UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-21694
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MELLON OPTIMA L/S STRATEGY FUND, LLC
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(Exact name of Registrant as specified in charter)
Mellon Financial Center
One Boston Place, 024-0071
Boston, Massachusetts 02108
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(Address of principal executive offices) (Zip code)
Christopher P. Harvey, Esq.
Wilmer Cutler Pickering Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
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(Name and address of agent for service)
Registrant's telephone number, including area code: (877) 257-0004
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Date of fiscal year end: March 31
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Date of reporting period: March 31, 2007
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ITEM 1. REPORTS TO STOCKHOLDERS.
The Annual Report to Investors is attached herewith.
MELLON OPTIMA L/S STRATEGY FUND, LLC
ANNUAL REPORT TO INVESTORS
FOR THE YEAR ENDED MARCH 31, 2007
This report and the financial statements contained herein are submitted for the
general information of the investors of Mellon Optima L/S Strategy Fund, LLC
("the Fund"). This report is not authorized for distribution to prospective
investors in the Fund unless preceded or accompanied by the Fund's Confidential
Offering Memorandum (the "Offering Memorandum").
Any information in this investor report regarding market or economic trends or
the factors influencing the Fund's historical or future performance are
statements of the opinion of Fund management as of the date of this report.
These statements should not be relied upon for any other purposes. Past
performance is no guarantee of future results, and there is no guarantee that
market forecasts discussed will be realized.
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission (SEC) for the first and third quarters of each fiscal
year on Form N-Q. Forms N-Q are available on the SEC's web site at
http://www.sec.gov. The Fund's Forms N-Q may be reviewed and copied at the SEC's
Public Reference Room in Washington D.C. Information regarding the operation of
the SEC's Public Reference Room may be obtained by calling 1800-SEC-0330. To
request a copy of the most recent quarterly holdings report, semi-annual report
or annual report, call 1-877-257-0004.
To view the Fund's proxy voting guidelines and proxy voting record for the
12-month period ended June 30 visit the SEC's web site at http://www.sec.gov.
You may also call 1-877-257-0004 to request a free copy of the proxy voting
guidelines.
The Fund is available only to investment management clients of the Private
Wealth Management Group of Mellon Financial Corporation, and only if they have a
net worth of more than $1 million and meet other criteria as described in the
Offering Memorandum. Interests in the Fund are not freely transferable, however
liquidity may be available through repurchase offers made at the discretion of
the Board of Directors of the Fund.
As with any speculative investment program, it is possible to incur losses as
well as gains through an investment in the Fund. There can be no assurances that
the Fund will achieve its objective. The Offering Memorandum contains a more
complete description of the risks associates with the Fund. Under no
circumstances should a prospective investor elect to invest in the Fund without
reviewing the Offering Memorandum.
MELLON OPTIMA L/S STRATEGY FUND, LLC
PORTFOLIO SUMMARY - MARCH 31, 2007 (UNAUDITED)
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PERCENTAGE OF
INVESTMENT FUNDS COST VALUE NET ASSETS
- -------------------------------------------------------------------------------------------
Opportunistic $139,612,937 $167,698,941 31.2%
Growth 131,610,286 149,489,914 27.8%
Value 124,413,209 146,784,471 27.3%
Global 53,000,000 61,299,467 11.4%
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TOTAL INVESTMENT FUNDS $448,636,432 $525,272,793 97.7%
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
1
MELLON OPTIMA L/S STRATEGY FUND, LLC
SCHEDULE OF INVESTMENTS - MARCH 31, 2007
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PERCENTAGE OF
INVESTMENT FUNDS COST VALUE NET ASSETS LIQUIDITY+
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OPPORTUNISTIC
Hunter Global Investors Fund I L.P. $ 19,127,412 $ 22,574,289 4.2% Quarterly
Impala Fund LP 22,000,000 26,918,551 5.0% Quarterly
Karsh Capital II, LP 28,125,331 34,827,208 6.5% Quarterly
Kingdon Associates 25,283,055 31,364,347 5.8% Quarterly
Raptor Global Fund L.P. 23,077,139 27,860,221 5.2% Quarterly
Sage Opportunity Fund (QP), L.P. 22,000,000 24,154,325 4.5% Quarterly
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139,612,937 167,698,941 31.2%
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GROWTH
Alydar QP Fund, L.P. 20,570,236 24,047,957 4.5% Quarterly
Chilton QP Investment Partners, L.P. 21,000,000 21,830,795 4.0% Annually
Copper Arch Fund, L.P. 21,000,000 24,382,509 4.5% Quarterly
Highbridge Long/Short Equity Fund, L.P. 21,643,955 25,339,022 4.7% Quarterly
Intrepid Capital Fund (QP), L.P. 16,432,041 18,677,660 3.5% Quarterly
Maverick Fund USA, Ltd. 10,964,054 12,726,489 2.4% Annually
Pequot Capital 20,000,000 22,485,482 4.2% Annually
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131,610,286 149,489,914 27.8%
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VALUE
Amici Qualified Associates L.P. 25,173,446 28,019,673 5.2% Quarterly
Clovis Capital Partners Institutional, L.P. 16,247,705 19,691,260 3.7% Quarterly
Delta Institutional, L.P. 19,624,302 23,049,423 4.3% Quarterly
Kinetics Institutional Partners, L.P. 22,000,000 28,940,948 5.4% Quarterly
Shoshone Partners, L.P. 17,299,000 19,669,800 3.6% Annually
Thruway Partners, L.P. 24,068,756 27,413,367 5.1% Quarterly
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124,413,209 146,784,471 27.3%
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GLOBAL
Asian Century Quest Fund (QP), L.P. 19,000,000 20,770,115 3.9% Quarterly
Calypso Qualified Partners, L.P. 18,500,000 22,538,983 4.2% Monthly
Lansdowne European Strategic Equity Fund, L.P. 15,500,000 17,990,369 3.3% Monthly
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53,000,000 61,299,467 11.4%
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TOTAL INVESTMENT FUNDS 448,636,432 525,272,793 97.7%
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AFFILIATED INVESTMENTS
Dreyfus Institutional Preferred Plus Money Market Fund 14,250,002 14,250,002 2.6% Daily
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TOTAL INVESTMENTS $462,886,434 539,522,795 100.3%
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LIABILITIES IN EXCESS OF OTHER ASSETS (1,652,450) (0.3)%
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TOTAL NET ASSETS $537,870,345 100.0%
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+ The Portfolio Funds provide for periodic redemptions, with lock-up provisions up to two years from initial investment.
The liquidity provisions shown in the table apply after any applicable lock-up provision.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
2
MELLON OPTIMA L/S STRATEGY FUND, LLC
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 2007
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ASSETS
Investments in funds, at value (Cost at $448,636,432) (Note 2A) $525,272,793
Investments in affiliated issuers, at value (Cost at $14,250,002) (Note 2F) 14,250,002
Advance investments in funds, at value (Note 4) 8,000,000
Receivable for investments sold 699,230
Prepaid expenses 169,785
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Total assets 548,391,810
LIABILITIES
Proceeds from sale of interests received in advance (Note 10) $ 7,904,000
Payable for repurchase of interests (Note 9) 872,724
Accrued investment advisor fees (Note 3) 1,331,399
Accrued accounting and administration fees (Note 3) 138,564
Accrued professional fees 253,560
Accrued Directors' fees (Note 3) 11,817
Accrued Chief Compliance Officer fees (Note 3) 2,562
Accrued custody fees (Note 3) 1,413
Other accrued expenses and liabilities 5,426
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Total liabilities 10,521,465
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NET ASSETS $537,870,345
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INVESTORS' CAPITAL
Net capital contributions $461,233,984
Net unrealized appreciation 76,636,361
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INVESTORS' CAPITAL $537,870,345
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
3
MELLON OPTIMA L/S STRATEGY FUND, LLC
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 2007
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INVESTMENT INCOME
Dividend income from affiliated investments (Note 2F) $ 516,431
EXPENSES
Investment advisory fee (Note 3) $ 7,094,329
Accounting, administration and investor services fees (Note 3) 315,306
Audit and tax service fees 250,000
Insurance expense 167,526
Legal fees 69,176
Directors' fees (Note 3) 59,169
Chief Compliance Officer fees (Note 3) 25,813
Custody fees (Note 3) 17,657
Miscellaneous expenses (12,848)
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Total expenses 7,986,128
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Net investment income (loss) (7,469,697)
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on portfolio funds sold (394,450)
Net change in unrealized appreciation (depreciation)
on investments in portfolio funds 40,347,273
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Net realized and unrealized gain (loss) 39,952,823
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NET INCREASE IN INVESTORS' CAPITAL DERIVED FROM INVESTMENT OPERATIONS $ 32,483,126
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
4
MELLON OPTIMA L/S STRATEGY FUND, LLC
STATEMENTS OF CHANGES IN INVESTORS' CAPITAL
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FOR THE PERIOD
MAY 2, 2005
FOR THE (COMMENCEMENT OF
YEAR ENDED OPERATIONS) THROUGH
MARCH 31, 2007 MARCH 31, 2006
---------------- --------------------
INCREASE (DECREASE) IN INVESTORS' CAPITAL FROM
INVESTMENT OPERATIONS
Net investment income (loss) $ (7,469,697) $ (3,649,012)
Net realized gain (loss) on portfolio funds sold (394,450) 3,006,397
Net change in unrealized appreciation (depreciation)
on investments in portfolio funds 40,347,273 36,289,088
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Net Increase in Investors' Capital Derived
from Operations 32,483,126 35,646,473
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CAPITAL TRANSACTIONS
Proceeds from conversion of Mellon Hedge Fund I - 122,131,552
Proceeds from sale of interests 219,625,250 148,979,099
Repurchase of interests (17,399,792) (3,595,363)
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Net Increase in Investors' Capital Derived from
Capital Transactions 202,225,458 267,515,288
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TOTAL INCREASE (DECREASE) IN INVESTORS' CAPITAL 234,708,584 303,161,761
INVESTORS' CAPITAL
At beginning of period 303,161,761 -
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At end of period $537,870,345 $303,161,761
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
5
MELLON OPTIMA L/S STRATEGY FUND, LLC
FINANCIAL HIGHLIGHTS
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FOR THE PERIOD
MAY 2, 2005
FOR THE (COMMENCEMENT OF
YEAR ENDED OPERATIONS) THROUGH
MARCH 31, 2007 MARCH 31, 2006
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TOTAL RETURN 5.96% 17.31% (1)
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.74% (2) 1.95% (2)(3)
Net Investment loss (1.63%) (1.80%)(3)
PORTFOLIO TURNOVER RATE 2% 17% (4)
NET ASSETS, END OF PERIOD (000'S OMITTED) $ 537,870 $303,162
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(1) Total return is for the period indicated and has not been annualized.
(2) Expense ratios of the underlying funds are not included in the expense
ratio.
(3) Annualized.
(4) Not Annualized.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
6
MELLON OPTIMA L/S STRATEGY FUND, LLC
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31, 2007
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CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in investors' capital resulting from operations $ 32,483,126
Adjustments to reconcile net increase in investors' capital
from operations to net cash used in operating activities:
Purchases of long-term investments (213,500,000)
Proceeds from sale of long-term investments 9,996,263
Purchases of short-term investments (52,012,152)
Proceeds from sale of short-term investments 38,852,355
Net realized loss on investments 394,450
Net change in unrealized appreciation on investments (40,347,273)
Decrease in advance investments in funds 67,500,000
Decrease in receivable for investments sold 8,283,766
Increase in prepaid expenses (164,367)
Increase in accrued investment advisor fees 644,325
Increase in accrued professional fees 80,304
Increase in accrued accounting and administrative fees 55,708
Increase in accrued Directors' fees 2,685
Decrease in accrued Chief Compliance Officer fees (1,688)
Decrease in accrued custody fees (2,695)
Decrease in other accrued expense and liabilities (35,005)
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Net cash used in operating activities (147,770,198)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of interests 164,476,750
Repurchase of interests (16,706,552)
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Net cash provided by financing activities 147,770,198
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Net change in cash --
--------------
Cash at beginning of year --
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Cash at end of year $ --
==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
7
MELLON OPTIMA L/S STRATEGY FUND, LLC
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION:
Mellon Optima L/S Strategy Fund, LLC (the "Fund") was organized as a limited
liability company under the laws of Delaware on December 14, 2004 and is
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as a closed-end, non-diversified, management investment company.
The Fund's investment objective is to seek capital appreciation over the long
term by attempting to maximize risk-adjusted returns while minimizing volatility
and maintaining a low correlation to the S&P 500 Index. The Fund is a fund of
hedge funds that seeks to achieve its objective by deploying its assets
primarily among a select group of portfolio managers who over time have produced
attractive returns principally in the U.S. equity markets by employing an
investing style known as "long/short." This style combines long investments with
short sales in the pursuit of opportunities in rising or declining markets.
Generally, such portfolio managers conduct their investment programs through
unregistered investment vehicles and in other registered investment companies
(collectively, the "Investment Funds"), in which the Fund invests as a limited
partner, member or shareholder along with other investors.
The Fund's Board of Directors (the "Directors") has overall responsibility to
manage and control the business affairs of the Fund, including the exclusive
authority to oversee and to establish policies regarding the management, conduct
and operation of the Fund's business. The Directors have engaged Mellon Hedge
Advisors LLC (the "Adviser"), a Delaware limited liability company, to provide
investment advice regarding the selection of Investment Funds and to be
responsible for the day-to-day management of the Fund. The Adviser is an
indirect wholly owned subsidiary of Mellon Financial Corporation, and is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended (the "Advisers Act"). The Adviser has engaged Optima Fund Management
LLC (the "Sub-Investment Adviser"), a registered investment adviser under the
Advisers Act, to assist it in performing certain of its duties.
Interests are offered solely to eligible investors ("Investors") in private
placement transactions exempt from registration under the Securities Act of
1933, as amended (the "1933 Act"). Initial and additional applications for
interests in the Fund by Investors may be accepted at such times as the Fund may
determine and are generally accepted monthly. The Fund reserves the right to
reject any application for interests in the Fund.
Interests of the Fund are not redeemable. The Fund from time to time may offer
to repurchase interests pursuant to written tenders. These repurchases will be
made at such times and on such terms as may be determined by the Directors, in
their complete and exclusive discretion. The Adviser expects that it will
recommend to the Directors that the Fund offer to repurchase interests from
Investors twice each year, near mid-year and year-end. Investors can transfer or
assign their membership interests only (i) by operation of law pursuant to the
death, bankruptcy, insolvency or dissolution of an Investor, or (ii) with the
written consent of the Adviser, which may be withheld in its sole and absolute
discretion.
(2) SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
8
MELLON OPTIMA L/S STRATEGY FUND, LLC
NOTES TO FINANCIAL STATEMENTS
A. VALUATION OF THE FUND AND ITS INVESTMENTS
Net asset value of the Fund will be determined by or at the direction of the
Adviser as of the close of business at the end of each calendar month and on any
other date the Directors may designate in accordance with the valuation
principles set forth below or as may be determined from time to time pursuant to
policies established by the Directors.
The Directors have approved procedures pursuant to which the Fund will value its
investments in Investment Funds at fair value. In accordance with these
procedures, fair value as of the end of each calendar month and on any other
date the Directors may designate and ordinarily will be the value determined as
of such period for each Investment Fund in accordance with the Investment Fund's
valuation policies and reported at the time of the Fund's valuation. As a
general matter, the fair value of the Fund's interest in an Investment Fund will
represent the amount that the Fund could reasonably expect to receive from an
Investment Fund if the Fund's interest were redeemed at the time of valuation,
based on information reasonably available at the time the valuation is made and
that the Fund believes to be reliable. All valuations utilize financial
information supplied by each Investment Fund and are net of management fees and
performance incentive fees or allocations payable to the Investment Funds'
managers or pursuant to the Investment Funds' agreements. In the event that an
Investment Fund does not report a value to the Fund on a timely basis at the end
of each calendar month, the Fund would determine the fair value of such
Investment Fund based on the most recent value reported by the Investment Fund,
as well any other relevant information available at the time the Fund values its
portfolio.
Short-term instruments with less than sixty days remaining to maturity are
valued at amortized cost, which approximates market value. If the Fund acquires
a short-term instrument with more than sixty days remaining to its maturity, it
is valued at current market value until the sixtieth day prior to maturity and
will then be valued at amortized cost upon the value on such date unless the
Board determines during such sixty-day period that amortized cost does not
represent fair value.
Distributions received or withdrawals from Investment Funds, whether in the form
of cash or securities, are first applied as a reduction of the investment's
cost.
B. SECURITIES TRANSACTIONS AND INCOME
Securities transactions are recorded as of the trade date. Interest income is
recorded on the accrual basis. Realized gains and losses from Investment Fund
transactions are calculated on the identified cost basis. The Investment Funds
in which the Fund invests do not regularly distribute income and realized gains
from their underlying investment activity. Such undistributed amounts are
captured in the value of the Investment Funds in the form of unrealized
appreciation.
C. FUND COSTS
The Adviser bore the non-recurring initial offering and organizational costs of
the Fund. The Fund bears all expenses incurred in the ongoing business of the
Fund including, but not limited to, the following: all costs and expenses
related to portfolio transactions and positions for the Fund's account; legal
fees; accounting fees; costs of computing the Fund's net asset value, including
valuation services provided by third parties; costs of insurance; a portion, as
determined by the Board, of the compensation payable to the Fund's Chief
Compliance Officer; certain printing costs; and expenses of meetings of the
Board and Investors.
9
MELLON OPTIMA L/S STRATEGY FUND, LLC
NOTES TO FINANCIAL STATEMENTS
D. INCOME TAXES
The Fund is treated as a partnership for Federal income tax purposes.
Accordingly, no provision is made by the Fund for Federal or state income taxes.
For income tax purposes, each Investor will be treated as a partner of the Fund
and, as such, will be taxed upon its distributive share of each item of the
Fund's income, gain, loss and deductions allocated to the Fund (including from
investments in other partnerships) for each taxable year of the Fund ending with
or within the Investor's taxable year. Each item will have the same character to
an Investor, and will generally have the same source (either United States or
foreign), as though the Investor realized the item directly. Investors must
report these items regardless of the extent to which, or whether, the Fund or
Investors receive cash distributions for such taxable year, and thus may incur
income tax liabilities unrelated to any distributions to or from the Fund.
At March 31, 2007, the Fund reclassified $7,469,697 and $394,450 from
undistributed net investment loss and accumulated net realized loss on
investments respectively, to net capital contributions. This reclassification
was to reflect, as an adjustment to net capital contributions, the amounts of
taxable income or loss that have been allocated to the Fund's Members and had no
effect on the net assets.
The cost of investments for Federal income tax purposes is adjusted for items of
accumulated taxable income allocated to the Fund from the Investment Funds. The
allocated taxable income is reported to the Fund by the Investment Funds on each
calendar year Schedules K-1. The aggregate cost of Investment Funds and the
gross unrealized appreciation and depreciation on Investment Funds for federal
income tax purposes as of March 31, 2007 are noted below.
Federal tax cost of investment funds $480,170,809 ***
-------------
Gross unrealized appreciation 59,351,986
Gross unrealized depreciation -
-------------
Net unrealized appreciation $ 59,351,986
=============
***Based on accumulated taxable income for the tax year ended December 31, 2006
and aggregate purchases and sale of proceeds of Investment Funds up to March 31,
2007.
E. USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires the Fund to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. The Fund believes that the estimates utilized in preparing
the Fund's financial statements are reasonable and prudent; however, actual
results could differ from these estimates.
F. SHORT-TERM INVESTMENTS
Short-term investments consist of liquid investments with maturities of less
than 90 days. The Fund had $14,250,002 invested in Dreyfus Institutional
Preferred Plus Money Market Fund, an affiliated institutional money market,
including $123,639 of segregated funds, which represents 5% of the estimated
value of the June 30, 2006 tender offer. See Note 9.
10
MELLON OPTIMA L/S STRATEGY FUND, LLC
NOTES TO FINANCIAL STATEMENTS
(3) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES:
The Adviser provides investment advisory services to the Fund pursuant to an
Investment Advisory Agreement. Pursuant to that agreement, the Fund pays the
Adviser a monthly fee (the "Investment Advisory Fee") at the annual rate of
1.50% of the Fund's net assets. Pursuant to this agreement the Fund was charged
$7,094,329 for the year ended March 31, 2007.
On December 4, 2006, Mellon Financial Corporation ("MFC") and The Bank of New
York Company, Inc. ("BNY") announced that they had entered into a definitive
agreement to merge. The new company will be called The Bank of New York Mellon
Corporation. As part of this transaction, Mellon Hedge Fund Advisors LLC will
become an indirect wholly-owned subsidiary of The Bank of New York Mellon
Corporation. The transaction is subject to certain regulatory approvals and the
approval of BNY's and MFC's shareholders, as well as other customary conditions
to closing. Subject to such approvals and the satisfaction of the other
conditions, MFC and BNY expect the transaction to be completed in the third
quarter of 2007.
Prior to January 1, 2007, the Fund compensated DPM Mellon, L.L.C. ("DPM"), a
wholly-owned indirect subsidiary of MFC, under an Administration and Transfer
Agency Agreement for certain administration and transfer agency services for the
Fund. In consideration for these services, the Fund paid DPM an annual fee
calculated based upon the net assets of the Fund, subject to a minimum monthly
fee, and reimbursed certain of DPM's expenses. Pursuant to this agreement, DPM
charged the Fund $177,445 during the period of April 1, 2006 to December 31,
2006.
As of December 21, 2006, the Fund entered into an Administration Agreement with
SEI Global Services, Inc. ("SEI") for certain administration and transfer agency
services for the Fund. The agreement was effective January 1, 2007. SEI is not
an affiliate of the Fund.
The Fund compensates Mellon Trust of New England, N.A. ("MTNE"), a wholly-owned
direct subsidiary of MFC, under a Custody Agreement to provide custody services
for the Fund. In consideration for these services, MTNE earns interest on
balances, including disbursement balances and balances arising from purchase and
sale transactions, and the Fund reimburses certain of MTNE's expenses. Pursuant
to this agreement, the Fund was charged $17,657 for the year ended March 31,
2007.
The Fund has contracted with Mellon Investor Services LLC, a wholly owned
subsidiary of Mellon Financial Corporation, to provide printing and fulfillment
services for the Fund. Pursuant to this agreement, the Fund was charged $17,003
for the year ended March 31, 2007, which is included in miscellaneous expenses
on the Statement of Operations.
The Fund reimburses Mellon Asset Management for a portion of the salary of the
Fund's Chief Compliance Officer. Pursuant to this arrangement, the Fund was
charged $25,813 for the year ended March 31, 2007. No other director, officer or
employee of Mellon Hedge Advisors, LLC or its affiliates receives any
compensation from the Fund for serving as an officer or Director of the Fund.
The Fund pays each Director who is not a director, officer or employee of the
Adviser or its affiliates (an "Independent Director") an annual retainer and per
meeting fees. The Fund also reimburses the Independent Directors for their
reasonable out-of-pocket expenses. In addition, the Fund pays the legal fees for
the independent counsel of the Independent Directors. The Directors do not
receive any pension or retirement benefits from the Fund.
11
MELLON OPTIMA L/S STRATEGY FUND, LLC
NOTES TO FINANCIAL STATEMENTS
(4) INVESTMENT TRANSACTIONS:
During the year ended March 31, 2007, the Fund had aggregate purchases and
proceeds from sales of Investment Funds of $213,500,000 and $9,996,263,
respectively.
At March 31, 2007, the Fund had made advance investments of $8,000,000 in
Maverick Fund USA, Ltd.
(5) INDEMNIFICATION:
In the ordinary course of business, the Fund may enter into contracts or
agreements that contain indemnifications or warranties. Future events could
occur that lead to the execution of these provisions against the Fund. Based on
its history and experience, management feels that the likelihood of such an
event is remote.
(6) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
In the normal course of business, the Investment Funds in which the Fund invests
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, contracts for differences, and
equity swaps. The Fund's risk of loss in these Investment Funds is limited to
the value of these investments as reported by the Fund.
(7) RISK FACTORS:
An investment in the Fund involves a high degree of risk, including the risk
that the entire amount invested may be lost. The Fund allocates assets to a
select group of portfolio managers and invests in Investment Funds that invest
in and actively trade securities and other financial instruments using a variety
of strategies and investment techniques with significant risk characteristics,
including the risks arising from the volatility of the equity, fixed income,
commodity and currency markets, the risks of borrowings and short sales, the
risks arising from leverage associated with trading in the equities, currencies
and over-the-counter derivatives markets, the illiquidity of derivative
instruments and the risk of loss from counter-party defaults. No guarantee or
representation is made that the investment program will be successful.
So as to satisfy certain prohibitions on affiliated transactions imposed by the
1940 Act, the Fund may limit its investment position in any one Investment Fund
to less than 5% of the Investment Fund's outstanding voting securities.
Alternatively, to facilitate investments in Investment Funds deemed attractive
by the Adviser, the Fund may purchase non-voting securities of, or waive its
right to vote some or all securities in, certain Investment Funds. In cases
where the Fund purchases non-voting securities of, or waives its right to vote
securities in, an Investment Fund, the Fund will not be able to vote on matters
that required the approval of security holders of the Investment Fund, including
matters that may be adverse to the Fund's and its Investors' interests.
12
MELLON OPTIMA L/S STRATEGY FUND, LLC
NOTES TO FINANCIAL STATEMENTS
(8) NEW ACCOUNTING REQUIREMENTS:
In July 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes -
an Interpretation of FASB Statement No. 109" (the "Interpretation"). The
Interpretation establishes for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. Adoption of FIN 48 is required for fiscal years beginning after
December 15, 2006 and is to be applied to all open tax years as of the effective
date. At this time, management is evaluating the implications of FIN 48 and its
impact, if any, in the financial statements has not yet been determined.
In addition, in September 2006, FASB released Statement of Financial Accounting
Standards No. 157 "Fair Value Measurements" ("FAS 157"). FAS 157 establishes an
authoritative definition of fair value, sets out a framework for measuring fair
value, and requires additional disclosures about fair-value measurements. The
application of FAS 157 is required for fiscal years beginning after November 15,
2007 and interim periods within those fiscal years. At this time, management is
evaluating the implications of FAS 157 and its impact, if any, in the financial
statements has not yet been determined.
(9) INTEREST REPURCHASES:
On March 20, 2006, the Fund offered to repurchase up to $10,000,000 in interests
in the Fund from Investors at their estimated net asset value as of June 30,
2006. The offer expired by its terms on April 17, 2006. The Fund received and
accepted pursuant to this offer tender requests for Fund interests with an
estimated value of $2,504,461. The Fund initially paid out 95% of the estimated
value of the repurchased interests. The remaining will be paid out promptly
after completion of the Fund's 2007 fiscal year-end audit.
On October 3, 2006, the Fund offered to repurchase up to $20,000,000 in
interests in the Fund from Investors at their estimated net asset value as of
December 31, 2006. The offer expired by its terms on November 1, 2006. The Fund
received and accepted pursuant to this offer tender requests for Fund interests
with an estimated value of $14,981,707. The Fund initially paid out 95% of the
estimated value of the repurchased interests. The remaining amount will be paid
out promptly after completion of the Fund's 2007 fiscal year-end audit.
On March 20, 2007, the Fund offered to repurchase up to $30,000,000 in interests
in the Fund from Investors at their estimated net asset value as of June 30,
2007. The offer expired by its terms on April 17, 2007. The Fund received and
accepted pursuant to this offer tender requests for Fund interests with an
estimated value of $14,233,310. The Fund initially will pay out 95% of the
estimated value of the repurchased interests. The remaining amount will be paid
out promptly after completion of the Fund's 2008 fiscal year-end audit.
(10) SUBSEQUENT EVENT:
As of March 31, 2007, the Fund had received in advance proceeds from the sale of
interests of $7,904,000, which was credited to Investor's Capital as of April 2,
2007. From April 2, 2007 through May 21, 2007, the Fund received additional
contributions from Investors of $7,007,500.
13
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Investors and Board of Directors of
Mellon Optima L/S Strategy Fund, LLC
In planning and performing our audit of the financial statements of Mellon
Optima L/S Strategy Fund, LLC (the "Fund) as of and for the year ended March 31,
2007, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), we considered its internal control over
financial reporting, including control activities for safeguarding securities,
as a basis for designing our auditing procedures for the purpose of expressing
our opinion on the financial statements and to comply with the requirements of
Form N-SAR, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion.
The management of the Fund is responsible for establishing and maintaining
effective internal control over financial reporting. In fulfilling this
responsibility, estimates and judgments by management are required to assess the
expected benefits and related costs of controls. A company's internal control
over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. Such internal control includes policies and procedures
that provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of a company's assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A control deficiency exists when the design or operation of a control does not
allow management or employees, in the normal course of performing their assigned
functions, to prevent or detect misstatements on a timely basis. A significant
deficiency is a control deficiency, or combination of control deficiencies, that
adversely affects the company's ability to initiate, authorize, record, process
or report financial data reliably in accordance with generally accepted
accounting principles such that there is more than a remote likelihood that a
misstatement of the company's annual or interim financial statements that is
more than inconsequential will not be prevented or detected. A material weakness
is a significant deficiency, or combination of significant deficiencies, that
results in more than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or detected.
Our consideration of the Fund's internal control over financial reporting was
for the limited purpose described in the first paragraph and would not
necessarily disclose all deficiencies in internal control that might be
significant deficiencies or material weaknesses under standards established by
the Public Company Accounting Oversight Board (United States). However, we noted
no deficiencies in the Fund's internal control over financial reporting and its
operation, including controls for safeguarding securities, that we consider to
be a material weakness as defined above as of March 31, 2007.
This report is intended solely for the information and use of management, the
Investors and the Board of Directors of Mellon Optima L/S Strategy Fund, LLC and
the Securities and Exchange Commission and is not intended to be and should not
be used by anyone other than these specified parties.
/s/ Ernst & Young LLP
New York, New York
May 30, 2007
14
FACTORS CONSIDERED BY THE BOARD OF DIRECTORS IN APPROVING
ADVISORY AGREEMENTS (Unaudited)
The 1940 Act requires that the Board of Directors, including a majority of its
Directors who are not affiliated with the Fund's investment adviser or
sub-investment adviser (the "Independent Directors") voting separately, approve
the Fund's investment advisory agreement, sub-investment advisory agreement
(together, the "Advisory Agreements") and the related fees on an annual basis.
In their most recent deliberations concerning their decision to approve the
continuation of the Advisory Agreements, the Board of Directors conducted the
review and made the determinations that are described below. In conducting this
review and in making such determinations, the Independent Directors received
from the Fund's investment adviser, Mellon Hedge Advisors LLC ("MHA" or the
"Adviser") and the Fund's sub-investment adviser, Optima Fund Management LLC
("Optima" or the "Sub-Adviser"), a range of information in response to a written
request prepared on their behalf by their own legal counsel. The Independent
Directors met alone in a private session with their legal counsel on September
28, 2006 to review these materials and to discuss the proposed continuation of
the Fund's Advisory Agreements. The entire Board then met on October 17, 2006.
Representatives of the Adviser attended a portion of the October meeting to
provide additional information and to respond to questions and comments arising
from the Independent Directors' review of the materials and their deliberations.
The information requested by the Independent Directors and reviewed by the
entire Board included:
(i) FINANCIAL AND ECONOMIC DATA: The Adviser's unaudited balance sheet and
income statement, as well as a profitability analysis of the Adviser
and the Sub-Adviser;
(ii) MANAGEMENT TEAMS AND OPERATIONS: The Adviser's Form ADV, as well as
information concerning the Adviser's executive management, investment
committee, and overall organizational structure;
(iii) COMPARATIVE PERFORMANCE AND FEES: Analyses prepared by the Adviser
regarding the Fund's historical performance, and an analysis of the
Fund's management fee and expense ratio compared to a peer group of
similar funds selected by the Adviser;
(iv) SPECIFIC FACTS RELATING TO THE FUND: The Sub-Adviser's commentary on
the Fund's performance and any material portfolio manager and strategy
changes that may have affected the Fund in the prior year; and
(v) OTHER BENEFITS: The benefits flowing to Mellon Financial Corporation
("Mellon") and its affiliates, including revenues received by Mellon
affiliates in consideration of advisory, custodial, administrative, and
transfer agency services provided by such affiliates to the Fund, and
information about the ownership of MHA by Mellon and Mellon's profit
interest in Optima.
In considering the continuation of the Fund's Advisory Agreements, the Board of
Directors, including the Independent Directors, did not identify any single
factor as all-important or controlling, and individual Directors did not
necessarily attribute the same weight or importance to each factor. The
Directors determined that the terms and conditions of the Advisory Agreements
and the compensation to the Adviser and Sub-Adviser provided therein were fair
and reasonable in light of the services performed, expenses incurred and such
other matters as the Directors considered relevant in the exercise of their
reasonable judgment. The following summary does not detail all the matters that
were considered. Some of the factors that figured prominently in the Directors'
determination are described below.
15
FACTORS CONSIDERED BY THE BOARD OF DIRECTORS IN APPROVING
ADVISORY AGREEMENTS (Unaudited)
NATURE, EXTENT AND QUALITY OF SERVICES
The Board considered the nature, scope and quality of the overall services
provided to the Fund by the Adviser and Sub-Adviser. In their deliberations as
to the continuation of the Advisory Agreements, the Directors were also mindful
of the fact that, by choosing to invest in the Fund, the Fund's investors have
chosen to entrust the Adviser, under the supervision of the Board and with the
advice of the Sub-Adviser, to manage the portion of their assets invested in the
Fund.
Among the specific factors the Board reviewed were the investment management,
administrative, compliance and related services provided by the Adviser and the
Sub-Adviser. The Board determined that the services provided were of high
quality and at least commensurate with industry standards.
The Directors reviewed the background and experience of MHA's investment
committee and also met with representatives of the Adviser. The Directors
considered the differing scope and nature of the investment management services
provided by MHA and Optima, respectively, in analyzing, selecting and monitoring
managers of hedge funds and the responsibility of MHA to oversee the performance
of Optima. In these discussions, the Board focused in particular on MHA's and
Optima's expertise with regard to investment strategies and techniques utilized
by hedge funds and managers of hedge funds.
The Board determined that the Adviser and the Sub-Adviser had the expertise and
resources to manage the Fund effectively.
INVESTMENT PERFORMANCE
The Board considered the investment performance of the Fund against its blended
benchmark (the S&P L/S Equity benchmark, which is comprised 90% of the S&P L/S
Equity Index and 10% of the S&P Global (non-US) Hedge Equity Index), as well as
to the S&P 500 Index. The Board was cognizant of the fact that, because the
Fund's investment strategy is designed to produce returns largely uncorrelated
to those of the broader securities markets, the S&P 500 Index was included to
demonstrate the lack of correlation rather than as a strategy benchmark for the
Fund.
In considering the Fund's long term performance it was noted that the Fund was
the successor to Mellon Hedge Fund I ("MHF"), a common trust fund launched on
February 1, 2003 having substantially the same objective and strategies as the
Fund and as to which Optima had served as subadviser.
The Board considered the Fund's performance for the one-year period ended June
30, 2006 based on the materials provided to the Board at the September 28, 2006
meeting. The Board found that the Fund outperformed its blended benchmark and
the S&P 500 Index for the one-year period (9.80% vs. 6.29% and 8.62%,
respectively). The Board also noted that if the returns of MHF, the Fund's
predecessor, adjusted for Fund expenses, were blended with the Fund's return,
the combined MHF/Fund return underperformed the S&P 500 Index for the three-year
period (9.60% vs. 11.21%) and since inception (February 1, 2003) period (10.57%
vs. 14.29%). The Directors also noted that blended benchmark data for the 3-year
and since-inception periods was not available.
16
FACTORS CONSIDERED BY THE BOARD OF DIRECTORS IN APPROVING
ADVISORY AGREEMENTS (Unaudited)
ADVISORY FEE AND OTHER EXPENSES
The Board also reviewed the advisory fees and expense ratios of the Fund and
compared such data with a peer group of similar funds compiled by Mellon. The
Board noted that the Fund's contractual advisory fee payable to MHA was 1.50% of
the Fund's net assets, and from that fee MHA paid 0.75% to Optima. They also
noted that the Fund's expense ratio was 1.73%.
The Board also noted that as investors in a fund of hedge funds, the investors
of the Fund would bear not only the fees and expenses of the Fund itself but
also indirectly the fees, including asset-based fees and performance-based fees,
and other expenses of the hedge funds in which the Fund invests, and may also
bear investment advisory fees payable by such investors as clients of Mellon
Private Wealth Management, outside the Fund. Although neither MHA nor Optima has
any separate account products utilizing the same strategy, the Board did note
that the 1.50% advisory fee payable by the Fund is identical to that payable by
a fund of hedge funds that is managed by Optima under a similar mandate as the
Fund.
The Board noted that the aggregate fees to be paid to MHA and Optima, while
higher than those of a typical registered investment company with a more
conventional investment strategy, were fair and reasonable in relation to the
nature and quality of the services to be provided by each, and the aggregate fee
was fair and reasonable in relation to the fees payable to other managers by
other funds of hedge funds having a similar objective and strategy, which, based
on the comparative peer group data provided, ranged from 0.85% to 1.99%.
In considering the portions of the total 1.50% advisory fee retained by MHA and
paid to Optima, the Board considered that, while Mellon had a 14.9% profit
interest and 24.9% voting interest in Optima, the disparate ownership of MHA and
Optima indicated an arm's length fee arrangement existed between the two firms.
The Board concluded that the allocation of the overall fee was reasonable in
relation to the services provided by each firm.
Furthermore, the Board concluded that the Fund's 1.73% actual total expense
ratio, while higher than that of a typical registered investment company with a
more conventional investment strategy, was reasonable in relation to that of the
other funds of hedge funds in the peer group presented, which ranged from 1.53%
to 3.22% before giving effect to applicable expense limitations and from 1.53%
to 2.30% after giving effect to applicable expense limitations.
THE ADVISER'S PROFITABILITY
The Independent Directors considered each of MHA's and Optima's profitability in
managing and sub-advising, respectively, the Fund as well as the different
methodology used to compute such profitability with respect to each firm, and
the various direct and indirect expenses incurred by MHA and Optima in these
roles. In considering Optima's profitability, the Independent Directors
considered the fact that the data presented reflected the application of
Optima's overall operating margin to its sub-advisory fee in the absence of a
fund-specific profitability analysis from Optima. The Independent Directors
determined that each firm's profitability in their respective roles with the
Fund was reasonable. The Directors noted that they intend to monitor annually
the profitability of MHA and Optima.
ECONOMIES OF SCALE
The Board also considered the extent to which economies of scale might be
realized as the Fund grows. The Independent Directors concluded that, at
existing asset levels and considering current assets growth projections and
management's earlier statements concerning an anticipated maximum Fund asset
size, the implementation of fee breakpoints or other fee reductions was not
necessary at this time.
17
FACTORS CONSIDERED BY THE BOARD OF DIRECTORS IN APPROVING
ADVISORY AGREEMENTS (Unaudited)
OTHER BENEFITS
The Board also considered the additional benefits flowing to Mellon as a result
of its relationship with the Fund, including potential incremental growth in the
business of Mellon Private Wealth Management as a result of the availability of
the Fund as an additional product within that business, revenues received by
Mellon affiliates in consideration of advisory, custodial, administrative, and
transfer agency services provided by such affiliates to the Fund, and Mellon's
14.9% share of profits derived from the subadvisory fees payable by the Fund. In
each case, such affiliates were selected by the Board on the basis of a
comparative analysis of their capabilities and fees relative to those of
unaffiliated competitors. It was also noted that the Board had engaged in
discussions with management, both earlier in the meeting and in previous
meetings, concerning the replacement of the Fund's affiliated transfer agent and
administrator with an unaffiliated service provider.
The Board considered the fact that Mellon operates businesses other than the
Fund, some of which businesses share personnel, office space and other resources
and that these were a component of the profitability analysis provided. The
Board also considered the intangible benefits that accrue to Mellon and its
affiliates by virtue of its relationship with the Fund.
* * *
The foregoing factors were among those weighed by the Directors in determining
that the terms and conditions of the Fund's Advisory Agreements and the
compensation to the Adviser and Sub-Adviser provided therein are fair and
reasonable and, thus, in approving the continuation of the Advisory Agreements
for a one-year period.
18
- ------------------------------------------------------------------------------------------------------------------------------------
DIRECTORS AND OFFICERS (UNAUDITED)
The following table lists the Fund's directors and officers; their addresses and dates of birth; their position(s) with the Fund;
the length of time holding such position(s) with the Fund; their principal occupation(s) during the past five years; the number of
portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting
requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The
Fund's Confidential Offering Memorandum includes additional information about the Fund's Directors and is available, without charge
to qualified clients of Mellon Private Wealth Management, upon request by writing Mellon Optima L/S Strategy Fund, LLC at One Boston
Place, Suite 024-0071, Boston, MA 02108 or calling toll free 1-877-257-0004.
- ------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT DIRECTORS
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
TERM OF PORTFOLIOS OTHER
OFFICE IN FUND DIRECTORSHIPS DIRECTOR
AND COMPLEX HELD BY REMUNERATION
POSITION(S) LENGTH OF OVERSEEN DIRECTOR (YEAR ENDED
NAME (AGE), ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) BY OUTSIDE FUND MARCH 31,
AND DATE OF BIRTH FUND SERVED DURING PAST 5 YEARS DIRECTOR COMPLEX 2007)
- ------------------------------------------------------------------------------------------------------------------------------------
Samuel C. Fleming (66) Director Term - Chairman Emeritus, 30 None $13,500
c/o Decision Resources, Indefinite Decision Resources, Inc.
Inc. Length - ("DRI"), a biotech and
61 Meadowbrook Road Since pharmaceutical research
Weston, MA 02493 Inception and consulting firm;
9/30/40 formerly, Chairman of the
Board and Chief Executive
Officer, DRI
- ------------------------------------------------------------------------------------------------------------------------------------
Benjamin M. Friedman Director Term - William Joseph Maier 30 None $13,500
(62) Indefinite Professor of Political
c/o Harvard University Length - Economy, Harvard
Littauer Center 127 Since University
Cambridge, MA 02138 Inception
8/5/44
- ------------------------------------------------------------------------------------------------------------------------------------
John H. Hewitt (72) Director Term - Trustee, Mertens House, 30 None $13,500
P.O. Box 2333 New Indefinite Inc., (hospice)
London, NH 03257 Length -
4/11/35 Since
Inception
- ------------------------------------------------------------------------------------------------------------------------------------
Caleb Loring III (63) Director Term - Trustee, Essex Street 30 None $15,500
c/o Essex Street Indefinite Associates, (family
Associates Length - investment trust office)
P.O. Box 5600 Since
Beverly, MA 01915 Inception
11/14/43
- ------------------------------------------------------------------------------------------------------------------------------------
19
- ------------------------------------------------------------------------------------------------------------------------------------
INTERESTED DIRECTOR
- ------------------------------------------------------------------------------------------------------------------------------------
Patrick J. Sheppard* Director, Term - President and Chief 30 None $0
(41) President Indefinite Operating Officer of The
c/o The Boston and Chief Length - Boston Company Asset
Company Executive Since Management, LLC;
Asset Management, Officer Inception formerly, Senior Vice
LLC President and Chief
One Boston Place Operating Officer, Mellon
Boston, MA 02108 Institutional Asset
7/24/65 Management ("MIAM");
formerly Vice President
and
Chief Financial Officer,
MIAM
- ------------------------------------------------------------------------------------------------------------------------------------
* Mr. Sheppard is an "Interested Director," as defined in the 1940 Act, due to his position as President and Chief Operating Officer
of The Boston Company Asset Management, LLC, an affiliate of the Adviser.
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OFFICERS WHO ARE NOT DIRECTORS
- ------------------------------------------------------------------------------------------------------------------------------------
TERM OF
OFFICE
AND
POSITION(S) LENGTH OF
NAME (AGE), ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S)
AND DATE OF BIRTH FUND SERVED DURING PAST 5 YEARS
- ------------------------------------------------------------------------------------------------
Steven M. Anderson (41) Vice Term - Vice President and Mutual Funds
Mellon Asset President, Indefinite Controller, Mellon Asset Management;
Management Treasurer Length - formerly Assistant Vice President and
One Boston Place and Chief Since Mutual Funds Controller, Standish
Boston, MA 02108 Financial Inception Mellon Asset Management, LLC.
7/14/65 Officer
- -------------------------------------------------------------------------------------------------
Jessica A. Drislane (35) Vice Term - First Vice President, and Director of Hedge
c/o Mellon Private President Indefinite Fund Strategies, Mellon Private Wealth
Wealth Management Group Length - Management Group and Vice President,
One Boston Place Since June Mellon Hedge Advisors, LLC; formerly,
Boston, MA 02108 2005 Founder and Chief Investment Officer,
4/30/72 Hub Capital Management and Principal,
Capital Resource Partners.
- -------------------------------------------------------------------------------------------------
Barbara A. McCann (46) Vice Term - Senior Vice President and Head of
Mellon Asset Management President Indefinite Operations, Mellon Asset Management
One Boston Place and Length - ("MAM"); formerly First Vice President,
Boston, MA 02108 Secretary Since MAM and Mellon Global Investments.
2/20/61 Inception
- -------------------------------------------------------------------------------------------------
Ridgeway H. Powell (43) Vice Term - First Vice President of Mellon Private
c/o Mellon Private President Indefinite Wealth Management Group ("MPWM")
Wealth Management Group Length - and Vice President of Mellon Hedge
One Boston Place Since June Advisors, LLC; formerly Head of Taxable
Boston, MA 02108 2005 Fixed Income Desk, MPWM.
11/5/63
- -------------------------------------------------------------------------------------------------
20
TERM OF
OFFICE
AND
POSITION(S) LENGTH OF
NAME (AGE), ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S)
AND DATE OF BIRTH FUND SERVED DURING PAST 5 YEARS
- ------------------------------------------------------------------------------------------------
Denise B. Kneeland (55) Assistant Term - Vice President and Manager, Mutual Funds
Mellon Asset Management Vice Indefinite Operations, Mellon Asset Management;
One Boston Place President Length - formerly Vice President and Manager,
Boston, MA 02108 Since Mutual Funds Operations, Standish
8/19/51 Inception Mellon Asset Management, LLC.
- ------------------------------------------------------------------------------------------------
Mary T. Lomasney (50) Chief Term - First Vice President, Mellon Asset
Mellon Asset Management Compliance Indefinite Management and Chief Compliance
One Boston Place Officer Length - Officer, Mellon Funds Distributor, L.P.
Boston, MA 02108 Since and Mellon Institutional Funds; formerly
4/8/57 Inception Director, Blackrock, Inc., Senior Vice
President, State Street Research &
Management Company ("SSRM"), and
Vice President, SSRM
- ------------------------------------------------------------------------------------------------
21
ITEM 2. CODE OF ETHICS.
On February 22, 2005, the Registrant adopted a Code of Ethics, as
defined in Item 2(b) of Form N-CSR, that applies to the Principal
Executive Officer and Principal Financial Officer. For the fiscal year
ended March 31, 2007, there were no amendments to a provision of the
Code of Ethics nor were there any waivers granted from a provision of
the Code of Ethics to the Registrant's Principal Executive Officer or
Principal Financial Officer that relates to any element of the
definition of code of ethics as enumerated in Item 2(b) of Form N-CSR.
A copy of the Registrant's Code of Ethics that applies to the Principal
Executive Officer and Principal Financial Officer is filed as an
exhibit to this Form N-CSR under Item 12(a)(1).
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Registrant's Board of Directors has determined that the Registrant
has more than one audit committee financial expert, as defined in Item
3 of Form N-CSR, serving on its audit committee. The audit committee
financial experts serving on the Registrant's audit committee are John
H. Hewitt and Caleb Loring III, both of whom are "independent" pursuant
to paragraph (a)(2) of Item 3 of Form N-CSR. Mr. Hewitt served at
Morgan Stanley as a securities analyst and also in a supervisory role
regarding analysis. He has held a chartered financial analyst
designation, as well as a master's degree in business administration
from Harvard University. He has been a member of the Registrant's audit
committee since its inception. Mr. Loring served as an executive in the
commercial lending division of the Bank of Boston, N.A., performing and
supervising credit analyses and reviewing financial statements of
potential and existing borrowers. Also, Mr. Loring has served as a
private trustee in the Ayer Family Office, where his duties involve
financial statement analysis. He has been a member of the Registrant's
audit committee since its inception, and has served on the audit
committees of several privately held companies.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(A) AUDIT FEES: The aggregate fees billed or accrued for professional
services rendered by the principal accountant, Ernst & Young LLP, for
the audit of the Registrant's annual financial statements or services
that are normally provided by the accountant in connection with
statutory and regulatory filings for the fiscal years ended March 31,
2007 and 2006 were $75,000 and $60,000, respectively.
(B) AUDIT RELATED FEES: The aggregate fees billed for the fiscal years
ended March 31, 2007 and 2006 for assurance and related services by
Ernst & Young LLP that are reasonably related to the performance of the
audit of the Registrant's financial statements and are not reported
under paragraph (a) of this Item were $5,500 and $5,000, respectively.
The nature of the services comprising the fees disclosed under this
Item include: the examination of compliance with requirements of Rule
17f-2 of the Investment Company Act of 1940.
(C) TAX FEES: The aggregate fees billed for the fiscal years ended March
31, 2007 and 2006 for professional services rendered by Ernst & Young
LLP for tax compliance, tax advice, and tax planning were $144,800 and
$88,300. Services rendered included the preparation of U.S. federal,
state and local tax returns.
(D) ALL OTHER FEES: No such fees were billed to the Registrant by Ernst &
Young LLP for the fiscal years ended March 31, 2007 and 2006.
(E) (1) AUDIT COMMITTEE PRE-APPROVAL POLICY: The Registrant's audit
committee pre-approves all audit and non-audit services to be performed
by the Registrant's accountant before the accountant is engaged by the
Registrant to perform such services.
(2) 100% of the services described in each of paragraphs (b) through
(d) of this Item 4 were pre-approved by the Registrant's audit
committee before the accountant was engaged by the Registrant to
perform such services.
(F) Not applicable.
(G) The aggregate non-audit fees billed by Ernst & Young LLP for services
rendered to the Registrant and the Registrant's investment advisers,
and any entity controlling, controlled by or under common control with
the
advisers that provides ongoing services to the Registrant for the
fiscal years ended March 31, 2007 and 2006 were $722,002 and $769,395,
respectively.
(H) Because all of the non-audit services rendered to the Registrant's
investment adviser or any entity controlling, controlled by, or under
common control with the investment adviser that provides ongoing
services to the Registrant were pre-approved by the Registrant's audit
committee of the Board of Directors and no such non-audit services were
not pre-approved, the audit committee was not asked to consider whether
the provision of non-audit services rendered to the Registrant's
investment adviser or any entity controlling, controlled by, or under
common control with the investment adviser that provides ongoing
services to the Registrant which were not pre-approved by the
Registrant's audit committee is compatible with maintaining the
principal accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable to the Registrant.
ITEM 6. SCHEDULE OF INVESTMENTS
The Schedule of Investments in securities of unaffiliated issuers is
included as part of the Annual Report to Investors filed under Item 1
of this Form N-CSR.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Proxy Voting Policies are as follows:
------------------------------------ ----------------------------------
MELLON HEDGE ADVISORS, LLC
POLICIES AND PROCEDURES
------------------------------------ ----------------------------------
CHAPTER: DOCUMENT NUMBER:
PROXY VOTING 504
------------------------------------ ----------------------------------
SECTION: ISSUED/REVISED DATE:
02/10/2005
------------------------------------ ----------------------------------
SUBJECT: PAGE NUMBER:
4
------------------------------------ ----------------------------------
ISSUING DEPARTMENT: RESPONSIBLE DEPARTMENT:
COMPLIANCE INVESTMENT COMMITTEE
------------------------------------ ----------------------------------
BACKGROUND: Proxy voting is an important right of shareholders and
reasonable care and diligence must be undertaken to ensure that such
rights are properly and timely exercised.
Investment advisers registered with the SEC, and which exercise voting
authority with respect to client securities, are required by Rule
206(4)-6 of the Advisers Act to (a) adopt and implement written
policies and procedures that are reasonably designed to ensure that
client securities are voted in the best interests of clients, which
must include how an adviser addresses material conflicts that may arise
between an adviser's interests and those of its clients; (b) to
disclose to clients how they may obtain information from the adviser
with respect to the voting of proxies for their securities; (c) to
describe to clients a summary of its proxy voting policies and
procedures and, upon request, furnish a copy to its clients; and (d)
maintain certain records relating to the adviser's proxy voting
activities when the adviser does have proxy voting authority.
REFERENCE: Rules 206(4)-6 and 204-2 under The Investment Advisers Act
of 1940.
POLICY: Mellon Hedge Advisors, as a matter of policy and as a fiduciary
to our clients, has responsibility for voting proxies for portfolio
securities consistent with the best economic interests of the clients.
Our firm maintains written policies and procedures as to the handling,
research, voting and reporting of proxy voting and makes appropriate
disclosures about our firm's proxy policies and practices. Our policy
and practice includes the responsibility to monitor corporate actions,
receive and vote client proxies and disclose any potential conflicts of
interest as well as making information available to clients about the
voting of proxies for their portfolio securities and maintaining
relevant and required records.
RESPONSIBILITY: The Investment Committee has the responsibility for the
implementation and monitoring of our proxy voting policy and practices.
The Chief Compliance Officer has the responsibility to ensure that the
firm's proxy voting policy is properly disclosed to its clients.
PROCEDURES: Mellon Hedge Advisors has adopted procedures to implement
the firm's policy and reviews to monitor and insure the firm's policy
is observed, implemented properly and amended or updated, as
appropriate, which include the following:
VOTING PROCEDURES
o All employees will forward any proxy materials received on behalf
of clients to an authorized investment manager;
o The authorized investment manager will determine which client
accounts hold the security to which the proxy relates;
o Absent material conflicts, the authorized investment manager will
determine how Mellon Hedge Advisors should vote the proxy in
accordance with applicable voting guidelines, complete the proxy
and vote the proxy in a timely and appropriate manner.
DISCLOSURE
o Mellon Hedge Advisors will provide conspicuously displayed
information in its Disclosure Document summarizing this proxy
voting policy and procedures, including a statement that clients
may request information regarding how Mellon Hedge Advisors voted
a client's proxies, and that clients may request a copy of these
policies and procedures.
o The authorized investment manager will also send a copy of this
summary to all existing clients who have previously received
Mellon Hedge Advisors' Disclosure Document; or the authorized
investment manager may send each client the amended Disclosure
Document. Either mailing shall highlight the inclusion of
information regarding proxy voting.
CLIENT REQUESTS FOR INFORMATION
o All client requests for information regarding proxy votes, or
policies and procedures, received by any employee should be
forwarded to an authorized investment manager.
o In response to any request the authorized investment manager will
prepare a written response to the client with the information
requested, and as applicable will include the name of the issuer,
the proposal voted upon, and how Mellon Hedge Advisors voted the
client's proxy with respect to each proposal about which client
inquired.
VOTING GUIDELINES
o In the absence of specific voting guidelines from the client,
Mellon Hedge Advisors will vote proxies in the best interests of
each particular client. Mellon Hedge Advisors' policy is to vote
all proxies from a specific issuer the same way for each client
absent qualifying restrictions from a client. Clients are
permitted to place reasonable restrictions on Mellon Hedge
Advisors' voting authority in the same manner that they may place
such restrictions on the actual selection of account securities.
o Mellon Hedge Advisors will generally vote in favor of routine
corporate housekeeping proposals such as the election of directors
and selection of auditors absent conflicts of interest raised by
an auditor's non-audit services.
o Mellon Hedge Advisors will generally vote against proposals that
cause board members to become entrenched or cause unequal voting
rights.
o In reviewing proposals, Mellon Hedge Advisors will further
consider the opinion of management and the effect on management,
and the effect on shareholder value and the issuer's business
practices.
CONFLICTS OF INTEREST
o Mellon Hedge Advisors will identify any conflicts that exist
between the interests of the adviser and the client by reviewing
the relationship of Mellon Hedge Advisors with the issuer of each
security to determine if Mellon Hedge Advisors or any of its
employees has any financial, business or personal relationship
with the issuer.
o If a material conflict of interest exists, the Chief Compliance
Officer will determine whether it is appropriate to disclose the
conflict to the affected clients, to give the clients an
opportunity to vote the proxies themselves, or to address the
voting issue through other objective means such as voting in a
manner consistent with a predetermined voting policy or receiving
an independent third party voting recommendation.
o Mellon Hedge Advisors will maintain a record of the voting
resolution of any conflict of interest
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(A)(1) IDENTIFICATION OF P ORTFOLIO MANAGERS: The table below provides
information concerning the persons employed by Mellon Hedge Advisors,
LLC, the Registrant's investment adviser (the "Adviser") and Optima
Fund Management LLC, the Registrant's sub-investment adviser (the
"Sub-Investment Adviser") who are primarily responsible for the
day-to-day management of the Registrant's portfolio by virtue of their
membership on the investment committee of their respective firms (each,
an "Investment Committee"). All information provided in the table is as
of March 31, 2007. No single individual has exclusive responsibility
for investment recommendations or decisions concerning the Registrant.
THE ADVISER
- ------------------------------------------------------------------------------------------------------------------------------------
NAME TITLE, LENGTH OF SERVICE AND BUSINESS EXPERIENCE IN LAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
David M. Breitwieser Vice President, Mellon Private Wealth Management Group (since 1997). Senior Director - Portfolio
Management, Fort Lauderdale (since 2001). Member of Investment Strategy Committee (since 2003). Vice
President, Mellon Hedge Advisors. LLC (since 2005).
- ------------------------------------------------------------------------------------------------------------------------------------
Jessica A. Drislane Vice President, Mellon Private Wealth Management Group (since 2005). Vice President, Mellon Hedge Advisors,
LLC (since 2006). Principal of Hub Capital Management (2004 to 2005); Vice President of Capital Resource
Partners (2002 to 2004).
- ------------------------------------------------------------------------------------------------------------------------------------
Joseph A. Fernandez Vice President of Mellon Private Wealth Management Group (since 2004). Vice President, Mellon Hedge
Advisors, LLC (since 2005). Member of the Strategic Acquisitions Group (1998 to 2003).
- ------------------------------------------------------------------------------------------------------------------------------------
Robin J. Kalota First Vice President of Mellon Private Wealth Management Group. Senior Director - Portfolio Management,
Newport Beach (since 1997). Vice President, Mellon Hedge Advisors, LLC (since 2005).
- ------------------------------------------------------------------------------------------------------------------------------------
Ridgway H. Powell First Vice President of Private Wealth Management Group (since 1998) and Managing Director of Family Office
(since 2003). Vice President, Mellon Hedge Advisors, LLC (since 2005).
- ------------------------------------------------------------------------------------------------------------------------------------
Steven H. Reiff Senior Vice President, Mellon Private Wealth Management (since 1999). National Director, Wealth Management
(since 2006). Vice President, Mellon Hedge Advisors, LLC (since 2005). Managing Director of Mellon, The
Family Office (2002 to 2005). Managing Director of Wealth Strategies (1999 to 2002).
- ------------------------------------------------------------------------------------------------------------------------------------
Christopher E. Sheldon Senior Vice President, Mellon Private Wealth Management and Director of Investment Strategy (since 2003).
Vice President, Mellon Hedge Advisors, LLC (since 2005). Managing Director of Portfolio Management - West
Coast (1998 to 2003).
- ------------------------------------------------------------------------------------------------------------------------------------
THE SUB-INVESTMENT ADVISER
- ------------------------------------------------------------------------------------------------------------------------------------
NAME TITLE, LENGTH OF SERVICE AND BUSINESS EXPERIENCE IN LAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
Dixon Boardman Managing Member, Optima Fund Management LLC (since 1988), New York, NY. Senior Vice President, UBS
Financial Services Inc. (1988 to 2005), New York, NY.
- ------------------------------------------------------------------------------------------------------------------------------------
Thomas Gimbel Executive Managing Director, Optima Fund Management LLC (since 2004). New York, NY. Managing Director,
Credit Suisse Asset Management (2000 to 2004) New York, NY. Managing Director, DLJ Asset Management
(acquired by Credit Suisse), (1999 to 2000), New York, NY.
- ------------------------------------------------------------------------------------------------------------------------------------
Geoffrey Lewis Chief Financial Officer, Optima Fund Management LLC (since 1989), New York, NY.
- ------------------------------------------------------------------------------------------------------------------------------------
Hal McMath Managing Director of Research, Optima Fund Management LLC (since 2003), New York, NY. Vice President, The
Blackstone Group (2001 to 2003), New York, NY. Associate, Wilshire Associates, Inc. (1999 to 2001), Santa
Monica, CA.
- ------------------------------------------------------------------------------------------------------------------------------------
Robert Picard Chief Investment Officer and Director of Research, Optima Fund Management LLC (since 2004),
New York, NY. Vacation (2003 to 2004). Managing Director, Asset Management, Hedge Funds The Carlyle Group
(2002 to 2003), New York, NY. Managing Director-Alternative Investments, RBC Capital Risk Advisors (1997 to
2001), New York, NY.
- ------------------------------------------------------------------------------------------------------------------------------------
Fabio Savoldelli Chief Global Strategist, Managing Director, Optima Fund Management LLC (since 2007), New York, NY. Chief
Investment Officer, Merrill Lynch Investment Managers Alternative Strategies (1996 - 2007), New York, NY.
- ------------------------------------------------------------------------------------------------------------------------------------
Shiv Srinivasan Managing Director, Optima Fund Management LLC (since 2002), New York, NY. Trader, Goldman Sachs, Equities
Division (1998 to 2002), New York, NY.
- ------------------------------------------------------------------------------------------------------------------------------------
Johnny Yee Managing Director, Optima Fund Management LLC (since 2001), New York, NY. Associate-Equity Research,
Thomas Weisel Partners (2000 to 2001), San Francisco, CA. Associate-Financial Services and Health Services,
Group Booz Allen and Hamilton (1998 to 2000), New York, NY.
- ------------------------------------------------------------------------------------------------------------------------------------
(A)(2)(I)-(III) OTHER ACCOUNTS MANAGED BY THE PORTFOLIO MANAGERS:
The table below indicates for each member of the Investment Committee of the Adviser and the Sub-Investment
Adviser information about the other accounts over which such person has day-to-day investment responsibility. All
information on the number of accounts and total assets in the table is as of March 31, 2007. For purposes of the
table, "Other Pooled Investment Vehicles" may include investment partnerships and group trusts, and "Other
Accounts" may include separate accounts for institutions or individuals, insurance company general or separate
accounts, pension funds and other similar institutional accounts.
THE ADVISER
- ------------------------------------------------------------------------------------------------------------------------------------
NAME OTHER ACCOUNTS MANAGED THE PORTFOLIO MANAGERS
- ------------------------------------------------------------------------------------------------------------------------------------
David M. Breitwieser Other Registered Investment Companies: None.
Other Pooled Investment Vehicles: None.
Other Accounts: 182 accounts with total assets of approximately $340 million.
- ------------------------------------------------------------------------------------------------------------------------------------
Jessica A. Drislane Other Registered Investment Companies: None.
Other Pooled Investment Vehicles: None.
Other Accounts: None.
- ------------------------------------------------------------------------------------------------------------------------------------
Joseph A. Fernandez Other Registered Investment Companies: None.
Other Pooled Investment Vehicles: None.
Other Accounts: 160 accounts with total assets of approximately $175 million.
- ------------------------------------------------------------------------------------------------------------------------------------
Robin J. Kalota Other Registered Investment Companies: None.
Other Pooled Investment Vehicles: None.
Other Accounts: 200 accounts with total assets of approximately $450 million.
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
NAME OTHER ACCOUNTS MANAGED THE PORTFOLIO MANAGERS
- ------------------------------------------------------------------------------------------------------------------------------------
Ridgway H. Powell Other Registered Investment Companies: None.
Other Pooled Investment Vehicles: None.
Other Accounts: 8 accounts with total assets of approximately $274 million.
- ------------------------------------------------------------------------------------------------------------------------------------
Steven H. Reiff Other Registered Investment Companies: None.
Other Pooled Investment Vehicles: None.
Other Accounts: None.
- ------------------------------------------------------------------------------------------------------------------------------------
Christopher E. Sheldon Other Registered Investment Companies: None.
Other Pooled Investment Vehicles: None.
Other Accounts: None.
- ------------------------------------------------------------------------------------------------------------------------------------
The Adviser receives no fees based on the investment performance of any account.
THE SUB-INVESTMENT ADVISER
- ------------------------------------------------------------------------------------------------------------------------------------
NAME OTHER ACCOUNTS MANAGED THE PORTFOLIO MANAGERS
- ------------------------------------------------------------------------------------------------------------------------------------
Dixon Boardman Other Registered Investment Companies: None.
Other Pooled Investment Vehicles: 27 entities with total assets of approximately $2.72 billion.
Other Accounts: None.
- ------------------------------------------------------------------------------------------------------------------------------------
Thomas Gimbel Other Registered Investment Companies: None.
Other Pooled Investment Vehicles: 27 entities with total assets of approximately $2.72 billion.
Other Accounts: None.
- ------------------------------------------------------------------------------------------------------------------------------------
Geoffrey Lewis Other Registered Investment Companies: None.
Other Pooled Investment Vehicles: 27 entities with total assets of approximately $2.72 billion.
Other Accounts: None.
- ------------------------------------------------------------------------------------------------------------------------------------
Hal McMath Other Registered Investment Companies: None.
Other Pooled Investment Vehicles: 27 entities with total assets of approximately $2.72 billion.
Other Accounts: None.
- ------------------------------------------------------------------------------------------------------------------------------------
Robert Picard Other Registered Investment Companies: None
Other Pooled Investment Vehicles: 27 entities with total assets of approximately $2.72 billion.
Other Accounts: None.
- ------------------------------------------------------------------------------------------------------------------------------------
Fabio Savoldelli Other Registered Investment Companies: None
Other Pooled Investment Vehicles: 27 entities with total assets of approximately $2.72 billion.
Other Accounts: None.
- ------------------------------------------------------------------------------------------------------------------------------------
Shiv Srinivasan Other Registered Investment Companies: None.
Other Pooled Investment Vehicles: 27 entities with total assets of approximately $2.72 billion.
Other Accounts: None.
- ------------------------------------------------------------------------------------------------------------------------------------
Johnny Yee Other Registered Investment Companies: None.
Other Pooled Investment Vehicles: 27 entities with total assets of approximately $2.72 billion.
Other Accounts: None.
- ------------------------------------------------------------------------------------------------------------------------------------
The Sub-Investment Adviser receives a fee based upon the investment performance
of:
o No Registered Investment Companies.
o 27 Other Pooled Investment Vehicles with total assets of $2.74 billion.
o No Other Accounts.
(A)(2)(IV) CONFLICTS OF INTEREST:
When a portfolio manager is responsible for the management of more than
one account, the potential arises for the portfolio manager to favor
one account over another. The principal types of potential conflicts of
interest that may arise in this context are discussed below. For the
reasons outlined below, the Registrant does not believe that any
material conflicts are likely to arise out of the Investment
Committees' members' responsibility for the management of the
Registrant as well as one or more other accounts. The Adviser and the
Sub-Investment Adviser have adopted procedures that are intended to
monitor compliance with the policies referred to in the following
paragraphs.
Generally, the risks of such conflicts of interests are increased to
the extent that a portfolio manager has a financial incentive to favor
one account over another.
A portfolio manager could favor one account over another in allocating
new investment opportunities that have limited supply. For example, an
Investment Fund manager may inform the Adviser or Sub-Investment
Adviser that the Investment Fund will accept only a specified aggregate
investment from the firm, due to investment capacity constraints or
other reasons. If the Adviser or Sub-Investment Adviser were to
allocate a disproportionate amount of the investment opportunity to one
or more accounts, and the Investment Fund outperformed other
investments, the accounts participating on a disproportionate basis
would outperform the remaining accounts and the remaining accounts
would be disadvantaged. The Adviser generally does not invest the
assets of any clients other than the Registrant in the types of
Investment Funds in which the Registrant will invest. Although the
Sub-Investment Adviser will invest assets of other clients in such
Investment Funds, the Sub-Investment Adviser has policies that require
a portfolio manager to allocate all investment opportunities in which
the Registrant might invest in an equitable manner and generally to
allocate such investments proportionately among all accounts with
similar investment objectives, subject to differences and exceptions
resulting from consideration of the factors described below
Conversely, a portfolio manager could favor one account over another in
the amounts or the sequence in which orders to redeem interests in
Investment Funds are placed. If a portfolio manager determines that a
particular Investment Fund in which client accounts are invested is
underperforming, its investment strategy is out of favor or the
Investment Fund is otherwise no longer a desirable investment, but that
Investment Funds imposes restrictions as to the amount it can or will
redeem, the portfolio manager may not be able to redeem the desired
amount as to each client. If the portfolio manager were to place
redemption orders in disproportionate amounts for one or more clients
or place certain redemption orders ahead of others (requiring others to
wait until the next liquidation date), the remaining clients may be
disadvantaged. When a portfolio manager, due to investment outlook,
intends to redeem interests in an Investment Fund for more than one
account, the policies of the Adviser and the Sub-Investment Adviser
generally require that such orders be placed proportionately and at the
same time, again subject to differences and exceptions as described
below.
In order to ensure that the Sub-Investment Adviser will fairly allocate
investment opportunities among its clients taking into account the
legitimate needs and circumstances of each client, the Sub-Investment
Adviser's Investment Policy Committee and Portfolio Committee will
consider the following factors, among other things, in allocating
investment opportunities among clients, which factors may indicate the
need for exceptions from a strict pro rata allocation: (i) any specific
client requirements for underlying liquidity; (ii) client requirements
for specific asset allocation; (iii) the imposition of penalty fees
associated with withdrawal from such an investment in light of
anticipated client liquidity needs or events; (iv) specific client
requests to invest with a particular manager or to not invest with such
a manager; (v) client cash inflows and outflows and available cash
balances; (vi) the time of entry of such an investment opportunity;
(vii) portfolio construction constraints; (viii) materiality of
position; (ix) a client's ERISA status, if applicable, and the
existence of limitations at the Investment Fund level on investments by
ERISA plans; and (x) specific client requirements to hold an actual
meeting with underlying managers (which may result in a delay in making
the implementation of a particular investment for such a client). In
instances of limited manager capacity, the Sub-Investment Adviser will
allocate such investment opportunities among clients as fairly as
possible within specific client constraints.
A portfolio manager might have an incentive to favor an account if the
portfolio manager's compensation is tied to the performance of that
account rather than all accounts managed by the portfolio manager. If,
for example, the portfolio manager receives a bonus based upon the
performance of certain accounts relative to a benchmark while other
accounts are disregarded for this purpose, the portfolio manager will
have a financial incentive to seek to have the accounts that determine
the portfolio manager's bonus achieve the best possible performance to
the possible detriment of other accounts. Similarly, if the Adviser or
the Sub-Investment Adviser receives a performance-based advisory fee as
to one account but not another, the portfolio manager may favor the
account subject to the performance fee, whether or not the performance
of that account directly determines the portfolio manager's
compensation. See "Compensation of Portfolio Managers" below for a
description of the structure of the compensation arrangements of the
members of the Investment Committee of each firm. The Adviser charges
no performance based advisory fees on any clients account. The
Sub-Investment Adviser receives performance fees with respect to
several accounts other than the Registrant. As noted above, however,
both the Adviser and the Sub-Investment Adviser have policies designed
to ensure equitable treatment of accounts, regardless of performance
fees.
A portfolio manager might also seek to favor an account: a) if the
portfolio manager has a beneficial interest in the account, b) in order
to benefit a large client or c) to compensate a client that previously
had poor returns. For example, if the portfolio manager held an
interest in an investment partnership that was one of the accounts
managed by the portfolio manager, the portfolio manager would have an
economic incentive to favor the account in which the portfolio manager
held an interest. The Adviser or the Sub-Investment Adviser imposes
certain trading restrictions and reporting requirements as to accounts
in which a portfolio manager or certain family members have a personal
interest in order to assist these firms in monitoring any such
conflicts and to seek to ensure that such accounts are not favored over
other accounts. In addition, both firms monitor dispersion of
performance between similar accounts and seek to identify the reasons
for such dispersion.
(A)(3) COMPENSATION OF PORTFOLIO MANAGERS:
The Adviser has adopted a system of compensation for portfolio managers
and others involved in the investment process that is applied
systematically among investment professionals and seeks to align the
financial interests of the investment professionals with those of the
Adviser. This is achieved, among other means, through incentive
payments based in part upon their respective firm's financial
performance.
COMPENSATION OF THE ADVISER'S PORTFOLIO MANAGERS.
The Adviser has no employees of its own. All members of the Adviser's
Investment Committee are employed and compensated by affiliates of
Mellon Financial Corporation ("Mellon"). Compensation arrangements of
these investment professionals are determined on the basis of the
investment professional's overall services to the Adviser and one or
more other Mellon affiliated entities and not on the basis of any
specific funds or accounts managed by these investment professionals.
The structure of compensation of all of the members of the Adviser's
Investment Committee is currently comprised of the following basic
components: base salary and participation in an annual bonus plan, as
well as customary benefits that are offered generally to all full-time
employees of Mellon affiliated investment firms. In addition, all
members of the Adviser's Investment Committee may also receive options
of common shares or restricted stock of common shares of Mellon. The
following describes each component of the compensation package of the
members of the Adviser's Investment Committee:
1. BASE SALARY. Base compensation is fixed and normally reevaluated
on an annual basis. Base compensation is a significant component
of an investment professional's overall compensation. Mellon
affiliates seek to set compensation at competitive market rates,
taking into account the experience and responsibilities of the
investment professional.
2 ANNUAL BONUS PLAN. Under the annual bonus plan, investment
professionals are eligible for an annual bonus, which is a
function both of the size of the overall bonus pool for such year
and of factors specific to each individual. The size of the
overall bonus pool is determined by the financial performance of
Mellon overall and the investment business of Mellon's Private
Wealth Management division. In the case of all members of the
Investment Committee, the size of an individual's participation in
such bonus pool is determined by reference to: (i) the person's
base salary, and (ii) the achievement of certain previously
prescribed professional
goals and objectives, none having to do with the investment
performance of a specific account or group of accounts. Any bonus
under the plan is completely discretionary.
3. STOCK AWARDS. Investment professionals may receive options to
purchase shares of stock of Mellon Financial Corporation, the
parent company of the Adviser. Such options permit the investment
professional to purchase a specified amount of stock at the strike
price which is the fair market value on the date of grant. The
option will vest over a set period and must be exercised within a
ten-year period from the date of grant. Investment professionals
may also receive restricted stock as part of their compensation.
If granted, restricted stock normally vests ratably over a period
of generally three years, although the time period could vary. In
the case of either options or restricted stock, if an employee
leaves before vesting, the unvested options or stock are
forfeited.
COMPENSATION OF THE SUB-INVESTMENT ADVISER'S PORTFOLIO MANAGERS.
The Sub-Investment Adviser's compensation arrangements with investment
professionals are determined on the basis of the investment
professional's overall services to the Sub-Investment Adviser and not
on the basis of specific funds or accounts managed by the investment
professional. At the Sub-Investment Adviser, the structure of
compensation of investment professionals is currently comprised of the
following basic components: base salary and an annual investment bonus
plan as well as customary benefits that are offered generally to all
full-time employees of the Sub-Investment Adviser. In addition, Messrs.
Boardman and Lewis are equity owners of the parent company of the
Sub-Investment Adviser. Messrs. Gimbel and Picard participate in a
stock option program. The following describes each component of the
compensation package for the members of the Sub-Investment Adviser's
Investment Committee:
1. BASE SALARY. Base compensation is fixed and normally reevaluated
on an annual basis. The Sub-Investment Adviser considers base
compensation a significant component of an investment
professional's overall compensation and seeks to set compensation
at market rates, taking into account the experience and
responsibilities of the investment professional.
2. INVESTMENT BONUS PLAN. Under the Sub-Investment Adviser's plan,
members of the Investment Committee are eligible for an annual
bonus. The plan is intended to provide a competitive level of
annual bonus compensation that is tied to the investment
professional achieving superior investment performance and aligns
the financial incentives of the adviser and the investment
professional. Any bonus under the plan is completely
discretionary, with a maximum annual bonus that may be in excess
of base salary. While the amount of any bonus is discretionary,
the following factors are generally used in determining bonuses
under the plan:
(I) INVESTMENT PERFORMANCE: Although no one individual employed
by the Sub-Investment Adviser has exclusive responsibility
as to any specific account, the investment performance of
all accounts as to which the Investment Committee has
day-to-day responsibility over a one-year period is
considered. The pre-tax performance of each account is
measured relative to an appropriate peer group benchmark. In
addition, the investment performance of any Investment Fund
held by the firm on behalf of any clients as a result of
such individual's identification and recommendation of such
fund is taken into account. The amount of total assets in
all accounts for which the Committee has day-to-day
responsibility is also considered.
(II) THE PROFITABILITY OF THE SUB-INVESTMENT ADVISER: The
profitability of all operations the Sub-Investment Adviser's
parent company is also considered in determining bonus
awards.
(III) NON-INVESTMENT PERFORMANCE: The more intangible
contributions of an investment professional to the
Sub-Investment Adviser's business, including the investment
professional's achievement of previously prescribed goals
and objectives, support of sales activities, new
fund/strategy idea generation, professional growth and
development, and management responsibility, where
applicable, are evaluated in determining the amount of any
bonus award.
3. STOCK OPTIONS. As noted above, Messrs. Gimbel and Picard receive
options to purchase restricted interests of Optima Group Holdings
LLC, the parent company of the Sub-Investment Adviser. Such
options permit the investment professional to purchase a set
amount of interests at the strike price on the date of grant. The
strike price is calculated in accordance with a formula tied to
the value of the parent company. The option can be exercised for a
set period (normally a number of years) and the investment
professional would be eligible to exercise the option if the firm
was sold prior to the expiration date.
(A)(4)(A) FUND OWNERSHIP BY PORTFOLIO MANAGERS:
The following table indicates as of May 31, 2007 the value, within the
indicated range, of shares beneficially owned by the Adviser's
Investment Committee in the Registrant. For purposes of this table, the
following letters indicates the range indicated below:
A - $0
B - $1 - $10,000
C - $10,001 - $50,000
D - $50,001 - $100,000
E - $100,001 - $500,000
F - $500,001 - $1,000,000
G - More than $1 million
-------------------------------------------- ----------- ------------------------- ------------
ADVISER'S PORTFOLIO OWNERSHIP SUB-INVESTMENT ADVISER'S OWNERSHIP
MANAGER NAME PORTFOLIO MANAGER NAME
-------------------------------------------- ----------- ------------------------- ------------
David M. Breitwieser A Dixon Boardman A
-------------------------------------------- ----------- ------------------------- ------------
Jessica Drislane A Thomas Gimbel A
-------------------------------------------- ----------- ------------------------- ------------
Joseph A. Fernandez A Geoffrey Lewis A
-------------------------------------------- ----------- ------------------------- ------------
Robin J. Kalota A Hal McMath A
-------------------------------------------- ----------- ------------------------- ------------
Ridgway H. Powell D Robert Picard A
-------------------------------------------- ----------- ------------------------- ------------
Steven H. Reiff A Fabio Savoldelli A
-------------------------------------------- ----------- ------------------------- ------------
Christopher E. Sheldon A Shiv Srinivasan A
-------------------------------------------- ----------- ------------------------- ------------
Johnny Yee A
-------------------------------------------- ----------- ------------------------- ------------
(A)(4)(B) Not applicable to this filing.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable to the Registrant.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which
shareholders may recommend nominees to the Registrant's board of
directors, where those changes were implemented after the Registrant
last provided disclosure in response to the requirements of Item
7(d)(2)(ii)(G) of Schedule 14A, or this Item 10 of Form N-CSR.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The Registrant's Principal Executive Officer and Principal
Financial Officer concluded that the Registrant's disclosure
controls and procedures are effective based on their
evaluation of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing
date of this report (the "Evaluation Date" as defined in Rule
30a-3(c) under the Investment Company Act of 1940).
(b) There were no changes in the Registrant's internal control
over financial reporting (as defined in Rule 30a-3(d) under
the Investment Company Act of 1940 that occurred during the
Registrant's second fiscal half-year that has materially
affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of Ethics required by Item 2 is attached hereto as an
exhibit.
(a)(2) Certifications of the Principal Executive Officer and
Principal Financial Officer of the Registrant as required by
Rule 30a-2(a) under the Investment Company Act of 1940 are
attached hereto as Exhibit 99CERT.302
(b) Certifications as required by Rule 30a-2(b) under the
Investment Company Act of 1940 and pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 are attached hereto as Exhibit
99CERT.906.
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) Mellon Optima L/S Strategy Fund, LLC
By (Signature and Title): /s/ Barbara A. McCann
-----------------------------------------------
Barbara A. McCann, Secretary and Vice President
Date: June 8, 2007
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/ Patrick J. Sheppard
-----------------------------------------------------
Patrick J. Sheppard, President and Chief Executive Officer
Date: June 8, 2007
By (Signature and Title): /s/ Steven M. Anderson
-----------------------------------------------------
Steven M. Anderson, Vice President and Treasurer
Date: June 8, 2007