uft_ncsr123108.htm

Underlying Funds Trust

Expense Example – December, 31 2008 (Unaudited)

The following expense example is presented for The Arbitrage-1 Portfolio (Convertible Bond), The Arbitrage-2 Portfolio (Fixed Income), The Deep Value Hedged Income-1, The Distressed Securities & Special Situations-1, The Energy & Natural Resources-1, The Global Hedged Income-1, The Long/Short Equity—Deep Discount Value-1, The Long/Short Equity—Earnings Revision-1, The Long/Short Equity—Growth-1, The Long/Short Equity—Healthcare/Biotech-1, The Long/Short Equity—International-1, The Long/Short Equity—Momentum-1, The Long/Short Equity—REIT-1, and The Merger Arbitrage-1 (the “Portfolio or Portfolios”), each a series of the Underlying Funds Trust.

As a shareholder of the Portfolios, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolios and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (7/1/08 - 12/31/08).

Actual Expenses

The first line of the table below provides information about actual account values and actual expenses. To the extent the Portfolios invest in shares of other investment companies as part of its investment strategy, you will indirectly bear your proportionate share of any fees and expenses charged by funds in which the Portfolios invest in addition to the expenses of each Portfolio. Actual expenses of the Portfolios are expected to vary among each Portfolio. The example below includes, but is not limited to, investment advisory fees and operating services fees. However, the example below does not include portfolio trading commissions and related expenses and other extraordinary expenses as determined under U.S. generally accepted accounting principles. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period'' to estimate the expenses you paid on your account during this period.

Hypothetical Example for Comparison Purposes

The second line of the table below provides information about hypothetical account values and hypothetical expenses based on each Portfolio’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not each Portfolio’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in each Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) or exchange fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

Underlying Funds Trust

Expense Example – December 31, 2008 (Unaudited) (continued)

The Arbitrage-1 Portfolio (Convertible Bond)

Expenses

Beginning

Ending

Paid

Account

During

Value

Period

7/1/08

12/31/08

7/1/08-12/31/08+

Actual^

1,000.00

838.70

12.85

Hypothetical

(5% return before

expenses)**

1,000.00

1,011.16

14.05



^ Excluding interest expense and dividends on short positions, your actual expenses would be $11.42.
** Excluding interest expense and dividends on short positions, your hypothetical expenses would be $12.50.
+ Expenses are equal to the Portfolio's annualized expense ratio, including interest expense and dividends on short
positions, of 2.78%, multiplied by the average account value over the period, multiplied by 184/366. If interest expense
and dividends on short positions were excluded, the annualized expense ratio would have been 2.47%.

The Arbitrage-2 Portfolio (Fixed Income)

Expenses

Beginning

Ending

Paid

Account

During

Value

Period

7/1/08

12/31/08

7/1/08-12/31/08+

Actual^

1,000.00

834.40

11.25

Hypothetical

(5% return before

expenses)**

1,000.00

1,012.87

12.35



^ Excluding interest expense and dividends on short positions, your actual expenses would be $11.25.
** Excluding interest expense and dividends on short positions, your hypothetical expenses would be $12.35.
+ Expenses are equal to the Portfolio's annualized expense ratio, including interest expense and dividends on short
positions, of 2.44%, multiplied by the average account value over the period, multiplied by 184/366. If interest expense
and dividends on short positions were excluded, the annualized expense ratio would have been 2.44%.

Underlying Funds Trust

Expense Example – December 31, 2008 (Unaudited) (continued)

The Deep Value Hedged Income-1 Portfolio

Expenses

Beginning

Ending

Paid

Account

During

Value

Period

7/1/08

12/31/08

7/1/08-12/31/08+

Actual^

1,000.00

647.40

10.73

Hypothetical

(5% return before

expenses)**

1,000.00

1,012.12

13.10



^ Excluding interest expense and dividends on short positions, your actual expenses would be $9.90.
** Excluding interest expense and dividends on short positions, your hypothetical expenses would be $12.09.
+ Expenses are equal to the Portfolio's annualized expense ratio, including interest expense and dividends on short
positions, of 2.59%, multiplied by the average account value over the period, multiplied by 184/366. If interest expense
and dividends on short positions were excluded, the annualized expense ratio would have been 2.39%.

The Distressed Securities & Special Situations-1 Portfolio

Expenses

Beginning

Ending

Paid

Account

During

Value

Period

7/1/08

12/31/08

7/1/08-12/31/08+

Actual^

1,000.00

524.90

10.46

Hypothetical

(5% return before

expenses)**

1,000.00

1,011.41

13.80



^ Excluding interest expense and dividends on short positions, your actual expenses would be $9.05.
** Excluding interest expense and dividends on short positions, your hypothetical expenses would be $11.94.
+ Expenses are equal to the Portfolio's annualized expense ratio, including interest expense and dividends on short
positions, of 2.73%, multiplied by the average account value over the period, multiplied by 184/366. If interest expense
and dividends on short positions were excluded, the annualized expense ratio would have been 2.36%.

Underlying Funds Trust

Expense Example – December 31, 2008 (Unaudited) (continued)

The Energy & Natural Resources-1 Portfolio

Expenses

Beginning

Ending

Paid

Account

During

Value

Period

7/1/08

12/31/08

7/1/08-12/31/08+

Actual^

1,000.00

495.80

8.61

Hypothetical

(5% return before

expenses)**

1,000.00

1,013.62

11.59



^ Excluding interest expense and dividends on short positions, your actual expenses would be $8.50.
** Excluding interest expense and dividends on short positions, your hypothetical expenses would be $11.44.
+ Expenses are equal to the Portfolio's annualized expense ratio, including interest expense and dividends on short
positions, of 2.29%, multiplied by the average account value over the period, multiplied by 184/366. If interest expense
and dividends on short positions were excluded, the annualized expense ratio would have been 2.26%.

The Global Hedged Income-1 Portfolio

Expenses

Beginning

Ending

Paid

Account

During

Value

Period

7/1/08

12/31/08

7/1/08-12/31/08+

Actual^

1,000.00

658.50

10.80

Hypothetical

(5% return before

expenses)**

1,000.00

1,012.12

13.10



^ Excluding interest expense and dividends on short positions, your actual expenses would be $10.17.
** Excluding interest expense and dividends on short positions, your hypothetical expenses would be $12.35.
+ Expenses are equal to the Portfolio's annualized expense ratio, including interest expense and dividends on short
positions, of 2.59%, multiplied by the average account value over the period, multiplied by 184/366. If interest expense
and dividends on short positions were excluded, the annualized expense ratio would have been 2.44%.

Underlying Funds Trust

Expense Example – December 31, 2008 (Unaudited) (continued)

The Long/Short Equity―Deep Discount Value-1 Portfolio

Expenses

Beginning

Ending

Paid

Account

During

Value

Period

7/1/08

12/31/08

7/1/08-12/31/08+

Actual^

1,000.00

839.10

12.25

Hypothetical

(5% return before

expenses)**

1,000.00

1,011.81

13.40



^ Excluding interest expense and dividends on short positions, your actual expenses would be $10.73.
** Excluding interest expense and dividends on short positions, your hypothetical expenses would be $11.74.
+ Expenses are equal to the Portfolio's annualized expense ratio, including interest expense and dividends on short
positions, of 2.65%, multiplied by the average account value over the period, multiplied by 184/366. If interest expense
and dividends on short positions were excluded, the annualized expense ratio would have been 2.32%.

The Long/Short Equity―Earnings Revision-1 Portfolio

Expenses

Beginning

Ending

Paid

Account

During

Value

Period

7/1/08

12/31/08

7/1/08-12/31/08+

Actual^

1,000.00

954.00

20.38

Hypothetical

(5% return before

expenses)**

1,000.00

1,004.27

20.91



^ Excluding interest expense and dividends on short positions, your actual expenses would be $12.72.
** Excluding interest expense and dividends on short positions, your hypothetical expenses would be $13.10.
+ Expenses are equal to the Portfolio's annualized expense ratio, including interest expense and dividends on short
positions, of 4.15%, multiplied by the average account value over the period, multiplied by 184/366. If interest expense
and dividends on short positions were excluded, the annualized expense ratio would have been 2.59%.

Underlying Funds Trust

Expense Example – December 31, 2008 (Unaudited) (continued)

The Long/Short Equity—Growth-1 Portfolio

Expenses

Beginning

Ending

Paid

Account

During

Value

Period

7/1/08

12/31/08

7/1/08-12/31/08+

Actual^

1,000.00

823.60

11.55

Hypothetical

(5% return before

expenses)**

1,000.00

1,012.47

12.75



^ Excluding interest expense and dividends on short positions, your actual expenses would be $10.41.
** Excluding interest expense and dividends on short positions, your hypothetical expenses would be $11.49.
+ Expenses are equal to the Portfolio's annualized expense ratio, including interest expense and dividends on short
positions, of 2.52%, multiplied by the average account value over the period, multiplied by 184/366. If interest expense
and dividends on short positions were excluded, the annualized expense ratio would have been 2.27%.

The Long/Short Equity—Healthcare/Biotech-1 Portfolio

Expenses

Beginning

Ending

Paid

Account

During

Value

Period

7/1/08

12/31/08

7/1/08-12/31/08+

Actual^

1,000.00

918.00

14.75

Hypothetical

(5% return before

expenses)**

1,000.00

1,009.75

15.46



^ Excluding interest expense and dividends on short positions, your actual expenses would be $11.62.
** Excluding interest expense and dividends on short positions, your hypothetical expenses would be $12.19.
+ Expenses are equal to the Portfolio's annualized expense ratio, including interest expense and dividends on short
positions, of 3.06%, multiplied by the average account value over the period, multiplied by 184/366. If interest expense
and dividends on short positions were excluded, the annualized expense ratio would have been 2.41%.

Underlying Funds Trust

Expense Example – December 31, 2008 (Unaudited) (continued)

The Long/Short Equity—International-1 Portfolio

Expenses

Beginning

Ending

Paid

Account

During

Value

Period

7/1/08

12/31/08

7/1/08-12/31/08+

Actual^

1,000.00

874.50

16.59

Hypothetical

(5% return before

expenses)**

1,000.00

1,007.44

17.76



^ Excluding interest expense and dividends on short positions, your actual expenses would be $11.59.
** Excluding interest expense and dividends on short positions, your hypothetical expenses would be $12.45.
+ Expenses are equal to the Portfolio's annualized expense ratio, including interest expense and dividends on short
positions, of 3.52%, multiplied by the average account value over the period, multiplied by 184/366. If interest expense
and dividends on short positions were excluded, the annualized expense ratio would have been 2.46%.

The Long/Short Equity—Momentum-1 Portfolio

Expenses

Beginning

Ending

Paid

Account

During

Value

Period

7/1/08

12/31/08

7/1/08-12/31/08+

Actual^……………

1,000.00

928.80

19.44

Hypothetical

(5% return before

expenses)**…….

1,000.00

1,004.98

20.21



^ Excluding interest expense and dividends on short positions, your actual expenses would be $12.17.
** Excluding interest expense and dividends on short positions, your hypothetical expenses would be $12.70.
+ Expenses are equal to the Portfolio's annualized expense ratio, including interest expense and dividends on short
positions, of 4.01%, multiplied by the average account value over the period, multiplied by 184/366. If interest expense
and dividends on short positions were excluded, the annualized expense ratio would have been 2.51%.

Underlying Funds Trust

Expense Example – December 31, 2008 (Unaudited) (continued)

The Long/Short Equity—REIT-1 Portfolio

Expenses

Beginning

Ending

Paid

Account

During

Value

Period

7/1/08

12/31/08

7/1/08-12/31/08+

Actual^

1,000.00

883.60

27.89

Hypothetical

(5% return before

expenses)**

1,000.00

995.53

29.54



^ Excluding interest expense and dividends on short positions, your actual expenses would be $12.03.
** Excluding interest expense and dividends on short positions, your hypothetical expenses would be $12.85.
+ Expenses are equal to the Portfolio's annualized expense ratio, including interest expense and dividends on short
positions, of 5.89%, multiplied by the average account value over the period, multiplied by 184/366. If interest expense
and dividends on short positions were excluded, the annualized expense ratio would have been 2.54%.

The Merger Arbitrage-1 Portfolio

Expenses

Beginning

Ending

Paid

Account

During

Value

Period

7/1/08

12/31/08

7/1/08-12/31/08+

Actual^

1,000.00

813.70

11.26

Hypothetical

(5% return before

expenses)**

1,000.00

1012.72

12.50



^ Excluding interest expense and dividends on short positions, your actual expenses would be $11.26.
** Excluding interest expense and dividends on short positions, your hypothetical expenses would be $12.50.
+ Expenses are equal to the Portfolio's annualized expense ratio, including interest expense and dividends on short
positions, of 2.47%, multiplied by the average account value over the period, multiplied by 184/366. If interest expense
and dividends on short positions were excluded, the annualized expense ratio would have been 2.47%.

Underlying Funds Trust
The Arbitrage-1 Portfolio (Convertible Bond)
Schedule of Investments
December 31, 2008

	Shares		Value
CONVERTIBLE PREFERRED STOCKS - 3.1%
Airlines - 2.0%
Continental Airlines Finance Trust II (a)		25,000	$	500,000
Oil, Gas & Consumable Fuels - 1.1%
El Paso Corp. (Acquired 08/27/2007 and 11/14/2007, Cost $549,094) (a)(b)		400		264,000
TOTAL CONVERTIBLE PREFERRED STOCKS (Cost $1,247,339)			$	764,000

	Principal
	Amount
CONVERTIBLE BONDS - 81.3%
Aerospace & Defense - 2.6%
Alliant Techsystems, Inc.
2.750%, 09/15/2011	$	150,000		147,375
L-3 Communications Holdings, Inc.
3.000%, 08/01/2035		400,000		398,000
Triumph Group, Inc.
2.625%, 10/01/2026		100,000		91,375
Total Aerospace & Defense				636,750

Beverages - 1.1%
Central European Distribution Corp.
3.000%, 03/15/2013		550,000		272,250
Biotechnology - 5.7%
Amgen, Inc.
0.125%, 02/01/2011		1,000,000		961,250
Incyte Corp. Ltd.
3.500%, 02/15/2011		500,000		265,625
Vertex Pharmaceuticals, Inc.
4.750%, 02/15/2013		140,000		191,450
Total Biotechnology				1,418,325

Capital Markets - 2.7%
Affiliated Managers Group, Inc.
3.950%, 08/15/2038 (Acquired 07/31/2008, Cost $962,525) (b)		1,000,000		678,750
Commercial Services & Supplies - 0.6%
Waste Connections, Inc.
3.750%, 04/01/2026		150,000		160,500
Communications Equipment - 2.4%
ADC Telecommunications, Inc. - Class B
2.698%, 06/15/2013 (c)		190,000		85,500
Ciena Corp.
0.250%, 05/01/2013		1,000,000		505,000
Total Communications Equipment				590,500

Containers & Packaging - 1.8%
Sealed Air Corp.
3.000%, 06/30/2033 (Acquired 10/16/2007 and 01/29/2008, Cost $491,020) (b)	500,000	450,000
Diversified Financial Services - 0.4%
Leucadia National Corp.
3.750%, 04/15/2014	100,000	98,500
Diversified Telecommunication Services - 1.5%
Global Crossing Ltd.
5.000%, 05/15/2011	400,000	248,500
Qwest Communications International, Inc.
3.500%, 11/15/2025	150,000	126,187
Total Diversified Telecommunication Services		374,687

Electric Utilities - 1.1%
Unisource Energy Corp.
4.500%, 03/01/2035	300,000	271,875
Electronic Equipment, Instruments & Components - 2.0%
Anixter International, Inc.
1.000%, 02/15/2013	500,000	311,875
Itron, Inc.
2.500%, 08/01/2026	100,000	107,250
Tech Data Corp.
2.750%, 12/15/2026	100,000	73,000
Total Electronic Equipment, Instruments & Components		492,125

Energy Equipment & Services - 14.3%
Cameron International Corp.
2.500%, 06/15/2026 (Acquired 05/23/2006 and 05/30/2006, Cost $749,895) (b)	750,000	740,625
2.500%, 06/15/2026	250,000	246,875
Hanover Compressor Co.
4.750%, 01/15/2014	300,000	192,750
Helix Energy Solutions Group, Inc.
3.250%, 12/15/2025	200,000	88,250
Hornbeck Offshore Services, Inc.
1.625%, 11/15/2026 (c)	1,000,000	549,400
SEACOR Holdings, Inc.
2.875%, 12/15/2024	100,000	100,875
SESI LLC
1.500%, 12/15/2026 (Acquired 12/21/2006 and 04/11/2007, Cost $1,008,665) (b) (c)	1,000,000	673,750
Transocean Ltd.
1.500%, 12/15/2037	1,100,000	847,000
Trico Marine Services, Inc.
3.000%, 01/15/2027	400,000	107,000
Total Energy Equipment & Services		3,546,525

Food Products - 4.2%
Archer-Daniels-Midland Co.
0.875%, 02/15/2014 (Acquired 02/16/2007 and 04/10/07, Cost $1,025,285) (b)	1,000,000	975,000
Smithfield Foods, Inc.
4.000%, 06/30/2013	100,000	73,500
Total Food Products		1,048,500

Health Care Equipment & Supplies - 4.5%
American Medical Systems Holdings, Inc.
3.250%, 07/01/2036	150,000	101,437
Conceptus, Inc.
2.250%, 02/15/2027	1,000,000	638,750
Greatbatch, Inc.
2.250%, 06/15/2013	200,000	171,500
Kinetic Concepts, Inc.
3.250%, 04/15/2015 (Acquired 10/31/2008, Cost $63,168) (b)	100,000	55,000
SonoSite, Inc.
3.750%, 07/15/2014	100,000	71,125
Wright Medical Group, Inc.
2.625%, 12/01/2014	100,000	76,875
Total Health Care Equipment & Supplies		1,114,687

Health Care Providers & Services - 2.3%
Henry Schein, Inc.
3.000%, 08/15/2034	150,000	148,125
LifePoint Hospitals, Inc.
3.500%, 05/15/2014	100,000	67,625
PSS World Medical, Inc.
3.125%, 08/01/2014 (Acquired 07/30/2008, Cost $350,374) (b)	350,000	345,188
Total Health Care Providers & Services		560,938

Hotels, Restaurants & Leisure - 4.7%
Morgans Hotel Group Co.
2.375%, 10/15/2014 (Acquired 07/25/2008, Cost $781,725) (b)	1,000,000	301,250
Scientific Games Corp.
0.750%, 12/01/2024 (c)	1,000,000	861,250
Total Hotels, Restaurants & Leisure		1,162,500

Insurance - 1.3%
American Equity Investment Life Holding Co.
5.250%, 12/06/2024	500,000	313,750
Internet Software & Services - 2.6%
SAVVIS, Inc.
3.000%, 05/15/2012	1,500,000	637,500
IT Services - 0.4%
DST Systems, Inc. - Class B
3.625%, 08/15/2023	100,000	87,500
Life Sciences Tools & Services - 5.8%
Charles River Laboratories International, Inc.
2.250%, 06/15/2013	150,000	116,063
Kendle International, Inc.
3.375%, 07/15/2012	1,400,000	1,071,000
Life Technologies Corp.
3.250%, 06/15/2025	100,000	85,000
Millipore Corp.
3.750%, 06/01/2026	200,000	174,500
Total Life Sciences Tools & Services		1,446,563

Machinery - 0.7%
Albany International Corp.
2.250%, 03/15/2026 (c)	300,000	166,875
Media - 2.0%
Interpublic Group of Companies, Inc.
4.250%, 03/15/2023	450,000	291,937
Liberty Media LLC
3.125%, 03/30/2023 (c)	150,000	107,625
Lions Gate Entertainment Corp.
3.625%, 03/15/2025 (c)	150,000	95,438
Total Media		495,000

Oil, Gas & Consumable Fuels - 1.1%
Chesapeake Energy Corp.
2.250%, 12/15/2038	200,000	89,750
Penn Virginia Corp.
4.500%, 11/15/2012	100,000	72,500
St. Mary Land & Exploration Co.
3.500%, 04/01/2027	150,000	103,313
Total Oil, Gas & Consumable Fuels		265,563

Pharmaceuticals - 1.9%
Endo Pharmaceuticals Holdings, Inc.
1.750%, 04/15/2015 (Acquired 04/10/2008, Cost $306,776) (b)	300,000	287,625
Mylan, Inc.
3.750%, 09/15/2015 (Acquired 09/10/2008, Cost $100,006) (b)	100,000	90,500
Watson Pharmaceuticals, Inc.
1.750%, 03/15/2023 (c)	100,000	93,000
Total Pharmaceuticals		471,125

Professional Services - 1.9%
CBIZ, Inc.
3.125%, 06/01/2026	100,000	91,375
School Specialty, Inc.
3.750%, 11/30/2026	550,000	383,625
Total Professional Services		475,000

Semiconductors & Semiconductor Equipment - 4.9%
Diodes, Inc.
2.250%, 10/01/2026	1,000,000	618,750
PMC - Sierra, Inc.
2.250%, 10/15/2025	750,000	608,437
Total Semiconductors & Semiconductor Equipment		1,227,187

Software - 1.6%
Blackboard, Inc.
3.250%, 07/01/2027	500,000	396,250
Specialty Retail - 1.4%
Best Buy Co., Inc.
2.250%, 01/15/2022	200,000	178,500
Penske Auto Group, Inc.
3.500%, 04/01/2026	300,000	167,625
Total Specialty Retail		346,125

Trading Companies & Distributors - 0.3%
United Rentals North America, Inc.
1.875%, 10/15/2023		100,000		70,625
Wireless Telecommunication Services - 3.5%
NII Holdings, Inc.
2.750%, 08/15/2025		1,000,000		866,250
TOTAL CONVERTIBLE BONDS (Cost $28,833,434)			$	20,142,725

PURCHASED OPTIONS - 0.0%
Call Options - 0.0%
Intel Corp.
Expiration: January 2009, Exercise Price: $25.00		100		100
TOTAL PURCHASED OPTIONS (Cost $25,256)			$	100

Total Investments (Cost $30,106,029) - 84.4%			$	20,906,825

REPURCHASE AGREEMENTS - 10.3%
J.P. Morgan
0.050%, dated 12/31/2008, due 01/02/2009
repurchase price $2,564,193 (d)	$	2,564,186	$	2,564,186
TOTAL REPURCHASE AGREEMENTS (Cost $2,564,186)			$	2,564,186

Other Assets in Excess of Liabilities - 5.3%				1,318,412
TOTAL NET ASSETS - 100.0%			$	24,789,423

Underlying Funds Trust
Financial Highlights

	The Arbitrage-1 Portfolio (Convertible Bond)
	Year Ended December 31, 2008			Year Ended December 31, 2007			Period from April 28, 2006* to December 31, 2006
Per Share Data:(1)
Net Asset Value, Beginning of Period	$	10.07		$	9.94		$	10.00

Gain (Loss) from Investment Operations:

Net investment income (loss) (2)(3)		0.01			0.12			0.10
Net realized and unrealized gain (loss) on investments		(1.68	)		0.28			0.07
Total Gain from Investment Operations		(1.67	)		0.40			0.17

Less Dividends and Distributions:
Net investment income		(0.00	) (7)		(0.24	)		(0.12	)
Net realized gains		-			(0.03	)		(0.11	)
Return of capital		-			-			-
Total Dividends and Distributions		-			(0.27	)		(0.23	)
Net Asset Value, End of Period
	$	8.40		$	10.07		$	9.94

Total Return		(16.55	%)		3.93	%		1.56	% (4)


Ratios/Supplemental Data:
Net assets (000's omitted), end of period		$24,789			$69,263			$21,672

Ratio of expenses including interest on short positions
and interest expense to average net assets:		2.70	% (6)		2.79	% (6)		4.73	% (5)

Ratio of expenses excluding interest on short positions
and interest expense to average net assets:		2.46	% (6)		2.60	% (6)		3.00	% (5)

Ratio of net investment income including interest on short
positions and interest expense to average net assets:		0.17	%		0.79	%		1.29	% (5)

Ratio of interest expense and interest on short positions
to average net assets:		0.24	%		0.19	%		1.73	% (5)

Portfolio turnover rate		64	%		80	%		98	% (4)

(1) Information presented relates to a share of capital stock outstanding for the entire period.
(2) Net Investment Income (loss) per share represents net investment income (loss) divided by the average shares outstanding throughout the period.
(3) For the periods ended December 31, 2008, December 31, 2007 and December 31, 2006, net investment income (loss) per share before interest expense
and interest on short positions was $0.04, $0.14 and $0.22, respectively.
(4) Not Annualized.
(5) Annualized.
(6) The ratio shown here reflects the expenses of the Fund net of any adjustments to the Investment Advisory Fees. See Note 5 of the Notes to Financial
Statements.
(7) Amount calculated is less than $0.005.
* Commencement of Fund-of-Funds structure. See Note 1 of the Notes to Financial Statements.

The accompanying notes are an integral part of these financial statements. 159

Underlying Funds Trust
Financial Highlights

	The Arbitrage-2 Portfolio (Fixed Income)
	Year Ended December 31, 2008			Year Ended December 31, 2007			Period from April 28, 2006* to December 31, 2006
Per Share Data:(1)
Net Asset Value, Beginning of Period	$	8.74		$	10.09		$	10.00

Gain (Loss) from Investment Operations:

Net investment income (loss) (2)(3)		0.16			0.44			0.35
Net realized and unrealized gain (loss) on investments		(1.34	)		0.54			0.52
Total Gain from Investment Operations		(1.18	)		0.98			0.87

Less Dividends and Distributions:
Net investment income		-			(0.34	)		(0.78	)
Net realized gains		-			(1.96	)		-
Return of capital		-			(0.03	)		-
Total Dividends and Distributions		-			(2.33	)		(0.78	)
Net Asset Value, End of Period
	$	7.56		$	8.74		$	10.09

Total Return		(13.50	%)		9.76	%		8.67	% (4)


Ratios/Supplemental Data:
Net assets (000's omitted), end of period		$52,448			$69,132			$40,515

Ratio of expenses including interest on short positions
and interest expense to average net assets:		2.41	% (6)		2.61	% (6)		3.37	% (5)

Ratio of expenses excluding interest on short positions
and interest expense to average net assets:		2.41	% (6)		2.61	% (6)		3.00	% (5)

Ratio of net investment income including interest on short
positions and interest expense to average net assets:		1.86	%		3.94	%		4.89	% (5)

Ratio of interest expense and interest on short positions
to average net assets:		0.00	%		0.00	%		0.37	% (5)

Portfolio turnover rate		926	%		43	%		61	% (4)

(1) Information presented relates to a share of capital stock outstanding for the entire period.
(2) Net Investment Income (loss) per share represents net investment income (loss) divided by the average shares outstanding throughout the period.
(3) For the periods ended December 31, 2008, December 31, 2007 and December 31, 2006, net investment income (loss) per share before interest expense
and interest on short positions was $0.16, $0.44 and $0.38, respectively.
(4) Not Annualized.
(5) Annualized.
(6) The ratio shown here reflects the expenses of the Fund net of any adjustments to the Investment Advisory Fees. See Note 5 of the Notes to Financial
Statements.
* Commencement of Fund-of-Funds structure. See Note 1 of the Notes to Financial Statements.

The accompanying notes are an integral part of these financial statements. 160

Underlying Funds Trust
Financial Highlights

	The Deep Value Hedged Income-1 Portfolio
	Year Ended December 31, 2008			Period from May 1, 2007(6) to December 31, 2007
Per Share Data:(1)
Net Asset Value, Beginning of Period	$	9.83			$	10.00

Gain (Loss) from Investment Operations:

Net investment income (loss) (2)(3)		0.84				0.43
Net realized and unrealized gain (loss) on investments		(4.88	)			(0.35	)
Total Gain from Investment Operations		(4.04	)			0.08

Less Dividends and Distributions:
Net investment income		(0.53	)			(0.25	)
Net realized gains		-				-
Return of capital		-				-
Total Dividends and Distributions		(0.53	)			(0.25	)
Net Asset Value, End of Period
	$	5.26			$	9.83

Total Return		(41.70	%)			0.80	% (4)


Ratios/Supplemental Data:
Net assets (000's omitted), end of period		$45,530				$81,351

Ratio of expenses including interest on short positions
and interest expense to average net assets:		2.72	% (7)			2.78	% (5)(7)

Ratio of expenses excluding interset on short positions
and interest expense to average net assets:		2.39	% (7)			2.60	% (5)(7)

Ratio of net investment income including interest on short
positions and interest expense to average net assets:		10.00	%			5.71	% (5)

Ratio of interest expense and interest on short positions
to average net assets:		0.33	%			0.18	% (5)

Portfolio turnover rate		44	%			8	% (4)

(1) Information presented relates to a share of capital stock outstanding for the entire period.
(2) Net Investment Income (loss) per share represents net investment income (loss) divided by the average shares outstanding throughout the period.
(3) For the periods ended December 31, 2008 and December 31, 2007, net investment income (loss) per share before interest expense
and interest on short positions was $0.87 and $0.44, respectively.
(4) Not Annualized.
(5) Annualized.
(6) Commencement of operations for The Deep Value Hedged Income-1 Portfolio was May 1, 2007.
(7) The ratio shown here reflects the expenses of the Fund net of any adjustments to the Investment Advisory Fees. See Note 5 of the Notes to Financial
Statements.

The accompanying notes are an integral part of these financial statements. 161

Underlying Funds Trust
Financial Highlights

	The Distressed Securities & Special Situations-1 Portfolio
	Year Ended December 31, 2008			Year Ended December 31, 2007			Period from April 28, 2006* to December 31, 2006
Per Share Data:(1)
Net Asset Value, Beginning of Period	$	9.09		$	9.51		$	10.00

Gain (Loss) from Investment Operations:

Net investment income (loss) (2)(3)		0.40			0.12			0.02
Net realized and unrealized gain (loss) on investments		(4.57	)		0.79			(0.01	)
Total Gain from Investment Operations		(4.17	)		0.91			0.01

Less Dividends and Distributions:
Net investment income		(0.00	) (7)		(0.13	)		(0.03	)
Net realized gains		(0.01	)		(1.20	)		(0.47	)
Total Dividends and Distributions		(0.01	)		(1.33	)		(0.50	)

	$	4.91		$	9.09		$	9.51
Net Asset Value, End of Period

Total Return		(45.90	%)		9.93	%		0.18	% (4)


Ratios/Supplemental Data:
Net assets (000's omitted), end of period		$43,229			$92,486			$57,421

Ratio of expenses including interest on short positions
and interest expense to average net assets:		2.71	% (6)		2.96	% (6)		4.23	% (5)

Ratio of expenses excluding interest on short positions
and interest expense to average net assets:		2.38	% (6)		2.62	% (6)		3.00	% (5)

Ratio of net investment income (loss) including interest on short
positions and interest expense to average net assets:		4.84	%		0.81	%		0.20	% (5)

Ratio of interest expense and interest on short positions
to average net assets:		0.33	%		0.34	%		1.23	% (5)

Portfolio turnover rate		219	%		194	%		74	% (4)

(1) Information presented relates to a share of capital stock outstanding for the entire period.
(2) Net Investment Income (loss) per share represents net investment income (loss) divided by the average shares outstanding throughout the period.
(3) For the periods ended December 31, 2008, December 31, 2007 and December 31, 2006, net investment income (loss) per share before interest expense and
interest on short positions was $0.43, $0.16 and $0.10, respectively.
(4) Not Annualized.
(5) Annualized.
(6) The ratio shown reflects the expenses of the Fund net of any adjustments to the Investment Advisory Fees. See Note 5 of the Notes to Financial
Statements.
(7) Amount calculated is less than $0.005.
* Commencement of Fund-of-Funds structure. See Note 1 of the Notes to Financial Statements.

The accompanying notes are an integral part of these financial statements. 162

Underlying Funds Trust
Financial Highlights

	The Energy & Natural Resources-1 Porfolio
	Period from January 2, 2008(6) to December 31, 2008
Per Share Data:(1)
Net Asset Value, Beginning of Period	$	10.00

Gain (Loss) from Investment Operations:

Net investment income (loss) (2)(3)		0.15
Net realized and unrealized gain (loss) on investments		(5.48	)
Total Gain from Investment Operations		(5.33	)

Less Dividends and Distributions:
Net investment income		-
Net realized gains		-
Total Dividends and Distributions		-

	$	4.67
Net Asset Value, End of Period

Total Return		(53.30	%) (4)


Ratios/Supplemental Data:
Net assets (000's omitted), end of period		$31,319

Ratio of expenses including dividends on short positions
and interest expense to average net assets:		2.37	% (5)(7)

Ratio of expenses excluding dividends on short positions
and interest expense to average net assets:		2.34	% (5)(7)

Ratio of net investment income (loss) including dividends on short
positions and interest expense to average net assets:		1.96	% (5)

Ratio of interest expense and dividends on short positions
to average net assets:		0.03	% (5)

Portfolio turnover rate		356	% (4)

(1) Information presented relates to a share of capital stock outstanding for the entire period.
(2) Net Investment Income (loss) per share represents net investment income (loss) divided by the average shares outstanding throughout the period.
(3) For the period ended December 31, 2008, net investment income (loss) per share before interest expense and dividends on short positions was $0.15 for
The Energy & Natural Resources-1 Portfolio.
(4) Not Annualized.
(5) Annualized.
(6) Commencement of operations for The Energy & Natural Resources-1 Portfolio was January 2, 2008.
(7) The ratio shown reflects the expenses of the Fund net of any adjustments to the Investment Advisory Fees. See Note 5 of the Notes to Financial
Statements.

The accompanying notes are an integral part of these financial statements. 163

Underlying Funds Trust
Financial Highlights

	The Global Hedged Income-1 Portfolio
	Year Ended December 31, 2008			Year Ended December 31, 2007			Period from May 24, 2006(7) to December 31, 2006
Per Share Data:(1)
Net Asset Value, Beginning of Period	$	10.21		$	10.12		$	10.00

Gain (Loss) from Investment Operations:

Net investment income (loss) (2)(3)		0.58			0.57			0.18
Net realized and unrealized gain (loss) on investments		(4.08	)		(0.21	)		0.07
Total Loss from Investment Operations		(3.50	)		0.36			0.25

Less Dividends and Distributions:
Net investment income		-			(0.27	)		(0.13	)
Net realized gains		-			-			-
Total Dividends and Distributions		-			(0.27	)		(0.13	)

Net Asset Value, End of Period	$	6.71		$	10.21		$	10.12

Total Return		(34.28	%)		3.57	%		2.55	% (4)


Ratios/Supplemental Data:
Net assets (000's omitted), end of period		$33,816			$78,465			$13,765

Ratio of expenses including dividends and interest on short
positions and interest expense to average net assets:		2.52	% (6)		2.87	% (6)		4.34	% (5)

Ratio of expenses excluding dividends and interest on short
positions and interest expense to average net assets:		2.45	% (6)		2.60	% (6)		3.00	% (5)

Ratio of net investment income (loss) including dividends and interest
on short positions and interest expense to average net assets:		5.98	%		5.13	%		2.77	% (5)

Ratio of interest expense and dividends and interest on short
positions to average net assets:		0.07	%		0.27	%		1.34	% (5)

Portfolio turnover rate		60	%		182	%		152	% (4)

(1) Information presented relates to a share of capital stock outstanding for the entire period.
(2) Net Investment Income (loss) per share represents net investment income (loss) divided by the average shares outstanding throughout the period.
(3) For the periods ended December 31, 2008, December 31, 2007 and December 31, 2006, net investment income (loss) per share before interest expense and
dividends and interest on short positions was $0.57, $0.60 and $0.26, respectively
(4) Not Annualized.
(5) Annualized.
(6) The ratio shown here reflects the expenses of the Fund net of any adjustments to the Investment Advisory Fees. See Note 5 of the Notes to Financial
Statements.
(7) Commencement of operations for The Global Hedged Income-1 Portfolio was May 24, 2006.

The accompanying notes are an integral part of these financial statements. 164

Underlying Funds Trust
Financial Highlights

	The Long/Short Equity―Deep Discount Value-1 Portfolio
	Year Ended December 31, 2008			Year Ended December 31, 2007			Period from April 28, 2006* to December 31, 2006
Per Share Data:(1)
Net Asset Value, Beginning of Period	$	8.40		$	8.53		$	10.00

Gain (Loss) from Investment Operations:

Net investment income (loss) (2)(3)		(0.07	)		(0.08	)		(0.06	)
Net realized and unrealized gain (loss) on investments		(2.02	)		(0.02	)		(1.38	)
Total Loss from Investment Operations		(2.09	)		(0.10	)		(1.44	)

Less Dividends and Distributions:
Net investment income		-			-			-
Net realized gains		-			(0.03	)		(0.03	)
Total Dividends and Distributions		-			(0.03	)		(0.03	)

Net Asset Value, End of Period	$	6.31		$	8.40		$	8.53

Total Return		(24.88	%)		(1.07	%)		(14.36	%) (4)


Ratios/Supplemental Data:
Net assets (000's omitted), end of period		$22,272			$49,014			$26,673

Ratio of expenses including dividends and interest on short
positions and interest expense to average net assets:		2.69	% (6)		3.26	% (6)		4.18	% (5)

Ratio of expenses excluding dividends and interest on short
positions and interest expense to average net assets:		2.30	% (6)		2.53	% (6)		3.00	% (5)

Ratio of net investment income (loss) including dividends and interest
on short positions and interest expense to average net assets:		(0.90	%)		(1.41	%)		(1.28	%) (5)

Ratio of interest expense and dividends and interest on short
positions to average net assets:		0.39	%		0.73	%		1.18	% (5)

Portfolio turnover rate		292	%		346	%		323	% (4)

(1) Information presented relates to a share of capital stock outstanding for the entire period.
(2) Net Investment Income (loss) per share represents net investment income (loss) divided by the average shares outstanding throughout the period.
(3) For the periods ended December 31, 2008, December 31, 2007 and December 31, 2006, net investment income (loss) per share before interest expense and
dividends and interest on short positions was ($0.04), ($0.02) and $0.01, recpectively.
(4) Not Annualized.
(5) Annualized.
(6) The ratio shown here reflects the expenses of the Fund net of any adjustments to the Investment Advisory Fees. See Note 5 of the Notes to Financial
Statements.
* Commencement of Fund-of-Funds structure. See Note 1 of the Notes to Financial Statements.

The accompanying notes are an integral part of these financial statements. 165

Underlying Funds Trust
Financial Highlights

	The Long/Short Equity―Earnings Revision-1 Portfolio
	Year Ended December 31, 2008			Year Ended December 31, 2007			Period from April 28, 2006* to December 31, 2006
Per Share Data:(1)
Net Asset Value, Beginning of Period	$	12.02		$	10.02		$	10.00

Gain (Loss) from Investment Operations:

Net investment income (loss) (2)(3)		(0.15	)		0.20			0.12
Net realized and unrealized gain (loss) on investments		0.38			1.97			0.01
Total Loss from Investment Operations		0.23			2.17			0.13

Less Dividends and Distributions:
Net investment income		-			(0.17	)		(0.11	)
Net realized gains		-			-			-
Total Dividends and Distributions		-			(0.17	)		(0.11	)

Net Asset Value, End of Period	$	12.25		$	12.02		$	10.02

Total Return		1.91	%		21.55	%		1.28	% (4)


Ratios/Supplemental Data:
Net assets (000's omitted), end of period		$21,908			$60,594			$28,043

Ratio of expenses including dividends on short positions
and interest expense to average net assets:		4.02	% (6)		3.84	% (6)		4.20	% (5)

Ratio of expenses excluding dividends on short positions
and interest expense to average net assets:		2.56	% (6)		2.63	% (6)		3.00	% (5)

Ratio of net investment income (loss) including dividends on short
positions and interest expense to average net assets:		(1.21	%)		1.51	%		1.53	% (5)

Ratio of interest expense and dividends on short positions
to average net assets:		1.46	%		1.21	%		1.20	% (5)

Portfolio turnover rate		122	%		81	%		54	% (4)

(1) Information presented relates to a share of capital stock outstanding for the entire period.
(2) Net Investment Income (loss) per share represents net investment income (loss) divided by the average shares outstanding throughout the period.
(3) For the periods ended December 31, 2008, December 31, 2007 and December 31, 2006, net investment income (loss) per share before interest expense and
dividends on short positions was $0.03, $0.34 and $0.20, respectively.
(4) Not Annualized.
(5) Annualized.
(6) The ratio shown here reflects the expenses of the Fund net of any adjustments to the Investment Advisory Fees. See Note 5 of the Notes to Financial
Statements.
* Commencement of Fund-of-Funds structure. See Note 1 of the Notes to Financial Statements.

The accompanying notes are an integral part of these financial statements. 166

Underlying Funds Trust
Financial Highlights

	The Long/Short Equity―Growth-1 Portfolio
	Year Ended December 31, 2008			Period from August 20, 2007(7) to December 31, 2007
Per Share Data:(1)
Net Asset Value, Beginning of Period	$	10.07		$	10.00

Gain (Loss) from Investment Operations:

Net investment income (loss) (2)(3)		(0.10	)		(0.00	)(6)
Net realized and unrealized gain (loss) on investments		(2.36	)		0.07
Total Gain (Loss) from Investment Operations		(2.46	)		0.07

Less Dividends and Distributions:
Net investment income		-			-
Net realized gains		-			-
Total Dividends and Distributions		-			-

Net Asset Value, End of Period	$	7.61		$	10.07

Total Return		(24.43	%)		0.70	% (4)


Ratios/Supplemental Data:
Net assets (000's omitted), end of period		$15,279			$59,610

Ratio of expenses including dividends on short positions
and interest expense to average net assets:		2.64	% (8)		2.75	% (5)(8)

Ratio of expenses excluding dividends on short positions
and interest expense to average net assets:		2.36	% (8)		2.53	% (5)(8)

Ratio of net investment income (loss) including dividends on short
positions and interest expense to average net assets:		(1.13	%)		(0.56	%) (5)

Ratio of interest expense and dividends on short positions
to average net assets:		0.28	%		0.22	% (5)

Portfolio turnover rate		364	%		74	% (4)

(1) Information presented relates to a share of capital stock outstanding for the entire period.
(2) Net Investment Income (loss) per share represents net investment income (loss) divided by the average shares outstanding throughout the period.
(3) For the periods ended December 31, 2008 and December 31, 2007, net investment income (loss) per share before interest expense and dividends on
short positions was ($0.08) and $0.00, respectively.
(4) Not Annualized.
(5) Annualized.
(6) Amount calculated is less than $0.005.
(7) Commencement of operations for The Long/Short Equity―Growth-1 Portfolio was August 20, 2007.
(8) The ratio shown here reflects the expenses of the Fund net of any adjustments to the Investment Advisory Fees. See Note 5 of the Notes to Financial
Statements.

The accompanying notes are an integral part of these financial statements. 167

Underlying Funds Trust
Financial Highlights

	The Long/Short Equity―Healthcare/Biotech-1 Portfolio
	Year Ended December 31, 2008			Year Ended December 31, 2007			Period from September 25, 2006(7) to December 31, 2006
Per Share Data:(1)
Net Asset Value, Beginning of Period	$	9.73		$	9.89		$	10.00

Gain (Loss) from Investment Operations:

Net investment income (loss) (2)(3)		(0.13	)		0.18			0.04
Net realized and unrealized gain (loss) on investments		(0.91	)		(0.09	)		0.34
Total Gain (Loss) from Investment Operations		(1.04	)		0.09			0.38

Less Dividends and Distributions:
Net investment income		(0.00	) (8)		(0.13	)		(0.04	)
Net realized gains		(0.14	)		(0.12	)		(0.45	)
Total Dividends and Distributions		(0.14	)		(0.25	)		(0.49	)

Net Asset Value, End of Period	$	8.55		$	9.73		$	9.89

Total Return		(10.65	%)		0.94	%		3.83	% (4)


Ratios/Supplemental Data:
Net assets (000's omitted), end of period		$10,335			$33,267			$10,430

Ratio of expenses including dividends on short positions
and interest expense to average net assets:		3.11	% (6)		2.71	% (6)		3.04	% (5)

Ratio of expenses excluding dividends on short positions
and interest expense to average net assets:		2.42	% (6)		2.60	% (6)		3.00	% (5)

Ratio of net investment income (loss) including dividends on short
positions and interest expense to average net assets:		(1.39	%)		1.45	%		1.43	% (5)

Ratio of interest expense and dividends on short positions
to average net assets:		0.69	%		0.11	%		0.04	% (5)

Portfolio turnover rate		617	%		212	%		76	% (4)

(1) Information presented relates to a share of capital stock outstanding for the entire period.
(2) Net Investment Income (loss) per share represents net investment income (loss) divided by the average shares outstanding throughout the period.
(3) For the periods ended December 31, 2008, December 31, 2007 and December 31, 2006, net investment income (loss) per share before interest expense and
dividends on short positions was ($0.06), $0.20 and $0.05, respectively.
(4) Not Annualized.
(5) Annualized.
(6) The ratio shown here reflects the expenses of the Fund net of any adjustments to the Investment Advisory Fees. See Note 5 of the Notes to Financial
Statements.
(7) Commencement of operations for The Long/Short Equity―Healthcare-1 Portfolio was September 25, 2006.
(8) Amount calculated is less than $0.005.

The accompanying notes are an integral part of these financial statements. 168

Underlying Funds Trust
Financial Highlights

	The Long/Short Equity―International-1 Portfolio
	Year Ended December 31, 2008			Year Ended December 31, 2007			Period from April 28, 2006* to December 31, 2006
Per Share Data:(1)
Net Asset Value, Beginning of Period	$	10.03		$	9.71		$	10.00

Gain (Loss) from Investment Operations:

Net investment income (loss) (2)(3)		(0.18	)		0.05			(0.03	)
Net realized and unrealized gain (loss) on investments		(1.14	)		0.74			(0.18	)
Total Gain (Loss) from Investment Operations		(1.32	)		0.79			(0.21	)

Less Dividends and Distributions:
Net investment income		-			-			-
Net realized gains		-			(0.46	)		(0.08	)
Return of capital		-			(0.01	)		-
Total Dividends and Distributions		-			(0.47	)		(0.08	)

Net Asset Value, End of Period	$	8.71		$	10.03		$	9.71

Total Return		(13.16	%)		8.09	%		(2.03	%) (4)


Ratios/Supplemental Data:
Net assets (000's omitted), end of period		$19,814			$54,541			$19,924

Ratio of expenses including dividends on short positions
and interest expense to average net assets:		5.23	% (6)		4.91	% (6)		6.01	% (5)

Ratio of expenses excluding dividends on short positions
and interest expense to average net assets:		2.45	% (6)		2.60	% (6)		3.00	% (5)

Ratio of net investment income including dividends on short
positions and interest expense to average net assets:		(1.90	%)		0.06	%		(0.66	%) (5)

Ratio of interest expense and dividends on short positions
to average net assets:		2.78	%		2.31	%		3.01	% (5)

Portfolio turnover rate		523	%		517	%		429	% (4)

(1) Information presented relates to a share of capital stock outstanding for the entire period.
(2) Net Investment Income (loss) per share represents net investment income (loss) divided by the average shares outstanding throughout the period.
(3) For the periods ended December 31, 2008, December 31, 2007 and December 31, 2006, net investment income (loss) per share before interest expense and
dividends on short positions was $0.08, $0.28 and $0.17, respectively.
(4) Not Annualized.
(5) Annualized.
(6) The ratio shown here reflects the expenses of the Fund net of any adjustments to the Investment Advisory Fees. See Note 5 of the Notes to Financial
Statements.
* Commencement of Fund-of-Funds structure. See Note 1 of the Notes to Financial Statements.

The accompanying notes are an integral part of these financial statements. 169

Underlying Funds Trust
Financial Highlights

	The Long/Short Equity―Momentum-1 Portfolio
	Year Ended December 31, 2008			Year Ended December 31, 2007			Period from April 28, 2006* to December 31, 2006
Per Share Data:(1)
Net Asset Value, Beginning of Period	$	10.10		$	9.16		$	10.00

Gain (Loss) from Investment Operations:

Net investment income (loss) (2)(3)		(0.13	)		0.16			0.12
Net realized and unrealized gain (loss) on investments		(0.18	)		0.89			(0.57	)
Total Gain (Loss) from Investment Operations		(0.31	)		1.05			(0.45	)

Less Dividends and Distributions:
Net investment income		-			(0.11	)		(0.12	)
Net realized gains		-			-			(0.27	)
Return of capital		-			-			-
Total Dividends and Distributions		-			(0.11	)		(0.39	)

Net Asset Value, End of Period	$	9.79		$	10.10		$	9.16

Total Return		(3.07	%)		11.51	%		(4.55	%) (4)


Ratios/Supplemental Data:
Net assets (000's omitted), end of period		$41,762			$81,258			$27,493

Ratio of expenses including dividends on short positions
and interest expense to average net assets:		3.98	% (6)		3.72	% (6)		4.15	% (5)

Ratio of expenses excluding dividends on short positions
and interest expense to average net assets:		2.48	% (6)		2.57	% (6)		3.00	% (5)

Ratio of net investment income including dividends on short
positions and interest expense to average net assets:		(1.34	%)		1.24	%		1.69	% (5)

Ratio of interest expense and dividends on short positions
to average net assets:		1.50	%		1.15	%		1.15	% (5)

Portfolio turnover rate		260	%		122	%		98	% (4)

(1) Information presented relates to a share of capital stock outstanding for the entire period.
(2) Net Investment Income (loss) per share represents net investment income (loss) divided by the average shares outstanding throughout the period.
(3) For the periods ended December 31, 2008, December 31, 2007 and December 31, 2006, net investment income (loss) per share before interest expense and
dividends on short positions was $0.02, $0.26 and $0.19, respectively.
(4) Not Annualized.
(5) Annualized.
(6) The ratio shown here reflects the expenses of the Fund net of any adjustments to the Investment Advisory Fees. See Note 5 of the Notes to Financial
Statements.
* Commencement of Fund-of-Funds structure. See Note 1 of the Notes to Financial Statements.

The accompanying notes are an integral part of these financial statements. 170

Underlying Funds Trust
Financial Highlights

	The Long/Short Equity―REIT-1 Portfolio
	Year Ended December 31, 2008			Year Ended December 31, 2007			Period from April 28, 2006* to December 31, 2006
Per Share Data:(1)
Net Asset Value, Beginning of Period	$	11.20		$	10.37		$	10.00

Gain (Loss) from Investment Operations:

Net investment income (loss) (2)(3)		(0.17	)		(0.09	)		-
Net realized and unrealized gain (loss) on investments		(0.79	)		1.15			0.43
Total Gain (Loss) from Investment Operations		(0.96	)		1.06			0.43

Less Dividends and Distributions:
Net investment income		-			-			(0.06	)
Net realized gains		(0.14	)		(0.23	)		-
Return of capital		-			-			-
Total Dividends and Distributions		(0.14	)		(0.23	)		(0.06	)

Net Asset Value, End of Period	$	10.10		$	11.20		$	10.37

Total Return		(8.56	%)		10.22	%		4.34	% (4)


Ratios/Supplemental Data:
Net assets (000's omitted), end of period		$19,145			$61,140			$27,645

Ratio of expenses including dividends on short positions
and interest expense to average net assets:		5.92	% (6)		9.08	% (6)		7.90	% (5)

Ratio of expenses excluding dividends on short positions
and interest expense to average net assets:		2.53	% (6)		2.62	% (6)		3.00	% (5)

Ratio of net investment income including dividends on short
positions and interest expense to average net assets:		(1.48	%)		(1.19	%)		(0.11	%) (5)

Ratio of interest expense and dividends on short positions
to average net assets:		3.39	%		6.46	%		4.90	% (5)

Portfolio turnover rate		650	%		296	%		347	% (4)

(1) Information presented relates to a share of capital stock outstanding for the entire period.
(2) Net Investment Income (loss) per share represents net investment income (loss) divided by the average shares outstanding throughout the period.
(3) For the periods ended December 31, 2008, December 31, 2007 and December 31, 2006, net investment income (loss) per share before interest expense and
dividends on short positions was $0.21, $0.60 and $0.34, respectively.
(4) Not Annualized.
(5) Annualized.
(6) The ratio shown here reflects the expenses of the Fund net of any adjustments to the Investment Advisory Fees. See Note 5 of the Notes to Financial
Statements.
* Commencement of Fund-of-Funds structure. See Note 1 of the Notes to Financial Statements.

The accompanying notes are an integral part of these financial statements. 171

Underlying Funds Trust
Financial Highlights

	The Merger Arbitrage-1 Portfolio
	Year Ended December 31, 2008			Year Ended December 31, 2007			Period from April 28, 2006* to December 31, 2006
Per Share Data:(1)
Net Asset Value, Beginning of Period	$	10.18		$	10.31		$	10.00

Gain (Loss) from Investment Operations:

Net investment income (loss) (2)(3)		(0.09	)		(0.15	)		(0.06	)
Net realized and unrealized gain (loss) on investments		(2.14	)		0.56			0.67
Total Gain (Loss) from Investment Operations		(2.23	)		0.41			0.61

Less Dividends and Distributions:
Net investment income		-			-			-
Net realized gains		-			(0.53	)		(0.30	)
Return of capital		-			(0.01	)		-
Total Dividends and Distributions		-			(0.54	)		(0.30	)

Net Asset Value, End of Period	$	7.95		$	10.18		$	10.31

Total Return		(21.91	%)		4.02	%		6.22	% (4)


Ratios/Supplemental Data:
Net assets (000's omitted), end of period		$24,540			$47,291			$23,949

Ratio of expenses including dividends on short positions
and interest expense to average net assets:		2.46	% (6)		3.26	% (6)		4.36	% (5)

Ratio of expenses excluding dividends on short positions
and interest expense to average net assets:		2.46	% (6)		2.63	% (6)		3.00	% (5)

Ratio of net investment income including dividends on short
positions and interest expense to average net assets:		(0.96	%)		(1.72	%)		(1.29	%) (5)

Ratio of interest expense and dividends on short positions
to average net assets:		0.00	%		0.63	%		1.36	% (5)

Portfolio turnover rate		212	%		235	%		140	% (4)

(1) Information presented relates to a share of capital stock outstanding for the entire period.
(2) Net Investment Income (loss) per share represents net investment income (loss) divided by the average shares outstanding throughout the period.
(3) For the periods ended December 31, 2008, December 31, 2007 and December 31, 2006, net investment income (loss) per share before interest expense and
dividends on short positions was ($0.09), ($0.08) and $0.03 , respectively.
(4) Not Annualized.
(5) Annualized.
(6) The ratio shown here reflects the expenses of the Fund net of any adjustments to the Investment Advisory Fees. See Note 5 of the Notes to Financial
Statements.
* Commencement of Fund-of-Funds structure. See Note 1 of the Notes to Financial Statements.

The accompanying notes are an integral part of these financial statements. 172

Underlying Funds Trust

Notes to Financial Statements

December 31, 2008

1. Organization

AIP Alternative Strategies Funds (the ‘‘Trust’’) was organized as a Delaware statutory trust on April 12, 2002. The Trust is registered under the Investment Company Act of 1940 (the ‘‘1940 Act’’), as amended. The Trust is an open-ended management investment company issuing two non-diversified series of shares to investors, Alpha Hedged Strategies Fund (formerly known as the Alpha Strategies I Fund) (‘‘Alpha’’) and Beta Hedged Strategies Fund (‘‘Beta’’) (collectively, the ‘‘Funds’’). Each Fund of the Trust has its own investment objective and policies. Alpha and Beta commenced operations on September 23, 2002 and April 28, 2006, respectively.

Underlying Funds Trust (the ‘‘UFT’’), an open-end management investment company, was organized as a Delaware statutory trust on March 27, 2006. Effective at the close of business on April 28, 2006, Alpha exchanged substantially all of its net assets through a tax-free exchange for shares of UFT mutual funds and changed its structure to become a Fund-of-Funds. The UFT is comprised of several series of mutual funds, all of which are non-diversified, open-ended management investment companies (the ‘‘Portfolios’’). As of December 31, 2008, the UFT consisted of the following Portfolios: The Arbitrage-1 Portfolio (Convertible Bond), The Arbitrage-2 Portfolio (Fixed Income), Deep Value Hedged Income-1, Distressed Securities & Special Situations-1, Energy & Natural Resources-1, Global Hedged Income-1, Long/Short Equity—Deep Discount Value-1, Long/Short Equity—Earnings Revision-1, Long/Short Equity—Growth-1, Long/Short Equity—Healthcare/Biotech-1, Long/Short Equity—International-1, Long/Short Equity—Momentum-1, Long/Short Equity—REIT-1, and the Merger Arbitrage-1. Each Portfolio is an affiliated registered investment company under the 1940 Act, but is not publicly offered and is only available to affiliated, publicly offered Funds.

Under a Fund-of-Funds structure, each Fund invests all of its investible assets across a number of Portfolios of the UFT. Each share of a Fund represents an equal proportionate interest in the assets and liabilities belonging to that Portfolio. The Funds and Portfolios are managed by Alternative Investment Partners, LLC (the ‘‘Advisor’’) and the Portfolios are advised by the Sub-Advisors. The Advisor and the Board of Trustees (the “Board”) may create additional Portfolios with additional Sub-Advisors from time to time to increase the number of Portfolios, and alternative investment strategies, available in which the Funds may invest.

Investment Concentration

As of December 31, 2008 for Alpha and Beta Funds, the investment concentrations in the UFT Portfolios were as follows:

	Alpha	Beta
The Arbitrage-1 Portfolio (Convertible Bond)	100.0%	0.0%
The Arbitrage-2 Portfolio (Fixed Income)	98.4	1.6
The Deep Value Hedged Income-1 Portfolio	98.1	1.9
The Distressed Securities & Special Situations-1 Portfolio	99.2	0.8
The Energy & Natural Resources-1 Portfolio	97.1	2.9
The Global Hedged Income-1 Portfolio	95.3	4.7
The Long/Short Equity—Deep Discount Value-1 Portfolio	98.8	1.2
The Long/Short Equity—Earning Revision-1 Portfolio	100.0	0.0
The Long/Short Equity—Growth-1 Portfolio	99.1	0.9
The Long/Short Equity—Healthcare/Biotech-1 Portfolio	100.0	0.0
The Long/Short Equity—International-1 Portfolio	98.6	1.4
The Long/Short Equity—Momentum-1 Portfolio	96.5	3.5
The Long/Short Equity—REIT-1 Portfolio	100.0	0.0
The Merger Arbitrage-1 Portfolio	100.0	0.0

Investment Objectives

As set forth below, each Portfolio has a distinct focus in accordance with which it employs certain investment strategies:

The Arbitrage-1 Portfolio (Convertible Bond)

Investment Objective

The Arbitrage-1 Portfolio (Convertible Bond) seeks to achieve current income and capital appreciation.

173

Underlying Funds Trust

Notes to Financial Statements

December 31, 2008

Principal Investment Strategies and Policies

To achieve its investment objective, the Portfolio, under normal market conditions, will invest at least 80% of its total assets in securities that allow the Portfolio to focus on opportunities to take advantage of perceived discrepancies in the market prices of certain convertible bonds and common stock. The Portfolio has no policy with respect to the capitalization of issuers in which it may invest and may invest in securities of all market capitalizations (small, mid and large capitalization companies). The securities held by the Portfolio may include common and preferred stock, nonconvertible and convertible debt, options and futures contracts, privately negotiated options, and shares of investment companies. The Portfolio has no policy with respect to the credit rating, maturity or duration of the debt securities in which it may invest and may invest in debt securities of any credit rating, maturity or duration.

The principal strategy to be employed by the Portfolio includes relative value/arbitrage strategies in which the Portfolio may invest both long and short in related securities or other instruments in an effort to take advantage of perceived discrepancies in the market prices for such securities.

The Arbitrage-2 Portfolio (Fixed Income)

Investment Objective

The Arbitrage-2 Portfolio (Fixed Income) seeks to achieve current income with preservation of principal.

Principal Investment Strategies and Policies

To achieve its investment objective, the Portfolio, under normal market conditions, will invest at least 80% of its total assets in securities that allow the Portfolio to focus on opportunities to take advantage of perceived discrepancies in the market prices of certain fixed income and derivative securities. The Portfolio has no policy with respect to the capitalization of issuers in which it may invest and may invest in securities of all market capitalizations (small, mid and large capitalization companies). The securities held by the Portfolio may include common and preferred stock, nonconvertible and convertible debt, options and futures contracts, privately negotiated options, and shares of investment companies. The Portfolio has no policy with respect to the maturity or duration of the debt securities in which it may invest and may invest in debt securities of any maturity or duration.

The principal strategies to be employed by the Portfolio include Fixed Income and High Yield Investment and Relative Value/Interest Rate Arbitrage Strategies. A Fixed Income and High Yield Investment Strategy is where the Portfolio is designed to take advantage of deeply discounted debt securities of companies that appear to have significant upside potential. The Portfolio may invest in debt securities that fall below investment grade debt — commonly referred to as “junk bonds.” Additionally, the Portfolio may invest in mortgage-backed and other fixed income securities of higher credit quality, and derivative securities of traditional fixed income instruments. A Relative Value/Interest Rate Arbitrage Strategy is where the Portfolio invests both long and short in related securities or other instruments in an effort to take advantage of perceived discrepancies in the market prices for such securities which may include investing in interest rate swap arbitrage, and/or U.S. and non-U.S. government bond arbitrage.

The Deep Value Hedged Income-1 Portfolio

Investment Objective

The Deep Value Hedged Income-1 Portfolio seeks to achieve capital preservation and appreciation.

Principal Investment Strategies and Policies

To achieve its investment objective, the Portfolio, under normal market conditions, will invest at least 80% of its total assets in securities that allow the Portfolio to invest in companies in financial distress. The Portfolio has no policy with respect to the capitalization of issuers in which it may invest and may invest in securities of all market capitalizations (small, mid and large capitalization companies). The securities held by the Portfolio may include common and preferred stock, nonconvertible and convertible debt, options and futures contracts, privately negotiated options, and shares of investment companies.

The principal strategies to be employed by the Portfolio include Event Driven Strategies, Distressed Securities Strategies and Market or Sector Timing/Trading Strategies. An Event Driven Strategy is where the Portfolio is designed to capture price movements generated by anticipated corporate events such as investing in companies involved in special situations, including, but not limited to, mergers, acquisitions, asset sales, spin-offs, balance sheet restructuring, bankruptcy and other situations. A Distressed Securities Strategy is where the Portfolio is designed to employ strategies designed to invest in the debt, equity, or trade claims of companies in financial distress. Such securities typically trade at substantial discounts to par value, and may be attractive to investors when managers perceive a turnaround will materialize. A Market or Sector Timing/Trading Strategy is where the Portfolio is designed to benefit from the cyclical relationships between movement in certain market indices, sectors, security types, etc. that have demonstrated a degree of consistency and correlation to past movements similar in nature and magnitude.

174

Underlying Funds Trust

Notes to Financial Statements

December 31, 2008

The Distressed Securities & Special Situations-1 Portfolio

Investment Objective

The Distressed Securities & Special Situations-1 Portfolio seeks to achieve capital appreciation.

Principal Investment Strategies and Policies

The principal strategies to be employed by the Portfolio include Event Driven and Distressed Securities Strategies. An Event Driven Strategy is where the Portfolio is designed to capture price movements generated by anticipated corporate events such as investing in companies involved in special situations, including, but not limited to, mergers, acquisitions, asset sales, spin-offs, balance sheet restructuring, bankruptcy and other situations. A Distressed Securities Strategy is where the Portfolio is designed to invest in the debt, equity, or trade claims of companies in financial distress. Such securities typically trade at substantial discounts to par value, and may be attractive to investors when managers perceive a turnaround will materialize.

The Energy and Natural Resources-1 Portfolio

Investment Objective

The Energy and Natural Resources-1 Portfolio seeks to achieve capital appreciation and capital preservation.

Principal Investment Strategies and Policies

To achieve its investment objective, the Portfolio, under normal market conditions, will invest at least 80% of its total assets in U.S. domestic equity securities and master limited partnerships within the energy and natural resources sectors. The Portfolio has no policy with respect to the capitalization of issuers in which it may invest and may invest in securities of all market capitalizations (small, mid and large capitalization companies). The securities held by the Portfolio may include common and preferred stock, nonconvertible and convertible debt, options and futures contracts, privately negotiated options, and shares of investment companies.

The principal strategies to be employed by the Portfolio include Market or Sector Timing/Trading and Long/Short Equity Strategies. A Market or Sector Timing/Trading Strategy is where the Portfolio may employ strategies designed to benefit from cyclical relationships between movement in certain market indices, sectors, security types, etc. that have demonstrated a degree of consistency and correlation to past movements similar in nature and magnitude. A Long/Short Equity Strategy is where the Portfolio may utilize strategies that employ long and short trading strategies applied to common stock, preferred stock and convertible securities of U.S. and foreign issuers. These strategies are typically constructed marginally net long in position, and attempt to yield a low beta (a measure of volatility) and also seek to dampen the effects of industry, sector, market capitalization and other potential bias exposures.

175

Underlying Funds Trust

Notes to Financial Statements

December 31, 2008

The Global Hedged Income-1 Portfolio

Investment Objective

The Global Hedged Income-1 Portfolio seeks to achieve current income. Its secondary objective is capital appreciation.

Principal Investment Strategies and Policies

To achieve its investment objective, the Portfolio, under normal market conditions, will invest (both long and short) at least 80% of its total assets in fixed income and income-oriented securities of issuers located in a variety of countries throughout the world, with an emphasis on sovereign fixed income securities. The Portfolio has no policy with respect to the capitalization of issuers in which it may invest and may invest in securities of all market capitalizations (small, mid and large capitalization companies). The securities held by the Portfolio may include common and preferred stock, nonconvertible and convertible debt, options and futures contracts, privately negotiated options, and shares of investment companies.

The principal strategies to be employed by the Portfolio include Market or Sector Timing/Trading and Fixed Income and High Yield Investment Strategies. A Market or Sector Timing/Trading Strategy is where the Portfolio is designed to benefit from cyclical relationships between movement in certain market indices, sectors, security types, etc. that have demonstrated a degree of consistency and correlation to past movements similar in nature and magnitude. A Fixed Income and High Yield Investment Strategy is where the Portfolio is designed to take advantage of deeply discounted debt securities of companies that appear to have significant upside potential. The Portfolio may invest in debt securities that fall below investment grade debt—commonly ‘‘junk bonds.’’ Additionally, the Portfolio may invest in mortgage-backed and other fixed income securities of higher credit quality, and derivative securities of traditional fixed income instruments.

The Long/Short Equity—Deep Discount Value-1 Portfolio

Investment Objective

The Long/Short Equity—Deep Discount Value-1 Portfolio seeks to achieve capital appreciation.

Principal Investment Strategies and Policies

To achieve its investment objective, the Portfolio, under normal market conditions, will invest at least 80% of its total assets in equity securities that allow the Portfolio to focus on the fundamental valuations relative to current market price of the companies in which it invests. The Portfolio has no policy with respect to the capitalization of issuers in which it may invest and may invest in securities of all market capitalizations (small, mid and large capitalization companies). The securities held by the Portfolio may include common and preferred stock, nonconvertible and convertible debt, options and futures contracts, privately negotiated options, and shares of investment companies.

The principal strategies to be employed by the Portfolio include Event Driven, Market or Sector Timing/Trading and Long/Short Equity Strategies. An Event Driven Strategy is where the Portfolio is designed to capture price movements generated by anticipated corporate events such as investing in companies involved in special situations, including, but not limited to, mergers, acquisitions, asset sales, spin-offs, balance sheet restructuring, bankruptcy and other situations. A Market or Sector Timing/Trading Strategy is where the Portfolio is designed to benefit from cyclical relationships between movement in certain market indices, sectors, security types, etc. that have demonstrated a degree of consistency and correlation to past movements similar in nature and magnitude. A Long/Short Equity Strategy is where the Portfolio is designed to employ long and short trading strategies applied to common stock, preferred stock and convertible securities of U.S. and foreign issuers. These strategies are typically constructed marginally net long in position, and attempt to yield a low beta (a measure of volatility) and also seek to dampen the effects of industry, sector, market capitalization and other potential bias exposures.

The Long/Short Equity—Earnings Revision-1 Portfolio

Investment Objective

The Long/Short Equity—Earning Revision-1 Portfolio seeks to achieve capital appreciation.

Principal Investment Strategies and Policies

To achieve its investment objective, the Portfolio, under normal market conditions, will invest at least 80% of its total assets in equity securities that allow the Portfolio to focus on the revisions of earnings estimates on the companies in which it invests. The Portfolio has no policy with respect to the capitalization of issuers in which it may invest and may invest in securities of all market capitalizations (small, mid and large capitalization companies). The securities held by the Portfolio may include common and preferred stock, nonconvertible and convertible debt, options and futures contracts, privately negotiated options, and shares of investment companies.

176

Underlying Funds Trust

Notes to Financial Statements

December 31, 2008

The principal strategies to be employed by the Portfolio include Market Neutral Equity and Long/Short Equity Strategies. A Market Neutral Equity Strategy is where the Portfolio is designed to exploit equity market inefficiencies, which generally involves being simultaneously invested in long and short matched equity portfolios of the same size, usually in the same market. These strategies are typically constructed to attempt to be beta neutral and attempt to control the industry, sector, market capitalization and other potential market bias exposures. A Long/Short Equity Strategy is where the Portfolio is designed to employ long and short trading strategies applied to common stock, preferred stock and convertible securities of U.S. and foreign issuers. These strategies are typically constructed marginally net long in position, and attempt to yield a low beta (a measure of volatility) and also seek to dampen the effects of industry, sector, market capitalization and other potential bias exposures.

The Long/Short Equity—Growth-1 Portfolio

Investment Objective

The Long/Short Equity—Growth-1 Portfolio seeks to achieve capital appreciation.

Principal Investment Strategies and Policies

To achieve its investment objective, the Portfolio, under normal market conditions, will invest at least 80% of its total assets in U.S. domestic equity securities. The Portfolio has no policy with respect to the capitalization of issuers in which it may invest and may invest in securities of all market capitalizations (small, mid and large capitalization companies). The securities held by the Portfolio may include common and preferred stock, nonconvertible and convertible debt, options and futures contracts, privately negotiated options, and shares of investment companies.

The principal strategies to be employed by the Portfolio include Market Neutral Equity and Long/Short Equity Strategies. A Market Neutral Equity Strategy is where the portfolio is designed to exploit equity market inefficiencies, which generally involves being simultaneously invested in long and short matched equity portfolios of the same size, usually in the same market. These strategies are typically constructed to attempt to be beta neutral and attempt to control the industry, sector, market capitalization and other potential market bias exposures. A Long/Short Equity Strategy is where the Portfolio is designed to employ long and short trading strategies applied to common stock, preferred stock and convertible securities of U.S. and foreign issuers. These strategies are typically constructed marginally net long in position, and attempt to yield a low beta (a measure of volatility) and also seek to dampen the effects of industry, sector, market capitalization and other potential bias exposures.

The Long/Short Equity—Healthcare/Biotech-1 Portfolio

Investment Objective

The Long/Short Equity—Healthcare/Biotech-1 Portfolio seeks to achieve capital appreciation.

Principal Investment Strategies and Policies

To achieve its investment objective, the Portfolio, under normal market conditions, will invest at least 80% of its total assets in equity securities of industry groups within the healthcare/biotech sector. The Portfolio has no policy with respect to the capitalization of issuers in which it may invest and may invest in securities of all market capitalizations (small, mid and large capitalization companies). The securities held by the Portfolio may include common and preferred stock, nonconvertible and convertible debt, options and futures contracts, privately negotiated options, and shares of investment companies.

The principal strategies to be employed by the Portfolio include Market Neutral and Long/Short Equity Strategies. A Market Neutral Equity Strategy is where the Portfolio may employ strategies designed to exploit equity market inefficiencies, which generally involves being simultaneously invested in long and short matched equity portfolios of the same size, usually in the same market. These strategies are typically constructed to attempt to be beta neutral and attempt to control the industry, sector, market capitalization and other potential market bias exposures. A Long/Short Equity Strategy is where the Portfolio may utilize strategies that employ long and short trading strategies applied to common stock, preferred stock and convertible securities of U.S. and foreign issuers. These strategies are typically constructed marginally net long in position, and attempt to yield a low beta (a measure of volatility) and also seek to dampen the effects of industry, sector, market capitalization and other potential bias exposures.

177

Underlying Funds Trust

Notes to Financial Statements

December 31, 2008

The Long/Short Equity—International-1 Portfolio

Investment Objective

The Long/Short Equity—International-1 Portfolio seeks to achieve capital appreciation.

Principal Investment Strategies and Policies

To achieve its investment objective, the Portfolio, under normal market conditions, will invest at least 80% of its total assets in equity securities of issuers located in a variety of countries throughout the world that allow the Portfolio to capture some of the inefficiencies in market pricing of equity securities domiciled outside the U.S. The Portfolio has no policy with respect to the capitalization of issuers in which it may invest and may invest in securities of all market capitalizations (small, mid and large capitalization companies). The securities held by the Portfolio may include common and preferred stock, nonconvertible and convertible debt, options and futures contracts, privately negotiated options, and shares of investment companies.

The principal strategies to be employed by the Portfolio include Market Neutral Equity and Long/Short Equity Strategies. A Market Neutral Equity Strategy is where the Portfolio is designed to employ strategies designed to exploit equity market inefficiencies, which generally involves being simultaneously invested in long and short matched equity portfolios of the same size, usually in the same market. These strategies are typically constructed to attempt to be beta neutral and attempt to control the industry, sector, market capitalization and other potential market bias exposures. A Long/Short Equity Strategy is where the Portfolio is designed to employ long and short trading strategies applied to common stock, preferred stock and convertible securities of U.S. and foreign issuers. These strategies are typically constructed marginally net long in position, and attempt to yield a low beta (a measure of volatility) and also seek to dampen the effects of industry, sector, market capitalization and other potential bias exposures.

The Long/Short Equity—Momentum-1 Portfolio

Investment Objective

The Long/Short Equity—Momentum-1 Portfolio seeks to achieve capital appreciation.

Principal Investment Strategies and Policies

To achieve its investment objective, the Portfolio, under normal market conditions, will invest at least 80% of its total assets in securities that allow the Portfolio to focus on the relative near-term price performance of the companies in which it invests. The Portfolio has no policy with respect to the capitalization of issuers in which it may invest and may invest in securities of all market capitalizations (small, mid and large capitalization companies). The securities held by the Portfolio may include common and preferred stock, nonconvertible and convertible debt, options and futures contracts, privately negotiated options, and shares of investment companies.

The principal strategies to be employed by the Portfolio include Market or Sector Timing/Trading, Market Neutral Equity and Long/Short Equity Strategies. A Market or Sector Timing/Trading Strategy is where the Portfolio is designed to benefit from cyclical relationships between movement in certain market indices, sectors, security types, etc. that have demonstrated a degree of consistency and correlation to past movements similar in nature and magnitude. A Market Neutral Equity Strategy is where the Portfolio is designed to exploit equity market inefficiencies, which generally involves being simultaneously invested in long and short matched equity portfolios of the same size, usually in the same market. These strategies are typically constructed to attempt to be beta neutral and attempt to control the industry, sector, market capitalization and other potential market bias exposures. A Long/Short Equity Strategy is where the Portfolio is designed to employ long and short trading strategies applied to common stock, preferred stock and convertible securities of U.S. and foreign issuers. These strategies are typically constructed marginally net long in position, and attempt to yield a low beta (a measure of volatility) and also seek to dampen the effects of industry, sector, market capitalization and other potential bias exposures.

178

Underlying Funds Trust

Notes to Financial Statements

December 31, 2008

The Long/Short Equity—REIT-1 Portfolio

Investment Objective

The Long/Short Equity—REIT-1 Portfolio seeks to achieve capital appreciation.

Principal Investment Strategies and Policies

To achieve its investment objective, the Portfolio, under normal market conditions, will invest at least 80% of its total assets in equity real estate investment trust (“REIT”) securities that allow the Portfolio to capture some of the inefficiencies in market pricing of U.S. commercial real estate. The Portfolio has no policy with respect to the capitalization of issuers in which it may invest and may invest in securities of all market capitalizations (small, mid and large capitalization companies). The securities held by the Portfolio may include common and preferred stock, nonconvertible and convertible debt, options and futures contracts, privately negotiated options, and shares of investment companies.

The principal strategies to be employed by the Portfolio include Long/Short Equity and Relative Value/Arbitrage Strategies. A Long/Short Equity Strategy is where the Portfolio is designed to employ long and short trading strategies applied to common stock, preferred stock and convertible securities of U.S. and foreign issuers. These strategies are typically constructed marginally net long in position, and attempt to yield a low beta (a measure of volatility) and also seek to dampen the effects of industry, sector, market capitalization and other potential bias exposures. A Relative Value/Arbitrage Strategies is where the Portfolio is designed to employ strategies that invest both long and short in related securities or other instruments in an effort to take advantage of perceived discrepancies in the market prices for such securities which may include investing in long and short positions in securities of different companies in the same industry.

The Merger Arbitrage-1 Portfolio

Investment Objective

The Merger Arbitrage-1 Portfolio seeks to achieve capital appreciation.

Principal Investment Strategies and Policies

To achieve its investment objective, the Portfolio, under normal market conditions, will invest at least 80% of its total assets in securities that allow the Portfolio to focus on investing in announced merger and acquisition transactions and in companies that may be attractive acquisition targets. The Portfolio has no policy with respect to the capitalization of issuers in which it may invest; therefore, the Portfolio may invest in securities of all market capitalizations (small, mid and large capitalization companies). The securities held by the Portfolio may include common and preferred stock, nonconvertible and convertible debt, options and futures contracts, privately negotiated options, and shares of investment companies.

The principal strategies to be employed by the Portfolio include Event Driven and Relative Value/Merger Arbitrage Strategies. An Event Driven Strategy is where the Portfolio employs strategies designed to capture price movements generated by anticipated corporate events such as investing in companies involved in special situations, including but not limited to, mergers, acquisitions, asset sales, spin-offs, balance sheet restructuring, bankruptcy and other situations. A Relative Value/Merger Arbitrage Strategy is where the Portfolio is designed to invest in both long and short positions in related securities or other instruments in an effort to take advantage of perceived discrepancies in the market prices for such securities which may include investing in long and short positions in securities involved in an announced merger deal.

2. Summary of Significant Accounting Policies

The following is a summary of significant accounting policies that are in conformity with U.S. generally accepted accounting principles (“GAAP”) and which are followed consistently by the Portfolios in the preparation of its financial statements.

Investment Valuation and Transactions

Securities in the Portfolios are valued in the following manner:

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Portfolio securities that are listed on a U.S. securities exchange are valued at the closing price of the applicable exchange on the day the valuation is made. Securities listed on the NASDAQ Global Market System are valued using the NASDAQ Official Closing Price (‘‘NOCP’’). Open short positions that are traded on the New York Stock Exchange, the American Stock Exchange and on the NASDAQ Global Market System are valued at the last reported sales price on that exchange. Listed securities and put and call options for which no sale was reported on a particular day and securities traded over-the-counter market are valued at the mean between the last bid and ask prices. Fixed income securities (other than obligations having a maturity of 60 days or less) are valued on the basis of values obtained from pricing services or from brokers, which take into account appropriate factors such as institutional sized trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. Fixed income securities purchased with remaining maturities of 60 days or less are valued at amortized cost, which approximates fair value. Futures are valued at settlement price. Foreign equities are valued at the official closing price or last bid if no closing price. The value of swap agreements is equal to the Portfolios’ obligation (or rights) under swap contracts which will generally be equal to the net amounts to be paid or received under the contracts based upon the relative values of the positions held by each party to the contracts. Securities and other assets for which market quotations are not readily available (including restricted securities) will be valued in good faith at fair value under the supervision of the Board. In determining the fair value of a security, the Advisor and the Board shall take into account the relevant factors and surrounding circumstances, which may include: (i) the nature and pricing history (if any) of the security; (ii) whether any dealer quotations for the security are available; (iii) possible valuation methodologies that could be used to determine the fair value of the security; (iv) the recommendation of the portfolio manager of the Portfolios with respect to the valuation of the security; (v) whether the same or similar securities are held by other funds managed by the Advisor or other funds and the method used to price the security in those funds; (vi) the extent to which the fair value to be determined for the security will result from the use of data or formula produced by third parties independent of the Advisor; and (vii) the liquidity or illiquidity of the market for the security. Whether a furnished price is significantly different from the previous day’s price, the Advisor will review the price to determine if it is appropriate. Events occurred surrounding some of the Portfolios which require adjustments to be made to the financial statements in order to comply with Generally Accepted Accounting Principles (GAAP). The financial statements have been updated to reflect these adjustments. Therefore, the net assets reflected in the financial statements may differ from the books and records of the Portfolios as of December 31, 2008.

As of December 31, 2008, the following Portfolios held fair valued securities. These percentages include securities where values are determined based upon neither a pricing service nor a price obtained from a broker, but rather an evaluation of the security by the Advisor, the Sub-Advisor, or an independent analyst.

			Percentage of
			Net Assets
The Deep Value Hedged Income-1 Portfolio	$	5,664,928		12.4	%
The Distressed Securities & Special Situations-1 Portfolio		446,274		1.0
The Energy & Natural Resources-1 Portfolio		939,651		3.0

In addition to the fair valued securities, the Portfolios hold securities where values were determined primarily on the basis of a single price obtained from a broker or other financial institution.

			Percentage of
			Net Assets
The Arbitrage-2 Portfolio (Fixed Income)	$	101,306		0.2	%
The Deep Value Hedged Income-1 Portfolio		4,709,701		10.3
The Distressed Securities & Special Situations-1 Portfolio		4,502,506		10.4
The Global Hedged Income-1 Portfolio		11,226,613		33.1

In September 2006, the Financial Accounting Standards Board issued Standard No. 157, “Fair Value Measurements” (“FAS 157”) effective for fiscal years beginning after November 15, 2007. FAS 157 clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosure about the use of fair value measurements in an effort to make the measurement of fair value more consistent and comparable. The Portfolios have adopted FAS 157 effective January 1, 2008. A summary of the fair value hierarchy under FAS 157 is described below:

Various inputs are used in determining the value of the Portfolios’ investments. These inputs are summarized in the three broad levels listed below:

Level 1 - Quoted prices in active markets for identical securities.

Level 2 - Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)

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Level 3 - Significant unobservable inputs (including the Portfolio's own assumptions in determining the fair value of investments). In addition to the fair-valued securities, the other securities designated as Level 3 include securities where prices are obtained from a broker quote in an illiquid market.

The following is a summary of the inputs used to value the Portfolios’ net assets as of December 31, 2008:

	The Arbitrage-1 Portfolio (Convertible Bond)
Description	Investments in Securities		Short Sales		Other Financial Instruments*
Level 1 - Quoted prices	$	100	$	6,217,874	$	11,100
Level 2 - Other significant observable inputs		23,470,911		285,078		—
Level 3 - Significant unobservable inputs		—		—		—
Total	$	23,471,011	$	6,502,952	$	11,100

Following is a reconciliation of Level 3 assets for which significant unobservable inputs were used to determine fair value.

	Investments in Securities			Short Sales		Other Financial Instruments*
Balance as of 12/31/07	$	424,825		$	—	$	—
Accrued discounts/premiums		—			—		—
Realized gain (loss)*		(407,144	)		—		—
Change in unrealized appreciation
(depreciation)		(16,985	)		—		—
Net purchases (sales)		(696	)		—		—
Transfer in and/or out of Level 3		—			—		—
Balance as of 12/31/08	$	—		$	—	$	—

	The Arbitrage-2 Portfolio (Fixed Income)
Description	Investments in Securities		Short Sales		Other Financial Instruments*
Level 1 - Quoted prices	$	—	$	—	$	1,228,967
Level 2 - Other significant observable inputs		75,792,942		—		3,848,190
Level 3 - Significant unobservable inputs		136,828		—		—
Total	$	75,929,770	$	—	$	5,077,157

Following is a reconciliation of Level 3 assets for which significant unobservable inputs were used to determine fair value.

	Investments in Securities			Short Sales		Other Financial Instruments*
Balance as of 12/31/07	$	778,085		$	—	$	—
Accrued discounts/premiums		31,572			—		—
Realized gain (loss)*		18,770			—		—
Change in unrealized appreciation
(depreciation)		(345,102	)		—		—
Net purchases (sales)		(346,497	)		—		—
Transfer in and/or out of Level 3		—			—		—
Balance as of 12/31/08	$	136,828		$	—	$	—

Change in unrealized appreciation/depreciation during the year for level 3 investments held at December 31, 2008	$	(375,442	)	$	—	$	—

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December 31, 2008

	The Deep Value Hedged Income-1 Portfolio
Description	Investments in Securities		Short Sales		Other Financial Instruments*
Level 1 - Quoted prices	$	2,135,362	$	76,672	$	(12,880	)
Level 2 - Other significant observable inputs		30,141,610		57,500	$	—
Level 3 - Significant unobservable inputs		11,363,167		—		—
Total	$	43,640,139	$	134,172	$	(12,880	)

Following is a reconciliation of Level 3 assets for which significant unobservable inputs were used to determine fair value.

	Investments in Securities			Short Sales		Other Financial Instruments*
Balance as of 12/31/07	$	16,022,670		$	—	$	—
Accrued discounts/premiums		137,770			—		—
Realized gain (loss)*		(649,236	)		—		—
Change in unrealized appreciation
(depreciation)		(12,837,998	)		—		—
Net purchases (sales)		6,689,335			—		—
Transfer in and/or out of Level 3		2,000,626			—		—
Balance as of 12/31/08	$	11,363,167		$	—	$	—

Change in unrealized appreciation/depreciation during the year for level 3 investments held at December 31, 2008	$	(12,902,513	)	$	—	$	—

	The Distressed Securities & Special Situations-1 Portfolio
Description	Investments in Securities		Short Sales		Other Financial Instruments*
Level 1 - Quoted prices	$	20,160,799	$	1,018,590	$	1,225
Level 2 - Other significant observable inputs		20,328,137		470,250		—
Level 3 - Significant unobservable inputs		6,068,551		—		—
Total	$	46,557,487	$	1,488,840	$	1,225

Following is a reconciliation of Level 3 assets for which significant unobservable inputs were used to determine fair value.

	Investments in Securities			Short Sales			Other Financial Instruments*
Balance as of 12/31/07	$	4,248,958		$	93,238		$	—
Accrued discounts/premiums		345,404			15			—
Realized gain (loss)*		19,478			235			—
Change in unrealized appreciation
(depreciation)		(3,202,456	)		(92,741	)		—
Net purchases (sales)		4,364,303			(747	)		—
Transfer in and/or out of Level 3		292,864			—			—
Balance as of 12/31/08	$	6,068,551		$	—		$	—

Change in unrealized appreciation/depreciation during the year for level 3 investments held at December 31, 2008	$	(3,209,527	)	$	(92,560	)	$	—

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December 31, 2008

	The Energy and Natural Resources-1 Portfolio
Description	Investments in Securities		Short Sales		Other Financial Instruments*
Level 1 - Quoted prices	$	26,849,113	$	238,225	$	—
Level 2 - Other significant observable inputs		4,853,813		—		—
Level 3 - Significant unobservable inputs		939,651		—		—
Total	$	32,642,577	$	238,225	$	—

Following is a reconciliation of Level 3 assets for which significant unobservable inputs were used to determine fair value.

	Investments in Securities			Short Sales		Other Financial Instruments*
Balance as of 12/31/07	$	—		$	—	$	—
Accrued discounts/premiums		—			—		—
Realized gain (loss)*		—			—		—
Change in unrealized appreciation
(depreciation)		(200,855	)		—		—
Net purchases (sales)		1,140,506			—		—
Transfer in and/or out of Level 3		—			—		—
Balance as of 12/31/08	$	939,651		$	—	$	—

Change in unrealized appreciation/depreciation during the year for level 3 investments held at December 31, 2008	$	(200,855	)	$	—	$	—

	The Global Hedged Income - 1 Portfolio
Description	Investments in Securities		Short Sales		Other Financial Instruments*
Level 1 - Quoted prices	$	8,013,934	$	—	$	—
Level 2 - Other significant observable inputs		13,790,017		—		—
Level 3 - Significant unobservable inputs		10,691,613		—		—
Total	$	32,495,564	$	—	$	—

Following is a reconciliation of Level 3 assets for which significant unobservable inputs were used to determine fair value.
	Investments in Securities			Short Sales		Other Financial Instruments*
Balance as of 12/31/07	$	15,889,728		$	—	$	—
Accrued discounts/premiums		(102,118	)		—		—
Realized gain (loss)*		(1,338,685	)		—		—
Change in unrealized appreciation
(depreciation)		(5,316,391	)		—		—
Net purchases (sales)		564,252			—		—
Transfer in and/or out of Level 3		994,827			—		—
Balance as of 12/31/08	$	10,691,613		$	—	$	—

Change in unrealized appreciation/depreciation during the year for level 3 investments held at December 31, 2008	$	(5,355,619	)	$	—	$	—

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December 31, 2008

	The Long/Short Equity-Deep Discount Value-1 Portfolio
Description	Investments in Securities		Short Sales		Other Financial Instruments*
Level 1 - Quoted prices	$	17,923,059	$	3,435,523	$	131,150
Level 2 - Other significant observable inputs		4,520,628		—		—
Level 3 - Significant unobservable inputs		—		—		—
Total	$	22,443,687	$	3,435,523	$	131,150

	The Long/Short Equity-Earnings Revision-1 Portfolio
Description	Investments in Securities		Short Sales		Other Financial Instruments*
Level 1 - Quoted prices	$	18,915,034	$	19,056,893	$	—
Level 2 - Other significant observable inputs		3,420,376		—		—
Level 3 - Significant unobservable inputs		—		—		—
Total	$	22,335,410	$	19,056,893	$	—

	The Long/Short Equity-Growth-1 Portfolio
Description	Investments in Securities		Short Sales		Other Financial Instruments*
Level 1 - Quoted prices	$	9,935,568	$	6,618,874	$	—
Level 2 - Other significant observable inputs		5,573,598		—		—
Level 3 - Significant unobservable inputs		—		—		—
Total	$	15,509,166	$	6,618,874	$	—

	The Long/Short Equity-Healthcare/Biotech-1 Portfolio
Description	Investments in Securities		Short Sales		Other Financial Instruments*
Level 1 - Quoted prices	$	10,077,471	$	9,242,863	$	—
Level 2 - Other significant observable inputs		221,542		257,779		—
Level 3 - Significant unobservable inputs		—		—		—
Total	$	10,299,013	$	9,500,642	$	—

	The Long/Short Equity-International-1 Portfolio
Description	Investments in Securities		Short Sales		Other Financial Instruments*
Level 1 - Quoted prices	$	15,340,664	$	18,004,603	$	—
Level 2 - Other significant observable inputs		1,326,633		429,832		—
Level 3 - Significant unobservable inputs		—		—		—
Total	$	16,667,297	$	18,434,435	$	—

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	The Long/Short Equity-Momentum-1 Portfolio
Description	Investments in Securities		Short Sales		Other Financial Instruments*
Level 1 - Quoted prices	$	39,961,914	$	39,056,749	$	—
Level 2 - Other significant observable inputs		992,272		—		—
Level 3 - Significant unobservable inputs		—		—		—
Total	$	40,954,186	$	39,056,749	$	—

	The Long/Short Equity-REIT-1 Portfolio
Description	Investments in Securities		Short Sales		Other Financial Instruments*
Level 1 - Quoted prices	$	19,740,896	$	16,976,804	$	—
Level 2 - Other significant observable inputs		224,066		—		—
Level 3 - Significant unobservable inputs		—		—		—
Total	$	19,964,962	$	16,976,804	$	—

	The Merger Arbitrage-1 Portfolio
Description	Investments in Securities		Short Sales		Other Financial Instruments*
Level 1 - Quoted prices	$	22,978,210	$	—	$	—
Level 2 - Other significant observable inputs		2,333,064		—		—
Level 3 - Significant unobservable inputs		—		—		—
Total	$	25,311,274	$	—	$	—

* Other financial instruments are derivative instruments not reflected in the Portfolio of Investments, such as futures, forwards, swap contracts and written

options. Futures, forwards and swap contracts are valued at the unrealized appreciation (depreciation) on the instrument while written options are valued at

market value.

Investments and shareholder transactions in the Portfolios are recorded on trade date. Realized gains and losses on the sale of investments are calculated on the identified cost basis. Dividend income is recorded on the ex-dividend date and interest income is recognized on an accrual basis. All premiums and discounts, including original issue discounts, are amortized/accreted using the interest method. Return of capital distributions received from REIT securities are recorded as an adjustment to the cost of the security and thus may impact unrealized or realized gains or losses on the security. Gains and losses from paydowns on mortgage and asset backed securities are recorded as adjustments to interest income.

Distributions to Alpha and Beta

Dividends from net investment income and distributions of net realized capital gains, if any, are declared and paid at least annually.

For the year ended December 31, 2008, the following Portfolios paid an income distribution to Alpha and Beta:

	Alpha		Beta

The Arbitrage-1 Portfolio (Convertible Bond)	$	14,465	$	—
The Deep Value Hedged Income-1 Portfolio		4,118,017		79,973
The Distressed Securities & Special Situations-1 Portfolio		6,476		50
The Long/Short Equity—Healthcare/Biotech-1 Portfolio		1,507		—
Total income distributions paid	$	4,140,465	$	80,023

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For the year ended December 31, 2008, the following Portfolios paid a short-term capital gain distribution to Alpha and Beta:

	Alpha		Beta

The Distressed Securities & Special Situations - 1 Portfolio	$	23,068	$	178
The Long/Short Equity—Healthcare/Biotech-1 Portfolio		31,549		—
The Long/Short Equity—REIT-1 Portfolio		122,190		—
Total short-term capital gain distributions paid	$	176,807	$	178

For the year ended December 31, 2008, the following Portfolios paid a long-term capital gain distribution to Alpha and Beta:

	Alpha		Beta

The Distressed Securities & Special Situations-1 Portfolio	$	37,310	$	288
The Long/Short Equity— Healthcare/Biotech-1Portfolio		136,606		—
The Long/Short Equity— REIT - 1 Portfolio		140,287		—
Total long-term capital gain distributions paid	$	314,203	$	288

Repurchase Agreements

The Portfolios may enter into repurchase agreements with a member bank of the Federal Reserve System or recognized securities dealer. Each repurchase agreement is recorded at cost, which approximates value. The Portfolios will receive, as collateral, securities whose market value, including accrued interest, at all times will be at least equal to 100% of the amount invested by the Portfolios in each repurchase agreement. If the seller defaults and the value of the collateral declines, realization of the collateral by the Portfolios may be delayed or limited.

Short Sales

The Portfolios may engage in short sale transactions. The Portfolios are liable for any dividends paid on securities sold short. At all times when the Portfolios do not own securities which are sold short, the Portfolios will maintain long securities equal in value on a daily marked-to-market basis to the securities sold short. The Portfolios do not require the brokers to maintain collateral in support of these receivables.

Futures Contracts

The Portfolios may purchase and sell futures contracts. Upon entering into a contract, the Portfolios deposit and maintain as collateral, an initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Portfolios agree to receive from or pay to the broker, an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Portfolios as unrealized gains and losses. When the contract is closed, the Portfolios record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. As collateral for futures contracts, the Portfolios are required by the executing broker to maintain assets consisting of cash, cash equivalents or liquid securities. This collateral is required to be adjusted daily to reflect the market value of the purchase obligation for long futures contracts or the market value of the instrument underlying the contract, but not less than the market price at which the futures contract was established, for short futures contracts.

Foreign Currency Transactions

The Portfolios may engage in foreign currency transactions. Foreign currency transactions are translated into U.S. dollars on the following basis (i) market value of investment securities, assets and liabilities at the daily rates of exchange, and (ii) purchases and sales of investment securities, dividend and interest income and certain expenses at the rates of exchange prevailing on the respective dates of such transactions. For financial reporting purposes, the Portfolios do not isolate changes in the exchange rate of investment securities from the fluctuations arising from changes in the market prices of securities.

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December 31, 2008

However, for federal income tax purposes, the Portfolios do isolate and treat as ordinary income the effect of changes in foreign exchange rates on realized gain or loss from the sale of investment securities and payables and receivables arising from trade-date and settlement-date differences.

Forward Currency Exchange Contracts

The Portfolios may enter into forward currency exchange contracts obligating the Portfolio to deliver and receive a currency at a specified future date. Forward contracts are valued daily and unrealized appreciation or depreciation is recorded daily as the difference between the contract exchange rate and the closing forward rate applied to the face amount of the contract. A realized gain or loss is recorded at the time the forward contract is closed.

At December 31, 2008, the Deep Value Hedged-1 Portfolio had entered into “position hedge” forward currency exchange contracts that obligated the Portfolio to deliver or receive currencies at a specified future date. The net unrealized deprecation of $12,880 for the Deep Value Hedged-1 Portfolio is included in the net unrealized appreciation (depreciation) section of the Statement of Assets and Liabilities. The terms of the open contracts are as follows:

The Deep Value Hedged Portfolio

Settlement Date	Currency to be Delivered	U.S. $ Value at December 31, 2008		Currency to be Received	U.S. $ Value at December 31
02/17/2009	500,000 Canadian Dollars	$	405,096	405,515 U.S. Dollars	$	405,515
03/16/2009	600,000 Euros		831,699	818,400 U.S. Dollars		818,400
		$	1,236,795		$	1,223,915

Options

The Portfolios may purchase and write call or put options on securities and indices and enter into related closing transactions. As a holder of a call option, the Portfolios have the right, but not the obligation, to purchase a security at the exercise price during the exercise period. As the writer of a call option, the Portfolios have the obligation to sell the security at the exercise price during the exercise period. As a holder of a put option, the Portfolios have the right, but not the obligation, to sell a security at the exercise price during the exercise period. As a writer of a put option, the Portfolios have the obligation to buy the underlying security at the exercise price during the exercise period.

The premium that the Portfolios pay when purchasing a call option or receives when writing a call option will reflect, among other things, the market price of the security, the relationship of the exercise price to the market price of the security, the relationship of the exercise price to the volatility of the security, the length of the option period and supply and demand factors. The premium is the market value of the option.

A purchaser (holder) of a put option pays a non-refundable premium to the seller (writer) of a put option to obtain the right to sell a specified amount of a security at a fixed price (the exercise price) during a specified period (exercise period). Conversely, the seller (writer) of a put option, upon payment by the holder of the premium, has the obligation to buy the security from the holder of the put option at the exercise price during the exercise period. When an option is exercised, the premium originally received decreases the cost basis of the underlying security (or increases the proceeds on the security sold short) and the Portfolio realizes a gain or loss from the sale of the security (or closing of the short sale).

Options are valued daily at the last reported sale price at the close of the exchange on which the security is primarily traded. If no sales are reported for exchange-traded options, or the options are not exchange-traded, then they are valued at the mean of the most recent quoted bid and asked prices.

The premiums received and the number of option contracts written by the Portfolios during the year ended December 31, 2008, were as follows:

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December 31, 2008

The Arbitrage-1 Portfolio (Convertible Bond):

	Premiums Received			Number Of Contracts
Options outstanding at December 31, 2007	$	60,602			322
Options written		356,429			1,479
Options closed		(155,812	)		(794	)
Options exercised		—			—
Options expired		(219,492	)		(803	)
Options outstanding at December 31, 2008	$	41,727			204

The Arbitrage -2 Portfolio (Fixed Income):

	Premiums Received			Number Of Contracts
Options outstanding at December 31, 2007	$	3,540			600
Options written		141,317			8,575
Options closed		(84,290	)		(3,225	)
Options exercised		—			—
Options expired		(60,567	)		(5,950	)
Options outstanding at December 31, 2008	$	—			—

The Deep Value Hedged-1 Portfolio:

	Premiums Received			Number Of Contracts
Options outstanding at December 31, 2007	$	—			—
Options written		2,262,052			14,000
Options closed		(2,091,362	)		(12,250	)
Options exercised		(18,870	)		(319	)
Options expired		(151,820	)		(1,431	)
Options outstanding at December 31, 2008	$	—			—

The Distressed Securities & Special Situations-1 Portfolio:

	Premiums Received			Number Of Contracts
Options outstanding at December 31, 2007	$	—			—
Options written		1,303,542			10,904
Options closed		(727,414	)		(6,107	)
Options exercised		(287,875	)		(2,211	)
Options expired		(284,583	)		(2,551	)
Options outstanding at December 31, 2008	$	3,670			35

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December 31, 2008

The Energy & Natural Resources-1 Portfolio:

	Premiums Received			Number Of Contracts
Options outstanding at December 31, 2007	$	—			—
Options written		197,709			930
Options closed		(190,109	)		(730	)
Options exercised		—			—
Options expired		(7,600	)		(200	)
Options outstanding at December 31, 2008	$	—			—

The Long/Short Equity—Deep Discount Value-1 Portfolio:

	Premiums Received			Number Of Contracts
Options outstanding at December 31, 2007	$	56,994			427
Options written		408,244			1,415
Options closed		(351,876	)		(1,484	)
Options exercised		—			—
Options expired		(23,759	)		(114	)
Options outstanding at December 31, 2008	$	89,603			244

The Long/Short Equity—Growth-1 Portfolio:

	Premiums Received			Number Of Contracts
Options outstanding at December 31, 2007	$	—			—
Options written		475,405			3,047
Options closed		(450,842	)		(2,755	)
Options exercised		(12,052	)		(34	)
Options expired		(12,511	)		(258	)
Options outstanding at December 31, 2008	$	—			—

Swaps

The Portfolios may enter into both long and short equity swap contracts with multiple broker-dealers. A long equity swap contract entitles the Portfolios to receive from the counterparty any appreciation and dividends paid on an individual security, while obligating the Portfolios to pay the counterparty any depreciation on the security as well as interest on the notional amount of the contract. A short equity swap contract obligates the Portfolios to pay the counterparty any appreciation and dividends paid on an individual security, while entitling the Portfolios to receive from the counterparty any depreciation on the security as well as interest on the notional value of the contact.

The Portfolios may also enter into equity swap contracts whose value is determined by the spread between a long equity position and a short equity position. This type of swap contract obligates the Portfolios to pay the counterparty an amount tied to any increase in the spread between the two securities over the term of the contract. The Portfolios are also obligated to pay the counterparty any dividends paid on the short equity holding as well as any net financing costs. This type of swap contract entitles the Portfolios to receive from the counterparty any gains based on a decrease in the spread as well as any dividends paid on the long equity holding and any net interest income.

Fluctuations in the value of an open contract are recorded daily as a net unrealized gain or loss. The Portfolios will realize a gain or loss upon termination or reset of the contract. Either party, under certain conditions, may terminate the contract prior to the contract’s expiration date. Credit risk may arise as a result of the failure of the counterparty to comply with the terms of the contract. The Portfolios consider the creditworthiness of each counterparty to a contract in evaluating potential credit risk. The counterparty risk to the Portfolios are limited to the net unrealized gain, if any, on the contract, along with dividends receivable on long equity contracts and interest receivable on short equity contracts. Additionally, risk may arise from unanticipated movements in interest rates or in the value of the underlying securities. The Portfolios did not hold any equity swap contracts at December 31, 2008.

189

Underlying Funds Trust

Notes to Financial Statements

December 31, 2008

The Portfolios may enter into credit default swaps for investment purposes, as a buyer or a seller. The buyer in a credit default contract is obligated to pay the seller a periodic stream of payments over the term of the contract provided no event of default on an underlying reference obligation has occurred. If an event of default occurs, the seller must pay the buyer the full notional value (“par value”) of the underlying reference obligation in exchange for the underlying reference obligation. If a Portfolio is a buyer and no event of default occurs, the Portfolio will have made a stream of payments to the seller without having benefited from the default protection it purchased. However, if an event of default occurs, the Portfolio, as buyer, will receive the full notional value of the underlying reference obligation that may have little or no value following default. As a seller, the Portfolio receives a fixed rate of income throughout the term of the contract, provided there is no default. If an event of default occurs, the Portfolio would be obligated to pay the notional value of the underlying reference obligation in return for the receipt of the underlying reference obligation. The value of the underlying reference obligation received by the Portfolio coupled with the periodic payments previously received may be less than the full notional value it pays to the buyer, resulting in a loss of value to the Portfolio.

The Arbitrage-2 Portfolio (Fixed Income) used credit default swaps to maintain appropriate portfolio duration and convexity levels. Also, credit default swaps provide an efficient tool for managing portfolio risk and thus are exclusively used for risk management activities.

The Arbitrage-2 Portfolio (Fixed Income) is party to International Swap Dealers Association, Inc. Master Agreements (“ISDA Master Agreements”) with select counterparties that govern transactions, such as over-the-counter swap contracts, entered into by the Portfolio and those counterparties. The ISDA Mater Agreements maintain provisions for general obligations, representations, agreements, collateral and events of default or termination. Events of termination include conditions that may entitle counterparties to elect to terminate early and cause settlement of all outstanding transaction under the applicable ISDA Master Agreement. Certain swap agreements between investment companies and counterparties contain terms which grant the counterparty the right to terminate the swap and demand settlement if the net asset value of the investment company has fallen by a specified percentage or below a specified value. Concentrations associated with such instruments may create risks associated with the timing of funding liabilities arising from these agreements. Any election by the counterparty to early terminate may impact the amounts reported in the financial statements. As of December 31, 2008 no early termination triggers have been met and invoked by the counterparties.

Upon entering into swap agreements, the Portfolios will either receive or pay an upfront payment based upon the difference between the current principal amount and the notional amount of the swap and whether the Portfolios are buying or selling protection. Upfront payments that are received are recorded as liabilities while upfront payments paid are recorded as assets. These payments remain on the books until the swap contract is closed. When entering into credit default swaps the Portfolio will either deliver collateral to the counterparty or the counterparty will deliver collateral to the Portfolio. The amount of this collateral is calculated based upon the notional value and the current price of the swap. In the event of default, the Portfolio has recourse against any collateral posted to them by the counterparty. Notional amounts of all credit default swaps agreements outstanding as of December 31, 2008 for which a Fund is the seller of protection are disclosed in the footnotes of the Schedules of Investments. These potential amounts would be partially offset by any recovery values of the respective referenced obligations, upfront payments received upon entering into the agreement, or net amounts received from the settlement of buy protection credit default swap agreements entered into by a Fund for the same referenced entity or entities.

The Portfolios may also enter into interest rate swap contracts. This type of swap contract obligates the Portfolios to pay the counterparty an amount tied to any increase in the spread between a floating or fixed rate payment over the term of the contract. The Portfolios are also obligated to pay the counterparty any interest paid on the holding as well as any net financing costs. This type of swap contract entitles the Portfolios to receive from the counterparty any gains based on a decrease in the spread as well as any net interest income.

Swap agreements are valued daily and unrealized appreciation or depreciation is recorded daily as the difference between the prior day and current day closing price.

190

Underlying Funds Trust

Notes to Financial Statements

December 31, 2008

Convertible Securities

The Portfolios may invest in convertible securities. A convertible security is a fixed-income security (a debt instrument or a preferred stock), which may be converted at a stated price within a specified period of time into a certain quantity of the common stock of the same or a different issuer. Convertible securities are senior to common stocks in an issuer’s capital structure, but are usually subordinated to similar non-convertible securities. While providing a fixed income stream (generally higher in yield than the income derivable from common stock but lower than that afforded by a similar nonconvertible security), a convertible security also gives an investor the opportunity, through its conversion feature, to participate in the capital appreciation of the issuing company depending upon a market price advance in the convertible security’s underlying common stock.

Warrants

The Portfolios may invest a portion of their assets in warrants. A warrant gives the holder a right to purchase at any time during a specified period a predetermined number of shares of common stock at a fixed price. Unlike convertible debt securities or preferred stock, warrants do not pay a fixed coupon or dividend. Investments in warrants involve certain risks, including the possible lack of a liquid market for resale of the warrants, potential price fluctuations as a result of speculation or other factors, and failure of the price of the underlying security to reach or have reasonable prospects of reaching a level at which the warrant can be prudently exercised (in which event the warrant may expire without being exercised, resulting in a loss of the Portfolios’ entire investment therein).

Financial Accounting Standards Board Interpretation No. 48 “Accounting for Uncertainty in Income Taxes”

Effective 2007, the Portfolios adopted Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes”. FIN 48 requires the evaluation of tax positions taken on previously filed tax returns or expected to be taken on future returns. These positions must meet a “more likely than not” standard that, based on the technical merits, have a more than fifty percent likelihood of being sustained upon examination. In evaluating whether a tax position has met the recognition threshold, the Portfolios must presume that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. Tax positions not deemed to meet the “more-likely-than-not” threshold are recorded as a tax expense in the current year.

Federal Income Taxes

The Portfolios intend to qualify and elect to be treated as a regulated investment company under the Internal Revenue Code. The Portfolios intend to distribute the requisite investment company net taxable income and net capital gains to shareholders. Therefore, no federal income tax provision is recorded.

The Portfolios have reviewed all open tax years and major jurisdictions and concluded that the adoption of FIN 48 resulted in no effect to the Portfolios’ financial position or results of operations. There is no tax liability resulting from unrecognized tax benefits relating to uncertain income tax positions taken or expected to be taken on the tax return for the fiscal year-end December 31, 2008. The Portfolios are also not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next twelve months.

Open tax years are those that are open for exam by taxing authorities. Major jurisdictions for the Portfolios include Federal and the state of New York. As of December 31, 2008, open Federal and New York tax years include the tax years ended December 31, 2006 through December 31, 2008. The Portfolios have no examination in progress.

Credit Facility

Custodial Trust Company (custodian affiliated with J.P. Morgan) has made available to the Portfolios a credit facility pursuant to a Loan and Pledge Agreement (‘‘Loan Agreement’’) dated April 28, 2006 for the purpose of purchasing portfolio securities. The Loan Agreement can be terminated by either the Portfolios or Custodial Trust Company. The Portfolios are permitted to borrow up to 33.3% of total assets. Borrowings under the Loan Agreement are charged at the 30-day LIBOR rate plus 1.00%. As collateral for the loan, the Portfolios are required to maintain assets consisting of cash, cash equivalents or liquid securities. The UFT Portfolios pledge all securities held at Custodial Trust Company as collateral for this loan. Custodial Trust Company monitors this balance on a daily basis against the amount of the loan outstanding. The Arbitrage-1 Portfolio (Convertible Bond), The Arbitrage-2 Portfolio (Fixed Income), Global Hedged Income-1 Portfolio, Long/Short Equity—Deep Discount Value-1 Portfolio, Long/Short Equity—Earnings Revision-1 Portfolio, Long/Short Equity—Growth-1 Portfolio, Long/Short Equity—Healthcare/Biotech-1 Portfolio, Long/Short Equity—International-1 Portfolio, Long/Short Equity—Momentum-1 Portfolio, and Long/Short Equity—REIT-1 Portfolio, did not utilize the credit facility during the year ended December 31, 2008. The remaining Portfolios did use the credit facility and the following table is presented on this loan agreement:

191

Underlying Funds Trust

Notes to Financial Statements

December 31, 2008

	Outstanding	Maximum		Weighted
	Balance	Amount Outstanding	Average	Average
	as of	during the year	Daily	Interest
	December 31, 2008	ended December 31, 2008	Balance	Rate

The Deep Value Hedged Income - 1 Portfolio	$ —	$ 3,500,000	$ 1,743,169	3.69 %
The Distressed Securities & Special Situations - 1 Portfolio	—	9,800,000	27,984	3.49 %
The Energy & Natural Resources-1 Portfolio1	—	13,000,000	200,521	4.21%

1 The Portfolio’s inception date was January 2, 2008.

Use of Estimates

The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Guarantees and Indemnifications

In the normal course of business, the Portfolios enter into contracts with service providers that contain general indemnification clauses. The Portfolios’ maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Portfolios that have not yet occurred. However, based on experience, the Portfolios expect the risk of loss to be remote.

3. Investment Transactions

Purchases and sales of securities for the year ended December 31, 2008 for the Portfolios (excluding short-term investments and U.S. Government securities) are as follows:

	Purchases		Sales
The Arbitrage-1 Portfolio (Convertible Bond)	$	37,490,604	$	53,893,374
The Arbitrage-2 Portfolio (Fixed Income Arbitrage)		11,603,673		4,380,501
The Deep Value Hedged Income-1 Portfolio		47,750,966		25,919,436
The Distressed Securities & Special Situations-1 Portfolio		170,495,848		123,674,644
The Energy & Natural Resources-1 Portfolio(1)		178,431,729		121,782,427
The Global Hedged Income-1 Portfolio		37,369,575		40,776,245
The Long/Short Equity—Deep Discount Value-1 Portfolio		93,265,488		110,576,556
The Long/Short Equity—Earnings Revision-1 Portfolio		57,489,691		74,020,042
The Long/Short Equity—Growth-1 Portfolio		141,182,036		165,050,767
The Long/Short Equity—Healthcare/Biotech-1 Portfolio		163,917,903		179,429,503
The Long/Short Equity—International-1 Portfolio		173,622,130		174,659,756
The Long/Short Equity— Momentum-1 Portfolio		181,118,407		160,127,433
The Long/Short Equity—REIT-1 Portfolio		253,685,483		271,409,742
The Merger Arbitrage-1 Portfolio		71,282,983		75,312,822

(1) The Portfolio’s inception date was January 2, 2008.

192

Underlying Funds Trust

Notes to Financial Statements

December 31, 2008

Purchases and sales of U.S. Government securities for the year ended December 31, 2008 for the Portfolios (excluding short-term investments) are as follows:

	Purchases		Sales

The Arbitrage-2 Portfolio (Fixed Income)	$	493,916,228	$	481,969,804
The Deep Value Hedged Income-1 Portfolio		—		469,030
The Distressed Securities & Special Situations-1 Portfolio		—		81,503
The Global Hedged Income-1 Portfolio		1,748,742		1,750,000

4. Federal Income Taxes

The cost basis of investments for federal income tax purposes at December 31, 2008 were as follows:

	The Arbitrage-1 Portfolio (Convertible Bond)			The Arbitrage-2 Portfolio (Fixed Income)			The Deep Value Hedged Income-1 Portfolio			The Distressed Securities & Special Situations-1 Portfolio
Cost of Investments	$	34,009,174		$	78,196,315		$	88,282,163		$	87,385,490
Gross tax unrealized appreciation		395,880			8,665,042			1,538,819			797,947
Gross tax unrealized depreciation		(10,934,043	)		(10,931,587	)		(46,180,843	)		(41,625,950	)
Net tax unrealized appreciation (depreciation)	$	(10,538,163	)	$	(2,266,545	)	$	(44,642,024	)	$	(40,828,003	)

	The Energy and Natural Resources-1 Portfolio			The Global Hedged Income-1 Portfolio			The Long/Short Equity—Deep Discount Value-1 Portfolio			The Long/Short Equity—Earning Revision-1 Portfolio
Cost of Investments	$	47,028,123		$	51,335,766		$	22,374,121		$	21,402,977
Gross tax unrealized appreciation		2,494,451			26,246			1,510,938			1,872,701
Gross tax unrealized depreciation		(16,879,997	)		(18,866,448	)		(1,441,372	)		(940,268	)
Net tax unrealized appreciation (depreciation)	$	(14,385,546	)	$	(18,840,202	)	$	69,566		$	932,433

	The Long/Short Equity—Growth-1 Portfolio			The Long/Short Equity—Healthcare/ Biotech-1 Portfolio			The Long/Short Equity—International-1 Portfolio			The Long/Short Equity— Momentum-1 Portfolio
Cost of Investments	$	15,339,850		$	12,004,578		$	21,418,946		$	45,186,200
Gross tax unrealized appreciation		1,505,616			1,234,767			2,776,011			4,147,958
Gross tax unrealized depreciation		(1,336,300	)		(2,940,332	)		(7,527,660	)		(8,379,972	)
Net tax unrealized appreciation	$	169,316		$	(1,705,565	)	$	(4,751,649	)	$	(4,232,014	)

193

Underlying Funds Trust

Notes to Financial Statements

December 31, 2008

	The Long/Short Equity—REIT-1 Portfolio			The Merger Arbitrage-1 Portfolio
Cost of Investments	$	23,082,785		$	34,227,982
Gross tax unrealized appreciation		3,910,541			1,006,899
Gross tax unrealized depreciation		(7,028,364	)		(9,923,607	)
Net tax unrealized appreciation	$	(3,117,823	)	$	(8,916,708	)

At December 31, 2008, the components of accumulated earnings/(losses) on a tax basis for the Portfolios were as follows:

	The Arbitrage-1 Portfolio (Convertible Bond)			The Arbitrage-2 Portfolio (Fixed Income)			The Deep Value Hedged Income-1 Portfolio			The Distressed Securities & Special Situations-1 Portfolio

Net tax unrealized appreciation (depreciation) on investments	$	(10,538,163	)	$	(2,266,545	)	$	(44,642,024	)	$	(40,828,003	)
Net tax unrealized appreciation (depreciation) on securities sold short and written option contracts		4,334,600			—			720,928			449,678
Capital loss carryover		(6,457,391	)		(2,134,525	)		(2,147,031	)		(4,487,220	)
Other accumulated earnings/(losses)		—			(419,900	)		(18,234	)		763,032
Total accumulated earnings/(losses)	$	(12,660,954	)	$	(4,820,970	)	$	(46,086,361	)	$	(44,102,513	)

	The Energy and Natural Resources-1 Portfolio			The Global Hedged Income-1 Portfolio			The Long/Short Equity—Deep Discount Value-1 Portfolio			The Long/Short Equity—Earning Revision-1 Portfolio

Net tax unrealized appreciation (depreciation) on investments	$	(14,385,546	)	$	(18,840,202	)	$	69,566		$	932,433
Net tax unrealized appreciation (depreciation) on securities sold short and written option contracts		(11,296	)		—			1,443,944			13,167,398
Capital loss carryover		(14,844,262	)		(12,648,163	)		(12,077,767	)		—
Other accumulated earnings/(losses)		132,294			(49,072	)		—			—
Total accumulated earnings/(losses)	$	(29,108,810	)	$	(31,537,437	)	$	(10,564,257	)	$	14,099,831

194

Underlying Funds Trust

Notes to Financial Statements

December 31, 2008

	The Long/Short Equity― Growth-1 Portfolio			The Long/Short Equity—Healthcare/Biotech-1 Portfolio			The Long/Short Equity—International-1 Portfolio			The Long/Short Equity— Momentum-1 Portfolio

Net tax unrealized appreciation (depreciation) on investments	$	169,316		$	(1,705,565	)	$	(4,751,649	)	$	(4,232,014	)
Net tax unrealized appreciation (depreciation) on securities sold short and written option contracts		358,468			723,885			1,707,417			12,039,167
Capital loss carryover		(14,264,732	)		(3,124,783	)		(2,174,013	)		(1,329,547	)
Other accumulated earnings/(losses)		—			—			(343	)		—
Total accumulated earnings/(losses)	$	(13,736,948	)	$	(4,106,463	)	$	(5,218,588	)	$	6,477,606

	The Long/Short Equity—REIT-1 Portfolio			The Merger Arbitrage-1 Portfolio

Net tax unrealized appreciation (depreciation) on investments	$	(3,117,823	)	$	(8,916,708	)
Net tax unrealized appreciation (depreciation) on securities sold short and written option contracts		2,743,792			—
Capital loss carryover		—			—
Other accumulated earnings/(losses)		(2	)		(1	)
Total accumulated earnings/(losses)	$	(374,033	)	$	(8,916,709	)

The primary differences between the cost amounts for book and tax purposes is primarily due to deferred wash sale losses, constructive sales and tax adjustments for passive foreign investment companies.

As of December 31, 2008, the Portfolios had accumulated capital loss carryovers of:

	Capital Loss Carryover		Expires
The Arbitrage-1 Portfolio (Convertible Bond)	$	109,019	12/31/2015
		6,348,372	12/31/2016
The Arbitrage-2 Portfolio (Fixed Income)		2,134,525	12/31/2015
The Deep Value Hedged Income-1 Portfolio		2,147,031	12/31/2016
The Distressed Securities & Special Situations-1 Portfolio		4,487,220	12/31/2016
The Energy and Natural Resources-1 Portfolio		14,844,262	12/31/2016
The Global Hedged Income-1 Portfolio		48,562	12/31/2014
		15,875	12/31/2015
		12,583,726	12/31/2016
The Long/Short Equity-Deep Discount Value-1 Portfolio		12,077,768	12/31/2016
The Long/Short Equity-Growth-1 Portfolio		1,893,079	12/31/2015
		12,371,653	12/31/2016
The Long/Short Equity-Healthcare/Biotech-1 Portfolio		3,124,783	12/31/2016
The Long/Short Equity-International-1 Portfolio		2,174,013	12/31/2016
The Long/Short Equity-Momentum-1 Portfolio		1,329,547	12/31/2015

195

Underlying Funds Trust

Notes to Financial Statements

December 31, 2008

The tax character of distributions for the Portfolios at the period ended December 31, 2008 were as follows:

	The Arbitrage-1 Portfolio (Convertible Bond)		The Arbitrage-1 Portfolio (Convertible Bond)		The Arbitrage-2 Portfolio (Fixed Income)		The Arbitrage-2 Portfolio (Fixed Income)
	Year Ended December 31, 2008		Year Ended December 31, 2007		Year Ended December 31, 2008		Year Ended December 31, 2007
Distributions paid from:
Ordinary income	$	14,465	$	1,625,201	$	—	$	14,336,944
Long term capital gain		—		190,361		—		—
Return of capital		—		—		—		221,777
Total distributions paid		14,465		1,815,562		—		14,558,721
Redemptions characterized as distributions for tax purposes:
Return of capital*		43,542,503		—		8,750,000		—
Ordinary income distributions from redemptions*		1,363,666		—		—		—
Total redemptions characterized as distributions for tax purposes	$	44,920,634	$	1,815,562	$	8,750,000	$	14,558,721

	The Deep Value Hedged Income-1 Portfolio		The Deep Value Hedged Income-1 Portfolio		The Distressed Securities & Special Situations-1 Portfolio^		The Distressed Securities & Special Situations-1 Portfolio
	Year Ended December 31, 2008		Period from May 1, 2007(1) to December 31, 2007		Year Ended December 31, 2008		Year Ended December 31, 2007
Distributions paid from:
Ordinary income	$	4,197,990	$	2,018,772	$	29,772	$	1,168,541
Long term capital gain		—		—		37,598		10,619,840
Total distributions paid		4,197,990		2,018,772		67,370		11,788,381
Redemptions characterized as distributions for tax purposes:
Return of capital*		8,907		—		25,536,486		—
Ordinary income distributions from redemptions*		2,991,093		—		4,290,079		—
Total redemptions characterized as distributions for tax purposes	$	7,197,990	$	2,018,772	$	29,893,935	$	11,788,381

(1) Commencement of operations for the Deep Value Hedged Income-1 Portfolio was May 1, 2007.

196

Underlying Funds Trust

Notes to Financial Statements

December 31, 2008

	The Energy & Natural Resources-1 Portfolio		The Global Hedged Income-1 Portfolio		The Global Hedged Income-1 Portfolio
	Period from January 2, 2008(1) to December 31, 2008		Year Ended December 31, 2008		Year Ended December 31, 2007
Distributions paid from:
Ordinary income	$	—	$	—	$	2,032,652
Long term capital gain		—		—		—
Total distributions paid		—		—		2,032,652
Redemptions characterized as distributions for tax purposes:
Return of capital*		2,903,369		14,383,762		—
Ordinary income distributions from redemptions*		1,096,631		4,527,077		—
Total redemptions characterized as distributions for tax purposes	$	4,000,000	$	18,910,839	$	2,032,652

(1) Commencement of operations for the Energy & Natural Resources-1 Portfolio was January 2, 2008.

	The Long/Short Equity-Deep Discount Value-1 Portfolio		The Long/Short Equity-Deep Discount Value-1 Portfolio		The Long/Short Equity-Earnings Revisions-1 Portfolio		The Long/Short Equity-Earnings Revisions-1 Portfolio
	Year Ended December 31, 2008		Year Ended December 31, 2007		Year Ended December 31, 2008		Year Ended December 31, 2007
Distributions paid from:
Ordinary income	$	—	$	166,297	$	—	$	840,607
Long term capital gain		—		—		—		—
Total distributions paid		—		166,297		—		840,607
Redemptions characterized as distributions for tax purposes:
Return of capital*		15,604,349		—		41,193,820		—
Ordinary income distributions from redemptions*		—		—		806,180		—
Total redemptions characterized as distributions for tax purposes	$	15,604,349	$	166,297	$	42,000,000	$	840,607

197

Underlying Funds Trust

Notes to Financial Statements

December 31, 2008

	The Long/Short Equity-Growth-1 Portfolio		The Long/Short Equity-Growth-1 Portfolio		The Long/Short Equity- Healthcare/ Biotech-1 Portfolio^		The Long/Short Equity- Healthcare/ Biotech-1 Portfolio
	Year Ended December 31, 2008		Period from August 20, 2007(1) to December 31, 2007		Year Ended December 31, 2008		Year Ended December 31, 2007
Distributions paid from:
Ordinary income	$	—	$	—	$	33,056	$	837,790
Long term capital gain		—		—		136,606		—
Total distributions paid		—		—		169,662		837,790
Redemptions characterized as distributions for tax purposes:
Return of capital*		53,479,539		—		20,000,000		—
Ordinary income distributions from redemptions*		—		—		—		—
Total redemptions characterized as distributions for tax purposes	$	53,479,539	$	—	$	20,169,662	$	837,790

(1) Commencement of operations for the Long/Short—Equity Growth-1 Portfolio was August 20, 2007.

	The Long/Short Equity- International-1 Portfolio		The Long/Short Equity- International-1 Portfolio		The Long/Short Equity- Momentum-1 Portfolio		The Long/Short Equity- Momentum-1 Portfolio
	Year Ended December 31, 2008		Year Ended December 31, 2007		Year Ended December 31, 2008		Year Ended December 31, 2007
Distributions paid from:
Ordinary income	$	—	$	2,292,115	$	—	$	618,520
Long-term capital gain		—		51,416		—		8,013
Return of capital		—		79,135		—		—
Total distributions paid		—		2,422,666		—		626,533
Redemptions characterized as distributions for tax purposes:
Return of capital*		28,000,000		—		46,872,820		—
Ordinary income distributions from redemptions*		—		—		—		—
Total redemptions characterized as distributions for tax purposes	$	28,000,000	$	2,422,666	$	46,872,820	$	626,533

198

Underlying Funds Trust

Notes to Financial Statements

December 31, 2008

	The Long/Short Equity-REIT-1 Portfolio^		The Long/Short Equity-REIT-1 Portfolio		The Merger Arbitrage-1 Portfolio		The Merger Arbitrage-1 Portfolio
	Year Ended December 31, 2008		Year Ended December 31, 2007		Year Ended December 31, 2008		Year Ended December 31, 2007
Distributions paid from:
Ordinary income	$	122,190	$	918,227	$	—	$	1,193,618
Long-term capital gain		140,287		306,134		—		1,176,249
Return of capital		—		—		—		35,084
Total distributions paid		262,477		1,224,361		—		2,404,951
Redemptions characterized as distributions for tax purposes:
Return of capital*		38,776,128		—		11,864,256		—
Ordinary income distributions from redemptions*		1,223,872		—		63,944		—
Total redemptions characterized as distributions for tax purposes	$	40,262,477	$	1,224,361	$	11,928,200	$	2,404,951

^ The Portfolio designated as long-term capital gain dividend, pursuant to Internal Revenue Code Section 852(b)(3), the amount necessary to reduce the earnings and profits of the Portfolio related to net capital gain to zero for the tax year ended December 31, 2008.

* Certain redemptions were deemed as distributions for income tax purposes due to Alpha’s ownership of the respective UFT’s.

199

Underlying Funds Trust

Notes to Financial Statements

December 31, 2008

On the Statement of Assets and Liabilities, the following adjustments were made for permanent tax adjustments:

	Undistributed Net Investment Income/(Loss)			Accumulated Net Realized Gain/(Loss)			Paid in Capital
The Arbitrage-1 Portfolio (Convertible Bond)	$	(648,321	)	$	(715,345	)	$	1,363,666
The Arbitrage-2 Portfolio (Fixed Income)		(4,969,809	)		18,119,612			(13,149,803	)
The Deep Value Hedged Income-1 Portfolio		(2,744,188	)		(246,904	)		2,991,092
The Distressed Securities & Special Situations-1 Portfolio		(4,088,715	)		(201,364	)		4,290,079
The Energy and Natural Resources-1 Portfolio		(1,134,488	)		37,857			1,096,631
The Global Hedged Income-1 Portfolio		(4,298,180	)		(228,897	)		4,527,077
The Long/Short Equity—Deep Discount Value-1 Portfolio		329,402			(22,552	)		(306,850	)
The Long/Short Equity—Earning Revision-1 Portfolio		666,349			(1,472,529	)		806,180
The Long/Short Equity—Growth-1 Portfolio		576,657			(9,298	)		(567,359	)
The Long/Short Equity—Healthcare/Biotech-1 Portfolio		383,993			(22,050	)		(361,943	)
The Long/Short Equity—International-1 Portfolio		796,621			(61,449	)		(735,172	)
The Long/Short Equity— Momentum-1 Portfolio		1,025,320			(10,388	)		(1,014,932	)
The Long/Short Equity—REIT-1 Portfolio		806,514			(2,030,387	)		1,223,873
The Merger Arbitrage-1 Portfolio		402,758			(466,704	)		63,946

The permanent differences primarily relate to swap adjustments, disallowed net operating losses, contingent payment debt instrument adjustments, foreign currency adjustments, short dividend expenses, and REIT adjustments with differing book and tax methods.

5. Investment Advisory Agreements and Other Expense Agreements

Pursuant to the Investment Advisory Agreement (the ‘‘Advisory Agreement’’), the Portfolios pay the Advisor monthly an annual advisory fee of 2.50% of the Portfolios’ average daily net assets. The Advisor has also entered into an Operating Services Agreement (the ‘‘Services Agreement’’) with the Portfolios to provide virtually all day-to-day services to the Portfolios. The Portfolios pay the Advisor an annual operating services fee of 0.50% the Portfolios’ average daily net assets. The Advisor analyzes the expense ratios of the Funds, and reduces its advisory fees across the Portfolios so the expenses passed along to the Funds calculates to 3.00% on an aggregate basis. Due to the effects of leverage, the actual expense ratios can be less than 3.00%.

Under the terms of the Agreements, subject to the supervision of the Board, the Advisor will provide, or arrange to provide, essentially all day-to-day portfolio, administrative and operational services to the Portfolios. The Advisor pays all fees and expenses associated with the services it provides, including, but not limited to, expenses of legal compliance, shareholder communications and meetings of the shareholders. The Advisor will pay all expenses related to marketing the Portfolios as well as related bookkeeping expenses.

The Advisor has entered into Sub-Advisory Agreements (“Sub-Advisor Agreement”) for the purpose of advising each Portfolio of the UFT. Each Sub-Advisor Agreement provides that each Sub-Advisor will formulate and implement a continuous investment program for a Portfolio in accordance with each Portfolio’s objective, policies and limitations and any investment guidelines established by the Advisor. Each Sub-Advisor will, subject to the supervision and control of the Advisor, determine in its discretion which issuers and securities will be purchased, held, sold or exchanged by a Portfolio, and will place orders with and give instruction to brokers and dealers to cause the execution of such transactions. Each Sub-Advisor is required to furnish at its own expense all investment facilities necessary to perform its obligations under the Sub-Advisor Agreement. Each Sub-Advisor Agreement will continue in effect from year to year, provided it is approved at least annually by a vote of the majority of the Trustees, where applicable, who are not parties to the agreement or interested persons of any such party, cast in person at a meeting specifically called for the purpose of voting on such approval. Each Sub-Advisor Agreement may be terminated without penalty at any time by the Advisor or the Sub-Advisor on 60 days’ written notice, and will automatically terminate in the event of its “assignment” (as that term is defined in the 1940 Act).

200

Underlying Funds Trust

Notes to Financial Statements

December 31, 2008

The Advisor is affiliated with Asset Alliance Corporation (‘‘Asset Alliance’’). Asset Alliance is also affiliated with the Funds’ Portfolio Research Consultant, Trust Advisors LLC. As a result, the Advisor is also affiliated with the Research Consultant.

6. Capital Share Transactions

Transactions in shares of each Portfolio were as follows:

The Arbitrage-1 Portfolio (Convertible Bond):

	Year Ended December 31, 2008						Year Ended December 31, 2007
	Shares			Amount			Shares		Amount
Shares sold		1,163,495		$	11,569,475			4,518,096	$	45,954,554
Shares issued to shareholders
in reinvestment of distributions		1,732			14,465			180,294		1,815,562
Shares redeemed		(5,092,719	)		(44,906,169	)		-		-
Net increase (decrease)		(3,927,492	)	$	(33,322,229	)		4,698,390	$	47,770,116

Shares outstanding:
Beginning of period		6,879,706						2,181,316
End of period		2,952,214						6,879,706

The Arbitrage-2 Portfolio (Fixed Income):

	Year Ended December 31, 2008						Year Ended December 31, 2007
	Shares			Amount			Shares		Amount
Shares sold		220,032		$	1,933,850			2,227,535	$	22,861,325
Shares issued to shareholders
in reinvestment of distributions		—			—			1,667,665		14,558,721
Shares redeemed		(1,188,368	)		(10,262,837	)		—		—
Net increase (decrease)		(968,336	)	$	(8,328,987	)		3,895,200	$	37,420,046

Shares outstanding:
Beginning of period		7,910,350						4,015,150
End of period		6,942,014						7,910,350

The Deep Value Hedged Income-1 Portfolio:

	Year Ended December 31, 2008						Period from May 1, 2007(1) to December 31, 2007
	Shares			Amount			Shares		Amount
Shares sold		248,696		$	2,141,155			8,070,814	$	85,682,034
Shares issued to shareholders
in reinvestment of distributions		780,296			4,197,990			205,369		2,018,772
Shares redeemed		(641,639	)		(5,402,968	)		—		—
Net increase (decrease)		387,353		$	936,177			8,276,183	$	87,700,806

Shares outstanding:
Beginning of period		8,276,183						—
End of period		8,663,536						8,276,183

(1) Commencement of operations for the Deep Value Hedged Income-1 Portfolio was May 1, 2007.

201

Underlying Funds Trust

Notes to Financial Statements

December 31, 2008

The Distressed Securities & Special Situations-1 Portfolio:

	Year Ended December 31, 2008						Year Ended December 31, 2007
	Shares			Amount			Shares		Amount
Shares sold		2,536,223		$	22,953,115		$	2,831,154	$	27,811,909
Shares issued to shareholders
in reinvestment of distributions		13,834			67,370			1,299,711		11,788,381
Shares redeemed		(3,924,209	)		(32,152,653	)		—		—
Net increase (decrease)		(1,374,152	)	$	(9,132,168	)	$	4,130,865	$	39,600,290

Shares outstanding:
Beginning of period		10,170,733						6,039,868
End of period		8,796,581						10,170,733

The Energy & Natural Resources-1 Portfolio:

	Period from January 2, 2008(1) to December 31, 2008
	Shares			Amount
Shares sold		7,314,912		$	63,503,536
Shares issued to shareholders
in reinvestment of distributions		—			—
Shares redeemed		(610,609	)		(4,172,339	)
Net increase		6,704,303		$	59,331,197

Shares outstanding:
Beginning of period		—
End of period		6,704,303

(1) Commencement of operations for the Energy & Natural Resources-1 Portfolio was January 2, 2008.

The Global Hedged Income-1 Portfolio:

	Year Ended December 31, 2008						Year Ended December 31, 2007
	Shares			Amount			Shares		Amount
Shares sold		217,177		$	2,118,607			6,128,787	$	63,400,032
Shares issued to shareholders
in reinvestment of distributions		—			—			199,279		2,032,652
Shares redeemed		(2,864,964	)		(20,303,951	)		—		—
Net increase (decrease)		(2,647,787	)	$	(18,185,344	)		6,328,066	$	65,432,684

Shares outstanding:
Beginning of period		7,688,505						1,360,439
End of period		5,040,718						7,688,505

202

Underlying Funds Trust

Notes to Financial Statements

December 31, 2008

The Long/Short Equity—Deep Discount Value- 1 Portfolio:

	Year Ended December 31, 2008						Year Ended December 31, 2007
	Shares			Amount			Shares		Amount
Shares sold		157,920		$	1,189,749			2,684,921	$	23,413,324
Shares issued to shareholders
in reinvestment of distributions		—			—			19,797		166,297
Shares redeemed		(2,461,454	)		(18,525,198	)		—		—
Net increase (decrease)		(2,303,534	)	$	(17,335,449	)		2,704,718	$	23,579,621

Shares outstanding:
Beginning of period		5,833,462						3,128,744
End of period		3,529,928						5,833,462

The Long/Short Equity—Earnings Revision-1 Portfolio:

	Year Ended December 31, 2008						Year Ended December 31, 2007
	Shares			Amount			Shares		Amount
Shares sold		122,138		$	1,494,463			2,174,609	$	23,560,203
Shares issued to shareholders
in reinvestment of distributions		—			—			70,051		840,607
Shares redeemed		(3,377,199	)		(42,000,000	)		—		—
Net increase (decrease)		(3,255,061	)	$	(40,505,537	)		2,244,660	$	24,400,810

Shares outstanding:
Beginning of period		5,042,959						2,798,299
End of period		1,787,898						5,042,959

The Long/Short Equity—Growth- 1 Portfolio:

	Year Ended December 31, 2008						Period from August 20, 2007(1) to December 31, 2007
	Shares			Amount			Shares		Amount
Shares sold		3,079,427		$	26,892,895			5,919,483	$	60,282,361
Shares issued to shareholders
in reinvestment of distributions		—			—			—		—
Shares redeemed		(6,991,498	)		(57,576,987	)		—		—
Net increase (decrease)		(3,912,071	)	$	(30,684,092	)		5,919,483	$	60,282,361

Shares outstanding:
Beginning of period		5,919,483						—
End of period		2,007,412						5,919,483

(1) Commencement of operations for the Long/Short Equity— Growth-1 Portfolio was August 20, 2007.

203

Underlying Funds Trust

Notes to Financial Statements

December 31, 2008

The Long/Short Equity—Healthcare/Biotech-1 Portfolio:

	Year Ended December 31, 2008						Year Ended December 31, 2007
	Shares			Amount			Shares		Amount
Shares sold		77,386		$	712,312			2,278,634	$	22,540,005
Shares issued to shareholders
in reinvestment of distributions		19,984			169,662			86,638		837,790
Shares redeemed		(2,308,585	)		(20,000,000	)		—		—
Net increase (decrease)		(2,211,215	)	$	(19,118,026	)		2,365,272	$	23,377,795

Shares outstanding:
Beginning of period		3,420,288						1,055,016
End of period		1,209,073						3,420,288

The Long/Short Equity—International-1 Portfolio:

	Year Ended December 31, 2008						Year Ended December 31, 2007
	Shares			Amount			Shares		Amount
Shares sold		199,066		$	1,926,442			3,142,726	$	31,842,719
Shares issued to shareholders
in reinvestment of distributions		—			—			241,302		2,422,666
Shares redeemed		(3,359,776	)		(30,228,584	)		—		—
Net increase (decrease)		(3,160,710	)	$	(28,302,142	)		3,384,028	$	34,265,385

Shares outstanding:
Beginning of period		5,436,267						2,052,239
End of period		2,275,557						5,436,267

The Long/Short Equity—Momentum-1 Portfolio:

	Year Ended December 31, 2008						Year Ended December 31, 2007
	Shares			Amount			Shares		Amount
Shares sold		1,224,802		$	12,590,990			4,984,122	$	48,789,995
Shares issued to shareholders
in reinvestment of distributions		—			—			61,788		626,533
Shares redeemed		(5,006,419	)		(48,675,743	)		—		—
Net increase (decrease)		(3,781,617	)	$	(36,084,753	)		5,045,910	$	49,416,528

Shares outstanding:
Beginning of period		8,048,621						3,002,711
End of period		4,267,004						8,048,621

204

Underlying Funds Trust

Notes to Financial Statements

December 31, 2008

The Long/Short Equity—REIT-1 Portfolio:

	Year Ended December 31, 2008						Year Ended December 31, 2007
	Shares			Amount			Shares		Amount
Shares sold		131,132		$	1,470,886			2,684,399	$	28,517,121
Shares issued to shareholders
in reinvestment of distributions		26,143			262,477			109,612		1,224,361
Shares redeemed		(3,722,468	)		(40,000,000	)		—		—
Net increase (decrease)		(3,565,193	)	$	(38,266,637	)		2,794,011	$	29,741,482

Shares outstanding:
Beginning of period		5,459,967						2,665,956
End of period		1,894,774						5,459,967

The Merger Arbitrage- 1 Portfolio:

	Year Ended December 31, 2008						Year Ended December 31, 2007
	Shares			Amount			Shares		Amount
Shares sold		147,183		$	1,432,324			2,086,861	$	22,686,749
Shares issued to shareholders
in reinvestment of distributions		—			—			236,011		2,404,951
Shares redeemed		(1,707,237	)		(15,375,349	)		—		—
Net increase (decrease)		(1,560,054	)	$	(13,943,025	)		2,322,872	$	25,091,700

Shares outstanding:
Beginning of period		4,645,244						2,322,372
End of period		3,085,190						4,645,244

7. Transactions with Affiliates

Pursuant to Section (2)(a)(3) of the 1940 Act, if any of the Portfolios own 5% or more of the outstanding voting securities of an issuer, the issuer is deemed to be an affiliate of that Portfolio. During the year ended from January 1, 2008 to December 31, 2008, the Portfolios owned the following positions in such companies for investment purposes only:

The Long/Short Equity—Deep Discount Value-1 Portfolio:

Issuer Name		Share Balance at December 31, 2007		Purchases		Sales		Share Balance at December 31, 2008		Value at December 31, 2008		Realized Gains (Losses)		Unrealized Gains (Losses)
Electronic Control Security, Inc.		1,537,859		—		1,537,859		—		$—		($787,705)		$—

205

Underlying Funds Trust

Notes to Financial Statements

December 31, 2008

The Distressed Securities & Special Situations-1 Portfolio:

Issuer Name	Share Balance at December 31, 2007	Purchases	Sales	Share Balance at December 31, 2008	Value at December 31, 2008	Realized Gains (Losses)	Unrealized Gains (Losses)
Electronic Control Security, Inc.	—	1,537,859	—	1,537,859	$107,650	$—	$(299,882)
IAT Air Cargo Facilities Income Fund	—	2,687,089	510	2,686,579	6,528,746	(434)	(11,988,710)

8. New Accounting Pronouncement

In March 2008, Statement of Financial Accounting Standards No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161") was issued and is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. SFAS 161 is intended to improve financial reporting for derivative instruments by requiring enhanced disclosure that enables investors to understand how and why an entity uses derivatives, how derivatives are accounted for, and how derivative instruments affect an entity's results of operations and financial position. Management is currently evaluating the implications of SFAS 161. The impact on the Fund's financial statement disclosures, if any, is currently being assessed.

The Statement of Financial Accounting Standards No. 133-1 “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45” amends FASB Statement No. 133 (“FAS 133”), “Accounting for Derivative Instruments and Hedging Activities”, and also amends FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” The amendments to FAS 133 include required disclosure for (i) the nature and terms of the credit derivative, reasons for entering into the credit derivative, the events or circumstances that would require the seller to perform under the credit derivative, and the current status of the payment/performance risk of the credit derivative, (ii) the maximum potential amount of future payments (undiscounted) the seller could be required to make under the credit derivative, (iii) the fair value of the credit derivative, and (iv) the nature of any recourse provisions and assets held either as collateral or by third parties. The amendments to FIN 45 require additional disclosures about the current status of the payment/performance risk of a guarantee. All changes to accounting policies have been made in accordance with the Position and incorporated for the current period.

206

Underlying Funds Trust

Notes to Financial Statements

December 31, 2008

9. Additional Tax Information (unaudited)

Long Term Capital Gain Designation

The Fund hereby designates the following as a capital gain dividend with respect to the taxable year ended December 31, 2008, or, if subsequently determined to be different, the net capital gain of such year:

The Arbitrage-1 Portfolio (Convertible Bond)	$	—
The Arbitrage-2 Portfolio (Fixed Income)		—
The Deep Value Hedged Income-1 Portfolio		—
The Distressed Securities & Special Situations-1 Portfolio		37,598
The Energy and Natural Resources-1 Portfolio		—
The Global Hedged Income-1 Portfolio		—
The Long/Short Equity—Deep Discount Value-1 Portfolio		—
The Long/Short Equity—Earning Revision-1 Portfolio		—
The Long/Short Equity—Growth-1 Portfolio		—
The Long/Short Equity—Healthcare/Biotech-1 Portfolio		136,606
The Long/Short Equity—International-1 Portfolio		—
The Long/Short Equity— Momentum-1 Portfolio		—
The Long/Short Equity—REIT-1 Portfolio		140,287
The Merger Arbitrage-1 Portfolio		—

Qualified Dividend Income/Dividends Received Deduction

For the fiscal year ended December 31, 2008, certain dividends paid by the Funds may be subject to a maximum tax rate of 15%, as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The percentage of dividends declared from ordinary income designated as qualified dividend income was as follows:

The Arbitrage-1 Portfolio (Convertible Bond)	15.89	%
The Arbitrage-2 Portfolio (Fixed Income)	0.00	%
The Deep Value Hedged Income-1 Portfolio	5.81	%
The Distressed Securities & Special Situations-1 Portfolio	20.54	%
The Energy and Natural Resources-1 Portfolio	100.00	%
The Global Hedged Income-1 Portfolio	17.99	%
The Long/Short Equity—Deep Discount Value-1 Portfolio	0.00	%
The Long/Short Equity—Earning Revision-1 Portfolio	77.04	%
The Long/Short Equity—Growth-1 Portfolio	0.00	%
The Long/Short Equity—Healthcare/Biotech-1 Portfolio	9.20	%
The Long/Short Equity—International-1 Portfolio	0.00	%
The Long/Short Equity— Momentum-1 Portfolio	0.00	%
The Long/Short Equity—REIT-1 Portfolio	15.10	%
The Merger Arbitrage-1 Portfolio	0.00	%

207

Underlying Funds Trust

Notes to Financial Statements

December 31, 2008

For corporate shareholders, the percent of ordinary income distributions qualifying for the corporate dividends received deduction for the fiscal year ended December 31, 2008 was as follows:

The Arbitrage-1 Portfolio (Convertible Bond)	15.20	%
The Arbitrage-2 Portfolio (Fixed Income)	0.00	%
The Deep Value Hedged Income-1 Portfolio	5.81	%
The Distressed Securities & Special Situations-1 Portfolio	45.12	%
The Energy and Natural Resources-1 Portfolio	100.00	%
The Global Hedged Income-1 Portfolio	0.42	%
The Long/Short Equity—Deep Discount Value-1 Portfolio	0.00	%
The Long/Short Equity—Earnings Revision-1 Portfolio	77.60	%
The Long/Short Equity—Growth-1 Portfolio	0.00	%
The Long/Short Equity—Healthcare/Biotech-1 Portfolio	1.87	%
The Long/Short Equity—International-1 Portfolio	0.00	%
The Long/Short Equity— Momentum-1 Portfolio	0.00	%
The Long/Short Equity—REIT-1 Portfolio	15.24	%
The Merger Arbitrage-1 Portfolio	0.00	%

Additional Information Applicable to Foreign Shareholders Only

The percent of ordinary income distributions designated as interest related dividends for the fiscal year ended December 31, 2008 was as follows:

The Arbitrage-1 Portfolio (Convertible Bond)	51.93	%
The Arbitrage-2 Portfolio (Fixed Income)	0.00	%
The Deep Value Hedged Income-1 Portfolio	91.29	%
The Distressed Securities & Special Situations-1 Portfolio	68.64	%
The Energy and Natural Resources-1 Portfolio	3.65	%
The Global Hedged Income-1 Portfolio	0.00	%
The Long/Short Equity—Deep Discount Value-1 Portfolio	0.00	%
The Long/Short Equity—Earning Revision-1 Portfolio	3.02	%
The Long/Short Equity—Growth-1 Portfolio	0.00	%
The Long/Short Equity—Healthcare/Biotech-1 Portfolio	1.98	%
The Long/Short Equity—International-1 Portfolio	0.00	%
The Long/Short Equity— Momentum-1 Portfolio	0.00	%
The Long/Short Equity—REIT-1 Portfolio	4.98	%
The Merger Arbitrage-1 Portfolio	0.00	%

208

Report of Independent Registered Public Accounting Firm

The Board of Trustees and Shareholders

Underlying Funds Trust:

We have audited the accompanying statements of assets and liabilities of Convertible Bond Arbitrage – 1 Portfolio, Deep Value Hedged Income – 1 Portfolio, Distressed Securities & Special Situations – 1 Portfolio, Energy and Natural Resources – 1 Portfolio, Fixed Income Arbitrage – 1 Portfolio, Global Hedged Income – 1 Portfolio, L/S Equity – Deep Discount Value – 1 Portfolio, L/S Equity – Earnings Revision – 1 Portfolio, L/S Equity – Growth – 1 Portfolio, L/S Equity – Healthcare/Biotech – 1 Portfolio, L/S Equity – International – 1 Portfolio, L/S Equity – Momentum – 1 Portfolio, L/S Equity – REIT – 1 Portfolio, Merger Arbitrage – 1 Portfolio, each a series of the Underlying Funds Trust, including the schedules of investments, securities sold short, and options written, as of December 31, 2008, and the related statements of operations for the year then ended, statements of cash flows of Deep Value Hedged Income – 1 Portfolio and Distressed Securities & Special Situations – 1 Portfolio for the year then ended, and the statements of changes in net assets and financial highlights for each of the years in the two-year period then ended. These financial statements and financial highlights are the responsibility of fund management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights for the periods presented through December 31, 2006 were audited by other independent registered public accountants whose report dated March 8, 2007 expressed an unqualified opinion on those financial highlights.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2008 by correspondence with the custodian and brokers, or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Convertible Bond Arbitrage – 1 Portfolio, Deep Value Hedged Income – 1 Portfolio, Distressed Securities & Special Situations – 1 Portfolio, Energy and Natural Resources – 1 Portfolio, Fixed Income Arbitrage – 1 Portfolio, Global Hedged Income – 1 Portfolio, L/S Equity – Deep Discount Value – 1 Portfolio, L/S Equity – Earnings Revision – 1 Portfolio, L/S Equity – Growth – 1 Portfolio, L/S Equity – Healthcare/Biotech – 1 Portfolio, L/S Equity – International – 1 Portfolio, L/S Equity – Momentum – 1 Portfolio, L/S Equity – REIT – 1 Portfolio, Merger Arbitrage – 1 Portfolio as of December 31, 2008, the results of their operations for the year then ended, the cash flows of Deep Value Hedged Income – 1 Portfolio and Distressed Securities & Special Situations – 1 Portfolio for the year then ended, and the changes in their net assets and financial highlights for each of the years in the two-year period then ended in conformity with U.S. generally accepted accounting principles.

Milwaukee, Wisconsin

March 2, 2009

209

Underlying Funds Trust
The Arbitrage-1 Portfolio (Convertible Bond)
Schedule of Securities Sold Short
December 31, 2008
	Shares		Value
COMMON STOCKS
Affiliated Managers Group, Inc.		4,000	$	167,680
Albany International Corp. - Class A		2,785		35,759
Alliant Techsystems, Inc.		1,025		87,904
American Equity Investment Life Holding Co.		14,125		98,875
American Medical Systems Holdings, Inc.		4,460		40,095
Amgen, Inc.		6,000		346,500
Archer-Daniels-Midland Co.		7,500		216,225
Cameron International Corp.		12,500		256,250
CBIZ, Inc.		6,180		53,457
Central European Distribution Corp.		6,080		119,776
Charles River Laboratories International, Inc.		1,270		33,274
Ciena Corp.		8,000		53,600
Conceptus, Inc.		10,000		152,200
Continental Airlines, Inc. - Class B		20,805		375,738
Diodes, Inc.		5,950		36,057
DST Systems, Inc.		1,035		39,309
El Paso Corp.		20,185		158,049
Endo Pharmaceuticals Holdings, Inc.		7,600		196,688
Exterran Holdings, Inc.		2,675		56,978
Global Crossing Ltd.		9,685		76,899
Greatbatch, Inc.		3,040		80,438
Helix Energy Solutions Group, Inc.		3,700		26,788
Henry Schein, Inc.		1,900		69,711
Hornbeck Offshore Services, Inc.		5,000		81,700
Incyte Corp. Ltd.		6,970		26,416
Interpublic Group of Companies, Inc.		17,300		68,508
Itron, Inc.		1,000		63,740
Kendle International, Inc.		17,580		452,158
Kinetic Concepts, Inc.		1,455		27,907
L-3 Communications Holdings, Inc.		1,800		132,804
Leucadia National Corp.		3,245		64,251
Life Technologies Corp.		900		20,979
LifePoint Hospitals, Inc.		1,100		25,124
Lions Gate Entertainment Corp.		5,770		31,735
Millipore Corp.		1,120		57,702
Morgans Hotel Group Co.		20,000		93,200
Mylan, Inc.		4,500		44,505
NII Holdings, Inc.		7,000		127,260
Penn Virginia Corp.		1,070		27,799
Penske Auto Group, Inc.		5,555		42,663
PMC - Sierra, Inc.		37,500		182,250
PSS World Medical, Inc.		11,970		225,275
SAVVIS, Inc.		2,000		13,780
School Specialty, Inc.		4,520		86,423
Scientific Games Corp. - Class A		12,000		210,480
SEACOR Holdings, Inc.		985		65,650

Smithfield Foods, Inc.		2,590		36,441
SonoSite, Inc.		1,800		34,344
St. Mary Land & Exploration Co.		1,160		23,560
Superior Energy Services, Inc.		8,600		136,998
Tech Data Corp.		720		12,845
Time Warner, Inc.		4,600		46,276
Transocean Ltd.		3,800		179,550
Triumph Group, Inc.		1,165		49,466
United Rentals, Inc.		2,300		20,976
Vertex Pharmaceuticals, Inc.		4,950		150,381
Waste Connections, Inc.		2,630		83,029
Wright Medical Group, Inc.		2,100		42,903
TOTAL COMMON STOCK (Proceeds $10,207,881)			$	5,767,328

INVESTMENT COMPANIES
ishares Barclays 20+ Year Treasury Bond Fund		3,775		450,546
TOTAL INVESTMENT COMPANIES (Proceeds $347,217)			$	450,546

	Principal
	Amount
U.S. TREASURY OBLIGATIONS
United States Treasury Notes
3.875%, 05/15/2018	$	250,000		285,078
TOTAL U.S TREASURY OBLIGATIONS (Proceeds $251,827)			$	285,078
Total Securities Sold Short (Proceeds $10,806,925)			$	6,502,952

The accompanying notes are an integral part of these financial statements.

Underlying Funds Trust
The Arbitrage-2 Portfolio (Fixed Income)
Schedule of Investments
December 31, 2008
	Principal
	Amount		Value
ASSET BACKED SECURITIES - 9.1%
American Airlines, Inc. Pass through Trust
Series 2001-1, 6.817%, 11/23/2012	$	400,000	$	256,000
Bear Stearns Asset Backed Securities Trust
Series 2007-AQ2 Class A1, 0.571%, 05/25/2030 (f)		164,398		128,508
Series 2007-HE4 Class 1A1, 0.591%, 05/25/2031		120,709		102,178
Carrington Mortgage Loan Trust
Series 2006-NC1, 0.631%, 08/25/2030		152,363		145,300
Citigroup Mortgage Loan Trust, Inc.
Series 2007-AMC2 Class A3A, 0.551%, 01/25/2037 (f)		296,793		245,063
Credit-Based Asset Servicing and Securitization LLC
Series 2006-CB2 Class AF2, 5.501%, 12/25/2036		175,979		145,989
DVI Receivables Corp.
Series 2002-2 Class A3A, 1.989%, 09/12/2010 (f)		78,937		35,522
Series 2003-1 Class A3A, 1.939%, 03/12/2011 (f) (h)		779,280		101,306
Equity One ABS, Inc.
Series 2002-4 Class B, 5.909%, 02/25/2033 (f)		27,992		5,124
First Franklin Mortgage Loan Asset Backed Certificates
Series 2004-FF8 Class B4, 3.971%, 10/25/2034 (Acquired 02/02/2005, Cost $29,231) (a) (f)		31,463		2,182
Series 2005-FF1 Class B4, 3.971%, 03/25/2035 (Acquired 02/02/2005, Cost $12,247) (a) (f)		13,144		267
Series 2005-FF9 Class A3, 0.751%, 10/25/2035		357,101		302,575
GSAMP Trust
Series 2007-HE2 Class A2A, 1.515%, 03/25/2037		334,231		249,226
Indymac Manufactured Housing Contract
Series 1998-2 Class A4, 6.640%, 12/25/2027		147,173		120,838
Merit Securities Corp.
Series 13 Class A4, 7.995%, 12/28/2033		292,059		291,082
Morgan Stanley ABS Capital l
Series 2007-HE1 Class A2A, 0.521%, 11/25/2036		244,599		229,911
Option One Mortgage Loan Trust
Series 2007-Hl1 Class 2A1, 0.591%, 02/25/2038		248,392		210,250
Residential Asset Mortgage Products, Inc.
Series 2006-RS2 Class A2, 0.671%, 01/25/2034		352,711		250,970
Residential Asset Securities Corp.
Series 2005-KS10 Class 1A2, 0.721%, 11/25/2035		287,675		253,350
Securitized Asset Backed Receivables LLC Trust
Series 2005-FR3 Class M1, 0.941%, 04/25/2035 (f)		350,000		313,123
Series 2006-NC1 Class A2, 0.631%, 03/25/2036		472,388		419,901
Series 2007-BR5 Class A2A, 0.601%, 05/25/2037 (f)		732,031		489,976
Soundview Home Equity Loan Trust
Series 2003-2 Class B, 5.500%, 11/25/2033 (Acquired 08/25/2005, Cost $18,584) (a) (f)		20,755		940
Structured Asset Securities Corp.
Series 2005-WF3 Class B1, 2.971%, 07/25/2035 (Acquired 07/20/2005, Cost $134,356) (a) (f)		150,818		3,064
Series 2007-EQ1 Class A2, 0.561%, 03/25/2037 (f)		261,220		206,976
Wells Fargo Home Equity Trust
Series 2005-3 Class AI1A, 0.741%, 11/25/2035 (Acquired 11/30/2007, Cost $249,670) (a)		263,504		242,526
TOTAL ASSET BACKED SECURITIES (Cost $6,241,048)			$	4,752,147

CORPORATE BONDS - 2.6%
Commercial Banks - 0.1%
Shinsei Financial Cayman Ltd.
6.418%, 07/20/2048 (Acquired 02/16/2006, Cost $195,000) (a) (b)	195,000		40,785
Consumer Finance - 0.1%
Discover Financial Services
6.450%, 06/12/2017	55,000		38,592
Hotels, Restaurants & Leisure - 0.8%
Harrah's Operating Co., Inc.
6.500%, 06/01/2016	223,000		34,565
10.000%, 12/15/2018 (Acquired 12/24/2008, Cost $87,540) (a)	44,000		16,060
MGM Mirage
6.000%, 10/01/2009	200,000		191,000
Starwood Hotels & Resorts Worldwide Inc.
6.250%, 02/15/2013	270,000		186,300
Total Hotels, Restaurants & Leisure			427,925

Insurance - 0.1%
MetLife, Inc.
6.400%, 12/15/2066	125,000		75,000
IT Services - 0.3%
First Data Corp.
9.875%, 09/24/2015	230,000		139,150
Metals & Mining - 0.3%
Freeport-McMoRan Copper & Gold, Inc.
8.250%, 04/01/2015	170,000		144,500
Specialty Retail - 0.6%
Autozone, Inc.
6.500%, 01/15/2014	340,000		303,757
Textiles, Apparel & Luxury Goods - 0.3%
Hanesbrands, Inc.
5.698%, 12/15/2014 (b)	270,000		190,350
TOTAL CORPORATE BONDS (Cost $2,114,993)		$	1,360,059

FOREIGN GOVERNMENT OBLIGATIONS - 0.4%
Democratic Socialist Republic of Sri Lanka
8.250%, 10/24/2012 (Acquired 10/17/2007, Cost $340,000) (a)	340,000		221,000
TOTAL FOREIGN GOVERNMENT BONDS (Cost $340,000)		$	221,000

COLLATERALIZED MORTGAGE OBLIGATIONS - 72.5%
Federal Home Loan Mortgage Corp. Strip
Series 227 Class IO, 5.000%, 12/01/2034 (g)	796,789		97,400
Federal National Mortgage Association 15-Yr. Fixed
Pool # 16869, 6.000%, 01/25/2022 (c)	18,000,000		18,663,750
Federal National Mortgage Association 30-Yr. Fixed
Pool # 54118, 6.000%, 01/01/2029 (c)	9,000,000		9,264,375
Pool # 42889, 5.500%, 01/01/2038 (c)	2,000,000		2,050,000
Federal National Mortgage Association Interest Strip
Series 337 Class 2, 5.000%, 07/01/2033 (g)	966,834		108,674
Series 343 Class 2, 4.500%, 10/01/2033 (g)	253,150		35,989
Series 353 Class 2, 5.000%, 07/25/2034 (g)	596,990		72,164
Series 356 Class 8, 5.000%, 02/01/2035 (g)	443,793		62,516
Series 356 Class 3, 5.000%, 03/01/2035 (g)	124,521		17,770
Series 357 Class 2, 5.000%, 03/01/2035 (g)	3,400,833		409,069

Series 356 Class 19, 6.000%, 03/01/2035 (g)		117,851		13,649
GS Mortgage Securities Corp. II
Series 2007-GG10 Class A4, 5.799%, 08/10/2045		10,000,000		7,256,566
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost $37,957,540)			$	38,051,922

U.S. GOVERNMENT AGENCY ISSUES - 1.7%
Federal Home Loan Mortgage Corp. Discount Note
2.840%, 03/23/2009 (d) (i)		200,000		199,969
2.893%, 03/30/2009 (d) (i)		100,000		99,983
Federal National Mortgage Association Discount Note
2.611%, 02/02/2009 (d) (i)		575,000		573,687
TOTAL U.S. GOVERNMENT AGENCY ISSUES (Cost $871,730)			$	873,639

Total Investments (Cost $47,525,311) - 86.3%			$	45,258,767

REPURCHASE AGREEMENTS - 58.5%
J.P. Morgan
0.050%, dated 12/31/2008, due 01/02/2009
repurchase price $30,671,088 (e)	$	30,671,003		30,671,003
TOTAL REPURCHASE AGREEMENTS (Cost $30,671,003)			$	30,671,003

Liabilities in Excess of Other Assets - (44.8)%				(23,481,469	)
TOTAL NET ASSETS - 100.0%			$	52,448,301

Underlying Funds Trust
The Arbitrage-1 Portfolio (Convertible Bond)
Schedule of Options Written
December 31, 2008

	Contracts		Value
CALL OPTIONS
Continental Airlines, Inc.
Expiration: January 2009, Exercise Price: $15.00		26	$	9,360
Expiration: January 2009, Exercise Price: $20.00		26		1,430
Intel Corp.
Expiration: January 2009, Exercise Price: $30.00		100		50

PUT OPTIONS
Continental Airlines, Inc.
Expiration: January 2009, Exercise Price: $10.00		52		260
				11,100
Total Options Written (Premiums received $41,727)			$	11,100

The accompanying notes are an integral part of these financial statements.

Underlying Funds Trust
The Arbitrage-2 Portfolio (Fixed Income)
Schedule of Future Contracts
December 31, 2008


			Unrealized Appreciation/
	Contracts		(Depreciation)
FUTURES CONTRACTS PURCHASED
Eurodollar 90 Day Futures Contract, Expiring March 2009
(underlying Face Amount at Market Value $13,109,550)		53	$	222,930
Eurodollar 90 Day Futures Contract, Expiring June 2009
(underlying Face Amount at Market Value $16,066,375)		65		306,182
Eurodollar 90 Day Futures Contract, Expiring September 2009
(underlying Face Amount at Market Value $24,192,525)		98		529,688
Eurodollar 90 Day Futures Contract, Expiring December 2009
(underlying Face Amount at Market Value $6,161,563)		25		37,238
Eurodollar 90 Day Futures Contract, Expiring March 2010
(underlying Face Amount at Market Value $5,662,025)		23		29,530
Eurodollar 90 Day Futures Contract, Expiring September 2010
(underlying Face Amount at Market Value $3,677,812)		15		13,275
Eurodollar 90 Day Futures Contract, Expiring December 2010
(underlying Face Amount at Market Value $5,872,800)		24		172,163
Eurodollar 90 Day Futures Contract, Expiring March 2011
(underlying Face Amount at Market Value $3,177,200)		13		90,417
Eurodollar 90 Day Futures Contract, Expiring June 2011
(underlying Face Amount at Market Value $2,440,625)		10		66,537
Eurodollar 90 Day Futures Contract, Expiring September 2011
(underlying Face Amount at Market Value $487,625)		2		11,845
Euro-Schatz Futures Contract, Expiring March 2009
(underlying Face Amount at Market Value $5,975,535)		40		23,867
Euro-Bobl Futures Contract, Expiring March 2009
(underlying Face Amount at Market Value $2,584,598)		16		23,067
Euro-Bond 10-Year Futures Contract, Expiring March 2009
(underlying Face Amount at Market Value $26,659,000)		212		556,360
FED Fund 30 Day, Expiring February 2009
(underlying Face Amount at Market Value $12,474,748)		30		249,829
10-Year Future, Expiring March 2009
(underlying Face Amount at Market Value $173,533)		1		1,537

TOTAL FUTURES CONTRACTS PURCHASED			$	2,334,465

SHORT FUTURES CONTRACTS
Eurodollar 90 Day Futures Contract, Expiring June 2010
(underlying Face Amount at Market Value $491,300)	2	$	(3,130	)
Eurodollar 90 Day Futures Contract, Expiring December 2012
(underlying Face Amount at Market Value $243,188)	1		(4,790	)
Eurodollar 90 Day Futures Contract, Expiring March 2013
(underlying Face Amount at Market Value $243,138)	1		(4,815	)
Eurodollar 90 Day Futures Contract, Expiring June 2013
(underlying Face Amount at Market Value $242,987)	1		(4,840	)
Eurodollar 90 Day Futures Contract, Expiring September 2013
(underlying Face Amount at Market Value $242,787)	1		(4,778	)
U.S. Treasury 2-Year Note Futures Contract, Expiring March 2009
(underlying Face Amount at Market Value $57,132,375)	262		(385,467	)
U.S. Treasury 5-Year Note Futures Contract, Expiring March 2009
(underlying Face Amount at Market Value $19,644,024)	165		(257,139	)
U.S. Treasury 5-Year Swap Futures Contract, Expiring March 2009
(underlying Face Amount at Market Value $8,603,735)	73		(167,285	)
U.S. Treasury 10-Year Swap Futures Contract, Expiring March 2009
(underlying Face Amount at Market Value $1,165,219)	9		(48,101	)
U.S. Treasury Bond Futures Contract, Expiring March 2009
(underlying Face Amount at Market Value $4,555,547)	33		(225,153	)

TOTAL SHORT FUTURES CONTRACTS		$	(1,105,498	)

TOTAL FUTURES CONTRACTS		$	1,228,967

Underlying Funds Trust
The Arbitrage-2 Portfolio (Fixed Income)
Schedule of Swap Contracts
December 31, 2008

			Pay/Receive			Moody's Rating	Maximum	Unrealized
Counterparty	Reference Entity	Buy/Sell Protection	Fixed Annual Rate	Termination Date	Notional Value	of Reference Entity	Potential Future	Appreciation/ Payment

CREDIT DEFAULT SWAP BUY CONTRACTS


Goldman Sachs & Co.	3M Company, 7.000%	Buy	0.07%	3/20/2011	(2,000,000)	Aa1	(2,000,000)	44,172

Goldman Sachs & Co.	ACE Limited	Buy	1.50%	12/20/2013	(4,500,000)	A3	(4,500,000)	(107,848)

Goldman Sachs & Co.	BorgWarner, Inc., 0.660%	Buy	0.66%	3/20/2013	(3,250,000)	Baa3	(3,250,000)	330,018

Goldman Sachs & Co.	BorgWarner, Inc., 0.800%	Buy	0.80%	3/20/2013	(1,750,000)	Baa3	(1,750,000)	168,564

Goldman Sachs & Co.	CenturyTel, Inc., 6.00%	Buy	1.10%	3/20/2013	(3,250,000)	Baa2	(3,250,000)	35,084

Goldman Sachs & Co.	Commercial Metals Co., 0.400%	Buy	0.40%	12/20/2011	(1,500,000)	Baa2	(1,500,000)	191,174

Goldman Sachs & Co.	Darden Restaurants Inc., 7.125%	Buy	0.34%	9/20/2011	(1,000,000)	Baa3	(1,000,000)	60,278

Goldman Sachs & Co.	Dow Jones CDX Emerging Markets Index(1)	Buy	1.75%	12/20/2012	(7,400,000)	Ba1	(7,400,000)	1,081,582

Goldman Sachs & Co.	Dow Jones CDX North American High Yield Index(1)	Buy	3.40%	6/20/2010	(975,000)	B2	(975,000)	20,683

Goldman Sachs & Co.	First Franklin Mortgage Loan Asset Backed Certificate	Buy	2.50%	10/25/2036	(500,000)	C	(500,000)	366,410
	Series 2006-FF13, 4.500% (a)

Goldman Sachs & Co.	GATX Financial Corp., 8.875%	Buy	0.39%	6/20/2014	(1,200,000)	Baa1	(1,200,000)	162,225

Goldman Sachs & Co.	Hasbro, Inc., 6.150%	Buy	0.38%	9/20/2011	(1,000,000)	Baa2	(1,000,000)	36,016

Goldman Sachs & Co.	IXIS Real Estate Capital Trust	Buy	2.24%	2/25/2036	(390,343)	C	(390,343)	374,515
	2005-HE4B, 5.326% (a)

Goldman Sachs & Co.	Johnson Controls, Inc., 7.125%	Buy	0.44%	12/20/2013	(1,500,000)	A3	(1,500,000)	277,397

Goldman Sachs & Co.	Limited Brands, Inc., 6.125%	Buy	0.88%	3/20/2011	(1,000,000)	Ba1	(1,000,000)	101,366

Goldman Sachs & Co.	Lowes Companies, Inc., 8.250%	Buy	0.15%	3/20/2011	(1,000,000)	A1	(1,000,000)	22,205

Goldman Sachs & Co.	Lowe's Companies, Inc., 8.250%	Buy	0.10%	9/20/2011	(1,000,000)	A1	(1,000,000)	28,209

Goldman Sachs & Co.	Markit CDX.NA.IG.9(1)	Buy	5.00%	12/20/2012	(1,693,387)	Baa1	(1,693,387)	69,923

Goldman Sachs & Co.	Markit CMBX.NA.BBB.2 Index(1)	Buy	0.60%	3/15/2049	(1,000,000)	Baa2	(1,000,000)	232,360

Goldman Sachs & Co.	Markit CMBX.NA.BBB.2 Index(1)	Buy	0.60%	3/15/2049	(1,000,000)	Baa2	(1,000,000)	232,360

Goldman Sachs & Co.	Masco Corp., 5.875%	Buy	0.65%	3/20/2011	(1,000,000)	Ba1	(1,000,000)	86,920

Goldman Sachs & Co.	MDC Holdings, Inc., 5.500%	Buy	1.03%	3/20/2011	(1,000,000)	Baa3	(1,000,000)	13,961

Goldman Sachs & Co.	Meadwestvaco Corp., 6.850%	Buy	0.72%	3/20/2011	(1,000,000)	Ba1	(1,000,000)	22,972

Goldman Sachs & Co.	MGIC Investment Corp., 0.350%	Buy	0.35%	12/20/2013	(1,000,000)	Baa1	(1,000,000)	330,571

Goldman Sachs & Co.	Merrill Lynch Mortgage Investors Trust	Buy	2.37%	12/25/2036	(178,782)	C	(178,782)	174,843
	Series 2006-HE1, 5.626% (a)

Goldman Sachs & Co.	Nordstrom Inc., 5.625%	Buy	0.35%	3/20/2011	(1,000,000)	Baa1	(1,000,000)	109,867

Goldman Sachs & Co.	Nordstrom, Inc.	Buy	0.58%	6/20/2010	(1,000,000)	Baa1	(1,000,000)	75,482

Goldman Sachs & Co.	Radian Group, 0.390%	Buy	0.39%	12/20/2013	(1,000,000)	Ba1	(1,000,000)	508,808

Goldman Sachs & Co.	Radioshack Corp., 7.375%	Buy	1.12%	9/20/2011	(1,000,000)	Ba1	(1,000,000)	28,876

Goldman Sachs & Co.	Republic of Hungary	Buy	1.47%	10/20/2013	(1,500,000)	A3	(1,500,000)	165,823


Goldman Sachs & Co.	Republic of Panama, 8.875%	Buy	1.32%	5/20/2011	(1,000,000)	Ba1	(1,000,000)	33,552

Goldman Sachs & Co.	Residential Capital, LLC, 6.500%	Buy	1.05%	3/20/2012	(2,000,000)	C	(2,000,000)	1,017,359

Goldman Sachs & Co.	Soundview Home Equity Loan Trust	Buy	3.87%	1/25/2037	(500,000)	C	(500,000)	487,542
	Series 2006-EQ2, 4.876% (a)

Goldman Sachs & Co.	Southwest Airlines Co.	Buy	1.83%	9/20/2013	(4,000,000)	Baa1	(4,000,000)	434,701

Goldman Sachs & Co.	The Gap, Inc., 6.900%	Buy	1.25%	3/20/2011	(1,000,000)	Ba1	(1,000,000)	(6,755)

Goldman Sachs & Co.	The Gap, Inc., 9.550%	Buy	0.79%	9/20/2011	(1,000,000)	Ba1	(1,000,000)	4,267

Goldman Sachs & Co.	The Lubrizol Corporation	Buy	0.82%	9/20/2013	(5,000,000)	Baa2	(5,000,000)	251,628

Goldman Sachs & Co.	The PMI Group, Inc., 0.350%	Buy	0.35%	12/20/2013	(1,000,000)	A1	(1,000,000)	345,368

Goldman Sachs & Co.	The TJX Companies, 7.45 %	Buy	0.39%	3/20/2011	(1,000,000)	A3	(1,000,000)	18,109

Goldman Sachs & Co.	Volkswagen Aktiengesellschaft, 4.875%	Buy	0.54%	3/20/2013	(1,500,000)	A3	(1,500,000)	117,447

Goldman Sachs & Co.	Whirlpool Corporation	Buy	1.02%	9/20/2013	(325,000)	Baa2	(325,000)	360,460

JP Morgan	AUTOZONE, Inc.	Buy	1.35%	12/20/2013	(5,000,000)	Baa2	(5,000,000)	8,282

JP Morgan	CDX.EM.10(1)	Buy	3.35%	12/20/2013	(2,000,000)	Ba1	(2,000,000)	(47,317)

JP Morgan	Markit ABX.HE.AAA.06-2(1)	Buy	0.11%	5/25/2046	(4,000,000)	A1	(4,000,000)	1,030,287

JP Morgan	Markit ABX.HE.AAA.06-2(1)	Buy	0.11%	5/25/2046	(4,000,000)	A1	(4,000,000)	845,287

JP Morgan	Markit CDX.EM.9(1)	Buy	2.65%	6/20/2013	(1,700,000)	Ba1	(1,700,000)	195,949

Total Credit Default Swap Buy Contracts								10,340,982

CREDIT DEFAULT SWAP SELL CONTRACTS


Goldman Sachs & Co.	Dow Jones CDX North American High Yield Index(1)	Sell	3.25%	12/20/2011	4,900,000	B2	4,900,000	(447,091)

Goldman Sachs & Co.	Dow Jones CDX North American High Yield Index, 3.250%(1)	Sell	3.25%	12/20/2011	6,860,000	B2	6,860,000	(831,727)

Goldman Sachs & Co.	Dow Jones CDX North American Investment Grade Index(1)	Sell	0.45%	12/20/2010	6,832,000	Baa1	6,832,000	(410,822)

Goldman Sachs & Co.	Dow Jones CDX North American Investment Grade Index(1)	Sell	0.90%	6/20/2010	9,000,000	Baa3	9,000,000	(471,426)

Goldman Sachs & Co.	Ford Motor Credit Co., 7.000%	Sell	3.75%	9/20/2010	1,000,000	Caa1	1,000,000	(107,995)

Goldman Sachs & Co.	Ford Motor Credit Company, 7.000%	Sell	1.07%	3/20/2009	750,000	Caa1	750,000	(6,243)

Goldman Sachs & Co.	GMAC, LLC, 0.580%	Sell	0.58%	3/20/2009	1,000,000	C	1,000,000	(9,488)

Goldman Sachs & Co.	Markit ABX.HE.AAA.06-1 Index(1)	Sell	0.18%	7/25/2045	1,919,583	Aaa	1,919,583	(133,765)

Goldman Sachs & Co.	Markit ABX.HE.PENAAA.06-1 Index(1)	Sell	0.18%	7/25/2045	1,846,525	Aaa	1,846,525	(96,333)

Goldman Sachs & Co.	Markit CDX.NA.IG.9(1)	Sell	0.60%	12/20/2012	4,099,200	Baa1	4,099,200	(77,336)

Goldman Sachs & Co.	Sabre Holdings Corporation, 7.350%	Sell	1.06%	3/20/2009	750,000	Caa1	750,000	(68,161)

Goldman Sachs & Co.	The Good Year Tire & Rubber Co., 0.700%	Sell	0.70%	3/20/2009	1,000,000	B2	1,000,000	(24,806)

JP Morgan	ABX.HE.PENAAA.06-2(1)	Sell	0.11%	5/25/2046	4,420,729	Aa3	4,420,729	13,389

JP Morgan	HCA, Inc.	Sell	1.20%	3/20/2009	1,000,000	Caa1	1,000,000	(3,367)


JP Morgan	Markit ABX.HE.AA.06-1(1)	Sell	0.32%	7/25/2045	7,000,000	Aa3	7,000,000	(1,577,907)

JP Morgan	Markit ABX.HE.AA.06-1(1)	Sell	0.32%	7/25/2045	4,000,000	Aa3	4,000,000	(1,111,661)

JP Morgan	Markit ABX.HE.AAA.06-1(1)	Sell	0.18%	7/25/2045	2,879,374	Aaa	2,879,374	(222,219)

JP Morgan	Markit ABX.HE.AAA.06-1(1)	Sell	0.18%	7/25/2045	4,223,082	Aaa	4,223,082	(399,825)

JP Morgan	Residential Capital Corp	Sell	1.08%	6/20/2011	1,000,000	C	1,000,000	(506,009)

Total Credit Default Swap Sell Contracts								(6,492,792)


Total Credit Default Swap Contracts								3,848,190


(1) Implied credit rating is shown. The implied credit rating represents the weighted average credit rating of the underlying securities in the index .

The accompanying notes are an integral part of these financial statements.

Federal Home Loan Mortgage Corp.
Series 2591 Class IB, 5.500%, 02/15/2030 (g)	303,228		22,584
QHL-1 1st Funding Loan
12.000%, 05/17/2010 (Acquired 06/15/2007, Cost $1,845,000) (a) (d) (f) (h)	1,845,000		1,483,380
Terwin Mortgage Trust
Series 2007-QHL1, 0.000%, 10/25/2013 (c) (f) (h)	660,723		19,821
Series 2007-QHL1, 7.870%, 10/13/2038 (f) (h)	789,358		631,486
Series 2007-QHL1 Class P, 17.360%, 10/25/2038 (f) (h)	5,614,772		6,861
Series 2007-QHL1 Class X, 0.000%, 10/25/2038 (f) (h)	5,614,772		280,739
Series 2007-QHL1 Class M1, 1.971%, 10/25/2038 (f) (h)	260,000		111,800
Series 2007-QHL1 Class M2, 1.971%, 10/25/2038 (f) (h)	217,000		84,630
Series 2007-QHL1 Class M3, 1.971%, 10/25/2038 (f) (h)	255,000		73,950
Series 2007-QHL1 Class M4, 1.971%, 10/25/2038 (f) (h)	118,000		8,260
Series 2007-QHL1 Class B1, 5.000%, 10/25/2038 (f) (h)	160,000		3,000
Series 2007-QHL1 Class M5, 5.000%, 10/25/2038 (f) (h)	229,000		11,449
Series 2007-QHL1 Class M6, 5.000%, 10/25/2038 (f) (h)	89,000		3,560
Series 2007-QHL1 Class M7, 5.000%, 10/25/2038 (f) (h)	87,000		2,520
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost $5,959,061)		$	3,237,712

CONVERTIBLE BONDS - 1.5%
Auto Components - 1.5%
Standard Motor Products, Inc.
6.750%, 07/15/2009	780,000		706,875
TOTAL CONVERTIBLE BONDS (Cost $768,781)		$	706,875

CORPORATE BONDS - 61.4%
Airlines - 0.8%
American Airlines, Inc. Equipment Trust 1990
10.610%, 03/04/2010 (f)	500,000		345,625
Apparel Retail - 0.4%
Rafaella Apparel Group, Inc.
11.250%, 06/15/2011	506,000		179,630
Auto Components - 2.9%
Cooper-Standard Automotive, Inc.
8.375%, 12/15/2014	1,000,000		175,000
J.B. Poindexter & Co., Inc.
8.750%, 03/15/2014	1,000,000		472,500
Keystone Automotive Operations, Inc.
9.750%, 11/01/2013	1,000,000		380,000
Lear Corp.
8.750%, 12/01/2016	1,000,000		290,000
Total Auto Components			1,317,500

Building Materials - 0.5%
Ply Gem Industries, Inc.
9.000%, 02/15/2012	1,000,000		240,000
Chemicals - 2.3%
Momentive Performance Materials, Inc.
11.500%, 12/01/2016 (b)	2,000,000		590,000
Nova Chemicals Corp.
7.400%, 04/01/2009	500,000		461,250
Total Chemicals			1,051,250

Commercial Services & Supplies - 1.8%
Aleris International, Inc.
10.000%, 12/15/2016	1,000,000	162,500
Koosharem Corp.
5.790%, 07/01/2014 (i)	1,076,736	376,858
West Corp.
9.500%, 10/15/2014	500,000	275,000
Total Commercial Services & Supplies		814,358

Computers & Peripherals - 1.2%
Intcomex, Inc.
11.750%, 01/15/2011	380,000	180,500
Viasystems, Inc.
10.500%, 01/15/2011	500,000	362,500
Total Computers & Peripherals		543,000
Construction & Engineering - 0.1%
Autopistas del Sol SA
7.000%, 06/15/2009 (Acquired 02/27/2008, Cost $84,308) (a) (i)	85,000	63,750
Consumer Finance - 2.3%
Discover Financial Services
2.629%, 06/11/2010 (b)	750,000	642,192
Ford Motor Credit Co., LLC
9.750%, 09/15/2010 (b) (f)	500,000	399,997
Total Consumer Finance		1,042,189

Containers & Packaging - 4.3%
Berry Plastic Holdings Corp.
10.250%, 03/01/2016	1,000,000	355,000
Caraustar Industries, Inc.
7.375%, 06/01/2009	1,000,000	582,500
Constar International, Inc.
11.000%, 12/01/2012 (d)	292,000	7,300
Portola Packaging, Inc.
8.250%, 02/01/2012 (d)	1,000,000	375,000
Solo Cup Co.
8.500%, 02/15/2014	1,000,000	640,000
Total Containers & Packaging		1,959,800

Diversified Telecommunications - 1.2%
Primus Telecommunications IHC, Inc.
14.250%, 05/20/2011 (f) (i)	3,000,000	480,000
14.250%, 05/20/2011 (Acquired 05/19/2008, Cost $703,558) (a) (f) (i)	500,000	80,000
		560,000
Electrical Equipment - 1.4%
Coleman Cable, Inc.
9.875%, 10/01/2012	1,000,000	631,250
International Wire Group, Inc.
10.000%, 10/15/2011	26,000	21,190
Total Electrical Equipment		652,440

Electronics - 0.4%
NXP BV / NXP Funding LLC
9.500%, 10/15/2015 (Acquired 09/26/2007, Cost $946,503) (a) (f)	1,000,000	190,000

Food & Staples Retailing - 1.2%
Duane Reade, Inc.
9.750%, 08/01/2011			350,000	185,500
Rite Aid Corp.
8.625%, 03/01/2015			1,000,000	345,000
Total Food & Staples Retailing				530,500

Food Products - 1.0%
Dole Food Co., Inc.
8.625%, 05/01/2009 (b)			500,000	452,500
Health Care Equipment & Supplies - 1.5%
Accellent, Inc.
10.500%, 12/01/2013			1,000,000	685,000
Health Care Providers & Services - 1.1%
Select Medical Corp.
8.834%, 09/15/2015 (b)			1,000,000	520,000
Hotels, Restaurants & Leisure - 6.4%
Buffets, Inc.
12.500%, 11/01/2014 (d)			1,000,000	1,875
Denny's Holdings, Inc.
10.000%, 10/01/2012			500,000	346,250
Harrahs Operating Co., Inc.
5.500%, 07/01/2010			500,000	317,500
Inn of the Mountain Gods Resort & Casino
12.000%, 11/15/2010			500,000	165,000
Landry's Restaurants, Inc.
9.500%, 12/15/2014 (b)			250,000	250,000
Perkins & Marie Callender's, Inc.
10.000%, 10/01/2013			1,000,000	485,000
Real Mex Restaurants, Inc.
10.000%, 04/01/2010 (b)			500,000	380,000
Silverleaf Resorts, Inc.
8.000%, 04/01/2010			1,200,000	960,000
Total Hotels, Restaurants & Leisure				2,905,625

Household Durables - 0.2%
TOUSA, Inc.
9.000%, 07/01/2010 (d)			1,000,000	20,000
Waterford Wedgwood PLC
9.875%, 12/01/2010 (d) (f)	EUR		500,000	55,602
Total Household Durables				75,602

Household Products - 0.6%
Spectrum Brands, Inc.
12.500%, 10/02/2013 (b)		$	1,000,000	272,500
IT Services - 0.8%
Unisys Corp.
6.875%, 03/15/2010			750,000	352,500
Machinery - 4.3%
Fantuzzi Finance SA
10.750%, 07/16/2020 (d) (f) (i)	EUR		596,000	621,351
Luxfer Holdings
11.330%, 02/06/2012 (i)		$	80,000	80,514

Milacron Escrow Corp.
11.500%, 05/15/2011			1,000,000	650,000
Wolverine Tube, Inc.
10.500%, 04/01/2009			750,000	603,750
Total Machinery				1,955,615

Media - 2.9%
American Media Operations, Inc.
10.250%, 05/01/2009			2,000,000	402,512
10.250%, 05/01/2009 (Acquired 01/18/2008, Cost $0) (a) (f)			36,360	7,318
Charter Comm. Holdings I LLC/Charter Comm. Holdings I Capital Corp.
13.500%, 01/15/2014 (b)			1,000,000	51,250
11.750%, 05/15/2014 (b)			1,000,000	51,250
Knight Ridder, Inc.
7.125%, 06/01/2011			750,000	210,000
Satelites Mexicanos SA de CV
10.209%, 11/30/2011 (b)			500,000	265,000
The Sheridan Group, Inc.
10.250%, 08/15/2011			500,000	350,625
Vertis, Inc.
13.500%, 04/01/2014 (f)			305,714	4,586
Total Media				1,342,541

Metals & Mining - 2.0%
Asia Aluminum Holdings Ltd.
8.000%, 12/23/2011			25,000	7,500
Frontera Copper Corp.
10.000%, 06/15/2010 (f)	CAD		1,300,000	421,223
Neenah Foundary Corp.
9.500%, 01/01/2017		$	1,000,000	500,000
Total Metals & Mining				928,723

Multi-line Retail - 1.3%
Brookstone Co., Inc.
12.000%, 10/15/2012			1,000,000	570,000
Oil, Gas & Consumable Fuels - 5.9%
Callon Petroleum Co.
9.750%, 12/08/2010			500,000	200,000
Coalcorp Mining, Inc.
12.000%, 08/31/2011 (f)			600,000	360,000
Harvest Operations Corp.
7.875%, 10/15/2011			791,000	569,520
National Coal Corp.
10.500%, 12/15/2010			750,000	669,375
Ship Finance International Ltd.
8.500%, 12/15/2013			500,000	355,000
Transmeridian Exploration, Inc.
12.000%, 12/15/2010 (d) (f)			1,250,000	312,500
USEC, Inc.
6.750%, 01/20/2009			220,000	214,500
Total Oil, Gas & Consumable Fuels				2,680,895

Paper & Forest Products - 0.3%
Abitibi-Consolidated Co. of Canada
15.500%, 07/15/2010 (Acquired 04/01/2008, Cost $356,765) (a) (f)	412,000	119,480
Paper Products - 0.4%
Cellu Tissue Holdings, Inc.
9.750%, 03/15/2010	250,000	200,000
Real Estate Investment Trusts - 0.5%
iStar Financial, Inc.
5.375%, 04/15/2010	500,000	230,000

Road & Rail - 0.4%
Quality Distribution LLC/QD Capital Corp.
9.000%, 11/15/2010	500,000	160,000
Semiconductors & Semiconductor Equipment - 2.5%
Amkor Technology, Inc.
7.750%, 05/15/2013	1,000,000	570,000
Freescale Semiconductor, Inc.
10.125%, 12/15/2016	1,000,000	410,000
MagnaChip Semiconductor SA / MagnaChip Semiconductor Finance Co.
6.875%, 12/15/2011 (d)	2,000,000	70,000
Spansion LLC
11.250%, 01/15/2016 (Acquired 08/02/2007, Cost $955,424) (a)	1,000,000	70,000
Total Semiconductors & Semiconductor Equipment		1,120,000

Special Purpose Entity - 0.3%
Winterhaven Finance BV
8.750%, 12/11/2028 (d) (f) (h)	640,000	128,000
Specialty Retail - 2.6%
Ames True Temper, Inc.
10.000%, 07/15/2012	1,000,000	350,000
Burlington Coat Factory Warehouse Corp.
11.125%, 04/15/2014	1,000,000	300,000
Claire's Stores, Inc.
9.625%, 06/01/2015	1,051,877	94,669
Linens 'n Things, Inc.
8.338%, 01/15/2014 (b) (d)	858,631	107,329
Remington Arms Co., Inc.
10.500%, 02/01/2011	448,000	340,480
Total Specialty Retail		1,192,478

Telecommunication Services - 0.6%
Securus Technologies, Inc.
11.000%, 09/01/2011	401,000	278,695
Textiles, Apparel & Luxury Goods - 0.4%
GFSI, Inc.
10.500%, 06/01/2011 (Acquired 09/19/2007, Cost $63,947) (a) (b)	62,000	52,700
Industrias Unidas
8.750%, 03/26/2009 (f) (i)	160,000	140,000
Total Textiles, Apparel & Luxury Goods		192,700

Transportation Infrastructure - 4.6%
Dura 2nd Lien Note
15.732%, 06/25/2018 (Acquired 09/25/2008, Cost $1,982,850) (a) (i)	2,718,197	1,970,692

USF Corp.
8.500%, 04/15/2010		250,000		130,000
Total Transportation Infrastructure				2,100,692

TOTAL CORPORATE BONDS (Cost $63,187,210)			$	27,953,588

	Principal
	Amount
CERTIFICATES OF DEPOSIT - 0.0%
Capital One Bank USA N.A.
4.300%, 04/20/2009	$	7,000		7,048
TOTAL CERTIFICATES OF DEPOSIT (Cost $6,905)

OTHER SECURITIES - 5.1%
T4/Halcyon Loan
15.000%, 05/04/2010 (Acquired 05/04/2007) (a) (f) (h)		925,652		925,652
T4/Halcyon Participation Units
Expiration: May 2010, Exercise Price: $1.00 (Acquired 05/04/2007) (a) (f) (h)		14,340		1,396,148
TOTAL OTHER SECURITIES (Cost $925,652)				2,321,800

Total Investments (Cost $81,900,945) - 81.8%			$	37,258,921

REPURCHASE AGREEMENTS - 14.0%
J.P. Morgan
0.050%, dated 12/31/2008, due 01/02/2009
repurchase price $6,381,227 (e)	$	6,381,218		6,381,218
TOTAL REPURCHASE AGREEMENTS (Cost $6,381,218)			$	6,381,218

Other Assets in Excess of Liabilities - 4.2%				1,889,895
TOTAL NET ASSETS - 100.0%			$	45,530,034

Footnotes

Percentages are stated as a percent of net assets.

CAD	Canadian Dollar
EUR	European Monetary Unit
(a) Restricted security as defined in Rule 144(a) under the Securities Act of 1933. Purchased in a private placement transaction; resale to the public may
require registration or may extend only to qualified institutional buyers. At December 31, 2008, the market value of these securities total $7,222,516,
which represents 15.9% of total net assets.
(b) Variable Rate Security. The rate shown represents the rate at December 31, 2008.
(c) Non-income producing.
(d) Default or other conditions exist and security is not presently accruing income.
(e) Collateralized by U.S. Government or U.S. Government Agency securities, U.S. Government Agency mortgage-backed
securities, certificates of deposit or banker's acceptances.
(f) Illiquid security identified by Investment Advisor. The market value of these securities total $9,202,610, which represents 20.2% of total net assets.
(g) Represents an interest only security that entitles holders to receive only interest payments on the
underlying mortgages. The yield to maturity of an interest only security is extremely sensitive to the rate of
principal payments on the underlying mortgage assets. A rapid (slow) rate of principal repayments may
have an adverse (positive) effect on yield to maturity. The principal amount shown is the notional amount of
the underlying mortgage. Interest rate disclosed represents the coupon rate of the underlying mortgage at December 31, 2008.
(h) Fair-valued security. The market value of these securities total $5,664,928, which represents 12.4% of total net assets.
(i) Security valued utilizing a single broker source. The market value of these securities total $4,709,701, which represents 10.3% of total net assets.

The accompanying notes are an integral part of these financial statements.

Electrical Equipment - 0.2%
Sunpower Corp. (a)	2,659	80,940
Electronic Equipment, Instruments & Components - 0.2%
Electronic Control Security, Inc. (a) (f) (h)	1,537,859	107,650
Hotels, Restaurants & Leisure - 1.7%
Center Cut Hospitality, Inc. (a) (f) (g)	14,800	404,780
Famous Dave's Of America, Inc. (a)	68,302	198,076
Wyndham Worldwide Corp.	18,084	118,450
Total Hotels, Restaurants & Leisure		721,306

Independent Power Producers & Energy Traders - 0.9%
Calpine Corp. (a)	20,129	146,539
Mirant Corp. (a)	4,747	89,576
NRG Energy, Inc. (a)	6,723	156,848
Total Independent Power Producers & Energy Traders		392,963

IT Services - 1.0%
Fidelity National Information Services, Inc.	10,521	171,177
Lender Processing Services, Inc.	9,507	279,981
Total IT Services		451,158

Life Sciences Tools & Services - 0.1%
Innovive Escrow Shares (a) (f) (g)	248,700	38,951
Machinery - 0.1%
Trinity Industries, Inc.	2,181	34,373
Media - 2.4%
Deutsche Bank Mexicosa SA (a) (f)	2,181	954
Fisher Communications, Inc.	4,534	93,582
Global Traffic Network, Inc. (a)	161,670	944,153
Time Warner Cable, Inc. - Class A (a)	17	364
Vertis Holdings, Inc. (a) (f)	2,903	0
Total Media		1,039,053

Metals & Mining - 1.1%
Ormet Corp. (a) (f)	15,000	12,750
White Mountain Titanium Corp. (Acquired 09/02/2008, Cost $693,200) (a) (b) (f)	866,500	441,915
Total Metals & Mining		454,665

Oil, Gas & Consumable Fuels - 4.4%
Elk Horn Coal Member Units (a) (f) (i)	1,139,645	660,994
International Coal Group Inc. (a)	50,231	115,531
Linn Energy LLC	28,271	423,217
Peabody Energy Corp.	9,077	206,502
Petroquest Energy, Inc. (a)	20,670	139,729
Rosetta Resources, Inc. (a)	12,750	90,270
Williams Cos., Inc.	18,336	265,505
Total Oil, Gas & Consumable Fuels		1,901,748

Paper & Forest Products - 0.1%
Tembec, Inc. (Acquired 03/12/2008, Cost $0) (a) (b) (f)	40,850	31,767
Pharmaceuticals - 0.3%
Access Pharmaceuticals, Inc. (a) (f)	110,480	109,375

Professional Services - 0.8%
TeamStaff, Inc. (a) (f)		188,404		348,547
Real Estate Investment Trusts - 0.6%
Huntingdon Real Estate Investment Trust (Acquired 01/17/2008, Cost $3,659,328) (b)		1,704,550		276,152
Real Estate Management & Development - 15.1%
IAT Air Cargo Facilities Income Fund (Acquired 08/20/2008, Cost $18,517,456) (b) (f) (h)		2,686,579		6,528,746
Software - 0.6%
Spare Backup, Inc. (Acquired 09/02/2008, Cost $192,080) (a) (b) (f) (g)		1,382,317		248,817
Tobacco - 0.9%
Lorillard, Inc.		6,937		390,900
Transportation Infrastructure - 0.0%
Sea Containers Ltd. - Class A (a)		7,500		16
TOTAL COMMON STOCKS (Cost $44,229,854)			$	19,422,530

INVESTMENT COMPANIES - 3.1%
Gabelli Global Deal Fund		18,834		247,479
UltraShort Lehman 20+ Year Treasury ProShares		800		30,184
UltraShort Real Estate ProShares		900		45,639
UltraShort Russell 2000 ProShares		14,571		922,636
United States Oil Fund LP (a)		1,800		59,598
WesternOne Equity Income Fund		14,232		40,350
TOTAL INVESTMENT COMPANIES (Cost $2,051,490)			$	1,345,886

CONVERTIBLE PREFERRED STOCKS - 0.0%
Media - 0.0%
ION Media Networks, Inc. 12% (a) (f) (g)		1		360
TOTAL CONVERTIBLE PREFERRED STOCKS (Cost $0)			$	360

	Principal
	Amount
CONVERTIBLE BONDS - 0.6%
Biotechnology - 0.1%
Cell Therapeutics, Inc.
4.000%, 07/01/2010 (f)	$	1,000,000		50,000
Semiconductors & Semiconductor Equipment - 0.5%
Jazz Technologies, Inc.
8.000%, 12/31/2011 (Acquired 06/5/2007, Cost $327,713) (b) (f)		350,000		68,250
8.000%, 12/31/2011 (f)		640,000		124,800
Total Semiconductors & Semiconductor Equipment				193,050

TOTAL CONVERTIBLE BONDS (Cost $1,559,579)			$	243,050

CORPORATE BONDS - 27.9%
Airlines - 6.1%
Hawaiian Airlines, Inc. Term Loan B
9.000%, 03/11/2011 (f) (i)		3,500,000		2,625,000

Auto Components - 0.6%
Cooper-Standard Automotive, Inc.
8.375%, 12/15/2014			1,500,000	262,500
Dana Corp.
6.500%, 03/15/2008 (d)			300,000	30
Dura Operating Corp.
9.000%, 05/01/2009 (d) (g)			150,000	0
Total Auto Components				262,530

Automobiles - 0.6%
Chrysler Corp. Term Loan
6.200%, 08/03/2013			943,789	240,666
Commercial Services & Supplies - 0.8%
Quebecor Dip Loan
8.250%, 07/17/2009 (f)			157,655	126,124
8.250%, 12/31/2050 (f)			351,070	175,535
8.250%, 12/31/2050 (f)	CAD		27,936	13,715
Quebecor World Capital Corp.
6.125%, 11/15/2013 (d) (f)		$	540,000	14,850
Total Commercial Services & Supplies				330,224

Communications Equipment - 1.1%
Telcordia Technologies, Inc.
8.503%, 07/15/2012 (Acquired 10/18/2007, Cost $959,109) (b) (c) (f)			1,000,000	485,000
Diversified Financial Services - 1.2%
Capmark Bridge Loan
1.136%, 03/23/2009 (f) (i)			480,670	408,569
Capmark Financial Group, Inc.
3.038%, 05/10/2010 (c)			190,000	96,992
Total Diversified Financial Services				505,561

Diversified Telecommunication Services - 1.9%
Iridium LLC/Capital Corp.
14.000%, 07/15/2005 (d)			225,000	563
Primus Telecommunications Group, Inc.
8.000%, 01/15/2014			860,000	43,000
Primus Telecommunications Group, Inc. Term Loan B
9.270%, 02/18/2011 (f) (i)			1,984,575	793,830
Total Diversified Telecommunication Services				837,393

Food Manufacturers - 0.9%
Merisant Co. Dip Loan
6.920%, 01/11/2050 (f)			546,876	362,305
Merisant Co.
9.500%, 07/15/2013 (c)			312,000	37,440
Total Food Manufacturers				399,745

Health Care Providers & Services - 0.5%
Interactive Health LLC/Interactive Health Finance Corp.
7.250%, 04/01/2011 (Acquired 09/21/2007, Cost $587,620) (b) (f)			662,000	198,600

Hotels, Restaurants & Leisure - 0.3%
Buffets, Inc. Letter Of Credit
7.711%, 05/01/2013 (f) (i)	62,724		14,113
Buffets, Inc. Term Loan
7.711%, 01/22/2009 (f)	472,859		106,393
Total Hotels, Restaurants & Leisure			120,506

Household Durables - 0.3%
K. Hovnanian Enterprises, Inc.
6.500%, 01/15/2014	480,000		129,600

Leisure Equipment & Products - 0.0%
PCA International, Inc. (d)	311,000		12,440

Media - 0.0%
Vertis, Inc.
13.500%, 04/01/2014 (f)	58,221		873
Paper & Forest Products - 0.7%
Abitibi-Consolidated, Inc.
8.500%, 08/01/2029	1,380,000		96,600
Tembec Industries, Inc. Term Loan
8.436%, 06/01/2012 (f)	365,500		219,300
Total Paper & Forest Products			315,900

Semiconductors & Semiconductor Equipment - 0.0%
MagnaChip Semiconductor SA
5.246%, 12/15/2011 (c)	300,000		10,500
Specialty Retail - 4.5%
Ames True Temper, Inc.
10.000%, 07/15/2012	840,000		294,000
Amscan Holdings, Inc.
8.750%, 05/01/2014	500,000		292,500
Broder Brothers Co.
11.250%, 10/15/2010 (c)	5,268,000		1,369,680
Total Specialty Retail			1,956,180

Textiles, Apparel & Luxury Goods - 7.3%
GFSI, Inc.
10.500%, 06/01/2011 (Acquired 12/13/2007, Cost $1,556,738) (b) (c) (f)	1,577,000		1,340,450
Unifi, Inc.
11.500%, 05/15/2014 (f)	3,100,000		1,829,000
Total Textiles, Apparel & Luxury Goods			3,169,450

Thrifts & Mortgage Finance - 0.4%
Residential Capital LLC
8.375%, 06/30/2010 (c)	480,000		168,000
Tobacco - 0.7%
North Atlantic Trading, Inc.
9.250%, 03/01/2012 (f)	300,000		90,000
10.000%, 03/01/2012 (Acquired 06/04/2007, Cost $351,225) (b) (f)	350,000		192,500
Total Tobacco			282,500

TOTAL CORPORATE BONDS (Cost $24,092,506)		$	12,050,668

ESCROW NOTES - 0.0%
Media - 0.0%
Adelphia Communications Corp.
10.250%, 11/01/2006 (a)	$	182,000		5,233
TOTAL ESCROW NOTES (Cost $0)				5,233

	Shares
RIGHTS - 0.1%
Gabelli Global Deal Rights (a)		18,834		39,551
TOTAL RIGHTS (Cost $0)			$	39,551

WARRANTS - 0.0%
Brazil Ethanol, Inc.
Expiration: April 2009, Exercise Price: $5.00
(Acquired 03/30/2007, Cost $11,640) (a) (b) (f) (g)		14,550		2,183
Solutia, Inc.
Expiration: February 2013, Exercise Price: $29.70 (a)		1,705		273
Spare Backup, Inc.
Expiration: July 2012, Exercise Price: $1.00 (Acquired 09/02/2008, Cost $0) (b) (f)		590,915		0
White Mountain Titanium Corp.
Expiration: August 2010, Exercise Price: $0.60 (Acquired 09/02/2008, Cost $160,000) (b) (f) (g)		800,000		0
TOTAL WARRANTS (Cost $183,500)			$	2,456

RECOVERY TRUSTS
Diversified Financial Services - 0.0%
Adelphia Recovery Trust (a)		175,044		1,750
TOTAL RECOVERY TRUSTS (Cost $81,657)				1,750

ENHANCED INCOME SECURITIES - 0.9%
Food Products - 0.9%
B&G Foods, Inc. (Each unit consists of 1 share of Class A
Common Stock and 1 12%, 10/30/16 subordinated note)		39,185		405,565
TOTAL ENHANCED INCOME SECURITIES (Cost $492,684)				405,565

	Contracts
PURCHASED OPTIONS - 0.3%
Call Options - 0.0%
Williams Cos., Inc.
Expiration: January 2009, Exercise Price: $15.00		20		1,240
Total Call Options				1,240
Put Options - 0.3%
General Motors Corp.
Expiration: January 2009, Exercise Price: $30.00		45		121,275
Total Put Options				121,275

TOTAL PURCHASED OPTIONS (Cost $22,010)			$	122,515

Total Investments (Cost $72,713,280) - 77.8%			$	33,639,564

	Principal
	Amount
REPURCHASE AGREEMENTS - 29.9%
J.P. Morgan
0.050%, dated 12/31/2008, due 01/02/2009
repurchase price $12,917,959 (e)	$	12,917,923		12,917,923
TOTAL REPURCHASE AGREEMENTS (Cost $12,917,923)			$	12,917,923

Liabilities in Excess of Other Assets - (7.7)%				(3,328,771	)
TOTAL NET ASSETS - 100.0%			$	43,228,716

Energy Equipment & Services - 0.4%
Aeroquest International Ltd. (a)	154,000	56,136
Hanwei Energy Services Corp. (a)	100,000	64,804
Total Energy Equipment & Services		120,940

Food Products - 0.8%
Archer-Daniels-Midland Co.	4,500	129,735
Bunge Ltd.	2,000	103,540
Cosan Ltd. - Class A (a)	5,000	17,300
Total Food Products		250,575

Independent Power Producers & Energy Traders - 1.5%
Iberdrola Renovables SA (a)	15,000	63,595
McKenzie Bay International Ltd. (Acquired 09/02/2008 - 09/05/2008, Cost $95,023) (a) (c) (e)	1,190,000	88,060
Ormat Technologies, Inc.	4,500	143,415
Sechilienne-Sidec (a)	2,200	97,859
US Geothermal, Inc. (a)	74,300	61,669
Total Independent Power Producers & Energy Traders		454,598

Machinery - 1.4%
Badger Meter, Inc.	5,500	159,610
China Wind Systems, Inc. (a)	86,000	47,300
Energy Recovery, Inc. (a)	20,000	151,600
Trinity Industries, Inc.	6,000	94,560
Total Machinery		453,070

Marine - 0.7%
Navios Maritime Partners LP	29,600	211,344
Metals & Mining - 3.4%
Capstone Mining Corp. (a)	145,500	107,254
Dynasty Metals & Mining, Inc. (a)	140,000	328,878
Energold Drilling Corp. (a)	55,000	43,661
Geodex Minerals Ltd. (a)	300,000	62,847
High Desert Gold Corp. (a)	1,000,000	153,909
MagIndustries Corp. (a)	240,000	50,547
Major Drilling Group International, Inc.	6,000	60,753
Phoscan Chemical Corp. (a)	505,500	122,843
South American Silver Corp. (a)	500,000	72,904
Tournigan Energy Ltd. (a)	428,500	64,275
Total Metals & Mining		1,067,871

Oil, Gas & Consumable Fuels - 29.3%
BreitBurn Energy Partners LP	61,100	428,005
Capital Product Partners LP	54,900	428,220
Carnarvon Petroleum Ltd. (a)	704,999	159,745
Copano Energy LLC	75,900	885,753
Delavaco Energy, Inc. (Acquired 07/28/2008, Cost $490,388) (a) (c) (d) (e)	250,000	405,022
Enbridge Energy Partners LP	14,800	377,400
Energy Transfer Partners LP	10,800	367,308
Enterprise Products Partners LP	18,200	377,286
Falcon Oil & Gas Ltd. (a)	800,000	181,450
Genesis Energy LP	45,900	400,707
Hathor Exploration Ltd. (a)	198,000	465,128

Magellan Midstream Partners LP		12,900		389,709
Martin Midstream Partners LP		24,500		360,150
Oilex Ltd. (a)		315,000		59,297
ONEOK Partners LP		16,200		737,910
OSG America LP		36,300		178,596
Pan Orient Energy Corp. (a)		29,480		80,476
Plains All American Pipeline LP		22,700		787,463
Riversdale Mining Ltd. (a)		22,500		37,806
Targa Resources Partners LP		114,700		888,925
Total Oil, Gas & Consumable Fuels				9,191,013

Paper & Forest Products - 2.2%
Cathay Forest Products Corp. (a)		645,500		156,865
Shanghai Songrui Forestry Products, Inc. (Acquired 06/19/2008, Cost $650,118) (a) (c) (d) (e)		660,000		534,629
Total Paper & Forest Products				691,494

Semiconductors & Semiconductor Equipment - 0.2%
Surfect Holdings, Inc. (Acquired 07/31/2008, Cost $300,000) (a) (c) (e)		6,000,000		57,000
TOTAL COMMON STOCKS (Cost $24,447,714)			$	16,038,812

INVESTMENT COMPANIES - 33.5% (f)
Fiduciary Claymore MLP Opportunity Fund		153,900		1,911,438
Horizons BetaPro S&P/TSX Global Gold Bull Plus ETF (a)		55,000		589,429
Kayne Anderson Energy Total Return Fund		160,700		1,848,050
Kayne Anderson MLP Investment Co.		124,200		2,024,460
ProShares UltraShort S&P500		500		35,458
Tortoise Energy Capital Corp.		170,400		2,155,560
Tortoise Energy Infrastructure Corp.		114,100		1,936,277
TOTAL INVESTMENT COMPANIES (Cost $12,695,090)			$	10,500,672

EXCHANGE TRADED NOTES - 5.8%
BearLinx Alerian MLP Select Index ETN		81,800		1,811,870
TOTAL EXCHANGE TRADED NOTES (Cost $2,295,306)			$	1,811,870


WARRANTS - 0.00%
Shanghai Songrui Forestry Products, Inc.
Expiration: 06/07/2010 , Exercise Price: $1.50 (Acquired 12/19/2008, Cost $0) (a) (c) (d) (e)		330,000		0
TOTAL WARRANTS (Cost $0)			$	0

	Contracts
PURCHASED OPTIONS - 0.0%
Call Options - 0.0%
First Solar, Inc.
Expiration: January 2009, Exercise Price: $185.00		50		1,250
JA Solar Holdings Co. Ltd.
Expiration: January 2009, Exercise Price: $10.00		100		250

LDK Solar Co. Ltd.
Expiration: January 2009, Exercise Price: $30.00		200		1,000
Total Call Options				2,500

TOTAL PURCHASED OPTIONS (Cost $343,700)			$	2,500

Total Investments (Cost $39,781,810) - 90.5%			$	28,353,854

	Principal
	Amount
REPURCHASE AGREEMENTS - 13.7%
J.P. Morgan
0.050%, dated 12/31/2008, due 01/02/2009
repurchase price $4,288,735 (b)	$	4,288,723		4,288,723
TOTAL REPURCHASE AGREEMENTS (Cost $4,288,723)			$	4,288,723

Liabilities in Excess of Other Assets - (4.2)%				(1,323,559	)
TOTAL NET ASSETS - 100.0%			$	31,319,018

Independent Power Producers & Energy Traders - 1.8%
AES Tiete S.A.			96,000		611,318
Metals & Mining - 2.0%
Cia Vale do Rio Doce			40,000		426,000
Usinas Siderurgicas de Minas Gerais SA - ADR			22,500		255,875
Total Metals & Mining					681,875

Oil, Gas & Consumable Fuels - 1.2%
Petroleo Brasileiro SA			20,000		408,200
Paper & Forest Products - 0.9%
Votorantim Celulose e Papel SA - ADR (a)			40,000		317,200
TOTAL PREFERRED STOCKS (Cost $5,338,984)				$	3,175,569

		Principal
		Amount
CORPORATE BONDS - 59.8%
Airlines - 1.4%
TAM Capital, Inc.
7.375%, 04/25/2017		$	1,000,000		470,000
Beverages - 1.6%
Cerveceria Nacional Dominicana C. por A.
16.000%, 03/27/2012 (i)			1,000,000		535,000
Commercial Banks - 27.6%
Banco ABN AMRO Real S.A.
16.200%, 02/22/2010 (Interest linked to Brazil PTAX Rate) (g)	BRL		800,000		346,484
Banco Bradesco S.A.
14.800%, 01/04/2010 (Interest linked to Brazil PTAX Rate) (g)	BRL		700,000		301,672
HSBC Bank PLC for Intercity - Ekim Turizm Ticaret ve Sanayi Ltd.
10.000%, 05/29/2012 (Credit linked to Ekim Turizm Ticaret Ve Sanayi as de 2012)
(Acquired 05/24/2007, Cost $1,208,790) (c) (g) (h) (i)	EUR		900,000		1,201,001
Kazkommerts Finance 2 BV for JSC Kazkommertsbank
8.500%, 06/13/2017 (d)		$	500,000		99,150
North Korea Debt Corp.
0.000%, 03/12/2010 (f) (h) (i)	CHF		4,000,000		305,351
Orient Express Finance for Vostochny Express Bank
14.250%, 07/03/2009 (i)	RUB		25,000,000		597,675
Renaissance Capital
14.500%, 10/11/2009 (Acquired 07/09/2008, Cost $983,640) (c) (d) (h) (i)	RUB		23,000,000		489,602
Renaissance Consumer Funding Ltd. for Renaissance Capital
9.500%, 06/27/2010		$	1,364,000		586,520
Royal Bank of Scotland PLC for Ritzio International Ltd.
10.000%, 07/27/2010 (h) (i)			2,500,000		1,625,000
Standard Bank PLC
12.000%, 03/09/2009 (Credit linked to Banco Central de la Republica Dominica) (g) (i)			523,030		472,037
0.000%, 05/15/2009 (Coupon and redemption linked to basket of currencies Series 623) (g) (i)			1,000,000		837,200
16.000%, 08/06/2009 (Credit linked to Dominican Republic due 08/02/2009) (g) (i)			2,064,897		1,775,811
5.496%, 09/15/2011 (Credit linked to Hidroelectica el Chocon S.A. Series 324) (d) (g) (i)			441,666		351,125
6.350%, 09/15/2011 (Credit linked to Hidroelectica el Chocon S.A. Series 325) (d) (g) (i)			441,666		351,124
Total Commercial Banks					9,339,752

Consumer Electronics - 0.1%
HD Capital SA for Profilo Telra Elektronik Sanayi Ve Ticaret AS
10.750%, 12/07/2011 (f) (i)	EUR		500,000		52,127

Diversified Financial Services - 4.0%
Leighton Finance International
7.875%, 05/16/2011			1,000,000	753,310
Marfrig Overseas Ltd.
9.625%, 11/16/2016			1,000,000	590,000
Total Diversified Financial Services				1,343,310

Diversified Telecommunication Services - 1.1%
Tricom S.A.
11.375%, 09/01/2004 (f)			1,450,000	362,500
Electric Utilities - 2.1%
AES Panama S.A.
6.350%, 12/21/2016			500,000	399,074
Empresa Distribuidora Y Comercializadora Norte
10.500%, 10/09/2017			750,000	315,000
Total Electric Utilities				714,074

Energy Equipment & Services - 1.4%
Empresa de Energía de Bogotá S.A. E.S.P. (EEB International Ltd.)
8.750%, 10/31/2014			500,000	463,750
Gas Utilities - 1.0%
Xinao Gas Holdings Ltd.
7.375%, 08/05/2012			500,000	339,433
Hotels, Restaurants & Leisure - 0.9%
Cap Cana S.A.
9.625%, 11/03/2013			1,000,000	300,000
Industrial Conglomerates - 1.0%
Grupo Kuo Sab De CV
9.750%, 10/17/2017 (Acquired 10/10/2007, Cost $496,085) (c)			500,000	340,000
Machinery - 2.2%
Lupatech Finance Ltd.
9.875%, 07/29/2049			1,250,000	735,375
Media - 0.8%
Grupo Televisa SA
8.490%, 05/11/2037	MXN		5,400,000	271,154
Metals & Mining - 6.4%
BeMaX Resources Ltd.
9.375%, 07/15/2014 (i)		$	1,500,000	547,500
CII Carbon LLC
11.125%, 11/15/2015			250,000	172,500
Citic Resources Ltd.
6.750%, 05/15/2014			1,000,000	670,000
Evraz Group SA
8.875%, 04/24/2013 (i)			1,000,000	525,000
KazakhGold Group Ltd.
9.375%, 11/06/2013			500,000	239,445
Total Metals & Mining				2,154,445

Oil, Gas & Consumable Fuels - 1.0%
KazMunaiGaz Finance Sub BV
9.125%, 07/02/2018			500,000	337,615

Real Estate Management & Development - 3.7%
Agile Property Holdings Ltd.
9.000%, 09/22/2013			750,000		413,271
IRSA Inversiones y Representaciones SA
8.500%, 02/02/2017			500,000		192,500
Teorema Holding Ltd.
11.000%, 10/27/2009 (d) (i)			1,000,000		650,000
Total Real Estate Management & Development					1,255,771

Telecommunications - 0.8%
VIP Finance Ireland Ltd. for OJSC Vimpel Communications
9.125%, 04/30/2018			500,000		261,040
Trading Companies & Distributors - 1.0%
Noble Group Ltd.
8.500%, 05/30/2013			500,000		350,000
Transportation Infrastructure - 1.7%
Panama Canal Railway Co.
7.000%, 11/01/2026 (i)			1,000,000		575,000
TOTAL CORPORATE BONDS (Cost $33,513,778)				$	20,200,346

SUPRANATIONAL OBLIGATIONS - 1.0%
Commercial Banks - 1.0%
African Development Bank
10.000%, 05/22/2009 (i)	GH		4,622,500,000		336,060
TOTAL SUPRANATIONAL OBLIGATIONS (Cost $500,000)				$	336,060

FOREIGN GOVERNMENT OBLIGATIONS - 2.3%
Brazil-letra Tesouro Nacional
13.708%, 01/01/2009 (b)	BRL		1,808,000		775,300
TOTAL FOREIGN GOVERNMENT OBLIGATIONS (Cost $1,111,551)				$	775,300

Total Investments (Cost $48,927,870) - 89.0%				$	30,088,191

REPURCHASE AGREEMENTS - 7.1%
J.P. Morgan
0.050%, dated 12/31/2008, due 01/02/2009
repurchase price $2,407,380 (e)		$	2,407,373		2,407,373
TOTAL REPURCHASE AGREEMENTS (Cost $2,407,373)				$	2,407,373

Other Assets in Excess of Liabilities - 3.9%					1,320,249
TOTAL NET ASSETS - 100.0%				$	33,815,813

Footnotes



Percentages are stated as a percent of net assets.

ADR	American Depository Receipt
GDR	Global Depository Receipt

BRL	Brazil Real
CHF	Swiss Francs
EUR	European Monetary Unit
GH	Ghana Cedi
MXN	Mexican Pesos
RUB	Russian Ruble

(a) Non-income producing.
(b) Zero coupon bond. Effective yield is listed.
(c) Restricted security as defined in Rule 144(a) under the Securities Act of 1933. Purchased in a private placement transaction; resale to the public may
require registration or may extend only to qualified institutional buyers. At December 31, 2008, the market value of these securities total $2,030,603,
which represents 6.0% of total net assets.
(d) Variable Rate Security. The rate shown represents the rate at December 31, 2008.
(e) Collateralized by U.S. Government or U.S. Government Agency securities, U.S. Government Agency mortgage-backed
securities, certificates of deposit or banker's acceptances.
(f) Default or other conditions exist and security is not presently accruing income.
(g) Structured note. Investment performance is partially or wholly derived from an underlying source.
(h) Illiquid security identified by Investment Advisor. The market value of these securities total $3,620,954, which represents 10.7% of total net assets.
(i) Security valued utilizing a single broker source. The market value of these securities total $11,226,613, which represents 33.1% of total net assets.

The accompanying notes are an integral part of these financial statements.

Underlying Funds Trust
The Long/Short Equity - Deep Discount Value-1 Portfolio
Schedule of Investments
December 31, 2008

	Shares		Value
COMMON STOCKS - 79.7%
Biotechnology - 3.2%
Genzyme Corp. (a)		10,700	$	710,159
Capital Markets - 4.3%
T. Rowe Price Group, Inc.		26,700		946,248
Commercial Services & Supplies - 7.6%
American Ecology Corp.		52,900		1,070,167
Covanta Holding Corp. (a)		28,800		632,448
Total Commercial Services & Supplies				1,702,615

Construction & Engineering - 7.5%
MasTec, Inc. (a)		112,000		1,296,960
Pike Electric Corp. (a)		30,600		376,380
Total Construction & Engineering				1,673,340

Containers & Packaging - 2.5%
Pactiv Corp. (a)		22,000		547,360
Electric Utilities - 6.2%
FPL Group, Inc.		11,800		593,894
PG&E Corp.		20,100		778,071
Total Electric Utilities				1,371,965

Electronic Equipment, Instruments & Components - 1.3%
Checkpoint Systems, Inc. (a)		30,200		297,168
Food & Staples Retailing - 10.0%
Casey's General Stores, Inc.		27,000		614,790
Walgreen Co.		39,200		967,064
Wal-Mart Stores, Inc.		11,500		644,690
Total Food & Staples Retailing				2,226,544

Hotels, Restaurants & Leisure - 1.4%
Scientific Games Corp. - Class A (a)		18,000		315,720
IT Services - 11.1%
Hewitt Associates, Inc. (a)		39,400		1,118,172
Lender Processing Services, Inc.		45,800		1,348,810
Total IT Services				2,466,982

Metals & Mining - 5.0%
Newmont Mining Corp.		27,600		1,123,320
Pharmaceuticals - 9.3%
Bristol-Myers Squibb Co.		49,400		1,148,550
Pfizer, Inc.		27,400		485,254
Wyeth		11,700		438,867
Total Pharmaceuticals				2,072,671

Professional Services - 6.9%
Equifax, Inc.		34,800		922,896
Robert Half International, Inc.		29,200		607,944
Total Professional Services				1,530,840

Specialty Retail - 3.4%
Home Depot, Inc.		32,900		757,358
TOTAL COMMON STOCKS (Cost $17,128,436)			$	17,742,290

	Contracts
PURCHASED OPTIONS - 0.8%
Call Options - 0.8%
Becton Dickinson & Co.
Expiration: January 2009, Exercise Price: $65.00		24		9,960
Expiration: January 2009, Exercise Price: $70.00		24		2,760
Cardinal Health, Inc.
Expiration: January 2009, Exercise Price: $35.00		176		15,400
Marriott International, Inc.
Expiration: January 2009, Exercise Price: $20.00		250		17,000
Expiration: January 2009, Exercise Price: $22.50		50		625
Patterson Cos., Inc.
Expiration: January 2009, Exercise Price: $20.00		246		3,690
Pitney Bowes, Inc.
Expiration: January 2009, Exercise Price: $25.00		298		29,800
Expiration: January 2009, Exercise Price: $30.00		63		157
Expiration: January 2009, Exercise Price: $35.00		190		475
Plantronics, Inc.
Expiration: January 2009, Exercise Price: $12.50		96		11,040
Expiration: January 2009, Exercise Price: $15.00		43		645
Premcor, Inc.
Expiration: January 2009, Exercise Price: $20.00		71		16,969
SPDR Trust Series 1
Expiration: January 2009, Exercise Price: $85.00		101		12,120
Expiration: January 2009, Exercise Price: $89.00		101		29,896
Stryker Corp.
Expiration: January 2009, Exercise Price: $45.00		49		980
Xerox Corp.
Expiration: January 2009, Exercise Price: $7.50		345		25,875
Expiration: January 2009, Exercise Price: $9.00		240		2,400
Total Call Options				179,792

Put Options - 0.0%
Newmount Mining Corp.
Expiration: January 2009, Exercise Price: $27.50		244		977

TOTAL PURCHASED OPTIONS (Cost $413,238)			$	180,769

Total Investments (Cost $17,541,674) - 80.5%			$	17,923,059

	Principal
	Amount
REPURCHASE AGREEMENTS - 20.3%
J.P. Morgan
0.050%, dated 12/31/2008, due 01/02/2009
repurchase price $4,520,641 (b)	$	4,520,628		4,520,628
TOTAL REPURCHASE AGREEMENTS (Cost $4,520,628)			$	4,520,628

Liabilities in Excess of Other Assets - (0.8)%				(172,012	)
TOTAL NET ASSETS - 100.0%			$	22,271,675