BlueMountain Capital Management, LLC

BlueMountain Capital Partners (London) LLP

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Tel: +44 20 7647 0700
Fax: +1 212 905 3964
Fax: +44 20 7491 0265
Private & Condential
Ladies and Gentlemen:

Attached please nd the most recent letter to the investors in Blue Mountain Credit Alternatives L.P. and Blue
Mountain Credit Alternatives Ltd. Te information contained in the attached letter has been prepared for
informational purposes only and is not an oer to sell or a solicitation of an oer to sell securities of Blue Mountain
Credit Alternatives L.P. or Blue Mountain Credit Alternatives Ltd. Any such oer will be made only pursuant to a
private placement memorandum describing such securities and to which prospective investors are referred.

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n the rights, e
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inancial regul
ancial regulat
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and overhaul
financial risk i
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ital markets a
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2 U.S. preside
at trusty old s
edictions abo
political part
ctions. First,
an acrimony a
tment of the
financial mar
litics, stupid.
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nsition that i
rative connot
to governmen
entitlements a
ernally focu
o the financia
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arket regulati
ntions, to nam
ocesses and o
lation is parti
tory process.
prevailing fina
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were depen
and mitigation
th many of th
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tly speaking,
erests, and co
se in American
ountain Credit
urns are now
are my though
ortunities and
e Politics, Stup
ential electio
saw in prepar
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ty; nor to one
politics globa
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rkets. From t

potential for a
mpact financ
tation to the
nt activities a
and obligatio
sed on the re
al markets an
y acute today
ion, Chinese f
me just a few.
utcomes.
cularly impor
On the one h
ancial regulat
oads, safe cap
externality th
ndent on the f
n of systemic
e new and pr
best interest
many of the
ounterproduc
n politics widely
t Alternatives
w 16.9% and th
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summarize B
pid
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ation for this
of the U.S. eco
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ally will contin
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d pressing issu
he investors
a change in p
cial markets.
term. I simp
nd policies, w
ons of individu
elationships b
nd investment
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fiscal, moneta
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rtant. BlueM
hand, any obs
tory regime n
pital markets
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roposed rules
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s Fund (BMC
he five year a
olitical and reg
BMCAs 2011
economy, stu
s years upcom
onomy come
.S. president.
nue to be cha
utter disregard
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It is politics in
ly note that f
whether those
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ountain has a
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Bill Clintons ca
CA) returned
annualized ne
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pid.
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ming presiden
e November.
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aracterized by
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nt, I would su
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financial outc
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binations of
es.
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is, the U.S. sta
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political outc
ticularly attun
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ties. Market s
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markets rebo
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on the transit
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truments wit
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ross industry
allow us to d
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g bonds, loans
os.
Mar
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ereign crisis d
marizes perfo
re 1 Perform
1Q 2011
1.27%
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ounded in the
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utious given t
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m. Our appro
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pitalize on mic
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nk would be t
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on and hesita
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ed borrowers
uted and rep
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sectors and i
develop stron
and infrastruc
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uake, Arab Sp
ominated he
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mance Across
2Q 2011
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e fourth quar
ng fiscal gove
Although vo
the political, r
tcomes, and d
oach to invest
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ate mispricing
ur policy is an
the best resu
ry change, ev
ountain.
ancial regulat
t is almost nev
encies and dis
ancy caused b
tals. (3) Be o
risk manage o
opportunitie
with savers a
laced. In the
ss markets ar
odels face gre
individual com
ng views on in
cture enable
aps, capital no
pring, U.S. deb
adlines and w
adly across as
Asset Classe
3Q 2011
-1.89%
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rter on the ba
ernance in the
latility has m
regulatory an
do not attem
ting in this en
xposure to an
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g. The ongoin
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ult for capital
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tion. (1) Don
ver truly expe
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s presented b
and hedgers w
process, cap
re dislocated,
eat uncertain
mpanies with
ndividual winn
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sset classes du
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4Q 2011
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ack of constru
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uted and mar
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companies, c
ng uncertainty
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markets. Tha
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t get fooled
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asioned by th
ertainties ofte
d alert to the
and remain a
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with speculat
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s these views
on stock, optio
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nancial marke
uring the yea
2011
3.09%
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uctive macro
nd inception
rkets have ra
uncertainties
te returns do
two-fold: firs
known
capital structu
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2
give
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ith

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mispriced

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a shift in d
banks hav
securities
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books and
Basel III in
assets ass
sheets an
holding in
dealer inv
as illustra
Volcker ru
for their o
banks are
trading de

2
Source: B
l inefficiency
s. There are a
trategies Fu
inancial Regu
alling primary
olatility in ret
olitical uncert
redit price vo
Mispricing of r
entral Banks
ecline in com
e most compe
r example, in
d building pro
hased by a co
would have b
sed number o
hough in secu
ecured credit
individual com
ecured debt.
nd yield than
e the higher c
m the loan to
d due to the c
ally, bank regu
nd the Volcke
dealer behavi
ve been large
dealers, kee
of bonds and
d matching bu
ncreases the r
sociated with
d increases b
nventories. C
ventory is a at
ted by Figure
ule limits ban
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e shrinking the
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in credit mar
a number of m
undamental C
lation (Dodd-
y dealer inven
tail fund flow
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olatility
risk across dif
are acting as
mmercial bank
elling opportu
the third qua
oducts compa
onsortium of i
een issued in
of re-financin
ured form. In
issuance, up
mpanies and
However, ma
recovery, ofte
oupon on un
bond market
onstraints or
ulation from
er rule are dr
ior. Historica
corporate
ping vast
loans on the
uyers and sel
risk-weighted
dealer balan
banks cost of
onsequently,
t a four year l
e 2. Further, t
ks from tradi
As a result,
eir proprietar
mbination of l

kets, has crea
market factor
Credit, Structu
-Frank, Volck
ntory
ws
ng mispricing
fferent asset c
s buyer of last
k lending
unities are a r
arter we were
any. The com
investors this
the loan ma
gs and recapi
2011, secure
from 21% in
therefore hav
any bond inve
en undervalu
secured debt
t), allows us t
limitations o
iving
ally,
ir
lers.
d
ce
,
low
the
ng
ry
lower dealer
ated frequent
rs which are le
ured Credit, a
er Rule, Base
classes
t resort
result of mult
e a lead inves
mpany was pre
fall. Pre-cris
rket. Howeve
italizations be
ed bond issua
2010. Both l
ve higher exp
estors, whose
ue the added
t. The shifting
o invest in att
of a new inves
inventory and
Figure
t and attracti
eading to opp
and Arbitrage
l III)
tiple market f
stor in the 2
nd
eviously fami
sis, the debt i
er, banks retr
eing executed
nce more tha
oans and sec
pected recove
e investment
downside pro
g sources of c
tractively stru
stor base.
d limited cap
e 2 Corporat
ve entry poin
portunities ac
e & Technical,
factors comin
d
lien secured
ly owned and
n a transactio
reat from len
d in the high y
an doubled, a
cured bonds a
eries in the ev
mandates fo
otection of th
apital for HY
uctured secu
pital is causing
te Dealer Inve
nts for our
cross our thre
, including:
ng into play at
bonds of a w
d operated, a
on like this
ding is leadin
yield bond
accounting fo
are backed by
vent of defau
ocus more on
hese securitie
borrowers (in
red bonds tha
g greater vola
entory
2


3
ee
t
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ult
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with price
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were duri
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3
in Septem
fundamen
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BMCAs s
and (3) A
Figure 3 b
portfolios


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At year-en
1.75% to
more than
the total
performa
positions,

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yield mar
unsecured
view that
because i
and secur

3
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4
Beta for the
e dislocations
nvestment G
ng three yea
3
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mber, providin
ntals, the bon
ve said before
to persist and
our investor
strategies are
rbitrage and
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s.
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mental Portfo
nd, the Funda
Funds net re
n 33 bps of e
positive per
nce. Additio
, which contri
out 2011, the
kets
4
) express
d debt (unsec
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nvestors are
red bonds in t

w Bond Market
e Fundamental Por
persisting fo
rade Bond pr
rs prior to it a
e, our positio
ng an opportu
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e, the structu
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s whatever th
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arizes the av
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olio
amental Port
eturn for the
ither positive
rformance Fu
onally, we a
ibuted equall
Fundamenta
sed through l
cured bonds a
t is trading to
mistakenly un
the event of a

t, Wall Street
rtfolio is calibrated
or longer and
rices have bee
and HY bond
on in the secu
unity to grow
eturn to their
ral inefficienc
stment oppor
he political, re
BMCA Re
nto three pri
n 2011, we a
erage capital
Allocation an
folio account
e year. The g
e or negative
undamental
re pleased t
y to perform
l Portfolio w
longs in secur
and CDS refer
oo closely to u
nder-valuing
a fundamenta
Journal, Febru
d relative to the CD
at large devia
en nearly 3x a
prices have b
ured bonds of
our position
pre-sell off le
cies of the cre
rtunities for B
egulatory or e
esults by Port
mary portfol
chieved posit
allocation a
nd Performan
ted for 49% o
gains were w
PnL for the ye
Credit, and
to have gene
ance.
as modestly n
red debt (loan
rencing unsec
unsecured de
the added do
ally driven se
uary 11, 2012.
DX HY index.
ations from o
as volatile sin
been 2x as vo
f a trucking co
. Despite no
evels until mi
edit markets
BlueMountain
economic out
tfolio
lios: (1) Fund
tive returns a
nd contributi
nce Attributio
of BMCAs cap
well diversified
ear. It took 8
61 to accou
erated profit
net long cred
ns and secure
cured bonds)
ebt. In our vie
ownside prote
ll-off. In a fun

our fundamen
nce the financ
latile, accord
ompany trade
change in the
d-October.
will cause thi
n. We will ad
tcome.
damental, (2)
across each o
ion to return
on by Portfol
pital allocatio
d as no single
88 names to a
unt for 75%
ts across bot
it risk (~14%
ed bonds) and
. This positio
ew, this misp
ection of sen
ndamentally d
ntal fair value
cial crises as t
ing to Barclay
ed down 15 p
e business
is kind of irra
djust and adap
Structured C
of these portf
ns of each of
io
on and contri
e credit gene
account for 7
of total neg
th long and
beta to the h
d shorts in
oning reflects
ricing is occu
ior secured lo
driven sell off

4

they
ys
points
tional
pt to
Credit
folios.
these
buted
erated
75% of
gative
short
high
our
rring
oans
f,

investors
assets of a

As describ
allowed u
positionin
of the 4
th

our long s
Going into
environm
Today, se
are 45% o


Looking a
instrumen
represent
European
Equity Tra
examples

(1) U.S. Pe
performin

Winner - L
2nd lien b
North Am
of improv
utilization
and 2.5x b
protected
significant
the marke
absolute a

We initiat
2010 and
reduced it
and Septe
used the m
13.5% yie
should ascrib
a company.
bed in our thi
us to increase
ng went from
quarter. This
secured credi
o 2012, our o
ent to rotate
cured longs a
of the Funds
F
head, we are
nt types, capi
tative winner
Performing C
ades and (6) O
below are on
erforming Cre
ng credit trad
Long Position
bond of a Nor
merica with a y
ving freight de
n, and materia
by 2012 from
d by a substan
t impairment
et was offerin
and relative b
ted the long i
grew the pos
t by 20% in Ju
ember, these
market driven
ld. Since the
be greater val
rd quarter let
BMCAs secu
19% of BMCA
positioning c
t positions ou
overall fundam
many of our
are 28% of BM
NAV up from
Figure 4 Fun
e finding stron
tal structures
s and losers o
Credit Trades
Other Trades/
n a gross basi
edit Trades: C
es.
n in a North A
rth American
young fleet (a
emand vs. an
al de-leveragi
3.8x in 2010
ntial equity cu
t to BMCAs s
ng a 10% yield
basis to BMCA
n the new iss
sition to one
uly at a price
secured 2
nd
l
n sell-off as a
n, the compa
lue to the pro
tter, the mar
ured holdings
As NAV at th
contributed s
utperformed
mental positio
single name
MCA NAV, dow
43% at end o
ndamental Po
ng relative va
s and asset cla
of 2011 acros
s (3) Stressed/
/Macro-Hedg
s.
Currently, 41%
American Tru
Trucking Com
average age o
aged and sm
ing with net l
. Given a targ
ushion. Even
ecured bond
d on these bo
As short cred
sue bond mar
of our top lon
of $109.5 and
ien bonds sol
n opportunity
any has show
otection offer
ket volatility
at very attra
he beginning o
ignificantly to
our unsecure
oning is show
secured long
wn slightly fro
of 3
rd
quarter
ortfolio Senio
lue opportun
asses. Below
s five trade ty
/Distressed C
ges. Please n
% of the Fund
ucking Compa
mpany. The c
of 3 years), w
maller fleet on
everage impr
get valuation
in the unlikel
exposure. D
onds. This risk
dit positions.
rket at a price
ngs at ~1% of
d a yield of 7.
ld off dramat
y to grow our
n a strong co
red by secure
and credit se
active valuatio
of the 2
nd
qua
o our perform
ed shorts.
wn below. We
gs and grow s
om the 3
rd
qu
r.
ority (% of BM
nities across a
w, we illustrat
ypes (1) U.S
Credit Trades
note all perfor
damental Por
any: One of o
company is th
hich is well p
n the road. W
roving to our
of 6.0x EV/EB
y event of de
espite strong
k/reward com
e of 100 and y
f NAV. As the
.5%. During t
tically despite
r position by
mmitment to
ed debt, which
ll-off in Augu
ons. Our secu
arter to 31% a
mance during
e have used t
ome of our u
uarter and un
MCA NAV)
and within sec
e these oppo
S. Performing
(4) Capital St
rmance figure
rtfolios capit
our core secur
he largest truc
ositioned to r
e projected b
estimated 3.
BITDA, the se
efault, there w
g and improvi
mpared favor
yield of 10% i
e position out
the market w
e improving fu
40% at a pric
o deleveragin
h is backed by
st and Septem
ured debt
at the beginn
the 4
th
quart
he market
unsecured sho
nsecured shor
ctors, regions
ortunities thro
g Credit Trade
ructure Trade
es in the trad
al is in U.S.
red longs is in
ckload carrier
reap the bene
better pricing
.0x at year-en
ecured debt w
would be no
ng fundamen
ably both on
n late Decem
tperformed, w
weakness of A
undamentals.
ce of $85 and
g by consiste

5
y the
mber
ing
ter as
orts.
rts
s,
ough
es (2)
es (5)
de
n the
r in
efits
and
nd
was
ntals,
an
mber
we
ugust
. We
a
ntly

paying do
continue t

Winner - S
identify sh
losses in a
price in th
we identif
pricing pr
environm
projected
from 2.5x
market w

We initiat
the CDS tr
company
underperf
this credit
aluminum

Loser - Lo
position in
initiated t
18-20%, a
business o
determine
remain re
of the loa
more than

At the tim
markets.
quarter, w
a major co
month lat
our PIK lo
position r

(2) Europe
European

Loser - Lo
leisure co
value give
companie
sale of thi
own its term l
to hold the p
Short Positio
hort credit tra
a rising marke
he business vo
fied, a large g
essure, and r
ent with sign
the company
x at the start o
as not accura
ted the trade
raded to tight
reported ear
formed the b
t contributed
m companys u
ong Position in
n the HoldCo
the position e
and a $90 pric
of intermedia
ed this risk to
elatively stabl
ns in the eve
n 0.5% of NAV
me of our inve
As the prosp
we cut the po
ontract in its
ter, the comp
ans a floor va
esulted in a l
ean Performi
performing c
ong a Europea
mpany by se
en strong ope
es, and potent
is subsidiary w
oan as it grow
osition becau
n in a Global
ades that we
et. These sho
olatility and/o
global alumin
rising input co
ificant cash b
y would get le
of 2011. How
ately pricing i
in late 2010
ts of 145 bps
rnings and for
broader credit
+6 bps of pe
unsecured de
n a North Am
Payment-in-
early in the ye
ce, given the
ating airline ti
o be smaller t
e over the ne
nt of default,
V.
estment, we b
ects for a ref
osition by half
ancillary busi
pany initiated
alue of $55 by
oss of -16 bps
ing Credit Tra
credit trades.
an Travel Com
lling 5yr CDS
erating perfor
tial upside fro
was part of o
ws its EBITDA
use it offers si
l Aluminum C
expect to pro
ort credit trad
or idiosyncrat
um producer
osts. In additi
burn and risin
evered up to
wever, with th
n these risks.
and more tha
. At its peak s
rward outlook
t markets and
rformance on
ebt, though at
merican Trave
Kind loans (P
ear, framing it
unlikely risk o
icket sales co
han priced in
ext several ye
we sized the
believed the c
inancing dete
f at a price of
iness would g
an amendme
y offering a co
s on NAV. W
ades: Current
.
mpany: In 201
protection. T
rmance, decli
om its stake i
ur thesis for b
A. The position
ignificant ups
Company: In
ovide outsize
de opportunit
tic risk across
r facing challe
ion, the comp
ng pension lia
~3.0x by the
he credit trad

an doubled th
size, the posi
k weaker tha
d we reduced
n NAV in 2011
t around half
el Company:
PIKs) of a No
t as an out-of
of a near-term
uld be challen
by the marke
ars. Howeve
e position con
company wou
eriorated thro
$70. In Augu
generate surp
ent combined
ombination o
e have exited
tly, 18% of the
11, we initiat
The name tra
ning leverage
n a global shi
being long ris
n contributed
side even at it
our portfolio
d returns in d
ties exist beca
s different ma
enging sector
pany is expos
bilities (addin
end of 2011
ing at a sprea
he position be
tion was 3% o
n anticipated
d our short po
1. We mainta
f of peak size.
One losing t
orth American
f-the-money
m default. Alt
nged by tech
et and we for
er, given the l
nservatively w
uld likely be a
ough the 2nd
ust, the comp
prisingly large
d with a restr
of cash, 2nd li
d the majority
e Fundament
ed a long pos
ded at a spre
e, attractive r
ipping compa
sk, we were a
d +12 bps on
ts current yie
o construction
down market
ause the mar
acro environm
dynamics suc
sed to a slowi
ng 1x of lever
and up to ~3
ad of 200bps
etween Janua
of NAV. Late
d by the mark
osition. The F
ain a short po

rade in 2011
n Travel Com
put option w
though the co
nological disr
recasted the
low enterpris
with a maximu
able to refina
quarter and
pany announc
e profit declin
ucturing that
ien notes and
y of our posit
tal Portfolios
sition in a Eur
ead 150 bps w
relative value
any (via sale o
lso comforta
NAV in 2011.
eld of 8%.
n, we often
s, while limit
ket often fail
ments. In this
ch as oversup
ng macro
rage). We
.6x by 2Q 201
in early 2011
ary and May w
er in the year
ket, the name
Funds positio
osition in this
was a long
pany. We
ith rich yields
ompanys cor
ruption, we
business to
se-value cove
um size of no
nce in the cap
into the 3rd
ced that the l
nes. Less than
t effectively g
d PIK. Overall
tion.
s capital is in
ropean travel
wide to our fa
vs. other trav
or IPO). While
ble that the

6
We
ing
s to
s case,
pply,
12
1, the
when
, the
e
on in
s
s of
re
erage
o
pital
oss of
n a
gave
l the
and
air
vel
e the

company
profile. F
flow to m

Despite th
underperf
capital ma
shipping c
Second, d
headlines
the fact th
position w
impacted
The positi
maintain
1% of NAV
flexible op

(3) Stresse
opportun
the Funda

Winner -
secured b
2010, but
operation
developm
valuation
load, seco
developm

During th
prevailing
prices give
signaled a

During th
hedged th
bondhold
other bon
during the
NAV in 20

Winner - L
lien notes
hearing im
reimburse
could also wa
urther, even
eets its liquid
he business p
formed the m
arkets, invest
company stak
despite the co
s of its major c
hat, longer te
was a crowde
our position
ion cost the F
our fundame
V. We expect
perating mod
ed/Distressed
ities in stress
amental Portf
Canadian Oil
bonds of a dis
t had elected
nal history. W
ment opportun
in 2010. We
ond lien bond
ments and pot
e spring of 20
g crude oil pri
en its high co
an investmen
e 2
nd
quarter,
he companys
er group that
ndholders bac
e restructurin
011.
Long Specialt
s of a market
mpaired comm
ement rates f
alk away from
under advers
dity needs ove
performing in
market throug
tors became i
ke and that it
ore businesse
competitors
erm, the demi
d long trade
as investors c
Fund -21bps o
ntal view. Th
t the compan
del, manageab
d Credit Trad
ed/distressed
folios capital
l Sands Produ
tressed Cana
not to invest
While the com
nities, the inf
believed tha
dholders wou
tentially pay d
011, the comp
ces rallied me
ost of product
t opportunity
, we initiated
s vulnerability
t was negotia
ckstopped a r
ng process an
ty Telecomm
leader in vide
munity. The
for the compa
m this investm
se operating c
er the next tw
line with our
gh 2011 for se
ncreasingly c
might also ha
s performing
profit warnin
ise of one of
in an often te
cut risk aggre
on NAV during
he trade rema
ny to outperfo
ble maturity p
des: Outside o
d names and
is in these st
ucer: During
dian oil sands
previously gi
mpany has a ve
ferior quality
at the compan
ld likely need
down first lien
panys second
eaningfully. T
tion. Thus, a l
y.
a 0.5% of NA
y to oil prices
ating terms fo
rights offering
d we exited o
unication Pro
eo-relay inter
primary conc
anys services
ment without
conditions, th
wo years.
r expectations
everal reason
concerned tha
ave to inject c
in line with e
ngs. This new
its major com
echnically driv
essively acros
g the course
ains a core po
orm in 2012 g
profile and de
of performing
post-reorgan
tressed and d
late spring an
s producer. W
iven its unusu
ery large rese
of the compa
ny would nee
d to provide a
n debt.
d lien bonds f
The company
ower valuatio
AV position in
by shorting o
or a restructu
g, ultimately t
our position d
ovider: Durin
rpreting servi
cern for this c
s (paid for via
any significa
he company h
s, the compa
ns. First, with
at the compa
capital into th
expectations,
s weighed he
mpetitors wou
ven European
s the board f
of 2011. Des
osition in our
given the com
eclining lever
g credit, we ar
nization equit
distressed trad
nd summer 20
We had been
ually high ope
erve base whi
anys produci
ed to restruct
large rights o
fell from the
y is particular
on on the bon
n the bonds at
oil futures. S
ring with the
the company
during the 3
rd
ng 2011 we in
ces and assoc
redit has bee
a the FCCs Un
nt implication
had enough s
nys credit sig
the sovereign
ny would be
he business a
the credit tra
eavily on the c
uld be to its b
n credit mark
from August o
spite the mar
European bo
mpanys stron
rage.
re finding con
ty securities.
des.
011, we purc
following the
erating costs
ich provides a
ng wells calle
ure, and give
offering to fu
$70s into the
ly levered to
nds and highe
t an average
ubsequently
company. A
y was sold to a
d
quarter, add
nitiated a pos
ciated equipm
en uncertainty
niversal Servic
ns to its credi
ources of cas
gnificantly
n crisis closin
unable to exi
as it did in 200
aded down o
company des
benefit. Third
ket. This adve
onwards.
ket weakness
ook and is size
ng asset cover
ntinued
Currently, 17
hased 2
nd
lien
e company si
and poor
attractive
ed into questi
n its heavy de
nd future
e $40s, and
changes in oi
er oil prices
price of $45 a
we joined the
Although we a
a strategic bu
ding +13bps o
ition in the se
ment for the
y relating to
ces Fund). W

7
it
sh
g
it its
08.
n
spite
d, the
ersely
s, we
ed at
rage,
7% of
n
nce
ion its
ebt
il
and
e
and
uyer
on
econd
We

came to t
that case,
(NPRM) th
which wa
risk/rewa
substantia
pathway f
leading th
of NAV an

(4) Capita
arbitrage

Capital St
long equit
significant
aggressive
and cost t
investmen
market ca

(5) Equity
of individ
Currently,

Winner - L
two relate
continent
(GP), whic
exploratio

At the tim
their peer
the poten
this value
side cover
the retail

As our an
and the G
to <1.0x (v
pursue hig
complete
well as ID
GP is effe
acquired a
he conclusion
, the downsid
hat suggested
s favorable to
rd is even mo
ally lessened.
forward, the
he bonds to ti
nd contribute
al Structure T
trades.
tructure Trad
ty / short cred
tly undervalu
e capital struc
trends (for wh
nt is in part at
ap (~$200mm
y Trades: As p
ual issuers, an
, 9% of the Fu
Long U.S. Mi
ed energy ma
t gathering an
ch owns a dir
on and produ
me of our inve
rs despite the
ntial to drive s
creation for
rage, iii) silen
nature of the
alysis predict
GP. Through a
vs. peers of ~
ghly accretive
d increase ca
Rs, entitling t
ctively a leve
a business wi
n that the like
de was limited
d a new rate a
o the compan
ore attractive
. As the rulem
high yield inv
ighten signific
d +7 bps in 2
Trades: Curren
de within a U.
dit position in
ued given its v
cture manage
hich expectat
ttractive as a
m). The positio
part of our de
nd are finding
undamental P
dstream Ener
aster limited p
nd processing
ect stake in t
ction assets.
estment in Fe
e fact that bot
substantial gr
a number of
ce on the par
e MLP market
ted, the trans
an asset sale,
~4x). This inje
e organic grow
sh flow 50%+
the GP to an i
red play on th
ith significant
elihood of an
d. In Decemb
and methodo
ny. Despite a
than before
making is fina
vestor commu
cantly from th
011.
ntly, 11% of t
.S. Newspape
n a leading U.
valuable digit
ement opport
tions are curr
result of its h
on is sized at
tailed fundam
g attractive ri
Portfolios cap
rgy Compani
partnerships
g limited partn
he LP, incent

bruary 2011,
th entities we
rowth in distr
reasons inclu
rt of managem
t.
actions funda
the LP de-lev
ection of capi
wth projects.
+ from pre-de
increasing po
he LP. In add
t future earni
adverse regu
ber 2011 the F
ology for eval
modest rally
given that th
alized and the
unity will beg
heir current m
he Fundamen
er Publisher:
.S. newspape
al investment
tunities, and
ently very low
high debt load
1% of NAV an
mental analys
isk-reward op
pital is in equ
ies: In early 2
(MLPs). Spec
ner (LP) as we
ive distributio
both the LP a
ere engaged i
ributable cash
uding: i) the c
ment (before
amentally alte
vered its bala
tal provided t
These proje
eal levels. Sin
ortion of the L
dition, simulta
ngs power th
ulatory decisio
FCC issued a
uating reimb
in the bonds
e primary do
e company pr
gin to view the
mid-20s yield
ntal Portfolio
During 2011
er publisher. T
ts, low multip
continued un
w). This cred
d (nearly $2b
nd was flat in
sis, we evalua
pportunities i
ity trades.
2011, we initi
cifically, we p
ell as an inter
on rights (IDR
and GP were
in transforma
h flow. The m
omplexity of
e their equity
ered the cash
nce sheet fro
the company
ects have ROIC
nce the GP ow
LPs cash flow
aneous with t
hat the marke
on was very l
notice of pro
ursement to
subsequent t
ownside risk is
rovides new g
e name in a d
d. The positio
os capital is in
we significan
The company
ple, liquidity r
ncertainty in i
it-equity cap
bn) relative to
2011.
ate the entire
n select equit
ated position
purchased an
rest in the LP
Rs) in the LP a
trading at sim
ational transa
market was fa
the transacti
incentives kic
h flow profile
om ~3x net de
y with substan
Cs of 25%+, a
wns a direct st
w and cash flo
the LPs asset
et failed to ide
ow and, even
posed rulema
the industry
to the NPRM,
s now
guidance and
different light
n is sized at 0
n capital struc
ntly increased
ys equity is
runway,
industry reve
ital structure
o its very sma
e capital struc
ty securities.
ns in the equit
interest in a m
s general par
and attractive
milar yields to
actions that h
iling to ident
ions, ii) lack o
cked in) and i
s of both the
ebt/LTM EBIT
ntial liquidity
and when
take in the LP
ow increases,
t sale, the GP
entify as it wa

8
n in
aking
, the
a
t,
0.6%
cture
d our
enue
ll
cture

ty of
mid-
rtner
e
o
ad
ify
of sell
iv)
LP
TDA
to
P as
the
as an

immateria
double its

We contin
appreciat
natural ga
place and
NAV in 20

(6) Other
portfolio t
several of
Portfolio
balance lo
that slowi
some of w

Winner -
mispriced
benefitted

A major b
proximity
extremely
necessary
shocks to
substantia
all maturi
into optio
gave us th
year recei
extreme,
roughly 5
modest, w
to around

During 20
implied vo
position a
they are a

II. Structu
At year-en
BMCAs n
(2) asset-
trading. P

al portion of t
s distributable
nue to be act
ion in value in
as impacts bo
the ability of
011.
Trades/Macr
to understan
f these scenar
s capital. In l
osses that ma
ing Chinese g
which we are
Macro hedge
d. One of the
d greatly from
beneficiary of
y to China. Ac
y accommoda
y. We expect
global growt
ally. We foun
ty dates rang
ons on swap r
he right to rec
iver swaption
if the one-ye
points, for a
we thought th
d 3% during th
011, as fears o
olatility picke
as the risk/rew
attractively pr
ured Credit P
nd, 32% of ca
et return for
-backed secu
Please note al
the entity fro
e cash flow be
ive in these n
n 2011 and th
oth the GP an
f the GP to di
ro-Hedges: A
d the impact
rios through s
arge adverse
ay occur elsew
growth could
long.
e: We are alw
areas that w
m Chinas infr
this boom ha
ccordingly, int
ative moneta
ed that if Chi
th expectation
nd that Austra
ging between
rates was very
ceive a 5% fix
n). At trade in
ar interest ra
return of 19x
here was a go
he 2008-9 fin
of a global slo
ed up. As pric
ward no longe
riced. This po
Portfolio
apital was de
the year. Ou
ritizations, (3
l performanc
om which it w
ecause of the
names, and ha
he recent sell
d LP, we are c
versify away
As part of our
of various ma
sovereign and
moves, these
where in our
significantly h
ways on the lo
e have focuse
rastructure an
as been Austr
terest rates in
ry policy expr
nas economy
ns) Australia w
alias interest
5%-6%. Furth
y reasonable.
xed rate for o
nception, we
te two years
x our investm
ood chance th
ancial crisis),
owdown incre
ces for our sw
er looks as co
osition contrib
ployed in our
ur investment
3) relative va
e figures belo
as acquired.
e ramp of the
ave trimmed
off in natura
comfortable w
from the com
r portfolio con
acro environm
d other hedge
e hedges prov
portfolio. A
hurt many co
ookout for tra
ed on has bee
nd real estate
ralia with its r
n Australia ar
ressed by oth
y were to slow
would be hig
t rate swap cu
her, we found
. Putting this
ne year, two
paid roughly
from now we
ment. Even in
hat Australian
resulting in a
eased, rates in
waptions have
ompelling as i
buted 22 bps
r Structured C
ts span across
alue syntheti
ow are on a g
The GP had
e LP and its ow
our position
al gas. While
with the expo
mmodity. The
nstruction, w
ments and sc
es, represent
vide asymme
particular are
ompanies and
ades where w
en commodit
e boom.
rich natural re
re the highest
her countries
w down (or if
hly likely to lo
urve was very
d that the im
together, we
years in the f
25 bps of pre
ent to 0%, ou
scenarios wh
n swap rates c
a return close
n Australia be
e risen, we ha
it did initially,
on NAV in 20
Credit Portfol
s (1) collatera
ic tranche tr
gross basis.
the ability to
wn assets.
(~0.5% of NA
the decline in
osure given h
e positions ad
we constantly
cenarios. We
ting 4% of the
etric returns a
ea of concern
d industries ar
we believe ris
ty producers w
esources and
t in the develo
central bank
f there were a
ower interest
y flat with int
plied volatilit
e bought two
future (know
emium for th
ur options wo
here Chinas s
could fall to 2
er to 10x our i
egan to fall as
ave monetized
, though we s
011 and is size
lio, which con
alized loan ob
rading, and (
o more than
AV) given both
n the price of
hedges that ar
dded +15bps
stress test th
e addressed
e Fundamenta
and help to
n is the possib
round the wo
k is
who have
geographic
oped world a
ks has not bee
any other ma
t rates
erest rates ac
ty being price
year options
n as a 2 year
is option. In
uld be worth
slow-down w
2-3% (they dip
investment.
s low as 3.7%
d a portion of
still believe th
ed at 0.2% of
ntributed 0.8
bligations (CL
4) credit vol

9
h the
f
re in
on
e
al
bility
orld,
as the
en
ajor
cross
d
s that
x 1
the

as
pped

%, and
f our
hat
f NAV.
4% to
LOs),
atility

(1) Collat
CLOs cont
Structure
in 2011, C
these pos
name cred

At year-en
(2% annu
the vintag
2011 as in
generate
the sprea
widened a
stay comf
leveraged
further su
percentag
quarterly
CLOs to re

Our CLO e
are within
issue loan
team whe
pools of lo
last defau

The new i
2011, as s
Capital M
issuing ou
of 2011. B
tranches o
More bro
profile in
earlier vin
market, th
CLOs are o
Additiona
attractive
given its l
structure.


5
Source: S&P
6
Based on Bl
7
Source: S&P
8
Please note
teralized Loan
tinued to be s
d Credit Portf
CLO equity wa
sitions with sh
dits.
nd, our CLO e
al default rat
ge and quality
nvestors were
an attractive
d volatility an
and increasin
fortable takin
d loans fell to
upported by h
ge of equity t
cash flows ha
einvest in hig
equity purcha
n their reinve
ns. In addition
en analyzing n
oans and rece
ult cycle and h
issue CLO ma
shown in Figu
anagement c
ur own new $
BMCA investe
of the BlueM
adly, while th
new issue CL
ntages availab
he pools of lo
of better cred
ally, we contin
e way to acces
ocked-in liabi
.

P LSTA
ueMountain analy
P LSTA
that BlueMounta
n Obligations
strong perfor
folio, returnin
as the largest
horts in the C
equity positio
e, 60% recove
y of the deal.
e attracted to
convexity (hi
nd convexity o
ng it as spread
g first loss ris
0.17% by pri
higher quarte
ranche notion
as been drive
her spread, n
ases in 2011 c
stment perio
n we continu
new CLO loan
ent new loan
how the pools
rket picked u
ure 5. BlueM
capitalized on
361mm CLO
ed in the equi
ountain man
he absolute re
Os is lower th
ble in the seco
oans in the ne
dit quality.
nue to find CL
ss the loan m
ility (term fu

ysis of portfolio ho
in does not double
s (CLOs)
rmers in 2011
ng 2.2% on NA
outperforme
DX HY index a
ns were mark
ery on secure
Equity valua
o the high qua
igh upside/lo
of our positio
ds tightened.
sk. As of Dece
ncipal amoun
rly coupons,
nal values in
en by a high p
new issue loan
continued to b
d and accord
e to leverage
n portfolios. W
purchases to
s are position
up steam in
ountain
n this by
in August
ty and BB
aged CLO.
8

eturn
han that of
ondary
ew issue
LOs as an
arket
unding)
oldings.
e charge fees for t
1, generating t
AV. While we
er. We contin
and the idiosy
ked between
ed loans, 17.5
ations remain
arterly coupo
w downside)
on by reducing
Additionally,
ember 2011,
nt and 0.62%
which increas
2010 to 8.0%
repayment ra
ns, which ofte
be focused on
ingly are able
e the fundame
With our rese
o determine h
ned going forw
these investments
Figure 5: An

the vast majo
e invested ac
nue to hedge
yncratic risk u
18%-22% IRR
5% annual pre
ed strong thr
ons and relativ
profile. We
g our CDX HY
, defaults rem
the lagging 1
by number o
sed from an a
% by the end o
ate of older v
en have LIBO
n 2005-2007
e to take adva
ental views o
earch teams
how the CLO m
ward.
s.
nnual CLO Iss
ority of profit
cross the CLO
and manage
using shorts i
R, under our b
epayment rat
roughout the
vely long fina
were able to
Y market hedg
mained low, h
12-month def
of loans.
5
Valu
average of 6.3
of 2011.
6
The
vintage loans
R floors.
U.S. deals as
antage of hig
f our 19 pers
help, we focu
manager trad
suance (2001
ts in our
capital struct
the market r
n select singl
base case sce
te), dependin
volatility see
al maturity tha
take advanta
ge as spreads
helping invest
fault rate for
uations were
3% as a
e increase in
that allow th
those vintag
h spreads on
on credit rese
us both on ex
ded through t
2011)
7


10
ture
risk of
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at
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too large
summer b
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Funds BB

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supported
liabilities,

(2) Relativ
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Most of th
second qu
100% (lon
and gener
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corporate

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were driv
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our unsec
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pricing in
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part of the ye
in our view. W
because mark
1200-1400 bp
B CLO position
arize, we stea
s capital at th
d by fundame
strength of t
ve Value Tran
ive Value Tra
hese losses w
uarter we init
ng senior vs. s
rate returns i
sitive to an in
orting senior
ur long 12-22%
ut the positio
ong by almost
e credit defau
posted mode
n junior mezz
efaults in som
ructure, leadi
new particip
on proprietary
pace. Away f
in our synthe
ple, we were
ul losses cam
e are pleased
2012, where
tion book). B
t-Backed Secu
ncy Mortgage
s Non-Agenc
en by underp
d high-yield c
cured shorts w
n U.S. homeb
a much more
ity, we began
ear we began
We also starte
ket volatility i
ps in spread t
ns in 2012.
adily increase
he start of 20
entals and con
the underlying
nche Trading
nche Trading
were generate
tiated a long i
short super se
n a market sp
ncrease in sys
ITRX tranches
% v short 22-
n significantly
t 40% and ad
ults.
est gains in th
zanine (3-7%)
me high yield
ng to a widen
ants and som
y and interme
from this we l
etic CDO book
flat credit ris
me from expos
d to announce
we are taking
BMCA will pa
uritizations
e Securitizati
cy Mortgage s
performance o
corporate cred
were up +30b
uilder positio
e bullish hous
n investing in
purchasing A
ed selectively
ncreased and
terms. These
ed our second
11 to approxi
ntinue to offe
g asset class a
g
g strategies pe
ed from our tr
in the ITRX9 2
enior), sized a
pread widenin
stematic risk.
s to hedge Eu
100% positio
y, unwinding
ding a 9-12%
he rest of the
tranches of t
credits led in
ning in the 3-
me of the large
ediary trading
largely avoide
k, leveraging
sk to defaultin
sure to Eastm
e that we suc
g over their le
rticipate in th
ions
strategies rea
of the RMBS
dit market. O
bps on NAV. O
ons which we
sing forecast t
other parts o
AA notes as th
y buying the B
d drove down
e are attractiv
dary market C
imately 8% at
er attractive r
and the high
erformed poo
rades in senio
2018 12-22%
at a ratio of 1
ng environme
However, as
uropean sove
on to significa
the entire 22
tranche shor
synthetic CD
the CDX9 ind
nvestors to re
7% tranche.
er market pa
g desks at ban
ed losses from
our large and
ng credits Dyn
man Kodak wh
cessfully clos
egacy corpora
his investmen
alized losses o
market relati
On a gross bas
Our short por
increased wh
than that imp
of the capital
he price betw
BB part of the
n BB pricing. C
ve levels and w
CLO exposure
t year-end. T
returns, given
cash flows.
orly in 2011, l
or tranches o
tranche vs. a
1:3. We expec
ent, where su
s the market
reign and idio
ntly underpe
2-100% tranch
rt to hedge ri
DO strategies
ex. This posit
ethink their po
Volatility in t
rticipants of t
nks) have less
m idiosyncrat
d strong fund
negy, PMI and
hich weve su
sed a transact
ate synthetic
nt, representi
of 40bps on fu
ive to the to t
sis, our RMBS
rtfolio perform
hen homebui
plied in the R
structure in U
ween AAAs an
e CLO capital
CLO BBs close
we will contin
e over the yea
These CLO po
n very low fix

losing 30bps
f the ITRX ind
a short in the
cted the posit
uper senior tr
began to we
osyncratic cre
rform. By th
he short, red
sk of a pick-u
as we mainta
tion perform
ositioning in j
tranches was
the past (nam
s hedging nee
tic credit defa
amental cred
d American A
bsequently fl
tion with Cred
structured c
ng a 4% of NA
und NAV (gro
the Funds he
S longs lost 70
mance was bo
ilders credit s
MBS market.
U.S. CLOs. Du
nd AAs had gr
structure ove
ed the year tr
nue to add to
ar, from 5.5%
sitions are we
ed cost of the
on NAV (gros
dices. During
ITRX9 2018 2
tion to trade s
ranches would
aken, investo
edit risk. This
he end of the
ucing the 12-
up in Europea
ained a small
ed well in the
junior parts o
low as there
mely bespoke
eds in the ind
aults and cred
dit research te
Airlines. The o
attened out.
dit Agricole in
redit portfoli
AV position.
oss). The loss
edges in the
0bps on NAV
olstered by 1
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11
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of
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g the
22-
short
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year,
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n
short
e Q4
of the
have
ex
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eam.
only
n
o
es
and
3bps


Despite p
of credit m
Prepayme
decline an
to decline
behavior.
principal a
This unde
our team
impacted

Going forw
late 2009
look to se
dramatica
exposure
loan-to-va
and attrac
severe rec
severities
will look t

Consumer
Non-mort
early gain
volatility.

Despite th
performa
and delinq
performa
addition t
has remai

Over the c
negotiate
with smal
consumer
investmen
money-ce
investmen
regimes. A
themselve
market or
BlueMoun
and senio
subordina
rice declines
markets, non-
ents remained
nd liquidation
e moderately
Servicers, w
and interest p
erscores the im
has always b
as others in t
ward we see
. We expect
ell. The prima
ally. We see t
to this sector
alue and high
ctive base cas
cession type s
than current
to increase ou
r/Non-mortg
tgage ABS str
ns during the f

he debt conce
nce in ABS co
quencies. Wh
nce began a r
to the strong
ined relativel
course of the
d transaction
ler specialty f
r debt investo
nts and gener
enter capital s
nts, as well as
As a result th
es with limite
r well enough
ntain can help
or liability cost
ate debt and e
from the gov
-Agency mort
d low, severit
n speeds rema
and stabilize
who have limit
payments to
mportance of
een focused
the market.
opportunity t
supply to inc
ry dealer com
his trend con
r. Securities b
h loan balance
se returns of
scenario (e.g.
t levels and lo
ur positioning
gage ABS
ategies earne
first quarter a
erns surround
ollateral conti
hereas 2010 s
return to nor
fundamental
y tight throug
e year, BlueM
n (vs. seconda
finance comp
ors and issuer
rally have a n
sources have
s ration capita
ere are succe
ed capital opt
h capitalized t
p fill this gap.
ts remaining
equity invest
vernments sa
tgage fundam
ties increased
ained steady.
d. The main
ted free cash,
bond holders
f understandi
on. Consequ
to add non-ag
rease as Euro
mmunity took
ntinuing throu
backed by op
e are currentl
15%. These o
., liquidation
oan modificat
g opportunist
ed +14bps on
and we reduc
ding Europe a
inued the stre
saw a sharp r
malcy, with s
performance
ghout the yea
ountains ABS
ary market an
panies, we tak
rs. ABS bond
eed for great
withdrawn c
al usage in th
essful and we
ions since the
to warrant a w
With collate
close to all-ti
ments.
ale of its Maid
mental perfor
d modestly, th
. Additionally
fundamental
, became mo
s, especially in
ing servicer in
ently, the sec
gency mortga
opean banks a
k significant lo
ugh 2012 as d
ption arm coll
y the best op
option arm su
of nearly all t
tions that furt
ically in the y
fund NAV (g
ced exposure
and perceived
ength exhibit
reversal of fin
table perform
e, ABS supply
ar, buoying bo
S team has pl
nd new issue A
ke advantage
investors are
ter liquidity.
apital to cons
he face of mo
ll managed sp
ey are not lar
warehouse ba
eral performa
me lows, it is
den Lane II po
mance was st
he rate of new
y, the percent
change over
re aggressive
n low loan ba
ncentives and
curities we ow
age exposure
and other hol
osses in 2011
dealers restru
ateral with lo
pportunity wit
uper seniors a
the collateral
ther reduce p
year ahead.
ross) during t
before the o
d economic w
ed in 2010, w
nancial crisis w
mance and re
y (both new is
ond spreads a
laced increas
ABS bonds).
e of the growi
e naturally co
At the same t
serve equity a
re conservati
pecialty finan
rge enough to
anking relatio
ance and lend
s a great oppo
ortfolio and g
table through
w delinquenc
t of delinquen
r the year was
e in refusing to
alance subprim
d behaviors, a
wn were not
e at price leve
lders of non-c
and has redu
ucture trading
ow enhancem
th good down
are priced to
at 5-10 point
payments to t
the year. The
onset of macr
weakness in th
with historical
weakness, 20
eturning seaso
ssue and seco
and limiting p
ed emphasis
In these priva
ing capital im
onstrained to
time, traditio
and address b
ive regulatory
nce companie
o access the s
onship. Inves
ding spreads a
ortunity for u
eneral widen
hout the year
cies continued
nt loans conti
s in servicer
o advance
me collateral.
and is an area
as adversely
els not seen si
core dollar as
uced risk appe
g desks to red
ment, relative
nside protect
yield 5-7% in
ts higher
the bonds). W
strategy pos
oeconomic
he U.S.,
lly low defaul
011 collateral
onal trends.
ondary marke
price weakne
on privately
ate transactio
mbalance amo
CUSIP based
onal lenders a
bad legacy
y and capital
es that find
securitization
stors like
at historic hig
s to invest in

12
ning
r.
d to
nued
.
a that
ince
ssets
etite
duce
ly low
tion
n a
We
ted
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In
et)
ss.
ons
ong
and
ghs,


(4) Credit
Credit vol
portfolio
more acti
We profit
options a
sovereign
addition,
buying U.

III. Arbitra
At year-en
to BMCA
underlyin

(1) Index A
Index Arb
Index Arb
names of
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the const
they trade
its entiret

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rebuilding
or the em
2011 with
portfolio
the embe
fund were
tightly mo
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monitorin
may take
same seri

These pos
U.S. credi
U.S. credi
remained
significant

9
Steepeners
long 5-year v
maturity inst
t Volatility Tra
latility strateg
performed w
ive in credit o
ted on our c
and spreads
n and crossov
we did well
S. volatility.
age & Techni
nd, 15% of ca
s net return f
g risk. Pleas
Arbitrage & R
bitrage and Re
bitrage exploit
the indices.
macro views o
ituent names
e at different
ty with the sin
bitrage and Re
g our arbitrag
mbedded prof
h just $26mm
(+12mm) tra
edded profits
e short positio
onitor and lim
sted in this st
Value Index Tr
ng of all CDS i
relative value
es (i.e., curve
sitions perfor
t indices, hed
t index and a
relatively ste
tly (Figure 6)

are constructed w
s. short 10-year in
rument and long i
ading
gies identify m
well over the y
options in the
credit volatil
on indices.
er CDS indice
in cross regi
cal Portfolio
apital was de
for the year. W
e note all per
Relative Valu
elative Value
ts the near-te
These mispri
on credit pa
s and the inde
spreads. We
ngle name co
elative Value
ge book, after
its in the port
of profit to m
ding in and o
to $59mm (g
ons in off-the
mit the size an
rategy.
rading is an e
ndices, we ar
e positions in
e trades).
rmed well dur
dged with ma
flattener in t
eep despite th
as markets b

where you are posi
n a credit derivativ
n a longer dated in
mispricing in
year, posting
e U.S. and Eu
ity trading in
For instance
es vs. buying
ion trades, sp
ployed in our
We continue
rformance fig
ue Index Trad
Index Trading
erm price disc
cings occur a
rticularly in p
ex must conve
e execute the
nstituents.
Index trades
r strong perfo
tfolio if all ou
make in the fu
out of HY and
ross), setting
e-run 10yr CD
nd risk of our
extension of o
re able to iden
different ser
ring the year,
rket shorts. I
the high yield
he relatively h
ecame more
itioned long in a sh
es index). Flatten
nstrument (e.g. sh
credit volatili
+23bps on fu
urope, as liqu
n both regio
e, in Europe
volatility on f
pecifically se
r Arbitrage &
d to pursue m
gures herein a
ding
g performed w
crepancies be
s many mark
periods of ma
erge to the sa
ese trades on
returned +1%
ormance in 20
r arbitrage po
und. We sho
European pa
g us up for a s
DX IG indices,
arbitrage pos
our Index Arb
ntify misprici
ries of the sam
with the maj
n 2011, we in
d U.S. credit in
high level of s
volatile.
horter dated matu
ers are constructe
hort 5-year vs. long
ity across reg
und NAV. In
uidity improv
ons by oppor
, we gained
financials and
lling elevated
& Technical Po
mispricing acr
are on a gross
well in 2011 r
etween CDS in
et participant
rket volatility
ame price, th
a fully hedge
% on NAV in 2
010 left us wi
ositions move
wed small ga
ackages in 201
trong 2012.
fully hedged
sitions, and a
itrage strateg
ngs of one in
me index or in
jority of gains
nitiated a stee
ndex.
9
As cre
spreads, whil
urity instrument a
ed where you are
g 10-year in a cred
gions, indices,
n 2011, the F
ed significant
rtunistically b
from selling
d investment
d European c
ortfolio, and
ross instrume
s basis.
returning +1%
ndices and th
ts use the ind
y and market
ere is a perio
ed basis, repli
2011. 2011 w
th limited Co
ed to fair valu
ains in the arb
11, and simul
The largest e
with single n
re currently a
gy. Through o
dex relative t
n different m
s coming from
epener in the
edit spreads w
e high yield c
nd short in a longe
positioned short i
dit derivatives inde
, and sectors
und became
tly in this pro
buying and s
g volatility o
t grade indice
credit volatili
contributed 0
ents with the
% on NAV (gro
he constituent
dex exclusivel
declines. Wh
od of time wh
cating the ind
was a year for
onvergence P
ue. We starte
bitrage
ltaneously gre
xposures in t
ame CDS. We
approximatel
our close
to another. W
aturities of th
m curve trade
e investment g
widened, IG in
curves flatten
er dated instrume
n a shorter dated
ex).

13
. This
much
oduct.
selling
n the
es. In
ity vs.
0.81%
same
oss).
t
ly to
hile
ere
dex in
PnL,
ed
ew
he
e
y
We
he
es in
grade
ndices
ned
ent (e.g.



The move
(1.9% in 2
extend th
high yield
defaults, i

(2) Bond B
Our Bond
positions
holdings a
generated
basis. Giv
trades, we
generatin

(3) Cross M
As part of
mispricing
technicall
did very w
we under
down ma
technical

IV. Count
At year-en
return for
index and

10
Source: Sta
Figure 6:
e in curves wa
2011 vs. 5.3%
eir hedges in
curves flatte
including Am
Basis
Basis portfol
continue to b
are in matche
d small gains
ven the high f
e do not antic
g performanc
Market
f our arbitrag
g across vario
y driven. Thi
well selling inv
performed o
rket. We wer
credit trading
erparty & Po
nd, our Other
r the year. Th
d S&P futures

andard & Poors LC
CDX HY 3s5s
as consistent
in 2008, 9.6%
longer dated
ened dramatic
erican Airline
lio performed
be related to
ed maturity a
in 2011, mos
financing cost
cipate materi
ce for the Fun
e and technic
ous markets t
s portfolio un
vestment gra
n our view th
re net flat on
g and hedges
ortfolio Hedge
r portfolio acc
his portfolio in
.

CD; represents the
s: Jan 11 De
with our expe
% in 2009 and
d maturities, a
cally on fears
es, Dynegy an
d modestly in
our fundame
nd entity bon
tly in the US o
ts for cash bo
ially grow this
nd.
cal strategy, w
hat we trade
nderperforme
de credit vola
hat high yield
a variety of o
.
es
counted for 2
ncludes coun
e percent of issuer
ec 11
ectations. Ev
d 4.3% in 201
allowed IG cu
of increased
d PMI.
2011, gainin
ental investing
nd basis arbi
on both inves
onds relative t
s portfolio in
we seek to ide
(e.g. credit v
ed modestly i
atility and bu
credits would
other position
2% of capital a
terparty and
s in payment defa
ven in a sell-o
0)
10
combine
urves to retain
systemic risk
g 22bps on N
g strategies, w
trage trades
stment grade
to the carry a
2012 and exp
entify fundam
vs. equity) wh
in 2011, losin
ying equity v
d outperform
ns, including f
and contribut
portfolio hed
ault or bankruptcy
off, extremely
ed with invest
n their steepn
k and idiosync
NAV. Most of
while a small
s. The arbitra
e and high yie
advantage of
pect the book
mentally or te
ether fundam
ng -12bps on N
olatility in de
m stocks in the
foreign excha
ted 0.16% to
dges with sho
y

y low default
tors continuin
ness. Conver
cratic high yie
our cash bon
portion of ou
age book
eld bond
bonds vs. CD
k to continuin
echnically driv
mentally or
NAV. While w
elta hedged tr
e U.S. in a flat
ange volatility
BMCAs net
orts in the CD

14
rates
ng to
rsely,
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d
ur
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rades,
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BlueMoun
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15
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