H&Q HEALTHCARE INVESTORS

Semiannual Report

March 31, 2012

(Unaudited)

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To our Shareholders:

On March 31, 2012, the net asset value (NAV) per share of the Fund was $17.87. During the six month period ended March 31, 2012, total return at NAV of your Fund was 28.60%, with distributions reinvested. During the most recent quarter ended March 31, 2012, total return at NAV of your Fund was 16.03%, with distributions reinvested. The total investment return at market with distributions reinvested was 30.34% during the six month period ended March 31, 2012 and was 18.99% during the quarter ended March 31, 2012. Total return at both market and NAV outperformed the S&P 500 Index but trailed the NBI for the six month period ending March 31, 2012. Comparisons to relevant indices are listed below:

Investment Returns				Quarter Ended 3/31/12				Six Months Ended 3/31/12
Investment Return at Market					18.99	%			30.34	%
Net Asset Value					16.03	%			28.60	%
NASDAQ Biotech Index (NBI)					18.21	%			32.35	%
S&P 500 Index					12.59	%			25.89	%

 

Portfolio Highlights

Overall, we are pleased with the performance of the Fund in the six month period ending March 31, 2012. It has been a very busy six months in the healthcare sector with several factors contributing to overall performance of the Fund and the sector. These include elevated merger and acquisition activity, the release of significant new clinical data, the approval of several new drugs and prominent Supreme Court hearings debating the constitutionality of recent healthcare reform legislation.

In this period, we believe that merger and acquisition (M&A) activity has been a key factor affecting sector performance. Public discussion of Express Scripts, Inc.'s offer to acquire Medco Health Solutions, Inc., made in July 2011, was highly visible during the report period and the transaction closed just after the end of the report period. Roche Holding AG's attempt to acquire Illumina Inc. also received considerable attention in the press even though the transaction was

1

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not ultimately completed. In addition, a number of other transactions were either proposed, announced or completed. These included Amgen, Inc.'s acquisition of Micromet, Inc., Celgene Corporation's acquisition of Avita Medical LTD, Cubist Pharmaceuticals, Inc.'s acquisition of Adolor Corporation, Jazz Pharmaceuticals, Inc.'s acquisition of Azur Pharma plc and Watson Pharmaceuticals, Inc.'s acquisition of Actavis Group. We think this M&A trend, which has occurred in a number of healthcare subsectors, continues to drive interest and valuation in the broad healthcare sector. We think that as long as the trend continues, healthcare has a good chance to outperform the broader market.

Positive clinical trial data also appears to be producing positive investor sentiment in the healthcare sector. We would highlight the disease Hepatitis C as an example. For many years this disease was treated by combination drug regimens that, in general, were only moderately effective, required long treatment duration and exhibited significant side effects. Approximately one year ago, new polymerase inhibitor drugs were introduced into the marketplace by Vertex Pharmaceuticals, Inc. and Merck & Company, Inc. These drugs, Incivek and Victrelis, respectively, when used with other existing medications, revolutionized the treatment of Hepatitis C, significantly improving efficacy without a substantial increase in side effects. Adoption of these drugs into common use has been rapid. The commercial launch of Incivek, for example, has been considered one of the best drug launches in many years. Both drugs have already reached what is commonly considered "blockbuster" status. Even more remarkable is that a second breakthrough in the treatment of Hepatitis C is already underway. In the last year or so, Pharmasset, Inc. (since acquired by Gilead Sciences, Inc.) demonstrated that one of its drugs, also in combination with several existing drugs, may well be even more effective and safer than the polymerase based drug regimens just introduced. Thus, the remarkable improvement in the standard of care for Hepatitis C patients demonstrated by Vertex's and Merck's novel drugs may well be soon replaced by even more impactful drug combinations from Gilead, Bristol-Myers Squibb Company, Abbott Laboratories and/or others. Furthermore, the impact of these new drug combinations has sparked a further increase in the M&A trend described above. In order to get access to these new therapeutic options, Gilead acquired Pharmasset, Inc. and Bristol Myers acquired Inhibitex, Inc., each at impressive acquisition valuations. Moreover, M&A activity in the Hepatitus C area seems to have had a positive impact on healthcare sector valuations in general. It appears that investors are anticipating a broad increase in M&A activity. This sentiment has

2

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had a positive impact on valuations of a number of healthcare sector companies and has contributed to the general outperformance of the healthcare sector in general and the NBI in particular.

Other clinical trial data and product approvals are also impressive. Biogen Idec, Inc.'s BG-12 product for the treatment of Multiple Sclerosis continues to show promising efficacy. Medivation, Inc.'s Enzalutamide and Johnson & Johnson's Zytiga have each demonstrated impressive efficacy in prostate cancer. We now expect that one or more of three prominent drugs in development to treat obesity may be approved, after having each been strongly challenged during the regulatory approval process. With respect to approvals, 2011 concluded with a significant increase in the number of new molecular entities approved by FDA relative to recent years. This approval trend has continued in 2012. Examples within the last year include approvals of Vertex Pharmaceutials, Inc.'s Kalydeco in Cystic Fibrosis, Regeneron Pharmaceuticals, Inc.'s Eylea in age-related macular edema, Takeda Pharmaceuticals Company Limited/Affymax, Inc.'s Omontys in anemia, Corcept Therapeutics, Inc.'s Korlym in Cushing's Syndrome, Seattle Genetics, Inc.'s Adcetris in Hodgkin's lymphoma and Amlyin Pharmaceuticals, Inc.'s Bydureon in diabetes. We see this approval trend as a sign both that the sector continues to develop novel new drugs and that the FDA continues to approve drugs that demonstrate impressive efficacy. We think these trends have been well documented and should extend positive sentiment about the sector.

Arguably the key healthcare event in this report period was the Supreme Court hearings arguing the constitutionality of key components of the Affordable Care Act (often referred to as the ACA). Since this law was passed in 2010, a number of key aspects have been challenged in the U.S. court system. In late March 2012, the Supreme Court held hearings examining various aspects of the law including: 1) the constitutionality of the so called individual mandate (which requires nearly all Americans to buy health insurance), 2) whether the individual mandate is severable from the rest of the ACA, 3) whether the proposed expansion of Medicaid is constitutional, and 4) whether the Supreme Court can even rule on items 1 through 3 above now or must wait until 2014 or later. Though it appears to be a minority opinion, it is our view that the ACA will be left largely intact by the Supreme Court. We expect that the Supreme Court will render its opinion on these matters by approximately midyear 2012.

It is our view that many things have gone well for the healthcare sector in recent months. This has driven sector valuations upward.

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Overall, we remain positive about the sector. And while we may see some sort of pullback in the intermediate term (in recognition of the significant upside move observed in recent months), we still feel that the population demographics we have discussed in previous updates provides the possibility of additional upside in the healthcare sector.

Investment Changes

During the six month period ended March 31, 2012, other Fund activities have occurred. Within the public portfolio, the Fund established positions in several companies. Notable examples include Alere, Inc., ARIAD Pharmaceuticals, Inc., Bruker Corporation, Covance, Inc., Impax Laboratories, Inc., Life Technologies Corporation, Medivation, Momenta Pharmaceuticals, Inc., Onyx Pharmaceuticals, Inc. and Regeneron. Examples of exited positions include Boston Scientific Corporation, Edwards Lifesciences Corporation, Hologic, Inc., Incyte Corporation, Kinetic Concepts, Inc., Inhibitex (acquired by Bristol Myers), Natus Medical, Inc., Pharmaceutical Product Development, Inc. (acquired by the Carlyle Group), Pharmasset (acquired by Gilead), XenoPort, Inc. and Zimmer Holdings, Inc. Within the restricted portfolio, representative new positions included investments in Verastem, Inc. and Puma Biotechnology, Inc., each which attained a public listing after our investment. Concentric Medical, Inc., acquired by Stryker Corporation, was the notable exit from the restricted portfolio. In addition, Ceres, Inc. completed an IPO and will exit the restricted portfolio after expiration of the Fund's trading restrictions.

As always, if you have questions, please feel free to call us at 617-772-8500.

Daniel R. Omstead, Ph.D.
President

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H&Q HEALTHCARE INVESTORS

LARGEST HOLDINGS BY ISSUER
(Excludes Short-Term Investments)

As of March 31, 2012
(Unaudited)

Issuer - Sector				% of Net Assets
Gilead Sciences, Inc. Biotechnologies/Biopharmaceuticals					4.5	%
Alexion Pharmaceuticals, Inc. Biotechnologies/Biopharmaceuticals					4.1	%
Teva Pharmaceutical Industries Ltd. Generic Pharmaceuticals					3.9	%
Celgene Corporation Biotechnologies/Biopharmaceuticals					3.2	%
Vertex Pharmaceuticals, Inc. Biotechnologies/Biopharmaceuticals					3.0	%
Aetna, Inc. Healthcare Services					2.8	%
Perrigo Company Generic Pharmaceuticals					2.7	%
Allergan, Inc. Biotechnologies/Biopharmaceuticals					2.5	%
Mylan, Inc. Generic Pharmaceuticals					2.5	%
Express Scripts, Inc. Healthcare Services					2.3	%

 

PORTFOLIO

As of March 31, 2012
(Unaudited)

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H&Q HEALTHCARE INVESTORS

SCHEDULE OF INVESTMENTS

MARCH 31, 2012

(Unaudited)

				CONVERTIBLE SECURITIES AND WARRANTS - 5.5% of Net Assets
SHARES				Convertible Preferred and Warrants (Restricted) (a) (b) - 5.5%				VALUE
				Biotechnologies/Biopharmaceuticals - 0.9%
	1,277,645			Celladon Corporation Series A-1				$	573,663
	3,205,099			EBI Life Sciences, Inc. Series A (c)					14,103
	3,205,099			Euthymics Biosciences, Inc. Series A (c)					2,941,319
	358,852			MacroGenics, Inc. Series D					234,008
	3,205,099			Neurovance, Inc. Series A (c)					249,357
									4,012,450
				Drug Discovery Technologies - 0.0%
	2,380,953			Agilix Corporation Series B (c)					0
				Healthcare Services - 1.3%
	5,384,615			PHT Corporation Series D (c)					5,007,691
	1,204,495			PHT Corporation Series E (c)					1,120,180
	149,183			PHT Corporation Series F (c)					138,740
									6,266,611
				Medical Devices and Diagnostics - 3.3%
	3,424,756			CardioKinetix, Inc. Series C (c)					890,437
	6,155,027			CardioKinetix, Inc. Series D (c)					677,053
	12,177,507			CardioKinetix, Inc. Series E (c)					1,217,751
	N/A			CardioKinetix, Inc. warrants (expiration 12/11/19) (c) (d)					0
	N/A			CardioKinetix, Inc. warrants (expiration 6/03/20) (c) (d)					0
	N/A			CardioKinetix, Inc. warrants (expiration 7/07/21) (c) (d)					0
	3,109,861			Dynex Technologies, Inc. Series A					559,775
	142,210			Dynex Technologies, Inc. warrants (expiration 4/01/19)					0
	11,335			Dynex Technologies, Inc. warrants (expiration 5/06/19)					0
	3,669,024			Labcyte, Inc. Series C					1,920,000
	3,109,861			Magellan Diagnostics, Inc. Series A					1,834,818
	142,210			Magellan Diagnostics, Inc. warrants (expiration 4/01/19)					0
	11,335			Magellan Diagnostics, Inc. warrants (expiration 5/06/19)					0
	1,547,988			OmniSonics Medical Technologies, Inc. Series A-1					1,548
	1,263,099			OmniSonics Medical Technologies, Inc. Series B-1					1,263

 

The accompanying notes are an integral part of these financial statements.
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H&Q HEALTHCARE INVESTORS

SCHEDULE OF INVESTMENTS

MARCH 31, 2012

(Unaudited)

(continued)

SHARES				Convertible Preferred and Warrants (Restricted) (a) (b) - continued				VALUE
	13,823,805			Palyon Medical Corporation Series A (c)				$	2,211,809
	65,217			TherOx, Inc. Series H					74,608
	149,469			TherOx, Inc. Series I					170,992
	4,720,000			Tibion Corporation Series B					2,360,000
	3,750,143			Veniti, Inc. Series A (c)					3,244,999
									15,165,053
				TOTAL CONVERTIBLE SECURITIES AND WARRANTS (Cost $35,969,900)					25,444,114
				COMMON STOCKS AND WARRANTS - 87.6%
				Biotechnologies/Biopharmaceuticals - 39.7%
	37,331			Acorda Therapeutics, Inc. (b)					991,138
	205,585			Alexion Pharmaceuticals, Inc. (b)					19,090,623
	241,095			Alkermes plc (b)					4,472,312
	123,278			Allergan, Inc.					11,764,420
	694,195			Amarin Corporation plc (b) (f)					7,858,287
	62,608			Amgen, Inc.					4,256,718
	5,910,745			Antisoma plc (b) (e)					167,629
	222,125			ARIAD Pharmaceuticals, Inc. (b)					3,542,894
	118,000			Athersys, Inc. warrants (Restricted, expiration 6/08/12) (a) (b)					0
	105,260			Baxter International, Inc.					6,292,443
	74,784			Biogen Idec, Inc. (b)					9,420,540
	190,198			Celgene Corporation (b)					14,744,149
	258,630			Ceres, Inc. (Restricted) (a) (b)					3,721,944
	2,723			Ceres, Inc. warrants (Restricted, expiration 9/05/15) (a) (b)					2,260
	131,023			Cubist Pharmaceuticals, Inc. (b)					5,666,745
	330,082			Dendreon Corporation (b)					3,517,024
	241,753			Elan Corporation plc (b) (f)					3,628,713
	424,800			Gilead Sciences, Inc. (b)					20,751,480
	450,726			Human Genome Sciences, Inc. (b)					3,713,982
	61,617			Momenta Pharmaceuticals, Inc. (b)					943,972
	701,250			Nektar Therapeutics (b)					5,553,900
	550,002			Neurocrine Biosciences, Inc. (b)					4,383,516
	115,189			Onyx Pharmaceuticals, Inc. (b)					4,340,322
	763,600			Puma Biotechnology, Inc. (Restricted) (a) (b)					2,863,500
	N/A			Puma Biotechnology, Inc. warrants (Restricted, expiration 10/04/21) (a) (b)					0
	89,025			Regeneron Pharmaceuticals, Inc. (b)					10,382,095
	153,894			United Therapeutics Corporation (b)					7,253,024
	610,595			Verastem, Inc. (Restricted) (a) (b)					6,006,423

 

The accompanying notes are an integral part of these financial statements.
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H&Q HEALTHCARE INVESTORS

SCHEDULE OF INVESTMENTS

MARCH 31, 2012

(Unaudited)

(continued)

SHARES				Biotechnologies/ Biopharmaceuticals - continued				VALUE
	337,551			Vertex Pharmaceuticals, Inc. (b)				$	13,842,967
	249,159			VIVUS, Inc. (b)					5,571,195
									184,744,215
				Drug Delivery - 1.6%
	9,200,000			A.P. Pharma, Inc. (b) (c)					3,404,000
	4,600,000			A.P. Pharma, Inc. warrants (Restricted, expiration 7/01/16) (a) (b) (c)					736,000
	1,023,650			IntelliPharmaCeutics International, Inc. (b) (c)					2,886,693
	460,200			IntelliPharmaCeutics International, Inc. warrants (Restricted, expiration 2/01/13) (a) (b) (c)					202,488
	460,200			IntelliPharmaCeutics International, Inc. warrants (Restricted, expiration 2/01/16) (a) (b) (c)					478,608
									7,707,789
				Drug Discovery Technologies - 0.0%
	70			Zyomyx, Inc. (Restricted) (a) (b)					18
				Generic Pharmaceuticals - 14.5%
	885,001			Akorn, Inc. (b)					10,354,512
	361,666			Impax Laboratories, Inc. (b)					8,889,750
	501,580			Mylan, Inc. (b)					11,762,051
	121,414			Perrigo Company					12,543,280
	401,677			Teva Pharmaceutical Industries Ltd. (f)					18,099,566
	84,180			Watson Pharmaceuticals, Inc. (b)					5,645,111
									67,294,270
				Healthcare Services - 12.6%
	256,141			Aetna, Inc.					12,848,032
	222,222			Aveta, Inc. (Restricted) (a) (g)					1,888,887
	55,850			Community Health Systems, Inc. (b)					1,242,104
	96,600			Covance, Inc. (b)					4,601,058
	106,006			CVS Caremark Corporation					4,749,069
	199,388			Express Scripts, Inc. (b)					10,802,842
	59,450			HCA Holdings, Inc. (b)					1,470,793
	137,675			Health Management Associates, Inc. (b)					925,176
	30,812			LifePoint Hospitals, Inc. (b)					1,215,225
	56,862			McKesson Corporation					4,990,778
	303,165			PAREXEL International Corporation (b)					8,176,360
	94,213			UnitedHealth Group, Inc.					5,552,914
									58,463,238

 

The accompanying notes are an integral part of these financial statements.
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H&Q HEALTHCARE INVESTORS

SCHEDULE OF INVESTMENTS

MARCH 31, 2012

(Unaudited)

(continued)

SHARES				Medical Devices and Diagnostics - 11.1%				VALUE
	251,928			Accuray, Inc. (b)				$	1,778,612
	291,249			Alere, Inc. (b)					7,575,386
	189,297			Bruker Corporation (b)					2,898,137
	160,000			Ceracor Laboratories, Inc. (Restricted) (a) (b)					101,855
	93,544			Gen-Probe, Inc. (b)					6,212,257
	51,173			iCAD, Inc. (b)					25,075
	171,804			iCAD, Inc. (Locked-up until 6/30/12) (Restricted) (a)					79,975
	38,181			iCAD, Inc. (Locked-up until 12/31/12) (Restricted) (a)					16,838
	38,597			IDEXX Laboratories, Inc. (b)					3,375,308
	71,000			Life Technologies Corporation (b)					3,466,220
	830,292			Medwave, Inc. (b) (c)					0
	93,008			OmniSonics Medical Technologies, Inc. (Restricted) (a) (b)					93
	91,019			Palomar Medical Technologies, Inc. (b)					850,117
	345,532			PerkinElmer, Inc.					9,557,415
	147,917			Quest Diagnostics, Inc.					9,045,124
	208			Songbird Hearing, Inc. (Restricted) (a) (b)					139
	114,288			Thermo Fisher Scientific, Inc.					6,443,557
									51,426,108
				Pharmaceuticals - 8.1%
	61,410			Endo Pharmaceuticals Holdings, Inc. (b)					2,378,409
	39,350			Jazz Pharmaceuticals, Inc. (b)					1,907,295
	114,358			Medivation, Inc. (b)					8,544,830
	258,030			Merck & Company, Inc.					9,908,352
	56,068			Sanofi, CVR (expiration 12/31/20) (b) (h)					75,692
	77,587			Shire plc (f)					7,351,368
	436,983			Warner Chilcott plc (b)					7,345,684
									37,511,630
				TOTAL COMMON STOCKS AND WARRANTS (Cost $340,021,292)					407,147,268
				EXCHANGE TRADED FUND - 1.3%
	47,741			iShares Nasdaq Biotechnology Index Fund					5,886,465
				TOTAL EXCHANGE TRADED FUND (Cost $4,187,923)					5,886,465

 

The accompanying notes are an integral part of these financial statements.
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H&Q HEALTHCARE INVESTORS

SCHEDULE OF INVESTMENTS

MARCH 31, 2012

(Unaudited)

(continued)

PRINCIPAL AMOUNT				SHORT-TERM INVESTMENT - 3.5%				VALUE
$	16,530,000			Repurchase Agreement, State Street Bank and Trust Co., repurchase value $16,530,014, 0.01%, dated 03/30/12, due 04/02/12 (collateralized by U.S. Treasury Note 4.23%, due 06/30/16, market value $16,860,938)				$	16,530,000
				TOTAL SHORT-TERM INVESTMENT (Cost $16,530,000)					16,530,000
				TOTAL INVESTMENTS BEFORE MILESTONE INTERESTS - 97.9% (Cost $396,709,115)					455,007,847
INTEREST				MILESTONE INTERESTS (Restricted) (a) (b) - 2.0%
				Biotechnologies/Biopharmaceuticals - 1.1%
	1			Targegen Milestone Interest					5,359,098
				Medical Devices and Diagnostics - 0.9%
	1			Interlace Medical Milestone Interest					3,072,417
	1			Xoft Milestone Interest					946,810
									4,019,227
				TOTAL MILESTONE INTERESTS (Cost $6,485,684)					9,378,325
				TOTAL INVESTMENTS - 99.9% (Cost $403,194,799)					464,386,172
				OTHER ASSETS IN EXCESS OF LIABILITIES - 0.1%					233,025
				NET ASSETS - 100%				$	464,619,197

 

(a)  Security fair valued.

(b)  Non-income producing security.

(c)  Affiliated issuers in which the Fund holds 5% or more of the voting securities (total market value of $25,421,228).

(d)  Number of warrants to be determined at a future date.

(e)  Foreign security.

(f)  American Depository Receipt

(g)  Security exempt from registration under Rule 144A of the Securities Act of 1933, as amended. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.

(h)  Contingent Value Rights

 

The accompanying notes are an integral part of these financial statements.
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H&Q HEALTHCARE INVESTORS

SCHEDULE OF INVESTMENTS

MARCH 31, 2012

(Unaudited)

(continued)

Other Information

The Fund uses a three-tier hierarchy to prioritize the assumptions, referred to as inputs, used in valuation techniques to measure fair value. The three-tier hierarchy of inputs is summarized in three broad levels. Level 1 includes quoted prices in active markets for identical investments. Level 2 includes prices determined using other significant observable inputs (including quoted prices for similar investments, interest rates, credit risk, etc.). Level 3 includes prices determined using significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments). These inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

The following is a summary of the inputs used as of March 31, 2012 to value the Fund's net assets. For the six months ended March 31, 2012, there were no transfers between Levels 1 and 2.

Assets at Value				Level 1				Level 2				Level 3				Total
Convertible Securities and Warrants
Biotechnologies/Biopharmaceuticals												$	4,012,450			$	4,012,450
Drug Discovery Technologies													0				0
Healthcare Services													6,266,611				6,266,611
Medical Devices and Diagnostics													15,165,053				15,165,053
Common Stocks and Warrants
Biotechnologies/Biopharmaceuticals				$	172,150,088								12,594,127				184,744,215
Drug Delivery					6,290,693								1,417,096				7,707,789
Drug Discovery Technologies					—								18				18
Generic Pharmaceuticals					67,294,270								—				67,294,270
Healthcare Services					56,574,351								1,888,887				58,463,238
Medical Devices and Diagnostics					51,227,208								198,900				51,426,108
Pharmaceuticals					37,511,630								—				37,511,630
Exchanged Traded Fund					5,886,465								—				5,886,465
Short-Term Investment					—			$	16,530,000				—				16,530,000
Milestone Interests
Biotechnologies/Biopharmaceuticals					—				—				5,359,098				5,359,098
Medical Devices and Diagnostics					—				—				4,019,227				4,019,227
Other Assets					—				—				2,021,868				2,021,868
Total				$	396,934,705			$	16,530,000			$	52,943,335			$	466,408,040

The accompanying notes are an integral part of these financial statements.
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H&Q HEALTHCARE INVESTORS

SCHEDULE OF INVESTMENTS

MARCH 31, 2012

(Unaudited)

(continued)

Other Information, continued

The following is a reconciliation of level 3 assets for which significant unobservable inputs were used to determine fair value. Realized and unrealized gain (loss) disclosed in the reconciliation are included in Net Realized and Unrealized Gain (Loss) on the Statement of Operations.

Level 3 Assets				Balance as of September 30, 2011				Realized gain/loss and change in unrealized appreciation (depreciation)				Cost of purchases				Proceeds from sales				Net transfers in (out of) Level 3				Balance as of March 31, 2012
Convertible Securities and Warrants
Biotechnologies/ Biopharmaceuticals				$	3,065,658			($	13,999	)		$	1,295,460			($	334,669	)			—			$	4,012,450
Drug Discovery Technologies					4,902,442				(1,179,884	)			43				(3,722,601	)			—				0
Healthcare Services					5,255,869				1,010,742				—				—				—				6,266,611
Medical Devices and Diagnostics					25,318,191				(841,720	)			1,088,209				(10,399,627	)			—				15,165,053
Common Stocks and Warrants
Biotechnologies/ Biopharmaceuticals					—				833,416				11,779,914				(19,203	)			—				12,594,127
Drug Delivery					1,477,002				(59,906	)			—				—				—				1,417,096
Drug Discovery Technologies					18				—				—				—				—				18
Healthcare Services					1,999,998				(111,111	)			—				—				—				1,888,887
Medical Devices and Diagnostics					201,816				65,559				—				(68,475	)			—				198,900
Milestone Interests
Biotechnologies/ Biopharmaceuticals					6,659,002				1,264				—				(1,301,168	)			—				5,359,098
Medical Devices and Diagnostics					4,927,637				1,875,993				892				(2,785,295	)			—				4,019,227
Other Assets					1,076,814				—				1,631,974				(686,920	)			—				2,021,868
Total				$	54,884,447			$	1,580,354			$	15,796,492			($	19,317,958	)			—			$	52,943,335
Net change in unrealized appreciation (depreciation) from investments still held as of March 31, 2012																								$	2,754,517

 

In May 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-04 "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards ("IFRS")." ASU 2011-04 includes common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. ASU 2011-04 will require reporting entities to disclose the following information for fair value measurements categorized within Level 3 of the fair value hierarchy: quantitative information about the unobservable inputs used in the fair value measurement, the valuation processes used by the reporting entity, and a narrative description of the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs. In addition, ASU 2011-04 will require reporting entities to make disclosures about amounts and reasons for all transfers into and out of Level 1 and Level 2 fair value measurements. The new and revised disclosures are effective for interim and annual reporting periods beginning after December 15, 2011. At this time, management is evaluating the implications of ASU No. 2011-04 and its impact on the financial statements.

The accompanying notes are an integral part of these financial statements.
12

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H&Q HEALTHCARE INVESTORS

STATEMENT OF ASSETS AND LIABILITIES

MARCH 31, 2012

(Unaudited)

ASSETS:
Investments in unaffiliated issuers, at value (cost $369,053,147)				$	429,586,619
Investments in affiliated issuers, at value (cost $27,655,968)					25,421,228
Milestone interests, at value (cost $6,485,684)					9,378,325
Cash					668
Dividends and interest receivable					224,324
Receivable for investments sold					1,063,220
Prepaid expenses					47,246
Other assets (see Note 1)					2,021,868
Total assets					467,743,498
LIABILITIES:
Payable for investments purchased					2,430,264
Accrued advisory fee					402,036
Accrued shareholder reporting fees					65,760
Accrued trustee fees					8,794
Accrued other					217,447
Total liabilities					3,124,301
NET ASSETS				$	464,619,197
SOURCES OF NET ASSETS:
Shares of beneficial interest, par value $.01 per share, unlimited number of shares authorized, amount paid in on 26,006,087 shares issued and outstanding				$	385,072,078
Accumulated net investment loss					(1,207,379	)
Accumulated net realized gain on investments, milestone interests and options					19,563,125
Net unrealized gain on investments and milestone interests					61,191,373
Total net assets (equivalent to $17.87 per share based on 26,006,087 shares outstanding)				$	464,619,197

 

The accompanying notes are an integral part of these financial statements.
13

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H&Q HEALTHCARE INVESTORS

STATEMENT OF OPERATIONS

SIX MONTHS ENDED MARCH 31, 2012

(Unaudited)

INVESTMENT INCOME:
Dividend income (net of foreign tax of $39,635)				$	1,762,411
Interest Income					1,397
Total investment income					1,763,808
EXPENSES:
Advisory fees					2,240,824
Legal fees					241,967
Administration and auditing fees					111,897
Trustees' fees and expenses					102,870
Shareholder reporting					72,307
Custodian fees					53,457
Transfer agent fees					27,837
Other (See Note 2)					120,028
Total expenses					2,971,187
Net investment loss					(1,207,379	)
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments in unaffiliated issuers					30,846,667
Investments in affiliated issuers					3,668,761
Closed or expired option contracts written					98,387
Net realized gain					34,613,815
Change in unrealized appreciation (depreciation)
Investments in unaffiliated issuers					70,241,224
Investments in affiliated issuers					(2,239,998	)
Milestone interests					1,877,257
Option contracts written					(38,258	)
Change in unrealized appreciation (depreciation)					69,840,225
Net realized and unrealized gain (loss)					104,454,040
Net increase in net assets resulting from operations				$	103,246,661

 

The accompanying notes are an integral part of these financial statements.
14

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H&Q HEALTHCARE INVESTORS

STATEMENTS OF CHANGES IN NET ASSETS

				Six months ended March 31, 2012 (Unaudited)				Year ended September 30, 2011
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS:
Net investment loss				($	1,207,379	)		($	4,038,147	)
Net realized gain					34,613,815				34,994,641
Change in net unrealized appreciation					69,840,225				1,401,496
Net increase in net assets resulting from operations					103,246,661				32,357,990
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized capital gains					(15,489,468	)			(32,335,067	)
Total distributions					(15,489,468	)			(32,335,067	)
CAPITAL SHARE TRANSACTIONS:
Fund shares repurchased (721,675 and 137,620 shares,   respectively) (See Note 1)					(9,947,204	)			(1,866,895	)
Reinvestment of distributions (527,515 and 1,104,265 shares,   respectively)					7,880,981				15,591,071
Total capital share transactions					(2,066,223	)			13,724,176
Net increase in net assets					85,690,970				13,747,099
NET ASSETS:
Beginning of period					378,928,227				365,181,128
End of period				$	464,619,197			$	378,928,227
*Includes accumulated net  investment loss of:				($	1,207,379	)		$	0	(a)

 

(a)  Reflects reclassifications to the Fund's capital accounts to reflect income and gains available for distribution under income tax regulations.

 

The accompanying notes are an integral part of these financial statements.
15

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H&Q HEALTHCARE INVESTORS

STATEMENT OF CASH FLOWS

SIX MONTHS ENDED MARCH 31, 2012

(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:
Purchases of portfolio securities				($	174,153,777	)
Purchases to close option contracts written					(77,930	)
Net maturities of short-term investments					(4,278,463	)
Sales of portfolio securities					198,135,085
Proceeds from option contracts written					108,378
Interest income received					854
Dividend income received					1,648,808
Other operating receipts (expenses paid)					(3,826,790	)
Net cash provided from operating activities					17,556,165
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions paid					(7,608,487	)
Fund shares repurchased					(9,947,204	)
Net cash used for financing activities					(17,555,691	)
NET INCREASE IN CASH					474
CASH AT BEGINNING OF PERIOD					194
CASH AT END OF PERIOD				$	668
RECONCILIATION OF NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS TO NET CASH PROVIDED FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operations				$	103,246,661
Purchases of portfolio securities					(174,153,777	)
Purchases to close option contracts written					(77,930	)
Net maturities of short-term investments					(4,278,463	)
Sales of portfolio securities					198,135,085
Proceeds from option contracts written					108,378
Accretion of discount					(537	)
Net realized gain on investments and options					(34,613,815	)
Decrease in net unrealized appreciation (depreciation) on investments and options					(69,840,225	)
Increase in dividends and interest receivable					(113,609	)
Increase in accrued expenses					72,967
Increase in prepaid expenses and other assets					(928,570	)
Net cash provided from operating activities				$	17,556,165

 

Noncash financing activities not included herein consist of reinvested distributions to shareholders of $7,880,981.

Noncash operating activity not included herein consists of corporate actions of $1,995,736.

 

The accompanying notes are an integral part of these financial statements.
16

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H&Q HEALTHCARE INVESTORS

FINANCIAL HIGHLIGHTS

				Six months ended March 31,2012				Year ended September 30,
				(Unaudited)				2011				2010				2009				2008				2007
OPERATING PERFORMANCE FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
Net asset value per share, Beginning of period				$	14.46			$	14.47			$	14.05			$	16.58			$	19.14			$	17.31
Net investment loss (1)					(0.05	)(2)			(0.16	)(3)			(0.07	)(4)			(0.17	)			(0.18	)			(0.18	)
Net realized and unrealized gain (loss)					4.02				1.40				0.81				(1.51	)			(0.95	)			3.45
Total increase (decrease) from investment operations					3.97				1.24				0.74				(1.68	)			(1.13	)			3.27
Distributions to shareholders from:
Net realized capital gain					(0.60	)			(1.26	)			(0.37	)			(0.12	)			(1.43	)			(1.44	)
Return of capital (tax basis)					—				—				—				(0.73	)			—				—
Total distributions					(0.60	)			(1.26	)			(0.37	)			(0.85	)			(1.43	)			(1.44	)
Increase resulting from shares repurchased (1)					0.04				0.01				0.05				—				—				—
Net asset value per share, end of period				$	17.87			$	14.46			$	14.47			$	14.05			$	16.58			$	19.14
Per share market value, end of period				$	16.47			$	13.15			$	12.08			$	11.32			$	13.70			$	17.30
Total investment return at market value					30.34	%*			18.90	%			10.04	%			(10.33	%)			(12.96	%)			12.34	%
RATIOS
Expenses to average net assets					1.43	%**			1.47	%			1.44	%			1.52	%			1.51	%			1.52	%
Net investment loss to average net assets					(0.58	%)**(2)			(1.00	%)(3)			(0.45	%)(4)			(1.30	%)			(0.99	%)			(1.00	%)
SUPPLEMENTAL DATA
Net assets, end of period (in millions)				$	465			$	379			$	365			$	356			$	403			$	444
Portfolio turnover rate					43.50	%*			93.75	%			48.68	%			66.34	%			65.38	%			115.77	%

 

*  Not Annualized.

**  Annualized.

(1)  Computed using average shares outstanding.

(2)  Includes a special dividend from an issuer in the amount of $1.00 per share. Excluding the special dividend, the ratio of net investment loss to average net assets would have been (0.97%).

(3)  Includes a special dividend from an issuer in the amount of $0.02 per share. Excluding the special dividend, the ratio of net investment loss to average net assets would have been (1.11%).

(4)  Includes a special dividend from an issuer in the amount of $0.05 per share. Excluding the special dividend, the ratio of net investment loss to average net assets would have been (0.83%).

 

The accompanying notes are an integral part of these financial statements.
17

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H&Q HEALTHCARE INVESTORS

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2012

(Unaudited)

(1)  Organization and Significant Accounting Policies

H&Q Healthcare Investors (the Fund) is a Massachusetts business trust registered under the Investment Company Act of 1940 as a diversified closed-end management investment company. The Fund's investment objective is long-term capital appreciation through investment in companies in the healthcare industry. This is a broad mandate and includes all companies Hambrecht & Quist Capital Management LLC (the Adviser) determines to be healthcare related. The Fund invests primarily in securities of public and private companies that are believed to have significant potential for above-average growth.

The preparation of these financial statements requires the use of certain estimates by management in determining the Fund's assets, liabilities, revenues and expenses. Actual results could differ from these estimates and such difference could be material. The following is a summary of significant accounting policies consistently followed by the Fund, which are in conformity with accounting principles generally accepted in the United States of America. Events or transactions occurring after March 31, 2012 through the date that the financial statements were issued have been evaluated in the preparation of the financial statements.

Investment Valuation

Shares of publicly traded investments listed on national securities exchanges or in the over-the-counter market are typically valued at the last sale price, as of the close of trading, generally 4 p.m., Eastern time. The Trustees have established and approved fair valuation policies and procedures with respect to securities for which effective quoted prices may not be available. Shares of publicly traded investments for which market quotations are not readily available, such as stocks for which trading has been halted or for which there are no current day sales, or whose quoted price may otherwise not reflect fair value are valued in good faith by the Adviser using a fair valuation process described below. Restricted securities of companies that are publicly traded are valued typically based on the closing market quote on the valuation date adjusted for the impact of the restriction as determined in good faith by the Adviser also using the fair valuation process described below. Non-traded warrants of publicly traded companies are typically valued using the Black-Scholes model, which incorporates both observable and unobservable inputs. Short-term investments with a maturity of 60 days or less are typically valued at amortized cost, which approximates fair value.

Convertible preferred shares, warrants or convertible note interests in private companies, milestone interests, other restricted securities, as well as shares of publicly traded companies for which market quotations are not available or which do not reflect fair value, are typically valued in good faith, based upon the recommendations made by the Adviser pursuant to fair valuation policies and procedures approved by the Trustees. Each fair value determination is based on a consideration of relevant factors. Factors the Adviser considers may include (i) the existence of any contractual restrictions on the disposition of securities; (ii) information obtained from the company, which may include an analysis of the company's financial statements, the company's products or intended markets or the company's technologies; (iii) the price of a security negotiated at arm's length in an issuer's completed subsequent round of financing; (iv) the price and extent of public trading in similar securities of the issuer or of comparable companies; or (v) a probability and time value adjusted analysis of contractual term. Where appropriate, multiple valuation methodologies are applied to confirm fair value. Due to the uncertainty inherent in the valuation process, despite the Adviser's good faith effort, such estimates of fair value may differ significantly from the values that would have been used had a

18

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H&Q HEALTHCARE INVESTORS

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2012

(continued)

ready market for the investments existed, and differences could be material. Additionally, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different from the valuations currently assigned.

Options on Securities

An option contract is a contract in which the writer (seller) of the option grants the buyer of the option, upon payment of a premium, the right to purchase from (call option) or sell to (put option) the writer a designated instrument at a specified price within a specified period of time. Certain options, including options on indices, will require cash settlement by the Fund if the option is exercised. The Fund may enter into option contracts in order to hedge against potential adverse price movements in the value of portfolio assets, as a temporary substitute for selling selected investments to lock in the purchase price of a security or currency which it expects to purchase in the near future as a temporary substitute for purchasing selected investments, or to enhance potential gain.

The Fund's obligation under an exchange traded written option or investment in an exchange-traded purchased option is valued at the last sale price or in the absence of a sale, the mean between the closing bid and asked prices. Gain or loss is recognized when the option contract expires, is exercised or is closed.

If the Fund writes a covered call option, the Fund foregoes, in exchange for the premium, the opportunity to profit during the option period from an increase in the market value of the underlying security above the exercise price. If the Fund writes a put option it accepts the risk of a decline in the market value of the underlying security below the exercise price. Over-the-counter options have the risk of the potential inability of counterparties to meet the terms of their contracts. The Fund's maximum exposure to purchased options is limited to the premium initially paid. In addition, certain risks may arise upon entering into option contracts including the risk that an illiquid secondary market will limit the Fund's ability to close out an option contract prior to the expiration date and that a change in the value of the option contract may not correlate exactly with changes in the value of the securities hedged.

All options on securities and securities indices written by the Fund are required to be covered. When the Fund writes a call option, this means that during the life of the option the Fund may own or have the contractual right to acquire the securities subject to the option or may maintain with the Fund's custodian in a segregated account appropriate liquid securities in an amount at least equal to the market value of the securities underlying the option. When the Fund writes a put option, this means that the Fund will maintain with the Fund's custodian in a segregated account appropriate liquid securities in an amount at least equal to the exercise price of the option. The Fund may use option contracts to gain or hedge exposure to financial market risk.

Transactions in call options written for the six months ended March 31, 2012 were as follows:

				Contracts				Premiums
Options outstanding, September 30, 2011					306			$	67,940
Options written					1,103				108,378
Options terminated in closing purchase transactions					(590	)			(127,295	)
Options exercised					—				—
Options expired					(819	)			(49,023	)
Options outstanding, March 31, 2012					—			$	0

19

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H&Q HEALTHCARE INVESTORS

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2012

(continued)

Derivatives not accounted for as hedging instruments under ASC 815				Statement of Assets and Liabilities Location								Statement of Operations Location
The Fund had no open options written contracts at March 31, 2012.												Net realized gain on investments in unaffiliated issuers				$	0
												Net realized gain on closed or expired option contracts written				$	98,387
												Change in unrealized appreciation (depreciation) on investments in unaffiliated issuers				$	0
												Change in unrealized appreciation (depreciation) on option contracts written				($	38,258	)

 

Milestone Interests

The Fund holds financial instruments which reflect the current value of future milestone payments the Fund may receive as a result of contractual obligations from other parties. The value of such payments are adjusted to reflect the estimated risk with the relative uncertainty of both the timing and the achievement of individual milestones. A risk to the Fund is that the milestones will not be achieved and no payment will be received by the Fund. The milestone interests were received as part of the proceeds from the sale of three private companies.

The following is a summary of the impact of the milestone interests on the financial statements as of and for the six months ended March 31, 2012:

Statement of Assets and Liabilities, Milestone interests, at value				$	9,378,325
Statement of Assets and Liabilities, Net unrealized gain on investments, milestone interests and options				$	2,892,641
Statement of Operations, Net realized gain on Milestone Interests				$	0
Statement of Operations, Change in unrealized appreciation (depreciation) on milestone interests				$	1,877,257

 

Other Assets

Other assets in the Statement of Assets and Liabilities consists of amounts due to the Fund at various times in the future in connection with the sale of investments in five private companies.

Investment Transactions and Income

Investment transactions are recorded on a trade date basis. Gains and losses from sales of investments are recorded using the "identified cost" method. Interest income is recorded on the accrual basis, adjusted for amortization of premiums and accretion of discounts. Dividend income is recorded on the ex-dividend date, minus any foreign taxes.

The aggregate cost of purchases and proceeds from sales of investment securities (other than short-term investments) for the six months ended March 31, 2012 totaled $174,528,324 and $186,381,865, respectively.

 

20

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H&Q HEALTHCARE INVESTORS

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2012

(continued)

Repurchase Agreements

In managing short-term investments the Fund may from time to time enter into transactions in repurchase agreements. In a repurchase agreement, the Fund's custodian takes possession of the underlying collateral securities from the counterparty, the market value of which is at least equal to the principal, including accrued interest, of the repurchase transaction at all times. In the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral by the Fund may be delayed.

Distribution Policy

Pursuant to a Securities and Exchange Commission exemptive order, the Fund has implemented a fixed distribution policy (the Policy) that permits the Fund to make quarterly distributions at a rate set by the Board of Trustees. Under the current Policy, the Fund intends to make quarterly distributions at a rate of 2% of the Fund's net assets to shareholders of record. The Fund intends to use net realized capital gains when making quarterly distributions, if available, but the Policy would result in a return of capital to shareholders if the amount of the distribution exceeds the Fund's net investment income and realized capital gains. Under the Policy realized capital gains in excess of the total distributed would be included in the December distribution. Previously, for the period April 5, 2010 to November 1, 2010, the Fund had made quarterly distributions at a rate of 1.25% of the Fund's net assets. The Board of Trustees suspended the Policy on August 4, 2009 and reinstated the Policy on April 5, 2010. Prior to August 4, 2009, the Fund made quarterly distributions at a rate of 2% of the Fund's net assets. The Policy has been established by the Board of Trustees and may be changed by them without shareholder approval. The Board regularly reviews the Policy and the distribution rate considering the purpose and effect of the Policy, the financial market environment, and the Fund's income, capital gains and capital available to pay distributions.

The Fund's policy is to declare distributions in stock. The distributions are automatically paid in newly-issued full shares of the Fund unless otherwise instructed by the shareholder. Fractional shares will generally be settled in cash, except for registered shareholders with book entry accounts at the Fund's transfer agent who will have whole and fractional shares added to their accounts. The Fund's transfer agent delivers an election card and instructions to each registered shareholder in connection with each distribution. The number of shares issued will be determined by dividing the dollar amount of the distribution by the lower of net asset value or market price on the pricing date. If a shareholder elects to receive a distribution in cash, rather than in shares, the shareholder's relative ownership in the Fund will be reduced. The shares reinvested will be valued at the lower of the net asset value or market price on the pricing date. Distributions in stock will not relieve shareholders of any federal, state or local income taxes that may be payable on such distributions.

Share Repurchase Program

In March 2012, the Trustees approved the renewal of the repurchase program to allow the Fund to repurchase up to 12% of its outstanding shares in the open market for a one year period beginning July 11, 2012. Prior to this renewal, in June 2011, the Trustees authorized a share repurchase program to allow the Fund to repurchase up to 12% of its outstanding shares for a one year period beginning July 11, 2011. The share repurchase program is intended to enhance shareholder value and potentially reduce the discount between the market price of the Fund's shares and the Fund's net asset value.

21

---

H&Q HEALTHCARE INVESTORS

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2012

(continued)

During the period October 01, 2011 to March 31, 2012, the Fund repurchased 721,675 shares at a total cost of $9,947,204. The weighted average discount per share between the cost of repurchase and the net asset value applicable to such shares at the date of repurchase was 8.88%.

During the period July 11, 2011 to September 30, 2011, the Fund repurchased 137,620 shares at a total cost of $1,866,895. The Weighted average discount per share between the cost of repurchase and the net asset value applicable to such shares at the date of repurchase was 9.73%.

Federal Taxes

It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute to its shareholders substantially all of its taxable income and its net realized capital gains, if any. Therefore, no Federal income or excise tax provision is required.

As of March 31, 2012, the Fund had no uncertain tax positions that would require financial statement recognition or disclosure. The Fund's federal tax returns are subject to examination by the Internal Revenue Service for a period of three years.

Distributions

The Fund records all distributions to shareholders from net investment income and realized gains, if any, on the ex-dividend date. Such distributions are determined in conformity with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences include temporary and permanent differences from losses on wash sale transactions, installment sale adjustments, return of capital distributions and ordinary loss netting to reduce short term capital gains. Reclassifications are made to the Fund's capital accounts to reflect income and gains available for distribution under income tax regulations.

Statement of Cash Flows

The cash amount shown in the Statement of Cash Flows is the amount included in the Fund's Statement of Assets and Liabilities and represents cash on hand at its custodian and does not include short-term investments at March 31, 2012.

Indemnifications

Under the Fund's organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into agreements with service providers that may contain indemnification clauses. The Fund's maximum exposure under these agreements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote.

(2)  Investment Advisory and Other Affiliated Fees

The Fund has entered into an Investment Advisory Agreement (the Advisory Agreement) with the Adviser. Pursuant to the terms of the Advisory Agreement, the Fund pays the Adviser a monthly fee at the rate when annualized of (i) 2.50% of the average net assets for the month of its venture capital and other restricted securities up to 25% of net assets and (ii) for all other net assets, 0.98% of the average net assets up to $250 million, 0.88% of the average net assets for the next $250 million, 0.80% of the average net assets for the next $500 million and 0.70% of the average net assets thereafter. The aggregate fee would not exceed a rate when annualized of 1.36%.

22

---

H&Q HEALTHCARE INVESTORS

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2012

(continued)

The Fund has entered into a Services Agreement (the Agreement) with the Adviser. Pursuant to the terms of the Agreement, the Fund reimburses the Adviser for certain services related to a portion of the payment of salary and provision of benefits to the Fund's Chief Compliance Officer. During the six months ended March 31, 2012 these payments amounted to $48,695 and are included in the Other category in the Statement of Operations, together with insurance and other expenses incurred to unaffiliated entities. Expenses incurred pursuant to the Agreement as well as certain expenses paid for by the Adviser are allocated in an equitable fashion as approved by the Board of the Fund.

The Fund pays compensation to Independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The Fund does not pay compensation directly to Trustees or officers of the Fund who are also officers of the Adviser.

(3)  Other Transactions with Affiliates

An affiliate company is a company in which the Fund holds 5% or more of the voting securities. Transactions with such companies during the six months ended March 31, 2012 were as follows:

Issuer				Value on September 30, 2011				Purchases				Sales				Income				Value on March 31, 2012
Agilix Corporation				$	3,952							$	3,966			$	—			$	0
A.P. Pharma, Inc.					2,944,000								—				—				4,140,000
CardioKinetix, Inc.					2,785,241								—				—				2,785,241
Concentric Medical, Inc.					10,153,138								10,113,758				—				—
EBI Life Sciences, Inc.					—			$	58,917				44,320				—				14,103
Euthymics Biosciences, Inc.					2,831,651				394,299				284,099				—				2,941,319
IntelliPharmaCeutics International, Inc.					4,008,342				283,938				—				—				3,567,789
Medwave, Inc.					2,491				—				—				—				—
Neurovance, Inc.					—				256,785				6,250				—				249,357
Palyon Medical Corporation					2,211,809				—				—				—				2,211,809
PHT Corporation					5,255,869				—				—				—				6,266,611
Veniti, Inc.					3,244,999				—				—				—				3,244,999
				$	33,441,492			$	993,939			$	10,452,393			$	—			$	25,421,228

 

(4)  Private Companies and Other Restricted Securities

The Fund may invest in private companies and other restricted securities if these securities would currently comprise 40% or less of net assets. The value of these securities represents 11% of the Fund's net assets at March 31, 2012.

At March 31, 2012, the Fund had commitments of $1,458,813 relating to additional investments in two private companies.

The following table details the acquisition date, cost, carrying value per unit, and value of the Fund's private companies and other restricted securities at March 31, 2012. The Fund on its own does not have the right to demand that such securities be registered.

Security (#)				Acquisition Date				Cost				Carrying Value per Unit				Value
Agilix Corporation
Series B Cvt. Pfd.				11/08/01				$	2,347,727			$	0.00			$	0
A.P. Pharma, Inc.
Warrants (expiration 7/01/16)				6/30/11					1,236				0.16				736,000

23

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H&Q HEALTHCARE INVESTORS

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2012

(continued)

Security (#)				Acquisition Date				Cost				Carrying Value per Unit				Value
Athersys, Inc.
Warrants (expiration 6/08/12)				6/07/07				$	0			$	0.00			$	0
Aveta, Inc.
Common				12/21/05					3,004,731				8.50				1,888,887
CardioKinetix, Inc.
Series C Cvt. Pfd.				5/22/08					2,378,400				0.26				890,437
Series D Cvt. Pfd.				12/10/10					784,228				0.11				677,053
Series E Cvt. Pfd.				9/14/11					1,156,249				0.10				1,217,751
Warrants (expiration 12/11/19)				12/10/09, 2/11/10					177				0.00				0
Warrants (expiration 6/03/20)				6/03/10, 9/01/10					177				0.00				0
Warrants (expiration 7/07/21)				7/07/11					69				0.00				0
Celladon Corporation,
Series A-1 Cvt. Pfd.				1/27/12					585,457				0.45				573,663
Ceracor Laboratories, Inc.
Common				3/31/98					0				0.64				101,855
Ceres, Inc.
Common				2/24/12††					3,718,596				14.39				3,721,944
Warrants (expiration 9/05/15)				9/05/07					23				0.83				2,260
Dynex Technologies, Inc.
Series A Cvt. Pfd.				1/03/2012††					285,869				0.18				559,775
Warrants (expiration 4/01/19)				1/03/2012††					0				0.00				0
Warrants (expiration 5/06/19)				1/03/2012††					0				0.00				0
EBI Life Sciences, Inc.
Series A Cvt. Pfd.				12/29/11††					14,598				0.00	†			14,103
Euthymics Biosciences, Inc.
Series A Cvt. Pfd.				7/14/10 - 2/28/12					2,951,194				0.92				2,941,319
iCAD, Inc.
Common (Locked-up until 6/30/12)				1/05/11††					259,486				0.47				79,975
Common (Locked-up until 12/31/12)				1/05/11††					0				0.44				16,838
IntelliPharmaCeutics International, Inc.
Warrants (expiration 2/01/13)				1/31/11					0				0.44				202,488
Warrants (expiration 2/01/16)				1/31/11					0				1.04				478,608
Interlace Medical
Milestone Interest				1/14/11					1,080,376				3,072,417				3,072,417
Labcyte, Inc.
Series C Cvt. Pfd.				7/18/05					1,924,893				0.52				1,920,000
MacroGenics, Inc.
Series D Cvt. Pfd.				9/04/08					1,318,294				0.65				234,008
Magellan Diagnostics, Inc.
Series A Cvt. Pfd.				11/28/06 - 10/01/09					1,760,316				0.59				1,834,818
Warrants (expiration 4/01/19)				4/03/09					394				0.00				0
Warrants (expiration 5/06/19)				5/12/09					31				0.00				0
Neurovance, Inc.
Series A Cvt. Pfd.				12/29/11††					250,535				0.08				249,357
OmniSonics Medical Technologies, Inc.
Series A-1 Cvt. Pfd.				10/01/03					1,801,555				0.00	†			1,548
Series B-1 Cvt. Pfd.				6/04/07, 11/15/07					961,365				0.00	†			1,263
Common				5/24/01, 7/02/07					2,409,096				0.00	†			93
Palyon Medical Corporation
Series A Cvt. Pfd.				4/28/09					2,967,404				0.16				2,211,809
PHT Corporation
Series D Cvt. Pfd.				7/23/01					4,206,263				0.93				5,007,691
Series E Cvt. Pfd.				9/12/03 - 10/19/04					941,783				0.93				1,120,180
Series F Cvt. Pfd.				7/21/08					122,594				0.93				138,740
Puma Biotechnology, Inc
Common				10/04/11					2,867,077				3.75				2,863,500
Warrants (expiration 10/04/21)				10/04/11					0				0.00				0
Songbird Hearing, Inc.
Common				12/14/00					3,004,862				0.67				139

 

24

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H&Q HEALTHCARE INVESTORS

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2012

(continued)

Security (#)				Acquisition Date				Cost				Carrying Value per Unit				Value
Targegen
Milestone Interest				7/20/10				$	4,562,178			$	5,359,098			$	5,359,098
TherOx, Inc.
Series H Cvt. Pfd.				9/11/00, 8/21/07					3,002,748				1.14				74,608
Series I Cvt. Pfd.				7/08/05					579,958				1.14				170,992
Tibion Corporation
Series B Cvt. Pfd.				2/23/11					2,366,726				0.50				2,360,000
Veniti, Inc.
Series A Cvt. Pfd.				2/28/11					3,260,896				0.87				3,244,999
Verastem, Inc
Common				1/27/12					5,174,999				9.84				6,006,423
Xoft
Milestone Interest				1/05/11					843,130				946,810				946,810
Zyomyx, Inc.
Common				2/19/99 - 1/12/04					3,902,233				0.25				18
								$	66,797,923							$	50,921,467

 

(#)  See Schedule of Investments and corresponding footnotes for more information on each issuer.

†  Carrying value per unit is greater than $0.00 but less than $0.01.

††  Interest received as part of a corporate action for a previously owned security.

 

25

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H&Q HEALTHCARE INVESTORS

INVESTMENT ADVISORY AGREEMENT APPROVAL

The Investment Advisory Agreement (the Advisory Agreement) between the Fund and the Adviser provides that the Advisory Agreement will continue in effect so long as its continuance is approved at least annually by (i) the Trustees of the Fund or the shareholders by affirmative vote of a majority of the outstanding shares and (ii) a majority of the Trustees of the Fund who are not interested persons (the Independent Trustees), by vote cast in person at a meeting called for the purpose of voting on such approval.

On March 20, 2012, the Board, and the Independent Trustees voting separately, determined that the terms of the Advisory Agreement are fair and reasonable and approved the continuance of the Advisory Agreement as being in the best interests of the Fund and its shareholders. In making its determination, the Board considered materials that were specifically prepared by the Adviser at the request of the Board and Fund counsel for purposes of the contract review process, including comparisons of (i) the Fund's performance to its benchmark, the NASDAQ Biotech Index (NBI), and to other investment companies, (ii) the Fund's expenses and expense ratios to those of a peer group of other investment companies, and (iii) the Adviser's profitability with respect to its services for the Fund to the profitability of other investment advisers, as described below. The Trustees took into account that the Adviser presently provides investment management services only to the Fund and to H&Q Life Sciences Investors and does not derive any benefit from its relationship with the Fund other than receipt of advisory fees pursuant to the Advisory Agreement. The Board also received and reviewed information throughout the year about the portfolio performance, the investment strategy, the portfolio management team and the fees and expenses of the Fund.

In approving the Advisory Agreement, the Board considered, among other things, the nature, extent, and quality of the services to be provided by the Adviser, the investment performance of the Fund and the Adviser, the costs of services provided and profits realized by the Adviser and its affiliates, and whether fee levels reflect economies of scale for the benefit of Fund shareholders and the extent to which economies of scale would be realized as the Fund grows. The Board reviewed information about the foregoing factors and considered changes, if any, in such information since its previous approval. The Board also evaluated the financial strength of the Adviser and the capability of the personnel of the Adviser, specifically the strength and background of its investment analysts. Fund counsel provided the Board with the statutory and regulatory requirements for approval and disclosure of investment advisory agreements. The Board, including the Independent Trustees, evaluated all of the foregoing and, considering all factors together, determined in the exercise of its business judgment that the continuance of the Advisory Agreement is in the best interests of the Fund and its shareholders. The following provides more detail on certain factors considered by the Trustees and the Board's conclusions with respect to each such factor.

The nature, extent and quality of the services to be provided by the Adviser. On a regular basis the Board considers the roles and responsibilities of the Adviser as a whole, along with specific portfolio management, support and trading functions the Adviser provides to the Fund. The Trustees considered the nature, extent and quality of the services provided by the Adviser to the Fund. The Trustees continue to be satisfied with the quality and value of the investment advisory services provided to the Fund by the Adviser, and, in particular, the management style and discipline followed by the Adviser and the quality of the Adviser's research, trading, portfolio management and administrative personnel.

26

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H&Q HEALTHCARE INVESTORS

INVESTMENT ADVISORY AGREEMENT APPROVAL

(continued)

The investment performance of the Fund and the Adviser. On a regular basis the Board reviews performance information for the Fund and discusses the Fund's investment strategy with the Adviser. The Trustees reviewed performance information for the Fund over the past one-, three-, five-, and ten-year periods. Although the NBI's performance exceeded the Fund's returns by net asset value and stock price in recent periods, the Fund's return by net asset value and stock price outperformed the NBI over the long-term. The Trustees continue to be satisfied with the investment performance of the Fund and the Adviser.

The costs of services to be provided and profits to be realized by the Adviser from its relationship with the Fund. The Trustees considered the various services provided by the Adviser to the Fund and reviewed comparative information regarding the expenses and expense ratios of the Fund and a peer group of other investment companies. The Trustees noted that the Adviser's fees are within the range of fees presented in the comparative information and noted that a portion of the Fund's investment portfolio is invested in venture and restricted securities, a portfolio management service that can command higher management fees than those charged by the Adviser pursuant to the Advisory Agreement. The Trustees also considered financial information provided by the Adviser, including financial statements of the Adviser and a comparison of the Adviser's profitability with respect to its services for the Fund to the profitability of other privately held investment advisers. Based on the information provided to and evaluated by the Trustees, the Trustees concluded that the fees charged by the Adviser are fair and reasonable in light of the quality and nature of the services provided by the Adviser and that the profitability of the Adviser's relationship with the Fund has not been excessive. The fees charged by the Adviser are within a reasonable range of fees as compared to fees charged by other investment advisers, and the services provided by the Adviser and the amounts paid under the Advisory Agreement are sufficiently favorable in comparison to the services rendered and fees charged by others for similar services to warrant a finding that fees to be paid by the Fund are fair.

Whether fee levels reflect economies of scale and the extent to which economies of scale would be realized as the Fund grows. The Trustees considered that the Advisory Agreement provides for breakpoints in the advisory fees so that the Fund will share the benefits of the economies of scale that would inure to the Adviser as the Fund's assets increase. The Trustees reviewed the net assets of the Fund over the last five years, the recent investment performance of the Fund, and the management fees of other funds with similar investment objectives. Given the asset size of the Fund, and as economies of scale are still modest at current Fund asset levels, the Trustees determined that the Fund's breakpoint schedule is satisfactory and fair.

27

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H&Q HEALTHCARE INVESTORS

PRIVACY NOTICE

If you are a registered shareholder of the Fund, the Fund and Hambrecht & Quist Capital Management LLC, the Fund's investment adviser, may receive nonpublic personal information about you from the information collected by the transfer agent from your transactions in Fund shares. Any nonpublic personal information is not disclosed to third parties, except as permitted or required by law. In connection with servicing your account and effecting transactions, the information received may be shared with the investment adviser and non-affiliates, including transfer agents, custodians or other service companies. Access to your nonpublic personal information is restricted to employees who need to know that information to provide products or services to you. To maintain the security of your nonpublic personal information, physical, electronic, and procedural safeguards are in place that comply with federal standards. The policies and practices described above apply to both current and former shareholders.

If your Fund shares are held in "street name" at a bank or brokerage, we do not have access to your personal information and you should refer to your bank's or broker's privacy policies for a statement of the treatment of your personal information.

FOR MORE INFORMATION

A description of the Fund's proxy voting policies and procedures and information on how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30, is available (i) without charge, upon request by calling 1-800-451-2597; (ii) by writing to Hambrecht & Quist Capital Management LLC at 2 Liberty Square, 9th floor, Boston, MA 02109; (iii) on the Fund's website at www.hqcm.com; and (iv) on the Securities and Exchange Commission's (SEC) website at www.sec.gov.

The Fund's complete Schedule of Investments for the first and third quarters of its fiscal year will be filed quarterly with the SEC on Form N-Q. This Schedule of Investments will also be available on the Fund's website at www.hqcm.com or the SEC's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the SEC's Public Reference Room in Washington, DC or by calling 1-800-SEC-0330.

DISTRIBUTION POLICY

The Fund has a fixed distribution policy as described in the Notes to Financial Statements. For more information contact your financial adviser.

PORTFOLIO MANAGEMENT

Daniel R. Omstead, Ph.D., Christopher Brinzey, M.B.A., Frank Gentile, Ph.D. and Jason C. Akus, M.D./M.B.A. are members of a team that analyzes investments on behalf of the Fund. Dr. Omstead exercises ultimate decision making authority with respect to investments.

HOUSEHOLDING

A number of banks, brokers and financial advisers have instituted "householding". Under this practice, which has been approved by the SEC, only one copy of shareholder documents may be delivered to multiple shareholders who share the same address and satisfy other conditions. Householding is intended to reduce expenses and eliminate duplicate mailings of shareholder documents. If you do not want the mailing of your shareholder documents to be combined with those of other members of your household, please contact your bank, broker or financial adviser.

28

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H&Q HEALTHCARE INVESTORS

New York Stock Exchange Symbol: HQH
NAV Symbol: XHQHX

2 Liberty Square, 9th Floor
Boston, Massachusetts 02109
(617) 772-8500
www.hqcm.com

Officers

Daniel R. Omstead, Ph.D., President
Laura Woodward, CPA, Chief Compliance Officer,
Secretary and Treasurer

Trustees

Michael W. Bonney

Rakesh K. Jain, Ph.D.

Daniel R. Omstead, Ph.D

Oleg M. Pohotsky

William S. Reardon, CPA

Uwe E. Reinhardt, Ph.D.

Lucinda H. Stebbins, CPA

Investment Adviser

Hambrecht & Quist Capital Management LLC

Administrator & Custodian

State Street Bank and Trust Company

Transfer Agent

Computershare, Inc.

Legal Counsel

Dechert LLP

Shareholders with questions regarding share transfers may call

1-800-426-5523

Daily net asset value may be obtained from

our website (www.hqcm.com) or by calling

1-800-451-2597

001CS60313

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