ISHARES DIVERSIFIED ALTERNATIVES TRUST - FORM 10-Q - August 12, 2011

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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 June 30, 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 June 30, 2011 (Unaudited) and December 31, 2010      1   
   Statements of Operations (Unaudited) for the three and six months ended June 30, 2011 and 2010      2   
   Statements of Changes in Shareholders’ Capital for the six months ended June 30, 2011 (Unaudited) and the year ended December 31, 2010      3   
   Statements of Cash Flows (Unaudited) for the six months ended June 30, 2011 and 2010      4   
   Schedule of Investments (Unaudited) at June 30, 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      21   

Item 1A.

    Risk Factors      21   

Item 2.

    Unregistered Sales of Equity Securities and Use of Proceeds      21   

Item 3.

    Defaults Upon Senior Securities      22   

Item 5.

    Other Information      22   

Item 6.

    Exhibits      22   

SIGNATURES

     23   

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

iShares® Diversified Alternatives Trust

Statements of Financial Condition

At June 30, 2011 (Unaudited) and December 31, 2010

 

     June 30,
2011		      December 31,
2010		  

Assets

      

Current Assets

      

Cash and cash equivalents

    $ 3,836,746       $ 3,309,973   

Cash and cash equivalents held at brokers (restricted)

      6,031,505         2,695,461   

Foreign currencies held at brokers (restricted) a

      4,833,472         6,926,407   

Short-term investments

      114,278,019         100,261,940   

Interest receivable

      2,643         1,834   

Unrealized appreciation on forward currency contracts (Note 9)

      1,931,105         3,620,413   

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

      1,345,612         (2,043,296 ) 
  

 

 

     

 

 

  

Total Assets

    $ 132,259,102       $ 114,772,732   
  

 

 

     

 

 

  

Liabilities and Shareholders’ Capital

      

Current Liabilities

      

Sponsor’s fees payable

    $ 100,821       $ 89,735   

Unrealized depreciation on forward currency contracts (Note 9)

      2,825,866         3,744,316   
  

 

 

     

 

 

  

Total Liabilities

      2,926,687         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 June 30, 2011 and 2,200,000 issued and outstanding at December 31, 2010

      129,323,215         110,931,481   

Additional paid-in capital

      9,200         7,200   
  

 

 

     

 

 

  

Total Shareholders’ Capital

      129,332,415         110,938,681   
  

 

 

     

 

 

  

Total Liabilities and Shareholders’ Capital

    $ 132,259,102       $ 114,772,732   
  

 

 

     

 

 

  

 

a 

Cost of foreign currencies at June 30, 2011 and December 31, 2010: $4,747,270 and $6,830,250, respectively.

See notes to financial statements.

 

1

Table of Contents

iShares® Diversified Alternatives Trust

Statements of Operations (Unaudited)

For the three and six months ended June 30, 2011 and 2010

 

     Three Months Ended
June 30,		     Six Months Ended
June 30,		  
     2011     2010     2011     2010  

Investment Income

         

Interest

    $ 41,035      $ 23,260      $ 86,215      $ 30,195   
  

 

 

    

 

 

    

 

 

    

 

 

  

Total investment income

      41,035        23,260        86,215        30,195   
  

 

 

    

 

 

    

 

 

    

 

 

  

Expenses

         

Sponsor’s fees

      297,360        127,380        570,172        186,811   

Brokerage commissions and fees

      17,410        9,671        35,457        14,150   
  

 

 

    

 

 

    

 

 

    

 

 

  

Total expenses

      314,770        137,051        605,629        200,961   
  

 

 

    

 

 

    

 

 

    

 

 

  

Net investment loss

      (273,735 )      (113,791 )      (519,414 )      (170,766 ) 
  

 

 

    

 

 

    

 

 

    

 

 

  

Realized and Unrealized Gain (Loss)

         

Net realized gain (loss) on:

         

Short-term investments

      2,762        —          2,762        —     

Forward currency contracts

      1,301,901        176,881        1,301,013        194,841   

Futures contracts

      3,418,213        891,763        (433,358 )      412,594   

Net change in unrealized appreciation/depreciation on:

         

Foreign currency translations

      37,294        (21,514 )      (9,955 )      (18,357 ) 

Forward currency contracts

      (2,134,784 )      (613,353 )      (770,858 )      (449,020 ) 

Futures contracts

      (483,228 )      (292,315 )      3,388,908        11,192   
  

 

 

    

 

 

    

 

 

    

 

 

  

Net realized and unrealized gain

      2,142,158        141,462        3,478,512        151,250   
  

 

 

    

 

 

    

 

 

    

 

 

  

Net gain (loss)

    $ 1,868,423      $ 27,671      $ 2,959,098      $ (19,516 ) 
  

 

 

    

 

 

    

 

 

    

 

 

  

Net gain (loss) per Share

    $ 0.77      $ 0.03      $ 1.25      $ (0.02 ) 

Weighted-average Shares outstanding

      2,434,066        1,097,802        2,361,326        815,470   

See notes to financial statements.

 

2

Table of Contents

iShares® Diversified Alternatives Trust

Statements of Changes in Shareholders’ Capital

For the six months ended June 30, 2011 (Unaudited)

and the year ended December 31, 2010

 

     Six Months
Ended
June 30, 2011		     Year Ended
December 31, 2010		  

Shareholders’ Capital, Beginning of Period

    $ 110,938,681      $ 14,855,197   

Contributions

      25,716,762        94,893,939   

Redemptions

      (10,282,126 )      —     

Net investment loss

      (519,414 )      (564,823 ) 

Net realized gain (loss) on:

     

Short-term investments

      2,762        199   

Forward currency contracts

      1,301,013        699,926   

Futures contracts

      (433,358 )      3,045,389   

Net change in unrealized appreciation/depreciation on:

     

Foreign currency translations

      (9,955 )      102,402   

Forward currency contracts

      (770,858 )      (175,836 ) 

Futures contracts

      3,388,908        (1,917,712 ) 
  

 

 

    

 

 

  

Shareholders’ Capital, End of Period

    $ 129,332,415      $ 110,938,681   
  

 

 

    

 

 

  

Net Asset Value per Share, End of Period

    $ 51.73      $ 50.43   

See notes to financial statements.

 

3

Table of Contents

iShares® Diversified Alternatives Trust

Statements of Cash Flows (Unaudited)

For the six months ended June 30, 2011 and 2010

 

     Six Months Ended
June 30,		  
     2011     2010  

Cash Flows from Operating Activities

     

Net gain (loss)

    $ 2,959,098      $ (19,516 ) 

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

     

Purchases of short-term investments

      (133,736,878 )      (83,699,520 ) 

Sales/maturities of short-term investments

      119,799,622        36,457,000   

Accretion of discount

      (76,061 )      (28,327 ) 

Net realized gain on short-term investments

      (2,762 )      —     

Change in operating assets and liabilities:

     

Cash and cash equivalents held at brokers (restricted)

      (3,336,044 )      (7,021,701 ) 

Foreign currencies held at brokers (restricted)

      2,082,980        (1,192,601 ) 

Interest receivable

      (809 )      66   

Collateral due to Authorized Participants

      —          293,216   

Net unrealized appreciation (depreciation) on futures contracts

      (3,356,780 )      (3,729 ) 

Sponsor’s fees payable

      11,086        35,344   
                

Net cash used in operating activities

      (15,656,548 )      (55,179,768 ) 
                

Cash Flows from Financing Activities

     

Contributions

      25,716,762        54,760,301   

Redemptions

      (10,282,126 )      —     
                

Net cash provided by financing activities

      15,434,636        54,760,301   
                

Effect of exchange rate changes on cash

      748,685        459,819   
                

Net increase in cash and cash equivalents

      526,773        40,352   
                

Cash and Cash Equivalents

     

Beginning of period

      3,309,973        166,599   
                

End of period

    $ 3,836,746      $ 206,951   
                

See notes to financial statements.

 

4

Table of Contents

iShares® Diversified Alternatives Trust

Schedule of Investments (Unaudited)

At June 30, 2011

 

Face Amount

   

Security Description

    Fair Value  
   United States Treasury Bills:   
$9,000,000    0.18% due 7/14/11    $ 8,999,425   
17,800,000    0.06% due 8/18/11      17,798,517   
9,000,000    0.15% due 8/25/11      8,997,979   
15,000,000    0.03% due 9/01/11      14,999,289   
14,200,000    0.13% due 9/08/11      14,196,479   
7,100,000    0.15% due 9/15/11      7,097,758   
19,500,000    0.11% due 9/22/11      19,495,010   
1,000,000    0.08% due 10/27/11      999,738   
9,700,000    0.07% due 11/10/11      9,697,510   
8,500,000    0.09% due 11/17/11      8,496,964   
3,500,000    0.04% due 12/15/11      3,499,350   
     

 

 

  
  

Total United States Treasury Bills - 88.36% a

    $ 114,278,019   
     

 

 

  

 

a 

Percentage is based on shareholders’ capital.

 

• As of June 30, 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)		  

7/5/2011

   AUD     17,590,496      USD     18,833,057      $ 679   

7/5/2011

   GBP     2,950,871      USD     4,800,408        62,930   

7/5/2011

   NOK     46,169,260      USD     8,604,919        —     

7/5/2011

   SEK     252,707,929      USD     40,217,362        168,879   

7/5/2011

   USD     24,211,502      AUD     23,627,041        1,083,599   

7/5/2011

   USD     23,461,969      CAD     22,643,146        —     

7/5/2011

   USD     14,443,340      CHF     12,252,708        108,570   

7/5/2011

   USD     4,322,534      EUR     3,028,688        68,606   

7/5/2011

   USD     12,748,730      GBP     7,963,392        36,105   

7/5/2011

   USD     6,210,191      NOK     34,520,446        223,649   

7/5/2011

   USD     39,870,395      SEK     252,707,929        178,088   

10/5/2011

   CAD     22,643,146      USD     23,407,567        —     

10/5/2011

   CHF     9,741,645      USD     11,576,249        —     

10/5/2011

   EUR     5,009,860      USD     7,244,658        —     

10/5/2011

   USD     16,742,782      AUD     15,821,496        —     

10/5/2011

   USD     14,453,809      GBP     9,012,957        —     

10/5/2011

   USD     8,554,140      NOK     46,169,260        —     

10/5/2011

   USD     32,441,059      SEK     205,794,725        —     
         

 

 

  
            1,931,105   
         

 

 

  

7/5/2011

   AUD     6,036,545      USD     6,391,874        (70,849)   

7/5/2011

   CAD     25,003,637      USD     25,673,571        (234,248)   

7/5/2011

   CHF     15,828,708      USD     17,316,698        (1,482,243)   

7/5/2011

   EUR     16,145,548      USD     22,871,935        (536,672)   

7/5/2011

   GBP     9,012,957      USD     14,469,852        (7)   

 

5

Table of Contents

7/5/2011

   NOK     7,428,186      USD     1,352,434        (32,014)   

7/5/2011

   USD     2,451,778      CAD     2,360,491        (5,926)   

7/5/2011

   USD     4,278,459      CHF     3,576,000        (31,428)   

7/5/2011

   USD     19,304,509      EUR     13,116,860        (287,042)   

7/5/2011

   USD     6,540,745      GBP     4,000,436        (118,242)   

7/5/2011

   USD     3,582,722      NOK     19,077,000        (27,195)   
         

 

 

  
            (2,825,866)   
         

 

 

  

Net Unrealized Depreciation

           $ (894,761)   
         

 

 

  

 

• As of June 30, 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

      (174 )      7/15/2011       $ (3,074,619 )    $ (52,530 ) 

MSCI Taiwan Index

      121        7/28/2011         3,584,020        72,600   

S&P/TSX 60 Index

      (61 )      9/15/2011         (9,635,105 )      (79,007 ) 

SPI 200 Index

      5        9/15/2011         615,729        5,219   

AEX Index

      (23 )      9/16/2011         (2,258,227 )      (38,624 ) 

CAC 40 10-Year Euro

      87        9/16/2011         5,022,139        219,478   

DAX Index

      65        9/16/2011         17,414,408        684,419   

FTSE 100 Index

      (18 )      9/16/2011         (1,705,711 )      (47,393 ) 

S&P 500 E-mini Index

      18        9/16/2011         1,183,950        46,530   

Hang Seng Index

      (70 )      9/29/2011         (10,026,924 )      (186,667 ) 
         

 

 

  
            624,025   
         

 

 

  

Interest Rate Contracts

          

Euro Bund

      (65 )      9/8/2011         (11,825,258 )      (93,298 ) 

Australian 10-Year Bond

      (322 )      9/15/2011         (36,561,380 )      (68,874 ) 

3-Month Euribor

      (231 )      9/19/2011         (82,280,272 )      236,325   

90-Day Eurodollar

      248        9/19/2011         61,786,100        133,600   

3-Month Sterling

      98        9/21/2011         19,493,705        9,432   

Canada 10-Year Bond

      (74 )      9/21/2011         (9,507,056 )      1,534   

US 10-Year Note

      291        9/21/2011         35,597,484        159,126   

Long Gilt

      110        9/28/2011         21,218,441        51,214   

3-Month Euribor

      (231 )      12/19/2011         (82,154,678 )      145,184   

90-Day Eurodollar

      249        12/19/2011         61,988,550        200,175   

3-Month Sterling

      98        12/21/2011         19,479,938        26,931   

3-Month Euribor

      (231 )      3/19/2012         (82,079,323 )      (257,783 ) 

90-Day Eurodollar

      248        3/19/2012         61,699,300        163,063   

3-Month Sterling

      99        3/21/2012         19,658,846        40,919   

3-Month Euribor

      (230 )      6/18/2012         (81,657,308 )      (16,673 ) 

90-Day Eurodollar

      248        6/18/2012         61,618,700        (15,188 ) 

3-Month Sterling

      98        6/20/2012         19,432,738        5,900   
         

 

 

  
            721,587   
         

 

 

  

Net Unrealized Appreciation

           $ 1,345,612   
         

 

 

  

See notes to financial statements.

 

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Table of Contents

iShares® Diversified Alternatives Trust

Notes to Financial Statements (Unaudited)

June 30, 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.

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.

 

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iShares® Diversified Alternatives Trust

Notes to the Financial Statements (Unaudited) (Continued)

June 30, 2011

 

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 to 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 June 30, 2011 and December 31, 2010, the Trust had cash and cash equivalents held at brokers of $6,031,505 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.

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 June 30, 2011 and December 31, 2010, the Trust had foreign currencies held at brokers of $4,833,472 and $6,926,407, respectively, which were restricted and held as collateral against margin obligations for open futures contracts.

 

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iShares® Diversified Alternatives Trust

Notes to the Financial Statements (Unaudited) (Continued)

June 30, 2011

 

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.

 

I. Recent Accounting Standard

In May 2011, the Financial Accounting Standards Board issued amended guidance to improve disclosure about fair value measurements which will require the following disclosures for fair value measurements categorized as Level 3: quantitative information about the unobservable inputs and assumptions used in the fair value measurement, a description of the valuation policies and procedures and a narrative description of the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs. In addition, the amounts and reasons for all transfers in and out of Level 1 and Level 2 will be required to be disclosed. The amended guidance is effective for financial statements for fiscal years beginning after December 15, 2011, and interim periods within those fiscal years. Management is evaluating the impact of this guidance on the Trust’s financial statements and disclosures.

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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iShares® Diversified Alternatives Trust

Notes to the Financial Statements (Unaudited) (Continued)

June 30, 2011

 

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 June 30, 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

      (0.22 ) 

Net realized and unrealized gain

      1.52   
  

 

 

  

Net increase in net assets from operations

      1.30   
  

 

 

  

Net asset value per Share, end of period

    $ 51.73   
  

 

 

  

Ratio to average net assets:

   

Net investment loss a

      (0.86 )% 

Expenses a

      1.01 % 

Total return b

      2.58 % 

 

a 

Percentage is annualized.

b 

Percentage is not annualized.

 

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iShares® Diversified Alternatives Trust

Notes to the Financial Statements (Unaudited) (Continued)

June 30, 2011

 

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 six months ended June 30, 2011 and the year ended December 31, 2010, the average month-end notional amounts of open forward currency contracts were $258,096,366 and $133,811,286, respectively. For the six months ended June 30, 2011 and the year ended December 31, 2010, the average month-end notional amounts of open futures contracts were $796,715,570 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 June 30, 2011 and December 31, 2010:

 

June 30, 2011

   

Asset Derivatives

    Fair Value     

Liability Derivatives

    Fair Value  

Foreign exchange contracts

    Unrealized appreciation on forward currency contracts    $ 1,931,105       Unrealized depreciation on forward currency contracts    $ 2,825,866   

Equity contracts

    Unrealized appreciation on futures contracts      1,028,246       Unrealized depreciation on futures contracts      404,221   

Interest rate contracts

    Unrealized appreciation on futures contracts      1,173,403       Unrealized depreciation on futures contracts      451,816   

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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iShares® Diversified Alternatives Trust

Notes to the Financial Statements (Unaudited) (Continued)

June 30, 2011

 

The following table shows the effect of the forward currency and futures contracts, by risk exposure category, on the Statements of Operations for the six months ended June 30, 2011 and 2010:

 

     

Statements of

Operations Location

    Realized
Gain (Loss)		     Change in Unrealized
Appreciation/
Depreciation		  

Six Months Ended June 30, 2011

                  

Foreign exchange contracts

    Net realized gain (loss) on forward currency contracts    $  1,301,013      $ —     
   Net change in unrealized appreciation/depreciation on forward currency contracts      —          (770,858 ) 

Equity contracts

    Net realized gain (loss) on futures contracts      129,800   a      —     
   Net change in unrealized appreciation/depreciation on futures contracts      —          952,322   

Interest rate contracts

    Net realized gain (loss) on futures contracts      (598,615 ) a      —     
   Net change in unrealized appreciation/depreciation on futures contracts      —          2,436,586   

Six Months Ended June 30, 2010

                  

Foreign exchange contracts

    Net realized gain (loss) on forward currency contracts    $ 194,841      $ —     
   Net change in unrealized appreciation/depreciation on forward currency contracts      —          (449,020 ) 

Equity contracts

    Net realized gain (loss) on futures contracts      (235,928 ) a      —     
   Net change in unrealized appreciation/depreciation on futures contracts      —          (109,109 ) a 

Interest rate contracts

    Net realized gain (loss) on futures contracts      634,277    a      —     
   Net change in unrealized appreciation/depreciation on futures contracts      —          120,396    a 

 

a 

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

 

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iShares® Diversified Alternatives Trust

Notes to the Financial Statements (Unaudited) (Continued)

June 30, 2011

 

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.

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 June 30, 2011 and December 31, 2010:

 

June 30, 2011

    Level 1     Level 2     Level 3      Total  

U.S. Treasury bills

    $ —        $ 114,278,019      $ —         $ 114,278,019   

Forward currency contracts

      —          (894,761 )      —           (894,761 ) 

Futures contracts

          

Equity contracts

      624,025        —          —           624,025   

Interest rate contracts

      721,587        —          —           721,587   
                                 

Total futures contracts

      1,345,612        —          —           1,345,612   
                                 

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 June 30, 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.

“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

The Trust returned 2.58% for the six months ended June 30, 2011 (the “reporting period”). Positive performance was largely driven by the short-term fixed income market investments, followed by the equity, long-term fixed income and currency market investments. The currency market investments had the smallest positive contribution to overall performance.

Market Environment/Background

The first half of the year was relatively volatile and eventful. The year began with optimism in the U.S., Asian, and the European Union (EU) region markets. This optimism carried through April and most major countries/indices outperformed, with some disruptions in March as a result of the immense natural disaster in Japan. However, this bull market came to a halt and risk aversion dominated in May and June. This was primarily driven by the mounting pressure on sovereign debt in EU peripheries and the fear of contagion effect globally.

The EU markets remained highly volatile during this reporting period as Greece, Ireland, and Portugal’s sovereign debt crises continued to cast a cloud over the euro zone and global recovery. Both Greece’s and Ireland’s credit ratings were downgraded and the outlook on Belgium was cut to negative in this reporting period. European officials scrambled to calm the markets and prevent the first sovereign default in the euro area. The main concern is that this crisis could infect the banking system. With the austerity measures approved by the Greek parliament, the EU officials agreed on another bailout package and requested banks to roll over their debt in order to avoid restructuring. Even though the German and French equity markets were particularly volatile, more than 16% this quarter, DAX delivered a positive performance of about 6.7% and CAC 40 returned 4.7%. Euro currency was also volatile (11%), but surprisingly appreciated from $1.33 to $1.45 by the end of this reporting period. This appreciation was primarily due to the progress on the Ireland, Portugal, and Greece situations.

Optimism about the health of the U.S. economy grew at the beginning of the year and the release of macroeconomic data during the reporting period appeared to confirm that the U.S. economic recovery remained on track. The U.S. market took advantage of its momentum and the equity market delivered a good performance until last April, despite Standard & Poor’s decision to revise their outlook on the

 

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long-term credit rating of the U.S. to negative. However in May and June, the release of macroeconomic data was uninspiring. In particular, U.S. consumer confidence index and ISM data came in well below consensus. Moreover, the decline in government spending resulted in higher than expected unemployment numbers, even though the private sector maintained its hiring pace. The U.S. equity market delivered a positive performance of 5.0% in the reporting period. The dollar index was not as volatile as the euro (about 8.0%), but, depreciated steadily to about 6.0% during this period.

Japan kicked off the year with some optimism. The Bank of Japan raised its economic assessment as faster overseas growth bolstered exports and production. This appeared to indicate 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. In the second quarter of 2011, Japan continued to struggle with the nuclear containment and the electricity shortfall. The OECD cut its growth forecast and the economic data from Japan was disappointing. Japan’s GDP dropped 3.7% in the first quarter of 2011 and the country is officially in recession. It is expected that Japan’s debt will reach more than 204% of its GDP this year.

The Middle East and North African unrest continued to raise concerns over the spread of the instability into the rest of the Middle East. This instability could potentially cause serious disruption in oil supply and push the price of oil upward. 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. Oil prices reached the $115 mark late April. However, concern over the euro zone debt crises and the fragile recovery of the U.S. economy pushed the price of oil downward to about $95 by the end of the second quarter.

Portfolio Update

The equity yield-curve arbitrage strategy, which was approved by the Trust’s Investment Committee in May 2011, was added to the current suite of strategies as of June 1, 2011. With this addition, the equity asset class takes advantage of all three strategies offered by the Trust. The existing equity relative value strategy was also enhanced to account for irregularities in accounting practices across different countries. These additions/changes helped the Trust to enhance its equity performance in this reporting period.

The Trust closed out all of its Japanese positions in the equity, bond, and currency markets in mid-March, due to the immense earthquake disaster in that country. The Trust continued to keep out of Japan for the rest of the reporting period. This temporary removal of Japan from the asset universe was a response to an extreme situation in which the current suite of signals provided minimal information relevant to Japan and helped the Trust to mitigate risk. The Trust believes that a strong and steady improvement in nuclear containment and the electricity shortfall would be a positive signal in adding back Japan to the asset universe.

Trust Strategies’ Performance

The Trust’s investments in equity markets delivered a positive performance of 0.58% during the reporting period (see Figure 1). In general, equity markets were highly volatile, which was primarily driven by the factors mentioned above. The performance of the Trust’s equity market investments was driven by the long positions in the German and French equity markets combined with the short positions (on average) in the Australian equity markets. The short positions in the Canadian and Swedish equity markets and the long position in Japanese equity markets detracted from performance.

The Trust’s investments in futures on short-term bonds (bonds with maturities of less than one year) delivered a strong return of 1.25% for this reporting period (see Figure 1). The short-term interest rate market sentiment insights were mostly positive for the first half of the reporting period. However, the euro zone sovereign debt crises made the short-term interest rate market more volatile in May and June. The large long positions in the Eurodollar and large short position in Euribor delivered strong positive returns, but the long position in Eurosterling detracted from the performance.

The Trust’s investments in futures on long-term bonds (bonds with maturities of more than one year) delivered a positive performance of 0.42% for this reporting period (see Figure 1). The large long positions in the U.S. Treasuries and UK Gilt added to the performance in this reporting period. On the other hand, the short positions in the German and Australian bonds detracted from performance.

The Trust’s investments in currency markets had the smallest positive contribution (0.33%) to overall performance during the reporting period (see Figure 1). The large long positions in the Swedish krona, Australian dollar, and Norwegian krone added to the positive performance. The main detractors were the short positions in the Swiss franc, euro, and Canadian dollar.

 

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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 carry delivered the strongest performance, with a return of 1.85%. The carry strategy highly benefited from the addition of equity asset class. The momentum and relative value strategies contributed equally to the performance at 0.38% and 0.35%, respectively. See Figure 2 for the performance of each strategy during this reporting period.

The Trust’s annualized portfolio return volatility was 6.36% for the reporting period, based on the daily performance of the Trust. The Trust experienced a modest increase in volatility relative to last year. This primarily was driven by Japan’s natural disaster, the euro zone sovereign debt crisis, and the concern over U.S. debt ceiling and their effects on their local 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 0.81 for this reporting period. Despite the challenges in May and June 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.

LOGO

Figure 1: Asset class total return during the reporting period

 

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LOGO

Figure 2: Strategy total return during the reporting period

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 and six months ended June 30, 2011.

The Quarter Ended June 30, 2011

The Trust’s net asset value increased from $127,386,377 at March 31, 2011 to $129,332,415 at June 30, 2011. The increase in the Trust’s net asset value primarily resulted from an increase in net realized and unrealized gain from investments.

Net gain for the period was $1,868,423, resulting from a net investment loss of $273,735 and a net realized and unrealized gain of $2,142,158. For the quarter ended June 30, 2011, the Trust had a net gain of $2,762 on short-term investments, a net realized and unrealized loss of $832,883 from forward currency contracts, a net realized and unrealized gain of $2,249,641 from equity index futures, a net realized and unrealized gain of $667,934 from fixed income futures, and a net unrealized gain of $37,294 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.

The increase of $177,719 in total expenses from $137,051 for the quarter ended June 30, 2010 to $314,770 for the quarter ended June 30, 2011, was primarily due to an increase in the Sponsor’s fee. The Sponsor’s fee increased due to an increase in the Trust’s net assets.

The Six Months Ended June 30, 2011

The Trust’s net asset value increased from $110,938,681 at December 31, 2010 to $129,332,415 at June 30, 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 June 30, 2011, due to 500,000 Shares (5 Baskets) being created and 200,000 Shares (2 Baskets) being redeemed during the period.

Net gain for the period was $2,959,098, resulting from a net investment loss of $519,414 and a net realized and unrealized gain of $3,478,512. For the six months ended June 30, 2011, the Trust had a gain of $2,762 on short-term investments, a net realized and unrealized gain of $530,155 from forward currency contracts, a net realized and unrealized gain of $1,082,122 from equity index futures, a net realized and unrealized gain of $1,837,971 from fixed income futures, and a net unrealized loss of $9,955 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.

The increase of $404,668 in total expenses from $200,961 for the six months ended June 30, 2010 to $605,629 for the six months ended June 30, 2011, was primarily due to an increase in the Sponsor’s fee. The Sponsor’s fee increased due to an increase in the Trust’s net assets.

 

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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.

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.

 

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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 June 30, 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.

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.

 

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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.

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) 200,000 Shares (2 Baskets) were redeemed during the quarter ended June 30, 2011.

 

Period

    Total Number of
Shares  Redeemed		      Average Price
Per Share		  

4/01/11 to 4/30/11

      200,000       $ 51.45   

5/01/11 to 5/31/11

      —           —     

6/01/11 to 6/30/11

      —           —     
           

Total

      200,000         51.45   
           

 

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Item 3. Defaults Upon Senior Securities

None.

Item 5. Other Information

On August 10, 2011, the Board of BlackRock Asset Management International Inc., the sole member and manager of the Sponsor, appointed Patrick J. Dunne to the Board of Directors of the Sponsor, replacing Michael A. Latham. This appointment will become effective on September 1, 2011.

Also on August 10, 2011, the Board of Directors of the Sponsor appointed Patrick J. Dunne as President and Chief Executive Officer of the Sponsor, replacing Michael A. Latham, and appointed Jack Gee as Chief Financial Officer of the Sponsor, replacing Geoffrey D. Flynn. These appointments will become effective on September 1, 2011.

Mr. Dunne is currently the Global Chief Operating Officer for iShares. Prior to assuming his current role in 2010, Mr. Dunne was the head of BlackRock’s securities lending business. Mr. Dunne’s service with BlackRock dates back to 1991, including his years with Barclays Global Investors (BGI), which merged with BlackRock in 2009. At BGI he was responsible for the Global Securities Lending and Cash Management businesses. Prior to moving to this role in 2003, Mr. Dunne was the Chief Operating Officer of BGI’s affiliated brokerage business in Europe and was involved with business strategy for the brokerage and transition services business globally. During his tenure at BGI, Mr. Dunne has held various positions including leading the fixed income trading department in the United States and managing global fixed income and equity portfolios.

Mr. Gee is currently the Head of the iShares Americas Fund Administration group and is responsible for fund administration and financial reporting. Prior to joining BlackRock in 2004, Mr. Gee was employed by Parnassus Investments, Fremont Investment Advisors, SIFE Trust Fund and PricewaterhouseCoopers, where he served in a variety of senior level positions.

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
101.INS**   XBRL Instance Document
101.SCH**   XBRL Taxonomy Extension Schema Document
101.CAL**   XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB**   XBRL Taxonomy Extension Label Linkbase Document
101.PRE**   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Confidential portions of this document have been filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.
** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for the purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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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: August 12, 2011

 

/s/    Geoffrey D. Flynn

Geoffrey D. Flynn
Chief Operating Officer and Chief Financial Officer
(Principal financial and accounting officer)
Date: August 12, 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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ISHARES DIVERSIFIED ALTERNATIVES TRUST Reports