UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-21760
Name of Fund: Multi-Strategy Hedge Advantage
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, Multi-Strategy Hedge Advantage, 800 Scudders Mill Road,
Plainsboro, NJ 08536. Mailing address: P.O. Box 9011, Princeton, NJ
08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 03/31/06
Date of reporting period: 04/01/05 - 09/30/05
Item 1 - Report to Stockholders
Multi-Strategy Hedge
Advantage
Semi-Annual Report
September 30, 2005
Multi-Strategy Hedge Advantage
Portfolio Information as of September 30, 2005
Percent of Total
Ten Largest Holdings Investments
- --------------------------------------------------------------------------------
HBK Offshore Fund Ltd ................................................ 7.6%
Bridgewater Pure Alpha Fund I ........................................ 6.8
GCM Little Arbor Partners (Cayman) Ltd ............................... 6.5
Kinetics Fund Inc. ................................................... 4.1
Litespeed Offshore Fund Ltd .......................................... 4.0
The Canyon Value Realization Fund
(Cayman) Ltd ....................................................... 4.0
North Sound Legacy International Ltd ................................. 3.5
York Global Value Unit Trust ......................................... 3.5
Trivium Offshore Fund Ltd ............................................ 3.5
York Investments Ltd ................................................. 3.5
- --------------------------------------------------------------------------------
Percent of
Investments by Strategy Net Assets
- --------------------------------------------------------------------------------
Event Driven ......................................................... 24.2%
Equity Opportunistic ................................................. 23.8
Directional .......................................................... 16.6
Managed Futures ...................................................... 11.2
Multi-Strategy ....................................................... 10.0
Convertible Arbitrage ................................................ 6.0
Fixed Income ......................................................... 5.4
Equity Neutral ....................................................... 1.9
Other* ............................................................... 0.9
- --------------------------------------------------------------------------------
* Includes portfolio holdings in short-term securities.
Availability of Quarterly Schedule of Investments
The Fund files its 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 Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Electronic Delivery
The Fund offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site at http://www.icsdelivery.com/live and follow the instructions. When you
visit this site, you will obtain a personal identification number (PIN). You
will need this PIN should you wish to update your e-mail address, choose to
discontinue this service and/or make any other changes to the service. This
service is not available for certain retirement accounts at this time.
2 MULTI-STRATEGY HEDGE ADVANTAGE SEPTEMBER 30, 2005
A Letter From the President
Dear Shareholder
Amid what we've coined a "muddle through" year for the financial markets, the
major benchmark indexes managed to post positive results for the current
reporting period:
Total Returns as of September 30, 2005 6-month 12-month
===================================================================================
U.S. equities (Standard & Poor's (S&P) 500 Index) +5.02% +12.25%
- -----------------------------------------------------------------------------------
Small-cap U.S. equities (Russell 2000 Index) +9.21% +17.95%
- -----------------------------------------------------------------------------------
International equities (MSCI Europe Australasia Far East Index) +9.26% +25.79%
- -----------------------------------------------------------------------------------
Fixed income (Lehman Brothers Aggregate Bond Index) +2.31% +2.80%
- -----------------------------------------------------------------------------------
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) +2.80% +4.05%
- -----------------------------------------------------------------------------------
High yield bonds (Credit Suisse First Boston High Yield Index) +2.82% +6.31%
- -----------------------------------------------------------------------------------
Since June 2004, the Federal Reserve Board (the Fed) has tirelessly advanced its
interest rate hiking program, raising the federal funds rate 11 times to 3.75%
by period-end. The Fed admittedly remains more concerned about inflation than
slowing economic growth, causing some to worry that the central bank may
overreact to inflation and increase interest rates more than is necessary to
maintain a healthy economic balance. Recent disruptions to production and
spending from Hurricanes Katrina and Rita are likely to distort the economic
data in the short term, muddying the underlying trends. However, any
hurricane-induced slowdown is likely to be short lived, and the fiscal stimulus
associated with reconstruction efforts in the Gulf could add to gross domestic
product growth in 2006.
U.S. equities exhibited resilience over the past several months as investors
generally tended to proceed with caution. After a strong finish to 2004, the S&P
500 Index remained largely range-bound in 2005, with the last three months
representing the best quarter of the year. Up to this point, strong corporate
earnings reports and low long-term bond yields have worked in favor of equities.
Looking ahead, high energy prices, continued interest rate hikes, a potential
consumer slowdown and/or disappointing earnings pose the greatest risks to U.S.
stocks. Internationally, many markets have benefited from strong economic
statistics, trade surpluses and solid finances.
In the bond market, the yield curve continued to flatten as short-term interest
rates moved in concert with the Fed rate hikes and longer-term interest rates
remained more constant or declined. The difference between two-year and 10-year
Treasury yields collapsed from 151 basis points (1.51%) on September 30, 2004 to
70 basis points on March 31, 2005, to just 16 basis points at period-end.
Financial markets are likely to face continued crosscurrents in the months
ahead. Nevertheless, opportunities do exist and we encourage you to work with
your financial advisor to diversify your portfolio among a variety of asset
types. This can help to diffuse risk while also tapping into the potential
benefits of a broader range of investment alternatives. As always, we thank you
for trusting Merrill Lynch Investment Managers with your investment assets, and
we look forward to serving you in the months and years ahead.
Sincerely,
/s/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
President and Trustee
MULTI-STRATEGY HEDGE ADVANTAGE SEPTEMBER 30, 2005 3
A Discussion With Your Fund's Portfolio Managers
We are pleased to provide you with this first shareholder report for
Multi-Strategy Hedge Advantage, a continuously offered, closed-end fund designed
to offer accredited investors access to opportunities in the hedge fund market.
What is the Fund's investment objective?
Multi-Strategy Hedge Advantage seeks high total returns through investment in
hedge funds and other investment vehicles that pursue alternative investment
strategies. The Fund seeks to accomplish its objective by investing primarily in
hedge funds, commodity pools, funds of funds and other alternative investment
pools managed by securities and commodity trading advisers. Through these types
of investments, the Fund will typically gain exposure to several common
alternative investment strategies, such as relative value, global macro, equity
long/short, event-driven and managed futures strategies. These are among the
strategies that hedge funds in the market today use to generate returns and
manage risks. In the discussion that follows, we will refer to "managers," or
hedge funds, that employ these strategies. The Fund's allocations to underlying
managers and strategies are based on, among other factors, quantitative
techniques and risk management guidelines that seek to maintain diversification.
How has the Fund performed since inception?
Since its inception on September 1, 2005 through September 30, 2005, the Common
Stock of Multi-Strategy Hedge Advantage had a total net investment return of
+.98% (not including a maximum distribution fee of 3%), based on a change in per
share net asset value from $1.0000 to $1.0098, and assuming reinvestment of all
distributions. This compares to the +.97% return of the Standard & Poor's (S&P)
Hedge Fund Index for the same period. The Fund outperformed more traditional
investments during this one-month timeframe, including the S&P 500 Index, which
returned +.81%, and the Lehman Brothers Aggregate Bond Index, which returned
- -1.03%.
Describe the market environment and how the various alternative investment
strategies fared under these conditions.
The Fund commenced operations in the last month of the third quarter, shortly
after Hurricane Katrina struck the United States. Equity investors anticipated
that the Federal Reserve Board (the Fed) would slow its pace of monetary
tightening in response to the devastation of the Gulf Coast region and its
resulting impact on economic growth. However, the spike in energy prices on the
heels of Katrina, along with increasing unit labor costs, sparked inflationary
concerns and depressed stock prices toward the end of the quarter. The Fed,
focused on inflationary pressures, raised the federal funds rate 25 basis points
(.25%) on September 20. Treasury yields, which declined after Katrina as
investors anticipated a more accommodative Fed, quickly resumed their upward
trend on concerns over the impact of both the massive fiscal stimulus and high
energy prices in Katrina's aftermath. Overall, the yield curve flattened as
continued Treasury purchases by Asian central banks and the pension demand for
long-duration assets seemingly tempered the rise in 10-year yields.
Event-driven strategies -- broadly consisting of high yield and distressed,
corporate restructurings, reorganizations, spin-offs, special situations and
capital structure arbitrage -- produced positive results for the period. Credit
spreads continued to tighten into July after the difficulties caused by the
General Motors Corp. and Ford Motor Co. downgrades in May. In August and
September, it was primarily credit-specific and event-driven investments that
drove returns, as high yield spreads remained stagnant in August while inching
up in September. Going forward, the focus will remain on both credit and event
analysis.
Our equity long/short managers generated positive performance. Equities showed
incredible resilience in the face of continued interest rate hikes, spiking oil
prices, sagging consumer confidence and two hurricanes (Katrina and Rita). Most
of the gains were generated in the energy sector, which advanced more than 17%
in the third quarter. Many equity long/short funds had long overweight energy
exposure and were able to profit from the sector rally. The balance of the
market showed relatively benign performance, with the consumer, financial and
telecommunications sectors all declining modestly. Many managers, however, were
short financials (in light of the flattening yield curve) and consumers (in the
face of higher interest rates and spiking oil prices) and were able to profit
outside the oil sector. The small cap rally continued in the third quarter, and
hedge funds focused on smaller cap securities generally outperformed.
Equity market neutral managers produced negative returns. Long-term fundamental
models generally posted positive performance; however, short-term price reversal
model returns were negative. In terms of geographical breakdown, Europe and the
U.K. contributed positively, while the United States and Asia made a
flat-to-negative contribution.
Most fundamental and discretionary macro managers generated strong profits in
the third quarter. The equity sector
4 MULTI-STRATEGY HEDGE ADVANTAGE SEPTEMBER 30, 2005
proved the most profitable as G10 equities and emerging market equities worked
in favor of most global macro managers. Managers renewed their focus on Asia
and, more specifically, on Japan. On the fixed income side, most macro managers
maintained their short duration to U.S. interest rates, and this benefited the
overall performance of the strategy, particularly in July and September.
Currency positions continued to suffer, with the worst affected market being the
Swiss franc, which strengthened appreciably as increasingly cautious investors
switched assets into safe haven areas. On the commodity side, crude oil and
natural gas continued to move higher but retraced sharply a few times,
generating mixed results. Some profits were recorded from long positions in
energy or utility stocks.
Managed futures, as defined by systematic/technical managers, were flat to
slightly positive as markets saw the continuation of strong trends in
commodities and stock indexes juxtaposed with significant intra-quarter
reversals in currencies and interest rates. The energy sector captured most of
the headlines, with both natural gas and crude oil touching all-time highs.
Several stock indexes worldwide also reached multi-year highs during the third
quarter, which proved favorable to trend followers. Conversely, interest rates
proved to be a difficult market. In particular, Japanese JGBs and the German
Bunds were generally money losers as August brought sharp reversals in both.
Currencies also were challenging to trade for most technical managers. Many of
the major currencies started and ended the quarter at nearly the same levels but
experienced significant intra-quarter volatility.
Our fixed income arbitrage managers performed well. Fixed income markets seem to
have migrated in the direction that our managers generally had been expecting.
U.S. interest rates rose across the yield curve and the yield curve flattened.
Spreads on mortgage-backed securities widened on a spike in volatility that
occurred due to investor uncertainty following Hurricane Katrina. The most
significant change in the markets that was not in line with our managers'
expectations was the further tightening of credit spreads. Our managers continue
to expect higher interest rates and wider credit spreads in the fourth quarter.
In one notable change in our managers' portfolio positioning, managers with a
"long Germany versus short U.S." bias recently switched the position to "long
U.S. versus short Germany."
It has been a difficult year for convertible arbitrage, but our managers believe
we entered a new, positive phase in July with the end of the massive sell-off
that was triggered by negative investor sentiment. Investor redemptions have
slowed dramatically. The shakeout was violent and resulted in the closure of
several hedge funds. The rebound in convertible bond valuations was not as
dramatic, but our managers are pleased with the steady gains they were able to
generate during the third quarter. The "icing on the cake" was an increase in
equity volatility to the highest level since the sell-off began. Volatility is
still low compared to recent historical levels, but our managers point out that
current convertible valuations are pricing in such low implied volatility levels
that any increase can push prices and performance higher. However, we still view
convertible arbitrage as an underperforming strategy given low realized
volatility, tight credit spreads, rising interest rates and weak new issuance.
How have you managed the Fund since its inception?
We made no major changes to the portfolio allocation. At September 30, 2005, the
Fund was comprised of 32 underlying managers and its market exposure was broken
down as follows: Event-driven (24.2%), equity opportunistic (23.8%), directional
(16.6%), managed futures (11.2%), multi-strategy (10.0%), convertible arbitrage
(6.0%), fixed income (5.4%), and equity neutral (1.9%).
How would you characterize the Fund's position at the close of the period?
We view the remainder of 2005 and 2006 as a "stock pickers'" market and are
positioning the portfolio accordingly, with significant exposure to strong
bottom-up, research-driven equity funds. Despite a slowdown in corporate
earnings growth and higher interest rates, the equity markets should receive
support from strong corporate balance sheets, solid free cash flow generation
and ample opportunities overseas. In the event-driven space, profit
opportunities should continue to surface due to abundant corporate activity. In
addition, we believe there will be opportunities in foreign exchange as the Fed
continues to raise interest rates and the U.S. dollar moves from a funding to a
high-yielding currency. Conversely, we believe it will be difficult for
traditional fixed income relative value managers to make money in the current
environment given tight credit and mortgage spreads and a flat yield curve.
Fabio P. Savoldelli
Vice President and Co-Portfolio Manager
Hideaki Yamagishi, CFA
Co-Portfolio Manager
October 25, 2005
MULTI-STRATEGY HEDGE ADVANTAGE SEPTEMBER 30, 2005 5
Disclosure of Expenses
Shareholders of this Fund may incur the following charges: (a) expenses related
to transactions, including sales charges, and (b) operating expenses, including
advisory fees, member services fees and other Fund expenses. The following
example (which is based on a hypothetical investment of $1,000 invested on
September 1, 2005 and held through September 30, 2005) is intended to assist
shareholders both in calculating expenses based on an investment in the Fund and
in comparing these expenses with similar costs of investing in other mutual
funds.
The first table below provides information about actual account values and
actual expenses. In order to estimate the expenses a shareholder paid during the
period covered by this report, shareholders can divide their account value by
$1,000 and then multiply the result by the number in the first line under the
heading entitled "Expenses Paid During the Period."
The second table below provides information about hypothetical account values
and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses. In order to assist
shareholders in comparing the ongoing expenses of investing in this Fund and
other funds, compare the 5% hypothetical example with the 5% hypothetical
examples that appear in other funds' shareholder reports.
The expenses shown in the table are intended to highlight shareholders ongoing
costs only and do not reflect any transactional expenses, such as sales charges.
Therefore, the second table is useful in comparing ongoing expenses only, and
will not help shareholders determine the relative total expenses of owning
different funds. If these transactional expenses were included, shareholder
expenses would have been higher.
Expenses Paid
Beginning Ending During the Period*
Account Value Account Value September 1, 2005 to
September 1, 2005 September 30, 2005 September 30, 2005
===================================================================================================================
Actual
===================================================================================================================
Multi-Strategy Hedge Advantage $1,000 $1,010 $2.48
===================================================================================================================
Hypothetical (5% annual return before expenses)**
===================================================================================================================
Multi-Strategy Hedge Advantage $1,000 $1,002 $2.47
- -------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio of 3%, multiplied by
the average account value over the period, multiplied by 30/365 (to
reflect the one-month period shown).
** Hypothetical 5% annual return before expenses is calculated by pro-rating
the number of days in the most recent fiscal month divided by 365.
Aggregate Total Return
Return Without Return With
Sales Charge Sales Charge*
================================================================================
Inception (9/01/05)
through 9/30/05 +0.98% -2.05%
- --------------------------------------------------------------------------------
* Maximum distribution fee is 3%.
6 MULTI-STRATEGY HEDGE ADVANTAGE SEPTEMBER 30, 2005
Schedule of Investments (in U.S. dollars)
Strategy Portfolio Funds Value
==========================================================================================================================
Convertible Arbitrage--6.0% Aristeia International Ltd $ 305,850
Context Convertible Arbitrage Offshore Ltd 303,051
Waterstone Market Neutral Offshore Fund 305,694
-----------
914,595
==========================================================================================================================
Directional--16.6% Cornerstone International Value (Offshore) Fund Ltd 383,978
Drawbridge Global Macro Fund Ltd 478,800
Graham Global Investment Fund II Ltd 451,724
Grinham Diversified Fund Ltd 457,382
The Drake Absolute Returns Fund Ltd 312,900
Vega Select Opportunities Fund Ltd 462,024
-----------
2,546,808
==========================================================================================================================
Equity Neutral--1.9% Ventus US$ Double Leverage Fund 294,368
==========================================================================================================================
Equity Opportunistic--23.8% GCM Little Arbor Partners (Cayman) Ltd 986,953
Hayground Cove Overseas Partners Ltd 518,344
Kinetics Fund Inc. 626,004
North Sound Legacy International Ltd 534,534
SR Capital Offshore Ltd 448,245
Trivium Offshore Fund Ltd 529,300
-----------
3,643,380
==========================================================================================================================
Event Driven--24.2% Avenue Europe International Ltd 303,854
Avenue International Ltd 302,550
GoldenTree Credit Opportunities II Ltd 452,229
Litespeed Offshore Fund Ltd 612,564
Ore Hill International Fund Ltd 378,788
The Canyon Value Realization Fund (Cayman) Ltd 605,406
York Global Value Unit Trust 529,725
York Investments Ltd 528,150
-----------
3,713,266
==========================================================================================================================
Fixed Income--5.4% PIMCO Global Relative Value Offshore Fund 299,318
Smith Breeden Global Funding Ltd 223,393
The Obsidian (Offshore) Fund 307,500
-----------
830,211
==========================================================================================================================
Managed Futures--11.2% Bridgewater Pure Alpha Fund I 1,027,610
Grossman Currency Fund Ltd 468,923
Salem Futures Fund (Offshore) Ltd 212,162
-----------
1,708,695
==========================================================================================================================
Multi-Strategy--10.0% CRG Partners Ltd 381,904
HBK Offshore Fund Ltd 1,147,156
-----------
1,529,060
==========================================================================================================================
Total Investments (Cost--$15,000,000*)--99.1% 15,180,383
Other Assets Less Liabilities--0.9% 140,404
-----------
Net Assets--100.0% $15,320,787
===========
* The cost and unrealized appreciation (depreciation) of investments as of
September 30, 2005, as computed for federal income tax purposes, were as
follows:
Aggregate cost ............................................ $15,000,000
===========
Gross unrealized appreciation ............................. $ 225,445
Gross unrealized depreciation ............................. (45,062)
-----------
Net unrealized appreciation ............................... $ 180,383
===========
See Notes to Financial Statements.
MULTI-STRATEGY HEDGE ADVANTAGE SEPTEMBER 30, 2005 7
Statement of Assets and Liabilities
As of September 30, 2005
================================================================================================
Assets
- ------------------------------------------------------------------------------------------------
Investments in Portfolio Funds*, at value
(identified cost--$15,000,000) ......... $ 15,180,383
Cash and cash equivalents ............... 669,203
Investments paid in advance ............. 3,900,000
Interest receivable ..................... 2,967
Reimbursement from advisor .............. 60,823
Prepaid expenses and other assets ....... 464,347
------------
Total assets ............................ 20,277,723
------------
================================================================================================
Liabilities
- ------------------------------------------------------------------------------------------------
Payables:
Investment adviser ................... $ 19,099
Service agents ....................... 31,400 50,499
------------
Subscriptions received in advance ....... 4,443,760
Accrued expenses and other liabilities .. 462,677
------------
Total liabilities ....................... 4,956,936
------------
================================================================================================
Net Assets
- ------------------------------------------------------------------------------------------------
Net assets .............................. $ 15,320,787
============
================================================================================================
Net Assets Consist of
- ------------------------------------------------------------------------------------------------
Investors' capital ...................... $ 15,172,380
Unrealized appreciation--net ............ 180,383
Undistributed net investment loss ....... (31,976)
------------
Net Assets .............................. $ 15,320,787
============
Shares outstanding ...................... 15,172,380
============
Net asset value per share ............... $ 1.0098
============
* Non-income securities.
See Notes to Financial Statements.
8 MULTI-STRATEGY HEDGE ADVANTAGE SEPTEMBER 30, 2005
Statement of Operations
For the Period September 1, 2005+ to September 30, 2005
================================================================================================
Investment Income
- ------------------------------------------------------------------------------------------------
Interest ................................ $ 5,955
------------
================================================================================================
Expenses
- ------------------------------------------------------------------------------------------------
Investment advisory fees ................ $ 19,099
Organizational and offering costs ....... 42,213
Accounting and administration services .. 5,174
Member services fee ..................... 3,184
Professional fees ....................... 18,542
Printing and shareholder reports ........ 3,208
Trustees' fees and expenses ............. 2,833
Custodian fees .......................... 600
Other ................................... 3,900
------------
Total expenses .......................... 98,753
------------
Less: Expense waivers ................... (60,822)
------------
Net expenses ............................ 37,931
------------
Investment loss--net .................... (31,976)
------------
================================================================================================
Unrealized Gain
- ------------------------------------------------------------------------------------------------
Unrealized appreciation on
investments--net ....................... 180,383
------------
Net Increase in Net Assets Resulting
from Operations ........................ $ 148,407
============
+ Commencement of operations.
See Notes to Financial Statements.
MULTI-STRATEGY HEDGE ADVANTAGE SEPTEMBER 30, 2005 9
Statement of Changes in Net Assets
For the Period
September 1, 2005+
to September 30,
Increase in Net Assets: 2005
===================================================================================================
Operations
- ---------------------------------------------------------------------------------------------------
Investment loss--net ....................................... $ (31,976)
Unrealized appreciation--net ............................... 180,383
------------
Net increase in net assets resulting from operations ....... 148,407
------------
===================================================================================================
Capital Transactions
- ---------------------------------------------------------------------------------------------------
Proceeds from contributions ................................ $ 15,072,380
------------
Net increase in net assets derived from capital transactions 15,072,380
------------
===================================================================================================
Net Assets
- ---------------------------------------------------------------------------------------------------
Total increase in net assets ............................... 15,220,787
Beginning of period ........................................ 100,000
------------
End of period .............................................. $ 15,320,787
============
+ Commencement of operations.
See Notes to Financial Statements.
10 MULTI-STRATEGY HEDGE ADVANTAGE SEPTEMBER 30, 2005
Statement of Cash Flows
For the Period September 1, 2005+ to September 30, 2005 (unaudited)
===================================================================================================
Cash Used for Operating Activities
- ---------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations ....... $ 148,407
------------
Adjustments to reconcile net increase in net assets
resulting from operations to net cash provided by operating
activities:
Increase in receivables ................................. (3,902,967)
Increase in other assets ................................ (525,170)
Increase in other liabilities ........................... 4,956,936
Increase in unrealized gain--net ........................ (180,383)
Purchases of long-term securities .......................... (15,000,000)
------------
Net cash used for investing activities ..................... (14,503,177)
------------
===================================================================================================
Cash Provided by Financing Activities
- ---------------------------------------------------------------------------------------------------
Cash receipts from issuance of shares ...................... $ 15,072,380
------------
Net cash provided by financing activities .................. 15,072,380
------------
===================================================================================================
Cash & Cash Equivalents
- ---------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents .................. 569,203
Cash and cash equivalents at beginning of period ........... 100,000
------------
Cash and cash equivalents at end of period ................. $ 669,203
============
+ Commencement of operations.
See Notes to Financial Statements.
MULTI-STRATEGY HEDGE ADVANTAGE SEPTEMBER 30, 2005 11
Financial Highlights
For the Period
September 1, 2005+
The following ratios have been derived from to September 30,
information provided in the financial statements. 2005
===================================================================================================
Per Share Operating Performance
- ---------------------------------------------------------------------------------------------------
Net asset value, beginning of period ....................... $ 1.0000
Investment loss--net ....................................... (.0021)
Unrealized gain ............................................ .0119
------------
Total from investment operations ........................... .0098
------------
Net asset value, end of period ............................. $ 1.0098
============
===================================================================================================
Total Investment Return
- ---------------------------------------------------------------------------------------------------
Total investment return .................................... .98%@
============
===================================================================================================
Ratios to Average Net Assets
- ---------------------------------------------------------------------------------------------------
Expenses ................................................... 7.81%*
============
Expenses net of reimbursement .............................. 3.00%*
============
Investment loss--net ....................................... (2.53%)*
============
===================================================================================================
Supplemental Data
- ---------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) ................... $ 15,321
============
Portfolio turnover ......................................... 0%
============
* Annualized.
+ Commencement of operations.
@ Aggregate total investment return.
See Notes to Financial Statements.
12 MULTI-STRATEGY HEDGE ADVANTAGE SEPTEMBER 30, 2005
Notes to Financial Statements
1. Significant Accounting Policies:
Multi-Strategy Hedge Advantage (the "Fund") is registered under the Investment
Company Act of 1940, as amended, as a continuously offered, closed-end,
non-diversified management investment company. The Fund's financial statements
are prepared in conformity with U.S. generally accepted accounting principles,
which may require the use of management accruals and estimates. Actual results
may differ from these estimates. The Fund offers one class of shares, which may
be sold with a front-end sales charge. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments in Portfolio Funds -- The Fund values its
investments in Portfolio Funds at fair value in accordance with procedures
established by the Board of Trustees. The valuations reported by the Portfolio
Fund Managers of the Portfolio Funds, upon which the Fund calculates its
month-end net asset value and net asset value per Share, may be subject to later
adjustment, based upon information reasonably available at that time. The Fund
will pay redemption proceeds, as well as calculate management fees, on the basis
of net asset valuations determined using the best information available as of
the valuation date. In the event a Portfolio Fund subsequently corrects,
revises, or adjusts a valuation after the Fund has determined a net asset value,
the Fund will generally not make any retroactive adjustment to such net asset
value, or to any amounts paid based on such net asset value, to reflect a
revised valuation.
(b) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends and
capital gains at various rates.
(c) Security transactions and investment income -- Portfolio Fund transactions
are recorded on the effective dates of the transactions. Realized gains and
losses on Portfolio Fund transactions are determined on the average cost basis.
Interest income is recognized on the accrual basis.
(d) Cash balances -- The Fund maintains cash in the PNC Money Market account,
which, at times, may exceed federally insured limits. The Fund has not
experienced any losses in such accounts and does not believe it is exposed to
any significant credit risk on such bank deposits.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Investment Managers LLC ("MLIM"). MLIM is an indirect, wholly-owned subsidiary
of Merrill Lynch & Co., Inc. ("ML & Co.").
MLIM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
an annual rate of 1.50% of the average month-end value of the Fund's net assets.
The Fund has also entered into a Member Services Agreement with FAM
Distributors, Inc. ("FAMD" and the "Service Agent"), an affiliate of MLIM. FAMD
provides or arranges for provision of ongoing investor and account maintenance
services. The Fund pays a monthly fee computed at the annual rate of .25% of the
Fund's average month-end assets (the "Service Fee"). The Service Fee will be
paid to the Service Agent to reimburse it for payments made to broker-dealers
and financial advisors that have agreed to provide ongoing investor and account
maintenance services to members of the Fund and for ongoing investor servicing
activities performed by the Service Agent.
For the one-month period ended September 30, 2005, FAMD received $341,534 in
distribution fees on sales of shares in the Fund.
Certain officers and/or Trustees of the Fund are officers and/or directors of
MLIM and/or ML & Co.
3. Investments:
Purchases of investments, excluding short-term securities, for the period from
September 1, 2005 (commencement of operations) to September 30, 2005 were
$15,000,000.
4. Capital Share Transactions:
An investor purchases Shares in the Fund and the Shares are offered at their net
asset value. The minimum initial investment for each investor is $25,000 (net of
any distribution fees) and the minimum additional investment is $10,000. An
investor's subscription for Shares is irrevocable by the investor and will
generally require the investor to maintain its investment in the Fund until such
time as the Fund offers to repurchase the Shares in a tender offering. No member
or other person holding Shares acquired from a Member will have the right to
require the Fund to redeem the Shares. The
MULTI-STRATEGY HEDGE ADVANTAGE SEPTEMBER 30, 2005 13
Notes to Financial Statements (continued)
Fund may from time to time repurchase Shares from Members in accordance with
written tenders by Members at those times, in those amounts and on terms and
conditions as the Board of Trustees may determine in its sole discretion. The
Adviser expects that it will recommend to the Board of Trustees that the Fund
offer to repurchase Shares from Members quarterly on the last business day of
March, June, September and December.
Transactions in capital shares were as follows:
- --------------------------------------------------------------------------------
For the period from
September 1, 2005+ to Dollar
September 30, 2005 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ........................ 15,172,380 $15,172,380
Shares tendered .................... -- --
---------------------------------
Net increase ....................... 15,172,380 $15,172,380
=================================
+ Commencement of operations.
5. Investments in Portfolio Funds:
The table below lists the Fund's investments in Portfolio Funds for the period
ending September 30, 2005, none of which was a related party. The agreements
related to investments in Portfolio Funds provide for the compensation in the
form of management fees of 1% to 3% (per annum) of net assets and performance
incentive fees or allocations of 10% to 25% of net profits earned.
Information about the underlying investments held by the Portfolio Funds is not
readily available, so it is unknown whether the Portfolio Funds hold any single
investment whereby the Fund's proportionate share exceeds 5% of the Fund's net
assets at September 30, 2005.
- --------------------------------------------------------------------------------------------------------------------------------
Fees
% of Fund's Net Income ------------------------ Redemptions
2005 Investments Total Fair Value Fair Value (Loss) Management Incentive Permitted
- --------------------------------------------------------------------------------------------------------------------------------
Aristeia Int'l 2.0% $ 305,850 $ 5,850 1% 20% Quarterly
Avenue Europe Int'l 2.0% 303,854 3,854 2% 20% Quarterly
Avenue Int'l 2.0% 302,550 2,550 2% 20% Quarterly
Bridgewater Pure Alpha Fund I 6.8% 1,027,610 27,610 2% 20% Monthly
Canyon Value 4.0% 605,406 5,406 1% 20% Quarterly
Context Convertible 2.0% 303,051 3,051 1.5% 20% Quarterly
Cornerstone Int'l 2.5% 383,978 8,978 1% 20% Quarterly
CRG Partners 2.5% 381,904 6,904 2% 20% Monthly
Drawbridge Global Macro 3.1% 478,800 28,800 2% 20% Quarterly
GCM Little Arbor Partners 6.5% 986,953 (13,047) 2% 20% Quarterly
Golden Tree Opp 3.0% 452,229 2,229 2% 20% Semi-Annual
Graham Global Investment Fund II 3.0% 451,724 1,724 3% 20% Monthly
Grinham Diversified 3.0% 457,382 7,382 1.5% 20% Quarterly
Grossman Currency 3.1% 468,923 18,923 3% 25% Monthly
Hayground Cove Overseas Partners 3.4% 518,344 (6,657) 1.5% 20% Monthly
HBK Offshore Fund 7.6% 1,147,156 (2,844) 1.5% 20% Quarterly
Kinetics Fund Inc. 4.1% 626,004 26,004 1.25% 20% Quarterly
Litespeed 4.0% 612,564 12,564 1.5% 20% Quarterly
North Sound Legacy Int'l 3.5% 534,534 9,534 1.5% 20% Quarterly
Ore Hill International Fund Ltd 2.5% 378,788 3,788 1.5% 20% Quarterly
Pimco Global Relative Value 2.0% 299,318 (682) 2% 20% Quarterly
Salem Futures 1.4% 212,162 (12,838) 1% 20% Quarterly
Smith Breeden 1.5% 223,393 (1,607) 1% 20% Quarterly
SR Capital Partners 3.0% 448,245 (1,755) 1.5% 20% Quarterly
The Drake Absolute Returns 2.1% 312,900 12,900 2% 20% Quarterly
The Obsidian 2.0% 307,500 7,500 1% 20% Quarterly
Trivium 3.5% 529,300 4,300 1.5% 20% Monthly
Vega Select Opp 3.0% 462,024 12,025 2% 20% Monthly
Ventus US$ 1.9% 294,368 (5,632) 2% 20% Monthly
Waterstone Market Neutral 2.0% 305,694 5,694 2% 20% Quarterly
York Global Value 3.5% 529,725 4,725 2% 20% Quarterly
York Investment 3.5% 528,150 3,150 2% 20% Quarterly
------------------------------------------
Total 100.0% $15,180,383 $180,383
==========================================
14 MULTI-STRATEGY HEDGE ADVANTAGE SEPTEMBER 30, 2005
Notes to Financial Statements (concluded)
6. Risk Factors:
An investment in the Fund involves a high degree of risk, including the risk
that the entire amount invested may be lost. The Fund allocates assets to
Portfolio Managers and invests in Portfolio Funds that invest in and actively
trade securities and other financial instruments using a variety of strategies
and investment techniques with significant risk characteristics, including the
risks arising from the volatility of the equity, fixed income, commodity and
currency markets, the risks of borrowings and short sales, the risks arising
from leverage associated with trading in the equities, currencies and
over-the-counter derivatives markets, the illiquidity of derivative instruments
and the risk of loss from counterparty defaults. No guarantee or representation
is made that the investment program will be successful.
7. Subsequent Event:
Throughout the normal course of business on October 1, 2005, there were
additional capital contributions of $4,443,760 to the Fund.
Officers and Trustees
Robert C. Doll, Jr., President and Trustee
David O. Beim, Trustee
James T. Flynn, Trustee
W. Carl Kester, Trustee
Karen P. Robards, Trustee
Fabio P. Savoldelli, Vice President
Donald C. Burke, Vice President and Treasurer
Jeffrey Hiller, Chief Compliance Officer
Alice A. Pellegrino, Secretary
Custodian
PFPC Trust Company
8800 Tinicum Boulevard
3rd Floor, Suite 200
Philadelphia, PA 19153
Administrator & Escrow Agent
PFPC, Inc.
301 Bellevue Parkway
Wilmington, DE 19809
MULTI-STRATEGY HEDGE ADVANTAGE SEPTEMBER 30, 2005 15
[LOGO] Merrill Lynch Investment Managers
www.mlim.ml.com
- --------------------------------------------------------------------------------
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com
Multi-Strategy Hedge Advantage seeks high total return over a full market cycle
through investments in hedge funds and other investment vehicles pursuing
alternative investment strategies.
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Statements and other
information herein are as dated and subject to change.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available without charge,
upon request, by calling toll-free 866-878-2987 or on the Securities and
Exchange Commission's Web site at http://www.sec.gov.
Multi-Strategy Hedge Advantage
Box 9011
Princeton, NJ
08543-9011
#MHA -- 9/05
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 to this
semi-annual report
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable to this semi-annual
report
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - Not
Applicable to this semi-annual report
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 - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others particularly
during the period in which this report is being prepared. The
registrant's certifying officers have determined that the registrant's
disclosure controls and procedures are effective based on our evaluation
of these controls and procedures as of a date within 90 days prior to
the filing date of this report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the last fiscal half-year of the
period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - Not Applicable to this semi-annual report
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
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.
Multi-Strategy Hedge Advantage
By: /s/ Robert C. Doll, Jr.
---------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Multi-Strategy Hedge Advantage
Date: November 17, 2005
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: /s/ Robert C. Doll, Jr.
---------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Multi-Strategy Hedge Advantage
Date: November 17, 2005
By: /s/ Donald C. Burke
---------------------------
Donald C. Burke,
Chief Financial Officer of
Multi-Strategy Hedge Advantage
Date: November 17, 2005