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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Hsbc Euro Stg | LSE:HENS | London | Ordinary Share | GB00B0BHKX21 | STERLING HEDGED SHARE GBP0.01 |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 146.75 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
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RNS Number : 1962A
HSBC European Absolute Limited
30 July 2008
HSBC EUROPEAN ABSOLUTE LIMITED
ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
FOR THE YEAR ENDED
31 MARCH 2008
Page
General Information 1-2
Directors' Report 3-6
Directors' Responsibility Statement 7
Investment Adviser's Report 8
Chairman's Statement 9
Independent Auditors' Report 10
Financial Statements:
* Income Statement 11
* Statement of Changes in Shareholders' Equity 12
* Balance Sheet 13
* Statement of Cash Flows 14
* Notes to the Financial Statements 15-31
Schedule of Investments 33-34
GENERAL INFORMATION
Manager, Company Secretary HSBC Management (Guernsey) Limited
and Registered Office St. Martin's House
Le Bordage
St Peter Port
Guernsey GY1 4AU
Directors Mr Ian Charles Domaille (Chairman)
Mr Stuart Francis Carnegie
Mr Stuart Walter Mitchell
Mr Michael John Quarrington
Banker HSBC Private Bank (C.I.) Limited
Park Place
Park Street
St Peter Port
Guernsey GY1 1EE
Investment Adviser HSBC Alternative Investments Limited
5th Floor, 78 St James's Street
London SW1A 1JB
Sponsor and Placing Agent Teather & Greenwood Ltd
Beaufort House, 15 St. Botolph Street
London EC3A 7QR
Solicitors to the Company Herbert Smith LLP
and to the Issue in England Exchange House
Primrose Street
London EC2A 2HS
Legal Advisers to the Company Carey Olsen
and to the Issue in Guernsey 7 New Street
St Peter Port
Guernsey GY1 4BZ
Channel Islands Sponsor HSBC Management (Guernsey) Limited
St. Martin's House
Le Bordage
St Peter Port
Guernsey GY1 4AU
Independent Auditors KPMG Channel Islands Limited
20 New Street
St. Peter Port
Guernsey GY1 4AN
Registrar Capita IRG (CI) Limited
PO Box 328
Landes du March
Vale
Guernsey GY1 3TY
GENERAL INFORMATION - (CONTINUED)
Custodian Investors Trust & Custodial Services (Ireland) Limited
(A State Street Company)
Block D
Iveagh Court
Harcourt Road
Dublin 2
The Fund HSBC European Absolute Limited (the "Company") is a Guernsey registered,
closed-ended investment company. The Company was incorporated and registered in Guernsey on 23 February, 2001, under The Companies
(Guernsey) Laws 1994 to 1996 (as amended) with registered number 38010. The initial Shares in the Company were offered at a price of 100p
each by HSBC. The Intermediaries Offer and the Offer for Subscription were also available in Euro denominated form in the form of European
Depositary Receipts. As of 30 June 2005, the Company introduced currency hedging on the Sterling class to protect from fluctuations in the
Euro/Sterling exchange rate. This was carried out by reclassifying Sterling shares previously held directly by Shareholders, i.e. not in the
form of EDRs, into new Sterling Hedged Shares. At the same time, all shares previously represented by EDRs, were reclassified as new Euro
Shares. Shareholders automatically received new Euro Shares if they held EDRs and/or Sterling Hedged Shares if they held their Shares directly. Shareholders may, however, elect to receive shares of
the other class. The Company is listed on the Channel Islands Stock Exchange and the London Stock Exchange.
Objective The objective of the Company is to seek to achieve equity like returns
with lower levels of volatility. Its policy is to achieve this by investing in a diversified portfolio of hedge funds and managed accounts
exposed to long/short strategies investing predominantly in UK and European markets which are managed to seek to provide investors with an
absolute total return and with a lower volatility than equities generally.
Net Asset Value The Net Asset Value (*NAV*) of the Company is calculated monthly with the
relevant valuation point being 5.00pm (Guernsey time) on the last Business Day of each month. A further two estimated NAVs are calculated
and published each month.
DIRECTORS' REPORT
The Directors present their report together with the audited financial statements of HSBC European Absolute Limited (the "Company") for
the year ended 31 March 2008. The results of operations are set out on page 11. A detailed review of activities is contained in the
Investment Adviser's Report on page 8.
In light of the performance of the Company since incorporation it is the view of the Directors that it is in the best interests of the
Shareholders to continue with the current appointment of the Investment Adviser under the terms agreed.
Principal Activity
The Company is a Guernsey registered closed ended investment company listed on the London Stock Exchange.
Investment Objective
The Company's objective is to seek to achieve equity like returns with lower levels of volatility. Its policy is to achieve this by
investing in a diversified portfolio of hedge funds and managed accounts exposed to long/short strategies investing predominantly in UK and
European markets which are managed to seek to provide investors with an absolute total return and with a lower volatility than equities
generally.
Going Concern
The Directors have examined significant areas of possible financial risk and have satisfied themselves that no material exposures exist.
The Directors therefore consider that the Company has adequate resources to continue in operational existence for the foreseeable future and
after due consideration believe it is appropriate to adopt the going concern basis in preparing the financial statements.
Further to their announcement of 20 May, 2008, the Directors announced that they have now resolved to bring forward proposals for the
Company which either will involve its liquidation or will otherwise enable those shareholders who so wish to realise their investment for
cash. Provided it is economic to do so, the Board intends to make available one or more successor investment vehicles for those shareholders
who wish to roll over their investment rather than realise it for cash.
The proposals will be subject to shareholders' approval. A shareholder circular giving full details is in preparation and will be
despatched as soon as practicable and further announcements made as appropriate.
Until the proposals have received shareholders' approval the Company shall continue to be deemed a going concern.
Corporate Governance
Principles Statement
The Directors are committed to high standards of corporate governance and have made it Company policy to adopt best practice in this
area, insofar as the Directors believe it is relevant and appropriate to the Company, and notwithstanding the fact that the Company is not
obliged to comply with the 'Combined Code' (i.e. the Code of Best Practice published by the Committee on the Financial Aspects of Corporate
Governance) as it is a Guernsey registered company.
Role of the Board
The Board has determined that its role is to consider and determine the following principal matters which it considers are of strategic
importance to the Company:
(i) review the overall objectives for the Company as described in the Prospectus and set the Company*s strategy for fulfilling
those objectives within an appropriate risk framework;
(ii) consider any shifts in strategy that it considers may be appropriate in light of market conditions;
(iii) review the capital structure of the Company including consideration of an appropriate use of gearing both for the Company and
in any joint ventures in which the Company may invest in from time to time;
(iv) appoint the Investment Manager, Administrator and other appropriate skilled service providers and monitor effectiveness through
regular reports and meetings; and
(v) review key elements of the Company*s performance including NAV and payment of dividends.
Board Decisions
At its Board meetings, the Board ensures that all the strategic matters listed under 'Role of the Board' are considered and resolved by
the Board. Issues associated with implementing the Company's strategy are generally considered by the Board to be non strategic in nature
and are delegated by the Board to either the Manager or the Administrator.
DIRECTORS' REPORT - (CONTINUED)
Directors, Rotation of Directors and Directors' Tenure
The Directors who held office during the year were:
Mr Ian Charles Domaille (appointed 23 February 2001)
Mr Stuart Francis Carnegie (appointed 23February 2001)
Mr Stuart Walter Mitchell (appointed 23 February 2001)
Mr Michael Quarrington (appointed 1 April 2005)
The Combined Code recommends that Directors should be appointed for a specified period. The Board has resolved in this instance that
Director appointments need not comply with this requirement as all Directors are non-executive and the respective appointments can be
terminated at any time without penalty.
Directors' Interests
None of the Directors have a service contract with the Company. Mr Stuart Walter Mitchell is also a manager of and adviser to various
investment funds and it is possible that the Company may invest in one or more funds whose portfolio is managed or advised by Mr Mitchell.
Mr Ian Charles Domaille is a non-executive director of the manager of various investment funds and a director of various investment funds
and it is possible that the Company may invest in one or more funds of which Mr Domaille is a director, or non-executive director of the
fund manager.
The Directors directly or indirectly hold the following shares in issue:
31 March 2008 31 March 2007
Mr Ian Charles Domaille 9,884 9,884
Mr Stuart Francis Carnegie 5,000 5,000
Mr Stuart Walter Mitchell 5,000 5,000
Mr Michael Quarrington 5,000 5,000
Audit Committee
The Board as a whole fulfils the function of an audit committee in relation to, amongst other things, monitoring the internal controls
of the Company and its service providers, reviewing the financial statements of the Company, monitoring the independence of the auditor and
the effectiveness of the audit process and reviewing the findings of the auditor.
Remuneration Committee
The Board as a whole fulfils the function of a remuneration committee in relation to the setting and periodic review of the fees of the
Directors and the Chairman, taking into account, amongst other factors, prevailing market conditions and the need to attract to the Board,
and retain thereafter, suitable persons.
Nomination Committee
The Board as a whole fulfils the function of a nomination committee.
Board Meetings
The Board meets quarterly and as required from time to time to consider specific issues reserved to the Board. At the quarterly meeting
it considers papers circulated seven days in advance including reports provided by the Manager and the Administrator. The Manager's report
comments on:
* The investment market including recommendations for any changes in strategy that the Manager considers may be appropriate;
* Performance of the Company's portfolio and key asset management initiatives;
* Transactional activity undertaken over the previous quarter and being contemplated for the future;
* The Company's financial position including its relationship with its bankers and lenders.
The Administrator provides a compliance report. These reports enable the Board to assess the success with which the Company's investment
strategy and other associated matters are being implemented and also to consider any relevant risks and how they should properly be
managed.
DIRECTORS' REPORT - (CONTINUED)
The following table shows the attendance at Board meetings and additional Ad Hoc Meetings during the year to 31 March 2008:
Board Meeting Attended Ad Hoc Attended
Mr Ian Charles Domaille 4 2
Mr Stuart Francis Carnegie 4 1
Mr Stuart Walter Mitchell 4 1
Mr Michael Quarrington 4 1
Number of meetings during the year 4 2
In between its regular quarterly meetings, duly appointed Committees of the Board have also met on a number of occasions during the year
to approve specific transactions.
(Note - Liability insurance is maintained for the Directors and Officers although the Company has no employees and none of its Directors
are Executive.)
Internal Controls
The Directors review the effectiveness of the Company's system of internal controls at least once annually.
The System's key controls reviewed by the Directors are as shown below. The Board considers risk management and internal control on a
regular basis during the year although such a system can only provide reasonable and not absolute assurance against material misstatement or
loss, as it is designed to manage rather than eliminate risk of failure.
Investment Management services and Administration services are provided to the Company by HSBC Management (Guernsey) Limited ("HMG") and
Investor Fund Services (Ireland) Limited, a State Street Company ("IFS") respectively. The Company's system of internal control therefore is
substantially reliant on HMG's and IFS's internal controls and their internal audit.
The key elements designed to provide effective control are as follows:
* Financial Reporting - A regular review of relevant financial data including NAV calculations and performance projections.
* Management and Administration Agreements - Contractual documentation with appropriately regulated entities which clearly describes
responsibilities for the two principal service providers.
* Management Systems - The Manager's system of internal controls is based on clear written processes, a formal investment committee
and clear lines of responsibility and reporting which are monitored by HMG's internal risk team.
* Investment Strategy - The Company's strategy is authorised and monitored on a regular basis by the Board.
Secretary
HSBC Management (Guernsey) Limited held the office of Secretary throughout the year.
Results and Dividends
The results for the year are shown on page 11. The Directors do not propose the payment of a dividend for the year ended 31 March 2008
(2007: Nil).
Independent Auditors
A resolution for the re-appointment of KPMG Channel Islands Limited is to be proposed at the forthcoming Annual General Meeting.
DIRECTORS' REPORT - (CONTINUED)
Statement of the Directors' Responsibilities
The directors are responsible for preparing financial statements for each financial year which give a true and fair view of the state of
affairs of the Company and of the profit or loss for that year and are in accordance with applicable laws and International Financial
Reporting Standards. In preparing these financial statements the directors are required to:
* select suitable accounting policies and then apply them consistently;
* make judgements and estimates that are reasonable and prudent;
* state whether applicable accounting standards have been followed subject to any material departures disclosed and explained in the
accounts; and
* prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue
in business.
The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial
position of the Company and to enable them to ensure that the financial statements comply with The Companies (Guernsey) Law, 1994. They are
also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud
and other irregularities.
By order of the Board
____________________ __________________
Stuart Mitchell Ian Domaille
Director Director
Date: 29th July 2008
DIRECTORS' RESPONSIBILITY STATEMENT
We confirm that to the best of our knowledge:
* the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the issuer and the undertakings included in the consolidation taken as a whole
as required by Disclosure and Transparency Rules ("DTR") 4.1.12R; and
* the management report includes a fair review of the development and performance of the business and the position of the issuer and
the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that
they face as required by DTR 4.1.12R.
By order of the Board
____________________ __________________
Stuart Mitchell Ian Domaille
Director Director
Date: 29th July 2008
INVESTMENT ADVISER'S REPORT
For the period 30 March 2007 to 31 March 2008 the Company's Euro class fell only slightly, comparing favourably to its target return of
50% EUR 3-month LIBOR + 50% MSCI Europe Total Return Index.
Over the period the MSCI Europe in local currency declined sharply by -14.0%, while the DAX, CAC40 and FTSE Indices fell -5.5%, -16.5%
and -9.6% respectively. This was caused largely by the sub-prime turmoil that spread from the US in the late summer. The European financial
sector in particular suffered due to significant write-downs related to the mortgage backed sector. At the same time, credit markets seized,
causing a slowing of Leveraged Buy Outs and merger activity. Declining consumer confidence and the continued credit crunch triggered a large
equity sell off at the beginning of 2008 with the DAX Index dropping by almost a quarter from peak to trough. Equity market volatility as
measured by the VDAX Index rose during August and spiked towards the end of 2007. Volatility spiked in June 2007 and decreased toward the
end of 2007. In early 2008, volatility reached high levels and decreased sharply at the end of March.
Against this background, equity long/short was the best performing hedge fund strategy. Those managers able to make money on their short
books posted strong returns, with one manager's long mining/short financials theme playing out particularly well. The high yield/distressed
allocation contributed negatively during the period as credit markets remained stressed. Mark-to-market losses hurt performance in
particular as index hedges were not as effective. Multi-strategy/event driven managers detracted the most over the period as the global
merger and acquisition boom dried up. Managers in this space suffered over the period as deals were shelved and general appetite for risk
arbitrage waned. November was a particularly bad month for managers in this space as LBO spreads widened in both the US and Europe.
Financials also detracted significantly from performance.
Over the period, the allocation to equity long/short and high yield/distressed fund managers increased against multi-strategy/event
driven managers. Two multi-strategy/ event driven managers were redeemed and one position trimmed. Over the year, six equity long
short/managers were redeemed and replaced with three others. A new high yield/distressed manager was also added. The Company continues to be
diversified by high quality managers that pursue a range of sub-strategies.
On a strategic basis this year the manager has reduced the overall equity long/ short allocation while the allocation to the
multi-strategy/ event driven and high-yield/ distressed strategies has increased. Going forwards we believe that European equities will
struggle from the high Euro, tighter credit conditions and a drawn out process of bank recapitalisations and inflationary pressures, despite
on a number of measures European equities being cheap. As a result, over the coming months we will be focussing on orienting the portfolio
more towards a relative value bias and de-emphasising directional equity allocations.
Within the mandate the portfolio continues to be invested in a range of high-quality managers pursuing a range of sub-strategies within
European markets. The manager continues to have a confident long-term outlook for the portfolio.
HSBC ALTERNATIVE INVESTMENTS LIMITED
April 2008
CHAIRMAN'S STATEMENT
In presenting the seventh Annual Report of HSBC European Absolute Limited, I would like to thank you for your continued support and
welcome all new shareholders. I hope that you find the audited accounting information presented here to be interesting and informative.
Since the launch of the Company in April 2001, the Company's portfolio has been designed in accordance with the prospectus to achieve
equity like returns with volatility lower than that of equities. In both these regards, the Company has performed in line with its stated
objectives at the time of the launch.
I would like to report that in the period from 1 April 2007 to 31 March 2008, the Net Asset Value of the Company's shares declined 2.3%
in Sterling terms and 3.5% in Euro terms. Over the same period the UK equity market and fixed income benchmarks, as measured by the FTSE All
Share Index (Total Return) fell 10.85% in Sterling terms and the MSCI Europe Index fell 14.82% in Euro terms. The FTSE Government Securities
All Stock Index (Total Return) rose 7.58% in Sterling terms and the JP Morgan Government Bond US hedged into Euro rose 11.74% in Euro terms
respectively. The HFR Fund of Funds Index (an index representing the performance of funds investing with multiple hedge fund managers)
returned 5.85% and 4.07% in Sterling and Euro terms respectively over the same period.
The Directors undertook to monitor demand for shares and considered the use of the share buy back and redemption facility at quarterly
meetings. At the Company's board meeting held in March 2008, the Directors considered it appropriate to offer shareholders the opportunity
to participate in the bi-annual redemption facility, whereby shareholders may redeem shares at net asset value. In October 2007, the
Directors again resolved to give shareholders the opportunity to redeem shares of the Company as at 31 December 2008.
At a company EGM in May 2007 amendments to the articles of association of the Company were approved. The amendments allow shareholders
the ability to convert their shares from one class to the other class at six monthly intervals.
In May 2008 the Directors announced that they have now resolved to bring forward proposals for the Company which either will involve its
liquidation or will otherwise enable those shareholders who so wish to realise their investment for cash. Provided it is economic to do so,
the Board intends to make available one or more successor investment vehicles for those shareholders who wish to roll over their investment
rather than realise it for cash.
The proposals will be subject to shareholders' approval. A shareholder circular giving full details is in preparation and will be
despatched as soon as practicable and further announcements made as appropriate.
The Investment Adviser believes that the Company's portfolio is well positioned for the coming months. I look forward to welcoming
shareholders to the forthcoming Annual General Meeting of the Company St Martin's House, St Peter Port, Guernsey, Channel Islands.
Mr. Ian Domaille
Chairman, HSBC European Absolute Limited
Date: 29th July 2008
INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDERS OF HSBC EUROPEAN ABSOLUTE LIMITED
We have audited the financial statements (the "financial statements") of HSBC European Absolute Limited for the year ended 31 March 2008
which comprise of the Income Statement, Statement of Changes in Shareholders' Equity, Balance Sheet, Statement of Cash Flows and the related
notes. These financial statements have been prepared under the accounting policies set out therein.
This report is made solely to the Company's members, as a body, in accordance with section 64 of The Companies (Guernsey) Law, 1994. Our
audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an
auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other
than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
The Directors are responsible for preparing the Directors' Report and the financial statements in accordance with applicable Guernsey
law and International Financial Reporting Standards as set out in the Statement of Directors' Responsibilities on page 3 to page 6.
Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International
Standards on Auditing (UK and Ireland).
We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance
with The Companies (Guernsey) Law, 1994. We also report to you if, in our opinion, the Company has not kept proper accounting records, or if
we have not received all the information and explanations we require for our audit.
We read the Directors' Report and consider the implications for our report if we become aware of any apparent misstatement within it.
We read the other information accompanying the financial statements and consider whether it is consistent with those statements. We
consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial
statements.
Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board.
An audit includes examination, on a test basis of evidence relevant to the amounts and disclosures in the financial statements. It also
includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements, and
of whether the accounting policies are appropriate to the Company's circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanation which we consider necessary in order to provide
us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused
by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in
the financial statements.
Opinion
In our opinion the financial statements:
* give a true and fair view in accordance with International Financial Reporting Standards, of the state of the Company's affairs as
at 31 March 2008 and of its results for the year then ended; and
* have been properly prepared in accordance with The Companies (Guernsey) Law, 1994.
KPMG CHANNEL ISLANDS LIMITED
CHARTERED ACCOUNTANTS
Guernsey
Date: 29th July 2008
INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 2008
2008 2007
Note EUR'000 EUR'000
Interest income for financial assets
that are not at fair value through
profit or loss:
- Cash and cash equivalents 20 14
Net (loss)/gain on financial assets 3 (4,426) 9,779
held at fair value through profit or
loss
Net investment (loss)/income (4,406) 9,793
Operating expenses
Management fee 8 (1,316) (1,301)
Performance fee 8 41 (49)
Directors fees and expenses 8 (90) (89)
Audit fees (12) (12)
Other operating expenses (183) (115)
Total operating expenses before (1,560) (1,566)
finance costs
Net (loss)/income from operations (5,966) 8,227
before finance costs
Interest expense for financial assets
that are not at fair value through
profit or loss:
- Cash and cash equivalents (201) (39)
(Loss)/profit for the year after (6,167) 8,188
finance costs
The items in the above statement are derived from continuing operations
The notes on pages 15 to 31 form an integral part of these financial statements
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEAR ENDED 31 MARCH 2008
Redeemable Preference Shares
Nominal Share capital Share Retained earnings Total
shares premium
EUR'000 EUR'000 EUR'000 EUR'000 EUR'000
Balance at 31 March 2006 260 408 43,654 16,832 61,154
Profit for the year - - - 8,188 8,188
Issue of shares - 226 30,902 - 31,128
Redemption of shares (216) - - - (216)
Balance at 31 March 2007 44 634 74,556 25,020 100,254
Profit for the year - - - (6,167) (6,167)
Issue of shares 202 31 5,739 - 5,941
Redemption of shares (31) (209) (38,213) - (38,422)
Balance at 31 March 2008 215 456 42,082 18,853 61,606
The notes on pages 15 to 31 form an integral part of these financial statements.
BALANCE SHEET AS AT 31 MARCH 2008
2008 2007
Note EUR*000 EUR*000
Assets
Financial assets at fair value through profit 2, 4 69,920 100,953
or loss
Cash and cash equivalents 127 101
Other receivables 5 249 112
Total assets 70,296 101,166
Liabilities
Financial liabilities at fair value through 2, 4 (154) (58)
profit or loss
Loan payable 9 (8,397) (616)
Accounts payable and accrued expenses 6 (139) (238)
Total liabilities (8,690) (912)
Net assets 61,606 100,254
Equity:
Share capital 456 634
Share premium 42,082 74,556
Nominal shares 215 44
Retained earnings 18,853 25,020
61,606 100,254
EUR redeemable participating preference 12 EUR2.1822 EUR2.2616
shares * net assets value per share
GBP redeemable participating preference 12 GBP1.5517 GBP1.5879
shares * net assets value per share
The financial statements on pages 11 to 31 were approved by the Board of Directors on 29th July 2008 and were signed on its behalf by:
Stuart Mitchell
Director
Ian Domaille
Director
The notes on pages 15 to 31 form an integral part of these financial statements.
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 MARCH 2008
2008 2007
EUR'000 EUR'000 EUR'000 EUR'000
Operating activities:
(Loss)/profit for the year (6,167) 8,188
Adjustments for:
Net realised gain on investments (4,659) (2,005)
Net unrealised loss/(gain) on 5,582 (5,910)
investments
Net movement in unrealised 89 (49)
(loss)/gain on forward foreign
currency contracts
Decrease in debtors 15 20
Decrease in creditors (99) (232)
Net cash (outflow)/inflow from (5,239) 12
operating activities
Investing activities:
Purchase of financial assets at (16,150) (46,432)
designated fair value through
profit or loss
Proceeds from sale of financial 46,286 18,910
assets at designated fair value
through profit or loss
Net cash inflow/(outflow) from 30,136 (27,522)
investing activities
Financing activities:
Repayment of loans (26,312) (5,253)
New loans advanced 34,093 4,869
Proceeds from issue of redeemable 5,770 31,127
participating preference shares
Amounts paid on redemption of (38,422) (2,880)
redeemable participating preference
shares
Net cash (outflow)/inflow from (24,871) 27,863
financing activities
Net increase in cash and cash 26 353
equivalents
Cash and Cash equivalents at start 101 (252)
of year
Cash and Cash equivalents at end of 127 101
year
Supplementary Information on cash flow from operating activity:
Interest received 20 14
Interest paid (201) (39)
The notes on pages 15 to 31 form an integral part of these financial statements.
NOTES TO THE FINANCIAL STATEMENTS
1 SIGNIFICANT ACCOUNTING POLICIES
HSBC European Absolute Limited (the "Company") is a close-ended investment company incorporated as a limited liability company under the
Companies (Guernsey) Laws 1994 to 1996 of Guernsey on 23 February 2001. The Company's shares are listed on the London Stock Exchange.
The objective of the Company is to seek to achieve equity like returns with lower levels of volatility. Its policy is to achieve this by
investing in a diversified portfolio of hedge funds and managed accounts exposed to long/short strategies investing predominantly in UK and
European markets which are managed to seek to provide investors with an absolute total return and with a lower volatility than equities
generally.
These financial statements were authorised for issue by the Board of Directors on Day Month 2008.
a) Statement of compliance
The financial statements are prepared in accordance with International Financial Reporting Standards (IFRSs) and interpretations adopted
by the International Accounting Standards Board (IASB).
These are the Company's first financial statements prepared in accordance with IFRSs. During the year, the Company elected to adopt
IFRSs for the first time in accordance with IFRS 1 First Time Adoption of IFRS 1, and as a result, these financial statements for the year
ended 31 March 2008, are the first the Company has prepared in accordance with IFRS. In preparing the Company's cash statement in accordance
with IFRS several presentational changes have been made to the statement of cash flows. The statement of cash flows now reconciles profit
for the year to the net movement in cash for the period. Under the previous accounting standards the statement of cash flows reconciled net
operating expenses to net cash movement from operating activities. Interest income and interest received during the period is now disclosed
as an operating cash flow.
The accounting polices that follow have been applied in preparing the financial statements for the year ended 31 March 2008 and the
comparative information presented in these financial statements for the year ended 31 March 2007. There has been no effect on the financial
position, financial performance and cash flows of the Company from the transition from previous GAAP (UK accounting standards) to IFRSs
other than to modify the layout and presentation of certain items.
New accounting standards
The Company has adopted IFRS 7 Financial Instruments: Disclosures - this standard replaces the disclosure requirements to the Company's
financial instruments and redeemable participating shares. It requires the disclosure of qualitative and quantitative information about
exposures to risks arising from financial instruments, including specified minimum disclosures about credit, liquidity and market risks,
including sensitivity analysis to market risk. Application of this standard will not affect any amount recognised in the financial
statements, but will impact the type of information disclosed in relation to the Company's financial instruments. This standard is
applicable for accounting periods commencing on or after 1 January 2007. IFRS 7 supersedes the disclosure requirement of IAS 32: Financial
Instruments: Disclosure and Presentation.
A number of new standards, amendments to standards and interpretations are not yet effective for the year ended 31 March 2008, and have
not been applied in preparing these consolidated financial statements:
IFRS 8 Operating Segments introduces the "management approach" to segment reporting. IFRS 8, which becomes mandatory on 1 January 2009,
will require the disclosure of segment information. As the Company is organised and operates as one segment, it is anticipated that segment
reporting will not apply. Consequently no segment reporting will be provided in the Company's financial statements.
b) Basis of preparation
The accounting policies set out below have been applied consistently to all periods presented in the financial statements.
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
1 SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
b) Basis of preparation (continued)
The financial statements are presented in Euro and rounded to the nearest thousand Euro and not the local currency of Guernsey
reflecting the fact that the majority of the Classes' assets and liabilities are denominated in Euro. They are prepared on a fair value
basis for derivative financial instruments, financial assets and financial liabilities at fair value through profit or loss. Other financial
assets and financial liabilities are stated at amortised cost.
The preparation of financial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that
affect the application of policies and the reported amounts of assets and liabilities, income and expense. The estimates and associated
assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the
results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the
period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the
revision affects both current and future periods.
The accounting policies have been applied consistently by the Company in dealings with items which are considered material in relation
to the Company's financial statements.
c) Foreign currency translation
Presentational and functional currency
Items included in the Fund's financial statements are measured using the currency of the primary economic environment in which it
operates (the "functional currency"). The Fund's functional currency is the Euro (EUR), and the Fund has also selected the Euro as the
currency in which it presents the financial statements.
Transactions and balances
Transactions in foreign currencies, other than Euros, are translated at the foreign currency exchange rate ruling at the date of the
transaction. Monetary assets and liabilities denominated in foreign currencies are translated to Euros at the foreign currency closing
exchange rate ruling at the balance sheet date. Foreign currency exchange differences arising on translation and realised gains and losses
on disposals or settlements of monetary assets and liabilities are recognised in the income statement. Foreign currency exchange differences
relating to investments at fair value through the profit or loss and derivative financial instruments are included in net gains and losses
on investments and net foreign exchange gains and losses, respectively.
d) Financial instruments
(i) Classification
IAS 39 establishes specific categories into which all financial assets and liabilities must be classified. The classification of
financial instruments dictates how these assets and liabilities are subsequently measured in the financial statements. There are four
categories of financial assets: assets at fair value through profit or loss, available for sale, loans and receivables and held to
maturity.
The Company classifies its investments in debt and equity securities, and related derivatives, as financial assets or financial
liabilities at fair value through profit or loss. These financial assets and financial liabilities are classified as held for trading or
designated by the Board of Directors at fair value through profit or loss at inception.
Classification of debt and equities
* Financial assets or financial liabilities held for trading are those acquired or incurred principally for the purposes of selling
or repurchasing in the short term. Derivatives are also categorised as financial assets or financial liabilities held for trading. These
include forward foreign currency contracts. The Company does not classify any derivatives as hedges in a hedging relationship. All
derivatives in a net receivable position (positive fair value) are reported as financial assets held for trading. All derivatives in a net
payable position (negative fair value) are reported as financial liabilities held for trading.
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
1 SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
d) Financial instruments (continued)
* Financial assets and financial liabilities designated at fair value through profit or loss at inception are those that are managed
and their performance evaluated on a fair value basis in accordance with the Company's documented investment strategy. The Company's policy
is for the Investment Manager and the Board of Directors to evaluate the information about these financial assets on a fair value basis
together with other related financial information. These included investment in Investment Funds.
* Financial assets that are classified as loans and receivables include accounts receivable and equalisation paid on investments.
* Financial liabilities that are not at fair value through profit or loss include accounts payable.
(ii) Recognition
Financial assets and liabilities are recognised on the Company's balance sheet when the Company becomes a party to the contractual
provisions of the instrument.
A regular way purchase of financial assets is recognised using trade date accounting - the date on which the Company commits to purchase
or sell the investment. Investments are derecognised where the rights to receive cash flows from the investments have expired or the Company
has transferred substantially all risks and rewards of ownership. From this date any gains and losses arising from changes in fair value of
the financial assets or financial liabilities are recorded.
(iii) Measurement
Financial instruments are measured initially at fair value. Transaction costs on financial assets and financial liabilities at fair
value through profit or loss are expensed immediately. Subsequent to initial recognition, all instruments classified at fair value through
profit or loss are measured at fair value with changes in their fair value recognised in the income statement.
Financial assets classified as loans and receivables are carried at amortised cost using the effective interest rate method, less
impairment losses, if any.
Financial liabilities, other than those at fair value through profit or loss, are measured at amortised cost using the effective
interest rate method.
(iv) Fair value measurement principles
The fair value of financial instruments traded in active markets is based on quoted market bid prices at the balance sheet date. The
fair value of investments in investment funds is based on the net asset value per share of the underlying investment funds as at the balance
sheet date as advised by the fund administrators of those funds.
The Company may from time to time invest in financial instruments that are not traded on an active market. The fair value of such
instruments is determined by using appropriate valuation techniques, which in the opinion of the directors, provide the best estimates of
the fair value of such investments.
(v) Impairment
Financial assets that are stated at cost or amortised cost are reviewed at each balance sheet date to determine whether there is
objective evidence of impairment. If any such indication exists, an impairment loss is recognised in the income statement as the difference
between the asset's carrying amount and the present value of estimated future cash flows discounted at the financial asset's original
effective interest rate.
If in a subsequent period the amount of an impairment loss recognised on a financial asset carried at amortised cost decreases and the
decrease can be linked objectively to an event occurring after the write down, the write down is reversed through the income statement.
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
1 SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
d) Financial Instruments (continued)
(vi) Specific instruments
Cash and cash equivalents
Cash comprises cash balances and call deposits with banks. Cash equivalents are short-term highly liquid investments that are readily
convertible to known amounts of cash, are subject to an insignificant risk of changes in value, and are held for the purpose of meeting
short-term cash commitments rather than for investment or other purposes.
Forward contracts
Forward contracts are commitments to either purchase or sell a designated financial instrument, currency or an index at a specified
future date for a specified price and may be settled in cash or another financial asset. Forward contracts are valued by reference to the
forward price at which a new contract of the same size and maturity could be undertaken at the valuation date. The unrealised gain or loss
on open forward contracts is calculated as the difference between the contract rate and this forward price (the rate to close out the
contract). Unrealised gains and losses on forward contracts are recognised in the income statement and reported in the Balance Sheet as an
asset or a liability respectively.
e) Revenue and expenses
Interest income and expense is recognised in the income statement as it accrues, using the original effective interest rate of the
instrument calculated at the acquisition or origination date. Interest income includes the amortisation of any discount or premium,
transaction costs or other differences between the initial carrying amount of an interest-bearing instrument and its amount at maturity
calculated on an effective interest rate basis.
Expenses are accounted for on an accruals basis.
f) Shares
The Company has a twice yearly redemption facility under which, subject to certain limitations and the Directors exercising their
discretion to operate the facility, investors are provided the opportunity to request redemption for cash at the value proportionate to the
investor's share in the Company's net assets at the redemption date. The Directors meet regularly to consider the operation of the
redemption facility in the light of prevailing market conditions, shareholder sentiment and legal constraints.
The Company also has a twice yearly conversion facility under which, subject to certain limitations and the Directors exercising their
discretion to operate the facility, investors are provided the opportunity to convert shares of either class into shares of the other class.
Such conversion will be on the basis of the ratio of the last reported net asset value of the class of shares held to the last reported net
asset value of the class of shares into which they will be converted and otherwise as set out in the Company's articles of association.
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
2 ASSETS
2008 2007
EUR'000 EUR'000
Financial assets at fair value through profit or loss
Held for trading:
- Derivatives (note 4) 7 *
Total held for trading 7 *
Designated at fair value through profit or loss:
- Mutual funds 69,913 100,953
Total designated at fair value through profit or loss 69,913 100,953
Total financial assets at fair value through profit or 69,920 100,953
loss
Loans and receivables 376 213
Total Assets 70,296 101,166
LIABILITIES
Financial liabilities at fair value through profit or
loss
Held for trading:
- Derivatives (note 4) (154) (58)
Total held for trading (154) (58)
Total financial liabilities at fair value through (154) (58)
profit or loss
Financial liabilities measured at amortised cost (8,536) (854)
Total liabilities (8,690) (912)
Loans and receivables presented above represents cash and cash equivalents and other receivables as detailed in the Balance Sheet.
Financial liabilities measured at amortised cost presented above represents balances loans payable and accounts payable and accrued
expenses as detailed in the balance sheet.
3 NET (LOSS)/GAIN ON FINANCIAL ASSETS HELD AT FAIR VALUE THROUGH PROFIT OR LOSS
Net (loss)/gain on financial
assets designated at fair
value through profit or
loss:
- Realised 4,659 2,005
- Unrealised (5,582) 5,910
Total (losses)/gains (923) 7,915
Net (loss)/gain in fair
value on assets held for
trading:
- Realised (3,414) 1,815
- Unrealised (89) 49
(3,503) 1,864
Total net (loss)/gain on (4,426) 9,779
financial assets held at
fair value through profit or
loss
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
3 NET (LOSS)/GAIN ON FINANCIAL ASSETS HELD AT FAIR VALUE THROUGH PROFIT OR LOSS *
(CONTINUED)
Net (loss)/gain from
financial assets
held at fair value
through profit or
loss:
- Mutual funds (923) 7,915
Net gains/losses (923) 7,915
from financial
assets and
liabilities
designated at fair
value through profit
or loss
Net (loss)/gain in
fair value on assets
held for trading:
- Derivatives (3,503) 1,864
Net gains/losses (3,503) 1,864
from financial
assets and
liabilities held for
trading
Total net (4,426) 9,779
(loss)/gain from
financial assets
held at fair value
through profit or
loss
Gains and losses presented above excludes interest income, dividend income and
interest expense
4 HEDGING AND DERIVATIVES
The only derivative instruments the Company holds are foreign exchange forwards. Forwards are a contractual obligation by one party to
buy and another party to sell a financial instrument, equity, commodity or currency at a specific future date. Forwards held by the Company
are mainly forward foreign currency contracts.
The notional amounts of certain types of financial instruments provide a basis for comparison with instruments recognised on the balance
sheet, but they do not necessarily indicate the amounts of future cash flows involved or the current fair value of the instruments and do
not therefore indicate the Company's exposure to credit or market price risks. The derivative instruments become favourable (assets) or
unfavourable (liabilities) as a result of fluctuations in market interest rate or foreign exchange rates relative to their terms. The
aggregate contractual or notional amount of derivative financial instruments on hand, the extent to which instruments are favourable or
unfavourable and, thus the aggregate fair values of derivatives financial assets and liabilities can fluctuate significantly from time to
time.
The Company's open forward foreign exchange contracts at 31 March 2008 are detailed below:
Settlement Date Amount Bought Amount Sold Counterparty Unrealised Loss
EUR'000
30 April 2008 EUR 2,473,367 GBP 1,972,510 IBT (1)
30 April 2008 GBP 22,042,000 EUR 27,800,971 IBT (153)
Total unrealised loss on forward foreign exchange contracts (154)
Settlement Date Amount Bought Amount Sold Counterparty Unrealised Gain
EUR'000
30 April 2008 EUR 4,520,289 USD 7,136,000 IBT 7
Total unrealised gain on forward foreign exchange contracts 7
The Company's open forward foreign exchange contracts at 31 March 2007 are detailed below:
Settlement Date Amount Bought Amount Sold Counterparty Unrealised Loss
EUR'000
30 April 2007 GBP 26,256,000 EUR 38,562,427 IBT (9)
30 April 2007 EUR 11,008,009 USD 14,734,000 IBT (49)
Total unrealised loss on forward foreign exchange contracts (58)
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
5 OTHER RECEIVABLES
2008 2007
EUR'000 EUR'000
Amounts due from Investment Manager 215 44
Equalisation paid on investments - 19
Prepayments 34 49
249 112
6 ACCOUNTS PAYABLE AND ACCRUED EXPENSES
2008 2007
EUR'000 EUR'000
Accrued director fees (21) (38)
Accrued management fee (18) (59)
Accrued expenses due to Manager (81) (121)
Other accrued expenses (19) (20)
(139) (238)
7 SHARE CAPITAL
The Company's capital is represented by the redeemable shares outstanding.
The Company strives to invest the subscriptions of redeemable shares in investments that meet the Company's investment objectives while
maintaining sufficient liquidity to meet operating requirements.
The Company does not have any externally imposed capital requirements.
The authorised shares of the Company as at 31 March 2008 was:
2008 2007
GBP GBP
100 Founder Shares of GBP1 each ("Founder Shares") 100 100
250,000,000 Shares of GBP0.01 (the "Shares") 2,500,000 2,500,000
100,000,000 Unclassified Shares of GBP0.01 ("Unclassified 1,000,000 1,000,000
Shares")
3,500,100 3,500,100
On incorporation, 2 Founder Shares were allotted to the subscribers to the Memorandum of Association. As Founder Shares are not
participating shares of the Company and do not form part of the Net Asset Value of the Company, they are disclosed in the financial
statements by way of this note only. The Unclassified Shares may be allotted and issued as Redeemable Participating Preference Shares or as
non-participating redeemable shares of GBP0.01 each or as Nominal Shares.
Issued and fully paid share capital
2008 2008
Number of shares EUR'000
Founder shares 2 -
Nominal shares 17,144,130 215
Redeemable participating preference shares
EUR redeemable participating preference shares 15,851,811 252
GBP Hedged redeemable participating shares 13,754,059 204
Total shares in issue 46,750,002 671
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
7 SHARE CAPITAL - (CONTINUED)
2007 2007
Number of shares EUR'000
Founder shares 2 -
Nominal shares 2,980,371 44
Redeemable participating preference shares
EUR redeemable participating preference shares 26,926,173 391
GBP Hedged redeemable participating shares 16,843,456 243
Total shares in issue 46,750,002 677
The movement in shares during the year to 31 March 2008 is shown below:
Nominal Shares Redeemable Redeemable Participating
Participating Preference Shares
Preference Shares
Euro Class Sterling Hedged Class
Number of shares at 1 April 2,980,371 26,926,173 16,843,456
2007
Number of shares issued 16,640,780 241 2,476,780
Number of shares redeemed (2,477,021) (11,074,603) (5,566,177)
Number of shares at 31 March 17,144,130 15,851,811 13,754,059
2008
The movement in shares during the year to 31 March 2007 is shown below:
Nominal Shares Redeemable Redeemable Participating
Participating Preference Shares
Preference Shares
Euro Class Sterling Hedged Class
Number of shares at 1 April 18,092,323 15,467,750 13,189,927
2006
Number of shares issued - 11,458,423 3,653,529
Number of shares redeemed (15,111,952) - -
Number of shares at 31 March 2,980,371 26,926,173 16,843,456
2007
The movement in share capital and share premium of redeemable participating preference shares during the year to 31 March 2008 is shown
below:
Euro class Sterling Hedged Total
EUR'000 EUR'000 EUR'000
Share capital
Balance at 1 April 2007 391 243 634
Issued during the year - 31 31
Redeemed during the year (139) (70) (209)
Balance at 31 March 2008 252 204 456
Euro class Sterling Hedged Total
EUR'000 EUR'000 EUR'000
Share premium
Balance at 1 April 2007 46,709 27,847 74,556
Issued during the year - 5,739 5,739
Redeemed during the year (25,407) (12,806) (38,213)
Balance at 31 March 2008 21,302 20,780 42,082
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
7 SHARE CAPITAL - (CONTINUED)
The movement in share capital and share premium of redeemable participating preference shares during the year to 31March 2007 is shown
below:
Euro class Sterling Hedged Total
EUR'000 EUR'000 EUR'000
Share capital
Balance at 1 April 2006 221 188 409
Issued during the year 170 55 225
Redeemed during the year - - -
Balance at 31March 2007 391 243 634
Euro class Sterling Hedged Total
EUR'000 EUR'000 EUR'000
Share premium
Balance at 1 April 2006 23,279 20,375 43,654
Issued during the year 23,430 7,472 30,902
Redeemed during the year - - -
Balance at 31March 2007 46,709 27,847 74,556
Rights attaching to shares
Unclassified Shares - The Directors may issue any of the Unclassified Shares of GBP0.01 each in the capital of the Company as one or
more classes of Shares or as non-participating redeemable shares of GBP0.01 each (Nominal Shares). The unclassified shares may be issued as
separate classes of redeemable participating preference shares.
Nominal Shares - The Nominal Shares may only be issued to the Manager at par and for the purpose of providing funds for the redemption
of Shares. Nominal Shares do not carry voting rights. Nominal Shares do not carry any general right to dividends. However, a fixed dividend
of EUR100 in aggregate shall be payable to the holders of Nominal Shares pro rata to their holdings in each year. In the event of a
liquidation they rank pari passu inter se but only for a return of the nominal amount paid up on them. The Company may redeem at par all or
any of the Nominal Shares for the time being issued and outstanding.
Rights as to income - Subject to the rights of the holders (if any) of the Founder Shares, the Shares carry the right to receive all the
revenue profits of the Company available for distribution. The Founder Shares carry the right to receive out of the profits of the Company
available for distribution a fixed cumulative preferential dividend at the annual rate of 0.01 per cent on the nominal amount of each share.
For so long as there are Shares in issue, the Founder Shares do not confer any further right to participate in the Company's profits.
The Redemption Facility
In order to assist further the narrowing of any discount to Net Asset Value at which the Shares of the relevant class may be trading,
the Company has a twice yearly redemption facility under which, subject to certain limitations and the Directors exercising their discretion
to operate the facility, Redeemable Participating Shareholders may request the redemption of all or part of their holdings of Shares of the
relevant class for cash by giving notice to the Company not less than 60 days' prior to the Redemption Date, 30 June and/or 31 December of
each year.
Redemptions on any Redemption Date will be restricted to up to 25 per cent. (or such lesser amount as the Directors, in their
discretion, resolve) of each class of Share in issue, with any excess redemption requests being scaled back pro-rata.
Issue of shares
Subject to any resolution of the Company in general meeting, the Company*s unissued shares shall be at the disposal of the Board which may
offer, allot, grant options over, or otherwise dispose of them to such persons, for such consideration, on such terms and conditions and at
such times as the Board determines but so that no share shall be issued at a discount and so that the amount payable on application on each
share shall be fixed by the Board.
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
8 RELATED PARTY TRANSACTIONS
IAS 24, Related Party Disclosures requires the disclosure of information relating to material transactions with parties who are deemed
to be related to the reporting entity. Parties are considered to be related if one party has the ability to control the other party or
exercise significant influence over the other party in making financial or operational decisions.
Management Agreement
Pursuant to the Management Agreement dated 7 March 2001, the Company appointed HSBC Management (Guernsey) Limited as the Manager of the
Company. The Manager is paid periodic fees and (if applicable) performance fees. The periodic fees are paid monthly at a rate equivalent to
1.5% per annum of the value of the Company's net assets and are paid in arrears. Such fees are paid by the Company to the Manager, out of
which the Manager discharges the fees to the Investment Adviser and Custodian. The performance fee (if applicable) equals to 10% of the
excess of the growth in the Net Asset Value of the Company in the Performance Period over the Performance Hurdle. Any performance fee
payable will be subject to a cap equal to 3% of the Net Asset Value of the Company in any one year. Due to an over-accrual in the prior
year, the performance fee resulted in a credit to the Company of EUR41,035 (2007: charge of EUR48,842). The performance fee outstanding at
the year end was EUR17,906 (2007: EUR58,941). The management fee for the year was EUR1,316,258 (2007: EUR1,300,698). The management fee outstanding at the year end was EUR80,815 (2007:
EUR121,331).
The Management Agreement may be terminated by any party giving not less than six month's notice in writing to the other parties.
Investment Advisory Agreement
Pursuant to the Investment Advisory Agreement dated 7 March 2001 the Company has appointed HSBC Alternative Investments Limited as the
Investment Adviser of the Company. The Investment Adviser fee is 0.75% per annum of the value of the Company's net assets, and is included
in the management fee.
Directors' Interests
Michael Quarrington is a director of the Manager. For Directors' interests in the Company please refer to Directors' interests on page
4.
The Directors are paid the following fees.
Stuart Francis Carnegie GBP10,000 per annum
Ian Charles Domaille GBP20,000 per annum
Stuart Walter Mitchell GBP15,000 per annum
Michael Quarrington GBP15,000 per annum
The Directors' fees outstanding at the period end was EUR21,495 (2007: EUR37,890).
9 LOANS
The Company will have the ability to borrow up to 20% of its adjusted total of capital and reserves for short-term or temporary
purposes as may be necessary for settlement of transactions, to facilitate redemption (where applicable) or to meet ongoing expenses. It is
not intended for the Company to have any structural gearing.
At 31 March 2008 the loan outstanding in respect of the credit facilities extended to HSBC European Absolute Limited by HSBC Private
Bank (C.I.) Limited (formerly HSBC Private Bank (Guernsey) Limited) was EUR8,396,784 (2007: EUR616,031). This is an unsecured loan and is
repayable within 1 month.
For the year ended 31 March 2008 the interest expense was EUR200,675 (2007: EUR38,683) and the interest rate range was a low of 5.09%
(2007: 3.89%) and a high of 6.17% (2007: 5.12%).
10 CUSTODY AGREEMENTS
Pursuant to the Custodian Agreement dated 12 March 2001 the Company appointed Investors Trust & Custodial Services (Ireland) Limited
(A State Street Company) as the Custodian of the Company. The Custodian fee is included in the management fee.
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
11 TAXATION STATUS
The Company is exempt from Guernsey income tax under the Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 and is charged an annual
exemption fee of GBP600 per annum (2007: GBP600).
12 NET ASSETS ATTRIBUTABLE TO PREFERENCE SHAREHOLDERS
At 31 March 2008 2007
EUR'000 EUR'000
Euro Class 34,592 60,896
Sterling Hedged Class 26,799 39,314
Total 61,391 100,210
Net asset value
The net asset value of each EUR and £ share is determined by dividing the net assets of the Company attributed to the EUR and £shares by
the number of EUR and £shares in issue at the
year end as follows:
Net assets Shares in
issue Net Assets Per Share
attributable to each
share class
As at 31 March 2008
EUR Share EUR34,591,684
15,851,811 EUR2.1822
£ Share £21,341,635
13,754,059 £1.5517
As at 31 March 2007
EUR Share EUR60,896,131
26,926,173 EUR2.2616
£ Share £26,745,570
16,843,456 £1.5879
13 FINANCIAL RISK MANAGEMENT
The Company maintains positions in a variety of derivative and non-derivative financial instruments as dictated by its investment
management strategy. The Company's investment strategy is to seek to achieve equity like returns with lower levels of volatility. Its policy
is to achieve this by investing in a diversified portfolio of hedge funds and managed accounts exposed to long/short strategies investing
predominantly in UK and European markets which are managed to seek to provide investors with an absolute total return and with a lower
volatility than equities generally.
The Company's investment portfolio comprises investment in other quoted and unquoted funds that it intends to hold for an indefinite
period of time.
Asset allocations and the composition of the portfolio are monitored by the Company's Investment Manager. In instances where the
portfolio has diverged from target asset allocations, the Company's Investment Manager will rebalance the portfolio to fall in line with the
target asset allocations.
The main risks arising from the Company's financial instruments are market risk, interest rate risk, credit risk, currency risk and
liquidity risk. The Company uses derivative financial instruments to mediate certain risk exposure.
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
13 FINANCIAL RISK MANAGEMENT - (CONTINUED)
(a)Market Price Risk Management
Market risk arises mainly from uncertainty about future prices of the financial instruments held. It represents the potential loss the
Company might suffer through holding market positions that fluctuate in market value. The Investment Adviser considers the diversification
of the portfolio in order to minimise the risk associated with particular countries or industry sectors while continuing to follow the
Company's investment objective.
Market risk embodies the potential for both loss and gains and includes currency risk, interest rate risk and price risk. The Company's
strategy on the management of investment risk is driven by its investment objective of providing shareholders with an absolute total return
and with a lower volatility than equities in general. The Investment Adviser will seek to achieve this by investing in a diversified
portfolio of holdings in hedge funds and managed accounts exposed to long/short strategies investing in global markets.
The Company's market risk is managed on a daily basis by the Investment Manager in accordance with policies and procedures in place. The
Company's overall market positions are monitored regularly by the Board of Directors. To select, allocate among, and evaluate hedge fund
managers, the Investment Adviser receives detailed portfolio information on a continuing basis from each manager of an investee hedge fund.
However, the Investment Adviser may not always be provided with such information because certain information may be considered proprietary
information by the particular hedge fund manager.
Value at Risk (VaR)
VAR represents the potential losses from adverse changes in market factors for a specified time period and confidence level, it is the
maximum loss not exceeded with a given probability defined as the confidence level, over a given period of time.
The Investment Manager estimates VAR using historical simulation. This involves running the current portfolio across a set of historical
price changes to yield a distribution of changes in portfolio value, and computing a percentile (the VaR).
The table below shows the value at risk calculated using a 3 year historical simulation of the portfolio, using the allocations as 31
March 2007 and 31 March 2008. The value at risk is measured as the potential 1 month loss in value as a percentage of the investment
portfolio with both a 95% and 99% confidence interval.
Year 95% Confidence 99% Confidence
2007 2.75% 3.25%
2008 3.41% 4.14%
Details of the Company's investment portfolio at the balance sheet date are disclosed in the schedule of investments included on page 33
and page 34. All individual investments in equity instruments are disclosed separately. Details of the nature and terms of derivative
financial instruments outstanding at the balance sheet date are set out in note 4.
Other price risk
Price risk is the risk that the value of the investments will fluctuate as a result of changes in market prices (other than those
arising from interest rate risk or currency risk), whether caused by factors specific to an individual investment, its issuer or all factors
affecting all investments traded in the market.
As the majority of the Company's financial instruments are carried at fair value with fair value changes recognised in the Income
Statement, all changes in market conditions will directly affect Net Investment Income.
The Company is required to comply with the standard investment and borrowing restrictions as defined in the prospectus The Company's
investment restrictions are monitored on a regular basis by the Custodian of the Company and reviewed quarterly by the Board of Directors.
There are specific guidelines in place for monitoring and reporting breaches, and situations where holdings come close to restriction
levels.
Price risk is mitigated by the Company's Investment Manager by constructing a diversified portfolio of instruments traded on various
markets.
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
13 FINANCIAL RISK MANAGEMENT - (CONTINUED)
(b) Foreign currency risk
The majority of the financial assets/net assets of the Company are denominated in Euros. Through the Company's objective of investing
through a manager of manager approach, the Company is exposed to foreign currency risk. Diversification of the underlying investments
partially reduces the Company's exposure to foreign currency risk.
The Company may invest in financial instruments and enter into transactions denominated in currencies other than its functional
currency. Consequently, the Company is exposed to currency risk as the value of investments denominated in currencies other than the Euro
will fluctuate due to changes in exchange rates.
The Company's currency risk is managed on a ongoing basis by the Investment Manager in accordance with policies and procedures in place.
All currency exposure at the portfolio level is hedged into the currency of the relevant share class on a monthly basis, using standard
monthly forwards. The Company's overall currency positions and exposures are monitored on a monthly basis by the Board of Directors.
At the reporting date the Company had the following net exposure:
31 March 2008 31 March 2007
% of net % of net
Assets Assets
British Pound Sterling 41.43% 38.45%
Euro 59.10% 61.42%
US Dollar (0.53%) 0.13%
100.00% 100.00%
The Company also offers redeemable participating preference shares denominated in GBP exposing the Company to foreign currency risk.
This risk is mitigated by the Company entering into foreign exchange contracts as described further in this note below. Details of open
forward foreign exchange contracts at the year end are disclosed in notes 4.
The following table sets out the Company's total exposure to foreign currency risk and the net exposure to foreign currencies of the
monetary assets and liabilities.
31 March 2008
Currency Monetary Assets Monetary Liabilities Total Forward FX Net
EUR'000 EUR'000 EUR'000 EUR'000
British Pound Sterling - (36) 25,200 25,164
Euro 65,741 (8,500) (20,834) 36,407
US Dollar 4,548 - (4,513) 35
Total 70,289 (8,536) (147) 61,606
31 March 2007
Currency Monetary Assets Monetary Liabilities Total Forward FX Net
EUR'000 EUR'000 EUR'000 EUR'000
British Pound Sterling - (48) 38,594 38,546
Euro 89,983 (806) (27,595) 61,582
US Dollar 11,183 - (11,057) 126
Total 101,166 (854) (58) 100,254
Amounts in the above table are based on the carrying value of monetary assets and liabilities and the underlying principle amount of
forward foreign exchange contracts.
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
13 FINANCIAL RISK MANAGEMENT - (CONTINUED)
(c) Interest rate risk
The majority of the Company's financial assets are investments in investment funds which neither pay interest nor have a maturity date.
The Company is exposed to risks associated with the effects of fluctuations in the prevailing level of market interest rates on the fair
value of underlying investments which the Company has invested in.
The Company minimises interest rate risk by only entering into short term loans bearing interest rates based on current market interest
rates.
The Company has borrowed US$8,396,784 at year end which bears interest rate at an average floating rate of 5.44% (2006: US$616,031
bearing interest at 5.11%). To minimise interest rate risk the Company enters into floating rate loan agreements.
(d) Credit risk
Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has
entered into with the Company.
The carrying amounts of financial assets best represent the maximum credit risk exposure at the balance sheet date.
At 31 March the following financial assets were exposed to credit risk:
31 March 2008 31 March 2007
EUR '000 EUR '000
Financial assets at fair value through profit 69,920 100,953
or loss
Cash and cash equivalents 127 101
Other receivables 249 112
Total 70,296 101,166
Amounts in the above table are based on carrying value of all accounts.
Transactions involving derivative financial instruments are usually with counterparties with whom the Fund signed master netting
agreements. Master netting agreements provide for the net settlement of contracts with the same party in the event of default. The impact of
the master netting agreements is to reduce credit risk from the amounts shown as Held for Trading: Derivatives in Note 2 by EUR 153,881
(2007: EUR 57,841). The credit risk associated with derivative financial assets subject to a master netting agreement is eliminated only to
the extent that financial liabilities due to the same counterparty will be settled after the assets are realised. The exposure to credit
risk reduced by the master netting agreements may change significantly within a short period of time as a result of transactions subject to
the arrangement. The corresponding assets and liabilities have not been offset on the balance sheet.
Credit risk arising on transactions with brokers relates to transactions awaiting settlement. Risk related to unsettled transactions is
considered small due to the short settlement period involved and the high credit quality of the brokers used. The Company monitors the
credit rating of and financial positions of the brokers used to further mitigate risk.
Credit risk arising on financial assets at fair value through profit or loss is mitigated by constructing a diversified portfolio to
minimise asset concentration with same/related asset managers or funds and in compliance with the company's investment restrictions as
defined in the prospectus.
The manager and investment advisor meets on a regular basis with the underlying investment managers to review the performance and
financial viability of the investments and will take necessary corrective remedial action to correct any instances of credit risk exposure.
Substantially all of the assets and cash of the Company are held by the Custodian. Bankruptcy or insolvency of the Custodian may cause
the Company's rights with respect to securities held by the Custodian to be delayed or limited. The company monitors its risk by monitoring
the credit quality of the Custodian of the Company.
The Company minimises concentrations of credit risk by undertaking transactions with a majority of customers and counterparties on
recognised and reputable exchanges.
There was no significant concentration of credit risk to counterparties as no individual investment exceeded 10% of the net asset
attributable to the holders of redeemable shares either at 31 March 2008 or 31 March 2007.
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
13 FINANCIAL RISK MANAGEMENT - (CONTINUED)
(e) Liquidity risk
The Company's constitution provides for the bi-annual redemption of shares facility which is subject to the discretion of the Directors.
The Company's financial instruments included investments which are in unlisted hedge funds and managed accounts which are not traded in
an organised public market and which generally may be illiquid. As a result, the Fund may not be able to liquidate quickly some of its
investments in these instruments at an amount close to their fair value in order to meet its liquidity requirements.
The Company's listed securities are considered to be readily realisable as they are all listed on major European Exchanges.
The Company's liquidity risk is managed on an ongoing by the Investment Manager in accordance with policies and procedures in place. The
Manager seeks to ensure that holdings which are deemed illiquid are normally not more than 5 per cent of the Net Asset Value of the Company.
It is not the normal policy of the Company to invest directly in funds, limited partnerships or other vehicles that have no liquidity. The
Company's overall liquidity risks are monitored on a quarterly by the Board of Directors.
The Company's investment restrictions, as defined in the prospectus, some of which pertain to the management of liquidity risk and
concentrations thereof are monitored on a monthly basis by the custodian of the Company. There are specific guidelines in place for
monitoring and reporting breaches, and situations where holdings come close to restriction levels.
There are no known significant concentrations of liquidity risk.
The Company's redemption policy only allows for redemptions, subject to certain limitations and the Directors discretion to operate this
facility, on a twice yearly basis and shareholders must provide six months notice.
Residual Contractual maturities of financial liabilities
The table below summaries the maturity profile of the Company's financial liabilities at 31 March 2008:
Less than 1 month 1-3 Months 3 Months to 1 Year No Stated Maturity Total
EUR '000 EUR '000 EUR '000 EUR '000 EUR '000
Liabilities
Financial liabilities at fair (154) - - - (154)
value through profit or loss
Loan payable (8,397) - - - (8,397)
Accounts payable and accrued (139) - - - (139)
expenses
(8,690)
The table below summaries the maturity profile of the Company's financial liabilities at 31 March 2007:
Less than 1 month 1-3 Months 3 Months to 1 Year No Stated Maturity Total
EUR '000 EUR '000 EUR '000 EUR '000 EUR '000
Liabilities
Financial liabilities at fair (58) - - - (58)
value through profit or loss
Loan payable (616) - - - (616)
Creditors amounts falling due (238) - - - (238)
within one year
(912)
The Company can borrow funds on a temporary basis up to 20% of its adjusted total of capital and reserves. At no point during the year
ended 31 March 2008 did the bank overdraft exceed 20% of its adjusted total of capital and reserves of the Company.
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
14 FAIR VALUES OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES
Many of the Company's financial instruments are carried at fair value on the balance sheet. Usually the fair value of the financial
instruments can be reliably determined within a reasonable range of estimates. For certain other financial instruments including sales
amounts due from/to brokers, accounts payable and accrued expenses, the carrying amounts approximate the fair value due to the immediate or
short-term nature of these financial instruments.
At 31 March 2008, the carrying amounts of hedge funds which fair values are valued at the net asset values provided by underlying
managers or their administrators amounted to EUR69,913,262 (2007: EUR100,953,090).
At 31 March 2008, the carrying amounts of derivative financial assets EUR6,610 (2007: nil) and derivative financial liabilities
EUR153,881 (2007: EUR57,841) which fair values are valued using valuation techniques amounted to 147,271 (2007: EUR57,841).
The major methods and assumptions used in estimating fair values are disclosed in note 1(d) of the significant accounting policies
section.
15 SHAREHOLDERS' INTERESTS
The following Shareholders had significant holdings in the Company at 31 March 2008:
Shareholder Redeemable Participating Redeemable Participating Preference Shares
Preference Shares
Sterling Hedged class Euro class
BNY (OCS) Nominees Limited 35.44% 1.50%
Capita Registrars Limited 12.42% 2.80%
Chase Nominees Limited 4.20% 0.30%
Citibank Nominees (Ireland) - 2.60%
Limited
City of Bradford Metropolitan - 8.20%
Euroclear Nominees Limited 0.57% 35.38%
HSBC Global Custody Nominees 17.57% 19.00%
(UK)
James Capel (Channel Islands) 0.07% 5.13%
James Capel (Nominees) Limited 3.72% 8.31%
Nortrust Nominees Limited 7.40% 0.20%
Rathbone Nominees Limited 10.55% -
Vidacos Nominees Limited - 4.41%
The following Shareholders had significant holdings in the Company at 31 March 2007:
Shareholder Redeemable Participating Redeemable Participating Preference Shares
Preference Shares
Sterling Hedged class Euro class
BNY (OCS) Nominees Limited 26.28% -
Chase Nominees Limited 8.31% -
Citibank Nominees (Ireland) - 2.61%
Limited
City of Bradford Metropolitan - 4.81%
Euroclear Nominees Limited 1.35% 37.40%
HSBC Global Custody Nominees 24.59% 28.06%
(UK)
James Capel (Nominees) Limited 11.38% 12.71%
Nortrust Nominees Limited 6.81% 3.32%
Rathbone Nominees Limited 10.83% -
16 ULTIMATE CONTROLLING PARTY
In the opinion of Directors on the basis of shareholding advised to them, the Company has no ultimate controlling party.
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
17 EXCHANGE RATES
The exchange rates to Euro at 31 March 2008 and 31 March 2007 were as follows:
31 March 2008 31 March 2007
GBP 0.7964 0.6803
US Dollar 1.5824 1.3311
18 SUBSEQUENT EVENTS
Further to their announcement of 20 May, 2008, the Directors of HSBC European Absolute Limited announced that they have now resolved to
bring forward proposals for the Company which either will involve its liquidation or will otherwise enable those shareholders who so wish to
realise their investment for cash. Provided it is economic to do so, the Board intends to make available one or more successor investment
vehicles for those shareholders who wish to roll over their investment rather than realise it for cash.
The proposals will be subject to shareholders' approval. A shareholder circular giving full details is in preparation and will be
despatched as soon as practicable and further announcements made as appropriate.
Until the proposals have received shareholders' approval the Company shall continue to be deemed a going concern.
The following pages are not an integral part of these financial statements and are presented for information purposes only.
SCHEDULE OF INVESTMENTS AS AT 31 MARCH 2008
(UNAUDITED)
Security Description Holding Market value % of total
EUR'000 net assets
Mutual Funds
Euro
Alphagen Volantis 18,000 2,056 3.34 %
Blue Bay High Yield Return 29,241 4,464 7.26 %
Fund, Ltd. - Euro Class
Brevan Howard Equity Strategy 45,000 5,030 8.18 %
Cantillon Europe, Ltd. - Class 15,109 2,514 4.09 %
D, Series 14
Egerton European Equity Fund 44,526 2,408 3.91 %
(The), Ltd. - Class B
Ennismore Vigeland Fund, Ltd. 12,500 1,076 1.75 %
Eureka (Euro) Fund, Ltd. 11,964 1,577 2.56 %
Eureka (Euro) Fund, Ltd. - 8,073 1,709 2.78 %
Class A
Fortelus - Euro Class B 3,500 3,542 5.76 %
Gradient Europe Fund 6,091 1,564 2.54 %
Henderson European Absolute 9,900 3,321 5.40 %
Return Fund, Ltd.
Jandakot Leveraged Fund - Euro 24,099 3,024 4.92 %
Class
Kairos Fund, Ltd. 9,851 2,862 4.65 %
Lansdowne European Fund, Ltd. 7,504 1,314 2.14 %
Lansdowne UK Equity Fund, Ltd. 11,522 3,723 6.05 %
Leonardo Capital Fund - Class 8,053 3,343 5.44 %
A
Meditor European Hedge Fund - 12,934 2,946 4.79 %
Class C
Mpc Samsara Fund Inc. - Class 35,095 3,601 5.85 %
A
Polar Capital European 30,000 3,157 5.13 %
Conviction Fund
Polar Capital European Smaller 13,884 2,814 4.58 %
Companies Absolute Return
Fund, Ltd. - Class A
Trident European Fund - Class 11,959 3,943 6.41 %
B
Za International Fund 42,442 991 1.61 %
Za International Fund - Class 99,583 2,344 3.81 %
B
Zadig Fund 16,300 2,042 3.32 %
65,365 106.27 %
U.S. Dollar
Eureka (USD) Fund, Ltd. 460 126 0.21 %
Lansdowne UK Equity Fund, Ltd. 3,331 360 0.59 %
Oz Europe Overseas Fund, Ltd. 2,333 2,934 4.77 %
Oz Europe Overseas Fund, Ltd. 1,704 1,128 1.83 %
- Class C
4,188 7.40 %
Total value of financial 69,913 113.88 %
assets at fair value through
profit and loss
Net current liabilities (8,307) (13.88) %
Total net assets attributable 61,606 100.00 %
to holders of redeemable
participating preference
shares
SCHEDULE OF INVESTMENTS AS AT 31 MARCH 2008 (UNAUDITED)
(CONTINUED)
Net asset value per share: 31 March 2008 31 March 2007
HSBC European Absolute Limited EUR 2.1822 2.2616
- Euro Share Class
HSBC European Absolute Limited GBP 1.5517 1.5879
- Sterling Hedged Class
Portfolio Classification 2008 2007
% of Portfolio % of Portfolio
-Securities with an official 60.70% 76.51%
stock exchange listing
- Unlisted securities 39.30% 23.49%
100.00% 100.00%
This information is provided by RNS
The company news service from the London Stock Exchange
END
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