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)
BNY Mellon Financial Center
One Boston Place, 024-0071
Boston, Massachusetts 02108
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(Address of principal executive offices) (Zip code)
David K. Mossman
BNY Mellon Wealth Management
One Mellon Center
Pittsburgh, PA 15258
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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, 2010
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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, 2010
This report and the financial statements contained herein are submitted for the
general information of investors in 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 1-800-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.
Interests in the Fund are offered and sold only to investment management clients
of the Wealth Management Group of The Bank of New York Mellon Corporation, and
only to clients that 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 associated with an investment in 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, 2010
PERCENTAGE OF
INVESTMENT FUNDS COST VALUE NET ASSETS
- ---------------- ------------ ------------ -------------
Opportunistic $131,377,063 $156,796,654 29.4%
Growth 79,136,741 99,273,801 18.6%
Value 125,356,289 144,688,838 27.1%
Global 69,270,177 80,737,284 15.1%
------------ ----------- ----
TOTAL INVESTMENT FUNDS $405,140,270 $481,496,577 90.2%
============ =========== ====
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
1
MELLON OPTIMA L/S STRATEGY FUND, LLC
SCHEDULE OF INVESTMENTS - MARCH 31, 2010
REDEMPTION
PERCENTAGE OF NOTICE PERIOD
INVESTMENT FUNDS COST VALUE NET ASSETS LIQUIDITY (# OF DAYS)
- ---------------- ------------ ------------ ------------- ------------- -------------
OPPORTUNISTIC
AlphaGen Tucana Fund $ 15,000,000 $ 15,200,211 2.9% Monthly (a) 30
Eminence Partners, L.P. 22,000,000 23,547,529 4.4% Quarterly (b) 45
Glenview Institutional Partners, L.P. 30,000,000 31,046,606 5.8% Quarterly (c) 45
Hunter Global Investors Fund I, L.P. 17,550,335 23,006,390 4.3% Quarterly + 30
Karsh Capital II, L.P. 21,570,031 30,040,422 5.6% Quarterly + 30
Kingdon Associates 22,419,749 31,320,085 5.9% Quarterly + 30
Raptor Private Holdings, L.P. 2,292,115 2,185,917 0.4% ++
Raptor Global Portfolio Liquidating Trust 544,833 449,494 0.1% ++
------------ ------------ -----
131,377,063 156,796,654 29.4%
------------ ------------ -----
GROWTH
Alydar QP Fund, L.P. 20,570,236 28,477,669 5.3% Quarterly + 30
Fox Point QP Fund, L.P. 15,521,186 10,587,871 2.0% Annually + 45
Highbridge Long/Short Equity Fund, L.P. 17,646,613 30,902,111 5.8% Quarterly + 45
Maverick Fund USA, Ltd. 21,711,185 25,357,980 4.8% Quarterly + 60
Pequot Capital 3,687,521 3,948,170 0.7% ++
------------ ------------ -----
79,136,741 99,273,801 18.6%
------------ ------------ -----
VALUE
Amici Qualified Associates, L.P. 20,661,818 27,478,084 5.1% Quarterly + 45
Bay II Resource Partners, L.P. 20,500,000 28,023,089 5.2% Quarterly + 45
Clovis Capital Partners Institutional, L.P. 25,247,705 29,690,367 5.6% Quarterly + 45
Delta Institutional Holdings, L.P. 1,240,022 1,360,805 0.3% ++
Oscar S. Schafer & Partners II, L.P. 18,407,744 13,894,982 2.6% Quarterly + 45
SEG Partners II, L.P. 22,000,000 22,432,035 4.2% Quarterly (d) 60
Shoshone Partners, L.P. 17,299,000 21,809,476 4.1% Annually + 30
------------ ------------ -----
125,356,289 144,688,838 27.1%
------------ ------------ -----
GLOBAL
Amiya Global Emerging Opportunities Fund, L.P. 20,000,000 22,563,022 4.2% Quarterly (e) 30
Asian Century Quest Fund (QP), L.P. 19,000,000 25,924,720 4.8% Quarterly + 45
Calypso Qualified Partners, L.P. 10,270,177 12,697,072 2.4% Monthly + 30
Miura Global Partners II, LP 20,000,000 19,552,470 3.7% Monthly + 180
------------ ------------ -----
69,270,177 80,737,284 15.1%
------------ ------------ -----
TOTAL INVESTMENT FUNDS 405,140,270 481,496,577 90.2%
------------ ------------ -----
AFFILIATED INVESTMENT
Dreyfus Institutional Preferred Plus Money Market Fund 12,111,306 12,111,306 2.3% Daily + (f)
------------ ------------ -----
TOTAL INVESTMENTS $417,251,576 493,607,883 92.5%
============ ------------ -----
ASSETS IN EXCESS OF OTHER LIABILITIES 40,242,292 7.5%
------------ -----
TOTAL NET ASSETS $533,850,175 100.0%
============ =====
(a) Investment has a 1 year soft lock-up period with a 2% early withdrawal fee
during the first six months. 1% during the next six months and none
thereafter. $15 million was invested on 2/1/10.
(b) Investment has a 1 year lock-up period. $22 million was invested on 9/1/09.
(c) Investment has a 2 year lock-up period. $20 million was invested on 4/1/08
and $10 million was invested on 5/1/08.
(d) Investment has a 1 year lock-up period. $22 million was invested on 3/1/10.
(e) Investment has a 1 year soft lock-up period with a 2% early withdrawal fee.
$20 million was invested on 7/1/09.
(f) Investment in affiliated money market mutual fund. The 7-day yield at
03/31/10 was 0.20%.
+ The investment amount has no lock-up or other redemption restrictions.
++ Investment is currently in liquidation and is expected to liquidate over
the next two to five years.
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, 2010
ASSETS
Investments in funds, at value (Cost at $405,140,270) (Note 2A) $481,496,577
Investments in affiliated issuer, at value (Cost at $12,111,306) (Note 2E) 12,111,306
Receivable for investments sold 28,189,656
Advance investments in funds, at value (Note 4) 20,000,000
Prepaid expenses 15,979
------------
Total assets 541,813,518
LIABILITIES
Payable for repurchase of interests (Note 9) $ 4,472,711
Proceeds from sale of interests received in advance 1,750,000
Accrued investment advisory fees (Note 3) 1,323,101
Accrued professional fees 282,033
Accrued accounting and administration fees 79,937
Accrued Directors' fees (Note 3) 18,996
Accrued custody fees (Note 3) 2,444
Other accrued expenses and other liabilities 34,121
------------
Total liabilities 7,963,343
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NET ASSETS $533,850,175
============
INVESTORS' CAPITAL
Net capital contributions $457,493,868
Net unrealized appreciation 76,356,307
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INVESTORS' CAPITAL $533,850,175
============
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, 2010
INVESTMENT INCOME
Dividend income from affiliated investments (Note 2E) $ 71,704
EXPENSES
Investment advisory fee (Note 3) $ 8,257,596
Accounting, administration and investor services fees 533,390
Audit and tax service fees 258,501
Legal fees 159,069
Directors' fees (Note 3) 139,268
Insurance expense 89,274
Miscellaneous expenses 36,621
Custody fees (Note 3) 15,941
Chief Compliance Officer fees (Note 3) 2,063
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Total expenses 9,491,723
-----------
Net investment loss (9,420,019)
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain on investment funds sold 11,078,241
Net change in unrealized appreciation on investment funds 45,811,540
-----------
Net realized and unrealized gain 56,889,781
-----------
NET INCREASE IN INVESTORS' CAPITAL DERIVED FROM INVESTMENT OPERATIONS $47,469,762
===========
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
FOR THE FOR THE
YEAR ENDED YEAR ENDED
MARCH 31, 2010 MARCH 31, 2009
-------------- --------------
INCREASE (DECREASE) IN INVESTORS' CAPITAL FROM
INVESTMENT OPERATIONS
Net investment loss $ (9,420,019) $ (9,906,621)
Net realized gain/(loss) on investment funds sold 11,078,241 (4,008,748)
Net change in unrealized appreciation on investment funds 45,811,540 (66,160,147)
------------ ------------
Net Increase (Decrease) in Investors' Capital Derived from Operations 47,469,762 (80,075,516)
------------ ------------
CAPITAL TRANSACTIONS
Proceeds from sale of interests 27,213,000 58,803,800
Repurchase of interests (90,194,459) (39,820,825)
------------ ------------
Net Increase (Decrease) in Investors' Capital Derived from Capital Transactions (62,981,459) 18,982,975
------------ ------------
TOTAL DECREASE IN INVESTORS' CAPITAL (15,511,697) (61,092,541)
INVESTORS' CAPITAL
At beginning of year 549,361,872 610,454,413
------------ ------------
At end of year $533,850,175 $549,361,872
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
5
MELLON OPTIMA L/S STRATEGY FUND, LLC
FINANCIAL HIGHLIGHTS
FOR THE PERIOD
MAY 2, 2005
FOR THE FOR THE FOR THE FOR THE (COMMENCEMENT OF
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED OPERATIONS) THROUGH
MARCH 31, 2010 MARCH 31, 2009 MARCH 31, 2008 MARCH 31, 2007 MARCH 31, 2006
-------------- -------------- -------------- -------------- -------------------
TOTAL RETURN 8.98% (12.48)% 2.63% 5.96% 17.31%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses (2) 1.73% 1.73% 1.71% 1.74% 1.95%(3)
Net Investment loss (1.71%) (1.66%) (1.56%) (1.63%) (1.80%)(3)
PORTFOLIO TURNOVER RATE 23% 12% 4% 2% 17%(4)
NET ASSETS, END OF PERIOD (000'S OMITTED) $533,850 $549,362 $610,454 $537,870 $303,162
(1) Total return is for the period indicated and has not been annualized.
(2) Expense ratios of the underlying funds in which the Fund invests 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, 2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in investors' capital resulting from operations $ 47,469,762
Adjustments to reconcile net increase in investors' capital
from operations to net cash provided by operating activities:
Purchases of long-term investments (114,393,612)
Proceeds from sale of long-term investments 163,008,593
Net sales of short-term investments 6,936,509
Net realized gain on investment funds sold (11,078,241)
Net change in unrealized appreciation on investment funds (45,811,540)
Decrease in receivable for investments sold 12,770,032
Increase in prepaid expenses (12,262)
Decrease in accrued investment advisory fees (48,283)
Decrease in accrued professional fees (6,298)
Decrease in accrued accounting and administration fees (101,691)
Decrease in accrued Directors' fees (504)
Decrease in accrued Chief Compliance Officer fees (2,063)
Decrease in accrued custody fees (1,621)
Increase in other accrued expenses and other liabilities 24,054
-------------
Net cash provided by operating activities 58,752,835
-------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of interests 28,963,000
Repurchase of interests (87,715,835)
-------------
Net cash used in financing activities (58,752,835)
-------------
Net change in cash --
-------------
Cash at beginning of year --
-------------
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
commenced operations on May 2, 2005.
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 following long/short strategies were employed during the fiscal year ended
March 31, 2010:
- - Growth Strategy. Investment managers employing a growth strategy are more
apt to subscribe to the "efficient market hypothesis" which maintains that
the current market price of a stock reflects all the currently available
information about a company and therefore represents the most reasonable
price for that stock at that point in time. They seek to enjoy their
rewards by participating in what the growth of the underlying company
imparts to the growth of the price of its stock.
- - Value Strategy. Investment managers following a value strategy focus on the
extent to which they believe a stock is mispriced in the marketplace. If a
stock is underpriced, it is a good buy; if it is overpriced, it is a good
sell. These managers seek to buy stocks that are depressed due to
difficulties being experienced by the stocks' issuers, riding the stock
prices upward, and then selling those stocks when the managers' price
objectives are reached, if and when the underlying entities recover.
- - Opportunistic Strategy. Investment managers employing an opportunistic
strategy seek to generate alpha (the incremental return that active fund
managers seek to earn above market benchmarks) by moving between growth
investing and value investing whenever they believe that market conditions
favor one or the other. For example, a manager may switch from a growth to
a value strategy when the manager believes that the momentum for growth
stocks is slowing and valuations in growth stocks have reached
unsustainable levels. Conversely, a manager may adopt a growth strategy
when the manager believes the economic data indicates the presence of
catalysts that favor growth stocks.
- - Global-International Strategy. Investment managers employing a
global-international strategy seek to generate capital appreciation through
a portfolio of investments representing a variety of globally-oriented or
international (non-US) focused long/short equity strategies. These
strategies may include positions in the cash, futures and forward markets.
Certain investment managers may also make investments in emerging markets.
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 The Bank of New York Mellon Corporation
("BNY Mellon"), 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. BNY Mellon owns indirectly a 15% interest in the Sub-Investment
Adviser.
8
MELLON OPTIMA L/S STRATEGY FUND, LLC
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION (CONTINUED):
Effective June 26, 2009, David K. Mossman was elected President and Chief
Executive Officer of the Fund and Joseph F. Murphy was no longer an officer of
the Fund.
Interests in the Fund ("Interests") are offered solely to eligible investment
management clients of the Wealth Management Group of BNY Mellon 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.
Interests 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
calendar year, near mid-year and year-end. Investors can transfer or assign
their 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.
Generally, except as provided under applicable law or under the Fund's
registration statement, a Member shall not be liable for the Fund's debts,
obligations and liabilities in any amount in excess of the Interests of such
Member, plus such Member's share of undistributed profits and assets.
(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.
A. VALUATION OF THE FUND AND ITS INVESTMENTS
The asset value of the Fund is 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 values 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 ordinarily is the value determined as of such
date 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 represents the
amount that the Fund could reasonably expect to receive from an Investment Fund
if the Fund's capital was withdrawn from the Investment Fund 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 the Investment Funds 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 determines the fair value of its
interest in such Investment Fund based on the most recent value reported by the
Investment Fund, as well as 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
then is valued at amortized cost based on the value on such date unless the
Board determines during such sixty-day period that amortized cost does not
represent fair value.
9
MELLON OPTIMA L/S STRATEGY FUND, LLC
NOTES TO FINANCIAL STATEMENTS
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
A. VALUATION OF THE FUND AND ITS INVESTMENTS (CONTINUED)
In accordance with the authoritative guidance on fair value measurements and
disclosure under U.S. generally accepted accounting principles, Accounting
Standards Codification ("ASC") 820, the Fund discloses fair value of its
investments in a hierarchy that prioritizes the inputs to valuation techniques
used to measure the fair value. The objective of a fair value measurement is to
determine the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the
measurement date (an exit price). Accordingly, the fair value hierarchy gives
the highest priority to quoted prices (unadjusted) in active markets for
identical assets or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). The three levels of the fair value hierarchy are
described below:
- Level 1 -- Unadjusted quoted prices in active markets for identical,
unrestricted assets or liabilities that the Fund has the ability to
access at the measurement date;
- Level 2 -- Quoted prices which are not active, or inputs that are
observable (either directly or indirectly) for substantially the full
term of the asset or liability; and
- Level 3 -- Prices, inputs or exotic modeling techniques which are both
significant to the fair value measurement and unobservable (supported
by little or no market activity).
Investments are classified within the level of the lowest significant input
considered in determining fair value. Investments classified within Level 3
whose fair value measurement considers several inputs may include Level 1 or
Level 2 inputs as components of the overall fair value measurement.
For the year ended March 31, 2010, there have been no significant changes to the
Fund's fair valuation methodology.
In September 2009, the FASB issued Accounting Standards Update ("ASU") No.
2009-12, "Investments in Certain Entities That Calculate Net Asset Value per
Share (or Its Equivalent"). ASU No. 2009-12 provides guidance about using net
asset value to measure the fair value of interests in certain investments and
requires additional disclosures about interests in investments. The Fund adopted
ASU No. 2009-12 during the year ended March 31, 2010. Since the Fund's current
fair value measurement policies are consistent with ASU No. 2009-12, the
adoption did not affect the Fund's financial condition, results of operations or
cash flows.
The following is a summary of the inputs used as of March 31, 2010 in valuing
the Fund's investments carried at fair value:
Level 2 - Level 3 -
Level 1 - Other Significant Significant
INVESTMENTS IN SECURITIES Quoted Prices Observable Inputs Unobservable Inputs Total
- ------------------------- ------------- ----------------- ------------------- ------------
Investment Funds $ -- $-- $481,496,577 $481,496,577
Affiliated Investment 12,111,306 -- -- 12,111,306
----------- --- ------------ ------------
TOTAL INVESTMENTS IN SECURITIES $12,111,306 $-- $481,496,577 $493,607,883
=========== === ============ ============
The Investment Funds have been disclosed by strategy in the Schedule of
Investments.
10
MELLON OPTIMA L/S STRATEGY FUND, LLC
NOTES TO FINANCIAL STATEMENTS
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
A. VALUATION OF THE FUND AND ITS INVESTMENTS (CONTINUED)
The following is a reconciliation of Level 3 assets for which significant
unobservable inputs were used to determine fair value:
Change in
unrealized Net Transfers in
Balance as of Realized appreciation purchases and/or out Balance as of
March 31, 2009 gains (depreciation) (sales) of Level 3 March 31, 2010
-------------- ----------- -------------- ------------ ------------ --------------
INVESTMENT FUNDS
Opportunistic $124,650,521 $ 326,118 $25,698,841 $ 6,121,174 $-- $156,796,654
Growth 139,068,725 4,524,417 1,240,270 (45,559,611) -- 99,273,801
Value 136,072,331 1,161,460 15,835,522 (8,380,475) -- 144,688,838
Global 73,430,200 5,066,246 3,036,907 (796,069) -- 80,737,284
------------ ----------- ----------- ------------ --- ------------
TOTAL $473,221,777 $11,078,241 $45,811,540 $(48,614,981) $-- $481,496,577
============ =========== =========== ============ === ============
The change in net unrealized gain (loss) on investments still held as of March
31, 2010 was $37,792,869.
B. SECURITIES TRANSACTIONS AND INCOME
Securities transactions are recorded as of the trade date. Dividend income is
recorded on the ex-dividend date. Realized gains and losses from Investment Fund
transactions are calculated on the average cost basis. The Investment Funds in
which the Fund invests do not generally distribute income or 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.
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.
The Fund evaluates tax positions taken or expected to be taken in the course of
preparing the Fund's tax return to determine whether it is
"more-likely-than-not" (i.e., greater than 50 percent) that each tax position
will be sustained upon examination by a taxing authority based on the technical
merits of the position. Tax positions not deemed to meet the
more-likely-than-not threshold are recorded as a tax benefit or expense in the
current year. The Fund did not record any tax provision in the current period.
If the tax law requires interest and/or penalties to be paid on an underpayment
11
MELLON OPTIMA L/S STRATEGY FUND, LLC
NOTES TO FINANCIAL STATEMENTS
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
D. INCOME TAXES (CONTINUED)
of income taxes, interest and penalty will be classified as income taxes on the
consolidated financial statements, if applicable. During the year, the Fund did
not incur any interest or penalty. However, management's conclusions regarding
tax positions taken may be subject to review and adjustment at a later date
based on factors including, but no limited to, examination by tax authorities
(i.e., the last three tax year ends), on-going analysis of and changes to tax
laws, regulations and interpretations thereof.
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
such fund's calendar year Schedule 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, 2010 are noted below.
Federal tax cost of investment funds $401,077,355
============
Gross unrealized appreciation 92,530,528
------------
Net unrealized appreciation $ 92,530,528
============
E. SHORT-TERM INVESTMENTS
Short-term investments consist of liquid investments with maturities of less
than 90 days. The Fund had $12,111,306 invested in Dreyfus Institutional
Preferred Plus Money Market Fund, an affiliated institutional money market fund,
including $1,989,208 of segregated assets, which represents 5% of the value of
the June 2009 tender offer. See Note 9.
(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 average net assets. Pursuant to this agreement, the Fund was
charged $8,257,596 for the year ended March 31, 2010.
The Fund compensates The Bank of New York Mellon, formerly Mellon Trust of New
England, N.A. ("BNYM"), a wholly-owned direct subsidiary of BNY Mellon, under a
Custody Agreement to provide custody services for the Fund. In consideration for
these services, BNYM earns interest on balances, including disbursement balances
and balances arising from purchase and sale transactions, and the Fund
reimburses certain of BNYM's expenses. Pursuant to this agreement, the Fund was
charged $15,941 for the year ended March 31, 2010.
The Fund has contracted with Mellon Investor Services LLC, a wholly owned
subsidiary of BNY Mellon, to provide printing and fulfillment services for the
Fund. Pursuant to this agreement, the Fund was charged $20,145 for the year
ended March 31, 2010, which is included in miscellaneous expenses on the
Statement of Operations.
The Fund reimbursed BNY Mellon for a portion of the salary of the Fund's Chief
Compliance Officer until April 30, 2009. Pursuant to this arrangement, the Fund
was charged $2,063 for the one month ended April 30, 2009. 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.
The Directors do not receive any pension or retirement benefits from the Fund.
12
MELLON OPTIMA L/S STRATEGY FUND, LLC
NOTES TO FINANCIAL STATEMENTS
(4) INVESTMENT TRANSACTIONS:
During the year ended March 31, 2010 the Fund had aggregate contributions of
capital to and withdrawals of capital from Investment Funds of $114,393,612 and
$163,008,593, respectively.
At March 31, 2010, the Fund had made advances of $20,000,000 to Brookside
Capital Partners Fund II, L.P., representing a contribution of capital in such
Investment Fund to be made on April 1, 2010.
(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 generally
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.
In order 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 securities of, certain Investment Funds. In cases where the Fund
purchases non-voting securities of, or waives its right to vote securities of,
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.
(8) NEW ACCOUNTING PRONOUNCEMENT:
In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-6,
Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about
Fair Value Measurements. ASU No. 2010-6 enhances and clarifies existing fair
value measurement disclosure requirements and is effective for interim and
annual reports beginning after December 15, 2009. The Fund is currently
evaluating the impact, in any, of applying the provisions of ASU No. 2010-6.
13
MELLON OPTIMA L/S STRATEGY FUND, LLC
NOTES TO FINANCIAL STATEMENTS
(9) INTEREST REPURCHASES:
The following is a summary of the Fund's repurchase activity for the fiscal year
ended March 31, 2010:
REPURCHASE VALUE COMMENCEMENT EXPIRATION DATE INTERESTS
DATE DATE OF OFFER OF OFFER PURCHASED
- ----------------- ------------------ ---------------- -----------
June 30, 2009 March 27, 2009 April 27, 2009 $40,389,225
December 31, 2009 September 25, 2009 October 26, 2009 $49,805,234
The Fund initially paid 95% of the estimated value of the repurchased Interests
of investors within one month after the value of the Interests to be repurchased
was determined. The remaining amount is expected to be paid no later than June
10, 2010.
(10) SUBSEQUENT EVENTS:
On April 2, 2010, the Fund offered to repurchase up to $50,000,000 in Interests
from investors at their estimated net asset value as of June 30, 2010. The offer
expired by its terms on April 29, 2010. The Fund received and accepted pursuant
to this offer tender requests for Interests with an estimated value of
$31,799,261. Pursuant to the terms of the repurchase offer, the Fund will
initially pay out approximately $30,716,298 by July 31, 2010. The remaining
amount will be paid out during June 2011.
From April 1, 2010 through May 31, 2010, the Fund received additional
contributions from investors of $3,285,000.
The Fund has evaluated the need for disclosures and/or adjustments resulting
from subsequent events through the date the financial statements were issued.
Based on this evaluation, no adjustments were required to the financial
statements as of March 31, 2010.
14
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Investors of
Mellon Optima L/S Strategy Fund, LLC
We have audited the accompanying statement of assets and liabilities of Mellon
Optima L/S Strategy Fund, LLC (the "Fund"), including the schedule of
investments, as of March 31, 2010, and the related statements of operations and
cash flows for the year then ended, changes in investors' capital for each of
the two years in the period then ended, and the financial highlights for each of
the four years in the period then ended and for the period from May 2, 2005
(commencement of operations) to March 31, 2006. These financial statements and
the financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
investments owned as of March 31, 2010, by correspondence with management of the
investment funds and the custodian. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above, present fairly, in all material respects, the financial position of
Mellon Optima L/S Strategy Fund, LLC at March 31, 2010, the results of its
operations and its cash flows for the year then ended, changes in its investors'
capital for each of the two years in the period then ended, and the financial
highlights for each of the four years in the period then ended and for the
period from May 2, 2005 (commencement of operations) to March 31, 2006, in
conformity with U.S. generally accepted accounting principles.
(ERNST & YOUNG LLP)
New York, New York
June 1, 2010
15
MELLON OPTIMA L/S STRATEGY FUND, LLC
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 the
Directors who are not affiliated with the Fund's investment adviser or
sub-investment adviser (the "Independent Directors") voting separately, approve
the continuance of the Fund's investment advisory agreement and sub-investment
advisory agreement (together, the "Advisory Agreements") on all annual basis in
order for such agreements to remain in effect. In their most recent
deliberations concerning their decision to approve the continuation of the
Advisory Agreements, the Board 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") and the Fund's sub-investment
adviser, Optima Fund Management LLC ("Optima"), a range of information in
response to a written request prepared on their behalf by the Fund's legal
counsel. The Directors met on December 14-15, 2009 to review these materials and
to discuss the proposed continuation of the Advisory Agreements. Representatives
of management attended a portion of the meetings to provide additional
information and to respond to questions and comments arising from the 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: MHA's and Optima's balance sheet and income
statement, as well as a profitability analysis of MHA and Optima;
(ii) MANAGEMENT TEAMS AND OPERATIONS: MHA's and Optima's Form ADV, as well as
information concerning the MHA's and Optima's executive management,
investment committee, and overall organizational structure;
(iii) COMPARATIVE PERFORMANCE AND FEES: Analyses prepared by MHA 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
MHA;
(iv) SPECIFIC FACTS RELATING TO THE FUND: Optima'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 The Bank of New York Mellon
Corporation ("BNY Mellon") and its affiliates, including revenues received
by BNY Mellon affiliates in consideration of advisory and custodial
services provided by such affiliates to the Fund, and information about the
ownership of MHA by BNY Mellon and BNY Mellon's interest in Optima.
In considering the continuation of the Advisory Agreements, the Board, 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 MHA and Optima
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.
NATURE, EXTENT AND QUALITY OF SERVICES
The Board considered the nature, scope and quality of the overall services
provided to the Fund by MHA and Optima. 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 MHA, under the supervision of the Board and with the advice of
Optima, to manage the portion of their assets invested in the Fund.
16
MELLON OPTIMA L/S STRATEGY FUND, LLC
FACTORS CONSIDERED BY THE BOARD OF DIRECTORS IN APPROVING ADVISORY AGREEMENTS
(UNAUDITED) (CONTINUED)
Among the specific factors the Board reviewed were the investment management,
administrative, compliance and related services provided by MHA and Optima. 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 MHA. 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 MHA and Optima had the expertise and resources to
manage the Fund effectively.
INVESTMENT PERFORMANCE
The Board considered the investment performance of the Fund relative to its
benchmark (the HFRX Equity Index), as well as relative 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 past three calendar years,
based on the materials provided to the Board. The Board found that for the
12-month periods ended December 31, 2008 and 2007, the Fund's average annual
total returns were -19.50% and 12.69%, respectively, and the Board noted that
these returns compared favorably to the returns for the Fund's benchmark index
(-25.46% and 3.22%) and to the returns of the S&P 500 Index (-37.00 and 5.49%)
over the same periods. The Board also noted that the Fund's return for the
12-month period ended December 31, 2006 was 9.98%, which outperformed the 9.23%
return of the benchmark index but underperformed the 15.80% return of the S&P
500 Index for that period. The Board also considered the performance of the Fund
relative to a peer group of six similarly managed funds, noting that the Fund's
calendar year performance ranked it first and second in 2007 and 2008,
respectively, and fifth in 2006.
ADVISORY FEE AND OTHER EXPENSES
The Board also reviewed the advisory fees and expense ratio of the Fund and
compared such data with data for a peer group of similar funds compiled by BNY
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.
It also noted that the Fund's total net expense ratio was 1.73% and 1.74%, as of
its fiscal year end March 31, 2009 and the six-month period ended September 30,
2009, respectively.
The Board also noted that as investors in a fund of hedge funds, the investors
of the Fund bear not only the fees and expenses of the Fund itself but also
indirectly bear the fees, including asset-based fees and performance-based fees,
and other expenses of the Investment Funds in which the Fund invests, and may
also bear investment advisory fees payable by such investors as clients of BNY
Mellon 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.
17
MELLON OPTIMA L/S STRATEGY FUND, LLC
FACTORS CONSIDERED BY THE BOARD OF DIRECTORS IN APPROVING ADVISORY AGREEMENTS
(UNAUDITED) (CONTINUED)
The Board concluded that the fees paid to MHA and Optima under the Advisory
Agreements were fair and reasonable in relation to the nature and quality of the
services provided by each, and that the aggregate fee paid by the Fund was fair
and reasonable in relation to the fees payable by other similar registered funds
of hedge funds.
In considering the portions of the total 1.50% advisory fee retained by MHA and
paid to Optima, the Board considered that, although BNY Mellon had a 15%
ownership interest in Optima Group Holdings LLC, Optima's parent company, the
disparate ownership of MHA and Optima indicated an arm's length fee arrangement
existed between the two firms. The Board concluded that the portion of the
overall fee retained by MHA and Optima was reasonable in relation to the
services provided by each firm.
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. The Independent Directors determined that each firm's profitability in
their respective roles with the Fund was reasonable and not excessive given the
quality and scope of services provided to the Fund. In this regard, the Board
recognized and considered the fact that BNY Mellon indirectly shares in the
profits realized by Optima because of its ownership of an interest in Optima's
parent.
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 there has
not been an increase in assets of the Fund of sufficient magnitude so as to
warrant any reduction or break point in the advisory fee at this time.
OTHER BENEFITS
As part of its review of the Advisory Agreements, the Board also considered the
extent to which BNY Mellon and Optima derive other benefits as a result of their
relationships with the Mellon Optima Fund. It determined that, although there
may be certain benefits which accrue to BNY Mellon and Optima, such benefits
cannot be precisely determined or quantified, and it does not believe those
benefits to be economically significant.
* * *
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 MHA and Optima provided therein are fair and reasonable, and in
approving the continuation of the Advisory Agreements.
18
DIRECTORS AND OFFICERS (UNAUDITED)
The following table lists the Fund's directors and officers; their ages,
addresses and years 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; and total
remuneration paid as of the period ended March 31, 2010. The Fund's Confidential
Offering Memorandum includes additional information about the Fund's directors
and is available, without charge to qualified clients of BNY Mellon 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 OTHER
PORTFOLIOS DIRECTORSHIPS
TERM OF IN FUND HELD BY DIRECTOR
OFFICE AND COMPLEX DIRECTOR REMUNERATION
NAME (AGE), POSITION(S) WITH FUND, LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OUTSIDE FUND (PERIOD ENDED
ADDRESS AND YEAR OF BIRTH TIME SERVED DURING PAST 5 YEARS BY DIRECTOR COMPLEX MARCH 31, 2010)
- ------------------------------------- ----------- --------------------------- ----------- --------------- ---------------
Robert Bowen (73), Director Term - Retired; formerly Executive 2 None $19,500
c/o Mellon Optima L/S Strategy Fund Indefinite Vice President, Callan
One Boston Place, Suite 024-0071 Length - Associates, 1993-2002
Boston, MA 02108 Since
1937 December
2008
Robert J. Dwyer (66), Director Term - Retired; Advisory Director 2 Mas-Tec Inc. $19,500
c/o Mellon Optima L/S Strategy Fund Indefinite of Morgan Stanley & Co. and (communications
One Boston Place, Suite 024-0071 Length - President of Dwyer Family and utilities
Boston, MA 02108 Since Foundation; formerly infrastructure
1943 December Executive Vice President of contractor)
2008 Morgan Stanley Dean Witter
Carla Diane Hunter (56), Director and Term - Chief Operating Officer, 2 None $23,250
Chair of Audit Committee Indefinite Weizmann Global Endowment
c/o Mellon Optima L/S Strategy Fund Length - Trust, since 2002; formerly
One Boston Place, Suite 024-0071 Since Director of Investments and
Boston, MA 02108 December Treasury, Museum of Modern
1954 2008 Art, New York City, 1997 -
2002
Arthur Williams III (69), Director Term - President and Chief 2 None $19,500
c/o Mellon Optima L/S Strategy Fund Indefinite Investment Officer, Pine
One Boston Place, Suite 024-0071 Length - Grove Associates, Inc.,
Boston, MA 02108 Since since 1994; formerly
1943 December Director of Retirement Plan
2008 Investments, McKinsey &
Company, until 1994
Rodney S. Yanker (50), Director Term - Co-Founder and Senior 2 None $19,000
c/o Mellon Optima L/S Strategy Fund Indefinite Partner, Alternative Asset
One Boston Place, Suite 024-0071 Length - Managers, LP, since 2004;
Boston, MA 02108 Since Director and Chief
1959 December Operations Officer,
2008 Transformation Capital
Corp., until 2008
19
INTERESTED DIRECTOR
NUMBER OF OTHER
PORTFOLIOS DIRECTORSHIPS
TERM OF IN FUND HELD BY DIRECTOR
OFFICE AND COMPLEX DIRECTOR REMUNERATION
NAME (AGE), POSITION(S) WITH FUND, LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OUTSIDE FUND (PERIOD ENDED
ADDRESS AND YEAR OF BIRTH TIME SERVED DURING PAST 5 YEARS BY DIRECTOR COMPLEX MARCH 31, 2010)
- ------------------------------------- ----------- --------------------------- ----------- --------------- ---------------
Newton P.S. Merrill (70), Director Term - Retired; formerly Senior 2 York $23,250
(Chairman) Indefinite Executive Vice President, Enhanced
c/o Mellon Optima L/S Strategy Fund Length - The Bank of New York, Strategy Fund
One Boston Place, Suite 024-0071 Since 1994-2003; Executive Vice LLC
Boston, MA 02108 December President and Group
1939 2008 Executive, Bank of Boston,
1991-1994
PRINCIPAL OFFICERS WHO ARE NOT DIRECTORS
NAME (AGE), ADDRESS AND POSITION(S) TERM OF OFFICE AND PRINCIPAL OCCUPATION(S)
YEAR OF BIRTH HELD WITH FUND LENGTH OF TIME SERVED DURING PAST 5 YEARS
- ------------------------------------- ---------------- --------------------- ------------------------------------------------
David K. Mossman (57) President and Term - Indefinite Senior Vice President and Director, Investment
BNY Mellon Wealth Management Chief Executive Length - Since Administration, BNY Mellon Wealth Management
One Mellon Center Officer December 2008 (since 1982)
Pittsburgh, PA 15258
1952
Steven M. Anderson (44) Vice President, Term - Indefinite Vice President, BNY Mellon Asset Management
BNY Mellon Asset Management Treasurer and Length - Since (since 2003)
One Boston Place, Suite 024-0242 Chief Financial Commencement of
Boston, MA 02108 Officer Operations
1965
Katherine Cain (52) Chief Compliance Term - Indefinite First Vice President, BNY Mellon Wealth
BNY Mellon Wealth Management Officer Length - Since Management Group Compliance (since 2005); Chief
One Boston Place, Suite 024-0072 December 2008 Compliance Officer, Mellon Hedge Advisors, LLC
Boston, MA 02108 (since 2005); formerly Chief Compliance Officer,
1958 Boston Safe Advisors (2005 - 2008)
Peter M. Sullivan (42) Secretary Term - Indefinite Managing Counsel - Asset Management and Managing
BNY Mellon Corporation Length - Since Director, BNY Mellon (since 2008); formerly
One Boston Place, Suite 024-0081 February 2009 Senior Counsel and Vice President, Mellon
Boston, MA 02108 Financial Corporation (2004-2008)
1968
Ridgway H. Powell (47) Vice President Term - Indefinite First Vice President, BNY Mellon Wealth
BNY Mellon Wealth Management Length - Since June Management Group ("WMG") and Vice President,
One Boston Place, Suite 024-0031 2005 Mellon Hedge Advisors, LLC; formerly Head of
Boston, MA 02108 Taxable Fixed Income Desk, BNY Mellon WMG
1963
Anthony J. Mastrocola (33) Assistant Vice Term - Indefinite Assistant Vice President, BNY Mellon Wealth
BNY Mellon Wealth Management President Length - Since Management Group (since 2004), Assistant Vice
One Boston Place, Suite 024-0071 October 2008 President, Mellon Hedge Advisors, LLC (since
Boston, MA 02108 2005)
1977
20
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, 2010, there were no substantive 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 one audit committee financial expert, as defined in Item 3 of Form
N-CSR, serving on its audit committee. The audit committee financial
expert serving on the Registrant's audit committee is Carla Diane
Hunter, who is "independent" pursuant to paragraph (a)(2) of Item 3 of
Form N-CSR. Ms. Hunter is the Chief Operating Officer of Weizmann
Global Endowment Management Trust, and formerly served as the Director
of Investments and Treasury of the Museum of Modern Art, New York City.
She has been a member of the Registrant's audit committee since
December 1, 2008.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(A) AUDIT FEES: The aggregate fees billed for professional services
rendered by the principal accountant, Ernst & Young LLP, for the audit
of the Registrant's annual financial statements or for services that
are normally provided by the accountant in connection with statutory
and regulatory filings for the fiscal years ended March 31, 2010 and
2009 were $62,100 and $66,100, respectively.
(B) AUDIT RELATED FEES: The aggregate fees billed in the fiscal years ended
March 31, 2010 and 2009 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 $7,400 and $7,400, 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 in the fiscal years ended March 31,
2010 and 2009 for professional services rendered by Ernst & Young LLP
for tax compliance, tax advice, and tax planning were $177,500 and
$108,000, respectively. 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 in the fiscal years ended March 31, 2010 and 2009.
(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, 2010 and 2009 were $26,201,339 and
17,417,147, 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. INVESTMENTS
(a) 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.
(b) Not applicable to this filing.
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: PROXY VOTING DOCUMENT NUMBER: 504
- --------------------------------------------------------- -----------------------------------------------------------------
SECTION: ISSUED/REVISED DATE: REVISED 3/2008
- --------------------------------------------------------- -----------------------------------------------------------------
SUBJECT: PAGE NUMBER: 3
- --------------------------------------------------------- -----------------------------------------------------------------
ISSUING DEPARTMENT: COMPLIANCE RESPONSIBLE DEPARTMENT: 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. Given the nature of
securities purchased (Hedge Funds) for our clients, it may be
advisable, at times, to irrevocably waive voting rights on
certain securities. In such cases, the investment management
agreement provides the authority to waive such rights on
behalf of our clients. The firm will vote proxies received in
accordance with its clients guidelines, if any, for proxy
voting. 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 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 employee designated by the Investment Committee;
o The designated employee will determine which client accounts hold the
security to which the proxy relates;
o The designated employee will summarize the information and identify any
known material conflicts for the Investment Committee.
o The Investment Committee will review the proxy and will assess whether
there is any conflict of interest as a result of an employee's personal
relationships and/or due to any special circumstances arising during the
conduct of the Advisor's business. If any conflict exists for any member of
the committee, he or she will promptly notify the other Committee members
and the Chief Compliance Officer of the conflict.
o The Investment Committee, the Chief Compliance Officer, and the Adviser's
legal department, if appropriate, will determine if the conflict of
interest is material. A conflict of interest will be considered material to
the extent that it is determined that such conflict has the potential to
influence the Advisor's decision making in voting the proxy. The Advisor
will maintain a record of all materiality determinations.
o If it is determined that a conflict of interest is not material, Mellon
Hedge Advisors will vote the proxies as determined by the Investment
Committee, by meeting or vote in lieu of meeting, notwithstanding the
existence of the conflict.
o If it is determined that a conflict of interest is material, the Chief
Compliance Officer and Investment Committee Chairman will consult with
legal to determine a method to resolve such conflict. Such methods may
include but are not limited to disclosing the conflict to the client and
obtaining consent before voting, engaging a third party to recommend a
vote, engaging another party on behalf of the client to vote the proxy on
its behalf.
o The designated Mellon Hedge Advisors' employee will vote the proxy as
determined above in a timely and appropriate manner and shall maintain
written records of the vote including, if applicable, a written record of
the method used to resolve a material conflict of interest.
DISCLOSURE
o Mellon Hedge Advisors will provide conspicuously displayed information in
its Disclosure Document, if required, 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.
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 the above
referenced designated employee.
o In response to any request the designated employee 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 with management's recommendations
on 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 Other matters will be voted on a case-by-case basis.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(A)(1) IDENTIFICATION OF PORTFOLIO 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, 2010. 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
- ---------------------------------------------------------------------------------------------------------------------------
Ted A. Berenblum Managing Director and Head of Alternative Assets, BNY Mellon Wealth Management Group (since
September 2008).Vice President, Mellon Hedge Advisors (since 2009). Managing Director and Head
of Ultra High Net Worth Investments, Citi Wealth Management (2005 - 2008). Managing Director and
Head of Product Management, Product Strategy and Manager Evaluation, Citi Private Bank (2002 -
2005).
- ---------------------------------------------------------------------------------------------------------------------------
David M. Breitwieser Vice President, BNY Mellon Wealth Management Group (since 1997). Senior Director - Portfolio
Management, Fort Lauderdale (since 2001). Rotating Member of Investment Strategy Committee
(since 2008), Member of Investment Strategy Committee (2003 - 2008). Vice President, Mellon
Hedge Advisors. LLC (since 2005).
- ---------------------------------------------------------------------------------------------------------------------------
Joseph A. Fernandez Managing Director, Florida Portfolio Management (since 2008), First Vice President of BNY Mellon
Wealth Management Group (since 2007), Vice President (2004-2007). Vice President, Mellon Hedge
Advisors, LLC (since 2005). Member of the Strategic Acquisitions Group (1998 to 2003).
- ---------------------------------------------------------------------------------------------------------------------------
Anthony Mastrocola Vice President (since 7/2009), BNY Mellon Wealth Management Group Assistant Vice President (2004
- 2009),, Vice President, Mellon Hedge Advisors, LLC (since 2009), Assistant Vice President
(2005-2009), Assistant Vice President, Mellon Optima L/S Strategy Fund (since October 2008).
- ---------------------------------------------------------------------------------------------------------------------------
Ridgway H. Powell Managing Director, BNY Mellon Wealth Management Group (since 1998). Vice President, Mellon Hedge
Advisors, LLC (since 2005). Head of Taxable Fixed Income Desk (1993 to 1998).
- ---------------------------------------------------------------------------------------------------------------------------
Steven H. Reiff Managing Director, BNY Mellon 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).
- ---------------------------------------------------------------------------------------------------------------------------
Patricia M. Schneider Vice President, BNY Mellon Wealth Management (since 2006), Assistant Vice President (2004-2006).
Vice President, Mellon Hedge Advisors, LLC (since 2009).
- ---------------------------------------------------------------------------------------------------------------------------
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.
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
NAME TITLE, LENGTH OF SERVICE AND BUSINESS EXPERIENCE IN LAST FIVE YEARS
- ---------------------------------------------------------------------------------------------------------------------------
Geoffrey Lewis Chief Financial Officer, Optima Fund Management LLC (since 1989), New York, NY.
- ---------------------------------------------------------------------------------------------------------------------------
Fabio Savoldelli Chief Investment Officer (since 2008), Chief Global Strategist, Managing Director, Optima Fund
Management LLC (since 2007), New York, NY. Chief Investment Officer, Merrill Lynch Investment
Managers Alternative Strategies (1996 to 2007), New York, NY.
- ---------------------------------------------------------------------------------------------------------------------------
Johnny Yee Deputy Chief Investment Officer, 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, 2010. 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
- ---------------------------------------------------------------------------------------------------------------------------
Ted A. Berenblum Other Registered Investment Companies: None.
Other Pooled Investment Vehicles: None.
Other Accounts: None.
- ---------------------------------------------------------------------------------------------------------------------------
David M. Breitwieser Other Registered Investment Companies: None.
Other Pooled Investment Vehicles: None.
Other Accounts: 224 accounts with total assets of approximately $436 million.
- ---------------------------------------------------------------------------------------------------------------------------
Joseph A. Fernandez Other Registered Investment Companies: None.
Other Pooled Investment Vehicles: None.
Other Accounts: 100 accounts with total assets of approximately $309 million.
- ---------------------------------------------------------------------------------------------------------------------------
Anthony Mastrocola Other Registered Investment Companies: None
Other Pooled Investment Vehicles: None
Other Accounts: None
- ---------------------------------------------------------------------------------------------------------------------------
Ridgway H. Powell Other Registered Investment Companies: None.
Other Pooled Investment Vehicles: None.
Other Accounts: 277 accounts with total assets of approximately $1.9 billion.
- ---------------------------------------------------------------------------------------------------------------------------
Steven H. Reiff Other Registered Investment Companies: None.
Other Pooled Investment Vehicles: None.
Other Accounts: None.
- ---------------------------------------------------------------------------------------------------------------------------
Patricia M. Schneider Other Registered Investment Companies: None.
Other Pooled Investment Vehicles: None.
Other Accounts: 240 accounts with total assets of approximately $300 million
- ---------------------------------------------------------------------------------------------------------------------------
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: 11 entities with total assets of approximately $667
million.
Other Accounts: 1 account with total assets of approximately $2 million.
- ---------------------------- ----------------------------------------------------------------------------------------------
Thomas Gimbel Other Registered Investment Companies: None.
Other Pooled Investment Vehicles: 11 entities with total assets of approximately $667
million.
Other Accounts: 1 account with total assets of approximately $2 million.
- ---------------------------- ----------------------------------------------------------------------------------------------
- ---------------------------- ----------------------------------------------------------------------------------------------
NAME OTHER ACCOUNTS MANAGED THE PORTFOLIO MANAGERS
- ---------------------------- ----------------------------------------------------------------------------------------------
Geoffrey Lewis Other Registered Investment Companies: None.
Other Pooled Investment Vehicles: 11 entities with total assets of approximately $667
million.
Other Accounts: 1 account with total assets of approximately $2 million.
- ---------------------------- ----------------------------------------------------------------------------------------------
Fabio Savoldelli Other Registered Investment Companies: None
Other Pooled Investment Vehicles: 11 entities with total assets of approximately $667
million.
Other Accounts: 1 account with total assets of approximately $2 million.
- ---------------------------- ----------------------------------------------------------------------------------------------
Johnny Yee Other Registered Investment Companies: None.
Other Pooled Investment Vehicles: 11 entities with total assets of approximately $667
million.
Other Accounts: 1 account with total assets of approximately $2 million.
- ---------------------------- ----------------------------------------------------------------------------------------------
The Sub-Investment Adviser receives a fee based upon the investment performance
of:
o No Registered Investment Companies.
o 11 Other Pooled Investment Vehicles with total assets of $667 million.
o 1 Other Account with total assets of approximately $2 million.
(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: (i) if the
portfolio manager has a beneficial interest in the account, (ii) in
order to benefit a large client or (iii) 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 The
Bank of New York Mellon Corporation ("BNY 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 BNY 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 BNY 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 BNY
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. BNY 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
BNY Mellon overall and the investment business of BNY Mellon's
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 BNY Mellon, 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. Mr. Gimbel participates 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, Mr. Gimbel receives 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 March 31, 2010, 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
------------------------------------- ----------------- ---------------------------------- -----------------
SUB-INVESTMENT ADVISER'S
ADVISER'S PORTFOLIO MANAGER NAME OWNERSHIP PORTFOLIO MANAGER NAME OWNERSHIP
------------------------------------- ----------------- ---------------------------------- -----------------
Ted A. Berenblum A Dixon Boardman A
------------------------------------- ----------------- ---------------------------------- -----------------
David M. Breitwieser A Thomas Gimbel A
------------------------------------- ----------------- ---------------------------------- -----------------
Joseph A. Fernandez A Geoffrey Lewis A
------------------------------------- ----------------- ---------------------------------- -----------------
Anthony Mastrocola A Fabio Savoldelli A
------------------------------------- ----------------- ---------------------------------- -----------------
Ridgway H. Powell D Johnny Yee A
------------------------------------- ----------------- ---------------------------------- -----------------
Steven H. Reiff A
------------------------------------- ----------------- ---------------------------------- -----------------
Patricia M. Schneider 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
Exhibit 12(a)(1).
(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 12(a)(2)
(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
12(b).
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/ DAVID K. MOSSMAN
---------------------------------
David K. Mossman, President and
Chief Executive Officer
Date: June 9, 2010
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/ DAVID K. MOSSMAN
---------------------------------
David K. Mossman, President and
Chief Executive Officer
Date: June 9, 2010
By (Signature and Title): s/ STEVEN M. ANDERSON
---------------------------------
Steven M. Anderson, Treasurer and
Chief Financial Officer
Date: June 9, 2010