Tetragon Financial Group
Annual Report 2015

Plain-text annual report

2015 Annual Report Tetragon Financial Group Limited 2015 Annual Report Tetragon Financial Group Limited 2015 Annual Report Contents 1 5 9 14 19 30 32 39 40 40 41 42 43 46 50 51 56 59 63 64 Letter to Shareholders TFG Overview Key Metrics 2015 in Review TFG Asset Management Overview Corporate Responsibility 2015 Financial Review Appendices Appendix I: Directors’ Statements Appendix II: Certain Regulatory Information Appendix III: Fair Value Determination of CLO Equity Investments Appendix IV: Fair Value Determination in TFG Asset Management Appendix V: Reconciliation between U.S. GAAP and Fair Value Basis Appendix VI: Additional CLO Portfolio Statistics Appendix VII: Share Reconciliation and Shareholdings Appendix VIII: Additional Corporate Information Appendix IX: Board of Directors and the Audit Committee Appendix X: Risk Factors Shareholder Information Endnotes Tetragon Financial Group Limited 2015 Audited Financial Statements Tetragon Financial Group Master Fund Limited 2015 Audited Financial Statements TFG: Delivering Results Since 2005(1)(i) Figure 1 RETURNS ROE TARGET(ii) AVERAGE ROE(iii) 2015 ROE 10-15% 13.5% 14.5% Annualised range Since April 2007 IPO 31 December 2015 SHAREHOLDER RETURNS(iv) ONE YEAR THREE YEARS FIVE YEARS SINCE APRIL 2007 IPO +7% to 31 December 2015 FTSE All-Share: +1% +7% Per annum to 31 December 2015 FTSE All-Share: +7% +18% Per annum to 31 December 2015 FTSE All-Share: +6% +7% Per annum to 31 December 2015 FTSE: All-Share: +4% RETURNING VALUE DIVIDEND YIELD 2015 DIVIDEND COVER(v) 7% 4x 31 December 2015 31 December 2015 DIVIDEND GROWTH FIVE-YEAR CAGR 13% Per annum to 31 December 2015 BUILDING VALUE ALIGNMENT FAIR VALUE NAV(vi) FULLY DILUTED FAIR VALUE NAV PER SHARE(vii) PRINCIPAL & EMPLOYEE OWNERSHIP(viii) $2B $19 31 December 2015 31 December 2015 19% Q1 2016 Letter to Shareholders Letter to Our Shareholders Tetragon Financial Group Limited (“TFG” or the “Company”) is a Guernsey closed-ended investment company traded on Euronext Amsterdam N.V. under the ticker symbol “TFG.NA” and (as of 9 November 2015) on the Specialist Fund Market(2) of the London Stock Exchange under ticker symbol “TFG.LN”. In this report, we provide an update on TFG’s results of operations for the period ending 31 December 2015.(3) Dear Fellow Shareholders, The Company made a number of significant achievements in 2015, which was otherwise a challenging year for many investment strategies and a difficult market environment as a whole. TFG posted strong annual Return on Equity (“RoE”) growth, both on a like-for-like basis and on a Fair Value(4) basis. TFG Asset Management, TFG’s diversified alternative asset management business, has continued its growth through active capital raising into existing businesses, the launch of new businesses and acquisitions. TFG also undertook several important initiatives to enhance shareholder value. ROE AND FAIR VALUE ROE GROWTH(5) Throughout the industry in 2015, investment performance across asset classes was generally negative and where positive, returns were in many cases only modest. Against that backdrop, we are pleased that the total return to TFG shareholders was +6.6%(6) for the year, with those results not fully reflecting the positive performance of the underlying business, which had a Fair Value RoE of 14.5%. In fact, all but one of TFG’s asset classes and underlying investment strategies posted positive returns during the year, with TFG Asset Management, U.S. CLOs, European event-driven equities and global real estate investments, in particular, delivering strong positive performance. A portion of the growth of Fair Value RoE in 2015 was attributable to the inclusion of the Fair Value of certain TFG Asset Management assets (LCM(7), Polygon(8) and Hawke’s Point(9)) that have otherwise been consolidated under U.S. GAAP and, as such, reflects value, whilst reported in 2015, that has actually been built over the last three years. Both CLO 1.0 investments (approximately $56 million of Fair Value Net Income(10) in 2015) and CLO 2.0 investments (approximately $30 million of Fair Value Net Income) performed well. The European CLOs (all pre-crisis deals) had positive returns, but continued to underperform their U.S. equivalents. 2015 marked a turning point in TFG’s CLO investing, where total investments in CLO 2.0 deals exceeded investments in CLO 1.0s for the first time as the Company continued to invest in new CLO 2.0s while CLO 1.0s continued to amortise. Event-driven equities produced a particularly strong performance (approximately $67 million of Fair Value Net Income). We were pleased that in a year that was difficult for many hedge funds, the event-driven hedge fund strategy generated double-digit returns. The global real estate allocation also contributed approximately $25 million of Fair Value Net Income. The only negative performer was the distressed strategy, where TFG has approximately $100 million invested, with the strategy down 2.2% net for the year. TFG continues to hold cash representing just under 20% of Fair Value Net Asset Value (“Fair Value NAV”) at year end. This cash balance is held to fund not only existing investment commitments but also new investments, as well as dividends, fees payable to Tetragon Financial Management LP (“TFM” or the “Investment Manager”) and other potential uses of cash. Tetragon Financial Group Limited 2015 Annual Report │1 (Continued) Letter to Shareholders CONTINUED GROWTH AT TFG ASSET MANAGEMENT INITIATIVES TO ENHANCE SHAREHOLDER VALUE: As announced in 2015, TFG’s investment manager is continuing to grow TFG Asset Management with a view to a planned initial public offering and listing of shares of TFG Asset Management in the next three to five years. To that end, TFG Asset Management continues to execute against key benchmarks: increased EBITDA, growth in assets under management (“AUM”), positive performance of the underlying strategies and the addition of new managers to the platform. During the year, TFG Asset Management’s EBITDA increased by 102% to $46.6 million, with Fair Value Net Income of approximately $185 million for the year. TFG Asset Management’s aggregate AUM grew 54% to $17.1 billion(11), with LCM, the GreenOak joint venture(12) and Equitix(13) as significant contributors to this growth. The underlying funds managed by the TFG Asset Management platform generally performed well against their peers.(14) And two of Polygon’s hedge funds were nominated for 2015 EuroHedge Awards.(15) TFG Asset Management added two new businesses in 2015: in February, TFG completed its acquisition of Equitix, an integrated core infrastructure asset management and primary project platform; and in the fourth quarter, TFG Asset Management launched Tetragon Credit Income Partners (TCIP)(16), which is the general partner of a private equity vehicle that, among other things, makes investments in CLOs relating to risk retention rules. TFG is a core investor in the vehicle, which had its first close in November 2015 with committed capital of $142.9 million (of which TFG was $35 million). By investing alongside third-party investors in one or more TCIP private equity vehicles, TFG (which owns TCIP as general partner), is also potentially able to further diversify its CLO equity holdings across multiple CLO managers and increase its return on equity on those investments as TCIP receives fees for its investment services. The Fair Value of TFG Asset Management as at 31 December 2015 was approximately $422 million, with LCM and Polygon shown at Fair Value for the first time during Q3 2015, and with the Fair Value for Equitix growing by approximately $41 million during the year. During the year, TFG embarked on several initiatives intended to enhance shareholder value.     Stephen Prince joined as Co-Head of TFG Asset Management and TFM’s Head of North America. Stephen joined from Silver Creek Capital Management LLC, a $7 billion alternative investment firm, where he most recently served as Deputy Chief Investment Officer and Chair of the Investment Committee. Stephen is focusing on helping to build value at TFG as it continues to seek to grow TFG Asset Management organically and through acquisitions, attract investment talent and optimise risk-adjusted returns for TFG’s capital. TFG retained Stifel Nicolaus Europe Ltd. and Cantor Fitzgerald Europe as new joint corporate brokers to the Company in 2015. The Company is working with its new brokers to bring TFG’s story to a broader investor group. TFG’s shares were admitted for trading on the Specialist Fund Market (“SFM”) of the London Stock Exchange on 9 November 2015 (ticker: TFG.LN). TFG believes that the principal benefits of having this additional trading venue should be improved liquidity through access to a broader investor base and expanded analyst coverage. TFG will maintain its listing on Euronext in Amsterdam(17). In conjunction with the SFM admission, the Investment Manager has conducted multiple meetings with potential shareholders in 2015 and early 2016 in London, Edinburgh and Amsterdam. In December, TFG purchased 6 million TFG non-voting shares at $10 per share in a tender offer using a modified Dutch auction structure. Substantially all of the TFG shares acquired in the tender offer are being held to hedge against (or otherwise offset the future impact of) grants of shares under long-term incentive compensation awards by TFG Asset Management for certain long-standing and senior employees. (Continued) 2│ tetragoninv.com Letter to Shareholders     As of Q1 2016, principal and employee holdings of TFG’s non-voting shares (including through incentive compensation arrangements) increased to approximately 19% of the outstanding shares, thereby continuing to increase the alignment with shareholders. TFG’s website has been redesigned. TFG hosted its annual Investor Day in London on 17 November 2015. The event was webcast live and the replay can be viewed on our website, www.tetragoninv.com. The fourth quarter dividend was declared at $16.5 cents per share, making $64.75 cents for the full year, an increase of 4.9% on 2014. This gives a current dividend yield of approximately 7%. Figure 2 TOP TEN HOLDINGS AT 31 DECEMBER 2015 CURRENT POSITIONING OF TFG’S PORTFOLIO: We believe that TFG’s portfolio is currently well-positioned, with many not easily replicated investments and with an appropriate level of cash. The Investment Manager continues to seek uncorrelated, alpha-generating strategies in which to deploy TFG’s capital. The Investment Manager then seeks to find high-quality managers who invest in these asset classes and strategies; selects or structures suitable investment vehicles that optimise risk-adjusted returns for TFG’s capital; and, where appropriate, seeks for TFG, through TFG Asset Management, to own a share of the asset management company. TFG aims to not only produce asset level returns, but also aims to enhance these returns with profits from owning asset management businesses that derive income from external investors. Thus, TFG seeks to use its balance sheet to facilitate the growth of TFG Asset Management to help create value for the Company. The results of this strategy are reflected in the list of TFG’s top ten holdings shown in Figure 2. (Continued) Tetragon Financial Group Limited 2015 Annual Report │3 Description Fair Value $MM % of Fair Value NAV 1Equitix (Manager)Asset Manager£1.9 Bn UK infrastructure fund asset manager173.98.7%2Polygon European Equity Opportunity FundFund Investment - EquitiesEuropean event driven equity hedge fund139.97.0%3LCM (Manager)Asset Manager$5.9 Bn CLO manager110.25.5%4Polygon Distressed Opportunities FundFund Investment - CreditDistressed opportunities hedge fund95.14.8%5GreenOak Real Estate (Manager)Asset Manager$6.6 Bn global real estate asset manager70.03.5%6Polygon (Manager)Asset Manager$1.5 Bn hedge fund manager67.03.4%7Polygon Convertible Opportunity FundFund Investment - CreditEvent driven credit hedge fund44.82.2%8Polygon Mining Opportunities FundFund Investment - EquitiesMining-related equity hedge fund38.11.9%9LCM XIX LP Fund Investment - CLO EquityUS broadly syndicated corporate loans (CLO)32.51.6%10LCM XVI LPFund Investment - CLO EquityUS broadly syndicated corporate loans (CLO)29.81.5% TOTAL 40.3% Holding Investment Type Letter to Shareholders OUTLOOK: The past several years have witnessed unprecedented monetary easing resulting in historically low interest rates globally. Although in low-LIBOR environments, TFG may achieve lower sustainable returns, TFG is generally invested, including through the ownership of the relevant asset managers, in strategies that are seeking “absolute” returns rather than returns “relative to a financial index”. We believe that TFG’s performance in 2015 reflects this approach. During 2016, we are hopeful that our mix of asset classes and investment strategies will continue to produce what we believe are generally uncorrelated returns. In terms of TFG Asset Management, despite increasing global uncertainty, it is continuing to seek to increase AUM across the platform. In addition, the Investment Manager continues to look for new asset classes and new asset managers to add to the TFG Asset Management platform. To date, through attractive performance, strong fundraising and good performance, the business has successfully grown. In closing, we believe that TFG’s portfolio, including TFG Asset Management, is well positioned to provide continued growth in 2016. With Regards, The Board of Directors 29 February 2016 4│ tetragoninv.com TFG Overview TFG Overview Tetragon Financial Group Limited (“TFG”) is a Guernsey closed-ended company traded on Euronext Amsterdam N.V. under the ticker symbol “TFG.NA” and (as of 9 November 2015) on the Specialist Fund Market of the London Stock Exchange under ticker symbol “TFG.LN”. Figure 3(i)(ii) investment objective inflation and real estate cycles. is to generate distributable TFG's income and capital appreciation. It aims to provide stable returns to investors across various credit, equity, interest rate, The company’s investment portfolio comprises a broad range of assets, including a diversified alternative asset management business, TFG Asset Management, and covers bank loans, real estate, equities, credit, convertible bonds and infrastructure. TFG’s Fair Value NAV as of 31 December 2015 was approximately $2.0 billion. Figure 3 shows the company’s current net asset breakdown including TFG Asset Management at full estimated Fair Value. (i) Net Cash consists of: (1) cash held directly by Tetragon Financial Group Master Fund Limited, (2) excess margin held by broke rs associated with assets held directly by Tetragon Financial Group Master Fund Limited, and (3) cash held in certain designated accounts related to TFG’s investments, which may only be used for designated purposes without incurring significant tax and transfer costs, net of “Other Net Assets and Liabilities.” (ii) Assets characterised as “Equities” consist of the Fair Value of investments in Polygon-managed equity funds as well as the Fair Value of, or capital committed to, equity assets (as applicable) held directly on TFG’s balance sheet. Please see Figure 10 for further details on asset composition. Tetragon Financial Group Limited 2015 Annual Report │5 CLO Equity30.2%Equities14.5%Credit7.2%Real Estate7.1%Asset Managers: TFG AM21.2%Net Cash19.8%Fair Value Net Asset Breakdown at 31 December 2015 TFG Overview investment objective of generating To achieve TFG’s distributable income and capital appreciation, TFG’s current investment strategy is:     To identify attractive asset classes and investment strategies. To identify asset managers it believes to be superior. To use the market experience of TFM, TFG’s investment manager, to negotiate favourable terms for its investments. Through TFG Asset Management, and where sensible, to seek to own all, or a portion, of asset management companies with which it invests in order to enhance the returns achieved on its capital. In addition, TFM’s current investment strategy is to continue to grow TFG Asset Management – as TFG’s diversified alternative asset management business – with a view to a possible initial public offering and listing of its shares. As part of its investment strategy, TFM may employ hedging strategies and leverage in seeking to provide attractive returns while managing risk. The Investment Manager seeks to identify asset classes that offer excess returns relative to their investment risk, or “intrinsic alpha.” It analyses the risk/reward, correlation, duration and liquidity characteristics of each potential capital use to gauge its attractiveness and incremental impact on the Company. The Investment Manager then seeks to find high-quality managers who invest in these asset classes; selects or structures suitable investment vehicles that optimise risk- adjusted returns for TFG’s capital; and/or seeks for TFG (via TFG Asset Management) to own a share of the asset management company. TFG aims to not only produce asset level returns, but also aims to enhance these returns with capital appreciation and its investments in asset management businesses that derive income from external investors. investment income from 6│ tetragoninv.com Additionally, the business are also Certain considerations when evaluating the viability of a potential asset manager typically include: performance track records, reputation, regulatory requirements, infrastructure needs and asset gathering capacity. Potential profitability important and scalability of considerations. capabilities, investment focus and strategy of any new business should offer a complementary operating income stream to TFG Asset Management’s existing businesses. The Investment Manager looks to mitigate potential correlated risks across TFG Asset its Management’s exposure across asset classes, investment vehicles, durations, and investor types, among other factors. investment managers by diversifying core the can businesses asset management TFG's operate autonomously, or on the TFG Asset Management platform. In either case, the objective is for them to benefit from an established infrastructure, which can assist in critical business management functions such as risk management, investor relations, financial control, technology, and compliance/legal matters, while maintaining entrepreneurial independence. TFG Overview TFG ASSET MANAGEMENT Figure 4 ASSETS UNDER MANAGEMENT(i) $17B 31 December 2015 HEADCOUNT OFFICES  CIRCA 210 Including GreenOak London · New York Plus GreenOak locations GLOBAL OPERATING PLATFORM  TM TM TM TM HAWKE’S POINT TM TM Bank Loans Real Estate Joint Venture Hedge Funds & Private Equity Infrastructure Mining Finance CLO Equity Approx. AUM $6.1 billion(ii) $6.6 billion(iii) $1.5 billion(iv) $2.8 billion(v) Start up(vi) $0.1 billion(vii)  LCM currently  Japan Fund I manages 14 CLOs  Asia Fund II  UK Debt Fund I  Europe Fund I Spain  US Fund I  US Fund II  Global Advisory  European Equity Opportunity Fund  Convertible Opportunity Fund  Mining Opportunity Fund  Global Equities Fund  Distressed Opportunities Fund  Recovery Fund  Fund I  Fund II  Fund III  Fund IV  Managed Account  Energy Saving Investments  Energy Efficiency Fund  Tetragon Credit Income II L.P.  TCI Capital Management (i)(ii)(iii)(iv)(v)(vi)(vii) Products/mandates listed are not necessarily open for new investment and are not an offer to sell or a solicitation of an offer to purchase securities in the United States or any other jurisdiction, but to illustrate the TFG Asset Management platform strategy. TFG Asset Management consists of:       LCM ASSET MANAGEMENT – a CLO loan manager. The GREENOAK REAL ESTATE joint venture – a real estate-focused principal investing, lending and advisory firm. POLYGON GLOBAL PARTNERS – a manager of open-ended hedge fund and private equity vehicles across a number of strategies. EQUITIX – an integrated core infrastructure asset management and primary project platform. HAWKE’S POINT – a business that seeks to provide capital to companies in the mining and resource sectors. TETRAGON CREDIT INCOME PARTNERS (TCIP) – TCIP acts as a general partner of a private equity vehicle that, among other things, makes investments in CLOs relating to risk retention rules. Assets under management for TFG Asset Management as of 31 December 2015 totalled approximately $17.0 billion.(18) Tetragon Financial Group Limited 2015 Annual Report │7 Board of Directors TFG’s Board of Directors is comprised of six members, four of whom are Independent Directors who have significant experience in asset management and financial markets. Biographies of the directors can be found in Appendix IX. Rupert Dorey Independent Director Frederic M. Hervouet Independent Director David Jeffreys Independent Director Byron Knief Independent Director Reade Griffith Paddy Dear 8│ tetragoninv.com Key Metrics Key Metrics Key Metrics The Company focuses on the following key metrics when assessing how value is being created for, and delivered to, TFG shareholders:    Earnings : Fair Value Return on Equity and Fair Value EPS; NAV per share; and Dividends. As noted in the Letter to Shareholders, TFG’s Key Metrics have been modified, effective from Q3 2015, to incorporate the value that is being created in TFG Asset Management on a consistent Fair Value basis using valuations provided by an independent valuation specialist reporting to the Audit Committee. The resulting Fair Value metrics are described in this section and further detail on the drivers for each of the Fair Value metrics is discussed in the following sections of the report. EARNINGS – FAIR VALUE RETURN ON EQUITY (“Fair Value RoE”) Fair Value RoE for 2015 was 14.5%, close to the top of TFG’s long-term target range of 10-15%,(19) enhanced by the move to fair value-based metrics in Q3 2015 Following a challenging environment for investing in Q3, TFG ended the year strongly, with Fair Value Net Income(20) of $35.5 million in the quarter and $263.9 million for the full year. This equated to a full year Fair Value RoE of 14.5% which included the impact of an uplift in the Fair Value of TFG Asset Management representing 6.3% ($114.6 of net income net of fees). Stand out performers in 2015 were CLOs, Polygon’s equity funds, “other equity” investments, real estate and TFG Asset Management, each of which is described in more detail later in the report. Figure 5(i) (i) Average RoE is calculated from TFG’s IPO in 2007. 2015 RoE includes a fair value adjustment for certain TFG Asset Management businesses, the value of which has accumulated over several years. Consequently the full year return of 14.5% is not prepared on a like for like basis with prior years. Like for like performance for 2015 was 8.2%. 10│ tetragoninv.com ROE TARGET 10-15% Annualised range AVERAGE ROE 13.5% Since April 2007 IPO 2015 ROE 14.5% 31 December 2015 36.1%20.8%15.3%6.6%14.5%0%5%10%15%20%25%30%35%40%20112012201320142015Annual Fair Value Return on Equity 2011 -2015 Target RoE: 10-15%Average RoE: 13.5% Key Metrics FAIR VALUE EARNINGS PER SHARE (“Fair Value EPS”) TFG generated a Fair Value EPS(21) of $2.72 in 2015 The Fair Value Net Income of $263.9 million resulted in an EPS of $2.72, of which $1.18 related to the move to fair value accounting for elements of TFG Asset Management. The underlying EPS performance of $1.54 represents a 24% increase over the corresponding period in 2014. Figure 6 Further detailed information on the drivers of the Company’s performance is provided later in this report. Tetragon Financial Group Limited 2015 Annual Report │11 $3.46 $2.70 $2.52 $1.24 $2.72 FY 2011FY 2012FY 2013FY 2014FY 2015Fair Value EPS Comparison 2011 -2015(USD) Key Metrics FULLY DILUTED FAIR VALUE NAV PER SHARE Fully Diluted Fair Value NAV per Share was $19.08 at the end of 2015, up 11.9% from the end of Q4 2014  Total Fair Value NAV for TFG rose to $1,987.3 million at 31 December 2015, which equated to Fully Diluted Fair Value NAV per Share(22) of $19.08.  The 11.9% growth recorded in the year is after distributing dividends of $0.64 during that period. Figure 7(i) (i) Source: Fully Diluted Fair Value NAV per share based on TFG’s financial statements as of 31 December of each of the years shown. Please see Figure 22 on page 33 for more details on the calculation of Fully Diluted Fair Value NAV Per Share. 12│ tetragoninv.com FAIR VALUE NAV $2B 31 December 2015 FAIR VALUE NAV PER SHARE $19 31 December 2015 NAV PER SHARE GROWTH +12% 2015 $12.71$14.65$16.36$17.05$19.0820112012201320142015Fair Value NAV Per Share2011 -2015(USD) DIVIDENDS PER SHARE (“DPS”) TFG increased its quarterly dividend to 16.50 cents per share in Q4 2015 from 16.25 cents the prior quarter  TFG declared a Q4 2015 DPS of $0.165, an increase on the level declared for Q2 and Q3 2015. On a rolling 12-month basis, the dividend of $0.6475 per share represents a 4.9% increase over the prior 12-month period and equated to an annualised dividend yield of 6.5% on the 31 December 2015 share price of $9.91.  This dividend declaration continues TFG’s progressive dividend policy, which targets a payout ratio of 30-50% of normalised earnings. The Q4 2015 DPS of $0.165 brings the cumulative DPS declared since TFG’s IPO to $4.09. Figure 8 Key Metrics DIVIDEND YIELD 7% 31 December 2015 2015 DIVIDEND COVER 4x 31 December 2015 DIVIDEND GROWTH FIVE-YEAR CAGR 13% Per annum to 31 December 2015 Tetragon Financial Group Limited 2015 Annual Report │13 $0.395$0.470$0.565$0.6175$0.647520112012201320142015Dividend per Share Comparison2011 -2015(USD) 2015 In Review 2015 In Review 2015 In Review The figure below illustrates the composition of TFG’s Fair Value net assets as of 31 December 2015 and 31 December 2014. Figure 9(i)(ii) Fair Value Net Asset Composition Summary(i)(ii) (i) Net Cash consists of: (1) cash held directly by Tetragon Financial Group Master Fund Limited, (2) excess margin held by brokers associated with assets held directly by Tetragon Financial Group Master Fund Limited, and (3) cash held in certain designated accounts related to TFG’s investments, which may only be used for designated purposes without incurring significant tax and transfer costs, net of “Other Net Assets and Liabilities.” (ii) Assets characterised as “Equities” consist of the Fair Value of investments in Polygon-managed equity funds as well as the Fair Value of, or capital committed to, equity assets (as applicable) held directly on TFG’s balance sheet. Please see Figure 10 for further details on asset composition. The table below highlights the fair value of TFG’s ten top holdings as of 31 December 2015. Figure 10 Top 10 Holdings at 31 December 2015 Tetragon Financial Group Limited 2015 Annual Report │15 CLO Equity45.0%Equities14.5%Credit8.8%Real Estate4.9%Asset Managers: TFG AM6.5%Net Cash20.3%Net Asset Breakdown at 31 December 2014CLO Equity30.2%Equities14.5%Credit7.2%Real Estate7.1%Asset Managers: TFG AM21.2%Net Cash19.8%Fair Value Net Asset Breakdown at 31 December 2015 Description Fair Value $MM % of Fair Value NAV 1Equitix (Manager)Asset Manager£1.9 Bn UK infrastructure fund asset manager173.98.7%2Polygon European Equity Opportunity FundFund Investment - EquitiesEuropean event driven equity hedge fund139.97.0%3LCM (Manager)Asset Manager$5.9 Bn CLO manager110.25.5%4Polygon Distressed Opportunities FundFund Investment - CreditDistressed opportunities hedge fund95.14.8%5GreenOak Real Estate (Manager)Asset Manager$6.6 Bn global real estate asset manager70.03.5%6Polygon (Manager)Asset Manager$1.5 Bn hedge fund manager67.03.4%7Polygon Convertible Opportunity FundFund Investment - CreditEvent driven credit hedge fund44.82.2%8Polygon Mining Opportunities FundFund Investment - EquitiesMining-related equity hedge fund38.11.9%9LCM XIX LP Fund Investment - CLO EquityUS broadly syndicated corporate loans (CLO)32.51.6%10LCM XVI LPFund Investment - CLO EquityUS broadly syndicated corporate loans (CLO)29.81.5% TOTAL 40.3% Holding Investment Type 2015 In Review NET ASSET BREAKDOWN AND INCOME FOR 2015 Figure 11 (i) “U.S. CLO 1.0” refers to U.S. CLOs issued before or during 2008. “U.S. CLO 2.0” refers to U.S. CLOs issued after 2008. The U.S. CLO 1.0 segment includes an investment in the BB tranche of a U.S. CLO 1.0 with Fair Value of $1.7 million. (ii) Assets characterised as “Other Equities” consist of the Fair Value of, or capital committed to, investment assets held directly on the balance sheet. (iii) The TFG Asset Management income figure includes the consolidated net income before tax of Polygon, LCM and Hawke’s Point to 30 June 2015, and changes in the Fair Value of those investments from 1 July to 31 December 2015. The income relating to investments in Equitix and GreenOak reflects the changes in the carrying value of these equity investments, and in the case of Equitix, interest income and changes in Fair Value connected to the loans held. Figure 11 above shows Fair Value Net Assets and Fair Value Net Income by asset class for Q4 2015 and full year 2015, compared to 2014.  U.S. CLO 1.0: TFG’s U.S. CLO 1.0 investments continued to make a positive contribution to the Company’s earnings during 2015, producing $55.7 million of income for the year, despite a pick-up in credit market volatility, particularly in energy and commodity related credits. The average remaining expected duration of this segment of the portfolio declined in 2015 due to continued post-reinvestment period structural deleveraging, optional redemptions, and one asset sale, driving an approximate 41% reduction in the fair value of TFG’s U.S. CLO 1.0 investments. The aggregate fair value of the U.S. CLO 1.0 portfolio is now below that of the U.S. CLO 2.0 portfolio. As of the end of 2015, all of TFG’s U.S. CLO 1.0 deals were passing their junior-most O/C tests.(23)  U.S. CLO 2.0: TFG’s U.S. CLO 2.0 investments performed well in 2015 generating income of $30.2 million for the year. As with U.S. CLO 1.0 investments, the CLO 2.0 segment faced oil/gas and commodity credit related headwinds as well as a handful of idiosyncratic defaults. The second half of the year also saw leveraged loan spreads widen with the average single-B institutional U.S. loan spread rising by more than 26% from the lows registered earlier in the year.(24) We believe this allowed our CLO managers to reinvest into loans at lower prices and wider effective spreads, increasing the potential arbitrage available to our CLO equity investments (all else being equal). Certain of our managers also focused on recalibrating the overall credit risk composition of their respective portfolios, by making opportunistic sales and substitutions. As of the end of 2015, all of TFG’s U.S. CLO 2.0s were in compliance with their junior-most O/C tests.(25)  European CLO: TFG’s European CLO investments generated positive returns on the year, recording $6.0 million of income. As with the U.S. CLO 1.0 portfolio, we continued to see amortization of these European CLOs and undertook certain optional redemptions, reducing the U.S. dollar fair value by over 50%. The vast majority of these optional calls were finalised during the year and TFG has received the net redemption proceeds. At the end of 2015, all of TFG’s European CLOs were in compliance with their junior-most O/C tests. (26) 16│ tetragoninv.com (continued) 20152015Q4 20152014 Fair Value Net Assets ($MM) Fair Value Net Income($MM)Fair Value Net Income ($MM)Fair Value Net Income ($MM) CLO Equity U.S. CLO 1.0(i) 260.6 55.7 14.4 116.7 CLO Equity U.S. CLO 2.0(i) 281.7 30.2 1.6 29.7 CLO Equity European CLOs 58.5 6.0 0.9 22.7 Equities Equity Funds 198.3 15.3 9.6 (3.2) Equities Other Equities(ii) 90.5 51.6 4.2 (27.1) Credit Convertible Bond Fund 44.8 2.3 0.6 5.4 Credit Distressed Fund 95.1 (5.4) (0.6) 3.3 Credit Direct Loans 3.0 1.0 0.3 1.3 Real Estate Real Estate 141.7 25.2 (2.5) 10.1 Asset Management TFG Asset Management(iii) 422.1 185.2 26.3 55.0 Net Cash Net Cash 391.0 0.1 - - Net Cash Corporate Fees and Expenses NA (92.2) (17.5) (69.1) Net Cash Net Hedge PnL and Taxes NA (11.1) (1.8) (26.7) 1,987.3 263.9 35.5 118.1 Asset Category Asset Subcategory 2015 In Review  Equity Funds: Polygon’s event-driven equity investments generated Fair Value Net Income of $15.3 million during 2015, compared to a loss of $3.2 million in 2014. Fair Value Net Income generated in Q4 2015 was $9.6 million, a turnaround from a challenging Q3. Polygon’s European event-driven strategy returned 10.3% net during 2015, and its mining equity vehicle returned 6.2% net; the HFRX Event-Driven index(27) was down 6.94% in 2015 by comparison. Please refer to page 26 for further details on the performance of the individual funds.  Other Equities: These assets had positive returns of $4.2 million in Q4 2015, and full year fair value net income of $51.6 million for 2015.  Convertible Fund: The contribution from Polygon’s convertible fund investment had fair value net income of $0.6 million during Q4 2015, and full year net income of $2.3 million. The fund’s performance was up 4.56% net during 2015, compared to -0.12% for the HFRX Convertible Index.(28) Please refer to page 26 for further details on the fund’s performance.  Distressed Fund: This asset subcategory had a loss of $0.6 million during Q4 2015 and a loss of $5.4 million for the full year. Polygon’s distressed fund performance was down 2.2% net during 2015, compared to the HFRX Distressed Index which was down 11.1% net in 2015; 6.7% of this drawdown was during Q4 alone.(29) It should be noted that the net loss attributable from TFG’s investment in the Distressed Fund also reflects start up costs for this aspect of the asset management business. Please refer to page 26 for further details on the fund’s performance.  Real Estate: Despite a loss of $2.5 million during the quarter, real estate investments contributed $25.2 million to net income during 2015, with the majority of the year’s contribution coming from U.S. and Japanese investments. Overall, approximately $17.3 million of cash was returned during the quarter bringing the life-to-date cash returned to $106.1 million on the GreenOak-managed investments.  TFG Asset Management: TFG’s investment in TFG Asset Management generated $26.3 million of capital appreciation and investment income during the fourth quarter, as the valuations of these investments were recalibrated. The main contributors were increases in the carrying value of TFG’s investments in Equitix and LCM as both businesses continued to grow their AUM and profitability. For further information on the basis for determining the Fair Value of the TFG Asset Management investment, please see Appendix IV. TFG Asset Management’s pro forma operating results are set out in Figure 15.  Net Cash: TFG held $391 million of Fair Value in net cash at 31 December 2015. The Company actively manages its cash levels to cover future commitments and to enable it to capitalise on opportunistic investments. Figure 12 Tetragon Financial Group Limited 2015 Annual Report │17 TFG Asset Management - Net Income Q4 2015BusinessFair Value Q4 2015($MM)Fair Value Q3 2015($MM)Fair Value Movement ($MM)Equitix173.9161.612.3GreenOak Joint Venture70.067.03.0Hawke's Point0.80.80.0TCIP0.30.00.3LCM110.2104.45.8Polygon67.068.6(1.6)Change in Fair Value422.1402.319.8Other TFGAM investment income and impact of currency hedge on Equitix6.5Total Capital Appreciation and Investment Income26.3 2015 In Review 2015 Major New Investments    U.S. CLO 2.0: In 2015, TFG acquired majority equity positions in two LCM-managed CLOs for a total cost of $62.4 million. During Q4 2015, TFG made a capital commitment of $35.0 million to Tetragon Credit Income II L.P. (“TCI II”), a new vehicle focused on CLO investments relating to risk retention rules. TCIP acts as the general partner of TCI II. Although no capital was drawn from TFG before the end of 2015, TCI II had made its first investment into LCM XX Limited Partnership, to which TFG has exposure on a look-through basis. Real Estate: During 2015, TFG invested $81.4 million into various real estate funds and vehicles which focus on a variety of geographical areas including the Americas, Europe, and Asia. Equitix: In February 2015, TFG completed the acquisition of 85%(30) of Equitix Holdings Limited for a total enterprise value of £159.5 million. 2015 Major Asset Sales and Optional Redemptions    U.S. CLO 1.0: During 2015, TFG sold one U.S. CLO 1.0 transaction for total proceeds of $6.5 million. In addition, TFG exercised its optional call rights on 11 U.S 1.0 CLOs, generating unwind proceeds of $67.1 million through the end of 2015. Certain of these transactions have not yet liquidated all of their underlying assets and the Company expects to receive additional proceeds from these redemptions in 2016. European CLOs: TFG initiated an optional early redemption of two European CLOs in 2015, which generated partial unwind proceeds of €23.1 million during the year. The Company expects to receive additional liquidation payments from the redemptions in 2016. Real Estate: During 2015, TFG received approximately $49.7 million in return of capital and income on certain investments in GreenOak-managed real estate vehicles; of this, $2.9 million was received in 2016. 18│ tetragoninv.com TFG Asset Management Overview TFG Asset Management Overview TFG Asset Management Overview One of TFG’s significant investments is TFG Asset Management, a diversified alternative asset management business that owns majority and minority stakes in asset managers. At 31 December 2015, TFG Asset Management comprised LCM, the GreenOak joint venture, Polygon, Equitix, Hawke’s Point and TCIP (please see Figure 13 for the breakdown of AUM and Fair Value by business line). TFG Asset Management has approximately $17.0 billion of assets under management(31) and approximately 210 employees globally. Figure 14 depicts the growth of that AUM over the last five years. During 2015, TFG Asset Management performed well, generating Fair Value Net Income of $185.2 million during the year, compared to $55.0 million in 2014. The total Fair Value Net Assets of TFG Asset Management was $422.1 million at 31 December 2015. Each of the underlying businesses increased its AUM during the year and the amount of fee income generated; see Figure 15 for details. We are hopeful for continuing positive progress during 2016. Figure 13(32) Figure 14(33) (i) The Fair Value of TFG’s 23% stake. 20│ tetragoninv.com EBITDA $47M 31 December 2015 EBITDA GROWTH +102% 2014 - 2015 AUM $17B 31 December 2015 AUM GROWTH +54% 2015 $4.0 $7.7 $9.2 $11.1 $17.1 Q4 2011Q4 2012Q4 2013Q4 2014Q4 2015TFG AM Assets Under ManagementLCM: U.S. CLOsGreenOak: Global Commercial Real EstatePolygon: Hedge FundsEquitix: UK InfrastructureTCIPat 31 December 2011 -2015($BN)LCM: U.S. CLOs$6.1 GreenOak: Global Commercial Real Estate$6.6 Polygon: Hedge Funds$1.5 Equitix: UK Infrastructure$2.8 TCIP$0.1 TFG AM AUM by Business Lineat 31 December 2015($BN)Equitix$173.9GreenOak Joint Venture(i)$70.0Hawke's Point$0.8TCIP$0.3LCM$110.2Polygon$67.0TFG AM Fair Value by Business Lineat 31 December 2015($MM)TFG ASSET MANAGEMENT PRO-FORMA EBITDA (Ex-GreenOak) Figure 15 TFG Asset Management Overview (i) The above table includes the income and expenses attributable to TFG’s majority owned businesses, Polygon, LCM and Equitix during that period. In the case of Equitix this only covers the period from 2 February 2015, the date of the closing of TFG’s acquisition of Equitix. Although TFG currently has an 85% effective economic share of its business, 100% of Equitix’s income and expenses are reflected with the 15% not attributable to TFG backed out through the minority interest line. GreenOak is not included. The EBITDA equivalent is a non-GAAP measure and is designed to show the performance of the TFG Asset Management businesses rather than what is reflected in TFG’s U.S. GAAP financial statements. (ii) The performance and success fees include some realised Polygon performance fees. These represent the fees calculated by the applicable administrator of the relevant Polygon funds, in accordance with the applicable fund constitutional documents, when determining NAV at year end. Similar amounts, if any, from LCM and GreenOak are recognised when received. TFG is able to invest at a preferred level of fees.  Overview: Figure 15 shows a pro forma statement of operations which reflects the operating performance of the majority - owned asset management companies within TFG Asset Management. Although they are currently reported under U.S. GAAP, partially at Fair Value and partially on a consolidated basis, the aim of also presenting the underlying performance in this way is to give investors insight into a key driver behind that valuation. GreenOak, in which TFG holds a minority interest, is not included in the pro forma EBITDA currently.  EBITDA: EBITDA equivalent for the majority-owned TFG Asset Management businesses rose by 102% in 2015 compared with 2014, accelerated in large part by the inclusion of Equitix from the start of February 2015.  Management fee income: Management fee income continued to increase with the growth of the TFG Asset Management businesses. Fee-paying capital increased significantly year on year, both through organic growth of the Polygon and LCM businesses and, notably, from the acquisition of Equitix which added approximately $2.0 billion of fee-paying AUM from early February onwards. See Figures 13 and 14 for further information on TFG Asset Management’s AUM.  Performance and success fees: Compared to last year, performance and success fees have increased significantly – by 174% – boosted by the addition of Equitix to TFG Asset Management. After a challenging third quarter for performance, TFG Asset Management finished the year with a strong Q4, with particularly strong performances from both the Primary and Secondary businesses within Equitix, from realised performance fees generated by LCM and from performance fees relating to certain of Polygon’s hedge funds, as described earlier in this report.  Other fee income: This category includes third party CLO management fee income, all of which relates to U.S. CLO 1.0 transactions, which continued to decline in line with expectations as these transactions amortised down. In addition, it includes certain cost recoveries from TFG relating to seeded Polygon hedge funds and management services revenues earned by Equitix. The cost recoveries, which are described in more detail in the TFG Asset Management Overview section of this report, decreased slightly year on year although the teams supporting the seeded funds continued to grow. As these businesses mature and build third party capital, such cost recoveries should reduce. This category also includes fee income generated by Equitix on certain management services contracts, which is a growing part of the Equitix business.  Operating expenses: Operating expenses rose by approximately 30% in 2015 compared to 2014, largely driven by the addition of the Equitix business in early 2015, plus additions to the teams supporting the growing Polygon and Hawke's Point businesses. Tetragon Financial Group Limited 2015 Annual Report │21 2015(i)20142013$MM$MM$MMManagement fee income55.042.936.8Performance and success fees(ii)52.119.012.8Other fee income19.119.224.7Interest income2.40.20.3Total income128.681.374.6Operating, employee and administrative expenses(75.4)(58.2)(47.1)Minority Interest(6.6)0.00.0Net income - "EBITDA equivalent"46.623.127.5TETRAGON FINANCIAL GROUPTFG Asset Management Pro Forma Statement of Operations (excluding GreenOak) TFG Asset Management Overview BUSINESS OVERVIEWS The following pages provide a summary of each asset management business and a 2015 review of AUM growth and underlying strategy / investment vehicle performance. All data is at 31 December 2015, unless otherwise stated. TM Description of Business:  LCM is a specialist in below-investment grade U.S. broadly-syndicated leveraged loans.  The business was established in 2001 and has offices in New York and London.  TFG owns 100% of LCM.  Currently, LCM manages loan assets exclusively through CLOs, which are long-term, multi-year investment vehicles. The typical duration of a CLO, and thus LCM’s management fee stream, depends on, among other things, the term of its reinvestment period (currently typically four to five years for a new issue CLO), the prepayment rate of the underlying loan assets, as well as post- reinvestment period reinvestment flexibility and weighted average life constraints.  CLO managers typically earn a management fee of up to 0.50% of total assets, and a performance fee of 20% over a CLO equity IRR hurdle.  Further information on LCM is available at www.lcmam.com. Amount of TFG’s Investment in Products: $227.1 million. TFG held equity investments with total fair value of $224.1 million (U.S. CLO 1.0: $12.2 million, U.S. CLO 2.0: $211.8 million) in LCM-managed CLOs. LCM additionally manages a portfolio of U.S. broadly-syndicated leveraged loans held directly on TFG’s balance sheet. At year-end 2015, the fair value of these loans was $3.0 million. AUM: Figure 16 The LCM-managed CLOs issued during the year were: LCM XVIII, $610 million, 31 March 2015; LCM XIX, $618 million, 28 July 2015; LCM XX, $509 million, 13 November 2015 LCM’s AUM is $6.1 billion, compared to $5.9 billion at the end of Q3 2015 and $5.3 billion at the end of 2014. During 2015, three new issue LCM-managed CLOs were closed, representing $1.7 billion in AUM (at the time of issuance). The LCM-managed CLOs issued during the year were: LCM XVIII, $610 million, 31 March 2015; LCM XIX, $618 million, 28 July 2015; LCM XX, $509 million, 13 November 2015    Performance in 2015: LCM continued to perform well in 2015, despite certain oil and gas-related realised and unrealised losses. During the year, LCM had defaults in three obligors (which includes one which was a technical default due to an exchange offer by the issuer) across all of the CLOs it manages, representing less than 0.2% of its AUM at the end of the year. As of the end of the year, all of LCM’s Cash Flow CLOs(34) that were still within their reinvestment periods remained in compliance with their coverage tests, continuing to pay senior and subordinated management fees and to generate cash flows for their equity tranches. 22│ tetragoninv.com $3.4$4.3$4.2$5.3$6.1YE 2011YE 2012YE 2013YE 2014YE 2015LCM AUM History ($BN)CLO 1.0CLO 2.0 TFG Asset Management Overview TM Description of Business:  GreenOak is a real estate-focused principal investing, lending and advisory firm that seeks to create long-term value for its investors and provide strategic advice to its clients.  The business was established in 2010 as a joint venture with TFG and has a presence in New York, London, Tokyo, Los Angeles, Madrid and Seoul.  TFG owns 23% of the business.  GreenOak currently has funds with investments focused on the United States, Japan, Spain, and the United Kingdom.  Funds are typically structured with management fees of 1.5%-2.0% and carried interest over a preferred return. The funds generally have a multi-year investment period, with a fund term of seven years after the final close, with possible extensions subject to certain approvals.  Further information on GreenOak is available at www.greenoakrealestate.com. Amount of TFG’s Investment in Products: $115.4 million. AUM: Figure 17 (i) Includes investment funds and advisory assets managed by GreenOak at 31 December 2015. TFG owns a 23% stake in GreenOak. AUM includes all third-party interests and total projected capital investment costs. AUM is $6.6 billion. During 2015, GreenOak completed its fundraise of its Europe Fund I with total commitments of €250 million, closed Asia II in excess of $500 million, and raised assets for a variety of projects such as 425 Park Avenue in the United States. GreenOak also continues to generate advisory fees across its various regions. Since its inception, GreenOak has raised approximately $3.7 billion of equity to invest in targeted strategies and assets, acquired 113 assets representing approximately 13 million square feet of space and $6.8 billion of real estate value within its target markets. Tetragon Financial Group Limited 2015 Annual Report │23 $0.6$2.3$3.6$4.4$6.6 YE 2011 YE 2012 YE 2013 YE 2014 YE 2015GreenOak AUM History(i) ($BN)EuropeU.S.Japan TFG Asset Management Overview GREENOAK (continued) AUM, continued Figure 18 ($MM) United States Investment Period Equity Raised(i) Fund I & Co-Investments 2011 - 2013 Fund II & Co-Investments 2014 - Present 425 Park/Other U.S. Sub-Total 2012 Fund I & Co-Investments Fund II & Co-Investment to date Other Japan Sub-Total 2012 - Present 2015 - Present 2011, 2013 Europe Fund I 2014 - Present Spanish Separate Account 2014 UK Investment Program 2012 - Present European Credit 2013 - Present Europe Sub-Total Asia Europe TOTAL 356 865 513 1,734 324 597 44 965 271 86 303 361 1,021 3,720 (i) Source: GreenOak, as of 31 December 2015. Includes assets previously purchased by GreenOak that have been monetised. Performance in 2015: GreenOak-managed vehicles continue to perform well across their European, U.S., and Asian businesses. In particular, U.S. Fund I and Japan Fund I are now starting to monetise significant parts of their portfolios, with both funds currently projected to exceed expected IRRs. In the United States, GreenOak raised $630 million of equity; invested $675 million of equity; closed eight investments; and purchased approximately $1.7 billion of real estate on an all-in cost basis. The company returned more fund equity to investors than it invested during the year, having disposed of a number of assets. Inception to date, GreenOak’s U.S. business has invested in and committed to 36 transactions totalling $4.7 billion of asset value, with $1.6 billion of equity invested. In Europe, GreenOak completed its fundraise of Europe Fund I with total commitments of €250 million; it invested over €190 million across 14 investments and in its Debt Fund I; and made six loans for a total commitment of £55 million, bringing the total from inception to nearly £150 million. In Asia, GreenOak closed in excess of $500 million for Asia Fund II plus $100 million of co-invest capital; invested $170 million in equity between Japan Fund I and Asia Fund II; and closed on seven transactions totalling over $550 million on an all-in cost basis. Inception to date, GreenOak Asia has invested and committed to $1.8 billion of asset value (cost basis) with $420 million of equity. GreenOak also continued to realise advisory revenues across all of its regions. Since the company’s inception, GreenOak has monetised approximately $1.9 billion of stabilised assets in GreenOak funds and separate accounts. 24│ tetragoninv.com TFG Asset Management Overview TM Description of Business:  Polygon manages open-ended hedge fund and private equity vehicles across a number of strategies.  Polygon was established in 2002 and has offices in New York and London.  TFG owns 100% of the business.  Fees in these products include a management fee that is generally between 1.5% and 2.0% and the typical performance fee or carried interest is 20%.  Further information on Polygon is available at www.polygoninv.com. Amount of TFG’s Investment in Products: $338.1 million. AUM: Figure 19(i) (i) Includes AUM for Polygon Convertible Opportunity Master Fund, Polygon European Equity Opportunity Master Fund and associated managed account, Polygon Mining Opportunity Master Fund, Polygon Global Equities Master Fund and Polygon Distressed Opportunities Master Fund, as calculated by the applicable fund administrator at 31 December 2011, 2012, 2013, 2014, and 2015. Includes, where relevant, investments by Tetragon Financial Group Master Fund Limited. AUM is $1.5 billion for all funds; $1.2 billion for open strategies. Tetragon Financial Group Limited 2015 Annual Report │25 $409$529$855$1,113$1,248YE 2011YE 2012YE 2013YE 2014YE 2015Polygon Hedge Funds AUM History ($MM)(Convertibles, European Event-Driven Equity, Mining Equities, Distressed, Other Equity)ConvertiblesEuropean Event-Driven EquityMining EquitiesDistressed OpportunitiesOther Equity TFG Asset Management Overview POLYGON (continued) Performance in 2015: Figure 20(35) Note: The AUM noted above includes investments in the relevant strategies by TFG, other than in respect of the Private Equity Vehicle, where there is no such investment. The Private Equity vehicle, at the time of the Polygon transaction and currently, remains a closed investment strategy. Past performance or experience (actual or simulated) does not necessarily give a guide for the future and no representation is being made that the funds listed will or are likely to achieve profits or losses similar to those shown. Past performance or experience (actual or simulated) does not necessarily give a guide for the future and no representation is being made that the funds listed will or are likely to achieve profits or losses similar to those shown. Except as otherwise noted, all performa nce numbers provided herein reflects the actual net performance of the funds net of management and performance fees, as well as any commissions and direct expenses incurred by the funds, but before withholding taxes, and other indirect expenses. All returns include the reinvestment of dividends, if any. Differences in account size, timing of transactions and market conditions prevailing at the time of investment may lead to different results. Differences in the methodology used to calculate performance may also lead to different performance results than those shown. P&L in 2015 for the Private Equity Vehicle was $26.9 million through to 31 December 2015 before FX movements of -$18.5 million. P&L is +$152.4 million from closing date net asset value before FX movements of -$39.2 million. The fund is generally precluded from hedging FX exposure. The fund has made life to date distributions of $565 million to its partners. The estimated approximate LTD multiple is based on the fund’s quarter end net asset value and historical distributions and other returns over an original aggregate purchase price for the fund’s initial assets of approximately $459 million and excludes the effects of FX and certain assets purchased through recycled capital. The estimated approximate LTD multiple including those two items (FX and recycled capital) would be 1.9x. Each of these multiples will be different from the multiples reflected for specific limited partners in the fund, which would be calculated with respect to relevant class of partners in accordance with the fund’s limited partnership agreement. Convertibles:  Polygon's convertibles strategy invests primarily in convertible securities in Europe and North America.  2015 net performance was 4.5%, compared to the HFRX Convertible Arbitrage Index which returned -0.12% for the same period; annualised net performance since inception in May 2009 has been 17.1% compared to 5.1% for the benchmark index.(36) European Event-Driven Equity:  Polygon’s European Event-Driven strategy invests primarily in the major European equity markets, with an event-driven focus.  The strategy returned 10.3% net during 2015. This compares to the HFRX Event Driven Index which returned -6.9% for the same period; annualised net performance since inception in July 2009 has been 11.2% compared to 1.8% for the benchmark index.(37) Mining Equities:  Polygon’s Mining Equities strategy focuses primarily in the equities of global mining companies, many of them based on gold.  The strategy posted net returns of 6.2% for 2015, versus the GDXJ Junior Gold Miners Index, which was down 19.7% for the same period; annualised net performance since inception in June 2012 has been 3.3% compared to -32.2% for the benchmark index.(38) 26│ tetragoninv.com Fund AUM at 31 Dec 2015 ($MM) Q4 2015 Net Performance 2015 Net Performance Annualised Net LTD Performance Convertibles(35.i)417.9$ 1.0%4.5%17.1%European Event-Driven Equity(35.ii)637.0$ 5.2%10.3%11.2%Mining Equities(35.iii)70.0$ 5.1%6.2%3.3%Distressed Opportunities(35.iv)100.0$ -1.2%-2.2%4.3%Other Equity(35.v)23.2$ 1.5%9.6%16.0%Total AUM - Open Funds1,248.1$ Estimated approx. LTD Multiple Private Equity Vehicle(35.vi)262.4$ N/AN/A1.9xTotal AUM1,510.5$ Polygon Funds Summary TFG Asset Management Overview POLYGON (continued) Distressed Opportunities:  Polygon’s Distressed strategy focuses on opportunities in companies undergoing, or about to undergo, balance sheet restructurings.  Net performance during 2015 was -2.2%. This compares to the HFRX Distressed Restructuring Index, which has returned -11.1% for the same period. Annualised net performance since inception in September 2013 has been 4.3% for the fund, versus the benchmark index return of -4.3%.(39) Other Equities:  These investments returned 9.6% net performance during 2015 and annualised performance from inception to 31 December 2015 was 16.0%.(40) Private Equity:  This represents Polygon’s portfolio of private and less-liquid public assets being sold down in a closed-ended investment vehicle. The fund has returned $565 million of cash to its partners since inception in March 2011, including $50.0 million during 2015. Performance in 2015 was affected by foreign exchange moves; P&L for 2015 was +$26.9 million; FX movements accounted for -$18.5 million, leading to net P&L of $8.4 million. Life to date, gross P&L is +$152.4 million excluding FX; FX movements accounted for -$39.2 million, and thus net P&L was $113.2 million.(41) TFG has not invested directly in this product; however, TFG Asset Management is the beneficiary of certain contracted management fee income. Tetragon Financial Group Limited 2015 Annual Report │27 TFG Asset Management Overview TM Description of Business:  Equitix is an integrated core infrastructure asset management and primary project platform.  Equitix was established in 2007 and is based in London.  TFG owns 85% of the business; over time, TFG’s holding is expected to decline to approximately 74.8%. Management own the balance.  Equitix typically invests in infrastructure projects in the United Kingdom with long-term revenue streams across the healthcare, education, social housing, highways & street lighting, offshore transmission and renewable and waste sectors.  Fees in this product include a management fee, and a carry interest fee that is over a hurdle currently set at 7.5%. The carried interest fee is typically 20% over the hurdle, and the management fee after the investment period is typically between 1.25% and 1.65%; during the investment period it has ranged between 0.95% and 2.0% on invested capital. The core funds also have an additional fee on committed capital of approximately 0.30%.  Further information on Equitix is available at www.equitix.co.uk. Amount of TFG’s Investment in Products: TFG has exposure to the performance of Equitix funds indirectly through its ownership of the company as Equitix holds certain GP interests in the funds it manages. As at 31 December 2015, these interests were valued at £12.5 million ($18.4 million). AUM: Figure 21 AUM is £1.9 billion ($2.8 billion)(i), compared to £1.3 billion at the end of 2014. (i) USD-GBP rate as at 31 December 2015. Performance in 2015: Equitix Fund I is cash generative and fully invested across 21 projects, Equitix Fund II is cash generative and fully invested across 35 projects and EF III is cash generative and fully invested/committed across 45 projects; all are delivering stable yields to investors. The Equitix Energy Efficiency Funds are in their investment period and are 70% committed to a diversified portfolio of projects; the portfolio is cash generative. The Equitix Managed Account is fully invested/committed and the portfolio is cash generative. Equitix Fund IV is in the process of fund raising and expected soon to reach its target with a significant proportion of capital invested/committed to date. 28│ tetragoninv.com £339£493£1,027£1,328£1,880 YE 2011 YE 2012 YE 2013 YE 2014 YE 2015Equitix AUM History (£MM)Equitix Fund IEquitix Fund IIEquitix Fund IIIEquitix Fund IVEnergy Efficiency FundsManaged Account TFG Asset Management Overview HAWKE’S POINT TM Description of Business:  Hawke’s Point is a mining finance company established by TFG in Q4 2014 which seeks to provide capital to companies in the mining and resource sectors.  TFG Asset Management established Hawke’s Point in Q4 2014 and owns 100% of the business.  Hawke’s Point is currently actively evaluating a range of mine financing opportunities. Amount of TFG’s Investment in Products: In 2015, there were no investments on which to report. AUM: Not applicable. TM Description of Business:  TCIP acts as a general partner of a private equity vehicle that, among other things, makes investments in CLOs relating to risk retention rules.(42)  The business was established at the end of 2015 and is managed out of New York and London.  TFG owns 100% of the business.  TCIP currently acts as general partner of Tetragon Credit Income II L.P. (“TCI II”), which focuses on CLO investments relating to risk retention rules, including majority stakes in CLO equity tranches of transactions managed by LCM or sub-advised by third-party CLO managers. TCI II is structured with a management fee and carried interest over a preferred return (each on non-LCM investments). It has a multi-year investment period and a term of seven years (subject to potential extensions and otherwise as required by applicable regulatory requirements). Amount of TFG’s Investment in Products: $35.0 million of committed capital. AUM: TCI II had its first close in November 2015 with committed capital of $142.9 million. Performance in 2015: TCI II made its first investment during Q4 2015, a majority stake in the equity tranche of LCM XX Limited Partnership. The TCIP team is focused on a near term pipeline of potential investments and third-party CLO sub-advisory arrangements. Tetragon Financial Group Limited 2015 Annual Report │29 Corporate Responsibility Corporate Responsibility Corporate Responsibility TFG believes that being a good citizen is an important part of doing business. It aims to contribute positively to the communities around it by participating in the following initiatives:      TFG Asset Management is the largest contributor to BACIT Limited (the Battle Against Cancer Investment Trust) a UK-based charitable investment vehicle. BACIT only invests where the relevant investment manager provides investment capacity on a ‘‘gross return’’ basis, meaning that BACIT and its subsidiaries (the “Group”) do not bear the impact of management or performance fees on its investments. This may be achieved by the relevant manager or fund agreeing not to charge management or performance fees, by rebating or donating back to the Group any management or performance fees charged or otherwise arranging for the Group to be compensated so as effectively to increase its investment return on the relevant investment by the amount of any such fees. BACIT does not charge its investors fees. However, it donates 1% of NAV each year to charity (50% to The Institute of Cancer Research and 50% to The BACIT Foundation). In addition, BACIT also intends to invest up to one per cent per annum of NAV to acquire interests in drug development and medical innovation projects undertaken by the Institute of Cancer Research or its subsidiaries in the field of cancer research and therapeutics which have the potential for commercial development and application. Further information on this initiative can be found on BACIT’s website, www.bacitltd.com. TFG Asset Management also supports Hedge Funds Care │Help for Children, a charity for the prevention and treatment of child abuse. Hedge Funds Care, also known as Help For Children (HFC), is an international charity, supported largely by the hedge fund industry, whose sole mission is preventing and treating child abuse. Its main goals are to raise as much money as possible to fund the programs that do the preventing and treating of child abuse; and to showcase the philanthropy of the hedge fund and finance industries. Further information can be found at www.hfc.org. In addition, TFG Asset Management is a corporate supporter of the Royal Court Theatre, its neighbour in London. The Royal Court bills itself as “the writer’s theatre” and has a particular mission to develop and cultivate new theatrical works from established and budding playwrights. Corporate sponsorships such as ours enable the Royal Court to support and develop exciting new plays. Further information can be found at www.royalcourttheatre.com. TFG Asset Management’s Polygon business is a member of the Alternative Investment Management Association (“AIMA”) and is a signatory of the Standards of the Hedge Fund Standards Board (“HFSB”). Equitix, one of TFG Asset Management’s businesses, has adopted specific initiatives regarding Environmental, Social and Governance (“ESG”) policies, by incorporating ESG policy and requesting socially responsible analysis and reporting within corporate governance of the projects they own and manage through all of their Funds. Furthermore, Equitix has a fund dedicated to making investments within the energy efficiency sector, which will make a direct contribution to the reduction of energy consumption and greenhouse gas emissions. Equitix is a signatory of the United Nations Principles of Responsible Investment (www.unpri.org) and a member of the UK Sustainable Investment and Finance Association (www.uksif.org). Please visit the Equitix website for further information: http://www.equitix.co.uk/sri.html. Tetragon Financial Group Limited 2015 Annual Report │31 2015 Financial Review Financial Review 2015 Financial Review This section shows consolidated financial data incorporating TFG and its 100% subsidiary, Tetragon Financial Group Master Fund Limited (the “Master Fund”), adjusted from Q3 2015 to reflect the Fair Value of TFG Asset Management’s businesses which are consolidated under U.S. GAAP, and provides comparative data where applicable.(43) Financial Highlights Figure 22 TFG uses, among others, the following metrics to understand the progress and performance of the business:  Fair Value Net Income ($263.9 million): Adds back to the U.S. GAAP net income ($127.3 million) the imputed 2015 share based compensation ($22.0 million), which is generated on an ongoing basis resulting from the 2012 Polygon transaction and the Fair Value adjustment ($114.6 million) attributable to Polygon, LCM, Hawke’s Point and TCIP which are currently consolidated under U.S. GAAP but are reflected in TFG’s key metrics as if they are held at Fair Value and not consolidated. Please see Appendix V for further details.  Fair Value Return on Equity (14.5%): Fair Value Net Income ($263.9 million) divided by Net Assets at the start of the year ($1,818.5 million).  Pro Forma Fully Diluted Shares (104.2 million):(44) Adjusts the U.S. GAAP shares outstanding (95.9 million) for the impact of escrow shares used as consideration in the Polygon transaction and associated stock dividends (together, 6.6 million) and for the potential impact of share options issued (1.7 million). These options represent the intrinsic value of shares available for the GreenOak Founders as at the end of 2015 (1.7 million) plus potential impact of options issued to TFG’s investment manager at the time of TFG’s IPO (0.0 million). See also Figure 40.  Fair Value EPS ($2.72): Calculated as Fair Value Net Income ($263.9 million) divided by weighted-average U.S. GAAP shares(i) during the period (97.1 million).  Fully Diluted Fair Value NAV per Share ($19.08):(44) Calculated as Fair Value Net Assets ($1,987.3 million) divided by Pro Forma Fully Diluted shares (104.2 million). (i) The time-weighted average daily U.S. GAAP Shares outstanding during the applicable year. Tetragon Financial Group Limited 2015 Annual Report │33 201520142013U.S. GAAP net income ($MM)$127.3$95.1$224.3Fair Value Net income ($MM)$263.9$118.1$247.4U.S. GAAP EPS$1.31$1.00$2.29Fair Value EPS$2.72$1.24$2.52Fair Value Return on equity14.5%6.6%15.3%Fair Value Net Assets ($MM)$1,987.3$1,818.5$1,803.2U.S. GAAP number of shares outstanding (MM)95.995.998.9Fair Value NAV per share$20.73$18.96$18.23Pro Forma number of shares outstanding (MM)104.2106.6110.2Fully diluted Fair Value NAV per share$19.08$17.05$16.36DPS$0.6475$0.6175$0.565 TETRAGON FINANCIAL GROUP Financial Highlights Through 2013 - 2015 Financial Review Fair Value EPS Analysis 2013-2015 Figure 23 34│ tetragoninv.com 201520142013Investment portfolio segmentU.S. CLO 1.0$0.58$1.23$1.74U.S. CLO 2.0$0.31$0.31$0.23European CLOs$0.06$0.24$0.89Equity Funds$0.16($0.03)$0.20Other Equities$0.53($0.28)$0.10Convertible Bond Fund$0.02$0.05$0.02Distressed Fund($0.06)$0.04$0.02Direct Loans$0.01$0.01$0.04Real Estate$0.26$0.11$0.03TFG Asset Management (fair value basis)$1.91$0.48$0.21FX, Options and Hedges($0.10)($0.15)$0.10Corporate Expenses($0.95)($0.64)($0.97)Corporate Income Taxes($0.01)($0.13)($0.09)Fair Value EPS$2.72$1.24$2.52Weighted Average Shares (MM)97.195.498.0TETRAGON FINANCIAL GROUPTFG Fair Value Earnings per Share Analysis Through 2013 - 2015Financial Review Statement of Operations (Fair Value Basis) Figure 24 Performance Fee A performance fee of $4.7 million was accrued in Q4 2015 in accordance with TFG’s investment management agreement. In 2015, the Investment Manager earned performance fees of $35.8 million. The hurdle rate for the Q1 2016 incentive fee has been reset at 3.259558% (Q4 2015: 2.971858%) as per the process outlined in TFG’s 2015 audited financial statements and in accordance with TFG’s investment management agreement. Please see TFG’s website, www.tetragoninv.com, and the 2015 TFG audited financial statements for more details on the calculation of this fee. Tetragon Financial Group Limited 2015 Annual Report │35 201520142013$MM$MM$MMInterest income134.7152.5204.8Fee income34.281.174.3Other income - cost recovery9.923.621.1Insurance recovery9.81.02.1Dividend income0.10.10.1Investment income188.7258.3302.4Management and performance fees(92.3)(49.8)(90.0)Other operating and administrative expenses(43.6)(101.5)(80.1)Amortisation of intangible assets(29.7)(6.8)(6.8)Total operating expenses (165.6)(158.1)(176.9)Net investment income23.1100.2125.5Net change in unrealised appreciation in investments157.4(48.8)105.1Realised gain on investments90.591.816.0Realised and unrealised losses from hedging and fx(6.2)(12.5)9.6Net realised and unrealised gains from investments and fx241.730.5130.7Net income before tax264.8130.7256.2Income tax(0.9)(12.6)(8.8)Net income263.9118.1247.4 TETRAGON FINANCIAL GROUP Fair Value Statement of Operations Through 2013 - 2015 Financial Review Balance Sheet (Fair Value Basis) Figure 25 See Appendix V for the reconciliation between the U.S. GAAP consolidated balance sheet and the balance sheet prepared on a Fair Value basis. 36│ tetragoninv.com 201520142013$MM$MM$MMAssetsInvestments, at fair value1,543.01,356.21,533.0Intangible assets- 29.736.5Cash and cash equivalents402.7402.0245.9Amounts due from brokers59.952.142.0Derivative financial assets19.419.215.2Fixed Assets- 0.10.3Deferred tax asset and income tax receivable- 10.08.3Other receivables3.133.426.5Total assets2,028.11,902.71,907.7LiabilitiesOther payables and accrued expenses36.054.579.8Amounts payable on share options- 12.310.7Deferred tax liability and income tax payable4.111.510.7Derivative financial liabilities0.75.93.3Total liabilities 40.884.2104.5 Net assets 1,987.31,818.51,803.2 TETRAGON FINANCIAL GROUP Fair Value Balance Sheet as at 31 December 2013, 2014, and 2015 Financial Review Statement of Cash Flows(i) Figure 26 (i) The gross dividend payable to shareholders was US$ 62.5 million (2014: US$ 58.4 million, 2013: US$ 53.9 million) with a value equivalent to US$ 12.0 million (2014: US$ 6.4 million, 2013: US$ 4.4 million) elected to be taken by the dividend recipient in shares rather than cash. Tetragon Financial Group Limited 2015 Annual Report │37 201520142013$MM$MM$MMOperating ActivitiesOperating cash flows after incentive fees and before movements in working capital315.0290.9375.6Purchase of fixed assets(0.1)(0.1)(0.4)Amounts due from broker(7.8)(10.2)(28.9)Change in (payables) / receivables(19.6)(0.4)2.7Cash flows from operating activities287.5280.2349.0Investment ActivitiesProceeds on sales of investments- Proceeds from sale of CLOs6.5171.5- - Net proceeds from derivative financial instruments7.7- 8.1- Proceeds from investments73.317.3102.6- Proceeds from realisation of real estate investments46.856.311.5- Proceeds from GreenOak working capital repayment6.45.1- Purchase of investments- Purchase of CLOs(62.4)(84.3)(73.1)- Purchase of bank loans- (1.4)(22.4)- Purchase of real estate investments(81.4)(77.0)(43.5)- Investments in asset managers(133.1)- (0.5)- Investments in Equity Funds(5.0)- (115.0)- Investments in Convertible Bond Fund- (15.0)(10.0)- Investments in Distressed Fund(5.0)(30.0)(60.0)- Investments in Other(22.0)(62.6)(10.9)Cash flows from operating and investing activities119.3260.1135.8Proceeds from issue of Shares0.1- - Net purchase of shares(60.9)(50.9)(16.1)Dividends paid to shareholders(50.5)(52.0)(49.5) Cash flows from financing activities (111.3)(102.9)(65.6)Net increase in cash and cash equivalents8.0157.270.2Cash and cash equivalents at beginning of period402.0245.9175.9Adjustment to cash balance upon deconsolidation(7.6)- - Effect of exchange rate fluctuations on cash and cash equivalents0.3(1.1)(0.2)Cash and cash equivalents at end of period402.7402.0245.9 TETRAGON FINANCIAL GROUP Fair Value Statement of Cash Flows Through 2013 - 2015 Financial Review Fair Value Net Income to U.S. GAAP Reconciliation Figure 27 TFG is primarily reporting earnings through a non-GAAP measurement called Fair Value Net Income. The reconciliation on the table above shows the adjustments required to get from this measure of earnings to U.S. GAAP net income. 1. 2. Adjustment one takes into account a Fair Value adjustment of $114.6 million for Polygon, LCM, Hawke’s Point and TCIP as if they were de-consolidated and held at Fair Value rather than consolidated as they currently are for U.S. GAAP purposes. Further details are provided in Appendix IV. Adjustment two removes share based compensation of $22.0 million as, under ASC 805, TFG is recognizing the value of the shares given in consideration for the Polygon transaction as compensation over the period in which they are vesting. This mechanic and future vesting schedule are described in more detail in the 2015 TFG audited financial statements. 38│ tetragoninv.com 2015 $MM Fair Value Net Income263.9Fair Value Adjustments(114.6)Share based compensation(22.0)U.S. GAAP net income127.3 Fair Value Net Income to U.S. GAAP Reconciliation Appendices Appendices Appendices APPENDIX I Directors’ Statements The Directors of TFG confirm that (i) this Annual Report constitutes the TFG management review for the year ended 31 December 2015 and contains a fair review of that period and (ii) the 2015 audited financial statements accompanying this Annual Report for TFG have been prepared in accordance with applicable laws and in conformity with U.S. generally accepted accounting principles. APPENDIX II Certain Regulatory Information This Performance Report constitutes TFG’s annual financial report as required pursuant to Section 5:25c of the Dutch Financial Markets Supervision Act (“FMSA”). Pursuant to Section 5:25c and 5:25m of the FMSA, this report is made public by means of a press release and has been filed with the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten) and also made available to the public by way of publication on the TFG website (www.tetragoninv.com). An investment in TFG involves substantial risks. Please refer to the Company’s website at www.tetragoninv.com for a description of the risks and uncertainties pertaining to an investment in TFG. This release does not contain or constitute an offer to sell or a solicitation of an offer to purchase securities in the United States or any other jurisdiction. The securities of TFG have not been and will not be registered under the U.S. Securities Act of 1933 (the “Securities Act”), as amended, and may not be offered or sold in the United States or to U.S. persons unless they are registered under applicable law or exempt from registration. TFG does not intend to register any portion of its securities in the United States or to conduct a public offer of securities in the United States. In addition, TFG has not been and will not be registered under the U.S. Investment Company Act of 1940, and investors will not be entitled to the benefits of such Act. TFG is registered in the public register of the Netherlands Authority for the Financial Markets under Section 1:107 of the FMSA as a collective investment scheme from a designated country. This release constitutes regulated information (“gereglementeerde informatie”) within the meaning of Section 1:1 of the FMSA. TFG shares (the “Shares”) are subject to legal and other restrictions on resale and the Euronext Amsterdam N.V. and SFM trading markets are less liquid than other major exchanges, which could affect the price of the Shares. There are additional restrictions on the resale of Shares by Shareholders who are located in the United States or who are U.S. persons and on the resale of Shares by any Shareholder to any person who is located in the United States or is a U.S. person. These restrictions include that each Shareholder who is located in the United States or who is a U.S. person must be a “Qualified Purchaser” or a “Knowledgeable Employee” (each as defined in the Investment Company Act of 1940), and, accordingly, that Shares may be resold to a person located in the United States or who is a U.S. person only if such person is a “Qualified Purchaser” or a “Knowledgeable Employee” under the Investment Company Act of 1940. These restrictions may adversely affect overall liquidity of the Shares. 40│ tetragoninv.com Appendices APPENDIX III Fair Value Determination of CLO Equity Investments In accordance with the valuation policies set forth on TFG’s website, the values of TFG’s CLO equity investments are determined using a third-party cash flow modelling tool. The model contains certain assumption inputs that are reviewed and adjusted as appropriate to factor in how historic, current and potential market developments (examined through, for example, forward- looking observable data) might potentially impact the performance of TFG’s CLO equity investments. Since this involves modelling, among other things, forward projections over multiple years, this is not an exercise in recalibrating future assumptions to the latest quarter’s historical data. Subject to the foregoing, when determining the U.S. GAAP-compliant Fair Value of TFG’s portfolio, the Company seeks to derive a value at which market participants could transact in an orderly market and also seeks to benchmark the model inputs and resulting outputs to observable market data when available and appropriate. The below modelling assumptions are unchanged from last quarter. Figure 28 U.S. CLOs Modelling Assumption Figure 29 U.S. CLOs Modelling Assumption Figure 30 Discount Rates Tetragon Financial Group Limited 2015 Annual Report │41 Variable Year Current Assumptions CADR Until deal maturity 1.0x WARF-implied default rate (2.2%) Recovery Rate Until deal maturity 73% Prepayment Rate Until deal maturity 20.0% p.a. on loans; 0.0% on bonds Reinvestment Price Until deal maturity 100% Variable Year Current Assumptions CADR Until deal maturity 1.0x WARF-implied default rate (2.1%) Recovery Rate Until deal maturity 67% Prepayment Rate Until deal maturity 20.0% p.a. on loans; 0.0% on bonds Reinvestment Price Until deal maturity 100% CLO Type Q4 2015 Q4 2014 U.S. 1.0 12.0%12.0% European 1.0 13.0%13.0% U.S. 2.0 - seasoned 11.0%11.0% U.S. 2.0 - less than 12 months old Deal IRRDeal IRR Appendices APPENDIX IV Fair Value Determination In TFG Asset Management In accordance with the accounting guidance in the AICPA Audit and Accounting Guide (2015): Investment Companies (the “Guide”), as an Investment Company, TFG carries all of its investments at Fair Value. However, as outlined in section 7.10 of the Guide, operating entities should be consolidated where TFG (i) has an economic interest in excess of 50%; (ii) is deemed to have control over the significant operational and financial decisions of the entity; and (iii) where the purpose of the operating entity is to provide services to the Investment Company (i.e., TFG) rather than realise a gain on the sale of the investment. As at 31 December 2015, this consolidation exemption was applied to TFG’s holdings in Polygon, LCM and Hawke’s Point (the “Consolidated Businesses”) because these businesses were managing some of TFG’s investment capital and thus could be deemed to be providing services to TFG. In contrast, Equitix is not managing TFG’s capital so is not subject to point (iii) above, and GreenOak is minority-owned so is not subject to points (i) or (ii) above. The resultant inconsistency of treatment under U.S. GAAP of the businesses in TFG Asset Management is potentially confusing to the reader of TFG’s financial statements, particularly since the determination and articulation in Q3 2015 of the “IPO Strategy”(45) for TFG Asset Management, which confirmed that the primary commercial purpose for TFG Asset Management, including the Consolidated Businesses, is to be held as an investment for capital appreciation, in line with TFG’s investment objective. Consequently, from Q3 2015, TFG has prepared and presented its non-GAAP financial metrics and performance information using a consistent Fair Value basis for all of TFG Asset Management. Some of the differences resulting from the presentation of non-GAAP metrics are reconciled in Appendix V. TFG’s investments in the TFG Asset Management businesses are considered to be “Level 3” investments in the U.S. GAAP valuation hierarchy and the Audit Committee of TFG, comprising the Independent Directors, has engaged third-party valuation specialists to determine an indicative valuation for each of these businesses. These valuations have been adopted for the purposes of reporting the Fair Value impact in TFG’s non-GAAP metrics as at 31 December 2015. Figure 31 sets out the valuation approach utilised for each of the businesses as well as the range of market metrics utilised in determining Fair Value. Both management and performance fees (“Fees”) continue to be calculated based on the U.S. GAAP measure of Net Asset Value and thus the non-GAAP adjustments do not currently impact the Fees payable to the Manager. Figure 31 42│ tetragoninv.com InvestmentTFG holdingFair Value Valuation approach($MM)Discount RateMultipleValue as % of AUMEquitix75% & Debt173.9Quoted market multiples and cross-check to recent transaction. Debt at par + accrued interest9.5% 15% Discount for Lack of Liquidity ("DLOL")5.3 x - 6.3 x EBITDA20% discount built-inN/AGreenOak23%70.0Quoted market multiples and cross-check using blended EBITDA and quoted market multiplesN/A11.7 x- 12.3 x Adjusted EBITDAN/ALCM 100%110.2Discounted cash flow analysis, cross checked to market multiples11.5%-13.5% 15% Discount for Lack of Liquidity ("DLOL")N/A1.6% -1.9% DLOL built-inPolygon100%67.0Discounted cash flow analysis, cross checked to market multiples12%-14% 20% DLOL7.7 x EBITDADLOL built-in3.8 x - 4.3 x DLOL built-inHawke's Point100%0.8Replacement cost basisN/AN/AN/ATCIP100%0.3Discounted cash flow analysis12.5%-14.5% 15% Discount for Lack of Liquidity ("DLOL")N/AN/AValuation approach to TFG's investments in TFG Asset ManagementRanges utilisedAppendices APPENDIX V Reconciliation Between U.S. GAAP and Fair Value Basis This section describes how the non-GAAP Fair Value adjustments relating to LCM, Polygon, Hawke’s Point and TCIP have been made to the U.S. GAAP financials to arrive at the Key Performance Metrics. Figure 32 details the impact of such a change in accounting treatment for LCM, Polygon and Hawke’s Point in terms of carrying value and performance fees. In arriving at the imputed performance fee, the change in NAV is adjusted by the full amortisation of the remaining base cost ($29.9 million) of the purchase of 25% of LCM in 2012. Previously, this was being amortised on a straight-line basis over 10 years, and each quarter an applicable adjustment is made to reduce the performance fees payable to the investment manager. Figure 32 Tetragon Financial Group Limited 2015 Annual Report │43 Fair ValueU.S. GAAPConsolidated Value31-Dec-1531-Dec-15Change($MM)($MM)($MM)Polygon67.023.443.6LCM110.2-110.2Hawke's Point0.8-0.8TCIP0.3-0.3Net assets of consolidated businesses-17.8(17.8)Deferred tax liability re intangible assets-(5.8)5.8Fair Value impact gross of imputed performance fee178.335.4142.9$MMGross change in NAV for purposes of incentive fee calculation142.9Full amortisation of LCM base cost(29.9)NAV for purposes of incentive fee calculation113.0Imputed performance fee28.3Fair Value impact net of imputed performance fee114.6TFG Asset Management - Impact of Use of Fair Value Metrics on Consolidated Businesses Appendices APPENDIX V (continued) Reconciliation Between U.S. GAAP and Fair Value Basis (continued) Figure 33 shows a reconciliation between the Statement of Operations prepared on a full Fair Value basis and on a U.S. GAAP basis. We assume that the date of notional de-consolidation was the start of Q3 2015, the quarter in which the IPO Strategy, and thus the change in the purpose for the expanded TFG Asset Management, was confirmed. In addition to adding in the unrealised Fair Value as detailed in Figure 32, the reconciliation shows the removal of the operating P&L for H2 2015, and the reversal of certain balance sheet items relating to Polygon, LCM, Hawke’s Point or TCIP. Such items include the remaining intangible asset balance relating to Polygon’s management contracts and a reversal of a deferred tax liability. We adjust for notional performance fees of $28.3 million as calculated in Figure 32. In addition, as in prior periods, we back out share-based compensation of $22.0 million as, under ASC 805, TFG is recognizing the value of the shares given in consideration for the Polygon transaction as compensation over the period in which they are vesting. This mechanic and future vesting schedule are described in more detail in the 2015 Master Fund audited financial statements. Figure 33 44│ tetragoninv.com Fair Value Net Economic Income$MM Fair Value Adjustments$MM Share Based Compensation$MM U.S. GAAP$MM Interest income134.7- - 134.7Fee income34.236.0- 70.2Other income - cost recovery9.97.4- 17.3Insurance recovery9.8- - 9.8Dividend income0.1- - 0.1Investment income188.743.4- 232.1Management and performance fees(92.3)28.3- (64.1)Other operating and administrative expenses(43.6)(43.8)(22.0)(109.4)Amortisation of intangible assets(29.7)23.4- (6.3)Total operating expenses (165.6)7.9(22.0)(179.8)Net investment income23.151.3(22.0)52.3Net change in unrealised appreciation in investments157.4(156.7)- 0.7Realised gain on investments90.5- - 90.5Realised and unrealised losses from hedging and fx(6.2)- - (6.2)Net realised and unrealised gains from investments and fx241.7(156.7)- 85.0Net income before tax264.8(105.4)(22.0)137.3Income tax(0.9)(9.2)- (10.1)Net income263.9(114.6)(22.0)127.3 TETRAGON FINANCIAL GROUP Fair Value to U.S. GAAP Statement of Operations Reconciliation Through 2015 Appendices APPENDIX V (continued) Reconciliation Between U.S. GAAP and Fair Value Basis (continued) Figure 34 shows a reconciliation between the Balance Sheet prepared on a full Fair Value basis and on a U.S. GAAP basis. As noted above, we assume that the date of notional de-consolidation was the start of Q3 2015, the quarter in which the IPO Strategy, and thus the purpose for the expanded TFG Asset Management – to be held as an investment for IPO – was confirmed. In addition to adding in the unrealised Fair Value of $178.3 million as detailed in Figure 32, the reconciliation shows the removal of certain balance sheet items relating to Polygon, LCM, Hawke’s Point and TCIP, including the value of Polygon’s un-amortised management contracts ($23.4 million), cash of $37.7 million held in TFG Asset Management, a small amount of fixed assets, a deferred tax asset and receivables, which mainly relate to cost recoveries. On the liability side, we reverse certain accrued expenses including compensation and add back a notional performance fee of $28.3 million relating to the Fair Value adjustment as detailed in Figure 32. Figure 34 Tetragon Financial Group Limited 2015 Annual Report │45 Fair Value$MM Fair Value Adjustments$MM U.S. GAAP$MM AssetsInvestments, at fair value1,543.0(178.3)1,364.7Intangible assets- 23.423.4Cash and cash equivalents402.737.7440.4Amounts due from brokers59.9- 59.9Derivative financial assets19.4- 19.4Fixed Assets- 0.50.5Deferred tax asset and income tax receivable- 9.29.2Other receivables3.118.421.5Total assets2,028.1(89.1)1,939.0LiabilitiesOther payables and accrued expenses36.017.253.2Deferred tax liability and income tax payable4.18.312.4Derivative financial liabilities0.7- 0.7Total liabilities 40.825.566.3 Net assets 1,987.3(114.6)1,872.7 TETRAGON FINANCIAL GROUP Fair Value to U.S. GAAP Balance Sheet Reconciliation as at 31 December 2015 Appendices APPENDIX VI Additional CLO Portfolio Statistics Each individual deal's metrics used in the calculation of the figures below will differ from the overall averages and vary across the portfolio. Figure 35 Figure 36 (i) The calculation of TFG's lagging 12-month corporate loan default rate does not include certain underlying investment collateral that was assigned a “Selective Default” rating by one or more of the applicable rating agencies. Such Selected Defaults are included the S&P/LCD lagging 12-month U.S. institutional loan default rate discussed above. Furthermore, TFG's CLO equity and direct loan investment portfolio includes approximately 10.5% CLOs with primary exposure to European senior secured loans and such loans are included in the calculation of TFG's corporate default rate. (ii) Source: S&P/LCD Quarterly Review as of the outlined quarter-end date. 46│ tetragoninv.com 17.3%17.1%17.0%17.3%17.0%16.1%15.9%16.2%16.4%16.7%16.4%16.6%21.6%21.6%21.7%21.9%22.0%21.7%21.7%21.8%22.0%22.5%22.6%23.0%10.8%10.9%10.3%11.6%11.4%11.4%11.2%12.0%12.0%12.7%12.8%12.4%7.5%7.6%7.6%8.4%8.1%7.4%7.5%7.3%7.3%5.7%5.5%5.1%0.0%5.0%10.0%15.0%20.0%25.0%Q1 2013Q2 2013Q3 2013Q4 2013Q1 2014Q2 2014Q3 2014Q4 2014Q1 2015Q2 2015Q3 2015Q4 2015Weighted-Average IRR on TFG's CLO InvestmentsWeighted-Average IRR on TFG's CLO Investments ALL TFGU.S. CLO 1.0U.S. CLO 2.0EUR1.1%1.5%1.8%1.5%1.5%1.6%1.2%1.0%0.7%0.4%0.5%0.6%2.2%1.4%2.4%2.1%1.2%4.4%3.3%3.2%3.8%1.2%1.3%1.5%0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%Q1 2013Q2 2013Q3 2013Q4 2013Q1 2014Q2 2014Q3 2014Q4 2014Q1 2015Q2 2015Q3 2015Q4 2015Trailing 12-Month Default RatesTFG and U.S. Market-Wide Trailing 12-Month Default Rates (i)(ii)TFG Trailing 12-Month Loan RateS&P/LCD Trailing 12-MonthDefault RateAppendices Additional CLO Portfolio Statistics (continued) CLO PORTFOLIO CREDIT QUALITY Figure 37 Tetragon Financial Group Limited 2015 Annual Report │47 ALL CLOs Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Caa1/CCC+ or 5.1%5.0%4.9%5.4%4.6%3.7%4.5%3.3%3.2%4.5%3.8%3.5% Below Obligors: WARF: 2,5412,5682,5532,5422,5652,6212,5542,4422,3502,5072,4882,549 U.S. CLOs Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Caa1/CCC+ or 4.0%4.1%3.9%3.8%3.4%3.0%4.4%2.5%2.2%2.6%2.5%2.9% Below Obligors: WARF: 2,5102,5502,5342,5132,5442,5562,4892,3472,2572,4022,3992,540 EUR CLOs Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Caa1/CCC+ or 9.7%8.7%9.1%11.8%9.4%6.9%4.8%6.5%7.2%12.8%10.0%6.4% Below Obligors: WARF: 2,6702,6422,6312,6582,6502,8942,8192,8262,7292,9742,8882,592 Appendices Figure 38 CLO EQUITY PORTFOLIO DETAILS AS OF 31 DECEMBER 2015 Notes (i) Transactions are investments made on a particular investment date. Multiple transactions may be associated with the same tranche of the same CLO deal. Note that certain transactions may have been removed from the table above, as the remaining value of the assets of those CLOs is immaterial. TFG may continue to hold such transactions as of the date of this report. (ii) The USD investment cost reflects a USD-EUR exchange rate fixed at a single historical rate to avoid the impact of skewed weightings and FX volatility over time. As such, the investment costs of European CLOs as shown in this table may not be comparable to the investments costs as shown in TFG's financial statements. (iii) Par weighted-average spread over LIBOR or EURIBOR (as appropriate) of the underlying loan assets in each CLO's portfolio. (iv) Notional weighted-average spread over LIBOR or EURIBOR (as appropriate) of the debt tranches issued by each CLO, as of the closing date of each transaction. (v) Notional weighted-average spread over LIBOR or EURIBOR (as appropriate) of the debt tranches issued by each CLO, as of the most recent trustee report date. (vi) The current junior-most O/C cushion is the excess (or deficit) of the junior-most O/C test ratio over the test requirement, as of the latest trustee report available as of the report date. Calculations are ignored and stated as “N/A” In certain cases where debt has been substantially, but not fully, repaid, resulting in a junior-most O/C test cushion that is not meaningful. (vii) The junior-most O/C cushion at close is the excess (or deficit) of the junior-most O/C test ratio over the test requirement that was expected on each deal's closing date. Please note that two of TFG's investments are so called “par structures” which don't include a junior O/C test. They have been marked by an “N/A” in the relevant junior-most O/C test columns. (viii) Calculated by annualising the change from the expected closing date junior-most O/C cushion to the current junior-most O/C cushion. (ix) Calculated from TFG's investment date. Includes both historical cash flows received to-date and prospective cash flows expected to be received, based on TFG's base case modelling assumptions. Inception to report date cash flow received on each transaction as a percentage of its original cost. (x) 48│ tetragoninv.com OriginalDeal End ofWtd AvgOriginalCurrentCurrent Jr-Jr-Most O/CAnnualizedITD CashInvest. CostClosingYear ofReinvSpreadCost of FundsCost of FundsMost O/CCushion at(Loss) GainReceived asTransaction(i)Deal Type($MM USD)(ii)DateMaturityPeriod(bps)(iii)(bps)(iv)(bps)(v)Cushion(vi)Close(vii)of Cushion(viii)IRR(ix)% of Cost(x)Transaction 1EUR CLO37.5 200720242014351 55 149 6.20% 3.86% 0.27% - 51.1%Transaction 2EUR CLO29.7 200620232013384 52 104 3.21% 3.60% (0.04%) 10.1% 135.1%Transaction 5EUR CLO36.9 200720222014396 60 69 5.29% 5.74% (0.05%) 11.2% 131.0%Transaction 7EUR CLO38.5 200720232013388 46 104 21.08% 3.64% 1.99% 3.4% 60.7%Transaction 10EUR CLO27.0 200620222012356 50 131 13.74% 4.54% 0.98% 1.1% 56.8%Transaction 86EUR CLO3.6 200620222012356 50 131 13.74% 3.11% 1.13% 9.1% 42.6%EUR CLO Subtotal:173.2 375 53 111 10.13% 4.26% 0.66% 85.3%Transaction 11US CLO20.5 200620182012288 45 131 52.09% 4.55% 5.11% 20.8% 202.4%Transaction 12US CLO22.8 200620192013333 46 132 54.22% 4.45% 5.43% 20.8% 202.8%Transaction 13US CLO15.2 200620182012304 47 67 11.51% 4.82% 0.71% 21.9% 234.3%Transaction 14US CLO26.0 200720212014332 49 74 4.43% 5.63% (0.14%) 19.2% 222.5%Transaction 15US CLO28.1 200720212014390 52 60 4.27% 4.21% 0.01% 29.8% 291.6%Transaction 16US CLO23.5 200620202013360 46 63 6.55% 4.44% 0.22% 21.1% 238.3%Transaction 17US CLO26.0 200720212014300 40 41 4.63% 4.24% 0.04% 24.7% 250.7%Transaction 22US CLO37.4 200720212014380 53 76 6.44% 5.00% 0.16% 21.9% 226.6%Transaction 24US CLO16.9 200620182012389 46 118 39.80% 4.17% 3.80% 17.9% 199.9%Transaction 32US CLO24.0 200720212014304 59 71 4.27% 5.57% (0.16%) 22.2% 229.8%Transaction 34US CLO22.2 200620202012372 50 143 16.14% 6.66% 1.05% 18.7% 207.9%Transaction 36US CLO28.4 200720212013344 46 83 4.82% 5.18% (0.04%) 19.4% 199.2%Transaction 47US CLO28.3 200620212013330 47 57 4.27% 4.34% (0.01%) 22.7% 240.6%Transaction 56US CLO23.0 200720192014611 42 N/A56.96% 4.53% 5.97% 22.6% 249.2%Transaction 57US CLO0.6 200720192014611 42 N/A56.96% 4.53% 5.97% 49.2% 1574.9%Transaction 61US CLO29.1 200720212014345 45 55 2.70% 4.04% (0.15%) 17.9% 192.9%Transaction 63US CLO27.3 200720212013353 53 105 7.83% 4.78% 0.36% 19.4% 209.5%Transaction 64US CLO15.4 200720212013359 38 56 N/AN/AN/A23.2% 245.1%Transaction 65US CLO26.9 200620212013340 47 119 19.49% 4.96% 1.60% 15.3% 173.2%Transaction 66US CLO21.3 200620202013289 49 66 4.25% 4.05% 0.02% 22.8% 243.4%Transaction 68US CLO19.3 200620202013319 48 54 8.83% 4.41% 0.49% 28.3% 295.7%Transaction 69US CLO28.2 200720192013319 44 53 11.30% 5.61% 0.65% 27.0% 272.8%Transaction 72US CLO4.8 200720192014611 42 N/A56.96% 4.53% 5.97% 19.5% 149.0%Transaction 73US CLO1.9 200720192014611 42 N/A56.96% 4.53% 5.97% 19.5% 149.0%Transaction 75US CLO32.7 201120222014366 168 193 7.41% 4.05% 0.74% 11.2% 84.0%Transaction 77US CLO14.5 201120232016385 212 214 4.04% 5.04% (0.25%) 12.0% 70.0%Transaction 78US CLO22.9 201220232015407 217 176 5.68% 4.00% 0.43% 16.6% 94.3%Transaction 79US CLO19.4 201220222015379 215 184 3.86% 4.00% (0.04%) 8.4% 66.8%Transaction 80US CLO22.7 201220222016392 185 185 3.19% 4.17% (0.27%) 10.6% 69.1%Transaction 81US CLO21.7 201220242016416 216 193 3.37% 4.00% (0.19%) 7.3% 52.4%Transaction 82US CLO25.4 201220222016396 206 207 3.54% 4.00% (0.14%) 9.5% 52.7%Transaction 83US CLO20.8 201320252017447 193 193 6.48% 6.17% 0.11% 14.5% 60.0%Transaction 84US CLO24.6 201320232017391 183 184 3.93% 4.02% (0.03%) 16.5% 69.1%Transaction 85US CLO1.0 201320252017394 170 171 4.87% 5.01% (0.05%) 9.9% 52.9%Transaction 87US CLO23.0 201320262018402 199 199 3.20% 4.00% (0.39%) 3.7% 35.4%Transaction 88US CLO30.1 201420242018390 199 200 3.54% 4.02% (0.26%) 11.5% 41.8%Transaction 89US CLO33.6 201420262018407 195 195 3.56% 3.96% (0.26%) 13.7% 36.5%Transaction 90US CLO20.7 201420262018414 203 200 3.95% 4.00% (0.04%) 13.2% 24.3%Transaction 91US CLO27.8 201520272019425 215 212 3.82% 4.00% (0.23%) 14.9% 15.5%Transaction 92US CLO34.6 201520272020425 199 199 4.05% 3.99% 0.13% 16.1% 12.6%US CLO Subtotal:892.5 375 111 126 10.47% 4.45% 0.65% 154.4%Total CLO Portfolio:1,065.7 375 102 123 10.42% 4.42% 0.65% 143.1%CLO EQUITY PORTFOLIO DETAILS AS OF 31 DECEMBER 2015 (continued) Figure 39 Appendices (i) The current junior-most O/C cushion is the excess (or deficit) of the junior-most O/C test ratio over the test requirement, as of the latest trustee report available as of the report date. Calculations are stated as “N/A” In certain cases where debt has been substantially, but not fully, repaid, resulting in a junior-most O/C test cushion that is not meaningful. Tetragon Financial Group Limited 2015 Annual Report │49 $42.3$84.3$46.4$107.3$27.8$34.6$0$20$40$60$80$100$120201520162017201820192020Reinvestment End DateBased on Original Investment Size ($ Millions)$0.0$52.6$81.3$86.4$296.9$167.6$130.2$89.3$21.8$77.3$62.4$0$100$200$300$40020172018201920202021202220232024202520262027CLO Deal MaturitiesBased on Original Investment Cost ($ Millions)001212210510152025<= 0%0% to 2%2% to 4%4% to 6%Over 6%Current Junior-Most O/C Test Cushion Distribution(by Number of Transactions) Appendices APPENDIX VII Share Reconciliation and Shareholdings Figure 40(46) Shareholdings Persons affiliated with TFG maintain significant interests in TFG shares. For example, as of 31 December 2015, the following persons own (directly or indirectly) interests in shares in TFG in the amounts set forth below: Mr. Reade Griffith* Mr. Paddy Dear* Mr. David Wishnow Mr. Jeff Herlyn Mr. Rupert Dorey Mr. Michael Rosenberg Mr. Frederic Hervouet Long Term Incentive Programme (“LTIP”) and other equity-based awards(47) 8,195,861 2,969,897 243,894 170,904 102,717 68,052 10,133 5,650,000 *The amounts set forth above in regards to Messrs. Griffith and Dear include their interests with respect to the Escrow Shares. In addition to the foregoing, as of 31 December 2015, certain employees of subsidiaries of TFG and other affiliated persons own in the aggregate approximately 3.3 million shares, including interests with respect to the Escrow Shares, in each case, however, excluding any TFG shares held by the GreenOak principals or employees. As previously disclosed, non-voting shares of TFG (together with accrued dividends and previously vested shares, (the “Vested Shares”)) that were issued pursuant to TFG’s acquisition in October 2012 of TFG Asset Management L.P. (f/k/a Polygon Management L.P.) and certain of its affiliates (the “Polygon Transaction”) have vested with certain persons (other than Messrs. Griffith and Dear) (such persons, the “Sellers”), all of whom are employees or partners (“Employees”) of TFG-owned or affiliated entities, pursuant to the Polygon Transaction. Certain Sellers agreed to sell to Messrs. Griffith and Dear and certain employees of TFG Asset Management on 29 October 2015 an aggregate of approximately 0.26 million Vested Shares at a price equal to the tender offer clearing price of $10. Messrs. Griffith and Dear acquired acquire in aggregate approximately 0.12 million Vested Shares and these are included in their shareholdings disclosed above. Certain of these persons may from time to time enter into purchases or sales trading plans (each a, “Fixed Trading Plan”) providing for the sale of Vested Shares or the purchase of TFG shares in the market, or may otherwise sell their Vested Shares or purchase TFG shares, subject to applicable compliance policies. Applicable brokerage firms may be authorised to purchase or sell TFG shares under the relevant Fixed Trading Plan pursuant to certain irrevocable instructions. Each Fixed Trading Plan is intended to comply with Rule 10b5-1 under the United States Securities Exchange Act of 1934, as amended. Each Fixed Trading Plan has been or will be approved by TFG in accordance with its applicable compliance policies. For additional information regarding the Polygon Transaction and the future vesting schedule for shares issued thereunder, see Note 22 to the 2015 Tetragon Financial Group Master Fund Limited audited financial statements. Rule 10b5-1 provides a “safe harbor” that is designed to permit individuals to establish a pre-arranged plan to buy or sell company stock if, at the time such plan is adopted, the individuals are not in possession of material, nonpublic information. 50│ tetragoninv.com 2015 Shares (MM) Legal Shares Issued and Outstanding137.8Less: Shares Held In Subsidiary(17.0)Less: Shares Held In Treasury(12.8)Less: Escrow Shares(46.i)(12.1)U.S. GAAP Shares Outstanding95.9Add: Dilution for Share Options1.7Add: Escrow Shares(46.i)6.6Pro Forma Fully Diluted Shares104.2 U.S. GAAP to Fully Diluted Shares Reconciliation Appendices APPENDIX VIII Additional Corporate Information DESCRIPTION OF BUSINESS TFG (company number 43321) is a Guernsey closed-ended company traded on Euronext Amsterdam N.V. under the ticker symbol “TFG.NA” and on the Specialist Fund Market of the London Stock Exchange under the symbol “TFG.LN”. TFG’s investment objective is to generate distributable income and capital appreciation. It aims to provide stable returns to investors across various credit, equity, interest rate, inflation and real estate cycles. The company’s investment portfolio comprises a broad range of assets, including a diversified alternative asset management business, TFG Asset Management, and covers bank loans, real estate, equities, credit, convertible bonds and infrastructure. TFG’s asset-management platform, TFG Asset Management, consists of LCM, the GreenOak joint venture, Polygon, Equitix, Hawke’s Point, and TCIP. TFG Asset Management is registered as an investment adviser under the U.S. Investment Advisers Act of 1940 and one of its investment management entities, Polygon Global Partners LLP, is authorised and regulated by the United Kingdom Financial Services Authority. TFG is registered in the public register of the Netherlands Authority for the Financial Markets under section 1:107 of the FMSA as a collective investment scheme from a designated country. ORGANISATIONAL STRUCTURE TFG currently invests through a “master-feeder” structure whereby TFG’s only direct investment is in shares of Tetragon Financial Group Master Fund Limited, or the TFG Master Fund. Figure 41 TFG has an authorised share capital of $1,000,000 divided into 10 voting shares, having a par value of $0.001 each, and 999,999,990 non-voting shares. The 10 voting shares in issue were issued at par and are owned by Polygon Credit Holdings II Limited, which is a non-U.S. affiliate of TFG’s investment manager and is ultimately controlled by Reade Griffith and Paddy Dear. TFG’s voting shares are the only shares of TFG entitled to vote for the election of TFG’s and the Master Fund’s boards of directors and on all other matters, subject to the limited rights of the shares described in TFG’s Memorandum and Articles of Incorporation. TFG’s voting shares are not entitled to receive dividends. Except as described in TFG’s Memorandum and Articles of Incorporation, the non-voting shares are not entitled to vote on any matter. The non-voting shares carry a right to any dividends or other distributions declared by TFG. INVESTMENT MANAGEMENT Tetragon Financial Management LP, or TFM, has been appointed the investment manager of TFG and the Master Fund pursuant to an investment management agreement dated 26 April 2007 (the “Investment Management Agreement”). TFM’s general partner, Tetragon Financial Management GP LLC, is responsible for all actions of the investment manager. The general partner is ultimately controlled by Reade Griffith and Paddy Dear, who also control the holder of TFG’s voting shares and are the voting members of TFM’s Investment and Risk Committees. Reade Griffith acts as the authorised representative of the general partner and TFM. TFM’s Investment Committee is responsible for the investment management of TFG and the Master Fund portfolio and currently consists of Reade Griffith, Paddy Dear, Jeffrey Herlyn, Michael Rosenberg, David Wishnow and Stephen Prince. The Investment Committee determines the investment strategy of TFG and the Master Fund and approves each significant investment by them. TFM’s Risk Committee is responsible for the risk management of TFG and the Master Fund portfolio and performs active and regular oversight and risk monitoring. The risk committee has the same composition as the investment committee. TFM’s Executive Committee oversees all key non-investment and risk activities of TFM and currently consists of Reade Griffith, Paddy Dear, David Wishnow, Stephen Prince, Phil Bland, Sean Côté and Greg Wadsworth. Tetragon Financial Group Limited 2015 Annual Report │51 (Continued) Appendices Additional Corporate Information (continued) SUMMARY OF KEY TERMS OF TFG’S INVESTMENT MANAGEMENT AGREEMENT Under the terms of the Investment Management Agreement, TFM has full discretion to invest the assets of TFG and the Master Fund in a manner consistent with the investment objective of TFG. TFM has the authority to determine the investment strategy to be pursued in furtherance of the investment objective, which strategy may be changed from time to time by TFM in its discretion. TFM is authorised to delegate its functions under the Investment Management Agreement. The Investment Management Agreement continues in full force and effect unless terminated (i) by the investment manager at any time upon 60 days’ notice or (ii) immediately upon TFG or the Master Fund giving notice to the Investment Manager or the Investment Manager giving notice to TFG or the Master Fund in relation to such entity in the event of (a) the party in respect of which notice has been given becoming insolvent or going into liquidation (other than a voluntary liquidation for the purpose of reconstruction or amalgamation upon terms previously approved in writing by the other party) or a receiver being appointed over all or a substantial part or of its assets or it becoming the subject of any petition for the appointment of an administrator, trustee or similar officer, (b) a party committing a material breach of the Investment Management Agreement which causes a material adverse effect to the non-breaching party and (if such breach shall be capable of remedy) not making good such breach within 30 days of service upon the party in breach of notice requiring the remedy of such breach or (c) fraud or wilful misconduct in the performance of a party’s duties under the Investment Management Agreement. The Investment Management Agreement provides that none of the Investment Manager, its affiliates or their respective members, managers, partners, shareholders, directors, officers and employees (including their respective executors, heirs, assigns, successors or other legal representatives) (each, as an indemnified party) will be liable to the Master Fund, TFG or any investor in the Master Fund or TFG for any liabilities, obligations, losses (including, without limitation, losses arising out of delay, mis-delivery or error in the transmission of any letter, cable, telephonic communication, telephone, facsimile transmission or other electronic transmission in a readable form), damages, actions, proceedings, suits, costs, expenses (including, without limitation, legal expenses), claims and demands suffered in connection with the performance by the investment manager of its obligations under the Investment Management Agreement or otherwise in connection with the business and operations of TFG or the Master Fund, in the absence of fraud or wilful misconduct on the part of an indemnified party, and TFG and the Master Fund have each agreed to indemnify each indemnified party against any such liabilities, obligations, losses, damages, actions, proceedings, suits, costs, expenses, claims and demands, except as may be due to the fraud or wilful misconduct of the indemnified party. TFM may act as investment manager or advisor to any other person, so long as its services to TFG or the Master Fund are not materially impaired thereby, and need not disclose to TFG or the Master Fund anything that comes to its attention in the course of its business in any other capacity than as investment manager. The Investment Manager is not liable to account for any profit earned or benefit derived from advice given by the investment manager to other persons. The Investment Manager will not be liable to TFG or the Master Fund for any loss suffered in connection with the Investment Manager’s decision to offer investments to any other person, or failure to offer investments to TFG or the Master Fund. The Investment Manager is authorised to enter into transactions on behalf of TFG and the Master Fund with persons who are affiliates of the investment manager, provided that in connection with any such transaction that exceeds $5 million of aggregate investment, the investment manager obtains either (i) the approval of a majority of the members of the Board Directors of TFG and the Master Fund that do not have a material interest in such transaction (whether as part of a Board of Directors resolution or otherwise) or (ii) an opinion from a recognized investment bank, auditing firm or other appropriate professional firm substantively to the effect that the financial terms of the transaction are fair to TFG and the Master Fund from a financial point of view. MANAGEMENT AND INCENTIVE FEES; EXPENSES All fees and expenses of TFG and the Master Fund, except for the incentive fees for TFM as investment manager (as described below), will be paid by the Master Fund, including management fees relating to the administration of TFG. The Investment Manager is entitled to receive management fees equal to one and one-half percent (1.5%) per annum of the net asset value (NAV) of TFG payable monthly in advance prior to the deduction of any accrued incentive fees. No separate management fees are payable with respect to the NAV of the Master Fund. TFG will also pay to the Investment Manager an incentive fee for each Calculation Period (as defined below) equal to 25% of the increase in the NAV of TFG during the Calculation Period (before deduction of any dividend paid or the amount of any redemptions or repurchases of Shares (or other relevant capital adjustments) during such Calculation Period) above (i) the Reference NAV (as defined below) plus (ii) the Hurdle (as defined below) for the Calculation Period. If the Hurdle is not met in any Calculation Period (and no incentive fee is paid), the shortfall will not carry forward to any subsequent Calculation Period. A “Calculation Period” is a period of three months ending on March 31, June 30, September 30 and December 31 of each year, or as otherwise determined by the Board of Directors of TFG. The “Reference NAV” is the greater of (i) NAV at the end of the Calculation Period immediately preceding the current Calculation Period and (ii) the NAV as of the end of the Calculation Period ending three months earlier than the Calculation Period referred to in clause (i). For the purposes of determining Reference NAV at the end of a Calculation Period, NAV shall be adjusted by the amount of accrued dividends and amounts of any redemptions or repurchases of Shares (or other relevant capital adjustments) and incentive fees to be paid with respect to that Calculation Period. The “Hurdle” for any Calculation Period will equal (i) the Reference NAV multiplied by (ii) the Hurdle Rate (defined below). (Continued) 52│ tetragoninv.com Appendices Additional Corporate Information (continued) The “Hurdle Rate” for any Calculation Period equals 3-month U.S. Dollar LIBOR determined as of 11:00 a.m. London time on the first London business day of the then current Calculation Period plus the hurdle spread of 2.647858%, in each case multiplied by (x) the actual number of days in the Calculation Period divided by (y) 365. The incentive fee in respect of each Calculation Period is calculated by reference to the increase in NAV of the Shares before deduction of any accrued incentive fee. The incentive fee is normally payable in arrears within 14 calendar days of the end of the Calculation Period. If the Investment Management Agreement is terminated other than at the end of a Calculation Period, the date of termination will be deemed to be the end of the Calculation Period. The Investment Manager does not charge separate fees based on the NAV of the Master Fund. TFG and the Master Fund generally bear all costs and expenses directly related to their investments or prospective investments, such as brokerage commissions, interest on debit balances or borrowings, custodial fees and legal and consultant fees. TFG and the Master Fund also generally bear all out-of-pocket costs of administration including accounting, audit, administrator and legal expenses, costs of any litigation or investigation involving their activities, costs associated with reporting and providing information to existing and prospective investors and the costs of liability insurance. INVESTMENT MANAGER OPTIONS In recognition of the work performed by the Investment Manager in successfully arranging the 2007 global offering and the associated raising of new capital for the company, TFG granted to the investment manager options to purchase 12,545,330 of TFG's non-voting shares (subject to the application of customary anti-dilution provisions) at an exercise price per share equal to the IPO offer price (U.S. $10.00). These options became fully vested and immediately exercisable as of the date of admission to the Euronext Amsterdam N.V. and will remain exercisable until the 10th anniversary of that date (i.e., 26 April 2017). None of the options have been exercised. THE INVESTMENT MANAGER’S ROLE WITH RESPECT TO TFG ASSET MANAGEMENT TFM’s responsibilities with respect to TFG and the Master Fund include, inter alia:  investing and reinvesting the assets of TFG and the TFG Master Fund in securities, derivatives and other financial instruments and other investments of whatever nature and committing the assets of TFG and the Master Fund in relation to agreements with entities, issuers and counterparties;  holding cash balances or investing them directly in any short-term investments, and reinvesting any income earned thereon in accordance TFG’s investment strategy;  purchasing, holding, selling, transferring, exchanging, mortgaging, pledging, hypothecating and otherwise acting to acquire and dispose of and exercise all rights, powers, privileges and other incidents of ownership or possession with respect to investments held or owned by TFG and the TFG Master Fund, with the objective of the preservation, protection and increase in value thereof;  exercising any voting or similar rights attaching to investments purchased on behalf of TFG and the TFG Master Fund;  borrowing or raising monies from time to time without limit as to amount or manner and time of repayment;  engaging consultants, attorneys, independent accountants or such other persons as the investment manager may deem necessary or advisable; and  entering into any other contracts or agreements in connection with any of the foregoing activities. TFG Asset Management is an investment of the Master Fund, and, as such, TFM, as the investment manager, is responsible for exercising any of the Master Fund’s voting or similar rights with respect to TFG Asset Management, as an investment. As with any other category of investments, TFM is also responsible for decisions with respect to acquisitions and dispositions by the Master Fund of asset management businesses – as investment decisions with respect to the Master Fund’s cash or other assets.(48) Following the acquisition of an asset management business, that business then becomes a part of TFG Asset Management. TFG Asset Management seeks to generate income and value from its asset management businesses by having these businesses manage third-party investor capital. TFG Asset Management has an internal management team that is responsible for the TFG Asset Management business as a whole, including the oversight of its various asset management businesses as they form and grow the funds that they manage, and is responsible for its own costs. The Master Fund may invest in the various funds and other vehicles managed by a TFG Asset Management business. It may also provide financial support to any fund managed by a TFG Asset Management business (such as a “seeding” arrangement), or provide equity, loans or other financial support to TFG Asset Management or its asset management businesses. TFM is responsible for any decision to invest cash into any fund or other vehicle managed by a TFG Asset Management business(49) and is also responsible for decisions regarding financial support for TFG Asset Management. SERVICES AGREEMENT BETWEEN THE INVESTMENT MANAGER AND CERTAIN SUBSIDIARIES OF TFG ASSET MANAGEMENT TFM has, since its inception, relied on two Polygon entities(50) for a broad range of services to support its activities.(51) Following TFG’s 28 October 2012 acquisition of Polygon Management L.P., these entities have been part of TFG Asset Management. The services provided to TFM under a Services Agreement by TFG Asset Management, through these entities, include infrastructure (Continued) Tetragon Financial Group Limited 2015 Annual Report │53 Appendices services such as operations, financial control, trading, marketing and investor relations, legal, compliance, office administration, payroll and employee benefits. One of those entities, Polygon Global Partners LLP, which is authorised and regulated by the United Kingdom Financial Conduct Authority, also provides services relating to the dealing in and management of investments, arrangement of deals and advising on investments. COST RECOVERY BY TFG ASSET MANAGEMENT FOR SERVICES PROVIDED TO TFG’S INVESTMENT MANAGER TFG Asset Management, through its Polygon subsidiaries, has implemented a cost-allocation methodology with the objective of allocating service-related costs, including to TFM, in a consistent, fair, transparent and commercially-based manner.(52) TFG Asset Management then charges fees to TFM for the services allocated to TFM on a cost-recovery basis that is designed to achieve full recovery of the allocated costs. Most of the costs related to these services are directly or indirectly attributable to personnel or “human capital”, with compensation typically being the largest single cost.(53) Consequently, one of the most critical cost allocations is related to professionals’ time, which is commonly expressed as Full Time Equivalents or “FTEs”. On a monthly basis, each TFG Asset Management employee, directly or via their team head, provides a breakdown of the approximate percentage of time spent supporting the various businesses for the previous month (this excludes certain functions such as office management and technology that are charged to business users on a standard basis (e.g., space used or global headcount) which removes any need on the part of those teams to allocate their FTEs to business lines). TFG Asset Management employees should not be incentivised to either over or under allocate to any business as their time allocation is not a consideration in the determination of their overall compensation. Once allocated percentages are determined and agreed, a FTE is derived. Personnel costs (excluding bonuses) of each function are calculated using a standard costing methodology, which includes a standard add-on for employment taxes and standard employee benefits. Bonuses are charged to each business line (including TFM) based on the FTE allocation described above. In addition to FTE costs, there are a number of other costs that reflect the use of resources by TFG Asset Management personnel on behalf of TFM (in addition to the other TFG Asset Management businesses), including real property costs, technology, travel and entertainment and market data. A standard cost methodology is used to allocate these costs across the various business lines that are supported, including TFM. The setting of standard costs is designed to reflect what those costs would be on an arm’s-length basis. The methodology is designed to create consistency in order to provide a fair allocation of resource costs to all businesses. Employee FTE data is collated and is used to process monthly cost allocations. Such allocations are invoiced monthly to users of the TFG Asset Management platform which are not owned by TFG Asset Management, including TFM, or allocated within the TFG Asset Management general ledger for businesses owned by TFG Asset Management. TFG Asset Management cost allocation methodology is documented and updated annually by TFG Asset Management’s finance team in consultation with its legal and compliance teams and is approved each year by TFG Asset Management’s executive committee. The methodology used to allocate costs forms part of the preparation of the financial statements of TFG and the Master Fund and is therefore within the terms of reference of TFG’s Audit Committee. TFG’s auditors, reporting directly to TFG’s Audit Committee, are currently employed under an agreed upon procedures assignment to periodically test that the costs allocated to (and therefore recovered from) TFM have been properly calculated in accordance with the approved cost-allocation methodology. TFG’s Independent Directors, who are specifically mandated to approve, among other things, related-party transactions, are required to approve the methodology for allocating costs and in their sole discretion the application of that methodology as part of their oversight processes. As such, the annual cost allocation methodology update and the actual annual cost allocations that result based on these cost methodology policies and procedures are separately approved by the Independent Directors. For additional information, please see TFG’s Financial Statements. VALUATION State Street (Guernsey) Limited serves as the TFG’s independent administrator and values the investments of the Master Fund on an ongoing basis. The NAV per Share is expected to fluctuate over time with the performance of TFG’s investments. The NAV of TFG and the Master Fund and the NAV per Share are determined as at the close of business on the last business day of each fiscal quarter for purposes of calculating incentive fees. As TFG makes all of its investments through the Master Fund, TFG’s NAV will equal the NAV of the Master Fund before any TFG specific liabilities, such as incentive fees. The Company’s valuation policies are set forth on the Company’s website at www.tetragoninv.com. The information on the “Valuation” page of the website supersedes any other disclosure by the Company with respect to such information. Subject to the foregoing, additional information with respect to TFG’s or the Master Fund’s valuation policies may be found in each Company’s annual audited financial statements accompanying this Annual Report. DIVIDENDS AND OTHER DISTRIBUTIONS The Company has sought to continue to return value to its shareholders, including through dividends and share repurchases. Dividends: TFG continues to pursue a progressive dividend policy with a target payout ratio of 30-50% of normalised earnings, based on the long-term target RoE of 10-15%.(54) (Continued) 54│ tetragoninv.com Appendices The Board of Directors will have the authority to declare dividend payments, based upon the recommendation of the Investment Manager, subject to the approval of the voting shares of TFG and adherence to applicable law, including the satisfaction of a solvency test as required pursuant to the Companies (Guernsey) Law, 2008, as amended. The Investment Manager’s recommendation with respect to the declaration of dividends (and other capital distributions) may be informed by a variety of considerations, including (i) the expected sustainability of the Company’s cash generation capacity in the short and medium term, (ii) the current and anticipated performance of the Company, (iii) the current and anticipated operating and economic environment and (iv) other potential uses of cash ranging from preservation of the Company’s investments and financial position to other investment opportunities. TFG has and may continue to also pay scrip dividends currently conducted through an optional dividend reinvestment program. If the Board of Directors declares a cash dividend payable by TFG, they will also (in their capacity as directors of the Master Fund) declare an equal dividend per share payable concurrently by the Master Fund. Share Repurchases: TFG has and may also continue to engage in share repurchases in the market from time to time. Such purchases may at appropriate price levels below NAV represent an attractive use of TFG’s excess cash and an efficient means to return cash to Shareholders. Any decision to engage in share repurchases will be made by the Investment Manager, upon consideration of relevant factors, and will be subject to, among other things, applicable law and profits at the time. The Company also continues to explore other methods of improving the liquidity of its shares. REPORTING In accordance with applicable regulations under Dutch law, TFG publishes monthly statements on its website for the benefit of its investors containing the following information: the total value of the investments of the Master Fund; a general statement of the composition of the investments of the Master Fund; and the number of legal issued and outstanding shares of TFG. In addition, in accordance with the requirements of Euronext Amsterdam N.V. and applicable regulations under Dutch law, TFG provides annual and semi-annual reports to its shareholders, including year-end financial statements, which in the case of the financial statements provided in its annual reports, will be reported in accordance with U.S. GAAP and audited in accordance with international auditing standards as well as U.S. GAAS for regulatory purposes, if applicable. The NAV of TFG is available to investors on a monthly basis on the Company’s website at www.tetragoninv.com. Tetragon Financial Group Limited 2015 Annual Report │55 Appendices APPENDIX IX Board of Directors and the Audit Committee THE BOARD OF DIRECTORS The Board of Directors currently comprises six directors, of which four are Independent Directors. Rupert Dorey has over 30 years of experience in financial markets. Rupert was at CSFB for 17 years from 1988 to 2005 where he specialised in credit related products, including derivative instruments where his expertise was principally in the areas of debt distribution, origination and trading, covering all types of debt from investment grade to high yield and distressed debt. He held a number of senior positions at CSFB, including establishing CSFB's high yield debt distribution business in Europe, fixed income credit product coordinator for European offices and head of UK Credit and Rates Sales. Since 2005, he has been acting in a Non-Executive Directorship capacity for a number of Hedge Funds, Private Equity & Infrastructure Funds, for both listed and unlisted vehicles. Rupert is a former President of the Guernsey Chamber of Commerce and is a member of the Institute of Directors. Rupert is based in Guernsey and is a Non-Executive, Independent Director. Frederic Hervouet has over 17 years of experience in financial markets and hedge funds, including in multi -asset class investment and risk management, structured products and structured finance. Until September 2013, Frederic was a Managing Director and Head of Commodity Derivatives Asia for BNP Paribas, where he was focused on trading, structuring and sales. Previously, Frederic was a Director and Global Head of Sales at Diapason Commodities Management SA, a partner at Systeia Capital Management, which is now part of Amundi Asset Management, and a Director and Head of European Market Distribution at BAREP Asset Management, the hedge fund management subsidiary of Société Générale. Frederic has a MSc in Applied Mathematics and International Finance and a Master's Degree (DESS) in Financial Markets, Commodities Markets and Risk Management from the Université Paris Dauphine. He is a member of the Institute of Directors (IoD) and of the Guernsey Chamber of Commerce. Frederic is based in Guernsey and is a Non-Executive, Independent Director. David Jeffreys provides directorship services to a small number of fund groups. From 1995 until 2010 David worked with EQT, a Scandinavian based private equity group, acting as a director of each of its Fund general partners and, from 2006, establishing and serving as Managing Director of EQT Funds Management Limited, its Guernsey based management and administration office. Between 1993 and June 2004, David was managing director of Abacus Fund Managers (Guernsey) Limited, where he was involved with private client trust arrangements, corporate administration, pension schemes and fund administration. He was a board member of Abacus' principal administration operating companies and served on the boards of various administrated client companies. Previously, David worked as an auditor and accountant for 12 years with Coopers & Lybrand (and its predecessor firms). He has an undergraduate degree in Economics and Accounting from the University of Bristol and is a fellow of the Institute of Chartered Accountants in England and Wales. David is based in Guernsey and is a Non-Executive, Independent Director. Byron Knief is Managing Director of Court Square Capital Advisor, LLC. Since 1989, he has raised and invested over $3 billion of capital through a series of mezzanine and leveraged debt funds. Prior to 1989, he ran a variety of businesses for Citigroup in the United States, Europe, Canada and Latin America. Byron received an undergraduate degree from Northwestern University and an MBA from Columbia University. He has served as a director on the boards of several public and private companies. Current corporate board memberships include DavCo Restaurants, Inc., JAC Products, Inc. and Olameter, Inc. He was also formerly a director of Polygon Global Opportunities Fund and certain of its affiliates. Byron's charitable board memberships include The Milbank Memorial Fund and The Mountain Top Arboretum. Byron is based in New York and is a Non-Executive, Independent Director. Reade Griffith co-founded Polygon in 2002 and Tetragon Financial Management LP in 2005. He was previously the founder and former chief executive officer of the European office of Citadel Investment Group, a multi-strategy hedge fund that he joined in 1998. He was a partner and senior managing director responsible for running the Global Event Driven arbitrage team in Tokyo, London and Chicago for the firm. He was previously with Baker, Nye, where he was an analyst working on an arbitrage and special situations portfolio. Reade holds a JD degree from Harvard Law School and an undergraduate degree in Economics from Harvard College. He also served as an officer in the U.S. Marine Corps and left as a Captain following the 1991 Gulf War. At Polygon, he is primarily focused on the trading businesses and risk management. Reade is based in London and is an Internal Director. Paddy Dear co-founded Polygon in 2002 and Tetragon Financial Management LP in 2005. He was previously managing director and the global head of Hedge Fund Coverage for UBS Warburg Equities. As global head of Hedge Fund Coverage and Chairman of the Global Hedge Fund Committee, Paddy was responsible for the delivery of all of the bank's products and services to hedge fund clients globally. He was on the board of UBS Netherlands, and was a member of both the European Equity Business Committee and the Extended Global Equity Business Committee. Prior to this, Paddy was co-head of European sales trading, execution, arbitrage sales and flow derivatives. He had been with UBS since 1988, including six years in New York. Paddy was in equity sales at Prudential Bache before joining UBS. Prior to working in investment banking, he was a petroleum engineer with Marathon Oil Co. Paddy holds an undergraduate degree in Petroleum Engineering from Imperial College in London. His responsibilities at Polygon include risk management, overseeing Polygon's non-trading activities, managing investment bank interfaces and relationships and new business development. Paddy is based in London and is an Internal Director. 56│ tetragoninv.com (Continued) Appendices Board of Directors and the Audit Committee (continued) THE AUDIT COMMITTEE The Audit Committee of TFG is responsible for, among other items, assisting and advising TFG's Board of Directors with matters relating to TFG's accounting and financial reporting processes and the integrity and audits of TFG's financial statements. The Audit Committee is also responsible for reviewing and making recommendations with respect to the plans and results of each audit engagement with TFG's and the Master Fund's independent accountants, the audit and non-audit fees charged by the independent accountants and the adequacy of TFG's and the Master Fund's internal accounting controls. Size, Independence and Composition of the Board of Directors of TFG and the Master Fund The structure, and practices and committees of the Board of Directors of each of TFG and the Master Fund, including matters relating to the size, independence and composition of the Board of Directors, the election and removal of members of the Board of Directors, requirements relating to board action and the powers delegated to board committees, are governed by each entity’s respective Memorandum and Articles of Incorporation. Each of TFG and the Master Fund has six directors (referred to herein as the Directors). Subject as set out below and as elsewhere described in the risk factors found on TFG’s website at http://www.tetragoninv.com/investor/riskfactors.aspx, not less than a majority of the Directors are independent. A Director will be an “Independent Director” if the Board of Directors determines that the person satisfies the standards for independence contained in the U.K. Combined Code in all material respects. If the death, resignation or removal of an Independent Director results in the Board of Directors having less than a majority of Independent Directors, the vacancy must be filled promptly. Pending the filling of such vacancy, the Board of Directors may temporarily consist of less than a majority of Independent Directors and those Directors who do not meet the standards for independence may continue to hold office. A Director who is not an Independent Director will not be required to resign as a Director as a result of an Independent Director’s death, resignation or removal. In addition, the TFG’s Memorandum and Articles of Incorporation prohibit the Board of Directors from consisting of a majority of Directors who are resident in the United Kingdom. Election and Removal of Directors of TFG and the Master Fund Each member of TFG’s and the Master Fund’s Boards of Directors is elected annually by the holder of TFG’s voting shares. All vacancies on the Board of Directors including by reason of death or resignation may be filled, and additional Directors may be appointed, by a resolution of the Voting Shareholder. A Director may be removed from office for any reason by notice requesting resignation signed by all other Directors then holding office, if the Director is absent from four successive meetings without leave expressed by a resolution of the Directors or for any reason by a resolution of the holder of TFG’s voting shares. A Director will also be removed from the Board of Directors if he becomes bankrupt, if he becomes of unsound mind, if he becomes a resident of the United Kingdom and such residency results in a majority of the Board of Directors being residents of the United Kingdom or if he becomes prohibited by law from acting as a Director. A Director is not required to retire upon reaching a certain age. Action by the Board of Directors of TFG and the Master Fund The Boards of Directors of TFG and the Master Fund may take action in a duly convened meeting, for which a quorum is five Directors, or by a written resolution signed by at least five Directors. When action is to be taken by the Board of Directors, the affirmative vote of five of the Directors then holding office is required for any action to be taken. As a result, the Board of Directors will not be able to act without the affirmative vote of one of the directors affiliated with the holder of TFG’s voting shares. The Directors are responsible for the management of TFG and the Master Fund. They have delegated to the Investment Manager certain functions, including broad discretion to adopt an investment strategy to implement TFG’s investment objective. However, certain matters are specifically reserved for the Board of Directors under the Memorandum and Articles of Incorporation. Transactions in which a Director has an Interest Provided that a Director has disclosed to the other Directors the nature and extent of any interests of his in accordance with the Companies (Guernsey) Law, 2008, as amended, a Director, notwithstanding his office: (a) may be a party to, or otherwise interested in, any transaction or arrangement with TFG or the Master Fund or in which TFG or the Master Fund is otherwise interested; (b) may be a director or other officer of, or employed by, or a party to any transaction or arrangement with, or otherwise interested in, any body corporate promoted by TFG or the Master Fund or in which TFG of the Master Fund is otherwise interested; and (c) shall not be accountable to TFG or the Master Fund for any benefit derived from any such transaction or arrangement or from any interest in any such body corporate, and no such transaction or arrangement shall be void or voidable on the ground of any such interest or benefit or because such Director is present at or participates in the meeting of the Directors that approves such transaction or arrangement, provided that (i) the material facts as to the interest of such Director in such transaction or arrangement have been disclosed or are known to the Directors and the Directors in good faith authorise the transaction or arrangement and (ii) the approval of such transaction or arrangement includes the votes of a majority of the Directors that are not interested in such transaction or such transaction is otherwise found by the Directors (before or after the fact) to be fair to TFG or the Master Fund as of the time it is authorised. Under the Investment Management Agreement, the Directors have authorised the Investment Manager to enter into transactions on behalf of TFG or the Master Fund with persons who are affiliates of the Investment Manager, provided that in connection with any such transaction that exceeds $5 million of aggregate investment the Investment Manager informs the Directors of such transaction and obtains either (i) the approval of a majority of the Directors that (Continued) Tetragon Financial Group Limited 2015 Annual Report │57 Appendices do not have a material interest in such transaction or (ii) an opinion from a recognised investment bank, auditing firm or other appropriate professional firm substantively to the effect that the financial terms of the transaction are fair to TFG and the Master Fund from a financial point of view. Compensation The remuneration for Directors is determined by resolution of the holder of TFG’s voting shares. Currently, the Directors’ annual fee is $100,000, in compensation for service on the Boards of Directors of both TFG and the Master Fund. The Master Fund pays Directors’ fees. The Directors affiliated with the Voting Shareholder have waived their entitlement to a fee. The Directors are entitled to be repaid by TFG for all travel, hotel and other expenses reasonably incurred by them in the discharge of their duties. Directors of the Master Fund are compensated and reimbursed on the same basis. None of the Directors has a contract with TFG or the Master Fund providing for benefits upon termination of employment. Certain Corporate Governance Rules TFG and the Master Fund are required to comply with all provisions of Guernsey company law relating to corporate governance to the extent the same are applicable and relevant to TFG’s activities. In particular, each Director must seek to act in accordance with the “Code of Practice-Company Directors” and “Code of Corporate Governance” issued by the Guernsey Financial Services Commission. No formal corporate governance code applies to TFG or the Master Fund under Dutch law. Indemnity Each present and former Director or officer of TFG and the Master Fund is indemnified against any loss or liability incurred by the Director or officer by reason of being or having been a Director or officer of TFG or the Master Fund. In addition, the Directors may authorise the purchase or maintenance by TFG and the Master Fund for any Director or officer or former Director or officer of TFG or the Master Fund of any insurance, in respect of any liability which would otherwise attach to the Director or officer or former Director or officer. 58│ tetragoninv.com Appendices APPENDIX X Risk Factors An investment in TFG (together with the Master Fund, the “company”) involves substantial risks and uncertainties. Investors may review a more detailed description of these risks and uncertainties and others to which the company is subject on TFG's website at www.tetragoninv.com. These risks and uncertainties include, among others, those listed below. Risks Relating to the Company’s Asset Management Platform             As the company becomes more of a financial services firm that functions as a company that owns operating companies, it may face difficulties as it invests in asset classes in which it does not have substantial experience. The asset management business is intensely competitive, with competition based on a variety of factors, including investment performance, the quality of service provided to clients, investor liquidity and willingness to invest, fund terms (including fees), brand recognition and business reputation. Our asset management business competes with a number of private equity funds, specialised investment funds, hedge funds, funds of hedge funds and other sponsors managing pools of capital, as well as corporate buyers, traditional asset managers, commercial banks, investment banks and other financial institutions (including sovereign wealth funds). Asset management and financial advisory businesses are subject to extensive regulation, which affects the company's activities and creates the potential for significant liabilities and penalties. The possibility of increased regulatory focus could result in additional burdens on the company's business. Recent legislative and regulatory changes in the United States, such as the Dodd-Frank Act, and the European Union, such as the Alternative Investment Fund Managers Directive and the European Market Infrastructure Regulation, could adversely affect the company's business. As we have expanded and as we continue to expand the number and scope of our businesses, we increasingly confront potential conflicts of interest relating to our activities. Certain of our funds may have overlapping investment objectives, including funds that have different fee structures, and potential conflicts may arise with respect to our decisions regarding how to allocate investment opportunities among those funds. To the extent we fail to appropriately deal with any such conflicts, it could negatively impact our reputation and ability to raise additional funds or result in potential litigation against us. Poor performance of our managed investment funds and vehicles would cause a decline in our asset management revenue, income and cash flow, and could adversely affect our ability to raise capital for future investment funds. Our asset management business depends in part on our ability to raise capital from third-party clients. If we are unable to raise capital from third-party clients, we would be unable to collect management fees or deploy their capital into investments and potentially collect transaction fees or incentive fees, which would materially reduce our asset management revenue and cash flow. Misconduct of our employees or at our portfolio companies could harm us by impairing our ability to attract and retain clients and subjecting us to significant legal liability and reputational harm. The performance of LCM and, in turn, the company's operating results, may be negatively influenced by various factors, including the (i) performance of LCM-managed CLOs, which in general are subject to the same risks as the company's CLO investments and are currently the primary source of LCM's revenues and (ii) ability of LCM to retain key personnel, the loss of whom may negatively affect LCM's ability to provide asset and collateral management services in a fashion, and of a quality, consistent with its prior practice. Furthermore, the company's ownership of LCM may negatively impact certain aspects of the company's CLO investment strategy and as a result the company's performance as well as the company's ability to diversify its investments across multiple asset managers. The performance of Polygon and, in turn, the company's operating results, may be negatively influenced by various factors, including the (i) performance of Polygon-managed funds, and (ii) ability of Polygon to retain key personnel, the loss of whom may negatively affect Polygon's ability to provide asset management services in a fashion, and of a quality, consistent with its prior practice. GreenOak has a limited operating history and it may be unable to successfully operate its business or achieve its investment objectives. The company established Hawke’s Point as a new start-up mining finance business in the fourth quarter of 2014. There is no assurance that Hawke’s Point will find appropriate financing and investment opportunities, will raise third-party funds necessary to pursue opportunities or generate fee income, or that its investments in such opportunities will generate profitable returns in the future. Equitix has a limited operating history and the company has controlled Equitix for a short period. The company acquired Equitix in February 2015. The company may not achieve the growth and performance that it expects to achieve by acquiring Equitix, which may adversely affect the company’s results of operations. (Continued) Tetragon Financial Group Limited 2015 Annual Report │59 Appendices Risk Factors (continued)  TFG Asset Management has organized Tetragon Credit Income Partners Ltd. (“TCIP”) in connection with the company’s efforts to deploy capital and resources intended to assist CLO collateral managers (including LCM) in satisfying recent “risk retention” rules which were promulgated by U.S. federal regulators pursuant to the Dodd-Frank Act (the “U.S. Risk Retention Rules”) and/or similar rules promulgated by the European Union (the “E.U. Risk Retention Rules”). The company, together with certain third parties, is a significant investor in TCIP’s affiliated investment vehicle. There can be no assurance that the U.S. Risk Retention Rules or the E.U. Risk Retention Rules will not change or be interpreted by regulators in a manner such that TCIP’s proposed transactions and arrangements do not facilitate compliance with the U.S. Risk Retention Rules and/or the E.U. Risk Retention Rules, or in a manner that otherwise precludes the contemplated transactions or arrangements. If the structures and arrangements established by TCIP were, in the future, determined to subject TCIP, its affiliated investment vehicle, any other TFG affiliate or any third-party manager to unacceptable regulatory risk, TCIP’s ability to make investments would likely be severely and negatively limited and arrangements with third-party managers may be terminated as a result.  As the company invests in new asset classes and as its asset mix changes, its revenues and profitability could be reduced. Risks Relating to the Company’s Investment Portfolio              Many of the company's investments are in the form of highly subordinated securities, which are susceptible to losses of up to 100% of the initial investments, including losses resulting from changes in the financial rating ascribed to, or changes in the market value or fair value of, the underlying assets of an investment. CLO vehicles, which make up a large portion of the company's current investment portfolio generally invest in fixed income securities rated lower than Baa by Moody's or lower than BBB by S&P (or, if not rated, of comparable quality) and may be regarded as predominantly speculative with respect to the issuer's continuing ability to meet principal and interest payments. Moreover, market developments (including, without limitation, deteriorating economic outlook, rising defaults and rating agency downgrades) may impact the fair value of an investment and/or its underlying assets, as we experienced during the period from the third quarter of 2008 through the first half of 2009. Defaults, their resulting losses and other losses on underlying assets (including bank loans) may have a negative impact on the value of the company's portfolio and cash flows received. In addition, bank loans may require substantial workout negotiations or restructuring in the event of a default or liquidation which could result in a substantial reduction in the interest rate and/or principal. The modeled cash flow predictions and assumptions used to calculate the IRR and fair value of each CLO investment may prove to be inaccurate and require adjustment. Factors affecting the accuracy of such modeled cash flow predictions include: (1) uncertainty in predicting future market values of certain distressed asset types, (2) the inability to accurately model collateral manager behaviour and (3) the divergence of assumed variables from realised levels over the period covered by the model. Bank loans are generally subject to liquidity risks and, consequently, there may be limited liquidity if a Securitization Vehicle is required to sell or otherwise dispose of such bank loans. Many of the company's investments in securitization vehicles are and will be illiquid and have values that are susceptible to changes in the ratings and market values of such vehicles' underlying assets, which may make it difficult for the company to sell such holdings. The company may be exposed to counterparty risk, which could make it difficult for the company to collect on the obligations represented by investments and result in significant losses. The performance of many of the company's investments may depend to a significant extent upon the performance of its asset managers (internal and external). The company is subject to concentration risk in its investment portfolio, which may increase the risk of an investment in TFG. The company's CLO investments are subject to (i) interest rate risk, which could cause the company's cash flow, fair value of its assets and operating results to decrease and (ii) currency risk, which could cause the value of the company's CLO investments in U.S. Dollars to decrease regardless of the inherent value of the underlying investments. The Investment Manager may not be successful in the utilization of hedging and risk management transactions, which could subject the company’s investment portfolio to increased risk or lower returns on its investments and in turn cause a decrease in the fair value of the company’s assets. The ability of securitization vehicles in which the company invests to sell assets and reinvest the proceeds may be restricted, which may reduce the yield from the company's investment in those Securitization Vehicles. In connection with the transaction with GreenOak, the company will invest its capital, directly and indirectly, in certain real estate investments. Real estate investments are subject to various risks and fluctuations and cycles in value and demand, many of which are beyond the company's control. 60│ tetragoninv.com (Continued) Appendices Risk Factors (continued)        The real estate investments made, and to be made, by GreenOak are relatively difficult to sell quickly. Return of capital and realisation of gains, if any, from an investment generally will occur upon disposition or refinance of the underlying property. GreenOak may be unable to realise its investment objectives by sale, other disposition or refinance at attractive prices within any given period of time or may otherwise be unable to complete any exit strategy. The company invests a portion of its capital, directly and indirectly, in certain European-listed equity securities. Such investments are subject to various risks, many of which are beyond the company’s control. Risks or events which could negatively affect such equity security investments include, but are not limited to: increased volatility in the market price and with respect to trading volume of the equity securities and increased uncertainty and government intervention in global financial markets. The company invests a portion of its capital, directly and indirectly, in certain mining-industry related equity securities, including through Hawke’s Point. Such investments are subject to various risks, many of which are beyond the company’s control. In addition to the risks discussed above associated with equity investments generally, risks or events which could negatively affect mining-industry related equity investments include, but are not limited to: exploration, developmental and operational risks. The company invests a portion of its capital, directly and indirectly, in certain convertible securities, mainly in the form of debt securities that can be exchanged for equity interests. Such investments are subject to various risks, many of which are beyond the company’s control. Risks or events which could negatively affect convertible security investments include, but are not limited to: declining credit quality of issuers of the convertible securities and increased volatility in the market price and with respect to trading volume of the underlying equity into which the convertible securities are convertible. The company invests a portion of its capital, directly and indirectly, in certain distressed opportunities. Such investments are subject to various risks, many of which are beyond the company’s control. Risks or events which could negatively affect distressed opportunity investments include, but are not limited to: difficulty in obtaining information as to the true condition of the issuer; potential for abrupt and erratic market movements and above average price volatility of the securities; and potential for litigation. The company may invest or intends to invest a portion of its capital, directly or indirectly, in infrastructure projects through Equitix, which the company acquired in February 2015. Investments in infrastructure projects are subject to specific risks including, but not limited to: (i) construction risks, (ii) subcontractor risks, (iii) financing risks, (iv) governmental risks and (v) long time horizons. Direct investments in asset managers will expose the company's business to additional risks, including: a decline in the price of securities, a more complex regulatory environment and competition. Risks Relating to TFG and the Master Fund         TFG's principal source of cash will be the investments that it makes through the Master Fund. TFG's ability to pay dividends will depend on it receiving distributions from the Master Fund. Shareholders will not be able to terminate the company's investment management agreement. None of the Investment Manager or the Service Providers owe fiduciary duties to the shareholders of TFG. The shares of TFG may continue to trade below NAV. The NAV per Share will change over time with the performance of the company's investments and will be determined by the company's valuation principles. The fees payable to the Investment Manager will be based on NAV and changes in NAV, which will not necessarily correlate to changes in the market value of the shares of TFG. TFG and the Master Fund have approved a very broad investment objective and the Investment Manager will have substantial discretion when making investment decisions. In addition, the Investment Manager's strategies may not achieve the company's investment objective. TFG is an investment company that has been registered under the laws of Guernsey. The rights of its Shareholders and the fiduciary duties that the Board of Directors owes to TFG and the Shareholders are governed by Guernsey law and TFG’s articles of incorporation. As a result, the rights of the Shareholders and the fiduciary duties that are owed to them and TFG may differ in material respects from the rights and duties that would be applicable if TFG were organised under the laws of a different jurisdiction or if it were not permitted to vary such rights and duties in its articles of incorporation. The liability of the Investment Manager is limited under the company’s arrangements with it, and the company has agreed to indemnify the Investment Manager against claims that it may face in connection with such arrangements, which may lead the Investment Manager to assume greater risks when making investment related decisions than it otherwise would if investments were being made solely for its own account. TFG is not, and does not intend to become, regulated as an investment company under the Investment Company Act and related rules. The company may become involved in litigation that adversely affects the company's business, investments and results of operations. (Continued) Tetragon Financial Group Limited 2015 Annual Report │61 Appendices Risk Factors (continued)  No formal corporate governance code applies to TFG under Dutch law and TFG will not be bound to comply with the U.K. Combined Code other than as set forth in its articles of incorporation. Risks Relating to the Investment Manager and Services Providers and Affiliated Relationships      The company's organizational, ownership and investment structure may create significant conflicts of interest that may be resolved in a manner which is not always in the best interests of the company or the shareholders of TFG. The company’s success depends on its continued relationship with the Investment Manager and its principals. If this relationship were to end or the principals or other key professionals were to depart, it could have a material adverse effect on the company’s business, investments and results of operations. The Investment Manager's compensation structure may encourage the Investment Manager to invest in high-risk investments. The liability of the Investment Manager to the company is limited and the company's indemnity of the Investment Manager may lead the Investment Manager to assume greater risks when making investment related decisions than it otherwise would. The Investment Manager may devote time and commitment to other activities. Risks Relating to Taxation   U.S. investors may suffer adverse tax consequences because TFG will be treated as a passive foreign investment company (a “PFIC”) for U.S. federal income tax purposes. Investors may suffer adverse tax consequences if TFG or the Master Fund is treated as resident in the U.K. or the U.S. for tax purposes. Risks Relating to the Shares      Shares of TFG (the “Shares”) do not carry any voting rights other than limited voting rights in respect of variation of their class rights. The holder of the voting shares of TFG will be able to control the composition of the Board of Directors and exercise extensive influence over TFG's and the Master Fund's business and affairs. Additional information on the organizational structure and corporate governance of TFG may be found on TFG's website at www.tetragoninv.com. The Shares are subject to legal and other restrictions on resale and the Euronext Amsterdam N.V. and SFM trading markets are less liquid than other major exchanges, which could affect the price of the Shares. TFG may decide in the future to list the Shares on a stock exchange other than Euronext in Amsterdam and SFM. There can be no assurance that an active trading market would develop on such an exchange. There are additional restrictions on the resale of Shares by Shareholders who are located in the United States or who are U.S. persons and on the resale of Shares by any Shareholder to any person who is located in the United States or is a U.S. person. These restrictions include that each Shareholder who is located in the United States or who is a U.S. person must be a “Qualified Purchaser” or a “Knowledgeable Employee” (each as defined in the Investment Company Act), and, accordingly, that Shares may be resold to a person located in the United States or who is a U.S. person only if such person is a “Qualified Purchaser” or a “Knowledgeable Employee” under the Investment Company Act. These restrictions may adversely affect overall liquidity of the Shares. Your ability to invest in the Shares or to transfer any Shares that you hold may be limited by restrictions imposed by ERISA regulations, TFG's articles of incorporation and other tax considerations. The company may issue additional securities that dilute existing holders of Shares, including as a result of the exercise of the Investment Management Options. The foregoing is not a comprehensive list of the risks and uncertainties to which the company is subject. 62│ tetragoninv.com (Continued) Shareholder Information Shareholder Information Registered Office of TFG and the Master Fund Tetragon Financial Group Limited Tetragon Financial Group Master Fund Limited 1st Floor Dorey Court Admiral Park St. Peter Port, Guernsey Channel Islands GY1 6HJ Investment Manager Tetragon Financial Management LP 399 Park Avenue, 22nd Floor New York, NY 10022 United States of America General Partner of Investment Manager Tetragon Financial Management GP LLC 399 Park Avenue, 22nd Floor New York, NY 10022 United States of America Investor Relations David Wishnow / Greg Wadsworth ir@tetragoninv.com Press Inquiries Sard Verbinnen & Co tetragon-svc@sardverb.com Auditors KPMG Channel Islands Ltd. Glategny Court Glategny Esplanade St. Peter Port, Guernsey Channel Islands GY1 1WR Sub-Registrar and CREST Transfer Agent Computershare Investor Services (Guernsey) Limited 1st Floor, Tudor House Le Bordage St Peter Port, Guernsey Channel Islands GY1 1DB Legal Advisor (as to U.S. law) Cravath, Swaine & Moore LLP Worldwide Plaza 825 Eighth Avenue New York, NY 10019 United States of America Legal Advisor (as to Guernsey law) Ogier Redwood House St. Julian’s Avenue St. Peter Port, Guernsey Channel Islands GY1 1WA Legal Advisor (as to Dutch law) De Brauw Blackstone Westbroek N.V. Claude Debussylaan 80 1082 MD Amsterdam The Netherlands Stock Listing Euronext Amsterdam N.V. London Stock Exchange (Specialist Fund Market) Administrator and Registrar State Street (Guernsey) Limited 1st Floor Dorey Court Admiral Park St. Peter Port, Guernsey Channel Islands GY1 6HJ Tetragon Financial Group Limited 2015 Annual Report │63 Endnotes ENDNOTES TFG is not responsible for the contents of any third-party website noted in this report. TFG: Delivering Results Since 2005 (1) (i) TFG commenced investing as an open-ended investment company in 2005, before its IPO in April 2007. (ii) TFG seeks to deliver 10-15% Fair Value RoE per annum to shareholders. TFG’s returns will most likely fluctuate with LIBOR. LIBOR directly flows through some of TFG’s investments and, as it can be seen as the risk-free short-term rate, it should affect all of TFG’s investments. In high-LIBOR environments, TFG should achieve higher sustainable returns; in low- LIBOR environments, TFG should achieve lower sustainable returns. (iii) Average RoE is calculated from TFG’s IPO in 2007. 2015 RoE includes a fair value adjustment for certain TFG Asset Management businesses, the value of which has accumulated over several years. Consequently the full year return of 14.5% is not prepared on a like for like basis with prior years. Like for like performance for 2015 was 8.2%. Please refer to page 33 for a definition of Fair Value RoE and Appendix V for more details. (iv) Annualised total shareholder return to 31 December 2015, defined as share price appreciation including dividends reinvested, for the last year, the last three years, the last five years, and since TFG’s initial public offering in April 2007. Source: Bloomberg TRA function. (v) Fair Value EPS divided by Dividends per Share at 31 December 2015. (vi) The vast majority of TFG’s investments are held at fair value in accordance with U.S. GAAP. The fair value basis for TFG’s key performance metrics adjusts U.S. GAAP to also include the fair value of certain TFG Asset Management businesses that are currently consolidated under U.S. GAAP. The fair values used are as determined by TFG’s Audit Committee based on information provided by an independent valuation specialist. The consistent use of fair value across all investments is hereinafter referred to in this report as “Fair Value”. Fair Value Key Metrics such as Fair Value RoE and Fair Value NAV are also adjusted to reflect incentive fees that would otherwise have arisen if these Fair Values were actually reflected in the U.S. GAAP accounting for TFG’s financial statements. Please refer to Appendices IV and V for further details. (vii) Fully Diluted Fair Value NAV per share as defined on page 33 of this report. (viii) Partner & Employee shareholdings at 31 December 2015, including all deferred compensation arrangements. Please refer to the 2015 Audited Tetragon Financial Group Master Fund Limited financial statements for more details of these arrangements. Letter to Shareholders (2) (3) (4) (5) (6) (7) (8) TFG’s ‘home Member State’ for the purposes of the EU Transparency Directive (Directive 2004/109/EC) is the Netherlands. TFG invests substantially all its capital through a master fund, Tetragon Financial Group Master Fund Limited (“TFGMF”), in which it holds 100% of the issued non-voting shares. In this report, unless otherwise stated, we report on the consolidated business incorporating TFG and TFGMF. References to “we” are to Tetragon Financial Management LP, TFG’s investment manager (the “Investment Manager”). Please see Note (1)(vi). Please see Note (1)(ii). Annualised total shareholder return from 1 January to 31 December 2015, defined as share price appreciation including dividends reinvested. Source: Bloomberg TRA function. LCM Asset Management LLC, a CLO loan manager that is part of TFG Asset Management, hereinafter referred to in this report as “LCM”. Polygon Global Partners LP and Polygon Global Partners LLP (and certain of their affiliates), managers of open-ended hedge fund and private equity vehicles across a number of strategies that are part of TFG Asset Management, hereinafter referred to in this report as “Polygon”. Polygon Global Partners LLP is authorised and regulated by the United Kingdom Financial Conduct Authority. (9) Hawke’s Point, a mining finance company that is part of TFG Asset Management, hereinafter referred to in this report as “Hawke’s Point”. (10) Please refer to Financial Highlights on page 33 of this report for the definition of Fair Value Net Income. (11) Includes GreenOak funds and advisory assets, LCM, Polygon Recovery Fund LP, Polygon Convertible Opportunity Master Fund, Polygon European Equity Opportunity Master Fund and associated managed account, Polygon Mining Opportunity Master Fund, Polygon Global Equities Master Fund, Polygon Distressed Opportunities Master Fund, Equitix, and Tetragon Credit Income II L.P. (“TCI II”) as calculated by the applicable administrator for value date 31 December 2015. Includes, 64│ tetragoninv.com Endnotes where relevant, investments by Tetragon Financial Group Master Fund Limited. TFG Asset Management AUM as used in this report includes the assets under management of several investment advisers, including Tetragon Asset Management L.P., and GreenOak, each of which is an investment manager registered under the U.S. Investment Advisers Act of 1940. Figures for GreenOak and TCI II may also include committed capital. (12) GreenOak Real Estate, LP, hereinafter referred to in this report as “GreenOak”. TFG owns a 23% interest in GreenOak. (13) Equitix Holdings Limited, hereinafter referred to in this report as “Equitix”. (14) (15) Please refer to the “Business Overviews” in the TFG Asset Management Overview section of this report for further information on performance benchmarks. The Polygon Convertible Opportunity Fund was nominated for the 2015 EuroHedge Award in the Convertibles & Volatility category. There were four other nominees for this award. The Polygon European Equity Opportunity Fund was nominated for the 2015 EuroHedge Award in the Event Driven and Distressed category. There were five other nominees for this award. The EuroHedge Award is organised by EuroHedge magazine, a publication of Hedge Fund Intelligence. To be considered for an award, funds must submit performance data to the HedgeFund Intelligence Database and have at least a 12-month track record history. The only exception to this rule is for new fund awards where a minimum seven-month track record is required; for these awards, the funds' whole performance history to date is taken into account. Winners are decided using an established methodology based upon a combination of Sharpe ratios and returns over the relevant time period. Nominations are decided by those funds in each peer group that achieve the strongest Sharpe ratios over 12 months, so long as they also beat the median returns in their relevant peer groups and are within 10% of their high-water marks. The eventual winners will be the funds that have the best returns, as long as they also have Sharpe ratios within 25% of the best Sharpe of the nominees in their relevant peer groups. Most of the award categories require a minimum asset level of at least $100 million. Most of the award categories require a minimum asset level of at least $100 million. Further information about the award, including nomination and winning criteria, is available at www.hedgefundintelligence.com. (16) Tetragon Credit Income Partners, hereinafter referred to in this report as “TCIP”. (17) Euronext in Amsterdam is a regulated market of Euronext Amsterdam N.V. (“Euronext Amsterdam”). As is the case for Euronext Amsterdam, the SFM is a regulated market for the purposes of the Markets in Financial Instruments Directive. TFG Overview (18) Please see Note 11. Key Metrics (19) Please see note (1)(ii). (20) Please refer to Financial Highlights on page 33 of this report for the definition of Fair Value Net Income. (21) Please refer to Financial Highlights on page 33 of this report for the definition of Fair Value EPS. (22) Please refer to Financial Highlights on page 33 of this report for the definition of Pro Forma Fully Diluted Shares and Fully Diluted Fair Value NAV per Share. 2015 in Review (23) Based on the most recent trustee reports available as of 31 December 2015. (24) “LCD Leveraged Lending Review,” S&P, Q4 2015. (25) Based on the most recent trustee reports available as of 31 December 2015. (26) Based on the most recent trustee reports available as of 31 December 2015. (27) Any index information contained herein is included to show general trends in the markets in the periods indicated, is not meant to imply that these indices are the only relevant indices, and is not intended to imply that the portfolio or investment was similar to any particular index either in composition or element of risk. The indices shown here have not been selected to represent appropriate benchmarks to compare an investor's performance, but rather are disclosed to allow for comparison of the investor's performance to that of certain well-known and widely-recognised indices. The volatility of the indices may be materially different from the individual performance attained by a specific investor. In addition, the Funds’ holdings may differ significantly from the securities that comprise the indices. You cannot invest directly in an index. The HFRX ED: Event Driven Index (Bloomberg Code: HFRXED) is compiled by HFR Hedge Fund Research Inc. Further information relating to index constituents and calculation methodology can be found at www.hedgefundresearch.com. (28) Any index information contained herein is included to show general trends in the markets in the periods indicated, is not meant to imply that these indices are the only relevant indices, and is not intended to imply that the portfolio or investment was similar to any particular index either in composition or element of risk. The indices shown here have not been selected Tetragon Financial Group Limited 2015 Annual Report │65 Endnotes to represent appropriate benchmarks to compare an investor's performance, but rather are disclosed to allow for comparison of the investor's performance to that of certain well-known and widely-recognised indices. The volatility of the indices may be materially different from the individual performance attained by a specific investor. In addition, the Funds’ holdings may differ significantly from the securities that comprise the indices. You cannot invest directly in an index. The HFRX RV: FI-Convertible Arbitrage Index (Bloomberg Code: HFRXCA) is compiled by HFR Hedge Fund Research Inc. Further information relating to index constituents and calculation methodology can be found at www.hedgefundresearch.com. (29) Any index information contained herein is included to show general trends in the markets in the periods indicated, is not meant to imply that these indices are the only relevant indices, and is not intended to imply that the portfolio or investment was similar to any particular index either in composition or element of risk. The indices shown here have not been selected to represent appropriate benchmarks to compare an investor's performance, but rather are disclosed to allow for comparison of the investor's performance to that of certain well-known and widely-recognised indices. The volatility of the indices may be materially different from the individual performance attained by a specific investor. In addition, the Funds’ holdings may differ significantly from the securities that comprise the indices. You cannot invest directly in an index. The HFRX DS: Distressed Restructuring Index (Bloomberg Code: HFRXDS) is compiled by HFR Hedge Fund Research Inc. Further information relating to index constituents and calculation methodology can be found at www.hedgefundresearch.com. (30) TFG’s 85% economic share of Equitix is expected to decline to approximately 74.8% over time. TFG Asset Management Overview (31) Please see Note 11. (32) Please see Note 11. (33) Please see Note 11. (34) (35) The LCM III, LCM IV, LCM V, LCM VI, LCM IX, LCM X, LCM XI, LCM XII, LCM XIII, LCM XIV, LCM XV, LCM XVI, LCM XVII, LCM XVIII, LCM XIX, and LCM XX CLOs are referred to as the “LCM Cash Flow CLOs.” LCM-managed CLOs that are no longer outstanding are not included in the LCM Cash Flow CLO statistics. In addition, these statistics do not include the performance of certain transactions that were developed and previously managed by a third-party prior to being assigned to LCM, some of which continue to be managed by LCM. (i) The fund began trading with Class B shares, which carry no incentive fees, on 20 May 2009. Class A shares of the fund were first issued on 1 April 2010 and returns from inception through March 2010 have been pro forma adjusted to match the fund's Class A share terms as set forth in the Offering Memorandum (1.5% management fee, 20% incentive fee over a hurdle and other items, in each case, as set forth in the Offering Memorandum). AUM figure and net performance is for the Polygon Convertible Opportunity Master Fund as calculated by the applicable fund administrator. (ii) The fund began trading 8 July 2009 with Class B shares which carry no incentive fee. Class A shares commenced trading on 1 December 2009. Returns from inception through November 2009 for Class A shares have been pro forma adjusted to match the fund's Class A share terms as set forth in the Offering Memorandum (1.5% management fee, 20% incentive fee and other items, in each case, as set forth in the offering Memorandum). From December 2009 to February 2011, the table reflects actual Class A share performance on the terms set forth in the Offering Memorandum. From March 2011, forward, the table reflects actual Class A1 share performance on the terms set forth in the Offering Memorandum. Class A1 share performance is equivalent to Class A share performance for prior periods. AUM figure and net performance is for the Polygon European Equity Opportunity Master Fund and associated managed account as calculated by the applicable fund administrators. (iii) The fund began trading with Class B1 shares, which carry no incentive fees, on 1 June 2012. Returns through October 2013 have been pro forma adjusted to account for a 2.0% management fee, a 20% incentive fee, and non-trading expenses capped at 1%, in each case, as set forth in the Offering Memorandum. Class A1 shares of the Fund were first issued on 1 November 2013. From November 2013, forward, performance reflects actual Class A1 share performance on the terms set forth in the Offering Memorandum. AUM figure and net performance is for the Polygon Mining Opportunity Master Fund as calculated by the applicable fund administrator. (iv) The fund began trading on 2 September 2013. Class A shares of the fund were first issued in September 2013 and returns from inception through September 2014 have been adjusted to match the fund’s class A share terms as set forth in the Offering Memorandum (1.5% management fee, 20% incentive fee and other items, in each case, as set forth in the Offering Memorandum). AUM figure and net performance is for the Polygon Distressed Opportunities Master Fund as calculated by the applicable fund administrator. (v) The fund began trading with Class B/B1 shares, which carry no incentive fees, on 12 September 2011. Returns shown from inception through August 2013 have been pro forma adjusted to account for a 2.0% management fee and a 20% incentive fee, in each case, as to be set forth in further definitive documents. The fund began trading Class A shares, which are not new issue eligible, on 23 September 2011. Class A1 shares of the Fund, which are new issue eligible, were first issued on 1 November 2013, and returns from inception through October 2013 have been pro forma adjusted to match the Fund’s Class A1 performance. AUM figure and net performance is for the Polygon Global Equities Master Fund as calculated by the applicable fund administrator. (vi) The Private Equity Vehicle noted is the Polygon Recovery Fund L.P. (“PRF”). The manager of the PRF is a subsidiary of TFG. The management fees earned in respect of PRF are included in the TFG Asset Management business segment 66│ tetragoninv.com Endnotes (36) (37) described herein. PRF is a limited-life vehicle seeking to dispose of its portfolio securities prior to the expiration of its term. It is contemplated that PRF’s term will be extended to March 2018 with a potential further one year extension thereafter based on investor approval. Individual investor performance will vary based on their high water mark. Currently, the majority of Class C share class investors have not reached their high water mark, so their performance is the same as their gross performance. The AUM figure for PRF is as calculated by the applicable fund administrator. The Polygon Convertible Opportunity Fund began trading with Class B shares, which carry no incentive fees, on 20 May 2009. Class A shares of the fund were first issued on 1 April 2010 and returns from inception through March 2010 have been pro forma adjusted to match the fund's Class A share terms as set forth in the Offering Memorandum (1.5% management fee, 20% incentive fee over a hurdle and other items, in each case, as set forth in the Offering Memorandum). From April 2010, forward, the reported returns reflect actual Class A share performance on the terms set forth in the Offering Memorandum. The return figures shown are final values as calculated by the applicable fund administrator. All performance numbers provided herein with respect to the Fund reflects the actual net performance of the Fund net of management and performance fees, as well as any commissions and direct expenses incurred by the Fund, but before withholding taxes, and other indirect expenses. All returns include the reinvestment of dividends, if any. Differences in account size, timing of transactions and market conditions prevailing at the time of investment may lead to different results. Differences in the methodology used to calculate performance may also lead to different performance results than those shown. Broad-based securities indices are unmanaged and are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in a broad-based securities index. Past performance or experience (actual or simulated) does not necessarily give a guide for the future and no representation is being made that the funds listed will or are likely to achieve profits or losses similar to those shown. Any indices and other financial benchmarks are provided for illustrative purposes only. Comparisons to indices have limitations because, for example, indices have volatility and other material characteristics that may differ from the fund. Any index information contained herein is included to show general trends in the markets in the periods indicated, is not meant to imply that these indices are the only relevant indices, and is not intended to imply that the portfolio or investment was similar to any particular index either in composition or element of risk. The indices shown here have not been selected to represent appropriate benchmarks to compare an investor's performance, but rather are disclosed to allow for comparison of the investor's performance to that of certain well-known and widely-recognised indices. The volatility of the indices may be materially different from the individual performance attained by a specific investor. In addition, the Fund's holdings may differ significantly from the securities that comprise the indices. You cannot invest directly in an index. The HFRX RV: FI- Convertible Arbitrage Index (Bloomberg Code: HFRXCA) is compiled by HFR Hedge Fund Research Inc. Further information relating to index constituents and calculation methodology can be found at www.hedgefundresearch.com. The Polygon European Equity Opportunity Fund began trading 8 July 2009 with Class B shares, which carry no incentive fee. Class A shares commenced trading on 1 December 2009. Returns from inception through November 2009 for Class A shares have been pro forma adjusted to match the fund's Class A share terms as set forth in the Offering Memorandum (1.5% management fee, 20% incentive fee and other items, in each case, as set forth in the offering Memorandum). From December 2009 to February 2011, reported performance reflects actual Class A share performance on the terms set forth in the Offering Memorandum. From March 2011, forward, the table reflects actual Class A1 share performance on the terms set forth in the Offering Memorandum. Class A1 share performance is equivalent to Class A share performance for prior periods. The return figures shown are final values as calculated by the applicable fund administrator. All performance numbers provided herein with respect to the Fund reflects the actual net performance of the Fund net of management and performance fees, as well as any commissions and direct expenses incurred by the Fund, but before withholding taxes, and other indirect expenses. All returns include the reinvestment of dividends, if any. Differences in account size, timing of transactions and market conditions prevailing at the time of investment may lead to different results. Differences in the methodology used to calculate performance may also lead to different performance results than those shown. Broad-based securities indices are unmanaged and are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in a broad-based securities index. Past performance or experience (actual or simulated) does not necessarily give a guide for the future and no representation is being made that the funds listed will or are likely to achieve profits or losses similar to those shown. Any index information contained herein is included to show general trends in the markets in the periods indicated, is not meant to imply that these indices are the only relevant indices, and is not intended to imply that the portfolio or investment was similar to any particular index either in composition or element of risk. The indices shown here have not been selected to represent appropriate benchmarks to compare an investor's performance, but rather are disclosed to allow for comparison of the investor's performance to that of certain well-known and widely-recognised indices. The volatility of the indices may be materially different from the individual performance attained by a specific investor. In addition, the Fund's holdings may differ significantly from the securities that comprise the indices. You cannot invest directly in an index. The HFRX ED: Event Driven Index (Bloomberg Code: HFRXED) is compiled by HFR Hedge Fund Research Inc. Further information relating to index constituents and calculation methodology can be found at www.hedgefundresearch.com. (38) The Polygon Mining Opportunity Fund began trading with Class B1 shares, which carry no incentive fees, on 1 June 2012. Returns shown here through October 2013 have been pro forma adjusted to account for a 2.0% management fee, a 20% incentive fee, and non trading expenses capped at 1%, in each case, as set forth in the Offering Memorandum. Class A1 shares of the Fund were first issued on 1 November 2013. From November 2013, forward, reported performance reflects actual Class A1 share performance on the terms set forth in the Offering Memorandum. The return figures shown are final values as calculated by the applicable fund administrator. All performance numbers provided herein with respect to the Tetragon Financial Group Limited 2015 Annual Report │67 Endnotes Fund reflects the actual net performance of the Fund net of management and performance fees, as well as any commissions and direct expenses incurred by the Fund, but before withholding taxes, and other indirect expenses. All returns include the reinvestment of dividends, if any. Differences in account size, timing of transactions and market conditions prevailing at the time of investment may lead to different results. Differences in the methodology used to calculate performance may also lead to different performance results than those shown. Broad-based securities indices are unmanaged and are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in a broad-based securities index. Past performance or experience (actual or simulated) does not necessarily give a guide for the future and no representation is being made that the funds listed will or are likely to achieve profits or losses similar to those shown. Any index information contained herein is included to show general trends in the markets in the periods indicated, is not meant to imply that these indices are the only relevant indices, and is not intended to imply that the portfolio or investment was similar to any particular index either in composition or element of risk. The indices shown here have not been selected to represent appropriate benchmarks to compare an investor's performance, but rather are disclosed to allow for comparison of the investor's performance to that of certain well-known and widely-recognised indices. The volatility of the indices may be materially different from the individual performance attained by a specific investor. In addition, the Fund's holdings may differ significantly from the securities that comprise the indices. You cannot invest directly in an index. The HFRX Global Hedge Fund Index (Bloomberg Code: HFRXGL) is compiled by HFR Hedge Fund Research Inc. Further information relating to index constituents and calculation methodology can be found at www.hedgefundresearch.com. The Market Vectors Junior Gold Miners Index (Bloomberg Code: GDXJ) is compiled by Market Vectors Index Solutions, a subsidiary of Van Eck. Further information relating to index constituents and calculation methodology can be found at www.marketvectorsindices.com. The Polygon Distressed Opportunities Fund began trading on 2 September 2013. Returns shown are for offshore Class A shares, reflecting the terms set forth in the offering documents (2.0% management fee, 20% incentive fee and other items, in each case, as set forth in the offering documents) as calculated by the applicable fund administrator. All performance numbers provided herein with respect to the Fund reflects the actual net performance of the Fund net of management and performance fees, as well as any commissions and direct expenses incurred by the Fund, but before withholding taxes, and other indirect expenses. All returns include the reinvestment of dividends, if any. Differences in account size, timing of transactions and market conditions prevailing at the time of investment may lead to different results. Differences in the methodology used to calculate performance may also lead to different performance results than those shown. Broad-based securities indices are unmanaged and are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in a broad-based securities index. Past performance or experience (actual or simulated) does not necessarily give a guide for the future and no representation is being made that the funds listed will or are likely to achieve profits or losses similar to those shown. Any index information contained herein is included to show general trends in the markets in the periods indicated, is not meant to imply that these indices are the only relevant indices, and is not intended to imply that the portfolio or investment was similar to any particular index either in composition or element of risk. The indices shown here have not been selected to represent appropriate benchmarks to compare an investor's performance, but rather are disclosed to allow for comparison of the investor's performance to that of certain well-known and widely-recognised indices. The volatility of the indices may be materially different from the individual performance attained by a specific investor. In addition, the Fund's holdings may differ significantly from the securities that comprise the indices. You cannot invest directly in an index. The HFRX DS: Distressed Restructuring Index (Bloomberg Code: HFRXDS) is compiled by HFR Hedge Fund Research Inc. Further information relating to index constituents and calculation methodology can be found at www.hedgefundresearch.com. The Polygon Global Equities Fund began trading with Class B/B1 shares, which carry no incentive fees, on 12 September 2011. Returns shown from inception through August 2013 have been pro forma adjusted to account for a 2.0% management fee and a 20% incentive fee, in each case, as to be set forth in further definitive documents. The fund began trading Class A shares, which are not new issue eligible, on 23 September 2011. Class A1 shares of the Fund, which are new issue eligible, were first issued on 1 November 2013, and returns from inception through October 2013 have been pro forma adjusted to match the Fund’s Class A1 performance. AUM figure and net performance is as calculated by the applicable fund administrator. All performance numbers provided herein with respect to the Fund reflects the actual net performance of the Fund net of management and performance fees, as well as any commissions and direct expenses incurred by the Fund, but before withholding taxes, and other indirect expenses. All returns include the reinvestment of dividends, if any. Differences in account size, timing of transactions and market conditions prevailing at the time of investment may lead to different results. Differences in the methodology used to calculate performance may also lead to different performance results than those shown. Broad-based securities indices are unmanaged and are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in a broad-based securities index. Past performance or experience (actual or simulated) does not necessarily give a guide for the future and no representation is being made that the funds listed will or are likely to achieve profits or losses similar to those shown. (39) (40) (41) The Private Equity Vehicle noted above is the Polygon Recovery Fund L.P. (“PRF”). The manager of the PRF is a subsidiary of TFG. The management fees earned in respect of PRF are included in the TFG Asset Management business segment described herein. PRF is a limited-life vehicle seeking to dispose of its portfolio securities prior to the expiration of its term. It is contemplated that PRF’s term will be extended to March 2018 with a potential for a further one year extension thereafter, based on investor approval. Individual investor performance will vary based on their high water mark. Currently the majority of Class C share class investors have not reached their high water mark, so their performance is the same as 68│ tetragoninv.com Endnotes their gross performance. AUM figure and net performance is for PRF as calculated by the applicable fund administrator. All performance numbers provided herein with respect to the Fund reflects the actual net performance of the Fund net of management and performance fees, as well as any commissions and direct expenses incurred by the Fund, but before withholding taxes, and other indirect expenses. All returns include the reinvestment of dividends, if any. Differences in account size, timing of transactions and market conditions prevailing at the time of investment may lead to different results. Differences in the methodology used to calculate performance may also lead to different performance results than those shown. Broad-based securities indices are unmanaged and are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in a broad-based securities index. (42) For additional information on the company’s CLO equity investments, including its buy and hold strategy, please see refer to http://www.tetragoninv.com/portfolio/clo-equity. 2015 Financial Review (43) On occasion, figures may not total due to rounding. (44) Fair Value Fully Diluted NAV per Share seeks to reflect certain potential changes to the total non-voting shares over the next few years, which may be utilised in the calculation of NAV per Share. Specifically, the number of shares used to calculate U.S. GAAP NAV per Share has been adjusted to incorporate: (i) The Escrow Shares, which have been used as consideration for the acquisition of Polygon and applicable stock dividends relating thereto, and which are held in escrow and are expected to be released and incorporated into the U.S. GAAP NAV per Share over the next two years. (ii) The number of shares corresponding to the applicable intrinsic value of the options issued to the Investment Manager at the time of the company’s IPO with a strike price of $10.00, to the extent such options are in the money at period end. The intrinsic value of the manager (IPO) share options is calculated as the excess of (x) the closing price of the shares as of the final trading day in the relevant period over (y) $10.00 (being the exercise price per share) times (z) 12,545,330 (being a number of shares subject to the options before the application of potential anti-dilution). The terms of exercise under the options allow for exercise using cash, as well as, with the consent of the board of the company, certain forms of cashless exercise. Each of these prescribed methods of exercise may give rise to the issuance of a different number of shares than the approach described herein. If the options were to be surrendered for their intrinsic value with the board’s consent, rather than exercised, the number of shares issued would equal the intrinsic value divided by the closing price of the shares as of the final trading day in the relevant period. This approach has been selected because we currently believe it is more reasonably illustrative of a likely outcome if the options are exercised. The options are exercisable until 26 April 2017. (iii) The number of shares corresponding to the applicable intrinsic value of the options issued to the GreenOak Founders in relation to the acquisition of a 10% stake in GreenOak in September 2010. The intrinsic value of the GreenOak share options is calculated as the excess of (x) the closing price of the shares as of the final trading day in the relevant period over (y) $5.50 (being the exercise price per share) times (z) 3,908,241 (being a number of shares subject to the options). Previously, As there were a number of contingent elements to the vesting of these options, including the repayment of the working capital loan and continued service provision to GreenOak by the Founders, in accordance with U.S. GAAP, the options were carried as a liability in the balance sheet of TFG Limited. Using a Black-Scholes model, these were revalued at each reporting date, and changes in the valuation were reflected through the Statement of Operations. On 15 September 2015 the options vested, and as a result of vesting, all contingent elements to the options, other than market price, were removed. Under ASC 815, once the vesting conditions were met, the options were reclassified to equity. The accounting result of this is that a liability of $16.3 million was reclassified to the capital reserve in respect of share options, and accordingly these share options are now incorporated into this dilution calculation. (iv) In December 2015, TFG purchased 6 million TFG non-voting shares at $10 per share in a tender offer using a modified Dutch auction structure. Approximately 5.65 million shares acquired in the tender offer are being held to hedge against (or otherwise offset the future impact of) grants of shares under the LTIP and other equity-based awards by TFG Asset Management for certain senior employees. Commencing from when the equity awards under the Plans are effective, the fully diluted share count will start to be increased to reflect the level of shares “earned” under the LTIP and other equity- based awards. The basis and pace of recognition is expected to match the rate at which service is being provided to TFG Asset Management in relation to these shares. Appendix IV (45) TFM has determined that it will continue to grow TFG Asset Management, as TFG’s diversified alternative asset management business, with a view to a planned initial public offering and listing of shares of TFG Asset Management in the next three to five years (referred to as the “IPO Strategy”). Appendix VII (46) For (46.i) please see Note 44(i). Tetragon Financial Group Limited 2015 Annual Report │69 Endnotes (47) The LTIP and other equity-based awards are intended to give certain senior employees of TFG Asset Management long-term exposure to TFG stock (with vesting subject to forfeiture and certain restrictions). Appendix VIII (48) TFM has determined that TFG’s current investment strategy is to continue to grow TFG Asset Management with a view to a possible initial public offering and listing of its shares. (49) TFM is also responsible for selecting third-party managers who invest in asset classes appropriate for the TFG Master Fund. (50) (51) (52) (53) These Polygon entities also provide infrastructure services to LCM and the GreenOak joint venture, infrastructure and investment management services to Hawke’s Point and the TCI General Partner, and oversight services with respect to Equitix. Polygon Private Investment Partners LP, an investment management entity in which Reade Griffith and Paddy Dear have an interest and that was not included in TFG’s 28 October 2012 acquisition of Polygon Management L.P., also continues to rely on TFG Asset Management for certain services to support its activities. TFG Asset Management employs a cost allocation and recovery methodology from Polygon Private Investment Partners LP that is the same as the cost allocation and recovery methodology applied to TFM. This cost allocation methodology also applies to the other TFG Asset Management businesses to which the Polygon entities provide services. Employee compensation will also include TFG Asset Management’s LTIP and its other equity-based awards. The cost of purchasing the TFG shares which are being held to hedge against grants under such incentive programmes includes the principal and interest payable on a loan from the TFG Master Fund to TFG Asset Management. (54) Please see Note (1)(ii). An investment in TFG involves substantial risks. Please refer to the company’s website at www.tetragoninv.com for a description of the risks and uncertainties pertaining to an investment in TFG. This release does not contain or constitute an offer to sell or a solicitation of an offer to purchase securities in the United States or any other jurisdiction. The securities of TFG have not been and will not be registered under the U.S. Securities Act of 1933 (the “Securities Act”), as amended, and may not be offered or sold in the United States or to U.S. persons unless they are registered under applicable law or exempt from registration. TFG does not intend to register any portion of its securities in the United States or to conduct a public offer of securities in the United States. In addition, TFG has not been and will not be registered under the U.S. Investment Company Act of 1940, and investors will not be entitled to the benefits of such Act. TFG is registered in the public register of the Netherlands Authority for the Financial Markets under Section 1:107 of the FMSA as a collective investment scheme from a designated country. This release constitutes regulated information (“gereglementeerde informative”) within the meaning of Section 1:1 of the FMSA. 70│ tetragoninv.com AUDITED FINANCIAL STATEMENTS TETRAGON FINANCIAL GROUP LIMITED FOR THE YEAR ENDED 31 DECEMBER 2015 TETRAGON FINANCIAL GROUP LIMITED AUDITED FINANCIAL STATEMENTS For the year ended 31 December 2015 _____________________________________________________________________________________ CONTENTS DIRECTORS’ REPORT INDEPENDENT AUDITOR’S REPORT STATEMENTS OF ASSETS AND LIABILITIES STATEMENTS OF OPERATIONS STATEMENTS OF CHANGES IN NET ASSETS STATEMENTS OF CASH FLOWS FINANCIAL HIGHLIGHTS NOTES TO THE FINANCIAL STATEMENTS AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF TETRAGON FINANCIAL GROUP MASTER FUND LIMITED PAGE 2 6 8 9 11 12 13 14 1 TETRAGON FINANCIAL GROUP LIMITED DIRECTORS’ REPORT For the year ended 31 December 2015 _____________________________________________________________________________________ The Directors present to the shareholders their report together with the audited financial statements for the year ended 31 December 2015. THE COMPANY AND ITS INVESTMENT OBJECTIVE Tetragon Financial Group Limited (the “Company”) was registered in Guernsey on 23 June 2005 as a company limited by shares, with registered number 43321. All voting shares of the Company are held by Polygon Credit Holdings II Limited (the “Voting Shareholder”). The Company continues to be registered and domiciled in Guernsey, and the Company's non-voting shares (the “Shares”) are listed on Euronext Amsterdam N.V. (ticker symbol: TFG.NA). On 9 November 2015, the Company announced the successful admission (“Admission") of its non-voting shares to trading on the Specialist Fund Market of the London Stock Exchange plc ("SFM") (ticker symbol: TFG.LN). The Company acts as a feeder fund in a “master feeder structure” investing substantially all of its assets in Tetragon Financial Group Master Fund Limited (the “Master Fund”). The Company's investment objective is to generate distributable income and capital appreciation. It aims to provide stable returns to investors across various credit, equity, interest rate, inflation and real estate cycles. The Master Fund’s investment portfolio comprises a broad range of assets, including a diversified alternative asset management business, TFG Asset Management, and covers bank loans, real estate, equities, credit, convertible bonds and infrastructure. As at 31 December 2015, TFG Asset Management consisted of Polygon Global Partners LP and Polygon Global Partners LLP (collectively with certain affiliates, “Polygon”), LCM Asset Management LLC (“LCM”), Equitix Holdings Limited (“Equitix”), Hawke's Point, the GreenOak Real Estate LP ("GreenOak") joint venture and Tetragon Credit Income Partners ("TCIP"). TFG Asset Management L.P. is registered as an investment adviser under the U.S. Investment Advisers Act of 1940 (the “Advisers Act”) and one of its investment management entities, Polygon Global Partners LLP, is authorized and regulated by the United Kingdom Financial Conduct Authority. The registered office of the Fund is 1st Floor Dorey Court, Admiral Park, St. Peter Port, Guernsey, Channel Islands, GY1 6HJ. RESULTS, ACTIVITIES AND FUTURE DEVELOPMENTS The results of operations are set out on pages 9 to 10. A detailed review of activities and future developments is contained in the Annual Report issued with these financial statements to the shareholders. 2 TETRAGON FINANCIAL GROUP LIMITED DIRECTORS’ REPORT (continued) For the year ended 31 December 2015 _____________________________________________________________________________________ DIRECTORS The Directors who held office during the year and up to the date of this report were: Paddy Dear Rupert Dorey* Reade Griffith Frederic Hervouet* David Jeffreys* Byron Knief* * Independent non-executive Directors The remuneration for Directors is determined by resolution of the Voting Shareholder. Each of the Directors’ annual fee is US$ 100,000 (year ended 31 December 2014: US$ 100,000) as compensation for service on the Boards of Directors of both the Company and the Master Fund, which is paid by the Master Fund. Paddy Dear and Reade Griffith have waived their entitlement to a fee in respect of their services as Directors. The Directors have the option to elect to receive Shares in the Company instead of the quarterly fee. With respect to the quarter ending 31 December 2015, Frederic Hervouet has elected to receive Shares and he received 2,564 Shares in relation to the first quarter’s fee, 2,354 Shares in relation to the second quarter’s fee and 2,495 Shares in relation to the third quarter’s fee. The number of Shares issued instead of the fee for the fourth quarter will be determined as part of the fourth quarter 2015 dividend process. The Directors are entitled to be repaid by the Company for all travel, hotel and other expenses reasonably incurred by them in the discharge of their duties. None of the Directors has a contract with the Company or the Master Fund providing for benefits upon termination of employment. SECRETARY State Street (Guernsey) Limited held the office of Secretary throughout the year and up to the date of this report. DIVIDENDS The Board of Directors has the authority to declare dividend payments, based upon the recommendation of the Investment Manager, subject to the approval of the voting shares of the Company and adherence to applicable law including the satisfaction of a solvency test as stated under The Companies (Guernsey) Law, 2008. The Investment Manager’s recommendation with respect to the declaration of dividends (and other capital distributions) may be informed by a variety of considerations, including (i) the expected sustainability of the Company’s cash generation capacity in the short and medium term, (ii) the current and anticipated performance of the Company, (iii) the current and anticipated operating and economic environment and (iv) other potential uses of cash ranging from preservation of the Company’s investments and financial position to other investment opportunities. 3 TETRAGON FINANCIAL GROUP LIMITED DIRECTORS’ REPORT (continued) For the year ended 31 December 2015 _____________________________________________________________________________________ DIVIDENDS (continued) The Directors declared a dividend amounting to US$ 0.1575 per Share for the quarter ended 31 December 2014, US$ 0.1575 per Share for the Quarter Ended 31 March 2015, US$ 0.1625 per Share for the Quarter Ended 30 June 2015 and US$ 0.1625 per Share for the Quarter Ended 30 September 2015. The total dividend declared during the year ended 31 December 2015 amounted to US$ 62.5 million or US$ 0.64 per Share (31 December 2014: US$ 58.4 million or US$ 0.61 per Share). On 25 February 2016, the Directors declared a dividend US$ 0.165 per Share for the Quarter Ended 31 December 2015. STATEMENT OF DIRECTORS’ RESPONSIBILITIES The Directors are responsible for preparing the Directors’ Report and the financial statements in accordance with applicable law and regulations. The Companies (Guernsey) Law, 2008 requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and applicable law. The financial statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing those financial statements the Directors are required to: Select suitable accounting policies and apply them consistently;   Make judgments and estimates that are reasonable and prudent;  State whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and  Prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the Company will continue in business. The Directors confirm that they have complied with the above requirements in preparing the financial statements. The Directors are responsible for keeping of proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with The Companies (Guernsey) Law, 2008. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. The Guernsey Financial Services Commission ("GFSC") has issued a Code of Corporate Governance (the “Code”) which provides a framework that applies to all entities licensed by the GFSC or which are registered or authorised as a collective investment scheme under the Protection of Investors (Bailiwick of Guernsey) Law, 1987. 4 TETRAGON FINANCIAL GROUP LIMITED DIRECTORS’ REPORT (continued) For the year ended 31 December 2015 _____________________________________________________________________________________ STATEMENT OF DIRECTORS’ RESPONSIBILITIES (continued) In conformity with the Code, the Company has prepared a self-assessment reflecting its nature, scale and complexity in order to assist the Directors in their annual consideration of the Code. The Directors confirm that we have complied with the above requirements in preparing the financial statements and that to the best of our knowledge and belief:  The annual report includes a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that the Company faces; and  The financial statements, prepared in conformity with U.S. GAAP give a true and fair view of the assets, liabilities, financial position, results and cash flows of the Company. DISCLOSURE OF INFORMATION TO AUDITOR So far as each of the Directors is aware, there is no relevant audit information of which the Company’s auditor is unaware, and each has taken all the steps he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. AUDITORS KPMG Channel Islands Limited are the appointed independent auditors of the Company and they have expressed their willingness to continue in office. A resolution for the re-appointment of KPMG Channel Islands Limited as auditors of the Company is to be proposed at the forthcoming Annual General Meeting. Signed on behalf of the Board of Directors by: Rupert Dorey, Director David Jeffreys, Director Date: 25 February 2016 5 Independent auditor’s report to the members of Tetragon Financial Group Limited We have audited the financial statements of Tetragon Financial Group Limited (the “Company”) for the year ended 31 December 2015 which comprise the Statements of Assets and Liabilities, the Statements of Operations, the Statements of Changes in Net Assets, the Statements of Cash Flows, the Financial Highlights and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and U.S. generally accepted accounting principles. This report is made solely to the Company’s members, as a body, in accordance with section 262 of the Companies (Guernsey) Law, 2008. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As explained more fully in the Statement of Directors' Responsibilities set out on pages 4 and 5, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's (APB's) Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Board of Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on the financial statements In our opinion the financial statements:    give a true and fair view of the state of the Company’s affairs as at 31 December 2015 and of its net income for the year then ended; are in conformity with U.S. generally accepted accounting principles; and comply with the Companies (Guernsey) Law, 2008. 6 Independent auditor’s report to the members of Tetragon Financial Group Limited (continued) Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies (Guernsey) Law, 2008 requires us to report to you if, in our opinion:   the Company has not kept proper accounting records; or the financial statements are not in agreement with the accounting records; or  we have not received all the information and explanations, which to the best of our knowledge and belief are necessary for the purpose of our audit. Lee C. Clark For and on behalf of KPMG Channel Islands Limited Chartered Accountants and Recognised Auditors Guernsey February 25, 2016 7 TETRAGON FINANCIAL GROUP LIMITED STATEMENTS OF ASSETS AND LIABILITIES As at 31 December 2015 Assets Investment in the Master Fund Total assets Liabilities Accrued incentive fee Amounts payable on share options Total liabilities Net assets Equity Share capital Share premium Capital reserve in respect of share options Share based employee compensation reserve Retained earnings Shares outstanding Shares Note 31 Dec 2015 US$ MM 31 Dec 2014 US$ MM 2 5 4 6 7 4, 8 3, 12 11 6 1,877.4 1,877.4 1,834.9 1,834.9 4.7 - 4.7 4.1 12.3 16.4 1,872.7 1,818.5 0.1 921.9 28.1 19.6 903.0 1,872.7 0.1 929.4 11.8 31.4 845.8 1,818.5 Millions 95.9 Millions 95.9 Net Asset Value per share US$ 19.54 US$ 18.96 The accompanying notes are an integral part of the financial statements. Signed on behalf of the Board of Directors by: Rupert Dorey, Director David Jeffreys, Director Date: 25 February 2016 8 TETRAGON FINANCIAL GROUP LIMITED STATEMENTS OF OPERATIONS For the year ended 31 December 2015 Note Year ended 31 Dec 2015 US$ MM Year ended 31 Dec 2014 US$ MM Investment income allocated from the Master Fund Interest income Fee income Other income – cost recovery Insurance recovery Dividend income Total investment income allocated from the Master Fund Direct expenses Incentive fee Total direct expenses Operating expenses allocated from the Master Fund Employee costs Management fees Share based employee compensation Legal and professional fees Amortization on intangible assets Audit fees Other operating and administrative expenses Total operating expenses allocated from the Master Fund Total operating expenses Net investment income Net decrease in unrealized depreciation on: Share options Net decrease in unrealized depreciation arising from direct operations Net realized and unrealized gain from investments and foreign currency allocated from the Master Fund Net realized gain / (loss) from: Investments Derivative financial instruments Foreign currency transactions 9 5 8 3 4 134.7 70.2 17.3 9.8 0.1 232.1 (35.8) (35.8) (58.6) (28.3) (22.0) (7.2) (6.3) (0.4) (21.2) (144.0) 152.5 81.1 23.6 1.0 0.1 258.3 (22.8) (22.8) (61.7) (27.0) (23.1) (17.6) (6.8) (0.4) (21.8) (158.4) (179.8) (181.2) 52.3 77.1 (3.9) (3.9) 82.7 4.8 4.9 92.4 (1.6) (1.6) 124.4 (36.3) 12.0 100.1 TETRAGON FINANCIAL GROUP LIMITED STATEMENTS OF OPERATIONS (continued) For the year ended 31 December 2015 Net (decrease) / increase in unrealized (depreciation) / appreciation on: Investments Derivative financial instruments Translation of assets and liabilities in foreign currencies Net realized and unrealized gain from investments and foreign currencies allocated from the Master Fund Net increase from operations before tax Income and deferred tax expense allocated from the Master Fund Net income Earnings per Share Basic Diluted Weighted average Shares outstanding Basic Diluted The accompanying notes are an integral part of the financial statements. Note Year ended 31 Dec 2015 US$ MM Year ended 31 Dec 2014 US$ MM (0.3) 8.0 (11.1) (3.4) 89.0 137.3 (10.1) 127.3 (52.2) 10.2 (25.9) (67.9) 32.2 107.7 (12.6) 95.1 10 10 10 10 US$ 1.31 US$ 1.21 Millions 97.1 105.5 US$ 1.00 US$ 0.90 Millions 95.4 106.1 10 TETRAGON FINANCIAL GROUP LIMITED STATEMENTS OF CHANGES IN NET ASSETS For the year ended 31 December 2015 Note Year ended 31 Dec 2015 US$ MM Year ended 31 Dec 2014 US$ MM From operations: Total investment income Total operating expenses Net unrealized depreciation on share options Net realized gain from investments and foreign currency allocated from the Master Fund Net unrealized gain / (loss) from investments and foreign currency allocated from the Master Fund Income and deferred tax expense Net income Share based employee compensation Net increase in net assets resulting from operations Dividends paid to shareholders Issue of Shares Purchase of Treasury Shares Capital reserve in respect of Share Options Decrease in net assets resulting from net share transactions 3 9 6 6 4 Total increase in net assets Net assets at start of year Net assets at end of year The accompanying notes are an integral part of the financial statements. 232.1 (179.8) (3.9) 92.4 (3.4) (10.1) 127.3 22.0 149.3 (50.5) 0.1 (60.9) 16.3 (44.5) 54.3 257.3 (180.2) (1.6) 100.1 (67.9) (12.6) 95.1 23.1 118.2 (52.0) - (50.9) - (50.9) 15.3 1,818.5 1,803.2 1,872.7 1,818.5 11 TETRAGON FINANCIAL GROUP LIMITED STATEMENTS OF CASH FLOWS For the year ended 31 December 2015 Operating activities Net income Adjustments for: Net unrealized depreciation on share options Share based employee compensation expense Net unrealized (depreciation) / appreciation on investment in the Master Fund Operating cash flows before movements in working capital Increase / (decrease) in payables Net cash provided by operating activities Financing activities Issue of Shares Purchase of Treasury Shares Dividends paid to shareholders* Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Year ended 31 Dec 2015 US$ MM Year ended 31 Dec 2014 US$ MM 127.3 95.1 3.9 22.0 (42.5) 110.7 0.6 111.3 0.1 (60.9) (50.5) (111.3) - - - 1.6 23.1 11.8 131.6 (28.7) 102.9 - (50.9) (52.0) (102.9) - - - The accompanying notes are an integral part of the financial statements. *The gross dividend payable to shareholders was US$ 62.5 million (2014: US$ 58.4 million) with value equivalent to US$ 12.0 million (2014: US$ 6.4 million) being taken by the dividend recipient in Shares rather than cash. ** The Company does not maintain any bank accounts or cash balances. All cash transactions take place within the Master Fund. 12 TETRAGON FINANCIAL GROUP LIMITED FINANCIAL HIGHLIGHTS For the year ended 31 December 2015 The following represents selected per Share operating performance of the Company, ratios to average net assets and total return information for the year ended 31 December 2015 and the year ended 31 December 2014. Per Share operating performance Net Asset Value at the start of the year Net investment income (before incentive fee) Incentive fee Net realized and unrealized gain from investments and foreign currencies Share based employee compensation Dividends paid to shareholders Income and deferred tax expense Other capital transactions Net Asset Value at the end of the year 31 Dec 2015 31 Dec 2014 US$ US$ 18.96 0.91 (0.37) 0.87 0.23 (0.52) (0.10) (0.44) 19.54 18.23 1.05 (0.24) 0.32 0.24 (0.61) (0.13) 0.10 18.96 Pro Forma Fully Diluted NAV per Share Millions Millions Shares outstanding Shares held in escrow Share options Pro Forma Fully Diluted Shares 95.9 6.6 1.7 104.2 95.9 10.7 - 106.6 Pro Forma Fully Diluted Net Asset Value per Share US$ 17.97 US$ 17.05 Total return (NAV change before dividend payments and other capital transactions) before incentive fee Incentive fee Total return (NAV change before dividend payments and other capital transactions) after incentive fee Ratios and supplemental data 10.07% (1.95%) 8.10% (1.31%) 8.12% 6.79% Ratio to average net assets: Operating expenses allocated from the Master Fund (7.46%) (7.46%) Total operating expenses Incentive fee (1.27%) Net investment income 4.29% An individual shareholder’s per Share operating performance and ratios may vary from the above based on the timing of capital transactions. (6.46%) (6.46%) (1.89%) 2.78% 13 TETRAGON FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2015 Note 1 Significant Accounting Policies Basis of Presentation The financial statements give a true and fair view, are prepared in conformity with U.S. GAAP and comply with The Companies (Guernsey) Law, 2008. The Company’s investment in the Master Fund is valued based on the Net Asset Value (“NAV”) per share, obtained from the Master Fund’s Administrator, which is the Company’s interest in the Net Assets of the Master Fund. The performance of the Company is directly affected by the performance of the Master Fund. The Company’s Statements of Operations includes its allocated share of each type of gain, loss, income and expense of the Master Fund’s Statements of Operations. Attached are the audited consolidated financial statements of the Master Fund, which are an integral part of these financial statements. As at 31 December 2015, the Company had 100% (31 December 2014: 100%) economic ownership interest in the Master Fund. As the Company’s only asset is 100% of the non-voting shares of the Master Fund and the audited consolidated financial statements of the Master Fund are attached, a separate Schedule of Investments for the Company has not been included. For financial statement reporting purposes, the Company is an investment company and follows the measurement guidance set out in ASC 946, Financial Services – Investment Companies. The accounting policies have been consistently applied by the Company during the year ended 31 December 2015 and are consistent with those used in the previous year. The financial statements are presented in United States Dollars. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes, including the valuation of investments. The Company’s management believes that the estimates made in preparing the financial statements are reasonable and prudent. Actual results could differ materially from these estimates. Valuation of Investments The value of the investment in the Master Fund is based on the NAV per share obtained from the Master Fund’s Administrator. Expenses Expenses are recognized in the Statements of Operations on an accruals basis. 14 TETRAGON FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 1 Significant Accounting Policies (continued) Taxation The Company is exempt from Guernsey income tax under the Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 and is charged GBP 1,200 per annum (31 December 2014: GBP 600). In accordance with ASC Subtopic 740-10 – Income Taxes – Overall, the Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. There were no uncertain tax positions recognized at 31 December 2015 (31 December 2014: Nil). Share Options The fair value of the options granted to the Investment Manager at the time of the Company’s initial public offering in 2007, was recognized as a charge to a reserve in respect of the share options, over the year in which the Investment Manager became unconditionally entitled to the options. The options were fully vested and immediately exercisable from the date of the grant, on 26 April 2007, and remain exercisable for ten years. The fair value of options issued to certain founding partners of GreenOak are also recognized through a capital reserve in respect of share options. Previously, because of contingent elements, other than linked to market price, they were recognized as a liability in the Statements of Assets and Liabilities. More details are included in Note 4. If and when the share options are exercised the share capital and share premium accounts will be increased by the applicable capital reserve. Dividend Expensse Dividend expense from Shares is recognized in the Statements of Changes in Net Assets. Share Based Payments Share-based compensation expense for all equity settled share-based payment awards granted is determined based on the grant-date fair value. The Company recognizes these compensation costs net of an estimated forfeiture rate, and recognizes compensation cost only for those Shares expected to meet the service and non-market performance vesting conditions, on a straightline basis over the requisite service period of the award. These compensation costs are determined at the aggregate grant level for service-based awards and at the individual vesting tranche level for awards with performance conditions. 15 TETRAGON FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 1 Significant Accounting Policies (continued) Share Based Payments (continued) When the Shares are actually issued the fair value of the Shares, as determined at the time of the award, is debited against the share based employee compensation reserve and credited to share capital and share premium. Any associated stock dividends accrued on the original award are debited against retained earnings and credited to share capital and share premium using the value determined by the stock reference price at the date of each applicable dividend. Treasury Shares When share capital recognized as equity is repurchased, the amount of the consideration paid, which includes directly attributable costs, is recognized as a deduction from equity. Repurchased Shares may be classified as treasury shares from an accounting perspective and are presented as a deduction from total equity. When treasury shares are sold or reissued subsequently, the amount received is recognized as an increase in equity, and the resulting surplus or deficit on the transaction is transferred to or from retained earnings. Shares may also be transferred out of the Treasury Account and into TFG Holdings I, an entity established through a joint arrangement with the Master Fund. Where this occurs the status of the Shares is unchanged from an accounting perspective and they are not included in the Shares outstanding on the Statements of Assets and Liabilities. Note 2 Investment in the Master Fund At the year end, the Master Fund held investments at fair value, management contracts, cash and cash equivalents, derivatives and other receivables and payables. As at 31 December 2015, the Company had an investment of US$ 1,877.4 million in the Master Fund (31 December 2014: US$ 1,834.9 million). Note 3 Share Based Payments TFG Asset Management L.P. and certain of its affiliates, including Polygon’s asset management businesses and infrastructure platform, along with Polygon’s interests in LCM and GreenOak, were acquired on 28 October 2012 (the “Acquisition”), in exchange for consideration of approximately 11.7 million non-voting Shares to the sellers subject to certain vesting and forfeiture conditions (the “Aggregate Consideration”). The Aggregate Consideration shall be held in escrow (along with accrued stock dividends) until it is released over the period 2013 to 2017. Under ASC 805 - Business Combinations ("ASC 805") these Shares are treated as payment for post combination services rather than upfront consideration, hence the initial consideration was determined to be nil, resulting in a bargain purchase. The expense is recognized in the Master Fund through the Statements of Operations, as well as reflecting the assets acquired and a reserve to reflect the capital contribution of the Shares from the Company. The Company has a share based compensation reserve and recognizes the expense indirectly as allocated from the Master Fund. The charge for the year ended 31 December 2015 amounted to US$ 22.0 million (31 December 2014: US$ 23.1 million). 16 TETRAGON FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 4 Share Options Issued to GreenOak Founders On 16 September 2010, the Master Fund entered into a transaction with GreenOak whereby it received a 10% equity interest in GreenOak and agreed to provide, among other things, a working capital loan of up to US$ 10.0 million and a US$ 100.0 million co-investment commitment that is expected to fund up to a limited fixed percentage of any GreenOak sponsored investment program, with the Master Fund retaining the option to invest further amounts. Under the terms of the transaction, the Company granted to the GreenOak founding partners ("Founders") options to purchase 3.9 million Shares (vesting after 5 years and subject to further conditions) at a strike price of US$ 5.50. The aggregate fair value of the options granted at the transaction date was US$ 0.5 million. On 15 September 2015 the options vested, and as a result of vesting, all contingent elements to the options, other than market price, were removed. Under ASC 815, once the vesting conditions were met, the options were reclassified to equity. The accounting result of this is that a liability of US$ 16.3 million was reclassified to the capital reserve in respect of share options. US$ 16.3 million was the deemed fair value of the options at the time of vesting and was determined by using a Black-Scholes model (31 December 2014: US$ 12.3 million). The options are split approximately as follows: 50% are exercisable from 1 January 2016, expiring a year later; 25% are exercisable from 1 January 2017, expiring a year later; 25% are exercisable from 1 January 2018, expiring a year later. Note 5 Incentive Fee The Company pays the Investment Manager an incentive fee for each Calculation Period (a period of three months ending on 31 March, 30 June, 30 September and 31 December in each year or as otherwise determined by the Directors) equal to 25% of the increase in the NAV of the Company during the Calculation Period (before deduction of any dividend paid or the amount of any redemptions or repurchases of the Shares (or other relevant capital adjustments) during such Calculation Period) above the Reference NAV (as defined below) plus the Hurdle (as defined below) for the Calculation Period. If the Hurdle is not met in any Calculation Period (and no incentive fee is paid), the shortfall will not carry forward to any subsequent Calculation Period. The “Hurdle” for any Calculation Period will equal the Reference NAV multiplied by the Hurdle Rate (as defined below). The Hurdle Rate for any Calculation Period equals 3-month USD LIBOR determined as of 11:00 a.m. London time on the first London business day of the then current Calculation Period, plus the Hurdle Spread of 2.647858% in each case multiplied by the actual number of days in the Calculation Period divided by 365. The ‘‘Reference NAV’’ is the greater of (i) NAV at the end of the Calculation Period immediately preceding the current Calculation Period and (ii) the NAV as of the end of the Calculation Period immediately preceding the Calculation Period referred to in clause (i). For the purpose of determining the Reference NAV at the end of a Calculation Period, NAV shall be adjusted by the amount of accrued dividends and the amounts of any redemptions or repurchase of the Shares (or other relevant capital adjustments) and incentive fees to be paid with respect to that Calculation Period. 17 TETRAGON FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 5 Incentive Fee (continued) The incentive fee in respect of each Calculation Period is calculated by reference to the NAV before deduction of any accrued incentive fee. If the Investment Management Agreement is terminated other than at the end of a Calculation Period, the date of termination will be deemed to be the end of the Calculation Period. The incentive fee is normally payable in arrears after the end of the Calculation Period. The incentive fee for the year ended 31 December 2015 was US$ 35.8 million (31 December 2014: US$ 22.8 million). As at 31 December 2015, US$ 4.7 million was outstanding (31 December 2014: US$ 4.1 million). Note 6 Share Capital Authorized The Company has an authorized share capital of US$ 1.0 million divided into 10 voting shares, having a par value of US$ 0.001 each and 999,999,990 non-voting Shares, each having a par value of US$ 0.001. Shares are issuable either as certificated shares or uncertificated shares, and in both cases as registered shares in accordance with applicable law. Voting Shares The 10 voting shares in issue were issued at par and are owned by the Voting Shareholder, which is a non-U.S. affiliate of the Investment Manager. The voting shares are the only shares of the Company entitled to vote for the election of Directors and on all other matters put to a vote of shareholders, subject to the limited rights of the Shares described below. The voting shares are not entitled to receive dividends. Shares The Shares are not entitled to vote on any matter other than limited voting rights in respect of variation of their class rights. The Shares carry a right to any dividends or other distributions declared by the Company. The Shares are subject to certain transfer restrictions as set out in the Company’s Memorandum and Articles of Incorporation. The Directors, upon the recommendation of the Investment Manager and with prior approval of a resolution of voting shares, may allot, issue or otherwise dispose of Shares to such persons, at such times, for such consideration and on such terms and conditions as they deem necessary or desirable. There are no pre-emption rights attaching to any Shares. The Directors, upon the recommendation of the Investment Manager, may grant options over the Shares. The Company may repurchase Shares and hold such repurchased Shares as Treasury Shares. 18 TETRAGON FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 6 Share Capital (continued) Share Transactions Shares in issue at 31 December 2013 Issued in lieu of stock dividend Issued through release of tranche of Escrow Shares Shares purchased during the year Shares in issue at 31 December 2014 Issued in lieu of stock dividend Issued through release of tranche of Escrow Shares Shares purchased during the year Shares in issue at 31 December 2015 Optional Stock Dividend Voting Shares No. 10 - - - 10 - - - 10 Shares No. MM Shares US$ MM 98.9 0.6 1.2 (4.9) 95.9 1.2 4.7 (6.0) 95.9 0.1 - - - 0.1 - - - 0.1 The Company has an Optional Stock Dividend Plan which offers investors an opportunity to elect to receive any declared dividend in the form of dividend shares at a reference price determined by calculating the five-day weighted average price post ex-dividend date. During the year a total dividend of US$ 62.5 million (31 December 2014: US$ 58.4 million) was declared, of which US$ 50.5 million was paid out as a cash dividend (31 December 2014: US$ 52.0 million), and the remaining US$ 12.0 million (31 December 2014: US$ 6.4 million) was reinvested under the Optional Stock Dividend Plan. Treasury Shares and Share Repurchases The Company has entered into a joint arrangement with the Master Fund through the establishment of TFG Holdings I. The Company may transfer, and has transferred, Shares previously held in a Treasury Account to TFG Holdings I. Where this occurs the status of the Shares is unchanged from an accounting perspective and they are not included in the Shares outstanding on the Statements of Assets and Liabilities. On 30 November 2007, the Company announced the implementation of a share repurchase program ("Program") of their outstanding Shares. This was renewed on several occasions. As at 31 December 2015, there was no share repurchase program in place. When the Program was in operation, the Master Fund had undertaken to repurchase an identical number of its own shares from the Company as and when it made these repurchases in the open market. The Master Fund matched the price per share paid by the Company. The shares are held in a Treasury Account or in TFG Holdings I, allowing them to potentially be resold back to the Company if it resells its own Shares back into the market at a later date. Whilst they are held by the Company (whether directly or via TFG Holdings I), the Shares are neither eligible to receive dividends nor are they included in the Shares outstanding on the Statements of Assets and Liabilities. 19 TETRAGON FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 6 Share Capital (continued) Treasury Shares and Share Repurchases (continued) On 15 December 2015, the Company and the Master Fund announced that under the terms of a “modified Dutch auction” tender offer (the “Tender Offer”) it had accepted for purchase approximately 6.0 million non-voting shares of the Company at a purchase price of US$ 10.00 per share and an aggregate cost of US$ 60.9 million, including applicable fees and expenses. The repurchased Shares were exchanged with the Company for the identical amount of Master Fund Shares. Of the repurchased shares, 5.65m shares were transferred to an escrow account (see below) and the remainder were transferred to TFG Holdings I. As at 31 December 2015, 17.0 million Shares are held in TFG Holdings I (31 December 2014: 16.6 million) and 12.8 million Shares in the Treasury Account (31 December 2014: 12.8 million), with an aggregate attributed cost of US$ 264.6 million (31 December 2014: US$ 261.0 million). Escrow Shares As part of the Acquisition to acquire TFG Asset Management, the Aggregate Consideration of 11.7 million Shares was moved to an escrow account where they were to be held before being released in conjunction with the agreed vesting schedule, subject to certain forfeiture conditions. During the year, 0.6 million Shares were added to the account due to stock dividends, whilst 4.7 million shares were released in accordance with the vesting terms and schedule, leaving 6.6 million Shares in the account as at 31 December 2015 (31 December 2014: 10.7 million). As a result of the release of 4.7 million shares, a value of US$ 33.8 million was debited against the Share Based Employee Compensation Reserve, which represented approximately 4.0 million Shares relating to the original escrow shares valued at the transaction share price of US$ 8.43. In addition, approximately 0.7 million Shares released relating to stock dividends awarded on the original shares released was debited against Retained Earnings, with the value being determined using the stock reference price at each applicable dividend date (US$ 7.5 million). The remaining Shares, which remain eligible for stock dividends, are expected to be released in 2016 and 2017, subject to the conditions described above. Additionally, a second escrow account was opened during 2015. This is intended to hold Shares which will form part of a long term incentive plan (“LTIP”) for certain employees of TFG Asset Management. During 2015, 5.65 million shares were moved into this account and going forward, these shares will be eligible to participate in the stock dividend. As at 31 December 2015, the terms and operation of this LTIP had yet to be finalized. 20 TETRAGON FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 6 Share Capital (continued) Other Share Transactions Shares brought forward at 31 December 2013 Shares purchased during the year Stock Dividend Vested and released Shares at 31 December 2014 Shares purchased during the year Shares repurchased for use in LTIP  Stock Dividend Vested and released Shares at 31 December 2015 Note 7 Share Premium Balance at start of year Premium arising on issuance of Shares Discount arising from purchase of Shares Balance at end of year Note 8 Related Party Transactions Treasury Shares Shares No. MM 7.9 4.9 - - 12.8 - - - - 12.8 Shares held in TFG Holdings I Shares No. MM 16.6 - - - 16.6 0.4 - - - 17.0 Escrow shares – TFG AM acquisition Shares No. MM 11.3 - 0.7 (1.2) 10.7 - - 0.6 (4.7) 6.6 Escrow Shares - LTIP Shares No. MM - - - - - - 5.7 - - 5.7 31 Dec 2015 US$ MM 31 Dec 2014 US$ MM 929.4 53.4 (60.9) 921.9 963.2 17.1 (50.9) 929.4 The Investment Manager is entitled to receive management fees equal to 1.5% per annum of the Net Asset Value of the Company payable monthly in advance prior to the deduction of any accrued incentive fee. All fees and expenses of the Company including the Management and Administration fees, but excluding incentive fees from the Investment Manager, are paid by the Master Fund and allocated fully to the Company. An incentive fee may be paid to the Investment Manager as disclosed in Note 5. In recognition of the work performed by the Investment Manager in successfully arranging the global offering and the associated raising of new capital for the Company, in 2007 the Company granted to the Investment Manager options (the “Investment Management Options”) to purchase approximately 12.5 million of the Company’s Shares (before any application of potential anti-dilution) at an exercise price per share equal to the Offer Price (US$ 10.00). 21 TETRAGON FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 8 Related Party Transactions (continued) The Investment Management Options were fully vested and immediately exercisable on the date of admission to Euronext Amsterdam N.V. and will remain exercisable until the 10th anniversary of that date. The aggregate fair value of the options granted at the time of the global offering was US$ 11.8 million. The fair value of each option granted during 2007 was US$ 0.94 on the date of grant using the Binomial-pricing model with the following average assumptions: expected dividend yield 8%, risk-free interest rate of 5.306%, an expected life of 5 years and a volatility of 17.5%. The Company invests substantially all of its assets in the Master Fund, a Guernsey based closed-ended investment company which has the same Investment Manager as the Company. The remuneration for Directors shall be determined by resolution of the Voting Shareholder. Each of the Directors’ annual fee is US$ 100,000 as compensation for service on the Boards of Directors of both the Company and the Master Fund. The Directors have the option to elect to receive Shares in the Company instead of the quarterly fee. With respect to the year ending 31 December 2015, Frederic Hervouet has elected to receive Shares and he received 2,564 Shares in relation to the first quarter’s fee, 2,354 Shares in relation to the second quarter’s fee and 2,495 Shares in relation to the third quarter’s fee. The number of Shares issued instead of the fee for the fourth quarter will be determined as part of the fourth quarter 2015 dividend process. The Master Fund will pay the Directors’ fees. Paddy Dear and Reade Griffith have waived their entitlement to a fee in respect of their services as Directors. The Directors are entitled to be repaid by the Company all travel, hotel and other expenses reasonably incurred by them in the discharge of their duties. None of the Directors has a contract with the Company or the Master Fund providing for benefits upon termination of employment. The Voting Shareholder is an affiliate of the Investment Manager and holds all of the voting shares. As a result of its ownership and the degree of control that it exercises, the Voting Shareholder will be able to control the appointment and removal of the Company’s Directors (subject to applicable law). Affiliates of the Voting Shareholder also control the Investment Manager and, accordingly, control the Company’s business and affairs. Paddy Dear, Reade Griffith, Rupert Dorey and Frederic Hervouet - all Directors of the Company and the Master Fund – maintained (directly or indirectly) interests in Shares of the Company as at 31 December 2015, with interests of 1,401,647, 3,752,486, 102,717 and 10,133 Shares respectively (31 December 2014: 459,057, 1,377,683, 96,465 and Nil Shares respectively). Messrs, Griffith and Dear also have a (direct or indirect) interest in the Escrow Shares (as defined below). As described in Note 4, TFG Asset Management L.P., including Polygon’s asset management businesses and infrastructure platform, and interests in LCM and GreenOak, was acquired on 28 October 2012. The Shares issued in consideration are subject to vesting and forfeiture conditions and are held in escrow for release over the period 2013 to 2017. These escrow Shares are eligible to participate in the optional stock dividend program, and as a result of subsequent dividends, further Shares were added to the relevant escrow accounts. As part of the Acquisition, Messrs, Griffith and Dear, as founders of Polygon, were awarded consideration in Shares which will vest between 2015 and 2017. 22 TETRAGON FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 8 Related Party Transactions (continued) In particular, Messrs, Griffith and Dear were initially allocated 5,539,954 and 1,955,291 Shares, respectively, and these are held in escrow pending release between 2015 and 2017. As at 31 December 2015, 4,443,375 Shares were held in escrow on behalf of Mr. Griffith (31 December 2014: 6,259,363 Shares) and 1,568,250 on behalf of Mr. Dear (31 December 2014: 2,209,190 Shares). It was also contractually agreed at the time of the Acquisition that they would be entitled to total annual compensation in respect of their executive role with the Company and its subsidiaries totaling not more than US$ 100,000 each. During the year ended 31 December 2015 total compensation paid to them each in this capacity by the Master Fund was US$ 100,000 (31 December 2014: US$ 100,000). Note 9 Dividends Quarter ended 31 December 2013 of US$ 0.15 per share Quarter ended 31 March 2014 of US$ 0.15 per share Quarter ended 30 June 2014 of US$ 0.155 per share Quarter ended 30 September 2014 of US$ 0.155 per share Quarter ended 31 December 2014 of US$ 0.1575 per share Quarter ended 31 March 2015 of US$ 0.1575 per share Quarter ended 30 June 2015 of US$ 0.1625 per share Quarter ended 30 September 2015 of US$ 0.1625 per share 31 Dec 2015 US$ MM - - - - 15.1 15.2 15.7 16.5 62.5 31 Dec 2014 US$ MM 14.8 14.1 14.6 14.9 - - - - 58.4 The fourth quarter dividend of US$ 0.165 per share was approved by the Directors on 25 February 2016. 23 TETRAGON FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 10 Earnings per Share The calculation of the basic and diluted earnings per share is based on the following data: Earnings for the purposes of basic earnings per share being net profit attributable to shareholders for the year Weighted average number of Shares for the purposes of basic earnings per share Effect of dilutive potential Shares: Share based employee compensation Share options Weighted average number of Shares for the purposes of diluted earnings per share Year ended 31 Dec 2015 US$ MM Year ended 31 Dec 2014 US$ MM 127.3 97.1 6.6 1.7 105.5 95.1 95.4 10.7 - 106.1 Diluted earnings per share is calculated by adjusting the weighted average number of Shares outstanding assuming conversion of all potential dilutive Shares. Share options and share based employee compensation are potential dilutive Shares. In respect of share based employee compensation, it is assumed that all of the Shares currently held in escrow will be released, thereby increasing the weighted average number of Shares. This includes Shares which are scheduled to vest and be released between 2016 and 2017. In respect of share options, the intrinsic value of the Shares issued to the Investment Manager in connection with the global offering in 2007 (see Note 8) is calculated using the Company’s quoted Share price on the last business day prior to the year end. This is then converted into a number of Shares by dividing the aforementioned intrinsic value by the aforementioned quoted Share price. This will yield the number of Shares to include in the dilution calculation. In respect of share options issued to GreenOak, (see Note 4) a similar intrinsic value calculation is used to determine the number of Shares to include in the dilution calculation. 24 TETRAGON FINANCIAL GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 11 Retained Earnings Balance at start of year Net increase in net assets resulting from operations for the year Dividends paid Stock dividends on Shares released from Escrow Balance at end of year Note 12 Share based employee compensation reserve Balance at start of year Share based employee compensation Release of Escrow Shares Balance at end of year Note 13 Subsequent Events 31 Dec 2015 US$ MM 31 Dec 2014 US$ MM 845.8 127.3 (62.5) (7.5) 903.0 810.5 95.1 (58.4) (1.4) 845.8 31 Dec 2015 US$ MM 31 Dec 2014 US$ MM 31.4 22.0 (33.8) 19.6 17.6 23.1 (9.3) 31.4 The Directors have evaluated the period up to 25 February 2016, which is the date the financial statements were approved, and have concluded that there are no material events that require disclosure or adjustment to the financial statements. Note 14 Approval of Financial Statements The Directors approved the financial statements on 25 February 2016. 25 AUDITED CONSOLIDATED FINANCIAL STATEMENTS TETRAGON FINANCIAL GROUP MASTER FUND LIMITED FOR THE YEAR ENDED 31 DECEMBER 2015 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED AUDITED CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2015 CONTENTS DIRECTORS’ REPORT INDEPENDENT AUDITOR’S REPORT CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES CONSOLIDATED STATEMENTS OF OPERATIONS CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS CONSOLIDATED STATEMENTS OF CASH FLOWS CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS FINANCIAL HIGHLIGHTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS PAGE 2 5 7 8 9 10 11 15 16 1 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED DIRECTORS’ REPORT For the year ended 31 December 2015 The Directors present to the shareholders their report together with the audited consolidated financial statements for the year ended 31 December 2015. THE FUND AND ITS INVESTMENT OBJECTIVE Tetragon Financial Group Master Fund Limited (the “Fund”) was registered in Guernsey on 23 June 2005 as a company limited by shares, with registered number 43322. All voting shares of the Fund are held by Polygon Credit Holdings II Limited (the “Voting Shareholder”). The Fund continues to be registered and domiciled in Guernsey. The registered office of the Fund is 1st Floor Dorey Court, Admiral Park, St. Peter Port, Guernsey, Channel Islands, GY1 6HJ. The Fund's investment objective is to generate distributable income and capital appreciation. It aims to provide stable returns to investors across various credit, equity, interest rate, inflation and real estate cycles. The company’s investment portfolio comprises a broad range of assets, including a diversified alternative asset management business, TFG Asset Management, and covers bank loans, real estate, equities, credit, convertible bonds and infrastructure. As at 31 December 2015, TFG Asset Management consisted of Polygon Global Partners LP and Polygon Global Partners LLP (collectively with certain affiliates, “Polygon”), LCM Asset Management LLC (“LCM”), Equitix Holdings Limited (“Equitix”), Hawke's Point, the GreenOak Real Estate LP ("GreenOak") joint venture and Tetragon Credit Income Partners ("TCIP"). TFG Asset Management L.P. is registered as an investment adviser under the U.S. Investment Advisers Act of 1940 and one of its investment management entities, Polygon Global Partners LLP, is authorised and regulated by the United Kingdom Financial Conduct Authority. RESULTS, ACTIVITIES AND FUTURE DEVELOPMENTS The results of operations are set out on page 8. A detailed review of activities and future developments is contained in the Annual Report issued with these consolidated financial statements to the shareholders of Tetragon Financial Group Limited (the “Feeder”). DIRECTORS The Directors who held office during the year were: Paddy Dear Rupert Dorey* Reade Griffith Frederic Hervouet* David Jeffreys* Byron Knief* * Independent non-executive Directors The remuneration for Directors is determined by resolution of the Voting Shareholder. Each Director’s annual fee is US$ 100,000 as compensation for service on the Board of Directors of both the Fund and the Feeder and is paid in quarterly installments by the Fund. Paddy Dear and Reade Griffith have waived their entitlement to a fee. 2 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED DIRECTORS’ REPORT (continued) For the year ended 31 December 2015 DIRECTORS (continued) The Directors have the option to elect to receive Shares in the Feeder instead of the quarterly fee. With respect to the year ending 31 December 2015, Frederic Hervouet has elected to receive Shares and he received 2,564 Shares in relation to the first quarter’s fee, 2,354 Shares in relation to the second quarter’s fee and 2,495 Shares in relation to the third quarter’s fee. The number of Shares issued instead of the fee for the fourth quarter will be determined as part of the fourth quarter dividend process. The Directors are entitled to be repaid by the Fund for all travel, hotel and other expenses reasonably incurred by them in the discharge of their duties. None of the Directors has a contract with the Fund or the Feeder providing for benefits upon termination of employment. DIVIDENDS The Board of Directors has the authority to declare dividend payments, based upon the recommendation of the Investment Manager, subject to the approval of the voting shares of the Fund and adherence to applicable law including the satisfaction of a solvency test as stated under The Companies (Guernsey) Law, 2008. The Investment Manager’s recommendation with respect to the declaration of dividends (and other capital distributions) may be informed by a variety of considerations, including (i) the expected sustainability of the Fund’s cash generation capacity in the short and medium term, (ii) the current and anticipated performance of the Fund, (iii) the current and anticipated operating and economic environment and (iv) other potential uses of cash ranging from preservation of the Fund’s investments and financial position to other investment opportunities. The Directors declared a dividend amounting to US$ 0.1575 per Share for the Quarter Ended 31 December 2014, US$ 0.1575 per Share for the Quarter Ended 31 March 2015, US$ 0.1625 per Share for the Quarter Ended 30 June 2015 and US$ 0.1625 per Share for the Quarter Ended 30 September 2015. The total dividend declared during the year ended 31 December 2015 amounted to US$ 62.5 million or US$ 0.64 per Share (31 December 2014: US$ 58.4 million or US$ 0.61 per Share). On 25 February 2016, the Directors have declared a dividend US$ 0.165 per Share for the Quarter Ended 31 December 2015. STATEMENT OF DIRECTORS’ RESPONSIBILITIES The Directors are responsible for preparing the Directors’ Report and the financial statements in accordance with applicable law and regulations. The Companies (Guernsey) Law, 2008, requires the Directors to prepare financial statements for each financial year. Under that law, they have elected to prepare the financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and applicable law. The financial statements are required by law to give a true and fair view of the state of affairs of the Fund and of the profit or loss of the Fund for that period. In preparing those financial statements, the Directors are required to: Select suitable accounting policies and apply them consistently;   Make judgments and estimates that are reasonable and prudent;  State whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and  Prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the Fund will continue in business. The Directors are responsible for the keeping of proper accounting records which disclose with reasonable accuracy at any time the financial position of the Fund and to enable them to ensure that the financial statements comply with The Companies (Guernsey) Law, 2008. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Fund and to prevent and detect fraud and other irregularities. 3 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED DIRECTORS’ REPORT (continued) For the year ended 31 December 2015 STATEMENT OF DIRECTORS’ RESPONSIBILITIES (continued) The Directors confirm that they have complied with the above requirements. DISCLOSURE OF INFORMATION TO AUDITOR So far as each of the Directors is aware, there is no relevant audit information of which the Fund’s auditor is unaware, and each has taken all the steps he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the Fund’s auditor is aware of that information. AUDITORS KPMG Channel Islands Limited are the appointed independent auditors of the Fund and they have expressed their willingness to continue in office. A resolution for the re-appointment of KPMG Channel Islands Limited as auditors of the Fund is to be proposed at the forthcoming Annual General Meeting. Signed on behalf of the Board of Directors by: Rupert Dorey, Director David Jeffreys, Director Date: 25 February 2016 4 Independent auditor’s report to the members of Tetragon Financial Group Master Fund Limited We have audited the consolidated financial statements (the “financial statements”) of Tetragon Financial Group Master Fund Limited (the ”Fund” or “Group”) for the year ended 31 December 2015 which comprise the Consolidated Statements of Assets and Liabilities, the Consolidated Statements of Operations, the Consolidated Statements of Changes in Net Assets, the Consolidated Statements of Cash Flows, the Consolidated Condensed Schedule of Investments, the Financial Highlights and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and U.S. generally accepted accounting principles. This report is made solely to the Fund’s members, as a body, in accordance with section 262 of the Companies (Guernsey) Law, 2008. Our audit work has been undertaken so that we might state to the Fund’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Fund and the Fund’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As explained more fully in the Statement of Directors' Responsibilities set out on pages 3 and 4, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's (APB's) Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Board of Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on the financial statements In our opinion the financial statements:    give a true and fair view of the state of the Group’s affairs as at 31 December 2015 and of its net income for the year then ended; are in conformity with U.S. generally accepted accounting principles; and comply with the Companies (Guernsey) Law, 2008. 5 Independent auditor’s report to the members of Tetragon Financial Group Master Fund Limited (continued) Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies (Guernsey) Law, 2008 requires us to report to you if, in our opinion:   the Fund has not kept proper accounting records; or the financial statements are not in agreement with the accounting records; or  we have not received all the information and explanations, which to the best of our knowledge and belief are necessary for the purpose of our audit. Chartered Accountants Guernsey 25 February 2016 6 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES As at 31 December 2015 Assets Investments, at fair value (Cost US$ 2,070.0 million, 31 Dec 2014: US$ 1,916.4 million) Management contracts Cash and cash equivalents Amounts due from brokers Derivative financial assets Fixed assets Deferred tax asset Prepaid income tax Other receivables Total assets Liabilities Derivative financial liabilities Other payables and accrued expenses Income tax payable Deferred tax liability Total liabilities Net assets Equity Share capital Share premium Retained earnings Capital contribution Shares outstanding Shares Net Asset Value per share Note 31 Dec 2015 31 Dec 2014 US$ MM US$ MM 2 5 8 9 2, 3 1 17 17 10 2, 3 11 17 17 12 13 15 16, 22 1,364.7 23.4 440.4 59.9 19.4 0.5 9.2 - 21.5 1,939.0 0.7 48.5 5.8 6.6 61.6 1,356.2 29.7 402.0 52.1 19.2 0.1 10.0 0.6 32.8 1,902.7 5.8 50.5 2.9 8.6 67.8 1,877.4 1,834.9 0.1 881.1 976.6 19.6 1,877.4 0.1 888.6 914.8 31.4 1,834.9 Millions Millions 12 95.9 95.9 US$ 19.58 US$ 19.13 The accompanying notes are an integral part of the consolidated financial statements. Signed on behalf of the Board of Directors by: Rupert Dorey, Director David Jeffreys, Director Date: 25 February 2016 7 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED CONSOLIDATED STATEMENTS OF OPERATIONS For the year ended 31 December 2015 Note Year ended 31 Dec 2015 US$ MM Year ended 31 Dec 2014 US$ MM Interest income Fee income Other income – cost recovery Insurance recovery Dividend income Investment income Employee costs Management fees Share based employee compensation Legal and professional fees Amortization on intangible assets Audit fees Other operating and administrative expenses Operating expenses Net investment income 18 19 20 25 24 24 22 5 21 Net realized and unrealized gain / (loss) from investments and foreign currency Net realized gain / (loss) from: Investments Derivative financial instruments Foreign currency transactions Net (decrease) / increase in unrealized (depreciation) / appreciation on: Investments Derivative financial instruments Translation of assets and liabilities in foreign currencies Net realized and unrealized gain from investments and foreign currency Net increase from operations before tax Income and deferred tax expense 17 Net income The accompanying notes are an integral part of the consolidated financial statements. 8 134.7 70.2 17.3 9.8 0.1 232.1 (58.6) (28.3) (22.0) (7.2) (6.3) (0.4) (21.2) (144.0) 88.1 82.7 4.8 4.9 92.4 (0.3) 8.0 (11.1) (3.4) 89.0 177.1 (10.1) 167.0 152.5 81.1 23.6 1.0 0.1 258.3 (61.7) (27.0) (23.1) (17.6) (6.8) (0.4) (21.8) (158.4) 99.9 124.4 (36.3) 12.0 100.1 (52.2) 10.2 (25.9) (67.9) 32.2 132.1 (12.6) 119.5 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS For the year ended 31 December 2015 Note Year ended 31 Dec 2015 US$ MM Year ended 31 Dec 2014 US$ MM From operations: Net investment income Net realized gain from investments and foreign currency Net decrease in unrealized depreciation on investments and translation of assets and liabilities in foreign currencies Income and deferred tax expense Net income after tax Share based employee compensation Net increase in net assets resulting from operations Dividends paid to Feeder in lieu of incentive fee liability Dividends paid to shareholders Total distributions Issue of Shares Purchase of Treasury Shares Decrease in net assets resulting from capital transactions Total increase / (decrease) in net assets Net assets at start of year Net assets at end of year 17 22 14 14 12 12 The accompanying notes are an integral part of the consolidated financial statements. 88.1 92.4 (3.4) (10.1) 167.0 22.0 189.0 (35.2) (50.5) (85.7) 0.1 (60.9) (60.8) 42.5 99.9 100.1 (67.9) (12.6) 119.5 23.1 142.6 (51.5) (52.0) (103.5) - (50.9) (50.9) (11.8) 1,834.9 1,846.7 1,877.4 1,834.9 9 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS For the year ended 31 December 2015 Operating activities Net income Adjustments for: Realized gains on investments and derivatives Cash received on investments in excess of interest income Amortization on intangible assets Share based employee compensation Unrealized losses Deferred tax Operating cash flows before movements in working capital Decrease / (increase) in receivables Increase in payables Income tax Amounts due from brokers Cash flows from operations (Purchase) / sale of fixed assets Proceeds from sale / prepayment / maturity of investments Net proceeds / (payment) on derivative financial instruments Purchase of investments Net cash provided by operating activities Financing activities Proceeds from issue of Shares Treasury Shares Dividends paid to shareholders* Dividends paid to Feeder in lieu of incentive fee liability Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Effect of exchange rate fluctuations on cash and cash equivalents Cash and cash equivalents at end of year Year ended 31 Dec 2015 US$ MM Year ended 31 Dec 2014 US$ MM 167.0 119.5 (72.8) 220.8 6.3 22.0 3.4 (1.2) 345.5 14.1 (2.1) 3.5 (7.8) 353.2 (0.3) 133.0 7.7 (309.0) 184.6 0.1 (60.9) (50.5) (35.2) (146.5) 38.1 402.0 0.3 440.4 (88.1) 216.7 6.8 23.1 67.9 (3.8) 342.1 (6.2) 3.5 2.3 (10.2) 331.5 0.2 250.2 (28.8) (241.5) 311.6 - (50.9) (52.0) (51.5) (154.4) 157.2 245.9 (1.1) 402.0 The accompanying notes are an integral part of the consolidated financial statements. * The gross dividend payable to shareholders was US$ 62.5 million (2014: US$ 58.4 million) with a value equivalent to US$ 12.0 million (2014: US$ 6.4 million) elected to be taken by the dividend recipient in Shares rather than cash. 10 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS As at 31 December 2015 Security Description United States CLO Equity Cayman Islands ABS and Structured Finance Broadly Syndicated Senior Secured Loans CDOs Squared Middle Market Senior Secured Loans European CLO Equity Ireland Broadly Syndicated Senior Secured Loans Luxembourg Broadly Syndicated Senior Secured Loans Netherlands Broadly Syndicated Senior Secured Loans United States CLO Mezzanine Cayman Islands Broadly Syndicated Senior Secured Loans Loans United Kingdom Loan Notes* United Kingdom Mezzanine Loan* United States Broadly Syndicated Senior Secured Loans Unlisted Stock Global Financial Real Estate Investment Manager Norway – Equity Investments United Kingdom – Infrastructure Asset Manager* United States – Equity Investments Investment Funds and Vehicles United States – Real Estate Japan – Real Estate Latin America – Real Estate Spain – Real Estate United Kingdom – Real Estate Global – Hedge Funds – Equities Polygon European Equity Opportunity Fund** Polygon Distressed Opportunities Fund*** Global – Hedge Funds – Credit and Convertible Bonds Nominal MM Fair Value US$ MM US$ MM Cost % of Net Assets 18.4 1,125.1 17.3 133.2 1,294.0 100.4 100.4 71.1 71.1 24.0 24.0 1.8 1.8 79.5 7.7 3.4 90.6 17.6 1,028.8 16.6 123.9 1,186.9 - 510.8 - 29.8 540.6 0.00% 27.21% 0.00% 1.59% 28.80% 121.5 121.5 84.3 84.3 31.8 31.8 1.1 1.1 119.7 10.7 3.4 133.8 10.7 3.7 2.4 20.2 37.0 43.7 31.3 28.1 12.8 27.6 60.9 139.2 95.0 35.0 473.6 20.3 20.3 23.3 23.3 14.9 14.9 1.7 1.7 130.1 11.4 3.0 144.5 70.0 10.0 32.4 21.5 133.9 47.4 29.9 26.3 12.5 25.6 64.0 139.9 95.1 44.8 485.5 1.08% 1.08% 1.24% 1.24% 0.79% 0.79% 0.09% 0.09% 6.93% 0.61% 0.16% 7.70% 3.72% 0.53% 1.73% 1.15% 7.13% 2.52% 1.59% 1.40% 0.67% 1.37% 3.41% 7.44% 5.07% 2.39% 25.86% Total Investments 2,070.0 1,364.7 72.69% 11 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS (continued) As at 31 December 2015 Financial Derivative Instruments Forward Foreign Currency Exchange Contracts Credit default swaps Equity Total Return Swaps Total Financial Derivative Instruments Cash and Cash Equivalents Other Assets and Liabilities Net Assets Fair Value US$ MM 10.1 7.6 1.0 18.7 % of Net Assets 0.54% 0.40% 0.05% 0.99% 440.4 53.6 1,877.4 23.46% 2.86% 100.00% * The securities held in Loan Notes, Mezzanine Loan and Infrastructure Asset Manager are the component parts of the Fund’s investment in Equitix. See note 6 for more details. **The investment in the Polygon European Equity Opportunity Fund consists of 436,051 units in Class A, 252,169 units in Class B and 230,084 units in Class C as at 31 December 2015. The stated objective of the Polygon European Equity Opportunity Fund is to seek superior risk adjusted returns. Its stated intention is to invest predominantly in European listed equity securities, but may also invest in other asset classes and in other non-European jurisdictions. Given the applicable notice, liquidity of up to 25% of the investment is available on a quarterly basis (subject to certain conditions), and the entire investment could be liquidated over four consecutive quarters. *** The investment in the Polygon Distressed Opportunities Fund consists of 456,562 units in Class A, 311,764 units in Class B, and 151,069 units in Class C at 31 December 2015. The stated objective of the Polygon Distressed Opportunities Fund is to seek superior risk adjusted returns. It states that to achieve this objective, it will invest primarily in investments (directly or indirectly) in securities, instruments and assets that are either distressed or acquired from holders in distressed situations. Given the applicable notice, liquidity of up to 25% of the investment is available on a quarterly basis (subject to certain conditions) subject to the redemption occurring at least 12 months after the purchase of the shares or units to be redeemed. Accordingly, the entire investment could be liquidated over four consecutive quarters subject to the conditions above. 12 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS (continued) As at 31 December 2014 Security Description United States CLO Equity Cayman Islands ABS and Structured Finance Broadly Syndicated Senior Secured Loans CDOs Squared Middle Market Senior Secured Loans European CLO Equity Ireland Broadly Syndicated Senior Secured Loans Luxembourg Broadly Syndicated Senior Secured Loans Netherlands Broadly Syndicated Senior Secured Loans United States CLO Mezzanine Cayman Islands Broadly Syndicated Senior Secured Loans Loans United States Broadly Syndicated Senior Secured Loans Global Unsecured Loan Listed Stock United Kingdom – Equity Investments Unlisted Stock Global Financial Real Estate Investment Manager Norway – Equity Investments Investment Funds and Vehicles United States – Real Estate Japan – Real Estate Netherlands – Real Estate Spain – Real Estate United Kingdom – Real Estate Global – Hedge Funds – Equities Polygon European Equity Opportunity Fund* Polygon Distressed Opportunities Fund** Global – Hedge Funds – Credit and Convertible Bonds Nominal MM Fair Value US$ MM US$ MM Cost % of Net Assets 18.4 1,107.6 17.3 163.0 1,306.3 17.6 1,006.8 16.6 152.5 1,193.5 - 639.7 - 57.1 696.8 - 34.88% - 3.11% 37.99% 100.4 100.4 121.5 121.5 71.1 71.1 24.0 24.0 1.8 1.8 22.4 5.5 27.9 84.3 84.3 31.8 31.8 1.1 1.1 22.0 5.5 27.5 33.3 33.3 10.7 2.4 13.1 44.9 21.4 0.2 10.9 12.7 61.0 134.2 90.0 35.0 410.3 53.0 53.0 46.8 46.8 20.3 20.3 1.7 1.7 22.1 6.4 28.5 29.4 29.4 66.5 2.8 69.3 46.1 20.3 0.1 9.5 12.3 63.3 120.8 95.5 42.5 410.4 2.89% 2.89% 2.55% 2.55% 1.10% 1.10% 0.09% 0.09% 1.20% 0.35% 1.55% 1.60% 1.60% 3.62% 0.15% 3.77% 2.52% 1.09% 0.01% 0.52% 0.67% 3.45% 6.58% 5.21% 2.32% 22.37% Total Investments 1,916.4 1,356.2 73.91% 13 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS (continued) As at 31 December 2014 Financial Derivative Instruments Interest Rate Swaptions Forward Foreign Currency Exchange Contracts Credit default swaps Equity Total Return Swaps Total Financial Derivative Instruments Cash and Cash Equivalents Other Assets and Liabilities Net Assets Fair Value US$ MM 0.6 10.0 (4.1) 6.9 13.4 % of Net Assets 0.03% 0.55% (0.23)% 0.38% 0.73% 402.0 63.3 1,834.9 21.91% 3.45% 100.00% *The investment in the Polygon European Equity Opportunity Fund consists of 415,537 units in Class A, 242,483 units in Class B and 228,851 units in Class C as at 31 December 2014. The stated objective of the Polygon European Equity Opportunity Fund is to seek superior risk adjusted returns. Its stated intention is to invest predominantly in European listed equity securities, but may also invest in other asset classes and in other non-European jurisdictions. Given the applicable notice, liquidity of up to 25% of the investment is available on a quarterly basis (subject to certain conditions), and the entire investment could be liquidated over four consecutive quarters. ** The investment in the Polygon Distressed Opportunities Fund consists of 432,676 units in Class A, 295,765 units in Class B, and 143,549 units in Class C at 31 December 2014. The stated objective of the Polygon Distressed Opportunities Fund is to seek superior risk adjusted returns. It states that to achieve this objective, it will invest primarily in investments (directly or indirectly) in securities, instruments and assets that are either distressed or acquired from holders in distressed situations. Given the applicable notice, liquidity of up to 25% of the investment is available on a quarterly basis (subject to certain conditions) subject to the redemption occurring at least 12 months after the purchase of the shares or units to be redeemed. Accordingly, the entire investment could be liquidated over four consecutive quarters subject to the conditions above. 14 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED FINANCIAL HIGHLIGHTS For the year ended 31 December 2015 and 31 December 2014 The following represents selected per Share operating performance of the Fund, ratios to average net assets and total return information for the year ended 31 December 2015 and 31 December 2014. Per Share operating performance Net Asset Value at start of year Net investment income Net realized and unrealized gain from investments, derivatives and foreign currencies Share based employee compensation Dividends paid to shareholders Income and deferred tax expense Other capital transactions Net Asset Value at the end of the year Pro Forma Fully Diluted NAV per Share Shares outstanding Shares held in escrow Pro Forma Fully Diluted Shares 31 Dec 2015 31 Dec 2014 US$ US$ 19.13 0.91 0.92 0.23 (0.88) (0.10) (0.63) 19.58 18.67 1.05 0.34 0.24 (1.15) (0.13) 0.11 19.13 Millions 95.9 6.6 102.5 Millions 95.9 10.7 106.6 Pro Forma Fully Diluted Net Asset Value per Share US$ 18.32 US$ 17.21 Return (NAV change before dividend payments and other capital transactions) 10.25% 8.03% Ratios and supplemental data Ratio to average net assets: Total operating expenses Net investment income (6.41%) 4.63% (7.39%) 5.50% An individual shareholder’s per Share operating performance and ratios may vary from the above based on the timing of capital transactions. 15 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2015 Note 1 Significant Accounting Policies Basis of Presentation The consolidated financial statements give a true and fair view, are prepared in conformity with U.S. GAAP and comply with The Companies (Guernsey) Law, 2008. For financial statement reporting purposes, the Fund is an investment company and follows Financial Services – Investment Companies (ASC 946). The accounting policies have been consistently applied by the Fund during the year ended 31 December 2015 and are consistent with those used in the previous year. The consolidated financial statements are presented in United States Dollars. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes, including the valuation of investments. The Fund’s management believes that the estimates made in preparing the consolidated financial statements are reasonable and prudent, however actual results could differ materially from these estimates. Foreign Currency Translation Transactions in foreign currencies are translated at the foreign currency exchange rate ruling at the date of the transaction. All assets and liabilities denominated in foreign currencies are translated to U.S. Dollars at the foreign currency closing exchange rate ruling at the reporting date. Foreign currency exchange differences arising on translation and realized gains and losses on disposals or settlements of monetary assets and liabilities are recognized in the Consolidated Statements of Operations. Foreign currency exchange differences relating to derivative financial instruments are included in foreign currency transactions and translation of assets and liabilities in foreign currencies in the Consolidated Statements of Operations. All other foreign currency exchange differences relating to monetary items, including cash and cash equivalents and investments, are included in the foreign currency transactions and translation of assets and liabilities in foreign currencies in the Consolidated Statements of Operations. Investment Transactions and Investment Income Investment transactions are recorded on a trade date basis (the trade date is the date that an entity commits to purchase or sell an asset). Realized gains and losses are calculated on the identified historical cost basis. Interest income is recognized on an effective interest rate basis. Financial Instruments Investments in CLO equity tranche investments (“CLO equity”), at fair value In the absence of an active market for the equity tranche investments in securitization vehicles, a mark to model approach has been adopted to determine their valuation. A third party valuation model that is used by the Investment Manager and the Administrator has been selected for this purpose. 16 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 1 Significant Accounting Policies (continued) Financial Instruments (continued) Investments in CLO equity tranche investments (“CLO equity”), at fair value (continued) The model contains characteristics of the securitization vehicle structure, including current assets and liabilities, based upon information derived by a specialist firm, from data sources such as the securitization vehicles’ trustee reports. Key model inputs include projected defaults and recovery rates and reinvestment spreads for the relevant class of underlying collateral held in the securitization vehicle. These inputs are derived by reference to a variety of market sources, which are used by both the Investment Manager and the Administrator. The model projects future cash flows which are discounted at the applicable rate in order to determine fair value. The model assumptions are reviewed on a regular basis and adjusted as appropriate to take into account any changes in observable data in relation to these inputs. The Fund recognizes interest income and any impairment pursuant to “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets” (ASC 325). ASC 325 sets forth rules for recognizing interest income and determining when an investment is impaired. In accordance with ASC 325, the excess of the estimated future cash flows over the initial investment is the accretable yield (or the “IRR”). At each individual coupon date, the IRR is recalculated and the new IRR is used to recognize interest income on that particular investment until the following coupon date using the effective yield method. Cash distributions received from investments under ASC 325 may not necessarily equal the income earned during any given year or period. The amortized cost of each investment is equal to the initial investment plus the yield accrued to date less all cash received to date less any write downs for impairment. Investments in leveraged loans, at fair value To the extent that the Fund’s leveraged loans are exchange traded and are priced or have sufficient bid price indications from normal course trading at or around the valuation date (financial reporting date), such bid pricing will determine fair value. Pricing service marks from third party pricing services may be used as an indication of fair value, depending on the volume and reliability of the marks, sufficient and reasonable correlation of bid and ask quotes, and, most importantly, the level of actual trading activity. Investments in CLO mezzanine tranche investments, at fair value Investments in CLO mezzanine tranches are carried at fair value using the latest broker indicative bid prices. As the mezzanine tranches are marked-to-market, changes in the fair value are recognized immediately in the Consolidated Statements of Operations. Investments in securities, listed stock, unlisted common stock and unsecured loans, at fair value Investments in listed stock, unlisted stock and unsecured loans are carried at fair value. For listed stock, the closing exchange price is utilized as the fair value price. For unlisted securities, their cost price, the price at which any recent transaction in the security may have been effected and any other applicable factors may be considered, as well as valuation techniques which may be used by market participants. Investments in unlisted investment funds, at fair value Investments in unlisted investment funds are valued utilizing the net asset valuations provided by the managers of the underlying funds and / or their administrators. This approach is known as the “practical expedient” and has been applied in accordance with the ASU 820. 17 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 1 Significant Accounting Policies (continued) Financial Instruments (continued) Investments in real estate, at fair value Investments where the primary purpose is to seek exposure to real estate are either made through an unlisted investment fund structure (see “investments in unlisted investment funds, at fair value”) or, where the Fund is the sole or majority investor in a company or partnership, which either directly or indirectly holds this exposure. The Fund’s interests are valued by reference to net asset valuations provided by the investment advisor for the investment and/or its administrator. The underlying real estate is revalued periodically but typically no more frequently than on an annual basis. Forward currency contracts, at fair value Forward currency contracts are recognized at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at their fair value. Fair values are based on observable foreign currency forward rates, recent market transactions, and valuation techniques, including discounted cash flow models, as appropriate. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative. The best evidence of fair value of a forward contract at initial recognition is the transaction price. Subsequent changes in the fair value of any forward contract are recognized immediately in the Consolidated Statements of Operations. Interest rate swaptions, at fair value This instrument combines the features of two other financial instruments, namely an option and an interest rate swap. A swaption involves writing / purchasing options to enter into a swap. When the Fund purchases a swaption, a premium is paid by the Fund and the swaption is initially recognized at the amount of the premium. The swaption is subsequently marked-to-market to reflect the fair value of the swaption purchased, which is reported as an asset on the Consolidated Statements of Assets and Liabilities, and changes in the fair value are recognized immediately in the Consolidated Statements of Operations. Premiums paid on the purchase of swaptions which expire unexercised are treated as realized losses. Swaps and Contracts for difference The Fund enters into swaps and contracts for difference (“CFDs”) arrangements with financial institutions. Swaps and CFDs are typically traded on the OTC market. The arrangement generally involves an agreement by the Fund and a counterparty to exchange the difference between the opening and closing price of the position underlying the contract, which are generally on equity positions. The fair value of the swap or CFD is derived by taking the difference between the quoted price of the underlying security and the contract price. Realized and unrealized gains and losses are included in the Consolidated Statements of Operations. Credit default swaps Credit default swaps are contracts in which the Fund pays or receives premium flows in return for the counterparty accepting or selling all or part of the risk of default or failure to pay of a reference entity on which the swap is written. Where the Fund has bought protection the maximum potential loss is the value of the premium flows the Fund is contracted to pay until maturity of the contract. Where the Fund has sold protection the maximum potential loss is the nominal value of the protection sold. 18 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 1 Significant Accounting Policies (continued) Financial Instruments (continued) Credit default swaps (continued) Credit default swaps are stated at fair value. Fair values are obtained from quoted market prices in active markets, including recent market transactions, and valuation techniques, including discounted cash flow models, as appropriate. The net income or expense on the swap agreements entered into by the Fund is reflected in the Statements of Operations. Unrealized gains are reported as an asset and unrealized losses are reported as a liability in the Statements of Assets and Liabilities. Changes in the fair value are reflected in the Statements of Operations in the period in which they occur. Tri-Party repurchase agreements In a tri-party repurchase agreement, the Fund lends cash to a third party secured against collateral posted by the borrower to a collateral agent. At any point the Fund can recall the loan with twenty-four hour’s notice. Failure to deliver the cash will be considered an event of default, enabling the Fund to take delivery of the collateral posted with the collateral agent. Due to the highly liquid nature of these instruments, the amount being lent through these tri-party repos is recorded as cash and cash equivalents in the Statements of Assets and Liabilities, with interest receivable accrued and recognized as interest income in the Statement of Operations. Fixed Assets Fixed assets are stated at cost and depreciated on a straight-line basis over their estimated useful lives. Cash and Cash Equivalents Cash comprises current deposits with banks. Cash equivalents comprised of short-term highly liquid investments that are readily convertible to known amounts of cash, are subject to an insignificant risk of changes in value, and are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. Management Contracts The cost of purchasing management contracts which provide investment management services to investment funds, accounts and other vehicles are amortized over their useful lives. Management contracts are stated at cost less accumulated amortization and impairment. The Fund reviews purchased intangible assets for impairment where there are events or changes in circumstance that indicate the carrying value of an asset may not be recoverable. Amortization is recognized through profit or loss in the Consolidated Statements of Operations on a straight-line basis over the useful life of the agreements. The estimated useful life for the purposes of amortizing management contracts ranges from three to ten years. Principles of Consolidation In accordance with the accounting guidance in the AICPA Audit and Accounting Guide (2015): Investment Companies (the “Guide”), as an Investment Company, the Fund carries all investments at fair value, with the exception of the investments detailed in the paragraph below. 19 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 1 Significant Accounting Policies (continued) Principles of Consolidation (continued) Operating entities are consolidated where the Fund (i) has an economic interest in excess of 50%; (ii) is deemed to have control over the significant operational and financial decisions of the entity; and (iii) where the purpose of the operating entity is to provide services to the Fund rather than realize a gain on the sale of the investment. This consolidation exemption, as outlined in section 7.10 of the Guide, currently applies to the Fund’s holdings in Polygon, LCM , Hawke's Point and TCIP (the “subsidiaries”). These consolidated financial statements include the accounts of the Fund and its subsidiaries (collectively, the“Group”). All significant intercompany balances and transactions have been eliminated on consolidation. During the year, the Fund purchased an 85% economic stake in Equitix, an infrastructure asset management business. This investment does not meet requirement (iii) of the exemption outlined above and is therefore carried at fair value. The Fund owns 23% of GreenOak, a real estate investment manager and certain of its affiliates. It does not meet any of the conditions of the exemption outlined above and is carried at fair value. The Fund is the primary beneficiary of some securities which are considered variable interest entities (“VIE”). As the Fund is accounting for its investments at fair value in accordance with the accounting guidance in the AICPA Audit and Accounting Guide (2015): Investment Companies, all other investments in operating and non-operating entities are carried at fair value regardless of the level of control. Consolidation of such entities is not required. At 31 December 2015, the fair value of these VIEs is approximately US$ 1,084.6 million (31 December 2014: US$ 1,227.4 million). These are non-recourse securities with no contingent liabilities where the Fund’s maximum loss exposure is capped at the current carrying value. Business Combinations Business combinations are accounted for using the acquisition method as at the acquisition date – i.e. when control is transferred to the Group. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the Group takes into consideration potential voting rights that are substantive. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When the excess is negative, a bargain purchase gain is recognized immediately in the Consolidated Statements of Operations. Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred. Share Based Employee Compensation Share-based compensation expense for all equity settled share-based payment awards granted is determined based on the grant-date fair value. The Fund recognizes these compensation costs net of an estimated forfeiture rate, and recognizes compensation cost only for those shares expected to meet the service and non-market performance vesting conditions, on a straightline basis over the requisite service period of the award. These compensation costs are determined at the aggregate grant level for service-based awards and at the individual vesting tranche level for awards with performance conditions. 20 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 1 Significant Accounting Policies (continued) Share Based Employee Compensation (continued) The Feeder issues the shares to the employees or providers of employment like services whereas the Fund receives the related services, and consequently the share based payments expense is recognized as a capital contribution. When the shares are actually issued the fair value of the shares, as determined at the time of the award, is debited against capital contribution and credited against share capital and share premium. Any associated stock dividends accrued on the original award are debited against retained earnings and credited to share capital and share premium using the value determined by the stock reference price at the date of each applicable dividend. Fee Income Fee income from management contracts is usually derived from either a base management fee, which is typically based on assets under management, or an incentive or performance fee which is linked to the performance of the applicable investment fund, account or vehicle. Base management fees are recognized on an accruals basis. Incentive or performance fees are recognized only when they have crystalized, which is usually on an annual or otherwise defined basis. Dividend Income Dividend income is recorded on the ex-dividend date, or when the information becomes available to the Fund. Other Income Where investment management, operating, infrastructure and administrative services are contractually provided to external entities outside of the consolidated Group, these services, along with any associated direct costs are invoiced and recorded as other income. This income is recognized on an accruals basis. Expenses Expenses are recognized in the Consolidated Statements of Operations on an accruals basis. Taxation Income taxes, Fund The Fund is exempt from Guernsey income tax under the Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 and is charged GBP 1,200 per annum (31 December 2014: GBP 600). The Fund has consolidated U.S. and UK operating businesses which are subject to federal and local taxes as applicable. Income taxes, Corporate Entities Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are recognized for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be used. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that is no longer probable that the related tax benefit will be realized. 21 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 1 Significant Accounting Policies (continued) Income taxes, Corporate Entities (continued) In accordance with ASC Subtopic 740-10 – Income Taxes – Overall, the Fund recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. There were no uncertain tax positions recognized at 31 December 2015 or 31 December 2014. Dividend Expense Dividend expense from shares are recognized in the Consolidated Statements of Changes in Net Assets. Note 2 ASC 820, Fair Value Measurements The Fund has adopted the provisions of “Fair Value Measurements” (ASC 820). ASC 820 defines fair value as the price that the Fund would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a framework for measuring fair value and a three level hierarchy for fair value measurement based upon the transparency of inputs to the valuation of an asset or liability. Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset or liability. The three levels of the fair value hierarchy are described below: Level 1 - Quoted in active markets for identical investments. Level 2 - Prices determined using other significant observable inputs. These may include quoted prices for similar securities, interest rates, prepayments spreads, credit risk and others. Level 3 - Unobservable inputs. Unobservable inputs reflect assumptions market participants would be expected to use in pricing the asset or liability. The following is a summary of investments by asset class, derivative financial instruments and level as of 31 December 2015 in valuing the Fund’s assets and liabilities carried at fair value: CLO Equity Tranches CLO Mezzanine Loans Unlisted Stock Forward foreign exchange contracts (asset) Forward foreign exchange contracts (liability) Credit default swaps Equity total return swaps (asset) Investments measured at Net Asset Value Level 1 US$ MM - - - - - - - - - - Level 2 US$ MM - 1.7 3.0 10.0 10.8 (0.7) 1.0 7.6 - 33.4 Level 3 US$ MM 599.1 - 141.5 123.9 - - - - - 864.5 Total Fair Value US$ MM 599.1 1.7 144.5 133.9 10.8 (0.7) 1.0 7.6 485.5 1,383.4 During the year ended 31 December 2015, an unlisted stock transferred from level 3 to level 2 as a result of a regularly published price becoming available. Additionally, under FASB 2015-07, the Fund evaluated the guidance to exclude certain investments from fair value hierarchy and elected to adopt the new disclosure "Investments measured at Net Asset Value". The 2014 comparatives have been adjusted to conform. 22 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 2 ASC 820, Fair Value Measurements (continued) The following is a summary of investments by asset class, derivative financial instruments and level as of 31 December 2014 in valuing the Fund’s assets and liabilities carried at fair value: CLO Equity Tranches CLO Mezzanine Loans Unlisted Stock Listed Stock Interest rate swaptions Forward foreign exchange contracts (asset) Forward foreign exchange contracts (liability) Credit default swaps Equity total return swaps (asset) Equity total return swaps (liability) Investments measured at Net Asset Value Level 1 US$ MM - - - - 29.4 - - - - - - - 29.4 Level 2 US$ MM - 1.7 22.1 - - 0.6 11.5 (1.5) (4.1) 7.1 (0.2) - 37.2 Level 3 US$ MM 816.9 - 6.4 69.3 - - - - - - - - 892.6 Total Fair Value US$ MM 816.9 1.7 28.5 69.3 29.4 0.6 11.5 (1.5) (4.1) 7.1 (0.2) 410.4 1,369.6 Investments measured at Net Asset Value: The Fund holds investments in investment funds and vehicles which have been valued using the net asset value of the underlying investment companies. This approach is known as the “practical expedient” and is in accordance with ASC820. In addition, in line with issued guidance, the Fund has opted to remove these investments from disclosure within the levelling hierarchy. See Note 27 for more detail. As at 31 December 2015, the Fund held US$ 485.5 million in such investments (31 December 2014: US$ 410.4 million) of which US$ 343.8 million was held in open ended hedge fund vehicles (31 December 2014: US$ 322.1 million). Given applicable notice, typically liquidity in these vehicles is such that up to 25% of the investment is available on a quarterly basis (subject to certain conditions), and the entire investment could be liquidated over four consecutive quarters. In addition, as at 31 December 2015, the Fund held investments in closed ended real estate investment funds and vehicles with a fair value of US$ 141.7 million (31 December 2014: US$ 88.3 million). These investments are typically held in structures where liquidity is primarily dependent upon the sooner of the liquidation of the underlying investments and the stated maturity of the vehicle. It is not uncommon for the expected maturity to exceed five years from the initial investment. The following is a reconciliation of the Fund’s assets in which significant unobservable inputs (Level 3) were used in determining fair value at 31 December 2015. Balance at start of year Purchases of investments Proceeds from sale of investments Transfers out of level 3 Realized (loss) / gain and change in unrealized (depreciation) / appreciation Amortization Balance at end of year CLO Equity Tranches US$ MM 816.9 62.4 (6.5) - (40.2) (233.5) 599.1 Loans US$ MM 6.4 130.7 (6.4) - 10.8 - 141.5 Unlisted Stock US$ MM 69.3 22.6 - (10.0) 42.0 - 123.9 Total US$ MM 892.6 215.7 (12.9) (10.0) 12.6 (233.5) 864.5 23 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 2 ASC 820, Fair Value Measurements (continued) The following is a reconciliation of the Fund’s assets in which significant unobservable inputs (Level 3) were used in determining fair value at 31 December 2014. Balance at start of year Purchases of investments Proceeds from sale of investments Realized gain / change in unrealized appreciation Amortization Balance at end of year CLO Equity Tranches US$ MM 1,120.4 84.3 (171.4) 0.3 (216.7) 816.9 Loans US$ MM 11.1 - (5.1) 0.4 - 6.4 Unlisted Stock US$ MM 28.4 2.4 - 38.5 - 69.3 Total US$ MM 1,159.9 86.7 (176.5) 39.2 (216.7) 892.6 Quantitative information about Level 3 Fair Value Measurements Investments in securities CLO Equity Tranches Balance at 31 December 2015 US$ MM 599.1 Valuation methodology Unobservable inputs Market standard model See investments in CLO equity tranche investments Range See below Loans 141.5 Market standard model Cost of financing for loan counterparty LIBOR +6% - 12% Unlisted Stock – Global Financial Real Estate Investment Manager Unlisted Stock – UK Infrastructure Asset Manager Unlisted Stock – U.S. Private Equity Investments 70.0 Market standard model Enterprise Value/EBITDA 32.4 Market standard model Market standard model 21.5 Cost adjusted by available data points Discounted Cash Flows Enterprise Value/EBITDA See unlisted stock Investments in securities CLO Equity Tranches Balance at 31 December 2014 US$ MM 816.9 Valuation methodology Unobservable inputs Market standard model Loans 6.4 Market standard model Unlisted Stock – Global Financial Real Estate Investment Manager Unlisted Stock – Norwegian Private Placement 66.5 Market standard model 2.8 Broker marks 24 See investments in CLO equity tranche investments Cost of financing for loan counterparty Price / earnings ratios Valuation as % of assets under management Discount to broker marks 12x 9.5% 5.8x Range See below 3 - 6% 7 - 11x 5.7 - 9.0% 10% TETRAGON FINANCIAL GROUP MASTER FUND LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 2 ASC 820, Fair Value Measurements (continued) The fair values of the level 3 investments are sensitive to the inputs used in the valuation process. The CLO equity valuations are sensitive to a number of different inputs to the third party model. For example, if the default rate assumption inputs were increased, assuming all other inputs were held constant, then the fair value would decrease and vice versa. Equally, if the discount rates applied to projected cash flows were increased, and similarly assuming all other inputs were held constant, then the fair value would also decrease and vice versa. Loans The loan investments relate to two tranches of loans advanced to Equitix as part of its acquisition by the Fund. A mezzanine loan of £7.7 million (US$ 11.5 million) was advanced at a rate of LIBOR+6%. Loan notes with a notional value of £79.5 million (US$ 124.9 million) and a coupon of 12% were also issued by Equitix to the Fund as part of the transaction. Both the loan notes and the mezzanine loan have been valued at fair value plus accrued interest. Unlisted stock The unlisted stock investment includes a 23% stake in GreenOak which had a fair value of US$ 70.0 million at 31 December 2015 (31 December 2014: US$ 66.5 million). The primary metric utilized to determine this valuation was an Enterprise Value/EBITDA multiple of 12x adjusted EBITDA. The valuation calculation was prepared by a third party valuation specialist. Given the methodology utilized, if the multiple applied to the adjusted EBITDA was decreased then the fair value would also decrease. It also includes the Fund’s investment in the equity of Equitix. Both a Discounted Cash Flow (“DCF”) and an Enterprise Value/EBITDA multiple were utilised by a third party valuation specialist to determine a valuation of US$ 32.4 million. This assumed that the Fund’s economic interest in Equitix is 74.8%, which is the level that it is expected to decline to over time, with management owning the remainder. For the DCF a discount rate of 9.5% was applied to determine the enterprise value before a 15% discount for lack of liquidity was applied. The Enterprise Value/EBITDA multiple was 5.8x. As with the GreenOak valuation, if the multiple applied to the EBITDA decreased then so would the fair value. If the discount rate applied to future cash flows was increased then the fair value would decrease. The unlisted stock investment also includes two private equity investments and these have been valued by reference to recently available data points. For the first investment this includes an implied valuation by reference to a new round of funding. For the second investment this includes a valuation document produced for the company by an investment bank. CLO equity tranches As disclosed in Note 1, a mark to model approach has been adopted to determine the value of the equity tranche CLO investments. The model contains certain assumption inputs that are reviewed and adjusted as appropriate to factor in how historic, current and potential market developments (examined through, for example, forward-looking observable data) might potentially impact the performance of these CLO equity investments. Since this involves modeling, among other things, forward projections over multiple years, this is not an exercise in recalibrating future assumptions to the latest quarter’s historical data. Subject to the foregoing, when determining the U.S. GAAP-compliant fair value of the CLO equity investments, the Fund seeks to derive a value at which market participants could transact in an orderly market and also seeks to benchmark the model inputs and resulting outputs to observable market data when available and appropriate. Although seeking to utilize, where possible, observable market data, for certain assumptions the Investment Manager may be required to make subjective judgements and forward-looking determinations, and its experience and knowledge is instrumental in the valuation process. 25 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 2 ASC 820, Fair Value Measurements (continued) CLO equity tranches (continued) As at 31 December 2015, some of the modeling assumptions used are disclosed below. The modeling assumptions disclosed below are a weighted average (by U.S. Dollar amount) of the individual deal assumptions, aggregated by geography (i.e. U.S. and European). Each individual deal’s assumptions may differ from this geographical average and vary across the portfolio. U.S. CLO equity tranche investments – Constant Annual Default Rate (“CADR”) 31 December 2015 Approximately 2.2%, which is 1.0x the original Weighted Average Rating Factor (“WARF”) derived base-case default rate for the life of the transaction. 31 December 2014 Approximately 2.2%, which is 1.0x the original Weighted Average Rating Factor (“WARF”) derived base-case default rate for the life of the transaction. Recovery Rate Prepayment Rate Reinvestment Price and Spread 73%, which is 1.0x of the original base-case assumed weighted-average recovery rate, for the life of the transaction. 73%, which is 1.0x of the original base-case assumed weighted-average recovery rate, for the life of the transaction. 20% p.a., the original base-case prepayment rate with a 0% prepayment rate on bonds throughout the life of the transaction. 20% p.a., the original base-case prepayment rate with a 0% prepayment rate on bonds throughout the life of the transaction. Assumed reinvestment price is par for the life of the transaction, with an effective spread over LIBOR of approximately 375 bps on broadly U.S. syndicated loan deals in their reinvestment which are still periods. Middle Market loan deals are all through their reinvestment period. Assumed reinvestment price is par for the life of the transaction, with an effective spread over LIBOR of approximately 294 bps on broadly U.S. syndicated loan deals in their reinvestment which are still periods. Middle Market loan deals are all through their reinvestment period. European CLO equity tranche investments - Constant Annual Default Rate (“CADR”) 31 December 2015 Approximately 2.1%, which is 1.0x the original WARF derived base-case default rate for the life of the transaction. 31 December 2014 Approximately 2.1%, which is 1.0x the original WARF derived base-case default rate for the life of the transaction. Recovery Rate Prepayment Rate 68%, which is 1.0x of the original base-case assumed weighted-average recovery rate, for the life of the transaction. 68%, which is 1.0x of the original base-case assumed weighted-average recovery rate, for the life of the transaction. 20% p.a., the original base-case prepayment rate with a 0% prepayment rate on bonds throughout the life of the transaction. 20% p.a., the original base-case prepayment rate with a 0% prepayment rate on bonds throughout the life of the transaction. Reinvestment Price and Spread All European deals are through their reinvestment period. All European deals are through their reinvestment period. When determining the fair value of the equity tranches a discount rate is applied to the expected future cash flows derived from the third party valuation model. The discount rate applied to those future cash flows reflects the perceived level of risk that would be used by another market participant in determining fair value. In determining the discount rates to use an analysis of the observable risk premium data as well as the individual deal’s structural strength and credit quality is undertaken. 26 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 2 ASC 820, Fair Value Measurements (continued) As at 31 December 2015, for the pre-2010 vintage U.S. equity tranches, the Fund applied a 12.0% discount rate to the expected future cashflows (31 December 2014: 12.0%). The European equity tranches are all discounted at 13.0% (31 December 2014: 13.0%). For both U.S. and European deals the aforementioned discount rates represent a significant spread over observed yields on the applicable BB-rated CLO tranches for each geographical region at that date. For the post-2010 vintage U.S. equity tranches, an increased level of transparency over certain data points and metrics associated with such deals has enabled the determination of a generic discount rate for this sub-asset class. As at 31 December 2015, a discount rate of 11.0% is applied to the future projected cash flows of seasoned U.S. CLO 2.0 deals. More recently-issued U.S. CLO 2.0 deals (within 12 months of deal closing) continue to be discounted at their respective deal IRRs. The weighted average IRR for deals discounted using deal specific IRRs was 15.6% at 31 December 2015 (31 December 2014: 13.1%). The IRRs for such deals ranged from 14.9% to 16.1% (31 December 2014: 12.1% to 14.1%) and the fair value of deals discounted using deal specific IRRs was 9.8% (31 December 2014: 9.9%) of the CLO equity portfolio by fair value. Note 3 Derivatives The fund uses derivative financial instruments to either gain new economic exposure to an underlying asset or to hedge an existing economic exposure. As at 31 December 2015, the Fund had a number of forward foreign exchange contracts in place with original maturities ranging from three months to approximately five years. The Fund typically agrees to sell foreign currency and buy U.S. Dollars in order to hedge long non-U.S. Dollar investment positions. The total open balance as at the end of the year was net long U.S. Dollars US$ 323.0 million, having executed 73 transactions during the year at an average notional of US$ 10.5 million. (31 December 2014: net long U.S. Dollars US$ 206.9 million, having executed 59 transactions during the year at an average notional of US$ 22.2 million). The Fund enters into swaps and CFDs with financial institutions. The Fund utilizes these swap or CFD agreements as an efficient means of hedging or of obtaining exposure to certain underlying investments. The Fund is subject to the risk of the inability or refusal to perform with respect to such contracts on the part of counterparties trading with it, as well as risks relating to the creditworthiness of the swap counterparty, market, liquidity, interest rate, fx and operations risk. Through swaps or CFDs the Fund can in effect be exposed to increases or decreases in the value of an equity or index or to decreases or increases in the value of a related equity or index. Depending on how they are used, the agreements may increase or decrease the overall volatility of the portfolio and performance of the Fund. During the year to 31 December 2015, the Fund had a weighted average notional exposure of US$ 215.2 million through swaps referencing underlying individual equity positions (31 December 2014: US$ 259.2 million). The Fund enters into credit default swaps in order to hedge certain risks or economic exposures. As at 31 December 2015, the Fund had single name credit default protection of US$ 65.2 million notional with an average notional of US$ 16.3 million, having executed seven transactions during the year. By comparison as at 31 December 2014, the Fund had purchased single name credit default protection of US$ 151.3 million notional with an average notional of US$ 15.1 million and having executed 10 transactions during the year. Note 4 Financial Instruments with Off-Balance Sheet and Concentration of Credit Risk The Fund holds certain investments in CLO equity tranches which consist of interests in and / or economic exposures to limited recourse securities that are subordinated in right of payment and ranked junior to other securities that are secured by the same pool of assets. In the event of default by an issuer in relation to such investments, holders of the issuer’s more senior securities will be entitled to payments in priority to the Fund. 27 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 4 Financial Instruments with Off-Balance Sheet and Concentration of Credit Risk (continued) Some of the Fund’s investments may also have structural features that divert payments of interest and / or principal to more senior classes secured by the same pool of assets when the delinquency or loss experience of the pool exceeds certain levels. This may lead to interruptions in the income stream that the Fund anticipates receiving from its investment portfolio. To the extent that actual losses on the underlying collateral exceed the level of assumed losses used to determine the fair value of the investment, the value of the investment may be reduced. The Fund has also made investments into certain collective investment schemes. These include real estate investment vehicles and hedge funds which have exposure to securities including equities, convertible bonds and derivatives. These underlying investments may be in securities or assets which are illiquid and / or in different geographies around the world. These investments may be subject to counterparty risk. Capital invested into the investment vehicles may be subject to lock ups and gates, or subject to the realization of the underlying investments and assets. The Fund has also made investments into equities which are directly held. These investments are subject to market and liquidity risk. The Fund is exposed to credit risk through its investment in GreenOak investment funds and bankruptcy or insolvency of GreenOak may cause the Fund’s rights with respect to the investment funds to be delayed or limited. The Fund is also exposed to Equitix through a combination of the mezzanine loan, loan notes and equity investment that it holds with respect to this entity. The loans are subordinate to another third party loan and in the event of bankruptcy or insolvency of Equitix this may impact upon the amount which is recoverable with respect to these loans. The maximum aggregate exposure to Equitix is disclosed in Note 6. The Fund is exposed to counterparty risk in a number of ways. Some of the Fund's assets, including cash and cash equivalents are held by a custodian and other financial institutions, and the Fund is exposed to the credit risk of these counterparties. The Fund has also entered into derivative transactions which results in credit exposure to the applicable counterparties. Concentration risk could arise as a result, notwithstanding the fact that the derivative counterparties are major financial institutions. This risk is monitored on an ongoing basis and is managed through collateral management including master netting agreements. The Fund is required to disclose the impact of offsetting assets and liabilities represented in the statements of assets liabilities to enable evaluation of the effect or potential effect of netting arrangements on its financial position for recognized assets and liabilities. As of 31 December 2015, the Fund holds financial instruments and derivative instruments that are eligible for offset in the statements of assets and liabilities and are subject to a master netting arrangement. The master netting arrangement allows the counterparty to net any collateral held on behalf of the Fund or liabilities or payment obligations of the counterparty against any liabilities or payment obligations of the Fund to the counterparty. 28 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 4 Financial Instruments with Off-Balance Sheet and Concentration of Credit Risk (continued) The following table provides disclosure regarding the potential effect of offsetting of recognized assets presented in the statement of assets and liabilities: Gross Amounts Offset in the Statements of Assets and Liabilities US$ MM 31 December 2015 Net Amounts Presented in the Statements of Assets and Liabilities US$ MM Gross Amount of Recognized Assets US$ MM Financial instruments eligible for netting US$ MM Cash Collateral received/ posted Net Amount US$ MM US$ MM 19.4 19.4 0.7 0.7 - - - - 19.4 19.4 0.7 0.7 (0.7) (0.7) (0.7) (0.7) - - - - 18.7 18.7 - - Gross Amounts Offset in the Statements of Assets and Liabilities US$ MM 31 December 2014 Net Amounts Presented in the Statements of Assets and Liabilities US$ MM Gross Amount of Recognized Assets US$ MM Financial instruments eligible for netting US$ MM Cash Collateral received/ posted Net Amount US$ MM US$ MM 19.2 19.2 5.8 5.8 - - - - 19.2 19.2 5.8 5.8 (2.1) (2.1) (2.1) (2.1) - - 17.1 17.1 (3.7) (3.7) - - Description Assets Derivatives Total Liabilities Derivatives Total Description Assets Derivatives Total Liabilities Derivatives Total Note 5 Management Contracts During 2012, the Fund acquired TFG Asset Management L.P. and certain of its affiliates. Of the assets that were purchased, intangible assets consisting of management contracts for hedge funds and private equity funds were identified. 29   TETRAGON FINANCIAL GROUP MASTER FUND LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 5 Management Contracts (continued) These are tested for impairment on a regular basis and are amortized over an estimated useful life as detailed below. 31 December 2015 Weighted average amortization period Gross carrying amount US$ MM Weighted average outstanding amortization period Accumulated amortization Net carrying amount US$ MM US$ MM Amortizing intangible assets: Management contracts – hedge funds Management contracts – private equity Total 10 years 3 years 34.3 10.2 44.5 31 December 2014 Weighted average amortization period Gross carrying amount US$ MM Amortizing intangible assets: Management contracts – hedge funds Management contracts – private equity Total 10 years 3 years 34.3 10.2 44.5 6 years 10 months - Weighted average outstanding amortization period 7 years 10 months 10 months 10.9 10.2 21.1 23.4 - 23.4 Accumulated amortization Net carrying amount US$ MM US$ MM 7.4 7.4 14.8 26.9 2.8 29.7 Aggregate amortization expense for amortizing intangible assets was US$ 6.3 million for the year ended 31 December 2015 (31 December 2014: US$ 6.8 million). Estimated annual amortization expense for the next seven years is US$ 3.4 million in years 2016 to 2021 and US$ 3.0 million in 2022. Note 6 Equitix On 2 February 2015, the Fund completed the acquisition of Equitix for a total enterprise value of £159.5 million (US$ 239.9 million). After giving effect to all aspects of the sale and purchase agreement, the total consideration was £160.4 million (US$ 241.2 million) with the Fund directly funding £88.3 million (US$ 132.8 million) and the remainder being funded through an external loan before fees of £60.0 million (US$ $92.3m) and a rollover of certain purchase consideration by the Equitix management team. The Fund’s investment is structured through the holding of a mezzanine loan, 12% ‘A’ loan notes and an equity stake. Although the Fund currently effectively receives 85% of the economics through the percentage of loan notes that it holds, upon repayment of the loan notes its effective economic equity share would be expected to decline to 74.8%, with the Equitix management team owning the balance. The purchase agreement also provided for some additional contingent consideration of up to £15.0 million, payable in early 2017 and subject to Equitix outperforming certain elements of its business plan. This contingent payment, should it become payable, will be contractually due from Equitix rather than the Fund and therefore is not an obligation of the Fund. 30 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 6 Equitix (continued) Loan notes Mezzanine loan Equity Total Note 7 GreenOak The Fund owns a 23% interest in GreenOak which it carries at fair value. The following table outlines the movement in fair value of the investment in GreenOak. Opening fair value Change in unrealized appreciation Closing fair value 31 Dec 2015 Cost US$ MM 119.7 10.7 2.4 132.8 Fair Value US$ MM 130.1 11.4 32.4 173.9 31 Dec 2015 US$ MM 66.5 3.5 70.0 31 Dec 2014 US$ MM 28.4 38.1 66.5 The Fund provided GreenOak with working capital of up to US$ 10.0 million in the form of a seven year non-recourse loan facility. Under the terms of this facility, the first US$ 5.0 million earned an annual interest rate of 3% and the balance earned an annual interest rate of 6%. During the year, GreenOak repaid the remaining balance on the loan. The following table outlines the movement in the fair value of the unsecured working capital facility provided by the Fund to GreenOak. Opening fair value Unrealized appreciation Paydown of loan Closing fair value Note 8 Cash and Cash Equivalents Cash and current deposits with banks Foreign currency cash with banks (cost: US$ 28.3 million (31 December 2014: US$ 30.3 million)) 31 Dec 2015 US$ MM 6.4 0.1 (6.5) - 31 Dec 2014 US$ MM 11.1 0.4 (5.1) 6.4 31 Dec 2015 31 Dec 2014 US$ MM 372.7 US$ MM 412.9 27.5 440.4 29.3 402.0 Of this cash balance, US$ 225.0 million relates to amounts loaned to counterparties and secured against collateral through tri-party agreements (31 December 2014: US$ Nil). These all have at least overnight liquidity. In addition, approximately US$ 5.5 million was held with respect to certain capital requirements in regulated entities (31 December 2014: US$ 5.5 million). 31 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 9 Amounts Due From Brokers The amounts due from brokers is cash pledged as collateral on the forward contracts and equity swaps. As at 31 December 2015, the collateral cash balance with UBS AG was US$ 10.7 million (31 December 2014: US$ 2.0 million), BNP Paribas was US$ 10.3 million (31 December 2014: US$ 13.3 million) Morgan Stanley was US$ 1.4 million (31 December 2014: US$ 1.4 million) and Bank of America Merrill Lynch was US$ 37.5 million (31 December 2014: US$ 35.4 million). Note 10 Other Receivables Accrued fee income Cost recovery receivable Amounts due from affiliated funds Prepayments Rent deposits on properties Other receivables Note 11 Other Payables and Accrued Expenses Employee costs Amounts owing to former Polygon partners (see Note 23) Other operating and administrative expenses Note 12 Share Capital Authorized 31 Dec 2015 US$ MM 10.6 - - 2.3 1.6 7.0 21.5 31 Dec 2014 US$ MM 12.1 2.2 5.8 1.9 1.7 9.1 32.8 31 Dec 2015 US$ MM 39.6 3.5 5.4 48.5 31 Dec 2014 US$ MM 41.1 3.5 5.9 50.5 The Fund has an authorized share capital of US$ 1.0 million divided into 10 voting shares, having a par value of US$ 0.001 each and 999,999,990 non-voting shares (which are the “Shares” referred to herein), having a par value of US$ 0.001 each. Voting Shares All of the Fund’s voting shares are issued at par and are beneficially owned by the Voting Shareholder, a non-U.S. affiliate of the Investment Manager. The voting shares will be the only shares entitled to vote for the election of Directors and on all other matters put to a vote of shareholders, subject to the limited rights of the Shares described below. The voting shares are not entitled to receive dividends. Non-Voting Shares The Shares carry a right to any dividends or other distributions declared by the Fund. The Shares are not entitled to vote on any matter other than limited voting rights in respect of variation of their own class rights. Dividend Rights Dividends may be paid to the holders of Shares at the sole and absolute discretion of the Directors. The voting shares carry no rights to dividends. 32 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 12 Share Capital (continued) Share Transactions Shares in issue at 31 December 2013 Issued in lieu of stock dividend Issued through release of tranche of Escrow Shares Shares purchased during the year Shares in issue at 31 December 2014 Issued in lieu of stock dividend Issued through release of tranche of Escrow Shares Shares purchased during the year Shares in issue at 31 December 2015 Treasury Shares Voting Shares No. Shares No. MM Shares US$ MM 10 - - - 10 - - - 10 98.9 0.6 1.2 (4.9) 95.9 1.2 4.8 (6.0) 95.9 0.1 - - - 0.1 - - - 0.1 The Fund has entered into a joint arrangement with the Feeder through the establishment of TFG Holdings I. The Fund may transfer, and has transferred, Shares previously held in a Treasury Account to TFG Holdings I. Where this occurs the status of the Shares is unchanged from an accounting perspective and they are not included in the Shares outstanding on the Consolidated Statements of Assets and Liabilities. On 30 November 2007, the Feeder announced the implementation of a share repurchase program of their outstanding Shares and this was renewed on several occasions. As at 31 December 2015, there was no share repurchase program in place. When the program was in operation, the Fund undertook to repurchase an identical number of its own Shares from the Feeder as and when it made these repurchases in the open market. The Fund matched the price per Share paid by the Feeder. The Shares are held in a Treasury Account or in TFG Holdings I allowing them to potentially be resold back to the Feeder if it resells its own shares back into the market at a later date. Whilst they are held by the Fund (whether directly or via TFG Holdings I), the Shares are neither eligible to receive dividends nor are they included in the Shares outstanding on the Statements of Assets and Liabilities. On 15 December 2015, the Feeder and the Fund announced that under the terms of a “modified Dutch auction” (the “Tender Offer”), the Fund had accepted for purchase approximately 6.0 million Feeder non-voting shares at a purchase price of US$ 10.00 per share and an aggregate cost of US$ 60.9 million, including applicable fees and expenses. The Feeder exchanged an equivalent number of Fund Shares for the Feeder shares which had been repurchased. Of those 6.0 million Shares, 0.35 million Shares were transferred to TFG Holdings I and the remainder were cancelled. As at 31 December 2015, 17.0 million Shares are held in TFG Holdings I (31 December 2014: 16.6 million) and 12.8 million Shares in the Treasury Account (31 December 2014: 12.8 million) with an aggregate attributed cost of US$ 264.6 million (31 December 2014: US$ 261.0 million). Escrow Shares As part of the acquisition to acquire TFG Asset Management (see Note 22), the Aggregate Consideration of 11.7 million Feeder shares was moved to an escrow account where they were to be held before being released in conjunction with the agreed vesting schedule, subject to certain forfeiture conditions. Upon the release of the Feeder shares, the Fund agreed to issue an identical number of Shares to the Feeder. During the year 4.7 million Shares were issued to the Feeder as a result of an equivalent number of Feeder Shares being released from escrow. Of these approximately 4.0 million Shares were deemed to be in relation to the original Feeder escrow shares, and a value of US$ 33.8 million was debited against Capital Contribution, using the transaction share price of US$ 8.43. 33 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 12 Share Capital (continued) Escrow Shares (continued) In addition, approximately 0.7 million shares were deemed to be related to the stock dividends awarded on the original shares released and an amount of US$ 7.5 million was released against Retained Earnings, based on the stock reference price at each applicable dividend date. Additionally the Feeder opened a second escrow account during 2015. This is intended to hold Shares which will form part of a long term incentive plan for certain employees of TFG Asset Management and during 2015, 5.65 million shares were moved into this account. As and when these Feeder shares are released, the Fund has agreed to issue an identical number of Shares to the Feeder. Other Share Transactions Shares brought forward at 31 December 2013 Shares purchased during the year Shares at 31 December 2014 Shares purchased during the year Shares at 31 December 2015 Note 13 Share Premium Balance at start of year Premium arising from issuance of Shares Discount arising from purchase of Shares Balance at end of year Note 14 Dividends Quarter ended 31 December 2013 of US$ 0.15 per share Quarter ended 31 March 2014 of US$ 0.15 per share Quarter ended 30 June 2014 of US$ 0.155 per share Quarter ended 30 September 2014 of US$ 0.155 per share Quarter ended 31 December 2014 of US$ 0.1575 per share Quarter ended 31 March 2015 of US$ 0.1575 per share Quarter ended 30 June 2015 of US$ 0.1625 per share Quarter ended 30 September 2015 of US$ 0.1625 per share Treasury Shares Shares No. MM 7.9 4.9 12.8 - 12.8 Shares held in TFG Holdings I Shares No. MM 16.6 - 16.6 0.4 17.0 31 Dec 2015 US$ MM 888.6 53.4 (60.9) 881.1 31 Dec 2014 US$ MM 922.4 17.1 (50.9) 888.6 31 Dec 2015 US$ MM - - - - 15.1 15.2 15.7 16.5 62.5 31 Dec 2014 US$ MM 14.8 14.1 14.6 14.9 - - - - 58.4 The fourth quarter dividend of US$ 0.165 per share was approved by the Directors on 25 February 2016 and has not been included as a liability in these consolidated financial statements. The Fund also pays a dividend to the Feeder that is sufficient to pay their incentive fee liability. In the year ended 31 December 2015, US$ 35.2 million (31 December 2014: US$ 51.5 million) was paid. 34 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 15 Retained Earnings Balance at start of year Net income resulting from operations for the year Dividends paid to shareholders Stock dividends on Shares released from Escrow Dividends paid to Feeder Balance at end of year Note 16 Capital contribution 31 Dec 2015 US$ MM 914.8 167.0 (62.5) (7.5) (35.2) 976.6 31 Dec 2014 US$ MM 906.6 119.5 (58.4) (1.4) (51.5) 914.8 Balance at start of year Capital contribution relating to share based compensation Release of Feeder Escrow Shares Balance at end of year Note 17 Income and Deferred Tax Expense Note 1 31 Dec 2015 US$ MM 31.4 22.0 (33.8) 19.6 31 Dec 2014 US$ MM 17.6 23.1 (9.3) 31.4 Income tax for the year ended 31 December 2015 and 31 December 2014 consists of: Year ended 31 December 2015: U.S. Federal and local UK Year ended 31 December 2014: U.S. Federal and local UK Current US$ MM 12.0 (0.7) 11.3 Current US$ MM 14.7 1.7 16.4 Deferred US$ MM 0.6 (1.8) (1.2) Deferred US$ MM (3.1) (0.7) (3.8) Total US$ MM 12.6 (2.5) 10.1 Total US$ MM 11.6 1.0 12.6 US$ 5.8 million of current tax was payable at the end of the year (31 December 2014: US$ 2.9 million) with US$ Nil receivable (31 December 2014: US$ 0.6 million). Tax Rate Reconciliation Income tax expense was US$ 10.1 million for the year ended 31 December 2015 (31 December 2014: US$ 12.6 million) and differed from the amounts computed by applying the U.S. Federal income tax of 35% to pretax increase in the net assets as a result of the following: Net increase in operations before tax Computed “expected” tax expense at 35% (2014: 35%) Deduction in income taxes resulting from: Income not subject to U.S. tax State and local income taxes Total income and deferred tax expense 35 31 Dec 2015 US$ MM 177.1 31 Dec 2014 US$ MM 132.1 62.0 (55.1) 3.2 10.1 46.2 (37.7) 4.1 12.6 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 17 Income and Deferred Tax Expense (continued) Deferred Tax Deferred tax assets Employee compensation payments Loss carried forward Total deferred tax assets Deferred tax liabilities Undistributed earnings Intangible assets Total deferred tax liabilities Net deferred tax assets 31 Dec 2015 US$ MM 31 Dec 2014 US$ MM 9.2 - 9.2 0.8 5.8 6.6 2.6 10.0 - 10.0 0.8 7.8 8.6 1.4 Deferred tax assets include US$ 9.2 million (31 December 2014: US$ 10.0 million) relating to amounts accrued for employee compensation in 2015 which will only be an allowable expense in 2016 for tax purposes. US$ 5.8 million (31 December 2014: US$ 7.8 million) is being recognized as a deferred tax liability due to the amortization on management contracts being a disallowable expense for tax purposes. This will be released over time as the management contracts are amortized. US$ 0.8 million has also been recognized as a liability with respect to applicable undistributed earnings at a withholding rate of 5%. Note 18 Interest Income Debt securities – CLO equity tranches and mezzanine tranches Debt securities – Loans Debt securities – Unsecured loans Cash and other Note 19 Fee Income Management fees CLO Hedge Funds and private equity Performance fees 31 Dec 2015 US$ MM 31 Dec 2014 US$ MM 119.5 0.6 14.4 0.2 134.7 150.5 1.3 0.4 0.3 152.5 31 Dec 2015 US$ MM 31 Dec 2014 US$ MM 30.3 25.6 14.3 70.2 33.1 28.5 19.5 81.1 CLO management fee income generally comprises senior and subordinated fees and in aggregate these fees currently range from 25 bps to 50 bps per annum of collateral under management. In addition to fee income earned on CLOs directly managed it also includes fee income derived from a number of one-off and recurring fee sharing arrangements with third parties. In the year to 31 December 2015 these third party fees generated US$ 8.6 million (31 December 2014: US$ 11.7 million). Hedge fund management fees charged to external investors are typically 150 bps of net assets under management and depending upon the applicable fund and share class certain other expenses may also be recovered. Management fees paid in connection with the private equity style vehicle are either 200 bps of net assets under management or a fixed declining management fee depending on the applicable class. 36 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 19 Fee Income (continued) Performance or incentive fees may be earned on hedge fund vehicles contingent upon the terms of each vehicle and the share class where applicable. They may also be earned through management of CLO vehicles once the vehicle has generated a specified return for the equity, or subordinated, tranche. During the year, such fees totaling US$ 14.3 million were earned (31 December 2014: US$ 19.5 million). Where the Fund invests in Polygon hedge fund or other investment vehicles, it is able to invest at a preferred level of fees. The fees received by such affiliated managers from the Fund’s investment are included and recognized in fee income reported in the Fund’s Consolidated Statements of Operations. During the year, these fee income amounts were US$ 4.4 million of management fees (31 December 2014: US$ 4.3 million) and US$ 1.8 million of performance fees (31 December 2014: US$ 1.8 million). The Fund also invests on preferred fee terms with its other affiliated asset managers (i.e. LCM and GreenOak). Where the Fund is seeding an investment vehicle or otherwise supporting its development, the vehicle’s investment manager may also recharge certain additional costs or fee equivalents, to the Fund’s investment in that vehicle. In 2015 the amount of fee equivalents recharged under these arrangements by Polygon hedge fund managers was US$ 6.5 million (2014: US$ 7.0 million). Note 20 Other income These include costs which are allocated to, and recovered from, the Investment Manager, GreenOak and Polygon Private Investment Partners LP pursuant to applicable separate services agreements, as well as the recovery of certain premises related costs from third party tenants. See Note 24 for a full explanation of the cost allocation methodology as well as the amounts charged to each of the related parties. Employee costs Legal and professional fees Technology Premises Other Note 21 Other operating and administrative expenses Premises Technology Other 31 Dec 2015 US$ MM 31 Dec 2014 US$ MM 12.1 0.3 1.6 2.5 0.8 17.3 16.4 0.4 2.5 3.3 1.0 23.6 31 Dec 2015 US$ MM 31 Dec 2014 US$ MM 8.9 6.0 6.3 21.2 9.5 6.3 6.0 21.8 Note 22 Share Based Employee Compensation On 28 October 2012, TFG Asset Management L.P. and certain of its affiliates were acquired in exchange for consideration of approximately 11.7 million non-voting shares of the Feeder to the sellers (the “Aggregate Consideration”). 37 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 22 Share Based Employee Compensation (continued) The Aggregate Consideration is held in escrow (along with accrued stock dividends), by the escrow agent pursuant to the terms of the escrow agreement. The first tranches were released in 2013, 2014 and 2015 with the remainder to be released over the period 2016 and 2017. Under ASC 805 - Business Combinations ("ASC 805") these shares were treated as payment for post combination services rather than upfront consideration. The Fund recognizes the individual compensation costs on a straight line basis over the relevant service period of each award if the vesting performance conditions are met. These are reflected in the Consolidated Statements of Operations as share based employee compensation and through Equity as a separate reserve. The charge for the year ended 31 December 2015 amounted to US$ 22.0 million (31 December 2014: US$ 23.1 million). The table below shows the number of Feeder shares which are currently expected to vest over the period to 2017, including accrued stock dividends up to the end of December 2015. These shares are all entitled to any future stock dividends prior to their release from escrow and so the actual amount of shares vesting each year may be higher. Upon the release of the Feeder shares from escrow, the Fund will issue an identical number of Shares to the Feeder. Vesting Schedule – Shares as at 31 December 2015 2016 2017 2015 2016 2017 Shares MM 3.6 3.0 6.6 Vesting Schedule – Shares as at 31 December 2014 Shares MM 4.5 3.4 2.8 10.7 US$ MM 16.6 12.6 29.2 US$ MM 23.1 16.6 12.6 52.3 Note 23 Contingencies and Commitments On 16 September 2010, the Fund committed to GreenOak to provide a co-investment commitment of up to US$ 100.0 million into GreenOak investment vehicles. As at 31 December 2015, in relation to this particular co-investment commitment, GreenOak had given the Fund notice totalling US$ 79.5 million across multiple investment vehicles, of which US$ 51.2 million had actually been drawn down and funded (31 December 2014: US$ 40.2 million). In certain cases, the Fund has also made additional commitments outside of the co-investment agreement and in aggregate, the Fund has estimated total unfunded commitments of US$ 103.8 million in respect of GreenOak investment vehicles (31 December 2014: US$ 84.6 million). The total actual amount ultimately drawn may be lower than this estimated maximum amount. Future minimum lease payments under noncancelable operating leases as of 31 December 2015 are: 2015 2016 2017 2018 2019 2020 2021 2022 31 Dec 2015 US$ MM - 5.3 5.5 3.0 2.8 2.8 2.8 2.5 24.7 38 31 Dec 2014 US$ MM 5.5 5.5 4.8 0.2 - - - - 16.0 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 23 Contingencies and Commitments (continued) During 2015, the amount paid with respect to such leases was US$ 5.4 million (31 December 2014: US$ 5.7 million). Note 24 Related Party Transactions The Feeder, a Guernsey based closed-ended investment company, invests substantially all of its assets in the Fund, and has the same Investment Manager as the Fund. All fees and expenses of the Feeder and the Fund (including management fees), except for the incentive fees, are paid by the Fund and allocated to the Feeder. An incentive fee may be paid to the Investment Manager by the Feeder. The remuneration for Directors shall be determined by resolution of the Voting Shareholder. Each of the Directors’ annual fee is US$ 100,000 as compensation for service on the Boards of Directors of both the Feeder and the Fund. The Directors have the option to elect to receive shares in the Feeder instead of the quarterly fee. With respect to the year ending 31 December 2015, Frederic Hervouet has elected to receive Shares and received 2,564 Shares in relation to the first quarter’s fee, 2,354 Shares in relation to the second quarter’s fee and 2,495 Shares in relation to the third quarter’s fee. The number of Shares issued instead of the fee for the fourth quarter will be determined as part of the fourth quarter 2015 dividend process. The Fund will pay the Directors’ fees. Paddy Dear and Reade Griffith have waived their entitlement to a fee in respect of their services as Directors. The Directors are entitled to be repaid by the Fund for all travel, hotel and other expenses reasonably incurred by them in the discharge of their duties. None of the Directors has a contract with the Feeder or the Fund providing for benefits upon termination of employment. The Voting Shareholder, which holds all of the voting shares, was an affiliate of Polygon and continues to be an affiliate of the Investment Manager. As a result of its ownership and the degree of control that it exercises, the Voting Shareholder will be able to control the appointment and removal of the Fund’s and Feeder’s Directors (subject to applicable law). Affiliates of the Voting Shareholder also control the Investment Manager and, accordingly, control the Fund’s business and affairs. TFG Asset Management L.P., including Polygon’s asset management businesses and infrastructure platform and interests in LCM and GreenOak, were acquired on 28 October 2012 (the “Acquistion”). As part of the Acquisition, Reade Griffith and Paddy Dear, as founders of Polygon, were awarded consideration in non-voting shares of the Feeder, which vest between 2016 and 2017. It was contractually agreed as part of the Acquisition that to the extent any annual compensation actually paid to each of Mr. Griffith and Mr. Dear in respect of his employment with the Fund exceeds an annual base salary of US$ 100,000, they would promptly return such excess amount to the Fund. During the year ended 31 December 2015 total compensation paid to them each in aggregate was US$ 100,000 (31 December 2014: US$ 100,000). As at 31 December 2015, in connection with the Acquisition, US$ 3.5 million in aggregate is owed to Reade Griffith and Paddy Dear, directly or via an entity to which they may direct payment (31 December 2014: US$ 3.5 million). This payable primarily relates to the repayment of certain rent deposits funded through Polygon entities by Messrs Griffith and Dear before the Acquisition. Under the terms of the sale and purchase agreement relating to the Acquisition, Messrs Griffith and Dear retained the economic rights to such deposits. Reade Griffith and Paddy Dear continue to hold membership interests in Polygon Global Partners LLP (the “UK Investment Manager” or "PGP LLP") which collectively entitle them to exercise all of the voting rights in respect of the UK Investment Manager. As part of the Acquisition, each of Mr. Griffith and Mr. Dear has agreed that he will (i) exercise his voting rights in a manner that is consistent with the best interests of the Fund and (ii) upon the request of the Fund, for nominal consideration, sell, transfer and deliver his membership interests in the UK Investment Manager to the Fund. 39 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 24 Related Party Transactions (continued) Reade Griffith and Paddy Dear also hold membership interests in Pace Cayman Holdco Limited (“Pace Holdco”), an entity through which the Fund ultimately owns its equity stake in Equitix. These membership interests collectively entitle them to exercise all of the voting rights in respect of Pace Holdco. Each of Mr. Griffith and Mr. Dear has agreed that he will (i) exercise his voting rights in a manner that is consistent with the best interests of the Fund and (ii) upon the request of the Fund, for nominal consideration, sell, transfer and deliver his membership interests in the Pace Holdco to the Fund. Polygon Global Partners LLP and Polygon Global Partners LP (together the “Service Providers”) provide operational, financial control, trading, marketing and investor relations, legal, compliance, administrative, payroll and employee benefits and other services to the Investment Manager in exchange for fees payable by the Investment Manager to the Services Providers. One of these entities, Polygon Global Partners LLP, which is authorized and regulated by the United Kingdom Financial Conduct Authority, also provides services to the Investment Manager relating to the dealing in and management of investments, arranging of deals and advising on investments. In addition, the Services Providers also provide certain operating, infrastructure and administrative services to GreenOak and Polygon Private Investment Partners LP, an affiliate of the Voting Shareholder, pursuant to applicable separate services agreements. TFG Asset Management, through the Service Providers has implemented a cost-allocation methodology with the objective of allocating service-related costs, including to the Investment Manager. TFG Asset Management then charges fees for the services allocated on a cost-recovery basis that is designed to achieve full recovery of the allocated costs. In the year the amount recharged to the Investment Manager was US$ 13.9m (31 December 2014: US$ 16.4 million), GreenOak US$ 2.4 million (31 December 2014: US$ 5.4 million) and Polygon Private Investment Partners LP US$ 0.1 million (31 December 2014: US$ 0.1 million). As at 31 December 2015, the amount (payable) / receivable relating to these recharges was US$ (0.1) million (31 December 2014: US$ 2.1 million). The Fund holds CLO equity investments in CLOs which are managed by LCM. During the year end it purchased a portion of the equity tranche in LCM XVIII at a cost of US$ 27.8 million and LCM XIX at a cost of US$ 34.6 million. In total, as at 31 December 2015, it held CLO equity tranche investments in 14 CLOs managed by LCM with a fair value of US$ 224.1 million (31 December 2014: US$ 208.3 million). At 31 December 2015, the Fund held investments across several hedge funds managed by Polygon. These hedge funds employ investment strategies involving investing in equities, convertible bonds, credit and derivatives. As at 31 December 2015, the fair value of these investments was US$ 338.1 million (31 December 2014: US$ 315.9 million). The fees paid on these investments are disclosed as per Note 20. The Fund owns a 23% equity interest in GreenOak. As part of the original transaction to acquire a share in GreenOak, the Fund provided a US$ 100.0 million coinvestment commitment and a US$ 10.0 million working capital loan commitment to GreenOak, with the Feeder issuing 3.9 million share options to the GreenOak founders. On 28 October 2012, as a result of the Acquisition the Fund increased its working capital loan commitment by an additional US$ 0.5 million by assuming the acquiree’s remaining unfunded commitment. During 2015, the working capital loan was fully repaid. The Fund has made investments across several real estate investment vehicles managed by GreenOak. As at 31 December 2015, these investments referenced real estate in the United States, Japan and Europe with a combined net asset value of US$ 115.4 million (31 December 2014: US$ 88.3 million). These investments are typically illiquid where the Fund will only receive distributions on liquidation of the investment vehicle’s underlying assets and in some cases this may not be for several years. In addition, based on projected capital raised (subject to change), the Fund had estimated unfunded commitments of up to US$ 103.8 million with respect to the investment vehicles (31 December 2014: US$ 84.6 million). 40 TETRAGON FINANCIAL GROUP MASTER FUND LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) For the year ended 31 December 2015 Note 25 Other Matters The Fund has recovered from insurers costs relating to shareholder derivative actions, details of which were referred to in note 25 of the 2014 Fund audited consolidated financial statements. During the year US$ 9.8 million was received (31 December 2014: US$ 1.0 million). The Fund does not expect to recover any further costs in relation to these actions. Note 26 Subsequent Events The Directors have evaluated the period up to 25 February 2016, which is the date that the financial statements were approved, and have concluded that there are no material events that require disclosure or adjustment to the financial statement. Note 27 Recent changes to U.S. GAAP In May 2015, the Financial Accounting Standards Board (“FASB”) issued guidance to address diversity in practice related to how certain investments measured at net asset value (“NAV”) are reported within the financial statement footnotes. The new guidance removes the requirement to categorise investments measured under the current NAV practical expedient within the fair value hierarchy for all investments. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the NAV practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The guidance will be effective in the first quarter of 2016 and is required to be applied retrospectively, although early adoption is permitted. The Fund has evaluated the effect of this guidance and has opted to early adopt with the results of this change being disclosed in Note 2. In August 2014, the FASB issued guidance to address diversity in the accounting for differences in the measurement of the fair values of financial assets and liabilities of consolidated financing VIEs. The new guidance provides an alternative for consolidated financing VIEs to elect: (1) to measure their financial assets and liabilities separately under existing U.S. GAAP for fair value measurement with any differences in such fair values reflected in earnings; or (2) to measure both their financial assets and liabilities using the more observable of the fair value of the financial assets or the fair value of the financial liabilities. The guidance will be effective in the first quarter of 2016, with early adoption permitted. The Fund is evaluating the effect of this guidance on its financial statements. Note 28 Approval of Financial Statements The Directors approved the consolidated financial statements on 25 February 2016. 41 

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