UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------------
FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
State or Other Jurisdiction of 04-3638229
Incorporation or Organization) (I.R.S. Employer Identification No.)
701 MOUNT LUCAS ROAD
PRINCETON, NEW JERSEY 08540
(Address of Principal Executive Offices) (Zip Code)
(609) 497-5500
(Registrant's Telephone Number, including Area Code)
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Securities registered pursuant to Section 12(b) of the Act: None
Name of each exchange
---------------------
Title of each class on which registered
------------------- -------------------
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Liability Company Interests
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 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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The Registrant's Units of Limited Liability Company Interests are not
traded on any market and, accordingly, have no aggregate market value. The
net asset value of the Units of Limited Liability Company Interests as of
June 30, 2004 held by non-affiliates was $855,015,131.
DOCUMENTS INCORPORATED BY REFERENCE
Certain exhibits are incorporated by reference in Item 15 of this report
TABLE OF CONTENTS Page
PART I
ITEM 1. BUSINESS.........................................................2
PERFORMANCE OF THE COMPANY.......................................6
CERTAIN RISK FACTORS............................................40
ITEM 2. PROPERTIES......................................................69
ITEM 3. LEGAL PROCEEDINGS...............................................69
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............69
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES..................................69
ITEM 6. SELECTED FINANCIAL DATA.........................................71
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................72
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......87
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................90
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................91
ITEM 9A. CONTROLS AND PROCEDURES.........................................91
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE MANAGING MEMBER AND
REGISTRANT......................................................91
ITEM 11. EXECUTIVE COMPENSATION..........................................94
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT......................................................96
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................96
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES..........................99
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES......................99
PART I
ITEM 1. BUSINESS
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
Goldman Sachs Hedge Fund Partners, LLC (the "Company") is a Delaware
limited liability company organized in March 2002 to operate as an
investment fund. Goldman Sachs Hedge Fund Strategies LLC ("GS HFS")
(formerly Goldman Sachs Princeton LLC), a Delaware limited liability
company, serves as the Company's managing member (the "Managing Member").
As of December 31, 2004, the Company had approximately $960.3 million net
assets under management.
From its inception in April 2002 through July 2003, the Company grew
through subscriptions of new investors. The Company believes its growth
during this period follows with the general national trend of significant
inflows achieved by other hedge funds during this period. From April 1,
2002 through July 1, 2003, the Company received approximately 834 new
investors averaging over 50 new investors a month and had a maximum of 104
new investors subscribing to the Company in July 2003. Moreover, during
that period, total subscriptions in the Company exceeded $880 million and
averaged over $55 million per month with approximately $121.8 million being
invested in July 2003. During this period the Company had at least 30 new
investors each month and at least $24.5 million invested every month. The
numbers of investors that came into the Company during this period does not
represent the number of investors in the Company today due to redemptions
made by investors during the same period. From July 2003 through September
2004, the Company only took in investments from existing investors and
limited subscriptions from new qualified investors; however, starting in
October 2004, the Company began accepting additional amounts of new
subscriptions again and the Company continued to do so through December 31,
2004. For the period from October 1, 2004 through December 31, 2004, the
Company had 96 new investors and $94,175,000 of aggregate subscriptions
from existing and new investors. The Company may close again at any time
without notice at the sole discretion of the Managing Member. The
acceptance of future subscriptions in the Company and the continued growth
of the Company will be determined by the Managing Member in its sole
discretion.
INVESTMENT PROGRAM
INVESTMENT OBJECTIVE AND APPROACH
The Company's investment objective is to target attractive long-term
risk-adjusted returns across a variety of market environments with lower
volatility than, and minimal correlation to, the broad equity markets. To
achieve this objective, the Company allocates all or substantially all of
its assets among privately placed investment funds (such funds and any
successor funds thereto, individually, an "Investment Fund" and
collectively 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 Company's assets are invested in four
Investment Funds, each of which is managed by the Managing Member. The
existing Investment Funds are 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"). The assets of each Investment Fund are allocated to
Advisors, directly or indirectly, pursuant to discretionary investment
management agreements or, in the discretion of the Investment Fund's
managing member (currently, in each case, the Managing Member), by means of
investments in funds managed by Advisors ("Advisor Funds"). (References
herein to Advisors include Advisor Funds where the context permits). One or
more of the Investment Funds have in the past and may from time to time not
accept additional subscriptions or limit the amount of additional
subscriptions from third parties because certain of the Advisors with which
they invest are no longer accepting additional investments. Under such
circumstances, the Managing Member does not expect to allow additional
investors to subscribe for units in the Company except as a result of
redemptions in the Company. However, even if the Investment Funds are
closed generally, the Investment Funds may accept additional investments
from the Company for rebalancing or other purposes. As of December 31,
2004, the Company's proportionate share of each individual investment in an
Advisor owned, directly or indirectly, by any individual Investment Fund
did not exceed 5% of the Company's equity.
Each of the existing Investment Funds is a Delaware limited liability
company. A brief description of the investment objective and approach of
each of the existing Investment Funds is set forth under "--Description of
the Investment Funds and the Performance of the Investment Funds" below in
this Item.
The hedge fund sectors referenced herein are subjective
classifications made by the managing member of an Investment Fund in its
sole discretion. Such classifications are based on information provided by
the Advisors to the managing member of the relevant Investment Fund and may
differ from classifications of similarly named sectors made by other
industry participants. In addition, although each Advisor to which an
Investment Fund allocates assets invests principally utilizing investment
strategies within such Investment Fund's hedge fund sector, certain
Advisors to which an Investment Fund allocates assets may also utilize
other investment strategies that are either related or unrelated to such
hedge fund sector.
There can be no assurance that the Company or any of the Investment
Funds will achieve its investment objective or that the portfolio design,
risk monitoring and hedging strategies of the Company or any of the
Investment Funds will be successful. See "CERTAIN RISK FACTORS."
The Company may hold cash or invest the Company's cash balances at
such times and in any instruments it deems appropriate, including cash
equivalents and other short term securities, pending investment in
Investment Funds, in order to fund anticipated redemptions or expenses of
the Company, or otherwise in the sole discretion of the Managing Member.
Such balances may also be invested in money market funds sponsored by The
Goldman Sachs Group, Inc. or its affiliates, including Goldman, Sachs & Co.
("Goldman Sachs") (collectively referred to herein, together with their
affiliates, directors, partners, trustees, managers, members, officers and
employees, as the "GS Group") and the Company will not be reimbursed for
any fees accruing to any affiliate of the GS Group in respect of any such
investment. The Company generally reinvests any available income earned
from investments of its cash balances in accordance with its investment
program. The Investment Funds are also permitted to hold cash or invest
their cash balances in the same manner.
ALLOCATION AMONG THE INVESTMENT FUNDS
The Managing Member may allocate the Company's assets across the four
hedge fund sectors in a manner consistent with the Company's objective of
targeting attractive long-term risk-adjusted returns. In order to determine
such allocation, the Managing Member periodically establishes a model
allocation among the four hedge fund sectors. In order to accomplish this,
the Managing Member estimates the long-term risk, return and correlation
expectations of each of the Investment Funds. For these purposes, risk is
measured by volatility, and volatility is determined utilizing various
models chosen by the Managing Member. The Managing Member utilizes this
model allocation as a benchmark and will either allocate the Company's
assets among the Investment Funds in a manner roughly consistent with such
benchmark or, in its sole discretion, will make tactical allocations to one
or more Investment Funds, which could result in an overweighting or
underweighting to one or more of the hedge fund sectors on a risk adjusted
basis. Through June 30, 2004, the Managing Member allocated on an equal
risk adjusted basis among the Investment Funds. As of July 1, 2004, the
Managing Member implemented an adjustment to weights, reflecting the
Managing Member's updated expectations for return, risk and correlations
for the Investment Funds. The Managing Member periodically re-evaluates the
contribution to the risk and return of the Company from each investment
sector and may in its sole discretion re-allocate the Company's assets or
weights of the investment sector as it deems advisable. Reallocation may be
considered due to such factors as are deemed relevant by the Managing
Member, which may include change in return, risk and correlation
expectations, changes in market conditions, differences in relative
performance among the Investment Funds, changes in the amount of the
Company's leverage and the addition or elimination of Investment Funds. Due
to the restrictions on redemptions and additional subscriptions imposed by
the Investment Funds and the Advisors and other factors, the Managing
Member may not always be able to re-allocate the Company's assets at the
time and in the manner that it would otherwise seek to do. See "CERTAIN
RISK FACTORS--GENERAL RISKS--Risks Related to the Company and the
Investment Funds' Performance and Operation--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 Company's Investment Objective"
and "--SPECIAL RISKS OF THE COMPANY'S STRUCTURE--Risks Associated with the
Company Investing in Other Entities--Advisors may have Limited Capacity to
Manage Additional Investment Fund Investments." The models used to measure
risk, and the methodologies utilized to allocate the assets of the Company
among the Investment Funds, may be changed or modified by the Managing
Member at any time without notice or approval of investors in its sole
discretion.
As of December 31, 2004, 2003 and 2002, respectively, the members'
equity of the Company was allocated among the Investment Funds
approximately as described in the tables below. Members' equity, or net
assets, means the total assets of the Company less total liabilities of the
Company at the time of determination in accordance with U.S. generally
accepted accounting principles ("GAAP"). Total assets means the sum of the
Company's cash and cash equivalents, other assets and investments
determined at any time in accordance with GAAP as of that date. The figures
represent actual allocations of the Company's members' equity and not the
allocation of the expected risk of the Company among the Investment Funds.
The allocations of the Company's members' equity will change from time to
time in accordance with the Company's investment objective and strategies.
In addition, the tables below also provide the approximate allocation among
the Investment Funds of the adjusted members' equity as of December 31,
2004 and 2003. The adjusted members' equity excludes Redemptions payable of
$128,546,636 payable after December 31, 2004 and $34,529,625 which was
payable after December 31, 2003. The Managing Member made a strategic
reallocation among the Investment Funds as of July 1, 2004. The adjustment
to the weights implemented as of July 1, 2004 reflected the Managing
Member's updated expectations for return, risk and correlations for the
Investment Funds. The Company's investments are carried at fair value as
determined by the Company's attributable share of the net assets of the
respective Investment Fund. Fair values are determined utilizing
information supplied by each individual Investment Fund net of each
Advisor's management and incentive fee and are not a guarantee of actual
realizable amounts. See "CERTAIN RISK FACTORS--SPECIAL RISKS OF THE
COMPANY'S STRUCTURE--Risks Related to the Company's Structure--The
Company's Financial Statements are, and in the Future will be, Based on
Estimates of Valuations Provided by Third Party Advisors Which May not be
Accurate or May Need to be Adjusted in the Future," "--Risks Associated
with the Company Investing in Other Entities--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 Company's Net Assets" and ITEM 7.
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Critical Accounting Policies and Estimates."
DECEMBER 31, 2004
- -----------------------------------------------------------------------------------------------------------
FAIR VALUE OF COMPANY'S FAIR VALUE OF COMPANY'S
FAIR VALUE OF COMPANY'S INVESTMENT AS A % OF INVESTMENT AS A % OF
INVESTMENT FUND INVESTMENT IN $ AMOUNT MEMBERS' EQUITY (1) ADJUSTED MEMBERS' EQUITY(2)
- --------------------------- --------------------------- ------------------------ --------------------------
GTT $248,081,137 25.91% 22.84%
- --------------------------- --------------------------- ------------------------ --------------------------
GELS $226,276,134 23.63% 20.84%
- --------------------------- --------------------------- ------------------------ --------------------------
GRV $350,409,379 36.60% 32.27%
- --------------------------- --------------------------- ------------------------ --------------------------
GED $268,186,702 28.01% 24.69%
- --------------------------- --------------------------- ------------------------ --------------------------
Total $1,092,953,352 114.15%(3) 100.64%(3)
- --------------------------- --------------------------- ------------------------ --------------------------
(1) Members' equity, used in the calculation of the investments as a
% of members' equity, is reduced for member redemptions that are
paid after the balance sheet date.
(2) Adjusted members' equity, used in the calculation of the
investments as a percentage of adjusted members' equity,
represents members' equity excluding Redemptions payable in the
amount of $128,546,636 that are payable after December 31, 2004.
(3) The total value of the Company's investments in the Investment
Funds exceeded 100% of members' equity and adjusted members'
equity, respectively, because members' equity and adjusted
members' equity both reflected certain accrued liabilities of the
Company, including fees and expenses, and, in addition, members'
equity also reflected redemptions payable after December 31,
2004.
DECEMBER 31, 2003
---------------------------- --------------------------- ------------------------ ---------------------------
FAIR VALUE OF FAIR VALUE OF FAIR VALUE OF
COMPANY'S COMPANY'S COMPANY'S INVESTMENT
INVESTMENT IN $ INVESTMENT AS A % OF AS A % OF ADJUSTED
INVESTMENT FUND AMOUNT MEMBERS'EQUITY(1) MEMBERS' EQUITY(2)
---------------------------- --------------------------- ------------------------ ---------------------------
GTT $249,583,571 26.74% 25.79%
---------------------------- --------------------------- ------------------------ ---------------------------
GELS $140,117,348 15.01% 14.48%
---------------------------- --------------------------- ------------------------ ---------------------------
GRV $359,311,989 38.50% 37.12%
---------------------------- --------------------------- ------------------------ ---------------------------
GED $221,899,920 23.78% 22.93%
---------------------------- --------------------------- ------------------------ ---------------------------
Total $970,912,828 104.03%(3) 100.32%(3)
--------------------------- --------------------------- ------------------------ ---------------------------
(1) Members' equity, used in the calculation of the investments as a
% of members' equity, is reduced for member redemptions that are
paid after the balance sheet date.
(2) Adjusted members' equity, used in the calculation of the
investments as a percentage of adjusted members' equity,
represents members' equity excluding Redemptions payable in the
amount of $34,529,625 that were payable after December 31, 2003.
(3) The total value of the Company's investments in the Investment
Funds exceeded 100% of members' equity and adjusted members'
equity, respectively, because members' equity and adjusted
members' equity both reflected certain accrued liabilities of the
Company, including fees and expenses, and, in addition, members'
equity also reflected redemptions payable after December 31,
2003.
DECEMBER 31, 2002
--------------------------- -------------------------- ---------------------------
FAIR VALUE OF COMPANY'S
FAIR VALUE OF COMPANY'S INVESTMENT AS A % OF
INVESTMENT FUND INVESTMENT IN $ AMOUNT MEMBERS' EQUITY
--------------------------- ------------------------ ---------------------------
GTT $98,921,553 25.81%
--------------------------- ------------------------ ---------------------------
GELS $53,355,947 13.92%
--------------------------- ------------------------ ---------------------------
GRV $146,920,415 38.34%
--------------------------- ------------------------ ---------------------------
GED $84,386,691 22.02%
--------------------------- ------------------------ ---------------------------
Total $383,584,606 100.09% (1)
--------------------------- ------------------------ ---------------------------
(1) The total value of the Company's investments in the Investment
Funds exceeded 100% of the Company's members' equity, because the
Company's members' equity reflected certain accrued liabilities
of the Company, including fees and expenses.
PERFORMANCE OF THE COMPANY
For the years ended December 31, 2004, December 31, 2003 and for the
period from commencement of operations on April 1, 2002 until December 31,
2002, the Company had net returns as described in the tables below. Past
performance of the Company is not indicative of future results which may
vary. The Company's net return has been computed based on the performance
of the Company net of all fees and expenses including, among others (i)
incentive allocations to the Managing Member and (ii) a monthly management
fee to the Managing Member. See "FEES AND EXPENSES."
JANUARY 1, 2004 - DECEMBER 31, 2004
-------------------------------- --------------------------- ----------------------------
MONTH OF ISSUANCE OF NET RETURN FOR PERIOD
SERIES OF UNITS(1) UNITS OUTSTANDING(2)
-------------------------------- --------------------------- ----------------------------
Class A Series 1 January 5.53%
-------------------------------- --------------------------- ----------------------------
Class A Series 2 February 4.48%
-------------------------------- --------------------------- ----------------------------
Class A Series 3 July 4.95%
-------------------------------- --------------------------- ----------------------------
Class A Series 4 August 5.73%
-------------------------------- --------------------------- ----------------------------
Class A Series 5 September 5.72%
-------------------------------- --------------------------- ----------------------------
Class A Series 6 October 4.98%
-------------------------------- --------------------------- ----------------------------
Class A Series 7 November 4.01%
-------------------------------- --------------------------- ----------------------------
Class A Series 8 December 1.12%
-------------------------------- --------------------------- ----------------------------
(1) As of December 31, 2004, the Company had 8 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.
(2) The net return is shown for the month of issuance through
December 31, 2004.
JANUARY 1, 2003 - DECEMBER 31, 2003
-------------------------------- --------------------------- ----------------------------
MONTH OF ISSUANCE OF NET RETURN FOR PERIOD
SERIES OF UNITS(1) UNITS OUTSTANDING(2)
-------------------------------- --------------------------- ----------------------------
Class A Series 1 January 9.60%
-------------------------------- --------------------------- ----------------------------
Class A Series 2 February 7.98%
-------------------------------- --------------------------- ----------------------------
Class A Series 3 March 6.87%
-------------------------------- --------------------------- ----------------------------
Class A Series 4 April 7.65%
-------------------------------- --------------------------- ----------------------------
Class A Series 5 May 6.59%
-------------------------------- --------------------------- ----------------------------
Class A Series 6 June 3.77%
-------------------------------- --------------------------- ----------------------------
Class A Series 7 July 3.74%
-------------------------------- --------------------------- ----------------------------
Class A Series 8 August 4.64%
-------------------------------- --------------------------- ----------------------------
Class A Series 9 November 1.65%
-------------------------------- --------------------------- ----------------------------
Class A Series 10 December 1.35%
-------------------------------- --------------------------- ----------------------------
(1) As of December 31, 2003, the Company had 10 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. Class A Series
(other than Class A Series 1) issued in future periods
represent issuances of new series and are different from
those series collapsed effective January 1, 2004.
(2) The net return is shown for the month of issuance through
December 31, 2003.
APRIL 1, 2002 - DECEMBER 31, 2002
-------------------------------- --------------------------- ----------------------------
MONTH OF ISSUANCE OF NET RETURN FOR PERIOD
SERIES OF UNITS(1) UNITS OUTSTANDING(2)
-------------------------------- --------------------------- ----------------------------
Class A Series 1 April 3.97%
-------------------------------- --------------------------- ----------------------------
Class A Series 2 May 3.88%
-------------------------------- --------------------------- ----------------------------
Class A Series 3 June 3.19%
-------------------------------- --------------------------- ----------------------------
Class A Series 4 July 2.33%
-------------------------------- --------------------------- ----------------------------
Class A Series 5 August 2.52%
-------------------------------- --------------------------- ----------------------------
Class A Series 6 September 1.51%
-------------------------------- --------------------------- ----------------------------
Class A Series 7 October 0.75%
-------------------------------- --------------------------- ----------------------------
Class A Series 8 November 1.77%
-------------------------------- --------------------------- ----------------------------
Class A Series 9 December 2.34%
-------------------------------- --------------------------- ----------------------------
(1) As of December 31, 2002, the Company had 9 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, 2003, Class
A Series 2 through Class A Series 9 units were collapsed
into Class A Series 1 units. Class A Series (other than
Class A Series 1) issued in future periods represent
issuances of new series and are different from those series
collapsed effective January 1, 2003.
(2) The net return is shown for the month of issuance through
December 31, 2002.
The Company only has one class of shares at present, Class A. The
Class A Series Units are subject to a management fee and an incentive
allocation. Separately, the Investment Funds (GTT, GELS, GRV and GED) each
offer separate classes of shares. Among the classes of shares offered by
the Investment Funds, each has offered Class C Series units which are not
subject to management fees and incentive allocations at an Investment Fund
level (although management fees and incentive allocations are paid to each
of the Advisors in which the Investment Funds invest). The Company only
owns Class C Series of the Investment Funds. The intent behind this fee
arrangement was to create a fee structure such that holders of Class A
Series Units of the Company are not - in addition to management and
incentive allocations paid to the Company (as well as management and
incentive allocations paid to individual Advisors) - also subject to
management fees and incentive allocations paid by each of the Investment
Funds. Therefore, holders of a fee bearing class of the Company indirectly
own "no-fee-shares" of the Investment Funds. Through its investment in the
Investment Funds, the Company bears a pro rata portion of all other
offering, organizational and operating expenses of the Investment Funds,
including the administration fee for the Managing Member's services as
administrator of each Investment Fund, and a pro rata portion of the
Advisor compensation paid by the Investment Funds. Returns in the tables
above are shown net of these expenses. See "FEES AND EXPENSES."
The table below compares the historical cumulative total net return of
the Company's Units for the investment periods indicated in the table with
the 3 Month LIBOR rate, the Lehman Brothers Aggregate Index, the MSCI World
Index and the S&P 500 Index. 3 Month LIBOR rate, the Lehman Brothers
Aggregate Index, the MSCI World Index and the S&P 500 Index are commonly
used as comparative indices by hedge fund investors. The Managing Member
does not manage the Company in respect of any particular index. References
to market or composite indices, benchmarks or other measures of relative
market performance over a specified period of time (referred to herein as
an index or collectively as indices) are provided for information only.
Reference to these indices does not imply that the portfolio will achieve
returns, volatility or other results similar to the indices. The
composition of an index may not reflect the manner in which a portfolio is
constructed in relation to expected or achieved returns, portfolio
guidelines, restrictions, sectors, correlations, concentrations, volatility
or tracking error targets, all of which are subject to change over time.
These indices are unmanaged and the figures for an index reflect the
reinvestment of dividends but do not reflect the deduction of any fees or
expenses which would reduce returns. The holders of Units of the Company
(each referred to as a "Member" and collectively the "Members") cannot
invest directly in indices.
------------------------ ------------ ------------ -------------- ------------- -------------
LEHMAN
BROTHERS
3 MONTH AGGREGATE MSCI WORLD S&P 500
INVESTMENT PERIOD COMPANY (1) LIBOR INDEX INDEX INDEX
------------------------ ------------ ------------ -------------- ------------- -------------
1/1/2004 - 12/31/2004 5.53% 1.48% 4.34% 14.72% 10.88%
------------------------ ------------ ------------ -------------- ------------- -------------
1/1/2003 - 12/31/2003 9.60% 1.23% 4.11% 33.11% 28.68%
------------------------ ------------ ------------ -------------- ------------- -------------
4/1/2002 - 12/31/2002 3.97% 1.42% 10.16% (20.16)% (22.31)%
------------------------ ------------ ------------ -------------- ------------- -------------
(1) Company returns shown are the net returns for Class A Series 1
for each of the investment periods shown. See above for the
Company's net returns for Class A Series 2-8, Class A Series 2-10
and Class A Series 2-9 for 2004, 2003 and 2002, respectively.
DESCRIPTION OF THE INVESTMENT FUNDS AND THE PERFORMANCE OF THE INVESTMENT
FUNDS
The annual net returns shown for each Investment Fund in the tables
below have been computed based on the performance of the respective
Investment Fund net of all expenses allocated by each Investment Fund to
the Company for periods shown following the commencement of the Company.
Past performance of the Investment Funds is not indicative of future
results which may vary significantly. The Company owns "no-fee-shares" in
each Investment Fund and accordingly the Company was not charged any
incentive allocation or management fee by the Managing Member in its
capacity as managing member of each of the Investment Funds. See "FEES AND
EXPENSES."
GOLDMAN SACHS GLOBAL TACTICAL TRADING, LLC
GTT's investment objective is to target attractive 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 futures and
currencies globally, generally using systematic or discretionary approaches
based on identified trends. In formulating these strategies, GTT's Advisors
generally use quantitative models or discretionary inputs to speculate on
the direction of individual markets or subsectors of markets. Discretionary
inputs may include macroeconomic and fundamental data (such as inflation
estimates and supply/demand characteristics of individual markets) and
technical data (such as market price patterns, market volatility estimates,
and trading volume statistics). Global macro strategies generally utilize
analysis of macroeconomic and financial conditions to develop views on
country, regional or broader economic themes and then seek to capitalize on
such views. Other strategies may be employed as well. The Advisors
generally invest GTT's assets in a diversified portfolio composed primarily
of futures contracts, forward contracts, physical commodities, options on
futures and on physical commodities and other derivative contracts on
foreign currencies, interest rates, financial instruments, stock indexes
and other financial market indexes, metals, grains and agricultural
products, petroleum and petroleum products, livestock and meats, oil seeds,
tropical products and softs (such as sugar, cocoa, coffee and cotton). GTT
Advisors also engage in the speculative trading of securities, including,
but not limited to, equity and debt securities (including, without
limitation, high yield securities and emerging market securities), and
other securities. Those GTT Advisors that trade securities may do so on a
cash basis or using options or other derivative instruments. Certain
Advisors may utilize other investment media, such as swaps and other
similar instruments and transactions. All speculative trading on behalf of
GTT is conducted at the direction of the Advisors. The GTT Advisors
generally trade on behalf of GTT on commodities and securities exchanges
worldwide as well as in the interbank foreign currency forward market and
various other over-the-counter markets. GTT allocates its assets pursuant
to discretionary investment advisory agreements and through investments in
Advisor Funds.
As of December 31, 2004, GTT's managing member (currently, the
Managing Member) had allocated GTT's assets, directly or indirectly, to 23
Advisors, although this number may change materially over time as
determined by GTT's managing member. GTT's managing member generally does
not allocate more than 25% of GTT's total assets to any single GTT Advisor
at the time of allocation. GTT is a successor fund to The Directors Fund
Limited Partnership which commenced its operations in 1986. Effective
January 2, 2002, pursuant to the Delaware Revised Uniform Partnership Act
and the Delaware Limited Liability Company Act, GTT was converted from a
Delaware limited partnership to a Delaware limited liability company at
which time its name was changed from The Directors Fund Limited Partnership
to Goldman Sachs Global Tactical Trading, LLC. GTT was converted from a
limited partnership to a limited liability company in order to bring GTT in
line with the Managing Member's other funds with similar investment
programs, which are organized as limited liability companies.
GS Group owned approximately 7% of GTT as of December 31, 2004,
exclusive of any direct or indirect ownership of GTT by or through the
Company.
For the past five years from January 1, 2000 to December 31, 2004, GTT
had net returns on invested assets as described in the table below.
--------------------------------- ------------------------------------
INVESTMENT PERIOD NET RETURN FOR PERIOD
--------------------------------- ------------------------------------
1/1/2004 - 12/31/2004(1) 3.88%
--------------------------------- ------------------------------------
1/1/2003 - 12/31/2003(1) 11.61%
--------------------------------- ------------------------------------
1/1/2002 - 12/31/2002(2) 10.99%
--------------------------------- ------------------------------------
1/1/2001 - 12/31/2001(3) 9.25%
--------------------------------- ------------------------------------
1/1/2000 - 12/31/2000(3) 1.18%
--------------------------------- ------------------------------------
(1) Net return is based on the performance of Class C Series 1 units.
Class C Series 1 units ("no-fee-shares") of GTT (including those
issued to the Company) are not subject to management fees or
incentive allocations paid or made to GS HFS as managing member
of GTT and therefore returns do not reflect the payment of any
such fees or the making of any allocations to GS HFS. In
addition, returns for Class C Series 1 units during the entire
period reflect returns net of the compensation paid to Advisors.
The returns shown are also net of the payment of an
administration fee to GS HFS by GTT.
(2) Annual net return is based on the performance of Class A Series 1
units (for the period from January 1, 2002 to March 31, 2002) and
Class C Series 1 (for the period from the commencement of the
Company's operations on April 1, 2002 to December 31, 2002).
Class A Series 1 units of GTT are subject to a 1.25% management
fee and a 5% incentive allocation paid or made to GS HFS as
managing member of GTT. The returns shown, to the extent they
reflect Class A Series 1 units, are net of the management fee and
the incentive allocation paid by GTT to GS HFS as managing member
of GTT. The Company did not invest in Class A Series 1 units of
GTT. Class C Series 1 units ("no-fee-shares") of GTT (including
those issued to the Company) are not subject to management fees
or incentive allocations paid or made to GS HFS as managing
member of GTT and therefore returns, to the extent they reflect
Class C Series 1 units, do not reflect the payment of any such
fees or the making of any allocations to GS HFS. In addition,
returns for Class A Series 1 units and Class C Series 1 units
during the entire period reflect returns net of the compensation
paid to Advisors. The returns shown are also net of the payment
of an administration fee to GS HFS by GTT. Returns for the Class
A Series 1 units are shown for periods prior to the Company's
commencement of operations on April 1, 2002 since GTT did not
have no-fee-shares outstanding during such periods.
(3) Annual net return is based on the performance of Class B Series 1
units and is net of a 3% management fee and a 25% incentive
allocation paid or made to GS HFS as managing member of GTT. GTT
did not bear any additional Advisor compensation expenses during
this period because such expenses were paid by GS HFS, and
therefore returns do not reflect any additional fees paid to
Advisors. The Company did not invest in Class B Series 1 units of
GTT. Effective January 1, 2002, the Class B Series 1 units were
converted to Class A Series 1 units.
GOLDMAN SACHS GLOBAL EQUITY LONG/SHORT, LLC
GELS' investment objective is to target attractive risk-adjusted
returns with volatility lower than the broad equity markets, primarily
through long and short investment opportunities in the global equity
markets. As of December 31, 2004, GELS' managing member (currently, the
Managing Member) had allocated GELS' assets, directly or indirectly, to 27
Advisors, although this number may change materially over time as
determined by GELS' managing member. GELS' Advisors' strategies generally
involve making long and short equity investments, often based on the
Advisor's assessment of fundamental value compared to market price. It is
anticipated that GELS' Advisors will employ a wide range of styles. For
example, the GELS Advisors may (i) focus on companies within specific
industries; (ii) focus on companies only in certain countries or regions;
(iii) focus on companies with specified levels of market capitalization; or
(iv) employ a more diversified approach, allocating assets to opportunities
across investing styles, industry sectors and geographic regions. Other
strategies may be employed as well. GELS' managing member generally does
not allocate more than 25% of GELS' total assets to any single Advisor at
the time of allocation. GELS was organized on July 1, 2001 and commenced
its operations on August 1, 2001.
GS Group owned approximately 3% of GELS as of December 31, 2004,
exclusive of any direct or indirect ownership of GELS by or through the
Company.
Since GELS commenced its operations on August 1, 2001 until December
31, 2004, it had net returns on invested assets as described in the table
below.
------------------------------ -------------------------------
INVESTMENT PERIOD NET RETURN FOR PERIOD
------------------------------ -------------------------------
1/1/2004 - 12/31/2004(1) 9.27%
------------------------------ -------------------------------
1/1/2003 - 12/31/2003(1) 13.73%
------------------------------ -------------------------------
1/1/2002 - 12/31/2002(2) 0.02%
------------------------------ -------------------------------
8/1/2001 - 12/31/2001(3) 1.58%
------------------------------ -------------------------------
(1) Net return is based on the performance of Class C Series 1 units.
Class C Series 1 units ("no-fee-shares") of GELS (including those
issued to the Company) are not subject to management fees or
incentive allocations paid or made to GS HFS as managing member
of GELS and therefore returns do not reflect the payment of any
such fees or the making of any allocations to GS HFS. In
addition, returns for Class C Series 1 units during the entire
period reflect returns net of the compensation paid to Advisors.
The returns shown are also net of the payment of an
administration fee to GS HFS by GELS.
(2) Annual net return is based on the performance of Class A Series 1
units (for the period from January 1, 2002 to March 31, 2002) and
Class C Series 1 (for the period from the commencement of the
Company's operations on April 1, 2002 to December 31, 2002).
Class A Series 1 units of GELS are subject to a 1.25% management
fee and a 5% incentive allocation by GS HFS as managing member of
GELS. The returns shown, to the extent they reflect Class A
Series 1 units, are net of the management fee and the incentive
allocation paid by GELS to GS HFS as managing member of GELS.
Class C Series 1 units ("no-fee-shares") of GELS (including those
issued to the Company) are not subject to management fees or
incentive allocations paid or made to GS HFS as managing member
of GELS and therefore returns, to the extent they reflect Class C
Series 1 units, do not reflect the payment of any such fees or
the making of any allocations to GS HFS. In addition, returns for
Class A Series 1 units and Class C Series 1 units during the
entire period reflect returns net of the compensation paid to
Advisors. The returns shown are also net of the payment of an
administration fee to GS HFS by GELS. Returns for the Class A
Series 1 units are shown for periods prior to the Company's
commencement of operations on April 1, 2002 since GELS did not
have no-fee-shares outstanding during such periods.
(3) Annual net return is based on the performance of Class A Series 1
units. Class A Series 1 units of GELS are subject to a 1.25%
management fee and a 5% incentive allocation paid or made to GS
HFS as managing member of GELS. The returns shown are net of the
management fee and the incentive allocation paid by GELS to GS
HFS as managing member of GELS. The Company did not invest in
Class A Series 1 units of GELS. The returns shown are also net of
the payment of an administration fee to GS HFS by GELS.
GOLDMAN SACHS GLOBAL RELATIVE VALUE, LLC
GRV's investment objective is to target attractive risk-adjusted
absolute returns with volatility and correlation lower than the broad
equity markets by allocating assets to Advisors that operate primarily in
the global relative value sector. As of December 31, 2004, GRV's managing
member (currently, the Managing Member) had allocated GRV's assets,
directly or indirectly, to 29 Advisors, although this number may change
materially over time as determined by GRV's managing member. GRV's managing
member generally does not allocate more than 25% of GRV's total assets to
any single Advisor at the time of allocation. 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 exposures are generally held to a
minimum or completely hedged. Strategies that may be utilized in the
relative value sector include convertible arbitrage, equity arbitrage, and
fixed-income arbitrage, each of which is described in greater detail below.
Other strategies may be employed as well.
Convertible Arbitrage
Convertible bond arbitrage strategies consist of buying convertible
bonds and shorting an appropriate number of shares of the issuer's common
stock. The stock short sale is intended to hedge the stock price risk
arising from the equity conversion feature of the convertible bond. Due to
the bond features of convertibles, credit and interest rate risk may also
be hedged.
Credit Relative Value
Credit relative value encompasses strategies that take long and short
positions in corporate bonds or their derivatives to capture misvaluations
between single issues as well as between portfolios or indices and their
underlying constituents. Strategies may also involve a capital structure
component to capture mispricings between equity and corporate debt.
Strategies are driven by both qualitative fundamental analysis and
quantitative considerations. Portfolios are constructed to ensure that the
directional exposure to credit spreads is minimal.
Equity Arbitrage
Equity arbitrage strategies try to avoid market direction influences
and seek to generate returns primarily from stock selection. Advisors
construct long and short baskets of equity securities they determine to be
mispriced relative to each other, typically with similar characteristics.
Portfolios are generally designed to exhibit zero or low beta to equity
markets. Beta measures the degree to which an asset's price changes when a
reference asset's price changes. For example, a beta greater than one
suggests that for every 1% change in the reference asset's price, the asset
will move greater than 1%.
Fixed Income Arbitrage
Fixed-income arbitrage strategies seek to exploit pricing anomalies
that might exist across fixed-income securities and their related
derivatives. Although some fixed-income strategies are based on
macroeconomic considerations, the strategies are primarily quantitative in
nature, and financial modeling is an integral component. Opportunities in
fixed-income instruments or baskets of securities are found when securities
deviate from historical relationships or fair value as determined by the
Advisor. These relationships can be temporarily distorted by exogenous
shocks to fixed-income supply and demand or by structural changes in the
fixed-income market. Markets covered are predominantly G10 and developed
countries, although some specialists employ similar techniques in
developing country fixed-income markets.
Multi-Strategy
Multi-strategy Advisors invest across a range of strategies. GRV's
Advisors tend to be more opportunistic in targeting specific relative value
strategies during differing market environments. In addition, these
Advisors may have exposures that have traditionally been described as being
within the event driven sector, such as merger arbitrage, high
yield/distressed securities and other special situations (e.g., capital
structure arbitrage, spin-offs, recapitalizations, divestitures,
litigations and regulatory changes, among others).
GS Group owned approximately 5% of GRV as of December 31, 2004,
exclusive of any direct or indirect ownership of GRV by or through the
Company.
GRV was organized on November 1, 2001 and commenced its operations on
January 1, 2002. Since commencement of its operations on January 1, 2002
until December 31, 2004, GRV had net returns on invested assets as
described in the table below.
----------------------------------- ------------------------------
INVESTMENT PERIOD NET RETURN FOR PERIOD
----------------------------------- ------------------------------
1/1/2004 - 12/31/2004(1) 5.38%
----------------------------------- ------------------------------
1/1/2003 - 12/31/2003(1) 7.11%
----------------------------------- ------------------------------
1/1/2002 - 12/31/2002(2) 4.93%
----------------------------------- ------------------------------
(1) Net return is based on the performance of Class C Series 1 units.
Class C Series 1 units ("no-fee-shares") of GRV (including those
issued to the Company) are not subject to management fees or
incentive allocations paid or made to GS HFS as managing member
of GRV and therefore returns do not reflect the payment of any
such fees or the making of any allocations to GS HFS. In
addition, returns for Class C Series 1 units during the entire
period reflect returns net of the compensation paid to Advisors.
The returns shown are also net of the payment of an
administration fee to GS HFS by GRV.
(2) Annual net return is based on the performance of Class A Series 1
units (for the period from January 1, 2002 to March 31, 2002) and
Class C Series 1 (for the period from the commencement of the
Company's operations on April 1, 2002 to December 31, 2002).
Class A Series 1 units of GRV are charged a 1.25% management fee
and a 5% incentive allocation by GS HFS as managing member of
GRV. The returns shown, to the extent they reflect Class A Series
1 units, are net of the management fee and the incentive
allocation paid by GRV to GS HFS as managing member of GRV. The
Company did not invest in Class A Series 1 units of GRV. Class C
Series 1 units ("no-fee-shares") of GRV (including those issued
to the Company) are not subject to management fees or incentive
allocations paid or made to GS HFS as managing member of GRV and
therefore returns, to the extent they reflect Class C Series 1
units, do not reflect the payment of any such fees or the making
of any allocations to GS HFS. In addition, returns for Class A
Series 1 units and Class C Series 1 units during the entire
period reflect returns net of the compensation paid to Advisors.
The returns shown are also net of the payment of an
administration fee to GS HFS by GRV. Returns for the Class A
Series 1 Units are shown for periods prior to the Company's
commencement of operations on April 1, 2002 since GRV did not
have no-fee-shares outstanding during such periods.
GOLDMAN SACHS GLOBAL EVENT DRIVEN, LLC
GED's investment objective is to target attractive risk-adjusted
absolute returns with volatility and correlation lower than the broad
equity markets by allocating assets to Advisors that operate primarily in
the global event driven sector. As of December 31, 2004, GED's managing
member (currently, the Managing Member) had allocated GED's assets,
directly or indirectly, to 19 Advisors, although this number may change
materially over time as determined by GED's managing member. GED's managing
member generally will not allocate more than 25% of GED's total assets to
any single Advisor at the time of allocation. 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 perceived
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, each of
which is described in greater detail below. Other strategies may be
employed as well.
Risk Arbitrage/Special Situations
Risk arbitrageurs seek to capture the price spread between current
market prices and the value of securities upon successful completion of a
takeover or merger transaction. The availability of spreads reflects the
unwillingness of other market participants to take on transaction-based
risk, i.e., the risk that the transaction will not be completed and the
price of the company being acquired will fall. Risk arbitrageurs evaluate
this risk and seek to create portfolios that reduce specific event risk.
Special situations such as spin-offs and corporate reorganizations and
restructurings offer additional opportunities for event driven managers.
Often these strategies are employed alongside risk arbitrage or distressed
investing. A GED Advisor's ability to evaluate the effect of the impact and
timing of the event and to take on the associated event risk is the source
of the returns. GED Advisors differ in the degree to which they hedge the
equity market risk of their portfolios.
Credit Opportunities/Distressed Securities
Credit opportunities/distressed securities strategies invest in debt
or equity securities of firms in or near bankruptcy. GED Advisors differ in
terms of the level of the capital structure in which they invest, the stage
of the restructuring process at which they invest, and the degree to which
they become actively involved in negotiating the terms of the
restructuring.
GS Group owned approximately 2% of GED as of December 31, 2004,
exclusive of any direct or indirect ownership of GED by or through the
Company.
GED was organized on November 1, 2001 and commenced its operations on
April 1, 2002. Since commencement of its operations until December 31,
2004, GED had net returns on invested assets as described in the table
below.
----------------------------------- ------------------------------
INVESTMENT PERIOD NET RETURN FOR PERIOD
----------------------------------- ------------------------------
1/1/2004 - 12/31/2004(1) 12.70%
----------------------------------- ------------------------------
1/1/2003 - 12/31/2003(1) 18.09%
----------------------------------- ------------------------------
4/1/2002 - 12/31/2002(1) (0.66)%
----------------------------------- ------------------------------
(1) Net return is based on the performance of Class C Series 1 units.
Class C Series 1 units ("no-fee-shares") of GED (including those
issued to the Company) are not subject to management fees or
incentive allocations paid or made to GS HFS as managing member
of GED and therefore returns do not reflect the payment of any
such fees or the making of any allocations to GS HFS. In
addition, returns for Class C Series 1 units during the entire
period reflect returns net of the compensation paid to Advisors.
The returns shown are also net of the payment of an
administration fee to GS HFS by GED.
OVERVIEW OF THE INVESTMENT PROCESS OF THE INVESTMENT FUNDS
In its capacity as managing member of each of the Investment Funds,
the Managing Member employs a dynamic investment process which includes
Advisor selection, portfolio design and ongoing risk analysis and
monitoring. The Goldman Sachs Group, Inc. acquired the assets and business
of Commodities Corporation Limited, a Princeton New Jersey-based asset
management firm established in 1969, specializing in alternative
investments, and contributed them to a newly formed wholly owned
subsidiary, Commodities Corporation LLC, which was renamed Goldman Sachs
Princeton LLC in May 2001, and which changed its name to Goldman Sachs
Hedge Fund Strategies LLC in December 2004. The Managing Member (together
with the predecessor entity) has over 30 years of experience in
constructing diversified portfolios by selecting, allocating among, and
monitoring absolute return-oriented (i.e., returns not measured against a
benchmark) or "skill-based" Advisors. Skill-based Advisors are Advisors
which, as a result of their particular investment style and skills, have
the potential to be profitable regardless of the direction of the market
(i.e., unlike long-only Advisors, which would be expected to make money
when markets go up, and not during periods of market decline). The Managing
Member has also developed computer systems and operational capabilities to
assist in the monitoring of Advisors.
An Investment Fund's managing member seeks to identify Advisors to
which it may allocate such Investment Fund's assets. The Advisor selection
process includes a review by the Investment Fund's managing member's team
of professionals, which may include representatives of its portfolio
management, Advisor selection, risk and quantitative analysis, compliance,
tax, legal, finance and operations areas.
Both qualitative and quantitative criteria are factored into the
Advisor selection process. These criteria include portfolio management
experience, strategy, style, historical performance, including risk profile
and drawdown (i.e., downward performance) patterns, risk management
philosophy and the ability to absorb an increase in assets under management
without a diminution in returns. The managing member of each Investment
Fund also examines the organizational infrastructure, including the quality
of the investment professionals and staff, the types and application of
internal controls, and any potential for conflicts of interest. However,
the Company and the Investment Funds do not control the Advisors and are
frequently not able to review the actual books and investments of many
Advisors since this is proprietary information and in many cases such
information is not shared with the managing member of the Investment Funds,
neither on a historical nor a current basis.
In determining the relative allocations of capital to each Advisor,
the managing member of an Investment Fund considers the risk and return
characteristics of each of the Advisors, including the average expected
volatility of returns, drawdown patterns and liquidity and leverage
characteristics. In addition, each Investment Fund's managing member
considers how each Advisor's returns are expected to correlate to the other
Advisors in the portfolio. It is expected that allocations will vary
significantly over time as returns for different Advisors vary. The
managing member of an Investment Fund also may adjust allocations from time
to time when it deems it appropriate to do so. In addition, it is expected
that individual allocations will grow larger or smaller as each Advisor's
performance varies over time.
The identity and number of the Investment Fund's Advisors may change
materially over time. The managing member of an Investment Fund may
withdraw from or invest with different Advisors without prior notice to or
the consent of the Company, the Members or the members of the Investment
Fund.
The managing member of an Investment Fund may invest a substantial
portion of the Investment Fund's assets with Advisors who may have limited
track records and Advisor Funds with limited operating histories. In such
cases, the Advisors or individual members of their management teams
generally will have had, in the Investment Fund's managing member's
opinion, relevant experience trading in the strategies that such Advisors
are expected to utilize. However, the Company and the Investment Funds are
not able to ensure Members that each of the Advisors, even those with
longer track records, will perform as expected or not undertake actions
that would not be in the best interest of the Company or the Members.
LEVERAGE AND OTHER STRATEGIES
Leverage
Advisors may utilize leverage in their investment programs. Leverage
may take the form of trading on margin, use of derivative instruments that
are inherently leveraged, and other forms of direct and indirect
borrowings. Advisors generally will determine the amount of leverage they
utilize, provided that limitations on leverage may be imposed on Advisors
by their investment management agreements or law, if applicable. The
managing member of the Investment Funds, on behalf of each Investment Fund,
may seek to adjust the degree of leverage with which such Investment Fund
as a whole invests by taking the Advisors' anticipated leverage use into
account when allocating and reallocating the Investment Fund's assets among
the Advisors. However, the managing member of an Investment Fund generally
will not have any right to adjust the amount of leverage utilized by any of
the Advisors, and generally does not exercise such right if available.
Adjustments to an Investment Fund's overall leverage level will be based on
factors deemed relevant by its managing member, including its assessment of
the risk/reward parameters of the Advisors and the strategies currently
included in such Investment Fund's investment portfolio.
The managing member of an Investment Fund may also elect, in its sole
discretion, to cause an Investment Fund to invest indirectly in an Advisor
Fund through a swap, option or other structure designed to provide greater
leverage than a direct investment in the Advisor Fund. As of December 31,
2004, none of the Investment Funds had invested indirectly in an Advisor
Fund through such a swap, option or other structure, however, the managing
member of an Investment Fund may elect to do so in the future. See
"--Additional Methods of Investing in Advisor Funds by the Investment
Funds" below and "CERTAIN RISK FACTORS--INVESTMENT RELATED RISKS--Risks
Related to Investment and Trading--The Use of Leverage May Substantially
Increase the Adverse Impact to Which the Investment Funds' Investment
Portfolios May be Subject."
The Company and each Investment Fund may, but are not required to,
borrow (including through direct borrowings, borrowings through derivative
instruments, or otherwise) from the GS Group or other parties, when deemed
appropriate by its managing member, including to make investments and
distributions in respect of redemptions of membership units, to pay
expenses or for other purposes. During the year ended December 31, 2003,
the Company entered into a borrowing facility with a major financial
institution (the "Facility Counterparty"). The facility was structured as a
call spread option that had been issued by the Company to the Facility
Counterparty. Under the terms of the facility, the Company received cash
and redeposited the amount with the Facility Counterparty in a collateral
account. The Company had the right to draw funds from the collateral
account to use for liquidity purposes. Under the facility, the Company was
able to draw, at any given time, up to a total amount of the collateral
account at the time of withdrawal. However, in no event could the Company
have drawn an amount under the facility exceeding 5% of the Company's net
asset value. The effective interest rate on funds drawn from the collateral
account was LIBOR + 0.875%. The Company also paid the equivalent of a
commitment fee of 0.25% on the undrawn funds. As of December 31, 2003, the
Company 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 $20.0 million and in October
2004 the facility expired. On November 24, 2004, the Company entered into a
credit facility with a new financial institution (the "New Facility
Counterparty"). The Company made an initial borrowing of $1 million under
this facility. Subject to rejection by the New Facility Counterparty, the
Company may request to borrow up to $45.0 million in the aggregate. At the
time of any borrowing, the aggregate amounts borrowed may not exceed 10% of
the Company's net asset value and at all other times the aggregate amount
borrowed may not exceed 15% of the Company's net asset value. The effective
interest rate on the borrowed amounts equals LIBOR plus 0.85% per annum
compounded daily. The Company also pays an administration and structuring
fee calculated as 0.10% per annum on the aggregate amount of $45.0 million.
The proceeds of the borrowings must be used primarily for purposes of
refinancing existing indebtedness, making further investment in a pool of
funds, funding liquidity of redemptions of Units in the Company and
managing the cash flow of the Company. The amount of cash borrowed totaled
$3.0 million at December 31, 2004. As security for its borrowings, the
Company granted the New Facility Counterparty a security interest in the
Company's cash accounts and any other account that contains other
investment property (other than to the extent that it comprises shares of
funds in the pool of funds in which the Company has invested) of the
Company. The terms of the facility include various restrictive covenants,
including restrictions on additional indebtedness, liens and fundamental
changes to the Company's business. See ITEM 7. "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and
Capital Resources" and Note 7 to the financial statements for further
description of the credit facility. Each Investment Fund has entered into a
similar facility with the New Facility Counterparty. Each Investment Fund
may pledge its assets in order to secure any such borrowings. The Advisors
may also borrow funds or enter into other similar transactions (including
from or with the GS Group). The managing member of the Company and an
Investment Fund may modify, as applicable, the Company's or the Investment
Fund's borrowing policies, including the purposes of borrowings, and the
length of time that the Company or the Investment Fund may hold portfolio
securities purchased with borrowed money. The rights of any lenders to the
Company or an Investment Fund to receive payments of interest or repayments
of principal will be senior to those of the members of the Company and the
Investment Fund and the terms of any borrowings may contain provisions that
limit the activities of the Company and the Investment Fund.
Temporary and Defensive Strategies
The Company and the Investment Funds may, from time to time, take
temporary or defensive positions in cash, cash equivalents, other
short-term securities or money market funds to attempt to minimize
volatility caused by adverse market, economic, or other conditions. Any
such temporary or defensive positions could prevent the Company and the
Investment Funds from achieving their investment objectives. In addition,
the Company may, in the Managing Member's sole discretion, hold cash, cash
equivalents, other short-term securities or investments in money market
funds pending allocation to Investment Funds, in order to fund anticipated
redemptions, expenses of the Company or other operational needs, or
otherwise in the sole discretion of the Managing Member. The Investment
Funds are permitted to hold cash or invest their cash balances in the same
manner as the Company.
Potential Investments
The Advisors may invest in securities, assets and instruments of any
type, long or short, including, without limitation, the following: equity
securities and instruments including, without limitation, common stocks,
preferred stocks, equity index futures and forwards, interests in real
estate investment trusts, convertible debt instruments, convertible
preferred stock, equity interests in trusts, partnerships, joint ventures,
limited liability companies, warrants and stock purchase rights, swaps and
structured notes; fixed income instruments including bonds, interest rate
futures contracts and swaps, options on futures, indices, loan
participations and government and corporate debt instruments (both rated
and unrated); currencies and speculative positions on currencies, spot
transactions, currency forwards, cross currency swaps, options and futures
on currencies; commodities, including without limitation, spot transactions
in commodities, commodities futures and swaps and options on futures; and
structured financial products, including mortgage-backed securities,
pass-throughs and other asset-backed securities (both investment-grade and
non-investment grade). The Advisors may employ short selling, and trade in
securities without active public markets, indices, over-the-counter
options, when-issued and forward commitment securities and engage in the
borrowing and lending of portfolio securities. The Advisors may also engage
in derivative transactions including swaps and repurchase and reverse
repurchase agreements or other strategies to hedge against securities,
currencies or interest rates or to manage risk relating to their portfolio
investments, to leverage their portfolio and to establish speculative
positions. The Advisors may invest in both U.S. and non-U.S. issuers,
including issuers based in emerging market countries.
Additional Methods of Investing in Advisor Funds by the Investment Funds
An Investment Fund will typically invest directly in an Advisor Fund
by purchasing an interest in such Advisor Fund. There may be situations,
however, where an Advisor Fund is not open or available for direct
investment by the Investment Fund or where the managing member of such
Investment Fund elects for other reasons to invest indirectly in an Advisor
Fund. Such an instance may arise, for example, where the Investment Fund's
proposed allocation does not meet an Advisor Fund's investment minimums. On
occasions where the managing member of an Investment Fund determines that
an indirect investment is the most effective or efficient means of gaining
exposure to an Advisor Fund, the Investment Fund may invest in an Advisor
Fund indirectly by purchasing a structured note or entering into a swap or
other contract, paying a return approximately equal to the total return of
an Advisor Fund. In the case of a structured note or swap, a counterparty
would agree to pay to the Investment Fund a return based on the return of
the Advisor Fund, in exchange for consideration from the Investment Fund
equivalent to the cost of purchasing an ownership interest in the Advisor
Fund. The Investment Fund may also invest indirectly in an investment
vehicle or "feeder fund" established by the managing member of the
Investment Funds, the Advisor or their respective affiliates that invests
all of their assets in an Advisor Fund. In addition, in the discretion of
the managing member of the Investment Funds, an indirect investment in an
Advisor Fund of the type described above may be structured so as to provide
greater leverage than a direct investment in the Advisor Fund, which may
increase the risks to the Investment Fund relative to a direct investment
in the Advisor Fund. Indirect investment through a swap or similar contract
in an Advisor Fund carries with it the credit risk associated with the
counterparty. Indirect investments will generally be subject to transaction
and other fees, which will reduce the value of the Investment Fund's
investment. There can be no assurance that the Investment Fund's indirect
investment in an Advisor Fund through a structured note or swap will have
the same or similar results as a direct investment in the Advisor Fund, and
the Investment Fund's value may decrease as a result of such indirect
investment.
Any references in this annual report on Form 10-K (the "Annual
Report") to strategies or techniques utilized by the Advisors on behalf of
the Investment Funds include strategies or techniques utilized by (i)
Advisors pursuant to investment management agreements entered into with
either the Investment Fund or separate Cayman Islands limited liability
companies formed by the managing member of an Investment Fund (each a
"Portfolio Company" and collectively the "Portfolio Companies") through
which the Investment Fund allocates assets to such Advisor, or (ii) Advisor
Funds in which an Investment Fund invests. See "PORTFOLIO COMPANIES" below
in this Item.
The Company's investment program and the investment program of each of
the Investment Funds are speculative and entail substantial risks. There
can be no assurance that the investment objectives of the Company and each
of the Investment Funds, including their risk monitoring and
diversification goals, will be achieved, and results may vary substantially
over time. Advisors of each Investment Fund may consider it appropriate,
subject to applicable regulations, to utilize forward and futures
contracts, options, swaps, other derivative instruments, short sales,
margin and other forms of leverage in their investment programs. Such
investment techniques can substantially increase the adverse impact to
which an Investment Fund's, and the Company's, investment portfolio may be
subject. See "CERTAIN RISK FACTORS."
INTERNATIONAL ACTIVITIES
The Company allocates its assets to the Investment Funds who in turn
allocate their assets to Advisors located throughout the world. From time
to time, these Advisors invest in securities of non-U.S. issuers, including
companies based in less developed countries (i.e., "emerging markets"), or
in securities issued by the governments outside the United States. A
portion of the Company's assets, therefore, ultimately may be invested in
securities and other financial instruments denominated in non-U.S.
currencies, the prices of which are translated into U.S. dollars for
purposes of calculating the Company's net asset value. Some Advisors may
invest exclusively in securities and other financial instruments
denominated in non-U.S. currencies. The Investment Funds have invested,
from time to time, up to 30%-40% of their assets with Advisors located
outside the United States or in non-U.S. markets or financial instruments.
The amount so invested outside the United States could be significantly
greater than such amount at any particular time in the future. Historical
international investment activity may not be indicative of current or
future levels.
The value of the Company's assets and liabilities may fluctuate with
U.S. dollar exchange rates as well as with the price changes of the
Advisors' investments in the various local markets and currencies.
Investing in securities of companies which are generally denominated in
non-U.S. currencies involve certain considerations comprising both risks
and opportunities not typically associated with investing in securities of
U.S. issuers. See "CERTAIN RISK FACTORS--INVESTMENT RELATED RISKS--Risks
Related to International Investments--Trading on Foreign Exchanges May
Involve Higher Risk of Financial Irregularities and/or Lack of Appropriate
Risk Monitoring and Controls," "--Non-U.S. Investments Involve Special
Risks not Usually Associated with Investments in U.S. Securities,"
"--Investment in Emerging Markets Involves Significant Risks, including
Inflation and Currency Devaluations," "--Foreign Currency Transactions and
Exchange Rate Risk Create Additional Risks for Advisors Investing in
Certain Financial Instruments," and "--Non-U.S. Futures Transactions Afford
Less Protection as Rules of a Foreign Exchange May Not be Enforced by a
Domestic Regulator."
PORTFOLIO COMPANIES
The Investment Funds may allocate assets to Advisors (i) through
direct or indirect investments in Advisor Funds, (ii) through direct
allocation of assets held in a separately managed account pursuant to an
investment management agreement between the Investment Fund and the Advisor
or such similar arrangement as is determined by the managing member of such
Investment Fund or (iii) through investments in Portfolio Companies, each
of which allocates its assets to a single Advisor via a separately managed
account. The managing member of the Investment Funds or an affiliate
thereof is the investment manager of each Portfolio Company, and the
officers and all or a majority of the directors of each such entity are
persons that are employed by, or are otherwise affiliated with, the
managing member of the Investment Funds or its affiliates. Portfolio
Companies may have other investors in addition to the Investment Funds. See
"POTENTIAL CONFLICTS OF INTEREST." It is expected that one investor in each
Portfolio Company is a Cayman Islands limited liability company managed by
the managing member of the Investment Funds and formed to accept
subscriptions from non-U.S. persons and U.S. tax-exempt entities.
Each Portfolio Company (or the investment manager on behalf of the
Portfolio Company) will enter into an investment management agreement with
an Advisor selected by the managing member of the applicable Investment
Fund. Each investment management agreement provides for the payment of fees
and expenses of the Advisor, any restrictions on the Advisor relating to
the management of the assets, including restrictions relating to leverage
and investment strategies, if applicable, and rights of the managing member
of the applicable Investment Fund with respect to ongoing monitoring and
risk management, which may include rights to receive reports, require the
disposition of positions, and withdraw all or a portion of an allocation to
the Advisor. Each Portfolio Company, however, reserves the right in its
sole discretion and for any reason to waive fees of, or impose different
fees on, any investor, as may be agreed to by the Portfolio Company and the
investor. Each Portfolio Company may, by agreement with its Advisor,
structure the Advisor's fees (or a portion thereof) as an incentive
allocation or other arrangement.
The governing documents of each Portfolio Company provide, among other
things, for the management of the Portfolio Company by its board of
directors, redemption rights of shareholders of the Portfolio Company
(which will be negotiated on a case-by-case basis with each shareholder,
provided that the Investment Funds have the right to redeem their shares
upon request, subject to any restrictions contained in the investment
management agreement between the Portfolio Company and the Advisor),
certain fees and expenses as discussed below and in "FEES AND EXPENSES,"
and indemnification and exculpation of the managing member of the
Investment Funds, in its capacity as the investment manager of the
Portfolio Company) and its affiliates. The board of directors of a
Portfolio Company may cause such entity to list its shares on the Irish,
Luxembourg or other stock exchange, or to enter into a transaction or
series of transactions in which the shareholders of the Portfolio Company
become beneficial owners of economically comparable equity interests of
another entity, which may be domiciled outside the Cayman Islands, so long
as (i) the shareholders of the Portfolio Company do not suffer any material
adverse economic effect as a result thereof or (ii) the shareholders of the
Portfolio Company receive prior written notice of any initial listing or
transaction and an opportunity to redeem their interests in the Portfolio
Company prior to the effectiveness of the initial listing or transaction.
The managing member of the Investment Funds does not currently charge
any management fee or performance-based fee or allocation at the Portfolio
Company level. In 2004, each Portfolio Company paid the managing member of
the Investment Funds (or other entity selected by the Portfolio Company to
be its administrator) an administration fee, accruing daily and calculated
and paid on a monthly basis, equal to one-twelfth of 0.20% of the net
assets of the Portfolio Company as of the end of each month, calculated
prior to any reduction in net assets due to Advisor fees. Effective January
1, 2005, an administration fee is no longer charged by the Managing Member
at the Portfolio Company level. The Portfolio Companies may also retain
another entity not affiliated with the Managing Member as
sub-administrator. Fees payable to such sub-administrator may be payable
out of an administration fee, if such a fee exists, or pursuant to such
other arrangements as may be agreed to by the Managing Member (in its
capacity as investment manager of the Portfolio Company) and such
sub-administrator. See "--FEES AND EXPENSES."
Each Portfolio Company bears its own offering, organizational, and
operating expenses, including any management and incentive fees payable to
the Advisor of the Portfolio Company's assets pursuant to the Portfolio
Company's investment management agreement. The Company bears, indirectly
through its investment in the Investment Funds, a pro rata portion of the
expenses of each Portfolio Company in which the Investment Funds invest.
See "--FEES AND EXPENSES."
References in this Annual Report to assets or investments of the
Company, the Investment Funds and the Advisors shall be deemed to include
interests in Portfolio Companies and assets and investments of Portfolio
Companies to the extent of the Company's and the Investment Funds' indirect
interest therein, whether or not so indicated, where the context permits.
FEES AND EXPENSES
The Company pays the Managing Member a monthly management fee (the
"Management Fee") equal to one-twelfth of 1.25% of the net assets of the
Company as of the end of the applicable month, appropriately adjusted to
reflect capital appreciation or depreciation and any subscriptions,
redemptions or distributions. For purposes of determining the Management
Fee, net assets are not reduced to reflect any accrued incentive allocation
(the "Incentive Allocation"). See "--Capital Accounts; Allocation of Gains
and Losses" below. In return for receiving the Management Fee, the Managing
Member, among other things, constructs the portfolio of the Company and
evaluates and monitors the performance of each of the Investment Funds. The
managing member of each of the Investment Funds (which is currently the
Managing Member) does not receive a separate management fee from the
Investment Funds for investments in the Investments Funds by the Company as
the Company owns "no-fee shares" of each of the Investment Funds.
The Company is currently issued units of a class of membership
interests of each Investment Fund (no-fee-shares) which is not subject to
any management fees or incentive allocation charged by the Managing Member,
although the Company may be charged management fees or an incentive
allocation in the future. As the Company owns no-fee shares in each of the
Investment Funds, there are no incentive allocations or management fees
paid to the Managing Member in respect of the Company's investments in each
of the Investment Funds. The ratios shown below do not reflect the
inclusion of the Company's proportionate shares of expenses of the
Investment Funds, including the administration fees paid, directly or
indirectly, by the Investment Funds.
Fees and Expenses for the Company for the year ended December 31, 2004
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
-------- -------- -------- -------- -------- -------- -------- --------
Ratios to average
net assets (annualized):
Expenses 1.48% 1.48% 1.35% 1.32% 1.31% 1.28% 1.29% 1.27%
Incentive allocation 0.28% 0.23% 0.26% 0.29% 0.29% 0.25% 0.20% 0.06%
-----------------------------------------------------------------------------------
Total expenses
and incentive
allocation 1.76% 1.71% 1.61% 1.61% 1.60% 1.53% 1.49% 1.33%
========== ========== ========= ========= ========== ========== =========== ========
The table below sets forth certain information with respect to the
Company including fees and expenses paid to the Managing Member by the
Company. The dollar amounts of fees and expenses are shown for fiscal year
2004 and are based on a $1,000,000 investment in Class A Series 1 made as
of January 1, 2004.
-------------------------- --------------------- --------------------
FEES AND EXPENSES PERCENTAGE AMOUNT DOLLAR AMOUNT
-------------------------- --------------------- --------------------
Management Fee 1.25%(1) $12,901(4)
Incentive Allocation 5%(2) $2,787(4)
Administration Fee 0.20%(3) $2,073(4)
Placement Fee None None
Entry Fee None None
Exit Fee None None
Minimum Subscription Amount N/A $1,000,000(5)
(1) The Managing Member receives a monthly Management Fee, equal to
one-twelfth of 1.25% of the net assets of the Company as of the
end of the applicable month, appropriately adjusted to reflect
capital appreciation or depreciation and any subscriptions,
redemptions or distributions. See "--Capital Accounts; Allocation
of Gains and Losses" below.
(2) At the end of each fiscal year of the Company, the Managing
Member is entitled to receive an Incentive Allocation equal to 5%
of the increase in the NAV (as defined below in this section) of
each series of Units. The Managing Member does not receive a
payment or make a contribution in the event of a decrease in the
NAV of a series of Units, however the Managing Member is only
entitled to receive an Incentive Allocation relating to an
increase in NAV of a series of Units if the NAV of such series is
above a prior high NAV. See "--Capital Accounts; Allocation of
Gains and Losses."
(3) The Company bears a pro rata portion of the administration fee to
the Managing Member for services provided to the Investment Funds
and Portfolio Companies. In 2004, each of the Investment Funds
paid its managing member (currently the Managing Member) an
administration fee of 0.20% for services rendered to it. The
Dollar Amount (which is approximate based on calculation)
reflects the total administration fee comprised of the Company's
aggregate pro rata portion for services provided to the
Investment Funds and the fee directly payable by the Portfolio
Companies based on an investment of $1,000,000 in Class A Series
1 Units as of January 1, 2004. Effective January 1, 2005, the
Managing Member agreed to change the administration fee rate
charged at the Investment Fund level from 0.20% to the fee rate
charged to each Investment Fund by SEI (as defined below in this
section). It is expected that initially the Administration Fee
Rate (as defined below in this section) will generally be in the
range of 0.08% to 0.10%, but such rate may be exceeded, subject
to a maximum of approximately 0.20%, if the total assets managed
by the Managing Member that are administered by SEI and its
affiliates declines or if an Investment Fund allocates a greater
percentage of its assets to Portfolio Companies or Managed
Accounts (as defined below in this section) than is currently
anticipated.
(4) Based on an investment of $1,000,000 in Class A Series 1 Units as
of January 1, 2004.
(5) The minimum subscription by a purchaser of Units is $1,000,000,
although the Managing Member, in its sole discretion, may accept
subscriptions below the minimum.
The Managing Member currently serves as the administrator of the
Company (in such capacity the "Administrator") pursuant to an
administration agreement (the "Administration Agreement"). The
Administrator is responsible for calculating the net asset value ("NAV")
for the Company, and maintaining capital accounts, valuing securities and
other assets, including securities which are not readily marketable,
assisting in the preparation of financial statements and tax returns,
assisting in the preparation and distribution of reports, maintaining a
registry of ownership and providing certain other administrative services.
See "CERTAIN RISK FACTORS--SPECIAL RISKS OF THE COMPANY'S STRUCTURE--Risks
Related to Company's Structure--The Company's Financial Statements are, and
in the Future will be, Based on Estimates of Valuations Provided by Third
Party Advisors Which May not be Accurate or May Need to be Adjusted in the
Future."
The Investment Funds and the Portfolio Companies have entered into a
similar administration agreement with the Managing Member. The Managing
Member does not receive a fee directly from the Company for its service as
the Administrator. In 2004, the administrator of each Investment Fund and
each Portfolio Company (currently the Managing Member in each case)
received an administration fee, accruing daily and calculated and paid on a
monthly basis, equal to one-twelfth of 0.20% of the net assets of such
Investment Fund or Portfolio Company (in the case of the Investment Funds,
without taking into account their investments in Portfolio Companies so as
to avoid duplication) as of the end of each month, appropriately adjusted
to reflect capital appreciation or depreciation and any subscriptions,
redemptions or distributions. Therefore, no administration fee was paid at
the Investment Fund level with respect to any assets of the Investment
Funds attributable to investments in Portfolio Companies.
Effective January 1, 2005, the Managing Member agreed to change the
administration fee rate (the "Administration Fee") charged at the
Investment Fund level from 0.20% to the fee rate charged to each Investment
Fund by SEI Global Services, Inc. ("SEI"). In addition, effective January
1, 2005, an administration fee is no longer charged by the Managing Member
at the Portfolio Company level, and the administration fee charged at the
Investment Fund level will be paid with respect to assets of the Investment
Funds invested in Portfolio Companies. The Administration Fee Rate is
determined each month, without notice to Members, based on the total assets
managed by the Managing Member that are administered by SEI and its
affiliates. In determining the Administration Fee Rate, each Investment
Fund is assessed a higher rate in respect of assets allocated to Portfolio
Companies and managed accounts ("Managed Accounts"). It is expected that
initially the Administration Fee Rate will generally be in the range of
0.08% to 0.10%, but such rate may be exceeded if the total assets managed
by the Managing Member that are administered by SEI and its affiliates
declines or if an Investment Fund allocates a greater percentage of its
assets to Portfolio Companies or Managed Accounts than is currently
anticipated. However, the Administration Fee Rate is subject to a maximum
of approximately 0.20%. For purposes of determining the administration fee
payable by the Investment Funds, NAV will not be reduced to reflect any
accrued but unpaid incentive allocation or management fees of the Managing
Member. The Company will bear its pro rata portion of these fees through
its investments in the Investment Funds.
The Administrator and the Company entered into an agreement with SEI
to serve as the sub-administrator of the Company effective March 1, 2004.
In addition to the services described above, SEI is expected to assist in
the preparation of the Company's periodic and other reports including
filing such reports with the Securities and Exchange Commission (the "SEC")
and other services associated with the Company being a registrant under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Pursuant
to the agreement, the Administrator is responsible for paying the fees of
SEI. The Company pays no additional fees to SEI. The Managing Member (in
its capacity as the administrator of each Investment Fund) and each
Investment Fund have entered into a similar agreement with SEI, and the
Managing Member and each Portfolio Company may enter into similar
agreements with SEI. In the future, the Managing Member may cease to serve
as the administrator of the Company and one or more of the Investment Funds
and the Portfolio Companies and SEI may perform such duties directly. The
Managing Member and SEI are currently discussing implementing such changes.
The Managing Member and the Company may, in the future, engage other
entities, which may be unaffiliated with the Managing Member, to provide
administration or other services to the Company, the Investment Funds or
the Portfolio Companies as administrator or sub-administrator. The terms of
any such engagement shall be subject to such terms and conditions as the
Managing Member and such other entity may agree. The terms of such
engagement may differ from the terms and conditions under which the
Managing Member or one or more of its affiliates provides administration
services to the Company, including without limitation the compensation
arrangements and indemnification obligations.
Pursuant to the Administration Agreement, the Company has agreed to
indemnify the Administrator against any loss or liability arising out of
any claim asserted or threatened by any third party in connection with the
Administrator's performance of its obligations or duties under the
Administration Agreement, except where such loss or liability arises as a
result of gross negligence, willful misconduct or reckless disregard on the
part of the Administrator. Pursuant to the agreement with SEI, the Company
has agreed to indemnify SEI under similar circumstances.
The Company bears all of its own operating expenses, including,
without limitation, legal expenses; professional fees (including, without
limitation, fees and expenses of consultants and experts) relating to
investments; costs and expenses relating to any amendment of the Amended
and Restated Limited Liability Company Agreement of the Company dated
January 1, 2004 (as it may be amended or modified from time to time, the
"LLC Agreement") or the Company's other organizational documents or
subscription agreement or any modification or supplement to the Private
Placement Memorandum for the Company (as it may be supplemented or modified
from time to time, the "Memorandum"), and any distribution of such
documentation to the Members; accounting, auditing and tax preparation
expenses; fees and expenses of other agents of the Company; taxes and
governmental fees; printing and mailing expenses; expenses relating to
transfers and redemptions of Units; fees and out-of-pocket expenses of any
service company retained to provide accounting and bookkeeping services to
the Company; quotation or valuation expenses; expenses relating to the
acquisition, holding and disposition of investments (e.g., expenses which
the Managing Member determines to be related to the investment of the
assets of the Company, including, among others, research expenses,
brokerage fees and commissions, expenses relating to short sales, clearing
and settlement charges, custodial fees and expenses, costs and charges for
equipment or services used in communicating information regarding the
Company's transactions between the Managing Member and other agents, bank
service fees, interest expenses, borrowing costs and extraordinary
expenses); insurance premiums; costs incurred in connection with any claim,
litigation, arbitration, mediation, government investigation or dispute in
connection with the business of the Company and the amount of any judgment
or settlement paid in connection therewith, or the enforcement of the
Company's rights against any person or entity; costs and expenses for
indemnification or contribution payable by the Company to any person or
entity (including, without limitation, pursuant to the indemnification
obligations described under ITEM 12. "INDEMNIFICATION OF DIRECTORS AND
OFFICERS" in the Form 10 filed on April 28, 2004, as amended (the
"Registration Statement")); and all costs and expenses incurred as a result
of dissolution, winding-up and termination of the Company.
The Company in the past has borne its organizational expenses and
continues to bear expenses incurred in connection with the offer and sale
of Units, including printing costs and legal fees and other expenses of the
Company, the Managing Member and any placement agent and other expenses
relating to the offering of Units. In addition, the Company bears,
indirectly through its investment in each Investment Fund its pro rata
portion of the offering, organizational and operating expenses of such
Investment Fund, including expenses related to the investment of such
Investment Fund's assets, such as fees to the Advisors, Portfolio Company
and Advisor Fund fees and expenses, brokerage commissions, expenses
relating to short sales, clearing and settlement charges, custodial fees,
bank service fees, interest expenses, borrowing costs and extraordinary
expenses.
Each of the Managing Member, the Administrator and any
sub-administrator pays its own overhead costs and expenses, including the
salaries, fringe benefits and other compensation costs of its employees.
The Managing Member, the Administrator or any sub-administrator may
pay certain of the Company's or any Investment Fund's expenses described
above. The Company or applicable Investment Fund will reimburse the
Managing Member, the Administrator or any sub-administrator, as applicable,
for the payment of any such expenses.
The Managing Member has the right, in its sole discretion, to waive or
impose different fees on the Members as may be agreed to by the Managing
Member and the Member (including by means of a rebate or the issuance of a
new class of Units) and to make appropriate amendments to the LLC Agreement
to reflect any such fee arrangements. Similarly, each Investment Fund has
the right, in its sole discretion and for any reason, to waive fees of, or
impose different fees on, its investors, as may be agreed to by the
Investment Fund and the investor.
Advisors are compensated by the Investment Funds on terms that may
include fixed and/or performance-based fees or allocations. Currently,
aggregate fixed fees of most Advisors generally range from approximately
0.5% to 4% (annualized) of each Advisor's allocation, and performance-based
fees or allocations generally range from 18% to 25% of the net capital
appreciation in each individual Advisor's investments for the year.
However, each Investment Fund may, in the sole discretion of its managing
member, allocate assets to Advisors that receive fixed and/or performance
based fees that exceed these ranges. The Company will bear a pro rata share
of the Advisor compensation paid by the Investment Funds.
Performance-based compensation is typically not paid to an Advisor
until the Advisor makes up prior losses. See "CERTAIN RISK FACTORS--GENERAL
RISKS--Risks Related to the Units, Liquidity of Units and the Offering of
Units--Special Considerations are Applicable to the Units; After the
Initial Offering of Units Subsequent Purchasers of Units may Suffer Losses
Because of Previously Established Open Positions."
CAPITAL ACCOUNTS; ALLOCATION OF GAINS AND LOSSES
The Company maintains a separate capital account on the books of the
Company for each series of Units and for each Member, with respect to each
series of Units held by such Member. Each capital account with respect to a
series of Units will be (i) increased by the amount of any capital
contributions in respect of such series, (ii) decreased for any payments in
redemption of, or any distributions in respect of, such series, (iii)
increased or decreased as of the close of each accounting period by such
series' allocable share of the net appreciation or net depreciation of the
net assets of the Company (as determined below), and (iv) decreased by any
Incentive Allocation (discussed below) and any Management Fee accrual in
respect of such series. For each accounting period, the net appreciation or
net depreciation of the net assets of the Company (before reduction for any
Management Fee) shall be allocated to each series of Units pro rata based
upon the relative capital accounts of each series as of the beginning of
such accounting period, prior to any year-to-date accrued Incentive
Allocation. Each Member's capital account with respect to each series of
Units shall equal the capital account of such series of Units multiplied by
the percentage of Units in such series owned by such Member. Capital
accounts will be appropriately adjusted for exchanges of Units from one
series into another series, the Incentive Allocation discussed below, and
for other events and items as determined by the Managing Member.
The NAV of a series of Units equals the capital account with respect
to such series of Units, and the NAV per Unit of a series shall be equal to
the NAV of such series divided by the number of outstanding Units of such
series.
At the end of each fiscal year of the Company (or other period used to
determine the Incentive Allocation), the Managing Member receives an
Incentive Allocation equal to 5% of the increase in the NAV of each series
of Units (appropriately adjusted as determined by the Managing Member in
its sole discretion for additional contributions, distributions and
redemptions, and determined prior to any Incentive Allocation accrual with
respect to such series of Units, but after the deduction of all Company
expenses for the period, including the Management Fee allocable to that
series) above the Prior High NAV (as defined below) of such series. The
Managing Member does not receive a payment or make a contribution in the
event of a decrease in the NAV of a series of Units, however the Managing
Member is only entitled to receive an Incentive Allocation relating to an
increase in NAV of a series of Units if the NAV of such series is above a
prior high NAV. The "Prior High NAV" with respect to a series of Units is
equal to the NAV of such series immediately following the date as of which
the last Incentive Allocation has been made with respect to such series
(or, if no Incentive Allocation with respect to such series has been made,
the NAV of such series immediately following the initial offering of such
series), appropriately adjusted as determined by the Managing Member in its
sole discretion for additional contributions, distributions and
redemptions.
The Incentive Allocation will be in addition to any performance-based
fees paid to the Advisors. The Incentive Allocation with respect to a
series of Units accrues daily and is credited to the capital account of the
Managing Member as of December 31 of each year out of the capital account
of such series. In the event of an intra-year redemption of Units, any
accrued Incentive Allocation with respect to such Units will be credited to
the capital account of the Managing Member upon redemption.
Each of the Investment Funds has entered into performance-based
compensation arrangements with the Managing Member as its managing member,
which are similar or identical to the arrangements described above.
However, as a member of each of the Investment Funds, the Company receives
membership units of a class, the NAV of which is not reduced in connection
with any performance-based allocations made to the managing member of the
Investment Funds.
The managing member of the Investment Funds may invest the Investment
Funds' assets in Advisor Funds or Managed Accounts managed by Advisors
affiliated with Goldman Sachs. In each such case, the managing member of
the Investment Funds and the Managing Member will ensure that the aggregate
fees and allocations paid to or received by the affiliated Advisor and the
Managing Member will not exceed the fees that a member (including the
Company) otherwise would incur if the Advisor were not so affiliated.
The Managing Member reserves the right, in its sole discretion, to
apply different performance-based percentage allocations and performance
compensation arrangements to any Member, as may be agreed to by the
Managing Member and such Member without notice to the other Members. The
managing member of the Investment Funds has a similar right with respect to
members of each of the Investment Funds.
The LLC Agreement provides that the Managing Member may amend the
provisions of the LLC Agreement relating to the Incentive Allocation to
conform to applicable law or regulatory authorities, so long as such
amendment does not increase the Incentive Allocation in respect of a Member
to more than the amount that would otherwise be determined absent such
amendment.
THE MANAGING MEMBER
GS HFS, a Delaware limited liability company, serves as Managing
Member of the Company and currently acts as the managing member of each of
the Investment Funds. The Managing Member is responsible for the management
and operations of the Company. As managing member of the Investment Funds,
GS HFS is responsible for the management and operations of the Investment
Funds, including the selection of the Advisors with which the Investment
Funds invest their assets. GS HFS, in its capacity as Managing Member and
as managing member of the Investment Funds, is permitted to delegate some
of its investment management responsibilities to its advisory affiliates or
other persons as set forth in the LLC Agreement and the limited liability
company agreements for the relevant Investment Funds. The principal
business of the Managing Member is to function as an investment manager for
multi-advisor funds and to select advisors to make investments on behalf of
such funds.
The Managing Member is an advisory affiliate of Goldman Sachs and
Goldman Sachs Asset Management, a unit of the Investment Management
Division of Goldman Sachs ("GS Asset Management" and, together with Goldman
Sachs Asset Management, L.P., a Delaware limited partnership and a
successor to certain of the asset management businesses of GS Asset
Management, "GSAM"). Each of the Managing Member, Goldman Sachs and GSAM is
a wholly owned subsidiary of The Goldman Sachs Group, Inc.
Goldman Sachs, one of the world's oldest and largest investment
banking and securities firms, was founded in 1869. GSAM, formed in 1988, is
located at 32 Old Slip, New York, New York 10005. GS HFS is located at 701
Mount Lucas Road, Princeton, New Jersey 08540.
The Company has no employees. As of December 31, 2004, the Managing
Member was supported by approximately 125 employees of the GS Group
worldwide, of which approximately 29 allocated at least a portion of their
time to portfolio management of the Company and the Investment Funds. The
Company's assets were managed, indirectly through the Company's investments
in the Investment Funds, by approximately 98 Advisors.
The Managing Member may withdraw any interest it may have as the
Managing Member, and may substitute an entity that is an affiliate of
Goldman Sachs as the Managing Member of the Company. From time to time
certain qualified officers and employees of the Managing Member, Goldman
Sachs and its affiliates may invest, directly or indirectly, in the
Company. Subject to the redemption provisions of the LLC Agreement, any
such party may redeem any Units that it may acquire without prior notice to
the non-managing members. The managing member of each Investment Fund has
such rights with respect to its interests therein. Members of the GS Group
have from time to time made and withdrawn investments in certain of the
Investment Funds. Redemptions of any amount may be made by members of the
Managing Member and Affiliates at any time, without prior notice, in
accordance with the redemption provisions of the limited liability company
agreement of the applicable Investment Fund.
It is not presently expected that the Investment Funds' Advisors or
any of their respective principals will purchase Units or membership units
in the Investment Funds.
The Managing Member also manages a number of other investment funds
that have investment programs that are similar to those of the Company. See
"POTENTIAL CONFLICTS OF INTEREST."
POTENTIAL CONFLICTS OF INTEREST
GENERAL CATEGORIES OF CONFLICTS ASSOCIATED WITH THE COMPANY
The Goldman Sachs Group, Inc. is a worldwide, full-service investment
banking, broker-dealer, asset management and financial services
organization. As a result, The Goldman Sachs Group, Inc., GSAM, the
Managing Member (for purposes of this "POTENTIAL CONFLICTS OF INTEREST"
section, in its capacities as Managing Member of the Company and managing
member of each of the Investment Funds) and their affiliates, directors,
partners, trustees, managers, members, officers and employees
(collectively, for purposes of this "POTENTIAL CONFLICTS OF INTEREST"
section, "Goldman Sachs"), including those who may be involved in the
management, sales, investment activities, business operations, or
distribution of the Company or the Investment Funds, are engaged in
businesses and have interests other than that of managing the Company or
the Investment Funds. In addition, the investment managers to which the
Investment Funds directly or indirectly allocate their assets and their
affiliates, directors, partners, trustees, managers, members, officers and
employees (collectively, for purposes of this "POTENTIAL CONFLICTS OF
INTEREST" section, the "Advisors") may similarly have clients, businesses,
and interests in addition to managing assets of the applicable Advisor
Fund, Portfolio Company or Managed Account. The activities and interests of
Goldman Sachs and the Advisors include potential multiple advisory,
transactional and financial and other interests in securities, instruments
and companies that may be directly or indirectly purchased or sold by the
Company, Investment Funds, Advisor Funds, Portfolio Companies or Managed
Accounts and their service providers, including without limitation the
Advisors. These are considerations of which Members should be aware, and
which may cause conflicts that could disadvantage the Investment Funds and
the Company.
Present and future activities of Goldman Sachs and the Advisors in
addition to those described in this "POTENTIAL CONFLICTS OF INTEREST"
section may give rise to additional conflicts of interest.
As a registered investment adviser under the Investment Advisers Act
of 1940 (the "Investment Advisers Act"), the Managing Member is required to
file a Form ADV with the SEC. Form ADV contains information about assets
under management, types of fee arrangements, types of investments,
potential conflicts of interest, and other relevant information regarding
the Managing Member. A copy of Part 1 of the Managing Member's Form ADV is
available on the SEC's website (www.sec.gov). A copy of Part 2 of the
Managing Member's Form ADV will be provided to Members or prospective
Members upon request.
By having made an investment in the Company, a Member is deemed to
have acknowledged and assented to the existence of potential conflicts of
interest relating to Goldman Sachs and the Advisors, and to the operations
of the Company, Investment Funds, Advisor Funds, Portfolio Companies and
Managed Accounts in the face of these conflicts.
POTENTIAL CONFLICTS RELATING TO THE SELECTION OF ADVISORS, THE SALE OF
COMPANY UNITS AND THE ALLOCATION OF INVESTMENT OPPORTUNITIES
GOLDMAN SACHS' INTERESTS HAVE THE POTENTIAL TO INFLUENCE THE SELECTION
OF ADVISORS FOR THE COMPANY AND THE INVESTMENT FUNDS
The interests of Goldman Sachs, including the Managing Member and its
personnel, may create potential conflicts in the selection of Advisors for
the Investment Funds and in the sale of Company Units. The Managing Member
will select Advisors for the Investment Funds in accordance with its duties
to clients. However, given the breadth of Goldman Sachs' activities, it is
expected that Goldman Sachs may receive various forms of compensation,
commissions, payments, rebates or services from Advisors, and provide a
variety of products and services to them. The amount of such compensation,
commissions, payments, rebates or services to Goldman Sachs may increase if
an Investment Fund invests with such Advisors. Such compensation,
commissions, payments, rebates or services may incentivize Goldman Sachs
and its personnel to select such Advisors over other Advisors which might
also be appropriate for the Investment Funds.
Goldman Sachs is a full-service investment banking, broker-dealer,
asset management and financial services organization and a major
participant in global financial markets. As such, it acts as an investor,
investment banker, research provider, investment manager, financer,
advisor, market maker, trader, prime broker, lender, agent and principal,
and has other direct or indirect interests, in the global fixed income,
currency, commodity, equity and other markets in which the Company, the
Investment Funds and the Advisors directly and indirectly invest. In
addition, it is likely that the Advisors will invest in, engage in
transactions with, make voting decisions with respect to, or obtain
services from entities for which Goldman Sachs performs or seeks to perform
investment banking or other services. It is also likely that the Advisors
will engage in transactions with or obtain services from Goldman Sachs, and
invest in securities in which Goldman Sachs makes a market or has other
direct or indirect interests. While decisions for the Company and the
Investment Funds will be made consistent with Goldman Sachs' obligations to
manage the Company and the Investment Funds appropriately, business
relationships and the fees, compensation and other benefits to Goldman
Sachs arising therefrom may in certain cases incentivize the Managing
Member to select certain Advisors as opposed to other Advisors which might
also be appropriate for the Investment Funds.
For example, while the Managing Member will select Advisors in
accordance with its fiduciary obligations to the Investment Funds, Goldman
Sachs may also provide brokerage or other services to Advisors or act as
prime broker for Advisors. Payments to Goldman Sachs for providing
brokerage or other services or acting as prime broker will generally
increase as the size of the assets that an Advisor manages increases.
Therefore, investment by an Investment Fund with an Advisor where Goldman
Sachs acts as prime broker, or to which Goldman Sachs provides brokerage or
other services, will likely result in additional revenues to Goldman Sachs
and its personnel. Goldman Sachs may provide research products and other
products and services to an Advisor and receive revenues in connection with
these activities. Goldman Sachs may receive price discounts or services
from Advisors based on its relationships with such Advisors. In connection
with services Goldman Sachs may provide Advisors, Goldman Sachs will act in
its own commercial interests. As a result, investment with Advisors will be
subject to many of the same conflicts arising from Goldman Sachs activities
described herein.
In addition, if an Advisor provides fee "breakpoints," such
breakpoints may be affected by Goldman Sachs' business relationships and
levels or accounts other than with respect to the applicable Investment
Fund, and may directly or indirectly benefit Goldman Sachs and other
proprietary or client accounts of Goldman Sachs.
GOLDMAN SACHS' FINANCIAL AND OTHER INTERESTS AND RELATIONSHIPS MAY
INCENTIVIZE GOLDMAN SACHS TO PROMOTE THE SALE OF COMPANY UNITS
Goldman Sachs, and its sales personnel and other financial service
providers, have interests in promoting sales of the Company and the
Investment Funds and certain Advisors. With respect to Goldman Sachs and
its personnel, the remuneration and profitability of activity relating to
the Company and the Investment Funds may be greater than the provision of
other services and sales of other products that might be provided or
offered. For example, Goldman Sachs and its sales personnel may directly or
indirectly receive a portion of the fees and commissions charged to the
Company and the Investment Funds. Such fees and commissions may be higher
than for other products or services, and the remuneration and profitability
to Goldman Sachs and such personnel resulting from transactions on behalf
of the Company and the Investment Funds may be greater than the
remuneration and profitability resulting from other products.
Goldman Sachs may also have business relationships with, and purchase,
or distribute or sell, services or products from or to, distributors,
consultants and others who recommend the Company, the Investment Funds or
the Advisors, or who engage in transactions with or for the Company, the
Investment Funds or the Advisors. For example, Goldman Sachs regularly
participates in industry and consultant sponsored conferences and may
purchase educational, data related or other services from consultants or
other third parties that it deems to be of value to its personnel and its
business. The products and services purchased from consultants may include,
but are not limited to, those that help Goldman Sachs understand the
consultant's points of view on the investment management process.
Consultants and other third parties that provide consulting or other
services to potential investors in the Company may receive fees from
Goldman Sachs, the Company or the Investment Funds, or the Advisor Funds in
connection with the distribution of Company Units or other Goldman Sachs
products. In addition, Goldman Sachs personnel, including employees of the
Managing Member, may have board, advisory, brokerage or other relationships
with issuers, distributors, consultants and others that may have
investments with the Advisors or that may recommend investments with the
Advisors or distribute Advisor Funds or engage in transactions for the
Advisors. As a result, those persons and institutions may have conflicts
associated with their promotion of the Company, the Investment Funds or
Advisors or other dealings with the Company, the Investment Fund or
Advisors that would create incentives for them to promote the Company, the
Investment Fund or Advisors or raise other conflicts.
POTENTIAL CONFLICTS RELATING TO THE ALLOCATION OF ADVISOR
OPPORTUNITIES AMONG THE INVESTMENT FUNDS AND OTHER GOLDMAN SACHS
ACCOUNTS
Goldman Sachs, including the Managing Member, currently manages or
advises, or may in the future manage or advise, accounts or funds,
including accounts or funds that may provide greater fees or other
compensation, including performance-based fees, to Goldman Sachs or in
which Goldman Sachs or its personnel have an interest (collectively, the
"Client/GS Accounts"), that have investment objectives that are similar to
those of the Company and/or the Investment Funds. The advice to those
Client/GS Accounts may compete or conflict with the advice given to the
Investment Funds, or may involve a different timing or nature of action
taken than with respect to the Investment Funds. For example, an Investment
Fund may compete with Client/GS Accounts for investment opportunities.
Client/GS Accounts may wish to invest with Advisors with which an
Investment Fund invests or that would be an appropriate investment for an
Investment Fund. Because Advisors may limit the number of investors in or
the size of their Advisor Funds or the amount of assets that they manage,
Client/GS Accounts may compete with the Investment Funds for appropriate
investment opportunities. In determining the allocation of such
opportunities among an Investment Fund and Client/GS Accounts, a number of
factors may be considered by the Managing Member that may include, without
limitation, the relative sizes of the applicable accounts and their
expected future sizes, the expected future capacity of the applicable
Advisor, the investment objectives and guidelines, risk tolerance,
availability of other investment opportunities, and available cash for
investment of the Investment Fund and such Client/GS Accounts. Fees charged
by the Advisors also have the potential to cause conflicts with the
Managing Member's allocation decisions. See "--Goldman Sachs' Interests
Have the Potential to Influence the Selection of Advisors for the Company
and the Investment Funds" above.
Allocation of investment opportunities with Advisors among an
Investment Fund and other Client/GS Accounts will be made by the Managing
Member in a manner that it considers, in its sole discretion, to be
reasonable and equitable over time. Allocation among accounts in any
particular circumstance may be more or less advantageous to any one
account. The Managing Member may determine that an investment opportunity
or particular purchases or sales are appropriate for one or more Client/GS
Accounts or for itself or an affiliate, but not for an Investment Fund, or
is appropriate for, or available to, the Investment Fund but in different
sizes, structures, terms or timing than is appropriate for others.
Therefore, the amount, timing, structuring or terms of an investment by the
Investment Funds may differ from, and performance may be lower than,
investments and performance of other Client/GS Accounts. Although
allocating investment opportunities with Advisors among an Investment Fund
and other Client/GS Accounts may create potential conflicts of interest
because of the interest of Goldman Sachs or its personnel in such other
Client/GS Accounts or because Goldman Sachs may receive greater fees or
compensation from such Client/GS Accounts, the Managing Member will not
make allocation decisions based on such interests or such greater fees or
compensation.
The Managing Member also serves as the managing member of Goldman
Sachs Hedge Fund Partners II, LLC, a Delaware limited liability company
("HFP II"), and Goldman Sachs Hedge Fund Partners III, LLC, a Delaware
limited liability company ("HFP III" and together with HFP II, the "Other
Existing HFP Funds"). The Other Existing HFP Funds have investment
objectives and utilize strategies similar to the Company. Goldman Sachs,
including the Managing Member, may in the future form additional investment
funds, that have investment objectives and utilize investment strategies
similar to the Company (any such fund, an "Additional HFP Fund"). Since the
Company, the Other Existing HFP Funds and any Additional HFP Fund will
utilize similar investment strategies, the Company may be competing with
the Other Existing HFP Funds and any Additional HFP Fund for the same
investment opportunities. For example, both the Company and HFP II invest
in GELS and GED. In addition, the Other Existing HFP Funds invest in other
investment funds managed by the Managing Member or its affiliates that have
investment objectives and strategies that are similar to the Investment
Funds, and also allocate their assets to Advisors in the same sectors as
the Investment Funds. It is anticipated that any Additional HFP Fund will
invest in certain of these and other investment funds. Allocation of
investment opportunities will be made in a reasonable and equitable manner,
as determined by the Managing Member in its sole discretion. The Managing
Member may determine that an investment opportunity is appropriate for the
Other Existing HFP Funds, an Additional HFP Fund, or the investment funds
in which they invest, but not for the Company or the Investment Funds, as
applicable, which may have adverse effects on the Company and the
Investment Funds. In addition, the fact that the Company, the Other
Existing HFP Funds and any Additional HFP Fund indirectly allocate their
assets to Advisors in the same sectors as the Company may create capacity
issues for the Company in the future.
OTHER POTENTIAL CONFLICTS RELATING TO THE MANAGEMENT OF THE COMPANY AND THE
INVESTMENT FUNDS BY THE MANAGING MEMBER
POTENTIAL RESTRICTIONS AND ISSUES RELATING TO INFORMATION HELD BY
GOLDMAN SACHS
In connection with its management of the Company and the Investment
Funds, the Managing Member may utilize investment policy advisors or a
committee which may include personnel of Goldman Sachs or of unaffiliated
firms. The performance by such persons of obligations related to their
consultation with Managing Member personnel could conflict with their areas
of primary responsibility within Goldman Sachs or elsewhere. In connection
with their activities with the Managing Member, such persons may receive
information regarding the proposed investment activities of the Company and
the Investment Funds that is not generally available to the public. There
will be no obligation on the part of such persons to make available for use
by the Company or Investment Funds any information or strategies known to
them or developed in connection with their own client, proprietary or other
activities. In addition, Goldman Sachs will be under no obligation to make
available any research or analysis prior to its public dissemination.
The Managing Member may from time to time have access to certain
fundamental analysis and proprietary technical models developed by Goldman
Sachs and its personnel, although Goldman Sachs has no obligation to make
such analysis and models available to the Managing Member. The Managing
Member is not obligated to use such analysis or models, and the Managing
Member is not obligated to effect transactions on behalf of the Company or
the Investment Funds in accordance therewith.
In addition, Goldman Sachs has no obligation to seek information or to
make available to or share with the Company or the Investment Funds any
information, investment strategies, opportunities or ideas known to Goldman
Sachs personnel or developed or used in connection with other clients or
activities. Goldman Sachs and certain of its personnel, including the
Managing Member or other Goldman Sachs personnel advising or otherwise
providing services to the Company or the Investment Funds, may be in
possession of information not available to all Goldman Sachs personnel, and
such personnel may act on the basis of such information in ways that have
adverse effects on the Company or the Investment Funds.
From time to time, Goldman Sachs may come into possession of material,
non-public information or other information that could limit the ability of
the Investment Funds to invest with Advisors. The investment flexibility of
the Investment Funds may be constrained as a consequence. In making
investment decisions for the Company and the Investment Funds, the Managing
Member is not generally permitted to obtain or use material non-public
information acquired by any division, department or affiliate of Goldman
Sachs in the course of their activities.
POTENTIAL CONFLICTS RELATING TO GOLDMAN SACHS' PROPRIETARY ACTIVITIES
AND ACTIVITIES ON BEHALF OF OTHER ACCOUNTS
The results of the investment activities of the Company and the
Investment Funds may differ significantly from the results achieved by
Goldman Sachs for its proprietary accounts and from the results achieved by
Goldman Sachs for other Client/GS Accounts. Goldman Sachs may give advice,
and take action, with respect to any current or future Client/GS Account or
proprietary or other account that may compete or conflict with the advice
the Managing Member may give to the Company or the Investment Funds, or may
involve a different timing or nature of action than with respect to the
Company or the Investment Funds.
Transactions undertaken by Goldman Sachs or Client/GS Accounts may
adversely impact the Company or the Investment Funds. Goldman Sachs and one
or more Client/GS Accounts may buy or sell positions while an Investment
Fund or an Advisor Fund, Portfolio Company or Managed Account is
undertaking the same or a differing, including potentially opposite,
strategy, which could disadvantage the Investment Fund, Advisor Fund,
Portfolio Company or Managed Account. For example, an Investment Fund or an
Advisor Fund, Portfolio Company or Managed Account may buy a security and
Goldman Sachs or its Client/GS Accounts may establish a short position in
that same security. That subsequent short sale may result in impairment of
the price of the security which the Investment Fund, Advisor Fund,
Portfolio Company or Managed Account holds. Conversely, the Investment
Fund, Advisor Fund, Portfolio Company or Managed Account may establish a
short position in a security and Goldman Sachs or its Client/GS Accounts
may buy that same security. That subsequent purchase may result in an
increase of the price of the underlying position in the short sale exposure
of the Investment Fund, Advisor Fund, Portfolio Company or Managed Account.
In addition, transactions in investments by one or more Client/GS Accounts
and Goldman Sachs may have the effect of diluting or otherwise
disadvantaging the values, prices or investment strategies of the
Investment Funds, Advisor Funds, Portfolio Companies or Managed Accounts,
particularly, but not limited to, in small capitalization, emerging market
or less liquid strategies. For example, an Investment Fund, Advisor Fund,
Portfolio Company or Managed Account may purchase or sell a position after
or at the same time Goldman Sachs or the Client/GS Accounts undertake the
same strategy which may increase the cost of that strategy to the
Investment Fund, Advisor Fund, Portfolio Company or Managed Account or
otherwise disadvantage the Investment Fund, Advisor Fund, Portfolio Company
or Managed Account.
In addition, conflicts may arise because portfolio decisions regarding
an Advisor Fund, Portfolio Company or Managed Account may benefit other
Client/GS Accounts. For example, the sale of a long position or
establishment of a short position by an Advisor Fund, Portfolio Company or
Managed Account may impair the price of the same security sold short by
(and therefore benefit) Goldman Sachs or another Client/GS Account, and the
purchase of a security or covering of a short position in a security by an
Advisor Fund, Portfolio Company or Managed Account may increase the price
of the same security held by (and therefore benefit) Goldman Sachs or
another Client/GS Account.
The directors, officers and employees of Goldman Sachs, including the
Managing Member, may buy and sell securities or other investments for their
own accounts (including through funds managed by Goldman Sachs, including
the Managing Member). As a result of differing trading and investment
strategies or constraints, positions may be taken by directors, officers
and employees that are the same, different from or made at different times
than positions taken for an Investment Fund or the Company. To reduce the
possibility that the Company or an Investment Fund will be materially
adversely affected by the personal trading described above, the Managing
Member has established policies and procedures that restrict securities
trading in the personal accounts of investment professionals and others who
normally come into possession of information regarding the Company's or the
Investment Funds' portfolio transactions.
Subject to applicable law, clients of Goldman Sachs (including
Client/GS Accounts) may have, as a result of receiving client reports or
otherwise, access to information regarding Goldman Sachs' transactions
(and, when Goldman Sachs is a client of an Advisor, transactions of such
Advisor) or views which may affect their transactions outside of accounts
controlled by the Managing Member's personnel and as a result negatively
impact the performance of the Company, the Investment Funds or the
Advisors. The Company, the Investment Funds and the Advisor Funds may also
be adversely affected by cash flows and market movements arising from
purchase and sales transactions, as well as increases in capital invested
in and redemptions from Advisor Funds, by other Client/GS Accounts.
An Advisor's management of an Advisor Fund, Portfolio Company or
Managed Account may benefit Goldman Sachs. For example, the Advisors may,
subject to applicable law, invest directly or indirectly in the securities
of companies affiliated with Goldman Sachs or in which Goldman Sachs has an
equity, debt or other interest. Subject to applicable law, the Advisors may
engage in investment transactions which may result in Goldman Sachs or
other Client/GS Accounts being relieved of obligations or otherwise
divesting of investments. The purchase, holding and sale of investments by
the Advisors may enhance the profitability of Goldman Sachs' or other
Client/GS Accounts' own investments in and its activities with respect to
such companies.
Goldman Sachs and its clients may pursue or enforce rights with
respect to an issuer in which an Advisor has invested, and those activities
may have an adverse effect on the applicable Investment Fund and, in turn,
the Company. As a result, prices, availability, liquidity and terms of an
Advisor's investments may be negatively impacted by the activities of
Goldman Sachs or its clients, and transactions of an Advisor may be
impaired or effected at prices or terms that may be less favorable than
would otherwise have been the case.
Goldman Sachs may create, write, sell or issue, or act as placement
agent or distributor of, derivative instruments with respect to the Company
or with respect to which the underlying securities, currencies or
instruments may be those in which the Company or an Investment Fund
invests, or which may be otherwise based on the performance of the Company
or such Investment Fund. The structure or other characteristics of the
derivative instruments may have an adverse effect on an Investment Fund.
For example, the derivative instruments could represent leveraged
investments in the Company or an Investment Fund or a Portfolio Company,
and the leveraged characteristics of such investments could make it more
likely, due to events of default or otherwise, that there would be
significant redemptions of interests from the Company or such Investment
Fund or Portfolio Company more quickly than might otherwise be the case.
Goldman Sachs, acting in commercial capacities in connection with such
derivative instruments, may in fact cause such a redemption. This may have
an adverse effect on the investment management, flexibility, and
diversification strategies of the Company, Investment Funds or Portfolio
Companies and on the amount of fees, expenses and other costs incurred
directly or indirectly for the account of the Company or the Investment
Funds. Similarly, Goldman Sachs (including its personnel or Client/GS
Accounts) may also invest in the Company or an Investment Fund or Portfolio
Company, hedge its derivative positions by buying or selling Units in the
Company or units of interests in an Investment Fund or Portfolio Company
and reserves the right to redeem some or all of its investments at any
time. These investments and redemptions will be made without notice to the
Members or the direct or indirect members of the Investment Funds or
Portfolio Companies, as applicable, including the Company, and could result
in early redemptions that could have similarly adverse effects on the
Company or the Investment Funds.
The Managing Member, the Company and the Investment Funds may receive
research products and services in connection with the brokerage services
that brokers (including, without limitation, Goldman Sachs entities) may
provide to the Company, the Investment Funds or one or more Client/GS
Accounts. Such products and services may disproportionately benefit other
Client/GS Accounts relative to the Company or an Investment Fund based on
the amount of brokerage commissions paid by the Company or such Investment
Fund, as applicable, and such other Client/GS Accounts. For example,
research or other services that are paid for through one client's
commissions may not be used in managing that client's account. In addition,
Client/GS Accounts may receive the benefit, including disproportionate
benefits, of economies of scale or price discounts in connection with
products and services that may be provided to the Company and the
Investment Funds and to Client/GS Accounts.
POTENTIAL CONFLICTS IN CONNECTION WITH INVESTMENTS IN GOLDMAN SACHS
MONEY MARKET FUNDS
To the extent permitted by applicable law, the Company or any
Investment Fund may invest all or some of its short term cash investments
in any money market fund advised or managed by Goldman Sachs. In connection
with any such investments, the Company and the Investment Funds will pay
all fees pertaining to the investments and no portion of any advisory,
administrative or 12b-1 fees will be offset against fees payable in
accordance with any such investments (i.e., there could be "double fees"
involved in making any such investment, which would not arise in connection
with a direct investment). In such circumstances, as well as in all other
circumstances in which Goldman Sachs receives any fees or other
compensation in any form relating to the provision of services, no
accounting or repayment to the Company or the Investment Funds or the
Members will be required.
GOLDMAN SACHS MAY IN-SOURCE OR OUTSOURCE
Subject to applicable law, Goldman Sachs, including the Managing
Member, may from time to time and without notice to investors in-source or
outsource certain processes or functions in connection with a variety of
services that it provides to the Company or the Investment Funds in its
administrative or other capacities. Such in-sourcing or outsourcing may
give rise to additional conflicts of interest.
POTENTIAL CONFLICTS THAT MAY ARISE WHEN GOLDMAN SACHS PROVIDES
BROKERAGE OR OTHER SERVICES TO THE ADVISORS, THE INVESTMENT FUNDS AND
THE COMPANY
The Managing Member may select Goldman Sachs to enter into
transactions and invest in futures, securities, currencies, swaps, options,
forward contracts or other instruments on behalf of the Investment Funds in
which Goldman Sachs, acting as principal or on a proprietary basis for its
customers, serves as the counterparty. The Company or an Investment Fund
may also enter into cross transactions in which Goldman Sachs acts on
behalf of the Company or such Investment Fund, as applicable, and for the
other party to the transaction. Goldman Sachs may have a potentially
conflicting division of loyalties and responsibilities to both parties to a
cross transaction. For example, Goldman Sachs and its personnel may receive
compensation or other payments from, or have different interests in, the
Company or the applicable Investment Fund and the other party to the
transaction. Goldman Sachs will only consider engaging in a principal or
cross transaction on behalf of the Company or the Investment Funds with
Goldman Sachs or its affiliates to the extent permitted by applicable law.
When the Managing Member chooses Goldman Sachs to act as broker,
dealer, agent, lender or advisor or in other commercial capacities for the
Company or the Investment Funds, it is anticipated that the commissions,
mark-ups, mark-downs, financial advisory fees, underwriting and placement
fees, sales fees, financing and commitment fees, brokerage fees, other
fees, compensation or profits, rates, terms and conditions charged by
Goldman Sachs will be in its view commercially reasonable, although Goldman
Sachs, including its sales personnel, will have an interest in obtaining
fees and other amounts that are favorable to Goldman Sachs and such sales
personnel. When the Managing Member chooses Goldman Sachs, the Company or
an Investment Fund may, to the extent permitted by applicable law, borrow
funds from Goldman Sachs at rates and on other terms arranged with Goldman
Sachs.
Goldman Sachs (and its personnel and other distributors) will be
entitled to retain fees and other amounts that it receives in connection
with its service to the Company, the Investment Funds and the Advisors as
broker, dealer, agent, lender, advisor or in other commercial capacities,
no accounting to the Company, the Investment Funds or the Members will be
required, and no fees or other compensation payable by the Company, the
Investment Funds or the Members will be reduced by reason of receipt by
Goldman Sachs of any such fees or other amounts.
When an Advisor chooses Goldman Sachs to act as broker, dealer, agent,
lender or advisor or in other commercial capacities in relation to an
Advisor Fund, Portfolio Company or Managed Account, Goldman Sachs may take
commercial steps in its own interests, which may have an adverse effect on
the Company. For example, in connection with prime brokerage or lending
arrangements involving Advisors, Goldman Sachs may require repayment of all
or part of a loan at any time or from time to time.
The Company and each Investment Fund will be required to establish
business relationships with its counterparties based on its own credit
standing. Goldman Sachs, including the Managing Member, will not have any
obligation to allow its credit to be used in connection with the Company's
or an Investment Fund's establishment of its business relationships, nor is
it expected that the Company's or an Investment Fund's counterparties will
rely on the credit of such entities in evaluating the Company's
creditworthiness.
POTENTIAL CONFLICTS RELATING TO THE SELECTION OF INVESTMENTS BY THE
ADVISORS
AN ADVISOR'S INTERESTS HAVE THE POTENTIAL TO INFLUENCE THE SELECTION
OF INVESTMENTS
Each Advisor may act as an investor, investment banker, research
provider, investment manager, financer, advisor, market maker, trader,
prime broker, lender, agent or principal, or have other direct or indirect
interests, in the global fixed income, currency, commodity, equity and
other markets in which the Advisor trades. Thus, it is possible that an
Advisor will undertake transactions in securities in which it makes a
market or otherwise has direct or indirect interests. These business
relationships and the fees, compensation and other benefits to the Advisors
arising therefrom may in certain cases incentivize the Advisors to make
certain investments for Advisor Funds, Portfolio Companies or Managed
Accounts over other investments which might also be appropriate.
POTENTIAL CONFLICTS RELATING TO THE ALLOCATION OF INVESTMENT
OPPORTUNITIES AMONG THE ADVISORS' ACCOUNTS
Advisors may manage or advise current or future accounts or funds,
including accounts or funds that may provide greater fees or other
compensation, including performance-based fees, to the Advisors or in which
Advisors or their personnel have an interest (collectively, the
"Client/Advisor Accounts") that have investment objectives that are similar
to those of an Advisor Fund, Portfolio Company or Managed Account managed
by such Advisor. Client/Advisor Accounts may wish to invest in securities
or instruments in which an Advisor Fund, Portfolio Company or Managed
Account invests or that would be an appropriate investment thereby.
Therefore, an Advisor or its personnel may have a financial incentive to
favor other Client/Advisor Accounts over an Advisor Fund, Portfolio Company
or Managed Account managed by such Advisor when allocating investment
opportunities and making purchase and sale decisions.
An Advisor may determine that a particular investment opportunity or
particular purchases or sales are appropriate for one or more
Client/Advisor Accounts or for itself or an affiliate, but not for the
Advisor Fund, Portfolio Company or Managed Account managed by such Advisor,
or is appropriate for, or available to, such Advisor Fund, Portfolio
Company or Managed Account, but in different sizes, terms or timing than is
appropriate for others. Such decisions may create a potential conflict of
interest. The amount, timing, structuring or terms of an investment by an
Advisor Fund, Portfolio Company or Managed Account managed by an Advisor
may differ from, and performance may be lower than, investments and
performance of other Client/Advisor Accounts managed by the same Advisor.
OTHER POTENTIAL CONFLICTS RELATING TO THE ADVISORS' PORTFOLIO MANAGEMENT
ACTIVITIES
POTENTIAL RESTRICTIONS AND ISSUES RELATING TO INFORMATION HELD BY
ADVISORS
In connection with its management of an Advisor Fund, Portfolio
Company or Managed Account, an Advisor may utilize investment policy
advisors or a committee which may include personnel of the Advisor or
unaffiliated firms. These individuals may, as a result, obtain information
regarding the proposed activities of the Advisor Fund, Portfolio Company or
Managed Account managed by such Advisor which is not generally available to
the public.
An Advisor may from time to time have access to certain fundamental
analysis and proprietary technical models developed by it and its
affiliates, although the Advisor may not be permitted to use such analysis
and models on behalf of the Advisor Fund, Portfolio Company or Managed
Account that it manages. Such Advisor may not be obligated to use such
analysis or models, and may not be obligated to effect transactions on
behalf of an Advisor Fund, Portfolio Company or Managed Account that it
manages in accordance therewith. In addition, the Advisor may have no
obligation to seek information or to make available to or share with the
Advisor Fund, Portfolio Company or Managed Account any information,
investment strategies, opportunities or ideas known to personnel of the
Advisor or developed or used in connection with other Client/Advisor
Accounts or activities.
In addition, an Advisor and certain of its personnel may be in
possession of information not available to all Advisor personnel, including
the personnel advising or otherwise providing services to the Advisor Fund,
Portfolio Company or Managed Account advised by such Advisor, and such
personnel may act on the basis of such information in ways that have
adverse effects on such Advisor Fund, Portfolio Company or Managed Account.
The Advisors will not be under any obligation to disseminate such
information.
From time to time, an Advisor may come into possession of material,
non-public information or other information that could limit the ability of
an Advisor Fund, Portfolio Company or Managed Account managed by such
Advisor to buy and sell investments. The investment flexibility of such
Advisor Fund, Portfolio Company or Managed Account may be constrained as a
consequence.
POTENTIAL CONFLICTS RELATING TO AN ADVISOR'S PROPRIETARY ACTIVITIES ON
BEHALF OF OTHER ACCOUNTS MANAGED BY ADVISORS
The results of the investment activities of an Advisor Fund, Portfolio
Company or Managed Account may differ significantly from the results
achieved by its Advisor for its proprietary accounts and from the results
achieved by the Advisor for other accounts managed by it. An Advisor may
give advice, and take action, with respect to one or more accounts that may
compete or conflict with the advice the Advisor may give to the Advisor
Fund, Portfolio Company or Managed Account managed by it, or may involve a
different timing or nature of action taken than with respect to such
Advisor Fund, Portfolio Company or Managed Account.
Transactions undertaken by Advisors or Client/Advisor Accounts may
adversely impact an Advisor Fund, Portfolio Company or Managed Account. An
Advisor and its Client/Advisor Accounts may buy or sell positions while an
Advisor Fund, Portfolio Company or Managed Account managed by such Advisor
is undertaking the same or a differing, including potentially opposite,
strategy, which could disadvantage the Advisor Fund, Portfolio Company or
Managed Account. For example, an Advisor Fund may buy a security and its
Advisor or such Advisor's Client/Advisor Accounts may establish a short
position in that same security. That subsequent short sale may result in
impairment of the price of the security which the Advisor Fund holds.
Conversely, the Investment Fund may establish a short position in a
security and the Advisor or its Client/Advisor Accounts may buy that same
security. That subsequent purchase may result in an increase of the price
of the underlying position in the short sale exposure of the Advisor Fund.
In addition, transactions in investments by one or more Client/Advisor
Accounts or the Advisor may have the effect of diluting or otherwise
disadvantaging the values, prices or investment strategies of an Advisor
Fund, Portfolio Company or Managed Account, particularly, but not limited
to, in small capitalization, emerging market or less liquid strategies.
This may occur when portfolio decisions regarding an Advisor Fund,
Portfolio Company or Managed Account are based on research or other
information that is also used to support portfolio decisions for other
Client/Advisor Accounts managed by personnel of the Advisor, which could
impact the timing and manner in which the portfolio decisions for the
Advisor Fund, Portfolio Company or Managed Account and other Client/Advisor
Accounts are implemented. When the Advisor or a Client/Advisor Account
implements a portfolio decision or strategy ahead of, or contemporaneously
with, similar portfolio decisions or strategies for an Advisor Fund,
Portfolio Company or Managed Account, market impact, liquidity constraints,
or other factors could result in the Advisor Fund, Portfolio Company or
Managed Account receiving less favorable trading results and the costs of
implementing such portfolio decisions or strategies could be increased or
the Advisor Fund, Portfolio Company or Managed Account could otherwise be
disadvantaged. The Advisor may, in certain cases, elect to implement
internal policies and procedures designed to limit such consequences to the
Client/Advisor Accounts as well as the Advisor Funds, Portfolio Companies
and Managed Accounts, which may cause an Advisor Fund, Portfolio Company or
Managed Account to be unable to engage in certain activities, including
purchasing or disposing of securities, when it might otherwise be desirable
for it to do so.
Conflicts may arise because portfolio decisions regarding an Advisor
Fund, Portfolio Company or Managed Account may benefit other Client/Advisor
Accounts. For example, the sale of a long position or establishment of a
short position by an Advisor Fund may impair the price of the same security
sold short by (and therefore benefit) the Advisor or another Client/Advisor
Account, and the purchase of a security or covering of a short position in
a security by an Advisor Fund may increase the price of the same security
held by (and therefore benefit) the Advisor or another Client/Advisor
Account.
The directors, officers and employees of an Advisor may buy and sell
securities or other investments for their own accounts (including through
funds managed by the Advisor). As a result of differing trading and
investment strategies or constraints, positions may be taken by directors,
officers and employees of an Advisor that are the same, different from or
made at different times than positions taken for an Advisor Fund, Portfolio
Company or Managed Account managed by such Advisor. An Advisor may
establish, and Goldman Sachs has established, policies and procedures that
restrict securities trading in the personal accounts of investment
professionals and others who normally come into possession of information
regarding the portfolio transactions of an Advisor Fund, Portfolio Company
or Managed Account that it manages. However, there can be no assurance that
such policies and procedures will avoid all conflicts of interest.
Subject to applicable law, clients of an Advisor (including
Client/Advisor Accounts) may have, as a result of receiving client reports
or otherwise, access to information regarding the Advisor's transactions or
views which may affect their transactions outside of accounts controlled by
the personnel providing advice to an Advisor Fund, Portfolio Company or
Managed Account managed by such Advisor, and in connection therewith
negatively impact the performance of such Advisor Fund, Portfolio Company
or Managed Account.
An Advisor's management of the assets of an Advisor Fund, Portfolio
Company or Managed Account may benefit the Advisor. For example, an Advisor
Fund, Portfolio Company or Managed Account may, subject to applicable law,
invest directly or indirectly in the securities of companies affiliated
with the Advisor or in which the Advisor has an equity, debt or other
interest. Subject to applicable law, an Advisor Fund, Portfolio Company or
Managed Account may engage in investment transactions which may result in
the Advisor or Client/Advisor Account being relieved of obligations or
otherwise divesting of an investment. The purchase, holding and sale of
investments by an Advisor Fund, Portfolio Company or Managed Account may
enhance the profitability of the Advisor's or its Client/Advisor Accounts'
own investments in and its activities with respect to such companies.
An Advisor and its clients may also pursue or enforce rights with
respect to an issuer in which an Advisor Fund, Portfolio Company or Managed
Account has invested, and those activities may have an adverse effect on
such Advisor Fund, Portfolio Company or Managed Account. As a result,
prices, availability, liquidity and terms of Advisor Fund, Portfolio
Company or Managed Account investments may be negatively impacted by the
activities of the Advisor or its clients, and transactions for an Advisor
Fund, Portfolio Company or Managed Account may be impaired or effected at
prices or terms that may be less favorable than would otherwise have been
the case.
An Advisor may create, write, sell or issue, or act as placement agent
or distributor of, derivative instruments with respect to which the
underlying securities, currencies or instruments may be those in which the
Advisor Fund, Portfolio Company or Managed Account managed by it invests,
or which may be based on the performance of such Advisor Fund, Portfolio
Company or Managed Account. The structure or other characteristics of the
derivative instruments may have an adverse effect on the Advisor Fund,
Portfolio Company or Managed Account. For example, the derivative
instruments could represent leveraged investments in an Advisor Fund, and
the leveraged characteristics of such investments could make it more
likely, due to events of default or otherwise, that there would be
significant redemptions of interests from the Advisor Fund more quickly
than might otherwise be the case. The Advisor, acting in commercial
capacities in connection with such derivative instruments, may in fact
cause such a redemption. This may have an adverse effect on the investment
management, flexibility, and diversification strategies of the Advisor Fund
and on the amount of fees, expenses and other costs incurred directly or
indirectly for the account of such Advisor Fund. Similarly, an Advisor
(including its personnel or Client/Advisor Accounts) may also invest in an
Advisor Fund, or hedge its derivative positions by buying or selling the
Advisor Fund and will generally reserve the right to redeem some or all of
its investments at any time. These investments and redemptions will be made
without notice to the investors in such Advisor Funds, including the
Investment Funds, and could result in early redemptions that could have
similarly adverse effects on the Advisor Funds.
POTENTIAL CONFLICTS THAT MAY ARISE WHEN AN ADVISOR ACTS IN A CAPACITY
OTHER THAN ADVISOR TO THE ADVISOR FUNDS, PORTFOLIO COMPANIES OR
MANAGED ACCOUNTS
To the extent permitted by applicable law, an Advisor may enter into
transactions and invest in futures, securities, currencies, swaps, options,
forward contracts or other instruments on behalf of an Advisor Fund,
Portfolio Company or Managed Account in which such Advisor, acting as
principal or on a proprietary basis for its customers, serves as the
counterparty. An Advisor Fund, Portfolio Company or Managed Account may
also enter into cross transactions in which its Advisor acts on behalf of
such Advisor Fund, Portfolio Company or Managed Account and for the other
party to the transaction. An Advisor may have a potentially conflicting
division of responsibilities to both parties to a cross transaction.
When an Advisor acts as broker, dealer, agent, lender or advisor or in
other commercial capacities in relation to an Advisor Fund, Portfolio
Company or Managed Account, such Advisor may take commercial steps in its
own interests, which may have an adverse effect on such Advisor Fund,
Portfolio Company or Managed Account. For example, in connection with prime
brokerage or lending arrangements involving an Advisor Fund, Portfolio
Company or Managed Account, an Advisor may require repayment of all or part
of a loan at any time or from time to time.
To the extent permitted by applicable law, an Advisor Fund, Portfolio
Company or Managed Account may invest all or some of its short term cash
investments in money market funds advised or managed by its Advisor, and
may invest in other products advised or managed by its Advisor. In
connection with any such investment, the Company and the Investment Funds
will pay all fees pertaining to the investment, and no portion of any
advisory, administrative or 12b-1 fees will be offset against fees payable
in accordance with any such investment (i.e., there could be "double fees"
involved in making any such investment, which would not arise in connection
with a direct investment). In such circumstances, as well as in all other
circumstances in which the Advisor receives any fees or other compensation
in any form relating to the provision of services, no accounting or
repayment to the Company or Investments Funds will be required.
When an Advisor acts as broker, dealer, agent, lender or advisor or in
other commercial capacities for an Advisor Fund, Portfolio Company or
Managed Account, it is anticipated that the commissions, mark-ups,
mark-downs, financial advisory fees, underwriting and placement fees, sales
fees, financing and commitment fees, brokerage fees, other fees,
compensation or profits, rates, terms and conditions charged thereby will
be in its view commercially reasonable, although the Advisor, including its
sales personnel will have an interest in obtaining fees and other amounts
which are favorable to such Advisor and its sales personnel.
THE ADVISORS MAY IN-SOURCE OR OUTSOURCE
Subject to applicable law, Advisors may from time to time and without
notice to investors in-source or outsource certain processes or functions
in connection with a variety of services that they provide to the
Investment Funds, Portfolio Companies or Managed Accounts managed by them
in their administrative or other capacities. Such in-sourcing or
outsourcing may give rise to additional conflicts of interest.
POTENTIAL CONFLICTS IN CONNECTION WITH BROKERAGE TRANSACTIONS AND
PROXY VOTING BY THE ADVISORS
Purchases and sales of securities for an Advisor Fund, Portfolio
Company or Managed Account may be bunched or aggregated with orders for
other Client/Advisor Accounts of the Advisor that manages such Advisor
Fund, Portfolio Company or Managed Account. An Advisor, however, is not
required to bunch or aggregate orders if portfolio management decisions for
different accounts are made separately, or if it determines that bunching
or aggregating would be inconsistent with its investment management duties
or with client direction. Prevailing trading activity frequently may make
impossible the receipt of the same price or execution on the entire volume
of securities purchased or sold. When this occurs, the various prices may
be averaged and the Advisor Fund, Portfolio Company or Managed Account, as
applicable, will be charged or credited with the average price. Thus, the
effect of aggregation may operate on some occasions to the disadvantage of
the Advisor Fund, Portfolio Company or Managed Account. In addition, under
certain circumstances, an Advisor Fund, Portfolio Company or Managed
Account will not be charged the same commission or commission equivalent
rates in connection with a bunched or aggregated order.
An Advisor and an Advisor Fund, Portfolio Company or Managed Account
managed by it may from time to time receive research products and services
in connection with the brokerage services that brokers (including, without
limitation, affiliated entities) may provide to such Advisor Fund,
Portfolio Company or Managed Account or one or more Client/Advisor Accounts
managed by such Advisor. Such products and services may disproportionately
benefit other Client/Advisor Accounts relative to such Advisor Fund,
Portfolio Company or Managed Account based on the amount of brokerage
commissions paid by such Advisor Fund, Portfolio Company or Managed Account
and such other Client/Advisor Accounts. For example, research or other
services that are paid for through one client's commissions may not be used
in managing that client's account. In addition, other Client/Advisor
Accounts may receive the benefit, including disproportionate benefits, of
economies of scale or price discounts in connection with products and
services that may be provided to the Advisor Funds, Portfolio Companies or
Managed Accounts and to such other Client/Advisor Accounts.
Advisors may adopt policies and procedures designed to prevent
conflicts of interest from influencing proxy voting decisions they make on
behalf of advisory clients, including the Advisor Funds, Portfolio
Companies and/or Managed Accounts that they manage, and to help ensure that
such decisions are made in accordance with the Advisors' fiduciary
obligations to their clients. Nevertheless, notwithstanding such proxy
voting policies and procedures, actual proxy voting decisions of an Advisor
may have the effect of favoring the interests of other clients or
businesses of the Advisor and/or its affiliates, and of Goldman Sachs.
POTENTIAL REGULATORY RESTRICTIONS ON ADVISOR ACTIVITY
From time to time, the activities of an Advisor Fund, Portfolio
Company or Managed Account may be restricted because of regulatory
requirements applicable to an Advisor and/or its internal policies designed
to comply with, limit the applicability of, or otherwise relate to such
requirements. A client not advised by an Advisor would not be subject to
some of those considerations. There may be periods when an Advisor may not
initiate or recommend certain types of transactions, or may otherwise
restrict or limit its advice in certain securities or instruments issued by
or related to companies for which the Advisor is performing investment
banking, market making or other services or has proprietary positions. For
example, when an Advisor is engaged in an underwriting or other
distribution of securities of, or advisory services for, a company, an
Advisor Fund, Portfolio Company or Managed Account managed by such Advisor
may be prohibited from or limited in purchasing or selling securities of
that company. Similar situations could arise if personnel of an Advisor
serve as directors of companies the securities of which an Advisor Fund,
Portfolio Company or Managed Account managed by such Advisor wishes to
purchase or sell. However, if permitted by applicable law, the Advisor
Fund, Portfolio Company or Managed Account may purchase investments that
are issued, or the subject of an underwriting, distribution, or advisory
assignment by its Advisor, or in cases in which the Advisor's personnel are
directors or officers of the issuer.
The investment activities of an Advisor for proprietary accounts and
for other accounts may also limit the investment strategies and rights of
the Advisor Fund, Portfolio Company or Managed Account managed by such
Advisor. For example, in regulated industries, in certain emerging or
international markets, in corporate and regulatory ownership definitions,
and in certain futures and derivative transactions, there are limits on the
aggregate amount of investment by affiliated investors that may not be
exceeded without the grant of a license or other regulatory or corporate
consent or, if exceeded, may cause the Advisor to suffer disadvantages or
business restrictions. If certain aggregate ownership thresholds are
reached or certain transactions undertaken, the ability of the Advisor to
purchase or dispose of investments, or exercise rights or undertake
business transactions, may be restricted by regulation or otherwise
impaired. As a result, an Advisor may limit purchases, sell existing
investments, or otherwise restrict or limit the exercise of rights
(including voting rights) when the Advisor, in its sole discretion, deems
it appropriate in light of potential regulatory restrictions on ownership
or other impairments resulting in the reaching investment thresholds.
SAFEGUARDS IMPLEMENTED BY THE MANAGING MEMBER TO ADDRESS CONFLICTS OF
INTEREST
The Managing Member and its personnel will act in accordance with
their fiduciary duties to the Company and investors, and conduct themselves
in accordance with professional and ethical standards. Because of the
nature of the Managing Member's business and the businesses of its
affiliates, potential conflicts of interest may arise. To minimize the
effect of potential conflicts of interest, the Managing Member and the
Company have put in place policies and procedures and ethical standards
which are described below. In addition, the Managing Member and the Company
have disclosed potential conflicts in this Annual Report as well as in
other materials publicly filed or sent to investors in connection with
their investment.
Below is a discussion of three general categories of conflicts of
interest that could affect the Company, and the general safeguards that the
Managing Member and the Company have put in place to address them.
CONFLICTS RESULTING FROM OTHER BUSINESS DEALINGS OF THE MANAGING MEMBER AND
ITS AFFILIATES
The Managing Member is a subsidiary of The Goldman Sachs Group, Inc.
which is a worldwide, full-service investment banking, broker-dealer, asset
management and financial services organization. As a result, Goldman Sachs
is engaged in activities that may result in conflicts of interest with
those of the Company. For example, potential conflicts of interests may
arise if Goldman Sachs were to provide brokerage or other services to an
Advisor of an Investment Fund or act as an Investment Fund's prime broker.
In such circumstances, payments to Goldman Sachs resulting from these
relationships will generally increase as the size of the assets of the
Advisor increases. This may result in the Managing Member having an
incentive to select for investment by the Company an Investment Fund whose
Advisor has established such a relationship with Goldman Sachs over another
Investment Fund that might also be appropriate for the Company. In
addition, in connection with prime brokerage or lending arrangements
involving Investment Funds, Goldman Sachs may require repayment of all or
part of a loan at any time or from time to time.
To minimize the effect of any potential conflict of interest resulting
from Goldman Sachs' other business operations, Goldman Sachs, including the
Managing Member, has established policies and procedures addressing
potential conflicts of interest. Specifically, Goldman Sachs has put in
place "Chinese Walls" policies and procedures, which are designed to
separate the various functions and business lines of Goldman Sachs,
including the asset management and brokerage businesses. As a result,
personnel of the Managing Member that make investment and other decisions
on behalf of the Company ("Advisory Personnel") generally perform their
duties for the Company without knowledge of other Goldman Sachs operations.
CONFLICTING OBLIGATIONS TO THE COMPANY AND OTHER ADVISORY ACCOUNTS
The Managing Member may have potential conflicts of interest in
connection with other accounts it manages ("Advisory Accounts"). For
example, there may be a conflict of interest in connection with the
Managing Member's allocation of investments or transaction decisions for
the Company and another Advisory Account that may provide the Managing
Member greater fees or other compensation than the Company, particularly
where there is limited availability or limited liquidity for those
investments. This has the potential of providing the Managing Member with
an incentive to allocate investment opportunities in a manner that favors
the other Advisory Account over the Company.
To minimize the effect of any potential conflict of interest resulting
from the Managing Member's conflicting obligations to Advisory Accounts,
including its allocation practices, the Managing Member has developed
policies and procedures addressing these conflicts, which provide that
portfolio managers will allocate investment opportunities and make purchase
and sale decisions among Advisory Accounts in a manner that is reasonable
and equitable. It is the policy of the Managing Member to allocate, to the
extent possible, investment opportunities to the Company over a period of
time on a fair and equitable basis relative to the Advisory Accounts. The
Managing Member will generally allocate investments and/or transaction
decisions among the Company and the Advisory Accounts pro rata based on
their respective relative amounts of capital available for investment. In
circumstances when it is impossible or impracticable for investments and/or
transaction decisions to be allocated among the Company and the Advisory
Accounts in such a manner, the Managing Member will seek to allocate such
investments and/or transaction decisions among the Company and the Advisory
Accounts in a manner that it believes is in the best interests of the
Company and the Advisory Accounts after considering, among other things,
the respective investment guidelines and objectives, portfolio weightings,
strategy exposure, risk profile and risk tolerance, current investments,
cash flow and anticipated liquidity needs, expected future sizes of the
Company or the Advisory Accounts and availability of other investments
opportunities for the Company and the Advisory Accounts.
PERSONAL INTERESTS OF ADVISORY PERSONNEL
Employees of the Managing Member may have conflicts of interest in
connection with performing their duties on behalf of the Company. For
example, employees of the Managing Member may come into possession of
material, non-public information or other information as a result of their
investment activities on behalf of the Company or otherwise, and they may
seek to improperly benefit from such information by trading on the
information for their own personal benefit.
To minimize the effect of any such potential conflict of interest, the
Managing Member has adopted policies and procedures that address conflicts
of interest, information barriers and the use of protected information.
These policies state, among other things, that protected information may
only be used in a manner consistent with the purposes for which it was
created, and may not be disclosed to any other person who does not have a
need to know the information in order to perform his/her duties and to
carry out the purposes for which the information was provided. Furthermore,
the Managing Member's policies specifically address protected information
relating to the trading activity of Advisors. These policies state that any
such information with respect to Advisors may not be used by employees of
the Managing Member to make personal investments or in the management of
any other account of the Managing Member or its affiliates.
The Managing Member also has policies relating to personal trading
generally. Pursuant to these policies, employees must effect personal
securities transactions consistent with their fiduciary duties and subject
to professional and ethical standards. Among other things, the policies and
procedures of the Managing Member require, subject to certain exceptions,
pre-clearance of personal securities transactions by Managing Member
employees and minimum holding periods for purchased securities. Violations
of these policies, like all Managing Member policies, may result in
disciplinary actions up to and including termination, and may also result
in the breaking of specific trades. The personal trading of employees of
the Managing Member is subject to monitoring by a compliance department to
ensure compliance with these policies.
In addition, employees of the Managing Member are subject to a code of
business conduct and ethics that is applicable to The Goldman Sachs Group,
Inc. and its subsidiaries. Moreover, the Managing Member has also adopted a
Code of Ethics, which is filed as an exhibit to this Annual Report, that
requires persons acting as chief executive and senior officers of the
Company to promote honest and ethical conduct, including the ethical
handling of conflicts of interests between personal and professional
relationships.
COMPETITION
The market for hedge funds and hedge fund products is highly
competitive. The Company competes for investors with other hedge funds,
fund of funds, mutual funds, and money managers who employ similar
investment strategies and who offer similar hedge fund products to
investors. New entities, including other hedge funds, fund of funds and
money managers, regularly enter the market, and there are limited barriers
to entry. In addition, new hedge fund products are regularly introduced
into the market by existing funds. The Company competes with its
competitors on, among other things, the basis of its reputation, its
short-term and long-term performance and track record, access to, and
ability to select, Advisors, fees, management and portfolio teams,
strategies, client services and its ability to manage risk.
FISCAL YEAR
The Company's fiscal year ends on December 31 of each calendar year.
The Managing Member, in its sole discretion, may change the fiscal year-end
of the Company.
EMPLOYEES
As of December 31, 2004, the Company had no employees, however, the
Company is managed by the Managing Member which as of December 31, 2004,
was supported by approximately 29 employees of the GS Group who allocate at
least a portion of their time to the management of the Company and the
Investment Funds.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains certain "forward-looking statements"
regarding the operation of the Company and the Company's investment
objectives, including, among other things:
investment strategies and allocations of assets;
future performance; and
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 Company'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
strategies and decisions, all of which are difficult or impossible to
predict accurately and many of which are beyond the Company's control. Any
of the assumptions underlying the forward-looking statements contained
herein could be inaccurate and, therefore, the Managing Member of the
Company cannot assure Members that the forward-looking statements included
in this Annual Report will prove to be accurate.
In light of the significant uncertainties inherent in the
forward-looking statements included in this Annual Report, including,
without limitation, the risks set forth under "CERTAIN RISK FACTORS" below,
the inclusion of such information should not be regarded as a
representation by the Company or the Managing Member that the investment
objectives set forth in this Annual Report will be achieved. The Company
cautions Members 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.
The Company 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 Company or Company 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.
CERTAIN RISK FACTORS
GENERAL RISKS
The following are certain risk factors that relate to the operations
and terms of the Company and the Investment Funds.
RISKS RELATED TO THE COMPANY AND THE INVESTMENT FUNDS'
PERFORMANCE AND OPERATION
LACK OF OPERATING HISTORY OF THE COMPANY; PAST PERFORMANCE OF THE COMPANY
IS NOT INDICATIVE OF FUTURE RESULTS
Although the Managing Member also manages other investment funds which
have historically had investment programs similar to that of the Company,
the Company commenced its operations on April 1, 2002 and has a short
independent operating history upon which Members can evaluate its likely
performance. Similarly, many current and future Advisors have or will have
had short operating histories. The past investment performance of the
Company, any of the Investment Funds or Advisors should not be construed as
an indication of the future results of such Advisors, the Investment Funds,
or of the Company. The results of other accounts and investment funds
previously formed and managed by the Managing Member currently or in the
past, which have or have had investment objectives, strategies, risk
profiles, or investments that are similar to or different from the Company
or the Investment Funds, are not indicative of the results that the Company
or the Investment Funds may achieve. The Investment Funds make investments
in different portfolios of securities and, accordingly, their results and,
in turn, the results of the Company, may differ from the results previously
obtained by the Managing Member and those funds and accounts.
A SUBSTANTIAL PORTION OF AN INVESTMENT FUND'S ASSETS MAY BE INVESTED
UTILIZING STRATEGIES WHICH ARE NOT WITHIN ITS HEDGE FUND SECTOR; MOST
ADVISORS DO NOT PROVIDE DETAILED POSITION INFORMATION REGARDING THEIR
PORTFOLIOS
Although the managing member of an Investment Fund intends to allocate
assets to Advisors whose principal investment strategies are within the
specified hedge fund sector referenced in its name, a substantial portion
of the Investment Fund's assets may be invested utilizing strategies within
other investment sectors. In addition, the sectors referenced therein are
subjective classifications made by the managing member in its sole
discretion. Such classifications are based on information previously
provided by the Advisors and may differ from classifications into similarly
named sectors made by other industry participants. The managing member of
each Investment Fund will rely on information previously provided by each
Advisor in determining in its sole discretion that the principal investment
strategies utilized by an Advisor are within such Investment Fund's
specified hedge fund sector.
The managing member of an Investment Fund seeks to select Advisors for
the Investment Fund that exhibit certain operational, management and risk
control standards in the daily investment of their portfolios. The managing
member requests historical performance and position data in order to
evaluate how Advisors behave in certain environments. However, some
Advisors have no operating history and therefore such performance and
position data may not be available. The managing member also requests that
each Advisor provide guidelines about the size of its typical positions and
the amount of leverage that it will use in managing assets. These risk and
investment guidelines serve as a framework for the managing member to
conduct its ongoing risk monitoring on behalf of each Investment Fund as it
believes that there is value in regularly monitoring each Investment Fund's
Advisors to better understand such Advisors' risk and sources of return.
The managing member also conducts due diligence visits with the Advisors,
which may include representatives of its Advisor selection, risk and
quantitative analysis, compliance and operations areas. Accordingly, the
managing member seeks Advisors who are willing to share information and
market outlook and who agree to engage in a regular dialogue and provide
portfolio composition and profit and loss information regularly, although
the level of detail will vary by Advisor. However, many Advisors are
unwilling to provide significant transparency, e.g. position detail,
because such information is proprietary to such Advisors, particularly
those Advisors operating in the event driven and relative value sectors,
but also those in the equity long/short and tactical trading sectors and
the Company may still choose to invest with such Advisors because of their
historical returns and reputation. Moreover, due to changes in the
investment programs of certain Advisors over time or the failure of the
Advisors to accurately provide information or to provide such information
in sufficient detail, it is possible that the Investment Fund's assets will
be allocated to Advisors whose principal investment strategies are not
within its specified hedge fund sector for extended periods of time.
As is customary with the funds-of-hedge funds, most of the Advisors do
not provide the managing member of the Investment Funds with detailed
position reports because such information is proprietary to such Advisors.
These Advisors would not likely permit the Investment Funds to invest with
them if such an information requirement was a condition to such
investments. Also, Advisors may not comply with their stated investment
strategies. Members of the Company are assuming the risk that the Advisors
may not be providing accurate and timely information about their
strategies, performance and positions and that the information provided by
the Advisors will subsequently be proven or discovered to be inaccurate
and/or false. Reference in this Annual Report to information received by
Advisors includes information received directly from the Advisors as well
as information received from independent administrators or other third
party providers on behalf of such Advisors.
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 COMPANY'S
INVESTMENT OBJECTIVE
The Managing Member will have the discretion to underweight or
overweight allocations to hedge fund sectors from a risk perspective. As of
July 1, 2004, the Managing Member implemented an adjustment to weightings
among the Investment Funds. There is no assurance that its decisions
regarding allocations of assets or weights will be successful. In addition,
the Company will be limited in its ability to make changes to allocations
due to the redemption provisions of the Investment Funds, including notice
periods and limited redemption dates and the ability of the Investment
Funds to suspend and postpone redemptions. In addition, any such
allocations will be made by the Company based on information previously
provided by the Advisors. If such information is inaccurate or incomplete,
it is possible that the Company's allocation to the hedge fund sectors from
a risk perspective may not reflect the Managing Member's intended
allocations. This could have a material adverse effect on the ability of
the Managing Member to implement the Company's investment objective.
NON-DIVERSIFIED STATUS; THE MANAGING MEMBER MAY ALLOCATE TO ONE OR MORE
ADVISORS A RELATIVELY LARGE PERCENTAGE OF AN INVESTMENT FUND'S ASSETS
The Company is a "non-diversified" investment company. Thus, there are
no percentage limitations imposed by the Investment Company Act of 1940, as
amended (the "Investment Company Act") on the percentage of the Company's
assets that may be invested in the securities of any one issuer. The
Company will allocate its assets to Investment Funds. Although the managing
member of the Investment Funds intends to follow a general policy of
seeking to diversify each Investment Fund's capital among multiple
Advisors, the managing member may in its discretion depart from such policy
from time to time and one or more Advisors may be allocated a relatively
large percentage of an Investment Fund's assets, although the managing
member of the Investment Funds generally will not allocate more than 25% of
the total assets of an Investment Fund to any single Advisor at the time of
investment in such Advisor. Consequently, losses suffered by such Advisors
of an Investment Fund could result in a proportionately higher reduction in
such Investment Fund's capital than if such capital had been more
proportionately allocated among a larger number of Advisors.
DEPENDENCE ON THE MANAGING MEMBER AND THE ADVISORS; 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
COMPANY
The Managing Member invests assets of the Company in the Investment
Funds which in turn will invest in the Advisors. The managing member of
each of the Investment Funds, which currently is the Managing Member, has
the sole authority and responsibility for the selection of the Advisors for
that Investment Fund. The success of each Investment Fund and, in turn, of
the Company, depends upon the ability of the managing member of the
Investment Funds and each Investment Fund's Advisors to develop and
implement investment strategies that achieve each Investment Fund's
investment objectives. For example, an Advisor's inability to effectively
hedge an investment strategy that it utilizes may cause the assets of an
Investment Fund allocated to such Advisor to significantly decline in value
and could result in substantial losses to such Investment Fund and, in
turn, to the Company. The Investment Funds do not have any control over the
Advisors. Moreover, subjective decisions made by the Managing Member or the
managing member of an Investment Fund or by the Investment Funds' Advisors
may cause the Company, the Investment Fund or the Advisors to incur losses
or to miss profit opportunities on which they may otherwise have
capitalized. Members of the Company will have no right or power to
participate in the management or control of the Company, Investment Funds,
Portfolio Companies, Advisors or Advisor Funds, and will not have an
opportunity to evaluate in advance any specific investments made by the
Company, the Investment Funds, Portfolio Companies, Advisors or Advisor
Funds, or the terms of any investments made by the Company, the Investment
Funds, Portfolio Companies, Advisors or Advisor Funds.
While the Managing Member will select the Investment Funds in which
the Company invests, the Managing Member relies to a great extent on
information provided by the Advisors and will generally have limited
access, if any access at all, to information regarding the Advisors'
portfolios and operations. Most Advisors consider this information
proprietary and would not provide this information even if requested. If
the Investment Funds only invested in Advisors who provided complete access
to their information, the Investment Funds would not be able to access many
Advisors with which they might otherwise wish to invest since many Advisors
with strong track records and/or limited capacity will not agree to provide
this access. Limiting the Advisors that the Investment Funds would invest
with would have a material adverse impact on the Investment Funds and, in
turn, the Company and its Members. Accordingly, the Investment Funds invest
with many Advisors who do not provide any or all such information, and
Members who are not willing to assume this risk should not retain their
investment in the Company. There is a risk that Advisors may knowingly,
recklessly, negligently or otherwise withhold or misrepresent information
regarding activities that could have a material negative impact on the
performance of an Investment Fund and the Company. Members of the Company
are assuming the risk that the Advisors will act in such a manner. These
activities, therefore, could occur without the knowledge of the Managing
Member, and could have a material negative impact on the Company's
performance and financial statements, including, among other things,
causing a restatement of prior financial statements. Any such
misrepresentation or fraud by an Advisor would result in their position
being inaccurately reflected in an Investment Fund's, and therefore the
Company's, financial statements. Once an Investment Fund learns of any such
misrepresentation or fraudulent activities, it will likely be too late for
such Investment Fund to withdraw its assets from such Advisor without
having incurred significant losses due to its investment with such Advisor.
In the event of misrepresentation and fraud committed by those
Advisors or hedge funds in which the Investment Funds invest, the Company
or, more likely the Investment Funds, will have remedies available under
applicable state and federal securities and anti-fraud laws. As a general
matter, the Company does not have contractual remedies available to it for
misrepresentation and fraud, however, in certain limited cases where the
Investment Funds invest through Managed Accounts or Portfolio Companies,
the Investment Funds may have certain contractual protections. The Company
or the Investment Funds intend to pursue their potential legal remedies
based on an evaluation of litigation risks and costs involved in pursuing a
litigation. In addition, in deciding on whether or not to pursue legal
remedies available to them, the Company or the Investment Funds will also
consider the costs involved in pursuing any remedy and the risk that the
underlying hedge fund may have insufficient assets to comply with a
successful outcome. Accordingly, even if a legal remedy may be available to
the Company or the Investment Funds, it may chose not to pursue such
remedy.
THE INVESTMENT FUNDS DO NOT INTEND TO PARTICIPATE IN INITIAL PUBLIC
OFFERINGS WHICH MAY LIMIT POTENTIAL GAINS
The Investment Funds do not presently intend to participate directly
or indirectly in initial public offerings, which are subject to the rules
of the NASD that limit the ability of NASD member firms to sell securities
in initial public offerings to certain classes of "restricted persons."
Securities sold in certain initial public offerings in the past have on
occasion experienced initial, sometimes rapid, increases in market value
following such offerings. As a result, this could have an adverse effect on
the performance of the Investment Funds, and, in turn, the Company.
RISKS RELATED TO THE COMPANY'S REGULATORY ENVIRONMENT
LIMITED REGULATORY OVERSIGHT; MEMBERS NOT AFFORDED PROTECTION OF INVESTMENT
COMPANY ACT
The Company and each of the Investment Funds, in reliance upon an
exemption available to privately offered investment companies, are not
required to register as investment companies and have not registered as
such under the Investment Company Act. Thus, the provisions of the
Investment Company Act intended to provide various protections to investors
(which, among other things, require investment companies to have a majority
of disinterested directors, provide limitations on leverage, limit
transactions between investment companies and their affiliates, require
securities held in custody at all times to be individually segregated from
the securities of any other person and marked to clearly identify such
securities as the property of such investment company and regulate the
relationship between the adviser and the investment company) are not
applicable. The Managing Member is registered as an adviser under the
Investment Advisers Act.
Moreover, the Advisor Funds and Portfolio Companies in which the
Investment Funds invest generally are not registered as investment
companies, and the Investment Funds and the Company, in turn, are not
provided the protections of the Investment Company Act. In addition,
although the SEC has adopted new rules that will require most of the
Advisors of the Investment Funds to register as investment advisers under
the Investment Advisers Act, there is expected to be a significant period
of time before such registrations are completed. Therefore, an Investment
Fund as an investor with such Advisors that are not registered as
investment advisers will not have the benefit of certain of the protections
of the Investment Advisers Act.
The Advisor Funds and Portfolio Companies generally do not maintain
their securities and other assets in the custody of a bank or a member of a
securities exchange, as generally required of registered investment
companies in accordance with certain SEC rules. A registered investment
company which places its securities in the custody of a member of a
securities exchange is required to have a written custodian agreement,
which provides that securities held in custody will be at all times
individually segregated from the securities of any other person and marked
to clearly identify such securities as the property of such investment
company and which contains other provisions designed to protect the assets
of the registered investment company. It is anticipated that the Advisors
to which the Investment Funds will allocate assets generally will maintain
custody of their assets with brokerage firms which do not separately
segregate such customer assets as would be required in the case of
registered investment companies. Under the provisions of the Securities
Investor Protection Act of 1970, as amended, the bankruptcy of any such
brokerage firm could have a greater adverse effect on an Investment Fund
and, in turn, on the Company, than would be the case if custody of assets
were maintained in accordance with the requirements applicable to
registered investment companies. There is also a risk that an Investment
Fund's Advisor could convert to its own use assets committed to it by an
Investment Fund or that a custodian could convert to its own use assets
committed to it by an Investment Fund's Advisor. There can be no assurance
that the Advisors or the entities they manage will comply with all
applicable laws and that assets of the Investment Funds entrusted to
Advisors by the Investment Funds will be protected.
Furthermore, in accordance with U.S. Commodity Futures Trading
Commission (the "CFTC") regulations, the Managing Member is registered as a
commodity trading advisor ("CTA") and a commodity pool operator ("CPO")
under the U.S. Commodity Exchange Act of 1974 as amended (the "Commodity
Exchange Act"), and all of the Advisors of each Investment Fund are either
registered as CTAs or have indicated to the managing member of the
Investment Funds, that they are exempt from such registration. Because the
Units are being privately offered under both federal and state securities
laws and Units may be purchased only by persons who are qualified eligible
persons pursuant to Rule 4.7 under the Commodity Exchange Act, the
Memorandum has not been filed with or reviewed by any regulatory authority.
The Managing Member reserves the right to withdraw any registrations
relating to the Company in the future as permitted by applicable law.
THE COMPANY FACES LEGAL, TAX AND REGULATORY RISKS WHICH MAY ADVERSELY
AFFECT THE COMPANY
Legal, tax and regulatory changes could occur during the term of the
Company that may adversely affect the Company (including changes under the
Exchange Act). For example, the regulatory and tax environment for
derivative instruments in which Advisors of an Investment Fund may
participate is evolving, and changes in the regulation or taxation of
derivative instruments may materially adversely affect the value of
derivative instruments held by such Investment Fund and, in turn, the value
of the Company's assets, and the ability of such Investment Fund to pursue
its trading strategies. Similarly, the regulatory environment for leveraged
investors and for hedge funds generally is evolving, and changes in the
direct or indirect regulation of leveraged investors or hedge funds may
materially adversely affect the ability of the Company to pursue its
investment objective or strategies.
RISKS RELATED TO THE UNITS, LIQUIDITY OF UNITS
AND THE OFFERING OF THE UNITS
UNITS WILL NOT BE LISTED AND WILL NOT BE MARKETABLE
The Company does not intend to list its Units for trading on any
national securities exchange. There is no secondary trading market for the
Units, and none is expected to develop. The Units are, therefore, not
readily marketable. Because the Company is a closed-end investment company,
its Units will not be redeemable at the option of Members, other than on
each January 1 or July 1 (occurring on or after the first anniversary of
the purchase of such Units by the Member) upon 60 days' prior written
notice to the Managing Member, and they will not be exchangeable for
interests of any other funds. See "--The Company is a Closed-End Fund With
Limited Liquidity and Limited Rights for Redemption" below.
THE COMPANY IS A CLOSED-END FUND WITH LIMITED LIQUIDITY AND LIMITED RIGHTS
FOR REDEMPTION
The Company is a non-diversified, closed-end management investment
company designed primarily for long-term investors, and is not intended to
be a trading vehicle. Members should not retain their investment in this
Company if they need a liquid investment. Closed-end funds differ from
open-end management investment companies (commonly known as mutual funds)
in that investors in a closed-end fund do not have the right to redeem
their shares on a daily basis at a price based on net asset value. In order
to be able to meet daily redemption requests, mutual funds are subject to
more stringent liquidity requirements than closed-end funds. In particular,
a mutual fund generally may not invest more than 15% of its net assets in
illiquid securities. The Managing Member believes that unique investment
opportunities exist in the market for Investment Funds. However, these
investments are often illiquid, and a closed-end fund's ability to make
such investments is limited.
An investment in the Company provides limited liquidity since the
Units are not freely transferable and generally a Member is only permitted
to redeem Units, upon 60 days' prior written notice to the Managing Member
(unless such notice is waived by the Managing Member in its sole
discretion), as of the time immediately prior to the opening of business on
each January 1 or July 1 occurring on or after the first anniversary of the
purchase of such Units by the Member. In addition, redemptions may be
limited or postponed under limited circumstances. The same or similar
limitations will apply to the Company's investment in each of the
Investment Funds.
The Advisors of the Investment Funds may invest a portion of such
Investment Fund's assets in securities and financial instruments that are
not publicly traded. Such non-publicly traded securities and financial
instruments may not be readily disposable, are difficult to value and, in
some cases, may be subject to contractual, statutory or regulatory
prohibitions on disposition for a specified period of time. An investment
in the Company is therefore suitable only for certain sophisticated
investors that will not be materially impacted by postponements of the
Company's normal redemption dates. Further, distributions of proceeds by an
Investment Fund to the Company upon the Company's withdrawal from such
Investment Fund may be limited, in such Investment Fund's managing member's
sole discretion, because of restrictions imposed upon withdrawals under the
terms of the Advisor Funds or investment management agreements in or
pursuant to which such Investment Fund's assets are invested, or where, in
the view of the managing member, the disposal of part or all of such
Investment Fund's assets to meet withdrawal requests would be prejudicial
to its members. Distributions of proceeds by the Company upon a Member's
withdrawal may be limited, in the Managing Member's sole discretion, due to
the above-described circumstances or where, in the view of the Managing
Member, the disposal of part or all of the Company's assets to meet
withdrawal requests would be prejudicial to the Members.
REDEMPTIONS OF UNITS ARE SUBJECT TO SUBSTANTIAL WAITING PERIOD AND
POTENTIALLY OUTDATED INFORMATION
There will be a substantial period of time between the date as of
which Members must submit a request for redemption and the date they can
expect to receive full payment for their redemption proceeds from the
Company. Members whose Units are accepted for redemption bear the risk that
the Company's NAV (which is based upon the net asset value of the
underlying Investment Funds) may fluctuate significantly in the 60-day
period between the date by which redemption requests must be submitted and
the date as of which such Units are valued for purposes of such redemption.
Members will have to decide whether to request that the Company redeem
their Units without the benefit of having current information regarding the
value of Units on a date proximate to the date on which Units are valued by
the Company for purposes of effecting such redemptions. In addition, under
certain exceptional circumstances, such as force majeure, the Managing
Member may find it necessary (i) to postpone redemptions if it determines
that the disposition of investments to fund redemptions would adversely
affect NAV per Unit or (ii) to set up a reserve for undetermined or
contingent liabilities and withhold a certain portion of redemption
proceeds. Having an investment in the Company is suitable only for Members
who can bear the risks associated with the limited liquidity of the Units
and the underlying investments of the Company.
SUBSTANTIAL REDEMPTIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY
Substantial requests for the Company or an Investment Fund to redeem
units of its members could require the Company or 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 units redeemed and the units
that remain outstanding.
REDEMPTION MAY BE IN CASH OR IN-KIND UNDER THE SOLE DISCRETION OF THE
MANAGING MEMBER; MEMBERS MAY BEAR RISKS RELATED TO IN-KIND SECURITIES AND
PAY FEES IN DISPOSING IN-KIND SECURITIES
The Company generally expects to pay redemption proceeds in respect of
redeemed Units in cash. However, there can be no assurance that the Company
will have sufficient cash to pay for Units that are being redeemed or that
it will be able to liquidate investments at favorable prices to pay for
redeemed Units. The Company may in certain circumstances distribute
securities as payment for redeemed Units, including if making a cash
payment would result in a material adverse effect on the Company or the
Members, or if the Company has received distributions from the Investment
Funds in the form of securities that are transferable to the Members. An
Investment Fund may distribute redemption proceeds to the Company if the
Investment Fund receives distributions from its Advisors in the form of
securities. It is possible that, upon the Company's withdrawal of all or a
portion of its assets invested in an Investment Fund, the Company may
receive securities that are illiquid or difficult to value. In such
circumstances, the Managing Member would seek to dispose of these
securities in a manner that is in the best interests of the Company, which
may include a distribution in-kind to its Members. In the event that the
Company makes such a distribution of securities as payment for Units,
Members will bear any risks of the distributed securities and may be
required to pay a brokerage commission or other costs in order to dispose
of such securities.
SPECIAL CONSIDERATIONS ARE APPLICABLE TO THE UNITS; AFTER THE INITIAL
OFFERING OF UNITS SUBSEQUENT PURCHASERS OF UNITS MAY SUFFER LOSSES BECAUSE
OF PREVIOUSLY ESTABLISHED OPEN POSITIONS
The Company may accept additional subscriptions for Units from time to
time as determined by the Managing Member and in accordance with the LLC
Agreement. Upon the approval of the Managing Member, a Member or
prospective Member may make additional subscriptions for Units on the first
day of each calendar quarter or at such other times as the Managing Member
may determine in its sole discretion. Historically, the Company has from
time to time taken in funds on a monthly basis. From July 2003 through
September 2004, the Company only took in investments from existing
investors and limited subscriptions from new qualified investors, however,
starting in October 2004, the Company began accepting additional amounts of
new subscriptions again and the Company continued to do so through December
31, 2004.
Additional subscriptions will dilute the indirect interests of
existing Members in the Company's investment portfolio prior to any such
subscription, which could have a material adverse impact on the existing
Members' interest in the Company if future Company investments underperform
the prior investments. The Investment Funds may be closed from time to time
to investments by new investors, however, the Investment Funds may be
reopened in the sole discretion of the managing member of each Investment
Fund. Additional subscriptions for membership units as determined by the
managing member of each Investment Fund and in accordance with its limited
liability company agreement will dilute the indirect interests of the
Investment Fund's existing members, including the Company, in the
Investment Fund's investment portfolio prior to any such subscription,
which could have an adverse impact on the existing members' interest in the
Investment Fund if such Investment Fund's future investments underperform
its prior investments. In addition, it is expected that certain Advisors of
the Investment Funds will structure performance-based compensation
similarly to the Company, with such compensation being paid only if net
asset value exceeds a high watermark equal to a previously obtained net
asset value. Generally, no performance-based compensation will be paid by
an Investment Fund to an Advisor until the assets managed by such Advisor
appreciate above its high watermark, and such appreciation will be shared
pro rata by all of the members of such Investment Fund, including the
Company, not just those who were members at the time the high watermark was
set. The value attributable to the fact that no performance-based
compensation will be paid to an Advisor until it exceeds its prior high
watermark will not be taken into account in determining the NAV of an
Investment Fund or any series of its membership units. Such value to
existing members of an Investment Fund, including the Company, will be
diluted by new subscriptions for such Investment Fund's membership units.
Because the new membership units will participate in any positive
performance by the Advisor before it hits its high watermark without the
Advisor being paid any performance-based compensation, the pre-existing
units in an Investment Fund, including those held by the Company, will not
get the full benefit of the amount of the appreciation that is not subject
to performance-based compensation.
In addition, unlike purchasers who purchased the initial Units offered
by the Company, Units acquired following the initial offering of Units will
represent indirect interests in operating funds which may have significant
open positions. Since these Units will, indirectly through the Company's
investments in each of the Investment Funds, share in each Investment
Fund's open positions which may have been held for some period of time
prior to the issuance of the additional Units, the application of the
relevant Advisor's trading approach to such positions may have a
qualitatively different effect on the performance of the additional Units
than it does on the performance of previously issued Units. For example, a
number of trading approaches may become more aggressive in terms of
willingness to tolerate losses in a position and increase the size of a
position after an open trade has generated a substantial profit because
subsequent losses (up to a certain level) are perceived as being only a
partial give-back of prior profits, not an actual loss. As purchasers of
Units will not have received, indirectly through the Company's investments
in the Investment Funds, the benefit of any profits on open positions prior
to the date on which they purchase the Units, subsequent losses will
constitute an absolute loss to such holders, not only a partial give-back
of profits. In addition, certain trading approaches may follow
profit-taking strategies whereby they will liquidate or partially liquidate
a position after it has generated a predetermined amount of profit. Since
the new Units will not, indirectly through the Company's investments in the
Investment Funds, have had the benefit of any such profit prior to the date
on which they were issued, Members holding such Units may find themselves,
indirectly through the Company's investments in the Investment Funds,
liquidated out of a position (which would have continued to generate
substantial profits) due to an Advisor "taking profits," none of which had
inured to their benefit. Some approaches apply similar analyses based on
overall portfolio performance, not just the performance of particular
positions, with generally analogous effects.
SPECIAL RISKS OF THE COMPANY'S STRUCTURE
This section discusses certain risks related to the fact that the
Company allocates its assets to Investment Funds, which allocate their
assets to Advisors.
RISKS RELATED TO THE COMPANY'S STRUCTURE
THE INVESTMENT FUNDS' AND THE ADVISORS' INVESTMENTS MAY NOT BE DIVERSIFIED
AND THERE CAN BE NO ASSURANCE THAT THE COMPANY'S ALLOCATION MODELS AND
METHODOLOGIES WILL ACHIEVE THE COMPANY'S ALLOCATION GOALS
The managing member of the Investment Funds generally will not
allocate more than 25% of any Investment Fund's total assets to any single
Advisor at the time of allocation. However, following the time of
allocation, the percentage of such Investment Fund's total assets allocable
to any single Advisor could exceed the 25% level due to a number of
factors, including redemptions from the Investment Fund and positive or
negative performance by an Advisor as compared to other Advisors. No
assurance is given as to any level of multiple Advisor diversification.
Greater concentration with any single Advisor may entail additional risks.
While the managing member of the Investment Funds may seek Advisors
that utilize diversified investment strategies, there can be no assurance
that market or other events will not have an adverse impact on the
strategies employed by multiple Advisors. Advisors may at certain times
hold large positions in a relatively limited number of investments.
Advisors may target or concentrate their investments in particular markets,
sectors, or industries. Those Advisors that concentrate in a specific
industry or target a specific sector will also be subject to the risks of
that industry or sector, which may include, but are not limited to, rapid
obsolescence of technology, sensitivity to regulatory changes, minimal
barriers to entry, and sensitivity to overall market swings. As a result,
the NAVs of such Advisors may be subject to greater volatility than those
of investment companies that are subject to diversification requirements
and this may negatively impact the NAV of the Investment Funds and the
Company.
The Company 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 Managing Member periodically re-evaluates the
contribution to the risk and return of the Company from each investment
sector and may in the future in its sole discretion re-allocate the
Company's assets or weights of the investment sector as it deems advisable.
The Managing Member may at certain times be unable to re-allocate the
Company's assets or weights among the Investment Funds as it determines is
advisable in order to achieve the Company's objectives due to restrictions
on redemptions and additional subscriptions imposed by the Investment Funds
or Advisors. If imbalances in the allocations occur because the Company is
unable to re-allocate on a timely basis, because the Company's allocation
models and methodologies are not successful, or otherwise, losses occurring
as a result could cause the Company to suffer significantly greater losses
than would be the case if the Company's allocation goals had been achieved.
THE COMPANY'S FINANCIAL STATEMENTS ARE, AND IN THE FUTURE WILL BE, BASED ON
ESTIMATES OF VALUATIONS PROVIDED BY THIRD PARTY ADVISORS WHICH MAY NOT BE
ACCURATE OR MAY NEED TO BE ADJUSTED IN THE FUTURE
Generally, the managing member of the Investment Funds does not, and
will not, have any ability to assess the accuracy of the valuations or
other financial information received from each Investment Fund's Advisors
with respect to allocations not made through Managed Accounts. Although the
managing member of the Investment Funds may obtain information provided by
the Advisors about their net asset values, the managing member of the
Investment Funds generally does not, and is not able to, confirm
independently the accuracy of such valuations (which are generally
unaudited except at year-end) except in the case of allocations made
through Managed Accounts. Most Advisors treat their investment positions as
proprietary information and many of them will not provide such information
to their investors. Furthermore, the net asset values received by the
managing member of the Investment Funds from each Investment Fund's
Advisors will typically be based on estimated or unaudited reports only,
and such values will be used to calculate NAVs and fee accruals for
purposes of determining amounts payable on redemption to the extent audited
information is not then available. In some cases, Advisors do not use
independent administrators or other third party providers to value and
report their net asset values. In such cases, the valuations used to
determine the net asset values of these Advisors will be dependent solely
upon the Advisors for validation, and even when third parties are involved,
the Advisors may have primary responsibility for determining the values of
the portfolio securities. The valuation reports will not be audited by
third parties in most cases except at year-end. Valuations provided by each
Investment Fund's Advisors may be subject to later adjustment based on
valuation information available at that time, including, for example, as a
result of year-end audits or other valuation reviews conducted by an
Advisor's auditors. Furthermore, there is a risk that any valuation an
Investment Fund receives from an Advisor will be fraudulent or may
inadvertently contain material errors that the Investment Funds and, in
turn, the Company would not know when it prepares its financial statements.
Members should understand that the Company cannot prevent this risk since
neither the Company nor the Investment Funds have access to the Advisors'
books and records. Neither the Company nor the Investment Funds is a party
to any direct agreements with any Advisor providing the Company or the
Investment Funds with a specific contractual recourse in the case where an
Advisor has provided inaccurate or untimely valuations. Additionally, an
Advisor may through its investment documents have sought to limit or
eliminate its liability for inaccurate or untimely valuations entirely in
which case the Company may not have any recourse. The Company has not
entered into any direct agreements to indemnify any of the Advisors against
such errors or omissions. Any such adjustments resulting from wrong
valuations or errors in calculations may result in the Company restating
its net asset value or having to restate its financial statements at the
time of such restatement, as well as for prior periods. Any such
restatement, whether increasing or decreasing the net asset value of the
Company could have a material impact on the NAV of Member's Units. Members
of the Company are assuming the risk that valuations may be materially
incorrect and/or will need to be adjusted and Members should not retain
their investment in the Company if they are unwilling to assume such risks.
See "GENERAL RISKS--Risks Related to the Company and the Investment Funds'
Performance and Operation--Dependence on the Managing Member and the
Advisors; 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 Company" above and "SPECIAL RISKS OF THE COMPANY'S
STRUCTURE--Risks Associated with the Company Investing in Other
Entities--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
Company's Net Assets" below.
If at any time the Managing Member determines, in its sole discretion,
that an incorrect number of Units was issued to a Member because the NAV in
effect on the date of issuance was materially incorrect, the Company will
adjust such Member's Units by increasing or decreasing them, as
appropriate, to such number of Units as would have been issued at the
correct NAV. In addition, if at any time after a redemption of Units
(including in connection with any withdrawal of a Member from the Company)
the Managing Member determines, in its sole discretion, that the amount
paid to such Member or former Member pursuant to such redemption was
materially incorrect (including because the NAV at which the Member or
former Member purchased such Units was incorrect), the Company will pay to
such Member or former Member any additional amount that it determines such
Member or former Member would have been entitled to receive had the
redemption been effected at the correct NAV, or, in its sole discretion,
seek payment from such Member or former Member of (and such Member or
former Member shall be required to pay) the amount of any excess payment
that the Managing Member determines such Member or former Member received,
in each case without interest. If such a determination is made after a
Member has had all of its Units redeemed, or if the NAV of a Member's
remaining Units is insufficient to cover the amount of any overpayment
(including, without limitation, due to a decrease in the Company's NAV),
the Company may be unable, or may elect not under the circumstances, to
collect the amount of any such excess payment, and any corresponding
restatement of and reduction in the NAV of the Company will generally be
borne by the remaining Members of the Company. The Company will be subject
to similar adjustment provisions as a member of the Investment Funds.
MEMBERS OF THE COMPANY ARE SUBJECT TO MULTIPLE LEVELS OF FEES AND EXPENSES
BECAUSE OF THE COMPANY'S STRUCTURE AND THE FEE STRUCTURE OF THE COMPANY MAY
CREATE INCENTIVES FOR ADVISORS TO MAKE RISKY INVESTMENTS
Although in many cases investor access to the Investment Funds may be
limited or unavailable, an investor who meets the conditions imposed by an
Investment Fund may be able to invest directly with the Investment Fund. By
investing in Investment Funds indirectly by having an investment in the
Company, a Member of the Company bears a proportionate share of the fees
and expenses of the Company (including organizational and offering
expenses, operating costs, sales charges, brokerage transaction expenses,
and administrative fees) and, indirectly, similar expenses of the
Investment Funds. Thus, a Member of the Company will be subject to higher
operating expenses than if he or she invested in an Investment Fund
directly or in a closed-end fund which did not utilize a "fund of funds"
structure.
Each Investment Fund generally will be subject to an Advisors'
performance-based fee or allocation, irrespective of the performance of the
Investment Fund and the Company generally. Accordingly, an Advisor to an
Investment Fund with positive performance may receive performance-based
compensation from the Investment Fund, and thus indirectly from the Company
and its Members, even if the Company's overall performance is negative.
Generally, fees payable to Advisors of the Investment Funds range from
approximately 0.5% to 4% (annualized) of the average net asset value of the
Company's investment, and incentive allocations or fees generally range
from 18% to 25% of an Investment Fund's net profits, although it is
possible that such ranges may be exceeded for certain Advisors. The
performance-based compensation received by the Managing Member, the
managing member of the Investment Funds and an Advisor also may create an
incentive for such managing member or Advisor to make investments that are
riskier or more speculative than those that it might have made in the
absence of the performance-based compensation. Such compensation may be
based on calculations of realized and unrealized gains made by the Managing
Member, the managing member of the Investment Funds and the Advisors.
THE COMPANY COULD INDIRECTLY INCUR DUPLICATIVE TRANSACTION COSTS WITHOUT
ACCOMPLISHING A NET INVESTMENT RESULT
Investment decisions of the Investment Funds are generally made by
their Advisors independently of each other. As a result, at any particular
time, one Advisor may be purchasing securities of an issuer whose
securities are being sold by another Advisor. Consequently, the Company
could indirectly incur transaction costs without accomplishing any net
investment result.
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
The Managing Member of the Company and the Investment Funds receives
an incentive allocation based upon the net capital appreciation allocated
to their members. In addition, the Advisors of the Investment Funds, which
may include affiliates of the Managing Member, may receive compensation
based on the performance of their investments, a pro rata share of which
will be borne by the Company as a member of each Investment Fund.
Accordingly, there often may be times when a particular Advisor of an
Investment Fund may receive incentive compensation in respect of its
portfolio for a period even though such Investment Fund's or the Company's
overall portfolio depreciated during such period. Incentive compensation
arrangements may also create an incentive for the managing member of the
Company and the Investment Funds or the Advisors to make investments that
are riskier or more speculative than would be the case if such arrangements
were not in effect. Such incentives could also cause the Advisors to
artificially or fraudulently inflate the actual performance of their
portfolio or the valuation of specific positions. In addition, because both
the Managing Member's Incentive Allocation and the performance-based
compensation of the Advisors are calculated on a basis which includes
unrealized appreciation of the Company's or an Investment Fund's assets or
a portion thereof, as the case may be, they may be greater than if such
compensation were based solely on realized gains and losses.
RISKS ASSOCIATED WITH THE COMPANY INVESTING IN OTHER ENTITIES
PAST PERFORMANCE OF AFFILIATED FUNDS AND OF ADVISORS ARE NOT NECESSARILY
INDICATIVE OF THE RESULTS THAT THE COMPANY AND ANY INVESTMENT FUND MAY
ACHIEVE OR OF FUTURE RESULTS
The results of the Investment Funds and other investment funds or
accounts formed or managed by the GS Group, including other investment
funds or accounts managed by the GS Group which have or have had investment
objectives that are similar to those of the Company or the Investment
Funds, are not necessarily indicative of the results that the Company or
any Investment Fund may achieve. The Company makes indirect investments in
a different portfolio of securities and, accordingly, its results are
independent of the previous results obtained by those funds. Further, the
Company and each Investment Fund and their methods of operation may differ
in several respects from prior GS Group investment vehicles or accounts;
e.g., there are different investment and return objectives and investment
allocation strategies and the Company and each Investment Fund utilizes a
different mix of Advisors and, in certain cases, investment techniques.
Similarly, the past investment performance of any of the Advisors with
which the Investment Funds will invest or with which other investment funds
or accounts managed by the GS Group invest should not be construed as an
indication of the future results of such Advisors or of the Investment
Funds. Potential investors that desire performance or related information
with respect to the Investment Funds or other investment funds formed or
managed by the GS Group should contact the Managing Member.
A MEMBER'S INVESTMENT IN THE COMPANY WILL BE AFFECTED BY THE INVESTMENT
POLICIES AND DECISIONS OF ADVISORS WHICH ARE OUTSIDE THE COMPANY'S CONTROL
Because the Company allocates its assets to Investment Funds which
allocate their assets to Advisors, a Member's investment in the Company
will be affected by the investment policies and decisions of an Advisor in
proportion to the amount of Company assets that through the Investment
Funds are allocated to each Advisor. The net asset value of the interests
of the Advisors, and as a result, the net asset value of the Investment
Funds and, in turn, the Company, will fluctuate in response to, among other
things, investment decisions made by the Advisor, various market and
economic factors related to the markets in which the Advisors invest and
the financial condition and prospects of issuers in which the Advisors
invest. These risks will be outside the control of the Company. Certain
risks related to the investment strategies and techniques utilized by the
Investment Funds and the Advisors are described under "INVESTMENT RELATED
RISKS" below.
LIMITATIONS ON ABILITY TO INVEST IN ADVISORS MAY RESULT IN ASSETS NOT BEING
USED TO PURSUE INVESTMENT OBJECTIVES
In the event that the Investment Funds are able to allocate assets to
Advisors only at certain times, the Investment Funds may hold cash or
invest any portion of its assets that is not allocated to Advisors in cash
equivalents, short-term securities or money market securities pending
investment in Advisors. During the time that the Investment Fund's assets
are not allocated to Advisors, that portion of the Investment Fund's assets
will not be used to pursue the Investment Funds' and, in turn, the
Company's investment objectives.
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
COMPANY'S NET ASSETS
The valuation of an Investment Fund's investments is ordinarily
determined based upon monthly valuations provided by the Advisors which are
only audited annually. Many of the securities in which Advisors invest may
not have a readily ascertainable market price and will be valued by the
Advisors without an independent third party valuation. In this regard, an
Advisor may face a conflict of interest in valuing the securities, as their
value will affect the Advisor's compensation. Valuations of the securities
are very subjective and could prove in hindsight to have been wrong, and at
times by significant amounts. Furthermore, the managing member of the
Investment Funds may face a conflict of interest in overseeing the value of
the Investment Funds' investments, as the value of the Investment Funds'
investments will affect such managing member's compensation. Although prior
to investing in any Advisor, the managing member of the Investment Funds
generally will seek to conduct a due diligence review of the valuation
methodology utilized by such Advisor, no assurances can be given that the
managing member of the Investment Funds will be given access to necessary
aspects of the Advisors' systems, that such due diligence review will
ascertain whether accurate valuations will be provided by such Advisors to
the Investment Funds, that the Advisors will comply with their own internal
policies or procedures for keeping records or making valuations, or that
the Advisors policies and procedures and systems will not change without
notice to the Investment Funds. Moreover, the managing member of the
Investment Funds will generally not have sufficient information in order to
be able to confirm or review the accuracy of valuations provided by Advisor
Funds in which an Investment Fund invests. See "GENERAL RISKS--Risks
Related to the Company and the Investment Funds' Performance and
Operation--Dependence on the Managing Member and the Advisors; 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 Company." The net asset values or other valuation information
received by the managing member of the Investment Funds from an Advisor may
require estimations of the value of certain assets and liabilities, and may
be subject to later adjustment or revision by the Advisor, which adjustment
or revisions may be significant. Any such adjustment or revision may result
in either an increase or decrease in the net asset value of the Company at
the time the Company is provided with information regarding the adjustment,
which adjustment or revision may be significant. If an Advisor's valuations
are consistently delayed or inaccurate, the managing member of the
Investment Funds will consider whether the Advisor continues to be an
appropriate manager for the Investment Fund. However, the managing member
of the Investment Funds may elect in its sole discretion to retain the
Advisor. The Advisor's information could be inaccurate due to fraudulent
activity, misvaluation or inadvertent error. In any case, the Investment
Funds may not uncover errors for a significant period of time. If this
occurs in connection with an investment in an Advisor Fund, the Investment
Fund may be unable to sell interests in an Advisor Fund quickly, and
therefore could be obligated to continue to hold such interests for an
extended period of time. In such a case, or in the event that the managing
member of the Investment Funds does not receive a valuation from an Advisor
Fund, or determines, in its sole discretion, that a valuation is inaccurate
or incomplete, the managing member of the Investment Funds may, in its sole
discretion, determine the fair value of an Investment Fund's interests in
the Advisor Fund independently of the Advisor's valuations based on
information available to, and factors deemed relevant by, the managing
member of the Investment Funds at the time of such valuation. Members
should be aware that situations involving uncertainties as to the
valuations by Advisors could have a material adverse effect on the
Company's net assets if the managing member of the Investment Funds or the
Advisor's judgments regarding valuations should prove incorrect. Members
who are unwilling to assume such risks should not retain their investment
in the Company. See "--Risks Related to the Company's Structure--The
Company's Financial Statements are, and in the Future will be, Based on
Estimates of Valuations Provided by Third Party Advisors Which May not be
Accurate or May Need to be Adjusted in the Future" above.
INVESTMENT FUND ALLOCATIONS TO ADVISOR FUNDS ARE DIFFICULT TO MONITOR AND
CONTROL
Each Investment Fund may invest all or a substantial portion of its
assets in Advisor Funds, rather than in all cases allocating assets, via
Portfolio Companies or directly to Advisors, pursuant to managed account
agreements. It is expected that the managing member of the Investment Funds
generally will have less ability to monitor investments in the Advisor
Funds, to obtain full and current information and to exercise control
rights over such investments than with respect to allocations of assets to
Managed Accounts. This could have a material adverse effect on the
performance of such investments and, therefore, on the performance of the
Investment Funds and the Company.
TRADING IN INVESTMENTS MAY BE ILLIQUID WHICH MAY CAUSE SUBSTANTIAL LOSSES
AND MAY NEGATIVELY IMPACT THE ABILITY TO MAKE DISTRIBUTIONS TO A
WITHDRAWING OR REDEEMING MEMBER
Some investment positions in which the Investment Funds have an
interest will be 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 above-described circumstances could prevent the Advisors of an
Investment Fund from liquidating unfavorable positions promptly and subject
such Investment Fund and, in turn, the Company, to substantial losses. This
could also impair the Company's ability to redeem its membership units in
an Investment Fund in order to make distributions to a withdrawing or
redeeming Member in a timely manner.
MANAGED ACCOUNT ALLOCATIONS EXPOSE THE INVESTMENT FUNDS TO LIABILITY
EXCEEDING ALLOCATIONS
Each Investment Fund, generally through Portfolio Companies and
possibly directly, may place assets with a number of Advisors by opening
discretionary Managed Accounts rather than investing in Advisor Funds. It
is possible, given the leverage at which certain of the Advisors of an
Investment Fund will trade, that allocations of an Investment Fund to an
Advisor through a managed account could result in losses that exceed the
amount the Investment Fund had allocated to such Advisor to invest.
Therefore, Managed Accounts expose the Investment Funds to theoretically
unlimited liability. This risk is also applicable to allocations made by an
Investment Fund to Portfolio Companies because of the possibility that the
limited liability provided by a Portfolio Company could be successfully
challenged based on various legal theories which could be proffered.
AN INVESTMENT FUND MAY NOT BE ABLE TO VOTE OR MAY LIMIT ITS VOTING
ABILITIES
Each Investment Fund may determine to limit its voting interest in
certain Advisors in order to avoid becoming subject to certain Investment
Company Act prohibitions with respect to affiliated transactions. To the
extent the Investment Fund holds non-voting securities, or contractually
forgoes the right to vote in respect of the voting securities of an
Advisor, the Investment Fund will not be able to vote on matters that
require the approval of the interestholders of the Advisor, including
matters adverse to the Investment Fund's and, in turn, the Company's
interests.
LACK OF OPERATING HISTORY OF CERTAIN ADVISORS; PAST PERFORMANCE OF ADVISORS
IS NOT INDICATIVE OF FUTURE RESULTS
Certain of the Advisors have short or limited or even no operating
histories. In addition, the information the managing member of an
Investment Fund has and will obtain about an Advisor may be limited. As
such, the ability of the managing member of an Investment Fund to evaluate
past performance or to validate investment strategies of such Advisors will
be limited. Moreover, even to the extent an Advisor has a long operating
history, the past investment performance of any of the Advisors should not
be construed as an indication of the future results of the Advisors or of
the Investment Funds or the Company. In addition, the investment
professionals within the Advisors and their strategies may change over
time. This risk is related to, and enhanced by, the risks created by the
fact that the managing member of an Investment Fund relies upon information
provided to it by the Advisors that is not, and cannot be, independently
verified.
ADVISORS INVEST INDEPENDENTLY AND MAY HOLD ECONOMICALLY OFFSETTING
POSITIONS
The Advisors of the Investment Funds generally invest wholly
independently of one another and may at times hold economically offsetting
positions. To the extent that the Advisors do, in fact, hold such
positions, the Investment Funds and, in turn, the Company may not achieve
any gain or loss despite incurring fees and expenses in connection with
such positions. In addition, an Advisor may be compensated based on the
performance of its portfolio. Accordingly, there may often be times when a
particular Advisor of an Investment Fund may receive performance or
incentive compensation in respect of its portfolio for a period even though
such Investment Fund's, or the Company's, net asset value may not have
increased, or may even have decreased, during such period. Furthermore, it
is not unlikely that from time to time various Advisors of an Investment
Fund may be competing with each other for the same positions in one or more
markets. There can be no assurance that choosing a combination of Advisors
for an Investment Fund will prove to be any more successful than would the
selection of a single Advisor for such Investment Fund.
ADVISORS MAY HAVE LIMITED CAPACITY TO MANAGE ADDITIONAL INVESTMENT FUND
INVESTMENTS
Certain Advisor's trading approaches presently can accommodate only a
certain amount of capital. Each Advisor will normally endeavor not to
undertake to manage more capital than such Advisor's approach can
accommodate without risking a potential deterioration in returns.
Accordingly, each Advisor has the right to refuse to manage some or all of
the Investment Funds' assets that the Investment Fund may wish to allocate
to such Advisor. Further, in the case of Advisors that limit the amount of
additional capital that they will accept from an Investment Fund, continued
sales of units and interests in Advisor Funds in which such Investment Fund
invests would dilute the participation of such Investment Fund's existing
members, including the Company, with such Advisor.
ADVISOR FUNDS' SECURITIES ARE GENERALLY ILLIQUID WHICH MAY INCREASE COSTS
AND LIMIT REDEMPTIONS
The securities of the Advisor Funds in which the Investment Funds
(directly or through Advisors) invest or plan to invest may be illiquid.
Subscriptions to purchase the securities of Advisor Funds are generally
subject to restrictions or delays. In addition, the Investment Funds may be
limited in their ability to make changes to allocations due to potential
redemption restrictions of the Advisor Funds, including notice periods and
limited redemption dates, the ability of the Advisor Funds to suspend and
postpone redemptions, and lockups on redemptions of securities of the
Advisor Funds. Further, the Advisor may not be able to dispose of Advisor
Fund securities that it has purchased in a timely manner and, if adverse
market conditions were to develop during any period in which the Advisor is
unable to sell Advisor Fund securities, the Advisor might obtain a
significantly less favorable price than that which prevailed when it
decided to buy or sell such securities.
FREQUENT TRADING AND TURNOVER TYPICALLY RESULT IN HIGH TRANSACTION COSTS
AND THE INVESTMENT FUNDS HAVE NO CONTROL OVER THIS TURNOVER
It is expected that Advisors will make frequent trades in securities
and other investments. Frequent trades typically result in high transaction
costs. The Advisors may invest on the basis of short-term market
considerations. The turnover rate within the Advisors may be significant,
potentially involving substantial brokerage commissions and fees. The
Investment Funds and, in turn, the Company will have no control over this
turnover. As a result, it is anticipated that a significant portion of the
Company's income and gains, if any, may be derived from ordinary income and
short-term capital gains. In addition, the withdrawal of an Investment Fund
from an Advisor could involve expenses to the Investment Fund under the
terms of the Investment Fund's investment with that Advisor.
INDEMNIFICATION OF ADVISORS MAY CREATE COSTS FOR THE COMPANY AND THE
INVESTMENT FUNDS
The Company and the Investment Funds may agree to indemnify certain of
the Advisors and their respective officers, directors, and affiliates from
any liability, damage, cost, or expense arising out of, among other things,
acts or omissions relating to the offer or sale of units by the Investment
Funds. Currently, neither the Company nor the Investment Funds is a party
to any direct indemnification agreements with Advisors. Accordingly, the
Company and the Investment Funds are under no direct contractual obligation
to indemnify any of the Advisors against inaccurate or untimely valuations
of investments or net asset value and although the Company and the
Investment Funds may, the Company and the Investment Funds currently do not
intend to, enter into any such direct indemnification agreements with
Advisors.
INVESTMENT RELATED RISKS
This section discusses the types of investments that Investment Funds
and the Advisors, as indicated, make, or are expected to make, and the
principal risks associated with such investments. It is possible that an
Advisor or the Investment Funds will make an investment that is not
described below, and any such investment will be subject to its own
particular risks.
RISKS RELATED TO INVESTMENT AND TRADING
AN INVESTMENT IN THE COMPANY INVOLVES A HIGH DEGREE OF RISK THAT THE ENTIRE
AMOUNT INVESTED MAY BE LOST; INVESTMENT RESULTS MAY VARY SUBSTANTIALLY OVER
TIME
An investment in the Company involves a high degree of risk, including
the risk that the entire amount invested may be lost. The Advisors will
invest in and actively trade financial instruments using strategies and
investment techniques with significant risk characteristics, including
risks arising from the volatility of the fixed income, commodity, currency
and equity markets, risks of concentration, risks of short sales, risks of
leverage, risks arising from the potential illiquidity of derivative
instruments and the potential illiquidity of certain emerging markets, the
risk of loss from counterparty and broker defaults, risk of inaccuracy of
information received from Advisors and the risk of borrowing to meet
redemption requests. No guarantee or representation is made that the
Company's, the Investment Funds' or the Advisors' investment program will
be successful, that the various investment strategies utilized or
investments made will have low correlation with each other or that the
Company's returns will exhibit low correlation with an investor's
traditional investment portfolio. Each Advisor's investment program may
utilize such investment techniques as margin transactions, option
transactions, short sales, forward contracts and futures contracts, which
involve substantial volatility and can, in certain circumstances,
substantially increase the adverse impact to which the Investment Funds and
the Company may be subject. All investments made by the Company risk the
loss of capital. Investment results may vary substantially over time. See
ITEM 1. "BUSINESS--INVESTMENT PROGRAM."
PAST RESULTS OF THE COMPANY, CERTAIN OF THE INVESTMENT FUNDS, AND THE
ADVISORS SELECTED BY ITS MANAGING MEMBER ARE NOT NECESSARILY INDICATIVE OF
FUTURE PERFORMANCE. NO ASSURANCE CAN BE MADE THAT PROFITS WILL BE ACHIEVED
OR THAT SUBSTANTIAL LOSSES WILL NOT BE INCURRED.
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
Many of the Advisors will, among other things, seek to utilize
specialized investment strategies, follow allocation methodologies, apply
investment models or assumptions, achieve a certain level of performance
relative to specified benchmarks, and enter into hedging and other
strategies intended, among other things, to affect the Advisors'
performance, risk levels, and/or market correlation. There can be no
assurance that any Advisor will have success in achieving any goal related
to such practices. The Advisors may be unable to or may choose in their
judgment not to seek to achieve such goals. In addition, there is a risk
that Advisors may invest outside their strategies, which could have a
negative impact on the Advisors' performance and in turn on the Company.
The success of the Advisor's trading activities will depend on, among
other things, the Advisor's ability to identify overvalued and undervalued
investment opportunities and to exploit price discrepancies in the capital
markets. Identification and exploitation of the investment strategies to be
pursued by an Advisor involves a high degree of uncertainty. No assurance
can be given that the Advisors will be able to locate suitable investment
opportunities in which to deploy all their capital. A reduction in the
volatility and pricing inefficiency of the markets in which an Advisor will
seek to invest, as well as other market factors, will reduce the number and
scope of available opportunities for an Advisor's investment strategies.
THE USE OF LEVERAGE MAY SUBSTANTIALLY INCREASE THE ADVERSE IMPACT TO WHICH
THE INVESTMENT FUNDS' INVESTMENT PORTFOLIOS MAY BE SUBJECT
The Investment Funds, Portfolio Companies, Advisors and Advisor Funds
may utilize leverage in their investment programs. Such leverage may take
the form of loans for borrowed money, trading on margin or other forms of
direct and indirect borrowings, or derivative instruments, including among
others forward contracts, futures contracts, options, swaps and reverse
repurchase agreements, and other instruments and transactions that are
inherently leveraged. The utilization of leverage will increase the
volatility of the Company's investments. The managing member of the
Investment Funds may seek to adjust the degree of leverage with which each
Investment Fund as a whole invests by taking the Advisors' anticipated
leverage use into account when allocating and reallocating the Investment
Fund's assets among the Advisors. However, the managing member of the
Investment Funds generally will not have any right to adjust the amount of
leverage utilized by any of the Advisors, and generally does not exercise
such right if available. In the discretion of its managing member, an
Investment Fund may make an investment in an Advisor Fund through a swap,
option or otherwise in a manner structured to provide greater leverage than
a direct investment in the Advisor Fund, which may increase the risks to
the Investment Fund relative to a direct investment in the Advisor Fund. In
addition, the Advisors may buy and sell securities on margin and otherwise
utilize leverage, further increasing the volatility of the Company's
investments. The use of leverage by the Investment Funds, Portfolio
Companies, Advisors and Advisor Funds may substantially increase the
adverse impact to which the Investment Funds' investment portfolios may be
subject. Trading securities on margin results in interest charges and,
depending on the amount of trading activity, such charges could be
substantial. The level of interest rates generally, and the rates at which
an Investment Fund, Portfolio Companies, Advisors and Advisor Funds may
borrow in particular, can affect the operating results of the Investment
Funds. The low margin deposits normally required in futures and forward
trading permit a high degree of leverage; accordingly, relatively small
price movement in a futures contract may result in immediate and
substantial losses to the investor. Such a high degree of leverage
necessarily entails a high degree of risk. In the event that an Investment
Fund or a Portfolio Company enters into an investment management agreement
with an Advisor that utilizes leverage in its investment program, the
Investment Fund or Portfolio Company may become subject to claims by
financial intermediaries that extended "margin" loans in respect of such
managed account. Such claims could exceed the value of the assets allocated
to such Advisor by the Investment Fund. The risks involved in the use of
leverage are increased to the extent that an Investment Fund leverages its
capital. The Company generally will not utilize leverage directly, although
it may borrow to, among other things, fund redemptions and pay expenses.
The rights of any lenders to the Investment Funds, Portfolio
Companies, Advisors and Advisor Funds to receive payments of interest or
repayments of principal will be senior to those of the members or the
investors in such Investment Funds, Portfolio Companies, Advisors and
Advisor Funds respectively, and the terms of any borrowings may contain
provisions that limit certain activities of the Investment Funds and, in
turn, the Company, including the ability to make distributions.
CONVERGENCE RISK MAY RESULT IN SIGNIFICANT LOSSES OF THE INVESTMENT FUNDS
AND THE COMPANY
The Investment Funds will pursue their investment objectives by
investing with Advisors that will take long positions in securities
believed to be undervalued and short positions in securities believed to be
overvalued. In the event that the perceived mispricings underlying one or
more Advisors' trading positions were to fail to converge toward, or were
to diverge further from, relationships expected by such Advisors, the
Investment Funds and the Company may incur significant losses.
POSSIBLE EFFECTS OF SPECULATIVE POSITION LIMITS COULD ADVERSELY AFFECT THE
OPERATIONS AND PROFITABILITY OF THE INVESTMENT FUNDS AND THE COMPANY
The CFTC, the U.S. commodities exchanges and certain offshore
commodity exchanges have established limits referred to as "speculative
position limits" or "position limits" on the maximum net long or net short
(or, for some commodities, the gross) positions which any person or group
of persons may own, hold or control in certain futures or options
contracts. No such limits presently exist in the forward contract markets
or on most foreign exchanges.
Under currently applicable regulations, each of the Investment Funds
which allocates its assets to Advisors who trade in commodities would be
required to comply with position limits as if it were a single trader,
absent obtaining exemptive relief therefrom. However, pursuant to the rules
of several principal U.S. commodities exchanges and the CFTC, GTT has
obtained exemptions that would permit it to not aggregate all of its
current Advisors' accounts for purposes of determining compliance with
position limits in contracts traded on these exchanges and to utilize
expanded limits or separate single limits per Advisor in contracts traded
on such exchanges. In addition, many of the major U.S. exchanges have
eliminated speculative position limits and have substituted position
accountability rules that would permit Advisors of an Investment Fund to
trade without restriction as long as the Advisor can demonstrate the
positions acquired were not acquired for the purpose of manipulating the
market. To the extent a single speculative position limit is not applicable
to the Advisors' trading in any or all futures, the different Advisors of
an Investment Fund are able to acquire larger positions on behalf of such
Investment Fund. Absent such exemptive relief or exchange rule changes, the
position limits, especially in certain markets, may be quite restrictive.
There can be no assurance that exemptive relief will continue to be
available. The modification of trading strategies or liquidation of
positions by the Advisors, if required to comply with position limits,
could adversely affect the operations and profitability of the Investment
Funds and therefore the Company.
The Commodity Exchange Act provides that trading done by persons
directly or indirectly under the same control or trading as one pursuant to
an expressed or implied agreement or understanding will be aggregated for
determining compliance with applicable position limits. There is a
possibility that the positions held by some or all Advisors of an
Investment Fund and their respective principals would be aggregated under
one of the foregoing principles or applicable exchange regulations with
those held by certain other Advisors of such Investment Fund. If a
commodity exchange or any other regulatory body were to aggregate the
positions held by certain Advisors of an Investment Fund, it may have a
material adverse effect on the ability of each of the affected Advisors to
trade in such markets.
The managing member of the Investment Funds will be responsible for
ensuring that the Investment Funds do not exceed applicable position limits
due to trading orders placed by its Advisors and comply with any exemptions
the managing member has obtained or may obtain in the future. The managing
member will monitor the Investment Funds' compliance with speculative
position limits by requiring Advisors, once the managing member has
informed the Advisors that an "early warning" level in the number of
positions it holds in any futures contract has been reached, to submit any
orders in that futures contract to a "permission desk," which will only
approve further orders if such additional orders would not result in a
violation of applicable limits. Nonetheless, in the operation of such
permission desk, the managing member will not exercise any discretion over
trading decisions for any account of the Investment Funds or reveal the
total position of an Investment Fund or the positions of any of its
Advisors to any other Advisors.
SHORT SELLING CREATES THE RISK OF SIGNIFICANT LOSSES
Advisors may engage in short selling. Short selling involves selling
securities that may or may not be owned and borrowing the same securities
for delivery to the purchaser, with an obligation to replace the borrowed
securities at a later date. Short selling allows the investor to profit
from declines in the value of securities. A short sale creates the risk of
a theoretically unlimited loss, in that the price of the underlying
security could theoretically increase without limit, thus increasing the
cost of buying those securities to cover the short position. There can be
no assurance that the security necessary to cover a short position will be
available for purchase. Purchasing securities to close out the short
position can itself cause the price of the securities to rise further,
thereby exacerbating the loss.
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
The Investment Funds, Portfolio Companies, Advisors and Advisor Funds
may or may not employ hedging techniques. These techniques could involve a
variety of derivative transactions, including futures contracts,
exchange-listed and over-the-counter put and call options on securities,
financial indices, forward foreign currency contracts, and various interest
rate transactions (collectively, "Hedging Instruments"). Hedging techniques
involve risks different than those of underlying investments. In
particular, the variable degree of correlation between price movements of
Hedging Instruments and price movements in the position being hedged
creates the possibility that losses on the hedge may be greater than gains
in the value of an Investment Fund's positions. In addition, certain
Hedging Instruments and markets may not be liquid in all circumstances. As
a result, in volatile markets, transactions in certain of these instruments
may not be able to be closed out without recurring losses substantially
greater than the initial deposit. Although the contemplated use of these
instruments should tend to minimize the risk of loss due to a decline in
the value of the hedged position, at the same time they tend to limit any
potential gain that might result from an increase in the value of such
position. 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. Advisors are not required to hedge and
there can be no assurance that hedging transactions will be available or,
even if undertaken, will be effective. In addition, it is not possible to
hedge fully or perfectly against currency fluctuations affecting the value
of securities denominated in non-U.S. currencies because the value of those
securities is likely to fluctuate as a result of independent factors not
related to currency fluctuations. Finally, the daily variation margin
deposit requirements in futures contracts that may be sold by an Investment
Fund, Portfolio Company, Advisor or Advisor Fund would create an ongoing
greater potential financial risk than would options transactions, where the
exposure is limited to the cost of the initial premium and transaction
costs paid by the Investment Fund, Portfolio Company, Advisor or Advisor
Fund.
FORWARD CONTRACTS MAY ENTAIL SIGNIFICANT RISKS AND UNCERTAINTIES WHICH
COULD RESULT IN SUBSTANTIAL LOSSES TO THE INVESTMENT FUNDS AND THE COMPANY
Advisors may enter into forward contracts, which are the purchase or
sale of a specific quantity of a commodity, government security, foreign
currency, or other financial instrument at the current or spot price, with
delivery and settlement at a specified future date. Because it is a
completed contract, a purchase forward contract can be a cover for the sale
of a futures contract. The Advisors may enter into forward contracts for
hedging purposes and non-hedging purposes (i.e., to increase returns).
Forward contracts are transactions involving an Advisor's obligation to
purchase or sell a specific instrument at a future date at a specified
price. Forward contracts may be used by the Advisors for hedging purposes
to protect against uncertainty in the level of future foreign currency
exchange rates, such as when an Advisor anticipates purchasing or selling a
foreign security. For example, this technique would allow the Advisor to
"lock in" the U.S. dollar price of the security. Forward contracts may also
be used to attempt to protect the value of an Advisor's existing holdings
of foreign securities. There may be, however, an imperfect correlation
between an Advisor's foreign securities holdings and the forward contracts
entered into with respect to those holdings. Forward contracts may also be
used for non-hedging purposes to pursue an Advisor's investment objective,
such as when an Advisor anticipates that particular foreign currencies will
appreciate or depreciate in value, even though securities denominated in
those currencies are not then held in the Advisor's portfolio. There is no
general requirement that the Advisors hedge all or any portion of their
exposure to foreign currency risks.
Forward contracts and options thereon, unlike futures contracts, are
not traded on exchanges and are not standardized; rather, banks and dealers
act as principals in these markets, negotiating each transaction on an
individual basis. Forward and "cash" trading is substantially unregulated;
there is no limitation on daily price movements and speculative position
limits are not applicable. The principals who deal in the forward markets
are not required to continue to make markets in the currencies or
commodities they trade and these markets can experience periods of
illiquidity, sometimes of significant duration. There have been periods
during which certain participants in these markets have refused to quote
prices for certain currencies or commodities or have quoted prices with an
unusually wide spread between the price at which they were prepared to buy
and that at which they were prepared to sell. Disruptions can occur in any
market traded by an Advisor due to unusually high trading volume, political
intervention or other factors. Arrangements to trade forward contracts may
be made with only one or a few counterparties, and liquidity problems
therefore might be greater than if such arrangements were made with
numerous counterparties. Significant risks and uncertainties exists in
dealing with counterparties in forward contracts. The imposition of
controls by governmental authorities might also limit such forward (and
futures) trading to less than that which the Advisors would otherwise
recommend, to the possible detriment of the Advisor and therefore the
applicable Investment Fund and the Company. Market illiquidity or
disruption could result in major losses to an Investment Fund and the
Company. In addition, Managed Accounts or entities in which an Investment
Fund has an interest may be exposed to credit risks with regard to
counterparties with whom the Advisors of such Investment Fund trade as well
as risks relating to settlement default. Such risks could result in
substantial losses to the Investment Funds and the Company.
SWAP AGREEMENTS MAY INCREASE OR DECREASE THE OVERALL VOLATILITY OF AN
INVESTMENT FUND'S PORTFOLIO
The Investment Funds, Portfolio Companies, Advisors and Advisor Funds
may enter into equity, interest rate, index, currency rate, total return
and other types of swap agreements. The transactions are entered into in an
attempt to obtain a particular return without the need to actually purchase
the reference asset. Swap agreements can be individually negotiated and
structured to include exposure to a variety of different types of
investments or market factors. Depending on their structure, swap
agreements may increase or decrease an Investment Fund's exposure to
long-term or short-term interest rates (in the United States or abroad),
foreign currency values, mortgage securities, corporate borrowing rates, or
other factors such as security prices, baskets of securities, or inflation
rates. Swap agreements can take many different forms. The Investment Funds,
Portfolio Companies, Advisors and Advisor Funds are not limited to any
particular form of swap agreement.
Swap agreements are two-party contracts entered into primarily by
institutional investors for periods ranging from a few weeks to more than a
year. In a standard swap transaction, two parties agree to exchange the
returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments, which may be adjusted
for an interest factor. The gross returns to be exchanged or "swapped"
between the parties are generally calculated with respect to a "notional
amount," i.e., the return on or increase in value of a particular U.S.
dollar amount invested at a particular interest rate, in a particular
foreign currency, or in a "basket" of securities representing a particular
index.
Swap agreements will tend to shift investment exposure from one type
of investment to another. For example, if an Investment Fund agrees to
exchange payments in U.S. dollars for payments in foreign currency, the
swap agreement would tend to decrease such Investment Fund's exposure to
U.S. interest rates and increase its exposure to foreign currency and
interest rates. Depending on how they are used, swap agreements may
increase or decrease the overall volatility of an Investment Fund's
portfolio.
Most swap agreements entered into by an Investment Fund, Portfolio
Company, Advisor or Advisor Fund would require the calculation of the
obligations of the parties to the agreements on a "net basis."
Consequently, an Investment Fund, Portfolio Company, Advisor or Advisor
Fund's current obligations (or rights) under a swap agreement generally
will be equal only to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party
to the agreement (the "net amount"). The risk of loss with respect to swaps
is limited to the net amount of interest payments that an Investment Fund,
Portfolio Company, Advisor or Advisor Fund is contractually obligated to
make. If the other party to a swap defaults, an Investment Fund's risk of
loss consists of the net amount of payments that the Investment Fund,
Portfolio Company, Advisor or Advisor Fund contractually is entitled to
receive. If a swap agreement calls for payments by an Investment Fund,
Portfolio Company, Advisor or Advisor Fund, it must be prepared to make
such payments when due. In addition, if the counterparty's creditworthiness
declined, the value of a swap agreement would be likely to decline,
potentially resulting in losses to the Investment Fund and the Company.
THE PRICES OF AN INVESTMENT FUND'S INVESTMENTS CAN BE HIGHLY VOLATILE AND
INFLUENCED BY EXTERNAL FACTORS OUTSIDE THE CONTROL OF SUCH INVESTMENT FUND
The prices of an Investment Fund's investments can be highly volatile.
Price movements of forward contracts, futures contracts and other
derivative contracts in which an Investment Fund may invest are influenced
by, among other things, interest rates, changing supply and demand
relationships, trade, fiscal, monetary and exchange control programs and
policies of governments, and national and international political and
economic events and policies. In addition, governments from time to time
intervene, directly and by regulation, in certain markets, particularly
those in currencies, financial instruments and interest rate-related
futures and options. Such intervention often is intended directly to
influence prices and may, together with other factors, cause all of such
markets to move rapidly in the same direction because of, among other
things, interest rate fluctuations. Moreover, since internationally there
may be less government supervision and regulation of worldwide stock
exchanges and clearinghouses than in the United States, Advisors also are
subject to the risk of the failure of the exchanges on which their
positions trade or of their clearinghouses, and there may be a higher risk
of financial irregularities and/or lack of appropriate risk monitoring and
controls.
FAILURE OF THE ADVISOR'S COUNTERPARTIES, BROKERS, AND EXCHANGES EXPOSES
ADVISORS TO CREDIT RISKS IN VARIOUS FORMS
The Advisors will be exposed to the credit risk of the counterparties
with which, or the brokers, dealers and exchanges through which, they deal,
whether they engage in exchange-traded or off-exchange transactions. More
than one of the Advisors at any time may be subject to the credit risk of
the same counterparty or broker-dealer. An Advisor may be subject to risk
of loss of its assets on deposit with a broker in the event of the broker's
bankruptcy, the bankruptcy of any clearing broker through which the broker
executes and clears transactions on behalf of the Advisor, or the
bankruptcy of an exchange clearing house. Although the Commodity Exchange
Act requires a commodity broker to segregate the funds of its customers, if
a commodity broker fails to properly segregate customer funds, the Advisor
may be subject to a risk of loss of its funds on deposit with such broker
in the event of such broker's bankruptcy or insolvency. The Advisor may be
subject to risk of loss of its funds on deposit with foreign brokers
because foreign regulatory bodies may not require such brokers to segregate
customer funds. The Advisor may be required to post margin for its foreign
exchange transactions either with its investment manager or other foreign
exchange dealers who are not required to segregate funds (although such
funds are generally maintained in separate accounts on the foreign exchange
dealer's books and records in the name of the Advisor). Under certain
circumstances, such as the inability of another customer of the commodity
broker or foreign exchange dealer or the commodity broker or foreign
exchange dealer itself to satisfy substantial deficiencies in such other
customer's account, the Advisor may be subject to a risk of loss of its
funds on deposit with such broker or dealer, even if such funds are
properly segregated. In the case of any such bankruptcy or customer loss,
the Advisor might recover, even in respect of property specifically
traceable to the Advisor, only a pro rata share of all property available
for distribution to all of such broker's or dealer's customers, which could
result in significant losses to the Investment Fund.
Many of the markets in which the Advisors effect their transactions
are "over-the-counter" or "interdealer" markets. Participants in these
markets are typically not subject to credit evaluation and regulatory
oversight as are members of "exchange based" markets. To the extent an
Advisor invests in swaps, derivatives or synthetic instruments, or other
over-the-counter transactions in these markets, the Advisor may take a
credit risk with regard to parties with which it trades and also may bear
the risk of settlement default. These risks may differ materially from
those involved in exchange-traded transactions, which generally are
characterized by clearing organization guarantees, daily marking-to-market
and settlement, and segregation and minimum capital requirements applicable
to intermediaries. Transactions entered into directly between two
counterparties generally do not benefit from these protections, which, in
turn, may subject an Advisor to the risk that a counterparty will not
settle a transaction in accordance with agreed terms and conditions because
of a dispute over the terms of the contract or because of a credit or
liquidity problem. Such "counterparty risk" is increased for contracts with
longer maturities when events may intervene to prevent settlement. The
ability of the Advisors to transact business with any one or any number of
counterparties, the lack of any independent evaluation of the
counterparties or their financial capabilities, and the absence of a
regulated market to facilitate settlement, may increase the potential for
losses to the Investment Funds and the Company.
In addition, the Advisors may engage in direct or indirect trading of
securities, currencies, forward contracts, options, swaps and repurchase
agreements on a principal basis. As such, an Advisor as transferee or
counterparty could experience both delays in liquidating the underlying
security, future or other investment and losses, including: (a) the risk of
the inability or refusal to perform with respect to such transactions on
the part of the principals with which the Advisor trades; (b) possible
decline in the value of any collateral during the period in which the
Advisor seeks to enforce its rights with respect to such collateral; (c)
possible subnormal levels of income and lack of access to income during
such period; (d) expenses of enforcing its rights; and (e) legal
uncertainty concerning the enforceability of certain rights under swap
agreements and possible lack of priority against collateral posted under
the swap agreements. Any such failure or refusal, whether due to
insolvency, bankruptcy or other causes, could subject the Advisor, and, in
turn, the Investment Fund and the Company, to substantial losses. The
Advisor will not be excused from performance on any such transactions due
to the default of third parties in respect of other trades which in the
Advisor's trading strategies were to have substantially offset such
contracts.
RISKS RELATED TO INTERNATIONAL INVESTMENTS
TRADING ON FOREIGN EXCHANGES MAY INVOLVE HIGHER RISK OF FINANCIAL
IRREGULARITIES AND/OR LACK OF APPROPRIATE RISK MONITORING AND CONTROLS
The Investment Funds may trade, directly or indirectly, futures and
securities on exchanges located outside the United States. Some foreign
exchanges, in contrast to domestic exchanges, are "principals' markets" in
which performance is solely the individual member's responsibility with
whom the trader has entered into a commodity contract and not that of an
exchange or its clearinghouse, if any. In the case of trading on foreign
exchanges, the Investment Funds will be subject to the risk of the
inability of, or refusal by, the counterparty to perform with respect to
contracts. Moreover, since there is generally less government supervision
and regulation of foreign exchanges, clearinghouses and clearing firms than
in the United States, the Investment Funds are also subject to the risk of
the failure of the exchanges on which their positions trade or of their
clearinghouses or clearing firms and there may be a higher risk of
financial irregularities and/or lack of appropriate risk monitoring and
controls.
NON-U.S. INVESTMENTS INVOLVE SPECIAL RISKS NOT USUALLY ASSOCIATED WITH
INVESTMENTS IN U.S. SECURITIES
The Advisors may invest in securities of non-U.S. issuers and the
governments of non-U.S. countries. These investments involve special risks
not usually associated with investing in securities of U.S. companies or
the U.S. government, including political and economic considerations, such
as greater risks of expropriation and nationalization, confiscatory
taxation, the potential difficulty of repatriating funds, general social,
political and economic instability and adverse diplomatic developments; the
possibility of the imposition of withholding or other taxes on dividends,
interest, capital gain or other income; the small size of the securities
markets in such countries and the low volume of trading, resulting in
potential lack of liquidity and in price volatility; fluctuations in the
rate of exchange between currencies and costs associated with currency
conversion; and certain government policies that may restrict an Investment
Fund's and its Advisors' investment opportunities. In addition, because
non-U.S. entities are not subject to uniform accounting, auditing, and
financial reporting standards, practices and requirements comparable with
those applicable to U.S. companies, there may be different types of, and
lower quality, information available about a non-U.S. company than a U.S.
company. There is also less regulation, generally, of the securities
markets in many foreign countries than there is in the United States, and
such markets may not provide the same protections available in the United
States. With respect to certain countries there may be the possibility of
political, economic or social instability, the imposition of trading
controls, import duties or other protectionist measures, various laws
enacted for the protection of creditors, greater risks of nationalization
or diplomatic developments which could materially adversely affect the
Investment Funds' investments in those countries. Furthermore, individual
economies may differ favorably or unfavorably from the U.S. economy in such
respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, and balance of payments position.
An Investment Fund's investment in non-U.S. countries may also be subject
to withholding or other taxes, which may be significant and may reduce the
Investment Fund's returns.
Brokerage commissions, custodial services and other costs relating to
investment in international securities markets generally are more expensive
than in the United States. In addition, clearance and settlement procedures
may be different in foreign countries and, in certain markets, such
procedures have been unable to keep pace with the volume of securities
transactions, thus making it difficult to conduct such transactions.
Investment in sovereign debt obligations of non-U.S. governments
involve additional risks not present in debt obligations of corporate
issuers and the U.S. government. The issuer of the debt or the governmental
authorities that control the repayment of the debt may be unable or
unwilling to repay principal or pay interest when due in accordance with
the terms of such debt, and an Investment Fund may have limited recourse to
compel payment in the event of a default. A sovereign debtor's willingness
or ability to repay principal and to pay interest in a timely manner may be
affected by, among other factors, its cash flow situation, the extent of
its foreign currency reserves, the availability of sufficient foreign
exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy
toward international lenders, and the political constraints to which the
sovereign debtor may be subject. Periods of economic uncertainty may result
in the volatility of market prices of sovereign debt to a greater extent
than the volatility inherent in debt obligations of other types of issues.
INVESTMENT IN EMERGING MARKETS INVOLVES SIGNIFICANT RISKS, INCLUDING
INFLATION AND CURRENCY DEVALUATIONS
The Advisors may invest in securities of companies based in emerging
markets or issued by the governments of such countries. Securities traded
in certain emerging markets may be subject to risks due to the inexperience
of financial intermediaries, a lack of modern technology, the lack of a
sufficient capital base to expand business operations, and the possibility
of temporary or permanent termination of trading. Political and economic
structures in many emerging markets may be undergoing significant evolution
and rapid development, and emerging markets may lack the social, political
and economic stability characteristics of more developed countries. As a
result, the risks relating to investments in foreign securities described
above, including the possibility of nationalization or expropriation, may
be heightened. In addition, certain countries may restrict or prohibit
investment opportunities in issuers or industries deemed important to
national interests. Such restrictions may affect the market price,
liquidity and rights of securities that may be purchased by Advisors.
Settlement mechanisms in emerging securities markets may be less efficient
and reliable than in more developed markets, and placing securities with a
custodian or broker-dealer in an emerging country may also present
considerable risks. The small size of securities markets in such countries
and the low volume of trading may result in a lack of liquidity and in
substantially greater price volatility. Many emerging market countries have
experienced substantial, and in some periods extremely high, rates of
inflation for many years. Inflation and rapid fluctuations in inflation
rates and corresponding currency devaluations and fluctuations in the rate
of exchange between currencies and costs associated with currency
conversion have had and may continue to have negative effects on the
economies and securities markets of certain emerging market countries. In
addition, accounting and financial reporting standards that prevail in
certain of such countries are not equivalent to standards in more developed
countries and, consequently, less information is available to investors in
companies located in such countries.
FOREIGN CURRENCY TRANSACTIONS AND EXCHANGE RATE RISK CREATE ADDITIONAL
RISKS FOR ADVISORS INVESTING IN CERTAIN FINANCIAL INSTRUMENTS
A portion of the Investment Funds' assets allocated to Advisors may be
invested in securities denominated in non-U.S. currencies and in other
financial instruments, the price of which is determined with reference to
such currencies. Advisors may engage in foreign currency transactions for a
variety of purposes, including to "lock in" the U.S. dollar price of the
security, between the trade and the settlement dates, the value of a
security an Advisor has agreed to buy or sell, or to hedge the U.S. dollar
value of securities the Advisor already owns. The Advisors may also engage
in foreign currency transactions for non-hedging purposes to generate
returns. The Investment Funds and the Company will, however, value its
investments and other assets in U.S. dollars. To the extent unhedged, the
value of each Investment Fund's net assets will fluctuate with U.S. dollar
exchange rates as well as with price changes of such Investment Fund's
Advisor's investments in the various local markets and currencies. Forward
currency contracts and options may be utilized by Advisors to hedge against
currency fluctuations, but the Advisors are not required to utilize such
techniques, and there can be no assurance that such hedging transactions
will be available or, even if undertaken, effective.
NON-U.S. FUTURES TRANSACTIONS AFFORD LESS PROTECTION AS RULES OF A FOREIGN
EXCHANGE MAY NOT BE ENFORCED BY A DOMESTIC REGULATOR
Foreign futures transactions involve executing and clearing trades on
a foreign exchange. This is the case even if the foreign exchange is
formally "linked" to a domestic exchange, whereby a trade executed on one
exchange liquidates or establishes a position on the other exchange. No
domestic organization regulates the activities of a foreign exchange,
including the execution, delivery, and clearing of transactions on such an
exchange, and no domestic regulator has the power to compel enforcement of
the rules of the foreign exchange or the laws of the foreign country.
Moreover, such laws or regulations will vary depending on the foreign
country in which the transaction occurs. For these reasons, an Investment
Fund may not be afforded certain of the protections that apply to domestic
transactions, including the right to use domestic alternative dispute
resolution procedures. In particular, funds received from customers to
margin foreign futures transactions may not be provided the same
protections as funds received to margin futures transaction on domestic
exchanges. In addition, the price of any foreign futures or option contract
and, therefore, the potential profit and loss resulting therefrom, may be
affected by any fluctuation in the foreign exchange rate between the time
the order is placed and the foreign futures contract is liquidated or the
foreign option contract is liquidated or exercised.
RISKS RELATED TO SECURITIES AND OTHER INSTRUMENTS
INVESTING IN DERIVATIVE INSTRUMENTS INVOLVES RISK OF LOSS TO THE ADVISORS
THAT COULD MATERIALLY ADVERSELY AFFECT THE VALUE OF THE COMPANY'S NET
ASSETS
Advisors may invest in, or enter into transactions involving,
derivative instruments. These are financial instruments that derive their
performance, at least in part, from the performance of an underlying asset,
index, or interest rate. Examples of derivatives include, but are not
limited to, futures contracts, options contracts, and options on futures
contracts. A futures contract is an exchange-traded agreement between two
parties, a buyer and a seller, to exchange a particular commodity or
financial instrument at a specific price on a specific date in the future.
An option transaction generally involves a right, which may or may not be
exercised, to buy or sell a commodity or financial instrument at a
particular price on a specified future date.
An Advisor's use of derivatives involves risks different from, or
possibly greater than, the risks associated with investing directly in
securities or more traditional investments, depending upon the
characteristics of the particular derivative and the Advisor's portfolio as
a whole. Derivatives permit an Advisor to increase or decrease the level of
risk of its portfolio, or change the character of the risk to which its
portfolio is exposed, in much the same way as the Advisor can increase or
decrease the level of risk, or change the character of the risk, of its
portfolio by making investments in specific securities.
Derivatives may entail investment exposures that are greater than
their cost would suggest, meaning that a small investment in derivatives
could have a large potential impact on an Advisor's performance. If an
Advisor invests in derivatives at inopportune times or judges market
conditions incorrectly, such investments may lower the Advisor's return or
result in a loss. An Advisor also could experience losses if derivatives
are poorly correlated with its other investments, or if an Advisor is
unable to liquidate its position because of an illiquid secondary market.
The market for many derivatives is, or suddenly can become, illiquid.
Changes in liquidity may result in significant, rapid, and unpredictable
changes in the prices for derivatives.
Engaging in these transactions involves risk of loss to the Advisors
that could materially adversely affect the value of the Company's net
assets. No assurance can be given that a liquid market will exist for any
particular futures contract at any particular time.
The successful use of futures also is subject to the ability to
predict correctly movements in the direction of the relevant market, and,
to the extent the transaction is entered into for hedging purposes, to
ascertain the appropriate correlation between the transaction being hedged
and the price movements of the futures contract.
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
Some Advisors may invest long and short in equities and equity-related
instruments in their investment programs. Stocks, options and other
equity-related instruments may be subject to various types of risk,
including market risk, liquidity risk, counterparty credit risk, legal risk
and operations risk. In addition, equity-related instruments can involve
significant economic leverage and may, in some cases, involve significant
risks of loss. "Equity securities" may include common stocks, preferred
stocks, interests in real estate investment trusts, convertible debt
obligations, convertible preferred stocks, equity interests in trusts,
partnerships, joint ventures or limited liability companies and similar
enterprises, warrants and stock purchase rights. In general, stock values
fluctuate in response to the activities of individual companies and in
response to general market and economic conditions. Accordingly, the value
of the stocks and other securities and instruments that the Investment
Funds hold directly or indirectly may decline over short or extended
periods. The stock markets tend to be cyclical, with periods when stock
prices generally rise and periods when prices generally decline. The
volatility of equity securities means that the value of an investment in
each of the Investment Funds may increase or decrease.
FIXED-INCOME SECURITIES ARE SUBJECT TO CREDIT RISK AND PRICE VOLATILITY
Advisors may invest in fixed-income securities. Investment in these
securities may offer opportunities for income and capital appreciation, and
may also be used for temporary defensive purposes and to maintain
liquidity.
"Fixed-income securities" are obligations of the issuer to make
payments of principal and/or interest on future dates, and include, among
other securities: bonds, notes, and debentures issued by corporations; debt
securities issued or guaranteed by the U.S. government or one of its
agencies or instrumentalities or by a foreign government; municipal
securities; and mortgage-backed and asset-backed securities. These
securities may pay fixed, variable, or floating rates of interest, and may
include zero coupon obligations. Fixed-income securities are subject to the
risk of the issuer's or a guarantor's inability to meet principal and
interest payments on its obligations (i.e., credit risk) and are subject to
price volatility due to such factors as interest rate sensitivity, market
perception of the creditworthiness of the issuer, and general market
liquidity (i.e., market risk). In addition, mortgage-backed securities and
asset-backed securities may also be subject to call risk and extension
risk. For example, homeowners have the option to prepay their mortgages.
Therefore, the duration of a security backed by home mortgages can either
shorten (i.e., call risk) or lengthen (i.e., extension risk). In general,
if interest rates on new mortgage loans fall sufficiently below the
interest rates on existing outstanding mortgage loans, the rate of
prepayment would be expected to increase. Conversely, if mortgage loan
interest rates rise above the interest rates on existing outstanding
mortgage loans, the rate of prepayment would be expected to decrease. In
either case, a change in the prepayment rate can result in losses to
investors. The same would be true of asset-backed securities, such as
securities backed by car loans.
HIGH YIELD DEBT INVESTMENTS ARE SUBJECT TO SIGNIFICANT RISKS OF DEFAULT,
ILLIQUIDITY AND VOLATILITY
High yield bonds and other debt securities in which Advisors may
invest on behalf of certain of the Investment Funds will typically be
junior to the obligations of companies to senior creditors, trade creditors
and employees. The lower rating of high yield debt reflects a greater
possibility that adverse changes in the financial condition of the issuer
or in general economic, financial, competitive, regulatory or other
conditions may materially impair the ability of the issuer to make payments
of principal and interest. High yield debt securities have historically
experienced greater default rates than investment grade securities. The
ability of holders of high yield debt to influence a company's affairs,
especially during periods of financial distress or following an insolvency,
will be substantially less than that of senior creditors.
As with other investments, there may not be a liquid market for high
yield debt, which could result in an Advisor being unable to sell such
securities for an extended period of time, if at all. In addition, as with
other types of Advisor investments, the market for high yield debt has
historically been subject to disruptions that have caused significant
illiquidity and substantial volatility in the prices of such securities.
Consolidation in the financial services industry has resulted in there
being fewer market makers for high yield debt, which may result in further
risk of illiquidity and volatility with respect to high yield debt, and
this trend may continue in the future.
STRUCTURED SECURITIES MAY PRESENT A GREATER DEGREE OF MARKET RISK AND MAY
BE MORE VOLATILE, LESS LIQUID AND MORE DIFFICULT TO PRICE ACCURATELY THAN
LESS COMPLEX SECURITIES
Advisors may invest in structured securities. Structured securities
are securities whose value is determined by reference to changes in the
value of specific currencies, interest rates, commodities, indexes or other
financial indicators (the "Reference") or the relative change in two or
more References. The interest rate or the principal amount payable upon
maturity or redemption may be increased or decreased depending upon changes
in the applicable Reference. Structured securities may be positively or
negatively indexed, so that appreciation of the Reference may produce an
increase or decrease in the interest rate or value of the security at
maturity. In addition, changes in the interest rates or the value of the
security at maturity may be a multiple of changes in the value of the
Reference. Consequently, structured securities may present a greater degree
of market risk than other types of securities and may be more volatile,
less liquid and more difficult to price accurately than less complex
securities.
CALL OPTIONS INVOLVES SIGNIFICANT RISKS FOR BUYERS AND SELLERS
There are risks associated with the sale and purchase of call options.
The seller (writer) of a call option which is covered (e.g., the writer
holds the underlying security) assumes the risk of a decline in the market
price of the underlying security below the purchase price of the underlying
security less the premium received, and gives up the opportunity for gain
on the underlying security above the exercise price of the option. The
seller of an uncovered call option assumes the risk of a theoretically
unlimited increase in the market price of the underlying security above the
exercise price of the option.
The buyer of a call option assumes the risk of losing his entire
investment in the call option. If the buyer of the call sells short the
underlying security, the loss on the call will be offset in whole or in
part by any gain on the short sale of the underlying security.
PUT OPTIONS INVOLVES SIGNIFICANT RISKS FOR BUYERS AND SELLERS
There are risks associated with the sale and purchase of put options.
The seller (writer) of a put option which is covered (e.g., the writer has
a short position in the underlying security) assumes the risk of an
increase in the market price of the underlying security above the sales
price (in establishing the short position) of the underlying security plus
the premium received, and gives up the opportunity for gain on the
underlying security below the exercise price of the option. If the seller
of the put option owns a put option covering an equivalent number of shares
with an exercise price equal to or greater than the exercise price of the
put written, the position is "fully hedged" if the option owned expires at
the same time or later than the option written. The seller of an uncovered
put option assumes the risk of a decline in the market price of the
underlying security below the exercise price of the option.
The buyer of a put option assumes the risk of losing his entire
investment in the put option. If the buyer of the put holds the underlying
security, the loss on the put will be offset in whole or in part by any
gain on the underlying security.
REVERSE REPURCHASE AGREEMENTS MAY INCREASE THE VOLATILITY OF AN INVESTMENT
FUND'S AND THE COMPANY'S INVESTMENT PORTFOLIO
The Investment Funds or the Advisors may enter into reverse repurchase
agreements. A reverse repurchase agreement typically involves the sale of a
security by a party to a bank or securities dealer and the selling party's
simultaneous agreement to repurchase that security for a fixed price
(reflecting a rate of interest) on a specific date, and may be considered a
form of borrowing for some purposes. These transactions involve risks that
the value of portfolio securities being relinquished may decline below the
price that must be paid when the transaction closes or that the other party
to a reverse repurchase agreement will be unable or unwilling to complete
the transaction as scheduled, which may result in losses to the applicable
Investment Fund and the Company. Reverse repurchase agreements are a form
of leverage that may also increase the volatility of an Investment Fund's
and the Company's investment portfolio.
THERE ARE SIGNIFICANT RISK ASSOCIATED WITH WHEN-ISSUED AND FORWARD
COMMITMENT SECURITIES
Advisors may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis in order to
hedge against anticipated changes in interest rates and prices or for
speculative purposes. These transactions involve a commitment by an Advisor
to purchase or sell securities at a future date (ordinarily at least one or
two months later). The price of the underlying securities, which is
generally expressed in terms of yield, is fixed at the time the commitment
is made, but delivery and payment for the securities takes place at a later
date. No income accrues on securities that have been purchased pursuant to
a forward commitment or on a when-issued basis prior to delivery to the
Advisor. When-issued securities and forward commitments may be sold prior
to the settlement date. If an Advisor disposes of the right to acquire a
when-issued security prior to its acquisition or disposes of its right to
deliver or receive against a forward commitment, it may incur a gain or
loss. There is a risk that securities purchased on a when-issued basis may
not be delivered and that the purchaser of securities sold by an Advisor on
a forward basis will not honor its purchase obligation. In such cases, an
Advisor may incur a loss potentially resulting in losses to the Investment
Fund and the Company.
DERIVATIVES WITH RESPECT TO HIGH YIELD AND OTHER INDEBTEDNESS EXPOSE
ADVISORS TO COUNTERPARTY AND ISSUER RISK
In addition to the credit risks associated with holding high yield
debt securities, with respect to derivatives involving high yield and other
debt, an Advisor will usually have a contractual relationship only with the
counterparty of the derivative, and not with the issuer of the
indebtedness. An Advisor generally will have no right to directly enforce
compliance by the issuer with the terms of the derivative nor any rights of
set-off against the issuer, nor have any voting rights with respect to the
indebtedness. An Advisor will not directly benefit from the collateral
supporting the underlying indebtedness and will not have the benefit of the
remedies that would normally be available to a holder of the indebtedness.
In addition, in the event of the insolvency of the counterparty to the
derivative, such Advisor will be treated as a general creditor of such
counterparty, and will not have any claim with respect to the underlying
indebtedness. Consequently, the Advisor will be subject to the credit risk
of the counterparty as well as that of the issuer of the indebtedness. As a
result, concentrations of such derivatives in any one counterparty subject
the Advisor to an additional degree of risk with respect to defaults by
such counterparty as well as by the issuer of the underlying indebtedness.
THE COMPANY MAY BE PREVENTED FROM ACHIEVING ITS OBJECTIVE DURING ANY PERIOD
IN WHICH ASSETS ARE NOT SUBSTANTIALLY INVESTED IN ACCORDANCE WITH PRINCIPAL
INVESTMENT STRATEGIES
Advisors may invest, for defensive purposes or otherwise, some or all
of their assets in fixed-income securities, money market instruments, and
money market mutual funds, or hold cash or cash equivalents in such amounts
as the Advisors deem appropriate under the circumstances. Pending
allocation of the offering proceeds and thereafter, from time to time, the
Investment Funds also may invest in these instruments. Money market
instruments are short-term fixed-income obligations, which generally have
remaining maturities of one year or less, and may include U.S. government
securities, commercial paper, certificates of deposit, bankers' acceptances
issued by domestic branches of U.S. banks that are members of the Federal
Deposit Insurance Corporation, and repurchase agreements. The Company and
the Investment Funds may be prevented from achieving their objective during
any period in which the Company's and the Investment Fund's assets are not
substantially invested in accordance with their principal investment
strategies.
RESTRICTED AND ILLIQUID INVESTMENTS MAY PREVENT PROMPT LIQUIDATION OF
UNFAVORABLE POSITIONS RESULTING IN SUBSTANTIAL LOSS
Advisors may invest a portion or all of the value of their assets in
restricted securities and other investments that are illiquid. Restricted
securities are securities that may not be sold to the public without an
effective registration statement under the Securities Act or, if they are
unregistered, may be sold only in a privately negotiated transaction or
pursuant to an exemption from registration. These may include restricted
securities that can be offered and sold only to "qualified institutional
buyers" under Rule 144A of the Securities Act. There is no limit to the
percentage of an Advisor's net assets that may be invested in illiquid
securities.
Positions in restricted or non-publicly traded securities, securities
on foreign exchanges and certain futures contracts 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. This
constraint could prevent the Advisors from promptly liquidating unfavorable
positions and subject the Investment Funds and, in turn, the Company to
substantial losses. This could also impair the Company's ability to redeem
its membership units from an Investment Fund in order to redeem Members'
Units in a timely manner.
RISKS RELATED TO ISSUERS OF SECURITIES
THE ISSUERS OF SECURITIES ACQUIRED BY ADVISORS WILL SOMETIMES FACE A HIGH
DEGREE OF BUSINESS AND FINANCIAL RISK
The issuers of securities acquired by Advisors will sometimes involve
a high degree of business and financial risk. These companies may be in an
early stage of development, may not have a proven operating history, may be
operating at a loss or have significant variations in operating results,
may be engaged in a rapidly changing business with products subject to a
substantial risk of obsolescence, may require substantial additional
capital to support their operations, to finance expansion or to maintain
their competitive position, or may otherwise have a weak financial
condition.
Issuers of securities acquired by Advisors may be highly leveraged.
Leverage may have important adverse consequences to these companies, and
the Advisor as an investor. These companies may be subject to restrictive
financial and operating covenants. The leverage may impair these companies'
ability to finance their future operations and capital needs. As a result,
these companies' flexibility to respond to changing business and economic
conditions and to business opportunities may be limited. A leveraged
company's income and net assets will tend to increase or decrease at a
greater rate than if borrowed money were not used.
In addition, such companies may face intense competition, including
competition from companies with greater financial resources, more extensive
development, manufacturing, marketing, and other capabilities, and a larger
number of qualified managerial and technical personnel.
EXPECTED TRANSACTIONS MAY NOT TAKE PLACE OR MAY RESULT IN SUBSTANTIAL
LOSSES
The Advisors of the Investment Funds, particularly those of GED, may
engage in merger arbitrage transactions. Substantial transaction failure
risks are involved with respect to companies that are the subject of
publicly disclosed mergers, takeover bids, exchange offers, tender offers,
spin-offs, liquidations, corporate restructuring, and other similar
transactions. Thus, there can be no assurance that any expected transaction
will take place. Certain transactions are dependent on one or more factors
in order to become effective, such as market conditions which may lead to
unexpected positive or negative changes in a company profile, shareholder
approval, regulatory and various other third party consents, changes in
earnings or business lines or shareholder activism as well as many other
factors. No assurance can be given that the transactions entered into will
result in profitable investments for the Advisors or that any such Advisor
and, in turn, the Investment Funds and the Company, will not incur
substantial losses.
INVESTMENTS IN SMALL CAPITALIZATION COMPANIES ARE SPECULATIVE AND MAY BE
DIFFICULT TO VALUE
From time to time, a significant portion of the assets of the
Investment Funds may be invested in securities of small capitalization
companies and recently organized companies and, conversely, the Advisors of
the Investment Funds may establish significant short positions in such
securities. Historically, such securities have been more volatile in price
than those of larger capitalized, more established companies. The
securities of small capitalization and recently organized companies pose
greater investment risks because such companies may have limited product
lines, distribution channels and financial and managerial resources. In
particular, small capitalization companies may be operating at a loss or
have significant variations in operating results; may be engaged in a
rapidly changing business with products subject to substantial risk of
obsolescence; may require substantial additional capital to support their
operations, to finance expansion or to maintain their competitive position;
and may have substantial borrowings or may otherwise have a weak financial
condition. In addition, these companies may face intense competition,
including competition from companies with greater financial resources, more
extensive development, manufacturing, marketing, and other capabilities,
and a larger number of qualified managerial and technical personnel.
Further, there is often less publicly available information concerning such
companies than for larger, more established businesses. The equity
securities of small capitalization companies are often traded
over-the-counter or on regional exchanges and may not be traded in the
volumes typical on a national securities exchange. Consequently, the
Investment Funds or entities in which the Investment Funds invest may be
required to dispose of such securities or cover a short position over a
longer (and potentially less favorable) period of time than is required to
dispose of or cover a short position with respect to the securities of
larger, more established companies. Investments in small capitalization
companies may also be more difficult to value than other types of
securities because of the foregoing considerations as well as lower trading
volumes. Investments in companies with limited operating histories are more
speculative and entail greater risk than do investments in companies with
an established operating record. Additionally, transaction costs for these
types of investments are often higher than those of larger capitalization
companies.
INVESTMENTS IN ISSUERS OF INDEBTEDNESS MAY BE ADVERSELY AFFECTED IN THE
EVENT OF AN ISSUER'S INSOLVENCY
Various laws enacted for the protection of creditors may apply to
indebtedness in which the Advisors invest. The information in this and the
following paragraph is applicable with respect to U.S. issuers subject to
United States federal bankruptcy law. Insolvency considerations may differ
with respect to other issuers. If a court in a lawsuit brought by an unpaid
creditor or representative of creditors of an issuer of indebtedness, such
as a trustee in bankruptcy, were to find that the issuer did not receive
fair consideration or reasonably equivalent value for incurring the
indebtedness and after giving effect to such indebtedness, the issuer (i)
was insolvent, (ii) was engaged in a business for which the remaining
assets of such issuer constituted unreasonably small capital or (iii)
intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they mature, such court could determine to
invalidate, in whole or in part, such indebtedness as a fraudulent
conveyance, to subordinate such indebtedness to existing or future
creditors of such issuer, or to recover amounts previously paid by such
issuer in satisfaction of such indebtedness. The measure of insolvency for
purposes of the foregoing will vary. Generally, an issuer would be
considered insolvent at a particular time if the sum of its debts was then
greater than all of its property at a fair valuation, or if the present
fair saleable value of its assets was then less than the amount that would
be required to pay its probable liabilities on its existing debts as they
became absolute and matured. There can be no assurance as to what standard
a court would apply in order to determine whether the issuer was
"insolvent" after giving effect to the incurrence of the indebtedness in
which an Advisor invested or that, regardless of the method of valuation, a
court would not determine that the issuer was "insolvent" upon giving
effect to such incurrence. In addition, in the event of the insolvency of
an issuer of indebtedness in which an Advisor invests, payments made on
such indebtedness could be subject to avoidance as a "preference" if made
within a certain period of time (which may be as long as one year) before
insolvency. In general, if payments on indebtedness are avoidable, whether
as fraudulent conveyances or preferences, such payments can be recaptured.
The Company or the Investment Funds do not anticipate that the
Advisors will engage in conduct that would form the basis for a successful
cause of action based upon fraudulent conveyance, preference or equitable
subordination. There can be no assurance, however, as to whether any
lending institution or other party from which the Advisor may acquire such
indebtedness engaged in any such conduct (or any other conduct that would
subject such indebtedness and any Investment Fund, the assets of which such
Advisor used to purchase such indebtedness, to insolvency laws) and, if it
did, as to whether such creditor claims could be asserted in a U.S. court
(or in the courts of any other country) against such Investment Fund.
Indebtedness consisting of obligations of non-U.S. issuers or U.S
issuers with respect to their foreign obligations may be subject to various
laws enacted in the countries of their issuance for the protection of
creditors. These insolvency considerations will differ depending on the
country in which each issuer is located or domiciled and may differ
depending on whether the issuer is a non-sovereign or a sovereign entity.
PURCHASES OF SECURITIES AND OTHER OBLIGATIONS OF FINANCIALLY DISTRESSED
COMPANIES CREATE AN ENHANCED RISK OF SUBSTANTIAL LOSS OR LOSS OF ENTIRE
INVESTMENT
The Advisors may purchase securities and other obligations of
companies that are experiencing significant financial or business distress,
including companies involved in bankruptcy or other reorganization and
liquidation proceedings. Although such purchases may result in significant
returns, they involve a substantial degree of risk and may not show any
return for a considerable period of time. In fact, many of these
instruments ordinarily remain unpaid unless and until the company
reorganizes and/or emerges from bankruptcy proceedings, and as a result may
have to be held for an extended period of time. The level of analytical
sophistication, both financial and legal, necessary for successful
investment in companies experiencing significant business and financial
distress is unusually high. There is no assurance that the Advisors will
correctly evaluate the nature and magnitude of the various factors that
could affect the prospects for a successful reorganization or similar
action. In any reorganization or liquidation proceeding relating to a
company in which an Advisor invests, an Advisor may lose its entire
investment or may be required to accept cash or securities with a value
less than its original investment. Under such circumstances, the returns
generated from an Advisor's investments may not compensate investors
adequately for the risks assumed.
LIMITS OF RISK DISCLOSURE
THE COMPANY SHOULD BE CONSIDERED A SPECULATIVE INVESTMENT AND MEMBERS
SHOULD RETAIN THEIR INVESTMENT ONLY IF THEY CAN SUSTAIN A COMPLETE LOSS OF
THEIR INVESTMENT
The above discussions relating to various risks associated with the
Company, the Units, the Investment Funds and the Advisors are not, and are
not intended to be, a complete enumeration or explanation of the risks
involved in an investment in the Company. Members should read this entire
Annual Report and the LLC Agreement and should consult with their own
advisers before deciding whether to retain their investment in the Company.
In addition, as the Company's investment program or market conditions
change or develop over time, an investment in the Company may be subject to
risk factors not currently contemplated or described in this Annual Report.
In view of the risks noted above, the Company should be considered a
speculative investment and Members should retain their investment in the
Company only if they can sustain a complete loss of their investment.
No guarantee or representation is made that the investment program of
the Company, the Investment Funds or any Advisor will be successful, that
the Investment Funds or the various Advisors selected by the Investment
Funds will produce positive returns, or that the Advisors selected by the
Investment Funds will provide complete or accurate information to the
Investment Funds, or that the Company, the Investment Funds or the Advisors
will achieve their investment objectives.
ITEM 2. PROPERTIES
The Company does not own or lease any physical properties. The Company
is operating at the Managing Member's facility and is not being charged
rent except indirectly through the monthly Management Fee.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company
or the Managing Member is a party or to which any of their assets are
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of holders of Units during the
fiscal year ended December 31, 2004.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
Currently, there is no established public trading market for the
Units. Other than transfers to the Company in redemption, transfers of
Units are expressly prohibited by the LLC Agreement without the consent of
the Managing Member.
Without the prior written consent of the Managing Member, which may be
withheld in its sole discretion, a Member may not assign or otherwise
transfer its Units in the Company in whole or in part, except by operation
of law pursuant to the death, bankruptcy or dissolution of a Member, or
pursuant to a corporate reorganization or merger, nor substitute any other
person as a Member. No transferee or assignee will be admitted as a Member
without the prior consent of the Managing Member, which may be withheld in
its sole discretion. A Member has the right to redeem some or all of its
Units, upon 60 days' prior written notice to the Managing Member on each
January 1 or July 1.
There are no outstanding options or warrants to purchase, or
securities convertible into, Units of the Company.
The high and low NAV per Unit of the initial series of Units for Class
A Series 1 of the Company during each quarterly period from the
commencement of the Company's operations on April 1, 2002 through December
31, 2004 are as follows:
----------------------- ---------------------- ----------------------
QUARTER ENDED HIGH LOW
----------------------- ---------------------- ----------------------
6/30/02 $101.60 $100.09
----------------------- ---------------------- ----------------------
9/30/02 $103.20 $101.42
----------------------- ---------------------- ----------------------
12/31/02 $103.97 $101.59
----------------------- ---------------------- ----------------------
3/31/03 $106.62 $105.52
----------------------- ---------------------- ----------------------
6/30/03 $109.83 $106.89
----------------------- ---------------------- ----------------------
9/30/03 $110.35 $108.87
----------------------- ---------------------- ----------------------
12/31/03 $113.95 $112.09
----------------------- ---------------------- ----------------------
3/31/04 $117.05 $115.10
----------------------- ---------------------- ----------------------
6/30/04 $115.92 $114.58
----------------------- ---------------------- ----------------------
9/30/04 $114.55 $113.73
----------------------- ---------------------- ----------------------
12/31/04 $120.25 $115.61
----------------------- ---------------------- ----------------------
The Units have not been and will not be registered under the
Securities Act and may not be resold unless an exemption from such
registration is available. Members have no right to require registration of
the Units and the Company does not intend to register the Units under the
Securities Act or take any action to cause an exemption (whether pursuant
to Rule 144 of the Securities Act or otherwise) to be available.
RECORD HOLDERS OF UNITS OF THE COMPANY
As of December 31, 2004, approximately 8,106,803 Units were held by
approximately 725 Members.
DISTRIBUTIONS
The Company has not made distributions from January 1, 2004 to
December 31, 2004 other than distributions to facilitate redemptions of
individual Members. The Company does not presently intend to make
distributions to Members other than in connection with redemptions of
Units.
RECENT SALES OF UNREGISTERED UNITS AND USE OF PROCEEDS
From January 1, 2004 to December 31, 2004, aggregate subscriptions
totaled $126.4 million. The Company previously reported sales of
unregistered Units during the 2004 fiscal year in the Company's Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K. Information with
respect to the first quarter of the 2004 fiscal year can be found in the
Registration Statement. In connection with each funding, 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. The Company has used the proceeds to make investments in
the Investment Funds.
PURCHASES OF UNITS BY THE COMPANY AND AFFILIATED PURCHASERS
Pursuant to the Company'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
Company for the accounting period then ending), after reduction for any
Management Fee and Incentive Allocation and other liabilities of the
Company to the extent accrued or otherwise attributable to the Units being
redeemed.
The Company previously reported redemptions of Units during the third
quarter ended September 30, 2004 in the Company's Quarterly Report on Form
10-Q. There were no redemptions of Units during the fourth quarter ended
December 31, 2004. Redemptions of $128,546,636 will be effective on January
1, 2005 and are reflected in Redemptions payable in the December 31, 2004
balance sheet. See ITEM 15. "EXHIBITS AND FINANCIAL STATEMENT SCHEDULES."
ITEM 6. SELECTED FINANCIAL DATA
The Company commenced its operations on April 1, 2002. Set forth below
is certain selected historical data for the Company as of and for the years
ended December 31, 2004 and 2003 and as of and for the period from
commencement of operations (April 1, 2002) to December 31, 2002. The
selected historical financial data as of and for the years ended December
31, 2004 and 2003 and as of and for the period from commencement of
operations (April 1, 2002) to December 31, 2002 were derived from the
financial statements of the Company, which were audited by Ernst & Young
LLP ("E&Y"). The information set forth below should be read in conjunction
with the financial statements and notes thereto contained elsewhere in this
Annual Report.
COMMENCEMENT OF
OPERATIONS
YEAR ENDED YEAR ENDED (APRIL 1, 2002)
OPERATIONS DATA DECEMBER 31, 2004 DECEMBER 31, 2003 TO DECEMBER 31, 2002
- --------------- ----------------- ----------------- --------------------
Net trading profit/(loss) $72,018,387 $81,854,395 $11,821,474
Total expenses $14,457,852 $10,733,672 $2,459,020
Net income/(loss) $58,055,729 $71,218,666 $9,395,178
Less: Incentive allocation to
the managing member $2,902,854 $3,560,865 $469,759
Net income/(loss) available for
pro-rata allocation to members $55,152,875 $67,657,801 $8,925,419
AS OF AS OF AS OF
FINANCIAL CONDITION DATA DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
- ------------------------ ----------------- ----------------- -----------------
Investments $1,092,953,352 $970,912,828 $383,584,606
Total assets $1,093,172,149 $1,019,413,929 $384,184,813
Total liabilities $135,716,916 $86,168,187 $958,552
Members' equity $957,455,233 (1) $933,245,742 (2) $383,226,261
Ending NAV/Unit: Class A
Series 1 $120.25 $113.95 $103.97
(1) The reduction in members' equity as of December 31, 2004 reflects
Redemptions payable in the amount of $128,546,636 that are payable
after December 31, 2004.
(2) The reduction in members' equity as of December 31, 2003 reflects
Redemptions payable in the amount of $34,529,625 that were payable
after December 31, 2003.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the
audited financial statements of the Company and related notes thereto
appearing elsewhere in this Annual Report, ITEM 6. "SELECTED FINANCIAL
DATA" and, ITEM 1. "BUSINESS--CERTAIN RISK FACTORS--SPECIAL RISKS OF THE
COMPANY'S STRUCTURE--Risks Related to the Company's Structure--The
Company's Financial Statements are, and in the Future will be, Based on
Estimates of Valuations Provided by Third Party Advisors Which May not be
Accurate or May Need to Be Adjusted in the Future."
The Company is a Delaware limited liability company organized in March
2002 to operate as an investment fund. It commenced operations on April 1,
2002. GS HFS, a Delaware limited liability company, serves as the Company's
Managing Member.
As of December 31, 2004, the Company had total assets of $1,093.2
million compared with total assets of $1,019.4 million as of December 31,
2003 and $384.2 million as of December 31, 2002. Total liabilities of the
Company totaled $135.7 million as of December 31, 2004 compared with $86.2
million as of December 31, 2003 and $1.0 million as of December 31, 2002.
Members' equity of the Company was $957.4 million as of December 31, 2004
compared with $933.2 million as of December 31, 2003 and $383.2 million as
of December 31, 2002.
The Company'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 Company allocates all or substantially all of
its assets among privately placed Investment Funds managed by the Managing
Member, each of which allocates its assets to, or invests in entities
managed by 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 Company's
assets are invested in the four Investment Funds: GTT, GELS, GRV and GED.
Performance of the Company in any period will be dependent upon the
performance in the relevant period by the four Investment Funds and the
weighted average percentage of the Company'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 Company's results depend on the Managing Member, including in its
capacity as managing member of each of the Investment Funds, and the
ability of the Managing Member to recognize and capitalize on trends and
other profit and investment opportunities within the four investment
sectors. Unlike many operating businesses, general economic or seasonal
conditions may not have any direct effect on the profit potential of the
Company due to the speculative nature of the Company's investments and
since the Company'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 Company'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
The following presents a summary of the operations for the years ended
December 31, 2004 and 2003 and for the period from commencement of
operations (April 1, 2002) to December 31, 2002, and a general discussion
of each Investment Fund's performance during those periods.
2004 PERFORMANCE
The Company's net trading profit/loss for the year ended December 31,
2004 was $72,018,387, compared to the year ended December 31, 2003 of
$81,854,395, and compared to the period from commencement of operations
(April 1, 2002) to December 31, 2002 of $11,821,474.
OVERVIEW
The Company 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. During the first six months of 2004, the Company allocated its
assets on a roughly equivalent risk weighted basis to each of the four
hedge fund sectors. Through June 30, 2004, the Managing Member had not made
any strategic allocations. As of July 1, 2004, the Managing Member
implemented an adjustment to the weightings among the Investment Funds.
This adjustment to the weights reflected the Managing Member's updated
expectations for return, risk and correlations for the Investment Funds.
The Managing Member periodically re-evaluates the contribution to the risk
and return of the Company from each investment sector and may in its sole
discretion re-allocate the Company's assets or weights of the investment
sector as it deems advisable. As further described under ITEM 7A.
"QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK--Risk
Management," 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 Company cannot predict which hedge fund sector and
accordingly which Investment Fund will perform best in the future. The
table below illustrates the portfolio weighting of each Investment Fund as
of December 31, 2004, as well as each Investment Fund's net return for the
year ended December 31, 2004.
- ------------------ ---------------------- ------------------------- ----------------------
PORTFOLIO WEIGHT PORTFOLIO WEIGHT AS A YEAR ENDED
AS A % OF % OF ADJUSTED DECEMBER 31, 2004
INVESTMENT FUND MEMBERS' EQUITY (1) MEMBERS' EQUITY (2) NET RETURN (3)
- ------------------ ---------------------- ------------------------- ----------------------
GTT 25.91% 22.84% 3.88%
GELS 23.63% 20.84% 9.27%
GRV 36.60% 32.27% 5.38%
GED 28.01% 24.69% 12.70%
(1) Members' equity, used in the calculation of the investments as a % of
members' equity, is reduced for member redemptions that are paid after
the balance sheet date.
(2) As a % of the Company's adjusted members' equity which represents
members' equity excluding Redemptions payable in the amount of
$128,546,636 that are payable after December 31, 2004.
(3) 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 Company's investment in any of
the Investment Funds. Past performance is not indicative of future
results, which may vary.
For the year ended December 31, 2004, the Company's Class A Series 1
Units returned 5.53% net of fees and incentive allocation.
THE INVESTMENT FUNDS
Each of the four Investment Funds' performance during the year ended
December 31, 2004 is described in the following.
GOLDMAN SACHS GLOBAL TACTICAL TRADING, LLC
As of December 31, 2004, GTT represented approximately 23% of adjusted
members' equity which excludes redemptions paid after December 31, 2004 and
which was generally consistent with the strategic weight set by the
Managing Member for GTT as of July 1, 2004. GTT returned 3.88% for Class C
Series 1 units for the year ended December 31, 2004.
Volatile markets resulted in a difficult year in 2004 for the
Company's GTT Advisors, in particular during the second and third quarters
of 2004.
In the first quarter of 2004, profits were made in commodities and
interest rates. In commodities, the agricultural markets, specifically the
soy complex, proved to be the largest driver of returns. GTT Advisors were
also profitable in base and precious metals. The majority of first quarter
losses was experienced in currencies as GTT Advisors suffered losses as a
result of the strengthening of the U.S. dollar.
The second quarter of 2004 proved to be more challenging as fixed
income and non-energy commodity markets, both of which had provided the
bulk of the returns in the first quarter, reversed sharply in early April.
Positions in these sectors contributed to the largest losses for GTT
Advisors for the second quarter of 2004. Indications of a strong economic
recovery and rising inflation led to market expectations of accelerated
rate increases by the Federal Reserve Board and a sell-off in fixed income
markets. Long equity and short dollar positions, particularly against the
Japanese yen and the euro, also suffered by the anticipation of a higher
rate environment.
Difficult markets persisted in the third quarter of 2004. Trading in
fixed income and commodities was slightly positive for the quarter, while
GTT Advisors experienced losses in currencies and equity indices. Despite
record trade deficit numbers, the U.S. dollar did not weaken significantly
which contributed to losses for GTT Advisors in short dollar positions.
Equity markets experienced several sharp reversals throughout the third
quarter of 2004 as the market digested rising oil prices and a potential
global slowdown. A series of weaker-than-expected economic data releases,
higher oil prices and the Federal Reserve Board's assurance that fears of
inflation were largely unfounded combined to drive bond yields lower over
the course of the quarter. Some GTT Advisors profited because crude oil
rallied and short positions were successful as a result of grain markets
experiencing sharp declines.
The fourth quarter of 2004 experienced positive performance overall
across the different asset classes, with the largest profits coming from
currencies. The dominating theme was the weakening of the U.S. dollar,
specifically against the Japanese yen and several European currencies. The
sell-offs were attributed to the massive current account deficit and the
perceived lack of fiscal discipline in the U.S., leaving the U.S. dollar
vulnerable to reduced investments in dollar assets and possible shifts by
central banks in reserves from dollars to other currencies. As market
concerns of a slowing economy in China spread, there was a sharp sell-off
in basic metals, causing losses on long positions. U.S. treasuries traded
lower on stronger-than-expected growth and payroll numbers and on news of
reduced foreign investment in U.S. assets, while European bonds rose.
Equity markets rose on positive economic news and falling crude oil prices,
which made them top contributors to performance, with long positions in the
U.S., Europe, and Asia generating profits.
GOLDMAN SACHS GLOBAL EQUITY LONG/SHORT, LLC
As of December 31, 2004, GELS represented approximately 21% of
adjusted members' equity which excludes redemptions paid after December 31,
2004 and which was generally consistent with the strategic weight set by
the Managing Member for GELS as of July 1, 2004. GELS returned 9.27% for
Class C Series 1 units for the year ended December 31, 2004.
The annualized volatility of GELS' returns for the year ended December
31, 2004 was 5.65%. In comparison, the S&P 500 Index had an annualized
volatility of 7.30% and the MSCI World Index had an annualized volatility
of 8.16% for the period.
The year ended December 31, 2004 was a solid year for GELS, with eight
positive and four negative months of performance. GELS started the year off
strongly in January and February because many trends that drove strong
fourth quarter 2003 performance continued into 2004. The period from March
through May 2004 was difficult for many of GELS' Advisors because of
significant sell-offs in several areas where they had exposures, namely in
small capitalization, basic materials and emerging market stocks. June was
a positive month for GELS as GELS Advisors rebounded; however, July was
another difficult month and represented the low point of GELS for the year,
as the global technology and healthcare sectors sold-off.
The last five months of 2004 were positive, with particularly strong
performance in September, November and December. The year-end rally for
GELS experienced additional momentum following the U.S. election in early
November, which brought a global equity rally, most notably in the areas
that negatively impacted performance in the spring of 2004 (e.g. small
capitalization, basic materials and emerging markets).
Almost all GELS Advisors posted positive returns for the fourth
quarter of 2004. GELS Advisors with exposures in Europe emerging markets,
energy, and basic materials posted particularly strong returns. GELS
Advisors that posted losses included those with significant exposure to
Japan and those with notional (gross long plus gross short) or
beta-adjusted (for volatility of the overall market) net short exposures.
GOLDMAN SACHS GLOBAL RELATIVE VALUE, LLC
As of December 31, 2004, GRV represented approximately 32% of adjusted
members' equity which excludes redemptions paid after December 31, 2004 and
which was generally consistent with the strategic weight set by the
Managing Member for GRV as of July 1, 2004. GRV returned 5.38% for Class C
Series 1 units for the year ended December 31, 2004.
The annualized volatility of GRV's returns was 2.00% for the year
ended December 31, 2004 compared to the Lehman Aggregate Bond Index which
had an annualized volatility of 4.04% for the same period. The asset
classes in which GRV Advisors traded spent the majority of 2004 trading in
a narrow range, resulting in very low levels of volatility. Equity
volatility remained close to 9-year lows throughout 2004, despite many
significant world events. The difference between the best and worst
performing stocks in the equity markets was minimal, resulting in lower
profits from security selection. Government bond markets experienced more
activity because the Federal Reserve Board began to increase rates in the
summer of 2004. Overall, the premium that investors require to take risk
has contracted, demonstrated by low bond yields, tight credit spreads and
negligible equity volatility.
Credit trading arbitrage strategies performed well as GRV Advisors
were able to profit from technical and fundamental trade opportunities,
including arbitraging credit indices versus their constituent credits,
capital structure (credit vs. equity) and long/short credit trades.
Fixed income arbitrage strategies performed moderately for the year
and although there were a number of sharp moves in the markets, overall
volatility remained subdued at 4-year lows. The summer of 2004 brought
difficult trading conditions as 10 year bond yields fell despite the
Federal Reserve Board increasing short-term interest rates, resulting in
modest losses by GRV Advisors. Following a difficult third quarter, GRV
Advisors experienced a recovery in the fourth quarter of 2004.
Equity arbitrage strategies experienced a positive year. Returns were
strong throughout 2004, with a modest summer slowdown as equity returns
were dominated by macro drivers rather than stock-specific characteristics.
Profitable model stock selection factors included valuation, earnings
momentum and quality. International markets were particularly successful
for GRV Advisors.
The decline in equity volatility led to negligible returns for GRV
Advisors in convertible bond arbitrage strategies. The amount of new
issuances declined and prices were high, exacerbating the challenging
environment. GRV Advisors shifted exposure into Asian markets, and selected
short positions and special situations to improve their returns.
Multi-strategy arbitrage, which covers all of GRV's sub-strategies,
benefited in 2004 from additional opportunities in special situations and
credit/high yield trades.
Convertible arbitrage strategies returned 2.27% and contributed 0.76%
to GRV's net income for the year ended December 31, 2004. Credit relative
value strategies returned 6.26% and contributed 0.39% to GRV's net income
for the year ended December 31, 2004. Emerging markets relative value
strategies returned 8.26% and contributed 0.42% to GRV's net income for the
year ended December 31, 2004. Equity market neutral strategies returned
4.02% and contributed 0.62% to GRV's net income for the year ended December
31, 2004. Fixed income arbitrage strategies returned 6.97% and contributed
1.52% to GRV's net income for the year ended December 31, 2004.
Multi-strategies returned 7.09% and contributed 2.13% to GRV's net income
for the year ended December 31, 2004.
GOLDMAN SACHS GLOBAL EVENT DRIVEN, LLC
As of December 31, 2004, GED represented approximately 25% of adjusted
members' equity which excludes redemptions paid after December 31, 2004 and
which was generally consistent with the strategic weight set by the
Managing Member for GED as of July 1, 2004. GED returned 12.70% for Class C
Series 1 units for the year ended December 31, 2004.
The annualized volatility of GED's returns for the year ended December
31, 2004 was 3.38% compared to the S&P 500 Index which had an annualized
volatility of 7.30% and to the MSCI World Index which had an annualized
volatility of 8.16% for the same period.
The year ended December 31, 2004 produced varied market results. The
MSCI World Index experienced low returns in the first half of 2004. In the
third quarter of 2004, the equity markets had negative performance as a
result of the Federal Reserve Board's interest rate increases and the
reduction in equity implied volatility. However, equity markets rebounded
in the fourth quarter of 2004, following the U.S. presidential election.
Risk arbitrage Advisors had a difficult year because of narrow deal
spreads, which, in part, resulted from many deals facing regulatory
scrutiny and other deal specific issues, especially in the summer of 2004.
Global mergers and acquisitions activity increased significantly in 2004,
but still remained below the historical highs of 1999 and 2000. Despite a
small decrease in deal momentum during the second quarter of 2004, GED
Advisors focusing on mergers and acquisitions were successful. Mergers and
acquisitions volume totaled a little under $2 trillion for 2004, which
easily surpassed 2003's volume of $1.3 trillion. December was the most
active month for mergers and acquisitions since August 2000, with over $300
billion in global activity.
Default rates fell to record lows of 1.3% in 2004. High yield credit
spreads tightened to historically narrow levels from 418 basis points over
treasuries at the beginning of the year to 310 basis points at year-end.
The high yield market experienced a record year of new issuance at $153
billion, which surpassed the prior record of $144 billion in 1998. GED
Advisors were rewarded for strong credit selection on both the long and
short side. Several of GED's credit-focused Advisors gradually built the
short side of their portfolios given their concerns on valuation levels in
the credit markets. The majority of new high yield issuance was driven by
refinancing activity. Financial sponsors contributed significantly to new
issuance activity by refinancing their portfolio companies to pay
themselves special dividends. The technology, media and telecom sectors
experienced the largest volume of new issuance ($39.4 billion), followed by
the energy sector ($24.1 billion) and the industrials sector ($19.7
billion).
Credit opportunities/distressed strategies returned 17.26% and
contributed 3.09% to GED's net income for the year ended December 31, 2004.
The multi-strategy component of the portfolio returned 12.43% and
contributed 1.38% to GED's net income for the year ended December 31, 2004.
Risk arbitrage/special situations strategies returned 8.36% and contributed
2.15% to GED's net income for the year ended December 31, 2004.
2003 PERFORMANCE
The Company's net trading profit for the year ended December 31, 2003
was $81,854,395 compared to the period from commencement of operations
(April 1, 2002) to December 31, 2002 of $11,821,474.
OVERVIEW
During 2003, the Company allocated its assets on a roughly equivalent
risk-weighted basis to each of the four hedge fund sectors. This diversity
of return drivers was particularly important to the Company's performance
in 2003 given the wide dispersion of returns within the various sectors of
the hedge fund market. For example, equity long/short and event driven
strategies rebounded from a difficult 2002 to post strong absolute returns
in 2003. By contrast, certain price based and quantitative equity arbitrage
Advisors in the relative value sector had a difficult year in 2003. The
Company cannot predict which hedge fund sector and accordingly which
Investment Fund will perform best in the future. The table below
illustrates the portfolio weighting of each Investment Fund as of December
31, 2003, as well as each Investment Fund's net return for the year ended
December 31, 2003.
- ------------------ ---------------------- ------------------------- ----------------------
PORTFOLIO WEIGHT PORTFOLIO WEIGHT AS A YEAR ENDED
AS A % OF % OF ADJUSTED DECEMBER 31, 2003
INVESTMENT FUND MEMBERS' EQUITY (1) MEMBERS' EQUITY (2) NET RETURN (3)
- ------------------ ---------------------- ------------------------- ----------------------
GTT 26.74% 25.79% 11.61%
GELS 15.01% 14.48% 13.73%
GRV 38.50% 37.12% 7.11%
GED 23.78% 22.93% 18.09%
(1) Members' equity, used in the calculation of the investments as a % of
members' equity, is reduced for member redemptions that are paid after
the balance sheet date.
(2) As a % of the Company's adjusted members' equity which represents
members' equity excluding Redemptions payable in the amount of
$34,529,625 that were payable after December 31, 2003.
(3) 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 Company's investment in any of
the Investment Funds. Past performance is not indicative of future
results, which may vary.
For the year ended December 31, 2003, the Company returned 9.60% net
of fees and incentive allocation for Class A Series 1 Units with a standard
deviation of 3.63% for the year. Standard deviation is a statistical
measure of return dispersion around an arithmetic mean return. The Company
would expect roughly two-thirds of the monthly returns to be within a range
equal to the arithmetic mean of the monthly returns plus or minus one
standard deviation.
THE INVESTMENT FUNDS
Each of the four Investment Funds' performance during the year 2003 is
described in the following.
GOLDMAN SACHS GLOBAL TACTICAL TRADING, LLC
As of December 31, 2003, GTT represented approximately 26% of adjusted
members' equity which excludes redemptions paid after December 31, 2003 and
which was generally consistent with the weighting of GTT as part of the
Company throughout the year ended December 31, 2003. GTT returned 11.61%
for Class C Series 1 units for the year ended December 31, 2003. Over the
course of the year, GTT made profits in each of the four asset classes
which the GTT Advisors trade. The approximate profit contribution coming
from Managed Accounts was 60% from currencies, 20% from commodities, 15%
from equities and 5% from interest rates. For 2003, managed futures
Advisors, whose trading was based upon systematic models, proved to be, in
general, more successful than discretionary managed futures and macro
Advisers, whose investments were driven by their views on broad economic
themes. GTT attributes this to discretionary managed futures and macro
Advisors' decreasing risk in periods of uncertainty, such as the period
leading up to the war in Iraq, or in late December 2003, when there were
concerns about market liquidity.
Over the course of 2003, GTT Advisors were challenged by considerable
market volatility, the end of the bond bull market and by geopolitical
uncertainty. While much of the behavior in 2002 could be explained by
simple motivations such as a movement toward safer, higher-quality assets
associated with bond rallies, equity sell-offs, rising gold and oil prices,
2003 proved to be more complex. Only during the first quarter of 2003 did
GTT Advisors profit from exploiting the themes dominating 2002, all of
which came to a peak in the weeks leading up to the war in Iraq.
One important trend of 2002 that carried through all of 2003 was the
weakening of the U.S. dollar. With the current United States account
deficit widening, and investor interest in U.S. assets waning, the U.S.
dollar dropped throughout the period, particularly against the euro. The
value of the Japanese yen remained stable against the U.S. dollar until
July 2003, after which it rose steadily, despite intervention by the Bank
of Japan. Short U.S. dollar positions against major currencies, in
particular the euro, were profitable for most of the year.
GOLDMAN SACHS GLOBAL EQUITY LONG/SHORT, LLC
As of December 31, 2003, GELS represented approximately 14% of
adjusted members' equity which excludes redemptions paid after December 31,
2003 and which was generally consistent with the weighting of GELS as part
of the Company throughout the year ended December 31, 2003. GELS returned
13.73% for Class C Series 1 units for the year ended December 31, 2003.
The annualized volatility of GELS' returns for the year ended December
31, 2003 was 5.85%. In comparison, the S&P 500 Index had an annualized
volatility of 11.39% and the MSCI World Index had an annualized volatility
of 12.31% for the period.
The end of the first quarter of 2003 represented a period of
significant change for equity markets. The first quarter was dominated by
macroeconomic fears stemming from the SARS virus and the buildup to the
coalition's invasion of Iraq. These macroeconomic fears resulted in many
global equity markets giving back gains made in the fourth quarter of 2002,
with new multi-year lows being reached in March 2003 in many markets
(notably France, Germany, and the U.K.). The end of large-scale hostilities
in Iraq and stronger-than-expected first quarter earnings created positive
momentum during the second quarter of 2003, driving stock prices sharply
higher. The rally was broad based across market capitalizations, sectors,
styles, and geographical regions (with the notable exception of Japan).
Equity markets moved up and down frequently though were directionally
positive on an overall basis in the third quarter of 2003, which saw
continued positive macroeconomic and company-specific news. The fourth
quarter of 2003 saw additional improvement in the equity markets, as the
pattern of positive news continued; for the quarter, the S&P 500 Index was
up 12.18% and the MSCI Europe hedged to U.S. dollars was up 11.11%,
representing 42.46% and 75.78% of their respective returns for the year. In
addition, the improving corporate earnings environment brought increased
corporate confidence and activity in the mergers and acquisitions area.
Equity long/short Advisors performed well in 2003, but on average
lagged the equity indexes (which finished the year with positive, mid-teens
performance), as many Advisors were caught with significant short exposure
when the equity markets reversed in the spring. Equity long/short Advisors
that performed particularly well in 2003 were those focused on
small-capitalization stocks, those with significant net long exposure,
those focused on high-beta sectors (i.e., those with volatility greater
than the overall market) such as biotechnology and information technology,
and those with significant exposure to emerging markets or
commodity-related equities. Advisors that lagged in 2003 were those with
significant high-beta short exposure, dedicated short sellers, those with
market-neutral portfolios, and those with significant value biases (i.e.,
seeking undervalued stocks at low prices). Those Advisors that were
disappointed with their 2003 results generally attributed their
underperformance to the fact that their cash flow positive long positions
did not increase in value as much as their short positions, which, on
average, were trading at higher multiples than the long positions, despite
the fact that many were cash flow negative.
GOLDMAN SACHS GLOBAL RELATIVE VALUE, LLC
As of December 31, 2003, GRV represented approximately 37% of adjusted
members' equity which excludes redemptions paid after December 31, 2003 and
which was generally consistent with the weighting of GRV as part of the
Company throughout the year ended December 31, 2003. GRV returned 7.11% for
Class C Series 1 units for the year ended December 31, 2003.
While the environment throughout the year was very challenging for
relative value investing, GRV delivered positive returns in 9 out of 12
months. The annualized volatility of GRV's returns was 2.36% for the year
ended December 31, 2003 which was less than half of that of the Lehman
Aggregate Bond Index which had an annualized volatility of 5.3% for the
period.
Convertible arbitrage strategies generated positive but lackluster
returns due to the large swings in credit spreads (i.e., the difference in
yield between a high yield bond and the corresponding government bond)
throughout the period and the sporadic nature of the new issuance market.
Successful Advisors focused on credit quality and took advantage of
tightening credit spreads between treasury rates and the high yield credits
over the course of the year.
Fixed income arbitrage strategies also generated positive returns in
2003, which saw interest rates near all-time lows with substantial bond
market volatility during the year. However, for the beginning of 2004, GRV
remains cautious in GRV's fixed income arbitrage exposure, avoiding
significant positions in dedicated mortgage-backed and other strategies
which GRV perceived to carry a higher level of risk.
Equity arbitrage strategies faced a challenging 2003. Early in the
year, prices of stocks of companies with low valuations increased while
prices of stocks of companies with high valuations declined and remained
low for an extended period of time. Consequently, investors gravitated to
lower quality stocks, and stocks with the least attractive valuations
outperformed others. As a result, value-driven Advisors looking for high
valuation stocks at a low price did not realize favorable returns.
In price-based statistical arbitrage strategies Advisors saw a decline
in the profitability of trading strategies based upon models predicting
reversion of stock prices of U.S. companies to their mean. As a result,
many Advisors began moving capital to international markets such as Japan
or the U.K., where these models still performed well.
Convertible arbitrage strategies returned 13.13% and contributed 2.99%
to GRV's net income for the year ended December 31, 2003. Credit relative
value strategies returned 15.48% and contributed 0.30% to GRV's net income
for the year ended December 31, 2003. Equity market neutral strategies had
a negative return of (0.73)% and a negative contribution of (0.32)% to
GRV's net income for the year ended December 31, 2003. Fixed income
arbitrage strategies returned 8.76% and contributed 1.32% to GRV's net
income for the year ended December 31, 2003. Multi-strategies returned
12.76% and contributed 3.22% to GRV's net income for the year ended
December 31, 2003.
GOLDMAN SACHS GLOBAL EVENT DRIVEN, LLC
As of December 31, 2003, GED represented approximately 23% of adjusted
members' equity which excludes redemptions paid after December 31, 2003 and
which was generally consistent with the weighting of GED as part of the
Company throughout the year ended December 31, 2003. GED returned 18.09%
for Class C Series 1 units for the year ended December 31, 2003.
The annualized volatility of GED's returns for the year ended December
31, 2003 was 2.19% compared to the S&P 500 Index which had an annualized
volatility of 11.39% and to the MSCI World Index which had an annualized
volatility of 12.31% for the period.
GED positions its investments with Advisors that primarily employ
"hedged" trades (i.e., with positions on both the long and the short sides)
to generate attractive risk-adjusted returns. During 2003, GED maintained
its practice of generally not investing in Advisors who invest in long-only
distressed credits hoping to effect a corporate reorganization. During
2003, GED had positive returns every month, and all of GED's underlying
Advisors were positive for the year.
In 2003, the biggest contributor to returns for GED was the
distressed/high yield sector. GED started the year with a sizeable
allocation to distressed Advisors with the intent of taking advantage of
the large amounts of defaulted and distressed debt in the marketplace. The
opportunity was created by record company default rates of 12.8% in the
high yield market in 2002 coupled with the prospects for economic recovery
in 2003. As the year progressed and credit markets showed improvement,
GED's allocation shifted toward special situations Advisors. Merger
arbitrage allocations remained steady, generally comprising between 5% and
15% of the portfolio during the period.
The strong improvement in credit that began in October 2002 continued
as high yield credit spreads (the difference in yield between a high yield
bond and the corresponding government bond) decreased by more than 4.5%
during 2003 to finish the year at approximately 4.2%. The credit rally was
broad-based, with the lowest rated debt securities being the biggest
beneficiary. The Merrill Lynch High Yield Master II Index returned 28.2%
and was up in 11 months of the year. New issuances of high yield debt
securities were also very robust as a record $140 billion of debt was
issued globally compared to only $58 billion of high yield new global
issuances in 2002.
Merger arbitrage got off to a slow start in 2003 as the combination of
economic and geopolitical uncertainty continued to lessen corporate
enthusiasm for mergers and acquisitions. As the year progressed, U.S.
mergers and acquisitions activity started to increase and ended the year up
6.7% from its 2002 levels. Global mergers and acquisitions deal volume
ended the year at $1.3 trillion, up about 9% from its 2002 levels. U.S.
activity represented about 44% of global volume, while European mergers and
acquisitions activity represented 38%.
Credit opportunities/distressed strategies returned 26.77% and
contributed 10.45% to GED's net income for the year ended December 31,
2003. The multi-strategy component of the portfolio returned 17.80% and
contributed 3.26% to GED's net income for the year ended December 31, 2003.
Risk arbitrage/special situations strategies returned 8.71% and contributed
5.04% to GED's net income for the year ended December 31, 2003.
2002 PERFORMANCE
For the period from commencement of operations (April 1, 2002) to
December 31, 2002, the Company's net trading profit was $11,821,474.
OVERVIEW
During 2002, the Company allocated its assets on a roughly equivalent
risk-weighted basis to each of the four hedge fund sectors. The year ended
December 31, 2002 was one of the most difficult years for equity markets in
recent years, as evidenced by the performance of the MSCI World Index which
was down 19.89% over the twelve months of 2002. The table below illustrates
the portfolio weighting of each Investment Fund as of December 31, 2002, as
well as each Investment Fund's net return for the period from commencement
of the Company's operations on April 1, 2002 through December 31, 2002.
- ------------------ ----------------------- ------------------------
2002 NET RETURN (2)
INVESTMENT FUND PORTFOLIO WEIGHT (1) (4/1/02 - 12/31/02)
- ------------------ ----------------------- ------------------------
GTT 25.81% 16.85%
GELS 13.92% (1.70)%
GRV 38.34% 4.15%
GED 22.02% (0.66)%
(1) As a % of the Company's members' equity.
(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 Company's investment in any of the Investment Funds. Past
performance is not indicative of future results, which may vary.
For the period ended December 31, 2002, the Company returned 3.97% net
of fees and incentive allocation since its commencement of operations
(April 1, 2002) which compared favorably to the MSCI World Index which was
down 20.16% for the period from commencement of operations (April 1, 2002)
through December 31, 2002.
THE INVESTMENT FUNDS
Each of the four Investment Funds' performance during the period from
commencement of operations (April 1, 2002) to December 31, 2002, is
described in the following.
GOLDMAN SACHS GLOBAL TACTICAL TRADING, LLC
As of December 31, 2002, GTT represented 26% of members' equity. This
weighting was generally consistent with the weighting of GTT throughout the
period from commencement of operations (April 1, 2002) to December 31, 2002
but at the end of certain months the weighting of GTT ranged from as much
as 24.7% to 28.2% of the Company. GTT returned 16.85% for Class C Series 1
units for the period from commencement of operations (April 1, 2002) to
December 31, 2002. Over the course of the year, GTT Advisors were
profitable in three of the four major asset classes in which they trade.
The approximate profit contribution coming from Managed Accounts was 75%
from interest rates, 35% from currencies, 10% from equities and a negative
contribution of (20)% from commodities. 16 of the 19 Advisors in GTT
delivered positive performance in 2002. Overall, Advisors took a bearish
stand, capitalizing on falling interest rates, a dropping U.S. dollar, and
rising energy prices. Given this background, GTT showed negative
correlation with equity markets and positive correlation with interest rate
markets. Over the year, the largest profits came not only from positions in
global interest rate markets, but also from investments in equity indices,
currencies, gold, and soybeans. Comparatively small losses resulted from
positions in the Canadian dollar, metals, coffee, cotton, and wheat.
GOLDMAN SACHS GLOBAL EQUITY LONG/SHORT, LLC
As of December 31, 2002, GELS represented 14% of members' equity which
was generally consistent with the weighting of GELS as part of the Company
throughout the period from commencement of operations (April 1, 2002) to
December 31, 2002. GELS returned (1.70)% for Class C Series 1 units for the
period from commencement of operations (April 1, 2002) to December 31,
2002.
The annualized volatility of GELS' returns for the period from
commencement of operations (April 1, 2002) to December 31, 2002 was 5.5%.
The S&P 500 Index had an annualized volatility of 23.1% and the MSCI World
Index had an annualized volatility of 21.2% for the same period.
Extreme market volatility made 2002 a difficult environment for the
equity long/short sector, as most Advisors maintained greater long than
short exposure to the markets. As a result of the volatility and downward
trend in the equity markets during the period, many of GELS' Advisors
sought to reduce risk by holding overall lower gross and net exposures.
Throughout most of 2002, it appeared that equity markets did not
generally trade based on factors important to the understanding of
particular businesses, but rather on mass sentiment, fear, and momentum
created by geopolitical uncertainty, corporate malfeasance, and a weak
macroeconomic background. Because GELS favors those equity long/short
Advisors that pick stocks based on fundamental research, GELS generally did
not participate in the two sharp market rallies of 2002 (July/August and
October/November) that were not supported by improving fundamentals.
GOLDMAN SACHS GLOBAL RELATIVE VALUE, LLC
As of December 31, 2002, GRV represented 38% of members' equity which
was generally consistent with the weighting of GRV as part of the Company
throughout the period from commencement of operations (April 1, 2002) to
December 31, 2002. GRV returned 4.15% for Class C Series 1 units for the
period from commencement of operations (April 1, 2002) to December 31,
2002. The annualized volatility of GRV's returns for the period from the
Company's commencement of operations (April 1, 2002) to December 31, 2002
was 2.0% compared to an annualized volatility of the Lehman Aggregate Bond
Index of 3.0% for the same period. GRV registered good performance in both
equity market neutral and statistical arbitrage strategies, as the value
stocks relatively outperformed growth stocks which enabled Advisors to
obtain improved returns. The end of the year was characterized by strong
stock market volatility, creating a difficult environment for most
Advisors. This market volatility reinforced the importance of portfolio
diversification of investment styles across strategies within the sector.
By seeking to select Advisors with different styles, GRV was able to
construct a portfolio that did not rely upon a particular investment style
to generate returns.
Convertible bond arbitrage strategies benefited from good performance
in U.S. and European convertible bond markets, as well as stock market
volatility. The performance of fixed income arbitrage investments
fluctuated throughout the year, as strategies based upon credit exposure
and asset-backed securities each faced opportunities and challenges at
different points in the year. Although the portfolio reflected a relatively
smaller allocation to fixed income strategies compared to other strategies
for the period, GRV generally benefited from improved returns in long
treasury positions and wide credit spreads, as money fled into U.S.
treasury securities.
Convertible arbitrage strategies returned 3.56% and contributed 0.98%
to GRV's net income for the period from commencement of operations (April
1, 2002) to December 31, 2002. Credit relative value strategies returned
8.34% and contributed 0.15% to GRV's net income for the period from
commencement of operations (April 1, 2002) to December 31, 2002. Equity
market neutral strategies returned 3.78% and contributed 1.42% to GRV's net
income for the period from commencement of operations (April 1, 2002) to
December 31, 2002. Fixed income arbitrage strategies returned 13.80% and
contributed 0.83% to GRV's net income for the period from commencement of
operations (April 1, 2002) to December 31, 2002. Multi-strategies returned
5.40% and contributed 1.28% to GRV's net income for the period from
commencement of operations (April 1, 2002) to December 31, 2002.
GOLDMAN SACHS GLOBAL EVENT DRIVEN, LLC
As of December 31, 2002, GED represented 22% of members' equity which
was generally consistent with the weighting of GED as part of the Company
throughout the period from commencement of operations (April 1, 2002) to
December 31, 2002. GED returned (0.66)% for Class C Series 1 units for the
period from commencement of operations (April 1, 2002) to December 31,
2002. The annualized volatility of GED's returns for the period from the
Company's commencement of operations (April 1, 2002) to December 31, 2002
was 4.1% compared to the S&P 500 Index which had an annualized volatility
of 23.1% and to the MSCI World Index which had an annualized volatility of
21.2% for the same period. During 2002, event driven Advisors experienced a
shift in opportunity, as U.S. mergers and acquisitions volume continued to
decrease, and the amount of distressed debt increased substantially.
Accordingly, allocations to U.S. merger arbitrage Advisors dropped to
approximately 5%, while European merger arbitrage Advisors increased to 15%
of the portfolio.
The imbalance between the supply and demand for distressed paper in
the marketplace allowed distressed situations and credits to offer greater
opportunity which GED believed warranted a sizeable allocation to
distressed-focused Advisors. During the period GED positioned its
investments with Advisors that primarily employed "hedged" trades as
opposed to Advisors who invest in long-only distressed credits hoping to
effect a corporate reorganization.
Credit opportunities/distressed strategies had a negative return of
(0.31)% and a negative contribution of (0.52)% to GED's net income for the
period from commencement of operations (April 1, 2002) to December 31,
2002. Multi-strategies returned 0.53% and contributed 0.29% to GED's net
income for the period from commencement of operations (April 1, 2002) to
December 31, 2002. Risk arbitrage/special situations strategies had a
negative return of (2.79)% and a negative contribution of (0.22)% to GED's
net income for the period from commencement of operations (April 1, 2002)
to December 31, 2002.
COMPARISON OF SELECT FINANCIAL INFORMATION FROM 2004, 2003 AND 2002
INTEREST INCOME
Interest income for the year ended December 31, 2004 was $495,194,
interest income for the year ended December 31, 2003 was $97,943 and
interest income from commencement of operations (April 1, 2002) to December
31, 2002 was $32,724. The Company's interest income will fluctuate with its
level of cash not invested in the Investment Funds.
EXPENSES
The Management Fee for the year ended December 31, 2004 was
$12,234,696, the Management Fee for the year ended December 31, 2003 was
$9,666,257 and the Management Fee from commencement of operations (April 1,
2002) to December 31, 2002 was $2,000,377. Because the Management Fee is
calculated as a percentage of the Company's net assets as of each month
end, the increases in the expense in Management Fee for the years ended
December 31, 2004 and 2003 and for the period from commencement of
operations (April 1, 2002) to December 31, 2002 were due to the increases
in the Company's net assets during the year ended December 31, 2004
compared to the year ended December 31, 2003 and for the year ended
December 31, 2003 compared to the period from commencement of operations
(April 1, 2002) to December 31, 2002.
Interest expense for the year ended December 31, 2004 was $546,069
compared to $0 for the year ended December 31, 2003 and for the period from
commencement of operations (April 1, 2002) to December 31, 2002. The
interest expense relates to the old and new borrowing facility that was
outstanding during the year ended December 31, 2004.
Professional fees and miscellaneous expenses for the year ended
December 31, 2004 were $1,677,087 compared to the year ended December 31,
2003 of $1,067,415. Professional fees and miscellaneous expenses for the
period from commencement of operations (April 1, 2002) to December 31, 2002
were $458,643. The increases in professional fees and miscellaneous
expenses for the year ended December 31, 2004 and the year ended December
31, 2003 were primarily due to additional services rendered by the
Company's legal providers related to the ongoing operations of the Company,
including the review of investor subscription documents for the year and
registration with the SEC.
INCENTIVE ALLOCATION
The Incentive Allocation for the year ended December 31, 2004 was
$2,902,854, compared to the year ended December 31, 2003 of $3,560,865. The
Incentive Allocation for the period from commencement of operations (April
1, 2002) to December 31, 2002 was $469,759. The change in Incentive
Allocation is due to the increase/decrease in new appreciation for those
periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements consist of cash needed to fund
investments in the Investment Funds in accordance with the Company's
investment strategy and to fund semi-annual redemptions and to pay costs
and expenses. The Company periodically re-allocates its investments in the
Investment Funds based on the performance of the Investment Funds and other
factors. The Company cannot predict the level of redemptions in the Company
for any semi-annual period until 60 days prior to the redemption date where
written notice must be given to the Managing Member. The Company endeavors
to pay redemption proceeds within 45 days following the redemption date,
without interest. If the Company 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 Company,
enables the Company to control and to some extent avoid a liquidity
problem. However, substantial redemptions of Units in the Company could
require the Company 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 Company.
The Company can 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 Company'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. From July 2003 through September 2004, the Company
only took in investments from existing investors and limited subscriptions
from new qualified investors, however, starting in October 2004, the
Company began accepting additional amounts of new subscriptions again and
the Company continued to do so through December 31, 2004. The Company may
close again at any time without notice at the sole discretion of the
Managing Member. The acceptance of future subscriptions in the Company and
the continued growth of the Company will be determined by the Managing
Member in its sole discretion. Although the Managing Member began to
receive new subscriptions to the Company 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 Company 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 Company, 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 Company received investments from new and existing investors of
$126,385,622 during the year ended December 31, 2004, of $524,318,830
during the year ended December 31, 2003, and of $373,831,083 in the period
from commencement of operations (April 1, 2002) to December 31, 2002.
The Company paid out redemptions of $66,214,849 during year ended
December 31, 2004, $10,988,390 during the year ended December 31, 2003 and
had no redemptions during the period from commencement of operations (April
1, 2002) to December 31, 2002. The Company had Redemptions payable in the
amount of $128,546,636 payable after December 31, 2004.
The Company and each Investment Fund may, but are 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 Company entered into a borrowing facility with the Facility
Counterparty. The facility was structured as a call spread option that had
been issued by the Company to the Facility Counterparty. Under the terms of
the facility, the Company received cash and redeposited the amount with the
Facility Counterparty in a collateral account. The Company had the right to
draw funds from the collateral account to use for liquidity purposes. Under
the facility, the Company was able to draw, at any given time, up to a
total amount of the collateral account at the time of withdrawal. However,
in no event could the Company have drawn an amount under the facility
exceeding 5% of the Company's net asset value. The effective interest rate
on funds drawn from the collateral account was LIBOR + 0.875%. The Company
also paid the equivalent of a commitment fee of 0.25% on the undrawn funds.
As of December 31, 2003, the Company 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 $20.0 million and in October 2004 the facility expired. On
November 24, 2004, the Company entered into a credit facility with a new
financial institution, the New Facility Counterparty. The Company made an
initial borrowing of $1 million under this facility. Subject to rejection
by the New Facility Counterparty, the Company may request to borrow up to
$45.0 million in the aggregate. At the time of any borrowing, the aggregate
amounts borrowed may not exceed 10% of the Company's net asset value and at
all other times the aggregate amount borrowed may not exceed 15% of the
Company's net asset value. The effective interest rate on the borrowed
amounts equals LIBOR plus 0.85% per annum compounded daily. The Company
also pays an administration and structuring fee calculated as 0.10% per
annum on the aggregate amount of $45.0 million. The proceeds of the
borrowings must be used primarily for purposes of refinancing existing
indebtedness, making further investment in a pool of funds, funding
liquidity of redemptions of Units in the Company and managing the cash flow
of the Company. The amount of cash borrowed totaled $3.0 million at
December 31, 2004. As security for its borrowings, the Company granted the
New Facility Counterparty a security interest in the Company's cash
accounts and any other account that contains other investment property
(other than to the extent that it comprises shares of funds in the pool of
funds in which the Company has invested) of the Company. The terms of the
facility include various restrictive covenants, including restrictions on
additional indebtedness, liens and fundamental changes to the Company's
business. The New Facility Counterparty may demand payment upon the
occurrence of certain events, including: (i) specified declines in the
Company's aggregate net asset value per Unit, (ii) the incurrence of
indebtedness or liens by the Company, (iii) the failure by the Company to
maintain prescribed diversification of its investments, (iv) if the
investment manager (which currently is GS HFS) resigns or is terminated by
the Company, (v) if the administrator (which currently is GS HFS),
custodian or auditor resigns or is terminated by the Company and the
replacement is not approved by the New Facility Counterparty (which consent
may not be unreasonably withheld) or (vi) the occurrence of events of
default customary for financing transactions. See Note 7 to the financial
statements. Each Investment Fund has entered into a similar facility with
the New Facility Counterparty.
As of December 31, 2004, the Company had Cash and cash equivalents on
hand of $218,797. As of December 31, 2003, the Company had Cash and cash
equivalents on hand of $48,423,637. The decrease in Cash and cash
equivalents on hand as of December 31, 2004 as compared to as of December
31, 2003 primarily relates to the structure of the credit facility with the
New Facility Counterparty which, unlike the Company's previous credit
facility, does not require the Company to redeposit cash received from the
credit facility into a collateral account, but instead allows the Company
to borrow as requested.
Investments as of December 31, 2004 were $1,092,953,352 as compared to
$970,912,828 as of December 31, 2003. The increase was due to net profits
earned by the Company from the Investment Funds during the year ended
December 31, 2004, and net subscriptions made by the Company to the
Investment Funds during the year ended December 31, 2004.
Due to managing member represents the management fees due to the
Managing Member. Due to managing member as of December 31, 2004 was
$3,247,774 as compared to $3,969,687 as of December 31, 2003. Because the
management fee is calculated as a percentage of the Company's net assets as
of each month end, the liability related to management fees will fluctuate
based on the fluctuation of the month end net asset value of the Company.
The decrease in Due to managing member is due to the timing of the payment
of the monthly management fee to the Managing Member.
The Company 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 Company together with borrowings under the
borrowing facility will be adequate to fund its operations and liquidity
requirements.
The Company does not have any long-term debt obligations, capital or
operational lease obligations, purchase obligations or other long-term debt
liabilities. In addition, there are no off balance sheet or contingent
liabilities at the Company level.
The value of the Company's directly held cash 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 Company'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 Company, 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 Company 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 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 for 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 Company's
net assets or net increase in net assets resulting from operations. The
Company understands that the Scope Project has been approved for issuance
by the FASB and retained these provisions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of the Company's financial condition and
results of operations are based on the Company'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 Company's accounting policies is set forth
in Note 1 to the Company's financial statements. In the Managing Member's
view, the policy that involves the most subjective judgment is set forth
below.
The Company'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 Company'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 audited, except at year-end, and could prove to be inaccurate due to
inadvertent mistakes, negligence, recklessness or fraud by the Advisors.
Neither the Company 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 described under ITEM 1. "BUSINESS--CERTAIN RISK
FACTORS--GENERAL RISKS--Risks Related to the Company and the Investment
Funds' Performance and Operation--Dependence on the Managing Member and the
Advisors; 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 Company," "--SPECIAL RISKS OF THE COMPANY'S
STRUCTURE--Risks Related to the Company's Structure--The Company's
Financial Statements are, and in the Future will be, Based on Estimates of
Valuations Provided by Third Party Advisors Which May not be Accurate or
May Need to be Adjusted in the Future," and "--SPECIAL RISKS OF THE
COMPANY'S STRUCTURE--Risks Associated with the Company Investing in Other
Entities--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
Company's Net Assets."
OFF BALANCE SHEET RISK
There are no off-balance sheet or material contingent liabilities at
the Company level.
CONTRACTUAL OBLIGATIONS
The Company does not have any long-term debt obligations, capital or
operational lease obligations or other long-term debt liabilities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following table lists the significant market risk sensitive
instruments held by the Company, through the Investment Funds, as of
December 31, 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
December 31, 2004 and from January 1, 2003 to December 31, 2003. Because of
the speculative nature of the investments that the Company engages in
through the Investment Funds, the Managing Member believes the entire
portfolio value of the Company is at risk.
YEAR ENDED
DECEMBER 31, 2004
- ---------------------------------------------------------------------------
% OF
% OF ADJUSTED FAIR
INVESTMENT MEMBERS' MEMBERS' VALUE/VALUE NET INCOME
FUND EQUITY EQUITY (6) AT RISK (IN MILLIONS) LIQUIDITY
---- ------ ---------- ------- ------------- ---------
GTT 25.91% 22.84% $248,081,137 $8.5 (3)
GELS 23.63% 20.84% $226,276,134 $17.7 (2)
GRV 36.60% 32.27% $350,409,379 $17.9 (4)
GED 28.01% 24.69% $268,186,702 $27.9 (1)
--------- ---------- -------------- -----
TOTAL 114.15%(5) 100.64%(5) $1,092,953,352 $72.0
========= ========== ============== =====
YEAR ENDED
DECEMBER 31, 2003
- ---------------------------------------------------------------------------
% OF
% OF ADJUSTED FAIR
INVESTMENT MEMBERS' MEMBERS' VALUE/VALUE NET INCOME
FUND EQUITY EQUITY (7) AT RISK (IN MILLIONS) LIQUIDITY
---- ------ ---------- ------- ------------- ---------
GTT 26.74% 25.79% $249,583,571 $18.6 (3)
GELS 15.01% 14.48% $140,117,348 $15.6 (2)
GRV 38.50% 37.12% $359,311,989 $19.4 (4)
GED 23.78% 22.93% $221,899,920 $28.3 (1)
--------- --------- ------------ -----
TOTAL 104.03%(5) 100.32%(5) $970,912,828 $81.9
========= ========= ============ =====
(1) Redemptions could be made semi-annually with 45 days' notice after a
twelve-month holding period, or at the sole discretion of the managing
member. Effective July 2004, a twelve-month holding period is no
longer required.
(2) Redemptions could be made quarterly with 45 days' notice after a
twelve-month holding period, or at the sole discretion of the managing
member. Effective July 2004, a twelve-month holding period is no
longer required.
(3) Redemptions can be made semi-annually with 60 days' notice, or at the
sole discretion of the Managing Member.
(4) Redemptions could be made semi-annually with 45 days' notice after a
twelve-month holding period, or at the sole discretion of the managing
member. Effective July 2004, redemptions can be made quarterly with 45
days' notice, or at the sole discretion of the managing member and a
twelve-month holding period is no longer required.
(5) The total value of the Company's investments in the Investment Funds
exceeded 100% of members' equity and adjusted members' equity,
respectively, because members' equity and adjusted members' equity
reflected certain accrued liabilities of the Company, including fees
and expenses, and members' equity also reflected redemptions payable
after the balance sheet date.
(6) Adjusted members' equity, used in the calculation of the investments
as a percentage of adjusted members' equity, represents members'
equity excluding Redemptions payable in the amount of $128,546,636
that are payable after December 31, 2004.
(7) Adjusted members' equity, used in the calculation of the investments
as a percentage of adjusted members' equity, represents members'
equity excluding Redemptions payable in the amount of $34,529,625 that
were payable after December 31, 2003.
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 risks involved are described under ITEM 1.
"BUSINESS--CERTAIN RISK FACTORS--GENERAL RISKS--Risks Related to the
Company and the Investment Funds' Performance and Operation--A Substantial
Portion of an Investment Fund's Assets May be Invested Utilizing Strategies
Which are not Within its Hedge Fund Sector; Most Advisors do not Provide
Detailed Position Information Regarding their Portfolios" and "--Dependence
on the Managing Member and the Advisors; 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 Company."
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
under ITEM 1. "BUSINESS--CERTAIN RISK FACTORS--GENERAL RISKS--Risks Related
to the Company and the Investment Funds' Performance and Operation--A
Substantial Portion of an Investment Fund's Assets May be Invested
Utilizing Strategies Which are not Within its Hedge Fund Sector; Most
Advisors do not Provide Detailed Position Information Regarding their
Portfolios" and "--Dependence on the Managing Member and the Advisors; 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 Company."
At the Company's portfolio level, the Company's portfolio construction
process is designed to ensure that all the Investment Funds are adequately
diversified. Each Investment Fund is a portfolio of approximately 20-30
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. Until June 30, 2004, the Company had allocated its assets
on a roughly equivalent risk-weighted basis to each of the four hedge fund
sectors. In other words, each of the four Investment Funds contributed
approximately 25% of the total risk of the Company portfolio, although the
actual allocations that achieve the roughly equivalent risk weightings were
different for each sector. The Managing Member utilizes a strategic sector
allocation and periodically re-evaluates the contribution to the risk and
return of the Company from each investment sector and may in its sole
discretion re-allocate the Company's assets or weights as it deems
advisable. Through June 30, 2004, the Managing Member had not made any
strategic allocations. The adjustment to the weights implemented as of July
1, 2004 reflected the Managing Member's updated expectations for return,
risk and correlations for the Investment Funds as well as the Managing
Member's judgment. In addition, the weights among the Investment Funds no
longer reflect a strict equal risk allocation (as they had prior to July 1,
2004). As of July 1, 2004, the strategic weights were set to 23% GTT, 20%
GELS, 33% GRV, and 24% GED. As of December 31, 2004, the strategic weights
for the Investment Funds were generally consistent with the strategic
weights set by the Managing Member as of July 1, 2004. The approximate
weights of the Investment Funds are 23% GTT, 21% GELS, 32% GRV and 25% GED
as of December 31, 2004 as a percentage of adjusted members' equity which
excludes redemptions paid after December 31, 2004. This portfolio
construction process is designed to create a diversified hedge fund
portfolio with attractive return and risk characteristics. See ITEM 1.
"BUSINESS--INVESTMENT PROGRAM--Allocation Among the Investment Funds."
The Company 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 Company'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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For the Company's financial statements, see the Financial Statements
beginning on page F-1 of this Annual Report.
The following is a summary of unaudited quarterly results of
operations of the Company for the period from January 1, 2003 to December
31, 2004.
FISCAL QUARTER ENDED
--------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31,
2003 2003 2003 2003
---- ---- ---- ----
NET TRADING PROFIT/(LOSS) $9,156,269 $29,716,678 $7,636,941 $35,344,507
TOTAL EXPENSES $1,628,401 $2,775,692 $3,060,275 $3,269,304
NET INCOME/(LOSS) $7,553,120 $26,993,805 $4,596,539 $32,075,202
NET INCOME/(LOSS) AVAILABLE
FOR PRO RATA ALLOCATION
TO MEMBERS $7,146,847 $25,672,732 $4,366,728 $30,471,494
MAR. 31, JUNE 30, SEP. 30, DEC. 31,
2004 2004 2004 2004
---- ---- ---- ----
NET TRADING PROFIT/(LOSS) $30,827,165 ($18,185,504) $3,283,040 $56,093,686
TOTAL EXPENSES $3,798,808 $3,708,542 $3,625,497 $3,325,005
NET INCOME/(LOSS) $27,314,711 ($21,804,167) ($228,045) $52,773,230
NET INCOME/(LOSS) AVAILABLE
FOR PRO RATA ALLOCATION
TO MEMBERS $25,948,975 ($20,714,043) ($216,748) $50,134,691
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in, or disagreements with, accountants on
accounting and financial disclosure.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was
carried out by the Managing Member's management, with the participation of
its Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Exchange
Act). Based on that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls
and procedures were effective as of the end of the period covered by this
report. In addition, no change in the Company's internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act)
occurred during the fourth quarter of the Company's fiscal year ended
December 31, 2004 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE MANAGING MEMBER AND
REGISTRANT
The Company has no directors or executive officers. The Managing
Member is responsible for the management and operations of the Company.
Information about the Managing Member and the GS Group appears in Item 1.
See ITEM 1. "BUSINESS--THE MANAGING MEMBER." The following table sets forth
the directors and executive officers of the Managing Member as of March 21,
2005.
NAME AGE POSITION(S)
- ------------------------- ------- -----------------------------------------
George H. Walker 35 Director, Managing Director and Chief
Executive Officer
Tobin V. Levy 61 Director, Managing Director and Chief
Financial Officer
Kent A. Clark 40 Director, Managing Director and Chief
Investment Officer
Hugh J. Lawson 36 Director, Managing Director and Global
Head of Product Management
Sebastiano F. Calabro, Jr. 37 Managing Director and Head of GTT
Thomas Dobler 39 Vice President and Head of GTT
Terrence O. Jones 41 Managing Director and Head of GED and GRV
Peter Ort 34 Vice President and Head of GELS
On March 16, 2005, Sebastiano F. Calabro, Jr. notified the Company of
his resignation as Managing Director from the Managing Member and Head of
GTT. His resignation is expected to be effective in June 2005. Thomas
Dobler will assume leadership of GTT effective April 1, 2005.
Information about the directors and executive officers of the Managing
Member as well as Mr. Dobler is provided below.
GEORGE H. WALKER is a Managing Director of Goldman Sachs and is a
Director, Managing Director, and Chief Executive Officer of the Managing
Member. He joined Goldman Sachs as a summer associate in Capital Markets in
1991 and joined the Managing Member in June 2001. Previously, he was
co-head of gs.com/Goldman Sachs Wealth Management, the firm's e-based
wealth management business, and he led GSAM's U.S. Institutional effort and
its high-net-worth businesses. Mr. Walker has also served in GSAM Division
Management in New York, and in Mergers & Acquisitions in Frankfurt, London,
and New York. He received an M.B.A. in 1992 from the Wharton Graduate
School of Business and bachelors degrees in 1991 from the University of
Pennsylvania.
TOBIN V. LEVY is a Managing Director of Goldman Sachs and is a
Director, Managing Director and Chief Financial Officer of the Managing
Member. Mr. Levy managed the Global Client Financing business for Private
Wealth Management from February 2001 to May 2002, when he returned to
Princeton to resume his role as Chief Financial Officer of the Managing
Member. Mr. Levy joined Commodities Corporation Limited ("CCL"), the
predecessor of the Managing Member, in January 1995 and became Chief
Financial Officer of the Managing Member in June 1997. The Managing Member
acquired the assets of CCL in June 1997. Mr. Levy graduated from the
University of Pennsylvania in 1967 with a B.S. in Economics. In 1972, he
received his M.B.A. from the Wharton Graduate School of Business.
KENT A. CLARK is a Managing Director of Goldman Sachs and the Chief
Investment Officer of the Managing Member. Prior to joining the Managing
Member, he managed portfolios of U.S. and Global equities for GSAM where he
also helped develop stock selection models for these markets using linear
and nonlinear techniques. Mr. Clark received a Bachelor of Commerce degree
from the University of Calgary in 1986 and an M.B.A. from the University of
Chicago Graduate School of Business in 1990, where he has also completed
all but his dissertation in the Ph.D. program. In 2002, Mr. Clark was
elected as a member of the Board of Directors of the Managed Funds
Association. A member of the International Investment Forum, Mr. Clark is
past President of the New York Society of Quantitative Analysts.
HUGH J. LAWSON is a Managing Director of Goldman Sachs and is the
Global Head of Product Management for the Managing Member, where he leads
the group's distribution, client relationship, business development, and
product launch efforts globally. Prior to assuming this role, Mr. Lawson
was co-head of the Managing Member's European and Asian businesses. Before
joining the Managing Member, Mr. Lawson was head of Products and Services
for Goldman Sachs' Investment Management Division for Europe, together with
responsibility for Business Strategy Development for Private Wealth
Management Europe. Mr. Lawson joined Goldman Sachs in 1997. He spent three
years in the Investment Banking Division in both London and Hong Kong,
executing a range of financing and merger assignments in Europe and Asia.
He then transferred to the Investment Management Division in 2000. Prior to
joining Goldman Sachs, Mr. Lawson worked at the Boston Consulting Group in
New York and, previously, at the Rockefeller Brothers Fund in New York. He
graduated from Columbia University and Yale Law School.
SEBASTIANO F. CALABRO, JR. is a Managing Director of the Managing
Member and is currently the Head of GTT and the Chair of the Managing
Member's Risk Committee. Effective June 2005, Mr. Calabro will resign as
Managing Director from the Managing Member and Head of GTT. Prior to
assuming this role, he served as head of the Quantitative Research & Risk
Management Group for the Managing Member. Mr. Calabro joined the
predecessor of the Managing Member as the Controls Manager in the
Operations Services Group in 1991. He helped form the Quantitative Research
& Risk Management Group in 1993, and he became head of the department in
1998. Mr. Calabro received his B.S. and M.S. degrees in Computer Science,
and an M.B.A. from Rensselaer Polytechnic Institute.
THOMAS DOBLER is a Vice President of the Managing Member and is the
lead Portfolio Manager focused on GTT, where he has worked since 2002.
Effective April 1, 2005, Mr. Dobler will become Head of GTT. Before coming
to GS HFS, he led the Client Research and Investment Strategy Group at
Goldman Sachs in London, and was responsible for advising high net worth
clients on asset allocation and overall investment strategy. Prior to
London, Mr. Dobler spent two years in New York assisting in the development
of the Client Research and Strategy Group at Goldman Sachs where he also
worked with high net worth clients and their advisors. He joined Goldman
Sachs in 1998 from Salomon Brothers Asset Management, where he was a senior
member of their Quantitative Research Group. Mr. Dobler holds a PhD in
Mathematics from Columbia University and a BS in Mathematics from the
University of Vienna.
TERRENCE O. JONES is a Managing Director of the Managing Member and is
the Head of the GED & GRV sectors. Mr. Jones joined the Managing Member in
2001 from Arden Asset Management, a $2 billion fund-of-funds company, where
he was Managing Director and Director of Research. In this capacity, Mr.
Jones worked on the investment committee of the firm and was responsible
for manager selection, portfolio construction, and due diligence. Prior to
joining Arden Asset Management, Mr. Jones was head of research and manager
selection for Morgan Stanley's Fiduciary Group, which managed in excess of
$22 billion for pension plans, endowments, foundations, and high net worth
individuals. Mr. Jones received a B.A. in Economics from Columbia
University and a M.B.A. from Columbia University.
PETER ORT is a Vice President of the Managing Member and is the Head
of GELS. Prior to joining the Managing Member in 2001, Mr. Ort was a Vice
President with Smartleaf, Inc. a portfolio management software company
based in Cambridge, Massachusetts. He was previously with Goldman Sachs
from 1996-2000, where he worked in the Investment Management Division's
Private Equity Group, evaluating private equity fund managers and direct
investment opportunities. He first joined the firm in the Investment
Banking Division's Financial Institutions Group, where he focused on M&A
transactions in New York and Tokyo. Mr. Ort received a J.D./M.B.A. from New
York University in 1995 and a B.A. from Duke University in 1991. He was a
Fulbright Scholar in Japan from 1991-1992.
AUDIT COMMITTEE FINANCIAL EXPERT
The Company has no directors or executive officers. The Company is not
a "listed issuer" as defined under Section 10A-3 of the Exchange Act and is
therefore not required to have an audit committee comprised of independent
directors. The Company currently does not have an audit committee and the
Board of Directors of the Managing Member which performs the functions of
an audit committee on behalf of the Company believes that the directors
collectively have the requisite financial background, experience, and
knowledge to fulfill the duties and obligations that an audit committee
would have including overseeing the Company's accounting and financial
reporting practices. Therefore, the Board of Directors of the Managing
Member does not believe that it is necessary at this time to search for a
person who would qualify as an audit committee financial expert.
Furthermore, the Board of Directors of the Managing Member has the power to
engage experts or consultants as it deems appropriate to carry out its
responsibilities.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the 1934 Act requires the officers and directors of
the Managing Member and persons who own more than ten percent of the
Company's Units to file forms reporting their affiliation with the Company
and reports of ownership and changes in ownership of the Company's Units
with the SEC. These persons and entities are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file. To
the best of the Company's knowledge, based solely on a review of the copies
of such reports furnished to the Company, during the year ended December
31, 2004 all Section 16(a) filing requirements applicable to such persons
and entities were complied with for such year.
CODE OF ETHICS
The Company has no directors or executive officers. The Managing
Member has adopted a Code of Ethics for the Company that applies to the
persons acting as chief executive officer and chief financial officer/chief
accounting officer of the Company. A copy of the Company's Code of Ethics
is filed as an exhibit to this Annual Report. If the Company makes any
substantive amendments to the Code of Ethics or grants any waiver,
including an implicit waiver, from a provision of the Code of Ethics as
applicable to the persons acting as chief executive officer and chief
financial officer/chief accounting officer of the Company, the Company will
disclose the nature of such amendment or waiver in a report on Form 8-K. In
addition, the Managing Member has adopted a Code of Ethics for the Managing
Member that applies to, among others, the chief executive officer and chief
financial officer/chief accounting officer of the Managing Member. A copy
of the Managing Member's Code of Ethics is also filed as an exhibit to this
Annual Report.
ITEM 11. EXECUTIVE COMPENSATION
The Company has no directors or executive officers.
In addition, the Company does not bear the costs of the annual
compensation of the executive officers or the directors of the Managing
Member. The Managing Member and its affiliates receive compensation from
the Company for services provided to the Company. Moreover, the Company
bears a pro rata portion of the administration fee for the Managing
Member's services as administrator of each Investment Fund and Portfolio
Companies through its investment in the Investment Funds. Set forth below
are the amounts of the different types of fees paid or payable by, or
allocable to, the Company to the Managing Member and its affiliates during
the year ended December 31, 2004. Information about the terms and
conditions of the Management Fee and the Incentive Allocation and other
fees and expenses appear in Item 1. See ITEM 1. "BUSINESS--FEES AND
EXPENSES."
FEE TYPE FEE AMOUNT
- ------------------------------------------------------- -----------------
Management Fee paid or payable by the Company $12,234,696
Incentive Allocation paid or payable by the Company $2,902,854
Placement Fee paid or payable by the Company to
Goldman Sachs $0
Pro rata portion of administration fee to the
Managing Member for services provided to the
Investment Funds and Portfolio Companies
Investment Funds $1,960,131
PERFORMANCE GRAPH
The line graph below compares the cumulative total return on the
Company's Units during the period from April 1, 2002, the date the Company
commenced its operations, through December 31, 2004, with the return on 3
Month LIBOR, the Lehman Brothers Aggregate Index, the MSCI World Index and
the S&P 500 Index. These indices are unmanaged, the figures for an index
reflect the reinvestment of dividends but do not reflect the deduction of
any fees or expenses which would reduce returns. The Members cannot invest
directly in indices.
The Company has not paid any cash dividends in the past and does not
expect to pay any in the foreseeable future.
[GRAPH]
(1) The performance of the Company is based on net returns for Class A
Series 1 Units. The performance of the Units shown in the graph is not
necessarily indicative of future performance.
(2) General: References to market or composite indices, benchmarks or
other measures of relative market performance over a specified period
of time (for purposes of this section, each an "index") are provided
for your information only. Reference to an index does not imply that
the portfolio will achieve returns, volatility or other results
similar to the index. The composition of an index may not reflect the
manner in which a portfolio is constructed in relation to expected or
achieved returns, portfolio guidelines, restrictions, sectors,
correlations, concentrations, volatility or tracking error targets,
all of which are subject to change over time.
(3) MSCI World Index: The Morgan Stanley Capital International World
Equities Index is a price index of the total return with dividends
reinvested monthly net of dividend withholding tax of a representative
group of listed companies for each region, with each component market
weighted on the basis of market capitalization relative to the total
market capitalization of the market being measured and adjusted for
changes in capital within the component firms.
(4) S&P 500 Index: The Standard & Poor's S&P 500 Index is an index based
on the prices of the securities of 500 different companies. Total
returns are calculated by adding the dividend income and price
appreciation for a given time period.
(5) Lehman Brothers Aggregate Index: The Lehman Brothers Aggregate Index
represents securities that are U.S. domestic, taxable, and dollar
denominated. The index covers the U.S. investment grade fixed rate
bond market, with index components for government and corporate
securities, mortgage pass-through securities, and asset-backed
securities. These major sectors are subdivided into more specific
indices that are calculated and reported on a regular basis.
(6) Index Sources: Bloomberg.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
To the knowledge of the Company, no person beneficially owns more than
five percent of the Units.
SECURITY OWNERSHIP OF MANAGEMENT
The Company has no directors or executive officers.
GS HFS, the Managing Member of the Company, did not have a beneficial
interest in the Company as of December 31, 2004 other than the Incentive
Allocation and other fees payable to it by the Company.
The following table sets forth (i) the individual directors and
executive officers of the Managing Member and (ii) all of the directors and
executive officers as a group who beneficially owned Units of the Company
as of December 31, 2004.
PERCENTAGE OF ALL INVESTORS'
NUMBER OF UNITS NAME OF BENEFICIAL OWNER INTERESTS
- ----------------------- ------------------------------------ -----------------------------------
0 George H. Walker *
0 Tobin V. Levy *
0 Kent A. Clark *
0 Hugh J. Lawson *
0 Sebastiano F. Calabro, Jr. *
0 Thomas Dobler *
2,276 Terrence O. Jones *
Class A Series 1
0 Peter Ort *
2,276 Directors and executive officers *
as a group
* Less than 1.0%
On March 16, 2005, Sebastiano F. Calabro, Jr. notified the Company of
his resignation as Managing Director from the Managing Member and Head of
GTT. His resignation is expected to be effective in June 2005. Thomas
Dobler will assume leadership of GTT effective April 1, 2005.
CHANGES IN CONTROL
There are no arrangements, including pledges by any person of Units of
the Company, the operation of which may at a subsequent date result in a
change of control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Managing Member is an advisory affiliate of Goldman Sachs and
GSAM. Each of the Managing Member, Goldman Sachs and GSAM is a wholly owned
subsidiary of The Goldman Sachs Group, Inc. See ITEM 1.
"BUSINESS--POTENTIAL CONFLICTS OF INTEREST."
The Managing Member also manages a number of other investment funds
that have investment programs that are similar to those of the Company. See
ITEM 1. " BUSINESS--POTENTIAL CONFLICTS OF INTEREST."
From time to time certain qualified officers and employees of the GS
Group may invest in the Company. Neither the Investment Funds' Advisors nor
any of their respective principals are presently expected to purchase Units
or membership units in the Investment Funds. See ITEM 1.
"BUSINESS--POTENTIAL CONFLICTS OF INTEREST."
The Company may from time to time, in the sole discretion of the
Managing Member, invest in money market funds sponsored by the GS Group,
and the Company will not be reimbursed for any fees accruing to any
affiliate of the GS Group in respect of any such investment. See ITEM 1.
"BUSINESS--INVESTMENT PROGRAM--Investment Objective and Approach."
The Company pays the Managing Member a Management Fee. In addition,
the Managing Member receives an administration fee for its services as
Administrator of each Investment Fund and each Portfolio Company. The
Company will bear its pro rata portion of these fees through its
investments in the Investment Funds. See ITEM 1. "BUSINESS--FEES AND
EXPENSES."
Some of the directors and executive officers of the Managing Member
also are or may become directors and executive officers of Goldman Sachs
and Goldman Sachs affiliates which entities provided services for the
Company, other than as an underwriter, during the year ended December 31,
2004 and are proposed to provide such services in the current year.
Certain directors and executive officers of the Managing Member,
including their spouses and entities owned or controlled by them, from time
to time invest in the Company. In addition, certain of the directors and
executive officers from time to time invest their personal funds directly
in other funds managed by the GS Group on the same terms and conditions as
the other investors in these funds, who are not directors, executive
officers or employees.
BROKERAGE
The Advisors (including employees and affiliates of the GS Group) of
the Investment Funds managing their assets directly (including through
Advisor Funds) or through Portfolio Companies have the authority to select
brokers and dealers from a list approved by the managing member of the
Investment Funds, through which to effect transactions on the basis of
various factors. The managing member of the Investment Funds requires such
Advisors to select executing brokers on a best execution basis, considering
price, commissions and commission equivalents, other transaction costs,
quality of brokerage services, financing arrangements, creditworthiness and
financial stability, financial responsibility and strength, and clearance
and settlement capability. The Company does not have oversight over broker
and dealer selection by Investment Funds.
To the extent permitted under applicable law, the Advisors (including
through Advisor Funds) of each Investment Fund or Portfolio Company are
authorized to execute agency transactions for such Investment Fund, Advisor
Fund or Portfolio Company with or through GS Group and its affiliates
(including in circumstances where transactions on behalf of GS Group and
its affiliates are executed together with those on behalf of such
Investment Fund, Advisor Fund or Portfolio Company) as the Advisors, in
their sole discretion, shall determine. The Advisors may also use GS Group
or its affiliates for prime brokerage services.
Additionally, in selecting brokers and dealers, certain of the
Advisors may have authority to and may consider products or services
provided, or expenses paid, by such brokers and dealers to, or on behalf
of, such Advisors. Products and services generally include research items.
In some circumstances, the commissions paid on transactions with brokers or
dealers providing such services may exceed the amount another broker would
have charged for effecting that transaction. "Soft dollar" payments or
rebates of amounts paid to brokers and dealers may arise from
over-the-counter principal transactions, as well as exchange traded agency
transactions. In addition, such payments or rebates may be made by futures
brokers in connection with futures transactions.
The Managing Member, either in its capacity as the managing member of
the Company or the Investment Funds, may also receive research items from
brokers and dealers that provide brokerage services to its clients
(including the Investment Funds and the Portfolio Companies). The total
amount of commissions directed to a particular broker may be made pursuant
to an agreement that would bind the managing member of the Investment Funds
to compensate the selected broker for the services provided. Research or
other services obtained in this manner may be used in servicing any or all
advisory clients of the managing member of the Investment Funds, including
each of the Investment Funds and the Portfolio Companies, and are used in
connection with advisory accounts other than those that pay commissions to
the broker relating to the research or other service arrangements.
Research products and services made available to the Managing Member,
either in its capacity as the managing member of the Company or the
Investment Funds, through brokers and dealers executing transactions for
its clients, including the Investment Funds and the Portfolio Companies,
involving brokerage commissions may include: performance and other
qualitative and quantitative data relating to Advisors in general and
certain Advisors in particular; data relating to the historic performance
of categories of securities associated with particular investment styles;
quotation equipment; and related computer hardware and software, all of
which research products and services are used by the managing member of the
Investment Funds in connection with its selection and monitoring of
Advisors, the portfolio design of a mix of investment styles appropriate to
investment objectives of clients, and the determination of overall
portfolio strategies including asset allocation models.
If the managing member of the Investment Funds receives products or
services from brokers or dealers that are used both for research purposes
and for administrative or other non-research purposes, it will make a good
faith effort to determine the relative proportions of such products or
services which may be considered as investment research, based primarily on
anticipated usage, and will pay for the costs attributable to the
non-research usage in cash.
To the extent permitted by applicable law, Advisors may execute
transactions with or through Goldman Sachs. The Advisors may also use GS
Group and its affiliates for prime brokerage and other services.
PLACEMENT AGENT
Goldman Sachs acts as placement agent for the Company (the "Placement
Agent"). The Placement Agent is entitled to a fee (the "Placement Fee") of
up to a specified amount of each Member's subscription. Historically,
Goldman Sachs has not charged a Placement Fee, however, there can be no
assurance that Goldman Sachs will not charge a Placement Fee in the future.
Amounts paid in respect of the Placement Fee will not constitute assets of
the Company. The Placement Agent may also receive compensation from the
Managing Member that represents a portion of the Management Fee. The
Placement Agent may enter into sub-placement agreements with affiliates and
unaffiliated third parties. At the discretion of the Placement Agent, all
or a portion of the Placement Fee may be allocated to such sub-placement
agents. The Company may waive or impose different sales charges, or
otherwise modify its distribution arrangements, in connection with the
offering of Units. Pursuant to an agreement entered into between the
Placement Agent and the Company (the "Placement Agent Agreement"), the
Company has agreed to indemnify and hold harmless the Placement Agent, its
affiliates and any agent against any losses, claims, damages or liabilities
(or actions in respect thereof), joint or several (the "Covered Claims"),
to which the Placement Agent may become subject, to the extent such Covered
Claims arise out of or are based upon (i) an untrue statement or alleged
untrue statement of a material fact contained in the Memorandum, or (ii)
the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statement therein not
misleading. The Placement Agent Agreement provides that the Company will
reimburse the Placement Agent for any legal or other expenses reasonably
incurred by the Placement Agent in connection with investigating or
defending any such Covered Claims; provided, however, that the Company will
not be liable to indemnify or reimburse the Placement Agent in any such
case to the extent that any such Covered Claims arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in the Memorandum in reliance upon and in conformity with
written information furnished to the Company by the Placement Agent
expressly for use therein.
In addition, to the extent the indemnification provisions described in
the preceding paragraph are unavailable or insufficient to hold harmless an
indemnified party with respect to any Covered Claims, the Placement Agent
Agreement specifies that the Company will contribute to the amount paid or
payable by such indemnified party as a result of such Covered Claims in
such proportion as is appropriate to reflect the relative benefits received
by the Company and the Placement Agent from the offering of the Units,
unless otherwise provided by applicable law or the Placement Agent
Agreement.
Goldman Sachs also acts as the placement agent on behalf of the
Investment Funds. The Company will not be charged any placement fee by the
Investment Funds.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table presents fees for the professional audit services
rendered by E&Y for the audit of the Company's annual financial statements
for the years ended December 31, 2004 and 2003 and fees billed for other
services rendered by E&Y during those periods.
YEAR ENDED DECEMBER 31,
2004 2003
---------------- ---------------
Audit Fees (1) $185,000 $32,500
Audit-Related Fees - -
Tax Fees (2) 60,000 $35,500
All Other Fees - -
---------------- ---------------
TOTAL 245,000 $68,000
================ ===============
(1) Year ended December 31, 2004 includes $115,000 for the review of the
Company's Registration Statement, this annual report on Form 10-K and
the Company's quarterly reports on Form 10-Q.
(2) Tax services primarily involves assistance with the preparation of tax
returns and K-1s.
The board of directors of the Managing Member does not have an audit
committee which is responsible for the oversight of the Company's
accounting and financial reporting practices. As the Company does not have
a formal audit committee, the services described above were not approved by
the audit committee and the Company does not have audit committee
pre-approval policies and procedures. The board of directors of the
Managing Member as a whole is responsible for the oversight of the
Company's accounting and financial reporting practices and the board is
responsible for approving every engagement of E&Y to perform audit or
non-audit services for the Company before E&Y is engaged to provide those
services. The board of directors considers whether the provision of any
non-audit provisions is compatible with maintaining E&Y's independence.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents Filed as Part of this Annual Report:
1. Financial Statements.
PAGE
DESCRIPTION OF FINANCIAL STATEMENTS NUMBER
----------------------------------- ------
Goldman Sachs Hedge Fund Partners, LLC Financial Statements
Report of Independent Registered Public Accounting Firm............................... F-2
Schedule of Investments as of December 31, 2004 and 2003.............................. F-3
Balance Sheet as of December 31, 2004 and 2003........................................ F-4
Statement of Operations for the years ended December 31, 2004, 2003 and for the
period from commencement of operations (April 1, 2002) to December 31, 2002........... F-5
Statement of Changes in Members' Equity for the years ended December 31, 2004, 2003
and for the period from commencement of operations (April 1, 2002) to December 31,
2002.................................................................................. F-6
Statement of Cash Flows for the years ended December 31, 2004, 2003 and for the
period from commencement of operations (April 1, 2002) to December 31, 2002........... F-7
Notes to Financial Statements......................................................... F-8
2. Financial Statement Schedules.
Certain schedules are omitted because they are not applicable
or the required information is shown in the financial
statements or notes thereto.
3. List of Exhibits.
See Index of Exhibits included on page E-1.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, 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 Hedge Fund Strategies LLC
Managing Member
By: /s/ Tobin V. Levy
-------------------------------------
Name: Tobin V. Levy
Title: Managing Director and Chief
Financial Officer
Date: March 29, 2005
INDEX OF EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3* Copy of Amended and Restated Limited Liability Company
Agreement of Goldman Sachs Hedge Fund Partners, LLC dated
January 1, 2004 (Note: the LLC Agreement also defines the
rights of the holders of Units of the Company) (filed as
Exhibit 3 to the Form 10, filed April 29, 2004, and
incorporated herein by reference).
10.1 Copy of Amended and Restated Limited Liability Company
Agreement of Goldman Sachs Global Tactical Trading, LLC dated
January 1, 2003.
10.2 Copy of Amended and Restated Limited Liability Company
Agreement of Goldman Sachs Global Equity Long/Short, LLC
dated July 1, 2004.
10.3 Copy of Amended and Restated Limited Liability Company
Agreement of Goldman Sachs Global Relative Value, LLC dated
July 1, 2004.
10.4 Copy of Amended and Restated Limited Liability Company
Agreement of Goldman Sachs Global Event Driven, LLC dated
July 1, 2004.
10.5* Distribution Agreement between Goldman Sachs Hedge Fund
Partners, LLC and Goldman, Sachs & Co. dated March 1, 2002
(filed as Exhibit 10.5 to the Form 10, filed April 29, 2004,
and incorporated herein by reference).
10.6* Administration Agreement between Goldman Sachs Hedge Fund
Partners, LLC and Goldman Sachs Hedge Fund Strategies LLC
(formerly Goldman Sachs Princeton LLC) dated March 1, 2002
(filed as Exhibit 10.6 to the Form 10, filed April 29, 2004,
and incorporated herein by reference).
14.1 Code of Ethics for Goldman Sachs Hedge Fund Partners, LLC
14.2 Code of Ethics for Goldman Sachs Hedge Fund Strategies LLC
31.1 Certification of Chief Executive Officer in the form
prescribed by Rule 13a-14(a) or 15d-14(a) under the
Securities Exchange Act of 1934.
31.2 Certification of Chief Financial Officer in the form
prescribed by Rule 13a-14(a) or 15d-14(a) under the
Securities Exchange Act of 1934.
32.1 Certification of Chief Executive Officer in the form
prescribed by 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 in the form
prescribed by 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
*Previously filed.
INDEX OF FINANCIAL STATEMENTS
PAGE
DESCRIPTION OF FINANCIAL STATEMENTS NUMBER
- ----------------------------------- ------
Goldman Sachs Hedge Fund Partners, LLC Financial Statements
Report of Independent Registered Public Accounting Firm..................................................... F-2
Schedule of Investments as of December 31, 2004 and 2003.................................................... F-3
Balance Sheet as of December 31, 2004 and 2003.............................................................. F-4
Statement of Operations for the years ended December 31, 2004, 2003 and for the period from commencement
of operations (April 1, 2002) to December 31, 2002.......................................................... F-5
Statement of Changes in Members' Equity for the years ended December 31, 2004, 2003 and for the period
from commencement of operations (April 1, 2002) to December 31, 2002........................................ F-6
Statement of Cash Flows for the years ended December 31, 2004, 2003 and for the period from commencement
of operations (April 1, 2002) to December 31, 2002.......................................................... F-7
Notes to Financial Statements............................................................................... F-8
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Managing Member and Members
Goldman Sachs Hedge Fund Partners, LLC
We have audited the accompanying balance sheet, including the schedule of
investments, of Goldman Sachs Hedge Fund Partners, LLC (the "Company"), as
of December 31, 2004 and 2003, and the related statements of operations,
changes in members' equity and cash flows for the two years then ended and
for the period from commencement of operation (April 1, 2002) to December
31, 2002. These financial statements are the responsibility of the managing
member. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. We were
not engaged to perform an audit of the Company's internal control over
financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over
financial reporting. Accordingly we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Goldman Sachs Hedge
Fund Partners, LLC at December 31, 2004 and 2003, the results of its
operations, changes in members' equity and its cash flows for the two years
then ended and for the period from commencement of operation (April 1,
2002) to December 31, 2002 in conformity with U.S. generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
New York, New York
March 15, 2005
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2004 AND 2003
2004 2003
----------------------------------------------- ----------------------------------------------
% of % of adjusted % of % of adjusted
Fair members' members' Fair members' members'
Investee value equity(1) equity(2) value equity(1) equity(2)
- ------------------------------- ------------------ ----------- -------------- ----------------- ------------ -------------
Goldman Sachs Global Equity
Long/Short, LLC $ 226,276,134 23.63% 20.84% $ 140,117,348 15.01% 14.48%
Goldman Sachs Global Event
Driven, LLC 268,186,702 28.01% 24.69% 221,899,920 23.78% 22.93%
Goldman Sachs Global Tactical
Trading, LLC 248,081,137 25.91% 22.84% 249,583,571 26.74% 25.79%
Goldman Sachs Global Relative
Value, LLC 350,409,379 36.60% 32.27% 359,311,989 38.50% 37.12%
---------------- -------- -------- -------------- -------- --------
Total investments
(cost $945,867,114 and
$877,478,931, respectively) $ 1,092,953,352 114.15% 100.64% $ 970,912,828 104.03% 100.32%
================ ======== ======== ============== ======== ========
(1) Members' equity, used in the calculation of the investments as a % of
members' equity, is reduced for member redemptions that are paid after
the balance sheet date.
(2) Adjusted members' equity, used in the calculation of the investments
as a percentage of adjusted members' equity, represents members'
equity excluding Redemptions payable in the amount of $128,546,636
that are payable after December 31, 2004 and Redemptions payable in
the amount of $34,529,625 that were payable after December 31, 2003.
The Goldman Sachs Hedge Fund Partners, LLC proportionate share of each
individual investment owned by any individual Investee does not exceed 5%
of members' 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 members'
equity.
See accompanying notes.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
BALANCE SHEET
DECEMBER 31, 2004 AND 2003
ASSETS
------
2004 2003
-------------------------- ------------------------
Assets:
Cash and cash equivalents $ 218,797 $ 48,423,637
Investments (cost $945,867,114 1,092,953,352 970,912,828
and $877,478,931, respectively)
Other assets - 77,464
-------------------------- ------------------------
Total assets $ 1,093,172,149 $ 1,019,413,929
========================== ========================
LIABILITIES AND MEMBERS' EQUITY
-------------------------------
Liabilities:
Due to bank $ 3,000,000 $ 47,500,000
Redemptions payable 128,546,636 34,529,625
Accounts payable and accrued liabilities 922,506 168,875
Due to managing member 3,247,774 3,969,687
-------------------------- ------------------------
Total liabilities 135,716,916 86,168,187
Members' equity (units outstanding 8,106,803.34 and
8,540,512.41, respectively) 957,455,233 933,245,742
-------------------------- ------------------------
Total liabilities and members' equity $ 1,093,172,149 $ 1,019,413,929
========================== ========================
Analysis of members' equity:
Net capital contributions, accumulated net
investment income/(loss) and realized
profit/(loss) $ 810,368,995 $ 839,811,845
Accumulated net unrealized profit/(loss)
$ 147,086,238 $ 93,433,897
========================== ========================
See accompanying notes.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND FOR THE PERIOD
FROM COMMENCEMENT OF OPERATIONS (APRIL 1, 2002) TO DECEMBER 31, 2002
2004 2003 2002
----------------- ------------------ ------------------
Income from trading:
Equity in earnings of investees:
Realized profit/(loss) $ 18,366,046 $ 241,972 $ -
Changed in unrealized profit/(loss) 53,652,341 81,612,423 11,821,474
-------------- ------------- --------------
Net trading profit/(loss) 72,018,387 81,854,395 11,821,474
Interest income 495,194 97,943 32,724
Expenses:
Management fee 12,234,696 9,666,257 2,000,377
Interest expense 546,069 - -
Professional fees 1,641,442 1,053,505 222,717
Miscellaneous expenses 35,645 13,910 235,926
-------------- ------------- --------------
Total expenses 14,457,852 10,733,672 2,459,020
-------------- ------------- --------------
Net investment income/(loss) (13,962,658) (10,635,729) (2,426,296)
-------------- ------------- --------------
Net income/(loss) 58,055,729 71,218,666 9,395,178
Less: Incentive allocation to the
managing member 2,902,854 3,560,865 469,759
-------------- ------------- --------------
Net income/(loss) available for pro-rata
allocation to members $ 55,152,875 $ 67,657,801 $ 8,925,419
============== ============= ==============
See accompanying notes.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
STATEMENT OF CHANGES IN MEMBERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND FOR THE PERIOD
FROM COMMENCEMENT OF OPERATIONS (APRIL 1, 2002) TO DECEMBER 31, 2002
Total
Managing Members' Members' members'
member's equity units equity equity
---------------- ----------------- ----------------- -------------------
Subscriptions $ - 3,738,439.26 $373,831,083 $ 373,831,083
Allocations of net income/(loss):
Incentive allocation 469,759 - - 469,759
Pro-rata allocation - - 8,925,419 8,925,419
-------------- ------------- ------------ --------------
Balance at December 31, 2002 469,759 3,738,439.26 382,756,502 383,226,261
Subscriptions - 5,228,815.64 524,318,830 524,318,830
Redemptions (4,030,624) (369,584.81) (41,487,391) (45,518,015)
Series collapse - (57,157.68) - -
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 - 8,540,512.41 933,245,742 933,245,742
Subscriptions - 1,238,393.44 126,385,622 126,385,622
Redemptions (2,902,854) (1,321,377.58) (157,329,006) (160,231,860)
Series collapse - (350,724.93) - -
Allocations of net income/(loss):
Incentive allocation 2,902,854 - - 2,902,854
Pro-rata allocation - - 55,152,875 55,152,875
-------------- ------------- ------------ --------------
Balance at December 31, 2004 $ - 8,106,803.34 $957,455,233 $ 957,455,233
============== ============= ============ =============
See accompanying notes.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND FOR THE PERIOD
FROM COMMENCEMENT OF OPERATIONS (APRIL 1, 2002) TO DECEMBER 31, 2002
2004 2003 2002
--------------- --------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $ 58,055,729 $ 71,218,666 $ 9,395,178
Adjustments to reconcile net income/(loss) to net
cash from operating activities:
Purchases of investments (174,845,756) (507,973,827) (371,763,132)
Proceeds from sales of investments 124,823,619 2,500,000 -
Realized profit/(loss) from sales of investments (18,366,046) (241,972) -
Change in unrealized profit/(loss) (53,652,341) (81,612,423) (11,821,474)
(Increase) decrease in operating assets:
Other assets 77,464 (77,464) -
Increase (decrease) in operating liabilities:
Accounts payable and accrued liabilities 753,631 (31,769) 200,644
Due to managing member (721,913) 3,211,779 757,908
--------------- --------------- -------------
Net cash from operating activities (63,875,613) (513,007,010) (373,230,876)
--------------- --------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Subscriptions 126,385,622 524,318,830 373,831,083
Redemptions (160,231,860) (45,518,015) -
Increase/decrease in Due to bank (44,500,000) 47,500,000 -
Increase in Redemptions payable 94,017,011 34,529,625 -
--------------- --------------- -------------
Net cash from financing activities 15,670,773 560,830,440 373,831,083
--------------- --------------- -------------
Net change in cash and cash equivalents (48,204,840) 47,823,430 600,207
Cash and cash equivalents at beginning of period 48,423,637 600,207 -
--------------- --------------- -------------
Cash and cash equivalents at end of period $ 218,797 $ 48,423,637 $ 600,207
=============== =============== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid by the Company during the year for interest $ 546,069 $ - $ -
=============== =============== =============
See accompanying notes.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
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 ("GELS"), Goldman Sachs Global Event
Driven, LLC ("GED"), Goldman Sachs Global Relative Value, LLC ("GRV") and
Goldman Sachs Global Tactical Trading, LLC ("GTT") (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 Hedge Fund Strategies
LLC ("GS HFS"), formerly Goldman Sachs Princeton LLC, 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 U.S. generally
accepted accounting principles ("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 United States
dollars. Certain reclassifications have been made to previously reported
amounts to conform to current year presentation.
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
December 31, 2004 and 2003:
12/31/2004
--------------------------------------------------------------
Company % owned by
Investee equity investment the Company
--------------------------------------------------------------
GELS $ 694,878,944 $ 226,276,134 32.56%
GED 860,469,969 268,186,702 31.17
GTT 635,662,057 248,081,137 39.03
GRV 617,008,832 350,409,379 56.79
---------------
Total $1,092,953,352
===============
12/31/2003
--------------------------------------------------------------
Company % owned by
Investee equity investment the Company
--------------------------------------------------------------
GELS $ 425,735,121 $ 140,117,348 32.91%
GED 530,245,182 221,899,920 41.85
GTT 657,712,862 249,583,571 37.95
GRV 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.
Equity in earnings of investees
- -------------------------------
Equity in earnings of investees 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 as well as Advisor's management fees, incentive
fees, administration fees and all other income/expenses. See Note 2 -
Investments for further information.
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 are carried at cost plus accrued interest,
which approximates market. Cash and cash equivalents at December 31, 2004
is restricted. See Note 7 - Borrowing facility for further information.
Allocation of net income/(loss)
- -------------------------------
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. 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.
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 services provided under the
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.
NOTE 2 - INVESTMENTS
- --------------------
The Investees, to whom the Company is exposed to credit risk, seek capital
appreciation over time by investing in the relative value, event driven,
equity long/short and tactical trading hedge fund sectors. The Company's
investments in Investees are subject to terms and conditions of the
respective operating agreements. The investments are carried at fair value
as determined by the Company's attributable share of the net assets of the
respective Investees. Fair values are determined utilizing net asset value
information supplied by each individual Investee net of each Advisor's
management and incentive fees. These fees are included in Equity in
earnings of investees on the Statement of Operations. The underlying
investments of each Investee are accounted for at fair value. For
investments of the underlying Advisor funds, market value normally is based
on quoted market prices or broker-dealer price quotations provided to the
Advisor fund. In the absence of quoted market prices or broker-dealer price
quotations, underlying Advisor fund investments are valued at fair value as
determined by the 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 HFS is the managing member for the four Investees. GS HFS 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 HFS, in its capacity as managing member of the Company, may
perform additional procedures including Advisor due diligence reviews and
analytical procedures with respect to the valuations provided by the
Advisors and to ensure conformity with GAAP. 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 Equity in earnings of
investees for the years ended December 31, 2004, 2003 and for the period
from commencement of operations (April 1, 2002) to December 31, 2002:
Year or Period Ended December 31,
- -------------- ------------- --------------------------------------------------------
Investee Liquidity 2004 2003 2002
- -------------- ------------- --------------- ---------------- -----------------
GELS (1) $17,695,686 $15,645,066 $ (226,472)
GED (2) 27,901,912 28,258,987 839,462
GTT (3) 8,501,811 18,588,822 7,135,919
GRV (4) 17,918,978 19,361,520 4,072,565
--------------- ---------------- -----------------
Total $72,018,387 $81,854,395 $11,821,474
=============== ================ =================
(1) Redemptions could be made quarterly with 45 days' notice after a
twelve-month holding period, or at the sole discretion of the managing
member. Effective July 2004, a twelve-month holding period is no
longer required.
(2) Redemptions could be made semi-annually with 45 days' notice after a
twelve-month holding period, or at the sole discretion of the managing
member. Effective July 2004, a twelve-month holding period is no
longer required.
(3) Redemptions can be made semi-annually with 60 days' notice, or at the
sole discretion of the managing member.
(4) Redemptions could be made semi-annually with 45 days' notice after a
twelve-month holding period, or at the sole discretion of the managing
member. Effective July 2004, redemptions can be made quarterly with 45
days' notice, or at the sole discretion of the managing member and a
twelve-month holding period is no longer required.
Goldman Sachs Global Equity Long/Short, LLC
- -------------------------------------------
Goldman Sachs Global Equity Long/Short, LLC seeks risk-adjusted absolute
returns with volatility lower than the broad equity markets, primarily
through long and short investment opportunities in the global equity
markets. Strategies generally involve making long and short equity
investments, often based on the Advisor's assessment of fundamental value
compared to market price, although Advisors employ a wide range of styles.
Goldman Sachs Global Event Driven, LLC
- --------------------------------------
Goldman Sachs Global Event Driven, LLC seeks risk-adjusted absolute returns
with volatility and correlation lower than the broad equity markets 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 perceived 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 systematic 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 with volatility and correlation lower than the broad equity markets
by allocating assets to Advisors that operate primarily in the global
relative value sector. Relative value strategies seek to profit from the
mispricing of financial instruments, capturing spreads between related
securities that deviate from their fair value or historical norms.
Directional and market exposure is generally held to a minimum or
completely hedged. Strategies that may be utilized in the relative value
sector include convertible arbitrage, equity arbitrage and fixed-income
arbitrage. Other strategies may be employed as well.
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 December 31, 2004, 2003 and
2002. 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 in the weighted average calculation are the actual rates
charged by each Advisor.
2004 2003 2002
------------------------------- ------------------------------ -------------------------------
Management Incentive Management Incentive Management Incentive
Investee fees fee fees fee fees fee
- ------------------- -------------- -------------- -------------- ------------- --------------- -------------
GELS 1.42% 20.00% 1.27% 19.78% 1.15% 19.81%
GED 1.43% 19.94% 1.44% 19.93% 1.36% 19.65%
GTT 2.05% 20.46% 1.96% 19.97% 1.94% 19.98%
GRV 1.57% 20.76% 1.53% 20.60% 1.48% 20.30%
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 the
Investees at December 31, 2004 and 2003:
Investee 12/31/2004 12/31/2003
- -------------------- ------------------- -------------------
GELS $ 193,714,595 $ 124,698,754
GED 213,989,105 193,043,444
GTT 222,215,176 223,858,829
GRV 315,948,238 335,877,904
------------------- -------------------
Total $ 945,867,114 $ 877,478,931
=================== ===================
NOTE 3 - FEES
- -------------
The Company pays a monthly management fee to GS HFS 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 HFS 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 years ended December 31,
2004 and 2003 and for the period from commencement of operations (April 1,
2002) to December 31, 2002, the administration fee charged at the Investee
level by GS HFS totaled $1,960,131, $1,539,364 and $319,588, respectively.
GS HFS and the Company have entered into an agreement with SEI Global
Services, Inc. ("SEI") to serve as the sub-administrator of the Company
effective March 1, 2004. Pursuant to the agreement, GS HFS is responsible
for paying the fees of SEI. GS HFS (in its capacity as the administrator of
each Investee) and each Investee have entered into a similar agreement with
SEI. See also Note 10 - Subsequent events.
NOTE 4 - RISK MANAGEMENT
- ------------------------
In the ordinary course of business, GS HFS 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 HFS 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 HFS 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 HFS 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 HFS 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 HFS 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 HFS at December 31, 2004 and 2003.
Goldman, Sachs & Co., an affiliate of the managing member, is one of
several prime brokers for the Advisors. Goldman, Sachs & Co. charges
fees at prevailing market rates.
Directors and Executive Officers of the managing member own less than 1% of
the Company's equity at December 31, 2004, 2003 and 2002.
NOTE 7 - BORROWING FACILITY
- ---------------------------
During the year ended December 31, 2003, the Company entered into a
borrowing facility with a major financial institution. The facility was
structured as a call spread option that had been issued by the Company to
the financial institution. Under the terms of the facility, the Company
received cash and redeposited the amount with the financial institution in
a collateral account. The Company had the right to draw funds from the
collateral account to use for liquidity purposes. The amount of the cash
received totaled $47.5 million at December 31, 2003 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 was
LIBOR plus 0.875%. The Company also paid the equivalent of a commitment fee
of 0.25% on the undrawn funds. At December 31, 2003, the Company had not
drawn any of the cash collateral balance. Included in Due to bank on the
Balance Sheet is $47.5 million at December 31, 2003 which represents the
borrowing. This facility expired in October 2004.
On November 24, 2004, the Company entered into a credit facility with a new
financial institution. Subject to rejection by the new financial
institution, the Company may request to borrow up to $45.0 million. At the
time of any borrowing, the aggregate amounts borrowed may not exceed 10% of
the Company's net asset value and at all other times the aggregate amount
borrowed may not exceed 15% of the Company's net asset value. The effective
interest rate on borrowed amounts is LIBOR plus 0.85%. The amount of the
cash borrowed totaled $3.0 million at December 31, 2004 and is included in
Due to bank on the Balance Sheet. The Company granted a security interest
in the Company's cash accounts and any other accounts that contain any
other investment property of the Company.
NOTE 8 - MEMBERS' EQUITY
- ------------------------
At December 31, 2004, the Company had eight 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. Transactions in units for non-managing members for years
ended December 31, 2004, and 2003 are as follows:
2004 2003
---------------------------------------------- -------------------------------------------
Units Amount Units Amount
-------------------- ---------------------- ------------------- --------------------
Series collapse
Class A
Series 1 4,493,143.70 $512,003,655 3,260,399.10 $338,995,791
Series 2 (415,994.14) (44,920,761) (243,082.49) (25,250,693)
Series 3 (752,365.57) (80,402,510) (666,920.13) (68,821,429)
Series 4 (879,574.26) (94,683,681) (453,500.00) (46,408,355)
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 6 298,400.00 29,840,000 841,120.00 84,112,000
Series 7 412,100.00 41,210,000 1,217,902.52 121,790,252
Series 8 231,250.00 23,125,000 86,650.95 8,665,095
Series 9 - - 8,313.51 831,351
Series 10 - - 774.64 77,464
-------------------- ---------------------- ------------------- --------------------
Total 1,238,393.44 $ 126,385,622 5,228,815.64 $524,318,830
==================== ====================== =================== ====================
2004 2003
---------------------------------------------- -------------------------------------------
Units Amount Units Amount
-------------------- ---------------------- ------------------- --------------------
Redemptions
Class A
Series 1 1,321,377.58 $157,329,006 346,366.44 $ 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 1,321,377.58 $157,329,006 369,584.81 $ 41,487,391
==================== ====================== =================== ====================
At December 31, 2004 and 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 7,050,909.85 $ 847,881,523 3,696,643.78 $ 421,242,087
Series 2 687.41 71,818 415,994.14 44,920,761
Series 3 83,221.74 8,734,155 752,365.57 80,402,510
Series 4 12,734.34 1,346,355 879,574.26 94,683,681
Series 5 17,500.00 1,850,110 654,391.41 69,753,438
Series 6 298,400.00 31,325,187 836,120.00 86,760,878
Series 7 412,100.00 42,863,013 1,210,045.71 125,529,478
Series 8 231,250.00 23,383,072 86,289.39 9,029,305
Series 9 - - 8,313.51 845,096
Series 10 - - 774.64 78,508
----------------- --------------------- ------------------ -------------------
Subtotal 8,106,803.34 $ 957,455,233 8,540,512.41 $ 933,245,742
================= ==================
Managing member - -
--------------------- -------------------
Total members' equity $ 957,455,233 $ 933,245,742
===================== ===================
Transactions in units for non-managing members for the period from
commencement of operations (April 1, 2002) to December 31, 2002 are as
follows:
2002
------------------------------------------
Subscriptions
Class A
Series 1 420,882.48 $ 42,088,436
Series 2 243,082.49 24,308,249
Series 3 666,920.13 66,692,013
Series 4 453,500.00 45,350,000
Series 5 284,000.00 28,400,000
Series 6 374,618.85 37,461,885
Series 7 622,822.97 62,269,724
Series 8 377,062.34 37,705,776
Series 9 295,550.00 29,555,000
------------------ --------------------
Total 3,738,439.26 $373,831,083
================== ====================
At December 31, 2002, members' equity consists of the following:
2002
-----------------------------------------
Units Net
outstanding asset value
----------------- -------------------
Non-managing members
Class A
Series 1 420,882.48 $ 43,760,711
Series 2 243,082.49 25,250,693
Series 3 666,920.13 68,821,429
Series 4 453,500.00 46,408,355
Series 5 284,000.00 29,115,024
Series 6 374,618.85 38,028,035
Series 7 622,822.97 62,750,159
Series 8 377,062.34 38,374,169
Series 9 295,550.00 30,247,927
----------------- -------------------
Subtotal 3,738,439.26 382,756,502
=================
Managing member 469,759
-------------------
Total members' equity $ 383,226,261
===================
NOTE 9 - FINANCIAL HIGHLIGHTS
- -----------------------------
Financial highlights for the Company for the year ended December 31, 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) 8.30 6.05 5.92 6.62 6.49
Net investment income/(loss) (2.00) (1.57) (0.97) (0.89) (0.77)
----------- ----------- ----------- ----------- ------------
Total income/(loss) from operations 6.30 4.48 4.95 5.73 5.72
----------- ----------- ----------- ----------- ------------
Net asset value, end of period $ 120.25 $ 104.48 $ 104.95 $ 105.73 $ 105.72
=========== =========== =========== =========== ============
Ratios to average net assets (annualized):
Expenses 1.48% 1.48% 1.35% 1.32% 1.31%
Incentive allocation 0.28% 0.23% 0.26% 0.29% 0.29%
----------- ----------- ----------- ----------- ------------
Total expenses and incentive allocation 1.76% 1.71% 1.61% 1.61% 1.60%
=========== =========== =========== =========== ============
Net investment income/(loss) (1.71%) (1.66%) (1.58%) (1.60%) (1.58%)
=========== =========== =========== =========== ============
Total return (prior to incentive allocation) 5.83% 4.72% 5.21% 6.03% 6.02%
Incentive allocation (0.30%) (0.24%) (0.26%) (0.30%) (0.30%)
----------- ----------- ----------- ----------- ------------
Total return 5.53% 4.48% 4.95% 5.73% 5.72%
=========== =========== =========== =========== ============
Class A Class A Class A
Series 6 Series 7 Series 8
----------- ----------- ------------
Per unit operating performance:
Net asset value, beginning of period $ 100.00 $ 100.00 $ 100.00
Income from operations:
Net trading profit/(loss) 5.58 4.43 1.28
Net investment income/(loss) (0.60) (0.42) (0.16)
----------- ----------- ------------
Total income/(loss) from operations
4.98 4.01 1.12
----------- ----------- ------------
Net asset value, end of period $ 104.98 $ 104.01 $ 101.12
=========== =========== ============
Ratios to average net assets (annualized):
Expenses 1.28% 1.29% 1.27%
Incentive allocation 0.25% 0.20% 0.06%
----------- ----------- ------------
Total expenses and incentive allocation 1.53% 1.49% 1.33%
=========== =========== ============
Net investment income/(loss) (1.54%) (1.49%) (1.32%)
=========== =========== ============
Total return (prior to incentive allocation) 5.24% 4.22% 1.18%
Incentive allocation (0.26%) (0.21%) (0.06%)
----------- ----------- ------------
Total return 4.98% 4.01% 1.12%
=========== =========== ============
Financial highlights for the Company for the year ended December 31, 2003
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 $ 103.97 $ 100.00 $ 100.00 $ 100.00 $ 100.00
Income from operations:
Net trading profit/(loss) 12.00 9.70 8.43 9.13 7.89
Net investment income/(loss) (2.02) (1.72) (1.56) (1.48) (1.30)
----------- ----------- ----------- ----------- ------------
Total income/(loss) from operations 9.98 7.98 6.87 7.65 6.59
----------- ----------- ----------- ----------- ------------
Net asset value, end of period $ 113.95 $ 107.98 $ 106.87 $ 107.65 $ 106.59
=========== =========== =========== =========== ============
Ratios to average net assets (annualized):
Expenses 1.39% 1.39% 1.38% 1.37% 1.35%
Incentive allocation 0.48% 0.40% 0.35% 0.39% 0.33%
----------- ----------- ----------- ----------- ------------
Total expenses and incentive allocation 1.87% 1.79% 1.73% 1.76% 1.68%
=========== =========== =========== =========== ============
Net investment income/(loss) (1.86%) (1.78%) (1.72%) (1.74%) (1.67%)
=========== =========== =========== =========== ============
Total return (prior to incentive allocation) 10.11% 8.40% 7.23% 8.05% 6.94%
Incentive allocation (0.51%) (0.42%) (0.36%) (0.40%) (0.35%)
----------- ----------- ----------- ----------- ------------
Total return 9.60% 7.98% 6.87% 7.65% 6.59%
=========== =========== =========== =========== ============
Class A Class A Class A Class A Class A
Series 6 Series 7 Series 8 Series 9 Series 10
----------- ----------- ----------- ----------- ------------
Per unit operating performance:
Net asset value, beginning of period $ 100.00 $ 100.00 $ 100.00 $ 100.00 $ 100.00
Income from operations:
Net trading profit/(loss) 4.79 4.61 5.47 1.98 1.55
Net investment income/(loss) (1.02) (0.87) (0.83) (0.33) (0.20)
----------- ----------- ----------- ----------- ------------
Total income/(loss) from operations 3.77 3.74 4.64 1.65 1.35
----------- ----------- ----------- ----------- ------------
Net asset value, end of period $ 103.77 $ 103.74 $ 104.64 $ 101.65 $ 101.35
=========== =========== =========== =========== ============
Ratios to average net assets (annualized):
Expenses 1.34% 1.30% 1.30% 1.28% 1.27%
Incentive allocation 0.20% 0.19% 0.24% 0.09% 0.07%
----------- ----------- ----------- ----------- ------------
Total expenses and incentive allocation 1.54% 1.49% 1.54% 1.37% 1.34%
=========== =========== =========== =========== ============
Net investment income/(loss) (1.53%) (1.49%) (1.54%) (1.37%) (1.34%)
=========== =========== =========== =========== ============
Total return (prior to incentive allocation) 3.97% 3.94% 4.88% 1.74% 1.42%
Incentive allocation (0.20%) (0.20%) (0.24%) (0.09%) (0.07%)
----------- ----------- ----------- ----------- ------------
Total return 3.77% 3.74% 4.64% 1.65% 1.35%
=========== =========== =========== =========== ============
Financial highlights for the Company for the period from commencement of
operations (April 1, 2002) to December 31, 2002 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 $ 100.00 $ 100.00 $ 100.00 $ 100.00 $ 100.00
Income from operations:
Net trading profit/(loss) 5.43 5.08 4.25 3.22 3.32
Net investment income/(loss) (1.46) (1.20) (1.06) (0.89) (0.80)
----------- ----------- ----------- ----------- ------------
Total income/(loss) from operations 3.97 3.88 3.19 2.33 2.52
----------- ----------- ----------- ----------- ------------
Net asset value, end of period $ 103.97 $ 103.88 $ 103.19 $ 102.33 $ 102.52
=========== =========== =========== =========== ============
Ratios to average net assets (annualized):
Expenses 1.63% 1.45% 1.47% 1.48% 1.51%
Incentive allocation 0.21% 0.20% 0.17% 0.12% 0.13%
----------- ----------- ----------- ----------- ------------
Total expenses and incentive allocation 1.84% 1.65% 1.64% 1.60% 1.64%
=========== =========== =========== =========== ============
Net investment income/(loss) (1.82%) (1.63%) (1.61%) (1.58%) (1.62%)
=========== =========== =========== =========== ============
Total return (prior to incentive allocation) 4.18% 4.08% 3.36% 2.45% 2.65%
Incentive allocation (0.21%) (0.20%) (0.17%) (0.12%) (0.13%)
----------- ----------- ----------- ----------- ------------
Total return 3.97% 3.88% 3.19% 2.33% 2.52%
=========== =========== =========== =========== ============
Class A Class A Class A Class A
Series 6 Series 7 Series 8 Series 9
----------- ----------- ----------- -----------
Per unit operating performance:
Net asset value, beginning of period $ 100.00 $ 100.00 $ 100.00 $ 100.00
Income from operations:
Net trading profit/(loss) 2.05 1.14 2.12 2.59
Net investment income/(loss) (0.54) (0.39) (0.35) (0.25)
----------- ----------- ----------- -----------
Total income/(loss) from operations 1.51 0.75 1.77 2.34
----------- ----------- ----------- -----------
Net asset value, end of period $ 101.51 $ 100.75 $ 101.77 $ 102.34
=========== =========== =========== ===========
Ratios to average net assets (annualized):
Expenses 1.31% 1.30% 1.30% 1.27%
Incentive allocation 0.08% 0.04% 0.09% 0.12%
----------- ----------- ----------- -----------
Total expenses and incentive allocation 1.39% 1.34% 1.39% 1.39%
=========== =========== =========== ===========
Net investment income/(loss) (1.36%) (1.31%) (1.39%) (1.38%)
=========== =========== =========== ===========
Total return (prior to incentive allocation) 1.59% 0.79% 1.86% 2.46%
Incentive allocation (0.08%) (0.04%) (0.09%) (0.12%)
----------- ----------- ----------- -----------
Total return 1.51% 0.75% 1.77% 2.34%
=========== =========== =========== ===========
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 and net
investment income/(loss) to average net assets is calculated by dividing
total expenses and net investment income/(loss), respectively, by the month
end average net assets for the period. The components of total return are
calculated by dividing the change in the per unit value of each component
for the period by the net asset value per unit at the beginning of the
period. The ratios to average net assets calculated above do not include
the Company's proportionate share of net investment income and expenses of
the Investees.
NOTE 10 - SUBSEQUENT EVENTS
- ---------------------------
Effective January 1, 2005, Class A Series 2 through Class A Series 8 units
were collapsed into Class A Series 1 units, as provided in the Company's
private placement memorandum.
Effective January 1, 2005, GS HFS agreed to change the administration fee
rate charged at the Investee level from 0.20% to the fee rate charged to
each Investee by SEI (the "Administration Fee Rate"). It is expected that
initially the Administration Fee Rate will generally be in the range of
0.08% to 0.10%, but such rate may be exceeded in certain circumstances,
subject to a maximum of approximately 0.20%.
In the future, GS HFS may cease to serve as the administrator of the
Company and one or more of the Investees and SEI may perform such duties
directly. GS HFS and SEI are currently discussing implementing such
changes.