Boussard & Gavaudan : BGHL January 2017 Monthly statement

A closed-ended investment company incorporated with limited liability under the laws of Guernsey with registration number 45582

1. BG FUND

   Note that trade examples detailed in each strategy below are among the best and worst performances of the month.

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   COMMENTARY AND HIGHLIGHTS

   After the year-end rally, European equity markets were negative in January with realized and implied volatilities cooling down substantially. In this context, BG Fund ended the month up 0.57% for the USD share class, mainly driven by idiosyncratic gains in equity strategies. This positive performance was somewhat offset by volatility trading which suffered from the low volatility environment.

   Eurostoxx 50 finished January down -1.8% on the month. VStoxx ended at 17.4%, down from 18.1%. iTraxx Crossover (S26) ended January at 301bps (13bps wider on the month).

   Volatility Strategies

   Mandatory convertible bond arbitrage

   1 The total value of the investments of BGHL is based on the final NAV for the euro and sterling shares and the currency exchange rate for the Sterling vs. Euro.

   Mandatory convertible bonds contributed positively this month. Flows were muted except for the Bayer mandatories. Changes in valuations were marginal.

   Convertible bond arbitrage

   Convertible bond contribution (excl. mandatories) to the performance of the fund was positive in January.

   As mentioned in previous newsletters, we sold a large portion of our CBs holdings during December. We continue to think that valuations remain high given the available cash in long-only funds is more limited. We have retained a few CB special situation positions where we believe current valuations represent an opportunity. The secondary market remained very quiet, a big issue for brokers and for liquidity in general.

   The primary market was limited in January which helped to support valuations in the secondary market. Two out of the four new issues were non-dilutive CBs. As highlighted in our last newsletter, we believe that this arbitrage of creating synthetic zero and negative yield vanilla debt for the issuer is cannibalising the convertible bond market.

   Volatility Trading

   Realized Vol	Spot level 30/12 (VIX / V2X)	Monthly realized Vol (ES1 / VG1)	Difference
   US	14.0	6.4	-7.6
   EUROPE	18.1	10.0	-8.1
   Implied Vol	Fev. Vol Index Fut as of 30/12	Feb. Vol Index Fut as of 31/01	Vol move
   US	16.6	13.3	-3.30
   Europe	22.0	18.6	-3.40

   Performance over January was poor due to very low realised volatilities on the major equity indices.

   As an example the 1-month and 2-month realised volatilities reached a 10-year low in January. The low realised volatilities led to a decrease in implied volatilities across the term structure, most notably on the Eurostoxx 50. Some of the gains made over December on implied volatility had not been fully monetised and the move in January negated Decembers gains and more. Portfolio losses were 40% due to theta and 60% attributable to the implied volatility move. The traditional hedges that we use to offset decreasing volatilities were not attractive enough and did not prove effective.

   On the positive side, given the adverse move we saw several opportunities to increase a number of positions which we remain confident on. We were also pleased with the profit made on the FX portfolio.

   Going into February our portfolio retains the same broad profile and main positions that we had at the beginning of January. We remain relatively long equity volatility (mainly through Eurostoxx 50) and have limited offsetting positions should volatilities decrease further.

   Equity strategies

   Although we feel the environment remains uncertain, with big questions surrounding Donald Trump's next moves and the forthcoming elections in Europe (particularly France), equity markets were relatively stable in January, with extremely low realised volatility. Despite low volatility on the broad indices there was lot of dispersion within Individual stocks which saw significant moves on idiosyncratic news.

   Our portfolio overall returned positively for January. Our option hedges cost us, especially on indices, due to low volatility, however performance was helped by our long gamma on single names, particularly around earnings, and on stocks that were impacted by the market rotation/reflation trade.

   In January, corporate activity picked up significantly: there was a bid on Actelion from Johnson & Johnson, Essilor and Luxotica announced a merger, British American Tobacco improved the terms of its offer on Reynolds American among several others. We benefited from this activity on a number of our positions and we believe this theme will remain a key driver of performance in the coming months.

   Credit strategies

   Capital Structure Arbitrage

   Capital structure arbitrage was flat this month. The market has been very range bound and volatilities remained subdued in all asset classes. This quiet environment prevents us from trading actively around our existing positions and no new opportunities presented themselves. We continue to carefully monitor cross asset dynamics and in order to identify new idiosyncratic situations.

   Credit long / short

   Credit long / short trading contributed positively in January.

   Despite underlying weakness in rates, credit markets outperformed this month. This was particularly true for high yield and subordinated financials given their lower sensitivity to rates than the investment grade bucket.

   Inflows into credit combined with a fairly low volatility environment on the macro-front set the scene for an active primary market; issuance was mainly from investment grade corporates and financials taking the opportunity of an issuance window and bringing forward their 2017 refinancing programme. Our portfolio benefited in particular from the proactive refinancing by Groupama of its short dated subordinated instruments. The refinancing was to effect an optimisation of its capital structure for the Solvency 2 regulatory capital environment and an extension of its debt maturity profile.

   Elsewhere in the book, secondary market levels rose due to the well-received primary issuance. This was particularly true in the Additional Tier 1 asset class. As a result, most of our long cash positions outperformed their hedges (CDS or stock).

   Finally, the active primary market created some trading opportunities. For example, Rabobank's €1.5bn tap of its Core Tier 1 certificates outperformed in secondary markets, trading c. 3% above issuance pricing just a few days after placement.

   Credit special situations

   Credit special situations contributed negatively in January. The negative contribution came mostly from CGG high yield bonds. The situation has continued to develop since the Q3 results last November when the company announced it intended to address the issues in its capital structure. CGG reiterated in January that they intend to implement a financial restructuring to improve the company balance sheet and restore its financial flexibility.

   Trading

   Trading contributed positively of which a main part came from quantitative equity trading, some negative from systematic trend following and negative from others.

   A new sub-strategy has been implemented in trading relying on artificial Intelligence. Investment and allocation decisions are based on ideas generated by a process designed and maintained by Arnaud de Servigny and his team at Bramham Gardens Investments Limited with whom BG has entered into an exclusive partnership.

   In his last position, Arnaud was the Head of the Multi-Asset Group (MAG) and Wealth Management Chief Investment Officer (CIO) at Deutsche Asset & Wealth Management. Arnaud holds a PhD in Financial Economics from the Sorbonne University, an MSc in quantitative finance (DEA) from Dauphine University, and a Civil

   Engineering MSc from the Ecole Nationale des Ponts & Chaussées in Paris. Publications include many papers and articles as well as five books: the first on monetary policy and fixed income, the second and third on credit risk management, the fourth on structuring and the last on asset management and behavioural finance.

2. DIRECT INVESTMENTS OTHER THAN BG FUND

   On top of its investment in BG Fund, BGHL has other investments. As of 31 January 2017, the net asset value of these investments represents approximately 6% of the net asset value of BGHL.

   Rasaland Investors ("RLI")

   RLI is a Malta-based holding company structured as a private equity fund in terms of fees and organisation and managed by BK Partners. RLI is dedicated to investing in land, hotels and high-end resort developments in Mexico. RLI has invested and is developing the Mandarina, Xala & Seramai resorts in Mexico. RLI's initial business was, soon after launch, affected by several adverse events which have changed the exit solution and the time schedule considered initially. RLI has mitigated the risk of running out of cash by selling in 2012 a stake in one of its land projects to a large Mexican institutional pension fund, raising USD 80 million with the National Infrastructure Fund and by listing (IPO) in November 2015 RLI's hotel subsidiary on Mexico's exchange, raising a total of USD 27 million. The subsidiary is the owner of the Four Seasons hotel in Mexico City acquired in May 2013.

   In February 2015 BK Partners entered into an agreement with Kerzner International Holdings Limited to develop and operate two new One&Only resorts in Mandarina and Xala, on the Pacific Coast of Mexico. RLI is currently focused on the development of the One&Only hotel of the Mandarina project. This development is likely to accelerate the liquidity to RLI's investment in Mandarina through the sale of land parcels as well as private residential estates.

   GFI Informatique

   BGHL holds GFI shares. GFI is a major player in value-added IT services and software in Europe. GFI is listed on the Paris Euronext, NYSE Euronext (Compartment B) - ISIN Code: FR0004038099.

   On 23 November 2015 Mannai Corporation ("Mannai"), together with Apax France (jointly with Altamir) and Boussard & Gavaudan, announced having entered exclusive negotiations for Mannai to purchase a 51 percent equity stake in GFI at a price of €8.50 per share. The press release is available at: http://www.bgholdingltd.com/uploadImages/File/ACTUS-0-42198-151123_PR_Gfi_EN.pdf.

   On 8 April 2016 Mannai acquired from entities managed by Apax, including Infofin Participations Sàrl ("Infofin"), and Boussard & Gavaudan (the "Sellers") 25% of the GFI share capital and voting rights (on a fully diluted basis) at €8.50 per share. Mannai and the Sellers entered a shareholders' agreement providing that they will act in concert. Following this transaction, BGHL received repayment of the Infofin bonds. On 19 April 2016 Mannai filed a cash tender offer on GFI which closed on 15 June 2016. On 20 June 2016 the Sellers completed a second block sale to Mannai at €8.50 per share so that Mannai holds 51% of the share capital and voting rights of GFI on a fully diluted basis.

3. BOUSSARD & GAVAUDAN INVESTMENT MANAGEMENT UPDATE

   TRANSA CTION IN T H E COMP ANY'S SECURIT IES

   Please note that transactions in the Company's securities that have been performed by officers, directors and persons referred to in the section 5:60 of the Financial Supervision Act ("Wft") are reported:

   • directly on the AFM website: www.afm.nl (professionals > registers > notifications > insider- transactions 5:60 wft);

   • on the Company's website through a link to the AFM notification: www.bgholdingltd.com (Investment Manager > Regulatory information).

Transactions in the Company's own securities are also reported on: