UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-CSR
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CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
INVESTMENT COMPANY ACT FILE NUMBER 811-21061
AETOS CAPITAL MULTI-STRATEGY ARBITRAGE FUND, LLC
(Exact name of registrant as specified in charter)
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c/o Aetos Capital, LLC
875 Third Avenue
New York, NY 10022
(Address of principal executive offices) (Zip code)
James M. Allwin
Aetos Capital, LLC
New York, NY 10022
(Name and address of agent for service)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 1-212-201-2500
DATE OF FISCAL YEAR END: JANUARY 31, 2005
DATE OF REPORTING PERIOD: JANUARY 31, 2005
ITEM 1. REPORTS TO STOCKHOLDERS.
AETOS CAPITAL MULTI-STRATEGY ARBITRAGE FUND, LLC
AETOS CAPITAL DISTRESSED INVESTMENT STRATEGIES FUND, LLC
AETOS CAPITAL LONG/SHORT STRATEGIES FUND, LLC
AETOS CAPITAL MARKET NEUTRAL STRATEGIES FUND, LLC
Financial Statements
January 31, 2005
TABLE OF CONTENTS
Fund Commentaries..............................................................1
Report of Independent Registered Public Accounting Firm........................6
Schedules of Investments.......................................................7
Statements of Assets and Liabilities..........................................11
Statements of Operations......................................................12
Statements of Changes in Members' Capital.....................................13
Statements of Cash Flows......................................................15
Financial Highlights..........................................................16
Notes to Financial Statements.................................................18
Managers and Officers of the Funds............................................25
The Funds' Forms N-Q are available on the Commission's web site at
HTTP://WWW.SEC.GOV, and may be reviewed and copied at the Commission's Public
Reference Room in Washington, DC. Information on the operation of the Public
Reference Room may be obtained by calling 1-800-SEC-0330.
A description of the policies and procedures that the Funds use to determine how
to vote proxies relating to portfolio securities, as well as information
relating to how the Funds voted proxies relating to portfolio securities during
the most recent 12-month period ended June 30, is available (i) without charge,
upon request, by calling1-212-201-2500; and (ii) on the Commission's website at
HTTP://WWW.SEC.GOV.
Aetos Capital Multi-Strategy Arbitrage Fund, LLC
Fund Commentary
For the year ended January 31, 2005
(Unaudited)
The Aetos Capital Multi-Strategy Arbitrage Fund, LLC (the "Fund") allocates its
assets among a select group of portfolio managers that utilize a variety of
arbitrage strategies while seeking to produce an attractive absolute return on
invested capital, largely independent of the various benchmarks associated with
traditional asset classes.
The Fund includes allocations to event arbitrage and fixed income arbitrage
managers. Event arbitrage managers seek to identify mispricings in securities
that will be resolved through an anticipated event. Events can include mergers,
acquisitions, spinoffs, recapitalizations and bankruptcy (either entering into
bankruptcy or emerging from it). Skills required include the ability to analyze
the relative value of the securities involved and the probability of the event
taking place in a timely manner. Fixed income arbitrage managers seek to
identify discrepancies in the prices of securities that are very closely related
and arbitrage that discrepancy.
For the year ended January 31, 2005, the Fund had a total return of 2.98%.1 For
the period from commencement of investment activities on September 1, 2002
through January 31, 2005, the Fund had an average annual total return of 8.35%.
While the Fund's performance for the year was disappointing, it was not
especially surprising given how the year evolved and how the portfolio was
positioned. In 2003, the Fund performed very well due in large part to exposure
to distressed investment strategies. Beginning in 2004, we began to pare risk in
the portfolio by layering in positions designed to serve as insurance against
potential mean-reversions in credit spreads and volatility, both of which we
felt had been stretched to abnormally low levels. As a result of these moves, as
well as risk-reduction trades performed by our multi-strategy managers, the Fund
was significantly less exposed to credit factors during 2004 relative to 2003.
Since neither volatility nor credit did mean-revert in 2004, the Fund's
performance was muted by these positions.
The resurgence in corporate activity during 2004 featured a fairly steady flow
of leveraged buyout activity, interspersed by some large strategic acquisitions,
particularly at the end of the year. Despite the increased transaction flow
during 2004, however, overall merger volume has not yet approached the levels of
1998-2000. In the meantime, the amount of capital managed by multi-strategy
event managers has probably doubled, commoditizing merger arbitrage to some
extent. The majority of merger arbitrage situations no longer offer favorable
spreads or returns compensating investors for the larger losses incurred if the
deal breaks. The Fund is invested with a group of managers who are
well-positioned to capitalize on any resurgence of opportunities in merger
arbitrage, but who have reoriented their investment processes and portfolios to
the point that they are not dependent on the strategy in order to earn
attractive risk-adjusted rates of return.
- --------------------------
1Returns are net of expenses and fees incurred at the Fund level. The returns
also reflect Fund level expenses that have been waived and/or reimbursed by
the Investment Manager. Returns would have been lower without such waivers and
reimbursements. Returns do not reflect Program fees and expenses charged at the
separate account level.
1
Aetos Capital Multi-Strategy Arbitrage Fund, LLC
Fund Commentary (continued)
For the year ended January 31, 2005
(Unaudited)
In other areas of their portfolios, these managers are gradually selling down
their distressed investment holdings, building out sector-focused long/short
equity exposure, and exploring limited opportunities in convertible arbitrage,
private equity and real estate.
In fixed income arbitrage, the phenomenon of investors reaching for yield has
reverberated through various areas of the fixed income and credit derivative
markets, creating opportunities for our managers. Market participants who reach
for higher yields by taking on negative-convexity and short-volatility positions
achieve a positive carry, but require that market conditions remain calm to be
profitable. As long as rates and volatility normalize the payout from taking the
other side of these trades, as our managers do, they should provide substantial
upside potential. At the same time, the growth and increasing complexity and
liquidity of segments of the credit markets, such as asset-backed securities,
bank loans and credit default swaps, expands the potential set of anomalies that
our managers like to exploit.
The environment in convertible arbitrage during 2004 echoed that of 2003.
Depressed levels of equity volatility made gamma trading unprofitable, but
tightening credit spreads drove modest returns in credit-sensitive issues. The
composition of the convertible universe and corresponding convertible managers'
portfolios is such that the effect of the trends roughly offset each other,
resulting in slightly positive performance for the year for managers exposed to
both factors. The Financial Accounting Standards Board-mandated change in the
accounting treatment for contingent convertible securities ("CoCos") also
affected returns, though modestly. Overall, the unfavorable supply/demand
characteristics, low volatility, and tight credit spreads make the prospects for
convertible arbitrage unexciting in the near term. We remain underweight in this
category awaiting a more favorable investment environment.
2
Aetos Capital Distressed Investment Strategies Fund, LLC
Fund Commentary
For the year ended January 31, 2005
(Unaudited)
The Aetos Capital Distressed Investment Strategies Fund, LLC (the "Fund")
allocates its assets among a select group of portfolio managers across a variety
of distressed investment strategies while seeking to produce an attractive
absolute return on invested capital, largely independent of the various
benchmarks associated with traditional asset classes.
The Fund allocates to investment managers that buy the securities (generally
bonds and bank loans) of companies that are in bankruptcy or in danger of
bankruptcy. These managers are able to buy these securities at a discount to
their eventual value because traditional fixed income portfolio managers who
bought the bonds or banks that made the loans may not want to or be able to own
them once they are in default. The sellers may also not have the expertise and
patience to go through a lengthy restructuring process. Distressed investing
involves credit analysis, legal expertise and (often) negotiating ability, as
the portfolio manager must estimate the value of the claims he is buying, the
likely timing and resolution of the bankruptcy process and also may be called
upon to reach agreements with other claimants in order to speed the process.
For the year ended January 31, 2005, the Fund had a total return of 10.24%.1 For
the period from commencement of investment activities on September 1, 2002
through January 31, 2005, the Fund had an average annual total return of 15.35%.
At the end of last year, we noted the historically tight levels of credit
spreads in the context of their closely linked relationship with returns over
time, and anticipated that the performance of distressed investment strategies
would be much more modest in 2004 as the portfolios of the Fund's managers
matured and the opportunity set for attractive new investments thinned out.
Despite this being the case, over the course of the past year the high yield and
distressed markets still posted solid gains as liquidity and demand for yield
overwhelmed any indications of a riskier environment for credit investing. The
reach for yield continued to invigorate the new issue market, which enjoyed a
second straight year of historically high activity and allowed many struggling
companies to refinance onerous high-coupon debt. Low levels of interest rates
translated into relatively reasonable leverage and interest coverage ratios on
the new issuance. However, the percentage of new issue volume rated CCC and
below more than doubled to 7% in 2004. Furthermore, amidst some very
constructive transactions, the frothy conditions also enabled some notable
instances of speculative activity, including high yield issuances that put
significant leverage on recent buyout deals in order to dividend back to equity
holders the majority of their investment. Our expectation is that some of these
higher risk situations might create opportunities for our distressed managers in
the medium term, as evidenced by the historical relationship between high yield
and default rates. Generally, we expect more muted return prospects for this
area of the portfolio until spreads are pushed out, either by the gradual
passage of time or some sort of dislocating event (or events) that will create
conditions that cause a repricing of credit risk and create attractive entry
points for new investment.
- --------------------------
1Returns are net of expenses and fees incurred at the Fund level. The returns
also reflect Fund level expenses that have been waived and/or reimbursed by
the Investment Manager. Returns would have been lower without such waivers and
reimbursements. Returns do not reflect Program fees and expenses charged at the
separate account level.
3
Aetos Capital Long/Short Strategies Fund, LLC
Fund Commentary
For the year ended January 31, 2005
(Unaudited)
The Aetos Capital Long/Short Strategies Fund, LLC (the "Fund") allocates its
assets among a select group of portfolio managers across a variety of long/short
strategies while seeking to produce an attractive absolute return on invested
capital, largely independent of the various benchmarks associated with
traditional asset classes. The Fund is composed mostly of managers that operate
long-biased portfolios of stocks, usually based on bottom-up equity research.
These portfolios generally vary from 20% to 40% net long.
For the year ended January 31, 2005, the Fund had a total return of 3.90%.1 For
the period from commencement of investment activities on September 1, 2002
through January 31, 2005, the Fund had an average annual total return of 6.34%.
Equity markets were particularly tranquil as the genuine economic recovery that
began in 2003 firmly took hold in 2004. The S&P 500 rose 4.44% for the one-year
period ending January 31, 2005, driven primarily by robust November and December
gains. The high liquidity, low volatility environment of the past year muted the
performance of most of our long/short managers. Well-diversified, well-hedged
portfolios simply did not have enough embedded risk to provide substantial alpha
in these market conditions, especially during the year-end rally. Consequently,
the top performing managers of 2004 typically ran either relatively concentrated
or relatively unhedged portfolios.
We believe this lower return environment for long/short managers is not so much
a function of inflows into the strategy as it is a function of the business
cycle. Volatility and dispersion are mean-reverting, and typically are depressed
during periods of steady economic growth and ample liquidity. Eventually,
something will upset this balance, as always happens, and we are positioning the
portfolio to attempt to prosper until that point and beyond.
- --------------------------
1Returns are net of expenses and fees incurred at the Fund level. The returns
also reflect Fund level expenses that have been waived and/or reimbursed by
the Investment Manager. Returns would have been lower without such waivers and
reimbursements. Returns do not reflect Program fees and expenses charged at the
separate account level.
4
Aetos Capital Market Neutral Strategies Fund, LLC
Fund Commentary
For the year ended January 31, 2005
(Unaudited)
The Aetos Capital Market Neutral Strategies Fund, LLC (the "Fund") allocates its
capital among a select group of portfolio managers across a variety of market
neutral strategies while seeking to produce an attractive absolute return on
invested capital, largely independent of the various benchmarks associated with
traditional asset classes.
The Fund contains managers that attempt to create long and short portfolios that
are roughly equal in size and therefore immune to overall stock markets
movements. Often these strategies are quantitative in nature, using computer
screens to pick long and short portfolios of stocks and balancing their risk
exposure through optimization techniques.
For the year ended January 31, 2005, the Fund had a total return of 1.84%.1 For
the period from commencement of investment activities on September 1, 2002
through January 31, 2005, the Fund had an average annual total return of 1.94%.
The low volatility and dispersion of equity returns made the year especially
difficult for market neutral managers, who cannot supplant return variance with
selective beta exposure to generate performance. Mid-year, we attempted to boost
performance by shifting assets into funds with higher concentrations and were
rewarded for doing so. We continue to believe that concentration is an asset for
market neutral managers, as high levels of liquidity will continue to hold down
measures of volatility and return dispersion. Our best performance this year
came from asset allocation strategies, which took advantage of strong trends in
the currency market and the relative outperformance of international and
emerging equities. The greatest source of weakness in the Fund this year came
from yield curve strategies. While disappointing, we do not view this
development with alarm as the Treasury markets defied expectations throughout
the year. We are continuing to reposition the Market Neutral Fund in an effort
to improve its performance profile. Given its primary objective as a volatility
dampener in a portfolio context, we are pleased with its results and expect it
to hold value relatively well in the event of market dislocation.
- --------------------------
1Returns are net of expenses and fees incurred at the Fund level. The returns
also reflect Fund level expenses that have been waived and/or reimbursed by
the Investment Manager. Returns would have been lower without such waivers and
reimbursements. Returns do not reflect Program fees and expenses charged at the
separate account level.
5
Report of Independent Registered Public Accounting Firm
To the Board of Managers and Members of:
Aetos Capital Multi-Strategy Arbitrage Fund, LLC
Aetos Capital Distressed Investment Strategies Fund, LLC
Aetos Capital Long/Short Strategies Fund, LLC
Aetos Capital Market Neutral Strategies Fund, LLC
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations, of
changes in members' capital and of cash flows and the financial highlights
present fairly, in all material respects, the financial position of Aetos
Capital Multi-Strategy Arbitrage Fund, LLC, Aetos Capital Distressed Investment
Strategies Fund, LLC, Aetos Capital Long/Short Strategies Fund, LLC and Aetos
Capital Market Neutral Strategies Fund, LLC (hereafter referred to as the
"Funds") at January 31, 2005, the results of each of their operations and their
cash flows for the year then ended, the changes in each of their members'
capital for the two years in the period then ended and the financial highlights
for the years ended January 31, 2005, and January 31, 2004, and the period
August 21, 2002 (commencement of operations) through January 31, 2003, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements and financial highlights (hereafter referred
to as "financial statements") are the responsibility of the Funds' management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements 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. An audit 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, which included confirmation of investments with the portfolio funds at
January 31, 2005, provide a reasonable basis for our opinion.
As explained in Note 2, the financial statements include investments held by
Aetos Capital Multi-Strategy Arbitrage Fund, LLC, Aetos Capital Distressed
Investment Strategies Fund, LLC, Aetos Capital Long/Short Strategies Fund, LLC
and Aetos Capital Market Neutral Strategies Fund, LLC, valued at $239,179,701
(97.2% of the Fund's net assets), $42,892,277 (94.8% of the Fund's net assets),
$316,129,396 (97.2% of Fund's net assets) and $76,514,302 (93.1% of the Fund's
net assets), respectively, at January 31, 2005, the values of which have been
estimated by the Investment Manager, under the general supervision of the Board
of Managers, in the absence of readily ascertainable market values. Those
estimated values may differ significantly from the values that would have been
used had a ready market for the investments existed, and the difference could be
material.
PricewaterhouseCoopers, LLP
New York, New York
March 22, 2005
6
Aetos Capital Multi-Strategy Arbitrage Fund, LLC
Schedule of Investments
January 31, 2005
[GRAPHIC OMITTED]
INVESTMENT OBJECTIVE AS A PERCENTAGE OF INVESTMENTS
Fixed Income Arbitrage 27.49%
Fixed Income/Event Arbitrage 11.70%
Statistical Arbitrage 6.92%
Convertible Arbitrage 4.78%
Event Arbitrage 13.28%
Event Arbitrage/Distressed Investments 35.83%
% OF MEMBERS
PORTFOLIO FUND NAME COST VALUE CAPITAL*
- ----------------------------------------------------------------------------------------------------------------------
AQR Global Arbitrage Offshore Fund (USD), Ltd. $ 27,726,549 $ 27,978,593 11.37%
Davidson Kempner Partners 25,000,000 25,250,719 10.27
FFIP, L.P. 14,630,000 16,100,791 6.55
Ishin Fund, LLC 13,000,000 11,434,398 4.65
Pentangle Partners, L.P. 16,000,000 16,546,876 6.73
Pequot Credit Opportunities Fund, L.P. 15,000,000 15,020,078 6.11
Perry Partners, L.P. 26,600,000 31,764,914 12.91
Satellite Fund II, L.P. 25,850,000 27,832,245 11.32
South Hill Trading Corp. 15,000,000 15,361,874 6.24
Sowood Alpha Fund, L.P. 32,500,000 32,621,181 13.26
Standard Pacific Credit Opportunities Fund, L.P. 20,000,000 19,268,032 7.83
----------------------------------------------------------
Total $231,306,549 $239,179,701 97.24%
==========================================================
*Percentages are based on Members' Capital of $245,963,775.
The aggregate cost of investments for tax purposes was $231,306,549. Net
unrealized appreciation on investments for tax purposes was $7,873,152
consisting of $10,170,722 of gross unrealized appreciation and $2,297,570 of
gross unrealized depreciation.
The investments in portfolio funds shown above, representing 97.24% of Members'
Capital, have been fair valued.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
7
Aetos Capital Distressed Investment Strategies Fund, LLC
Schedule of Investments
January 31, 2005
[GRAPHIC OMITTED]
INVESTMENT OBJECTIVE AS A PERCENTAGE OF INVESTMENTS
Distressed Investments, 100%
% OF MEMBERS
PORTFOLIO FUND NAME COST VALUE CAPITAL*
- ----------------------------------------------------------------------------------------------------------------------
King Street Capital, L.P. $ 7,050,000 $7,848,346 17.34%
Satellite Credit Opportunities Fund, Ltd. 8,750,000 9,922,762 21.93
Silver Point Capital Fund, L.P. 11,100,000 13,350,168 29.50
Watershed Capital Partners, L.P. 11,050,000 11,771,001 26.01
----------------------------------------------------------
Total $37,950,000 $42,892,277 94.78%
==========================================================
*Percentages are based on Members' Capital of $45,254,188.
The aggregate cost of investments for tax purposes was $37,950,000. Net
unrealized appreciation on investments for tax purposes was $4,942,277
consisting of $4,942,277 of gross unrealized appreciation and of $0 of gross
unrealized depreciation.
The investments in portfolio funds shown above, representing 94.78% of Members'
Capital, have been fair valued.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
8
Aetos Capital Long/Short Strategies Fund, LLC
Schedule of Investments
January 31, 2005
[GRAPHIC OMITTED]
INVESTMENT OBJECTIVE AS A PERCENTAGE OF INVESTMENTS
Short Equity Investments 3.30%
Equity Investment Market Neutral 3.95%
Long/Short Equity Investments 92.75%
% OF MEMBERS
PORTFOLIO FUND NAME COST VALUE CAPITAL*
- ----------------------------------------------------------------------------------------------------------------------
Bay Pond Partners, L.P. $ 27,000,000 $ 32,530,678 10.00%
Bay Resource Partners, L.P. 18,000,000 19,561,261 6.01
Cadmus Capital Partners (QP), L.P. 21,000,000 22,314,612 6.86
Cantillion Pacific, L.P. 10,000,000 10,719,038 3.29
Cantillion U.S. Low Volatility, L.P. 12,000,000 12,477,338 3.84
Cavalry Technology, L.P. 38,750,000 35,472,224 10.90
The Elkhorn Fund, LLC 15,000,000 15,421,577 4.74
Fine Partners I, L.P. 17,500,000 17,727,358 5.45
Hygrove Capital Fund (QP), L.P. 15,000,000 15,201,892 4.67
Icarus Qualified Partners, L.P. 10,500,000 10,437,984 3.21
JL Partners, L.P. 49,820,000 55,172,698 16.96
North River Partners, L.P. 16,750,000 17,540,023 5.39
Standard Global Equity Partners SA, L.P. 38,700,000 41,051,924 12.62
Viking Global Equities, L.P. 10,000,000 10,500,789 3.23
-------------------------------------------------------------
Total $300,020,000 $316,129,396 97.17%
=============================================================
*Percentages are based on Members' Capital of $325,336,932.
The aggregate cost of investments for tax purposes was $300,020,000. Net
unrealized appreciation on investments for tax purposes was $16,109,396
consisting of $19,449,188 of gross unrealized appreciation and $3,339,792 of
gross unrealized depreciation.
The investments in portfolio funds shown above, representing 97.17% of Members'
Capital, have been fair valued.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
9
Aetos Capital Market Neutral Strategies Fund, LLC
Schedule of Investments
January 31, 2005
[GRAPHIC OMITTED]
INVESTMENT OBJECTIVE AS A PERCENTAGE OF INVESTMENTS
Multi-Strategy Market Neutral 42.91%
Equity Investment Market Neutral 57.09%
% OF MEMBERS
PORTFOLIO FUND NAME COST VALUE CAPITAL*
- ----------------------------------------------------------------------------------------------------------------------
AQR Absolute Return Institutional Fund, L.P. $14,900,000 $15,038,012 18.29%
Bravura 99 Fund, L.P. 8,682,132 9,101,086 11.07
Cantillion U.S. Low Volatility, L.P. 27,500,000 28,005,020 34.05
GMO Market Neutral Fund (Onshore) 6,384,310 6,575,496 8.00
GMO Mean Reversion Fund 16,000,000 17,794,688 21.64
----------------------------------------------------------
Total $73,466,442 $76,514,302 93.05%
==========================================================
*Percentages are based on Members' Capital of $82,229,635.
The aggregate cost of investments for tax purposes was $73,466,442. Net
unrealized appreciation on investments for tax purposes was $3,047,860
consisting of $3,047,860 of gross unrealized appreciation and $0 of gross
unrealized depreciation.
The investments in portfolio funds shown above, representing 93.05% of Members'
Capital, have been fair valued.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
10
Statements of Assets and Liabilities
January 31, 2005
AETOS CAPITAL AETOS CAPITAL
AETOS CAPITAL DISTRESSED AETOS CAPITAL MARKET
MULTI-STRATEGY INVESTMENT LONG/SHORT NEUTRAL
ARBITRAGE STRATEGIES STRATEGIES STRATEGIES
FUND, LLC FUND, LLC FUND, LLC FUND, LLC
--------------------------------------------------------------------------
ASSETS
Investments in portfolio funds, at cost $231,306,549 $37,950,000 $300,020,000 $73,466,442
--------------------------------------------------------------------------
Investments in portfolio funds, at value $239,179,701 $42,892,277 $316,129,396 $76,514,302
Cash and cash equivalents 260,918 2,443,683 9,392,071 5,827,970
Accrued income 12,217 4,328 15,680 10,349
Prepaid investment 7,000,000 -- -- --
Receivable for sale of investments -- -- 360,158 --
Due from investment manager -- 3,090 -- --
--------------------------------------------------------------------------
Total assets 246,452,836 45,343,378 325,897,305 82,352,621
--------------------------------------------------------------------------
LIABILITIES
Sales of Interests received in advance 204,971 -- 197,894 --
Investment manager fees payable 129,872 -- 174,456 23,441
Administration fees payable 34,042 6,235 45,854 11,750
Board of Managers' fees payable 3,750 3,750 3,750 3,750
Other accrued expenses 116,426 79,205 138,419 84,045
--------------------------------------------------------------------------
Total liabilities 489,061 89,190 560,373 122,986
--------------------------------------------------------------------------
NET ASSETS $245,963,775 $45,254,188 $325,336,932 $82,229,635
==========================================================================
MEMBERS' CAPITAL
Net capital 238,090,623 40,311,911 309,227,536 79,181,775
Net unrealized appreciation on investments
in portfolio funds 7,873,152 4,942,277 16,109,396 3,047,860
--------------------------------------------------------------------------
Members' Capital $245,963,775 $45,254,188 $325,336,932 $82,229,635
==========================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
11
Statements of Operations
For the year ended January 31, 2005
AETOS CAPITAL AETOS CAPITAL
AETOS CAPITAL DISTRESSED AETOS CAPITAL MARKET
MULTI-STRATEGY INVESTMENT LONG/SHORT NEUTRAL
ARBITRAGE STRATEGIES STRATEGIES STRATEGIES
FUND, LLC FUND, LLC FUND, LLC FUND, LLC
--------------------------------------------------------------------------
Investment income:
Interest $ 167,842 $ 19,110 $ 188,606 $ 27,485
--------------------------------------------------------------------------
Expenses:
Management fees 1,134,124 257,855 1,520,455 392,125
Administration fees 183,115 44,800 242,927 66,159
Board of Managers' fees 15,000 15,000 15,000 15,000
Professional fees 193,375 157,575 216,950 161,475
Registration fees 65,131 32,954 100,740 33,456
Printing fees 17,000 17,000 17,000 17,000
Custodian fees 380 484 484 484
Other expenses 5,718 5,625 11,123 5,615
--------------------------------------------------------------------------
Total expenses 1,613,843 531,293 2,124,679 691,314
Fund expenses reimbursed (105,274) (187,846) (114,957) (168,701)
--------------------------------------------------------------------------
Net expenses 1,508,569 343,447 2,009,722 522,613
--------------------------------------------------------------------------
Net investment loss (1,340,727) (324,337) (1,821,116) (495,128)
--------------------------------------------------------------------------
Net gain (loss) on portfolio funds sold -- -- 401,496 (35,660)
Net change in unrealized appreciation on
investments in portfolio funds 6,931,365 3,931,069 14,218,146 2,853,177
--------------------------------------------------------------------------
Net increase in Members' Capital derived
from investment activities $ 5,590,638 $ 3,606,732 $12,798,526 $2,322,389
==========================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
12
Statements of Changes in Members' Capital
For the years ended January 31, 2004 and January 31, 2005
AETOS CAPITAL DISTRESSED
AETOS CAPITAL MULTI-STRATEGY INVESTMENT STRATEGIES
ARBITRAGE FUND, LLC FUND, LLC
-------------------------------- ----------------------------------
2/1/04 - 2/01/03 - 2/1/04 - 2/01/03 -
1/31/05 1/31/04 1/31/05 1/31/04
-------------------------------- ----------------------------------
From investment activities:
Net investment loss $(1,340,727) $ (59,394) $(324,337) $(41,995)
Net gain on portfolio funds sold -- 26,549 -- 51,835
Net change in unrealized appreciation on
investments in portfolio funds 6,931,365 889,869 3,931,069 879,234
-------------------------------- ----------------------------------
Net increase in Members' Capital
derived from investment activities 5,590,638 857,024 3,606,732 889,114
-------------------------------- ----------------------------------
Members' Capital transactions:
Proceeds from sales of Interests 198,877,612 31,430,196 34,412,376 12,592,746
Redemptions of Interests (196,464) -- (163,410) --
Transfers of Interests 6,616,600 1,696,000 (6,780,600) (1,658,000)
-------------------------------- ----------------------------------
Net increase in Members' Capital derived from
capital transactions 205,297,748 33,126,196 27,468,366 10,934,746
-------------------------------- ----------------------------------
Net increase in Members' Capital 210,888,386 33,983,220 31,075,098 11,823,860
Members' Capital at beginning of period 35,075,389 1,092,169 14,179,090 2,355,230
-------------------------------- ----------------------------------
Members' Capital at end of period $245,963,775 $35,075,389 $45,254,188 $14,179,090
================================ ==================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
13
Statements of Changes in Members' Capital (continued)
For the years ended January 31, 2004 and January 31, 2005
AETOS CAPITAL MARKET
AETOS CAPITAL LONG/SHORT NEUTRAL STRATEGIES
STRATEGIES FUND, LLC FUND, LLC
-------------------------------------------------------------------
2/1/04 - 2/1/03 - 2/1/04 - 2/1/03 -
1/31/05 1/31/04 1/31/05 1/31/04
-------------------------------- ---------------------------------
From investment activities:
Net investment loss $ (1,821,116) $ (101,147) $ (495,128) $ (30,656)
Net gain (loss) on portfolio funds sold 401,496 -- (35,660) --
Net change in unrealized appreciation on
investments in portfolio funds 14,218,146 1,918,399 2,853,177 184,926
-------------------------------- ---------------------------------
Net increase in Members' Capital
derived from investment activities 12,798,526 1,817,252 2,322,389 154,270
-------------------------------- ---------------------------------
Members' Capital transactions:
Proceeds from sales of Interests 255,135,361 51,627,696 65,834,326 13,138,546
Redemptions of Interests (417,274) -- (58,815) --
Transfers of Interests 152,000 661,000 12,000 (699,000)
-------------------------------- ---------------------------------
Net Increase in Members' Capital derived from
capital transactions 254,870,087 52,288,696 65,787,511 12,439,546
-------------------------------- ---------------------------------
Net increase in Members' Capital 267,668,613 54,105,948 68,109,900 12,593,816
Members' Capital at beginning of period 57,668,319 3,562,371 14,119,735 1,525,919
-------------------------------- ---------------------------------
Members' Capital at end of period $325,336,932 $57,668,319 $82,229,635 $14,119,735
================================ =================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
14
Statements of Cash Flows
For the year ended January 31, 2005
AETOS CAPITAL AETOS CAPITAL
AETOS CAPITAL DISTRESSED AETOS CAPITAL MARKET
MULTI-STRATEGY INVESTMENT LONG/SHORT NEUTRAL
ARBITRAGE STRATEGIES STRATEGIES STRATEGIES
FUND, LLC FUND, LLC FUND, LLC FUND, LLC
------------------------------------------------------------------
CASH FLOWS USED IN OPERATING ACTIVITIES
Purchases of Portfolio Funds $(197,250,000) $(25,000,000) $(251,329,569) $(63,000,000)
Sales of Portfolio Funds -- -- 7,341,065 3,097,898
Net investment loss (1,340,727) (324,337) (1,821,116) (495,128)
Adjustments to reconcile net investment loss to net
cash used in operating activities:
Increase in accrued income (6,959) (3,351) (10,770) (8,935)
Increase in prepaid investments (7,000,000) -- -- --
Increase in receivable for sale of
investments -- -- (360,158) --
Decrease (increase) in due from investment
manager -- (478) -- 2,178
Increase (decrease) in administration fees
payable 18,741 (3,768) 25,008 4,637
Increase in investment manager fees payable 119,921 -- 146,374 23,441
Increase in other accrued expenses 70,727 35,506 92,718 40,345
------------------------------------------------------------------
Net cash used in operating activities (205,388,297) (25,296,428) (245,916,448) (60,335,564)
------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Sales of Interests received in advance 204,971 -- 197,894 --
Sales of Interests 153,838,612 29,396,376 220,012,361 50,812,326
Redemptions of Interests (196,464) (163,410) (417,274) (58,815)
Transfers of Interests 6,616,600 (6,780,600) 152,000 12,000
------------------------------------------------------------------
Net cash provided by financing activities 160,463,719 22,452,366 219,944,981 50,765,511
------------------------------------------------------------------
Net decrease in cash and cash equivalents (44,924,578) (2,844,062) (25,971,467) (9,570,053)
Cash and cash equivalents, beginning of year 45,185,496 5,287,745 35,363,538 15,398,023
------------------------------------------------------------------
Cash and cash equivalents, end of year $ 260,918 $ 2,443,683 $ 9,392,071 $ 5,827,970
==================================================================
Non-cash operating activity of the Aetos Capital Market Neutral Strategies Fund,
LLC consisted of exchanges of Portfolio Funds for others valued at $18,682,132.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
15
Financial Highlights
AETOS CAPITAL AETOS CAPITAL DISTRESSED
MULTI-STRATEGY ARBITRAGE INVESTMENT STRATEGIES
FUND, LLC FUND, LLC
---------------------------------------------- --------------------------------------------
2/1/04 - 2/1/03 - 8/21/02* - 2/1/04 - 2/1/03 - 8/21/02* -
1/31/05 1/31/04 1/31/03 1/31/05 1/31/04 1/31/03
---------------------------------------------- --------------------------------------------
Total Return 2.98% 13.17% 4.44%(1) 10.24% 22.13% 5.38%(1)
Net assets, end of period (000's) $245,964 $35,075 $1,092 $45,254 $14,179 $2,355
Ratios to average net assets:
Expenses, before waivers and
reimbursements (2)(4) 1.07% 5.04% 43.96%(3) 1.55% 7.72% 22.93%(3)
Expenses, net of waivers and
reimbursements (2)(4) 1.00% 1.13% 1.25%(3) 1.00% 1.18% 1.25%(3)
Net investment loss, before waivers
and reimbursements (0.96)% (4.87)% (43.95)%(3) (1.50)% (7.65)% (22.92)%(3)
Net investment loss, net of waivers
and reimbursements (0.89)% (0.96)% (1.24)%(3) (0.95)% (1.11)% (1.24)%(3)
Portfolio turnover rate (5) 0.00% 0.00% 0.00% 0.00% 16.94% 0.00%
* Commencement of operations.
(1) Total return is for the period indicated and has not been annualized.
(2) Expense ratios of underlying funds are not included in the expense ratio.
(3) Annualized.
(4) The expense ratios do not include the Program fees charged separately
to investors as described in Note 3 in the Notes to Financial
Statements.
(5) Not annualized.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
16
Financial Highlights (continued)
AETOS CAPITAL MARKET
AETOS CAPITAL LONG/SHORT NEUTRAL STRATEGIES
STRATEGIES FUND, LLC FUND, LLC
--------------------------------------------- --------------------------------------------
2/1/04 - 2/1/03 - 8/21/02* - 2/1/04 - 2/1/03 - 8/21/02* -
1/31/05 1/31/04 1/31/03 1/31/05 1/31/04 1/31/03
--------------------------------------------- ---------------------------------------------
Total Return 3.90% 12.88% (0.89)%(1) 1.84% 2.81% 0.13%(1)
Net assets, end of period (000's) $325,337 $57,668 $3,562 $82,230 $14,120 $1,526
Ratios to average net assets:
Expenses, before waivers and
reimbursements (2)(4) 1.05% 4.09% 18.87%(3) 1.33% 8.79% 31.67%(3)
Expenses, net of waivers and
reimbursements (2)(4) 1.00% 1.14% 1.25%(3) 1.00% 1.15% 1.25%(3)
Net investment loss, before waivers
and reimbursements (0.95)% (3.96)% (18.86)%(3) (1.28)% (8.69)% (31.65)%(3)
Net investment loss, net of waivers
and reimbursements (0.90)% (1.01)% (1.24)%(3) (0.95)% (1.05)% (1.23)%(3)
Portfolio turnover rate (5) 4.06% 0.00% 20.87% 45.70% 0.00% 0.00%
* Commencement of operations.
(1) Total return is for the period indicated and has not been annualized.
(2) Expense ratios of underlying funds are not included in the expense ratio.
(3) Annualized.
(4) The expense ratios do not include the Program fees charged separately to
investors as described in Note 3 in the Notes to Financial Statements.
(5) Not annualized.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
17
Notes to Financial Statements
January 31, 2005
1. ORGANIZATION
The Aetos Capital Multi-Strategy Arbitrage Fund, LLC, the Aetos Capital
Distressed Investment Strategies Fund, LLC, the Aetos Capital Long/Short
Strategies Fund, LLC and the Aetos Capital Market Neutral Strategies Fund, LLC
(collectively the "Funds" and individually a "Fund") were formed in the state of
Delaware as limited liability companies. The Funds are registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as closed-end,
non-diversified, management investment companies. Each of the Funds is a
fund-of-funds. The Funds seek capital appreciation by allocating their assets
among a select group of private investment funds (commonly known as hedge funds)
("Portfolio Funds") that utilize a variety of alternative investment strategies
specific for each Fund to produce an attractive absolute return on invested
capital, largely independent of the various benchmarks associated with
traditional asset classes. Aetos Alternatives Management, LLC serves as the
Investment Manager to the Funds.
The principal investment objective of each Fund is as follows:
Aetos Capital Multi-Strategy Arbitrage Fund, LLC seeks to produce an attractive
absolute return on invested capital, largely independent of the various
benchmarks associated with traditional asset classes, by allocating its assets
among a select group of portfolio managers that utilize a variety of arbitrage
strategies.
Aetos Capital Distressed Investment Strategies Fund, LLC seeks to produce an
attractive absolute return on invested capital, largely independent of the
various benchmarks associated with traditional asset classes, by allocating its
assets among a select group of portfolio managers across a variety of distressed
investment strategies.
Aetos Capital Long/Short Strategies Fund, LLC seeks to produce an attractive
absolute return on invested capital, largely independent of the various
benchmarks associated with traditional asset classes, by allocating its assets
among a select group of portfolio managers across a variety of long/short
strategies.
Aetos Capital Market Neutral Strategies Fund, LLC seeks to produce an attractive
absolute return on invested capital, largely independent of the various
benchmarks associated with traditional asset classes, by allocating its assets
among a select group of portfolio managers across a variety of market neutral
strategies.
The Funds may offer, from time to time, to repurchase outstanding members'
interests ("Interests") pursuant to written tenders by Members. Repurchase
offers will be made at such times and on such terms as may be determined by the
Funds' Board of Managers (the "Board") in its sole discretion. The Funds may
offer to repurchase Interests four times each year, as of the last business day
of March, June, September and December.
18
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES
The Funds' financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America. The following is
a summary of the significant accounting policies followed by the Funds:
A. Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the Investment
Manager to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from these estimates.
B. Portfolio Valuation
The net asset values of the Funds are determined as of the close of business at
the end of each month in accordance with the valuation principles set forth
below or as may be determined from time to time pursuant to policies established
by the Board.
Investments in Portfolio Funds are presented in the accompanying financial
statements at fair value, as determined by the Funds' Investment Manager under
the general supervision of the Board. Such fair value generally represents a
Fund's pro-rata interest in the net assets of a Portfolio Fund as provided by
the Portfolio Funds. The Investment Manager considers information provided by
the Portfolio Funds regarding the methods they use to value underlying
investments in the Portfolio Funds in determining fair value.
Considerable judgment is required to interpret the factors used to develop
estimates of fair value. Accordingly, the estimates may not be indicative of the
amounts the Fund could realize in a current market exchange and the differences
could be material to the financial statements. The use of different factors or
estimation methodologies could have a significant effect on the estimated fair
value.
C. Fund Expenses
Each Fund bears its own expenses including, but not limited to: any taxes;
organizational expenses; offering costs; investment-related expenses incurred by
the Funds (e.g., fees and expenses charged by the Portfolio Managers and
Portfolio Funds, placement fees, professional fees, custody and administrative
fees). Most expenses of the Funds can be directly attributed to a particular
Fund. Expenses which cannot be directly attributed are apportioned among the
Funds based upon relative net assets or on another reasonable basis.
19
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. Income Taxes
Each Fund intends to be treated as a partnership for Federal income tax
purposes. Each Member is responsible for the tax liability or benefit relating
to the Member's distributive share of taxable income or loss. Accordingly, no
provision for Federal income taxes is reflected in the accompanying financial
statements.
E. Distribution Policy
Each Fund has no present intention of making periodic distributions of its net
investment income or capital gains, if any, to Members. The amount and frequency
of distributions, if any, will be determined in the sole discretion of the
Board.
F. Distributions from Portfolio Funds
Distributions from Portfolio Funds will be classified as investment income or
realized gains in the Statements of Operations, or alternatively, as a decrease
to the cost of the investments based on the U.S. income tax characteristics of
the distribution if such information is available. In cases where the tax
characteristics are not available, such distribution will be classified as
investment income.
G. Cash and Cash Equivalents
The Funds treat all highly liquid financial instruments that mature within three
months as cash equivalents.
3. INVESTMENT MANAGER FEE, RELATED PARTY TRANSACTIONS AND OTHER
The Funds pay the Investment Manager a monthly management fee (the "Management
Fee") at the annual rate of 0.75% of the net asset value of each Fund as of the
last day of the month (before any repurchases of Interests). The Investment
Manager is responsible for providing day-to-day investment management services
to the Funds, and for providing various administrative services to the Funds.
The Investment Manager contractually agreed to reimburse the Funds in order to
limit the Funds' other expenses (defined as total operating expenses excluding
the Management Fee) at 0.50% of each Fund's average monthly net assets, through
December 31, 2003. Effective January 1, 2004, the Investment Manager has
contractually agreed to reimburse the Funds in order to limit the Funds' other
expenses at 0.25% of each Fund's average monthly net assets, at least until May
31, 2006.
20
Notes to Financial Statements (continued)
3. INVESTMENT MANAGER FEE, RELATED PARTY TRANSACTIONS AND OTHER (CONTINUED)
The Investment Manager may also be paid a Program fee outside of the Funds for
services rendered to investors. The Program fee is paid directly by the
investors at an annual rate of up to 0.50% of an investor's assets in the Funds.
The Investment Manager may also be paid an annual performance-based incentive
fee outside of the Funds based on the return of an investor's account with the
Investment Manager.
SEI Investments Global Funds Services (the "Administrator") provides certain
administration, accounting and investor services for the Funds. In consideration
for such services, each Fund pays the Administrator a monthly fee based on
month-end net assets at an annual rate of up to 0.12%, subject to certain fee
minimums, and will reimburse the Administrator for certain out-of-pocket
expenses.
SEI Private Trust Company acts as custodian (the "Custodian") for the Funds'
assets. In consideration for such services, each Fund pays the Custodian, a
monthly fee, based on month-end net assets, at an annual rate of up to 0.01%.
Each Member of the Board who is not an "interested person" of the Funds as
defined by the 1940 Act receives an annual fee of $20,000. Any Manager who is an
"interested person" does not receive any annual or other fee from the Funds. All
Managers are reimbursed by the Funds for reasonable out-of-pocket expenses.
Net profits or net losses of the Funds for each fiscal period are allocated
among and credited to or debited against the capital accounts of Members as of
the last day of each fiscal period in accordance with each Member's respective
investment percentage for each Fund. Net profits or net losses are measured as
the net change in the value of the net assets of a Fund during a fiscal period,
before giving effect to any repurchases of Interest in the Fund, and excluding
the amount of any items to be allocated among the capital accounts of the
Members of the Fund, other than in accordance with the Members' respective
investment percentages.
4. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Portfolio Funds in which the Funds invest
trade various financial instruments and enter into various investment activities
with off-balance sheet risk. These include, but are not limited to, short
selling activities, writing option contracts, and equity swaps. The Funds' risk
of loss in these Portfolio Funds is limited to the value of these investments
reported by the Portfolio Funds.
21
Notes to Financial Statements (continued)
5. CONCENTRATION OF RISK
The Funds invest primarily in Portfolio Funds that are not registered under the
1940 Act and invest in and actively trade securities and other financial
instruments using different strategies and investment techniques, including
leverage, that may involve significant risks. These Portfolio Funds may invest a
high percentage of their assets in specific sectors of the market in order to
achieve a potentially greater investment return. As a result, the Portfolio
Funds may be more susceptible to economic, political, and regulatory
developments in a particular sector of the market, positive or negative, and may
experience increased volatility of the Portfolio Funds' net asset value. The
Funds invest in a limited number of Portfolio Funds. Such concentration may
result in additional risk.
Various risks are also associated with an investment in the Funds, including
risks relating to the multi-manager structure of the Funds, risks relating to
compensation arrangements and risks relating to the limited liquidity of
Interests.
In the normal course of business, the Funds enter into contracts that contain a
variety of representations which provide general indemnifications. Each Fund's
maximum exposure under these arrangements is unknown as this would involve
future claims that may be made against each Fund that have not yet occurred.
However, based on experience, the Funds expect the risk of loss to be remote.
6. INVESTMENT TRANSACTIONS
For the year ended January 31, 2005, purchases and sales of investments were as
follows:
FUND PURCHASES SALES
----------------------------------------------------------------------------------------------------------------
Aetos Capital Multi-Strategy Arbitrage Fund, LLC $197,250,000 $ --
Aetos Capital Distressed Investment Strategies Fund, LLC 25,000,000 --
Aetos Capital Long/Short Strategies Fund, LLC 251,329,569 7,341,065
Aetos Capital Market Neutral Strategies Fund, LLC 81,682,132 21,780,030
7. INVESTMENTS
As of January 31, 2005, the Funds had investments in thirty-three Portfolio
Funds, none of which were related parties. The following table lists the Funds'
investments in Portfolio Funds as of January 31, 2005. The agreements related to
investments in Portfolio Funds provide for compensation to the general
partners/managers in the form of management fees of 1.0% to 2.0% (per annum) of
the net assets and incentive fees or allocations of 10% to 20% of net profits
earned. The Portfolio Funds provide for periodic redemptions, with lock-up
provisions ranging from 3 months to 2 years from initial investment. The
liquidity provisions shown in the table apply after the lock-up provisions.
22
Notes to Financial Statements (continued)
7. INVESTMENTS (CONTINUED)
AETOS CAPITAL MULTI-STRATEGY ARBITRAGE FUND, LLC
INVESTMENT FAIR VALUE % OF MEMBERS'
PORTFOLIO FUND NAME OBJECTIVE 1/31/2005 CAPITAL LIQUIDITY
- ----------------------------------------------------------------------------------------------------------------------------------
AQR Global Arbitrage Offshore Fund (USD), Ltd. Fixed Income/Event Arbitrage $ 27,978,593 11.37% Quarterly
Davidson Kempner Partners Event Arbitrage/Distressed Investments 25,250,719 10.27 Quarterly
FFIP, L.P. Fixed Income Arbitrage 16,100,791 6.55 Annual
Ishin Fund, LLC Convertible Arbitrage 11,434,398 4.65 Annual
Pentangle Partners, L.P. Statistical Arbitrage 16,546,876 6.73 Monthly
Pequot Credit Opportunities Fund, L.P. Fixed Income Arbitrage 15,020,078 6.11 Annual
Perry Partners, L.P. Event Arbitrage 31,764,914 12.91 Annual
Satellite Fund II, L.P. Event Arbitrage/Distressed Investments 27,832,245 11.32 Annual
South Hill Trading Corp. Fixed Income Arbitrage 15,361,874 6.24 Monthly
Sowood Alpha Fund, L.P. Event Arbitrage/Distressed Investments 32,621,181 13.26 Annual
Standard Pacific Credit Opportunities Fund, L.P. Fixed Income Arbitrage 19,268,032 7.83 Annual
---------------------------
$239,179,701 97.24%
---------------------------
AETOS CAPITAL DISTRESSED INVESTMENT STRATEGIES FUND, LLC
INVESTMENT FAIR VALUE % OF MEMBERS'
PORTFOLIO FUND NAME OBJECTIVE 1/31/2005 CAPITAL LIQUIDITY
- ----------------------------------------------------------------------------------------------------------------------------------
King Street Capital, L.P. Distressed Investments $ 7,848,346 17.34% Quarterly
Satellite Credit Opportunities Fund, Ltd. Distressed Investments 9,922,762 21.93 Annual
Silver Point Capital Fund, L.P. Distressed Investments 13,350,168 29.50 Annual
Watershed Capital Partners, L.P. Distressed Investments 11,771,001 26.01 Quarterly
---------------------------
$ 42,892,277 94.78%
---------------------------
AETOS CAPITAL LONG/SHORT STRATEGIES FUND, LLC
INVESTMENT FAIR VALUE % OF MEMBERS'
PORTFOLIO FUND NAME OBJECTIVE 1/31/2005 CAPITAL LIQUIDITY
- ----------------------------------------------------------------------------------------------------------------------------------
Bay Pond Partners, L.P. Long/Short Equity Investments $ 32,530,678 10.00% Semi-Annual
Bay Resource Partners, L.P. Long/Short Equity Investments 19,561,261 6.01 Annual
Cadmus Capital Partners (QP), L.P. Long/Short Equity Investments 22,314,612 6.86 Quarterly
Cantillion Pacific, L.P. Long/Short Equity Investments 10,719,038 3.29 Quarterly
Cantillion U.S. Low Volatility, L.P. Equity Investment Market Neutral 12,477,338 3.84 Quarterly
Cavalry Technology, L.P. Long/Short Equity Investments 35,472,224 10.90 Annual
The Elkhorn Fund, LLC Long/Short Equity Investments 15,421,577 4.74 Quarterly
Fine Partners I, L.P. Long/Short Equity Investments 17,727,358 5.45 Annual
Hygrove Capital Fund (QP), L.P. Long/Short Equity Investments 15,201,892 4.67 Quarterly
Icarus Qualified Partners, L.P. Short Equity Investments 10,437,984 3.21 Annual
JL Partners, L.P. Long/Short Equity Investments 55,172,698 16.96 Quarterly
North River Partners, L.P. Long/Short Equity Investments 17,540,023 5.39 Quarterly
Standard Global Equity Partners SA, L.P. Long/Short Equity Investments 41,051,924 12.62 Annual
Viking Global Equities, L.P. Long/Short Equity Investments 10,500,789 3.23 Annual
---------------------------
$316,129,396 97.17%
---------------------------
23
Notes to Financial Statements (continued)
7. INVESTMENTS (CONTINUED)
AETOS CAPITAL MARKET NEUTRAL STRATEGIES FUND, LLC
INVESTMENT FAIR VALUE % OF MEMBERS'
PORTFOLIO FUND NAME OBJECTIVE 1/31/2005 CAPITAL LIQUIDITY
- ----------------------------------------------------------------------------------------------------------------------------------
AQR Absolute Return Institutional Fund, L.P. Multi-Strategy Market Neutral $ 15,038,012 18.29% Quarterly
Bravura 99 Fund, L.P. Equity Investment Market Neutral 9,101,086 11.07 Quarterly
Cantillion U.S. Low Volatility, L.P. Equity Investment Market Neutral 28,005,020 34.05 Quarterly
GMO Market Neutral Fund (Onshore) Equity Investment Market Neutral 6,575,496 8.00 Quarterly
GMO Mean Reversion Fund Multi-Strategy Market Neutral 17,794,688 21.64 Quarterly
---------------------------
$ 76,514,302 93.05%
---------------------------
8. SUBSEQUENT EVENTS
Through March 1, 2005, the Funds received the following proceeds from sales of Interests:
FUND AMOUNT
- ------------------------------------------------------------------------------------------------
Aetos Capital Multi-Strategy Arbitrage Fund, LLC $4,259,471
Aetos Capital Distressed Investment Strategies Fund, LLC 752,500
Aetos Capital Long/Short Strategies Fund, LLC 3,738,394
Aetos Capital Market Neutral Strategies Fund, LLC 1,112,500
of which the following were received in advance of January 31, 2005:
FUND AMOUNT
- ------------------------------------------------------------------------------------------------
Aetos Capital Multi-Strategy Arbitrage Fund, LLC $204,971
Aetos Capital Distressed Investment Strategies Fund, LLC --
Aetos Capital Long/Short Strategies Fund, LLC 197,894
Aetos Capital Market Neutral Strategies Fund, LLC --
9. COMMITMENTS
At January 31, 2005, the Funds had made commitments to purchase underlying funds as follows:
FUND AMOUNT
- ------------------------------------------------------------------------------------------------
Aetos Capital Multi-Strategy Arbitrage Fund, LLC $7,000,000
Aetos Capital Distressed Investment Strategies Fund, LLC --
Aetos Capital Long/Short Strategies Fund, LLC --
Aetos Capital Market Neutral Strategies Fund, LLC --
24
Managers and Officers of the Funds (unaudited)
NUMBER OF FUNDS
IN THE FUND
POSITION(S) LENGTH OF PRINCIPAL OCCUPATION(S) DURING THE PAST 5 COMPLEX
NAME, ADDRESS(1), HELD WITH TIME YEARS/OTHER DIRECTORSHIPS(3) HELD BY BOARD OVERSEEN BY
AGE FUNDS SERVED(2) MEMBER MANAGER(4)
- ------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT
MANAGERS:
- ------------------------------------------------------------------------------------------------------------------------------------
Senior Vice President, Mercantile Bankshares,
February 2003-Present; Partner and Manager of
Fixed Income, Brown Investment Advisory and
Trust Co., April 2000-December 2002; Miller
Anderson & Sherrerd/Morgan Stanley Dean
Ellen Harvey Since Witter Investment Management, October 1984-
50 Manager 2002 January 2000. 4
- ------------------------------------------------------------------------------------------------------------------------------------
Chairman, Atlantic Whitehall Funds, January
2004-Present; Managing Director and Chief
Legal Officer, iFormation Group, November
Pierre de Saint Phalle Since 2000-November 2003; Partner, Davis Polk &
56 Manager 2002 Wardwell, January 1983-October 2000. 4
- ------------------------------------------------------------------------------------------------------------------------------------
Chairman and Chief Investment Officer, First
Western Investment Management, September
2002-Present; President and CEO, IBJ
Warren J. Olsen Since Whitehall Asset Management Group, May
47 Manager 2003 1999-February 2002. 4
- ------------------------------------------------------------------------------------------------------------------------------------
INTERESTED MANAGERS:
- ------------------------------------------------------------------------------------------------------------------------------------
Chief Executive Officer, Aetos Capital, LLC,
March 1999-Present; President, Morgan
Stanley Dean Witter Investment Management,
Manager and 1996-January 1999; Advisory Director, Morgan
James M. Allwin(5) Chairman of Since Stanley Dean Witter & Co., January 1999-
51 the Board 2002 September 1999. 4
- ------------------------------------------------------------------------------------------------------------------------------------
Co-President and Chief Operating Officer,
Aetos Alternatives Management and Managing
Director, Aetos Capital, LLC, March 2000-
Present; Managing Director, Morgan Stanley
Institutional Funds, June 1998-March 2000;
Michael Klein(6) Manager and Since Principal, Morgan Stanley Dean Witter & Co.,
46 President 2003 August 1997-December 1999. 4
- ------------------------------------------------------------------------------------------------------------------------------------
25
Managers and Officers of the Funds (unaudited) (continued)
NUMBER OF FUNDS
POSITION(S) LENGTH OF PRINCIPAL OCCUPATION(S) DURING THE PAST 5 IN THE FUND
NAME, ADDRESS(1), HELD WITH TIME YEARS/OTHER DIRECTORSHIPS(3) HELD BY BOARD COMPLEX OVERSEEN
AGE FUNDS SERVED(2) MEMBER BY MANAGER(4)
- ------------------------------------------------------------------------------------------------------------------------------------
OFFICERS:
- ------------------------------------------------------------------------------------------------------------------------------------
Managing Director, Aetos Capital, LLC,
October 2001-Present; Chief Investment
Officer, Stanford Management Company,
November 1998-September 2001; Managing
Chief Director of Investment Policy Research,
Anne Casscells Investment Since Stanford University, April 1996-October
46 Officer 2002 1998. N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Vice President, Aetos Capital, LLC, August
2004-Present; Client Portfolio Manager, GE
Asset Management, 2002-July 2004; Manager
of Fund Operations, GE Asset Management
Scott Sawyer Since 2000-2002; Audit Manager, Pricewaterhouse-
36 Treasurer 2004 Coopers LLP, 1998-2000. N/A
- ------------------------------------------------------------------------------------------------------------------------------------
General Counsel and Managing Director, Aetos
Capital, LLC, March 2001-Present; President,
Morgan Stanley Insitutional Funds, March
Harold J. Schaaf Vice President Since 2000-March 2001; Managing Director, Morgan
44 and Secretary 2002 Dean Witter & Co., December 1999-March 2001. N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Fund Accounting Director-Alternative
Investment Fund Products, SEI Investments
Global Fund Services, March 2003-Present;
Fund Accounting Manager-Alternative
Investment Fund Products, SEI Investments
Global Fund Services 2001-March 2003; Fund
Colette Bull Assistant Since Accounting Manager, SEI Investments Global
34 Treasurer 2003 Fund Servies, 1997-2001. N/A
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(1) Each Manager can be contacted by writing to Aetos Capital, LLC 875 Third Avenue, New York, NY 10022.
(2) Each Manager holds office until the next meeting of shareholders at which Managers are elected following his or her
election or appointment and until his successor has been elected and qualified.
(3) Directorships of companies required to report to the Securities and Exchange Commission under the Securities Exchange
Act of 1934 (i.e., "public companies") or other investment companies registered under the 1940 Act.
(4) The "Fund Complex" consists of all registered investment companies for which Aetos Alternatives Management, LLC or any
of its affiliates serves as investment adviser.
(5) Mr. Allwin is considered to be an "interested person" of the Fund as defined in the 1940 Act because he is Chief Executive
Officer of Aetos Capital, LLC.
(6) Mr. Klein is considered to be an "interested person" of the Fund as defined in the 1940 Act because he is Chief Operating
Officer of Aetos Capital, LLC.
For more information regarding the Managers and Officers, please refer to the Statement of Additional Information.
26
ITEM 2. CODE OF ETHICS.
The registrant has adopted a code of ethics that applies to the registrant's
President and Treasurer. The registrant has not made any amendments to its code
of ethics during the covered period. The registrant has not granted any waivers
from any provisions of the code of ethics during the covered period.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a)(1) The registrant's Board of Managers has determined that the registrant has
at least one audit committee financial expert serving on the audit committee.
(a)(2) The audit committee financial expert is Warren J. Olsen. Mr. Olsen is
independent as defined in Form N-CSR Item 3(a)(2).
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Fees billed by PricewaterhouseCoopers ("PwC") Related to the Fund.
PwC billed the Fund aggregate fees for services rendered to the Trust for the
last two fiscal years as follows:
FISCAL 2005 FISCAL 2004
All fees and All other fees All fees and All other fees
services to and services to services to and services to
All fees and service service All fees and service service
services to the affiliates that affiliates that services to the affiliates that affiliates that
Fund that were were did not require Trust that were were did not require
pre-approved pre-approved pre-approval pre-approved pre-approved pre-approval
(a) Audit
Fees(1)
$34,000 $0 $0 $27,250 $0 $0
(b) Audit-
Related
Fees
$0 $0 $0 $0 $0 $0
(c) Tax
Fees
(2)
$27,350 $0 $0 $16,562 $0 $0
(d) All
Other
Fees
$0 $0 $0 $0 $0 $0
Notes:
(1) Audit fees include amounts related to the audit of the registrant's
annual financial statements and services normally provided by the
accountant in connection with statutory and regulatory filings.
(2) Tax fees relate to preparation of federal and state tax returns.
(e)(1) The audit committee has adopted pre-approval policies and procedures
that require the audit committee to pre-approve all audit and non-audit
services (including tax services) to be provided to the Fund and all
non-auditing services to be provided to the Fund's investment adviser
(or any affiliate thereof that provides ongoing services to the Fund)
if such services relate directly to operations and financial reporting
of the Fund.
(e)(2) Percentage of fees billed applicable to non-audit services pursuant to
waiver of pre-approval requirement were as follows:
FISCAL 2005 FISCAL 2004
Audit-Related Fees 0% 0%
Tax Fees 0% 0%
All Other Fees 0% 0%
(f) Not applicable.
(g) The aggregate non-audit fees and services billed by PwC for the last
two fiscal years were $0 and $0 for Fiscal 2005 and Fiscal 2004,
respectively.
(h) Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS
Included as part of the report to shareholders filed under Item 1 of this Form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
AETOS ALTERNATIVES MANAGEMENT, LLC
PROXY VOTING POLICY
I. INTRODUCTION
This policy sets forth Aetos Alternatives Management, LLC ("AAM")
policies and procedures for voting proxies with respect to portfolio
securities held in the accounts for which AAM provides discretionary
investment management services and for which AAM has the explicit
authority to vote their proxies. The policy will be reviewed and, if
necessary, updated periodically to address new or revised proxy voting
issues as they arise.
As an investment manager for various clients, including clients
governed by the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), AAM may vote proxies as part of its authority to
manage, acquire and dispose of client account assets, unless the "named
fiduciary" for an ERISA account has explicitly reserved the authority
for itself, or in the case of an account not governed by ERISA, the
client investment management agreement does not provide that AAM will
vote proxies. When voting
proxies for client accounts, AAM will make voting decisions solely in
the best interests of its clients and its ERISA plan clients and
beneficiaries and participants, considering all relevant factors and
without undue influence from individuals or groups who may have an
economic interest in the outcome of a proxy vote. In fulfilling its
obligations to its clients, AAM will act in a manner it deems prudent
and diligent and which is intended to enhance the economic value of the
underlying portfolio securities held in its clients' accounts.
II. ROUTINE CORPORATE MATTERS
AAM will generally, although not always, vote in support of management
on matters which are common management-sponsored initiatives, provided
that, in AAM's opinion, approval of such initiatives will not detract
from the economic value of the company's securities held in AAM client
accounts. These matters are set out below:
(i) Appointment or election of auditors;
(ii) Routine elections or re-elections of directors;
(iii) Director's liability and indemnification;
(iv) General updating/corrective amendments to charter;
(v) Name changes;
(vi) Elimination of cumulative voting; and
(vii) Elimination of preemptive rights.
III. ISSUES HAVING THE POTENTIAL FOR MAJOR ECONOMIC IMPACT
A. AAM will generally, although not always, vote in support of
management initiatives which may have a substantive financial
or best interest impact, provided that, in AAM's opinion,
approval of such initiatives will not detract from the
economic value of the company's securities held in AAM client
accounts. These matters are set out below:
(i) Capitalization changes which eliminate other classes
of stock and voting rights;
(ii) Changes in capitalization authorization for stock
splits, stock dividends, and other specified needs
which are no more than 50% of the existing
authorization;
(iii) Stock purchase plans with an exercise price of not
less than 85% of fair market value;
(iv) Stock option plans that are incentive based and not
excessive;
(v) Other stock-based plans which are appropriately
structured;
(vi) Reductions in supermajority vote requirements; and
(vii) Adoption of anti-greenmail provisions.
B. AAM will generally not vote in support of management on
certain issues which have a potential substantive financial or
best interest impact when AAM believes that approval of the
proposal may negatively impact the economic value of the
company's securities held in AAM client accounts. These
matters are set out below:
(i) Capitalization changes which add classes of stock
which are blank check in nature or that dilute the
voting interests of existing shareholders;
(ii) Changes in capitalization authorization where
management does not offer an appropriate rationale or
that are contrary to the best interest of existing
shareholders;
(iii) Anti-takeover and related provisions which serve to
prevent the majority of shareholders from exercising
their rights or effectively deter appropriate tender
offers and other offers;
(iv) Amendments to by-laws which would require
supermajority shareholder votes to pass or repeal
certain provisions;
(v) Classified boards of directors;
(vi) Reincorporation into a state which has more stringent
anti-takeover and related provisions;
(vii) Shareholder rights plans which allow appropriate
offers to shareholders to be blocked by the board or
trigger provisions which prevent legitimate offers
from proceeding;
(viii) Excessive compensation or non-salary compensation
related proposals;
(ix) Change-in-control provisions in non-salary
compensation plans, employment contracts and
severance agreements that benefit management and
would be costly to shareholders if triggered; and
(x) "Other business as properly comes before the meeting"
proposals which give a blank check to those acting as
proxy.
IV. SOCIAL AND CORPORATE RESPONSIBILITY ISSUES
AAM, believing that management's job is to handle ordinary business
matters, and not wanting to arbitrarily impose a judgment on such
matters, usually votes with management on these proposals. Third party
analyses of these issues are taken into account. If an issue will, in
our view negatively impact the investment merits of a company, we will
oppose it.
V. CONFLICT OF INTERESTS
Situations may arise where there are material conflicts between AAM's
interest and those of its advisory clients. AAM may resolve potential
conflicts by using any of the following methods: (1) adopting a policy
of disclosing the conflict to clients and obtaining their consent
before voting: (2) basing the proxy vote on pre-determined voting
guidelines if the application of the guidelines to the matter do not
involve the exercise of discretion on the part of AAM; or (3) using the
recommendations of an independent third party.
VI. PROXY VOTING RECORD RETENTION
AAM retains the following records: (1) proxy voting policies and
procedures; (2) proxy statements; (3) records of votes cast on behalf
of clients; (4) records of clients' requests for proxy voting
information; and (5) any documents prepared by or on behalf of AAM that
were material in making decisions on how to vote. AAM retains the
above-mentioned records for a minimum of five years.
VII. PROXY ADMINISTRATION
AAM's internal Proxy Committee (the "Committee") develops the firm's
positions on all major corporate issues, creates guidelines, and
oversees the voting process. The Committee, comprised of the Chief
Investment Officer, Chief Operating Officer, and General Counsel,
analyzes types of proposals based on whether they would adversely
affect shareholder's interests and make a company less attractive to
own. In evaluating proxy proposals each year, the Committee relies upon
our own knowledge of each company and its management, independent
research provided by third parties, and information presented by
company managements and shareholder groups.
Once the Committee establishes its recommendations, they are
distributed to AAM's Portfolio Management Group as voting guidelines.
Ultimately, the investment professional primarily accountable for a
portfolio is responsible for votes on companies in that portfolio. Most
vote consistent with AAM's guidelines. Occasionally, some will take an
independent view on certain issues and vote differently. When an
investment professional casts votes which are counter to the
Committee's guidelines, they are required to document their reasons in
writing for the Committee. Annually, the Board of Managers of the AAM
Funds will review AAM's proxy voting process, policies, and voting
records.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES
Not applicable. Effective for closed-end management investment companies for
fiscal years ending on or after December 31, 2005.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT COMPANY AND
AFFILIATED PURCHASERS.
Not applicable as Interests of the Fund are not registered pursuant to Section
12 of the Exchange Act.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of Security Holders during the covered
period.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The certifying officers, whose certifications are included herewith, have
evaluated the registrant's disclosure controls and procedures within 90 days of
the filing date of this report. In their opinion, based on their evaluation, the
registrant's disclosure controls and procedures are adequately designed, and are
operating effectively to ensure, that information required to be disclosed by
the registrant in the reports it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
(b) There were no significant changes in the registrant's internal control over
financial reporting that occurred during the registrant's last fiscal half-year
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
ITEMS 12. EXHIBITS.
(a)(1) Code of Ethics attached hereto.
(a)(2) A separate certification for the principal executive officer and the
principal financial officer of the registrant as required by Rule 30a-2(a) under
the Investment Company Act of 1940, as amended (17 CFR 270.30a-2(a)), are filed
herewith.
(b) Officer certifications as required by Rule 30a-2(b) under the Investment
Company Act of 1940, as amended (17 CFR 270.30a-2(b)) also accompany this filing
as an Exhibit.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Aetos Capital Multi-Strategy
Arbitrage Fund, LLC
By (Signature and Title)* /s/ Michael F. Klein
--------------------
Michael F. Klein, President
Date: 03/29/05
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Michael F. Klein
--------------------
Michael F. Klein, President
Date: 03/29/05
By (Signature and Title)* /s/ Scott D. Sawyer
-------------------
Scott D. Sawyer, Treasurer
Date: 03/29/05
* Print the name and title of each signing officer under his or her signature.