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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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 ]
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GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheet as of September 30, 2004 and December 31, 2003.........1
Statement of Operations for the three and nine months ended
September 30, 2004 and 2003..........................................2
Statement of Changes in Members' Equity for the nine months ended
September 30, 2004 and for the year ended December 31, 2003..........3
Statement of Cash Flows for the nine months ended September 30, 2004
and September 30, 2003...............................................4
Notes to Unaudited Financial Statements..............................5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...........................................17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........34
ITEM 4. CONTROLS AND PROCEDURES.............................................36
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...................................................37
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.........37
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.....................................37
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................38
ITEM 5. OTHER INFORMATION...................................................38
ITEM 6. EXHIBITS............................................................41
SIGNATURES...................................................................42
INDEX TO EXHIBITS............................................................43
ITEM 1. FINANCIAL STATEMENTS
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
BALANCE SHEET
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
ASSETS
------
(UNAUDITED) (AUDITED)
September 30, 2004 December 31, 2003
--------------------- --------------------
Assets:
Cash and cash equivalents $ 21,308,177 $ 48,423,637
Other assets - 77,464
Investments (cost $850,868,232 and
$877,478,931 at 2004 and 2003, respectively) 941,859,666 970,912,828
-------------------- ------------------
Total assets $ 963,167,843 $ 1,019,413,929
==================== ====================
LIABILITIES AND MEMBERS' EQUITY
-------------------------------
Liabilities:
Due to bank $ 21,007,975 $ 47,500,000
Redemptions payable - 34,529,625
Accounts payable and accrued liabilities 1,156,870 168,875
Due to managing member 1,949,352 3,969,687
--------------------- --------------------
Total liabilities 24,114,197 86,168,187
Members' equity (units outstanding 8,209,973.43 and
8,540,512.41 at 2004 and 2003, respectively) 939,053,646 933,245,742
--------------------- --------------------
Total liabilities and members' equity $ 963,167,843 $ 1,019,413,929
===================== ====================
See accompanying notes.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- --------------------------
2004 2003 2004 2003
-------------- ------------ ------------ -----------
Income from trading:
Equity in Earnings of Investees $ 3,283,040 $ 7,636,941 $ 15,924,701 $ 46,509,889
-------------- ------------ ------------ ------------
Net trading profit/(loss) 3,283,040 7,636,941 15,924,701 46,509,889
Interest income 114,412 19,873 490,645 97,943
Expenses:
Management fee 2,918,115 2,892,482 8,986,922 6,671,298
Interest expense 121,684 - 544,094 -
Professional fees 585,698 167,792 1,601,831 793,070
------------- ------------ ------------ ------------
Total expenses 3,625,497 3,060,274 11,132,847 7,464,368
------------- ------------- ------------ ------------
Net investment income/(loss) (3,511,085) (3,040,401) (10,642,202) (7,366,425)
------------- ------------ ------------ ------------
Net income/(loss) (228,045) 4,596,540 5,282,499 39,143,464
Less: Incentive allocation to the
managing member (11,297) 229,811 264,315 1,957,157
------------- ------------ ------------ ------------
Net income/(loss) available for pro-rata
allocation to members $ (216,748) $ 4,366,729 $ 5,018,184 $ 37,186,307
============= ============== ============== ==============
See accompanying notes.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
STATEMENT OF CHANGES IN MEMBERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)
AND FOR THE YEAR ENDED DECEMBER 31, 2003 (AUDITED)
TOTAL
MANAGING MEMBERS' MEMBERS' MEMBERS'
MEMBER UNITS 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 - 296,643 32,210,622 32,210,622
Redemptions (9,101) (276,457) (31,676,116) (31,685,217)
Series collapse - (350,725) - -
Allocations of net income/(loss):
Incentive allocation 264,315 - - 264,315
Pro-rata allocation - - 5,018,184 5,018,184
----------- ---------- ------------- -------------
Balance at September 30, 2004 $ 255,214 8,209,973 938,798,432 $ 939,053,646
=========== ========== ============= =============
See accompanying notes.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
2004 2003
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $ 5,282,499 $ 39,143,464
Adjustments to reconcile net income/(loss) to net cash from
operating activities:
Undistributed earnings from Investees 2,442,463 (46,267,916)
(Increase) decrease in operating assets:
Investments:
Subscriptions (79,845,756) (507,973,826)
Redemptions 106,456,455 2,258,027
Other assets 77,464 -
Increase (decrease) in operating liabilities:
Due to bank (26,492,025) -
Redemptions payable (34,529,625) -
Accounts payable and accrued liabilities 987,995 21,013
Due to managing member (2,020,335) 1,220,828
------------ ------------
Net cash from operating activities (27,640,865) (511,598,410)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Subscriptions 32,210,622 523,410,015
Redemptions (31,685,217) (10,988,390)
----------- ------------
Net cash from financing activities 525,405 512,421,625
----------- ------------
Net change in cash and cash equivalents (27,115,460) 823,215
Cash and cash equivalents at beginning of period 48,423,637 600,207
----------- ------------
Cash and cash equivalents at end of period $ 21,308,177 $ 1,423,422
============ ============
See accompanying notes.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 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 the consolidation of these balances would not enhance
the usefulness or understandability of information to the member. The
Company may, but normally does not intend to exercise, control over
majority owned Investees.
The following table summarizes the Company's ownership in the Investees at
September 30, 2004 and December 31, 2003:
9/30/2004
--------------------------------------------
Investee Company % owned by
Equity investment the Company
--------------- ---------------- -----------
Goldman Sachs Global Equity Long/Short, LLC $629,340,398 $192,787,154 30.63%
Goldman Sachs Global Event Driven, LLC $786,436,233 $231,397,994 29.42%
Goldman Sachs Global Tactical Trading, LLC $564,528,866 $208,258,188 36.89%
Goldman Sachs Global Relative Value, LLC $564,528,759 $309,416,330 54.81%
-------------
Total $941,859,666
=============
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 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. 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 a 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.
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 indemnification
arrangements. The indemnification arrangements the Company has entered into
with service providers include provisions for the Company to indemnify and
hold harmless such service providers for certain liabilities. These
indemnification arrangements typically cover liabilities incurred by
service providers in connection with the service provided under contractual
arrangements with the Company and are generally entered into as part of a
negotiated contractual arrangement stipulating the furnishing of the
delineated services. However, under the terms of such contractual
arrangements, the Company will not be required to indemnify service
providers in certain situations to the extent that the liabilities incurred
by the service providers were caused by the gross negligence, willful
misconduct, bad faith, reckless disregard of duties, or similar conduct on
the part of the service provider. The Company's maximum exposure under
these arrangements is unknown. It is not possible to estimate the maximum
potential exposure under these agreements, because the indemnification
arrangements relate to unforeseeable liabilities suffered as a result of
the conduct of the Company or other parties which is presently unknown or
unforeseeable. However, the Company has not had prior claims or losses
pursuant to these indemnification arrangements and expects the risk of
material loss therefrom to be remote.
Equity in Earnings of Investee
- ------------------------------
Equity in Earnings of Investee includes the change in fair value of each
Investee. Fair values are determined utilizing net asset value information
supplied by each individual Investee which includes realized and unrealized
gains/losses on investments, Advisor's management fees, incentive fees,
administration fees and all other income/expenses. See Note 2 - Investments
for further information.
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 by the Company
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.
The managing member generally has limited access, if at all, to specific
information regarding the Advisors' portfolios and relies on 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. Typically, audited financial
statements are not received before issuance of the Company's financial
statements. GS Princeton, in its capacity as managing member of the
Company, may perform additional procedures to ensure conformity with U.S.
generally accepted accounting principles, including Advisor due diligence
reviews and analytical procedures with respect to the valuations provided
by the Advisors. Valuations provided by the Advisors may differ from the
audited values received subsequent to the date of the Company's net asset
value determination. In such cases, the Company will evaluate the
materiality of any such differences.
The following table summarizes the Company's investments in Investees at
September 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 (2) 20.53% $192,787,154 15.01% $ 140,117,348
Equity Long/Short, LLC
Goldman Sachs Global
Event Driven, LLC (1) 24.64% 231,397,994 23.78% 221,899,920
Goldman Sachs Global
Tactical Trading, LLC (3) 22.18% 208,258,188 26.74% 249,583,571
Goldman Sachs Global
Relative Value, LLC (2) 32.95% 309,416,330 38.50% 359,311,989
------------ -------------- ------------ -------------
Total (4) 100.30% $941,859,666 (4) 104.03% $ 970,912,828
============ ============== ============ =============
(1) Effective July, 2004, redemptions can be made semi-annually 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 semi-annually with 60 days' notice, or at the sole discretion
of the managing member.
(4) The total value of the Company's investments in the Investees exceeded 100% of the
Company's net asset value, because the Company's net asset value reflected certain
accrued liabilities of the Company, including fees and expenses.
NOTE 2 - INVESTMENTS (CONTINUED)
- --------------------------------
The following table summarizes the Company's Equity in Earnings of
Investees for the three and nine month periods ended September 30, 2004 and
2003:
Three months ended September 30, Nine months ended September 30,
--------------------------------- --------------------------------
Investee 2004 2003 2004 2003
- ------------------------------------------- ------------- ------------ ------------ -------------
Goldman Sachs Global Equity Long/Short, LLC $ 1,355,084 $( 1,300,551) $ 3,206,707 $ 4,705,883
Goldman Sachs Global Event Driven, LLC 3,471,616 4,915,191 13,933,031 18,493,950
Goldman Sachs Global Tactical Trading, LLC (3,428,635) (777) (9,471,138) 10,687,785
Goldman Sachs Global Relative Value, LLC 1,884,975 4,023,078 8,256,101 12,622,271
------------- ------------ ------------ -------------
Total $ 3,283,040 $ 7,636,941 $15,924,701 $46,509,889
============= ============ ============ =============
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 risk
arbitrage/special situations, credit opportunities/distressed securities
and multi-strategy investing. Other strategies may be employed as well.
Goldman Sachs Global Tactical Trading, LLC
- ------------------------------------------
Goldman Sachs Global Tactical Trading, LLC seeks long-term risk-adjusted
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 bond trading, equity market neutral,
fixed-income trading, credit trading and emerging markets trading. Other
strategies may be employed as well.
The Company's proportionate share of each individual investment owned by
any individual Investee does not exceed 5% of the Company's equity. Where
an underlying investment of an Investee is held by more than one Investee,
such investments are aggregated for the purpose of ensuring that any
individual investment does not exceed 5% of the Company's equity.
Information regarding the actual management and incentive fees charged by
the Advisors for the period was not available for all Advisors. The
following table reflects the weighted average Advisors' management fee and
incentive fee rates at the Investee level at September 30, 2004 and 2003.
The weighted average is based on the period ended market values of each
Advisor investment in proportion to the Company's total investments. The
fee rates used are the actual rates charged by each Advisor.
2004 2003
-------------------------- --------------------------
Management Incentive Management Incentive
Investee fee fee fee fee
- ------------------------------------------ ------------- ------------ ------------- ------------
Goldman Sachs Global Equity Long/Short, LLC 1.44% 19.82% 1.24% 19.91%
Goldman Sachs Global Event Driven, LLC 1.41% 19.94% 1.40% 19.86%
Goldman Sachs Global Tactical Trading, LLC 2.01% 20.04% 2.00% 20.09%
Goldman Sachs Global Relative Value, LLC 1.58% 20.70% 1.53% 20.48%
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 September 30, 2004 and December 31, 2003:
9/30/2004 12/31/2003
-------------- --------------
Goldman Sachs Global Equity Long/Short, LLC $ 174,714,595 $ 124,698,754
Goldman Sachs Global Event Driven, LLC 191,189,105 193,043,444
Goldman Sachs Global Tactical Trading, LLC 200,365,176 223,858,829
Goldman Sachs Global Relative Value, LLC 284,599,356 335,877,904
-------------- --------------
Total $ 850,868,232 $ 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
September 30, 2004 and 2003, the administrative fee charged at the Investee
level by GS Princeton totaled $468,009 and $463,038, respectively. For the
nine months ended September 30, 2004 and 2003, the administrative fee
charged at the Investee level by GS Princeton totaled $1,439,194 and
$1,067,875, respectively.
GS Princeton and the Company have entered into an agreement with SEI Global
Services, Inc. ("SEI") for 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.
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 September 30, 2004 and December 31,
2003.
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 September 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 cash received totaled $20.4 million and $47.5 million at September 30,
2004 and December 31, 2003, respectively, and is included in Cash and cash
equivalents on the Balance Sheet. The effective interest rate on borrowed
amounts represented by funds drawn from the collateral account is LIBOR
plus 0.875%. The Company 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 renewed the facility on a month-to-month basis. At September 30,
2004 and December 31, 2003, the Company has 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 $21.0
million and $47.5 million at September 30, 2004 and December 31, 2003,
respectively, which represents the borrowing plus accrued interest.
NOTE 8 - MEMBERS' EQUITY
- ------------------------
At September 30, 2004, the Company had five 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 nine
months ended September 30, 2004 and the year ended December 31, 2003 are as
follows:
NOTE 8 - MEMBERS' EQUITY (CONTINUED)
- ------------------------------------
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)
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 83,221.74 8,322,174 752,365.57 75,236,557
Series 4 12,734.34 1,273,434 879,574.26 87,957,426
Series 5 17,500.00 1,750,000 654,391.41 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 296,643.44 $ 32,210,622 5,228,815.64 $524,318,830
============= ============ ============ ============
Redemptions
Class A
Series 1 276,457.49 $31,676,116 346,366.44 $ 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 $31,676,116 369,584.81 $ 41,487,391
============= ============ ============ ============
NOTE 8 - MEMBERS' EQUITY (CONTINUED)
- ------------------------------------
At September 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 $ 927,365,229 3,696,643.78 $ 421,242,087
Series 2 687.41 68,396 415,994.14 44,920,761
Series 3 83,221.74 8,319,946 752,365.57 80,402,510
Series 4 12,734.34 1,282,499 879,574.26 94,683,681
Series 5 17,500.00 1,762,362 654,391.41 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 8,209,973.43 $ 938,798,432 8,540,512.41 $ 933,245,742
============ ============
Managing member 255,214 -
------------- -------------
Total members' equity $ 939,053,646 $ 933,245,742
============= =============
NOTE 9 - FINANCIAL HIGHLIGHTS
- -----------------------------
Financial highlights for the Company for the nine months ended September
30, 2004 are as follows:
Class A Class A Class A Class A Class A
Series 1 Series 2 Series 3 Series 4 Series 5
-------- -------- -------- -------- --------
Per unit operating performance:
Net asset value, beginning of
period $ 113.95 $ 100.00 $ 100.00 $ 100.00 $ 100.00
Income from operations:
Net trading profit/(loss) 1.90 0.50 0.34 1.00 0.88
Net investment income/(loss) (1.30) (1.00) (0.37) (0.29) (0.17)
-------- -------- -------- -------- --------
Net income/(loss) from 0.60 (0.50) (0.03) 0.71 0.71
operations -------- -------- -------- -------- --------
Net asset value, end of period $ 114.55 $ 99.50 $ 99.97 $ 100.71 $ 100.71
======== ======== ======== ======== ========
Ratios to average net assets
(annualized):
Expenses 1.50% 1.50% 1.38% 1.35% 1.34%
Incentive allocation 0.03% 0.00% 0.00% 0.04% 0.04%
-------- -------- -------- -------- --------
Total expenses and incentive
allocation 1.53% 1.50% 1.38% 1.39% 1.38%
======== ======== ======== ======== ========
Net investment income/(loss) (1.46%) (1.43%) (1.33%) (1.33%) (1.32%)
======== ======== ======== ======== ========
Total return (prior to incentive
allocation) 0.57% (0.50%) (0.03%) 0.75% 0.75%
Incentive allocation (0.04%) 0.00% 0.00% (0.04%) (0.04%)
-------- -------- -------- -------- --------
Total return 0.53% (0.50%) (0.03%) 0.71% 0.71%
======== ======== ======== ======== ========
NOTE 9 - FINANCIAL HIGHLIGHTS (CONTINUED)
- -----------------------------------------
Financial highlights for the Company for the nine months ended September
30, 2003 are as follows:
Class A Class A Class A Class A Class A Class A Class A Class A
Series 1 Series 2 Series 3 Series 4 Series 5 Series 6 Series 7 Series 8
-------- -------- -------- -------- -------- -------- -------- --------
Per unit operating performance:
Net asset value, beginning $ 103.97 $ 100.00 $ 100.00 $ 100.00 $ 100.00 $ 100.00 $ 100.00 $ 100.00
of period
Income from operations:
Net trading profit/(loss) 7.83 5.75 4.51 5.18 3.98 0.99 0.82 1.64
Net investment income/(loss) (1.45) (1.18) (1.02) (0.94) (0.76) (0.50) (0.35) (0.30)
-------- -------- -------- -------- -------- -------- -------- --------
Net income/(loss) from operations
operations 6.38 4.57 3.49 4.24 3.22 0.49 0.47 1.34
-------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of period $ 110.35 $ 104.57 $ 103.49 $ 104.24 $ 103.22 $ 100.49 $ 100.47 $ 101.34
======== ======== ======== ======== ======== ======== ======== ========
Ratios to average net assets
(annualized):
Expenses 1.36% 1.36% 1.35% 1.34% 1.32% 1.32% 1.27% 1.27%
Incentive allocation 0.31% 0.23% 0.18% 0.22% 0.17% 0.03% 0.02% 0.07%
-------- -------- -------- -------- -------- -------- -------- --------
Total expenses and incentive
allocation 1.67% 1.59% 1.53% 1.56% 1.49% 1.35% 1.29% 1.34%
======== ======== ======== ======== ======== ======== ======== ========
Net investment income/(loss) (1.66%) (1.57%) (1.51%) (1.54%) (1.47%) (1.33%) (1.29%) (1.34%)
======== ======== ======== ======== ======== ======== ======== ========
Total return (prior to incentive
allocation) 6.45% 4.80% 3.66% 4.45% 3.38% 0.52% 0.49% 1.41%
Incentive allocation (0.31%) (0.23%) (0.17%) (0.21%) (0.16%) (0.03%) (0.02%) (0.07%)
-------- -------- -------- -------- -------- -------- -------- --------
Total return 6.14% 4.57% 3.49% 4.24% 3.22% 0.49% 0.47% 1.34%
======== ======== ======== ======== ======== ======== ======== ========
Financial highlights for the Company for the three months ended
September 30, 2004 are as follows:
Class A Class A Class A Class A Class A
Series 1 Series 2 Series 3 Series 4 Series 5
-------- -------- -------- -------- --------
Per unit operating performance:
Net asset value, beginning of
period $ 114.58 $ 99.52 $ 100.00 $ 100.00 $ 100.00
Income from operations:
Net trading profit/(loss) 0.40 0.35 0.34 1.00 0.88
Net investment income/(loss) (0.43) (0.37) (0.37) (0.29) (0.17)
-------- -------- -------- -------- --------
Net income/(loss) from
operations (0.03) (0.02) (0.03) 0.71 0.71
-------- -------- -------- -------- --------
Net asset value, end of period $ 114.55 $ 99.50 $ 99.97 $ 100.71 $ 100.71
======== ======== ======== ======== ========
Ratios to average net assets
(annualized):
Expenses 1.38% 1.38% 1.38% 1.35% 1.34%
Incentive allocation 0.00% 0.00% 0.00% 0.04% 0.04%
-------- -------- -------- -------- --------
Total expenses and incentive
allocation 1.38% 1.38% 1.38% 1.39% 1.38%
======== ======== ======== ======== ========
Net investment income/(loss) (1.33%) (1.33%) (1.33%) (1.33%) (1.32%)
======== ======== ======== ======== ========
Total return (prior to incentive
allocation) (0.03%) (0.02%) (0.03%) 0.75% 0.75%
Incentive allocation (0.00%) (0.00%) (0.00%) (0.04%) (0.04%)
-------- -------- -------- -------- --------
Total return (0.03%) (0.02%) (0.03%) 0.71% 0.71%
======== ======== ======== ======== ========
NOTE 9 - FINANCIAL HIGHLIGHTS (CONTINUED)
Financial highlights for the Company for the three months ended
September 30, 2003 are as follows:
Class A Class A Class A Class A Class A Class A Class A Class A
Series 1 Series 2 Series 3 Series 4 Series 5 Series 6 Series 7 Series 8
-------- -------- -------- -------- -------- -------- -------- --------
Per unit operating performance:
Net asset value, beginning
of period $ 109.83 $ 104.08 $ 103.01 $ 103.76 $ 102.75 $ 100.03 $ 100.00 $ 100.00
Income from operations:
Net trading profit/(loss) 0.90 0.85 0.84 0.84 0.83 0.81 0.82 1.64
Net investment income/(loss) (0.38) (0.36) (0.36) (0.36) (0.36) (0.35) (0.35) (0.30)
-------- -------- -------- -------- -------- -------- --------- --------
Net income/(loss) from
operations 0.52 0.49 0.48 0.48 0.47 0.46 0.47 1.34
-------- -------- -------- -------- -------- -------- --------- --------
Net asset value, end of period $ 110.35 $ 104.57 $ 103.49 $ 104.24 $ 103.22 $ 100.49 $ 100.47 $ 101.34
======== ======== ======== ======== ======== ======== ========= ========
Ratios to average net assets
(annualized):
Expenses 1.27% 1.27% 1.27% 1.27% 1.27% 1.27% 1.27% 1.27%
Incentive allocation 0.02% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02% 0.07%
-------- -------- -------- -------- -------- -------- --------- --------
Total expenses and incentive
allocation 1.29% 1.29% 1.29% 1.29% 1.29% 1.29% 1.29% 1.34%
======== ======== ======== ======== ======== ======== ========= ========
Net investment income/(loss) (1.29%) (1.29%) (1.29%) (1.29%) (1.29%) (1.29%) (1.29%) (1.34%)
======== ======== ======== ======== ======== ======== ========= ========
Total return (prior to
incentive allocation) 0.50% 0.49% 0.49% 0.48% 0.48% 0.49% 0.49% 1.41%
Incentive allocation (0.03%) (0.02%) (0.02%) (0.02%) (0.02%) (0.03%) (0.02%) (0.07%)
-------- -------- -------- -------- -------- -------- --------- --------
Total return 0.47% 0.47% 0.47% 0.46% 0.46% 0.46% 0.47% 1.34%
======== ======== ======== ======== ======== ======== ========= ========
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.
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 September 30, 2004, the Fund had total assets of $963.2 million
compared with total assets of $1,019.4 million as of December 31, 2003.
Total liabilities of the Fund totaled $24.1 million as of September 30,
2004 compared with $86.2 million as of December 31, 2003. Member's equity
of the Fund was $939.1 million as of September 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
percentage of the Fund's 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 ability of the Managing Member,
including in its capacity as managing member of each of the Investment
Funds, 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 NINE MONTHS ENDED SEPTEMBER
30, 2004 AND 2003
The following presents a summary of the operations for the three and
nine months ended September 30, 2004 and for the three and nine months
ended September 30, 2003, and a general discussion of each Investment
Fund's performance during those periods.
PERFORMANCE FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
The Fund's net trading profit/loss for the three and nine months ended
September 30, 2004 was $3,283,040 and $15,924,701, respectively, compared
to the three and nine month period ended September 30, 2003 of $7,636,941
and $46,509,889, 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 September 30, 2004, the Fund had the following exposures:
----------------------- --------------------- ---------------------- ---------------------
INVESTMENT FUND PORTFOLIO WEIGHT THREE MONTHS ENDED NINE MONTHS ENDED
(1) SEPTEMBER 30, 2004 SEPTEMBER 30, 2004
NET RETURN (2) NET RETURN (2)
----------------------- --------------------- ---------------------- ---------------------
GTT 22.18% (1.62%) (3.95%)
----------------------- --------------------- ---------------------- ---------------------
GELS 20.53% 0.71% 2.10%
----------------------- --------------------- ---------------------- ---------------------
GRV 32.95% 0.61% 2.42%
----------------------- --------------------- ---------------------- ---------------------
GED 24.64% 1.52% 6.71%
----------------------- --------------------- ---------------------- ---------------------
(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 nine months ended September 30, 2004, the Fund's
Class A Series 1 Units returned (0.03%) and 0.53%, respectively, net of
fees and incentive allocation.
THE INVESTMENT FUNDS
Each of the four Investment Funds' performance during the three and
nine months ended September 30, 2004 is described in the following.
GOLDMAN SACHS GLOBAL TACTICAL TRADING, LLC
As of September 30, 2004, GTT represented approximately 22.2% of the
Fund's net assets which was generally consistent with the strategic weight
of 23% set by the Managing Member for GTT as of July 1, 2004. For further
description of the adjustment to the weights implemented as of July 1,
2004, see "Item 3. Quantitative and Qualitative Disclosure about Market
Risk--Risk Management." GTT returned (1.62%) and (3.95%), respectively, for
Class C Series 1 units for the three and nine months ended September 30,
2004.
THREE MONTHS ENDED SEPTEMBER 30, 2004
The third quarter of 2004 saw mixed performance across all four asset
classes (fixed income, commodity trading, currencies and equities). Fixed
income and commodity trading, which contributed the largest losses in the
second quarter, were the most profitable in the third quarter. For the
period, losses were incurred in currencies and equities.
Foreign exchange trading continued to experience a challenging
environment throughout the third quarter. Despite the growing consensus of
a weaker U.S. economy and a record current account deficit, markets
remained directionless, leading to losses in short U.S. dollar positions.
Equity markets experienced several sharp reversals throughout the quarter
as the market digested rising oil prices and signs of a potential global
economic slowdown.
A series of weaker-than-expected economic data releases, higher oil
prices, and the Federal Reserve's assurance that fears of inflation were
largely unfounded combined to drive bond yields lower over the course of
the third quarter. Advisors were able to profit from long fixed income
positions, particularly in Europe. Advisors also benefited from trends that
developed in several commodity markets. Crude oil rallied throughout the
quarter as concerns regarding the already-strained supply were aggravated
by hurricane-related damage in the Gulf of Mexico and instability in
Nigeria. Grain markets, on the other hand, experienced sharp declines as
crop estimates came in above expectations.
NINE MONTHS ENDED SEPTEMBER 30, 2004
Year-to-date, commodities have proven to be the most profitable asset
class for GTT. In the first quarter of 2004, commodities continued their
bullish trend, contributing the majority of GTT profits for the quarter.
Within commodities, the agricultural markets, specifically the soy complex,
proved to be the largest driver of returns. Advisors also held profitable
positions in base and precious metals. In the second quarter, long
positions in the energy sector proved to be the most profitable, as
Advisors were able to capitalize on record high oil prices, driven by
tightening supply and concerns in the Middle East. However, non-energy
commodity markets, specifically agriculturals and metals, fell sharply due
to the strengthening of the U.S. dollar and concerns regarding slowing
demand from China, resulting in losses for the quarter. Advisors continued
to profit from long energy positions in the third quarter and also made
strong gains in metals, which rallied on expectations of increased Chinese
demand.
Results in fixed income were mixed for the first three quarters of
2004. Long bond positions in the U.S. and Europe survived significant
volatility resulting from the Federal Reserve's indication in January that
it would likely raise interest rates in the near future, and remained
profitable in the first quarter. The second quarter proved to be
challenging, as well, as reports of a strong economic recovery and rising
inflation led to expectations of accelerated rate hikes by the Federal
Reserve and to a sell-off in fixed income markets. Fixed income positions
finished the second quarter with net losses. In the third quarter, a series
of weaker-than-expected economic data releases, higher oil prices, and the
Federal Reserve's assurance that fears of inflation were largely unfounded
combined to drive bond yields lower. Advisors were able to profit with long
fixed income positions, particularly in Europe. Year-to-date, fixed income
trading has been profitable.
The largest losses for the first three quarters of 2004 were incurred
in currencies and global equity indices. Throughout the year to date,
currency trading has proven to be challenging, as the U.S. dollar has
remained range-bound and directionless. As a result of the difficult
environment, foreign exchange has incurred the largest losses to date this
year. The equity market rally of the second half of 2003 continued in
January and February, helping long equity index positions early in the
year. However, anticipation of a higher rate environment following reports
of a strengthening economy and rising inflation in the second quarter hurt
long equity, bringing performance for the period into negative territory.
The equity markets saw several reversals throughout the third quarter,
resulting in additional losses for the period.
GOLDMAN SACHS GLOBAL EQUITY LONG/SHORT, LLC
As of September 30, 2004, GELS represented approximately 20.5% of the
Fund's net assets which was generally consistent with the strategic weight
of 20% set by the Managing Member for GELS as of July 1, 2004. For further
description of the adjustment to the weights implemented as of July 1,
2004, see "Item 3. Quantitative and Qualitative Disclosure about Market
Risk--Risk Management." GELS returned 0.71% and 2.10%, respectively, for
Class C Series 1 units for the three and nine months ended September 30,
2004.
THREE MONTHS ENDED SEPTEMBER 30, 2004
Global equity markets experienced significant volatility throughout
the third quarter of 2004. The first half of the third quarter was
negative, marked by surging oil prices, slowing economic growth and
consumer spending, an uncertain geopolitical landscape, and the economic
impact of hurricanes that hit Florida and the Gulf. However, despite record
high crude oil prices, global equity markets gained strength from near-term
lows and reversed late in the quarter. GELS Advisors with significant
exposures in healthcare and technology sectors had a difficult July as
those sectors sold off on weak earnings results and deteriorating
sentiment. In September, positive company-specific news and earnings
reports rallied performance. Nearly all GELS Advisors posted gains for
September. Particularly strong were Advisors with exposures in Europe,
emerging markets, energy, and basic materials.
NINE MONTHS ENDED SEPTEMBER 30, 2004
Global equity markets experienced significant volatility throughout
the first three quarters of 2004. The first quarter saw geopolitical and
macroeconomic uncertainty, with terrorist bombings in Spain, the discovery
of a bomb plot in London, the impeachment of South Korea's president, and
an attempted assassination and disputed election in Taiwan. This, combined
with a weak United States jobs report for February and increasing energy
prices, raised concerns about the breadth of the U.S. economic expansion
and its potential impact on consumer confidence and spending. In the second
quarter, positive employment and job reports, coupled with encouraging
indicators from the Federal Open Market Committee alluding to economic
strength and trends towards low inflation, helped to stabilize the markets.
A series of strong earnings reports, a pull-back in oil prices, the
indication that interest rate adjustments would be made at a moderate pace
going forward, and the unexpected early transfer of sovereignty in Iraq,
built confidence in the markets in June. In the third quarter of 2004,
disappointing earnings reports, hurricanes in Florida and the Gulf, the
high current account deficit, and interest rate hikes led to a decline in
the markets. Within developed markets, Japan was the most volatile,
experiencing a sharp pull-back in April and May, followed by a strong rally
in June, and a subsequent decline in the third quarter.
GOLDMAN SACHS GLOBAL RELATIVE VALUE, LLC
As of September 30, 2004, GRV represented approximately 33.0% of the
Fund's net assets which was generally consistent with the strategic weight
of 33% set by the Managing Member for GRV as of July 1, 2004. For further
description of the adjustment to the weights implemented as of July 1,
2004, see "Item 3. Quantitative and Qualitative Disclosure about Market
Risk--Risk Management." GRV returned 0.61% and 2.42%, respectively, for
Class C Series 1 units for the three and nine months ended September 30,
2004.
THREE MONTHS ENDED SEPTEMBER 30, 2004
The third quarter of 2004 was a challenging period for convertible
arbitrage Advisors, although GRV ended the period with positive
performance. Concerns surrounding the economy, as well as the significant
rise in oil prices, led major equity and credit markets to trade in a
narrow range, with low volatility, resulting in a diminished opportunity
set.
Fixed income arbitrage Advisors delivered modest performance but were
hurt in some cases by short positions in U.S. 10-year Treasury bonds,
reflecting their view of rising interest rates. Hedges implemented to
create a relative value trade from this view, using international markets
and other points in the U.S. Treasury yield curve, proved inadequate as
traditional relationships broke down over the period, and the 10-year U.S.
Treasury bond experienced a strong move.
In corporate bond markets, Advisors' results were stronger, as credit
trading Advisors' company selection was rewarded on both the long and short
sides. The arbitrage between credit indices and their underlying
constituents remained a positive contributor to returns. Advisors'
model-driven trades underperformed fundamentally driven strategies, and GRV
benefited from its diversification across approaches.
Equity market neutral Advisors performed well, particularly in
September, as fundamental quality and valuation metrics were rewarded by
the market and benefited quantitative portfolios. International strategies
delivered stronger performance than U.S. strategies, particularly in the
case of smaller-capitalization stocks.
Convertible bond arbitrage strategies faced difficult conditions over
the third quarter as equity volatility decreased, hitting multi-year lows,
and new issuance levels continued to disappoint.
NINE MONTHS ENDED SEPTEMBER 30, 2004
The first three quarters of 2004 presented a difficult environment for
GRV Advisors. Markets experienced volatile price movements in reaction to
any indicator which might sway the general consensus regarding the health
of the global economic recovery, but finished the period range-bound,
making it difficult for GRV Advisors to generate profits.
Fixed income arbitrage Advisors' performance was fair, as expectations
of growth and inflation traded in wide swings throughout the period. These
large swings resulted in a challenging trading environment, especially
hurting those Advisors caught on the wrong side of a significant move. At
the same time, expected future volatility declined, which normally
translates into reduced opportunities for many relative value-oriented
Advisors. Many Advisors saw their portfolio leverage decline, as they
exercised patience and waited for rare but profitable trading
opportunities.
Credit Advisors posted strong results throughout the period, as credit
spreads remained strong. The increased liquidity in credit indices, as well
as the formation of several new indices and standardized index tranches,
led to many profitable trades for Advisors who focus on trading credit
indices versus their underlying constituents.
Convertible bond arbitrage trading strategies faced a difficult
environment throughout most of the period, as the market's two main drivers
of return, volatility and new supply, were static. Equity volatility was
depressed compared to historical levels, as the Chicago Board Options
Exchange SPX Volatility Index ("VIX") fell to a low of 13.3. At the same
time, the supply of new convertible issues was small, limiting
opportunities for Advisors to deploy capital in attractively priced bonds.
As a result, many Advisors shifted allocations to Asia, especially Japan in
pursuit of more volatile markets and more active new security issuance.
Equity market neutral Advisors gradually shifted assets over the
period toward international strategies, in order to take advantage of
opportunities afforded by those less efficient markets. Statistical,
price-based, mean-reversion strategies continued to falter in the U.S.
GOLDMAN SACHS GLOBAL EVENT DRIVEN, LLC
As of September 30, 2004, GED represented approximately 24.6% of the
Fund's net assets which was generally consistent with the strategic weight
of 24% set by the Managing Member for GED as of July 1, 2004. For further
description of the adjustment to the weights implemented as of July 1,
2004, see "Item 3. Quantitative and Qualitative Disclosure about Market
Risk--Risk Management." GED returned 1.52% and 6.71%, respectively, for
Class C Series 1 units for the three and nine months ended September 30,
2004.
THREE MONTHS ENDED SEPTEMBER 30, 2004
The third quarter of 2004 was marked by strength in the credit
markets, mixed performance by the equity markets, two interest rate hikes
of 25 basis points each by the Federal Reserve (raising the overnight
lending rate to 1.75%), and a reduction in implied equity volatility, with
the VIX trading down to 13.3 from 14.3. For the quarter, the MSCI World
Index returned -1.00%, the S&P 500 Index returned -1.87%, the Lehman
Aggregate Bond Index returned 3.20%, and the Merrill Lynch US High Yield
Master II Index returned 4.63%. The U.S. Treasury market was volatile, as
yields fell from 4.58% at the beginning of the quarter to end the quarter
at 4.12%. While the high yield market was positive in each of the quarter's
three months, the equity markets experienced their worst month of
performance to date this year during July, recovering partially in the two
subsequent months. GED Advisors performed well in an environment where
catalysts like bankruptcy filings and restructuring announcements, the
aforementioned strength in the high yield market, and the tightening of
spreads in specific merger and acquisition deals enabled different areas of
the portfolio to contribute positively.
High yield credit spreads tightened by 20 basis points, ending the
quarter at 384 basis points over U.S. Treasury bonds, and $30 billion of
new high yield paper was issued, bringing year-to-date issuance to $110
billion. GED's high yield- and credit-focused Advisors were rewarded for
strong credit selection, and several Advisors continued to increase their
short exposure in order to maintain a more balanced book of long and short
positions. This is a continuation of a trend that started several months
ago. This short exposure has hurt some GED Advisors, but they continue to
position their books judiciously given that credit spreads, in general, are
at their tightest levels in years. Specifically, opportunities for GED
Advisors may arise in certain secured credits within the airline sector
where spreads have broadly widened to over 1,700 basis points over U.S.
Treasuries spurred by negative announcements from several major airlines.
Global merger and acquisition volume for the quarter totaled $420
billion, a 36% increase over third quarter activity in 2003. The third
quarter of 2004 saw resurgence in the merger arbitrage space.
NINE MONTHS ENDED SEPTEMBER 30, 2004
The first three quarters of 2004 were marked by rising interest rates,
concerns over the situation in Iraq, the upcoming U.S. presidential
election, and low implied equity volatility. Since the beginning of 2004,
the VIX has traded in a range between 13 and 18, high yield credit spreads
have tightened from 418 basis points to 384 basis points over U.S.
Treasuries, and the Merrill Lynch US High Yield Master II Index has
returned 6.05%.
The first quarter of 2004 saw high yield credit spreads widen
slightly, while the second and third quarters saw a tightening of high
yield credit spreads. High yield new issuance for the first nine months of
the year was robust at approximately $110 billion (compared to the record
$140 billion of high yield debt that was issued in 2003). Many GED Advisors
performed well by focusing on arbitrage and shorting opportunities in the
credit markets.
On the merger and acquisition front, global merger and acquisition
volume, at over $1.3 trillion for the first three quarters, has surpassed
last year's total deal volume. The first quarter of the year witnessed
three key large deals. The second quarter saw some of the momentum from the
first quarter slow, with no very large deals announced. In addition, the
termination of a large deal in the defense sector negatively impacted a
number of GED Advisors in their risk arbitrage portfolios. The third
quarter of 2004 saw a tightening of spreads in several large deals enabling
GED Advisors to generate profits.
PERFORMANCE FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003
For the three and nine month periods ended September 30, 2003, the
Fund's net trading profit was $7,636,941 and $46,509,889, respectively.
OVERVIEW
The table below illustrates the portfolio weighting of each Investment
Fund as of September 30, 2003, as well as each Investment Fund's net return
for the three and nine month period ended September 30, 2003.
- --------------------------- -------------------- ---------------------- ------------------------
INVESTMENT FUND PORTFOLIO WEIGHT THREE MONTHS ENDED NINE MONTHS ENDED
(1) SEPTEMBER 30, 2003 SEPTEMBER 30, 2003
NET RETURN (2) NET RETURN (2)
- --------------------------- -------------------- ---------------------- ------------------------
GTT 25.85% (0.01%) 8.08%
- --------------------------- -------------------- ---------------------- ------------------------
GELS 13.82% (1.00%) 4.86%
- --------------------------- -------------------- ---------------------- ------------------------
GRV 37.72% 1.15% 5.10%
- --------------------------- -------------------- ---------------------- ------------------------
GED 22.69% 2.36% 12.90%
- --------------------------- -------------------- ---------------------- ------------------------
(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 nine months ended September 30, 2003, the Fund's
Class A Series 1 Units returned 0.47% and 6.14% net of fees and incentive
allocation.
THE INVESTMENT FUNDS
Each of the four Investment Funds' performance during the three and
nine month period ended September 30, 2003, is described in the following.
GOLDMAN SACHS GLOBAL TACTICAL TRADING, LLC
As of September 30, 2003, GTT represented approximately 25.9% of the
Fund's net assets which was generally consistent with the weighting of GTT
as part of the Fund throughout the nine months ended September 30, 2003.
GTT returned (0.01%) and 8.08%, respectively, for Class C Series 1 units
for the three and nine months ended September 30, 2003.
THREE MONTHS ENDED SEPTEMBER 30, 2003
The third quarter of 2003 was marked by the continued rally in global
equities and a sharp sell-off in global fixed income markets early in the
period. The MSCI World Index rose throughout the quarter, as the prospect
of improved economic growth increased, extending its streak of consecutive
positive months to six. The quarter began quite differently in the fixed
income markets, with the Lehman Aggregate Bond Index falling by 3.36% in
July, its worst month since December 1981, and the yield on the U.S.
Treasury's 10-year note rising by over 150 basis points from its 45-year
low in mid-June. Rising interest rates and strong equity markets, along
with reports of higher consumer spending, increased productivity, and
stronger-than-expected growth continued to suggest that the U.S. economy
was on its way to recovery. The general optimism surrounding the U.S.
economy led to the strengthening of the U.S. dollar early in the quarter.
Despite the positive outlook, however, concerns regarding the lack of job
creation and low levels of capital expenditures remained, suggesting that
the economic recovery scenario was not as strong as it appeared. This was
reflected in weakening investor sentiment, which, according to the
Conference Board's consumer confidence index, reached its lowest point in
September since the end of the war in Iraq. These factors have led many
economists and investors to believe that, in absence of inflationary
pressures, the Federal Reserve will maintain the low interest rate
environment. Globally, prospects for increased economic growth were
strongest in Japan, as both the Japanese equity markets and the Yen
strengthened substantially in the third quarter.
GTT bounced back after a difficult period in July and August to post a
strong return in September. Early in the third quarter, it suffered losses
primarily in global fixed income instruments and currencies, as the U.S.
Treasury market endured a strong sell-off beginning in mid-June, and the
U.S. dollar appreciated after a sustained decline. As the quarter
progressed, Advisors began to take advantage of the Japanese reflationary
theme, driven by signs of strength in the Japanese economy and expectations
of stronger commitment from Japanese policy makers. The majority of profits
for the quarter were attributed to this theme, with gains made specifically
in long positions in Japanese Yen, short positions in Japanese government
bonds, and long positions in equity indices in the Pacific Rim. GTT also
earned substantial profits in long positions in soy products, as well as in
base and precious metals. Losses sustained in U.S. and European interest
rates earlier in the quarter proved to be the most substantial negative
contributors to performance.
NINE MONTHS ENDED SEPTEMBER 30, 2003
Negative news regarding the economy, combined with uncertainty
surrounding the conflict in the Middle East, caused 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, these trends reversed
sharply; bonds sold off, oil prices dropped, and the dollar and equity
markets rose. The large move was fueled by general optimism about a quick
resolution of the war in Iraq. In April, equity markets continued the rally
that began in mid-March, shortly before the war in Iraq. The sustained rise
in equities, which continued throughout the third quarter, was attributed
primarily to relief about the successful outcome of the war, a rebound in
consumer sentiment, and hope for renewed corporate and consumer spending.
Performance of the fixed income markets was mixed throughout the second
quarter. Bond prices remained flat in April but rose substantially in May
on fears of U.S. deflation. This rally was then followed by a sharp
reversal in June. The sell-off in bonds continued into the third quarter,
with the Lehman Aggregate Bond Index falling by 3.36% in July, its worst
month since December 1981; U.S. 10-year Treasury note yields rose over 150
basis points from a 45-year low in mid-June. In currencies, the dollar
continued its decline until mid-June before strengthening for much of the
third quarter due to the Federal Reserve's smaller-than-expected rate cut,
concerns about the European economy, and optimism regarding a U.S. economic
recovery.
Early in the year, GTT profited in energy, currencies, and fixed
income. In energy, the majority of profits came in natural gas. Moderate
gains were also made in other areas of the energy complex--namely in crude
oil and gasoline. Gains in foreign exchange were attributed primarily to
the weakening dollar, while profits in fixed income were made largely in
Eurodollars and European and Japanese government bonds. Gains in these
areas, however, were partially offset by a sharp reversal of trends,
beginning on March 13, as Advisors gave back some of the profits they had
accumulated throughout the quarter. Following the reversal, GTT experienced
flat performance in April, followed by a very strong month in May, when
short U.S. dollar and long fixed income positions were once again
profitable. GTT experienced a reversal in mid-June, leading to a mild loss
for the month. Commodities proved difficult throughout most of the second
quarter, with losses incurred in agricultural products, metals, and energy.
The first two months of the third quarter were challenging, as a strong
sell-off in the U.S. Treasury market and the appreciation of the U.S.
dollar resulted in losses in global fixed income instruments and
currencies. Driven by signs of strength in the Japanese economy, the
majority of profits for the quarter were made in long positions in Japanese
Yen, short positions in Japanese government bonds, and long positions in
equity indices in the Pacific Rim. Commodities also proved profitable for
the quarter, with gains in long soy product positions, as well as in base
and precious metals.
GOLDMAN SACHS GLOBAL EQUITY LONG/SHORT, LLC
As of September 30, 2003, GELS represented approximately 13.8% of the
Fund's net assets which was generally consistent with the weighting of GELS
as part of the Fund throughout the nine months ended September 30, 2003.
GELS returned (1.00%) and 4.86%, respectively, for Class C Series 1 units
for the three and nine months ended September 30, 2003.
THREE MONTHS ENDED SEPTEMBER 30, 2003
Strong second quarter earnings results announced in July provided
support for equity markets early in the third quarter. However, rising
interest rates and economic reports during the period continued to send
mixed signals regarding the strength of the U.S. economy, calling into
question the degree to which the anticipated second-half recovery will
materialize.
NINE MONTHS ENDED SEPTEMBER 30, 2003
The year began with highly volatile global equity markets, due in
large measure to the uncertainty surrounding the U.S.-led Iraqi war. 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 as more
news on the war in Iraq, and its cost and longer-than-expected duration,
caused investors to take a cautious stance.
Low interest rates, a weak dollar, and reduced tax rates bolstered the
equity markets in the second quarter, as hope remained strong for an
economic recovery in the second half of the year. Market resiliency was
strong in spite of several high profile negative earnings
pre-announcements. By the end of the quarter, it became clear that both
fundamentals across many industries and market sentiment had improved
materially.
GELS Advisors benefited from the equity market rally to generate
positive returns through the end of the third quarter of 2003.
GOLDMAN SACHS GLOBAL RELATIVE VALUE, LLC
As of September 30, 2003, GRV represented approximately 37.7% of the
Fund's net assets which was generally consistent with the weighting of GRV
as part of the Fund throughout the nine months ended September 30, 2003.
GRV returned 1.15% and 5.10%, respectively, for Class C Series 1 units for
the three and nine months ended September 30, 2003.
THREE MONTHS ENDED SEPTEMBER 30, 2003
The trading environment in the third quarter of 2003 was a difficult
one for GRV Advisors, with tight credit spreads and highly volatile equity
and fixed income markets.
Fixed income arbitrage Advisors experienced one of the worst sell-offs
in interest rate products in recent history. From a trading perspective,
the market presented a very volatile environment, with numerous
opportunities to establish new trades. The most profitable Advisors were
able to sit on the sidelines during the sell-off and accumulate large
positions as security prices dislocated from each other due to the market's
chaotic behavior. As the environment cooled toward the end of the quarter,
and those dislocations began to correct themselves, the trades produced
significant profits.
Convertible bond arbitrage trading saw an increase in bond issuance,
which added much-needed supply to the market throughout the third quarter
of 2003. However, the performance boost which should have resulted from the
open issuance window in July and August was mitigated by a series of events
which caused irrational selling and reductions in valuations. Equity
volatility, which contributes positively to the valuation of the conversion
options embedded in all convertible bonds, continued its year-long decline
and compressed even further in July and August. Credit spreads stabilized
at their already tight levels, which maintained rich valuations for bonds
but failed to add incremental profits. Interest rates took a sharp turn
upwards during July, on the back of the Federal Reserve's interest rate
increase, and caught many Advisors by surprise, if they were not hedged.
Finally, concerns over increasing dividend payments by companies which had
issued convertible bonds, a negative event for bond arbitrageurs, remained
elevated during the quarter and kept valuations down. As a result, the
convertible market sold off across the board as the strategy experienced
one of the worst bear markets in its history.
Equity market neutral Advisors began the third quarter of 2003 on the
back of a difficult second quarter, during which equity markets were driven
primarily by emotion and sentiment, rather than fundamentals. This created
a difficult environment for fundamentally driven quantitative strategies,
as these strategies utilize sophisticated computer models to analyze stocks
for hidden value and growth opportunities, and are not successful in
identifying which stocks are likely to outperform in sentiment-driven
markets. However, the markets began to turn around toward the end of the
quarter, as economic growth indicators showed improvement, and investors
began to focus on stock fundamentals once again. Market-neutral strategies
finished the quarter with modest results, as Advisors' quantitative systems
successfully identified opportunities in value stocks over growth stocks.
NINE MONTHS ENDED SEPTEMBER 30, 2003
The markets saw significant volatility over the first three quarters
of 2003, as geopolitical risks and uncertainty regarding the economic
health of key global markets evoked confusion and caution on the part of
investors.
Fixed income markets experienced significant volatility, resulting in
increased investment opportunities for Advisors who were able to identify
dislocations in the relative pricing of many fixed-income securities. The
consensus among GRV Advisors was that the transition to an environment of
rising interest rates, either later in 2003 or sometime in 2004, will
present challenges but may result in trading opportunities for Advisors
skilled enough to capitalize on them.
Convertible bond arbitrage strategies saw a positive environment
during the first three quarters of 2003, primarily due to strengthening
corporate bonds. Although equity volatility continued to decline, hurting
traditional convertible trades, losses in this area were more than offset
by profitable credit opportunities. Although the period ended with a
significant and sudden sell-off in the interest rate market, GRV Advisors
avoided bond-specific issues and posted positive results for the nine-month
period.
Equity market neutral Advisors experienced a challenging trading
environment during most of the period, as their quantitative models,
designed to seek fundamentally cheap stocks based on classic valuation
metrics, were faced with markets driven primarily by sentiment. Although
investors appeared to refocus on corporate fundamentals following the war
in Iraq, equity market neutral strategies continued to be subject to
periods of emotional trading during the third quarter and ended the period
flat to modestly profitable.
GOLDMAN SACHS GLOBAL EVENT DRIVEN, LLC
As of September 30, 2003, GED represented approximately 22.7% of the
Fund's net assets which was generally consistent with the weighting of GED
as part of the Fund throughout the nine months ended September 30, 2003.
GED returned 2.36% and 12.90%, respectively, for Class C Series 1 units for
the three and nine months ended September 30, 2003.
THREE MONTHS ENDED SEPTEMBER 30, 2003
Despite being up for the third quarter of 2003, the equity markets
lost ground in the month of September. Volatility, which was stable
throughout most of the quarter, inched up in the last couple of weeks, and
the VIX ended the quarter at approximately 23%. The S&P 500 ended the
quarter up 2.65%, with the economy continuing to show mixed signs. U.S.
Treasuries were down for the quarter, pushing the benchmark 10-year
Treasury note yields up from 3.51% to 3.94% at quarter-end. The quarter was
marked by very high levels of volatility in the Treasury market, which
experienced one of its worst months in July but subsequently recovered and
showed some strength in September. During the quarter, none of the
sub-strategies experienced negative performance.
The distressed and high yield markets experienced another good
quarter. The Merrill Lynch US High Yield Master II Index was up
approximately 2.6%, primarily due to its strong performance in September.
Mutual fund capital inflows into high yield weakened significantly, as they
totaled only $300 million, compared to $9 billion of inflows in the second
quarter. Credit spreads tightened by approximately 60 basis points, to 543
basis points over U.S. Treasuries. The high yield new issuance market,
which was quiet in the middle of the quarter due to the summer cycle,
picked up momentum in the second half of September, with more than $9
billion of new deals. High yield new issuance is approximately $104 billion
year-to-date, on pace with the 1998 record of $138 billion.
In the corporate special situations area, the strong refinancing
environment led to many attractive capital structure arbitrage, litigation,
and spin-off opportunities, and GED Advisors benefited from a number of
situations which came to fruition during the third quarter. Many GED
Advisors continued to see a strong pipeline of investable events.
On the merger and acquisition front, global merger and acquisition
volume, at $945 billion, was down 9% compared to the first three quarters
of 2002. In the third quarter alone, deal activity was down 10%, to $296
billion, compared to the third quarter of 2002. The decline in merger and
acquisition activity was due primarily to lackluster U.S. activity, as
European merger and acquisition volume was flat, and Asia-Pacific activity
was up by 6% compared to 2002 levels. To that end, GED's emphasis on
building a global portfolio of risk arbitrage was proved beneficial during
this time period.
NINE MONTHS ENDED SEPTEMBER 30, 2003
The first three quarters of 2003 witnessed a strong period for equity
and credit markets. The year began with high volatility, as the market
focused on the uncertainty of the war in Iraq, as well as the state of the
economy. The S&P 500 recovered from a difficult first quarter to end the
first nine months up 14.72%, the Lehman Aggregate Bond Index was up 3.77%,
and the Merrill Lynch US High Yield Master II Index was up 20.96%. During
this nine-month period, corporate data was mixed, with earnings
announcements generally exceeding dampened expectations. The sub-strategies
experienced positive performance in this time period.
The distressed and high yield markets performed well, with high yield
spreads tightening in each of the three quarters to end at 543 basis points
over U.S. Treasuries, representing a tightening of over 300 basis points
from the beginning of the year. While the credit rally was widespread
across sectors (utilities, cable and media, financial services, air
transport) and quality, lower quality paper was the biggest beneficiary.
High yield new issuance was robust at $104 billion year-to-date, on pace
with the 1998 record of $138 billion. The outlook for the distressed sector
remains positive, as more corporations refinance their maturing debt,
delever their balance sheets, and sell off non-core assets.
Corporate special situations were active in both the US and Europe.
Debt refinancings, corporate restructurings, litigation situations, and the
impact of government regulations provided good opportunities for GED
Advisors.
On the merger and acquisition front, the year got off to a slow start
as a result of geopolitical uncertainty. As the year progressed, activity
picked up, with Europe witnessing more activity than the U.S. Global
announced deal volume stood at $945 billion for the first three quarters of
2003, a 9% decrease compared to the first three quarters of 2002.
COMPARISON OF SELECTED FINANCIAL INFORMATION FOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 2004 AND 2003
INTEREST INCOME
Interest income for the three and nine months ended September 30, 2004
was $114,412 and $490,645, respectively, compared to the three and nine
months ended September 30, 2003 of $19,873 and $97,943. The Fund's interest
income fluctuates with the level of cash available to invest.
EXPENSES
The Management Fee for the three and nine months ended September 30,
2004 was $2,918,115 and $8,986,922, respectively, compared to the three and
nine months ended September 30, 2003 of $2,892,482 and $6,671,298,
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
September 30, 2004 compared to the same periods in 2003.
Interest expense for the three and nine months ended September 30,
2004 was $121,684 and $544,094, respectively, compared to the three and
nine months ended September 30, 2003 of $0 and $0, respectively. The
interest expense relates to the borrowing facility that was not outstanding
during the periods ended September 30, 2003.
Professional fees and miscellaneous expenses for the three and nine
months ended September 30, 2004 were $585,698 and $1,601,831, respectively,
compared to the three and nine months ended September 30, 2003 of $167,792
and $793,070, respectively. The increase in professional fees and
miscellaneous expenses for the periods ended September 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 nine months ended September
30, 2004 was ($11,297) and $264,315, respectively, compared to the three
and nine months ended September 30, 2003 of $229,811 and $1,957,157,
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 a
material 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
semi-annual or quarterly basis depending on the Investment Fund, subject to
certain limitations. Since July 2003, the Fund has only taken in
investments from existing investors and limited subscriptions from new
qualified investors, however the Fund will begin accepting additional
amounts of new subscriptions starting in October 2004. The Fund may close
again at any time without notice at the sole discretion of the Managing
Member. The acceptance of future subscriptions in the Fund and the
continued growth of the Fund will be determined by the Managing Member in
its sole discretion. Although the Managing Member will begin to receive new
subscriptions to the Fund in October 2004, any liquidity requirements in
the near term may need to be funded through the redemption of existing
investments in the Investment Funds to the extent new investments are not
received in sufficient amounts to cover redemptions. 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 $11.3
million and $32.2 million during the three and nine months ended September
30, 2004 and $130.5 million and $523.4 million during the three and nine
months ended September 30, 2003.
The Fund paid out redemption proceeds of $10.5 million and $11.0
million during the three and nine months ended September 30, 2003,
respectively, and paid out redemption proceeds of $31.7 million and $66.2
million during the three and nine months ended September 30, 2004,
respectively.
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 Fund has
renewed 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
September 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 September 30, 2004, the Fund had cash and cash equivalents on
hand of $21.3 million. As of December 31, 2003, the Fund had cash and cash
equivalents on hand of $48.4 million.
Investments as of September 30, 2004 were $941.9 million as compared
to $970.9 million as of December 31, 2003. The decrease is primarily due to
net redemptions made by the Fund from the Investment Funds during the nine
month period ended September 30, 2004.
Due to managing member represents the management fees due to the
Managing Member. Due to managing member as of September 30, 2004 was $1.9
million as compared to $4.0 million as of December 31, 2003. The decrease
in due to managing member is primarily due to the timing of the payment of
the management fee to the Managing Member.
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 together with borrowings under the
borrowing facility 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 were
effective as of January 1, 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 a 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 and as further amended
on October 14, 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 September
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 September 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.
NINE MONTHS ENDED SEPTEMBER 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 22.2% $208,258,188 ($9.5) 26.7% $249,583,571 $18.6 (3)
GELS 20.5% 192,787,154 3.2 15.0% 140,117,348 15.6 (2)
GRV 33.0% 309,416,330 8.3 38.5% 359,311,989 19.4 (2)
GED 24.6% 231,397,994 13.9 23.8% 221,899,920 28.3 (1)
----------- ------------- ----------- --------- ------------- ----------
TOTAL 100.3%(4) $941,859,666 $15.9 104.0%(4) $970,912,828 $81.9
=========== ============= =========== ========== ============ ==========
____________________
(1) Effective July 2004, redemptions can be made semi-annually 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 semi-annually 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.
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 Investment Funds were 27%
GTT, 15% GELS, 39% GRV and 24% GED as of December 31, 2003 and 22% GTT, 21%
GELS, 33% GRV and 25% GED as of September 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
material modifications to initial 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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
From July 1, 2004 to September 30, 2004, aggregate subscriptions
totaled $ 11.3 million. Details of the sale of the series of Units are as
follows:
Class and Total
Series of Number of Number of Subscription
Date of Sale Units Units Sold Investors Amount
- ------------ ---------- ----------- ---------- ------------
July 1, 2004 A3 83,222 9 $8,322,174
- ----------------- ---------- ----------- ---------- ------------
August 1, 2004 A4 12,734 4 $1,273,434
- ----------------- ---------- ----------- ---------- ------------
September 1, 2004 A5 17,500 3 $1,750,000
- ----------------- ---------- ----------- ---------- ------------
Total - 113,456 16 $11,345,608
- ----------------- ---------- ----------- ---------- ------------
The Units were sold at $100.00 per Unit. The sale was not subject to
any underwriting discount or commission. The Units were privately offered
and sold to accredited investors pursuant to Rule 506 of Regulation D and
the sales were exempt from registration under the Securities Act of 1933.
Pursuant to the Fund's limited liability company agreement, holders of
Units may redeem their Units upon 60 days' prior written notice to the
Managing Member (unless such notice is waived by the Managing Member in its
sole discretion), on each January 1 or July 1 occurring on or after the
first anniversary of the purchase of such Units by the holder (each a
"Redemption Date"). Units of a particular series will be redeemed at a per
Unit price based upon the NAV of such series as of the close of business on
the day immediately preceding the Redemption Date (taking into account the
allocation of any net appreciation or depreciation in the net assets of the
Fund for the accounting period then ending), after reduction for any
Management Fee and Incentive Allocation and other liabilities of the Fund
to the extent accrued or otherwise attributable to the Units being
redeemed.
The following table summarizes the redemptions by holders of Units
during the three months ended September 30, 2004:
--------------- ---------------- -------------
PERIOD TOTAL NUMBER NAV PER UNIT
OF UNITS
REDEEMED (1)
--------------- ---------------- -------------
July 1, 2004 276,457 114.58
-------------- ---------------- -------------
Total 276,457 -
--------------- ---------------- -------------
(1) Class A Series 1 Units.
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 Form 10. The Fund or the Managing Member do 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
(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
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: November 15, 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