===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
--------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 000-50723
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
(Exact name of registrant as specified in its charter)
DELAWARE 04-3638229
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
701 MOUNT LUCAS ROAD
PRINCETON, NEW JERSEY 08540
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 609-497-5500
----------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [ ] No [
X ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
===============================================================================
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets as of June 30, 2004 and December 31, 2003............3
Statement of Operations for the three and six months ended June
30, 2004 and 2003...................................................4
Statement of Changes in Members' Equity for the six months ended
June 30, 2004 and for the year ended December 31, 2003..............5
Statement of Cash Flows for the six months ended June 30, 2004
and June 30, 2003...................................................6
Notes to Unaudited Financial Statements.............................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...........................................21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........38
ITEM 4. CONTROLS AND PROCEDURES.............................................40
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...................................................41
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS...........................41
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.....................................41
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................41
ITEM 5. OTHER INFORMATION...................................................41
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................43
SIGNATURES...................................................................44
INDEX TO EXHIBITS............................................................45
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
BALANCE SHEET
JUNE 30, 2004 AND DECEMBER 31, 2003
ASSETS
------
(UNAUDITED) (AUDITED)
June 30, 2004 December 31, 2003
--------------------- --------------------
Assets:
Cash and cash equivalents $ 20,776,146 $ 48,423,637
Other assets - 77,464
Investments (cost $862,932,603 and
$877,478,931 at 2004 and 2003, respectively) 965,576,626 970,912,828
-------------------- --------------------
Total assets $ 986,352,772 $ 1,019,413,929
==================== ====================
LIABILITIES AND MEMBERS' EQUITY
-------------------------------
Liabilities:
Due to bank $ 20,779,281 $ 47,500,000
Redemptions payable 31,676,122 34,529,625
Accounts payable and accrued liabilities 888,737 168,875
Due to managing member 5,063,454 3,969,687
--------------------- --------------------
Total liabilities 58,407,594 86,168,187
Members' equity (units outstanding 8,096,517.35 and
8,540,512.41 at 2004 and 2003, respectively) 927,945,178 933,245,742
--------------------- --------------------
--------------------- --------------------
Total liabilities and members' equity $ 986,352,772 $ 1,019,413,929
===================== ====================
See accompanying notes.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- --------------------------
2004 2003 2004 2003
-------------- ------------ ------------ -----------
Income from trading:
Equity in Earnings of Investees $ (18,185,504) $ 29,716,678 $ 12,641,661 $ 38,872,948
-------------- ------------ ------------ ------------
Net trading profit/(loss) (18,185,504) 29,716,678 12,641,661 38,872,948
Interest income 89,879 52,819 376,233 78,070
Expenses:
Management fee 3,019,488 2,269,526 6,068,807 3,778,816
Interest expense 101,138 - 422,410 -
Professional fees 587,916 506,166 1,016,133 625,277
------------- ------------ ------------ ------------
Total expenses 3,708,542 2,775,692 7,507,350 4,404,093
------------- ------------- ------------ ------------
Net investment income/(loss) (3,618,663) (2,722,873) (7,131,117) (4,326,023)
------------- ------------ ------------ ------------
Net income/(loss) (21,804,167) 26,993,805 5,510,544 34,546,925
Less: Incentive allocation to the
managing member (1,090,124) 1,321,073 275,612 1,727,346
------------- ------------ ------------ ------------
Net income/(loss) available for pro-rata
allocation to members $ (20,714,043) $ 25,672,732 $ 5,234,932 $ 32,819,579
============= ============== ============== ==============
See accompanying notes.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
STATEMENT OF CHANGES IN MEMBERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)
AND FOR THE YEAR ENDED DECEMBER 31, 2003 (AUDITED)
TOTAL
MANAGING MEMBERS' MEMBERS' MEMBERS'
MEMBER SHARES EQUITY EQUITY
----------- --------- ------------- -------------
Balance at December 31, 2002 $ 469,759 3,738,439 $ 382,756,502 $ 383,226,261
Subscriptions - 5,228,816 524,318,830 524,318,830
Redemptions (4,030,624) (369,585) (41,487,391) (45,518,015)
Series collapse - (57,158) - -
Allocations of net
income/(loss):
Incentive allocation 3,560,865 - - 3,560,865
Pro-rata allocation - - 67,657,801 67,657,801
----------- --------- ------------- -------------
Balance at December 31, 2003 - 8,540,512 933,245,742 933,245,742
Subscriptions - 183,187 20,865,014 20,865,014
Redemptions - (276,457) (31,676,122) (31,676,122)
Series collapse - (350,725) - -
Allocations of net
income/(loss):
Incentive allocation 275,612 - - 275,612
Pro-rata allocation - - 5,234,932 5,234,932
----------- --------- ------------- -------------
Balance at June 30, 2004 $ 275,612 8,096,517 927,669,566 $ 927,945,178
=========== ========= ============= =============
See accompanying notes.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
2004 2003
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $ 5,510,544 $ 34,546,925
Adjustments to reconcile net income/(loss) to net cash from
operating activities:
Undistributed earnings from Investees (9,210,126) (38,872,948)
(Increase) decrease in operating assets:
Investments:
Subscriptions (7,845,756) (388,038,743)
Redemptions 22,392,084 -
Other assets 77,464 (1,149)
Increase (decrease) in operating liabilities:
Due to bank (26,720,719) -
Redemptions payable (2,853,503) -
Accounts payable and accrued liabilities 719,862 (4,600)
Due to managing member 1,093,767 133,227
----------- ------------
Net cash from operating activities (16,836,383) (392,237,288)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Subscriptions 20,865,014 392,954,668
Redemptions (31,676,122) (469,759)
----------- ------------
Net cash from financing activities (10,811,108) 392,484,909
----------- ------------
Net change in cash and cash equivalents (27,647,491) 247,621
Cash and cash equivalents at beginning of period 48,423,637 600,207
----------- ------------
Cash and cash equivalents at end of period $20,776,146 $ 847,828
=========== ============
See accompanying notes.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2004
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------
Organization and basis of financial statements
- ----------------------------------------------
Goldman Sachs Hedge Fund Partners, LLC (the "Company") was organized as a
limited liability company, pursuant to the laws of the State of Delaware
and commenced operations on April 1, 2002 for the principal purpose of
investing in the equity long/short, event driven, relative value, and
tactical trading hedge fund sectors through investments in each of Goldman
Sachs Global Equity Long/Short, LLC, Goldman Sachs Global Event Driven,
LLC, Goldman Sachs Global Relative Value, LLC and Goldman Sachs Global
Tactical Trading, LLC (collectively, the "Investees"). Each of these
Investees invests directly through trading advisors, or indirectly through
investment vehicles managed by such trading advisors (together, the
"Advisors"). Goldman Sachs Princeton LLC ("GS Princeton"), a wholly-owned
subsidiary of The Goldman Sachs Group, Inc., is the managing member,
administrator and commodity pool operator of the Company.
The financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America, which
require the managing member to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes.
Actual results may differ from those estimates. The financial statements
are expressed in United States dollars.
The Company is an investment company for financial reporting purposes and
accordingly carries its assets and liabilities at fair value. Net asset
value per unit is determined by dividing the net assets attributable to
each series by that series' respective number of units outstanding.
Consolidation
- -------------
During the year the Company's ownership percentage of certain Investees
exceeded 50%. This ownership percentage will fluctuate as a result of the
Company's investment strategy and investor subscriptions and redemptions at
the Company and Investee level. The Company does not present consolidated
results in its financial statements as the Company does not invest in
Investees for purposes of exercising control, ownership in excess of 50%
may be temporary, and since the consolidation of these balances would not
enhance the usefulness or understandability of information to the member.
The following table summarizes the Company's ownership in the Investees at
June 30, 2004 and December 31, 2003:
6/30/2004
--------------------------------------------
Investee Company % owned by
Equity investment the Company
--------------- ---------------- -----------
Goldman Sachs Global Equity Long/Short, LLC $522,337,150 $ 137,432,070 26.31%
Goldman Sachs Global Event Driven, LLC $731,878,487 215,926,378 29.50%
Goldman Sachs Global Tactical Trading, LLC $609,312,879 247,686,822 40.65%
Goldman Sachs Global Relative Value, LLC $590,556,843 364,531,356 61.73%
-------------
Total $ 965,576,626
=============
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2004
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- ---------------------------------------------------
12/31/2003
--------------------------------------------
Investee Company % owned by
Equity investment the Company
--------------- ---------------- -----------
Goldman Sachs Global Equity Long/Short, LLC $425,735,121 $140,117,348 32.91%
Goldman Sachs Global Event Driven, LLC $530,245,182 221,899,920 41.85%
Goldman Sachs Global Tactical Trading, LLC $657,712,862 249,583,571 37.95%
Goldman Sachs Global Relative Value, LLC $621,463,189 359,311,989 57.82%
-------------
Total $970,912,828
=============
In addition, in December 2003, the Financial Accounting Standards Board
("FASB") issued interpretation No. 46(R), "Consolidation of Variable
Interest Entities" ("FIN 46(R)"), which provides new criteria for
determining whether consolidation accounting is required. The Company is a
registered investment company. Registered investment companies have been
exempted from the provisions of FIN 46(R) and FIN 46(R) has been deferred
for non-registered investment companies pending the release of an FASB
Scope of Investment Companies project ("Scope Project"). The Scope Project
is designed to determine which entities will qualify as investment
companies, and therefore present their investees at fair value. Those
entities so qualifying will not need to determine whether their investees
should be consolidated pursuant to the provisions of FIN 46(R). FIN 46(R)
would have no impact on the Fund's net assets or net increase in net assets
resulting from operations. The Scope Project has been approved for issuance
by the FASB and the Company complies with the most recent guidance.
Cash and cash equivalents
- -------------------------
The Company considers all highly liquid investments with a maturity of less
than 90 days at the time of purchase and not held for resale to be cash
equivalents. Cash equivalents consisting of time deposits are held at
several major financial institutions to which the Company is exposed to
credit risk. Cash equivalents are carried at cost plus accrued interest,
which approximates market.
Foreign currency
- ----------------
Assets and liabilities denominated in currencies other than United States
dollars are translated at the closing rates of exchange at the end of the
period. Transactions during the period are translated at the rate of
exchange prevailing on the date of the transaction. Foreign currency
transaction gains and losses are included in net trading profit/(loss).
Allocation of net income/(loss)
- -------------------------------
The managing member receives an incentive allocation equal to five percent
of any new appreciation in the net asset value of each series, as defined.
Any depreciation in the net asset value of a series must be recouped prior
to the managing member receiving an incentive allocation. Net income/(loss)
is allocated monthly to the capital account of each member in the ratio
that the balance of each such member's capital account bears to the total
balance of all members' capital accounts.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2004
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- ----------------------------------------------------
Subscriptions and redemptions
- -----------------------------
Subscriptions to the Company can be made as of the first day of each
calendar quarter or at the sole discretion of the managing member.
Redemptions from the Company can be made semi-annually after a twelve-month
holding period or at such other times as determined in the sole discretion
of the managing member, as provided for in the Company's limited liability
company agreement.
Income taxes
- ------------
The Company is taxed as a partnership for U.S. federal income tax purposes.
The members include their distributive share of the Company's taxable
income or loss on their respective income tax returns. Accordingly, no
income tax liability or expense has been recorded in the financial
statements of the Company.
Indemnifications
- ----------------
The Company enters into contracts that contain a variety of
indemnifications. The Company's maximum exposure under these arrangements
is unknown. However, the Company has not had prior claims or losses
pursuant to these contracts and expects the risk of loss to be remote.
NOTE 2 - INVESTMENTS
- --------------------
The Investees, to whom the Company is exposed to credit risk, seek capital
appreciation over time by investing in the relative value, event driven,
equity long/short and tactical trading hedge fund sectors. The Company's
investments in Investees are subject to terms and conditions of the
respective operating agreements. The investments are carried at fair value
as determined by the Company's attributable share of the net assets of the
respective Investees. Fair values are determined utilizing net asset value
information supplied by each individual Investee net of each Advisor's
management and incentive fees. These fees are included in Equity in
Earnings of Investees on the Statement of Operations. The underlying
investments of each Investee are accounted for at fair value. For
investments of the underlying Advisor funds, market value normally is based
on quoted market prices or broker-dealer price quotations provided to the
Advisor fund. In the absence of quoted market prices or broker-dealer price
quotations, underlying Advisor funds investments are valued at fair value
as determined by each Advisor or their administrator. Because of the
inherent uncertainty of valuation, estimated fair values may differ, at
times significantly, from the values that would have been used had a ready
market existed. GS Princeton is the managing member for the four Investees.
GS Princeton does not charge the Company any management fee or incentive
allocation at the Investee level.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2004
NOTE 2 - INVESTMENTS (CONTINUED)
- --------------------------------
The managing member generally has limited access, if at all, to information
regarding the Advisors' portfolios and operations and relies on information
and valuations provided by the Advisors. Generally, the valuations provided
by the Advisors are only audited on an annual basis and are not subject to
independent third party verification. Valuations received from the Advisors
may differ from the values recognized in the balance sheet.
The following table summarizes the Company's investments in Investees at
June 30, 2004 and December 31, 2003:
2004 2003
------------------------------ -----------------------------
% of % of
Company Company
members' members'
Investee Liquidity equity Fair value equity Fair value
- ------------------------ --------- --------- ---------- ----------- ----------
Goldman Sachs Global
Equity Long/Short, LLC (2) 14.81% $ 137,432,070 15.01% $ 140,117,348
Goldman Sachs Global
Event Driven, LLC (1) 23.27% 215,926,378 23.78% 221,899,920
Goldman Sachs Global
Tactical Trading, LLC (3) 26.69% 247,686,822 26.74% 249,583,571
Goldman Sachs Global
Relative Value, LLC (1) 39.28% 364,531,356 38.50% 359,311,989
-------- ------------ ---------- -------------
Total 104.05% $ 965,576,626 104.03% $ 970,912,828
======= ============= ========= =============
(1) Redemptions can be made semiannually with 45 days' notice after a
twelve-month holding period, or at the sole discretion of the managing
member.
(2) Redemptions can be made quarterly with 45 days' notice after a
twelve-month holding period, or at the sole discretion of the managing
member.
(3) Redemptions can be made semiannually with 60 days' notice, or at the
sole discretion of the managing member.
The following table summarizes the Company's Equity in Earnings of
Investees for the three and six month periods ended June 30, 2004 and 2003:
Three months ended June 30, Six months ended June 30,
------------------------------- -----------------------------
Investee 2004 2003 2004 2003
- ------------------------------ -------------- ------------- ------------ ------------
Goldman Sachs Global Equity
Long/Short, LLC ($2,702,335) $6,451,023 1,851,623 $ 6,006,434
Goldman Sachs Global Event
Driven, LLC 2,421,851 9,838,012 10,441,587 13,578,760
Goldman Sachs Global
Tactical Trading, LLC (16,211,320) 7,123,735 (6,042,504) 10,688,562
Goldman Sachs Global
Relative Value, LLC (1,693,700) 6,303,908 6,390,955 8,599,192
-------------- ------------- ------------ ------------
Total ($18,185,504) $ 29,716,678 $ 12,641,661 $ 38,872,948
============== ============= ============ ============
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2004
NOTE 2 - INVESTMENTS (CONTINUED)
- --------------------------------
Goldman Sachs Global Equity Long/Short, LLC
- --------------------------------------------
Goldman Sachs Global Equity Long/Short, LLC seeks risk-adjusted returns
primarily through long and short investment opportunities in the global
equity markets. Strategies employed by the Investees are based on each
Advisor's assessment of fundamental value compared to market price,
although they are implemented via a wide range of styles.
Goldman Sachs Global Event Driven, LLC
- --------------------------------------
Goldman Sachs Global Event Driven, LLC seeks risk-adjusted absolute returns
by allocating assets to Advisors that operate primarily in the global event
driven sector. Event driven strategies seek to identify security price
changes resulting from corporate events such as restructurings, mergers,
takeovers, spin-offs, and other special situations. Corporate event
arbitrageurs generally choose their investments based on their perceptions
of the likelihood that the event or transaction will occur, the amount of
time that the process will take, and the estimated ratio of return to risk.
Strategies that may be utilized in the event driven sector include merger
arbitrage, high yield/distressed securities, and special situations. Other
strategies may be employed as well.
Goldman Sachs Global Tactical Trading, LLC
- ------------------------------------------
Goldman Sachs Global Tactical Trading, LLC seeks long-term risk-adjusted
absolute returns by allocating its assets to Advisors that employ
strategies primarily within the tactical trading sector. Tactical trading
strategies are directional trading strategies that generally fall into one
of the following two categories: managed futures strategies and global
macro strategies. Managed futures strategies involve trading in the global
futures and currencies markets, generally using quantitative or
discretionary approaches. Global macro strategies generally utilize
analysis of macroeconomic, geopolitical, and financial conditions to
develop views on country, regional or broader economic themes and then seek
to capitalize on such views by trading in securities, commodities, interest
rates, currencies and various financial instruments.
Goldman Sachs Global Relative Value, LLC
- ----------------------------------------
Goldman Sachs Global Relative Value, LLC seeks risk-adjusted absolute
returns by allocating assets to Advisors that operate primarily in the
global relative value sector. Relative value strategies seek to profit from
the mispricing of financial instruments, capturing spreads between related
securities that deviate from their fair value or historical norms.
Directional and market exposure is generally held to a minimum or
completely hedged. Strategies that may be utilized in the relative value
sector include convertible arbitrage, equity arbitrage, and fixed-income
arbitrage. Other strategies may be employed as well.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2004
NOTE 2 - INVESTMENTS (CONTINUED)
- --------------------------------
The Company's proportionate share of each individual investment owned by
any individual Investee does not exceed 5% of the Company's equity. The
following table reflects the weighted average Advisors' management fee and
incentive fee rates at the Investee level at June 30, 2004 and 2003:
2004 2003
------------------------- -------------------------
Management Incentive Management Incentive
Investee fee fee fee fee
- ----------------------------------------------- ------------- ----------- -------------- ----------
Goldman Sachs Global Equity Long/Short, LLC 1.44% 19.83% 1.21% 19.86%
Goldman Sachs Global Event Driven, LLC 1.39% 19.90% 1.41% 19.66%
Goldman Sachs Global Tactical Trading, LLC 2.00% 20.00% 1.96% 19.75%
Goldman Sachs Global Relative Value, LLC 1.57% 20.72% 1.51% 20.54%
The Advisors' management and incentive fees are not paid to the managing
member.
The following table summarizes the cost of the Company's investments in
Investees at June 30, 2004 and December 31, 2003:
6/30/2004 12/31/2003
------------ ------------
Goldman Sachs Global Equity Long/Short, LLC $120,714,595 $124,698,754
Goldman Sachs Global Event Driven, LLC 179,189,105 193,043,444
Goldman Sachs Global Tactical Trading, LLC 228,004,585 223,858,829
Goldman Sachs Global Relative Value, LLC 335,024,318 335,877,904
------------ ------------
Total $862,932,603 $877,478,931
============ ============
NOTE 3 - FEES
- -------------
The Company pays a monthly management fee to GS Princeton equal to 1.25%
per annum of the net assets of the Company as of each month-end, as
defined.
The Company pays a monthly administration fee to GS Princeton equal to
0.20% per annum of the net assets at the Investee level. The administration
fee is charged at the Investee level and is included in Equity in Earnings
of Investees on the Statement of Operations. For the three months ended
June 30, 2004 and 2003, the administrative fee charged at the Investee
level by GS Princeton totaled $484,937 and $362,854, respectively. For the
six months ended June 30, 2004 and 2003, the administrative fee charged at
the Investee level by GS Princeton totaled $971,185 and $604,837,
respectively.
GS Princeton and the Company have entered into an agreement with SEI Global
Services, Inc. ("SEI") to serve as the sub-administrator of the Company
effective March 1, 2004. Pursuant to the agreement, GS Princeton is
responsible for paying the fees of SEI. GS Princeton (in its capacity as
the administrator of each Investee) and each Investee have entered into a
similar agreement with SEI.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2004
NOTE 4 - RISK MANAGEMENT
- ------------------------
In the ordinary course of business, GS Princeton in its capacity as
managing member of the Company and the Investees attempts to manage a
variety of risks, including market, credit and operational risk. GS
Princeton in its capacity as managing member of the Company and the
Investees attempts to identify, measure and monitor risk through various
mechanisms including risk management strategies and credit policies. These
include monitoring risk guidelines and diversifying exposures across a
variety of instruments, markets and counterparties.
Market risk is the risk of potential significant adverse changes to the
value of financial instruments because of changes in market conditions such
as interest and currency rate movements and volatility in commodity or
security prices. GS Princeton in its capacity as managing member of the
Company and the Investees monitors its exposure to market risk through
various analytical techniques.
The Company invests in the Investees, and may from time to time redeem its
membership units of the Investees. The Investees, in turn, maintain
relationships with counterparties that include the Advisors. These
relationships could result in concentrations of credit risk. Credit risk
arises from the potential inability of counterparties to perform their
obligations under the terms of the contract. GS Princeton in its capacity
as managing member of the Investees has formal credit-review policies to
monitor counterparty risk.
Operational risk is the potential for loss caused by a deficiency in
information, communication, transaction processing and settlement, and
accounting systems. GS Princeton in its capacity as managing member of the
Company and the Investees maintains controls and procedures for the purpose
of mitigating operational risk.
There can be no assurance that GS Princeton in its capacity as managing
member of the Company and the Investees will be able to implement its risk
guidelines or that its risk monitoring strategies will be successful.
NOTE 5 - DERIVATIVE CONTRACTS
- -----------------------------
In the normal course of business, the Advisors trade various financial
instruments and may enter into various investment activities with
off-balance sheet risk. These include, but are not limited to, futures,
forwards, swaps and the writing of options. The Company's risk of loss in
the Investees is limited to the value of its investment as reported by the
Investee.
NOTE 6 - RELATED PARTIES
- ------------------------
The Due to managing member liability on the Balance Sheet represents
management fees due to GS Princeton at June 30, 2004 and December 31, 2003.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2004
NOTE 6 - RELATED PARTIES (CONTINUED)
- ------------------------------------
Goldman, Sachs & Co., an affiliate of the managing member, is one of
several prime brokers for the Advisors. Goldman, Sachs & Co. charges
commissions at prevailing market rates.
Directors and Executive Officers of the managing member own less than 1% of
the Company's equity at June 30, 2004 and December 31, 2003.
NOTE 7 - BORROWING FACILITY
- ---------------------------
The Company has a borrowing facility with a major financial institution.
The facility is structured as a call spread option that has been issued by
the Company to the financial institution. Under the terms of the facility,
the Company receives cash and redeposits the amount with the financial
institution in a collateral account. The Company has the right to draw
funds from the collateral account to use for liquidity purposes. The amount
of the facility was $20.4 million and $47.5 million at June 30, 2004 and
December 31, 2003, respectively, and is included in Cash and cash
equivalents on the Balance Sheet. The effective interest rate on funds
drawn from the collateral account is LIBOR plus 0.625%. The Company also
pays the equivalent of a commitment fee of 0.25%. The facility expired on
July 15, 2004 and the Company currently intends to renew the facility on a
month-to-month basis. At June 30, 2004 and December 31, 2003, the Company
had not drawn any of the cash collateral balance. In February 2004, the
size of the facility was reduced to $20.4 million. Included in Due to bank
on the Balance Sheet is $20.8 million and $47.5 million at June 30, 2004
and December 31, 2003, respectively, which represents the borrowing plus
accrued interest.
NOTE 8 - MEMBERS' EQUITY
- ------------------------
At June 30, 2004, the Company had two series of Class A units outstanding.
Each series of Class A units is identical in every regard except with
respect to its individualized incentive allocation base. Effective January
1, 2004, Class A Series 2 through Class A Series 10 units were collapsed
into Class A Series 1 units and effective January 1, 2003, Class A Series 2
through Class A Series 9 units were collapsed into Class A Series 1 units,
as provided for in the Company's limited liability company agreement.
Transactions in units for non-managing members for the six months ended
June 30, 2004 and the year ended December 31, 2003 are as follows:
2004 2003
-------------------------- ------------------------
Units Amount Units Amount
---------- ---------- ------------ -----------
Series collapse
Class A
Series 1 4,493,143.70 $512,003,655 3,260,399.10 $338,995,791
Series 2 (415,994.14) (44,920,761) (243,082.49) (25,250,693)
Series 3 (752,365.57) (80,402,510) (666,920.13) (68,821,429)
Series 4 (879,574.26) (94,683,681) (453,500.00) (46,408,355)
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2004
NOTE 8 - MEMBERS' EQUITY (CONTINUED)
- ------------------------------------
2004 2003
------------------------------------ ---------------------------------
Series 5 (654,391.41) (69,753,438) (284,000.00) (29,115,024)
Series 6 (836,120.00) (86,760,878) (374,618.85) (38,028,035)
Series 7 (1,210,045.71) (125,529,478) (622,822.97) (62,750,159)
Series 8 (86,289.39) (9,029,305) (377,062.34) (38,374,169)
Series 9 (8,313.51) (845,096) (295,550.00) (30,247,927)
Series 10 (774.64) (78,508) -
-------------- ------------ -------------- -------------
Total (350,724.93) $ - $ (57,157.68) $ -
============== ============ ============== =============
Subscriptions
Class A
Series 1 182,499.95 $ 20,796,273 $ 361,728.64 $37,610,130
Series 2 687.41 68,741 425,994.14 42,599,414
Series 3 - - 752,365.57 75,236,557
Series 4 - - 879,574.26 87,957,426
Series 5 - - 654,391.41 65,439,141
Series 6 - - 841,120.00 84,112,000
Series 7 - - 1,217,902.52 121,790,252
Series 8 - - 86,650.95 8,665,095
Series 9 - - 8,313.51 831,351
Series 10 - - 774.64 77,464
-------------- ------------ -------------- -------------
Total 183,187.36 $ 20,865,014 $ 5,228,815.64 $ 524,318,830
============== ============ ============== =============
Redemptions
Class A
Series 1 276,457.49 $ 31,676,122 346,366.44 $ 39,035,825
Series 2 - - 10,000.00 1,079,841
Series 6 - - 5,000.00 518,829
Series 7 - - 7,856.81 815,062
Series 8 - - 361.56 37,834
-------------- ------------ -------------- -------------
Total 276,457.49 $ 31,676,122 $ 369,584.81 $ 41,487,391
=============== ============ ============== =============
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2004
NOTE 8 - MEMBERS' EQUITY (CONTINUED)
At June 30, 2004 and December 31, 2003, members' equity consists of the
following:
2004 2003
----------------------------------- ---------------------------------
Units Net Units Net
outstanding asset value outstanding asset value
-------------- ----------------- -------------- ---------------
Non-managing members
Class A
Series 1 8,095,829.94 $927,601,152 3,696,643.78 $421,242,087
Series 2 687.41 68,414 415,994.14 44,920,761
Series 3 - - 752,365.57 80,402,510
Series 4 - - 879,574.26 94,683,681
Series 5 - - 654,391.41 69,753,438
Series 6 - - 836,120.00 86,760,878
Series 7 - - 1,210,045.71 125,529,478
Series 8 - - 86,289.39 9,029,305
Series 9 - - 8,313.51 845,096
Series 10 - - 774.64 78,508
-------------- ------------ ------------ ------------
Subtotal 8,096,517.35 $927,669,566 8,540,512.41 $933,245,742
============== ============
Managing member 275,612 -
------------ ------------
Total members' equity $927,945,178 $933,245,742
============ =============
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2004
NOTE 9 - FINANCIAL HIGHLIGHTS
- -----------------------------
Financial highlights for the Company for the six months ended June 30, 2004
are as follows:
Class A Class A
Series 1 Series 2
-------- --------
Per unit operating performance:
Net asset value, beginning of period $ 113.95 $100.00
Income from operations:
Net trading profit/(loss) 1.52 0.15
Net investment income/(loss) (0.89) (0.63)
-------- -------
Total income/(loss) from opeations 0.63 (0.48)
-------- -------
Net asset value, end of period $ 114.58 $ 99.52
======== =======
Ratios to average net assets
(annualized):
Expenses 1.57% 1.60%
Incentive allocation 0.03% 0.00%
-------- -------
Total expenses and incentive 1.60% 1.60%
allocation ======== =======
Net investment income/(loss) (1.49%) (1.51%)
======== =======
Total return (prior to incentive
allocation) 0.58% (0.48%)
Incentive allocation (0.03%) (0.00%)
-------- -------
Total return 0.55% (0.48%)
======== =======
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2004
NOTE 9 - FINANCIAL HIGHLIGHTS (CONTINUED)
- -----------------------------------------
Financial highlights for the Company for the six months ended June 30, 2003
are as follows:
Class A Class A Class A Class A Class A Class A
Series 1 Series 2 Series 3 Series 4 Series 5 Series 6
-------- -------- -------- -------- -------- --------
Per unit operating performance:
Net asset value, beginning
of period $ 103.97 $ 100.00 $ 100.00 $ 100.00 $ 100.00 $ 100.00
Income from operations:
Net trading profit/(loss) 6.93 4.90 3.67 4.34 3.15 0.18
Net investment income/(loss) (1.07) (0.82) (0.66) (0.58) (0.40) (0.15)
Total income/(loss) -------- -------- --------- --------- --------- ----------
operations 5.86 4.08 3.01 3.76 2.75 0.03
-------- -------- --------- --------- --------- ----------
Net asset value, end of period $ 109.83 $ 104.08 103.01 103.76 102.75 100.03
======== ======== ========= ========= ========= =========
Ratios to average net assets
(annualized):
Expenses 1.35% 1.34% 1.34% 1.33% 1.30% 1.30%
Incentive allocation 0.29% 0.21% 0.16% 0.19% 0.14% 0.00%
-------- -------- --------- --------- --------- ---------
Total expenses and incentive
allocation 1.64% 1.55% 1.50% 1.52% 1.44% 1.30%
======== ======== ========= ========= ========= =========
Net investment income/(loss) (1.61%) (1.52%) (1.47%) (1.49%) (1.42%) (1.28%)
======== ======== ========= ========= ========= =========
Total return (prior to incentive
allocation) 5.93% 4.29% 3.16% 3.95% 2.89% 0.03%
Incentive allocation (0.29%) (0.21%) (0.15%) (0.19%) (0.14%) (0.00%)
-------- -------- --------- --------- --------- ---------
Total return 5.64% 4.08% 3.01% 3.76% 2.75% 0.03%
======== ======== ========= ========= ========= =========
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2004
NOTE 9 - FINANCIAL HIGHLIGHTS (CONTINUED)
- -----------------------------------------
Financial highlights for the Company for the three months ended June 30,
2004 are as follows:
Class A Class A
Series 1 Series 2
-------- --------
Per unit operating performance:
Net asset value, beginning of period $ 117.05 $101.68
Income from operations:
Net trading profit/(loss) (2.16) (1.87)
Net investment income/(loss) (0.31) (0.29)
-------- -------
Total income/(loss) from opeations (2.47) (2.16)
-------- -------
Net asset value, end of period $ 114.58 $ 99.52
======== =======
Ratios to average net assets
(annualized):
Expenses 1.55% 1.54%
Incentive allocation (0.11%) (0.09%)
-------- -------
Total expenses and incentive 1.44% 1.45%
allocation ======== =======
Net investment income/(loss) (1.52%) (1.50%)
======== =======
Total return (prior to incentive
allocation) (2.22)% (2.21%)
Incentive allocation (0.11%) (0.09%)
-------- -------
Total return (2.11%) (2.12%)
======== =======
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2004
NOTE 9 - FINANCIAL HIGHLIGHTS (CONTINUED)
- ------------------------------------------
Financial highlights for the Company for the three months ended June 30,
2003 are as follows:
Class A Class A Class A Class A Class A Class A
Series 1 Series 2 Series 3 Series 4 Series 5 Series 6
-------- -------- -------- -------- -------- --------
Per unit operating performance:
Net asset value, beginning
of period $ 105.85 $ 100.31 $ 99.24 $ 100.00 $ 100.00 $ 100.00
Income from operations:
Net trading profit/(loss) 4.60 4.35 4.31 4.34 3.15 0.18
Net investment income/(loss) (0.62) (0.58) (0.54) (0.58) (0.40) (0.15)
Total income/(loss) -------- -------- --------- --------- --------- ---------
operations 3.98 3.77 3.77 3.76 2.75 0.03
-------- -------- --------- --------- --------- ---------
Net asset value, end of period $ 109.83 $ 104.08 103.01 103.76 102.75 100.03
======== ======== ========= ========= ========= =========
Ratios to average net assets
(annualized):
Expenses 1.33% 1.33% 1.33% 1.33% 1.30% 1.30%
Incentive allocation 0.19% 0.19% 0.16% 0.19% 0.14% 0.00%
-------- -------- --------- --------- --------- ---------
Total expenses and incentive
allocation 1.52% 1.52% 1.49% 1.52% 1.44% 1.30%
======== ======== ========= ========= ========= =========
Net investment income/(loss) (1.49%) (1.49%) (1.45%) (1.49%) (1.42%) (1.28%)
======== ======== ========= ========= ========= =========
Total return (prior to incentive
allocation) 3.95% 3.96% 3.95% 3.95% 2.89% 0.03%
Incentive allocation (0.19%) (0.20%) (0.15%) (0.19%) (0.14%) (0.00%)
-------- -------- --------- --------- --------- ---------
Total return 3.76% 3.76% 3.80% 3.76% 2.75% 0.03%
======== ======== ========= ========= ========= =========
Total return is calculated for each series taken as a whole. The ratios to
average net assets and the total return for each member may vary based on
the timing of capital transactions. The ratio of expenses to average net
assets is calculated by dividing total expenses by the month end average
net assets for the period. The components of total return are calculated by
dividing the change in the per unit value of each component for the period
by the net asset value per unit at the beginning of the period. The ratios
to average net assets calculated above do not include the Company's
proportionate share of net investment income and expenses of the Investees.
NOTE 10 - SUBSEQUENT EVENT
- --------------------------
On July 1, 2004, the Company made redemption payments of approximately
$31.7 million in connection with the Company's receipt of irrevocable
notices of redemption. Also on July 1, 2004, the Company redeemed a net
amount of $27 million from the Investees.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements of Goldman Sachs Hedge Fund Partners, LLC (the "Fund")
and the related notes thereto.
OVERVIEW
The Fund is a Delaware limited liability company organized in March
2002 to operate as an investment fund. It commenced operations on April 1,
2002. Goldman Sachs Princeton LLC, a Delaware limited liability company,
serves as the Fund's managing member (the "Managing Member").
As of June 30, 2004, the Fund had total assets of $986.4 million
compared with total assets of $1,019.4 million as of December 31, 2003.
Total liabilities of the Fund totaled $58.4 million as of June 30, 2004
compared with $86.2 million as of December 31, 2003. Member's equity of the
Fund was $927.9 million as of June 30, 2004 compared with $933.2 million as
of December 31, 2003.
The Fund's investment objective is to target attractive long-term
risk-adjusted returns across a variety of market environments with lower
volatility than, and minimal correlations, to the broad equity markets. To
achieve this objective, the Fund allocates all or substantially all of its
assets among privately placed investment funds (the "Investment Funds")
managed by the Managing Member, each of which allocates its assets to, or
invests in entities managed by, independent investment managers
(collectively, the "Advisors") that employ a broad range of investment
strategies primarily within one of the following four hedge fund sectors:
the tactical trading sector, the equity long/short sector, the relative
value sector, and the event driven sector. Currently, substantially all of
the Fund's assets are invested in the four Investment Funds: Goldman Sachs
Global Tactical Trading, LLC ("GTT"), Goldman Sachs Global Equity
Long/Short, LLC ("GELS"), Goldman Sachs Global Relative Value, LLC ("GRV")
and Goldman Sachs Global Event Driven, LLC ("GED").
Performance of the Fund in any period will be dependent upon the
performance in the relevant period by the four Investment Funds and the
weighted average percentage of the Funds assets in each of the Investment
Funds during the period. In addition, performance is determined by the
allocation by the Investment Funds of their assets with the various
Advisors and the performance of each of those Advisors.
The Fund's results depend on the Managing Member, including in its
capacity as managing member of each of the investment funds, and the
ability of the Managing Member to recognize and capitalize on trends and
other profit and investment opportunities within the four investment
sectors. Unlike many operating businesses, general economic or seasonal
conditions may not have any direct effect on the profit potential of the
Fund due to the speculative nature of the Fund's investments and since the
Fund's investments in the Investment Funds are managed to seek to eliminate
or at least significantly reduce the impact of general economic or seasonal
conditions. In addition, the Fund's past performance is not necessarily
indicative of future results. Each Investment Fund allocates assets to
Advisors that invest in various markets at different times and prior
activity in a particular market does not mean that such market will be
invested in by the Advisors or will be profitable in the future.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
The following presents a summary of the operations for the three and
six months ended June 30, 2004 and for the three and months ended June 30,
2003, and a general discussion of each Investment Fund's performance during
those periods.
PERFORMANCE FOR THE THREE MONTHS ENDED JUNE 30, 2004
The Fund's net trading profit/loss for the three and six months ended
June 30, 2004 was ($18,185,504) and $12,641,661, respectively, compared to
the three and six month period ended June 30, 2003 of $29,716,678 and
$38,872,948, respectively.
OVERVIEW
The Fund is designed to be broadly exposed to the hedge fund market by
allocating its assets to the Investment Funds in the four hedge fund
sectors: tactical trading, equity long/short, relative value and event
driven. Quantitative analysis is combined with judgment to determine
strategic allocations that will offer broad exposure to hedge fund returns.
Strategic return, risk and correlation estimates inform the quantitative
analysis, which balances returns and contribution to portfolio risk.
Judgment is applied to both estimates and weights in an attempt to achieve
a diversified exposure to hedge funds while targeting attractive risk
adjusted returns. The Fund cannot predict which hedge fund sector and
accordingly, which Investment Fund will perform the best in the future. As
of June 30, 2004, the Fund had the following exposures:
- ------------------------- ---------------------- ---------------------- ----------------------
INVESTMENT FUND PORTFOLIO WEIGHT THREE MONTHS ENDED SIX MONTHS ENDED
(1) JUNE 30, 2004 JUNE 30, 2004
NET RETURN (2) NET RETURN (2)
- ------------------------- ---------------------- ---------------------- ----------------------
GTT 26.69% (6.14%) (2.37%)
- ------------------------- ---------------------- ---------------------- ----------------------
GELS 14.81% (1.93%) 1.39%
- ------------------------- ---------------------- ---------------------- ----------------------
GRV 39.28% (0.46%) 1.79%
- ------------------------- ---------------------- ---------------------- ----------------------
GED 23.27% 1.13% 5.11%
- ------------------------- ---------------------- ---------------------- ----------------------
(1) As a % of the Fund's net assets.
(2) These returns are based on the performance of Class C Series 1 units.
The returns include administration fees. No management fee or
incentive allocation was charged by the managing member of the
Investment Funds with respect to the Fund's investment in any of the
Investment Funds. Past performance is not indicative of future
results, which may vary.
For the three and six months ended June 30, 2004, the Fund's Class A
Series 1 Units returned (2.11%) and 0.55%, respectively, net of fees and
incentive allocation.
THE INVESTMENT FUNDS
Each of the four Investment Funds' performance during the three and
six months ended June 30, 2004 is described in the following.
GOLDMAN SACHS GLOBAL TACTICAL TRADING, LLC
As of June 30, 2004, GTT represented approximately 26.7% of the Fund's
net assets which was generally consistent with the weighting of GTT as part
of the Fund throughout the six months ended June 30, 2004. GTT returned
(6.14%) and (2.37%), respectively, for Class C Series 1 units for the three
and six months ended June 30, 2004.
THREE MONTHS ENDED JUNE 30, 2004
The second quarter of 2004 proved to be a challenging period across
commodities, currencies, equities, and fixed income markets. Fixed income
and non-energy commodity markets, both of which had provided the bulk of
the returns in the first quarter, reversed sharply in early April.
Positions in these sectors contributed the largest losses for the quarter.
Reports of a strong economic recovery and rising inflation led to
expectations of accelerated interest rate hikes by the Federal Reserve and
to a sell-off in fixed income markets. Long equity and short dollar
positions, particularly against the Japanese Yen and Euro, were also hurt
by the anticipation of a higher interest rate environment.
Within commodity markets, long positions in the energy sector proved
to be the most profitable for the quarter, as Advisors were able to
capitalize on record high oil prices, driven by tightening supply and worry
about the Middle East. Non-energy commodities, specifically agriculturals
and metals, fell sharply due to the strengthening of the U.S. dollar and
concerns regarding slowing demand from China.
SIX MONTHS ENDED JUNE 30, 2004
During the first quarter of 2004, commodities continued their bullish
trend, contributing the majority of the profits for the quarter. Although
the non-energy commodity markets fell sharply in the second quarter,
resulting in a give-back of some of the profits earned earlier in the year,
commodities still proved to be the most profitable asset class in the first
half of 2004. Agricultural markets, specifically the soy complex, were the
largest driver of returns, and Advisors also held profitable positions in
base and precious metals.
Results in fixed income were mixed for the first half of 2004. In the
first quarter, long bond positions in the U.S. and Europe remained
profitable despite an announcement in late January by the Federal Reserve
that it would no longer hold interest rates low "for a considerable
period." However, expectations in the second quarter of imminent
accelerated interest rate hikes by the Federal Reserve negatively impacted
fixed income positions, which finished the quarter with net losses.
The largest losses for the first six months of 2004 were incurred in
currencies and global equity indices. Early in the year, currency trading
experienced mixed performance as the U.S. dollar continued to trade within
a narrow band. Meanwhile, the equity market rally of the second half of
2003 continued in January and February, helping long equity index
positions. However, anticipation in the second quarter of a higher interest
rate environment hurt short dollar and long equity positions, bringing GTT
performance for the first half of the year into negative territory.
GOLDMAN SACHS GLOBAL EQUITY LONG/SHORT, LLC
As of June 30, 2004, GELS represented approximately 14.8% of the
Fund's net assets which was generally consistent with the weighting of GELS
as part of the Fund throughout the six months ended June 30, 2004. GELS
returned (1.93%) and 1.39%, respectively, for Class C Series 1 units for
the three and six months ended June 30, 2004.
THREE MONTHS ENDED JUNE 30, 2004
Global equity markets experienced significant volatility throughout
the second quarter of 2004. The first half of the quarter produced a sharp
sell-off, leaving U.S. and emerging markets down. Stability returned in
mid-May, reversing market lows by quarter-end and allowing Advisors with
net long exposure to recoup some earlier losses. Within developed markets,
Japan experienced the strongest rally; they also suffered the sharpest
developed market pull-back in the months of April and May.
Macro economic news drove the markets into positive territory in the
latter half of the quarter as encouraging information from various sectors
flowed. Continued positive employment and job reports coupled with
encouraging indicators from the Federal Open Market Committee alluding to
economic strength and trends towards disinflation helped to stabilize the
markets. A series of strong earning reports, a pull-back in oil prices, the
indication that interest rate adjustments would be made at a moderate rate
going forward, and the surprise early transfer of sovereignty in Iraq,
built confidence in the markets in June. By the end of June, over half of
the Advisors posted positive returns for the quarter.
SIX MONTHS ENDED JUNE 30, 2004
Investor sentiment shifted over the first half of the year from
apprehension about the labor market to fears of rising inflation and
interest rates. A solid economy and signs of inflation prompted the Federal
Reserve to increase the federal funds rate from 1.00% to 1.25% at the very
end of the second quarter. This was the first increase since May 2000 and
was largely based on a series of unexpectedly strong monthly non-farm
payroll data releases and evidence of inflationary pressures.
Despite the continuation of strong corporate profit growth, equity
investors became preoccupied with the prospect of rising interest rates as
the first half of the year progressed. This, coupled with continued unrest
in Iraq, tempered the stock markets, especially during the second quarter.
US stocks, as measured by the S&P 500 Index, returned 1.72% during the
second quarter. This was the second consecutive quarter of positive results
for the Index, following a 1.69% gain in the first quarter. The NASDAQ
Composite gained 2.69% in the second quarter, after falling 0.46% during
the first three months of the year. International equities generated
similar results, with the Morgan Stanley Capital International
Europe/Australia/Far East Index posting two consecutive quarters of
positive results at 4.34% and 0.22%, respectively. Those sectors,
geographies, and styles that have led the equity market rally over the past
year experienced a sharp correction in April. Semiconductor stocks,
emerging markets, small cap stocks, and commodity-related stocks all
declined and our Advisors with exposures to these sectors incurred losses.
Markets continued to be volatile in May, a month which saw a sharp
correction in Japan, a market which until this point had been left
unscathed. June saw a degree of stabilization as most major equity markets
rebounded; among developed markets, Japan experienced the strongest rally
after the correction experienced the previous month.
GOLDMAN SACHS GLOBAL RELATIVE VALUE, LLC
As of June 30, 2004, GRV represented approximately 39.3% of the Fund's
net assets which was generally consistent with the weighting of GRV as part
of the Fund throughout the six months ended June 30, 2004. GRV returned
(0.46%) and 1.79%, respectively, for Class C Series 1 units for the three
and six months ended June 30, 2004.
THREE MONTHS ENDED JUNE 30, 2004
Convertible arbitrage Advisors experienced a challenging trading
environment during the second quarter of 2004 due to numerous adverse
market forces. The main theme expressed by Advisors was a lack of
opportunity as a result of a very richly valued market, which continued to
see large investor inflows despite lower expected returns. The credit space
saw a widening in credit spreads, mostly as a reaction to the increase in
interest rates during April and May. Equity implied volatility,
historically an important contributor to convertible arbitrage returns,
continued its year-long decline to such a point that many Advisors saw an
attractive entry point for volatility-based trades. The market also reacted
to sudden exogenous risks represented in events which reduced the valuation
of certain convertible bonds and resulted in a market decline. Overall,
Advisors were cautious in analyzing a very complicated trading environment
ripe with macro risks.
Fixed income arbitrage Advisors had an active second quarter, as the
U.S. interest-rate environment experienced the first official hike in
short-term Federal Reserve lending rates. This monetary tightening began as
the Federal Reserve broadcast its intentions of tightening economic
conditions in response to a heating economy. The U.S. interest-rate yield
curve began to flatten early in the second quarter, as short-term bonds
sold off more than long-term bonds. Fixed income arbitrage Advisors
profited from short-term trading of mispriced securities in this highly
volatile market, as well as from well-positioned curve-flattening trades.
With much of the tightening already priced into the market by the time of
the actual Federal Reserve action, the Federal Open Market Committee acted
accordingly with a 25-basis-point increase in rates and expectations are
that the next few meetings will provide similar "measured" hikes.
Equity market neutral Advisors were able to deliver modest profits
during an otherwise "nervous" equity market. Despite low equity volatility
and high correlation among names, certain Advisors were able to put on the
correct value and momentum bets in their portfolio and generate returns. In
particular, Advisors who focused on the small-cap sector had strong
performance.
SIX MONTHS ENDED JUNE 30, 2004
Convertible bond arbitrage strategies saw a steady inflow of investor
capital in the first half of 2004. The supply of new issues did not live up
to investor demand, resulting in a lack of opportunity for Advisors.
Throughout the year, the market saw stable and narrow credit spreads,
declining equity volatility, and higher interest-rates, which reduced the
returns in traditional convertible-bond trades and motivated Advisors to
trade smartly and selectively. Some successful Advisors reduced exposure to
credit-sensitive trades and put on volatility-sensitive trades, inspired by
the attractive low level of equity volatility. Many Advisors also began
employing more complex and higher-return trades, increasingly using
convertible bonds to express views on special situations and
capital-structure arbitrage.
Fixed income arbitrage Advisors traded through two very different
markets in the first half of 2004, with the turning point being the
market's expectation of imminent higher interest rates. In the first
quarter, the market was still unsure that an economic recovery was
underway, and investors moved into interest-rate products, lowering the
benchmark 10-year Treasury yield from 4.3% to 3.8%. When stronger payroll
numbers were later released, along with a broadcasted message from the
Federal Reserve that it would likely raise rates, the fixed-income market
sold off dramatically and pushed the 10-year rate back to a peak of 4.85%.
The market fluctuated and traded in a narrow band during the last two
months, leading to the actual 25-basis-point Federal Reserve interest rate
increase at the end of June, which provided Advisors with an opportunity to
profit from short-term range-bound trading and volatility-sensitive trades.
As the market adjusted to expectations of higher short-term interest rates,
the yield-curve flattened, and Advisors who were able to put on trades that
captured movements in the yield curve through any combination of securities
were profitable.
Equity market neutral Advisors saw a reversal in 2004 from the
negative trends of 2003, as most Advisors posted modest positive results.
The equity markets moved around during the first half of the year, but have
given back almost all gains, posting a return of only 2%-3%. To the benefit
of fundamentally-driven market-neutral Advisors, investors appeared to
refocus on company fundamentals, ending the "flight-to-junk" behavior of
the previous year. Advisors were able to generate profits depending on
their models' relative weights among various factors such as value or
momentum. This dynamic produced the best results in portfolios focused on
the small-cap sector, which offered more attractive trades than large-caps.
GOLDMAN SACHS GLOBAL EVENT DRIVEN, LLC
As of June 30, 2004, GED represented approximately 23.3% of the Fund's
net assets which was generally consistent with the weighting of GED as part
of the Fund throughout the six months ended June 30, 2004. GED returned
1.13% and 5.11%, respectively, for Class C Series 1 units for the three and
six months ended June 30, 2004.
THREE MONTHS ENDED JUNE 30, 2004
The second quarter of 2004 was a challenging time period and produced
variable market results: the Morgan Stanley Capital International World
Index rose 0.87%, while the S&P 500 Index ended the quarter up 1.72%.
Anticipation of rising interest rates and concern over the situation in
Iraq generated uneven results in the primary markets while investors waited
for news. For most of the quarter, implied equity volatility was low, with
the Chicago Board Options Exchange SPX Volatility Index ("VIX") trading in
a range between 14 and 17, with the exception of the first two weeks in May
when the index spiked to 20. The U.S. Treasury market was volatile and
pulled back for the quarter as the benchmark 10-year note yield rose from
3.8% to 4.6%.
The distressed and high yield markets witnessed a volatile quarter due
to capital outflows and interest rate concerns; high yield credit spreads
tightened by 34 basis points to 404 basis points versus Treasuries, and the
Merrill Lynch U.S. High Yield Master II Index declined in two of the three
months in the second quarter, ending the quarter down approximately 0.80%.
Additionally, High Yield mutual fund flows were net negative for the
quarter at about $4 billion. Despite the choppiness in the market, many
Advisors performed relatively well by focusing on arbitrage and shorting
opportunities in the credit markets. Some benefited from investing in
situations with a clear catalyst or "event" uncorrelated to the markets.
The high yield calendar slowed in the second quarter, with new issuance
totaling approximately $38 billion and year-to-date issuance at $82
billion.
Global mergers and acquisition volume for the quarter totaled $371
billion, a 15% increase over last year's second quarter activity. However,
momentum in the market fizzled as deal activity in the second quarter was
slower than the previous quarter, with no extremely large deals announced.
SIX MONTHS ENDED JUNE 30, 2004
The first half of 2004 was characterized by the anticipation of rising
interest rates, concerns over the situation in Iraq, and low implied equity
volatility.
The first quarter of 2004 saw high yield credit spreads widen slightly
while the second quarter of the year saw a tightening of credit spreads.
Since the beginning of 2004, credit spreads have tightened from 418 basis
points to 404 basis points over Treasuries, and the Merrill Lynch U.S. High
Yield Master II Index has returned 1.36%. High yield mutual funds saw
capital outflows of approximately $5.4 billion over the first half of the
year. Many Advisors performed relatively well by focusing on arbitrage and
shorting opportunities in the credit markets. Unlike the indiscriminate
high yield rally of 2003, during 2004, Advisors have increasingly been
rewarded for strong credit selection. High yield new issuance for the first
half of the year was very robust at approximately $82 billion, on its way
to surpassing the record $140 billion of debt that was issued in 2003.
On the mergers and acquisitions front, global volume of $909 billion
was also on course to surpass last year's total volume of $1.3 trillion.
The first quarter of the year witnessed three key large deals: the $67
billion hostile bid by Comcast to acquire Disney, the $65 billion hostile
bid by Sanofi-Synthelab to acquire Aventis, and the $55 billion merger
between JP Morgan Chase and Banc One. This created a greater opportunity
for the Advisors than previously seen. Although there were no extremely
large deals announced in the second quarter, the termination of the $1.6
billion deal between Titan and Lockheed Martin was noteworthy, as it hurt a
number Advisors in their risk arbitrage portfolios. In a benign merger
environment, the negative impact from the termination of one deal can be
amplified for the risk arbitrage community, which seeks returns from a
limited number of deals.
PERFORMANCE FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003
For the three and six month periods ended June 30, 2003, the Fund's
net trading profit was $29,716,678 and $38,872,948, respectively.
OVERVIEW
The table below illustrates the portfolio weighting of each Investment
Fund as of June 30, 2003, as well as each Investment Fund's net return for
the three and six month period ended June 30, 2003.
-------------------------- --------------------- --------------------- -------------------------
INVESTMENT FUND PORTFOLIO THREE MONTHS ENDED SIX MONTHS ENDED
WEIGHT (1) JUNE 30, 2003 JUNE 30, 2003
NET RETURN (2) NET RETURN (2)
-------------------------- --------------------- --------------------- -------------------------
GTT 26.74% 4.24% 8.09%
-------------------------- --------------------- --------------------- -------------------------
GELS 15.01% 6.71% 5.92%
-------------------------- --------------------- --------------------- -------------------------
GRV 38.50% 2.40% 3.90%
-------------------------- --------------------- --------------------- -------------------------
GED 23.78% 6.36% 10.30%
-------------------------- --------------------- --------------------- -------------------------
(1) As a % of the Fund's net assets.
(2) These returns are based on Class C Series 1 units. The returns include
administration fees. No management fee or incentive allocation was
charged by the managing member of the Investment Funds with respect to
the Fund's investment in any of the Investment Funds. Past performance
is not indicative of future results, which may vary.
For the three and six months ended June 30, 2003, the Fund's Class A
Series 1 Units returned 3.76% and 5.64% net of fees and incentive
allocation.
THE INVESTMENT FUNDS
Each of the four Investment Funds' performance during the three and
six month period ended June 30, 2003, is described in the following.
GOLDMAN SACHS GLOBAL TACTICAL TRADING, LLC
As of June 30, 2003, GTT represented approximately 26.7% of the Fund's
net assets which was generally consistent with the weighting of GTT as part
of the Fund throughout the six months ended June 30, 2003. GTT returned
4.24% and 8.09%, respectively, for Class C Series 1 units for the three and
six months ended June 30, 2003.
THREE MONTHS ENDED JUNE 30, 2003
Over the course of the second quarter, equity markets continued the
rally that began in mid-March, shortly before the war in Iraq. The
sustained rise in equities was attributed mostly to the relief about the
successful outcome of the war, a rebound in consumer sentiment, and the
hope for renewed corporate and consumer spending. Performance of the fixed
income markets was more mixed for the period. Bond prices remained flat in
April, but rose substantially in May, sparked by the fear of deflation in
the U.S. The rally in the fixed income markets was then followed by a sharp
reversal in June. The month of May saw strong returns in both the equity
and bond markets. In currencies, the dollar continued its decline until
mid-June. The strengthening of the dollar in the second half of June was
attributed to the Federal Reserve's smaller-than-expected rate cut and
worries about the European economy.
GTT began the quarter with flat performance in April, followed by a
successful month in May. GTT experienced a reversal in mid-June, leading to
a mild loss for the month. For the quarter, the majority of the GTT's
profits came in currencies and fixed income. Gains in foreign exchange were
attributed largely to the continued weakening of the U.S. dollar, while
profits in fixed income were made largely in U.S. and European bonds, as
well as in Eurodollars. The gains in these areas were partially offset by
the mid-June reversals, as Advisors gave back some of the profits they had
earned earlier in the quarter. Commodities proved difficult throughout most
of the quarter, with losses incurred in agriculture, metals, and energy.
SIX MONTHS ENDED JUNE 30, 2003
Negative news regarding the economy, coupled with the uncertainty
surrounding the conflict in the Middle East, caused the trends that had
been observed since December--falling equities, dropping interest rates, a
declining dollar, and rising energy and gold price--to continue in January,
February, and early March. On March 13, however, a sharp reversal of these
trends occurred, as bonds sold off sharply, oil prices dropped, and the
U.S. dollar and equity markets rose. The large move was based on very
little substantial news but was largely supported by optimism about a quick
resolution of the war in Iraq. In April, equity markets continued the rally
that began in mid-March.
Early in the year, GTT profited in energy, currencies and fixed
income. In energy, gains were made in crude oil and gasoline, but the
majority of profits came in natural gas, which experienced its largest
single daily move ever on February 24. Gains in foreign exchange were
attributed largely to the weakening dollar, while profits in fixed income
were made largely in Eurodollars, European bonds, and Japanese bonds. The
gains in these areas, however, were partially offset by the sharp reversal
of trends beginning on March 13, as GTT Advisors lost some of the profits
they had accumulated throughout the quarter. Overall, in the first half of
2003, the majority of GTT's profits came from currencies, driven by the
weakening U.S. dollar, and in long fixed income positions in the U.S. and
in Europe.
GOLDMAN SACHS GLOBAL EQUITY LONG/SHORT, LLC
As of June 30, 2003, GELS represented approximately 15.0% of the
Fund's net assets which was generally consistent with the weighting of GELS
as part of the Fund throughout the six months ended June 30, 2003. GELS
returned 6.71% and 5.92%, respectively, for Class C Series 1 units for the
three and six months ended June 30, 2003.
THREE MONTHS ENDED JUNE 30, 2003
Following the strong equity rally of April and May, the S&P 500 Index
rose more modestly in June. The Index finished down in 9 trading days out
of 21, with an average up day of 0.73% and an average down day of (0.83)%.
The NASDAQ again outperformed the S&P 500 Index despite being down in 11
trading days out of 21, with an average up day of 1.16% and an average down
day of (0.88)%.
Positive news on two fronts drove equity markets sharply higher in
April and May - the war in Iraq and first quarter earnings reports. A rise
in consumer confidence against a backdrop of low interest rates, a weakened
dollar, and reduced tax rates bolstered the equity markets and hopes for a
second half economic recovery. The rally was broad-based across market
capitalizations, sectors, styles, and geographies. Several high profile
negative earnings pre-announcements in mid-June slowed the equity market's
climb but did not halt it as the market demonstrated resiliency in
shrugging off the reports.
As geopolitical developments recede from the headlines, equity markets
have begun to reward fundamental analysis. Companies posting solid
operating and financial results for the first quarter have been rewarded
with stock price appreciation, while companies with poor or weaker than
expected results have seen their stock prices decline. Many of our Advisors
have increased both their gross and net exposures in this more favorable
environment for individual stock picking.
SIX MONTHS ENDED JUNE 30, 2003
The first half of 2003 began with highly volatile global equity
markets, due in large measure to the uncertainty surrounding the U.S.-led
war in Iraq. A rally in January was followed by a reversal through the end
of the month into mid February. In March, the markets continued to
experience large intra-month moves; with the S&P 500 Index fluctuating
significantly throughout the month as more news on the war in Iraq, its
cost, and expected lengthy duration made investors take a cautious stance
in the face of highly uncertain markets.
Market moves were driven largely by the anticipation and occurrence of
geopolitical events, rather than by economic or company specific
fundamentals. As such, the quarter was a difficult one in which to generate
positive returns for fundamental equity long/short Advisors. Our Advisors
select their longs and shorts based on fundamental bottom-up research. In
markets that are trading largely on macro events, such as the situation in
Iraq, investors generally pay less attention to company and industry sector
fundamentals. The majority of our Advisors are net long and have found
attractive long ideas to date.
The second half saw a reversal of these macro driven fears as positive
news on two fronts drove equity markets sharply higher in April and May -
the war in Iraq and first quarter earnings reports.
GOLDMAN SACHS GLOBAL RELATIVE VALUE, LLC
As of June 30, 2003, GRV represented approximately 38.5% of the Fund's
net assets which was generally consistent with the weighting of GRV as part
of the Fund throughout the six months ended June 30, 2003. GRV returned
2.40% and 3.90%, respectively, for Class C Series 1 units for the three and
six months ended June 30, 2003.
THREE MONTHS ENDED JUNE 30, 2003
Advisors focusing on convertible arbitrage strategies saw a
continuation of the first quarter's credit spread tightening, as the market
rose to new highs on a trend that continued well into the second quarter
and benefited Advisors skilled in researching credits. Once the
geopolitical risks due to the war in Iraq were resolved, and corporate
America restructured and strengthened on the back of the convertible
market, the new issue calendar saw its second largest month ever. The new
issues, although expensively priced and approached cautiously by
experienced Advisors, brought much needed supply into an overly rich
market. Despite gains in credit, the market suffered a continuous decline
in both realized and implied volatilities that contracted valuations and
created losses for volatility traders. Finally, the market suffered a
direct hit due to sudden investor concern about the future of dividend
payouts by corporations. As some large issuers of convertibles suddenly
increased dividend payouts due to the favorable change in their taxation,
convertible arbitrage advisors sold off due to a concern about the
increased costs of shorting those dividend-paying stocks to hedge the
underlying bond positions. Overall, the quarter was a positive one for
convertible arbitrage Advisors.
Advisors focusing on fixed income strategies dealt with significant
volatility throughout the second quarter, as concerns over the health of
the U.S. economy were a primary focus. Market participants faced successive
tightening in the yield curves, a declining dollar, and expectations of
further interest rate cuts, as well as increased Treasury auctions aimed at
funding the growing budget deficit. The U.S. yield curve steepened on
indications from that Federal Reserve that it would keep interest rates at
historical lows as long as necessary and might even begin buying
long-maturity Treasuries in order to induce a recovery. When the
smaller-than-expected 25 basis point interest rate cut was finally
announced by the Federal Reserve, in conjunction with an announcement which
signaled that it was less worried about the economy than anticipated, the
markets sold off heavily. In Europe, the European Central Bank entered an
easing phase with a 50-basis-point cut in interest rates. Certain Advisors
had a difficult time trading in the final volatile swings of the
down-market, and many positioned themselves to focus on opportunities in a
future environment of increasing rates.
Advisors focusing on equity market neutral strategies slowly produced
profits over the second quarter, as the markets began to refocus on company
fundamentals after a poor trading environment in the first quarter. The
initial post-war rally was largely based on emotion rather than
fundamentals, a "flight-to-junk" characterized by irrational buying of
stock. Some Advisors using technical (price-based) factors were able to
trade through the non-directional market, but most struggled while the
market sought a general direction. The equity market's eventual rally
caused an increase in the sensitivity of portfolios to volatility, which,
along with an increasing focus on fundamentals, slowly boosted Advisors'
returns. The increasing markets also allowed for the necessary liquidity to
profitably trade quantitative strategies.
SIX MONTHS ENDED JUNE 30, 2003
Advisors focusing on convertible arbitrage strategies were profitable
throughout the first half of 2003, as significant gains from a
strengthening corporate bond environment more than offset losses due to a
reduction in equity volatility. Following the relatively quick war in Iraq,
equity volatility began a long decline, eroding some of the optionality in
the value of the convertible bond market. The supply of new convertible
issuers was supported by a rising equity market, and the overall valuation
in the market represented healthy expected prospective returns. At the very
end of the second quarter, however, the market as a whole declined due to
sudden investor concern about the effect of tax cuts on the future
corporate dividend payouts. Dividend taxation affects convertible bonds,
since corporate issuers of convertibles may suddenly increase dividends and
thereby raise the costs of shorting those stocks to hedge convertible bond
arbitrage positions.
Many Advisors focusing on fixed income strategies were able to
identify dislocations in relative value pricing and found increased
opportunity sets during the volatile markets of the first half of the year.
Advisors pursuing equity market neutral strategies saw two different
trading environments during the first half of 2003. The first quarter was
characterized by nervous investors who created a "whip-saw" effect in the
market as hope for economic recovery vied with fear surrounding the
situation in Iraq. Money moved around irrespective of the quality of
stocks, which created a challenging environment for Advisors employing
fundamentals-based quantitative trading systems. The second-quarter equity
market rally and renewed focus on corporate fundamentals, however, created
a more favorable trading environment for Advisors.
GOLDMAN SACHS GLOBAL EVENT DRIVEN, LLC
As of June 30, 2003, GED represented approximately 23.8% of the Fund's
net assets which was generally consistent with the weighting of GED as part
of the Fund throughout the six months ended June 30, 2003. GED returned
6.36% and 10.30%, respectively, for Class C Series 1 units for the three
and six months ended June 30, 2003.
THREE MONTHS ENDED JUNE 30, 2003
The second quarter of 2003 was a very strong period for the equity and
debt markets. Volatility declined compared to the first quarter of the year
and remained relatively low, with the VIX ending the quarter at 21.6%. The
S&P 500 Index ended the quarter up 15.39%, with economic data continuing to
be mixed. Corporate data was also mixed, with earnings announcements
generally meeting or exceeding the somewhat dampened expectations. However,
corporate revenue growth and capital expenditures budgets remained low. The
quarter witnessed the passage of the tax stimulus package and the continued
easing monetary policy in Washington. U.S. Treasuries were up for the
quarter, pushing the benchmark 10-year note yields down from 3.80% to 3.51%
at quarter end.
The distressed and high yield markets had a strong quarter. Mutual
fund capital inflows into high yield exceeded $9 billion, and credit
spreads tightened by over 150 basis points to 601 basis points over
Treasuries. The high yield rally was broad based, and many sectors
benefited, including utilities, cable and media, financial services, and
air transport. The Merrill Lynch U.S. High Yield Master II Index was up
10.02%. The high yield new issuance market was wide open, with nearly 170
deals, totaling an extremely large $46 billion, with a $5.5 billion backlog
at the end of the quarter.
Corporate special situations continued to dominate the news in both
the U.S. and Europe. Debt refinancings, corporate restructurings,
litigation situations, and the impact of government regulations (e.g.,
possible new asbestos legislation in the U.S.) provided investment
opportunities in the event driven sector.
On the mergers and acquisitions front, global volume at $541 billion
was down 7.5% compared to the second quarter of 2002. European mergers and
acquisitions volume, on the other hand, was up, as Europe witnessed more
activity than the U.S. New deal activity was greater among the small- and
mid-cap names than in large-cap companies. Hostile and topping activity was
also on the rise during the quarter.
SIX MONTHS ENDED JUNE 30, 2003
The first half of 2003 witnessed a significant rally in the credit
markets. The year began with high volatility, as the market focused on the
uncertainty surrounding the war in Iraq and the status of the economy.
However, this volatility eventually ebbed and remained relatively low after
the Iraq resolution in March. High yield and distressed, risk arbitrage,
and special situations Advisors all contributed positively to returns in
the first half of 2003.
High yield and distressed Advisors benefited from the credit market
rally in the first half of 2003.The credit rally was widespread across
sectors and quality, with the lowest quality paper being the biggest
beneficiary. High yield new issuance was also robust, while default rates
dropped significantly. This strong rally in the credit markets was coupled
with strong performance in the equity markets and a significant decline in
volatility.
On the mergers and acquisitions front, the year got off to a slow
start, given the geopolitical situation in Iraq. As the year progressed,
however, activity gained momentum. Risk arbitrage performance was positive,
although global mergers and acquisition volume remained low, with Europe
witnessing more activity than the U.S. New deal activity was greater and
more attractive among the smaller to mid-cap names than the large cap
companies.
Special situation Advisors were able to take advantage of debt
refinancing, corporate restructurings, litigation situations and the impact
of government regulations and posted significant positive returns.
All Event Driven strategies performed well with the exception of
merger arbitrage which posted flat to negative returns for the first half
of 2003.
COMPARISON OF SELECT FINANCIAL INFORMATION FOR THE THREE AND SIX MONTHS
ENDED JUNE 30, 2004 AND 2003
INTEREST INCOME
Interest income for the three and six months ended June 30, 2004 was
$89,879 and $376,233, respectively, compared to the three months ended June
30, 2003 of $52,819 and $78,070. The Fund's interest income will fluctuate
with the level of cash available to invest.
EXPENSES
The Management Fee for the three and six months ended June 30, 2004
was $3,019,488 and $6,068,807, respectively, compared to the three and six
months ended June 30, 2003 of $2,269,526 and 3,378,816, respectively.
Because the Management Fee is calculated as a percentage of the Fund's net
assets as of each month end, the increase in the expense was due to the
increase in the Fund's net assets for the periods ended June 30, 2004
compared to the same periods in 2003.
Interest expense for the three and six months ended June 30, 2004 was
$101,138 and $422,410, respectively, compared to the three and six months
ended June 30, 2003 of $0 and $0, respectively. The interest expense
relates to the borrowing facility that was not outstanding during the
periods ended June 30, 2003.
Professional fees and miscellaneous expenses for the three and six
months ended June 30, 2004 were $587,916 and $1,016,133, respectively,
compared to the three and six months ended June 30, 2003 of $506,166 and
$625,277, respectively. The increase in professional fees and miscellaneous
expenses for the periods ended June 30, 2004 was primarily due to
additional services rendered by the Fund's legal providers related to the
ongoing operations of the Fund and registration with the SEC.
INCENTIVE ALLOCATION
The Incentive Allocation for the three and six months ended June 30,
2004 was ($1,090,124) and $275,612, respectively, compared to the three and
six months ended June 30, 2003 of $1,321,073 and $1,727,346, respectively.
The change in Incentive Allocation is due to the increase/decrease in new
appreciation, as defined, for those periods.
LIQUIDITY AND CAPITAL RESOURCES
The Fund's liquidity requirements consist of cash needed to fund
investments in the Investment Funds in accordance with the Fund's
investment strategy and to fund semi annual redemptions and to pay costs
and expenses. The Fund periodically re-allocates its investments in the
Investment Funds based on the performance of the Investment Funds and other
factors. The Fund cannot predict the level of redemptions in the Fund for
any semi annual period until 60 days prior to the redemption date when
written notice must be given to the Managing Member. The Fund endeavors to
pay redemption proceeds within 45 days following the redemption date,
without interest. If the Fund faces a liquidity problem, the redemptions
may be limited or postponed under certain limited circumstances. The
Managing Member's ability to limit or postpone redemptions in the Fund
enables the Fund to control and to some extent avoid a liquidity problem.
However, substantial redemptions of units in the Fund ("Units") could
require the Fund to liquidate certain of its investments in the Investment
Funds in order to raise cash to fund the redemptions which could have an
adverse effect on the NAV of the Units and the performance of the Fund.
The Fund may elect to fund its liquidity requirements by liquidation
(through redemption, or as otherwise permitted in the limited liability
agreements of the Investment Funds) of its investments in the Investment
Funds and from new investments from existing and new investors. Redemptions
of the Fund's investments in the Investment Funds can be made on a
semiannual or quarterly basis depending on the Investment Fund, subject to
certain limitations. The Fund is currently closed to new investors
generally but, in the sole discretion of the Managing Member, the Managing
Member expects to continue to accept limited investments from existing
qualified investors and to accept investments from new investors to the
extent additional capacity is created as a result of redemptions from the
Fund. Although the Managing Member expects the Fund may open in the future,
any liquidity requirements in the near term may need to be funded through
the redemption of existing investments in the Investment Funds. If the Fund
seeks to redeem all or a portion of its investment positions in any of the
Investment Funds, the Investment Fund, to the extent it does not have cash
on hand to fund such redemption, will need to liquidate some of its
investments. Substantial redemptions of membership units in an Investment
Fund, including by the Fund, could require the Investment Fund to liquidate
certain of its investments more rapidly than otherwise desirable in order
to raise cash to fund the redemptions and achieve a market position
appropriately reflecting a smaller asset base. This could have a material
adverse effect on the value of the membership units redeemed and the
membership units that remain outstanding and on the performance of the
Investment Fund. Under certain exceptional circumstances, such as force
majeure, the managing member of an Investment Fund (currently, the Managing
Member) may find it necessary (a) to postpone redemptions if it determines
that the liquidation of investments in the Investment Fund to fund
redemptions would adversely affect the net asset value per membership unit
of the Investment Fund or (b) to set up a reserve for undetermined or
contingent liabilities and withhold a certain portion of redemption
proceeds. In such circumstances, the Investment Fund would likely postpone
any redemptions it could not fund.
Certain investment positions in which the Investment Funds have a
direct or indirect interest are illiquid. The Advisors may invest in
restricted or non-publicly traded securities, securities on foreign
exchanges and futures. These positions may be illiquid because certain
exchanges limit fluctuations in certain securities and futures contract
prices during a single day by regulations referred to as "daily price
fluctuation limits" or "daily limits." Under such daily limits, during a
single trading day no trades may be executed at prices beyond the daily
limits. Once the price of a particular security or futures contract has
increased or decreased by an amount equal to the daily limit, positions in
that security or contract can neither be taken nor liquidated unless
traders are willing to effect trades at or within the limit.
The Fund received investments from new and existing investors of $0
and $20.9 million during the three and six months ended June 30, 2004 and
of $237.5 million and $393.0 million during the three and six months ended
June 30, 2003.
The Fund paid out redemptions of $0 and $17.6 million during the three
and six months ended June 30, 2003, respectively, and paid out redemption
proceeds of $0 and $34.5 million during the three and six months ended June
30, 2004, respectively. In addition, the Fund made redemption payments of
approximately $31.7 million in July 2004 in connection with the Fund's
receipt of irrevocable notices of redemption.
The Fund and each Investment Fund may, but is not required to, borrow
from (including through direct borrowings, borrowings through derivative
instruments, or otherwise) the GS Group or other parties, when deemed
appropriate by its managing member, including to make investments and
distributions in respect of redemptions of Units or membership units, to
pay expenses, or for other purposes. During the year ended December 31,
2003, the Fund entered into a borrowing facility with a major financial
institution (the "Facility Counterparty"). The facility is structured as a
call spread option that has been issued by the Fund to the Facility
Counterparty. Under the terms of the facility, the Fund receives cash and
redeposits the amount with the Facility Counterparty in a collateral
account. The Fund has the right to draw funds from the collateral account
to use for liquidity purposes. Under the facility, the Fund may draw, at
any given time, up to the total amount of the collateral account at the
time of withdrawal. However, in no event can the amount which the Fund may
draw under the facility exceed 5% of the Fund's net asset value. The
effective interest rate on funds drawn from the collateral account is LIBOR
+ 0.875%. The Fund also pays the equivalent of a commitment fee of 0.25% on
the undrawn funds. The facility expired on July 15, 2004 and the Company
currently intends to renew the facility on a month-to-month basis. As of
December 31, 2003, the Fund had received an amount of $47.5 million under
the facility, all of which had been redeposited as collateral and remained
undrawn. In February 2004, the size of the facility was reduced to $20.4
million. As of June 30, 2004, the Fund had received an amount of $20.4
million, all of which had been redeposited as collateral and remained
undrawn. The Facility Counterparty may terminate the facility upon the
occurrence of certain events, including: (i) certain specified declines in
the Fund's net asset value, (ii) the incurrence of indebtedness or liens by
the Fund, subject to certain exceptions, (iii) if the Fund does not
maintain certain prescribed diversification of its investments, (iv) if the
Managing Member is no longer the manager of the Fund, or (v) the occurrence
of events of default customary for financing transactions. See Note 7 to
the financial statements. Each Investment Fund currently has a similar
facility with the Facility Counterparty.
As of June 30, 2004, the Fund had cash and cash equivalents on hand of
$20.8 million. As of December 31, 2003, the Fund had cash and cash
equivalents on hand of $48.4 million.
The Fund generally expects that its cash flow from liquidating its
investment positions in the Investment Funds to the extent necessary and
from new investments in the Fund will be adequate to fund its operations
and liquidity requirements.
The value of the Fund's directly held cash and cash equivalents and
financial instruments is not expected to be materially affected by
inflation. At the Investment Fund level, given that GRV's and GED's
Advisors seek to profit from price movements and can take both positive and
negative views on the drivers of such movements, their outlooks may include
a view on the direction of inflation, with the outcome of their trades
derived, at least in part, from the accuracy of such a view. No first-order
endemic effects from inflation, as may exist in long-only bond portfolios,
are expected. Further, extended changes in inflation may be associated with
strong up or down trends in interest rates, creating a favorable
environment for GTT's Advisors, and therefore contributing to the Fund's
profit potential. However, unexpected changes in inflation can also give
rise to rapid reversals in interest rate markets, creating an environment
in which such Advisors, and the Fund, potentially may suffer losses. The
impact of changes in inflation on equity long/short strategies used by
GELS' Advisors is difficult to predict and depends upon how large the
change is in both absolute terms and relative to expectations. A sharp
increase in inflation could hurt certain sectors, such as regional banks,
homebuilders, and autos, while sharp downward moves could be beneficial for
equities. If a downward move were too large, however, it could give rise to
concerns about deflation. In all cases, however, the Fund endeavors to take
inflation, and its possible effects on each of the Investment Funds, into
account when it develops its investment strategies.
RECENT ACCOUNTING PRONOUNCEMENTS
FASB STATEMENT NO. 150
On May 15, 2003, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity, ("SFAS 150") which establishes standards for classifying and
measuring as liabilities certain financial instruments that embody
obligations of the issuer and have characteristics of both liabilities and
equity. SFAS 150 requires that financial instruments that are issued in the
form of shares should be classified as liabilities if they are mandatorily
redeemable (i) on a fixed or determinable date or (ii) upon an event
certain to occur. All forms of equity, including common stock, preferred
stock and partnership interests, are considered an issuer's shares under
SFAS 150. SFAS 150 is generally effective for financial instruments entered
into or modified after May 31, 2003, and to other instruments at the
beginning of the first interim period beginning after June 15, 2003. The
Fund has adopted SFAS 150 in its financial statements for the year ended
December 31, 2003. The adoption of SFAS 150 impacted the presentation of
the Fund's December 31, 2003 financial statements by reducing the Fund's
net asset value by $34.5 million to reflect Member redemptions that are
effective as of January 1, 2004, but had no impact on the NAV per Unit. In
addition, the adoption of SFAS 150 has also impacted the presentation of
the Fund's financial statements by reducing the Fund's net asset value by
$31.7 million to reflect the Member redemptions that are effective as of
June 30, 2004, but had no impact on the NAV per Unit.
FASB INTERPRETATION NO. 46(R)
In December 2003, the FASB issued Interpretation No. 46(R),
Consolidation of Variable Interest Entities ("FIN 46(R)"), which provides
new criteria for determining whether consolidation accounting is required.
Registered investment companies have been exempted from the provisions of
FIN 46(R) and FIN 46(R) has been deferred for non-registered investment
companies pending the release of an FASB Scope of Investment Companies
project ("Scope Project"). The Scope Project is designed to determine which
entities will qualify as investment companies, and therefore present their
investments at fair value. Those entities so qualifying will not need to
determine whether their investments should be consolidated pursuant to the
provisions of FIN 46(R). FIN 46(R) would have no impact on the Fund's net
assets or net increase in net assets resulting from operations. The Fund
understands that the Scope Project has been approved for issuance by the
FASB, and retained these provisions. Those entities so qualifying will not
need to determine whether their investments should be consolidated pursuant
to the provisions of FIN 46(R) or other accounting standards.
STATEMENT OF POSITION 03-04
On December 29, 2003, the AICPA's Accounting Standards Executive
Committee issued Statement of Position 03-04 ("SOP 03-04"), Reporting
Financial Highlights and Schedule of Investments by Nonregistered
Investment Partnerships: An Amendment to the Audit and Accounting Guide
Audits of Investment Companies and AICPA Statement of Position 95-2,
Financial Reporting by Nonpublic Investment Partnerships. SOP 03-04
provides guidance on the application of certain provisions of the AICPA
Audit and Accounting Guide Audits of Investment Companies (the "Guide") to
nonregistered investment partnerships/companies. SOP 03-04 incorporates
into the Guide, and elevates in the U.S. GAAP hierarchy, the guidance
provided in previously issued Technical Practice Aids. It also provides
additional guidance on how nonregistered investment partnerships/companies
should disclose their derivative positions in the financial statements and
requires funds of funds to disclose additional qualitative information for
investments that exceed 5% of net assets. SOP 03-04 is effective for annual
financial statements issued for fiscal year ending after December 15, 2003.
The Fund has adopted the provision of this pronouncement in its financial
statements for the year ended December 31, 2003.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of the Fund's financial condition and
results of operations are based on the Fund's financial statements, which
have been prepared in accordance with GAAP, which require the Managing
Member to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results may
differ from those estimates. The financial statements are expressed in U.S.
dollars. A summary of the Fund's accounting policies is set forth in Note 1
to the Fund's financial statements. In the Managing Member's view, the
policy that involves the most subjective judgment is set forth below.
The Fund's investments in Investment Funds are subject to terms and
conditions of their respective operating agreements. The investments are
carried at fair value as determined by the Fund's attributable share of the
net assets of the respective Investment Fund. Fair values are determined
utilizing net asset value information supplied by each individual
Investment Fund that are net of the Advisors' management and incentive fees
charged to the Investment Funds. The underlying investments of each
Investment Fund are accounted for at fair value. For investments of the
underlying Advisor Funds, market value normally is based on quoted market
prices or broker-dealer price quotations provided to the Advisor Fund. In
the absence of quoted market prices or broker-dealer price quotations,
underlying Advisor Fund investments are valued at fair value as determined
by the Advisors or their administrator. Because of the inherent uncertainty
of valuation, estimated fair values may differ, at times significantly,
from the values that would have been used had a ready market existed. In
particular, the valuations are made based on information the Investment
Funds receive from the Advisors. This information is generally not subject
to audit procedures, except at year-end, and could prove to be inaccurate
due to inadvertent mistakes, negligence, recklessness or fraud by the
Advisors. Neither the Fund nor the Investment Funds generally will receive
independent valuations from third party administrators or from any of the
Advisors and will not in many cases be able to conduct any independent
valuations on their own or to cause any third parties to undertake such
valuations. In addition, valuations of illiquid securities and other
investments are inherently uncertain and may prove to be inaccurate in
hindsight. These risks are more fully described in the Fund's Form 10 as
filed on April 29, 2004, as amended on June 28, 2004 (the "Form 10").
OFF BALANCE SHEET RISK
There are no off-balance sheet or contingent liabilities at the Fund
level.
CONTRACTUAL OBLIGATIONS
The Fund does not have any long-term debt obligations, capital or
operational lease obligations or other long-term debt liabilities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following table lists the significant market risk sensitive
instruments held by the Fund, through the Investment Funds, as of June 30,
2004 and as of December 31, 2003, as indicated by the Fair Value/Value at
Risk column, and the net income from January 1, 2004 to June 30, 2004 and
from January 1, 2003 to December 31, 2003. Because of the speculative
nature of the investments that the Fund engages in through the Investment
Funds, the Managing Member believes the entire portfolio value of the Fund
is at risk.
SIX MONTHS ENDED JUNE 30, 2004 YEAR ENDED DECEMBER 31, 2003
---------------------------------------- ---------------------------------------
% of Net Income
Members' Fair Value/ (in % of Fair Value/ Net Income
Investment Equity Value at millions) Members' Value (in
Fund (5) Risk (5) Equity at Risk millions) Liquidity
------------- ----------- ------------- --------- ---------- ------------- ----------- ---------
GTT 26.7% $247,686,822 ($6.0) 26.7% $249,583,571 $18.6 (3)
GELS 14.8% 137,432,070 $1.9 15.0% $140,117,348 $15.6 (2)
GRV 39.3% 364,531,356 $6.4 38.5% $359,311,989 $19.4 (2)
GED 23.3% 215,926,378 $10.4 23.8% $221,899,920 $28.3 (1)
----------- ------------- --------- ---------- ------------- ----------
TOTAL 104.1%(4) $ 965,576,626 $12.6 104.0%(4) $970,912,828 $81.9
=========== ============= ========= ========== ============= =========
(1) Effective July 2004, redemptions can be made semiannually with 45
days' notice, or at the sole discretion of the managing member.
(2) Effective July 2004, redemptions can be made quarterly with 45 days'
notice, or at the sole discretion of the managing member.
(3) Redemptions can be made semiannually with 60 days' notice, or at the
sole discretion of the managing member.
(4) The total value of the Fund's investments in the Investment Funds
exceeded 100% of the Fund's net asset value, because the Fund's net
asset value reflected certain accrued liabilities of the Fund,
including fees and expenses.
(5) The sum of the columns may not equal the respective totals due to
rounding.
RISK MANAGEMENT
In the ordinary course of business, the Managing Member including in
its capacity as managing member of the Investment Funds attempts to manage
a variety of risks, including market, credit and operational risk. The
Managing Member including in its capacity as the managing member of the
Investment Funds attempts to identify, measure and monitor risk through
various mechanisms including risk management strategies and credit
policies. These include monitoring risk guidelines and diversifying
exposures across a variety of instruments, markets and counterparties.
Market risk is the risk of potential significant adverse changes to
the value of financial instruments because of changes in market conditions
such as interest rates, foreign exchange rates, equity prices, credit
spreads, liquidity and volatility in commodity or security prices. The
Managing Member including in its capacity as managing member of the
Investment Funds monitors its exposure to market risk at both the Advisor
and portfolio level through various analytical techniques. At the Advisor
level, market risk is monitored on a regular basis. Where position level
detail is available, the Managing Member including in its capacity as
managing member of the Investment Funds monitors its exposure to market
risk through a variety of analytical techniques, including Value-at-Risk
("VaR") and scenario analysis (stress testing). VaR is calculated by a
Monte Carlo simulation using a 99.9% confidence level and a 240-day look
back period. Where position level detail is unavailable, an Investment Fund
relies on risk reports provided by the Advisors as well as through open
communication channels with Advisors, which includes site visits and
monthly conference calls.
The managing member of the Investment Funds monitors Advisors to
prevent style drift. Style drift is defined as Advisors changing their
investment style from the Investment Fund's expectations. Where position
level detail is available, the managing member of the Investment Funds
monitors leverage against predetermined limits. Positions sizing limits are
also monitored to ensure Advisors are properly diversified and risk
normally is not concentrated in one or relatively few positions. In some
cases, the managing member of the Investment Funds also has the ability to
monitor approved trading instruments to ensure Advisors are not trading
securities outside their mandate. Where position level detail is not
available, the managing member of the Investment Funds relies on both
written and oral Advisor communications. The risks involved are described
in the Fund's Form 10 as filed on April 29, 2004, as amended on June 28,
2004.
At the Fund's portfolio level, the Fund's portfolio construction
process is designed to ensure that all the Investment Funds are adequately
diversified. Each Investment Fund is a portfolio of approximately 20-25
underlying Advisors and the managing member of each of the Investment Funds
regularly reviews portfolio statistics, such as relative contribution to
risk, to confirm that risk is not concentrated in any single Advisor.
Quantitative analysis is combined with judgment to determine strategic
allocations that will offer broad exposure to hedge fund returns. Strategic
return, risk and correlation estimates inform the quantitative analysis,
which balances returns and contribution to portfolio risk. Judgment is
applied to both estimates and weights in an attempt to achieve a
diversified exposure to hedge funds while delivering attractive risk
adjusted returns. The approximate weights of the Investees were 27% GTT,
15% GELS, 39% GRV and 24% GED as of December 31, 2003 and 27% GTT, 15%
GELS, 39% GRV and 23% GED as of June 30, 2004. The Managing Member utilizes
a strategic sector allocation and periodically re-evaluates the
contribution to the risk and return of the Fund from each investment sector
and may in its sole discretion re-allocate the Fund's assets as it deems
advisable. Through June 30, 2004, the Managing Member had not made any
strategic allocations. The adjustment to the weights implemented as of July
1, 2004 reflects the Managing Member's updated expectations for return,
risk and correlations for the investment funds. In addition, the weights
among the investment funds no longer reflect a strict equal risk
allocation, (as they had prior to July 1, 2004) but rather the weights have
been adjusted to incorporate the Managing Member's updated view of expected
returns for each of the investment funds. As of July 1, 2004 the strategic
weights have been set to 23% GTT, 20% GELS, 33% GRV, and 24% GED. This
reweighting reflects revised expectations for risk, return, and correlation
as well as the Managing Member's judgment. This portfolio construction
process is designed to create a diversified hedge fund portfolio with
attractive return and risk characteristics.
The Fund invests in the Investment Funds, and may from time to time
redeem its membership units of the Investment Funds. The Investment Funds,
in turn, maintain relationships with counterparties that include the
Advisors. These relationships could result in concentrations of credit
risk. Credit risk arises from the potential inability of counterparties to
perform their obligations under the terms of the contract, including in the
case of the Fund's investments in the Investment Funds, the potential
inability of an Investment Fund to satisfy its redemption obligations. The
managing member of the Investment Funds (currently, the Managing Member)
has formal credit-review policies to monitor counterparty risk.
In addition to market risk and credit risk, the Managing Member,
including in its capacity as managing member of the Investment Funds,
allocates resources to mitigate operational risk. Operational risk is the
potential for loss caused by a deficiency in information, communication,
transaction processing, settlement and accounting systems. The Managing
Member, including in its capacity as managing member of the Investment
Funds, maintains controls and procedures for the purpose of mitigating its
own operational risk but it does not have control over the systems of the
Advisors. In addition, the Managing Member, including in its capacity as
managing member of the Investment Funds, deploys resources to assess
control systems, legal risk, compliance risk, operations and treasury risk,
credit risk, accounting risk and reputational risk.
Fraud and other business risks cannot be eliminated, however, the
Managing Member, including in its capacity as managing member of the
Investment Funds, seeks to significantly reduce such risks. The portfolio
risk management process includes an effort to monitor and manage risk, but
should not be confused with and does not imply low risk. There can be no
assurance that the Managing Member, including in its capacity as managing
member of the Investment Funds, will be able to implement its risk
guidelines or that its risk monitoring strategies will be successful.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was
carried out by the management of the Managing Member, with the
participation of its Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of Fund's disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934). Based on that evaluation, the Fund's Chief Executive
Officer and Chief Financial Officer have concluded that the Fund's
disclosure controls and procedures were effective as of the end of the
period covered by this report. In addition, no changes in the Fund's
internal control over financial reporting (as defined in Rule 13a-15(f)
under the Securities Exchange Act of 1934) occurred during the most recent
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Fund's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Fund or
the Managing Member is a party or to which any of their assets are subject.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
From April 1, 2004 to June 30, 2004, there were no subscriptions to
the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
This Quarterly Report on Form 10-Q contains certain "forward-looking
statements" regarding the operation of the Fund and the Fund's investment
objectives, including, among other things:
o investment strategies and allocations of assets;
o future performance; and
o trends in the four hedge fund sectors.
Forward-looking statements are typically identified by the use of
terms such as "may," "will," "should," "expect," "intend," "plan,"
"anticipate," "estimate," "believe," "continue," "predict," "potential" or
the negative of such terms and other comparable terminology. These
statements are only predictions and are not historical facts. Actual events
or results may differ materially.
The forward-looking statements included herein are based on the
Managing Member of the Fund's current expectations, plans, estimates and
beliefs that involve numerous risks and uncertainties. Assumptions relating
to the foregoing involve judgments with respect to, among other things,
future economic, competitive and market conditions and future business
decisions, all of which are difficult or impossible to predict accurately
and many of which are beyond the Fund's control. Any of the assumptions
underlying the forward-looking statements contained herein could be
inaccurate and, therefore, the Managing Member of the Fund cannot assure
investors that the forward-looking statements included in this Quarterly
Report on Form 10-Q will prove to be accurate.
In light of the significant uncertainties inherent in the
forward-looking statements included in this Quarterly Report on Form 10-Q,
the inclusion of such information should not be regarded as a
representation by the Fund or the Managing Member that the investment
objectives set forth in this Quarterly Report on Form 10-Q will be
achieved. The Fund cautions investors that forward-looking statements are
not guarantees and that the actual results could differ materially from
those expressed or implied in the forward-looking statements.
In addition to the risks identified in our Form 10, which is
incorporated herein by reference, the following list indicates some of the
risks which could impact the likelihood that any forward-looking statements
will come true:
o There can be no assurance that the Managing Member's decisions
regarding risk allocations will be successful; inaccurate
information provided by the Advisors may have a material adverse
effect on implementing the Fund's investment objective;
o The Managing Member generally has limited access to information
on or control over Advisor's portfolios and Members assume the
risk that Advisors may knowingly misrepresent information which
could have a material negative impact on the Fund;
o The Fund faces legal, tax and regulatory risks which may
adversely affect the Fund;
o Units will not be listed and will not be marketable; the Fund is
a closed-end fund with limited liquidity and limited rights for
redemption; substantial redemptions could have a material adverse
effect on the Fund;
o The fee structure of the Fund, including compensation
arrangements with the Managing Member and the Advisors of the
Investment Funds, may create incentives for the Managing Member,
the Investment Funds or the Advisors to make riskier investments
or to inflate returns;
o Past performance of affiliated funds and of Advisors are not
necessarily indicative of the results that the Fund and any
investment fund may achieve or of future results;
o Valuation of the investment funds' investments will be based upon
valuations provided by the Advisors which are generally not
audited; uncertainties in valuations could have a material
adverse effect on the Fund's net assets;
o Frequent trading and turnover typically result in high
transaction costs and the investment funds have no control over
this turnover;
o An investment in the Fund involves a high degree of risk that the
entire amount invested may be lost; investment results may vary
substantially over time;
o A Member's investment in the Fund will be affected by the
investment policies and decisions of Advisors which are outside
the Fund's control; the Advisors may be unable to or may choose
not to seek to achieve their investment goals; Advisors may not
be able to locate suitable investment opportunities;
o The ability of an investment fund to hedge successfully will
depend on the particular Advisor's ability to predict pertinent
market movements which cannot be assured;
o The prices of an investment fund's investments can be highly
volatile and influenced by external factors outside the control
of such investment fund;
o International investments may involve special risks not usually
associated with investments in U.S. securities, including higher
risk of financial irregularities and/or lack of appropriate risk
monitoring and controls;
o Equity and equity related instruments may be subject to various
types of risk, including market risk, liquidity risk,
counterparty credit risk, legal risk and operations risk; and
o The issuers of securities acquired by Advisors will sometimes
face a high degree of business and financial risk.
The foregoing list of factors is not exhaustive. You should carefully
consider the foregoing factors and the other uncertainties and potential
events described in the Registration Statement on Form 10 filed with the
Securities and Exchange Commission on April 29, 2004, as amended on June
28, 2004. The Fund does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by
the Managing Member of the Fund or Fund or on their behalf.
References to market or composite indices, benchmarks or other
measures of relative market performance (each, an "index") are provided for
your information only. Reference to an index does not imply that the
portfolio will achieve results similar to that index.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
Number Description
------ -----------
31.1 Certification of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification of Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as
Adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as
Adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
-------------------
None.
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
(Registrant)
By: Goldman Sachs Princeton LLC
Managing Member
Date: August 16, 2004 By: /s/ Tobin V. Levy
--------------------------
Tobin V. Levy
Managing Director and Chief
Financial Officer
INDEX TO EXHIBITS
Number Description
------ -----------
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002