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 811-21537
Name of Fund: Multi-Strategy Hedge Opportunities LLC
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, Multi-Strategy Hedge Opportunities LLC, 222 Broadway, 27th Floor,
New York, NY 10038.
Registrant's telephone number, including area code: (866) 878-2987
Date of fiscal year end: 03/31/06
Date of reporting period: 04/01/05 - 03/31/06
Item 1 - Report to Stockholders
Annual Report
March 31, 2006
Multi-Strategy Hedge
Opportunities LLC
Multi-Strategy Hedge Opportunities LLC
Announcement to Shareholders
On February 15, 2006, BlackRock, Inc. ("BlackRock") and Merrill Lynch & Co.,
Inc. ("Merrill Lynch") entered into an agreement to contribute Merrill Lynch's
investment management business, Merrill Lynch Investment Managers, L.P. and
certain affiliates (including Fund Asset Management, L.P. and Merrill Lynch
Investment Managers International Limited), to BlackRock to create a new
independent company that will be one of the world's largest asset management
firms with over $1 trillion in assets under management (based on combined assets
under management as of March 31, 2006). The transaction is expected to close in
the third quarter of 2006, at which time the new company will operate under the
BlackRock name. If approved by the Fund's Board of Directors and Fund
shareholders, the combined company that results from the transaction is expected
to become the investment adviser of the Fund.
Portfolio Information as of March 31, 2006
Percent of Total
Ten Largest Holdings Investments
- --------------------------------------------------------------------------------
Glenview Institutional Partners LP ..................................... 7.5%
Canyon Value Realization Fund LP ....................................... 5.9
Kinetics Partners LP ................................................... 5.6
Golden Tree Credit Opportunities LP .................................... 5.5
Litespeed Partners LP .................................................. 5.4
LibertyView Credit Opportunities Fund II LLC ........................... 5.4
North Sound Legacy Institutional Fund LLC .............................. 5.4
Context Convertible Arbitrage Fund LP .................................. 5.0
Maverick Levered Partners LP ........................................... 4.2
Trivium Institutional Onshore Fund LP .................................. 4.1
- --------------------------------------------------------------------------------
Percent of
Investments by Strategy Net Assets
- --------------------------------------------------------------------------------
Equity Opportunistic ................................................... 38.5%
Event Driven ........................................................... 22.0
Directional ............................................................ 21.0
Equity Neutral ......................................................... 6.6
Convertible Arbitrage .................................................. 4.9
Fixed Income ........................................................... 2.9
Multi-Strategy ......................................................... 2.7
Other* ................................................................. 1.4
- --------------------------------------------------------------------------------
* Includes other assets less liabilities.
2 MULTI-STRATEGY HEDGE OPPORTUNITIES LLC MARCH 31, 2006
A Letter From the President
Dear Shareholder
You may be aware that changes are on the horizon at Merrill Lynch Investment
Managers ("MLIM"). On February 15, 2006, Merrill Lynch announced plans to
combine the firm's investment advisory business, including MLIM, with another
highly regarded investment manager -- BlackRock, Inc. ("BlackRock").
We believe this merger of asset management strength will benefit our investors.
MLIM is a leading investment management organization with over $576 billion in
assets under management globally and 2,757 employees in 17 countries. It offers
over 100 investment strategies in vehicles ranging from mutual funds to
institutional portfolios. BlackRock is one of the largest publicly traded
investment management firms in the United States with $463.1 billion in assets
under management and 1,839 employees. It manages assets on behalf of
institutional and individual investors worldwide through a variety of equity,
fixed income, liquidity and alternative investment products.
At the completion of the transaction, which is expected in the third quarter of
this year, the resultant firm will be a top-10 investment manager worldwide with
over $1 trillion in assets under management.* The combined company will provide
a wider selection of high-quality investment solutions across a range of asset
classes and investment styles. MLIM and BlackRock possess complementary
capabilities that together create a well-rounded organization uniting some of
the finest money managers in the industry. At the same time, the firms share
similar values and beliefs -- they are focused on delivering excellence on
behalf of clients, and both make investment performance their single most
important mission. In short, the merger only reinforces our commitment to
shareholders.
Most of MLIM's investment products -- including mutual funds, separately managed
accounts, annuities and variable insurance funds -- eventually will carry the
"BlackRock" name. As a shareholder in one or more MLIM-advised mutual funds, you
will receive a proxy package in the coming weeks in connection with this
transaction. After you receive this information, should you have any questions
or concerns, do not hesitate to contact your financial advisor.
As always, we thank you for entrusting us with your investment assets, and we
look forward to continuing to serve your investment needs with even greater
strength and scale as the new BlackRock.
Sincerely,
/s/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
President and Chief Investment Officer
Merrill Lynch Investment Managers
* $1.039 trillion in assets under management as of March 31, 2006.
Data, including assets under management, are as of March 31, 2006.
MULTI-STRATEGY HEDGE OPPORTUNITIES LLC MARCH 31, 2006 3
A Discussion With Your Fund's Portfolio Managers
We continue to concentrate primarily on strong bottom-up, research-driven
equity funds, but overall have positioned the portfolio to benefit from
relatively benign global equity markets.
What is the Fund's investment objective?
Multi-Strategy Hedge Opportunities LLC seeks high total returns through
investment in hedge funds and other investment vehicles that pursue alternative
investment strategies. The Fund seeks to accomplish its objective by investing
primarily in hedge funds, commodity pools, funds of funds and other alternative
investment pools managed by securities and commodity trading advisers. Through
these types of investments, the Fund will typically gain exposure to several
common alternative investment strategies, such as relative value, global macro,
equity long/short, event-driven and managed futures strategies. These are among
the different strategies that hedge funds in the market today use to generate
returns and manage risks. In the discussion that follows, we will make reference
to "managers," or hedge funds, that employ these various strategies. The Fund's
allocations to underlying managers and strategies are based on, among other
factors, quantitative techniques and risk management guidelines that seek to
maintain diversification.
How did the Fund perform during the fiscal year?
For the 12-month period ended March 31, 2006, the Common Stock of Multi-Strategy
Hedge Opportunities, LLC provided a total net investment return of +7.16% (not
including a maximum sales charge of 3%), based on a change in per unit net asset
value from $.9979 to $1.0693, and assuming reinvestment of all distributions.
For the same period, the Standard & Poor's (S&P) Hedge Fund Index returned
+6.46% while the S&P 500 Index and the Lehman Brothers Aggregate Bond Index
returned +11.73% and +2.26%, respectively.
Describe the market environment and how the various alternative investment
strategies fared under these conditions.
After a tumultuous April 2005, the market environment improved dramatically
during the period. Buoyed by robust earnings growth and reasonable valuations,
equity markets trended higher, with overseas markets particularly strong. After
declining in the early part of the period, bond yields rose to levels last seen
in June 2004 when the Federal Reserve Board (the "Fed") first embarked on its
monetary tightening program. March 2006 represented the 15th consecutive
quarter-point (.25%) interest rate hike as the Fed increased its target rate to
4.75%. Both equity and fixed income volatility remained muted. Confounding many
observers, the dollar strengthened versus most major currencies. Interest rate
differentials clearly favored the greenback despite concerns over America's
sizable current account deficit. Commodity prices soared during the period, with
oil and several metals at multi-year highs. While some of the upward pressure on
various commodities can be attributed to geopolitical uncertainty or speculative
activity, it appears that strong global growth is putting a strain on capacity.
Our equity long/short managers generated positive performance for the period.
Despite macro concerns in rising interest rates, surging oil prices and
geopolitical uncertainty, markets rallied to multi-year highs during the period.
All sectors were positive for the period, with energy and financials
particularly strong. Small capitalization stocks once again outperformed their
large cap counterparts. Our managers extracted profits from long exposure to
energy, utilities, financials, technology, Japan and emerging markets. The
shorting environment improved modestly during the period, although it remained
challenging and somewhat crowded.
Event-driven strategies -- broadly consisting of high yield and distressed,
corporate restructurings, reorganizations, spin-offs, special situations and
capital structure arbitrage -- produced positive results for the period. Credit
markets experienced volatility in April and May 2005, with spreads widening
sharply on the S&P downgrades of Ford Motor Co. and General Motors Corp. ("GM").
In addition, the unwinding of capital structure and structured credit trades
involving GM caused further instability and sparked fears of massive hedge fund
losses and contagion. However, spreads rebounded and actually tightened during
the period as corporate cash levels as a percentage of assets reached multi-year
highs. Overall, our managers benefited from carry and credit-specific events.
Several managers were successful in extracting profits from exposure to the
automotive and airlines industries. Many managers currently see more
opportunities in the equity component of the capital structure.
Macro managers generated positive returns during the period. Long exposure to
Asian equities and short exposure to intermediate U.S. Treasury issues provided
most of the gains. The U.S. dollar strengthened versus most major currencies,
but its rise hardly resembled a straight line. As a result, currencies generally
did not produce significant profits for most of our managers. The U.S. dollar's
fluctuation can be attributed to investors vacillating their focus between
interest
4 MULTI-STRATEGY HEDGE OPPORTUNITIES LLC MARCH 31, 2006
rate differentials and the outsized current account deficit. Within the
commodity complex, crude oil and natural gas experienced several violent moves
both upward and downward, which detracted from performance. However, managers
generally recorded profits from long exposure to both precious and industrial
metals.
Rebounding from a difficult April, the portfolio reaped gains from its managed
futures exposure. Several global stock indexes exhibited strong trends and
breached multi-year highs. Trend followers also captured gains from the strong
downward move in U.S., German and Japanese 10-year notes during the first
quarter of 2006. In addition, managers benefited from long exposure to metals,
many of which made multi-decade and even all-time highs. Conversely, currencies
proved more difficult for our managers as several strong reversals interrupted
the U.S. dollar's upward trend.
Equity market neutral managers generated strong performance during the period.
Maintaining low net exposure to the market, managers steadily extracted profits
from a broad range of sectors during the period. Managers benefited from the
increasing divergence between the top- and bottom-performing stocks within
individual sectors.
After struggling during the early part of 2005, convertible arbitrage rebounded
to produce positive performance during the period. The strategy had been plagued
by low equity volatility, negative investor sentiment and massive redemptions.
As a result, many convertible managers were forced to shut down their operations
and money hemorrhaged out of the strategy, providing the technical foundation
for a strong upward move. While volatility has remained low, new issuance has
picked up somewhat during the early part of 2006. In fact, February saw the
largest new issue ever in Amgen's $5 billion offering.
Fixed income arbitrage generated modestly positive performance during the
period. The yield curve (as measured by the 10-year note minus the two-year)
inverted briefly for the first time since 2000. Reserve accumulation by Asian
central banks, pension fund demand for longer-duration assets, tempered
inflationary expectations and even recessionary fears have all been offered as
reasons for seemingly low bond yields. All spread products contracted to
historically low levels and volatility continued to decline. Our managers reaped
gains primarily by trading commercial mortgage-backed and asset-backed
securities versus duration-matched swaps.
What changes were made to the portfolio during the period?
The portfolio's assets under management grew from $75.3 million at March 31,
2005 to $125.5 million at March 31, 2006. During the period, we increased our
allocation to equity long/short managers based on our belief that they will
continue to benefit from the favorable environment in the upcoming months. More
specifically, we raised exposure to those managers with a global focus, as we
believe that ample profit opportunities exist in Europe, Japan and Asia (ex
Japan). We also increased our exposure to convertible arbitrage, as we felt that
distressed sellers had created a textbook set-up for a technical bounce. In
addition, we were attracted by the prospect of adding inexpensive long
volatility exposure as a prudent hedge to our overweight exposure to equity
long/short managers. We reduced our allocation to event-driven managers,
particularly those with outsized distressed credit exposure. Spreads and default
rates are at or near cyclical lows, while companies are beginning to lever up
their balance sheets again to the benefit of shareholders.
At March 31, 2006, the Fund was comprised of 27 underlying managers and its
market exposure was broken down as follows: equity opportunistic (38.5%); event
driven (22.0%); directional (21.0%); equity neutral (6.6%); convertible
arbitrage (4.9%); fixed income (2.9%); and multi-strategy (2.7%).
How would you characterize the Fund's position at the close of the period?
We have positioned the portfolio to benefit from relatively benign global equity
markets. Despite concerns such as rising interest rates and surging commodity
prices, companies possess strong balance sheets and continue to generate solid
free cash flow. We expect companies to continue to engage in
shareholder-friendly activities, such as stock buybacks, dividend increases, and
mergers and acquisitions. We believe that currency trading can generate profits
if the Fed ends its tightening campaign and the dollar succumbs to concerns over
the growing current account deficit. Furthermore, we believe that traditional
fixed income arbitrage managers are facing a difficult environment given low
volatility, tight credit and mortgage spreads, and a flat yield curve.
Fabio Savoldelli
Vice President and Co-Portfolio Manager
Hideaki Yamagishi, CFA
Vice President and Co-Portfolio Manager
April 27, 2006
MULTI-STRATEGY HEDGE OPPORTUNITIES LLC MARCH 31, 2006 5
Disclosure of Expenses
Members of this Fund may incur the following charges: (a) expenses related to
transactions, including sales charges, and (b) operating expenses, including
advisory fees, member services fees and other Fund expenses. The following
example (which is based on a hypothetical investment of $1,000 invested on
October 1, 2005 and held through March 31, 2006) is intended to assist members
both in calculating expenses based on an investment in the Fund and in comparing
these expenses with similar costs of investing in other mutual funds.
The first table below provides information about actual account values and
actual expenses. In order to estimate the expenses a member paid during the
period covered by this report, members can divide their account value by $1,000
and then multiply the result by the number in the first line under the heading
entitled "Expenses Paid During the Period."
The second table below provides information about hypothetical account values
and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses. In order to assist
members in comparing the ongoing expenses of investing in this Fund and other
funds, compare the 5% hypothetical example with the 5% hypothetical examples
that appear in other funds' member reports.
The expenses shown in the table are intended to highlight members' ongoing costs
only and do not reflect any transactional expenses, such as sales charges.
Therefore, the second table is useful in comparing ongoing expenses only, and
will not help members determine the relative total expenses of owning different
funds. If these transactional expenses were included, member expenses would have
been higher.
Expenses Paid
Beginning Ending During the Period*
Account Value Account Value October 1, 2005 to
October 1, 2005 March 31, 2006 March 31, 2006
===============================================================================================================
Actual
===============================================================================================================
Multi-Strategy Hedge Opportunities LLC $1,000 $1,041 $14.22
===============================================================================================================
Hypothetical (5% annual return before expenses)**
===============================================================================================================
Multi-Strategy Hedge Opportunities LLC $1,000 $1,011 $14.02
- ---------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio of 2.78%, multiplied by
the average account value over the period, multiplied by 182/365 (to
reflect the one-half year period shown).
** Hypothetical 5% annual return before expenses is calculated by pro-rating
the number of days in the most recent fiscal six months divided by 365.
Average Annual Total Return
Return Without Return With
Sales Charge Sales Charge*
================================================================================
One Year Ended 3/31/06 +7.16% +3.94%
- --------------------------------------------------------------------------------
Inception (1/03/05)
through 3/31/06 +5.56 +3.00
- --------------------------------------------------------------------------------
* Maximum sales charge is 3%.
Past results shown should not be considered a representation of future
performance.
6 MULTI-STRATEGY HEDGE OPPORTUNITIES LLC MARCH 31, 2006
Schedule of Investments (in U.S. dollars)
Strategy Portfolio Funds Value
=========================================================================================================
Convertible Arbitrage--4.9% Context Convertible Arbitrage Fund LP $ 6,183,029
=========================================================================================================
Directional--21.0% CRG Partners LP 4,157,335
Cornerstone International Value Fund LLC 3,261,758
FORT Global Contrarian LP 1,803,039
FX Concepts Global Funds Master Trust 4,115,026
Grinham Diversified Fund (US) LP 3,691,228
Grossman Currency Fund LP 3,570,994
Kottke Arbitrage Opportunity Fund LLC 3,620,208
Salem Futures Fund LP 2,047,868
------------
26,267,456
=========================================================================================================
Equity Neutral--6.6% SR Capital Partners LP 2,355,901
Ventus US$ Double Leverage Fund 3,678,487
Zaxis Equity Neutral LP 2,217,683
------------
8,252,071
=========================================================================================================
Equity Opportunistic--38.5% Glenview Institutional Partners LP 9,263,809
Hayground Cove Institutional Partners LP 4,304,628
Kinetics Partners LP 6,923,892
Martin Currie Absolute Return Funds Ltd Daijiro 4,108,974
Maverick Levered Partners LP 5,202,198
Neon Liberty Emerging Markets Fund LP 2,566,927
North Sound Legacy Institutional Fund LLC 6,649,947
SR Phoenicia Inc. 4,117,292
Trivium Institutional Onshore Fund LP 5,099,385
------------
48,237,052
=========================================================================================================
Event Driven--22.0% Canyon Value Realization Fund LP 7,298,950
Golden Tree Credit Opportunities LP 6,860,090
LibertyView Credit Opportunities Fund II LLC 6,703,161
Litespeed Partners LP 6,735,256
------------
27,597,457
=========================================================================================================
Fixed Income--2.9% Smith Breeden Mortgage Partners LP 3,674,769
=========================================================================================================
Multi-Strategy--2.7% Double Black Diamond LP 3,420,577
=========================================================================================================
Total Investments** (Cost--$113,050,000*)--98.6% 123,632,411
Other Assets Less Liabilities--1.4% 1,818,084
------------
Net Assets--100.0% $125,450,495
============
* The cost and unrealized appreciation (depreciation) of investments as of
March 31, 2006, as computed for federal income tax purposes, were as
follows:
Aggregate cost ..................................... $ 114,612,091
=============
Gross unrealized appreciation ...................... $ 9,245,565
Gross unrealized depreciation ...................... (225,245)
-------------
Net unrealized appreciation ........................ $ 9,020,320
=============
** Non-income producing securities.
See Notes to Financial Statements.
MULTI-STRATEGY HEDGE OPPORTUNITIES LLC MARCH 31, 2006 7
Statement of Assets and Liabilities
As of March 31, 2006
===================================================================================================================================
Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Investments in Portfolio Funds, at value (identified cost--$113,050,000) ......... $ 123,632,411
Cash ............................................................................. 1,810,865
Investments sold receivable ...................................................... 6,516,926
Investments paid in advance ...................................................... 2,500,000
Interest receivable .............................................................. 4,055
Prepaid expenses and other assets ................................................ 5,545
-------------
Total assets ..................................................................... 134,469,802
-------------
===================================================================================================================================
Liabilities
- -----------------------------------------------------------------------------------------------------------------------------------
Payables:
Investment adviser ............................................................ $ 473,991
Service agent ................................................................. 79,015 553,006
-------------
Subscriptions received in advance ................................................ 2,729,186
Redemptions payable .............................................................. 5,225,154
Accrued expenses and other liabilities ........................................... 511,961
-------------
Total liabilities ................................................................ 9,019,307
-------------
===================================================================================================================================
Net Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets ....................................................................... $ 125,450,495
=============
===================================================================================================================================
Net Assets Consist of
- -----------------------------------------------------------------------------------------------------------------------------------
Members' capital ................................................................. $ 117,303,149
Unrealized appreciation on investments--net ...................................... 10,582,411
Realized gain on investments--net ................................................ 854,251
Accumulated investment loss--net ................................................. (3,289,316)
-------------
Net Assets ....................................................................... $ 125,450,495
=============
Units outstanding ................................................................ 117,317,992
=============
Net asset value per unit ......................................................... $ 1.0693
=============
See Notes to Financial Statements.
8 MULTI-STRATEGY HEDGE OPPORTUNITIES LLC MARCH 31, 2006
Statement of Operations
For the Year Ended March 31, 2006
===================================================================================================================================
Investment Income
- -----------------------------------------------------------------------------------------------------------------------------------
Interest ......................................................................... $ 139,104
Other ............................................................................ 41,700
-------------
Total investment income .......................................................... 180,804
-------------
===================================================================================================================================
Expenses
- -----------------------------------------------------------------------------------------------------------------------------------
Investment advisory fees ......................................................... $ 1,640,965
Offering costs ................................................................... 427,381
Accounting and administration services ........................................... 282,386
Service agent fees ............................................................... 273,551
Professional fees ................................................................ 219,375
Printing and member reports ...................................................... 93,619
Directors' fees and expenses ..................................................... 34,000
Custodian fees ................................................................... 10,760
Other ............................................................................ 104,460
-------------
Total expenses ................................................................... 3,086,497
-------------
Less: Expense waivers ............................................................ (65,602)
-------------
Net expenses ..................................................................... 3,020,895
-------------
Investment loss--net ............................................................. (2,840,091)
-------------
===================================================================================================================================
Unrealized/Realized Gain
- -----------------------------------------------------------------------------------------------------------------------------------
Change in unrealized appreciation on investments--net ............................ 10,271,129
Realized gain on investments--net ................................................ 854,251
-------------
Total unrealized/realized gain--net .............................................. 11,125,380
-------------
Net Increase in Net Assets Resulting from Operations ............................. $ 8,285,289
=============
See Notes to Financial Statements.
MULTI-STRATEGY HEDGE OPPORTUNITIES LLC MARCH 31, 2006 9
Statements of Changes in Net Assets
For the For the Period
Year Ended January 3, 2005+
March 31, to March 31,
Increase (Decrease) in Net Assets 2006 2005
==================================================================================================================================
Operations
- ----------------------------------------------------------------------------------------------------------------------------------
Investment loss--net ............................................................. $ (2,840,091) $ (449,225)
Change in unrealized appreciation on investments--net ............................ 10,271,129 311,282
Realized gain on investments--net ................................................ 854,251 --
-------------------------------
Net increase (decrease) in net assets resulting from operations .................. 8,285,289 (137,943)
-------------------------------
==================================================================================================================================
Capital Transactions
- ----------------------------------------------------------------------------------------------------------------------------------
Proceeds from issuance of Units .................................................. 51,113,201 75,433,801
Fair value of Units tendered ..................................................... (9,295,455) (48,398)
-------------------------------
Net increase in net assets derived from capital transactions ..................... 41,817,746 75,385,403
-------------------------------
==================================================================================================================================
Net Assets
- ----------------------------------------------------------------------------------------------------------------------------------
Total increase in net assets ..................................................... 50,103,035 75,247,460
Beginning of period .............................................................. 75,347,460 100,000
-------------------------------
End of period*.................................................................... $ 125,450,495 $ 75,347,460
===============================
* Accumulated investment loss--net ............................................. $ (3,289,316) $ (449,225)
===============================
+ Commencement of operations.
See Notes to Financial Statements.
10 MULTI-STRATEGY HEDGE OPPORTUNITIES LLC MARCH 31, 2006
Statement of Cash Flows
For the Year Ended March 31, 2006
===================================================================================================================================
Cash Used for Operating Activities
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations ................................................. $ 8,285,289
------------
Adjustments to reconcile net increase in net assets resulting from operations to net cash used
for operating activities:
Increase in investments paid in advance ............................................................ (1,500,000)
Decrease in receivables and other assets ........................................................... 383,417
Decrease in liabilities ............................................................................ (27,757)
Change in unrealized gain on investments--net ...................................................... (10,271,129)
Realized gain on investments--net .................................................................. (854,251)
Purchases of long-term securities .................................................................... (59,397,345)
Sales of long-term securities ........................................................................ 13,084,670
------------
Net cash used for operating activities ............................................................... (50,297,106)
------------
===================================================================================================================================
Cash Provided by Financing Activities
- -----------------------------------------------------------------------------------------------------------------------------------
Cash receipts from issuance of Units (including subscriptions received in advance of $2,729,186) ..... 43,432,544
Cash payments for tender of Units .................................................................... (4,118,699)
------------
Net cash provided by financing activities ............................................................ 39,313,845
------------
===================================================================================================================================
Cash
- -----------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash ................................................................................. (10,983,261)
Cash at beginning of year ............................................................................ 12,794,126
------------
Cash at end of year .................................................................................. $ 1,810,865
============
See Notes to Financial Statements.
MULTI-STRATEGY HEDGE OPPORTUNITIES LLC MARCH 31, 2006 11
Financial Highlights
For the For the Period
Year Ended January 3, 2005+
The following ratios have been derived from March 31, to March 31,
information provided in the financial statements. 2006 2005
===================================================================================================================================
Per Unit Operating Performance
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ............................. $ .9979 $ 1.0000
Investment loss--net ............................................. (.0266) (.0070)
Unrealized/realized gain on investments--net ..................... .0980 .0049
------------------------------------------
Total from investment operations ................................. .0714 (.0021)
------------------------------------------
Net asset value, end of period ................................... $ 1.0693 $ .9979
==========================================
===================================================================================================================================
Total Investment Return
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment return .......................................... 7.16% (.21%)@
==========================================
===================================================================================================================================
Ratios to Average Net Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses ......................................................... 2.84% 3.28%*
==========================================
Expenses net of reimbursement .................................... 2.78% 2.96%*
==========================================
Investment loss--net ............................................. (2.65%) (2.83%)*
==========================================
===================================================================================================================================
Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) ......................... $ 125,450 $ 75,347
==========================================
Portfolio turnover ............................................... 19% 0%
==========================================
* Annualized.
+ Commencement of operations.
@ Aggregate total investment return; not annualized.
See Notes to Financial Statements.
12 MULTI-STRATEGY HEDGE OPPORTUNITIES LLC MARCH 31, 2006
Notes to Financial Statements
1. Significant Accounting Policies:
Multi-Strategy Hedge Opportunities LLC (the "Company") is registered under the
Investment Company Act of 1940, as amended, as a closed-end, non-diversified
management investment company. The Company's financial statements are prepared
in conformity with U.S. generally accepted accounting principles, which may
require the use of management accruals and estimates. Actual results may differ
from these estimates. The Company offers one class of units, which may be sold
with a front-end sales charge. The following is a summary of significant
accounting policies followed by the Company.
(a) Valuation of investments in Portfolio Funds -- The Company values its
investments in Portfolio Funds at fair value in accordance with procedures
established by the Board of Directors. The valuations reported by the Portfolio
Fund Managers of the Portfolio Funds, upon which the Company calculates its
month-end net asset value and net asset value per Unit, may be subject to later
adjustment, based upon information reasonably available at that time. The
Company will pay repurchase proceeds, as well as calculate management fees, on
the basis of net asset valuations determined using the best information
available as of the valuation date. In the event a Portfolio Fund subsequently
corrects, revises or adjusts a valuation after the Company has determined a net
asset value, the Company will generally not make any retroactive adjustment to
such net asset value, or to any amounts paid based on such net asset value, to
reflect a revised valuation.
(b) Income taxes -- The Company is classified as a partnership for federal
income tax purposes. As such, each investor in the Company is treated as owner
of its proportionate share of the net assets, income, expenses and realized and
unrealized gains and losses of the Company. Therefore, no federal income tax
provision is required.
(c) Security transactions and investment income -- Portfolio Fund transactions
are recorded on the effective dates of the transactions. Realized gains and
losses on Portfolio Fund transactions are determined on the average cost basis.
Interest income is recognized on the accrual basis.
(d) Cash balances -- The Company maintains cash in the PNC Money Market account,
which, at times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and does not believe it is exposed to
any significant credit risk on such bank deposits.
(e) Offering costs -- Direct costs related to the initial public offering of the
Company's Units were deferred and amortized over the 12 month period beginning
with the commencement of operations. Offering costs associated with the ongoing
sale of the Company's Units are expensed as incurred.
2. Investment Advisory Agreement and Transactions with Affiliates:
Prior to December 1, 2005, the Company had entered into an Investment Advisory
Agreement with Merrill Lynch Investment Managers, LLC ("MLIM"). MLIM is an
indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co.").
Effective December 1, 2005, Merrill Lynch Alternative Investments LLC ("MLAI"),
an indirect wholly-owned subsidiary of ML & Co., became the adviser of the
Company.
MLAI is responsible for the management of the Company's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Company. For such services, the Company pays
a monthly fee at an annual rate of 1.50% of the average month-end value of the
Company's net assets.
The Company has also entered into a Member Services Agreement with FAM
Distributors, Inc. ("FAMD" and the "Service Agent"), an affiliate of MLAI. FAMD
provides or arranges for provision of ongoing investor and account maintenance
services. The Company pays a monthly fee computed at the annual rate of .25% of
the Company's average month-end assets (the "Service Fee"). The Service Fee will
be paid to the Service Agent to reimburse it for payments made to broker-dealers
and financial advisors that have agreed to provide ongoing investor and account
maintenance services to members of the Company and for ongoing investor
servicing activities performed by the Service Agent.
MLAI had agreed to voluntarily cap the total annual expenses of the Company at
0.25% per month (3.0% per year) until December 31, 2005.
For the year ended March 31, 2006, FAMD received $1,079,079 in sales charges on
sales of units in the Company.
Certain officers and/or directors of the Company are officers and/or directors
of MLAI and/or ML & Co.
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
contribute ML & Co.'s investment management business, including MLIM and certain
assets of MLAI, to
MULTI-STRATEGY HEDGE OPPORTUNITIES LLC MARCH 31, 2006 13
Notes to Financial Statements (continued)
the investment management business of BlackRock, Inc. The transaction is
expected to close in the third quarter of 2006. If approved by the Company's
Board of Directors and members, the combined company that results from the
transaction is expected to become the adviser of the Company.
3. Investments:
Purchases of investments for the year ended March 31, 2006 were $59,397,345.
Sales of investment for the year ended March 31, 2006 were $19,601,596.
4. Capital Transactions:
An investor purchases Units in the Company and the Units are offered at their
net asset value. The minimum initial investment for each investor is $25,000
(net of any distribution fees) and the minimum additional investment is $10,000.
An investor's subscription for Units is irrevocable by the investor and will
generally require the investor to maintain its investment in the Company until
such time as the Company offers to repurchase the Units in a tender offering. No
Member or other person holding Units acquired from a Member will have the right
to require the Company to redeem the Units. The Company may from time to time
repurchase Units from Members in accordance with written tenders by Members at
those times, in those amounts and on terms and conditions as the Board of
Directors may determine in its sole discretion. The Adviser expects that it will
recommend to the Board of Directors that the Company offer to repurchase Units
from Members quarterly on the last business day of March, June, September and
December.
During the year ended March 31, 2006, the Company modified the classification of
subscriptions received in advance within the statement of cash flows. These
activities are included within the cash flows from financing activities.
Previously these activities were included within cash flows from operating
activities.
Transactions in capital were as follows:
- -------------------------------------------------------------------------------
For the Year Ended Dollar
March 31, 2006 Units Amount
- -------------------------------------------------------------------------------
Units sold ....................... 50,679,465 $ 51,113,201
Units tendered ................... (8,870,777) (9,295,455)
---------------------------------
Net increase ..................... 41,808,688 $ 41,817,746
=================================
5. Investments in Portfolio Funds:
The following table lists the Company's investments in Portfolio Funds for the
year ended March 31, 2006, none of which was a related party. The agreements
related to investments in Portfolio Funds provide for the compensation in the
form of management fees of 0.5% to 3% (per annum) of net assets and performance
incentive fees or allocations of 20% to 25% of net profits earned.
Information about the underlying investments held by the Portfolio Funds is not
readily available, so it is unknown whether the Portfolio Funds hold any single
investment whereby the Company's proportionate share exceeds 5% of the Company's
net assets at March 31, 2006.
- ----------------------------------------------------------------------------------------------------------------------------------
Fees
% of Company's Net Income ---------------------- Redemptions
Investments Total Fair Value Fair Value (Loss) Management Incentive Permitted
- ----------------------------------------------------------------------------------------------------------------------------------
CRG Partners 3.4% $ 4,157,335 $ 38,002 2% 20% Monthly
Canyon Value 5.9 7,298,950 726,465 1.5 20 Monthly
Context Convertible 5.0 6,183,029 426,732 1.5 20 Quarterly
Copper Beech --(a) --(a) 136,238 1 20 Quarterly
Cornerstone International 2.6 3,261,758 359,518 0.5 20 Monthly
Double Black Diamond 2.8 3,420,577 309,569 1 20 Quarterly
FORT Global 1.5 1,803,039 53,039 1 20 Monthly
FX Concepts 3.3 4,115,026 178,272 1.5 20 Monthly
Glenview Institutional 7.5 9,263,809 725,711 1 20 Monthly
Golden Tree Credit Opportunities 5.5 6,860,090 990,206 2 20 Semi-Annual
Grinham Diversified 3.0 3,691,228 291,228 1.5 20 Monthly
Grossman Currency 2.9 3,570,994 74,071 3 25 Monthly
Hayground Cove Institutional 3.5 4,304,628 204,628 1.5 20 Monthly
Kinetics Partners 5.6 6,923,892 1,520,379 1 20 Monthly
Kottke Arbitrage 2.9 3,620,208 (155,652) 2 20 Monthly
LibertyView Credit 5.4 6,703,161 881,499 1 20 Quarterly
Litespeed Partners 5.4 6,735,256 635,256 1.5 20 Quarterly
Martin Currie Absolute Return
Funds Ltd Daijiro 3.3 4,108,974 108,974 1.5 20 Monthly
Maverick Levered 4.2 5,202,198 (152,289) 1 20 Quarterly
Neon Liberty 2.1 2,566,927 434,605 1.5 20 Quarterly
North Sound 5.4 6,649,947 849,947 1.5 20 Quarterly
14 MULTI-STRATEGY HEDGE OPPORTUNITIES LLC MARCH 31, 2006
Notes to Financial Statements (concluded)
- ----------------------------------------------------------------------------------------------------------------------------------
Fees
% of Company's Net Income ---------------------- Redemptions
Investments Total Fair Value Fair Value (Loss) Management Incentive Permitted
- ----------------------------------------------------------------------------------------------------------------------------------
Para Partners --%(b) $ --(b) $ 527,378 1.25% 20% Quarterly
SR Capital 1.9 2,355,901 255,900 1 20 Quarterly
SR Phoenica 3.3 4,117,292 117,292 1 20 Monthly
Salem Futures 1.7 2,047,868 226,541 2 20 Quarterly
Smith Breeden 3.0 3,674,769 149,890 1 20 Quarterly
TGM Eagle --(c) --(c) (5,910) 1.5 20 Daily
Trivium Institutional 4.1 5,099,385 799,385 1.5 20 Monthly
Ventus US$ 3.0 3,678,487 (8,693) 2 20 Monthly
Winton Futures --(d) --(d) 183,690 1 20 Monthly
Zaxis Equity 1.8 2,217,683 243,509 1 20 Quarterly
-----------------------------------------------
Total 100.0% $123,632,411 $11,125,380
===============================================
(a) The Company fully redeemed from the Portfolio Fund as of December
31, 2005.
(b) The Company fully redeemed from the Portfolio Fund as of March 31,
2006.
(c) The Company fully redeemed from the Portfolio Fund as of October 24,
2005.
(d) The Company fully redeemed from the Portfolio Fund as of November
30, 2005.
6. Short-Term Borrowings:
The Company is a party to a $50,000,000 credit agreement with Harris Trust and
Savings Bank. The Company may borrow under the credit agreement to fund member
redemptions and for other lawful purposes including leverage. The Company may
borrow up to the maximum amount allowable under the Company's current prospectus
and statement of additional information, subject to various other legal,
regulatory or contractual limits. The Company pays a commitment fee of .375% per
annum based on the unused portion of the Fee Cap (a minimum of $20,000,000) as
defined in the credit agreement. Amounts borrowed under the credit agreement
bear interest at a rate equal to, at the Company's election, the federal funds
rate plus 1.75% or a base rate, as defined in the credit agreement, minus 1%.
The Company did not borrow under the credit agreement during the year ended
March 31, 2006.
7. Risk Factors:
An investment in the Company involves a high degree of risk, including the risk
that the entire amount invested may be lost. The Company allocates assets to
Portfolio Managers and invests in Portfolio Funds that invest in and actively
trade securities and other financial instruments using a variety of strategies
and investment techniques with significant risk characteristics, including the
risks arising from the volatility of the equity, fixed income, commodity and
currency markets, the risks of borrowings and short sales, the risks arising
from leverage associated with trading in the equities, currencies and
over-the-counter derivatives markets, the illiquidity of derivative instruments
and the risk of loss from counterparty defaults. No guarantee or representation
is made that the investment program will be successful.
8. Subsequent Events:
Throughout the normal course of business on April 1, 2006, there were additional
capital contributions of $2,729,186 to the Company.
MULTI-STRATEGY HEDGE OPPORTUNITIES LLC MARCH 31, 2006 15
Report of Independent Registered Public Accounting Firm
To the Members and Board of Directors of Multi-Strategy Hedge Opportunities LLC:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Multi-Strategy Hedge Opportunities LLC as of
March 31, 2006, the related statements of operations and cash flows for the year
then ended and the statements of changes in net assets and the financial
highlights for the year then ended and for the period January 3, 2005
(commencement of operations) through March 31, 2005. These financial statements
and financial highlights are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. The Company 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 Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of March 31, 2006, by correspondence with the custodian and
financial intermediaries; where replies were not received from financial
intermediaries, we performed other auditing procedures. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Multi-Strategy Hedge Opportunities LLC as of March 31, 2006, the results of its
operations and its cash flow for the year then ended and the changes in its net
assets and its financial highlights for the respective periods then ended, in
conformity with U.S. generally accepted accounting principles.
As discussed in Note 4, the Company modified its classification of subscriptions
received in advance within the statement of cash flows during the year ended
March 31, 2006.
Deloitte & Touche LLP
Princeton, New Jersey
May 26, 2006
16 MULTI-STRATEGY HEDGE OPPORTUNITIES LLC MARCH 31, 2006
Officers and Directors
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
====================================================================================================================================
Interested Director
- ------------------------------------------------------------------------------------------------------------------------------------
Robert C. P.O. Box 9011 President 2005 to President of the MLIM/FAM-advised funds since 131 Funds None
Doll, Jr.* Princeton, NJ and present 2005; President of MLIM and FAM since 2001; 177 Portfolios
08543-9011 Director Co-Head (Americas Region) thereof from 2000 to
Age: 51 2001 and Senior Vice President from 1999 to
2001; President and Director of Princeton
Services, Inc. ("Princeton Services") since
2001; President of Princeton Administrators,
L.P. ("Princeton Administrators") since 2001;
Chief Investment Officer of OppenheimerFunds,
Inc. in 1999 and Executive Vice President
thereof from 1991 to 1999.
------------------------------------------------------------------------------------------------------------------------
* Mr. Doll is a director, trustee or member of an advisory board of certain other investment companies for which
MLIM or FAM acts as investment adviser. Mr. Doll is an "interested person," as defined in the Investment Company
Act, of the Fund based on his positions with MLIM, FAM, Princeton Services and Princeton Administrators. Directors
serve until their resignation, removal or death, or until December 31 of the year in which they turn 72. As Fund
President, Mr. Doll serves at the pleasure of the Board of Directors.
====================================================================================================================================
Independent Directors*
- ------------------------------------------------------------------------------------------------------------------------------------
David O. P.O. Box 9095 Director 2004 to Professor of Finance and Economics at the 20 Funds None
Beim** Princeton, NJ present Columbia University Graduate School of Business 26 Portfolios
08543-9095 since 1991; Chairman of Outward Bound USA from
Age: 65 1997 to 2001; Chairman of Wave Hill Inc. since
1990; Trustee of Phillips Exeter Academy from
2002 to present.
- ------------------------------------------------------------------------------------------------------------------------------------
James T. P.O. Box 9095 Director 2004 to Chief Financial Officer of JPMorgan & Co., Inc. 20 Funds None
Flynn Princeton, NJ present from 1990 to 1995 and an employee of JPMorgan 26 Portfolios
08543-9095 in various capacities from 1967 to 1995.
Age: 66
- ------------------------------------------------------------------------------------------------------------------------------------
W. Carl P.O. Box 9095 Director 2004 to Mizuho Financial Group, Professor of Finance, 21 Funds None
Kester Princeton, NJ present Harvard Business School, Unit Head, Finance 27 Portfolios
08543-9095 since 2005; Senior Associate Dean and Chairman
Age: 54 of the MBA Program of Harvard Business School,
1999 to 2005, Member of the faculty of Harvard
Business School since 1981; Independent
Consultant since 1978.
- ------------------------------------------------------------------------------------------------------------------------------------
Karen P. P.O. Box 9095 Director 2004 to President of Robards & Company, a financial 20 Funds None
Robards*** Princeton, NJ present advisory firm since 1987; formerly an 26 Portfolios
08543-9095 investment banker with Morgan Stanley for more
Age: 56 than ten years; Director of Enable Medical
Corp. from 1996 to 2005; Director of AtriCure,
Inc. since 2000; Director of the Cooke Center
for Learning and Development, a not-for-profit
organization, since 1987.
------------------------------------------------------------------------------------------------------------------------
* Directors serve until their resignation, removal or death, or until December 31 of the year in which they turn 72.
** Chairman of the Audit Committee.
*** Chair of the Board of Directors.
MULTI-STRATEGY HEDGE OPPORTUNITIES LLC MARCH 31, 2006 17
Officers and Directors (concluded)
Position(s) Length of
Held with Time
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years
====================================================================================================================================
Fund Officers*
- ------------------------------------------------------------------------------------------------------------------------------------
Donald C. P.O. Box 9011 Vice 2004 to First Vice President of MLIM and FAM since 1997 and Treasurer thereof since
Burke Princeton, NJ President present 1999; Senior Vice President and Treasurer of Princeton Services since 1999 and
08543-9011 and Director since 2004; Vice President of FAM Distributors, Inc. ("FAMD") since
Age: 45 Treasurer 1999 and Director since 2004; Vice President of MLIM and FAM from 1990 to 1997;
Director of Taxation of MLIM from 1990 to 2001; Vice President, Treasurer and
Secretary of the IQ Funds since 2004.
- ------------------------------------------------------------------------------------------------------------------------------------
Fabio P. P.O. Box 9011 Vice 2004 to Managing Director of MLIM since 2000; Chief Investment Officer of MLIM's
Savoldelli Princeton, NJ President present Alternative Strategies division since 2003.
08543-9011
Age: 44
- ------------------------------------------------------------------------------------------------------------------------------------
Hideaki P.O. Box 9011 Vice 2006 to Managing Director of MLIM since 2002; Head of Portfolio Construction of the
Yamagishi Princeton, NJ President present Adviser's Alternative Strategies division since 2002; Director of MLIM from 2000
08543-9011 to 2002; Vice President of Merrill Lynch Corporate and Institutional Client
Age: 43 Group from 1998 to 2002; various positions at The Norinchukin Bank from 1986 to
1998.
- ------------------------------------------------------------------------------------------------------------------------------------
Jeffrey P.O. Box 9011 Chief 2004 to Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice President
Hiller Princeton, NJ Compliance present and Chief Compliance Officer of MLIM (Americas Region) since 2004; Chief
08543-9011 Officer Compliance Officer of the IQ Funds since 2004; Global Director of Compliance at
Age: 54 Morgan Stanley Investment Management from 2002 to 2004; Managing Director and
Global Director of Compliance at Citigroup Asset Management from 2000 to 2002;
Chief Compliance Officer at Soros Fund Management in 2000; Chief Compliance
Officer at Prudential Financial from 1995 to 2000; Senior Counsel in the
Commission's Securities and Exchange Division of Enforcement in Washington, D.C.
from 1990 to 1995.
- ------------------------------------------------------------------------------------------------------------------------------------
Alice A. P.O. Box 9011 Secretary 2004 to Director (Legal Advisory) of MLIM since 2002; Vice President of MLIM from 1999
Pellegrino Princeton, NJ present to 2002; Attorney associated with MLIM since 1997; Secretary of MLIM, FAM, FAMD
08543-9011 and Princeton Services since 2004.
Age: 46
------------------------------------------------------------------------------------------------------------------------
* Officers of the Fund serve at the pleasure of the Board of Directors.
- ------------------------------------------------------------------------------------------------------------------------------------
Custodian
PFPC Trust Company
8800 Tinicum Boulevard
3rd Floor, Suite 200
Philadelphia, PA 19153
Administrator & Escrow Agent
PFPC, Inc.
103 Bellevue Parkway
Wilmington, DE 19809
18 MULTI-STRATEGY HEDGE OPPORTUNITIES LLC MARCH 31, 2006
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Electronic Delivery
The Fund offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site at http://www.icsdelivery.com/live and follow the instructions. When you
visit this site, you will obtain a personal identification number (PIN). You
will need this PIN should you wish to update your e-mail address, choose to
discontinue this service and/or make any other changes to the service. This
service is not available for certain retirement accounts at this time.
MULTI-STRATEGY HEDGE OPPORTUNITIES LLC MARCH 31, 2006 19
[LOGO] Merrill Lynch Investment Managers
www.mlim.ml.com
- --------------------------------------------------------------------------------
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com
Multi-Strategy Hedge Opportunities LLC seeks high total return over a full
market cycle through investments in hedge funds and other investment vehicles
pursuing alternative investment strategies.
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Statements and other
information herein are as dated and are subject to change.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available without charge,
upon request, by calling toll-free 866-878-2987 or on the Securities and
Exchange Commission's Web site at http://www.sec.gov.
Multi-Strategy Hedge Opportunities LLC
Box 9011
Princeton, NJ 08543-9011
#MHO -- 3/06
Item 2 - Code of Ethics - The registrant has adopted a code of ethics, as of the
end of the period covered by this report, that applies to the
registrant's principal executive officer, principal financial officer
and principal accounting officer, or persons performing similar
functions. A copy of the code of ethics is available without charge
upon request by calling toll-free 1-800-MER-FUND (1-800-637-3863).
Item 3 - Audit Committee Financial Expert - The registrant's board of directors
has determined that (i) the registrant has the following audit
committee financial experts serving on its audit committee and (ii)
each audit committee financial expert is independent: (1) David O.
Beim, (2) W. Carl Kester, (3) James T. Flynn and (4) Karen P. Robards.
The registrant's board of directors has determined that David O. Beim,
W. Carl Kester and Karen P. Robards qualify as financial experts
pursuant to Item 3(c)(4) of Form N-CSR.
Mr. Beim has a thorough understanding of generally accepted accounting
principles, financial statements and internal control over financial
reporting as well as audit committee functions. For 25 years, Mr. Beim
was an investment banker actively engaged in financial analysis for
securities transactions and mergers. These transactions presented a
breadth and level of complexity of accounting issues that are generally
comparable to the breadth and complexity of issues that can reasonably
be expected to be raised by the Registrant's financial statements. Mr.
Beim has also been a professor of finance and economics at the Columbia
University Graduate School of Business for the past 11 years.
Prof. Kester has a thorough understanding of generally accepted
accounting principles, financial statements and internal control over
financial reporting as well as audit committee functions. Prof. Kester
has been involved in providing valuation and other financial consulting
services to corporate clients since 1978. Prof. Kester's financial
consulting services present a breadth and level of complexity of
accounting issues that are generally comparable to the breadth and
complexity of issues that can reasonably be expected to be raised by
the Registrant's financial statements.
Ms. Robards has a thorough understanding of generally accepted
accounting principles, financial statements and internal control over
financial reporting as well as audit committee functions. Ms. Robards
has been President of Robards & Company, a financial advisory firm,
since 1987. Ms. Robards was formerly an investment banker for more than
10 years where she was responsible for evaluating and assessing the
performance of companies based on their financial results. Ms. Robards
has over 30 years of experience analyzing financial statements. She
also is the member of the Audit Committees of two privately held
companies and a non-profit organization.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending March 31, 2006 - $31,000
Fiscal Year Ending March 31, 2005 - $33,500
(b) Audit-Related Fees - Fiscal Year Ending March 31, 2006 - $0
Fiscal Year Ending March 31, 2005 - $0
(c) Tax Fees - Fiscal Year Ending March 31, 2006 - $45,000
Fiscal Year Ending March 31, 2005 - $0
The nature of the services include tax compliance, tax advice and tax
planning.
(d) All Other Fees - Fiscal Year Ending March 31, 2006 - $0
Fiscal Year Ending March 31, 2005 - $0
(e)(1) The registrant's audit committee (the "Committee") has adopted
policies and procedures with regard to the pre-approval of services.
Audit, audit-related and tax compliance services provided to the
registrant on an annual basis require specific pre-approval by the
Committee. The Committee also must approve other non-audit services
provided to the registrant and those non-audit services provided to the
registrant's affiliated service providers that relate directly to the
operations and the financial reporting of the registrant. Certain of
these non-audit services that the Committee believes are a) consistent
with the SEC's auditor independence rules and b) routine and recurring
services that will not impair the independence of the independent
accountants may be approved by the Committee without consideration on a
specific case-by-case basis ("general pre-approval"). However, such
services will only be deemed pre-approved provided that any individual
project does not exceed $5,000 attributable to the registrant or
$50,000 for all of the registrants the Committee oversees. Any proposed
services exceeding the pre-approved cost levels will require specific
pre-approval by the Committee, as will any other services not subject
to general pre-approval (e.g., unanticipated but permissible services).
The Committee is informed of each service approved subject to general
pre-approval at the next regularly scheduled in-person board meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending March 31, 2006 - $3,754,550
Fiscal Year Ending March 31, 2005 - $10,018,400
(h) The registrant's audit committee has considered and determined that
the provision of non-audit services that were rendered to the
registrant's 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.
Regulation S-X Rule 2-01(c)(7)(ii) - $1,227,000, 0%
Item 5 - Audit Committee of Listed Registrants - The following individuals are
members of the registrant's separately-designated standing audit
committee established in accordance with Section 3(a)(58)(A) of the
Exchange Act (15 U.S.C. 78c(a)(58)(A)):
David O. Beim
James T. Flynn
W. Carl Kester
Karen P. Robards
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies -
Proxy Voting Policies and Procedures
Each Fund's Board of Directors/Trustees has delegated to Merrill Lynch
Investment Managers, L.P. and/or Fund Asset Management, L.P. (the
"Investment Adviser") authority to vote all proxies relating to the
Fund's portfolio securities. The Investment Adviser has adopted
policies and procedures ("Proxy Voting Procedures") with respect to the
voting of proxies related to the portfolio securities held in the
account of one or more of its clients, including a Fund. Pursuant to
these Proxy Voting Procedures, the Investment Adviser's primary
objective when voting proxies is to make proxy voting decisions solely
in the best interests of each Fund and its shareholders, and to act in
a manner that the Investment Adviser believes is most likely to enhance
the economic value of the securities held by the Fund. The Proxy Voting
Procedures are designed to ensure that that the Investment Adviser
considers the interests of its clients, including the Funds, and not
the interests of the Investment Adviser, when voting proxies and that
real (or perceived) material conflicts that may arise between the
Investment Adviser's interest and those of the Investment Adviser's
clients are properly addressed and resolved.
In order to implement the Proxy Voting Procedures, the Investment
Adviser has formed a Proxy Voting Committee (the "Committee"). The
Committee is comprised of the Investment Adviser's Chief Investment
Officer (the "CIO"), one or more other senior investment professionals
appointed by the CIO, portfolio managers and investment analysts
appointed by the CIO and any other personnel the CIO deems appropriate.
The Committee will also include two non-voting representatives from the
Investment Adviser's Legal department appointed by the Investment
Adviser's General Counsel. The Committee's membership shall be limited
to full-time employees of the Investment Adviser. No person with any
investment banking, trading, retail brokerage or research
responsibilities for the Investment Adviser's affiliates may serve as a
member of the Committee or participate in its decision making (except
to the extent such person is asked by the Committee to present
information to the Committee, on the same basis as other interested
knowledgeable parties not affiliated with the Investment Adviser might
be asked to do so). The Committee determines how to vote the proxies of
all clients, including a Fund, that have delegated proxy voting
authority to the Investment Adviser and seeks to ensure that all votes
are consistent with the best interests of those clients and are free
from unwarranted and inappropriate influences. The Committee
establishes general proxy voting policies for the Investment Adviser
and is responsible for determining how those policies are applied to
specific proxy votes, in light of each issuer's unique structure,
management, strategic options and, in certain circumstances, probable
economic and other anticipated consequences of alternate actions. In so
doing, the Committee may determine to vote a particular proxy in a
manner contrary to its generally stated policies. In addition, the
Committee will be responsible for ensuring that all reporting and
recordkeeping requirements related to proxy voting are fulfilled.
The Committee may determine that the subject matter of a recurring
proxy issue is not suitable for general voting policies and requires a
case-by-case determination. In such cases, the Committee may elect not
to adopt a specific voting policy applicable to that issue. The
Investment Adviser believes that certain proxy voting issues require
investment analysis - such as approval of mergers and other significant
corporate transactions - akin to investment decisions, and are,
therefore, not suitable for general guidelines. The Committee may elect
to adopt a common position for the Investment Adviser on certain proxy
votes that are akin to investment decisions, or determine to permit the
portfolio manager to make individual decisions on how best to maximize
economic value for a Fund (similar to normal buy/sell investment
decisions made by such portfolio managers). While it is expected that
the Investment Adviser will generally seek to vote proxies over which
the Investment Adviser exercises voting authority in a uniform manner
for all the Investment Adviser's clients, the Committee, in conjunction
with a Fund's portfolio manager, may determine that the Fund's specific
circumstances require that its proxies be voted differently.
To assist the Investment Adviser in voting proxies, the Committee has
retained Institutional Shareholder Services ("ISS"). ISS is an
independent adviser that specializes in providing a variety of
fiduciary-level proxy-related services to institutional investment
managers, plan sponsors, custodians, consultants, and other
institutional investors. The services provided to the Investment
Adviser by ISS include in-depth research, voting recommendations
(although the Investment Adviser is not obligated to follow such
recommendations), vote execution, and recordkeeping. ISS will also
assist the Fund in fulfilling its reporting and recordkeeping
obligations under the Investment Company Act.
The Investment Adviser's Proxy Voting Procedures also address special
circumstances that can arise in connection with proxy voting. For
instance, under the Proxy Voting Procedures, the Investment Adviser
generally will not seek to vote proxies related to portfolio securities
that are on loan, although it may do so under certain circumstances. In
addition, the Investment Adviser will vote proxies related to
securities of foreign issuers only on a best efforts basis and may
elect not to vote at all in certain countries where the Committee
determines that the costs associated with voting generally outweigh the
benefits. The Committee may at any time override these general policies
if it determines that such action is in the best interests of a Fund.
From time to time, the Investment Adviser may be required to vote proxies in
respect of an issuer where an affiliate of the Investment Adviser (each, an
"Affiliate"), or a money management or other client of the Investment Adviser
(each, a "Client") is involved. The Proxy Voting Procedures and the Investment
Adviser's adherence to those procedures are designed to address such conflicts
of interest. The Committee intends to strictly adhere to the Proxy Voting
Procedures in all proxy matters, including matters involving Affiliates and
Clients. If, however, an issue representing a non-routine matter that is
material to an Affiliate or a widely known Client is involved such that the
Committee does not reasonably believe it is able to follow its guidelines (or if
the particular proxy matter is not addressed by the guidelines) and vote
impartially, the Committee may, in its discretion for the purposes of ensuring
that an independent determination is reached, retain an independent fiduciary to
advise the Committee on how to vote or to cast votes on behalf of the Investment
Adviser's clients.
In the event that the Committee determines not to retain an independent
fiduciary, or it does not follow the advice of such an independent
fiduciary, the powers of the Committee shall pass to a subcommittee,
appointed by the CIO (with advice from the Secretary of the Committee),
consisting solely of Committee members selected by the CIO. The CIO
shall appoint to the subcommittee, where appropriate, only persons
whose job responsibilities do not include contact with the Client and
whose job evaluations would not be affected by the Investment Adviser's
relationship with the Client (or failure to retain such relationship).
The subcommittee shall determine whether and how to vote all proxies on
behalf of the Investment Adviser's clients or, if the proxy matter is,
in their judgment, akin to an investment decision, to defer to the
applicable portfolio managers, provided that, if the subcommittee
determines to alter the Investment Adviser's normal voting guidelines
or, on matters where the Investment Adviser's policy is case-by-case,
does not follow the voting recommendation of any proxy voting service
or other independent fiduciary that may be retained to provide research
or advice to the Investment Adviser on that matter, no proxies relating
to the Client may be voted unless the Secretary, or in the Secretary's
absence, the Assistant Secretary of the Committee concurs that the
subcommittee's determination is consistent with the Investment
Adviser's fiduciary duties
In addition to the general principles outlined above, the Investment
Adviser has adopted voting guidelines with respect to certain recurring
proxy issues that are not expected to involve unusual circumstances.
These policies are guidelines only, and the Investment Adviser may
elect to vote differently from the recommendation set forth in a voting
guideline if the Committee determines that it is in a Fund's best
interest to do so. In addition, the guidelines may be reviewed at any
time upon the request of a Committee member and may be amended or
deleted upon the vote of a majority of Committee members present at a
Committee meeting at which there is a quorum.
The Investment Adviser has adopted specific voting guidelines with
respect to the following proxy issues:
o Proposals related to the composition of the Board of Directors of issuers
other than investment companies. As a general matter, the Committee
believes that a company's Board of Directors (rather than shareholders) is
most likely to have access to important, nonpublic information regarding a
company's business and prospects, and is therefore best-positioned to set
corporate policy and oversee management. The Committee, therefore,
believes that the foundation of good corporate governance is the election
of qualified, independent corporate directors who are likely to diligently
represent the interests of shareholders and oversee management of the
corporation in a manner that will seek to maximize shareholder value over
time. In individual cases, the Committee may look at a nominee's history
of representing shareholder interests as a director of other companies or
other factors, to the extent the Committee deems relevant.
o Proposals related to the selection of an issuer's independent auditors. As
a general matter, the Committee believes that corporate auditors have a
responsibility to represent the interests of shareholders and provide an
independent view on the propriety of financial reporting decisions of
corporate management. While the Committee will generally defer to a
corporation's choice of auditor, in individual cases, the Committee may
look at an auditors' history of representing shareholder interests as
auditor of other companies, to the extent the Committee deems relevant.
o Proposals related to management compensation and employee benefits. As a
general matter, the Committee favors disclosure of an issuer's
compensation and benefit policies and opposes excessive compensation, but
believes that compensation matters are normally best determined by an
issuer's board of directors, rather than shareholders. Proposals to
"micro-manage" an issuer's compensation practices or to set arbitrary
restrictions on compensation or benefits will, therefore, generally not be
supported.
o Proposals related to requests, principally from management, for approval
of amendments that would alter an issuer's capital structure. As a general
matter, the Committee will support requests that enhance the rights of
common shareholders and oppose requests that appear to be unreasonably
dilutive.
o Proposals related to requests for approval of amendments to an issuer's
charter or by-laws. As a general matter, the Committee opposes poison pill
provisions.
o Routine proposals related to requests regarding the formalities of
corporate meetings.
o Proposals related to proxy issues associated solely with holdings of
investment company shares. As with other types of companies, the Committee
believes that a fund's Board of Directors (rather than its shareholders)
is best-positioned to set fund policy and oversee management. However, the
Committee opposes granting Boards of Directors authority over certain
matters, such as changes to a fund's investment objective, that the
Investment Company Act envisions will be approved directly by
shareholders.
o Proposals related to limiting corporate conduct in some manner that
relates to the shareholder's environmental or social concerns. The
Committee generally believes that annual shareholder meetings are
inappropriate forums for discussion of larger social issues, and opposes
shareholder resolutions "micromanaging" corporate conduct or requesting
release of information that would not help a shareholder evaluate an
investment in the corporation as an economic matter. While the Committee
is generally supportive of proposals to require corporate disclosure of
matters that seem relevant and material to the economic interests of
shareholders, the Committee is generally not supportive of proposals to
require disclosure of corporate matters for other purposes.
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - as
of March 31, 2006
Fabio P. Savoldelli and Hideaki Yamagishi, CFA, are the portfolio managers
at the Adviser responsible for investing the Company's assets. Mr. Savoldelli
joined Merrill Lynch in 1996 as a Director for Merrill Lynch Corporate and
Institutional Client Group and has been a Managing Director of the Adviser since
1998 and the Chief Investment Officer of the Adviser's Alternative Strategies
division since 2003. Mr. Yamagishi joined the Adviser in 1998 as a Vice
President, became a Director in 2000 and has been a Managing Director of the
Adviser since 2002, prior to which he held the position of Vice President with
The Norinchukin Bank. Mr. Savoldelli and Mr. Yamagishi each has over 19 years'
experience in investing and in managing similar investments.
Other Funds and Accounts Managed
The following table sets forth information about funds and accounts other
than the Company for which the Company's portfolio managers are primarily
responsible for the day-to-day portfolio management as of March 31, 2006.
Number of Other Accounts Managed Number of Accounts and Assets for Which
and Assets by Account Type Advisory Fee is Performance-Based
-------------------------------------------------- --------------------------------------------------
Name of Registered Other Pooled Registered Other Pooled
Portfolio Investment Investment Other Investment Investment Other
Manager Companies Vehicles accounts Companies Vehicles accounts
- ------------------- -------------- -------------- -------------- -------------- -------------- --------------
Fabio P. Savoldelli 1 17 1 0 4 1
$ 41,758,878 $1,369,512,899 $ 29,022,800 $ 456,979,752 $ 29,022,800
- ------------------------------------------------------------------------------------------------------------------------------------
Hideaki Yamagishi 1 12 1 0 4 1
$ 41,758,878 $ 973,213,550 $ 29,022,800 $ 456,979,752 $ 29,022,800
Compensation Program
The Portfolio Manager Compensation Program of the Adviser and its
affiliates is critical to the Adviser's ability to attract and retain the most
talented asset management professionals. This program is intended to ensure that
compensation is aligned with maximizing investment returns and it provides a
competitive pay opportunity for competitive performance.
Policies and Procedures
The elements of total compensation for portfolio managers are base salary,
annual performance-based cash and stock compensation (cash and stock bonus) and
other benefits. The Adviser has balanced these components of pay to provide
portfolio managers with a powerful incentive to achieve consistently superior
investment performance. By design, portfolio manager compensation levels
fluctuate -- both up and down -- with the relative investment performance of the
portfolios that they manage.
Base Salary
Under the Adviser's approach, like that of many asset management firms,
fixed base salaries represent a relatively small portion of a portfolio
manager's total compensation. This approach serves to enhance the motivational
value of the performance-based (and therefore variable) compensation elements of
the compensation program.
Performance-Based Compensation
The Adviser believes that the best interests of investors are served by
recruiting and retaining exceptional asset management talent and managing their
compensation within a consistent and disciplined framework that emphasizes pay
for performance in the context of an intensely competitive market for talent. To
that end, portfolio manager incentive compensation is derived on a discretionary
basis considering such factors as products they manage, external market
conditions, the Adviser's investment performance (measured on a pre-tax basis
versus the S&P Hedge Fund Index), financial results of the Adviser, expense
control, profit margins, strategic planning and implementation, quality of
client service, market share, corporate reputation, capital allocation,
compliance and risk control, leadership, workforce diversity, technology and
innovation. The Adviser also considers the extent to which individuals exemplify
and foster Merrill Lynch's principles of Client Focus, Respect for the
Individual, Teamwork, Responsible Citizenship and Integrity. All factors are
considered collectively by the Adviser's management.
Cash Bonus
Performance-based compensation is distributed to portfolio managers in a
combination of cash and stock. Typically, the cash bonus, when combined with
base salary, represents more than 60% of total compensation for portfolio
managers.
Stock Bonus
A portion of the dollar value of the total annual performance-based bonus
is paid in restricted shares of Merrill Lynch stock. Paying a portion of annual
bonuses in stock puts compensation earned by a portfolio manager for a given
year "at risk" based on the company's ability to sustain and improve its
performance over future periods.
The ultimate value of stock bonuses is dependent on future Merrill Lynch
stock price performance. As such, the stock bonus aligns each portfolio
manager's financial interests with those of the Merrill Lynch shareholders and
encourages a balance between short-term goals and long-term strategic
objectives.
Management strongly believes that providing a significant portion of
competitive performance-based compensation in stock is in the best interests of
investors and shareholders. This approach is intended to ensure that portfolio
managers participate as shareholders in both the "downside risk" and "upside
opportunity" of the company's performance. Portfolio managers therefore have a
direct incentive to protect Merrill Lynch's reputation for integrity.
Other Benefits
Portfolio managers are also eligible to participate in broad-based plans
offered generally to Merrill Lynch employees, including broad-based retirement,
401(k), health, and other employee benefit plans.
Potential Material Conflicts of Interest
Real, potential or apparent conflicts of interest may arise when a
portfolio manager has day-to-day portfolio management responsibilities with
respect to more than one fund or account, including the following:
Certain investments may be appropriate for the Company and also for other
clients advised by the Adviser and its affiliates, including other client
accounts managed by the Company's portfolio management team. Investment
decisions for the Company and other clients are made with a view to achieving
their respective investment objectives and after consideration of such factors
as their current holdings, availability of cash for investment and the size of
their investments generally. Frequently, a particular security may be bought or
sold for only one client or in different amounts and at different times for more
than one but less than all clients. Likewise, because clients of the Adviser and
its affiliates may have differing investment strategies, a particular security
may be bought for one or more clients when one or more other clients are selling
the security. The investment results for the Company may differ from the results
achieved by other clients of the Adviser and its affiliates and results among
clients may differ. In addition, purchases or sales of the same security may be
made for two or more clients on the same day. In such event, such transactions
will be allocated among the clients in a manner believed by the Adviser to be
equitable to each. The Adviser will not determine allocations based on whether
it receives a performance-based fee from the client. In some cases, the
allocation procedure could have an adverse effect on the price or amount of the
securities purchased or sold by the Company. Purchase and sale orders for the
Company may be combined with those of other clients of the Adviser and its
affiliates in the interest of achieving the most favorable net results to the
Company.
To the extent that the Company's portfolio managers have responsibilities
for managing accounts in addition to the Company, each portfolio manager will
need to divide his time and attention among relevant accounts.
In some cases, a real, potential or apparent conflict may also arise where
(i) the Adviser may have an incentive, such as a performance-based fee, in
managing one account and not with respect to other accounts it manages or (ii)
where a member of the Company's portfolio management team owns an interest in
one fund or account he or she manages and not another.
Company Ownership
The following table sets forth the dollar range of equity securities of
the Company beneficially owned by each portfolio manager as of May 22, 2006.
Portfolio Manager Dollar Range
- ----------------- ------------
Fabio P. Savoldelli $0
Hideaki Yamagishi $0
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 - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others particularly
during the period in which this report is being prepared. The
registrant's certifying officers have determined that the registrant's
disclosure controls and procedures are effective based on our evaluation
of these controls and procedures as of a date within 90 days prior to
the filing date of this report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the second fiscal half-year 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 attached hereto
12(a)(1) - Code of Ethics - See Item 2
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
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.
Multi-Strategy Hedge Opportunities LLC
By: /s/ Robert C. Doll, Jr.
----------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Multi-Strategy Hedge Opportunities LLC
Date: May 22, 2006
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: /s/ Robert C. Doll, Jr.
----------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Multi-Strategy Hedge Opportunities LLC
Date: May 22, 2006
By: /s/ Donald C. Burke
----------------------------
Donald C. Burke,
Chief Financial Officer of
Multi-Strategy Hedge Opportunities LLC
Date: May 22, 2006