Interim Management Statement
(Thomson Reuters ONE) - TAPESTRY INVESTMENT COMPANY PCC LIMITEDInterim Management Statement - 3 months to 30 Sep 2009 (unaudited)November 2009This statement has been prepared to provide additional information toshareholders as a body to meet the relevant requirements of the UKListing Authority's Disclosure and Transparency Rules. It should notbe relied upon by any party for any purpose other than as statedabove.Tapestry Investment Company PCC Limited ("The Company") is registeredin Guernsey, Channel Islands as a closed-ended protected cell companyin accordance with the provisions of The Protected Cell CompaniesOrdinance, 1997 and The Companies (Guernsey) Law, 1994. It isestablished with one "Cell" known as Tapestry Investment Company -Multi-Strategy (GBP) which has an unlimited life.At an Extraordinary General Meeting and Class Meeting held on 11September 2009, the Company's shareholders approved the ManagedWind-Down of the Company (as more particularly described in thecircular that was sent to shareholders on 21 August 2009 (the"Circular"). On 18 November 2009, the Company returned £31,470,343to shareholders by way of a compulsory, pro rata, partial redemptionof shares.Investment Objective and PolicyThe Company will not make any new investment however, this will notpreclude the Company from switching an existing investment to a newshare class or new vehicle should this enhance the prospects of thatparticular investment's future realizations.The Company will seek to realize the Company's existing investmentportfolio with a view to maximizing the orderly return of investedcapital to Shareholders.Any cash received by the Company as part of the realization processbut prior to its distribution to Shareholders will be held by theCompany as cash on deposit.The Company will not have borrowings other than for short-termworking capital purposes.ManagerThe Company has appointed Ramius Fund of Funds Group LLC asinvestment manager with responsibility for the day to daydiscretionary management of the Company's investment portfolio,including cash in accordance with the Company's investment objectiveand policy, subject to the overall supervision of the directors.Performance summaryOver the three month period the Company achieved a return of 1.46%net of all fees. The closing net asset value as at 30 September 2009was £80.7 million representing 96.55 pence per share. At the close ofbusiness on 30 September 2009 (the last business day of the month)the mid market price of The Company's shares on the London StockExchange was 84.50p, representing a discount of 12.48%.The performance of the Company's portfolio for the three months to 30September 2009 was as follows: July 2009 0.73% August 2009 0.34% September 2009 0.37%Risk assets continued their upward trend throughout the 3rd quarteras economic data improved on a global basis. The reversal of adepression-like contraction of global inventory levels created a minicyclical boom being reflected in data such as industrial output,business and consumer confidence. However, the key question at handis the nature and sustainability of this rebound which undeniablybegan from an extremely low base. The sustainability of any suchrecovery is likely tied to meaningful improvement in aggregate globaldemand given the continued high levels of unemployment.For the investment community, the impact of the current economicuncertainty described above on asset prices remains the mostimportant dynamic going forward. In summary, we see a 'story oftwo-tails' unfolding. The left tail argument (of further rapiddeterioration in asset prices) was driven in 2008 by a financialcrisis where counterparty risk, liquidity and solvency concernsdestroyed risk capital and pushed many participants to delever over anumber of weeks. For the time being a repeat of this scenario is offthe table with a change in economic fundamentals more likely toinfluence a deterioration in asset prices in the future. If thetraditional time horizon prevails (that asset markets should begin todiscount a material change in fundamentals 6 to 9 months in advanceof the change in economic fundamentals taking place) we anticipatethat sometime within the next 12 months markets will likely need todecide on the health of the global economy post the short-terminventory readjustment coupled with the government stimulus packagesreceding into the background.Market positioning will likely cause this adjustment to take place ina hurried and thus disorderly fashion. As a whole, current investmentlevels are lower than in 2008 as risk capital remains lower, leveragelevels remain significantly lower and the reemergence of a shadowbanking system that was previously nonexistent. This all potentiallypoints to a more orderly effect on asset markets if the fundamentalsdeteriorate. Unfortunately, this is where the good news ends. Thecrowded trade, which tends to suggest a potentially disorderlyreaction, remains a disconnect between investors' medium-termconviction in fundamentals driven by the health of the global economyversus their portfolio positioning which is long risk assets. Manyinvestors believe they can reconcile this difference by cuttingexposure when the economic data supports their medium-term view andthe markets begin to price this in. Everyone expects to be able tocut risk and watch the volatility walk through someone else'sportfolio. Simply put, they recognize the game is in overtime andeveryone wants to head for their cars at the same time; the problemis that the game is far too exciting for anyone to leave early andthey all believe the exit door is wider than it actually is.The other part of the story of two tails is one where central banksand governments have created an environment that they hope willsupport asset prices, especially for any society that is in debt. Theconsensus is that inflation is the better of two evils and assetvalues are key to any type of credit extension into the economy. Allpolicies point to asset re-inflation, if not bubble creation, at atime where acceptable yield is no longer available in traditionalmoney market assets and the new supply of investment assets that usedto be generated by the securitization machine remain low. The push tointo risk assets and away from the curse of cash is almost mandatoryat this time. Because of this, the ongoing scenario of further assetprice momentum is as likely as any other path.Strategy contribution Three months to 30 September 2009Convertible/Capital Structure Arb. 0.03%Credit-Based 1.64%Event Driven 0.23%Fixed Income Arbitrage 0.06%Hedged Equity 1.17%Other 0.41%Source: Ramius Alternative Solutions LLCEquity Driven StrategiesThe 3rd quarter was again positive, with global equities postingdouble digit returns for the second straight period, a feataccomplished only for the 3rd time in the last 50 years. The MSCIWorld Index returned 17.6% whilst geographic dispersion was higherthan the previous quarter with Asia noticeably underperformingdeveloped and other emerging markets. This underperformance waspredominantly driven by Japan where ongoing economic weaknesscontributed to a change in the political leadership of the county andsecondly in China where authorities looked to tighten lendingconditions.The rally in developed markets was largely driven by a combination ofbetter than expected 2nd quarter earnings results, furtherconfirmation of the ongoing global economic recovery and expectationsfor earnings growth for the remainder of the year. Earningsimprovements however continued to be more supported by cost cuttingby corporates rather than revenue growth.Technology and material sectors retained their leadership of themarket together with sectors like consumer discretionary sectors thathad previously witnessed higher levels of short interest. Theenvironment over the summer, where lower market liquidity incombination with an upward trending market, resulted in the remainingconcentration of short positions being squeezed as positions werecovered.Hedge fund managers continue to expand their gross and net exposuresover the quarter with Morgan Stanley reporting that aggregate grossand net exposures across more than 200 long short equity fundsincreased from 138% gross and 41% net at the close of the 2nd quarterto 146% gross and 53% gross through the end of the 3rd quarter. In anumber of cases we are seeing man-ager exposures return to 2007levels.Performance across the universe of long short equity funds waspositive over the quarter with returns being dominated more by netmarket exposure than alpha because, in general, lower qualitybusinesses (that managers tend to be short) outperformed the broadermarket. For example, a Goldman Sachs customized index of weak balancesheet companies returned 30.11% as compared to the index of strongbalance sheet companies which returned 16.01%. This translated into adifficult environment for managers with more of a hedged investmentstyle versus directional orientated managers that benefited more fromthe overall movement higher in the equity market.This stage of the market has been dominated by multiple expansions ina correlated fashion across the broader market. Going forward, thismultiple expansion stage should be followed by earnings growthproviding a far better climate for fundamental hedged investmentstyles.Credit Based StrategiesThe 3rd quarter of 2009 for the credit markets represented acontinuation of many of the same themes that were in place the priorquarter: dramatically tighter spreads, heavy inflows into risk assets(credit in particular), strong market technicals, receptive capitalmarkets towards new issue corporate bonds and government sponsoredprograms designed to foster demand for securitized assets. Theseconsiderations brought risk premiums in the credit indices to levelsbelow where they were trading prior to the calamitous events ofSeptember 2008.One of the biggest developments that led to the rally in corporatecredit was the ability of companies to effect bond for loantake-outs. These takeouts involved issuing secured bonds to pay-down(at par) loans. The bond-for-loan takeout trade had three primarybenefits. First, the onerous maintenance covenants found in bankloans went away. Secondly, the technicals in the loan market improvedas these instruments got taken out at par and were not replaced byincremental supply. Third, the secured bonds that were issuedextended the maturity profile of the company thus buying them moretime to reduce debt and improve operating metrics without the specterof a debt overhang.Bond-for-loan takeouts in addition to sponsor-led debt exchanges havebeen a key component in lowering default expectations for 2010.Defaults are currently expected to peak at 12.5% at year-end and thendrop to 4.5% for 2010 according to strategists at Moody's. Theextension of maturities has now resulted in $1 trillion of high yieldbonds and loans that maturing between 2012 and 2015.The securitization markets showed signs of life over the 3rd quarteras the RMBS and consumer ABS markets improved largely due togovernment sponsored programs aimed at increasing demand for thesesecurities. The consumer ABS market continued to be supported byfollow-on interest by TALF investors. Lastly, the CMBS market isbeing viewed with a lot of caution given the bleak outlook foremployment which is pressuring rent rolls and capitalization rates.Credit manager performance during the 3rd quarter of 2009 was betterthan virtually all other hedge fund strategies. The HFRI Fixed IncomeCorporate Index was up 7.72% during the 2nd quarter and is now up23.36% year to date. Other alternative credit-based indices such asthe Distressed Index and Fixed Income Asset Backed Index were up9.22% and 6.61% respectively for the quarter.In terms of credit manager return differentiation, pure distressedmanagers led the pack because the strategy often entails very littlein terms of hedging and the trajectory of the market was up nearlythe entire quarter. Managers that employ a more balanced approachwith smaller net exposures were positive but didn't participate tothe same extent. These managers have concentrated their shortexposures primarily in investment grade CDS which detracted fromperformance. Additionally, many credit based managers haveimplemented policies to hedge tail risk in their credit portfolioswithout of the money puts on the S&P 500. This cost managers anywherefrom 25-75bp per month depending upon the amount of premium theycommitted to the trade.Overall, managers are wary of the speed and strength of the recentrally in risk assets and have started the process of trimming backexposures and acknowledging that the market is no longer genericallycheap.Event Driven StrategiesEvent driven strategies experienced strong performance in the 3rdquarter with the HFRI Event Driven Index +9.8%. Stressed/distressedcorporate credit (see credit commentary) was the primary driver ofperformance. Directional equity strategies such as deep value with acatalyst also performed well. Merger arbitrage underperformed otherstrategies but was positive nonetheless. The HFRIDistressed/Restructuring Index gained +10.5% and the HFRI MergerArbitrage Index returned +2.5%.In merger arbitrage, fourteen deals were completed during the quarterwith the largest and most widely held being Suncor/Petro-Canada at$14b. Annualized deal spreads continued to tighten over the quarteras capital markets became less volatile and hedge funds, as well asproprietary trading desks at banks, be-came more fully invested.Hedge funds remain invested in the relative safety and liquidity ofthe larger deals where annualized deal spreads range between 6 - 8%(excluding outliers).Total deal flow in the 3rd quarter reached $35bn over the quarterremaining near the lows of 2002 with the number of announced dealsonly reaching 15 a similar level to 2003. The largest announced dealsover the quarter were Xerox/Affiliated Computer Service ($6.3b) andBaker Hughes/BJ Services ($5.2b). According to Barclays Capitalresearch the average deal size was $2.3b, one of the lowest of anyquarter since 1998.Traditional event driven managers react to corporate announcementsand the 3rd quarter represents a trough in deal announcements, dealvalue and corporate transactions as a whole. Corporations continue toraise more cash via the capital markets and together with this higherequity prices and access to financing have all contributed tobusinesses being in a better position to finance acquisitions. Inaddition, the likelihood of slower growth in 2010 could result incompanies looking increasingly at inorganic ways to grow theirbusinesses whilst also allowing them to take excess capacity out oftheir respective markets.Distressed performed well during the quarter. The technicaltail-winds detailed in our credit commentary show no signs ofabating. The massive rally in credit took high yield credit spreadstighter by 240bps to end the quarter at 779bps. Today only 2.2% ofthe market is trading at levels (<50% of par) traditionally de-finedas distressed.Also, the pace and par value of defaults continues to decline. Manyin sell side research believe that defaults have already peaked thisyear and predict a much lower default rate for 2010 (4%). This willlead to a less attractive opportunity set for distressed/bankruptcyspecialists over the short-term. However, with over $1 trillion inhigh yield maturities through 2015 the opportunity set is likely torebuild in the medium to longer term.Shareholder activists experienced strong positive performance duringthe 3rd quarter. In a repeat of the 2nd quarter, activist performanceduring the 3rd quarter was generally beta driven rather than "valuerealization" driven. Activists tend to be long-only; therefore,equity market performance (S&P +15.6%, Russell 2000 +19.3%) duringthe 3rd quarter explains much of the performance. With that said,there were a few instances during the quarter where activistinvestors were responsible for a catalyst. Sara Lee sold its personalcare business to Unilever for $1.8b. Sara Lee plans to increasemarketing, consider strategic acquisitions and/or buy back stock withthe proceeds. Also, Kraft Foods made a $16.7b hostile bid forCadbury. Lastly, Target Corporation has implemented many of thecorporate governance improvements that Pershing Square fought for inlast quarter's failed proxy contest.In other news, we will continue to monitor the SEC's decisionregarding the proxy access. The SEC has decided to wait until 2010 tovote on a proposal to allow shareholders greater leeway and make itless costly to nominate directors to corporate boards. The SEC wassupposed to have voted on the proposal during November 2009.Notwithstanding the positive trends listed above, public share-holderactivism in the current environment remains challenging. We willcontinue to focus our attention on managers that pursue afriendly/private approach to management and managers that haveoperational expertise.Portfolio AllocationFollowing the first redemption of the Company's shares on 18 November2009, the Company's portfolio consists of [26] underlying managers inthe following strategies:Strategy As at 18 November 2009 %Convertible/Capital Structure Arb. 1.19%Credit-Based 26.60%Event Driven 26.04%Fixed Income Arbitrage 6.46%Hedged Equity 22.53%Other 17.19%Source: Ramius Alternative Solutions LLCMaterial EventsAt an Extraordinary General Meeting and Class Meeting held on 11September 2009, the Company's shareholders approved the ManagedWind-Down of the Company (as more particularly described in theCircular).On 16 November 2009, the Company cancelled all 7,018,000 shares heldin Treasury.On 18 November 2009, the Company returned £31,470,343 to shareholdersby way of a compulsory, pro rata, partial redemption of shares(equivalent to 37.65p per share). Following the redemption, theCompany's issued share capital consists of 50,981,904 shares withvoting rights.For further information contact:Anthony Simpson at Ramius Alternative Solutions LLC tel: 020 70164201Kleinwort Benson (Channel Islands) Fund Services LimitedCompany Secretary24 November 2009Disclosure:Source for statistics in commentary: BloombergPerformance results for Tapestry Investment Company PCC Limited (the"Company") are net of all fees and reflect the reinvestment ofdividends and other earnings. Prospective investors should be awarethat past performance is not necessarily indicative of future resultsand that an investment in a leveraged fund is speculative andinvolves a high degree of risk. Investors should read the Company'sprospectus which describes the leverage intended to be employed. TheCompany's performance can be volatile and an investor could lose allor a substantial amount of his or her investment. The Company's feesand expenses may offset its trading profits. The Company's InvestmentAdviser has total trading authority over the Company. The investorshould be aware that the use of a single investment adviser applyinggenerally similar trading programs could mean lack of diversificationand, consequentially, higher risk. A substantial portion of theinvestments made by the underlying funds may take place on foreignexchanges. The Target Returns are presented for the purposes ofproviding insight into the Company's objective, detailing theCompany's anticipated risk and reward characteristics in order tofacilitate comparisons with other investments, and aiding inassisting in future evaluations of the performance of the Company.The Target Returns are not a prediction, projection or guarantee offuture performance. They are based upon assumptions regarding futureevents and conditions which may not prove to be accurate.Accordingly, the Target Return should not form the primary basis foran investment decision. There can be no assurance that the TargetReturns will be achieved.---END OF MESSAGE---This announcement was originally distributed by Hugin. The issuer is solely responsible for the content of this announcement.
Datum: 24.11.2009 - 18:34 Uhr
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