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ALT > SEC Filings for ALT > Form 10-Q on 9-May-2013All Recent SEC Filings

Show all filings for ISHARES DIVERSIFIED ALTERNATIVES TRUST | Request a Trial to NEW EDGAR Online Pro



Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This information should be read in conjunction with the financial statements and notes to financial statements included in Item 1 of Part I of this Form 10-Q. The discussion and analysis that follows may contain statements that relate to future events or future performance. In some cases, such forward-looking statements can be identified by terminology such as "may," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or the negative of these terms or other comparable terminology. None of the Trust, the Sponsor, the Trustee or the Delaware Trustee assumes responsibility for the accuracy or completeness of any forward-looking statements. None of the Trust, the Sponsor, the Trustee or the Delaware Trustee is under a duty to update any of the forward-looking statements to conform such statements to actual results or to a change in expectations or predictions.


The iShares ® Diversified Alternatives Trust (the "Trust") is a Delaware statutory trust that issues units of beneficial interest ("Shares") representing fractional undivided beneficial interests in its net assets. The Trust holds long and/or short positions in foreign currency forward contracts and exchange-traded futures contracts involving assets such as commodities, currencies, interest rates and certain eligible stock and/or bond indices. Investments for the Trust's portfolio are selected by BlackRock Fund Advisors (the "Advisor") following investment strategies that utilize quantitative methodologies to identify potentially profitable discrepancies in the relative values or market prices of one or more assets.

iShares® Delaware Trust Sponsor LLC, a Delaware limited liability company, is the "Sponsor" of the Trust. BlackRock Institutional Trust Company, N.A. is the "Trustee" of the Trust. The Trust is a commodity pool, as defined in the Commodity Exchange Act (the "CEA") and the applicable regulations of the Commodity Futures Trading Commission (the "CFTC"), and is operated by the Sponsor, a commodity pool operator registered with the CFTC. The Advisor serves as the commodity trading advisor of the Trust and is registered under the CEA. The Trust has delegated some of the administration of the Trust to State Street Bank and Trust Company (the "Trust Administrator"). Wilmington Trust Company, a Delaware banking corporation, serves as the "Delaware Trustee" of the Trust.

The Trust offers Shares on a continuous basis. The Trust issues and redeems Shares only in one or more blocks of 100,000 Shares ("Baskets"). These transactions take place only with certain broker-dealers with whom the Trust has entered into written arrangements regarding the issuance and redemption of Shares (we refer to these broker-dealers as "Authorized Participants"), in each case in exchange for a consideration per Share equal to the net asset value per Share announced by the Trust on the first Business Day after the purchase or redemption order is received by the Trust. A "Business Day" is defined as any day other than: (a) a Saturday or a Sunday; or (b) a day on which NYSE Arca, Inc. ("NYSE Arca") is closed for regular trading. Only institutions that enter into an agreement with the Trust to become Authorized Participants may purchase or redeem Baskets. The Trust has delegated the processing of creation and redemption orders of Baskets to SEI Investments Distribution Co.

The Trust is a passive investor in the cash or U.S. Treasury securities and other short-term securities ("Short-Term Securities") posted as margin to collateralize the portfolio of futures and/or forward contracts, cash and other investments held by the Trust (the "Portfolio"). The Trust does not engage in any activities designed to obtain a profit from, or to ameliorate losses caused by, changes in the value of Short-Term Securities posted as margin.

Shares of the Trust trade on NYSE Arca under the symbol "ALT."

Computation of Trust's Net Asset Value

On each Business Day, as soon as practicable after the close of regular trading of the Shares on NYSE Arca (normally 4:00 p.m., New York time), the Trustee determines the net asset value of the Trust, the "NAV" and the amount equal to the product of the NAV and the number of shares constituting a Basket ("Basket Amount") as of that date. The NAV is the net asset value of the Trust divided by the number of outstanding Shares.

"Net asset value of the Trust" means the total assets of the Trust, including all cash and cash equivalents or other debt securities less total liabilities of the Trust, each determined on the basis of accounting principles generally accepted in the United States of America ("U.S. GAAP"), consistently applied under the accrual method of accounting. In particular, net asset value of the Trust includes any unrealized profit or loss on open forward contracts and futures contracts, and any other credit or debit accruing to the Trust but unpaid or not received by the Trust.

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On each day on which the Trustee must determine the net asset value of the Trust and the NAV, the Trust Administrator must value all futures and forward trading positions and other Short-Term Securities and non-cash assets in the Portfolio and communicate such valuation to the Trustee for use by the Trustee in the determination of the Trust's net asset value.

The current market value of all open futures contracts, whether traded on a United States exchange or a non-United States exchange, is determined by the Trust Administrator based upon the settlement price for that particular futures contract traded on the applicable exchange on the date with respect to which net asset value is being determined; provided, that if a futures contract could not be liquidated on such day due to the operation of daily limits (if applicable) or other rules, procedures or actions of the exchange upon which that position is traded or otherwise, the settlement price on the most recent day on which the position could have been liquidated may be the basis for determining the market value of the position for that day.

The current market value of all open forward contracts is based upon the prices determined by the Trust Administrator utilizing data from an internationally recognized valuation service for those types of assets.

The Trustee may in its discretion (and, under extraordinary circumstances, will) value any asset of the Trust pursuant to other principles that it deems fair and equitable. In this context, "extraordinary circumstances" include, for example, periods during which a valuation price for a forward contract or a settlement price of a futures contract is not available due to events such as systems failure, natural or man-made disaster, act of God, armed conflict, act of terrorism, riot or labor disruption or any similar intervening circumstance or due to a trading or other restriction imposed by a relevant futures exchange.

On each Business Day, the Trustee subtracts the Trust's accrued fees (other than fees computed by reference to the value of the Trust or its assets), expenses and other liabilities on that day from the value of the Trust's assets as of the close of trading on that day. The difference is the Trust's "Adjusted Net Asset Value." Fees computed by reference to the value of the Trust or its assets are calculated based on the Adjusted Net Asset Value. The Trustee subtracts the fees of the Trust calculated on an Adjusted Net Asset Value basis to determine the Trust's net asset value.

The Trust Administrator may be replaced if, in the judgment of the Trustee, it ceases to provide regular or accurate valuations.

Overall Performance

For the quarter ended March 31, 2013 (the "reporting period"), the Trust's total return, net of expenses, was 1.40%. This performance was the result of a positive return on the Trust's currency and long-term fixed income investments, partially offset by the losses in equity investments.

Market Environment/Background

During the reporting period, the Trust's investments resulted in exposure to the
following geographical areas: Europe, North America, Australia, and Asia.

The following table presents certain macro-economic indicators for each of the
areas referred to above at the dates and for the periods indicated:

                                                           Nominal GDP Year  Over
                     10-Year Yield                               Year Change                                     Unemployment Rate                         Exchange Rate(3)
                                                  Quarter Ended               Quarter Ended             Month Ended              Month Ended
            December 31,          March 31,       December  31,               December  31,            December  31,             March  31,          December 31,      March 31,
                2012                2013              2011                        2012                     2012                     2013                 2012             2013
Germany             1.32%              1.29%                2.2% (1)                    1.6% (1)                 6.9% (2)                6.9% (2)    €      0.7578     €   0.7802
Sweden              1.54%              1.81%                1.2% (1)(4)                 1.6% (1)                 7.6% (1)(4)             8.8% (1)    Kr     6.5042     Kr  6.5281
U.S.A.              1.76%              1.85%                4.0% (2)                    3.5% (2)                 7.8% (2)                7.6% (2)              N/A            N/A
Australia           3.28% (4)          3.42%                5.4% (2)                    2.0% (2)                 5.4% (2)                5.6% (2)    AUD    0.9631     AUD 0.9598

Japan 0.79% 0.55% (1.8 )%(1) (0.2 )%(1) 4.3% (2)(4) 4.1% (2) ¥ 86.62 ¥ 94.22

(1) Not seasonally adjusted

(2) Seasonally adjusted

(3) Currency units per $1

(4) Latest revision

Source: Bloomberg

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Portfolio Update

The Trust continued to remain out of the short-term bond strategy for the reporting period.

Trust's Strategies' Performance

The Trust's investments in currency markets generated a net return of 1.38% during the reporting period (see figure 1). The Trust's performance was driven by short positions in Japanese yen and Swiss franc. Long positions in Norwegian krone and British pound sterling contributed negatively to the performance of this asset class.

The Trust's investments in futures on long-term bonds (bonds with maturities of more than one year) generated a net return of 0.18% for the reporting period (see figure 1). The Trust's performance in this asset class was primarily driven by long positions in the United Kingdom and U.S. bond markets. Short positions in Canadian and Japanese bond markets contributed negatively to the performance and offset some of the gains.

The Trust's investments in futures on the equity markets generated a net return of (0.16)% for the reporting period (see figure 1). The Trust's performance in the equity markets was driven by long positions in the Australian, German, and United Kingdom equity markets. Short equity positions in Canada, Sweden, and Taiwan contributed negatively to the performance of this asset class.

The Trust exploited three strategies (relative value, momentum, and yield curve arbitrage or carry) across three different asset classes during the reporting period. Of these three strategies, the momentum and yield curve arbitrage strategies delivered a positive performance of 1.47% and 4.50%, respectively. On the other hand, the relative value strategy returned (4.57)%. See figure 2 for the performance of each strategy during the reporting period.

The Trust's annualized portfolio return volatility was 5.90% for this reporting period, based on the daily performance of the Trust. The Trust targets 6% to 10% annualized portfolio return volatility. The proprietary risk model uses over 20 years of historical return data to calculate the expected annualized portfolio return volatility.

The annualized realized Sharpe ratio of the portfolio during the reporting period was 0.24 and the realized Sharpe ratio from inception through the end of the reporting period was 0.38. This below-target ratio is primarily the result of poor performance of the Trust and high volatility in the third quarter of 2011.

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Figure 1: Asset class total return during the quarter ended March 31, 2013

[[Image Removed: LOGO]]

Figure 2: Strategy total return during the quarter ended March 31, 2013

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Results of Operations

The Trust invested in three broad asset classes: currency, equity, and fixed income through investments in forward and futures contracts and Short-Term Securities posted as margin to collateralize the Trust's portfolio of futures and/or forward contracts. The fixed income asset class includes bond futures with duration greater than one year. See below for a discussion on the performance of the Trust for the quarter ended March 31, 2013.

The Quarter Ended March 31, 2013

The Trust's net asset value increased from $50,827,436 at December 31, 2012 to $56,693,977 at March 31, 2013. The increase in the Trust's net asset value resulted primarily from an increase in outstanding Shares, which rose from 1,000,000 at December 31, 2012 to 1,100,000 at March 31, 2013, due to 100,000 Shares (1 Basket) being created and zero Shares being redeemed during the quarter.

Net gain for the quarter was $711,732, resulting from a net investment loss of $118,931 and a net realized and unrealized gain of $830,663. For the quarter ended March 31, 2013, the Trust had a net realized and unrealized gain of $783,273 from forward currency contracts, a net realized and unrealized loss of $40,854 from equity index futures, a net realized and unrealized gain of $143,466 from fixed income futures, and a net unrealized loss of $55,222 from foreign currency translations. Other than the Sponsor's fees of $120,365 and brokerage commissions and fees of $12,629, the Trust had no expenses during the quarter.

The decrease of $67,033 in total expenses from $200,027 for the quarter ended March 31, 2012 to $132,994 for the quarter ended March 31, 2013, was primarily due to a decrease in the Sponsor's fee. The Sponsor's fee decreased due to a decrease in the Trust's net assets.

Liquidity and Capital Resources

A significant portion of the assets of the Trust are held in cash, U.S. Treasury bills and other Short-Term Securities which are used, as needed, to secure the Trust's trading obligations in respect of a portfolio of futures and/or forward contracts as described elsewhere in this report. The percentage that cash, U.S. Treasury bills and Short-Term Securities given as collateral bears to the total assets of the Trust varies from day to day, depending on the changes in the market values of the contracts held in the Portfolio.

The Trust's liquidity needs arise in connection with payment of
(1) mark-to-market and termination costs of futures and forward contracts with respect to which the Trust is "out of the money," (2) redemption of Baskets,
(3) the Sponsor's fee, (4) trading fees and commissions, and (5) any expenses not assumed by the Sponsor. The Sponsor is not aware of any trends, demands, conditions or events that are reasonably likely to result in material changes to the Trust's liquidity needs.

The Trust is expected to generate liquidity from (1) mark-to-market and termination payments received with respect to futures and forward contracts with respect to which the Trust is "in the money," (2) the sale of Baskets, (3) any interest on its cash and other instruments (including, when and to the extent they become available to the Trust, securities held as collateral for the Trust's trading obligations), and (4) the disposition of its assets. Pursuant to the trust agreement, the Trust is prohibited from incurring any indebtedness for borrowed money.

The Trust's futures contracts may from time to time be subject to periods of illiquidity due to market conditions, regulatory limits or other reasons. Futures exchanges limit the fluctuations during a single day of prices of the contracts traded on such exchanges by regulations known as "daily limits." Once the price of a futures contract has increased or decreased by an amount equal to the daily limit, positions in that contract can not be taken or liquidated unless the parties are willing to affect the trade at a price equal to or within the daily limit.

The Trust's Portfolio or one or more of its futures or forward contract positions may prove to be illiquid. Such illiquidity could cause or exacerbate losses to the Trust.

Because the Portfolio may include a variety of trading positions, the Trust's capital is at risk due to changes in the value of such positions or other assets (market risk) or the inability of counterparties to perform (credit risk).

Market Risk

The Portfolio consists of positions in certain futures and/or forward contracts and cash and financial instruments which may be used, as needed, to secure the Trust's trading obligations with respect to those trading positions. Depending upon the level of diversification of the Portfolio at any given time, fluctuations in the value of one or more trading positions of the Trust may have a significant impact on the value of the Shares. The value of any futures and/or forward contracts in the Portfolio at any time is expected to reflect the market value of the underlying asset, although this correlation may not be exact. The market risk associated with the trading positions in the Portfolio may, potentially, be the entire Portfolio. The Trust's exposure to market risk is also influenced by a number of factors, including the liquidity of the assets in the Portfolio, market conditions in U.S. and non-U.S. markets, market volatility and activities of other market participants.

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Credit Risk

In respect of each trading position in the Portfolio, the Trust is exposed to the credit risk of a default by the counterparties to over-the-counter trades and, with respect to exchange-traded contracts, of a default by relevant brokers or the clearing institutions or exchanges through which such trades settle. In the case of such a default, the Trust could be unable to recover amounts due to it on its trading positions and assets posted as margin. The Portfolio is also exposed to the credit risk of the obligors of any Short-Term Securities posted as margin.

Off-Balance Sheet Arrangements and Contractual Obligations

The Trust does not use and is not expected to use special purpose entities to facilitate off-balance sheet financing arrangements. The Trust does not have and is not expected to have loan guarantee arrangements or other off-balance sheet arrangements of any kind other than agreements entered into in the normal course of business, which may include indemnification provisions related to certain risks service providers undertake in performing services that are in the interest of the Trust. While the Trust's exposure under such indemnification provisions cannot be estimated, these general business indemnifications are not expected to have a material impact on the Trust's financial position. The Trust is contractually obligated to maintain margin with its clearing futures commission merchant and its prime broker. Under extreme circumstances, such contractual obligations could demand substantially all of the assets of the Trust.

Critical Accounting Policies

The financial statements of the Trust and accompanying notes are prepared in accordance with U.S. GAAP. The preparation of these financial statements relies on estimates and assumptions that impact the Trust's financial positions and results of operations. These estimates and assumptions affect the Trust's application of accounting policies. Please refer to Note 2 to the financial statements of the Trust for a further discussion of the Trust's accounting policies.

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