- --------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
---------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period _____ from to _____
Commission File Number: 000-50723
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
(Exact name of registrant as specified in its charter)
DELAWARE 04-3638229
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
701 MOUNT LUCAS ROAD
PRINCETON, NEW JERSEY 08540
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 609-497-5500
---------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [ X ] No
[ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
- --------------------------------------------------------------------------
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Schedule of Investments as of March 31, 2005 and
December 31, 2004....................................................1
Balance Sheet as of March 31, 2005 and December 31,
2004.................................................................2
Statement of Operations for the three months ended March 31, 2005 and
2004.................................................................3
Statement of Changes in Members' Equity for the three months ended
March 31, 2005 and for the year ended December 31,
2004.................................................................4
Statement of Cash Flows for the three months ended March 31, 2005
and March 31, 2004...................................................5
Notes to Unaudited Financial
Statements...........................................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.............................................................31
ITEM 4. CONTROLS AND PROCEDURES..........................................34
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................35
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.........................................................35
ITEM 3. DEFAULTS UPON SENIOR SECURITIES..................................35
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............35
ITEM 5. OTHER INFORMATION................................................36
ITEM 6. EXHIBITS.........................................................38
SIGNATURES...............................................................39
INDEX TO EXHIBITS........................................................40
ITEM 1. FINANCIAL STATEMENTS
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
SCHEDULE OF INVESTMENTS
MARCH 31, 2005 AND DECEMBER 31, 2004
(Unaudited) (Audited)
2005 2004
----------------------------- -------------------------------------
% of
% of % of adjusted
Fair members' Fair members' members'
Investee value equity (1) value equity (1) equity (2)
- ---------------------- -------------- --------- ------------- ---------- -----------
Goldman Sachs Global
Equity Long/Short, LLC $ 215,085,733 20.16% $ 226,276,134 23.63% 20.84%
Goldman Sachs Global
Event Driven, LLC 261,423,862 24.51% 268,186,702 28.01% 24.69%
Goldman Sachs Global
Relative Value, LLC 354,415,113 33.22% 350,409,379 36.60% 32.27%
Goldman Sachs Global
Tactical Trading,
LLC 241,354,360 22.62% 248,081,137 25.91% 22.84%
--------------- ------- --------------- ------- -------
Total investments
(cost $942,419,291 and
$945,867,114,
respectively) $ 1,072,279,068 100.51% $ 1,092,953,352 114.15% 100.64%
=============== ======= =============== ======= =======
(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.
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. Information regarding the investment portfolio for certain
underlying investments of the Investees was not available.
See accompanying notes.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
BALANCE SHEET
MARCH 31, 2005 AND DECEMBER 31, 2004
ASSETS
------
(Unaudited) (Audited)
2005 2004
--------------------- -------------------
Assets:
Cash and cash equivalents $ 163,220 $ 218,797
Investments (cost $942,419,291
and $945,867,114, respectively) 1,072,279,068 1,092,953,352
--------------------- -------------------
Total assets $ 1,072,442,288 $ 1,093,172,149
===================== ===================
LIABILITIES AND MEMBERS' EQUITY
-------------------------------
Liabilities:
Due to bank $ 4,027,608 $ 3,000,000
Redemptions payable - 128,546,636
Due to managing member 1,066,198 3,247,774
Accounts payable and accrued liabilities 518,886 922,506
--------------------- -------------------
Total liabilities 5,612,692 135,716,916
Members' equity (units outstanding 9,066,826.90 and
8,106,803.34, respectively) 1,066,829,596 957,455,233
--------------------- -------------------
Total liabilities and members' equity $ 1,072,442,288 $ 1,093,172,149
==================== ===================
Analysis of members' equity:
Net capital contributions, accumulated net
investment income/(loss) and realized
profit/(loss) $ 936,969,819 $ 810,368,995
Accumulated net unrealized profit/(loss) $ 129,859,777 $ 147,086,238
See accompanying notes.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
2005 2004
---------------- -----------------
Income from trading:
Equity in earnings of Investees:
Realized profit/(loss) $ 19,392,177 $ 3,431,534
Changed in unrealized profit/(loss) (17,226,461) 27,395,631
---------------- ----------------
Net trading profit/(loss) 2,165,716 30,827,165
Interest income 18,591 286,354
Expenses:
Management fee 3,216,389 3,049,319
Interest expense 32,233 321,272
Professional fees 31,350 428,217
Miscellaneous expenses 1,149 -
---------------- ----------------
Total expenses 3,281,121 3,798,808
---------------- ----------------
Net investment income/(loss) (3,262,530) (3,512,454)
---------------- ----------------
Net income/(loss) (1,096,814) 27,314,711
Less: Incentive allocation to the managing
member 13,167 1,365,736
---------------- ----------------
Net income/(loss) available for pro-rata
allocation to members $ (1,109,981) $ 25,948,975
================ ================
See accompanying notes.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
STATEMENT OF CHANGES IN MEMBERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED)
AND THE YEAR ENDED DECEMBER 31, 2004 (AUDITED)
Managing Total
member's Members' Members' members'
equity units equity equity
------------ ----------------- -------------- --------------
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)
Share class conversion - (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
Subscriptions - 1,104,711.77 110,471,177 110,471,177
Share class conversion - (144,688.21) - -
Allocations of net
income/(loss):
Incentive allocation 13,167 - - 13,167
Pro-rata allocation - - (1,109,981) (1,109,981)
------------ ---------------- --------------- ---------------
Balance at March 31, 2005 $ 13,167 9,066,826.90 $1,066,816,429 $1,066,829,596
============= ================ ============== ==============
See accompanying notes.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
2005 2004
--------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $ (1,096,814) $ 27,314,711
Adjustments to reconcile net income/(loss) to net
cash from operating activities:
Purchases of investments (75,260,000) (7,845,756)
Proceeds from sales of investments 98,100,000 25,823,618
Realized (profit)/loss from sales of
investments (19,392,177) (3,431,534)
Change in unrealized (profit)/loss 17,226,461 (27,395,631)
(Increase)/decrease in operating assets:
Other assets - 77,464
Increase/(decrease) in operating liabilities:
Due to managing member (2,181,576) (1,925,371)
Accounts payable and accrued liabilities (403,620) 362,512
--------------- ---------------
Net cash from operating activities 16,992,274 12,980,013
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Subscriptions 110,471,177 20,865,014
Redemptions - (18,040,275)
Increase/(decrease) in Due to bank 1,027,608 (26,911,147)
Decrease in Redemption payable (128,546,636) (16,489,350)
--------------- ---------------
Net cash from financing activities (17,047,851) (40,575,758)
--------------- ---------------
Net change in cash and cash equivalents (55,577) (27,595,745)
Cash and cash equivalents at beginning of period 218,797 48,423,637
--------------- ---------------
Cash and cash equivalents at end of period $ 163,220 $ 20,827,892
=============== ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid by the Company during the period for
interest $ 4,625 $ -
=============== ================
See accompanying notes.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2005
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"), 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
March 31, 2005 and December 31, 2004:
March 31, 2005
---------------------------------------------------
Company % owned by
Investee equity investment the Company
----------------- ------------------ --------------
GELS $706,053,207 $ 215,085,733 30.46%
GED 850,757,060 261,423,862 30.73%
GRV 602,747,259 354,415,113 58.80%
GTT 564,600,818 241,354,360 42.75%
---------------
Total $1,072,279,068
===============
December 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%
GRV 617,008,832 350,409,379 56.79%
GTT 635,662,057 248,081,137 39.03%
---------------
Total $1,092,953,352
===============
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 consisting of time deposits, are held at
major financial institutions to which the Company is exposed to risk. Cash
equivalents are carried at cost plus accrued interest, which approximates
market.
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 seek capital appreciation over time by investing in the event
driven, equity long/short, relative value 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 three months ended March 31, 2005 and 2004:
Three months ended March 31,
- ------------ ----------- ---------------------------------
Investee Liquidity 2005 2004
- ------------ ----------- --------------- ---------------
GELS (1) $ 2,277,599 $ 4,553,958
GED (2) 4,698,760 8,019,736
GRV (3) 1,952,934 8,084,655
GTT (4) (6,763,577) 10,168,816
--------------- -------------
Total $ 2,165,716 $30,827,165
=============== =+===========
(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 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.
(4) Redemptions can be made semi-annually with 60 days' notice, or at the
sole discretion of the managing member.
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 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.
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.
Information regarding the actual management and incentive fees charged by
the Advisors for the period presented 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 March 31, 2005 and 2004.
The weighted average is based on the period ended market values of each
Advisor investment in proportion to the Investee's total investments. The
fee rates used in the weighted average calculation are the actual rates
charged by each Advisor.
March 31, 2005 March 31, 2004
------------------------- --------------------------
Management Incentive Management Incentive
Investee fees fee fees fee
- ------------- ----------- ------------ ------------- -----------
GELS 1.46% 19.85% 1.35% 19.80%
GED 1.45% 19.94% 1.40% 19.90%
GRV 1.63% 20.93% 1.53% 20.59%
GTT 1.99% 20.08% 1.96% 19.97%
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 March 31, 2005 and December 31, 2004:
Investee March 31, 2005 December 31, 2004
----------------- ------------------ ---------------------
GELS $ 185,417,893 $ 193,714,595
GED 209,930,938 213,989,105
GRV 321,217,153 315,948,238
GTT 225,853,307 222,215,176
------------------ ---------------------
Total $ 942,419,291 $ 945,867,114
================== =====================
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.
Effective January 1, 2005, the Company pays a monthly administration fee to
GS HFS in the range of 0.07% to 0.10% per annum of the net assets at the
Investee level, but such rate may be exceeded under certain circumstances,
subject to a maximum of approximately 0.20%. Prior to January 1, 2005, the
Company paid 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 three months ended March
31, 2005 and 2004, the administration fee charged at the Investee level by
GS HFS totaled $148,849, and $486,243 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.
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 AND OTHER FINANCIAL INSTRUMENTS
- -------------------------------------------------------------
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 March 31, 2005 and December 31, 2004.
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 March 31, 2005 and December 31, 2004.
NOTE 7 - BORROWING FACILITY
- ---------------------------
The Company had 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
effective interest rate on borrowed amounts represented by funds drawn from
the collateral account was the London Interbank Offering Rate ("LIBOR"),
plus 0.875%. The Company also paid the equivalent of a commitment fee of
0.25% on the undrawn funds. This facility expired in October 2004.
On November 24, 2004, the Company entered into a five year 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 $4.0 and $3.0 million at March 31, 2005 and December
31, 2004, respectively, 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 March 31, 2005, the Company had 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, 2005, Class
A Series 2 through Class A Series 8 units were converted into Class A
Series 1 units. Transactions in units for non-managing members for the
three months ended March 31, 2005 and the year ended December 31, 2004 are
as follows:
Three months ended March 31, 2005 Year ended December 31, 2004
-------------------------------------- -----------------------------------
Units Amount Units Amount
--------------- ----------------- ---------------- --------------
Share Class Conversion
Class A
Series 1 911,205.28 $ 109,573,710 4,493,143.70 $ 512,003,655
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)
---------------- ------------------ ---------------- ----------------
Total (144,688.21) $ (350,724.93) $ -
================ ================== ================ ================
Subscriptions
Class A
Series 1 - $ - 182,499.95 $ 20,796,273
Series 2 - - 687.41 68,741
Series 3 - - 83,221.74 8,322,174
Series 4 - - 12,734.34 1,273,434
Series 5 - - 17,500.00 1,750,000
Series 6 - - 298,400.00 29,840,000
Series 7 - - 412,100.00 41,210,000
Series 8 - - 231,250.00 23,125,000
Series 9 244,566.36 24,456,636 - -
Series 10 546,895.41 54,689,541 - -
Series 11 313,250.00 31,325,000 - -
---------------- ------------------ ---------------- ----------------
Total 1,104,711.77 $ 110,471,177 1,238,393.44 $ 126,385,622
================ ================== ================ ================
Redemptions
Class A
Series 1 - $ - 1,321,377.58 $ 157,329,006
---------------- ------------------ ---------------- ----------------
Total - $ 1,321,377.58 $ 157,329,006
================ ================== ================ ================
At March 31, 2005 and December 31, 2004, members' equity consists of the
following:
March 31, 2005 December 31, 2004
----------------------------------- ---------------------------------
Units Net Units Net
outstanding asset value outstanding asset value
-------------- ----------------- -------------- ---------------
Non-managing members
Class A
Series 1 7,962,115.13 $ 956,304,065 7,050,909.85 $ 847,881,523
Series 2 - - 687.41 71,818
Series 3 - - 83,221.74 8,734,155
Series 4 - - 12,734.34 1,346,355
Series 5 - - 17,500.00 1,850,110
Series 6 - - 298,400.00 31,325,187
Series 7 - - 412,100.00 42,863,013
Series 8 - - 231,250.00 23,383,072
Series 9 244,566.36 24,427,231 - -
Series 10 546,895.41 54,939,715 - -
Series 11 313,250.00 31,145,418 - -
-------------- ----------------- -------------- ---------------
Subtotal 9,066,826.90 $1,066,816,429 8,106,803.34 $ 957,455,233
============== ==============
Managing member 13,167 -
----------------- ---------------
Total members' equity $1,066,829,596 $ 957,455,233
================= ===============
NOTE 9 - FINANCIAL HIGHLIGHTS
- -----------------------------
Financial highlights for the Company for the three months ended March 31,
2005 are as follows:
Class A Class A Class A Class A
Series 1 Series 9 Series 10 Series 11
---------- ---------- ----------- -----------
Per unit operating performance:
Net asset value, beginning of period $ 120.25 $ 100.00 $ 100.00 $ 100.00
Income from operations:
Net trading profit/(loss) 0.25 0.19 0.70 (0.46)
Net investment income/(loss) (0.39) (0.31) (0.24) (0.11)
---------- ---------- ----------- -----------
Total income/(loss) from operations (0.14) (0.12) 0.46 (0.57)
---------- ---------- ----------- -----------
Net asset value, end of period $ 120.11 $ 99.88 $ 100.46 $ 99.43
========== ========== =========== ===========
Ratios to average net assets (annualized):
Expenses 1.27% 1.27% 1.27% 1.26%
Incentive allocation 0.00% 0.00% 0.02% 0.00%
---------- ---------- ----------- -----------
Total expenses and incentive
allocation 1.27% 1.27% 1.29% 1.26%
========== ========== =========== ===========
Net investment income/(loss) (1.26%) (1.26%) (1.29%) (1.26%)
========== =========== =========== ===========
Total return (prior to incentive allocation) (0.12%) (0.12%) 0.48% (0.57%)
Incentive allocation (0.00%) (0.00%) (0.02%) (0.00%)
---------- ---------- ----------- -----------
Total return (0.12%) (0.12%) 0.46% (0.57%)
========== =========== =========== ===========
Financial highlights for the Company for the three months ended March 31,
2004 are as follows:
Class A Class A
Series 1 Series 2
---------- ----------
Per unit operating performance:
Net asset value, beginning of period $ 113.95 $ 100.00
Income from operations:
Net trading profit/(loss) 3.71 2.07
Net investment income/(loss) (0.61) (0.39)
---------- ----------
Total income/(loss) from operations 3.10 1.68
---------- ----------
Net asset value, end of period $ 117.05 $ 101.68
========== ==========
Ratios to average net assets (annualized):
Expenses 1.43% 1.50%
Incentive allocation 0.14% 0.09%
---------- ----------
Total expenses and incentive 1.57% 1.59%
allocation ========== ==========
Net investment income/(loss) (1.57%) (1.59%)
========== ==========
Total return (prior to incentive allocation) 2.86% 1.77%
Incentive allocation (0.14%) (0.09%)
---------- ----------
Total return 2.72% 1.68%
========== ==========
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 EVENT
- --------------------------
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements of Goldman Sachs Hedge Fund Partners, LLC (the
"Company") and the related notes thereto.
OVERVIEW
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. Goldman Sachs Hedge Fund Strategies LLC, a Delaware limited liability
company, serves as the Company's managing member (the "Managing Member").
As of March 31, 2005, the Company had total assets of $1,072,442,288
compared with total assets of $1,093,172,149 as of December 31, 2004.
Liabilities of the Company totaled $5,612,692 as of March 31, 2005 compared
with $135,716,916 as of December 31, 2004. Member's equity of the Company
was $1,066,829,596 as of March 31, 2005 compared with $957,455,233 as of
December 31, 2004.
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 (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 equity long/short sector, the event driven sector, the relative value
sector, and the tactical trading sector. Currently, substantially all of
the Company's assets are invested in four Investment Funds: 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").
Performance of the Company in any period will be dependent upon the
performance by the four Investment Funds and the 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 ability of the Managing Member,
including in its capacity as managing member of each of the Investment
Funds, to recognize and capitalize on trends and other profit and
investment opportunities within the four investment sectors. Unlike many
operating businesses, general economic or seasonal conditions may not have
any direct effect on the profit potential of the 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 FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
The following presents a summary of the operations for the three
months ended March 31, 2005 and for the three months ended March 31, 2004,
and a general discussion of each Investment Fund's performance during those
periods.
PERFORMANCE FOR THE THREE MONTHS ENDED MARCH 31, 2005
The Company's net trading profit/loss for the three months ended March
31, 2005 was $2,165,716 compared to the three month period ended March 31,
2004 of $30,827,165.
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. 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 the best in the future. As
of March 31, 2005, the Company had the following exposures:
- ---------------------- ------------------------- ----------------------
PORTFOLIO WEIGHT THREE MONTHS ENDED
AS A % OF MARCH 31, 2005
INVESTMENT FUND MEMBERS' EQUITY NET RETURN (1)
- ---------------------- ------------------------- ----------------------
GELS 20.16% 1.14%
- ---------------------- ------------------------- ----------------------
GED 24.51% 1.90%
- ---------------------- ------------------------- ----------------------
GRV 33.22% 0.58%
- ---------------------- ------------------------- ----------------------
GTT 22.62% (2.90)%
- ---------------------- ------------------------- ----------------------
(1) 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 three months ended March 31, 2005, the Company's Class A
Series 1 Units returned (0.12)% net of fees and incentive allocation.
THE INVESTMENT FUNDS
Each of the four Investment Funds' performance during the three months
ended March 31, 2005 is described in the following.
GOLDMAN SACHS GLOBAL EQUITY LONG/SHORT, LLC
As of March 31, 2005, GELS represented approximately 20% of members'
equity which was generally consistent with the strategic weight set by the
Managing Member for GELS as of July 1, 2004. For further description of the
adjustment to the weights implemented as of July 1, 2004, see "Item 3.
Quantitative and Qualitative Disclosure about Market Risk--Risk
Management." GELS returned 1.14% for Class C Series 1 units for the three
months ended March 31, 2005.
The first quarter of 2005 was mixed for global equity markets, with
the MSCI World Index down 1.10%. U.S. equities were the weakest of the
major developed markets; for the quarter, the S&P 500 finished down 2.15%
while the MSCI Europe hedged to U.S. dollars rose 3.36%, and the Nikkei 225
Index finished down 1.86%. Asian markets were mixed; Hong Kong, India, and
Taiwan finished the quarter lower, while Korea's KOSPI Index returned 7.8%.
In the U.S., small capitalization stocks underperformed, with the
Russell 1000 Index and Russell 2000 Index down 1.91% and 5.34%,
respectively. Value stocks underperformed growth stocks in the quarter,
with the value components of the Russell 1000 Index outperforming the
growth components by over 380 basis points. Technology stocks were weak as
shown by the NASDAQ's 8.1% loss for the quarter. Energy stocks were among
the best performers, buoyed by record high oil prices.
The European equity markets made the most gains among developed world
countries in local currency terms, despite a continued sluggish economic
outlook for much of the eurozone. The three major regional indices, the
FTSE 100, the French CAC, and the German DAX, finished the quarter up 1.7%,
6.5%, and 2.2%, respectively.
In Japan, equity markets rose modestly, with small capitalization
stocks outperforming as shown by the JASDAQ's return of 5.92%. Overall,
Japanese equities approached 52-week highs in March 2005, before retreating
slightly in the last two weeks of the quarter.
Approximately half of GELS' net exposure is outside the U.S. with
Europe and Asia comprising the majority of the Fund's non-U.S. exposure.
Non-U.S. Advisors were generally the biggest contributors to the Fund's
performance in the quarter, although the majority of the Fund's Advisors
ended the quarter in positive territory.
GOLDMAN SACHS GLOBAL EVENT DRIVEN, LLC
As of March 31, 2005, GED represented approximately 25% of members'
equity which was generally consistent with the strategic weight set by the
Managing Member for GED as of July 1, 2004. For further description of the
adjustment to the weights implemented as of July 1, 2004, see "Item 3.
Quantitative and Qualitative Disclosure about Market Risk--Risk
Management." GED returned 1.90% for Class C Series 1 units for the three
ended March 31, 2005.
GED Advisors were profitable across all strategies during the first
quarter, which was generally choppy and difficult for both the equity and
fixed income markets. Advisors benefited notably from the short positions
held by many of our credit-focused managers, as well as European and other
non-U.S. exposure.
High yield credit spreads widened by 42 basis points, ending the
quarter at 352 basis points over Treasuries. High yield spreads were
affected late in the quarter by a number of events: the Federal Reserve's
decision to raise short-term interest rates, high yield mutual fund
outflows, and negative earnings guidance from GM, the world's largest auto
maker. Higher quality credits generally outperformed lower quality credits
over the course of the first quarter. GED Advisors were able to profit on
both the long and short side of their portfolios.
Global mergers and acquisitions volumes for the first quarter of 2005
totaled $583 billion, an 18% increase over last year's first quarter
activity. GED Advisors employing risk arbitrage strategies had exposure to
several significant deals.
Credit opportunities/distressed strategies returned 1.89% and
contributed 0.71% to GED's net income for the three months ended March 31,
2005. Multi strategies returned 1.84% and contributed 0.99% to GED's net
income for the three months ended March 31, 2005. Risk arbitrage/special
situations strategies returned 2.82% and contributed 0.24% to GED's net
income for the three months ended March 31, 2005.
GOLDMAN SACHS GLOBAL RELATIVE VALUE, LLC
As of March 31, 2005, GRV represented approximately 33% of members'
equity which was generally consistent with the strategic weight set by the
Managing Member for GRV as of July 1, 2004. For further description of the
adjustment to the weights implemented as of July 1, 2004, see "Item 3.
Quantitative and Qualitative Disclosure about Market Risk--Risk
Management." GRV returned 0.58% for Class C Series 1 units for the three
ended March 31, 2005.
Convertible bond arbitrage strategies generated negative returns in
the first quarter of 2005, as convertible bond valuations decreased. The
macro environment for convertible bond arbitrage funds was challenging due
to decreasing implied volatilities from the already persistent low levels,
investor sentiment reflecting fear of significant redemptions in the
convertible bond arbitrage space, and certain company specific events. The
Goldman Sachs US Convertible Hedge Fund Index was down 3.7% for the
quarter, while the Goldman Sachs European Convertible Hedge Fund Index was
down 2.2%. The Chicago Board Options Exchange volatility index or VIX Index
(a measure of short term implied volatility) was range-bound between 11.1
and 14.7 for the period. As a result, most GRV Advisors trading convertible
arbitrage strategies suffered losses for the quarter.
Equity market neutral Advisors experienced a good first quarter in
2005 and were among GRV's best performing Advisors, despite a difficult
equity market environment. Strong performance is attributed to the fact
that the quarter saw a return to fundamental equity quality, as well as the
fact that certain key model factors, including traditional value and
momentum measures, worked well for GRV Advisors.
Fixed income trading Advisors also experienced a good first quarter
with the majority of GRV Advisors generating positive returns. The US
Treasury market witnessed a rise in the 10-year bond from a yield level of
4.22% to 4.48%. In addition to higher absolute yields, the yield curve
flattened, volatility and convexity increased, and the risk premium
increased, all of which were reflected in wider credit spreads. Swap
spreads also widened during the quarter. GRV's best performing Advisor in
the fixed income trading category was able to take advantage of the yield
curve flattening, while others profited specifically from the widening of
swap spreads.
Credit relative value Advisors delivered mixed results, although as a
group attributed positive returns to GRV. Both investment grade and high
yield corporate bond spreads widened on the quarter, a move from which some
GRV Advisors with moderately bearish positioning benefited. Credit curve
and basis trades also worked well for the more technically oriented GRV
Advisors. Fundamental credit Advisors experienced the most difficulty
during the first quarter.
Emerging market relative value Advisors also experienced mixed
performance during the first quarter of 2005, although their contribution
as a group was positive. Two Advisors were down for the quarter as a
function of the market sell-off, while one Advisor was up as a result of
successful basis trades.
Multi-strategy Advisors also had mixed results for the quarter,
although as a group they were positive. The major difference in performance
between GRV Advisors in this category was related to how much capital an
Advisor had allocated to convertible bond arbitrage strategies; the more
allocated, the greater the likelihood of negative performance.
Convertible Arbitrage strategies returned -3.04% and contributed
- -0.11% to GRV's net income. Credit Relative Value strategies returned 0.63%
and contributed 0.07% to GRV's net income. Emerging Markets Relative Value
strategies returned 0.55% and contributed 0.03% to GRV's net income. Equity
Market Neutral strategies returned 2.00% and contributed 0.18% to GRV's net
income. Fixed Income Arbitrage strategies returned 1.04% and contributed
0.17% to GRV's net income. Multi-strategies returned 0.70% and contributed
0.33% to GRV's net income for the three months ended March 31, 2005.
GOLDMAN SACHS GLOBAL TACTICAL TRADING, LLC
As of March 31, 2005, GTT represented approximately 23% of members'
equity which was generally consistent with the strategic weight set by the
Managing Member for GTT as of July 1, 2004. For further description of the
adjustment to the weights implemented as of July 1, 2004, see "Item 3.
Quantitative and Qualitative Disclosure about Market Risk--Risk
Management." GTT returned negative 2.90% for Class C Series 1 units for the
three months ended March 31, 2005.
The first quarter of 2005 proved to be a challenging period for GTT
Advisors. The year began with a sharp reversal of many of the trends that
dominated the end of the previous year and was followed by directionless
trading across most markets, creating a difficult environment for Advisors.
After weakening during much of the fourth quarter of 2004, the US
dollar rose sharply early in the first quarter of 2005. The dollar then
resumed its decline midway through the quarter on news of a
wider-than-expected trade deficit and speculation that the European Central
Bank would increase interest rates in response to signs of inflation.
However, the dollar reversed sharply yet again in mid-March in reaction to
a statement from the Hong Kong Monetary Authority Chief Executive urging
fellow Asian monetary officials to slow their Euro purchases to avoid a
potential run on the dollar. Comments by the Federal Open Market Committee
later in March, expressing concern about growing inflation, led to
speculation of potentially aggressive rate hikes, further contributing to
the dollar rally. As a result of this choppiness, currency trading was a
net detractor to GTT performance for the quarter.
Like the dollar, equity markets experienced sharp reversals and
generally range-bound trading during the quarter. Stocks quickly came under
pressure in January 2005 as a result of rising oil prices. In February,
increased corporate activity, lower oil prices, and easing concerns of
inflation led to a rally that pushed global indices to multi-year highs in
March. However, weak earnings data and the resumption of rising energy
markets, led markets to change direction once again at the end of the
quarter. These swings proved challenging for GTT Advisors and led to losses
in equity index trading for the quarter.
GTT Advisors finished the quarter with profits in fixed income. The
main driver of returns was short positions on the front-end of the US
curve, as short-term yields rose on expectations of accelerated interest
rate hikes by the Federal Reserve.
Commodities were the largest contributor to GTT performance for the
first quarter, led by profits in energy trading. Oil prices rose for much
of the quarter as a result of unseasonably cold weather in the US,
increased Chinese demand, and higher consumption estimates.
PERFORMANCE FOR THE THREE MONTHS ENDED MARCH 31, 2004
The Company's net trading profit for the three months ended March 31,
2004 was $30,827,165.
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 three months of 2004, the Company allocated its
assets on a roughly equivalent risk-weighted basis to each of the four
hedge fund sectors. Despite stagnant job growth, weakened consumer
confidence, and increased geopolitical tensions, all sectors posted
positive returns in the first quarter. Profits were driven, in many cases,
by profits from short sales as well as from long positions of Advisors'
portfolios. The Company cannot predict which hedge fund sector and
accordingly which Investment Fund will perform best in the future. As of
March 31, 2004, the Company had the following exposures:
- ---------------------- ---------------------- ---------------------------
PORTFOLIO WEIGHT THREE MONTHS ENDED
AS A % OF MARCH 31, 2004
INVESTMENT FUND MEMBERS' EQUITY NET RETURN (1)
- ---------------------- ---------------------- ---------------------------
GELS 14.55% 3.38%
- ---------------------- ---------------------- ---------------------------
GED 22.16% 3.93%
- ---------------------- ---------------------- ---------------------------
GRV 38.01% 2.27%
- ---------------------- ---------------------- ---------------------------
GTT 27.39% 4.02%
- ---------------------- ---------------------- ---------------------------
(1) 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 three months ended March 31, 2004, the Company returned 2.72% net
of fees and incentive allocation for Class A Series 1 Units.
THE INVESTMENT FUNDS
Each of the four Investment Funds' performance during the three months
ended March 31, 2004 is described in the following.
GOLDMAN SACHS GLOBAL EQUITY LONG/SHORT, LLC
As of March 31, 2004, GELS represented approximately 15% of the
Company's members' equity which was generally consistent with the weighting
of GELS as part of the Company throughout the three months ended March 31,
2004. GELS returned 3.38% for Class C Series 1 units for the three months
ended March 31, 2004.
The first quarter of 2004 was choppy yet directionally positive for
global equity markets, with the S&P 500 Index up 1.7%, MSCI Europe hedged
to U.S. dollars up 0.69%, and the Nikkei 225 Index up 13.22%.
For the quarter, the S&P 500 Index finished down in 31 trading days
out of 62, or in half of the quarter's trading sessions, with an average up
day of 0.63% and an average down day of (0.59)%. Small capitalization
stocks continued to outperform, with the Russell 1000 Index and Russell
2000 Index up 1.9% and 6.3%, respectively; value stocks generally
outperformed growth stocks in the quarter, with the value components of the
Russell 1000 Index outperforming the growth components by over 220 basis
points.
Macroeconomic news was mixed in the quarter, while increased
geopolitical tensions dampened investor enthusiasm for equities. Equity
markets opened the quarter and year very strongly until January 28, when
the Federal Reserve's Open Market Committee eliminated the "Considerable
Period" low interest rate language and replaced it with "being patient" on
raising interest rates; in the final three trading days of January, most
equity markets declined by approximately half of their then month to date
gains. February brought weakened consumer confidence and continued stagnant
job growth. Investors also began to focus on the continued pickup in
corporate deal activity. March brought geopolitical risk to the forefront
with the terrorist bombings in Spain, the discovery of a bomb plot in
London, the impeachment of South Korea's president, and an attempted
assassination and disputed election in Taiwan. A weak jobs report released
in early March raised concerns about the breadth of the US economic
expansion and its potential impact on consumer confidence and spending;
continued strength in energy prices fueled these concerns.
The Japanese equity markets made the most gains among developed world
countries. Japanese equities benefited from a combination of stabilizing
real estate prices, growing confidence that deflation within the broader
economy had been tamed, ongoing corporate restructuring and balance sheet
de-leveraging, and growing exports to China.
GELS Advisors generally performed well in the first quarter, with many
keeping pace or generally outperforming the equity indices. Importantly,
many GELS Advisors produced positive returns from both the long and short
side of their portfolios; profits from the short side had been elusive in
the previous three quarters, as the majority of stocks rallied strongly in
the March-December period of 2003. The outperformance of value versus
growth mentioned above also benefited GELS Advisors that favor lower valued
stocks on the long side.
GOLDMAN SACHS GLOBAL EVENT DRIVEN, LLC
As of March 31, 2004, GED represented approximately 22% of the
Company's members' equity which was generally consistent with the weighting
of GED as part of the Company throughout the three months ended March 31,
2004. GED returned 3.93% for Class C Series 1 units for the three months
ended March 31, 2004.
The first quarter of 2004 was somewhat choppy, but still generated
positive returns for the global equity markets. For most of the quarter,
implied equity volatility traded in the relatively low range of 14 to 18 as
indicated by the VIX with the exception of the temporary spike in March
largely due to the tragic terrorist event in Madrid.
The distressed and high yield markets had a decent quarter from a
performance standpoint even though high yield credit spreads slightly
widened over Treasuries. As opposed to the broad high yield rally witnessed
since the end of October 2002, Advisors increasingly were rewarded for
picking the "right" credit. High yield mutual fund flow was net negative
for the quarter by approximately $1.4 billion. Much of the outflow took
place in February as demand for high yield paper plummeted. During the
first quarter, the total deal volume in the high yield new issue market
stands at about $40 billion, with a healthy $9 billion backlog at the end
of the quarter.
Global mergers and acquisitions volume for the quarter totaled $538
billion, an increase of 132% compared to last year's first quarter activity
of $232 billion. Spin-off activity for the quarter was also solid.
Credit opportunities/distressed strategies returned 4.75% and
contributed 1.62% to GED's net income for the three months ended March 31,
2004. Multi strategies returned 4.12% and contributed 2.00% to GED's net
income for the three months ended March 31, 2004. Risk arbitrage/special
situations strategies returned 2.89% and contributed .48% to GED's net
income for the three months ended March 31, 2004.
GOLDMAN SACHS GLOBAL RELATIVE VALUE, LLC
As of March 31, 2004, GRV represented approximately 38% of the
Company's members' equity which was generally consistent with the weighting
of GRV as part of the Company throughout the three months ended March 31,
2004. GRV returned 2.27% for Class C Series 1 units for the three months
ended March 31, 2004.
Convertible bond arbitrage strategies generated positive returns in
the first quarter, as bond valuations across the globe increased gradually.
The macro environment for convertible bond arbitrage funds was challenging,
and while many GRV Advisors reduced their expectations going-forward due to
a perceived richness in the market over 2003, they were nonetheless able to
produce good results in the first quarter of 2004. The bullish trend in
credit finally ended as credit spreads (i.e. the difference in yield
between a high yield bond and the corresponding government bond) ceased
tightening and actually widened a bit over the quarter, with the indicative
Goldman Sachs 150 Index widening from 104 to 110. At the same time,
volatility remained low for most of the quarter, with the Chicago Board
Options Exchange volatility index or VIX Index range-bound between 15 and
18 for most of the period until a brief spike to 22 during March. Most GRV
Advisors have shifted the exposures in their portfolios away from the
credit risks they took in 2003 and towards more volatility bets and
special-situations/capital structure trades. The market's richness going
into the quarter was reflected in strong appetite for new convertible bond
issuance. With one-third of the global convertible market due to be
refinanced during 2004, new-issuances became highly anticipated but has
thus far not had the volumes that had been expected. Despite this lack of
supply, and an already rich valuation of the overall market, convertible
arbitrage funds continued to raise assets.
Fixed income arbitrage Advisors had a good first quarter, as the
interest rate markets saw significant trading activity in accordance with
the expected health of the US economy. Despite a strong GDP growth number
in the fourth quarter of 2003, investors were concerned over a barrage of
negative economic indicators in 2004, in particular weak jobs figures, and
investors concluded that the Federal Reserve Board was unlikely to raise
rates in the near future while the recovery was still shaky. Interest-rates
experienced a downward trend during all three months, with the 10-year
benchmark yield dropping from 4.3% to 3.8% for the quarter. During this
time, the implied volatility in the market (as indicated by the MOVE Index)
fluctuated in accordance with the market's directional uncertainty. The
index, which reflects annual expected up or down moves in interest rates,
reached quarterly highs both at the end of January and during March and was
a reflection of increased uncertainty concerning the US economic recovery
during the relevant period. Overall, increased volatility is a good
indicator of future opportunities for GRV's fixed income Advisors, as new
trades and entry points become available during volatile times. Many GRV
Advisors saw their portfolio leverage decline, as they await good
opportunities to which they can allocate capital.
Quantitative equity Advisors began to see a reversal in the trend of
2003, as the average Advisor posted a positive first quarter in 2004. The
equity markets continued to rise for most of the quarter, and investors
seemed to refocus on company fundamentals. This reversal of the prior
period's relative increase in prices of stocks of companies with low
valuations which previously hurt quantitative fundamentals-based Advisors,
proved to positively impact results of some Advisors. Value driven Advisors
outperformed momentum driven Advisors for the quarter, and GRV Advisors
performance depended heavily on their relative weightings of the factors in
their long and short portfolios. On the statistical-arbitrage front,
Advisors have been able to produce good performance in international
markets, as markets which are less developed in terms of sophistication
seemed to offer more opportunities for these systems. Overall, the majority
of Advisors are diverting capital away from trading strategies based upon
models predicting reversion of stock price of U.S. companies to their mean
and into longer-term fundamentals-based models.
Convertible arbitrage strategies returned 1.33% and contributed 0.19%
to GRV's net income for the three months ended March 31, 2004. Credit
Relative Value strategies returned 2.81% and contributed 0.12% to GRV's net
income for the three months ended March 31, 2004. Equity market neutral
strategies returned 1.68% and contributed 0.35% to GRV's net income for the
three months ended March 31, 2004. Fixed income arbitrage strategies
returned 1.76% and contributed 0.33% to GRV's net income for the three
months ended March 31, 2004. Multi-strategies returned 3.37% and
contributed 1.39% to GRV's net income for the three months ended March 31,
2004.
GOLDMAN SACHS GLOBAL TACTICAL TRADING, LLC
As of March 31, 2004, GTT represented approximately 27% of the
Company's members' equity which was generally consistent with the weighting
of GTT as part of the Company throughout the three months ended March 31,
2004. GTT returned 4.02% for Class C Series 1 units for the three months
ended March 31, 2004.
In the first three months of 2004, commodities continued their bullish
trend, contributing the majority of the tactical trading profits for the
quarter. Within commodities, the agricultural markets, specifically the soy
complex, proved to be the largest driver of returns. GTT Advisors also held
profitable positions in base and precious metals.
In fixed income, long bond positions in the US and Europe survived
some significant volatility in the aftermath of the Federal Reserve Board's
announcement in late January, and proved overall profitable for the
quarter. Weak economic reports reduced expectations of an early rate hike
by the Federal Reserve.
Currencies experienced more mixed performance for the period,
contributing slightly negative to fund performance. Volatility was
particularly notable for the Japanese yen. Intervention by the Bank of
Japan led to a sharp rise of the U.S. dollar against the Japanese yen until
the middle of March. At this point, intervention ceased suddenly and the
U.S. dollar declined from 112 Japanese yen to the U.S. dollar to 104
Japanese yen to the U.S. dollar. Similarly, the euro rally of late 2003
finally stalled in January and started to reverse.
Global equity markets continued to rally for most of January and
February. However, the pull-back for European and US equities in March
erased most of the gains previously made in the quarter. In contrast, long
positions in Asian equities were generally profitable throughout the
quarter.
COMPARISON OF SELECTED FINANCIAL INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 2005 AND 2004
INTEREST INCOME
Interest income for the three months ended March 31, 2005 was $18,591
compared to the three months ended March 31, 2004 of $286,354. The
Company's interest income fluctuates with the level of cash available to
invest. The decrease in interest income for the three months ended March
31, 2005 as compared to the three months ended March 31, 2004 primarily
relates to the structure of the current credit facility which, unlike the
Company's previous credit facility, does not require the Company to
redeposit cash received from the credit facility into an interest bearing
collateral account, but instead allows the Company to borrow as requested.
EXPENSES
The Management Fee for the three months ended March 31, 2005 was
$3,216,389 compared to the three months ended March 31, 2004 of $3,049,319.
Because the Management Fee is calculated as a percentage of the Company's
net assets as of each month end, the increase in the expense was due to the
increase in the Company's members' equity for the periods ended March 31,
2005 compared to the same periods in 2004.
Interest expense for the three months ended March 31, 2005 was $32,233
compared to the three months ended March 31, 2004 of $321,272. The interest
expense relates to the terms of the borrowing facility that was outstanding
during the periods ended March 31, 2005 and 2004.
Professional fees and miscellaneous expenses for the three months
ended March 31, 2005 were $32,499 compared to the three months ended March
31, 2004 of $428,217. The decrease in professional fees and miscellaneous
expenses for the periods ended March 31, 2005 was primarily due to
additional services rendered by the Company's legal providers in the prior
period related to the registration with the SEC.
INCENTIVE ALLOCATION
The Incentive Allocation for the three months ended March 31, 2005 was
$13,167 compared to the three months ended March 31, 2004 of $1,365,736.
The change in Incentive Allocation is due to the decrease in new
appreciation, as defined, 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 March 31, 2005. 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
$110,471,177 during the three months ended March 31, 2005 and of
$20,865,014 during the three months ended March 31, 2004.
The Company paid out redemptions of $128,546,636 during three the
months ended March 31, 2005 and $34,529,625 during the three months ended
March 31, 2004, which were previously reported in the Company's Annual
Report on Form 10-K for the year ended December 31, 2004 (the "Form 10-K")
and in its Form 10 Registration Statement.
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 a major financial
institution (the "Old Facility Counterparty"). The facility was structured
as a call spread option that had been issued by the Company to the Old
Facility Counterparty. Under the terms of the facility, the Company
received cash and redeposited the amount with the Old 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. In February 2004, the size of the facility was
reduced to $20,000,000 and in October 2004 the facility expired. On
November 24, 2004, the Company entered into a five year credit facility
with a new financial institution (the "New Facility Counterparty"). The
Company made an initial borrowing of $1,000,000 under this facility.
Subject to rejection by the New Facility Counterparty, the Company may
request to borrow up to $45,000,000 in the aggregate. At the time of any
borrowing, the aggregate amounts borrowed, however, 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 the London Interbank Offered
Rate ("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 $45,000,000. 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 $4,027,608 at March 31, 2005 and $3,000,000 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 removed by the
Company, (v) if the administrator (which currently is GS HFS), custodian or
auditor resigns or is removed 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 March 31, 2005, the Company had Cash and cash equivalents on
hand of $163,220. As of December 31, 2004, the Company had Cash and cash
equivalents on hand of $218,797.
Investments as of March 31, 2005 were $1,072,279,068 as compared to
$1,092,953,352 as of December 31, 2004. The decrease was due to net losses
to the Company and net redemptions made by the Company to the Investment
Funds during the three months ended March 31, 2005.
Due to managing member represents the management fees due to the
Managing Member. Due to managing member as of March 31, 2005 was $1,066,198
as compared to $3,247,774 as of December 31, 2004. 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 more fully described in the Company's Form 10-K.
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 3. 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 March
31, 2005 and as of December 31, 2004, as indicated by the Fair Value/Value
at Risk column, and the net income from January 1, 2005 to March 31, 2005
and from January 1, 2004 to December 31, 2004. 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.
QUARTER ENDED
MARCH 31, 2005
-----------------------------------------------------------------
% OF FAIR NET TRADING
INVESTMENT MEMBERS' VALUE/VALUE PROFIT/LOSS
FUND EQUITY AT RISK (IN MILLIONS) LIQUIDITY
---- ------ ------- ------------- ---------
GELS 20.16% $215,085,733 $2.3 (2)
GED 24.51% $261,423,862 $4.7 (1)
GRV 33.22% $354,415,113 $2.0 (4)
GTT 22.62% $241,354,360 $(6.8) (3)
---------- -------------- ------
TOTAL 100.51%(5) $1,072,279,068 $2.2
========== ============== ============
YEAR ENDED
DECEMBER 31, 2004
---------------------------------------------------------------------
% OF % OF ADJUSTED NET TRADING
INVESTMENT MEMBERS' MEMBERS' FAIR VALUE/VALUE PROFIT
FUND EQUITY EQUITY (6) AT RISK (IN MILLIONS) LIQUIDITY
---- ------ ---------- ------- ------------- ---------
GELS 23.63% 20.84% $226,276,134 $17.7 (2)
GED 28.01% 24.69% $268,186,702 $27.9 (1)
GRV 36.60% 32.27% $350,409,379 $17.9 (4)
GTT 25.91% 22.84% $248,081,137 $8.5 (3)
------------ ------------ --------------- -------
TOTAL 114.15%(5) 100.64%(5) $1,092,953,352 $72.0
============ ============ ================ ========
(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 as of December 31, 2004 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.
RISK MANAGEMENT
In the ordinary course of business, the Managing Member, including in
its capacity as managing member of the Investment Funds, attempts to manage
a variety of risks, including market, credit and operational risk. The
Managing Member, including in its capacity as the managing member of the
Investment Funds, attempts to identify, measure and monitor risk through
various mechanisms including risk management strategies and credit
policies. These include monitoring risk guidelines and diversifying
exposures across a variety of instruments, markets and counterparties.
Market risk is the risk of potential significant adverse changes to
the value of financial instruments because of changes in market conditions
such as interest rates, foreign exchange rates, equity prices, credit
spreads, liquidity and volatility in commodity or security prices. The
Managing Member including in its capacity as managing member of the
Investment Funds monitors its exposure to market risk at both the Advisor
and portfolio level through various analytical techniques. At the Advisor
level, market risk is monitored on a regular basis. Where position level
detail is available, the Managing Member including in its capacity as
managing member of the Investment Funds monitors its exposure to market
risk through a variety of analytical techniques, including Value-at-Risk
("VaR") and scenario analysis (stress testing). VaR is calculated by a
Monte Carlo simulation using a 99.9% confidence level and a 240-day look
back period. Where position level detail is unavailable, an Investment Fund
relies on risk reports provided by the Advisors as well as through open
communication channels with Advisors, which includes site visits and
monthly conference calls.
The managing member of the Investment Funds monitors Advisors to
prevent style drift. "Style drift" is defined as Advisors changing their
investment style from the Investment Fund's expectations. Where position
level detail is available, the managing member of the Investment Funds
monitors leverage against predetermined limits. Positions sizing limits are
also monitored to ensure Advisors are properly diversified and risk
normally is not concentrated in one or relatively few positions. In some
cases, the managing member of the Investment Funds also has the ability to
monitor approved trading instruments to ensure Advisors are not trading
securities outside their mandate. Where position level detail is not
available, the managing member of the Investment Funds relies on both
written and oral Advisor communications. The risks involved are described
in the Company's Form 10-K.
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 March 31, 2005, 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 20% GELS, 25% GED, 33% GRV and 23% GTT as of March
31, 2005 as a percentage of members' equity. This portfolio construction
process is designed to create a diversified hedge fund portfolio with
attractive return and risk characteristics.
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 4. 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 most recent fiscal quarter that have materially
affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
From January 1, 2005 to March 31, 2005, aggregate subscriptions
totaled $110,471,177. Details of the sale of the series of Units are as
follows:
--------------------- -------------- -------------- --------------- --------------------
CLASS AND TOTAL
SERIES OF NUMBER OF NUMBER OF SUBSCRIPTION
DATE OF SALE UNITS UNITS SOLD INVESTORS AMOUNT
--------------------- -------------- -------------- --------------- --------------------
January 1, 2005 Class A 244,566.36 40 $24,456,636
Series 9
--------------------- -------------- -------------- --------------- --------------------
February 1, 2005 Class A 546,895.41 50 $54,689,541
Series 10
--------------------- -------------- -------------- --------------- --------------------
March 1, 2005 Class A 313,250.00 35 $31,325,000
Series 11
--------------------- -------------- -------------- --------------- --------------------
Total 1,104,711.77 125 $110,471,177
---------------------- -------------- -------------- --------------- --------------------
The Units were sold at $100.00 per Unit. The sale was not subject to
any underwriting discount or commission. The Units were privately offered
and sold to accredited investors pursuant to Rule 506 of Regulation D and
the sales were exempt from registration under the Securities Act of 1933.
Pursuant to the 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 paid out redemptions of $128,546,636 during three the
months ended March 31, 2005 which were previously reported in the Company's
Form 10-K.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
This Quarterly Report on Form 10-Q contains certain "forward-looking
statements" regarding the operation of the Company and the Company's
investment objectives, including, among other things:
o investment strategies and allocations of assets;
o future performance; and
o trends in the four hedge fund sectors.
Forward-looking statements are typically identified by the use of
terms such as "may," "will," "should," "expect," "intend," "plan,"
"anticipate," "estimate," "believe," "continue," "predict," "potential" or
the negative of such terms and other comparable terminology. These
statements are only predictions and are not historical facts. Actual events
or results may differ materially.
The forward-looking statements included herein are based on the
Managing Member of the 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
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
investors that the forward-looking statements included in this Quarterly
Report on Form 10-Q will prove to be accurate.
In light of the significant uncertainties inherent in the
forward-looking statements included in this Quarterly Report on Form 10-Q,
the inclusion of such information should not be regarded as a
representation by the Company or the Managing Member that the investment
objectives set forth in this Quarterly Report on Form 10-Q will be
achieved. The Company cautions investors that forward-looking statements
are not guarantees and that the actual results could differ materially from
those expressed or implied in the forward-looking statements.
In addition to the risks identified in our Form 10-K, which is
incorporated herein by reference, the following list indicates some of the
risks which could impact the likelihood that any forward-looking statements
will come true:
o There can be no assurance that the Managing Member's decisions
regarding risk allocations will be successful; inaccurate
information provided by the Advisors may have a material adverse
effect on implementing the Company's investment objective;
o The Managing Member generally has limited access to information
on or control over Advisor's portfolios and Members assume the
risk that Advisors may knowingly misrepresent information which
could have a material negative impact on the Company;
o The Company faces legal, tax and regulatory risks which may
adversely affect the Company;
o Units will not be listed and will not be marketable; the Company
is a closed-end fund with limited liquidity and limited rights
for redemption; substantial redemptions could have a material
adverse effect on the Company;
o The fee structure of the Company, including compensation
arrangements with the Managing Member and the Advisors of the
Investment Funds, may create incentives for the Managing Member,
the Investment Funds or the Advisors to make riskier investments
or to inflate returns;
o Past performance of affiliated funds and of Advisors are not
necessarily indicative of the results that the Company and any
Investment Fund may achieve or of future results;
o Valuation of the Investment Funds' investments will be based upon
valuations provided by the Advisors which are generally not
audited; uncertainties in valuations could have a material
adverse effect on the Company's net assets;
o Frequent trading and turnover typically result in high
transaction costs and the Investment Funds have no control over
this turnover;
o An investment in the Company involves a high degree of risk that
the entire amount invested may be lost; investment results may
vary substantially over time;
o A Member's investment in the Company will be affected by the
investment policies and decisions of Advisors which are outside
the Company's control; the Advisors may be unable to or may
choose not to seek to achieve their investment goals; Advisors
may not be able to locate suitable investment opportunities;
o The ability of an Investment Fund to hedge successfully will
depend on the particular Advisor's ability to predict pertinent
market movements which cannot be assured;
o The prices of an Investment Fund's investments can be highly
volatile and influenced by external factors outside the control
of such Investment Fund;
o International investments may involve special risks not usually
associated with investments in U.S. securities, including higher
risk of financial irregularities and/or lack of appropriate risk
monitoring and controls;
o Equity and equity related instruments may be subject to various
types of risk, including market risk, liquidity risk,
counterparty credit risk, legal risk and operations risk; and
o The issuers of securities acquired by Advisors will sometimes
face a high degree of business and financial risk.
The foregoing list of factors is not exhaustive. You should carefully
consider the foregoing factors and the other uncertainties and potential
events described in the Form 10-K. 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.
ITEM 6. EXHIBITS
(a) Exhibits
Number Description
------ -----------
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as Adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as Adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
(Registrant)
By: Goldman Sachs Hedge Fund
Strategies LLC
Managing Member
Date: May 16, 2005 By: /s/ Tobin V. Levy
--------------------------
Tobin V. Levy
Managing Director and
Chief Financial Officer
INDEX TO EXHIBITS
Number Description
- ------ -----------
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002