UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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
Date of reporting period: September 30, 2018
Item 1. | Reports to Stockholders. |
The Report to Shareholders is attached hereto.
Blackstone
|
Blackstone Alternative Asset Management L.P.
SEMI-ANNUAL REPORT (Unaudited)
For the Period Ended September 30, 2018
Blackstone Alternative Alpha Fund II
TABLE OF CONTENTS
Blackstone Alternative Alpha Fund II |
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1 | |||||
2 | |||||
3 | |||||
4 | |||||
5 | |||||
6 | |||||
8 | |||||
14 | |||||
18 | |||||
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22 | |||||
23 | |||||
24 | |||||
25 | |||||
26 | |||||
33 |
Blackstone Alternative Alpha Fund II
Statement of Assets and Liabilities
As of September 30, 2018 (Unaudited)
Assets: |
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Investment in Blackstone Alternative Alpha Master Fund (Master Fund), at fair value (Cost $62,875,730) |
$ | 68,254,169 | ||
Cash |
595,850 | |||
Receivable from Investment Manager |
539,461 | |||
Receivable for shares repurchased from Master Fund |
405,401 | |||
Prepaid Expenses |
8,152 | |||
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|
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Total assets |
69,803,033 | |||
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Liabilities: |
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Payable for shares repurchased |
578,068 | |||
Shareholder subscriptions received in advance |
180,000 | |||
Shareholder service fees payable |
800 | |||
Accrued expenses and other liabilities |
173,303 | |||
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Total liabilities |
932,171 | |||
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Net assets |
$ | 68,870,862 | ||
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Components of Net Assets: |
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Paid-in capital |
$ | 62,210,512 | ||
Accumulated net investment loss |
(317,768 | ) | ||
Accumulated net realized gain |
1,599,680 | |||
Net unrealized appreciation on investments |
5,378,438 | |||
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Net assets |
$ | 68,870,862 | ||
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Net Asset Value: |
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Net assets, Advisor Class II |
$ | 3,840,856 | ||
Shares of beneficial interests outstanding, Advisor Class II |
3,632.92 | |||
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Net asset value per share, Advisor Class II |
$ | 1,057.24 | ||
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Net assets, Advisor Class III |
$ | 65,030,006 | ||
Shares of beneficial interests outstanding, Advisor Class III |
54,739.58 | |||
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Net asset value per share, Advisor Class III |
$ | 1,187.99 | ||
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See accompanying Notes to Financial Statements.
1
Blackstone Alternative Alpha Fund II
September 30, 2018 (Unaudited)
Shares | Cost | Fair Value | Percentage of Total Net Assets | |||||||||||||||||
Blackstone Alternative Alpha Master Fund (Master Fund) |
55,551 | $ | 62,875,730 | $ | 68,254,169 | 99.10 | % | |||||||||||||
Other assets, less liabilities |
616,693 | 0.90 | % | |||||||||||||||||
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Total Net Assets |
$ | 68,870,862 | 100.00 | % | ||||||||||||||||
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See accompanying Notes to Financial Statements.
2
Blackstone Alternative Alpha Fund II
For the Six Months Ended September 30, 2018 (Unaudited)
Fund Expenses: |
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Legal |
$ | 90,000 | ||
Printing |
35,979 | |||
Professional |
26,951 | |||
Blue sky fees |
26,517 | |||
Registration fees |
22,938 | |||
Transfer agent fees |
22,451 | |||
Service fee |
4,950 | |||
Custody |
3,900 | |||
Other |
20,100 | |||
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|
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Total Fund expenses |
253,786 | |||
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Less: Expenses reimbursed by Investment Manager* |
(195,300 | ) | ||
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Fund expenses |
58,486 | |||
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Net Investment Loss |
(58,486 | ) | ||
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Net Realized and Unrealized Gain from Investments: |
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Realized gain from investment in Master Fund |
128,244 | |||
Net change in unrealized appreciation from investment in Master Fund |
1,412,814 | |||
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Net Realized and Unrealized Gain from Investments |
1,541,058 | |||
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Net Increase in Net Assets resulting from Operations |
$ | 1,482,572 | ||
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* | The reimbursement includes expenses incurred by the Fund and the Master Fund (as defined herein). See Note 5. |
See accompanying Notes to Financial Statements.
3
Blackstone Alternative Alpha Fund II
Statements of Changes in Net Assets
For the Six Months Ended September 30, 2018 (Unaudited) |
For the Year Ended March 31, 2018 |
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Increase (Decrease) in Net Assets: |
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Operations: |
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Net investment loss |
$ | (58,486 | ) | $ | (108,940 | ) | ||
Realized gain distribution from Master Fund |
| 2,449,858 | ||||||
Realized loss from investment in Master Fund |
128,244 | (18,297 | ) | |||||
Net change in unrealized appreciation from investment in Master Fund |
1,412,814 | 777,670 | ||||||
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Net increase in net assets resulting from operations |
1,482,572 | 3,100,291 | ||||||
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Distributions to shareholders from ordinary income |
| (900,699 | ) | |||||
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Distributions to shareholders |
| (900,699 | ) | |||||
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Capital Transactions: |
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Advisor Class II: |
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Shareholder subscriptions |
93,000 | 205,111 | ||||||
Reinvestment of distributions |
| 48,173 | ||||||
Shareholder redemptions |
(386,253 | ) | (166,734 | ) | ||||
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Total Advisor Class II |
(293,253 | ) | 86,550 | |||||
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Advisor Class III: |
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Shareholder subscriptions |
3,713,500 | 7,963,964 | ||||||
Reinvestment of distributions |
| 814,137 | ||||||
Shareholder redemptions |
(1,840,385 | ) | (20,974,492 | ) | ||||
Early withdrawal fee |
8,591 | 13,079 | ||||||
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Total Advisor Class III |
1,881,706 | (12,183,312 | ) | |||||
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Net increase (decrease) in net assets from capital transactions |
1,588,453 | (12,096,762 | ) | |||||
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Net Assets: |
||||||||
Total increase (decrease) in net assets |
3,071,025 | (9,897,170 | ) | |||||
Beginning of period |
65,799,837 | 75,697,007 | ||||||
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End of period |
$ | 68,870,862 | $ | 65,799,837 | ||||
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Accumulated net investment loss |
$ | (317,768 | ) | $ | (259,282 | ) | ||
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Share Transactions: |
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Advisor Class II: |
||||||||
Beginning of period |
3,913 | 3,828 | ||||||
Shares issued |
| 201 | ||||||
Shares reinvested |
| 47 | ||||||
Shares redeemed |
(280 | ) | (163 | ) | ||||
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End of period |
3,633 | 3,913 | ||||||
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Advisor Class III: |
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Beginning of period |
53,147 | 63,864 | ||||||
Shares issued |
3,151 | 6,860 | ||||||
Shares reinvested |
| 707 | ||||||
Shares redeemed |
(1,558 | ) | (18,284 | ) | ||||
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End of period |
54,740 | 53,147 | ||||||
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See accompanying Notes to Financial Statements.
4
Blackstone Alternative Alpha Fund II
For the Six Months Ended September 30, 2018 (Unaudited)
Cash Flows from Operating Activities: |
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Net increase in net assets resulting from operations |
$ | 1,482,572 | ||
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities: |
||||
Realized loss from investment in Master Fund |
(128,244 | ) | ||
Net change in unrealized appreciation from investment in Master Fund |
(1,412,814 | ) | ||
Purchase of investment in Master Fund |
(3,806,500 | ) | ||
Proceeds from redemptions of investment in Master Fund and receivable for shares repurchased from Master Fund |
3,954,517 | |||
Increase in receivable from Investment Manager |
(48,779 | ) | ||
Increase in prepaid expenses |
(3,202 | ) | ||
Payable for shares purchased from Master Fund |
(1,341,614 | ) | ||
Decrease in shareholder service fees payable |
(44 | ) | ||
Increase in accrued expenses and other liabilities |
43,567 | |||
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|
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Net cash used in operating activities |
(1,260,541 | ) | ||
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|
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Cash Flows from Financing Activities: |
||||
Proceeds from shareholder subscriptions and subscriptions received in advance |
3,805,000 | |||
Payments for shareholder redemptions and payable for shares repurchased |
(3,692,121 | ) | ||
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|
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Net cash used in financing activities |
112,879 | |||
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Net change in cash |
(1,147,662 | ) | ||
Cash, beginning of period |
1,743,512 | |||
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|
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Cash, end of period |
$ | 595,850 | ||
|
|
See accompanying Notes to Financial Statements.
5
Blackstone Alternative Alpha Fund II
Advisor Class II |
For the Six Months Ended September 30, 2018 (Unaudited) |
For the Year Ended March 31, 2018 |
For the Year Ended March 31, 2017 |
For the Year Ended March 31, 2016 |
For the Period Ended March 31, 2015* |
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Per Share Operating Performance: |
||||||||||||||||||||
Net Asset Value, Beginning of period |
$ | 1,035.27 | $ | 1,004.21 | $ | 919.20 | $ | 1,049.91 | $ | 1,000.00 | ||||||||||
Income/(loss) from Investment Operations: |
||||||||||||||||||||
Net investment loss1 |
(4.27 | ) | (4.08 | ) | (4.06 | ) | (4.33 | ) | (1.37 | ) | ||||||||||
Net unrealized gain/(loss) from investments |
26.24 | 49.14 | 102.02 | (111.51 | ) | 65.81 | ||||||||||||||
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|
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Net income/(loss) from investment operations |
21.97 | 45.06 | 97.96 | (115.84 | ) | 64.44 | ||||||||||||||
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Distributions to shareholders from ordinary income |
| (14.00 | ) | | | | ||||||||||||||
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Distribution to shareholders from net realized capital gains |
| | (12.95 | ) | (14.87 | ) | (14.53 | ) | ||||||||||||
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Net Asset Value, end of period |
$ | 1,057.24 | $ | 1,035.27 | $ | 1,004.21 | $ | 919.20 | $ | 1,049.91 | ||||||||||
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Financial Ratios:2 |
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Service fees |
0.25 | % | 0.25 | % | 0.25 | % | 0.25 | % | 0.25 | % | ||||||||||
Other expenses to average net assets for the class before reimbursement from Investment Manager |
0.73 | % | 0.69 | % | 0.56 | % | 0.75 | % | 0.35 | % | ||||||||||
Reimbursement from Investment Manager3 |
(0.57 | )% | (0.55 | )% | (0.39 | )% | (0.56 | )% | (0.18 | )% | ||||||||||
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Total expenses to average net assets for the class after reimbursement from Investment Manager4 |
0.41 | % | 0.39 | % | 0.42 | % | 0.44 | % | 0.42 | % | ||||||||||
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Net investment loss to average net assets for the class |
(0.41 | )% | (0.39 | )% | (0.42 | )% | (0.44 | )% | (0.42 | )% | ||||||||||
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Portfolio turnover5 |
21.77 | % | 2.47 | % | 13.15 | % | 8.97 | % | 8.68 | % | ||||||||||
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Total return |
2.12 | %6 | 4.50 | % | 10.72 | % | (11.12 | )% | 6.50 | % | ||||||||||
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Net assets, end of period (000s) |
$ | 3,841 | $ | 4,051 | $ | 3,844 | $ | 4,770 | $ | 1,510 | ||||||||||
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1 | Calculated using average shares outstanding during the period. |
2 | Financial ratios have been annualized. |
3 | The reimbursement includes expenses incurred by the class and the Master Fund. See Note 5. |
4 | 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 5. The expenses of the Master Fund represent 1.49%, 1.49%, 1.46%, 1.45% and 1.47% on an annualized basis, of average net assets for the class for the period ended September 30, 2018, the years ended March 31, 2018, March 31, 2017, March 31, 2016 and the period ended March 31, 2015, respectively. The net expense ratio for the class, including the applicable Master Fund expenses, is 1.90%, 1.88%, 1.88%, 1.89% and 1.89% on an annualized basis, for the period ended September 30, 2018, the years ended March 31, 2018, March 31, 2017, March 31, 2016 and the period ended March 31, 2015, respectively. |
5 | The Fund is invested solely in the Master Fund, therefore this ratio reflects the portfolio turnover of the Master Fund. |
6 | Total return has not been annualized. |
* | Advisor Class II commenced on September 1, 2014. |
The financial ratios represent the expenses and net investment loss to average monthly net assets for the period. The computation of such ratios does not reflect the classs 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
Financial Highlights
Advisor Class III |
For the Six Months Ended September 30, 2018 (Unaudited) |
For the Year Ended March 31, 2018 |
For the Year Ended March 31, 2017 |
For the Year Ended March 31, 2016 |
For the Year Ended March 31, 2015 |
|||||||||||||||
Per Share Operating Performance: |
||||||||||||||||||||
Net Asset Value, Beginning of period |
$ | 1,161.85 | $ | 1,125.08 | $ | 1,025.82 | $ | 1,166.96 | $ | 1,072.05 | ||||||||||
Income/(loss) from Investment Operations: |
||||||||||||||||||||
Net investment loss1 |
(1.85 | ) | (1.69 | ) | (1.85 | ) | (2.12 | ) | (1.19 | ) | ||||||||||
Net change in unrealized gain/(loss) from investments |
27.83 | 54.85 | 113.77 | (124.24 | ) | 110.63 | ||||||||||||||
|
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|
|
|
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|
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Net income/(loss) from investment operations |
25.98 | 53.16 | 111.92 | (126.36 | ) | 109.44 | ||||||||||||||
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Distributions to shareholders from ordinary income |
| (16.63 | ) | | | | ||||||||||||||
|
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|
|
|
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|
|
|
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Distribution to shareholders from net realized capital gains |
| | (12.95 | ) | (14.87 | ) | (14.53 | ) | ||||||||||||
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Early withdrawal fee |
0.16 | 0.24 | 0.29 | 0.09 | | |||||||||||||||
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Net Asset Value, end of period |
$ | 1,187.99 | $ | 1,161.85 | $ | 1,125.08 | $ | 1,025.82 | $ | 1,166.96 | ||||||||||
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Financial Ratios:2 |
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Expenses to average net assets for the class before reimbursement from Investment Manager |
0.73 | % | 0.70 | % | 0.57 | % | 0.74 | % | 2.21 | % | ||||||||||
Reimbursement from Investment Manager3 |
(0.57 | )% | (0.55 | )% | (0.39 | )% | (0.55 | )% | (2.10 | )% | ||||||||||
|
|
|
|
|
|
|
|
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|
|||||||||||
Total expenses to average net assets for the class after reimbursement from Investment Manager4 |
0.16 | % | 0.15 | % | 0.18 | % | 0.19 | % | 0.11 | % | ||||||||||
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|
|
|
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|
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Net investment loss to average net assets for the class |
(0.16 | )% | (0.16 | )% | (0.18 | )% | (0.19 | )% | (0.11 | )% | ||||||||||
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Portfolio turnover5 |
21.77 | % | 2.47 | % | 13.15 | % | 8.97 | % | 8.68 | % | ||||||||||
|
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|
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|
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Total return |
2.25 | %6 | 4.76 | % | 10.99 | % | (10.89 | )% | 10.26 | % | ||||||||||
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Net assets, end of period (000s) |
$ | 65,030 | $ | 61,749 | $ | 71,853 | $ | 70,306 | $ | 29,189 | ||||||||||
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1 | Calculated using average shares outstanding during the period. |
2 | Financial ratios have been annualized. |
3 | The reimbursement includes expenses incurred by the class and the Master Fund. See Note 5. |
4 | 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 5. The expenses of the Master Fund represent 1.49%, 1.49%, 1.46%, 1.45%, and 1.53%, on an annualized basis, of average net assets for the class for the period ended September 30, 2018, and the years ended March 31, 2018, March 31, 2017, March 31, 2016, and March 31, 2015, respectively. The net expense ratio for the class, including the applicable Master Fund expenses, is 1.65%, 1.64%, 1.64%, 1.64%, and 1.64% on an annualized basis, for the period ended September 30, 2018, and the years ended March 31, 2018, March 31, 2017, March 31, 2016, and March 31, 2015, respectively. |
5 | The Fund is invested solely in the Master Fund, therefore this ratio reflects the portfolio turnover of the Master Fund. |
6 | 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 computation of such ratios does not reflect the classs 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.
7
Blackstone Alternative Alpha Fund II
September 30, 2018 (Unaudited)
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 attractive long-term risk-adjusted returns. Risk-adjusted returns reflect that the Fund is managed to target, among other things, lower volatility than traditional equity markets and therefore the Funds performance is not expected to track traditional equity markets on an absolute basis. There can be no assurance that the Fund will achieve its objective or avoid significant losses. 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, 2018, Advisor Class II Shares and Advisor Class III Shares were 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, 2018, the Fund held a 9.36% 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, which serves as 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 respective 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 Fund is an investment company in accordance with Accounting Standards Codification 946, Financial ServicesInvestment Companies (ASC 946), which defines investment companies and prescribes specialized accounting and reporting requirements for investment companies. The Fund follows the accounting and reporting guidance in Topic 946, as described in the Financial Accounting Standards Board (FASB) Accounting Standards Update No. 2013-08.
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
8
Blackstone Alternative Alpha Fund II
Notes to Financial Statements (Continued)
September 30, 2018 (Unaudited)
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
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 Expenses
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 investment in the Master Fund are recorded when the Fund redeems or partially redeems its interest in the Master Fund 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.
Allocation of Gains and Losses
Net increase or decrease in net assets from operations is generally allocated on a pro-rata basis to shareholders in accordance with the provisions set forth in the Prospectus. Class-specific income and expenses are allocated directly to the applicable class.
Cash
At September 30, 2018, the Fund had $595,850 of cash held at a major U.S. bank.
Contingencies
Under the Funds Amended and Restated Agreement and Declaration of Trust (Declaration of Trust), the Funds officers and Trustees 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. To date, the Fund has not had claims or losses pursuant to these contracts, although there is no assurance that it will not incur losses in connection with these indemnifications in the future.
Income Taxes
The Funds policy is to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986 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 files U.S. federal and various state and local tax returns.
9
Blackstone Alternative Alpha Fund II
Notes to Financial Statements (Continued)
September 30, 2018 (Unaudited)
Management of the Fund has evaluated the tax positions taken or expected to be taken in the course of preparing the Funds tax returns for the current open tax years ended October 31, 2014, October 31, 2015, October 31, 2016 and October 31, 2017 and has concluded, as of September 30, 2018, that no provision for income tax would be required in the Funds financial statements. The Funds federal and state income and federal excise tax returns for the current open tax years are subject to examination by the Internal Revenue Service and state taxing authorities.
Dividends and Distributions to Shareholders
Dividends from net investment income and distributions of capital gains, if any, are declared and paid at least annually. Dividends and capital gain distributions paid by the Fund will be reinvested in additional Shares (defined below) 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.
Recent Accounting Pronouncements and Regulatory Updates
In August 2018, the Financial Accounting Standards Board (FASB) issued ASU No. 2018-13, Fair Value Measurements (Topic 820): Disclosure FrameworkChanges to the Disclosure Requirements for Fair Value Measurement to streamline disclosure requirements. The new standard eliminated the requirements to disclose Level 1 and Level 2 transfers, policy of timing of transfers, valuation process for Level 3 fair value measurements and the changes in unrealized gains and losses included in Level 3 investments held at the end of the reporting period. Also there are modifications to disclosure requirements for the timing of the liquidation of an underlying Investee Funds assets, for restrictions from redemption from an underlying Investee Fund, and for non-public companies, the Level 3 roll forward. The guidance is effective for financial statement with fiscal years beginning on or after December 15, 2019. Early adoption is permitted. Management is currently evaluating the new guidance. The adoption of ASU No. 2018-13 is not expected to have a material impact on the consolidated financial statements.
In November 2016, FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230)Restricted Cash. The new guidance is intended to change the presentation of restricted cash on the statement of cash flows. The new standard affects all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows under Topic 230. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted. Management is currently evaluating the new guidance. The adoption of ASU No. 2016-18 is not expected to have a material impact on the financial statements.
4. Fund Terms
Issuance of Shares
The Fund will issue shares of beneficial interest (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.
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
10
Blackstone Alternative Alpha Fund II
Notes to Financial Statements (Continued)
September 30, 2018 (Unaudited)
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, among other factors. 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 is subject to the Master Funds repurchase policy.
5. Related Party Transactions
Blackstone Holdings Finance Co. L.L.C. (FINCO), an affiliate of the Fund, pays expenses on behalf of the Fund. The Fund reimburses FINCO for such expenses paid on behalf of the Fund. FINCO does not charge any fees for providing such administrative services. At year-end September 30, 2018, the amount outstanding is $295,633.
Management Fee
The Investment Manager will not charge the Fund a management 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 at the end of such month before giving effect to the payment of the management fee or any purchases or repurchases of Master Fund shares or any distributions by the Master Fund. 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 described below and including the Funds pro rata share of the Master Funds Specified Expenses) to an amount not to exceed 0.35% per annum of the Funds net assets (the Expense Cap) (computed and applied on a monthly basis). Specified Expenses is defined to include all expenses incurred by the Fund and the Funds pro rata share of all expenses incurred by the Master Fund with the exception of: (i) the Management Fee, (ii) the Distribution and Service Fee (as defined below), (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 Master Fund), (vi) taxes, and (vii) extraordinary expenses (in each case, as determined in the sole discretion of the Investment Manager). 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 August 31, 2020 upon written notice to the Fund. This arrangement cannot be terminated prior to August 31, 2020 without the Boards consent. 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, but only if and to the extent that the estimated annualized Specified Expenses of the Fund (including the Funds pro rata share of the Master Funds Specified Expenses) for a given month are less than the lower of the Expense Cap and any expense limitation agreement then in effect with respect to the Specified Expenses. The Investment Manager is permitted to receive such repayment from
11
Blackstone Alternative Alpha Fund II
Notes to Financial Statements (Continued)
September 30, 2018 (Unaudited)
the Fund provided that the reimbursement amount does 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 the repayment is being made to a level that exceeds the Expense Cap or any other expense limitation agreement then in effect with respect to the Specified Expenses.
As of September 30, 2018, the repayments that may be made by the Fund to the Investment Manager total $1,155,972. Of this amount, repayments of $260,258 have a maximum expiration date of March 31, 2019, repayments of $325,898 have a maximum expiration date of March 31, 2020, repayments of $374,516 have a maximum expiration date of March 31, 2021 and repayments of $195,300 have a maximum expiration date of March 31, 2022.
Distribution and Servicing Agreement
Blackstone Advisory Partners L.P., an affiliate of the Investment Manager, serves as the distributor of the Shares of the Fund (the Distributor). The Fund pays the Distributor a fee (the Distribution and Service Fee) equal to 0.40% (annualized) of the average net assets of the Fund that are attributable to the Advisor Class I Shares and a service fee (the Service Fee) equal to 0.25% (annualized) of the average net assets of the Fund that are attributable to Advisor Class II Shares. There is no Distribution and Service Fee or Service Fee attributable to Advisor Class III Shares. The Distributor may pay all or a portion of the Distribution and Service Fee or Service Fee to the selling agents that sell Shares and/or provide sales support services and to other financial intermediaries that provide personal services and/or the maintenance of shareholder accounts.
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 $195,300 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, 2018, the Fund had a net receivable from the Investment Manager of $539,461 recorded in the Statement of Assets and Liabilities.
6. Financial Instruments and Off-Balance Sheet Risk
In the normal course of business, the investment partnerships, managed funds and other investment funds (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 Funds market risk is also impacted by an Investee Funds exposure to interest rate risk, foreign exchange risk, and industry or geographic concentration 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 investment partnerships, managed funds and other investment funds (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.
12
Blackstone Alternative Alpha Fund II
Notes to Financial Statements (Continued)
September 30, 2018 (Unaudited)
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 fails to perform its obligations under contractual terms. See notes to the Consolidated Master Funds financial statements.
7. Subsequent Events
The Investment Manager 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.
13
Blackstone Alternative Alpha Fund II
September 30, 2018 (Unaudited)
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 or the Investment Manager (the Independent Trustees). The Funds Trustees and officers are subject to removal or replacement in accordance with Massachusetts law and the Funds Amended and Restated Declaration of Trust (Declaration of Trust). 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 together with the Fund, the Feeder Funds), an affiliate of the Fund that also invests substantially all of its assets in the Master Fund.
Compensation for Trustees
Each of the Independent Trustees is paid by the Fund Complex (as defined below) at a rate of $110,000 per fiscal year in the aggregate for their services to the Fund Complex (including the subsidiaries of Blackstone Alternative Multi-Strategy Fund, the Subsidiaries). Mr. Coates (a Trustee being treated as an interested person (as defined in the 1940 Act) of the Fund due to his employment by Envestnet, Inc., which conducts business with certain Investee Funds and may conduct business with the Investment Adviser and its affiliates in the future) is paid by the Fund Complex at a rate of $95,000 per fiscal year in the aggregate for his services to the Fund Complex (excluding the Subsidiaries). The Chairpersons of the Board of Trustees and the Audit Committee are paid by the Fund Complex an additional $25,000 and $15,000, respectively, per fiscal year. These payments are allocated to the Fund and the other funds in the Fund Complex on the basis of assets under management. The Fund Complex also pays for the Trustees travel expenses related to Board of Trustees meetings. The Trustees do not receive any pension or retirement benefits from the Fund Complex.
The following table sets forth information covering the total compensation payable by the Feeder Funds and Blackstone Alternative Alpha Master Fund (collectively, the BAAF Funds) during the semi-annual period ended September 30, 2018 to the persons who serve, and who are expected to continue serving, as Trustees of the BAAF Funds during such period.
Name of Independent Trustee | Aggregate Compensation From the BAAF Funds |
Total Compensation From the Fund Complex1 | ||||||||
John M. Brown |
$ | 7,392 | $ | 67,500 | ||||||
Peter M. Gilbert |
$ | 5,851 | $ | 55,000 | ||||||
Paul J. Lawler |
$ | 5,851 | $ | 55,000 | ||||||
Kristen M. Leopold |
$ | 6,775 | $ | 62,500 | ||||||
Name of Interested Trustee | Aggregate Compensation From the BAAF Funds |
Total Compensation From the Fund Complex1 | ||||||||
Frank J. Coates |
$ | 5,851 | $ | 47,500 | ||||||
Peter Koffler |
None | None |
1 | These amounts represent aggregate compensation for the services of each Trustee to each fund in the Fund Complex, for which each Trustee serves as trustee. For purposes of this table, the Fund Complex consists of the BAAF Funds, Blackstone Alternative Multi-Strategy Fund, a series of Blackstone Alternative Investment Funds, and the Subsidiaries. |
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.
14
Blackstone Alternative Alpha Fund II
Supplemental Information (Continued)
September 30, 2018 (Unaudited)
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 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 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 Fund and the Master Fund voted proxies relating to their portfolio securities during the most recent 12-month period ended June 30, will be available by August 31 of that year (1) without charge, upon request, by calling toll free, 1-855-890-7725 and (2) on the SECs website at http://www.sec.gov.
Additional Information
The Funds prospectus and statement of additional information include additional information about the Trustees of the Fund. The prospectus and statement of additional information are available, without charge, upon request by calling 1-855-890-7725.
15
Privacy Policy
FACTS |
WHAT DO BLACKSTONE REGISTERED FUNDS DO WITH YOUR PERSONAL INFORMATION? |
Why? |
Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
What? |
The types of personal information we collect and share depend on the product or service you have with us. This information can include: ∎ Social Security number and income ∎ Assets and investment experience ∎ Risk tolerance and transaction history |
How? |
All financial companies need to share customers personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers personal information; the reasons Blackstone Registered Funds (as defined below) choose to share; and whether you can limit this sharing. |
Reasons we can share your
personal information |
Do Blackstone Registered Funds share? |
Can you limit this sharing? | ||
For our everyday business purposes such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus |
Yes | No | ||
For our marketing purposes to offer our products and services to you |
Yes | No | ||
For joint marketing with other financial companies | No | We dont share | ||
For our affiliates everyday business purposes information about your transactions and experiences |
No | We dont share | ||
For our affiliates everyday business purposes information about your creditworthiness |
No | We dont share | ||
For our affiliates to market to you | No | We dont share | ||
For nonaffiliates to market to you | No | We dont share |
Questions? | Email us at GLB.privacy@blackstone.com |
16
Privacy Policy (continued)
Who we are | ||
Who is providing this notice? | Blackstone Registered Funds include Blackstone Alternative Alpha Fund, Blackstone Alternative Alpha Fund II, Blackstone Real Estate Income Fund, Blackstone Real Estate Income Fund II, Blackstone Alternative Investment Funds, on behalf of its series Blackstone Alternative Multi-Strategy Fund, and the GSO Funds, consisting of Blackstone / GSO Senior Floating Rate Term Fund, Blackstone / GSO Long-Short Credit Income Fund and Blackstone / GSO Strategic Income Fund | |
What we do | ||
How do Blackstone Registered Funds protect my personal information? | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include computer safeguards and secured files and buildings. | |
How do Blackstone Registered Funds collect my personal information? | We collect your personal information, for example, when you: ∎ open an account or give us your income information ∎ provide employment information or give us your contact information ∎ tell us about your investment or retirement portfolio We also collect your personal information from others, such as credit bureaus, affiliates, or other companies. | |
Why cant I limit all sharing? | Federal law gives you the right to limit only: ∎ sharing for affiliates everyday business purposesinformation about your creditworthiness ∎ affiliates from using your information to market to you ∎ sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. See below for more on your rights under state law. | |
What happens when I limit sharing for an account I hold jointly with someone else? | Your choices will apply to everyone on your accountunless you tell us otherwise. | |
Definitions | ||
Affiliates | Companies related by common ownership or control. They can be financial and nonfinancial companies. ∎ Our affiliates include companies with a Blackstone name and financial companies such as GSO Capital Partners LP and Strategic Partners Fund Solutions. | |
Nonaffiliates | Companies not related by common ownership or control. They can be financial and nonfinancial companies. ∎ Blackstone Registered Funds do not share with nonaffiliates so they can market to you. | |
Joint marketing | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. ∎ Our joint marketing partners include financial services companies. | |
Other important information | ||
California ResidentsIn accordance with California law, we will not share information we collect about California residents with nonaffiliates except as permitted by law, such as with the consent of the customer or to service the customers accounts. We will also limit the sharing of information about you with our affiliates to the extent required by applicable California law. Vermont ResidentsIn accordance with Vermont law, we will not share information we collect about Vermont residents with nonaffiliates except as permitted by law, such as with the consent of the customer or to service the customers accounts. We will not share creditworthiness information about Vermont residents among Blackstone Registered Funds affiliates except with the authorization or consent of the Vermont resident. |
17
Blackstone Alternative Alpha Master Fund and Subsidiary
Consolidated Statement of Assets and Liabilities
As of September 30, 2018 (Unaudited)
Assets: |
||||
Investments in Investee Funds, at fair value (Cost $587,344,542) |
$ | 719,756,599 | ||
Cash |
604,153 | |||
Receivable from investments sold |
31,763,330 | |||
Investment subscription paid in advance to Investee Fund |
10,930,000 | |||
Prepaid expenses |
34,434 | |||
Other assets |
2,870 | |||
|
|
|||
Total assets |
763,091,386 | |||
|
|
|||
Liabilities: |
||||
Payable for shares repurchased |
30,384,885 | |||
Management fees payable |
2,374,443 | |||
Payable to Investment Manager |
817,875 | |||
Commitment fees payable |
72,205 | |||
Accrued expenses and other liabilities |
438,268 | |||
|
|
|||
Total liabilities |
34,087,676 | |||
|
|
|||
Net assets |
$ | 729,003,710 | ||
|
|
|||
Components of Net Assets: |
||||
Paid-in capital |
$ | 610,179,977 | ||
Accumulated net investment loss |
(32,313,488 | ) | ||
Accumulated net realized gain |
18,725,165 | |||
Net unrealized appreciation on investments |
132,412,056 | |||
|
|
|||
Net assets |
$ | 729,003,710 | ||
|
|
|||
Net Asset Value: |
||||
Net assets |
$ | 729,003,710 | ||
Shares of beneficial interests outstanding, no par value, unlimited shares authorized |
593,330 | |||
|
|
|||
Net asset value per share |
$ | 1,228.66 | ||
|
|
See accompanying Notes to Consolidated Financial Statements.
18
Blackstone Alternative Alpha Master Fund and Subsidiary
Consolidated Schedule of Investments
September 30, 2018 (Unaudited)
Shares | Cost | Fair Value | Percentage of Total Net Assets |
First Acquisition Date |
Redemptions Permitted(1) |
Redemption Notification Period(1) |
||||||||||||||||||||||
Investments in Investee Funds: |
| |||||||||||||||||||||||||||
Equity(a) |
||||||||||||||||||||||||||||
Glenview Institutional Partners, L.P. |
$ | 44,121,799 | $ | 60,021,251 | 8.23% | 4/1/2012 | Quarterly | 45 Days | ||||||||||||||||||||
Southpoint Qualified Fund LP |
46,653,397 | 59,212,773 | 8.12% | 6/1/2012 | Quarterly | 60 Days | ||||||||||||||||||||||
Shearwater Offshore, Ltd.(2) |
446,514 | 44,345,088 | 57,404,292 | 7.87% | 8/1/2014 | Annually | 60 Days | |||||||||||||||||||||
Corvex Partners LP |
46,147,902 | 53,914,094 | 7.40% | 3/1/2013 | Quarterly | 60 Days | ||||||||||||||||||||||
York European Opportunities
Fund |
33,999 | 50,000,000 | 48,604,035 | 6.67% | 8/1/2018 | Quarterly | 45 Days | |||||||||||||||||||||
Soroban Opportunities Cayman Fund Ltd(2) |
23,977 | 30,149,639 | 37,379,583 | 5.13% | 9/1/2014 | Quarterly | 60 Days | |||||||||||||||||||||
SRS Partners US, LP |
40,000 | 40,000,000 | 36,831,239 | 5.05% | 7/1/2018 | Quarterly | 60 Days | |||||||||||||||||||||
Coatue Qualified Partners, L.P. |
24,942,270 | 35,334,846 | 4.85% | 12/1/2013 | Quarterly | 45 Days | ||||||||||||||||||||||
Viking Global Equities III Ltd.(2) |
12,400,000 | 22,981,929 | 3.15% | 4/1/2012 | Annually | 45 Days | ||||||||||||||||||||||
Visium Balanced Offshore Fund, Ltd.(2) |
56,437 | 60,073 | 0.01% | 4/1/2012 | |
Non- Redeemable |
|
Non- Redeemable |
||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||
Total |
338,816,532 | 411,744,115 | 56.48% | |||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||
Multi-Category(b) |
||||||||||||||||||||||||||||
Magnetar Constellation Fund, Ltd(2) |
36,148 | 43,320,706 | 55,460,858 | 7.61% | 4/1/2012 | Quarterly | 90 Days | |||||||||||||||||||||
Third Point Ultra, Ltd.(2) |
51,565 | 49,271,072 | 54,286,513 | 7.45% | 4/1/2017 | Quarterly | 60 Days | |||||||||||||||||||||
Elliott International Limited(2) |
35,878 | 38,075,920 | 48,218,202 | 6.60% | 7/1/2012 | |
Quarterly Semi-annually |
|
60 Days | |||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||
Total |
130,667,698 | 157,965,573 | 21.66% | |||||||||||||||||||||||||
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
19
Blackstone Alternative Alpha Master Fund and Subsidiary
Consolidated Schedule of Investments (Continued)
September 30, 2018 (Unaudited)
Shares | Cost | Fair Value | Percentage of Total Net Assets |
First Acquisition Date |
Redemptions Permitted(1) |
Redemption Notification Period(1) |
||||||||||||||||||||||
Global Macro(c) |
||||||||||||||||||||||||||||
Autonomy Global Macro Fund Limited(2) |
439,314 | $ | 44,931,907 | $ | 62,661,639 | 8.60% | 7/1/2015 | |
` Monthly |
|
60 Days | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||
Relative Value(d) |
||||||||||||||||||||||||||||
Renaissance Institutional Diversified Alpha Fund International L.P.(2) |
51,878,405 | 62,453,752 | 8.57% | 5/1/2014 | Monthly | 60 Days | ||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||
Interest Rate-Driven(e) |
||||||||||||||||||||||||||||
Element Capital Feeder Fund Limited(2) |
21,050,000 | 24,931,520 | 3.42% | 3/1/2017 | Quarterly | 90 Days | ||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||
Total Investments in Investee Funds(3)(4) |
$ | 587,344,542 | $ | 719,756,599 | 98.73% | |||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||
Other assets, less liabilities |
9,247,111 | 1.27% | ||||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||
Total Net Assets |
$ | 729,003,710 | 100.00% | |||||||||||||||||||||||||
|
|
|
|
Percentage of total net assets represents each respective investment in Investee Fund at fair value as compared to total net assets.
The Consolidated Master Fund (as defined herein) 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.
Investee Funds are restricted securities per Rule §210.12-12.8 of Regulation S-X.
(1) | Reflects general redemption terms for each Investee Fund. See. Note 4 in the Notes to the Consolidated Financial Statements for Major Investment Strategies disclosure. |
(2) | Investee Fund is organized in a non-U.S. offshore jurisdiction. |
(3) | The total cost of Investee Funds organized in the United States is $201,865,368, with a fair value of $245,314,203. |
(4) | The total cost of Investee Funds organized in non-U.S. offshore jurisdictions is $385,479,174, with a fair value of $474,442,396. |
See accompanying Notes to Consolidated Financial Statements.
20
Blackstone Alternative Alpha Master Fund and Subsidiary
Consolidated Schedule of Investments (Continued)
September 30, 2018 (Unaudited)
(a) | The Equity strategy generally includes equity-focused Investee Funds with strategies using a bottom-up analysis that do not actively trade exposures, strategies focusing on shorter-term dynamics and appreciation for market technicals, strategies based on top-down thematic/macro views and strategies using technically driven statistical arbitrage with fundamental quantitative long/short strategies. |
(b) | The Multi-Category strategy generally includes Investee Funds that invest across multiple strategies. |
(c) | The Global Macro strategy generally includes global macro-focused Investee Funds with discretionary, directional and inter-country exposure to commodities, equities, interest rates and currencies. |
(d) | The Relative Value strategy generally includes relative value-focused Investee Funds with a focus on long/short managers with fundamentally hedged products or otherwise low net exposure. |
(e) | The Interest Rate-Driven strategy generally includes Investee Funds with relative value trades across global fixed income markets, intra-country trades, yield curve trades, basis trades, on the run vs. off the run trades, cash vs. derivative trades and volatility arbitrage in fixed income. |
See accompanying Notes to Consolidated Financial Statements.
21
Blackstone Alternative Alpha Master Fund and Subsidiary
Consolidated Statement of Operations
For the Six Months Ended September 30, 2018 (Unaudited)
Net Investment Loss: |
||||
Income: |
||||
Interest |
$ | 329,572 | ||
Other |
20,025 | |||
|
|
|||
Total income |
349,597 | |||
|
|
|||
Expenses: |
||||
Management fees |
4,811,581 | |||
Administration |
199,706 | |||
Commitment fees |
142,079 | |||
Risk monitoring |
124,584 | |||
Insurance |
99,494 | |||
Legal |
90,317 | |||
Professional |
87,943 | |||
Transfer agent fees |
44,658 | |||
Interest |
43,763 | |||
Custody |
40,807 | |||
Trustee |
37,218 | |||
Other |
34,435 | |||
|
|
|||
Total expenses |
5,756,585 | |||
|
|
|||
Net Investment Loss |
(5,406,988 | ) | ||
|
|
|||
Realized and Unrealized Gain from Investments: |
||||
Net realized gain from investments in Investee Funds |
23,001,403 | |||
Net change in unrealized depreciation from investments in Investee Funds |
(49,400 | ) | ||
|
|
|||
Realized and Unrealized Gain from Investments |
22,952,003 | |||
|
|
|||
Net Increase in Net Assets resulting from Operations |
$ | 17,545,015 | ||
|
|
See accompanying Notes to Consolidated Financial Statements.
22
Blackstone Alternative Alpha Master Fund and Subsidiary
Consolidated Statements of Changes in Net Assets
For the Six Months Ended September 30, 2018 (Unaudited) |
For the Year Ended March 31, 2018 |
|||||||
Increase (Decrease) in Net Assets: |
||||||||
Operations: |
||||||||
Net investment loss |
$ | (5,406,988 | ) | $ | (11,117,647 | ) | ||
Net realized gain from investments in Investee Funds |
23,001,403 | 26,907,890 | ||||||
Net change in unrealized appreciation from investments in Investee Funds |
(49,400 | ) | 23,832,804 | |||||
|
|
|
|
|||||
Net increase in net assets resulting from operations |
17,545,015 | 39,623,047 | ||||||
|
|
|
|
|||||
Distributions to shareholders from ordinary income |
| (12,641,629 | ) | |||||
Distributions to shareholders from net realized capital gains |
| (18,852,407 | ) | |||||
|
|
|
|
|||||
Distributions to shareholders |
| (31,494,036 | ) | |||||
|
|
|
|
|||||
Capital Transactions: |
||||||||
Shareholder subscriptions |
9,886,000 | 40,464,720 | ||||||
Shareholder redemptions |
(67,439,323) | (174,737,872 | ) | |||||
Reinvestment of distributions |
| 31,494,036 | ||||||
|
|
|
|
|||||
Net decrease in net assets from capital transactions |
(57,553,323 | ) | (102,779,116 | ) | ||||
|
|
|
|
|||||
Net Assets: |
||||||||
Total decrease in net assets |
(40,008,308 | ) | (94,650,105 | ) | ||||
Beginning of period |
769,012,018 | 863,662,123 | ||||||
|
|
|
|
|||||
End of period |
$ | 729,003,710 | $ | 769,012,018 | ||||
|
|
|
|
|||||
Accumulated net investment loss |
$ | (32,313,488 | ) | $ | (27,066,512 | ) | ||
|
|
|
|
|||||
Share Transactions: |
||||||||
Beginning of period |
640,352 | 725,329 | ||||||
Shares issued |
8,133 | 33,365 | ||||||
Shares redeemed |
(55,155 | ) | (144,830 | ) | ||||
Shares reinvested |
| 26,488 | ||||||
|
|
|
|
|||||
End of period |
593,330 | 640,352 | ||||||
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
23
Blackstone Alternative Alpha Master Fund and Subsidiary
Consolidated Statement of Cash Flows
For the Six Months Ended September 30, 2018 (Unaudited)
Cash Flows from Operating Activities: |
||||
Net increase in net assets resulting from operations |
$ | 17,545,015 | ||
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities: |
||||
Net realized gain from investments in Investee Funds |
(23,001,403 | ) | ||
Net change in unrealized appreciation from investments in Investee Funds |
49,400 | |||
Purchases of investments in Investee Funds and subscription paid in advance to |
(163,062,008 | ) | ||
Investee Fund |
||||
Proceeds from redemptions of investments in Investee Funds and receivable for |
215,533,575 | |||
investments sold |
||||
Decrease in prepaid expenses |
34,434 | |||
Decrease in interest receivable |
217,498 | |||
Increase in other assets |
(2,870 | ) | ||
Decrease in due from feeder funds |
1,341,614 | |||
Decrease in management fees payable |
(153,884 | ) | ||
Increase in payable to Investment Manager |
576,496 | |||
Increase in commitment fees payable |
776 | |||
Increase in accrued expenses and other liabilities |
146,698 | |||
|
|
|||
Net cash provided by operating activities |
49,225,341 | |||
|
|
|||
Cash Flows from Financing Activities: |
||||
Proceeds from shareholder subscriptions |
9,886,000 | |||
Payments for shareholder redemptions of shares and payable for shares repurchased |
(71,977,218 | ) | ||
Proceeds from borrowings under credit facility |
39,000,000 | |||
Repayment of borrowings under credit facility |
(39,000,000 | ) | ||
|
|
|||
Net cash used in financing activities |
(62,091,218 | ) | ||
|
|
|||
Net change in cash |
(12,865,877 | ) | ||
Cash, beginning of period |
13,470,030 | |||
|
|
|||
Cash, end of period |
$ | 604,153 | ||
|
|
See accompanying Notes to Consolidated Financial Statements.
24
Blackstone Alternative Alpha Master Fund and Subsidiary
Consolidated Financial Highlights
For the Six Months Ended September 30, 2018 (Unaudited) |
For the Year Ended March 31, 2018 |
For the Year Ended March 31, 2017 |
For the Year Ended March 31, 2016 |
For the Year Ended March 31, 2015 |
||||||||||||||||
Per Share Operating Performance: |
||||||||||||||||||||
Net Asset Value, Beginning of Period |
$ | 1,200.92 | $ | 1,190.72 | $ | 1,073.77 | $ | 1,234.31 | $ | 1,160.74 | ||||||||||
Income/(loss) from Investment Operations: |
||||||||||||||||||||
Net investment loss1 |
(8.58 | ) | (16.20 | ) | (14.16 | ) | (15.48 | ) | (18.30 | ) | ||||||||||
Net realized and unrealized gain/(loss) from investments |
36.32 | 74.00 | 133.39 | (114.95 | ) | 136.51 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income/(loss) from investment operations |
27.74 | 57.80 | 119.23 | (130.43 | ) | 118.21 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Distributions to shareholders from ordinary income |
| (19.10 | ) | (2.28 | ) | | | |||||||||||||
Distributions to shareholders from net realized capital gains |
| (28.50 | ) | | (30.11 | ) | (44.64 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net Asset Value, end of period |
$ | 1,228.66 | $ | 1,200.92 | $ | 1,190.72 | $ | 1,073.77 | $ | 1,234.31 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Financial Ratios:2 |
||||||||||||||||||||
Expenses to average net assets |
1.49 | % | 1.48 | % | 1.46 | % | 1.45 | % | 1.53 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net investment loss to average net assets |
(1.41 | )% | (1.33 | )% | (1.25 | )% | (1.33 | )% | (1.53 | )% | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Portfolio turnover |
21.77 | % | 2.47 | % | 13.15 | % | 8.97 | % | 8.68 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total return |
2.31 | %3 | 4.90 | % | 11.11 | % | (10.70 | )% | 10.33 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net assets, end of period (000s) |
$ | 729,004 | $ | 769,012 | $ | 863,662 | $ | 944,402 | $ | 815,598 | ||||||||||
|
|
|
|
|
|
|
|
|
|
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.
25
Blackstone Alternative Alpha Master Fund and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2018 (Unaudited)
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 attractive long-term risk-adjusted returns.
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, the Feeder Funds and the Intermediate Fund is a commodity pool subject to regulation by the Commodity Futures Trading Commission (CFTC). BAAM, the commodity pool operator of the Master Fund, the Feeder Funds and the Intermediate Fund, is registered with the CFTC, but has claimed relief under Rule 4.12(c)(3) of the Commodity Exchange Act, with respect to the Master Fund and the Feeder Funds, and Rule 4.7 with respect to the Intermediate Fund, 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 respective 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 registration statement 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.
The Master Fund is an investment company in accordance with Accounting Standards Codification 946, Financial ServicesInvestment Companies (ASC 946), which defines investment companies and prescribes specialized accounting and reporting requirements for investment companies. The Master Fund follows the accounting and reporting guidance in Topic 946, as described in FASB Accounting Standards Update No. 2013-08.
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.
Consolidation
The Fund consolidates its investment in the Intermediate Fund. Accordingly, the consolidated financial statements include the assets and liabilities and the results of operations of the Intermediate Fund. All material intercompany balances and transactions have been eliminated.
26
Blackstone Alternative Alpha Master Fund and Subsidiary
Notes to Consolidated Financial Statements (Continued)
September 30, 2018 (Unaudited)
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 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 investment partnerships, managed funds, and other investment funds (Investee Fund(s)) is generally determined using the reported net asset value per share of the Investee Fund, or its equivalent (NAV), as a practical expedient for fair value 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 ASC 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.
Additionally, the Consolidated Master Fund may invest in promissory notes issued by an Investee Fund. Such promissory notes are secured by a lien upon assets of the Investee Fund and are classified as investments in Investee Funds. The fair value of Investee Fund promissory notes is based on the residual value of the notes after subtracting the fair value of the Investee Funds shares from the Investee Funds enterprise value. The enterprise value of the Investee Fund is based upon the reported NAV of the Investee Fund gross of the par value of promissory note liabilities. An investment in promissory notes is classified as Level 3 of the fair value hierarchy and the most significant unobservable input in determining fair value is the reported NAV of the Investee Fund. As of period-end, the promissory note was no longer outstanding due to sales of $5,065,787 during the period. There were no transfers in or out of level 3 during the period.
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 realized and unrealized gain 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.
27
Blackstone Alternative Alpha Master Fund and Subsidiary
Notes to Consolidated Financial Statements (Continued)
September 30, 2018 (Unaudited)
Fair Value of Financial Instruments
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 Expenses
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.
Cash
At September 30, 2018, the Consolidated Master Fund had $604,153 of cash held at a major U.S. bank.
Contingencies
Under the Master Funds Amended and Restated Declaration of Trust (Declaration of Trust), the Master Funds officers and Trustees 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. To date, the Consolidated Master Fund has not had claims or losses pursuant to these contracts, although there is no assurance that it will not incur losses in connection with these indemnifications in the future.
Income Taxes
The Master Funds policy is to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986 applicable to regulated investment companies 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 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 returns for the current open tax years ended October 31, 2014, October 31, 2015, October 31, 2016 and October 31, 2017 and has concluded, as of September 30, 2018, that no provision for income tax would be required in the Master Funds financial statements. The Master Funds federal and state income and federal excise tax returns for the current open tax years 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. As a wholly-owned CFC, the Intermediate Funds net income and capital gains, to the extent of its earnings and profits, are included in the Master Funds investment company taxable income.
For the current open tax years 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 Master Funds financial statements. Management is also not aware of any tax positions for which it is reasonably
28
Blackstone Alternative Alpha Master Fund and Subsidiary
Notes to Consolidated Financial Statements (Continued)
September 30, 2018 (Unaudited)
possible that the total amounts of uncertain unrecognized tax benefits will significantly change in the next twelve months. As a result, no income tax liability or expense, including interest and penalties, has been recorded within these consolidated financial statements.
Dividends and Distributions to Shareholders
Dividends from net investment income and distributions of capital gains, if any, are declared and paid at least 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.
Borrowings Under Credit Facility
The Master Fund has a secured revolving borrowing facility (the Facility) with borrowing capacity of $43,000,000 (the Maximum Principal Amount). Borrowings under the Facility are used primarily for bridge financing purposes and are secured by the assets of the Master Fund. Under the terms of the agreement, the Maximum Principal Amount may be increased or decreased upon mutual written consent of the Master Fund and the lender. Outstanding borrowings bear interest at a rate equal to 3-month LIBOR plus 1.00% per annum (3.38% at September 30, 2018). A commitment fee is charged in the amount of 0.65% per annum on the total commitment amount of the Facility. Outstanding borrowings and accrued interest are due no later than December 31, 2018, the expiration date of the Facility, at which time the Master Fund and the lender can agree to extend the existing agreement. At September 30, 2018, the Master Fund had no outstanding borrowings under the Facility.
During the period ended September 30, 2018, the Master Funds maximum outstanding borrowing was $39,000,000. The weighted average principal outstanding during the period was approximately $1,495,890 at a weighted average interest rate of 3.33% per annum.
Restricted Securities
The Master Fund may purchase securities which are considered restricted. Restricted securities are securities that cannot be offered for public sale without first being registered under the Securities Act of 1933, as amended, or are subject to contractual restrictions on public sales. Many such restricted securities may be resold in the secondary market in transactions exempt from registration. The Master Fund will not incur any registration costs upon such resales. The Master Fund cannot demand registration of restricted securities. The Master Funds restricted securities, like other securities, are priced in accordance with the Valuation Procedures. Restricted securities are identified in the Consolidated Schedule of Investments.
Recent Accounting Pronouncements and Regulatory Updates
In August 2018, the Financial Accounting Standards Board (FASB) issued ASU No. 2018-13, Fair Value Measurements (Topic 820): Disclosure FrameworkChanges to the Disclosure Requirements for Fair Value Measurement to streamline disclosure requirements. The new standard eliminated the requirements to disclose Level 1 and Level 2 transfers, policy of timing of transfers, valuation process for Level 3 fair value measurements and the changes in unrealized gains and losses included in Level 3 investments held at the end of the reporting period. Also there are modifications to disclosure requirements for the timing of the liquidation of an underlying Investee Funds assets, for restrictions from redemption from an underlying Investee Fund, and for non-public companies, the Level 3 rollforward. The guidance is effective for financial statement with fiscal years beginning on or after December 15, 2019. Early adoption is permitted and is not expected to have a material impact on the financial statements.
29
Blackstone Alternative Alpha Master Fund and Subsidiary
Notes to Consolidated Financial Statements (Continued)
September 30, 2018 (Unaudited)
In November 2016, FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230)Restricted Cash. The new guidance is intended to change the presentation of restricted cash on the statement of cash flows. The new standard affects all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows under Topic 230. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted. Management is currently evaluating the new guidance. The adoption of ASU No. 2016-18 is not expected to have a material impact on the consolidated financial statements.
4. Investments
Major Investment Strategies
Investments in Investee Funds that are non-redeemable or subject to other restrictions such as a lockup at the measurement date or have the ability to limit the individual amount of investor redemptions shall be classified as having a redemption restriction.
The following table summarizes investments in Investee Funds, by investment strategy, the unfunded commitment of each strategy (if applicable), and the amount of the investment in Investee Fund that cannot be redeemed because of redemption restrictions put in place by the Investee Fund.
Investments in Investee Funds by Strategy |
Unfunded Commitment $ |
Non-Redeemable Investments (A) |
Other Restricted Investments (B) |
Investments Subject to No Restrictions |
Total $ | |||||||||
Amount $ |
Redemption Restriction Commencement Date |
Amount $ |
Redemption Restriction Term |
Amount $ | ||||||||||
Equity | | 60,073 | November 2014 |
271,276,570 | 9 months- 48 months |
140,407,472 | 411,744,115 | |||||||
Multi-Category | | | | 55,460,858 | 12 months- 24 months |
102,504,715 | 157,965,573 | |||||||
Global Macro | | | | 62,661,639 | 10 months | | 62,661,639 | |||||||
Relative Value | | | | | | 62,453,752 | 62,453,752 | |||||||
Interest Rate-Driven | | | | 24,931,520 | 12 months | | 24,931,520 | |||||||
Total | | 60,073 | | 414,330,587 | | 305,365,939 | 719,756,599 |
(A) Investments in Investee Funds cannot currently be redeemed and the remaining redemption restriction period is not known. The date the redemption restriction commenced is disclosed.
(B) Investments subject to other restrictions include investments in Investee Funds that are subject to a lockup at the measurement date and/or have the ability to limit the individual amount of investor redemptions. The redemption restriction term is based on the restriction period (or range of restriction periods) for Investee Funds as defined in each respective Investee Funds governing legal agreement, without
30
Blackstone Alternative Alpha Master Fund and Subsidiary
Notes to Consolidated Financial Statements (Continued)
September 30, 2018 (Unaudited)
consideration of the length of time elapsed from the date of the investments in the Investee Funds. 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 which were made at differing points in time.
Purchases and sales of investments (inclusive of non-cash activity) for the period ended September 30, 2018 were $152,132,008 and $162,686,154, 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 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 Master Funds Declaration of Trust.
Repurchase of Shares
The Master 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. In determining whether the Master Fund should repurchase Shares from shareholders pursuant to written tenders, the Master Funds Board will consider the Investment Managers recommendations, among other factors. The Investment Manager expects to recommend quarterly repurchases.
6. Related Party Transactions
Blackstone Holdings Finance Co. L.L.C. (FINCO), an affiliate of the Fund, pays expenses on behalf of the Fund. The Fund reimburses FINCO for such expenses paid on behalf of the Fund. FINCO does not charge any fees for providing such administrative services. As of September 30, 2018, the amount outstanding is $817,875.
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 at the end of such month before giving effect to the payment of the management fee or any purchases or repurchases of Master Fund shares or any distributions by the Master Fund. 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. As of September 30, 2018, the Consolidated Master Fund had $817,875 payable to the Investment Manager recorded in the Consolidated Statement of Assets and Liabilities.
31
Blackstone Alternative Alpha Master Fund and Subsidiary
Notes to Consolidated Financial Statements (Continued)
September 30, 2018 (Unaudited)
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 Consolidated Master Funds market risk is also impacted by an Investee Funds exposure to interest rate risk, foreign exchange risk, and industry or geographic concentration 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 entered into by the Investee Funds. 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 fails to perform its obligations under contractual terms and if the Investee Funds fail to perform under their respective agreements.
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, 2018, 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 |
$ | 623,874,347 | |||
|
|
||||
Gross unrealized appreciation |
100,446,978 | ||||
Gross unrealized depreciation |
(4,564,726 | ) | |||
|
|
||||
Net unrealized appreciation |
$ | 95,882,252 | |||
|
|
9. Subsequent Events
The Investment Manager 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.
32
Blackstone Alternative Alpha Master Fund and Subsidiary
September 30, 2018 (Unaudited)
Management of the Fund
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 or the Investment Manager, (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 Consolidated Master Funds Board of Trustees also serves as the board of trustees of the Feeder Funds.
Compensation for Trustees
Each of the Independent Trustees is paid by the Fund Complex (as defined below) at a rate of $110,000 per fiscal year in the aggregate for their services to the Fund Complex (including the subsidiaries of Blackstone Alternative Multi-Strategy Fund, the Subsidiaries). Mr. Coates (a Trustee being treated as an interested person (as defined in the 1940 Act) of the Fund due to his employment by Envestnet, Inc., which conducts business with certain Investee Funds and may conduct business with the Investment Adviser and its affiliates in the future) is paid by the Fund Complex at a rate of $95,000 per fiscal year in the aggregate for his services to the Fund Complex (excluding the Subsidiaries). The Chairpersons of the Board of Trustees and the Audit Committee are paid by the Fund Complex an additional $25,000 and $15,000, respectively, per fiscal year. These payments are allocated to the Feeder-Funds and the other funds in the Fund Complex on the basis of assets under management. The Fund Complex also pays for the Trustees travel expenses related to Board of Trustees meetings. The Trustees do not receive any pension or retirement benefits from the Fund Complex.
The following table sets forth information covering the total compensation payable by the Feeder Funds and Blackstone Alternative Alpha Master Fund (collectively, the BAAF Funds) during the semi-annual period ended September 30, 2018 to the persons who serve, and who are expected to continue serving, as Trustees of the BAAF Funds during such period.
Name of Independent Trustee | Aggregate Compensation From the BAAF Funds |
Total Compensation From the Fund Complex1 | ||||||||
John M. Brown |
$ | 7,392 | $ | 67,500 | ||||||
Peter M. Gilbert |
$ | 5,851 | $ | 55,000 | ||||||
Paul J. Lawler |
$ | 5,851 | $ | 55,000 | ||||||
Kristen M. Leopold |
$ | 6,775 | $ | 62,500 | ||||||
Name of Interested Trustee | Aggregate Compensation From the BAAF Funds |
Total Compensation From the Fund Complex1 | ||||||||
Frank J. Coates |
$ | 5,851 | $ | 47,500 | ||||||
Peter Koffler |
None | None |
1 | These amounts represent aggregate compensation for the services of each Trustee to each fund in the Fund Complex, for which each Trustee serves as trustee. For the purposes of this table, the Fund Complex consists of the BAAF Funds, Blackstone Alternative Multi-Strategy Fund, a series of Blackstone Alternative Investment Funds, and the Subsidiaries. |
33
Blackstone Alternative Alpha Master Fund and Subsidiary
Supplemental Information (Continued)
September 30, 2018 (Unaudited)
Allocation of Investments
The following chart indicates the allocation of investments among the asset classes in the Consolidated Master Fund as of September 30, 2018.
Assets Class(1) |
Fair Value |
% | ||||||||
Equity |
$ | 411,744,115 | 57.21 | % | ||||||
Multi-Category |
157,965,573 | 21.94 | % | |||||||
Global Macro |
62,661,639 | 8.71 | % | |||||||
Relative Value |
62,453,752 | 8.68 | % | |||||||
Interest Rate-Driven |
24,931,520 | 3.46 | % | |||||||
|
|
|
|
|||||||
Total Investments |
$ | 719,756,599 | 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 Funds financial statements. |
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 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 how the Master Fund and Feeder Funds voted proxies relating to their portfolio securities during the most recent 12-month period ended June 30, will be available by August 31 of that year (1) without charge, upon request, by calling toll free, 1-855-890-7725 and (2) on the SECs website at http://www.sec.gov.
Additional Information
The Master Funds prospectus and statement of additional information includes additional information about the Trustees of the Fund. The prospectus and statement of additional information is available, without charge, upon request by calling 1-855-890-7725.
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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 request a copy of the Funds prospectus and statement of additional information without charge by calling the Funds transfer agent at 1-855-890-7725.
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 Investment Management Companies. |
(a) Not applicable to this semi-annual report.
(b)-(a)(1) Identification of New Portfolio Manager and Description of Role of Portfolio Manager - as of September 30, 2018.
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). BAAMs Investment Committee has primary responsibility for the day-to-day management of the portfolio of such funds. Information regarding the new portfolio manager serving on BAAMs Investment Committee is set forth below.
Name |
Portfolio Manager of the |
Title and Recent Bibliography | ||
Ilan Sender |
2018 | 2015Present: Managing Director, Blackstone (Hedge Fund Solutions) | ||
2013-2014: Managing Director, Claar Advisors |
(b)-(a)(2) Other Accounts Managed by Portfolio Manager
As of September 30, 2018, the table below identifies the number of accounts (other than the Registrant, the Master Fund or BAAF) for which the new portfolio manager of the Registrant (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. For each category, the number of accounts and total assets in the accounts where fees are based on performance are also indicated.
Portfolio Manager |
Type of Account | Number of Accounts Managed |
Total Assets Managed |
Number of Accounts for which Advisory Fee is Performance Based |
Assets Managed for which Advisory Fee is Performance Based | ||||||||||||||||||||
Ilan Sender* |
Registered Investment Companies | 0 | $ | 0 | 0 | $ | 0 | ||||||||||||||||||
Other Pooled Investment Vehicles | 0 | $ | 0 | 0 | $ | 0 | |||||||||||||||||||
Other Accounts | 0 | $ | 0 | 0 | $ | 0 |
* | Information provided as of September 1, 2018. |
Potential Conflicts of Interest. The Registrant (the Fund) and the Master Fund 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 Fund, the Master Fund 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 accordance with BAAMs written allocation procedures, which are governed by the principle of fair and equitable allocation, taking into account various investment criteria, such as the relative amounts of capital available for investments, the relative assets under management of the funds or accounts seeking to participate, relative exposure to market trends, investment objectives, available capacity, liquidity, diversification, contractual restrictions and guidelines 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 Blackstones Hedge Fund Solutions Group, acts as an investment manager, managing member, general partner, 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 Fund, the Master Fund, 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 Fund and the Master Fund and are limited in capacity, BAAM may be required to choose among the Fund, the Master Fund, 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 and in accordance with BAAMs written allocation procedures, taking into account various investment criteria, such as the relative amounts of capital available for investments, the relative assets under management of the funds or accounts seeking to participate, relative exposure to market trends, investment objectives, available capacity, liquidity, diversification, contractual restrictions and guidelines 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 potential conflicts of interest between the Fund, the Master Fund and other investment vehicles managed by 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 (or in the future may be) otherwise affiliated with, various investment managers (each fund managed by such an investment manager, a Blackstone Affiliated Fund). These ownership interests range from minority to 100%. Blackstone may receive a substantial portion of the revenues attributable to Blackstone Affiliated Funds. 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 Fund and the Master Fund may not be able to invest in the Blackstone Affiliated Funds, even if the investment would be appropriate for the Fund or the Master Fund. These prohibitions are designed to prevent affiliates and insiders from using a registered investment company (such as the Fund and 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 Funds or the Master Funds assets to such Blackstone Affiliated Fund since affiliates of BAAM have a direct or indirect financial interest in the success of such fund.
Blackstone Strategic Alliance Advisors L.L.C.
Blackstone Strategic Alliance Advisors L.L.C. (BSAA), an affiliate of BAAM, 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 these seed investments, 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 Fund and the Master Fund typically will not be able to invest in the Emerging Manager Vehicles, even if the investment would be appropriate for the Fund or the Master Fund. These prohibitions are designed to prevent affiliates and insiders from using a registered investment company (such as the Fund and 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 Fund or the Master Fund in an Emerging Manager Vehicle would not be prohibited under the 1940 Act, the investment generally would benefit the Strategic Alliance Fund and a withdrawal/redemption by the Fund or the Master Fund from such fund generally would be detrimental to the Strategic Alliance Fund. In particular, to the extent that a BAAM Multi-Manager Fund (including the Fund or the Master Fund) invests with an Emerging Manager, the Strategic Alliance Fund will receive a portion of the revenue the Emerging Manager receives in respect of the BAAM Multi-Manager Funds investment. Accordingly, there may be a conflict between BAAMs fiduciary obligation to the Fund and the Master Fund, on the one hand, and BAAMs interest in the success of the Strategic Alliance Funds, on the other hand. In order to mitigate the potential conflict, BSAA and the Strategic Alliance Funds general partner will waive their share of any management or performance-based allocations or fees derived from the BAAM Multi-Manager Funds investment with an Emerging Manager. Those amounts will be passed through or rebated to the investing Fund. This pass through/rebate generally also applies in the case of investments with an Emerging Manager outside of its commingled vehicle. The BAAM Multi-Manager Funds (including the Fund and the Master Fund) will not otherwise participate in any of the economic arrangements related to any Emerging Manager with which they invest.
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, manages certain funds (the BSCA Funds) that make investments typically in the form of equity interests or revenue shares in established alternative asset managers (the Strategic Capital Managers). The nature of BAAMs relationship with BSCA and BSCAs 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 Fund and the Master Fund may not be able to invest in funds managed by a Strategic Capital Manager, even if the investment would be appropriate for the Fund or the Master Fund. These prohibitions are designed to prevent affiliates and insiders from using a registered investment company (such as the Fund and 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 Fund or the Master Fund in a fund managed by a Strategic Capital Manager would not be prohibited under the 1940 Act, it generally would benefit the BSCA Funds and a withdrawal/redemption by the Fund or the Master Fund from such fund generally would be detrimental to the BSCA Funds. Accordingly, there may be a conflict between BAAMs fiduciary obligation to the Fund and the Master Fund, on the one hand, and BAAMs interest in the success of the BSCA Funds, on the other hand.
In particular, to the extent that a BAAM Multi-Manager Fund (including the Fund or the Master Fund) invests with a Strategic Capital Manager, the BSCA Funds will receive a portion of the revenue the Strategic Capital Manager receives in respect of the BAAM Multi-Manager Funds investment. Accordingly, there may be a conflict between BAAMs fiduciary obligation to the Fund and the Master Fund, on the one hand, and BAAMs interest in the success of the BSCA Funds, on the other hand. In order to mitigate the potential conflict, BSCA and the BSCA Funds general partner will waive their share of any management or performance-based allocations or fees derived from the Funds or the Master Funds investment with a Strategic Capital Manager. Those amounts will be passed through or rebated to the Fund or Master Fund. This pass through/rebate generally also applies in the case of investments with a Strategic Capital Manager outside of its commingled vehicles. The BAAM Multi-Manager Funds (including the Fund and the Master Fund) will not otherwise participate in any of the economic arrangements related to any Strategic Capital Manager with which they invest.
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 Fund and the Master Fund expect to draw on for purposes of pursuing attractive investment opportunities. Because Blackstone has many different asset management businesses, it is subject to a number of actual and potential conflicts of interest, greater regulatory oversight, and 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 Fund and the Master Fund expect to utilize for purposes of finding attractive investments. For example, the Investment Manager generally will be restricted from investing in (i) portfolio companies of Blackstones private equity business and (ii) issuers with respect to which any investment advisor in the Blackstone Hedge Fund Solutions group has received material non-public information (the Restricted Issuers). These restrictions generally will not apply to Portfolio Managers. Other than with respect to the Restricted Issuers, the Investment Manager generally will be permitted to invest in issuers in which funds and accounts managed by affiliates of the Investment Manager have an interest. The Investment Manager could be forced to sell or could be restricted from selling existing investments, or could be precluded from making new investments, as a result of a relationship that Blackstone has or as a result of investments Blackstone and its clients and its affiliates have made.
Blackstone maintains information barriers that are designed to protect against the improper possession and/or use of material non-public information. Generally, no employee of the Investment Manager may contact an employee of another Blackstone group outside of the Blackstone Hedge Fund Solutions group, and vice versa, about a substantive business matter, without consent of the compliance department of the Investment Manager and, if appropriate, having the compliance department chaperone such contact. Prior to receiving confidential information each Blackstone group typically seeks to limit the impact that such receipt may have on other Blackstone groups by, among other things, limiting the applicability of any confidentiality agreement to the particular Blackstone group(s) that receive the confidential information. With respect to the Investment Managers ability to allocate investment opportunities to the Feeder Fund and the Master Fund where such opportunities are within the common investment programs of the Feeder Fund and other clients of the Hedge Fund Solutions group, Blackstone has established general guidelines for determining how such allocations are made, which, among other things, sets forth priorities and presumptions regarding allocation for certain types of investments and other matters. The application of those guidelines may result in the Feeder Fund and the Master Fund not participating (and/or not participating to the same extent) in certain investment opportunities in which it would have otherwise participated had the related allocations been determined without regard to such guidelines. It may also be the case that the Feeder Fund and the Master Fund will benefit from the relationships of other clients of the Hedge Fund Solutions group and Blackstone with respect to the availability of a particular investment opportunity.
Blackstone Proprietary Funds
From time to time, Blackstone hires or enters 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 will receive a substantial portion of the revenues attributable to these Proprietary Funds, in some instances greater than the revenues it receives from the Fund or the Master Fund. 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 Fund and the Master Fund typically will not be able to invest in the Proprietary Funds, even if the investment would be appropriate for the Fund or the Master Fund. These prohibitions are designed to prevent affiliates and insiders from using a registered investment company (such as the Fund and the Master Fund) to benefit themselves to the detriment of the registered investment company and its shareholders.
Middle- and Back-Office Services
BAAM owns a non-controlling, minority equity interest in Arcesium LLC (Arcesium) and the President of the Fund and the Master Fund, who is also the Chief Operating Officer of BAAM, serves on the board of Arcesium. To the extent permitted by the 1940 Act, Arcesium provides certain middle- and back-office services and technology to one or more Portfolio Managers and Investment Funds. The services and technology provided to the applicable Investment Funds by Arcesium are expected to support various post-trade activities, including trade capture, cash and position reconciliations, asset servicing, margin and collateral monitoring, pricing-related services, portfolio data warehousing, related recordkeeping, and other services and technology as agreed between the applicable Portfolio Managers and Arcesium. BAAM may recommend Arcesiums services to certain Portfolio Managers, and certain Portfolio Managers from time to time may hire Arcesium. BAAM will not require any Portfolio Managers to hire Arcesium as a condition to investing in the Investment Funds of said Portfolio Managers nor will it favor Portfolio Managers who use Arcesium over Portfolio Managers who use other qualified middle- and back-office services providers when selecting Portfolio Managers for the Funds portfolio.
In return for its services, Arcesium typically receives a one-time upfront implementation fee, an annual software use and service fee (partly based on the relevant funds net asset value), and a monthly financial operations services fee (also based on the relevant funds net asset value) (such fees in the aggregate, the Arcesium Fees). The Arcesium Fees will be negotiated directly by Arcesium and the Portfolio Managers. Because the Arcesium Fees are based, in part, on the net asset value of a fund, which, in the case of the Fund, is generally determined by the Administrator under the supervision of BAAM, there are potential conflicts with respect to calculation of the fees. Additional information regarding the Arcesium Fees is available from BAAM upon request.
In connection with BAAMs minority equity ownership interest in Arcesium, BAAM is expected to receive cash distributions from Arcesium from time to time. In accordance with applicable law, these cash distributions are expected to be used to reimburse BAAM for the operating expenses of Arcesium for which BAAM has previously paid. Following such expected reimbursement, cash received by BAAM from Arcesium will be applied to reimburse funds/accounts that are managed by BAAM or its affiliates for the amount of Arcesium Fees paid by such entities to Arcesium. Accordingly, a fund may be reimbursed in part or in full for its payment of Arcesium Fees; however, there is no guarantee of reimbursement in any event. In the event that cash distributions received by BAAM from Arcesium with respect to these funds/accounts use of Arcesium exceed the Arcesium Fees paid by the funds/accounts, any excess amounts will be retained by BAAM. In addition, in the event that Arcesium is sold to a third-party, there is no guarantee that BAAM will continue to receive such cash distributions and that the funds/accounts will be reimbursed for any portion of the Arcesium Fees paid by it.
Other Activities of Blackstone, BAAM and its Affiliates
BAAM devotes to the Fund and the Master Fund as much time as is necessary or appropriate, in its judgment, to manage the Funds and the Master Funds activities. Certain inherent conflicts of interest arise from the fact that BAAM, Blackstone and their affiliates act on behalf of the Fund and the Master Fund and may also carry on investment activities for a significant number of other clients (including registered investment companies and other investment funds sponsored by BAAM, Blackstone or their affiliates) in which the Fund or the Master Fund has 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 Fund or the Master Fund. 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 Fund or the Master Fund but will be allocated among the Fund, the Master Fund and BAAMs other clients.
BAAMs future investment activities, including the establishment of registered investment companies and other investment funds, will 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 Fund or the Master Fund may otherwise have to participate in investments. The Fund or the Master Fund may be forced to waive voting rights or sell or hold existing investments as a result of 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 Funds or the Master Funds assets in an Investment Fund, or may withdraw/redeem all or a portion of an existing Fund or Master 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 Fund, the Master Fund and BAAMs other clients if that investment was made or maintained. To the extent that the adverse regulatory implications are attributable to the Funds or Master Funds investment, BAAM may cause the Fund or Master Fund 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 Fund or the Master Fund, any investment that BAAM or its affiliates may purchase or sell, or recommend for purchase or sale for their own accounts, for the accounts of family members 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 Fund or the Master Fund but, for various reasons, were not pursued by, or available to, the Fund or the Master Fund. BAAM, Blackstone and their affiliates may also engage in business activities unrelated to the Fund and the Master Fund 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 Fund or the Master Fund 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 Fund or the Master Fund.
Blackstone employees, including employees of BAAM, may invest in hedge funds or other investment entities, including potential competitors of the Fund. 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 Fund, the Master Fund, BAAM Multi-Manager Funds or other discretionary clients. Accordingly, the Fund, the Master Fund, 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 Fund, the Master Fund, BAAM Multi-Manager Funds or other discretionary accounts. In addition, through receiving investment recommendations, non-discretionary clients may from time to time effectively have access to or have the right to obtain information about investment decisions made for the Fund, the Master Fund, BAAM Multi-Manager Funds or other discretionary clients. Based on such information, the non-discretionary clients may take actions that are adverse to the Fund, the Master Fund, BAAM Multi-Manager Funds or other discretionary BAAM clients.
Transactions Between the Fund and Other BAAM Clients
BAAM, to the extent permitted by applicable law, including the 1940 Act, may cause the Fund or the Master Fund 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.
(b)-(a)(3) Compensation of Portfolio Manager
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.
(b)-(a)(4) Securities Ownership of Portfolio Manager
The table below shows the dollar range of the interests of the Registrant and the Master Fund beneficially owned by the Portfolio Manager as of September 30, 2018.
Portfolio Manager |
Registrant | Master Fund | ||||||||
Ilan Sender |
None | None |
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 procedures by which the 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. | Disclosure of Securities Lending Activities for Closed-End Management Investment Companies. |
(a) Not applicable.
(b) Not applicable.
Item 13. | 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. |
(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 November 21, 2018
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 November 21, 2018
By (Signature and Title) | /s/ Arthur Liao |
|||
Arthur Liao, Treasurer (Principal Financial and Accounting Officer) |
Date November 21, 2018
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 periods 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. |
November 21, 2018 |
/s/ Brian F. Gavin | |||
Date | Brian 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 periods 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. |
November 21, 2018 | /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, 2018 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. |
Date: November 21, 2018 |
/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, 2018 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. |
Date: November 21, 2018 |
/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.