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EX-31.1 - CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A) - ISHARES DIVERSIFIED ALTERNATIVES TRUSTdex311.htm
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2011

 

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to             

Commission file number: 001-34537

iShares® Diversified Alternatives Trust

(Exact name of registrant as specified in its charter)

 

Delaware   26-4632352

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

c/o BlackRock Asset Management International Inc.

400 Howard Street

San Francisco, California 94105

Attn: Product Management Team

iShares® Product Research & Development

(Address of principal executive offices)

(415) 670-2000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨  
Non-accelerated filer   ¨    Smaller reporting company  

x

 

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x


Table of Contents

Table of Contents

 

          Page  
PART I – FINANCIAL INFORMATION   
Item 1.    Financial Statements      1   
   Statements of Financial Condition at March 31, 2011 (Unaudited) and December 31, 2010      1   
   Statements of Operations (Unaudited) for the three months ended March 31, 2011 and 2010      2   
   Statements of Changes in Shareholders’ Capital for the three months ended March 31, 2011 (Unaudited) and the year ended December 31, 2010      3   
   Statements of Cash Flows (Unaudited) for the three months ended March 31, 2011 and 2010      4   
   Schedule of Investments (Unaudited) at March 31, 2011      5   
   Notes to Financial Statements (Unaudited)      7   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      14   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      20   
Item 4.    Controls and Procedures      21   
PART II – OTHER INFORMATION   
Item 1.    Legal Proceedings      22   
Item 1A.    Risk Factors      22   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      22   
Item 3.    Defaults Upon Senior Securities      22   
Item 5.    Other Information      22   
Item 6.    Exhibits      23   
SIGNATURES      24   


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

iShares® Diversified Alternatives Trust

Statements of Financial Condition

At March 31, 2011 (Unaudited) and December 31, 2010

 

     March 31,
2011
     December 31,
2010
 

Assets

     

Current Assets

     

Cash and cash equivalents

   $ 4,040,367       $ 3,309,973   

Cash and cash equivalents held at brokers (restricted)

     2,629,161         2,695,461   

Foreign currencies held at brokersa (restricted)

     4,480,590         6,926,407   

Short-term investments

     113,264,096         100,261,940   

Interest receivable

     1,065         1,834   

Unrealized appreciation on forward currency contracts (Note 9)

     4,950,324         3,620,413   

Net unrealized appreciation (depreciation) on futures contracts (Note 9)

     1,828,840         (2,043,296
                 

Total Assets

   $ 131,194,443       $ 114,772,732   
                 

Liabilities and Shareholders’ Capital

     

Current Liabilities

     

Sponsor’s fees payable

   $ 97,765       $ 89,735   

Unrealized depreciation on forward currency contracts (Note 9)

     3,710,301         3,744,316   
                 

Total Liabilities

     3,808,066         3,834,051   
                 

Commitments and Contingent Liabilities (Note 7)

     —           —     

Shareholders’ Capital

     

Redeemable capital Shares, no par value, unlimited amount authorized (at redemption value) - 2,500,000 issued and outstanding at March 31, 2011 and 2,200,000 issued and outstanding at December 31, 2010

     127,377,977         110,931,481   

Additional paid-in capital

     8,400         7,200   
                 

Total Shareholders’ Capital

     127,386,377         110,938,681   
                 

Total Liabilities and Shareholders’ Capital

   $ 131,194,443       $ 114,772,732   
                 

 

a 

Cost of foreign currencies at March 31, 2011 and December 31, 2010: $4,431,682 and $6,830,250, respectively.

See notes to financial statements.

 

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iShares® Diversified Alternatives Trust

Statements of Operations (Unaudited)

For the three months ended March 31, 2011 and 2010

 

     Three Months Ended
March 31,
 
     2011     2010  

Investment Income

    

Interest

   $ 45,180      $ 6,935   
                

Total investment income

     45,180        6,935   
                

Expenses

    

Sponsor’s fees

     272,812        59,431   

Brokerage commissions and fees

     18,047        4,479   
                

Total expenses

     290,859        63,910   
                

Net investment loss

     (245,679     (56,975
                

Realized and Unrealized Gain (Loss)

    

Net realized gain (loss) on:

    

Forward currency contracts

     (888     17,960   

Futures contracts

     (3,851,571     (479,169

Net change in unrealized appreciation/depreciation on:

    

Foreign currency translations

     (47,249     3,157   

Forward currency contracts

     1,363,926        164,333   

Futures contracts

     3,872,136        303,507   
                

Net realized and unrealized gain

     1,336,354        9,788   
                

Net gain (loss)

   $ 1,090,675      $ (47,187
                

Net gain (loss) per Share

   $ 0.48      $ (0.09

Weighted-average Shares outstanding

     2,287,778        521,111   

See notes to financial statements.

 

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Table of Contents

iShares® Diversified Alternatives Trust

Statements of Changes in Shareholders’ Capital

For the three months ended March 31, 2011 (Unaudited)

and the year ended December 31, 2010

 

     Three Months
Ended
March 31, 2011
    Year Ended
December 31, 2010
 

Shareholders’ Capital, Beginning of Period

   $ 110,938,681      $ 14,855,197   

Contributions

     15,357,021        94,893,939   

Net investment loss

     (245,679     (564,823

Net realized gain (loss) on:

    

Short-term investments

     —          199   

Forward currency contracts

     (888     699,926   

Futures contracts

     (3,851,571     3,045,389   

Net change in unrealized appreciation/depreciation on:

    

Foreign currency translations

     (47,249     102,402   

Forward currency contracts

     1,363,926        (175,836

Futures contracts

     3,872,136        (1,917,712
                

Shareholders’ Capital, End of Period

   $ 127,386,377      $ 110,938,681   
                

Net Asset Value per Share, End of Period

   $ 50.95      $ 50.43   

See notes to financial statements.

 

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iShares® Diversified Alternatives Trust

Statements of Cash Flows (Unaudited)

For the three months ended March 31, 2011 and 2010

 

     Three Months Ended
March 31,
 
     2011     2010  

Cash Flows from Operating Activities

    

Net gain (loss)

   $ 1,090,675      $ (47,187

Adjustments to reconcile net gain (loss) to net cash used in operating activities:

    

Purchases of short-term investments

     (58,760,000     (22,944,191

Sales/maturities of short-term investments

     45,800,000        —     

Accretion of discount

     (42,156     —     

Change in operating assets and liabilities:

    

Cash and cash equivalents held at brokers (restricted)

     66,300        (896,827

Foreign currencies held at brokers (restricted)

     2,398,568        (389,723

Interest receivable

     769        (6,333

Net unrealized appreciation (depreciation) on futures contracts

     (3,809,631     (304,443

Sponsor’s fees payable

     8,030        12,251   
                

Net cash used in operating activities

     (13,247,445     (24,576,453
                

Cash Flows from Financing Activities

    

Contributions

     15,357,021        24,792,923   
                

Net cash provided by financing activities

     15,357,021        24,792,923   
                

Effect of exchange rate changes on cash

     (1,379,182     (166,651
                

Net increase in cash and cash equivalents

     730,394        49,819   
                

Cash and Cash Equivalents

    

Beginning of period

     3,309,973        166,599   
                

End of period

   $ 4,040,367      $ 216,418   
                

See notes to financial statements.

 

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iShares® Diversified Alternatives Trust

Schedule of Investments (Unaudited)

At March 31, 2011

 

Face Amount

    

Security Description

   Fair Value  
  

United States Treasury Bills

  
$ 19,500,000      

0.15% due 4/07/11

   $ 19,499,511   
  26,500,000      

0.17% due 4/14/11

     26,498,416   
  8,500,000      

0.19% - 0.20% due 5/26/11

     8,497,528   
  4,500,000      

0.14% due 6/09/11

     4,498,836   
  9,000,000      

0.18% due 7/14/11

     8,995,398   
  15,000,000      

0.13% - 0.15% due 8/04/11

     14,992,864   
  9,000,000      

0.15% due 8/25/11

     8,994,635   
  14,200,000      

0.13% due 9/08/11

     14,191,835   
  7,100,000      

0.15% due 9/15/11

     7,095,073   
           
  

Total United States Treasury Bills – 88.91%*

   $ 113,264,096   
           

 

* Percentage is based on shareholders’ capital.

 

  As of March 31, 2011, open forward currency contracts held by the Trust were as follows:

 

Settlement

Date

  Currency to  be
Delivered
    Amount to  be
Delivered
    Currency to  be
Received
    Amount to  be
Received
    Unrealized
Appreciation
(Depreciation)
 
4/5/2011     CHF        2,106,211        USD        2,336,642      $ 34,382   
4/5/2011     EUR        629,304        USD        893,517        488   
4/5/2011     GBP        2,254,000        USD        3,638,024        25,016   
4/5/2011     JPY        600,830,638        USD        7,406,074        156,632   
4/5/2011     SEK        229,147,551        USD        36,322,611        155   
4/5/2011     USD        24,601,247        AUD        24,559,322        793,630   
4/5/2011     USD        1,397,610        CAD        1,386,000        27,096   
4/5/2011     USD        25,097,010        CHF        23,363,297        440,984   
4/5/2011     USD        16,178,726        EUR        11,852,000        640,138   
4/5/2011     USD        7,065,289        GBP        4,594,040        298,642   
4/5/2011     USD        2,943,260        JPY        244,735,000        9,639   
4/5/2011     USD        6,253,575        NOK        35,649,364        190,591   
4/5/2011     USD        36,241,177        SEK        243,352,551        2,332,931   
7/5/2011     CAD        18,830,146        USD        19,316,398        —     
7/5/2011     CHF        10,780,297        USD        11,790,766        —     
7/5/2011     EUR        15,732,600        USD        22,284,756        —     
7/5/2011     USD        22,213,055        AUD        21,725,322        —     
7/5/2011     USD        12,748,730        GBP        7,963,392        —     
7/5/2011     USD        5,553,496        NOK        30,878,826        —     
7/5/2011     USD        36,153,411        SEK        229,147,551        —     
               
            4,950,324   
               
4/5/2011     AUD        24,559,322        USD        25,277,465        (117,412
4/5/2011     CAD        20,216,146        USD        20,314,285        (466,419
4/5/2011     CHF        21,257,086        USD        22,703,056        (532,677
4/5/2011     EUR        26,955,296        USD        35,958,908        (2,292,650
4/5/2011     GBP        9,066,392        USD        14,470,936        (61,869
4/5/2011     NOK        35,649,364        USD        6,397,998        (56,168
4/5/2011     SEK        14,205,000        USD        2,239,600        (12,060
4/5/2011     USD        19,356,249        CAD        18,830,146        (250
4/5/2011     USD        22,325,975        EUR        15,732,600        (253
4/5/2011     USD        10,924,060        GBP        6,726,352        (142,179
4/5/2011     USD        4,324,907        JPY        356,095,638        (28,364
               
            (3,710,301
               

Net Unrealized Appreciation

  

    $ 1,240,023   
               

 

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  As of March 31, 2011, open futures contracts held by the Trust were as follows:

 

Contract Type

   Number of
Contracts
    Expiration Date      Notional Amount     Unrealized
Appreciation
(Depreciation)
 

Equity Contracts

         

OMX 30 Index

     (309     4/15/2011         (5,492,141   $ (317,569

Hang Seng Index

     (16     4/28/2011         (2,418,554     (48,752

MSCI Taiwan Index

     136        4/28/2011         4,176,560        61,200   

S&P/TSX 60 Index

     6        6/16/2011         995,898        16,860   

SPI 200 Index

     (156     6/16/2011         (19,621,439     (776,388

AEX Index

     13        6/17/2011         1,329,569        57,431   

CAC 40 10-Year Euro

     115        6/17/2011         6,335,288        314,295   

DAX Index

     71        6/17/2011         17,830,051        870,281   

FTSE 100 Index

     (10     6/17/2011         (943,256     (34,672

S&P 500 E-mini Index

     (46     6/17/2011         (3,038,300     (104,300
               
            38,386   
               

Interest Rate Contracts

         

Euro Bund

     (70     6/8/2011         (12,047,591     124,029   

3-Month Euribor

     (204     6/13/2011         (71,274,011     212,422   

90-Day Eurodollar

     255        6/13/2011         63,520,500        80,388   

3-Month Sterling

     33        6/15/2011         6,543,400        (2,685

Australian 10-Year Bond

     (408     6/15/2011         (43,799,526     78,580   

Canada 10-Year Bond

     (115     6/21/2011         (14,186,584     (41,964

US 10-Year Note

     357        6/21/2011         42,494,156        147,328   

Long Gilt

     135        6/28/2011         25,355,374        247,736   

3-Month Euribor

     (204     9/19/2011         (71,042,414     369,782   

90-Day Eurodollar

     255        9/19/2011         63,456,750        104,138   

3-Month Sterling

     33        9/21/2011         6,529,514        (4,007

3-Month Euribor

     (204     12/19/2011         (70,854,241     361,055   

90-Day Eurodollar

     258        12/19/2011         64,109,775        144,619   

3-Month Sterling

     33        12/21/2011         6,513,645        (6,613

3-Month Euribor

     (205     3/19/2012         (71,041,563     32,497   

90-Day Eurodollar

     252        3/19/2012         62,461,350        (48,275

3-Month Sterling

     33        3/21/2012         6,497,115        (8,576
               
            1,790,454   
               

Net Unrealized Appreciation

          $ 1,828,840   
               

See notes to financial statements.

 

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iShares® Diversified Alternatives Trust

Notes to Financial Statements (Unaudited)

March 31, 2011

1 - Organization

The iShares® Diversified Alternatives Trust, (the “Trust”) is a Delaware statutory trust organized under the laws of the State of Delaware on July 30, 2009 and commenced operations on October 6, 2009. iShares® Delaware Trust Sponsor LLC is the sponsor of the Trust (the “Sponsor”). The sole member and manager of the Sponsor is BlackRock Asset Management International Inc., a Delaware corporation. BlackRock Institutional Trust Company, N.A. is the “Trustee” of the Trust. The Trust holds long and/or short positions in foreign currency forward contracts and exchange-traded futures contracts involving assets such as 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.

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 Sponsor is an indirect subsidiary of BlackRock, Inc. The Advisor, an indirect subsidiary of BlackRock, Inc., serves as the commodity trading advisor of the Trust and is registered under the CEA.

The Trust is not an investment company registered under the Investment Company Act of 1940, as amended.

The accompanying unaudited financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions for Form 10-Q and the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). In the opinion of management, all material adjustments, consisting only of normal recurring adjustments, considered necessary for a fair statement of the interim period financial statements have been made. Interim period results are not necessarily indicative of results for a full-year period. These financial statements and the notes thereto should be read in conjunction with the Trust’s financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2010 as filed with the SEC on March 24, 2011.

2 - Summary of Significant Accounting Policies

 

A. Basis of Accounting

The following is a summary of significant accounting policies consistently followed by the Trust in the preparation of its financial statements in conformity with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates and these differences could be material.

Certain amounts in the financial statements for the prior year have been reclassified to conform to the current financial statement presentation.

 

B. Investment in Forward and Futures Contracts

A forward contract is an agreement between two parties, one of whom undertakes to purchase from or sell to the other, on a specified future date, a specified quantity of a specified asset at a specified location in exchange for a specified purchase price. The types of assets involved may vary from foreign currencies to physical commodities and financial assets such as bonds or interest rates. Unlike futures contracts, forward contracts are usually the subject of negotiation between the parties involved. As a result, forward contracts may have a variety of maturities and involve different amounts of the specified asset.

 

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Futures contracts are standardized forward contracts traded on an exchange. As such, futures contracts and the parties to a futures contract are subject to the regulations of the exchange where the contracts trade. Each exchange may impose certain margin requirements, setting forth the minimum amount of funds that must be deposited by a futures trader with the futures commission merchant in order to initiate futures trading or to maintain an open position in futures contracts.

Forward and futures contracts are derivative instruments and are valued at fair value. The Trust’s derivatives are not designated as hedges, and all changes in the fair value are reflected in the Statements of Operations. 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 State Street Bank and Trust Company (the “Trust Administrator”). Such current market value is 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 is the primary basis for determining the market value of such position for such 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 assets of that nature. The Trustee periodically assesses the appropriateness of the methodologies used by the valuation service provider in determining the price of forward contracts.

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” includes, 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.

The investment objective of the Trust is to maximize absolute returns from its investments in certain futures and/or forward contracts selected by the Advisor following strategies that utilize quantitative methodologies to identify potentially profitable discrepancies in the relative values or market prices of one or more commodities, currencies, interest rates or certain eligible stock or bond indices, and seek to reduce the risks and volatility inherent in these investments by taking long and short positions in historically correlated assets. In pursuing its investment objectives, the Trust is subject to equity price risk, interest rate risk and foreign currency exchange rate risk. The return on assets in the Trust, if any, is not intended to track the performance of any index or other benchmark.

For futures contracts, counterparty credit risk is minimized because futures contracts are exchange-traded and the exchange’s clearing house acts as a central counterparty to all exchange-traded futures contracts (although customers continue to have credit exposure to the clearing member who holds their account). Forward contracts are not exchange-traded, and are therefore subject to counterparty credit risk of The Royal Bank of Scotland plc, the prime broker of the Trust.

Please refer to Note 9 for additional disclosures regarding the Trust’s investments in forward and futures contracts.

 

C. Cash and Cash Equivalents

The Trust defines cash and cash equivalents to be highly liquid investments with original maturities of three months or less.

As of March 31, 2011 and December 31, 2010, the Trust had cash and cash equivalents held at brokers of $2,629,161 and $2,695,461 respectively, which were restricted and held as collateral against margin obligations for open forward and/or futures contracts.

 

D. Foreign Currencies

The Trust may hold foreign currencies as collateral for futures contracts traded on exchanges located outside the United States. Foreign currencies are translated into U.S. dollars at the prevailing spot exchange rate. Net realized gain or loss on foreign currencies, if any, arises from the sale of such foreign currencies and is presented on the Statements of Operations. Net change in unrealized gain or loss on foreign currency translation on the Statements of Operations arises from changes in foreign currency values resulting from changes in exchange rates during the period.

 

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The Trust does not isolate the effect of fluctuations in foreign exchange rates from the effect of fluctuations in the market prices of securities. Such fluctuations are reflected by the Trust as a component of realized and unrealized gains and losses from investments for financial reporting purposes.

As of March 31, 2011 and December 31, 2010, the Trust had foreign currencies held at brokers of $4,480,590 and $6,926,407, respectively, which were restricted and held as collateral against margin obligations for open futures contracts.

 

E. Short-Term Investments

Short-term investments on the Statements of Financial Condition consist principally of short-term fixed income securities with original maturities of one year or less. These investments are valued at fair value.

 

F. Securities Transactions, Income and Expense Recognition

Securities transactions are accounted for on the trade date. Realized gains and losses on investment transactions are determined using the specific identification method. Other income and expenses are recognized on the accrual basis.

 

G. Income Taxes

The Trust is not an association taxable as a corporation and is treated as a partnership for federal, state and local income tax purposes.

No provision for federal, state, and local income taxes has been made in the accompanying financial statements because the Trust is not subject to income taxes. Shareholders are individually responsible for their own tax payments on their proportionate share of income, gain, loss, deduction, expense and credit.

 

H. Calculation of Net Asset Value

On each business day on which NYSE Arca, Inc. (“NYSE Arca”) is open for regular trading, as soon as practicable after the close of regular trading of the Shares on NYSE Arca (normally 4:15 p.m., New York time), the Trustee determines the net asset value of the Trust. 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 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.

3 - Offering of the Shares

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”) for consideration in cash equal to the net asset value per Basket announced by the Trust on the first business day after the purchase or redemption order is received by the Trust. 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 (such authorized broker-dealers are the “Authorized Participants”). Only institutions that enter into an agreement with the Trust to become Authorized Participants may purchase or redeem Baskets. The Trust will not redeem individual Shares or Baskets held by parties who are not Authorized Participants.

Redemptions of Shares in exchange for a consideration in cash are treated as sales for financial statement purposes.

 

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4 - Trust Expenses

The Trust incurs all brokerage commissions and other transaction related fees and expenses in connection with the trading activities of the Trust. These expenses are recorded as brokerage commissions and fees in the Statements of Operations as incurred.

The Sponsor pays the amounts that would otherwise be considered the ordinary operating expenses, if any, of the Trust. In return, the Sponsor receives an allocation from the Trust that accrues daily at an annualized rate equal to 0.95% of the adjusted net asset value of the Trust.

The Sponsor is obligated under the trust agreement to pay the following administrative, operational and marketing expenses: (1) the fees of the Trustee, the Advisor, Wilmington Trust Company (the “Delaware Trustee”), the Trust Administrator and SEI Investments Distribution Co., (2) NYSE Arca listing fees, (3) printing and mailing costs, (4) audit fees, (5) fees for registration of the Shares with the SEC, (6) tax reporting costs and (7) legal expenses up to $100,000 annually.

5 - Related Parties

iShares® Delaware Trust Sponsor LLC, is the Sponsor of the Trust, and BlackRock Fund Advisors is the Advisor of the Trust. The Sponsor and the Advisor are considered to be related parties to the Trust.

6 - Indemnification

The trust agreement provides that the Sponsor and its shareholders, directors, officers, employees, affiliates (as such term is defined under the United States Securities Act of 1933, as amended) and subsidiaries shall be indemnified from the Trust and held harmless against any loss, liability, cost, expense or judgment arising out of or in connection with the performance of their obligations under the trust agreement or any actions taken in accordance with the provisions of the trust agreement incurred without their (1) negligence, bad faith, willful misconduct or willful malfeasance or (2) reckless disregard of their obligations and duties under the trust agreement.

7 - Commitments and Contingent Liabilities

In the normal course of business, the Trust may enter into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred.

8 - Financial Highlights

The Trust is presenting the following financial highlights related to investment performance and operations for the period from January 1, 2011 through March 31, 2011. The net investment income (loss) and total expense ratios are calculated using average net assets. The net asset value presentation is calculated using daily Shares outstanding. The net investment income (loss) and expense ratios have been annualized. The total return is based on the change in the net asset value of a Share during the period.

 

Net asset value per Share, beginning of period

   $ 50.43   

Net investment loss

     (0.11

Net realized and unrealized gain

     0.63   
        

Net increase in net assets from operations

     0.52   
        

Net asset value per Share, end of period

   $ 50.95   
        

Ratio to average net assets:

  

Net investment loss (i)

     (0.85 )% 

Expenses (i)

     1.01

Total return (ii)

     1.03

 

(i) Percentage is annualized.
(ii) Percentage is not annualized.

 

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9 - Investing in Forward and Futures Contracts

Substantially all of the Trust’s assets are invested in forward and/or futures contracts. The return on assets in the portfolio, if any, is not intended to track the performance of any index or other benchmark. There is no assurance the Trust will achieve its investment objectives.

For the three months ended March 31, 2011 and the year ended December 31, 2010, the average month-end notional amounts of open forward currency contracts were $281,041,776 and $133,811,286, respectively. For the three months ended March 31, 2011 and the year ended December 31, 2010, the average month-end notional amounts of open futures contracts were $784,430,072 and $405,818,327, respectively.

The following table shows the fair values of the open forward currency and futures contracts, by risk exposure category, on the Statements of Financial Condition as of March 31, 2011 and December 31, 2010:

 

    

Asset Derivatives

   Fair Value     

Liability Derivatives

   Fair Value  

March 31, 2011

                       

Foreign exchange contracts

   Unrealized appreciation on forward currency contracts    $ 4,950,324       Unrealized depreciation on forward currency contracts    $ 3,710,301   

Equity contracts

   Unrealized appreciation on futures contracts      1,320,067       Unrealized depreciation on futures contracts      1,281,681   

Interest rate contracts

   Unrealized appreciation on futures contracts      1,902,574       Unrealized depreciation on futures contracts      112,120   

December 31, 2010

                       

Foreign exchange contracts

   Unrealized appreciation on forward currency contracts    $ 3,620,413       Unrealized depreciation on forward currency contracts    $ 3,744,316   

Equity contracts

   Unrealized appreciation on futures contracts      227,254       Unrealized depreciation on futures contracts      555,551   

Interest rate contracts

   Unrealized appreciation on futures contracts      85,806       Unrealized depreciation on futures contracts      1,800,805   

 

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The following table shows the effect of the forward currency and futures contracts, by risk exposure category, on the Statements of Operations for the three months ended March 31, 2011 and 2010:

 

    

Statements of

Operations Location

  Realized
Gain  (Loss)
    Change in  Unrealized
Appreciation/Depreciation
 

Three Months Ended

March 31, 2011

                

Foreign exchange contracts

   Net realized gain (loss) on forward currency contracts   $ (888   $ —     
   Net change in unrealized appreciation/depreciation on forward currency contracts     —          1,363,926   

Equity contracts

   Net realized gain (loss) on futures contracts     (1,534,202 )a      —     
   Net change in unrealized appreciation/depreciation on futures contracts     —          366,683   

Interest rate contracts

   Net realized gain (loss) on futures contracts     (2,335,416 )a      —     
   Net change in unrealized appreciation/depreciation on futures contracts     —          3,505,453   

Three Months Ended

March 31, 2010

                

Foreign exchange contracts

   Net realized gain (loss) on forward currency contracts   $ 17,960      $ —     
   Net change in unrealized appreciation/depreciation on forward currency contracts     —          164,333   

Equity contracts

   Net realized gain (loss) on futures contracts     (213,538 )a      —     
   Net change in unrealized appreciation/depreciation on futures contracts     —          48,262 a 

Interest rate contracts

   Net realized gain (loss) on futures contracts     (270,205 )a      —     
   Net change in unrealized appreciation/depreciation on futures contracts     —          255,340 a 

 

a Amounts do not reconcile to the Statements of Operations due to brokerage commissions and fees.

10 - Investment Valuation

In accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, the Trust values investments using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Inputs may be based on independent market data (“observable inputs”) or they may be internally developed (“unobservable inputs”). The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

 

Level 1 –   Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Trust has the ability to access as of the measurement date;
Level 2 –   Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly, including inputs in markets that are not considered to be active; and
Level 3 –   Inputs that are unobservable for the asset or liability.

 

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U.S. Treasury bills are classified as Level 2 investments, as these trade in markets that are not considered active, but whose values are based on inputs such as quoted market prices, dealer quotations or valuations provided by alternative pricing sources that are supported by observable inputs.

Forward currency contracts are not exchange-traded and do not have quoted prices for identical assets in active markets. These contracts are valued using pricing information obtained from third-party pricing vendors who derive the value of these contracts from observable market inputs such as expiration dates of forward contracts, forward rates and spot exchange rates. Therefore, forward currency contracts are classified as Level 2 investments.

Futures contracts are valued using settlement prices for the particular futures contract traded on the applicable exchanges. Futures contracts are classified as Level 1 investments, as quoted prices for identical assets in active markets are available.

The following table summarizes the valuation of the Trust’s investments by the fair value hierarchy levels as of March 31, 2011 and December 31, 2010:

 

     Level 1     Level 2     Level 3      Total  

March 31, 2011

                         

U.S. Treasury bills

   $ —        $ 113,264,096      $ —         $ 113,264,096   

Forward currency contracts

     —          1,240,023        —           1,240,023   

Futures contracts

         

Equity contracts

     38,386        —          —           38,386   

Interest rate contracts

     1,790,454        —          —           1,790,454   
                                 

Total futures contracts

     1,828,840        —          —           1,828,840   
                                 

December 31, 2010

                         

U.S. Treasury bills

   $ —        $ 100,261,940      $ —         $ 100,261,940   

Forward currency contracts

     —          (123,903     —           (123,903

Futures contracts

         

Equity contracts

     (328,297     —          —           (328,297

Interest rate contracts

     (1,714,999     —          —           (1,714,999
                                 

Total futures contracts

     (2,043,296     —          —           (2,043,296
                                 

11 - Subsequent Events

In connection with the preparation of the financial statements of the Trust as of and for the period ended March 31, 2011, management has evaluated the impact of all subsequent events on the Trust through the date the financial statements were issued and has determined that there were no subsequent events requiring adjustment or disclosure in the financial statements.

 

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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.

Introduction

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 4:15 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.

 

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“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.

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

The Trust returned 1.03% for the quarter ended March 31, 2011 (the “reporting period”). Positive performance was largely driven by the currency and the short-term fixed income market investments. However, the equity and long-term fixed income market investments detracted from the overall performance.

Market Environment/Background

The European and Asian markets were relatively volatile during the reporting period compared to the U.S. market. The relatively high volatility in the European Union (“EU”) zone was driven by sovereign debt crises in Spain, Portugal and Ireland. The mounting pressure on sovereign debt and its subsequent effects raised concerns about the future of the euro. The early macroeconomic data was mixed, suggesting that the peripheral weakness may be undermining the main core EU strength. However, later in the quarter, the European economic data became more encouraging, and industrial production beat expectations, which helped ease concerns. But these concerns came back into the spotlight in March as Portugal’s rating was lowered by two notches and at least four banks in Ireland needed to raise large sums of cash. The euro initially lost ground in January but eventually bounced back and appreciated more than 5% relative to the U.S. dollar during this reporting period.

 

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The Asian markets experienced higher than normal volatility during the reporting period. This volatility was driven by news from China and Japan. China’s continued growth led to boosting the benchmark interest rate in February in order to control inflation and cool off its economy. These interest rate hikes are expected to continue throughout the next few quarters. The Bank of Japan raised its economic assessment for the first time in nine months as faster overseas growth bolstered exports and production. This indicated that Japan’s economy was emerging from the current deceleration phase and its equity market should perform well. However, the massive earthquake in March and its subsequent powerful tsunami devastated the country, and the ramifications in terms of energy and nuclear fallout derailed the hope of its economic growth and prosperity in the short term.

The first quarter of 2011 was eventful as Tunisia, Egypt, and Libya experienced unparallel turmoil which led to the fall of the Tunisian and Egyptian regimes. The Libyan government has maintained its grip on power and continues to defy the regime change. Of these three countries, only Libya is oil producing (about 2%-5% of the world’s oil), which by any measure is minimal. However, concerns over the spread of the instability into the Middle East and serious disruption in oil supply pushed the price of oil upward steadily and passed the $100 mark in February. This abrupt price increase could, in principle, hamper global growth levels and introduce unexpected inflation in the Western world, which could hinder the fragile global economic recovery.

Fourth quarter 2010 news for the U.S. market was released in early January, and was quite positive, with GDP being higher than expected. The strong earning season, a substantial jump in U.S. retail sales, and improved U.S. housing sector numbers helped the U.S. market pick up momentum during the beginning of the first quarter. The market kept building momentum into the reporting period and the macroeconomic data continued to support the strength. However, Middle Eastern unrest, steady increases in oil prices, and Japan’s natural disaster hampered performance in March. The U.S. Dollar Index was relatively volatile (7%), and the U.S. dollar dropped steadily against most of the currencies in the index (more than 4% depreciation) during this reporting period.

Update on Portfolio Composition

After thorough research on the Swedish equity market and a complete model backtest, the Trust found this market suitable for inclusion in the portfolio based on liquidity, depth and future growth, and added it to the portfolio in February as part of its breadth expansion initiative.

Extreme Event

In light of the immense earthquake disaster in Japan and its ramifications, such as the critical nuclear situation, rolling blackouts, and disruption in production across different industries, the Trust did not view this country as favorable in the near future. The Trust closed out of all the Japanese positions in the equity, bond, and currency markets in mid-March and rebalanced the whole portfolio by temporarily removing Japan from the portfolio’s asset universe. The reason for this decision was that in the short/mid-term, this country may struggle with energy demands (electricity) and nuclear fallout. This action was a response to an extreme situation where the current suite of signals provided minimal information relevant to Japan and helped the Trust to mitigate risk. Removal of Japanese positions helped the Trust reduce losses in March. See below for a discussion of the Trust’s performance.

Trust’s Strategies’ Performance

The Trust’s investments in futures on short-term bonds (bonds with maturities of less than one year) outperformed and delivered 1.32% for the reporting period (see figure 1). The short-term interest rate market sentiment insights were positive and the right market conditions allowed the strategy to take advantage of the trend. The large short position in Euribor and large long positions in the Eurodollar assets delivered strong positive returns and provided a positive performance for this strategy.

The Trust’s investments in futures on long-term bonds (bonds with maturities of more than one year) detracted from performance and had a (0.19%) return for the reporting period (see figure 1). Most of the negative performance in this asset class occurred in the month of January. In particular, in the United Kingdom, the hawkish minutes from the Bank of England on the government policy pushed bond prices down. On average, large long position in United Kingdom gilts combined with the overall large short position in the Australian bond markets had a negative contribution to the Trust’s performance. However, the overall short positions in the Canadian government bonds and large long position in the U.S. Treasuries added to the performance in this reporting period.

 

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The Trust’s investments in currency markets performed well during the reporting period and delivered a 1.13% return (see figure 1). The main contributors to the performance were the overall large long positions in the Swedish krona, Australian dollar, and Norwegian krone. Meanwhile, the overall large short positions in the euro contributed negatively to the performance of the currency portfolio in this reporting period.

The Trust’s investments in equity markets delivered a negative performance of (0.96)% during the reporting period (see figure 1). In general, equity markets had poor performance in March, which was primarily driven by the immense natural disaster in Japan, and affected the global equity markets. The Japanese equity market tumbled more than 8% that month alone, and the Trust had a long position in that equity market. The underperformance in the Trust’s equity market investments was driven by the short positions in the Australian and U.S. equity markets, and long position in the Japanese equity market. Meanwhile, the long positions in the German and French equity markets contributed positively to the performance during the reporting period.

The Trust exploited three strategies (namely, relative value, momentum, and yield curve arbitrage or carry) across three different asset classes during the reporting period. Of these three strategies, the carry and relative value strategies delivered positive returns of 0.06% and 1.25%, respectively. The momentum strategy, on the other hand, had a flat performance (0.01)%. The underperformance in momentum strategy was the result of highly volatile equity and currency markets, which did not allow for the establishment of sizeable trends that market neutral long/short momentum techniques could benefit from. See figure 2 for the performance of each strategy during the reporting period.

The Trust’s annualized portfolio return volatility was 5.72% for the reporting period, based on the daily performance of the Trust. This jump in volatility, relative to last year’s reported return volatility, was driven by Japan’s natural disaster and its effect on the Japanese and global markets. This is in line with the stated target risk, and the Trust continues to maintain an expected annualized portfolio return volatility of 6% to 8%. The proprietary risk model uses more than 19 years of historical return data to calculate the expected annualized portfolio return volatility.

The realized Sharpe ratio of the portfolio was 0.74 for the reporting period. Despite the challenges in March and a volatile quarter, the Trust managed to deliver a higher than stated Sharpe ratio target. The Trust continues to target a long-term Sharpe ratio between 0.50 and 0.75.

 

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LOGO

Figure 1: Asset class total return during the reporting period

LOGO

Figure 2: Strategy total return during the reporting period

 

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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 portfolio of futures and/or forward contracts. The fixed income asset class includes bond futures with duration greater than one year and short-term interest rate futures less than or equal to one year. See below for a discussion on the performance of the Trust for the quarter ended March 31, 2011.

The Quarter Ended March 31, 2011

The Trust’s net asset value increased from $110,938,681 at December 31, 2010 to $127,386,377 at March 31, 2011. The increase in the Trust’s net asset value primarily resulted from an increase in outstanding Shares, which rose from 2,200,000 at December 31, 2010 to 2,500,000 at March 31, 2011, due to 300,000 Shares (3 Baskets) being created and zero Shares being redeemed during the period.

Net gain for the period was $1,090,675, resulting from a net investment loss of $245,679 and a net realized and unrealized gain of $1,336,354. For the quarter ended March 31, 2011, the Trust had a net realized and unrealized gain of $1,363,038 from forward currency contracts, a net realized and unrealized loss of $1,167,519 from equity index futures, a net realized and unrealized gain of $1,170,037 from fixed income futures, and a net unrealized loss of $47,249 from foreign currency translations. Net realized and unrealized gain and loss for the period from futures contracts noted above do not reconcile to the Statement of Operations due to brokerage commissions and fees.

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).

 

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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.

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Quantitative Disclosure

Please refer to the Schedule of Investments in the financial statements for quantitative disclosure for open forward currency contracts and open futures contracts held by the Trust as of March 31, 2011.

Qualitative Disclosure

The investment objective of the Trust is to maximize absolute returns from a portfolio of foreign currency forward contracts and exchange-traded futures contracts that may involve commodities, currencies, interest rates and certain eligible stock or bond indices while seeking to reduce the risks and volatility inherent in those investments by taking long and short positions in historically correlated assets. As a result, at any time the Trust may have substantial exposure to interest rate risk, foreign currency exchange rate risk, commodity price risk and equity price risk.

 

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Part I, Item 1A. “Risk Factors” of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission on March 24, 2011 discussed these risks in detail. Specifically, please refer to “Risks Relating to U.S. Government and Sovereign Debt Markets” and “Risks Relating to Interest Rate Derivatives Markets” for further discussion of interest rate risk, “Risks Relating to Currency Markets” for further discussion of foreign currency exchange rate risk, “Risks Relating to Commodities Markets” for further discussion of commodity price risk and “Risks Relating to Security Index Futures Markets” for further discussion of equity price risk.

In addition, the Advisor utilizes a portfolio construction process in which each potential strategy and underlying asset is ranked in terms of expected return, volatility and trading cost. This portfolio construction process is quantitative and relies on the use of computer models developed by affiliates of the Advisor for the computation of expected return, volatility and trading cost and the determination of optimal positions and consequent leverage in accordance with the risk and return targets of the Portfolio. These risk and return targets take into account certain financial measurements known as annualized portfolio return volatility and Sharpe ratio. Annualized portfolio return volatility is a quantitative measure used to assess a portfolio’s deviation above or below its average returns over a one year period. The Portfolio’s construction targets an allocation of annualized portfolio return volatility of 6-8%, which is allocated equally across the investment strategies of the Trust.

The Advisor expects a Sharpe ratio of 0.50 to 0.75 for the Portfolio. A Sharpe ratio is a quantitative measure of the excess return per unit of risk in an investment asset or a trading strategy. The Advisor measures excess returns as the realized portfolio return minus a one-month Treasury bill benchmark return for the same period being measured. The Advisor measures risk as the annualized portfolio return volatility described above. For example, a 0.50 Sharpe ratio indicates that for each one percent of excess return, an investor may expect 2% of annualized portfolio return volatility (0.50 = 1%/2%). Also, a 0.75 Sharpe ratio indicates that for each one percent of excess return, an investor may expect approximately 1.33% of annualized portfolio return volatility (0.75 = 1%/1.33%). Some or all of the Advisor’s expectations or targets may not be realized by the Trust.

The principals of the Advisor determine the asset allocation for the Portfolio which seeks to achieve a target excess return at a targeted risk level. The Advisor expects to allocate Trust investments periodically among yield and futures curve arbitrage strategies, technical strategies and fundamental relative value strategies such as those listed above using a “mean variance optimization.” Mean variance optimization is a method used to determine portfolio allocations by considering risk and return metrics. The goal of mean variance optimization is to diversify risk based on quantitative analysis of historical relationships without reducing expected return. There is no guarantee that the Advisor will be able to achieve this goal for the Trust.

Item 4. Controls and Procedures

The duly authorized officers of the Sponsor performing functions equivalent to those a principal executive officer and principal financial officer of the Trust would perform if the Trust had any officers, and with the participation of the Trustee, have evaluated the effectiveness of the Trust’s disclosure controls and procedures, and have concluded that the disclosure controls and procedures of the Trust were effective as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed in the reports that the Trust files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to the duly authorized officers of the Sponsor performing functions equivalent to those a principal executive officer and principal financial officer of the Trust would perform if the Trust had any officers, as appropriate to allow timely decisions regarding required disclosure.

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures.

There were no changes in the Trust’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Trust’s internal control over financial reporting.

 

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There have been no material changes to the Risk Factors last reported under Part I, Item 1A of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission on March 24, 2011.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

a) None.

b) As described in the Trust’s first registration statement on Form S-1 (No. 333-153099), which was declared effective on November 12, 2009, proceeds received by the Trust from the issuance and sale of Shares to Authorized Participants consists of cash, which is invested in United States government securities and other financial instruments that, in compliance with the rules of the futures exchanges and other markets where the Trust trades, are eligible to secure the Trust’s trading obligations.

c) No redemption of Shares occurred during the quarter ended March 31, 2011.

Item 3. Defaults Upon Senior Securities

None.

Item 5. Other Information

None.

 

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Item 6. Exhibits

 

Exhibit No.

  

Description

4.1    First Amended and Restated Trust Agreement incorporated by reference to Exhibit 4.1 filed with Amendment No. 5 to Registration Statement No. 333-153099 on October 13, 2009
4.2    Creation and Redemption Procedures incorporated by reference to Exhibit 4.2 filed with Amendment No. 5 to Registration Statement No. 333-153099 on October 13, 2009
4.3    Standard Terms of Authorized Participant Agreement incorporated by reference to Exhibit 4.3 filed with Amendment No. 5 to Registration Statement No. 333-153099 on October 13, 2009
10.1    Investment Advisory Agreement incorporated by reference to Exhibit 10.1 filed with Amendment No. 5 to Registration Statement No. 333-153099 on October 13, 2009
10.2    Futures Commission Merchant Agreement incorporated by reference to Exhibit 10.2 filed with Amendment No. 5 to Registration Statement No. 333-153099 on October 13, 2009
10.3    Foreign Exchange Prime Brokerage Agency Agreement incorporated by reference to Exhibit 10.3 filed with Post Effective Amendment No. 2 to Registration Statement 333-153099 on October 12, 2010*
31.1    Certification by Principal Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended, for iShares® Diversified Alternatives Trust
31.2    Certification by Principal Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended, for iShares® Diversified Alternatives Trust
32.1    Certification by Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    Certification by Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

* Confidential portions of this document have been filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned in the capacities* indicated, thereunto duly authorized.

iShares® Delaware Trust Sponsor LLC

Sponsor of the iShares® Diversified Alternatives Trust (Registrant)

 

/s/ Michael A. Latham

Michael A. Latham
President and Chief Executive Officer
(Principal executive officer)

Date: May 13, 2011

 

/s/ Geoffrey D. Flynn

Geoffrey D. Flynn

Chief Operating Officer and Chief

Financial Officer

(Principal financial and accounting officer)

Date: May 13, 2011

 

*

The Registrant is a trust and the persons are signing in their respective capacities as officers of iShares® Delaware Trust Sponsor LLC, the Sponsor of the Registrant.

 

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