Last Arbitrage performance letter. The halcyon days!

1. Fund Type: Offshore
Fees: 1.5% Management Fee
20% Annual Performance Fee
High-Water Mark: Yes
-5%
0%
5%
10%
15%
20%
2004 2005 2006 2007 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08*
YTD 2008*Since
Inception**
FRAS Offshore Fund Lehman 90 Day T-bill HFRI RV - Fixed Income Cvt Arb Merrill Lynch HXA0
FROLEY REVY ALTERNATIVE STRATEGIES OFFSHORE FUND, LTD.
MONTHLY UPDATE – JUNE 2008
Froley Revy aims to extract the alpha identified between any
mispricing of global debt and equities. The Fund employs
credit, equity, convertible and option trades to extract alpha
while preserving capital.
Fund Terms
T E L 3 1 0 – 2 0 8 – 4 9 3 8 • F A X 3 1 0 – 2 0 8 – 1 6 9 5 • E-M A I L ifischler@froleyrevy.com
Past Performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Offerings may be made only as outlined in the
offering memorandum which contains important information concerning risk factors, performance information and other material aspects of the fund and must be read carefully before any decision to invest is
made. Not FDIC insured, No Bank Guarantee, May Lose Value
Michael Erich Revy, Managing Director, Senior Portfolio Manager Alternative Strategies
Michael Revy is a Senior Portfolio Manager, Managing Director and was named Director of Research in 2004. He joined Froley, Revy Investment Co., Inc.
in 2002 to develop and co-manage the firm’s convertible arbitrage product. He spent six years with the Lehman Brothers convertible bond desk in New
York, building the foundation of their existing convertible risk management systems. Mr. Revy was also a private banker with Wechsler & Co. structuring
private equity deals, seeking trading opportunities. Mr. Revy holds a BA from UCLA and an MBA in International Finance from Pepperdine University.
Founded in 1975, Froley, Revy focuses exclusively on convertible securities, serving both individual and institutional investors.
Froley, Revy is a registered investment advisor and operates as a 100% employee-owned company.
Manager’s Comments
Performance Summary
^Hedge Fund Research Index . HFRI Convertible Arbitrage index was used since the inception of the Fund thru Dec. 2007. Effective Jan. 2008, HFRI merged the HFRI Convertible Bonds Index with
the Convertible Arbitrage Index and reclassified it as the HFRI Relative Value – Fixed Income Convertible Arbitrage Index.
^^Merrill Lynch All U.S. Hedge - (Net of 2% Management Fee & 20% Incentive Fee)
*Preliminary. Performance results are net of fees and have not been audited for 2007. Presented results include the reinvestment of income. Inception date of Offshore Fund was September 1, 2004.
Performance results that exceed one year are cumulative.
**Returns are cumulative
Strategy
In June, the Fund averted many market disasters by avoiding small
issue, big conversion premium names that, during credit widening, offer
no protection for bond floor losses. Instead, the portfolio was positioned
towards large, liquid names most with relatively high deltas. The Fund's
credits were skewed towards quality with 60% of portfolio at BB- or
better.
The Fund suffered from exposure to Financials in June. Looking at
equity price-book and price-sales, Financials are trading more than 2
standard deviations below their means since 1995. In regards to our
credit views, we are constructive on Financials - we like embedded calls
in their converts. Certainly, credit risk exists in the names, but we have
some optionality to hedge this risk where the conversion premium is not
too large. Could we be in a new age of black or at least grey swans? Here
are our rough aggregate calculations:
According to Bloomberg, Major & Regional Banks, Diversified
financials and Savings & Loans have approximately $13.8 trillion in
assets. Aggregate enterprise value for the same group is approximately
$7.4 trillion. Market value of equity is a mere $1.4 trillion (Leverage in
the group is about 4.5x). You control $9.80 in assets for every $1 dollar
in equity. Asset control numbers in the recent past have been around 6.5
to 7.5. Compare this same aggregation with that of Natural Gas, Oil
services and Integrated Oils and there is $0.9 trillion in assets, $1 trillion
in enterprise value and $0.9 trillion in market equity value. Leverage in
this group is low. In this group, the investor controls $1 dollar of assets
per unit of equity.
Assets (along with people) are what produce returns. Clearly, people
in Financials have mismanaged their asset bases. The lesson is that asset
volatility in real estate has long been masked by a lack of daily mark to
market. Ergo: Leveraged products designed with this smoothing
characteristic underestimated risks. Sadly, the magnitude of this error has
been compounded by emerging market economic mercantilism and its
effects on the US Treasury market, i.e. Greenspan and the Asian savings
glut of 2005.
2004 2005 2006 2007 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08* YTD 2008*
Since
Inception**
FRASOF (Net) 0.50% 0.78% 13.57% 5.80% 2.06% 0.33% -1.90% 1.60% -0.06% -0.84% 1.15% 23.25%
HFRI^ 0.58% -1.99% 12.16% 5.26% -1.40% -0.78% -4.16% 1.32% 0.77% -3.51% -7.63% 7.50%
HXA0^^ -0.16% -4.30% 7.43% 4.00% 2.62% 0.37% -1.56% 0.22% 0.15% -0.44% 1.32% 8.26%
90-Day T-Bill 0.59% 3.00% 4.87% 5.11% 0.55% 0.17% 0.24% 0.12% 0.03% 0.17% 1.29% 15.67%