UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-22792
Blackstone Alternative Alpha Fund II
(Exact name of registrant as specified in charter)
345 Park Avenue,
28th Floor
New York, NY 10154
(Address of principal executive offices)
Peter Koffler, Esq.
c/o Blackstone Alternative Asset Management L.P.
345 Park Avenue
28th Floor
New York, NY 10154
(Name and address of agent for service)
With a copy to:
James E. Thomas, Esq.
Ropes & Gray LLP
Prudential Tower
800 Boylston Street
Boston, MA 02199-3600
Registrants telephone number, including area code: (212) 583-5000
Date of fiscal year end: March 31, 2014
Date of reporting period: September 30, 2013
Item 1. Reports to Stockholders.
The Report to Shareholders is attached hereto.
Blackstone
Blackstone Alternative Alpha Fund II
Semi-Annual Report (Unaudited)
For the Period Ended September 30, 2013
Blackstone Alternative Alpha Fund II |
||||
1 | ||||
2 | ||||
3 | ||||
4 | ||||
5 | ||||
6 | ||||
7 | ||||
13 | ||||
Blackstone Alternative Alpha Master Fund and Subsidiary |
||||
16 | ||||
17 | ||||
19 | ||||
20 | ||||
21 | ||||
22 | ||||
23 | ||||
31 |
Blackstone Alternative Alpha Fund II
Statement of Assets and Liabilities (Unaudited)
As of September 30, 2013
Assets: |
||||
Investment in Blackstone Alternative Alpha Master Fund (Master Fund), at fair value |
$ | 202,571 | ||
Cash |
850,500 | |||
Deferred offering costs |
317,352 | |||
Prepaid expenses |
64,813 | |||
Receivable from Investment Manager |
20,863 | |||
Interest receivable |
28 | |||
|
|
|||
Total assets |
1,456,127 | |||
|
|
|||
Liabilities: |
||||
Shareholder subscriptions received in advance |
850,000 | |||
Offering costs payable |
346,202 | |||
Accrued expenses and other liabilities |
56,884 | |||
|
|
|||
Total liabilities |
1,253,086 | |||
|
|
|||
Net assets |
$ | 203,041 | ||
|
|
|||
Components of Net Assets: |
||||
Paid-in capital |
$ | 200,000 | ||
Accumulated net investment income |
59 | |||
Net unrealized appreciation on investments |
2,982 | |||
|
|
|||
Net assets |
$ | 203,041 | ||
|
|
|||
Net Asset Value: |
||||
Net assets, Advisor Class III |
$ | 203,041 | ||
Shares of beneficial interests outstanding, Advisor Class III |
200 | |||
|
|
|||
Net asset value per share, Advisor Class III |
$ | 1,015.21 | ||
|
|
See accompanying Notes to Financial Statements.
1
Blackstone Alternative Alpha Fund II
Schedule of Investments (Unaudited)
September 30, 2013
Shares | Cost | Fair Value | Percentage of Total Net Assets |
|||||||||||||
Blackstone Alternative Alpha Master Fund (Master Fund) |
183 | $ | 199,589 | $ | 202,571 | 99.77 | % | |||||||||
Other assets, less liabilities |
470 | 0.23 | % | |||||||||||||
|
|
|
|
|||||||||||||
Total Net Assets |
$ | 203,041 | 100.00 | % | ||||||||||||
|
|
|
|
See accompanying Notes to Financial Statements.
2
Blackstone Alternative Alpha Fund II
Statement of Operations (Unaudited)
For the Period September 1, 2013 (commencement of operations) to September 30, 2013
Fund Income: |
||||
Interest |
$ | 118 | ||
|
|
|||
Fund Expenses: |
||||
Offering |
28,851 | |||
Legal |
20,000 | |||
Printing |
3,857 | |||
Professional |
10,668 | |||
Administration |
7,445 | |||
Custody |
429 | |||
Other |
33 | |||
|
|
|||
Total Fund expenses |
71,283 | |||
|
|
|||
Less expenses reimbursed by Investment Manager* |
(71,224 | ) | ||
|
|
|||
Net Fund expenses |
59 | |||
|
|
|||
Net Investment Income |
59 | |||
|
|
|||
Net Increase in Net Assets from Investments: |
||||
Net unrealized appreciation from investment in Master Fund |
2,982 | |||
|
|
|||
Net Increase in Net Assets from Investments |
2,982 | |||
|
|
|||
Net Increase in Net Assets from Operations |
$ | 3,041 | ||
|
|
* | The reimbursement includes expenses incurred by the Fund and Master Fund. See Note 6. |
See accompanying Notes to Financial Statements.
3
Blackstone Alternative Alpha Fund II
Statement of Changes in Net Assets (Unaudited)
For the Period September 1, 2013 (commencement of operations) to September 30, 2013
Increase (Decrease) in Net Assets: |
||||
Operations: |
||||
Net investment income |
$ | 59 | ||
Net unrealized appreciation from investment in Master Fund |
2,982 | |||
|
|
|||
Net increase in net assets from operations |
3,041 | |||
|
|
|||
Capital Transactions: |
||||
Advisor Class III: |
||||
Shareholder subscriptions |
100,000 | |||
|
|
|||
Increase in net assets from capital transactions |
100,000 | |||
|
|
|||
Net Assets: |
||||
Total increase in net assets |
103,041 | |||
Beginning of period |
100,000 | |||
|
|
|||
End of period |
$ | 203,041 | ||
|
|
|||
Accumulated net investment income |
$ | 59 | ||
|
|
|||
Share Transactions: |
||||
Beginning of period |
100 | |||
Shares issued |
100 | |||
|
|
|||
End of period |
200 | |||
|
|
See accompanying Notes to Financial Statements.
4
Blackstone Alternative Alpha Fund II
Statement of Cash Flows (Unaudited)
For the Period September 1, 2013 (commencement of operations) to September 30, 2013
Cash Flows from Operating Activities: |
||||
Net increase in net assets resulting from operations |
$ | 3,041 | ||
Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities: |
||||
Net unrealized appreciation from investment in Master Fund |
(2,982 | ) | ||
Purchase of investment in Master Fund |
(199,589 | ) | ||
Increase in deferred offering costs |
(44,502 | ) | ||
Increase in prepaid expenses |
(64,813 | ) | ||
Increase in receivable from Investment Manager |
(20,863 | ) | ||
Increase in interest receivable |
(28 | ) | ||
Increase in offering costs payable |
73,352 | |||
Increase in accrued expenses and other liabilities |
56,884 | |||
|
|
|||
Net cash used in operating activities |
(199,500 | ) | ||
|
|
|||
Cash Flows from Financing Activities: |
||||
Proceeds from shareholder subscriptions and subscriptions received in advance |
950,000 | |||
|
|
|||
Cash provided by financing activities |
950,000 | |||
|
|
|||
Net change in cash |
750,500 | |||
Cash, beginning of period |
100,000 | |||
|
|
|||
Cash, end of period |
$ | 850,500 | ||
|
|
See accompanying Notes to Financial Statements.
5
Blackstone Alternative Alpha Fund II
Financial Highlights (Unaudited)
For the Period September 1, 2013 (commencement of operations) to September 30, 2013
Advisor Class III | ||||
Per Share Operating Performance: |
||||
Net Asset Value, September 1, 20131 |
$ | 1,000.00 | ||
Income from Investment Operations: |
||||
Net investment income2 |
0.30 | |||
Net unrealized gain from investments |
14.91 | |||
|
|
|||
Net income from investment operations |
15.21 | |||
|
|
|||
Net Asset Value, September 30, 2013 |
$ | 1,015.21 | ||
|
|
|||
Financial Ratios:3 |
||||
Expenses to average net assets for the Fund before reimbursement from Investment Manager |
407.88 | % | ||
Reimbursement from Investment Manager4 |
(407.53 | )% | ||
|
|
|||
Total expenses to average net assets for the Fund after reimbursement from Investment Manager5 |
0.35 | % | ||
|
|
|||
Net investment income to average net assets for the Fund |
0.36 | % | ||
|
|
|||
Portfolio turnover6 |
2.80 | % | ||
|
|
|||
Total return7 |
1.52 | % | ||
|
|
|||
Net assets, September 30, 2013 (000s) |
$ | 203 | ||
|
|
1 | Commencement of operations. |
2 | Calculated using average shares outstanding during the period. |
3 | Financial ratios have been annualized except for non-recurring costs. |
4 | The reimbursement includes expenses incurred by the Fund and the Master Fund. See Note 6. |
5 | In accordance with the Expense Limitation and Reimbursement Agreement, Specified Expenses of the Master Fund are included in the limitation of the Expense Cap. See Note 6. For the period ended September 30, 2013, the expenses of the Master Fund represent less than 0.00% of average net assets for the Fund. |
6 | The Fund is invested solely in the Master Fund, therefore this ratio reflects the portfolio turnover of the Master Fund. |
7 | Total return has not been annualized. |
The financial ratios represent the expenses and net investment income to average monthly net assets for the period. The computation of such ratios do not reflect the Funds share of the income and expenses of the underlying Investee Funds held by the Master Fund. The individual shareholders total return may vary from this total return based on the timing of capital transactions.
See accompanying Notes to Financial Statements.
6
Blackstone Alternative Alpha Fund II
Notes to Financial Statements (Unaudited)
September 30, 2013
1. Organization
Blackstone Alternative Alpha Fund II (the Fund), a Massachusetts business trust registered under the Investment Company Act of 1940, as amended (the 1940 Act), as a continuously offered, non-diversified, closed-end management investment company, commenced operations on September 1, 2013. The Funds investment objective is to seek to earn long-term risk-adjusted returns that are attractive as compared to those of traditional public equity and fixed income markets. The Fund pursues its objective by investing substantially all of its assets in Blackstone Alternative Alpha Master Fund (the Master Fund), a Massachusetts business trust registered under the 1940 Act as a continuously offered, closed-end management investment company with the same investment objective and substantially the same investment policies as the Fund.
The Fund offers three classes of shares of beneficial interest (Shares): Advisor Class I Shares, Advisor Class II Shares, and Advisor Class III Shares. As of September 30, 2013, there were no Advisor Class I Shares or Advisor Class II Shares outstanding.
The Master Funds consolidated financial statements and notes to consolidated financial statements, included elsewhere within this report, are an integral part of the Funds financial statements and should be read in conjunction with these financial statements. As of September 30, 2013, the Fund held a 0.06% ownership interest in the Master Fund.
The investment manager of the Fund and the Master Fund is Blackstone Alternative Asset Management L.P. (BAAM or the Investment Manager), a registered investment adviser under the Investment Advisers Act of 1940, as amended. Each of the Fund and the Master Fund is a commodity pool subject to regulation by the Commodity Futures Trading Commission (CFTC). BAAM, the commodity pool operator of the Fund and the Master Fund, is registered as such with the CFTC, but has claimed relief under Rule 4.12(c)(3) of the Commodity Exchange Act from certain disclosure, reporting and recordkeeping requirements otherwise applicable to commodity pools. The Board of Trustees (the Board and each member a Trustee) of the Fund and the Master Fund supervises the conduct of the Funds and the Master Funds affairs and, pursuant to their investment management agreements, has engaged BAAM to manage the Funds and the Master Funds day-to-day investment activities.
Capitalized terms used, but not defined herein, shall have the meaning assigned to them in the Prospectus of the Fund.
2. Basis of Presentation
The Funds financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and are stated in U.S. dollars.
The preparation of financial statements in accordance with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses during the reporting period. Actual results could differ from these estimates and these differences could be material.
7
Blackstone Alternative Alpha Fund II
Notes to Financial Statements (Continued) (Unaudited)
September 30, 2013
3. Significant Accounting Policies
Fair Value Measurements
Investment in the Master Fund
The Funds investment in the Master Fund is recorded at fair value and is based upon the Funds percentage ownership of the net assets of the Master Fund. The performance of the Fund is directly affected by the performance of the Master Fund.
See Note 3 to the Master Funds consolidated financial statements for the determination of fair value of the Master Funds investments.
Investment Transactions and Related Investment Income and Expense
Investment transactions are accounted for on a trade date basis. Income and expense, including interest, are recorded on an accrual basis.
Cash
At September 30, 2013, the Fund had $850,500 of cash held at a major U.S. bank.
Contingencies
Under the Funds Agreement and Declaration of Trust (Declaration of Trust), the Funds officers and each Trustee are indemnified against certain liabilities that may arise out of the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of representations and indemnifications. The Funds maximum exposure under these arrangements is unknown. However, the Fund has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
Income Taxes
The Funds policy is to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code and to distribute substantially all of its investment company taxable income and net long-term capital gains to its shareholders. Therefore, no federal income tax provision is expected to be required. The Fund plans to file U.S. federal and various state and local tax returns.
Organization and Offering Costs
Organization costs associated with the establishment of the Fund were expensed by the Fund and reimbursed by the Investment Manager.
Offering costs are amortized over 12 months on a straight-line basis beginning on the date of commencement of operations.
Dividends and Distributions to Shareholders
Dividends from net investment income and distributions of capital gains, if any, are declared and paid annually. Dividends and capital gain distributions paid by the Fund will be reinvested in additional Shares of the Fund unless a shareholder elects not to reinvest in Shares or is otherwise ineligible. Shares purchased by reinvestment will be issued at their net asset value on the ex-dividend date.
8
Blackstone Alternative Alpha Fund II
Notes to Financial Statements (Continued) (Unaudited)
September 30, 2013
4. Fair Value Hierarchy
Current fair value guidance defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Fund may, as a practical expedient, estimate the fair value of the investment in the Master Fund based on the reported net asset value per share or its equivalent if the reported net asset value of the investment in the Master Fund is calculated in a manner consistent with the measurement principles applied to investment companies. The hierarchy established under the fair value guidance gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
Investments measured and reported at fair value are classified and disclosed in one of the following levels within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement or based on liquidity, as indicated by the redemption terms:
Level 1 Quoted prices are available in active markets for identical investments as of the measurement date. The Fund does not adjust the quoted price for these investments.
Level 2 Quoted prices are available in markets that are not active or model inputs are based on inputs that are either directly or indirectly observable as of the measurement date.
The Funds investment in the Master Fund shall be categorized within Level 2 if the Fund has the ability to redeem its investment in the Master Fund at the reported net asset value per share (or its equivalent) at the measurement date or within 90 days thereof, upon no greater than 90 days prior written notice.
Level 3 Pricing inputs are unobservable for the investment and include instances where there is little, if any, market activity for the investment.
The Fund has categorized within Level 3, its investment in the Master Fund that is subject to a minimum holding period or lockup greater than 90 days from the measurement date, are in liquidation, cannot be redeemed within 90 days of the measurement date, are subject to redemption notice periods in excess of 90 days, have limited the individual amount of shareholder redemptions and/or aggregate amount of shareholder redemptions, or have suspended redemptions.
The classification of investment in the Master Fund in the table below is indicative of the Funds classification of its investment in the Master Fund. It is not meant to be indicative of the classification of investments in Investee Funds of the Master Fund within the fair value hierarchy.
The following is a summary categorization, as of September 30, 2013, of the Funds investment based on the level of inputs utilized in determining the value of such investments:
Investments | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Investment in the Master Fund |
$ | | $ | | $ | 202,571 | $ | 202,571 | ||||||||
$ | | $ | | $ | 202,571 | $ | 202,571 |
9
Blackstone Alternative Alpha Fund II
Notes to Financial Statements (Continued) (Unaudited)
September 30, 2013
The changes in investments measured at fair value for which the Fund used Level 3 inputs to determine fair value are as follows:
Investment in Master Fund |
||||
Beginning Balance September 1, 2013 |
$ | | ||
Transfers into Level 3 |
| |||
Transfers out of Level 3 |
| |||
Net realized gain |
| |||
Net change in unrealized appreciation |
2,982 | |||
Reinvestment of realized gains |
| |||
Purchases |
199,589 | |||
Sales |
| |||
|
|
|||
Ending Balance September 30, 2013 |
$ | 202,571 | ||
|
|
|||
Change in unrealized appreciation related to investments still held |
$ | 2,982 | ||
|
|
The Fund recognizes transfers within the fair value hierarchy as of the beginning of the period. There were no transfers between Levels 1, 2, or 3 for the period ended September 30, 2013.
5. Fund Terms
Issuance of Shares
The Fund will issue Shares to eligible investors as of the first business day of the month or at such other times as determined by the Board upon receipt of an initial or additional application for Shares.
The Fund reserves the right to reject, in whole or in part, any applications for subscriptions of Shares. The Shares are subject to restrictions on transferability and resale and may not be transferred or resold except as permitted under the Funds Declaration of Trust.
Effective March 5, 2013, the Investment Manager subscribed $100,000 into the Fund and the Fund issued 100 shares of beneficial interest in Advisory Class III Shares to the Investment Manager at a net asset value of $1,000 per share.
Repurchase of Shares
The Fund from time to time may offer to repurchase a portion of its outstanding Shares pursuant to written tenders by shareholders. Repurchases will be made only at such times and on such terms as may be determined by the Board, in its complete and exclusive discretion. Shareholders who tender Shares in a repurchase offer that has a Tender Valuation Date within the 12 month period following the original issue date of such Shares will be subject to an early withdrawal fee of 2% of the aggregate net asset value of the Shares repurchased by the Fund. In determining whether the Fund should repurchase Shares from shareholders pursuant to written tenders, the Funds Board will consider the Investment Managers recommendations. The Investment Manager expects to recommend quarterly repurchases. Since the Funds assets consist primarily of its investment in the Master Fund, the ability of the Fund to have its Shares in the Master Fund be repurchased would be subject to the Master Funds repurchase policy.
10
Blackstone Alternative Alpha Fund II
Notes to Financial Statements (Continued) (Unaudited)
September 30, 2013
6. Related Party Transactions
Management Fee
The Investment Manager will not charge the Fund an advisory fee as long as substantially all of the assets of the Fund are invested in the Master Fund. The Master Fund pays the Investment Manager a management fee (the Management Fee) quarterly in arrears (accrued on a monthly basis), equal to 1.25% (annualized) of the Master Funds net asset value. The Management Fee for any period less than a full quarter is prorated.
Expense Limitation and Reimbursement
The Investment Manager has entered into an Expense Limitation and Reimbursement Agreement (the Agreement) with the Fund to limit the amount of the Funds Specified Expenses (as defined below) not to exceed 0.35% per annum of the Funds net assets (the Expense Cap). Specified Expenses includes all expenses incurred in the business of the Fund or the Master Fund with the exception of: (i) the Management Fee, (ii) the Distribution and/or Service Fee (as applicable), (iii) fees and expenses of the Investment Funds in which the Master Fund invests, (iv) brokerage costs, (v) interest payments (including any interest expenses, commitment fees, or other expenses related to any line of credit of the Fund or the Master Fund), (vi) taxes, and (vii) extraordinary expenses (as determined in the sole discretion of BAAM). To the extent that Specified Expenses for the Fund (including the Funds pro rata share of the Master Funds Specified Expenses) for any month exceed the Expense Cap, the Investment Manager will waive its fees and/or reimburse the Fund for expenses to the extent necessary to eliminate such excess. The Investment Manager may discontinue its obligations under the Agreement at any time in its sole discretion after March 31, 2016. The Fund has agreed to repay the amounts borne by the Investment Manager under the Agreement within the three year period after the Investment Manager bears the expense, when and if requested by the Investment Manager, to the extent the Specified Expenses of the Fund (including the Funds pro rata share of the Master Funds Specified Expenses) are less than the lower of the Expense Cap and any expense limitation agreement then in effect with respect to the Specified Expenses. The repayment may not raise the level of Specified Expenses of the Fund (including the Funds pro rata share of the Master Funds Specified Expenses) in the month of repayment to exceed the Expense Cap. As of September 30, 2013, the repayments that potentially may be made by the Fund to the Investment Manager total $186,524 and expire March 31, 2017.
Distribution and Servicing Agreement
Blackstone Advisory Partners L.P., an affiliate of the Investment Manager, acts as the distributor of the Fund (the Distributor). The Fund will pay the Distributor a fee equal to 0.40% (annualized) of the average net assets of the Fund that are attributable to the Advisor Class I Shares and 0.25% (annualized) of the average net assets of the Fund that are attributable to Advisor Class II Shares. There is no Distribution and/or Service Fee attributable to Advisor Class III Shares.
Expense Payments
The Investment Manager pays expenses on behalf of the Fund and is subsequently reimbursed for such payments. Subject to the Expense Limitation and Reimbursement Agreement, the Fund was allocated $71,224 of the repayment amount, which reduced the amount payable by the Fund to the Investment Manager for reimbursement of such expenses. As of September 30, 2013, the Fund had a net receivable from the Investment Manager of $20,863 recorded in the Statement of Assets and Liabilities.
11
Blackstone Alternative Alpha Fund II
Notes to Financial Statements (Continued) (Unaudited)
September 30, 2013
7. Financial Instruments and Off-Balance Sheet Risk
In the normal course of business, the Investee Funds held by the Master Fund may enter into certain financial instrument transactions which may result in off-balance sheet market risk and credit risk. The Investee Funds held by the Master Fund invest in these instruments for trading and hedging purposes. The Fund is indirectly subject to certain risks arising from investments made by the Investee Funds held by the Master Fund.
Market Risk
The Fund, through its investments in Investee Funds held by the Master Fund, has exposure to financial instrument transactions which may have off-balance sheet market risk. Off-balance sheet market risk is the risk of potential adverse changes to the value of financial instruments and derivatives because of changes in market conditions such as interest and currency rate movements. See notes to the Consolidated Master Funds financial statements.
Credit Risk
The Fund is subject to certain inherent credit risks arising from transactions involving derivative financial instruments by exposure through the Master Funds investments. Credit risk is the amount of accounting loss that the Fund would incur if a counterparty failed to perform its obligations under contractual terms. See notes to the Consolidated Master Funds financial statements.
8. Subsequent Events
On September 26, 2013, the Fund commenced an offer to purchase (Offer) up to 30 Shares at a price equal to the Shares net asset value effective as of December 31, 2013. As of October 25, 2013, the expiration date of the Offer, no Shares were tendered for repurchase by the Fund.
The Fund has evaluated the impact of subsequent events through the date of financial statement issuance and determined there were no subsequent events outside the normal course of business requiring adjustment to or disclosure in the financial statements.
12
Blackstone Alternative Alpha Fund II
Supplemental Information (Unaudited)
September 30, 2013
Management of the Fund
The Funds operations are managed by the Investment Manager under the direction and oversight of the Board of Trustees. A majority of the Trustees are not interested persons (as defined in the 1940 Act) of the Fund (the Independent Trustees). The Funds Trustees and officers are subject to removal or replacement in accordance with Massachusetts law and the Funds Declaration of Trust. The Trustees serving on the Board of Trustees were elected by the initial shareholder of the Fund. The Funds Board of Trustees also serves as the board of trustees of the Master Fund and the board of trustees of Blackstone Alternative Alpha Fund (BAAF), an affiliate of the Fund that also invests substantially all of its assets in the Master Fund. The Fund, Master Fund and BAAF will be referred to together herein as the Master-Feeder Funds.
Compensation for Trustees
The Master-Feeder Funds pay no compensation to any of their officers or to the Trustees who are not Independent Trustees. Each Independent Trustee is paid by the Master-Feeder Funds $20,000 per fiscal year in aggregate for his or her services to the Master-Feeder Funds, and the Chair of the Audit Committee receives an additional $2,000 per fiscal year. The Trustees are reimbursed by the Master-Feeder Funds for their travel expenses related to Board meetings.
Allocation of Investments
The Fund invests substantially all of its assets in the Master Fund. See the Consolidated Master Funds supplemental information for the allocation of investments among asset classes.
Form N-Q Filings
The Fund files a complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year on Form N-Q. The Funds Form N-Q is available on the SECs website at http://www.sec.gov within 60 days after the Funds first and third fiscal quarters. The Funds Form N-Q may be reviewed and copied at the SECs Public Reference Room in Washington, DC, and information regarding the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Proxy Voting Policies
The Fund and the Master Fund have delegated proxy voting responsibilities to the Investment Manager, subject to the Boards general oversight. A description of the policies and procedures used to vote proxies related to the Funds and the Master Funds portfolio securities, and information regarding how the Master Fund voted proxies relating to its portfolio securities during the most recent 12-month period ended June 30, 2013, is available, and information regarding how the Fund voted proxies related to its portfolio securities from its inception through June 30, 2014 will be available, (1) without charge, upon request, by calling toll free, 1-888-386-9490 and (2) on the SECs website at http://www.sec.gov.
Board Approval of the Investment Management Agreement
At an organizational meeting of the Board of the Fund held in person on March 12, 2013, the Board, including all of the Independent Trustees, considered and unanimously approved the Investment Management Agreement (the Agreement) between the Fund and BAAM.
The Independent Trustees were assisted in their review of the Agreement by independent legal counsel. The Board requested and evaluated all the information it deemed reasonably necessary under the circumstances in connection with the approval of the Agreement. Prior to the meeting, the Board received, among other things,
13
Blackstone Alternative Alpha Fund II
Supplemental Information (Continued) (Unaudited)
September 30, 2013
(a) materials prepared by independent legal counsel regarding the relevant factors to consider in evaluating the Agreement; (b) materials prepared by BAAM relating to, among other things, BAAMs qualifications to serve as investment manager; analysis of the fees and expenses of the Fund (on a combined basis with the fees and expenses of the Master Fund) as compared with a peer group of funds; and analysis of BAAMs expected profitability from providing services to the Fund, Master Fund and Blackstone Alternative Alpha Fund; and (c) materials prepared by an outside firm, unaffiliated with the Fund or BAAM, that is in the business of regularly preparing reports for use by fund boards in considering investment advisory agreement approvals (the Service Provider) comparing the management fee rate and total operating expenses of the Fund (on a combined basis with the fees and expenses of the Master Fund) to those of a peer group of funds determined by the Service Provider.
At the meeting, there was a discussion regarding the materials that had been provided to the Board, the terms of the Agreement, the expected operations of the Fund, and other relevant considerations. The Independent Trustees met with representatives of BAAM separately in executive session to consider the information BAAM provided. They also met in executive session with their independent legal counsel. In evaluating the Agreement, the Board took into account the master-feeder structure and the fact that BAAM serves as investment adviser to the Fund and Master Fund but receives a management fee only from the Master Fund. Following this discussion, the Board, including all of the Independent Trustees, determined to approve the Agreement for an initial term of two years on the basis of the following considerations, among others:
Nature, Extent and Quality of the Services
The Board discussed BAAMs personnel, operations, and financial condition, including the following: the background and experience of key investment personnel and the BAAMs ability to retain them; BAAMs focus on analysis of complex asset categories; BAAMs disciplined investment approach and commitment to investment principles; BAAMs significant investment in and commitment to personnel, including additional hiring and extensive training and infrastructure including research, risk and portfolio management analytics; BAAMs significant compliance efforts, and oversight of and plan for sales; BAAMs oversight of and interaction with service providers; and BAAMs status as one of the largest discretionary hedge fund allocators. The Board concluded that the nature, extent, and quality of the management and advisory services to be provided were appropriate and thus support a decision to approve the Agreement.
Costs of Services and Profitability
The Board noted that BAAM receives compensation for performing investment advisory services for the Master Fund pursuant to a separate investment management agreement (the Master Fund Agreement) with the Master Fund and that no additional compensation is received for rendering services under the Agreement. In analyzing the cost of services and the expected profitability of BAAM, the Board considered BAAMs resources devoted to the Fund (as well as to the Master Fund, BAAF, and Blackstone Alternative Alpha Sub Fund I, the wholly-owned subsidiary of the Master Fund (the Sub Fund)), as well as the assessment of estimated costs and profitability provided by BAAM.
The Board reviewed the Funds management fee rate and the total expense ratio (on a combined basis with the fees and expenses of the Master Fund and the Sub Fund) compared to those of a peer group of funds (comprised of fourteen funds, including BAAF) selected by the Service Provider. Within this peer group, the Fund ranked (a) in the third quintile (and below the median) for actual total expenses excluding investment related expenses and taxes; and (b) in the fourth quintile for management fee rate. The Board noted that BAAM has agreed to cap certain operating and other expenses of the Fund (excluding the management fee, underlying fund expenses, distribution fee, and other expenses described in the Funds prospectus) in order to maintain certain expenses below 0.35%.
14
Blackstone Alternative Alpha Fund II
Supplemental Information (Continued) (Unaudited)
September 30, 2013
The Board took into account the significant investment by, and cost to, BAAM regarding the service infrastructure needed to support the Fund, the Master Fund, and the Funds investors. On the basis of the Boards review of the fees to be charged by BAAM for investment advisory and related services, the relatively unique, and highly specialized structuring, launching, and nature of the Funds investment program, BAAMs financial information, and the estimated costs associated with managing the Funds, the Board concluded that the level of investment management fees payable under the Funds Investment Management Agreement is appropriate in light of the services to be provided, the management fees, the estimated overall expense ratios of comparable investment companies, BAAMs agreement to cap certain expenses, and the fees paid under the Master Fund Agreement.
Economies of Scale
The Board discussed various financial and economic considerations relating to the proposed arrangement with BAAM, including economies of scale. While noting that the management fees would not decrease as the level of Fund assets increased, the Board concluded that the management fees payable under the Master Fund Agreement are reasonable and reflect the complexity of the Funds operations. The Board was advised that the Fund is expected to be modest in size for the foreseeable future. The Board noted that it will have the opportunity to periodically re-examine whether the Funds have achieved economies of scale, as well as the appropriateness of management fees payable to BAAM with respect to different asset sizes of the Fund, in the future.
Investment Performance
The Board evaluated the comparative information provided by BAAM regarding the performance of other similar investment funds managed by BAAM, including the Master Fund and BAAF, compared with the performance of various indices. On the basis of the Boards assessment, the Board concluded that BAAM was capable of generating a level of investment performance that is appropriate in light of the Funds investment objective, policies, and strategies and competitive with comparable funds.
Other Benefits
The Board noted BAAMs expectation that it does not expect to receive significant ancillary benefits, including soft dollar benefits, as a result of its relationship with the Funds. The Board concluded that other benefits derived by BAAM from its relationship with the Funds, to the extent such benefits are identifiable or determinable, are reasonable and fair, result from the provision of appropriate services to the Funds and investors therein, and are consistent with industry practice and the best interests of the Funds and its shareholders.
Conclusion
The Board, including all of the Independent Trustees, concluded that the fees payable under the Agreement were fair and reasonable with respect to the services that BAAM provides to the Fund and in light of the other factors described above that the Board deemed relevant. The Board based its decision on an evaluation of all these factors as a whole and did not consider any one factor as all-important or controlling. The Board was assisted by the advice of independent counsel in making this determination.
Additional Information
The Funds registration statement includes additional information about the Trustees of the Fund. The registration statement is available, without charge, upon request by calling 1-888-386-9490.
15
Blackstone Alternative Alpha Master Fund and Subsidiary
Consolidated Statement of Assets and Liabilities (Unaudited)
As of September 30, 2013
Assets: |
||||
Investments in Investee Funds, at fair value (Cost $331,209,796) |
$ | 358,366,968 | ||
Cash |
5,377,015 | |||
Investment subscriptions paid in advance to Investee Funds |
16,000,000 | |||
Prepaid expenses |
115,151 | |||
Receivable from investments sold |
5,348 | |||
Interest receivable |
420 | |||
|
|
|||
Total assets |
379,864,902 | |||
|
|
|||
Liabilities: |
||||
Shareholder subscriptions received in advance |
19,200,000 | |||
Management fees payable |
1,040,079 | |||
Payable to Investment Manager |
249,752 | |||
Accrued expenses and other liabilities |
220,684 | |||
|
|
|||
Total liabilities |
20,710,515 | |||
|
|
|||
Net assets |
$ | 359,154,387 | ||
|
|
|||
Components of Net Assets: |
||||
Paid-in capital |
$ | 337,952,360 | ||
Accumulated net investment loss |
(4,929,710 | ) | ||
Accumulated net realized loss |
(1,025,435 | ) | ||
Net unrealized appreciation on investments |
27,157,172 | |||
|
|
|||
Net assets |
$ | 359,154,387 | ||
|
|
|||
Net Asset Value: |
||||
Net assets |
$ | 359,154,387 | ||
Shares of beneficial interests outstanding, no par value, unlimited shares authorized |
324,432 | |||
|
|
|||
Net asset value per share |
$ | 1,107.02 | ||
|
|
See accompanying Notes to Consolidated Financial Statements.
16
Blackstone Alternative Alpha Master Fund and Subsidiary
Consolidated Schedule of Investments (Unaudited)
September 30, 2013
Shares |
Cost |
Fair Value |
Percentage |
Redemptions |
Redemption | |||||||||||||
Investments in Investee Funds: |
|
|||||||||||||||||
Equity(a) |
||||||||||||||||||
Samlyn Offshore Ltd.(2) |
28,942 | $ | 29,000,000 | $29,372,497 | 8.18% | Semi-annually | 45 Days | |||||||||||
Turiya Fund, L.P. |
24,080,000 | 29,185,979 | 8.13% | Quarterly | 45 Days | |||||||||||||
Bay Pond Partners, L.P.(3) |
26,700,000 | 29,084,868 | 8.10% | Semi-annually | 45 Days | |||||||||||||
Southpoint Qualified Fund, L.P. |
26,300,000 | 28,356,366 | 7.90% | Quarterly | 60 Days | |||||||||||||
Glenview Institutional Partners, L.P. |
20,400,000 | 27,080,909 | 7.54% | Quarterly | 45 Days | |||||||||||||
Hoplite Partners, L.P. |
25,600,000 | 26,755,632 | 7.45% | Quarterly | 45 Days | |||||||||||||
Pershing Square, L.P. |
20,100,000 | 20,255,537 | 5.64% | Quarterly | 65 Days | |||||||||||||
Viking Global Equities III Ltd.(2) |
6,279 | 12,400,000 | 14,996,366 | 4.18% | Annually | 45 Days | ||||||||||||
AKO Partners, L.P.(2) |
12,706,864 | 13,840,666 | 3.85% | Quarterly | 90 Days | |||||||||||||
Visium Balanced Offshore Fund Ltd.(2) |
4,683 | 9,230,000 | 10,826,037 | 3.01% | Quarterly | 60 Days | ||||||||||||
Merchants Gate Offshore Fund Ltd.(2) |
8,000 | 8,000,000 | 8,393,748 | 2.34% | Semi-annually | 60 Days | ||||||||||||
Soroban Cayman Fund Ltd.(2) |
1,308 | 1,738,000 | 2,372,264 | 0.65% | Quarterly | 60 Days | ||||||||||||
|
|
|
|
|
||||||||||||||
Total |
216,254,864 | 240,520,869 |
66.97% | |||||||||||||||
|
|
|
|
|
||||||||||||||
Event-Driven(b) |
||||||||||||||||||
Corvex Partners, L.P. |
34,800,000 | 36,802,271 | 10.25% | Quarterly | 60 Days | |||||||||||||
|
|
|
|
|
||||||||||||||
Global Macro(c) |
||||||||||||||||||
Tudor BVI Global Fund Ltd.(2) |
161 | 19,080,000 | 19,413,770 | 5.40% | Quarterly | 60 Days | ||||||||||||
BlueCrest Capital International Ltd.(2) |
54,669 | 16,500,000 | 16,260,290 | 4.53% | Quarterly | 90 Days | ||||||||||||
|
|
|
|
|
||||||||||||||
Total |
35,580,000 | 35,674,060 | 9.93% | |||||||||||||||
|
|
|
|
|
||||||||||||||
Credit-Driven(d) |
||||||||||||||||||
Magnetar Constellation Fund Ltd.(2) |
20,800 | 20,800,000 | 22,265,789 | 6.20% | Quarterly | 90 Days | ||||||||||||
|
|
|
|
|
||||||||||||||
Multi-Category(e) |
||||||||||||||||||
HBK Offshore Fund II, L.P.(2) |
12,237,012 | 12,693,154 | 3.53% | Quarterly | 90 Days | |||||||||||||
Elliott International |
354 | 287,920 | 340,195 | 0.10% | Quarterly Semi-annually | 60 Days | ||||||||||||
|
|
|
|
|
||||||||||||||
Total |
12,524,932 | 13,033,349 | 3.63% | |||||||||||||||
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
17
Blackstone Alternative Alpha Master Fund and Subsidiary
Consolidated Schedule of Investments (Continued) (Unaudited)
September 30, 2013
Shares |
Cost |
Fair Value |
Percentage |
Redemptions |
Redemption | |||||||||||||
Managed Futures(f) |
||||||||||||||||||
BlueTrend Fund Ltd.(2) |
39,500 | $ | 11,250,000 | $ 10,070,630 | 2.80% | Monthly | 30 Days | |||||||||||
|
|
|
|
|
||||||||||||||
Total Investments in Investee Funds(4)(5) |
$ | 331,209,796 | $358,366,968 | 99.78% | ||||||||||||||
|
|
|
|
|
||||||||||||||
Other assets, less liabilities |
787,419 |
0.22% | ||||||||||||||||
|
|
|
||||||||||||||||
Total Net Assets |
$359,154,387 | 100.00% | ||||||||||||||||
|
|
|
Percentage represents each respective investment in Investee Fund at fair value as compared to total net assets.
The Consolidated Master Fund is not able to obtain information about certain specific investments held by the Investee Funds due to lack of available data.
Investee Funds are organized in the United States, unless otherwise noted.
Investee Funds are non-income producing securities.
(1) | Reflects general redemption terms for each Investee Fund. See Note 4 for Fair Value Hierarchy disclosure. |
(2) | Investee Fund is organized in a non-U.S. offshore jurisdiction. |
(3) | Investee Fund is held by Blackstone Alternative Alpha Sub Fund I Ltd., which is wholly-owned by the Master Fund. |
(4) | The total cost of Investee Funds organized in the United States is $177,980,000, with a fair value of $197,521,562. |
(5) | The total cost of Investee Funds organized in non-U.S. offshore jurisdictions is $153,229,796, with a fair value of $160,845,406. |
(a) | The Equity strategy generally includes equity-focused Investee Funds with a bottom-up analysis that do not actively trade exposures, with trading strategies focusing on shorter-term dynamics and appreciation for market technicals, top-down thematic/macro views, and technically driven statistical arbitrage with fundamental quantitative long/short strategies. |
(b) | The Event-Driven strategy generally includes Investee Funds that are generally event-driven-focused and seek returns by investing in strategies including catalyst events, share class arbitrage, share buybacks, post re-organization equity, recapitalizations, spin-offs and stub trades. |
(c) | The Global Macro strategy generally includes global macro-focused Investee Funds with discretionary, directional, and inter-country exposure to commodities, equity, interest rates and currencies. |
(d) | The Credit-Driven strategy generally includes credit-driven focused Investee Funds with a focus on fundamental hedged products or otherwise low net exposure, positional concentration and opportunistic directional exposures, mortgages, and non-mortgage asset-backed securities. |
(e) | The Multi-Category strategy generally includes Investee Funds that invest across multiple strategies. |
(f) | The Managed Futures strategy generally includes managed futures-focused Investee Funds that invest in systematic futures and foreign exchange forward trading strategies. |
See accompanying Notes to Consolidated Financial Statements.
18
Blackstone Alternative Alpha Master Fund and Subsidiary
Consolidated Statement of Operations (Unaudited)
For the Six Months Ended September 30, 2013
Net Investment Loss: |
||||
Income: |
||||
Interest |
$ | 2,633 | ||
|
|
|||
Total investment income |
2,633 | |||
|
|
|||
Expenses: |
||||
Management fees |
1,822,987 | |||
Legal |
155,006 | |||
Professional |
106,616 | |||
Risk monitoring |
68,047 | |||
Insurance |
66,813 | |||
Administration |
65,318 | |||
Printing |
47,500 | |||
Trustee |
31,387 | |||
Custody |
28,186 | |||
Other |
9,714 | |||
|
|
|||
Total expenses |
2,401,574 | |||
|
|
|||
Net investment loss |
(2,398,941 | ) | ||
|
|
|||
Net Increase in Net Assets from Investments: |
||||
Net realized loss from investments in Investee Funds |
(530,271 | ) | ||
Net change in unrealized appreciation from investments in Investee Funds |
10,477,499 | |||
|
|
|||
Net Increase in Net Assets from Investments |
9,947,228 | |||
|
|
|||
Net Increase in Net Assets from Operations |
$ | 7,548,287 | ||
|
|
See accompanying Notes to Consolidated Financial Statements.
19
Blackstone Alternative Alpha Master Fund and Subsidiary
Consolidated Statements of Changes in Net Assets (Unaudited)
For the Six Months Ended September 30, 2013 |
For the Year Ended March 31, 2013 |
|||||||
Increase (Decrease) in Net Assets: |
||||||||
Operations: |
||||||||
Net investment loss |
$ | (2,398,941 | ) | $ | (2,587,573 | ) | ||
Net realized loss from investments in Investee Funds |
(530,271 | ) | (212,497 | ) | ||||
Net change in unrealized appreciation from investments in Investee Funds |
10,477,499 | 16,679,673 | ||||||
|
|
|
|
|||||
Net increase in net assets from operations |
7,548,287 | 13,879,603 | ||||||
|
|
|
|
|||||
Distributions of realized gains to shareholders |
| (282,667 | ) | |||||
|
|
|
|
|||||
Capital Transactions: |
||||||||
Shareholder subscriptions |
155,257,724 | 182,368,773 | ||||||
Reinvestment of dividends |
| 282,667 | ||||||
|
|
|
|
|||||
Increase in net assets from capital transactions |
155,257,724 | 182,651,440 | ||||||
|
|
|
|
|||||
Net Assets: |
||||||||
Total increase in net assets |
162,806,011 | 196,248,376 | ||||||
Beginning of period |
196,348,376 | 100,000 | ||||||
|
|
|
|
|||||
End of period |
$ | 359,154,387 | $ | 196,348,376 | ||||
|
|
|
|
|||||
Accumulated net investment loss |
$ | (4,929,710 | ) | $ | (2,530,769 | ) | ||
|
|
|
|
|||||
Share Transactions: |
||||||||
Beginning of period |
182,177 | 100 | ||||||
Shares issued |
142,255 | 181,800 | ||||||
Shares reinvested |
| 277 | ||||||
|
|
|
|
|||||
End of period |
324,432 | 182,177 | ||||||
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
20
Blackstone Alternative Alpha Master Fund and Subsidiary
Consolidated Statement of Cash Flows (Unaudited)
For the Six Months Ended September 30, 2013
Cash Flows from Operating Activities: |
||||
Net increase in net assets resulting from operations |
$ | 7,548,287 | ||
Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities: |
||||
Net realized loss from investments in Investee Funds |
530,271 | |||
Net change in unrealized appreciation from investments in Investee Funds |
(10,477,499 | ) | ||
Purchases of investments in Investee Funds and subscriptions paid in advance to Investee Funds |
(156,930,000 | ) | ||
Proceeds from redemptions of investments in Investee Funds |
9,246,816 | |||
Increase in interest receivable |
(169 | ) | ||
Increase in prepaid expenses |
(13,080 | ) | ||
Increase in management fees payable |
481,454 | |||
Decrease in trustee fees payable |
(10,250 | ) | ||
Increase in payable to Investment Manager |
185,883 | |||
Increase in accrued expenses and other liabilities |
57,901 | |||
|
|
|||
Net cash used in operating activities |
(149,380,386 | ) | ||
|
|
|||
Cash Flows from Financing Activities: |
||||
Proceeds from shareholder subscriptions and subscriptions received in advance |
153,257,724 | |||
|
|
|||
Cash provided by financing activities |
153,257,724 | |||
|
|
|||
Net change in cash |
3,877,338 | |||
Cash, beginning of period |
1,499,677 | |||
|
|
|||
Cash, end of period |
$ | 5,377,015 | ||
|
|
See accompanying Notes to Consolidated Financial Statements.
21
Blackstone Alternative Alpha Master Fund and Subsidiary
Consolidated Financial Highlights (Unaudited)
For the Six Months Ended September 30, 2013 |
For the Year Ended March 31, 2013 |
|||||||
Per Share Operating Performance: |
||||||||
Net Asset Value, Beginning of Period |
$ | 1,077.79 | $ | 1,000.00 | ||||
Income from Investment Operations: |
||||||||
Net investment loss1 |
(9.03 | ) | (23.23 | ) | ||||
Net realized and unrealized gain from investments |
38.26 | 102.99 | ||||||
|
|
|
|
|||||
Net income from investment operations |
29.23 | 79.76 | ||||||
|
|
|
|
|||||
Distributions of realized gains to shareholders |
| (1.97 | ) | |||||
|
|
|
|
|||||
Net Asset Value, End of Period |
$ | 1,107.02 | $ | 1,077.79 | ||||
|
|
|
|
|||||
Financial Ratios:2 |
||||||||
Expenses to average net assets |
1.64 | % | 2.28 | % | ||||
|
|
|
|
|||||
Net investment loss to average net assets |
(1.64 | )% | (2.27 | )% | ||||
|
|
|
|
|||||
Portfolio turnover |
2.80 | % | 9.01 | % | ||||
|
|
|
|
|||||
Total return3 |
2.71 | % | 7.99 | % | ||||
|
|
|
|
|||||
Net assets, end of period (000s) |
$ | 359,154 | $ | 196,348 | ||||
|
|
|
|
1 | Calculated using average shares outstanding during the period. |
2 | Financial ratios have been annualized. |
3 | Total return has not been annualized. |
The financial ratios represent the expenses and net investment loss to average monthly net assets for the period. The ratios do not reflect the Consolidated Master Funds share of the income and expenses of the underlying Investee Funds.
See accompanying Notes to Consolidated Financial Statements.
22
Blackstone Alternative Alpha Master Fund and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2013
1. Organization
Blackstone Alternative Alpha Master Fund (the Master Fund), a Massachusetts business trust registered under the Investment Company Act of 1940, as amended (the 1940 Act), as a continuously offered, non-diversified, closed-end management investment company, commenced operations on April 1, 2012. Blackstone Alternative Alpha Fund and Blackstone Alternative Alpha Fund II (the Feeder Funds) invest substantially all of their assets in the Master Fund. The Master Funds investment objective is to seek to earn long-term risk-adjusted returns that are attractive as compared to those of traditional public-equity and fixed income markets.
The Master Fund owns 100% of the shareholder interest of Blackstone Alternative Alpha Sub Fund I Ltd. (the Intermediate Fund), an exempted company incorporated under the laws of the Cayman Islands on March 14, 2012 for the purpose of facilitating the implementation of the Master Funds investment objectives. The Consolidated Financial Statements include the financial statements of the Master Fund and the Intermediate Fund (collectively, the Consolidated Master Fund).
The investment manager of the Consolidated Master Fund and the Feeder Funds is Blackstone Alternative Asset Management L.P. (BAAM or the Investment Manager), a registered investment adviser under the Investment Advisers Act of 1940, as amended. Each of the Master Fund and the Feeder Funds is a commodity pool subject to regulation by the Commodity Futures Trading Commission (CFTC). BAAM, the commodity pool operator of the Master Fund and the Feeder Funds, is registered as such with the CFTC, but has claimed relief under Rule 4.12(c)(3) of the Commodity Exchange Act from certain disclosure, reporting and recordkeeping requirements otherwise applicable to commodity pools. The Board of Trustees (the Board and each member a Trustee) of the Master Fund supervises the conduct of the Consolidated Master Funds and the Feeder Funds affairs and, pursuant to their investment management agreements, has engaged BAAM to manage the Consolidated Master Funds and Feeder Funds day-to-day investment activities.
Capitalized terms used, but not defined herein, shall have the meaning assigned to them in the Prospectus of the Master Fund.
2. Basis of Presentation
The Consolidated Master Funds financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and are stated in U.S. dollars. All inter-company accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in accordance with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses during the reporting period. Actual results could differ from these estimates and these differences could be material.
3. Significant Accounting Policies
Fair Value Measurements
Valuation Process
The valuation of the Consolidated Master Funds investments is reviewed monthly by the valuation committee (Valuation Committee). The Valuation Committee is delegated by the Board with the administration and oversight of the Consolidated Master Funds valuation policies and procedures. The
23
Blackstone Alternative Alpha Master Fund and Subsidiary
Notes to Consolidated Financial Statements (Continued) (Unaudited)
September 30, 2013
Valuation Committee determines the fair value of investments in accordance with the current fair value guidance and as described below. In the event the Valuation Committee determines, in its discretion and based on its own due diligence and investment monitoring procedures, that the valuation of any investment determined, as set forth below, does not represent fair value, the Valuation Committee will value such investments at fair value in accordance with procedures adopted in good faith and approved by the Board, as may be amended from time to time.
Investments in Investee Funds
The fair value of investments in limited partnerships and investment funds (Investee Fund(s)) is generally determined using the reported net asset value per share of the Investee Fund, or its equivalent, as a practical expedient for fair value.
The Consolidated Master Fund may, as a practical expedient, estimate the fair value of an Investee Fund based on the reported net asset value per share or its equivalent (NAV) if the reported NAV of the Investee Fund is calculated in a manner consistent with the measurement principles applied to investment companies, in accordance with Accounting Standards Codification 946, Financial Services-Investment Companies (ASC 946). In order to use the practical expedient, the Investment Manager has internal processes to independently evaluate the fair value measurement process utilized by the underlying Investee Fund to calculate the Investee Funds NAV in accordance with ASC 946. Such internal processes include the evaluation of the Investee Funds process and related internal controls in place to estimate the fair value of its underlying investments that are included in the NAV calculation, performing ongoing operational due diligence, review of the Investee Funds audited financial statements, and ongoing monitoring of other relevant qualitative and quantitative factors.
The fair value of investments in Investee Funds is reported net of management fees and incentive allocations/fees. The Investee Funds management fees and incentive allocations/fees are reflected in the net increase in net assets from investments in the Consolidated Statement of Operations.
Due to the inherent uncertainty of these estimates, these values may differ from the values that would have been used had a ready market for these investments existed and the differences could be material.
The investments in Investee Funds may involve varying degrees of interest rate risk, credit risk, foreign exchange risk, and market, industry or geographic concentration risk. While the Investment Manager monitors and attempts to manage these risks, the varying degrees of transparency into, and potential illiquidity of, the financial instruments held by the Investee Funds may hinder the Investment Managers ability to effectively manage and mitigate these risks.
The fair value of the Consolidated Master Funds assets and liabilities, which qualify as Financial Instruments under the existing accounting guidance for Financial Instruments, approximates the carrying amounts presented in the Consolidated Statement of Assets and Liabilities due to their short term nature.
Investment Transactions and Related Investment Income and Expense
Investment transactions are accounted for on a trade date basis. Income and expenses, including interest, are recorded on an accrual basis.
The net realized gains or losses from investments in Investee Funds are recorded when the Consolidated Master Fund redeems or partially redeems its interest in the Investee Funds or receives distributions in excess of return of capital. Realized gains and losses from redemptions of investments are calculated using the first-in, first-out cost basis methodology.
24
Blackstone Alternative Alpha Master Fund and Subsidiary
Notes to Consolidated Financial Statements (Continued) (Unaudited)
September 30, 2013
Cash
At September 30, 2013, the Consolidated Master Fund had $5,377,015 of cash held at a major U.S. bank.
Contingencies
Under the Master Funds Declaration of Trust, the Master Funds officers and each Trustee are indemnified against certain liabilities that may arise out of the performance of their duties to the Master Fund.
Additionally, in the normal course of business, the Consolidated Master Fund enters into contracts that contain a variety of representations and indemnifications. The Consolidated Master Funds maximum exposure under these arrangements is unknown. However, the Consolidated Master Fund has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
Income Taxes
The Consolidated Master Funds policy is to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code and to distribute substantially all of its investment company taxable income and net long-term capital gains to its shareholders. Therefore, no federal income tax provision is expected to be required. The Consolidated Master Fund files U.S. federal and various state and local tax returns.
Management of the Master Fund has evaluated the tax positions taken or expected to be taken in the course of preparing the Master Funds tax return for the current open tax year ending October 31, 2013, and has concluded, as of September 30, 2013, no provision for income tax would be required in the Consolidated Master Funds financial statements. The Master Funds federal and state income and federal excise tax returns are subject to examination by the Internal Revenue Service and state taxing authorities.
The Intermediate Fund is a controlled foreign corporation (CFC) for U.S. income tax purposes, and is not expected to be subject to U.S. income tax. However, as a wholly-owned CFC, the Intermediate Funds net income and capital gains, to the extent of its earnings and profits, are consolidated into the Master Funds investment company taxable income.
For the current open tax year and for all major jurisdictions, management of the Intermediate Fund has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements. Management is not aware of any tax positions for which it is reasonably possible that the total amounts of uncertain unrecognized tax benefits will significantly change in the next twelve months.
Dividends and Distributions to Shareholders
Dividends from net investment income and distributions of capital gains, if any, are declared and paid annually. Dividends and capital gain distributions paid by the Master Fund will be reinvested in additional Shares (defined below) of the Master Fund unless a shareholder elects not to reinvest in Shares or is otherwise ineligible. Shares purchased by reinvestment will be issued at their net asset value on the ex-dividend date.
4. Fair Value Hierarchy
Current fair value guidance defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Consolidated Master Fund may, as a practical expedient, estimate the fair value of an Investee Fund based on the reported net asset value per share or its equivalent if the reported net asset value of the Investee Fund is calculated in a manner consistent with the measurement
25
Blackstone Alternative Alpha Master Fund and Subsidiary
Notes to Consolidated Financial Statements (Continued) (Unaudited)
September 30, 2013
principles applied to investment companies. The hierarchy established under the fair value guidance gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
Investments measured and reported at fair value are classified and disclosed in one of the following levels within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement or based on liquidity, as indicated by the redemption terms:
Level 1 Quoted prices are available in active markets for identical investments as of the measurement date. The Consolidated Master Fund does not adjust the quoted price for these investments.
Level 2 Quoted prices are available in markets that are not active or model inputs are based on inputs that are either directly or indirectly observable as of the measurement date.
The Consolidated Master Funds investment in an Investee Fund shall be categorized within Level 2 if the Consolidated Master Fund has the ability to redeem its investment in the Investee Fund at the reported net asset value per share (or its equivalent) at the measurement date or within 90 days thereof, upon no greater than 90 days prior written notice.
Level 3 Pricing inputs are unobservable for the investment and include instances where there is little, if any, market activity for the investment.
The Consolidated Master Fund has categorized within Level 3, investments in Investee Funds that are subject to a minimum holding period or lockup greater than 90 days from the measurement date, are in liquidation, cannot be redeemed within 90 days of the measurement date, are subject to redemption notice periods in excess of 90 days, have limited the individual amount of shareholder redemptions and/or aggregate amount of shareholder redemptions, or have suspended redemptions.
Investee Funds, as set forth in their governing legal agreements, may offer various liquidity terms for differing classes of investors. The Consolidated Master Funds investment in a particular Investee Fund may be comprised of investments with differing liquidity terms or investments that were made at different points in time resulting in differences in the effective minimum holding period or lockup or participation in side pocket investments. As such, the classification of investments in Investee Funds may not be indicative of the actual liquidity available to the Consolidated Master Fund associated with each investment at September 30, 2013.
The classification of investments in Investee Funds included in the table below is meant to be indicative of the Consolidated Master Funds classification of its investments in Investee Funds. It is not meant to be indicative of the classification of investments in the underlying portfolios of the Investee Funds within the fair value hierarchy.
The following is a summary categorization, as of September 30, 2013, of the Consolidated Master Funds investments based on the level of inputs utilized in determining the value of such investments:
Investments in Investee Funds by Strategy | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Equity |
$ | | $ | 76,056,110 | $ | 164,464,759 | $ | 240,520,869 | ||||||||
Event-Driven |
| | 36,802,271 | 36,802,271 | ||||||||||||
Global Macro |
| 24,838,624 | 10,835,436 | 35,674,060 | ||||||||||||
Credit-Driven |
| | 22,265,789 | 22,265,789 | ||||||||||||
Multi-Category |
| | 13,033,349 | 13,033,349 | ||||||||||||
Managed Futures |
| 10,070,630 | | 10,070,630 | ||||||||||||
$ | | $ | 110,965,364 | $ | 247,401,604 | $ | 358,366,968 |
26
Blackstone Alternative Alpha Master Fund and Subsidiary
Notes to Consolidated Financial Statements (Continued) (Unaudited)
September 30, 2013
The changes in investments measured at fair value for which the Consolidated Master Fund used Level 3 inputs to determine fair value are as follows:
Investments in Investee Funds by Strategy | ||||||||||||||||||||||||
Equity | Event- Driven |
Global Macro |
Credit- Driven |
Multi- Category |
Total | |||||||||||||||||||
Beginning Balance March 31, 2013 |
$ | 121,171,459 | $ | 12,979,656 | $ | 6,558,335 | $ | 14,256,794 | $ | 4,792,331 | $ | 159,758,575 | ||||||||||||
Transfers into Level 3 |
2,700,501 | | | | | 2,700,501 | ||||||||||||||||||
Transfers out of Level 3 |
(44,343,891 | ) | | (5,538,694 | ) | | | (49,882,585 | ) | |||||||||||||||
Net realized gain (loss) |
(530,271 | ) | | | | | (530,271 | ) | ||||||||||||||||
Net change in unrealized appreciation |
6,736,690 | 1,822,615 | (184,205 | ) | 508,995 | 241,018 | 9,125,113 | |||||||||||||||||
Purchases |
86,400,000 | 22,000,000 | 10,000,000 | 7,500,000 | 8,000,000 | 133,900,000 | ||||||||||||||||||
Sales |
(7,669,729 | ) | | | | | (7,669,729 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending Balance September 30, 2013 |
$ | 164,464,759 | $ | 36,802,271 | $ | 10,835,436 | $ | 22,265,789 | $ | 13,033,349 | $ | 247,401,604 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Change in unrealized appreciation (depreciation) related to investments still held as of September 30, 2013 |
$ | 6,618,238 | $ | 1,822,615 | $ | (184,205 | ) | $ | 508,995 | $ | 241,018 | $ | 9,006,661 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The Consolidated Master Fund recognizes transfers within the fair value hierarchy as of the beginning of the period. Transfers into and out of Level 3 are primarily due to updated liquidity terms, transfers between different strategies, or upon expiration of liquidity restrictions.
27
Blackstone Alternative Alpha Master Fund and Subsidiary
Notes to Consolidated Financial Statements (Continued) (Unaudited)
September 30, 2013
The following table summarizes investments in Investee Funds, by investment strategy and the amount of the investments in Investee Funds that cannot be redeemed because of redemption restrictions put in place by the Investee Funds. In instances where redemptions were restricted, the maximum remaining redemption restriction period is disclosed. Where the remaining redemption restriction period is not known, the date the redemption restriction commenced is disclosed.
Investments in Investee Funds by Strategy |
Unfunded $ |
Category (A) | Category (B) | |||||||||
Amount $ |
Maximum Remaining Redemption Restriction Period |
Amount $ |
Redemption Restriction Commencement Date |
Total $ (A) + (B) | ||||||||
Equity | | 164,464,759 | 24 months | | N/A | 164,464,759 | ||||||
Event-Driven | | 36,802,271 | 12 months | | N/A | 36,802,271 | ||||||
Global Macro | | 10,835,436 | 12 months | | N/A | 10,835,436 | ||||||
Credit-Driven | | 22,265,789 | 24 months | | N/A | 22,265,789 | ||||||
Multi-Category | 558,576 | 13,033,349 | 24 months | | N/A | 13,033,349 |
Category (A) Investments in Investee Funds cannot be redeemed and the maximum remaining redemption restriction period is disclosed. The maximum remaining redemption restriction period is based on the restriction period for Investee Funds as defined in each respective Investee Funds governing legal agreements without consideration of the length of time elapsed from the date of the investment in the Investee Fund. The Consolidated Master Funds investment in a particular Investee Fund classified within the strategies above may be comprised of investments with differing liquidity terms or investments that were made at differing points in time.
Category (B) Investments in Investee Funds cannot be redeemed and the remaining redemption restriction period is not known. The date the redemption restriction commenced is disclosed.
Purchases and sales of investments for the period ended September 30, 2013 were $165,930,000 and $7,669,729, respectively.
5. Fund Terms
Issuance of Shares
The Master Fund is authorized to issue an unlimited number of shares of beneficial interest (Shares). The Master Fund will issue Shares as of the first business day of the month or at such other times as determined by the Board upon receipt of an initial or additional application for Shares. The Shares are subject to restrictions on transferability and resale and may not be transferred or resold except as permitted under the Master Funds Declaration of Trust.
Repurchase of Shares
Repurchases will be made only at such times and on such terms as may be determined by the Board, in its sole discretion.
28
Blackstone Alternative Alpha Master Fund and Subsidiary
Notes to Consolidated Financial Statements (Continued) (Unaudited)
September 30, 2013
6. Related Party Transactions
Management Fee
The Master Fund pays the Investment Manager a management fee (the Management Fee) quarterly in arrears (accrued on a monthly basis), equal to 1.25% (annualized) of the Master Funds net asset value. The Management Fee for any period less than a full quarter is pro-rated.
Expense Payments
The Investment Manager pays expenses on behalf of the Consolidated Master Fund and is subsequently reimbursed for such payments. For the period ended September 30, 2013, Blackstone Alternative Alpha Fund allocated to the Consolidated Master Fund, through investments in the Master Fund, $358,135 of the repayment amounts under the Feeder Funds Expense Limitation and Reimbursement Agreements. This allocation reduced the amount payable by the Consolidated Master Fund to the Investment Manager. As of September 30, 2013, the Consolidated Master Fund had $249,752 payable to the Investment Manager recorded in the Consolidated Statement of Assets and Liabilities.
7. Financial Instruments and Off-Balance Sheet Risk
In the normal course of business, the Investee Funds may enter into certain financial instrument transactions which may result in off-balance sheet market risk and credit risk. The Investee Funds invest in these instruments for trading and hedging purposes. The Consolidated Master Fund is indirectly subject to certain risks arising from investments made by the Investee Funds.
Market Risk
Market risk is the risk of potential adverse changes to the value of financial instruments because of changes in market conditions such as interest and currency rate movements. The Consolidated Master Fund is exposed to market risk indirectly as a result of the types of investments that the Investee Funds make. The Consolidated Master Fund actively monitors its exposure to market risk.
Investee Funds may invest in entities that trade or may invest directly in interest rate swaps, credit default swaps, exchange-traded and over-the-counter options, futures transactions, forward transactions, and securities sold, not yet purchased.
Credit Risk
Credit risk arises from the potential inability of counterparties to perform their obligations under the terms of a contract. The Consolidated Master Fund is indirectly exposed to credit risk related to the amount of accounting loss that the Investee Funds would incur if a counterparty failed to perform its obligations under contractual terms and if the Investee Funds fail to perform under their respective agreements.
29
Blackstone Alternative Alpha Master Fund and Subsidiary
Notes to Consolidated Financial Statements (Continued) (Unaudited)
September 30, 2013
8. Income Taxes
The primary difference between book and tax appreciation/depreciation of Investee Funds is attributable to adjustments to the tax basis of Investee Funds based on allocation of income and distributions from Investee Funds and the realization for tax purposes of financial statement unrealized gain/loss. In addition, the cost of Investee Funds for federal income tax purposes is adjusted for items of taxable income allocated to the Master Fund from the Investee Funds. As of September 30, 2013, the aggregate cost of Investee Funds and the composition of unrealized appreciation and depreciation on Investee Funds for federal income tax purposes are noted below.
Federal tax cost of investments in Investee Funds |
$ | 332,221,059 | ||
|
|
|||
Gross unrealized appreciation |
$ | 27,564,989 | ||
Gross unrealized depreciation |
(1,419,080 | ) | ||
|
|
|||
Net unrealized appreciation |
$ | 26,145,909 | ||
|
|
9. Subsequent Events
On September 26, 2013, the Master Fund commenced an offer to purchase (Offer) up to 45,430 Shares at a price equal to the Shares net asset value effective as of December 31, 2013. The Offer expires on December 20, 2013.
The Consolidated Master Fund has evaluated the impact of subsequent events through the date of financial statement issuance and determined there were no subsequent events outside of the normal course of business requiring adjustment to or disclosure in the financial statements.
30
Blackstone Alternative Alpha Master Fund and Subsidiary
Supplemental Information (Unaudited)
September 30, 2013
The Consolidated Master Funds operations are managed by the Investment Manager under the direction and oversight of the Board of Trustees. A majority of the Trustees are not interested persons (as defined in the 1940 Act) of the Consolidated Master Fund (the Independent Trustees). The Consolidated Master Funds Trustees and officers are subject to removal or replacement in accordance with Massachusetts law and the Master Funds Declaration of Trust. The Trustees serving on the Board of Trustees were elected by the initial shareholder of the Master Fund. The Consolidated Master Funds Board of Trustees also serves as the board of trustees of the Feeder Funds. The Master Fund and the Feeder Funds will be referred to together herein as the Master-Feeder Funds.
Compensation for Trustees
The Master-Feeder Funds pay no compensation to any of their officers or to the Trustees who are not Independent Trustees. Each Independent Trustee is paid by the Master-Feeder Funds $20,000 per fiscal year in aggregate for his or her services to the Master-Feeder Funds, and the Chair of the Audit Committee receives an additional $2,000 per fiscal year. The Trustees are reimbursed by the Master-Feeder Funds for their travel expenses related to Board meetings.
Allocation of Investments
The following chart indicates the allocation of investments among the asset classes in the Consolidated Master Fund as of September 30, 2013.
Asset Class(1) |
Fair Value |
% |
||||||
Equity |
$ | 240,520,869 | 67.12 | % | ||||
Event-Driven |
36,802,271 | 10.27 | % | |||||
Global Macro |
35,674,060 | 9.95 | % | |||||
Credit-Driven |
22,265,789 | 6.21 | % | |||||
Managed Futures |
13,033,349 | 3.64 | % | |||||
Multi-Category |
10,070,630 | 2.81 | % | |||||
|
|
|
|
|||||
Total Investments |
$ | 358,366,968 | 100.00 | % | ||||
|
|
|
|
(1) | The complete list of investments included in the listed asset class categories is included in the Consolidated Schedule of Investments of the Consolidated Master Fund. |
Form N-Q Filings
The Consolidated Master Fund files a complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year on Form N-Q. The Consolidated Master Funds Form N-Q is available on the SECs website at http://www.sec.gov within 60 days after the Consolidated Master Funds first and third fiscal quarters. The Consolidated Master Funds Form N-Q may be reviewed and copied at the SECs Public Reference Room in Washington, DC, and information regarding the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. Holdings and allocations shown on any Form N-Q are as of the date indicated in the filing and may not be representative of future investments. Holdings and allocations should not be considered research or investment advice and should not be relied upon in making investment decisions.
Proxy Voting Policies
The Master Fund and the Feeder Funds have delegated proxy voting responsibilities to the Investment Manager, subject to the Boards general oversight. A description of the policies and procedures used to vote proxies related to the Master Funds and the Feeder Funds portfolio securities, and information regarding
31
Blackstone Alternative Alpha Master Fund and Subsidiary
Supplemental Information (Continued) (Unaudited)
September 30, 2013
how the Master Fund and the Feeder Funds voted proxies relating to their portfolio securities during the most recent 12-month period ended June 30, 2013, is available (1) without charge, upon request, by calling toll free, 1-888-386-9490 and (2) on the SECs website at http://www.sec.gov.
Additional Information
The Master Funds registration statement includes additional information about the Trustees of the Fund. The registration statement is available, without charge, upon request by calling 1-888-386-9490.
32
Blackstone Alternative Alpha Fund II
Blackstone Alternative Alpha Master Fund
This report, including the financial information herein, is transmitted to the shareholders of Blackstone Alternative Alpha Fund II for their information. It is not a prospectus or representation intended for use in the purchase of shares of the Fund or any securities mentioned in this report.
You can find the Funds prospectus and other information about the Fund, including the Funds statement of additional information, on the Funds website at www.blackstone.com/blackstone-alternative-alpha-funds. You can also get this information at no cost by calling the Fund at 1-888-386-9490.
Item 2. Code of Ethics.
Not applicable to this semi-annual report.
Item 3. Audit Committee Financial Expert.
Not applicable to this semi-annual report.
Item 4. Principal Accountant Fees and Services.
Not applicable to this semi-annual report.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Investments.
(a) | The registrants Schedule of Investments as of the close of the reporting period is included in the Report to Shareholders filed under item 1 of this Form. |
(b) | Not applicable. |
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable to this semi-annual report.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
(a)(1) | Identification of Portfolio Managers and Description of Role of Portfolio Managers as of September 30, 2013 |
Each of the registrant and Blackstone Alternative Alpha Fund (BAAF) is a feeder fund that invests substantially all of its assets in Blackstone Alternative Alpha Master Fund (the Master Fund and together with the registrant and BAAF, the BAAF Funds). The portfolio managers of the BAAF Funds have day-to-day management responsibilities for the portfolio of such funds. BAAMs Investment Committee reviews and approves investments made by the BAAF Funds but is not primarily responsible for the day-to-day management of the portfolio of such funds. Information regarding the portfolio managers is set forth below.
Name |
Since |
Title and Recent Biography | ||
Alberto Santulin (Portfolio Manager) |
2013 | Managing Director of BAAM since 2005. | ||
John (JT) Shields (Portfolio Manager) |
2013 | Vice President of BAAM since 2010; Prior to joining BAAM, was Vice President at UBP Asset Management. |
* | Mr. Santulin has served as portfolio manager of BAAF and the Master Fund since 2012; Mr. Shields has served as portfolio manager of BAAF and the Master Fund since 2013. |
(a)(2) | Other Accounts Managed by Portfolio Managers |
The table below identifies, for each named portfolio manager of the registrant (a Portfolio Manager), the number of accounts (other than the BAAF Funds) for which the Portfolio Manager has day-to-day management responsibilities and the total assets in such accounts, within each of the following categories: registered investment companies, other pooled investment funds and other accounts.
Name of Portfolio Manager |
Registered Investment Companies Managed by Portfolio Manager |
Other Pooled Investment Vehicles Managed by Portfolio Manager |
Other Accounts Managed by Portfolio Manager |
|||||||||||||||||||||
Number | Total Assets | Number | Total Assets |
Number | Total Assets |
|||||||||||||||||||
Alberto Santulin |
1 | $ | 1.05 Billion | 0 | N/A | 0 | N/A | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
JT Shields |
0 | N/A | 0 | N/A | 0 | N/A | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Potential Conflicts of Interest
The BAAF Funds may be subject to a number of actual and potential conflicts of interest.
Allocation of Investment Opportunities. If an investment opportunity is appropriate for the BAAF Funds and one or more BAAM Multi-Manager Funds (as defined below), BAAM affiliates or their clients (collectively, Other BAAM Clients), BAAM intends to allocate such opportunity in a fair and equitable manner, taking into account various investment criteria, such as the relative amounts of capital available for investments, relative exposure to market trends, investment objectives, liquidity, diversification, contractual restrictions and similar factors. BAAM Multi-Manager Funds is defined as multi-manager funds or accounts (i) for which BAAM, or any of its affiliates within The Blackstone Group L.P.s, the parent company of BAAM (Blackstone), Hedge Fund Solutions Group, acts as an investment manager, managing member or in a similar capacity and (ii) in which underlying investments generally are made with or through third-party portfolio managers (and also, in certain cases, directly).
Capacity. To the extent that BAAM Multi-Manager Funds as well as entities affiliated with BAAM invest in private investment funds and managed accounts through third-party investment managers that limit the amount of assets and the number of accounts that they manage, BAAM may be required to choose among the BAAF Funds, other BAAM Multi-Manager Funds and affiliated entities in allocating assets to such third-party investment managers. Similarly, to the extent that BAAM Multi-Manager Funds and other entities affiliated with BAAM wish to invest in specific opportunities (e.g., co-investments) directly or through third-party managers, where such opportunities also are of interest to the BAAF Funds and are limited in capacity, BAAM may be required to choose among the BAAF Funds, other BAAM Multi-Manager Funds and affiliated entities in allocating assets to such opportunities. In both of these scenarios, BAAM intends to allocate such opportunities in a fair and equitable manner, taking into account various investment criteria, such as the relative amounts of capital available for investments, relative exposure to market trends, investment objectives, liquidity, diversification, contractual restrictions and similar factors.
Financial Interests in Underlying Managers. BAAM and its affiliates have financial interests in investment vehicles and asset managers, which interests may give rise to conflicts of interest between the BAAF Funds and such other investment vehicles managed by such other asset managers. BAAM and its affiliates will endeavor to manage these potential conflicts in a fair and equitable manner, subject to legal, regulatory, contractual or other applicable considerations. These potential conflicts principally relate to the following:
Blackstone-Owned Managers. Affiliates of BAAM currently (or in the future may) hold ownership interests in, or are (and in the future may be) otherwise affiliated with, various investment managers (each fund managed by such an investment manager, a Blackstone Affiliated Fund). The nature of BAAMs or its affiliates relationship with the Blackstone Affiliated Funds means that, due to the prohibitions contained in the 1940 Act on certain transactions between a registered investment company and affiliated persons of it, or affiliated persons of those affiliated persons, the BAAF Funds may not be able to invest in the Blackstone Affiliated Funds, even if the investment would be appropriate for the BAAF Funds. These prohibitions are designed to prevent affiliates and insiders from using a registered investment company (such as the registrant, BAAF or the Master Fund) to benefit themselves to the detriment of the registered investment company and its shareholders. If an investment in a Blackstone Affiliated Fund is not prohibited under the 1940 Act, BAAM may have an incentive to allocate the BAAF Funds assets to such Blackstone Affiliated Fund since affiliates of BAAM have a direct or indirect financial interest in the success of such fund.
Strategic Alliance Fund. Blackstone Strategic Alliance Advisors L.L.C. (BSAA), an affiliate of BAAM, has launched and manages certain funds (each, a Strategic Alliance Fund) that make seed investments in investment vehicles (Emerging Manager Vehicles) managed by emerging fund managers (Emerging Managers). In connection with such seed investment, the Strategic Alliance Fund generally receives economic participation from the Emerging Manager Vehicles in the form of profit sharing or equity interests, or other contractual means of participating in the business of the Emerging Manager Vehicle. The nature of BAAMs or its affiliates relationship with the Emerging Manager Vehicles means that, due to the prohibitions contained in the 1940 Act on certain transactions between a registered investment company and affiliated persons of it, or affiliated persons of those affiliated persons, the BAAF Funds will not be able to invest in the Emerging Manager Vehicles, even if the investment would be appropriate for the BAAF Funds. These prohibitions are designed to prevent affiliates and insiders from using a registered investment company (such as the registrant, BAAF or the Master Fund) to benefit themselves to the detriment of the registered investment company and its shareholders.
There is significant overlap between BAAMs and BSAAs investment committees.
Blackstone Strategic Capital Advisors L.L.C. Blackstone Strategic Capital Advisors L.L.C. (BSCA), an affiliate of BAAM, is expected to launch and manage certain funds (the BSCA Funds) that will seek to make investments in established alternative asset managers (the Strategic Capital Managers). The nature of BAAMs or its affiliates relationship with the Strategic Capital Managers means that, due to the prohibitions contained in the 1940 Act on certain transactions between a registered investment company and affiliated persons of it, or affiliated persons of those affiliated persons, the BAAF Funds may not be able to invest in funds managed by a Strategic Capital Manager, even if the investment would be appropriate for the BAAF Funds. These prohibitions are designed to prevent affiliates and insiders from using a registered investment company (such as the registrant, BAAF or the Master Fund) to benefit themselves to the detriment of the registered investment company and its shareholders. To the extent that an investment by the BAAF Funds in a fund managed by a Strategic Capital Manager would not be prohibited under the 1940 Act, such investment generally would benefit the BSCA Funds and a withdrawal/redemption by the BAAF Funds from such fund generally would be detrimental to the BSCA Funds. Accordingly, there may be a conflict between BAAMs fiduciary obligation to the BAAF Funds, on the one hand, and BAAMs interest in the success of the BSCA Funds, on the other hand.
There is significant overlap between BAAMs and BSCAs investment committees.
Blackstone Policies and Procedures. Specified policies and procedures implemented by Blackstone to mitigate potential conflicts of interest and address certain regulatory requirements and contractual restrictions may reduce the synergies across Blackstones various businesses that the BAAF Funds expect to draw on for purposes of pursuing attractive investment opportunities. Because Blackstone has many different asset management and advisory businesses, it is subject to a number of actual and potential conflicts of interest, greater regulatory oversight and subject to more legal and contractual restrictions than that to which it would otherwise be subject if it had just one line of business. In addressing these conflicts and regulatory, legal and contractual requirements across its various businesses, Blackstone has implemented certain policies and procedures (e.g., information walls) that may reduce the positive synergies that the BAAF Funds expect to utilize for purposes of finding attractive investments. For example, Blackstone may come into possession of material non-public information with respect to companies in which its private equity business may be considering making an investment or companies that are Blackstone advisory clients. As a consequence, that information, which could be of benefit to the BAAF Funds, might become restricted to those respective businesses and otherwise be unavailable to the BAAF Funds.
Blackstone Proprietary Funds. From time to time, Blackstone may hire or enter into a partnership or other arrangement with one or more investment professionals to form and manage private investment funds or separately managed accounts pursuing alternative investment strategies (Proprietary Funds). Blackstone generally receives a substantial portion of the revenues attributable to these Proprietary Funds, in most instances greater than the portion of the revenues it would receive from the BAAF Funds. Blackstone has formed several Proprietary Funds and expects to form additional Proprietary Funds in the future. The nature of BAAMs or its affiliates relationship with the Proprietary Funds means that, due to the prohibitions contained in the 1940 Act on certain transactions between a registered investment company and affiliated persons of it, or affiliated persons of those affiliated persons, the BAAF Funds will not be able to invest in the Proprietary Funds, even if the investment would be appropriate for the BAAF Funds. These prohibitions are designed to prevent affiliates and insiders from using a registered investment company (such as the registrant, BAAF or the Master Fund) to benefit themselves to the detriment of the registered investment company and its shareholders.
Other Activities of Blackstone, BAAM and its Affiliates. BAAM devotes to the BAAF Funds as much time as is necessary or appropriate, in its judgment, to manage the BAAF Funds activities. Certain inherent conflicts of interest arise from the fact that BAAM, Blackstone and their affiliates act on behalf of the BAAF Funds and may also carry on investment activities for a significant number of other clients (including other investment funds sponsored by BAAM, Blackstone or their affiliates) in which the BAAF Funds have no interest. In certain instances, the investment strategies and objectives of these other clients are similar to, or overlap with, the investment objective and strategy of the BAAF Funds. These activities could be viewed as creating a conflict of interest in that BAAMs time will not be devoted exclusively to the business of the BAAF Funds but such time will be allocated among the BAAF Funds and BAAMs other clients.
BAAMs future investment activities, including the establishment of other investment funds, may give rise to additional conflicts of interest. In addition, the activities in which Blackstone and its affiliates are involved may limit or preclude the flexibility that the BAAF Funds may otherwise have to participate in investments. The BAAF Funds may be forced to waive voting rights or sell or hold existing investments as a result of investment banking relationships or other relationships that Blackstone may have or transactions or investments Blackstone and its affiliates may make or have made. In addition, BAAM may determine not to invest the BAAF Funds assets in an Investment Fund, or may withdraw/redeem all or a portion of an existing BAAF Fund investment in an investment fund, subject to applicable law, in order to address adverse regulatory implications that would arise under the 1940 Act for the BAAF Funds and BAAMs other clients if that investment was made or maintained. To the extent that the adverse regulatory implications are attributable to the BAAF Funds investment, BAAM may cause the BAAF Funds to withdraw/redeem prior to other BAAM clients.
BAAMs investment activities, including the establishment of other investment funds and providing advisory services to discretionary or non-discretionary clients (see Non-Discretionary/Advisory Clients below), may give rise to additional conflicts of interest. BAAM has no obligation to purchase or sell, or recommend for purchase or sale for the BAAF Funds, any investment that BAAM or its affiliates may purchase or sell, or recommend for purchase or sale for their own accounts or for the account of any other client or investment fund. Situations may arise in which private investment funds or accounts managed by BAAM or its affiliates have made investments which would have been suitable for investment by the BAAF Funds but, for various reasons, were not pursued by, or available to, the BAAF Funds. BAAM, Blackstone and their affiliates may also engage in business activities unrelated to the BAAF Funds that create conflicts of interest. BAAM, Blackstone, their affiliates and any of their respective officers, directors, partners, members or employees, may invest for their own account in various investment opportunities, including in investment funds, in which the BAAF Funds have no interest. BAAM may determine that an investment opportunity in a particular investment is appropriate for a particular account, or for itself, but not for the BAAF Funds.
Blackstone employees, including employees of BAAM, may invest in hedge funds or other investment entities, including potential competitors of the BAAF Funds. Investors will not receive any benefit from any such investments.
Non-Discretionary/Advisory Clients. BAAM provides advisory services, typically on a non-discretionary basis, regarding the hedge fund portfolios of certain clients. BAAM may communicate investment recommendations to such clients prior to the full implementation of such recommendations by BAAM for the BAAF Funds, BAAM Multi-Manager Funds or other discretionary clients. Accordingly, the BAAF Funds, BAAM Multi-Manager Funds and BAAMs other discretionary clients may be seeking to obtain limited capacity from investment funds at the same time as such non-discretionary clients. Similarly, to the extent that an investment fund imposes redemption limitations, actions taken by non-discretionary clients may be adverse to the BAAF Funds, BAAM Multi-Manager Funds or other discretionary accounts. In addition, non-discretionary clients may from time to time have access to or have the right to obtain information about investment decisions made for the BAAF Funds, BAAM Multi-Manager Funds or other discretionary clients. Based on such information, the non-discretionary clients may take actions that are adverse to the BAAF Funds, BAAM Multi-Manager Funds or other discretionary BAAM clients.
Placement Agent Arrangements. Certain broker-dealer affiliates of BAAM may enter into placement agent agreements or otherwise be retained as placement agent by an investment fund. Under these placement agent agreements, to the extent permitted by applicable law, the investment fund may compensate BAAMs affiliates for referring investors (including the BAAF Funds) to the investment fund and such fees will not be shared with the BAAF Funds or their investors.
Service Providers and Financial Institutions as Investors. From time to time, Blackstone personnel may speak at conferences and programs for potential investors interested in investing in hedge funds, which are sponsored by investment firms that either provide services to the BAAF Funds or have a relationship with BAAM and/or Blackstone. Through such capital introduction events, prospective investors in the BAAF Funds have the opportunity to meet with BAAM. Neither BAAM nor the BAAF Funds compensates the sponsors for organizing such events or for investments ultimately made by prospective investors attending such events. However, such events and other services (including, without limitation, capital introduction services) may influence Blackstone and BAAM in deciding whether to do business with or employ the services of such investment firms consistent with their obligations to the BAAF Funds.
Investment banks or other financial institutions, as well as Blackstone employees, may also be investors in the BAAF Funds. These institutions and employees are a potential source of information and ideas that could benefit the BAAF Funds. BAAM has procedures in place designed to prevent the inappropriate use of such information by the BAAF Funds.
Transactions between the BAAF Funds and Other BAAM Clients. BAAM, to the extent permitted by applicable law, including the 1940 Act, may cause the BAAF Funds to purchase investments from, to sell investments to or to exchange investments with any of its or Blackstones affiliates. Any such purchases, sales or exchanges generally will be effected based upon the net asset value of the investment.
(a)(3) | Compensation of Portfolio Managers |
The Portfolio Managers compensation is comprised primarily of a fixed salary and a discretionary bonus paid by BAAM or its affiliates and not by the registrant, BAAF or the Master Fund. A portion of the discretionary bonus may be paid in shares of stock or stock options of The Blackstone Group L.P., the parent company of BAAM (Blackstone), which stock options may be subject to certain vesting periods. The amount of the Portfolio Managers discretionary bonus, and the portion to be paid in shares or stock options of Blackstone, is determined by senior officers of BAAM and/or Blackstone. In general, the amount of the bonus will be based on a combination of factors, none of which is necessarily weighted more than any other factor. These factors may include: the overall performance of BAAM; the overall performance of Blackstone and its affiliates and subsidiaries; the profitability to BAAM derived from the management of the registrant, BAAF, the Master Fund and the other accounts managed by BAAM; the absolute performance of the registrant, BAAF, the Master Fund and such other accounts for the preceding year; contributions by the Portfolio Manager in assisting with managing the assets of BAAM; and execution of managerial responsibilities, client interactions and support of colleagues. The bonus is not based on a precise formula, benchmark or other metric.
(a)(4) | Securities Ownership of Portfolio Managers |
The table below shows the dollar range of the interests of the registrant, BAAF and the Master Fund beneficially owned as of September 30, 2013 by each Portfolio Manager.
Portfolio Manager |
Registrant |
BAAF |
Master Fund | |||
Alberto Santulin |
None |
None |
None | |||
JT Shields |
None |
None |
None |
(b) | Not applicable. |
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no material changes to the procedures by which shareholders may recommend nominees to the registrants Board of Trustees.
Item 11. Controls and Procedures.
(a) | The registrants principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrants disclosure controls and procedures as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the 1940 Act) are effective as of the date within 90 days of the filing date of this report based on the evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended. |
(b) | There were no changes in the registrants internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act that occurred during the second fiscal quarter of the period covered by this report that have materially affected or are reasonably likely to materially affect the registrants internal control over financial reporting. |
Item 12. Exhibits.
(a)(1) |
Not applicable to this semi-annual report. | |
(a)(2) |
Certifications pursuant to Rule 30a-2(a) are attached hereto. | |
(a)(3) |
Not applicable. | |
(a)(4) |
Not applicable to this semi-annual report. | |
(b) |
Certifications pursuant to Rule 30a-2(b) are attached hereto. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Blackstone Alternative Alpha Fund II
By (Signature and Title) | /s/ Brian F. Gavin |
|||
Brian F. Gavin, President (Principal Executive Officer) |
Date: | December 5, 2013 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By (Signature and Title) | /s/ Brian F. Gavin |
|||
Brian F. Gavin, President (Principal Executive Officer) |
Date: | December 5, 2013 |
By (Signature and Title) | /s/ Arthur Liao |
|||
Arthur Liao, Treasurer (Principal Financial and Accounting Officer) |
Date: | December 5, 2013 |
CERTIFICATIONS
I, Brian F. Gavin, certify that:
1. | I have reviewed this report on Form N-CSR of Blackstone Alternative Alpha Fund II (the registrant); |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report fairly present in all material respects the financial condition, results of operations, changes in net assets and cash flows of the registrant as of, and for, the period presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report, based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize, and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
December 5, 2013 |
/s/ Brain F. Gavin | |||||
Date |
Brain F. Gavin, President (Principal Executive Officer) |
CERTIFICATIONS
I, Arthur Liao, certify that:
1. | I have reviewed this report on Form N-CSR of Blackstone Alternative Alpha Fund II (the registrant); |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report fairly present in all material respects the financial condition, results of operations, changes in net assets and cash flows of the registrant as of, and for, the period presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report, based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize, and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
December 5, 2013 |
/s/ Arthur Liao | |||
Date |
Arthur Liao, Treasurer (Principal Financial and Accounting Officer) |
This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. § 1350, and accompanies the report on Form N-CSR for the period ended September 30, 2013 of Blackstone Alternative Alpha Fund II (the registrant).
I, Brian F. Gavin, the President of the registrant, certify that, to the best of my knowledge:
1. | the Form N-CSR fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 ( 15 U.S.C. 78m(a) or 78o(d)); and |
2. | the information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
December 5, 2013 |
Date |
/s/ Brian F. Gavin |
Brian F. Gavin |
President (Principal Executive Officer) |
This certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and is not being filed as part of Form N-CSR or as a separate disclosure document. A signed original of this written statement required by Section 906 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.
This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. § 1350, and accompanies the report on Form N-CSR for the period ended September 30, 2013 of Blackstone Alternative Alpha Fund II (the registrant).
I, Arthur Liao, the Treasurer of the registrant, certify that, to the best of my knowledge:
1 | the Form N-CSR fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 ( 15 U.S.C. 78m(a) or 78o(d)); and |
2 | the information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
December 5, 2013 |
Date |
/s/ Arthur Liao |
Arthur Liao |
Treasurer (Principal Financial and Accounting Officer) |
This certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and is not being filed as part of Form N-CSR or as a separate disclosure document. A signed original of this written statement required by Section 906 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.