UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------------------
FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------- -------
COMMISSION FILE NUMBER: 000-50723
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
(Exact name of registrant as specified in its charter)
DELAWARE
(State or Other
Jurisdiction of 04-3638229
Incorporation or (I.R.S. Employer
Organization) Identification No.)
701 MOUNT LUCAS ROAD
PRINCETON, NEW JERSEY 08540
(Address of Principal (Zip Code)
Executive Offices)
(609) 497-5500
(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 [ ] No [X]
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 [ ] No [X]
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The Registrant's Units of Limited Liability Company Interests are not
traded on any market and, accordingly, have no aggregate market value. The
net asset value of the Units of Limited Liability Company Interests as of
June 30, 2005 held by non-affiliates was $987,699,515.
DOCUMENTS INCORPORATED BY REFERENCE
Certain exhibits are incorporated by reference in ITEM 15 of this report
TABLE OF CONTENTS Page
PART I
ITEM 1. BUSINESS......................................................1
PERFORMANCE OF THE COMPANY....................................6
ITEM 1A RISK FACTORS.................................................46
ITEM 2. PROPERTIES...................................................78
ITEM 3. LEGAL PROCEEDINGS............................................78
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........78
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES...................................................79
ITEM 6. SELECTED FINANCIAL DATA......................................80
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..........................81
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
102.........................................................100
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................104
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.........................105
ITEM 9A.CONTROLS AND PROCEDURES.....................................105
PART III
ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE MANAGING MEMBER
AND REGISTRANT..............................................105
ITEM 11 EXECUTIVE COMPENSATION......................................108
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT..............................................110
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............110
ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES......................113
PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES..................114
PART I
ITEM 1 BUSINESS
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
Goldman Sachs Hedge Fund Partners, LLC (the "Company") is a Delaware
limited liability company organized in March 2002 to operate as an
investment fund. Goldman Sachs Hedge Fund Strategies LLC ("GS HFS")
(formerly Goldman Sachs Princeton LLC), a Delaware limited liability
company, serves as the Company's managing member (the "Managing Member").
As of December 31, 2005, the Company had net assets of approximately $774.6
million.
From its inception in April 2002 through July 2003, the Company grew
through subscriptions of new investors. The Company believes its growth
during this period follows with the general national trend of significant
inflows achieved by other hedge funds during this period. From April 1,
2002 through July 1, 2003, the Company received approximately 834 investors
averaging over 50 investors a month and had a maximum of 104 investors
subscribing to the Company in July 2003. Moreover, during this
fifteen-month period, total subscriptions in the Company exceeded $880
million and averaged over $55 million per month with approximately $121.8
million being invested in July 2003. During this period, the Company had at
least 30 new investors each month and at least $24.5 million invested every
month. From July 2003 through September 2004, the Company only took in
investments from existing investors and limited subscriptions from new
qualified investors; however, starting in October 2004, the Company began
accepting additional amounts of new subscriptions again and the Company
continued to do so through December 31, 2005. For the period from October
1, 2004 through December 31, 2005, the Company had 314 new investors and
$319.5 million of aggregate subscriptions from existing and new investors.
The number of investors that came into the Company during this period does
not represent the number of investors in the Company today due to
redemptions made by investors during the same period. 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 2006, the Company satisfied redemption
requests in the amount of approximately $347.5 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. To achieve this objective, the Company allocates all or
substantially all of its assets among privately placed investment funds
(such funds and any successor funds thereto, individually, an "Investment
Fund" and collectively the "Investment Funds") managed by the Managing
Member, each of which allocates its assets to, or invests in entities
managed by, independent investment managers (collectively, the "Advisors")
that employ a broad range of investment strategies primarily within one of
the following four hedge fund sectors: the tactical trading sector, the
equity long/short sector, the relative value sector, and the event driven
sector. Currently, substantially all of the Company's assets are invested
in four Investment Funds, each of which is managed by the Managing Member.
The existing Investment Funds are Goldman Sachs Global Equity Long/Short,
LLC ("GELS"), Goldman Sachs Global Event Driven, LLC ("GED"), Goldman Sachs
Global Relative Value, LLC ("GRV") and Goldman Sachs Global Tactical
Trading, LLC ("GTT"). The assets of each Investment Fund are allocated to
Advisors, directly or indirectly, by (i) investing in investment funds
managed by Advisors ("Advisor Funds"), (ii) investing with Advisors
pursuant to investment management agreements in respect of discretionary
managed accounts, or (iii) investing in a separate exempted company
incorporated with limited liability in the Cayman Islands (as defined
below). (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.
Each of the existing Investment Funds is a Delaware limited liability
company. A brief description of the investment objective and approach of
each of the existing Investment Funds is set forth under "PERFORMANCE OF
THE COMPANY--Description of the Investment Funds and the Performance of the
Investment Funds" below in this Item.
The hedge fund sectors referenced herein are subjective
classifications made by the managing member of an Investment Fund in its
sole discretion. Such classifications are based on information provided by
the Advisors to the managing member of the relevant Investment Fund and may
differ from classifications of similarly named sectors made by other
industry participants. In addition, although each Advisor to which an
Investment Fund allocates assets invests principally utilizing investment
strategies within such Investment Fund's hedge fund sector, certain
Advisors to which an Investment Fund allocates assets may also utilize
other investment strategies that are either related or unrelated to such
hedge fund sector. For example, multi-strategy Advisors invest across a
range of strategies. These Advisors tend to be more opportunistic in
targeting specific event driven, equity long/short or relative value
strategies during differing market environments.
The Managing Member, in its sole discretion, may also invest the
Company's assets with Advisors outside of an investment in an Investment
Fund. See "PERFORMANCE OF THE COMPANY--Direct Allocations to Advisors."
There can be no assurance that the Company or any of the Investment
Funds will achieve its investment objective or that the portfolio design,
risk monitoring and hedging strategies of the Company or any of the
Investment Funds will be successful. See ITEM 1A. "RISK FACTORS."
The Company may hold cash or invest the Company's cash balances at
such times and in any instruments it deems appropriate, including cash
equivalents and other short term securities, pending investment in
Investment Funds, in order to fund anticipated redemptions or expenses of
the Company, or otherwise in the sole discretion of the Managing Member.
Such balances may also be invested in money market funds sponsored by The
Goldman Sachs Group, Inc. or its affiliates, including Goldman, Sachs & Co.
("Goldman Sachs") (collectively referred to herein, together with their
affiliates, directors, partners, trustees, managers, members, officers and
employees, as the "GS Group") and the Company will not be reimbursed for
any fees accruing to any affiliate of the GS Group in respect of any such
investment. The Company generally reinvests any available income earned
from investments of its cash balances in accordance with its investment
program. The Investment Funds are also permitted to hold cash or invest
their cash balances in the same manner.
ALLOCATION AMONG THE INVESTMENT FUNDS
The Managing Member may allocate the Company's assets across the four
hedge fund sectors in a manner consistent with the Company's investment
objective. In order to determine such allocation, the Managing Member
periodically establishes a model allocation among the four hedge fund
sectors. In order to accomplish this, the Managing Member estimates the
long-term risk, return and correlation expectations of each of the
Investment Funds. For these purposes, risk is measured by volatility, and
volatility is determined utilizing various models chosen by the Managing
Member. The Managing Member utilizes this model allocation as a benchmark
and will either allocate the Company's assets among the Investment Funds in
a manner roughly consistent with such benchmark or, in its sole discretion,
will make tactical allocations to one or more Investment Funds, which could
result in an overweighting or underweighting to one or more of the hedge
fund sectors on a risk-adjusted basis. Through June 30, 2004, the Managing
Member allocated on an equal risk-adjusted basis among the Investment
Funds. An adjustment to weights was implemented as of July 1, 2004 to
reflect the Managing Member's updated expectations for return, risk and
correlations for the Investment Funds. In addition, on July 1, 2005, the
Managing Member made a tactical adjustment to the weightings of the
Investment Funds. This adjustment to the weights among the Investment Funds
reflects the Managing Member's judgment and was implemented by the Managing
Member gradually following July 1, 2005. The Managing Member utilizes a
strategic sector allocation and periodically re-evaluates the contribution
to the risk and return of the Company from each investment sector and may
in its sole discretion adjust the Company's assets or weights as it deems
advisable. Adjustments may be considered due to such factors as are deemed
relevant by the Managing Member, which may include change in return, risk
and correlation expectations, changes in market conditions, differences in
relative performance among the Investment Funds, changes in the amount of
the Company's leverage, and the addition or elimination of Investment
Funds. Due to the restrictions on redemptions and additional subscriptions
imposed by the Investment Funds and the Advisors and other factors, the
Managing Member may not always be able to adjust the Company's assets at
the time and in the manner that it would otherwise seek to do. 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 Risk Allocations will be
Successful; Inaccurate Information Provided by the Advisors May Have a
Material Adverse Effect on Implementing the Company's Investment Objective"
and "--SPECIAL RISKS OF THE COMPANY'S STRUCTURE--Risks Associated with the
Company Investing in Other Entities--Advisors May Have Limited Capacity to
Manage Additional Investment Fund Investments, Which Could Cause Dilution
or Concentration of the Company's Investments or Negatively Affect
Allocation of Investments." The models used to measure risk, and the
methodologies utilized to allocate the assets of the Company among the
Investment Funds, may be changed or modified by the Managing Member at any
time without notice or approval of investors in its sole discretion.
As of December 31, 2005, 2004, 2003 and 2002, respectively, the
members' equity of the Company was allocated among the Investment Funds
approximately as described in the tables below. Members' equity, or net
assets, means the total assets of the Company less total liabilities of the
Company at the time of determination in accordance with U.S. generally
accepted accounting principles ("GAAP"). Total assets means the sum of the
Company's cash and cash equivalents, other assets and investments
determined at any time in accordance with GAAP as of that date. The figures
represent actual allocations of the Company's members' equity and not the
allocation of the expected risk of the Company among the Investment Funds.
The allocations of the Company's members' equity will change from time to
time in accordance with the Company's investment objective and strategies.
In addition, the table below as of December 31, 2005 also provides the
approximate allocation among the Investment Funds of the adjusted members'
equity as of December 31, 2005. The adjusted members' equity excluded
Redemptions payable of $347,523,596 at December 31, 2005, $128,546,636 at
December 31, 2004 and $34,529,625 at December 31, 2003, which is reflected
in the financial statements as a liability under GAAP. The Managing Member
believes this ratio more accurately reflects the percentage of the
Company's equity invested in the Investment Funds given the timing of the
payment for the redemption payable. The Managing Member made a strategic
adjustment among the Investment Funds starting on July 1, 2004 and
gradually changed the weightings of the Investment Funds over the ensuing
period until completing the adjustment on January 1, 2005. The adjustment
to the weights implemented as of January 1, 2005 reflected the Managing
Member's updated expectations for return, risk and correlations for the
Investment Funds. The Company's investments are carried at fair value as
determined by the Company's attributable share of the net assets of the
respective Investment Fund. Fair values are determined utilizing
information supplied by each individual Investment Fund net of each
Advisor's management and incentive fee and are not a guarantee of actual
realizable amounts. See 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 Based Upon Valuations Provided by the
Advisors Which are Generally not Audited; Uncertainties in Valuations Could
Have a Material Adverse Effect on the Company's Net Assets" and ITEM 7.
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Critical Accounting Policies and Estimates."
DECEMBER 31, 2005
----------------------------------------------------------------
FAIR VALUE OF
FAIR VALUE OF COMPANY'S
COMPANY'S INVESTMENT AS
FAIR VALUE OF INVESTMENT AS A % OF
COMPANY'S A % OF ADJUSTED
INVESTMENT IN $ MEMBERS' MEMBERS'
INVESTMENT FUND AMOUNT EQUITY (1) EQUITY (2)
----------------------------------------------------------------
GELS $294,096,911 37.97% 26.21%
----------------------------------------------------------------
GED $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 investments as a % of
members' equity, is reduced for member redemptions that are paid after
the balance sheet date.
(2) Adjusted members' equity, used in the calculation of the investments
as a percentage of adjusted members' equity, represents members'
equity excluding Redemptions payable in the amount of $347,523,596
that was payable at December 31, 2005.
(3) The total value of the Company's investments in the Investment Funds
exceeded 100% of members' equity and adjusted members' equity,
respectively, because members' equity and adjusted members' equity
both reflected certain accrued liabilities of the Company, including
fees and expenses, and, in addition, members' equity also reflected
redemptions payable at December 31, 2005.
DECEMBER 31, 2004
----------------------------------------------------------------
INVESTMENT FUND FAIR VALUE OF FAIR VALUE OF FAIR VALUE OF
COMPANY'S
COMPANY'S INVESTMENT AS
INVESTMENT AS A % OF
COMPANY'S A % OF ADJUSTED
INVESTMENT IN $ MEMBERS' MEMBERS'
AMOUNT EQUITY (1) EQUITY (2)
----------------------------------------------------------------
GELS $226,276,134 23.63% 20.84%
----------------------------------------------------------------
GED $268,186,702 28.01% 24.69%
----------------------------------------------------------------
GRV $350,409,379 36.60% 32.27%
----------------------------------------------------------------
GTT $248,081,137 25.91% 22.84%
----------------------------------------------------------------
Total $1,092,953,352 114.15%(3) 100.64% (3)
----------------------------------------------------------------
(1) Members' equity, used in the calculation of the investments as a % of
members' equity, is reduced for member redemptions that are paid after
the balance sheet date.
(2) Adjusted members' equity, used in the calculation of the investments
as a percentage of adjusted members' equity, represents members'
equity excluding Redemptions payable in the amount of $128,546,636
that was payable at December 31, 2004.
(3) The total value of the Company's investments in the Investment Funds
exceeded 100% of members' equity and adjusted members' equity,
respectively, because members' equity and adjusted members' equity
both reflected certain accrued liabilities of the Company, including
fees and expenses, and, in addition, members' equity also reflected
redemptions payable at December 31, 2004.
DECEMBER 31, 2003
----------------------------------------------------------------
INVESTMENT FUND FAIR VALUE OF
FAIR VALUE OF COMPANY'S
COMPANY'S INVESTMENT AS
FAIR VALUE OF INVESTMENT AS A % OF
COMPANY'S A % OF ADJUSTED
INVESTMENT IN MEMBERS' MEMBERS'
$ AMOUNT EQUITY (1) EQUITY (2)
----------------------------------------------------------------
GELS $140,117,348 15.01% 14.48%
----------------------------------------------------------------
GED $221,899,920 23.78% 22.93%
----------------------------------------------------------------
GRV $359,311,989 38.50% 37.12%
----------------------------------------------------------------
GTT $249,583,571 26.74% 25.79%
----------------------------------------------------------------
Total $970,912,828 104.03%(3) 100.32%(3)
----------------------------------------------------------------
(1) Members' equity, used in the calculation of the investments as a % of
members' equity, is reduced for member redemptions that are paid after
the balance sheet date.
(2) Adjusted members' equity, used in the calculation of the investments
as a percentage of adjusted members' equity, represents members'
equity excluding Redemptions payable in the amount of $34,529,625 that
was payable at December 31, 2003.
(3) The total value of the Company's investments in the Investment Funds
exceeded 100% of members' equity and adjusted members' equity,
respectively, because members' equity and adjusted members' equity
both reflected certain accrued liabilities of the Company, including
fees and expenses, and, in addition, members' equity also reflected
redemptions payable at December 31, 2003.
DECEMBER 31, 2002
-------------------------------------------------------------
INVESTMENT FUND FAIR VALUE OF FAIR VALUE OF
COMPANY'S COMPANY'S
INVESTMENT IN $ AMOUNT INVESTMENT AS A %
OF MEMBERS' EQUITY
-------------------------------------------------------------
GELS $53,355,947 13.92%
-------------------------------------------------------------
GED $84,386,691 22.02%
-------------------------------------------------------------
GRV $146,920,415 38.34%
-------------------------------------------------------------
GTT $98,921,553 25.81%
-------------------------------------------------------------
Total $383,584,606 100.09% (1)
-------------------------------------------------------------
(1) The total value of the Company's investments in the Investment Funds
exceeded 100% of the Company's members' equity, because the Company's
members' equity reflected certain accrued liabilities of the Company,
including fees and expenses.
PERFORMANCE OF THE COMPANY
For the years ended December 31, 2005, December 31, 2004, December 31,
2003 and for the period from commencement of operations on April 1, 2002
until December 31, 2002, the Company had net returns as described in the
tables below. Past performance of the Company is not indicative of future
results which may vary. The Company's net return has been computed based on
the performance of the Company net of all fees and expenses including,
among others (i) incentive allocations to the Managing Member and (ii) a
monthly management fee to the Managing Member. See "FEES AND EXPENSES."
JANUARY 1, 2005 - DECEMBER 31, 2005
-----------------------------------------------------
SERIES OF UNITS(1) MONTH OF NET RETURN FOR
ISSUANCE OF PERIOD
UNITS OUTSTANDING (2)
-----------------------------------------------------
Class A Series 1 -- 4.57%
-----------------------------------------------------
Class A Series 9 January 4.57%
-----------------------------------------------------
Class A Series 10 February 5.17%
-----------------------------------------------------
Class A Series 11 March 4.12%
-----------------------------------------------------
Class A Series 12 April 4.69%
-----------------------------------------------------
Class A Series 13 May 6.28%
-----------------------------------------------------
Class A Series 14 June 5.87%
-----------------------------------------------------
Class A Series 15 July 4.71%
-----------------------------------------------------
Class A Series 16 August 3.26%
-----------------------------------------------------
Class A Series 17 September 2.31%
-----------------------------------------------------
Class A Series 18 October 1.04%
-----------------------------------------------------
Class A Series 19 November 2.77%
-----------------------------------------------------
Class A Series 20 December 1.46%
-----------------------------------------------------
(1) As of December 31, 2005, the Company had 13 series of Class A units
outstanding. Each series of Class A units is identical in every regard
except with respect to its individualized incentive allocation base.
Effective January 1, 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 those series.
(2) The net return is shown for the month of issuance through December 31,
2005.
JANUARY 1, 2004 - DECEMBER 31, 2004
-----------------------------------------------------
SERIES OF UNITS MONTH OF NET RETURN FOR
(1) ISSUANCE OF PERIOD
UNITS OUTSTANDING (2)
-----------------------------------------------------
Class A Series 1 January 5.53%
-----------------------------------------------------
Class A Series 2 February 4.48%
-----------------------------------------------------
Class A Series 3 July 4.95%
-----------------------------------------------------
Class A Series 4 August 5.73%
-----------------------------------------------------
Class A Series 5 September 5.72%
-----------------------------------------------------
Class A Series 6 October 4.98%
-----------------------------------------------------
Class A Series 7 November 4.01%
-----------------------------------------------------
Class A Series 8 December 1.12%
-----------------------------------------------------
(1) As of December 31, 2004, the Company had 8 series of Class A units
outstanding. Each series of Class A units is identical in every regard
except with respect to its individualized incentive allocation base.
Effective January 1, 2005, Class A Series 2 through Class A Series 8
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 those series.
(2) The net return is shown for the month of issuance through December 31,
2004.
JANUARY 1, 2003 - DECEMBER 31, 2003
-----------------------------------------------------
SERIES OF UNITS MONTH OF NET RETURN FOR
(1) ISSUANCE OF PERIOD
UNITS OUTSTANDING (2)
-----------------------------------------------------
Class A Series 1 January 9.60%
-----------------------------------------------------
Class A Series 2 February 7.98%
-----------------------------------------------------
Class A Series 3 March 6.87%
-----------------------------------------------------
Class A Series 4 April 7.65%
-----------------------------------------------------
Class A Series 5 May 6.59%
-----------------------------------------------------
Class A Series 6 June 3.77%
-----------------------------------------------------
Class A Series 7 July 3.74%
-----------------------------------------------------
Class A Series 8 August 4.64%
-----------------------------------------------------
Class A Series 9 November 1.65%
-----------------------------------------------------
Class A Series 10 December 1.35%
-----------------------------------------------------
(1) As of December 31, 2003, the Company had 10 series of Class A units
outstanding. Each series of Class A units is identical in every regard
except with respect to its individualized incentive allocation base.
Effective January 1, 2004, Class A Series 2 through Class A Series 10
units were collapsed into Class A Series 1 units. Class A Series
(other than Class A Series 1) issued in future periods represent
issuances of new series and are different from those series.
(2) The net return is shown for the month of issuance through December 31,
2003.
APRIL 1, 2002 - DECEMBER 31, 2002
-----------------------------------------------------
SERIES OF UNITS MONTH OF NET RETURN FOR
(1) ISSUANCE OF PERIOD
UNITS OUTSTANDING (2)
-----------------------------------------------------
Class A Series 1 April 3.97%
-----------------------------------------------------
Class A Series 2 May 3.88%
-----------------------------------------------------
Class A Series 3 June 3.19%
-----------------------------------------------------
Class A Series 4 July 2.33%
-----------------------------------------------------
Class A Series 5 August 2.52%
-----------------------------------------------------
Class A Series 6 September 1.51%
-----------------------------------------------------
Class A Series 7 October 0.75%
-----------------------------------------------------
Class A Series 8 November 1.77%
-----------------------------------------------------
Class A Series 9 December 2.34%
-----------------------------------------------------
(1) As of December 31, 2002, the Company had 9 series of Class A units
outstanding. Each series of Class A units is identical in every regard
except with respect to its individualized incentive allocation base.
Effective January 1, 2003, Class A Series 2 through Class A Series 9
units were collapsed into Class A Series 1 units. Class A Series
(other than Class A Series 1) issued in future periods represent
issuances of new series and are different from those series.
(2) The net return is shown for the month of issuance through December 31,
2002.
The Company only has one class of units at present, Class A Units. The
Class A Series Units are subject to a management fee and an incentive
allocation. Separately, the Investment Funds (GTT, GELS, GRV and GED) each
offer separate classes of units. Among the classes of units offered by the
Investment Funds, each has offered Class C Series units which are not
subject to management fees and incentive allocations at an Investment Fund
level (although management fees and incentive allocations are paid to each
of the Advisors in which the Investment Funds invest). The Company only
owns Class C Series of the Investment Funds. The intent behind this fee
arrangement was to create a fee structure such that holders of Class A
Series Units of the Company are not - in addition to management and
incentive allocations paid to the Company (as well as management and
incentive allocations paid to individual Advisors) - also subject to
management fees and incentive allocations paid by each of the Investment
Funds. Therefore, holders of a fee bearing class of the Company indirectly
own "no-fee-shares" of the Investment Funds. Through its investment in the
Investment Funds, the Company bears a pro rata portion of all other
offering, organizational and operating expenses of the Investment Funds,
including the administration fee for SEI's (as defined below) services as
administrator of each Investment Fund, and a pro rata portion of the
Advisor compensation paid by the Investment Funds. Returns in the tables
above are shown net of these expenses. See "FEES AND EXPENSES."
The table below compares the historical cumulative total net return of
the Company's Units for the investment periods indicated in the table with
the 3 Month LIBOR (London Interbank Offered Rate), the Lehman Brothers
Aggregate Index, the MSCI World Index and the S&P 500 Index. The 3 Month
LIBOR, the Lehman Brothers Aggregate Index, the MSCI World Index and the
S&P 500 Index are commonly used as comparative indices by hedge fund
investors. The Managing Member does not manage the Company in respect of
any particular index. References to market or composite indices, benchmarks
or other measures of relative market performance over a specified period of
time (referred to herein as an index or collectively as indices) are
provided for information only. Reference to these indices does not imply
that the portfolio will achieve returns, volatility or other results
similar (or dissimilar) to the indices. The composition of an index may not
reflect the manner in which a portfolio is constructed in relation to
expected or achieved returns, portfolio guidelines, restrictions, sectors,
correlations, concentrations, volatility or tracking error targets, all of
which are subject to change over time. These indices are unmanaged and the
figures for an index reflect the reinvestment of dividends but do not
reflect the deduction of any fees or expenses which would reduce returns.
The holders of Units of the Company (each referred to as a "Member" and
collectively the "Members") cannot invest directly in these indices.
- ------------------------------ ------------ ------------ -------------- ------------- -------------
INVESTMENT PERIOD COMPANY (1) 3 MONTH LEHMAN MSCI WORLD S&P 500
LIBOR BROTHERS INDEX INDEX
AGGREGATE
INDEX
- ------------------------------ ------------ ------------ -------------- ------------- -------------
1/1/2005-12/31/2005 4.57% 3.32% 2.43% 9.49% 4.91%
- ------------------------------ ------------ ------------ -------------- ------------- -------------
1/1/2004-12/31/2004 5.53% 1.48% 4.34% 14.72% 10.88%
- ------------------------------ ------------ ------------ -------------- ------------- -------------
1/1/2003-12/31/2003 9.60% 1.23% 4.11% 33.11% 28.68%
- ------------------------------ ------------ ------------ -------------- ------------- -------------
4/1/2002-12/31/2002 3.97% 1.42% 10.16% (20.16)% (22.31)%
- ------------------------------ ------------ ------------ -------------- ------------- -------------
<FN>
(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 9-20, Class A Series 2-8, Class A Series
2-10 and Class A Series 2-9 for 2005, 2004, 2003 and 2002,
respectively.
</FN>
DESCRIPTION OF THE INVESTMENT FUNDS AND THE PERFORMANCE OF THE
INVESTMENT FUNDS
The annual net returns shown for each Investment Fund in the tables
below have been computed based on the performance of the respective
Investment Fund net of all expenses allocated by each Investment Fund to
the Company for periods shown following the commencement of the Company.
Past performance of the Investment Funds is not indicative of future
results which may vary significantly. The Company owns "no-fee-shares" in
each Investment Fund and accordingly the Company was not charged any
incentive allocation or management fee by the Managing Member in its
capacity as managing member of each of the Investment Funds. See "FEES AND
EXPENSES."
GOLDMAN SACHS GLOBAL EQUITY LONG/SHORT, LLC
GELS' investment objective is to target attractive risk-adjusted
absolute 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, 2005, GELS'
managing member (currently, the Managing Member) had allocated GELS'
assets, directly or indirectly, to 29 Advisors, 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. GELS' managing member generally does not allocate more
than 25% of GELS' total assets to any single Advisor at the time of
allocation. GELS was organized on July 1, 2001 and commenced its operations
on August 1, 2001.
GS Group owned approximately 1% of GELS as of December 31, 2005,
exclusive of any direct or indirect ownership of GELS by or through the
Company.
Since GELS commenced its operations on August 1, 2001 until December
31, 2005, it had net returns on invested assets as described in the table
below.
- -------------------------------------- -----------------------------------
INVESTMENT PERIOD NET RETURN FOR PERIOD
- -------------------------------------- -----------------------------------
1/1/2005 - 12/31/2005 (1) 9.93%
- -------------------------------------- -----------------------------------
1/1/2004 - 12/31/2004 (1) 9.27%
- -------------------------------------- -----------------------------------
1/1/2003 - 12/31/2003 (1) 13.73%
- -------------------------------------- -----------------------------------
1/1/2002 - 12/31/2002 (2) 0.02%
- -------------------------------------- -----------------------------------
8/1/2001 - 12/31/2001 (3) 1.58%
- -------------------------------------- -----------------------------------
(1) Net return is based on the performance of Class C Series 1 units.
Class C Series 1 units ("no-fee-shares") of GELS (including those
issued to the Company) are not subject to management fees or incentive
allocations paid or made to GS HFS as managing member of GELS and
therefore returns do not reflect the payment of any such fees or the
making of any allocations to GS HFS. In addition, returns for Class C
Series 1 units during the entire period reflect returns net of the
compensation paid to Advisors. The returns shown for 2003 and 2004 are
also net of the payment of an administration fee to GS HFS by GELS.
The return shown for 2005 is 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.
(2) Annual net return is based on the performance of Class A Series 1
units (for the period from January 1, 2002 to March 31, 2002) and
Class C Series 1 (for the period from the commencement of the
Company's operations on April 1, 2002 to December 31, 2002). Class A
Series 1 units of GELS are subject to a 1.25% management fee and a 5%
incentive allocation paid or made to GS HFS as managing member of
GELS. The returns shown, to the extent they reflect Class A Series 1
units, are net of the management fee and the incentive allocation paid
by GELS to GS HFS as managing member of GELS. Class C Series 1 units
("no-fee-shares") of GELS (including those issued to the Company) are
not subject to management fees or incentive allocations paid or made
to GS HFS as managing member of GELS and therefore the returns of
Class C Series 1 units, do not reflect the payment of any such fees or
the making of any allocations to GS HFS. In addition, returns for
Class A Series 1 units and Class C Series 1 units during the entire
period reflect returns net of the compensation paid to Advisors. The
returns shown for Class C Series 1 units are also net of the payment
of an administration fee to GS HFS by GELS. Returns for the Class A
Series 1 units are shown for periods prior to the Company's
commencement of operations on April 1, 2002 since GELS did not have
no-fee-shares outstanding during such periods.
(3) Annual net return is based on the performance of Class A Series 1
units. Class A Series 1 units of GELS are subject to a 1.25%
management fee and a 5% incentive allocation paid or made to GS HFS as
managing member of GELS. The returns shown are net of the management
fee and the incentive allocation paid by GELS to GS HFS as managing
member of GELS. The Company did not invest in Class A Series 1 units
of GELS. The returns shown are also net of the payment of an
administration fee to GS HFS by GELS.
GOLDMAN SACHS GLOBAL EVENT DRIVEN, LLC
GED'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, 2005, GED's
managing member (currently, the Managing Member) had allocated GED's
assets, directly or indirectly, to 16 Advisors, although this number may
change materially over time as determined by GED's managing member. GED's
managing member generally will not allocate more than 25% of GED's total
assets to any single Advisor at the time of allocation. Event driven
strategies seek to identify security price changes resulting from corporate
events such as restructurings, mergers, takeovers, spin-offs and other
special situations. Corporate event arbitrageurs generally choose their
investments based on their perceptions of the likelihood that the event or
transaction will occur, the amount of time that the process will take and
the perceived ratio of return to risk.
Strategies that may be utilized in the event driven sector include
risk arbitrage/special situations and credit opportunities/distressed
securities, each of which is described in greater detail below. Other
strategies may be employed as well.
Risk Arbitrage/Special Situations
Risk arbitrageurs seek to capture the price spread between current
market prices and the value of securities upon successful completion of a
takeover or merger transaction. The availability of spreads reflects the
unwillingness of other market participants to take on transaction-based
risk, i.e., the risk that the transaction will not be completed and the
price of the company being acquired will fall. Risk arbitrageurs evaluate
this risk and seek to create portfolios that reduce specific event risk.
Special situations such as spin-offs and corporate reorganizations and
restructurings offer additional opportunities for event driven Advisors.
Often these strategies are employed alongside risk 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.
Credit Opportunities/Distressed Securities
Credit Opportunities/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.
GS Group owned approximately 2% of GED as of December 31, 2005,
exclusive of any direct or indirect ownership of GED by or through the
Company.
GED was organized on November 1, 2001 and commenced its operations on
April 1, 2002. Since commencement of its operations until December 31, 2005
GED had net returns on invested assets as described in the table below.
- -------------------------------------- -------------------------------------
INVESTMENT PERIOD NET RETURN FOR PERIOD
- -------------------------------------- -------------------------------------
1/1/2005 - 12/31/2005 (1) 7.65%
- -------------------------------------- -------------------------------------
1/1/2004 - 12/31/2004 (1) 12.70%
- -------------------------------------- -------------------------------------
1/1/2003 - 12/31/2003 (1) 18.09%
- -------------------------------------- -------------------------------------
4/1/2002 - 12/31/2002 (1) (0.66)%
- -------------------------------------- -------------------------------------
(1) Net return is based on the performance of Class C Series 1 units.
Class C Series 1 units ("no-fee-shares") of GED (including those
issued to the Company) are not subject to management fees or incentive
allocations paid or made to GS HFS as managing member of GED and
therefore returns do not reflect the payment of any such fees or the
making of any allocations to GS HFS. In addition, returns for Class C
Series 1 units during the entire period reflect returns net of the
compensation paid to Advisors. The returns shown for 2002, 2003 and
2004 are also net of the payment of an administration fee to GS HFS by
GED. The return shown for 2005 is net of an administration fee paid by
GED to SEI who became the administrator of GED on January 1, 2005. No
administration fee was paid to GS HFS by GED in 2005.
GOLDMAN SACHS GLOBAL RELATIVE VALUE, LLC
GRV'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 relative value sector. As of December 31, 2005,
GRV's managing member (currently, the Managing Member) had allocated GRV's
assets, directly or indirectly, to 19 Advisors, although this number may
change materially over time as determined by GRV's managing member. GRV's
managing member generally does not allocate more than 25% of GRV's total
assets to any single Advisor at the time of allocation. Relative value
strategies seek to profit from the mispricing of financial instruments,
capturing spreads between related securities that deviate from their fair
value or historical norms. Directional and market 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.
Credit Relative Value
Credit relative value encompasses strategies that take long and short
positions in corporate bonds or their derivatives to capture misvaluations
between single issues as well as between portfolios or indices and their
underlying constituents. Strategies may also involve a capital structure
component, to capture mispricing between equity and corporate debt.
Strategies are driven by both qualitative fundamental analysis and
quantitative considerations. Portfolios are constructed to ensure that the
directional exposure to credit spreads is minimal.
Convertible Arbitrage
Convertible bond arbitrage strategies consist of buying convertible
bonds and shorting an appropriate number of shares of the issuer's common
stock. The stock short sale is intended to hedge the stock price risk
arising from the equity conversion feature of the convertible bond. Due to
the bond features of convertibles, credit and interest rate risk may also
be hedged. Convertible arbitrage strategies are long volatility strategies
and primarily profit from rapid changes in stock price. A second source of
potential profit is the cash flows generated from the bond's coupon payment
and the short sale interest rebate.
Equity Market Neutral
Equity market neutral strategies try to avoid market direction
influences and seek to generate returns purely from stock selection.
Advisors construct long and short baskets of equity securities with similar
characteristics but different current valuations, with the view that the
market will gradually realize these different valuations and correct the
difference. Portfolios are designed to exhibit zero or negligible beta to
all or most markets. In many instances, Advisors also attempt to immunize
portfolios to industry, market capitalization, and country exposure.
Fixed Income Relative Value
Fixed-income relative value strategies seek to exploit pricing
anomalies that might exist across fixed-income securities and their related
derivatives. Some fixed-income strategies are based on macro
considerations, and others are primarily quantitative in nature where
financial modeling is an integral component. Mispricing in fixed-income
instruments or baskets of securities are found when securities deviate from
historical relationships or fair value. These relationships can be
temporarily distorted by exogenous shocks to fixed-income supply and demand
or by structural changes in the fixed-income market. Markets covered are
predominantly G10, developed countries, although some specialists employ
similar techniques in developing country fixed-income markets.
GS Group owned approximately 2% of GRV as of December 31, 2005,
exclusive of any direct or indirect ownership of GRV by or through the
Company.
GRV was organized on November 1, 2001 and commenced its operations on
January 1, 2002. Since commencement of its operations on January 1, 2002
until December 31, 2005, GRV had net returns on invested assets as
described in the table below.
- -------------------------------------- -------------------------------------
INVESTMENT PERIOD NET RETURN FOR PERIOD
- -------------------------------------- -------------------------------------
1/1/2005 - 12/31/2005 (1) 4.09%
- -------------------------------------- -------------------------------------
1/1/2004 - 12/31/2004 (1) 5.38%
- -------------------------------------- -------------------------------------
1/1/2003 - 12/31/2003 (1) 7.11%
- -------------------------------------- -------------------------------------
1/1/2002 - 12/31/2002 (2) 4.93%
- -------------------------------------- -------------------------------------
(1) Net return is based on the performance of Class C Series 1 units.
Class C Series 1 units ("no-fee-shares") of GRV (including those
issued to the Company) are not subject to management fees or incentive
allocations paid or made to GS HFS as managing member of GRV and
therefore returns do not reflect the payment of any such fees or the
making of any allocations to GS HFS. In addition, returns for Class C
Series 1 units during the entire period reflect returns net of the
compensation paid to Advisors. The returns shown for 2003 and 2004 are
also net of the payment of an administration fee to GS HFS by GRV. The
return shown for 2005 is 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.
(2) Annual net return is based on the performance of Class A Series 1
units (for the period from January 1, 2002 to March 31, 2002) and
Class C Series 1 (for the period from the commencement of the
Company's operations on April 1, 2002 to December 31, 2002). Class A
Series 1 units of GRV are charged a 1.25% management fee and a 5%
incentive allocation by GS HFS as managing member of GRV. The returns
shown, to the extent they reflect Class A Series 1 units, are net of
the management fee and the incentive allocation paid by GRV to GS HFS
as managing member of GRV. The Company did not invest in Class A
Series 1 units of GRV. Class C Series 1 units ("no-fee-shares") of GRV
(including those issued to the Company) are not subject to management
fees or incentive allocations paid or made to GS HFS as managing
member of GRV and therefore returns, to the extent they reflect Class
C Series 1 units, do not reflect the payment of any such fees or the
making of any allocations to GS HFS. In addition, returns for Class A
Series 1 units and Class C Series 1 units during the entire period
reflect returns net of the compensation paid to Advisors. The returns
shown are also net of the payment of an administration fee to GS HFS
by GRV. Returns for the Class A Series 1 Units are shown for periods
prior to the Company's commencement of operations on April 1, 2002
since GRV did not have no-fee-shares outstanding during such periods.
GOLDMAN SACHS GLOBAL TACTICAL TRADING, LLC
GTT's investment objective is to target attractive long-term
risk-adjusted returns by allocating its assets to Advisors that employ
strategies primarily within the tactical trading sector. Tactical trading
strategies are directional trading strategies, which generally fall into
one of two categories: managed futures strategies and global macro
strategies. Managed futures strategies involve trading in futures and
currencies globally, generally using systematic or discretionary
approaches. 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. Advisors use quantitative models or discretionary inputs
to speculate on the direction of individual markets or subsectors of
markets. 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 (such as sugar, cocoa, coffee and cotton). Advisors also
engage in the speculative 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.
GTT allocates its assets pursuant to discretionary investment advisory
agreements and through investments in Advisor Funds.
As of December 31, 2005, GTT's managing member (currently, the
Managing Member) had allocated GTT's assets, directly or indirectly, to 23
Advisors, although this number may change materially over time as
determined by GTT's managing member. GTT's managing member generally does
not allocate more than 25% of GTT's total assets to any single Advisor at
the time of allocation.
GS Group owned approximately 6% of GTT as of December 31, 2005,
exclusive of any direct or indirect ownership of GTT by or through the
Company.
For the past five years from January 1, 2000 to December 31, 2005, GTT
had net returns on invested assets as described in the table below.
- ---------------------------------- -------------------------------
INVESTMENT PERIOD NET RETURN FOR PERIOD
- ---------------------------------- -------------------------------
1/1/2005 - 12/31/2005 (1) 4.03%
- ---------------------------------- -------------------------------
1/1/2004 - 12/31/2004 (1) 3.88%
- ---------------------------------- -------------------------------
1/1/2003 - 12/31/2003 (1) 11.61%
- ---------------------------------- -------------------------------
1/1/2002 - 12/31/2002 (2) 10.99%
- ---------------------------------- -------------------------------
1/1/2001 - 12/31/2001 (3) 9.25%
- ---------------------------------- -------------------------------
(1) Net return is based on the performance of Class C Series 1 units.
Class C Series 1 units ("no-fee-shares") of GTT (including those
issued to the Company) are not subject to management fees or incentive
allocations paid or made to GS HFS as managing member of GTT and
therefore returns do not reflect the payment of any such fees or the
making of any allocations to GS HFS. In addition, returns for Class C
Series 1 units during the entire period reflect returns net of the
compensation paid to Advisors. The returns shown for 2003 and 2004 are
also net of the payment of an administration fee to GS HFS by GTT. The
return shown for 2005 is net of an 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.
(2) Annual net return is based on the performance of Class A Series 1
units (for the period from January 1, 2002 to March 31, 2002) and
Class C Series 1 (for the period from the commencement of the
Company's operations on April 1, 2002 to December 31, 2002). Class A
Series 1 units of GTT are subject to a 1.25% management fee and a 5%
incentive allocation paid or made to GS HFS as managing member of GTT.
The returns shown, to the extent they reflect Class A Series 1 units,
are net of the management fee and the incentive allocation paid by GTT
to GS HFS as managing member of GTT. The Company did not invest in
Class A Series 1 units of GTT. Class C Series 1 units
("no-fee-shares") of GTT (including those issued to the Company) are
not subject to management fees or incentive allocations paid or made
to GS HFS as managing member of GTT and therefore returns, to the
extent they reflect Class C Series 1 units, do not reflect the payment
of any such fees or the making of any allocations to GS HFS. In
addition, returns for Class A Series 1 units and Class C Series 1
units during the entire period reflect returns net of the compensation
paid to Advisors. The returns shown are also net of the payment of an
administration fee to GS HFS by GTT. Returns for the Class A Series 1
units are shown for periods prior to the Company's commencement of
operations on April 1, 2002 since GTT did not have no-fee-shares
outstanding during such periods.
(3) Annual net return is based on the performance of Class B Series 1
units and is net of a 3% management fee and a 25% incentive allocation
paid or made to GS HFS as managing member of GTT. GTT did not bear any
additional Advisor compensation expenses during this period because
such expenses were paid by GS HFS, and therefore returns do not
reflect any additional fees paid to Advisors. The Company did not
invest in Class B Series 1 units of GTT. Effective January 1, 2002,
the Class B Series 1 units were converted to Class A Series 1 units.
OVERVIEW OF THE INVESTMENT PROCESS OF THE INVESTMENT FUNDS
In its capacity as managing member of each of the Investment Funds,
the Managing Member employs a dynamic investment process which includes
advisor selection, portfolio design and ongoing risk analysis and
monitoring. The Goldman Sachs Group, Inc. acquired the assets and business
of Commodities Corporation Limited, a Princeton New Jersey-based asset
management firm established in 1969, specializing in alternative
investments, and contributed them to a newly formed wholly owned
subsidiary, Commodities Corporation LLC, which was renamed Goldman Sachs
Princeton LLC in May 2001, and which changed its name to Goldman Sachs
Hedge Fund Strategies LLC in December 2004. The Managing Member (together
with the predecessor entity) has over 30 years of experience in
constructing diversified portfolios by selecting, allocating among, and
monitoring absolute return-oriented (i.e., returns not measured against a
benchmark) or "skill-based" Advisors. Skill-based Advisors are Advisors
which, as a result of their particular investment style and skills, have
the potential to be profitable regardless of the direction of the market
(i.e., unlike long-only Advisors, which would be expected to make money
when markets go up, and not during periods of market decline). The Managing
Member has also developed computer systems and operational capabilities to
assist in the monitoring of Advisors.
An Investment Fund's managing member seeks to identify Advisors to
which it may allocate such Investment Fund's assets. The Advisor selection
process includes a review by the Investment Fund's managing member's team
of professionals, which may include representatives of its portfolio
management, Advisor selection, risk and quantitative analysis, compliance,
tax, legal, finance and operations areas.
Both qualitative and quantitative criteria are factored into the
Advisor selection process. These criteria include portfolio management
experience, strategy, style, historical performance, including risk profile
and drawdown (i.e., downward performance) patterns, risk management
philosophy and the ability to absorb an increase in assets under management
without a diminution in returns. The managing member of each Investment
Fund also examines the organizational infrastructure, including the quality
of the investment professionals and staff, the types and application of
internal controls, and any potential for conflicts of interest. However,
the Company and the Investment Funds do not control the Advisors and are
frequently not able to review the actual books and investments of many
Advisors since this is proprietary information and in many cases such
information is not shared with the managing member of the Investment Funds,
neither on a historical nor a current basis.
In determining the relative allocations of capital to each Advisor,
the managing member of an Investment Fund considers the risk and return
characteristics of each of the Advisors, including the average expected
volatility of returns, drawdown patterns and liquidity and leverage
characteristics, as well as their asset capacity limits and constraints. In
addition, each Investment Fund's managing member considers how each
Advisor's returns are expected to correlate to the other Advisors in the
portfolio. It is expected that allocations will vary significantly over
time as returns for different Advisors vary. The managing member of an
Investment Fund also may adjust allocations from time to time when it deems
it appropriate to do so. In addition, it is expected that individual
allocations will grow larger or smaller as each Advisor's performance
varies over time.
The identity and number of each Investment Fund's Advisors may change
materially over time. The managing member of an Investment Fund may
withdraw from or invest with different Advisors without prior notice to or
the consent of the Company, the Members or the members of the Investment
Fund.
The managing member of an Investment Fund may invest a substantial
portion of the Investment Fund's assets with Advisors who may have limited
track records and Advisor Funds with limited operating histories. In such
cases, the Advisors or individual members of their management teams
generally will have had, in the Investment Fund's managing member's
opinion, relevant experience trading in the strategies that such Advisors
are expected to utilize. However, the Company and the Investment Funds are
not able to ensure Members that each of the Advisors, even those with
longer track records, will perform as expected or not undertake actions
that would not be in the best interest of the Company or the Members.
Any references in this Annual Report on Form 10-K (the "Annual
Report") to strategies or techniques utilized by the Advisors on behalf of
the Investment Funds include strategies or techniques utilized by (i)
Advisors pursuant to investment management agreements entered into with
either 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" below. 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 above 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 hedge fund 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 four 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.
As described below, there is no administration fee payable at the
Company level with respect to assets of the Company attributable to
investments in the Investment Funds. Administration fees are charged at the
Investment Fund level. However, to the extent the Company allocates assets
to Advisors other than through Investment Funds, administration fees will
be payable. See "FEES AND EXPENSES." In addition, if the Company allocates
assets to Advisors other than through Investment Funds, 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 Advisors.
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
OF CERTAIN INVESTMENT FUNDS
Goldman Sachs or accounts or other investment funds managed 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" and together with the HFP U.S. Funds, the "HFP Funds"), each
of which has a similar investment objective and utilizes similar strategies
to those of the Company and the corresponding offshore fund, respectively.
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 fund or account, 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 conflicts. In particular, certain
Advisors of the funds in which the HFP Funds invest are currently closed to
new investment. Such Advisors currently manage a material portion of the
total assets of the funds in which the HFP Funds invest. It is not
anticipated that the Investment Funds or the Company will generally
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.
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 transactions,
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 techniques.
Leverage
Advisors may utilize leverage in their investment programs. Leverage
may take the form of trading on margin, use of derivative instruments that
are inherently leveraged, and other forms of direct and indirect
borrowings. Advisors generally will determine the amount of leverage they
utilize, provided that limitations on leverage may be imposed on Advisors
by their investment management agreements or law, if applicable. The
managing member of the Investment Funds, on behalf of each Investment Fund,
may seek to adjust the degree of leverage with which such Investment Fund
as a whole invests by taking the Advisors' anticipated leverage use into
account when allocating and reallocating the Investment Fund's assets among
the Advisors. However, the managing member of an Investment Fund generally
will not have any right to adjust the amount of leverage utilized by any of
the Advisors, and generally does not exercise such right if available.
Adjustments to an Investment Fund's overall leverage level will be based on
factors deemed relevant by its managing member, including its assessment of
the risk/reward parameters of the Advisors and the strategies currently
included in such Investment Fund's investment portfolio.
The managing member of an Investment Fund may also elect, in its sole
discretion, to cause an Investment Fund to invest indirectly in an Advisor
Fund through a swap, option or other structure designed to provide greater
leverage than a direct investment in the Advisor Fund. As of December 31,
2005, none of the Investment Funds had invested indirectly in an Advisor
Fund through such a swap, option or other structure, however, the managing
member of an Investment Fund may elect to do so in the future. See
"--Additional Methods of Investing in Advisor Funds by the Investment
Funds" below and 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 are not required to,
borrow (including through direct borrowings, borrowings through derivative
instruments, or otherwise) from the GS Group, its affiliates 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 November 24, 2004, the
Company entered into a credit facility with a financial institution (the
"Facility Counterparty") to replace its then existing credit facility. The
Company made an initial borrowing of $1,000,000 under this facility. On
January 3, 2006, the Company increased the maximum borrowing limit from
$40,000,000 to $76,000,000 under this credit facility. Effective January 3,
2006, the Company may request to borrow up to $76,000,000 in the aggregate
at the discretion of the Facility Counterparty. Prior to September 1, 2005,
the company could request to borrow up to $45,000,000 in the aggregate. At
the time of any borrowing, the aggregate amounts borrowed may not exceed
10% of the Company's net asset value and at all other times the aggregate
amount borrowed may not exceed 15% of the Company's net asset value. The
effective interest rate on the borrowed amounts equals LIBOR plus 0.85% per
annum compounded daily. The Company also pays an administration and
structuring fee calculated as 0.10% per annum on the aggregate amount of
$76,000,000. The proceeds of the borrowings must be used primarily for
purposes of refinancing existing indebtedness, making further investment in
a pool of funds, funding liquidity of redemptions of Units in the Company
and managing the cash flow of the Company. There were no borrowings
outstanding at December 31, 2005 and the amount of cash borrowed totaled
$3,000,000 at December 31, 2004. As security for its borrowings, the
Company granted the Facility Counterparty a security interest in the
Company's cash accounts and any other account that contains other
investment property (other than to the extent that it comprises shares of
funds in the pool of funds in which the Company has invested) of the
Company. The terms of the facility include various restrictive covenants,
including restrictions on additional indebtedness, liens and fundamental
changes to the Company's business. See ITEM 7. "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and
Capital Resources" and Note 7 to the financial statements for further
description of the credit facility. Each Investment Fund has entered into a
similar facility with the Facility Counterparty. Each Investment Fund may
pledge its assets in order to secure any such borrowings. The Advisors may
also borrow funds for similar purposes or enter into other transactions
similar to the Company and the Investment Funds (including from or with the
GS Group) as described above in this paragraph. The Managing Member of the
Company and an Investment Fund may modify, as applicable, the Company's or
the Investment Fund's borrowing policies, including the purposes of
borrowings, and the length of time that the Company or the Investment Fund
may hold portfolio securities purchased with borrowed money. The rights of
any lenders to the Company or an Investment Fund to receive payments of
interest or repayments of principal will be senior to those of the members
of the Company and the Investment Fund and the terms of any borrowings may
contain provisions that limit the activities of the Company and the
Investment Fund.
Temporary and Defensive Strategies
The Company and the Investment Funds may, from time to time, take
temporary or defensive positions in cash, cash equivalents, other
short-term securities or money market funds to attempt to minimize
volatility caused by adverse market, economic, or other conditions. Any
such temporary or defensive positions could prevent the Company and the
Investment Funds from achieving their investment objectives. In addition,
the Company may, in the Managing Member's sole discretion, hold cash, cash
equivalents, other short-term securities or investments in money market
funds pending allocation to Investment Funds, in order to fund anticipated
redemptions, expenses of the Company or other operational needs, or
otherwise in the sole discretion of the Managing Member. The Investment
Funds are permitted to hold cash or invest their cash balances in the same
manner as the Company.
Potential 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 stocks,
preferred stocks, equity index futures and forwards, interests in real
estate investment trusts, convertible debt instruments, convertible
preferred stock, equity interests in trusts, partnerships, joint ventures,
limited liability companies, warrants and stock purchase rights, swaps and
structured notes; fixed income instruments including bonds, interest rate
futures contracts and swaps, options on futures, indices, loan
participations and government and corporate debt instruments (both rated
and unrated); currencies and speculative positions on currencies, spot
transactions, currency forwards, cross currency swaps, options and futures
on currencies; commodities, including without limitation, spot transactions
in commodities, commodities futures and swaps and options on futures; and
structured financial products, including mortgage-backed securities,
pass-throughs and other asset-backed securities (both investment-grade and
non-investment grade). The Advisors may employ short selling, and trade in
securities without active public markets, indices, over-the-counter
options, when-issued and forward commitment securities and engage in the
borrowing and lending of portfolio securities. The Advisors may also engage
in derivative transactions including swaps and repurchase and reverse
repurchase agreements or other strategies to hedge against securities,
currencies or interest rates or to manage risk relating to their portfolio
investments, to leverage their portfolio and to establish speculative
positions. The Advisors may invest in both U.S. and non-U.S. issuers,
including issuers based in emerging market countries.
Additional Methods of Investing in Advisor Funds by the Investment
Funds
An Investment Fund will typically invest directly in an Advisor Fund
by purchasing an interest in such Advisor Fund. There may be situations,
however, where an Advisor Fund is not open or available for direct
investment by the Investment Fund or where the managing member of such
Investment Fund elects for other reasons to invest indirectly in an Advisor
Fund. Such an instance may arise, for example, where the Investment Fund's
proposed allocation does not meet an Advisor Fund's investment minimums. On
occasions where the managing member of an Investment Fund determines that
an indirect investment is the most effective or efficient means of gaining
exposure to an Advisor Fund, the Investment Fund may invest in an Advisor
Fund indirectly by purchasing a structured note or entering into a swap or
other contract, paying a return approximately equal to the total return of
an Advisor Fund. In the case of a structured note or swap, a counterparty
would agree to pay to the Investment Fund a return based on the return of
the Advisor Fund, in exchange for consideration from the Investment Fund
equivalent to the cost of purchasing an ownership interest in the Advisor
Fund. The Investment Fund may also invest indirectly in an investment
vehicle or "feeder fund" established by the managing member of the
Investment Funds, the Advisor or their respective affiliates that invests
all of their assets in an Advisor Fund. In addition, in the discretion of
the managing member of the Investment Funds, an indirect investment in an
Advisor Fund of the type described above may be structured so as to provide
greater leverage than a direct investment in the Advisor Fund, which may
increase the risks to the Investment Fund relative to a direct investment
in the Advisor Fund. Indirect investment through a swap or similar contract
in an Advisor Fund carries with it the credit risk associated with the
counterparty. Indirect investments will generally be subject to transaction
and other fees, which will reduce the value of the Investment Fund's
investment. There can be no assurance that the Investment Fund's indirect
investment in an Advisor Fund through a structured note or swap will have
the same or similar results as a direct investment in the Advisor Fund, and
the Investment Fund's value may decrease as a result of such indirect
investment.
Any references in this Annual Report to strategies or techniques
utilized by the Advisors on behalf of the Investment Funds include
strategies or techniques utilized by (i) Advisors pursuant to investment
management agreements entered into with either the Investment Fund or
separate Cayman Islands limited liability companies formed by the managing
member of an Investment Fund (each a "Portfolio Company" and collectively
the "Portfolio Companies") through which the Investment Fund allocates
assets to such Advisor, or (ii) Advisor Funds in which an Investment Fund
invests. See "PORTFOLIO COMPANIES" below in this Item.
The Company's investment program and the investment program of each of
the Investment Funds are speculative and entail substantial risks. There
can be no assurance that the investment objectives of the Company and each
of the Investment Funds, including their risk monitoring and
diversification goals, will be achieved, and results may vary substantially
over time. Advisors of each Investment Fund may consider it appropriate,
subject to applicable regulations, to utilize forward and futures
contracts, options, swaps, other derivative instruments, short sales,
margin and other forms of leverage in their investment programs. Such
investment techniques can substantially increase the adverse impact to
which an Investment Fund's, and the Company's, investment portfolio may be
subject. See ITEM 1A. "RISK FACTORS."
INTERNATIONAL ACTIVITIES
The Company allocates its assets to the Investment Funds who in turn
allocate their assets to Advisors located throughout the world. From time
to time, these Advisors invest in securities of non-U.S. issuers, including
companies based in less developed countries (i.e., "emerging markets"), or
in securities issued by the governments outside the United States. A
portion of the Company's assets, therefore, ultimately may be invested in
securities and other financial instruments denominated in non-U.S.
currencies, the prices of which are translated into U.S. dollars for
purposes of calculating the Company's net asset value. Some Advisors may
invest exclusively in securities and other financial instruments
denominated in non-U.S. currencies. The Investment Funds have invested,
from time to time, up to 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 Foreign Exchanges May
Involve Higher Risk of Financial Irregularities and/or Lack of Appropriate
Risk Monitoring and Controls," "--Non-U.S. Investments Involve Special
Risks not Usually Associated with Investments in U.S. Securities,"
"--Investment in Emerging Markets Involves Significant Risks, including
Inflation and Currency Devaluations," "--Foreign Currency Transactions and
Exchange Rate Risk Create Additional Risks for Advisors Investing in
Certain Financial Instruments," and "--Non-U.S. Futures Transactions Afford
Less Protection as Rules of a Foreign Exchange May Not be Enforced by a
Domestic Regulator."
PORTFOLIO COMPANIES
The Investment Funds may allocate assets to Advisors (i) through
direct or indirect investments in Advisor Funds, (ii) through direct
allocation of assets held in a separately managed account pursuant to an
investment management agreement between the Investment Fund and the Advisor
or such similar arrangement as is determined by the managing member of such
Investment Fund or (iii) through investments in Portfolio Companies, each
of which allocates its assets to a single Advisor via a separately managed
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 is a Cayman Islands
or Irish limited liability company managed by the managing member of the
Investment Funds and formed to accept subscriptions from non-U.S. persons
and U.S. tax-exempt entities.
Each Portfolio Company (or the 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 applicable
Investment Fund with respect to ongoing monitoring and risk management,
which may include rights to receive reports, require the disposition of
positions, and withdraw all or a portion of an allocation to the Advisor. 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.
Each 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 of 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 member of the Investment Funds (in its capacity as the
investment manager of the Portfolio Company) and its affiliates.
Goldman Sachs and certain of its affiliates 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 the Investment Funds does not currently charge
any management fee or performance-based fee or allocation at the Portfolio
Company level. In 2004, each Portfolio Company paid the managing member of
the Investment Funds (or other entity selected by the Portfolio Company to
be its administrator) an administration fee, accruing daily and calculated
and paid on a monthly basis, equal to one-twelfth of 0.20% of the net
assets of the Portfolio Company as of the applicable month-end, calculated
prior to any reduction in net assets due to Advisor fees. Effective January
1, 2005, an administration fee was no longer charged by the Managing Member
at the Portfolio Company level. The Portfolio Companies may also retain
another entity not affiliated with the Managing Member as
sub-administrator. Fees payable to such sub-administrator may be payable
out of an administration fee, if such a fee exists, or pursuant to such
other arrangements as may be agreed to by the Managing Member (in its
capacity as investment manager of the Portfolio Company) and such
sub-administrator. See "FEES AND EXPENSES."
Each 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 incentive fees payable to the Advisor of the
Portfolio Company's assets pursuant to the Portfolio Company's investment
management agreement. The Company bears, indirectly through its investment
in the Investment Funds, a pro rata portion of the expenses of each
Portfolio Company in which the Investment Funds invest. See "FEES AND
EXPENSES." For instance, 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 members 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 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
Companies to the extent of the Company's and the Investment Funds' indirect
interest therein, whether or not so indicated, where the context permits.
FEES AND EXPENSES
The Company pays the Managing Member a monthly management fee (the
"Management Fee"), equal to one-twelfth of 1.25% of the net assets of the
Company in respect of each series of Class A Units as of the end of the
applicable month, appropriately adjusted to reflect capital appreciation or
depreciation and any subscriptions, redemptions or distributions. For
purposes of determining the Management Fee, net assets in respect of each
series of Class A Units are not reduced to reflect any accrued incentive
allocation (the "Incentive Allocation"). The Management Fee payable by any
other class of Units may be different from the Management Fee payable by
the Class A Units. The Management Fee with respect to 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"
below. In return for receiving the Management Fee, the Managing Member,
among other things, constructs the portfolio of the Company and evaluates
and monitors the performance of each of the Investment Funds. The managing
member of each of the Investment Funds (which is currently the Managing
Member) does not receive a separate management fee from the Investment
Funds for investments in the Investments Funds by the Company as the
Company owns "no-fee shares" of each of the Investment Funds.
The Company is currently issued units of a class of membership
interests of each Investment Fund ("no-fee-shares") which 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. As the
Company owns "no-fee-shares" in each of the Investment Funds, there are no
incentive allocations or management fees paid to the Managing Member in
respect of the Company's investments in each of the Investment Funds. The
ratios shown below do not reflect the inclusion of the Company's
proportionate shares of expenses of the Investment Funds, including the
administration fees paid, directly or indirectly, by the Investment Funds.
[Left Blank Intentionally]
Fees and Expenses for the Company for the year ended December 31, 2005
are as follows:
Class A Class A Class A Class A Class A Class A Class A Class A
Series 1 Series 9 Series 10 Series 11 Series 12 Series 13 Series 14 Series 15
---------------------------------------------------------------------------------------------------
Ratios to average
net assets (annualized):
Expenses 1.36% 1.37% 1.37% 1.37% 1.36% 1.37% 1.36% 1.36%
---------------------------------------------------------------------------------------------------
Incentive allocation 0.22% 0.24% 0.27% 0.21% 0.24% 0.32% 0.30% 0.24%
---------------------------------------------------------------------------------------------------
Total expenses
and incentive
allocation 1.58% 1.61% 1.64% 1.58% 1.60% 1.69% 1.66% 1.60%
===================================================================================================
Class A Class A Class A Class A Class A
Series 16 Series 17 Series 18 Series 19 Series 20
------------------------------------------------------------
Ratios to average
net assets (annualized):
Expenses 1.35% 1.33% 1.33% 1.33% 1.31%
------------------------------------------------------------
Incentive allocation 0.17% 0.12% 0.06% 0.14% 0.08%
------------------------------------------------------------
Total expenses
and incentive
allocation 1.52% 1.45% 1.39% 1.47% 1.39%
============================================================
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
2005 and are based on a $1,000,000 investment in Class A Series 1 made as
of January 1, 2005.
- -------------------------------- ------------------------ ---------------------
Fees and Expenses Percentage Amount Dollar Amount
- -------------------------------- ------------------------ ---------------------
Management Fee 1.25% (1) $12,857 (4)
- -------------------------------- ------------------------ ---------------------
Incentive Allocation 5% (2) $2,324 (4)
- -------------------------------- ------------------------ ---------------------
Administration Fee N/A (3) $1,031 (4)
- -------------------------------- ------------------------ ---------------------
Placement Fee None None
- -------------------------------- ------------------------ ---------------------
Entry Fee None None
- -------------------------------- ------------------------ ---------------------
Exit Fee None None
- -------------------------------- ------------------------ ---------------------
Minimum Subscription Amount N/A $1,000,000 (5)
- -------------------------------- ------------------------ ---------------------
(1) The Managing Member receives a monthly Management Fee, equal to
one-twelfth of 1.25% of the net assets of the Company as of the end of
the applicable month, appropriately adjusted to reflect capital
appreciation or depreciation and any subscriptions, redemptions or
distributions. See "--Capital Accounts; Allocation of Gains and
Losses" below.
(2) At the end of each fiscal year of the Company, the Managing Member is
entitled to receive an Incentive Allocation equal to 5% of the
increase in the NAV (as defined below in this section) of each series
of Units. The Managing Member does not receive a payment or make a
contribution in the event of a decrease in the NAV of a series of
Units, however the Managing Member is only entitled to receive an
Incentive Allocation relating to an increase in NAV of a series of
Units if the NAV of such series is above a prior high NAV. See
"--Capital Accounts; Allocation of Gains and Losses."
(3) The Company bears a pro rata portion of the administration fee paid to
the Managing Member for services provided to the Investment Funds and
Portfolio Companies. In 2004, each of the Investment Funds paid its
managing member an administration fee of 0.20% for services rendered
to it as administrator. The Dollar Amount (which is approximate based
on calculation) reflects the total administration fee comprised of the
Company's aggregate pro rata portion for services provided to the
Investment Funds and the fee directly payable by the Portfolio
Companies based on an investment of $1,000,000 in Class A Series 1
Units as of January 1, 2004. Effective as of January 1, 2005, SEI (as
defined below) became the administrator of each Investment Fund and
certain Portfolio Companies, and currently serves as the administrator
with respect to all of the Investment Funds and Portfolio Companies.
Throughout 2005, the Administration Fee Rate (as defined below) was in
the range of 0.07% to 0.10%, but in the future such rate may be
exceeded, subject to a maximum of approximately 0.20%, if the total
assets managed by the Managing Member that are administered by SEI and
its affiliates declines or if an Investment Fund allocates a greater
percentage of its assets to Portfolio Companies or Managed Accounts
(as defined below in this section) than is currently anticipated.
(4) Based on an investment of $1,000,000 in Class A Series 1 Units as of
January 1, 2005.
(5) The minimum subscription by a purchaser of Units is $1,000,000,
although the Managing Member, in its sole discretion, may accept
subscriptions below the minimum.
The Managing Member currently serves as the administrator of the
Company (in such capacity the "Administrator") pursuant to an
administration agreement (the "Administration Agreement"). The
Administrator is responsible for, among other things, calculating the net
asset value ("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. 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."
Unless the Company allocates assets directly to Advisors (see
"PERFORMANCE OF THE COMPANY--Direct Allocations to Advisors"), the Managing
Member 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. In 2004, the Managing Member also served
as the administrator of each Investment Fund and each Portfolio Company and
received an administration fee, accruing daily and calculated and paid on a
monthly basis, equal to one-twelfth of 0.20% of the net assets of such
Investment Fund or Portfolio Company (in the case of the Investment Funds,
without taking into account their investments in Portfolio Companies so as
to avoid duplication) as of the applicable month-end, appropriately
adjusted to reflect capital appreciation or depreciation and any
subscriptions, redemptions or distributions. Therefore, no administration
fee was paid at the Investment Fund level with respect to any assets of the
Investment Funds attributable to investments in Portfolio Companies.
Effective as of January 1, 2005, SEI Global Services, Inc. ("SEI")
became the administrator of each Investment Fund and certain Portfolio
Companies, and currently serves as the administrator with respect to all of
the Investment Funds and Portfolio Companies. An administration fee is not
charged at the Portfolio Company level, and the administration fee charged
at the Investment Fund level is currently paid with respect to assets of
the Investment Funds invested in Portfolio Companies. The administration
fee rate ( the "Administration Fee Rate") is determined each month, without
notice to Members, based on the total assets managed by the Managing Member
that are administered by SEI and its affiliates. In determining the
Administration Fee Rate, each Investment Fund is assessed a higher rate in
respect of assets allocated to Portfolio Companies and managed accounts
("Managed Accounts"). Throughout 2005, the Administration Fee Rate was in
the range of 0.07% to 0.10%, but in the future such rate may be exceeded if
the total assets managed by the Managing Member that are administered by
SEI and its affiliates declines or if an Investment Fund allocates a
greater percentage of its assets to Portfolio Companies or Managed Accounts
than is currently anticipated. However, the Administration Fee Rate is
subject to a maximum of approximately 0.20%. For purposes of determining
the administration fee payable by the Investment Funds, NAV will not be
reduced to reflect any accrued but unpaid incentive allocation or
management fees of the Managing Member. The Company will bear its pro rata
portion of these fees through its investments in the Investment Funds.
The Managing Member (in its capacity as Administrator of the Company)
and the Company entered into an agreement with SEI to serve as the
sub-administrator of the Company effective March 1, 2004. In addition to
the services described above, SEI may assist in the preparation of the
Company's periodic and other reports including filing such reports with the
SEC and other services associated with the Company being a registrant under
the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Pursuant to the agreement, the Administrator is responsible for paying the
fees of SEI. The Company pays no additional fees to SEI. In the future, the
Managing Member may cease to serve as the administrator of the Company and
SEI may perform such duties directly. The Managing Member and SEI are
currently discussing implementing such changes.
The Managing Member, the Company or any Investment Fund may, in the
future, engage other entities, which may be unaffiliated with the Managing
Member, to provide administration or other services to the Company, the
Investment Funds or the Portfolio Companies as administrator or
sub-administrator. The terms of any such engagement shall be subject to
such terms and conditions as the Managing Member and such other entity may
agree. The terms of such engagement may differ from the terms and
conditions under which the Managing Member or one or more of its affiliates
provides administration services to the Company and SEI provides
administration services to the Investment Funds, including without
limitation the compensation arrangements and indemnification obligations
described above.
Pursuant to the Administration Agreement, the Company has agreed to
indemnify the Administrator against any loss or liability arising out of
any claim asserted or threatened by any third party in connection with the
Administrator's performance of its obligations or duties under the
Administration Agreement, except where such loss or liability arises as a
result of gross negligence, willful misconduct or reckless disregard on the
part of the Administrator. Pursuant to the agreement with SEI, the Company
has agreed to indemnify SEI.
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 LLC
Agreement or the Company's other organizational documents or subscription
agreement or any modification or supplement to the Private Placement
Memorandum dated January 2006 for the Company (as it may be supplemented or
modified from time to time, the "Memorandum"), and any distribution of such
documentation to the Members; accounting, auditing and tax preparation
expenses; fees and expenses of other agents of the Company; taxes and
governmental fees; printing and mailing expenses; expenses relating to
transfers and redemptions of Units; fees and out-of-pocket expenses of any
service company retained to provide accounting and bookkeeping services to
the Company; quotation or valuation expenses; expenses relating to the
acquisition, holding and disposition of investments (e.g., expenses which
the Managing Member determines to be related to the investment of the
assets of the Company, including, among others, research expenses,
brokerage fees and commissions, expenses relating to short sales, clearing
and settlement charges, custodial fees and expenses, costs and charges for
equipment or services used in communicating information regarding the
Company's transactions between the Managing Member and other agents, bank
service fees, interest expenses, borrowing costs and extraordinary
expenses); insurance premiums; costs incurred in connection with any claim,
litigation, arbitration, mediation, government investigation or dispute in
connection with the business of the Company and the amount of any judgment
or settlement paid in connection therewith, or the enforcement of the
Company's rights against any person or entity; costs and expenses for
indemnification or contribution payable by the Company to any person or
entity (including, without limitation, pursuant to the indemnification
obligations) described under ITEM 12. "INDEMNIFICATION OF DIRECTORS AND
OFFICERS" in the Form 10 filed on April 28, 2004, as amended (the
"Registration Statement")); and all costs and expenses incurred as a result
of dissolution, winding-up and termination of the Company.
The Company in the past has borne its organizational expenses and
continues to bear expenses incurred in connection with the offer and sale
of Units, including printing costs and legal fees and other expenses of the
Company, the Managing Member and any placement agent and other expenses
relating to the offering of Units. In addition, the Company bears,
indirectly through its investment in each Investment Fund its pro rata
portion of the offering, organizational and operating expenses of such
Investment Fund, including expenses related to the investment of such
Investment Fund's assets, such as fees to the Advisors, Portfolio Company
and Advisor Fund fees and expenses, brokerage commissions, expenses
relating to short sales, clearing and settlement charges, custodial fees,
bank service fees, interest expenses, borrowing costs and extraordinary
expenses.
Advisors are compensated by the Investment Funds on terms that may
include fixed and/or performance-based fees or allocations. 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 4%. Performance-based fees or
allocations of Advisors are currently expected to range from 15% to 25% of
the net capital appreciation in each individual Advisor's investments for
the year. However, each Investment Fund may, in the sole discretion of its
managing member, allocate assets to Advisors that receive fixed and/or
performance-based fees that materially exceed these ranges. The Company
bears a pro rata share of the Advisor compensation paid by the Investment
Funds.
Performance-based compensation is typically not paid to an Advisor
until the Advisor makes up prior losses. See ITEM 1A. "RISK
FACTORS--GENERAL RISKS--Risks Related to the Units, Liquidity of Units and
the Offering of Units--Special Considerations are Applicable to the Units;
After the Initial Offering of Units Subsequent Purchasers of Units may
Suffer Losses Because of Previously Established Open Positions."
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, the Administrator or sub-administrator for the payment of
any such expenses.
The Managing Member reserves the right, in its sole discretion, to
partially or completely waive fees, or to charge no fees or fees that are
greater or less than or in other ways different from the fees being charged
to the Company and the Members, as 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 LLC Agreement (including in connection with the creation of
additional classes or series of Units) if required to reflect any such fee
arrangements 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 affiliates
or personnel.
CAPITAL ACCOUNTS; ALLOCATION OF GAINS AND LOSSES
The Company maintains a separate capital account on the books of the
Company for each series of Units and for each Member, with respect to each
series of Units held by such Member. Each capital account with respect to a
series of Units will be (i) increased by the amount of any capital
contributions in respect of such series, (ii) decreased for any payments in
redemption of, or any distributions in respect of, such series, (iii)
increased or decreased by such series' allocable share of the appreciation
or depreciation of the net assets of the Company (as determined below) for
each accounting period*, and (iv) decreased by any Incentive Allocation
(discussed below) and any Management Fee accrual in respect of such series.
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 any year-to-date
accrued 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.
- ---------------------
* 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 an
additional capital contribution by a Member, or (v) the date
immediately prior to the effective date of any redemption or
complete withdrawal by a 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 with respect
to such series of Units, and the NAV per Unit of a series shall be equal to
the NAV of such series divided by the number of outstanding Units of such
series.
At the end of each fiscal year of the Company (or other applicable
period), the Managing Member receives an Incentive Allocation for each
series of Class A Units equal to 5% of the amount by which the NAV of each
series of Class A Units (appropriately adjusted as determined by the
Managing Member in its sole discretion for additional contributions,
distributions and redemptions, and determined prior to any Incentive
Allocation accrual with respect to such series of Units, but after the
deduction of all Company expenses for the period, including the Management
Fee allocable to that series) exceeds the Prior High NAV (as defined below)
of such series of Class A Units. The Incentive Allocation of any other
class of Units may be different from the Incentive Allocation of the Class
A Units.
The "Prior High NAV" with respect to a series of Units initially will
be equal to 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, 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. The Prior
High NAV for each series of Units shall be appropriately ADJUSTED, as
determined by the Managing Member in its sole discretion, to account for
any additional contributions, 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 accounts of the Members who
hold Units in 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, for example, 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 reserves 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 LLC Agreement (including in connection with the creation of
additional classes or series of Units) if required to reflect any such
arrangements 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 affiliates
or personnel.
THE MANAGING MEMBER
GS HFS, a Delaware limited liability company, serves as Managing
Member of the Company and currently acts as the managing member of each of
the Investment Funds. The Managing Member is responsible for the management
and operations of the Company. As managing member of the Investment Funds,
GS HFS is responsible for the management and operations of the Investment
Funds, including the selection of the Advisors with which the Investment
Funds invest their assets. GS HFS, in its capacity as Managing Member and
as managing member of the Investment Funds, is permitted to delegate some
of its investment management responsibilities to its advisory affiliates or
other persons as set forth in the LLC Agreement and the limited liability
company agreements for the relevant Investment Funds. The principal
business of the Managing Member is to function as an investment manager for
multi-advisor funds and to select advisors to make investments on behalf of
such funds.
The Managing Member is an advisory affiliate of Goldman Sachs and
Goldman Sachs Asset Management, a unit of the Investment Management
Division of Goldman Sachs ("GS Asset Management" and, together with Goldman
Sachs Asset Management, L.P., a Delaware limited partnership and a
successor to certain of the asset management businesses of GS Asset
Management, "GSAM"). Each of the Managing Members, Goldman Sachs and GSAM
is a wholly owned subsidiary of The Goldman Sachs Group, Inc.
Goldman Sachs, one of the world's oldest and largest investment
banking and securities firms, was founded in 1869. GSAM, formed in 1988, is
located at 32 Old Slip, New York, New York 10005. GS HFS is located at 701
Mount Lucas Road, Princeton, New Jersey 08540.
The Company has no employees. As of December 31, 2005, the Managing
Member was supported by approximately 108 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 Investment Funds. The
Company's assets were managed, indirectly through the Company's investments
in the Investment Funds, by approximately 83 Advisors.
The Managing Member may withdraw any interest it may have as the
Managing Member, and may substitute an entity that is an affiliate of
Goldman Sachs as the Managing Member of the Company. From time to time
certain qualified officers and employees of the Managing Member, Goldman
Sachs and its affiliates may invest, directly or indirectly, in the
Company. Subject to the redemption provisions of the LLC Agreement, any
such party may redeem any Units that it may acquire without prior notice to
the non-managing members. The managing member of each Investment Fund has
such rights with respect to its interests therein. Members of the GS Group
have from time to time made and withdrawn investments in certain of the
Investment Funds. Redemptions of any amount may be made by members of the
Managing Member and Affiliates at any time, without prior notice, in
accordance with the redemption provisions of the limited liability company
agreement of the applicable Investment Fund.
It is not presently expected that the Investment Funds' Advisors or
any of their respective principals will purchase Units or membership units
in the Investment Funds.
The Managing Member also manages a number of other investment funds
that have investment programs that are similar to those of the Company. See
"POTENTIAL CONFLICTS OF INTEREST."
POTENTIAL CONFLICTS OF INTEREST
GENERAL CATEGORIES OF CONFLICTS ASSOCIATED WITH THE COMPANY AND
THE INVESTMENT FUNDS
The Goldman Sachs Group, Inc. is 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 and other markets
in which the Company and the Investment Funds directly and indirectly
invest. As a result, The Goldman Sachs Group, Inc., the Managing Member,
GSAM (for purposes of this "POTENTIAL CONFLICTS OF INTEREST" section, in
its capacities as Managing Member of the Company and managing member of
each of the Investment Funds), and their affiliates, directors, partners,
trustees, managers, members, officers and employees (collectively, for
purposes of this "POTENTIAL CONFLICTS OF INTEREST" section, "Goldman
Sachs"), including those who may be involved in the management, sales,
investment activities, business operations or distribution of the Company
or the Investment Funds, are engaged in businesses and have interests other
than that of managing the Company or the Investment Funds. 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.
As a registered investment adviser under the Investment Advisers Act
of 1940 (the "Investment Advisers Act"), the Managing Member is required to
file a Form ADV with the SEC. Form ADV contains information about assets
under management, types of fee arrangements, types of investments,
potential conflicts of interest and other relevant information regarding
the Managing Member. A copy of Part 1 of the Managing Member's Form ADV is
available on the SEC's website (www.adviserinfo.sec.gov). A copy of Part 2
of the Managing Member's Form ADV will be provided to Members or
prospective investors upon request.
By having made an investment in the Company, a Member is deemed to
have acknowledged and assented to the existence of potential conflicts of
interest relating to Goldman Sachs and the Advisors, and to the operations
of the Company, Investment Funds, Advisor Funds, Portfolio Companies and
Managed Accounts in the face of these conflicts.
POTENTIAL CONFLICTS RELATING TO THE SELECTION OF ADVISORS, THE
SALE OF INTERESTS AND THE ALLOCATION OF INVESTMENT OPPORTUNITIES
GOLDMAN SACHS' OTHER ACTIVITIES MAY HAVE AN IMPACT ON THE SELECTION OF
ADVISORS
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, it is expected that Goldman Sachs may receive
various forms of compensation, commissions, payments, rebates or services
from Advisors and/or their Advisor Funds, Portfolio Companies and Managed
Accounts, and provide a variety of products and services to them. The
amount of such compensation, commissions, payments, rebates or services 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.
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" above, 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 Company and 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,
compensation and other benefits to Goldman Sachs (including benefits
relating to business relationships of Goldman Sachs) arising from those
decisions may be greater as a result of the selection of certain Advisors
than they would have been had other Advisors been selected which also might
have been appropriate for the Investment Funds.
For example, while the Managing Member, as the managing member of the
Investment Funds, will select Advisors in accordance with its fiduciary
obligations to the Investment Funds, Goldman Sachs may also provide
brokerage or other services to Advisors or act as prime broker for
Advisors. Payments to Goldman Sachs for providing brokerage or other
services or acting as prime broker will generally increase as the size of
the assets that an Advisor manages increases. Therefore, investment by an
Investment Fund (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. As a result, investment with Advisors will be
subject to many of the same conflicts arising from Goldman Sachs activities
described herein.
In addition, if an Advisor provides fee "breakpoints," such
breakpoints may be affected by Goldman Sachs' business relationships and
levels or accounts other than with respect to the Company or the Investment
Funds, and may directly or indirectly benefit Goldman Sachs and other
proprietary or client accounts of Goldman Sachs.
GOLDMAN SACHS' FINANCIAL AND OTHER INTERESTS AND RELATIONSHIPS MAY
INCENTIVIZE GOLDMAN SACHS TO PROMOTE THE SALE OF UNITS AND INTERESTS
IN THE INVESTMENT FUNDS
Goldman Sachs, its sales personnel and other financial service
providers, have interests in promoting sales of the Company, the Investment
Funds and certain Advisors. With respect to Goldman Sachs and its
personnel, the remuneration and profitability of activity relating to the
Company and the Investment Funds may be greater than the provision of other
services and sales of other products that might be provided or offered. For
example, Goldman Sachs and its sales personnel may directly or indirectly
receive a portion of the fees and commissions charged to the Company, the
Investment Funds or their respective investors. Such fees and commissions
may be higher than for other products or services, and the remuneration and
profitability to Goldman Sachs and such personnel resulting from
transactions on behalf of the Company or the Investment Funds may be
greater than the remuneration and profitability resulting from other
products.
Goldman Sachs may also have relationships with, and purchase, or
distribute or sell, services or products from or to, distributors,
consultants and others who recommend the Company, the Investment Funds or
the Advisors, or who engage in transactions with or for the Company, the
Investment Funds or the Advisors. For example, Goldman Sachs regularly
participates in industry and consultant sponsored conferences and may
purchase educational, data related or other services from consultants or
other third parties that it deems to be of value to its personnel and its
business. The products and services purchased from consultants may include,
but are not limited to, those that help Goldman Sachs understand the
consultants' points of view on the investment management process.
Consultants and other third parties that provide consulting or other
services to potential investors in the Company or the Investment Funds may
receive fees from Goldman Sachs, the Company or the Investment Funds in
connection with the distribution of Units or interests in the Investment
Funds, or other Goldman Sachs products. In addition, Goldman Sachs
personnel, including employees of the Managing Member, may have board,
advisory, brokerage or other relationships with issuers, distributors,
consultants and others that may have investments with the Advisors or that
may recommend investments with the Advisors or distribute Advisor Fund
interests or engage in transactions for the Advisors and/or their Advisor
Funds, Portfolio Companies and Managed Accounts. Goldman Sachs, including
the Managing Member, may, when it considers it appropriate, 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 in accordance with law. As a result, those persons
and institutions may have conflicts associated with their promotion of the
Company or the Investment Funds, or other dealings with the Company, the
Investment Funds or the Advisors, that would create incentives for them to
promote the Company, the Investment Funds or the Advisors or raise other
conflicts.
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 or the
Investment Funds, including in situations in which Goldman Sachs or its
personnel (including personnel of the Managing Member) have interests. For
example, an Investment Fund may be competing for investment opportunities
with current or future accounts or funds managed or advised by Goldman
Sachs (including the Managing Member). These accounts or funds may provide
greater fees or other compensation (including performance-based fees) to
Goldman Sachs (including the Managing Member) or in which Goldman Sachs
(including the Managing Member) or its personnel have an interest
(collectively, the "Client/GS Accounts").
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 an
Investment Fund invests or that would be an appropriate investment for an
Investment Fund. This will create potential conflicts and potential
differences among the Company, the Investment Funds and other Client/GS
Accounts, 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. The Managing Member has developed policies and procedures
that provide that it will allocate investment opportunities among the
Company, the Investment Funds and other Client/GS Accounts in a manner that
it considers, in its sole discretion and consistent with its fiduciary
obligation to each Client/GS Account, to be reasonable and equitable over
time.
The Managing Member will make allocations for the Company, the
Investment Funds and other Client/GS Accounts with reference to numerous
factors that may include, without limitation, relative sizes and expected
future sizes of the applicable accounts, expected future capacity of the
applicable Advisor, investment objectives and guidelines, risk tolerance,
availability of other investment opportunities, and available cash for
investment. Although allocating investment opportunities with Advisors
among the Investment Funds and other Client/GS Accounts may create
potential conflicts of interest because of the interests of Goldman Sachs
or its personnel or because Goldman Sachs may receive greater fees or
compensation from one of the Client/GS Account's allocations, 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. The Managing Member may determine
that an investment opportunity or particular purchases or sales are
appropriate for one or more Client/GS Accounts or for itself or an
affiliate, but not for the Company or an Investment Fund, as applicable, or
is appropriate for, or available to, the Company or an Investment Fund, as
applicable, but in different sizes, terms or timing than is appropriate for
other Client/GS Accounts. Therefore, 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.
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 Company, except that HFP
Institutional is currently intended for investment by benefit plans and
other similar 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.
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
From time to time and subject to the Managing Member's policies and
procedures regarding informational barriers, 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. The performance by such persons of obligations
related to their consultation with personnel of the Managing Member could
conflict with their areas of primary responsibility within Goldman Sachs or
elsewhere. In connection with their activities with the Managing Member,
such persons may receive information regarding the Managing Member's
proposed investment activities of 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 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 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.
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 certain Advisors. The Investment Fund's
and, in turn, the Company's investment flexibility may be constrained as a
consequence.
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, or may involve a different timing or nature of action than
with respect to the Company or an Investment Fund.
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 or sell 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.
In addition, transactions in investments by one or more Client/GS
Accounts and Goldman Sachs may have the effect of diluting or otherwise
disadvantaging the values, prices or investment strategies of the Advisor
Funds, Portfolio Companies or Managed Accounts, particularly, but not
limited to, in small capitalization, emerging market or less liquid
strategies. For example, an Advisor Fund, Portfolio Company or Managed
Account may purchase or sell a position after or at the same time Goldman
Sachs or the Client/GS Accounts undertake the same strategy, which may
increase the cost of that strategy to the Advisor Fund, Portfolio Company
or Managed Account and, in turn, the relevant Investment Fund and the
Company.
Conflicts may also arise because portfolio decisions made by an
Advisor may benefit other Client/GS Accounts. For example, the sale of a
long position or establishment of a short position by an Advisor 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 may increase
the price of the same security held by (and therefore benefit) Goldman
Sachs or other Client/GS Accounts.
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 funds managed by Goldman Sachs,
including the Managing Member). As a result of differing trading and
investment strategies or constraints, positions may be taken by directors,
officers and employees that are the same 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 Advisers
Act and monitoring procedures relating to certain personal securities
transactions by the Managing Member personnel which 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 the 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.
An Advisor's management of an Advisor Fund, Portfolio Company or
Managed Account may benefit Goldman Sachs. For example, the Advisors may,
subject to applicable law, invest directly or indirectly in the securities
of companies affiliated with Goldman Sachs or in which Goldman Sachs has an
equity, debt or other interest. In addition, subject to applicable law, the
Advisors may engage in investment transactions which 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 Advisors may enhance the profitability of Goldman Sachs'
or other Client/GS Accounts' own investments in and its activities with
respect to such companies.
Goldman Sachs and its clients may pursue or enforce rights with
respect to an issuer in which an Advisor has invested, and those activities
may have an adverse effect on the Investment Funds and, in turn, the
Company. As a result, prices, availability, liquidity and terms of an
Advisor's investments may be negatively impacted by the activities of
Goldman Sachs or its clients, and transactions of an Advisor may be
impaired or effected at prices or terms that may be less favorable than
would otherwise have been the case.
Goldman Sachs may create, write, sell or issue, or act as placement
agent or distributor of, derivative instruments with respect to the Company
or the Investment Funds, or with respect to which the underlying
securities, currencies or instruments may be those in which the Company or
the Investment Funds invest, or which may be otherwise based on the
performance of the Company, an Investment Fund, an Advisor Fund or a
Portfolio Company. The structure or other characteristics of the derivative
instruments may have an adverse effect on the Company or the Investment
Funds. For example, the derivative instruments could represent leveraged
investments in the Company, an Investment Fund, an Advisor Fund or a
Portfolio Company, and the leveraged characteristics of such investments
could make it more likely, due to events of default or otherwise, that
there would be significant redemptions of interests from the Company, the
Investment Fund, the Advisor Fund or the 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, which may have an adverse effect on the investment
management, flexibility, and diversification strategies of the Company, the
Investment Fund, the Advisor Fund or the Portfolio Company, as applicable,
and on the amount of fees, expenses and other costs incurred directly or
indirectly for the account of the Company or the Investment Funds.
Similarly, Goldman Sachs (including its personnel or Client/GS Accounts)
may invest in the Company, the Investment Funds, the Advisor Funds or the
Portfolio Companies, may hedge its derivative positions by buying or
selling interests in the Company, the Investment Funds, the Advisor Funds
or the Portfolio Companies, and reserves the right to redeem some or all of
its investments at any time. These investments and redemptions may be made
without notice to the Members or the investors in the Investment Funds.
The Managing Member, the Company and the Investment Funds may receive
research products and services in connection with the brokerage services
that brokers (including, without limitation, Goldman Sachs entities) may
provide to the Company, the Investment Funds or one or more Client/GS
Accounts. Such products and services may disproportionately benefit other
Client/GS Accounts relative to the Company and the Investment Funds based
on the amount of brokerage commissions paid by the Company, 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.
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 advised or managed 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 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). 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.
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 RELATED TO THE VALUATION OF THE COMPANY'S INVESTMENTS
The valuation of the Company's investments is ordinarily determined
based on valuations provided directly or indirectly by the Advisors.
Certain securities in which the Company directly or indirectly invests may
not have a readily ascertainable market price and will generally be valued
by the Advisors. 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 (in its capacity
as managing member of the Company and of the Investment Funds) may face a
conflict of interest in overseeing the valuation of the Company's
investments, as the value of the Company's investments will affect the
Managing Member's compensation. In certain circumstances, the Managing
Member may determine that a valuation of Company assets is inaccurate or
incomplete. In such event, 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 PROVIDES
BROKERAGE OR OTHER SERVICES TO THE ADVISORS, THE COMPANY OR THE
INVESTMENT FUNDS
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 in which Goldman Sachs, acting as
principal or on a proprietary basis for its customers, serves as the
counterparty. Except as permitted by applicable law, Goldman Sachs will
not, acting as principal for its own account, purchase securities or other
property from, or sell securities or other property to, the Company.
However, subject to applicable law, the Company or an Investment Fund may
engage in transactions with accounts which are affiliated with the Company
or such Investment Fund because they are advised by Goldman Sachs or
because they have common officers, directors or managers. Such transactions
would be made in circumstances where the Managing Member has determined
that it would be appropriate for the Company or the Investment Fund, as
applicable, to purchase and Goldman Sachs or another client of Goldman
Sachs to sell, or the Company or the Investment Fund, as applicable, to
sell and another client of Goldman Sachs to purchase, the same security or
instrument on the same day. By virtue of having entered into a subscription
agreement, an investor consents to the Company and the Investment Funds
entering into such transactions to the fullest extent permitted under
applicable law. An Advisor Fund, Portfolio Company or Managed Account may
also enter into cross transactions in which Goldman Sachs acts on behalf of
such Advisor Fund, Portfolio Company or Managed Account, as applicable, and
for the other party to the transaction.
Goldman Sachs may have a potentially conflicting division of
responsibilities to both parties to a cross transaction. For example, to
the extent permitted by applicable law, Goldman Sachs may represent both
the Company or an Investment Fund, Advisor Fund, Portfolio Company or
Managed Account and another Client/GS Account in connection with the
purchase of a security by the Company or such Investment Fund, Advisor
Fund, Portfolio Company or Managed Account, as applicable, and Goldman
Sachs may receive compensation or other payments from either or both
parties.
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 (and its personnel and other distributors) will be
entitled to retain fees and other amounts that it receives in connection
with its service to the Company and the Investment Funds, Advisor Funds,
Portfolio Companies or Managed Accounts and their Advisors as broker,
dealer, agent, lender, advisor or in other commercial capacities and no
accounting to the Company, the Investment Funds or their respective
investors will be required, and no fees or other compensation payable by
the Company, the Investment Funds or their respective investors will be
reduced by reason of receipt by Goldman Sachs of any such fees or other
amounts.
When an Advisor chooses Goldman Sachs to act as broker, dealer, agent,
lender or advisor or in other commercial capacities in relation to an
Advisor Fund, Portfolio Company or Managed Account, Goldman Sachs may take
commercial steps in its own interests, which may have an adverse effect on
the Company, 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, 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 any Investment Fund's counterparties
will rely on the credit of Goldman Sachs in evaluating the Company's or
such Investment Fund's creditworthiness.
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 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.
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 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 (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.
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. Therefore, the amount, timing, structuring or terms of an
investment by an Advisor Fund, Portfolio Company or Managed Account managed
by an Advisor may differ from, and performance may be lower than,
investments and performance of other Client/Advisor Accounts managed by the
same Advisor.
OTHER POTENTIAL CONFLICTS RELATING TO THE ADVISORS' PORTFOLIO MANAGEMENT
ACTIVITIES
POTENTIAL RESTRICTIONS AND ISSUES RELATING TO INFORMATION HELD BY
ADVISORS
From time to time, an Advisor may consult with personnel of the
Advisor or unaffiliated firms, or may form investment policy committees
comprised of such personnel. In connection with their activities with the
Advisor, such persons may receive information regarding the proposed
investment activities of the Advisor Fund, Portfolio Company or Managed
Account managed by such Advisor which is not generally available to the
public.
An Advisor from time to time may have access to certain fundamental
analysis and proprietary technical models developed by it and its
affiliates. However, the Advisor may not be permitted to use such analysis
and models on behalf of the Advisor Fund, Portfolio Company or Managed
Account that it manages. Even if the Advisor is permitted to use such
analysis and models, 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.
In addition, an Advisor and certain of its personnel may be in
possession of information not available to all Advisor personnel, including
the personnel advising or otherwise providing services to the Advisor Fund,
Portfolio Company or Managed Account advised by such Advisor, and such
personnel may act on the basis of such information in ways that have
adverse effects on such Advisor Fund, Portfolio Company or Managed Account.
The Advisors will not be under any obligation to disseminate such
information.
From time to time, an Advisor may come into possession of material,
non-public information or other information that could limit the ability of
an Advisor Fund, Portfolio Company or Managed Account managed by such
Advisor to buy and sell investments. The investment flexibility of such
Advisor Fund, Portfolio Company or Managed Account may be constrained as a
consequence.
POTENTIAL CONFLICTS RELATING TO AN ADVISOR'S PROPRIETARY ACTIVITIES ON
BEHALF OF OTHER ACCOUNTS MANAGED BY 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,
or may involve a different timing or nature of action than with respect to
such Advisor Fund, Portfolio Company or Managed Account.
Transactions undertaken by Advisors or Client/Advisor Accounts may
adversely impact an Advisor Fund, Portfolio Company or Managed Account. An
Advisor and its Client/Advisor Accounts may buy or sell positions while an
Advisor Fund, Portfolio Company or Managed Account managed by such Advisor
is undertaking the same or a differing, including potentially opposite,
strategy, which could disadvantage the Advisor Fund, Portfolio Company or
Managed Account. For example, an Advisor Fund may buy a security and its
Advisor or such Advisor's Client/Advisor Accounts may establish a short
position in that same security. The subsequent short sale may result 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
disadvantaging the values, prices or investment strategies of an Advisor
Fund, Portfolio Company or Managed Account, particularly, but not limited
to, in small capitalization, emerging market or less liquid strategies.
This may occur when portfolio decisions 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, which could impact the timing
and manner in which the portfolio decisions for the Advisor Fund, Portfolio
Company or Managed Account and other Client/Advisor Accounts are
implemented. When the Advisor or a Client/Advisor Account implements a
portfolio decision or strategy ahead of, or contemporaneously with, similar
portfolio decisions or strategies for an Advisor Fund, Portfolio Company or
Managed Account, market impact, liquidity constraints, or other factors
could result in the Advisor Fund, Portfolio Company or Managed Account
receiving less favorable trading results and the costs of implementing such
portfolio decisions or strategies could be increased or the Advisor Fund,
Portfolio Company or Managed Account could otherwise be disadvantaged. The
Advisor may, in certain cases, elect to implement internal policies and
procedures designed to limit such consequences to the Client/Advisor
Accounts as well as the Advisor Funds, Portfolio Companies and Managed
Accounts which may cause an Advisor Fund, Portfolio Company or Managed
Account to be unable to engage in certain activities, including purchasing
or disposing of securities, when it might otherwise be desirable for it to
do so.
Conflicts may also arise because portfolio decisions for 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, different from or
made at different times than positions taken for an Advisor Fund, Portfolio
Company or Managed Account managed by such Advisor. An Advisor may
establish 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's management of the assets of an Advisor Fund, Portfolio
Company or Managed Account may benefit the Advisor. For example, an Advisor
Fund, Portfolio Company or Managed Account may, subject to applicable law,
invest directly or indirectly in the securities of companies affiliated
with the Advisor or in which the Advisor has an equity, debt or other
interest. In addition, subject to applicable law, an Advisor Fund,
Portfolio Company or Managed Account may engage in investment transactions
which may result 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 pursue or enforce rights with respect
to an issuer in which an Advisor Fund, Portfolio Company or Managed Account
has invested, and those activities may have an adverse effect on such
Advisor Fund, Portfolio Company or Managed Account. As a result, prices,
availability, liquidity and terms of Advisor Fund, Portfolio Company or
Managed Account investments may be negatively impacted by the activities of
the Advisor or its clients, and transactions for an Advisor Fund, Portfolio
Company or Managed Account 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.
An Advisor may create, write, sell or issue, or act as placement agent
or distributor of, derivative instruments with respect to which the
underlying securities, currencies or instruments may be those in which the
Advisor Fund, Portfolio Company or Managed Account managed by it invests,
or which may be otherwise based on the performance of such Advisor Fund,
Portfolio Company or Managed Account. The structure or other
characteristics of the derivative instruments may have an adverse effect on
the Advisor Fund, Portfolio Company or Managed Account. For example, the
derivative instruments could represent leveraged investments in an Advisor
Fund, and the leveraged characteristics of such investments could make it
more likely, due to events of default or otherwise, that there would be
significant redemptions of interests from the Advisor Fund more quickly
than might otherwise be the case. The Advisor, acting in commercial
capacities in connection with such derivative instruments, may in fact
cause such a redemption. This may have an adverse effect on the investment
management, flexibility, and diversification strategies of the Advisor Fund
and on the amount of fees, expenses and other costs incurred directly or
indirectly for the account of such Advisor Fund. Similarly, an Advisor
(including its personnel or Client/Advisor Accounts) may 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
Investment Funds and indirectly the Company.
POTENTIAL CONFLICTS THAT MAY ARISE WHEN AN ADVISOR ACTS IN A CAPACITY
OTHER THAN ADVISOR TO THE ADVISOR FUNDS, PORTFOLIO COMPANIES OR
MANAGED ACCOUNTS
To the extent permitted by applicable law, an Advisor may enter into
transactions and invest in futures, securities, currencies, swaps, options,
forward contracts or other instruments on behalf of an Advisor Fund,
Portfolio Company or Managed Account in which such Advisor, acting as
principal or on a proprietary basis for its customers, serves as the
counterparty. An Advisor Fund, Portfolio Company or Managed Account may
also enter into cross transactions in which its Advisor acts on behalf of
such Advisor Fund, Portfolio Company or Managed Account and for the other
party to the transaction. An Advisor may have a potentially conflicting
division of responsibilities to both parties to a cross transaction.
When an Advisor acts as broker, dealer, agent, lender or advisor or in
other commercial capacities in relation to an Advisor Fund, Portfolio
Company or Managed Account, such Advisor may take commercial steps in its
own interests, which may have an adverse effect on such Advisor Fund,
Portfolio Company or Managed Account. For example, in connection with prime
brokerage or lending arrangements involving an Advisor Fund, Portfolio
Company or Managed Account, an Advisor may require repayment of all or part
of a loan at any time or from time to time.
To the extent permitted by applicable law, an Advisor Fund, Portfolio
Company or Managed Account may invest all or some of its short term cash
investments in money market funds advised or managed by its Advisor, and
may invest in other products advised or managed by its Advisor. In
connection with any such investment, the 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). 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.
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.
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
Purchases and sales of securities for an Advisor Fund, Portfolio
Company or Managed Account may be bunched or aggregated with orders for
other Client/Advisor Accounts of the Advisor that manages such Advisor
Fund, Portfolio Company or Managed Account. An Advisor, however, is not
required to bunch or aggregate orders if portfolio management decisions for
different accounts are made separately, or if it determines that bunching
or aggregating is not required or is inconsistent with client direction.
Prevailing trading activity frequently may make impossible the receipt
of the same price or execution on the entire volume of securities purchased
or sold. When this occurs, the various prices may be averaged, and the
Advisor Fund, Portfolio Company or Managed Account, as applicable, will be
charged or credited with the average price. Thus, the effect of 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.
An Advisor may select brokers (including, without limitation,
affiliates) that furnish the Advisor, an Advisor Fund, Portfolio Company or
Managed Account managed by the Advisor, or another Client/Advisor Account,
directly or through correspondent relationships, with research or other
appropriate services which 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 or other services may
include, to the extent permitted by law, research reports on companies,
industries and securities; economic and financial data; financial
publications; proxy analysis; trade industry seminars; computer data bases;
quotation equipment and services; and research-oriented computer hardware,
software and other services and products. Research or other services
obtained in this manner may be used in servicing any or all of the Advisor
Funds, Portfolio Companies or Managed Accounts and other Client/Advisor
Accounts, including in connection with Client/Advisor Accounts other than
those that pay commissions to the broker relating to the research or other
service arrangements. Such products and services may disproportionately
benefit other Client/Advisor Accounts relative to the Advisor Fund,
Portfolio Company or Managed Account based on the amount of brokerage
commissions paid by the Advisor Fund, Portfolio Company or Managed Account
and such other Client/Advisor Accounts. For example, research or other
services that are paid for through one client's commissions may not be used
in managing that client's account. In addition, other Client/Advisor
Accounts may receive the benefit, including disproportionate benefits, of
economies of scale or price discounts in connection with products and
services that may be provided to the Advisor Funds, Portfolio Companies or
Managed Accounts and to such other Client/Advisor Accounts.
An Advisor may endeavor to execute trades through brokers who,
pursuant to such arrangements, provide research or other services in order
to ensure the continued receipt of research or other services the Advisor
believes are useful in its investment decision-making process.
An Advisor may from time to time choose not to engage in the above
described "soft dollar arrangements" to varying degrees.
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 Advisor Funds, Portfolio
Companies and/or Managed Accounts that they manage, and to help ensure that
such decisions are made in accordance with the Advisors' fiduciary
obligations to their clients. Nevertheless, notwithstanding such proxy
voting policies and procedures, actual proxy voting decisions of an Advisor
may have the effect of favoring the interests of other clients or
businesses of the Advisor and/or its affiliates, and of other divisions or
units of Goldman Sachs and/or its affiliates provided that the Advisor
believes such voting decisions to be in accordance with its fiduciary
obligations.
POTENTIAL REGULATORY RESTRICTIONS ON ADVISOR ACTIVITY
From time to time, the activities of an Advisor Fund, Portfolio
Company or Managed Account may be restricted because of regulatory
requirements applicable to an Advisor and/or its internal policies designed
to comply with, limit the applicability of, or otherwise relate to such
requirements. A client not advised by an Advisor would not be subject to
some of those considerations. There may be periods when an Advisor may not
initiate or recommend certain types of transactions, or may otherwise
restrict or limit its advice in certain securities or instruments issued by
or related to companies for which the Advisor is performing investment
banking, market making or other services or has proprietary positions. For
example, when an Advisor is engaged in an underwriting or other
distribution of securities of, or advisory services for, a company, an
Advisor Fund, Portfolio Company or Managed Account managed by such Advisor
may be prohibited from or limited in purchasing or selling securities of
that company. Similar situations could arise if personnel of an Advisor
serve as directors of companies the securities of which an Advisor Fund,
Portfolio Company or Managed Account managed by such Advisor wishes to
purchase or sell. However, if permitted by applicable law, the Advisor
Fund, Portfolio Company or Managed Account may purchase 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 other accounts may also limit the investment strategies and rights
of the Advisor Fund, Portfolio Company or Managed Account managed by such
Advisor. For example, in regulated industries, in certain emerging or
international markets, in corporate and regulatory ownership definitions,
and in certain futures and derivative transactions, there 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 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. As a result, an Advisor, on behalf of 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 in
light of potential regulatory restrictions on ownership or other
impairments resulting from reaching investment thresholds.
SAFEGUARDS IMPLEMENTED BY THE MANAGING MEMBER TO ADDRESS CONFLICTS OF
INTEREST
The Managing Member and its personnel will act in accordance with
their fiduciary duties to the Company and investors, and conduct themselves
in accordance with professional and ethical standards. Because of the
nature of the Managing Member's business and the businesses of its
affiliates, potential conflicts of interest may arise. To minimize the
effect of potential conflicts of interest, the Managing Member and the
Company have put in place policies and procedures and ethical standards
which are described below. In addition, the Managing Member and the Company
have disclosed potential conflicts in this Annual Report 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 worldwide, full-service investment banking, broker-dealer, asset
management and financial services organization. As a result, Goldman Sachs
is engaged in activities that may result in conflicts of interest with
those of the Company. For example, potential conflicts of interests may
arise if Goldman Sachs were to provide brokerage or other services to an
Advisor of an Investment Fund or act as an Investment Fund's prime broker.
In such circumstances, payments to Goldman Sachs resulting from these
relationships will generally increase as the size of the assets of the
Advisor increases. This may result in the Managing Member having an
incentive to select for investment by the Company an Investment Fund whose
Advisor has established such a relationship with Goldman Sachs over another
Investment Fund that might also be appropriate for the Company. In
addition, in connection with prime brokerage or lending arrangements
involving Investment Funds, Goldman Sachs may require repayment of all or
part of a loan at any time or from time to time.
To minimize the effect of any potential conflict of interest resulting
from Goldman Sachs' other business operations, Goldman Sachs, including the
Managing Member, has established policies and procedures addressing
potential conflicts of interest. Specifically, Goldman Sachs has put in
place "Chinese Walls" policies and procedures, which are designed to
separate the various functions and business lines of Goldman Sachs,
including the asset management and brokerage businesses. As a result,
personnel of the Managing Member that make investment and other decisions
on behalf of the Company ("Advisory Personnel") generally perform their
duties for the Company without knowledge of other Goldman Sachs operations.
CONFLICTING OBLIGATIONS TO THE COMPANY AND OTHER ADVISORY ACCOUNTS
The Managing Member may have potential conflicts of interest in
connection with other accounts it manages ("Advisory Accounts"). For
example, there may be a conflict of interest in connection with the
Managing Member's allocation of investments or transaction decisions for
the Company and another Advisory Account that may provide the Managing
Member greater fees or other compensation than the Company, particularly
where there is limited availability or limited liquidity for those
investments. This has the potential of providing the Managing Member with
an incentive to allocate investment opportunities in a manner that favors
the other Advisory Account over the Company.
To minimize the effect of any potential conflict of interest resulting
from the Managing Member's conflicting obligations to Advisory Accounts,
including its allocation practices, the Managing Member has developed
policies and procedures addressing these conflicts, which provide that
portfolio managers will allocate investment opportunities and make purchase
and sale decisions among Advisory Accounts in a manner that is reasonable
and equitable. It is the policy of the Managing Member to allocate, to the
extent possible, investment opportunities to the Company over a period of
time on a fair and equitable basis relative to the Advisory Accounts. The
Managing Member will generally allocate investments and/or transaction
decisions among the Company and the Advisory Accounts pro rata based on
their respective relative amounts of capital available for investment. In
circumstances when it is impossible or impracticable for investments and/or
transaction decisions to be allocated among the Company and the Advisory
Accounts in such a manner, the Managing Member will seek to allocate such
investments and/or transaction decisions among the Company and the Advisory
Accounts in a manner that it believes is in the best interests of the
Company and the Advisory Accounts after considering, among other things,
the respective investment guidelines and objectives, portfolio weightings,
strategy exposure, risk profile and risk tolerance, current investments,
cash flow and anticipated liquidity needs, expected future sizes of the
Company or the Advisory Accounts and availability of other investments
opportunities for the Company and the Advisory Accounts.
PERSONAL INTERESTS OF ADVISORY PERSONNEL
Employees of the Managing Member may have conflicts of interest in
connection with performing their duties on behalf of the Company. For
example, employees of the Managing Member may come into possession of
material, non-public information or other information as a result of their
investment activities on behalf of the Company or otherwise, and they may
seek to improperly benefit from such information by trading on the
information for their own personal benefit.
To minimize the effect of any such potential conflict of interest, the
Managing Member has adopted policies and procedures that address conflicts
of interest, information barriers and the use of protected information.
These policies state, among other things, that protected information may
only be used in a manner consistent with the purposes for which it was
created, and may not be disclosed to any other person who does not have a
need to know the information in order to perform his/her duties and to
carry out the purposes for which the information was provided. Furthermore,
the Managing Member's policies specifically address protected information
relating to the trading activity of Advisors. These policies state that any
such information with respect to Advisors may not be used by employees of
the Managing Member to make personal investments or in the management of
any other account of the Managing Member or its affiliates.
The Managing Member also has policies relating to personal trading
generally. Pursuant to these policies, employees must effect personal
securities transactions consistent with their fiduciary duties and subject
to professional and ethical standards. Among other things, the policies and
procedures of the Managing Member require, subject to certain exceptions,
pre-clearance of personal securities transactions by Managing Member
employees and minimum holding periods for purchased securities. Violations
of these policies, like all Managing Member policies, may result in
disciplinary actions up to and including termination, and may also result
in the breaking of specific trades. The personal trading of employees of
the Managing Member is subject to monitoring by a compliance department to
ensure compliance with these policies.
In addition, employees of the Managing Member are subject to a code of
business conduct and ethics that is applicable to The Goldman Sachs Group,
Inc. and its subsidiaries. Moreover, the Managing Member has also adopted a
Code of Ethics, which 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.
COMPETITION
The market for hedge funds and hedge fund products is highly
competitive. The Company competes for investors with other hedge funds,
fund of funds, mutual funds, and money managers who employ similar
investment strategies and who offer similar hedge fund products to
investors. New entities, including other hedge funds, fund of funds and
money managers, regularly enter the market, and there are limited barriers
to entry. In addition, new hedge fund products are regularly introduced
into the market by existing funds. The Company competes with its
competitors on, among other things, the basis of its reputation, its
short-term and long-term performance and track record, access to, and
ability to select, Advisors, fees, management and portfolio teams,
strategies, client services and its ability to manage risk.
FISCAL YEAR
The Company's fiscal year ends on December 31 of each calendar year.
The Managing Member, in its sole discretion, may change the fiscal year-end
of the Company.
EMPLOYEES
As of December 31, 2005, the Company had no employees, however, the
Company is managed by the Managing Member which as of December 31, 2005,
was supported by approximately 108 employees of the GS Group who allocate
at least a portion of their time to the management of the Company and the
Investment Funds.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains certain "forward-looking statements"
regarding the operation of the Company and the Company's investment
objective, including, among other things:
o investment strategies and allocations of assets;
o future performance; and
o trends in the four hedge fund sectors.
Forward-looking statements are typically identified by the use of
terms such as "may," "will," "should," "expect," "intend," "plan,"
"anticipate," "estimate," "believe," "continue," "predict," "potential" or
the negative of such terms and other comparable terminology. These
statements are only predictions and are not historical facts. Actual events
or results may differ materially.
The forward-looking statements included herein are based on the
Managing Member of the Company's current expectations, plans, estimates and
beliefs that involve numerous risks and uncertainties. Assumptions relating
to the foregoing involve judgments with respect to, among other things,
future economic, competitive and market conditions and future business
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"
below, the inclusion of such information should not be regarded as a
representation by the Company or the Managing Member that the 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 (each, an "index") 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.
ITEM 1A. RISK FACTORS
GENERAL RISKS
The following are certain risk factors that relate to the operation
and terms of the Company and the Investment Funds.
RISKS RELATED TO THE COMPANY AND THE INVESTMENT FUNDS'
PERFORMANCE AND OPERATION
LACK OF OPERATING HISTORY OF THE COMPANY; PAST PERFORMANCE OF THE COMPANY
IS NOT INDICATIVE OF FUTURE RESULTS
Although the Managing Member also manages other investment funds that
have historically had investment programs similar to that of the Company,
the Company commenced its operations on April 1, 2002 and has a short
independent operating history upon which Members can evaluate its likely
performance. Similarly, many current and future Advisors have or will have
had short operating histories. The past investment performance of the
Company, any of the Investment Funds or Advisors should not be construed as
an indication of the future results of such Advisors, the Investment Funds,
or of the Company. The results of other accounts and investment funds
previously formed and managed by the Managing Member currently or in the
past, which have or have had investment objectives, strategies, risk
profiles, or investments that are similar to or different from the Company
or the Investment Funds, are not indicative of the results that the Company
or the Investment Funds may achieve. The Investment Funds make investments
in different portfolios of Advisors and securities and, accordingly, their
results and, in turn, the results of the Company, may differ from the
results previously obtained by the Managing Member and those funds and
accounts. See "--SPECIAL RISKS OF THE COMPANY'S STRUCTURE--Risks Associated
with the Company Investing in Other Entities--Past Performance of
Affiliated Funds and of Advisors are not Necessarily Indicative of the
Results that the Company and any Investment Fund May Achieve or of Future
Results" below.
A SUBSTANTIAL PORTION OF AN INVESTMENT FUND'S ASSETS MAY BE INVESTED
UTILIZING STRATEGIES THAT ARE NOT WITHIN ITS HEDGE FUND SECTOR; MOST
ADVISORS DO NOT PROVIDE DETAILED POSITION INFORMATION REGARDING THEIR
PORTFOLIOS
Although the managing member of an Investment Fund intends to allocate
assets to Advisors whose principal investment strategies are within one of
the four specified hedge fund sectors described under ITEM 1.
"BUSINESS--PERFORMANCE OF THE COMPANY--Description of the Investment Funds
and the Performance of the investment Funds," 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 into similarly named
sectors made by other industry participants. The managing member of each
Investment Fund will rely on information previously provided by each
Advisor in determining in its sole discretion that the principal investment
strategies utilized by an Advisor are within such Investment Fund's
specified hedge fund sector.
The managing member of an Investment Fund seeks to select Advisors for
the Investment Fund that exhibit certain operational, management and risk
control standards in the daily investment of their portfolios. The managing
member 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 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 the
failure of the Advisors to accurately provide information or to provide
such information in sufficient detail, it is possible that an Investment
Fund's assets will be allocated to Advisors whose principal investment
strategies are not within the Investment Fund's specified hedge fund 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
RISK ALLOCATIONS WILL BE SUCCESSFUL; INACCURATE INFORMATION PROVIDED BY THE
ADVISORS MAY HAVE A MATERIAL ADVERSE EFFECT ON IMPLEMENTING THE COMPANY'S
INVESTMENT OBJECTIVE
The Managing Member will have the discretion to underweight or
overweight allocations among hedge fund sectors from a risk perspective. As
of July 1, 2004, the Managing Member implemented an adjustment to
weightings among the Investment Funds. In addition, on July 1, 2005, the
Managing Member made a tactical adjustment to the weightings of the
Investment Funds. There is no assurance that the Managing Member's
decisions regarding allocations of assets or weights will be successful. In
addition, the Company will be limited in its ability to make changes to
allocations due to the subscription and redemption provisions of the
Investment Funds, including notice periods and limited subscription and
redemption dates, the ability of the Investment Funds to suspend and
postpone redemptions, and a one-year lockup on redemptions imposed by GRV.
In addition, any such allocations will be made by the Company based on
information previously provided by the Advisors. If such information is
inaccurate or incomplete, it is possible that the Company's allocation to
the hedge fund sectors from a risk perspective may not reflect the Managing
Member's intended allocations. This could have a material adverse effect on
the ability of the Managing Member to implement the Company's investment
objective.
NON-DIVERSIFIED STATUS; THE MANAGING MEMBER MAY ALLOCATE TO ONE OR MORE
ADVISORS A RELATIVELY LARGE PERCENTAGE OF AN INVESTMENT FUND'S ASSETS
The Company is a "non-diversified" investment company. Thus, there are
no percentage limitations imposed by the Investment Company Act of 1940, as
amended (the "Investment Company Act") on the percentage of the Company's
assets that may be invested in the securities of any one issuer. 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 the Investment Funds generally will not allocate more than 25% of
the total assets of an Investment Fund to any single Advisor at the time of
investment in such Advisor. Consequently, losses suffered by such Advisors
of an Investment Fund could result in a proportionately higher reduction in
such Investment Fund's capital than if such capital had been more
proportionately allocated among a larger number of Advisors.
DEPENDENCE ON THE MANAGING MEMBER AND THE ADVISORS; THE MANAGING MEMBER
GENERALLY HAS LIMITED ACCESS TO INFORMATION ON OR CONTROL OVER 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 will 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 the ability
of the managing member of the Investment Funds and each Investment Fund's
Advisors to develop and implement investment strategies that achieve their
investment objectives. For example, an Advisor's inability to effectively
hedge an investment strategy that it utilizes may cause the assets of an
Investment Fund allocated to such Advisor to significantly decline in value
and could result in substantial losses to such Investment Fund and, in
turn, to the Company. The Investment Funds do not have any control over the
Advisors. Moreover, subjective decisions made by the Managing Member or the
managing member of an Investment Fund and/or by the Investment Fund's
Advisors 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
management or control of the Company, Investment Funds, Portfolio
Companies, Advisors or Advisor Funds, and will not have an opportunity to
evaluate in advance any specific investments made by the Company,
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 (the "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 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 a
litigation. In addition, in deciding on whether or not to pursue legal
remedies available to them, the Company or the Investment Funds will also
consider the costs involved in pursuing any remedy and the risk that the
underlying hedge fund may have insufficient assets to comply with a
successful outcome. Accordingly, even if a legal remedy may be available to
the Company or the Investment Funds, it may chose not to pursue such
remedy.
THE COMPANY DOES NOT INTEND TO PARTICIPATE IN NEW ISSUES WHICH MAY LIMIT
POTENTIAL GAINS
The Company does not presently intend to participate in "new issues,"
as such term is defined under National Association of Securities Dealers,
Inc. ("NASD") Rule 2790, as amended, supplemented and interpreted from time
to time ("NASD Rule 2790"). NASD Rule 2790 limits the ability of NASD
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.
RISKS RELATED TO THE COMPANY'S REGULATORY ENVIRONMENT
LIMITED REGULATORY OVERSIGHT; MEMBERS NOT AFFORDED PROTECTION OF INVESTMENT
COMPANY ACT
The Company and each of the Investment Funds, in reliance upon an
exemption available to privately offered investment companies, are not
required to register as investment companies and have not registered as
such under the Investment Company Act. Thus, the provisions of the
Investment Company Act intended to provide various protections to investors
(which, among other things, require investment companies to have a majority
of disinterested directors, provide limitations on leverage, limit
transactions between investment companies and their affiliates, require
securities held in custody at all times to be individually segregated from
the securities of any other person and marked to clearly identify such
securities as the property of such investment company and regulate the
relationship between the adviser and the investment company) are not
applicable. The Managing Member is registered as an adviser under the
Investment Advisers Act.
Moreover, the Advisor Funds and Portfolio Companies in which the
Investment Funds invest generally are not registered as investment
companies, and the Investment Funds and the Company, in turn, are not
provided the protections of the Investment Company Act. In addition,
although the SEC has adopted new rules that will require most of the
Advisors of the Investment Funds to register as investment advisers under
the Investment Advisers Act, there is expected to be a significant period
of time before such registrations are completed and certain of the
Investment Funds' Advisors may not need to register. As an investor with
Advisors that are not registered as investment advisers, the Investment
Funds and the Company will not have the benefit of certain of the
protections of the Investment Advisers Act.
The Advisor Funds and Portfolio Companies generally do not maintain
their securities and other assets in the custody of a bank or a member of a
securities exchange, as generally required of registered investment
companies in accordance with certain SEC rules. A registered investment
company which places its securities in the custody of a member of a
securities exchange is required to have a written custodian agreement,
which provides that securities held in custody will be at all times
individually segregated from the securities of any other person and marked
to clearly identify such securities as the property of such investment
company and which contains other provisions designed to protect the assets
of the registered investment company. It is anticipated that the Advisors
to which the Investment Funds will allocate assets generally will maintain
custody of their assets with brokerage firms which do not separately
segregate such customer assets as would be required in the case of
registered investment companies. Under the provisions of the Securities
Investor Protection Act of 1970, as amended, the bankruptcy of any such
brokerage firm could have a greater adverse effect on an Investment Fund
and, in turn, on the Company, than would be the case if custody of assets
were maintained in accordance with the requirements applicable to
registered investment companies. There is also a risk that an Investment
Fund's Advisor could convert to its own use assets committed to it by an
Investment Fund or that a custodian could convert to its own use assets
committed to it by an Investment Fund's Advisor. There can be no assurance
that the Advisors or the entities they manage will comply with all
applicable laws and that assets of the Investment Funds entrusted to
Advisors by the Investment Funds will be protected.
Furthermore, in accordance with U.S. Commodity Futures Trading
Commission (the "CFTC") regulations, the Managing Member is registered as a
commodity trading advisor (a "CTA") and a commodity pool operator (a "CPO")
under the U.S. Commodity Exchange Act of 1974, 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 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 and
"qualified eligible persons" 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 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 was 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.
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.
THE COMPANY FACES LEGAL, TAX AND REGULATORY RISKS THAT MAY ADVERSELY AFFECT
THE COMPANY
Legal, tax and regulatory changes could occur during the term of the
Company and the Investment Funds that may 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 Advisors of an Investment Fund may participate is evolving, and
changes in the regulation or taxation of derivative instruments may
materially adversely affect the value of derivative instruments held by
such Investment Fund and, in turn, the value of the Company's assets and
the ability of such Investment Fund to pursue its trading strategies.
Similarly, the regulatory environment for leveraged investors and for hedge
funds generally is evolving, and changes in the direct or indirect
regulation of leveraged investors or hedge funds may materially adversely
affect the ability of the Company or an Investment Fund to pursue its
investment objective or strategies.
RISKS RELATED TO THE UNITS, LIQUIDITY OF UNITS AND THE OFFERING OF THE UNITS
UNITS WILL NOT BE LISTED AND WILL NOT BE MARKETABLE
The Company does not intend to list its Units for trading on any
national securities exchange. There is no secondary trading market for the
Units, and none is expected to develop. The Units are, therefore, not
readily marketable. Units will not be redeemable at the option of Members,
other than, effective January 1, 2006, 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" below.
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 may be
limited or postponed under limited circumstances. Additionally, effective
January 1, 2006, the Managing Member may limit redemptions to the extent
that aggregate redemption requests by Members exceed a specified threshold.
The same or similar limitations will apply to the Company's investment in
the Investment Funds or an Investment Fund's investment with certain
Advisors.
The Advisors of the Investment Funds may invest a portion of such
Investment Fund's assets in securities and financial instruments that are
not publicly traded. Such non-publicly traded securities and financial
instruments may not be readily disposable, 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. An investment
in the Company is therefore suitable only for certain sophisticated
investors that will not be materially impacted by postponements of the
Company's normal redemption dates. Further, distributions of proceeds by an
Investment Fund to the Company upon the Company's redemption from such
Investment Fund may be limited, in such Investment Fund's managing member's
sole discretion, because of restrictions imposed upon redemptions by the
Advisor Funds or under the terms of investment management agreements in or
pursuant to which such Investment Fund's assets are invested, or where, in
the view of the managing member, the disposal of part or all of such
Investment Fund's assets to meet withdrawal requests would be prejudicial
to its members. Distributions of proceeds by the Company upon a Member's
redemption may be limited, in the Managing Member's sole discretion, due to
the above-described circumstances or where, in the view of the Managing
Member, the disposal of part or all of the Company's assets to meet
withdrawal requests would be prejudicial to the Members.
REDEMPTIONS OF UNITS ARE SUBJECT TO 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 91-day period between
the date by which redemption requests must be submitted and the date as of
which such Units are valued for purposes of such redemption. Members will
have to decide whether to request that the Company redeem their Units
without the benefit of having current information regarding the value of
Units on a date proximate to the date on which Units are valued by the
Company for purposes of effecting such redemptions. In addition, under
certain exceptional circumstances, such as force majeure, the Managing
Member may find it necessary (i) to postpone redemptions if it determines
that the disposition of investments to fund redemptions would adversely
affect NAV per Unit or (ii) to set up a reserve for undetermined or
contingent liabilities and withhold a certain portion of redemption
proceeds. Effective January 1, 2006, the Managing Member may also limit
redemptions 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.
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 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. The Company
had redemptions in the amount of $128,546,636 in January 2005, $112,803,581
in July 2005 and $347,523,596 in January 2006. The Company funded the
redemptions made in January 2005, July 2005 and January 2006 by making
redemptions from the Investment Funds in proportion to the then current
weightings and through the use of uninvested cash on hand and the Company
also used its credit facility to fund January 2006 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 in January 2005, July 2005 and
January 2006 to fund the redemptions made in the Company in January 2005,
July 2005 and January 2006 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 2006 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 Models and
Methodologies will Achieve the Company's Allocation Goals." Further, while
the Company did not borrow under the credit facility to fund the
redemptions in January 2005 and July 2005, it did borrow from its credit
facility to fund redemptions in January 2006. The Company may elect to
borrow under the credit facility, including without limitation, to fund
redemptions, from time to time in the future. 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.
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 as payment for redeemed Units, including if making a cash
payment would result in a material adverse effect on the Company or the
Members, or if the Company has received distributions from the Investment
Funds in the form of securities that are transferable to the Members. For
instance, an Investment Fund may distribute redemption proceeds to the
Company if the Investment Fund receives distributions from its Advisors in
the form of securities. It is possible that, upon the Company's withdrawal
of all or a portion of its assets invested in an Investment Fund, the
Company may receive securities that are illiquid or difficult to value. In
such circumstances, the Managing Member would seek to dispose of these
securities in a manner that is in the best interests of the Company, which
may include a distribution in-kind to its Members. In the event that the
Company makes such a distribution of securities as payment for Units,
Members will bear any risks of the distributed securities and may be
required to pay a brokerage commission or other costs in order to dispose
of such securities.
SPECIAL CONSIDERATIONS ARE APPLICABLE TO THE UNITS; AFTER THE INITIAL
OFFERING OF UNITS SUBSEQUENT PURCHASERS OF UNITS MAY SUFFER LOSSES BECAUSE
OF PREVIOUSLY ESTABLISHED OPEN POSITIONS
The Company may accept additional subscriptions for Units from time to
time as determined by the Managing Member and in accordance with the LLC
Agreement. Upon the approval of the Managing Member, a Member or
prospective Member may make additional subscriptions for Units on the first
day of each calendar quarter or at such other times as the Managing Member
may determine in its sole discretion. Historically, the Company has from
time to time taken in funds on a monthly basis. From July 2003 through
September 2004, the Company only took in investments from existing
investors and limited subscriptions from new qualified investors, however,
starting in October 2004, the Company began accepting additional amounts of
new subscriptions again and the Company continued to do so through December
31, 2005.
Additional subscriptions will dilute the indirect interests of
existing Members in the Company's investment portfolio prior to any such
subscription, which could have a material adverse impact on the existing
Members' interest in the Company if future Company investments underperform
the prior investments. The Investment Funds may be closed from time to time
to investments by new investors; however, the Investment Funds may be
reopened in the sole discretion of the managing member of each Investment
Fund. Additional subscriptions for membership units as determined by the
managing member of each Investment Fund and in accordance with its limited
liability company agreement will dilute the indirect interests of the
Investment Fund's existing members, including the Company, in the
Investment Fund's investment portfolio prior to any such subscription,
which could have an adverse impact on the existing members' interest in the
Investment Fund if such Investment Fund's future investments underperform
its prior investments. In addition, it is expected that certain Advisors of
the Investment Funds will structure performance-based compensation
similarly to the Company, with such compensation being paid only if 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 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 Carryforward Value") will not be taken into account in
determining the NAV of an Investment Fund. Therefore, such Loss
Carryforward Value to existing members of an Investment Fund, including the
Fund, 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 that 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 that may have been held for some period of time prior
to the issuance of the additional Units, the application of the relevant
Advisor's trading approach to such positions may have a qualitatively
different effect on the performance of the additional Units than it does on
the performance of previously issued Units. For example, a number of
trading approaches may become more aggressive in terms of willingness to
tolerate losses in a position and increase the size of a position after an
open trade has generated a substantial profit because subsequent losses (up
to a certain level) are perceived as being only a partial give-back of
prior profits, not an actual loss. As purchasers of Units will not have
received, indirectly through the Company's investments in the Investment
Funds, the benefit of any profits on open positions prior to the date on
which they purchase the Units, subsequent losses will constitute an
absolute loss to such holders, not only a partial give-back of profits. In
addition, certain trading approaches may follow profit-taking strategies
whereby they will liquidate or partially liquidate a position after it has
generated a predetermined amount of profit. Since the new Units will not,
indirectly through the Company's investments in the Investment Funds, have
had the benefit of any such profit prior to the date on which they were
issued, Members holding such Units may find themselves, indirectly through
the Company's investments in the Investment Funds, liquidated out of a
position (which would have continued to generate substantial profits) due
to an Advisor "taking profits," none of which had inured to their benefit.
Some approaches apply similar analyses based on overall portfolio
performance, not just the performance of particular positions, with
generally analogous effects.
SPECIAL RISKS OF THE COMPANY'S STRUCTURE
This section discusses certain risks related to the fact that the
Company allocates its assets to Investment Funds, which allocate their
assets to Advisors.
RISKS RELATED TO THE COMPANY'S STRUCTURE
THE INVESTMENT FUNDS' AND THE ADVISORS' INVESTMENTS MAY NOT BE DIVERSIFIED
AND THERE CAN BE NO ASSURANCE THAT THE COMPANY'S ALLOCATION MODELS AND
METHODOLOGIES WILL ACHIEVE THE COMPANY'S ALLOCATION GOALS
The managing member of the Investment Funds generally will not
allocate more than 25% of any Investment Fund's total assets to any single
Advisor at the time of allocation. However, following the time of
allocation, the percentage of such Investment Fund's total assets allocable
to any single Advisor could exceed the 25% level due to a number of
factors, including redemptions from the Investment Fund and positive or
negative performance by an Advisor as compared to other Advisors. No
assurance is given as to any level of multiple Advisor diversification.
Greater concentration with any single Advisor may entail additional risks.
While the managing member of the Investment Funds may seek Advisors
that utilize diversified investment strategies, there can be no assurance
that market or other events will not have an adverse impact on the
strategies employed by multiple Advisors. Advisors may at certain times
hold large positions in a relatively limited number of investments.
Advisors may target or concentrate their investments in particular markets,
sectors, or industries. Those Advisors that concentrate in a specific
industry or target a specific sector will also be subject to the risks of
that industry or sector, which may include, but are not limited to, rapid
obsolescence of technology, sensitivity to regulatory changes, minimal
barriers to entry, and sensitivity to overall market swings. As a result,
the NAVs of such Advisors may be subject to greater volatility than those
of investment companies that are subject to diversification requirements
and this may negatively impact the NAV of the Investment Funds and the
Company.
The Company is designed to be broadly exposed to the hedge fund market
by allocating its assets to the Investment Funds in the four hedge fund
sectors: tactical trading, equity long/short, relative value and event
driven. Quantitative analysis is combined with judgment to determine
weightings that will offer broad exposure to hedge fund returns. Strategic
return, risk and correlation estimates inform the quantitative analysis,
which balances returns and contribution to portfolio risk. Judgment is
applied to both estimates and weights in an attempt to achieve a
diversified exposure to hedge funds while targeting attractive
risk-adjusted returns. The Managing Member periodically re-evaluates the
contribution to the risk and return of the Company from each investment
sector and may in the future in its sole discretion adjust the Company's
assets or weights of the investment sector as it deems advisable. The
Managing Member may at certain times be unable to adjust the Company's
assets or weights among the Investment Funds as it determines is advisable
in order to achieve the Company's objectives due to restrictions on
redemptions and additional subscriptions imposed by the Investment Funds or
Advisors. If imbalances in the allocations occur because the Company is
unable to adjust on a timely basis, because the Company's allocation models
and methodologies are not successful, or otherwise, losses occurring as a
result could cause the Company to suffer significantly greater losses than
would be the case if the Company's allocation goals had been achieved.
THE COMPANY'S FINANCIAL STATEMENTS ARE, AND IN THE FUTURE WILL 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 does not, and
will not, have any ability to assess the accuracy of the valuations or
other financial information received from each Investment Fund's Advisors
with respect to allocations not made through Managed Accounts or Advisor
Funds. 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 Advisor Funds. 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 each Investment Fund's
Advisors will typically be based on estimated or unaudited reports only,
and such values will be used to calculate NAVs and fee accruals for
purposes of determining amounts payable on redemption to the extent audited
information is not then available. In some cases, Advisors do not use
independent administrators or other third party providers to value and
report their 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 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 Advisor's Portfolios and
Members Assume the Risk that Advisors May Knowingly Misrepresent
Information Which Could Have a Material Negative Impact on the Company"
above and "--Risks Associated with the Company Investing in Other
Entities--Valuation of the Investment Funds' Investments Will be Based Upon
Valuations Provided by the Advisors Which are Generally not Audited;
Uncertainties in Valuations Could Have a Material Adverse Effect on the
Company's Net Assets" below.
If at any time the Managing Member determines, in its sole discretion,
that an incorrect number of Units was issued to a Member because the NAV in
effect on the date of issuance was incorrect, the Company will adjust such
Member's Units by increasing or decreasing them (by means of issuances of
additional Units or compulsory redemptions of Units, in each case without
additional consideration), as appropriate, to such number of Units as would
have been issued at the correct NAV. In addition, if at any time after a
redemption of Units (including in connection with any withdrawal of a
Member from the Company) the Managing Member determines, in its sole
discretion, that the amount paid to such Member or former Member pursuant
to such redemption was materially incorrect (including because the NAV at
which the Member or former Member purchased such Units was incorrect), the
Company will pay to such Member or former Member any additional amount that
it determines such Member or former Member would have been entitled to
receive had the redemption been effected at the correct NAV, or, in its
sole discretion, seek payment from such Member or former Member of (and
such Member or former Member shall be required to pay) the amount of any
excess payment that the Managing Member determines such Member or former
Member received (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.
If such a determination is made after a Member has had all of its Units
redeemed, or if the NAV of a Member's remaining Units is insufficient to
cover the amount of any overpayment (including, without limitation, due to
a decrease in the Company's NAV), the Company may be unable, or may elect
not under the circumstances, to collect the amount of any such excess
payment, and any corresponding restatement of and reduction in the NAV of
the Company will generally be borne by the remaining Members of the
Company. The Company will be subject to similar adjustment provisions as a
member of the Investment Funds.
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 worldwide,
full-service investment banking, broker-dealer, asset management and
financial securities organization, and a major 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
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 "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 objectives 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 and performance-based fees
at the Company or Investment Fund 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 transaction 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 he or she invested with the
Advisors directly or in a fund that did not utilize a "fund of funds"
structure. See "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 they allocate assets, 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.
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 4%.
Performance-based fees or allocations of Advisors are currently expected to
range from 15% to 25% of the net capital appreciation in each individual
Advisor's investments for the year. However, each Investment Fund may, in
the sole discretion of its managing member, allocate assets to Advisors
that receive fixed and/or performance-based fees that materially exceed
these ranges. 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 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. The transfer price may not take into account
any value associated with the transfer of the Investment Funds' investment
holding period, if any, in a 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 OF ADVISORS ARE NOT NECESSARILY
INDICATIVE OF THE RESULTS THAT THE COMPANY AND ANY INVESTMENT FUND MAY
ACHIEVE OR OF FUTURE RESULTS
The results of the Investment Funds and other investment funds or
accounts formed or managed by the GS Group, including other investment
funds or accounts managed by the GS Group which have or have had investment
objectives that are similar to those of the Company or the Investment
Funds, are not necessarily indicative of the results that the Company or
any Investment Fund may achieve. The Company makes indirect investments in
a different portfolio of Advisors and securities than other investment
funds and, accordingly, its results are independent of the previous results
obtained by those funds. See ITEM 1. "PERFORMANCE OF THE COMPANY--Certain
Considerations Relating to Limited Capacity of Potential Advisors of
Certain Investment Funds." Further, the Company and each Investment Fund
and their methods of operation may differ in several respects from prior GS
Group investment vehicles or accounts; e.g., there are different investment
and return objectives and investment allocation strategies and the Company
and each Investment Fund utilizes a different mix of Advisors and, in
certain cases, investment techniques. Similarly, the past investment
performance of any of the Advisors with which the Investment Funds will
invest or with which other investment funds or accounts managed by the GS
Group invest should not be construed as an indication of the future results
of such Advisors or of the Investment Funds. Potential investors that
desire performance or related information with respect to the 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 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" below.
LIMITATIONS ON ABILITY TO INVEST IN ADVISORS MAY RESULT IN ASSETS NOT BEING
USED TO PURSUE INVESTMENT OBJECTIVES
In the event that the Investment Funds are able to allocate assets to
Advisors only at certain times, the Investment Funds may hold cash or
invest any portion of their assets that are not allocated to Advisors in
cash equivalents, short-term securities or money market securities pending
investment in Advisors. During the time that the Investment Fund's assets
are not allocated to Advisors, that portion of the Investment Fund's assets
will not be used to pursue the Investment Funds' and, in turn, the
Company's investment objectives.
VALUATION OF THE INVESTMENT FUNDS' INVESTMENTS WILL BE BASED UPON
VALUATIONS PROVIDED BY THE ADVISORS WHICH ARE GENERALLY NOT AUDITED;
UNCERTAINTIES IN VALUATIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON THE
COMPANY'S NET ASSETS
The valuation of an Investment Fund's investments is ordinarily
determined based upon monthly valuations provided by the Advisors which are
only audited annually. Many of the securities in which Advisors invest may
not have a readily ascertainable market price and will be valued by the
Advisors without an independent third party valuation. In this regard, an
Advisor may face a conflict of interest in valuing the securities, as their
value will affect the Advisor's compensation. Valuations of the securities
are very subjective and could prove in hindsight to have been wrong, and at
times by significant amounts. Furthermore, the managing member of the
Investment Funds may face a conflict of interest in overseeing the value of
the Investment Funds' investments, as the value of the Investment Funds'
investments will affect such managing member's compensation. Although prior
to investing in any Advisor, the managing member of the Investment Funds
generally will seek to conduct a due diligence review of the valuation
methodology utilized by such Advisor, no assurances can be given that the
managing member of the Investment Funds will be given access to necessary
aspects of the Advisors' systems, that such due diligence review will
ascertain whether accurate valuations will be provided by such Advisors to
the Investment Funds, that the Advisors will comply with their own internal
policies or procedures for keeping records or making valuations, or that
the Advisors policies and procedures and systems will not change without
notice to the Investment Funds. Moreover, the managing member of the
Investment Funds will generally not have sufficient information in order to
be able to confirm or review the accuracy of valuations provided by Advisor
Funds in which an Investment Fund invests. See "--GENERAL RISKS--Risks
Related to the Company and the Investment Funds' Performance and
Operation--Dependence on the Managing Member and the Advisors; the Managing
Member Generally has Limited Access to Information on or Control over
Advisor's Portfolios and Members Assume the Risk that Advisors May
Knowingly Misrepresent Information Which Could Have a Material Negative
Impact on the Company" above. 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 for the Investment Fund. However, the managing member of the
Investment Funds may elect in its sole discretion to retain the Advisor.
The Advisor's information could be inaccurate due to Fraudulent 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" above.
INVESTMENT FUND ALLOCATIONS TO ADVISOR FUNDS ARE DIFFICULT TO MONITOR AND
CONTROL
Each Investment Fund may invest all or a substantial portion of its
assets in Advisor Funds, rather than in all cases allocating assets via
Portfolio Companies or directly to Advisors pursuant to Managed 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 a material adverse effect on
the performance of such investments and, therefore, on the performance of
the Investment Funds and the Company.
TRADING IN INVESTMENTS MAY BE ILLIQUID WHICH MAY CAUSE SUBSTANTIAL LOSSES
AND MAY NEGATIVELY IMPACT THE ABILITY TO MAKE DISTRIBUTIONS TO A
WITHDRAWING OR REDEEMING MEMBER
Some investment positions in which the Investment Funds have an
interest will be illiquid. The Advisors may invest in restricted or
non-publicly traded securities, securities on foreign exchanges and
futures. These positions may be illiquid because certain exchanges limit
fluctuations in certain securities and futures contract prices during a
single day by regulations referred to as "daily price fluctuation limits"
or "daily limits." Under such daily limits, during a single trading day no
trades may be executed at prices beyond the daily limits. Once the price of
a particular security or futures contract has increased or decreased by an
amount equal to the daily limit, positions in that security or contract can
neither be taken nor liquidated unless traders are willing to effect trades
at or within the limit.
The above-described circumstances could prevent the Advisors of an
Investment Fund from liquidating unfavorable positions promptly and subject
such Investment Fund and, in turn, the Company, to substantial losses. This
could also impair the Company's ability to redeem its membership units in
an Investment Fund in order to make distributions to a withdrawing or
redeeming Member in a timely manner.
ADVISOR REDEMPTION HOLDBACKS AND OTHER ADVISOR FUND LIQUIDITY RESTRICTIONS
MAY ADVERSELY AFFECT REMAINING MEMBERS
From time to time, the Managing Member may be unable to liquidate the
Company's assets as it otherwise deems advisable in order to pay redemption
requests for 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. As a result, the Managing Member may be
required to redeem interests from more liquid Advisor Funds in order to
meet redemption requests, which could have an adverse effect on the
Company's portfolio mix and liquidity for remaining Members.
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 Advisor Fund's financial records have been audited, the Company
may not receive redemption proceeds otherwise expected by it prior to the
Fund'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 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 Advisor Fund. If an Advisor
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 over-payment 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 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.
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 Investment Company Act prohibitions with
respect to affiliated transactions. To the extent the Investment Fund holds
non-voting securities, or contractually forgoes the right to vote in
respect of the voting securities of an Advisor Fund, the Investment Fund
will not be able to vote on matters that require the approval of the
interestholders of the Advisor Fund, including matters 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
The Advisors of the Investment Funds generally invest wholly
independently of one another and may at times hold economically offsetting
positions. To the extent that the Advisors do, in fact, hold such
positions, an Investment Fund and, in turn, the Company, may not achieve
any gain or loss despite incurring fees and expenses in connection with
such positions. In addition, an Advisor may be compensated based on the
performance of its portfolio. Accordingly, there may often be times when a
particular Advisor may receive performance or incentive compensation in
respect of its portfolio for a period even though such Investment Fund's or
the Company's NAV may not have increased, or may even have decreased,
during such period. Furthermore, it is not unlikely that from time to time
various Advisors of an Investment Fund may be competing with each other for
the same positions in one or more markets. There can be no assurance that
choosing a combination of Advisors for an Investment Fund will prove to be
any more successful than would the selection of a single Advisor for such
Investment Fund.
ADVISORS MAY HAVE LIMITED CAPACITY TO MANAGE ADDITIONAL INVESTMENT FUND
INVESTMENTS, WHICH COULD CAUSE DILUTION OR CONCENTRATION OF THE COMPANY'S
INVESTMENTS OR NEGATIVELY AFFECT ALLOCATION OF INVESTMENTS
Certain Advisor's trading approaches presently can accommodate only a
certain amount of capital. Each Advisor will normally endeavor not to
undertake to manage more capital than such Advisor's approach can
accommodate without risking a potential deterioration in returns.
Accordingly, each Advisor has the right to refuse to manage some or all of
the Investment Funds' assets that the 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.
"PERFORMANCE OF THE COMPANY--Certain Considerations Relating to Limited
Capacity of Potential Advisors of Certain Investment Funds."
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. "PERFORMANCE OF THE
COMPANY--Certain Considerations Relating to Limited Capacity of Potential
Advisors of Certain Investment Funds." Advisors may in their discretion
also limit the capacity available to the Fund 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 Fund 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.
ADVISOR FUNDS' SECURITIES ARE GENERALLY ILLIQUID WHICH MAY INCREASE COSTS
AND LIMIT REDEMPTIONS
The securities of the Advisor Funds in which the Investment Funds
(directly or through Advisors) invest or plan to invest may be illiquid.
Subscriptions to purchase the securities of Advisor Funds are generally
subject to restrictions or delays. In addition, the Investment Funds may be
limited in their ability to make changes to allocations due to potential
redemption restrictions of the Advisor Funds, including notice periods and
limited redemption dates, the ability of the Advisor Funds to suspend and
postpone redemptions, and lockups on redemptions of securities of the
Advisor Funds. Further, the Advisor may not be able to dispose of Advisor
Fund securities that it has purchased in a timely manner and, if adverse
market conditions were to develop during any period in which the Advisor is
unable to sell Advisor Fund securities, the Advisor might obtain a
significantly less favorable price than that which prevailed when it
decided to buy or sell such securities.
FREQUENT TRADING AND TURNOVER TYPICALLY RESULT IN HIGH TRANSACTION COSTS
AND THE INVESTMENT FUNDS HAVE NO CONTROL OVER THIS TURNOVER
It is expected that Advisors will make frequent trades in securities
and other investments. Frequent trades typically result in high transaction
costs. The Advisors may invest on the basis of short-term market
considerations. The turnover rate within the Advisors may be significant,
potentially involving substantial brokerage commissions and fees. The
Investment Funds and, in turn, the Company will have no control over this
turnover. As a result, it is anticipated that a significant portion of the
Company's income and gains, if any, may be derived from ordinary income and
short-term capital gains. In addition, the withdrawal of an Investment Fund
from an Advisor could involve expenses to the Investment Fund under the
terms of the Investment Fund's investment with that Advisor.
INDEMNIFICATION OF ADVISORS MAY CREATE COSTS FOR THE COMPANY AND THE
INVESTMENT FUNDS
The Company and the Investment Funds may agree to indemnify certain of
the Advisors and their respective officers, directors, and affiliates from
any liability, damage, cost, or expense arising out of 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 Fund may adversely
affect the Fund'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 HEDGE FUND SECTOR
The Managing Member generally will seek to allocate the Company's
assets in an attempt to mitigate the Company's exposure to downturns
experienced by any one Investment Fund or hedge fund sector. The identity
of, and relative investments of capital among, the hedge fund sectors will
be determined by the Managing Member, in its sole discretion, based on a
number of factors deemed relevant to the Managing Member, which may include
the amount of the Company's assets under management, 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.
INVESTMENT RELATED RISKS
Following is a discussion of certain of the investments that are
expected to be made by the Advisors of the Investment Funds and certain of
the principal risks associated with such investments. It is possible that
an Advisor will make an investment that is not described below, and any
such investment will be subject to its own particular risks.
RISKS RELATED TO INVESTMENT AND TRADING
AN INVESTMENT IN THE COMPANY INVOLVES A HIGH DEGREE OF RISK THAT THE ENTIRE
AMOUNT INVESTED MAY BE LOST; INVESTMENT RESULTS MAY VARY SUBSTANTIALLY OVER
TIME
An investment in the Company involves a high degree of risk, including
the risk that the entire amount invested may be lost. The Advisors will
invest in and actively trade financial instruments using strategies and
investment techniques with significant risk characteristics, including
risks arising from the volatility of the fixed income, commodity, currency
and equity markets, risks of concentration, risks of short sales, risks of
leverage, risks arising from the potential illiquidity of derivative
instruments and the potential illiquidity of certain emerging markets, the
risk of loss from counterparty and broker defaults, risk of inaccuracy of
information received from Advisors and the risk of borrowing to meet
redemption requests. No guarantee or representation is made that the
Company's, the Investment Funds' or the Advisors' investment program will
be successful, that the various investment strategies utilized or
investments made will have low correlation with each other or that the
Company's returns will exhibit low correlation with an investor's
traditional investment portfolio. Each Advisor's investment program may
utilize such investment techniques as margin transactions, option
transactions, short sales, forward contracts and futures contracts, which
involve substantial volatility and can, in certain circumstances,
substantially increase the adverse impact to which the Investment Funds and
the Company may be subject. All investments made by the Company risk the
loss of capital. Investment results may vary substantially over time. See
ITEM 1. "BUSINESS--INVESTMENT PROGRAM."
PAST RESULTS OF THE COMPANY, 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 the Advisor's trading activities will depend on, among
other things, the Advisor's ability to identify overvalued and undervalued
investment opportunities and to exploit price discrepancies in the capital
markets. Identification and exploitation of the investment strategies to be
pursued by an Advisor involves a high degree of uncertainty. No assurance
can be given that the Advisors will be able to locate suitable investment
opportunities in which to deploy all their capital. A reduction in the
volatility and pricing inefficiency of the markets in which an Advisor will
seek to invest, as well as other market factors, will reduce the number and
scope of available opportunities for an Advisor's investment strategies.
THE USE OF LEVERAGE MAY SUBSTANTIALLY INCREASE THE ADVERSE IMPACT TO WHICH
THE INVESTMENT FUNDS' INVESTMENT PORTFOLIOS MAY BE SUBJECT
As described under ITEM 1. "PERFORMANCE OF THE COMPANY--Hedging,
Leverage and Other Strategies," it is expected that the Advisors will incur
leverage in their investment programs. Such leverage may take the form of
loans for borrowed money, trading on margin or other forms of direct and
indirect borrowings, or derivative instruments, including among others
forward contracts, futures contracts, options, swaps and reverse repurchase
agreements, and other instruments and transactions that are inherently
leveraged. The utilization of leverage will increase the volatility of the
Company's investments. The managing member of the Investment Funds may seek
to adjust the degree of leverage with which each Investment Fund as a whole
invests by taking the Advisors' anticipated leverage use into account when
allocating and reallocating the Investment Fund's assets among the
Advisors. However, the managing member of the Investment Funds generally
will not have any right to adjust the amount of leverage utilized by any of
the Advisors, and generally does not exercise such right if available. In
the discretion of its managing member, an Investment Fund may make an
investment in an Advisor Fund through a swap, option or otherwise in a
manner structured to provide greater leverage than a direct investment in
the Advisor Fund, which may increase the risks to the Investment Fund
relative to a direct investment in the Advisor Fund. In addition, the
Advisors may buy and sell securities on margin and otherwise utilize
leverage, further increasing the volatility of the Fund's investments. The
use of leverage by the Investment Funds, Portfolio Companies, Advisors or
Advisor Funds can substantially increase the adverse impact to which the
Investment Funds' investment portfolios may be subject. Trading securities
on margin results in interest charges and, depending on the amount of
trading activity, such charges could be substantial. The level of interest
rates generally, and the rates at which the Investment Funds, Portfolio
Companies, Advisors and Advisor Funds may borrow in particular, can affect
the operating results of the Investment Funds. The low margin deposits
normally required in futures and forward trading permit a high degree of
leverage; accordingly, relatively small price movement in a futures
contract may result in immediate and substantial losses to the investor.
Such a high degree of leverage necessarily entails a high degree of risk.
In the event that an Investment Fund or a Portfolio Company enters into an
investment management agreement with an Advisor that utilizes leverage in
its investment program, the Investment Fund or Portfolio Company may become
subject to claims by financial intermediaries that extended "margin" loans
in respect of such Managed Account. Such claims could exceed the value of
the assets allocated to such Advisor by the Investment Fund. The risks
involved in the use of leverage are increased to the extent an Investment
Fund leverages its capital. The Company generally will not utilize leverage
directly, although it may borrow to, among other things, fund redemptions
and pay expenses.
The rights of any lenders to the Company, an Investment Fund,
Portfolio Companies or Advisor Funds 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.
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 foreign 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.
The Commodity Exchange Act provides that trading done by persons
directly or indirectly under the same control or trading as one pursuant to
an expressed or implied agreement or understanding will be aggregated for
determining compliance with applicable position limits. There is a
possibility that the positions held by some or all Advisors of an
Investment Fund and their respective principals who, through Managed
Accounts or Portfolio Companies, trade in commodities on behalf of the
Investment Fund, would be aggregated under one of the foregoing principles
or applicable exchange regulations with those held by certain other
Advisors of such Investment Fund. If a commodity exchange or any other
regulatory body were to aggregate the positions held by certain Advisors of
an Investment Fund, it may have a material adverse effect on the ability of
each of the affected Advisors to trade in such markets.
SHORT SELLING CREATES THE RISK OF SIGNIFICANT LOSSES
Advisors may engage in short selling. Short selling involves selling
securities that may or may not be owned and borrowing the same securities
for delivery to the purchaser, with an obligation to replace the borrowed
securities at a later date. Short selling allows the investor to profit
from declines in the value of securities. A short sale creates the risk of
a theoretically unlimited loss, in that the price of the underlying
security could theoretically increase without limit, thus increasing the
cost of buying those securities to cover the short position. There can be
no assurance that the security necessary to cover a short position will be
available for purchase. Purchasing securities to close out the short
position can itself cause the price of the securities to rise further,
thereby exacerbating the loss.
THE ABILITY OF AN INVESTMENT FUND TO HEDGE SUCCESSFULLY WILL DEPEND ON THE
PARTICULAR ADVISOR'S ABILITY TO PREDICT PERTINENT MARKET MOVEMENTS WHICH
CANNOT BE ASSURED
Advisors and Advisor Funds may or may not employ hedging techniques.
These techniques could involve a variety of derivative transactions,
including futures contracts, exchange-listed and over-the-counter put and
call options on securities, financial indices, forward foreign currency
contracts, and various interest rate transactions (collectively, "Hedging
Instruments"). Hedging techniques involve risks different than those of
underlying investments. In particular, the variable degree of correlation
between price movements of Hedging Instruments and price movements in the
position being hedged creates the possibility that losses on the hedge may
be greater than gains in the value of an Investment Fund's positions. In
addition, certain Hedging Instruments and markets may not be liquid in all
circumstances. As a result, in volatile markets, transactions in certain of
these instruments may not be able to be closed out without 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 Advisors to hedge successfully will
depend on the particular Advisor's ability to predict pertinent market
movements, which cannot be assured. Advisors are not required to hedge and
there can be no assurance that hedging transactions will be available or,
even if undertaken, will be effective. In addition, it is not possible to
hedge fully or perfectly against currency fluctuations affecting the value
of securities denominated in non-U.S. currencies because the value of those
securities is likely to fluctuate as a result of independent factors not
related to currency fluctuations. Finally, the daily variation margin
deposit requirements in futures contracts that may be sold by the Advisor
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
foreign security. For example, this technique would allow the Advisor to
"lock in" the U.S. Dollar price of the security. Forward contracts may also
be used to attempt to protect the value of an Advisor's existing holdings
of foreign securities. There may be, however, an imperfect correlation
between an Advisor's foreign securities holdings and the forward contracts
entered into with respect to those holdings. Forward contracts may also be
used for non-hedging purposes to pursue an Advisor's investment objective,
such as when an Advisor anticipates that particular foreign currencies will
appreciate or depreciate in value, even though securities denominated in
those currencies are not then held in the Advisor's portfolio. There is no
general requirement that the Advisors hedge all or any portion of their
exposure to foreign currency risks.
Forward contracts and options thereon, unlike futures contracts, are
not traded on exchanges and are not standardized; rather, banks and dealers
act as principals in these markets, negotiating each transaction on an
individual basis. Forward and "cash" trading is substantially unregulated;
there is no limitation on daily price movements and speculative position
limits are not applicable. The principals who deal in the forward markets
are not required to continue to make markets in the currencies or
commodities they trade and these markets can experience periods of
illiquidity, sometimes of significant duration. There have been periods
during which certain participants in these markets have refused to quote
prices for certain currencies or commodities or have quoted prices with an
unusually wide spread between the price at which they were prepared to buy
and that at which they were prepared to sell. Disruptions can occur in any
market traded by an Advisor due to unusually high trading volume, political
intervention or other factors. Arrangements to trade forward contracts may
be made with only one or a few counterparties, and liquidity problems
therefore might be greater than if such arrangements were made with
numerous counterparties. Significant risks and uncertainties exists in
dealing with counterparties in forward contracts. The imposition of
controls by governmental authorities might also limit such forward (and
futures) trading to less than that which the Advisors would otherwise
recommend, to the possible detriment of the Advisor and therefore the
applicable Investment Fund and the Company. Market illiquidity or
disruption could result in major losses to an Investment Fund and the
Company. In addition, managed accounts or Advisor Funds in which an
Investment Fund has an 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.
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 there may be less government
supervision and regulation of worldwide stock exchanges and clearinghouses
than in the United States, Advisors also are subject to the risk of the
failure of the exchanges on which their positions trade or of their
clearinghouses, and there may be a higher risk of financial irregularities
and/or lack of appropriate risk monitoring and controls.
FAILURE OF THE 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 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. 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 be subject to risk of loss of its funds on deposit with
foreign brokers because foreign regulatory bodies may not require such
brokers to segregate customer funds. 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 any such bankruptcy or customer
loss, the Advisor might recover, even in respect of property specifically
traceable to the Advisor, only a pro rata share of all property available
for distribution to all of such broker's or dealer's customers, which could
result in significant losses to the Investment Fund.
Many of the markets in which the Advisors effect their transactions
are "over-the-counter" or "interdealer" markets. Participants in these
markets are typically not subject to credit evaluation and regulatory
oversight as are members of "exchange based" markets. To the extent an
Advisor invests in swaps, derivatives or synthetic instruments, or other
over-the-counter transactions in these markets, the Advisor may take a
credit risk with regard to parties with which it trades and also may bear
the risk of settlement default. These risks may differ materially from
those involved in exchange-traded transactions, which generally are
characterized by clearing organization guarantees, daily marking-to-market
and settlement, and segregation and minimum capital requirements applicable
to intermediaries. Transactions entered into directly between two
counterparties generally do not benefit from these protections, which, in
turn, may subject an Advisor to the risk that a counterparty will not
settle a transaction in accordance with agreed terms and conditions because
of a dispute over the terms of the contract or because of a credit or
liquidity problem. Such "counterparty risk" is increased for contracts with
longer maturities when events may intervene to prevent settlement. The
ability of the Advisors to transact business with any one or any number of
counterparties, the lack of any independent evaluation of the
counterparties or their financial capabilities, and the absence of a
regulated market to facilitate settlement, may increase the potential for
losses to the Investment Funds and the Company.
In addition, the Advisors may engage in direct or indirect trading of
securities, currencies, forward contracts, options, swaps and repurchase
agreements on a principal basis. As such, 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; (b) possible
decline in the value of any collateral during the period in which the
Advisor seeks to enforce its rights with respect to such collateral; (c)
possible subnormal levels of income and lack of access to income during
such period; (d) expenses of enforcing its rights; and (e) legal
uncertainty concerning the enforceability of certain rights under swap
agreements and possible lack of priority against collateral posted under
the swap agreements. Any such failure or refusal, whether due to
insolvency, bankruptcy or other causes, could subject the Advisor and, in
turn, the Investment Fund and the Company, to substantial losses. The
Advisor will not be excused from performance on any such transactions due
to the default of third parties in respect of other trades which in the
Advisor's trading strategies were to have substantially offset such
contracts.
RISKS RELATED TO INTERNATIONAL INVESTMENTS
TRADING ON FOREIGN EXCHANGES MAY INVOLVE HIGHER RISK OF FINANCIAL
IRREGULARITIES AND/OR LACK OF APPROPRIATE RISK MONITORING AND CONTROLS
Advisors may trade, directly or indirectly, futures and securities on
exchanges located outside the United States. Some foreign exchanges, in
contrast to domestic exchanges, are "principals' markets" in which
performance is solely the individual member's responsibility with whom the
trader has entered into a commodity contract and not that of an exchange or
its clearinghouse, if any. In the case of trading on foreign exchanges, the
Advisors will be subject to the risk of the inability of, or refusal by,
the counterparty to perform with respect to contracts. Moreover, since
there is generally less government supervision and regulation of foreign
exchanges, clearinghouses and clearing firms than in the United States,
there is a risk of the exchanges on which positions trade to fail or of
their clearinghouses or clearing firms to fail and there may be a higher
risk of financial irregularities and/or lack of appropriate risk monitoring
and controls.
NON-U.S. INVESTMENTS INVOLVE SPECIAL RISKS NOT USUALLY ASSOCIATED WITH
INVESTMENTS IN U.S. SECURITIES
The Advisors may invest in securities of non-U.S. issuers and the
governments of non-U.S. countries. These investments involve special risks
not usually associated with investing in securities of U.S. companies or
the U.S. government, including political and economic considerations, such
as greater risks of expropriation and nationalization, confiscatory
taxation, the potential difficulty of repatriating funds, general social,
political and economic instability and adverse diplomatic developments; the
possibility of the imposition of withholding or other taxes on dividends,
interest, capital gain or other income; the small size of the securities
markets in such countries and the low volume of trading, resulting in
potential lack of liquidity and in price volatility; fluctuations in the
rate of exchange between currencies and costs associated with currency
conversion; and certain government policies that may restrict an Investment
Fund's and its Advisors' investment opportunities. In addition, because
non-U.S. entities are not subject to uniform accounting, auditing, and
financial reporting standards, practices and requirements comparable with
those applicable to U.S. companies, there may be different types of, and
lower quality, information available about a non-U.S. company than a U.S.
company. There is also less regulation, generally, of the securities
markets in many foreign countries than there is in the United States, and
such markets may not provide the same protections available in the United
States. With respect to certain countries there may be the possibility of
political, economic or social instability, the imposition of trading
controls, import duties or other protectionist measures, various laws
enacted for the protection of creditors, greater risks of nationalization
or diplomatic developments which could materially adversely affect the
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 foreign countries and, in certain markets, such
procedures have been unable to keep pace with the volume of securities
transactions, thus making it difficult to conduct such transactions.
Investment in sovereign debt obligations of non-U.S. governments
involve additional risks not present in debt obligations of corporate
issuers and the U.S. government. The issuer of the debt or the governmental
authorities that control the repayment of the debt may be unable or
unwilling to repay principal or pay interest when due in accordance with
the terms of such debt, and an 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 foreign securities described
above, including the possibility of nationalization or expropriation, may
be heightened. In addition, certain countries may restrict or prohibit
investment opportunities in issuers or industries deemed important to
national interests. Such restrictions may affect the market price,
liquidity and rights of securities that may be purchased by Advisors.
Settlement mechanisms in emerging securities markets may be less efficient
and 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 and financial reporting standards that prevail in
certain of such countries are not equivalent to standards in more developed
countries and, consequently, less information is available to investors in
companies located in such countries.
FOREIGN CURRENCY TRANSACTIONS AND EXCHANGE RATE RISK CREATE ADDITIONAL
RISKS FOR ADVISORS INVESTING IN CERTAIN FINANCIAL INSTRUMENTS
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 FOREIGN
EXCHANGE MAY NOT BE ENFORCED BY A DOMESTIC REGULATOR
Foreign futures transactions involve executing and clearing trades on
a foreign exchange. This is the case even if the foreign exchange is
formally "linked" to a domestic exchange, whereby a trade executed on one
exchange liquidates or establishes a position on the other exchange. No
domestic organization regulates the activities of a foreign exchange,
including the execution, delivery, and clearing of transactions on such an
exchange, and no domestic regulator has the power to compel enforcement of
the rules of the foreign exchange or the laws of the foreign country.
Moreover, such laws or regulations will vary depending on the foreign
country in which the transaction occurs. For these reasons, an Investment
Fund may not be afforded certain of the protections that apply to domestic
transactions, including the right to use domestic alternative dispute
resolution procedures. In particular, funds received from customers to
margin foreign futures transactions may not be provided the same
protections as funds received to margin futures transaction on domestic
exchanges. In addition, the price of any foreign futures or option contract
and, therefore, the potential profit and loss resulting therefrom, may be
affected by any fluctuation in the foreign exchange rate between the time
the order is placed and the foreign futures contract is liquidated or the
foreign option contract is liquidated or exercised.
RISKS RELATED TO SECURITIES AND OTHER INSTRUMENTS
INVESTING IN DERIVATIVE INSTRUMENTS INVOLVES RISK OF LOSS TO THE ADVISORS
THAT COULD MATERIALLY ADVERSELY AFFECT THE VALUE OF THE COMPANY'S NET
ASSETS
Advisors may invest in, or enter into transactions involving,
derivative instruments. These are financial instruments that derive their
performance, at least in part, from the performance of an underlying asset,
index, or interest rate. Examples of derivatives include, but are not
limited to, futures contracts, options contracts, and options on futures
contracts. A futures contract is an exchange-traded agreement between two
parties, a buyer and a seller, to exchange a particular commodity or
financial instrument at a specific price on a specific date in the future.
An option transaction generally involves a right, which may or may not be
exercised, to buy or sell a commodity or financial instrument at a
particular price on a specified future date.
An Advisor's use of derivatives involves risks different from, or
possibly greater than, the risks associated with investing directly in
securities or more traditional investments, depending upon the
characteristics of the particular derivative and the Advisor's portfolio as
a whole. Derivatives permit an Advisor to increase or decrease the level of
risk of its portfolio, or change the character of the risk to which its
portfolio is exposed, in much the same way as the Advisor can increase or
decrease the level of risk, or change the character of the risk, of its
portfolio by making investments in specific securities.
Derivatives may entail investment exposures that are greater than
their cost would suggest, meaning that a small investment in derivatives
could have a large potential impact on an Advisor's performance. If an
Advisor invests in derivatives at inopportune times or judges market
conditions incorrectly, such investments may lower the Advisor's return or
result in a loss. An Advisor also could experience losses if derivatives
are poorly correlated with its other investments, or if an Advisor is
unable to liquidate its position because of an illiquid secondary market.
The market for many derivatives is, or suddenly can become, illiquid.
Changes in liquidity may result in significant, rapid, and unpredictable
changes in the prices for derivatives.
Engaging in these transactions involves risk of loss to the Advisors
that could materially adversely affect the value of the Company's net
assets. No assurance can be given that a liquid market will exist for any
particular futures contract at any particular time.
The successful use of futures also is subject to the ability to
predict correctly movements in the direction of the relevant market, and,
to the extent the transaction is entered into for hedging purposes, to
ascertain the appropriate correlation between the transaction being hedged
and the price movements of the futures contract.
EQUITY 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
Some Advisors may invest long and short in equities and equity-related
instruments in their investment programs. Stocks, options and other
equity-related instruments may be subject to various types of risk,
including market risk, liquidity risk, counterparty credit risk, legal risk
and operations risk. In addition, equity-related instruments can involve
significant economic leverage and may, in some cases, involve significant
risks of loss. "Equity securities" may include common stocks, preferred
stocks, interests in real estate investment trusts, convertible debt
obligations, convertible preferred stocks, equity interests in trusts,
partnerships, joint ventures or limited liability companies and similar
enterprises, warrants and stock purchase rights. In general, stock values
fluctuate in response to the activities of individual companies and in
response to general market and economic conditions. Accordingly, the value
of the stocks and other securities and instruments that the Investment
Funds hold directly or indirectly may decline over short or extended
periods. The stock markets tend to be cyclical, with periods when stock
prices generally rise and periods when prices generally decline. The
volatility of equity securities means that the value of an investment in
each of the Investment Funds and, in turn, the Company may increase or
decrease.
FIXED INCOME SECURITIES ARE SUBJECT TO CREDIT RISK AND PRICE VOLATILITY
Advisors may invest in fixed income securities. Investment in these
securities may offer opportunities for income and capital appreciation, and
may also be used for temporary defensive purposes and to maintain
liquidity.
"Fixed income securities" are obligations of the issuer to make
payments of principal and/or interest on future dates, and include, among
other securities: bonds, notes, and debentures issued by corporations; debt
securities issued or guaranteed by the U.S. government or one of its
agencies or instrumentalities or by a foreign government; municipal
securities; and mortgage-backed and asset-backed securities. These
securities may pay fixed, variable, or floating rates of interest, and may
include zero coupon obligations. Fixed income securities are subject to the
risk of the issuer's or a guarantor's inability to meet principal and
interest payments on its obligations (i.e., credit risk) and are subject to
price volatility due to such factors as interest rate sensitivity, market
perception of the creditworthiness of the issuer, and general market
liquidity (i.e., market risk). In addition, mortgage-backed securities and
asset-backed securities may also be subject to call risk and extension
risk. For example, homeowners have the option to prepay their mortgages.
Therefore, the duration of a security backed by home mortgages can either
shorten (i.e., call risk) or lengthen (i.e., extension risk). In general,
if interest rates on new mortgage loans fall sufficiently below the
interest rates on existing outstanding mortgage loans, the rate of
prepayment would be expected to increase. Conversely, if mortgage loan
interest rates rise above the interest rates on existing outstanding
mortgage loans, the rate of prepayment would be expected to decrease. In
either case, a change in the prepayment rate can result in losses to
investors. The same would be true of asset-backed securities, such as
securities backed by car loans.
HIGH YIELD DEBT INVESTMENTS ARE SUBJECT TO SIGNIFICANT RISKS OF DEFAULT,
ILLIQUIDITY AND VOLATILITY
High yield bonds (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 high
yield debt, which could result in an Advisor being unable to sell such
securities for an extended period of time, if at all. In addition, as with
other types of Advisor investments, the market for high yield debt has
historically been subject to disruptions that have caused significant
illiquidity and substantial volatility in the prices of such securities.
Consolidation in the financial services industry has resulted in there
being fewer market makers for high yield debt, which may result in further
risk of illiquidity and volatility with respect to high yield debt, and
this trend may continue in the future.
STRUCTURED SECURITIES MAY PRESENT A GREATER DEGREE OF MARKET RISK AND MAY
BE MORE VOLATILE, LESS LIQUID AND MORE DIFFICULT TO PRICE ACCURATELY THAN
LESS COMPLEX SECURITIES
Advisors may invest in structured securities. Structured securities
are securities whose value is determined by reference to changes in the
value of specific currencies, interest rates, commodities, indexes or other
financial indicators (the "Reference") or the relative change in two or
more References. The interest rate or the principal amount payable upon
maturity or redemption may be increased or decreased depending upon changes
in the applicable Reference. Structured securities may be positively or
negatively indexed, so that appreciation of the Reference may produce an
increase or decrease in the interest rate or value of the security at
maturity. In addition, changes in the interest rates or the value of the
security at maturity may be a multiple of changes in the value of the
Reference. Consequently, structured securities may present a greater degree
of market risk than other types of securities and may be more volatile,
less liquid and more difficult to price accurately than less complex
securities.
CALL OPTIONS INVOLVES SIGNIFICANT RISKS FOR BUYERS AND SELLERS
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 INVOLVES 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, 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.
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 domestic branches of U.S. banks that are
members of the Federal Deposit Insurance Corporation, and repurchase
agreements. The Company or the Investment Funds may be prevented from
achieving their objective 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
Advisors may invest a portion or all of the value of their assets in
restricted securities and other investments that are illiquid. Restricted
securities are securities that may not be sold to the public without an
effective registration statement under the Securities Act or, if they are
unregistered, may be sold only in a privately negotiated transaction or
pursuant to an exemption from registration. These may include restricted
securities that can be offered and sold only to "qualified institutional
buyers" under Rule 144A of the Securities Act. There is no limit to the
percentage of the net assets managed by an Advisor that may be invested in
illiquid securities.
Positions in restricted or non-publicly traded securities, securities
on foreign exchanges and certain futures contracts may be illiquid because
certain exchanges limit fluctuations in certain securities and futures
contract prices during a single day by regulations referred to as "daily
price fluctuation limits" or "daily limits." Under such daily limits,
during a single trading day no trades may be executed at prices beyond the
daily limits. Once the price of a particular security or futures contract
has increased or decreased by an amount equal to the daily limit, positions
in that security or contract can neither be taken nor liquidated unless
traders are willing to effect trades at or within the limit. This
constraint could prevent the Advisors from promptly liquidating unfavorable
positions and subject the Investment Funds and, in turn, the Company to
substantial losses. This could also impair the Company's ability to redeem
its membership units from an Investment Fund in order to redeem Members'
Units in a timely manner. 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. These
companies may be subject to restrictive financial and operating covenants.
The leverage may impair these companies' ability to finance their future
operations and capital needs. As a result, these companies' flexibility to
respond to changing business and economic conditions and to business
opportunities may be limited. A leveraged company's income and net assets
will tend to increase or decrease at a greater rate than if borrowed money
were not used.
In addition, such companies may face intense competition, including
competition from companies with greater financial resources, more extensive
development, manufacturing, marketing, and other capabilities, and a larger
number of qualified managerial and technical personnel.
EXPECTED TRANSACTIONS MAY NOT TAKE PLACE OR MAY RESULT IN SUBSTANTIAL
LOSSES
The Advisors of the Investment Funds, particularly those of GED, may
engage in merger arbitrage transactions. Substantial transaction failure
risks are involved with respect to companies that are the subject of
publicly disclosed mergers, takeover bids, exchange offers, tender offers,
spin-offs, liquidations, corporate restructuring, and other similar
transactions. Thus, there can be no assurance that any expected transaction
will take place. Certain transactions are dependent on one or more factors
in order to become effective, such as market conditions which may lead to
unexpected positive or negative changes in a company profile, shareholder
approval, regulatory and various other third party consents, changes in
earnings or business lines or shareholder activism as well as many other
factors. No assurance can be given that the 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 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 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 Advisors to which such payments were made.
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 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 of an Investment Fund may cause
the Investment Fund to allocate assets to an Advisor Fund, the Advisor of
which allocates assets to investment funds that retain certain services and
support from service providers retained by, or affiliated with, such
Advisor ("Multi-Advisor Structures"). As described under ITEM 1.
"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
of the Investment Fund generally will have limited ability to examine the
organizational infrastructure of the underlying managers and the investment
funds in which the Investment Fund (or the Company) indirectly invests. In
addition, the managing member of the Investment Fund will not be able
control the selection or removal of underlying managers. The risks
described under "--SPECIAL RISKS OF THE COMPANY'S STRUCTURE" above 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.
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 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.
ITEM 2. PROPERTIES
The Company does not own or lease any physical properties. The Company
is operating at the Managing Member's facility and is not being charged
rent except indirectly through the monthly Management Fee.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company
or the Managing Member is a party or to which any of their assets are
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of holders of Units during the
fiscal year ended December 31, 2005.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
MARKET INFORMATION
Currently, there is no established public trading market for the
Units. Other than transfers to the Company in redemption, transfers of
Units are expressly prohibited by the LLC Agreement without the consent of
the Managing Member.
Without the prior written consent of the Managing Member, which may be
withheld in its sole discretion, a Member may not assign, 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. Effective January 1, 2006, 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. Prior to January 1, 2006, a Member
had the right to redeem some or all of its Units, upon 61 days' prior
written notice to the Managing Member on each January 1 or July 1
(occurring on or after the first anniversary of the purchase of such Units
by the Member).
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, 2004
through December 31, 2005 are as follows:
- ----------------------------------------------------------------------
QUARTER ENDED HIGH LOW
- ----------------------------------------------------------------------
3/31/04 $117.05 $115.10
- ----------------------------------------------------------------------
6/30/04 $115.92 $114.58
- ----------------------------------------------------------------------
9/30/04 $114.55 $113.73
- ----------------------------------------------------------------------
12/31/04 $120.25 $115.61
- ----------------------------------------------------------------------
3/31/05 $120.77 $119.53
- ----------------------------------------------------------------------
6/30/05 $120.08 $118.22
- ----------------------------------------------------------------------
9/30/05 $124.44 $121.77
- ----------------------------------------------------------------------
12/31/05 $125.75 $122.35
- ----------------------------------------------------------------------
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, 2005, 6,507,125 Units were held by 801 Members.
DISTRIBUTIONS
The Company has not made distributions from January 1, 2005 to
December 31, 2005 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, 2005 to December 31, 2005, aggregate subscriptions
totaled $225,329,193. The Company previously reported sales of unregistered
Units during the 2005 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 sold to accredited investors pursuant
to Rule 506 of Regulation D and the sales were exempt from registration
under the Securities Act. The Company has used the proceeds to make
investments in the Investment Funds.
PURCHASES OF UNITS BY THE COMPANY AND AFFILIATED PURCHASERS
Effective January 1, 2006, pursuant to the Company's limited liability
company 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 2005 in
the Company's Quarterly Reports on Form 10-Q. There were no redemptions of
Units during the fourth quarter ended December 31, 2005. Redemptions of
$347,523,596 will be effective on January 1, 2006 and are reflected in
Redemptions payable in the December 31, 2005 balance sheet. See ITEM 15.
"EXHIBITS AND FINANCIAL STATEMENT SCHEDULES."
ITEM 6. SELECTED FINANCIAL DATA
The Company commenced its operations on April 1, 2002. Set forth below
is certain selected historical data for the Company as of December 31,
2005, 2004, 2003 and 2002 and for the years ended December 31, 2005, 2004,
2003 and for the period from the commencement of operations (April 1, 2002)
to December 31, 2002. The selected historical financial data as of and for
the years ended December 31, 2005, 2004 2003 and as of and for the period
from commencement of operations (April 1, 2002) to December 31, 2002 were
derived from the financial statements of the Company, which were audited by
Ernst & Young LLP ("E&Y"). The information set forth below should be read
in conjunction with the financial statements and notes thereto contained
elsewhere in this Annual Report.
COMMENCEMENT OF
OPERATIONS
YEAR ENDED (APRIL 1, 2002)
DECEMBER 31, YEAR ENDED YEAR ENDED TO DECEMBER 31,
------------- ---------------
OPERATIONS DATA 2005 DECEMBER 31, 2004 DECEMBER 31, 2003 2002
- --------------- ---- ----------------- ----------------- ----
Net trading
profit/(loss) $66,816,581 $72,018,387 $81,854,395 $11,821,474
Total expenses $14,836,748 $14,457,852 $10,733,672 $2,459,020
Net income/(loss) $52,141,634 $58,055,729 $71,218,666 $9,395,178
Less: Incentive
allocation to the
managing member $2,615,216 $2,902,854 $3,560,865 $469,759
Net income/(loss)
available for
pro-rata allocation
to members $49,526,418 $55,152,875 $67,657,801 $8,925,419
FINANCIAL CONDITION
- -------------------- AS OF AS OF AS OF AS OF
DATA DECEMBER 31, 2005 DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
- ---- ----------------- ----------------- ----------------- -----------------
Investments $1,124,329,933 $1,092,953,352 $970,912,828 $383,584,606
Total assets $1,125,036,745 $1,093,172,149 $1,019,413,929 $384,184,813
Total liabilities $350,437,862 $135,716,916 $86,168,187 $958,552
Members' equity $774,598,883(1) $957,455,233(2) $933,245,742(3) $383,226,261
Ending NAV/Unit:
Class A Series 1 $125.75 $120.25 $113.95 $103.97
<FN>
(1) The reduction in members' equity as of December 31, 2005 reflects
Redemptions payable in the amount of $347,523,596 that was payable at
December 31, 2005.
(2) The reduction in members' equity as of December 31, 2004 reflects
Redemptions payable in the amount of $128,546,636 that was payable at
December 31, 2004.
(3) The reduction in members' equity as of December 31, 2003 reflects
Redemptions payable in the amount of $34,529,625 that was payable at
December 31, 2003.
</FN>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the
audited financial statements of the Company and related notes thereto
appearing elsewhere in this Annual Report, in ITEM 6. "SELECTED FINANCIAL
DATA" above, and in 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, 2005, the Company had total assets of
$1,125,036,745 compared with total assets of $1,093,172,149 as of December
31, 2004. Total liabilities of the Company totaled $350,437,862 as of
December 31, 2005 compared to $135,716,916 as of December 31, 2004.
Members' equity of the Company was $774,598,883 as of December 31, 2005
compared to $957,455,233 million as of December 31, 2004.
The Company's investment objective is to target attractive long-term
risk-adjusted returns across a variety of market environments with
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 privately placed Investment Funds
managed by the Managing Member, each of which allocates its assets to, or
invests in entities managed by the Advisors that employ a broad range of
investment strategies primarily within one of the following four hedge fund
sectors: the tactical trading sector, the equity long/short sector, the
relative value sector, and the event driven sector. Currently,
substantially all of the Company's assets are invested in the four
Investment Funds: GELS, GED, GRV and GTT.
Performance of the Company in any period will be dependent upon the
performance in the relevant period by the four Investment Funds and the
weighted average percentage of the Company's assets in each of the
Investment Funds during the period. In addition, performance is determined
by the allocation by the Investment Funds of their assets with the various
Advisors and the performance of each of those Advisors.
The Company's results depend on the Managing Member, including in its
capacity as managing member of each of the Investment Funds, and the
ability of the Managing Member to recognize and capitalize on trends and
other profit and investment opportunities within the four investment
sectors. Unlike many operating businesses, general economic or seasonal
conditions may not have any direct effect on the profit potential of the
Company due to the speculative nature of the Company's investments and
since the Company's investments in the Investment Funds are managed to seek
to eliminate or at least significantly reduce the impact of general
economic or seasonal conditions. In addition, the Company's past
performance is not necessarily indicative of future results. Each
Investment Fund allocates assets to Advisors that invest in various markets
at different times and prior activity in a particular market does not mean
that such market will be invested in by the Advisors or will be profitable
in the future.
RESULTS OF OPERATIONS
The following presents a summary of the operations for the year ended
December 31, 2005, 2004 and 2003, and a general discussion of each
Investment Fund's performance during those periods.
2005 PERFORMANCE
The Company's net trading profit/loss for the year ended December 31,
2005 was $66,816,581, compared to the year ended December 31, 2004 of
$72,018,387 and December 31, 2003 of $81,854,395.
OVERVIEW
The Company is designed to be broadly exposed to the hedge fund market
by allocating its assets to the Investment Funds in the four hedge fund
sectors: tactical trading, equity long/short, relative value and event
driven. As further described under ITEM 7A. "QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK--Risk Management," quantitative analysis is
combined with judgment to determine weightings that will offer broad
exposure to hedge fund returns. Strategic return, risk and correlation
estimates inform the quantitative analysis, which balances returns and
contribution to portfolio risk. Judgment is applied to both estimates and
weights in an attempt to achieve a diversified exposure to hedge funds
while targeting attractive risk adjusted returns. For 2005, all four hedge
fund sectors posted positive returns, with the strongest performance
delivered by the equity long/short sector. Strong European and Asian
markets, a lagging U.S. market, and a sharp decline and subsequent rally in
energy, industrial, and cyclical stocks were all significant drivers of
performance. The Managing Member utilizes a strategic sector allocation and
periodically re-evaluates the contribution to the risk and return of the
Company from each investment sector and may in its sole discretion adjust
the Company's assets or weights as it deems advisable. On July 1, 2005, the
Managing Member made a tactical adjustment to the weightings of the
Investment Funds. This adjustment to the weights among the Investment Funds
reflects the Managing Member's judgment and was implemented by the Managing
Member gradually following July 1, 2005. The Company cannot predict which
hedge fund sector and accordingly which Investment Fund will perform best
in the future. The table below illustrates the portfolio weighting of each
Investment Fund as of December 31, 2005, as well as each Investment Fund's
net return for the year ended December 31, 2005.
--------------------------------------------------------------
PORTFOLIO
PORTFOLIO WEIGHT AS A YEAR ENDED
WEIGHT % OF DECEMBER 31,
AS A % OF ADJUSTED 2005
MEMBERS' MEMBERS' NET RETURN
INVESTMENT FUND EQUITY (1) EQUITY (2) (3)
--------------------------------------------------------------
GELS 37.97% 26.21% 9.93%
--------------------------------------------------------------
GED 38.91% 26.86% 7.65%
--------------------------------------------------------------
GRV 41.02% 28.32% 4.09%
--------------------------------------------------------------
GTT 27.25% 18.81% 4.03%
--------------------------------------------------------------
(1) Members' equity, used in the calculation of the investments as a % of
members' equity, is reduced for member redemptions that are paid after
the balance sheet date.
(2) As a % of the Company's adjusted members' equity which represents
members' equity excluding Redemptions payable in the amount of
$347,523,596 that was payable at December 31, 2005.
(3) These returns are based on the performance of Class C Series 1 units.
The returns include administration fees. No management fee or
incentive allocation was charged by the managing member of the
Investment Funds with respect to the Company's investment in any of
the Investment Funds. Past performance is not indicative of future
results, which may vary.
For the year ended December 31, 2005, the Company's Class A Series 1
Units returned 4.57% net of fees and incentive allocation.
THE INVESTMENT FUNDS
Each of the four Investment Funds' performance during the year ended
December 31, 2005 is described in the following.
GOLDMAN SACHS GLOBAL EQUITY LONG/SHORT, LLC
As of December 31, 2005, GELS represented approximately 26% of the
Company's adjusted members' equity which excluded redemptions paid after
December 31, 2005 and which reflected the reweighting of the portfolio and
the subsequent increase in the weighting of GELS during the first half of
2005. GELS returned 9.93% for Class C Series 1 units for the year ended
December 31, 2005.
The annualized volatility of GELS' returns for the year ended December
31, 2005 was 7.54%. In comparison, the S&P 500 Index had an annualized
volatility of 7.92% and the MSCI World Index had an annualized volatility
of 8.20% for the same period.
During the year ended December 31, 2005, GELS Advisors delivered
positive performance in eight months (February, May, June, July, August,
September, November, and December) and negative performance in four months
(January, March, April, and October). Notably, the performance of GELS
Advisors in January and February was mixed, as U.S. markets lagged both
European and Asian markets. In addition, March and April were particularly
difficult months due to significant sell-offs in several areas where GELS
Advisors had exposure, particularly energy, industrial, and cyclical
stocks.
GELS Advisors performed well from May 2005 through September 2005,
with especially strong performance in June and July. During this period,
GELS Advisors benefited from a rally in global equity markets, most notably
in the areas that negatively impacted performance earlier in the year
(e.g., energy, industrial, and cyclical stocks). October was a difficult
month for GELS Advisors, as global equity markets declined sharply. The
decline was particularly severe in energy-related stocks, which had been
among the best performing stocks going into October 2005. November and
December were positive for GELS Advisors, as global equity markets
recovered from the decline in October 2005. Non-U.S. markets, particularly
Japan, were especially strong during the last two months of the year in
2005.
Thirty out of thirty-four GELS Advisors delivered positive performance
for the year ended December 31, 2005. GELS Advisors with exposure to Japan,
Europe, and India performed particularly well during 2005. GELS Advisors
who posted losses included those Advisors with notional (gross long plus
gross short) or beta-adjusted (adjusted to take into account the volatility
of underlying securities) net short exposures.
GOLDMAN SACHS GLOBAL EVENT DRIVEN, LLC
As of December 31, 2005, GED represented approximately 27% of the
Company's adjusted members' equity which excluded redemptions paid after
December 31, 2005 and which reflected the reweighting of the portfolio and
the subsequent increase in the weighting of GED during the first half of
2005. GED returned 7.65% for Class C Series 1 units for the year ended
December 31, 2005.
The annualized volatility of GED's returns for the year ended December
31, 2005 was 3.32% compared to the S&P 500 Index which had an annualized
volatility of 7.92% and to the MSCI World Index which had an annualized
volatility of 8.20% for the same period.
GED Advisors had particularly strong performance in the third quarter
of 2005, with the majority of gains resulting from exposure to European and
Asian situations, specifically merger-related equity transactions and
distressed credit names. April and October of 2005 proved to be challenging
months, due to a widespread sell-off in the credit markets in April and
difficult global equity and credit markets in October. In general,
European-focused GED Advisors generated strong returns in 2005, driven by
strength in the European equity markets and by a resurgence in corporate
activity in Europe.
Risk arbitrage Advisors were able to profit from some of the larger
deals such as Procter & Gamble-Gillete, Sprint-Nextel, and Bank of
America-MBNA. Returns were muted to some extent by transactions such as
Johnson & Johnson-Guidant, where there were multiple periods of negative
news. Mergers and acquisitions activity continued to improve in 2005, and
the number of deals was up 32% from 2004 levels. Leveraged buyout activity
soared to $259 billion, and was up 56% from $144 billion in 2004.
Despite strong issuance of $111 billion of debt in 2005, the high
yield market had a mediocre year of performance, returning 2.74% in 2005,
following successive years of double digit returns in 2003 and 2004. Credit
spreads widened from 310 bps at the beginning of the year to 371 bps at the
end of the year over 10-year U.S. Treasuries. Defaults remained near
historical lows, though the trailing twelve-month default rate jumped by
over one percentage point to 2.87% in the third quarter of 2005. The year
was also marked by over $295 billion of issuance of debt in the leveraged
loans market and significant outflows from high yield mutual funds, which
reached over $11 billion. While mutual fund outflows and the downgrade of
General Motors were responsible for significant credit spread widening in
the second quarter of 2005, many GED Advisors chose to invest in more
senior parts of the capital structure, given the lack of incremental return
associated with investing in the lower parts of the capital structure. The
airline sector continued to be one of the most negatively impacted sectors,
with negative trends continuing in major airlines. The auto suppliers
sector was also negatively impacted by rising raw materials prices and
declining sales for the major auto makers. Delphi, the largest U.S. auto
parts supplier, filed for Chapter 11 bankruptcy protection in October. In
general, GED Advisors who were involved in bankruptcy-related situations
avoided losses, with secured assets performing better than unsecured
assets.
Credit opportunities/distressed strategies returned 10.09% and
contributed 3.44% to GED's gross income for the year ended December 31,
2005. The multi-strategy component of the portfolio returned 6.97% and
contributed 3.92% to GED's gross income for the year ended December 31,
2005. Risk arbitrage/special situations strategies returned 6.07% and
contributed 0.50% to GED's gross income for the year ended December 31,
2005.
GOLDMAN SACHS GLOBAL RELATIVE VALUE, LLC
As of December 31, 2005, GRV represented approximately 28% of the
Company's adjusted members' equity which excluded redemptions paid after
December 31, 2005 and which reflected the reweighting of the portfolio and
the subsequent decrease in the weighting of GRV during the first nine
months of 2005. GRV returned 4.09% for Class C Series 1 units for the year
ended December 31, 2005.
GRV Advisors implementing a multi-strategy approach experienced
overall positive results in 2005, but returns were widely dispersed. The
differences in performance between multi-strategy GRV Advisors were
primarily due to the different allocations each GRV Advisor had to
convertible bond trading, correlation trading, and equity volatility
trading strategies. GRV Advisors who allocated in favor of fundamental
credit, equity trading, and less crowded strategies, such as energy
volatility trading produced better results than those who allocated to
convertible bond, correlation, and equity volatility trading strategies.
Equity market neutral GRV Advisors experienced a strong year in 2005
despite an environment characterized by low equity volatility and low
single-stock return dispersion. GRV Advisors typically benefit from strong
performance by value stocks and stocks that have recently experienced
strong price or earnings momentum; both of these types of stocks performed
well in 2005.
GRV Advisors focused on fixed income trading strategies collectively
experienced a slightly positive year in 2005, although there was
significant variance among GRV Advisors' returns. Profits were primarily
due to a strong overall market, coupled with a successful long and short
trading of securities based upon fundamental country selection. GRV
Advisors focused on trading different points along the yield curve
experienced mixed results, while those whose fixed income trading was based
upon individual country selection performed better.
GRV Advisors implementing credit relative value strategies delivered
positive results in 2005 despite some intra-month volatility. While credit
relative value GRV Advisors with a more quantitatively based investment
processes (especially those exposed to structured credit trades) suffered
losses in the first half of 2005 but were able to gain the profits back in
the second half of 2005.
GRV Advisors implementing strategies based on emerging market relative
value posted strong results in 2005. Profits were primarily due to a strong
market, coupled with successful long and short trading of securities based
upon fundamental country selection.
Convertible bond arbitrage strategies generated negative returns in
2005. Realized and implied equity volatility remained low throughout 2005,
and the new issue market was weak. For much of the period, there was also
pressure on convertible bond valuations as a result of technical selling,
driven by hedge fund investor redemptions. GRV's exposure to convertible
bond arbitrage strategies is only through Advisors implementing a
multi-strategy approach.
Credit relative value strategies returned (0.56)% and contributed
(0.05)% to GRV's gross income for the year ended December 31, 2005.
Convertible bond arbitrage strategies returned (6.39)% and contributed
(0.21)% to GRV's gross income for the year ended December 31, 2005. Equity
market neutral strategies returned 4.06% and contributed 0.40% to GRV's
gross income for the year ended December 31, 2005. Fixed income arbitrage
strategies returned 3.84% and contributed 0.51% to GRV's gross income for
the year ended December 31, 2005. Emerging markets relative value
strategies returned 5.90% and contributed 0.53% to GRV's gross income for
the year ended December 31, 2005. Multi-strategies returned 7.84% and
contributed 3.63% to GRV's gross income for the year ended December 31,
2005.
GOLDMAN SACHS GLOBAL TACTICAL TRADING, LLC
As of December 31, 2005, GTT represented approximately 19% of the
Company's adjusted members' equity which excluded redemptions paid after
December 31, 2005 and which reflected the reweighting of the portfolio and
the subsequent decrease in the weighting of GTT during the first nine
months of 2005. GTT returned 4.03% for Class C Series 1 units for the year
ended December 31, 2005.
The first quarter of 2005 brought reversals of several trends which
had been drivers of performance during the fourth quarter of 2004. The most
salient and difficult of these reversals was the path of the U.S. dollar.
The dollar rallied sharply in early January 2005 and then traded in a
narrow range, leading to a difficult trading environment for most GTT
Advisors. Global equity markets also experienced a sharp reversal during
the first quarter of 2005, causing GTT Advisors to give back a portion of
their 2004 fourth quarter profits. Fixed income trading was the largest
contributor to performance for the first quarter of 2005, with the majority
of returns made from short positions in short-term U.S. government debt, as
investors priced in additional interest rate increases by the Federal
Reserve Board. Commodity trading was roughly flat for the first quarter.
Long energy positions performed well as crude oil prices reached record
highs and grain and gold positions sustained moderate losses.
The second quarter was profitable for GTT Advisors with gains led by
fixed income positions. Long positions in German Bunds (10-year government
bonds) generated gains during the second quarter, while falling yields
reflected slower growth in Germany. Foreign exchange trading also posted
gains during the second quarter of 2005. Long dollar positions performed
well as investors looked toward strong growth and high interest rates in
the U.S. relative to most other major economies. Equity index trading
contributed small losses, following a difficult April, which saw a sharp
reversal in global equity indices as markets reacted to soft U.S. retail
numbers, GTT Advisors recouped most losses during May and June with long
positions in most regions, with the majority of risk taken in Europe.
Commodity trading was the largest detractor from performance in the second
quarter. After steep losses suffered in April, volatile energy and grain
markets proved to be difficult trading environments for most GTT Advisors.
GTT Advisors posted modest gains during the third quarter of 2005.
Profits were driven by long equity index positioning and major global
indices rallied during the third quarter, reflecting an increasingly
positive outlook on the global economy. Commodity trading was strongly
positive in 2005 as energy prices rose following Hurricane Katrina and the
resultant supply disruptions. GTT Advisors were also profitable trading
industrial metals during the third quarter. Foreign exchange markets
continued to trade on growth and interest rate differentials during the
third quarter. Accordingly, long dollar positions against most major
currencies performed well during the quarter. Offsetting losses were
sustained in long dollar position against the Australian dollar as it
appreciated in response to growing commodity demand. Fixed income positions
declined during the quarter. GTT Advisors that were long in most
instruments suffered losses as yields rose globally in response to economic
optimism. Losses were partially recouped in September via short U.S.
positions at all points on the yield curve.
The fourth quarter was also profitable for GTT Advisors. Commodities
drove gains during the fourth quarter, with the highest profits derived
from the base and precious metal markets. Gold traded above $500/ounce as
investors bought the metal as an alternative to major currencies, given the
uncertainty surrounding future exchange rates. Moreover, higher prices were
supported by investor flows into gold's new exchange traded fund, which
allows retail investors to gain exposure to gold. Base metals were also
strongly positive via long positioning. Long dollar positions performed
exceptionally well in the fourth quarter. The dollar was supported by its
yield and growth advantages over most major currencies. Equity trading was
solidly profitable with gains concentrated in Europe and Asia. Indices in
both regions ended the year near multi-year highs. Finally, GTT Advisors
finished the fourth quarter of 2005 approximately flat in fixed income
trading. Losses were sustained in a number of markets that finished the
quarter nearly unchanged.
2004 PERFORMANCE
The Company's net trading profit/loss for the year ended December 31,
2004 was $72,018,387, compared to the year ended December 31, 2003 of
$81,854,395, and compared to the period from commencement of operations
(April 1, 2002) to December 31, 2002 of $11,821,474.
OVERVIEW
During the first six months of 2004, the Company allocated its assets
on a roughly equivalent risk weighted basis to each of the four hedge fund
sectors. Through June 30, 2004, the Managing Member had not made any
tactical adjustment. As of July 1, 2004, the Managing Member implemented an
adjustment to the weightings among the Investment Funds. The adjustment to
the weights reflected the Managing Member's updated expectations for
return, risk and correlations for the Investment Funds. The Company cannot
predict which hedge fund sector and accordingly which Investment Fund will
perform best in the future. The table below illustrates the portfolio
weighting of each Investment Fund as of December 31, 2004, as well as each
Investment Fund's net return for the year ended December 31, 2004.
--------------------------------------------------------------
INVESTMENT FUND PORTFOLIO YEAR ENDED
PORTFOLIO WEIGHT AS A
WEIGHT % OF DECEMBER 31,
AS A % OF ADJUSTED 2004
MEMBERS' MEMBERS' NET RETURN
EQUITY (1) EQUITY (2) (3)
--------------------------------------------------------------
GELS 23.63% 20.84% 9.27%
--------------------------------------------------------------
GED 28.01% 24.69% 12.70%
--------------------------------------------------------------
GRV 36.60% 32.27% 5.38%
--------------------------------------------------------------
GTT 25.91% 22.84% 3.88%
--------------------------------------------------------------
(1) Members' equity, used in the calculation of the investments as a % of
members' equity, is reduced for member redemptions that are paid after
the balance sheet date.
(2) As a % of the Company's adjusted members' equity which represents
members' equity excluding Redemptions payable in the amount of
$128,546,636 that was payable at December 31, 2004.
(3) These returns are based on the performance of Class C Series 1 units.
The returns include administration fees. No management fee or
incentive allocation was charged by the managing member of the
Investment Funds with respect to the Company's investment in any of
the Investment Funds. Past performance is not indicative of future
results, which may vary.
For the year ended December 31, 2004, the Company's Class A Series 1
Units returned 5.53% net of fees and incentive allocation.
THE INVESTMENT FUNDS
Each of the four Investment Funds' performance during the year ended
December 31, 2004 is described in the following.
GOLDMAN SACHS GLOBAL EQUITY LONG/SHORT, LLC
As of December 31, 2004, GELS represented approximately 21% of
adjusted members' equity which excluded redemptions paid after December 31,
2004 and which was generally consistent with the strategic weight set by
the Managing Member for GELS as of July 1, 2004. GELS returned 9.27% for
Class C Series 1 units for the year ended December 31, 2004.
The annualized volatility of GELS' returns for the year ended December
31, 2004 was 5.65%. In comparison, the S&P 500 Index had an annualized
volatility of 7.30% and the MSCI World Index had an annualized volatility
of 8.16% for the period.
The year ended December 31, 2004 was a solid year for GELS, with eight
positive and four negative months of performance. GELS started the year off
strongly in January and February because many trends that drove strong
fourth quarter 2003 performance continued into 2004. The period from March
through May 2004 was difficult for many of GELS' Advisors because of
significant sell-offs in several areas where they had exposures, namely in
small capitalization, basic materials and emerging market stocks. June was
a positive month for GELS as GELS Advisors rebounded; however, July was
another difficult month and represented the low point of GELS for the year,
as the global technology and healthcare sectors sold-off.
The last five months of 2004 were positive, with particularly strong
performance in September, November and December. The year-end rally for
GELS experienced additional momentum following the U.S. election in early
November, which brought a global equity rally, most notably in the areas
that negatively impacted performance in the spring of 2004 (e.g. small
capitalization, basic materials and emerging markets).
Almost all GELS Advisors posted positive returns for the fourth
quarter of 2004. GELS Advisors with exposures in Europe, emerging markets,
energy, and basic materials posted particularly strong returns. GELS
Advisors that posted losses included those with significant exposure to
Japan and those with notional (gross long plus gross short) or
beta-adjusted (for volatility of the overall market) net short exposures.
GOLDMAN SACHS GLOBAL EVENT DRIVEN, LLC
As of December 31, 2004, GED represented approximately 25% of adjusted
members' equity which excluded redemptions paid after December 31, 2004 and
which was generally consistent with the strategic weight set by the
Managing Member for GED as of July 1, 2004. GED returned 12.70% for Class C
Series 1 units for the year ended December 31, 2004.
The annualized volatility of GED's returns for the year ended December
31, 2004 was 3.38% compared to the S&P 500 Index which had an annualized
volatility of 7.30% and to the MSCI World Index which had an annualized
volatility of 8.16% for the same period.
The year ended December 31, 2004 produced varied market results. The
MSCI World Index experienced low returns in the first half of 2004. In the
third quarter of 2004, the equity markets had negative performance as a
result of the Federal Reserve Board's interest rate increases and the
reduction in equity implied volatility. However, equity markets rebounded
in the fourth quarter of 2004, following the U.S. presidential election.
Risk arbitrage Advisors had a difficult year because of narrow deal
spreads, which, in part, resulted from many deals facing regulatory
scrutiny and other deal specific issues, especially in the summer of 2004.
Global mergers and acquisitions activity increased significantly in 2004,
but still remained below the historical highs of 1999 and 2000. Despite a
small decrease in deal momentum during the second quarter of 2004, GED
Advisors focusing on mergers and acquisitions were successful. Mergers and
acquisitions volume totaled a little under $2 trillion for 2004, which
easily surpassed 2003's volume of $1.3 trillion. December was the most
active month for mergers and acquisitions since August 2000, with over $300
billion in global activity.
Default rates fell to record lows of 1.3% in 2004. High yield credit
spreads tightened to historically narrow levels from 418 basis points over
treasuries at the beginning of the year to 310 basis points at year-end.
The high yield market experienced a record year of new issuance at $153
billion, which surpassed the prior record of $144 billion in 1998. GED
Advisors were rewarded for strong credit selection on both the long and
short side. Several of GED's credit-focused Advisors gradually built the
short side of their portfolios given their concerns on valuation levels in
the credit markets. The majority of new high yield issuances were driven by
refinancing activity. Financial sponsors contributed significantly to new
issuance activity by refinancing their portfolio companies to pay
themselves special dividends. The technology, media and telecom sectors
experienced the largest volume of new issuance ($39.4 billion), followed by
the energy sector ($24.1 billion) and the industrials sector ($19.7
billion).
Credit opportunities/distressed strategies returned 17.26% and
contributed 3.09% to GED's net income for the year ended December 31, 2004.
The multi-strategy component of the portfolio returned 12.43% and
contributed 1.38% to GED's net income for the year ended December 31, 2004.
Risk arbitrage/special situations strategies returned 8.36% and contributed
2.15% to GED's net income for the year ended December 31, 2004.
GOLDMAN SACHS GLOBAL RELATIVE VALUE, LLC
As of December 31, 2004, GRV represented approximately 32% of adjusted
members' equity which excluded redemptions paid after December 31, 2004 and
which was generally consistent with the strategic weight set by the
Managing Member for GRV as of July 1, 2004. GRV returned 5.38% for Class C
Series 1 units for the year ended December 31, 2004.
The annualized volatility of GRV's returns was 2.00% for the year
ended December 31, 2004 compared to the Lehman Aggregate Bond Index which
had an annualized volatility of 4.04% for the same period. The asset
classes in which GRV Advisors traded spent the majority of 2004 trading in
a narrow range, resulting in very low levels of volatility. Equity
volatility remained close to 9-year lows throughout 2004, despite many
significant world events. The difference between the best and worst
performing stocks in the equity markets was minimal, resulting in lower
profits from security selection. Government bond markets experienced more
activity because the Federal Reserve Board began to increase rates in the
summer of 2004. Overall, the premium that investors require to take risk
has contracted, demonstrated by low bond yields, tight credit spreads and
negligible equity volatility.
Credit trading arbitrage strategies performed well as GRV Advisors
were able to profit from technical and fundamental trade opportunities,
including arbitraging credit indices versus their constituent credits,
capital structure (credit vs. equity) and long/short credit trades.
Fixed income arbitrage strategies performed moderately for the year
and although there were a number of sharp moves in the markets, overall
volatility remained subdued at 4-year lows. The summer of 2004 brought
difficult trading conditions as 10 year bond yields fell despite the
Federal Reserve Board increasing short-term interest rates, resulting in
modest losses by GRV Advisors. Following a difficult third quarter, GRV
Advisors experienced a recovery in the fourth quarter of 2004.
Equity arbitrage strategies experienced a positive year. Returns were
strong throughout 2004, with a modest summer slowdown as equity returns
were dominated by macro drivers rather than stock-specific characteristics.
Profitable model stock selection factors included valuation, earnings
momentum and quality. International markets were particularly successful
for GRV Advisors.
The decline in equity volatility led to negligible returns for GRV
Advisors in convertible bond arbitrage strategies. The amount of new
issuances declined and prices were high, exacerbating the challenging
environment. GRV Advisors shifted exposure into Asian markets, and selected
short positions and special situations to improve their returns.
Multi-strategy arbitrage, which covers all of GRV's sub-strategies,
benefited in 2004 from additional opportunities in special situations and
credit/high yield trades.
Convertible arbitrage strategies returned 2.27% and contributed
(0.40)% to GRV's net income for the year ended December 31, 2004. Credit
relative value strategies returned 6.26% and contributed 0.42% to GRV's net
income for the year ended December 31, 2004. Emerging markets relative
value strategies returned 8.26% and contributed 0.40% to GRV's net income
for the year ended December 31, 2004. Equity market neutral strategies
returned 4.02% and contributed 0.63% to GRV's net income for the year ended
December 31, 2004. Fixed income arbitrage strategies returned 6.97% and
contributed 1.31% to GRV's net income for the year ended December 31, 2004.
Multi-strategies returned 7.09% and contributed 2.50% to GRV's net income
for the year ended December 31, 2004.
GOLDMAN SACHS GLOBAL TACTICAL TRADING, LLC
As of December 31, 2004, GTT represented approximately 23% of adjusted
members' equity which excluded redemptions paid after December 31, 2004 and
which was generally consistent with the strategic weight set by the
Managing Member for GTT as of July 1, 2004. GTT returned 3.88% for Class C
Series 1 units for the year ended December 31, 2004.
Volatile markets resulted in a difficult year in 2004 for the
Company's GTT Advisors, in particular during the second and third quarters
of 2004.
In the first quarter of 2004, profits were made in commodities and
interest rates. In commodities, the agricultural markets, specifically the
soy complex, proved to be the largest driver of returns. GTT Advisors were
also profitable in base and precious metals. The majority of first quarter
losses was experienced in currencies as GTT Advisors suffered losses as a
result of the strengthening of the U.S. dollar.
The second quarter of 2004 proved to be more challenging as fixed
income and non-energy commodity markets, both of which had provided the
bulk of the returns in the first quarter, reversed sharply in early April.
Positions in these sectors contributed to the largest losses for GTT
Advisors for the second quarter of 2004. Indications of a strong economic
recovery and rising inflation led to market expectations of accelerated
rate increases by the Federal Reserve Board and a sell-off in fixed income
markets. Long equity and short dollar positions, particularly against the
Japanese Yen and the Euro, also suffered by the anticipation of a higher
rate environment.
Difficult markets persisted in the third quarter of 2004. Trading in
fixed income and commodities was slightly positive for the quarter, while
GTT Advisors experienced losses in currencies and equity indices. Despite
record trade deficit numbers, the U.S. dollar did not weaken significantly
which contributed to losses for GTT Advisors in short dollar positions.
Equity markets experienced several sharp reversals throughout the third
quarter of 2004 as the market digested rising oil prices and a potential
global slowdown. A series of weaker-than-expected economic data releases,
higher oil prices and the Federal Reserve Board's assurance that fears of
inflation were largely unfounded combined to drive bond yields lower over
the course of the quarter. Some GTT Advisors profited because crude oil
rallied and short positions were successful as a result of grain markets
experiencing sharp declines.
The fourth quarter of 2004 experienced positive performance overall
across the different asset classes, with the largest profits coming from
currencies. The dominating theme was the weakening of the U.S. dollar,
specifically against the Japanese Yen and several European currencies. The
sell-offs were attributed to the massive current account deficit and the
perceived lack of fiscal discipline in the U.S., leaving the U.S. dollar
vulnerable to reduced investments in dollar assets and possible shifts by
central banks in reserves from dollars to other currencies. As market
concerns of a slowing economy in China spread, there was a sharp sell-off
in basic metals, causing losses on long positions. U.S. treasuries traded
lower on stronger-than-expected growth and payroll numbers and on news of
reduced foreign investment in U.S. assets, while European bonds rose.
Equity markets rose on positive economic news and falling crude oil prices,
which made them top contributors to performance, with long positions in the
U.S., Europe, and Asia generating profits.
2003 PERFORMANCE
The Company's net trading profit for the year ended December 31, 2003
was $81,854,395 compared to the period from commencement of operations
(April 1, 2002) to December 31, 2002 of $11,821,474.
OVERVIEW
During 2003, the Company allocated its assets on a roughly equivalent
risk-weighted basis to each of the four hedge fund sectors. This diversity
of return drivers was particularly important to the Company's performance
in 2003 given the wide dispersion of returns within the various sectors of
the hedge fund market. For example, equity long/short and event driven
strategies rebounded from a difficult 2002 to post strong absolute returns
in 2003. By contrast, certain price based and quantitative equity arbitrage
Advisors in the relative value sector had a difficult year in 2003. The
Company cannot predict which hedge fund sector and accordingly which
Investment Fund will perform best in the future. The table below
illustrates the portfolio weighting of each Investment Fund as of December
31, 2003, as well as each Investment Fund's net return for the year ended
December 31, 2003.
[Left Blank Intentionally]
- ----------------------- --------------------- -------------------- --------------------
Portfolio Weight Portfolio Weight Year Ended
as a % of as a % of Adjusted December 31, 2003
Investment Fund Members' Equity (1) Members' Equity (2) Net Return (3)
- ----------------------- --------------------- -------------------- --------------------
GELS 15.01% 14.48% 13.73%
- ----------------------- --------------------- -------------------- --------------------
GED 23.78% 22.93% 18.09%
- ----------------------- --------------------- -------------------- --------------------
GRV 38.50% 37.12% 7.11%
- ----------------------- --------------------- -------------------- --------------------
GTT 26.74% 25.79% 11.61%
- ----------------------- --------------------- -------------------- --------------------
<FN>
(1) Members' equity, used in the calculation of the investments as a % of
members' equity, is reduced for member redemptions that are paid after
the balance sheet date.
(2) As a % of the Company's adjusted members' equity which represents
members' equity excluding Redemptions payable in the amount of
$34,529,625 that was payable at December 31, 2003.
(3) These returns are based on the performance of Class C Series 1 units.
The returns include administration fees. No management fee or
incentive allocation was charged by the managing member of the
Investment Funds with respect to the Company's investment in any of
the Investment Funds. Past performance is not indicative of future
results, which may vary.
</FN>
For the year ended December 31, 2003, the Company returned 9.60% net
of fees and incentive allocation for Class A Series 1 Units with a standard
deviation of 3.63% for the year. Standard deviation is a statistical
measure of return dispersion around an arithmetic mean return. The Company
would expect roughly two-thirds of the monthly returns to be within a range
equal to the arithmetic mean of the monthly returns plus or minus one
standard deviation.
THE INVESTMENT FUNDS
Each of the four Investment Funds' performance during the year 2003 is
described in the following.
GOLDMAN SACHS GLOBAL EQUITY LONG/SHORT, LLC
As of December 31, 2003, GELS represented approximately 14% of
adjusted members' equity which excluded redemptions paid after December 31,
2003 and which was generally consistent with the weighting of GELS as part
of the Company throughout the year ended December 31, 2003. GELS returned
13.73% for Class C Series 1 units for the year ended December 31, 2003.
The annualized volatility of GELS' returns for the year ended December
31, 2003 was 5.85%. In comparison, the S&P 500 Index had an annualized
volatility of 11.39% and the MSCI World Index had an annualized volatility
of 12.31% for the period.
The end of the first quarter of 2003 represented a period of
significant change for equity markets. The first quarter was dominated by
macroeconomic fears stemming from the SARS virus and the buildup to the
coalition's invasion of Iraq. These macroeconomic fears resulted in many
global equity markets giving back gains made in the fourth quarter of 2002,
with new multi-year lows being reached in March 2003 in many markets
(notably France, Germany, and the U.K.). The end of large-scale hostilities
in Iraq and stronger-than-expected first quarter earnings created positive
momentum during the second quarter of 2003, driving stock prices sharply
higher. The rally was broad based across market capitalizations, sectors,
styles, and geographical regions (with the notable exception of Japan).
Equity markets moved up and down frequently though were directionally
positive on an overall basis in the third quarter of 2003, which saw
continued positive macroeconomic and company-specific news. The fourth
quarter of 2003 saw additional improvement in the equity markets, as the
pattern of positive news continued; for the quarter, the S&P 500 Index was
up 12.18% and the MSCI Europe hedged to U.S. dollars was up 11.11%,
representing 42.46% and 75.78% of their respective returns for the year. In
addition, the improving corporate earnings environment brought increased
corporate confidence and activity in the mergers and acquisitions area.
Equity long/short Advisors performed well in 2003, but on average
lagged the equity indexes (which finished the year with positive, mid-teens
performance), as many Advisors were caught with significant short exposure
when the equity markets reversed in the spring. Equity long/short Advisors
that performed particularly well in 2003 were those focused on
small-capitalization stocks, those with significant net long exposure,
those focused on high-beta sectors (i.e., those with volatility greater
than the overall market) such as biotechnology and information technology,
and those with significant exposure to emerging markets or
commodity-related equities. Advisors that lagged in 2003 were those with
significant high-beta short exposure, dedicated short sellers, those with
market-neutral portfolios, and those with significant value biases (i.e.,
seeking undervalued stocks at low prices). Those Advisors that were
disappointed with their 2003 results generally attributed their
underperformance to the fact that their cash flow positive long positions
did not increase in value as much as their short positions, which, on
average, were trading at higher multiples than the long positions, despite
the fact that many were cash flow negative.
GOLDMAN SACHS GLOBAL EVENT DRIVEN, LLC
As of December 31, 2003, GED represented approximately 23% of adjusted
members' equity which excluded redemptions paid after December 31, 2003 and
which was generally consistent with the weighting of GED as part of the
Company throughout the year ended December 31, 2003. GED returned 18.09%
for Class C Series 1 units for the year ended December 31, 2003.
The annualized volatility of GED's returns for the year ended December
31, 2003 was 2.19% compared to the S&P 500 Index which had an annualized
volatility of 11.39% and to the MSCI World Index which had an annualized
volatility of 12.31% for the period.
GED positions its investments with Advisors that primarily employ
"hedged" trades (i.e., with positions on both the long and the short sides)
to generate attractive risk-adjusted returns. During 2003, GED maintained
its practice of generally not investing in Advisors who invest in long-only
distressed credits hoping to effect a corporate reorganization. During
2003, GED had positive returns every month, and all of GED's underlying
Advisors were positive for the year.
In 2003, the biggest contributor to returns for GED was the
distressed/high yield sector. GED started the year with a sizeable
allocation to distressed Advisors with the intent of taking advantage of
the large amounts of defaulted and distressed debt in the marketplace. The
opportunity was created by record company default rates of 12.8% in the
high yield market in 2002 coupled with the prospects for economic recovery
in 2003. As the year progressed and credit markets showed improvement,
GED's allocation shifted toward special situations Advisors. Merger
arbitrage allocations remained steady, generally comprising between 5% and
15% of the portfolio during the period.
The strong improvement in credit that began in October 2002 continued
as high yield credit spreads (the difference in yield between a high yield
bond and the corresponding government bond) decreased by more than 4.5%
during 2003 to finish the year at approximately 4.2%. The credit rally was
broad-based, with the lowest rated debt securities being the biggest
beneficiary. The Merrill Lynch High Yield Master II Index returned 28.2%
and was up in 11 months of the year. New issuances of high yield debt
securities were also very robust as a record $140 billion of debt was
issued globally compared to only $58 billion of high yield new global
issuances in 2002.
Merger arbitrage got off to a slow start in 2003 as the combination of
economic and geopolitical uncertainty continued to lessen corporate
enthusiasm for mergers and acquisitions. As the year progressed, U.S.
mergers and acquisitions activity started to increase and ended the year up
6.7% from its 2002 levels. Global mergers and acquisitions deal volume
ended the year at $1.3 trillion, up about 9% from its 2002 levels. U.S.
activity represented about 44% of global volume, while European mergers and
acquisitions activity represented 38%.
Credit opportunities/distressed strategies returned 26.77% and
contributed 10.45% to GED's net income for the year ended December 31,
2003. The multi-strategy component of the portfolio returned 17.80% and
contributed 3.26% to GED's net income for the year ended December 31, 2003.
Risk arbitrage/special situations strategies returned 8.71% and contributed
5.04% to GED's net income for the year ended December 31, 2003.
GOLDMAN SACHS GLOBAL RELATIVE VALUE, LLC
As of December 31, 2003, GRV represented approximately 37% of adjusted
members' equity which excluded redemptions paid after December 31, 2003 and
which was generally consistent with the weighting of GRV as part of the
Company throughout the year ended December 31, 2003. GRV returned 7.11% for
Class C Series 1 units for the year ended December 31, 2003.
While the environment throughout the year was very challenging for
relative value investing, GRV delivered positive returns in 9 out of 12
months. The annualized volatility of GRV's returns was 2.36% for the year
ended December 31, 2003 which was less than half of that of the Lehman
Aggregate Bond Index which had an annualized volatility of 5.3% for the
period.
Convertible arbitrage strategies generated positive but lackluster
returns due to the large swings in credit spreads (i.e., the difference in
yield between a high yield bond and the corresponding government bond)
throughout the period and the sporadic nature of the new issuance market.
Successful Advisors focused on credit quality and took advantage of
tightening credit spreads between treasury rates and the high yield credits
over the course of the year.
Fixed income arbitrage strategies also generated positive returns in
2003, which saw interest rates near all-time lows with substantial bond
market volatility during the year. However, for the beginning of 2004, GRV
remains cautious in GRV's fixed income arbitrage exposure, avoiding
significant positions in dedicated mortgage-backed and other strategies
which GRV perceived to carry a higher level of risk.
Equity arbitrage strategies faced a challenging 2003. Early in the
year, prices of stocks of companies with low valuations increased while
prices of stocks of companies with high valuations declined and remained
low for an extended period of time. Consequently, investors gravitated to
lower quality stocks, and stocks with the least attractive valuations
outperformed others. As a result, value-driven Advisors looking for high
valuation stocks at a low price did not realize favorable returns.
In price-based statistical arbitrage strategies Advisors saw a decline
in the profitability of trading strategies based upon models predicting
reversion of stock prices of U.S. companies to their mean. As a result,
many Advisors began moving capital to international markets such as Japan
or the U.K., where these models still performed well.
Convertible arbitrage strategies returned 13.13% and contributed 2.67%
to GRV's net income for the year ended December 31, 2003. Credit relative
value strategies returned 15.48% and contributed 0.30% to GRV's net income
for the year ended December 31, 2003. Equity market neutral strategies
returned (0.73)% and a contributed (0.32)% to GRV's net income for the year
ended December 31, 2003. Fixed income arbitrage strategies returned 8.76%
and contributed 1.34% to GRV's net income for the year ended December 31,
2003. Multi-strategies returned 12.76% and contributed 3.55% to GRV's net
income for the year ended December 31, 2003.
GOLDMAN SACHS GLOBAL TACTICAL TRADING, LLC
As of December 31, 2003, GTT represented approximately 26% of adjusted
members' equity which excluded redemptions paid after December 31, 2003 and
which was generally consistent with the weighting of GTT as part of the
Company throughout the year ended December 31, 2003. GTT returned 11.61%
for Class C Series 1 units for the year ended December 31, 2003. Over the
course of the year, GTT made profits in each of the four asset classes
which the GTT Advisors trade. The approximate profit contribution coming
from Managed Accounts was 60% from currencies, 20% from commodities, 15%
from equities and 5% from interest rates. For 2003, managed futures
Advisors, whose trading was based upon systematic models, proved to be, in
general, more successful than discretionary managed futures and macro
Advisers, whose investments were driven by their views on broad economic
themes. GTT attributes this to discretionary managed futures and macro
Advisors' decreasing risk in periods of uncertainty, such as the period
leading up to the war in Iraq, or in late December 2003, when there were
concerns about market liquidity.
Over the course of 2003, GTT Advisors were challenged by considerable
market volatility, the end of the bond bull market and by geopolitical
uncertainty. While much of the behavior in 2002 could be explained by
simple motivations such as a movement toward safer, higher-quality assets
associated with bond rallies, equity sell-offs, rising gold and oil prices,
2003 proved to be more complex. Only during the first quarter of 2003 did
GTT Advisors profit from exploiting the themes dominating 2002, all of
which came to a peak in the weeks leading up to the war in Iraq.
One important trend of 2002 that carried through all of 2003 was the
weakening of the U.S. dollar. With the current United States account
deficit widening, and investor interest in U.S. assets waning, the U.S.
dollar dropped throughout the period, particularly against the euro. The
value of the Japanese yen remained stable against the U.S. dollar until
July 2003, after which it rose steadily, despite intervention by the Bank
of Japan. Short U.S. dollar positions against major currencies, in
particular the euro, were profitable for most of the year.
COMPARISON OF SELECT FINANCIAL INFORMATION FROM 2005, 2004, AND 2003
INTEREST INCOME
Interest income for the year ended December 31, 2005 was $161,801.
Interest income for the year ended December 31, 2004 was $495,194 and
interest income for the year ended December 31, 2003 was $97,943. The
Company's interest income fluctuates with its level of cash available to
invest. The decrease in interest income for the year ended December 31,
2005 as compared to the year ended December 31, 2004 primarily relates to
the structure of the current credit facility which, unlike the Company's
previous credit facility, does not require the Company to redeposit cash
received from the credit facility into a collateral account, but instead
allows the Company to borrow as requested.
EXPENSES
The Management Fee for the year ended December 31, 2005 was
$13,560,772. The Management Fee for the year ended December 31, 2004 was
$12,234,696 and the Management Fee for the year ended December 31, 2003 was
$9,666,257. Because the Management Fee is calculated as a percentage of the
Company's member's equity as of each month end (equal to one-twelfth of
1.25% of the net assets of the Company as of the end of the applicable
month), the increase in Management Fee expense for the year ended December
31, 2005 as compared to the year ended December 31, 2004 was due to an
increase in the Company's members' equity, excluding Redemptions payable
that were paid after the Balance Sheet date for the period, resulting from
net subscriptions. The increase in the management fee expense for the year
ended December 31, 2004 as compared to the year ended 2003 was due to an
increase in the Company's net assets during the year ended December 31,
2004 compared to the year ended December 31, 2003.
Interest expense for the year ended December 31, 2005 was $37,747,
compared to the year ended December 31, 2004 of $546,069 and compared to
the year ended December 31, 2003 of $0. The interest expense relates to the
old and new borrowing facility that was outstanding during the year ended
December 31, 2005. The change in interest expense for the year ended
December 31, 2005 compared to December 31, 2004 was due to decreased levels
of short-term borrowing during the period. The increase in interest expense
for the year ended December 31, 2004 compared to December 31, 2003 was due
to increased levels of short-term borrowing during the period.
Professional fees for the year ended December 31, 2005 were
$1,237,030, compared to the year ended December 31, 2004 of $1,641,442 and
the year ended December 31, 2003 of $1,053,505. The decrease in
professional fees for the year ended December 31, 2005 compared to the year
ended December 31, 2004 was primarily due to additional services rendered
during 2004 by the Company's legal providers and auditors related to the
ongoing operations of the Company, including the review of investor
subscription documents for the year and registration with the SEC. The
increase in professional fees for the year ended December 31, 2004 compared
to the year ended December 31, 2003 was primarily due to additional
services rendered by the Company's legal providers and auditors related to
the ongoing operations of the Company, including the review of investor
subscription documents for the year and registration with the SEC.
INCENTIVE ALLOCATION
The Incentive Allocation for the year ended December 31, 2005 was
$2,615,216, compared to the year ended December 31, 2004 of $2,902,854 and
the year ended December 31, 2003 of $3,560,865. The change in Incentive
Allocation for the year ended December 31, 2005 compared to the year ended
December 31, 2004 is due to a decrease in net income from operations for
the period. The change in Incentive Allocation for the year ended December
31, 2004 compared to the year ended December 31, 2003 is due to a decrease
in net income from operations for the period.
Other than the management fee, the professional fees and miscellaneous
expenses and the 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 Managing Member for
services provided to the Investment Funds and Portfolio Companies. In 2004,
the Managing Member served as the administrator of the Investment Funds and
each of the Investment Funds paid its managing member an administration fee
of 0.20% for services rendered to it. 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, 2005 and January 1,
2004, was $1,031 and $2,073, respectively. Effective as of January 1, 2005,
SEI became the administrator of each Investment Fund and certain Portfolio
Companies, and currently serves as the administrator with respect to all of
the Investment Funds and Portfolio Companies. Throughout 2005, the
Administration Fee Rate ranged from 0.07% to 0.10%, but in the future such
rate may be exceeded, subject to a maximum of approximately 0.20%, if the
total assets managed by the Managing Member that are administered by SEI
and its affiliates declines or if an Investment Fund allocates a greater
percentage of its assets to Portfolio Companies or Managed Accounts than is
currently anticipated. See ITEM 1. "BUSINESS--FEES AND EXPENSES."
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements consist of cash needed to fund
investments in the Investment Funds in accordance with the Company's
investment strategy and to fund semi-annual redemptions and to pay costs
and expenses. The Company periodically re-allocates its investments in the
Investment Funds based on the performance of the Investment Funds and other
factors. From inception through December 2005, the Company could not
predict the level of redemptions in the Company for any semi-annual period
until 61 days prior to the redemption date where written notice must be
given to the Managing Member. Effective January 1, 2006, redemptions are
permitted on a quarterly basis rather than a semi-annual 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, rather than the 61 day notice
period previously required. Accordingly, effective January 1, 2006, 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 redemption, or as otherwise permitted in the limited liability
agreements of the Investment Funds) of its investments in the Investment
Funds and from new investments from existing and new investors. From
inception through December 2005, redemptions of the Company's investments
in the Investment Funds could be made on a semi-annual or quarterly basis
depending on the Investment Fund, subject to certain limitations. Effective
January 1, 2006, redemptions can be made quarterly, subject to certain
limitations. From July 2003 through September 2004, the Company only took
in investments from existing investors and limited subscriptions from new
qualified investors, however, starting in October 2004, the Company began
accepting additional amounts of new subscriptions again and the Company
continued to do so through December 31, 2005. The Company may close again
at any time without notice at the sole discretion of the Managing Member.
The acceptance of future subscriptions in the Company and the continued
growth of the Company will be determined by the Managing Member in its sole
discretion. Although the Managing Member began to receive new subscriptions
to the Company in October 2004, any liquidity requirements in the near term
may need to be funded through the redemption of existing investments in the
Investment Funds to the extent new investments are not received in
sufficient amounts to cover redemptions. If the Company seeks to redeem all
or a portion of its investment positions in any of the Investment Funds,
the Investment Fund, to the extent it does not have cash on hand to fund
such redemption, will need to liquidate some of its investments.
Substantial redemptions of membership units in an Investment Fund,
including by the Company, could require the Investment Fund to liquidate
certain of its investments more rapidly than otherwise desirable in order
to raise cash to fund the redemptions and achieve a market position
appropriately reflecting a smaller asset base. This could have a material
adverse effect on the value of the membership units redeemed and the
membership units that remain outstanding and on the performance of the
Investment Fund. Under certain exceptional circumstances, such as force
majeure, the managing member of an Investment Fund (currently, the Managing
Member) may find it necessary (a) to postpone redemptions if it determines
that the liquidation of investments in the Investment Fund to fund
redemptions would adversely affect the net asset value per membership unit
of the Investment Fund or (b) to set up a reserve for undetermined or
contingent liabilities and withhold a certain portion of redemption
proceeds. In such circumstances, the Investment Fund would likely postpone
any redemptions it could not fund.
Certain investment positions in which the Investment Funds have a
direct or indirect interest are illiquid. The Advisors may invest in
restricted or non-publicly traded securities, securities on foreign
exchanges and futures. These positions may be illiquid because certain
exchanges limit fluctuations in certain securities and futures contract
prices during a single day by regulations referred to as "daily price
fluctuation limits" or "daily limits." Under such daily limits, during a
single trading day no trades may be executed at prices beyond the daily
limits. Once the price of a particular security or futures contract has
increased or decreased by an amount equal to the daily limit, positions in
that security or contract can neither be taken nor liquidated unless
traders are willing to effect trades at or within the limit.
The Company received investments from new and existing investors of
$225,329,193 during the year ended December 31, 2005, of $126,385,622
during the year ended December 31, 2004, and of $524,318,830 during the
year ended December 31, 2003.
The Company paid out redemptions in the amount of $241,350,217 during
the year ended December 31, 2005. The Company paid out redemptions in the
amount of $66,214,849 during the year ended December 31, 2004 and
$10,988,390 during the year ended December 31, 2003. the Company had
Redemptions payable in the amount of $347,523,596 at December 31, 2005. The
Company had Redemptions payable in the amount of $128,546,636 payable at
December 31, 2004. The Company funded the redemptions made in January 2005
and July 2005 by making redemptions from the Investment Funds in proportion
to the then current weightings and through the use of uninvested cash on
hand and the Company also used its credit facilities to fund January 2006
redemptions. The Managing Member expects the Company to fund future
redemptions in a similar manner and does not believe that the redemptions
payable in January 2006 had a material adverse effect on the value of the
Units or the performance of the Company. While the Company did not borrow
under its credit facility to fund the redemptions in January 2004 and July
2005, it did borrow from its credit facility to fund redemptions in January
2006. 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.
The Company and each Investment Fund may, but are not required to,
borrow from (including through direct borrowings, borrowings through
derivative instruments, or otherwise) the GS Group or other parties, when
deemed appropriate by its managing member, including to make investments
and distributions in respect of redemptions of Units or membership units,
to pay expenses, or for other purposes. On November 24, 2004, the Company
entered into a credit facility with a financial institution, the Facility
Counterparty to replace its then existing credit facility. The Company made
an initial borrowing of $1,000,000 under this facility. On January 3, 2006,
the Company increased the maximum borrowing limit from $40,000,000 to
$76,000,000 under this credit facility. Effective January 3, 2006, the
Company may request to borrow up to $76,000,000 in the aggregate at the
discretion of the Facility Counterparty. Prior to September 1, 2005, the
company could request to borrow up to $45,000,000 in the aggregate. At the
time of any borrowing, the aggregate amounts borrowed may not exceed 10% of
the Company's net asset value and at all other times the aggregate amount
borrowed may not exceed 15% of the Company's net asset value. The effective
interest rate on the borrowed amounts equals LIBOR plus 0.85% per annum
compounded daily. The Company also pays an administration and structuring
fee calculated as 0.10% per annum on the aggregate amount of $76,000,000.
The proceeds of the borrowings must be used primarily for purposes of
refinancing existing indebtedness, making further investment in a pool of
funds, funding liquidity of redemptions of Units in the Company and
managing the cash flow of the Company. There were no borrowings outstanding
at December 31, 2005. As security for its borrowings, the Company granted
the Facility Counterparty a security interest in the Company's cash
accounts and any other account that contains other investment property
(other than to the extent that it comprises shares of funds in the pool of
funds in which the Company has invested) of the Company. The terms of the
facility include various restrictive covenants, including restrictions on
additional indebtedness, liens and fundamental changes to the Company's
business. The Facility Counterparty may demand payment upon the occurrence
of certain events, including: (i) specified declines in the Company's
aggregate net asset value per Unit, (ii) the incurrence of indebtedness or
liens by the Company, (iii) the failure by the Company to maintain
prescribed diversification of its investments, (iv) if the investment
manager (which currently is GS HFS) resigns or is terminated by the
Company, (v) if the administrator (which currently is GS HFS), custodian or
auditor resigns or is terminated by the Company and the replacement is not
approved by the Facility Counterparty (which consent may not be
unreasonably withheld) or (vi) the occurrence of events of default
customary for financing transactions. See Note 6 to the financial
statements. Each Investment Fund has entered into a similar facility with
the Facility Counterparty.
As of December 31, 2005, the Company had Cash and cash equivalents on
hand of $706,812. As of December 31, 2004, the Company had Cash and cash
equivalents on hand of $218,797.
Investments as of December 31, 2005 were $1,124,329,933 as compared to
$1,092,953,352 as of December 31, 2004. The increase from December 31, 2004
to December 31, 2005 was due to net subscriptions made by the Company to
the Investment Funds and net income earned during the year ended December
31, 2005.
Due to managing member represents the management fees due to the
Managing Member. Due to managing member as of December 31, 2005 was
$2,321,114 as compared to $3,247,774 as of December 31, 2004. Because the
management fee is calculated as a percentage of the Company's net assets as
of each month end, the liability related to management fees will fluctuate
based on the fluctuation of the month end net asset value of the Company.
The decrease in Due to managing member is due to the amount and timing of
the payment of the monthly management fee to the Managing Member.
The Company generally expects that its cash flow from liquidating its
investment positions in the Investment Funds to the extent necessary and
from new investments in the Company together with borrowings under the
borrowing facility will be adequate to fund its operations and liquidity
requirements.
The Company does not have any long-term debt obligations, capital or
operational lease obligations, purchase obligations or other long-term debt
liabilities. In addition, there are no off balance sheet or contingent
liabilities at the Company level.
The value of the Company's directly held cash and financial
instruments is not expected to be materially affected by inflation. At the
Investment Fund level, given that GRV's and GED's Advisors seek to profit
from price movements and can take both positive and negative views on the
drivers of such movements, their outlooks may include a view on the
direction of inflation, with the outcome of their trades derived, at least
in part, from the accuracy of such a view. No first-order endemic effects
from inflation, as may exist in long-only bond portfolios, are expected.
Further, extended changes in inflation may be associated with strong up or
down trends in interest rates, creating a favorable environment for GTT's
Advisors, and therefore contributing to the Company's profit potential.
However, unexpected changes in inflation can also give rise to rapid
reversals in interest rate markets, creating an environment in which such
Advisors, and the Company, potentially may suffer losses. The impact of
changes in inflation on equity long/short strategies used by GELS' Advisors
is difficult to predict and depends upon how large the change is in both
absolute terms and relative to expectations. A sharp increase in inflation
could hurt certain sectors, such as regional banks, homebuilders, and
autos, while sharp downward moves could be beneficial for equities. If a
downward move were too large, however, it could give rise to concerns about
deflation. In all cases, however, the Company endeavors to take inflation,
and its possible effects on each of the Investment Funds, into account when
it develops its investment strategies.
RECENT ACCOUNTING PRONOUNCEMENTS
FASB INTERPRETATION NO. 46(R)
In December 2003, the FASB issued Interpretation No. 46(R),
Consolidation of Variable Interest Entities ("FIN 46(R)"), which provides
new criteria for determining whether consolidation accounting is required.
Registered investment companies have been exempted from the provisions of
FIN 46(R) and FIN 46(R) has been deferred for non-registered investment
companies pending the release of a FASB Scope of Investment Companies
project ("Scope Project"). The Scope Project is designed to determine which
entities will qualify as investment companies, and therefore present their
investments at fair value. Those entities so qualifying will not need to
determine whether their investments should be consolidated pursuant to the
provisions of FIN 46(R). FIN 46(R) would have no impact on the Company's
net assets or net increase in net assets resulting from operations. The
Company understands that the Scope Project has been approved for issuance
by the FASB and retained these provisions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of the Company's financial condition and
results of operations are based on the Company's financial statements,
which have been prepared in accordance with GAAP, which require the
Managing Member to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
may differ from those estimates. The financial statements are expressed in
U.S. dollars. A summary of the Company's accounting policies is set forth
in Note 1 to the Company's financial statements. In the Managing Member's
view, the policy that involves the most subjective judgment is set forth
below.
The Company's investments in Investment Funds are subject to the terms
and conditions of the operating agreements of the respective Investment
Funds. These investments are carried at fair value, based on the Company's
attributable share of the net assets of the respective Investment Fund.
Fair values of interests in Investment Funds are determined utilizing net
asset value information supplied by each individual Investment Fund that
are net of the Advisors' management and incentive fees charged to the
Investment Funds. The underlying investments of each Investment Fund are
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 value reported by or on
behalf of the applicable Advisor, and other assets of the Company will be
valued at fair value in a commercially reasonable manner. 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 Investment Funds, 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. 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 Investment Funds 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 described under ITEM
1. "BUSINESS--CERTAIN RISK FACTORS--GENERAL RISKS--Risks Related to the
Company and the Investment Funds' Performance and Operation--Dependence on
the Managing Member and the Advisors; the Managing Member Generally has
Limited Access to Information on or Control over Advisor's Portfolios and
Members Assume the Risk that Advisors May Knowingly Misrepresent
Information Which Could Have a Material Negative Impact on the Company,"
"--SPECIAL RISKS OF THE COMPANY'S STRUCTURE--Risks Related to the Company's
Structure--The Company's Financial Statements are, and in the Future will
be, Based on Estimates of Valuations Provided by Third Party Advisors Which
May not be Accurate or May Need to be Adjusted in the Future," and
"--SPECIAL RISKS OF THE COMPANY'S STRUCTURE--Risks Associated with the
Company Investing in Other Entities--Valuation of the Investment Funds'
Investments Will be Based upon Valuations Provided by the Advisors Which
are Generally not Audited; Uncertainties in Valuations Could Have a
Material Adverse Effect on the Company's Net Assets."
The valuation provisions of the LLC Agreement and the limited
liability agreements of the Investment Funds have been 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. 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 now be able to take the bankruptcy
into account to attempt to more accurately determine the fair value of such
assets.
To date there has been one situation during the periods presented in
the Company's financial statements presented in this Annual Report where
the Managing Member has determined that the valuation provided by an
Advisor or independent investment manager in which one of the Investment
Funds had invested was not complete or was inaccurate. In this particular
situation, the managing member of the Investment Fund adjusted the
valuation provided by the Advisor to the Investment Fund upon receipt of
information that the investment was under distress to reflect more fairly
its belief as to the appropriate value of the investment. As the Company
continues to ascribe a minor value to this investment, the Managing Member
continues to evaluate this investment on an on-going basis and may further
adjust its valuation in the future.
OFF BALANCE SHEET RISK
There are no off-balance sheet or material contingent liabilities at
the Company level.
CONTRACTUAL OBLIGATIONS
The Company does not have any long-term debt obligations, capital or
operational lease obligations or other long-term debt liabilities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following table lists the significant market risk sensitive
instruments held by the Company, through the Investment Funds, as of
December 31, 2005 and as of December 31, 2004, as indicated by the Fair
Value/Value at Risk column, and the Net Trading Profit/Loss from January 1,
2005 to December 31, 2005 and January 1, 2004 to December 31, 2004. Because
of the speculative nature of the investments that the Company engages in
through the Investment Funds, the Managing Member believes the entire
portfolio value of the Company is at risk. The Managing Member is unable to
track the impact of market volatility, credit and interest rate risk on the
Units as 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.
[Left Blank Intentionally]
YEAR ENDED
% OF NET TRADING
% OF ADJUSTED FAIR PROFIT
INVESTMENT MEMBERS' MEMBERS' VALUE/VALUE (IN
FUND EQUITY EQUITY(6) AT RISK MILLIONS) LIQUIDITY
---- ------ --------- ----------- --------- ---------
GELS 37.97% 26.21% $294,096,911 $25.7 (1)
GED 38.91% 26.86% $301,443,254 $20.9 (2)
GRV 41.02% 28.32% $317,728,892 $12.3 (3)
GTT 27.25% 18.81% $211,060,876 $7.9 (4)
------------ ---------- --------------- -----------
TOTAL 145.15% (5) 100.20%(5) $1,124,329,933 $66.8
============ ========== =============== ===========
YEAR ENDED
DECEMBER 31, 2004
-------------------------------------------------------------------------------
% OF NET
ADJUSTED TRADING
% OF MEMBERS' FAIR PROFIT
INVESTMENT MEMBERS' EQUITY VALUE/VALUE AT (IN
FUND EQUITY (6) RISK MILLIONS) LIQUIDITY
---- ------ --- ---- --------- ---------
GELS 23.63% 20.84% $226,276,134 $17.7 (1)
GED 28.01% 24.69% $268,186,702 $27.9 (2)
GRV 36.60% 32.27% $350,409,379 $17.9 (3)
GTT 25.91% 22.84% $248,081,137 $8.5 (4)
------------ ---------- ---------------- -----------
TOTAL 114.15%(5) 100.64%(5) $1,092,953,352 $72.0
============ ========== ================ ===========
(1) Redemptions can be made quarterly with 45 days' notice or at the sole
discretion of the managing member.
(2) Effective January 1, 2006, redemptions can be made quarterly with 91
days' notice or at the sole discretion of the managing member, rather
than semi-annually with 45 days' notice as required prior to January
1, 2006.
(3) Effective January 1, 2006, redemptions can be made quarterly with 91
days' notice or at the sole discretion of the managing member, rather
than semi-annually with 45 days notice after a twelve-month holding
period as required prior to January 1, 2006.
(4) Effective January 1, 2006, redemptions can be made quarterly with 61
days' notice or at the sole discretion of the managing member, rather
than semi-annually with 60 days' notice as required prior to January
1, 2006.
(5) The total value of the Company's investments in the Investment Funds
exceeded 100% of members' equity and adjusted members' equity,
respectively, because members' equity and adjusted members' equity
reflected certain accrued liabilities of the Company, including fees
and expenses, and members' equity also reflected redemptions payable
after the balance sheet date
(6) Adjusted members' equity, used in the calculation of the investments
as a percentage of adjusted members' equity, represents members'
equity excluding Redemptions payable in the amount of $347,523,596
that was payable at December 31, 2005 and $128,546,636 that was
payable at December 31, 2004.
RISK MANAGEMENT
In the ordinary course of business, the Managing Member, including in
its capacity as managing member of the Investment Funds, attempts to manage
a variety of risks, including market, credit and operational risk. The
Managing Member, including in its capacity as the managing member of the
Investment Funds, attempts to identify, measure and monitor risk through
various mechanisms including risk management strategies and credit
policies. These include monitoring risk guidelines and diversifying
exposures across a variety of instruments, markets and counterparties.
Market risk is the risk of potential significant adverse changes to
the value of financial instruments because of changes in market conditions
such as interest rates, foreign exchange rates, equity prices, credit
spreads, liquidity and volatility in commodity or security prices. The
Managing Member including in its capacity as managing member of the
Investment Funds monitors its exposure to market risk at both the Advisor
and portfolio level through various analytical techniques. At the Advisor
level, market risk is monitored on a regular basis. Where position level
detail is available, the Managing Member including in its capacity as
managing member of the Investment Funds monitors its exposure to market
risk through a variety of analytical techniques, including Value-at-Risk
("VaR") and scenario analysis (stress testing). VaR is calculated by a
Monte Carlo simulation using a 99.9% confidence level and a 240-day look
back period. Where position level detail is unavailable, an Investment Fund
relies on risk reports provided by the Advisors as well as through open
communication channels with Advisors, which generally includes site visits
and monthly conference calls. The risks involved are 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 Hedge Fund Sector; Most Advisors do not Provide Detailed
Position Information Regarding their Portfolios" and "--Dependence on the
Managing Member and the Advisors; the Managing Member Generally has Limited
Access to Information on or Control over Advisor's Portfolios and Members
Assume the Risk that Advisors May Knowingly Misrepresent Information Which
Could Have a Material Negative Impact on the Company."
The managing member of the Investment Funds monitors Advisors to
prevent style drift. "Style drift" is defined as Advisors changing their
investment style from the Investment Fund's expectations. Where position
level detail is available, the managing member of the Investment Funds
monitors leverage against predetermined limits. Positions sizing limits are
also monitored to ensure Advisors are properly diversified and risk
normally is not concentrated in one or relatively few positions. In some
cases, the managing member of the Investment Funds also has the ability to
monitor approved trading instruments to ensure Advisors are not trading
securities outside their mandate. Where position level detail is not
available, the managing member of the Investment Funds relies on both
written and oral Advisor communications. The risks involved are described
under ITEM 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 Hedge Fund Sector; Most Advisors do not Provide Detailed
Position Information Regarding their Portfolios" and "--Dependence on the
Managing Member and the Advisors; the Managing Member Generally has Limited
Access to Information on or Control over Advisor's Portfolios and Members
Assume the Risk that Advisors May Knowingly Misrepresent Information Which
Could Have a Material Negative Impact on the Company."
At the Company's portfolio level, the Company's portfolio construction
process is designed to provide for adequate diversification. Each
Investment Fund is a portfolio of approximately 20-30 underlying Advisors
and the managing member of each of the Investment Funds regularly reviews
portfolio statistics, such as relative contribution to risk, to confirm
that risk is not concentrated in any single Advisor.
Quantitative analysis is combined with judgment to determine
weightings that will offer broad exposure to hedge fund returns. Strategic
return, risk and correlation estimates inform the quantitative analysis,
which balances returns and contribution to portfolio risk. Judgment is
applied to both estimates and weights in an attempt to achieve a
diversified exposure to hedge funds while delivering attractive
risk-adjusted returns. Until June 30, 2004, the Company had allocated its
assets on a roughly equivalent risk-weighted basis to each of the four
hedge fund sectors. In other words, each of the four Investment Funds
contributed approximately 25% of the total risk of the Company portfolio,
although the actual allocations that achieve the roughly equivalent risk
weightings were different for each sector. The Managing Member utilizes a
strategic sector allocation and periodically re-evaluates the contribution
to the risk and return of the Company from each investment sector and may
in its sole discretion adjust the Company's assets or weights as it deems
advisable. Through June 30, 2004, the Managing Member had not made any
tactical adjustments. An adjustment to the weights was implemented as of
July 1, 2004 to reflect the Managing Member's updated expectations for
return, risk and correlations for the Investment Funds as well as the
Managing Member's judgment. In addition, the weights among the Investment
Funds no longer reflect a strict equal risk allocation (as they had prior
to July 1, 2004). As of July 1, 2004, the weights were set to 20% GELS, 24%
GED, 33% GRV , and 23% GTT. In addition, on July 1, 2005, the Managing
Member made a tactical adjustment to the weightings of the Investment
Funds. As of July 1, 2005, the weights were set to 30% GELS, 30% GED, 25%
GRV, and 15% GTT. This adjustment to the weights among the Investment Funds
reflects the Managing Member's judgment and was implemented by the Managing
Member gradually following July 1, 2005. The approximate weights of the
Investment Funds were 26% GELS, 27% GED, 28% GRV and 19% GTT as of December
31, 2005 as a percentage of adjusted members' equity which excluded
redemptions paid after December 31, 2005. This portfolio construction
process is designed to create a diversified hedge fund portfolio with
attractive return and risk characteristics. See ITEM 1.
"BUSINESS--INVESTMENT PROGRAM--Allocation Among the Investment Funds."
The Company invests in the Investment Funds, and may from time to time
redeem its membership units of the Investment Funds. The Investment Funds,
in turn, maintain relationships with counterparties that include the
Advisors. These relationships could result in concentrations of credit
risk. Credit risk arises from the potential inability of counterparties to
perform their obligations under the terms of the contract, including in the
case of the Company's investments in the Investment Funds, the potential
inability of an Investment Fund to satisfy its redemption obligations. The
managing member of the Investment Funds (currently, the Managing Member)
has formal credit-review policies to monitor counterparty risk.
In addition to market risk and credit risk, the Managing Member,
including in its capacity as managing member of the Investment Funds,
allocates resources to mitigate operational risk. Operational risk is the
potential for loss caused by a deficiency in information, communication,
transaction processing, settlement and accounting systems. The Managing
Member including in its capacity as managing member of the Investment Funds
maintains controls and procedures for the purpose of mitigating its own
operational risk but it does not have control over the systems of the
Advisors. In addition, the Managing Member including in its capacity as
managing member of the Investment Funds deploys resources to assess control
systems, legal risk, compliance risk, operations and treasury risk, credit
risk, accounting risk and reputational risk.
Fraud and other business risks cannot be eliminated, however, the
Managing Member including in its capacity as managing member of the
Investment Funds seeks to significantly reduce such risks. The portfolio
risk management process includes an effort to monitor and manage risk, but
should not be confused with and does not imply low risk. There can be no
assurance that the Managing Member including in its capacity as managing
member of the Investment Funds will be able to implement its risk
guidelines or that its risk monitoring strategies will be successful.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For the Company's financial statements, see the Financial Statements
beginning on page F-1 of this Annual Report.
The following is a summary of unaudited quarterly results of
operations of the Company for the period from January 1, 2004 to December
31, 2005.
FISCAL QUARTER ENDED
--------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31,
2004 2004 2004 2004
---- ---- ---- ----
NET TRADING PROFIT/(LOSS) $30,827,165 ($18,185,504) $3,283,040 $56,093,686
TOTAL EXPENSES $3,798,808 $3,708,542 $3,625,497 $3,325,005
NET INCOME/(LOSS) $27,314,711 ($21,804,167) ($228,045) $52,773,230
NET INCOME/(LOSS) AVAILABLE
FOR PRO RATA ALLOCATION
TO MEMBERS $25,948,975 ($20,714,043) ($216,748) $50,134,691
MAR. 31, JUNE 30, SEP. 30, DEC. 31,
2005 2005 2005 2005
---- ---- ---- ----
NET TRADING PROFIT/(LOSS) $2,165,716 $4,068,802 $44,098,205 $16,483,858
TOTAL EXPENSES $3,281,121 $3,596,025 $3,693,226 $4,266,376
NET INCOME/(LOSS) ($1,096,814) $559,164 $40,446,627 $12,232,657
NET INCOME/(LOSS) AVAILABLE
FOR PRO RATA ALLOCATION
TO MEMBERS ($1,109,981) $518,802 $38,496,572 $11,621,025
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in, or disagreements with, accountants on
accounting and financial disclosure.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was
carried out by the Managing Member's management, with the participation of
its Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Exchange
Act). Based on that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls
and procedures were effective as of the end of the period covered by this
report. In addition, no change in the Company's internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act)
occurred during the fourth quarter of the Company's fiscal year ended
December 31, 2005 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE MANAGING MEMBER
AND REGISTRANT
The Company has no directors or executive officers. The Managing
Member is responsible for the management and operations of the Company.
Information about the Managing Member and the GS Group appears in ITEM 1.
See ITEM 1. "BUSINESS--THE MANAGING MEMBER." The following table sets forth
the directors and executive officers of the Managing Member.
NAME AGE POSITION(S)
--------------------- ------ ------------------------------
George H. Walker 36 Director, Managing Director
and Chief Executive Officer
Tobin V. Levy 62 Director, Managing Director
and Chief Financial Officer
Kent A. Clark 41 Director, Managing Director
and Chief Investment Officer
Hugh J. Lawson 37 Director, Managing Director
and Global Head of Product
Management
Jennifer Barbetta 33 Vice President and Chief Financial Officer*
Thomas Dobler 40 Vice President and Head of GTT
Omar Asali 36 Vice President and Head of GED
Melanie Owen 29 Vice President and Head of GRV
Peter Ort 35 Vice President and Head of GELS
* Chief Financial Officer effective April 1, 2006.
Effective September 23, 2005, Omar Asali, the current co-portfolio
manager of the Global Event Driven Sector, assumed leadership of the Event
Driven team as well as portfolio management responsibility for all Event
Driven portfolios. Melanie Owen, the current co-portfolio manager of the
Global Relative Value Sector, assumed leadership of the Relative Value team
as well as portfolio management responsibility for all Relative Value
portfolios. Terrence O. Jones, former co-portfolio manager of the Global
Event Driven team and the Global Relative Value team, left the Managing
Member to pursue other interests in early 2006.
On March 28, 2006, Tobin V. Levy notified the Company that effective
April 1, 2006, he will no longer serve as the Managing Member's Chief
Financial Officer for the Company. Mr. Levy will remain a Managing Director
of the Managing Member and will continue to support the Managing Member in
a variety of capacities. Jennifer Barbetta will assume the role of Chief
Financial Officer for the Managing Member as of this date.
Information about the directors and executive officers of the Managing
Member is provided below.
GEORGE H. WALKER is a Managing Director of Goldman Sachs and is a
Director, Managing Director, and Chief Executive Officer of the Managing
Member. He joined Goldman Sachs as a summer associate in Capital Markets in
1991 and joined the Managing Member in June 2001. Previously, he was
co-head of gs.com/Goldman Sachs Wealth Management, the firm's e-based
wealth management business, and he led GSAM's U.S. Institutional effort and
its high-net-worth businesses. Mr. Walker has also served in GSAM Division
Management in New York, and in Mergers & Acquisitions in Frankfurt, London,
and New York. He received an M.B.A. in 1992 from the Wharton Graduate
School of Business and bachelors degrees in 1991 from the University of
Pennsylvania.
TOBIN V. LEVY is a Managing Director of Goldman Sachs and is a
Director, Managing Director and Chief Financial Officer of the Managing
Member. Mr. Levy managed the Global Client Financing business for Private
Wealth Management from February 2001 to May 2002, when he returned to
Princeton to resume his role as Chief Financial Officer of the Managing
Member. Mr. Levy joined Commodities Corporation Limited ("CCL"), the
predecessor of the Managing Member, in January 1995 and became Chief
Financial Officer of the Managing Member in June 1997. The Managing Member
acquired the assets of CCL in June 1997. Mr. Levy graduated from the
University of Pennsylvania in 1967 with a B.S. in Economics. In 1972, he
received his M.B.A. from the Wharton Graduate School of Business.
KENT A. CLARK is a Managing Director of Goldman Sachs and Chief
Investment 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 he is a member of the Chicago Quantitative Alliance.
Formerly, he was president of the Society of the 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.
HUGH J. LAWSON is a Managing Director of Goldman Sachs and is the
Global Head of Product Management for the Managing Member, where he leads
the group's distribution, client relationship, business development, and
product launch efforts globally. Prior to assuming this role, Mr. Lawson
was co-head of the Managing Member's European and Asian businesses. Before
joining the Managing Member, Mr. Lawson was head of Products and Services
for Goldman Sachs' Investment Management Division for Europe, together with
responsibility for Business Strategy Development for Private Wealth
Management Europe. Mr. Lawson joined Goldman Sachs in 1997. He spent three
years in the Investment Banking Division in both London and Hong Kong,
executing a range of financing and merger assignments in Europe and Asia.
He then transferred to the Investment Management Division in 2000. Prior to
joining Goldman Sachs, Mr. Lawson worked at the Boston Consulting Group in
New York and, previously, at the Rockefeller Brothers Fund in New York. He
graduated from Columbia University and Yale Law School.
JENNIFER BARBETTA is a Vice President in GSAM Alternative Investments.
In addition, Ms. Barbetta is Chief Operating Officer and Head of Portfolio
Analytics and Reporting for the Private Equity Group, Hedge Fund Strategies
and the Real Estate Alternative Investments businesses, where she is
responsible for client reporting, portfolio monitoring and analytics, cash
management, infrastructure development and overall administration of the
groups' products. Ms. Barbetta joined Goldman Sachs Asset Management in
1997 after spending two years in Goldman Sachs' 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 received a B.S. in Finance from Villanova
University
THOMAS DOBLER is a Vice President of the Managing Member and is the
Head of GTT, where he has worked since 2002, and he is also the Head of
GTT. Before coming to GS HFS, he led the Client Research and Investment
Strategy Group at Goldman Sachs in London, and was responsible for advising
high net worth clients on asset allocation and overall investment strategy.
Prior to London, Mr. Dobler spent two years in New York assisting in the
development of the Client Research and Strategy Group at Goldman Sachs
where he also worked with high net worth clients and their advisors. He
joined Goldman Sachs in 1998 from Salomon Brothers Asset Management, where
he was a senior member of their Quantitative Research Group. Mr. Dobler
holds a PhD in Mathematics from Columbia University and a BS in Mathematics
from the University of Vienna.
OMAR ASALI is a Vice President of the Managing Member and is the Head
of GED, and is Portfolio Manager of West Street Partners, a concentrated,
multi-manager vehicle that invests in hedge funds that demand longer term,
stable capital. Prior to joining Goldman Sachs Asset Management in 2003,
Omar worked in Goldman Sachs' Investment Banking Division providing M&A and
strategic advisory services to clients in the High Technology Group. Prior
to joining the firm, Omar worked in private equity at Capital Guidance. He
started his career as a C.P.A. working for a public accounting firm. Omar
has 12 years of industry experience. He received a B.S. in Accounting from
Virginia Tech and an M.B.A. from Columbia University.
MELANIE OWEN is a Vice President of the Managing Member and is the
Head of GRV . Prior to joining the Managing Member, Melanie was part of the
Manager Selection team in London, researching managers across all sectors
in the European and Asian regions. She joined Goldman Sachs' Investment
Management Division in 1998, subsequently working in both the Global Fixed
Income and Global Equities portfolio management teams. Melanie graduated
from Warwick University with a first class B.Sc. (Hons) in M.O.R.S.E.
(Maths, Operational Research, Statistics and Economics). In 2001, Melanie
attained her CFA Designation.
PETER ORT is a Vice President of the Managing Member and is the Head
of GELS. Prior to joining the Managing Member in 2001, Mr. Ort was a Vice
President with Smartleaf, Inc. a portfolio management software company
based in Cambridge, Massachusetts. He was previously with Goldman Sachs
from 1996-2000, where he worked in the Investment Management Division's
Private Equity Group, evaluating private equity fund managers and direct
investment opportunities. He first joined the firm in the Investment
Banking Division's Financial Institutions Group, where he focused on M&A
transactions in New York and Tokyo. Mr. Ort received a J.D./M.B.A. from New
York University in 1995 and a B.A. from Duke University in 1991. He was a
Fulbright Scholar in Japan from 1991-1992.
AUDIT COMMITTEE FINANCIAL EXPERT
The Company has no directors or executive officers. The Company is not
a "listed issuer" as defined under Section 10A-3 of the Exchange Act and is
therefore not required to have an audit committee comprised of independent
directors. The Company currently does not have an audit committee and the
Board of Directors of the Managing Member which performs the functions of
an audit committee on behalf of the Company believes that the directors
collectively have the requisite financial background, experience, and
knowledge to fulfill the duties and obligations that an audit committee
would have including overseeing the Company's accounting and financial
reporting practices. Therefore, the Board of Directors of the Managing
Member does not believe that it is necessary at this time to search for a
person who would qualify as an audit committee financial expert.
Furthermore, the Board of Directors of the Managing Member has the power to
engage experts or consultants as it deems appropriate to carry out its
responsibilities.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the 1934 Act requires the officers and directors of
the Managing Member and persons who own more than ten percent of the
Company's Units to file forms reporting their affiliation with the Company
and reports of ownership and changes in ownership of the Company's Units
with the SEC. These persons and entities are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file. To
the best of the Company's knowledge, based solely on a review of the copies
of such reports furnished to the Company, during the year ended December
31, 2004 all Section 16(a) filing requirements applicable to such persons
and entities were complied with for such year.
CODE OF ETHICS
The Company has no directors or executive officers. The Managing
Member has adopted a Code of Ethics for the Company that applies to the
persons acting as chief executive officer and chief financial officer/chief
accounting officer of the Company. A copy of the Company's Code of Ethics
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 Code of
Ethics is also filed as an exhibit to this Annual Report.
ITEM 11. EXECUTIVE COMPENSATION
The Company has no directors or executive officers.
In addition, the Company does not bear the costs of the annual
compensation of the executive officers or the directors of the Managing
Member. The Managing Member and its affiliates receive compensation from
the Company for services provided to the Company. Set forth below are the
amounts of the different types of fees paid or payable by, or allocable to,
the Company to the Managing Member and its affiliates during the year ended
December 31, 2005. 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 $13,560,772
- ---------------------------------------------------------------------------- -----------
Incentive Allocation paid or payable by the Company $2,615,216
- ---------------------------------------------------------------------------- -----------
Placement Fee paid or payable by the Company to Goldman Sachs $0
- ---------------------------------------------------------------------------- -----------
PERFORMANCE GRAPH
The line graph below compares the cumulative total return on the
Company's Units during the period from April 1, 2002, the date the Company
commenced its operations, through December 31, 2005, with the return on the
3 Month LIBOR, the Lehman Brothers Aggregate Index, the MSCI World Index
and the S&P 500 Index. These indices are unmanaged, the figures for an
index reflect the reinvestment of dividends but do not reflect the
deduction of any fees or expenses which would reduce returns. The Members
cannot invest directly in 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 (APRIL 2002 - DECEMBER 2005)
[GRAPHIC OMITTED]
o 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.
o 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.
o MSCI World Index: The Morgan Stanley Capital International World
Equities Index is a price index of the total return with dividends
reinvested monthly net of dividend withholding tax of a representative
group of listed companies for each region, with each component market
weighted on the basis of market capitalization relative to the total
market capitalization of the market being measured and adjusted for
changes in capital within the component firms.
o S&P 500 Index: The Standard & Poor's S&P 500 Index is an index based
on the prices of the securities of 500 different companies. Total
returns are calculated by adding the dividend income and price
appreciation for a given time period.
o Lehman Brothers Aggregate Index: The Lehman Brothers Aggregate Index
represents securities that are U.S. domestic, taxable, and dollar
denominated. The index covers the U.S. investment grade fixed rate
bond market, with index components for government and corporate
securities, mortgage pass-through securities, and asset-backed
securities. These major sectors are subdivided into more specific
indices that are calculated and reported on a regular basis.
o Index Sources: Bloomberg.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
To the knowledge of the Company, no person beneficially owns more than
five percent of the Units.
SECURITY OWNERSHIP OF MANAGEMENT
The Company has no directors or executive officers.
GS HFS, the Managing Member of the Company, did not have a beneficial
interest in the Company as of December 31, 2005 other than the Incentive
Allocation and other fees payable to it by the Company.
The following table sets forth (i) the individual directors and
executive officers of the Managing Member and (ii) all of the directors and
executive officers as a group who beneficially owned Units of the Company
as of December 31, 2005.
---------------------------------------------------------
NUMBER OF NAME OF BENEFICIAL PERCENTAGE OF ALL
UNITS OWNER INVESTORS' INTERESTS
---------------------------------------------------------
0 George H. Walker -
---------------------------------------------------------
0 Tobin V. Levy -
---------------------------------------------------------
0 Kent A. Clark -
---------------------------------------------------------
0 Hugh J. Lawson -
---------------------------------------------------------
0 Jennifer Barbetta -
---------------------------------------------------------
0 Thomas Dobler -
---------------------------------------------------------
0 Peter Ort -
---------------------------------------------------------
0 Omar Asali -
---------------------------------------------------------
0 Melanie Owen -
---------------------------------------------------------
0 Directors and -
executive officers
as a group
---------------------------------------------------------
CHANGES IN CONTROL
There are no arrangements, including pledges by any person of Units of
the Company, the operation of which may at a subsequent date result in a
change of control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Managing Member is an advisory affiliate of Goldman Sachs and
GSAM. Each of the Managing Member, Goldman Sachs and GSAM is a wholly owned
subsidiary of The Goldman Sachs Group, Inc. See ITEM 1.
"BUSINESS--POTENTIAL CONFLICTS OF INTEREST."
The Managing Member also manages a number of other investment funds
that have investment programs that are similar to those of the Company. See
ITEM 1. "BUSINESS--POTENTIAL CONFLICTS OF INTEREST."
From time to time certain qualified officers and employees of the GS
Group may invest in the Company. Neither the Investment Funds' Advisors nor
any of their respective principals are presently expected to purchase Units
or membership units in the Investment Funds. See ITEM 1.
"BUSINESS--POTENTIAL CONFLICTS OF INTEREST."
The Company may from time to time, in the sole discretion of the
Managing Member, invest in money market funds sponsored by the GS Group,
and the Company will not be reimbursed for any fees accruing to any
affiliate of the GS Group in respect of any such investment. See ITEM 1.
"BUSINESS--INVESTMENT PROGRAM--Investment Objective and Approach."
The Company pays the Managing Member a Management Fee. See ITEM 1.
"BUSINESS--FEES AND EXPENSES."
Some of the directors and executive officers of the Managing Member
also are or may become directors and executive officers of Goldman Sachs
and Goldman Sachs affiliates which entities provided services for the
Company, other than as an underwriter, during the year ended December 31,
2005 and are proposed to provide such services in the current year.
No directors and executive officers of the Managing Member, their
spouses and entities owned or controlled by them invested an amount in
excess of $60,000 in the Company during the year ended December 31, 2005.
Certain directors 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 and
executive officers from time to time invest their personal funds directly
in other funds managed by the GS Group on the same terms and conditions as
the other investors in these funds, who are not directors, executive
officers or employees.
BROKERAGE
The Advisors of the Investment Funds managing their assets directly
(including through Advisor Funds) or through Portfolio Companies have the
authority to select brokers and dealers from a list approved by the
managing member of the Investment Funds, through which to effect
transactions on the basis of various factors. The managing member of the
Investment Funds requires such Advisors to select executing brokers on a
best execution basis, considering price, commissions and commission
equivalents, other transaction costs, quality of brokerage services,
financing arrangements, creditworthiness and financial stability, financial
responsibility and strength, and clearance and settlement capability. The
Company does not have oversight over broker and dealer selection by
Investment Funds.
To the extent permitted under applicable law, the Advisors (including
through Advisor Funds) of each Investment Fund or Portfolio Company are
authorized to execute agency transactions for such Investment Fund, Advisor
Fund or Portfolio Company with or through GS Group and its affiliates
(including in circumstances where transactions on behalf of GS Group and
its affiliates are executed together with those on behalf of such
Investment Fund, Advisor Fund or Portfolio Company) as the Advisors, in
their sole discretion, shall determine. The Advisors may also use GS Group
or its affiliates for prime brokerage services.
Additionally, in selecting brokers and dealers, certain of the
Advisors may have authority to and may consider products or services
provided, or expenses paid, by such brokers and dealers to, or on behalf
of, such Advisors. Products and services generally include research items.
In some circumstances, the commissions paid on transactions with brokers or
dealers providing such services may exceed the amount another broker would
have charged for effecting that transaction. "Soft dollar" payments or
rebates of amounts paid to brokers and dealers may arise from
over-the-counter principal transactions, as well as exchange traded agency
transactions. In addition, such payments or rebates may be made by futures
brokers in connection with futures transactions.
The Managing Member, either in its capacity as the managing member of
the Company or the Investment Funds, may also receive research items from
brokers and dealers that provide brokerage services to its clients
(including the Investment Funds and the Portfolio Companies). The total
amount of commissions directed to a particular broker may be made pursuant
to an agreement that would bind the managing member of the Investment Funds
to compensate the selected broker for the services provided. Research or
other services obtained in this manner may be used in servicing any or all
advisory clients of the managing member of the Investment Funds, including
each of the Investment Funds and the Portfolio Companies, and are used in
connection with advisory accounts other than those that pay commissions to
the broker relating to the research or other service arrangements.
Research products and services made available to the Managing Member,
either in its capacity as the managing member of the Company or the
Investment Funds, through brokers and dealers executing transactions for
its clients, including the Investment Funds and the Portfolio Companies,
involving brokerage commissions may include: performance and other
qualitative and quantitative data relating to Advisors in general and
certain Advisors in particular; data relating to the historic performance
of categories of securities associated with particular investment styles;
quotation equipment; and related computer hardware and software, all of
which research products and services are used by the managing member of the
Investment Funds in connection with its selection and monitoring of
Advisors, the portfolio design of a mix of investment styles appropriate to
investment objectives of clients, and the determination of overall
portfolio strategies including asset allocation models.
To the extent permitted by applicable law, Advisors may execute
transactions with or through Goldman Sachs. The Advisors may also use GS
Group and its affiliates for prime brokerage and other services.
PLACEMENT AGENT
Goldman Sachs acts as placement agent for the Company (the "Placement
Agent"). The Placement Agent is entitled to a fee (the "Placement Fee") of
up to a specified amount of each Member's subscription. Historically,
Goldman Sachs has not charged a Placement Fee, however, there can be no
assurance that Goldman Sachs will not charge a Placement Fee in the future.
Amounts paid in respect of the Placement Fee will not constitute assets of
the Company. The Placement Agent may also receive compensation from the
Managing Member that represents a portion of the Management Fee. The
Placement Agent may enter into sub-placement agreements with affiliates and
unaffiliated third parties. At the discretion of the Placement Agent, all
or a portion of the Placement Fee may be allocated to such sub-placement
agents. The Company may waive or impose different sales charges, or
otherwise modify its distribution arrangements, in connection with the
offering of Units. Pursuant to an agreement entered into between the
Placement Agent and the Company (the "Placement Agent Agreement"), the
Company has agreed to indemnify and hold harmless the Placement Agent, its
affiliates and any agent against any losses, claims, damages or liabilities
(or actions in respect thereof), joint or several (the "Covered Claims"),
to which the Placement Agent may become subject, to the extent such Covered
Claims arise out of or are based upon (i) an untrue statement or alleged
untrue statement of a material fact contained in the Memorandum, or (ii)
the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statement therein not
misleading. The Placement Agent Agreement provides that the Company will
reimburse the Placement Agent for any legal or other expenses reasonably
incurred by the Placement Agent in connection with investigating or
defending any such Covered Claims; provided, however, that the Company will
not be liable to indemnify or reimburse the Placement Agent in any such
case to the extent that any such Covered Claims arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in the Memorandum in reliance upon and in conformity with
written information furnished to the Company by the Placement Agent
expressly for use therein.
In addition, to the extent the indemnification provisions described in
the preceding paragraph are unavailable or insufficient to hold harmless an
indemnified party with respect to any Covered Claims, the Placement Agent
Agreement specifies that the Company will contribute to the amount paid or
payable by such indemnified party as a result of such Covered Claims in
such proportion as is appropriate to reflect the relative benefits received
by the Company and the Placement Agent from the offering of the Units,
unless otherwise provided by applicable law or the Placement Agent
Agreement.
Goldman Sachs also acts as the placement agent on behalf of the
Investment Funds. The Company will not be charged any placement fee by the
Investment Funds.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table presents fees for the professional audit services
rendered by E&Y for the audit of the Company's annual financial statements
for the years ended December 31, 2005 and 2004 and fees billed for other
services rendered by E&Y during those periods.
Year Ended December 31,
2005 2004
------------------------- --------------------------
Audit Fees $ 120,000 (1) $ 185,000(2)
Audit-Related Fees (3) $ 280,000 $ -
Tax Fees (4) $ 50,000 $ 60,000
All Other Fees $ - $ -
------------------------- --------------------------
Total $ 450,000 $ 245,000
========================= ==========================
(1) Year ended December 31, 2005 includes $45,000 for the review of this
annual report on Form 10-K and the Company's quarterly reports on Form
10-Q.
(2) Year ended December 31, 2004 includes $115,000 for the review of the
Company's Registration Statement, this annual report on Form 10-K and
the Company's quarterly reports on Form 10-Q.
(3) Year ended December 31, 2005 audit-related fees are for Sarbanes Oxley
404 consultation, documentation and testing.
(4) Tax services primarily involve assistance with the preparation of tax
returns and K-1s.
The board of directors of the Managing Member does not have an audit
committee which is responsible for the oversight of the Company's
accounting and financial reporting practices. As the Company does not have
a formal audit committee, the services described above were not approved by
the audit committee and the Company does not have audit committee
pre-approval policies and procedures. The board of directors of the
Managing Member as a whole is responsible for the oversight of the
Company's accounting and financial reporting practices and the board is
responsible for approving every engagement of E&Y to perform audit or
non-audit services for the Company before E&Y is engaged to provide those
services. The board of directors considers whether the provision of any
non-audit provisions is compatible with maintaining E&Y's independence.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents Filed as Part of this Annual Report:
1. Financial Statements.
DESCRIPTION OF FINANCIAL STATEMENTS PAGE
----------------------------------- 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, 2005
and 2004.......................................... F-3
Balance Sheet as of December 31, 2005 and 2004.... F-5
Statement of Operations for the years ended
December 31, 2005, 2004 and 2003.................. F-6
Statement of Changes in Members' Equity for the
years ended December 31, 2005, 2004 and 2003...... F-7
Statement of Cash Flows for the years ended
December 31, 2005, 2004 and 2003.................. F-8
Notes to Financial Statements..................... F-9
2. Financial Statement Schedules.
Certain schedules are omitted because they are not
applicable or the required information is shown in the
financial statements or notes thereto.
3. List of Exhibits.
See Index of Exhibits included on page E-1.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
(Registrant)
By: Goldman Sachs Hedge Fund Strategies LLC
Managing Member
By: /s/ Tobin V. Levy
--------------------------------
Name: Tobin V. Levy
Title: Managing Director and Chief
Financial Officer
Date: March 31, 2006
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 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, 2006 (filed as Exhibit 10.2 to the
8-K, filed January 6, 2006, 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* Copy of Amended and Restated Limited Liability Company
Agreement of Goldman Sachs Global Event Driven, LLC, dated
as of January 1, 2006 (filed as Exhibit 10.4 to the Form
8-K, filed January 6, 2006, and incorporated herein by
reference).
10.5* Distribution Agreement between Goldman Sachs Hedge Fund
Partners, LLC and Goldman, Sachs & Co. dated March 1, 2002
(filed as Exhibit 10.5 to the Form 10, filed April 29, 2004,
and incorporated herein by reference).
10.6* Administration Agreement between Goldman Sachs Hedge Fund
Partners, LLC and Goldman Sachs Hedge Fund Strategies LLC
(formerly Goldman Sachs Princeton LLC) dated March 1, 2002
(filed as Exhibit 10.6 to the Form 10, filed April 29, 2004,
and incorporated herein by reference).
14.1* Code of Ethics for Goldman Sachs Hedge Fund Partners, LLC
(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.
31.1 Certification of Chief Executive Officer in the form
prescribed by Rule 13a-14(a) or 15d-14(a) under the
Securities Exchange Act of 1934.
31.2 Certification of Chief Financial Officer in the form
prescribed by Rule 13a-14(a) or 15d-14(a) under the
Securities Exchange Act of 1934.
32.1 Certification of Chief Executive Officer in the form
prescribed by 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer in the form
prescribed by 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
*Previously filed.
INDEX OF FINANCIAL STATEMENTS
-----------------------------
PAGE
DESCRIPTION OF FINANCIAL STATEMENTS NUMBER
- ----------------------------------- ------
Goldman Sachs Hedge Fund Partners, LLC Financial Statements
Report of Independent Registered Public Accounting Firm.........F-2
Schedule of Investments as of December 31, 2005 and 2004........F-3
Balance Sheet as of December 31, 2005 and 2004..................F-5
Statement of Operations for the years ended December 31,
2005, 2004 and 2003.............................................F-6
Statement of Changes in Members' Equity for the years ended
December 31, 2005, 2004 and 2003................................F-7
Statement of Cash Flows for the years ended December 31,
2005, 2004 and 2003.............................................F-8
Notes to Financial Statements...................................F-9
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Managing Member and Members
Goldman Sachs Hedge Fund Partners, LLC
We have audited the accompanying balance sheet, including the schedule of
investments, of Goldman Sachs Hedge Fund Partners, LLC (the "Company"), as
of December 31, 2005 and 2004, 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, 2005. These financial statements are the
responsibility of the managing member. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. We were
not engaged to perform an audit of the Company's internal control over
financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over
financial reporting. Accordingly we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Goldman Sachs Hedge
Fund Partners, LLC at December 31, 2005 and 2004, the results of its
operations, changes in its members' equity and its cash flows for each of
the three years in the period ended December 31, 2005, in conformity with
U.S. generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
March 28, 2006
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2005 AND 2004
2005 2004
-------------------------------------------------- --------------------------------------------
% of % of adjusted % of % of adjusted
Fair members' members' Fair members' members'
Investee value equity(1) equity(2) value equity(1) equity(2)
- ----------------------- ---------------- ------------- ---------------- --------------- ------------ ---------------
Goldman Sachs Global
Equity Long/Short, LLC $ 294,096,911 37.97% 26.21% $ 226,276,134 23.63% 20.84%
Goldman Sachs Global
Event Driven, LLC 301,443,254 38.91% 26.86% 268,186,702 28.01% 24.69%
Goldman Sachs Global
Relative Value, LLC 317,728,892 41.02% 28.32% 350,409,379 36.60% 32.27%
Goldman Sachs Global
Tactical Trading, LLC 211,060,876 27.25% 18.81% 248,081,137 25.91% 22.84%
---------------- ------------- ---------------- --------------- ------------ ---------------
Total investments
(cost $949,298,808 and
$945,867,114,
respectively) $ 1,124,329,933 145.15% 100.20% $ 1,092,953,352 114.15% 100.64%
================ ============= ================ =============== ============ ===============
<FN>
(1) Members' equity used in the calculation of the investments as a % of
members' equity, is reduced for member redemptions that are paid after
the balance sheet date.
(2) Adjusted members' equity used in the calculation of the investments as
a % of adjusted members' equity, represents members' equity excluding
Redemptions payable in the amount of $347,523,596 that was payable at
December 31, 2005 and Redemptions payable in the amount of and
$128,546,636 that was payable at December 31, 2004.
</FN>
See accompanying notes
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2005 AND 2004 (continued)
Underlying investment information required to make a complete presentation
of the Company's aggregate proportionate share of the underlying
investments of the Investees is not available from certain Investees. Where
such information is available, the Company's aggregate proportionate share
of any underlying investment of the Investees, which exceeds 5% of the
Company's members' equity, would be disclosed.
The Company's aggregate proportionate share of the following underlying
investments of the Investees represented greater than 5% of the Company's
members' equity.
2005
- ------------------------------------------------------------------------------------------------------------------------
% OF
PROPORTIONATE ADJUSTED
SHARE OF % OF MEMBERS' MEMBERS'
INVESTEE UNDERLYING INVESTMENT FAIR VALUE EQUITY EQUITY(2)
- -------------------------------------------- -------------------------- ---------------- -------------- --------------
Goldman Sachs Global Event Driven, LLC OZ Domestic Partners, LP 23,653,904 3.04% 2.10%
Goldman Sachs Global Relative Value, LLC OZ Domestic Partners, LP 18,712,511 2.41% 1.66%
<FN>
(1) Members' equity used in the calculation of the underlying investments
held by the Investees as a % of members' equity, is reduced for member
redemptions that are paid after the balance sheet date.
(2) Adjusted members' equity used in the calculation of the underlying
investments held by the Investees as a percentage of adjusted members'
equity, represents members' equity excluding Redemptions payable in
the amount of $347,523,596 that was payable at December 31, 2005.
</FN>
See accompanying notes.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
BALANCE SHEET
DECEMBER 31, 2005 AND 2004
ASSETS
------
2005 2004
--------------------- --------------------
Assets:
Investments (cost $949,298,808 and
$945,867,114, respectively) $ 1,124,329,933 $ 1,092,953,352
Cash and cash equivalence 706,812 218,797
--------------------- --------------------
Total assets $ 1,125,036,745 $ 1,093,172,149
===================== ====================
LIABILITIES AND MEMBERS' EQUITY
-------------------------------
Liabilities:
Redemptions payable $ 347,523,596 $ 128,546,636
Due to managing member 2,321,114 3,247,774
Due to bank 10,112 3,000,000
Accounts payable and accrued liabilities 583,040 922,506
--------------------- --------------------
Total liabilities 350,437,862 135,716,916
Members' equity (units outstanding 6,507,125.18 and
8,106,803.34, respectively) 774,598,883 957,455,233
--------------------- --------------------
Total liabilities and members' equity $ 1,125,036,745 $ 1,093,172,149
===================== ====================
Analysis of members' equity:
Net capital contributions, accumulated net investment
income/(loss) and realized profit/(loss) $ 599,567,758 $ 810,368,995
Accumulated net unrealized profit/(loss) $ 175,031,125 $ 147,086,238
===================== ====================
See accompanying notes.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
2005 2004 2003
----------------- ----------------- -----------------
Income from trading:
Equity in earnings of investees:
Realized profit/(loss) $ 38,871,694 $ 18,366,046 $ 241,972
Changed in unrealized profit/(loss) 27,944,887 53,652,341 81,612,423
----------------- ----------------- -----------------
Net trading profit/(loss) 66,816,581 72,018,387 81,854,395
Interest income 161,801 495,194 97,943
Expenses:
Management fee 13,560,772 12,234,696 9,666,257
Professional fees 1,237,030 1,641,442 1,053,505
Interest expense 37,747 546,069 -
Miscellaneous expenses 1,199 35,645 13,910
----------------- ----------------- -----------------
Total expenses 14,836,748 14,457,852 10,733,672
----------------- ----------------- -----------------
Net investment income/(loss) (14,674,947) (13,962,658) (10,635,729)
----------------- ----------------- -----------------
Net income/(loss) 52,141,634 58,055,729 71,218,666
Less: Incentive allocation to the
managing member 2,615,216 2,902,854 3,560,865
----------------- ----------------- -----------------
Net income/(loss) available for pro-rata
allocation to members $ 49,526,418 $ 55,152,875 $ 67,657,801
================= ================= =================
See accompanying notes.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
STATEMENT OF CHANGES IN MEMBERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
Managing Total
member's Members' Members' members'
equity units equity equity
--------------- -------------------- ----------------- -----------------
Balance at December 31, 2002 $ 469,759 3,738,439.26 $ 382,756,502 $ 383,226,261
Subscriptions - 5,228,815.64 524,318,830 524,318,830
Redemptions (4,030,624) (369,584.81) (41,487,391) (45,518,015)
Share class conversion - (57,157.68) - -
Allocations of net income/(loss):
Incentive allocation 3,560,865 - - 3,560,865
Pro-rata allocation - - 67,657,801 67,657,801
--------------- -------------------- ----------------- -----------------
Balance at December 31, 2003 - 8,540,512.41 933,245,742 933,245,742
Subscriptions - 1,238,393.44 126,385,622 126,385,622
Redemptions (2,902,854) (1,321,377.58) (157,329,006) (160,231,860)
Share class conversion - (350,724.93) - -
Allocations of net income/(loss):
Incentive allocation 2,902,854 - - 2,902,854
Pro-rata allocation - - 55,152,875 55,152,875
--------------- -------------------- ----------------- -----------------
Balance at December 31, 2004 - 8,106,803.34 957,455,233 957,455,233
Subscriptions - 2,253,291.93 225,329,193 225,329,193
Redemptions (2,615,216) (3,708,281.88) (457,711,961) (460,327,177)
Share class conversion - (144,688.21) - -
Allocations of net income/(loss):
Incentive allocation 2,615,216 - - 2,615,216
Pro-rata allocation - - 49,526,418 49,526,418
--------------- -------------------- ----------------- -----------------
Balance at December 31, 2005 $ - 6,507,125.18 $ 774,598,883 $ 774,598,883
=============== ==================== ================= =================
See accompanying notes.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
2005 2004 2003
---------------- ---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $ 52,141,634 $ 58,055,729 $ 71,218,666
Adjustments to reconcile net income/(loss) to net
cash from operating activities:
Purchases of investments (192,640,000) (174,845,756) (507,973,827)
Proceeds from sales of investments 228,080,000 124,823,619 2,500,000
Realized profit/(loss) from sales of
investments (38,871,694) (18,366,046) (241,972)
Change in unrealized profit/(loss) (27,944,887) (53,652,341) (81,612,423)
(Increase)/decrease in operating assets:
Other assets - 77,464 (77,464)
Increase/(decrease) in operating liabilities:
Due to managing member (926,660) (721,913) 3,211,779
Accounts payable and accrued liabilities
(339,466) 753,631 (31,769)
---------------- ---------------- ----------------
Net cash from operating activities 19,498,927 (63,875,613) (513,007,010)
---------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Subscriptions 225,329,193 126,385,622 524,318,830
Redemptions (241,350,217) (66,214,849) (10,988,390)
Increase (decrease) in Due to bank (2,989,888) (44,500,000) 47,500,000
---------------- ---------------- ----------------
Net cash from financing activities (19,010,912) 15,670,773 560,830,440
---------------- ---------------- ----------------
Net change in cash and cash equivalents 488,015 (48,204,840) 47,823,430
Cash and cash equivalents at beginning of year 218,797 48,423,637 600,207
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 706,812 $ 218,797 $ 48,423,637
================ ================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid by the Company during the year for interest $ 27,635 $ 546,069 -
================ ================ ================
See accompanying notes.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------
Organization and basis of financial statements
- ----------------------------------------------
Goldman Sachs Hedge Fund Partners, LLC (the "Company") was organized as a
limited liability company, pursuant to the laws of the State of Delaware
and commenced operations on April 1, 2002 for the principal purpose of
investing in the equity long/short, event driven, relative value, and
tactical trading hedge fund sectors through investments in Goldman Sachs
Global Equity Long/Short, LLC ("GELS"), Goldman Sachs Global Event Driven,
LLC ("GED"), Goldman Sachs Global Relative Value, LLC ("GRV") and Goldman
Sachs Global Tactical Trading, LLC ("GTT") (collectively, the "Investees").
Each of these Investees invests directly through trading advisors, or
indirectly through investment vehicles managed by such trading advisors
(together, the "Advisors"). Goldman Sachs Hedge Fund Strategies LLC ("GS
HFS"), a wholly-owned subsidiary of The Goldman Sachs Group, Inc., is the
managing member, administrator and commodity pool operator of the Company.
The financial statements are prepared in accordance with U.S. generally
accepted accounting principles ("GAAP"), which require the managing member
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results may differ from
those estimates. The financial statements are expressed in United States
dollars. Certain reclassifications have been made to previously reported
amounts to conform to current year presentation.
The Company is an investment company for financial reporting purposes and
accordingly carries its assets and liabilities at fair value. Net asset
value per unit is determined by dividing the net assets attributable to
each series by that series' respective number of units outstanding.
Consolidation
- -------------
During the years ended December 31, 2005 and 2004, the Company's ownership
percentage of certain Investees exceeded 50%. This ownership percentage
will fluctuate as a result of the Company's investment strategy and
investor subscriptions and redemptions at the Company and Investee level.
The Company does not consolidate the results of the Investees in its
financial statements as 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
may, but normally does not intend to, exercise control over majority owned
Investees.
The following table summarizes the Company's ownership in the Investees at
December 31, 2005 and 2004:
December 31, 2005
------------------------------------------------------------------------------------------
% owned by Adjusted Adjusted %
Company Investee the Investee owned by the
investment equity (1) Company(1) equity (2) Company(2)
------------------ ------------------- ------------- ------------------- -----------------
GELS $ 294,096,911 $ 816,334,736 36.03% $ 971,851,587 30.26%
GED 301,443,254 971,795,729 31.02% 1,014,743,053 29.71%
GRV 317,728,892 397,729,785 79.89% 742,911,706 42.77%
GTT 211,060,876 316,096,988 66.77% 484,726,735 43.54%
------------------
Total $ 1,124,329,933
==================
December 31, 2004
----------------------------------------------------
Company Investee % owned by
investment equity the Company
----------------------------------------------------
GELS $ 226,276,134 $ 694,878,944 32.56%
GED 268,186,702 860,469,969 31.17%
GRV 350,409,379 617,008,832 56.79%
GTT 248,081,137 635,662,057 39.03%
------------------
Total $ 1,092,953,352
==================
(1) The Investees' equity used in the calculation of the % owned by the
Company is reduced for member redemptions from the Investees that are
paid after the balance sheet date.
(2) The Adjusted Investees' Equity used in the calculation of the % owned
by the Company represents Investees' equity excluding Redemptions that
were paid after December 31, 2005.
In addition, in December 2003, the Financial Accounting Standards Board
("FASB") issued interpretation No. 46(R), "Consolidation of Variable
Interest Entities" ("FIN 46(R)"), which provides new criteria for
determining whether consolidation accounting is required. Registered
investment companies have been exempted from the provisions of FIN 46(R)
and FIN 46(R) has been deferred for non-registered investment companies
pending the release of a FASB Scope of Investment Companies project ("Scope
Project"). The Scope Project is designed to determine which entities will
qualify as investment companies, and therefore present their Investees at
fair value. Those entities so qualifying will not need to determine whether
their investees should be consolidated pursuant to the provisions of FIN
46(R). FIN 46(R) would have no impact on the Company's net assets or net
increase in net assets resulting from operations.
Equity in earnings of investees
- -------------------------------
Equity in earnings of investees includes the change in fair value of each
Investee. Fair values are determined utilizing net asset value information
supplied by each individual Investee which includes realized and unrealized
gains/losses on investments as well as the Advisor's management, incentive
and administration fees and all other income/expenses. See Note 2 -
Investments for further information.
Cash and cash equivalents
- -------------------------
The Company considers all highly liquid investments with a maturity of less
than 90 days at the time of purchase which are not held for resale to be
cash equivalents. Cash equivalents are carried at cost plus accrued
interest, which approximates fair value.
Allocation of net income/(loss)
- -------------------------------
Net income/(loss) is allocated monthly to the capital account of each
member in the ratio that the balance of each such member's capital account
bears to the total balance of all members' capital accounts. The managing
member receives an annual incentive allocation equal to five percent of any
new appreciation in the net asset value of each series, as defined. Any
depreciation in the net asset value of a series must be recouped prior to
the managing member receiving an incentive allocation.
Subscriptions and redemptions
- -----------------------------
Subscriptions to the Company can be made as of the first day of each
calendar quarter or at the sole discretion of the managing member.
Redemptions from the Company can be made semi-annually after a twelve-month
holding period or at such other times as determined in the sole discretion
of the managing member, as provided for in the Company's limited liability
company agreement.
Income taxes
- ------------
The Company is taxed as a partnership for U.S. federal income tax purposes.
The members include their distributive share of the Company's taxable
income or loss on their respective income tax returns. Accordingly, no
income tax liability or expense has been recorded in the financial
statements of the Company.
Indemnifications
- ----------------
The Company enters into contracts that contain a variety of indemnification
arrangements. The indemnification arrangements the Company has entered into
with service providers include provisions for the Company to indemnify and
hold harmless such service providers for certain liabilities. These
indemnification arrangements typically cover liabilities incurred by
service providers in connection with the services provided under the
contractual arrangements with the Company and are generally entered into as
part of a negotiated contractual arrangement stipulating the furnishing of
the delineated services. However, under the terms of such contractual
arrangements, the Company will not be required to indemnify service
providers in certain situations to the extent that the liabilities incurred
by the service providers were caused by the gross negligence, willful
misconduct, bad faith, reckless disregard of duties, or similar conduct on
the part of the service provider. The Company's maximum exposure under
these arrangements is unknown. It is not possible to estimate the maximum
potential exposure under these agreements, because the indemnification
arrangements relate to unforeseeable liabilities suffered as a result of
the conduct of the Company or other parties which is presently unknown or
unforeseeable. However, the Company has not had prior claims or losses
pursuant to these indemnification arrangements and expects the risk of
material loss therefrom to be remote.
NOTE 2 - INVESTMENTS
- --------------------
The Investees seek capital appreciation over time by investing in the
equity long/short, event driven, relative value and tactical trading hedge
fund sectors. The Company's investments in Investees are subject to terms
and conditions of the respective operating agreements. The investments are
carried at fair value as determined by the Company's attributable share of
the net assets of the respective Investees. Fair values are determined
utilizing net asset value information supplied by each individual Investee
net of each Advisor's management and incentive fees. These fees are
included in Equity in earnings of investees on the Statement of Operations.
The underlying investments of each Investee are accounted for at fair value
as determined by the 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. GS HFS is
the managing member for each of the Investees. GS HFS does not charge the
Company any management fee or incentive allocation at the Investee level.
The managing member generally has limited access, if at all, to specific
information regarding the Advisors' portfolios and relies on valuations
provided by the Advisors. Generally, the valuations provided by the
Advisors are only audited on an annual basis and are not subject to
independent third party verification. Typically, audited financial
statements are not received before issuance of the Company's financial
statements. GS HFS, in its capacity as managing member of the Company, may
perform additional procedures including Advisor due diligence reviews and
analytical procedures with respect to the valuations provided by the
Advisors and to ensure conformity with GAAP. Valuations provided by the
Advisors may differ from the audited values received subsequent to the date
of the Company's net asset value determination. In such cases, the Company
will evaluate the materiality of any such differences.
The following table summarizes the Company's Equity in earnings of
investees for the year ended December 31, 2005, 2004 and 2003:
Year Ended December 31,
- -------------------------- ------------ -------------------------------------------------------------
Investee Liquidity 2005 2004 2003
- -------------------------- ------------ ------------------ ----------------- ------------------
GELS (1) $ 25,751,277 $ 17,695,686 $ 15,645,066
GED (2) 20,855,652 27,901,912 28,258,987
GRV (3) 12,266,713 17,918,978 19,361,520
GTT (4) 7,942,939 8,501,811 18,588,822
------------------ ----------------- ------------------
Total $ 66,816,581 $ 72,018,387 $ 81,854,395
================== ================= ==================
<FN>
(1) Redemptions can be made quarterly with 45 days' notice, or at the sole
discretion of the managing member. Prior to July 2004, a twelve-month
holding period was in effect.
(2) Redemptions can be made semi-annually with 45 days' notice, or at the
sole discretion of the managing member. Prior to July 2004, a
twelve-month holding period was in effect. Effective January 1, 2006,
redemptions can be made quarterly with 91 days' notice.
(3) Redemptions can be made quarterly with 45 days' notice, or at the sole
discretion of the managing member. Prior to July 2004, redemptions
were made semi-annually with 45 days' notice, or at the sole
discretion of the managing member and a twelve-month holding period
was in effect. Effective January 1, 2006, redemptions can be made
quarterly with 91 days' notice.
(4) Redemptions can be made semi-annually with 60 days' notice, or at the
sole discretion of the managing member. Effective January 1, 2006,
redemptions can be made quarterly with 61 days' notice.
</FN>
Goldman Sachs Global Equity Long/Short, LLC
- -------------------------------------------
Goldman Sachs Global Equity Long/Short, LLC seeks risk-adjusted absolute
returns with volatility lower than the broad equity markets, primarily
through long and short investment opportunities in the global equity
markets. Strategies generally involve making long and short equity
investments, often based on the Advisor's assessment of fundamental value
compared to market price, although Advisors employ a wide range of styles.
Goldman Sachs Global Event Driven, LLC
- --------------------------------------
Goldman Sachs Global Event Driven, LLC seeks risk-adjusted absolute returns
with volatility and correlation lower than the broad equity markets by
allocating assets to Advisors that operate primarily in the global event
driven sector. Event driven strategies seek to identify security price
changes resulting from corporate events such as restructurings, mergers,
takeovers, spin-offs, and other special situations. Corporate event
arbitrageurs generally choose their investments based on their perceptions
of the likelihood that the event or transaction will occur, the amount of
time that the process will take, and the perceived ratio of return to risk.
Strategies that may be utilized in the event driven sector include risk
arbitrage/special situations, credit opportunities/distressed securities
and multi-strategy investing. Other strategies may be employed as well.
Goldman Sachs Global Relative Value, LLC
- ----------------------------------------
Goldman Sachs Global Relative Value, LLC seeks risk-adjusted absolute
returns with volatility and correlation lower than the broad equity markets
by allocating assets to Advisors that operate primarily in the global
relative value sector. Relative value strategies seek to profit from the
mispricing of financial instruments, capturing spreads between related
securities that deviate from their fair value or historical norms.
Directional and market exposure is generally held to a minimum or
completely hedged. Strategies that may be utilized in the relative value
sector include convertible arbitrage, equity arbitrage and fixed-income
arbitrage. Other strategies may be employed as well.
Goldman Sachs Global Tactical Trading, LLC
- ------------------------------------------
Goldman Sachs Global Tactical Trading, LLC seeks long-term risk-adjusted
returns by allocating its assets to Advisors that employ strategies
primarily within the tactical trading sector. Tactical trading strategies
are directional trading strategies that generally fall into one of the
following two categories: managed futures strategies and global macro
strategies. Managed futures strategies involve trading in the global
futures and currencies markets, generally using systematic or discretionary
approaches. Global macro strategies generally utilize analysis of
macroeconomic, geopolitical, and financial conditions to develop views on
country, regional or broader economic themes and then seek to capitalize on
such views by trading in securities, commodities, interest rates,
currencies and various financial instruments.
Information regarding the actual management and incentive fees charged by
the Advisors for the period was not available for all Advisors. The
following table reflects the weighted average Advisors' management fee and
incentive fee rates at the Investee level at December 31, 2005, 2004 and
2003. The weighted average is based on the period end market values of each
Advisor investment in proportion to the Investee's total investments. The
fee rates used are the actual rates charged by each Advisor.
2005 2004 2003
------------------------------- ------------------------------ --------------------------------
Investee Management Incentive Management Incentive Management Incentive
fees fee fees fee fees fee
- ------------- --------------- ------------ -------------- ------------ ---------------- ------------
GELS 1.50% 19.94% 1.42% 20.00% 1.27% 19.78%
GED 1.47% 19.92% 1.43% 19.94% 1.44% 19.93%
GRV 1.65% 20.88% 1.57% 20.76% 1.53% 20.60%
GTT 2.02% 20.63% 2.05% 20.46% 1.96% 19.97%
The Advisors' management and incentive fees are not paid to the managing
member.
The following table summarizes the cost of the Company's investments in the
Investees at December 31, 2005 and 2004:
Investee 12/31/2005 12/31/2004
- ---------------------------------- -------------------- -----------------
GELS $ 241,980,239 $ 193,714,595
GED 236,665,601 213,989,105
GRV 282,956,248 315,948,238
GTT 187,696,720 222,215,176
----------------- -------------------
Total $ 949,298,808 $ 945,867,114
================= ===================
NOTE 3 - FEES
- -------------
The Company pays a monthly management fee to GS HFS equal to 1.25% per
annum of the net assets of the Company as of each month-end, as defined.
Effective January 1, 2005, the Company pays a monthly administration fee to
SEI Global Services, Inc. ("SEI") in the range of 0.07% to 0.10% per annum
of the net assets at the Investee level, but such rate may be exceeded
under certain circumstances, subject to a maximum of approximately 0.20%.
Prior to January 1, 2005, the Company paid a monthly administration fee to
GS HFS equal to 0.20% per annum of the net assets at the Investee level.
The administration fee is charged at the Investee level and is included in
Equity in earnings of investees on the Statement of Operations. For the
year ended December 31, 2005, 2004 and 2003, the administration fee charged
at the Investee level totaled $713,242, $1,960,131 and $1,539,364,
respectively.
GS HFS and the Company entered into an agreement with SEI to serve as the
sub-administrator of the Company effective March 1, 2004. Pursuant to the
agreement, GS HFS is responsible for paying the fees of SEI. SEI serves as
the administrator for each of the Investees.
NOTE 4 - RISK MANAGEMENT
- ------------------------
In the ordinary course of business, GS HFS, in its capacity as managing
member of the Company and the Investees, attempts to manage a variety of
risks, including market, credit and operational risk. GS HFS, in its
capacity as managing member of the Company and the Investees, attempts to
identify, measure and monitor risk through various mechanisms including
risk management strategies and credit policies. These include monitoring
risk guidelines and diversifying exposures across a variety of instruments,
markets and counterparties.
Market risk is the risk of potential significant adverse changes in the
value of financial instruments because of changes in market conditions such
as interest and currency rate movements and volatility in commodity or
security prices. GS HFS, in its capacity as managing member of the Company
and the Investees, monitors its exposure to market risk through various
analytical techniques.
The Company invests in the Investees, and may from time to time redeem its
membership units of the Investees. The Investees, in turn, maintain
relationships with counterparties that include the Advisors. These
relationships could result in concentrations of credit risk. Credit risk
arises from the potential inability of counterparties to perform their
obligations under the terms of the contract. GS HFS, in its capacity as
managing member of the Investees, has formal credit-review policies to
monitor counterparty risk.
Operational risk is the potential for loss caused by a deficiency in
information, communication, transaction processing and settlement and
accounting systems. GS HFS, in its capacity as managing member of the
Company and the Investees, maintains controls and procedures for the
purpose of mitigating operational risk.
There can be no assurance that GS HFS, in its capacity as managing member
of the Company and the Investees, will be able to implement its risk
guidelines or that its risk monitoring strategies will be successful.
NOTE 5 - RELATED PARTIES
- ------------------------
The Due to managing member liability on the Balance Sheet represents
management fees due to GS HFS at December 31, 2005 and 2004.
Included in the Redemptions payable on the Balance Sheet at December 31,
2005 and 2004 were redemptions due to the managing member of $2,615,216 and
$2,902,854, respectively.
Goldman, Sachs & Co. ("GS&Co."), an affiliate of the managing member, is
one of several prime brokers for the Advisors. GS&Co. charges fees at
prevailing market rates.
Directors and Executive Officers of the managing member own less than 1% of
the Company's equity at December 31, 2005, 2004 and 2003.
NOTE 6 - BORROWING FACILITY
- ---------------------------
On November 24, 2004, the Company entered into a five year credit facility
with a financial institution. The Company may request to borrow up to
$45,000,000, at the discretion of the financial institution. Effective,
September 1, 2005, the Company may request to borrow up to $40,000,000 at
the discretion of the financial institution. At the time of any borrowing,
the aggregate amounts borrowed may not exceed 10% of the Company's net
asset value and at all other times the aggregate amount borrowed may not
exceed 15% of the Company's net asset value. The effective interest rate on
borrowed amounts is the London Interbank Offering Rate ("LIBOR"), plus
0.85%. There were no borrowings outstanding at December 31, 2005 and
$3,000,000 was outstanding at December 31, 2004, which is included in Due
to bank on the Balance Sheet. The Company granted a security interest in
the Company's cash accounts and any other accounts that contain any other
investment property of the Company. Effective January 3, 2006, the Company
may request to borrow up to $76,000,000.
Prior to November 24, 2004, the Company entered into a borrowing facility
with a major financial institution. The facility was structured as a call
spread option that had been issued by the Company to the financial
institution. Under the terms of the facility, the Company received cash and
redeposited the amount with the financial institution in a collateral
account. The Company had the right to draw funds from the collateral
account to use for liquidity purposes. The effective interest rate on
borrowed amounts represented by funds drawn from the collateral account was
LIBOR plus 0.875%. The Company also paid the equivalent of a commitment fee
of 0.25% on the undrawn funds. This facility expired in October 2004.
NOTE 7 - MEMBERS' EQUITY
- ------------------------
At December 31, 2005 and 2004, the Company had Class A units outstanding.
Each series of Class A units is identical in every regard except with
respect to its individualized incentive allocation base. Effective January
1, 2005, Class A Series 2 through Class A Series 8 units were converted
into Class A Series 1 units and effective January 1, 2004, Class A Series 2
through Class A Series 10 units were converted into Class A Series 1 units.
Transactions in units for non-managing members for the year ended December
31, 2005 and 2004 are as follows:
Year ended December 31, 2005 Year ended December 31, 2004
---------------------------------------------- -------------------------------------------
Units Amount Units Amount
-------------------- ---------------------- ------------------- --------------------
Share Class Conversion
=============================
Class A
Series 1 911,205.28 $ 109,573,710 4,493,143.70 $ 512,003,655
Series 2 (687.41) (71,818) (415,994.14) (44,920,761)
Series 3 (83,221.74) (8,734,155) (752,365.57) (80,402,510)
Series 4 (12,734.34) (1,346,355) (879,574.26) (94,683,681)
Series 5 (17,500.00) (1,850,110) (654,391.41) (69,753,438)
Series 6 (298,400.00) (31,325,187) (836,120.00) (86,760,878)
Series 7 (412,100.00) (42,863,013) (1,210,045.71) (125,529,478)
Series 8 (231,250.00) (23,383,072) (86,289.39) (9,029,305)
Series 9 - - (8,313.51) (845,096)
Series 10 - - (774.64) (78,508)
-------------------- ---------------------- ------------------- --------------------
Total (144,688.21) $ - (350,724.93) $ -
==================== === ================== =================== ====================
Subscriptions
Class A
Series 1 - $ - 182,499.95 $ 20,796,273
Series 2 - - 687.41 68,741
Series 3 - - 83,221.74 8,322,174
Series 4 - - 12,734.34 1,273,434
Series 5 - - 17,500.00 1,750,000
Series 6 - - 298,400.00 29,840,000
Series 7 - - 412,100.00 41,210,000
Series 8 - - 231,250.00 23,125,000
Series 9 244,566.36 24,456,636 - -
Series 10 546,895.41 54,689,541 - -
Series 11 313,250.00 31,325,000 - -
Series 12 282,000.00 28,200,000 - -
Series 13 305,217.66 30,521,766 - -
Series 14 294,000.00 29,400,000 - -
Series 15 128,500.00 12,850,000 - -
Series 16 52,500.00 5,250,000 - -
Series 17 10,000.00 1,000,000 - -
Series 18 51,262.50 5,126,250 - -
Series 19 12,000.00 1,200,000 - -
Series 20 13,100.00 1,310,000 - -
-------------------- ---------------------- ------------------- --------------------
Total 2,253,291.93 $ 225,329,193 1,238,393.44 $ 126,385,622
==================== ====================== =================== ====================
Year Ended December 31, 2005 Year Ended December 31, 2004
---------------------------------------------- -------------------------------------------
Units Amount Units Amount
-------------------- ---------------------- ------------------- --------------------
Redemptions
Class A
Series 1 3,549,600.61 $ 441,034,885 1,321,377.58 $ 157,329,006
Series 9 34,090.66 3,553,991 - -
Series 10 52,240.59 5,492,810 - -
Series 11 10,000.00 1,041,174 - -
Series 12 19,000.00 1,989,089 - -
Series 13 25,850.01 2,747,295 - -
Series 14 17,500.01 1,852,717 - -
-------------------- --- ------------------ ------------------- --- ----------------
Total 3,708,281.88 $ 457,711,961 1,321,377.58 $ 157,329,006
==================== === ================== =================== === ================
At December 31, 2005 and 2004, members' equity consists of the following:
December 31, 2005 December 31, 2004
------------------------------------------- -----------------------------------------
Units Net Units Net
outstanding asset value outstanding asset value
----------------- --------------------- ------------------ -------------------
Non-managing members
Class A
Series 1 4,412,514.52 $ 554,854,668 7,050,909.85 $ 847,881,523
Series 2 - - 687.41 71,818
Series 3 - - 83,221.74 8,734,155
Series 4 - - 12,734.34 1,346,355
Series 5 - - 17,500.00 1,850,110
Series 6 - - 298,400.00 31,325,187
Series 7 - - 412,100.00 42,863,013
Series 8 - - 231,250.00 23,383,072
Series 9 210,475.70 22,009,240 - -
Series 10 494,654.82 52,022,308 - -
Series 11 303,250.00 31,573,596 - -
Series 12 263,000.00 27,533,177 - -
Series 13 279,367.65 29,690,733 - -
Series 14 276,499.99 29,272,927 - -
Series 15 128,500.00 13,455,578 - -
Series 16 52,500.00 5,421,351 - -
Series 17 10,000.00 1,023,103 - -
Series 18 51,262.50 5,179,803 - -
Series 19 12,000.00 1,233,270 - -
Series 20 13,100.00 1,329,129 - -
----------------- --------------------- ------------------ -------------------
Subtotal 6,507,125.18 $ 774,598,883 8,106,803.34 $ 957,455,233
================= ==================
Managing member - -
--------------------- -------------------
Total members' equity $ 774,598,883 $ 957,455,233
===================== ===================
Effective January 1, 2003, Class A Series 2 through Class A Series 9 units
were converted into Class A Series 1 units. Transactions in units for
non-managing members for the year ended December 31, 2003 were as follows:
Year Ended December 31, 2003
-------------------------------------------
Units Amount
------------------- --------------------
Share class conversion
Class A
Series 1 3,260,399.10 $ 338,995,791
Series 2 (243,082.49) (25,250,693)
Series 3 (666,920.13) (68,821,429)
Series 4 (453,500.00) (46,408,355)
Series 5 (284,000.00) (29,115,024)
Series 6 (374,618.85) (38,028,035)
Series 7 (622,822.97) (62,750,159)
Series 8 (377,062.34) (38,374,169)
Series 9 (295,550.00) (30,247,927)
------------------- --------------------
Total (57,157.68) $ -
=================== ====================
Subscriptions
Class A
Series 1 361,728.64 $ 37,610,130
Series 2 425,994.14 42,599,414
Series 3 752,365.57 75,236,557
Series 4 879,574.26 87,957,426
Series 5 654,391.41 65,439,141
Series 6 841,120.00 84,112,000
Series 7 1,217,902.52 121,790,252
Series 8 86,650.95 8,665,095
Series 9 8,313.51 831,351
Series 10 774.64 77,464
------------------- --------------------
Total 5,228,815.64 $ 524,318,830
=================== ====================
Redemptions
Class A
Series 1 346,366.44 $ 39,035,825
Series 2 10,000.00 1,079,841
Series 6 5,000.00 518,829
Series 7 7,856.81 815,062
Series 8 361.56 37,834
------------------- --------------------
Total 369,584.81 $ 41,487,391
=================== ====================
At December 31, 2003, members' equity consists of the following:
December 31, 2003
-----------------------------------------
Units Net
outstanding asset value
------------------ -------------------
Non-managing members
Class A
Series 1 3,696,643.78 $ 421,242,087
Series 2 415,994.14 44,920,761
Series 3 752,365.57 80,402,510
Series 4 879,574.26 94,683,681
Series 5 654,391.41 69,753,438
Series 6 836,120.00 86,760,878
Series 7 1,210,045.71 125,529,478
Series 8 86,289.39 9,029,305
Series 9 8,313.51 845,096
Series 10 774.64 78,508
------------------ -------------------
Subtotal 8,540,512.41 $ 933,245,742
==================
Managing member -
-------------------
Total members' equity $ 933,245,742
===================
NOTE 8 - FINANCIAL HIGHLIGHTS
- -----------------------------
Financial highlights for the Company for the year ended December 31, 2005
are as follows:
Class A Class A Class A Class A Class A
Series 1 Series 9 Series 10 Series 11 Series 12
------------ --------- ----------- ---------- ----------
Per unit operating performance:
Net asset value, beginning of period $ 120.25 $ 100.00 $ 100.00 $ 100.00 $ 100.00
Income from operations:
Net trading profit/(loss) 7.44 6.17 6.73 5.49 5.99
Net investment income/(loss) (1.94) (1.60) (1.56) (1.37) (1.30)
------------ --------- ----------- ---------- ----------
Total income/(loss) from operations 5.50 4.57 5.17 4.12 4.69
------------ --------- ----------- ---------- ----------
Net asset value, end of period $ 125.75 $ 104.57 $ 105.17 $ 104.12 $ 104.69
============ ========= =========== ========== ==========
Ratios to average net assets (annualized):
Expenses 1.36% 1.37% 1.37% 1.37% 1.36%
Incentive allocation 0.22% 0.24% 0.27% 0.21% 0.24%
------------ --------- ----------- ---------- ----------
Total expenses and incentive allocation 1.58% 1.61% 1.64% 1.58% 1.60%
============ ========= =========== ========== ==========
Net investment income/(loss) (1.57%) (1.59%) (1.62%) (1.57%) (1.59%)
============ ========= =========== ========== ==========
Total return (prior to incentive allocation) 4.79% 4.81% 5.44% 4.33% 4.93%
Incentive allocation (0.22%) (0.24%) (0.27%) (0.21%) (0.24%)
------------ --------- ----------- ---------- ----------
Total return 4.57% 4.57% 5.17% 4.12% 4.69%
============ ========= =========== ========== ==========
Class A Class A Class A Class A Class A
Series 13 Series 14 Series 15 Series 16 Series 17
------------ --------- ----------- ---------- ----------
Per unit operating performance:
Net asset value, beginning of period $ 100.00 $ 100.00 $ 100.00 $ 100.00 $ 100.00
Income from operations:
Net trading profit/(loss) 7.58 7.04 5.71 4.06 2.93
Net investment income/(loss) (1.30) (1.17) (1.00) (0.80) (0.62)
------------ --------- ----------- ---------- ----------
Total income/(loss) from operations 6.28 5.87 4.71 3.26 2.31
------------ --------- ----------- ---------- ----------
Net asset value, end of period $ 106.28 $ 105.87 $ 104.71 $ 103.26 $ 102.31
============ ========= =========== ========== ==========
Ratios to average net assets (annualized):
Expenses 1.37% 1.36% 1.36% 1.35% 1.33%
Incentive allocation 0.32% 0.30% 0.24% 0.17% 0.12%
------------ --------- ----------- ---------- ----------
Total expenses and incentive allocation 1.69% 1.66% 1.60% 1.52% 1.45%
============ ========= =========== ========== ==========
Net investment income/(loss) (1.67%) (1.64%) (1.59%) (1.52%) (1.44%)
============ ========= =========== ========== ==========
Total return (prior to incentive allocation) 6.60% 6.17% 4.95% 3.43% 2.43%
Incentive allocation (0.32%) (0.30%) (0.24%) (0.17%) (0.12%)
------------ --------- ----------- ---------- ----------
Total return 6.28% 5.87% 4.71% 3.26% 2.31%
============ ========= =========== ========== ==========
Class A Class A Class A
Series 18 Series 19 Series 20
------------ --------- -----------
Per unit operating performance:
Net asset value, beginning of period $ 100.00 $ 100.00 $ 100.00
Income from operations:
Net trading profit/(loss) 1.48 3.20 1.70
Net investment income/(loss) (0.44) (0.43) (0.24)
------------ --------- -----------
Total income/(loss) from operations 1.04 2.77 1.46
------------ --------- -----------
Net asset value, end of period $ 101.04 $ 102.77 $ 101.46
============ ========= ===========
Ratios to average net assets (annualized):
Expenses 1.33% 1.33% 1.31%
Incentive allocation 0.06% 0.14% 0.08%
------------ --------- -----------
Total expenses and incentive allocation 1.39% 1.47% 1.39%
============ ========= ===========
Net investment income/(loss) (1.38%) (1.46%) (1.38%)
============ ========= ===========
Total return (prior to incentive allocation) 1.10% 2.92% 1.54%
Incentive allocation (0.06%) (0.15%) (0.08%)
------------ --------- -----------
Total return 1.04% 2.77% 1.46%
============ ========= ===========
Financial highlights for the Company for the year ended December 31, 2004
are as follows:
Class A Class A Class A Class A Class A
Series 1 Series 2 Series 3 Series 4 Series 5
------------ --------- ----------- ---------- ----------
Per unit operating performance:
Net asset value, beginning of period $ 113.95 $ 100.00 $ 100.00 $ 100.00 $ 100.00
Income from operations:
Net trading profit/(loss) 8.30 6.05 5.92 6.62 6.49
Net investment income/(loss) (2.00) (1.57) (0.97) (0.89) (0.77)
------------ --------- ----------- ---------- ----------
Total income/(loss) from operations 6.30 4.48 4.95 5.73 5.72
------------ --------- ----------- ---------- ----------
Net asset value, end of period $ 120.25 $ 104.48 $ 104.95 $ 105.73 $ 105.72
============ ========= =========== ========== ==========
Ratios to average net assets (annualized):
Expenses 1.48% 1.48% 1.35% 1.32% 1.31%
Incentive allocation 0.28% 0.23% 0.26% 0.29% 0.29%
------------ --------- ----------- ---------- ----------
Total expenses and incentive allocation 1.76% 1.71% 1.61% 1.61% 1.60%
============ ========= =========== ========== ==========
Net investment income/(loss) (1.71%) (1.66%) (1.58%) (1.60%) (1.58%)
============ ========= =========== ========== ==========
Total return (prior to incentive allocation) 5.83% 4.72% 5.21% 6.03% 6.02%
Incentive allocation (0.30%) (0.24%) (0.26%) (0.30%) (0.30%)
------------ --------- ----------- ---------- ----------
Total return 5.53% 4.48% 4.95% 5.73% 5.72%
============ ========= =========== ========== ==========
Class A Class A Class A
Series 6 Series 7 Series 8
------------ --------- -----------
Per unit operating performance:
Net asset value, beginning of period $ 100.00 $ 100.00 $ 100.00
Income from operations:
Net trading profit/(loss) 5.58 4.43 1.28
Net investment income/(loss) (0.60) (0.42) (0.16)
------------ --------- -----------
Total income/(loss) from operations 4.98 4.01 1.12
------------ --------- -----------
Net asset value, end of period $ 104.98 $ 104.01 $ 101.12
============ ========= ===========
Ratios to average net assets (annualized):
Expenses 1.28% 1.29% 1.27%
Incentive allocation 0.25% 0.20% 0.06%
------------ --------- -----------
Total expenses and incentive allocation 1.53% 1.49% 1.33%
============ ========= ===========
Net investment income/(loss) (1.54%) (1.49%) (1.32%)
============ ========= ===========
Total return (prior to incentive allocation) 5.24% 4.22% 1.18%
Incentive allocation (0.26%) (0.21%) (0.06%)
------------ --------- -----------
Total return 4.98% 4.01% 1.12%
============ ========= ===========
Financial highlights for the Company for the year ended December 31, 2003
are as follows:
------------ --------- ----------- ---------- ----------
Class A Class A Class A Class A Class A
Series 1 Series 2 Series 3 Series 4 Series 5
------------ --------- ----------- ---------- ----------
Per unit operating performance:
Net asset value, beginning of period $ 103.97 $ 100.00 $ 100.00 $ 100.00 $ 100.00
Income from operations:
Net trading profit/(loss) 12.00 9.70 8.43 9.13 7.89
Net investment income/(loss) (2.02) (1.72) (1.56) (1.48) (1.30)
------------ --------- ----------- ---------- ----------
Total income/(loss) from operations 9.98 7.98 6.87 7.65 6.59
------------ --------- ----------- ---------- ----------
Net asset value, end of period $ 113.95 $ 107.98 $ 106.87 $ 107.65 $ 106.59
============ ========= =========== ========== ==========
Ratios to average net assets (annualized):
Expenses 1.39% 1.39% 1.38% 1.37% 1.35%
Incentive allocation 0.48% 0.40% 0.35% 0.39% 0.33%
------------ --------- ----------- ---------- ----------
Total expenses and incentive allocation 1.87% 1.79% 1.73% 1.76% 1.68%
============ ========= =========== ========== ==========
Net investment income/(loss) (1.86%) (1.78%) (1.72%) (1.74%) (1.67%)
============ ========= =========== ========== ==========
Total return (prior to incentive allocation) 10.11% 8.40% 7.23% 8.05% 6.94%
Incentive allocation (0.51%) (0.42%) (0.36%) (0.40%) (0.35%)
------------ --------- ----------- ---------- ----------
Total return 9.60% 7.98% 6.87% 7.65% 6.59%
============ ========= =========== ========== ==========
------------ --------- ----------- ---------- ----------
Class A Class A Class A Class A Class A
Series 6 Series 7 Series 8 Series 9 Series 10
------------ --------- ----------- ---------- ----------
Per unit operating performance:
Net asset value, beginning of period $ 100.00 $ 100.00 $ 100.00 $ 100.00 $ 100.00
Income from operations:
Net trading profit/(loss) 4.79 4.61 5.47 1.98 1.55
Net investment income/(loss) (1.02) (0.87) (0.83) (0.33) (0.20)
------------ --------- ----------- ---------- ----------
Total income/(loss) from operations 3.77 3.74 4.64 1.65 1.35
------------ --------- ----------- ---------- ----------
Net asset value, end of period $ 103.77 $ 103.74 $ 104.64 $ 101.65 $ 101.35
============ ========= =========== ========== ==========
Ratios to average net assets (annualized):
Expenses 1.34% 1.30% 1.30% 1.28% 1.27%
Incentive allocation 0.20% 0.19% 0.24% 0.09% 0.07%
------------ --------- ----------- ---------- ----------
Total expenses and incentive allocation 1.54% 1.49% 1.54% 1.37% 1.34%
============ ========= =========== ========== ==========
Net investment income/(loss) (1.53%) (1.49%) (1.54%) (1.37%) (1.34%)
============ ========= =========== ========== ==========
Total return (prior to incentive allocation) 3.97% 3.94% 4.88% 1.74% 1.42%
Incentive allocation (0.20%) (0.20%) (0.24%) (0.09%) (0.07%)
------------ --------- ----------- ---------- ----------
Total return 3.77% 3.74% 4.64% 1.65% 1.35%
============ ========= =========== ========== ==========
Total return is calculated for each series taken as a whole. The ratios to
average net assets and the total return for each member may vary based on
the timing of capital transactions. The ratios of expenses and net
investment income/(loss) to average net assets is calculated by dividing
total expenses and net investment income/(loss), respectively, by the month
end average net assets for the period. The components of total return are
calculated by dividing the change in the per unit value of each component
for the period by the net asset value per unit at the beginning of the
period. The ratios to average net assets calculated above do not include
the Company's proportionate share of net investment income and expenses of
the Investees.
NOTE 9 - SUBSEQUENT EVENTS
- --------------------------
Effective January 1, 2006, Class A Series 9 through Class A Series 20 units
were collapsed into Class A Series 1 units, as provided in the Company's
private placement memorandum.
Effective January 1, 2006, redemptions from the Company can be made
quarterly with 91 days' 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 amended limited liability company
agreement.