UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
811-21396
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Investment Company Act file number
Excelsior Absolute Return Fund of Funds, LLC
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(Exact name of registrant as specified in charter)
225 High Ridge Road
Stamford, CT 06905
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(Address of principal executive offices) (Zip code)
U.S. Trust Hedge Fund Management, Inc.
225 High Ridge Road
Stamford, CT 06905
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(Name and address of agent for Service)
Registrant's telephone number, including area code: (203) 352-4497
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Date of fiscal year end: 3/31/2006
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Date of reporting period: 9/30/2005
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ITEM 1. REPORTS TO STOCKHOLDERS.
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EXCELSIOR ABSOLUTE RETURN FUND OF FUNDS, LLC
Financial Statements
(Unaudited)
Period from April 1, 2005 to September 30, 2005
Excelsior Absolute Return Fund of Funds, LLC
Financial Statements
(Unaudited)
Period from April 1, 2005 to September 30, 2005
Contents
Statement of Assets, Liabilities and Members' Equity - Net Assets.... 1
Statement of Operations.............................................. 2
Statement of Changes in Members' Equity - Net Assets................. 3
Statement of Cash Flows.............................................. 4
Notes to Financial Statements........................................ 5
The Registrant files its complete schedule of portfolio holdings with
the Securities and Exchange Commission (the "Commission") for the first and
third quarters of each fiscal year on Form N-Q. The Registrant's Forms N-Q are
available on the Commission's website at http://www.sec.gov, and may be reviewed
and copied at the Commission's Public Reference Room in Washington, DC.
Information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330. Information on Form N-Q is available without charge,
upon request, by calling collect 1-800-52-4497.
A description of the policies and procedures that the Registrant uses
to determine how to vote proxies relating to portfolio securities is available
without charge, upon request, by calling collect (203) 352-4497 and on the
Commission's website at http://www.sec.gov.
Information regarding how the Registrant voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available without charge, upon request, by calling collect (203) 352-4497, and
on the Commission's website at http://www.sec.gov.
Excelsior Absolute Return Fund of Funds, LLC
Statement of Assets, Liabilities and Members' Equity - Net Assets (Unaudited)
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September 30, 2005
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ASSETS
Investment in Excelsior Absolute Return Fund of
Funds Master Fund, LLC at fair value (cost $224,951,001) $247,247,305
Cash and cash equivalents 1,385,786
Advance investment in Excelsior Absolute Return
Fund of Funds Master Fund, LLC 9,700,000
Due from Adviser 55,760
Prepaid Fees 31,731
Interest Receivable 815
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Total Assets 258,421,397
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LIABILITIES
Adviser management fee payable 304,797
Professional fees payable 56,000
Repurchase of Members' Interests payable 284,533
Members' Interests received in advance 10,574,289
Administration fees payable 66
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Total Liabilities 11,219,685
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Net Assets $247,201,712
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MEMBERS' EQUITY - NET ASSETS
Represented by:
Capital subscriptions - net $224,905,408
Accumulated net unrealized appreciation on investments 22,296,304
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Members' Equity - Net Assets $247,201,712
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The accompanying notes and attached unaudited financial statement of Excelsior
Absolute Return Fund of Funds Master Fund, LLC are an integral part of these
financial statements.
Excelsior Absolute Return Fund of Funds, LLC
Statement of Operations (Unaudited)
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Period from April 1, 2005 to September 30, 2005
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Net investment loss allocated from Excelsior Absolute
Return Fund of Funds Master Fund, LLC:
Interest $5,758
Expenses (1,340,501)
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Net investment loss allocated from Excelsior Absolute
Return Fund of Funds Master Fund, LLC (1,334,743)
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Fund Income:
Interest 25,817
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Fund Expenses:
Adviser management fees 597,446
Professional fees 191,440
Administration fees 97,365
Board of Managers' fees 26,250
Other 50,229
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Total Expenses 962,730
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Expenses reimbursed to the Adviser 62,976
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Net Expenses 1,025,706
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Net Investment Loss (2,334,632)
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Realized and unrealized gain on investments allocated from
Excelsior Absolute Return Fund of Funds Master Fund, LLC:
Net realized gain on investments 364,783
Net unrealized appreciation on investments 7,570,540
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Net Unrealized Gain on Investments Allocated from Excelsior
Absolute Return Fund of Funds Master Fund, LLC 7,935,323
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INCREASE IN MEMBERS' EQUITY - NET ASSETS
DERIVED FROM OPERATIONS $5,600,691
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The accompanying notes and attached unaudited financial statement of Excelsior
Absolute Return Fund of Funds Master Fund, LLC are an integral part of these
financial statements.
Excelsior Absolute Return Fund of Funds, LLC
Statement of Changes in Members' Equity - Net Assets (Unaudited)
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For the
period from For the
April 1, 2005 Year Ended
to September March 31,
30, 2005 2005
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OPERATIONS
Net investment loss $(2,334,632) $(3,483,256)
Net realized gain on investments 364,783 320,977
Net unrealized appreciation on investments 7,570,540 12,233,400
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Increase in Members' Equity - Net Assets
Derived from Operations 5,600,691 9,071,121
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CAPITAL TRANSACTIONS
Members' subscriptions 25,790,404 145,459,090
Members' Interests repurchased (8,590,667) (9,665,795)
Offering costs (23,576) (31,805)
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Increase in Members' Equity - Net Assets
Derived From Capital Transactions 17,176,161 135,761,490
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Net Increase in Members' Equity - Net Assets 22,776,852 144,832,611
MEMBERS' EQUITY - NET ASSETS
AT BEGINNING OF PERIOD 224,424,860 79,592,249
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MEMBERS' EQUITY - NET ASSETS
AT END OF PERIOD $247,201,712 $224,424,860
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The accompanying notes and attached unaudited financial statement of Excelsior
Absolute Return Fund of Funds Master Fund, LLC are an integral part of these
financial statements.
Excelsior Absolute Return Fund of Funds, LLC
Statement of Cash Flows (Unaudited)
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Period from April 1, 2005 to September 30, 2005
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CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in members' equity - net assets
derived from operations $5,600,691
Adjustments to reconcile net increase in members' equity -
net assets derived from operations to net
cash used in operating activities:
Net unrealized appreciation on investment allocated from (7,570,540)
Excelsior Absolute Return Fund of Funds Master Fund, LLC
Net realized gain on investment allocated from Excelsior
Absolute Return Fund of Funds Master Fund, LLC (364,783)
Net investment loss allocated from Excelsior Absolute
Return Fund of Funds Master Fund, LLC 1,334,743
Purchases of investment in Excelsior Absolute Return
Fund of Funds Master Fund, LLC (17,291,949)
Proceeds from investment in Excelsior Absolute Return
Fund of Funds Master Fund, LLC 1,440,841
Increase in advance investment in Excelsior Absolute
Return Fund of Funds Master Fund, LLC (9,700,000)
Decrease in prepaid fees 24,284
Increase in interest receivable (508)
Increase in due from Adviser (55,760)
Decrease in due to Adviser (69,423)
Increase in Adviser management fee payable 24,773
Decrease in administration fees payable (19,237)
Increase in payable for Members' Interests repurchased 284,533
Increase in professional fees payable 3,000
Decrease in Board of Managers fees' payable (6,000)
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Net Cash Used in Operating Activities (26,365,335)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Members' subscriptions 36,364,693
Payments for Members' Interests repurchased (8,590,667)
Offering costs paid (23,576)
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Net Cash Provided by Financing Activities 27,750,450
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Net increase in cash and cash equivalents 1,385,115
Cash and cash equivalents at beginning of period 671
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Cash and Cash Equivalents at End of Year $1,385,786
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The accompanying notes and attached unaudited financial statement of Excelsior
Absolute Return Fund of Funds Master Fund, LLC are an integral part of these
financial statements.
Excelsior Absolute Return Fund of Funds, LLC
Notes to Financial Statements (Unaudited)
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September 30, 2005
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1. Organization
Excelsior Absolute Return Fund of Funds, LLC (the "Fund") was organized as a
limited liability company under the laws of Delaware on June 17, 2003, and
commenced operations on December 1, 2003. The Fund is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as a closed-end,
non-diversified, management investment company. The Fund's investment objective
is to provide long-term, risk-adjusted absolute returns in a variety of capital
market conditions. The Fund pursues its investment objective by investing
substantially all of its assets in Excelsior Absolute Return Fund of Funds
Master Fund, LLC (the "Company"), a closed-end, non-diversified, management
investment company which has the same investment objective as the Fund. The
Company seeks to achieve its investment objective by investing its assets
primarily in private investment limited partnerships or limited liability
companies and other similar investment vehicles (collectively, "Investment
Funds") that are managed by investment managers utilizing a broad range of
alternative investment strategies.
The financial statements of the Company, including the Schedule of Investments,
are attached to this report and should be read with the Fund's financial
statements. The percentage of the Company's members' equity owned by the Fund at
September 30, 2005 was 86.51%.
U.S. Trust Hedge Fund Management, Inc. serves as the investment adviser of
the Company (the "Adviser"). The Adviser is a wholly-owned subsidiary of
U.S. Trust Corporation, and is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended (the "Advisers Act"). The
Adviser provides various management and administrative services to the
Company and the Fund.
The Adviser has retained AIG Global Investment Corp. ("AIG Global"), an indirect
wholly-owned subsidiary of American International Group, Inc., to serve as the
investment manager of the Company. AIG Global is registered as an investment
adviser under the Advisers Act, and is responsible for Investment Fund selection
and determining the portion of the Company's assets to be allocated to each
Investment Fund, subject to the general supervision of the Adviser.
The Fund's Board of Managers (the "Board") has overall responsibility to manage
and supervise the operations of the Fund and the Company, including the
exclusive authority to oversee and to establish policies regarding the
management, conduct and operation of the Fund's business.
Excelsior Absolute Return Fund of Funds, LLC
Notes to Financial Statements (Unaudited) continued
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September 30, 2005
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1. Organization (continued)
Initial and additional subscriptions for interests in the Fund ("Interests") by
eligible investors may be accepted as of the first day of each calendar quarter,
or at such times as the Board may determine. The Fund may, from time to time,
offer to repurchase Interests from members ("Members") pursuant to written
tenders by Members. These repurchase offers will be made at such times and on
such terms as may be determined by the Board, in its sole discretion, subject to
the liquidity of the Company's assets and other factors considered by the Board.
The Adviser expects that, generally, it will recommend to the Board that the
Fund offer to repurchase Interests from Members twice each year, at June 30th
and December 31st. Members can only transfer or assign Interests under certain
limited circumstances.
2. Significant Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Management believes that the estimates utilized in preparing
the Fund's financial statements are reasonable and prudent; however, actual
results could differ from these estimates.
a. Portfolio Valuation
The net asset value of the Fund is determined by, or at the direction of, the
Adviser as of the close of business at the end of any fiscal period (as defined
in the Fund's Limited Liability Company Agreement), in accordance with the
valuation principles set forth below, or as may be determined from time to time
pursuant to policies established by the Board.
The Fund records its investment in the Company at fair value and is represented
by the Fund's proportionate interest in the Company's Members' Equity - Net
Assets at September 30, 2005. Valuation of investments held by the Company is
discussed in these notes to the Company's financial statements.
The net unrealized appreciation on investments, which is included in Members'
Equity - Net Assets on the Statement of Assets, Liabilities and Members' Equity
- - Net Assets, reflects the Fund's allocated share of the Company's net
unrealized gain on investments.
Distributions received from the Company, whether in the form of cash or
securities, are applied first as a reduction of the investment's cost and, if
any, any excess as a realized gain from investments.
Excelsior Absolute Return Fund of Funds, LLC
Notes to Financial Statements (Unaudited) continued
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September 30, 2005
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2. Significant Accounting Policies (continued)
b. Fund Expenses
The Fund bears its own expenses and, indirectly, bears a pro rata portion of the
Company's expenses, including, but not limited to: fees paid directly or
indirectly to the investment managers of the Investment Funds, all costs and
expenses directly related to portfolio transactions and positions for the
Company's account; certain legal fees; accounting and auditing fees; custodial
and escrow fees; fees paid to the Fund's administrator; costs of insurance; the
advisory fee; travel and related expenses of Board; all costs with respect to
communications regarding the Fund's transactions among the Adviser and any
custodian or other agent engaged by the Fund; and other types of expenses
approved by the Board.
The Adviser and the Fund have entered into an expense limitation and
reimbursement agreement (the "Expense Limitation Agreement"), under which the
Adviser has agreed to waive its fees, or to pay or absorb the ordinary operating
expenses of the Fund, to the extent necessary to limit the ordinary operating
expenses of the Fund, including organizational and offering costs and the
proportionate share of the Company's expenses to 2% per annum of the Fund's
average monthly net assets (the "Expense Limitation"). In consideration of the
Adviser's agreement to limit the Fund's expenses, the Fund will carry forward
the amount of expenses waived, paid or absorbed by the Adviser in excess of the
Expense Limitation for a period not to exceed three years from the end of the
fiscal year in which they were incurred, and will reimburse the Adviser such
amounts. Reimbursement will be made as promptly as possible, but only to the
extent it does not cause the Fund's ordinary operating expenses to exceed the
Expense Limitation.
As of September 30, 2005, the Adviser has paid $1,290,775 of expenses on behalf
of the Fund pursuant to the Expense Limitation Agreement. Of this amount, the
Fund has reimbursed $1,206,430 of expenses to the Adviser and the Adviser has
agreed to reimburse another $55,760 of which is reflected as Due from Adviser on
the Statement of Assets, Liabilities, and Members' Equity- Net Assets. The Fund
will carry forward the remaining $140,105 of excess expenses and reimburse the
Adviser as promptly as possible pursuant to the Expense Limitation Agreement.
The reimbursement of these expenses is dependent on future levels of members'
equity - net assets and expenses of the Fund.
Excelsior Absolute Return Fund of Funds, LLC
Notes to Financial Statements (Unaudited) continued
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September 30, 2005
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2. Significant Accounting Policies (continued)
c. Income Taxes
As a limited liability company, no provision for the payment of Federal, state
or local income taxes has been provided by the Fund. Each Member is individually
required to report on its own tax return its share of the Fund's taxable income
or loss. The Fund has a tax year end of December 31.
Net investment income or loss and net realized and unrealized gain or loss from
investments of the Fund for each fiscal period are allocated among, and credited
to or debited against, the capital accounts of all members as of the last day of
the fiscal period in accordance with each member's respective investment
percentages for the fiscal period, as defined in the Fund's Limited Liability
Company Agreement.
The cost of the Fund's investment in the Company for federal income tax purposes
is based on amounts reported to the Fund by the Company on Schedule K-1 for the
year ended December 31, 2004. At December 31, 2004, the cost for federal income
tax purposes was $195,744,998. This consisted of aggregate gross unrealized
appreciation of $6,062,389.
d. Other
Cash and cash equivalents consist of monies maintained in a PFPC Trust Company
interest-bearing account. Interest income is recorded on the accrual basis.
The Fund records its proportionate share of the Company's investment income,
expenses and realized and unrealized gain and losses.
3. Management Fee, Related Party Transactions and Other
As of September 30, 2005, the Fund's employees and affiliates have a combined
interest of approximately 15.77% of the Fund's Members' equity - net assets.
Excelsior Absolute Return Fund of Funds, LLC
Notes to Financial Statements (Unaudited) continued
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September 30, 2005
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3. Management Fee, Related Party Transactions and Other
(continued)
The Adviser provides certain investment advisory services and incurs travel and
other expenses related to the selection and monitoring of investment managers
for the Company's Investment Funds. Pursuant to a management agreement (the
"Management Agreement") between the Fund and the Adviser, the Adviser provides
certain management and administrative services to the Fund including providing
office space and other support services, maintaining files and records, and
preparing and filing various regulatory materials. In consideration for such
services under the Management Agreement, the Fund pays the Adviser a quarterly
management fee at an annual rate of 0.5% of the Fund's net assets on the first
business day of each quarter after adjustments for any subscriptions effective
on that date. For the period from April 1, 2005 to September 30, 2005, the
management fee was $597,446, of which $304,797 was payable as of September 30,
2005.
In connection with the services provided by AIG Global pursuant to the
investment sub-advisory agreement between the Company and AIG Global, the
Company pays AIG Global a quarterly fee computed by applying the following
annual rates to the Company's average monthly net assets determined on the first
business day of each month: 0.80% of assets not exceeding $200 million; .70% of
assets exceeding $200 million but less than $400 million; .60% of assets
exceeding $400 million but less than $800 million; and .50% of assets exceeding
$800 million.
Each member of the Board (a "Manager"), who is not an "interested person" of the
Fund, as defined by the 1940 Act, receives an annual retainer of $5,000 plus a
fee for each meeting attended. Any Manager who is an "interested person" does
not receive any annual or other fee from the Fund. The Fund incurred $26,250 of
retainer and per meeting fees for the period from April 1, 2005 to September 30,
2005 none of which was payable as of September 30, 2005. Also all Managers who
are not "interested persons" of the Fund are reimbursed by the Fund for all
reasonable out-of-pocket expenses.
The Fund has retained J.D. Clark & Co. (the "Administrator") to provide
accounting and certain administrative and investor services to the Company. In
connection with such services provided, the Fund pays the Administrator a
quarterly fee equal to the greater of: (i) $3,000; or (ii) .00025 of the Fund's
net assets as of the first day of each calendar quarter on the first $150
million of net assets, plus .000125 of the Fund's net assets in excess of $150
million. For the period from April 1, 2005 to September 30, 2005, the Company
incurred $97,365 in expenses related to such administrative services, of which
$66 was payable as of September 30, 2005.
Excelsior Absolute Return Fund of Funds, LLC
Notes to Financial Statements (Unaudited) continued
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September 30, 2005
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4. Guarantees
In the normal course of business, the Fund enters into contracts that provide
general indemnifications. The Fund's maximum exposure under these arrangements
is dependent on future claims that may be made against the Fund, and therefore,
cannot be established; however, based on experience, the risk of loss from such
claim is considered remote.
5. Financial Highlights
The following represents the ratios to average members' equity - net assets,
total return and other supplemental information for the periods indicated:
For the
period For the
April 1, year December 1,
2005 to Ended 2003* to
September March 31, March 31,
30, 2005 2005 2004
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Net assets, end of period $247,201,712 $224,424,860 $79,592,249
Ratio of net investment (0.97%) (2.00%) (0.60%)
loss to average
members' equity -
net assets (a)
Ratio of total expenses 0.96% 1.88% 1.25%
to average members'
equity - net
assets (b),(c)
Ratio of net expenses to 0.99% 2.03% 0.59%
average members' equity -
net assets (b)
Total return (d) 2.30% 4.31% 4.85%
* Commencement of operations. The ratios and total return are not
annualized for the initial period.
(a) The ratio reflects the income and expenses assuming inclusion of the
Fund's proportionate share of income and expenses of the Company.
(b) The ratio reflects the expenses assuming inclusion of the Fund's
proportionate share of expenses of the Company.
(c) The ratio is before any expense limitation or reimbursement per the
Expense Limitation Agreement.
(d) Total return assumes a purchase of an interest in the Fund on the first
day and a sale of interest on the last day of the period.
Excelsior Absolute Return Fund of Funds, LLC
Notes to Financial Statements (Unaudited) continued
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September 30, 2005
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6. Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, the Investment Funds in which the Company
invests trade various financial instruments and enter into various investment
activities with off-balance sheet risk. These may include, but are not limited
to, short selling activities, writing option contracts, contracts for
differences and equity swaps. However, as a result of the investments by the
Company as a limited partner or member, the Company's liability with respect to
its investments in the Investment Funds is limited to the net asset value of its
interest in each Investment Fund.
7. Subsequent Events
Subsequent to September 30, 2005, the Fund received subscriptions for Interests
from Members in the amount of $10,574,289. The Fund purchased $9,700,000 in the
Company as of October 1, 2005.
ADVISORY AGREEMENT APPROVAL
The Investment Advisory Agreement between the Company and the Adviser
and the Sub-Advisory Agreement between the Adviser and AIG Global (together, the
"Advisory Agreements") each had an initial term of two years. The Fund (together
with the Company, the "Funds") is managed by the Adviser, and invests
substantially all of its assets in the Company. Each of the Advisory Agreements
provides that it may be continued in effect from year to year thereafter subject
to approval by: (i) the Board of Managers of the Company (the "Company Board");
or (ii) vote of a majority of the outstanding voting securities, as defined by
the 1940 Act, of the Company, provided that, in either event, the continuance
must also be approved by a majority of the Managers who are not "interested
persons" of the Company (the "Independent Managers"), by vote cast in person at
a meeting called for the purpose of voting on such approval. The continuance of
each of the Advisory Agreements for an additional annual period was approved by
the Company Board, and by the Independent Managers, at a meeting held in person
on June 17, 2005. The Independent Managers were assisted in their review of the
proposal to continue the Advisory Agreements by independent legal counsel and
met in an executive session with such counsel separate from representatives of
the Adviser and AIG Global.
In considering this matter, the Company Board reviewed various
written materials, including: performance information on and expense ratios of
comparable registered investment companies, including similar funds managed by
AIG Global and the Adviser; and information relating to the costs and
profitability of the Adviser and AIG Global from their relationships with the
Funds ("Profitability Analysis"). The Company Board evaluated and considered:
(i) the nature, extent and quality of services provided by the Adviser and AIG
Global; (ii) the investment performance of the Funds; (iii) the costs of
services provided and the profits realized by the Adviser and AIG Global from
their relationships with the Funds; (iv) the extent to which economies of scale
in costs of providing services would be realized as the Company grows; and (v)
whether the fees payable to the Adviser and AIG Global pursuant to the Advisory
Agreements properly reflect these economies of scale for the benefit of
investors.
In considering the nature, extent and quality of services that the
Adviser and AIG Global provide to the Company, the Company Board reviewed
presentations from Fund management relating to the structure and capabilities of
the Adviser and AIG Global, including information concerning the qualifications
of key personnel, and technology and operational support, which support the
services provided to the Company. The Company Board concluded that the Company
benefits from the services provided by the Adviser and AIG Global, and in this
regard took note of AIG Global's research and portfolio management capabilities,
as well as the Adviser's extensive administrative, accounting and compliance
infrastructure and its oversight of AIG Global. The Independent Managers noted
their overall satisfaction with the nature, extent and quality of services
provided by the Adviser and AIG Global and concluded that the Company was
receiving all services required from the Adviser and AIG Global under the
Advisory Agreements, and that these services were of high quality.
The Company Board also considered the investment performance of the
Funds and compared the performance of the Funds to that of comparable funds,
including other funds managed by the Adviser and AIG Global. The Company Board
concluded that this performance compared favorably with the performance of
similar registered funds.
The profitability realized by the Adviser and AIG Global was also
considered. The Company Board relied principally on the Profitability Analysis.
Representatives of the Adviser stated that neither the Adviser nor AIG Global
receives any significant indirect benefits from its relationship with the Funds.
After reviewing the information contained in the Profitability Analysis, the
Company Board determined that each of the Adviser's and AIG Global's
profitability from its relationship with the Funds was not disproportionately
large so that it bore no reasonable relationship to the services rendered, and
also determined that, given the overall performance of the Funds and superior
service levels, the current profitability to the Adviser and AIG Global was not
excessive.
The Company Board also evaluated the fees paid for advisory services,
relying on information concerning the fees and expenses of the Funds, which were
contained in the materials provided to the Company Board. The Company Board
compared those fees and expenses to the advisory fees and expense ratios of
other similar registered funds of hedge funds, including another similar
registered fund for which the Adviser serves as investment adviser, as well as
other funds managed by AIG Global. In this regard, the Independent Managers
noted that the fee payable by the Company to the Adviser, the fee payable by the
Adviser to AIG Global and the expenses of the Funds are well within the range of
those of similar funds. The Independent Managers concluded that the fees payable
to the Adviser and AIG Global are reasonable in light of comparative performance
and expense and advisory fee information and costs of the services provided.
With regard to economies of scale, the Company Board was cognizant of
the fact that economies of scale in costs of providing services may be realized
when there is a significant increase in a fund's assets. The Independent
Managers concluded that, although the net assets of the Company have grown since
its inception, the Company has not reached an appropriate size to support fee
reductions based on economies of scale realized by the Adviser or AIG Global.
Based on the information provided to the Company Board, and the
considerations and conclusions described above, the Company Board, including
each of the Independent Managers, determined that: (i) it is appropriate that
the Adviser and AIG Global continue to provide investment advisory services to
the Company; (ii) the advisory fee paid by the Company, and the fee paid by the
Adviser to AIG Global, for these services are fair and reasonable; and (iii) it
is in the best interest of the Company and its Members to continue in effect
each of the Advisory Agreements for an additional annual period.
EXCELSIOR ABSOLUTE RETURN FUND OF FUNDS MASTER FUND, LLC
Financial Statements
(Unaudited)
Period from April 1, 2005 to September 30, 2005
Excelsior Absolute Return Fund of Funds Master Fund, LLC
Financial Statements
(Unaudited)
Period from April 1, 2005 to September 30, 2005
Contents
Statement of Assets, Liabilities and Members' Equity - Net Assets.... 1
Schedule of Investments.............................................. 2
Statement of Operations.............................................. 3
Statement of Changes in Members' Equity - Net Assets................. 4
Statement of Cash Flows.............................................. 5
Notes to Financial Statements........................................ 6
The Registrant files its complete schedule of portfolio holdings with
the Securities and Exchange Commission (the "Commission") for the first and
third quarters of each fiscal year on Form N-Q. The Registrant's Forms N-Q are
available on the Commission's website at http://www.sec.gov, and may be reviewed
and copied at the Commission's Public Reference Room in Washington, DC.
Information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330. Information on Form N-Q is available without charge,
upon request, by calling collect (203) 352-4497.
A description of the policies and procedures that the Registrant uses
to determine how to vote proxies relating to portfolio securities is available
without charge, upon request, by calling collect (203) 352-4497 and on the
Commission's website at http://www.sec.gov.
Information regarding how the Registrant voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available without charge, upon request, by calling collect (203) 352-4497, and
on the Commission's website at http://www.sec.gov.
Excelsior Absolute Return Fund of Funds Master Fund, LLC
Statement of Assets, Liabilities and Members' Equity - Net Assets (Unaudited)
- --------------------------------------------------------------------------------
September 30, 2005
- --------------------------------------------------------------------------------
ASSETS
Investments in Investment Funds, at fair value (cost $260,471,520) $286,997,720
Cash and cash equivalents 1,183,784
Advance investment in Investment Fund 10,500,000
Due from investment fund 124,771
Other assets 179
- --------------------------------------------------------------------------------
Total Assets 298,806,454
- --------------------------------------------------------------------------------
LIABILITIES
Due to Adviser 1,003,977
Professional fees payable 54,417
Administration fees payable 6,000
Members' Interests received in advance 11,950,000
- --------------------------------------------------------------------------------
Total Liabilities 13,014,394
- --------------------------------------------------------------------------------
Net Assets $285,792,060
- --------------------------------------------------------------------------------
MEMBERS' EQUITY - NET ASSETS
Represented by:
Capital subscriptions - net $259,265,860
Net unrealized appreciation on investments 26,526,200
- --------------------------------------------------------------------------------
Members' Equity - Net Assets $285,792,060
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Excelsior Absolute Return Fund of Funds Master Fund, LLC
Schedule of Investments (Unaudited)
- --------------------------------------------------------------------------------
September 30, 2005
- --------------------------------------------------------------------------------
% of % Ownership First
First Members' of Available
Acquisition Fair Equity - Investment Redemption
Investment Funds Date Cost* Value* Net Assets Funds Date** Liquidity***
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed Income
- ------------
<s> <c> <c> <c> <c> <c> <c> <c>
Citadel Wellington, LLC 12/01/2003 $23,750,000 $25,524,381 8.93% 0.81% N/A Quarterly
Highbridge Capital Corporation- Class A 12/01/2003 11,250,000 12,363,545 4.33% 0.21% N/A Quarterly
MKP Opportunity Partners, L.P. 12/01/2003 5,000,000 5,293,669 1.85% 3.52% N/A Monthly
MKP Partners, L.P. 12/01/2003 5,600,000 5,807,393 2.03% 3.09% N/A Quarterly
Polygon Global Opportunities Fund, L.P. 8/01/2004 10,200,000 11,593,261 4.06% 3.08% N/A Quarterly
Silverback Partners, L.P. 1/01/2004 6,500,000 5,549,383 1.94% 3.90% N/A Quarterly
Suttonbrook Capital Partners, L.P. 10/01/2004 9,500,000 10,142,752 3.55% 5.02% N/A Quarterly
-----------------------------------
Strategy Total 71,800,000 76,274,384 26.69%
-----------------------------------
Equity
- ------
<s> <c> <c> <c> <c> <c> <c> <c>
Galleon Diversified Fund, Ltd.- Class E 12/01/2003 12,600,000 13,176,053 4.61% 2.31% N/A Quarterly
Copper Beech Partners II, L.P. 12/01/2003 11,850,000 13,111,781 4.59% 4.70% N/A Quarterly
Heirloom Qualified Partners, L.P. 12/01/2003 11,350,000 12,180,171 4.26% 8.01% N/A Quarterly
Glenview Capital Partners, L.P. 12/01/2003 11,300,000 16,039,493 5.61% 4.63% N/A Quarterly
The Mako Europe Fund, L.P. 12/01/2003 9,500,000 9,458,396 3.31% 18.53% N/A Monthly
Cantillon World, L.P. 12/01/2003 3,050,000 4,140,041 1.45% 0.90% N/A Quarterly
Shoshone Partners, L.P. 12/01/2003 10,500,000 14,264,400 4.99% 4.02% N/A Annually
Maverick Levered Partners, L.P. 5/01/2004 6,000,000 6,655,967 2.33% 0.83% 5/1/07 Quarterly
North River Partners, L.P. 7/01/2005 4,000,000 4,165,701 1.46% 0.97% N/A Quarterly
------------------------------------
Strategy Total 80,150,000 93,192,003 32.61%
------------------------------------
Macro/CTA/Short-Term Trading
- ----------------------------
<s> <c> <c> <c> <c> <c> <c> <c>
Sunrise Commodities Select Portfolio-
Davco Fund, L.P. 12/01/2003 7,450,000 7,057,959 2.47% 2.58% N/A Monthly
The Capital Fund(Domestic), LLC 12/01/2003 6,750,000 6,806,259 2.38% 12.17% N/A Monthly
Bridgewater Pure Alpha Trading Co. Ltd.- 2/01/2004 6,400,000 7,180,926 2.51% 0.14% N/A Monthly
Class B
OLEA Global Partners, L.P. 10/01/2004 5,000,000 4,686,104 1.64% 5.84% N/A Quarterly
Caxton Global Investments (USA) LLC 1/01/2005 9,000,000 9,490,855 3.32% 2.02% 1/1/06 Quarterly
------------------------------------
34,600,000 35,222,103 12.32%
------------------------------------
Event Driven
- ------------
<s> <c> <c> <c> <c> <c> <c> <c>
Castlerigg Partners, L.P. 12/01/2003 16,000,000 18,241,139 6.38% 3.34% N/A Quarterly
Canyon Value Realization Fund, L.P. 12/01/2003 12,500,000 15,298,190 5.35% 0.89% N/A Annually
K Capital II, L.P. 12/01/2003 14,000,000 13,921,506 4.87% 3.48% N/A Quarterly
Brencourt Multi-Strategy, L.P. 9/01/2005 5,421,520 5,464,044 1.91% 4.12% N/A Quarterly
York Capital Management, L.P. 7/01/2004 14,500,000 17,129,850 6.00% 3.01% N/A Annually
Empyrean Capital Fund, L.P. 7/01/2004 11,500,000 12,254,501 4.29% 2.30% N/A Quarterly
------------------------------------
Strategy Total 73,921,520 82,309,230 28.80%
------------------------------------
Total Investments in Investment Funds $260,471,520 286,997,720 100.42%
============
Other Assets, Less Liabilities (1,205,660) -0.42%
---------------------
Members' Equity - Net Assets $285,792,060 100.00%
======================
* See definition in Note 2a. N/A Initial lock-up period has either
** From original investment date. expired prior to September 30,
*** Available frequency of redemptions 2005 or the Investment Fund did
after initial lock-up period. not have an intial lock-up period.
However specific redemption
restrictions may apply.
The accompanying notes are an integral part of these financial statements.
Excelsior Absolute Return Fund of Funds Master Fund, LLC
Statement of Operations (Unaudited)
- --------------------------------------------------------------------------------
Period from April 1, 2005 to September 30, 2005
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Interest $6,664
- --------------------------------------------------------------------------------
Total Investment Income 6,664
- --------------------------------------------------------------------------------
OPERATING EXPENSES
Advisory fee 1,383,021
Professional fees 80,983
Administration fees 12,000
Bank note facility and interest expenses 42,547
Other 37,619
- --------------------------------------------------------------------------------
Total Operating Expenses 1,556,170
- --------------------------------------------------------------------------------
Net Investment Loss (1,549,506)
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from investments in Investment Funds 421,520
Net unrealized appreciation on investments in Investment Funds 8,749,189
- --------------------------------------------------------------------------------
Net Realized and Unrealized Gain on Investments 9,170,709
- --------------------------------------------------------------------------------
INCREASE IN MEMBERS' EQUITY - NET ASSETS
DERIVED FROM OPERATIONS $7,621,203
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Excelsior Absolute Return Fund of Funds Master Fund, LLC
Statement of Changes in Members' Equity - Net Assets (Unaudited)
- --------------------------------------------------------------------------------
For the
period from For the
April 1, 2005 year ended
to September March 31,
30, 2005 2005
- --------------------------------------------------------------------------------
OPERATIONS
Net investment loss $(1,549,506) $(2,154,033)
Net realized gain from investments 421,520 362,933
Net unrealized appreciation on investments 8,749,189 13,832,449
- --------------------------------------------------------------------------------
Increase in Members' Equity - Net Assets
Derived from Operations 7,621,203 12,041,349
- --------------------------------------------------------------------------------
CAPITAL TRANSACTIONS
Members' subscriptions 28,041,949 164,246,463
Members' Interests repurchased (1,600,921) (7,587,506)
- --------------------------------------------------------------------------------
Increase in Members' Equity - Net Assets
Derived From Capital Transactions 26,441,028 156,658,957
- --------------------------------------------------------------------------------
Net Increase in Members' Equity - Net Assets 34,062,231 168,700,306
MEMBERS' EQUITY - NET ASSETS
AT BEGINNING OF PERIOD 251,729,829 83,029,523
- --------------------------------------------------------------------------------
MEMBERS' EQUITY - NET ASSETS
AT END OF PERIOD $285,792,060 $251,729,829
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Excelsior Absolute Return Fund of Funds Master Fund, LLC
Statement of Cash Flows (Unaudited)
- --------------------------------------------------------------------------------
Period from April 1, 2005 to September 30, 2005
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in members' equity - net assets
Derived from operations $7,621,203
Adjustments to reconcile net increase in members' equity -
net assets derived from operations to
net cash used in operating activities:
Net unrealized appreciation on investments (8,749,189)
Net realized gain from investments in Investment Funds (421,520)
Purchases of Investment Funds (32,621,520)
Proceeds from Investment Funds 5,421,520
Decrease in advance investment in Investment Funds 10,700,000
Decrease in due from Investment Funds 315,973
Decrease in other assets 2,426
Increase in due to Adviser 228,192
Decrease in professional fees payable (5,583)
- --------------------------------------------------------------------------------
Net Cash Used in Operating Activities (17,508,498)
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Member subscriptions 39,991,949
Payments for Member Interests repurchased (1,600,921)
Borrowings on bank note payable 500,000
Payments on bank note payable (500,000)
Decrease in due to Custodian (19,698,746)
- --------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 18,692,282
- --------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,183,784
Cash and cash equivalents at beginning of period -
- --------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $1,183,784
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Excelsior Absolute Return Fund of Funds Master Fund, LLC
Notes to Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
September 30, 2005
- --------------------------------------------------------------------------------
1. Organization
Excelsior Absolute Return Fund of Funds Master Fund, LLC (the "Company") was
organized as a limited liability company under the laws of Delaware on June 17,
2003, and commenced operations on December 1, 2003. The Company is registered
under the Investment Company Act of 1940, as amended (the "1940 Act"), as a
non-diversified, closed-ended management investment company. The Company's
investment objective is to provide attractive long-term, risk-adjusted absolute
returns in a variety of capital market conditions. The Company pursues its
investment objective by investing its assets primarily in private investment
limited partnerships, limited liability companies, joint ventures and other
similar investment vehicles (collectively, the "Investment Funds") that are
managed by a select group of alternative investment managers ("Investment
Managers") that utilize a broad range of alternative investment strategies.
U.S. Trust Hedge Fund Management, Inc. serves as the investment Adviser of
the Company (the "Adviser"). The Adviser is a wholly-owned subsidiary of
U.S. Trust Corporation, and is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended. The Adviser is responsible for
developing, implementing and supervising the investment program and providing
day-to-day management services.
The Adviser has retained AIG Global Investment Corp. ("AIG Global"), an indirect
wholly-owned subsidiary of American International Group, Inc., to serve as the
investment manager of the Company. AIG Global is responsible for Investment Fund
selection and determining the portion of the Company's assets to be allocated to
each Investment Fund, subject to the general supervision of the Adviser.
The Company's Board of Managers (the "Board") has overall responsibility to
manage and supervise the operations of the Company, including the exclusive
authority to oversee and to establish policies regarding the management, conduct
and operation of the Company's business.
The Company was established to hold substantially all of the assets of Excelsior
Absolute Return Fund of Funds, LLC (the "Feeder Fund") and Excelsior Absolute
Return Fund of Funds, Ltd. (the "Offshore Fund") as members of the Company
("Members"). As of September 30, 2005, the Feeder Fund and Offshore Fund
ownership of the Company's Members' Equity - Net Assets were 86.51% and 13.49%,
respectively.
Excelsior Absolute Return Fund of Funds Master Fund, LLC
Notes to Financial Statements (Unaudited) continued
- --------------------------------------------------------------------------------
September 30, 2005
- --------------------------------------------------------------------------------
1. Organization (continued)
Member subscriptions for interests in the Company ("Interests") by eligible
investors may be accepted as of the first day of each calendar quarter, or at
such times as the Board may determine. The Company may, from time to time, offer
to repurchase interests from Members pursuant to written tenders by Members.
These repurchase offers will be made at such times and on such terms as may be
determined by the Board, in its sole discretion, subject to the liquidity of the
Company's assets and other factors considered by the Board. The Adviser expects
that, generally, it will recommend to the Board that the Company offer to
repurchase Interests from Members twice in each year, at June 30th and December
31st. Members can only transfer or assign Company Interests under certain
limited circumstances.
2. Significant Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Management believes that the estimates utilized in preparing
the Company's financial statements are reasonable and prudent; however, actual
results could differ from these estimates.
a. Portfolio Valuation
The net asset value of the Company is determined by, or at the direction of, the
Adviser as of the close of business at the end of any fiscal period (as defined
in the Company's Limited Liability Company Agreement), in accordance with the
valuation principles set forth below, or as may be determined from time to time
pursuant to policies established by the Board.
Ordinarily, the Company's investments in Investment Funds are carried at fair
value as determined by the Company's pro-rata interest in the net assets of each
Investment Fund as reported by the Investment Manager who determines the value
of the Investment Fund's net assets. The values of the Investment Funds' net
assets are determined in accordance with their valuation policies as described
in their respective offering memoranda or operating agreements. All valuations
utilize financial information supplied by the Investment Manager of each
Investment Fund and are net of management and performance incentive fees or
allocations pursuant to the Investment Funds' agreements.
Excelsior Absolute Return Fund of Funds Master Fund, LLC
Notes to Financial Statements (Unaudited) continued
- --------------------------------------------------------------------------------
September 30, 2005
- --------------------------------------------------------------------------------
2. Significant Accounting Policies (continued)
a. Portfolio Valuation (continued)
As a general matter, the fair value of the Company's interest in an Investment
Fund will represent the amount that the Adviser could reasonably expect to
receive from the Investment Fund if the Company's interest were redeemed at the
time of valuation, based on information reasonably available at the time the
valuation is made and that the Adviser believes to be reliable. The Adviser or,
in certain cases, the Board, will consider such information, and may conclude in
certain circumstances that the information provided by an Investment Fund's
manager does not represent the fair value of the Company's interests in an
Investment Fund. Following procedures adopted by the Board, and in the absence
of specific transaction activity in interests in a particular Investment Fund,
the Company could consider whether it was appropriate, in light of all relevant
circumstances, to value such a position at the Investment Fund's net asset value
as reported at the time of valuation, or whether to adjust such value to reflect
a premium or discount to net asset value. Any such decision must be made in good
faith, and subject to the review and supervision of the Board. Because of the
inherent uncertainty of valuation, the values of the Company's investments may
differ significantly from the values that would have been used had a ready
market for the investments held by the Company been available.
Distributions received from Investment Funds, whether in the form of cash or
securities, are applied first as a reduction of the investment's cost and, if
any, any excess as a realized gain from investments in Investment Funds.
b. Company Expenses
The Company bears certain expenses incurred in its business, including, but not
limited to, the following: fees paid directly or indirectly to the Investment
Managers of the Investment Funds, all costs and expenses directly related to
portfolio transactions and positions for the Company's account; legal fees;
accounting and auditing fees; custodial fees; fees paid to the Company's
administrator; costs of insurance; advisory fees; travel and related expenses of
the Board; all costs with respect to communications regarding the Company's
transactions among the Adviser and any custodian or other agent engaged by the
Company; and other types of expenses approved by the Board.
Excelsior Absolute Return Fund of Funds Master Fund, LLC
Notes to Financial Statements (Unaudited) continued
- --------------------------------------------------------------------------------
September 30, 2005
- --------------------------------------------------------------------------------
2. Significant Accounting Policies (continued)
c. Income Taxes
As a limited liability company, no provision for the payment of Federal, state
or local income taxes has been provided by the Company. Each Member is
individually required to report on its own tax return its share of the Company's
taxable income or loss. The Company has a tax year end of December 31.
Net investment income or loss and net realized and unrealized gain or loss from
investments of the Company for each fiscal period are allocated among, and
credited to or debited against, the capital accounts of all members as of the
last day of the fiscal period in accordance with each Member's respective
investment percentages for the fiscal period, as defined in the Company's
Limited Liability Company Agreement.
The cost of the Company's investment in Investment Funds for federal income tax
purposes is based on amounts reported to the Company by the Investment Funds on
a Schedule K-1 or PFIC annual information statement for the year ended December
31, 2004. Based on Investment Funds owned at December 31, 2004, the cost of
investments for federal income tax purposes was $221,169,866. This consisted of
aggregate gross unrealized appreciation of $6,972,038 and aggregate gross
unrealized depreciation of $270,806.
3. Advisory Fee, Related Party Transactions and Other
The Company pays the Adviser a quarterly advisory fee at an annual rate of 1%,
based on the Company's net assets on the first business day of each month, after
adjustments for any subscriptions effective on that date. For the period from
April 1, 2005 to September 30, 2005, the advisory fee was $1,383,021, of which
$705,102 was included in Due to Adviser as of September 30, 2005.
As of September 30, 2005 the Company owes the Adviser $298,875 for certain
reimbursable operating expenses and organizational costs paid by the Adviser on
behalf of the Company, of which $150,114 was paid by the Adviser during the
period from April 1, 2005 to September 30, 2005.
In connection with the services provided by AIG Global pursuant to the
investment sub-advisory agreement between the Company and AIG Global, the
Company pays AIG Global a quarterly fee computed by applying the following
annual rates to the Company's average monthly net assets determined on the first
business day of each month: 0.80% of assets not exceeding $200 million; .70% of
assets exceeding $200 million but less than $400 million; .60% of assets
exceeding $400 million but less than $800 million; and .50% of assets exceeding
$800 million.
Excelsior Absolute Return Fund of Funds Master Fund, LLC
Notes to Financial Statements (Unaudited) continued
- --------------------------------------------------------------------------------
September 30, 2005
- --------------------------------------------------------------------------------
3. Advisory Fee, Related Party Transactions and Other (continued)
The Company has retained J.D. Clark & Co. (the "Administrator") to provide
accounting and certain administrative and investor services to the Company. In
connection with such services provided, the Company pays the Administrator a
quarterly fee equal to $3,000 per fund invested in the Company. For the period
from April 1, 2005 to September 30, 2005, the Company incurred $12,000 in
expenses related to such administrative services, of which $6,000 was payable as
of September 30, 2005.
4. Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, the Investment Funds in which the Company
invests trade various financial instruments and enter into various investment
activities with off-balance sheet risk. These may include, but are not limited
to, short selling activities, writing option contracts, contracts for
differences and equity swaps. However, as a result of the investments by the
Company as a limited partner or member, the Company's liability with respect to
its investments in the Investment Funds is limited to the net asset value of its
interest in each Investment Fund.
5. Investments in Investment Funds
As of September 30, 2005, the Company had investments in twenty-seven Investment
Funds. The agreements related to investments in Investment Funds provide for
compensation to the general partners/managers of the Investment Funds in the
form of management fees of 1.0% to 2.0% (per annum) of net assets and incentive
fees or allocations ranging from 20% to 25% of net profits earned. The
Investment Funds provide for periodic redemptions, with lock-up provisions
ranging from one month to one year from initial investment.
Aggregate purchases and proceeds of interests in Investment Funds for the period
from April 1, 2005 to September 30, 2005 are $32,621,520 and $5,421,520,
respectively.
Advance investment in Investment Fund of $10,500,000 represents the amount
transferred to an Investment Fund as of September 30, 2005 and relates to an
investment to be made effective October 1, 2005 pursuant to the Investment
Fund's offering memorandum or limited partnership agreement.
Excelsior Absolute Return Fund of Funds Master Fund, LLC
Notes to Financial Statements (Unaudited) continued
- --------------------------------------------------------------------------------
September 30, 2005
- --------------------------------------------------------------------------------
6. Bank Note- Line of Credit Facility
On May 2, 2005 the Company entered into a $25,000,000 revolving line of credit
note facility with a U.S. financial institution that is collateralized by the
Company's cash and investments. Based upon the election of the Company, interest
accrues at either the financial institution's prime rate less 1.25% per annum or
Libor plus 1.5% per annum. The note also included a provision for a facility fee
of 0.375% per annum on the unused portion. For the period May 2, 2005 to
September 30, 2005, the Company's interest expense and facility fee associated
with the bank note was $42,547. As of September 30, 2005 the Company did not
have any revolving note balance outstanding.
7. Financial Highlights
The following represents the ratios to average members' equity - net assets,
total return and other supplemental information for the periods indicated:
For the
For the period from
period from December
April 1, 2005 For the 1, 2003*
to September year ended to March
30, 2005 March 31, 2005 31, 2004
--------------------------------------------------
Net assets, end of period $285,792,060 $251,729,829 $83,029,523
Ratio of net investment loss to
average members' equity - (0.56%) (1.09%) (0.54%)
net assets (a)(b)
Ratio of expenses to average 0.56% 1.11% 0.54%
members' equity - net
assets (a) (b)
Portfolio turnover 1.95% 7.07% -
Total return (c) 2.73% 5.26% 5.02%
* Commencement of Operations. The ratios and total return are not
annualized for the period.
(a) Ratio doesn't reflect the Company's proportionate share of the net income
(loss) and expenses, including incentive allocation, of the Investment
Funds.
(b) Average members' equity - net assets is determined using the net assets at
the end of each month during the period.
(c) Total return assumes a purchase of an interest in the Company on the
first day and a sale of interest on the last day of the period.
Excelsior Absolute Return Fund of Funds Master Fund, LLC
Notes to Financial Statements (Unaudited) continued
- --------------------------------------------------------------------------------
September 30, 2005
- --------------------------------------------------------------------------------
8. Subsequent Events
As of October 1, 2005, the Company has received subscriptions for Interests from
Members in the amount of $13,074,289. The Company received $11,950,000 of these
Member subscriptions prior to October 1, 2005, which is reflected as Members'
Interests received in advance on the Statement of Assets, Liabilities and
Members' Equity- Net Assets. The Company also invested $10,500,000 in one new
Investment Fund as of October 1, 2005, which is reflected as Advance investment
in Investment Fund on the Statement of Assets, Liabilities and Members' Equity -
Net Assets.
9. Guarantees
In the normal course of business, the Company enters into contracts that provide
general indemnifications. The Company's maximum exposure under these
arrangements is dependent on future claims that may be made against the Company,
and therefore, cannot be established; however, based on experience, the risk of
loss from such claim is considered remote.
ADVISORY AGREEMENT APPROVAL
The Investment Advisory Agreement between the Company and the Adviser
and the Sub-Advisory Agreement between the Adviser and AIG Global (together, the
"Advisory Agreements") each had an initial term of two years. The Fund (together
with the Company, the "Funds") is managed by the Adviser, and invests
substantially all of its assets in the Company. Each of the Advisory Agreements
provides that it may be continued in effect from year to year thereafter subject
to approval by: (i) the Board of Managers of the Company (the "Company Board");
or (ii) vote of a majority of the outstanding voting securities, as defined by
the 1940 Act, of the Company, provided that, in either event, the continuance
must also be approved by a majority of the Managers who are not "interested
persons" of the Company (the "Independent Managers"), by vote cast in person at
a meeting called for the purpose of voting on such approval. The continuance of
each of the Advisory Agreements for an additional annual period was approved by
the Company Board, and by the Independent Managers, at a meeting held in person
on June 17, 2005. The Independent Managers were assisted in their review of the
proposal to continue the Advisory Agreements by independent legal counsel and
met in an executive session with such counsel separate from representatives of
the Adviser and AIG Global.
In considering this matter, the Company Board reviewed various
written materials, including: performance information on and expense ratios of
comparable registered investment companies, including similar funds managed by
AIG Global and the Adviser; and information relating to the costs and
profitability of the Adviser and AIG Global from their relationships with the
Funds ("Profitability Analysis"). The Company Board evaluated and considered:
(i) the nature, extent and quality of services provided by the Adviser and AIG
Global; (ii) the investment performance of the Funds; (iii) the costs of
services provided and the profits realized by the Adviser and AIG Global from
their relationships with the Funds; (iv) the extent to which economies of scale
in costs of providing services would be realized as the Company grows; and (v)
whether the fees payable to the Adviser and AIG Global pursuant to the Advisory
Agreements properly reflect these economies of scale for the benefit of
investors.
In considering the nature, extent and quality of services that the
Adviser and AIG Global provide to the Company, the Company Board reviewed
presentations from Fund management relating to the structure and capabilities of
the Adviser and AIG Global, including information concerning the qualifications
of key personnel, and technology and operational support, which support the
services provided to the Company. The Company Board concluded that the Company
benefits from the services provided by the Adviser and AIG Global, and in this
regard took note of AIG Global's research and portfolio management capabilities,
as well as the Adviser's extensive administrative, accounting and compliance
infrastructure and its oversight of AIG Global. The Independent Managers noted
their overall satisfaction with the nature, extent and quality of services
provided by the Adviser and AIG Global and concluded that the Company was
receiving all services required from the Adviser and AIG Global under the
Advisory Agreements, and that these services were of high quality.
The Company Board also considered the investment performance of the
Funds and compared the performance of the Funds to that of comparable funds,
including other funds managed by the Adviser and AIG Global. The Company Board
concluded that this performance compared favorably with the performance of
similar registered funds.
The profitability realized by the Adviser and AIG Global was also
considered. The Company Board relied principally on the Profitability Analysis.
Representatives of the Adviser stated that neither the Adviser nor AIG Global
receives any significant indirect benefits from its relationship with the Funds.
After reviewing the information contained in the Profitability Analysis, the
Company Board determined that each of the Adviser's and AIG Global's
profitability from its relationship with the Funds was not disproportionately
large so that it bore no reasonable relationship to the services rendered, and
also determined that, given the overall performance of the Funds and superior
service levels, the current profitability to the Adviser and AIG Global was not
excessive.
The Company Board also evaluated the fees paid for advisory services,
relying on information concerning the fees and expenses of the Funds, which were
contained in the materials provided to the Company Board. The Company Board
compared those fees and expenses to the advisory fees and expense ratios of
other similar registered funds of hedge funds, including another similar
registered fund for which the Adviser serves as investment adviser, as well as
other funds managed by AIG Global. In this regard, the Independent Managers
noted that the fee payable by the Company to the Adviser, the fee payable by the
Adviser to AIG Global and the expenses of the Funds are well within the range of
those of similar funds. The Independent Managers concluded that the fees payable
to the Adviser and AIG Global are reasonable in light of comparative performance
and expense and advisory fee information and costs of the services provided.
With regard to economies of scale, the Company Board was cognizant of
the fact that economies of scale in costs of providing services may be realized
when there is a significant increase in a fund's assets. The Independent
Managers concluded that, although the net assets of the Company have grown since
its inception, the Company has not reached an appropriate size to support fee
reductions based on economies of scale realized by the Adviser or AIG Global.
Based on the information provided to the Company Board, and the
considerations and conclusions described above, the Company Board, including
each of the Independent Managers, determined that: (i) it is appropriate that
the Adviser and AIG Global continue to provide investment advisory services to
the Company; (ii) the advisory fee paid by the Company, and the fee paid by the
Adviser to AIG Global, for these services are fair and reasonable; and (iii) it
is in the best interest of the Company and its Members to continue in effect
each of the Advisory Agreements for an additional annual period.
ITEM 2. CODE OF ETHICS.
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Not applicable for semi-annual reports.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
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Not applicable for semi-annual reports.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
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Not applicable for semi-annual reports.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
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Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
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The Schedule of Investments is included as part of the semi-annual
report to members filed under Item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
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MANAGEMENT INVESTMENT COMPANIES.
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Not applicable for semi-annual reports.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES
- -------------------------------------------------------------------------
Not applicable for semi-annual reports.
ITEM 9. PURCHASE OF EQUITY SECURITIES BY CLOSE-END MANAGEMENT INVESTMENT
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COMPANY AND AFFILIATED PURCHASERS.
- ----------------------------------
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- --------------------------------------------------------------
There have been no material changes to the procedures by which members may
recommend nominees to the registrant's board of managers that would require
disclosure.
ITEM 11. CONTROLS AND PROCEDURES.
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(a) The Registrant's Principal Executive Officer and Principal Financial Officer
have concluded that the Registrant's disclosure controls and procedures (as
defined in Rule 30a-3(c) under the 1940 Act) were effective as of a date within
90 days prior to the filing date of this report, based on their evaluation of
the effectiveness of the Registrant's disclosure controls and procedures, as
required by Rule 30a-3(b) of the 1940 Act.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's second fiscal quarter of the
period covered by this report that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over financial
reporting.
ITEM 12. EXHIBITS.
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(a)(1) Not applicable for semi-annual reports.
(a)(2) Separate certifications for the Registrant's Principal Executive Officer
and Principal Financial Officer, as required by Rule 30a-2(a) under the
1940 Act are filed herewith.
(a)(3) Not applicable.
(b) Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Excelsior Absolute Return Fund of Funds, LLC
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By (Signature and Title) /s/ James L. Bailey
--------------------------
James L. Bailey, Principal Executive Officer
Date December 9, 2005
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Pursuant to the requirements of the Securities Exchange
Act of 1934 and the Investment Company Act of 1940, the
Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly
authorized.
(Registrant) Excelsior Absolute Return Fund of Funds,LLC
--------------------------------------------
By (Signature and Title) /s/ Robert F. Aufenanger
-------------------------
Robert F. Aufenanger, Principal Financial Officer
Date December 9, 2005
-----------------