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 811-21685
Hatteras Multi-Strategy Fund I, L.P.
(Exact name of registrant as specified in charter)
8540 Colonnade Center Drive, Suite 401
Raleigh, North Carolina 27615
(Address of principal executive offices) (Zip code)
David B. Perkins
8540 Colonnade Center Drive, Suite 401
Raleigh, North Carolina 27615
(Name and address of agent for service)
registrant's telephone number, including area code: (919) 846-2324
Date of fiscal year end: March 31
Date of reporting period: March 31, 2007
Form N-CSR is to be used by management investment companies to file reports
with the Commission not later than 10 days after the transmission to
stockholders of any report that is required to be transmitted to stockholders
under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1).
The Commission may use the information provided on Form N-CSR in its regulatory,
disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form
N-CSR, and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. Section 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
HATTERAS MULTI-STRATEGY FUND I, L.P.
FINANCIAL STATEMENTS
FOR THE YEAR ENDED MARCH 31, 2007
WITH REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
HATTERAS MULTI-STRATEGY FUND I, L.P.
FOR THE YEAR ENDED MARCH 31, 2007
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm.................... 1
Statement of Assets, Liabilities and Partners' Capital..................... 2
Statement of Operations.................................................... 3
Statement of Changes in Partners' Capital.................................. 4
Statement of Cash Flows.................................................... 5
Notes to Financial Statements.............................................. 6
Board of Directors (unaudited)............................................. 14
Fund Management (unaudited)................................................ 15
Other Information (unaudited).............................................. 16
Financial Statements of Hatteras Master Fund, L.P.......................... I
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Partners of
Hatteras Multi-Strategy Fund I, L.P.:
We have audited the accompanying statement of assets, liabilities and partners'
capital of Hatteras Multi-Strategy Fund I, L.P. (the "Fund") as of March 31,
2007, and the related statements of operations and cash flows for the year then
ended, and changes in partners' capital for the two years then ended. These
financial statements are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Fund is not required
to have, nor were we engaged to perform, an audit of its 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 also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Fund as of March 31, 2007,
and the results of its operations and its cash flows for the year then ended,
and the changes in its partners' capital for the two years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
May 24, 2007
HATTERAS MULTI-STRATEGY FUND I, L.P.
STATEMENT OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
MARCH 31, 2007
ASSETS
Investment in Hatteras Master Fund, L.P., at fair value (cost $122,748,522) $136,396,994
Cash and cash equivalents 418,943
Investment in Hatteras Master Fund, L.P. paid in advance 5,430,829
Receivable for redemption from Hatteras Master Fund, L.P. 6,000,000
Due from Investment Manager 11,345
Interest receivable 3,471
Prepaid assets 967
------------
TOTAL ASSETS $148,262,549
============
LIABILITIES AND PARTNERS' CAPITAL
Redemptions payable $ 6,184,091
Contributions received in advance 5,616,000
Servicing fee payable 89,155
Professional fees payable 39,664
Accounting and administration fees payable 23,726
Custodian fees payable 943
Other accrued expenses 11,740
------------
TOTAL LIABILITIES 11,965,319
------------
PARTNERS' CAPITAL 136,297,230
------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $148,262,549
============
See Notes to Financial Statements
2
HATTERAS MULTI-STRATEGY FUND I, L.P.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 2007
NET INVESTMENT LOSS ALLOCATED FROM HATTERAS MASTER FUND, L.P.
Dividends $ 397,718
Interest 34,303
Expenses (1,346,363)
-----------
NET INVESTMENT LOSS ALLOCATED FROM HATTERAS MASTER FUND, L.P. (914,342)
-----------
FUND INVESTMENT INCOME
Interest 75,264
-----------
OPERATING EXPENSES
Servicing fee 747,722
Professional fees 72,825
Accounting and administration fees 64,969
Investor servicing fees 53,248
Registration fees 43,000
Custodian fees 5,155
Insurance fees 1,533
Other expenses 43,414
-----------
TOTAL OPERATING EXPENSES 1,031,866
Reimbursement from Investment Manager (30,231)
-----------
NET OPERATING EXPENSES 1,001,635
-----------
NET INVESTMENT LOSS (1,840,713)
-----------
NET REALIZED GAIN AND CHANGE IN UNREALIZED APPRECIATION ON
INVESTMENTS ALLOCATED FROM HATTERAS MASTER FUND, L.P.
Net realized gain on investments 723,978
Net increase in unrealized appreciation on investments 11,151,864
-----------
NET REALIZED GAIN AND CHANGE IN UNREALIZED APPRECIATION ON
INVESTMENTS ALLOCATED FROM HATTERAS MASTER FUND, L.P. 11,875,842
-----------
NET INCREASE IN PARTNERS' CAPITAL RESULTING FROM OPERATIONS $10,035,129
===========
See Notes to Financial Statements
3
HATTERAS MULTI-STRATEGY FUND I, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
GENERAL LIMITED TOTAL
PARTNER'S PARTNERS' PARTNERS'
CAPITAL CAPITAL CAPITAL
--------- ------------ ------------
PARTNERS' CAPITAL, AT APRIL 1, 2005 $ -- $ -- $ --
Capital contributions -- 39,869,000 39,869,000
Capital withdrawals (80,875) -- (80,875)
Net investment income -- (443,123) (443,123)
Net realized loss on investments -- (22,066) (22,066)
Net unrealized appreciation on investments -- 2,915,712 2,915,712
Actual Performance Allocation from April 1, 2005
to December 31, 2005 80,875 (80,875) --
Accrued Performance Allocation from January 1, 2006
to March 31, 2006 116,833 (116,833)
--------- ------------ ------------
PARTNERS' CAPITAL, AT MARCH 31, 2006 $ 116,833 $ 42,121,815 $ 42,238,648
Capital contributions -- 92,834,540 92,834,540
Capital withdrawals (393,168) (8,417,919) (8,811,087)
Net investment loss -- (1,840,713) (1,840,713)
Net realized gain on investments -- 723,978 723,978
Net increase in unrealized appreciation on investments -- 11,151,864 11,151,864
Actual Performance Allocation from January 1, 2006
to December 31, 2006 393,168 (393,168) --
Reverse accrued Performance Allocation from
January 1,2006 to March 31, 2006 (116,833) 116,833 --
Accrued Performance Allocation from January 1, 2007
to March 31, 2007 300,863 (300,863) --
--------- ------------ ------------
PARTNERS' CAPITAL, AT MARCH 31, 2007 $ 300,863 $135,996,367 $136,297,230
========= ============ ============
See Notes to Financial Statements
4
HATTERAS MULTI-STRATEGY FUND I, L.P.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31, 2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in partners' capital resulting from operations $ 10,035,129
Adjustments to reconcile net increase in partners' capital resulting from
operations to net cash used in operating activities:
Purchases of interests in Hatteras Master Fund, L.P. (89,232,003)
Proceeds from redemptions from Hatteras Master Fund, L.P. 6,000,000
Net investment gain allocated from Hatteras Master Fund, L.P. (10,961,500)
Decrease in investment in Hatteras Master Fund, L.P. paid in advance 7,189,036
Increase in receivable for redemption from Hatteras Master Fund, L.P. (6,000,000)
Increase in due from Investment Manager (1,138)
Increase in interest receivable (3,129)
Increase in prepaid assets (967)
Increase in servicing fee payable 62,722
Increase in professional fees payable 8,164
Increase in accounting and administration fees payable 17,909
Decrease in custodian fees payable (333)
Decrease in prepaid registration fees 6,081
Decrease in due to affiliates (1,625)
Increase in other accrued expenses 6,140
------------
NET CASH USED IN OPERATING ACTIVITIES (82,875,514)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions (including decrease in contributions received in advance) 85,829,540
Capital redemptions (including increase in redemptions payable) (2,635,083)
------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 83,194,457
------------
Net change in cash and cash equivalents 318,943
Cash and cash equivalents at beginning of year 100,000
------------
Cash and cash equivalents at end of year $ 418,943
============
See Notes to Financial Statements
5
HATTERAS MULTI-STRATEGY FUND I, L.P.
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007
1. ORGANIZATION
Hatteras Multi-Strategy Fund I, L.P. (the "Fund") was organized as a
limited partnership under the laws of the State of Delaware on November 23,
2004 and commenced operations on April 1, 2005. The Fund is registered
under the Investment Company Act of 1940, as amended (the "1940 Act"), as a
closed-end, non-diversified, management investment company. The Fund's
investment objective is to generate consistent long-term appreciation and
returns across all market cycles. To achieve its objective, the Fund
provides its investors with access to a broad range of investment
strategies and asset categories, trading advisors ("Advisors") and overall
asset allocation services typically available on a collective basis to
larger institutions through an investment of substantially all of its
assets into Hatteras Master Fund, L.P., a Delaware limited partnership (the
"Master Fund"), which is also registered under the 1940 Act. The Master
Fund is managed by Hatteras Investment Partners, LLC (the "Investment
Manager"), a Delaware limited liability company registered as an investment
adviser under the Investment Advisers Act of 1940, as amended. Investors
who acquire interests in the Fund ("Interests") are the Limited Partners
(each, a "Limited Partner" and together, the "Limited Partners") of the
Fund.
Hatteras Investment Management, LLC, a Delaware limited liability company,
serves as the General Partner of the Fund ("General Partner"). The General
Partner has appointed a Board of Directors ("Board") and, to the fullest
extent permitted by applicable law, has irrevocably delegated to the Board
its rights and powers to monitor and oversee the business affairs of the
Fund, including the complete and exclusive authority to oversee and
establish policies regarding the management, conduct and operation of the
Fund's business.
The percentage of the Master Fund's beneficial interests owned by the Fund
at March 31, 2007 was 31.56%.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America and are
expressed in United States dollars. The following is a summary of
significant accounting and reporting policies used in preparing the
financial statements.
A. INVESTMENT VALUATION
Valuation of the Fund's interest in the Master Fund is based on the
investment in Underlying Funds held by the Master Fund. The Master Fund
will value interests in the Underlying Funds at fair value, which
ordinarily will be the value determined by their respective investment
managers, in accordance with procedures established by the Board.
Investments in Underlying Funds are subject to the terms of the Underlying
Funds' offering documents. Valuations of the Underlying Funds may be
subject to estimates and are net of management and performance incentive
fees or allocations payable to the Underlying Funds' as required by the
Underlying Funds' offering documents.
6
HATTERAS MULTI-STRATEGY FUND I, L.P.
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. INVESTMENT VALUATION (CONTINUED)
If the Investment Manager determines that the most recent value reported by
the Underlying Fund does not represent fair value or if the Underlying Fund
fails to report a value to the Master Fund, a fair value determination is
made under procedures established by and under the general supervision of
the Board. Because of the inherent uncertainty in valuation, the estimated
values may differ from the values that would have been used had a ready
market for the securities existed, and the differences could be material.
The accounting policies of the Master Fund, including the valuation of
securities held by the Master Fund, will directly affect the Funds and are
discussed in the Notes to Financial Statements of the Master Fund which are
included elsewhere in this report.
B. ALLOCATIONS FROM THE MASTER FUND
As required by accounting principles generally accepted in the United
States of America, the Fund records its allocated portion of income,
expense, realized gains and losses and unrealized appreciation and
depreciation from the Master Fund.
C. FUND LEVEL INCOME AND EXPENSES
Interest income on any cash or cash equivalents held by a Fund and not
invested into the Master Fund will be recognized on an accrual basis.
Expenses that are specifically attributed to the Fund are charged to the
Fund. In addition, the Fund also bears its proportionate share of the
expenses of the Master Fund. Because the Fund bears its proportionate share
of the management fees of the Master Fund, the Fund pays no direct
management fee to the Investment Manager.
D. TAX BASIS REPORTING
Because the Master Fund invests primarily in investment funds that are
treated as partnerships for U.S. Federal tax purposes, the tax character of
the Fund's allocated earnings is established dependent upon the tax filings
of the investor partnerships. Accordingly, the tax basis of these allocated
earnings and the related balances are not available as of the reporting
date.
E. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes amounts held in interest bearing demand
deposit accounts. At March 31, 2007, the Fund held $418,943 in interest
bearing demand deposit accounts. Such cash, at times, may exceed federally
insured limits. The Fund has not experienced any losses in such accounts
and does not believe it is exposed to any significant credit risk on such
bank deposits.
7
HATTERAS MULTI-STRATEGY FUND I, L.P.
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of income and expenses during the reported period. Actual results
could differ from those estimates.
3. ALLOCATION OF LIMITED PARTNERS' CAPITAL
Net profits or net losses of the Fund for each Allocation Period
("Allocation Period") will be allocated among and credited to or debited
against the capital accounts of the Limited Partners. Net profits or net
losses will be measured as the net change in the value of the partners'
capital of the Fund, including any net change in unrealized appreciation or
depreciation of investments and realized income and gains or losses and
expenses during an allocation period, adjusted to exclude any items to be
allocated among the capital accounts of the Limited Partners other than in
accordance with the Limited Partners' respective investment percentages.
Allocation Periods begin on the day after the last day of the preceding
Allocation Period and end at the close of business on (1) the last day of
each month; (2) the last day of each taxable year; (3) the day preceding
each day on which interests are purchased; (4) the day on which interests
are repurchased; or (5) the day on which any amount is credited to or
debited from the capital account of any Limited Partner other than an
amount to be credited to or debited from the capital accounts of all
Limited Partners in accordance with their respective investment percentages
in the Master Fund.
The Fund will maintain a separate capital account ("Capital Account") on
its books for each Limited Partner. Each Limited Partner's capital account
will have an opening balance equal to the Limited Partner's initial
contribution to the capital of the Fund (i.e., the amount of the investment
less any applicable sales load), and thereafter, will be (i) increased by
the amount of any additional capital contributions by such Limited Partner;
(ii) decreased for any payments upon repurchase or in redemption of such
Limited Partner's interest or any distributions in respect of such Limited
Partner; and (iii) increased or decreased as of the close of each
Allocation Period by such Limited Partner's allocable share of the net
profits or net losses of the Fund.
4. RELATED PARTY TRANSACTIONS AND OTHER
In consideration for investor services, the Fund will pay Hatteras
Investment Partners, LLC (in such capacity, the "Servicing Agent") an
investor servicing fee at the annual rate of 0.75% of the partners' capital
of the interests beneficially owned by customers of the Servicing Agent or
any service provider who has entered into a service provider agreement with
the Servicing Agent. The investor servicing fees payable to the Servicing
Agent will be borne by all Limited Partners of the Fund on a pro-rata
basis. The Servicing Agent may waive (to all investors on a pro-rata basis)
or pay to third parties all or a portion of any such fees in its sole
discretion.
8
HATTERAS MULTI-STRATEGY FUND I, L.P.
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 (CONTINUED)
4. RELATED PARTY TRANSACTIONS AND OTHER (CONTINUED)
The Investment Manager has contractually agreed to reimburse certain
expenses for the initial period November 1, 2005 through April 1, 2007, so
that the total annual expenses for this period will not exceed 2.35% for
the Fund (the "Expense Limitation"). The agreement will automatically renew
for one-year terms after the initial period until terminated by the
Investment Manager or the Fund. The Fund will carry forward, for a period
not to exceed (3) three years from the date on which a reimbursement is
made by the Investment Manager, any expenses in excess of the expense
limitation and repay the Investment Manager such amounts, provided the Fund
is able to effect such reimbursement and remain in compliance with the
expense limitation disclosed in the then effective confidential memorandum.
As of March 31, 2007, the Fund has carried forward expenses of $97,824
which will begin to expire on November 30, 2008.
The General Partner generally receives an annual performance based
allocation (the "Performance Allocation") with respect to the Capital
Account of each Limited Partner. The Performance Allocation is calculated
generally as of the end of each calendar year. The Performance Allocation
with respect to a Limited Partner's Capital Account is equal to 10% of the
amount by which the excess, if any, of net profit over net loss allocated
to such Limited Partner for the calendar year exceeds (a) any Loss
Carryforward Amount (as defined below) for such Limited Partner plus (b)
the non-cumulative "hurdle amount" (an annualized return on the Capital
Account balance of such Limited Partner as of the last day of the preceding
calendar year at a rate equal to the yield to maturity of the 90-day United
States Treasury Bill as reported by the Wall Street Journal on the last day
of the preceding calendar year).
The Performance Allocation with respect to each applicable Limited
Partner's Capital Account shall be deducted from such Capital Account and
allocated to the Capital Account of the General Partner. If at the end of
any calendar year, the net losses allocated to a Limited Partner's Capital
Account exceed the net profits so allocated, then a Loss Carryforward
Amount shall be established for that Limited Partner. No Performance
Allocation shall be deducted from the Capital Account of any Limited
Partner unless the excess of net profits over net losses subsequently
allocated exceeds any Loss Carryforward Amount for that Limited Partner. If
a Limited Partner withdraws completely from the Fund other than at the end
of a calendar year, a Performance Allocation shall be made with respect to
such Limited Partner's Capital Account as of the date of complete
withdrawal as if such date were the end of a calendar year and the hurdle
amount will be pro rated.
UMB Bank, n.a. serves as custodian of the Fund's assets and provides
custodial services for the Fund. UMB Investment Services Group serves as
administrator and accounting agent to the Fund and provides certain
accounting, record keeping and investor related services. The Fund pays a
monthly fee to the administrator based upon average partners' capital,
subject to certain minimums.
9
HATTERAS MULTI-STRATEGY FUND I, L.P.
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 (CONTINUED)
5. FEDERAL INCOME TAXES
For Federal income tax purposes, the Fund is treated as a partnership, and
each partner in the Fund is treated as the owner of its proportionate share
of the net assets, income, expenses, and the realized and unrealized gains
(losses) of the Fund. Accordingly, no federal, state or local income taxes
have been provided on profits of the Fund since the partners are
individually liable for the taxes on their share of the Fund's income.
6. RISK FACTORS
An investment in the Fund involves significant risks that should be
carefully considered prior to investment and should only be considered by
persons financially able to maintain their investment and who can afford a
loss of a substantial part or all of such investment. The Master Fund
intends to invest substantially all of its available capital in securities
of private investment companies. These investments will generally be
restricted securities that are subject to substantial holding periods or
are not traded in public markets at all, so that the Master Fund may not be
able to resell some of its securities holdings for extended periods, which
may be several years. No guarantee or representation is made that the
investment objective will be met.
7. LINE OF CREDIT
On May 1, 2006, the Fund, along with other limited partners of the Master
Fund, entered into a $20,000,000 unsecured, uncommitted revolving loan
facility ("Facility"), for the purpose to finance short timing differences
between the redemption of investments or receipt of partnership capital and
the redemption of partnership capital accounts, the investment in new
managers, or as general working capital. A fee of 37.5 basis points per
annum is payable quarterly in arrears on the unused portion of the
Facility. Borrowings are charged an interest rate at a base rate less 75
basis points. The base rate is the greater of (a) the prime commercial rate
as announced from time to time, or (b) the Federal Funds rate plus 1/2 of
1%, calculated on a 360-day basis and payable monthly in arrears. The Fund
did not directly borrow or pay Facility expenses during the year, rather
the Master Fund paid all expenses related to the Facility for the period
ended March 31, 2007 and allocated to the Fund it's proportional share of
the expenses. At March 31, 2007, the Master Fund had $3,000,000 in
borrowings outstanding under the Facility and $20,383 in fees and interest
payable. The average interest rate, the average daily balance, and the
maximum balance outstanding for borrowings under the Facility for the
period ended March 31, 2007 was 7.45%, $284,932, and $7,500,000,
respectively.
8. REPURCHASE OF PARTNERS' INTERESTS
The Board may, from time to time and in its sole discretion, cause the Fund
to repurchase interests from Limited Partners pursuant to written tenders
by Limited Partners at such times and on such terms and conditions as
established by the Board. In determining whether the Fund should offer to
repurchase interests, the Board will consider the recommendation of the
Investment Manager.
10
HATTERAS MULTI-STRATEGY FUND I, L.P.
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 (CONTINUED)
8. REPURCHASE OF PARTNERS' INTERESTS (CONTINUED)
The Fund generally expects to offer repurchase interests from Limited
Partners on a quarterly basis as of March 31, June 30, September 30 and
December 31 of each year. The Fund does not intend to distribute to the
partners any of the Fund's income, but generally expects to reinvest
substantially all income and gains allocable to the partners. A partner
may, therefore, be allocated taxable income and gains and not receive any
cash distribution.
9. INDEMNIFICATION
In the normal course of business, the Fund enters into contracts that
provide general indemnifications. The Fund's maximum exposure under these
agreements is dependent on future claims that may be made against the Fund,
and therefore cannot be established; however, based on experience, the risk
of loss from such claims is considered remote.
10. FINANCIAL HIGHLIGHTS
The financial highlights are intended to help you understand the Fund's
financial performance for the past period. The total returns in the table
represent the rate that a Limited Partner would be expected to have earned
or lost on an investment in the Fund.
The ratios and total return amounts are calculated based on the Limited
Partner group taken as a whole. The General Partner's interest is excluded
from the calculations. An individual Limited Partner's ratios or returns
may vary from the table below based on performance arrangements and the
timing of capital transactions.
The ratios are calculated by dividing total dollars of income or expenses
as applicable by the average of total monthly Limited Partners' capital.
The ratios include the Fund's proportionate share of the Master Fund's
income and expenses.
Total return amounts are calculated by geometrically linking returns based
on the change in value during each accounting period.
The portfolio turnover rate is calculated based on the Master Fund's
investment activity, as turnover occurs at the Master Fund level and the
Fund is invested 100% in the Master Fund.
11
HATTERAS MULTI-STRATEGY FUND I, L.P.
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 (CONTINUED)
10. FINANCIAL HIGHLIGHTS (CONTINUED)
FOR THE YEAR ENDED FOR THE YEAR ENDED
MARCH 31, 2007 MARCH 31, 2006
------------------ ------------------
Total return amortizing organizational expenses
and before Performance Allocation* --** 11.72%
Organization expense (1.17)%
-------- -------
Total Return before Performance Allocation 8.27% 10.55%
Performance Allocation (0.58)% (0.09)%
-------- -------
Total return after expensing organizational expenses
and Performance Allocation 7.69% 10.46%
======== =======
Limited Partners' capital, end of year (000) $135,996 $42,122
Portfolio Turnover Rate (Master Fund) 14.03% 19.35%
Net investment loss before Performance Allocation (1.94)% (2.79)%
Operating expenses, excluding reimbursement
from Investment Manager and Performance Allocation 2.51% 3.58%
Performance Allocation 0.61% 1.24%
-------- -------
Total expenses and Performance Allocation before 3.12% 4.82%
reimbursement from Investment Manager
Reimbursement from Investment Manager (0.03)% (0.45)%
-------- -------
Net expenses 3.09% 4.37%
======== =======
* Return is indicative of amortizing organizational expenses over 60 months
for tax purposes.
** Organizational costs were fully expensed as of 3/31/06.
11. NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" (the "Interpretation"). The
Interpretation establishes for all entities, including pass-through
entities such as the Fund, a minimum threshold for financial statements
recognition of the benefit of positions taken in filing tax returns
(including whether an entity is taxable in a particular jurisdiction), and
required certain expanded tax disclosures. The Interpretation is effective
for fiscal years beginning after December 15, 2006 and is required to be
implemented no later than September 30, 2007. Management has recently begun
to evaluate the application of the Interpretation to the Fund, and is not
in a position at this time to estimate the significance of its impact, if
any, on the Fund's financial statements.
12
HATTERAS MULTI-STRATEGY FUND I, L.P.
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 (CONCLUDED)
11. NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements," (the "Statement"). The
Statement defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles (GAAP), and expands
disclosures about fair value hierarchy that distinguishes between (1)
market participant assumptions developed based on market data obtained from
sources independent of the reporting entity (observable inputs). The
Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and is to be applied prospectively as of
the beginning of the fiscal year in which this Statement is initially
applied. Management has recently begun to evaluate the application of the
Statement to the Funds, and is not in a position at this time to evaluate
the significance of its impact, if any, on the Fund's financial statements.
12. SUBSEQUENT EVENTS:
Effective April 1, 2007 and May 1, 2007, there were additional capital
contributions of $ 5,616,000 and $14,651,500, respectively.
13
HATTERAS MULTI-STRATEGY FUND I, L.P.
BOARD OF DIRECTORS (UNAUDITED)
The identity of the Board Members and brief biographical information is set
forth below.
Number of
Position(s) Term of Office; Portfolios in Fund
Held with the Length of Time Principal Occupation(s) During Past 5 years Complex' Overseen by
Name, Address & Age Fund Served and Other Directorships Held by Director Director or Officer
- ------------------- ------------- ---------------- ------------------------------------------- --------------------
INTERESTED DIRECTORS
David B. Perkins, 44 Chief 3 year term; Mr. Perkins has been Chairman and CEO since 5
1000 Watermeet Lane Executive Since Inception inception of the Funds. Mr. Perkins became
Raleigh, NC 27614 Officer and the President and Managing Principal of the
Chairman of Investment Manager in September 2003 and
the Board of became the co-founder and Managing Partner
Directors of CapFinancial Partners, LLC in April
2003. Prior to that, he was Managing
Partner at Wachovia Securities Financial
Network, Inc. from June 2002 to September
2003 and Managing Principal of CapTrust
Financial Advisors, LLC from October 1997
to June 2002.
INDEPENDENT DIRECTORS
Steve E. Moss, 53 Director: 3 year term; Mr. Moss has been a member of HMKCT 5
918 Meadow Lane Chairman of Since December Properties, LLC since January 1996.
Henderson, NC 27536 the Audit 2004
Committee
H. Alexander Holmes, 64 Director: 3 year term; Mr. Holmes founded Holmes Advisory 5
3408 Landor Road Audit Since December Services, LLC, a financial consultation
Raleigh, NC 27609 Committee 2004 firm, in 1993.
Member
Gregory S. Sellers, 47 Director: 3 year term; Mr. Sellers became the Chief Financial 5
2643 Steeplechase Road Audit Since December Officer and a director of Kings Plush,
Gastonia, NC 28056 Committee 2004 Inc., a fabric manufacturer, in April 2003.
Member Prior to that, he was the Vice President of
Finance at Parksdale Mills, Inc., a cotton
and cotton blend yarns producer, from
January 1991 to April 2003.
Art Lottes, 53 Director: 3 year term; Mr. Lottes was the President of CARQUEST 5
4813 Wynneford Way Audit Since November Corporation, an automotive aftermarket
Raleigh, NC 27615 Committee 2006 company until December 2005. Mr. Lottes was
Member a Board member of CARQUEST and General
Partner until December 2005.
14
HATTERAS MULTI-STRATEGY FUND I, L.P.
FUND MANAGEMENT (UNAUDITED)
Set forth below is the name, age, position with the Fund, length of term of
office, and the principal occupation for the last five years of each of the
persons currently serving as Executive Officers of the Fund. Unless otherwise
noted, the business address of each officer is 8450 Colonnade Center Drive,
Suite 401, Raleigh, NC 27615.
Number of
Position(s) Term of Office; Portfolios in Fund
Held with the Length of Time Principal Occupation(s) During Past 5 years Complex' Overseen by
Name, Address & Age Fund Served and Other Directorships Held by Director Director or Officer
- ------------------- ------------- ---------------- ------------------------------------------- --------------------
OFFICERS
J. Michael Fields, 33 Chief Since Mr. Fields has been the CFO since inception N/A
8540 Colonnade Center Drive, Financial Inception of the Funds. Mr. Fields became a Director
Suite 401 Officer of the Investment Manager in September
Raleigh, NC 27615 2003. Prior to joining the Investment
Manager, Mr. Fields was employed by
CapTrust Financial Advisors from August
2002 to September 2003. Prior to joining
CapTrust, Mr. Fields was employed by
Morgan Stanley in Atlanta, Georgia from
January 2000 to August 2002.
Denise Buchanan, 44 Chief Since Ms. Buchanan has been the CCO since N/A
8540 Colonnade Center Drive, Compliance Inception inception of the Funds. Ms. Buchanan
Suite 401 Officer became the Compliance Officer with
Raleigh, NC 27615 CapFinancial Partners, LLC ("CapTrust") in
November 2003. Prior to joining CapTrust,
Ms. Buchanan was President of
Broker/Dealer Sales & Consulting, Inc. from
2001 to November 2003. Previously, Ms.
Buchanan was the Director of Compliance
for Atlantic Capital Management, LLC from
1996 to 2001.
Vickey Collins, 40 Secretary Since Ms. Collins has been the Secretary of the N/A
8540 Colonnade Drive, Inception Funds since inception. She became the
Suite 401 Operations Manager for the Investment
Raleigh, NC 27615 Manager in September 2004. Prior to joining
the Investment Manager, she was employed
with McKinely Capital Management from
1994 to 2004.
15
HATTERAS MULTI-STRATEGY FUND I, L.P.
OTHER INFORMATION (UNAUDITED)
PROXY VOTING
For free information regarding how the Fund voted proxies during the period
ended March 31, 2007 or to obtain a free copy of the Fund's complete proxy
voting policies and procedures, call 1-800-504-9070 or visit the SEC's website
at http://www.sec.gov
AVAILABILITY OF QUARTERLY PORTFOLIO SCHEDULES
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Form N-Q is
available, without charge and upon request, on the SEC's website at
http://www.sec.gov or may be reviewed and copied at the SEC's Public Reference
Room in Washington, DC. Information on the Public Reference Room may be obtained
by calling 1-800-SEC-0330.
16
Tab I
HATTERAS MASTER FUND, L.P.
FINANCIAL STATEMENTS
FOR THE YEAR ENDED MARCH 31, 2007
WITH REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
HATTERAS MASTER FUND, L.P.
FOR THE YEAR ENDED MARCH 31, 2007
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm.................... 1
Schedule of Investments.................................................... 2
Statement of Assets, Liabilities and Partners' Capital..................... 6
Statement of Operations.................................................... 7
Statement of Changes in Partners' Capital.................................. 8
Statement of Cash Flows.................................................... 9
Notes to Financial Statements.............................................. 10
Board of Directors (unaudited)............................................. 17
Fund Management (unaudited)................................................ 18
Other Information (unaudited).............................................. 19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Partners of
Hatteras Master Fund, L.P.:
We have audited the accompanying statement of assets, liabilities and partners'
capital of Hatteras Master Fund, L.P. (the "Master Fund"), including the
schedule of investments, as of March 31, 2007, and the related statements of
operations and cash flows for the year then ended, and changes in partners'
capital for the two years then ended. These financial statements are the
responsibility of the Master Fund's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
The Master Fund is not required to have, nor were we engaged to perform, an
audit of its 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 Master
Fund's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. Our procedures
included confirmation of investments owned as of March 31, 2007, by
correspondence with the Underlying Fund managers. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Master Fund as of March 31,
2007, and the results of its operations and its cash flows for the year then
ended, and the changes in its partners' capital for the two years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 2, the financial statements of the Master Fund include
investments in Underlying Funds valued at $439,348,184 (approximately 101.67% of
partners' capital), which are stated at fair value based on estimates by the
Master Fund's management. The Master Fund's management estimated the fair values
relating to certain of the underlying investments of these Underlying Funds in
the absence of readily ascertainable market values. These values may differ from
the values that would have been used had a ready market for these investments
existed, and the differences could be material.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
May 24, 2007
HATTERAS MASTER FUND, L.P.
SCHEDULE OF INVESTMENTS - MARCH 31, 2007
INVESTMENT OBJECTIVE AS A PERCENTAGE OF TOTAL PARTNERS' CAPITAL
Percentages are as follows:
GRAPHIC OMITTED
EDGAR REPRESENTATION OF DATA AS FOLLOWS:
<Table>
Opportunistic Equity 34.98%
Enhanced Fixed Income 19.32%
Absolute Return 17.84%
Energy and Natural Resources 13.71%
Private Equity Composite 8.92%
Real Estate Composite 6.90%
Liabilities in excess of other assets (1.67)%
</Table>
COST FAIR VALUE
----------- -----------
INVESTMENTS IN UNDERLYING FUNDS (101.67%)
ABSOLUTE RETURN (17.84%) (c)
Black River Global Multi-Strategy Leveraged Fund, LLC (a, b) $ 6,000,000 $ 6,762,373
Courage Special Situations Fund, L.P. (a, b) 4,827,675 5,913,748
DE Shaw Composite Fund, LLC (a, b) 10,000,000 11,588,849
Montrica Global Oppurtunities Fund, L.P. (a, b) 9,000,000 9,523,663
OZ Asia Domestic Partners, L.P. (a, b) 12,000,000 12,982,155
Smith Breeden Mortgage Partners, L.P. (a, b) 4,413,258 4,919,962
Stark Investments, L.P. (a, b) 8,000,000 9,001,669
Waterstone Market Neutral Fund, L.P. (a, b) 6,000,000 6,419,434
Wellington Partners, LLC (a, b) 7,785,759 9,970,026
-----------
77,081,879
-----------
See Notes to Financial Statements
2
HATTERAS MASTER FUND, L.P.
SCHEDULE OF INVESTMENTS - MARCH 31, 2007 (CONTINUED)
COST FAIR VALUE
----------- ------------
ENERGY AND NATURAL RESOURCES (13.71%) (c)
All-Cap Energy Hedge Fund, LLC (a, b) $ 4,234,684 $ 4,095,657
Arclight Energy Partners Fund III, L.P. (a, b) 2,521,815 2,487,895
Black River Commodity Multi Strategy Fund, L.P. (a, b) 7,000,000 7,647,026
Cambridge Energy, L.P. (a, b) 2,566,534 3,971,043
Centennial Energy Partners, L.P. (a, b) 9,000,000 9,061,111
EnerVest Energy Institutional Fund X-A, L.P. (a, b) 2,613,547 2,907,185
Merit Energy Partners F-II, L.P. (a, b) 375,696 369,167
Natural Gas Partners Energy Tech, L.P. (a, b) 306,000 270,724
Natural Gas Partners VIII, L.P. (a, b) 1,163,221 1,620,083
Ospraie Special Opportunities Fund, L.P. (a, b) 3,750,000 3,998,515
Quantum Energy Partners IV, LP (a, b) 579,088 486,271
Southport Energy Plus Partners, L.P. (a, b) 5,083,819 7,964,413
Touradji Deeprock Partners, L.P. (a, b) 4,000,000 4,138,484
Treaty Oak Partners, L.P. (a, b) 9,000,000 10,217,684
------------
59,235,258
------------
ENHANCED FIXED INCOME (19.32%) (c)
ARX Global High Yield Securities Fund I, L.P. (a, b) 9,000,000 10,242,728
BDCM Partners I, L.P. (a, b) 11,500,000 13,852,017
Blackrock International Bond Fund (a) 1,408,430 1,397,772
Contrarian Capital Fund I, L.P. (a, b) 10,880,064 13,548,180
D.B. Zwirn Special Opportunities Fund, L.P. (a, b) 6,500,000 7,719,877
Drawbridge Special Opportunities Fund, L.P. (a, b) 8,800,000 9,504,003
Greylock Global Opportunity Fund, L.P. (a, b) 4,922,405 5,599,692
Halcyon Europe L.P. (a, b) 8,000,000 8,096,256
Lazard Emerging Income, L.P. (a, b) 3,000,000 3,463,829
Melody Fund, L.P. (a, b) 3,000,000 3,296,042
Ore Hill Fund, L.P. (a, b) 5,221,928 6,752,896
------------
83,473,292
------------
See Notes to Financial Statements
3
HATTERAS MASTER FUND, L.P.
SCHEDULE OF INVESTMENTS - MARCH 31, 2007(CONTINUED)
COST FAIR VALUE
----------- ------------
OPPORTUNISTIC EQUITY (34.98%) (c)
Algebris Global Financials Fund, LP (a, b) $ 6,000,000 $ 7,002,670
Artis Technology Qualified 2X, L.P. a, b 7,000,000 8,804,958
Asian Century Quest Fund (QP) L.P. (a, b) 3,000,000 3,257,326
CCM Small Cap Value Qualified Fund, L.P. (a, b) 2,500,000 2,852,857
Criterion Horizons Fund, LP (a, b) 5,000,000 5,160,790
CRM Windridge Partners, L.P. (a, b) 4,522,017 5,061,699
DE Shaw Oculus Fund LLC (a, b) 5,000,000 5,935,777
Ellerston GEMS Offshore Fund, L.P. (a, b) 7,000,000 8,508,509
Encore Consumer Capital Fund, LP. (a, b) 1,253,544 1,176,062
GMO Mean Reversion Fund A (a, b) 5,770,065 6,685,726
Gradient Europe Fund, L.P. (a, b) 3,500,000 6,701,209
Healthcor, L.P. (a, b) 11,000,000 13,086,998
Liberty Square Strategic Partners IV (Asia), L.P. (a, b) 10,000,000 11,375,241
Samlyn Onshore Fund, L.P. (a, b) 4,000,000 4,096,000
Sansar Capital, L.P. (a, b) 10,000,000 11,484,906
SCP Domestic Fund, L.P. (a, b) 4,002,947 5,485,351
SR Global Fund, L.P. (Class C) International (a, b) 3,457,674 5,700,541
SR Global Fund, L.P. (Class G) Emerging (a, b) 4,281,970 7,358,784
SR Global Fund, L.P. (Class H) Japan (a, b) 3,665,240 4,341,533
Standard Pacific Japan Fund, L.P. (a, b) 6,500,000 6,537,005
The Platinum Fund Ltd. (a, b) 2,535,461 3,165,942
The Raptor Global Fund, L.P. (a, b) 2,500,000 3,130,738
Visium Long Bias Fund, L.P. (a, b) 10,964,983 11,747,732
Witches Rock Fund, L.P. (a, b) 2,003,000 2,525,998
------------
151,184,352
------------
PRIVATE EQUITY COMPOSITE (8.92%) (c)
Actis Umbrella Fund, L.P. (a, b) 1,008,914 967,634
BDCM Opportunity Fund II, L.P. (a, b) 962,673 900,999
Brazos Equity Fund II, L.P. (a, b) 1,321,087 1,134,737
Carlyle Japan Partners II, L.P. (a, b) 218,049 199,744
CJIP II Co-Invest, L.P. (a, b) 48,764 48,163
Claremont Creek Ventures, L.P. (a, b) 370,000 298,710
Crosslink Crossover Fund IV, L.P. (a, b) 4,403,262 5,285,173
Crosslink Crossover Fund IV, L.P. (a, b) 3,000,000 3,050,069
Great Point Partners VII, L.P. (a, b) 450,000 382,880
Halifax Fund II, L.P. (a, b) 501,438 357,874
See Notes to Financial Statements
4
HATTERAS MASTER FUND, L.P.
SCHEDULE OF INVESTMENTS - MARCH 31, 2007 (CONCLUDED)
COST FAIR VALUE
----------- ------------
PRIVATE EQUITY COMPOSITE (8.92%) (c) (CONTINUED)
Hancock Park Capital III, L.P. (a, b) $ 1,500,000 $ 1,942,631
Integral Capital Partners VII, L.P. (a, b) 6,000,000 6,811,122
OCM European Principal Opportunties Fund, L.P. (a, b) 3,080,307 3,716,207
OCM Mezzanine Fund II, L.P. (a, b) 2,575,000 2,670,149
Pipe Equity Partners, LLC (a, b) 3,824,693 4,609,674
Private Equity Investment Fund IV, L.P. (a, b) 1,138,058 1,363,835
Roundtable Healthcare Partners II, L.P. (a, b) 755,563 665,906
Sanderling Venture Partners VI Co-Investment Fund, L.P. (a, b) 350,000 291,795
Sanderling Venture Partners VI, L.P. (a, b) 450,000 390,318
Sterling Capital Partners II, L.P. (a, b) 682,221 786,992
Strategic Value Global Opportunities Fund I-A, LP (a, b) 1,497,239 1,472,239
VCFA Private Equity Partners IV, L.P. (a, b) 586,606 632,914
VCFA Venture Partners V, L.P. (a, b) 560,000 560,000
------------
35,283,874 38,539,765
------------
REAL ESTATE COMPOSITE (6.90%) (c)
Benson, Elliot Real Estate Partners II, L.P. (a, b) 1,268,436 1,135,730
Colony Edge, L.P. (a, b) 2,000,000 2,183,068
Colony Investors VII, L.P. (a, b) 1,847,168 2,037,770
ING Clarion CRA Hedge Fund, L.P. (a, b) 2,356,915 3,417,955
ING Clarion Global, L.P. (a, b) 3,000,000 3,489,044
Oak Hill Plus, L.P. (a, b) 4,000,000 3,903,574
ORBIS Real Estate Fund I, L.P. (a, b) 707,967 636,545
Rockwood Capital Real Estate Partners Fund VII, LP (a, b) 748,474 692,159
Security Capital Preferred Growth, Inc. (b) 1,714,042 1,657,795
Transwestern Mezzanine Realty Partner II, LLC (b) 1,375,483 1,392,246
WCP Real Estate Fund I, LP (a, b) 2,750,000 2,750,000
Wells Street Global Partners, LP (a, b) 4,686,679 6,537,752
------------
29,833,638
------------
TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $379,649,862) 439,348,184
------------
LIABILITIES IN EXCESS OF OTHER ASSETS (-1.67%) (7,228,445)
------------
PARTNERS' CAPITAL - 100.00% $432,119,739
============
a- Non-income producing
b- Underlying Funds are issued in private placement transactions and as such
are restricted as to resale.
c- Sectors are unaudited by Deloitte & Touche LLP.
Total cost and value of restricted securities as of March 31, 2007 was
$378,182,052 and $437,950,412 respectively.
See Notes to Financial Statements
5
HATTERAS MASTER FUND, L.P.
STATEMENT OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL - MARCH 31, 2007
ASSETS
Investments in Underlying Funds, at fair value (cost $379,649,862) $439,348,184
Cash and cash equivalents 14,981,857
Investments in Underlying Funds paid in advance 17,316,547
Receivable from redemption of Underlying Funds 5,904,264
Dividends and interest receivable 27,016
Withholding tax refund receivable 26,478
Prepaid assets 125,811
------------
TOTAL ASSETS $477,730,157
============
LIABILITIES AND PARTNERS' CAPITAL
Contributions received in advance $ 29,369,377
Redemptions payable 12,680,000
Line of credit loan payable 3,000,000
Management fee payable 370,734
Professional fees payable 96,775
Accounting and administration fees payable 58,870
Interest expense payable 16,250
Custodian fees payable 10,670
Line of credit fees payable 4,133
Risk management expense payable 3,609
------------
TOTAL LIABILITIES 45,610,418
------------
PARTNERS' CAPITAL 432,119,739
------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $477,730,157
============
See Notes to Financial Statements
6
HATTERAS MASTER FUND, L.P.
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED MARCH 31, 2007
INVESTMENT INCOME
Dividends $ 1,290,949
Interest 118,168
-----------
TOTAL INVESTMENT INCOME 1,409,117
-----------
OPERATING EXPENSES
Management fee 3,363,892
Risk management expense 306,789
Accounting and administration fees 294,026
Professional fees 224,070
Insurance expense 106,340
Line of credit fees 77,169
Board of directors' fees 37,500
Custodian fees 31,489
Interest expense 30,646
Compliance consulting fees 11,250
Other expenses 41,903
-----------
TOTAL OPERATING EXPENSES 4,525,074
-----------
NET INVESTMENT LOSS (3,115,957)
-----------
NET REALIZED GAIN AND CHANGE IN UNREALIZED APPRECIATION ON INVESTMENTS IN UNDERLYING FUNDS
Net realized gain on investments in Underlying Funds 2,322,022
Net increase in unrealized appreciation on investments in Underlying Funds 35,414,077
-----------
NET REALIZED GAIN AND CHANGE IN UNREALIZED APPRECIATION ON INVESTMENTS IN UNDERLYING FUNDS 37,736,099
-----------
NET INCREASE IN PARTNERS' CAPITAL RESULTING FROM OPERATIONS $34,620,142
===========
See Notes to Financial Statements
7
HATTERAS MASTER FUND, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
LIMITED
PARTNERS'
CAPITAL*
------------
PARTNERS' CAPITAL, AT MARCH 31, 2005 $116,826,646
Capital contributions 77,428,383
Capital withdrawals (2,250,000)
Net investment loss (1,894,577)
Net realized loss on investments in Underlying Funds (89,064)
Net increase in unrealized appreciation on investments
in Underlying Funds 23,499,600
------------
PARTNERS' CAPITAL, AT MARCH 31, 2006 $213,520,988
Capital contributions 207,108,880
Capital withdrawals (23,130,271)
Net investment loss (3,115,957)
Net realized gain on investments in Underlying Funds 2,322,022
Net increase in unrealized appreciation on investments
in Underlying Funds 35,414,077
------------
PARTNERS' CAPITAL, AT MARCH 31, 2007 $432,119,739
============
See Notes to Financial Statements
8
HATTERAS MASTER FUND, L.P.
STATEMENT OF CASH FLOWS - FOR THE YEAR ENDED MARCH 31, 2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in partners' capital resulting from operations $ 34,620,142
Adjustments to reconcile net increase in partners' capital resulting from
investment operations to net cash used in operating activities:
Purchases of Underlying Funds (234,324,375)
Proceeds from redemptions of Underlying Funds 45,561,151
Net realized gain on investments in Underlying Funds (2,322,022)
Net increase in unrealized appreciation on investments in Underlying Funds (35,414,077)
Decrease in investments in Underlying Funds paid in advance 2,183,453
Increase in receivable from redemption of Underlying Funds (5,496,725)
Increase in dividends and interest receivable (2,695)
Increase in withholding tax refund receivable (26,478)
Increase in prepaid assets (5,667)
Increase in management fee payable 192,679
Increase in professional fees payable 22,150
Increase in accounting and administration fees payable 24,452
Decrease in organizational fees payable (25,393)
Increase in interest expense payable 16,250
Increase in custodian fees payable 8,111
Increase in line of credit fees payable 4,133
Decrease in risk management expense payable (12,201)
-------------
Net cash used in operating activities (194,997,112)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions (including contributions received in advance) 213,903,313
Capital withdrawals (net of redemptions payable) (10,450,271)
Line of credit borrowings 3,000,000
-------------
Net cash used in financing activities 206,453,042
-------------
Net change in cash and cash equivalents 11,455,930
Cash and cash equivalents at beginning of year 3,525,927
-------------
Cash and cash equivalents at end of year $ 14,981,857
=============
Supplemental Disclosure of Interest Paid $ 14,396
=============
See Notes to Financial Statements
9
HATTERAS MASTER FUND, L.P.
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007
1. ORGANIZATION
Hatteras Master Fund, L.P. (the "Master Fund") was organized as a limited
partnership under the laws of the State of Delaware on October 29, 2004.
The Master Fund is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as a closed-end, non-diversified management
investment company. The Master Fund is managed by Hatteras Investment
Partners, LLC (the "Investment Manager"), a Delaware limited liability
company registered as an investment adviser under the Investment Advisers
Act of 1940, as amended. The objective of the Master Fund is to generate
consistent long-term appreciation and returns across all market cycles. To
achieve its objective, the Master Fund will provide its limited partners
(each, a "Limited Partner" and together, the "Limited Partners") with
access to a broad range of investment strategies and asset categories,
trading advisors ("Advisors") and overall asset allocation services
typically available on a collective basis to larger institutions.
Generally, the Investment Manager intends to select Advisors that
collectively employ widely diversified investment strategies and engage in
such techniques as opportunistic equity, enhanced fixed income, absolute
return, private equity, real estate and energy/natural resources. However,
the Investment Manager may also retain Advisors who utilize other
strategies. The Master Fund invests with each Advisor either by becoming a
participant in an investment vehicle operated by the Advisor (an
"Underlying Fund") or by placing assets in an account directly managed by
the Advisor. The Master Fund commenced operations on January 1, 2005. Prior
to January 1, 2005, the Master Fund engaged in no transactions other than
those related to organizational matters and the sale of a $100,000 interest
to Hatteras Diversified Strategies Fund, LP.
Hatteras Investment Management LLC, a Delaware limited liability company,
serves as the General Partner of the Master Fund (the "General Partner").
The General Partner has initially appointed a Board of Directors (the
"Board") and, to the fullest extent permitted by applicable law, has
irrevocably delegated to the Board its rights and powers to monitor and
oversee the business affairs of the Master Fund, including the complete and
exclusive authority to oversee and establish policies regarding the
management, conduct and operation of the Master Fund's business.
On January 3, 2005, the Master Fund received capital contributions totaling
$116,269,458, including contributions in the form of transfers-in-kind from
Hatteras Diversified Strategies Fund, LP and Hatteras Diversified
Strategies Offshore Fund, Ltd. for $72,386,769 and $16,620,182,
respectively. In addition, the Hatteras Diversified Strategies Offshore
Fund, Ltd. transferred receivables in the amount of $17,242,388 and
liquidated $10,020,119 of the Fund's securities at December 31, 2004 and
reinvested the proceeds in the Master Fund.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. The
following is a summary of significant accounting and reporting policies
used in preparing the financial statement.
10
HATTERAS MASTER FUND, L.P.
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. INVESTMENT VALUATION - INVESTMENTS IN UNDERLYING FUNDS
The Master Fund will value interests in the Underlying Funds at fair value,
which ordinarily will be the value determined by their respective
investment managers, in accordance with procedures established by the
Board. Investments in Underlying Funds are subject to the terms of the
Underlying Funds' offering documents. Valuations of the Underlying Funds
may be subject to estimates and are net of management and performance
incentive fees or allocations payable to the Underlying Funds' as required
by the Underlying Funds' offering documents. If the Investment Manager
determines that the most recent value reported by the Underlying Fund does
not represent fair value or if the Underlying Fund fails to report a value
to the Master Fund, a fair value determination is made under procedures
established by and under the general supervision of the Board. Because of
the inherent uncertainty in valuation, the estimated values may differ from
the values that would have been used had a ready market for the securities
existed, and the differences could be material.
B. INVESTMENT INCOME
Interest income is recorded on an accrual basis. Dividend income is
recorded on the ex-dividend date, except that certain dividends from
private equity investments are recorded as soon as the information is
available to the Master Fund. The Underlying Funds generally do not make
regular cash distributions of income and gains and so are generally
considered non-income producing securities, however the Master Fund owns
securities that are income producing and disburse regular cash
distributions.
C. FUND EXPENSES
The Master Fund will bear all expenses incurred in the business of the
Master Fund, including, but not limited to, the following: all costs and
expenses related to portfolio transactions and positions for the Master
Fund's account; legal fees; accounting and auditing fees; costs of
insurance; registration expenses; certain offering and organization costs;
and expenses of meetings of the Board.
D. INCOME TAXES
The Master Fund is treated as a partnership for federal income tax purposes
and therefore not subject to federal income tax. For income tax purposes,
the individual partners will be taxed upon their distributive share of each
item of the Master Fund's income, gain, loss, deductions and credits.
11
HATTERAS MASTER FUND, L.P.
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes amounts held in interest bearing demand
deposit accounts. At March 31, 2007, the Master Fund held $14,981,857 in
interest bearing demand deposit accounts. Such cash, at times, may exceed
federally insured limits. The Master Fund has not experienced any losses in
such accounts and does not believe it is exposed to any significant credit
risk on such bank deposits.
F. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires the
Master Fund to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of income and expense during the reporting period.
Actual results could differ from these estimates.
3. ALLOCATION OF PARTNERS' CAPITAL
Net profits or net losses of the Master Fund for each Allocation Period (as
defined below) will be allocated among and credited to or debited against
the capital accounts of the Limited Partners. Allocation Periods begin on
the day after the last day of the preceding Allocation Period and end at
the close of business on (1) the last day of each month, (2) the last day
of each taxable year; (3) the day preceding each day on which interests are
purchased, (4) the day on which interests are repurchased, or (5) the day
on which any amount is credited to or debited from the capital account of
any Limited Partner other than an amount to be credited to or debited from
the capital accounts of all Limited Partners in accordance with their
respective investment percentages.
4. MANAGEMENT FEE, RELATED PARTY TRANSACTIONS AND OTHER
The Investment Manager is responsible for providing day-to-day investment
management services to the Master Fund, subject to the ultimate supervision
of and subject to any policies established by the Board, pursuant to the
terms of an investment management agreement with the Master Fund (the
"Investment Management Agreement"). Under the Investment Management
Agreement, the Investment Manager is responsible for developing,
implementing and supervising the Master Fund's investment program.
In consideration for such services, the Master Fund pays the Investment
Manager a monthly management fee equal to 1/12th of 1.00% (1.00% on an
annualized basis) of the aggregate value of its partners' capital
determined as of the last day of the month (before repurchase of
interests).
12
HATTERAS MASTER FUND, L.P.
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 (CONTINUED)
4. MANAGEMENT FEE, RELATED PARTY TRANSACTIONS AND OTHER (CONTINUED)
Each member of the Board who is not an "interested person" of the Master
Fund (the "Independent Board"), as defined by the 1940 Act, receives an
annual retainer of $15,000. All Board members are reimbursed by the Master
Fund for all reasonable out-of-pocket expenses incurred by them in
performing their duties.
UMB Bank, n.a. serves as custodian of the Master Fund's assets and provides
custodial services for the Master Fund. UMB Investment Services Group
serves as administrator and accounting agent to the Master Fund and
provides certain accounting, record keeping and investor related services.
The Master Fund pays a monthly fee to the administrator based upon average
partners' capital, subject to certain minimums.
5. INVESTMENT TRANSACTIONS
Total purchases of Underlying Funds for the year ended March 31, 2007
amounted to $234,324,375. Total proceeds from redemptions of Underlying
Funds for the year ended March 31, 2007 amounted to $45,561,151. The cost
of investments in Underlying Funds for federal income tax purposes is
adjusted for items of taxable income allocated to the Master Fund from the
Underlying Funds. The Master Fund relies upon actual and estimated tax
information provided by the underlying funds as to the amounts of taxable
income allocated to the Master Fund as of March 31, 2007.
6. RISK FACTORS
An investment in the Master Fund involves significant risks that should be
carefully considered prior to investing and should only be considered by
persons financially able to maintain their investment and who can afford a
loss of a substantial part or all of such investment. The Master Fund
intends to invest substantially all of its available capital in securities
of private investment companies. These investments will generally be
restricted securities that are subject to substantial holding periods or
are not traded in public markets at all, so that the Master Fund may not be
able to resell some of its securities holdings for extended periods, which
may be several years. Investments in the Underlying Funds may be restricted
from early redemptions or subject to fees for early redemptions as part of
contractual obligations agreed to by the Advisor on behalf of the Master
Fund. Underlying Funds generally require the Advisor to provide advanced
notice of its intent to redeem the Master Fund's total or partial interest
and may delay or deny a redemption request depending on the Underlying
Funds' governing agreements. No guarantee or representation is made that
the investment objective will be met.
13
HATTERAS MASTER FUND, L.P.
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 (CONTINUED)
7. LINE OF CREDIT
On May 1, 2006, the Master Fund entered into a $20,000,000 unsecured,
uncommitted revolving loan facility ("Facility"), for the purpose to
finance short timing differences between the redemption of investments or
receipt of partnership capital and the redemption of partnership capital
accounts; the investment in new managers; or as general working capital. A
fee of 37.5 basis points per annum is payable quarterly in arrears on the
unused portion of the Facility. Borrowings are charged an interest rate at
a base rate less 75 basis points. The base rate is the greater of a) the
prime commercial rate as announced from time to time, or b) the Federal
Funds rate plus 1/2 of 1%, calculated on a 360-day basis and payable
monthly in arrears. At March 31, 2007 the Master Fund had $3,000,000 in
borrowings outstanding under the Facility and $20,383 in fees and interest
payable. The average interest rate, the average daily balance, and the
maximum balance outstanding for borrowings under the Facility for the
period ended March 31, 2007 was 7.45%, $284,932, and $7,500,000,
respectively.
8. REPURCHASE OF PARTNERS' INTERESTS
The Board may, from time to time and in its sole discretion, cause the
Master Fund to repurchase interests from Limited Partners pursuant to
written tenders by Limited Partners at such times and on such terms and
conditions as established by the Board. In determining whether the Master
Fund should offer to repurchase interests, the Board will consider the
recommendation of the Investment Manager. On March 31, 2006, the Investment
Manager recommended to the Board that the Master Fund offer to repurchase
interests from Limited Partners on a quarterly basis as of March 31, June
30, September 30 and December 31 of each year. The Master Fund does not
intend to distribute to the partners any of the Master Fund's income, but
generally expects to reinvest substantially all income and gains allocable
to the partners. A partner may, therefore, be allocated taxable income and
gains and not receive any cash distribution.
9. INDEMNIFICATION
In the normal course of business, the Master Fund enters into contracts
that provide general indemnifications. The Master Fund's maximum exposure
under these agreements is dependent on future claims that may be made
against the Master Fund, and therefore cannot be established; however,
based on experience, the risk of loss from such claims is considered
remote.
10. COMMITMENTS
As of March 31, 2007, the Master Fund had outstanding investment
commitments to Underlying Funds totaling $ 93,387,778.
14
HATTERAS MASTER FUND, L.P.
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 (CONTINUED)
11. FINANCIAL HIGHLIGHTS
The financial highlights are intended to help you understand the Master
Fund's financial performance for the past period. The total returns in the
table represent the rate that a typical Limited Partner would be expected
to have earned or lost on an investment in the Master Fund. The ratios and
total return amounts are calculated based on the Limited Partner group
taken as a whole. An individual Limited Partner's results may vary from
those shown below due to the timing of capital transactions.
The ratios are calculated by dividing total dollars of net investment
income or expenses, as applicable, by the average of total monthly limited
partners' capital. The ratios do not reflect the Master Fund's
proportionate share of income and expenses from Underlying Funds.
Total return amounts are calculated by geometrically linking returns based
on the change in value during each accounting period. The total return
amounts have not been annualized for the periods less than a year.
FOR THE PERIOD FROM
FOR THE YEARS ENDED JANUARY 1, 2005
MARCH 31, (COMMENCEMENT OF
-------------------- OPERATIONS) THROUGH
2007 2006 MARCH 31, 2005
-------- -------- -------------------
Total return amortizing organizational
expenses* --** --** 0.23%
Total return 9.31% 13.79% 0.17%
Partners' capital, end of period (000) $432,120 $213,521 $116,827
Portfolio Turnover 14.03% 19.35% 3.72%
ANNUALIZED RATIOS:
Net Investment loss (0.96)% (1.23)% (1.43)%
Total Expenses 1.39% 1.52% 1.50%
* Return is indicative of amortizing organizational expenses over 60 months
for tax purposes.
** Organizational costs were fully expensed as of 3/31/05.
15
HATTERAS MASTER FUND, L.P.
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 (CONCLUDED)
12. NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" (the "Interpretation"). The
Interpretation establishes for all entities, including pass-through
entities such as the Master Fund, a minimum threshold for financial
statements recognition of the benefit of positions taken in filing tax
returns (including whether an entity is taxable in a particular
jurisdiction), and required certain expanded tax disclosures. The
Interpretation is effective for fiscal years beginning after December 15,
2006 and is required to be implemented no later than September 30, 2007.
Management has recently begun to evaluate the application of the
Interpretation to the Master Fund, and is not in a position at this time to
estimate the significance of its impact, if any, on the Master Fund's
financial statements.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements," (the "Statement"). The
Statement defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles (GAAP), and expands
disclosures about fair value hierarchy that distinguishes between (1)
market participant assumptions developed based on market data obtained from
sources independent of the reporting entity (observable inputs). The
Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and is to be applied prospectively as of
the beginning of the fiscal year in which this Statement is initially
applied. Management has recently begun to evaluate the application of the
Statement to the Master Fund, and is not in a position at this time to
evaluate the significance of its impact, if any, on the Master Fund's
financial statements.
13. SUBSEQUENT EVENTS
Effective April 1, 2007 and May 1, 2007, there were additional capital
contributions of $29,369,377 and $42,762,643, respectively.
16
HATTERAS MASTER FUND, L.P.
BOARD OF DIRECTORS (UNAUDITED)
The identity of the Board Members and brief biographical information is set
forth below.
Principal Occupation(s) During Number of
Position(s) Term of Office; Past 5 years and Portfolios in Fund
Name, Address & Held with Length of Time Other Directorships Held by Complex' Overseen by
Age the Fund Served Director Director or Officer
- ------------------ ------------ --------------- -------------------------------- --------------------
INTERESTED DIRECTORS
David B. Perkins, Chief 3 year term; Mr. Perkins has been Chairman 5
44 Executive Since Inception and CEO since inception of the
1000 Watermeet Officer and Funds. Mr. Perkins became the
Lane Chairman of President and Managing Principal
Raleigh, NC 27614 the Board of of the Investment Manager in
Directors September 2003 and became the
co-founder and Managing Partner
of CapFinancial Partners, LLC in
April 2003. Prior to that, he
was Managing Partner at Wachovia
Securities Financial Network,
Inc. from June 2002 to
September 2003 and Managing
Principal of CapTrust Financial
Advisors, LLC from October 1997
to June 2002.
INDEPENDENT DIRECTORS
Steve E. Moss, 53 Director: 3 year term; Mr. Moss is a principal of 5
918 Meadow Lane Chairman of Since December Holden, Moss, Knott, Clark,
Henderson, NC the Audit 2004 Copley & Hoyle, P.A. and has
27536 Committee been a member manager of HMKCT
Properties, LLC since January
1996. Mr. Moss as been a
Director and Member of the Audit
Committee of the Fund since
December 2004.
H. Alexander Director: 3 year term; Mr. Holmes founded Holmes 5
Holmes, 64 Audit Since December Advisory Services, LLC, a
3408 Landor Road Committee 2004 financial consultation firm, in
Raleigh, NC 27609 Member 1993. Mr. Holmes has been a
Director and Member of the Audit
Committee of the Fund since
December 2004.
Gregory S. Director: 3 year term; Mr. Sellers became the Chief 5
Sellers, 47 Audit Since December Financial Officer and a director
2643 Steeplechase Committee 2004 of Kings Plush, Inc., a fabric
Road Member manufacturer, in April 2003.
Gastonia, NC Prior to that, he was the Vice
28056 President of Finance at
Parksdale Mills, Inc., a cotton
and cotton blend yarns producer,
from January 1991 to April 2003.
Mr. Sellers has been a Director
and Member of the Audit
Committee for the Fund since
December 2004.
Art Lottes, 53 Director: 3 year term; Mr. Lottes was the President of 5
4813 Wynneford Way Audit Since November CARQUEST Corporation, an
Raleigh, NC 27615 Committee 2006 automotive aftermarket company
Member until December 2005. Mr. Lottes
was a Board member of CARQUEST
and General Parts until December
2005.
17
HATTERAS MASTER FUND, L.P.
FUND MANAGEMENT (UNAUDITED)
Set forth below is the name, age, position with the Fund, length of term of
office, and the principal occupation for the last five years of each of the
persons currently serving as Executive Officers of the Fund. Unless otherwise
noted, the business address of each officer is 8540 Colonnade Center Drive,
Suite 401, Raleigh, NC 27615.
Number of
Position(s) Portfolios in Fund
Name, Address & Held with Length of Time Principal Occupation(s) During Past 5 years Complex' Overseen by
Age the Fund Served and Other Directorships Held by Director Director or Officer
- ----------------- ----------- -------------- ------------------------------------------- --------------------
OFFICERS
J. Michael Chief Since Mr. Fields has been the CFO since N/A
Fields, 33 Financial Inception inception of the Funds. Mr. Fields became
8540 Colonnade Officer a Director of the Investment Manager in
Center Drive, September 2003. Prior to joining the
Suite 401 Investment Manager, Mr. Fields was
Raleigh, NC 27615 employed by CapTrust Financial Advisors
from August 2002 to September 2003.
Prior to joining CapTrust, Mr. Fields was
employed by Morgan Stanley in Atlanta,
Georgia from January 2000 to August
2002.
Denise Chief Since Ms. Buchanan has been the CCO since N/A
Buchanan, 44 Compliance Inception inception of the Funds. Ms. Buchanan
8540 Colonnade Officer became the Compliance Officer with
Center Drive, CapFinancial Partners, LLC ("CapTrust")
Suite 401 in November 2003. Prior to joining
Raleigh, NC 27615 CapTrust, Ms. Buchanan was President of
Broker/Dealer Sales & Consulting, Inc.
from 2001 to November 2003. Previously,
Ms. Buchanan was the Director of
Compliance for Atlantic Capital
Management, LLC from 1996 to 2001.
Vickey Secretary Since Ms. Collins has been the Secretary of the N/A
Collins, 40 Inception Funds since inception. She became the
8540 Colonnade Operations Manager for the Investment
Drive, Manager in September 2004. Prior to
Suite 401 joining the Investment Manager, she was
Raleigh, NC 27615 employed with McKinely Capital
Management from 1994 to 2004.
18
HATTERAS MASTER FUND, L.P.
OTHER INFORMATION (UNAUDITED)
ANNUAL RENEWAL OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting of the Board of the Master Fund held on February 28, 2007, by
a unanimous vote, the Board of the Master Fund, including a majority of the
Directors who are not "interested persons" within the meaning of Section
2(a)(19) of the 1940 Act, approved the continuation of the Investment
Management Agreement (the "Agreement").
In advance of the meeting, the Independent Directors requested and received
extensive materials from the Investment Manager to assist them in
considering the renewal of the Agreement. The materials provided by the
Investment Manager contained information including detailed comparative
information relating to the performance, advisory fees and other expenses
of the Master Fund and the Limited Partners of the Master Fund managed by
the Investment Manager (collectively, the "Funds"). The materials also
included comparisons of the performance of each of the Master Fund's
investment sectors versus a relevant benchmark.
The Board engaged in a detailed discussion of the materials with management
of the Investment Manager. The Independent Directors then met separately
with independent counsel to the Independent Directors for a full review of
the materials. Following this session, the full Board reconvened and after
further discussion determined that the information presented provided a
sufficient basis upon which to approve the continuation of the Agreement.
DISCUSSION OF FACTORS CONSIDERED
The Board reviewed various materials relating to the Investment Manager,
including materials furnished by the Investment Manager. These materials
included information about the Investment Manager's personnel,
organizational structure, operations and financial condition. Management
discussed with the Independent Directors the Investment Manager's business
plans regarding ownership of the Manager, stability and retention of
management and improvements in the Funds' distribution and marketing.
The Board considered, among other things, various matters relating to the
organizational capabilities of the Investment Manager, including: (1) the
nature and stability of the ownership of the Investment Manager; (2) the
nature of the Investment Manager's portfolio management experience and
resources, including the experience of relevant personnel; and (3) the
Investment Manager's resources, practices and procedures to address
regulatory compliance matters.
The Board concluded that the Investment Manager has sufficient resources to
fulfill effectively the Investment Manager's duties under the Agreement.
The Board also considered other information, including: (1) the terms of
the Agreement; (2) the standard of care applicable to the Investment
Manager under the Agreement; (3) information regarding the performance of
and fees paid by certain similar private funds managed by the Investment
Manager; (4) information compiled by the Investment Manager intended to
gauge the
19
HATTERAS MASTER FUND, L.P.
OTHER INFORMATION (UNAUDITED) (CONCLUDED)
ANNUAL RENEWAL OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
behavior of the Investment Manager's portfolio management strategy during
periods of historical or hypothetical market stress; (5) the Funds'
investment performance and expense ratios and the investment performance
and expense ratios of other investment companies with similar investment
styles to the Funds; and (6) the structure of, and the method used to
determine, the compensation of portfolio managers.
The Board gave consideration to the fees payable under the Agreement,
including: (1) the fees to be paid to the Investment Manager and the
Investment Manager's anticipated expenses in providing its services, and
the fact that certain affiliates of the Investment Manager provide other
services to the Funds and receive payment for these services; and (2) a
comparison of the fees payable under the Agreement to fees paid under
investment advisory agreements to investment advisers serving other
investment companies with similar investment programs to the Master Fund,
which assisted the Board in evaluating the reasonableness of the fees to be
paid to the Investment Manager.
The Board also considered possible economies of scale that might be
recognized in the future at different asset levels. In this regard the
Board considered the amount of assets in the Master Fund; the placement
agent agreements currently in force to increase the Funds' penetration in
various distribution channels; the information provided by the Investment
Manager relating to its estimated costs; and information comparing the fee
rate to be charged by the Investment Manager (which does not include fee
breakpoints) with fee rates charged by other unaffiliated investment
managers to their clients. The Board considered all factors and no one
factor alone was deemed dispositive.
PROXY VOTING
A description of the policies and procedures that the Master Fund uses to
determine how to vote proxies relating to portfolio securities and
shareholders record of actual proxy votes cast is available at www.sec.gov
and may be obtained at no additional charge by calling 1-800-504-9070.
AVAILABILITY OF QUARTERLY PORTFOLIO SCHEDULES
The Fund files its complete schedule of portfolio holdings with the SEC for
the first and third quarters of each fiscal year on Form N-Q. The Fund's
Form N-Q is available, without charge and upon request, on the SEC's
website at http://www.sec.gov or may be reviewed and copied at the SEC's
Public Reference Room in Washington, DC. Information on the Public
Reference Room may be obtained by calling 1-800-SEC-0330.
20
ITEM 2. CODE OF ETHICS.
(a) The registrant, as of the end of the period covered by this report, has
adopted a code of ethics that applies to the registrant's principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions, regardless of whether these
individuals are employed by the registrant or a third party.
(c) There have been no amendments, during the period covered by this
report, to a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions, regardless of
whether these individuals are employed by the registrant or a third party, and
that relates to any element of the code of ethics description.
(d) The registrant has not granted any waivers, including an implicit
waiver, from a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions, regardless of
whether these individuals are employed by the registrant or a third party, that
relates to one or more of the items set forth in paragraph (b) of this item's
instructions.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the registrant's board of
directors has determined that Messrs. Steve E. Moss, H Alexander Holmes and
Gregory S. Sellers are each qualified to serve as audit commitee financial
experts serving on its audit commitee and that each is "independent," as defined
by Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
(a) The aggregate fees billed for each of the last two fiscal years for
professional services rendered by the principal accountant for the audit of the
registrant's annual financial statements or services that are normally provided
by the accountant in connection with statutory and regulatory filings or
engagements for those fiscal years are $8,500 for 2006 and $9,450 for 2007.
Audit-Related Fees
(b) The aggregate fees billed in each of the last two fiscal years for
assurance and related services by the principal accountant 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 are $1,600 for 2006 and
$340 for 2007. The fees listed on item 4 (b) are related to out-of-pocket
expenses in relation to the annual audit of the registrant.
Tax Fees
(c) The aggregate fees billed in each of the last two fiscal years for
professional services rendered by the principal accountant for tax compliance,
tax advice, and tax planning are $0 for 2006 and $0 for 2007.
All Other Fees
(d) The aggregate fees billed in each of the last two fiscal years for
products and services provided by the principal accountant, other than the
services reported in paragraphs (a) through (c) of this Item are $0 for 2006 and
$0 for 2007.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
The Registrant's Audit Committee must pre-approve the audit and non-audit
services of the Auditors prior to the Auditor's engagement.
(e)(2) The percentage of services described in each of paragraphs (b)
through (d) of this Item that were approved by the audit committee pursuant to
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X are as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most recent
fiscal year that were attributed to work performed by persons other than the
principal accountant's full-time, permanent employees was less than fifty
percent.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's investment
adviser (not including any sub-adviser whose role is primarily portfolio
management and is subcontracted with or overseen by another investment adviser),
and any entity controlling, controlled by, or under common control with the
adviser that provides ongoing services to the registrant for each of the last
two fiscal years of the registrant was $0.
(h) The registrant's audit committee of the board of directors has
considered whether the provision of non-audit services that were rendered to the
registrant's investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal accountant's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Schedule of Investments in securities of unaffiliated issuers as of the close of
the reporting period is included as part of the report to shareholders filed
under Item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Proxy Voting Policies are attached herewith.
HATTERAS INVESTMENT PARTNERS LLC
HATTERAS MASTER FUND, L.P.
HATTERAS MULTI-STRATEGY FUND I, L.P.
HATTERAS MULTI-STRATEGY TEI FUND, L.P.
HATTERAS MULTI-STRATEGY INSTITUTIONAL FUND, L.P.
HATTERAS MULTI-STRATEGY TEI INSTITUTIONAL FUND, L.P.
PROXY VOTING POLICY
This statement sets forth the policy of Hatteras Investment Partners, LLC
("Hatteras") with respect to the exercise of corporate actions and proxy voting
authority of client accounts.
The Funds and other advisory clients of Hatteras invest, directly or indirectly,
substantially all of their assets in securities of pooled investment vehicles or
separate accounts, which are private partnerships, limited liability companies
or similar entities managed by third-party investment managers (collectively,
"Advisor Funds"). These securities do not typically convey traditional voting
rights to the holder and the occurrence of corporate governance or other notices
for this type of investment is substantially less than that encountered in
connection with registered equity securities. To the extent that the we or our
clients receive notices or proxies from Advisor Funds (or receive proxy
statements or similar notices in connection with any other portfolio
securities), Hatteras has proxy voting responsibilities.
With respect to proxies issued by Hatteras Master Fund, L.P. (the "Master
Fund"), the feeder funds which invest in the Master Fund have delegated proxy
voting authority to Hatteras. Hatteras will vote proxies in a manner that it
deems to be in the best interests of the Funds. In general, the Investment
Manager believes that voting proxies in accordance with the policies described
below will be in the best interests of its clients. If an analyst, trader or
partner of the Hatteras believes that voting in accordance with stated
proxy-voting guidelines would not be in the best interests of a client, the
proxy will be referred to Hatteras' Chief Compliance Officer for a determination
of how such proxy should be voted.
Hatteras will generally vote to support management recommendations relating to
routine matters such as the election of directors (where no corporate governance
issues are implicated), the selection of independent auditors, an increase in or
reclassification of common stock, the addition or amendment of indemnification
provisions in the company's charter or by-laws, changes in the board of
directors and compensation of outside directors. Hatteras will generally vote in
favor of management or shareholder proposals that Hatteras believes will
maintain or strengthen the shared interests of shareholders and management,
increase shareholder value, maintain or increase shareholder influence over the
company's board of directors and management and maintain or increase the rights
of shareholders.
On non-routine matters, Hatteras will generally vote in favor of management
proposals for mergers or reorganizations, reincorporation plans, fair-price
proposals and shareholder rights plans so long as such proposals are in the best
economic interests of Hatteras' clients.
If a proxy includes a matter to which none of the specific policies described
above or in Hatteras' stated proxy-voting guidelines is applicable or a matter
involving an actual or potential conflict of interest as described below, the
proxy will be referred to Hatteras' Chief Compliance Officer for a determination
of how such proxy should be voted.
In exercising its voting discretion, Hatteras and its employees will seek to
avoid any direct or indirect conflict of interest presented by the voting
decision. If any substantive aspect or foreseeable result of the matter to be
voted on by Hatteras Master Fund, L.P., Hatteras Multi-Strategy Fund I, L.P.,
Hatteras Multi-Strategy TEI Fund, L.P., Hatteras Multi-Strategy Institutional
Fund, L.P. or Hatteras Multi-Strategy TEI Institutional Fund, L.P. (the
"Registered Funds") presents an actual or potential conflict of interest
involving Hatteras (or an affiliate of Hatteras), any issuer of a security for
which Hatteras (or an affiliate of Hatteras) acts as sponsor, advisor, manager,
custodian, distributor, underwriter, broker or other similar capacity or any
person with whom Hatteras (or an affiliate of Hatteras) has an existing material
contract or business relationship not entered into in the ordinary course of
business (Hatteras and such other persons having an interest in the matter being
called "Interested Persons"), Hatteras will make written disclosure of the
conflict to the Independent Directors of the applicable Fund(s) indicating how
Hatteras proposes to vote on the matter and its reasons for doing so. If the
Investment Manager does not receive timely written instructions as to voting or
non-voting on the matter from the applicable Registered Fund's Independent
Directors, Hatteras may take any of the following actions which it deems to be
in the best interests of the Fund: (1) engage an independent third party to
determine whether and how the proxy should be voted and vote or refrain from
voting on the matter as determined by the third party; (2) vote on the matter in
the manner proposed to the Independent Directors if the vote is against the
interests of all Interested Persons; or (3) refrain from voting on the matter.
The Registered Fund each are required to file Form N-PX, with its complete proxy
voting record for the twelve months ended June 30, no later than August 31 of
each year. Each of the Registered Fund's Form N-PX filing is available: (1)
without charge, upon request, by calling (800) 504-9070; or (2) by visiting the
SEC's website at www.sec.gov.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a)(1) Identification of Portfolio Manager(s) or Management Team Members and
Description of Role of Portfolio Manager(s) or Management Team Members
The following table provides biographical information about the
members of the Investment Committee of Hatteras Investment Partners LLC (the
"Investment Manager"), who are primarily responsible for the day-to-day
portfolio management of the Hatteras Master Fund, L.P. (the "Fund") as of March
31, 2007:
LENGTH OF
TIME OF ROLE OF
NAME OF INVESTMENT SERVICE TO INVESTMENT
COMMITTEE MEMBER TITLE THE FUND BUSINESS EXPERIENCE DURING THE PAST 5 YEARS COMMITTEE MEMBER
- ------------------ ------------- ------------- ---------------------------------------------- -----------------
Mark W. Yusko Principal and Since January Mr. Yusko became a Principal and co-founder of Asset allocation;
co-founder of 2004 the Investment Manager in September 2003 and underlying
the (inception) President and Chief Executive Officer of manager
Investment Morgan Creek Capital Management, LLC in July, selection; and
Manager 2004. Previously, Mr. Yusko served as portfolio
President and Chief Executive Officer for UNC construction
Management Co., LLC from January 1998 through
July 2004, where he was responsible for all
areas of investment management for the UNC
Endowment and Affiliated Foundation Funds.
David B. Perkins President and Since January Mr. Perkins became the President and Managing Systems analyst;
Managing 2004 Principal of the Investment Manager in and strategic
Principal of (inception) September 2003 and co-founder and Managing recommendations
the Partner of CapFinancial Partners, LLC in April and portfolio
Investment 2003. Previously, Mr. Perkins was Managing oversight
Manager Partner at Wachovia Securities Financial
Network, Inc. from June 2002 to September 2003
and as Managing Principal of CapTrust
Financial Advisors, LLC from October 1997 to
June 2002.
Joshua E. Parrott Director of Since January Mr. Parrott joined the Investment Manager as Risk management;
Risk 2004 an Analyst in March 2004 and became the underlying
Management of (inception) Director of Risk Management in January 2005. manager due
the Previously, Mr. Parrott was employed as an diligence;
Investment Analyst by Dialectic Capital Management in operational due
Manager 2003 and as a Financial Advisor at Morgan diligence; and
Stanley from February 1999 to March 2003. performance
analysis
(a)(2) Other Accounts Managed by Portfolio Manager(s) or Management Team Member
and Potential Conflicts of Interest
The following table provides information about portfolios and
accounts, other than the Fund, for which the members of the Investment Committee
of the Investment Manager are primarily responsible for the day-to-day portfolio
management as of March 31, 2007:
Total Assets
Number of Accounts for Which
Managed for Which Advisory Fee is
Name of Investment Total Number of Advisory Fee is Based Based on
Committee Member Type of Accounts Accounts Managed Total Assets on Performance Performance
- ------------------ -------------------------------- ---------------- -------------- --------------------- ---------------
Mark W. Yusko Registered Investment Companies 1 $1,356,000,000 0 $ 0
Other Pooled Investment Vehicles 11 $1,680,000,000 11 $1,280,000,000
Other Accounts 9 $1,040,000,000 9 $1,040,000,000
David B. Perkins Registered Investment Companies 0 $ 0 0 $ 0
Other Pooled Investment Vehicles 0 0 0 0
Other Accounts 0 0 0 0
Joshua E. Parrott Registered Investment Companies 0 $ 0 0 $ 0
Other Pooled Investment Vehicles 0 0 0 0
Other Accounts 0 0 0 0
Potential Conflicts of Interests
Mr. Yusko is responsible for managing other accounts, including proprietary
accounts, separate accounts and other pooled investment vehicles, including
unregistered hedge funds and funds of hedge funds. He may manage separate
accounts or other pooled investment vehicles which may have materially higher,
lower or different fee arrangements than the registrant and may also be subject
to performance-based fees. The side-by-side management of these separate
accounts and pooled investment vehicles may raise potential conflicts of
interest relating to cross trading and the allocation of investment
opportunities. The Investment Manager has a fiduciary responsibility to manage
all client accounts in a fair and equitable manner. It seeks to provide best
execution of all securities transactions and to allocate investments to client
accounts in a fair and timely manner. To this end, the Investment Manager has
developed policies and procedures designed to mitigate and manage the potential
conflicts of interest that may arise from side-by-side management.
Messrs. Perkins and Parrott do not manage any other accounts and
therefore no material conflicts of interest arise out of their management of the
registrant.
(a)(3) Compensation Structure of Portfolio Manager(s) or Management Team Members
The compensation of the members of the Investment Committee of the
Investment Manager includes a combination of the following: (i) fixed annual
salary; (ii) a variable portion of the management fee paid by the Master Fund to
the Investment Manager; and (iii) a variable portion of any incentive
compensation paid by the registrant, or any other feeder fund, to the Investment
Manager or its affiliates. The portions of the management fee and incentive fee
paid to a member of the Investment Committee are based on the pre-tax
performance of the Fund as compared to a benchmark. The Investment Manager uses
the yield-to-maturity of the 90 day U.S. Treasury Bill as reported by the Wall
Street Journal for the last business day of the preceding calendar year as a
benchmark for the Fund's pre-tax performance when determining the variable
components of the compensation of members of the Investment Committee.
(a)(4) Disclosure of Securities Ownership
The following table sets forth the dollar range of equity securities
beneficially owned by each member of the Investment Committee of the Investment
Manager indirectly in the Master Fund as of March 31, 2007:
INVESTMENT DOLLAR RANGE OF FUND SHARES
COMMITTEE MEMBER BENEFICIALLY OWNED
- ---------------- ---------------------------
Mark W. Yusko $100,001 to $500,000
David B. Perkins $100,001 to $500,000
Joshua E. Parrott $ 10,001 to $50,000
(b) Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the 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 (17 CFR
240.14a-101), or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers,
or persons performing similar functions, have concluded that the registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR
270.30a-3(c))) are effective, as of a date within 90 days of the filing date of
the report that includes the disclosure required by this paragraph, based on
their evaluation of these controls and procedures required by Rule 30a-3(b)
under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b)or 15d-15(b) under
the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or
240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the registrant's second fiscal quarter of the
period covered by this report 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, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Not applicable.
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) Hatteras Multi-Strategy Fund I, L.P.
By (Signature and Title)* /s/ David B. Perkins
------------------------------------------
David B. Perkins, President &
Chief Executive Officer
(principal executive officer)
Date June 8, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ David B. Perkins
------------------------------------------
David B. Perkins, President &
Chief Executive Officer
(principal executive officer)
Date June 8, 2007
By (Signature and Title)* /s/ J. Michael Fields
------------------------------------------
J. Michael Fields, Chief Financial Officer
(principal financial officer)
Date June 8, 2007
* Print the name and title of each signing officer under his or her
signature.