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Blackstone Alternative Investment Funds – ‘N-CSR’ for 3/31/18

On:  Friday, 5/25/18, at 2:22pm ET   ·   Effective:  5/25/18   ·   For:  3/31/18   ·   Accession #:  1193125-18-175012   ·   File #:  811-22743

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 5/25/18  Blackstone Alternative Inv Funds  N-CSR       3/31/18    4:8.6M                                   Donnelley … Solutions/FA
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number 811-22743

Blackstone Alternative Investment Funds

(Exact Name of Registrant as Specified in Charter)

345 Park Avenue

28^th Floor

New York, NY 10154

(Address of Principal Executive Offices)

Registrant’s telephone number, including area code: (212) 583-5000

Peter Koffler, Esq.

c/o Blackstone Alternative Investment Advisors LLC

345 Park Avenue

28^th Floor

New York, NY 10154

(Name and Address of Agent for Service)

With a copy to:

James E. Thomas, Esq.

Ropes & Gray LLP

Prudential Tower

800 Boylston Street

Boston, MA 02199-3600

Date of fiscal year end: March 31

Date of reporting period: March 31, 2018

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The Report to Shareholders is attached hereto.

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Blackstone Alternative Multi-Strategy Fund

a series of Blackstone Alternative Investment Funds

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All investors should consider the investment objectives, risks, charges and expenses of Blackstone Alternative Multi-Strategy Fund (the “Fund”) carefully before investing. The prospectus and, if available, the summary prospectus contain this and other information about the Fund. You can obtain a prospectus and a summary prospectus from the Fund’s website (www.bxmix.com). All investors are urged to carefully read the prospectus and summary prospectus in their entirety before investing. Interests in the Fund are offered through Blackstone Advisory Partners L.P., a member of FINRA and an affiliate of Blackstone Alternative Investment Advisors LLC.

Important Risks: An investment in the Fund should be considered a speculative investment that entails substantial risks; you may lose part or all of your investment or your investment may not perform as well as other investments. The Fund’s investments involve special risks including, but not limited to, loss of all or a significant portion of the investment due to leveraging, short-selling, or other speculative practices, lack of liquidity and volatility of returns. The following is a summary description of certain additional principal risks of investing in the Fund:

Allocation Risk - Blackstone’s judgment about the attractiveness, value or market trends affecting a particular asset class, investment style, sub-adviser or security may be incorrect and this may have a negative impact upon performance. Debt Securities Risk - investments in debt securities, such as bonds and certain asset-backed securities involve certain risks which may cause the securities to lose value, including credit risk, extension risk, interest rate risk, prepayment risk, and variable and floating rate instrument risk. Derivatives Risk - the use of derivatives involves the risk that their value may not move as expected relative to the value of the relevant underlying assets, rates, or indices. Derivatives can be volatile and illiquid, can be subject to counterparty credit risk, and may entail investment exposure greater than their notional amount. Distressed Securities Risk - investments in securities of business enterprises involved in workouts, liquidations, reorganizations, bankruptcies and similar situations involve a high degree of risk of loss since there is typically substantial uncertainty concerning the outcome of such situations. Equity Securities Risk - there is a risk of loss associated with price fluctuations of equity and preferred securities which change based on a company’s financial condition and overall market and economic environment. Event-Driven Trading Risk - involves the risk that the specific event identified may not occur as anticipated and that this may have a negative impact upon the market price of the securities involved. Foreign Investments/Emerging Markets Risk - involves special risks caused by foreign political, social and economic factors, including exposure to currency fluctuations, less liquidity, less developed and less efficient trading markets, political instability and less developed legal and auditing standards. High Portfolio Turnover Risk - active trading of securities can increase transaction costs (thus lowering performance) and taxable distributions. Model and Technology Risk - involves the risk that model-based strategies, data gathering systems, order execution and trade allocation systems and risk management systems may not be successful on an ongoing basis or could contains errors, omissions, imperfections or malfunctions. Multi-Manager Risk - managers may make investment decisions which conflict with each other and as a result, the Fund could incur transaction costs without accomplishing any net investment result.

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BLACKSTONE ALTERNATIVE INVESTMENT FUNDS

Dear Blackstone Investor,

We are pleased to present this annual shareholder report for Blackstone Alternative Investment Funds (“BAIF”) and its series, Blackstone Alternative Multi-Strategy Fund (the “Fund”). This report includes portfolio commentary, a listing of the Fund’s investments and the Fund’s audited financial statements. Audited financial statements for the Fund cover the period from April 1, 2017 to March 31, 2018 (the “Reporting Period”).

The Fund’s investment objective is to seek capital appreciation. The Fund seeks this objective by allocating its assets among a variety of nontraditional, or “alternative,” investment strategies. Blackstone Alternative Investment Advisors LLC (the “Investment Adviser” or “BAIA”) determines the allocations of the Fund’s assets and allocates a majority of the Fund’s assets among investment sub-advisers with experience managing alternative investment strategies and among investment funds. Each discretionary sub-adviser is responsible for the day-to-day management of the Fund’s assets that the Investment Adviser allocates to it. Subject to oversight by the Board of Trustees, the Investment Adviser is responsible for making recommendations with respect to hiring, terminating and/or replacing the Fund’s investment sub-advisers, and it may also manage a portion of the Fund’s assets directly and, from time to time, may instruct Sub-Advisers with respect to particular investments¹. In pursuing the Fund’s investment objective, the Fund seeks to maintain an investment portfolio with, on average, lower volatility relative to the broader equity markets.

Fund Performance²

The Reporting Period was comprised of three quarters with very low volatility in capital markets and a final quarter punctuated by sharply elevated volatility. The Fund weathered the turbulence, mitigating investor exposure to sharp market pullbacks, and, on the year, provided investors with positive returns in accord with its objective of capital appreciation. As we look ahead to the next 12 months, we intend to continue leveraging our due diligence, risk management, and investment expertise, accumulated over our 28 years’ experience in hedge fund investing, to identify attractive alternative investment strategies and investment sub-advisers that we believe may advance the Fund in its objective.

None of the indices presented herein are benchmarks or targets for the Fund.

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During the Reporting Period, the Fund generated a cumulative return, net of fees and expenses, of 3.06%³ and realized a volatility of 2.35%⁴ with a Sharpe ratio⁵ of 0.87. Over the same period, the HFRX Global Hedge Fund Index, a measure of hedge fund performance, returned 3.20%; the MSCI World Total Return Index, a measure of global equity market performance, returned 14.20%; the S&P 500 Index, a measure of U.S. equity market performance, returned 13.99%; and the Bloomberg Barclays Global Aggregate Bond Index, a measure of investment grade bond performance, returned 6.97%.

Portfolio Managers

In keeping with its historical approach to team-based portfolio management, the Investment Adviser has designated each of the members of the BAIA Investment Committee as a portfolio manager of the Fund. Effective March 31, 2018, the list of portfolio managers is as follows:

Market and Portfolio Commentary

The fiscal year ended March 31, 2018 began with a steady continuation of the market rally that followed President Donald Trump’s entrance into the White House, leading many—including us—to wonder when the party would end. For ten months of the Reporting Period, a number of geopolitical events failed to stall the market’s upward plod: the GOP failed to unwind Obamacare with even a ‘skinny’ repeal, a bad hurricane season wrought tragic destruction upon Puerto Rico and the Gulf Coast, and North Korea tested record numbers of missiles, to name just a few. Yet the equity market climbed higher, albeit with notable dispersion among sectors—consider, for instance, the rally among financial stocks in June as big tech names sank during the so-called ‘tech tantrum’.

For months, historically high stock prices relative to fundamentals (i.e., earnings) suggested the potential for a market correction. Indeed, despite earnings growth over the course of the year, the Cyclically Adjusted Price to Earnings or “CAPE” ratio—a metric designed to enable comparison of market valuations across economic cycles—by January had swollen to over 33x, a multiple topped only in the lead-up to the Dot Com Bubble⁷. Around the same time, net margin debt as a percentage of the total value of the New York Stock Exchange (“NYSE”) surpassed its peak also hit in the buildup to the Dot Com Bubble⁸.

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In February, equities’ calm climb came to an abrupt halt: the S&P 500 ended twelve of February’s nineteen trading days with a move of over 1% in either direction. Three of those days ended down in excess of 2%, and by the end of the month’s first week of trading, the index entered “market correction” territory with an overall pullback of over 10% from its January 26th peak. Equity market volatility (as measured by the so-called “Fear Gauge”, the CBOE Volatility Index) spiked to a level last seen in November 2011 as a broad selloff in stocks reversed the positive momentum of much of the year to that point. As stocks dropped, investors who had piled into equities on margin—funds borrowed against securities posted as collateral—were forced to deleverage, i.e. sell holdings to meet margin calls, thereby amplifying the market rout.

February’s equity market turbulence serves as a good case study as to the potential benefits of a multialternative portfolio diversifier in times of elevated volatility. Across three days in the first half of February with drawdowns greater than 1%, the S&P 500 Index plummeted 9.64%, and the MSCI World Index plunged 7.45%. The Fund, meanwhile, dropped just 1.21% as positive performance from certain of the Fund’s Credit and Multi-Asset exposures offset declines in equities⁹. Looking at the Reporting Period as a whole, there were 14 trading days on which the S&P 500 Index dropped 1% or more in a single day. Over the same period, this happened to the MSCI World Index 10 times. As for the Fund? Not once¹⁰. In fact, the Fund has been down 1% or more just once since inception—as compared to 79 times for the S&P 500 Index and 61 times for the MSCI World Index¹¹. The Fund’s inherent diversification has helped to mitigate volatility and weather drawdowns in equity markets both this Reporting Period and since inception. However, because of the broadly diversified and low beta nature of the portfolio, the Fund is not expected to participate, and historically has not participated, in the full upside of broader equity markets.

Over the Reporting Period, the Fund’s Equity strategies contributed positively to performance, propelled both by alpha opportunities created by the year’s political uncertainties and developments as well as by factor positioning—especially momentum, a factor premised upon the tendency for assets’ relative performance to continue for a certain period of time, as equities climbed ever higher over the first ten months. Market hedges, however, dampened the overall positive performance: sub-advisers’ pursuit of delivering alpha while neutralizing beta was hindered by the persistent rise in equity markets. This year underscored the value of Equity Market Neutral sub-strategies in particular. The Fund’s exposure to these sub-strategies resulted in strong, uncorrelated performance throughout the Reporting Period even during the recent equity market drawdown. Equity Long/Short sub-strategies, meanwhile, ultimately detracted despite positive performance over much of the period until the market correction of early 2018. Broad exposure to healthcare, notably managed care, produced positive returns early in the Reporting Period, as did exposure to the financial sector, which benefitted from a favorable regulatory outlook. Later, however, tech exposure faltered, as did exposure to certain healthcare sub-sectors and financials, due, in large part, to disappointing earnings or macroeconomic news. Still, these sub-strategies’ low beta to equities proved beneficial, as short exposures implemented directly by BAIA helped the Fund to preserve capital amidst the market’s broader move lower in February and March¹².

Credit strategies contributed the most to the Fund’s positive returns over the Reporting Period, with all sub-strategies generating gains on the year. Fixed Income—Asset Backed sub-strategies were the highest-performing ones in this part of the portfolio, benefitting in large part from positive carry and appreciation of

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government-sponsored enterprise (“GSE”) credit risk transfer (“CRT”) bonds. CRT bonds are U.S. residential mortgage debentures—unsecured GSE obligations originating from a regulator mandate in the wake of the Great Financial Crisis that Fannie Mae and Freddie Mac sell off credit risk to the private sector. This exposure has performed well over the past year, as steadily growing track-records of payment and new ratings by the National Association of Insurance Commissioners (“NAIC”) increased the market’s estimation of such securities’ creditworthiness, and accordingly, their value.

During the Reporting Period, Multi-Asset strategies also collectively posted gains, driven by Multi-Strategy sub-strategies. Uncorrelated returns this year largely derived from idiosyncratic European and emerging markets exposures, along with certain quantitative exposures. Early in the Reporting Period, as Emmanuel Macron’s party secured a majority in the French parliament, Multi-Strategy exposures to European equity markets rallied. Later, as tensions between North Korea and the United States intensified over the summer and fall, exposure to safe-haven assets, such as gold, gained in value. Towards the end of the calendar year, exposure to long-dated sovereign debt in the United States and Europe within Systematic Diversified sub-strategies contributed to performance. Meanwhile, a sharp factor reversal late in the year dampened gains: Momentum (which we mentioned earlier) gave up gains, and value—a factor defined by systematic comparison of some measure of an asset’s fundamental value to its price—outperformed. This factor performance dispersion, we believe, was driven by a material tax differential between the underlying indices in light of November’s tax reform legislation. (The weighted-average effective tax rate for companies within the value index was 26% as compared to 17% for momentum). Additionally, in the first few months of 2018, Risk Premia and Systematic Trend Following strategies detracted from performance in this part of the portfolio. Some of these strategies’ trading models take shorter-term views, accounting more significantly for recent market moves in their positioning; most, however, are built around medium-to-long-term trends, meaning that they aim to capture more persistent risk premia over longer time frames. Accordingly, these models are less likely to adapt to short-term swings in market factors, and at certain moments in the Reporting Period like November or February, when longer-term trends reversed suddenly, these models did not dramatically adjust positioning; hence, they experienced losses at those times. But as long-term investors, we retain our conviction in Risk Premia and other systematic strategies. We believe that the diversification benefits and potential to harvest differentiated sources of return over time outweigh the month-to-month fluctuations that may at times detract from performance.

During the Reporting Period, the Investment Advisor added seven new sub-advisers to the Fund: Cerebellum GP LLC (doing business as Cerebellum Capital) (Equity Hedge strategy), Endeavour Capital Advisors Inc. (Equity Hedge strategy), Gracian Capital LLC (Equity Hedge strategy¹³), GSA Capital Partners LLP (Macro strategy), H2O AM LLP (Macro strategy), Magnetar Asset Management LLC (Event-Driven strategy), and NWI Management, L.P. (Macro strategy). Also during the Reporting Period, the Investment Adviser terminated three sub-advisers to the Fund: Chatham Asset Management, LLC (Relative Value strategy), FT AlphaParity, LLC (Macro strategy), and GS Investment Strategies, LLC (Equity Hedge strategy). Sub-adviser additions and terminations are normal events in the Investment Adviser’s investment process and result from our dynamic top-down evaluation of the opportunity set for hedge fund strategies as well as the bottom-up evaluation of a manager’s ability to deliver alpha in a given environment. When done well, value may be generated by making the right top-down calls on which asset classes are attractive in a given environment and increasing the Fund’s exposure to those asset classes. For more information on the Fund’s sub-advisers, please refer to their profiles available on the Fund’s website.

Looking forward to the remainder of 2018 and into 2019, we anticipate continued volatility and further dispersion among stocks, sectors, and geographies—together, conditions that furnish active managers with potential opportunities to pick winners and losers and thereby generate alpha. The market correction in February and continued slump through March may portend additional downside volatility this year; after all, the CAPE ratio remains historically high at 31.2x even after equities’ recent pullback. Still, the tax cuts and Jobs Act, signed by President Trump in December and the favorable regulatory environment may stimulate earnings growth that could help bring fundamentals into closer alignment with valuations. Whether through

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corporate earnings growth or by market moves to the downside, we would expect the CAPE to revert to the mean. (Since 1881, the average CAPE ratio is 16.9x; since the December 1999 peak before the Dot Com Bubble, the average is 25.3x). In either event, we believe that skilled active managers are well positioned to take advantage of what the coming year may bring in equity markets, whether by picking winning companies poised for earnings growth or by determining losing companies most susceptible to downside risk.

Turning to fixed income, the rising rate environment portends challenges ahead: when rates rise, prices fall on fixed rate bonds as investors favor new supply with a higher yield. Additionally, borrower creditworthiness may also decrease in the face of higher interest rates as debt service increases and profitability comes under pressure. Together, these potential headwinds could reduce the value of many fixed income investments. If equity markets also face headwinds in the coming year, traditional equity-fixed income diversification techniques may fall short in protecting investor capital. This potential threat to investors’ portfolios suggests the importance of seeking new means of diversification—a gap that alternative investment strategies and nontraditional asset classes could fill. In our view, an actively-managed long/short investment approach, for instance, may reduce a portfolio’s reliance on the overall market’s direction. We also believe that floating rate instruments may weather a rising rate environment better than fixed rate debt. And we believe that diversifying, multi-asset strategies, such as Global Macro, may be well-positioned to navigate the challenges presented by increasing domestic inflation and divergent Central Bank policy around the world, while quantitative and risk premia-oriented strategies may provide additional differentiation and uncorrelated sources of return.

We maintain conviction in the expertise and opportunity sets for the Fund’s sub-advisory lineup; nonetheless, we continue to manage the portfolio dynamically—allocating to strategies that we deem attractive in the current market environment and reassessing those that face potential headwinds. It is impossible to predict with accuracy what the coming year holds in store, but we remain confident that investment strategies that are both diversified and hedged by nature could play an important role in the prudent investor’s portfolio by mitigating downside volatility and affording alpha generation potential.

We are grateful for your choosing to invest with us and for giving us the opportunity to serve you for years to come.

Sincerely,

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Performance Summary

Performance quoted represents past performance, which may be higher or lower than current performance. Past performance is not indicative of future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The returns shown do not reflect taxes that an investor would pay on fund distributions or on the sale of fund shares. To obtain the most recent month-end performance, visit www.bxmix.com.

Value of a $10,000 Investment Since Inception at Net Asset Value*

None of the indices presented are benchmarks or targets for the Fund.

Cumulative Total Return

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Blackstone Alternative Multi-Strategy Fund and Subsidiaries

Portfolio Information

March 31, 2018

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Blackstone Alternative Multi-Strategy Fund and Subsidiaries

Portfolio Information (Continued)

March 31, 2018

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Blackstone Alternative Multi-Strategy Fund and Subsidiaries

Portfolio Information (Continued)

March 31, 2018

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Blackstone Alternative Multi-Strategy Fund and Subsidiaries

Consolidated Schedule of Investments

March 31, 2018

See Notes to Consolidated Financial Statements.

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Blackstone Alternative Multi-Strategy Fund and Subsidiaries

Consolidated Schedule of Investments (Continued)

March 31, 2018

See Notes to Consolidated Financial Statements.

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Blackstone Alternative Multi-Strategy Fund and Subsidiaries

Consolidated Schedule of Investments (Continued)

March 31, 2018

See Notes to Consolidated Financial Statements.

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Blackstone Alternative Multi-Strategy Fund and Subsidiaries

Consolidated Schedule of Investments (Continued)

March 31, 2018

See Notes to Consolidated Financial Statements.

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Blackstone Alternative Multi-Strategy Fund and Subsidiaries

Consolidated Schedule of Investments (Continued)

March 31, 2018

See Notes to Consolidated Financial Statements.

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Blackstone Alternative Multi-Strategy Fund and Subsidiaries

Consolidated Schedule of Investments (Continued)

March 31, 2018

See Notes to Consolidated Financial Statements.

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Blackstone Alternative Multi-Strategy Fund and Subsidiaries

Consolidated Schedule of Investments (Continued)

March 31, 2018

See Notes to Consolidated Financial Statements.

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Blackstone Alternative Multi-Strategy Fund and Subsidiaries

Consolidated Schedule of Investments (Continued)

March 31, 2018