UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-22635
Blackstone Alternative Alpha Master Fund
(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
Registrant’s telephone number, including area code: (212) 583-5000
Date of fiscal year end: March 31
Date of reporting period: March 31, 2013
Item 1. | Reports to Stockholders. |
The Report to Shareholders is attached hereto.
Blackstone
Blackstone Alternative Asset Management L.P.
ANNUAL REPORT (Unaudited)
For the Period Ended March 31, 2013
Blackstone Alternative Alpha Master Fund and Subsidiary
Blackstone Alternative Alpha Master Fund and Subsidiary | ||||
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholder and Board of Trustees of
Blackstone Alternative Alpha Master Fund and Subsidiary:
We have audited the accompanying consolidated statement of assets and liabilities of Blackstone Alternative Alpha Master Fund and Subsidiary (the “Master Fund”), including the consolidated schedule of investments, as of March 31, 2013, and the related consolidated statements of operations, changes in net assets, and cash flows, and the consolidated financial highlights for year then ended. These financial statements and financial highlights are the responsibility of the Master Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Master Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Master Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of investments in investee funds owned as of March 31, 2013, by correspondence with the investee funds’ investment advisor or administrator. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements and consolidated financial highlights referred to above present fairly, in all material respects, the financial position of Blackstone Alternative Alpha Master Fund and Subsidiary as of March 31, 2013, the results of their operations, the changes in their net assets, and their cash flows, and the consolidated financial highlights for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
New York, New York
May 28, 2013
Member of
Deloitte Touche Tohmatsu
1
Blackstone Alternative Alpha Master Fund and Subsidiary
Consolidated Statement of Assets and Liabilities
As of March 31, 2013
Assets: | ||||
Investments in Investee Funds, at fair value (cost $173,479,796) | $ | 190,159,469 | ||
Cash and cash equivalents | 1,499,677 | |||
Investment subscriptions paid in advance to Investee Funds | 25,000,000 | |||
Interest receivable | 251 | |||
Receivable from investments sold | 1,582,435 | |||
Prepaid expenses | 102,071 | |||
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Total assets | 218,343,903 | |||
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Liabilities: | ||||
Shareholder subscriptions received in advance | 21,200,000 | |||
Management Fees payable | 558,625 | |||
Trustee fees payable | 10,250 | |||
Payable to Investment Manager | 63,869 | |||
Accrued expenses and other liabilities | 162,783 | |||
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Total liabilities | 21,995,527 | |||
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Net assets | $ | 196,348,376 | ||
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Components of net assets: | ||||
Paid-in capital | $ | 182,694,636 | ||
Accumulated net investment loss | (2,530,769 | ) | ||
Accumulated net realized loss | (495,164 | ) | ||
Net unrealized appreciation on investments | 16,679,673 | |||
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Net assets | $ | 196,348,376 | ||
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Net asset value: | ||||
Net assets | $ | 196,348,376 | ||
Shares of beneficial interests outstanding, no par value, unlimited shares authorized | 182,177 | |||
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Net asset value per share | $ | 1,077.79 | ||
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See accompanying notes to consolidated financial statements.
2
Blackstone Alternative Alpha Master Fund and Subsidiary
Consolidated Schedule of Investments
March 31, 2013
Shares | Cost | Fair Value | Percentage of Total Net Assets | Redemptions Permitted(1) | Redemption Notification Period(1) | |||||||||||||||
Investments in Investee Funds: | ||||||||||||||||||||
Equity(a) | ||||||||||||||||||||
Glenview Institutional Partners, L.P. | $ | 12,400,000 | $ | 16,454,699 | 8.38 | % | Quarterly | 45 Days | ||||||||||||
Bay Pond Partners, L.P.(3) | 13,700,000 | 15,008,678 | 7.64 | % | Semi-annually | 45 Days | ||||||||||||||
Southpoint Qualified Fund, L.P. | 13,800,000 | 14,870,698 | 7.57 | % | Quarterly | 60 Days | ||||||||||||||
Turiya Fund, L.P. | 12,950,000 | 14,189,656 | 7.23 | % | Quarterly | 45 Days | ||||||||||||||
Pershing Square, L.P. | 12,600,000 | 13,944,960 | 7.10 | % | Quarterly | 65 Days | ||||||||||||||
Viking Global Equities III Ltd.(2) | 6,279 | 12,400,000 | 13,927,470 | 7.08 | % | Annually | 45 Days | |||||||||||||
Hoplite Partners, L.P. | 12,100,000 | 12,813,157 | 6.53 | % | Quarterly | 45 Days | ||||||||||||||
Visium Balanced Offshore Fund Ltd.(2) | 4,683 | 9,230,000 | 10,130,328 | 5.16 | % | Quarterly | 60 Days | |||||||||||||
AKO Partners, L.P.(2) | 7,936,864 | 9,593,974 | 4.89 | % | Quarterly | 90 Days | ||||||||||||||
Merchants’ Gate Offshore Fund Ltd.(2) | 8,000 | 8,000,000 | 8,308,573 | 4.23 | % | Semi-annually | 60 Business Days | |||||||||||||
Vinik Fund, L.P.(3) | 8,200,000 | 8,081,548 | 4.12 | % | Quarterly | 30 Days | ||||||||||||||
Soroban Cayman Fund Ltd.(2) | 1,308 | 1,738,000 | 2,201,112 | 1.12 | % | Quarterly | 60 Days | |||||||||||||
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Total | 125,054,864 | 139,524,853 | 71.05 | % | ||||||||||||||||
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Credit-Driven(b) | ||||||||||||||||||||
Magnetar Constellation Fund Ltd.(2) | 13,300 | 13,300,000 | 14,256,794 | 7.26 | % | Quarterly | 90 Days | |||||||||||||
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Global Macro(c) | ||||||||||||||||||||
Tudor BVI Global Fund Ltd.(2) | 1,551 | 7,050,000 | 7,656,900 | 3.90 | % | Quarterly | 60 Days | |||||||||||||
BlueCrest Capital International Ltd.(2) | 21,630 | 6,500,000 | 6,558,335 | 3.34 | % | Quarterly | 90 Days | |||||||||||||
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Total | 13,550,000 | 14,215,235 | 7.24 | % | ||||||||||||||||
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Event-Driven(d) | ||||||||||||||||||||
Corvex Partners, L.P. | 12,800,000 | 12,979,656 | 6.61 | % | Quarterly | 60 Days | ||||||||||||||
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Multi-Category(e) | ||||||||||||||||||||
HBK Offshore Fund II, L.P.(2) | 4,237,012 | 4,470,364 | 2.28 | % | Quarterly | 90 Days | ||||||||||||||
Elliott International Ltd.(2) | 354 | 287,920 | 321,967 | 0.17 | % | Quarterly - Semi-annually | 60 Days | |||||||||||||
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Total | 4,524,932 | 4,792,331 | 2.45 | % | ||||||||||||||||
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Managed Futures(f) | ||||||||||||||||||||
BlueTrend Fund Ltd.(2) | 14,433 | 4,250,000 | 4,390,600 | 2.24 | % | Monthly | 30 Days | |||||||||||||
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Total Investments in Investee Funds(4)(5) | $ | 173,479,796 | $ | 190,159,469 | 96.85 | % | ||||||||||||||
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Other assets, less liabilities | 6,188,907 | 3.15 | % | |||||||||||||||||
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Total Net Assets | $ | 196,348,376 | 100.00 | % | ||||||||||||||||
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See accompanying notes to consolidated financial statements.
3
Blackstone Alternative Alpha Master Fund and Subsidiary
Consolidated Schedule of Investments, (continued)
March 31, 2013
Percentage represents each respective investment in Investee Fund at fair value as compared to total net assets.
The Consolidated Master Fund is not able to obtain information about certain specific investments held by the Investee Funds due to lack of available data.
Investee Funds are organized in the United States, unless otherwise noted.
Investee Funds are non-income producing securities.
(1) | Reflects general redemption terms for each Investee Fund. See Note 4 for Fair Value Hierarchy disclosure. |
(2) | Investee Fund organized in a non-U.S. offshore jurisdiction. |
(3) | Investee Fund is held by Blackstone Alternative Alpha Sub Fund I Ltd., which is wholly owned by the Master Fund. |
(4) | The total cost of Investee Funds organized in the United States is $98,550,000, with a fair value of $108,343,052. |
(5) | The total cost of Investee Funds organized in non-U.S. offshore jurisdictions is $74,929,796, with a fair value of $81,816,417. |
(a) | The Equity strategy generally includes equity-focused Investee Funds with a bottom-up analysis that do not actively trade exposures, with trading strategies focusing on shorter-term dynamics and appreciation for market technicals, top-down thematic/macro views, and technically driven statistical arbitrage with fundamental quantitative long/short strategies. |
(b) | The Credit-Driven strategy generally includes credit-driven focused Investee Funds with a focus on fundamental hedged products or otherwise low net exposure, positional concentration and opportunistic directional exposures, mortgages, and non-mortgage asset-backed securities. |
(c) | The Global Macro strategy generally includes global macro-focused Investee Funds with discretionary, directional, and inter-country exposure to commodities, equity, interest rates and currencies. |
(d) | The Event-Driven strategy generally includes Investee Funds that are generally event-driven-focused and seek returns by investing in strategies including catalyst events, share class arbitrage, share buybacks, post re-organization equity, recapitalizations, spin-offs and stub trades. |
(e) | The Multi-Category strategy generally includes Investee Funds that invest across multiple strategies. |
(f) | The Managed Futures strategy generally includes managed futures-focused Investee Funds that invest in systematic futures and foreign exchange forward trading strategies. |
See accompanying notes to consolidated financial statements.
4
Blackstone Alternative Alpha Master Fund and Subsidiary
Consolidated Statement of Operations
For the Year Ended March 31, 2013
Net investment loss: | ||||||||
Income: | ||||||||
Interest | $ | 2,350 | ||||||
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Expenses: | ||||||||
Management fees | 1,424,001 | |||||||
Organization | 104,095 | |||||||
Legal | 182,500 | |||||||
Risk monitoring | 170,117 | |||||||
Professional | 149,218 | |||||||
Insurance | 144,104 | |||||||
Administration | 95,130 | |||||||
Printing | 95,000 | |||||||
Custody | 63,368 | |||||||
Trustee | 56,982 | |||||||
Offering | 43,478 | |||||||
Other | 61,930 | |||||||
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Total expenses | 2,589,923 | |||||||
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Net investment loss | (2,587,573 | ) | ||||||
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Net increase in net assets from investments: | ||||||||
Net realized loss from investments in Investee Funds | (212,497 | ) | ||||||
Net unrealized appreciation from investments in Investee Funds | 16,679,673 | |||||||
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Net increase in net assets from investments | 16,467,176 | |||||||
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Net increase in net assets from operations | $ | 13,879,603 | ||||||
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See accompanying notes to consolidated financial statements.
5
Blackstone Alternative Alpha Master Fund and Subsidiary
Consolidated Statement of Changes in Net Assets
For the Year Ended March 31, 2013
Increase (Decrease) in Net Assets: | ||||
Operations: | ||||
Net investment loss | $ | (2,587,573 | ) | |
Net realized loss from investments in Investee Funds | (212,497 | ) | ||
Net unrealized appreciation from investments in Investee Funds | 16,679,673 | |||
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Net increase in net assets from operations | 13,879,603 | |||
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Distributions of realized gains to shareholders | (282,667 | ) | ||
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Capital Transactions: | ||||
Shareholder subscriptions | 182,368,773 | |||
Reinvestment of dividends | 282,667 | |||
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Increase in net assets from capital transactions | 182,651,440 | |||
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Net Assets: | ||||
Total increase in net assets | 196,248,376 | |||
Beginning of period | 100,000 | |||
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End of period (including accumulated net investment loss of $2,530,769) | $ | 196,348,376 | ||
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Share Transactions: | ||||
Beginning of period | 100 | |||
Shares issued | 181,800 | |||
Shares reinvested | 277 | |||
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End of period | 182,177 | |||
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See accompanying notes to consolidated financial statements.
6
Blackstone Alternative Alpha Master Fund and Subsidiary
Consolidated Statement of Cash Flows
For the Year Ended March 31, 2013
Cash flows from operating activities: | ||||
Net increase in net assets resulting from operations | $ | 13,879,603 | ||
Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities: | ||||
Net realized loss from investments in Investee Funds | 212,497 | |||
Net unrealized appreciation from investments in Investee Funds | (16,679,673 | ) | ||
Purchases of investments in Investee Funds and subscriptions paid in advance to Investee Funds | (208,330,919 | ) | ||
Proceeds from redemptions of investments in Investee Funds | 8,056,191 | |||
Increase in interest receivable | (251 | ) | ||
Increase in prepaid expenses | (102,071 | ) | ||
Increase in management fees payable | 558,625 | |||
Increase in trustee fees payable | 10,250 | |||
Increase in payable to Investment Manager | 63,869 | |||
Increase in accrued expenses and other liabilities | 162,783 | |||
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Net cash used in operating activities | (202,169,096 | ) | ||
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Cash flows from financing activities: | ||||
Proceeds from shareholder subscriptions and subscriptions received in advance | 203,568,773 | |||
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Cash provided by financing activities | 203,568,773 | |||
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Net change in cash and cash equivalents | 1,399,677 | |||
Cash and cash equivalents, beginning of period | 100,000 | |||
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Cash and cash equivalents, end of period | $ | 1,499,677 | ||
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Supplemental disclosure of non-cash financing activities: | ||||
Reinvestment of dividends | $ | 282,667 | ||
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See accompanying notes to consolidated financial statements.
7
Blackstone Alternative Alpha Master Fund and Subsidiary
Consolidated Financial Highlights
As of March 31, 2013
Per share operating performance: | ||||
Net asset value, April 1, 2012 1 | $ | 1,000.00 | ||
Income from investment operations: | ||||
Net investment loss 2 | (23.23 | ) | ||
Net realized and unrealized gain from investments | 102.99 | |||
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Net income from investment operations | 79.76 | |||
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Distributions of realized gains to shareholders | (1.97 | ) | ||
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Net asset value, March 31, 2013 | $ | 1,077.79 | ||
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Financial Ratios: | ||||
Expenses to average net assets | 2.28 | % | ||
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Net investment loss to average net assets | (2.27 | )% | ||
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Portfolio turnover | 9.01 | % | ||
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Total return | 7.99 | % | ||
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Net assets, March 31, 2013 (000s) | $ | 196,348 | ||
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1 | Commencement of operations. |
2 | Calculated using average shares outstanding during the period. |
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 Fund’s share of the income and expenses of the underlying Investee Funds. |
See accompanying notes to consolidated financial statements.
8
Blackstone Alternative Alpha Master Fund and Subsidiary
Notes to Consolidated Financial Statements
March 31, 2013
1. | ORGANIZATION |
Blackstone Alternative Alpha Master Fund (the “Master Fund”), a Massachusetts business trust registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as a continuously offered, non-diversified, closed-end management investment company, commenced operations on April 1, 2012. Blackstone Alternative Alpha Fund (the “Feeder Fund”) invests substantially all of its assets in the Master Fund. The Master Fund’s investment objective is to seek to earn long-term risk-adjusted returns that are attractive as compared to those of traditional public-equity and fixed income markets.
The Master Fund owns 100% of the shareholder interest of Blackstone Alternative Alpha Sub Fund I Ltd. (the “Intermediate Fund”), an exempted company incorporated under the laws of the Cayman Islands on March 14, 2012, for the purpose of facilitating the implementation of the Master Fund’s 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 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, and a commodity trading advisor and commodity pool operator under the Commodity Exchange Act and the rules of the Commodity Futures Trading Commission. The Board of Trustees (the “Board” and each member a “Trustee”) of the Master Fund supervises the conduct of the Consolidated Master Fund’s and the Feeder Fund’s affairs and pursuant to the investment advisory agreement, has engaged BAAM to manage the Consolidated Master Fund’s and the Feeder Fund’s day-to-day investment activities.
Capitalized terms used, but not defined herein, shall have the meaning assigned to them in the Prospectus of the Master Fund.
2. | BASIS OF PRESENTATION |
The Consolidated Master Fund’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and are stated in U.S. dollars. All inter-company accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in accordance with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses during the reporting period. Actual results could differ from these estimates and these differences could be material.
3. | SIGNIFICANT ACCOUNTING POLICIES |
Fair Value Measurements
Valuation Process
The valuation of the Consolidated Master Fund’s 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 Fund’s 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
9
Blackstone Alternative Alpha Master Fund and Subsidiary
Notes to Consolidated Financial Statements, (continued)
March 31, 2013
based on its own due diligence and investment monitoring procedures, that the valuation of any investment determined, as set further 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 the same may be amended from time to time.
Investments in Investee Funds
The fair value of investments in limited partnerships and investment funds (“Investee Fund(s)”) is generally determined using the reported net asset value per share of the Investee Fund, or its equivalent, as a practical expedient for fair value.
The Consolidated Master Fund may, as a practical expedient, estimate the fair value of an Investee Fund based on the reported net asset value per share or its equivalent (“NAV”) if the reported NAV of the Investee Fund is calculated in a manner consistent with the measurement principles applied to investment companies, in accordance with Accounting Standards Codification 946, Financial Services-Investment Companies (“ASC 946”). In order to use the practical expedient, the Investment Manager has internal processes to independently evaluate the fair value measurement process utilized by the underlying Investee Fund to calculate the Investee Fund’s NAV in accordance with ASC 946. Such internal process includes the evaluation of the Investee Fund’s 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 Fund’s audited financial statements, and ongoing monitoring of other relevant qualitative and quantitative factors.
The fair value of investments in Investee Funds is reported net of management fees and incentive allocations/fees. The Investee Funds’ management fees and incentive allocations/fees are reflected in the net increase in net assets from investments in the Consolidated Statement of Operations.
Due to the inherent uncertainty of these estimates, these values may differ from the values that would have been used had a ready market for these investments existed and the differences could be material.
The investments in Investee Funds may involve varying degrees of interest rate risk, credit risk, foreign exchange risk, and market, industry or geographic concentration risk. While the Investment Manager monitors and attempts to manage these risks, the varying degrees of transparency into and potential illiquidity of the financial instruments held by the Investee Funds may hinder the Investment Manager’s ability to effectively manage and mitigate these risks.
The fair value of the Consolidated Master Fund’s assets and liabilities which qualify as financial instruments under the existing accounting guidance for Financial Instruments, approximates the carrying amounts presented in the Consolidated Statement of Assets and Liabilities due to their short term nature.
Investment Transactions and Related Investment Income and Expense
Investment transactions are accounted for on a trade date basis. Income and expenses, including interest, are recorded on an accrual basis.
The net realized gains or losses from investments in Investee Funds are recorded when the Consolidated Master Fund redeems or partially redeems its interest in the Investee Funds or receives distributions in excess of return of capital. Realized gains and losses from redemptions of investments are calculated using the first-in, first-out cost basis methodology.
10
Blackstone Alternative Alpha Master Fund and Subsidiary
Notes to Consolidated Financial Statements, (continued)
March 31, 2013
Cash and Cash Equivalents
The Consolidated Master Fund considers short-term, highly liquid investments with original maturities of 90 days or less when acquired to be cash equivalents. At March 31, 2013, the Consolidated Master Fund had $1,499,677 of cash held at a major U.S. bank.
Contingencies
Under the Master Fund’s Declaration of Trust, the Master Fund’s officers and each Trustee are indemnified against certain liabilities that may arise out of the performance of their duties to the Master Fund. Additionally, in the normal course of business, the Consolidated Master Fund enters into contracts that contain a variety of representations and indemnifications. The Consolidated Master Fund’s maximum exposure under these arrangements is unknown. However, the Consolidated Master Fund has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
Income Taxes
The Consolidated Master Fund’s policy is to qualify each year as a “regulated investment company” under Subchapter M of the Internal Revenue Code 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 Consolidated Master Fund files U.S. federal and various state and local tax returns.
Management of the Master Fund has evaluated the tax positions taken or expected to be taken in the course of preparing the Master Fund’s tax return for the current open tax year ended October 31, 2012, and has concluded, as of March 31, 2013, no provision for income tax would be required in the Consolidated Master Fund’s financial statements. The Master Fund’s federal and state income and federal excise tax returns for the current open tax year are subject to examination by the Internal Revenue Service and state taxing authorities.
The Intermediate Fund is a controlled foreign corporation (“CFC”) for U.S. income tax purposes, and is therefore not subject to U.S. income tax. However, as a wholly-owned CFC, the Intermediate Fund’s net income and capital gains, to the extent of its earnings and profits, are consolidated into the Master Fund’s investment company taxable income.
For the current open tax year and for all major jurisdictions, management of the Intermediate Fund has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements. Management is also not aware of any tax positions for which it is reasonably possible that the total amounts of uncertain unrecognized tax benefits will significantly change in the next twelve months.
Organization and Offering Costs
Organization costs associated with the establishment of the Consolidated Master Fund were expensed by the Consolidated Master Fund and reimbursed by the Investment Manager.
Offering costs have been amortized over 12 months on a straight-line basis beginning from the date of commencement of operations.
Dividends and Distributions to Shareholders
Dividends from net investment income and distributions of capital gains, if any, are declared and paid annually. Dividends and capital gain distributions paid by the Master Fund will be reinvested in additional Shares 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.
11
Blackstone Alternative Alpha Master Fund and Subsidiary
Notes to Consolidated Financial Statements, (continued)
March 31, 2013
4. | FAIR VALUE HIERARCHY |
Current fair value guidance defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Consolidated Master Fund may, as a practical expedient, estimate the fair value of an Investee Fund based on the reported net asset value per share or its equivalent if the reported net asset value of the Investee Fund is calculated in a manner consistent with the measurement principles applied to investment companies. The hierarchy established under the fair value guidance gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
Investments measured and reported at fair value are classified and disclosed in one of the following levels within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement or based on liquidity, as indicated by the redemption terms:
• | Level 1 – Quoted prices are available in active markets for identical investments as of the measurement date. The Consolidated Master Fund does not adjust the quoted price for these investments. |
• | Level 2 – Quoted prices are available in markets that are not active or model inputs are based on inputs that are either directly or indirectly observable as of the measurement date. |
The Consolidated Master Fund’s investment in the Investee Fund shall be categorized within Level 2 if the Consolidated Master Fund has the ability to redeem its investment in the Investee Funds at the reported net asset value per share (or its equivalent) at the measurement date or within 90 days thereof, upon no greater than 90 days prior written notice.
• | Level 3 – Pricing inputs are unobservable for the investment and include instances where there is little, if any, market activity for the investment. |
The Consolidated Master Fund has categorized within Level 3, investments in Investee Funds that are subject to a minimum holding period or lockup greater than 90 days from the measurement date, are in liquidation, cannot be redeemed within 90 days of the measurement date, are subject to redemption notice periods in excess of 90 days, have limited the individual amount of shareholder redemptions and/or aggregate amount of shareholder redemptions, or have suspended redemptions.
Investee Funds as set forth in their governing legal agreements may offer various liquidity terms for differing classes of investors. The Consolidated Master Fund’s investment in a particular Investee Fund may be comprised of investments with differing liquidity terms or which were made at different points in time that result in differences in the effective minimum holding period or lockup or participation in side pocket investments. As such, the classification of investments in Investee Funds may not be indicative of the actual liquidity available to the Consolidated Master Fund associated with each investment at March 31, 2013.
The classification of investments in Investee Funds included in the table below is meant to be indicative of the Consolidated Master Fund’s classification of its investments in Investee Funds. It is not meant to be indicative of the classification of investments in the underlying portfolios of the Investee Funds within the fair value hierarchy.
12
Blackstone Alternative Alpha Master Fund and Subsidiary
Notes to Consolidated Financial Statements, (continued)
March 31, 2013
The following is a summary categorization, as of March 31, 2013, of the Consolidated Master Fund’s investments based on the level of inputs utilized in determining the value of such investments:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Investments in Investee Funds by Strategy | ||||||||||||||||
Equity | $ | - | $ | 18,353,394 | $ | 121,171,459 | $ | 139,524,853 | ||||||||
Credit-Driven | - | - | 14,256,794 | 14,256,794 | ||||||||||||
Global Macro | - | 7,656,900 | 6,558,335 | 14,215,235 | ||||||||||||
Event-Driven | - | - | 12,979,656 | 12,979,656 | ||||||||||||
Multi-Category | - | - | 4,792,331 | 4,792,331 | ||||||||||||
Managed Futures | - | 4,390,600 | - | 4,390,600 | ||||||||||||
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| |||||||||
$ | - | $ | 30,400,894 | $ | 159,758,575 | $ | 190,159,469 | |||||||||
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The changes in investments measured at fair value for which the Consolidated Master Fund used Level 3 inputs to determine fair value are as follows:
Investments in Investee Funds by Strategy | ||||||||||||||||||||||||
Equity | Credit-Driven | Global Macro | Event-Driven | Multi-Category | Total | |||||||||||||||||||
April 1, 2012 (commencement of operations) | $ | - | $ | - | - | $ | - | $ | - | $ | - | |||||||||||||
Transfers into Level 3 | - | - | - | - | - | - | ||||||||||||||||||
Transfers out of Level 3 | - | - | - | - | - | - | ||||||||||||||||||
Net realized gain | - | - | - | - | 69,029 | 69,029 | ||||||||||||||||||
Net change in unrealized appreciation | 11,603,459 | 956,794 | 58,335 | 179,656 | 267,400 | 13,065,644 | ||||||||||||||||||
Purchases | 109,568,000 | 13,300,000 | 6,500,000 | 12,800,000 | 5,912,919 | 148,080,919 | ||||||||||||||||||
Sales | - | - | - | - | (1,457,017 | ) | (1,457,017 | ) | ||||||||||||||||
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Ending Balance March 31, 2013 | $ | 121,171,459 | $ | 14,256,794 | $ | 6,558,335 | $ | 12,979,656 | $ | 4,792,331 | $ | 159,758,575 | ||||||||||||
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Change in unrealized appreciation related to investments still held as of March 31, 2013 | $ | 11,603,459 | $ | 956,794 | $ | 58,335 | $ | 179,656 | $ | 267,400 | $ | 13,065,644 | ||||||||||||
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The Consolidated Master Fund recognizes transfers within the fair value hierarchy as of the beginning of the period. There were no transfers between Levels 1, 2, or 3 for the year ended March 31, 2013.
13
Blackstone Alternative Alpha Master Fund and Subsidiary
Notes to Consolidated Financial Statements, (continued)
March 31, 2013
The following table summarizes investments in Investee Funds, by investment strategy and the amount of the investments in Investee Funds that cannot be redeemed because of redemption restrictions put in place by the Investee Funds. In instances where redemptions were restricted, the maximum remaining redemption restriction period is disclosed. Where the remaining redemption restriction period is not known, the date the redemption restriction commenced is disclosed.
Category (A) | Category (B) | |||||||||||||||||||||||
Investments in Investee Funds by Strategy | Unfunded Commitment $ | Amount $ | Maximum Remaining Redemption Restriction Period | Amount $ | Redemption Restriction Commencement Date | Total $ (A) + (B) | ||||||||||||||||||
Equity | $ | - | $ | 121,171,459 | 24 months | $ | - | N/A | $ | 121,171,459 | ||||||||||||||
Credit-Driven | - | 14,256,794 | 24 months | - | N/A | 14,256,794 | ||||||||||||||||||
Global Macro | - | 6,558,335 | 12 months | - | N/A | 6,558,335 | ||||||||||||||||||
Event-Driven | - | 12,979,656 | 12 months | - | N/A | 12,979,656 | ||||||||||||||||||
Multi-Category | 558,576 | 4,792,331 | 24 months | - | N/A | 4,792,331 |
Category (A) Investments in Investee Funds cannot be redeemed and the maximum remaining redemption restriction period is disclosed. The maximum remaining redemption restriction period is based on the restriction period for Investee Funds as defined in each respective Investee Fund’s governing legal agreements without consideration of the length of time elapsed from the date of investments in the Investee Funds. The Consolidated Master Fund’s 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.
Category (B) Investments in Investee Funds cannot be redeemed and the remaining redemption restriction period is not known. The date the redemption restriction commenced is disclosed.
Purchases and sales of investments for the year ended March 31, 2013 were $183,330,919 and $9,638,626, respectively.
5. | FUND TERMS |
Issuance of Shares
The Master Fund is authorized to issue an unlimited number of shares of beneficial interest (“Shares”). The Master Fund will issue Shares as of the first business day of the month or at such other times as determined by the Board upon receipt of an initial or additional application for Shares. The Shares are subject to restrictions on transferability and resale and may not be transferred or resold except as permitted under the Master Fund’s Declaration of Trust.
Repurchase of Shares
Repurchases will be made only at such times and on such terms as may be determined by the Board, in its sole discretion.
14
Blackstone Alternative Alpha Master Fund and Subsidiary
Notes to Consolidated Financial Statements, (continued)
March 31, 2013
6. | RELATED PARTY TRANSACTIONS |
Management Fee
The Master Fund pays the Investment Manager a management fee (the “Management Fee”) quarterly in arrears (accrued on a monthly basis), equal to 1.25% (annualized) of the Master Fund’s net asset value. The Management Fee for any period less than a full quarter is pro-rated.
Expense Payments
The Investment Manager pays expenses on behalf of the Consolidated Master Fund and is subsequently reimbursed for such payments. The Feeder Fund allocated to the Consolidated Master Fund, through an investment in the Master Fund, $1,031,090 of the repayment amount under the Feeder Fund’s Expense Limitation and Reimbursement Agreement. This allocation reduced the amount payable by the Consolidated Master Fund to the Investment Manager. As of March 31, 2013, the Consolidated Master Fund had $63,869 payable to the Investment Manager recorded in the Consolidated Statement of Assets and Liabilities.
7. | FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET RISK |
In the normal course of business, the Investee Funds may enter into certain financial instrument transactions which may result in off-balance sheet market risk and credit risk. The Investee Funds invest in these instruments for trading and hedging purposes. The Consolidated Master Fund is indirectly subject to certain risks arising from investments made by the Investee Funds.
Market Risk
Market risk is the risk of potential adverse changes to the value of financial instruments because of changes in market conditions such as interest and currency rate movements. The Consolidated Master Fund is exposed to market risk indirectly as a result of the types of investments that the Investee Funds make. The Consolidated Master Fund actively monitors its exposure to market risk.
Investee Funds may invest in entities that trade or may invest directly in interest rate swaps, credit default swaps, exchange-traded and over-the-counter options, futures transactions, forward transactions, and securities sold, not yet purchased.
Credit Risk
Credit risk arises from the potential inability of counterparties to perform their obligations under the terms of a contract. The Consolidated Master Fund is indirectly exposed to credit risk related to the amount of accounting loss that the Investee Funds would incur if a counterparty failed to perform its obligations under contractual terms and if the Investee Funds fail to perform under their respective agreements.
8. | INCOME TAXES |
The primary difference between the 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. The allocated taxable income is reported annually by each Investee Fund to the Master Fund. The aggregate cost of Investee Funds for federal income tax purposes is
15
Blackstone Alternative Alpha Master Fund and Subsidiary
Notes to Consolidated Financial Statements, (continued)
March 31, 2013
therefore calculated and presented annually as of March 31. 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 | $ | 174,491,059 | ||
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| |||
Gross unrealized appreciation | $ | 15,786,862 | ||
Gross unrealized depreciation | (118,452 | ) | ||
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| |||
Net unrealized appreciation | $ | 15,668,410 | ||
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The tax character of dividends paid to shareholders during the period April 1, 2012 (commencement of operations) to December 31, 2012 was as follows:
Ordinary | Net Long Term Capital Gains | Total Taxable Distributions | Tax Return of Capital | Total Distributions Paid | ||||||||||||
$ 196,951 | $ | 85,716 | $ | 282,667 | $ | - | $ | 282,667 |
As of the tax year ended October 31, 2012, the components of accumulated earnings (deficit) on a tax basis were as follows:
Undistributed | Undistributed Long-Term Captial Gains | Accumulated Capital and Other Losses | Unrealized Appreciation (Depreciation) | Total Accumulated Earnings (Deficit) | ||||||||||||
$149,785 | $ | - | $ | - | $ | 1,459,652 | $ | 1,609,437 |
The amounts of net investment income (loss) and net realized gain (loss) may differ for financial statement and tax purposes. The character of dividends and distributions made during the fiscal year from net investment income or net realized gains may differ from the ultimate characterization for federal income tax purposes. The timing of dividends from net investment income and distributions from net realized gains distributed during the fiscal year may also differ from the year that the income or realized gain was recorded by the Master Fund. To the extent these differences are permanent, adjustments are made to the appropriate equity accounts in the period the differences arise.
Accordingly, the following permanent differences, primarily due to nondeductible stock issuance costs, have been reclassified to increase (decrease) such accounts during the tax year ended October 31, 2012:
Accumulated Net Investment | Accumulated Net Realized Gain (Loss) | Paid-in Capital | ||||||
$56,804 | $ | - | $ | (56,804 | ) |
9. | SUBSEQUENT EVENTS |
The Consolidated Master Fund has evaluated the impact of subsequent events through the date of financial statement issuance, and determined there were no subsequent events outside of the normal course of business requiring adjustment to or disclosure in the financial statements.
16
Blackstone Alternative Alpha Master Fund and Subsidiary
Supplemental Information (Unaudited)
March 31, 2013
Management of the Fund
The Consolidated Master Fund’s operations are managed under the direction and oversight of the Board of Trustees. A majority of the Trustees are not “interested persons” (as defined in the 1940 Act) of the Consolidated Master Fund, (the “Independent Trustees”). The Consolidated Master Fund’s Trustees and officers are subject to removal or replacement in accordance with Massachusetts law and the Master Fund’s Declaration of Trust. The initial Trustees serving on the Board of Trustees have been elected by the organizational shareholder of the Master Fund. The Consolidated Master Fund’s Board of Trustees also serves as the board of trustees of the Feeder Fund.
Compensation for Trustees
The Master Fund and the Feeder Fund pay no compensation to any of its officers or to the Trustees who are not Independent Trustees. The Independent Trustees are each paid by the Master Fund and the Feeder Fund $20,000 per fiscal year in aggregate for their services to the Master Fund and the Feeder Fund and the chair of the Audit Committee receives an additional $2,000 per fiscal year. The Trustees are reimbursed by the Master Fund and the Feeder Fund for their travel expenses related to Board meetings.
INDEPENDENT TRUSTEES | ||||||||||||
Name and Year of Birth | Positions Held with the Trust | Term of Office(1)/ Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen in Fund Complex | Other Trusteeships Held During Past 5 Years | |||||||
John M. Brown (1959) | Trustee | Since 1/2012 | Retired (2012 to present) Independent Consultant (2010 to 2012) Principal, Acquiline Holdings (Private Equity) (2006 to 2010) | 2 | None | |||||||
Frank J. Coates(2) (1964) | Trustee | Since 1/2012 | CEO, Wheelhouse Analytics, LLC (2010 to present) CEO, Coates Analytics, LP (PNC Bank) (2005 to 2010) | 2 | Member of Board of Managers of Evermore Global Advisors, LLC | |||||||
Paul J. Lawler(2) (1948) | Trustee | Since 1/2012 | Private Investor (2010 to present) VP Investments & Chief Investment Officer, W.K. Kellogg Foundation (1997 to 2009) | 2 | Custody Advisory Committee Member, The Bank of New York; Trustee, First Eagle Variable Funds (1 portfolio); Trustee, First Eagle Funds (8 portfolios); Trustee (Audit Committee and Finance Committee Member), American University in Cairo | |||||||
Kristen M. Leopold(2) (1967) | Trustee | Since 1/2012 | Managing Member, KL Associates LLC (CFO Consulting) (2005 to present) Member and CFO, WFL Real Estate Services, LLC (2005 to present) | 2 | Trustee, CPG JP Morgan Alternative Strategies Fund, LLC; Trustee, CPG Carlyle Private Equity Fund, LLC and CPG Carlyle Private Equity Master Fund, LLC |
17
Blackstone Alternative Alpha Master Fund and Subsidiary
Supplemental Information (Unaudited), (continued)
March 31, 2013
INDEPENDENT TRUSTEES(3) | ||||||||||||
Name and Year of Birth of Interested Trustees | Positions Held with the Trust | Term of Office(1)/ Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen in Fund Complex | Other Trusteeships Held During Past 5 Years | |||||||
Peter Koffler (3) (1958) | Trustee | Since 12/2012 | Senior Managing Director, Blackstone Alternative Asset Management L.P. (2012 to present) General Counsel, Blackstone Alternative Asset Management L.P. (2010 to present) Chief Compliance Officer, The Blackstone Group L.P. (2012 to present) Managing Director, Blackstone Alternative Asset Management L.P. (2006 to 2012) Chief Compliance Officer, Blackstone Alternative Asset Management L.P. (2008 to 2012) | 2 | None |
OFFICERS | ||||||
Name and Year of Birth | Positions Held with the Trust | Term of Office(1)/ Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Stephen Buehler (1977) | Secretary | Since 11/2011 | Vice President, Blackstone Alternative Asset Management L.P. (2011 to present) Associate, Blackstone Alternative Asset Management L.P. (2010 to 2011) Associate, Merrill Lynch and Bank of America Merrill Lynch (2008 to 2010) | |||
Brian F. Gavin (1969) | President (Principal Executive Officer) | Since 11/2011 | Chief Operating Officer & Senior Managing Director, Blackstone Alternative Asset Management L.P. (2007 to present) | |||
Hayley Stein (1977) | Chief Compliance Officer | Since 12/2012 | Managing Director, Blackstone Alternative Asset Management L.P. (2011 to present) Chief Compliance Officer, Blackstone Alternative Asset Management L.P. (2012 to present) Vice President, Blackstone Alternative Asset Management L.P. (2006 to 2011) | |||
Arthur Liao (1972) | Treasurer (Principal Financial and Accounting Officer) | Since 11/2011 | Chief Financial Officer & Managing Director, Blackstone Alternative Asset Management L.P. (2007 to present) | |||
Scott Sherman (1975) | Chief Legal Officer | Since 11/2011 | Managing Director, Blackstone Alternative Asset Management L.P. (2009 to present) Vice President, Blackstone Alternative Asset Management L.P. (2007 to 2009) |
(1) | Indefinite. |
(2) | Member of the Audit Committee. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Blackstone Alternative Asset Management L.P. |
18
Blackstone Alternative Alpha Master Fund and Subsidiary
Supplemental Information (Unaudited), (continued)
March 31, 2013
Allocation of Investments
The following chart indicates the allocation of investments among the asset classes in the Consolidated Master Fund as of March 31, 2013.
Asset Class(1) | Fair Value | % | ||||||
Equity | $ | 139,524,853 | 73.37 | % | ||||
Credit-Driven | 14,256,794 | 7.49 | % | |||||
Global Macro | 14,215,235 | 7.48 | % | |||||
Event-Driven | 12,979,656 | 6.83 | % | |||||
Multi-Category | 4,792,331 | 2.52 | % | |||||
Managed Futures | 4,390,600 | 2.31 | % | |||||
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Total Investments | $ | 190,159,469 | 100.00 | % | ||||
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(1) | The complete list of investments included in the following asset class categories is included in the Consolidated Schedule of Investments of the Consolidated Master Fund. |
Form N-Q Filings
The Master Fund files a complete schedule of investments with the Securities and Exchange Commission (“SEC”) for the first and third quarters of each fiscal year on Form N-Q. The Master Fund’s Form N-Q is available on the SEC website at http://www.sec.gov. The Master Fund’s Form N-Q may be reviewed and copied at the SEC Public Reference Room in Washington, DC and information regarding operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Proxy Voting Policies
The Master Fund and the Feeder Fund have delegated proxy voting responsibilities to the Investment Manager, subject to the Board’s general oversight. Information regarding how the Master Fund and the Feeder Fund voted proxies relating to investments during the period ended June 30, 2012 is available (1) without charge, upon request, by calling toll free, 1-888-386-9490 and (2) on the SEC website at http://www.sec.gov.
Board Consideration of the Investment Management Agreement
At a meeting of the Board of the Fund held in person on March 12, 2013, the Board, including all of the Independent Trustees considered the ratification of the Investment Management Agreement (the “Intermediate Fund Agreement”) between Blackstone Alternative Alpha Sub Fund I Ltd. (the “Intermediate Fund”), a Cayman Islands subsidiary of the Master Fund, and BAAM.
The Independent Trustees were assisted in their review of the Intermediate Fund Agreement by independent legal counsel. Prior to the meeting, the Board received (a) materials prepared by independent legal counsel regarding the relevant factors to consider, (b) materials prepared by BAAM relating to, among other things, BAAM’s qualifications to serve as investment manager; analysis of the fees and expenses of the Feeder Fund (on a combined basis with the fees and expenses of the Master Fund and Intermediate Fund) as compared with a peer group of funds; and analysis of BAAM’s profitability from providing services to the Feeder Fund, Master Fund and Intermediate Fund and (c) materials prepared by an outside firm, unaffiliated with the Feeder Fund or BAAM, that is in the business of regularly preparing reports for use by fund boards in considering investment
19
Blackstone Alternative Alpha Master Fund and Subsidiary
Supplemental Information (Unaudited), (continued)
March 31, 2013
advisory agreement approvals (the “Service Provider”) comparing the management fee rate and total operating expenses of the Feeder Fund (on a combined basis with the fees and expenses of the Master Fund and Intermediate Fund) to those of a peer group of funds determined by the Service Provider. At the meeting, a discussion ensued regarding the materials that had been provided to the Board, the terms of the Intermediate Fund Agreement, the operations of the Intermediate Fund and other relevant considerations. In evaluating the Intermediate Fund Agreement, the Board considered that the Intermediate Fund had been established to facilitate the Master Fund’s investment program, and that the Intermediate Fund did not pay a management fee under the Intermediate Fund Agreement. The Board also took into account the “master feeder” structure and the fact that BAAM serves as investment adviser to the Feeder Fund and Master Fund but receives a management fee only from the Master Fund. Following this discussion, the Board, including all of the Independent Trustees, determined to ratify the Intermediate Fund Agreement for an initial term of two years on the basis of the following considerations, among others:
Nature, Extent and Quality of the Services
The Board discussed BAAM’s personnel, operations and financial condition, including the following: the background and experience of key investment personnel and BAAM’s ability to retain them; BAAM’s focus on analysis of complex asset categories; BAAM’s disciplined investment approach and commitment to investment principles; BAAM’s significant investment in and commitment to personnel, including additional hiring and extensive training and infrastructure including research, risk and portfolio management analytics; BAAM’s significant compliance efforts, and oversight of and plan for sales; and, BAAM’s oversight of and interaction with service providers. The Board concluded that the nature, extent and quality of the management and advisory service to be provided were appropriate and thus support a decision to approve the Intermediate Fund Agreement.
Costs of Services and Profitability
It was noted that BAAM receives compensation for performing investment advisory services for the Master Fund pursuant to a separate investment management agreement (the “Master Fund Agreement”) with the Master Fund and that no additional compensation is received for rendering services under the Intermediate Fund Agreement or under BAAM’s separate investment management agreement with the Feeder Fund. In analyzing the cost of services and profitability of BAAM, the Board considered BAAM’s resources devoted to the Intermediate Fund (as well as to the Feeder Fund and Master Fund) as well as the assessment of estimated costs and profitability provided by BAAM.
The Board reviewed the Feeder Fund’s management fee rate and the total expense ratio (on a combined basis with the fees and expenses of the Master Fund and Intermediate Fund) compared to those of a peer group of funds determined by the Service Provider. The funds within the peer group were selected by the Service Provider, which is not affiliated with BAAM.
The peer group selected by the Service Provider for the Feeder Fund contained fourteen funds, including the Feeder Fund. Within this peer group, the Feeder Fund ranked (a) in the third quintile (and below the median) for actual total expenses excluding investment related expenses and taxes and (b) in the fourth quintile for management fee rate. The Board noted that BAAM has agreed to cap certain operating and other expenses of the Feeder Fund (excluding the management fee, underlying fund expenses, distribution fee and other expenses described in the Feeder Fund’s prospectus as being excluded) in order to maintain certain expenses below 0.35%.
The Board took into account the significant investment by, and cost to, BAAM regarding service infrastructure to support the Funds and the Feeder Fund’s investors. On the basis of the Board’s review of the fees to be charged
20
Blackstone Alternative Alpha Master Fund and Subsidiary
Supplemental Information (Unaudited), (continued)
March 31, 2013
by BAAM for investment advisory and related services, the relatively unique, and highly specialized structuring, launching and nature of the Funds’ investment program, BAAM’s financial information, and the estimated costs associated with managing the Funds, the Board concluded that the level of investment management fees payable under the Intermediate Fund Agreement is appropriate in light of the services to be provided, the management fees and estimated overall expense ratios of comparable investment companies, and the cap on current expenses established by an expense limitation agreement, and the fees paid under the Master Fund Agreement.
Economies of Scale
While noting that the management fees will not decrease as the level of Fund assets increase, the Board concluded that the management fees payable under the Master Fund Agreement are reasonable and reflect the Fund’s complex operations. The Board also was advised that the Fund is expected to be modest in size for the foreseeable future. The Board noted that it will have the opportunity to periodically re-examine whether the Funds have achieved economies of scale, as well as the appropriateness of management fees payable to BAAM, in the future.
Other Benefits
The Board noted that BAAM said it does not expect to receive significant ancillary benefits as a result of its relationship with the Funds and BAAM does not realize “soft dollar” benefits from its relationship with the Funds. The Board concluded that other benefits derived by BAAM from its relationship with the Funds, to the extent such benefits are identifiable or determinable, are reasonable and fair, result from the provision of appropriate services to the Funds and investors therein, and are consistent with industry practice and the best interests of the Funds and its shareholders.
Other considerations
The Board evaluated the comparative information provided by BAAM regarding the performance of other similar investment funds managed by BAAM, including the Funds, compared with the performance of various indices, including the relevance of various indices. On the basis of the Board’s assessment, the Board concluded that BAAM was capable of generating a level of investment performance that is appropriate in light of the Funds’ investment objective, policies and strategies and fully competitive with comparable funds.
Conclusion
The Board, including all of the Independent Trustees, concluded that the fees payable under the Intermediate Fund Agreement were fair and reasonable with respect to the services that BAAM provides to the Intermediate Fund and in light of the other factors described above that the Board deemed relevant. The Board based its decision on an evaluation of all these factors as a whole and did not consider any one factor as all-important or controlling. The Board was also assisted by the advice of independent counsel in making this determination.
Additional Information
The Master Fund’s registration statement includes additional information about the Trustees of the Master Fund. The registration statement is available, without charge, upon request by calling 1-800-725-9456.
21
Privacy Policy
This privacy policy sets forth BAAM’s policies with respect to nonpublic personal information of individual investors, shareholders, prospective investors and former investors of investment funds managed by BAAM. These policies apply to individuals only and are subject to change.
BAAM collects nonpublic personal information about Investors from the information it receives in subscription agreements and information relating to an Investor’s transactions with BAAM.
BAAM does not disclose any nonpublic personal information about the Investors to anyone other than (i) fund administrators and other service providers as necessary in order to service each BAAM Investor’s investment with BAAM, (ii) The Blackstone Group L.P. and its affiliates (collectively, “TBG”) in order to determine the Investor’s eligibility for services offered by TBG, and (iii) as permitted by law.
An Investor may limit the extent to which BAAM shares the Investor’s personal information with TBG by calling 1-888-386-9490. BAAM is required to share the Investor’s personal information with TBG in order to determine the Investor’s eligibility for investment services offered by TBG. However, BAAM still may share such personal information with TBG as necessary to service such Investor’s investment with BAAM or under other circumstances permitted by law. TBG also may market investment services to Investors where TBG has its own relationship with an Investor. Once an Investor has informed BAAM about his or her privacy preferences, they will remain in effect until the Investor notifies BAAM otherwise.
It also may be necessary under anti-money laundering and similar laws to disclose information about Investors in order to accept subscriptions from them. BAAM also will release information about Investors if compelled to do so by law in connection with any government request or investigation, or if any Investors direct BAAM to do so.
22
Blackstone Alternative Alpha Fund
Blackstone Alternative Alpha Master Fund
Trustees
John M. Brown, Chairman
Frank J. Coates
Paul J. Lawler
Kristen M. Leopold
Peter Koffler
Investment Manager
Blackstone Alternative Asset Management L.P.
345 Park Avenue
New York, New York 10154
Administrator, Custodian, Fund
Accounting Agent and Transfer Agent
Citi Fund Services Ohio, Inc.
3435 Stelzer Road
Columbus, Ohio 43219
Officers
Brian F. Gavin, President and Principal Executive Officer
Arthur Liao, Treasurer and Principal Financial and Accounting Officer
Hayley Stein, Chief Compliance Officer
Scott Sherman, Chief Legal Officer
Stephen Buehler, Secretary
Independent Registered Public
Accounting Firm
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
Legal Counsel
Ropes & Gray LLP
Prudential Tower
800 Boylston Street
Boston, Massachusetts 02199-3600
This report, including the financial information herein, is transmitted to the shareholders of Blackstone Alternative Alpha Fund 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 Fund’s prospectus and statement of additional information without charge by calling the Fund’s transfer agent at 1-888-386-9490.
Item 2. | Code of Ethics. |
(a) The registrant, as of the end of the period covered by the report, has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. This code of ethics is included as Exhibit 12(a)(1).
(b) During the period covered by the report, with respect to the registrant’s code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions; there have been no amendments to, nor any waivers granted from, a provision that relates to any element of the code of ethics definition enumerated in paragraph (b) of this Item 2.
Item 3. | Audit Committee Financial Expert. |
3(a)(1) The registrant’s board of trustees has determined that the registrant has at least one audit committee financial expert serving on its audit committee.
3(a)(2) The audit committee financial expert is Kristen M. Leopold, who is “independent” for purposes of this Item 3 of Form N-CSR.
Item 4. | Principal Accountant Fees and Services. |
Current Year | Previous Year | |||||||||
(a) | Audit Fees | $ | 64,500 | $ | N/A | |||||
(b) | Audit-Related Fees | $ | 0 | $ | N/A | |||||
(c) | Tax Fees(1) | $ | 29,540 | $ | N/A | |||||
(d) | All Other Fees | $ | 0 | $ | N/A |
(1) | The nature of the services includes tax compliance, tax advice and tax planning. |
(e)(1) Disclose the audit committee’s pre-approval policies and procedures described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
The charter for the audit committee (the “Committee”) of the board of trustees of the registrant requires that the Committee pre-approve (i) all audit and non-audit services that the registrant’s independent auditors provide to the registrant, and (ii) all non-audit services that the registrant’s independent auditors provide to Blackstone Alternative Asset Management L.P., the investment manager of the registrant (“BAAM”), and any entity controlling, controlled by, or under common control with BAAM that provides ongoing services to the registrant, if the engagement relates directly to the operations and financial reporting of the registrant; provided that the Committee may implement policies and procedures by which such services are approved other than by the full Committee prior to their ratification by the Committee.
(2) Disclose the percentage of services described in each of paragraphs (b) through (d) of this item that were approved by the audit committee pursuant to paragraph (c) (7)(i)(c) of Rule 2-01 of Regulation S-X.
Current Year | Previous Year | |
100% | N/A |
(f) Not applicable.
(g) Disclose the aggregate non-audit fees billed by the registrant’s accountant for services rendered to registrant, and rendered to the registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant for each of the last two fiscal years of the registrant.
Current Year | Previous Year | |
$0 | N/A |
(h) Not applicable.
Item 5. | Audit Committee of Listed Registrants. |
Not applicable.
Item 6. | Investments. |
(a) The registrant’s Consolidated 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. |
These policies are included as Exhibit 12(a)(4).
Item 8. | Portfolio Managers of Closed-End Management Investment Companies. |
(a)(1) Identification of Portfolio Managers and Description of Role of Portfolio Managers – as of March 31, 2013
Alberto Santulin (since inception) and John (JT) Shields (since January 2013) are the portfolio managers of the registrant and the Feeder Fund and as such have day-to-day management responsibilities for the registrant and the Feeder Fund. BAAM’s Investment Committee reviews and approves investments made by the registrant and the Feeder Fund but is not primarily responsible for the day-to-day management of the registrant’s and the Feeder Fund’s portfolios.
Alberto Santulin has been a Managing Director of BAAM since 2005. In this role, Mr. Santulin has been involved in portfolio management, primarily focusing on arbitrage, credit and event strategies. In addition, he is involved in hedge fund manager evaluation, selection and monitoring. From 2006-2008, Mr. Santulin focused on European hedge fund managers while maintaining the aforementioned responsibilities.
JT Shields has been a Vice President of BAAM. Since joining BAAM, Mr. Shields has been involved in manager evaluation, selection and monitoring, primarily focused on hedged equity managers. In addition, he has been involved in portfolio management of BAAM’s equity strategies. Before joining BAAM in 2010, Mr. Shields was a Vice President at UBP Asset Management, a fund of hedge funds, where he focused on equity strategies.
(a)(2) Other Accounts Managed by Portfolio Managers
The table below identifies, for each named portfolio manager of the registrant (a “Portfolio Manager”), the number of accounts (other than the registrant or Blackstone Alternative Alpha Fund (a feeder fund that invests substantially all of its assets in the registrant, the “Feeder Fund”)) for which the Portfolio Manager has day-to-day management responsibilities and the total assets in such accounts, within each of the following categories: registered investment companies, other pooled investment funds and other accounts.
Name of Portfolio Manager | Registered Investment Companies Managed by Portfolio Manager | Other Pooled Investment Vehicles Managed by Portfolio Manager | Other Accounts Managed by Portfolio Manager | |||||||||||||||||||||
Number | Total Assets | Number | Total Assets | Number | Total Assets | |||||||||||||||||||
Alberto Santulin | 0 | N/A | 0 | N/A | 0 | N/A | ||||||||||||||||||
JT Shields | 0 | N/A | 0 | N/A | 0 | N/A |
Potential Conflicts of Interest
Not applicable.
(a)(3) Compensation of Portfolio Managers
The Portfolio Managers’ compensation is comprised primarily of a fixed salary and a discretionary bonus paid by BAAM or its affiliates and not by the registrant or the Feeder 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, the Feeder Fund and the other accounts managed by BAAM; the absolute performance of the registrant, the Feeder Fund and such other accounts for the preceding year; contributions by the Portfolio Manager in assisting with managing the assets of BAAM; and execution of managerial responsibilities, client interactions and support of colleagues. The bonus is not based on a precise formula, benchmark or other metric.
(a)(4) Securities Ownership of Portfolio Managers
The table below shows the dollar range of the interests of the registrant and the Feeder Fund beneficially owned as of March 31, 2013 by each Portfolio Manager.
Portfolio Manager | Registrant | Feeder Fund | ||
Alberto Santulin | None | None | ||
JT Shields | 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 registrant’s Board of Trustees.
Item 11. | Controls and Procedures. |
(a) The registrant’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant’s 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 registrant’s 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 registrant’s internal control over financial reporting.
Item 12. | Exhibits. |
(a)(1) Code of ethics, or any amendment thereto, that is the subject of disclosure require by Item 2 is attached hereto.
Exhibit 99.CODE
(a)(2) Certifications pursuant to Rule 30a-2(a) are attached hereto.
Exhibit 99.CERT
(a)(3) Not applicable.
(a)(4) Proxy voting policies and procedures pursuant to Item 7 are attached hereto.
Exhibit 99.PROXY
(b) Certifications pursuant to Rule 30a-2(b) are attached hereto.
Exhibit 99.906CERT
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 Master Fund
By (Signature and Title) /s/ Brian F. Gavin
Brian F. Gavin, President (Principal Executive Officer)
Date: June 10, 2013
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By (Signature and Title) /s/ Brian F. Gavin
Brian F. Gavin, President (Principal Executive Officer)
Date: June 10, 2013
By (Signature and Title) /s/ Arthur Liao
Arthur Liao, Treasurer (Principal Financial and Accounting Officer)
Date: June 10, 2013