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Blackstone Alternative Investment Funds – ‘N-CSR’ for 3/31/19

On:  Wednesday, 5/29/19, at 3:20pm ET   ·   Effective:  5/29/19   ·   For:  3/31/19   ·   Accession #:  1193125-19-159491   ·   File #:  811-22743

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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, 2019

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Blackstone Alternative Multi-Strategy Fund

a series of Blackstone Alternative Investment Funds

Beginning on January 25, 2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of the Fund’s shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the reports from the Fund or from your financial intermediary, such as a broker-dealer or bank. Instead, the reports will be made available on the Fund’s website. You will be notified by mail each time a report is available, and you will be provided with a website link to access the report.

If you already have elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any action. Shareholders who hold accounts directly with the Distributor or the Fund may elect to receive shareholder reports and other communications from the Fund electronically by calling 1-855-890-7725 to make such arrangements. Shareholders who hold accounts through an investment advisor, bank, or broker-dealer should contact that financial intermediary directly for information on how to receive shareholder reports and other communications electronically.

You may elect to receive all future reports in paper free of charge. If you hold accounts directly with the Distributor, you can inform the Fund that you wish to continue receiving paper copies of your shareholder reports by calling 1-855-890-7725 to make such arrangements. For shareholders who hold accounts through an investment advisor, bank, or broker-dealer, please contact your financial intermediary directly to inform them that you wish to continue receiving paper copies of your shareholder reports. If your Fund shares are held through a financial intermediary, your election to receive reports in paper will apply to all funds held with that financial intermediary.

Capitalized terms not defined herein have the meanings assigned to them in the Prospectus.

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All investors should consider the investment objectives, risks, charges and expenses of the 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.blackstone.com/bamsf). All investors are urged to carefully read the prospectus and the summary prospectus, in its 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, the Fund’s investment adviser (“BAIA” or the “Investment Adviser”).

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 - BAIA’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 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. Large Redemption Risk - large redemption activity could result in the Fund incurring additional costs and being forced to sell portfolio securities at a loss to meet redemptions. Leverage Risk - use of leverage can produce volatility and may exaggerate changes in the net asset value of Fund shares and in the return on the Fund’s portfolio, which may increase the risk that the Fund will lose more than it has invested. Liquidity Risk - some securities held by the Fund, including, but not limited to, restricted, distressed, non-exchange traded,

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and/or privately placed securities, may be difficult to sell, or illiquid, particularly during times of market turmoil. Illiquid securities may be difficult to value and if the Fund is forced to sell an illiquid asset to meet redemption requests or other cash needs, the Fund may be forced to sell at a loss. Market Risk and Selection Risk - one or more markets in which the Fund invests may go down in value, possibly sharply and unpredictably, affecting the values of individual securities held by the Fund. Mortgage- and Asset-Based Securities Risk - these securities are subject to credit, interest rate, prepayment and extension risks. These securities also are subject to risk of default on the underlying mortgage or asset, particularly during periods of economic downturn. Small movements in interest rates may quickly and significantly reduce the value of certain mortgage-backed securities. 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, 2018 to March 31, 2019 (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 a number of affiliated and unaffiliated investment advisory organizations (each, a “Sub-Adviser” and together, the “Sub-Advisers”) with experience managing alternative investment strategies and among investment funds. BAIA also manages a portion of the Fund’s assets directly and, from time to time, may instruct Sub-Advisers with respect to particular investments¹. Each Sub-Adviser is responsible for the day-to-day management of the Fund’s assets that the Investment Adviser allocates to it. The Investment Adviser has the ultimate responsibility to oversee each Sub-Adviser, subject to the oversight of the Fund’s Board of Trustees. The Investment Adviser is also responsible for recommending the hiring, termination, and replacement of Sub-Advisers. In pursuing the Fund’s investment objective, BAIA focuses on the preservation of capital and 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 one quarter punctuated by sharply elevated volatility. The Fund largely weathered the turbulence, mitigating investor exposure to sharp market pullbacks, and provided investors with positive returns in accord with its objective of capital appreciation.

During the Reporting Period, the Fund generated a cumulative return, net of fees and expenses, of 2.76%. Over the same period, the HFRX Global Hedge Fund Index, a measure of hedge fund performance, returned -3.32%; the MSCI World Total Return Index, a measure of global equity market performance, returned 4.61%; the S&P 500 Total Return Index, a measure of U.S. equity market performance, returned 9.50%; and

Becauseof the broadly diversified and low beta nature of the portfolio, the Fund is not expected to participate in the full upside of broader equity and fixed income markets. The indices referenced herein are not benchmarks or targets for the Fund.

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the Bloomberg Barclays Global Aggregate Bond Index, a measure of investment grade bond performance, returned -0.38%.³

Market and Portfolio Commentary

The Reporting Period was colored by ebbs and flows in the market, beginning with two moderately calm, positive quarters for equity markets that came on the heels of a volatile end to the prior fiscal year. During the quarter ended December 31, 2018, public equity markets sold off considerably, closing down for the calendar year (S&P 500 TR: -4.38%) for the first time since 2008, driven primarily by December’s returns (S&P 500 TR: -9.03%). The market rebounded afterwards, as the S&P 500 had the best 2-month start to a year in roughly three decades⁴ (+11.48%). In a period punctuated by both historic highs and lows, a number of concerns kept markets in constant flux.

In the U.S., all eyes were on the Federal Reserve (“the Fed”) this year. Just before the fiscal year began, Jerome Powell was sworn in as Chairman, and the Fed penciled in three to four potential interest hikes for 2018 and an additional three for 2019 amid signs of a strengthening economy. As multiple reports throughout the calendar year illustrated, the U.S. economy was humming along, with the U.S. Bureau of Economic Analysis estimating second quarter GDP growth to be 4.1%, the highest reading since 2014. At the same time, the U.S. Bureau of Labor Statistics reported that U.S. inflation increased 2.9% year-over-year. Given both a growing U.S. economy and rising inflation towards the end of 2018, the Fed hiked rates four times and continued to unwind its bond portfolio through open market operations throughout the year. Both of these steps were taken to help rein in U.S. inflation and reload the tools available to the Fed should it need them in the event of an economic downturn.

However, by the end of December 2018, the Fed started changing course as equity markets began to weaken. The last few days of the month were characterized by a crisis of confidence, in part due to data that suggested U.S. growth was beginning to slow. Both the Richmond Fed’s manufacturing activity survey and the Conference Board’s consumer confidence index, considered by some to be leading indicators of the health of U.S. production and the degree of consumer optimism on the state of the U.S. economy, respectively, hit lows during the month. This exacerbated the fears the market had been harboring, and the softening economic data and weakening consumer confidence resulted in a sharp negative turn in the equity markets. In early January, Chairman Powell said that the Fed could afford to be patient and responsive to the economy, suggesting that the Fed would not necessarily have to continue raising rates as had been projected. Combined with a strong jobs report on the same day, this sent a message to the markets that there was still plenty of runway in the expansion, causing the stock market to surge and initiating the quarter’s rebound. By the time the Fed met in March 2019, consensus estimates of monetary policy suggested no rate hikes in 2019, a single hike in 2020, and no hikes in 2021, a marked reversal from just a year ago.

Outside of the U.S., there have been additional indicators that suggested the onset of a global slowdown that could affect U.S. equity markets. Just before the start to the fiscal year, President Trump signed orders to place tariffs of 25% and 10% on imported steel and aluminum, respectively. This action spurred negotiations with a number of the United States’ major trade partners and triggered some nations to respond with their own tariffs, including an in-kind response from China. By the end of the year, the trade war had clearly taken its toll as the People’s Bank of China had already injected nearly ¥2.2 trillion into the economy to stimulate the economy above 6% growth⁵.

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Europe also faced headwinds. While the U.S. posted GDP growth that topped estimates, the European Central Bank (“ECB”) revised growth forecasts lower than previously expected. At the time, President Mario Draghi cited increased global risks such as protectionism and a resulting reduction in global free trade. While the Fed worked to increase the Fed Funds rate to a range of 2.25%-2.50% and control U.S. economic growth, the ECB continued to hold its overnight deposit rate at -0.40% and buy bonds in the open market, effectively attempting to promote growth within the European economy. However, this may not have been enough, as recessionary conditions were evident in Italy and France, and there are indicators that Germany may fall into recession as well⁶. Additionally, many European leading indicators were at levels not seen since 2012, when Mario Draghi famously said the ECB would do whatever it takes to avoid falling into a recession.

Europe wasn’t alone in its slowing growth, as emerging markets were also a focus for many this year. Emerging markets faced stifling lows towards the end of 2018, ending the calendar year with their worst performance since 2008 (EMBI Global Diversified High Yield Index TR: -6.22%). In Argentina, concerns grew about the government’s ability to repay U.S. dollar denominated debt, as a strengthening dollar, rising inflation, and growing trade tensions all contributed to a plunge in the value of the currency. Likewise in Turkey, the lira weakened as inflation surged in response to the government’s struggle to stabilize the economy amidst high levels of private, foreign-currency denominated debt and a large current account deficit. This reversed sharply in the first quarter of 2019, primarily on the back of the reestablishment of dovish U.S. monetary policy, continued global central bank easing, and momentary de-escalation of trade war tensions between the U.S. and China.

Over the Reporting Period, the Fund’s Equity strategies were the largest contributor to performance (+5.80%⁷). Quantitative equity market neutral sub-strategies posted strong, consistent, and uncorrelated gains throughout the Reporting Period, even during the recent equity market drawdown. Equity Long/Short sub-strategies also contributed, though they were not without the ebbs and flows that defined the year. The Fund’s Health Care exposures suffered on news of a court in Texas invalidating the Affordable Care Act. However, given the Fund’s ability to be both long and short securities, it has less of a dependence on broader market moves than traditional equity strategies, which can be beneficial when markets or specific sectors trend lower. While the S&P 500 Health Care Index TR suffered in the quarter ended December 31, 2018 (-8.71%), and was only able to partially make up the loss in the quarter ended March 31, 2019 (+6.59%), the Fund was able to capitalize on active management and prudent stock selection in the Health Care sector to make up losses during the same time period. The Fund’s exposures to Financials also ended the year as mild contributors amidst bumpy performance driven by the shifting expectations for monetary policy and oscillating concerns around global growth and the impact of the ongoing trade war.

Credit strategies also contributed strongly to the Fund’s positive performance (+5.39%⁷). Fixed Income – Asset Backed sub-strategies drove gains, as commercial mortgage backed securities indices tightened throughout the period. The credit markets fluctuated similarly to equity markets during the year, with a similar pattern of de-risking during the quarter ended December 31, 2018 causing spreads to widen, especially in December, followed by a rebound in the quarter ended March 31, 2019, when spreads tightened, resulting in positive attribution. Exposures to collateralized loan obligations followed a similar trend due to spread fluctuation, but had an additional benefit of positive carry that contributed gains. On the other hand, exposure to trust preferred security collateralized debt obligations ended the year as a minor detractor. Finally, high yield and corporate credit finished positively for the year while facing pockets of challenged performance in 2018 due to the dual headwinds of rising U.S. rates and late-cycle credit conditions.

During the Reporting Period, Multi-Asset strategies also collectively posted gains (+2.70%⁷). Risk Arbitrage sub-strategies, which attempt to exploit pricing inefficiencies caused by corporate events by taking long positions in target companies and selling acquirers short, contributed gains for the year. Heightened levels of acquisition activity over the past year provided ample opportunities for arbitrage, as positions across energy, healthcare, telecommunications, aerospace and defense, and utilities contributed to gains. On the other hand, a set of exposures in the Multi-Strategy sub-strategy faced headwinds, particularly in the quarter ended

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December 31, 2018. Long exposure to commodities detracted as crude oil prices fell to levels not seen since 2016 on fears of oversupply. Long exposure to REITS also generated losses, as rising interest rates made REIT yields look less attractive versus other income-bearing alternatives. This same sub-strategy was ultimately able to reverse its losses on the quarter with an explosive start to January, including positive contributions from both high yield positions in the US and Europe, and long equity exposures in emerging markets. Finally, the gains in this sub-strategy were partially offset by overlay equity hedges that suffered during the rising equity market of the quarter ended March 31, 2019. Elsewhere, select exposures to fixed income carry and momentum trades suffered from the previously mentioned turbulence in the quarter ended December 31, 2018.

During the Reporting Period, the Investment Adviser hired Blackstone Real Estate Special Situations Advisors LLC⁸ (Relative Value strategy) to serve as a Sub-Adviser to the Fund. Also during the Reporting Period, the Investment Adviser terminated two Sub-Advisers to the Fund: Cerebellum GP, LLC (Equity Hedge strategy) and Gracian Capital LLC (Equity Hedge strategy⁹). 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 Sub-Adviser’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 (www.bxmix.com).

Looking forward to the remainder of 2019 and into 2020, we anticipate continued volatility and further dispersion among stocks, sectors, and geographies—together, conditions that furnish active Sub-Advisers with potential opportunities to pick winners and losers and generate alpha. In the last two weeks of the fiscal year, the spread between the 10-year and 3-month yield curve inverted for the first time since the Global Financial Crisis, indicating that investors’ expectations for the future were beginning to sour. During the same period, German manufacturing data came in weak, exacerbating fears that unresolved trade disputes were causing a slowdown in Europe’s biggest economy, dragging the German 10-year bund yield below zero for the first time since 2016¹⁰. Given the rapidly changing global economic environment and several potential threats to investors’ portfolios, we re-iterate 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. Additionally, we believe that diversifying, multi-asset strategies, such as Global Macro, may be well-positioned to navigate the challenges presented by 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 has in store, but we remain confident that diversified investment strategies which exhibit low market correlation could play an important role in the prudent investor’s portfolio by mitigating downside volatility and affording alpha generation potential.

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

Sincerely,

Note: Effective as of September 21, 2018, David Mehenny no longer serves as Portfolio Manager to the Fund. David is pursuing an opportunity in another business unit at Blackstone and we wish him the best in his new role. The Fund’s six other Portfolio Managers as of March 31, 2019 are remain, as listed above.

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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, 2019

See Notes to Consolidated Financial Statements.

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Blackstone Alternative Multi-Strategy Fund and Subsidiaries

Portfolio Information (Continued)

March 31, 2019

See Notes to Consolidated Financial Statements.

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Blackstone Alternative Multi-Strategy Fund and Subsidiaries

Portfolio Information (Continued)

March 31, 2019

See Notes to Consolidated Financial Statements.

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Blackstone Alternative Multi-Strategy Fund and Subsidiaries

Consolidated Schedule of Investments

March 31, 2019

See Notes to Consolidated Financial Statements.

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Blackstone Alternative Multi-Strategy Fund and Subsidiaries

Consolidated Schedule of Investments (Continued)

March 31, 2019

See Notes to Consolidated Financial Statements.

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Blackstone Alternative Multi-Strategy Fund and Subsidiaries

Consolidated Schedule of Investments (Continued)

March 31, 2019

See Notes to Consolidated Financial Statements.

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Blackstone Alternative Multi-Strategy Fund and Subsidiaries

Consolidated Schedule of Investments (Continued)

March 31, 2019

See Notes to Consolidated Financial Statements.

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Blackstone Alternative Multi-Strategy Fund and Subsidiaries

Consolidated Schedule of Investments (Continued)

March 31, 2019

See Notes to Consolidated Financial Statements.

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Blackstone Alternative Multi-Strategy Fund and Subsidiaries

Consolidated Schedule of Investments (Continued)

March 31, 2019

See Notes to Consolidated Financial Statements.

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Blackstone Alternative Multi-Strategy Fund and Subsidiaries

Consolidated Schedule of Investments (Continued)

March 31, 2019