforts to achieve this in the coming year through 2nd line share buybacks and other mechanisms, as appropriate, subject to shareholder approval.
Our investment process begins with a research effort that seeks to value all of the companies in a fund’s respective investment universe. Our philosophy is simple. Although stock prices react to emotion over the short term, over the long term the market is very good at finding the fair value of stocks. Therefore, we believe that if we are good at valuing businesses (a share of stock represents a percentage ownership stake in a business), the market will agree with us...eventually.For an individual stock, we believe the waiting period for the market to get it “right” is no more than 2 or 3 years in the vast majority of cases. For a group of stocks, we believe the average waiting period can often be much shorter. In other words, for us, there is a“true north” when it comes to the stock market. If we do a good job of analyzing and valuing companies, we believe the market will agree with us — even if it takes some time. This is crucial. No investment strategy, regardless of how good or logical, works all the time.
On the long side, though we cannot predict short term market moves and the overall market remains expensive, we believe that there is an opportunity to nicely exceed the positive returns we expect for large cap indexes. Combining these long returns with theattractive long/short spread environment that should be available from a market that does not continue up at a 15-20% annualized clip should hopefully lead to promising returns for our portfolios over the next several years. Finally, as a CEO, I would like to thank you for your continuing support for the Company as it enters its thirteen year.
Absolute Fund’s CEO
The Fund returned +15.6% for the trailing twelve month period, based on net asset value.
|Per Unit operating performance||2018||2017||2016|
|Net asset value,
beginning of year
|Net investment (loss)||($0.27)||$0.34||($0.23)|
|Net realized and
|Net asset value, end of year||$33.28||$28.78||$23.12|
Statement of Assets and Liabilities:
|Assets||Dec 31, 2018|
|Non-affiliated investments, at value||$18,452,745|
|Cash and cash equivalents||$2,473,237|
|Investment securities sold, at value||$7,675,318|
|Liabilities||Dec 31, 2018|
|Securities sold short, at value||$3,515,352|
|Tax Advisory fees||$73,684|
|Net Asset Value per Unit||$33.28|
Statement of Income:
|Investment Income||Dec 31, 2018|
|Dividends from unaffiliated issuers||$450,686|
|Interest from unaffiliated issuers||$124,632|
|Income from securities loaned||$50,130|
|Total investment income||$625,448|
|Tax Advisory fees||$122,165|
|Dividends on securities sold short||$111,500|
|Total operating expenses||$879,962|
|Net Investment loss||($202,379)|
|Realized and unrealized gain||Dec 31, 2018|
|Net realized gain from non-affiliated investments||$6,348,232|
|Net realized loss from securities sold short||($1,327,850)|
|Net change in unrealized appreciation/(depreciation)
|Net gain on investments||$3,589,857|
|Net increase in net assets from operations||$3,387,478|
Statement of Changes in Net Assets:
Increase (decrease) in net assets
|Net investment loss||($202,379)|
|Net realized gain||$5,020,382|
|Net change in unrealized depreciation||($1,430,525)|
|Net increase in net assets from operations||$3,387,478|
|Distributions to shareholders||($1,652,653)|
|Total increase in net assets||$1,734,825|
|Beginning of year||$23,263,909|
|End of year||$24,998,734|
Statement of Cash Flows:
|Cash flows from operating activities||Dec 31, 2018|
|Net increase in net assets resulting from operations||$3,387,478|
|Adjustments to non-cash items:||-|
|Proceeds from sales of long-term investments||$3,286,650|
|Purchases of long-term investments||($4,430,000)|
|Increase in prepaid expenses||($43,307)|
|Net cash provided by operating activities||$2,287,435|
|Cash used for financing activities||-|
|Contributions received in advance||($310,000)|
|Proceeds from issuance of Units||$230,000|
|Dividends paid to shareholders||($1,652,653)|
|Net cash used for financing activities||($802,653)|
|Net increase(decrease) in cash||$1,484,782|
|Cash at the beginning of year||$988,455|
|Cash at the end of year||$2,473,237|
Notes to Financial Statements:
Absolute Fund LTD (the “Fund”) is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as a continuously offered, well diversified, open-end management investment company. The Fund is organized as a Delaware limited liability company. The Fund regards shareholders’ equity as the capital it manages. The Fund’s investment objective is to maximise the long-term returns to shareholders by investing, through its Subsidiaries or through such other subsidiaries as the Company may establish from time to time, in a diversified portfolio of alternative investments. Non-traditional investments mean and include investment funds and other investment structures which aim for absolute returns and use a broad range of investment strategies including short sales and leverage. The Fund offers the essential benefits of hedge fund investing in a well-diversified and actively managed global portfolio of high-quality hedge funds: absolute performance, low volatility, and low correlation to traditional assets.The Fund targets to generate absolute returns net to investors independently of major market cycles. In order to reach its investment objectives, the Group features an optimally balanced portfolio across all major hedge fund strategies: long/short, relative value, event driven and macro/CTA. The alternative investment fund manager (“Manager”) provides active portfolio management, thorough due diligence and risk management. The strategy relies on the Manager’s experience and access to excellent hedge fund managers worldwide. No assurance can be given that the Fund’s investment objective will be achieved and investment results may vary substantially over time. The consolidated financial statements are presented in USD which is the Fund’s entities’ functional currency and presentation currency.
- Significant Accounting Policies
Basis of valuation:
The financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which may require management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in members' capital from operations during the reporting period. Actual results could differ from those estimates. The Fund is considered an investment company under U.S. GAAP and follows the accounting and reporting guidance applicable to investment companies. Below is a summary of significant accounting policies:
- Financial instrument valuation
Each Fund’s net asset value (“NAV”) is calculated once daily at the close of regular trading hours on the New York Stock Exchange (“NYSE”) (typically 4:00 p.m. Eastern time) on each business day the NYSE is open. Each Fund’s equity securities listed on any national or foreign exchange market system will be valued at the last sale price. Equity securities traded in the over-the-counter market are valued at their closing sale or official closing price. If there were no transactions on that day, securities traded principally on an exchange will be valued at the mean of the last bid and ask prices prior to the market close. The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the Fund primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. When the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the Fund’s NAV is not calculated, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period.Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.
- Cash and cash equivalents
Cash and cash equivalents comprise demand, call and term deposits with a maturity of three months or less. For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise all cash, short-term deposits and other money market instruments with an original maturity of three months or less, net of bank overdrafts on demand. Cash and cash equivalents are recorded at nominal value. The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments in the Statement of Income. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
- Securities lending
The Fund participates in an agency based securities lending program to earn additional income. The Fund receives cash collateral against the loaned securities in an amount equal to at least 102% of the fair value of the loaned securities. Сollaterals maintained over the life of the loan in an amount not less than 100% of the fair value of loaned securities, as determined at the close of Fund business each day; any additional collateral required due to changes in security values is delivered to the Fund on the next business day. Income from securities loaned, net of fees paid to the securities lending agent and/or third-party vendor, is reported jointly in the Statement of Income. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. If the borrower defaults on its obligation to return the securities loaned, the Fund has the right to repurchase the securities in the open market using the collateral received. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower.
- Securities sold short
The Fund is engaged in selling securities short, which obligates the Fund to replace a borrowed security with the same security at current fair value. The Fund incurs a loss if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fundrealizes a gain if the price of the security declines between those dates. Gains are limited to the price at which the Fund sold the security short, while losses are potentially unlimited in size. The Fund is required to establish a margin account with the broker lending the security sold short. While the short sale is outstanding, the broker retains the proceeds of the short sale to the extent necessary to meet margin requirements until the short position is closed out. A deposit must also be maintained with the Fund’s custodian/counterparty broker consisting of cash and/or securities having a value equal to a specified percentage of the value of the securities sold short. The Fund is obligated to pay fees for borrowing the securities sold short and is required to pay the counterparty any dividends and/or interest due on securities sold short. Such dividends and/or interest and any security borrowing fees are recorded as an expense to the Fund.
- Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income and dividends declared on securities sold short are recorded on the ex-dividend date except for certain dividends from securities where the dividend rate is not available. In such cases, the dividend is recorded as soon as the information is received by the Fund. Distributions to shareholders are recorded on the ex-dividend date. Distributable earnings are determined according to income tax regulations(tax basis) and may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations.Temporary differences are not reclassified, as they may reverse in subsequent periods. Fund expenses are charged directly to the Fund. Realized and unrealized gains and losses and net investment income are allocated daily to shares.
- Financial instrument valuation
- Transactions with Service Providers
Steady Murphy Funding Co. is an affiliate (“SMF Co.”) and serves as administrator and custodian for the Funds. For providing administrative and accounting services, BNY Mellon is entitled to receive a monthly fee equal to an annual percentage rate of the Funds’ average daily net assets and is subject to certain minimum monthly fees. For providing certain custodial services, BNY Mellon is entitled to receive a monthly fee, subject to certain minimum, and out of pocket expense.
- Tax Advisory and Information
SMF Co. serves as Tax Adviser to the Funds pursuant to a tax advisory agreement with the Fund. For its services as the Tax adviser, Fund pays the Adviser a fee, which is computed and accrued daily and paid monthly, at an annual rate based on average amount of taxes. The Tax Advisory Fee paid to the Affiliate is enclosed in the statement of income and includes all the taxes paid by the Fund. The Tax Advisory fee for the period ended 31 December 2018 amounts to USD 122,165.
The Fund Manager receives an annual Management Fee of 0.97% of the Net Asset Value for the Units prior to deducting provision for fees payable to the Fund Manager. The fee is calculated monthly on the basis of the gross of fee Net Asset Value of each Series as of the Valuation Day that coincides with the last Business Day of the month and is paid quarterly in USD. This fee currently does not attract VAT. The management fee for the period ended 31 December 2018 amounts to USD 436,780.
The Fund entered into a Distribution Agreement with SFM Co. Pursuant to a Distribution Plan approved by the Fund's Board, the Fund pays SFM Co. ongoing distribution fees. The fees are accrued monthly and paid quarterly in arrears at an annual rate equal to 2.7% of the Fund's month-end Net Asset Value.
- Independent Auditor
The Fund appointed Deloitte as the Independent Auditor. The Independent Auditor’s remuneration consists of USD 23,345 audit fee for the audit of the financial statements and is enclosed as a part legal fees in statement of income. The Independent Auditor does not provide any non-audit services or other audit services to the Fund.
- Investment Transactions
Purchases and sales of investments (excluding short term securities and securities sold short) for the year ended December 31, 2018, aggregated USD
4,430,000 and USD 3,286,650, respectively.
- Financial Risk Management
The Fund is exposed to a variety of financial risks including: market risk, credit risk and liquidity risk. The Manager attributes great importance to professional risk management, beginning with careful diversifications, the sourcing of access to premier hedge fund investment opportunities, proper understanding and negotiation of appropriate terms and conditions, and active monitoring including ongoing interviews with managers, thorough analysis of reports and financial statements and performance reviews. The Fund has investment guidelines that set out its overall business strategies, its investment policy, general investment and risk guidelines, and has established processes for the monitoring of these guidelines.
- Market Risks
- Price risk - The investments held in the portfolio may be realised only after several years and their fair values may change significantly. The Funds’ Manager provides the fund with investment opportunities that are consistent with Fund’s objectives. The investment portfolio is regularly reviewed by the board of directors.
- Currency risk - The majority of the Fund’s assets are denominated in the US Dollar, the functional currency. As a result, the Fund is not exposed to a significant amount of currency risk. The policy is not to enter into any currency hedging transactions. In accordance with the Fund’s policy, the Manager monitors Fund’s currency position on a monthly basis and the board of directors reviews it on a regular basis.
- Interest rate risk - The majority of the Fund’s financial assets and liabilities are non-interest bearing. As a result, the 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 are invested at short-term market interest rates. In accordance with the Fund’s policy, the Manager monitors the Fund’s overall interest sensitivity on a monthly basis, and the board of directors reviews it on a regular basis.
- Credit Risks
The Fund takes on exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. Impairment provisions are provided for losses that have been incurred by the balance sheet date, if any. The Fund’s main credit risk concentration is from redemptions to be received from the hedge funds investments in which the Fund is invested. The Fund seeks to mitigate its exposure to credit risk by conducting its contractual transactions and placing its short-term funds only with institutions which are reputable and well established. In accordance with the Group’s policy, the AIFM monitors the Group’s credit position on a monthly basis and the board of directors reviews it on a regular basis.
- Liquidity Risks
The Fund is designed primarily for long term investors and an investment in the Fund's Units should be considered to be illiquid. The Fund's Units are not and will not be listed for trading on a securities exchange. Members may not be able to sell their Units as it is unlikely that a secondary market for the Units will develop or, if a secondary market does develop, members may be able to sell their Units only at substantial discounts from net asset value. Additionally, transfers of Units generally may not be effected without the express written consent of the Board or it's delegate.The Portfolio Funds invest in securities and investments with various degrees of liquidity and as such the Fund is subject to certain redemption/withdrawal provisions, in accordance with the Portfolio Funds' offering agreements.
- Subsequent Events
Management has evaluated the impact of all subsequent events on the Funds through the date the financial statements were available to be issued, and has determined that there are no material subsequent events requiring recognition or disclosure in the financial statements.
- Financial Risk Management
Independent Auditor’s Report
To: Shareholders and the Board of Directors of Absolute Fund.
Opinion on the Financial Statements
We have audited the accompanying statements of assets and liabilities of Absolute Fund, Ltd. as of December 31, 2018, the related statements of income for the year ended December 31, 2018, statements of changes in net assets for the period ended December 31, 2018, and the statement of cash flows for the year ended September 31, 2018, including the related notes and the financial highlights for each of the periods indicated therein(collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2018, the results of each of their operations for the year then ended, the changes in each of their net assets for the period ended December 31, 2018, and the statement of cash flows for the year ended December 31, 2018 and each of the financial highlights for each of the periods indicated therein in conformity with accounting principles generally accepted in the United States of America.
Basis for the opinion
These financial statements are the responsibility of the Funds’ management. Our responsibility is to express an opinion on the Funds’ financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of December 31, 2018 by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinions.