Blackstone Alternative Investment Funds plc

55 Pages·2016·1.71 MB·English

Blackstone Alternative Investment Funds plc
(an umbrella fund with segregated liability between sub-funds)

Semi-Annual Report and Unaudited Financial Statements
for the period ended 30 June 2016

A claim for exemption has been made pursuant to the U.S Commodity Futures Trading Commission (“CFTC”) Rule 4.7.
Blackstone Alternative Investment Funds plc
Contents
Page
Company Information 1
Background to the Company 2
Investment Manager’s Report 3
Statement of Financial Position 6
Statement of Comprehensive Income 7
Statement of Changes in Net Assets Attributable to Holders of Redeemable Participating Shares 8
Statement of Cash Flows 9
Notes to the Semi-Annual Financial Statements 10
Schedule of Investments 19
Summary of Material Portfolio Changes 50
Total Expense Ratio (“TER”) / Information for Investors in Switzerland 51
Blackstone Alternative Investment Funds plc

Company Information

The Board of Directors of the Company Mr. Gerald Brady* (Irish resident)
Mr. Peter Koffler (U.S. resident)
Mr. David Mehenny (U.K. resident)
Mr. Carl O’Sullivan* (Irish resident)

Registered Office 78 Sir John Rogerson’s Quay
Dublin 2
Ireland

Investment Manager and Distributor Blackstone Alternative Investment Advisors LLC
345 Park Avenue
New York, NY 10154
United States

Depositary State Street Custodial Services (Ireland) Limited
78 Sir John Rogerson’s Quay
Dublin 2
Ireland

Administrator and Transfer Agent State Street Fund Services (Ireland) Limited
78 Sir John Rogerson’s Quay
Dublin 2
Ireland

Company Secretary Bradwell Limited
Arthur Cox Building
Earlsfort Terrace
Dublin 2
Ireland

Independent Auditors Deloitte Chartered Accountants and Statutory Audit Firm
Deloitte & Touche House
Earlsfort Terrace
Dublin 2
Ireland

Legal Advisers as to Irish Law Arthur Cox
Arthur Cox Building
Earlsfort Terrace
Dublin 2
Ireland

* Independent Director

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Blackstone Alternative Investment Funds plc

Background to the Company

Unless otherwise provided for in this report, the capitalised terms have the same meaning herein as in the most recent
prospectus of Blackstone Alternative Investment Funds plc (the “Company”) and its supplement dated 16 March 2016 (together
“the Prospectus”).

The following information is derived from and should be read in conjunction with the full text and definitions section of the
Prospectus.

Principal Activities
The Company was incorporated on 13 May 2014 under registration number 543808 and was authorised as an undertaking for
collective investment in transferable securities (“UCITS”) on 15 July 2014 by the Central Bank of Ireland (“Central Bank”).

The Company is organised as an open-ended investment company with variable capital organised under the laws of Ireland as
a public limited company pursuant to the Companies Act 2014 and the European Communities (Undertakings for Collective
Investment in Transferable Securities) Regulations 2011 as amended, (the "UCITS Regulations"). The Company is organised in
the form of an umbrella fund with segregated liability between sub-funds.

The Articles of Association provide that the Company may offer separate classes of shares, each representing interests in a
sub-fund, with each sub-fund comprising a separate and distinct portfolio of investments. The Company has obtained the
approval of the Central Bank for the establishment of the initial fund, Blackstone Diversified Multi-Strategy Fund (the “Fund”)
which commenced operations on 11 August 2014. As of 30 June 2016, this was the only active sub-fund. As of 30 June 2016,
Class A (EUR) Accumulating, Class A (USD) Accumulating, Class I (AUD) Accumulating, Class I (CHF) Accumulating, Class I
(EUR) Accumulating, Class I (GBP) Accumulating, Class I (GBP) Distributing, Class I (JPY) Accumulating, Class I (NOK)
Accumulating, Class I (USD) Accumulating and Class K (EUR) Accumulating shares were issued and outstanding. Additional
sub-funds in respect of which a supplement will be issued may be established by the Company with the prior approval of the
Central Bank.

Investment objective and policies
The investment objective of the Fund is to seek capital appreciation. The Fund seeks to achieve its objective by allocating its
assets among a variety of discretionary investment advisers (the “Sub-Advisers”) with experience managing non-traditional or
“alternative” investment strategies.

Blackstone Alternative Investment Advisors LLC (the “Investment Manager”) is responsible for selecting the strategies, for
identifying and retaining Sub-Advisers with expertise in the selected strategies, and for determining the amount of Fund assets
to allocate to each strategy and to each Sub-Adviser.

The Investment Manager may also manage a portion of the Fund’s assets directly and may invest a portion of the Fund’s assets
in Eligible Collective Investment Schemes. The Fund may invest principally in derivatives.

Full details of the investment policies of the Fund can be found in the supplement relating to the Fund.

Sub-Advisers
During the period covered by this report, the Investment Manager had engaged the following entities as Sub-Advisers to provide
investment management services to the Fund:

 AlphaParity, LLC
 Bayview Asset Management, LLC
 Blackstone Senfina Advisors, L.L.C.
 Caspian Capital LP
 Cerberus Sub-Advisory I, LLC
 Cerebellum GP, LLC
 Chatham Asset Management, LLC
 EMSO Partners Limited
 GS Investment Strategies, LLC
 Good Hill Partners, LP
 HealthCor Management, L.P.
 IPM Informed Portfolio Management AB
 Rail-Splitter Capital Management, LLC
 Sorin Capital Management, LLC
 Two Sigma Advisers, LP
 Waterfall Asset Management, LLC
 Wellington Management Company, LLP

The Investment Manager may determine not to employ one or more of the above Sub-Advisers and may add new Sub-Advisers
at any time. A list of the current Sub-Advisers is available from the Investment Manager, free of charge, upon request and is
available at the internet address www.blackstone.com/UCITS.

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Blackstone Alternative Investment Funds plc

Investment Manager’s Report

Dear Shareholder,

We are pleased to present this Investment Manager's report for the Fund for the period 1 January through 30 June 2016 (the
“Reporting Period”). The Fund’s investment objective is to seek capital appreciation. The Fund seeks to achieve its objective by
allocating assets among a variety of investment sub-advisers with experience managing non-traditional or “alternative”
investment strategies. The Investment Manager is responsible for selecting the strategies, for identifying and retaining Sub-
Advisers with expertise in the selected strategies, and for determining the amount of Fund assets to allocate to each strategy
and to each Sub-Adviser. The Investment Manager may also manage a portion of the Fund’s assets directly.

Market Commentary

The first quarter of 2016 was challenging for hedge fund strategies, particularly those that are equity-focused. At the end of the
fourth quarter of 2015, we commented that the Fund benefited from reduced allocations to sub-advisers with higher beta and
higher market directionality in favor of sub-advisers with less market directionality. While additive in 2015, these portfolio shifts
created headwinds in the first quarter of 2016 as the Fund’s Equity Market Neutral sub-advisers were most exposed to the
extreme short squeeze that took place in February 2016. As managers sought to de-risk their portfolios, they covered their short
positions, which drove prices up despite little to no improvement in fundamentals. The short squeeze was pervasive across
Equity Long/Short and Equity Market Neutral strategies and dramatically affected many hedge funds that focus on single-name
shorts. Despite the challenges, we continue to believe that single-name short exposures are a potential source of alpha over the
long term, and may continue to benefit the portfolio over time. Finally, equity strategies were also negatively affected by a
reversal in factor returns, particularly momentum. High momentum names tended to be crowded, and traded down due to
selling pressure as hedge funds sought to unwind these exposures.

The defining event of the second quarter of 2016 was undoubtedly the “Brexit” vote. The month of June 2016 was dominated by
anticipation of the historic referendum and then the ensuing volatility once the results were announced. On 23 June 2016,
United Kingdom voters made the decision to leave the European Union, with the “leave” campaign winning by a narrow margin
of 52% to 48%. In the days leading up to the referendum, markets were pricing in an overwhelmingly high probability that the
“remain” camp would prevail, shocking markets when final results were tallied. On 24 June 2016, the day following the
referendum, the value of the British pound (Sterling) plunged to 30-year lows, overnight market futures dropped significantly in
major markets, gold rallied, and the S&P 500 had its worst trading day since August 2015 (ending down more than -3%).
Treasury yields also fell sharply, with the 10-year U.S. Treasury note hitting an intraday low of 1.41%, its lowest since July 2012.
The volatility continued after the weekend on 27 June 2016, with the S&P and MSCI dropping an additional -1.81% and -2.30%,
respectively. The Fund was positioned conservatively leading up to the Brexit referendum vote, both from a strategy allocation
perspective as well as from a sub-adviser risk appetite perspective. From a geographic exposure standpoint, the Fund’s net
exposure to Core Europe including the UK is relatively low in relation to its AUM. In fact, the Fund is only 3.54% net long to
“Core Europe.” Included within this exposure figure is a net short position of approximately -3.85% and -1.38% to the Euro and
GBP, respectively.4 This positioning helped protect capital and mitigate a significant amount of volatility that was seen during the
two business days following Brexit.

Review of Fund Performance

During the Reporting Period, the Fund generated a cumulative return, net of fees and expenses, in the Class I (USD)
Accumulating share class of (1.93%) and realised an annualised volatilityi of 5.42% with a Sharpe Ratioii of (0.75)1,2. For a
summary of Fund performance of other share classes, please refer to Note 6 of these unaudited semi-annual financial
statements. Over the same period, the MSCI World Total Return Index, a measure of global equity market performance,
returned 1.02%; the Barclays Global Aggregate Bond Index, a measure of U.S. global investment grade bond performance,
returned 8.96%3.

Multi-Asset

The Multi-Asset strategy was the top contributor to performance across the Reporting Period.

In the first quarter of 2016, the Fund’s Multi-Asset strategies experienced weakness. Some strategies within this category
generated positive returns, particularly those with exposure to emerging markets. Continued dovish, low-interest rate credit
conditions in the U.S. made emerging markets credit exposure increasingly attractive, and we continue to source attractive
opportunities in macro strategies. Strategies that avoided trading momentum also performed well, as momentum saw a big
reversal in the first part of this year. Exposures that hurt the Multi-Asset category were value strategies that caused losses in
fixed income and FX.

In the second quarter of 2016, the Fund’s Multi-Asset strategies also generated positive returns and continue to provide
diversification to the portfolio with low betas to traditional asset classes such as equity and credit. On the macro side, positive
developments in Argentina, Venezuela, and Greece have benefitted the Fund’s exposures to sovereign high yield bonds in
these regions. Local rates and FX exposures have also contributed positively. Systematic diversified strategies experienced
gains across factor models, with momentum rallying in particular. Strategies that do not include momentum offset some gains.
As we continue to reduce exposure to strategies with more market directionality, the multi-asset category is an area where we
may look to add additional sub-advisers.
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Blackstone Alternative Investment Funds plc

Investment Manager’s Report (continued)

Credit

The Credit strategy was a positive contributor to performance over the Reporting Period.

In the first quarter of 2016, Credit strategies faced challenging market conditions, detracting from performance. While the Fund’s
asset-backed sub-strategies experienced mark-to-market losses in January and February 2016, our sub-advisers continued to
search for opportunities to take advantage of market dislocations, and these exposures performed well in March 2016. We are
also increasingly bullish on some opportunities in corporate credit, which is an area where Blackstone has been underweight for
several years. Now that excessive issuance, volatility, interest rate-hikes, and slowing global growth have led to weakness in
corporate credit markets, redemptions and fund outflows have created forced sellers of attractive risk across the corporate credit
spectrum.

In the second quarter of 2016, Credit strategies contributed gains, with corporate credit contributing significantly. Going into
2016, we have seen increased opportunities in corporate credit, an area we have been underweight for several years. The
Fund’s allocation to corporate credit strategies was approximately tripled over the first half of the year on the belief that
increasing weakness due to forced sellers across the corporate credit spectrum would provide greater opportunities for liquidity
providers to capture excess spread. At this point, we believe this opportunity has mostly played out. With rates as low as they
are, attractive yields are especially hard to find.

Equity

The Equity strategy was the top detractor over the Reporting Period.

In the first quarter of 2016, Equity strategies contributed positively in March, with both the Fund’s Equity Long/Short and Equity
Market Neutral sub-strategies generating positive returns overall. However, performance across sub-advisers was mixed with
some capturing meaningful portions of the equity upside while others continued to struggle in the volatile markets. As a group,
the Equity Long/Short sub-strategies did not capture as much of the market’s upside as they have historically. Several of the
Equity Long/Short sub-advisers cut risk in February 2016, which limited their ability to fully snap back when markets recovered.
However, we did see sub-advisers begin to become more constructive as the month progressed and their levels of risk reflected
this view. From a sector perspective, exposures to Financials proved beneficial as this sector rebounded on the month.
Meanwhile, Healthcare continued to struggle returning to pre-January 2016 levels, with Biotech offsetting broader sector losses
in the Fund. As for Equity Market Neutral sub-strategies, our sub-advisers benefited from a normalisation in markets post what
we observed to be one of the most extreme short squeeze environments on record. Several of the short exposures that
experienced violent, technically-driven upward moves in February 2016 began to trade again on fundamentals. This reversal
resulted in positive performance for the month and re-capture of some of the mark to market losses from previous months.

In the second quarter of 2016, Equity strategies contributed positively, even though the Fund’s equity market neutral strategies
generated losses. Despite challenges in the second quarter, we believe equity market neutral strategies can be advantageous
in volatile and uncertain markets and are maintaining allocations to these strategies. Looking at equity strategies broadly over
the first half of the year, the Fund benefitted from reduced exposure to higher beta strategies, but suffered from overweight
exposures to underperforming sectors, particularly financials and technology. Going forward, we maintain cautious views on
equity markets and look to continue to reduce exposure to strategies with higher betas and market directionality.

Portfolio Changes and Market Outlook

During the Reporting Period, one Multi-Strategy sub-adviser employing risk premia strategies intended to capture well defined
and well understood risk premia across multiple asset classes was added to the Fund. Additionally, one Equity-focused sub-
adviser had its allocation reduced to zero during the Reporting Period, although remains a sub-adviser to the platform. The
Investment Manager also made adjustments to the Fund’s asset allocation in response to market conditions and the Investment
Manager’s assessment of the relative attractiveness of certain investment strategies to the current and anticipated market
environment.

It has been a tumultuous first half of the year for markets, despite the MSCI ending in positive territory. Starting in January 2016
with the second Chinese currency depreciation, all the way through June 2016 with the culmination of Brexit, investors have
experienced significant volatility. To the extent that events like the Brexit vote dominate markets and drive volatility higher,
diversifying exposures such as the Fund seek to provide stability and downside protection within a portfolio, as well as take
advantage of emerging dislocations that can create compelling investment opportunities.

Thank you for your continued confidence. We look forward to continuing to service your investment needs in the years to come.

Sincerely,

Blackstone Alternative Investment Advisors LLC

Date: August 2016

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Blackstone Alternative Investment Funds plc

Investment Manager’s Report (continued)

Information about principal risks of investing in the Fund is set forth in the Prospectus and Supplement.

The portfolio composition, industries and holdings of the Fund are subject to change.

The opinions expressed are those of Blackstone Alternative Investment Advisors LLC. The opinions are as of the date of this
report and are subject to change without notice.

Glossary of Indices:

The volatility of the indices presented may be materially different from that of the performance of the Fund. In addition, these
indices employ different investment guidelines and criteria than the Fund; as a result, the holdings in the Fund may differ
significantly from the securities that comprise the indices. The performance of these indices has not been selected to represent
an appropriate benchmark to compare to the performance of the Fund, but rather is disclosed to allow for comparison of Fund
performance to that of well-known and widely recognised indices. A summary of the investment guidelines for these indices is
available upon request. In the case of equity indices, performance of the indices reflects the reinvestment of dividends.

Barclays Global Aggregate Bond Index: provides a broad-based measure of the global investment grade fixed-rate debt
markets. The index includes securities issued in U.S., European and Asian currencies. The principal asset classes in the index
include local currency sovereign debt, government-related, corporate and securitised (including MBS, ABS and CMBS) bonds.

MSCI World Total Return Index: A market capitalisation weighted index designed to provide a broad measure of equity market
performance throughout the world. The MSCI ACWI is maintained by Morgan Stanley Capital International, and is comprised of
stocks from both developed and emerging markets.

1 Class I (USD) Accumulating is the Fund share class with the longest track record that is currently open to new investors. Net performance
for the Class I (USD) Accumulating class, as well as indices, is from 01/01/16 – 30/06/16.
2 Fund performance is shown net of all fees and expenses. Past performance may not be a reliable guide to future performance. The value of
Fund shares may go down as well as up and there can be no assurance that the Fund will achieve its investment objectives or avoid
significant losses.
3 The indices presented are indicative and for illustrative purposes only. There is no guarantee the Fund will outperform an index.
4 Exposure data is as of 30/06/16. Core Europe is defined to include Belgium, Czech Republic, Denmark, Finland, France, Germany, Jersey,
Luxembourg, Monaco, Netherlands, Norway, Sweden, Switzerland, and the United Kingdom.

i Volatility / Standard Deviation: A measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher
the deviation. Standard deviation is calculated as the square root of variance
ii Sharpe Ratio: A ratio to measure risk‐adjusted performance. The Sharpe Ratio is calculated by subtracting the risk‐free rate – such as
that of the 10‐year U.S. Treasury bond – from the rate of return for a portfolio and dividing the result by the standard deviation of the
portfolio returns. The greater a portfolio’s Sharpe Ratio, the better its risk‐adjusted performance has been.

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Blackstone Alternative Investment Funds plc

Statement of Financial Position (Unaudited)

Blackstone Blackstone
Diversified Diversified
Multi-Strategy Multi-Strategy
Fund Fund
As at As at
30 Jun 2016 31 Dec 2015
Assets USD USD
Financial assets at fair value through profit or loss:
Held for trading:
Investments in securities 633,273,048 415,153,633
Purchased options 4,017,959 2,165,582
Futures contracts 15,081,944 3,571,074
Forward foreign currency exchange contracts 4,891,693 2,142,192
Swap contracts 8,639,848 2,969,525

Securities purchased under agreement to resell 287,145,000 188,500,000
Cash 104,866,565 168,770,056
Due from broker 192,100,642 129,390,161
Receivable for investments sold 17,333,071 154,103
Interest receivable 5,019,174 2,199,252
Receivable for fund shares sold 4,392,069 4,684,257
Receivable for financial derivative instruments sold 285,668 586,834
Other assets 435,231 281,149
Total current assets 1,277,481,912 920,567,818

Liabilities
Financial liabilities at fair value through profit or loss:
Held for trading:
Options written (4,447,700) ( 9 ,990,925)
Futures contracts (13,233,760) (2,282,309)
Forward foreign currency exchange contracts (17,445,359) (6,978,188)
Swap contracts (12,785,445) (4,448,287)

Due to broker (3,799,429) (60,000)
Payable for investments purchased (22,167,425) ( 17,043,558)
Payable for Fund shares redeemed (166,333) ( 5 13,771)
Investment Management fees payable (3,663,811) ( 2 ,181,575)
Administrator fees payable (605,034) ( 4 34,486)
Performance fees payable (421,985) (1,995,350)
Audit and tax fees payable (61,619) ( 1 0 2,939)
Custodian fees payable (109,695) (69,324)
Trustee fees payable (85,091) ( 4 0,140)
Directors’ fees payable - ( 2 7 , 894)
Legal fees payable (19,072) ( 2 1,645)
Payable for financial derivative instruments purchased (1,103,598) (565,593)
Other payables and accrued expenses (321,990) (114,376)
Liabilities (excluding net assets attributable to holders of
redeemable participating shares) (80,437,346) (46,870,360)

Net assets attributable to holders of redeemable participating shares 1,197,044,566 873,697,458

The accompanying notes are an integral part of these financial statements.

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Blackstone Alternative Investment Funds plc

Statement of Comprehensive Income (Unaudited)

Blackstone Blackstone
Diversified Diversified
Multi-Strategy Multi-Strategy
Fund Fund
For the For the
period ended period ended
30 Jun 2016 30 Jun 2015
USD USD
Investment income/(loss)
Dividends 1,172,041 687,109
Interest 12,318,414 4,963,048
Net (loss)/gain from investments in securities included in financial assets
at fair value through profit or loss (9,303,273) 10,596,927
Net gain/(loss) on foreign exchange 136,331 (104,777)
Net gain/(loss) from financial derivative instruments included in financial
assets and liabilities at fair value through profit or loss 4,631,764 (22,438,537)
Total investment income/(loss) 8,955,277 (6,296,230)

Investment Management fees (6,719,776) (2,782,152)
Administrator fees (996,777) (427,506)
Performance fees (421,983) (2,053,665)
Legal fees (73,196) (53,599)
Audit and tax fees (41,954) (60,076)
Custodian fees (173,199) (176,927)
Trustee fees (122,377) (52,736)
Directors’ fees (22,530) (32,505)
Other operating expenses (194,039) (59,618)
Total expenses (8,765,831) (5,698,784)

Operating profit/(loss) 189,446 (11,995,014)

Profit/(loss) before tax 189,446 (11,995,014)

Withholding tax (739,575) (165,795)

Decrease in net assets attributable to holders of redeemable
participating shares resulting from operations (550,129) (12,160,809)

There are no recognised gains or losses in the financial period other than those dealt with in the Statement of Comprehensive
Income. All results are from continuing activities.

The accompanying notes are an integral part of these financial statements.

For a summary of share class performance in local currency, please refer to Note 6.

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Blackstone Alternative Investment Funds plc

Statement of Changes in Net Assets Attributable to Holders of Redeemable Participating Shares (Unaudited)

Blackstone Blackstone
Diversified Diversified
Multi-Strategy Multi-Strategy
Fund Fund
For the For the
period ended period ended
30 Jun 2016 30 Jun 2015
USD USD
Net assets attributable to holders of redeemable
participating shares at beginning of period 873,697,458 375,296,759

Issuance of shares during the period 358,250,170 172,046,964
Redemption of shares during the period (34,352,933) (38,160,067)
Net increase from share transactions 323,897,237 133,886,897

Decrease in net assets attributable to holders of redeemable participating shares
from operations (550,129) (12,160,809)

Net assets attributable to holders of redeemable
participating shares at end of period 1,197,044,566 497,022,847

The accompanying notes are an integral part of these financial statements.

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