Attached files

file filename
EX-31.1 - EX-31.1 - Hedge Fund Managers (Diversified) LLCy82946exv31w1.htm
EX-31.2 - EX-31.2 - Hedge Fund Managers (Diversified) LLCy82946exv31w2.htm
EX-32.1 - EX-32.1 - Hedge Fund Managers (Diversified) LLCy82946exv32w1.htm
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-K
     
(Mark One)
   
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
   
    For the fiscal year ended December 31, 2009
   
or
o
  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: 001-50723
 
 
Goldman Sachs Hedge Fund Partners, LLC
(Exact name of registrant as specified in its charter)
 
     
Delaware
  04-3638229
(State or Other Jurisdiction of
  (I.R.S. Employer
Incorporation or Organization)
  Identification No.)
     
200 West Street
  10282
New York, New York
  (Zip Code)
(Address of Principal Executive Offices)
   
 
(212) 902-1000
(Registrant’s Telephone Number, including Area Code)
 
Securities registered pursuant to Section 12(b) of the Act: None
 
         
    Name of Each Exchange
 
Title of Each Class
  on Which Registered  
 
 
Securities registered pursuant to Section 12(g) of the Act:
 
Units of Limited Liability Company Interests
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer þ
(Do not check if a smaller reporting company)
  Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No þ
 
The Registrant’s Units of Limited Liability Company Interests are not traded on any market and, accordingly, have no aggregate market value. The net asset value of the Units of Limited Liability Company Interests as of June 30, 2009 held by non-affiliates was $586,114,608. The Registrant had 4,959,970 Units of Limited Liability Company Interests outstanding as of March 30, 2010.
 
Documents Incorporated By Reference
 
Certain exhibits are incorporated by reference in ITEM 15 of this report


 

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
NOTES TO FINANCIAL STATEMENTS
December 31, 2009
 
TABLE OF CONTENTS
 
             
        Page
 
       
           
  BUSINESS     3  
  RISK FACTORS     66  
  UNRESOLVED STAFF COMMENTS     112  
  PROPERTIES     112  
  LEGAL PROCEEDINGS     112  
  RESERVED     112  
       
PART II        
           
  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES     113  
  SELECTED FINANCIAL DATA     115  
  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     116  
  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     139  
  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA     143  
  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE     144  
  CONTROLS AND PROCEDURES     144  
  OTHER INFORMATION     145  
       
PART III        
           
  DIRECTORS, EXECUTIVE OFFICERS OF THE MANAGING MEMBER AND REGISTRANT AND CORPORATE GOVERNANCE     146  
  EXECUTIVE COMPENSATION     149  
  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS     149  
  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE     150  
  PRINCIPAL ACCOUNTING FEES AND SERVICES     153  
       
PART IV        
           
  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES     154  
 EX-31.1
 EX-31.2
 EX-32.1


2


Table of Contents

 
PART I
 
ITEM 1.   BUSINESS
 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
Goldman Sachs Hedge Fund Partners, LLC (the “Company”) is a Delaware limited liability company organized in March 2002 to operate as an investment fund. Goldman Sachs Hedge Fund Strategies LLC (“GS HFS”), a Delaware limited liability company that is a wholly-owned subsidiary of the Goldman Sachs Group, Inc., serves as the Company’s managing member (the “Managing Member”). As of December 31, 2009, the Company had net assets of $597,698,035.
 
From its inception, the Company has grown through subscriptions of new investors. While there have been certain periods where the Company has only taken in investments from existing investors and limited subscriptions from new qualified investors, since October 2004, the Company has been accepting additional amounts from new subscriptions and the Company has continued to do so through December 31, 2009. For the period from December 31, 2008 through December 31, 2009, the Company had 124 new investors and approximately $73.9 million of aggregate subscriptions from existing and new investors. The Company may close again at any time without notice at the sole discretion of the Managing Member. The acceptance of future subscriptions in the Company and the continued growth of the Company will be determined by the Managing Member in its sole discretion. In January 2010, the Company satisfied redemption requests in the amount of approximately $22 million.
 
INVESTMENT PROGRAM
 
Investment Objective and Approach
 
The Company’s investment objective is to target attractive long-term risk-adjusted returns across a variety of market environments with volatility and correlation that are lower than those of the broad equity markets. There can be no assurance that the Company or any of the Investment Funds (as defined below) will achieve their investment objectives or that the portfolio design, risk monitoring and hedging strategies of the Company and the Investment Funds will be successful. See ITEM 1A. “RISK FACTORS”.
 
To achieve this objective, the Company allocates all or substantially all of its assets among investment funds managed by the Managing Member (such funds and any successor funds thereto, individually, an “Investment Fund” and collectively the “Investment Funds”), each of which (directly or through other entities) 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 or more of the following hedge fund sectors (each, an “Investment Sector” and, collectively, the “Investment Sectors”): the tactical trading sector, the equity long/short sector, the relative value sector and the event driven sector. Currently, substantially all of the Company’s assets are invested in four Investment Funds, each of which is managed by the Managing Member. The current Investment Funds are Goldman Sachs Global Tactical Trading, LLC (“GTT”), which employs investment strategies in the tactical trading sector; Goldman Sachs Global Equity Long/Short, LLC (“GELS”), which employs investment strategies within the equity long/short sector; Goldman Sachs Global Fundamental Strategies, LLC (“GFS”), which employs investment strategies within the event driven sector; and Goldman Sachs HFP Opportunistic Fund, LLC (“HFPO”), which employs investment strategies within one or more of the Investment Sectors. The balance of the Company’s assets are invested in Goldman Sachs Global Fundamental Strategies Asset Trust (“GFS Trust”), which is a trust containing certain interests in illiquid assets transferred by GFS, and Goldman Sachs Global Relative Value, LLC (“GRV” and together with GFS Trust and the Investment Funds, the “Investees”), which is in the process of liquidation. In addition, the Company may, directly or indirectly, allocate assets to Advisors whose principal investment strategies are not within one of the hedge fund sectors referenced herein.
 
The Company may also allocate assets to an Advisor (other than through an investment in an Investment Fund) by investing in an Advisor Fund, establishing a Managed Account or investing in a Portfolio Company (each, as


3


Table of Contents

defined below). See “PERFORMANCE OF THE COMPANY—Direct Allocations to Advisors”. The assets of each Investment Fund are allocated to Advisors, directly or indirectly, by, among other means, (i) investing in investment funds managed by the Advisor (each, an “Advisor Fund” and collectively, the “Advisor Funds”), (ii) investing with an Advisor pursuant to an investment management agreement in respect of a discretionary managed account (each, a “Managed Account” and collectively, the “Managed Accounts”), or (iii) investing in a separate exempted company incorporated with limited liability in the Cayman Islands (each, a “Portfolio Company” and collectively, the “Portfolio Companies”) that has entered into an investment management agreement with an Advisor in respect of a Managed Account established by such Portfolio Company. See “PORTFOLIO COMPANIES”. (References herein to Advisors include Advisor Funds where the context permits). One or more of the Investment Funds have in the past and may from time to time not accept additional subscriptions or limit the amount of additional subscriptions from third parties because certain of the Advisors with which they invest are no longer accepting additional investments. Under such circumstances, the Managing Member does not expect to allow additional investors to subscribe for units in the Company except as a result of redemptions in the Company. However, even if the Investment Funds are closed generally, the Investment Funds may accept additional investments from the Company for rebalancing or other purposes. See also the Schedule of Investments in the financial statements for more information about the level of the Company’s investments through the Investment Funds with certain Advisors.
 
The Investment Funds and GRV are each a Delaware limited liability company and GFS Trust is a Delaware statutory trust. A brief description of the investment objective and approach of each of the current Investees is set forth under “PERFORMANCE OF THE COMPANY—Description of the Investees and the Performance of the Investees”.
 
The Investment Sectors are subjective classifications made by the managing member of the Investment Funds in its sole discretion. Such classifications are based on information provided by the Advisors to the managing member of the relevant Investment Fund and may differ from classifications of similarly named sectors made by other industry participants. In addition, although each Advisor to which an Investment Fund allocates assets invests principally utilizing investment strategies within the applicable Investment Sector, certain Advisors to which an Investment Fund allocates assets may also utilize other investment strategies that are either related or unrelated to such Investment Sector. The Investment Funds may pursue a wide variety of investment strategies and may modify or depart from the investment strategies described herein as the managing member of the Investment Funds determines appropriate to accomplish the Investment Funds’ investment objectives.
 
The managing member of the Investment Funds may invest a substantial portion of an Investment Fund’s assets with Advisors that may have limited or no track records and/or limited or no operating histories. Certain Advisors may have limited or no experience managing certain of the strategies expected to be deployed by them in their investment programs. Certain strategies utilized may also be newly developed and may not be widely used. The risk of such strategies may be difficult to predict in various market conditions. In such cases, the Advisors or individual members of their management teams will each have had, in the opinion of the managing member of the Investment Funds, sufficient relevant experience in other contexts or trading in strategies similar to those that the Advisor is expected to utilize.
 
The Managing Member may, from time to time in its sole discretion, without prior notice to the holders of units of the Company (each, a “Member” and, collectively, the “Members”) and without limitation, introduce new instruments into the portfolio of investment strategies, utilize additional investment strategies and/or remove, substitute or modify any investment strategy it is then utilizing. Any such decision will be made by the Managing Member, in its sole discretion, based on one or more factors it may deem relevant from time to time, which among others may include liquidity constraints and the availability of opportunities that it deems attractive. Any such decision may result in the utilization of additional investment strategies, the removal or substitution of any investment strategy, or all of the Company’s assets being allocated to a single investment strategy. There can be no assurance that the Managing Member’s decisions in this regard will be successful or will not otherwise have an adverse effect on the Company. Members will not have an opportunity to evaluate the Managing Member’s decisions regarding the determination of (and any changes to) the investment strategies utilized by the Company, nor an opportunity to redeem units, prior to any such decision. There can be no assurance that the strategies utilized by the Company are adequate, that they will be adequately implemented by the Managing Member, or that changes


4


Table of Contents

made by the Managing Member to the strategies utilized by the Company will not be disadvantageous to the Company.
 
Allocation Among the Investment Funds
 
The Managing Member establishes allocations among the Investment Sectors in a manner consistent with the Company’s investment objective. Since April 1, 2008, the Managing Member has had no constraints with respect to the percentage of the Company’s assets to be allocated, directly or indirectly, to any single Advisor, group of Advisors, Investment Fund, or Investment Sector, or with respect to the number of Investment Funds and Advisors to which, directly or indirectly, assets of the Company are allocated at any time. The percentage of the Company’s assets to be allocated to any single Advisor, group of Advisors, Investment Fund or Investment Sector, and the number of Investment Funds and Advisors to which the Company allocates assets from time to time will be determined by the Managing Member in its sole discretion, based on factors deemed relevant by the Managing Member, which may include the amount of the Company’s assets under management, constraints on the capital capacity of the Investment Funds and Advisors, the liquidity needs of the Company and the liquidity terms offered by the Investment Funds and Advisors, the availability of attractive opportunities, and other portfolio construction considerations.
 
The Managing Member may, from time to time, vary or change materially the actual allocation of assets made by the Company, as it deems appropriate in its sole discretion, including without limitation, by way of allocation of Company assets to any new Investment Fund or Advisor, complete or partial withdrawal of an allocation to any existing Investment Fund or Advisor, a reallocation of assets among existing Investment Funds or Advisors, or any combination of the foregoing. In carrying out any reallocation of Company assets, the Managing Member will have the sole discretion to determine the manner of such reallocation, including from which Investment Funds or Advisors to withdraw assets and to which Investment Funds or Advisors to allocate assets. Any reallocation of Company assets may take a significant period of time to implement due to the liquidity provisions and restrictions of the Investment Funds and the Advisors and for other reasons. There can be no assurance that market or other events will not have an adverse impact on the strategies employed by multiple Investment Funds and Advisors. Investment Funds and Advisors may at certain times hold large positions in a relatively limited number of investments. The Company could be subject to significant losses if an Investment Fund or an Advisor holds a large position in a particular investment that declines in value that cannot be liquidated without adverse market reaction or is otherwise adversely affected by changes in market conditions or circumstances. See ITEM 1A. “RISK FACTORS—General Risks—Risks Related to the Company and the Investment Funds’ Performance and Operation—There Can Be No Assurance that the Managing Member’s Decisions Regarding Allocations will be Successful; Inaccurate Information Provided by the Advisors May Have a Material Adverse Effect on Implementing the Company’s Investment Objective,” “—Special Risks of the Company’s Structure—Risks Associated with the Company Investing in Other Entities—Advisors May Have Limited Capacity to Manage Additional Investment Fund Investments, Which Could Cause Dilution or Concentration of the Company’s Investments or Negatively Affect Allocation of Investments” and “—Allocation of the Company’s Assets May Not Protect the Company from Exposure to Economic Downturns in Any Investment Fund or Investment Sector”.
 
As of the years ended December 31, 2009, 2008, 2007, 2006 and 2005, respectively, the members’ equity of the Company was substantially allocated among the Investees approximately as described in the tables below. Members’ equity, or net assets, means the total assets of the Company less total liabilities of the Company at the time of determination in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). Total assets means the sum of the Company’s cash and cash equivalents, other assets and investments determined at any time in accordance with U.S. GAAP as of that date. The figures represent actual allocations of the Company’s members’ equity and not the allocation of the expected risk of the Company among the Investees. The allocations of the Company’s members’ equity will change from time to time in accordance with the Company’s investment objective and strategies. In addition, the tables below as of December 31, 2009, 2008, 2007, 2006 and 2005 also provide the approximate allocations among the Investees of the adjusted members’ equity. The adjusted members’ equity excluded Redemptions payable of $22,410,715 at December 31, 2009, $28,982,893 at December 31, 2008, $22,708,145 at December 31, 2007, $23,701,199 at December 31, 2006 and $347,523,596 at December 31, 2005, which is reflected in the financial statements as a liability under U.S. GAAP. The Managing Member believes this


5


Table of Contents

allocation more accurately reflects the percentage of the Company’s equity invested in the Investees given the timing of the payment for the Redemptions payable. The Company’s 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 information supplied by each individual Investees net of each Advisor’s management fee and incentive allocation and are not a guarantee of actual realizable amounts. See ITEM 1A. “RISK FACTORS—Special Risks of the Company’s Structure—Risks Related to the Company’s Structure—The Company’s Financial Statements are, and in the Future Will Ultimately be, Based on Estimates of Valuations Provided by Third Party Advisors Which May not be Accurate or May Need to be Adjusted in the Future,” “—Risks Associated with the Company Investing in Other Entities—Valuation of the Investment Funds’ Investments Will be Determined Utilizing Valuations Provided by the Advisors Which are Generally not Audited; Uncertainties in Valuations Could Have a Material Adverse Effect on the Company’s Net Assets” and ITEM 7. “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Critical Accounting Policies and Estimates”.
 
December 31, 2009
 
                         
          Fair Value of
    Fair Value of
 
    Fair Value of
    Company’s
    Company’s Investment
 
    Company’s
    Investment as a % of
    as a % of Adjusted
 
Investee
  Investment in $ Amount     Members’ Equity (1)     Members’ Equity (2)  
 
GELS
  $ 235,518,832       39.40 %     37.98 %
GFS
  $ 132,477,127       22.17 %     21.36 %
GFS Trust
  $ 37,532,758       6.28 %     6.05 %
GRV
  $ 4,887,674       0.82 %     0.79 %
GTT
  $ 155,217,816       25.97 %     25.03 %
HFPO
  $ 20,801,289       3.48 %     3.36 %
                         
Total
  $   586,435,496       98.12 %(3)     94.57 %(3)
                         
 
 
(1) Members’ equity, used in the calculation of the fair value of the Investees as a percentage of members’ equity, is reduced for member redemptions that are paid after the balance sheet date according to ASC 480, “Distinguishing Liabilities from Equity.”
 
(2) Adjusted members’ equity, used in the calculation of the fair value of the Investees as a percentage of adjusted members’ equity, represents members’ equity excluding Redemptions payable in the amount of $22,410,715 at December 31, 2009.
 
(3) The total value of the Company’s investment in the Investees was less than 100% of members’ equity and adjusted members’ equity because members’ equity and adjusted members’ equity reflected cash and cash equivalents greater than total liabilities.


6


Table of Contents

December 31, 2008
 
                         
          Fair Value of
    Fair Value of
 
    Fair Value of
    Company’s
    Company’s Investment
 
    Company’s
    Investment as a % of
    as a % of Adjusted
 
Investee
  Investment in $ Amount     Members’ Equity (1)     Members’ Equity (2)  
 
GELS
  $ 182,311,620       29.89 %     28.53 %
GFS
  $ 212,189,214       34.79 %     33.21 %
GRV
  $ 59,060,101       9.68 %     9.24 %
GTT
  $ 119,121,670       19.53 %     18.65 %
HFPO
  $ 42,106,058       6.91 %     6.59 %
                         
Total
  $   614,788,663       100.80 %(3)     96.22 %(4)
                         
 
 
(1) Members’ equity, used in the calculation of the fair value of the Investees as a percentage of members’ equity, is reduced for member redemptions that are paid after the balance sheet date according to ASC 480, “Distinguishing Liabilities from Equity.”
 
(2) Adjusted members’ equity, used in the calculation of the fair value of the Investees as a percentage of adjusted members’ equity, represents members’ equity excluding Redemptions payable in the amount of $28,982,893 at December 31, 2008.
 
(3) The total value of the Company’s investments in the Investees exceeded 100% of adjusted members’ equity because adjusted members’ equity reflected certain accrued liabilities of the Company, including fees and expenses and, in addition, also reflected Redemptions payable at December 31, 2008.
 
(4) The total value of the Company’s investment in the Investees was less than 100% of adjusted members’ equity because adjusted members’ equity reflected cash and cash equivalents greater than total liabilities excluding Redemptions payable in the amount of $28,982,893 at December 31, 2008.
 
December 31, 2007
 
                         
          Fair Value of
    Fair Value of
 
    Fair Value of
    Company’s
    Company’s Investment
 
    Company’s
    Investment as a % of
    as a % of Adjusted
 
Investee
  Investment in $ Amount     Members’ Equity (1)     Members’ Equity (2)  
 
GELS
  $ 225,759,808       33.16 %     32.09 %
GFS
  $ 257,594,595       37.84 %     36.62 %
GRV
  $ 84,319,166       12.38 %     11.99 %
GTT
  $ 97,949,282       14.39 %     13.92 %
HFPO
  $ 36,813,437       5.41 %     5.23 %
                         
Total
  $   702,436,288       103.18 %(3)     99.85 %(4)
                         
 
 
(1) Members’ equity, used in the calculation of the fair value of the Investees as a percentage of members’ equity, is reduced for member redemptions that are paid after the balance sheet date according to ASC 480, “Distinguishing Liabilities from Equity.”
 
(2) Adjusted members’ equity, used in the calculation of the fair value of the Investees as a percentage of adjusted members’ equity, represents members’ equity excluding Redemptions payable in the amount of $22,708,145 at December 31, 2007.
 
(3) The total value of the Company’s investments in the Investees exceeded 100% of members’ equity because members’ equity reflected certain accrued liabilities of the Company, including fees and expenses and, in addition, also reflected Redemptions payable at December 31, 2007.


7


Table of Contents

 
(4) The total value of the Company’s investment in the Investees was less than 100% of adjusted members’ equity because adjusted members’ equity reflected cash and cash equivalents greater than total liabilities excluding Redemptions payable in the amount of $22,708,145 at December 31, 2007.
 
December 31, 2006
 
                         
          Fair Value of
    Fair Value of
 
    Fair Value of
    Company’s
    Company’s Investment
 
    Company’s
    Investment as a % of
    as a % of Adjusted
 
Investee
  Investment in $ Amount     Members’ Equity (1)     Members’ Equity (2)  
 
GELS
  $ 243,737,514       36.81 %     35.54 %
GFS
  $ 240,699,867       36.36 %     35.10 %
GRV
  $ 98,479,997       14.87 %     14.36 %
GTT
  $ 103,332,963       15.61 %     15.07 %
                         
Total
  $   686,250,341       103.65 %(3)     100.07 %(3)
                         
 
 
(1) Members’ equity, used in the calculation of the fair value of the Investees as a percentage of members’ equity, is reduced for member redemptions that are paid after the balance sheet date according to ASC 480, “Distinguishing Liabilities from Equity.”
 
(2) Adjusted members’ equity, used in the calculation of the fair value of the Investees as a percentage of adjusted members’ equity, represents members’ equity excluding Redemptions payable in the amount of $23,701,199 at December 31, 2006.
 
(3) The total value of the Company’s investments in the Investees exceeded 100% of members’ equity and adjusted members’ equity, respectively, because members’ equity and adjusted members’ equity both reflected certain accrued liabilities of the Company, including fees and expenses and, in addition, members’ equity also reflected Redemptions payable at December 31, 2006.
 
December 31, 2005
 
                         
          Fair Value of
    Fair Value of
 
    Fair Value of
    Company’s
    Company’s Investment
 
    Company’s
    Investment as a % of
    as a % of Adjusted
 
Investee
  Investment in $ Amount     Members’ Equity (1)     Members’ Equity (2)  
 
GELS
  $ 294,096,911       37.97 %     26.21 %
GFS
  $ 301,443,254       38.91 %     26.86 %
GRV
  $ 317,728,892       41.02 %     28.32 %
GTT
  $ 211,060,876       27.25 %     18.81 %
                         
Total
  $   1,124,329,933       145.15 %(3)     100.20 %(3)
                         
 
 
(1) Members’ equity, used in the calculation of the fair value of the Investees as a percentage of members’ equity, is reduced for member redemptions that are paid after the balance sheet date according to ASC 480, “Distinguishing Liabilities from Equity.”
 
(2) Adjusted members’ equity, used in the calculation of the fair value of the Investees as a percentage of adjusted members’ equity, represents members’ equity excluding Redemptions payable in the amount of $347,523,596 at December 31, 2005.
 
(3) The total value of the Company’s investments in the Investees exceeded 100% of members’ equity and adjusted members’ equity, respectively, because members’ equity and adjusted members’ equity both reflected certain accrued liabilities of the Company, including fees and expenses and, in addition, members’ equity also reflected Redemptions payable at December 31, 2005.


8


Table of Contents

 
PERFORMANCE OF THE COMPANY
 
For the years ended December 31, 2009, 2008, 2007, 2006 and 2005, the Company had net returns as described in the tables below. Past performance of the Company is not indicative of future results which may vary. The Company’s net return has been computed based on the performance of the Company net of all fees and expenses including, among others (i) incentive allocations to the Managing Member and (ii) a monthly management fee to the Managing Member. See “FEES AND EXPENSES”.
 
January 1, 2009 — December 31, 2009
 
             
    Date of Issuance of
  Net Return for Period
Series of Units (1)
  Units   Outstanding (2)
 
Class A Series 1
      9.07 %
Class A Series 45
  January 2008     9.07 %
Class A Series 46
  February 2008     9.07 %
Class A Series 47
  March 2008     9.07 %
Class A Series 48
  April 2008     9.07 %
Class A Series 49
  May 2008     9.07 %
Class A Series 50
  June 2008     9.07 %
Class A Series 51
  July 2008     9.07 %
Class A Series 52
  August 2008     9.07 %
Class A Series 53
  September 2008     9.07 %
Class A Series 54
  October 2008     8.96 %
Class A Series 55
  November 2008     8.76 %
Class A Series 56
  December 2008     8.66 %
Class A Series 57
  January 2009     8.61 %
Class A Series 58
  February 2009     7.74 %
Class A Series 59
  March 2009     7.91 %
Class A Series 60
  April 2009     7.94 %
Class A Series 61
  May 2009     7.18 %
Class A Series 62
  June 2009     5.15 %
Class A Series 63
  July 2009     5.08 %
Class A Series 64
  August 2009     3.95 %
Class A Series 65
  September 2009     2.68 %
Class A Series 66
  September 2009     2.82 %
Class A Series 67
  September 2009     2.82 %
Class A Series 68
  September 2009     2.82 %
Class A Series 69
  September 2009     2.82 %
Class A Series 70
  September 2009     2.82 %
Class A Series 71
  September 2009     2.82 %
Class A Series 72
  September 2009     2.82 %
Class A Series 73
  September 2009     2.82 %
Class A Series 74
  October 2009     1.22 %
Class A Series 75
  November 2009     1.39 %
Class A Series 76
  December 2009     0.16 %
 
 
(1) As of December 31, 2009, the Company had 33 series of Class A Units (as defined below) outstanding. The Class A Series Units (as defined below) are identical in every regard except with respect to its individualized incentive allocation base. Effective January 1, 2010, Class A Series 55 through Class A Series 65 and Class A


9


Table of Contents

Series 74 through Class A Series 76 units were converted into Class A Series 54 units. Class A Series Units (other than Class A Series 1) issued in future periods represent issuances of new series and are different from existing series.
 
(2) The net return is shown for the month of issuance through December 31, 2009.
 
January 1, 2008 — December 31, 2008
 
             
    Date of Issuance of
  Net Return for Period
Series of Units (1)
  Units   Outstanding (2)
 
Class A Series 1
      (13.71 )%
Class A Series 45
  January 2008     (13.71 )%
Class A Series 46
  February 2008     (12.20 )%
Class A Series 47
  March 2008     (14.00 )%
Class A Series 48
  April 2008     (12.45 )%
Class A Series 49
  May 2008     (13.27 )%
Class A Series 50
  June 2008     (14.85 )%
Class A Series 51
  July 2008     (14.90 )%
Class A Series 52
  August 2008     (12.59 )%
Class A Series 53
  September 2008     (11.44 )%
Class A Series 54
  October 2008     (6.48 )%
Class A Series 55
  November 2008     (2.77 )%
Class A Series 56
  December 2008     (0.97 )%
 
 
(1) As of December 31, 2008, the Company had 13 series of Class A Units outstanding. The Class A Series Units are identical in every regard except with respect to its individualized incentive allocation base. Class A Series Units (other than Class A Series 1) issued in future periods represent issuances of new series and are different from existing series.
 
(2) The net return is shown for the month of issuance through December 31, 2008.


10


Table of Contents

 
January 1, 2007 — December 31, 2007
 
             
    Date of Issuance of
  Net Return for Period
Series of Units (1)
  Units   Outstanding (2)
 
Class A Series 1
      11.51 %
Class A Series 33
  January 2007     11.51 %
Class A Series 34
  February 2007     9.77 %
Class A Series 35
  March 2007     8.90 %
Class A Series 36
  April 2007     7.95 %
Class A Series 37
  May 2007     6.21 %
Class A Series 38
  June 2007     3.95 %
Class A Series 39
  July 2007     3.43 %
Class A Series 40
  August 2007     3.54 %
Class A Series 41
  September 2007     5.58 %
Class A Series 42
  October 2007     3.87 %
Class A Series 43
  November 2007     0.36 %
Class A Series 44
  December 2007     0.73 %
 
 
(1) As of December 31, 2007, the Company had 13 series of Class A Units outstanding. The Class A Series Units are identical in every regard except with respect to its individualized incentive allocation base. Effective January 1, 2008, Class A Series 33 through Class A Series 44 units were converted into Class A Series 1 units. Class A Series Units (other than Class A Series 1) issued in future periods represent issuances of new series and are different from existing series.
 
(2) The net return is shown for the month of issuance through December 31, 2007.
 
January 1, 2006 — December 31, 2006
 
             
    Date of Issuance of
  Net Return for Period
Series of Units (1)
  Units   Outstanding (2)
 
Class A Series 1
      9.03 %
Class A Series 21
  January 2006     9.03 %
Class A Series 22
  February 2006     6.00 %
Class A Series 23
  March 2006     5.51 %
Class A Series 24
  April 2006     3.82 %
Class A Series 25
  May 2006     2.32 %
Class A Series 26
  June 2006     4.28 %
Class A Series 27
  July 2006     4.74 %
Class A Series 28
  August 2006     4.84 %
Class A Series 29
  September 2006     4.06 %
Class A Series 30
  October 2006     4.77 %
Class A Series 31
  November 2006     3.21 %
Class A Series 32
  December 2006     1.37 %
 
 
(1) As of December 31, 2006, the Company had 13 series of Class A Units outstanding. The Class A Series Units are identical in every regard except with respect to its individualized incentive allocation base. Effective January 1, 2007, Class A Series 21 through Class A Series 32 units were converted into Class A Series 1 units. Class A Series (other than Class A Series 1) issued in future periods represent issuances of new series and are different from existing series.
 
(2) The net return is shown for the month of issuance through December 31, 2006.


11


Table of Contents

 
January 1, 2005 — December 31, 2005
 
             
    Date of Issuance of
  Net Return for Period
Series of Units (1)
  Units   Outstanding (2)
 
Class A Series 1
      4.57 %
Class A Series 9
  January 2005     4.57 %
Class A Series 10
  February 2005     5.17 %
Class A Series 11
  March 2005     4.12 %
Class A Series 12
  April 2005     4.69 %
Class A Series 13
  May 2005     6.28 %
Class A Series 14
  June 2005     5.87 %
Class A Series 15
  July 2005     4.71 %
Class A Series 16
  August 2005     3.26 %
Class A Series 17
  September 2005     2.31 %
Class A Series 18
  October 2005     1.04 %
Class A Series 19
  November 2005     2.77 %
Class A Series 20
  December 2005     1.46 %
 
 
(1) As of December 31, 2005, the Company had 13 series of Class A Units outstanding. The Class A Series Units are identical in every regard except with respect to its individualized incentive allocation base. Effective January 1, 2006, Class A Series 9 through Class A Series 20 units were converted into Class A Series 1 units. Class A Series (other than Class A Series 1) issued in future periods represent issuances of new series and are different from existing series.
 
(2) The net return is shown for the month of issuance through December 31, 2005.
 
The Company only has one class of units at present, Class A units (the “Class A Units” and each series of Class A Units, the “Class A Series Units”). The Class A Series Units are subject to a management fee and an incentive allocation. Separately, the Investment Funds each offer and GRV offered separate classes of units. Among the classes of units offered by GTT, GELS, GRV and GFS, each has offered Class C units (the “Class C Units” and each series of Class C Units, the “Class C Series Units”), while HFPO has offered Class A Units, all of which are not subject to management fees and incentive allocations at an Investment Fund level (although management fees and incentive allocations are paid to each of the Advisors in which the Investment Funds invest). GFS Trust has issued interests, which are not subject to management fees and incentive allocations. The Company only owns Class C Series Units of GTT, GELS, GRV and GFS, Class A Series Units of HFPO and interests in GFS Trust. The intent behind this fee arrangement was to create a fee structure such that holders of Class A Series Units of the Company are not—in addition to management and incentive allocations paid to the Company (as well as management and incentive allocations paid to individual Advisors)—also subject to management fees and incentive allocations paid by each of the Investees. Therefore, holders of a fee bearing class of the Company indirectly own “no-fee-shares” of the Investees. Through its investment in the Investees, the Company bears a pro rata portion of all other offering, organizational and operating expenses of the Investees, including the administration fee for SEI’s (as defined below) services as administrator of each Investee, and a pro rata portion of the Advisor compensation paid by the Investment Funds. Returns in the tables above are shown net of these expenses. See “FEES AND EXPENSES”.
 
The table below compares the historical cumulative total net return of the Company’s Class A Series 1 units for the investment periods indicated in the table with the 3 Month London Interbank Offered Rate (“LIBOR”), the Barclays Aggregate Bond Index (formerly Lehman Brothers Aggregate Index), the MSCI World Index and the S&P 500 Index. The 3 Month LIBOR, the Barclays Aggregate Bond Index, the MSCI World Index and the S&P 500 Index are commonly used as comparative indices by hedge fund investors. The Managing Member does not manage the Company in respect of any particular index. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time (referred to herein as an “index” or, collectively, as “indices”) are provided for information only. Reference to these indices does not imply that the portfolio will achieve returns, volatility or other results similar (or dissimilar) to the indices. The composition of an


12


Table of Contents

index may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject to change over time. These indices are unmanaged and the figures for an index reflect the reinvestment of dividends but do not reflect the deduction of any fees or expenses which would reduce returns. The Members cannot invest directly in these indices.
 
                                         
                Barclays
    MSCI
       
    Company
    3 Month
    Aggregate
    World
    S&P 500
 
Investment Period
  (1)     LIBOR     Bond Index     Index     Index  
 
1/1/2009 — 12/31/2009
    9.07 %     0.87 %     5.93 %     29.99 %     26.46 %
1/1/2008 — 12/31/2008
    (13.71 )%     3.56 %     5.24 %     (40.71 )%     (37.00 )%
1/1/2007 — 12/31/2007
    11.51 %     5.32 %     6.96 %     9.04 %     5.49 %
1/1/2006 — 12/31/2006
    9.03 %     5.10 %     4.33 %     20.07 %     15.79 %
1/1/2005 — 12/31/2005
    4.57 %     3.32 %     2.43 %     9.49 %     4.91 %
 
 
(1) Company returns shown are the net returns for Class A Series 1 for each of the investment periods shown. See above for the Company’s net returns for Class A Series 45-76, Class A Series 45-56, Class A Series 33-44, Class A Series 21-32 and Class A Series 9-20 for 2009, 2008, 2007, 2006 and 2005, respectively.
 
Description of the Investees and the Performance of the Investees
 
The annual net returns shown for each Investee in the tables below have been computed based on the performance of the respective Investee net of all expenses allocated by each Investee to the Company for periods shown following the commencement of the Company. Past performance of the Investees is not indicative of future results which may vary significantly. The Company owns “no-fee-shares” in each Investee and accordingly the Company was not charged any incentive allocation or management fee by the Managing Member in its capacity as managing member of each of the Investees. See “FEES AND EXPENSES”. The Investees’ dealing net asset value (“NAV”) and reported performance are prepared using the latest information available from the Advisor Funds at the time of such valuation in accordance with their Limited Liability Company Agreement. The Investees’ investments in the Advisor Funds are determined utilizing NAVs supplied by, or on behalf of, the Advisors of each Advisor Fund. Furthermore, NAVs received from the administrator of the Advisor Funds may be estimates and such values will be used to calculate the NAV of the Investees for purposes of determining amounts payable on redemptions and reported performance of the Investees. Such estimates provided by the administrators of the Advisor Funds may be subject to subsequent revisions which may not be reflected in the Investees’ final month-end dealing NAV. The annual audited financial statements may reflect adjustments for such subsequent revisions which may result in a variance between the Investees’ total return reported in their audited financial statements and the reported performance based on the month-end dealing NAV.
 
Goldman Sachs Global Equity Long/Short, LLC
 
GELS’ investment objective is to target attractive risk-adjusted returns with volatility lower than the broad equity markets, primarily through long and short investment opportunities available principally in the global equity markets. As of December 31, 2009, GELS’ managing member (currently, the Managing Member) had allocated GELS’ assets, directly or indirectly, to 30 Advisor Funds, although this number may change materially over time as determined by GELS’ managing member. Equity long/short strategies involve making long and short equity investments, generally based on fundamental evaluations, although it is expected that Advisors in this Investment Sector will employ a wide range of styles. For example, such Advisors may (i) focus on companies within specific industries; (ii) focus on companies only in certain countries or regions; (iii) focus on companies with certain ranges of market capitalization; or (iv) employ a more diversified approach, allocating assets to opportunities across investing styles, industry sectors, market capitalizations and geographic regions. Other strategies may be employed as well. The managing member of GELS generally will not allocate more than 25% of GELS’ total assets to any single Advisor at the time of allocation.


13


Table of Contents

Individuals and entities affiliated with the GS Group (as defined below), including investment funds, directors, officers, employees, partners, trustees, managers, members and any related trusts, owned approximately 70% of GELS as of December 31, 2009.
 
For the past five years from January 1, 2005 to December 31, 2009, GELS had net returns on invested assets as described in the table below.
 
         
Investment Period*
  Net Return for Period  
 
1/1/2009 — 12/31/2009
    13.37 %
1/1/2008 — 12/31/2008
    (16.75 )%
1/1/2007 — 12/31/2007
    11.70 %
1/1/2006 — 12/31/2006
    11.91 %
1/1/2005 — 12/31/2005
    9.93 %
 
 
Net return is based on the performance of Class C Series 1 units. Class C Series 1 units of GELS (including those issued to the Company) are not subject to management fees paid or incentive allocations made to GS HFS as managing member of GELS and therefore returns do not reflect the payment of any such fees or the making of any allocations to GS HFS. In addition, returns for Class C Series 1 units during the entire period reflect returns net of the compensation paid to Advisors. The returns shown for 2005, 2006, 2007, 2008 and 2009 are net of an administration fee paid by GELS to SEI, who became the administrator of GELS on January 1, 2005. No administration fee was paid to GS HFS by GELS in 2005, 2006, 2007, 2008 and 2009.
 
Goldman Sachs Global Fundamental Strategies, LLC
 
GFS’s investment objective is to target attractive risk-adjusted absolute returns with volatility and correlation that are lower than the broad equity markets by allocating assets to Advisors that operate primarily in the global event driven sector. As of December 31, 2009, GFS’s managing member (currently, the Managing Member) had allocated GFS’s assets, directly or indirectly, to 14 Advisor Funds, although this number may change materially over time as determined by GFS’s managing member. Prior to April 1, 2008, GFS’s managing member generally did not allocate more than 25% of GFS’s total assets to any single Advisor at the time of allocation. As of April 1, 2008, there are no restrictions on the amount of assets of GFS that its managing member can allocate to any single Advisor. 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 merger arbitrage, high yield/distressed securities and special situations. Other strategies may be employed as well.
 
Merger Arbitrage
 
Merger arbitrageurs seek to capture the price spread between current market prices and the value of securities upon successful completion of a takeover or merger transaction. The availability of spreads reflects the unwillingness of other market participants to take on transaction-based risk, i.e., the risk that the transaction will not be completed and the price of the company being acquired will fall. Merger arbitrageurs specialize in evaluating this risk and seek to create portfolios that reduce specific event risk.
 
High Yield/Distressed Securities
 
High yield/distressed securities strategies invest in debt or equity securities of firms in or near bankruptcy. Advisors differ in terms of the level of the capital structure in which they invest, the stage of the restructuring process at which they invest, and the degree to which they become actively involved in negotiating the terms of the restructuring.


14


Table of Contents

Special Situations
 
Special situations such as spin-offs and corporate reorganizations and restructurings offer additional opportunities for event-driven Advisors. Often these strategies are employed alongside merger arbitrage or distressed investing. An Advisor’s ability to evaluate the effect of the impact and timing of the event and to take on the associated event risk is the source of the returns. Advisors differ in the degree to which they hedge the equity market risk of their portfolios.
 
Multi-strategy and Other
 
Multi-strategy Advisors invest across a range of strategies. These Advisors tend to be more opportunistic in targeting specific event driven, equity long/short and relative value strategies during differing market environments.
 
Individuals and entities affiliated with the GS Group, including investment funds, directors, officers, employees, partners, trustees, managers, members and any related trusts, owned approximately 57% of GFS as of December 31, 2009.
 
For the past five years from January 1, 2005 until December 31, 2009, GFS had net returns on invested assets as described in the table below.
 
         
Investment Period*
  Net Return for Period  
 
1/1/2009 — 12/31/2009
    19.10 %
1/1/2008 — 12/31/2008
    (19.18 )%
1/1/2007 — 12/31/2007
    20.22 %
1/1/2006 — 12/31/2006
    14.57 %
1/1/2005 — 12/31/2005
    7.65 %
 
 
Net return is based on the performance of Class C Series 1 units. Class C Series 1 units of GFS (including those issued to the Company) are not subject to management fees paid or incentive allocations made to GS HFS as managing member of GFS and therefore returns do not reflect the payment of any such fees or the making of any allocations to GS HFS. In addition, returns for Class C Series 1 units during the entire period reflect returns net of the compensation paid to Advisors. The returns shown for 2005, 2006, 2007, 2008 and 2009 are net of an administration fee paid by GFS to SEI, who became the administrator of GFS on January 1, 2005. No administration fee was paid to GS HFS by GFS in 2005, 2006, 2007, 2008 and 2009.
 
Goldman Sachs Global Fundamental Strategies Asset Trust
 
On March 31, 2009, GFS transferred to GFS Trust its interest in certain illiquid investments, including illiquid investments made by Advisor Funds, as well as liquidating vehicles that the Advisors formed as liquidity decreased for previously liquid investments, such as certain credit instruments. GFS transferred to GFS Trust the economic risks and benefits of its interests in the assets. In connection with such transfer, each investor in GFS, including the Company, was issued its pro-rata share of GFS Trust interests based on its ownership in GFS as of the transfer date. Distributions from GFS Trust in respect of GFS Trust interests will be made to holders of GFS Trust interests, including the Company, as amounts in respect of the assets transferred to GFS Trust are received from the Advisors. However, the actual timing of these distributions will be dependent on the Advisors’ ability to liquidate positions as market conditions allow, and it could be a significant period of time before such positions are realized or disposed of. See ITEM 7. “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Liquidity and Capital Resources”.
 
Individuals and entities affiliated with the GS Group, including investment funds, directors, officers, employees, partners, trustees, managers, members and any related trusts, owned approximately 60% of GFS Trust as of December 31, 2009.
 
Since inception until December 31, 2009, GFS Trust had net returns on invested assets as described in the table below.
 


15


Table of Contents

         
Investment Period*
  Net Return for Period  
 
3/31/2009 — 12/31/2009
    5.06 %
 
 
Net return is based on the performance of GFS Trust interests. Interests of GFS Trust (including those issued to the Company) are not subject to management fees or incentive allocations.
 
Goldman Sachs Global Tactical Trading, LLC
 
GTT’s investment objective is to target attractive long-term, risk-adjusted absolute returns by allocating its assets to Advisors that employ strategies primarily within the tactical trading sector. As of December 31, 2009, GTT’s managing member (currently, the Managing Member) had allocated GTT’s assets, directly or indirectly, to 17 Advisor Funds, although this number may change materially over time as determined by GTT’s managing member. GTT’s managing member generally will not allocate more than 25% of GTT’s total assets to any single Advisor at the time of allocation. Tactical trading strategies are directional trading strategies, which generally fall into one of two categories: global macro strategies and managed futures strategies. The first category, global macro strategies, generally utilize analysis of macroeconomic and financial conditions to develop views on country, regional or broader economic themes and then seek to capitalize on such views by trading in securities, commodities, interest rates, currencies and other instruments. The Advisors use quantitative models or discretionary inputs to forecast the direction of individual markets or subsectors of markets. The Advisors invest assets in a diversified portfolio composed primarily of futures contracts, forward contracts, physical commodities, options on futures and on physical commodities, and other derivative contracts on foreign currencies, financial instruments, stock indices and other financial market indices, metals, grains and agricultural products, petroleum and petroleum products, livestock and meats, oil seeds, tropical products and softs. The Advisors also engage in the trading of securities, including, but not limited to, equity and debt securities, high yield securities, emerging market securities and other security interests, and may do so on a cash basis or using options or other derivative instruments. Certain Advisors may utilize other investment media, such as swaps and other similar instruments and transactions. Advisors generally trade futures and securities on commodities and securities exchanges worldwide as well as in the interbank foreign currency forward market and various other over-the-counter markets. The second category, managed futures strategies, involve trading in futures and currencies globally, generally using systematic or discretionary approaches. The Advisors use quantitative models or discretionary inputs to speculate on the direction of the individual markets or subsectors of markets. GTT allocates its assets pursuant to discretionary investment advisory agreements and through investments in Advisor Funds.
 
Individuals and entities affiliated with the GS Group, including investment funds, directors, officers, employees, partners, trustees, managers, members and any related trusts, owned approximately 80% of GTT as of December 31, 2009.
 
For the past five years from January 1, 2005 to December 31, 2009, GTT had net returns on invested assets as described in the table below.
 
         
Investment Period*
  Net Return for Period  
 
1/1/2009 — 12/31/2009
    6.35 %
1/1/2008 — 12/31/2008
    3.27 %
1/1/2007 — 12/31/2007
    15.72 %
1/1/2006 — 12/31/2006
    5.61 %
1/1/2005 — 12/31/2005
    4.03 %
 
 
Net return is based on the performance of Class C Series 1 units. Class C Series 1 units of GTT (including those issued to the Company) are not subject to management fees paid or incentive allocations made to GS HFS as managing member of GTT and therefore returns do not reflect the payment of any such fees or the making of any allocations to GS HFS. In addition, returns for Class C Series 1 units during the entire period reflect returns net of the compensation paid to Advisors. The returns shown for 2005, 2006, 2007, 2008 and 2009 are net of an

16


Table of Contents

administration fee paid by GTT to SEI, who became the administrator of GTT on January 1, 2005. No administration fee was paid to GS HFS by GTT in 2005, 2006, 2007, 2008 and 2009.
 
Goldman Sachs Global Relative Value, LLC
 
GRV ceased trading activities effective July 1, 2009 and will dissolve at the time all assets are liquidated, liabilities satisfied and liquidation proceeds are distributed through payment of a liquidating distribution. Investors in GRV (including the Company) will receive proceeds from the liquidation over time as GRV receives redemption proceeds from Advisors. The Company is reinvesting the liquidation proceeds it receives from GRV in accordance with the Company’s investment program. See “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Liquidity and Capital Resources” and ITEM 7A. “QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK — Risk Management.” Historically, GRV’s investment objective was to target attractive risk-adjusted absolute returns with volatility and correlation that was lower than the broad equity markets by allocating assets to Advisors that operated 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. Hence, relative value strategies endeavor to have low correlation and beta to most market indices. Strategies that may be utilized in the relative value sector include credit relative value, convertible arbitrage, equity market neutral, and fixed income relative value. Other strategies may be employed as well.
 
For the past five years from January 1, 2005 to December 31, 2009, GRV had net returns on invested assets as described in the table below.
 
         
Investment Period*
  Net Return for Period  
 
1/1/2009 — 12/31/2009
    6.70 %
1/1/2008 — 12/31/2008
    (9.37 )%
1/1/2007 — 12/31/2007
    4.53 %
1/1/2006 — 12/31/2006
    5.89 %
1/1/2005 — 12/31/2005
    4.09 %
 
 
Net return is based on the performance of Class C Series 1 units. Class C Series 1 units of GRV (including those issued to the Company) are not subject to management fees paid or incentive allocations made to GS HFS as managing member of GRV and therefore returns do not reflect the payment of any such fees or the making of any allocations to GS HFS. In addition, returns for Class C Series 1 units during the entire period reflect returns net of the compensation paid to Advisors. The returns shown for 2005, 2006, 2007, 2008 and 2009 are net of an administration fee paid by GRV to SEI, who became the administrator of GRV on January 1, 2005. No administration fee was paid to GS HFS by GRV in 2005, 2006, 2007, 2008 and 2009.
 
Allocations to Other Investees
 
Goldman Sachs HFP Opportunistic Fund, LLC
 
The Company currently allocates a portion of its assets to HFPO in order to make opportunistic investments by (a) increasing the weighting of particular Advisors that have low weightings in the Company due to a lower target weight in one of the other Investment Funds, and (b) adding Advisors that are not represented in any of the other Investment Funds at the time of determination. There are no restrictions on the amount of assets of HFPO that its managing member can allocate to any single Advisor, group of Advisors or investment strategy. HFPO has an investment objective to target attractive long-term risk-adjusted absolute returns with lower volatility than the broad equity markets. To achieve its objective, HFPO, directly or indirectly, allocates its assets to, or invests in entities managed by, a concentrated portfolio of Advisors that employ a broad range of alternative investment strategies primarily within one or more of the Investment Sectors. HFPO is managed by the Managing Member. The Company is not charged an additional management fee or performance-based fee or allocation by the Managing Member, in its capacity as managing member of HFPO, in connection with its investment therein.

17


Table of Contents

Individuals and entities affiliated with the GS Group, including investment funds, directors, officers, employees, partners, trustees, managers, members and any related trusts, owned 100% of HFPO as of December 31, 2009.
 
HFPO was organized on June 25, 2007 and commenced operations on July 1, 2007. For the six month period ended December 31, 2007 and for the years ended December 31, 2008 and December 31, 2009, HFPO had net returns on invested assets as described in the table below.
 
         
Investment Period*
  Net Return for Period  
 
1/1/2009 — 12/31/2009
    11.27 %
1/1/2008 — 12/31/2008
    (4.51 )%
7/1/2007 — 12/31/2007
    (10.26 )%
 
 
Net return is based on the performance of Class A Series 1 units. Class A Series 1 units of HFPO (including those issued to the Company) are not subject to management fees paid or incentive allocations made to GS HFS as managing member of HFPO and therefore returns do not reflect the payment of any such fees or the making of any allocations to GS HFS. In addition, returns for Class A Series 1 units during the entire period reflect returns net of the compensation paid to Advisors. Returns for periods less than one year are cumulative and not annualized. The returns shown are net of an administration fee paid by HFPO to SEI, who became the administrator of HFPO on July 1, 2007. No administration fee was paid to GS HFS by HFPO in 2007, 2008 and 2009.
 
Historically, the Managing Member has allocated its assets to all of the Investment Sectors through allocations to GTT, GELS, GRV and GFS and HFPO since July 1, 2007. Since April 1, 2008, the Managing Member had no constraints with respect to the percentage of the Company’s assets to be allocated, directly or indirectly, to any single Advisor, group of Advisors, Investment Fund, or Investment Sector, or with respect to the number of Investment Funds and Advisors to which, directly or indirectly, assets of the Company are allocated at any time. Currently the Managing Member has allocated less than 1% of assets to GRV.
 
Overview of the Investment Process of the Investment Funds
 
In its capacity as managing member of each of the Investment Funds, the Managing Member employs a dynamic investment process that includes Advisor selection, portfolio design and ongoing risk analysis and monitoring. The Goldman Sachs Group, Inc. acquired the assets and business of Commodities Corporation Limited, a Princeton, New Jersey-based asset management firm established in 1969, specializing in alternative investments, and contributed them to a newly formed wholly owned subsidiary, Commodities Corporation LLC, which was renamed Goldman Sachs Princeton LLC in May 2001, and which changed its name to Goldman Sachs Hedge Fund Strategies LLC in December 2004. The Managing Member (together with predecessor entities) has over 35 years of experience in constructing diversified portfolios by selecting, allocating among, and monitoring absolute return-oriented (i.e., returns not measured against a benchmark) or “skill-based” Advisors. Skill-based Advisors are Advisors which, as a result of their particular investment style and skills, have the potential to be profitable regardless of the direction of the market (i.e., unlike long-only Advisors, which would be expected to make money when markets go up, and not during periods of market decline). The Managing Member has also developed computer systems and operational capabilities to assist in the monitoring of Advisors.
 
Each Investment Fund’s managing member seeks to identify Advisors to which it may allocate such Investment Fund’s assets through Advisor Funds, Managed Accounts and Portfolio Companies. The Advisor selection process includes a review by the Investment Fund’s managing member’s team of professionals, which may include representatives of its portfolio management, Advisor selection, risk and quantitative analysis, compliance, tax, legal, finance and operations areas.
 
Both qualitative and quantitative criteria are factored into each Investment Fund’s Advisor selection process. These criteria include portfolio management experience, strategy, style, historical performance, including risk profile and drawdown (i.e., downward performance) patterns, risk management philosophy and the ability to absorb an increase in assets under management without a diminution in returns. The managing member of each Investment


18


Table of Contents

Fund also examines the organizational infrastructure of each Advisor, including the quality of the investment professionals and staff, the types and application of internal controls and any potential for conflicts of interest. However, the Company and the Investment Funds do not control the Advisors and are frequently not able to review the actual books and investments of many Advisors since this is proprietary information and in many cases such information is not shared with the managing members of the Investment Funds, neither on a historical nor a current basis.
 
In determining the relative allocations of capital to each Advisor, an Investment Fund’s managing member considers the risk and return characteristics of each of the Advisors, including the average expected volatility of returns, drawdown patterns and liquidity and leverage characteristics, as well as their asset capacity limits and constraints. In addition, an Investment Fund’s managing member considers how each Advisor’s returns are expected to correlate to the other Advisors in the Investment Fund’s portfolio. It is expected that allocations will vary significantly over time as returns for different Advisors vary. An Investment Fund’s managing member also may adjust allocations from time to time when it deems it appropriate to do so. In addition, it is expected that individual allocations will grow larger or smaller as each Advisor’s performance varies over time.
 
The identity and number of the Advisors of an Investment Fund may change materially over time. The managing member of an Investment Fund may withdraw from or invest with different Advisors without prior notice to, or the consent of, the Company, the Members or the members of the Investment Fund.
 
The managing member of an Investment Fund may invest a substantial portion of the Investment Fund’s assets with Advisors that may have limited or no track records and Advisor Funds with limited or no operating histories. Certain Advisors may have limited or no experience managing certain of the strategies expected to be deployed by them in their investment programs. In such cases, the Advisors or individual members of their management teams generally will each have had, in the Investment Fund’s managing member’s opinion, relevant experience in other contexts trading in strategies similar to those that such Advisors are expected to utilize. However, the Company and the Investment Funds are not able to ensure Members that each of the Advisors, even those with longer track records, will perform as expected or not undertake actions that would not be in the best interest of the Company or the Members.
 
Any references in this Annual Report to strategies or techniques utilized by the Advisors on behalf of the Investment Funds include strategies or techniques utilized by (i) Advisors pursuant to investment management agreements entered into with either an Investment Fund or a Portfolio Company through which an Investment Fund allocates assets to such Advisor, or (ii) Advisor Funds in which the Investment Fund invests. See “PORTFOLIO COMPANIES”. In addition, any references in this Annual Report to strategies or techniques utilized by Advisors on behalf of the Investment Funds may also be utilized by the Advisors on behalf of the Company, should the Managing Member decide to make investments with Advisors outside of an investment in an Investment Fund. See “—Direct Allocations to Advisors”. References herein to Advisors include Advisor Funds managed by such Advisors.
 
Direct Allocations to Advisors
 
The Managing Member, in its sole discretion, may from time to time allocate some or all of the Company’s assets to Advisors directly (rather than through an investment in the Investment Funds). In such cases, the Managing Member may allocate Company assets to Advisors similar to the way Investment Funds allocate their assets (i.e., by investing, directly or indirectly, in Advisor Funds, Managed Accounts or Portfolio Companies). Any Advisor selection, portfolio design and monitoring will be conducted by the Managing Member in the same manner as described under “—Overview of the Investment Process of the Investment Funds” with respect to the Investment Funds.
 
The Managing Member will assign each direct allocation to an Advisor to a particular Investment Sector (and examine the risk characteristics of such investments), so that such direct allocations will be taken into account by the Managing Member for purposes of determining the appropriate allocation of the Company’s assets among the Investment Sectors. See “INVESTMENT PROGRAM—Allocation Among the Investment Funds”. The Administrator (as defined below) will value such direct allocations using the same policy as the Investment Funds apply to valuations of their assets.


19


Table of Contents

Administration fees are charged at the Investment Fund level. Unless the Company allocates assets directly to Advisors, no administration fee will be paid at the Company level. However, to the extent the Company allocates assets to Advisors other than through investments in Investment Funds, administration fees will be payable. In addition, if the Company allocates assets to Advisors through investments in Advisor Funds or Portfolio Companies, the Company will bear its pro rata portion of the offering, organizational and operating expenses of such Advisor Funds and Portfolio Companies, including management and incentive fees of the applicable Advisors. See “FEES AND EXPENSES”.
 
Should the Managing Member invest the Company’s assets with Advisors other than through an investment in an Investment Fund, the risks described herein with respect to the Investment Funds will also apply to the Company. See ITEM 1A. “RISK FACTORS” and “POTENTIAL CONFLICTS OF INTEREST”. In addition, any references in this Annual Report to strategies or techniques utilized by Advisors on behalf of the Investment Funds may also be utilized by the Advisors on behalf of the Company.
 
Certain Considerations Relating to Limited Capacity of Potential Advisors
 
The Goldman Sachs Group, Inc., together with Goldman Sachs & Co., HFS and their other subsidiaries and affiliates (“Goldman Sachs”) (collectively referred to herein, together with their affiliates, directors, partners, trustees, managers, members, officers and employees, as the “GS Group”) or accounts or other investment funds sponsored, managed or advised by Goldman Sachs may invest in Investment Funds, Advisor Funds or Portfolio Companies or allocate assets to the Investment Funds’ existing Advisors through Managed Accounts. Such entities or accounts may also seek to invest in funds managed by, or enter into managed account agreements with, investment managers to which it would be appropriate for the Company to allocate assets. For example, GS HFS is currently the managing member of three other Delaware limited liability companies (the “HFP U.S. Funds”), and the investment manager of three Irish public limited companies (the “HFP Ireland Funds”). In addition, GS HFS is the investment manager of Goldman Sachs Hedge Fund Partners Institutional, Ltd., a Cayman Islands exempted limited company (“HFP Institutional,” and together with the HFP U.S. Funds and the HFP Ireland Funds, the “HFP Funds”). The HFP Funds generally have investment objectives and strategies similar to those of the Company and the corresponding offshore funds except that HFP Institutional is currently intended for investment by benefit plans and other similar investors and the HFP Ireland Funds are generally open only to non-U.S. investors and certain tax-exempt U.S. investors.
 
In addition, each of the HFP U.S. Funds generally invests all or substantially all of its assets among other investment funds managed by GS HFS. These investment funds include the Investment Funds and other funds that have investment objectives and strategies similar to the Investment Funds. Similarly, the HFP Ireland Funds generally invest their assets among investment funds managed by GS HFS that have investment objectives and strategies similar to the Investment Funds. GS HFS may in the future develop and manage other investment vehicles that have investment objectives and strategies that are similar to the Company, the Investment Funds and the funds in which the HFP Funds invest.
 
Advisors may limit the amount of assets or the number of accounts that they will manage. In determining how to allocate investment opportunities among the Investment Funds, the other funds in which the HFP Funds invest and any other investment funds or accounts managed by Goldman Sachs, Goldman Sachs and/or GS HFS, as applicable, will take into account the investment objectives of each such entity or account and such other considerations as they deem relevant in their sole discretion.
 
Such allocations may present certain conflicts. For example, certain Advisors of the funds in which the HFP Funds invest may be closed to new investment. Such Advisors may manage a material portion of the total assets of the funds in which the HFP Funds invest. The Investment Funds and the Company may not be able to allocate assets to such Advisors. If at any time in the future these Advisors accept additional investments, the funds in which the HFP Funds invest may be given priority over the Investment Funds or the Company in the determination of how any available capacity is allocated. See “POTENTIAL CONFLICTS OF INTEREST—Potential Conflicts Relating to the Selection of Advisors, the Sale of Units and the Allocation of Investment Opportunities”.


20


Table of Contents

Hedging, Leverage and Other Strategies
 
Hedging
 
From time to time in its sole discretion, the Managing Member may employ various hedging techniques to reduce certain actual or potential risks to which the Company’s portfolio may be exposed. These hedging techniques generally will involve the use of derivative instruments, including swaps, futures and forward contracts, exchange-listed and over-the-counter put and call options, currency contracts and interest rate transactions. The Managing Member may employ these hedging techniques directly or by investing a portion of the Company’s assets in one or more entities managed by the Managing Member, an affiliate thereof or an Advisor that engages in such hedging techniques. The Company will bear, through its investment in any such entity, its pro rata portion of the expenses and fees of such entity.
 
Leverage
 
The Company, GTT, GELS and HFPO generally do not utilize leverage as part of their investment programs. Since April 1, 2008, GFS is able to utilize long-term leverage in its investment program, including, without limitation, to pursue investment opportunities that its managing member determines, in its sole discretion, are attractive during periods in which the capital of GFS is otherwise deployed. The amount of leverage utilized by GFS will be determined by its managing member from time to time based on factors deemed relevant by its managing member in its sole discretion, although such amount of leverage will not exceed 25% of the net asset value (the “NAV”) of GFS at the time of any borrowing.
 
Advisors are expected to utilize varying degrees of leverage in their investment programs. Leverage utilized by the Advisors in their and the Investment Funds’ investment programs may take the form of trading on margin, use of derivative instruments that are inherently leveraged and other forms of direct and indirect borrowings. Advisors may, but are not required to, borrow from Goldman Sachs. Advisors generally will determine the amount of leverage they utilize, provided that limitations on the amount of leverage may be imposed on Advisors by their governing documents or investment management agreements, as applicable. The managing member of the Investment Funds, on behalf of each Investment Fund, may seek to adjust the degree of leverage with which such Investment Fund as a whole invests by taking the Advisors’ anticipated leverage use into account when allocating and reallocating the Investment Fund’s assets among the Advisors. However, the managing member of an Investment Fund generally will not have any right to adjust the amount of leverage utilized by any of the Advisors, and generally does not exercise such right if available. Adjustments to an Investment Fund’s overall leverage level will be based on factors deemed relevant by its managing member, including its assessment of the risk/reward parameters of the Advisors and the strategies currently included in such Investment Fund’s investment portfolio.
 
The managing member of an Investment Fund may also elect, in its sole discretion, to cause an Investment Fund to invest indirectly in an Advisor Fund through a swap, option or other structure designed to provide greater leverage than a direct investment in the Advisor Fund. See “—Indirect Investments in Advisor Funds and with Advisors” and ITEM 1A. “RISK FACTORS—Investment Related Risks—Risks Related to Investment and Trading—The Use of Leverage May Substantially Increase the Adverse Impact to Which the Investment Funds’ Investment Portfolios May be Subject”.
 
The Company and each Investment Fund may, but is not required to, borrow (including through direct borrowings, borrowings through derivative instruments or otherwise) from Goldman Sachs or other parties, when deemed appropriate by its managing member in its sole discretion, including, without limitation, in anticipation of subscriptions, to make investments, make distributions in respect of redemptions of membership units, pay expenses or make margin calls or for other purposes.
 
There can be no assurance that the Company or the Investment Funds will be able to obtain financing on terms available to any other funds or accounts managed by the Managing Member and its affiliates, or to competitors, including terms which may be currently available in the market, or that financing will be accessible by the Company or the Investment Funds at any time, and to the extent that it is available there can be no assurance that such financing will be on terms favorable to the Company or the Investment Funds, including with respect to interest rates. The use of leverage can substantially increase the adverse impact to which the investment portfolios of the


21


Table of Contents

Company and the Investment Funds may be subject. See “RISK FACTORS” and “POTENTIAL CONFLICTS OF INTEREST.”
 
In lieu of, or in addition to, obtaining a revolving credit line, the Company and the Investment Funds may determine from time to time to attempt to borrow funds as and when needed, as opposed to relying on committed facilities, with respect to all or a portion of its borrowing needs. Subject to applicable law, the Company and the Investment Funds may make borrowings from Goldman Sachs on this basis. Such borrowings would therefore generally not involve the payment of any commitment fees, but may result in a higher interest rate when borrowings are made than would have been the case had a committed facility been in place, and could leave the Company and the Investment Funds at risk in situations where no such financing is available, or is only available at high rates. In addition, the terms of any such borrowings may provide that such borrowings may be subject to repayment at any time upon demand by the lender, which could occur at a time when complying with such demand could have a material adverse effect on the Company and the Investment Funds.
 
On June 30, 2006, the Company entered into a committed credit facility (as amended from time to time, the “Credit Facility”) with Barclays Bank PLC (the “Facility Counterparty”). On June 6, 2008, the Company extended the maturity date of the Credit Facility for an additional two-year period to, and including, June 5, 2010 amended certain terms of the Credit Facility. The Company further amended certain terms of the Credit Facility on January 28, 2010. As of December 31, 2009, the Company had no outstanding borrowings under the Credit Facility. Pursuant to the Credit Facility, the Company may borrow up to an amount equal to the lesser of (i) $33,700,000 which amount may be subsequently increased to $100,000,000 subject to the approval of the Facility Counterparty, and (ii) 14.25% of the Company’s NAV from time to time. If borrowings by the Company exceed 14.25% of its NAV at any time, then the Company is required to make mandatory prepayments to the extent necessary so that borrowings (subject to adjustments for pending redemptions by the Company) do not exceed 12.5% of the Company’s NAV, payable when the Company has received proceeds of redemptions from the Investment Funds. The Company is also required to prepay all borrowings if, after a five business day remediation period, the Facility Counterparty notifies the Company that its investments in Investment Funds continue to not meet certain liquidity and diversification criteria set forth in the Credit Facility, payable within ninety days of any such notice. The Company may voluntarily borrow, repay and reborrow advances on a revolving basis. The advances bear interest at a per annum rate equal to (i) with respect to advances provided on less than three business days’ notice, the overnight LIBOR, for the initial day of such advance and one-week LIBOR thereafter, and (ii) with respect to all other advances, one-week LIBOR, plus in each case 1.00%. The Company also pays a monthly commitment fee to the Facility Counterparty at the rate of 0.29% per annum of the average daily aggregate unused portion of the commitment. If the Company terminates the Credit Facility prior to the stated final maturity, it has agreed to pay a fee (except in certain circumstances where no such fee will be payable) equal to the product of 0.25% per annum times the commitment in effect immediately prior to such optional termination times “M”; where “M” equals the period commencing on the date of such optional termination and ending on the stated final maturity. The proceeds of the advances under the Credit Facility will be used for liquidity management in connection with subscriptions to the Company and redemptions of the Company’s investments in the Investment Funds and for general purposes not prohibited by the Credit Facility or the investment guidelines therein. The obligation of the Facility Counterparty to make advances is subject to customary conditions precedent, including the absence of defaults. The terms of the Credit Facility include various affirmative and negative covenants, including restrictions on additional indebtedness, liens and change of control events. See ITEM 7. “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Liquidity and Capital Resources” and Note 7 to the financial statements for a description of the Credit Facility. The Investment Funds have entered into a similar facility with a different counterparty, except HFPO which does not participate in a credit facility. As a condition to any such borrowing, the Company and each Investment Fund may be required to comply with certain investment guidelines, which may include without limitation, restrictions on permitted investments, strategy limits, leverage and borrowing restrictions, liquidity and diversification guidelines, and remediation requirements. Advisors may also borrow funds for similar purposes or enter into other similar transactions (including from or with Goldman Sachs). The managing member of the Company and each Investment Fund may modify, as applicable, the Company’s or the Investment Fund’s borrowing policies, including the purposes of borrowings, and the length of time that the Company or the Investment Fund may hold portfolio securities purchased with borrowed money. The rights of any lenders to the Company or an Investment Fund to


22


Table of Contents

receive payments of interest or repayments of principal will be senior to those of the members of the Company and the Investment Fund and the terms of any borrowings may contain provisions that limit certain activities of the Company and an Investment Fund.
 
Temporary and Defensive Strategies
 
The Company and the Investment Funds may, from time to time, take temporary or defensive positions in cash, cash equivalents, other short-term securities or money market funds to attempt to minimize volatility caused by adverse market, economic, or other conditions. Any such temporary or defensive positions could prevent the Company and the Investment Funds from achieving their investment objectives. In addition, the Company may, in the Managing Member’s sole discretion, hold cash, cash equivalents, other short-term securities or investments in money market funds pending allocation to Investment Funds, in order to fund anticipated redemptions, expenses of the Company or other operational needs, or otherwise in the sole discretion of the Managing Member. The Investment Funds are permitted to hold cash or invest their cash balances in the same manner as the Company.
 
Indirect Investments in Advisor Funds and with Advisors
 
An Investment Fund will typically invest directly in an Advisor Fund by purchasing an interest in such Advisor Fund. There may be situations, however, where an Advisor Fund is not open or available for direct investment or where the managing member of such Investment Fund elects for other reasons to invest indirectly in an Advisor Fund. Such an instance may arise, for example, where an Investment Fund’s proposed allocation does not meet an Advisor Fund’s investment minimums or where the Investment Fund desires to use an instrument that provides leverage with respect to an investment in an Advisor Fund.
 
An Investment Fund may invest indirectly in one or more Advisors by allocating assets to investment funds (each, an “Indirect Investment Fund”) managed by the managing member of the Investment Fund or an affiliate thereof, so long as the Investment Fund is not subject to an additional management fee or performance-based fee or allocation by the managing member of the Indirect Investment Funds or its affiliate in connection with such investment. An Investment Fund may also invest indirectly in an Advisor Fund through an investment vehicle (a “Feeder Fund”) established by the Managing Member, an Advisor or any of their respective affiliates that invests all or substantially all of its assets in such Advisor Fund. Indirect Investment Funds and Feeder Funds may invest assets in Advisor Funds that charge performance-based compensation similar to the Company, with such compensation being paid only if gains exceed prior losses (i.e., the NAV of the interest in the Advisor Fund must first exceed a “high water mark” attributable to a previously obtained NAV). In such circumstances, appreciation in the net assets managed by an Advisor at any given time will be shared pro rata by all of the investors in the applicable Indirect Investment Fund or Feeder Fund at such time, not just those who were investors at the time prior losses were incurred. The value attributable to the fact that no performance-based compensation will be paid to an Advisor until its gains exceed its prior losses (the “Loss Carry-forward Value”) may not be taken into account in determining the NAV of the Indirect Investment Fund or Feeder Fund. Therefore, such Loss Carry-forward Value to existing investors in the Indirect Investment Fund or Feeder Fund could be diluted by new subscriptions for interests because the new interests will participate in any positive performance by the Advisor until its gains exceed its prior losses without the Advisor being paid any performance-based compensation. Certain Indirect Investment Funds and Feeder Funds may invest with Advisors that have the right to designate investments as “special investments”. Such special investments raise additional liquidity and valuation risks for the applicable Indirect Investment Fund or Feeder Fund (and indirectly the Company). See ITEM 1A. “RISK FACTORS—Investment Related Risks—Risks Related to Issuers of Securities—Advisor Special Investments” and ITEM 7. “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Liquidity and Capital Resources”. Feeder Funds may be managed by the Managing Member or an affiliate thereof so long as the Company is not subject to an additional management fee or performance-based fee or allocation by the Managing Member or its affiliate in connection with such investment. An Investment Fund may also invest in an Advisor Fund indirectly by purchasing or entering into a “Derivative Advisor Investment,” which is a derivative instrument (such as a structured note, swap or similar contract) designed to pay a return approximately equal to the total return of the Advisor Fund. A Derivative Advisor Investment acquired by an Investment Fund generally would require a counterparty to pay to the Investment Fund a return based on the return of a particular Advisor Fund, in exchange for


23


Table of Contents

consideration from the Investment Fund equivalent to the cost of purchasing an ownership interest in the Advisor Fund. In addition, in the sole discretion of the managing member of the Investment Funds, a Derivative Advisor Investment may be structured in a manner that provides greater leverage than a direct investment in the Advisor Fund, which may increase the risks to the Investment Fund and consequently, the Company. Indirect investments through Derivative Advisor Investments carry with them the credit risk associated with the applicable counterparty. In addition, such investments may be subject to transaction and other fees, which may reduce the value of the Investment Fund’s underlying investment. There can be no assurance that a Derivative Advisor Investment will have the same or similar results as a direct investment in an Advisor Fund, and the Investment Fund’s value, and consequently the value of the Company, may decrease as a result of making a Derivative Advisor Investment.
 
Investment in Exchange-Traded Advisor Funds
 
From time to time, the Company may (directly or indirectly through an Investment Fund) invest in shares or other interests of Advisor Funds which are traded on a stock exchange. Unlike a typical private investment fund, an investor (including the Company) holding shares of an exchange-traded Advisor Fund generally will not have the right to require the Advisor Fund to redeem its shares. Instead, if an investor wishes to realize all or a portion of its investment in the exchange-traded Advisor Fund, it must sell its shares through the applicable exchange at a price set by the market. There can be no assurance that the market price for such shares will reflect the underlying NAV of the shares; such shares may trade at a significant discount to NAV for extended periods of time or at all times. In addition, there can be no assurance that an active trading market in the shares of an exchange-traded Advisor Fund will develop or will be sustained, and if no such market is developed or sustained, the price and liquidity of such shares may be adversely affected. In addition, certain parties, including investors or potential investors in an exchange-traded Advisor Fund, may receive information that has a bearing on the NAV of the Advisor Fund that is not available or has not been made available to the Advisor Fund or other investors (including the Company). These parties may act on the basis of such information in ways that have adverse effects on such Advisor Fund or investors in such Advisor Fund, including the Company.
 
Co-Investment and Other Investment Opportunities
 
Goldman Sachs (including, without limitation, the Managing Member) may receive notice of, or offers to participate in, investment opportunities from Advisors, their affiliates or other third parties. Advisors or such other parties (for themselves or funds or accounts under their management) may or may not elect to invest in such opportunities. In this regard, because of many factors and relationships, including considerations that Client/GS Accounts (as defined below), including the Company and the Investment Funds, are investors or have other relationships with such Advisors, as a general matter, neither the Company nor the Investment Funds will have any entitlement to participate in such investments. In certain very limited circumstances, through a pre-emptive or other similar right, the Company or the Investment Funds may have an entitlement which may or may not be realized or exercised. Furthermore, whether or not a pre-emptive or other right exists, such investment opportunities may not be appropriate for the Company or the Investment Funds, considering the Company’s and the Investment Funds’ investment mandate of allocating their assets to, or investing in entities managed by, a portfolio of Advisors. This may be particularly true in cases of direct investments in securities or other assets that either are not managed by the Advisor or are not part of a broader portfolio of securities or other assets. Therefore, there should not be an expectation that the Company or the Investment Funds will participate in any such investment opportunities.
 
Any such opportunity may be undertaken by other Client/GS Accounts, including without limitation, investment vehicles formed, sponsored, managed or advised by Goldman Sachs to invest in such opportunities, or by Goldman Sachs for its own account. Goldman Sachs’ other activities may have an impact on the selection of Advisors for the Company and the Investment Funds. Certain investment vehicles may be organized to facilitate the investment by Goldman Sachs and certain current or former directors, partners, trustees, managers, members, officers, consultants, employees and their families and related entities, including employee benefit plans in which they participate.
 
Any references in this Annual Report to strategies or techniques utilized by the Advisors on behalf of the Investment Funds include strategies or techniques utilized by (i) Advisors pursuant to investment management agreements entered into with either the Investment Fund or separate Cayman Islands limited liability companies


24


Table of Contents

formed by the managing member of an Investment Fund through which the Investment Fund allocates assets to such Advisor or (ii) Advisor Funds in which an Investment Fund invests. See “PORTFOLIO COMPANIES”.
 
Secondary Investments
 
The Company and the Investment Funds may also purchase or sell direct or indirect interests in Advisor Funds through secondary market transactions. Valuation of assets acquired in a secondary market transaction may be difficult, as there generally will be no established market for these assets. See “RISK FACTORS—Risks Associated with the Company Investing in Other Entities—Valuation of the Investment Funds’ Investments will be Determined Utilizing 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.” In addition, such assets are likely to be illiquid or less liquid than the Company and the Investment Funds. See “RISK FACTORS—Risks Related to the Units, Liquidity of Units and the Offering of the Units—The Company has Limited Liquidity and Limited Rights for Redemption.”
 
Potential Types of Advisor Investments
 
The Advisors may invest in securities, assets and instruments of any type, long or short, including, without limitation, the following: equity securities and instruments including, without limitation, common stock, preferred stock, equity index futures and forwards, interests in real estate investment trusts, convertible debt instruments, convertible preferred stock, equity interests in trusts, partnerships, joint ventures, limited liability companies, warrants and stock purchase rights, swaps and structured notes; fixed income instruments including bonds, interest rate futures contracts and swaps, options on futures, indices, loan participations, trade claims and government and corporate debt instruments (both rated and unrated); currencies and positions on currencies, spot transactions, currency forwards, cross currency swaps, options and futures on currencies; commodities and futures, including without limitation, spot transactions in commodities, commodities futures and swaps and options on futures; and structured financial products, including mortgage-backed securities, pass-throughs and other asset-backed securities (both investment-grade and non-investment grade). The Advisors may employ short selling, and trade in securities without active public markets, indices, over-the-counter options, when-issued and forward commitment securities and engage in the borrowing and lending of portfolio securities. The Advisors may also engage in derivative transactions including swaps and repurchase and reverse repurchase agreements or other strategies to hedge against securities, currencies or interest rates or to manage risk relating to their portfolio investments, to leverage their portfolio and to establish positions. The Advisors may invest in both U.S. and non-U.S. issuers, including issuers of emerging market countries.
 
Economic Arrangements with Advisors
 
From time to time, the Company, an Investment Fund, Goldman Sachs and/or other clients or accounts of Goldman Sachs (including other investment funds sponsored, managed or advised by the Managing Member or its affiliates, collectively, “Participants”) may enter into economic arrangements with an Advisor Fund or an Advisor in connection with an investment in an Advisor Fund or with an Advisor. Such economic arrangements may include, without limitation, the agreement by an Advisor to reduce or rebate any fees, allocations or other compensation incurred by a Participant in respect of an investment in an Advisor Fund; the agreement by an Advisor to pay or share with a Participant or any third party some or all of the fees, allocations or other compensation earned by the Advisor with respect to one or more Advisor Funds; or the agreement by a Participant to acquire or receive an interest (which may be significant) in the equity of and/or profits or revenues earned by an Advisor and/or its affiliates in respect of its business.
 
The determination as to whether or not the Company or an Investment Fund should negotiate or enter into any such arrangements will be made by the Managing Member or the managing member of the Investment Funds, as applicable, in its sole discretion, based on factors which it considers to be relevant. To participate in such arrangements, the Company or the Investment Fund may be required to make an initial or periodic payment or contribution to the Advisor Fund, which may be substantial. In addition, the Company or the Investment Fund may be required to invest in an Advisor Fund on terms that are more restrictive or less advantageous than may be available to other investors, including without limitation, agreeing to lock up a substantial portion or all of its


25


Table of Contents

investment in such Advisor Fund for an extended period of time. Any such determination made on behalf of the Company or an Investment Fund may differ from a determination made by Goldman Sachs in respect of itself or its other Client/GS Accounts. See “POTENTIAL CONFLICTS OF INTEREST—Potential Conflicts Relating to the Selection of Advisors, the Sale of Units and the Allocation of Investment Opportunities” and “—Potential Conflicts Relating to the Allocation of Investment Opportunities Among the Company or the Investment Funds and Other Goldman Sachs Accounts”. Subject to applicable law, Goldman Sachs may participate in or be allocated any such arrangements or opportunities.
 
Such an arrangement, if entered into by the Company or an Investment Fund, may pose liquidity and valuation risks for the Company or the Investment Fund. For example, such an arrangement may be contingent on the Company or the Investment Fund investing in one of the Advisor’s Advisor Funds and locking up such investment for long periods of time, potentially for several years. There can be no assurance that any such arrangement will be beneficial to the Company or the Investment Fund, or that the benefits will outweigh the detriments of any such arrangement. The assets of the Company or the Investment Fund may be tied up in such arrangements for substantial periods of time, during which time the Company or the Investment Fund may be unable to liquidate such assets to pursue more profitable investments. Requests to redeem a substantial amount of the interests in the Company or the Investment Fund may require the Company or the Investment Fund to redeem interests from other more liquid assets in order to meet such redemption requests. This could limit the ability of the Managing Member or the managing member of the Investment Funds, as applicable, to successfully implement the investment program of the Company or the Investment Fund and could have a material adverse effect on the portfolio mix of the Company or the Investment Fund and liquidity for remaining members therein. There can be no assurance that any such illiquid investments will not constitute a material portion of the Company’s portfolio, particularly following substantial redemptions from the Company.
 
Any fee and/or profit sharing arrangements with, or interest in the profits of, an Advisor, if entered into by the Company or an Investment Fund, will be an asset of the Company or the Investment Fund, and its value will need to be determined in connection with calculating the NAV for purposes of, among other things, subscriptions, redemptions and fees. However, any such arrangements may be difficult to value and generally will not be transferable. The value of any such asset will be determined in accordance with U.S. GAAP consistently applied as a guideline and according to such procedures as may be established from time to time by the Managing Member or the managing member of the Investment Funds, as applicable, in its sole discretion. There is no guarantee, however, that any value given to any such asset will represent the value that would be realized by the Company or the Investment Fund in respect of the asset at the time of liquidation. The value of any such asset may change over time and any such asset could lose some or all of its value.
 
If Goldman Sachs or clients of Goldman Sachs other than the Company or the Investment Funds invest in, or provide financial or non-cash support to, or acquire or receive an interest in the equity of and/or profits or revenues of, an Advisor, or enter into an arrangement with such Advisor to share in fees, allocations and/or profits earned by such Advisor, such arrangement may cause potential conflicts of interest. See “POTENTIAL CONFLICTS OF INTEREST”.
 
The investment program of the Company and each of the Investment Funds entails substantial risks. There can be no assurance that the investment objective of the Company or any Investment Fund, including their asset allocation, risk monitoring and diversification goals, will be achieved, and results may vary substantially over time. Advisors that are directly or indirectly investing Company assets are expected to utilize forward or futures contracts, options, swaps, other derivative instruments, short sales, margin or other forms of leverage in their investment programs. Such investment techniques can substantially increase the adverse impact to which an Investment Fund’s, and the Company’s investment portfolio may be subject. See ITEM 1A. “RISK FACTORS”.
 
INTERNATIONAL ACTIVITIES
 
The Company has historically allocated its assets to the Investment Funds who in turn have historically allocated their assets to Advisors located throughout the world. From time to time, these Advisors invest in securities of non-U.S. issuers, including companies based in less developed countries (i.e., “emerging markets”), or in securities issued by the governments outside the United States. A portion of the Company’s assets, therefore,


26


Table of Contents

ultimately may be invested in securities and other financial instruments denominated in non-U.S. currencies, the prices of which are translated into U.S. dollars for purposes of calculating the Company’s NAV. Some Advisors may invest exclusively in securities and other financial instruments denominated in non-U.S. currencies. The Investment Funds have invested, from time to time, up to 40%-50% of their assets with Advisors located outside the United States or in non-U.S. markets or financial instruments. The amount so invested outside the United States could be significantly greater than such amount at any particular time in the future. Historical international investment activity may not be indicative of current or future levels.
 
The value of the Company’s assets and liabilities may fluctuate with U.S. dollar exchange rates as well as with the price changes of the Advisors’ investments in the various local markets and currencies. Investing in securities of companies which are generally denominated in non-U.S. currencies involve certain considerations comprising both risks and opportunities not typically associated with investing in securities of U.S. issuers. See ITEM 1A. “RISK FACTORS—Investment Related Risks—Risks Related to International Investments—Trading on Non-U.S. Exchanges May Involve Higher Risk of Financial Irregularities and/or Lack of Appropriate Risk Monitoring and Controls,” “—Non-U.S. Investments Involve Special Risks not Usually Associated with Investments in U.S. Securities,” “—Investment in Emerging Markets Involves Significant Risks, Including Inflation and Currency Devaluations,” “—Foreign Currency Transactions and Exchange Rate Risk Create Additional Risks for Advisors Investing in Certain Financial Instruments,” and “—Non-U.S. Futures Transactions Afford Less Protection as Rules of a Non-U.S. Exchange May Not be Enforced by a U.S. Regulator”.
 
PORTFOLIO COMPANIES
 
The Investment Funds may also allocate assets to Advisors through investments in Portfolio Companies, each of which allocates its assets to a single Advisor via a separately managed discretionary account. The managing member of the Investment Funds or an affiliate thereof is the investment manager of each Portfolio Company to which the Investment Funds allocate assets, and the officers and all or a majority of the directors of each such entity are persons that are employed by, or are otherwise affiliated with, the managing member of the Investment Funds or their affiliates. Portfolio Companies may have other investors in addition to the Investment Funds. See “POTENTIAL CONFLICTS OF INTEREST”. It is expected that one investor in each Portfolio Company will be an exempted company incorporated with limited liability under the laws of the Cayman Islands or an Irish public limited company each of which is managed by the managing member of the Investment Funds and formed to accept subscriptions from non-U.S. persons and U.S. tax-exempt entities.
 
Each Portfolio Company (or the managing member of the applicable Investment Fund, in its capacity as investment manager, on behalf of the Portfolio Company) will enter into an investment management agreement with an Advisor selected by the managing member of the applicable Investment Fund. Each investment management agreement provides for the payment of fees and expenses of the Advisor, any restrictions on the Advisor relating to the management of the assets, including restrictions relating to leverage and investment strategies, if applicable, and rights of the managing member of the Investment Fund with respect to ongoing monitoring and risk management, which may include rights to receive reports, require the disposition of positions and withdraw all or a portion of an allocation to the Advisor. A Portfolio Company may issue shares of various series or classes, which may bear fees or have terms that differ from the shares held by the applicable Investment Fund or the corresponding offshore investment fund. Each Portfolio Company reserves the right in its sole discretion and for any reason to waive fees of, or impose different fees on, any investor, as may be agreed to by the Portfolio Company and the investor. Each Portfolio Company may, by agreement with its Advisor, structure the Advisor’s fees (or a portion thereof) as an incentive allocation or other arrangement.
 
Any Portfolio Company is expected to be formed as an exempted company incorporated with limited liability in the Cayman Islands. The governing documents of each Portfolio Company provide, among other things, for the management of the Portfolio Company by its board of directors, redemption rights of investors in the Portfolio Company (which will be negotiated on a case-by-case basis with each investor, provided that the Investment Funds have the right to redeem their shares upon request, subject to any restrictions contained in the investment management agreement between the Portfolio Company and the Advisor), certain fees and expenses as discussed below and under “FEES AND EXPENSES,” and indemnification and exculpation of the managing


27


Table of Contents

member of the Investment Funds (in its capacity as the investment manager of the Portfolio Company) and its affiliates.
 
Goldman Sachs will be issued the only voting shares of each Portfolio Company, and only those voting shares will be entitled to vote on most Portfolio Company matters, including the election of the Portfolio Company’s directors. Accordingly, an investor in a Portfolio Company (including the applicable Investment Fund) generally will have little or no control rights with respect to the activities of the Portfolio Company, including modifying or enforcing the terms of the investment management agreement between the Portfolio Company and the Advisor. In addition, the terms of a Portfolio Company may be amended in accordance with the memorandum of association and articles of association of such Portfolio Company, without notification to the Members or the investors in the applicable Investment Fund (including the Company).
 
The board of directors of a Portfolio Company may cause such entity to list its shares on the Irish, Luxembourg or other stock exchange, or to enter into a transaction or series of transactions in which the investors of the Portfolio Company become beneficial owners of economically comparable equity interests of another entity, which may be domiciled outside the Cayman Islands, so long as (i) the investors of the Portfolio Company do not suffer any material adverse economic effect as a result thereof or (ii) the investors of the Portfolio Company receive prior written notice of any initial listing or transaction and an opportunity to redeem their interests in the Portfolio Company prior to the effectiveness of the initial listing or transaction.
 
The managing member of an Investment Fund will not charge any management fee or performance-based fee or allocation at the Portfolio Company level. Each Portfolio Company, however, will pay the Administrator certain fees as described more fully in “FEES AND EXPENSES” and will be responsible for reimbursing the Administrator for its reasonable out-of-pocket expenses incurred in connection with providing services to the Portfolio Company.
 
Each investor in a Portfolio Company (including the applicable Investment Fund) shares in the appreciation and depreciation of the NAV of the Portfolio Company for any accounting period pro rata based on the relative NAV of the investor’s interest as of the beginning of such accounting period (adjusted as necessary to take into account subscriptions, redemptions and distributions, any Advisor fees and any performance-based Advisor compensation or allocations not borne in the same proportions by each investor, and other events as determined by the Portfolio Company’s board of directors in its sole discretion).
 
The applicable Investment Fund bears, indirectly through its investment in each Portfolio Company, a pro rata portion of the expenses of each Portfolio Company in which it invests. Such expenses include each Portfolio Company’s own offering, organizational and operating expenses, including any management and performance-based fees or allocations payable to the Advisor of the Portfolio Company’s assets pursuant to the Portfolio Company’s investment management agreement. The Company bears, indirectly through its investment in the Investment Funds, a pro rata portion of the expenses of each Portfolio Company in which the Investment Funds invest. See “FEES AND EXPENSES”. In addition, each Portfolio Company is responsible for (and the applicable Investment Fund and, in turn, the Company indirectly will be affected by) indemnifying each of the managing member of the applicable Investment Fund (in its capacity as investment manager of the Portfolio Company), Goldman Sachs, members of the board of directors, officers of the Portfolio Company, persons controlling, controlled by or under common control with any of the foregoing, or any of their respective directors, members, stockholders, partners, officers, employees or controlling persons against any losses, claims, costs, damages or liabilities to which such person may become subject in connection with any matter arising out of or in connection with the business or affairs of the Portfolio Company, except to the extent that any such loss, claim, cost, damage or liability results solely from the willful misfeasance or gross negligence (as interpreted under the laws of the State of New York) of, or any criminal wrongdoing by, such indemnified person. A Portfolio Company may agree to indemnify certain of the Advisors and their respective officers, directors and affiliates from liability, damage, cost or expenses to which such person may become subject in connection with matters arising out of or in connection with the business or affairs of the Portfolio Company.
 
References in this Annual Report to assets or investments of the Company, the Investment Funds and the Advisors shall be deemed to include interests in Portfolio Companies and assets and investments of Portfolio


28


Table of Contents

Companies to the extent of the Company’s and the Investment Funds’ indirect interest therein, whether or not so indicated, where the context permits.
 
FEES AND EXPENSES
 
The Company pays the Managing Member a monthly management fee, accruing daily (the “Management Fee”), equal to one-twelfth of 1.25% of the NAV of the Company in respect of each series of Class A Units, determined as of the end of each month, appropriately adjusted to reflect capital appreciation or depreciation and any subscriptions, redemptions or distributions. For purposes of determining the Management Fee, the NAV of each such series of Class A Units are not reduced to reflect any accrued incentive allocation (the “Incentive Allocation”), including any Incentive Allocation that is allocated to the Managing Member as of such date. The Management Fee payable in respect of any other class of units may be different from the Management Fee payable in respect of the Class A Units. The Management Fee in respect of each series of units will reduce the capital account of the series of units to which it relates, as described under “—Capital Accounts; Allocation of Gains and Losses”. In return for receiving the Management Fee, the Managing Member, among other things, constructs the portfolio of the Company and evaluates and monitors the performance of each of the Investment Funds. The managing member of each of the Investment Funds (which is currently the Managing Member) does not receive a separate management fee from the Investment Funds for investments in the Investment Funds by the Company because the Company owns “no-fee shares” of each of the Investment Funds.
 
The Company is currently issued units of a class of membership interests of each Investee (“no-fee-shares”) which are not subject to any management fees or incentive allocation, although the Company may be charged management fees or an incentive allocation in the future. Because the Company owns “no-fee-shares” in each of the Investees, there are no incentive allocations or management fees paid to the Managing Member in respect of the Company’s investments in each of the Investees. The ratios shown below do not reflect the inclusion of the Company’s proportionate shares of expenses of the Investees, including the administration fees paid, directly or indirectly, by the Investees.
 
Fees and Expenses for Class A Series 1 of the Company for the year ended December 31, 2009 are as follows:
 
         
    Class A
 
    Series 1  
 
Ratios to average net assets (annualized):
       
Expenses
    1.46 %
Incentive allocation
    0.00 %
Total expenses and incentive allocation
    1.46 %
 
The table below sets forth certain information with respect to the Company including fees and expenses paid to the Managing Member by the Company. The dollar amounts of fees and expenses are shown for fiscal year 2009 and are based on a $1,000,000 investment in Class A Series 1 made as of January 1, 2009.
 
                 
Fees and
  Percentage
  Dollar
Expenses
  Amount   Amount
 
Management Fee
    1.25%(1)     $ 13,131(4)  
Incentive Allocation
    5%(2)     $ 4,498(4)  
Administration Fee
    N/A(3)     $ 526(4)  
Placement Fee
    None       None  
Entry Fee
    None       None  
Exit Fee
    None       None  
Minimum Subscription Amount
    N/A     $   1,000,000(5)  
 
 
(1) The Managing Member receives a monthly Management Fee, equal to one-twelfth of 1.25% of the net assets of the Company, determined as of the end of the applicable month, appropriately adjusted to reflect capital appreciation or depreciation and any subscriptions, redemptions or distributions. See “—Capital Accounts; Allocation of Gains and Losses”.


29


Table of Contents

 
(2) At the end of each fiscal year of the Company, the Managing Member is entitled to receive an Incentive Allocation equal to 5% of the increase in the NAV of each series of units. The Managing Member does not receive a payment or make a contribution in the event of a decrease in the NAV of a series of units, and the Managing Member is only entitled to receive an Incentive Allocation relating to an increase in NAV of a series of units if the NAV of such series is above a Prior High NAV (as defined below). See “—Capital Accounts; Allocation of Gains and Losses”.
 
(3) The Company bears a pro rata portion of the administration fee paid to the administrator of the Investees for services provided to the Investees and Portfolio Companies. SEI is the administrator of each Investment Fund and certain Portfolio Companies. Throughout 2009, the administration fee rate (as discussed below) ranged between 0.05% and 0.06%.
 
(4) Based on an investment of $1,000,000 in Class A Series 1 Units as of January 1, 2009.
 
(5) The minimum subscription by a purchaser of Units is $1,000,000, although the Managing Member, in its sole discretion, may accept subscriptions below the minimum.
 
SEI Global Services, Inc. (“SEI”) is the administrator of the Company, the Investment Funds and the Portfolio Companies (the “Administrator”). The Administrator is responsible for, among other things, calculating the NAV for the Company; maintaining capital accounts; valuing securities and other assets, including securities which are not readily marketable; assisting in the preparation of financial statements and tax returns; assisting in the preparation and distribution of reports; maintaining a registry of ownership and providing certain other administrative services. In addition, the Administrator provides the Company with, among other things, office space, utilities, computer equipment and services, and secretarial, clerical and other personnel. Further, the Administrator may assist in the preparation of the Company’s periodic and other reports including filing such reports with the U.S. Securities and Exchange Commission (the “SEC”) and other services associated with the Company being a registrant under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). See ITEM 1A. “RISK FACTORS—Special Risks of the Company’s Structure—Risks Related to the Company’s Structure—The Company’s Financial Statements are, and in the Future Will Ultimately be, Based on Estimates of Valuations Provided by Third Party Advisors Which May not be Accurate or May Need to be Adjusted in the Future”. From time to time, the terms and conditions of the Administration Agreement may be amended as agreed between the Managing Member and the Administrator.
 
Unless the Company allocates assets directly to Advisors (see “PERFORMANCE OF THE COMPANY—Direct Allocations to Advisors”), SEI does not receive a fee directly from the Company for its service as the Administrator. However, the Administrator receives a per investor servicing charge and will be reimbursed by the Company for all of its reasonable out-of-pocket expenses. The Company will also bear its pro rata portion of each Investment Fund’s administration fees.
 
Each Investment Fund pays SEI an administration fee equal to a percentage of such Investment Fund’s NAV, calculated and paid on a monthly basis, at a rate based on the total assets managed by the managing member of the Investment Fund that are administered by SEI and its affiliates (the “Administration Fee”). For purposes of determining the Administration Fee, the NAV of the Investment Fund will not be reduced to reflect any accrued but unpaid incentive allocation or management fees payable at the Investment Fund level. In addition, each Investment Fund pays SEI a fee in respect of the assets that the Investment Fund allocates to each Managed Account, and each Portfolio Company pays SEI a fee, a portion of which will be borne by the Investment Fund through its investment therein (each, an “Account Administration Fee” and collectively, the “Account Administration Fees”). Each Account Administration Fee will be equal to a percentage of the NAV of the applicable Managed Account or Portfolio Company, calculated and paid on a monthly basis, at a rate which will vary depending on the complexity of the administration of the Managed Account or Portfolio Company and the total assets of Managed Accounts and Portfolio Companies of a similar type that are administered by SEI. As a result of the foregoing, the amount of the Account Administration Fees borne directly or indirectly by the Company will be greater or lesser depending on the percentage of the Company’s assets that are directly or indirectly allocated to Managed Accounts and Portfolio Companies, and on the complexity of the administration of such Managed Accounts and Portfolio Companies. Each Investment Fund will also pay SEI a monthly investor servicing charge for each investor in the Investment Fund and reimburse SEI for reasonable expenses incurred in connection with providing services to the Investment Fund and the Managed Accounts, and the Investment Fund will bear, through its investment in each Portfolio Company, a


30


Table of Contents

portion of similar expenses incurred by such Portfolio Company. In the event that the Company allocates assets directly to Advisors rather than through an investment in an Investment Fund, the Company will pay SEI administration fees similar to the administration fees paid at the Investment Fund level. In 2008, the administration fee rate ranged between 0.04% and 0.06%. In 2009, the administration fee rate ranged between 0.05% and 0.06%.
 
Pursuant to the Administration Agreement with SEI, the Company has agreed to indemnify and hold SEI harmless from and against any loss or liability (including, without limitation, any loss or liability arising out of any act or omission of SEI or any claim asserted or threatened in connection with SEI’s performance of its obligations or duties under the Administration Agreement), except where such loss or liability arises as a result of the willful misfeasance, bad faith or negligence of SEI, or by reason of SEI’s reckless disregard of its duties under the Administration Agreement.
 
The Company, the Investment Funds and the Portfolio Companies may, in the future, engage other entities, which may be affiliated with the Managing Member, to provide administration services to the Company, the Investment Funds or the Portfolio Companies, respectively, as administrator or sub-administrator. The terms and conditions of any such engagement shall be as agreed to by the Company, the Investment Funds or the Portfolio Companies and the applicable service provider, and may differ from the terms and conditions under which SEI provides administration services to the Company, the Investment Funds and the Portfolio Companies, including without limitation, the compensation arrangements and indemnification obligations described above. In addition, the Company, any Investment Fund or any Portfolio Company may in the future agree with SEI to alter the terms of its existing agreement with SEI, including without limitation, the compensation arrangements described above.
 
The Company bears all of its own operating expenses, including, without limitation, legal expenses; professional fees (including, without limitation, fees and expenses of consultants and experts) relating to investments; costs and expenses relating to any amendment of the Company’s LLC Agreement (as defined below) or the Company’s other organizational documents or the subscription agreement (the “Subscription Agreement”) or any modification or supplement to the Private Placement Memorandum dated September 2009 for the Company (as it may be supplemented or modified from time to time, the “Memorandum”), and any distribution of such documentation to the Members; accounting, auditing and tax preparation expenses; fees and expenses of other agents of the Company; taxes and governmental fees; printing and mailing expenses; expenses relating to transfers and redemptions of units; fees and out-of-pocket expenses of any service company retained to provide accounting and bookkeeping services to the Company; quotation or valuation expenses; expenses relating to the acquisition, holding and disposition of investments (e.g., expenses which the Managing Member determines to be related to the investment of the assets of the Company, including, among others, research expenses, brokerage fees and commissions, expenses relating to short sales, clearing and settlement charges, fees to Advisors with respect to Managed Accounts, custodial fees and expenses, costs and charges for equipment or services used in communicating information regarding the Company’s transactions between the Managing Member and other agents, bank service fees, interest expenses, borrowing costs and extraordinary expenses); insurance premiums; costs incurred in connection with any claim, litigation, arbitration, mediation, government investigation or dispute in connection with the business of the Company and the amount of any judgment or settlement paid in connection therewith, or the enforcement of the Company’s rights against any person or entity; costs and expenses for indemnification or contribution payable by the Company to any person or entity (including, without limitation, pursuant to the indemnification obligations described under ITEM 12. “INDEMNIFICATION OF DIRECTORS AND OFFICERS” in the Form 10 filed on April 29, 2004, as amended); and all costs and expenses incurred as a result of the reorganization, dissolution, winding-up or termination of the Company.
 
Certain administrative and investment-related services, including, but not limited to, those relating to accounting, tax and legal advice and other services (including with respect to litigation, if any), marketing efforts, information technology, risk management, cash management, administrative services, and the selection, investigation, acquisition, holding or disposition of investments may be provided by internal staff of Goldman Sachs, including entities created by Goldman Sachs to handle such services. Goldman Sachs may, in its sole discretion, charge the Company or an Investment Fund its allocable portion of the fees and expenses associated with such services, and the Company or Investment Fund, as applicable, will be responsible for such fees and expenses. In such event, the Managing Member will determine the fair and reasonable cost for such services based on, among


31


Table of Contents

other things, the compensation and benefits of the personnel providing the services as well as an allocation of overhead expenses. Amounts paid to Goldman Sachs by the Company directly or indirectly with respect to all of these services are incremental to the Management Fee charged to the Company.
 
The Company in the past has borne its organizational expenses and continues to bear expenses incurred in connection with the offer and sale of units, including printing costs, distribution fees and legal fees, expenses incurred in connection with the review of subscription agreements and related documentation, and other expenses of the Company, the Managing Member, any placement agents, authorized dealers and other financial intermediaries and other expenses of the offering of units. In addition, the Company bears, indirectly through its investment in each Investment Fund, Advisor Fund and Portfolio Company, its pro rata portion of the offering, organizational and operating expenses of such other entities, including, without limitation, expenses similar to those enumerated in this paragraph and the preceding two paragraphs, and expenses related to the investment of such assets, such as Advisor, Advisor Fund and Portfolio Company fees and expenses, brokerage commissions, expenses relating to short sales, clearing and settlement charges, custodial fees, bank service fees, interest expenses, borrowing costs and extraordinary expenses. If the Company or an Investment Fund invests its assets through a Portfolio Company, the Managing Member will not charge an additional management fee or performance-based fee or allocation at the Portfolio Company level.
 
Advisors are compensated on terms that may include fixed fees, asset-based fees or performance-based fees and/or allocations or other compensation. Fixed fees, generally calculated and paid to Advisors monthly based upon the NAV of the allocation to such Advisor, are currently expected to range (on an annualized basis) from approximately 0% to 3%. Performance-based fees or allocations of Advisors are currently expected to range from approximately 0% to 30% of the net capital appreciation in each individual Advisor’s investments for the year. However, the Company may, in the Managing Member’s sole discretion, allocate assets to Advisors that receive fixed and/or performance-based fees or other compensation that materially exceed these percentages or that structure their compensation in materially different ways. Certain Advisor Funds in which the Company or an Investment Fund invests may charge redemption fees in certain circumstances. Each Member will indirectly through its investment in the Company bear its pro rata portion of any such redemption fees charged to the Company or the Investment Fund.
 
Performance-based compensation is typically not paid to an Advisor until the Advisor makes up prior losses. Certain Advisors, however, may continue to receive performance-based compensation while making up prior losses, but generally at lower rates. See ITEM 1A. “RISK FACTORS—General Risks—Risks Related to the Units, Liquidity of Units and the Offering of the Units—Special Considerations Applicable to the Continuous Offering of Units; After the Initial Offering of Units Subsequent Purchasers of Units May Suffer Losses Because of Previously Established Open Positions”.
 
The Managing Member may invest the Company’s assets directly or indirectly in Advisor Funds or discretionary managed accounts managed by Advisors affiliated with Goldman Sachs. In each such case, the Managing Member will ensure that the aggregate fees and allocations paid to or received by the affiliated Advisor and the Managing Member will not exceed the fees that would otherwise be incurred if the Advisor were not so affiliated.
 
If the Company invests its assets through a Portfolio Company, the Managing Member will not charge a management fee or performance-based fee or allocation at the Portfolio Company level. Each such Portfolio Company will bear its own offering, organizational, and operating expenses. The Company will bear, indirectly through its investment in each such Portfolio Company, a pro rata portion of the expenses of such Portfolio Company.
 
Each of the Managing Member, the Administrator and any sub-administrator pays its own overhead costs and expenses, including the salaries, fringe benefits and other compensation costs of its employees.
 
The Managing Member, the Administrator or any sub-administrator may pay certain of the Company’s, an Investment Fund’s, an Advisor Fund’s or a Portfolio Company’s expenses described above. The Company or applicable Investment Fund, Advisor Fund or Portfolio Company will reimburse the Managing Member, Administrator or sub-administrator for the payment of any such expenses.


32


Table of Contents

Each Member will indirectly through its investment in the Company bear its pro rata portion of the expenses of the Company (including, without limitation, expenses incurred in connection with the indemnification obligations); provided that any expenses allocable to a specific class or series of units held by such Member may be allocated only to such class or series.
 
The Managing Member and its affiliates each has the right, in its sole discretion, to waive the fees and performance-based allocations or compensation to which it is entitled in respect of a Member’s units or to impose different fees or performance-based allocations or compensation on a Member (including, without limitation, by means of a rebate or the issuance of a new class of units), and to enter into other agreements with a Member that may affect the Member’s economic or legal rights and obligations with respect to the Member’s investment in the Company (including, without limitation, by waiving any indemnification payments to which the Managing Member or its affiliates are entitled from the Member or by reimbursing the Member for any indemnification payments owed by the Member in connection with its ownership of units), regardless of the class of units the Member holds, without notice to other Members. Such arrangements reflect terms privately agreed to between parties other than the Company, and for the avoidance of doubt, the Company cannot, and is under no duty to, enforce equality of treatment between Members by other entities, including the Managing Member and its affiliates. The Managing Member and its affiliates shall be under no obligation to make arrangements available on equal terms to other Members. In addition, where permitted by applicable law, the Managing Member and its affiliates may elect to pay part or all of the fees and performance-based compensation paid to it by the Company to investors in or distributors of the Company. See “POTENTIAL CONFLICTS OF INTEREST—Potential Conflicts Relating to the Selection of Advisors, the Sale of Units and the Allocation of Investment Opportunities—Goldman Sachs’ or Intermediaries’ Financial and Other Interests and Relationships May Incentivize Goldman Sachs or Intermediaries to Promote the Sale of Units and Interests in the Investment Funds”.
 
Capital Accounts; Allocation of Gains and Losses
 
The Company maintains a separate capital account on its books for each series of units and for each Member with respect to each series of units held by such Member. A “series” includes, for this purpose, a class of units not issued in multiple series. Each capital account with respect to a series of units will be (i) increased by the amount of any capital contributions in respect of such series, (ii) decreased for any payments in redemption of, or any distributions in respect of, such series, (iii) increased or decreased by such series’ allocable share of the appreciation or depreciation of the net assets of the Company (determined as set forth below) for each accounting period, and (iv) decreased by any Incentive Allocation and any Management Fee in respect of such series, if applicable. For each accounting period, the appreciation or depreciation of the net assets of the Company (before reduction for any Management Fee) shall be allocated among each series of units pro rata based upon the relative capital accounts of each series (determined prior to taking into account any unearned Incentive Allocation) as of the beginning of such accounting period, after adjustment for any capital contributions, distributions and redemptions as of the beginning of such accounting period. Each Member’s capital account with respect to each series of units shall equal the capital account of such series of units multiplied by the percentage of units in such series owned by such Member. Capital accounts will be appropriately adjusted for exchanges of units from one series into another series and for other events and items as determined by the Managing Member in its sole discretion.
 
*  An “accounting period” refers to the following periods: the initial accounting period began upon the commencement of operations of the Company. Each subsequent accounting period begins immediately after the close of the preceding accounting period. Each accounting period closes at the close of business on the first to occur of (i) the last day of each calendar month, (ii) the last day of each fiscal year of the Company, (iii) the date immediately prior to the effective date of the admission of a new Member, (iv) the date immediately prior to the effective date of the issuance of additional units, (v) the date immediately prior to the effective date of any redemption or complete withdrawal by a Member, or (vi) such other dates as determined by the Managing Member. In addition, the final accounting period shall end on the date the Company dissolves.
 
The NAV of a series of units equals the capital account balance with respect to such series of units, and the NAV per unit of a series shall be equal to the NAV of such series divided by the number of outstanding units of such series.


33


Table of Contents

At the end of each fiscal year of the Company (or other applicable period), the Managing Member receives an Incentive Allocation in respect of each series of Class A Units equal to 5% of the amount by which the NAV of each such series (appropriately adjusted as determined by the Managing Member in its sole discretion for additional subscriptions, distributions and redemptions, and determined prior to any Incentive Allocation accrual with respect to such series of units, but after the deduction of all Company expenses for the period, including the Management Fee allocable to that series) exceeds the Prior High NAV of such series. The Incentive Allocation in respect of any other class of units may differ from the Incentive Allocation in respect of the Class A Units.
 
The “Prior High NAV” with respect to a series of units initially equals the NAV of such series immediately following the initial issuance of such series. The Prior High NAV with respect to a series of units immediately following the end of any year for which an Incentive Allocation has been made with respect to such series will be “reset” to equal the NAV of such series as of such time (after reduction for any Incentive Allocation), unless the series is exchanged into another series, in which case the Prior High NAV will be “reset” to equal the NAV of such other series as of such time (after reduction for any Incentive Allocation). The Prior High NAV for each series of units will be appropriately adjusted, as determined by the Managing Member in its sole discretion, to account for any additional subscriptions, distributions and redemptions made with respect to such series of units. Since each outstanding series of units may have a different Prior High NAV, the Managing Member will earn an Incentive Allocation with respect to each series of units the NAV of which, as of the close of the applicable measurement period, exceeds its Prior High NAV for such period, even though it will not earn an Incentive Allocation with respect to any series of units the NAV of which, as of the close of such measurement period, did not exceed its Prior High NAV for such period.
 
The Incentive Allocation with respect to a series of units accrues daily and is credited to the capital account of the Managing Member as of December 31 of each year out of the capital account of such series. In the event of an intra-year redemption of units, any accrued Incentive Allocation with respect to such units will be credited to the capital account of the Managing Member upon redemption. Appropriate adjustments will be made to the calculation of the Incentive Allocation for extraordinary circumstances, including, without limitation, if the Managing Member permits a contribution or redemption by a Member to be made intra-month.
 
GS HFS, as managing member of each Investment Fund, is entitled to an incentive allocation, which is substantially similar to the arrangement described above. However, the Company will invest in a class of units of each of the Investment Funds that is not subject to any such incentive allocation.
 
The Managing Member has the right, in its sole discretion, to partially or completely waive any performance-based incentive allocations or performance compensation arrangements, or to apply no such performance-based fees or allocations or performance-based fees or allocations that are greater or less than or in other ways different from the incentive allocation described in this Annual Report, in respect of certain Members (including without limitation affiliates or personnel of Goldman Sachs), as may be agreed to by the Managing Member and such Members, and the Managing Member may make appropriate amendments to or supplement the Company’s LLC Agreement (including in connection with the creation of additional classes or series of units) if required to reflect any such arrangements, in each case without notice to or the consent of other Members. Such Members may include investment vehicles formed or managed by Goldman Sachs, or formed for purposes of participation by Goldman Sachs or its personnel and these vehicles may impose no performance-based fees or allocations or performance-based fees or allocations that are greater or less than or in other ways different from the incentive allocation described in this Annual Report.
 
THE MANAGING MEMBER
 
GS HFS serves as Managing Member of the Company and as the managing member of each of the Investment Funds and as the special assets direction advisor with respect to GFS Trust. GS HFS, in its capacity as the Managing Member, is responsible for the management and operation of the Company. As managing member of the Investment Funds, GS HFS is responsible for the management and operation of the Investment Funds, as well as the selection of the Advisors with which the Investment Funds invest their assets. The principal business of the Managing Member is to function as an investment manager for multi-advisor funds and to select advisors to make investments on behalf of such funds. GS HFS, in its capacity as Managing Member and as managing member of the Investment Funds, is permitted to delegate certain of its investment management responsibilities to its advisory affiliates or other persons


34


Table of Contents

as set forth in the limited liability company agreement for the Company and the relevant Investment Fund (each an “LLC Agreement”).
 
The Managing Member is an affiliate of Goldman Sachs Asset Management, L.P., a Delaware limited partnership (“GSAM”). Each of the Managing Member and GSAM is a wholly owned subsidiary of The Goldman Sachs Group, Inc.
 
As a registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Investment Advisers Act”), the Managing Member is required to file a Form ADV with the SEC. Form ADV contains information about assets under management, types of fee arrangements, types of investments, potential conflicts of interest and other relevant information regarding the Managing Member. A copy of Part 1 of the Managing Member’s Form ADV is available on the SEC’s website (www.adviserinfo.sec.gov). A copy of Part 2 of the Managing Member’s Form ADV will be provided to Members upon request.
 
Goldman Sachs, a bank holding company, and a leading global investment banking, securities and investment management firm, was founded in 1869. GSAM, formed in 1988, is located at 200 West Street, New York, New York 10282. GS HFS is located at 200 West Street, New York, New York 10282.
 
The Company has no employees. As of December 31, 2009, the Managing Member was supported by approximately 115 employees of the GS Group worldwide, of which approximately 33 allocated at least a portion of their time to portfolio management of the Company and the Investees. The Company’s assets were managed, indirectly through the Company’s investments in the Investees, by approximately 90 Advisors.
 
The Managing Member may withdraw any interest it may have as the Managing Member. From time to time certain qualified officers and employees of the Managing Member or Goldman Sachs may directly or indirectly invest in the Company or the Investment Funds. Any such party may redeem any units that it may acquire at any time, without notice to the Members, in accordance with the redemption provisions of the LLC Agreement of the Company or the relevant Investment Fund. GS HFS, in its capacity as Managing Member, is permitted to delegate certain of its investment management responsibilities to its affiliates or other persons as set forth in the Company’s LLC Agreement. Without the consent of the other Members, the Managing Member may assign its rights and obligations as Managing Member or otherwise transfer its units to (i) any affiliate of the Managing Member, (ii) a corporation, partnership or other entity which succeeds to the business of Goldman, Sachs & Co. or The Goldman Sachs Group, Inc. substantially in its entirety, (iii) The Goldman Sachs Group, Inc. or any corporation, partnership or other entity the ownership of which is substantially the same as that of The Goldman Sachs Group, Inc. or (iv) any corporation, partnership or other entity of which at least 50% of the voting securities or general partnership interests or membership interests are owned, directly or indirectly, by any person described in clause (i), (ii) or (iii) above. It is not currently expected that the Investment Funds’ Advisors or any of those Advisors’ respective principals will purchase units or membership units in the Company or the Investment Funds.
 
The Managing Member also manages a number of other investment funds and accounts that have investment programs that are similar to those of the Company and may manage additional similar funds in the future. See “PERFORMANCE OF THE COMPANY—Certain Considerations Relating to Limited Capacity of Potential Advisors” and “POTENTIAL CONFLICTS OF INTEREST.”
 
POTENTIAL CONFLICTS OF INTEREST
 
General Categories of Conflicts Associated with the Company and the Investment Funds
 
The Goldman Sachs Group, Inc. is a bank holding company and a worldwide, full-service investment banking, broker-dealer, asset management and financial services organization, and a major participant in global financial markets. As such, it acts as an investor, investment banker, research provider, investment manager, financer, advisor, market maker, proprietary trader, prime broker, lender, agent and principal, and has other direct and indirect interests, in the global fixed income, currency, commodity, equity, bank loan and other markets in which the Company and the Investment Funds directly and indirectly invest. As a result, The Goldman Sachs Group, Inc., GSAM, the Managing Member (for purposes of this “POTENTIAL CONFLICTS OF INTEREST” section, in its capacities as Managing Member of the Company and managing member of each of the Investment Funds), and their


35


Table of Contents

affiliates, directors, partners, trustees, managers, members, officers and employees (collectively, for purposes of this “POTENTIAL CONFLICTS OF INTEREST” section, “Goldman Sachs”), including those who may be involved in the management, sales, investment activities, business operations or distribution of the Company or the Investment Funds, are engaged in businesses and have interests other than that of managing the Company or the Investment Funds. Neither the Company nor the Investment Funds will be entitled to compensation related to such businesses. In addition, the Advisors, their affiliates, directors, partners, trustees, managers, members, officers and employees (collectively, for purposes of this “POTENTIAL CONFLICTS OF INTEREST” section, the “Advisors”) may similarly have clients, businesses, and interests in addition to managing assets of the applicable Advisor Fund, Portfolio Company or Managed Account.
 
The activities and interests of Goldman Sachs and the Advisors include potential multiple advisory, transactional, financial and other interests in securities, instruments and companies that may be directly or indirectly purchased or sold by the Company, the Investment Funds, the Advisor Funds, the Portfolio Companies or the Managed Accounts and their service providers, including without limitation the Advisors. These are considerations of which Members should be aware, and which may cause conflicts that could disadvantage the Company or the Investment Funds.
 
Present and future activities of Goldman Sachs and the Advisors in addition to those described in this “POTENTIAL CONFLICTS OF INTEREST” section may give rise to additional conflicts of interest.
 
By having made an investment in the Company, a Member is deemed to have acknowledged and assented to the existence of potential conflicts of interest relating to Goldman Sachs and the Advisors, and to the operations of the Company, Investment Funds, Advisor Funds, Portfolio Companies and Managed Accounts in the face of these conflicts.
 
Potential Conflicts Relating to the Selection of Advisors, the Sale of Units and the Allocation of Investment Opportunities
 
      Goldman Sachs’ Other Activities May Have an Impact on the Selection of Advisors for each Investment Fund
 
The Managing Member, as the managing member of each Investment Fund, selects Advisors for the Investment Fund in accordance with its obligations as the managing member of the Investment Fund. However, given the breadth of Goldman Sachs’ activities, Goldman Sachs’ other activities may have a negative effect on the Company. It is expected that Goldman Sachs may receive various forms of compensation, commissions, payments, rebates, remuneration, investment activity, services or other benefits from Advisors and/or their Advisor Funds, Portfolio Companies and Managed Accounts, or may have interests in Advisors or their businesses, and provide a variety of products and services to them. The amount of such compensation, commissions, payments, rebates, remuneration, investment activity, services or other benefits to Goldman Sachs may be greater if the managing member of the Investment Funds selects such Advisors than it would have been had other Advisors been selected which also might have been appropriate for the Investment Funds. In addition, the managing member of the Investment Funds will face potential conflicts in making determinations as to whether the Company should invest in or withdraw funds from Advisor Funds, Portfolio Companies and Managed Accounts managed by Advisors that have other business relationships with the managing member of the Investment Funds.
 
As a result of the various activities and interests of Goldman Sachs as described in the first paragraph under “General Categories of Conflicts Associated with the Company and the Investment Funds”, it is likely that the Company and the Investment Funds will have multiple business relationships with, and will invest in, engage in transactions with, make voting decisions with respect to, or obtain services from, entities for which Goldman Sachs performs or seeks to perform investment banking or other services. It is also likely that the Advisors will undertake transactions in securities in which Goldman Sachs makes a market or otherwise has other direct or indirect interests. In addition, while the Managing Member, as the managing member of the Investment Funds, will make decisions for the Company and the Investment Funds, respectively, in accordance with its obligations to manage the Company and the Investment Funds appropriately, the fees, allocations, compensation, remuneration and other benefits to Goldman Sachs (including benefits relating to investment and business relationships of Goldman Sachs) arising


36


Table of Contents

from those decisions may be greater as a result of Advisor selection and certain portfolio, investment, service provider or other decisions made by the Managing Member for the Company and the Investments Funds, respectively, than they would have been had other decisions been made which also might have been appropriate for the Company or the Investment Funds. For example, Goldman Sachs or Client/GS Accounts (as defined below) may have significant equity, profits or other interests in the Advisor or may have entered into arrangements with the Advisor in which the Advisor would share with Goldman Sachs, a Client/GS Account or related parties a material portion of its fees or allocations (including, without limitation, fees earned by the Advisor as a result of the Company’s or an Investment Fund’s allocation of assets to an Advisor Fund managed by the Advisor). Payments to Goldman Sachs (either directly from the Advisor or in the form of fees or allocations payable by the Client/GS Accounts) will generally increase as the amount of assets that an Advisor manages increases. Therefore, investment by the Company or an Investment Fund with an Advisor where Goldman Sachs, a Client/GS Account or a related party has a fee and/or profit sharing arrangement or other interest in the equity or profits of the Advisor may result in additional revenues to Goldman Sachs and its personnel or related parties. Also, the Managing Member may make the decision to have Goldman Sachs provide administrative or other services to the Company or the Investment Funds instead of hiring an unaffiliated administrator or service provider, provided that such engagement is on market terms as determined by the Company in its sole discretion.
 
Goldman Sachs (including, without limitation, the Managing Member) may receive notice of, or offers to participate in, investment opportunities from Advisors, their affiliates or other third parties. An Advisor or its affiliates may offer Goldman Sachs investment opportunities because of the amount of assets managed by an Advisor and its affiliates for Goldman Sachs and Client/GS Accounts, including the Company and the Investment Fund, but such opportunities may not be allocated to the Company or the Investment Funds or such other Client/GS Accounts as described under “—Potential Conflicts Relating to the Allocation of Investment Opportunities Among the Company or the Investment Funds and Other Goldman Sachs Accounts” below. Therefore, investment (or continued investment) by the Company or an Investment Fund with an Advisor where Goldman Sachs, a Client/GS Account or a related party are being offered investment opportunities by the Advisor may result in additional investment opportunities to Goldman Sachs and its personnel or related parties.
 
Goldman Sachs may also provide brokerage or other services to Advisors or act as prime broker for Advisors. Payments to Goldman Sachs for providing brokerage or other services or acting as prime broker will generally increase as the size of the assets that an Advisor manages increases. Therefore, investment by an Investment Fund (and indirectly the Company) with an Advisor where Goldman Sachs acts as prime broker, or to which Goldman Sachs provides brokerage or other services, will likely result in additional revenues to Goldman Sachs and its personnel. Goldman Sachs may provide research products and other products and services to an Advisor and receive revenues in connection with these activities. Goldman Sachs may receive price discounts or services from Advisors based on its relationships with such Advisors. In connection with services Goldman Sachs may provide Advisors, Goldman Sachs will act in its own commercial interests and will not be obligated to take actions consistent or beneficial to the Company. As a result, investment with Advisors will be subject to many of the same conflicts arising from Goldman Sachs activities described herein.
 
The Managing Member or the managing member of an Investment Fund or Goldman Sachs may become aware of market or other information regarding an Advisor selected for the Company, may place an Advisor under review or may adjust its assessments of an Advisor at any time and for any reason. The Managing Member or the managing member of the relevant Investment Fund may continue to retain such Advisor regardless of such information, review or adjustment in assessments, and neither the Managing Member or such managing member nor Goldman Sachs will be under any obligation to provide the Company notice of such information, review or adjustment in assessments or to effect transactions on behalf of the Company as a result of such information, review or adjustment in assessments. Goldman Sachs (on its own behalf or on behalf of certain Client/GS Accounts) may take any action, including but not limited to the sale of investments, the unwinding of hedge positions in connection with derivative transactions entered into with respect to such Advisor, or redemptions from such Advisor, based on any information, review or adjustment in assessments (as described above) at any time and without notice to the Company or to other clients. Such actions by Goldman Sachs may differ from, and may conflict with, advice given or investment decisions made by the Managing Member on behalf of the Company and may have an adverse effect on the Company.


37


Table of Contents

In connection with the Managing Member’s ongoing review of Advisors, the Managing Member may work with Advisors to address certain issues that arise, including related to operations, performance, personnel and investment. The Managing Member may make comments or requests for changes or improvements. These comments and requests may occur over extended periods and the Managing Member may decide not to terminate a particular Advisor despite having such outstanding comments and requests.
 
In addition, if an Advisor provides fee “breakpoints,” such breakpoints may be affected by Goldman Sachs’ business relationships and levels or accounts other than with respect to the Company or the Investment Funds, and may directly or indirectly benefit Goldman Sachs and other proprietary or client accounts of Goldman Sachs.
 
Goldman Sachs may also serve as an Advisor with respect to Advisor Funds, Portfolio Companies and Managed Accounts. Goldman Sachs will receive compensation in connection with acting as an Advisor, and such compensation will not be reduced by any fees payable in accordance with any investments made by Goldman Sachs as Advisor of such Advisor Fund, Portfolio Company or Managed Account (i.e., there could be “double fees” involved in making any such investment, which would not arise in connection with the direct purchase of underlying investments by an Advisor Fund, Portfolio Company or Managed Account). Such fees to Goldman Sachs may be greater as a result of the selection of certain Advisors by the Managing Member and its personnel than they would have been had other Advisors been selected which also might have been appropriate for the Investment Fund.
 
      Goldman Sachs’ or Intermediaries’ Financial and Other Interests and Relationships May Incentivize Goldman Sachs or Intermediaries to Promote the Sale of Units
 
Goldman Sachs, its personnel and other financial service providers have interests in promoting sales of interests in the Company, the Investment Funds and certain Advisors. With respect to both Goldman Sachs and its personnel, the remuneration and profitability relating to services to and sales of interests in the Company and the Investment Funds or other products may be greater than the remuneration and profitability relating to services to and sales of other products that might be provided or offered. Conflicts may arise in relation to sales-related incentives. Goldman Sachs and its sales personnel may directly or indirectly receive a portion of the fees and commissions charged to the Company, the Investment Funds or their respective investors. Goldman Sachs and its advisory or other personnel may also benefit from increased amounts of assets under management. Fees and commissions may also be higher than for some products or services, and the remuneration and profitability to Goldman Sachs and such personnel resulting from transactions on behalf of or management of the Company or the Investment Funds may be greater than the remuneration and profitability resulting from other products. Goldman Sachs may also benefit from equity, profits or other interests in Advisors or arrangements in which the Advisors agree to share their fees or allocations with Goldman Sachs, Client/GS Accounts or related parties.
 
Goldman Sachs and its personnel may receive greater compensation or greater profit in connection with the Company or the Investment Funds than with an account advised by an unaffiliated investment adviser. Differentials in compensation may be related to the fact that Goldman Sachs may pay a portion of its advisory fee to the unaffiliated investment adviser, or to other compensation arrangements, including for portfolio management, brokerage transactions or account servicing. Any differential in compensation may create a financial incentive on the part of Goldman Sachs and its personnel to recommend the Company or the Investment Funds over other accounts or products managed by unaffiliated investment advisers or to effect transactions differently in the Company or the Investment Funds as compared to other accounts or products.
 
Goldman Sachs may also have relationships with, and purchase, distribute or sell services or products from or to, distributors, consultants and others who recommend the Company, the Investment Funds or the Advisors, or who engage in transactions with or for the Company, the Investment Funds or the Advisors. For example, Goldman Sachs regularly participates in industry and consultant sponsored conferences and may purchase educational, data related or other services from consultants or other third parties that it deems to be of value to its personnel and its business. The products and services purchased from consultants may include, but are not limited to, those that help Goldman Sachs understand the consultants’ points of view on the investment management process. Consultants and other third parties that provide consulting or other services or provide service platforms for employee benefit plans to potential investors in the Company or the Investment Funds may receive fees from Goldman Sachs, the Company, the Investment Funds or the Advisor Funds in connection with the distribution of units or interests in the Investment


38


Table of Contents

Funds, or other Goldman Sachs products. For example, Goldman Sachs may enter into revenue or fee-sharing arrangements with consultants, service providers, and other intermediaries relating to investments in mutual funds, collective trusts, or other products or services offered, sponsored, managed or advised by the Managing Member. Goldman Sachs may also pay a fee for membership in industry-wide or state and municipal organizations or otherwise help sponsor conferences and educational forums for investment industry participants including, but not limited to, trustees, fiduciaries, consultants, administrators, state and municipal personnel and other clients. Goldman Sachs’ membership in such organizations allows Goldman Sachs to participate in these conferences and educational forums and helps Goldman Sachs interact with conference participants and develop an understanding of the points of view and challenges of the conference participants. In addition, Goldman Sachs personnel, including employees of the Managing Member, may have board, advisory, brokerage or other relationships with issuers, distributors, consultants and others that may have investments with the Advisors or in the Company or Investment Funds or that may recommend investments with the Advisors or distribute Advisor Fund, Company or Investment Fund interests or engage in transactions for the Advisors and/or their Advisor Funds, Portfolio Companies and Managed Accounts. In addition, Goldman Sachs, including the Managing Member, may make charitable contributions to institutions, including those that have relationships with clients or personnel of clients. Personnel of Goldman Sachs may also make political contributions. As a result of the relationships and arrangements described in this paragraph, consultants, distributors and other parties may have conflicts associated with their promotion of the Company, the Investment Funds or the Advisors, or other dealings with the Company, the Investment Funds or the Advisors, that create incentives for them to promote the Company, the Investment Funds, the Advisors or certain portfolio transactions.
 
One or more divisions of Goldman Sachs may refer certain investment opportunities to the Managing Member, or otherwise provide services to, or enter into other arrangements with, the Managing Member. In connection with such referrals, services or other arrangements involving one or more divisions of Goldman Sachs, such divisions may engage in sharing of fees or other compensation received by the Managing Member from the Company or the Investment Funds.
 
Goldman Sachs, the Company or the Investment Funds may make payments to authorized dealers and other financial intermediaries (each, an “Intermediary” and collectively, “Intermediaries”) from time to time to promote the Company, the Investment Funds, Client/GS Accounts and other products. In addition to placement fees, sales loads or similar distribution charges, such payments may be made out of Goldman Sachs’ assets, or amounts payable to Goldman Sachs rather than a separately identified charge to the Company, the Investment Funds, Client/GS Accounts or other products. Such payments may compensate Intermediaries for, among other things: marketing the Company, the Investment Funds, Client/GS Accounts and other products (which may consist of payments resulting in or relating to the inclusion of the Company, the Investment Funds, Client/GS Accounts and other products on preferred or recommended fund lists or in certain sales programs from time to time sponsored by the Intermediaries); access to the Intermediaries’ registered representatives or salespersons, including at conferences and other meetings; assistance in training and education of personnel; “finders” or “referral fees” for directing investors to the Company, the Investment Funds, Client/GS Accounts and other products; marketing support fees for providing assistance in promoting the Company, the Investment Funds, Client/GS Accounts and other products (which may include promotions in communications with the Intermediaries’ customers, registered representatives and salespersons); and/or other specified services intended to assist in the distribution and marketing of the Company, the Investment Funds, Client/GS Accounts and other products. Such payments may be a fixed dollar amount; may be based on the number of customer accounts maintained by an Intermediary; may be based on a percentage of the value of interests sold to, or held by, customers of the Intermediary involved; or may be calculated on another basis. The payments may also, to the extent permitted by applicable regulations, contribute to various non-cash and cash incentive arrangements to promote certain products, as well as sponsor various educational programs, sales contests and/or promotions. Furthermore, subject to applicable law, such payments may also pay for the travel expenses, meals, lodging and entertainment of Intermediaries and their salespersons and guests in connection with educational, sales and promotional programs. The additional payments by Goldman Sachs may also compensate Intermediaries for subaccounting, administrative and/or shareholder processing or other investor services that are in addition to the fees paid for these services by such products.


39


Table of Contents

The payments made by Goldman Sachs, the Company or the Investment Funds may be different for different Intermediaries. The payments may be negotiated based on a range of factors, including but not limited to, ability to attract and retain assets, target markets, customer relationships, quality of service and industry reputation. Payment arrangements may include breakpoints in compensation which provide that the percentage rate of compensation varies as the dollar value of the amount sold or invested through an Intermediary increases. The presence of these payments and the basis on which an Intermediary compensates its registered representatives or salespersons may create an incentive for a particular Intermediary, registered representative or salesperson to highlight, feature or recommend certain products based, at least in part, on the level of compensation paid.
 
Potential Conflicts Relating to the Allocation of Investment Opportunities Among the Company or the Investment Funds and Other Goldman Sachs Accounts
 
Goldman Sachs has potential conflicts in connection with the allocation of investments or transaction decisions for the Company and the Investment Funds, including in situations in which Goldman Sachs or its personnel (including personnel of the Managing Member) have interests or in situations where Goldman Sachs may have an incentive to prefer certain funds or accounts over others. For example, the Company or the Investment Funds may be competing for investment opportunities with current or future accounts or funds sponsored, managed or advised by Goldman Sachs (including the Managing Member), including current of future accounts or funds managed by the same portfolio management team, or in which Goldman Sachs (including the Managing Member) or its personnel have an interest (each a “Client/GS Account” and collectively, the “Client/GS Accounts”). In addition, certain Advisors may have other commercial relationships with Goldman Sachs, including being investors in Client/GS Accounts. These Client/GS Accounts or accounts or funds may provide greater fees or other compensation or other benefits (including performance-based fees, equity, profit or other interests) to Goldman Sachs (including the Managing Member) and potentially to Goldman Sachs personnel (including personnel of the Managing Member).
 
Goldman Sachs may manage or advise Client/GS Accounts that have investment objectives that are similar to those of the Company or the Investment Funds and/or may seek to invest with Advisors with which the Company or the Investment Funds invest or that would be an appropriate investment for the Company or the Investment Funds or make investments or sell investments in securities or other instruments, sectors or strategies in which the Company or the Investment Funds may invest. This may create potential conflicts and potential differences among Client/GS Accounts (including the Company or the Investment Funds), particularly where there is limited availability or limited liquidity for those investments or where Advisors limit the number of investors in or the size of their Advisor Funds or the amount of assets that they manage. For example, limited availability may exist, without limitation, in emerging markets, high yield securities, fixed income securities, regulated industries and initial public offerings/new issues. Transactions in investments by multiple Client/GS Accounts (including accounts in which Goldman Sachs and its personnel have an interest), other clients of Goldman Sachs or Goldman Sachs itself may have the effect of diluting or otherwise negatively affecting the values, prices or investment strategies associated with securities held by Client/GS Accounts and the Advisor Funds, Portfolio Companies and Managed Accounts, particularly, but not limited to, in small capitalization, emerging market or less liquid strategies. In addition, opportunities may arise to enter into economic arrangements with Advisors in which the Advisors may agree to reduce or rebate fees, allocations or other compensation to an investor, or agree to pay or share some or all of the fees, allocations or other compensation earned by the Advisor, or to take equity, profits or other interests in Advisors or their businesses.
 
The Managing Member has developed policies and procedures that provide that it will allocate investment opportunities and make purchase and sale decisions among the Company, the Investment Funds and other Client/GS Accounts in a manner that it considers, in its sole discretion, to be reasonable. In certain cases, these policies result in the pro rata allocation of limited opportunities across Client/GS Accounts, but in certain other cases the allocations reflect numerous other factors based upon the Managing Member’s good faith assessment of the best use of such limited opportunities relative to the objectives, limitations and requirements of each Client/GS Account and applying a variety of factors including those described below. The Managing Member seeks to treat all clients reasonably in light of all factors relevant to managing an account, and in some cases it is possible that the application of the factors described below may result in allocations in which certain accounts may receive an allocation when


40


Table of Contents

other accounts do not. Non-proportional allocations may occur frequently in the fixed income portfolio management area, in many instances because multiple appropriate or substantially similar investments are available in fixed income strategies, as well as due to differences in benchmark factors, hedging strategies, or other reasons, but non-proportional allocations could also occur in other areas. The application of these factors as described below may result in allocations in which Goldman Sachs and Goldman Sachs employees may receive an allocation or an opportunity not allocated to other Clients/GS Accounts (including the Company and the Investment Funds). Allocations may be based on numerous factors and may not always be pro rata based on assets managed.
 
The Managing Member may make allocation related decisions for the Company, the Investment Funds and other Client/GS Accounts with reference to numerous factors. These factors, which are applied using the Managing Member’s reasonable judgment, may include, without limitation, (i) account investment horizons, investment objectives and guidelines; (ii) different levels of investment for different strategies including sector oriented, concentrated new opportunities or other strategies; (iii) client-specific investment guidelines and restrictions, including the ability to hedge through short sales or other techniques; (iv) the expected future capacity of applicable Client/GS Accounts; (v) fully directed brokerage accounts; (vi) tax sensitivity of accounts; (vii) suitability requirements and the nature of the investment opportunity; (viii) account turnover guidelines; (ix) cash and liquidity considerations, including without limitation, availability of cash for investment; (x) relative sizes and expected future sizes of applicable accounts; (xi) availability of other appropriate investment opportunities; (xii) regulatory restrictions affecting certain accounts, and/or (xiii) minimum denomination, minimum increments, de minimis threshold and round lot considerations. Suitability considerations can include without limitation (i) relative attractiveness of a strategy or Advisor to different accounts; (ii) concentration of sector, sub-strategy or Advisor positions in an account; (iii) appropriateness of a security for the benchmark and benchmark sensitivity of an account; (iv) an account’s risk tolerance and parameters; (v) use of the opportunity as a replacement for a security Goldman Sachs believes to be attractive for an account; (vi) considerations related to hedging a position in a pair trade; and/or (vii) considerations related to giving a subset of accounts exposure to an industry. In addition, the fact that certain Goldman Sachs personnel are dedicated to one or more funds, accounts or clients may be a factor in determining the allocation of opportunities sourced by such personnel. Reputational matters and other such considerations may also be considered. The application of these principles may cause dispersion over time.
 
In addition to allocations of limited availability investments and transactions, Goldman Sachs may, from time to time, develop and implement new investment opportunities with Advisors and/or trading strategies, and these strategies may not be employed in all accounts (including the Company or the Investment Funds) or pro rata among the accounts where they are employed, even if the strategy is consistent with the objectives of all accounts. Goldman Sachs may make decisions based on such factors as strategic fit and other portfolio management considerations, including, without limitation, an account’s capacity for such strategy, the liquidity of the strategy and its underlying instruments, the account’s liquidity, the business risk of the strategy relative to the account’s overall portfolio make-up, and the lack of efficacy of, or return expectations from, the strategy for the account, and such other factors as Goldman Sachs deems relevant in its sole discretion. For example, such a determination may, but will not necessarily, include consideration of the fact that a particular strategy will not have a meaningful impact on an account given the overall size of the account, the limited availability of opportunities in the strategy and the availability of other strategies for the account. The Company and the Investment Funds will not be entitled to compensation in connection with investments that are not allocated to the Company and the Investment Funds (or not fully allocated to the Company and the Investment Funds) and are allocated to other Client/GS Accounts.
 
During periods of unusual market conditions, GS HFS, in its capacity as the Managing Member and managing member of the Investment Funds, may deviate from its normal trade allocation practices. For example, this may occur with respect to the management of unlevered and/or long-only funds or accounts that are typically managed on a side-by-side basis with levered and/or long-short funds or accounts. During such periods, the Managing Member will seek to exercise a disciplined process for determining allocations (including to Advisor Funds or Portfolio Companies in which Goldman Sachs or its personnel have an interest), as it determines in its sole discretion.
 
Although allocating investment opportunities or orders with Advisors among the Investment Funds and other Client/GS Accounts may create potential conflicts of interest because of the interests of Goldman Sachs and/or its personnel or because Goldman Sachs may receive greater fees or compensation from one Client/GS Account’s


41


Table of Contents

allocations relative to another, the Managing Member will not make allocation decisions based on such interests or greater fees or compensation.
 
Allocation decisions among accounts may be more or less advantageous to any one account or group of accounts. As a result of these allocation issues, the amount, timing, structuring or terms of an investment by the Company or an Investment Fund may differ from, and performance may be lower than, investments and performance of other Client/GS Accounts. Client/GS Accounts (including the Company) that do not receive allocations that perform well may experience lower performance as a result.
 
The Managing Member is currently the managing member of the HFP U.S. Funds, and the investment manager of the HFP Ireland Funds and HFP Institutional. The HFP Funds generally have investment objectives and strategies similar to those of the Company and the Investment Funds, except that HFP Institutional is currently intended for investment by benefit plans and other similar investors and the HFP Ireland Funds are generally open only to non-U.S. investors and certain tax-exempt U.S. investors.
 
Certain of the HFP Funds allocate assets to Advisors that are currently not accepting any new investments. Such Advisors may manage a material portion of the total assets of the HFP Funds. It is not anticipated that the Company, indirectly through the Investment Funds, will generally allocate assets to such Advisors. If at any time in the future these Advisors accept additional investments, the HFP Funds that currently allocate assets to such Advisors may be given priority over the Investment Funds in the determination of how any such available capacity is allocated.
 
Goldman Sachs, accounts sponsored, managed or advised by Goldman Sachs or other investment funds sponsored, managed or advised by Goldman Sachs, including accounts and investment funds which have investment objectives and utilize investment strategies similar to those of the Company, may invest in the Investment Funds, Advisor Funds and Portfolio Companies. Such entities or accounts may also seek to invest in funds managed by, or enter into managed account agreements with, investment managers to which it would be appropriate for the Company or the Investment Funds to allocate assets.
 
Notwithstanding anything in the foregoing, the Company and the Investment Funds may or may not receive, but in any event will have no rights with respect to, opportunities sourced by Goldman Sachs businesses and affiliates. Such opportunities or any portion thereof may be offered to other GS/Client Accounts, Goldman Sachs, all or certain investors in the Company or the Investment Funds, or such other persons or entities as determined by Goldman Sachs in its sole discretion. The Company and the Investment Funds will have no rights and will not receive any compensation related to such opportunities.
 
Other Potential Conflicts Relating to the Management of the Company and the Investment Funds by the Managing Member
 
      Potential Restrictions and Issues Relating to Information Held by Goldman Sachs
 
As a result of informational barriers constructed between different divisions of Goldman Sachs, the Managing Member will generally not have access to information and personnel in other areas of Goldman Sachs. Therefore, the Managing Member will generally not be able to manage the portfolios of the Company or the Investment Funds with the benefit of information held by other divisions of Goldman Sachs. However, although it is under no obligation to do so, the Managing Member may consult with personnel in other areas of Goldman Sachs, or with persons unaffiliated with Goldman Sachs, or may form investment policy committees comprised of such personnel, and in certain circumstances, personnel of affiliates of the Managing Member may have input into, or make determinations regarding, portfolio management transactions for the Company or the Investment Funds, and may receive information regarding the Managing Member’s proposed investment activities for the Company or the Investment Funds that is not generally available to the public. There will be no obligation on the part of such persons to make available for use by the Company or the Investment Funds any information or strategies known to them or developed in connection with their own client, proprietary or other activities. In addition, Goldman Sachs will be under no obligation to make available any research or analysis prior to its public dissemination.
 
The Managing Member makes decisions for the Company and the Investment Funds based on their respective investment programs. The Managing Member from time to time may have access to certain fundamental analysis


42


Table of Contents

and proprietary technical models developed by Goldman Sachs and its personnel. Goldman Sachs will not be under any obligation, however, to effect transactions on behalf of the Company or the Investment Funds in accordance with such analysis and models. In addition, Goldman Sachs has no obligation to seek information or to make available to or share with the Company or the Investment Funds any information, investment strategies, opportunities or ideas known to Goldman Sachs personnel or developed or used in connection with other clients or activities. Goldman Sachs may restrict transactions for itself, but not for the Company or the Investment Funds or vice versa. Goldman Sachs and certain of its personnel, including the Managing Member’s personnel or other Goldman Sachs personnel advising or otherwise providing services to the Company or the Investment Funds, may be in possession of information not available to all Goldman Sachs personnel, and such personnel may act on the basis of such information in ways that have adverse effects on the Company or the Investment Funds. The Company or the Investment Funds could sustain losses during periods in which Goldman Sachs and other Client/GS Accounts achieve significant profits in connection with Goldman Sachs’ trading for proprietary or other Client/GS Accounts.
 
From time to time, Goldman Sachs may come into possession of material, non-public information or other information that could limit the ability of an Investment Fund to invest with Advisors or reduce Company or Investment Fund allocations made to Advisors. The Investment Fund’s and, in turn, the Company’s investment flexibility may be constrained as a consequence. The Managing Member and the Advisors are generally not permitted to obtain or use material non-public information in effecting purchases and sales in public securities transactions for the Company or Investment Funds.
 
Goldman Sachs conducts extensive broker-dealer, banking and other activities around the world and operates a business known as Goldman Sachs Securities Services (“GSS”), which provides prime brokerage, administrative and other services to clients which may involve markets and securities in which the Company or the Investment Funds invest. These businesses will give GSS and many other parts of Goldman Sachs broad access to the current status of certain markets, investments and funds, and detailed knowledge about fund operators. In addition, given Goldman Sachs’ scale of activity in the prime brokerage market, Goldman Sachs may act as a prime broker to one or more funds in which the Company or the Investment Funds may invest, in which case Goldman Sachs will have direct knowledge concerning the investments and transactions of such funds. As a result of the activities described in this paragraph and the access and knowledge arising from those activities, parts of Goldman Sachs may be in possession of information in respect of markets, investments and funds, which, if known to the Managing Member, might cause the Managing Member to seek to dispose of, retain or increase interests in investments held by the Company or the Investment Funds or acquire certain positions on behalf of the Company or the Investment Funds. Goldman Sachs will be under no duty to make any such information available to the Managing Member or in particular the personnel of the Managing Member making investment decisions on behalf of the Company or the Investment Funds. In some circumstances, Goldman Sachs personnel may have input into, or make determinations regarding, portfolio management transactions, however, Goldman Sachs is under no duty to make such resources available to the Managing Member.
 
Issues Relating to the Valuation of Assets by the Managing Member and/or Multiple Divisions or Units Within Goldman Sachs
 
The Managing Member oversees the valuation of the investments of the Company and the Investment Funds based on values provided by the Advisors. Certain securities and other assets in which the Company or the Investment Funds may directly or indirectly invest may not have a readily ascertainable market value. Such securities and other assets may constitute a substantial portion of the investments of the Company and the Investment Funds.
 
Various divisions and units within Goldman Sachs are required to value assets, including in connection with managing or advising Client/GS Accounts and in their capacity as a broker-dealer. These various divisions and units may share information regarding valuation techniques and models or other information relevant to the valuation of a specific asset or category of assets. Goldman Sachs does not, however, have any obligation to engage in such information sharing. The Managing Member will value investments according to its valuation policies, and may value an identical asset differently than another division or unit of Goldman Sachs. This is particularly the case


43


Table of Contents

when an asset does not have a readily ascertainable market price and/or where one division or unit of Goldman Sachs has more recent and/or accurate information about the asset being valued.
 
Potential Conflicts Relating to Goldman Sachs’ Proprietary Activities and Activities on Behalf of Other Accounts
 
The results of the investment activities of the Company and the Investment Funds may differ significantly from the results achieved by Goldman Sachs for its proprietary accounts and from the results achieved by Goldman Sachs for other Client/GS Accounts. The Managing Member will manage the Company, the Investment Funds and the other Client/GS Accounts it manages in accordance with their respective investment objectives and guidelines. However, Goldman Sachs may give advice, and take action, with respect to any current or future Client/GS Accounts that may compete or conflict with the advice the Managing Member may give to the Company or an Investment Fund, including with respect to the return of the investment, the timing or nature of action relating to the investment or the method of exiting the investment.
 
Transactions undertaken by Goldman Sachs or Client/GS Accounts may adversely impact the Company and the Investment Funds. Goldman Sachs and one or more Client/GS Accounts may buy, sell or hold positions while the Company or an Investment Fund, Advisor Fund, Portfolio Company or Managed Account is undertaking the same or a differing, including potentially opposite, strategy, which could disadvantage the Advisor Fund, Portfolio Company or Managed Account and, in turn, the relevant Investment Fund and the Company. For example, the Company or an Investment Fund, Advisor Fund, Portfolio Company or Managed Account may buy a security and Goldman Sachs or Client/GS Accounts may establish a short position in that same security. The subsequent short sale may result in impairment of the price of the security which the Company, Investment Fund, Advisor Fund, Portfolio Company or Managed Account holds. Conversely, the Company or an Investment Fund, Advisor Fund, Portfolio Company or Managed Account may establish a short position in a security and Goldman Sachs or other Client/GS Accounts may buy that same security. The subsequent purchase may result in an increase of the price of the underlying position in the short sale exposure of the Company, Investment Fund, Advisor Fund, Portfolio Company or Managed Account and such increase in price would be to the detriment of the Advisor Fund, Portfolio Company or Managed Account and, in turn, the relevant Investment Fund and the Company.
 
Further, the Managing Member and other Goldman Sachs affiliates may manage funds or accounts, and Goldman Sachs may be invested in funds or accounts, that have similar investment objectives or portfolios to that of the Company, the Investment Funds, the Advisor Funds, Portfolio Companies or Managed Accounts, and events occurring with respect to such funds or accounts could affect the performance of the Company, the Investment Funds, the Advisor Funds, Portfolio Companies or Managed Accounts. For example, in the event that withdrawals of capital or performance losses result in such a fund or account selling securities, those sales could result in securities of the same issuer, strategy or type held by the Company, the Investment Funds, the Advisor Funds, Portfolio Companies or Managed Accounts falling in value, which could have a material adverse effect on the Company or the Investment Funds. The Company or the Investment Funds may, to the extent permitted by applicable law, lend any securities held by the Company or the Investment Funds to any other Client/GS Account, and will be subject to the risk of the default of any such Client/GS Account. Goldman Sachs will be under no duty to compensate the Company or the Investment Funds for any losses incurred as a result of such loans.
 
In the event that Goldman Sachs invests in the Company or the Investment Funds, Goldman Sachs’ investment in the Company may constitute a substantial percentage of the NAV of the Company. Redemptions by Goldman Sachs from the Company may be made at any time without notice to the Members in accordance with the redemption procedures disclosed herein, even if the amount of such redemption constitutes a material portion of the Company’s NAV. Goldman Sachs’ decision to make a redemption from any such entity will be made based on factors it deems relevant in its sole discretion without regard to its effect on the Company.
 
Conflicts may also arise because portfolio decisions regarding an Advisor Fund, Portfolio Company or Managed Account may benefit other Client/GS Accounts. For example, the sale of a long position or establishment of a short position by an Advisor Fund, Portfolio Company or Managed Account may impair the price of the same security sold short by (and therefore benefit) Goldman Sachs or other Client/GS Accounts, and the purchase of a security or covering of a short position in a security by an Advisor Fund, Portfolio Company or Managed Account


44


Table of Contents

may increase the price of the same security held by (and therefore benefit) Goldman Sachs or other Client/GS Accounts.
 
In addition, transactions in investments by one or more Client/GS Accounts and Goldman Sachs may have the effect of diluting or otherwise negatively affecting the values, prices or investment strategies of the Advisor Funds, Portfolio Companies or Managed Accounts, particularly, but not limited to, in small capitalization, emerging market, distressed or less liquid strategies. For example, this may occur when portfolio decisions regarding the Company or an Investment Fund, or for an Advisor Fund, Portfolio Company or Managed Account, are based on research or other information that is also used to support portfolio decisions for other Client/GS Accounts. When Goldman Sachs or a Client/GS Account implements a portfolio decision or strategy ahead of, or contemporaneously with, similar portfolio decisions or strategies for the Advisor Funds, Portfolio Companies or Managed Accounts (whether or not the portfolio decisions emanate from the same research analysis or other information), market impact, liquidity constraints, or other factors could result in the Advisor Funds, Portfolio Companies or Managed Accounts receiving less favorable trading results and the costs of implementing such portfolio decisions or strategies could be increased or the Advisor Funds, Portfolio Companies or Managed Accounts, and, in turn, the relevant Investment Fund and the Company, could otherwise be disadvantaged. Goldman Sachs may, in certain cases, elect to implement internal policies and procedures reasonably designed to mitigate such consequences, which may cause an Advisor Fund, Portfolio Company or Managed Account to be unable to engage in certain activities, including purchasing or disposing of securities, when it might otherwise be desirable for it to do so.
 
The directors, officers and employees of Goldman Sachs, including the Managing Member, may buy and sell securities or other investments for their own accounts (including through investment in funds sponsored, managed or advised by Goldman Sachs, including the Managing Member). As a result of differing trading and investment strategies or constraints, positions may be taken by directors, officers and employees that are the same as, different from or made at different times than positions taken for the Company or an Investment Fund. To reduce the possibility that the Company and the Investment Funds will be materially adversely affected by the personal trading described above, the Managing Member has established policies and procedures that restrict securities trading in the personal accounts of investment professionals and others who normally come into possession of information regarding the Company’s and the Investment Funds’ portfolio transactions. The Managing Member has adopted a code of ethics restriction required by the Investment Advisers Act and monitoring procedures relating to certain personal securities transactions by Managing Member personnel that the Managing Member deems to involve potential conflicts involving such personnel, Client/GS Accounts managed by the Managing Member and the Company or the Investment Funds. The code of ethics requires that Managing Member personnel comply with all applicable U.S. federal securities laws and with the fiduciary duties and anti-fraud rules to which the Managing Member is subject.
 
Clients of Goldman Sachs (including Client/GS Accounts) may have, as a result of receiving client reports or otherwise, access to information regarding the Managing Member’s transactions (and, when Goldman Sachs is a client of an Advisor, transactions of such Advisor) or views which may affect such clients’ transactions outside of accounts controlled by the Managing Member, and such transactions may negatively impact the performance of the Company, the Investment Funds or the assets managed by the Advisors. The Company, the Investment Funds and the assets managed by the Advisors may also be adversely affected by cash flows and market movements arising from purchase and sales transactions, as well as increases of capital in, and withdrawals of capital from, other Client/GS Accounts. These effects can be more pronounced in thinly traded and less liquid markets.
 
An Advisor’s management of an Advisor Fund, Portfolio Company or Managed Account may benefit Goldman Sachs. For example, the Advisor Funds, Portfolio Companies and Managed Accounts may, subject to applicable law, invest directly or indirectly in the securities, bank loans or other obligations of companies affiliated with Goldman Sachs (or a Client/GS Account) or in which Goldman Sachs (or a Client/GS Account) has an equity, debt or other interest. In addition, subject to applicable law, the Advisor Funds, Portfolio Companies and Managed Accounts may engage in investment transactions that may result in other Client/GS Accounts being relieved of obligations or otherwise divesting of investments or cause an Advisor Fund, Portfolio Company or Managed Account to have to divest certain investments. The purchase, holding and sale of investments by the Advisor Funds, Portfolio Companies and Managed Accounts may enhance the profitability of Goldman Sachs’ or other Client/GS Accounts’ own investments in and its activities with respect to such companies.


45


Table of Contents

The Advisor Funds, the Portfolio Companies and the Managed Accounts may invest in indebtedness of portfolio companies affiliated with Goldman Sachs or in which Goldman Sachs and/or funds or accounts sponsored, managed or advised by Goldman Sachs have an equity or other interest, and may acquire such indebtedness either directly or indirectly through syndicate or secondary market purchases. Such investments may benefit Goldman Sachs. This may create conflicts, including in relation to exercising rights as a creditor, and could adversely affect the Company’s and Investment Fund’s rights, interest and activities. Goldman Sachs or funds or accounts which Goldman Sachs manages or in which Goldman Sachs has an interest that hold investments in different parts of the capital structure of a company than the Company, an Investment Fund, Advisor Fund, Portfolio Company or Managed Account, may take certain actions that could be materially adverse to the Company’s direct or indirect investment in such company. Goldman Sachs will not be obligated to take actions in those accounts in a manner consistent or beneficial to the Company. There are also certain risks involved in making investments in issuers that are or become insolvent. See ITEM 1A. “RISK FACTORS—Risks Related to Issuers of Securities—Investments in Issuers of Indebtedness May be Adversely Affected in the Event of an Issuer’s Insolvency,” including the discussion on the avoidance of certain payments on indebtedness as preferences in connection with bankruptcy proceedings, which could be a more significant issue for the Company and the Investment Funds in connection with investments in companies affiliated with Goldman Sachs. In addition, it is possible that in connection with an insolvency, bankruptcy or similar proceeding the Company, the Investment Funds, the Advisor Funds, the Portfolio Companies and the Managed Accounts may be limited (by applicable law, courts or otherwise) in the positions or actions they may be permitted to take due to other interests held or actions or positions taken by Goldman Sachs or funds or other accounts it manages or in which it invests.
 
The Managing Member may, but is not required to, aggregate purchase or sale orders for the Company and the Investment Funds with trades for other funds or accounts sponsored, managed or advised by Goldman Sachs, including Client/GS Accounts. Aggregation of orders occurs when considered appropriate by the Managing Member. These circumstances may include, without limitation, aggregation among client accounts and accounts that contain Goldman Sachs and/or employee interests; when consistent with the goal of aligning advisor and client interests; in developing products that demonstrate client experience track records; when managing accounts in a commercially reasonable manner for clients (which may be affiliates but are engaging the Managing Member to act as an independent commercial money manager); or when aggregating will have a de minimis effect on the performance of client accounts (e.g., where client accounts’ size is larger than the size of the seed account). When orders are aggregated for execution, it is possible that Goldman Sachs and Goldman Sachs employee interests will receive benefits from such transactions, even in limited capacity situations. While the Managing Member maintains policies and procedures that it believes are reasonably designed to deal with conflicts of interest that may arise in certain situations when purchase or sale orders for the Company and the Investment Funds are aggregated for execution with orders for Client/GS Accounts, in some cases the Managing Member will make allocations to accounts in which Goldman Sachs and/or Goldman Sachs employees have an interest.
 
Goldman Sachs and one or more Client/GS Accounts (including the Company, the Investment Funds, Advisor Funds, Portfolio Companies and Managed Accounts) may also invest in different classes of securities of the same issuer. As a result, one or more Client/GS Accounts may pursue or enforce rights with respect to a particular issuer in which an Advisor Fund, Portfolio Company or Managed Account has invested, and those activities may have an adverse effect on the Investment Funds and, in turn, the Company. For example, if a Client/GS Account holds debt securities of an issuer and an Advisor Fund, Portfolio Company or Managed Account holds equity securities of the same issuer, then if the issuer experiences financial or operational challenges, the Client/GS Account which holds the debt securities may seek a liquidation of the issuer, whereas the Advisor Fund, Portfolio Company or Managed Account which holds the equity securities may prefer a reorganization of the issuer. In addition, Goldman Sachs and Client/GS Accounts may pursue or enforce rights with respect to an Advisor with respect to any economic arrangements with, or equity, profits or other interests in, the Advisor. The Managing Member may also, in certain circumstances, pursue or enforce rights with respect to a particular issuer jointly on behalf of one or more Client/GS Accounts (including the Company and the Investment Funds), or Goldman Sachs employees may work together to pursue or enforce such rights. As a result, prices, availability, liquidity and terms of an Advisor’s investments on behalf of the Advisor Funds, Portfolio Companies and Managed Accounts may be negatively impacted by Goldman Sachs’ and other Client/GS Accounts’ activities, and transactions of an Advisor may be impaired or effected at prices or terms that may be less favorable than would otherwise have been the case. In addition, in certain instances


46


Table of Contents

personnel of the Managing Member may obtain information about an issuer that would be material to the management of other Client/GS Accounts, which could limit the ability of personnel of the Managing Member to make allocations to or reduce allocations to certain Advisors.
 
Goldman Sachs (including its personnel or Client/GS Accounts) may create, write, sell or issue, invest in, or act as placement agent or distributor of, derivative instruments with respect to the Company, the Investment Funds, Advisor Funds, Portfolio Companies or Managed Accounts, with respect to underlying securities, currencies or instruments of the Company, the Investment Funds, Advisor Funds, Portfolio Companies or Managed Accounts, or which may be otherwise based on or seek to replicate or hedge the performance of the Company, the Investment Funds, Advisor Funds, Portfolio Companies or Managed Accounts (collectively referred to as “Structured Investment Products”). The values of the Structured Investment Products may be linked to the NAV of the Company, the Investment Funds, Advisor Funds, Portfolio Companies or Managed Accounts and/or the Company’s, the Investment Funds’, Advisor Funds’, Portfolio Companies’ or Managed Accounts’ investments. In connection with the Structured Investment Products and for hedging, re-balancing, investment trading and other purposes, the Company and/or Goldman Sachs (including its personnel or Client/GS Accounts) may (i) purchase or sell investments held by the Company, the Investment Funds, Advisor Funds, Portfolio Companies or Managed Accounts, (ii) purchase or sell units in the Company or interests in the Investment Funds, Advisor Funds, Portfolio Companies or Managed Accounts, or (iii) hold synthetic positions that seek to replicate or hedge the performance of the Company, the Investment Funds, Advisor Funds, Portfolio Companies or Managed Accounts or the Company’s, the Investments Funds’, Advisor Funds’, Portfolio Companies’ or Managed Accounts’ investments. Such positions may be significant and may differ from and/or be adverse to the Company’s, the Investment Funds’, Advisor Funds’, Portfolio Companies’ or Managed Accounts’ positions. Goldman Sachs (including its personnel and Client/GS Accounts) reserves the right to make purchases and sales of investments that may also be held by the Company, the Investment Funds, Advisor Funds, Portfolio Companies and/or Managed Accounts and to make purchases and sales of units in the Company or interests in the Investment Funds, Advisor Funds, Portfolio Companies or Managed Accounts at any time and without notice to investors in the Company. These derivative-related activities, as well as such investment and redemption activities, may have an adverse effect on the investment management of the Company and the Company’s positions, flexibility, diversification strategies and on the amount of fees, expenses and other costs incurred directly or indirectly through the Company by the Members.
 
Goldman Sachs may enter into derivatives transactions with the Company, the Investment Funds and Client/GS Accounts, and Goldman Sachs may hedge such derivatives transactions. This hedging activity may adversely affect the value of the derivative transactions entered into with the Company or the Investments Funds. Any such activity, or investment or sale of positions, may occur as a result of Goldman Sachs deciding to alter or sell positions or adjusting its assessments of an investment or adviser at any time and for any other reason, based on market information, consideration of issues with respect to an adviser or otherwise, and Goldman Sachs will not be under any obligation to provide the Company notice of such adjustment in assessment or the reason behind such adjustment or to effect transactions on behalf of the Company as a result of such adjustments. Actions taken with respect to Goldman Sachs or Client/GS Accounts may adversely impact the Company, and actions taken by the Company may benefit Goldman Sachs or Client/GS Accounts.
 
In addition, Goldman Sachs may make loans to Members or enter into similar transactions that are secured by a pledge of, or mortgage over, a Member’s units, which would provide Goldman Sachs with the right to redeem such units in the event that such Member defaults on its obligations. These transactions and related redemptions may be significant and may be made without notice to the Members. A Goldman Sachs investment may be made in any class of units, including a class which is not subject to any management fee or incentive allocation. The structure or other characteristics of the derivative instruments (including the Structured Investment Products) may have an adverse effect on the Company, an Investment Fund, an Advisor Fund or a Portfolio Company. For example, the derivative instruments could represent leveraged investments in the Company, an Investment Fund, an Advisor Fund or Portfolio Company, and the leveraged characteristics of such investments could make it more likely, due to events of default or otherwise, that there would be significant redemptions of interests from the Company, an Investment Fund, Advisor Fund or Portfolio Company more quickly than might otherwise be the case. Goldman Sachs, acting in commercial capacities in connection with such derivative instruments, may in fact cause such a redemption. This may have an adverse effect on the investment management and positions, flexibility and


47


Table of Contents

diversification strategies of the Company, Investment Fund, Advisor Fund or Portfolio Company, as applicable, and on the amount of fees, expenses and other costs incurred directly or indirectly for the account of the Company.
 
The Managing Member, the Company and the Investment Funds may receive research products and services in connection with the brokerage services that brokers (including, without limitation, Goldman Sachs entities) may provide to the Company, the Investment Funds or one or more Client/GS Accounts. Such products and services may disproportionately benefit other Client/GS Accounts relative to the Company and the Investment Funds based on the amount of brokerage commissions paid by the Company and the Investment Funds and such other Client/GS Accounts. For example, research or other services that are paid for through one client’s commissions may not be used in managing that client’s account. In addition, Client/GS Accounts may receive the benefit, including disproportionate benefits, of economies of scale or price discounts in connection with products and services that may be provided to the Company, the Investment Funds and to Client/GS Accounts.
 
The Company may also directly or indirectly enter into asset-based or other credit facilities. Any credit facility of the Company may be secured by all or any portion of the Company’s portfolio of assets, including any interests in other funds. Actions taken by the Managing Member or Goldman Sachs on behalf of Goldman Sachs’ proprietary accounts, Client/GS Accounts or otherwise may result in adverse performance or diminution in value of the Company’s portfolio, which could cause the Company to be in default, or to take certain actions to avoid being in default, in connection with a credit facility. This could have a material adverse effect on the Company. Actions taken either by the applicable lender (which may, to the extent permitted by applicable law, be Goldman Sachs) or by the Managing Member on behalf of a Client/GS Account or the Company arising out of credit facility related issues may impact the value of the assets of the Company, may cause the Company to be in default or take certain actions to avoid being in default with respect to a credit facility and may have a material adverse effect on the Company. For example, an event of default or actions taken by the Managing Member to avoid an event of default could cause the Company to liquidate assets more rapidly (and therefore potentially at significantly lower prices) than might otherwise be desirable, which could have a material adverse effect on the Company’s portfolio. In addition, such a liquidation could alter the constitution of the Company’s portfolio, resulting in a portfolio that is less diversified and less liquid, and could otherwise limit the ability of the Company to successfully implement its investment program. An example of this would be where, to avoid an event of default, more liquid securities are sold in advance of less liquid securities. Similarly, if the Company is invested in another fund, the consequences arising out of a default or potential default by such fund in connection with a credit facility as described above could adversely affect the Company, and such consequences could be exacerbated by substantial redemptions from other investors (including Goldman Sachs and the Managing Member on behalf of Client/GS Accounts) in the defaulting or potentially defaulting fund. Such redemptions could cause the liquidation of additional portfolio assets of the Company at times that would not otherwise be desirable, with the negative effects described above. When Goldman Sachs acts as a lender to a fund or Client/GS Account, it may take commercial steps in its own interest, such as requiring repayment of all or part of a loan at a time that may not be desirable for the Company, and such actions may have a material adverse effect on the Company.
 
      Potential Conflicts in Connection with Investments in Goldman Sachs Money Market Funds
 
To the extent permitted by applicable law, the Company and the Investment Funds may invest all or some of their short-term cash investments in any money market fund sponsored, managed or advised by Goldman Sachs. In connection with any such investments, the Company and the Investment Funds will pay all advisory, administrative or 12b-1 fees applicable to the investment and the fees or allocations from the Company and the Investment Funds will not be reduced thereby (i.e., there could be “double fees” involved in making any such investment, which would not arise in connection with an investor’s direct purchase of the underlying investments because Goldman Sachs could receive fees with respect to both the management of the Company or the Investment Funds and such money market fund). In such circumstances, as well as in all other circumstances in which Goldman Sachs receives any fees or other compensation in any form relating to the provision of services, no accounting or repayment to the Company or the Investment Funds will be required.


48


Table of Contents

      Potential Conflicts in Connection with Investments in Affiliated Funds
 
The Managing Member may directly or indirectly allocate the Company’s assets to Advisor Funds, Portfolio Companies or Managed Accounts managed by Goldman Sachs or to open-end investment companies, unit investment trusts or other collective investment funds, registered or non-registered, for which Goldman Sachs serves as investment adviser (“Affiliated Funds”). In such case, the Company may be required to pay all advisory and other fees and expenses (including, but not limited to, management fees, carried interest charges, incentive fees and allocations, and offering, organizational and operating expenses) applicable to such investment, and Goldman Sachs may receive compensation from the Company in connection with acting as an Advisor, and such compensation may not reduce any fees payable directly to the Managing Member by the Company. Because Goldman Sachs may receive fees in respect of both the Company and the management of the Affiliated Funds, there may be “multiple fees” involved in making any such investment, which would not arise if clients invested directly in the Affiliated Funds. In addition, the affiliated Advisor’s personnel may receive compensation as a result of such investments. Any such fees, allocations or other compensation received by Goldman Sachs in connection with a direct or indirect investment by the Company in an Affiliated Fund will generally be retained by Goldman Sachs and will generally not be shared with the Company or investors, provided, however, that subject to applicable law, Goldman Sachs (including the Managing Member) has the right, in its sole discretion, to waive, reduce or rebate fees that would otherwise be payable to Goldman Sachs in connection with the Managing Member’s allocation of the Company’s assets to Affiliated Funds.
 
As the Managing Member’s allocations of Company assets to Affiliated Funds may result in the Managing Member and/or Goldman Sachs receiving higher fees, compensation or other benefits than if the Managing Member makes direct or indirect allocations solely to Advisor Funds, Portfolio Companies or Managed Accounts managed by third parties, the Managing Member will have an incentive to make direct or indirect allocations to Affiliated Funds. Furthermore, the Managing Member will have an interest in allocating Company assets directly or indirectly to Affiliated Funds that impose higher fees than those imposed by other Affiliated Funds.
 
      Goldman Sachs May In-Source or Outsource
 
Subject to applicable law, Goldman Sachs, including the Managing Member, may from time to time and without notice to investors in-source or outsource certain processes or functions in connection with a variety of services that it provides to the Company and the Investment Funds in its administrative or other capacities. Such in-sourcing or outsourcing may give rise to additional conflicts of interest.
 
      Potential Conflicts Pertaining to Advisor Fund Special Investments and Designated Investments
 
From time to time, the Company may, as part of its investment program, invest in one or more Advisor Funds and/or Portfolio Companies that acquire or hold assets or securities that its Advisor determines should, either at the time such security or other asset is acquired or at a later date, be segregated (or “side pocketed”) from the other assets and securities of the Advisor Fund or Portfolio Company because such assets cannot be readily liquidated or because the value of such assets cannot be readily ascertained (each such investment, together with certain related assets and liabilities and investments related thereto which are also segregated, such as hedge positions, a “Portfolio Fund Special Investment”). Such assets typically retain their designation as Portfolio Fund Special Investments until they are realized or become marketable or until the occurrence of such other specified event or circumstance as may be determined by the Advisor. Investors that hold interests in side pocketed assets generally will not be able to redeem their indirect interests in such assets until the relevant side-pocketed assets are liquidated or deemed realized by the Advisor Funds or Portfolio Companies.
 
In addition, from time to time, the Company and/or an Advisor Fund or Portfolio Company in which the Fund has invested or any other assets held by the Fund may become materially impaired, including in situations where the Company, Advisor Fund or Portfolio Company has limited, suspended or discontinued redemptions of its interests or has suspended determination of its net asset value. If the Managing Member, in its sole discretion, determines that the Company’s ability to redeem or otherwise dispose of interests in or to value a particular Advisor Fund, Portfolio Company or other asset held by the Company has become materially impaired, the Managing Member, in its sole discretion, may (but is not required to) designate the Company’s interests in such Advisor Fund, Portfolio Company


49


Table of Contents

or other asset a “Designated Investment.” The Managing Member may rescind the Designated Investment status when it determines, in its sole discretion, that the Designated Investment no longer suffers from a liquidity or valuation impairment, including upon the Company’s liquidation of the Designated Investment.
 
At any time on or before a redemption date, the Managing Member may determine as a result of the Company’s aggregate exposure to Portfolio Fund Special Investments and Designated Investments, that fulfilling outstanding redemption requests as of such redemption date solely in cash may have a material adverse effect on the investment mix or future liquidity of the Company for remaining investors. To attempt to mitigate the effects of redemptions on the investment mix and future liquidity of the Company, the Managing Member may have the right to cause the Company to satisfy a redemption request partly in cash (by disposing of liquid assets) and partly by transferring the economic risks and benefits of the illiquid assets to the redeeming investor through, among other means, a distribution in kind or the issuance of interests in special investment accounts to which the Managing Member, in its sole discretion, may allocate interests in certain Portfolio Fund Special Investments and Designated Investments (“Special Investment Accounts”). Clients will retain their interests in each Special Investment Account until the last investment in such Special Investment Account is realized, deemed realized or disposed of, or its Designated Investment status has been rescinded by the Managing Member, in its sole discretion. Throughout the time period that clients hold interests in Special Investment Accounts, the Managing Member shall determine the value of the Special Investment Accounts, and clients that hold interests in Special Investment Accounts may pay the Managing Member management fees and performance-based fees that shall be calculated based on the value of the clients’ investments in the Special Investment Accounts.
 
The Managing Member’s ability to distribute illiquid assets in kind or to allocate Portfolio Fund Investments and Designated Investments to Special Investment Accounts and issue interests in Special Investment Accounts raises conflicts of interest. For example, the Managing Member’s determinations with respect thereto may affect the amount of fees earned by the Managing Member. The Managing Member may, therefore, be incentivized to satisfy clients’ redemption requests through a combination of cash and interests in Special Investment Accounts in order to earn management and performance-based fees that the Managing Member would otherwise not be entitled to had clients’ redemption requests been satisfied fully in cash. The Managing Member may also be incentivized not to rescind a Designated Investment’s status as such, because rescission of Designated Investment’s status will reduce the value of the Special Investment Accounts to which such Designated Investment has been allocated, and this in turn will reduce the fees payable by clients to the Managing Member in connection with such clients’ interests in Special Investment Accounts.
 
Moreover, the Managing Member may have discretion over the amount and identity of the Portfolio Fund Special Investments and Designated Investments distributed in kind or allocable to Special Investment Accounts. Depending on the composition of the Portfolio Fund Special Investments and Designated Investments that the Managing Member distributes in kind or allocates to Special Investment Accounts in respect of a particular redemption date (each a “Special Investment Account Series”), one Special Investment Account Series may outperform another Special Investment Account Series or may outperform the Fund itself. Therefore, the composition of such in-kind distribution or Special Investment Account may cause the returns received by one client (including Goldman Sachs) to be greater than those received by another client. In this regard, while the Managing Member will have broad discretion as to whether to designate Portfolio Fund Special Investments and Designated Investments and as to the composition of any such in-kind distribution or allocation to Special Investment Accounts, the Managing Member may establish internal guidelines as to the factors it will employ in making these determinations. These internal guidelines will be subject to change in the sole discretion of the Managing Member.
 
      Potential Conflicts Related to the Valuation of Investments
 
The valuation of investments made by the Company and the Investment Funds is ordinarily determined based on valuations provided directly or indirectly by the Advisors. Certain securities in which the Company or the Investment Funds directly or indirectly invest may not have a readily ascertainable market price and will generally be valued by the Advisors. Such securities and other assets may constitute a substantial portion of the Company’s direct or indirect investments. In this regard, the Advisors may face a conflict of interest in valuing the securities, as their value will affect the Advisors’ compensation. Furthermore, the Managing Member may face a conflict of


50


Table of Contents

interest in overseeing the valuation of the investments of the Company or an Investment Fund, as the value of such fund’s investments will affect the Managing Member’s compensation. In certain circumstances, the Managing Member may determine that a valuation of the assets of the Company or an Investment Fund is inaccurate or incomplete. In addition, certain assets of the Company or an Investment Fund may not be valued by the Advisors, including without limitation, fee or profit sharing arrangements with an Advisor. In such events, the Managing Member may, in its sole discretion, determine the fair value of such assets based on information available to, and factors deemed relevant by, the Managing Member at the time of such valuation. The Managing Member may face a conflict of interest in making such determination.
 
Potential Conflicts That May Arise When Goldman Sachs Acts in a Capacity Other than Managing Member to the Company or the Investment Funds
 
      Potential Conflicts Relating to Principal and Cross Transactions
 
To the extent permitted by applicable law, the Managing Member, on behalf of the Company or the Investment Funds, or an Advisor, on behalf of an Advisor Fund, Portfolio Company or Managed Account, may enter into transactions and invest in futures, securities, currencies, swaps, options, forward contracts or other instruments in which Goldman Sachs or an affiliate of the Advisor, acting as principal or on a proprietary basis for its customers, serves as the counterparty.
 
To the extent permitted by applicable law, the Company may also enter into “cross transactions” (i.e., where the Managing Member causes the Company to buy a security from, or sell a security to, another client of the Managing Member or its affiliates) and “agency cross transactions” (i.e., where Goldman Sachs acts as broker for, and receives a commission from, both the Company on one side of the transaction and a brokerage account on the other side of the transaction in connection with the purchase or sale of securities). Goldman Sachs may have a potentially conflicting division of loyalties and responsibilities to both parties to a cross transaction or agency cross transaction. For example, in a cross transaction, the Managing Member or an affiliate will represent both the Company on the one side of a transaction and another account on the other side of the transaction (including an account in which Goldman Sachs or its affiliates have a proprietary interest) in connection with the purchase of a security by the Company. In addition, in an agency cross transaction, Goldman Sachs will act as broker and receive compensation or other payments from either or both parties which could influence the decision of Goldman Sachs to cause the Company to purchase such security. Cross transactions and agency cross transactions are effected on commercially reasonable terms. The Managing Member may also, to the extent permitted by applicable law and subject to Goldman Sachs’ allocation policies, transfer some or all of the Company’s interest in an Investment Fund, Advisor Fund, Portfolio Company or Managed Account to other Client/GS Accounts if the Managing Member deems it advisable in order to achieve the investment objectives of the Company and such Client/GS Account.
 
By virtue of entering into the Subscription Agreement, the investor consents to the Company, Investment Funds, Advisor Funds, Portfolio Companies and Managed Accounts entering into principal transactions, agency cross transactions and cross transactions to the fullest extent permitted under applicable law. An investor may revoke such consent in the manner set forth herein or in such other manner as the Company or the Managing Member will notify the investor from time to time.
 
Pursuant to the Subscription Agreement and to the extent permitted by applicable law, in respect of matters described in the next sentence in which the Company may engage and which may require approval on behalf of the Company or with respect to which the Managing Member determines to seek approval, the Company and/or the Managing Member is authorized without limitation (but is not in any way required), to (i) consider and approve or disapprove such transactions and other matters on behalf of the Company and its investors, or (ii) select certain Members or beneficial owners of units or one or more persons who are not affiliated with the Company, including persons who may or may not be affiliated with the Managing Member and/or Goldman Sachs, to serve on a committee, the purpose of which will be to consider and approve or disapprove any such transactions and other matters on behalf of the Company and the Members that are presented to such committee by the Managing Member in its sole discretion. Such transactions or other matters may include the following, but in any event only with respect to any particular transaction or other matter that the Managing Member determines in its sole discretion to either, in the case of (i) above, consider, or in the case of (ii) above, present to the committee: (a) any transaction in


51


Table of Contents

which the Company proposes to purchase or sell securities and which, as a result of participation (directly or indirectly) by Goldman Sachs in respect of such transaction, requires consent under the Investment Advisers Act, (b) any fee paid to Goldman Sachs in respect of a transaction in which the Company proposes to be an investor and which, as a result of the participation by Goldman Sachs, requires consent under the Investment Advisers Act, (c) any other transaction or matter for which prior consent or other consent may be required under the Investment Advisers Act, and (d) any other transaction or matter which the Managing Member determines to consider itself or present to the committee, which may include, without limitation, transactions involving possible conflicts of interest. For the avoidance of doubt, the Managing Member will be under no obligation to form any such committee or present any particular matter to any such committee, and the determination to set up a committee or to present any matter for consideration to the committee will in each case be made by the Managing Member in its sole discretion.
 
      Potential Conflicts That May Arise When Goldman Sachs Acts in Commercial Capacities for the Company and the Investment Funds
 
Goldman Sachs may act as broker, dealer, agent, lender or advisor or in other commercial capacities for the Company and the Investment Funds. It is anticipated that the commissions, mark-ups, mark-downs, financial advisory fees, underwriting and placement fees, sales fees, financing and commitment fees, brokerage fees, other fees, compensation or profits, rates, terms and conditions charged by Goldman Sachs will be in its view commercially reasonable, although Goldman Sachs, including its sales personnel, will have an interest in obtaining fees and other amounts that are favorable to Goldman Sachs and such sales personnel. The Company and the Investment Funds may, to the extent permitted by applicable law, borrow funds from Goldman Sachs at rates and on other terms arranged with Goldman Sachs.
 
Goldman Sachs may be entitled to compensation when it acts in capacities other than as the Managing Member or the managing member of the Investment Funds, and the Company, the Investment Funds, Advisor Funds, Portfolio Companies and Managed Accounts will not be entitled to any such compensation.
 
When an Advisor chooses Goldman Sachs to act as broker, prime broker, dealer, agent, lender, borrower or advisor or in other commercial capacities in relation to an Advisor Fund, Portfolio Company or Managed Account, Goldman Sachs may take commercial steps in its own interests, which may have an adverse effect on the Company, the relevant Investment Fund, and the Advisor Fund, Portfolio Company or Managed Account, as applicable. For example, in connection with prime brokerage or lending arrangements involving Advisors on behalf of the Investment Funds, Portfolio Companies or Managed Accounts, Goldman Sachs may require repayment of all or part of a loan at any time or from time to time.
 
The Company and each Investment Fund will be required to establish business relationships with its counterparties based on its own credit standing. Goldman Sachs, including the Managing Member, will not have any obligation to allow its credit to be used in connection with the Company’s or any Investment Fund’s establishment of its business relationships, nor is it expected that the Company’s or such Investment Fund’s counterparties will rely on the credit of Goldman Sachs in evaluating the Company’s or any Investment Fund’s creditworthiness.
 
Goldman Sachs may have ownership interests in trading networks, securities or derivatives indices, trading tools, settlement systems and other assets, and Goldman Sachs may benefit when the Managing Member and Advisors use them in connection with the Company or the Investment Funds.
 
      The Board of Directors Lacks Independence
 
The Managing Member is, and has historically been, responsible for the management of the affairs of the Company. Effective April 1, 2009, the Managing Member established a board of directors of the Company, which supervises the affairs of the Company in lieu of the supervision previously provided by the Board of Directors of the Managing Member. The directors of the Company are employees of Goldman Sachs and will not be independent of the Managing Member and the Company, as applicable. As a result, the directors of the Company may have other considerations in addition to their responsibilities for the Company, including as a result of their employment by Goldman Sachs, which could result in potential conflicts of interest.


52


Table of Contents

Potential Conflicts Relating to the Selection of Investments by the Advisors
 
      An Advisor’s Other Activities May Have an Impact on the Advisor Funds, Portfolio Companies and Managed Accounts
 
Each Advisor may act as an investor, investment banker, research provider, investment manager, financer, advisor, market maker, proprietary trader, prime broker, lender, agent or principal, and may have other direct and indirect interests, in the global fixed income, currency, commodity, equity, bank loan and other markets in which the Advisor trades. Thus, it is possible that an Advisor will undertake transactions in securities in which it makes a market or otherwise has direct or indirect interests. These business relationships and the fees, compensation and other benefits to the Advisor arising therefrom, may, in certain cases, create an incentive for the Advisor to make certain investments for the Company over other investments that might also be appropriate.
 
      Potential Conflicts Relating to the Allocation of Investment Opportunities Among the Advisors’ Accounts
 
Advisors have potential conflicts in connection with the allocation of investments or transaction decisions for Advisor Funds, Portfolio Companies and Managed Accounts, including in situations in which Advisors or their personnel have interests. For example, an Advisor Fund may be competing for investment opportunities with current or future accounts or funds sponsored, managed or advised by the Advisor Fund’s Advisor, including accounts or funds that may provide greater fees or other compensation, including performance-based fees, to the Advisor or in which the Advisor or its personnel have an interest (each, a “Client/Advisor Account” and collectively, the “Client/Advisor Accounts”) that have investment objectives that are similar to those of an Advisor Fund, Portfolio Company or Managed Account managed by such Advisor. Economic arrangements which an Advisor may have entered into, such as agreements to share or rebate fees or to grant equity, profits or other interests, may also result in other Client/Advisor Accounts of the Advisor providing greater compensation to the Advisor than an Advisor Fund, Portfolio Company or Managed Account.
 
An Advisor may manage or advise Client/Advisor Accounts that may seek to make investments or sell investments in securities or other instruments, sectors or strategies in which an Advisor Fund, Portfolio Company or Managed Account may invest. This may create potential conflicts and potential differences among an Advisor Fund, Portfolio Company or Managed Account and other Client/Advisor Accounts, particularly where there is limited availability or limited liquidity for those investments. For example, limited availability situations may exist, without limitation, in emerging markets, high yield securities, fixed income securities, regulated industries and initial public offerings/new issues. Transactions in investments by multiple Client/Advisor Accounts (including accounts in which an Advisor and/or its personnel have an interest), other clients of an Advisor or an Advisor itself may have the effect of diluting or otherwise negatively affecting the values, prices or investment strategies associated with securities held by an Advisor Fund, Portfolio Company or Managed Account, particularly, but not limited to, in small capitalization, emerging market or less liquid strategies. Each Advisor will allocate investment opportunities and make purchase and sale decisions among the Advisor Fund, Portfolio Company or Managed Account and other Client/Advisor Accounts in a manner that it considers, in its sole discretion, to each Client/Advisor Account, to be reasonable. Allocations may be based on numerous factors and may not always be pro rata based on assets managed.
 
Allocation decisions by Advisors among accounts may be more or less advantageous to any one account or group of accounts. An Advisor may determine that an investment opportunity or particular purchases or sales are appropriate for one or more Client/Advisor Accounts or for itself or an affiliate, but not for the Advisor Fund, Portfolio Company or Managed Account managed by such Advisor, or is appropriate for, or available to, such Advisor Fund, Portfolio Company or Managed Account, but in different sizes, terms or timing than is appropriate for other Client/Advisor Accounts. As a result of these allocation issues, the amount, timing, structuring or terms of an investment by an Advisor Fund, Portfolio Company or Managed Account managed by an Advisor may differ from, and performance may be lower than, investments and performance of other Client/Advisor Accounts managed by the same Advisor.


53


Table of Contents

Other Potential Conflicts Relating to the Advisors’ Portfolio Management Activities
 
      Potential Restrictions and Issues Relating to Information Held by Advisors
 
As a result of informational barriers constructed between different divisions of an Advisor, an Advisor will generally not have access to information and personnel in other areas of the Advisor. Therefore, an Advisor will generally not be able to manage the Advisor Funds, Portfolio Companies or Managed Accounts with the benefit of information held by its other divisions. However, although they are under no obligation to do so, personnel of an Advisor may consult with personnel in other areas of the Advisor or personnel of unaffiliated firms, or may form investment policy committees comprised of such personnel, and in certain circumstances, personnel of affiliates of an Advisor may have input into, or make determinations regarding, portfolio management transactions for Advisor Funds, Portfolio Companies or Managed Accounts and may receive information regarding the proposed investment activities of the Advisor Funds, Portfolio Companies or Managed Accounts managed by such Advisor that is not generally available to the public. There will be no obligation on the part of such persons to make available for use by the Advisor Funds, Portfolio Companies or Managed Accounts any information or strategies known to them or developed in connection with their own client, proprietary or other activities. In addition, Advisors will be under no obligation to make available any research or analysis prior to its public dissemination.
 
An Advisor from time to time may have access to certain fundamental analysis and proprietary technical models developed by it and its affiliates. The Advisor will not be under any obligation to effect transactions on behalf of an Advisor Fund, Portfolio Company or Managed Account that it manages in accordance with such analysis and models. In addition, the Advisor may have no obligation to seek information or to make available to or share with the Advisor Fund, Portfolio Company or Managed Account any information, investment strategies, opportunities or ideas known to the Advisor’s personnel or developed or used in connection with other Client/Advisor Accounts or activities.
 
An Advisor and certain of its personnel may be in possession of information not available to all Advisor personnel, including the personnel advising or otherwise providing services to an Advisor Fund, Portfolio Company or Managed Account advised by such Advisor, and such personnel may act on the basis of such information in ways that have adverse effects on such Advisor Fund, Portfolio Company or Managed Account.
 
From time to time, an Advisor may come into possession of material, non-public information or other information that could limit the ability of an Advisor Fund, Portfolio Company or Managed Account managed by such Advisor to buy and sell investments. The investment flexibility of such Advisor Fund, Portfolio Company or Managed Account may be constrained as a consequence. Advisors are not generally permitted to obtain or use material non-public information in effecting purchases and sales in public securities transactions for an Advisor Fund, Portfolio Company or Managed Account.
 
      Potential Conflicts Relating to an Advisor’s Proprietary Activities on Behalf of Other Accounts Managed by the Advisor
 
The results of the investment activities of an Advisor Fund, Portfolio Company or Managed Account may differ significantly from the results achieved by its Advisor for its proprietary accounts and from the results achieved by the Advisor for other Client/Advisor Accounts. An Advisor is expected to manage the applicable Advisor Fund, Portfolio Company or Managed Account and its other Client/Advisor Accounts in accordance with their respective investment objectives and guidelines. However, the Advisor may give advice, and take action, with respect to any current or future Client/Advisor Accounts that may compete or conflict with the advice the Advisor may give to an Advisor Fund, Portfolio Company or Managed Account, including with respect to the return of an investment, the timing or nature of action relating to an investment or the method of exiting the investment.
 
Transactions undertaken by Advisors or Client/Advisor Accounts may adversely impact an Advisor Fund, Portfolio Company or Managed Account. An Advisor and its Client/Advisor Accounts may buy or sell positions while an Advisor Fund, Portfolio Company or Managed Account managed by such Advisor is undertaking the same or a differing, including potentially opposite, strategy, which could disadvantage the Advisor Fund, Portfolio Company or Managed Account. For example, an Advisor Fund may buy a security and its Advisor or such Advisor’s Client/Advisor Accounts may establish a short position in that same security. The subsequent short sale may result


54


Table of Contents

in impairment of the price of the security which the Advisor Fund holds. Conversely, the Advisor Fund may establish a short position in a security and the Advisor or its Client/Advisor Accounts may buy that same security. The subsequent purchase may result in an increase of the price of the underlying position in the short sale exposure of the Advisor Fund and such increase in price would be to the Advisor Fund’s detriment.
 
In addition, transactions in investments by one or more Client/Advisor Accounts or the Advisors may have the effect of diluting or otherwise negatively affecting the values, prices or investment strategies of an Advisor Fund, Portfolio Company or Managed Account, particularly, but not limited to, in small capitalization, emerging market or less liquid strategies. This may occur when portfolio decisions for an Advisor Fund, Portfolio Company or Managed Account are based on research or other information that is also used to support portfolio decisions for other Client/Advisor Accounts managed by personnel of an Advisor. When the Advisor or a Client/Advisor Account implements a portfolio decision or strategy ahead of, or contemporaneously with portfolio decisions or strategies for an Advisor Fund, Portfolio Company or Managed Account (whether or not the portfolio decisions emanate from the same research analysis or other information), market impact, liquidity constraints, or other factors could result in the Advisor Fund, Portfolio Company or Managed Account receiving less favorable trading results and the costs of implementing such portfolio decisions or strategies could be increased or the Advisor Fund, Portfolio Company or Managed Account could otherwise be disadvantaged. The Advisor may, in certain cases, elect to implement internal policies and procedures designed to limit such consequences to the Client/Advisor Accounts as well as the Advisor Funds, Portfolio Companies and Managed Accounts, which may cause an Advisor Fund, Portfolio Company or Managed Account to be unable to engage in certain activities, including purchasing or disposing of securities, when it might otherwise be desirable for it to do so.
 
Conflicts may also arise because portfolio decisions regarding an Advisor Fund, Portfolio Company or Managed Account may benefit other Client/Advisor Accounts. For example, the sale of a long position or establishment of a short position by an Advisor Fund may impair the price of the same security sold short by (and therefore benefit) the Advisor or other Client/Advisor Accounts, and the purchase of a security or covering of a short position in a security by an Advisor Fund may increase the price of the same security held by (and therefore benefit) the Advisor or other Client/Advisor Accounts.
 
The directors, officers and employees of an Advisor may buy and sell securities or other investments for their own accounts (including through funds managed by the Advisor). As a result of differing trading and investment strategies or constraints, positions may be taken by directors, officers and employees of an Advisor that are the same as, different from or made at different times than positions taken for an Advisor Fund, Portfolio Company or Managed Account managed by such Advisor. To reduce the possibility that an Advisor Fund, Portfolio Company or Managed Account will be materially adversely affected by the personal trading described above, each Advisor may establish policies and procedures that restrict securities trading in the personal accounts of investment professionals and others who normally come into possession of information regarding the portfolio transactions of an Advisor Fund, Portfolio Company or Managed Account that it manages. However, there can be no assurance that such policies and procedures will avoid all conflicts of interest.
 
Clients of an Advisor (including Client/Advisor Accounts) may have, as a result of receiving client reports or otherwise, access to information regarding the Advisor’s transactions or views which may affect such clients’ transactions outside of accounts controlled by the personnel providing advice to an Advisor Fund, Portfolio Company or Managed Account managed by such Advisor, and such transactions may negatively impact the performance of such Advisor Fund, Portfolio Company or Managed Account. An Advisor Fund, Portfolio Company or Managed Account may also be adversely affected by cash flows and market movements arising from purchase and sales transactions, as well as increases of capital in, and withdrawals of capital from, other Client/Advisor Accounts and Client/GS Accounts. These effects can be more pronounced in thinly traded and less liquid markets.
 
An Advisor’s management of the assets of an Advisor Fund, Portfolio Company or Managed Account may benefit the Advisor. For example, an Advisor Fund, Portfolio Company or Managed Account may, subject to applicable law, invest directly or indirectly in the securities, bank loans or other obligations of companies affiliated with the Advisor or in which the Advisor has an equity, debt or other interest. In addition, subject to applicable law, an Advisor Fund, Portfolio Company or Managed Account may engage in investment transactions which may result


55


Table of Contents

in other Client/Advisor Accounts being relieved of obligations or otherwise divesting of investments or cause an Advisor Fund, Portfolio Company or Managed Account to have to divest certain investments. The purchase, holding and sale of investments by an Advisor Fund, Portfolio Company or Managed Account may enhance the profitability of the Advisor’s or its Client/Advisor Accounts’ own investments in and its activities with respect to such companies.
 
An Advisor and its clients may also invest in different classes of securities of the same issuer. As a result, one or more Client/Advisor Accounts may pursue or enforce rights with respect to a particular issuer in which an Advisor Fund, Portfolio Company or Managed Account has invested, and those activities may have an adverse effect on such Advisor Fund, Portfolio Company or Managed Account. For example, if a Client/Advisor Account holds debt securities of an issuer, and an Advisor Fund, Portfolio Company or Managed Account holds equity securities of the same issuer, then if the issuer experiences financial or operational challenges, the Client/Advisor Account which holds the debt securities may seek a liquidation of the issuer, whereas the Advisor Fund, Portfolio Company or Managed Account which holds the equity securities, may prefer a reorganization of the issuer. An Advisor may also, in certain circumstances, pursue or enforce rights with respect to a particular issuer jointly on behalf of one or more Client/Advisor Accounts, or the Advisor’s employees may work together to pursue or enforce such rights. An Advisor Fund, Portfolio Company or Managed Account may be negatively impacted by the activities of the Advisor or its clients, and transactions for an Advisor Fund, Portfolio Company or Managed Account managed by such Advisor may be impaired or effected at prices or terms that may be less favorable than would otherwise have been the case had the Advisor and Client/Advisor Accounts not pursued a particular course of action with respect to the issuer of the securities. In addition, in certain instances personnel of an Advisor may obtain information about an issuer that would be material to the management of other Client/Advisor Accounts which could limit the ability of personnel of the Advisor to make or reduce investments for the Advisor Funds, Portfolio Companies and Managed Accounts.
 
To the extent permitted by applicable law, an Advisor (including its personnel or Client/Advisor Accounts) may create, write, sell, issue, invest in or act as placement agent or distributor of, derivative instruments (including the Structured Investment Products). The structure or other characteristics of the derivative instruments (including the Structured Investment Products) may have an adverse effect on the Advisor Fund, Portfolio Company or Managed Account. For example, the derivative instruments could represent leveraged investments in an Advisor Fund, and the leveraged characteristics of such investments could make it more likely, due to events of default or otherwise, that there would be significant redemptions of interests from the Advisor Fund more quickly than might otherwise be the case. The Advisor, acting in commercial capacities in connection with such derivative instruments, may in fact cause such a redemption. This may have an adverse effect on the Advisor Fund’s investment management and positions, flexibility, and diversification strategies and on the amount of fees, expenses and other costs incurred directly or indirectly for the account of such Advisor Fund. Similarly, an Advisor (including its personnel or Client/Advisor Accounts) may invest in an Advisor Fund, may hedge its derivative positions by buying or selling interests in the Advisor Fund, and may reserve the right to redeem some or all of its investments at any time. These investments and redemptions may be made without notice to the investors in such Advisor Funds, including the Investment Funds and indirectly the Company.
 
The Advisors and the Advisor Funds, Portfolio Companies or Managed Accounts may receive research products and services in connection with the brokerage services that brokers (including, without limitation, Goldman Sachs entities and Advisor affiliated entities) may provide to the Advisor Funds, Portfolio Companies or Managed Accounts or one or more Client/Advisor Accounts. Such products and services may disproportionately benefit other Client/Advisor Accounts relative to the Advisor Funds, Portfolio Companies or Managed Accounts based on the amount of brokerage commissions paid by the Advisor Funds, Portfolio Companies or Managed Accounts and such other Client/Advisor Accounts. For example, research or other services that are paid for through one client’s commissions may not be used in managing that client’s account. In addition, Client/Advisor Accounts may receive the benefit, including disproportionate benefits, of economies of scale or price discounts in connection with products and services that may be provided to the Advisor Funds, Portfolio Companies or Managed Accounts and to Client/Advisor Accounts.


56


Table of Contents

      Potential Conflicts That May Arise When an Advisor Acts in a Capacity Other Than Advisor to the Advisor Funds, Portfolio Companies or Managed Accounts
 
An Advisor may act as broker, dealer, agent, lender or advisor or in other commercial capacities for an Advisor Fund, Portfolio Company or Managed Account. It is anticipated that the commissions, mark-ups, mark-downs, financial advisory fees, underwriting and placement fees, sales fees, financing and commitment fees, brokerage fees, other fees, compensation or profits, rates, terms and conditions charged by the Advisor will be in its view commercially reasonable, although the Advisor, including its sales personnel, will have an interest in obtaining fees and other amounts that are favorable to such Advisor and its sales personnel.
 
To the extent permitted by applicable law, an Advisor may enter into transactions and invest in futures, securities, currencies, swaps, options, forward contracts or other instruments on behalf of an Advisor Fund, Portfolio Company or Managed Account in which such Advisor, acting as principal or on a proprietary basis for its customers, serves as the counterparty. An Advisor Fund, Portfolio Company or Managed Account may also enter into cross transactions in which its Advisor acts on behalf of such Advisor Fund, Portfolio Company or Managed Account and for the other party to the transaction. An Advisor may have a potentially conflicting division of responsibilities to both parties to a cross transaction.
 
When an Advisor acts as broker, dealer, agent, lender or advisor or in other commercial capacities in relation to an Advisor Fund, Portfolio Company or Managed Account, such Advisor may take commercial steps in its own interests, which may have an adverse effect on such Advisor Fund, Portfolio Company or Managed Account. For example, in connection with prime brokerage or lending arrangements involving an Advisor Fund, Portfolio Company or Managed Account, an Advisor may require repayment of all or part of a loan at any time or from time to time.
 
To the extent permitted by applicable law, an Advisor Fund, Portfolio Company or Managed Account may invest all or some of its short-term cash investments in any money market fund advised or managed by its Advisor, and may invest in other products advised or managed by its Advisor. In connection with any such investment, the Advisor Fund, Portfolio Company or Managed Account will pay all advisory, administrative or 12b-1 fees applicable to the investment and the fees or allocations from the Advisor Fund, Portfolio Company or Managed Account generally will not be reduced thereby (i.e., there could be “double fees” involved in making any such investment, which would not arise in connection with an investor’s direct purchase of underlying investments because its Advisor could receive fees with respect to both the management of the Advisor Fund, Portfolio Company or Managed Account and such investment). In such circumstances, as well as in all other circumstances in which the Advisor receives any fees or other compensation in any form relating to the provision of services, no accounting or repayment to the Company will be required.
 
      The Advisors May In-Source or Outsource
 
Subject to applicable law, Advisors may from time to time and without notice to investors in-source or outsource certain processes or functions in connection with a variety of services that they provide to the Advisor Funds, Portfolio Companies or Managed Accounts managed by them in their administrative or other capacities. Such in-sourcing or outsourcing may give rise to additional conflicts of interest.
 
Potential Conflicts in Connection with Brokerage Transactions and Proxy Voting by the Advisors
 
To the extent permitted by applicable law, purchases and sales of securities for an Advisor Fund, Portfolio Company or Managed Account may be bunched or aggregated with orders for other Client/Advisor Accounts of the Advisor that manages such Advisor Fund, Portfolio Company or Managed Account. An Advisor, however, is not required to bunch or aggregate orders if portfolio management decisions for different accounts are made separately, if it determines that bunching or aggregating is not practicable or required, or with respect to client-directed accounts.
 
Prevailing trading activity frequently may make impossible the receipt of the same price or execution on the entire volume of securities purchased or sold. When this occurs, the various prices may be averaged, and the Advisor Fund, Portfolio Company or Managed Account, as applicable, will be charged or credited with the average


57


Table of Contents

price. Thus, the effect of the aggregation may operate on some occasions to the disadvantage of the Advisor Fund, Portfolio Company or Managed Account. In addition, under certain circumstances, an Advisor Fund, Portfolio Company or Managed Account will not be charged the same commission or commission equivalent rates in connection with a bunched or aggregated order. Without limitation, time zone differences, separate trading desks or portfolio management processes in a global organization may, among other factors, result in separate, non-aggregated executions.
 
An Advisor may select broker-dealers (including, without limitation, affiliates of the Managing Member) that furnish the Advisor, its affiliates or personnel, or its clients, including Advisor Funds, Portfolio Companies and Managed Accounts, with proprietary or other brokerage and research and other appropriate products and services (collectively, “brokerage and research services”) that provide, in the Advisor’s view, appropriate assistance to the Advisor in the investment decision-making process (including with respect to futures, fixed-price offerings and over-the-counter transactions). Such research may include, to the extent permitted by law, research reports on companies, industries and securities; access to broker-dealer analysts and corporate executives; economic, market and financial data; financial publications; proxy analysis; trade industry seminars; computer databases; order routing and quotation services; and other brokerage and research services. When selecting broker-dealers that provide research, an Advisor may pay reasonable “commissions” (as broadly defined by the SEC to include a markup, markdown, commission equivalent or other fee in certain circumstances) to broker-dealers in connection with such research, even though another broker-dealer might be willing to execute the transactions at a lower commission. An Advisor’s evaluation of the brokerage and research services provided by a broker-dealer may be a significant factor in selecting a broker-dealer to execute transactions.
 
Arrangements under which an Advisor receives such research may vary, including by product or strategy, account or applicable law in the jurisdictions in which an Advisor conducts business. An Advisor may enter into soft dollar arrangements with U.S. and non-U.S. broker-dealers. An Advisor may receive research, including proprietary research that is bundled with trade execution, clearing, or settlement services provided by a particular broker-dealer. An Advisor may also participate in so-called “commission sharing arrangements” and “client commission arrangements” under which the Advisor may execute transactions through a broker-dealer and request that the broker-dealer allocate a portion of the commissions or commission credits to another firm that provides research to the Advisor.
 
Commission sharing and client commission arrangements may be subject to different legal requirements in the jurisdictions in which an Advisor does business. Participating in commission sharing and client commission arrangements may enable an Advisor to consolidate payments for research through one or more channels using accumulated client commissions or credits from transactions executed through a particular broker-dealer to obtain research provided by other firms. Such arrangements also help to ensure the continued receipt of brokerage and research services while facilitating best execution in the trading process.
 
These arrangements may raise conflicts of interests. For example, to the extent that an Advisor uses client commissions to obtain research, it will not have to pay for research itself. In addition, research or other services obtained in this manner may be used in servicing any or all advisory clients of the Advisor and may be used in connection with advisory accounts other than those that pay commissions to the broker relating to the research or other service arrangements. To the extent permitted by applicable law, such products and services may disproportionately benefit one account of the Advisor over another based on the amount of brokerage commissions paid by such accounts of the Advisor. For example, research or other services that are paid for through one client’s commissions may not be used in managing that client’s account, but may be used in managing other client accounts.
 
An Advisor may from time to time choose not to engage in the above-described arrangements to varying degrees. An Advisor may also engage in such arrangements that may be broader and may raise additional conflicts than the arrangements and conflicts described above. For example, certain Advisors may engage in soft dollar arrangements to obtain products or services (e.g., services that would normally be considered expenses of the Advisor) that are not within the Section 28(e) definition of “brokerage and research services”.
 
The Managing Member may select broker-dealers (including, without limitation, affiliates of the Managing Member) to provide prime brokerage services to funds that it manages. Conflicts may arise with respect to the


58


Table of Contents

Managing Member’s selection of prime brokers and its negotiation of the brokerage, margin and other fees payable to such parties. Prime brokerage firms may introduce prospective clients or afford the Managing Member the opportunity to make a presentation regarding its services to qualified investors. Such capital introduction opportunities are generally provided at no additional cost. In addition, prime brokerage firms may provide certain other services (including, among others, clearance and settlement of securities transactions, placement agent and custody services, and extending margin credit) at favorable or below market rates. Such capital introduction opportunities and other services may create incentives for or provide benefits to the Managing Member (and not the Client/GS Accounts) from the selection of such prime brokerage firms. In addition, the Managing Member may have an incentive to select prime brokers that are clients of the Managing Member. The Managing Member will select such firms only when consistent with obtaining appropriate services for clients.
 
The Managing Member may receive brokerage and research services from brokers-dealers that provide services to clients of the Managing Member. These broker-dealers may execute transactions directly for the Managing Member’s clients, or may execute them indirectly through the Advisors. To date the Managing Member has not received any such brokerage and research services.
 
When the Managing Member allocates Company assets to Advisors (through Advisor Funds, Portfolio Companies or Managed Accounts), such Advisors generally are responsible for taking all action with respect to the underlying securities held in the Advisor Funds, Portfolio Companies and Managed Accounts, and the Managing Member is not responsible for taking any action with respect to the securities held in the Advisor Funds, Portfolio Companies and Managed Accounts.
 
However, the Managing Member may exercise voting rights with respect to proposals presented by Advisor Funds, Portfolio Companies and Managed Accounts to which the Company has made allocations. In such instances, the Managing Member will take appropriate action with respect to such proposals.
 
The Managing Member and the Advisors may adopt policies and procedures designed to prevent conflicts of interest from influencing proxy voting decisions that they make on behalf of advisory clients, including the Company, Investment Funds, Advisor Funds, Portfolio Companies and/or Managed Accounts that they manage, and to help ensure that such decisions are made in accordance with their fiduciary obligations to their clients. Nevertheless, notwithstanding such proxy voting policies and procedures, actual proxy voting decisions of the Managing Member or an Advisor may have the effect of favoring the interests of other clients or businesses of the Advisor and/or its affiliates, and of other divisions or units of Goldman Sachs and/or their affiliates, provided that each of the Managing Member and/or the Advisor believes such voting decisions to be in accordance with its fiduciary obligations.
 
Potential Regulatory Limitations and Restrictions on Investment Opportunities and Activities of the Advisors and the Company
 
From time to time, the activities of an Advisor Fund, Portfolio Company or Managed Account may be restricted because of regulatory or other requirements applicable to an Advisor and/or its internal policies designed to comply with, limit the applicability of, or otherwise relate to such requirements. A client not advised by an Advisor would not be subject to some of those considerations. There may be periods when an Advisor may not initiate or recommend certain types of transactions, or may otherwise restrict or limit its advice in certain securities or instruments issued by or related to companies for which the Advisor is performing investment banking, market making or other services or has proprietary positions. For example, when an Advisor is engaged in an underwriting or other distribution of securities of, or advisory services for, a company, an Advisor Fund, Portfolio Company or Managed Account managed by such Advisor may be prohibited from or limited in purchasing or selling securities of that company. In addition, there may be certain investment opportunities, investment strategies or actions that an Advisor will not undertake on behalf of an Advisor Fund, Portfolio Company or Managed Account in view of the Advisor’s client or firm activities. For example, an Advisor may determine that an Advisor Fund, Portfolio Company or Managed Account may be precluded from exercising certain rights that it may have as a creditor to a particular borrower. Certain activities and actions may also be considered to result in reputational risk or disadvantage for the management of the Company, an Investment Fund, an Advisor Fund, Portfolio Company or Managed Account as well as for Goldman Sachs and/or an Advisor. An Advisor Fund, Portfolio Company or


59


Table of Contents

Managed Account may also be prohibited from participating in an auction or from otherwise investing in or purchasing certain assets, or from providing financing to a purchaser or potential purchaser, if the Advisor of such Advisor Fund, Portfolio Company or Managed Account is representing the seller or is representing or providing financing to another potential purchaser. Similar situations could arise if personnel of an Advisor serve as directors of companies the securities of which an Advisor Fund, Portfolio Company or Managed Account managed by such Advisor wishes to purchase or sell. The larger an Advisor’s investment advisory business and such Advisor’s overall business, the larger the potential that these restricted policies will impact investment transactions. However, if permitted by applicable law, the Advisor Fund, Portfolio Company or Managed Account may purchase securities or instruments that are issued by such companies or are the subject of an underwriting, distribution, or advisory assignment by its Advisor, or in cases in which the Advisor’s personnel are directors or officers of the issuer.
 
The investment activities of an Advisor for its proprietary accounts and for Client/Advisor Accounts may also limit the investment strategies and rights of the Advisor Fund, Portfolio Company or Managed Account managed by such Advisor. For example, in regulated industries, in certain emerging or international markets, in corporate and regulatory ownership definitions, and in certain futures and derivative transactions, there may be limits on the aggregate amount of investment by affiliated investors that may not be exceeded without the grant of a license or other regulatory or corporate consent or, if exceeded, may cause the Advisor, the Advisor Fund, Portfolio Company or Managed Account or other Client/Advisor Accounts to suffer disadvantages or business restrictions. If certain aggregate ownership thresholds are reached or certain transactions undertaken, the ability of the Advisor, on behalf of an Advisor Fund, Portfolio Company or Managed Account, to purchase or dispose of investments, or exercise rights or undertake business transactions, may be restricted by regulation or otherwise impaired. In addition, certain investments may be considered to result in reputational risk or disadvantage. As a result, an Advisor, on behalf of its clients (including an Advisor Fund, Portfolio Company or Managed Account), may limit purchases, sell existing investments, or otherwise restrict or limit the exercise of rights (including voting rights) when the Advisor, in its sole discretion, deems it appropriate.
 
Safeguards Implemented by the Managing Member to Address Conflicts of Interest
 
The Managing Member and its personnel will act in accordance with their fiduciary duties to the Company and investors, and conduct themselves in accordance with professional and ethical standards. Because of the nature of the Managing Member’s business and the businesses of its affiliates, potential conflicts of interest may arise. To minimize the effect of potential conflicts of interest, the Managing Member and the Company have put in place policies and procedures and ethical standards which are described below. In addition, the Managing Member and the Company have disclosed potential conflicts in this Annual Report and in the Memorandum sent to investors in connection with their investment.
 
Below is a discussion of three general categories of conflicts of interest that could affect the Company, and the general safeguards that the Managing Member and the Company have put in place to address them.
 
      Conflicts Resulting From Other Business Dealings of the Managing Member and its Affiliates
 
The Managing Member is a subsidiary of The Goldman Sachs Group, Inc. which is a bank holding company and a worldwide, full-service investment banking, broker-dealer, asset management and financial services organization. As a result, Goldman Sachs is engaged in activities that may result in conflicts of interest with those of the Company. For example, potential conflicts of interests may arise if Goldman Sachs were to provide brokerage or other services to an Advisor of an Investment Fund or act as an Investment Fund’s prime broker. In such circumstances, payments to Goldman Sachs resulting from these relationships will generally increase as the size of the assets of the Advisor increases. This may result in the Managing Member having an incentive to select for investment by the Company an Investment Fund whose Advisor has established such a relationship with Goldman Sachs over another Investment Fund that might also be appropriate for the Company. In addition, in connection with prime brokerage or lending arrangements involving Investment Funds, Goldman Sachs may require repayment of all or part of a loan at any time or from time to time.
 
To minimize the effect of any potential conflict of interest resulting from Goldman Sachs’ other business operations, Goldman Sachs, including the Managing Member, has established policies and procedures addressing


60


Table of Contents

potential conflicts of interest. Specifically, Goldman Sachs has put in place information barriers, which are designed to separate the various functions and business lines of Goldman Sachs, including the asset management and brokerage businesses. As a result, personnel of the Managing Member that make investment and other decisions on behalf of the Company generally perform their duties for the Company without knowledge of other Goldman Sachs operations.
 
      Conflicting Obligations to the Company and Other Advisory Accounts
 
The Managing Member may have potential conflicts of interest in connection with other accounts it manages (“Advisory Accounts”). For example, there may be a conflict of interest in connection with the Managing Member’s allocation of investments or transaction decisions for the Company and another Advisory Account that may provide the Managing Member greater fees or other compensation than the Company, particularly where there is limited availability or limited liquidity for those investments. This has the potential of providing the Managing Member with an incentive to allocate investment opportunities in a manner that favors the other Advisory Account over the Company.
 
To minimize the effect of any potential conflict of interest resulting from the Managing Member’s conflicting obligations to Advisory Accounts, including its allocation practices, the Managing Member has developed policies and procedures addressing these conflicts, which provide that a portfolio manager will allocate investment opportunities and make purchase and sale decisions among Advisory Accounts in a manner that it considers, in its sole discretion, to be reasonable. It is the policy of the Managing Member to allocate, to the extent possible, investment opportunities to the Company over a period of time in a manner that it considers, in its sole discretion, to be reasonable. In certain cases, these policies result in the pro rata allocation of limited opportunities among the Company and the Advisory Accounts, but in certain other cases the allocations reflect numerous other factors based upon the Managing Member’s good faith assessment of the best use of such limited opportunities relative to the objectives, limitations and requirements of the Company and each of the Advisory Accounts and applying a variety of factors including those described below. The Managing Member seeks to treat all clients reasonably in light of all factors relevant to managing an account, and in some cases it is possible that the application of the factors described below may result in allocations in which certain accounts may receive an allocation when other accounts do not. Non-proportional allocations may occur frequently in the fixed income portfolio management area, in many instances because multiple appropriate or substantially similar investments are available in fixed income strategies, as well as due to differences in benchmark factors, hedging strategies, or other reasons, but non-proportional allocations could also occur in other areas. The application of these factors as described below may result in allocations in which Goldman Sachs and Goldman Sachs employees may receive an allocation or an opportunity not allocated to other Advisory Accounts (including the Company). Allocations may be based on numerous factors and may not always be pro rata based on assets managed.
 
Personal Interests of Advisory Personnel
 
Employees of the Managing Member may have conflicts of interest in connection with performing their duties on behalf of the Company. For example, employees of the Managing Member may come into possession of material, non-public information or other information as a result of their investment activities on behalf of the Company or otherwise, and they may seek to improperly benefit from such information by trading on the information for their own personal benefit.
 
To minimize the effect of any such potential conflict of interest, the Managing Member has adopted policies and procedures that address conflicts of interest, information barriers and the use of protected information. These policies state, among other things, that protected information may only be used in a manner consistent with the purposes for which it was created, and may not be disclosed to any other person who does not have a need to know the information in order to perform his/her duties and to carry out the purposes for which the information was provided. Furthermore, the Managing Member’s policies specifically address protected information relating to the trading activity of Advisors. These policies state that any such information with respect to Advisors may not be used by employees of the Managing Member to make personal investments or in the management of any other account of the Managing Member or its affiliates.


61


Table of Contents

The Managing Member also has policies relating to personal trading generally. Pursuant to these policies, employees must effect personal securities transactions consistent with their fiduciary duties and subject to professional and ethical standards. Among other things, the policies and procedures of the Managing Member require, subject to certain exceptions, pre-clearance of personal securities transactions by Managing Member employees and minimum holding periods for purchased securities. Violations of these policies, like all Managing Member policies, may result in disciplinary actions up to and including termination, and may also result in the breaking of specific trades. The personal trading of employees of the Managing Member is subject to monitoring by a compliance department to ensure compliance with these policies.
 
In addition, employees of the Managing Member are subject to a code of business conduct and ethics that is applicable to The Goldman Sachs Group, Inc. and its subsidiaries. Moreover, the Managing Member has also adopted a Code of Ethics, which was filed as an exhibit to the Company’s Form 10-K for December 31, 2004 that requires persons acting as chief executive and senior officers of the Company to promote honest and ethical conduct, including the ethical handling of conflicts of interests between personal and professional relationships.
 
Error and Error Correction Policy
 
The policy described below applies to GS HFS as the Managing Member of the Company. GS HFS applies similar policies in connection with its role as managing member of the Investment Funds.
 
Identification of Compensable Errors.  Pursuant to the Managing Member’s policies, an error is generally compensable from the Managing Member to the Company when it is a mistake (whether an action or inaction) in which the Managing Member has, in the Managing Member’s reasonable view, deviated from the applicable standard of care in managing the Company’s assets, subject to materiality and other policies set forth below. The LLC Agreement and any contractual obligations of the Company provide that the Managing Member and its affiliates shall not be responsible for mistakes absent willful misfeasance, bad faith, or gross negligence.
 
Consistent with the standard of care applicable to the Managing Member, the Managing Member’s policies do not require perfect implementation of investment management decisions, trading, processing or other functions performed by the Managing Member or its affiliates. Therefore, not all mistakes will be considered compensable errors. For example, depending upon the circumstances, without limitation, imperfection in the implementation of investment, execution, cash flow rebalancing or processing instructions may not be considered by the Managing Member to be significant to the fundamental functions, purpose or implementation of the strategies, programs, models and other tools utilized as part of the investment process. As a result, such imperfections, including, without limitation, mistakes in amount, timing or direction of a trade, may not be compensable errors. Mistakes may also occur in connection with other activities that may be undertaken by the Managing Member and its affiliates, such as net asset value calculation, transfer agent activities (i.e., processing subscriptions and redemptions), fund accounting, trade recording and settlement and other matters that are non-advisory in nature. Such activities may not fall within the Managing Member’s obligations as a managing member.
 
Mistakes may result in gains as well as losses. The Managing Member may determine that trading and other mistakes will be treated as being for the Company’s account (i.e., the Company will bear the loss or benefit from the gain). In certain circumstances, however, the Managing Member may determine that it is appropriate to reallocate or remove gains from the Company’s account that are the result of a mistake. Furthermore, the Managing Member expects to follow a materiality policy with respect to the Company. Therefore, in certain circumstances, mistakes that result in losses below a threshold will not be compensable.
 
The Managing Member makes its determinations pursuant to its error policies on a case-by-case basis, in its discretion, based on factors it considers reasonable. Relevant facts and circumstances the Managing Member may consider include, among others, specific applicable contractual and legal restrictions and standards of care, whether the Company’s investment objective was contravened, the nature of the Company’s investment program, whether a contractual guideline was violated, the nature and materiality of the relevant circumstances and, if a compensable error occurred, the materiality of the resulting losses.
 
No compensable errors have been identified for the years December 31, 2009, 2008 and 2007.


62


Table of Contents

Waiver of Subscription and Redemption Requirements.  The Company may, in the sole discretion of the Managing Member, approve waivers in connection with the processing of subscription or redemption requests of Members including, without limitation, with respect to any notice periods, lock-up periods, minimum redemption and holding amounts, as applicable, or other requirements. Such waivers may be granted by the Company to any Member, including without limitation affiliates of the Managing Member and persons who have a security interest in the units of certain Members. Members, including Members who purchase or sell units during periods in which any such waivers are approved, may not be notified of such matters.
 
Compensation for Errors.  When the Managing Member determines that reimbursement by the Managing Member is appropriate, the Company will be compensated as determined in good faith by the Managing Member. Compensation will be calculated in the Managing Member’s discretion. The Managing Member will follow what it considers reasonable guidelines regarding these matters in light of all of the facts and circumstances related to an error. In general, compensation is expected to be limited to direct and actual losses, which may be calculated relative to comparable conforming investments, market factors and benchmarks and with reference to other factors the Managing Member considers relevant. Compensation generally will not include any amounts or measures that the Managing Member determines are uncertain, including potential opportunity losses resulting from delayed investment or sale as a result of correcting an error or other forms of consequential or indirect losses. The Managing Member expects that, subject to its discretion, losses will be netted with an account’s gains relating to errors and will not exceed amounts in relation to an appropriate replacement investment, benchmark or other relevant product returns. In addition, losses may also be capped at the value of the actual loss, particularly when the outcome of a differing investment would in the Managing Member’s view be uncertain or in light of reasonable equitable considerations. As a result, error compensation is expected to be limited to the lesser of actual losses or losses in relation to comparables. The Managing Member may also consider whether it is possible to adequately address a mistake through cancellation, correction, reallocation of losses and gains or other means. The Managing Member may face conflicts of interest in making determinations and calculations with respect to compensation for errors.
 
Notification of Compensable Errors.  Members will generally not be notified of the occurrence of a compensable error or the resolution thereof.
 
Errors by Advisors.  Advisors may also have error and error correction policies regarding the implementation of investment management decisions, trading or processing in relation to the Advisors’ clients, including the Company. The Advisors’ respective error and error correction policies may vary materially from one another and each may differ materially from the Managing Member’s policies described herein. Also, there can be no assurance that an Advisor’s actual practices regarding errors and error correction will be in conformity with its policies, and the Managing Member will have limited ability to monitor an Advisor’s compliance with its policies. Although the Managing Member will select and monitor the Advisors to which the Company allocates assets, the Managing Member is not responsible for the actions of, or any errors committed by, any Advisor.
 
Reprocessing NAV Errors and Compensation of Members.  The Company follows materiality policies to determine when individual Member accounts will be restated (credited or debited) in respect of particular errors, and to handle certain NAV-related errors that occur in the Company’s operation (including, without limitation, errors made in the processing of subscriptions and redemptions). Under these policies, when a compensable error by the Managing Member occurs, the Managing Member may reimburse the Company in an amount according to its policies without reprocessing individual Member accounts. Reprocessing of individual Member accounts generally will only occur when the error is of a size that exceeds the Company’s materiality threshold for reprocessing. This means that an error below the materiality threshold may disadvantage Members during the period the error persists, but reimbursement may benefit Members at the time of reimbursement and may not, in either event, be allocated to, or in proportion to, the specific Members whose units were negatively affected by the error. As described in “—Identification of Compensable Errors”, the Company also expects to follow materiality policies with respect to the resolution of errors that may limit or restrict when compensation to the Company or Members will be paid. Accordingly, Members who purchase or redeem units during periods in which errors accrue or occur may not be recompensed in connection with the resolution of the error. Similar considerations may apply with respect to the error and error correction policies of the Advisors.


63


Table of Contents

Additional information about the Managing Member’s error and error correction policies may be set forth in Part 2 of the Managing Member’s Form ADV, which will be provided to Members or prospective investors upon request. The Managing Member may at any time, in its sole discretion and without notice to Members, amend or supplement its error and error correction policies.
 
COMPETITION
 
The market for hedge funds and hedge fund products is highly competitive. The Company competes for investors with other hedge funds, funds of funds, mutual funds, and money managers who employ similar investment strategies and who offer similar hedge fund products to investors. New entities, including other hedge funds, funds of funds and money managers, regularly enter the market, and there are limited barriers to entry. In addition, new hedge fund products are regularly introduced into the market by existing funds. The Company competes with its competitors on, among other things, the basis of its reputation, its short-term and long-term performance and track record, access to, and ability to select, Advisors, fees, management and portfolio teams, strategies, client services and its ability to manage risk.
 
FISCAL YEAR
 
The Company’s fiscal year ends on December 31 of each calendar year. The Managing Member, at its sole discretion, may change the fiscal year-end of the Company.
 
EMPLOYEES
 
As of December 31, 2009, the Company had no employees. However, the Company is managed by the Managing Member which as of December 31, 2009, was supported by approximately 115 employees of the GS Group worldwide, of which approximately 33 allocated at least a portion of their time to the management of the Company and the Investees.
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This Annual Report contains certain “forward-looking statements” regarding the operation of the Company and the Company’s investment objective, including, among other things:
 
•       investment strategies and allocations of assets;
 
•       future performance;
 
•       the Company’s liquidity position; and
 
•       trends in the Investment Sectors.
 
Forward-looking statements are typically identified by the use of terms such as “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology. These statements are only predictions and are not historical facts. Actual events or results may differ materially.
 
The forward-looking statements included herein are based on the Managing Member of the Company’s current expectations, plans, estimates and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business strategies and decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the Company’s control. Any of the assumptions underlying the forward-looking statements contained herein could be inaccurate and, therefore, the Managing Member of the Company cannot assure Members that the forward-looking statements included in this Annual Report will prove to be accurate.
 
In light of the significant uncertainties inherent in the forward-looking statements included in this Annual Report, including, without limitation, the risks set forth under ITEM 1A. “RISK FACTORS”, the inclusion of such information should not be regarded as a representation by the Company or the Managing Member that the


64


Table of Contents

investment objective set forth in this Annual Report will be achieved. The Company cautions Members that forward-looking statements are not guarantees and that the actual results could differ materially from those expressed or implied in the forward-looking statements.
 
The Company or the Managing Member does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by the Managing Member of the Company or the Company or on their behalf.
 
References to market or composite indices, benchmarks or other measures of relative market performance are provided for your information only. Reference to an index does not imply that the portfolio will achieve results similar (or dissimilar) to that index.


65


Table of Contents

 
ITEM 1A.
 
RISK FACTORS
 
General Risks
 
The following are risk factors that relate to the operation and certain terms of the Company and the Investment Funds.
 
Risks Related to the Company and the Investment Funds’ Performance and Operation
 
Limited Operating History of the Company; Past Performance of the Company is not Indicative of Future Results
 
The Company has a limited operating history upon which prospective investors can evaluate its likely performance. Similarly, certain of the Investment Funds and the Advisors have limited or no track records and/or operating histories. The past investment performance of the Company or any of the Investment Funds or Advisors should not be construed as an indication of the future results of such Advisors, the Investment Funds, or of the Company. The results of other investment funds or accounts managed by the Managing Member which have or have had an investment objective similar to or different from that of the Company or the Investment Funds, are not indicative of the results that the Company or the Investment Funds may achieve. The Investment Funds make allocations in different portfolios of Advisors and securities and, accordingly, their results and, in turn, the results of the Company, are independent of the previous results obtained by those funds and accounts. See “—Special Risks of the Company’s Structure—Risks Associated with the Company Investing in Other Entities—Past Performance of Affiliated Funds and Advisors are not Necessarily Indicative of the Results that the Company and any Investment Fund May Achieve or of Future Results”. Further, the Company and its method of operation may differ in several respects from prior Goldman Sachs investment vehicles or accounts, including as a result of different investment and return objectives and investment allocation strategies. In addition, the Company and the Investment Funds may utilize a different mix of Advisors and, in certain cases, investment techniques. Similarly, the past investment performance of any of the Advisors with which the Company will directly or indirectly invest, or with which other investment funds or accounts sponsored, managed, or advised by Goldman Sachs invest should not be construed as an indication of the future results of such Advisors or of the Company. Potential investors that desire performance or related information with respect to the other investment funds sponsored, managed or advised by Goldman Sachs should contact the Managing Member.
 
A Substantial Portion of an Investment Fund’s Assets May be Invested Utilizing Strategies That are Not Within its Investment Sector; Most Advisors do not Provide Detailed Position Information Regarding their Portfolios
 
Although the managing member of an Investment Fund intends to allocate assets to Advisors whose principal investment strategies are within one of the Investment Sectors described under ITEM 1. “BUSINESS—PERFORMANCE OF THE COMPANY—Description of the Investees and the Performance of the Investees,” a substantial portion of the Investment Fund’s assets may be invested utilizing strategies within other investment sectors. In addition, the sectors referenced therein are subjective classifications made by the managing member of the Investment Fund in its sole discretion. Such classifications are based on information previously provided by the Advisors to the managing member of the relevant Investment Fund and may differ from classifications of similarly named sectors made by other industry participants. The managing member of each Investment Fund will rely on information previously provided by each Advisor in determining in its sole discretion that the principal investment strategies utilized by an Advisor are within such Investment Fund’s specified Investment Sector.
 
The managing member of an Investment Fund seeks to select Advisors for the Investment Fund that exhibit certain operational, management and risk control standards in the daily investment of their portfolios. The managing member may request historical performance and position data in order to evaluate how Advisors behave in certain environments. However, some Advisors have no operating history and therefore such performance


66


Table of Contents

and position data may not be available. The managing member also may request that each Advisor provide guidelines about the size of its typical positions and the amount of leverage that it will use in managing assets. These risk and investment guidelines serve as a framework for the managing member to conduct its ongoing risk monitoring on behalf of each Investment Fund as it believes that there is value in regularly monitoring each Investment Fund’s Advisors to better understand the Advisors’ risk and sources of return. The managing member also conducts due diligence visits with the Advisors, which may include representatives of its Advisor selection, risk and quantitative analysis, compliance and operations areas. Accordingly, the managing member seeks Advisors who are willing to share information and market outlook and who agree to engage in a regular dialogue and provide portfolio composition and profit and loss information regularly, although the level of detail will vary by Advisor. However, many Advisors are unwilling to provide significant transparency, e.g., position detail, because such information is proprietary to such Advisors, particularly those Advisors operating in the event driven and relative value sectors, but also those in the equity long/short and tactical trading sectors and the Company may still choose to invest with such Advisors because of their historical returns and reputation. Moreover, due to changes in the investment programs of certain Advisors over time or other factors, it is possible that an Investment Fund’s assets may be allocated to Advisors whose principal investment strategies are not within the Investment Fund’s specified Investment Sector for extended periods of time.
 
As is customary with funds of hedge funds, most of the Advisors do not provide the managing member of the Investment Funds with detailed position reports because such information is proprietary to such Advisors. These Advisors would not likely permit the Investment Funds to invest with them if such an information requirement was a condition to investment. Also, Advisors may not comply with their stated investment strategies. Members of the Company assume the risk that the Advisors may not provide accurate and timely information about their strategies, performance and positions and that the information provided by the Advisors will subsequently be proven or discovered to be inaccurate and/or false. Reference in this Annual Report to information received by Advisors includes information received directly from the Advisors as well as information received from independent administrators or other third party providers on behalf of such Advisors.
 
There Can Be No Assurance that the Managing Member’s Decisions Regarding Allocations will be Successful; Inaccurate Information Provided by the Advisors May Have a Material Adverse Effect on Implementing the Company’s Investment Objective
 
Since April 1, 2008, the Managing Member had the discretion to make allocations among Investment Sectors without being constrained by assumptions, based mainly on historical data, regarding the long-term risk-return and correlation expectations of the Investment Sectors. See ITEM 7A. “QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK—Risk Management”. There is no assurance that the Managing Member’s decisions regarding allocations of assets will be successful. In addition, the Company will be limited in its ability to make changes to allocations due to the subscription and redemption provisions of the Investment Funds, including notice periods and limited subscription and redemption dates, and the ability of the Investment Funds to suspend and postpone redemptions. In addition, any such allocations will be made by the Company based on information previously provided by the Advisors. If such information is inaccurate or incomplete, it is possible that the Company’s allocation to the Investment Sectors may not reflect the Managing Member’s intended allocations. This could have a material adverse effect on the ability of the Managing Member to implement the Company’s investment objective.
 
Non-Diversified Status; the Managing Member may Allocate to One or More Advisors a Relatively Large Percentage of an Investment Fund’s Assets
 
The Company is a “non-diversified” investment company. Thus, there are no percentage limitations imposed by the Investment Company Act of 1940, as amended (the “Investment Company Act”) on the percentage of the Company’s assets that may be invested in the securities of any one issuer. Generally, the Company will allocate its assets to Investment Funds. Although the managing member of the Investment Funds intends to follow a general policy of seeking to diversify each Investment Fund’s capital among multiple Advisors, the managing member may in its discretion depart from such policy from time to time and one or more Advisors may be allocated a relatively large percentage of an Investment Fund’s assets, although the managing member of each of GTT and GELS


67


Table of Contents

generally will not allocate more than 25% of the total assets of the applicable Investment Fund to any single Advisor at the time of investment in such Advisor. There are no restrictions on the amount of assets of HFPO that its managing member can allocate to any single Advisor, and, since April 1, 2008, there were no restrictions on the amount of assets of GFS that its managing member can allocate to any single Advisor. Consequently, losses suffered by such Advisors of any of the Investment Funds could result in a proportionately higher reduction in an Investment Fund’s capital than if such capital had been more proportionately allocated among a larger number of Advisors.
 
Dependence on the Managing Member and the Advisors; the Managing Member Generally Has Limited Access to Information on or Control over Advisors’ Portfolios and Members Assume the Risk that Advisors May Knowingly Misrepresent Information Which Could Have a Material Negative Impact on the Company
 
Generally, the Managing Member invests assets of the Company in the Investment Funds, which in turn invest their assets through the Advisors. The managing member of each of the Investment Funds, which currently is the Managing Member, has the sole authority and responsibility for the selection of the Advisors for that Investment Fund. The success of each Investment Fund and, in turn, of the Company, depends upon, among other things, the ability of the managing member of the Investment Funds and each Investment Fund’s Advisors to develop and successfully implement investment strategies that achieve their investment objectives. No assurance can be given that the managing member of the Investment Funds or any Advisor will be able to do so. For example, an Advisor’s inability to effectively hedge an investment strategy that it utilizes may cause the assets of an Investment Fund allocated to such Advisor to significantly decline in value and could result in substantial losses to such Investment Fund and, in turn, to the Company. The Investment Funds do not have any control over the Advisors. Moreover, subjective decisions made by the Managing Member or the managing member of an Investment Fund and/or by the Investment Fund’s Advisors (including with respect to the utilization of leverage) may cause the Company or the Investment Fund to incur losses or to miss profit opportunities on which they may otherwise have capitalized. Members of the Company will have no right or power to participate in the day to day management or control of the Company, Investment Funds, Portfolio Companies, Advisors or Advisor Funds, and will not have an opportunity to evaluate in advance the specific strategies used or investments made by the Company, Investment Funds, Portfolio Companies, Advisors or Advisor Funds, or the terms of any investments made by the Company, Investment Funds, Portfolio Companies, Advisors or Advisor Funds.
 
While the managing member of an Investment Fund will select and monitor the Advisors to which the Investment Fund allocates assets, the managing member of an Investment Fund relies to a great extent on information provided by the Advisors and will generally have limited access to other information regarding the Advisors’ portfolios and operations. Most Advisors consider this information proprietary and would not provide this information even if requested. If the Investment Funds only invested in Advisors who provided complete access to their information, the Investment Funds would not be able to access many Advisors with which they might otherwise wish to invest since many Advisors with strong track records and/or limited capacity will not agree to provide this access. Limiting the Advisors that the Investment Funds would invest with would have a material adverse impact on the Investment Funds and, in turn, the Company and its Members. Accordingly, the Investment Funds invest with many Advisors who do not provide any or all such information, and Members who are not willing to assume this risk should not retain their investment in the Company. There is a risk that Advisors may knowingly, recklessly, negligently or otherwise withhold or misrepresent information regarding activities that could have a material negative impact on the performance of an Investment Fund and the Company. Members of the Company are assuming the risk that the Advisors will act in such a manner. These activities, therefore, could occur without the knowledge of the Managing Member, and could have a material negative impact on the Company’s performance and financial statements, including, among other things, causing a restatement of prior financial statements. Any such misrepresentation or fraudulent or similar activities (each, a “Fraudulent Activity,” and collectively, “Fraudulent Activities”) by an Advisor would result in their position being inaccurately reflected in an Investment Fund’s, and therefore the Company’s, financial statements. Once an Investment Fund learns of any such Fraudulent Activities, it will likely be too late for such Investment Fund to withdraw its assets from such Advisor without incurring significant losses due to its investment with such Advisor. The proper performance of monitoring functions by the Managing Member of the Company or the managing member of the Investment Funds would generally not give the managing member the opportunity to discover such situations prior to the time the


68


Table of Contents

Advisor discloses (or there is public disclosure of) the presence or effects of any Fraudulent Activities. Accordingly, the managing member of the Investment Funds can offer no assurances that an Advisor will not engage in Fraudulent Activities and cannot guarantee that it will have the opportunity or ability to protect the Investment Fund, and consequently the Company, from suffering a loss because of an Advisor’s Fraudulent Activities.
 
In the event of misrepresentation and fraud committed by those Advisors or hedge funds in which the Investment Funds invest, the Company or, more likely the Investment Funds, will have remedies available under applicable state and federal securities and anti-fraud laws. As a general matter, the Company does not have contractual remedies available to it for misrepresentation and fraud, however, in certain limited cases where the Investment Funds invest through Managed Accounts or Portfolio Companies, the Investment Funds may have certain contractual protections. The Company or the Investment Funds intend to pursue their potential legal remedies based on an evaluation of litigation risks and costs involved in pursuing litigation. In addition, in deciding on whether or not to pursue legal remedies available to them, the Company or the Investment Funds will also consider the costs involved in pursuing any remedy and the risk that the underlying hedge fund may have insufficient assets to comply with a successful outcome. Accordingly, even if a legal remedy may be available to the Company or the Investment Funds, it may choose not to pursue such remedy.
 
The Investment Funds may invest in Advisor Funds that are not administered by an independent third party administrator. Advisor Fund administrators generally are responsible for, among other things, calculating (or assisting with the calculation of) the NAV for the Advisor Funds that they administer, valuing (or assisting in the valuation of) securities and other assets, including securities which are not readily marketable, and assisting in the preparation of financial statements. If an Advisor Fund is not administered by an independent third party administrator, the determinations of the Advisor with respect to valuations generally will not be subject to review or oversight by an independent party other than the Advisor Fund’s auditor. Such an arrangement may have an adverse effect on the Investment Fund and, in turn, the Company and the Members by, among other things, reducing the likelihood that the managing member of the Investment Fund will learn of any error, miscalculation or misrepresentation in the valuation of the Advisor Fund’s investments, whether intentional or otherwise, or any Fraudulent Activity.
 
In connection with the managing member of the Investment Fund’s ongoing review of Advisors, the managing member of the Investment Funds may identify certain deficiencies with an Advisor (including potentially significant deficiencies) that should be addressed by the Advisor, including issues related to operations, risk management, performance, personnel and investments. The managing member of the Investment Funds may raise such concerns with such Advisor and request that such Adviser address such concerns. The managing member of the Investment Funds may decide not to terminate an Advisor despite the identification of such deficiencies for various reasons, including without limitation, because the managing member of the Investment Funds determines in its sole discretion that such deficiencies are not significant or because the Advisor is attempting to address such deficiencies. If the Advisor suffers losses during this period, the Company could be materially adversely affected. Alternatively, the managing member of the Investment Fund may determine to redeem or attempt to redeem the Company’s assets from an Advisor as a result of such deficiencies. Due to a number of factors including, without limitation, minimum holding periods and restrictions on redemptions imposed by the Advisors, it may take a significant period of time for the managing member of the Investment Fund to redeem the Company’s assets from such Advisor, and if the Advisor suffers losses before the Company is able to redeem fully, the Company could suffer significantly greater losses than if the Company had been able to redeem from such Advisor without restriction.
 
The managing member of the Investment Funds may invest a substantial portion of an Investment Fund’s assets with Advisors that may have limited or no track records and Advisor Funds with limited or no operating histories. Certain Advisors may have limited or no experience managing certain of the strategies expected to be deployed by them in their investment programs. Certain strategies utilized may also be newly developed and may not be widely used. The risks of such strategies may be difficult to predict in various market conditions. In such cases, the Advisors or individual members of their management teams will each have had, in the opinion of the managing member of the Investment Fund, sufficient relevant experience in other contexts or trading in strategies similar to those that the Advisor is expected to utilize.


69


Table of Contents

The Company Does Not Currently Intend to Participate in New Issues Which May Limit Potential Gains
 
The Company does not currently intend to participate in “new issues,” as such term is defined under Financial Industry Regulatory Authority (“FINRA”) Rule 5130, as amended, supplemented and interpreted from time to time by FINRA or other rules and Interpretations of FINRA with respect to new issues from time to time (“FINRA Rule 5130”), although this intention could change at any time as determined by the Managing Member in its sole discretion. FINRA Rule 5130 limits the ability of FINRA member firms to sell securities of new issues to certain classes of “restricted persons”. Such securities sold in the past have on occasion experienced initial, sometimes rapid, increases in market value following such offerings. As a result of not participating in new issues, the Company will not share in any such increases.
 
If the Managing Member in the future determines that the Company will directly or indirectly participate in new issues, the Company will have the ability to permit only those investors who are not “restricted persons” under FINRA Rule 5130 to participate fully in such new issues, and investors who are “restricted persons” under FINRA Rule 5130 may either not receive an allocation of new issues gains and losses, or receive a de minimis allocation of new issues gains and losses, as permitted under FINRA Rule 5130 and as determined by the Managing Member in its sole discretion. In addition, if the Managing Member in the future determines that the Company will participate in new issues, it will have the ability to create one or more additional classes of units that would be permitted to invest in and have a participatory interest in such new issues. The Company may, in its sole discretion and without prior notice to or consent from an investor, exchange (by way of redemption and issuance or otherwise) or otherwise convert units of any class held by an investor for units of another class in order to ensure that the Company complies with FINRA Rule 5130. Should the Company elect to participate in new issues, Members wishing to invest in or have a participatory interest in such new issues will be required to establish to the satisfaction of the Managing Member that they are eligible to hold such units. Notwithstanding the foregoing, the Company may decline to participate in new issues and may treat any investor as a restricted person, notwithstanding a representation to the contrary. Members participating in new issues may have returns on their investment that are materially different from the returns on investment obtained by Members that do not participate in new issues.
 
Risks Related to the Company’s Regulatory Environment
 
Limited Regulatory Oversight; Members not Afforded Protection of Investment Company Act
 
The Company and each of the Investment Funds, in reliance upon an exemption available to privately offered investment companies, are not required to register as investment companies and have not registered as such under the Investment Company Act. Thus, the provisions of the Investment Company Act intended to provide various protections to investors (which, among other things, require investment companies to have a majority of disinterested directors, provide limitations on leverage, limit transactions between investment companies and their affiliates, require securities of an investment company held in custody to be individually segregated at all times from the securities of any other person and marked to clearly identify such securities as the property of such investment company and regulate the relationship between the adviser and the investment company) are not applicable. The Managing Member is registered as an adviser under the Investment Advisers Act.
 
Moreover, the Advisor Funds and Portfolio Companies in which the Investment Funds invest generally are not registered as investment companies, and the Investment Funds and the Company, in turn, are not provided the protections of the Investment Company Act. In addition, the Advisors may not be registered as investment advisers under the Investment Advisers Act. Therefore, the Investment Funds and the Company, as investors with such Advisors, will not have the benefit of certain of the protections of the Investment Advisers Act.
 
The Advisor Funds and Portfolio Companies generally do not maintain their securities and other assets in the custody of a bank or a member of a securities exchange, as generally required of registered investment companies, in accordance with certain SEC rules. A registered investment company which places its securities in the custody of a member of a securities exchange is required to have a written custodian agreement, which provides that securities held in custody will be at all times individually segregated from the securities of any other person and marked to clearly identify such securities as the property of such investment company and which contains other provisions designed to protect the assets of the registered investment company. It is anticipated that the Advisors to which the


70


Table of Contents

Investment Funds will allocate assets generally will maintain custody of their assets with brokerage firms which do not separately segregate such customer assets as would be required in the case of registered investment companies. Under the provisions of the Securities Investor Protection Act of 1970, as amended, the bankruptcy or failure of any such brokerage firm could have a greater adverse effect on an Investment Fund and, in turn, on the Company, than would be the case if custody of assets were maintained in accordance with the requirements applicable to registered investment companies. There is also a risk that an Investment Fund’s Advisor could convert to its own use assets committed to it by an Investment Fund or that a custodian could convert to its own use assets committed to it by an Investment Fund’s Advisor. There can be no assurance that the Advisors or the entities they manage will comply with all applicable laws and that assets of the Investment Funds entrusted to Advisors by the Investment Funds will be protected.
 
Furthermore, in accordance with U.S. Commodity Futures Trading Commission (the “CFTC”) regulations, the Managing Member is registered as a commodity trading advisor (a “CTA”) and a commodity pool operator (a “CPO”) under the U.S. Commodity Exchange Act, as amended (the “Commodity Exchange Act”), and all of the Advisors are either registered as CTAs or have indicated to the managing member of the Investment Funds that they are exempt from such registration. Because the units are being privately offered under both U.S. federal and state securities laws and units may be purchased only by persons who are “qualified purchasers” under the Investment Company Act, “accredited investors” under the Securities Act of 1933, as amended (the “Securities Act”), and “qualified eligible persons” or “accredited investors” in accordance with Rule 4.13(a)(4) under the Commodity Exchange Act, the Memorandum has not been filed with or reviewed by the SEC, the CFTC, or any self-regulatory authority. The Managing Member reserves the right to withdraw any registrations relating to the Company in the future as permitted by applicable law.
 
Although the Managing Member is registered with the CFTC under the Commodity Exchange Act as a CPO with respect to other pools that it operates, the Managing Member operates the Company as if it were exempt from such registration pursuant to Rule 4.13(a)(4) under the Commodity Exchange Act because (i) the units are exempt from registration under the Securities Act and are being offered and sold without marketing to the public in the United States, and (ii) units may be purchased only by natural persons who are “qualified eligible persons” as defined in Rule 4.7(a)(2) under the Commodity Exchange Act and non-natural persons that are “qualified eligible persons” as defined in Rule 4.7 under the Commodity Exchange Act or “accredited investors” as defined in Rule 501(a)(1)-(3), (a)(7) or (a)(8) of Regulation D promulgated under the Securities Act. Therefore, the Managing Member is not required to deliver to Members certified annual reports and a disclosure document that are required to be delivered pursuant to the Commodity Exchange Act, which would contain certain disclosures required thereby that may not be included herein or in the reports to be provided to Members by the Company.
 
Notwithstanding the foregoing, the Company may be impacted by the restrictions applicable to Goldman Sachs as a Bank Holding Company (a “BHC”) under the Bank Holding Company Act of 1956, as amended (the “BHCA”). See “—Regulation as a Bank Holding Company”.
 
Legal, Tax and Regulatory Risks; Disclosure of Information Regarding Members
 
Legal, tax and regulatory changes could occur during the term of the Company and the Investment Funds that may materially adversely affect the Company and the Investment Funds (including changes under the Exchange Act). For example, the regulatory and tax environment for derivative instruments in which an Investment Fund or Advisors of an Investment Fund may participate is evolving, and changes in the regulation or taxation of derivative instruments may materially adversely affect the value of derivative instruments directly or indirectly held by such Investment Fund and, in turn, the value of the Company’s assets and the ability of the Advisors with which such Investment Fund invests to pursue their trading strategies. Members should note that recently proposed legislation directed at certain non-US entities and entities organized in tax haven jurisdictions would, and future legislation could, if enacted, result in material tax or other costs for some or all of the Portfolio Companies or Advisor Funds through which the Company invests, or require a significant restructuring of the manner in which some or all of the Portfolio Companies or Advisor Funds through which the Company invests are organized or operated. Similarly, the regulatory environment for leveraged investors and for hedge funds generally is evolving, and changes in the direct or indirect regulation of leveraged investors or hedge funds may materially adversely affect the ability of the Company, the Investment Funds and the Advisors to pursue their respective investment objectives or strategies. Likewise, the ability of the Company and the Investment Funds to pursue their trading strategies may be adversely


71


Table of Contents

affected due to additional regulatory requirements or changes to regulatory requirements applicable to the Company and the Investment Funds, such as requirements that may be imposed due to other activities of Goldman Sachs (including, without limitation, as a result of Goldman Sachs electing to be regulated as a BHC) or as a result of the investment in the Company or the Investment Funds by certain investors or types of investors (including, without limitation, investors subject to ERISA). See “—Regulation as a Bank Holding Company” below.
 
Moreover, the Investment Funds, the Managing Member or its affiliates and/or service providers or agents of the Company, the Investment Funds or the Managing Member, may, from time to time, be required or may, in their sole discretion, determine that it is advisable to disclose certain information about the Company, the Investment Funds and the Members, including, but not limited to, investments held by the Company and the names and level of beneficial ownership of Members, to (i) one or more regulatory authorities of certain jurisdictions which have or assert jurisdiction over the disclosing party or any Advisor Fund, Managed Account or Portfolio Company in which the Company directly or indirectly invests and/or (ii) one or more counterparties of, or service providers to, the Managing Member or the Company. By virtue of the entering into the Subscription Agreement, each Member will have consented to any such disclosure relating to such Member.
 
Regulation as a Bank Holding Company
 
Goldman Sachs has recently elected to be regulated as a BHC under the BHCA. In addition, Goldman Sachs is in the process of making an application to be treated as an FHC under the BHCA, which is a status available to BHCs that meet certain criteria. FHCs may engage in a broader range of activities than BHCs that are not FHCs.
 
However, the activities of FHCs and their affiliates remain subject to certain restrictions imposed by the BHCA and related regulations. Because Goldman Sachs is deemed to “control” the Company and the Investment Funds within the meaning of the BHCA, these restrictions are expected to apply to the Company and the Investment Funds as well. Accordingly, the BHCA and other applicable banking laws, rules, regulations and guidelines, and their interpretation and administration by the appropriate regulatory agencies, may restrict the transactions and relationships between the Managing Member (in its capacity as managing member of the Company or the Investment Funds, as applicable), Goldman Sachs and their affiliates, on the one hand, and the Company and the Investment Funds, on the other hand, and may restrict the investments and transactions by, and the operations of, the Company and the Investment Funds. For example, the BHCA regulations applicable to Goldman Sachs, the Company and the Investment Funds may, among other things, restrict the ability of the Company and the Investment Funds to make certain investments or the size of certain investments, impose a maximum holding period on some or all of the Company’s and the Investment Funds’ investments, restrict the Managing Member’s ability to participate in the management and operations of the companies in which the Company and the Investment Funds invest, and restrict the ability of Goldman Sachs to invest in the Company and the Investment Funds. In addition, certain BHCA regulations may require aggregation of the positions owned, held or controlled by related entities. Thus, in certain circumstances positions held by Goldman Sachs and its affiliates for client and proprietary accounts may need to be aggregated with positions held by the Company and the Investment Funds. In this case, where BHCA regulations impose a cap on the amount of a position that may be held, Goldman Sachs may utilize available capacity to make investments for its proprietary accounts or for the accounts of other clients, which may require the Company and the Investment Funds to limit and/or liquidate certain investments. See “Potential Conflicts of Interest”.
 
These restrictions may materially adversely affect the Investment Funds and, in turn, the Company by, among other things, affecting the Managing Member’s ability to pursue certain strategies within the Investment Funds’ investment programs or trade in certain securities. Moreover, Goldman Sachs’ application to become a FHC may be denied, or Goldman Sachs may cease in the future to qualify as an FHC, which may subject the Company and the Investment Funds to additional restrictions. Moreover, there can be no assurance that the bank regulatory requirements applicable to Goldman Sachs, the Company and the Investment Funds will not change, or that any such change will not have a material adverse effect on the Company and the Investment Funds.


72


Table of Contents

 
Risks Related to the Units, Liquidity of Units and the Offering of the Units
 
Units Will Not be Listed and Will Not be Marketable
 
The Company does not intend to list its units for trading on any national securities exchange. There is no secondary trading market for the units, and none is expected to develop. The units are, therefore, not readily marketable. Units will not be redeemable at the option of Members, other than, on each January 1, April 1, July 1 or October 1 (occurring on or after the first anniversary of the purchase of such units by the Member) upon 91 days’ prior written notice to the Managing Member (unless such notice is waived by the Managing Member in its sole discretion), and such units will not be exchangeable for interests of any other funds. See “—The Company has Limited Liquidity and Limited Rights for Redemption”.
 
The Company has Limited Liquidity and Limited Rights for Redemption
 
The Company is a non-diversified management investment company with limited liquidity designed primarily for long-term investors and is not intended to be a trading vehicle. Members should not retain their investment in this Company if they need a liquid investment.
 
An investment in the Company provides limited liquidity since the units are not freely transferable. Generally, a Member is only permitted to redeem units upon written notice received by the Managing Member at least 91 days prior to the Valuation Date (as defined below) in respect of such redemption, as of the time immediately prior to the opening of business on each January 1, April 1, July 1 and October 1 occurring on or after the first anniversary of the purchase of such units by the Member, but such right may be limited or postponed under certain circumstances. Additionally, the Managing Member may limit redemptions of units to the extent that aggregate redemption requests by Members exceed a specified threshold.
 
The same or similar limitations may also apply to the Company’s investment in the Investment Funds or an Investment Fund’s investment with certain Advisors. For example, certain Investment Funds and Advisor Funds in which the Company directly or indirectly invests, may impose greater restrictions on redemptions than those imposed by the Company, including without limitation by offering less frequent redemption dates than are offered by the Company to its Members, or by restricting the amounts or percentage of interests that may be redeemed on a redemption date to amounts or percentages that are less than those permitted by the Company. In addition, certain Investment Funds and Advisor Funds may impose redemption fees under certain circumstances. Since the Company does not charge a redemption fee on redeeming Members, any such redemption fees charged directly or indirectly to the Company will reduce the NAV of the Company and adversely affect all Members (not just redeeming investors).
 
A significant portion of the Company’s assets may be directly or indirectly allocated to such relatively less liquid Investment Funds and Advisor Funds. The Company’s inability to redeem its interests from such Investment Funds and Advisor Funds may have a material adverse effect on the Company’s ability to reallocate assets. In addition, significant amounts of redemption requests by investors in the Company that are not offset by new subscriptions could result in the Company holding a greater concentration of such less liquid interests than was previously the case. This could have a material adverse effect on the Company’s investment mix, and could also cause the Company to postpone or suspend future Member redemptions. This could also result in the Company being required to liquidate some or all of its assets at a time when it is not considered by the Managing Member to be an optimal time to do so, which could have a material adverse effect on the portfolio.
 
The investment manager of GFS recently created GFS Trust for the benefit of its investors, including the Company. On March 31, 2009, GFS transferred to GFS Trust its interest in certain illiquid investments, including illiquid investments made by Advisor Funds, as well as liquidating vehicles that the Advisors formed as liquidity decreased for previously liquid investments, such as certain credit instruments. GFS transferred to GFS Trust the economic risks and benefits of its interests in the assets. In connection with such transfer, each investor in GFS, including the Company, was issued its pro-rata share of GFS Trust interests based on its ownership in GFS as of the transfer date. Distributions from GFS Trust in respect of GFS Trust interests have been and will continue to be made to investors in GFS, including the Company, as liquidity is received from the Advisors. However, the actual timing of these distributions is dependent on the Advisors’ ability to liquidate positions as market conditions allow, and it may be a significant period of time before such positions are realized or disposed of. The Company’s pro-rata share


73


Table of Contents

of GFS Trust interests as of December 31, 2009 was an amount equal to approximately 6% of the Company’s member’s equity.
 
The Company may be directly or indirectly invested in derivatives, securities or other financial instruments or assets that are illiquid and/or not publicly traded. Such investments may not be readily disposable, may be difficult to value and, in some cases, may be subject to contractual, statutory or regulatory prohibitions on disposition for a specified period of time. In addition, from time to time, Advisors may segregate from their portfolio of assets certain illiquid or difficult-to-value securities or instruments (each, a “special investment”) and hold them in special investment accounts. If the Company holds direct or indirect interests in special investments, substantial redemptions could result in the Company holding a significantly greater concentration of highly illiquid investments than was previously the case. See “—Risks Related to Issuers of Securities—Advisor Special Investments” below. An investment in the Company is therefore suitable only for sophisticated investors that will not be materially impacted by postponements of the Company’s normal redemption dates. The market value of an Advisor’s investments may fluctuate with, among other things, changes in prevailing interest rates, general economic conditions, the condition of financial markets, developments or trends in any particular industry and the financial condition of the issuers of the securities in which such Advisor invests. During periods of limited liquidity and higher price volatility, an Advisor’s ability to acquire or dispose of investments at a price and time that the Advisor deems advantageous may be impaired. As a result, in periods of rising market prices, an Advisor may be unable to participate in price increases fully to the extent that it is unable to acquire desired positions quickly; conversely, such Advisor’s inability to dispose fully and promptly of positions in declining markets will cause the NAV of an Advisor Fund, Portfolio Company or Managed Account (and, consequently, the NAV of an Investment Fund) to decline as the value of unsold positions is marked to lower prices. These circumstances could also impair an Advisor’s ability to make redemption distributions to an Investment Fund in a timely manner and, as a result, could impair the ability of the Investment Fund to make timely distributions to a redeeming member, including the Company. Further, the managing member of an Investment Fund may, in its sole discretion, suspend redemptions, including, among other reasons, because the Investment Fund is unable to withdraw sufficient funds from Advisor Funds and Portfolio Companies or otherwise to meet redemption requests, and in circumstances when the disposal of part or all of such Investment Fund’s assets to meet withdrawal requests would be prejudicial to its members.
 
Investors in one or more of the Advisor Funds and Portfolio Companies may be permitted to withdraw more of their interests with greater frequency and/or under otherwise more favorable terms than an Investment Fund. This could materially adversely affect the Investment Fund and, in turn, the Company and the Members.
 
Redemptions of Units are Subject to a Substantial Waiting Period and Potentially Outdated Information
 
There will be a substantial period of time between the date as of which Members must submit a request for redemption and the date they can expect to receive full payment for their redemption proceeds from the Company. Members whose units are accepted for redemption bear the risk that the Company’s NAV may fluctuate significantly in the period between the date by which redemption requests must be submitted and the date as of which such units are valued for purposes of such redemption. Members will have to decide whether to request that the Company redeem their units without the benefit of having current information regarding the value of units on a date proximate to the date on which units are valued by the Company for purposes of effecting such redemptions. In addition, under certain circumstances, the Managing Member may find it necessary (i) to suspend redemptions, including, among other reasons, because the Company is unable to withdraw sufficient funds from Investment Funds or otherwise to meet redemption requests, and in circumstances when the disposal of part or all of the Company’s assets to meet such redemption requests would be prejudicial to the Members; or (ii) to set up a reserve for undetermined or contingent liabilities and withhold a certain portion of redemption proceeds. The Managing Member may also limit redemptions of units to the extent that aggregate redemption requests by Members exceed a specified threshold. An investment in the Company is suitable only for Members who can bear the risks associated with the limited liquidity of the units and the underlying investments of the Company.
 
In determining whether the Company should limit redemptions as of any Company redemption date, the Managing Member will rely in part on information provided by each Advisor, including with respect to the Advisor’s liquidity. Due to sudden changes in the liquidity profile of certain Advisors and other factors, an Advisor may suspend, delay or otherwise limit redemptions as of a redemption date. In certain cases, the Company may not


74


Table of Contents

learn of such suspension, delay or other limitations until after the Company’s redemption date. As a result, the Company may not be able to take action to limit redemptions as of such redemption date. Therefore, any such delayed notice could materially adversely affect the Company and its portfolio, could result in the delay of redemption payments and/or leave non-redeeming Members with a less liquid portfolio than if the Managing Member had received more timely notice regarding the liquidity of the Advisor Funds.
 
Substantial Redemptions Could Have a Material Adverse Effect on the Company
 
Substantial requests for the Company or an Investment Fund to redeem membership units of its members in a concentrated period of time, including redemption requests by current and former directors, partners or employees of the GS Group or from certain investment vehicles organized by the Managing Member or its affiliates, could require the Company or the Investment Fund to liquidate certain of its investments more rapidly than otherwise desirable in order to raise cash to fund the redemptions and achieve a market position appropriately reflecting a smaller asset base. In addition, certain Advisor Funds may impose redemption fees, which the Company or the Investment Funds may be required to pay in order to obtain required redemption proceeds. The Company could experience disproportionately high redemptions on any particular redemption date, which could have a material adverse effect on the value of the units redeemed and the units that remain outstanding. In addition, following receipt of a redemption request, the Company may be required to liquidate assets in advance of the applicable redemption date, which may result in the Company holding cash or highly liquid investments pending such redemption date. During any such period, the ability of the Managing Member to successfully implement the investment program of the Company may be impaired and the Company’s returns may be adversely affected as a result.
 
If the Company holds direct or indirect interests in special investments, substantial redemptions could result in the Company holding a significantly greater concentration of highly illiquid investments than was previously the case. See “—Risks Related to Issuers of Securities—Advisor Special Investments” below. In addition, the Managing Member may be unable to redeem interests in one or more Investment Funds as it otherwise deems advisable in order to pay redemption requests, for among other reasons, limits imposed by an Advisor Fund on redemptions by such Investment Fund. As a result, the Managing Member may be required to redeem interests from other more liquid Investment Funds in order to meet redemption requests, which could have a material adverse effect on the Company’s, portfolio mix and the liquidity for remaining Members. Moreover, regardless of the time period over which substantial redemption requests are made, the resulting reduction in the Company’s NAV could make it more difficult for the Company to generate profits or recover losses. Members will not receive notification of substantial redemption requests in respect of any particular Redemption Date (as defined below) from the Company, and therefore may not have the opportunity to redeem units prior to, or at the same time as, the redeeming Members. The Company funded the redemptions made in 2007, 2008, 2009 and January 2010, by making redemptions from the Investment Funds in proportion to the then current weightings and through the use of uninvested cash on hand. The Company also has used its Credit Facility to fund past redemptions. The Managing Member expects the Company to fund future redemptions in a similar manner. However, the Managing Member may in its sole discretion decide to change the weightings and the manner in which the Company makes redemptions from the Investment Funds to fund these or any other redemptions. The redemptions from the Investment Funds made during 2009 to fund the redemptions made in the Company during 2009 did not result in any costs, fees or payments of premiums for the Company. The Company does not believe that the Redemptions payable in January 2010 had a material adverse effect on the value of the units or the performance of the Company. See “—Special Risks of the Company’s Structure—Risks Related to the Company’s Structure—The Investment Funds’ and the Advisors’ Investments May not be Diversified and There can be no Assurance that the Company’s Allocation Methodologies will Achieve the Company’s Allocation Goals”. The Company may elect to borrow under the Credit Facility, including without limitation, to fund redemptions, from time to time in the future. As further described in Item 7, the Company entered into the Credit Facility on June 30, 2006. For a description of the Credit Facility, see ITEM 7. “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Liquidity and Capital Resources” and Note 6 to the financial statements.


75


Table of Contents

Certain Classes of Units May Have No Lock-Up Period
 
Certain investment vehicles organized by the Managing Member or its affiliates, including without limitation, investment vehicles offered to third party investors (each, a “GS Investment Vehicle” and collectively, “GS Investment Vehicles”) may from time to time invest in the Company. In the event that GS Investment Vehicles invest in the Company, it is expected that such GS Investment Vehicles will be issued units of a class that is not subject to any lock-up period. Since certain Investment Funds and Advisor Funds may impose greater restrictions on redemptions (including lock-ups) than those imposed by the Company on such GS Investment Vehicles, redemptions by such GS Investment Vehicles may materially adversely affect other Members. The Company may determine to meet a redemption request from such a GS Investment Vehicle by redeeming from more liquid Investment Funds and Advisor Funds or Investment Funds and Advisor Funds that impose redemption fees. Since the Company does not charge a redemption fee on redeeming Members, any such redemption fees charged to the Company in connection with the redemption by a GS Investment Vehicle will reduce the NAV of the Company and adversely affect all Members (not just redeeming investors). In addition, redemptions by such GS Investment Vehicles could result in the Company holding a greater concentration of less liquid Investment Funds and Advisor Funds than was previously the case. This could have a material adverse effect on the Company’s investment mix, and could also cause the Company to postpone or suspend future Member redemptions.
 
Redemption May be in Cash or In-Kind Under the Sole Discretion of the Managing Member; Members May Bear Risks Related to In-Kind Securities and Pay Fees in Disposing of In-Kind Securities
 
The Company generally expects to pay redemption proceeds in respect of redeemed units in cash. However, there can be no assurance that the Company will have sufficient cash to pay for units that are being redeemed or that it will be able to liquidate investments at favorable prices to pay for redeemed units. The Company may in certain circumstances distribute securities or other assets as payment for redeemed units, including, without limitation, if making a cash payment would result in a material adverse effect on the Company or the Members, or if the Company has received distributions from the Investment Funds in the form of securities or other assets that are transferable to the Members. An Investment Fund may distribute redemption proceeds to the Company if the Investment Fund receives distributions from its Advisors in the form of securities or other assets. It is possible that, upon the Company’s withdrawal of all or a portion of its assets invested in an Investment Fund, the Company may receive securities or other assets that are illiquid or difficult to value. In such circumstances, the Managing Member would seek to dispose of these securities or other assets in a manner that is in the best interests of the Company, which may include a distribution in-kind to its Members. Assets that may be distributed include without limitation, interests in Advisor Funds the liquidity of which has become materially impaired or interests in Advisor Fund special investments.
 
A distribution of securities to Members (including, without limitation, a distribution of securities as payment for units) may be made by the Company by, among other things (i) distributing securities or other assets held by the Company to Members, (ii) distributing to Members the right to receive net proceeds ultimately realized on securities or other assets held by the Company (e.g., through issuance of a certificate or note or distribution of interests in a special purpose vehicle) or (iii) otherwise providing Members with an economic interest in securities or other assets held by the Company. In the event that the Company makes such a distribution of securities as payment for units, Members will bear any risks of the distributed securities and may be required to pay a brokerage commission or other costs in order to dispose of such securities.
 
Such securities and other assets may not be readily marketable or saleable and may have to be held by Members (or the special purpose vehicle or liquidating trust created to hold such assets) for an indefinite period of time. The risk of loss and delay in liquidating these securities and other assets (including any expenses involved in the organization and maintenance of a special purpose vehicle or liquidating trust) will be borne by the Member, pro rata in relationship to its interest in a special purpose vehicle or liquidating trust if such assets are held in a special purpose vehicle or liquidating trust, with the result that such Member may receive less cash than it would have otherwise received on the applicable redemption date. Assets distributed in-kind will ordinarily be valued as of the applicable redemption date, although the Managing Member, in its sole discretion, may determine to value such assets as of the date such distribution is made or as of any other date. However, the value of any assets distributed in-


76


Table of Contents

kind will fluctuate and the value assigned thereto for purposes of such distribution may not reflect the actual amount that will be realized in connection with a disposition (or, on the eventual liquidation) of such assets.
 
Special Considerations Applicable to the Continuous Offering of Units; After the Initial Offering of Units Subsequent Purchasers of Units May Suffer Losses Because of Previously Established Open Positions
 
The Company may accept additional subscriptions for units from time to time as determined by the Managing Member, in its sole discretion, and in accordance with the Company’s LLC Agreement. Upon the approval of the Managing Member, a Member or prospective Member may make additional subscriptions for units on the first day of each calendar month or at such other times as the Managing Member may determine in its sole discretion. Historically, the Company has from time to time taken in funds on a monthly basis. From July 2003 through September 2004, the Company only took in investments from existing investors and limited subscriptions from new qualified investors, however, starting in October 2004, the Company began accepting additional amounts of new subscriptions and the Company has continued to do so through December 31, 2009.
 
Additional subscriptions will dilute the indirect interests of existing Members in the Company’s investment portfolio prior to any such subscription, which could have an adverse impact on the existing Members’ interest in the Company if future Company investments underperform the prior investments. The Investment Funds may be closed from time to time to investments by new investors; however, the Investment Funds may be reopened in the sole discretion of the managing member of each Investment Fund. Each Investment Fund may also accept additional subscriptions for membership units (as determined by the managing member of each Investment Fund and in accordance with such Investment Fund’s governing documents). Such additional subscriptions will dilute the indirect interests of the Investment Fund’s existing members, including the Company, in the Investment Fund’s investment portfolio prior to any such subscription, which could have an adverse impact on the existing members’ interest in the Investment Fund if such Investment Fund’s future investments underperform its prior investments. In addition, it is expected that certain Advisors of the Investment Funds will structure performance-based compensation similarly to the Company, with such compensation being paid only if gains exceed prior losses (i.e., the NAV of the interest must first exceed a high watermark attributable to a previously obtained NAV). Appreciation in the net assets managed by an Advisor at any given time will be shared pro rata by all of the members of such Investment Fund at such time, including the Company, not just those who were members at the time prior losses were incurred. The Loss Carry-forward Value will not be taken into account in determining the NAV of an Investment Fund. Therefore, such Loss Carry-forward Value to existing members of an Investment Fund, including the Company, will be diluted by new subscriptions for units of such Investment Fund’s membership units because the new membership units will participate in any positive performance by the Advisor until its gains exceed its prior losses without the Advisor being paid any performance-based compensation.
 
In addition, unlike purchasers who purchased the initial units offered by the Company, units acquired following the initial offering of units will represent indirect interests in operating funds, which may have significant open positions. Since these units will, indirectly through the Company’s investments in each of the Investment Funds, share in each Investment Fund’s open positions which may have been held for some period of time prior to the issuance of the additional units, the application of the relevant Advisor’s trading approach to such positions may have a qualitatively different effect on the performance of the additional units than it does on the performance of previously issued units. For example, a number of trading approaches may become more aggressive in terms of willingness to tolerate losses in a position and increase the size of a position after an open trade has generated a substantial profit because subsequent losses (up to a certain level) are perceived as being only a partial give-back of prior profits, not an actual loss. As subsequent purchasers of units in the continuous offering will not have received, indirectly through the Company’s investments in the Investment Funds, the benefit of any profits on open positions prior to the date on which they purchase the units, subsequent losses will constitute an absolute loss to such holders, not only a partial give-back of profits. In addition, certain trading approaches may follow profit-taking strategies whereby they will liquidate or partially liquidate a position after it has generated a predetermined amount of profit. Since the new units will not, indirectly through the Company’s investments in the Investment Funds, have had the benefit of any such profit prior to the date on which they were issued, Members holding such units may find themselves, indirectly through the Company’s investments in the Investment Funds, liquidated out of a position


77


Table of Contents

(which may have continued to generate substantial profits) due to an Advisor “taking profits,” none of which had inured to their benefit. Some approaches apply similar analyses based on overall portfolio performance, not just the performance of particular positions, with generally analogous effects.
 
From time to time, certain Advisor Funds may suspend, gate or otherwise limit redemptions, side pocket assets, implement holdbacks until after the completion of year-end or final audits, make distributions in-kind in connection with redemption requests or liquidate their portfolios. The timeframe for the recovery of illiquid assets is typically unknown, and it may be a significant period of time before the Company or the relevant Investment Fund is able to liquidate such assets or to redeem from such Advisor Funds. This could have a material adverse effect on the Company’s investment mix and could materially adversely affect the ability of the Managing Member to successfully implement the investment program of the Company, including the Managing Member’s ability to rebalance the Company’s portfolio. New units will share in these less liquid positions.
 
Investing Prior to Receipt of Subscription Monies and Prior to the Effective Date of Subscriptions
 
The Company may, in the sole discretion of the Managing Member, begin making investments at any time prior to the effective date of subscriptions for units on the basis of anticipated subscriptions. In addition, without limiting the generality of the foregoing, the Company may, in the sole discretion of the Managing Member, begin making investments on or after the effective date of a subscription on the basis of anticipated receipt of funds with respect to the subscription even if such funds were not received on such effective date. Pursuant to the Subscription Agreement, an investor or prospective investor will be liable for any losses or costs arising out of or relating to the non-payment or late payment of subscription monies, including any losses or costs incurred as a result of the Company making investments on the basis of anticipated receipt of such monies as of the effective date of a subscription. These practices could have an adverse effect on the Company. Non-payment or late payment of subscription monies may result in direct or indirect losses and costs to the Company, and the Company may not ultimately recoup such losses or costs from the applicable investors or prospective investors. In addition, the Managing Member may make investment or other portfolio decisions in anticipation of subscriptions that would not have been made were it known that the subscriptions would not be made or would be made late, which could have an adverse effect on the Company’s portfolio.
 
Special Risks of the Company’s Structure
 
This section discusses certain risks related to the fact that the Company has historically allocated its assets to Investment Funds, which have historically allocated their assets to Advisors.
 
Risks Related to the Company’s Structure
 
The Investment Funds’ and the Advisors’ Investments May not be Diversified and There can be no Assurance that the Company’s Allocation Methodologies will Achieve the Company’s Allocation Goals
 
The managing member of each of GTT and GELS generally will not allocate more than 25% of the total assets of the applicable fund to any single Advisor at the time of investment in such Advisor. However, following the time of allocation, the percentage of each such Investment Fund’s total assets allocable to any single Advisor could exceed the 25% level due to a number of factors, including redemptions from the applicable Investment Fund and positive or negative performance by an Advisor as compared to other Advisors. There are no restrictions on the amount of assets of HFPO that its managing member can allocate to any single Advisor, group of Advisors or investment strategy, and as of April 1, 2008, there are no restrictions on the amount of assets of GFS that its managing member can allocate to any single Advisor. No assurance is given as to any level of multiple Advisor diversification. Greater concentration with any single Advisor may entail additional risks.
 
While the managing member of the Investment Funds may seek Advisors that utilize diversified investment strategies, there can be no assurance that market or other events will not have an adverse impact on the strategies employed by multiple Advisors. Advisors may at certain times hold large positions in a relatively limited number of investments. Advisors may target or concentrate their investments in particular markets, sectors, or industries.


78


Table of Contents

Those Advisors that concentrate in a specific industry or target a specific sector will also be subject to the risks of that industry or sector, which may include, but are not limited to, rapid obsolescence of technology, sensitivity to regulatory changes, nationalization, expropriation, political or economic conditions, minimal barriers to entry, and sensitivity to overall market swings. As a result, the NAVs of such Advisors may be subject to greater volatility than those of investment vehicles that are subject to diversification requirements and this may negatively impact the NAV of the Investment Funds and the Company. In addition, greater concentration of Advisors likely will increase the adverse effect on the Investment Funds of any problems experienced by an underlying Advisor (including without limitation any suspension of redemptions by such Advisor), since such Advisor is more likely to make up a significant portion of the Investment Fund’s assets.
 
The Managing Member establishes allocations among the Investment Sectors in a manner consistent with the Company’s investment objective. Quantitative analysis is combined with judgment to determine weightings and strategic return, risk and correlation estimates inform the quantitative analysis. Judgment is applied to both estimates and weights in an attempt to achieve exposure to hedge funds while targeting attractive risk-adjusted returns. The Managing Member may, from time to time, vary or change materially the actual allocation of assets made by the Company, as it deems appropriate in its sole discretion. The Managing Member may at certain times be unable to reallocate the Company’s assets among the Investment Funds as it determines is advisable in order to achieve the Company’s investment objective due to a number of factors, including without limitation, minimum holding periods and restrictions on redemptions imposed by the Investment Funds or Advisors. If imbalances in the allocations occur because the Company is unable to reallocate on a timely basis, losses occurring as a result could cause the Company to suffer significantly greater losses than would be the case if the Company’s allocation goals had been achieved.
 
The Company’s Financial Statements are, and in the Future Will Ultimately be, Based on Estimates of Valuations Provided by Third Party Advisors Which May not be Accurate or May Need to be Adjusted in the Future
 
Generally, the managing member of the Investment Funds will have no ability to assess the accuracy of the valuations or other financial information received from each Investment Fund’s Advisors with respect to allocations not made through Managed Accounts or Portfolio Companies. In addition, the Investment Funds may allocate assets to Advisors that invest in assets that are difficult to value. The Company’s NAV will be affected by the valuations of these difficult-to-value assets. Although the managing member of the Investment Funds may obtain information provided by the Advisors about their NAVs, the managing member of the Investment Funds generally does not, and is not able to, confirm independently the accuracy of such valuations (which are generally unaudited except at year-end) except in the case of allocations made through Managed Accounts and Portfolio Companies. Most Advisors treat their investment positions as proprietary information and many of them will not provide such information to their investors. Furthermore, the NAVs received by the managing member of the Investment Funds from Advisors will typically be based on estimated or unaudited reports only, and such values generally will be used to calculate NAVs and fee accruals for purposes of determining amounts payable on redemption to the extent current audited information is not then available. In some cases, Advisors do not use independent administrators or other third party providers to value and report their NAVs. In such cases, the valuations used to determine the NAVs of these Advisors will be dependent solely upon the Advisors for validation, and even when third parties are involved, the Advisors may have primary responsibility for determining the values of the portfolio securities. The valuation reports will not be audited by third parties in most cases except at year-end. Valuations provided by each Investment Fund’s Advisors may be subject to later adjustment based on valuation information available at that time, including, for example, as a result of year-end audits or other valuation reviews conducted by an Advisor’s auditors. Furthermore, there is a risk that any valuation an Investment Fund receives from an Advisor will be fraudulent or may inadvertently contain material errors that the Investment Funds and, in turn, the Company would not know when it prepares its financial statements. Members should understand that the Company cannot prevent this risk since neither the Company nor the Investment Funds have access to the Advisors’ books and records. Neither the Company nor the Investment Funds is a party to any direct agreements with any Advisor providing the Company or the Investment Funds with a specific contractual recourse in the case where an Advisor has provided inaccurate or untimely valuations. Additionally, an Advisor may through its investment documents have sought to limit or eliminate its liability for inaccurate or untimely valuations entirely in which case the Company may not have any


79


Table of Contents

recourse. The Company has not entered into any direct agreements to indemnify any of the Advisors against such errors or omissions. Any such adjustments resulting from wrong valuations or errors in calculations may result in the Company restating its NAV or having to restate its financial statements at the time of such restatement, as well as for prior periods. Any such restatement, whether increasing or decreasing the NAV of the Company, could have a material impact on the NAV of Member’s units. Members of the Company are assuming the risk that valuations may be materially incorrect and/or will need to be adjusted and Members should not retain their investment in the Company if they are unwilling to assume such risks. See “—General Risks—Risks Related to the Company and the Investment Funds’ Performance and Operation—Dependence on the Managing Member and the Advisors; the Managing Member Generally Has Limited Access to Information on or Control over Advisors’ Portfolios and Members Assume the Risk that Advisors May Knowingly Misrepresent Information Which Could Have a Material Negative Impact on the Company” and “—Risks Associated with the Company Investing in Other Entities—Valuation of the Investment Funds’ Investments Will be Determined Utilizing Valuations Provided by the Advisors Which are Generally not Audited; Uncertainties in Valuations Could Have a Material Adverse Effect on the Company’s Net Assets”.
 
The Company follows materiality policies to handle certain NAV-related errors that occur in the Company’s and the Investment Fund’s operation (including, without limitation, errors made in the processing of subscriptions and redemptions). Members who purchase or redeem units during periods in which errors accrue or occur may not be recompensed in connection with the resolution of the error. See ITEM 1. “BUSINESS—THE MANAGING MEMBER—Error and Error Correction Policy”.
 
If at any time the Managing Member determines, in its sole discretion, that an incorrect number of units was issued to a Member because the NAV of the Company or the applicable series in effect on the date of issuance was materially incorrect, the Managing Member will implement such arrangements as it determines, in its sole discretion, are required for an equitable treatment of such Member, which arrangements may include redeeming a portion of such Member’s units for no additional consideration or issuing new units to such Member for no consideration, as appropriate, so that the number of units held by such Member following such redemption or issuance, as the case may be, is the number of units as would have been issued at the correct NAV. In addition, if at any time after a redemption of units (including in connection with any withdrawal of a Member from the Company) the Managing Member determines, in its sole discretion, that the amount paid to such Member or former Member pursuant to such redemption was materially incorrect (including because the NAV at which the Member or former Member purchased such units or at which the redemption was effected was materially incorrect), the Company will pay to such Member or former Member any additional amount that it determines such Member or former Member would have been entitled to receive had the redemption been effected at the correct NAV, or, in its sole discretion, seek payment from such Member or former Member of (and such Member or former Member shall be required to pay) the amount of any excess payment that the Managing Member determines such Member or former Member received (including, without limitation, by compulsorily redeeming without consideration a number of units held by such Member having a NAV equal to the amount of such excess payment), in each case without interest. Further, the Managing Member may, although is under no obligation to, make the foregoing adjustments in the event that the amount paid was incorrect (but not to a material extent). If such a determination is made after a Member has had all of its units redeemed, or if the NAV of a Member’s remaining units is insufficient to cover the amount of any overpayment (including, without limitation, due to a decrease in the Company’s NAV), the Company may be unable, or may, under the circumstances, elect not, to collect the amount of any such excess payment, and any corresponding restatement of and reduction in the NAV of the Company will generally be borne by the remaining Members of the Company. If the Company elects not to seek the payment of such amounts from a Member or former Member or is unable to collect such amounts from a Member or former Member, the NAV of the Company will be less than it would have been had such amounts been collected. The Company will be subject to similar adjustment provisions as a member of the Investment Funds.
 
The Other Business Activities and Relationships of Goldman Sachs and the Company’s Advisors May Create Conflicts of Interest
 
Goldman Sachs, including its affiliates and personnel, is a bank holding company and a worldwide, full-service investment banking, broker-dealer, asset management and financial services organization, and a major


80


Table of Contents

participant in global financial markets. As a result, Goldman Sachs is engaged in many businesses and has interests in the global fixed income, currency, commodity, equity, bank loan and other markets in addition to those related to the Company, including as an investor, investment banker, research provider, investment manager, financer, advisor, market maker, proprietary trader, prime broker, lender, agent and principal. Such additional businesses and interests may give rise to potential conflicts of interest. In addition, the activities of the Advisors and their respective affiliates, and their directors, trustees, managers, members, partners, officers and employees, for their own accounts and other accounts they manage, may give rise to conflicts of interest that could disadvantage the Company and its Members. A description of certain of such potential conflicts of interest is set forth under ITEM 1. “BUSINESS—POTENTIAL CONFLICTS OF INTEREST”.
 
Affiliates of Goldman Sachs and Members of the Company May Market and Trade Derivatives Linked to the Performance of the Company, Which May Adversely Affect the NAV of the Company
 
Affiliates of Goldman Sachs and certain Members may market and sell, from time to time, directly or indirectly, derivative instruments, the return on which tracks or is related to the economic performance of the Company. Sellers of such derivative instruments, including affiliates of Goldman Sachs, may seek to hedge the risk associated with their exposure thereunder by purchasing or redeeming units from time to time, the NAV of which may represent a significant percentage of the Company’s NAV at any given time. Such trading may adversely affect the NAV of the Company. In particular, significant purchases and/or redemptions of units over a concentrated period of time may result in high transaction costs and other operating inefficiencies in connection with the direct or indirect investment of the Company’s assets. Similar consequences could occur in the case of derivative instruments that track the performance of an Investment Fund.
 
The Company will be managed in accordance with its investment program and objective and wholly independent of considerations related to any such derivative instruments that are sold by any Member. Accordingly, the identity of, and the relative allocations of capital among, the Investment Funds and Advisors, as well as the manner of any reallocation of the Company’s assets and other investment management decisions (including, without limitation, in connection with the dissolution of the Company), will not take into account, and may run counter to, the terms or objectives of any such derivative instruments.
 
Special Risks of the Fund of Funds Structure
 
The following are certain risks related to the fact that the Company allocates assets to Investment Funds and Advisors.
 
Members of the Company are Subject to Multiple Levels of Fees and Expenses Because of the Company’s Structure, and the Fee Structure of the Company May Create Incentives for Advisors to Make Risky Investments
 
Although in many cases investor access to the Advisors of the Investment Funds may be limited or unavailable, an investor who meets the conditions imposed by an Advisor may be able to invest directly with the Advisor. By investing in Advisors indirectly through the Company, via the Investment Funds, the investor bears asset-based fees and performance-based allocations at the Company level, in addition to any asset-based fees and performance-based fees and allocations at the Advisor level. Moreover, an investor in the Company bears a proportionate share of the fees and expenses of the Company (including organizational and offering expenses, operating costs, sales charges, brokerage expenses, and administrative fees) and, indirectly, similar expenses of the Investment Funds and the Advisors. Thus, a Member of the Company will be subject to higher operating expenses than if the Member invested with the Advisors directly or in a fund that did not utilize a “fund of funds” structure. See ITEM 1. “BUSINESS—FEES AND EXPENSES”.
 
In addition to the Incentive Allocation payable to the Managing Member, the Investment Funds are subject to performance-based fees or allocations from each Advisor to which assets are allocated, irrespective of the performance of other Advisors, the Investment Funds and the Company generally. Accordingly, an Advisor with positive performance may receive performance-based compensation from an Investment Fund, and thus indirectly from the Members, even if such Investment Fund’s or the Company’s overall performance is negative.


81


Table of Contents

Fixed fees, generally calculated and paid to Advisors monthly based upon the NAV of the relevant Investment Fund’s allocation to such Advisor, are currently expected to range (on an annualized basis) from approximately 0% to 3%. Performance-based fees or allocations of Advisors are currently expected to range from 0% to 30% of the net capital appreciation in each individual Advisor’s investments for the year. However, each Investment Fund may, in the sole discretion of its managing member, allocate assets to Advisors that receive fixed fees, asset-based fees or performance-based fees and/or allocations or other compensation that materially exceed these percentages or that structure their compensation in materially different ways. The performance-based compensation received by the Managing Member, the managing member of the Investment Funds and an Advisor also may create an incentive for such managing member or Advisor to make investments that are riskier or more speculative than those that it might have made in the absence of the performance-based compensation. Because the performance-based compensation may in certain circumstances be based on calculations of realized and unrealized gains as determined by the person entitled to receive such compensation, certain inherent conflicts of interests and consequent risks can arise.
 
The Company Could Indirectly Incur Duplicative Transaction Costs Without Accomplishing a Net Investment Result
 
Investment decisions of the Advisors are generally made independently of each other. As a result, at any particular time, one Advisor may be purchasing securities of an issuer whose securities are being sold by another Advisor. Consequently, the Company and the Investment Funds could indirectly incur transaction costs without accomplishing any net investment result.
 
Compensation Arrangements With the Managing Member and the Advisors of the Investment Funds May Create Incentives for the Managing Member, the Investment Funds or the Advisors to Make Riskier Investments or to Inflate Returns
 
The Managing Member of the Company and the Investment Funds receives an incentive allocation based upon the net capital appreciation allocated to their members. In addition, the Advisors of the Investment Funds may receive compensation based on the performance of their investments, a pro rata share of which will be borne by the Company as a member of each Investment Fund. Accordingly, there often may be times when a particular Advisor of an Investment Fund may receive incentive compensation in respect of its portfolio for a period even though such Investment Fund’s or the Company’s overall portfolio depreciated during such period. Incentive compensation arrangements may also create an incentive for the managing member of the Company and the Investment Funds or the Advisors to make investments that are riskier or more speculative than would be the case if such arrangements were not in effect. Such incentives could also cause the Advisors to artificially or fraudulently inflate the actual performance of their portfolio or the valuation of specific positions. In addition, because both the Managing Member’s Incentive Allocation and the performance-based compensation of the managing member of the Investment Funds and the Advisors are calculated on a basis which includes unrealized appreciation of the Company’s or an Investment Fund’s assets or a portion thereof, as the case may be, they may be greater than if such compensation were based solely on realized gains and losses.
 
Transactions Between and Among Funds May Be Undervalued and Negatively Affect the Company’s Performance
 
The managing member of the Investment Funds may determine that it is advisable to reallocate some or all of the Investment Funds’ assets away from one or more Advisor Funds in order to achieve the Investment Funds’ investment objectives. In certain cases, such Advisor Funds may be appropriate investments for one or more other investment funds or accounts managed by the managing member of the Investment Funds. Rather than redeeming the Investment Funds’ direct or indirect interests in such Advisor Funds, the managing member of the Investment Funds may attempt to transfer such interests to one or more investment funds or accounts managed by the managing member of the Investment Funds. Any such transfer generally would be effected at a price equal to the redemption price that otherwise would have been payable to the Investment Funds in respect of such Advisor Fund upon redemption of such interests (or at a price equal to the reported value of such interests if all or a portion of such interests are not redeemable on such transfer date). The transfer price will not take into account any value associated


82


Table of Contents

with the transfer of the Investment Funds’ investment holding period, if any, in an Advisor Fund, or the prior high NAV associated with the transferred interests.
 
The Investment Funds may allocate assets, directly or indirectly, to Advisor Funds that invest in assets that are difficult to value. If the Investment Funds transfer interests in such Advisor Funds, such interests generally will be valued in accordance with the terms of the Advisor Fund’s governing agreement, as such valuations are reported to the Investment Funds. However, given the nature of such investments, such valuations may not represent the actual amount that would be realized by the Advisor Fund upon a disposition of such investments. If such difficult-to-value assets are undervalued by the Advisor Fund, any transfer of interests in such Advisor Fund may adversely affect the Investment Funds’ and the Company’s performance.
 
Risks Associated with the Company Investing in Other Entities
 
Past Performance of Affiliated Funds and Advisors are not Necessarily Indicative of the Results that the Company and Any Investment Fund May Achieve or of Future Results
 
The past performance of the Investment Funds and other investment funds or accounts formed or managed by the GS Group, including other investment funds or accounts managed by the GS Group which have or have had investment objectives that are similar to those of the Company or the Investment Funds, are not necessarily indicative of the results that the Company or any Investment Fund may achieve. The Company makes indirect investments in a different portfolio of Advisors and securities than other investment funds and, accordingly, its results are independent of the previous results obtained by those funds. See ITEM 1. “BUSINESS—PERFORMANCE OF THE COMPANY—Certain Considerations Relating to Limited Capacity of Potential Advisors”. Further, the Company and each Investment Fund and their methods of operation may differ in several respects from prior GS Group investment vehicles or accounts; e.g., there are different investment and return objectives and investment allocation strategies and the Company and each Investment Fund utilizes a different mix of Advisors and, in certain cases, investment techniques. Similarly, the past investment performance of any of the Advisors with which the Investment Funds will invest or with which other investment funds or accounts managed by the GS Group invest should not be construed as an indication of the future results of such Advisors or of the Investment Funds. Potential investors that desire performance or related information with respect to the Company, Investment Funds or other investment funds formed or managed by the GS Group should contact the Managing Member.
 
A Member’s Investment in the Company will be Affected by the Investment Policies and Decisions of Advisors Which are Outside the Company’s Control
 
Because the Company generally invests its assets in Investment Funds, which in turn allocate assets to Advisors, a Member’s investment in the Company will be affected by the investment policies and decisions of the Advisors in direct proportion to the amount of an Investment Fund’s assets that are invested, directly or indirectly, with each Advisor. The NAV of the assets allocated to Advisors, and as a result, the NAV of the Investment Funds and, in turn, the Company, will fluctuate in response to, among other things, investment decisions made by the Advisor, various market and economic factors related to the markets in which the Advisors invest and the financial condition and prospects of issuers in which the Advisors invest. These risks will be outside the control of the Company. Certain risks related to the investment strategies and techniques utilized by the Investment Funds and the Advisors are described under “—Investment Related Risks”.
 
Limitations on Ability to Invest in Advisors May Result in Assets Not Being Used to Pursue Investment Objectives
 
In the event that the Investment Funds are able to allocate assets to Advisors only at certain times, the Investment Funds may hold cash or invest any portions of their assets that are not invested in Advisors in cash equivalents, short-term securities or money market securities pending allocation to Advisors. During the time that the Company’s assets are not invested in Advisors, that portion of the Company’s assets will not be used to pursue the Investment Funds’ and, in turn, the Company’s investment objective.


83


Table of Contents

Valuation of the Investment Funds’ Investments Will be Determined Utilizing Valuations Provided by the Advisors Which are Generally not Audited; Uncertainties in Valuations Could Have a Material Adverse Effect on the Company’s Net Assets
 
The valuation of an Investment Fund’s investments is ordinarily determined utilizing monthly valuations provided by the Advisors which are only audited annually. Many of the securities or other assets in which Advisors invest may not have a readily ascertainable market price and will be valued by the Advisors without an independent third party valuation. In this regard, an Advisor may face a conflict of interest in valuing the securities, as their value will affect the Advisor’s compensation. Valuations of the securities are very subjective and could prove in hindsight to have been wrong, and at times by significant amounts. Furthermore, the managing member of the Investment Funds may face a conflict of interest in overseeing the value of the Investment Funds’ investments, as the value of the Investment Funds’ investments will affect such managing member’s compensation. Although prior to investing in any Advisor, the managing member of the Investment Funds generally will seek to conduct a due diligence review of the valuation methodology utilized by such Advisor, no assurances can be given that the managing member of the Investment Funds will be given access to necessary aspects of the Advisors’ systems, that such due diligence review will ascertain whether accurate valuations will be provided by such Advisors to the Investment Funds, that the Advisors will comply with their own internal policies or procedures for keeping records or making valuations, or that the Advisors policies and procedures and systems will not change without notice to the Investment Funds. Moreover, the managing member of the Investment Funds will generally not have sufficient information in order to be able to confirm or review the accuracy of valuations provided by Advisors to whom an Investment Fund allocates assets. See “—General Risks—Risks Related to the Company and the Investment Funds’ Performance and Operation—Dependence on the Managing Member and the Advisors; the Managing Member Generally Has Limited Access to Information on or Control over Advisors’ Portfolios and Members Assume the Risk that Advisors May Knowingly Misrepresent Information Which Could Have a Material Negative Impact on the Company”.
 
The NAV of any Advisor Fund, Portfolio Company or Managed Account as of a particular date may be materially greater than or less than the NAV of such Advisor Fund, Portfolio Company or Managed Account that would be determined if its assets were to be liquidated as of such date. For example, if an Advisor Fund, Portfolio Company or Managed Account were required to sell a certain asset or all or a substantial portion of its assets on a particular date, the actual price that such Advisor Fund, Portfolio Company or Managed Account would realize upon the disposition of such asset or assets could be materially less than the value of such asset or assets as reflected in the NAV of the Advisor Fund, Portfolio Company or Managed Account. Volatile market conditions could also cause reduced liquidity in the market for certain assets, which could result in liquidation values that are materially less than the values of such assets as reflected in the NAV of the Advisor Fund, Portfolio Company or Managed Account.
 
The managing member of an Investment Fund may allocate assets to Advisors that invest in assets that lack a readily ascertainable market value, and the NAV of the Investment Fund will be affected by the valuations of any such assets (including, without limitation, in connection with calculations of any management fee or performance-based fee or allocation at the Investment Fund level). In valuing assets that lack a readily ascertainable market value, Advisors (or affiliated or independent agents thereof) may utilize dealer supplied quotations or pricing models developed by the Advisor, affiliates of the Advisor and/or third parties, including GS HFS or affiliates of GS HFS). Such methodologies may be based upon assumptions and estimates that are subject to error. Given the uncertainty inherent in the valuation of assets that lack a readily ascertainable market value, the value of such assets as reflected in the NAV of an Investment Fund, Advisor Fund, Portfolio Company or Managed Account may differ materially from the prices at which the applicable Advisor would be able to liquidate the assets.
 
The value of assets that lack a readily ascertainable market value may be subject to later adjustment based on valuation information available to the applicable Advisor at that time including, for example, as a result of year-end audits. Any adjustment to the value of such assets may result in an adjustment to the NAV of an Investment Fund and in turn the Company. See “—Risks Related to the Company’s Structure—The Company’s Financial Statements are, and in the Future Will Ultimately be, Based on Estimates of Valuations Provided by Third Party Advisors Which May not be Accurate or May Need to be Adjusted in the Future”.


84


Table of Contents

The NAVs or other valuation information received by the managing member of the Investment Funds from an Advisor may require estimations of the value of certain assets and liabilities, and may be subject to later adjustment or revision by the Advisor, which adjustment or revisions may be significant. Any such adjustment or revision may result in either an increase or decrease in the NAV of the Company at the time the Company is provided with information regarding the adjustment, which adjustment or revision may be significant. If an Advisor’s valuations are consistently delayed or inaccurate, the managing member of the Investment Funds will consider whether the Advisor continues to be an appropriate manager of Investment Fund assets. However, the managing member of the Investment Funds may elect in its sole discretion to retain the Advisor. The Advisor’s information could be inaccurate due to Fraudulent Activities, misvaluation or inadvertent error. In any case, the Investment Funds may not uncover errors for a significant period of time. If this occurs in connection with an investment in an Advisor Fund, the Investment Fund may be unable to sell interests in an Advisor Fund quickly, and therefore could be obligated to continue to hold such interests for an extended period of time. In such a case, or in the event that the managing member of the Investment Funds does not receive a valuation from an Advisor Fund, or determines, in its sole discretion, that a valuation is inaccurate or incomplete, the managing member of the Investment Funds may, in its sole discretion, determine the fair value of an Investment Fund’s interests in the Advisor Fund independently of the Advisor’s valuations based on information available to, and factors deemed relevant by, the managing member of the Investment Funds at the time of such valuation. Members should be aware that situations involving uncertainties as to the valuations by Advisors could have a material adverse effect on the Company’s net assets if the managing member of the Investment Funds or the Advisor’s judgments regarding valuations should prove incorrect. Members who are unwilling to assume such risks should not retain their investment in the Company. See “—Risks Related to the Company’s Structure—The Company’s Financial Statements are, and in the Future Will Ultimately be, Based on Estimates of Valuations Provided by Third Party Advisors Which May not be Accurate or May Need to be Adjusted in the Future”.
 
Investment Fund Allocations to Advisor Funds are Difficult to Monitor and Control
 
Each Investment Fund may invest all or a substantial portion of its assets in Advisor Funds, rather than allocating assets via Portfolio Companies or directly to Advisors pursuant to Managed Accounts. It is expected that the managing member of the Investment Funds generally will have less ability to monitor investments in the Advisor Funds, to obtain full and current information and to exercise control rights over such investments than with respect to allocations of assets to Portfolio Companies or Managed Accounts. This could have an adverse effect on the performance of such investments and, therefore, on the performance of the Investment Funds and the Company.
 
Trading in Investments May be Illiquid Which May Cause Substantial Losses and May Negatively Impact the Ability to Make Distributions to a Withdrawing or Redeeming Member
 
Some investment positions in which the Investment Funds have an interest will be illiquid. The Advisors may invest in restricted or non-publicly traded securities, securities on foreign exchanges and futures. These positions may be illiquid because certain exchanges limit fluctuations in certain securities and futures contract prices during a single day by regulations referred to as “daily price fluctuation limits” or “daily limits”. Under such daily limits, during a single trading day no trades may be executed at prices beyond the daily limits. Once the price of a particular security or futures contract has increased or decreased by an amount equal to the daily limit, positions in that security or contract can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit.
 
The market value of an Advisor’s investments may fluctuate with, among other things, changes in prevailing interest rates, general economic conditions, the condition of financial markets, developments or trends in any particular industry and the financial condition of the issuers of the securities in which the Advisor invests. During periods of limited liquidity and higher price volatility, the Advisor’s ability to acquire or dispose of its investments at a price and time that the Advisor deems advantageous may be impaired. As a result, in periods of rising market prices, the Advisor may be unable to participate in price increases fully to the extent that it is unable to acquire desired positions quickly; conversely, the Advisor’s inability to dispose fully and promptly of positions in declining markets will cause its net asset value to decline as the value of unsold positions is marked to lower prices.


85


Table of Contents

In addition, Advisors may invest a portion or all of the value of their assets in restricted securities and other investments that are illiquid. Restricted securities are securities that may not be sold to the public without an effective registration statement under the Securities Act or, if they are unregistered, may be sold only in a privately negotiated transaction or pursuant to an exemption from registration. These may include restricted securities that can be offered and sold only to “qualified institutional buyers” under Rule 144A of the Securities Act. There may be no limit to the percentage of an Advisor’s net assets that may be invested in illiquid securities.
 
The above-described circumstances could prevent the Advisors of an Investment Fund from liquidating unfavorable positions promptly and subject such Investment Fund and, in turn, the Company, to substantial losses. This could also impair the Company’s ability to redeem its membership units in an Investment Fund in order to make distributions to a withdrawing or redeeming Member in a timely manner.
 
Advisor Redemption Holdbacks and Other Advisor Fund Liquidity Restrictions May Adversely Affect Remaining Members
 
From time to time, the managing member of an Investment Fund may be unable to liquidate the Investment Fund’s assets as it otherwise deems advisable in order to pay redemption requests made by the Company due to a number of factors including, without limitation, minimum holding periods and restrictions on redemptions imposed by the Advisor Funds or Advisors (including but not limited to the use of longer notice periods and less frequent redemption dates than those offered by the Company and the Investment Funds, holdbacks, and the segregation of assets by the Advisors through the use of “side-pockets”). At any given time, assets of an Investment Fund that cannot be redeemed to meet current redemption requests may constitute a substantial portion of the Investment Fund’s portfolio. See “—Risks Related to the Units, Liquidity of Units and the Offering of the Units—The Company has Limited Liquidity and Limited Rights for Redemption”. As a result, the managing member of an Investment Fund may be required to redeem interests from more liquid Advisor Funds or Portfolio Companies in order to meet redemption requests, which could result in an Investment Fund holding a greater concentration of less liquid assets than was previously the case or in the Investment Fund incurring additional costs in connection with the redemption. This could have an adverse effect on the Investment Fund’s portfolio mix and liquidity for remaining members which could potentially include the Company. Significant amounts of redemption requests by investors in an Investment Fund that are not offset by new subscriptions could cause the Investment Fund to postpone or suspend redemptions. The Investment Fund’s inability to liquidate its interests in such less liquid assets may also have a material adverse effect on the Investment Fund’s ability to reallocate assets.
 
The Company will endeavor to pay redemption proceeds to a redeeming Member within 45 days following the applicable Redemption Date. For various reasons, however, including the suspension or delay in payment of redemption proceeds by Advisor Funds and the holdback of a portion of the redemption proceeds otherwise payable to the Company until after the applicable underlying Advisor Fund’s financial records have been audited, the Company may not receive redemption proceeds otherwise expected by it prior to the Company’s payout of proceeds to redeeming Members. Therefore, at the time the Company pays redemption proceeds to a redeeming Member, the Company may hold receivables that may not be paid to the Company for a significant period of time, may not accrue any interest, and ultimately may not be paid to the Company (as a result of post-audit adjustments or for other reasons). During the time that the Company’s assets include such receivables, that portion of the Company’s assets cannot be used to pursue the Company’s investment objective. In addition, in cases in which Investment Funds or Advisor Funds limit or reduce the Company’s redemption request, the Company may continue to have investment exposure to Advisor Funds or Advisors that it would otherwise have redeemed. This could have an adverse effect on the performance of the Company.
 
The NAV used by the Company to determine the redemption price payable to a redeeming Member generally will include the full value of any receivables due the Company without any discount or reduction, notwithstanding the fact that such receivables do not accrue interest and may ultimately not be paid to the Company by an Investment Fund. If an Investment Fund later determines that a portion or all of such a receivable is no longer payable to the Company or the value of the receivable is otherwise impaired, the Company and the non-redeeming Members may be adversely affected because the Company may be unable, or may elect not, to collect the amount of any overpayment made to a redeeming Member. See “—Risks Related to the Company’s Structure—The Company’s Financial Statements are, and in the Future Will Ultimately be, Based on Estimates of Valuations Provided by Third


86


Table of Contents

Party Advisors Which May not be Accurate or May Need to be Adjusted in the Future”. Any corresponding restatement of and reduction in the NAV of the Company will be borne by the non-redeeming Members.
 
Risks on Liquidation
 
Distributions in liquidation of the Company will be made in accordance with the Members’ respective capital account balances. Timing of such liquidating distributions will be based in large part on the Company’s ability to withdraw from underlying Investment Funds, which will in turn depend in large part on the Investment Funds’ ability to withdraw from the applicable Advisor Funds. Since certain Advisor Funds may impose significant restrictions on withdrawal (including without limitation, minimum holding periods, infrequent withdrawal dates, holdbacks, and the segregation of assets by the Advisor Funds through the use of side-pockets), and other Advisor Funds may have suspended, delayed or otherwise limited redemptions, Members may not receive final liquidating distributions for a significant period of time following a determination to dissolve the Company, potentially several years. In addition to liquidation of the Company, the risks described above will also apply if the Managing Member determines to cease the Company’s operations and the Company compulsorily redeems Members.
 
Managed Account Allocations Expose the Investment Funds to Liability Exceeding Allocations
 
The Investment Funds may place assets with a number of Advisors by opening Managed Accounts (either directly or via Portfolio Companies). It is possible, given the leverage at which certain of the Advisors of an Investment Fund will trade, that allocations of an Investment Fund to an Advisor through a Managed Account could result in losses that exceed the amount the Investment Fund had allocated to such Advisor to invest. Therefore, Managed Accounts expose the Investment Funds to theoretically unlimited liability. This risk is also applicable to allocations made by the Investment Funds to Portfolio Companies because of the possibility that the limited liability provided by Portfolio Companies could be successfully challenged based on various legal theories which could be proffered.
 
An Investment Fund May Not be Able to Vote or May Limit its Voting Abilities
 
The managing member of an Investment Fund may determine, in its sole discretion, to limit the Investment Fund’s voting interest in certain Advisor Funds, including, without limitation, in order to allow other investment vehicles managed by the managing member or its affiliates to avoid becoming subject to certain prohibitions under the Investment Company Act with respect to affiliated transactions. To the extent the Investment Fund holds non-voting interests, or contractually forgoes the right to vote in respect of the voting securities of an Advisor Fund, the Investment Fund will not be able to vote on matters that require the approval of the interest-holders of the Advisor Fund, including matters potentially adverse to the interests of the Investment Fund and its members, including the Company.
 
Lack of Operating History of Certain Advisors; Past Performance of Advisors is not Indicative of Future Results
 
Certain of the Advisors have short or limited or even no operating histories. In addition, the information the managing member of an Investment Fund has and will obtain about an Advisor may be limited. As such, the ability of the managing member of an Investment Fund to evaluate past performance or to validate investment strategies of such Advisors will be limited. Moreover, even to the extent an Advisor has a long operating history, the past investment performance of any of the Advisors should not be construed as an indication of the future results of the Advisors or of the Investment Funds or the Company. In addition, the investment professionals within the Advisors and their strategies may change over time. This risk is related to, and enhanced by, the risks created by the fact that the managing member of an Investment Fund relies upon information provided to it by the Advisors that is not, and cannot be, independently verified.
 
Advisors Invest Independently and May Hold Economically Offsetting Positions
 
Each of the Advisors generally makes investment decisions wholly independently of other Advisors and may at times hold, or cause the Company and/or the Investment Funds to hold, economically offsetting positions. To the


87


Table of Contents

extent that the Advisors, the Company and/or the Investment Funds do, in fact, hold such positions, the Company’s portfolio, considered as a whole, may not achieve any gain or loss despite incurring fees and expenses in connection with such positions. In addition, an Advisor may be compensated based on the performance of its portfolio. Accordingly, there often may be times when a particular Advisor may receive performance based compensation in respect of its portfolio for a period even though an Investment Fund’s or the Company’s NAV may not have increased, or may even have decreased, during such period. Furthermore, it is possible that, from time to time, various Advisors may be competing with each other for the same positions in one or more markets. There can be no assurance that choosing a combination of Advisors for an Investment Fund will prove to be any more successful than would the selection of a single Advisor for such Investment Fund.
 
Advisors May Have Limited Capacity to Manage Additional Investment Fund Investments, Which Could Cause Dilution or Concentration of the Company’s Investments or Negatively Affect Allocation of Investments
 
Certain Advisors’ trading approaches presently can accommodate only a limited amount of capital. Accordingly, each Advisor has the right to refuse to manage some or all of the Investment Funds’ assets that the managing member of an Investment Fund may wish to allocate to such Advisor. Further, in the case of Advisors that limit the amount of additional capital that they will accept from an Investment Fund, continued sales of membership units of such Investment Fund and interests of Advisor Funds in which such Investment Fund invests would dilute the indirect participation of existing members of such Investment Fund, including the Company, with such Advisors. See ITEM 1. “BUSINESS—PERFORMANCE OF THE COMPANY—Certain Considerations Relating to Limited Capacity of Potential Advisors”. Due to the asset-based fees that Advisors will normally be entitled to receive, Advisors may have an incentive to accept additional capital and may do so even where their respective investment programs cannot accommodate such additional capital.
 
In determining capital allocations among Advisors, the managing member of the Investment Funds may consider, among other factors, constraints on an Advisor’s capital capacity. See ITEM 1. “BUSINESS—PERFORMANCE OF THE COMPANY—Certain Considerations Relating to Limited Capacity of Potential Advisors”. Advisors may in their discretion also limit the capacity available to the Company or other investment funds or accounts managed by the Managing Member or its affiliates after a specific date. In these cases, the managing member of the Investment Funds, in order to provide for long-term management of the Investment Funds, may determine to increase the Investment Funds’ investments in an Advisor more than would otherwise be the case. Such allocations may result in the Investment Funds’ portfolio being more concentrated from time to time and for substantial periods of time. As a result of any such concentration, the Investment Funds’ portfolio may be subject to more rapid changes in value than would be the case if the Investment Funds’ portfolio were less concentrated and the economic returns of the Investment Funds and the Company may thereby be materially adversely affected.
 
In determining how to allocate investment opportunities among the Investment Funds and any other investment funds or accounts, the managing member will take into account the investment objectives of each such investment fund or account, the capital capacity of the Advisors, and such other considerations as deemed relevant in its sole discretion. Certain Advisors to which the Investment Funds have previously allocated assets may be closed to new investments or may otherwise limit subscriptions (a “Closed Advisor”). The managing member of the Investment Funds may determine, for various reasons, including without limitation, strategic fit and other portfolio construction considerations, that a Closed Advisor is more appropriately included as part of the portfolio of another of its investment funds or accounts rather than the Investment Funds. In such event, the managing member of the Investment Funds may cause the Investment Funds to transfer interests in such Closed Advisor to another investment fund or account managed by the managing member of the Investment Funds, notwithstanding that such Closed Advisor may continue to be an appropriate investment for the Investment Funds. Any such transfer may give rise to potential conflicts of interest. Any such transfer would be effected at a price equal to the redemption price that otherwise would have been payable to the Investment Fund in respect of such Closed Advisor upon redemption of such interests. The transfer price will not take into account any value associated with the transfer of the Investment Fund’s investment holding period, if any, in a Closed Advisor, or the prior high NAV associated with the transferred interests.


88


Table of Contents

Advisor Funds’ Securities are Generally Illiquid Which May Increase Costs and Limit Redemptions
 
The securities of the Advisor Funds in which the Investment Funds (directly or through Advisors) invest or plan to invest may be illiquid. Subscriptions to purchase the securities of Advisor Funds are generally subject to restrictions or delays. In addition, the Investment Funds may be limited in their ability to make changes to allocations due to potential redemption restrictions of the Advisor Funds, including notice periods and limited redemption dates, the ability of the Advisor Funds to suspend and postpone redemptions, and lockups on redemptions of securities of the Advisor Funds. Further, the Advisor may not be able to dispose of Advisor Fund securities that it has purchased in a timely manner and, if adverse market conditions were to develop during any period in which the Advisor is unable to sell Advisor Fund securities, the Advisor might obtain a significantly less favorable price than that which prevailed when it decided to buy or sell such securities.
 
Frequent Trading and Turnover Typically Result in High Transaction Costs and the Investment Funds Have No Control Over This Turnover
 
It is expected that Advisors will make frequent trades in securities and other investments. Frequent trades typically result in high transaction costs. In addition, the Advisors may invest on the basis of short-term market considerations. The turnover rate within the Advisors may be significant, potentially involving substantial brokerage commissions and fees. The Investment Funds and, in turn, the Company will have no control over this turnover. As a result, it is anticipated that a significant portion of the Company’s income and gains, if any, may be derived from ordinary income and short-term capital gains. In addition, the withdrawal of an Investment Fund from an Advisor could involve expenses to the Investment Fund under the terms of the Investment Fund’s investment with that Advisor.
 
Indemnification of Advisors May Create Costs for the Company and the Investment Funds
 
The Company and the Investment Funds may agree to indemnify certain of the Advisors and their respective officers, directors, and affiliates from any liability, damage, cost, or expense arising out of or in connection with, among other things, (i) acts or omissions relating to the offer or sale of units by the Investment Funds and (ii) services provided by the Advisors directly or indirectly on behalf of the Company. In addition, Advisor Funds and Portfolio Companies in which the Company and the Investment Funds invest may also agree to indemnify Advisors and their respective officers, directors, and affiliates. Any such indemnification obligations incurred directly or indirectly by the Company may adversely affect the Company’s performance. Currently, neither the Company nor the Investment Funds is a party to any direct indemnification agreements with Advisors. Accordingly, the Company and the Investment Funds are under no direct contractual obligation to indemnify any of the Advisors against inaccurate or untimely valuations of investments or NAV and although the Company and the Investment Funds may, the Company and the Investment Funds currently do not intend to, enter into any such direct indemnification agreements with Advisors.
 
Allocation of the Company’s Assets May Not Protect the Company from Exposure to Economic Downturns in Any Investment Fund or Investment Sector
 
The Managing Member establishes allocations among the Investment Sectors in a manner consistent with the Company’s investment objective. The identity of, and relative investments of capital among, the Investment Sectors will be determined by the Managing Member, in its sole discretion, based on factors deemed relevant to the Managing Member, which may include the amount of the Company’s assets under management, constraints on the capital capacity of the Investment Fund and Advisors, the availability of attractive opportunities, and other portfolio construction considerations. There is no assurance that the Managing Member’s allocation decisions will be successful. In addition, the Managing Member’s ability to make ongoing changes to the allocation of the Company’s assets will be limited due to the redemption provisions of the Investment Funds in which the Company’s assets are invested, including limited redemption dates, notice periods, minimum holding periods, minimum holding amounts, and/or the possibility of postponement or suspension of redemptions. Any such limitation may be significant. These factors could have an adverse effect on the ability of the Company to successfully and efficiently achieve its investment objective or a market position appropriately reflecting its asset base.


89


Table of Contents

Investment Related Risks
 
Following is a discussion of certain of the investments and strategies that are expected to be made or utilized by the Advisors of the Investment Funds and certain of the principal risks associated with such investments and strategies. It is possible that an Advisor will make investments and utilize strategies that are not described below, and any such investment or strategy will be subject to its own particular risks.
 
Risks Related to Investment and Trading
 
An Investment in the Company Involves a High Degree of Risk That the Entire Amount Invested May be Lost; Investment Results May Vary Substantially over Time
 
An investment in the Company involves a high degree of risk, including the risk that the entire amount invested may be lost. The Advisors will invest in and actively trade financial instruments using highly complex strategies and investment techniques with significant risk characteristics, including risks arising from the volatility of the fixed income, commodity, currency and equity markets, risks of concentration, risks of short sales, risks of leverage, risks arising from the potential illiquidity of derivative instruments and the potential illiquidity of certain emerging markets, the risk of loss from counterparty and broker defaults, risk of inaccuracy of information received from Advisors and the risk of borrowing to meet redemption requests. No guarantee or representation is made that the Company’s, the Investment Funds’ or the Advisors’ investment programs will be successful, that the various investment strategies utilized or investments made will have low correlation with each other or that the Company’s returns will exhibit low correlation with an investor’s traditional investment portfolio. Each Advisor’s investment program may utilize such investment techniques as margin transactions, option transactions, short sales, forward contracts and futures contracts, which involve substantial volatility and can, in certain circumstances, substantially increase the adverse impact to which the Investment Funds and the Company may be subject. All investments made by the Company risk the loss of capital. Investment results may vary substantially over time. Certain Advisors may have no limits with respect to the types and sizes of investments that they may make. See ITEM 1. “BUSINESS—INVESTMENT PROGRAM”.
 
PAST RESULTS OF THE COMPANY, THE INVESTMENT FUNDS, AND THE ADVISORS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. NO ASSURANCE CAN BE MADE THAT PROFITS WILL BE ACHIEVED OR THAT SUBSTANTIAL LOSSES WILL NOT BE INCURRED.
 
The Advisors May be Unable to or May Choose not to Seek to Achieve their Investment Goals; Advisors May Not be Able to Locate Suitable Investment Opportunities
 
Many of the Advisors will, among other things, seek to utilize specialized investment strategies, follow allocation methodologies, apply investment models or assumptions, achieve a certain level of performance relative to specified benchmarks, and enter into hedging and other strategies intended, among other things, to affect the Advisors’ performance, risk levels, and/or market correlation. There can be no assurance that any Advisor will have success in achieving any goal related to such practices. The Advisors may be unable to, or may choose in their judgment not to seek to, achieve such goals. In addition, there is a risk that Advisors may invest outside their strategies, which could have a negative impact on the Advisors’ performance and in turn on the Company.
 
The success of an Advisor’s trading activities will depend on, among other things, the Advisor’s ability to identify overvalued and undervalued investment opportunities and to exploit price discrepancies in the capital markets. Identification and exploitation of the investment strategies to be pursued by an Advisor involve a high degree of uncertainty. No assurance can be given that the Advisors will be able to locate suitable investment opportunities in which to deploy all their capital. A decline in, or lack of volatility and pricing inefficiency of, the markets in which an Advisor seeks to invest, changing, evolving and maturing markets, the increased number of market participants in competition with the strategies deployed by Advisors, as well as other market factors, may reduce the number and scope of an Advisor’s investment opportunities available to an Advisor.


90


Table of Contents

Competition
 
The Advisors compete with a large number of firms. Competitive investment activity by other firms tends to reduce the Advisors’ opportunities for profit by reducing the magnitude as well as the duration of the market inefficiencies which they seek to exploit.
 
The Use of Leverage May Substantially Increase the Adverse Impact to Which the Investment Funds’ Investment Portfolios May be Subject
 
As described under ITEM 1. “BUSINESS—PERFORMANCE OF THE COMPANY—Hedging, Leverage and Other Strategies,” it is expected that the Investment Funds and the Advisors will incur leverage in various forms. Such leverage may take the form of loans for borrowed money, trading on margin or other forms of direct and indirect borrowings, or derivative instruments that are inherently leveraged, including, among others, forward contracts, futures contracts, options, swaps and reverse repurchase agreements, and other instruments and transactions that are inherently leveraged. The utilization of leverage will increase the volatility of the Company’s investments. The managing member of the Investment Funds may seek to adjust the degree of leverage with which each Investment Fund as a whole invests by taking the Advisors’ anticipated leverage use into account when allocating and reallocating the Investment Fund’s assets among the Advisors. However, the managing member of the Investment Funds generally will not have any right to adjust the amount of leverage utilized by any of the Advisors, and generally does not exercise such right if available. In the discretion of its managing member, an Investment Fund may make an investment in an Advisor Fund through a swap, option or otherwise in a manner structured to provide greater leverage than a direct investment in the Advisor Fund, which may increase the risks to the Investment Fund relative to a direct investment in the Advisor Fund. In addition, the Advisors may buy and sell securities on margin and otherwise utilize leverage, further increasing the volatility of the Company’s direct or indirect investments.
 
The use of leverage by the Investment Funds, Advisor Funds, Portfolio Companies or Advisors can substantially increase the adverse impact to which the Company’s investment portfolio may be subject. Trading securities on margin results in interest charges and, depending on the amount of trading activity, such charges could be substantial. The amount of leverage or borrowings which the Company, Investment Funds, Advisor Funds, Portfolio Companies and Advisors may have outstanding at any one time may be large in relation to their capital. Consequently, the level of interest rates generally, and the rates at which the Investment Funds, Advisor Funds, Portfolio Companies and Advisors can borrow in particular, can affect the operating results of the Company. The low margin deposits normally required in futures and forward trading permit a high degree of leverage; accordingly, a relatively small price movement in a futures contract can result in immediate and substantial losses to the investor. Such a high degree of leverage necessarily entails a high degree of risk. In the event that an Investment Fund or a Portfolio Company enters into an investment management agreement with an Advisor that utilizes leverage in its investment program, the Investment Fund or Portfolio Company may become subject to claims by financial intermediaries that extended “margin” loans to such Advisor in respect of the applicable Managed Account. Such claims could exceed the value of the assets allocated to such Advisor by the Investment Fund or Portfolio Company. The risks involved in the use of leverage are increased to the extent an Investment Fund leverages its capital. The Company generally will not utilize leverage directly, although it may borrow to, among other things, fund redemptions and pay expenses.
 
The Company, Investment Funds, Advisor Funds and Portfolio Companies will incur expenses, which may include, without limitation, interest charges and commitment fees, in connection with any leverage that it utilizes, which expenses could be significant. In addition, the rights of any lenders to the Company, Investment Funds, Advisor Funds and Portfolio Companies to receive payments of interest or repayments of principal will be senior to those of the Members or the investors in such entities, and the terms of any borrowings may contain provisions that limit certain activities of such entities or the Advisors, including the ability to make distributions.
 
In lieu of, or in addition to, obtaining a revolving credit line, the Company, Investment Funds, Advisor Funds and Portfolio Companies may determine from time to time to attempt to borrow funds as and when needed, as opposed to relying on committed facilities, with respect to all or a portion of their borrowing needs. Subject to applicable law, the Company, Investment Funds, Advisor Funds and Portfolio Companies may make borrowings


91


Table of Contents

from Goldman Sachs on this basis. Such borrowings would therefore generally not involve the payment of any commitment fees, but may result in a higher interest rate when borrowings are made than would have been the case had a committed facility been in place, and could leave the Company, Investment Funds, Advisor Funds or Portfolio Companies at risk in situations where no such financing is available, or is only available at high rates. In addition, the terms of any such borrowings may provide that such borrowings may be subject to repayment at any time upon demand by the lender, which could occur at a time when complying with such demand could have a material adverse effect on the Investment Funds, Advisor Funds or Portfolio Companies and, in turn, the Company. In addition, a lender may terminate such borrowings upon the occurrence of certain events, including, without limitation, events of default or termination events. Any such event with respect to a borrowing could materially adversely affect the Company. The Company will also be subject to other risks related to the use of leverage, which may have an adverse impact on the Company.
 
Depending upon the form of leverage utilized by the Company, Investment Funds, Advisor Funds and Portfolio Companies, the applicable lender may impose certain restrictions or requirements on the operations of the Company, Investment Funds, Advisor Funds or Portfolio Companies including, without limitation, restrictions relating to the permitted investments of the Company, Investment Funds, Advisor Funds or Portfolio Companies and redemptions therefrom, and requirements with respect to the valuation procedures of the Company, Investment Funds, Advisor Funds and Portfolio Companies, the liquidity of the Company, Investment Funds, Advisor Funds and Portfolio Companies, and the performance or other reports or notices to be provided to the relevant lender by the Company or the applicable Investment Fund, Advisor Fund or Portfolio Company. From time to time, a lender to the Company, Investment Funds, Advisor Funds or Portfolio Companies may also require that such entity reduce its leverage ratio. This may occur as a result of the decline in the value of the assets of the Company or the applicable Investment Fund, Advisor Fund or Portfolio Company or for other reasons. If this occurs, the Company may be required to redeem interests in Investment Funds or the Investment Funds may be required to redeem interests in Advisor Funds when they otherwise would not have done so.
 
Convergence Risk May Result in Significant Losses of the Investment Funds and the Company
 
Certain Advisors will take long positions in securities believed to be undervalued and short positions in securities believed to be overvalued. In the event that the perceived mispricings underlying one or more Advisors’ trading positions were to fail to converge toward, or were to diverge further from, relationships expected by such Advisors, the Investment Funds and the Company may incur significant losses.
 
Possible Effects of Speculative Position Limits Could Adversely Affect the Operations and Profitability of the Investment Funds and the Company
 
The CFTC, the U.S. commodities exchanges and certain offshore commodity exchanges have established limits referred to as “speculative position limits” or “position limits” on the maximum net long or net short (or, for some commodities, the gross) positions which any person or group of persons may own, hold or control in certain futures or options contracts. No such limits presently exist in the forward contract markets or on most non-U.S. exchanges.
 
Under currently applicable regulations, each of the Investment Funds that allocates its assets to Advisors who, through Managed Accounts or Portfolio Companies, trade in commodities on behalf of the Investment Fund could be required to comply with position limits as if it were a single trader, absent obtaining exemptive relief therefrom. Many of the major U.S. exchanges have eliminated speculative position limits and have substituted position accountability rules that would permit Advisors of an Investment Fund to trade without restriction as long as the Advisor can demonstrate the positions acquired were not acquired for the purpose of manipulating the market. To the extent a single speculative position limit is not applicable to the Advisors’ trading in any or all futures, the different Advisors of an Investment Fund are able to acquire larger positions on behalf of such Investment Fund. Absent such exemptive relief or exchange rule changes, the position limits, especially in certain markets, may be quite restrictive. There can be no assurance that exemptive relief will continue to be available. The modification of trading strategies or liquidation of positions by the Advisors, if required to comply with position limits, could adversely affect the operations and profitability of the Investment Funds and therefore the Company.


92


Table of Contents

The Commodity Exchange Act provides that trading done by persons directly or indirectly under the same control or trading as one pursuant to an expressed or implied agreement or understanding will be aggregated for determining compliance with applicable position limits. There is a possibility that the positions held by some or all Advisors of an Investment Fund that, through Managed Accounts or Portfolio Companies, trade in commodities on behalf of the Investment Fund and their respective principals could be aggregated under one of the foregoing principles or applicable exchange regulations with those held by certain other Advisors of such Investment Fund. If a commodity exchange or any other regulatory body were to aggregate the positions held by certain Advisors of an Investment Fund, it may have a material adverse effect on the ability of each of the affected Advisors to trade in such markets.
 
Short Selling Creates the Risk of Significant Losses
 
Advisors may engage in short selling. Short selling involves selling securities that may or may not be owned and borrowing the same securities for delivery to the purchaser, with an obligation to replace the borrowed securities at a later date. Short selling allows the investor to profit from declines in the value of securities. A short sale creates the risk of a theoretically unlimited loss, in that the price of the underlying security could theoretically increase without limit, thus increasing the cost of buying those securities to cover the short position. There can be no assurance that the security necessary to cover a short position will be available for purchase. Purchasing securities to close out the short position can itself cause the price of the securities to rise further, thereby exacerbating the loss.
 
Advisors may make “short sales against-the-box,” in which they will sell short securities they own or have the right to obtain without payment of additional consideration. If an Advisor makes a short sale against-the-box, it will be required to set aside securities equivalent in kind and amount to the securities sold short (or securities convertible or exchangeable into those securities) and will be required to hold those securities while the short sale is outstanding. Advisors will incur transaction costs, including interest expenses, in connection with opening, maintaining and closing short sales against-the-box.
 
Many jurisdictions have recently imposed restrictions and reporting requirements on short selling. In particular, in the fall of 2008, the SEC temporarily suspended short selling on stocks of over 950 publicly traded companies. These restrictions and reporting requirements may prevent the Advisors from successfully implementing their investment strategies, including without limitation as part of their long/short strategies or in connection with hedging their investments, and achieving their investment objective. In addition, reporting requirements relating to short selling may provide transparency to the Advisors’ competitors as to their short positions, which may have an adverse effect on the Investment Funds and, in turn, the Company.
 
The Ability of an Investment Fund to Hedge Successfully will Depend on the Particular Advisor’s Ability to Predict Pertinent Market Movements Which Cannot be Assured
 
The Investment Funds, Advisors and Advisor Funds may or may not employ hedging techniques. There can be no assurance that such hedging techniques will be effective or that they will result in more favorable returns than would have been the case had they not been employed. Moreover, while such hedging techniques are intended to protect investors from changes in the valuation of the securities and other instruments in which the Company invests, the Company will not generally benefit when the value of such securities and other instruments increases.
 
Hedging techniques could involve a variety of derivative transactions, including futures contracts, exchange-listed and over-the-counter put and call options on securities, financial indices, forward foreign currency contracts, and various interest rate transactions (collectively, “Hedging Instruments”). Hedging techniques involve risks different from those of underlying investments. In particular, the variable degree of correlation between price movements of Hedging Instruments and price movements in the position being hedged creates the possibility that losses on the hedge may be greater than gains in the value of an Investment Fund’s positions. In addition, certain Hedging Instruments and markets may not be liquid in all circumstances. As a result, in volatile markets, transactions in certain of these instruments may not be able to be closed out without incurring losses substantially greater than the initial deposit. Although the contemplated use of these instruments should tend to minimize the risk of loss due to a decline in the value of the hedged position, at the same time they tend to limit any potential gain that might result from an increase in the value of such position. The ability of the Investment


93


Table of Contents

Funds and the Advisors to hedge successfully will depend on the ability of the Investment Funds and the Advisors to predict pertinent market movements, which cannot be assured. There is also a risk that an Investment Fund or an Advisor may over-hedge or under-hedge a particular exposure because it has incomplete information regarding the amount of such exposure to which its investments are subject. The Investment Funds and Advisors are not required to hedge and there can be no assurance that hedging transactions will be available or, even if undertaken, will be effective. In addition, it is not possible to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in non-U.S. currencies because the value of those securities is likely to fluctuate as a result of independent factors not related to currency fluctuations. Finally, the daily variation margin deposit requirements in futures contracts that may be sold by the Investment Funds Advisors or Advisor Funds would create an ongoing greater potential financial risk than would options transactions, where the exposure is limited to the cost of the initial premium and transaction costs paid by the Advisor or Advisor Funds.
 
Forward Contracts May Entail Significant Risks and Uncertainties Which Could Result in Substantial Losses to the Investment Funds and the Company
 
Advisors may enter into forward contracts, which are the purchase or sale of a specific quantity of a commodity, government security, foreign currency, or other financial instrument at the current or spot price, with delivery and settlement at a specified future date. Because it is a completed contract, a purchase forward contract can be a cover for the sale of a futures contract. The Advisors may enter into forward contracts for hedging purposes and non-hedging purposes (i.e., to increase returns). Forward contracts are transactions involving an Advisor’s obligation to purchase or sell a specific instrument at a future date at a specified price. Forward contracts may be used by the Advisors for hedging purposes to protect against uncertainty in the level of future foreign currency exchange rates, such as when an Advisor anticipates purchasing or selling a non-U.S. security. For example, this technique would allow the Advisor to “lock in” the U.S. dollar price of the security. Forward contracts may also be used to attempt to protect the value of an Advisor’s existing holdings of non-U.S. securities. There may be, however, an imperfect correlation between an Advisor’s non-U.S. securities holdings and the forward contracts entered into with respect to those holdings. Forward contracts may also be used for non-hedging purposes to pursue an Advisor’s investment objective, such as when an Advisor anticipates that particular non-U.S. currencies will appreciate or depreciate in value, even though securities denominated in those currencies are not then held in the Advisor’s portfolio. There is no general requirement that the Advisors hedge all or any portion of their exposure to foreign currency risks.
 
Forward contracts and options thereon, unlike futures contracts, are not traded on exchanges and are not standardized; rather, banks and dealers act as principals in these markets, negotiating each transaction on an individual basis. Forward and “cash” trading is substantially unregulated; there is no limitation on daily price movements and speculative position limits are not applicable. The principals who deal in the forward markets are not required to continue to make markets in the currencies or commodities they trade and these markets can experience periods of illiquidity, sometimes of significant duration. There have been periods during which certain participants in these markets have refused to quote prices for certain currencies or commodities or have quoted prices with an unusually wide spread between the price at which they were prepared to buy and that at which they were prepared to sell. Disruptions can occur in any market traded by an Advisor due to unusually high trading volume, political intervention or other factors. Arrangements to trade forward contracts may be made with only one or a few counterparties, and liquidity problems therefore might be greater than if such arrangements were made with numerous counterparties. Significant risks and uncertainties exist in dealing with counterparties in forward contracts. The imposition of controls by governmental authorities might also limit such forward (and futures) trading to less than that which the Advisors would otherwise recommend, to the possible detriment of the Advisor and therefore the applicable Investment Fund and the Company. Market illiquidity or disruption could result in major losses to an Investment Fund and the Company. In addition, Managed Accounts or Advisor Funds in which an Investment Fund has a direct or indirect interest may be exposed to credit risks with regard to counterparties with whom the Advisors trade as well as risks relating to settlement default. Such risks could result in substantial losses to the Investment Funds and the Company.


94


Table of Contents

Swap Agreements May Increase or Decrease the Overall Volatility of an Investment Fund’s Portfolio
 
Advisors and Advisor Funds may enter into equity, interest rate, index, currency rate, total return, and other types of swap agreements. The transactions are entered into in an attempt to obtain a particular return without the need to actually purchase the reference asset. Swap agreements can be individually negotiated and structured to include exposure to a variety of different types of investments or market factors. Depending on their structure, swap agreements may increase or decrease an Investment Fund’s exposure to long-term or short-term interest rates (in the United States or abroad), foreign currency values, mortgage securities, corporate borrowing rates, or other factors such as security prices, baskets of securities, or inflation rates. Swap agreements can take many different forms. Advisors and Advisor Funds are not limited to any particular form of swap agreement.
 
Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than a year. In a standard swap transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments, which may be adjusted for an interest factor. The gross returns to be exchanged or “swapped” between the parties are generally calculated with respect to a “notional amount” (i.e., the return on or increase in value of a particular U.S. dollar amount invested at a particular interest rate, in a particular foreign currency, or in a “basket” of securities representing a particular index).
 
Swap agreements will tend to shift investment exposure from one type of investment to another. For example, if an Advisor agrees to exchange payments in U.S. dollars for payments in foreign currency, the swap agreement would tend to decrease the Company’s exposure to U.S. interest rates and increase its exposure to foreign currency and interest rates. Depending on how they are used, swap agreements may increase or decrease the overall volatility of an Investment Fund’s portfolio.
 
Most swap agreements entered into by an Advisor or Advisor Fund would require the calculation of the obligations of the parties to the agreements on a “net basis”. Consequently, an Advisor or Advisor Fund’s current obligations (or rights) under a swap agreement generally will be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the “net amount”). The risk of loss with respect to swaps is limited to the net amount of interest payments that an Advisor or Advisor Fund is contractually obligated to make. If the other party to a swap defaults, an Investment Fund’s risk of loss consists of the net amount of payments that the Advisor or Advisor Fund contractually is entitled to receive. If a swap agreement calls for payments by an Investment Fund, an Advisor Fund or Portfolio Company, such entity must be prepared to make such payments when due. In addition, if the counterparty’s creditworthiness declined, the value of a swap agreement would be likely to decline, potentially resulting in losses to the Investment Fund and the Company.
 
The Prices of an Investment Fund’s Investments Can be Highly Volatile and Influenced by External Factors Outside the Control of Such Investment Fund
 
The prices of an Investment Fund’s investments, and therefore the NAVs of the Investment Fund and the Company, can be highly volatile. Price movements of forward contracts, futures contracts and other derivative contracts in which an Advisor may invest are influenced by, among other things, interest rates, changing supply and demand relationships, trade, fiscal, monetary and exchange control programs and policies of governments, and national and international political and economic events and policies. In addition, governments from time to time intervene, directly and by regulation, in certain markets, particularly those in currencies, financial instruments and interest rate-related futures and options. Such intervention often is intended directly to influence prices and may, together with other factors, cause all of such markets to move rapidly in the same direction because of, among other things, interest rate fluctuations. Moreover, since internationally, including certain of the markets in which the Advisors will invest there may be less government supervision and regulation of worldwide stock exchanges and clearinghouses than in the United States, Advisors also are subject to the risk of the failure of the exchanges on which their positions trade or of their clearinghouses, and there may be a higher risk of financial irregularities and/or lack of appropriate risk monitoring and controls.
 
The Company and the Investment Funds may be adversely affected by the recent deteriorations in the financial markets and economic conditions throughout the world, some of which may magnify the risks described herein and


95


Table of Contents

have other adverse effects. Economic and financial market conditions have continued to deteriorate since 2008 and have resulted in increasing volatility and illiquidity in the global credit, debt and equity markets generally. Market participants’ initial concerns were focused primarily on credit and valuation problems in the sub-prime mortgage market and resultant volatility and illiquidity in the sub-prime segment of the mortgage-backed securities market, but these concerns have broadened to the global credit and interbank money markets generally, and a wide range of financial institutions and markets, asset classes and sectors, causing decreased risk tolerance by investors and significantly tightened availability of credit. As a result, certain securities have become less liquid and more difficult to value, and thus harder to dispose of. This deterioration has been exacerbated by, among other things, uncertainty regarding the extent of the problems in the mortgage industry and the degree of exposure of financial institutions and other market participants, increased aversion to risk, concerns over inflation, instability in energy costs, complex geopolitical issues, the lack of availability and higher cost of credit and the declining real estate and mortgage markets in the United States and elsewhere. These factors, combined with variable commodity pricing, declining business and consumer confidence, increased unemployment and diminished expectations for predictable global financial markets, have led to a global economic slowdown and fears of a global recession. The duration and ultimate effect of current market conditions cannot be forecast, nor is it known whether or the degree to which such conditions may worsen. The continuation or further deterioration of current market conditions and continued uncertainty regarding economic markets generally could result in further declines in the market values of potential investments or declines in market values. Such declines could lead to losses and diminished investment opportunities for the Company and the Investment Funds, could prevent the Company and the Investment Funds from successfully meeting their investment objectives or could require the Company and the Investment Funds to dispose of investments at a loss while such unfavorable market conditions prevail. While current market conditions persist, the Company and the Investment Funds will also be subject to heightened risks associated with the potential failure of brokers, counterparties and exchanges, as well as increased systemic risks associated with the potential failure of one or more systemically important institutions. See “—Failure of the Investment Funds’ Counterparties, Brokers, and Exchanges Exposes Investment Funds to Credit Risks in Various Forms”.
 
Failure of the Investment Funds’ Counterparties, Brokers, and Exchanges Exposes Investment Funds to Credit Risks in Various Forms
 
The Investment Funds will be exposed to the credit risk of the counterparties with which, or the brokers, dealers and exchanges through which, the Advisors deal, whether they engage in exchange-traded or off-exchange transactions. More than one of the Investment Funds at any time may be subject to the credit risk of the same counterparty or broker-dealer. An Advisor’s prime brokers or other parties may hold assets, including assets held as collateral for margin loans or other financing provided to such Advisor. Under the terms of such arrangements and under applicable law, a secured party may be permitted to rehypothecate such assets in connection with securities lending or other transactions entered into by the secured party. An Investment Fund may be subject to risk of loss of its assets placed on deposit with a broker by an Advisor in the event of the broker’s bankruptcy, the bankruptcy of any clearing broker through which the broker executes and clears transactions on behalf of the Advisor, or the bankruptcy of an exchange clearing house.
 
In addition, although the Commodity Exchange Act requires a commodity broker to segregate the funds of its customers, if a commodity broker fails to properly segregate customer funds, the Advisor may be subject to a risk of loss of its funds on deposit with such broker in the event of such broker’s bankruptcy or insolvency. An Investment Fund may also be subject to risk of loss of its funds on deposit with non-U.S. brokers because non-U.S. regulatory bodies may not require such brokers to segregate customer funds. An Advisor may be required to post margin for its foreign exchange transactions either with the foreign exchange dealers who are not required to segregate funds (although such funds are generally maintained in separate accounts on the foreign exchange dealer’s books and records in the name of the Advisor). Under certain circumstances, such as the inability of another customer of the commodity broker or foreign exchange dealer or the commodity broker or foreign exchange dealer itself to satisfy substantial deficiencies in such other customer’s account, an Investment Fund may be subject to a risk of loss of its funds placed on deposit with such broker or dealer, even if such funds are properly segregated.
 
In the case of a bankruptcy of the counterparties with which, or the brokers, dealers and exchanges through which, an Investment Fund deals, or in the case of a customer loss as described in the foregoing paragraph, the


96


Table of Contents

Investment Fund might not be able to recover any of its assets held, or amounts owed, by such person, even property specifically traceable to the Investment Fund, and, to the extent such assets or amounts are recoverable, the Investment Fund might only be able to recover a portion of such amounts. Further, even if the Investment Fund is able to recover a portion of such assets or amounts, such recovery could take a significant period of time. Prior to receiving the recoverable amount of the Investment Fund’s property, the Investment Fund may be unable to trade any positions held by such person, or to transfer any positions and cash held by such person on behalf of the Investment Fund. This could result in significant losses to the Investment Fund and, in turn, the Company.
 
Many of the markets in which the Advisors effect their transactions are “over-the-counter” or “interdealer” markets. Participants in these markets are typically not subject to credit evaluation and regulatory oversight as are members of “exchange based” markets. To the extent an Advisor invests in swaps, derivatives or synthetic instruments, or other over-the-counter transactions in these markets, the Advisor may take a credit risk with regard to parties with which it trades and also may bear the risk of settlement default. These risks may differ materially from those involved in exchange-traded transactions, which generally are characterized by clearing organization guarantees, daily marking-to-market and settlement, and segregation and minimum capital requirements applicable to intermediaries. Transactions entered into directly between two counterparties generally do not benefit from these protections, which, in turn, may subject an Advisor to the risk that a counterparty will not settle a transaction in accordance with agreed terms and conditions due to, among other things, a dispute over the terms of the contract or because of a credit or liquidity problem. Such “counterparty risk” is increased for contracts with longer maturities when events may intervene to prevent settlement. The inability of the Advisors to transact business with any one or any number of counterparties, the lack of any independent evaluation of the counterparties or their financial capabilities, and the absence of a regulated market to facilitate settlement, may increase the potential for losses to the Investment Funds and the Company.
 
In addition, the Advisors may engage in direct or indirect trading of securities, currencies, forward contracts, options, swaps and repurchase agreements on a principal basis. As such, the Advisors as transferee or counterparty could experience both delays in liquidating the underlying security, future or other investment and losses, including: (a) the risk of the inability or refusal to perform with respect to such transactions on the part of the principals with which the Advisor trades including, without limitation, the inability or refusal to timely return collateral posted by the Advisor; (b) possible decline in the value of any collateral during the period in which the Advisor seeks to enforce its rights with respect to such collateral; (c) the need to remargin or repost collateral in respect of transferred, assigned or replaced positions; (d) reduced levels of income and lack of access to income during such period; (e) expenses of enforcing its rights; and (f) legal uncertainty concerning the enforceability of certain rights under swap agreements and possible lack of priority against collateral posted under the swap agreements. Any such failure or refusal, whether due to insolvency, bankruptcy or other causes, could subject the Advisor and, in turn, the Investment Fund and the Company, to substantial losses. The Advisor will not be excused from performance on any such transactions due to the default of third parties in respect of other trades which in the Advisor’s trading strategies were to have substantially offset such contracts.
 
Third Party Co-Investment with Advisor Funds
 
Advisors may co-invest or form joint ventures with third parties, including affiliates of Goldman Sachs. There is a risk that such a co-investor or co-venturer may default on its participation in an investment or otherwise encounter financial difficulty, may have or develop interests inconsistent with those of the Advisor (or the Company), or may be in a position to take action with respect to an investment that is not in the best interests of the assets managed by such Advisor (or the Company).
 
Reliance on Technology
 
Certain Advisors may utilize quantitative portfolio models to seek to allocate assets. These models, among other things, may forecast relative returns for, risk levels and volatility of, and correlations among, strategies and investments. However, these models may, for a variety of reasons, fail to accurately predict such factors, including because of scarcity of historical data in respect of certain strategies and investments, erroneous underlying assumptions or estimates in respect of certain data or other defects in the models, or because future events may not necessarily follow historical norms. In particular, substantial components of the strategies employed on behalf of


97


Table of Contents

one or more of the Advisors may involve attempts at the analysis of market phenomena for which there is limited or otherwise unreliable historical data, and therefore, the risk of various statistical or other errors may be considerably higher under such circumstances. There can be no assurance that the predictive models of an Advisor are adequate or that the models will be adequately utilized by the Advisor. In addition, certain Advisors may employ investment strategies that are dependent upon various computer and telecommunications technologies. The successful implementation and operation of these strategies could be severely compromised by telecommunications failures, power loss, software-related “system crashes,” fire or water damage, or various other events or circumstances. Any such event could result in, among other things, the inability of an Advisor to establish, maintain, modify, liquidate or monitor its investments, which could have a material adverse effect on an Investment Fund, Advisor Fund or Portfolio Company and consequently, the Company.
 
Third-Party Use of Publicly Available Information or Similar Trading Strategies
 
Certain positions and the prices and terms of certain transactions undertaken by the Advisors may be required to be made publicly available. Because certain trades made by the Advisors may be based upon quantitative trading methods or other proprietary information, there is a risk that market participants may seek to reverse engineer the trading strategies implemented by the Advisors using data required to be made publicly available. The use of similar trading strategies by other persons may have a material adverse effect on the assets managed by such Advisors, and consequently the Company.
 
Risks Related to International Investments
 
Trading on Non-U.S. Exchanges May Involve Higher Risk of Financial Irregularities and/or Lack of Appropriate Risk Monitoring and Controls
 
Advisors may trade, directly or indirectly, futures and securities on exchanges located outside the United States. Some non-U.S. exchanges, in contrast to U.S. exchanges, are “principals’ markets” in which performance is solely the individual member’s responsibility with whom the Advisor has entered into a commodity contract and not that of an exchange or its clearinghouse, if any. In the case of trading on non-U.S. exchanges, the Advisors, and, in turn, the Investment Funds and the Company, will be subject to the risk of the inability of, or refusal by, the counterparty to perform with respect to contracts. Moreover, since there is generally less government supervision and regulation of non-U.S. exchanges, clearinghouses and clearing firms than in the United States, Advisors and, consequently, the Investment Funds and the Company are also subject to the risk of the failure of the exchanges on which their positions trade or of their clearinghouses or clearing firms, and there may be a higher risk of financial irregularities and/or lack of appropriate risk monitoring and controls.
 
Non-U.S. Investments Involve Special Risks not Usually Associated with Investments in U.S. Securities
 
The Advisors may invest in securities of non-U.S. issuers and the governments of non-U.S. countries, including issuers in and governments of emerging market countries. These investments involve special risks not usually associated with investing in securities of U.S. companies or the U.S. government, including political and economic considerations, such as greater risks of expropriation and nationalization, currency devaluation, debt default, regime change confiscatory taxation, the potential difficulty of repatriating funds, general social, political and economic instability and adverse diplomatic developments; the small size of the securities markets in such countries and the low volume of trading, resulting in potential lack of liquidity and in price volatility; fluctuations in the rate of exchange between currencies and costs associated with currency conversion; and certain government policies that may restrict an Investment Fund’s and its Advisors’ investment opportunities. In addition, because non-U.S. entities are not subject to uniform accounting, auditing, and financial reporting standards, practices and requirements comparable with those applicable to U.S. companies, there may be different types of, and lower quality, information available about a non-U.S. company than a U.S. company. There is also less regulation, generally, of the securities markets in many non-U.S. countries than there is in the United States, and such markets may not provide the same protections available in the United States. With respect to certain countries there may be the possibility of political, economic or social instability, the imposition of trading controls, import duties or other protectionist measures, various laws enacted for the protection of creditors, greater risks of nationalization or


98


Table of Contents

diplomatic developments which could materially adversely affect the Advisors’ investments in those countries. Furthermore, individual economies may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency, and balance of payments position. An Advisor’s investment in non-U.S. countries may also be subject to withholding or other taxes, which may be significant and may reduce the Advisor’s returns.
 
Brokerage commissions, custodial services and other costs relating to investment in international securities markets generally are more expensive than in the United States. In addition, clearance and settlement procedures may be different in non-U.S. countries and, in certain markets, such procedures have been unable to keep pace with the volume of securities transactions, thus making it difficult to conduct such transactions.
 
Investment in sovereign debt obligations of non-U.S. governments involves additional risks not present in debt obligations of corporate issuers and the U.S. government. The issuer of the debt or the governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal or pay interest when due in accordance with the terms of such debt, and an Advisor may have limited recourse to compel payment in the event of a default. A sovereign debtor’s willingness or ability to repay principal and to pay interest in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign currency reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor’s policy toward international lenders, and the political constraints to which the sovereign debtor may be subject. Periods of economic uncertainty may result in the volatility of market prices of sovereign debt to a greater extent than the volatility inherent in debt obligations of other types of issues.
 
Investment in Emerging Markets Involves Significant Risks, Including Inflation and Currency Devaluations
 
The Advisors may invest in securities of companies based in emerging markets or issued by the governments of such countries. Securities traded in certain emerging markets may be subject to risks due to the inexperience of financial intermediaries, the lack of modern technology, the lack of a sufficient capital base to expand business operations, and the possibility of temporary or permanent termination of trading. Political and economic structures in many emerging markets may be undergoing significant evolution and rapid development, and emerging markets may lack the social, political and economic stability characteristics of more developed countries.
 
As a result, the risks relating to investments in non-U.S. securities described above, including the possibility of nationalization or expropriation, may be heightened. In addition, certain countries may restrict or prohibit investment opportunities in issuers or industries deemed important to national interests and there may generally be a high degree of governmental involvement and control over the economy. Governments may decide to discontinue support for economic reform programs or impose centrally planned economies. Such changes may affect the market price, liquidity and rights of securities that may be purchased by Advisors. Settlement mechanisms in emerging securities markets may be less efficient and less reliable than in more developed markets, and placing securities with a custodian or broker-dealer in an emerging country may also present considerable risks. The small size of securities markets in such countries and the low volume of trading may result in a lack of liquidity and in substantially greater price volatility. Many emerging market countries have experienced substantial, and in some periods extremely high, rates of inflation for many years. Inflation and rapid fluctuations in inflation rates and corresponding currency devaluations and fluctuations in the rate of exchange between currencies and costs associated with currency conversion have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries. In addition, accounting, auditing and financial reporting standards that prevail in certain of such countries are not equivalent to standards in more developed countries and, consequently, less information is available to investors in companies located in such countries. Similarly, it may be more difficult to enforce contractual obligations. Additional risks arise from social or health issues including an increase in the prevalence of AIDS and social and civil unrest, including terrorist attacks and other acts of violence or war.
 
Many of the laws that govern private and foreign investment, equity securities transactions and other contractual relationships for sophisticated investors in certain countries, particularly in emerging markets, are not yet fully established. As a result, the Advisors may be subject to a number of unusual risks, including limited


99


Table of Contents

investor protection, contradictory legislation, incomplete, unclear and changing laws, ignorance or breaches of regulations on the part of other market participants, lack of established or effective avenues for legal redress, lack of standard practices and confidentiality customs characteristic of developed markets and lack of enforcement of existing regulations. Furthermore, it may be difficult to obtain and enforce a judgment in certain countries. There can be no assurance that this difficulty in protecting and enforcing rights will not have a material adverse effect on the Advisors and consequently, the Company and its operations. In addition, the income and gains of an Advisor and consequently, the Company may directly or indirectly be subject to withholding taxes imposed by foreign governments for which the Company or the Members may not receive a full foreign tax credit.
 
Privatizations
 
The Advisors may seek to invest in privatizations (i.e., foreign government programs of selling interests in government-owned or controlled enterprises). The ability of Advisors to participate in privatizations may be limited by local law or the terms for participation may be less advantageous than for local investors. There can be no assurance that privatization programs will be available or successful.
 
Foreign Currency Transactions and Exchange Rate Risk Create Additional Risks for Advisors Investing in Certain Financial Instruments
 
Advisors may invest in equity and equity-related securities denominated in non-U.S. currencies and in other financial instruments, the price of which is determined with reference to such currencies. Advisors may engage in foreign currency transactions for a variety of purposes, including to “lock in” the U.S. dollar price of the security, between the trade and the settlement dates, the value of a security an Advisor has agreed to buy or sell, or to hedge the U.S. dollar value of securities the Advisor already owns. The Advisors may also engage in foreign currency transactions for non-hedging purposes to generate returns. The Investment Funds will, however, value their investments and other assets in U.S. dollars. To the extent unhedged, the value of each Investment Fund’s net assets will fluctuate with U.S. dollar exchange rates as well as with price changes of an Advisor’s investments in the various local markets and currencies. Forward currency contracts and options may be utilized by Advisors to hedge against currency fluctuations, but the Advisors are not required to utilize such techniques, and there can be no assurance that such hedging transactions will be available or, even if undertaken, effective.
 
Non-U.S. Futures Transactions Afford Less Protection as Rules of a Non-U.S. Exchange May Not be Enforced by a U.S. Regulator
 
Non-U.S. futures transactions involve executing and clearing trades on a non-U.S. exchange. This is the case even if the non-U.S. exchange is formally “linked” to a U.S. exchange, whereby a trade executed on one exchange liquidates or establishes a position on the other exchange. No U.S. organization regulates the activities of a non-U.S. exchange, including the execution, delivery, and clearing of transactions on such an exchange, and no U.S. regulator has the power to compel enforcement of the rules of the non-U.S. exchange or the laws of the non-U.S. country. Moreover, such laws or regulations will vary depending on the non-U.S. country in which the transaction occurs. For these reasons, an Investment Fund may not be afforded certain of the protections that apply to U.S. transactions, including the right to use U.S. alternative dispute resolution procedures. In particular, funds received from customers to margin non-U.S. futures transactions may not be provided the same protections as funds received to margin futures transactions on U.S. exchanges. In addition, the price of any non-U.S. futures or option contract and, therefore, the potential profit and loss resulting therefrom, may be affected by any fluctuation in the foreign exchange rate between the time the order is placed and the non-U.S. futures contract is liquidated or the non-U.S. option contract is liquidated or exercised.


100


Table of Contents

Risks Related to Securities and Other Instruments
 
Investing in Derivative Instruments Involves Risk of Loss to the Advisors That Could Materially Adversely Affect the Value of the Company’s Net Assets
 
Advisors may invest in, or enter into transactions involving, derivative instruments. These are financial instruments that derive their performance, at least in part, from the performance of an underlying asset, index, or interest rate. Examples of derivatives include, but are not limited to, futures contracts, options contracts, and options on futures contracts. A futures contract is an exchange-traded agreement between two parties, a buyer and a seller, to exchange a particular commodity or financial instrument at a specific price on a specific date in the future. An option transaction generally involves a right, which may or may not be exercised, to buy or sell a commodity or financial instrument at a particular price on a specified future date.
 
An Advisor’s use of derivatives involves risks different from, or possibly greater than, the risks associated with investing directly in securities or more traditional investments, depending upon the characteristics of the particular derivative and the Advisor’s portfolio as a whole. Derivatives permit an Advisor to increase or decrease the level of risk of its portfolio, or change the character of the risk to which its portfolio is exposed, in much the same way as the Advisor can increase or decrease the level of risk, or change the character of the risk, of its portfolio by making investments in specific securities. Certain swaps, options and other derivative instruments may be subject to various types of risks, including market risk, liquidity risk, counterparty credit risk, legal risk and operations risk. In addition, swaps and other derivatives can involve significant economic leverage and may, in some cases, involve significant risk of loss.
 
Derivatives may entail investment exposures that are greater than their cost would suggest, meaning that a small investment in derivatives could have a large potential impact on an Advisor’s performance. If an Advisor invests in derivatives at inopportune times or judges market conditions incorrectly, such investments may lower the Advisor’s return or result in a loss. An Advisor also could experience losses if derivatives are poorly correlated with its other investments, or if an Advisor is unable to liquidate its position because of an illiquid secondary market. The market for many derivatives is, or suddenly can become, illiquid. Changes in liquidity may result in significant, rapid, and unpredictable changes in the prices for derivatives.
 
Engaging in these transactions involves risk of loss to the Advisors that could materially adversely affect the value of the Company’s net assets. No assurance can be given that a liquid market will exist for any particular futures contract at any particular time.
 
The successful use of futures also is subject to the ability to predict correctly movements in the direction of the relevant market, and, to the extent the transaction is entered into for hedging purposes, to ascertain the appropriate correlation between the transaction being hedged and the price movements of the futures contract.
 
Equity Securities 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
 
Advisors may invest long and short in equities and equity-related instruments in their investment programs. Stocks, options and other equity-related instruments may be subject to various types of risk, including market risk, liquidity risk, counterparty credit risk, legal risk and operations risk. In addition, equity-related instruments can involve significant economic leverage and may, in some cases, involve significant risk of loss. “Equity securities” may include common stocks, preferred stocks, interests in real estate investment trusts, convertible debt obligations, convertible preferred stocks, equity interests in trusts, partnerships, joint ventures or limited liability companies and similar enterprises, warrants and stock purchase rights. In general, stock values fluctuate in response to the activities of individual companies and in response to general market and economic conditions. Accordingly, the value of the stocks and other securities and instruments that the Investment Funds hold directly or indirectly may decline over short or extended periods of time. The stock markets tend to be cyclical, with periods when stock prices generally rise and periods when stock prices generally decline. The volatility of equity securities means that the value of an investment in each of the Investment Funds and, in turn, the Company may increase or decrease.


101


Table of Contents

Fixed Income Securities are Subject to Credit Risk and Price Volatility
 
Advisors may invest in fixed income securities. Investment in these securities may offer opportunities for income and capital appreciation, and may also be used for temporary defensive purposes and to maintain liquidity.
 
“Fixed income securities” are obligations of the issuer to make payments of principal and/or interest on future dates, and include, among other securities: bonds, notes, and debentures issued by corporations; debt securities issued or guaranteed by the U.S. government or one of its agencies or instrumentalities or by a non-U.S. government; municipal securities; and mortgage-backed and asset-backed securities. These securities may pay fixed, variable, or floating rates of interest, and may include zero coupon obligations. Fixed income securities are subject to the risk of the issuer’s or a guarantor’s inability to meet principal and interest payments on its obligations (i.e., credit risk) and are subject to price volatility due to such factors as interest rate sensitivity, market perception of the creditworthiness of the issuer, and general market liquidity (i.e., market risk). In addition, mortgage-backed securities and asset-backed securities may also be subject to call risk and extension risk. For example, homeowners have the option to prepay their mortgages. Therefore, the duration of a security backed by home mortgages can either shorten (i.e., call risk) or lengthen (i.e., extension risk). In general, if interest rates on new mortgage loans fall sufficiently below the interest rates on existing outstanding mortgage loans, the rate of prepayment would be expected to increase. Conversely, if mortgage loan interest rates rise above the interest rates on existing outstanding mortgage loans, the rate of prepayment would be expected to decrease. In either case, a change in the prepayment rate can result in losses to investors. The same would be true of asset-backed securities, such as securities backed by car loans.
 
Generally, mortgage-backed securities on commercial (in contrast to residential) properties are not subject to prepayment risk, but are subject to other risks, including without limitation the financial well being of large tenants, local or general business climate, and ability to raise and collect rents. Mortgage loans on commercial properties often are structured so that a substantial portion of the loan principal is not amortized over the loan term, but is payable at maturity. Therefore, repayment of the loan principal often depends upon the future availability of property financing from the lenders and/or upon the current value and salability of the property.
 
High Yield Debt Investments are Subject to Significant Risks of Default, Illiquidity and Volatility
 
High yield bonds (commonly known as “junk bonds”) and other debt securities in which Advisors may invest on behalf of certain of the Investment Funds will typically be junior to the obligations of companies to senior creditors, trade creditors and employees. The lower rating of high yield debt reflects a greater possibility that adverse changes in the financial condition of the issuer or in general economic, financial, competitive, regulatory or other conditions may materially impair the ability of the issuer to make payments of principal and interest. High yield debt securities have historically experienced greater default rates than investment grade securities. The ability of holders of high yield debt to influence a company’s affairs, especially during periods of financial distress or following an insolvency, will be substantially less than that of senior creditors.
 
As with other investments, there may not be a liquid market for certain high yield debt, which could result in an Advisor being unable to sell such securities for an extended period of time, if at all. In addition, as with other types of Advisor investments, the market for high yield debt has historically been subject to disruptions that have caused significant illiquidity and substantial volatility in the prices of such securities. Consolidation in the financial services industry has resulted in fewer market makers for high yield debt, which may result in further risk of illiquidity and volatility with respect to high yield debt, and this trend may continue in the future. Furthermore, high yield debt which is held by an Advisor is often not registered under the Securities Act and, unless so registered, will not be able to be sold except pursuant to an exemption from registration under the Securities Act. This may further limit the ability of an Advisor to sell high yield debt or to obtain the desired price for high yield debt.
 
Other Debt Instruments; CBOs and CLOs
 
Advisors may directly or indirectly invest in other debt instruments (both investment-grade and non-investment grade) of companies or other entities not affiliated with countries or governments, including but not limited to, senior and subordinated corporate debt; tranches of collateralized mortgage obligations, collateralized bond obligations and collateralized loan obligations; preferred stock; corporate securities; and bank debt. Advisors


102


Table of Contents

may acquire debt securities on a private placement basis and may invest in loan participations. As with other investments made by Advisors, there may not be a liquid market for these debt instruments, which may limit the Advisors’ ability to sell these debt instruments or to obtain the desired price.
 
Advisors may also invest in collateralized bond obligations (“CBOs”) and collateralized loan obligations (“CLOs”) and other similar securities. These may be fixed pools or may be “market value” or managed pools of collateral, including commercial loans, high yield debt, structured securities and derivative instruments relating to debt. The pools are typically separated into tranches representing different degrees of credit quality, with lower rated tranches being subordinate to senior tranches. The senior tranches of CBOs and CLOs, which represent the highest credit quality in the pool, have the greatest collateralization and pay the lowest spreads over treasuries. Lower rated CBO and CLO tranches represent lower degrees of credit quality and pay higher spreads over treasuries to compensate for the attendant risks. The bottom tranches specifically receive the residual interest payments (i.e., money that is left over after the higher tiers have been paid) rather than a fixed interest rate. The returns on the junior tranches of CBOs and CLOs are especially sensitive to the rate of defaults in the collateral pool. In addition, the exercise of redemption rights, if any, by more senior CBO and CLO tranches and certain other events could result in an elimination, deferral or reduction in the funds available to make interest or principal payments to the junior tranches.
 
In addition, there can be no assurance that a liquid market will exist in any CBO or CLO when an Advisor seeks to sell its interest therein. Also, it is possible that an Advisor’s investment in a CBO or CLO will be subject to certain contractual limitations on transfer.
 
Structured Securities May Present a Greater Degree of Market Risk and May be More Volatile, Less Liquid and More Difficult to Price Accurately Than Less Complex Securities
 
Advisors may invest in structured securities. Structured securities are securities whose value is determined by reference to changes in the value of specific currencies, interest rates, commodities, indexes or other financial indicators (the “Reference”) or the relative change in two or more References. The interest rate or the principal amount payable upon maturity or redemption may be increased or decreased depending upon changes in the applicable Reference. Structured securities may be positively or negatively indexed, so that appreciation of the Reference may produce an increase or decrease in the interest rate or value of the security at maturity. In addition, changes in the interest rates or the value of the security at maturity may be a multiple of changes in the value of the Reference. Consequently, structured securities may present a greater degree of market risk than other types of securities and may be more volatile, less liquid and more difficult to price accurately than less complex securities.
 
Call Options Involve Significant Risks for Buyers and Sellers
 
Advisors may participate in, and there are risks associated with, the purchase and sale of call options. The seller (writer) of a call option which is covered (e.g., the writer holds the underlying security) assumes the risk of a decline in the market price of the underlying security below the purchase price of the underlying security less the premium received, and gives up the opportunity for gain on the underlying security above the exercise price of the option. The seller of an uncovered call option assumes the risk of a theoretically unlimited increase in the market price of the underlying security above the exercise price of the option.
 
The buyer of a call option assumes the risk of losing its entire investment in the call option. If the buyer of the call sells short the underlying security, the loss on the call will be offset in whole or in part by any gain on the short sale of the underlying security.
 
Put Options Involve Significant Risks for Buyers and Sellers
 
Advisors may participate in, and there are risks associated with, the purchase and sale of put options. The seller (writer) of a put option which is covered (e.g., the writer has a short position in the underlying security) assumes the risk of an increase in the market price of the underlying security above the sales price (in establishing the short position) of the underlying security plus the premium received, and gives up the opportunity for gain on the underlying security below the exercise price of the option. If the seller of the put option owns a put option covering an equivalent number of shares with an exercise price equal to or greater than the exercise price of the put written,


103


Table of Contents

the position is “fully hedged” if the option owned expires at the same time or later than the option written. The seller of an uncovered put option assumes the risk of a decline in the market price of the underlying security below the exercise price of the option.
 
The buyer of a put option assumes the risk of losing its entire investment in the put option. If the buyer of the put holds the underlying security, the loss on the put will be offset in whole or in part by any gain on the underlying security.
 
Reverse Repurchase Agreements May Increase the Volatility of an Investment Fund’s and the Company’s Investment Portfolio
 
The Investment Funds or the Advisors may enter into reverse repurchase agreements. A reverse repurchase agreement typically involves the sale of a security by a party to a bank or securities dealer and the selling party’s simultaneous agreement to repurchase that security for a fixed price (reflecting a rate of interest) on a specific date, and may be considered a form of borrowing for some purposes. These transactions involve risks that the value of portfolio securities being relinquished may decline below the price that must be paid when the transaction closes or that the other party to a reverse repurchase agreement will be unable or unwilling to complete the transaction as scheduled, which may result in losses to the applicable Investment Fund and the Company. Reverse repurchase agreements are a form of leverage that may also increase the volatility of an Investment Fund’s and the Company’s investment portfolio.
 
There are Significant Risks Associated with When-Issued and Forward Commitment Securities
 
Advisors may purchase securities on a “when-issued” basis and may purchase or sell securities on a “forward commitment” basis in order to hedge against anticipated changes in interest rates and prices or for speculative purposes. These transactions involve a commitment by an Advisor to purchase or sell securities at a future date (ordinarily at least one or two months later). The price of the underlying securities, which is generally expressed in terms of yield, is fixed at the time the commitment is made, but delivery and payment for the securities takes place at a later date. No income accrues on securities that have been purchased pursuant to a forward commitment or on a when-issued basis prior to delivery to the Advisor. When-issued securities and forward commitments may be sold prior to the settlement date. If an Advisor disposes of the right to acquire a when-issued security prior to its acquisition or disposes of its right to deliver or receive against a forward commitment, it may incur a gain or loss. There is a risk that securities purchased on a when-issued basis may not be delivered and that the purchaser of securities sold by an Advisor on a forward basis will not honor its purchase obligation. In such cases, the applicable Investment Fund and, in turn, the Company, may incur a loss.
 
Derivatives with Respect to High Yield and Other Indebtedness Expose Advisors to Counterparty and Issuer Risk
 
In addition to the credit risks associated with holding high yield debt securities, with respect to derivatives involving high yield and other debt, an Advisor will usually have a contractual relationship only with the counterparty of the derivative, and not with the issuer of the indebtedness. An Advisor generally will have no right to directly enforce compliance by the issuer with the terms of the derivative nor any rights of set-off against the issuer, nor have any voting rights with respect to the indebtedness. An Advisor will not directly benefit from the collateral supporting the underlying indebtedness and will not have the benefit of the remedies that would normally be available to a holder of the indebtedness. In addition, in the event of the insolvency of the counterparty to the derivative, the Advisor will be treated as a general creditor of such counterparty, and will not have any claim with respect to the underlying indebtedness. Consequently, the Advisor will be subject to the credit risk of the counterparty as well as that of the issuer of the indebtedness. As a result, concentrations of such derivatives in any one counterparty subject the Advisor, and, in turn, the applicable Investment Fund, to an additional degree of risk with respect to defaults by such counterparty as well as by the issuer of the underlying indebtedness.


104


Table of Contents

Credit Default Swaps
 
Advisors may enter into credit derivative contracts. The typical credit default swap contract requires the seller to pay to the buyer, in the event that a particular reference entity experiences specified credit events, the difference between the notional amount of the contract and the value of a portfolio of securities issued by the reference entity that the buyer delivers to the seller. In return, the buyer typically agrees to make periodic and/or upfront payments equal to a fixed percentage of the notional amount of the contract. Advisors may also purchase or sell credit default swaps on a basket of reference entities or an index. In circumstances in which Advisors do not own the debt securities that are deliverable under a credit default swap, Advisors will be exposed to the risk that deliverable securities will not be available in the market, or will be available only at unfavorable prices, as would be the case in a so-called “short squeeze”. In certain instances of issuer defaults or restructurings, it has been unclear under the standard industry documentation for credit default swaps whether or not a “credit event” triggering the seller’s payment obligation had occurred. In either of these cases, an Advisor would not be able to realize the full value of the credit default swap upon a default by the reference entity. As sellers of credit default swaps, Advisors incur leveraged exposure to the credit of the reference entity and are subject to many of the same risks they would incur if they were holding debt securities issued by the reference entity. However, Advisors will not have any legal recourse against the reference entity and will not benefit from any collateral securing the reference entity’s debt obligations. In addition, the credit default swap buyer will have broad discretion to select which of the reference entity’s debt obligations to deliver to an Advisor following a credit event and will likely choose the obligations with the lowest market value in order to maximize the payment obligations of the Advisor. Given increases in volume of credit derivatives trading in the market, settlement of such contracts may also be delayed beyond the time frame originally anticipated by counterparties. Such delays may adversely impact the Advisors’ ability to otherwise productively deploy any capital that is committed with respect to such contracts.
 
Risks of Spread Transactions
 
Where an Advisor enters into spread transactions, it is subject to the risk that the prices of the currencies underlying the positions comprising such spreads will not fluctuate in the same direction or to the same extent during the period in which the spread position is maintained. Under such circumstances, the relevant Investment Fund or Advisor Fund could sustain losses on one or both legs of the spread position.
 
The Company May be Prevented From Achieving its Objective During any Period in Which Assets are not Substantially Invested in Accordance with Principal Investment Strategies
 
Advisors may invest, for defensive purposes or otherwise, some or all of their assets in fixed income securities, money market instruments, and money market mutual funds, or hold cash or cash equivalents in such amounts as the Advisors deem appropriate under the circumstances. Pending allocation of the offering proceeds and thereafter, from time to time, the Company and the Investment Funds also may invest in these instruments. Money market instruments are short-term fixed income obligations, which generally have remaining maturities of one year or less, and may include U.S. government securities, commercial paper, certificates of deposit, bankers’ acceptances issued by U.S. branches of U.S. banks that are members of the Federal Deposit Insurance Corporation, and repurchase agreements. The Company and the Investment Funds may be prevented from achieving their objectives during any period in which the Company’s and the Investment Funds’ assets are not substantially invested in accordance with their principal investment strategies.
 
Restricted and Illiquid Investments May Prevent Prompt Liquidation of Unfavorable Positions Resulting in Substantial Loss
 
The market value of an Advisor’s investments may fluctuate with, among other things, changes in prevailing interest rates, general economic conditions, the condition of financial markets, developments or trends in any particular industry and the financial condition of the issuers of the securities in which the Advisor invests. During periods of limited liquidity and higher price volatility, the Advisor’s ability to acquire or dispose of its investments at a price and time that the Advisor deems advantageous may be impaired. As a result, in periods of rising market prices, the Advisor may be unable to participate in price increases fully to the extent that it is unable to acquire


105


Table of Contents

desired positions quickly; conversely, the Advisor’s inability to dispose fully and promptly of positions in declining markets will cause its NAV to decline as the value of unsold positions is marked to lower prices.
 
In addition, Advisors may invest a portion or all of the value of their assets in restricted securities and other investments that are illiquid. Restricted securities are securities that may not be sold to the public without an effective registration statement under the Securities Act or, if they are unregistered, may be sold only in a privately negotiated transaction or pursuant to an exemption from registration. These may include restricted securities that can be offered and sold only to “qualified institutional buyers” under Rule 144A of the Securities Act. There may be no limit to the percentage of an Advisor’s net assets that may be invested in illiquid securities.
 
Positions in restricted or non-publicly traded securities, securities on non-U.S. exchanges and certain futures contracts may be illiquid because certain exchanges limit fluctuations in certain securities and futures contract prices during a single day by regulations referred to as “daily price fluctuation limits” or “daily limits”. Under such daily limits, during a single trading day no trades may be executed at prices beyond the daily limits. Once the price of a particular security or futures contract has increased or decreased by an amount equal to the daily limit, positions in that security or contract can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit. This constraint could prevent the Advisors from promptly liquidating unfavorable positions and subject the Investment Funds and, in turn, the Company to substantial losses. This could also impair the Company’s ability to redeem its membership units from an Investment Fund in order to redeem Members’ units in a timely manner. An investment in the Company is therefore suitable only for certain sophisticated investors that will not be materially impacted by postponement of the Company’s redemption dates.
 
Risks Related to Issuers of Securities
 
The Issuers of Securities Acquired by Advisors will Sometimes Face a High Degree of Business and Financial Risk
 
The issuers of securities acquired by Advisors will sometimes involve a high degree of business and financial risk. These companies may be in an early stage of development, may not have a proven operating history, may be operating at a loss or have significant variations in operating results, may be engaged in a rapidly changing business with products subject to a substantial risk of obsolescence, may require substantial additional capital to support their operations, to finance expansion or to maintain their competitive position, or may otherwise have a weak financial condition.
 
Issuers of securities acquired by Advisors may be highly leveraged. Leverage may have important adverse consequences to these companies and the Company as an indirect investor. These companies may be subject to restrictive financial and operating covenants. The leverage may impair these companies’ ability to finance their future operations and capital needs. As a result, these companies’ flexibility to respond to changing business and economic conditions and to business opportunities may be limited. A leveraged company’s income and net assets will tend to increase or decrease at a greater rate than if borrowed money were not used.
 
In addition, such companies may face intense competition, including competition from companies with greater financial resources, more extensive development, manufacturing, marketing, and other capabilities, and a larger number of qualified managerial and technical personnel.
 
Expected Transactions May not Take Place or may Result in Substantial Losses
 
The Advisors of the Investment Funds, particularly those of GFS, may engage in merger arbitrage transactions. Substantial transaction failure risks exist with respect to companies that are the subject of publicly disclosed mergers, takeover bids, exchange offers, tender offers, spin-offs, liquidations, corporate restructuring, and other similar transactions. Thus, there can be no assurance that any expected transaction will take place. Certain transactions are dependent on one or more factors in order to become effective, such as market conditions which may lead to unexpected positive or negative changes in a company profile, shareholder approval, regulatory and various other third party constraints, changes in earnings or business lines or shareholder activism as well as many


106


Table of Contents

other factors. No assurance can be given that the merger arbitrage transactions entered into by the Advisors will be profitable, and any such transaction may result in substantial losses.
 
Investments in Small Capitalization Companies are Speculative and May be Difficult to Value
 
Advisors may invest in securities of small capitalization companies and recently organized companies and, conversely, the Advisors may establish significant short positions in such securities. Historically, such securities have been more volatile in price than those of larger capitalized, more established companies. The securities of small capitalization and recently organized companies pose greater investment risks because such companies may have limited product lines, distribution channels and financial and managerial resources. In particular, small capitalization companies may be operating at a loss or have significant variations in operating results; may be engaged in a rapidly changing business with products subject to substantial risk of obsolescence; may require substantial additional capital to support their operations, to finance expansion or to maintain their competitive position; and may have substantial borrowings or may otherwise have a weak financial condition. In addition, these companies may face intense competition, including competition from companies with greater financial resources, more extensive development, manufacturing, marketing, and other capabilities, and a larger number of qualified managerial and technical personnel. Further, there is often less publicly available information concerning such companies than for larger, more established businesses. The equity securities of small capitalization companies are often traded over-the-counter or on regional exchanges and may not be traded in the volumes typical on a national securities exchange. Consequently, the Advisors or entities in which the Advisors invest may be required to dispose of such securities or cover a short position over a longer (and potentially less favorable) period of time than is required to dispose of or cover a short position with respect to the securities of larger, more established companies. Investments in small capitalization companies may also be more difficult to value than other types of securities because of the foregoing considerations as well as lower trading volumes. Investments in companies with limited operating histories are more speculative and entail greater risk than do investments in companies with an established operating record. Additionally, transaction costs for these types of investments are often higher than those of larger capitalization companies.
 
Investments in Issuers of Indebtedness May be Adversely Affected in the Event of an Issuer’s Insolvency
 
Various laws enacted for the protection of creditors may apply to indebtedness in which the Advisors of the Investment Funds invest. The information in this and the following paragraph is applicable with respect to U.S. issuers subject to United States federal bankruptcy law. Insolvency considerations may differ with respect to other issuers. If a court in a lawsuit brought by an unpaid creditor or representative of creditors of an issuer of indebtedness, such as a trustee in bankruptcy, were to find that the issuer did not receive fair consideration or reasonably equivalent value for incurring the indebtedness and that, after giving effect to such indebtedness, the issuer (i) was insolvent, (ii) was engaged in a business for which the remaining assets of such issuer constituted unreasonably small capital or (iii) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature, such court could determine to invalidate, in whole or in part, such indebtedness as a fraudulent conveyance, to subordinate such indebtedness to existing or future creditors of such issuer, or to recover amounts previously paid by such issuer in satisfaction of such indebtedness. The measure of insolvency for purposes of the foregoing will vary. Generally, an issuer would be considered insolvent at a particular time if the sum of its debts was then greater than all of its property at a fair valuation, or if the present fair saleable value of its assets was then less than the amount that would be required to pay its probable liabilities on its existing debts as they became absolute and matured. There can be no assurance as to what standard a court would apply in order to determine whether the issuer was “insolvent” after giving effect to the incurrence of the indebtedness in which an Advisor invested or that, regardless of the method of valuation, a court would not determine that the issuer was “insolvent” upon giving effect to such incurrence. In addition, in the event of the insolvency of an issuer of indebtedness in which an Advisor invests, payments made on such indebtedness could be subject to avoidance as a “preference” if made within a certain period of time (which may be as long as one year) before insolvency. In general, if payments on indebtedness are avoidable, whether as fraudulent conveyances or preferences, such payments can be recaptured from the Advisor to which such payments were made.


107


Table of Contents

The Company and the Investment Funds do not anticipate that the Advisors will engage in conduct that would form the basis for a successful cause of action based upon fraudulent conveyance, preference or equitable subordination. There can be no assurance, however, as to whether any lending institution or other party from which the Advisor may acquire such indebtedness engaged in any such conduct (or any other conduct that would subject such indebtedness and any Investment Fund, the assets of which such Advisor used to purchase such indebtedness, to insolvency laws) and, if it did, as to whether such creditor claims could be asserted in a U.S. court (or in the courts of any other country) against such Investment Fund.
 
Indebtedness consisting of obligations of non-U.S. issuers or U.S. issuers with respect to their foreign obligations may be subject to various laws enacted in the countries of their issuance for the protection of creditors. These insolvency considerations and the levels of protection provided will differ depending on the country in which each issuer is located or domiciled and may differ depending on whether the issuer is a non-sovereign or a sovereign entity.
 
Purchases of Securities and Other Obligations of Financially Distressed Companies Create an Enhanced Risk of Substantial Loss or Loss of Entire Investment
 
The Advisors may purchase securities and other obligations of companies that are experiencing significant financial or business distress, including companies involved in bankruptcy or other reorganization and liquidation proceedings. Although such purchases may result in significant returns, they involve a substantial degree of risk and may not show any return for a considerable period of time. In fact, many of these instruments ordinarily remain unpaid unless and until the company reorganizes and/or emerges from bankruptcy proceedings, and as a result may have to be held for an extended period of time. The level of analytical sophistication, both financial and legal, necessary for successful investment in companies experiencing significant business and financial distress is unusually high. There is no assurance that the Advisors will correctly evaluate the nature and magnitude of the various factors that could affect the prospects for a successful reorganization or similar action. In any reorganization or liquidation proceeding relating to a company in which an Advisor invests, an Advisor may lose its entire investment or may be required to accept cash or securities with a value less than its original investment. Under such circumstances, the returns generated from an Advisor’s investments may not compensate investors adequately for the risks assumed.
 
Investments in Certain Multi-Advisor Structures
 
From time to time, the Managing Member may cause the Company or the Investment Fund, as applicable, to allocate assets to an Advisor that allocates assets to investment funds that retain certain services and support from service providers retained by, or affiliated with, such Advisor (a “Multi-Advisor Structure”). As described under ITEM 1. “BUSINESS—PERFORMANCE OF THE COMPANY—Overview of the Investment Process of the Investment Funds,” the Advisor selection process generally includes an examination of the organizational infrastructure, including the quality of the investment professionals and staff, the types and application of internal controls, and any potential for conflicts of interest. However, where funds are allocated to a Multi-Advisor Structure, the Managing Member generally will have limited ability to examine the organizational infrastructure of the underlying managers and the investment funds in which the Company or the Investment Fund indirectly invests. In addition, the Managing Member will not be able to control the selection or removal of underlying managers. The risks described under “—Special Risks of the Fund of Funds Structure” are particularly applicable to investments in Multi-Advisor Structures, including, without limitation, the payment of multiple levels of fees. Any references in this Annual Report to strategies or techniques utilized by the Advisors include strategies or techniques utilized by investment funds and their managers in which Multi-Advisor Structures invest.
 
Additional Investment Risks of Certain Advisor Funds
 
Certain Advisor Funds to which the Investment Funds may allocate assets may invest in private equity investments, which involve a high degree of business and financial risk. These investments typically take many years to be realized or to become liquid. Certain Advisor Funds may also invest in real estate investments, which generally will be subject to the risks incident to the ownership and operation of commercial real estate and risks incident to the making of non-recourse mortgage loans secured by real estate including risks associated with


108


Table of Contents

U.S. and non-U.S. general economic climates, local real estate conditions, dependence on cash flow and lack of liquidity.
 
Private equity and real estate investments may be difficult to value. The Investment Funds will generally value interests in Advisor Funds in accordance with the terms of the Advisor Fund’s governing agreement, as such valuations are reported to the Investment Fund. Such valuations will be, indirectly through the Investment Funds, utilized by the Company in calculating the NAV of the Company and the NAV per unit for purposes of subscriptions and redemptions, as well as for calculating the Management Fee, Incentive Allocation and administration fee. These calculations will therefore be directly affected by the valuations of any difficult-to-value assets.
 
In addition, the Investment Funds may from time to time allocate assets to Advisor Funds that require the Investment Funds to make capital commitments, which will be drawn down over time rather than paid at the time of the initial investment. If an Investment Fund fails to make a required capital contribution, the Investment Fund may be liable for costs incurred in collecting or attempting to collect such late payment, and could lose its entire investment in such an Advisor Fund. The Company, as a member of an Investment Fund, will not be required to make additional investments to fund capital contributions; these will come solely from the Investment Fund’s existing assets.
 
Advisor Special Investments
 
From time to time certain Advisor Funds may segregate from their portfolio of assets certain illiquid or difficult-to-value securities or instruments (each, a “special investment”) and hold them in special investment accounts. This practice is commonly referred to as “side-pocketing”. Interests in special investment accounts generally are allocated only to those investors that were investors at the time the relevant special investment was acquired or segregated and future investors in the Advisor Fund generally will not participate in such special investment. Investors (including the Investment Funds) that hold interests in special investment accounts generally will not be able to redeem their interests in such accounts until the relevant special investments are liquidated, deemed realized (because, for example, the special circumstances surrounding such investment ceases) or otherwise disposed of. Therefore, an Investment Fund may be required to hold its interest in a special investment account for a significant period of time. An Investment Fund’s inability to redeem its interests from such special investment account may have a material adverse effect on the Investment Fund’s ability to reallocate assets. In addition, significant amounts of redemption requests by investors in the Investment Fund that are not offset by new subscriptions could result in the Investment Fund holding a greater concentration of highly illiquid investments than was previously the case. This could have a material adverse effect on the Investment Fund’s investment mix, and could also cause the Investment Fund to postpone or suspend future redemptions.
 
Special investments generally are carried on the books of an Advisor Fund at the applicable Advisor’s or a third party’s determination of fair value (which may, under the relevant Advisor Fund’s organizational documents, be presumed to be the cost of such special investment). However, given the nature of special investments, such determinations may not represent the actual amount that would be realized by the Advisor Fund (and therefore the Investment Fund) upon the eventual disposition of such special investment or that would, in fact, be realized upon an immediate disposition of the special investment. As discussed above, an Investment Fund will generally value interests in Advisor Funds in accordance with the terms and conditions of the Advisor Fund’s governing agreement, as such valuations are reported to the Investment Fund. Unlike a typical Advisor Fund, however, which generally will not use the unrealized value of a special investment for purposes of subscriptions, redemptions and calculating performance-based fees or allocations, such valuations will be utilized by the Investment Fund in calculating the NAV of units in the Investment Fund for purposes of subscriptions and redemptions, as well as for calculating the management fee, incentive allocation and administration fees in respect thereof. Accordingly, indirectly through the Investment Funds, the NAV of the Company and the NAV per unit will be directly affected by the valuations of any special investments as reported to the Investment Funds. Valuations of special investments generally will not be adjusted retroactively when such special investments are sold or otherwise disposed of by an Advisor Fund.
 
Certain Advisor Funds may charge a performance-based incentive fee or allocation (i) at the time a special investment is designated and/or (ii) at the time a special investment is realized or deemed realized based solely on the gains with respect to such special investment, which could adversely affect investors in the Advisor Fund,


109


Table of Contents

including an Investment Fund and, indirectly, the Company. Other Advisor Funds may have different procedures for calculating fees or allocations with respect to special investments that also could adversely affect the Company and its Members.
 
In the event of a cross transaction between an Investment Fund and another client of the Managing Member that involves the direct or indirect assignment of an interest in an Advisor Fund special investment (whether such interest is assigned by itself or together with a related interest in the relevant Advisor Fund), the Investment Fund or the other party which is a client of the Managing Member, as applicable, will receive an interest in such assigned Advisor Fund special investment that it would generally not have received had it made a new investment in the applicable Advisor Fund rather than obtaining an interest therein by means of a cross transaction. In the event of a cross transaction involving an Advisor Fund special investment, it is anticipated that the Advisor Fund special investment will generally be assigned for a price equal to the last value reported by the applicable Advisor to the holder of such Advisor Fund special investment. Because Advisor Fund special investments may be difficult to value, in any cross transaction involving an Advisor Fund special investment an Investment Fund will be exposed to the risk that it is paying more (in the event that the Investment Fund is the transferee) or receiving less (in the event that the Investment Fund is the transferor) for such Advisor Fund special investment than the value at which such Advisor Fund special investment might be realized if it were realized at the time of the transfer or the value at which such Advisor Fund special investment will ultimately be realized. In addition, in the event that the Investment Fund receives an interest in an Advisor Fund special investment through a cross-transaction, the Investment Fund will generally have a greater portion of its assets invested in Advisor Fund special investments following such cross transaction than it did beforehand, which will generally decrease the overall liquidity of the Investment Fund’s underlying investments.
 
In addition, in the event that the managing member of an Investment Fund determines to reduce the Investment Fund’s exposure to Advisor Fund special investments generally or to a particular Advisor Fund special investment, for liquidity reasons or otherwise, the managing member may cause the Investment Fund to sell its interest in one or more Advisor Fund special investments to a third party or, to the extent permitted by applicable law, to the managing member or an affiliate of the managing member. Any such sale may be of the Advisor Fund special investment by itself or together with the associated interest in the relevant Advisor Fund and may be effected through a broker or a matching or other service designed to bring together buyers and sellers of Advisor Fund special investments. In the event of a sale of an Advisor Fund special investment or other interest in an Advisor Fund, the Investment Fund will bear the associated brokerage and other expenses. Any such transfer may be made at a price that represents a discount to the last value reported by the applicable Advisor, and the Investment Fund may receive significantly less than the value at which such Advisor Fund special investment might be realized if it were realized at the time of the transfer or the value at which such Advisor Fund special investment will ultimately be realized.
 
The same or similar risks may also apply to the Company’s direct investments in Investment Funds and Advisor Funds.
 
Changes to the Trading and Investment Strategies Utilized by the Advisors
 
Advisors may, from time to time, without prior notice to the Managing Member, the Investment Funds or the Company, utilize additional investment strategies and sub-strategies, including investment strategies and sub-strategies that are not discussed herein, and/or remove, substitute or modify their investment strategies and sub-strategies or any of the types of investments then being utilized. Any such addition or change may result in the Advisors investing in other markets, securities and instruments than those described herein. Any such decision may result in all or a significant portion of an Advisor’s assets being allocated to a single investment strategy or sub-strategy or type of investment. There can be no assurance that an Advisor’s decisions in this regard will be successful or will not otherwise have an adverse effect on the assets managed by such Advisor and, in turn, the Investment Funds and the Company. The Company will not have an opportunity to evaluate such decisions or an opportunity to redeem its interests in the applicable Investment Fund prior to any such decision.


110


Table of Contents

Limits of Risk Disclosure
 
The Company Should be Considered a Speculative Investment and Members Should Retain Their Investment Only if They Can Sustain a Complete Loss of their Investment
 
The above discussions relating to various risks associated with the Company, the units, the Investment Funds and the Advisors are not, and are not intended to be, a complete enumeration or explanation of the risks involved in an investment in the Company. Should the Managing Member invest the Company’s assets with Advisors other than through an investment in an Investment Fund, the risks described herein with respect to the Investment Funds will also apply to the Company. Members should read this entire Annual Report and the Company’s LLC Agreement and should consult with their own advisers before deciding whether to retain their investment in the Company. In addition, as the Company’s investment program or market conditions change or develop over time, an investment in the Company may be subject to risk factors not currently contemplated or described in this Annual Report.
 
In view of the risks noted above, the Company should be considered a speculative investment and Members should retain their investment in the Company only if they can sustain a complete loss of their investment.
 
No guarantee or representation is made that the investment program of the Company, the Investment Funds or any Advisor will be successful, that the Investment Funds or the various Advisors selected by the Investment Funds will produce positive returns, or that the Advisors selected by the Company or the Investment Funds will provide complete or accurate information to the Company or the Investment Funds, or that the Company, the Investment Funds or the Advisors will achieve their investment objectives.
 
Assets and liabilities of the Company may be attributable to certain classes of units and not others. If, in the future, the liabilities of a class of units exceed its assets, creditors of the Company in respect of such class may have recourse to the assets attributable to other classes.
 
From time to time, the Company may be subject to contingent liabilities (including liabilities for taxes), known or unknown. To the extent the Company is aware of these contingent liabilities, the Company may be required by applicable accounting standards, or may otherwise determine in its discretion, to accrue amounts for such contingent liabilities for U.S. GAAP or other purposes, including contingent liabilities that may never become payable. The accrual of any such liabilities will reduce the Company’s NAV.
 
In certain circumstances the Company may not accrue amounts for contingent liabilities, including because such accruals are not required by U.S. GAAP, or because the potential facts giving rise to such contingent liabilities are not known to the Company, because the Company otherwise does not anticipate that any payments relating to such contingencies will be required or for other reasons in the Managing Member’s sole discretion. In the event that the Company subsequently determines to accrue amounts for such contingent liabilities and/or is required to pay amounts relating to such contingencies, such accruals and/or payments will reduce the Company’s NAV.
 
Members that invest in the Company at a time during which contingent liabilities are not accrued (or for which there is not a sufficient accrual) will invest in the Company at a higher NAV than had such liabilities been accrued at the time of the applicable investment. In addition, Members that redeem from the Company at a time during which contingent liabilities are accrued will redeem from the Company at a lower NAV than if such liabilities had not been accrued at the time of the applicable redemption. In the event that amounts associated with accrued contingent liabilities do not subsequently become payable and the amounts of the liabilities are reduced, causing the NAV of the Company to increase, the benefits of such increased NAV will accrue to Members who remain in the Company, and Members who previously redeemed will not receive additional compensation or otherwise share the benefit of such increase. Similarly, Members in the Company at the time when a liability for which there is no accrual becomes payable will bear the entire amount of such liability (regardless of whether such liability occurred prior to the Member’s subscription to the Company), and the Company may be unable to, or may elect not to attempt to, recover amounts from Members that redeemed from the Company prior to the contingent liability becoming payable by the Company. Similar consequences as those described above may also occur when the Company under-accrues or over-accrues for such contingent liabilities.


111


Table of Contents

The Advisors and Advisor Funds will also be subject to contingent liabilities, and the Company will be subject to similar (or potentially greater) risks as those discussed above through its investment in such Advisors and Advisor Funds.
 
ITEM 1B.   UNRESOLVED STAFF COMMENTS
 
Not applicable.
 
ITEM 2.   PROPERTIES
 
The Company does not own or lease any physical properties. The Company is operating at the Managing Member’s facility and is not being charged rent except indirectly through the monthly Management Fee.
 
ITEM 3.   LEGAL PROCEEDINGS
 
There are no material pending legal proceedings to which the Company or the Managing Member is a party or to which any of their assets are subject.
 
ITEM 4.   RESERVED


112


Table of Contents

 
PART II
 
ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Information
 
Currently, there is no established public trading market for the units. Other than transfers to the Company in redemption, transfers of units are expressly prohibited by the Company’s LLC Agreement without the consent of the Managing Member.
 
Units are subject to the restrictions on transfer contained in the Company’s LLC Agreement. Without the prior written consent of the Managing Member, which may be withheld in its sole discretion, a Member may not assign, pledge or otherwise transfer its units in the Company in whole or in part, except by operation of law pursuant to the death, adjudication of incompetency, insolvency or bankruptcy of the Member, or pursuant to the corporate reorganization or merger of the Member, nor substitute any other person as a Member. No transferee or assignee will be admitted as a Member without the prior consent of the Managing Member, which may be withheld in its sole discretion. A Member is permitted to redeem units upon 91 days’ prior written notice to the Managing Member (unless such notice is waived by the Managing Member in its sole discretion) as of the time immediately prior to the opening of business on each January 1, April 1, July 1, and October 1 occurring on or after the first anniversary of the purchase of such units by the Member, but may be limited or postponed under limited circumstances.
 
There are no outstanding options or warrants to purchase, or securities convertible into, units of the Company.
 
The high and low NAV per Unit of the initial series of units for Class A Series 1 of the Company during each quarterly period from January 1, 2008 through December 31, 2009 are as follows:
 
                     
Quarter Ended
    High     Low  
 
  3/31/08     $   153.37     $   150.25  
  6/30/08     $ 154.91     $ 152.11  
  9/30/08     $ 150.92     $ 141.06  
  12/31/08     $ 135.68     $ 131.92  
  3/31/09     $ 133.05     $ 132.78  
  6/30/09     $ 136.59     $ 133.78  
  9/30/09     $ 142.06     $ 138.14  
  12/31/09     $ 143.89     $ 141.81  
 
The units have not been and will not be registered under the Securities Act and may not be resold unless an exemption from such registration is available. Members have no right to require registration of the units and the Company does not intend to register the units under the Securities Act or take any action to cause an exemption (whether pursuant to Rule 144 of the Securities Act or otherwise) to be available.
 
Record Holders of Units of the Company
 
As of December 31, 2009, 4,736,483.29 units were held by 591 Members.
 
Distributions
 
The Company has not made distributions from January 1, 2009 to December 31, 2009 other than distributions to facilitate redemptions of individual Members. The Company does not presently intend to make distributions to Members other than in connection with redemptions of units.
 
Recent Sales of Unregistered Units and Use of Proceeds
 
From January 1, 2009 to December 31, 2009, aggregate subscriptions totaled $73,875,837. The Company previously reported sales of unregistered units during the 2009 fiscal year in the Company’s Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. In connection with each funding, the units were privately offered and


113


Table of Contents

old to accredited investors pursuant to Rule 506 of Regulation D and the sales were exempt from registration under the Securities Act. The Company has used substantially all the proceeds to make investments in the Investment Funds.
 
Purchases of Units by the Company and Affiliated Purchasers
 
Pursuant to the Company’s LLC Agreement, holders of units may redeem their units upon 91 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, April 1, July 1, or October 1 occurring on or after the first anniversary of the purchase of such units by the Member (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 (the “Valuation Date”) immediately preceding the applicable 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 (calculated as if the applicable Valuation Date was the last day of the fiscal year) and other liabilities of the Company to the extent accrued or otherwise attributable to the units being redeemed.
 
The Company previously reported redemptions of units during 2009 in the Company’s Quarterly Reports on Form 10-Q. There were 168,397.67 redemptions of units during the fourth quarter ended December 31, 2009. Redemptions of $22,410,715 will be effective on January 1, 2010 and are reflected in redemptions payable in the December 31, 2009 balance sheet. See ITEM 15. “EXHIBITS AND FINANCIAL STATEMENT SCHEDULES”.
 
Performance Graph
 
The line graph below compares the cumulative total return on the Company’s units during the period from January 2005 through December 31, 2009, with the return on the 3 Month LIBOR, the Barclays U.S. Aggregate Index, the MSCI World Index and the S&P 500 Index. These indices are unmanaged and the figures for an index reflect the reinvestment of dividends but do not reflect the deduction of any fees or expenses which would reduce returns. The Members cannot invest directly in these indices.
 
The Company has not paid any cash dividends in the past and does not expect to pay any in the foreseeable future.
 
(CUMULATIVE PERFORMANCE GRAPH TO COME)
 
 
  •       The performance of the Company is based on net returns for Class A Series 1 Units. The performance of the units shown in the graph is not necessarily indicative of future performance.


114


Table of Contents

  •       General: References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time (for purposes of this section, each an “index”) are provided for your information only. Reference to an index does not imply that the portfolio will achieve returns, volatility or other results similar to the index. The composition of an index may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject to change over time.
 
  •       MSCI World Index: The Morgan Stanley Capital International World Index is a price index of the total return with dividends reinvested monthly net of dividend withholding tax of a representative group of listed companies for each region, with each component market weighted on the basis of market capitalization relative to the total market capitalization of the market being measured and adjusted for changes in capital within the component firms.
 
  •       S&P 500 Index: Standard & Poor’s S&P 500 Index is an index based on the prices of the securities of 500 different companies. Total returns are calculated by adding the dividend income and price appreciation for a given time period.
 
  •       Barclays Aggregate Bond Index: Barclays Aggregate Bond Index represents securities that are U.S. domestic, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. These major sectors are subdivided into more specific indices that are calculated and reported on a regular basis.
 
ITEM 6.   SELECTED FINANCIAL DATA
 
Set forth below is certain selected historical data for the Company as of and for the years ended December 31, 2009, 2008, 2007, 2006 and 2005. The selected historical financial data as of and for the years ended December 31, 2009, 2008, 2007, 2006 and 2005 were derived from the financial statements of the Company, which were audited by Ernst & Young LLP (“E&Y”). The information set forth below should be read in conjunction with the financial statements and notes thereto contained elsewhere in this Annual Report.
 
                                         
    Year Ended December 31,  
Operations Data
  2009     2008     2007     2006     2005  
 
Net trading gain/(loss)
  $ 60,555,634     $ (91,647,625 )   $ 87,875,947     $ 76,020,409     $ 66,816,581  
Total expenses
  $ 8,871,658     $ 9,978,508     $ 9,808,096     $ 9,926,911     $ 14,836,748  
Net income/(loss)
  $ 51,843,963     $ (101,224,791 )   $ 78,394,581     $ 66,569,645     $ 52,141,634  
Less: Incentive allocation to the managing member
  $ 137,681     $ 14,474     $ 3,919,729     $ 3,328,482     $ 2,615,216  
Net income/(loss) available for pro-rata allocation to members
  $    51,706,282     $  (101,239,265 )   $    74,474,852     $    63,241,163     $    49,526,418  
 
                                         
Financial Condition
  Year Ended As of December 31,  
Data
  2009     2008     2007     2006     2005  
 
Investments
  $ 586,435,496     $ 614,788,663     $ 702,436,288     $ 686,250,341     $ 1,124,329,933  
Total assets
  $ 621,906,334     $ 641,732,463     $ 705,861,961     $ 687,475,191     $ 1,125,036,745  
Total liabilities
  $ 24,208,299     $ 31,796,392     $ 25,077,879     $ 25,400,717     $ 350,437,862  
Members’ equity
  $   597,698,035 (1)   $   609,936,071 (2)   $   680,784,082 (3)   $   662,074,474 (4)   $   774,598,883 (5)
Ending NAV/Unit:
                                       
Class A Series 1
  $ 143.89     $ 131.92     $ 152.88     $ 137.10     $ 125.75  
 
 
(1) The reduction in members’ equity as of December 31, 2009 reflects redemptions payable in the amount of $22,410,715 at December 31, 2009.


115


Table of Contents

 
(2) The reduction in members’ equity as of December 31, 2008 reflects redemptions payable in the amount of $28,982,893 at December 31, 2008.
 
(3) The reduction in members’ equity as of December 31, 2007 reflects redemptions payable in the amount of $22,708,145 at December 31, 2007.
 
(4) The reduction in members’ equity as of December 31, 2006 reflects redemptions payable in the amount of $23,701,199 at December 31, 2006.
 
(5) The reduction in members’ equity as of December 31, 2005 reflects redemptions payable in the amount of $347,523,596 at December 31, 2005.
 
ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
 
The following discussion should be read in conjunction with the audited financial statements of the Company and the related notes thereto appearing elsewhere in this Annual Report, ITEM 6. “SELECTED FINANCIAL DATA,” and ITEM 1A. “RISK FACTORS—Special Risks of the Company’s Structure—Risks Related to the Company’s Structure—The Company’s Financial Statements Are, and in the Future Will Ultimately be, Based on Estimates of Valuations Provided by Third Party Advisors Which May not be Accurate or May Need to be Adjusted in the Future”.
 
The Company is a Delaware limited liability company organized in March 2002 to operate as an investment fund. It commenced operations on April 1, 2002. GS HFS, a Delaware limited liability company, serves as the Company’s Managing Member.
 
As of December 31, 2009, the Company had total assets of $621,906,334 compared with total assets of $641,732,463 as of December 31, 2008. Total liabilities of the Company were $24,208,299 as of December 31, 2009 compared with $31,796,392 as of December 31, 2008. Members’ equity of the Company was $597,698,035 as of December 31, 2009 compared with $609,936,071 as of December 31, 2008.
 
The Company’s investment objective is to target attractive long-term risk-adjusted returns across a variety of market environments with volatility and correlation that are lower than those of the broad equity markets. To achieve this objective, the Company allocates all or substantially all of its assets among investment funds managed by the Managing Member (such funds and any successor funds thereto, individually, an “Investment Fund” and collectively the “Investment Funds”), each of which (directly or through other entities) 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 or more of the following hedge fund sectors (each, an “Investment Sector” and, collectively, the “Investment Sectors”): the tactical trading sector, the equity long/short sector, the relative value sector and the event driven sector. Currently, substantially all of the Company’s assets are invested in four Investment Funds, each of which is managed by the Managing Member. The current Investment Funds are Goldman Sachs Global Tactical Trading, LLC (“GTT”), which employs investment strategies in the tactical trading sector; Goldman Sachs Global Equity Long/Short, LLC (“GELS”), which employs investment strategies within the equity long/short sector; Goldman Sachs Global Fundamental Strategies, LLC (“GFS”), which employs investment strategies within the event driven sector; and Goldman Sachs HFP Opportunistic Fund, LLC (“HFPO”), which employs investment strategies within one or more of the Investment Sectors. The balance of the Company’s assets are invested in Goldman Sachs Global Fundamental Strategies Asset Trust (“GFS Trust”), which is a trust containing certain interests in illiquid assets transferred by GFS, and Goldman Sachs Global Relative Value, LLC (“GRV” and together with GFS Trust and the Investment Funds, the “Investees”), which is in the process of liquidation. In addition, the Company may, directly or indirectly, allocate assets to Advisors whose principal investment strategies are not within one of the hedge fund sectors referenced herein.
 
Performance of the Company in any period will be dependent upon the performance in the relevant period by the Investees and the weighted average percentage of the Company’s assets in each of the Investees during the


116


Table of Contents

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.
 
While the Managing Member currently expects to allocate assets to all the Investment Sectors through allocations to the Investment Funds, since April 1, 2008, the Managing Member has had no constraints with respect to the percentage of the Company’s assets to be allocated, directly or indirectly, to any single Advisor, group of Advisors, Investment Fund, or Investment Sector, or with respect to the number of Investment Funds and Advisors to which, directly or indirectly, assets of the Company are allocated at any time. The percentage of the Company’s assets to be allocated to any single Advisor, group of Advisors, Investment Fund or Investment Sector, and the number of Investment Funds and Advisors to which the Company allocates assets from time to time will be determined by the Managing Member in its sole discretion, based on factors deemed relevant by the Managing Member at the time of such allocation, which may include the amount of the Company’s assets under management, constraints on the capital capacity of the Investment Funds and Advisors, the availability of attractive opportunities, and other portfolio construction and portfolio management considerations.
 
The performance described herein is based in part on estimates of the recovery value of the Advisors’ claims against Lehman Brothers Holdings, Inc. and for certain subsidiaries and affiliates (“Lehman”), including cash claims involving amounts owed to the Advisors by Lehman and/or proprietary claims involving the recovery of the Advisors’ assets held by Lehman at the time of its insolvency. These estimates are based on information received from the majority, but not all of, the Advisors, and the Company has no way of independently verifying or otherwise confirming the accuracy of the information provided. As a result, there can be no guarantee that such estimates are accurate. There is significant uncertainty with respect to the ultimate outcome of the Lehman insolvency proceedings, and therefore the amounts ultimately recovered in respect of the Advisor’s claims against Lehman could be materially different than such estimates. Based on the information received, the gross indirect exposure to Lehman did not materially affect the Company’s Members’ Equity.
 
The managing member of GFS recently created GFS Trust, a Delaware statutory trust, for the benefit of its investors, including the Company. On March 31, 2009, GFS transferred to GFS Trust its interest in certain illiquid investments, including illiquid investments made by Advisor Funds, as well as liquidating vehicles that Advisors formed as liquidity decreased for previously liquid investments, such as certain credit instruments. See “—Liquidity and Capital Resources” for a further discussion of GFS Trust.
 
GRV ceased trading activities effective July 1, 2009 and will dissolve at the time all assets are liquidated, liabilities are satisfied and liquidation proceeds are distributed through payment of a liquidating distribution. Investors in GRV (including the Company) will receive proceeds from the liquidation over time as GRV receives redemption proceeds from Advisors. The Company is reinvesting the liquidation proceeds it receives from GRV in accordance with the Company’s investment program. See “—Liquidity and Capital Resources” and ITEM 7A. “QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK—Risk Management.”
 
The Company’s results depend on the Managing Member, including in its capacity as managing member of each of the Investment Funds, and the ability of the Managing Member to recognize and capitalize on trends and other profit and investment opportunities within the 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 uncertain nature of the Company’s investments and since the Company’s investments in the Investment Funds are managed to seek to eliminate or reduce the impact of general economic or seasonal conditions. In addition, the Company’s past performance is not necessarily indicative of future results. Each Investment Fund allocates assets to Advisors that invest in various markets at different times and prior activity in a particular market does not mean that such market will be invested in by the Advisors or will be profitable in the future.
 
Results of Operations
 
The following presents a summary of the operations for the years ended December 31, 2009, 2008 and 2007, and a general discussion of each Investee’s performance during those periods. The Investees’ dealing net asset value (“NAV”) and reported performance are prepared using the latest information available from the Advisor Funds at the time of such valuation in accordance with their Limited Liability Company Agreement. The Investees’ investments in the Advisor Funds are determined utilizing NAVs supplied by, or on behalf of, the Advisors of each


117


Table of Contents

Advisor Fund. Furthermore, NAVs received from the administrator of the Advisor Funds may be estimates and such values will be used to calculate the NAV of the Investees for purposes of determining amounts payable on redemptions and reported performance of the Investees. Such estimates provided by the administrators of the Advisor Funds may be subject to subsequent revisions which may not be reflected in the Investees’ final month-end dealing NAV. The annual audited financial statements may reflect adjustments for such subsequent revisions which may result in a variance between the Investees’ total return reported in their audited financial statements and the reported performance based on the month-end dealing NAV.
 
2009 Performance
 
The Company’s net trading gain/(loss) for the year ended December 31, 2009 was $60,555,634 compared to the year ended December 31, 2008 of $(91,647,625).
 
Overview
 
The Company is designed to be broadly exposed to the hedge fund market by allocating its assets to the Investment Funds in the Investment Sectors. As further described under ITEM 7A. “QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK—Risk Management,” quantitative analysis is combined with judgment to determine weightings and strategic return, risk and correlation estimates to inform the quantitative analysis. Judgment is applied to both estimates and weights in an attempt to achieve exposure to hedge funds while targeting attractive risk adjusted returns. The investment markets experienced four distinct phases during 2009: As the turmoil of 2008 spilled over into the early part of 2009, investors’ attention during the first quarter of 2009 continued to focus on whether systemic financial and economic disaster would be averted, and the unprecedented levels of fiscal and monetary stimulus from policymakers. As these fears showed signs of dissipating during the second quarter of 2009, investors began to focus on whether the environment was stabilizing in a robust and lasting manner. In this context, the driving theme of the third quarter of 2009 was on building from these steadier foundations to examine whether improved momentum would actually translate into a sustainable economic recovery. There were a number of positive signs and developments in this regard during the third quarter of 2009, both in terms of economic data as well as the performance of certain asset classes—particularly equities and credit. However, as the third quarter of 2009 drew to a close, there were signs that momentum—at least in some areas—was waning. As a result during the fourth quarter of 2009, investors conducted a nuanced examination of where the recovery flourished most and where it looked most fragile, and the momentum in market rallies showed signs of fading as a result.
 
Equity and credit markets rebounded strongly from their 2008 lows during 2009, helping many Advisors produce strong returns. World equities (proxied by the MSCI AC World Index) returned 34.6% during 2009 (compared to a 42.2% loss in 2008—the biggest in its 40-year history). However, the strong overall yearly performance hides a significant intra-year shift: between January 1, 2009 and March 9, 2009, world equities dropped 22.9%, but subsequently rallied 74.6% through the end of 2009. Similarly, credit markets also rallied through much of 2009, as the Credit Suisse High Yield Index rose 54.2% and the S&P Leveraged Loan 100 Index rose 52.2% for 2009.
 
Many Advisors protected capital well in the first couple of months of 2009 while equity markets were still falling, by being defensively positioned coming into the year. However, a number of Advisors took a cautious approach in increasing market exposure as market conditions changed towards the end of the first quarter, of 2009, and consequently their performance lagged during the early part of these rallies. Through the rest of 2009, Advisors selectively increased gross and net exposure to participate more in the strong market direction. This benefited strategies with greater exposure to equities and credit markets, such as event driven and equity long/short strategies. Trend following strategies found conditions more difficult to navigate: for much of the year, this was due to declining volatility and a lack of clear market trends. Towards the end of the year, trends returned, but sharply reversed in October and November, which also made conditions challenging.
 
The Company cannot predict which Investment Sector and accordingly which Investee will perform best in the future. The table below illustrates the portfolio weighting of each Investee as of December 31, 2009, as well as each Investee’s net return for the year ended December 31, 2009.
 


118


Table of Contents

                         
                Year Ended
 
    Portfolio Weight
    Portfolio Weight
    December 31,
 
    as a % of
    as a % of Adjusted
    2009
 
Investee
  Members’ Equity (1)     Members’ Equity (2)     Net Return (3)  
 
GELS
    39.40 %     37.98 %     13.37 %
GFS
    22.17 %     21.36 %     19.10 %
GFS Trust
    6.28 %     6.05 %     5.06 %(4)
GRV
    0.82 %     0.79 %     6.70 %
GTT
    25.97 %     25.03 %     6.35 %
HFPO
    3.48 %     3.36 %     11.27 %
 
 
(1) Members’ equity, used in the calculation of the fair value of the Investees as a percentage of members’ equity, is reduced for member redemptions that are paid after the balance sheet date according to ASC 480, “Distinguishing Liabilities from Equity.”
 
(2) Adjusted members’ equity, used in the calculation of the fair value of the Investees as a percentage of adjusted members’ equity, represents members’ equity excluding Redemptions payable in the amount of $22,410,715 at December 31, 2009.
 
(3) These returns are based on the performance of Class C Series 1 units for GELS, GFS, GRV and GTT and Class A Series 1 units for HFPO and GFS Trust interests for GFS Trust. 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.
 
(4) GFS Trust commenced operations on March 31, 2009. The return is for the period from March 31, 2009 to December 31, 2009.
 
For the year ended December 31, 2009, the Company’s Class A Series 1 units returned 9.07% net of fees and incentive allocation.
 
The Investees
 
Each of the Investees’ performance during the year ended December 31, 2009 is described in the following.
 
Goldman Sachs Global Equity Long/Short, LLC
 
As of December 31, 2009, GELS represented approximately 38% of the Company’s adjusted members’ equity, which excluded redemptions paid after December 31, 2009. GELS returned 13.37% for Class C Series 1 units for the year ended December 31, 2009.
 
GELS Advisors started 2009 with a strong first quarter and, as a group, GELS Advisors reported positive performance during the first quarter and outperformed developed market equity indices. In the first quarter of 2009, GELS Advisors largely continued to operate with lower levels of gross and net exposure which helped them preserve capital and limit portfolio volatility in the challenging market environment of 2008. Throughout the first quarter, equity markets experienced a wide dispersion of both intra- and inter-sector performance which rewarded GELS Advisors for strong security selection and low levels of net equity exposure as they generated profits from the performance spread between long and short positions. Several GELS Advisors in the portfolio took advantage of the weakness in the cyclicals, financials, industrials, and REIT sectors and generated significant gains through short positions. Top performing GELS Advisors also used the market volatility to their advantage by actively trading individual positions and adjusting fund exposures during the market sell-offs and rallies. In the first quarter, underperforming GELS Advisors tended to have the highest levels of net exposure, particularly in the financials, energy, and industrials sectors.
 
Positive performance for the GELS Advisors continued in the second quarter of 2009 as global equity markets experienced a sustained rally in April and May. In April and May, conservatively positioned GELS Advisors tended to underperform those GELS Advisors with higher levels of net exposure and exposure to more cyclical sectors

119


Table of Contents

including consumer discretionary, industrials, and financials. Short positions broadly detracted from performance and led to losses by GELS Advisors. However, the equity rally slowed in June and many of the sectors that had benefitted from the April and May rally, such as industrials, metals and banks, traded down during June. As a result, the more aggressively positioned GELS Advisors with higher levels of net exposure to these sectors realized losses and underperformed their more conservatively positioned peers.
 
Equity markets continued their rally in the third quarter of 2009, with the performance of GELS Advisors very similar to that of April and May. Throughout the third quarter, top performing GELS Advisors included those with the highest levels of net exposure, particularly in levered, early-cyclical high beta sectors that benefited the most from the economic recovery. The majority of GELS Advisors’ negative performance during the third quarter 2009 was due to loss from short positions. More conservatively positioned GELS Advisors with high levels of short and long exposure concentrated in more defensive sectors like healthcare, consumer staples, media/telecom, and utilities were typically among the worst performers.
 
GELS Advisors finished 2009 with positive performance in the fourth quarter, benefitting from the broad based rally in global equity markets during November and December. As has been the case for much of 2009, performance was largely dictated by GELS Advisors’ levels of market exposure. In October, when equity markets declined globally, GELS Advisors who positioned their portfolios with some of the highest levels of net exposure realized the largest losses, with long positions in the consumer sector being particularly costly for select GELS Advisors. Top performing GELS Advisors in October benefited from strong short position performance, more neutral portfolio positioning, and strong stock selection as quarterly earnings served as a positive catalyst for specific names on both the long and short sides. November and December were similar in that, broadly speaking, GELS Advisors with higher gross and net exposure performed strongly, particularly those GELS Advisors with long exposure in technology, healthcare, consumer/retail, and media/telecom sectors. In November, underperforming GELS Advisors realized losses from short positions in the natural resources, industrials, and materials sectors. In December, weaker performance came from GELS Advisors who realized significant losses from short positions in small cap and more cyclical stocks. Meanwhile, GELS Advisors with long positioning focused towards natural resources, industrials, and materials tended to underperform relative to peers.
 
For the year, catalyst/activist focused GELS Advisors generated strong returns as markets recovered from their lows. Key drivers of returns included positions in the real estate, financials, business services, and consumer sectors as such positions reacted positively to the recovering market environments. Short positions held by GELS Advisors detracted during 2009 as it was challenging to find positions not buoyed by the general market strength.
 
Trading-oriented GELS Advisors underperformed other GELS Advisors as they maintained balanced net exposures in what turned out to be a strong equity market. Generally, these GELS Advisors maintained bearish portfolios coming into 2009 with long exposure primarily to defensive names and short exposure to what such GELS Advisors believed to be low quality names. This positioning proved to be difficult as the strong rally in the equity markets caused low quality stocks to outperform defensive stocks.
 
Value focused GELS Advisors benefited from rising global equity prices in 2009, as equity multiples from crisis level, short positions held by GELS Advisors negatively impacted performance, value focused GELS Advisors achieved gains from well timed short positions in the financials and consumer sectors.
 
After building exposure throughout 2009, by the end of the year many of the GELS Advisors were close to fully invested levels. GELS Advisors noted that the strongly directional markets in 2008 and 2009 presented a challenging environment in which to generate profits, and performance was driven largely by portfolio positioning.
 
Goldman Sachs Global Fundamental Strategies, LLC
 
As of December 31, 2009, GFS represented approximately 21% of the Company’s adjusted members’ equity, which excluded redemptions paid after December 31, 2009. GFS returned 19.10% for Class C Series 1 units for the year ended December 31, 2009.
 
GFS Advisors performed reasonably well in a year marked by strong rallies across the equity and credit markets. Credit-oriented situations were the largest contributors to performance during 2009 as the portfolio had ample exposure to GFS Advisors dedicated to credit and multi-strategy managers who allocated significantly to


120


Table of Contents

credit-oriented situations. Within credit strategies, GFS Advisors profited from a rebound in deeply discounted performing leveraged loans, a strong rally in the high yield bond market and a number of bankruptcy situations that were resolved during 2009. Distressed mortgage-backed securities and convertible bonds also performed well as these markets experienced renewed investor interest and benefited from substantially improved liquidity conditions. Additionally, while the level of mergers and acquisition activity was still below the peak levels recorded in 2007, exposure to select merger arbitrage transactions contributed meaningfully to return.
 
As noted, credit-oriented situations were the largest contributors to performance throughout 2009 while single name short positions and portfolio hedges detracted from returns. The credit markets benefited from significant mutual fund inflows into the high yield and leveraged loan markets during 2009. This trend was helpful to several credit-oriented and multi-strategy GFS Advisors who started the year with net long credit exposure. Additionally, this accommodative backdrop for credit markets in the first half of 2009 set the stage for major recapitalization events in the second half of the year. For example, CIT Group, Inc., Lear Corporation, and Charter Communications, Inc. were each able to file for and exit from bankruptcy protection over the course of the year, which is a testament to the market’s willingness to provide exit financing. Several GFS Advisors held positions that benefited from the successful restructuring of these companies. In some cases, GFS Advisors were active participants in the restructuring process and negotiations. Also, convertible bond strategies performed particularly well during the year given a strong rally from dislocated price levels from late 2008. Also, during 2009, several GFS Advisors approached convertible bonds as distressed opportunities rather than as a traditional arbitrage strategy.
 
Merger arbitrage was also a significant contributor to performance in 2009. GFS Advisors were significantly invested in major deals such as Rohm and Haas Company / The Dow Chemical Company, Genentech, Inc. / Roche Holding, Ltd., Wyeth / Pfizer Inc., Schering Plough Corporation / Merck & Co. Inc. Multi-strategy GFS Advisors invested in these merger arbitrage transactions with the view that broken deals were less likely given the strategic nature of the transactions, the superior credit quality of the acquirers and the attractiveness of arbitrage spreads given a diminished amount of competing capital. Overall, 2009 ended with the successful completion of each of the major merger transactions highlighted above and no major failed transactions.
 
Goldman Sachs Global Fundamental Strategies Asset Trust
 
As of December 31, 2009, GFS Trust represented approximately 6% of the Company’s adjusted members’ equity, which excluded redemptions paid after December 31, 2009. Performance information for GFS Trust for the year ended December 31, 2009 cannot be provided because GFS Trust was formed on March 31, 2009. GFS Trust returned 5.06% for the period from March 31, 2009 to December 31, 2009. See “—Liquidity and Capital Resources” for a further discussion of GFS Trust.
 
Goldman Sachs Global Tactical Trading, LLC
 
As of December 31, 2009, GTT represented approximately 25% of the Company’s adjusted members’ equity, which excluded redemptions paid after December 31, 2009. GTT returned 6.35% for Class C Series 1 units for the year ended December 31, 2009.
 
The tactical trading sector delivered positive performance in 2009, as a positive contribution from macro GTT Advisors was only slightly offset by small losses from managed futures GTT Advisors. During the first half of 2009, macro GTT Advisors capitalized on opportunities across asset classes resulting in strong gains despite small losses toward the end of the second quarter of 2009. Managed futures GTT Advisors experienced difficulty in the first half of the year, although risk remained low through much of the second quarter. Strong gains in the third quarter of 2009 prompted both macro and managed futures GTT Advisors to increase risk over this period. This proved difficult for managed futures GTT Advisors as there were sharp trend reversals across asset classes during the fourth quarter of 2009. Macro GTT Advisors also had a difficult time toward the end of 2009 but held on to gains as discretionary risk reduction proved to be prudent.
 
Macro GTT Advisors delivered strong performance in 2009, profiting during each quarter of the year. During the first quarter of 2009, macro GTT Advisors experienced mixed performance, particularly around the mid-March announcement from the U.S. Federal Reserve on quantitative easing. The second quarter of 2009 experienced strong performance, particularly in May as GTT Advisors benefited from global yield curve steepeners, long gold


121


Table of Contents

positions, and short U.S. Dollar positions. However, some of May’s gains were given back in June trading. The third quarter of 2009 experienced very strong performance for macro GTT Advisors, posting gains in each month, although quieter market activity in August caused gains to be more muted as compared to July and September. In the third quarter of 2009, macro GTT Advisors continued to profit from year-to-date trends including long positions at the front-end of global yield curves, long equity positions, long positions in commodity and emerging market currencies compared to the U.S. Dollar, and long gold positions. The fourth quarter of 2009 proved to be a difficult trading environment due to increased asset class correlations and acute market reversals. Macro GTT Advisors’ focus on liquid markets allowed GTT Advisors to be nimble with respect to risk reduction, which proved to be prudent toward the end of the fourth quarter of 2009.
 
Managed futures GTT Advisors experienced difficulty trading in 2009 as volatility decreased over the year and markets experienced sharp reversals. Managed futures GTT Advisors found the environment through the first few quarters of 2009 difficult for trading due to the choppy nature of market trends. Returns were fairly muted during January and February, but trend reversals in March led to losses for the first quarter of 2009. GTT Advisors experienced roughly flat performance during the second quarter of 2009. March’s losses led into April and while May was an extremely strong month for managed futures strategies, managed futures GTT Advisors gave back much of May’s gains in June. The third quarter of 2009 was strong as the strategy benefited from a continuation of trends within select markets, particularly within the equity and currency sectors. Managed futures strategies were positive over the third quarter of 2009 after posting small losses in July. Generally, longer-term trend-followers outperformed shorter-term strategies as many markets experienced large trends over the third quarter of 2009. While managed futures GTT Advisors profited from strong trends in the third quarter of 2009, these trends proved highly correlated, resulting in sharp swings in performance as many risky assets declined in October, rose in November and declined again in December. High correlations combined with increased risk taking after a strong third quarter lead to losses in the fourth quarter of 2009.
 
Goldman Sachs HFP Opportunistic Fund, LLC
 
As of December 31, 2009, HFPO represented approximately 3% of the Company’s adjusted members’ equity, which excluded redemptions paid after December 31, 2009. HFPO returned 11.27% for Class A Series 1 units for the year ended December 31, 2009.
 
The tactical trading HFPO Advisor contributed positively to performance in 2009. This HFPO Advisor’s discretionary macro trading was a key driver of returns, but all strategies with the exception of the equity arbitrage strategy were positive during 2009. The equity long/short HFPO Advisor contributed positively to performance in 2009. This HFPO Advisor’s exposure to the energy, industrials and materials sectors were the key drivers of returns, but some losses were generated from exposure to the utilities sector. From a geographical standpoint, the vast majority of gains were generated in North America.
 
Goldman Sachs Global Relative Value, LLC
 
As of December 31, 2009, GRV represented approximately 1% of the Company’s adjusted members’ equity, which excluded redemptions paid after December 31, 2009. GRV returned 6.70% for Class C Series 1 units for the year ended December 31, 2009. GRV ceased its trading activities effective July 1, 2009 and will dissolve at the time all assets are liquidated, liabilities are satisfied and liquidation proceeds are distributed through payment of a liquidation distribution. Investors in GRV (including the Company) will receive proceeds from the liquidation over time as GRV receives redemption proceeds from Advisor Funds. The Company expects to reinvest the liquidation proceeds it receives from GRV in accordance with the Company’s investment program. See “—Liquidity and Capital Resources” for a further discussion of GRV.
 
2008 Performance
 
The Company’s net trading profit/(loss) for the year ended December 31, 2008 was $(91,647,625) compared to the year ended December 31, 2007 of $87,875,947.


122


Table of Contents

Overview
 
Global markets experienced extraordinarily high volatility during 2008 amidst numerous systemic shocks and doubts over the stability of the financial system. During 2008, the Company experienced the weakest equity markets since the Great Depression and unprecedented credit market dislocations including high yield spreads that reached more than double the highs of the recession in 2002. While most hedge fund strategies still significantly outperformed broad equity market indices, hedge funds, including the Company, were not immune from these events and experienced their most challenging year on record, with most funds, including the Company, recording negative returns.
 
During the first half of 2008, hedge funds were able to outperform broader markets as managers successfully captured thematic opportunities. Some of the successful trends and strategies included long positions in commodities, short positions in financials, long positions in emerging as compared to developed markets, short positions in the U.S. dollar, long positions in fixed income and yield curve trading. However, even in the first half of 2008, adept risk management was key to maintaining profits amidst major reversals including, for example, following the bail out of Bear, Stearns & Co. in mid-March. However, the second half of 2008 proved to be much more challenging for hedge funds and the Company. Since mid July, a number of trends abruptly reversed as markets focused more on global economic weakness and risk aversion led to repatriation of overseas investments and a ‘flight to safety’ that has benefited the U.S. dollar and hurt investments globally. The table below illustrates the portfolio weighting of each Investee as of December 31, 2008, as well as each Investee’s net return for the year ended December 31, 2008.
 
                         
    Portfolio Weight
    Portfolio Weight as
    Year Ended
 
    as a% of
    a% of Adjusted
    December 31, 2008
 
Investee
  Members’ Equity (1)     Members’ Equity (2)     Net Return (3)  
 
GELS
    29.89 %     28.53 %     (16.75 )%
GFS
    34.79 %     33.21 %     (19.18 )%
GRV
    9.68 %     9.24 %     (9.37 )%
GTT
    19.53 %     18.65 %     3.27 %
HFPO
    6.91 %     6.59 %     (4.51 )%
 
 
(1) Members’ equity, used in the calculation of the fair value of the Investees as a percentage of members’ equity, is reduced for member redemptions that are paid after the balance sheet date according to ASC 480, “Distinguishing Liabilities from Equity.”
 
(2) Adjusted members’ equity, used in the calculation of the fair value of the Investees as a percentage of adjusted members’ equity, represents members’ equity excluding Redemptions payable in the amount of $28,982,893 at December 31, 2008.
 
(3) These returns are based on the performance of Class C Series 1 units for GELS, GFS, GRV and GTT and Class A Series 1 units for HFPO. The returns include administration fees. No management fee or incentive allocation was charged by the managing member of the Investees with respect to the Company’s investment in any of the Investees. Past performance is not indicative of future results, which may vary.
 
For the year ended December 31, 2008, the Company’s Class A Series 1 units returned (13.71)% net of fees and incentive allocation.
 
The Investees
 
Each of the Investees’ performance during the year ended December 31, 2008 is described in the following.
 
Goldman Sachs Global Equity Long/Short, LLC
 
As of December 31, 2008, GELS represented approximately 29% of the Company’s adjusted members’ equity which excluded redemptions paid after December 31, 2008. GELS returned (16.75)% for Class C Series 1 units for the year ended December 31, 2008.


123


Table of Contents

For the first half of the year, despite very volatile global equity markets, many GELS Advisors were able to outperform global markets, with several achieving strong gains. Many GELS Advisors entered the year with reduced risk levels given the uncertainty. Lower risk levels benefited GELS Advisors as the year had a difficult start as January experienced significant intra-month volatility and a wide dispersion of performance by GELS Advisors. January experienced broad-based selling globally, led by sectors and markets which realized the largest gains in 2007, including energy, technology and emerging markets. In February, markets continued downward, although many GELS Advisors posted gains as a rise in commodity related equities and short positions in the financials, telecom and technology sectors benefited portfolios. March, much like January, experienced significant intra-month volatility. GELS Advisors accumulated losses due to a rally in the financials sector during the second half of the month, while weakness in long energy/commodity positions and long emerging market positions also weighed on returns. GELS Advisors broadly benefited as markets seemed to rebound in April and May. Top performing GELS Advisors had long exposure to energy, basic materials and technology equities, as well as short positions in financials. However, the second quarter of 2008 ended much as it had begun. In June, the equity markets reversed and gave back all of April and May’s gains. Even so, many of the GELS Advisors mitigated losses and a number of GELS Advisors finished the second quarter in positive territory.
 
The second half of 2008 was one of the most difficult periods for GELS Advisors on record because of extreme reversals in themes that worked during the first quarter of 2008 and a significant increase in equity market volatility globally. The second half of 2008 was also impacted by short selling restrictions across a variety of regions and sectors, negatively affecting some GELS Advisors. The increase in volatility and government regulation during the second half of 2008 negatively impacted GELS Advisors, driving losses for the year. Over the third quarter, GELS Advisors experienced an extreme reversal in many of the key drivers of performance for the first half of the year. In July, there was a sharp second half rally in the financials sector and steep losses among energy and materials stocks. Long positions in energy and materials names and short positions in financials and real estate contributed to losses for a number of the GELS Advisors. In September, equity markets globally experienced unprecedented volatility as dramatic developments in the financial sector, including the ban on short selling in varying degrees globally, created a difficult investing environment. Continued de-levering led to downward pressure across all sectors, particularly the energy and materials sectors as well as selected technology and telecom companies. The rapidly changing environment in the financials sector also led to increased volatility among financial firms which led to both gains and losses for GELS Advisors.
 
The fourth quarter was one of the most difficult on record for GELS Advisors as they faced historic levels of equity market volatility and sharply declining equity prices. The equity long/short investment sector ended the quarter and the year negative. The fourth quarter had a difficult start in October as continued de-levering led to downward pressure across all sectors, particularly in energy, materials, agriculture, consumer, financials and emerging markets equities. GELS Advisors with the highest levels of net exposure declined the most, particularly those with exposure to the hardest hit sectors. Selected single stock short positions also detracted from performance. Many of the challenges in October continued into November, namely widespread selling of equities and elevated volatility. Once again a small group of GELS Advisors were responsible for the bulk of the losses. Exposure to healthcare, materials, technology and consumer discretionary spending accounted for the majority of losses. In October and November, selected GELS Advisors were able to generate profits from short positions in financial, consumer and real estate sectors, while also profiting from short term opportunistic trading. December experienced a small rebound in equity markets and a decrease in volatility; however, this decrease in volatility combined with GELS Advisors low risk levels led to muted returns across the sector. Top performing GELS Advisors benefited from net long exposure in consumer, healthcare and technology positions, while bottom performing GELS Advisors realized losses from short exposure in consumer discretionary/retail and financials stocks, as well as long exposure in energy. Despite steep losses in October and November, GELS Advisors outperformed global equity indices during the quarter as many GELS Advisors maintained low levels of gross and net exposure and were able to avoid significant long book losses and generate profits through short holdings. There was a strong correlation between the GELS Advisors’ exposures and their performance during the fourth quarter—GELS Advisors with higher levels of exposure and more concentrated portfolios were more susceptible to the market swings and tended to underperform their equity long/short peers.


124


Table of Contents

Goldman Sachs Global Fundamental Strategies, LLC
 
As of December 31, 2008, GFS represented approximately 33% of the Company’s adjusted members’ equity which excluded redemptions paid after December 31, 2008. GFS returned (19.18)% for Class C Series 1 units for the year ended December 31, 2008.
 
Despite negative performance from global equity and credit markets over the first half of the year, many GFS Advisors performed reasonably well. Hedges and short positions were meaningful contributors to performance as GFS Advisors entered the year with a defensive stance. Hedges implemented through subprime mortgage bonds, emerging/developed markets credit and equity indices helped to dampen volatility. The second half of 2008 witnessed a significant increase in volatility across equity and credit markets in addition to a drying up of liquidity. Despite finishing the first half of 2008 in positive territory, performance reversal in a number of commonly held positions and concentrated sectors combined with the increase of volatility and lower levels of liquidity significantly hurt GFS Advisors erasing the first quarter gains and leading to large losses for the sector for 2008. In the second half of the year, GFS experienced a significant amount of volatility and negative performance in what has been widely noted as the most difficult period for hedge funds on record. GFS Advisors with exposure to emerging markets and materials/commodity related companies suffered disproportionately as these trades reversed.
 
Credit-oriented GFS Advisors also experienced significant losses due to poor liquidity and broad declines in asset prices.
 
Credit-oriented GFS Advisors were the largest contributors to performance for the first half of 2008. Short subprime exposures drove profits in the first quarter. In the second quarter, most credit-oriented GFS Advisors were able to protect capital as many of them were positioned to have neutral to net short exposure to the market given their cautious view on the broader markets. Equity and credit market hedge positions proved to be beneficial for GFS Advisors. In the second half of the year, credit oriented GFS Advisors had difficulty as the bank debt and high yield bond markets traded down on technical pressure and became even more illiquid. Difficult conditions in the credit markets were exacerbated by concerns about counterparty risk and its effect on credit default swap positions.
 
Merger arbitrage was mixed in 2008. GFS Advisors experienced losses in the first quarter as major deals such as Clear Channel Communications, Inc., BCE Inc. and Alliance Data Systems Corporation traded down on heightened concerns about financing. However, the announcement that the leveraged buy-out of Clear Channel Communications, Inc. came to a conclusion on re-negotiated terms in the second quarter led to profits for some GFS Advisors. This was slightly offset by the announcement of the Hexion/Huntsman deal break. In the second half of 2008, several GFS Advisors profited from Anheuser-Busch’s $52 billion announced acquisition by InBev while others were hurt in September as merger spreads widened significantly.
 
Goldman Sachs Global Relative Value, LLC
 
As of December 31, 2008, GRV represented approximately 9% of the Company’s adjusted members’ equity which excluded redemptions paid after December 31, 2008. GRV returned (9.37)% for Class C Series 1 units for the year ended December 31, 2008.
 
The volatile environment continued to create opportunities across most relative value strategies in the first half of the year, although market volatility led to a wider dispersion of returns among GRV Advisors. However, GRV Advisors struggled during the third quarter and fourth quarters as markets experienced extreme dislocations and poor liquidity and finished with negative returns for the year.
 
Volatility trading strategies generated the strongest returns with profits coming from single stock volatility positions. Performance was very strong in January with more muted returns for the remainder of the period. In the first quarter, Asia-focused strategies led performance while U.S.-focused strategies outperformed for the remainder of the year.
 
Equity market neutral strategies were strong performers for the first half of the year as value factors generated positive returns across geographical regions. In the third quarter, equity market neutral strategies detracted each month, but were particularly hurt in September as global de-leveraging negatively impacted portfolios. Equity


125


Table of Contents

market neutral strategies reversed in the fourth quarter of 2008 and were generally positive contributors, but GRV Advisors experienced a dispersion of returns across geographies and strategies.
 
Despite a decline from March through May, emerging markets strategies were strong in the first half of 2008. Short positions performed well in January and February in local markets due to market unrest. Market reversals in March caused GRV Advisors to give back some returns and the difficult performance persisted through May. However, GRV Advisors short-biased positioning in emerging markets were profitable when markets sold off in June and they finished the half in positive territory. In the third quarter, emerging markets strategies reversed as poor liquidity and high volatility led to very difficult trading conditions and GRV Advisors were negatively affected by country specific news. Generally, commodity-rich countries underperformed in the second half of the year, and the deleveraging and deteriorating fundamentals negatively contributing to GRV Advisors’ performance.
 
Fixed income strategies experienced mixed results over the first half of the year but finished in positive territory overall. European yield curve trading contributed to performance, while some credit strategies struggled in less liquid markets. In March, sharp reversals led to difficulties, particularly in Japan. The second quarter was a strong finish to the first half of the year as several positions recovered following mark-to-market losses in March. The third and fourth quarter experienced muted returns as GRV Advisors have been running with low exposures due to high volatility.
 
Multi-strategy GRV Advisors were also negatively impacted by the poor market liquidity, particularly in strategies such as convertible arbitrage in the second half of the year.
 
Goldman Sachs Global Tactical Trading, LLC
 
As of December 31, 2008, GTT represented approximately 19% of the Company’s adjusted members’ equity which excluded redemptions paid after December 31, 2008. GTT returned 3.27% for Class C Series 1 units for the year ended December 31, 2008.
 
The tactical trading sector delivered strong performance in 2008, with positive contribution from both discretionary GTT Advisors and systematic trading GTT Advisors. GTT performed well as diversification helped to improve the risk-adjusted return. Performance was strong throughout the first half of the year despite a dip as a number of markets reversed in later half of March and GTT Advisors gave back some returns. In the third quarter, GTT Advisors gave back more of their returns as dramatic swings, multiple market reversals and significantly worsening liquidity created extremely difficult trading conditions. Both discretionary and systematic GTT Advisors had mixed results through July and August, but by September, amid high policy uncertainty, many GTT Advisors felt the markets were becoming uninvestible and moved assets partially to the sidelines, increasing already substantial cash positions. Trend-followers, who only trade the most liquid markets, were the only GTT Advisors to remain with more normal levels of risk. These GTT Advisors gained from falling equity markets, with their index future positions not directly affected by the short selling bans, but suffered losses elsewhere as trend reversals detracted. In the fourth quarter of 2008, trend-following GTT Advisors generally profited from declines in equities and commodities, although December market rallies reduced gains. GTT Advisors finished 2008 with strong positive performance.
 
Commodities trading was a key driver of positive returns for the first half of the year. Systematic trading GTT Advisors, broadly long positioned, benefited from the strong commodity rallies for much of the period. Despite March reversals in the markets, GTT Advisors were able to sustain gains across grains, energy, precious metals and soft metals. Discretionary commodity managers posted mixed results. Agriculture-focused GTT Advisors generally delivered strong returns, while GTT Advisors with exposure to commodities-related equities had negative performance. At the beginning of the third quarter, energy markets reversed their long-standing uptrend. The reversal hurt trend-followers, who had produced strong profits from the uptrend; however, by September, many of these GTT Advisors were profiting from short energy positions. Discretionary GTT Advisors also suffered from the reversal and generally responded by substantially reducing long exposures.
 
Fixed income trading experienced gains in the first half of the year. Long exposures to global fixed income and yield curve trading, particularly in the U.S., benefited GTT Advisors for much of the second quarter. As markets reversed in March, GTT Advisors experienced notable losses in both relative value and directional trades. Macro


126


Table of Contents

GTT Advisors experienced mixed performance in fixed income trading over the second quarter while most commodity trading GTT Advisors produced gains. Fixed income and foreign exchange markets experienced extraordinary volatility during the second half of the year. GTT Advisors generally profited from a long bias in U.S. and global fixed income in 2008.
 
Foreign exchange trading posted profits over the first half of the year. Short U.S. dollar positions realized gains with the U.S. dollar declining to record levels against a number of currencies. In addition, long bias to emerging market currencies and long volatility trading in the major currencies contributed to performance. Performance declined slightly towards the end of the period as the U.S. dollar gained some strength. The U.S. dollar began to rally strongly in mid-July, hurting systematic GTT Advisors short positions; by later in the quarter these positions had been reversed and GTT Advisors had started to profit from long exposures to the U.S. dollar. However, the rally reversed, with the euro rallying 7% against the U.S. dollar in late September before resuming its decline, making for challenging conditions for directional trading.
 
Equities trading was flat for the period. Systematic GTT Advisors profited from net short exposures to major indices, while many discretionary GTT Advisors experienced losses in long positions. In general, GTT Advisors reduced overall equity exposure as the markets proved difficult to navigate over the second quarter. An increase in equity volatility kept equity exposures low during the second half of the year.
 
Goldman Sachs HFP Opportunistic Fund, LLC
 
As of December 31, 2008, HFPO represented approximately 7% of the Company’s adjusted members’ equity which excluded redemptions paid after December 31, 2008. HFPO returned (4.51)% for Class A Series 1 units for the year ended December 31, 2008.
 
HFPO Advisors focused on equity market neutral strategies experienced positive returns for the first half of 2008 as value factors generated positive returns across geographical regions. Equity market neutral strategies generated strong returns in every month of the first half of the year, with the exception of March. Market reversals in March caused HFPO Advisors to give back some returns. In the third quarter, global de-leveraging negatively impacted these HFPO Advisors’ portfolios leading to significant losses. HFPO redeemed its investment from equity market neutral HFPO Advisors strategies effective December 1, 2008.
 
Quantitative macro strategies were strong performers in the first half of the year. One of the quantitative macro HFPO Advisors experienced strong performance driven specifically by a rise in commodities markets. Performance benefited from exposure to all four asset classes—commodities, fixed income, foreign exchange and equities trading. However, the other quantitative macro HFPO Advisors experienced negative performance early in the year from U.S. equity exposures in the consumer and technology sectors. This Advisor was redeemed effective December 1, 2008. In the second half of the year, HFPO Advisors focused on quantitative macro strategies experienced mixed performance, driven by asset class and discretionary trading. Overall, macro strategies contributed to performance for the year.
 
One HFPO Advisor with long exposure to energy and commodities experienced severe losses in the early part of the year and reduced exposures prevented it from capturing the upswing in commodities for the latter half of the period. This HFPO Advisor benefited from lower risk levels and diversification in the second half of the year.
 
One HFPO Advisor in particular experienced very significant losses as natural gas exposures moved away from its positions. This HFPO Advisor’s negative performance meaningfully impacted the portfolio returns in the first nine months of the year. However, this HFPO Advisor benefited from lower market exposures and diversification across positions in the third quarter. HFPO redeemed its investment from this HFPO Advisor at the end of the third quarter of 2008.
 
2007 Performance
 
The Company’s net trading profit/loss for the year ended December 31, 2007 was $87,875,947 compared to the year ended December 31, 2006 of $76,020,409.


127


Table of Contents

Overview
 
For 2007, all four Investment Sectors posted positive returns, with the strongest performance delivered by the event driven sector. Short positions in credit, in particular short exposure to bonds linked to sub-prime mortgages, were profitable. The weakest performance came from the allocation to HFPO, which finished the year in negative territory. Negative performance was driven by exposure to quantitative equity market neutral strategies which suffered from liquidity pressures as the sub-prime mortgage crisis led to widespread liquidations in August. The table below illustrates the portfolio weighting of each Investee as of December 31, 2007, as well as each Investee’s net return for the year ended December 31, 2007.
 
                         
    Portfolio Weight
    Portfolio Weight as
    Year Ended
 
    as a % of
    a % of Adjusted
    December 31, 2007
 
Investee
  Members’ Equity (1)     Members’ Equity (2)     Net Return (3)  
 
GELS
    33.16 %     32.09 %     11.70 %
GFS
    37.84 %     36.62 %     20.22 %
GRV
    12.38 %     11.99 %     4.53 %
GTT
    14.39 %     13.92 %     15.72 %
HFPO
    5.41 %     5.23 %     (10.26 )%
 
 
(1) Members’ equity, used in the calculation of the fair value of the Investees as a percentage of members’ equity, is reduced for member redemptions that are paid after the balance sheet date according to ASC 480, “Distinguishing Liabilities from Equity”.
 
(2) As a percentage of the Company’s adjusted members’ equity which represents members’ equity excluding Redemptions payable in the amount of $22,708,145 that was payable at December 31, 2007.
 
(3) These returns are based on the performance of Class C Series 1 units for GELS, GFS, GRV and GTT and Class A Series 1 units for HFPO. The returns are net of administration fees. No management fee or incentive allocation was charged by the managing member of the Investees with respect to the Company’s investment in any of the Investees. Past performance is not indicative of future results, which may vary.
 
For the year ended December 31, 2007, the Company’s Class A Series 1 Units returned 11.51% net of fees and incentive allocation.
 
The Investees
 
Each of the Investees’ performance during the year ended December 31, 2007 is described in the following.
 
Goldman Sachs Global Equity Long/Short, LLC
 
As of December 31, 2007, GELS represented approximately 32% of the Company’s adjusted members’ equity which excluded redemptions paid after December 31, 2007. GELS returned 11.70% for Class C Series 1 units for the year ended December 31, 2007.
 
The annualized volatility of GELS’ returns for the year ended December 31, 2007 was 5.73%. In comparison, the S&P 500 Index had an annualized volatility of 9.66% and the MSCI World Index (hedged to U.S. dollars) had an annualized volatility of 8.80% for the same period.
 
During the year ended December 31, 2007, GELS Advisors delivered positive performance in nine months (January, February, March, April, May, June, September, October and December) and negative performance in three months (July, August and November). Notably, the performance of GELS Advisors in July and August suffered as equity markets fell on concerns of a global credit crunch, a slowing U.S. economy and continued fallout in the sub-prime mortgage and structured finance spaces. GELS Advisors with long exposure to financial and consumer stocks underperformed during the second half of the year as large write-downs from major banks and concerns of a slowdown in consumer spending weighed on these sectors.
 
GELS Advisors performed well from January 2007 through May 2007, with especially strong performance in April and May. During this period, GELS Advisors benefited from a rally in global equity markets, driven by global


128


Table of Contents

economic growth, robust mergers and acquisitions activity and abundant liquidity. September and October 2007 were positive months for GELS Advisors, as global equity markets rallied from the late summer sell-off as the U.S. Federal Reserve (the “Federal Reserve”) cut interest rates. Top-performing GELS Advisors benefited from an increase in volatility during the second half of 2007 as strong stock pickers were able to realize gains more quickly. Additionally, GELS Advisors who reduced portfolio risk during the summer were able to better preserve capital and realize gains from hedges and short positions during the drawdown in the second half of the year.
 
Thirty-six out of 48 GELS Advisors delivered positive performance for the year ended December 31, 2007. GELS Advisors with long exposure to Asian market volatility, emerging markets, energy/commodities and short exposure to financials performed particularly well during 2007. The GELS Advisors that posted losses had long exposure to value stocks, small- and mid-cap stocks and Japanese equities.
 
Goldman Sachs Global Fundamental Strategies, LLC
 
As of December 31, 2007, GFS represented approximately 37% of the Company’s adjusted members’ equity which excluded redemptions paid after December 31, 2007. GFS returned 20.22% for Class C Series 1 units for the year ended December 31, 2007.
 
The annualized volatility of GFS’s returns for the year ended December 31, 2007 was 4.55%. In comparison, the S&P 500 Index had an annualized volatility of 9.66% and the MSCI World Index (hedged to U.S. dollars) had an annualized volatility of 8.80% for the same period.
 
GFS generated solid returns in 2007, with substantially lower volatility than global equity markets. In the first half of the year, GFS Advisors performed well as the equity and credit markets continued their positive performance from 2006. In the first half of 2007, robust mergers and acquisitions activity, idiosyncratic credit events and abundant corporate restructuring activity contributed positively to some of the GFS Advisors’ returns. In the second half of 2007, the market experienced substantially more volatility and negative performance as investors became concerned about the economic and financial outlook.
 
Global announced mergers and acquisitions activity surpassed $4.4 trillion in 2007, a new annual record; however this was not without some unconsummated deals. In general, GFS Advisors were able to take advantage of the robust environment in the first half of 2007 through merger arbitrage and equity special situations. In the second half of 2007, merger arbitrage spreads proved to be a profitable area given the completion of several bellwether deals. Equity markets experienced negative performance as valuations were readjusted given lower mergers and acquisitions and private equity activity, which negatively impacted the performance of some GFS Advisors.
 
The credit asset class proved to be difficult in 2007 given the broad re-pricing of risk across the asset class. In particular, some GFS Advisors were hurt by long exposure to bank debt and some high yield bonds. Hedges and directional short exposure to credit generated substantial gains for some GFS Advisors in the fund. In particular, short exposure to bonds linked to sub-prime mortgages were profitable, as several of the multi-strategy and credit GFS Advisors were able to put on exposure early.
 
Credit opportunities/distressed strategies returned 40.10% and contributed 9.70% to GFS’s gross income for the year ended December 31, 2007. The multi-strategy component of the portfolio returned 15.02% and contributed 9.86% to GFS’s gross income for the year ended December 31, 2007. Merger arbitrage/special situations strategies returned 5.28% and contributed 0.38% to GFS’s gross income for the year ended December 31, 2007.
 
Goldman Sachs Global Relative Value, LLC
 
As of December 31, 2007, GRV represented approximately 12% of the Company’s adjusted members’ equity which excluded redemptions paid after December 31, 2007. GRV returned 4.53% for Class C Series 1 units for the year ended December 31, 2007.
 
Following a fairly stable market environment in 2006, volatility increased significantly in 2007 and, consequently, relative value strategies experienced mixed results.
 
Overall, 2007 was a good year for GRV Advisors strategically positioned to take advantage of long volatility, as market participants became increasingly nervous due to the widening impact of the sub-prime mortgage crisis and


129


Table of Contents

the deteriorating state of the U.S. economy. Within the volatility trading sector, the Asian-focused GRV Advisor outperformed as it successfully captured the region’s rise in implied volatility, particularly in single-name stocks. Given this GRV Advisor’s negative correlation with the markets, the outsized results are particularly impressive considering the bull market in Asia, where the MSCI Asia ex-Japan Index returned 33%, its best performance since 2003.
 
Credit spreads were re-priced in virtually every market (i.e., investment grade, high yield, loans, residential mortgage-backed securities, commercial mortgage-backed securities, etc.) and across all rating categories, benefiting GRV Advisors with short biases and creating opportunities for relative value trading around technical dislocations.
 
GRV Advisors with long credit exposures, particularly in high-grade asset-backed securities, suffered losses as market liquidity decreased significantly.
 
GRV Advisors implementing equity market neutral strategies suffered from liquidity pressures as the sub-prime mortgage crisis led to widespread liquidations in August. GRV Advisors with longer-term models were particularly impacted. As a result, GRV Advisors reduced leverage and focused research efforts on minimizing correlation with other hedge funds.
 
Emerging markets’ fundamental strength continued due to strong growth, high commodity prices, and increasing levels of domestic reserves. The asset class grew during the year, with new local issues from major economies, corporate issues and new sovereign markets. Long external debt positions in Venezuela and Russia, as well as long positions in Brazilian and Turkish local markets, contributed to positive performance by GRV Advisors. In addition, strategic short positions benefited GRV Advisors’ returns in late 2007.
 
The opportunity set for relative value investments across the fixed income universe broadened significantly in 2007. Turmoil in the housing and credit markets resulted in increased uncertainty and higher volatility levels, creating an environment favorable for fixed income arbitrage.
 
Credit relative value strategies returned 9.67% and contributed 0.85% to GRV’s gross income for the year ended December 31, 2007. Equity market neutral strategies returned (14.14)% and contributed (3.78)% to GRV’s gross income for the year ended December 31, 2007. Fixed income arbitrage strategies returned 12.49% and contributed 2.34% to GRV’s gross income for the year ended December 31, 2007. Emerging markets relative value strategies returned 12.19% and contributed 1.37% to GRV’s gross income for the year ended December 31, 2007.
 
Multi-strategies returned (2.68)% and contributed (0.24)% to GRV’s gross income for the year ended December 31, 2007. Volatility trading returned 42.52% and contributed 4.45% to GRV’s gross income for the year ended December 31, 2007.
 
Goldman Sachs Global Tactical Trading, LLC
 
As of December 31, 2007, GTT represented approximately 14% of the Company’s adjusted members’ equity which excluded redemptions paid after December 31, 2007. GTT returned 15.72% for Class C Series 1 units for the year ended December 31, 2007.
 
The first quarter of 2007 was moderately profitable for the tactical trading sector. Short European fixed income positions generated strong profits early in the first quarter for GTT Advisors. However, a broad recovery in global bond markets in February, followed by another reversal later in the first quarter, led many GTT Advisors to give back prior gains. Commodities trading posted gains, mainly due to long exposure to grains. Foreign exchange trading detracted from performance for the first quarter, with losses predominantly driven by developed-market currency trading, and short Japanese yen positions suffered material losses at February month-end, as investors unwound their carry trades following the global equity plunge. Equities trading finished the first quarter approximately flat. After posting strong gains in the first half of the first quarter, GTT Advisors who were positioned net long gave back most profits when a sharp decline in Chinese markets on February 27 triggered a global equity sell-off.
 
The tactical trading sector had a strong second quarter in 2007, finishing the period profitable in all four asset classes. In fixed income trading, the majority of gains by GTT Advisors were generated from short European fixed


130


Table of Contents

income exposures maintained throughout the second quarter. Foreign exchange trading was also positive for the second quarter, with short Japanese yen positions contributing the bulk of gains. Short U.S. dollar positions against major currencies proved more difficult for GTT Advisors, as choppy markets resulted in weak performance. In equities trading, GTT Advisors with broadly long exposure profited from the global stock market rally, with the S&P nearing record levels and major European indices moving consistently higher. Finally, commodities trading was modestly profitable, with gains attributable to select long positions in grains, particularly soybeans. Soybeans soared mid-second quarter on speculation that an increasing number of soybean acres will be rotated into corn planting, resulting in a diminished supply.
 
Tactical trading delivered positive results in the third quarter of 2007. Foreign exchange trading was positive for the third quarter. Short U.S. dollar positions contributed most of the gains as the U.S. dollar experienced notable declines through the third quarter, dropping to a record low against the euro in September. Equities trading from the long side proved difficult for GTT Advisors during the first two months of the third quarter. However, GTT Advisors with sustained long exposures were able to profit from the market recovery in September, which was largely driven by the widely anticipated 50 basis point cut in the federal funds rate. Fixed income trading generated moderate losses for GTT Advisors for the third quarter, as bond markets were centered on concerns about the credit crisis in the U.S. Finally, GTT Advisors with broad long exposures to commodities delivered strong results across grains, metals and energy.
 
The tactical trading sector posted strong performance in the fourth quarter of 2007. Commodities trading was a significant contributor to performance by GTT Advisors during the fourth quarter. Long positions in grains were particularly profitable as wheat, corn and soybeans all surged substantially higher amid concerns regarding weather and growing global supply. Fixed income trading was also positive. Global government bonds rallied during the fourth quarter as continued credit concerns led to a “flight-to-quality”. As a result, GTT Advisors with long exposures to U.S. Treasury bonds produced strong returns. GTT Advisors with yield curve plays in the U.S. and Europe also generated positive results. Equities trading posted flat performance for the fourth quarter, with the vast majority of GTT Advisors positioned net long. In foreign exchange trading, GTT Advisors were generally short the U.S. dollar, which led to notable profits during the first half of the fourth quarter. As the U.S. dollar recovered later in the fourth quarter, many GTT Advisors returned most prior gains. Declines in high-yielding currencies during the second half of the fourth quarter also added to losses.
 
Goldman Sachs HFP Opportunistic Fund, LLC
 
On July 1, 2007, the Company made an investment in HFPO in the aggregate amount of $26,100,000. The investment objective of HFPO is to make opportunistic investments in underlying Advisors in order to (a) increase the weighting of a particular Advisor which had a low weighting in the Company due to a lower target weight in one of the other Investment Funds or (b) add an Advisor that is not currently represented in any of the other Investment Funds. As of December 31, 2007, the fair value of the Company’s investment in HFPO was $36,813,437. The change in value from July 1, 2007 through December 31, 2007 reflects the return of the Company’s investment during the six month period ended December 31, 2007.
 
As of December 31, 2007, HFPO represented approximately 5% of the Company’s adjusted members’ equity which excluded redemptions paid after December 31, 2007. HFPO returned (10.26)% for Class A Series 1 units for the period from commencement of HFPO’s operations on July 1, 2007 through December 31, 2007.
 
For the period from July 1, 2007 (commencement of operations of HFPO) through December 31, 2007
 
HFPO experienced negative performance during the period from July 2007 through December 2007. The negative performance was driven by exposure to equity market neutral strategies which suffered from liquidity pressures as the sub-prime mortgage crisis led to widespread liquidation in August. Managers with value oriented models and longer-term models were particularly impacted. Exposure to macro strategies slightly mitigated losses as managers benefited from the higher volatility environment. Commodities trading drove performance and fixed income trading was also positive over the period. Equities trading was flat from July 2007 through December 2007.


131


Table of Contents

Comparison of Selected Financial Information for the years ended December 31, 2009, 2008 and 2007
 
Interest and Dividend Income
 
Interest and dividend income for the years ended December 31, 2009, 2008 and 2007 was $159,987, $401,342 and $326,730, respectively. The Company’s interest and dividend income fluctuates with the level of cash available to invest.
 
Expenses
 
The management fee for the year ended December 31, 2009 was $7,578,899 compared to the year ended December 31, 2008 of $8,638,530 and the year ended December 31, 2007 of $8,636,414. Because the management fee is calculated as a percentage of the Company’s net assets as of each month end (equal to one-twelfth of 1.25% of the net assets of the Company of the applicable month), the changes in the expense were due to fluctuations in the Company’s net assets for the year ended December 31, 2009 compared to the year ended December 31, 2008 and the year ended December 31, 2008 compared to the year ended December 31, 2007.
 
Interest expense for the year ended December 31, 2009 was $81,111, compared to the year ended December 31, 2008 of $81,333 and the year ended December 31, 2007 of $283,897. The interest expense for the year ended December 31, 2009 compared to December 31, 2008 did not significantly change as the Company did not borrow during either period. The decrease in interest expense for the year ended December 31, 2008 compared to December 31, 2007 was due to reduced borrowings under the Credit Facility (as defined below) and reduced commitment fees under the Credit Facility as a result of a decrease in the amount available for borrowings.
 
Professional fees for the year ended December 31, 2009 were $1,049,718, compared to the year ended December 31, 2008 of $1,059,248 and the year ended December 31, 2007 of $632,679. The professional fees for the year ended December 31, 2009 compared to the year ended December 31, 2008 did not significantly change. The increase in professional fees for the year ended December 31, 2008 compared to the year ended December 31, 2007 was primarily due to increased legal and audit costs related to the ongoing operations as a publicly registered company and the costs related to Sarbanes-Oxley 404 compliance.
 
Miscellaneous expenses for the year ended December 31, 2009 were $161,930 compared to the year ended December 31, 2008 of $199,397 and the year ended December 31, 2007 of $255,106.
 
Incentive Allocation
 
The Incentive Allocation for the year ended December 31, 2009 was $137,681, compared to the year ended December 31, 2008 of $14,474 and the year ended December 31, 2007 of $3,919,729. The increase in Incentive Allocation for the year ended December 31, 2009 from the year ended December 31, 2008 was due to an increase in net income from operations for the period for certain series of Class A shares that were above their high watermark. The decrease in Incentive Allocation for the year ended December 31, 2008 from the year ended December 31, 2007 was due to a decrease in net income from operations for the period.
 
Other than the management fee, interest expense, professional fees, miscellaneous expenses and incentive allocation, there are no other fees directly borne by the Company.
 
Through its investments in the Investment Funds, the Company bears a pro rata portion of the administration fee paid to the administrator of the Investment Funds for services provided to the Investment Funds and Portfolio Companies. The total administration fee (which is approximate based on calculation), comprised of the Company’s aggregate pro rata portion for services provided to the Investment Funds and the fee directly payable by the Portfolio Companies based on an investment of $1,000,000 in Class A Series 1 units as of January 1, 2009, January 1, 2008 and January 1, 2007, was $526, $469, and $534, respectively. SEI is the administrator of each Investment Fund and certain Portfolio Companies. Throughout 2009, the administration fee rate ranged between 0.05% and 0.06%. See ITEM 1. “BUSINESS—FEES AND EXPENSES”.


132


Table of Contents

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, to fund quarterly 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. Redemptions are permitted on a quarterly basis and written notices of redemption must be delivered to the Company at least 91 days prior to the applicable valuation date, which is the day immediately preceding the applicable redemption date. Accordingly, the Company cannot predict the level of redemptions in the Company for any quarterly period until 91 days prior to the redemption date. 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 redemptions, or as otherwise permitted in the LLC Agreements of the Investment Funds) of its investments in the Investment Funds and from new investments from existing and new investors. Neither GFS Trust nor GRV provide investors with a voluntary redemption right. Redemptions can be made quarterly, subject to certain limitations. During certain historic periods, the Company only took in investments from existing investors and limited subscriptions from new qualified investors; however, the Company has been accepting additional amounts of new subscriptions throughout 2009. 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 has been receiving new subscriptions, 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 NAV 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.
 
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.
 
In addition, certain of the investments held by the Investment Funds are subject to various lock-up provisions. Additionally, the Advisors of the investments held by the Investment Funds may, at their discretion, transfer a portion of the Investment Funds’ investment into share classes where liquidity terms are directed by the Advisor in accordance with the respective investment’s private placement memorandum, commonly referred to as side pocket share classes (“side pockets”). These side pockets may have restricted liquidity and prohibit the Investment Funds


133


Table of Contents

from fully liquidating their investments without delay. The managing member of each Investment Fund attempts to determine each Advisor’s strategy on side pockets through its due diligence process prior to making an allocation to the investment managed by the Advisor. However, no assurance can be given on whether or not the Advisor will implement side pockets during the investment period. The Advisors of the investments held by the Investment Funds may also, at their discretion, suspend redemptions or implement other restrictions on liquidity which could impact the Investment Funds’ ability to meet redemptions submitted by the Company. As of December 31, 2009, approximately 2% of the Company’s investments in the Investees were considered illiquid due to restrictions implemented by the Advisors of the investments held by Investees, excluding contractual restrictions imposed by the Advisors at the time of purchase, such as lock-ups. In addition, as of December 31, 2009, approximately 7% of the Company’s members’ equity was considered illiquid due to restrictions implemented by the Investees including the lack of a voluntary redemption right from GFS Trust and GRV.
 
The managing member of GFS, GS HFS, recently created GFS Trust for the benefit of its investors, including the Company. Goldman Sachs Trust Company, a Delaware Corporation, is the trustee of GFS Trust (the “Trustee”). The Trustee appointed GS HFS as the “Special Assets Direction Advisor,” responsible for, among other things, disposition of GFS Trust assets. On March 31, 2009, GFS transferred to GFS Trust its interest in certain illiquid investments, including illiquid investments made by Advisor Funds, as well as liquidating vehicles that the Advisors formed as liquidity decreased for previously liquid investments, such as certain credit instruments. GFS transferred to GFS Trust the economic risks and benefits of its interests in the assets. In connection with such transfer, each investor in GFS, including the Company, was issued its pro-rata share of GFS Trust interests based on its ownership in GFS as of the transfer date. The transfer was accounted for as an in-kind transfer at a fair value of $47,730,311, which resulted in a realized gain of $3,179,237. In connection with the transfer, the historical cost of the Company’s investment in GFS of $44,551,074 was transferred to GFS Trust including an unrealized gain of $3,179,237. Distributions from GFS Trust in respect of GFS Trust interests will be made to holders of GFS Trust interests, including the Company, as amounts in respect of the assets transferred to GFS Trust are received from the Advisors. However, the actual timing of these distributions will be dependent on the Advisors’ ability to liquidate positions as market conditions allow, and it could be a significant period of time before such positions are realized or disposed of. The Company’s pro-rata share of GFS Trust interests as of December 31, 2009 was an amount equal to approximately 6% of the Company’s members’ equity. Such amount of the Company’s pro-rata share of GFS Trust interests is included in the percentage of the Company’s investments in the Investees that were considered illiquid at December 31, 2009.
 
The managing member of GRV notified its investors (including the Company), by letter dated June 15, 2009, that it had begun the process of liquidating GRV’s portfolio, and that investors in GRV (including the Company), will receive proceeds from the liquidation over time as GRV receives redemption proceeds from Advisor Funds. As of December 31, 2009, GRV represented approximately 1% of the Company’s members’ equity and the fair value of the Company’s investments in GRV was $4,887,674. The Company is reinvesting the liquidation proceeds it receives from GRV in accordance with the Company’s investment program.
 
The Company received subscriptions from new and existing investors of $73,875,837 during the year ended December 31, 2009, of $124,251,266 during the year ended December 31, 2008 and of $43,080,500 during the year ended December 31, 2007.
 
Demand from new and existing investors varies from period to period based upon market conditions, the Company’s returns and other alternative investments available to investors. The Company believes that in more recent periods investors’ interest has decreased from earlier periods as investors have sought to reduce overall portfolio exposure.
 
The Company paid out redemptions in the amount of $144,530,014 during the year ended December 31, 2009, $87,599,738 during the year ended December 31, 2008 and $103,758,527 during the year ended December 31, 2007. The Company had Redemptions payable in the amount of $22,410,715 at December 31, 2009, $28,982,893 at December 31, 2008 and $22,708,145 at December 31, 2007. The Company funded the redemptions made in 2007, 2008 and 2009 by making redemptions from the Investment Funds in proportion to the then current weightings and through the use of uninvested cash on hand. The Company also used its Credit Facility to fund January 2007 and July 2007 redemptions. The Managing Member expects the Company to fund future redemptions in a similar


134


Table of Contents

manner and does not believe that the Redemptions payable in January 2010 had a material adverse effect on the value of the units or the performance of the Company. As further described below in this section, the Company entered into a Credit Facility on June 30, 2006, which was amended as described below. Although the Company may elect to borrow under its Credit Facility, including, without limitation, to fund redemptions, from time to time, in the future, it currently expects any such borrowing would not result in long term debt of the Company and does not expect the Company’s risk position to change as a result thereof.
 
Demand for redemptions varies from period to period based upon market conditions, the Company’s returns and other alternative investments available to investors.
 
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 membership units, to pay expenses or for other purposes.
 
On June 30, 2006, the Company entered into a committed credit facility (as amended from time to time, the “Credit Facility”) with Barclays Bank PLC (the “Facility Counterparty”). On June 6, 2008, the Company extended the maturity date of the Credit Facility for an additional two-year period to, and including, June 5, 2010 and amended certain terms of the Credit Facility. The Company further amended certain terms of the Credit Facility on January 28, 2010. As of December 31, 2009, the Company had no outstanding borrowings under the Credit Facility. Pursuant to the Credit Facility, the Company may borrow up to an amount equal to the lesser of (i) $33,700,000 which amount may be subsequently increased to $100,000,000 subject to the approval of the Facility Counterparty, and (ii) 14.25% of the Company’s NAV from time to time. If borrowings by the Company exceed 14.25% of its NAV at any time, then the Company is required to make mandatory prepayments to the extent necessary so that borrowings (subject to adjustments for pending redemptions by the Company) do not exceed 12.5% of the Company’s NAV, payable when it has received proceeds of redemptions from the Investment Funds. The Company is also required to prepay all borrowings if, after a five business day remediation period, the Facility Counterparty notifies the Company that its investments in funds continue to not meet certain liquidity and diversification criteria set forth in the Credit Facility, payable within ninety days of any such notice. The Company may voluntarily borrow, repay and reborrow advances on a revolving basis. The advances bear interest at a per annum rate equal to (i) with respect to advances provided on less than three business days’ notice, the overnight London Interbank Offered Rate (“LIBOR”), for the initial day of such advance and one-week LIBOR thereafter, and (ii) with respect to all other advances, one-week LIBOR, plus in each case 1.00%. The Company also pays a monthly commitment fee to the Facility Counterparty at the rate of 0.29% per annum of the average daily aggregate unused portion of the commitment. If the Company terminates the Credit Facility prior to the stated final maturity, it has agreed to pay a fee (except in certain circumstances where no such fee will be payable) equal to the product of 0.25% per annum times the commitment in effect immediately prior to such optional termination times “M”; where “M” equals the period commencing on the date of such optional termination and ending on the stated final maturity. The proceeds of the advances under the Credit Facility will be used for liquidity management in connection with subscriptions to the Company and redemptions of the Company’s investments in the Investment Funds and for general purposes not prohibited by the Credit Facility or the investment guidelines therein. The obligation of the Facility Counterparty to make advances is subject to customary conditions precedent, including the absence of defaults. The Credit Facility contains customary representations and warranties, affirmative covenants, including a covenant to deliver information regarding the Company’s NAV and negative covenants, including restrictions on the Company’s ability to incur additional indebtedness (other than the advances or fees and expenses incurred in the ordinary course of business), grant liens, merge or sell all or substantially all of its assets, pay dividends or make redemptions of the Company’s investors if advances would exceed the permitted borrowing amount or there is an event of default regarding non-payment of advances, failure to comply with investment guidelines, failure to provide access to financial records, insolvency events or change of control events, and enter into material amendments of the Company’s organizational documents or investment management or fund administration agreements. The Credit Facility contains customary events of default (subject to thresholds, materiality qualifications and notice periods specified therein), including: failure to make payments when due, incorrectness of representations and warranties, non-compliance with the Credit Facility and note, breach of material agreements, insolvency events, judgments or orders to pay money, a “material adverse effect” as defined in the Credit Facility, change in the control of the


135


Table of Contents

Managing Member, or its removal or resignation, violation of law or suspension of licenses held by the Company or the Managing Member and suspension in the redemption of the units. In addition, the Credit Facility contains investment guidelines setting forth certain requirements regarding permitted instruments, strategy limits, leverage and borrowing, liquidity, diversification and remediation. The Managing Member does not expect that any of these investment guidelines, including, but not limited to, the strategy limits, will have a limiting effect on the operation of the Company or the Managing Member’s investment strategy for the Company. Each Investment Fund, except HFPO, has entered into a similar facility with a different counterparty. See Note 7 to the financial statements for a description of the Company’s Credit Facility.
 
As of December 31, 2009, the Company had cash and cash equivalents on hand of $35,470,838. As of December 31, 2008, the Company had cash and cash equivalents on hand of $26,943,800. The increase in cash and cash equivalents held by the Company at December 31, 2009 was attributed to actions taken by the Company to anticipate future liquidity requirements.
 
Investments as of December 31, 2009 were $586,435,496 as compared to $614,788,663 as of December 31, 2008. The decrease for the year ended December 31, 2009 compared to the year ended December 31, 2008 was due to net redemptions made by the Company from the Investment Funds during the year ended December 31, 2009, partially offset by net trading profit.
 
Due to managing member represents the management fees due to the Managing Member. Due to managing member as of December 31, 2009 was $1,288,968 as compared to $2,017,653 as of December 31, 2008. 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 NAV of the Company. The decrease in Due to managing member is due to the amount and timing of the payment of the monthly management fee to the Managing Member and fluctuations in the NAV.
 
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 Credit Facility, are adequate to fund its operations and liquidity requirements.
 
The value of the Company’s directly held cash and financial instruments is not expected to be materially affected by inflation. At the Investee level, given that GFS’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 addition, as HFPO employs a broad range of alternative investment strategies primarily within one or more of the Investment Sectors, HFPO’s Advisors could experience similar effects from changes in inflation depending on the particular strategy employed. 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
 
Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”).  In July 2009, the FASB launched the FASB Accounting Standards Codification (the “Codification”) as the single source of U.S. GAAP. While the Codification did not change U.S. GAAP, it introduced a new structure to the accounting literature and changed references to accounting standards and other authoritative accounting guidance. The Codification did not have an effect on the Company’s financial condition, results of operations or cash flows.


136


Table of Contents

Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (ASC 820).  In April 2009, the FASB issued amended accounting principles related to determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. Specifically, these amended principles list factors which should be evaluated to determine whether a transaction is orderly, clarify that adjustments to transactions or quoted prices may be necessary when the volume and level of activity for an asset or liability have decreased significantly, and provide guidance for determining the concurrent weighting of the transaction price relative to fair value indications from other valuation techniques when estimating fair value. The Company adopted these amended accounting principles during the year ended December 31, 2009. Since the Company’s fair value methodologies are consistent with these amended accounting principles, adoption did not affect the Company’s financial condition, results of operations or cash flows.
 
Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).  In September 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-12, “Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent”). ASU No. 2009-12 provides guidance about using net asset value to measure the fair value of interests in certain Investees and requires additional disclosures about interests in Investees. The Company adopted ASU No. 2009-12 during the year ended December 31, 2009. Since the Company’s current fair value measurement policies are consistent with ASU No. 2009-12, adoption did not affect the Company’s financial condition, results of operations or cash flows.
 
Critical Accounting Policies and Estimates
 
Use of 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 U.S. 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 significant accounting policies is set forth in Note 2 to the Company’s financial statements. In the Managing Member’s view, the policy that involves the most subjective judgment is set forth below.
 
Fair value
 
The Company’s investments in Investees are subject to the terms and conditions of the operating agreements of the respective Investees. These investments are carried at fair value, based on the Company’s attributable share of the net assets of the respective Investee. The Company adopted ASC 820 on January 1, 2008, which establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The objective of a fair value measurement is to determine the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurements). Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. See Note 2 to the Company’s financial statements.
 
Fair values of interests in Investees are determined utilizing NAV information supplied by each individual Investee that is net of the Advisors’ management and incentive fees charged to the Investees. The underlying investments of each Investee are also 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. Assets of the Company invested directly in Advisor Funds will generally be valued based on the net asset value reported by or on behalf of the applicable Advisor.


137


Table of Contents

For the fiscal years ended December 31, 2009 and December 31, 2008, the fair value of the Company’s investments in the Investees was determined by the following valuation techniques:
 
December 31, 2009
 
         
    % of fair value
  % of fair value
    investments valued using
  utilizing NAV provided by
Investee   quoted market prices   external advisors
     
 
GELS
  0.07%   40.09%
GFS
  —%   21.59%
GFS Trust
  —%   6.40%
GRV
  —%   0.83%
GTT
  0.57%   25.89%
HFPO
  —%   3.56%
         
Total
  0.64%   99.36%
         
 
December 31, 2008
 
         
    % of fair value
  % of fair value
    investments valued using
  utilizing NAV provided by
Investee   quoted market prices   external advisors
     
 
GELS
  0.10%   29.55%
GFS
  —%   34.51%
GRV
  1.30%   8.31%
GTT
  —%   19.38%
HFPO
  —%   6.85%
         
Total
  1.40%   98.60%
         
 
The change in percentages between December 31, 2009 and December 31, 2008 was primarily due to assets being allocated from investments valued using quoted market prices to investments valued directly by external advisors.
 
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 generally are made based on information the Company or the Investees, as applicable, 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. The Company receives preliminary and final NAVs from each of the Investees on a monthly basis. Historically, the Company has not experienced any material variance between the preliminary and final NAVs, which would have required adjustment to the Company’s financial statements. If the Managing Member determines that any such valuation may be inaccurate or incomplete, the Managing Member may determine the fair value of the asset based on information available to, and factors deemed relevant by, the Managing Member at the time of such valuation. Generally, however, neither the Company nor the Investees will receive independent valuations with respect to the assets managed by 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 under ITEM 1A. “RISK FACTORS—General Risks—Risks Related to the Company and the Investment Funds’ Performance and Operation—Dependence on the Managing Member and the Advisors; the Managing Member Generally Has Limited Access to Information on or Control over Advisors’ Portfolios and Members Assume the Risk that Advisors May Knowingly Misrepresent Information Which Could Have a Material Negative Impact on the Company,” “—Special Risks of the Company’s Structure—Risks Related to the Company’s Structure—The Company’s Financial Statements are, and in the Future Will Ultimately be, Based on Estimates of Valuations Provided by Third Party Advisors Which May not be Accurate or May Need to be Adjusted in the Future,” and “—Risks Associated with the Company Investing in Other Entities—


138


Table of Contents

Valuation of the Investment Funds’ Investments Will be Determined Utilizing Valuations Provided by the Advisors Which are Generally not Audited; Uncertainties in Valuations Could Have a Material Adverse Effect on the Company’s Net Assets”.
 
The valuation provisions of the Company’s LLC Agreement and the LLC Agreements of the Investment Funds were revised as of January 1, 2006 to provide the Managing Member with greater flexibility to more accurately value the Company’s assets (for purposes of subscriptions, redemptions and fees) in circumstances where the Managing Member has information available to it indicating that a valuation may be inaccurate or incomplete, although generally, as described above, the Managing Member will not have access to independent valuations and will rely on valuations provided by the Advisors. Valuations are performed in a substantially similar manner for GFS Trust. However, where such information does exist, the Managing Member will be entitled to apply its authority to more accurately reflect the Company’s value. Accordingly, to the extent that the Managing Member determines that a valuation provided by an Advisor may be inaccurate or incomplete, the additional flexibility on the Company’s valuation practices is designed to make the Company’s valuations more accurate. For example, to the extent an Advisor has allocated assets to an Advisor Fund that has provided the Company with a valuation report indicating a positive valuation, but the Managing Member is aware that the Advisor Fund has filed for bankruptcy, the Managing Member will be able to take the bankruptcy into account to attempt to more accurately determine the fair value of such assets.
 
During the periods contained in this Annual Report, the managing member of an Investment Fund had adjusted the valuation provided by an Advisor in which an Investment Fund had invested to reflect what the managing member believes to be the appropriate fair value of that investment. There has been no situation during the periods contained in this Annual Report, where the impact of an adjustment to a valuation provided by an Advisor or independent investment manager at an Investment Fund was material to the Company.
 
Off-Balance Sheet Risk
 
In the normal course of business, the Advisors of the Advisor Funds may trade various financial instruments and enter into various investment transactions with off-balance sheet risk, which include, but are not limited to securities sold short, futures, forwards, swaps and written options. There are no off-balance sheet or material contingent liabilities at the Company or Investee levels.
 
Contractual Obligations
 
The Company does not have any long-term debt obligations, capital or operational lease obligations or other long-term debt liabilities.
 
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Quantitative and Qualitative Disclosures About Market Risk
 
The following table lists the significant market risk sensitive instruments held by the Company, through the Investees, as of December 31, 2009 and as of December 31, 2008, as indicated by the Fair Value/Value at Risk column and the Net Trading Profit/(Loss) column from January 1, 2009 to December 31, 2009 and from January 1, 2008 to December 31, 2008. Because of the uncertain nature of the investments that the Company engages in through the Investees, the Managing Member believes the entire portfolio value of the Company is at risk. The Managing Member is unable to track the impact of market volatility, credit and interest rate risk on the units because in many cases it does not receive information on individual investments made by Advisors or their aggregate holdings and so is not in a position to track such risks on an aggregate basis.
 


139


Table of Contents

                                         
Year Ended
 
December 31, 2009  
                      Net Trading
       
    % of Members’
    % of Adjusted
    Fair Value/Value
    Profit/(Loss)
       
Investee
  Equity (1)     Members’ Equity (2)     at Risk     (In millions)     Liquidity  
 
GELS
    39.40 %     37.98 %   $ 235,518,832     $ 24.2       (3 )
GFS
    22.17 %     21.36 %   $ 132,477,127     $ 22.5       (4 )
GFS Trust
    6.28 %     6.05 %   $ 37,532,758     $ 2.2       (5 )
GRV
    0.82 %     0.79 %   $ 4,887,674     $ 1.5       (6 )
GTT
    25.97 %     25.03 %   $ 155,217,816     $ 8.1       (7 )
HFPO
    3.48 %     3.36 %   $ 20,801,289     $ 2.1       (4 )
             
             
Total
    98.12 % (9)     94.57 % (8)   $ 586,435,496     $ 60.6          
             
             
 
                                         
Year Ended
 
December 31, 2008  
                      Net Trading
       
    % of Members’
    % of Adjusted
    Fair Value/Value
    Profit/(Loss)
       
Investee
  Equity (1)     Members Equity (2)     at Risk     (In millions)     Liquidity  
 
GELS
    29.89 %     28.53 %   $ 182,311,620     $ (37.4 )     (3 )
GFS
    34.79 %     33.21 %   $ 212,189,214     $ (49.4 )     (4 )
GRV
    9.68 %     9.24 %   $ 59,060,101     $ (6.3 )     (6 )
GTT
    19.53 %     18.65 %   $ 119,121,670     $ 3.2       (7 )
HFPO
    6.91 %     6.59 %   $ 42,106,058     $ (1.7 )     (4 )
             
             
Total
    100.80 % (10)     96.22 % (8)   $ 614,788,663     $ (91.6 )        
             
             
 
 
(1) Members’ equity, used in the calculation of the investments as a percentage of members’ equity, is reduced for member redemptions that are paid after the balance sheet date according to ASC 480, “Distinguishing Liabilities from Equity.”
 
(2) Adjusted members’ equity, used in the calculation of the fair value of the Investees as a percentage of adjusted members’ equity, represents members’ equity excluding Redemptions payable in the amount of $22,410,715 at December 31, 2009 and Redemptions payable in the amount of $28,982,893 at December 31, 2008.
 
(3) Redemptions can be made quarterly with 61 days’ notice, or at the sole discretion of the Managing Member.
 
(4) Redemptions can be made quarterly on or after the first anniversary of the initial purchase of the units with at least 91 days’ notice, or at the sole discretion of the Managing Member.
 
(5) GFS Trust does not provide investors with a voluntary redemption right. Pursuant to the terms of the trust agreement for GFS Trust, distributions will be made to holders of interests in GFS Trust as GFS Trust receives proceeds in respect of its Advisors.
 
(6) Redemptions can be made quarterly with 91 days’ notice, or at the sole discretion of the Managing Member. GRV ceased its trading activities effective July 1, 2009 and will dissolve at the time all assets are liquidated, liabilities are satisfied and liquidation proceeds are distributed through payment of a liquidating distribution. GRV suspended redemptions pending the completion of the liquidation proceedings.
 
(7) Redemptions can be made quarterly with 60 days’ notice, or at the sole discretion of the Managing Member.
 
(8) The total value of the Company’s investment in the Investees was less than 100% of adjusted members’ equity because adjusted members’ equity reflected cash and cash equivalents greater than total liabilities excluding Redemptions payable in the amount of $28,982,893 that was payable at December 31, 2008.
 
(9) The total value of the Company’s investment in the Investees was less than 100% of members’ equity because members’ equity reflected cash and cash equivalents greater than total liabilities.
 
(10) The total value of the Company’s investment in the Investees exceeded 100% of members’ equity because member’s equity reflected certain accrued liabilities of the Company, including fees and expenses, and also reflected Redemptions payable on the balance sheet date.

140


Table of Contents

 
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 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 for each Advisor using a Monte Carlo simulation with a one-year look back period. The Managing Member looks at VaR over a one-day horizon at the 95% and 99% confidence intervals. As of December 31, 2009, the Managing Member had full position level transparency for approximately 28% (as a percentage of fair value investments) of the Advisors in which the Company invests through the Investment Funds. For the first and second quarters of 2008, the Company’s calculation of the percentage of Advisors for which it had position level transparency was based on a list that excluded some Advisors who provided position level details but did not provide pricing information for those positions, resulting in a lower percentage than had been reported prior to the first quarter of 2008, when the Company had used a list containing some Advisors who did not provide pricing information for their positions. Beginning in the third quarter of 2008, the Company began using an updated list containing all Advisors for whom the Company received position level details, whether or not the Advisors also provided pricing information for those positions. The Company believes that knowing its transparency on the position level details of its Advisors provides meaningful information about its underlying investments in its Advisors whether or not the Company also has transparency on the pricing information for these positions and therefore will continue to use such methodology for conveying information regarding the Company’s position level transparency in future quarters. The Managing Member believes that the VaR assumptions it utilizes are reasonable given that VaR is only one determinant in the Managing Member’s overall risk management. 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 generally includes site visits and monthly conference calls. The Company’s maximum risk of loss is limited to the Company’s investment in the Investment Funds. The risks involved are more fully described under ITEM 1A. “RISK FACTORS—General Risks—Risks Related to the Company and the Investment Funds’ Performance and Operation—A Substantial Portion of an Investment Fund’s Assets May be Invested Utilizing Strategies That are Not Within its Investment Sector; Most Advisors do not Provide Detailed Position Information Regarding their Portfolios” and “—Dependence on the Managing Member and the Advisors; the Managing Member Generally Has Limited Access to Information on or Control over Advisors’ Portfolios and Members Assume the Risk that Advisors May Knowingly Misrepresent Information Which Could Have a Material Negative Impact on the Company”.
 
The managing member of the Investment Funds monitors Advisors to prevent style drift. “Style drift” is defined as Advisors changing their investment style from the Investment Fund’s expectations. Where position level detail is available, the managing member of the Investment Funds monitors leverage against predetermined limits. Position 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 more fully described under ITEM 1A. “RISK FACTORS—General Risks—Risks Related to the Company and the Investment Funds’ Performance and Operation—A Substantial Portion of an Investment Fund’s Assets May be Invested Utilizing Strategies That


141


Table of Contents

are Not Within its Investment Sector; Most Advisors do not Provide Detailed Position Information Regarding their Portfolios” and “—Dependence on the Managing Member and the Advisors; the Managing Member Generally Has Limited Access to Information on or Control over Advisors’ Portfolios and Members Assume the Risk that Advisors May Knowingly Misrepresent Information Which Could Have a Material Negative Impact on the Company”.
 
At the Company’s portfolio level, the Company’s portfolio construction process is designed to provide for adequate diversification. Each Investment Fund, other than HFPO and GRV, is a portfolio of approximately 10-30 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. However, as of April 1, 2008, GFS is no longer prohibited from allocating 25% or more of its assets to any single Advisor. The managing member of GFS, in its sole discretion, may determine from time to time the number of Advisors with which GFS invests based on factors such as the amount of GFS’s assets under management, the availability of attractive opportunities, and other portfolio construction considerations. Any such greater concentration with any single Advisor or in any single investment strategy may entail additional risks. See Item 1A. “RISK FACTORS—General Risks—Risks Related to the Company and the Investment Funds’ Performance and Operation—Non-Diversified Status; the Managing Member may Allocate to One or More Advisors a Relatively Large Percentage of an Investment Fund’s Assets”.
 
Quantitative analysis is combined with judgment to determine weightings, strategic return, risk and correlation estimates to inform the quantitative analysis. Judgment is applied to both estimates and weights in an attempt to achieve exposure to hedge funds while delivering attractive risk-adjusted returns. The approximate weights of the Investees were 29% GELS, 33% GFS, 9% GRV, 19% GTT and 7% HFPO as of December 31, 2008 as a percentage of adjusted members’ equity which excluded redemptions paid after December 31, 2008. The approximate weights of the Investees were 38% GELS, 21% GFS, 6% GFS Trust, 1% GRV, 25% GTT and 3% HFPO as of December 31, 2009 as a percentage of adjusted members’ equity. This portfolio construction process is designed to create a diversified hedge fund portfolio with attractive return and risk characteristics. See ITEM 1. “BUSINESS—INVESTMENT PROGRAM—Allocation Among the Investment Funds”.
 
The Managing Member may, from time to time, vary or change materially the actual allocation of assets made by the Company, as it deems appropriate in its sole discretion, including without limitation by way of allocation of Company assets to any new Investment Fund or Advisor, complete or partial withdrawal of an allocation to any existing Investment Fund or Advisor, a reallocation of assets among existing Investment Funds or Advisors, or any combination of the foregoing. In carrying out any reallocation of Company assets, the Managing Member will have the sole discretion to determine the manner of such reallocation, including from which Investment Funds or Advisors to withdraw assets and to which Investment Funds or Advisors to allocate assets. Any reallocation of Company assets, for purposes of diversification, attempts to meet target allocations or otherwise, may take a significant period of time to implement due to the liquidity provisions and restrictions of the Investment Funds and the Advisors and for other reasons. There can be no assurance that market or other events will not have an adverse impact on the strategies employed by multiple Investment Funds and Advisors. Investment Funds and Advisors may at certain times hold large positions in a relatively limited number of investments. The Company could be subject to significant losses if an Investment Fund or an Advisor holds a large position in a particular investment that declines in value that cannot be liquidated without adverse market reaction or is otherwise adversely affected by changes in market conditions or circumstances. While the Managing Member currently expects to allocate assets to all the Investment Sectors (other than relative value) through allocations to the Investment Funds, since April 1, 2008, the Managing Member had no constraints with respect to the percentage of the Company’s assets to be allocated, directly or indirectly, to any single Advisor, group of Advisors, Investment Fund, or Investment Sector, or with respect to the number of Investment Funds and Advisors to which, directly or indirectly, assets of the Company are allocated at any time. The percentage of the Company’s assets to be allocated to any single Advisor, group of Advisors, Investment Fund or Investment Sector, and the number of Investment Funds and Advisors to which the Company allocates assets from time to time will be determined by the Managing Member in its sole discretion, based on factors deemed relevant by the Managing Member at the time of such allocation, which may include the amount of the Company’s assets under management, constraints on the capital capacity of the Investment Funds and Advisors, the availability of attractive opportunities, and other portfolio construction and portfolio management considerations.


142


Table of Contents

As the GRV portfolio is liquidated over time, the weighting of GRV as a percentage of the Company’s adjusted members’ equity will decrease. As of December 31, 2009, GRV represented approximately 1% of the Company’s adjusted members’ equity and the fair value of the Company’s investments in GRV was $4,887,674. The Company is reinvesting the liquidation proceeds it receives from GRV in accordance with the Company’s investment program.
 
The Company invests in the Investment Funds, and may from time to time redeem its membership units of the Investment Funds. Neither GFS Trust nor GRV provide investors with a voluntary redemption right. The Investment Funds, in turn, maintain relationships with counterparties that include the Advisors. These relationships could result in concentrations of credit risk. Credit risk arises from the potential inability of counterparties to perform their obligations under the terms of the contract, including, in the case of the Company’s investments in the Investment Funds, the potential inability of an Investment Fund to satisfy its redemption obligations. The managing member of the Investment Funds (currently, the Managing Member) has formal credit-review policies to monitor counterparty risk.
 
In addition to market risk and credit risk, the Managing Member, including in its capacity as managing member of the Investment Funds, allocates resources to mitigate operational risk. Operational risk is the potential for loss caused by a deficiency in information, communication, transaction processing, settlement and accounting systems. The Managing Member, including in its capacity as managing member of the Investment Funds, maintains controls and procedures for the purpose of mitigating its own operational risk but it does not have control over the systems of the Advisors. In addition, the Managing Member, including in its capacity as managing member of the Investment Funds, deploys resources to assess control systems, legal risk, compliance risk, operations and treasury risk, credit risk, accounting risk and reputational risk.
 
Fraud and other business risks cannot be eliminated; however, the Managing Member, including in its capacity as managing member of the Investment Funds, seeks to significantly reduce such risks. The portfolio risk management process includes an effort to monitor and manage risk, but should not be confused with and does not imply low risk. There can be no assurance that the Managing Member, including in its capacity as managing member of the Investment Funds, will be able to implement its risk guidelines or that its risk monitoring strategies will be successful.
 
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
For the Company’s financial statements, see the Financial Statements beginning on page F-1 of this Annual Report.
 
The following is a summary of unaudited quarterly results of operations of the Company for the period from January 1, 2008 to December 31, 2009.
 
                                 
    Fiscal Quarter Ended  
    Mar. 31,
    June 30,
    Sep. 30,
    Dec. 31,
 
    2008     2008     2008     2008  
 
Net Trading Profit/(Loss)
  $   (7,642,197 )   $   22,542,434     $   (64,673,915 )   $   (41,873,947 )
Total Expenses
  $ 2,395,147     $ 2,688,753     $ 2,573,237     $ 2,321,371  
Net Income/(Loss)
  $ (9,944,622 )   $ 19,929,186     $ (67,148,220 )   $ (44,061,135 )
Net Income/(Loss) Available for pro rata allocation to Members
  $ (9,946,834 )   $ 19,411,322     $ (66,642,618 )   $ (44,061,135 )
 
                                 
    Fiscal Quarter Ended  
    Mar. 31,
    June 30,
    Sep. 30,
    Dec. 31,
 
    2009     2009     2009     2009  
 
Net Trading Profit/(Loss)
  $   6,140,299     $   18,620,945     $   25,706,878     $   10,087,512  
Total Expenses
  $ 2,244,249     $ 2,200,386     $ 2,184,443     $ 2,242,580  
Net Income/(Loss)
  $ 3,976,409     $ 16,474,468     $ 23,537,710     $ 7,855,376  
Net Income/(Loss) Available for pro rata allocation to Members
  $ 3,975,595     $ 16,453,430     $ 23,464,525     $ 7,812,732  


143


Table of Contents

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
There have been no changes in, or disagreements with, accountants on accounting and financial disclosure.
 
ITEM 9A(T).   CONTROLS AND PROCEDURES
 
Disclosure 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 principal executive officer and principal financial officer (or persons performing similar functions), 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 principal executive officer and principal financial officer (or persons performing similar functions) concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
 
Management’s Report on Internal Control over Financial Reporting
 
The management of the Managing Member of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act, as a process designed by, or under the supervision of, the Managing Member’s principal executive and principal financial officers (or persons performing similar functions) and effected by the Managing Member’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for the Company for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
 
  •       pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
 
  •       provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
 
  •       provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the consolidated financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
The management of the Managing Member assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. In making this assessment, the Managing Member used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework.
 
Based on this assessment, the management of the Managing Member believes that, as of December 31, 2009, the Company’s internal control over financial reporting is effective based on those criteria.
 
This Annual Report does not include an Attestation Report of the Company’s registered public accounting firm regarding internal control over financial reporting. The report of the management of the Managing Member was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only the Managing Member’s management’s report in this Annual Report.


144


Table of Contents

The information contained in this report shall not be deemed to be filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, nor shall such information be incorporated by reference into any future filing under the Securities Act or the Exchange Act.
 
Changes in Internal Control Over Financial Reporting
 
In addition, no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the fourth quarter of the Company’s fiscal year ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
ITEM 9B.   OTHER INFORMATION
 
None.


145


Table of Contents

 
PART III
 
ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS OF THE MANAGING MEMBER AND REGISTRANT AND CORPORATE GOVERNANCE
 
The Company currently has directors but no executive officers, and historically has had no directors, until April 1, 2009, or executive officers. The Managing Member is, and has historically been, responsible for the management and operations of the Company. Information about the Managing Member and the GS Group appears in ITEM 1. See ITEM 1. “BUSINESS—THE MANAGING MEMBER”. On April 1, 2009, the Managing Member established a board of directors of the Company (the “Board of Directors”) to supervise the affairs of the Company in lieu of the supervision previously provided by the Board of Directors of the Managing Member. The Managing Member, through its executive officers who have responsibility for the Company, currently is and will continue to be responsible for the operations of the Company. The following table sets forth the executive officers of the Managing Member who have responsibility for the Company and the directors of the Company.
 
             
Name  
Age
  Position(s)
 
Kent A. Clark
    45     Managing Director and Chief Investment Officer of the Managing Member
Jennifer Barbetta
    37     Managing Director and Chief Financial Officer of the Managing Member
Westley D. Chapman
    43     Managing Director of the Managing Member
J. Christopher A. Kojima
    40     Director of the Company
A. Charles Baillie
    42     Director of the Company
 
Information about the executive officers of the Managing Member and the directors of the Company is provided below.
 
Kent A. Clark is a Managing Director of Goldman Sachs and Chairman of the Investment Committee of the Managing Member. Mr. Clark is also the Chief Investment Officer of the Managing Member, and performs the responsibilities of principal executive officer of the Managing Member. Mr. Clark joined GSAM in 1992 as a member of the Quantitative Equity team, where he managed Global Equity portfolios and equity market neutral trading strategies. In this capacity, he also developed risk and return models. Mr. Clark’s research has been published in the Journal of Financial and Quantitative Analysis and in Enhanced Indexing. Mr. Clark serves on the Board of Governors of the Graduate Faculty at the New School University, on the board of the Managed Funds Association, and is a member of the Chicago Quantitative Alliance. Formerly, he was president of the Society of Quantitative Analysts. Mr. Clark joined Goldman Sachs from the University of Chicago Graduate School of Business where he completed all but dissertation in the Ph.D. program and earned an M.B.A. He holds a Bachelor of Commerce degree from the University of Calgary.
 
Jennifer Barbetta is a Managing Director of Goldman Sachs and is the Chief Financial Officer of the Managing Member and a Director of the Managing Member. Ms. Barbetta is also the Chief Operating Officer for Goldman Sachs Asset Management’s Alternative Investments & Manager Selection businesses, which include the Private Equity Group, Hedge Fund Strategies and Global Manager Strategies. Ms. Barbetta is responsible for client reporting, portfolio monitoring and analytics, cash and credit management, infrastructure development and overall administration of the groups’ products. Ms. Barbetta joined Goldman Sachs in 1995 as an analyst in the Finance Division where she supported the Real Estate Principal Investment Area, focusing on the financial and tax reporting of the Whitehall Street Real Estate Limited Partnerships. Ms. Barbetta joined the Private Equity Group in 1997 and became head of its Portfolio Analytics and Reporting team in 2003 and Chief Operating Officer in 2005, prior to expanding her role within GSAM. Ms. Barbetta earned a B.S. in Finance from Villanova University and was a member of the Beta Gamma Sigma honor society.
 
Westley D. Chapman is a Managing Director of Goldman Sachs and Head of Quantitative, Operational & Business Due Diligence of the Managing Member. Prior to joining the Managing Member, Mr. Chapman was the Chief Financial Officer of the Investment Management Division where he led the division’s financial management processes, including a strategic review of the infrastructure systems and processes supporting the Managing


146


Table of Contents

Member. Prior to joining GSAM in 1997, Mr. Chapman was the Director of Financial Planning & Analysis at Travelers Group, focusing on their life insurance businesses, where he participated in the integration and evaluation of business acquisitions. Prior to joining Travelers Group in 1994, Mr. Chapman supported IBM as an auditor at Price Waterhouse where he led elements of the annual audit, performed control reviews of various Corporate Treasury systems and processes, and participated in a number of consulting projects. He obtained an M.B.A. in Finance from New York University in 1993 and a B.A. in Economics from Harvard College in 1989. Mr. Chapman is a Certified Public Accountant.
 
J. Christopher A. Kojima has been a director of the Company since April 1, 2009. Mr. Kojima is a Managing Director of Goldman Sachs and co-head of the Alternative Investments and Manager Selection businesses, which oversees the Private Equity Group, Hedge Fund Strategies Group, Global Manager Strategies Group and Portfolio Solutions Group. Previously, Mr. Kojima was the co-head of the Private Equity Group focusing on the private equity secondary market. Prior to joining the Private Equity Group, Mr. Kojima specialized in leveraged buyouts in the Leveraged Finance Group. Mr. Kojima joined Goldman Sachs in 1995 in the Investment Banking Division. Mr. Kojima is a trustee of The Juilliard School and The Asian Cultural Council, and serves as adjunct professor at Columbia Business School. Mr. Kojima earned a JD, cum laude, from Harvard Law School and is a member of the New York Bar. Mr. Kojima received an M.Phil. from The University of Cambridge, and a B.Comm. from The University of Manitoba.
 
A. Charles Baillie has been a director of the Company since April 1, 2009. Mr. Baillie is a Managing Director of Goldman Sachs and co-head of the Alternative Investments and Manager Selection businesses in the Investment Management Division, which oversees the Private Equity Group, Hedge Fund Strategies Group, Global Manager Strategies Group and Petershill Group. Prior to joining the Private Equity Group, Mr. Baillie worked in the Mergers & Acquisitions Group in London where he focused on restructurings. Mr. Baillie joined the firm as an analyst in 1991 in the Corporate Finance Department of the Investment Banking Division. Mr. Baillie received a BAH from Queen’s University, Canada, an MA from the University of Oxford, and an MBA from the Harvard Graduate School of Business Administration, where he graduated as a Baker Scholar.
 
Compliance with Section 16(a) of the Securities Exchange Act of 1934
 
Section 16(a) of the Exchange Act requires the officers and directors of the Managing Member and persons who own more than ten percent of the Company’s units to file forms reporting their affiliation with the Company and reports of ownership and changes in ownership of the Company’s units with the SEC. These persons and entities are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. To the best of the Company’s knowledge, based solely on a review of the copies of such reports furnished to the Company, during the year ended December 31, 2009 all Section 16(a) filing requirements applicable to such persons and entities were complied with for such year.
 
Code of Ethics
 
The Managing Member has adopted a Code of Ethics for the Company that applies to the Board of Directors and the persons acting as chief executive officer and chief financial officer/chief accounting officer of the Company. A copy of the Company’s Code of Ethics was filed as an exhibit to the Company’s Form 10-K for December 31, 2004. If the Company makes any substantive amendments to the Code of Ethics or grants any waiver, including an implicit waiver, from a provision of the Code of Ethics as applicable to the persons acting as chief executive officer and chief financial officer/chief accounting officer of the Company, the Company will disclose the nature of such amendment or waiver in a report on Form 8-K. In addition, the Managing Member has adopted a Code of Ethics for the Managing Member that applies to, among others, the chief executive officer and chief financial officer/chief accounting officer of the Managing Member. A copy of the Managing Member’s Amended Code of Ethics was filed as an exhibit to the Company’s Form 10-K, filed April 2, 2007.


147


Table of Contents

Corporate Governance
 
Nominating Committee and Compensation Committee
 
The Company is not a “listed issuer” as defined under Section 10A-3 of the Exchange Act and is therefore not required to have a nominating and compensation committee comprised of independent directors. The Company currently does not have a standing nominating or compensation committee and accordingly there are no charters for such committees. The Board of Directors believes that standing committees are not necessary and that the directors of the Board of Directors collectively have the requisite background, experience, and knowledge to fulfill any limited duties and obligations that a nomination committee and a compensation committee would have on behalf of the Company. In addition, no direct compensation is paid to any employees of the Company making a compensation committee not applicable. Furthermore, the Board of Directors has the power to engage experts or consultants as it deems appropriate to carry out its responsibilities.
 
Audit Committee and Audit Committee Financial Expert
 
The Company is not a “listed issuer” as defined under Section 10A-3 of the Exchange Act and is therefore not required to have an audit committee comprised of independent directors. The Company currently does not have an audit committee, and accordingly there is no charter for such committee, and the Board of Directors which performs the functions of an audit committee on behalf of the Company believes that the directors of the Company collectively have the requisite financial background, experience, and knowledge to fulfill the duties and obligations that an audit committee would have including overseeing the Company’s accounting and financial reporting practices. Therefore, the Board of Directors does not believe that it is necessary at this time to search for a person who would qualify as an audit committee financial expert. Furthermore, the Board of Directors has the power to engage experts or consultants as it deems appropriate to carry out its responsibilities.
 
The Board of Directors has:
 
  •       reviewed and discussed the financial statements with management of the Managing Member responsible for the management and operations of the Company;
 
  •       discussed with the independent auditors the matters required to be discussed by the Statement of Auditing Standards No. 114, as amended, as adopted by the Public Company Accounting Oversight Board in Rule 3200T;
 
  •       received the written disclosures and the letters from the independent accountants required by the Public Company Accounting Oversight Board in Rule 3526, and has discussed with the independent accountant, the independent accountant’s independence; and based on the review and discussions referred to above, the Board of Directors recommended that the audited financial statements be included in the Company’s Annual Report for filing with the SEC.
 
Advisory Committee
 
In addition, pursuant to the Company’s LLC Agreement, the Managing Member is authorized to select one or more Members who are not affiliated with the Managing Member to serve on a committee, the purpose of which would be to, on behalf of the Members, approve or disapprove, to the extent required by applicable law, principal transactions and certain other related party transactions.
 
Board Meetings and Committees; Annual Meeting Attendance; Shareholder Communications
 
The Board of Directors is responsible for the management and operations of the Company. In 2009, the Board of Directors met frequently, including at regularly scheduled quarterly meetings, with employees of the Managing Member to discuss, among other things, the Company. As discussed above, the Company does not have standing audit, nominating and compensation committees.
 
The Company does not have a policy with regard to board members’ attendance at annual meetings of Members. The Company does not hold director elections and therefore does not solicit proxies for the elections of directors from Members (or by written consent) and the Company is not required under Delaware law nor under its


148


Table of Contents

LLC Agreement to hold annual meetings for its Members. The Company did not hold an annual meeting for Members in 2009 and accordingly no members of the Board of Directors attended.
 
Members wishing to communicate with the Board of Directors may send communications to Ms. Kristin Olson, Goldman, Sachs & Co., 200 West Street, New York, New York 10282 who will forward all appropriate communications directly to the Board of Directors or to any individual director or directors, depending upon the facts and circumstances outlined in the communication. In addition, Members have the opportunity to receive the Company’s monthly report to Members which provides for information as to how Members can contact a designated contact person at the Managing Member with any questions relating to the Member’s investment in the Company and the Company’s performance. Moreover, the Memorandum provides for contact information for Members relating to their investment in the Company. The Managing Member believes that it is not necessary to have a more specific and detailed process and that providing contact information for the Managing Member provides for an appropriate means for communication for Members with the Board of Directors or with respect to their investment in the Company.
 
ITEM 11.   EXECUTIVE COMPENSATION
 
The Company does not bear the costs of the annual compensation of its directors or the executive officers of the Managing Member. The Managing Member and its affiliates receive compensation from the Company for services provided to the Company and will not bear costs for the Company’s directors. Set forth below are the amounts of the different types of fees paid or payable by the Company, or allocable to the Managing Member and its affiliates during the year ended December 31, 2009. Information about the terms and conditions of the Management Fee and the Incentive Allocation and other fees and expenses appear in ITEM 1. See ITEM 1. “BUSINESS—FEES AND EXPENSES”.
 
         
Fee Type   Fee Amount  
 
Management Fee paid or payable by the Company
  $ 7,578,899  
Incentive Allocation paid or payable by the Company
  $ 137,681  
Placement Fee paid or payable by the Company to Goldman Sachs
  $  
 
ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
Security Ownership of Certain Beneficial Owners
 
To the knowledge of the Company, no person beneficially owns more than five percent of the units.
 
Security Ownership of Management
 
GS HFS, the Managing Member of the Company, did not have a beneficial interest in the Company as of December 31, 2009 other than the Incentive Allocation and other fees payable to it by the Company.
 
The following table sets forth (i) the individual directors and executive officers of the Managing Member and the directors of the Company and (ii) all of the directors and executive officers as a group who beneficially owned units of the Company as of March 29, 2010.
 
                 
          Percentage of All
 
          Investors’
 
Number of Units
    Name of Beneficial Owner   Interests  
 
  0     Kent A. Clark      
  0     Jennifer Barbetta      
  0     Westley D. Chapman      
  0     J. Christopher A. Kojima      
  0     A. Charles Baillie      
  0     Directors and executive officers as a group      


149


Table of Contents

Changes in Control
 
There are no arrangements, including pledges by any person of units of the Company, the operation of which may at a subsequent date result in a change of control of the Company.
 
ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
The Managing Member is an advisory affiliate of Goldman Sachs and GSAM. Each of the Managing Member, Goldman Sachs and GSAM is a wholly owned subsidiary of The Goldman Sachs Group, Inc. See ITEM 1. “BUSINESS—POTENTIAL CONFLICTS OF INTEREST”.
 
The Managing Member also manages a number of other investment funds that have investment programs that are similar to those of the Company. See ITEM 1. “BUSINESS—POTENTIAL CONFLICTS OF INTEREST”.
 
From time to time certain qualified officers and employees of the GS Group may invest in the Company. Neither the Investment Funds’ Advisors nor any of their respective principals are presently expected to purchase units or membership units in the Investment Funds. See ITEM 1. “BUSINESS—POTENTIAL CONFLICTS OF INTEREST”.
 
The Company may from time to time, in the sole discretion of the Managing Member, invest in money market funds sponsored, managed or advised by the GS Group, and the Company will not be reimbursed for any fees accruing to any affiliate of the GS Group in respect of any such investment. See ITEM 1. “BUSINESS—INVESTMENT PROGRAM—Investment Objective and Approach”.
 
The Company pays the Managing Member a Management Fee. See ITEM 1. “BUSINESS—FEES AND EXPENSES”.
 
Some of the directors of the Company and executive officers of the Managing Member also are or may become directors and executive officers of Goldman Sachs which entities provided services for the Company, other than as an underwriter, during the year ended December 31, 2009 and are proposed to provide such services in the current year.
 
No directors of the Company and executive officers of the Managing Member, their spouses and entities owned or controlled by them invested an amount in excess of $120,000 in the Company during the year ended December 31, 2009. Certain directors of the Company and executive officers of the Managing Member, including their spouses and entities owned or controlled by them, may from time to time invest in the Company. In addition, certain of the directors of the Company and executive officers of the Managing Member from time to time invest their personal funds directly in other funds managed by the GS Group on the same terms and conditions as the other investors in these funds, who are not directors, executive officers or employees.
 
Under the Company’s Related Party Transaction Policy, which is a written policy adopted as of March 28, 2007, the Board of Directors is required to review all related party transactions for potential conflicts of interest. The Board of Directors shall approve each such transaction if it is consistent with the policy and is on terms, taken as a whole, which the Board of Directors believes are no less favorable to the Company than could be obtained in an arms-length transaction with an unrelated third party, unless the Board of Directors otherwise determines that the transaction is not in the Company’s best interests. The policy also provides for a ratification process if it is not practical for the Board of Directors to review the transaction in advance.
 
The types of related party transactions covered by the policy are those that are required to be disclosed pursuant to SEC Regulation S-K, Item 404(a). There were no transactions required to be reported under Item 404(a) since the beginning of the Company’s fiscal year where the Company’s procedures and policies did not require review or were not followed.
 
Pursuant to the LLC Agreement, the Managing Member is authorized by the Members to select on behalf of the Members one or more Members who are not affiliated with the Managing Member to serve on a committee, the


150


Table of Contents

purpose of which will be to consider and, on behalf of the Members, approve or disapprove, to the extent required by the applicable law, principal transactions and certain other related party transactions.
 
Director Independence
 
The Company is not a “listed issuer” as defined under Section 10A-3 of the Exchange Act and is therefore not subject to a requirement that a majority of the board of directors be independent. The Managing Member is responsible for the management and operations of the Company. All of the directors of the Company are employees of Goldman Sachs and the Managing Member. Accordingly, under the Independence Test of the Corporate Governance Standards of the New York Stock Exchange and other comparable stock exchange standards, none of the directors of the Company are independent. Similarly, as discussed further under Item 10, the Company is not subject to the requirements under the Corporate Governance Standards of the New York Stock Exchange that the audit, nominating and compensation committees be comprised of independent directors and the Managing Member does not currently have and the Company is not expected to have separately designated audit, nominating and compensation committees.
 
Brokerage
 
The Advisors of the Investment Funds, managing their assets directly (including through Advisor Funds) or through Portfolio Companies, have the authority to select brokers and dealers from a list approved by the managing member of the Investment Funds, through which to effect transactions on the basis of various factors. The managing member of the Investment Funds requires such Advisors to select executing brokers on a best execution basis, taking into consideration such factors as price, commissions and commission equivalents, other transaction costs, quality of brokerage services, financing arrangements, creditworthiness and financial stability, financial responsibility, strength and clearance and settlement capability. The Company does not have oversight over broker and dealer selection by Investment Funds.
 
To the extent permitted under applicable law, the Advisors may, in their sole discretion, execute transactions on behalf of the Company and the Investment Funds, through Managed Accounts, Portfolio Companies and Advisor Funds, and with or through Goldman Sachs, and such transactions may, in some cases, be executed together with transactions on behalf of Goldman Sachs. The Advisors may also use Goldman Sachs for prime brokerage and other services for the Managed Accounts, Portfolio Companies and Advisor Funds, as well as their other clients.
 
Additionally, in selecting brokers and dealers to execute transactions for any Portfolio Company or Advisor Fund, or the Company or an Investment Fund through any Managed Account, certain of the Advisors may have authority to and may consider products or services provided, or expenses paid, by such brokers and dealers to, or on behalf of, such Advisors. Products and services generally include research items. In some circumstances, the commissions paid on transactions with brokers or dealers providing such services may exceed the amount another broker would have charged for effecting that transaction. “Soft dollar” payments or rebates of amounts paid to brokers and dealers may arise from exchange traded agency transactions, as well as over-the-counter principal transactions. In addition, such payments or rebates may be made by futures brokers in connection with futures transactions.
 
Research or other services obtained in this manner may be used in servicing any or all advisory clients of the Advisors of the Investment Funds, including each of the Investment Funds and the Portfolio Companies, and may be used in connection with advisory accounts other than those that pay commissions to the broker or dealer relating to the research or other service arrangements.
 
GS Group may also receive products or services, including research, from brokers and dealers that provide brokerage services to its clients. The brokers and dealers providing such products and services may include the brokers and dealers that Advisors select to execute transactions on behalf of Portfolio Companies and Advisor Funds, and the Company or an Investment Fund through Managed Accounts. Research products and services made available to GS Group through such brokers and dealers may include: performance and other qualitative and quantitative data relating to Advisors in general and certain Advisors in particular; data relating to the historic performance of categories of securities associated with particular investment styles; quotation equipment; and related computer hardware and software, all of which research products and services may be used by the managing


151


Table of Contents

member of the Investment Funds in connection with its selection and monitoring of Advisors, the portfolio design of a mix of investment styles appropriate to investment objectives of clients, and the determination of overall portfolio strategies including asset allocation models.
 
Placement Agent
 
Goldman Sachs acts as placement agent for the Company (the “Placement Agent”). The Placement Agent is entitled to a fee (the “Placement Fee”) of up to a specified amount of each Member’s subscription. Historically, Goldman Sachs has not charged a Placement Fee, however, there can be no assurance that Goldman Sachs will not charge a Placement Fee in the future. Amounts paid in respect of the Placement Fee will not constitute assets of the Company. The Placement Agent may also receive compensation from the Managing Member that represents a portion of the Management Fee. The Placement Agent may enter into sub-placement agreements with affiliates and unaffiliated third parties, and the Company may engage one or more affiliated or unaffiliated successors or additional placement agents or distributors. At the discretion of the Placement Agent, all or a portion of the Placement Fee may be allocated to such sub-placement agents. The Managing Member or the Company may also pay certain expenses of the Placement Agent and certain fees and expenses of other Intermediaries. The Company may waive or impose different sales charges, or otherwise modify its distribution arrangements, in connection with the offering of units. Subject to applicable law, the Placement Agent and Intermediaries, at their discretion (with the approval of the Managing Member) may on a negotiated basis enter into private arrangements with a Member or prospective Member (or an agent thereof) under which the Placement Agent, an Intermediary or the Managing Member makes payments to or for the benefit of such Member which represent a rebate of all or part of the fees paid by the Company to the Managing Member in respect of such holder’s units. Consequently, the effective net fees payable by a Member who is entitled to receive a rebate under the arrangements described above may be lower than the fees payable by a Member who does not participate in such arrangements. Such arrangements reflect terms privately agreed between parties other than the Company, and for the avoidance of doubt, the Company cannot, and is under no duty to, enforce equality of treatment between Members by other entities, including those service providers of the Company that it has appointed. The Placement Agent, an Intermediary or the Managing Member shall be under no obligation to make arrangements available on equal terms to other Members. Pursuant to an agreement entered into between the Placement Agent and the Company (the “Placement Agent Agreement”), the Company has agreed to indemnify and hold harmless the Placement Agent, its affiliates and any agent against any losses, claims, damages or liabilities (or actions in respect thereof), joint or several (the “Covered Claims”), to which the Placement Agent may become subject, to the extent such Covered Claims arise out of or are based upon (i) an untrue statement or alleged untrue statement of a material fact contained in the Memorandum, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading. The Placement Agent Agreement provides that the Company will reimburse the Placement Agent for any legal or other expenses reasonably incurred by the Placement Agent in connection with investigating or defending any such Covered Claims; provided, however, that the Company will not be liable to indemnify or reimburse the Placement Agent in any such case to the extent that any such Covered Claims arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Memorandum in reliance upon and in conformity with written information furnished to the Company by the Placement Agent expressly for use therein.
 
In addition, to the extent the indemnification provisions described in the preceding paragraph are unavailable or insufficient to hold harmless an indemnified party with respect to any Covered Claims, the Placement Agent Agreement specifies that the Company will contribute to the amount paid or payable by such indemnified party as a result of such Covered Claims in such proportion as is appropriate to reflect the relative benefits received by the Company and the Placement Agent from the offering of the units, unless otherwise provided by applicable law or the Placement Agent Agreement.
 
Goldman Sachs also acts as the placement agent on behalf of the Investment Funds. The Company will not be charged any placement fee by the Investment Funds.


152


Table of Contents

ITEM 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES
 
The following table presents fees for the professional audit services rendered by E&Y for the audit of the Company’s annual financial statements for the years ended December 31, 2009 and 2008 and fees billed for other services rendered by E&Y during those periods.
 
                 
    Year Ended
 
    December 31  
    2009     2008  
 
Audit Fees
  $ 179,473     $ 148,000  
Audit-Related Fees
  $     $  
Tax Fees(1)
  $ 81,500     $ 70,800  
All Other Fees
  $     $  
                 
Total
  $ 260,973     $ 218,800  
                 
 
 
(1) Tax services primarily involve assistance with the preparation of tax returns and K-1s.
 
The Board of Directors does not have an audit committee which is responsible for the oversight of the Company’s accounting and financial reporting practices. As the Company does not have a formal audit committee, the services described above were not approved by the audit committee and the Company does not have audit committee pre-approval policies and procedures. The Board of Directors as a whole is responsible for the oversight of the Company’s accounting and financial reporting practices and the Board of Directors is responsible for approving every engagement of E&Y to perform audit or non-audit services for the Company before E&Y is engaged to provide those services. The Board of Directors considers whether the provision of any non-audit provisions is compatible with maintaining E&Y’s independence.


153


Table of Contents

 
PART IV
 
ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
(a)  Documents Filed as Part of this Annual Report:
 
1.  Financial Statements.
 
         
    Page
 
Description of Financial Statements
  Number  
 
Goldman Sachs Hedge Fund Partners, LLC Financial Statements
       
Report of Independent Registered Public Accounting Firm
    F-2  
Schedule of Investments as of December 31, 2009 and December 31, 2008
    F-3  
Balance Sheet as of December 31, 2009 and December 31, 2008
    F-4  
Statement of Operations for the years ended December 31, 2009, 2008 and 2007
    F-5  
Statement of Changes in Members’ Equity for the years ended December 31, 2009, 2008 and 2007
    F-6  
Statement of Cash Flows for the years ended December 31, 2009, 2008 and 2007
    F-7  
Notes to Financial Statements
    F-8  
 
  2.   Financial Statement Schedules.
 
Certain schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
 
  3.   List of Exhibits.
 
See Index of Exhibits included on page E-1.


154


Table of Contents

SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
(Registrant)
 
By: Goldman Sachs Hedge Fund Strategies LLC
Managing Member
 
  By: 
/s/  Jennifer Barbetta
Name: Jennifer Barbetta
Title: Managing Director and Principal Financial Officer
Date: March 30, 2010
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
 
             
   
Signature
 
Capacity
 
Date
 
         
/s/  J. Christopher A. Kojima

J. Christopher A. Kojima
  Director   March 30, 2010
         
/s/  A. Charles Baillie

A. Charles Baillie
  Director   March 30, 2010


155


Table of Contents

INDEX OF EXHIBITS
 
         
Exhibit No.
  Description
 
  3 *   Copy of Amended and Restated Limited Liability Company Agreement of Goldman Sachs Hedge Fund Partners, LLC dated January 1, 2006 (Note: the Company’s LLC Agreement also defines the rights of the holders of units of the Company) (filed as Exhibit 3 to the Form 8-K, filed January 6, 2006, and incorporated herein by reference).
  10.1 *   Copy of Amended and Restated Limited Liability Company Agreement of Goldman Sachs Global Tactical Trading, LLC, dated as of January 1, 2006 (filed as Exhibit 10.1 to the Form 8-K, filed January 6, 2006, and incorporated herein by reference).
  10.2 *   Copy of Amended and Restated Limited Liability Company Agreement of Goldman Sachs Global Equity Long/Short, LLC, dated as of January 1, 2008 (filed as Exhibit 10.2 to the Form 10-K filed March 31, 2008, and incorporated herein by reference).
  10.3 *   Copy of Amended and Restated Limited Liability Company Agreement of Goldman Sachs Global Relative Value, LLC, dated as of January 1, 2006 (filed as Exhibit 10.3 to the Form 8-K, filed January 6, 2006, and incorporated herein by reference).
  10.4 *   Form of Amended and Restated Limited Liability Company Agreement of Goldman Sachs Global Fundamental Strategies, LLC, to be dated as of April 1, 2008 (filed as Exhibit 10.5 to the Form 10-K, filed March 31, 2008, and incorporated herein by reference).
  10.5 *   Copy of Limited Liability Company Agreement of Goldman Sachs HFP Opportunistic Fund, LLC, dated as of June 25, 2007 (filed as Exhibit 10.6 to the Form 10-K, filed March 31, 2008, and incorporated herein by reference).
  10.6 *   Distribution Agreement between Goldman Sachs Hedge Fund Partners, LLC and Goldman, Sachs & Co. dated March 1, 2002 (filed as Exhibit 10.5 to the Form 10, filed April 29, 2004, and incorporated herein by reference).
  10.7 *   Administration Agreement between Goldman Sachs Hedge Fund Partners, LLC and Goldman Sachs Hedge Fund Strategies LLC (formerly Goldman Sachs Princeton LLC) dated March 1, 2002 (filed as Exhibit 10.6 to the Form 10, filed April 29, 2004, and incorporated herein by reference).
  10.8 *   Administration Agreement between Goldman Sachs Hedge Fund Partners, LLC and SEI Global Services, Inc. dated February 9, 2007 (filed as Exhibit 10.7 to the Form 10-K, filed April 2, 2007, and incorporated herein by reference).
  14.1 *   Code of Ethics for Goldman Sachs Hedge Fund Partners, LLC (filed as Exhibit 14.1 to the Form 10-K, filed March 29, 2005, and incorporated herein by reference).
  14.2 *   Amended Code of Ethics for Goldman Sachs Hedge Fund Strategies LLC (filed as Exhibit 14.2 to the Form 10-K, filed April 2, 2007, and incorporated herein by reference).
  31.1     Certification in the form prescribed by Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934.
  31.2     Certification in the form prescribed by Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934.
  32.1     Certification in the form prescribed by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
* Previously filed


E-1


Table of Contents


Table of Contents

 
Report of Independent Registered Public Accounting Firm
 
 
The Board of Directors and Members
Goldman Sachs Hedge Fund Partners, LLC
 
We have audited the accompanying balance sheet, including the schedule of investments, of Goldman Sachs Hedge Fund Partners, LLC (the “Company”) as of December 31, 2009 and 2008, and the related statements of operations, changes in members’ equity and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Goldman Sachs Hedge Fund Partners, LLC at December 31, 2009 and 2008, the results of its operations, the changes in its members’ equity and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
 
/s/  ERNST & YOUNG LLP
 
New York, New York
March 30, 2010


F-2


Table of Contents

GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
December 31, 2009 and December 31, 2008
 
                                                 
    2009     2008  
          % of
    % of adjusted
          % of
    % of adjusted
 
    Fair
    members’
    members’
    Fair
    members’
    members’
 
Affiliated Investee   value     equity(1)     equity(2)     value     equity(1)     equity(2)  
 
Goldman Sachs Global Equity Long/Short, LLC
  $ 235,518,832       39.40 %     37.98 %   $ 182,311,620       29.89 %     28.53 %
Goldman Sachs Global Fundamental Strategies, LLC
    132,477,127       22.17 %     21.36 %     212,189,214       34.79 %     33.21 %
Goldman Sachs Global Fundamental Strategies Asset Trust
    37,532,758       6.28 %     6.05 %                  
Goldman Sachs Global Relative Value, LLC
    4,887,674       0.82 %     0.79 %     59,060,101       9.68 %     9.24 %
Goldman Sachs Global Tactical Trading, LLC
    155,217,816       25.97 %     25.03 %     119,121,670       19.53 %     18.65 %
Goldman Sachs HFP Opportunistic Fund, LLC
    20,801,289       3.48 %     3.36 %     42,106,058       6.91 %     6.59 %
                                                 
Total investments (cost $526,489,487 and $580,410,892, respectively)
  $ 586,435,496       98.12 %     94.57 %   $ 614,788,663       100.80 %     96.22 %
                                                 
 
The Company’s aggregate proportionate share of the following underlying investments of the Investees represented greater than 5% of the Company’s member’s equity at December 31, 2009 and December 31, 2008.
 
                                         
December 31, 2009  
                            % of
 
                Proportionate
    % of
    Adjusted
 
    Underlying
          Share of
    Members’
    Members’
 
Affiliated Investee
  Investment     Strategy     Fair Value     Equity(1)     Equity(2)  
 
Goldman Sachs Tactical
Trading, LLC
    GS Global Trading Advisors, LLC(4 )     Managed Futures     $ 58,480,624       9.78 %     9.43 %
 
                                         
December 31, 2008  
                            % of
 
                Proportionate
    % of
    Adjusted
 
    Underlying
          Share of
    Members’
    Members’
 
Affiliated Investee
  Investment     Strategy     Fair Value     Equity(1)     Equity(2)  
 
Goldman Sachs Global Fundamental Strategies, LLC
    Eton Park Fund, L.P.(3 )     Multi-Strategy     $ 34,543,108       5.66 %     5.41 %
Goldman Sachs Tactical Trading, LLC
    GS Global Trading Advisors, LLC(4 )     Managed Futures     $ 33,660,348       5.52 %     5.27 %
 
 
(1) Members’ equity, used in the calculation of the fair value of each of the investees and the underlying investment as a percentage of members’ equity, is reduced for member redemptions that are paid after the balance sheet date according to Statement of Financial Accounting Standards ASC 480, “Distinguishing Liabilities from Equity.”
 
(2) Adjusted members’ equity, used in the calculation of the fair value of each of the investees and the underlying investment as a percentage of adjusted members’ equity represents members’ equity excluding Redemptions payable in the amount of $22,410,715 at December 31, 2009 and Redemptions payable in the amount of $28,982,893 at December 31, 2008.
 
(3) Liquidity term is as follows: 1/3 after a 3.5 year holding period, 1/3 after a 4.5 year holding period, 1/3 after a 5.5 year holding period.
 
(4) Affiliated investment fund with a monthly liquidity term.
 
See accompanying notes.


F-3


Table of Contents

GOLDMAN SACHS HEDGE FUND PARTNERS, LLC

BALANCE SHEET

December 31, 2009 and December 31, 2008
 
                 
    2009     2008  
 
ASSETS
Assets:
               
Investments in affiliated Investees, at fair value (cost $526,489,487 and $580,410,892, respectively)
  $ 586,435,496     $ 614,788,663  
Cash and cash equivalents
    35,470,838       26,943,800  
                 
Total assets
  $ 621,906,334     $ 641,732,463  
                 
 
LIABILITIES AND MEMBERS’ EQUITY
Liabilities:
               
Redemptions payable
  $ 22,410,715     $ 28,982,893  
Due to managing member
    1,288,968       2,017,653  
Interest payable
    13,556       6,889  
Accrued expenses and other liabilities
    495,060       788,957  
                 
Total liabilities
    24,208,299       31,796,392  
Members’ equity (units outstanding 4,736,483.29 and 5,040,063.11, respectively)
    597,698,035       609,936,071  
                 
Total liabilities and members’ equity
  $ 621,906,334     $ 641,732,463  
                 
Analysis of members’ equity:
               
Net capital contributions, accumulated net investment income/(loss) and realized profit/(loss) on investments
  $ 537,752,026     $ 575,558,300  
Accumulated net unrealized profit/(loss) on investments
  $ 59,946,009     $ 34,377,771  
                 
Total members’ equity*
  $ 597,698,035     $ 609,936,071  
                 
 
 
Refer to Note 8 for units outstanding and NAV per unit amounts by series.
 
See accompanying notes.


F-4


Table of Contents

GOLDMAN SACHS HEDGE FUND PARTNERS, LLC

STATEMENT OF OPERATIONS

For the years ended December 31, 2009, 2008 and 2007
 
                         
    2009     2008     2007  
 
Income from trading:
                       
Realized and unrealized gain/(loss) on investments in affiliated Investees:
                       
Net realized gain/(loss)
  $ 38,166,633     $ 43,741,004     $ 49,362,879  
Net change in unrealized gain/(loss)
    22,389,001       (135,388,629 )     38,513,068  
                         
Net trading gain/(loss)
    60,555,634       (91,647,625 )     87,875,947  
Interest and dividend income
    159,987       401,342       326,730  
Expenses:
                       
Management fee
    7,578,899       8,638,530       8,636,414  
Professional fees
    1,049,718       1,059,248       632,679  
Interest expense
    81,111       81,333       283,897  
Other expenses
    161,930       199,397       255,106  
                         
Total expenses
    8,871,658       9,978,508       9,808,096  
                         
Net investment income/(loss)
    (8,711,671 )     (9,577,166 )     (9,481,366 )
                         
Net income/(loss)
    51,843,963       (101,224,791 )     78,394,581  
Less: Incentive allocation to the Managing Member
    137,681       14,474       3,919,729  
                         
Net income/(loss) available for pro-rata allocation to members
  $ 51,706,282     $ (101,239,265 )   $ 74,474,852  
                         
 
See accompanying notes.


F-5


Table of Contents

GOLDMAN SACHS HEDGE FUND PARTNERS, LLC

STATEMENT OF CHANGES IN MEMBERS’ EQUITY

For the years ended December 31, 2009, 2008 and 2007
 
                                 
    Managing
                Total
 
    member’s
    Member’s
    Member’s
    member’s
 
    equity     units     equity     equity  
 
Member’s equity at December 31, 2006
  $       4,928,239.53     $ 662,074,474     $ 662,074,474  
Subscriptions
          430,805.00       43,080,500       43,080,500  
Redemptions
    (3,919,729 )     (671,424.67 )     (98,845,744 )     (102,765,473 )
Share class conversion
          (99,115.71 )            
Allocations of net income/(loss):
                               
Incentive allocation
    3,919,729                   3,919,729  
Pro-rata allocation
                74,474,852       74,474,852  
                                 
Member’s equity at December 31, 2007
          4,588,504.15       680,784,082       680,784,082  
                                 
Subscriptions
          1,242,512.66       124,251,266       124,251,266  
Redemptions
    (14,474 )     (655,466.41 )     (93,860,012 )     (93,874,486 )
Share Class conversion
          (135,487.29 )            
Allocations of net income/(loss):
                               
Incentive allocation
    14,474                   14,474  
Pro-rata allocation
                (101,239,265 )     (101,239,265 )
                                 
Member’s equity at December 31, 2008
          5,040,063.11     $ 609,936,071       609,936,071  
                                 
Subscriptions
          738,758.37       73,875,837       73,875,837  
Redemptions
    (137,681 )     (1,042,338.19 )     (137,820,155 )     (137,957,836 )
Share Class conversion
                       
Allocations of net income/(loss):
                               
Incentive allocation
    137,681                   137,681  
Pro-rata allocation
                51,706,282       51,706,282  
                                 
Member’s equity at December 31, 2009
  $       4,736,483.29     $ 597,698,035     $ 597,698,035  
                                 
 
See accompanying notes.


F-6


Table of Contents

GOLDMAN SACHS HEDGE FUND PARTNERS, LLC

STATEMENT OF CASH FLOWS

For the years ended December 31, 2009, 2008 and 2007
 
                         
    2009     2008     2007  
 
Cash flows from operating activities
                       
Net income/(loss)
  $ 51,843,963     $ (101,224,791 )   $ 78,394,581  
Adjustments to reconcile net income/(loss) to net cash provided by (used in) operating activities:
                       
Subscription of investments in affiliated Investees
    (142,600,000 )     (151,000,000 )     (100,310,000 )
Proceeds from redemptions of investments in affiliated Investees
    231,508,801       147,000,000       172,000,000  
Net realized gain/(loss) from investments in affiliated Investees
    (38,166,633 )     (43,741,004 )     (49,362,879 )
Net change in unrealized gain/(loss) of investments in affiliated Investees
    (22,389,001 )     135,388,629       (38,513,068 )
Increase/(decrease) in operating liabilities
                       
Due to managing member
    (728,685 )     (164,006 )     766,233  
Accrued expenses and other liabilities
    (293,897 )     607,771       (87,314 )
                         
Net cash from operating activities
    79,174,548       (13,133,401 )     62,887,553  
                         
Cash flows from financing activities
                       
Subscriptions
    73,875,837       124,251,266       43,080,500  
Redemptions
    (144,530,014 )     (87,599,738 )     (103,758,527 )
Proceeds from loan
    6,667             20,283,897  
Repayments of loan
                (20,292,600 )
                         
Net cash from financing activities
    (70,647,510 )     36,651,528       (60,686,730 )
                         
Net change in cash and cash equivalents
    8,527,038       23,518,127       2,200,823  
Cash and cash equivalents at beginning of year
    26,943,800       3,425,673       1,224,850  
                         
Cash and cash equivalents at end of year
  $ 35,470,838     $ 26,943,800     $ 3,425,673  
                         
Supplemental disclosure of cash flow information
                       
Cash paid by the Company during the year for interest
  $ 74,444     $ 81,333     $ 292,600  
                         
In-kind transfer from Goldman Sachs Global Fundamental Strategies, LLC to Goldman Sachs Global Fundamental Strategies Asset Trust (Refer to Note 3)
  $ 47,730,311     $     $  
                         
 
See accompanying notes.


F-7


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
NOTES TO FINANCIAL STATEMENTS
 
December 31, 2009
 
Note 1 – Organization
 
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 (the “Investment Sectors”). Currently, substantially all of the Company’s assets are allocated to Goldman Sachs Global Equity Long/Short, LLC (“GELS”), Goldman Sachs Global Fundamental Strategies, LLC (“GFS”), Goldman Sachs Global Tactical Trading, LLC (“GTT”) and Goldman Sachs HFP Opportunistic Fund, LLC (“HFPO”) (collectively, the “Investment Funds”). The balance of the Company’s assets are invested in Goldman Sachs Global Fundamental Strategies Asset Trust (“GFS Trust”) and Goldman Sachs Global Relative Value, LLC (“GRV” and, together with GFS Trust and the Investment Funds, the “Investees”). Each of these Investees invests indirectly through investment vehicles (“Advisor Funds”) managed by such trading advisors (the “Advisors”). In addition, the Company may, directly or indirectly, allocate assets to Advisors whose principal investment strategies are not within one of the Investment Sectors. Goldman Sachs Hedge Fund Strategies LLC (“GS HFS”), a wholly-owned subsidiary of The Goldman Sachs Group, Inc., is the managing member (the “Managing Member”) and commodity pool operator of the Company and a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended. SEI Global Services, Inc. (“SEI) serves as administrator of the Company.
 
Note 2 – Significant accounting policies
 
Basis of presentation
 
The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and are expressed in United States dollars.
 
Use of estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
 
Recent Accounting Developments
 
Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”).  In July 2009, the FASB launched the FASB Accounting Standards Codification (the “Codification”) as the single source of U.S. GAAP. While the Codification did not change U.S. GAAP, it introduced a new structure to the accounting literature and changed references to accounting standards and other authoritative accounting guidance. The Codification did not have an effect on the Company’s financial condition, results of operations or cash flows.
 
Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (ASC 820).  In April 2009, the FASB issued amended accounting principles related to determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. Specifically, these amended principles list factors which should be evaluated to determine whether a transaction is orderly, clarify that adjustments to transactions or quoted prices may be necessary when the volume and level of activity for an asset or liability have decreased significantly, and provide guidance for determining the concurrent weighting of the transaction price relative to fair value indications from other valuation techniques when estimating fair value. The Company adopted these amended accounting principles during the year ended December 31, 2009. Since the


F-8


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
Note 2 – Significant accounting policies (continued)
 
Company’s fair value methodologies are consistent with these amended accounting principles, adoption did not affect the Company’s financial condition, results of operations or cash flows.
 
Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).  In September 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-12, “Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent”). ASU No. 2009-12 provides guidance about using net asset value to measure the fair value of interests in certain Investees and requires additional disclosures about interests in Investees. The Company adopted ASU No. 2009-12 during the year ended December 31, 2009. Since the Company’s current fair value measurement policies are consistent with ASU No. 2009-12, adoption did not affect the Company’s financial condition, results of operations or cash flows.
 
Fair value of Investments
 
The Company is an investment company for financial reporting purposes and accordingly carries its financial assets and liabilities at fair value. The fair value of the Company’s assets and liabilities that qualify as financial instruments approximates the carrying amounts presented in the Balance Sheet.
 
ASC 820 “Fair Value Measurements and Disclosure” Fair value hierarchy establishes a fair value hierarchy and specifies that a valuation technique used to measure fair value shall maximize the use of observable inputs and minimize the use of unobservable inputs. The objective of a fair value measurement is to determine the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). Accordingly, the fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC 820 are described below:
 
  •       Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
 
  •       Level 2—Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly; and
 
  •       Level 3—Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
 
As required by ASC 820, investments are classified within the level of the lowest significant input considered in determining fair value. In evaluating the level at which the Company’s investments have been classified, the Company has assessed factors including, but not limited to, price transparency, the ability to redeem at net asset value (“NAV”) at the measurement date and the existence or absence of certain restrictions at the measurement date. In accordance with ASU 2009-12, if the Company has the ability to redeem from the investment at the measurement date or in the near-term at NAV, the investment would be classified as a Level 2 fair value measurement. Alternatively, if the Company will never have the ability to redeem from the investment or is restricted from redeeming for an uncertain or extended period of time from the measurement date, the investment would be classified as a Level 3 fair value measurement. See “Note 3—Investments in affiliated Investees” for further information.
 
Ownership in Investees
 
During the years ended December 31, 2009 and 2008, 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


F-9


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
Note 2 – Significant accounting policies (continued)
 
investor subscriptions and redemptions at the Company and Investee levels. The Company does not consolidate the results of the Investees in its financial statements because the Company does not invest in such 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 members. The Company does not exercise control over majority owned Investees. The following tables summarize the Company’s ownership in the Investees at December 31, 2009 and December 31, 2008:
 
                                         
    December 31, 2009  
                % owned
    Adjusted
    Adjusted %
 
          Investee
    by the
    Investee
    owned by the
 
    Company investment     equity(1)     Company(1)     equity(2)     Company(2)  
 
GELS
  $ 235,518,832     $ 406,728,241       57.91 %   $ 464,593,167       50.69 %
GFS
    132,477,127       275,465,080       48.09 %     357,336,116       37.07 %
GFS Trust
    37,532,758       133,566,660       28.10 %     133,566,660       28.10 %
GRV
    4,887,674       18,606,692       26.27 %     18,606,692       26.27 %
GTT
    155,217,816       296,045,714       52.43 %     312,655,496       49.64 %
HFPO
    20,801,289       35,033,537       59.38 %     35,033,537       59.38 %
                                         
Total
  $ 586,435,496                                  
                                         
 
                                         
    December 31, 2008  
                % owned
    Adjusted
    Adjusted %
 
    Company
    Investee
    by the
    Investee
    owned by the
 
    investment     equity(1)     Company(1)     equity(2)     Company(2)  
 
GELS
  $ 182,311,620     $ 531,609,977       34.29 %   $ 597,755,511       30.50 %
GFS
    212,189,214       696,463,843       30.47 %     767,385,948       27.65 %
GRV
    59,060,101       180,740,040       32.68 %     231,754,831       25.48 %
GTT
    119,121,670       208,504,823       57.13 %     256,655,918       46.41 %
HFPO
    42,106,058       30,841,896       136.52 %(3)     105,841,896       39.78 %
                                         
Total
  $ 614,788,663                                  
                                         
 
 
(1) The Investees’ equity used in the calculation of the percentage owned by the Company is reduced for member redemptions from the Investees that are paid after the balance sheet date according to ASC 480, “Distinguishing Liabilities from Equity.”
 
(2) The adjusted Investees’ equity used in the calculation of the percentage owned by the Company represents Investees’ equity excluding redemptions payable at December 31, 2008.
 
(3) The fair value of the Company’s investment in the Investee exceeded 100% of the Investee’s members’ equity because members’ equity reflected certain accrued liabilities of the Investee, including fees and expenses, and, in addition, also reflected redemptions payable at December 31, 2008. On January 1, 2009, the Company partially redeemed HFPO, reducing the percentage owned by the Company to 39.25% based on the December 31, 2008 HFPO’s equity.
 
Realized and unrealized gain/(loss) on investments in affiliated Investees
 
Realized and unrealized gain/(loss) on investments in affiliated Investees includes the change in fair value of each Investee. Fair values are determined utilizing NAV information supplied by each individual Investee, which includes realized and unrealized gains/losses on underlying investments of the Investees as well as management


F-10


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
Note 2 – Significant accounting policies (continued)
 
fees and incentive fees charged by the Advisors, administration fees and all other income/expenses of the Investees. See “Note 3—Investments in affiliated Investees” 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, which are not held for resale, to be cash equivalents. Cash equivalents, consisting of investments in money market funds, are held at financial institutions to which the Company is exposed to credit risk. Money market funds are valued at net asset value per share.
 
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 earns an annual incentive allocation equal to 5.0% of any new net appreciation in the NAV of each series. Any net depreciation in the NAV of a series for a fiscal year must be recouped prior to the Managing Member earning an incentive allocation in future years.
 
Subscriptions and redemptions
 
Subscriptions to the Company can be made as of the first day of each calendar month or at the sole discretion of the Managing Member. Redemptions from the Company can be made at the end of each calendar quarter, upon 91 days prior written notice 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.
 
The Managing Member has reviewed the Company’s tax positions for the open tax years by major jurisdictions and has concluded that no provision for taxes is required in the Company’s financial statements. Such open tax years vary by jurisdiction and remain subject to examination by the foreign taxing authorities. The tax liability is also subject to ongoing interpretation of laws by taxing authorities.
 
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


F-11


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
Note 2 – Significant accounting policies (continued)
 
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 to be remote.
 
Certain reclassifications have been made to certain previously reported amounts in the footnotes to reflect current year presentation.
 
Note 3 – Investments in affiliated Investees
 
The Investees seek capital appreciation over time by investing primarily within one of the following Investment Sectors: the equity long/short sector, the event driven sector, the relative value sector and the tactical trading sector. The Company’s investments in affiliated Investees are subject to terms and conditions of the respective operating agreements. The investments in affiliated Investees are carried at fair value. Fair values are determined utilizing NAV information supplied by each individual affiliated Investee. GS HFS is the managing member of each of the Investment Funds. GS HFS does not charge the Company any management fee or incentive allocation at the Investee level. Realized gains/(losses) on the redemption of investments in affiliated Investees are calculated using the specific identification cost method. 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.
 
Performance of the Company in any period will be dependent upon the performance in the relevant period by the affiliated Investees and the weighted average percentage of the Company’s assets in each of the affiliated Investees 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 their Advisor Funds and interests held by GFS Trust and GRV. In the normal course of business, the Advisor Funds may trade various financial instruments and enter into various investment transactions with off-balance sheet risk, which include, but are not limited to, securities sold short, futures, forwards, swaps and written options. The Managing Member generally has limited access, if at all, to specific information regarding the Advisor Funds’ portfolios and relies on NAV provided by the Advisors. Generally, the NAV provided by the Advisors is 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, performs additional procedures including Advisor due diligence reviews and analytical procedures with respect to the NAV provided by the Advisors to ensure conformity with U.S. GAAP. The Managing Member has assessed factors including, but not limited to, Advisors’ compliance with ASC 820, price transparency and valuation procedures in place, the ability to redeem at NAV at the measurement date, and existence of certain redemption restrictions at the measurement date. NAV provided by the Advisors may differ from the audited values received subsequent to the date of the Company’s NAV determination. In such cases, the Company will evaluate the materiality of any such differences.
 
The following tables set forth by level within the fair value hierarchy the Company’s assets and liabilities by investment strategy at fair value measured at December 31, 2009 and December 31, 2008:
 
                                 
    December 31, 2009  
Assets
  Level 1     Level 2     Level 3     Total  
 
Investments by investment strategy:
                               
Equity Long/Short
  $     $ 235,518,832     $     $ 235,518,832  
Event Driven
          132,477,127       37,532,758       170,009,885  
Relative Value
                4,887,674       4,887,674  
Tactical Trading
          155,217,816             155,217,816  
Multi-Strategy
          20,801,289             20,801,289  
                                 
Total
  $     $ 544,015,064     $ 42,420,432     $ 586,435,496  
                                 


F-12


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
Note 3 – Investments in affiliated Investees (continued)
 
                                 
    December 31, 2008  
Assets
  Level 1     Level 2     Level 3     Total  
 
Investments by investment strategy:
                               
Equity Long/Short
  $     $ 182,311,620     $     $ 182,311,620  
Event Driven
          212,189,214             212,189,214  
Relative Value
          59,060,101             59,060,101  
Tactical Trading
          119,121,670             119,121,670  
Multi-Strategy
          42,106,058             42,106,058  
                                 
Total
  $     $ 614,788,663     $     $ 614,788,663  
                                 
 
Included in cash and cash equivalents on the Balance Sheet are investments in money market funds with a fair value of $35,440,838 and $26,924,486, which were classified as Level 1 assets as of December 31, 2009 and December 31, 2008, respectively.
 
The following table summarizes the changes in fair value of the Company’s Level 3 investments for the year ended December 31, 2009:
 
                                 
          Investees by investment strategy  
          Event Driven     Relative Value     Total  
 
Balance at January 1, 2009
          $     $     $  
Net realized gain/(loss) on investments in affiliated investees
            380,599       (1,417,919 )     (1,037,320 )
Net change in unrealized gain/(loss) on investments in affiliated investees held at year-end
            1,427,159       386,882       1,814,041  
Net subscriptions/(redemptions)
            35,725,000       (24,193,735 )     11,531,265  
Net Level 3 transfers in/(out)
                  30,112,446       30,112,446  
                                 
Balance at December 31, 2009
          $ 37,532,758     $ 4,887,674     $ 42,420,432  
                                 
 
The following table summarizes the cost of the Company’s investments in the affiliated Investees at December 31, 2009 and December 31, 2008:
 
                 
    December 31,  
Investee
  2009     2008  
 
GELS
  $ 211,430,047     $ 173,053,312  
GFS
    122,004,423       195,942,328  
GFS Trust
    32,545,763        
GRV
    5,165,590       62,102,941  
GTT
    136,619,878       103,502,311  
HFPO
    18,723,786       45,810,000  
                 
    $ 526,489,487     $ 580,410,892  
                 


F-13


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
Note 3 – Investments in affiliated Investees (continued)
 
The following table summarizes the Company’s Realized and unrealized gain/(loss) on investments in affiliated Investees for the years ended December 31, 2009, 2008 and 2007:
 
                                 
    Year Ended December 31,  
Investee
  Liquidity     2009     2008     2007  
 
GELS
    (1 )   $ 24,207,212     $ (37,448,188 )   $ 26,022,295  
GFS
    (2 )     22,529,461       (49,405,381 )     45,144,727  
GFS Trust
    (3 )     2,188,357              
GRV
    (4 )     1,439,227       (6,259,065 )     4,339,169  
GTT
    (5 )     8,096,147       3,172,388       14,366,319  
HFPO
    (2 )     2,095,230       (1,707,379 )     (1,996,563 )
                                 
Total
          $ 60,555,634     $ (91,647,625 )   $ 87,875,947  
                                 
 
 
(1) Redemptions can be made quarterly with 61 days’ notice, or at the sole discretion of its managing member.
 
(2) Redemptions can be made quarterly on or after the first anniversary of the initial purchase of the units with at least 91 days’ notice, or at the sole discretion of its managing member.
 
(3) GFS Trust does not provide investors with a voluntary redemption right. Pursuant to the terms of the trust agreement for GFS Trust, distributions will be made to holders of interests in GFS Trust as GFS Trust receives proceeds in respect of its underlying investments. The estimated remaining holding period of its remaining underlying investments range from one to five years.
 
(4) Redemptions can be made quarterly with 91 days’ notice, or at the sole discretion of its managing member. GRV ceased its trading activities effective on July 1, 2009, and will dissolve at the time all assets are liquidated, liabilities are satisfied and liquidation proceeds are distributed through payment of a liquidating distribution. GRV suspended redemptions pending the completion of the liquidation proceedings. The estimated remaining holding period of its remaining underlying investments range from one to five years.
 
(5) Redemptions can be made quarterly with 60 days’ notice, or at the sole discretion of its managing member.
 
The investment strategy for each Investment Fund is as follows:
 
Goldman Sachs Global Equity Long/Short, LLC
 
GELS 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. Strategies that may be utilized in the equity long/short sector include catalyst—activist, consumer, diversified, energy, growth, long-bias, real estate, multi-strategy, short-term trading and value. Other strategies may be employed as well.
 
Goldman Sachs Global Fundamental Strategies, LLC
 
GFS 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


F-14


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
Note 3 – Investments in affiliated Investees (continued)
 
catalyst-activist, merger arbitrage/special situations, credit opportunities/distressed securities and multi-strategy investing. Other strategies may be employed as well.
 
Goldman Sachs Global Fundamental Strategies Asset Trust
 
The managing member of GFS, GS HFS, recently created GFS Trust, a Delaware statutory trust, for the benefit of its investors, including the Company. Goldman Sachs Trust Company, a Delaware Corporation, is the trustee of GFS Trust (the “Trustee”). The Trustee appointed GS HFS as the “Special Assets Direction Advisor,” responsible for, among other duties, disposition of GFS Trust assets. On March 31, 2009, GFS transferred to GFS Trust its interest in certain illiquid investments, including illiquid investments made by Advisor Funds, as well as liquidating vehicles that the Advisors formed as liquidity decreased for previously liquid investments, such as certain credit instruments. GFS transferred to GFS Trust the economic risks and benefits of its interests in such assets. In connection with such transfer, each investor in GFS, including the Company, was issued its pro-rata share of GFS Trust interests based on its ownership in GFS as of the transfer date. The transfer was accounted for as an in-kind transfer at a fair value of $47,730,311, which resulted in a realized gain of $3,179,237. In connection with the transfer, the historical cost of the Company’s investment in GFS of $44,551,074 was transferred to GFS Trust including an unrealized gain of $3,179,237. Distributions from GFS Trust in respect of GFS Trust interests will be made to holders of GFS Trust interests, including the Company, as amounts in respect of the assets transferred to GFS Trust are received from the Advisors. However, the actual timing of these distributions will be dependent on the Advisors’ ability to liquidate positions as market conditions allow, and it could be a significant period of time before such positions are realized or disposed of. The Company’s pro-rata share of GFS Trust interests as of December 31, 2009 was an amount equal to approximately 6% of the Company’s adjusted members’ equity. Such amount of the Company’s pro-rata share of GFS Trust interests is included in the percentage of the Company’s investments in the Investees that were considered illiquid at December 31, 2009.
 
Goldman Sachs Global Relative Value, LLC
 
GRV ceased its trading activities effective July, 1 2009 and will dissolve at the time all assets are liquidated, liabilities are satisfied and liquidation proceeds are distributed through payment of a liquidating distribution. Investors in GRV (including the Company) will receive proceeds from the liquidation over time as GRV receives redemption proceeds from Advisor Funds. The Company is reinvesting the liquidation proceeds it receives from GRV in accordance with the Company’s investment program.
 
GRV 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
 
GTT 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


F-15


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
Note 3 – Investments in affiliated Investees (continued)
 
conditions to develop views on country, regional or broader economic themes and then seek to capitalize on such views by trading in securities, commodities, interest rates, currencies and various financial instruments.
 
Goldman Sachs HFP Opportunistic Fund, LLC
 
On July 1, 2007, the Company made an investment in HFPO whose investment objective is to make opportunistic investments in underlying Advisor Funds in order to (a) increase the weighting of a particular Advisor Fund which had a low weighting in the Company due to a lower target weight in one of the other Investees or (b) add an Advisor Fund that is not currently represented in any of the other Investees.
 
Management fees and incentive allocations/fee
 
GS HFS does not charge the Company any management fee or incentive allocation at the Investee level. The underlying Advisor Funds held by the Investees charge management and incentive allocations/fees to the Investees. The following table reflects the contractual weighted average Advisors’ management fees and incentive allocations/fee rates at the Investee level for the years ended December 31, 2009, 2008 and 2007. The weighted average is based on the period-end fair values of each investment in the Advisor Fund in proportion to the Investee’s total investments. The fee rates used are the contractual rates charged by each Advisor.
 
                                                 
    2009     2008     2007  
    Management
    Incentive
    Management
    Incentive
    Management
    Incentive
 
Investee
  fees     fee     fees     fee     fees     fee  
 
GELS
    1.54 %     18.25 %     1.63 %     19.77 %     1.49 %     20.22 %
GFS
    1.58 %     18.00 %     1.72 %     17.78 %     1.51 %     19.77 %
GFS Trust
    1.42 %     16.04 %                        
GRV
    1.27 %     12.22 %     1.64 %     17.83 %     1.51 %     20.91 %
GTT
    1.85 %     17.81 %     2.26 %     22.28 %     2.09 %     22.70 %
HFPO
    1.99 %     19.86 %     2.35 %     23.49 %     1.56 %     20.18 %
 
The Advisors’ management fees and incentive allocations/fees are not paid to the Managing Member.
 
Note 4 – Fees
 
The Company incurs a monthly management fee paid in arrears to GS HFS equal to 1.25% per annum of the net assets of the Company as of each month-end.
 
The Company incurs an indirect monthly administration fee to SEI Global Services, Inc. (“SEI”) which ranges between 0.05% and 0.06% 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% during the year ended December 31, 2009. During the years ended December 31, 2008 and 2007, the administration fee ranged between 0.04% and 0.06% per annum of the net assets at the Investee level. The administration fee is charged at the Investee level and is included in realized and unrealized gain/(loss) on investments in affiliated Investees in the Statement of Operations. For the years ended December 31, 2009, 2008 and 2007, the Company’s pro-rata indirect share of the administration fee charged at the Investee level totaled $295,484, $337,223 and $324,928, respectively.
 
Note 5 – Risk Management
 
The Investees’ investing activities and those of the Advisor Funds in which they invest expose the Company to various types of risks that are associated with the financial investments and markets in which the Investees and such Advisor Funds invest. In the ordinary course of business, GS HFS, in its capacity as Managing Member of the


F-16


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
Note 5 – Risk Management (continued)
 
Company and the Investees, attempts to manage a variety of risks, including market, credit, operational and liquidity risk and attempts to identify, measure and monitor risk through various mechanisms including risk management strategies and credit policies. GS HFS monitors risk guidelines and diversifying exposures across a variety of instruments, markets and counterparties.
 
Item 1A of Part I of this Annual Report on Form 10-K provides details of these and other types of risks, some of which are additional to the information provided in these financial statements.
 
Asset allocation is determined by the Company’s Managing Member who manages the allocation of assets to achieve the investment objectives. Achievement of the investment objectives involves taking risks. The Managing Member exercises judgment based on analysis, research and risk management techniques when making investment decisions. Divergence from target asset allocations and the composition of the Company’s investments is monitored by the Company’s Managing Member.
 
Market risk
 
The potential for changes in the fair value of the Company’s investment portfolio is referred to as market risk. Commonly used categories of market risk include currency risk, interest rate risk and price risk.
 
(i) Currency risk
 
The Advisor Funds may invest in financial investments and enter into transactions denominated in currencies other than its functional currency. Consequently, the Company, its Investees and their Advisor Funds may be exposed to risks that the exchange rate of its functional currency relative to other foreign currencies may change in a manner that has an adverse effect on the value of that portion of the Company’s or Investees’ assets or liabilities denominated in currencies other than the functional currency.
 
(ii) Interest rate risk
 
The Advisor Funds may invest in fixed income securities and derivatives. Any change to the interest rates relevant for particular securities may result in the Advisors being unable to secure similar returns on the expiration of contracts or the sale of securities. In addition, changes to prevailing interest rates or changes in expectations of future rates may result in an increase or decrease in the value of the securities held. In general, if interest rates rise, the value of the fixed income securities and derivatives will decline. A decline in interest rates will in general have the opposite effect.
 
(iii) Price risk
 
Price risk is the risk that the value of the Investees’ and Advisor Funds’ financial investments will fluctuate as a result of changes in market prices, other than those arising from currency risk or interest rate risk whether caused by factors specific to an individual investment, its issuer or any factor affecting financial investments traded in the market.
 
As all of the Company’s investments in Investees and the Investees’ investments in Advisor Funds are carried at fair value with changes in fair value recognized in the Statement of Operations, all changes in market conditions will directly affect net assets. The Company’s maximum risk of loss is limited to the Company’s investment in the Investees. The Investees’ maximum risk of loss is limited to the Investees’ investment in the Advisor Funds.
 
The Investees’ investments in the Advisor Funds are determined utilizing NAVs value supplied by, or on behalf of, the Advisors of each Advisor Fund. Furthermore, NAVs received from the administrator of the Advisor Funds may be estimates and such values will be used to calculate the NAV of the Investees for purposes of determining amounts


F-17


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
Note 5 – Risk Management (continued)
 
payable on redemptions and reported performance of the Investees. Such estimates provided by the administrators of the Advisor Funds may be subject to subsequent revisions which may not be reflected in the Investees’ final month-end NAV.
 
Credit risk
 
Credit risk is the risk that one party to a financial investment will cause a financial loss for the other party by failing to discharge an obligation.
 
The Managing Member has adopted procedures to reduce credit risk related to the Company’s dealings with counterparties and Advisor Funds. Before transacting with any counterparty or Advisor Fund, the Managing Member or its affiliates evaluate both creditworthiness and reputation by conducting a credit analysis of the party, their business and reputation. The credit risk of approved counterparties and Advisor Funds are then monitored on an ongoing basis, including periodic reviews of financial statements and interim financial reports as needed.
 
Some of the Investees’ investments in Advisor Funds may have had credit exposure related to the bankruptcy of Lehman. See “Liquidity risk” for further information related to Lehman exposure.
 
Operational risk
 
Operational risk is the potential for loss caused by a deficiency in information, communications, transaction processing and settlement and accounting systems. The Company’s service providers maintain controls and procedures for the purpose of mitigating operational risk. Reviews of the service levels of service providers are performed on a regular basis. No assurance is given that these measures will be 100% effective. Operational risk also exists at the Investee and Advisor Fund level.
 
Liquidity risk
 
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company provides for the subscription and redemption of units and it is therefore exposed to the liquidity risk of meeting member redemptions.
 
In order to meet its obligations associated with financial liabilities, the Company primarily redeems from the investments in the Investment Funds. However, the Company’s investments in the Investment Funds may only be redeemed on a limited basis. Neither GFS Trust nor GRV provide investors with a voluntary redemption right as detailed in “Note 3—Investments in affiliated Investees.” As a result, the Company may not be able to liquidate quickly some of its investments in order to meet liquidity requirements.
 
To mitigate some of the liquidity risks described above, the Company currently maintains a committed credit facility with a financial institution which may be used to meet member redemptions. See “Note 7—Borrowing facility” for further information. Additionally, the Company has the ability to suspend redemptions prior to the effectiveness of redemption requests in the Managing Member’s sole discretion.
 
Certain of the Advisor Funds held by the Investees may have liquidity exposure related to the Advisors’ estimates of the recovery value of these claims against Lehman Brothers Holdings, Inc. and for certain of its subsidiaries and affiliates (“Lehman”), including cash claims involving amounts owed to the Advisors by Lehman and/or proprietary claims involving the recovery of Advisor Funds’ assets held by Lehman at the time of its insolvency. These estimates are based on information received from the majority, but not all, of the Advisor Funds’, and the Company has no way of independently verifying or otherwise confirming the accuracy of the information provided. As a


F-18


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
Note 5 – Risk Management (continued)
 
result, there can be no guarantee that such estimates are accurate. There is significant uncertainty with respect to the ultimate outcome of the Lehman insolvency proceedings, and therefore the amounts ultimately recovered in respect of the Advisors’ claims against Lehman could be materially different than such estimates. Based on the information received, the gross indirect exposure to Lehman did not materially affect the Company’s net assets.
 
Certain of the Advisor Funds held by the Investees are subject to various lock-up provisions. Additionally, an Advisor may, at its discretion, transfer a portion of an Investee’s investment in the Advisor Fund into share classes where liquidity terms are directed by the Advisor in accordance with the Advisor’s operating agreement, commonly referred to as side pocket share classes (“side pockets”). These side pockets may have restricted liquidity and prohibit the Investees from fully liquidating their investments without delay. The managing member of the Investees attempts to determine each Advisor’s strategy on side pockets through its due diligence process prior to making an allocation to the Advisor. However, no assurance can be given on whether or not the Advisor will implement side pockets during the investment period. The Advisors may also, at their discretion, suspend redemptions or implement other restrictions on liquidity which could impact the Investees’ ability to meet redemptions submitted by the Company. As of December 31, 2009, approximately 2% of the Company’s investments in the Investees were considered illiquid due to restrictions implemented by the Advisors of the investments held by Investees, excluding contractual restrictions imposed by the Advisors at the time of purchase, such as lock-ups. In addition, as of December 31, 2009, approximately 7% of the Company’s members’ equity was considered illiquid due to restrictions implemented by the Investees, including the lack of a voluntary redemption right for GFS Trust and GRV.
 
To mitigate some of the liquidity risks above, the Company has the ability to suspend redemptions prior to the effectiveness of redemption requests should conditions warrant.
 
Note 6 – Related parties
 
The due to managing member liability in the Balance Sheet represents management fees due to GS HFS at December 31, 2009 and December 31, 2008.
 
Included in the redemptions payable on the Balance Sheet at December 31, 2009 and December 31, 2008 were redemptions due to the Managing Member of $137,240, and $0, respectively.
 
For the year ended December 31, 2009, the Company earned dividends of $159,987 from investments in Goldman Sachs Financial Square Government Fund and Goldman Sachs Financial Square Treasury Obligations Fund, money market funds managed by Goldman Sachs Asset Management, L.P., an affiliate of GS HFS. For the year ended December 31, 2008, the Company earned dividends of $209,486 from Goldman Sachs Financial Square Prime Obligation Fund, a money market fund managed by Goldman Sachs Asset Management L.P. At December 31, 2009, the Company held investments in Goldman Sachs Financial Square Government Fund and Goldman Sachs Financial Square Treasury Obligations Fund with fair values of $27,258,649 and $8,182,189 respectively. At December 31, 2008, the Company held an investment in the Goldman Sachs Financial Square Prime Obligations Fund with a fair value of $26,924,486.
 
Goldman, Sachs & Co. (“GS & Co.”), an affiliate of the Managing Member, is one of several prime brokers for certain of the Advisor Funds. Goldman Sachs Administration Services, an affiliate of the Managing Member, may serve as the administrator for one or more Advisor Funds.
 
Directors and executive officers of the Company and the Managing Member owned less than 1% of the Company’s equity at December 31, 2009, 2008 and 2007. Employees of GS & Co. owned approximately 2% of the Company’s equity at December 31, 2009, 2008 and 2007.


F-19


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
Note 6 – Related parties (continued)
 
During the year ended December 31, 2009, members equity in Class A Series 66 through Class A Series 73 of $19,139,514 was transferred into the Company from an affiliated fund of the Company. The capital losses of these series were carried forward to the Company, which will be recovered before an incentive allocation is charged.
 
Note 7 – Borrowing facility
 
The following table summarizes the Company’s committed credit facility (as amended from time to time, the “Credit Facility”) with Barclays Bank PLC (the “Facility Counterparty”) between January 1, 2008 and December 31, 2009:
 
                 
Time periods(1)
  Maximum amount(2)(3)   Interest rate(4)   Commitment fee  
 
6/7/08-12/31/09
  Lesser of $32,000,000
or 14.25% of the Company’s NAV
  LIBOR plus 1.00%     0.25 %
1/1/08-6/6/08
  Lesser of $32,000,000
or 15% of the Company’s NAV
  LIBOR plus 0.65%     0.25 %
 
 
(1) The maturity date of the Credit Facility is June 5, 2010.
 
(2) The Company also granted a security interest in the Company’s cash accounts and any other accounts that contain any other investment property of the Company.
 
(3) The Company further amended certain terms of the Credit Facility on January 28, 2010. The maximum amount was increased to $33,700,000 or 14.25% of the Company’s NAV and the commitment fee was increased to 0.29%.
 
(4) London Interbank Offered Rate (“LIBOR”).
 
The Company borrows from the Credit Facility to meet its liquidity needs. As of December 31, 2009 and 2008, there were no borrowings outstanding. Interest related to borrowing and the commitment fees are included in Interest expense in the Statement of Operations. Included in Interest payable in the Balance Sheet are amounts owed for interest and commitment fees.
 
Note 8 – Members’ equity
 
At December 31, 2009, December 31, 2008 and December 31, 2007, 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, 2008, Class A Series 33 through Class A Series 44 units were converted into Class A Series 1 units. The Managing Member does not own any units in the Company.
 
Transactions in units for non-managing members for the years ended December 31, 2009, 2008 and 2007 are as follows:
                                                 
    Year Ended December 31, 2009     Year Ended December 31, 2008     Year Ended December 31, 2007  
    Units     Amount     Units     Amount     Units     Amount  
 
Share Class Conversion
                                       
Class A
                                               
Series 1
        $       295,317.71     $ 45,148,615       319,714.29     $ 43,832,922  
Series 21
                            (20,000.00 )     (2,180,597 )
Series 22
                            (126,060.00 )     (13,362,621 )
Series 23
                            (17,500.00 )     (1,846,363 )


F-20


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
Note 8 – Members’ equity (continued)
 
                                                 
    Year Ended December 31, 2009     Year Ended December 31, 2008     Year Ended December 31, 2007  
    Units     Amount     Units     Amount     Units     Amount  
 
Series 24
        $           $       (16,500.00 )   $ (1,713,051 )
Series 25
                            (26,000.00 )     (2,660,197 )
Series 26
                            (5,000.00 )     (521,404 )
Series 27
                            (19,000.00 )     (1,990,075 )
Series 28
                            (79,750.00 )     (8,361,171 )
Series 29
                            (20,000.00 )     (2,081,244 )
Series 30
                            (6,020.00 )     (630,689 )
Series 31
                            (39,000.00 )     (4,025,172 )
Series 32
                            (44,000.00 )     (4,460,338 )
Series 33
                (10,000.00 )     (1,115,107 )            
Series 34
                (10,010.00 )     (1,098,794 )            
Series 35
                (27,595.00 )     (3,005,067 )            
Series 36
                (37,000.00 )     (3,993,991 )            
Series 37
                (34,000.00 )     (3,611,289 )            
Series 38
                (38,700.00 )     (4,022,981 )            
Series 39
                (31,750.00 )     (3,283,841 )            
Series 40
                (51,000.00 )     (5,280,566 )            
Series 41
                (75,000.00 )     (7,918,349 )            
Series 42
                (54,000.00 )     (5,608,852 )            
Series 43
                (27,750.00 )     (2,785,064 )            
Series 44
                (34,000.00 )     (3,424,714 )            
                                                 
          $       (135,487.29 )   $       (99,115.71 )   $  
                                                 
Subscriptions Class A
                                               
Series 33
        $           $       10,000.00     $ 1,000,000  
Series 34
                            10,010.00       1,001,000  
Series 35
                            27,595.00       2,759,500  
Series 36
                            37,000.00       3,700,000  
Series 37
                            34,000.00       3,400,000  
Series 38
                            38,700.00       3,870,000  
Series 39
                            31,750.00       3,175,000  
Series 40
                            51,000.00       5,100,000  
Series 41
                            75,000.00       7,500,000  
Series 42
                            54,000.00       5,400,000  
Series 43
                            27,750.00       2,775,000  
Series 44
                            34,000.00       3,400,000  
Series 45
                77,622.13       7,762,213              
Series 46
                149,310.53       14,931,053              


F-21


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
Note 8 – Members’ equity (continued)
 
                                                 
    Year Ended December 31, 2009     Year Ended December 31, 2008     Year Ended December 31, 2007  
    Units     Amount     Units     Amount     Units     Amount  
 
Series 47
        $       72,250.00     $ 7,225,000           $  
Series 48
                126,500.00       12,650,000              
Series 49
                145,800.00       14,580,000              
Series 50
                222,080.00       22,208,000              
Series 51
                126,300.00       12,630,000              
Series 52
                108,750.00       10,875,000              
Series 53
                89,550.00       8,955,000              
Series 54
                81,850.00       8,185,000              
Series 55
                22,500.00       2,250,000              
Series 56
                20,000.00       2,000,000              
Series 57
    25,000.00       2,500,000                          
Series 58
    50,000.00       5,000,000                          
Series 59
    15,000.00       1,500,000                          
Series 60
    27,600.00       2,760,000                          
Series 61
    11,312.98       1,131,298                          
Series 62
    62,000.00       6,200,000                          
Series 63
    66,712.98       6,671,298                          
Series 64
    36,650.00       3,665,000                          
Series 65
    54,137.27       5,413,727                          
Series 66
    95,580.88       9,558,088                          
Series 67
    1,367.32       136,732                          
Series 68
    57,080.94       5,708,094                          
Series 69
    20,861.87       2,086,187                          
Series 70
    6,848.67       684,867                          
Series 71
    1,403.93       140,393                          
Series 72
    6,915.70       691,570                          
Series 73
    1,335.83       133,583                          
Series 74
    83,000.00       8,300,000                          
Series 75
    85,100.00       8,510,000                          
Series 76
    30,850.00       3,085,000                          
                                                 
Total
    738,758.37     $ 73,875,837       1,242,512.66     $ 124,251,266       430,805.00     $ 43,080,500  
                                                 
Redemptions Class A
                                               
Series 1
    918,434.94     $ 126,197,094       649,166.41     $ 93,316,375       671,424.67     $ 98,845,744  
Series 45
    18,500.00       1,619,229       6,300.00       543,637              
Series 46
    28,057.64       2,537,895                          
Series 48
    5,000.00       453,200                          
Series 49
    5,000.00       472,959                          


F-22


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
Note 8 – Members’ equity (continued)
 
                                                 
    Year Ended December 31, 2009     Year Ended December 31, 2008     Year Ended December 31, 2007  
    Units     Amount     Units     Amount     Units     Amount  
 
Series 50
    13,613.61     $ 1,240,823           $           $  
Series 51
    3,232.00       300,000                          
Series 52
    12,000.00       1,138,619                          
Series 53
    16,000.00       1,525,865                          
Series 54
    12,500.00       1,258,376                          
Series 56
    10,000.00       1,076,095                          
                                                 
      1,042,338.19     $ 137,820,155       655,466.41     $ 93,860,012       671,424.67     $ 98,845,744  
                                                 
 
At December 31, 2009, 2008 and 2007, members’ equity consisted of the following:
 
                                                 
    December 31, 2009     December 31, 2008     December 31, 2007  
    Outstanding Units     Net Asset Value     Outstanding Units     Net Asset Value     Outstanding Units     Net Asset Value  
 
Non-managing
                                               
members
                                               
Class A
                                               
Series 1
    2,885,415.51     $ 415,172,330       3,803,850.45     $ 501,818,748       4,157,699.15     $ 635,635,467  
Series 33
                            10,000.00       1,115,107  
Series 34
                            10,010.00       1,098,794  
Series 35
                            27,595.00       3,005,067  
Series 36
                            37,000.00       3,993,991  
Series 37
                            34,000.00       3,611,289  
Series 38
                            38,700.00       4,022,981  
Series 39
                            31,750.00       3,283,841  
Series 40
                            51,000.00       5,280,566  
Series 41
                            75,000.00       7,918,349  
Series 42
                            54,000.00       5,608,852  
Series 43
                            27,750.00       2,785,064  
Series 44
                            34,000.00       3,424,714  
Series 45
    52,822.13       4,971,425       71,322.13       6,154,499              
Series 46
    121,252.89       11,612,001       149,310.53       13,110,185              
Series 47
    72,250.00       6,777,089       72,250.00       6,213,647              
Series 48
    121,500.00       11,601,290       126,500.00       11,074,495              
Series 49
    140,800.00       13,318,515       145,800.00       12,644,862              
Series 50
    208,466.39       19,361,580       222,080.00       18,911,135              
Series 51
    123,068.00       11,423,377       126,300.00       10,748,705              
Series 52
    96,750.00       9,224,038       108,750.00       9,506,109              
Series 53
    73,550.00       7,104,425       89,550.00       7,930,768              
Series 54
    69,350.00       7,066,804       81,850.00       7,654,640              
Series 55
    22,500.00       2,379,248       22,500.00       2,187,676              


F-23


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
Note 8 – Members’ equity (continued)
 
                                                 
    December 31, 2009     December 31, 2008     December 31, 2007  
    Outstanding Units     Net Asset Value     Outstanding Units     Net Asset Value     Outstanding Units     Net Asset Value  
 
Series 56
    10,000.00     $ 1,076,095       20,000.00     $ 1,980,602           $  
Series 57
    25,000.00       2,715,361                          
Series 58
    50,000.00       5,386,946                          
Series 59
    15,000.00       1,618,719                          
Series 60
    27,600.00       2,979,262                          
Series 61
    11,312.98       1,212,471                          
Series 62
    62,000.00       6,519,496                          
Series 63
    66,712.98       7,009,995                          
Series 64
    36,650.00       3,809,919                          
Series 65
    54,137.27       5,558,740                          
Series 66
    95,580.88       9,827,589                          
Series 67
    1,367.32       140,588                          
Series 68
    57,080.94       5,869,039                          
Series 69
    20,861.87       2,145,009                          
Series 70
    6,848.67       704,178                          
Series 71
    1,403.93       144,351                          
Series 72
    6,915.70       711,069                          
Series 73
    1,335.83       137,350                          
Series 74
    83,000.00       8,401,415                          
Series 75
    85,100.00       8,628,531                          
Series 76
    30,850.00       3,089,790                          
                                                 
Subtotal
    4,736,483.29     $ 597,698,035       5,040,063.11     $ 609,936,071       4,588,504.15     $ 680,784,082  
                                                 
Managing member
                                         
                                                 
Total members’ equity
          $ 597,698,035             $ 609,936,071             $ 680,784,082  
                                                 
 
                         
    December 31, 2009     December 31, 2008     December 31, 2007  
    NAV per unit     NAV per unit     NAV per unit  
 
Non-managing members
Class A
                       
Series 1
  $ 143.89     $ 131.92     $ 152.88  
Series 33
                111.51  
Series 34
                109.77  
Series 35
                108.90  
Series 36
                107.95  
Series 37
                106.21  
Series 38
                103.95  
Series 39
                103.43  

F-24


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
Note 8 – Members’ equity (continued)
 
                         
    December 31, 2009     December 31, 2008     December 31, 2007  
    NAV per unit     NAV per unit     NAV per unit  
 
Series 40
  $     $     $ 103.54  
Series 41
                105.58  
Series 42
                103.87  
Series 43
                100.36  
Series 44
                100.73  
Series 45
    94.12       86.29        
Series 46
    95.77       87.80        
Series 47
    93.80       86.00        
Series 48
    95.48       87.55        
Series 49
    94.59       86.73        
Series 50
    92.88       85.15        
Series 51
    92.82       85.10        
Series 52
    95.34       87.41        
Series 53
    96.59       88.56        
Series 54
    101.90       93.52        
Series 55
    105.74       97.23        
Series 56
    107.61       99.03        
Series 57
    108.61              
Series 58
    107.74              
Series 59
    107.91              
Series 60
    107.94              
Series 61
    107.18              
Series 62
    105.15              
Series 63
    105.08              
Series 64
    103.95              
Series 65
    102.68              
Series 66
    102.82              
Series 67
    102.82              
Series 68
    102.82              
Series 69
    102.82              
Series 70
    102.82              
Series 71
    102.82              
Series 72
    102.82              
Series 73
    102.82              
Series 74
    101.22              
Series 75
    101.39              
Series 76
    100.16              

F-25


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
 
Note 9 – Financial Highlights
 
Financial highlights for the Company for the years ended December 31, 2009, 2008 and 2007 are as follows:
 
                         
    2009
    2008
    2007
 
    Class A
    Class A
    Class A
 
    Series 1     Series 1     Series 1  
 
Per unit operating performance:
                       
Net asset value, beginning of period
  $ 131.92     $ 152.88     $ 137.10  
Income from operations:
                       
Net trading profit/(loss)
    13.95       (18.92 )     18.63  
Net investment income/(loss)(1)(2)
    (1.98 )     (2.04 )     (2.85 )
                         
Total income/(loss) from operations
    11.97       (20.96 )     15.78  
                         
Net asset value, end of period
  $ 143.89     $ 131.92     $ 152.88  
                         
Ratios to average members’ equity(3)
                       
Expenses
    1.46 %     1.44 %     1.42 %
Incentive allocation
    0.00 %     0.00 %     0.57 %
                         
Total expenses and incentive allocation
    1.46 %     1.44 %     1.99 %
                         
Net investment income/(loss)(2)
    (1.44 )%     (1.39 )%     (1.95 )%
                         
Total return (prior to incentive allocation)(4)
    9.07 %     (13.71 )%     12.12 %
Incentive allocation
    0.00 %     0.00 %     (0.61 )%
                         
Total return
    9.07 %     (13.71 )%     11.51 %
                         
 
 
(1) Net investment income/(loss) is calculated based on average units outstanding during the period.
 
(2) Includes incentive allocation.
 
(3) The ratios of expenses and net investment income/(loss) to average members’ equity are calculated by dividing total expenses and net investment income/(loss), respectively, by the month end average members’ equity for the period. The ratios to average members’ equity calculated above do not include the Company’s proportionate share of the net investment income and expenses of the Investees. The ratios to average members’ equity for each member may vary based on individualized incentive allocation bases and the timing of capital transactions.
 
(4) The components of total return are calculated by dividing the change in the per unit value of each component for the period by the NAV per unit at the beginning of the period. The total return for Class A Series 1 units is calculated taken as a whole. The total return for each member may vary based on individualized incentive allocation bases and the timing of capital transactions.
 
The per unit operating performance, ratios to average net assets and total return are calculated and presented for the initial series.


F-26


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
 
Note 10 — Significant Investees
 
The following is a summary of financial information for Investees that represented more than 20% of the Company’s total assets and/or income as of and/or for the years ended December 31, 2009, December 31, 2008 and December 31, 2007 (the “Significant Investees”):
 
Balance Sheet
 
The balance sheets as of December 31, 2009 and December 31, 2008, are summarized as follows:
 
                         
    December 31, 2009  
    GELS     GFS     GTT  
 
Assets
                       
Investments in Investees, at fair value
  $ 422,198,049     $ 303,788,708     $ 106,086,018  
Investments in affiliated Investees, at fair value
    720,104       23,626,633       185,915,266  
Cash and cash equivalents
    18,030,775       25,410,020       8,723,057  
Other assets
    24,466,148       6,509,847       12,457,432  
                         
Total assets
  $ 465,415,076     $ 359,335,208     $ 313,181,773  
                         
Liabilities and Net Assets
                       
Liabilities
                       
Redemptions payable
  $ 57,864,926     $ 81,871,036     $ 16,609,782  
Accrued expenses and other liabilities
    821,909       1,999,092       526,277  
                         
Total liabilities
    58,686,835       83,870,128       17,136,059  
Net assets
    406,728,241       275,465,080       296,045,714  
                         
Total liabilities and net assets
  $ 465,415,076     $ 359,335,208     $ 313,181,773  
                         
 
                         
    December 31, 2008  
    GELS     GFS     GTT  
 
Assets
                       
Investments in Investees, at fair value
  $ 507,375,746     $ 651,881,468     $ 115,983,452  
Investments in affiliated Investees, at fair value
    1,757,984       41,756,829       95,549,215  
Cash and cash equivalents
    86,798,258       48,995,300       45,129,030  
Other assets
    2,043,326       25,339,004       237,320  
                         
Total assets
  $ 597,975,314     $ 767,972,601     $ 256,899,017  
                         
Liabilities and Net Assets
                       
Liabilities
                       
Redemptions payable
  $ 66,145,534     $ 70,922,105     $ 48,151,095  
Accrued expenses and other liabilities
    219,803       586,653       243,099  
                         
Total liabilities
    66,365,337       71,508,758       48,394,194  
Net assets
    531,609,977       696,463,843       208,504,823  
                         
Total liabilities and net assets
  $ 597,975,314     $ 767,972,601     $ 256,899,017  
                         


F-27


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
Note 10 – Significant Investees (continued)
 
Statement of Operations
 
For the years ended December 31, 2009, December 31, 2008 and December 31, 2007, the statements of operations are summarized as follows:
 
                         
    December 31, 2009  
Income/(Loss)
  GELS     GFS     GTT  
 
Net realized gain/(loss) on Investees
  $ (12,369,124 )   $ 61,818,045     $ 30,113,212  
Net change in unrealized gain/(loss) on Investees
    71,714,411       8,234,277       (13,300,462 )
Investment income
    311,429       454,261       172,459  
Expenses
    (1,266,799 )     (2,128,662 )     (1,334,934 )
                         
Net income/(loss) from operations
  $ 58,389,917     $ 68,377,921     $ 15,650,275  
                         
 
                         
    December 31, 2008  
Income/(Loss)
  GELS     GFS     GTT  
 
Net realized gain/(loss) on Investees
  $ 59,529,257     $ 147,794,327     $ 11,377,950  
Net change in unrealized gain/(loss) on Investees
    (184,985,135 )     (332,763,998 )     (4,153,934 )
Investment income
    753,825       709,613       692,883  
Expenses
    (1,552,959 )     (3,043,920 )     (962,708 )
                         
Net income/(loss) from operations
  $ (126,255,012 )   $ (187,303,978 )   $ 6,954,191  
                         
 
                         
    December 31, 2007  
Income/(Loss)
  GELS     GFS     GTT  
 
Net realized gain/(loss) on Investees
  $ 110,713,958     $ 35,640,098     $ 31,920,318  
Net change in unrealized gain/(loss) on Investees
    (14,893,541 )     149,147,801       3,547,627  
Investment income
    913,379       2,057,736       469,010  
Expenses
    (2,475,626 )     (3,549,586 )     (1,430,314 )
                         
Net income/(loss) from operations
  $ 94,258,170     $ 183,296,049     $ 34,506,641  
                         


F-28


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
Note 10 – Significant Investees (continued)
 
Statement of Cash Flows
 
For the years ended December 31, 2009, December 31, 2008 and December 31, 2007, the statements of cash flows are summarized as follows:
 
                         
    December 31, 2009  
    GELS     GFS     GTT  
 
Cash flows from operating activities
                       
Net income/(loss) from operations
  $ 58,389,917     $ 68,377,921     $ 15,650,275  
Net increase/(decrease) in investments in investees(1)
    86,215,577       208,956,990       (8,538,000 )
Net increase/(decrease) in operating assets and liabilities
    (22,190,524 )     20,241,596       (11,986,473 )
                         
Net cash provided by/(used in) operating activities
    122,414,970       297,576,507       (4,874,198 )
                         
Cash flows from financing activities
                       
Net subscriptions/(redemptions)(1)
    (191,182,453 )     (321,161,787 )     (31,531,775 )
                         
Net cash provided by/(used in) financing activities
    (191,182,453 )     (321,161,787 )     (31,531,775 )
                         
Net change in cash and cash equivalents
    (68,767,483 )     (23,585,280 )     (36,405,973 )
Cash and cash equivalents at beginning of year
    86,798,258       48,995,300       45,129,030  
                         
Cash and cash equivalents at end of year
  $ 18,030,775     $ 25,410,020     $ 8,723,057  
                         
 
 
(1) During the year ended December 31, 2009, GTT had an in-kind subscription of $71,930,617 and GFS had an in-kind redemption of $157,265,966.
 
                         
    December 31, 2008  
    GELS     GFS     GTT  
 
Cash flows from operating activities
                       
Net income/(loss) from operations
  $ (126,255,012 )   $ (187,303,978 )   $ 6,954,191  
Net increase/(decrease) in investments in investees
    330,388,001       393,838,578       18,142,713  
Net increase/(decrease) in operating assets and liabilities
    23,085,420       (25,653,047 )     (280,519 )
                         
Net cash provided by/(used in) operating activities
    227,218,409       180,881,553       24,816,385  
                         
Cash flows from financing activities
                       
Net subscriptions/(redemptions)
    (119,744,804 )     (105,594,645 )     9,959,197  
Net proceeds/(repayments) from loan
    (23,896,658 )     (26,485,771 )      
                         
Net cash provided by/(used in) financing activities
    (143,641,462 )     (132,080,416 )     9,959,197  
                         
Net change in cash and cash equivalents
    83,576,947       48,801,137       34,775,582  
Cash and cash equivalents at beginning of year
    3,221,311       194,163       10,353,448  
                         
Cash and cash equivalents at end of year
  $ 86,798,258     $ 48,995,300     $ 45,129,030  
                         
 


F-29


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
Note 10 – Significant Investees (continued)
 
                         
    December 31, 2007  
    GELS     GFS     GTT  
 
Cash flows from operating activities
                       
Net income/(loss) from operations
  $ 94,258,170     $ 183,296,049     $ 34,506,641  
Net increase/(decrease) in investments in investees
    36,575,263       (174,799,663 )     59,220,253  
Net increase/(decrease) in operating assets and liabilities
    (32,604,644 )     (9,861,298 )     (6,668,527 )
                         
Net cash provided by/(used in) operating activities
    98,228,789       (1,364,912 )     87,058,367  
                         
Cash flows from financing activities
                       
Net subscriptions/(redemptions)
    (136,268,832 )     (81,057,381 )     (82,147,096 )
Net proceeds/(repayments) from loan
    24,004,697       26,460,437       (1,435,289 )
                         
Net cash provided by/(used in) financing activities
    (112,264,135 )     (54,596,944 )     (83,582,385 )
                         
Net change in cash and cash equivalents
    (14,035,346 )     (55,961,856 )     3,475,982  
Cash and cash equivalents at beginning of year
    17,256,657       56,156,019       6,877,466  
                         
Cash and cash equivalents at end of year
  $ 3,221,311     $ 194,163     $ 10,353,448  
                         

F-30


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
Note 10 – Significant Investees (continued)
 
Condensed Schedule of Investments
 
The condensed schedules of investments as of December 31, 2009 and December 31, 2008, are as follows:
 
GELS — December 31, 2009
 
                 
          % of
 
Advisor Funds by Investment Strategy
  Fair Value     Net Assets  
 
Catalyst — Activist (cost $15,808,963)
  $ 20,220,428       4.97 %
                 
Consumer
               
TE Hayground Cove Portfolio, Ltd. (cost $3,126,742)(1)
    720,104       0.18  
                 
Diversified
               
Glenview Institutional Partners, L.P.
    21,023,811       5.17 %
Karsch Capital II, L.P. 
    26,228,977       6.45  
PFM Diversified Fund, L.P. 
    20,966,390       5.16  
SCP Ocean Fund, L.P. 
    21,809,122       5.36  
Viking Global Equities, L.P. 
    25,612,676       6.30  
Other
    187,274,286       46.04  
                 
Total Diversified (cost $265,634,005)
    302,915,262       74.48  
                 
Energy (cost $11,500,000)
    11,350,421       2.79  
                 
Growth
               
Conatus Capital Partners, L.P. (cost $19,910,770)
    20,997,168       5.16  
                 
Multi-Strategy (cost $12,165,969)
    8,787,164       2.16  
                 
Short-Term Trading (cost $16,500,000)
    16,184,835       3.98  
                 
Value
               
Skellig Partners, L.P. 
    26,492,494       6.51  
Other
    15,250,277       3.75  
                 
Total Value (cost $33,607,973)
    41,742,771       10.26  
                 
Total Investments in Advisor Funds (cost $378,254,422)
  $ 422,918,153       103.98 %
                 


F-31


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
Note 10 – Significant Investees (continued)
 
GFS — December 31, 2009
 
                 
          % of
 
Advisor Funds by Investment Strategy
  Fair Value     Net Assets  
 
Credit Opportunities — Distressed Securities
               
Anchorage Capital Partners L.P. 
  $ 30,096,559       10.93 %
Brigade Leveraged Capital Structures Fund, L.P. 
    21,107,054       7.66  
Greywolf Capital Partners II, L.P. 
    43,058,240       15.63  
Other
    17,808,045       6.46  
                 
Total Credit Opportunities — Distressed Securities (cost $84,442,652)
    112,069,898       40.68  
                 
                 
Multi-Strategy
               
Empyrean Capital Fund L.P. 
    26,286,209       9.54  
Eton Park Fund, L.P. 
    32,833,855       11.92  
Goldman Sachs RP Partners, LLC (invested in Perry Partners, L.P.)(1)
    23,626,633       8.58  
Halcyon Partners, L.P. 
    29,989,388       10.89  
Manikay Master Fund, L.P. 
    12,557,334       4.56  
Manikay Onshore Fund, L.P. 
    5,237,957       1.90  
Orange Capital Domestic I, L.P. 
    26,201,521       9.51  
OZ Domestic Partners II, L.P. 
    25,706,638       9.33  
Taconic Capital Partners 1.5, L.P. 
    32,905,908       11.95  
                 
Total Multi-Strategy (cost $172,167,300)
    215,345,443       78.18  
                 
Total Investments in Advisor Funds (cost $256,609,952)
  $ 327,415,341       118.86 %
                 


F-32


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
Note 10 – Significant Investees (continued)
 
GTT — December 31, 2009
 
                 
          % of
 
Advisor Funds by Investment Strategy
  Fair Value     Net Assets  
 
Emerging Markets Relative Value (cost $1,748,911)
  $ 573,112       0.19 %
Global Macro
               
Bridgewater Pure Alpha II, LLC
    17,600,097       5.95  
D. E. Shaw Oculus Fund, LLC
    18,099,787       6.11  
Goldman Sachs BH Fund Onshore, LLC (invested in Brevon Howard, L.P.)(1)
    30,495,770       10.30  
Goldman Sachs DeWorde Onshore, LLC (invested in Caxton Global Investments (USA) LLC)(1)
    26,294,707       8.88  
Goldman Sachs Sherwood Fund, LLC(1)
    11,244,080       3.80  
Remington Investment Strategies, L.P. 
    21,226,289       7.17  
Other
    30,757,618       10.39  
                 
Total Global Macro (cost $134,540,323)
    155,718,348       52.60  
                 
                 
Managed Futures
               
Goldman Sachs Global Trading Advisors, LLC(1)
    111,539,633       37.67  
TE Jenkins Portfolio, Ltd.(1)
    6,341,076       2.14  
Other
    17,829,115       6.03  
                 
Total Managed Futures (cost $130,289,377)
    135,709,824       45.84  
                 
Total Investments in Advisor Funds (cost $266,578,611)
  $ 292,001,284       98.63 %
                 
 
 
(1) Advisor Fund is affiliated with the Significant Investee and the Company.
 
The type and industry for each Advisor Fund is categorized as hedge fund investment.
 
The Advisor Funds are primarily domiciled in the United States of America.
 
Information about the underlying investments of Advisor Funds other than affiliated Advisor Funds is generally not available at December 31, 2009.
 
For all the investments in Advisor Funds that represent more than 5% of the Significant Investees net assets at December 31, 2009, the redemption periods ranged from monthly to annually and there are no restrictions such as lock-ups or suspended redemptions in place with the exception of one Advisor fund with a three year lock-up. Additionally, certain Advisor Funds had notified the Significant Investees of certain restrictions on liquidity such as side pocket investments.
 
See “Note 3 — Investments in affiliated Investees” for investment objectives of the Significant Investees.


F-33


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
Note 10 – Significant Investees (continued)
 
GELS — December 31, 2008
 
                 
          % of
 
Advisor Funds by Investment Strategy
  Fair Value     Net Assets  
 
Catalyst — Activist
               
Jana Partners Qualified L.P. (cost $27,442,323)
  $ 29,791,327       5.61 %
                 
                 
Consumer
               
TE Hayground Cove Portfolio, Ltd.(1) (cost $3,126,742)
    1,757,984       0.33  
                 
                 
Diversified
               
Viking Global Equities L.P. 
    40,033,864       7.53  
Other
    315,970,718       59.43  
                 
Total Diversified (cost $370,190,725)
    356,004,582       66.96  
                 
Long-Bias
               
Scout Capital Concentrated, L.P. (cost $46,500,960)
    37,947,287       7.14  
                 
                 
Multi-Strategy (cost $22,000,000)
    19,871,957       3.74  
                 
                 
Real Estate (cost $12,000,000)
    9,934,135       1.87  
                 
                 
Value (cost $54,923,660)
    53,826,458       10.12  
                 
                 
Total Investments in Advisor Funds (cost $536,184,410)
  $ 509,133,730       95.77 %
                 


F-34


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
Note 10 – Significant Investees (continued)
 
GFS — December 31, 2008
 
                 
          % of
 
Advisor Funds by Investment Strategy
  Fair Value     Net Assets  
 
Catalyst — Activist (cost $30,000,000)
  $ 20,070,165       2.88 %
Credit Opportunities — Distressed Securities
               
Anchorage Capital Partners L.P. 
    46,728,641       6.71  
Greywolf Capital Partners II, L.P. 
    39,169,176       5.62  
Silver Point Capital Fund, L.P. 
    58,137,704       8.35  
Trafalgar Merchant Fund
    678,667       0.10  
Trafalgar Recovery Fund
    542,185       0.08  
Other
    29,499,300       4.23  
                 
Total Credit Opportunities — Distressed Securities (cost $145,850,425)
    174,755,673       25.09  
                 
Multi Strategy
               
Canyon Value Realization Fund, L.P. 
    36,227,068       5.20  
Empyrean Capital Fund L.P. 
    40,063,040       5.75  
Eton Park Fund, L.P. 
    123,548,877       17.74  
Eton Park Re LDC
    86,655       0.01  
Goldman Sachs RP Partners, LLC (invests in Perry Partners, L.P.)(1)
    41,756,829       6.00  
OZ Domestic Partners, L.P. 
    16,194,011       2.33  
OZ Domestic Partners II, L.P. 
    30,110,987       4.32  
Taconic Capital Partners 1.5, L.P. 
    45,792,207       6.58  
Trafalgar Catalyst Fund
    41,047,579       5.89  
Other
    82,606,242       11.86  
                 
Total Multi Strategy (cost $400,345,662)
    457,433,495       65.68  
Risk Arbitrage — Special Situation (cost $54,871,098)
    41,378,964       5.94  
                 
Total Investments in Advisor Funds (cost $631,067,185)
  $ 693,638,297       99.59 %
                 


F-35


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
Note 10 – Significant Investees (continued)
 
GTT — December 31, 2008
 
                 
          % of
 
Advisor Funds by Investment Strategy
  Fair Value     Net Assets  
 
Global Macro
               
Brevan Howard, L.P. 
  $ 29,489,564       14.14 %
Bridgewater Pure Alpha II, LLC
    14,015,870       6.72  
D. E. Shaw Oculus Fund, LLC
    18,373,403       8.81  
Drawbridge Global Macro Fund, L.P. 
    14,043,197       6.74  
Goldman Sachs DeWorde Onshore, LLC (invests in Caxton Global Investments (USA) LLC)(1)
    23,025,655       11.04  
Remington Investment Strategies, L.P. 
    19,162,801       9.19  
Other
    12,399,879       5.95  
                 
Total Global Macro (cost $109,472,426)
    130,510,369       62.59  
                 
Managed Futures
               
Goldman Sachs Global Trading Advisors, LLC(1)
    72,523,560       34.78  
Other
    8,498,738       4.08  
                 
Total Managed Futures (cost $63,337,106)
    81,022,298       38.86  
                 
                 
Total Investments in Advisor Funds (cost $172,809,532)
  $ 211,532,667       101.45 %
                 
 
 
(1) Advisor Fund is affiliated with the Significant Investee and the Company.
 
The type and industry for each Advisor Fund is categorized as hedge fund investment.
 
The Advisor Funds are primarily domiciled in the United States of America.
 
Information about the underlying investments of Advisor Funds other than affiliated Advisor Funds is generally not available at December 31, 2008.
 
For all the investments in Advisor Funds that represent more than 5% of the Significant Investees net assets at December 31, 2008, the redemption periods range from monthly to annually and the remaining lock-ups were less than one year. Additionally, certain Advisor Funds had notified the Significant Investees of certain restrictions on liquidity which may include side pocket investments, suspended redemptions, or other restrictions at December 31, 2008. Such restrictions, except side pocket investments, have lapsed since such date.
 
See “Note 3 — Investments in affiliated Investees” for investment objectives of the Significant Investees.


F-36


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
Note 10 – Significant Investees (continued)
 
Fair Value Hierarchy
 
The following tables summarize by level within the fair value hierarchy each Significant Investee’s investments at fair value as of December 31, 2009 and December 31, 2008:
 
                                 
    December 31, 2009  
Assets
  Level 1     Level 2     Level 3     Total  
 
GELS
  $     $ 413,334,824     $ 9,583,329     $ 422,918,153  
GFS
          308,047,463       19,367,878       327,415,341  
GTT
          285,886,771       6,114,513       292,001,284  
 
                                 
    December 31, 2008  
Assets
  Level 1     Level 2(1)     Level 3(1)     Total  
 
GELS
  $     $ 487,440,886     $ 21,692,844     $ 509,133,730  
GFS
          575,946,236       117,692,061       693,638,297  
GTT
          180,295,473       31,237,194       211,532,667  
 
 
(1) The Level 2 and Level 3 fair value amounts were reclassified at December 31, 2008 for comparative purposes to such levels at December 31, 2009 due to additional guidance related to liquidity provided by Advisor Funds in leveling such assets as provided within ASU No. 2009-12 “Investment in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)”.
 
See “Note 2 — Significant accounting policies” for disclosures regarding the fair value hierarchy.
 
Liquidity
 
As of December 31, 2009 and December 31, 2008, certain of the Advisor Funds of the Significant Investees’ were considered illiquid due to restrictions such as side pocket investments or suspended redemptions implemented by the Advisors of such Advisor Funds. The Significant Investees have not imposed any liquidity restrictions on the Company. The following represents the percentage of the net assets of the Significant Investees that were considered illiquid.
 
                 
    2009     2008  
 
GELS
    2 %     4 %
GFS
    5 %     17 %
GTT
    2 %     14 %
 
See “Note 5 — Risk management — Liquidity Risk” for disclosures regarding illiquidity related to the Significant Investees.
 
Each of the Significant Investees maintains a borrowing facility with a financial institution in order to meet liquidity needs. At December 31, 2009 and December 31, 2008, the Significant Investees had borrowings outstanding of $0 and $0, respectively.
 
Risk Management
 
See “Note 5 — Risk Management” for information on risk information associated with the Significant Investees.


F-37


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
NOTES TO FINANCIAL STATEMENTS (continued)
 
 
December 31, 2009
 
Note 10 – Significant Investees (continued)
 
Advisor Funds’ Management Fees and Incentive Allocations/Fees
 
See “Note 3 — Investments in affiliated Investees” for information on the contractual weighted average Advisor Funds’ management fee and incentive allocation/fee rates at the Significant Investee level.
 
Financial Highlights
 
The financial highlights for the Significant Investees for the years ended December 31, 2009, December 31, 2008 and December 31, 2007 are summarized as follows:
 
                         
    December 31, 2009  
    GELS     GFS     GTT  
 
Ratios to average net assets(1)
                       
Expenses
    0.19 %     0.21 %     0.23 %
                         
Net investment income/(loss)
    (0.12 )%     (0.11 )%     (0.16 )%
                         
Total return(2)
    13.37 %     19.10 %     6.35 %
                         
 
                         
    December 31, 2008  
    GELS     GFS     GTT  
 
Ratios to average net assets(1)
                       
Expenses
    0.15 %     0.12 %     0.14 %
                         
Net investment income/(loss)
    (0.04 )%     (0.05 )%     0.12 %
                         
Total return(2)
    (16.75 )%     (19.18 )%     3.27 %
                         
 
                         
    December 31, 2007  
   
GELS
    GFS     GTT  
 
Ratios to average net assets(1)
                       
Expenses
    0.16 %     0.11 %     0.22 %
                         
Net investment income/(loss)
    (0.06 )%     0.09 %     (0.03 )%
                         
Total return(2)
    11.70 %     20.22 %     15.72 %
                         
 
 
(1) The ratios to average net assets are based on expenses and net investment income/(loss) of Class C Series 1 units for GELS, GFS and GTT. The ratios to average net assets calculated above do not include each Significant Investees’ proportionate share of the net investment income/(loss) and expenses of their investments.
 
(2) The total returns are based on the performance of Class C Series 1 units for GELS, GFS, and GTT. The returns include administration fees. No management fee or incentive allocation was charged by the managing member of the Significant Investees with respect to the Company’s investment in any of the Significant Investees.
 
Note 11 – Subsequent Events
 
Effective January 1, 2010, Class A Series 55 through Class A Series 65 and Class A Series 74 through Class A Series 76 units were converted to Class A Series 54 units.


F-38