UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2009
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission file number:
001-50723
Goldman Sachs Hedge Fund
Partners, LLC
(Exact name of registrant as
specified in its charter)
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Delaware
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04-3638229
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(State or Other Jurisdiction
of
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(I.R.S. Employer
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Incorporation or
Organization)
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Identification No.)
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200 West Street
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10282
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New York, New York
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(Zip Code)
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(Address of Principal Executive
Offices)
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(212) 902-1000
(Registrants Telephone Number, including Area
Code)
Securities registered pursuant to Section 12(b) of the
Act: None
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Name of Each Exchange
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Title of Each Class
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on Which Registered
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Securities registered pursuant to Section 12(g) of the
Act:
Units of Limited Liability Company Interests
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or such shorter period that the Registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K.
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The Registrants Units of Limited Liability Company
Interests are not traded on any market and, accordingly, have no
aggregate market value. The net asset value of the Units of
Limited Liability Company Interests as of June 30, 2009
held by non-affiliates was $586,114,608. The Registrant had
4,959,970 Units of Limited Liability Company Interests
outstanding as of March 30, 2010.
Documents Incorporated By Reference
Certain exhibits are incorporated by reference in ITEM 15
of this report
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS
December 31,
2009
TABLE OF
CONTENTS
2
PART I
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
Goldman Sachs Hedge Fund Partners, LLC (the
Company) is a Delaware limited liability company
organized in March 2002 to operate as an investment fund.
Goldman Sachs Hedge Fund Strategies LLC (GS
HFS), a Delaware limited liability company that is a
wholly-owned subsidiary of the Goldman Sachs Group, Inc., serves
as the Companys managing member (the Managing
Member). As of December 31, 2009, the Company had net
assets of $597,698,035.
From its inception, the Company has grown through subscriptions
of new investors. While there have been certain periods where
the Company has only taken in investments from existing
investors and limited subscriptions from new qualified
investors, since October 2004, the Company has been accepting
additional amounts from new subscriptions and the Company has
continued to do so through December 31, 2009. For the
period from December 31, 2008 through December 31,
2009, the Company had 124 new investors and approximately
$73.9 million of aggregate subscriptions from existing and
new investors. The Company may close again at any time without
notice at the sole discretion of the Managing Member. The
acceptance of future subscriptions in the Company and the
continued growth of the Company will be determined by the
Managing Member in its sole discretion. In January 2010, the
Company satisfied redemption requests in the amount of
approximately $22 million.
INVESTMENT
PROGRAM
Investment
Objective and Approach
The Companys investment objective is to target attractive
long-term risk-adjusted returns across a variety of market
environments with volatility and correlation that are lower than
those of the broad equity markets. There can be no assurance
that the Company or any of the Investment Funds (as defined
below) will achieve their investment objectives or that the
portfolio design, risk monitoring and hedging strategies of the
Company and the Investment Funds will be successful. See
ITEM 1A. RISK FACTORS.
To achieve this objective, the Company allocates all or
substantially all of its assets among investment funds managed
by the Managing Member (such funds and any successor funds
thereto, individually, an Investment Fund and
collectively the Investment Funds), each of which
(directly or through other entities) allocates its assets to, or
invests in entities managed by, independent investment managers
(collectively, the Advisors) that employ a broad
range of investment strategies primarily within one or more of
the following hedge fund sectors (each, an Investment
Sector and, collectively, the Investment
Sectors): the tactical trading sector, the equity
long/short sector, the relative value sector and the event
driven sector. Currently, substantially all of the
Companys assets are invested in four Investment Funds,
each of which is managed by the Managing Member. The current
Investment Funds are Goldman Sachs Global Tactical Trading, LLC
(GTT), which employs investment strategies in the
tactical trading sector; Goldman Sachs Global Equity Long/Short,
LLC (GELS), which employs investment strategies
within the equity long/short sector; Goldman Sachs Global
Fundamental Strategies, LLC (GFS), which employs
investment strategies within the event driven sector; and
Goldman Sachs HFP Opportunistic Fund, LLC (HFPO),
which employs investment strategies within one or more of the
Investment Sectors. The balance of the Companys assets are
invested in Goldman Sachs Global Fundamental Strategies Asset
Trust (GFS Trust), which is a trust containing
certain interests in illiquid assets transferred by GFS, and
Goldman Sachs Global Relative Value, LLC (GRV and
together with GFS Trust and the Investment Funds, the
Investees), which is in the process of liquidation.
In addition, the Company may, directly or indirectly, allocate
assets to Advisors whose principal investment strategies are not
within one of the hedge fund sectors referenced herein.
The Company may also allocate assets to an Advisor (other than
through an investment in an Investment Fund) by investing in an
Advisor Fund, establishing a Managed Account or investing in a
Portfolio Company (each, as
3
defined below). See PERFORMANCE OF THE COMPANYDirect
Allocations to Advisors. The assets of each Investment
Fund are allocated to Advisors, directly or indirectly, by,
among other means, (i) investing in investment funds
managed by the Advisor (each, an Advisor Fund and
collectively, the Advisor Funds), (ii) investing
with an Advisor pursuant to an investment management agreement
in respect of a discretionary managed account (each, a
Managed Account and collectively, the Managed
Accounts), or (iii) investing in a separate exempted
company incorporated with limited liability in the Cayman
Islands (each, a Portfolio Company and collectively,
the Portfolio Companies) that has entered into an
investment management agreement with an Advisor in respect of a
Managed Account established by such Portfolio Company. See
PORTFOLIO COMPANIES. (References herein to Advisors
include Advisor Funds where the context permits). One or more of
the Investment Funds have in the past and may from time to time
not accept additional subscriptions or limit the amount of
additional subscriptions from third parties because certain of
the Advisors with which they invest are no longer accepting
additional investments. Under such circumstances, the Managing
Member does not expect to allow additional investors to
subscribe for units in the Company except as a result of
redemptions in the Company. However, even if the Investment
Funds are closed generally, the Investment Funds may accept
additional investments from the Company for rebalancing or other
purposes. See also the Schedule of Investments in the financial
statements for more information about the level of the
Companys investments through the Investment Funds with
certain Advisors.
The Investment Funds and GRV are each a Delaware limited
liability company and GFS Trust is a Delaware statutory trust. A
brief description of the investment objective and approach of
each of the current Investees is set forth under
PERFORMANCE OF THE COMPANYDescription of the
Investees and the Performance of the Investees.
The Investment Sectors are subjective classifications made by
the managing member of the Investment Funds in its sole
discretion. Such classifications are based on information
provided by the Advisors to the managing member of the relevant
Investment Fund and may differ from classifications of similarly
named sectors made by other industry participants. In addition,
although each Advisor to which an Investment Fund allocates
assets invests principally utilizing investment strategies
within the applicable Investment Sector, certain Advisors to
which an Investment Fund allocates assets may also utilize other
investment strategies that are either related or unrelated to
such Investment Sector. The Investment Funds may pursue a wide
variety of investment strategies and may modify or depart from
the investment strategies described herein as the managing
member of the Investment Funds determines appropriate to
accomplish the Investment Funds investment objectives.
The managing member of the Investment Funds may invest a
substantial portion of an Investment Funds assets with
Advisors that may have limited or no track records
and/or
limited or no operating histories. Certain Advisors may have
limited or no experience managing certain of the strategies
expected to be deployed by them in their investment programs.
Certain strategies utilized may also be newly developed and may
not be widely used. The risk of such strategies may be difficult
to predict in various market conditions. In such cases, the
Advisors or individual members of their management teams will
each have had, in the opinion of the managing member of the
Investment Funds, sufficient relevant experience in other
contexts or trading in strategies similar to those that the
Advisor is expected to utilize.
The Managing Member may, from time to time in its sole
discretion, without prior notice to the holders of units of the
Company (each, a Member and, collectively, the
Members) and without limitation, introduce new
instruments into the portfolio of investment strategies, utilize
additional investment strategies
and/or
remove, substitute or modify any investment strategy it is then
utilizing. Any such decision will be made by the Managing
Member, in its sole discretion, based on one or more factors it
may deem relevant from time to time, which among others may
include liquidity constraints and the availability of
opportunities that it deems attractive. Any such decision may
result in the utilization of additional investment strategies,
the removal or substitution of any investment strategy, or all
of the Companys assets being allocated to a single
investment strategy. There can be no assurance that the Managing
Members decisions in this regard will be successful or
will not otherwise have an adverse effect on the Company.
Members will not have an opportunity to evaluate the Managing
Members decisions regarding the determination of (and any
changes to) the investment strategies utilized by the Company,
nor an opportunity to redeem units, prior to any such decision.
There can be no assurance that the strategies utilized by the
Company are adequate, that they will be adequately implemented
by the Managing Member, or that changes
4
made by the Managing Member to the strategies utilized by the
Company will not be disadvantageous to the Company.
Allocation
Among the Investment Funds
The Managing Member establishes allocations among the Investment
Sectors in a manner consistent with the Companys
investment objective. Since April 1, 2008, the Managing
Member has had no constraints with respect to the percentage of
the Companys assets to be allocated, directly or
indirectly, to any single Advisor, group of Advisors, Investment
Fund, or Investment Sector, or with respect to the number of
Investment Funds and Advisors to which, directly or indirectly,
assets of the Company are allocated at any time. The percentage
of the Companys assets to be allocated to any single
Advisor, group of Advisors, Investment Fund or Investment
Sector, and the number of Investment Funds and Advisors to which
the Company allocates assets from time to time will be
determined by the Managing Member in its sole discretion, based
on factors deemed relevant by the Managing Member, which may
include the amount of the Companys assets under
management, constraints on the capital capacity of the
Investment Funds and Advisors, the liquidity needs of the
Company and the liquidity terms offered by the Investment Funds
and Advisors, the availability of attractive opportunities, and
other portfolio construction considerations.
The Managing Member may, from time to time, vary or change
materially the actual allocation of assets made by the Company,
as it deems appropriate in its sole discretion, including
without limitation, by way of allocation of Company assets to
any new Investment Fund or Advisor, complete or partial
withdrawal of an allocation to any existing Investment Fund or
Advisor, a reallocation of assets among existing Investment
Funds or Advisors, or any combination of the foregoing. In
carrying out any reallocation of Company assets, the Managing
Member will have the sole discretion to determine the manner of
such reallocation, including from which Investment Funds or
Advisors to withdraw assets and to which Investment Funds or
Advisors to allocate assets. Any reallocation of Company assets
may take a significant period of time to implement due to the
liquidity provisions and restrictions of the Investment Funds
and the Advisors and for other reasons. There can be no
assurance that market or other events will not have an adverse
impact on the strategies employed by multiple Investment Funds
and Advisors. Investment Funds and Advisors may at certain times
hold large positions in a relatively limited number of
investments. The Company could be subject to significant losses
if an Investment Fund or an Advisor holds a large position in a
particular investment that declines in value that cannot be
liquidated without adverse market reaction or is otherwise
adversely affected by changes in market conditions or
circumstances. See ITEM 1A. RISK FACTORSGeneral
RisksRisks Related to the Company and the Investment
Funds Performance and OperationThere Can Be No
Assurance that the Managing Members Decisions Regarding
Allocations will be Successful; Inaccurate Information Provided
by the Advisors May Have a Material Adverse Effect on
Implementing the Companys Investment Objective,
Special Risks of the Companys
StructureRisks Associated with the Company Investing in
Other EntitiesAdvisors May Have Limited Capacity to Manage
Additional Investment Fund Investments, Which Could Cause
Dilution or Concentration of the Companys Investments or
Negatively Affect Allocation of Investments and
Allocation of the Companys Assets May Not
Protect the Company from Exposure to Economic Downturns in Any
Investment Fund or Investment Sector.
As of the years ended December 31, 2009, 2008, 2007, 2006
and 2005, respectively, the members equity of the Company
was substantially allocated among the Investees approximately as
described in the tables below. Members equity, or net
assets, means the total assets of the Company less total
liabilities of the Company at the time of determination in
accordance with U.S. generally accepted accounting
principles (U.S. GAAP). Total assets means the
sum of the Companys cash and cash equivalents, other
assets and investments determined at any time in accordance with
U.S. GAAP as of that date. The figures represent actual
allocations of the Companys members equity and not
the allocation of the expected risk of the Company among the
Investees. The allocations of the Companys members
equity will change from time to time in accordance with the
Companys investment objective and strategies. In addition,
the tables below as of December 31, 2009, 2008, 2007, 2006
and 2005 also provide the approximate allocations among the
Investees of the adjusted members equity. The adjusted
members equity excluded Redemptions payable of $22,410,715
at December 31, 2009, $28,982,893 at December 31,
2008, $22,708,145 at December 31, 2007, $23,701,199 at
December 31, 2006 and $347,523,596 at December 31,
2005, which is reflected in the financial statements as a
liability under U.S. GAAP. The Managing Member believes
this
5
allocation more accurately reflects the percentage of the
Companys equity invested in the Investees given the timing
of the payment for the Redemptions payable. The Companys
investments are carried at fair value as determined by the
Companys attributable share of the net assets of the
respective Investees. Fair values are determined utilizing
information supplied by each individual Investees net of each
Advisors management fee and incentive allocation and are
not a guarantee of actual realizable amounts. See ITEM 1A.
RISK FACTORSSpecial Risks of the Companys
StructureRisks Related to the Companys
StructureThe Companys Financial Statements are, and
in the Future Will Ultimately be, Based on Estimates of
Valuations Provided by Third Party Advisors Which May not be
Accurate or May Need to be Adjusted in the Future,
Risks Associated with the Company Investing in Other
EntitiesValuation of the Investment Funds
Investments Will be Determined Utilizing Valuations Provided by
the Advisors Which are Generally not Audited; Uncertainties in
Valuations Could Have a Material Adverse Effect on the
Companys Net Assets and ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONSCritical Accounting
Policies and Estimates.
December 31,
2009
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Fair Value of
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Fair Value of
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Fair Value of
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Companys
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Companys Investment
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Companys
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Investment as a % of
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as a % of Adjusted
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Investee
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Investment in $
Amount
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Members
Equity (1)
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Members
Equity (2)
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GELS
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$
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235,518,832
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39.40
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%
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37.98
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%
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GFS
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$
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132,477,127
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22.17
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%
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21.36
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%
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GFS Trust
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$
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37,532,758
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6.28
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%
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6.05
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%
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GRV
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$
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4,887,674
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0.82
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%
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0.79
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%
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GTT
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$
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155,217,816
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25.97
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%
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25.03
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%
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HFPO
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$
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20,801,289
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3.48
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%
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3.36
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%
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Total
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$
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586,435,496
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98.12
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%(3)
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94.57
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%(3)
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(1) |
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Members equity, used in the calculation of the fair value
of the Investees as a percentage of members equity, is
reduced for member redemptions that are paid after the balance
sheet date according to ASC 480, Distinguishing
Liabilities from Equity. |
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(2) |
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Adjusted members equity, used in the calculation of the
fair value of the Investees as a percentage of adjusted
members equity, represents members equity excluding
Redemptions payable in the amount of $22,410,715 at
December 31, 2009. |
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(3) |
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The total value of the Companys investment in the
Investees was less than 100% of members equity and
adjusted members equity because members equity and
adjusted members equity reflected cash and cash
equivalents greater than total liabilities. |
6
December 31,
2008
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Fair Value of
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Fair Value of
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Fair Value of
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Companys
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Companys Investment
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Companys
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Investment as a % of
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as a % of Adjusted
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Investee
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Investment in $
Amount
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Members
Equity (1)
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Members
Equity (2)
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GELS
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$
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182,311,620
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29.89
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%
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28.53
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%
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GFS
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$
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212,189,214
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34.79
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%
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33.21
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%
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GRV
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$
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59,060,101
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9.68
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%
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9.24
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%
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GTT
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$
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119,121,670
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19.53
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%
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18.65
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%
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HFPO
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$
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42,106,058
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6.91
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%
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6.59
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%
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Total
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$
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614,788,663
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100.80
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%(3)
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96.22
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%(4)
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(1) |
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Members equity, used in the calculation of the fair value
of the Investees as a percentage of members equity, is
reduced for member redemptions that are paid after the balance
sheet date according to ASC 480, Distinguishing
Liabilities from Equity. |
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(2) |
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Adjusted members equity, used in the calculation of the
fair value of the Investees as a percentage of adjusted
members equity, represents members equity excluding
Redemptions payable in the amount of $28,982,893 at
December 31, 2008. |
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(3) |
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The total value of the Companys investments in the
Investees exceeded 100% of adjusted members equity because
adjusted members equity reflected certain accrued
liabilities of the Company, including fees and expenses and, in
addition, also reflected Redemptions payable at
December 31, 2008. |
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(4) |
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The total value of the Companys investment in the
Investees was less than 100% of adjusted members equity
because adjusted members equity reflected cash and cash
equivalents greater than total liabilities excluding Redemptions
payable in the amount of $28,982,893 at December 31, 2008. |
December 31,
2007
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Fair Value of
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Fair Value of
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Fair Value of
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Companys
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Companys Investment
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Companys
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Investment as a % of
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as a % of Adjusted
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Investee
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Investment in $
Amount
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Members
Equity (1)
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Members
Equity (2)
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GELS
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$
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225,759,808
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33.16
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%
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32.09
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%
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GFS
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$
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257,594,595
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37.84
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%
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36.62
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%
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GRV
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$
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84,319,166
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12.38
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%
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11.99
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%
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GTT
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$
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97,949,282
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14.39
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%
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13.92
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%
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HFPO
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$
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36,813,437
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5.41
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%
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5.23
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%
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Total
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$
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702,436,288
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103.18
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%(3)
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99.85
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%(4)
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(1) |
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Members equity, used in the calculation of the fair value
of the Investees as a percentage of members equity, is
reduced for member redemptions that are paid after the balance
sheet date according to ASC 480, Distinguishing
Liabilities from Equity. |
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(2) |
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Adjusted members equity, used in the calculation of the
fair value of the Investees as a percentage of adjusted
members equity, represents members equity excluding
Redemptions payable in the amount of $22,708,145 at
December 31, 2007. |
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(3) |
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The total value of the Companys investments in the
Investees exceeded 100% of members equity because
members equity reflected certain accrued liabilities of
the Company, including fees and expenses and, in addition, also
reflected Redemptions payable at December 31, 2007. |
7
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(4) |
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The total value of the Companys investment in the
Investees was less than 100% of adjusted members equity
because adjusted members equity reflected cash and cash
equivalents greater than total liabilities excluding Redemptions
payable in the amount of $22,708,145 at December 31, 2007. |
December 31,
2006
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of
|
|
|
Fair Value of
|
|
|
|
Fair Value of
|
|
|
Companys
|
|
|
Companys Investment
|
|
|
|
Companys
|
|
|
Investment as a % of
|
|
|
as a % of Adjusted
|
|
Investee
|
|
Investment in $
Amount
|
|
|
Members
Equity (1)
|
|
|
Members
Equity (2)
|
|
|
GELS
|
|
$
|
243,737,514
|
|
|
|
36.81
|
%
|
|
|
35.54
|
%
|
GFS
|
|
$
|
240,699,867
|
|
|
|
36.36
|
%
|
|
|
35.10
|
%
|
GRV
|
|
$
|
98,479,997
|
|
|
|
14.87
|
%
|
|
|
14.36
|
%
|
GTT
|
|
$
|
103,332,963
|
|
|
|
15.61
|
%
|
|
|
15.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
686,250,341
|
|
|
|
103.65
|
%(3)
|
|
|
100.07
|
%(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Members equity, used in the calculation of the fair value
of the Investees as a percentage of members equity, is
reduced for member redemptions that are paid after the balance
sheet date according to ASC 480, Distinguishing
Liabilities from Equity. |
|
(2) |
|
Adjusted members equity, used in the calculation of the
fair value of the Investees as a percentage of adjusted
members equity, represents members equity excluding
Redemptions payable in the amount of $23,701,199 at
December 31, 2006. |
|
(3) |
|
The total value of the Companys investments in the
Investees exceeded 100% of members equity and adjusted
members equity, respectively, because members equity
and adjusted members equity both reflected certain accrued
liabilities of the Company, including fees and expenses and, in
addition, members equity also reflected Redemptions
payable at December 31, 2006. |
December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of
|
|
|
Fair Value of
|
|
|
|
Fair Value of
|
|
|
Companys
|
|
|
Companys Investment
|
|
|
|
Companys
|
|
|
Investment as a % of
|
|
|
as a % of Adjusted
|
|
Investee
|
|
Investment in $
Amount
|
|
|
Members
Equity (1)
|
|
|
Members
Equity (2)
|
|
|
GELS
|
|
$
|
294,096,911
|
|
|
|
37.97
|
%
|
|
|
26.21
|
%
|
GFS
|
|
$
|
301,443,254
|
|
|
|
38.91
|
%
|
|
|
26.86
|
%
|
GRV
|
|
$
|
317,728,892
|
|
|
|
41.02
|
%
|
|
|
28.32
|
%
|
GTT
|
|
$
|
211,060,876
|
|
|
|
27.25
|
%
|
|
|
18.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,124,329,933
|
|
|
|
145.15
|
%(3)
|
|
|
100.20
|
%(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Members equity, used in the calculation of the fair value
of the Investees as a percentage of members equity, is
reduced for member redemptions that are paid after the balance
sheet date according to ASC 480, Distinguishing
Liabilities from Equity. |
|
(2) |
|
Adjusted members equity, used in the calculation of the
fair value of the Investees as a percentage of adjusted
members equity, represents members equity excluding
Redemptions payable in the amount of $347,523,596 at
December 31, 2005. |
|
(3) |
|
The total value of the Companys investments in the
Investees exceeded 100% of members equity and adjusted
members equity, respectively, because members equity
and adjusted members equity both reflected certain accrued
liabilities of the Company, including fees and expenses and, in
addition, members equity also reflected Redemptions
payable at December 31, 2005. |
8
PERFORMANCE
OF THE COMPANY
For the years ended December 31, 2009, 2008, 2007, 2006 and
2005, the Company had net returns as described in the tables
below. Past performance of the Company is not indicative of
future results which may vary. The Companys net return has
been computed based on the performance of the Company net of all
fees and expenses including, among others (i) incentive
allocations to the Managing Member and (ii) a monthly
management fee to the Managing Member. See FEES AND
EXPENSES.
January 1,
2009 December 31, 2009
|
|
|
|
|
|
|
|
|
Date of Issuance of
|
|
Net Return for Period
|
Series of
Units (1)
|
|
Units
|
|
Outstanding (2)
|
|
Class A Series 1
|
|
|
|
|
9.07
|
%
|
Class A Series 45
|
|
January 2008
|
|
|
9.07
|
%
|
Class A Series 46
|
|
February 2008
|
|
|
9.07
|
%
|
Class A Series 47
|
|
March 2008
|
|
|
9.07
|
%
|
Class A Series 48
|
|
April 2008
|
|
|
9.07
|
%
|
Class A Series 49
|
|
May 2008
|
|
|
9.07
|
%
|
Class A Series 50
|
|
June 2008
|
|
|
9.07
|
%
|
Class A Series 51
|
|
July 2008
|
|
|
9.07
|
%
|
Class A Series 52
|
|
August 2008
|
|
|
9.07
|
%
|
Class A Series 53
|
|
September 2008
|
|
|
9.07
|
%
|
Class A Series 54
|
|
October 2008
|
|
|
8.96
|
%
|
Class A Series 55
|
|
November 2008
|
|
|
8.76
|
%
|
Class A Series 56
|
|
December 2008
|
|
|
8.66
|
%
|
Class A Series 57
|
|
January 2009
|
|
|
8.61
|
%
|
Class A Series 58
|
|
February 2009
|
|
|
7.74
|
%
|
Class A Series 59
|
|
March 2009
|
|
|
7.91
|
%
|
Class A Series 60
|
|
April 2009
|
|
|
7.94
|
%
|
Class A Series 61
|
|
May 2009
|
|
|
7.18
|
%
|
Class A Series 62
|
|
June 2009
|
|
|
5.15
|
%
|
Class A Series 63
|
|
July 2009
|
|
|
5.08
|
%
|
Class A Series 64
|
|
August 2009
|
|
|
3.95
|
%
|
Class A Series 65
|
|
September 2009
|
|
|
2.68
|
%
|
Class A Series 66
|
|
September 2009
|
|
|
2.82
|
%
|
Class A Series 67
|
|
September 2009
|
|
|
2.82
|
%
|
Class A Series 68
|
|
September 2009
|
|
|
2.82
|
%
|
Class A Series 69
|
|
September 2009
|
|
|
2.82
|
%
|
Class A Series 70
|
|
September 2009
|
|
|
2.82
|
%
|
Class A Series 71
|
|
September 2009
|
|
|
2.82
|
%
|
Class A Series 72
|
|
September 2009
|
|
|
2.82
|
%
|
Class A Series 73
|
|
September 2009
|
|
|
2.82
|
%
|
Class A Series 74
|
|
October 2009
|
|
|
1.22
|
%
|
Class A Series 75
|
|
November 2009
|
|
|
1.39
|
%
|
Class A Series 76
|
|
December 2009
|
|
|
0.16
|
%
|
|
|
|
(1) |
|
As of December 31, 2009, the Company had 33 series of
Class A Units (as defined below) outstanding. The
Class A Series Units (as defined below) are identical
in every regard except with respect to its individualized
incentive allocation base. Effective January 1, 2010,
Class A Series 55 through Class A Series 65
and Class A |
9
|
|
|
|
|
Series 74 through Class A Series 76 units
were converted into Class A Series 54 units.
Class A Series Units (other than Class A
Series 1) issued in future periods represent issuances
of new series and are different from existing series. |
|
(2) |
|
The net return is shown for the month of issuance through
December 31, 2009. |
January 1,
2008 December 31, 2008
|
|
|
|
|
|
|
|
|
Date of Issuance of
|
|
Net Return for Period
|
Series of
Units (1)
|
|
Units
|
|
Outstanding (2)
|
|
Class A Series 1
|
|
|
|
|
(13.71
|
)%
|
Class A Series 45
|
|
January 2008
|
|
|
(13.71
|
)%
|
Class A Series 46
|
|
February 2008
|
|
|
(12.20
|
)%
|
Class A Series 47
|
|
March 2008
|
|
|
(14.00
|
)%
|
Class A Series 48
|
|
April 2008
|
|
|
(12.45
|
)%
|
Class A Series 49
|
|
May 2008
|
|
|
(13.27
|
)%
|
Class A Series 50
|
|
June 2008
|
|
|
(14.85
|
)%
|
Class A Series 51
|
|
July 2008
|
|
|
(14.90
|
)%
|
Class A Series 52
|
|
August 2008
|
|
|
(12.59
|
)%
|
Class A Series 53
|
|
September 2008
|
|
|
(11.44
|
)%
|
Class A Series 54
|
|
October 2008
|
|
|
(6.48
|
)%
|
Class A Series 55
|
|
November 2008
|
|
|
(2.77
|
)%
|
Class A Series 56
|
|
December 2008
|
|
|
(0.97
|
)%
|
|
|
|
(1) |
|
As of December 31, 2008, the Company had 13 series of
Class A Units outstanding. The Class A
Series Units are identical in every regard except with
respect to its individualized incentive allocation base.
Class A Series Units (other than Class A
Series 1) issued in future periods represent issuances
of new series and are different from existing series. |
|
(2) |
|
The net return is shown for the month of issuance through
December 31, 2008. |
10
January 1,
2007 December 31, 2007
|
|
|
|
|
|
|
|
|
Date of Issuance of
|
|
Net Return for Period
|
Series of
Units (1)
|
|
Units
|
|
Outstanding (2)
|
|
Class A Series 1
|
|
|
|
|
11.51
|
%
|
Class A Series 33
|
|
January 2007
|
|
|
11.51
|
%
|
Class A Series 34
|
|
February 2007
|
|
|
9.77
|
%
|
Class A Series 35
|
|
March 2007
|
|
|
8.90
|
%
|
Class A Series 36
|
|
April 2007
|
|
|
7.95
|
%
|
Class A Series 37
|
|
May 2007
|
|
|
6.21
|
%
|
Class A Series 38
|
|
June 2007
|
|
|
3.95
|
%
|
Class A Series 39
|
|
July 2007
|
|
|
3.43
|
%
|
Class A Series 40
|
|
August 2007
|
|
|
3.54
|
%
|
Class A Series 41
|
|
September 2007
|
|
|
5.58
|
%
|
Class A Series 42
|
|
October 2007
|
|
|
3.87
|
%
|
Class A Series 43
|
|
November 2007
|
|
|
0.36
|
%
|
Class A Series 44
|
|
December 2007
|
|
|
0.73
|
%
|
|
|
|
(1) |
|
As of December 31, 2007, the Company had 13 series of
Class A Units outstanding. The Class A
Series Units are identical in every regard except with
respect to its individualized incentive allocation base.
Effective January 1, 2008, Class A Series 33
through Class A Series 44 units were converted
into Class A Series 1 units. Class A
Series Units (other than Class A
Series 1) issued in future periods represent issuances
of new series and are different from existing series. |
|
(2) |
|
The net return is shown for the month of issuance through
December 31, 2007. |
January 1,
2006 December 31, 2006
|
|
|
|
|
|
|
|
|
Date of Issuance of
|
|
Net Return for Period
|
Series of
Units (1)
|
|
Units
|
|
Outstanding (2)
|
|
Class A Series 1
|
|
|
|
|
9.03
|
%
|
Class A Series 21
|
|
January 2006
|
|
|
9.03
|
%
|
Class A Series 22
|
|
February 2006
|
|
|
6.00
|
%
|
Class A Series 23
|
|
March 2006
|
|
|
5.51
|
%
|
Class A Series 24
|
|
April 2006
|
|
|
3.82
|
%
|
Class A Series 25
|
|
May 2006
|
|
|
2.32
|
%
|
Class A Series 26
|
|
June 2006
|
|
|
4.28
|
%
|
Class A Series 27
|
|
July 2006
|
|
|
4.74
|
%
|
Class A Series 28
|
|
August 2006
|
|
|
4.84
|
%
|
Class A Series 29
|
|
September 2006
|
|
|
4.06
|
%
|
Class A Series 30
|
|
October 2006
|
|
|
4.77
|
%
|
Class A Series 31
|
|
November 2006
|
|
|
3.21
|
%
|
Class A Series 32
|
|
December 2006
|
|
|
1.37
|
%
|
|
|
|
(1) |
|
As of December 31, 2006, the Company had 13 series of
Class A Units outstanding. The Class A
Series Units are identical in every regard except with
respect to its individualized incentive allocation base.
Effective January 1, 2007, Class A Series 21
through Class A Series 32 units were converted
into Class A Series 1 units. Class A Series
(other than Class A Series 1) issued in future
periods represent issuances of new series and are different from
existing series. |
|
(2) |
|
The net return is shown for the month of issuance through
December 31, 2006. |
11
January 1,
2005 December 31, 2005
|
|
|
|
|
|
|
|
|
Date of Issuance of
|
|
Net Return for Period
|
Series of
Units (1)
|
|
Units
|
|
Outstanding (2)
|
|
Class A Series 1
|
|
|
|
|
4.57
|
%
|
Class A Series 9
|
|
January 2005
|
|
|
4.57
|
%
|
Class A Series 10
|
|
February 2005
|
|
|
5.17
|
%
|
Class A Series 11
|
|
March 2005
|
|
|
4.12
|
%
|
Class A Series 12
|
|
April 2005
|
|
|
4.69
|
%
|
Class A Series 13
|
|
May 2005
|
|
|
6.28
|
%
|
Class A Series 14
|
|
June 2005
|
|
|
5.87
|
%
|
Class A Series 15
|
|
July 2005
|
|
|
4.71
|
%
|
Class A Series 16
|
|
August 2005
|
|
|
3.26
|
%
|
Class A Series 17
|
|
September 2005
|
|
|
2.31
|
%
|
Class A Series 18
|
|
October 2005
|
|
|
1.04
|
%
|
Class A Series 19
|
|
November 2005
|
|
|
2.77
|
%
|
Class A Series 20
|
|
December 2005
|
|
|
1.46
|
%
|
|
|
|
(1) |
|
As of December 31, 2005, the Company had 13 series of
Class A Units outstanding. The Class A
Series Units are identical in every regard except with
respect to its individualized incentive allocation base.
Effective January 1, 2006, Class A Series 9
through Class A Series 20 units were converted
into Class A Series 1 units. Class A Series
(other than Class A Series 1) issued in future
periods represent issuances of new series and are different from
existing series. |
|
(2) |
|
The net return is shown for the month of issuance through
December 31, 2005. |
The Company only has one class of units at present, Class A
units (the Class A Units and each series of
Class A Units, the Class A
Series Units). The Class A Series Units are
subject to a management fee and an incentive allocation.
Separately, the Investment Funds each offer and GRV offered
separate classes of units. Among the classes of units offered by
GTT, GELS, GRV and GFS, each has offered Class C units (the
Class C Units and each series of Class C
Units, the Class C Series Units), while
HFPO has offered Class A Units, all of which are not
subject to management fees and incentive allocations at an
Investment Fund level (although management fees and incentive
allocations are paid to each of the Advisors in which the
Investment Funds invest). GFS Trust has issued interests, which
are not subject to management fees and incentive allocations.
The Company only owns Class C Series Units of GTT,
GELS, GRV and GFS, Class A Series Units of HFPO and
interests in GFS Trust. The intent behind this fee arrangement
was to create a fee structure such that holders of Class A
Series Units of the Company are notin addition to
management and incentive allocations paid to the Company (as
well as management and incentive allocations paid to individual
Advisors)also subject to management fees and incentive
allocations paid by each of the Investees. Therefore, holders of
a fee bearing class of the Company indirectly own
no-fee-shares of the Investees. Through its
investment in the Investees, the Company bears a pro rata
portion of all other offering, organizational and operating
expenses of the Investees, including the administration fee for
SEIs (as defined below) services as administrator of each
Investee, and a pro rata portion of the Advisor compensation
paid by the Investment Funds. Returns in the tables above are
shown net of these expenses. See FEES AND EXPENSES.
The table below compares the historical cumulative total net
return of the Companys Class A
Series 1 units for the investment periods indicated in
the table with the 3 Month London Interbank Offered Rate
(LIBOR), the Barclays Aggregate Bond Index (formerly
Lehman Brothers Aggregate Index), the MSCI World Index and the
S&P 500 Index. The 3 Month LIBOR, the Barclays Aggregate
Bond Index, the MSCI World Index and the S&P 500 Index are
commonly used as comparative indices by hedge fund investors.
The Managing Member does not manage the Company in respect of
any particular index. References to market or composite indices,
benchmarks or other measures of relative market performance over
a specified period of time (referred to herein as an
index or, collectively, as indices) are
provided for information only. Reference to these indices does
not imply that the portfolio will achieve returns, volatility or
other results similar (or dissimilar) to the indices. The
composition of an
12
index may not reflect the manner in which a portfolio is
constructed in relation to expected or achieved returns,
portfolio guidelines, restrictions, sectors, correlations,
concentrations, volatility or tracking error targets, all of
which are subject to change over time. These indices are
unmanaged and the figures for an index reflect the reinvestment
of dividends but do not reflect the deduction of any fees or
expenses which would reduce returns. The Members cannot invest
directly in these indices.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barclays
|
|
|
MSCI
|
|
|
|
|
|
|
Company
|
|
|
3 Month
|
|
|
Aggregate
|
|
|
World
|
|
|
S&P 500
|
|
Investment Period
|
|
(1)
|
|
|
LIBOR
|
|
|
Bond Index
|
|
|
Index
|
|
|
Index
|
|
|
1/1/2009 12/31/2009
|
|
|
9.07
|
%
|
|
|
0.87
|
%
|
|
|
5.93
|
%
|
|
|
29.99
|
%
|
|
|
26.46
|
%
|
1/1/2008 12/31/2008
|
|
|
(13.71
|
)%
|
|
|
3.56
|
%
|
|
|
5.24
|
%
|
|
|
(40.71
|
)%
|
|
|
(37.00
|
)%
|
1/1/2007 12/31/2007
|
|
|
11.51
|
%
|
|
|
5.32
|
%
|
|
|
6.96
|
%
|
|
|
9.04
|
%
|
|
|
5.49
|
%
|
1/1/2006 12/31/2006
|
|
|
9.03
|
%
|
|
|
5.10
|
%
|
|
|
4.33
|
%
|
|
|
20.07
|
%
|
|
|
15.79
|
%
|
1/1/2005 12/31/2005
|
|
|
4.57
|
%
|
|
|
3.32
|
%
|
|
|
2.43
|
%
|
|
|
9.49
|
%
|
|
|
4.91
|
%
|
|
|
|
(1) |
|
Company returns shown are the net returns for Class A
Series 1 for each of the investment periods shown. See
above for the Companys net returns for Class A
Series 45-76,
Class A
Series 45-56,
Class A
Series 33-44,
Class A
Series 21-32
and Class A
Series 9-20
for 2009, 2008, 2007, 2006 and 2005, respectively. |
Description
of the Investees and the Performance of the Investees
The annual net returns shown for each Investee in the tables
below have been computed based on the performance of the
respective Investee net of all expenses allocated by each
Investee to the Company for periods shown following the
commencement of the Company. Past performance of the Investees
is not indicative of future results which may vary
significantly. The Company owns no-fee-shares in
each Investee and accordingly the Company was not charged any
incentive allocation or management fee by the Managing Member in
its capacity as managing member of each of the Investees. See
FEES AND EXPENSES. The Investees dealing net
asset value (NAV) and reported performance are
prepared using the latest information available from the Advisor
Funds at the time of such valuation in accordance with their
Limited Liability Company Agreement. The Investees
investments in the Advisor Funds are determined utilizing NAVs
supplied by, or on behalf of, the Advisors of each Advisor Fund.
Furthermore, NAVs received from the administrator of the Advisor
Funds may be estimates and such values will be used to calculate
the NAV of the Investees for purposes of determining amounts
payable on redemptions and reported performance of the
Investees. Such estimates provided by the administrators of the
Advisor Funds may be subject to subsequent revisions which may
not be reflected in the Investees final month-end dealing
NAV. The annual audited financial statements may reflect
adjustments for such subsequent revisions which may result in a
variance between the Investees total return reported in
their audited financial statements and the reported performance
based on the month-end dealing NAV.
Goldman
Sachs Global Equity Long/Short, LLC
GELS investment objective is to target attractive
risk-adjusted returns with volatility lower than the broad
equity markets, primarily through long and short investment
opportunities available principally in the global equity
markets. As of December 31, 2009, GELS managing
member (currently, the Managing Member) had allocated GELS
assets, directly or indirectly, to 30 Advisor Funds,
although this number may change materially over time as
determined by GELS managing member. Equity long/short
strategies involve making long and short equity investments,
generally based on fundamental evaluations, although it is
expected that Advisors in this Investment Sector will employ a
wide range of styles. For example, such Advisors may
(i) focus on companies within specific industries;
(ii) focus on companies only in certain countries or
regions; (iii) focus on companies with certain ranges of
market capitalization; or (iv) employ a more diversified
approach, allocating assets to opportunities across investing
styles, industry sectors, market capitalizations and geographic
regions. Other strategies may be employed as well. The managing
member of GELS generally will not allocate more than 25% of
GELS total assets to any single Advisor at the time of
allocation.
13
Individuals and entities affiliated with the GS Group (as
defined below), including investment funds, directors, officers,
employees, partners, trustees, managers, members and any related
trusts, owned approximately 70% of GELS as of December 31,
2009.
For the past five years from January 1, 2005 to
December 31, 2009, GELS had net returns on invested assets
as described in the table below.
|
|
|
|
|
Investment Period*
|
|
Net Return for Period
|
|
|
1/1/2009 12/31/2009
|
|
|
13.37
|
%
|
1/1/2008 12/31/2008
|
|
|
(16.75
|
)%
|
1/1/2007 12/31/2007
|
|
|
11.70
|
%
|
1/1/2006 12/31/2006
|
|
|
11.91
|
%
|
1/1/2005 12/31/2005
|
|
|
9.93
|
%
|
|
|
* |
Net return is based on the performance of Class C
Series 1 units. Class C Series 1 units
of GELS (including those issued to the Company) are not subject
to management fees paid or incentive allocations made to GS HFS
as managing member of GELS and therefore returns do not reflect
the payment of any such fees or the making of any allocations to
GS HFS. In addition, returns for Class C
Series 1 units during the entire period reflect
returns net of the compensation paid to Advisors. The returns
shown for 2005, 2006, 2007, 2008 and 2009 are net of an
administration fee paid by GELS to SEI, who became the
administrator of GELS on January 1, 2005. No administration
fee was paid to GS HFS by GELS in 2005, 2006, 2007, 2008 and
2009.
|
Goldman
Sachs Global Fundamental Strategies, LLC
GFSs investment objective is to target attractive
risk-adjusted absolute returns with volatility and correlation
that are lower than the broad equity markets by allocating
assets to Advisors that operate primarily in the global event
driven sector. As of December 31, 2009, GFSs managing
member (currently, the Managing Member) had allocated GFSs
assets, directly or indirectly, to 14 Advisor Funds,
although this number may change materially over time as
determined by GFSs managing member. Prior to April 1,
2008, GFSs managing member generally did not allocate more
than 25% of GFSs total assets to any single Advisor at the
time of allocation. As of April 1, 2008, there are no
restrictions on the amount of assets of GFS that its managing
member can allocate to any single Advisor. Event-driven
strategies seek to identify security price changes resulting
from corporate events such as restructurings, mergers,
takeovers, spin-offs and other special situations. Corporate
event arbitrageurs generally choose their investments based on
their perceptions of the likelihood that the event or
transaction will occur, the amount of time that the process will
take and the perceived ratio of return to risk.
Strategies that may be utilized in the event driven sector
include merger arbitrage, high yield/distressed securities and
special situations. Other strategies may be employed as well.
Merger
Arbitrage
Merger arbitrageurs seek to capture the price spread between
current market prices and the value of securities upon
successful completion of a takeover or merger transaction. The
availability of spreads reflects the unwillingness of other
market participants to take on transaction-based risk, i.e., the
risk that the transaction will not be completed and the price of
the company being acquired will fall. Merger arbitrageurs
specialize in evaluating this risk and seek to create portfolios
that reduce specific event risk.
High
Yield/Distressed Securities
High yield/distressed securities strategies invest in debt or
equity securities of firms in or near bankruptcy. Advisors
differ in terms of the level of the capital structure in which
they invest, the stage of the restructuring process at which
they invest, and the degree to which they become actively
involved in negotiating the terms of the restructuring.
14
Special
Situations
Special situations such as spin-offs and corporate
reorganizations and restructurings offer additional
opportunities for event-driven Advisors. Often these strategies
are employed alongside merger arbitrage or distressed investing.
An Advisors ability to evaluate the effect of the impact
and timing of the event and to take on the associated event risk
is the source of the returns. Advisors differ in the degree to
which they hedge the equity market risk of their portfolios.
Multi-strategy
and Other
Multi-strategy Advisors invest across a range of strategies.
These Advisors tend to be more opportunistic in targeting
specific event driven, equity long/short and relative value
strategies during differing market environments.
Individuals and entities affiliated with the GS Group, including
investment funds, directors, officers, employees, partners,
trustees, managers, members and any related trusts, owned
approximately 57% of GFS as of December 31, 2009.
For the past five years from January 1, 2005 until
December 31, 2009, GFS had net returns on invested assets
as described in the table below.
|
|
|
|
|
Investment Period*
|
|
Net Return for Period
|
|
|
1/1/2009 12/31/2009
|
|
|
19.10
|
%
|
1/1/2008 12/31/2008
|
|
|
(19.18
|
)%
|
1/1/2007 12/31/2007
|
|
|
20.22
|
%
|
1/1/2006 12/31/2006
|
|
|
14.57
|
%
|
1/1/2005 12/31/2005
|
|
|
7.65
|
%
|
|
|
* |
Net return is based on the performance of Class C
Series 1 units. Class C Series 1 units
of GFS (including those issued to the Company) are not subject
to management fees paid or incentive allocations made to GS HFS
as managing member of GFS and therefore returns do not reflect
the payment of any such fees or the making of any allocations to
GS HFS. In addition, returns for Class C
Series 1 units during the entire period reflect
returns net of the compensation paid to Advisors. The returns
shown for 2005, 2006, 2007, 2008 and 2009 are net of an
administration fee paid by GFS to SEI, who became the
administrator of GFS on January 1, 2005. No administration
fee was paid to GS HFS by GFS in 2005, 2006, 2007, 2008 and 2009.
|
Goldman
Sachs Global Fundamental Strategies Asset Trust
On March 31, 2009, GFS transferred to GFS Trust its
interest in certain illiquid investments, including illiquid
investments made by Advisor Funds, as well as liquidating
vehicles that the Advisors formed as liquidity decreased for
previously liquid investments, such as certain credit
instruments. GFS transferred to GFS Trust the economic risks and
benefits of its interests in the assets. In connection with such
transfer, each investor in GFS, including the Company, was
issued its pro-rata share of GFS Trust interests based on its
ownership in GFS as of the transfer date. Distributions from GFS
Trust in respect of GFS Trust interests will be made to holders
of GFS Trust interests, including the Company, as amounts in
respect of the assets transferred to GFS Trust are received from
the Advisors. However, the actual timing of these distributions
will be dependent on the Advisors ability to liquidate
positions as market conditions allow, and it could be a
significant period of time before such positions are realized or
disposed of. See ITEM 7. MANAGEMENTS DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONSLiquidity and Capital Resources.
Individuals and entities affiliated with the GS Group, including
investment funds, directors, officers, employees, partners,
trustees, managers, members and any related trusts, owned
approximately 60% of GFS Trust as of December 31, 2009.
Since inception until December 31, 2009, GFS Trust had net
returns on invested assets as described in the table below.
15
|
|
|
|
|
Investment Period*
|
|
Net Return for Period
|
|
|
3/31/2009 12/31/2009
|
|
|
5.06
|
%
|
|
|
* |
Net return is based on the performance of GFS Trust interests.
Interests of GFS Trust (including those issued to the Company)
are not subject to management fees or incentive allocations.
|
Goldman
Sachs Global Tactical Trading, LLC
GTTs investment objective is to target attractive
long-term, risk-adjusted absolute returns by allocating its
assets to Advisors that employ strategies primarily within the
tactical trading sector. As of December 31, 2009,
GTTs managing member (currently, the Managing Member) had
allocated GTTs assets, directly or indirectly, to
17 Advisor Funds, although this number may change
materially over time as determined by GTTs managing
member. GTTs managing member generally will not allocate
more than 25% of GTTs total assets to any single Advisor
at the time of allocation. Tactical trading strategies are
directional trading strategies, which generally fall into one of
two categories: global macro strategies and managed futures
strategies. The first category, global macro strategies,
generally utilize analysis of macroeconomic and financial
conditions to develop views on country, regional or broader
economic themes and then seek to capitalize on such views by
trading in securities, commodities, interest rates, currencies
and other instruments. The Advisors use quantitative models or
discretionary inputs to forecast the direction of individual
markets or subsectors of markets. The Advisors invest assets in
a diversified portfolio composed primarily of futures contracts,
forward contracts, physical commodities, options on futures and
on physical commodities, and other derivative contracts on
foreign currencies, financial instruments, stock indices and
other financial market indices, metals, grains and agricultural
products, petroleum and petroleum products, livestock and meats,
oil seeds, tropical products and softs. The Advisors also engage
in the trading of securities, including, but not limited to,
equity and debt securities, high yield securities, emerging
market securities and other security interests, and may do so on
a cash basis or using options or other derivative instruments.
Certain Advisors may utilize other investment media, such as
swaps and other similar instruments and transactions. Advisors
generally trade futures and securities on commodities and
securities exchanges worldwide as well as in the interbank
foreign currency forward market and various other
over-the-counter markets. The second category, managed futures
strategies, involve trading in futures and currencies globally,
generally using systematic or discretionary approaches. The
Advisors use quantitative models or discretionary inputs to
speculate on the direction of the individual markets or
subsectors of markets. GTT allocates its assets pursuant to
discretionary investment advisory agreements and through
investments in Advisor Funds.
Individuals and entities affiliated with the GS Group, including
investment funds, directors, officers, employees, partners,
trustees, managers, members and any related trusts, owned
approximately 80% of GTT as of December 31, 2009.
For the past five years from January 1, 2005 to
December 31, 2009, GTT had net returns on invested assets
as described in the table below.
|
|
|
|
|
Investment Period*
|
|
Net Return for Period
|
|
|
1/1/2009 12/31/2009
|
|
|
6.35
|
%
|
1/1/2008 12/31/2008
|
|
|
3.27
|
%
|
1/1/2007 12/31/2007
|
|
|
15.72
|
%
|
1/1/2006 12/31/2006
|
|
|
5.61
|
%
|
1/1/2005 12/31/2005
|
|
|
4.03
|
%
|
|
|
* |
Net return is based on the performance of Class C
Series 1 units. Class C Series 1 units
of GTT (including those issued to the Company) are not subject
to management fees paid or incentive allocations made to GS HFS
as managing member of GTT and therefore returns do not reflect
the payment of any such fees or the making of any allocations to
GS HFS. In addition, returns for Class C
Series 1 units during the entire period reflect
returns net of the compensation paid to Advisors. The returns
shown for 2005, 2006, 2007, 2008 and 2009 are net of an
|
16
|
|
|
administration fee paid by GTT to SEI, who became the
administrator of GTT on January 1, 2005. No administration
fee was paid to GS HFS by GTT in 2005, 2006, 2007, 2008 and 2009.
|
Goldman
Sachs Global Relative Value, LLC
GRV ceased trading activities effective July 1, 2009 and
will dissolve at the time all assets are liquidated, liabilities
satisfied and liquidation proceeds are distributed through
payment of a liquidating distribution. Investors in GRV
(including the Company) will receive proceeds from the
liquidation over time as GRV receives redemption proceeds from
Advisors. The Company is reinvesting the liquidation proceeds it
receives from GRV in accordance with the Companys
investment program. See MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS Liquidity and Capital Resources and
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK Risk Management.
Historically, GRVs investment objective was to target
attractive risk-adjusted absolute returns with volatility and
correlation that was lower than the broad equity markets by
allocating assets to Advisors that operated primarily in the
global relative value sector. Relative value strategies seek to
profit from the mispricing of financial instruments, capturing
spreads between related securities that deviate from their fair
value or historical norms. Directional and market exposure is
generally held to a minimum or completely hedged. Hence,
relative value strategies endeavor to have low correlation and
beta to most market indices. Strategies that may be utilized in
the relative value sector include credit relative value,
convertible arbitrage, equity market neutral, and fixed income
relative value. Other strategies may be employed as well.
For the past five years from January 1, 2005 to
December 31, 2009, GRV had net returns on invested assets
as described in the table below.
|
|
|
|
|
Investment Period*
|
|
Net Return for Period
|
|
|
1/1/2009 12/31/2009
|
|
|
6.70
|
%
|
1/1/2008 12/31/2008
|
|
|
(9.37
|
)%
|
1/1/2007 12/31/2007
|
|
|
4.53
|
%
|
1/1/2006 12/31/2006
|
|
|
5.89
|
%
|
1/1/2005 12/31/2005
|
|
|
4.09
|
%
|
|
|
* |
Net return is based on the performance of Class C
Series 1 units. Class C Series 1 units
of GRV (including those issued to the Company) are not subject
to management fees paid or incentive allocations made to GS HFS
as managing member of GRV and therefore returns do not reflect
the payment of any such fees or the making of any allocations to
GS HFS. In addition, returns for Class C
Series 1 units during the entire period reflect
returns net of the compensation paid to Advisors. The returns
shown for 2005, 2006, 2007, 2008 and 2009 are net of an
administration fee paid by GRV to SEI, who became the
administrator of GRV on January 1, 2005. No administration
fee was paid to GS HFS by GRV in 2005, 2006, 2007, 2008 and 2009.
|
Allocations
to Other Investees
Goldman
Sachs HFP Opportunistic Fund, LLC
The Company currently allocates a portion of its assets to HFPO
in order to make opportunistic investments by
(a) increasing the weighting of particular Advisors that
have low weightings in the Company due to a lower target weight
in one of the other Investment Funds, and (b) adding
Advisors that are not represented in any of the other Investment
Funds at the time of determination. There are no restrictions on
the amount of assets of HFPO that its managing member can
allocate to any single Advisor, group of Advisors or investment
strategy. HFPO has an investment objective to target attractive
long-term risk-adjusted absolute returns with lower volatility
than the broad equity markets. To achieve its objective, HFPO,
directly or indirectly, allocates its assets to, or invests in
entities managed by, a concentrated portfolio of Advisors that
employ a broad range of alternative investment strategies
primarily within one or more of the Investment Sectors. HFPO is
managed by the Managing Member. The Company is not charged an
additional management fee or performance-based fee or allocation
by the Managing Member, in its capacity as managing member of
HFPO, in connection with its investment therein.
17
Individuals and entities affiliated with the GS Group, including
investment funds, directors, officers, employees, partners,
trustees, managers, members and any related trusts, owned 100%
of HFPO as of December 31, 2009.
HFPO was organized on June 25, 2007 and commenced
operations on July 1, 2007. For the six month period ended
December 31, 2007 and for the years ended December 31,
2008 and December 31, 2009, HFPO had net returns on
invested assets as described in the table below.
|
|
|
|
|
Investment Period*
|
|
Net Return for Period
|
|
|
1/1/2009 12/31/2009
|
|
|
11.27
|
%
|
1/1/2008 12/31/2008
|
|
|
(4.51
|
)%
|
7/1/2007 12/31/2007
|
|
|
(10.26
|
)%
|
|
|
* |
Net return is based on the performance of Class A
Series 1 units. Class A Series 1 units
of HFPO (including those issued to the Company) are not subject
to management fees paid or incentive allocations made to GS HFS
as managing member of HFPO and therefore returns do not reflect
the payment of any such fees or the making of any allocations to
GS HFS. In addition, returns for Class A
Series 1 units during the entire period reflect
returns net of the compensation paid to Advisors. Returns for
periods less than one year are cumulative and not annualized.
The returns shown are net of an administration fee paid by HFPO
to SEI, who became the administrator of HFPO on July 1,
2007. No administration fee was paid to GS HFS by HFPO in 2007,
2008 and 2009.
|
Historically, the Managing Member has allocated its assets to
all of the Investment Sectors through allocations to GTT, GELS,
GRV and GFS and HFPO since July 1, 2007. Since
April 1, 2008, the Managing Member had no constraints with
respect to the percentage of the Companys assets to be
allocated, directly or indirectly, to any single Advisor, group
of Advisors, Investment Fund, or Investment Sector, or with
respect to the number of Investment Funds and Advisors to which,
directly or indirectly, assets of the Company are allocated at
any time. Currently the Managing Member has allocated less than
1% of assets to GRV.
Overview
of the Investment Process of the Investment Funds
In its capacity as managing member of each of the Investment
Funds, the Managing Member employs a dynamic investment process
that includes Advisor selection, portfolio design and ongoing
risk analysis and monitoring. The Goldman Sachs Group, Inc.
acquired the assets and business of Commodities Corporation
Limited, a Princeton, New Jersey-based asset management firm
established in 1969, specializing in alternative investments,
and contributed them to a newly formed wholly owned subsidiary,
Commodities Corporation LLC, which was renamed Goldman Sachs
Princeton LLC in May 2001, and which changed its name to Goldman
Sachs Hedge Fund Strategies LLC in December 2004. The
Managing Member (together with predecessor entities) has over
35 years of experience in constructing diversified
portfolios by selecting, allocating among, and monitoring
absolute return-oriented (i.e., returns not measured against a
benchmark) or skill-based Advisors. Skill-based
Advisors are Advisors which, as a result of their particular
investment style and skills, have the potential to be profitable
regardless of the direction of the market (i.e., unlike
long-only Advisors, which would be expected to make money when
markets go up, and not during periods of market decline). The
Managing Member has also developed computer systems and
operational capabilities to assist in the monitoring of Advisors.
Each Investment Funds managing member seeks to identify
Advisors to which it may allocate such Investment Funds
assets through Advisor Funds, Managed Accounts and Portfolio
Companies. The Advisor selection process includes a review by
the Investment Funds managing members team of
professionals, which may include representatives of its
portfolio management, Advisor selection, risk and quantitative
analysis, compliance, tax, legal, finance and operations areas.
Both qualitative and quantitative criteria are factored into
each Investment Funds Advisor selection process. These
criteria include portfolio management experience, strategy,
style, historical performance, including risk profile and
drawdown (i.e., downward performance) patterns, risk management
philosophy and the ability to absorb an increase in assets under
management without a diminution in returns. The managing member
of each Investment
18
Fund also examines the organizational infrastructure of each
Advisor, including the quality of the investment professionals
and staff, the types and application of internal controls and
any potential for conflicts of interest. However, the Company
and the Investment Funds do not control the Advisors and are
frequently not able to review the actual books and investments
of many Advisors since this is proprietary information and in
many cases such information is not shared with the managing
members of the Investment Funds, neither on a historical nor a
current basis.
In determining the relative allocations of capital to each
Advisor, an Investment Funds managing member considers the
risk and return characteristics of each of the Advisors,
including the average expected volatility of returns, drawdown
patterns and liquidity and leverage characteristics, as well as
their asset capacity limits and constraints. In addition, an
Investment Funds managing member considers how each
Advisors returns are expected to correlate to the other
Advisors in the Investment Funds portfolio. It is expected
that allocations will vary significantly over time as returns
for different Advisors vary. An Investment Funds managing
member also may adjust allocations from time to time when it
deems it appropriate to do so. In addition, it is expected that
individual allocations will grow larger or smaller as each
Advisors performance varies over time.
The identity and number of the Advisors of an Investment Fund
may change materially over time. The managing member of an
Investment Fund may withdraw from or invest with different
Advisors without prior notice to, or the consent of, the
Company, the Members or the members of the Investment Fund.
The managing member of an Investment Fund may invest a
substantial portion of the Investment Funds assets with
Advisors that may have limited or no track records and Advisor
Funds with limited or no operating histories. Certain Advisors
may have limited or no experience managing certain of the
strategies expected to be deployed by them in their investment
programs. In such cases, the Advisors or individual members of
their management teams generally will each have had, in the
Investment Funds managing members opinion, relevant
experience in other contexts trading in strategies similar to
those that such Advisors are expected to utilize. However, the
Company and the Investment Funds are not able to ensure Members
that each of the Advisors, even those with longer track records,
will perform as expected or not undertake actions that would not
be in the best interest of the Company or the Members.
Any references in this Annual Report to strategies or techniques
utilized by the Advisors on behalf of the Investment Funds
include strategies or techniques utilized by (i) Advisors
pursuant to investment management agreements entered into with
either an Investment Fund or a Portfolio Company through which
an Investment Fund allocates assets to such Advisor, or
(ii) Advisor Funds in which the Investment Fund invests.
See PORTFOLIO COMPANIES. In addition, any references
in this Annual Report to strategies or techniques utilized by
Advisors on behalf of the Investment Funds may also be utilized
by the Advisors on behalf of the Company, should the Managing
Member decide to make investments with Advisors outside of an
investment in an Investment Fund. See Direct
Allocations to Advisors. References herein to Advisors
include Advisor Funds managed by such Advisors.
Direct
Allocations to Advisors
The Managing Member, in its sole discretion, may from time to
time allocate some or all of the Companys assets to
Advisors directly (rather than through an investment in the
Investment Funds). In such cases, the Managing Member may
allocate Company assets to Advisors similar to the way
Investment Funds allocate their assets (i.e., by investing,
directly or indirectly, in Advisor Funds, Managed Accounts or
Portfolio Companies). Any Advisor selection, portfolio design
and monitoring will be conducted by the Managing Member in the
same manner as described under Overview of the
Investment Process of the Investment Funds with respect to
the Investment Funds.
The Managing Member will assign each direct allocation to an
Advisor to a particular Investment Sector (and examine the risk
characteristics of such investments), so that such direct
allocations will be taken into account by the Managing Member
for purposes of determining the appropriate allocation of the
Companys assets among the Investment Sectors. See
INVESTMENT PROGRAMAllocation Among the Investment
Funds. The Administrator (as defined below) will value
such direct allocations using the same policy as the Investment
Funds apply to valuations of their assets.
19
Administration fees are charged at the Investment Fund level.
Unless the Company allocates assets directly to Advisors, no
administration fee will be paid at the Company level. However,
to the extent the Company allocates assets to Advisors other
than through investments in Investment Funds, administration
fees will be payable. In addition, if the Company allocates
assets to Advisors through investments in Advisor Funds or
Portfolio Companies, the Company will bear its pro rata portion
of the offering, organizational and operating expenses of such
Advisor Funds and Portfolio Companies, including management and
incentive fees of the applicable Advisors. See FEES AND
EXPENSES.
Should the Managing Member invest the Companys assets with
Advisors other than through an investment in an Investment Fund,
the risks described herein with respect to the Investment Funds
will also apply to the Company. See ITEM 1A. RISK
FACTORS and POTENTIAL CONFLICTS OF INTEREST.
In addition, any references in this Annual Report to strategies
or techniques utilized by Advisors on behalf of the Investment
Funds may also be utilized by the Advisors on behalf of the
Company.
Certain
Considerations Relating to Limited Capacity of Potential
Advisors
The Goldman Sachs Group, Inc., together with Goldman
Sachs & Co., HFS and their other subsidiaries and
affiliates (Goldman Sachs) (collectively referred to
herein, together with their affiliates, directors, partners,
trustees, managers, members, officers and employees, as the
GS Group) or accounts or other investment funds
sponsored, managed or advised by Goldman Sachs may invest in
Investment Funds, Advisor Funds or Portfolio Companies or
allocate assets to the Investment Funds existing Advisors
through Managed Accounts. Such entities or accounts may also
seek to invest in funds managed by, or enter into managed
account agreements with, investment managers to which it would
be appropriate for the Company to allocate assets. For example,
GS HFS is currently the managing member of three other Delaware
limited liability companies (the HFP
U.S. Funds), and the investment manager of three
Irish public limited companies (the HFP Ireland
Funds). In addition, GS HFS is the investment manager of
Goldman Sachs Hedge Fund Partners Institutional, Ltd., a
Cayman Islands exempted limited company (HFP
Institutional, and together with the HFP U.S. Funds
and the HFP Ireland Funds, the HFP Funds). The HFP
Funds generally have investment objectives and strategies
similar to those of the Company and the corresponding offshore
funds except that HFP Institutional is currently intended for
investment by benefit plans and other similar investors and the
HFP Ireland Funds are generally open only to
non-U.S. investors
and certain tax-exempt U.S. investors.
In addition, each of the HFP U.S. Funds generally invests
all or substantially all of its assets among other investment
funds managed by GS HFS. These investment funds include the
Investment Funds and other funds that have investment objectives
and strategies similar to the Investment Funds. Similarly, the
HFP Ireland Funds generally invest their assets among investment
funds managed by GS HFS that have investment objectives and
strategies similar to the Investment Funds. GS HFS may in the
future develop and manage other investment vehicles that have
investment objectives and strategies that are similar to the
Company, the Investment Funds and the funds in which the HFP
Funds invest.
Advisors may limit the amount of assets or the number of
accounts that they will manage. In determining how to allocate
investment opportunities among the Investment Funds, the other
funds in which the HFP Funds invest and any other investment
funds or accounts managed by Goldman Sachs, Goldman Sachs
and/or GS
HFS, as applicable, will take into account the investment
objectives of each such entity or account and such other
considerations as they deem relevant in their sole discretion.
Such allocations may present certain conflicts. For example,
certain Advisors of the funds in which the HFP Funds invest may
be closed to new investment. Such Advisors may manage a material
portion of the total assets of the funds in which the HFP Funds
invest. The Investment Funds and the Company may not be able to
allocate assets to such Advisors. If at any time in the future
these Advisors accept additional investments, the funds in which
the HFP Funds invest may be given priority over the Investment
Funds or the Company in the determination of how any available
capacity is allocated. See POTENTIAL CONFLICTS OF
INTERESTPotential Conflicts Relating to the Selection of
Advisors, the Sale of Units and the Allocation of Investment
Opportunities.
20
Hedging,
Leverage and Other Strategies
Hedging
From time to time in its sole discretion, the Managing Member
may employ various hedging techniques to reduce certain actual
or potential risks to which the Companys portfolio may be
exposed. These hedging techniques generally will involve the use
of derivative instruments, including swaps, futures and forward
contracts, exchange-listed and over-the-counter put and call
options, currency contracts and interest rate transactions. The
Managing Member may employ these hedging techniques directly or
by investing a portion of the Companys assets in one or
more entities managed by the Managing Member, an affiliate
thereof or an Advisor that engages in such hedging techniques.
The Company will bear, through its investment in any such
entity, its pro rata portion of the expenses and fees of such
entity.
Leverage
The Company, GTT, GELS and HFPO generally do not utilize
leverage as part of their investment programs. Since
April 1, 2008, GFS is able to utilize long-term leverage in
its investment program, including, without limitation, to pursue
investment opportunities that its managing member determines, in
its sole discretion, are attractive during periods in which the
capital of GFS is otherwise deployed. The amount of leverage
utilized by GFS will be determined by its managing member from
time to time based on factors deemed relevant by its managing
member in its sole discretion, although such amount of leverage
will not exceed 25% of the net asset value (the NAV)
of GFS at the time of any borrowing.
Advisors are expected to utilize varying degrees of leverage in
their investment programs. Leverage utilized by the Advisors in
their and the Investment Funds investment programs may
take the form of trading on margin, use of derivative
instruments that are inherently leveraged and other forms of
direct and indirect borrowings. Advisors may, but are not
required to, borrow from Goldman Sachs. Advisors generally will
determine the amount of leverage they utilize, provided that
limitations on the amount of leverage may be imposed on Advisors
by their governing documents or investment management
agreements, as applicable. The managing member of the Investment
Funds, on behalf of each Investment Fund, may seek to adjust the
degree of leverage with which such Investment Fund as a whole
invests by taking the Advisors anticipated leverage use
into account when allocating and reallocating the Investment
Funds assets among the Advisors. However, the managing
member of an Investment Fund generally will not have any right
to adjust the amount of leverage utilized by any of the
Advisors, and generally does not exercise such right if
available. Adjustments to an Investment Funds overall
leverage level will be based on factors deemed relevant by its
managing member, including its assessment of the risk/reward
parameters of the Advisors and the strategies currently included
in such Investment Funds investment portfolio.
The managing member of an Investment Fund may also elect, in its
sole discretion, to cause an Investment Fund to invest
indirectly in an Advisor Fund through a swap, option or other
structure designed to provide greater leverage than a direct
investment in the Advisor Fund. See Indirect
Investments in Advisor Funds and with Advisors and
ITEM 1A. RISK FACTORSInvestment Related
RisksRisks Related to Investment and TradingThe Use
of Leverage May Substantially Increase the Adverse Impact to
Which the Investment Funds Investment Portfolios May be
Subject.
The Company and each Investment Fund may, but is not required
to, borrow (including through direct borrowings, borrowings
through derivative instruments or otherwise) from Goldman Sachs
or other parties, when deemed appropriate by its managing member
in its sole discretion, including, without limitation, in
anticipation of subscriptions, to make investments, make
distributions in respect of redemptions of membership units, pay
expenses or make margin calls or for other purposes.
There can be no assurance that the Company or the Investment
Funds will be able to obtain financing on terms available to any
other funds or accounts managed by the Managing Member and its
affiliates, or to competitors, including terms which may be
currently available in the market, or that financing will be
accessible by the Company or the Investment Funds at any time,
and to the extent that it is available there can be no assurance
that such financing will be on terms favorable to the Company or
the Investment Funds, including with respect to interest rates.
The use of leverage can substantially increase the adverse
impact to which the investment portfolios of the
21
Company and the Investment Funds may be subject. See RISK
FACTORS and POTENTIAL CONFLICTS OF INTEREST.
In lieu of, or in addition to, obtaining a revolving credit
line, the Company and the Investment Funds may determine from
time to time to attempt to borrow funds as and when needed, as
opposed to relying on committed facilities, with respect to all
or a portion of its borrowing needs. Subject to applicable law,
the Company and the Investment Funds may make borrowings from
Goldman Sachs on this basis. Such borrowings would therefore
generally not involve the payment of any commitment fees, but
may result in a higher interest rate when borrowings are made
than would have been the case had a committed facility been in
place, and could leave the Company and the Investment Funds at
risk in situations where no such financing is available, or is
only available at high rates. In addition, the terms of any such
borrowings may provide that such borrowings may be subject to
repayment at any time upon demand by the lender, which could
occur at a time when complying with such demand could have a
material adverse effect on the Company and the Investment Funds.
On June 30, 2006, the Company entered into a committed
credit facility (as amended from time to time, the Credit
Facility) with Barclays Bank PLC (the Facility
Counterparty). On June 6, 2008, the Company extended
the maturity date of the Credit Facility for an additional
two-year period to, and including, June 5, 2010 amended
certain terms of the Credit Facility. The Company further
amended certain terms of the Credit Facility on January 28,
2010. As of December 31, 2009, the Company had no
outstanding borrowings under the Credit Facility. Pursuant to
the Credit Facility, the Company may borrow up to an amount
equal to the lesser of (i) $33,700,000 which amount may be
subsequently increased to $100,000,000 subject to the approval
of the Facility Counterparty, and (ii) 14.25% of the
Companys NAV from time to time. If borrowings by the
Company exceed 14.25% of its NAV at any time, then the Company
is required to make mandatory prepayments to the extent
necessary so that borrowings (subject to adjustments for pending
redemptions by the Company) do not exceed 12.5% of the
Companys NAV, payable when the Company has received
proceeds of redemptions from the Investment Funds. The Company
is also required to prepay all borrowings if, after a five
business day remediation period, the Facility Counterparty
notifies the Company that its investments in Investment Funds
continue to not meet certain liquidity and diversification
criteria set forth in the Credit Facility, payable within ninety
days of any such notice. The Company may voluntarily borrow,
repay and reborrow advances on a revolving basis. The advances
bear interest at a per annum rate equal to (i) with respect
to advances provided on less than three business days
notice, the overnight LIBOR, for the initial day of such advance
and one-week LIBOR thereafter, and (ii) with respect to all
other advances, one-week LIBOR, plus in each case 1.00%. The
Company also pays a monthly commitment fee to the Facility
Counterparty at the rate of 0.29% per annum of the average daily
aggregate unused portion of the commitment. If the Company
terminates the Credit Facility prior to the stated final
maturity, it has agreed to pay a fee (except in certain
circumstances where no such fee will be payable) equal to the
product of 0.25% per annum times the commitment in effect
immediately prior to such optional termination times
M; where M equals the period commencing
on the date of such optional termination and ending on the
stated final maturity. The proceeds of the advances under the
Credit Facility will be used for liquidity management in
connection with subscriptions to the Company and redemptions of
the Companys investments in the Investment Funds and for
general purposes not prohibited by the Credit Facility or the
investment guidelines therein. The obligation of the Facility
Counterparty to make advances is subject to customary conditions
precedent, including the absence of defaults. The terms of the
Credit Facility include various affirmative and negative
covenants, including restrictions on additional indebtedness,
liens and change of control events. See ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONSLiquidity and Capital
Resources and Note 7 to the financial statements for
a description of the Credit Facility. The Investment Funds have
entered into a similar facility with a different counterparty,
except HFPO which does not participate in a credit facility. As
a condition to any such borrowing, the Company and each
Investment Fund may be required to comply with certain
investment guidelines, which may include without limitation,
restrictions on permitted investments, strategy limits, leverage
and borrowing restrictions, liquidity and diversification
guidelines, and remediation requirements. Advisors may also
borrow funds for similar purposes or enter into other similar
transactions (including from or with Goldman Sachs). The
managing member of the Company and each Investment Fund may
modify, as applicable, the Companys or the Investment
Funds borrowing policies, including the purposes of
borrowings, and the length of time that the Company or the
Investment Fund may hold portfolio securities purchased with
borrowed money. The rights of any lenders to the Company or an
Investment Fund to
22
receive payments of interest or repayments of principal will be
senior to those of the members of the Company and the Investment
Fund and the terms of any borrowings may contain provisions that
limit certain activities of the Company and an Investment Fund.
Temporary
and Defensive Strategies
The Company and the Investment Funds may, from time to time,
take temporary or defensive positions in cash, cash equivalents,
other short-term securities or money market funds to attempt to
minimize volatility caused by adverse market, economic, or other
conditions. Any such temporary or defensive positions could
prevent the Company and the Investment Funds from achieving
their investment objectives. In addition, the Company may, in
the Managing Members sole discretion, hold cash, cash
equivalents, other short-term securities or investments in money
market funds pending allocation to Investment Funds, in order to
fund anticipated redemptions, expenses of the Company or other
operational needs, or otherwise in the sole discretion of the
Managing Member. The Investment Funds are permitted to hold cash
or invest their cash balances in the same manner as the Company.
Indirect
Investments in Advisor Funds and with Advisors
An Investment Fund will typically invest directly in an Advisor
Fund by purchasing an interest in such Advisor Fund. There may
be situations, however, where an Advisor Fund is not open or
available for direct investment or where the managing member of
such Investment Fund elects for other reasons to invest
indirectly in an Advisor Fund. Such an instance may arise, for
example, where an Investment Funds proposed allocation
does not meet an Advisor Funds investment minimums or
where the Investment Fund desires to use an instrument that
provides leverage with respect to an investment in an Advisor
Fund.
An Investment Fund may invest indirectly in one or more Advisors
by allocating assets to investment funds (each, an
Indirect Investment Fund) managed by the managing
member of the Investment Fund or an affiliate thereof, so long
as the Investment Fund is not subject to an additional
management fee or performance-based fee or allocation by the
managing member of the Indirect Investment Funds or its
affiliate in connection with such investment. An Investment Fund
may also invest indirectly in an Advisor Fund through an
investment vehicle (a Feeder Fund) established by
the Managing Member, an Advisor or any of their respective
affiliates that invests all or substantially all of its assets
in such Advisor Fund. Indirect Investment Funds and Feeder Funds
may invest assets in Advisor Funds that charge performance-based
compensation similar to the Company, with such compensation
being paid only if gains exceed prior losses (i.e., the NAV of
the interest in the Advisor Fund must first exceed a high
water mark attributable to a previously obtained NAV). In
such circumstances, appreciation in the net assets managed by an
Advisor at any given time will be shared pro rata by all of the
investors in the applicable Indirect Investment Fund or Feeder
Fund at such time, not just those who were investors at the time
prior losses were incurred. The value attributable to the fact
that no performance-based compensation will be paid to an
Advisor until its gains exceed its prior losses (the Loss
Carry-forward Value) may not be taken into account in
determining the NAV of the Indirect Investment Fund or Feeder
Fund. Therefore, such Loss Carry-forward Value to existing
investors in the Indirect Investment Fund or Feeder Fund could
be diluted by new subscriptions for interests because the new
interests will participate in any positive performance by the
Advisor until its gains exceed its prior losses without the
Advisor being paid any performance-based compensation. Certain
Indirect Investment Funds and Feeder Funds may invest with
Advisors that have the right to designate investments as
special investments. Such special investments raise
additional liquidity and valuation risks for the applicable
Indirect Investment Fund or Feeder Fund (and indirectly the
Company). See ITEM 1A. RISK FACTORSInvestment
Related RisksRisks Related to Issuers of
SecuritiesAdvisor Special Investments and
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONSLiquidity and
Capital Resources. Feeder Funds may be managed by the
Managing Member or an affiliate thereof so long as the Company
is not subject to an additional management fee or
performance-based fee or allocation by the Managing Member or
its affiliate in connection with such investment. An Investment
Fund may also invest in an Advisor Fund indirectly by purchasing
or entering into a Derivative Advisor Investment,
which is a derivative instrument (such as a structured note,
swap or similar contract) designed to pay a return approximately
equal to the total return of the Advisor Fund. A Derivative
Advisor Investment acquired by an Investment Fund generally
would require a counterparty to pay to the Investment Fund a
return based on the return of a particular Advisor Fund, in
exchange for
23
consideration from the Investment Fund equivalent to the cost of
purchasing an ownership interest in the Advisor Fund. In
addition, in the sole discretion of the managing member of the
Investment Funds, a Derivative Advisor Investment may be
structured in a manner that provides greater leverage than a
direct investment in the Advisor Fund, which may increase the
risks to the Investment Fund and consequently, the Company.
Indirect investments through Derivative Advisor Investments
carry with them the credit risk associated with the applicable
counterparty. In addition, such investments may be subject to
transaction and other fees, which may reduce the value of the
Investment Funds underlying investment. There can be no
assurance that a Derivative Advisor Investment will have the
same or similar results as a direct investment in an Advisor
Fund, and the Investment Funds value, and consequently the
value of the Company, may decrease as a result of making a
Derivative Advisor Investment.
Investment
in Exchange-Traded Advisor Funds
From time to time, the Company may (directly or indirectly
through an Investment Fund) invest in shares or other interests
of Advisor Funds which are traded on a stock exchange. Unlike a
typical private investment fund, an investor (including the
Company) holding shares of an exchange-traded Advisor Fund
generally will not have the right to require the Advisor Fund to
redeem its shares. Instead, if an investor wishes to realize all
or a portion of its investment in the exchange-traded Advisor
Fund, it must sell its shares through the applicable exchange at
a price set by the market. There can be no assurance that the
market price for such shares will reflect the underlying NAV of
the shares; such shares may trade at a significant discount to
NAV for extended periods of time or at all times. In addition,
there can be no assurance that an active trading market in the
shares of an exchange-traded Advisor Fund will develop or will
be sustained, and if no such market is developed or sustained,
the price and liquidity of such shares may be adversely
affected. In addition, certain parties, including investors or
potential investors in an exchange-traded Advisor Fund, may
receive information that has a bearing on the NAV of the Advisor
Fund that is not available or has not been made available to the
Advisor Fund or other investors (including the Company). These
parties may act on the basis of such information in ways that
have adverse effects on such Advisor Fund or investors in such
Advisor Fund, including the Company.
Co-Investment
and Other Investment Opportunities
Goldman Sachs (including, without limitation, the Managing
Member) may receive notice of, or offers to participate in,
investment opportunities from Advisors, their affiliates or
other third parties. Advisors or such other parties (for
themselves or funds or accounts under their management) may or
may not elect to invest in such opportunities. In this regard,
because of many factors and relationships, including
considerations that Client/GS Accounts (as defined below),
including the Company and the Investment Funds, are investors or
have other relationships with such Advisors, as a general
matter, neither the Company nor the Investment Funds will have
any entitlement to participate in such investments. In certain
very limited circumstances, through a pre-emptive or other
similar right, the Company or the Investment Funds may have an
entitlement which may or may not be realized or exercised.
Furthermore, whether or not a pre-emptive or other right exists,
such investment opportunities may not be appropriate for the
Company or the Investment Funds, considering the Companys
and the Investment Funds investment mandate of allocating
their assets to, or investing in entities managed by, a
portfolio of Advisors. This may be particularly true in cases of
direct investments in securities or other assets that either are
not managed by the Advisor or are not part of a broader
portfolio of securities or other assets. Therefore, there should
not be an expectation that the Company or the Investment Funds
will participate in any such investment opportunities.
Any such opportunity may be undertaken by other Client/GS
Accounts, including without limitation, investment vehicles
formed, sponsored, managed or advised by Goldman Sachs to invest
in such opportunities, or by Goldman Sachs for its own account.
Goldman Sachs other activities may have an impact on the
selection of Advisors for the Company and the Investment Funds.
Certain investment vehicles may be organized to facilitate the
investment by Goldman Sachs and certain current or former
directors, partners, trustees, managers, members, officers,
consultants, employees and their families and related entities,
including employee benefit plans in which they participate.
Any references in this Annual Report to strategies or techniques
utilized by the Advisors on behalf of the Investment Funds
include strategies or techniques utilized by (i) Advisors
pursuant to investment management agreements entered into with
either the Investment Fund or separate Cayman Islands limited
liability companies
24
formed by the managing member of an Investment Fund through
which the Investment Fund allocates assets to such Advisor or
(ii) Advisor Funds in which an Investment Fund invests. See
PORTFOLIO COMPANIES.
Secondary
Investments
The Company and the Investment Funds may also purchase or sell
direct or indirect interests in Advisor Funds through secondary
market transactions. Valuation of assets acquired in a secondary
market transaction may be difficult, as there generally will be
no established market for these assets. See RISK
FACTORSRisks Associated with the Company Investing in
Other EntitiesValuation of the Investment Funds
Investments will be Determined Utilizing Valuations Provided by
the Advisors Which are Generally not Audited; Uncertainties in
Valuations Could Have a Material Adverse Effect on the
Companys Net Assets. In addition, such assets are
likely to be illiquid or less liquid than the Company and the
Investment Funds. See RISK FACTORSRisks Related to
the Units, Liquidity of Units and the Offering of the
UnitsThe Company has Limited Liquidity and Limited Rights
for Redemption.
Potential
Types of Advisor Investments
The Advisors may invest in securities, assets and instruments of
any type, long or short, including, without limitation, the
following: equity securities and instruments including, without
limitation, common stock, preferred stock, equity index futures
and forwards, interests in real estate investment trusts,
convertible debt instruments, convertible preferred stock,
equity interests in trusts, partnerships, joint ventures,
limited liability companies, warrants and stock purchase rights,
swaps and structured notes; fixed income instruments including
bonds, interest rate futures contracts and swaps, options on
futures, indices, loan participations, trade claims and
government and corporate debt instruments (both rated and
unrated); currencies and positions on currencies, spot
transactions, currency forwards, cross currency swaps, options
and futures on currencies; commodities and futures, including
without limitation, spot transactions in commodities,
commodities futures and swaps and options on futures; and
structured financial products, including mortgage-backed
securities, pass-throughs and other asset-backed securities
(both investment-grade and non-investment grade). The Advisors
may employ short selling, and trade in securities without active
public markets, indices, over-the-counter options, when-issued
and forward commitment securities and engage in the borrowing
and lending of portfolio securities. The Advisors may also
engage in derivative transactions including swaps and repurchase
and reverse repurchase agreements or other strategies to hedge
against securities, currencies or interest rates or to manage
risk relating to their portfolio investments, to leverage their
portfolio and to establish positions. The Advisors may invest in
both U.S. and
non-U.S. issuers,
including issuers of emerging market countries.
Economic
Arrangements with Advisors
From time to time, the Company, an Investment Fund, Goldman
Sachs and/or
other clients or accounts of Goldman Sachs (including other
investment funds sponsored, managed or advised by the Managing
Member or its affiliates, collectively,
Participants) may enter into economic arrangements
with an Advisor Fund or an Advisor in connection with an
investment in an Advisor Fund or with an Advisor. Such economic
arrangements may include, without limitation, the agreement by
an Advisor to reduce or rebate any fees, allocations or other
compensation incurred by a Participant in respect of an
investment in an Advisor Fund; the agreement by an Advisor to
pay or share with a Participant or any third party some or all
of the fees, allocations or other compensation earned by the
Advisor with respect to one or more Advisor Funds; or the
agreement by a Participant to acquire or receive an interest
(which may be significant) in the equity of
and/or
profits or revenues earned by an Advisor
and/or its
affiliates in respect of its business.
The determination as to whether or not the Company or an
Investment Fund should negotiate or enter into any such
arrangements will be made by the Managing Member or the managing
member of the Investment Funds, as applicable, in its sole
discretion, based on factors which it considers to be relevant.
To participate in such arrangements, the Company or the
Investment Fund may be required to make an initial or periodic
payment or contribution to the Advisor Fund, which may be
substantial. In addition, the Company or the Investment Fund may
be required to invest in an Advisor Fund on terms that are more
restrictive or less advantageous than may be available to other
investors, including without limitation, agreeing to lock up a
substantial portion or all of its
25
investment in such Advisor Fund for an extended period of time.
Any such determination made on behalf of the Company or an
Investment Fund may differ from a determination made by Goldman
Sachs in respect of itself or its other Client/GS Accounts. See
POTENTIAL CONFLICTS OF INTERESTPotential Conflicts
Relating to the Selection of Advisors, the Sale of Units and the
Allocation of Investment Opportunities and
Potential Conflicts Relating to the Allocation of
Investment Opportunities Among the Company or the Investment
Funds and Other Goldman Sachs Accounts. Subject to
applicable law, Goldman Sachs may participate in or be allocated
any such arrangements or opportunities.
Such an arrangement, if entered into by the Company or an
Investment Fund, may pose liquidity and valuation risks for the
Company or the Investment Fund. For example, such an arrangement
may be contingent on the Company or the Investment Fund
investing in one of the Advisors Advisor Funds and locking
up such investment for long periods of time, potentially for
several years. There can be no assurance that any such
arrangement will be beneficial to the Company or the Investment
Fund, or that the benefits will outweigh the detriments of any
such arrangement. The assets of the Company or the Investment
Fund may be tied up in such arrangements for substantial periods
of time, during which time the Company or the Investment Fund
may be unable to liquidate such assets to pursue more profitable
investments. Requests to redeem a substantial amount of the
interests in the Company or the Investment Fund may require the
Company or the Investment Fund to redeem interests from other
more liquid assets in order to meet such redemption requests.
This could limit the ability of the Managing Member or the
managing member of the Investment Funds, as applicable, to
successfully implement the investment program of the Company or
the Investment Fund and could have a material adverse effect on
the portfolio mix of the Company or the Investment Fund and
liquidity for remaining members therein. There can be no
assurance that any such illiquid investments will not constitute
a material portion of the Companys portfolio, particularly
following substantial redemptions from the Company.
Any fee
and/or
profit sharing arrangements with, or interest in the profits of,
an Advisor, if entered into by the Company or an Investment
Fund, will be an asset of the Company or the Investment Fund,
and its value will need to be determined in connection with
calculating the NAV for purposes of, among other things,
subscriptions, redemptions and fees. However, any such
arrangements may be difficult to value and generally will not be
transferable. The value of any such asset will be determined in
accordance with U.S. GAAP consistently applied as a
guideline and according to such procedures as may be established
from time to time by the Managing Member or the managing member
of the Investment Funds, as applicable, in its sole discretion.
There is no guarantee, however, that any value given to any such
asset will represent the value that would be realized by the
Company or the Investment Fund in respect of the asset at the
time of liquidation. The value of any such asset may change over
time and any such asset could lose some or all of its value.
If Goldman Sachs or clients of Goldman Sachs other than the
Company or the Investment Funds invest in, or provide financial
or non-cash support to, or acquire or receive an interest in the
equity of
and/or
profits or revenues of, an Advisor, or enter into an arrangement
with such Advisor to share in fees, allocations
and/or
profits earned by such Advisor, such arrangement may cause
potential conflicts of interest. See POTENTIAL CONFLICTS
OF INTEREST.
The investment program of the Company and each of the Investment
Funds entails substantial risks. There can be no assurance that
the investment objective of the Company or any Investment Fund,
including their asset allocation, risk monitoring and
diversification goals, will be achieved, and results may vary
substantially over time. Advisors that are directly or
indirectly investing Company assets are expected to utilize
forward or futures contracts, options, swaps, other derivative
instruments, short sales, margin or other forms of leverage in
their investment programs. Such investment techniques can
substantially increase the adverse impact to which an Investment
Funds, and the Companys investment portfolio may be
subject. See ITEM 1A. RISK FACTORS.
INTERNATIONAL
ACTIVITIES
The Company has historically allocated its assets to the
Investment Funds who in turn have historically allocated their
assets to Advisors located throughout the world. From time to
time, these Advisors invest in securities of
non-U.S. issuers,
including companies based in less developed countries (i.e.,
emerging markets), or in securities issued by the
governments outside the United States. A portion of the
Companys assets, therefore,
26
ultimately may be invested in securities and other financial
instruments denominated in
non-U.S. currencies,
the prices of which are translated into U.S. dollars for
purposes of calculating the Companys NAV. Some Advisors
may invest exclusively in securities and other financial
instruments denominated in
non-U.S. currencies.
The Investment Funds have invested, from time to time, up to
40%-50% of their assets with Advisors located outside the United
States or in
non-U.S. markets
or financial instruments. The amount so invested outside the
United States could be significantly greater than such amount at
any particular time in the future. Historical international
investment activity may not be indicative of current or future
levels.
The value of the Companys assets and liabilities may
fluctuate with U.S. dollar exchange rates as well as with
the price changes of the Advisors investments in the
various local markets and currencies. Investing in securities of
companies which are generally denominated in
non-U.S. currencies
involve certain considerations comprising both risks and
opportunities not typically associated with investing in
securities of U.S. issuers. See ITEM 1A. RISK
FACTORSInvestment Related RisksRisks Related to
International InvestmentsTrading on
Non-U.S. Exchanges
May Involve Higher Risk of Financial Irregularities
and/or Lack
of Appropriate Risk Monitoring and Controls,
Non-U.S. Investments
Involve Special Risks not Usually Associated with Investments in
U.S. Securities, Investment in Emerging
Markets Involves Significant Risks, Including Inflation and
Currency Devaluations, Foreign Currency
Transactions and Exchange Rate Risk Create Additional Risks for
Advisors Investing in Certain Financial Instruments, and
Non-U.S. Futures
Transactions Afford Less Protection as Rules of a
Non-U.S. Exchange
May Not be Enforced by a U.S. Regulator.
PORTFOLIO
COMPANIES
The Investment Funds may also allocate assets to Advisors
through investments in Portfolio Companies, each of which
allocates its assets to a single Advisor via a separately
managed discretionary account. The managing member of the
Investment Funds or an affiliate thereof is the investment
manager of each Portfolio Company to which the Investment Funds
allocate assets, and the officers and all or a majority of the
directors of each such entity are persons that are employed by,
or are otherwise affiliated with, the managing member of the
Investment Funds or their affiliates. Portfolio Companies may
have other investors in addition to the Investment Funds. See
POTENTIAL CONFLICTS OF INTEREST. It is expected that
one investor in each Portfolio Company will be an exempted
company incorporated with limited liability under the laws of
the Cayman Islands or an Irish public limited company each of
which is managed by the managing member of the Investment Funds
and formed to accept subscriptions from
non-U.S. persons
and U.S. tax-exempt entities.
Each Portfolio Company (or the managing member of the applicable
Investment Fund, in its capacity as investment manager, on
behalf of the Portfolio Company) will enter into an investment
management agreement with an Advisor selected by the managing
member of the applicable Investment Fund. Each investment
management agreement provides for the payment of fees and
expenses of the Advisor, any restrictions on the Advisor
relating to the management of the assets, including restrictions
relating to leverage and investment strategies, if applicable,
and rights of the managing member of the Investment Fund with
respect to ongoing monitoring and risk management, which may
include rights to receive reports, require the disposition of
positions and withdraw all or a portion of an allocation to the
Advisor. A Portfolio Company may issue shares of various series
or classes, which may bear fees or have terms that differ from
the shares held by the applicable Investment Fund or the
corresponding offshore investment fund. Each Portfolio Company
reserves the right in its sole discretion and for any reason to
waive fees of, or impose different fees on, any investor, as may
be agreed to by the Portfolio Company and the investor. Each
Portfolio Company may, by agreement with its Advisor, structure
the Advisors fees (or a portion thereof) as an incentive
allocation or other arrangement.
Any Portfolio Company is expected to be formed as an exempted
company incorporated with limited liability in the Cayman
Islands. The governing documents of each Portfolio Company
provide, among other things, for the management of the Portfolio
Company by its board of directors, redemption rights of
investors in the Portfolio Company (which will be negotiated on
a
case-by-case
basis with each investor, provided that the Investment Funds
have the right to redeem their shares upon request, subject to
any restrictions contained in the investment management
agreement between the Portfolio Company and the Advisor),
certain fees and expenses as discussed below and under
FEES AND EXPENSES, and indemnification and
exculpation of the managing
27
member of the Investment Funds (in its capacity as the
investment manager of the Portfolio Company) and its affiliates.
Goldman Sachs will be issued the only voting shares of each
Portfolio Company, and only those voting shares will be entitled
to vote on most Portfolio Company matters, including the
election of the Portfolio Companys directors. Accordingly,
an investor in a Portfolio Company (including the applicable
Investment Fund) generally will have little or no control rights
with respect to the activities of the Portfolio Company,
including modifying or enforcing the terms of the investment
management agreement between the Portfolio Company and the
Advisor. In addition, the terms of a Portfolio Company may be
amended in accordance with the memorandum of association and
articles of association of such Portfolio Company, without
notification to the Members or the investors in the applicable
Investment Fund (including the Company).
The board of directors of a Portfolio Company may cause such
entity to list its shares on the Irish, Luxembourg or other
stock exchange, or to enter into a transaction or series of
transactions in which the investors of the Portfolio Company
become beneficial owners of economically comparable equity
interests of another entity, which may be domiciled outside the
Cayman Islands, so long as (i) the investors of the
Portfolio Company do not suffer any material adverse economic
effect as a result thereof or (ii) the investors of the
Portfolio Company receive prior written notice of any initial
listing or transaction and an opportunity to redeem their
interests in the Portfolio Company prior to the effectiveness of
the initial listing or transaction.
The managing member of an Investment Fund will not charge any
management fee or performance-based fee or allocation at the
Portfolio Company level. Each Portfolio Company, however, will
pay the Administrator certain fees as described more fully in
FEES AND EXPENSES and will be responsible for
reimbursing the Administrator for its reasonable out-of-pocket
expenses incurred in connection with providing services to the
Portfolio Company.
Each investor in a Portfolio Company (including the applicable
Investment Fund) shares in the appreciation and depreciation of
the NAV of the Portfolio Company for any accounting period pro
rata based on the relative NAV of the investors interest
as of the beginning of such accounting period (adjusted as
necessary to take into account subscriptions, redemptions and
distributions, any Advisor fees and any performance-based
Advisor compensation or allocations not borne in the same
proportions by each investor, and other events as determined by
the Portfolio Companys board of directors in its sole
discretion).
The applicable Investment Fund bears, indirectly through its
investment in each Portfolio Company, a pro rata portion of the
expenses of each Portfolio Company in which it invests. Such
expenses include each Portfolio Companys own offering,
organizational and operating expenses, including any management
and performance-based fees or allocations payable to the Advisor
of the Portfolio Companys assets pursuant to the Portfolio
Companys investment management agreement. The Company
bears, indirectly through its investment in the Investment
Funds, a pro rata portion of the expenses of each Portfolio
Company in which the Investment Funds invest. See FEES AND
EXPENSES. In addition, each Portfolio Company is
responsible for (and the applicable Investment Fund and, in
turn, the Company indirectly will be affected by) indemnifying
each of the managing member of the applicable Investment Fund
(in its capacity as investment manager of the Portfolio
Company), Goldman Sachs, members of the board of directors,
officers of the Portfolio Company, persons controlling,
controlled by or under common control with any of the foregoing,
or any of their respective directors, members, stockholders,
partners, officers, employees or controlling persons against any
losses, claims, costs, damages or liabilities to which such
person may become subject in connection with any matter arising
out of or in connection with the business or affairs of the
Portfolio Company, except to the extent that any such loss,
claim, cost, damage or liability results solely from the willful
misfeasance or gross negligence (as interpreted under the laws
of the State of New York) of, or any criminal wrongdoing by,
such indemnified person. A Portfolio Company may agree to
indemnify certain of the Advisors and their respective officers,
directors and affiliates from liability, damage, cost or
expenses to which such person may become subject in connection
with matters arising out of or in connection with the business
or affairs of the Portfolio Company.
References in this Annual Report to assets or investments of the
Company, the Investment Funds and the Advisors shall be deemed
to include interests in Portfolio Companies and assets and
investments of Portfolio
28
Companies to the extent of the Companys and the Investment
Funds indirect interest therein, whether or not so
indicated, where the context permits.
FEES AND
EXPENSES
The Company pays the Managing Member a monthly management fee,
accruing daily (the Management Fee), equal to
one-twelfth of 1.25% of the NAV of the Company in respect of
each series of Class A Units, determined as of the end of
each month, appropriately adjusted to reflect capital
appreciation or depreciation and any subscriptions, redemptions
or distributions. For purposes of determining the Management
Fee, the NAV of each such series of Class A Units are not
reduced to reflect any accrued incentive allocation (the
Incentive Allocation), including any Incentive
Allocation that is allocated to the Managing Member as of such
date. The Management Fee payable in respect of any other class
of units may be different from the Management Fee payable in
respect of the Class A Units. The Management Fee in respect
of each series of units will reduce the capital account of the
series of units to which it relates, as described under
Capital Accounts; Allocation of Gains and
Losses. In return for receiving the Management Fee, the
Managing Member, among other things, constructs the portfolio of
the Company and evaluates and monitors the performance of each
of the Investment Funds. The managing member of each of the
Investment Funds (which is currently the Managing Member) does
not receive a separate management fee from the Investment Funds
for investments in the Investment Funds by the Company because
the Company owns no-fee shares of each of the
Investment Funds.
The Company is currently issued units of a class of membership
interests of each Investee (no-fee-shares) which are
not subject to any management fees or incentive allocation,
although the Company may be charged management fees or an
incentive allocation in the future. Because the Company owns
no-fee-shares in each of the Investees, there are no
incentive allocations or management fees paid to the Managing
Member in respect of the Companys investments in each of
the Investees. The ratios shown below do not reflect the
inclusion of the Companys proportionate shares of expenses
of the Investees, including the administration fees paid,
directly or indirectly, by the Investees.
Fees and Expenses for Class A Series 1 of the Company
for the year ended December 31, 2009 are as follows:
|
|
|
|
|
|
|
Class A
|
|
|
|
Series 1
|
|
|
Ratios to average net assets (annualized):
|
|
|
|
|
Expenses
|
|
|
1.46
|
%
|
Incentive allocation
|
|
|
0.00
|
%
|
Total expenses and incentive allocation
|
|
|
1.46
|
%
|
The table below sets forth certain information with respect to
the Company including fees and expenses paid to the Managing
Member by the Company. The dollar amounts of fees and expenses
are shown for fiscal year 2009 and are based on a $1,000,000
investment in Class A Series 1 made as of
January 1, 2009.
|
|
|
|
|
|
|
|
|
Fees and
|
|
Percentage
|
|
Dollar
|
Expenses
|
|
Amount
|
|
Amount
|
|
Management Fee
|
|
|
1.25%(1)
|
|
|
$
|
13,131(4)
|
|
Incentive Allocation
|
|
|
5%(2)
|
|
|
$
|
4,498(4)
|
|
Administration Fee
|
|
|
N/A(3)
|
|
|
$
|
526(4)
|
|
Placement Fee
|
|
|
None
|
|
|
|
None
|
|
Entry Fee
|
|
|
None
|
|
|
|
None
|
|
Exit Fee
|
|
|
None
|
|
|
|
None
|
|
Minimum Subscription Amount
|
|
|
N/A
|
|
|
$
|
1,000,000(5)
|
|
|
|
|
(1) |
|
The Managing Member receives a monthly Management Fee, equal to
one-twelfth of 1.25% of the net assets of the Company,
determined as of the end of the applicable month, appropriately
adjusted to reflect capital appreciation or depreciation and any
subscriptions, redemptions or distributions. See
Capital Accounts; Allocation of Gains and
Losses. |
29
|
|
|
(2) |
|
At the end of each fiscal year of the Company, the Managing
Member is entitled to receive an Incentive Allocation equal to
5% of the increase in the NAV of each series of units. The
Managing Member does not receive a payment or make a
contribution in the event of a decrease in the NAV of a series
of units, and the Managing Member is only entitled to receive an
Incentive Allocation relating to an increase in NAV of a series
of units if the NAV of such series is above a Prior High NAV (as
defined below). See Capital Accounts; Allocation of
Gains and Losses. |
|
(3) |
|
The Company bears a pro rata portion of the administration fee
paid to the administrator of the Investees for services provided
to the Investees and Portfolio Companies. SEI is the
administrator of each Investment Fund and certain Portfolio
Companies. Throughout 2009, the administration fee rate (as
discussed below) ranged between 0.05% and 0.06%. |
|
(4) |
|
Based on an investment of $1,000,000 in Class A
Series 1 Units as of January 1, 2009. |
|
(5) |
|
The minimum subscription by a purchaser of Units is $1,000,000,
although the Managing Member, in its sole discretion, may accept
subscriptions below the minimum. |
SEI Global Services, Inc. (SEI) is the administrator
of the Company, the Investment Funds and the Portfolio Companies
(the Administrator). The Administrator is
responsible for, among other things, calculating the NAV for the
Company; maintaining capital accounts; valuing securities and
other assets, including securities which are not readily
marketable; assisting in the preparation of financial statements
and tax returns; assisting in the preparation and distribution
of reports; maintaining a registry of ownership and providing
certain other administrative services. In addition, the
Administrator provides the Company with, among other things,
office space, utilities, computer equipment and services, and
secretarial, clerical and other personnel. Further, the
Administrator may assist in the preparation of the
Companys periodic and other reports including filing such
reports with the U.S. Securities and Exchange Commission
(the SEC) and other services associated with the
Company being a registrant under the Securities Exchange Act of
1934, as amended (the Exchange Act). See
ITEM 1A. RISK FACTORSSpecial Risks of the
Companys StructureRisks Related to the
Companys StructureThe Companys Financial
Statements are, and in the Future Will Ultimately be, Based on
Estimates of Valuations Provided by Third Party Advisors Which
May not be Accurate or May Need to be Adjusted in the
Future. From time to time, the terms and conditions of the
Administration Agreement may be amended as agreed between the
Managing Member and the Administrator.
Unless the Company allocates assets directly to Advisors (see
PERFORMANCE OF THE COMPANYDirect Allocations to
Advisors), SEI does not receive a fee directly from the
Company for its service as the Administrator. However, the
Administrator receives a per investor servicing charge and will
be reimbursed by the Company for all of its reasonable
out-of-pocket expenses. The Company will also bear its pro rata
portion of each Investment Funds administration fees.
Each Investment Fund pays SEI an administration fee equal to a
percentage of such Investment Funds NAV, calculated and
paid on a monthly basis, at a rate based on the total assets
managed by the managing member of the Investment Fund that are
administered by SEI and its affiliates (the Administration
Fee). For purposes of determining the Administration Fee,
the NAV of the Investment Fund will not be reduced to reflect
any accrued but unpaid incentive allocation or management fees
payable at the Investment Fund level. In addition, each
Investment Fund pays SEI a fee in respect of the assets that the
Investment Fund allocates to each Managed Account, and each
Portfolio Company pays SEI a fee, a portion of which will be
borne by the Investment Fund through its investment therein
(each, an Account Administration Fee and
collectively, the Account Administration Fees). Each
Account Administration Fee will be equal to a percentage of the
NAV of the applicable Managed Account or Portfolio Company,
calculated and paid on a monthly basis, at a rate which will
vary depending on the complexity of the administration of the
Managed Account or Portfolio Company and the total assets of
Managed Accounts and Portfolio Companies of a similar type that
are administered by SEI. As a result of the foregoing, the
amount of the Account Administration Fees borne directly or
indirectly by the Company will be greater or lesser depending on
the percentage of the Companys assets that are directly or
indirectly allocated to Managed Accounts and Portfolio
Companies, and on the complexity of the administration of such
Managed Accounts and Portfolio Companies. Each Investment Fund
will also pay SEI a monthly investor servicing charge for each
investor in the Investment Fund and reimburse SEI for reasonable
expenses incurred in connection with providing services to the
Investment Fund and the Managed Accounts, and the Investment
Fund will bear, through its investment in each Portfolio
Company, a
30
portion of similar expenses incurred by such Portfolio Company.
In the event that the Company allocates assets directly to
Advisors rather than through an investment in an Investment
Fund, the Company will pay SEI administration fees similar to
the administration fees paid at the Investment Fund level. In
2008, the administration fee rate ranged between 0.04% and
0.06%. In 2009, the administration fee rate ranged between 0.05%
and 0.06%.
Pursuant to the Administration Agreement with SEI, the Company
has agreed to indemnify and hold SEI harmless from and against
any loss or liability (including, without limitation, any loss
or liability arising out of any act or omission of SEI or any
claim asserted or threatened in connection with SEIs
performance of its obligations or duties under the
Administration Agreement), except where such loss or liability
arises as a result of the willful misfeasance, bad faith or
negligence of SEI, or by reason of SEIs reckless disregard
of its duties under the Administration Agreement.
The Company, the Investment Funds and the Portfolio Companies
may, in the future, engage other entities, which may be
affiliated with the Managing Member, to provide administration
services to the Company, the Investment Funds or the Portfolio
Companies, respectively, as administrator or sub-administrator.
The terms and conditions of any such engagement shall be as
agreed to by the Company, the Investment Funds or the Portfolio
Companies and the applicable service provider, and may differ
from the terms and conditions under which SEI provides
administration services to the Company, the Investment Funds and
the Portfolio Companies, including without limitation, the
compensation arrangements and indemnification obligations
described above. In addition, the Company, any Investment Fund
or any Portfolio Company may in the future agree with SEI to
alter the terms of its existing agreement with SEI, including
without limitation, the compensation arrangements described
above.
The Company bears all of its own operating expenses, including,
without limitation, legal expenses; professional fees
(including, without limitation, fees and expenses of consultants
and experts) relating to investments; costs and expenses
relating to any amendment of the Companys LLC Agreement
(as defined below) or the Companys other organizational
documents or the subscription agreement (the Subscription
Agreement) or any modification or supplement to the
Private Placement Memorandum dated September 2009 for the
Company (as it may be supplemented or modified from time to
time, the Memorandum), and any distribution of such
documentation to the Members; accounting, auditing and tax
preparation expenses; fees and expenses of other agents of the
Company; taxes and governmental fees; printing and mailing
expenses; expenses relating to transfers and redemptions of
units; fees and out-of-pocket expenses of any service company
retained to provide accounting and bookkeeping services to the
Company; quotation or valuation expenses; expenses relating to
the acquisition, holding and disposition of investments (e.g.,
expenses which the Managing Member determines to be related to
the investment of the assets of the Company, including, among
others, research expenses, brokerage fees and commissions,
expenses relating to short sales, clearing and settlement
charges, fees to Advisors with respect to Managed Accounts,
custodial fees and expenses, costs and charges for equipment or
services used in communicating information regarding the
Companys transactions between the Managing Member and
other agents, bank service fees, interest expenses, borrowing
costs and extraordinary expenses); insurance premiums; costs
incurred in connection with any claim, litigation, arbitration,
mediation, government investigation or dispute in connection
with the business of the Company and the amount of any judgment
or settlement paid in connection therewith, or the enforcement
of the Companys rights against any person or entity; costs
and expenses for indemnification or contribution payable by the
Company to any person or entity (including, without limitation,
pursuant to the indemnification obligations described under
ITEM 12. INDEMNIFICATION OF DIRECTORS AND
OFFICERS in the Form 10 filed on April 29, 2004,
as amended); and all costs and expenses incurred as a result of
the reorganization, dissolution,
winding-up
or termination of the Company.
Certain administrative and investment-related services,
including, but not limited to, those relating to accounting, tax
and legal advice and other services (including with respect to
litigation, if any), marketing efforts, information technology,
risk management, cash management, administrative services, and
the selection, investigation, acquisition, holding or
disposition of investments may be provided by internal staff of
Goldman Sachs, including entities created by Goldman Sachs to
handle such services. Goldman Sachs may, in its sole discretion,
charge the Company or an Investment Fund its allocable portion
of the fees and expenses associated with such services, and the
Company or Investment Fund, as applicable, will be responsible
for such fees and expenses. In such event, the Managing Member
will determine the fair and reasonable cost for such services
based on, among
31
other things, the compensation and benefits of the personnel
providing the services as well as an allocation of overhead
expenses. Amounts paid to Goldman Sachs by the Company directly
or indirectly with respect to all of these services are
incremental to the Management Fee charged to the Company.
The Company in the past has borne its organizational expenses
and continues to bear expenses incurred in connection with the
offer and sale of units, including printing costs, distribution
fees and legal fees, expenses incurred in connection with the
review of subscription agreements and related documentation, and
other expenses of the Company, the Managing Member, any
placement agents, authorized dealers and other financial
intermediaries and other expenses of the offering of units. In
addition, the Company bears, indirectly through its investment
in each Investment Fund, Advisor Fund and Portfolio Company, its
pro rata portion of the offering, organizational and operating
expenses of such other entities, including, without limitation,
expenses similar to those enumerated in this paragraph and the
preceding two paragraphs, and expenses related to the investment
of such assets, such as Advisor, Advisor Fund and Portfolio
Company fees and expenses, brokerage commissions, expenses
relating to short sales, clearing and settlement charges,
custodial fees, bank service fees, interest expenses, borrowing
costs and extraordinary expenses. If the Company or an
Investment Fund invests its assets through a Portfolio Company,
the Managing Member will not charge an additional management fee
or performance-based fee or allocation at the Portfolio Company
level.
Advisors are compensated on terms that may include fixed fees,
asset-based fees or performance-based fees
and/or
allocations or other compensation. Fixed fees, generally
calculated and paid to Advisors monthly based upon the NAV of
the allocation to such Advisor, are currently expected to range
(on an annualized basis) from approximately 0% to 3%.
Performance-based fees or allocations of Advisors are currently
expected to range from approximately 0% to 30% of the net
capital appreciation in each individual Advisors
investments for the year. However, the Company may, in the
Managing Members sole discretion, allocate assets to
Advisors that receive fixed
and/or
performance-based fees or other compensation that materially
exceed these percentages or that structure their compensation in
materially different ways. Certain Advisor Funds in which the
Company or an Investment Fund invests may charge redemption fees
in certain circumstances. Each Member will indirectly through
its investment in the Company bear its pro rata portion of any
such redemption fees charged to the Company or the Investment
Fund.
Performance-based compensation is typically not paid to an
Advisor until the Advisor makes up prior losses. Certain
Advisors, however, may continue to receive performance-based
compensation while making up prior losses, but generally at
lower rates. See ITEM 1A. RISK FACTORSGeneral
RisksRisks Related to the Units, Liquidity of Units and
the Offering of the UnitsSpecial Considerations Applicable
to the Continuous Offering of Units; After the Initial Offering
of Units Subsequent Purchasers of Units May Suffer Losses
Because of Previously Established Open Positions.
The Managing Member may invest the Companys assets
directly or indirectly in Advisor Funds or discretionary managed
accounts managed by Advisors affiliated with Goldman Sachs. In
each such case, the Managing Member will ensure that the
aggregate fees and allocations paid to or received by the
affiliated Advisor and the Managing Member will not exceed the
fees that would otherwise be incurred if the Advisor were not so
affiliated.
If the Company invests its assets through a Portfolio Company,
the Managing Member will not charge a management fee or
performance-based fee or allocation at the Portfolio Company
level. Each such Portfolio Company will bear its own offering,
organizational, and operating expenses. The Company will bear,
indirectly through its investment in each such Portfolio
Company, a pro rata portion of the expenses of such Portfolio
Company.
Each of the Managing Member, the Administrator and any
sub-administrator pays its own overhead costs and expenses,
including the salaries, fringe benefits and other compensation
costs of its employees.
The Managing Member, the Administrator or any sub-administrator
may pay certain of the Companys, an Investment
Funds, an Advisor Funds or a Portfolio
Companys expenses described above. The Company or
applicable Investment Fund, Advisor Fund or Portfolio Company
will reimburse the Managing Member, Administrator or
sub-administrator for the payment of any such expenses.
32
Each Member will indirectly through its investment in the
Company bear its pro rata portion of the expenses of the Company
(including, without limitation, expenses incurred in connection
with the indemnification obligations); provided that any
expenses allocable to a specific class or series of units held
by such Member may be allocated only to such class or series.
The Managing Member and its affiliates each has the right, in
its sole discretion, to waive the fees and performance-based
allocations or compensation to which it is entitled in respect
of a Members units or to impose different fees or
performance-based allocations or compensation on a Member
(including, without limitation, by means of a rebate or the
issuance of a new class of units), and to enter into other
agreements with a Member that may affect the Members
economic or legal rights and obligations with respect to the
Members investment in the Company (including, without
limitation, by waiving any indemnification payments to which the
Managing Member or its affiliates are entitled from the Member
or by reimbursing the Member for any indemnification payments
owed by the Member in connection with its ownership of units),
regardless of the class of units the Member holds, without
notice to other Members. Such arrangements reflect terms
privately agreed to between parties other than the Company, and
for the avoidance of doubt, the Company cannot, and is under no
duty to, enforce equality of treatment between Members by other
entities, including the Managing Member and its affiliates. The
Managing Member and its affiliates shall be under no obligation
to make arrangements available on equal terms to other Members.
In addition, where permitted by applicable law, the Managing
Member and its affiliates may elect to pay part or all of the
fees and performance-based compensation paid to it by the
Company to investors in or distributors of the Company. See
POTENTIAL CONFLICTS OF INTERESTPotential Conflicts
Relating to the Selection of Advisors, the Sale of Units and the
Allocation of Investment OpportunitiesGoldman Sachs
or Intermediaries Financial and Other Interests and
Relationships May Incentivize Goldman Sachs or Intermediaries to
Promote the Sale of Units and Interests in the Investment
Funds.
Capital
Accounts; Allocation of Gains and Losses
The Company maintains a separate capital account on its books
for each series of units and for each Member with respect to
each series of units held by such Member. A series
includes, for this purpose, a class of units not issued in
multiple series. Each capital account with respect to a series
of units will be (i) increased by the amount of any capital
contributions in respect of such series, (ii) decreased for
any payments in redemption of, or any distributions in respect
of, such series, (iii) increased or decreased by such
series allocable share of the appreciation or depreciation
of the net assets of the Company (determined as set forth below)
for each accounting period, and (iv) decreased by any
Incentive Allocation and any Management Fee in respect of such
series, if applicable. For each accounting period, the
appreciation or depreciation of the net assets of the Company
(before reduction for any Management Fee) shall be allocated
among each series of units pro rata based upon the relative
capital accounts of each series (determined prior to taking into
account any unearned Incentive Allocation) as of the beginning
of such accounting period, after adjustment for any capital
contributions, distributions and redemptions as of the beginning
of such accounting period. Each Members capital account
with respect to each series of units shall equal the capital
account of such series of units multiplied by the percentage of
units in such series owned by such Member. Capital accounts will
be appropriately adjusted for exchanges of units from one series
into another series and for other events and items as determined
by the Managing Member in its sole discretion.
|
|
* |
An accounting period refers to the following
periods: the initial accounting period began upon the
commencement of operations of the Company. Each subsequent
accounting period begins immediately after the close of the
preceding accounting period. Each accounting period closes at
the close of business on the first to occur of (i) the last
day of each calendar month, (ii) the last day of each
fiscal year of the Company, (iii) the date immediately
prior to the effective date of the admission of a new Member,
(iv) the date immediately prior to the effective date of
the issuance of additional units, (v) the date immediately
prior to the effective date of any redemption or complete
withdrawal by a Member, or (vi) such other dates as
determined by the Managing Member. In addition, the final
accounting period shall end on the date the Company dissolves.
|
The NAV of a series of units equals the capital account balance
with respect to such series of units, and the NAV per unit of a
series shall be equal to the NAV of such series divided by the
number of outstanding units of such series.
33
At the end of each fiscal year of the Company (or other
applicable period), the Managing Member receives an Incentive
Allocation in respect of each series of Class A Units equal
to 5% of the amount by which the NAV of each such series
(appropriately adjusted as determined by the Managing Member in
its sole discretion for additional subscriptions, distributions
and redemptions, and determined prior to any Incentive
Allocation accrual with respect to such series of units, but
after the deduction of all Company expenses for the period,
including the Management Fee allocable to that series) exceeds
the Prior High NAV of such series. The Incentive Allocation in
respect of any other class of units may differ from the
Incentive Allocation in respect of the Class A Units.
The Prior High NAV with respect to a series of units
initially equals the NAV of such series immediately following
the initial issuance of such series. The Prior High NAV with
respect to a series of units immediately following the end of
any year for which an Incentive Allocation has been made with
respect to such series will be reset to equal the
NAV of such series as of such time (after reduction for any
Incentive Allocation), unless the series is exchanged into
another series, in which case the Prior High NAV will be
reset to equal the NAV of such other series as of
such time (after reduction for any Incentive Allocation). The
Prior High NAV for each series of units will be appropriately
adjusted, as determined by the Managing Member in its sole
discretion, to account for any additional subscriptions,
distributions and redemptions made with respect to such series
of units. Since each outstanding series of units may have a
different Prior High NAV, the Managing Member will earn an
Incentive Allocation with respect to each series of units the
NAV of which, as of the close of the applicable measurement
period, exceeds its Prior High NAV for such period, even though
it will not earn an Incentive Allocation with respect to any
series of units the NAV of which, as of the close of such
measurement period, did not exceed its Prior High NAV for such
period.
The Incentive Allocation with respect to a series of units
accrues daily and is credited to the capital account of the
Managing Member as of December 31 of each year out of the
capital account of such series. In the event of an intra-year
redemption of units, any accrued Incentive Allocation with
respect to such units will be credited to the capital account of
the Managing Member upon redemption. Appropriate adjustments
will be made to the calculation of the Incentive Allocation for
extraordinary circumstances, including, without limitation, if
the Managing Member permits a contribution or redemption by a
Member to be made intra-month.
GS HFS, as managing member of each Investment Fund, is entitled
to an incentive allocation, which is substantially similar to
the arrangement described above. However, the Company will
invest in a class of units of each of the Investment Funds that
is not subject to any such incentive allocation.
The Managing Member has the right, in its sole discretion, to
partially or completely waive any performance-based incentive
allocations or performance compensation arrangements, or to
apply no such performance-based fees or allocations or
performance-based fees or allocations that are greater or less
than or in other ways different from the incentive allocation
described in this Annual Report, in respect of certain Members
(including without limitation affiliates or personnel of Goldman
Sachs), as may be agreed to by the Managing Member and such
Members, and the Managing Member may make appropriate amendments
to or supplement the Companys LLC Agreement (including in
connection with the creation of additional classes or series of
units) if required to reflect any such arrangements, in each
case without notice to or the consent of other Members. Such
Members may include investment vehicles formed or managed by
Goldman Sachs, or formed for purposes of participation by
Goldman Sachs or its personnel and these vehicles may impose no
performance-based fees or allocations or performance-based fees
or allocations that are greater or less than or in other ways
different from the incentive allocation described in this Annual
Report.
THE
MANAGING MEMBER
GS HFS serves as Managing Member of the Company and as the
managing member of each of the Investment Funds and as the
special assets direction advisor with respect to GFS Trust. GS
HFS, in its capacity as the Managing Member, is responsible for
the management and operation of the Company. As managing member
of the Investment Funds, GS HFS is responsible for the
management and operation of the Investment Funds, as well as the
selection of the Advisors with which the Investment Funds invest
their assets. The principal business of the Managing Member is
to function as an investment manager for multi-advisor funds and
to select advisors to make investments on behalf of such funds.
GS HFS, in its capacity as Managing Member and as managing
member of the Investment Funds, is permitted to delegate certain
of its investment management responsibilities to its advisory
affiliates or other persons
34
as set forth in the limited liability company agreement for the
Company and the relevant Investment Fund (each an LLC
Agreement).
The Managing Member is an affiliate of Goldman Sachs Asset
Management, L.P., a Delaware limited partnership
(GSAM). Each of the Managing Member and GSAM is a
wholly owned subsidiary of The Goldman Sachs Group, Inc.
As a registered investment adviser under the Investment Advisers
Act of 1940, as amended (the Investment Advisers
Act), the Managing Member is required to file a
Form ADV with the SEC. Form ADV contains information
about assets under management, types of fee arrangements, types
of investments, potential conflicts of interest and other
relevant information regarding the Managing Member. A copy of
Part 1 of the Managing Members Form ADV is
available on the SECs website
(www.adviserinfo.sec.gov). A copy of Part 2 of the
Managing Members Form ADV will be provided to Members
upon request.
Goldman Sachs, a bank holding company, and a leading global
investment banking, securities and investment management firm,
was founded in 1869. GSAM, formed in 1988, is located at
200 West Street, New York, New York 10282. GS HFS is
located at 200 West Street, New York, New York 10282.
The Company has no employees. As of December 31, 2009, the
Managing Member was supported by approximately
115 employees of the GS Group worldwide, of which
approximately 33 allocated at least a portion of their time to
portfolio management of the Company and the Investees. The
Companys assets were managed, indirectly through the
Companys investments in the Investees, by approximately
90 Advisors.
The Managing Member may withdraw any interest it may have as the
Managing Member. From time to time certain qualified officers
and employees of the Managing Member or Goldman Sachs may
directly or indirectly invest in the Company or the Investment
Funds. Any such party may redeem any units that it may acquire
at any time, without notice to the Members, in accordance with
the redemption provisions of the LLC Agreement of the Company or
the relevant Investment Fund. GS HFS, in its capacity as
Managing Member, is permitted to delegate certain of its
investment management responsibilities to its affiliates or
other persons as set forth in the Companys LLC Agreement.
Without the consent of the other Members, the Managing Member
may assign its rights and obligations as Managing Member or
otherwise transfer its units to (i) any affiliate of the
Managing Member, (ii) a corporation, partnership or other
entity which succeeds to the business of Goldman,
Sachs & Co. or The Goldman Sachs Group, Inc.
substantially in its entirety, (iii) The Goldman Sachs
Group, Inc. or any corporation, partnership or other entity the
ownership of which is substantially the same as that of The
Goldman Sachs Group, Inc. or (iv) any corporation,
partnership or other entity of which at least 50% of the voting
securities or general partnership interests or membership
interests are owned, directly or indirectly, by any person
described in clause (i), (ii) or (iii) above. It is
not currently expected that the Investment Funds Advisors
or any of those Advisors respective principals will
purchase units or membership units in the Company or the
Investment Funds.
The Managing Member also manages a number of other investment
funds and accounts that have investment programs that are
similar to those of the Company and may manage additional
similar funds in the future. See PERFORMANCE OF THE
COMPANYCertain Considerations Relating to Limited Capacity
of Potential Advisors and POTENTIAL CONFLICTS OF
INTEREST.
POTENTIAL
CONFLICTS OF INTEREST
General
Categories of Conflicts Associated with the Company and the
Investment Funds
The Goldman Sachs Group, Inc. is a bank holding company and a
worldwide, full-service investment banking, broker-dealer, asset
management and financial services organization, and a major
participant in global financial markets. As such, it acts as an
investor, investment banker, research provider, investment
manager, financer, advisor, market maker, proprietary trader,
prime broker, lender, agent and principal, and has other direct
and indirect interests, in the global fixed income, currency,
commodity, equity, bank loan and other markets in which the
Company and the Investment Funds directly and indirectly invest.
As a result, The Goldman Sachs Group, Inc., GSAM, the Managing
Member (for purposes of this POTENTIAL CONFLICTS OF
INTEREST section, in its capacities as Managing Member of
the Company and managing member of each of the Investment
Funds), and their
35
affiliates, directors, partners, trustees, managers, members,
officers and employees (collectively, for purposes of this
POTENTIAL CONFLICTS OF INTEREST section,
Goldman Sachs), including those who may be involved
in the management, sales, investment activities, business
operations or distribution of the Company or the Investment
Funds, are engaged in businesses and have interests other than
that of managing the Company or the Investment Funds. Neither
the Company nor the Investment Funds will be entitled to
compensation related to such businesses. In addition, the
Advisors, their affiliates, directors, partners, trustees,
managers, members, officers and employees (collectively, for
purposes of this POTENTIAL CONFLICTS OF INTEREST
section, the Advisors) may similarly have clients,
businesses, and interests in addition to managing assets of the
applicable Advisor Fund, Portfolio Company or Managed Account.
The activities and interests of Goldman Sachs and the Advisors
include potential multiple advisory, transactional, financial
and other interests in securities, instruments and companies
that may be directly or indirectly purchased or sold by the
Company, the Investment Funds, the Advisor Funds, the Portfolio
Companies or the Managed Accounts and their service providers,
including without limitation the Advisors. These are
considerations of which Members should be aware, and which may
cause conflicts that could disadvantage the Company or the
Investment Funds.
Present and future activities of Goldman Sachs and the Advisors
in addition to those described in this POTENTIAL CONFLICTS
OF INTEREST section may give rise to additional conflicts
of interest.
By having made an investment in the Company, a Member is deemed
to have acknowledged and assented to the existence of potential
conflicts of interest relating to Goldman Sachs and the
Advisors, and to the operations of the Company, Investment
Funds, Advisor Funds, Portfolio Companies and Managed Accounts
in the face of these conflicts.
Potential
Conflicts Relating to the Selection of Advisors, the Sale of
Units and the Allocation of Investment Opportunities
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Goldman
Sachs Other Activities May Have an Impact on the Selection
of Advisors for each Investment Fund
|
The Managing Member, as the managing member of each Investment
Fund, selects Advisors for the Investment Fund in accordance
with its obligations as the managing member of the Investment
Fund. However, given the breadth of Goldman Sachs
activities, Goldman Sachs other activities may have a
negative effect on the Company. It is expected that Goldman
Sachs may receive various forms of compensation, commissions,
payments, rebates, remuneration, investment activity, services
or other benefits from Advisors
and/or their
Advisor Funds, Portfolio Companies and Managed Accounts, or may
have interests in Advisors or their businesses, and provide a
variety of products and services to them. The amount of such
compensation, commissions, payments, rebates, remuneration,
investment activity, services or other benefits to Goldman Sachs
may be greater if the managing member of the Investment Funds
selects such Advisors than it would have been had other Advisors
been selected which also might have been appropriate for the
Investment Funds. In addition, the managing member of the
Investment Funds will face potential conflicts in making
determinations as to whether the Company should invest in or
withdraw funds from Advisor Funds, Portfolio Companies and
Managed Accounts managed by Advisors that have other business
relationships with the managing member of the Investment Funds.
As a result of the various activities and interests of Goldman
Sachs as described in the first paragraph under General
Categories of Conflicts Associated with the Company and the
Investment Funds, it is likely that the Company and the
Investment Funds will have multiple business relationships with,
and will invest in, engage in transactions with, make voting
decisions with respect to, or obtain services from, entities for
which Goldman Sachs performs or seeks to perform investment
banking or other services. It is also likely that the Advisors
will undertake transactions in securities in which Goldman Sachs
makes a market or otherwise has other direct or indirect
interests. In addition, while the Managing Member, as the
managing member of the Investment Funds, will make decisions for
the Company and the Investment Funds, respectively, in
accordance with its obligations to manage the Company and the
Investment Funds appropriately, the fees, allocations,
compensation, remuneration and other benefits to Goldman Sachs
(including benefits relating to investment and business
relationships of Goldman Sachs) arising
36
from those decisions may be greater as a result of Advisor
selection and certain portfolio, investment, service provider or
other decisions made by the Managing Member for the Company and
the Investments Funds, respectively, than they would have been
had other decisions been made which also might have been
appropriate for the Company or the Investment Funds. For
example, Goldman Sachs or Client/GS Accounts (as defined below)
may have significant equity, profits or other interests in the
Advisor or may have entered into arrangements with the Advisor
in which the Advisor would share with Goldman Sachs, a Client/GS
Account or related parties a material portion of its fees or
allocations (including, without limitation, fees earned by the
Advisor as a result of the Companys or an Investment
Funds allocation of assets to an Advisor Fund managed by
the Advisor). Payments to Goldman Sachs (either directly from
the Advisor or in the form of fees or allocations payable by the
Client/GS Accounts) will generally increase as the amount of
assets that an Advisor manages increases. Therefore, investment
by the Company or an Investment Fund with an Advisor where
Goldman Sachs, a Client/GS Account or a related party has a fee
and/or
profit sharing arrangement or other interest in the equity or
profits of the Advisor may result in additional revenues to
Goldman Sachs and its personnel or related parties. Also, the
Managing Member may make the decision to have Goldman Sachs
provide administrative or other services to the Company or the
Investment Funds instead of hiring an unaffiliated administrator
or service provider, provided that such engagement is on market
terms as determined by the Company in its sole discretion.
Goldman Sachs (including, without limitation, the Managing
Member) may receive notice of, or offers to participate in,
investment opportunities from Advisors, their affiliates or
other third parties. An Advisor or its affiliates may offer
Goldman Sachs investment opportunities because of the amount of
assets managed by an Advisor and its affiliates for Goldman
Sachs and Client/GS Accounts, including the Company and the
Investment Fund, but such opportunities may not be allocated to
the Company or the Investment Funds or such other Client/GS
Accounts as described under Potential Conflicts
Relating to the Allocation of Investment Opportunities Among the
Company or the Investment Funds and Other Goldman Sachs
Accounts below. Therefore, investment (or continued
investment) by the Company or an Investment Fund with an Advisor
where Goldman Sachs, a Client/GS Account or a related party are
being offered investment opportunities by the Advisor may result
in additional investment opportunities to Goldman Sachs and its
personnel or related parties.
Goldman Sachs may also provide brokerage or other services to
Advisors or act as prime broker for Advisors. Payments to
Goldman Sachs for providing brokerage or other services or
acting as prime broker will generally increase as the size of
the assets that an Advisor manages increases. Therefore,
investment by an Investment Fund (and indirectly the Company)
with an Advisor where Goldman Sachs acts as prime broker, or to
which Goldman Sachs provides brokerage or other services, will
likely result in additional revenues to Goldman Sachs and its
personnel. Goldman Sachs may provide research products and other
products and services to an Advisor and receive revenues in
connection with these activities. Goldman Sachs may receive
price discounts or services from Advisors based on its
relationships with such Advisors. In connection with services
Goldman Sachs may provide Advisors, Goldman Sachs will act in
its own commercial interests and will not be obligated to take
actions consistent or beneficial to the Company. As a result,
investment with Advisors will be subject to many of the same
conflicts arising from Goldman Sachs activities described herein.
The Managing Member or the managing member of an Investment Fund
or Goldman Sachs may become aware of market or other information
regarding an Advisor selected for the Company, may place an
Advisor under review or may adjust its assessments of an Advisor
at any time and for any reason. The Managing Member or the
managing member of the relevant Investment Fund may continue to
retain such Advisor regardless of such information, review or
adjustment in assessments, and neither the Managing Member or
such managing member nor Goldman Sachs will be under any
obligation to provide the Company notice of such information,
review or adjustment in assessments or to effect transactions on
behalf of the Company as a result of such information, review or
adjustment in assessments. Goldman Sachs (on its own behalf or
on behalf of certain Client/GS Accounts) may take any action,
including but not limited to the sale of investments, the
unwinding of hedge positions in connection with derivative
transactions entered into with respect to such Advisor, or
redemptions from such Advisor, based on any information, review
or adjustment in assessments (as described above) at any time
and without notice to the Company or to other clients. Such
actions by Goldman Sachs may differ from, and may conflict with,
advice given or investment decisions made by the Managing Member
on behalf of the Company and may have an adverse effect on the
Company.
37
In connection with the Managing Members ongoing review of
Advisors, the Managing Member may work with Advisors to address
certain issues that arise, including related to operations,
performance, personnel and investment. The Managing Member may
make comments or requests for changes or improvements. These
comments and requests may occur over extended periods and the
Managing Member may decide not to terminate a particular Advisor
despite having such outstanding comments and requests.
In addition, if an Advisor provides fee breakpoints,
such breakpoints may be affected by Goldman Sachs business
relationships and levels or accounts other than with respect to
the Company or the Investment Funds, and may directly or
indirectly benefit Goldman Sachs and other proprietary or client
accounts of Goldman Sachs.
Goldman Sachs may also serve as an Advisor with respect to
Advisor Funds, Portfolio Companies and Managed Accounts. Goldman
Sachs will receive compensation in connection with acting as an
Advisor, and such compensation will not be reduced by any fees
payable in accordance with any investments made by Goldman Sachs
as Advisor of such Advisor Fund, Portfolio Company or Managed
Account (i.e., there could be double fees involved
in making any such investment, which would not arise in
connection with the direct purchase of underlying investments by
an Advisor Fund, Portfolio Company or Managed Account). Such
fees to Goldman Sachs may be greater as a result of the
selection of certain Advisors by the Managing Member and its
personnel than they would have been had other Advisors been
selected which also might have been appropriate for the
Investment Fund.
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Goldman
Sachs or Intermediaries Financial and Other
Interests and Relationships May Incentivize Goldman Sachs or
Intermediaries to Promote the Sale of Units
|
Goldman Sachs, its personnel and other financial service
providers have interests in promoting sales of interests in the
Company, the Investment Funds and certain Advisors. With respect
to both Goldman Sachs and its personnel, the remuneration and
profitability relating to services to and sales of interests in
the Company and the Investment Funds or other products may be
greater than the remuneration and profitability relating to
services to and sales of other products that might be provided
or offered. Conflicts may arise in relation to sales-related
incentives. Goldman Sachs and its sales personnel may directly
or indirectly receive a portion of the fees and commissions
charged to the Company, the Investment Funds or their respective
investors. Goldman Sachs and its advisory or other personnel may
also benefit from increased amounts of assets under management.
Fees and commissions may also be higher than for some products
or services, and the remuneration and profitability to Goldman
Sachs and such personnel resulting from transactions on behalf
of or management of the Company or the Investment Funds may be
greater than the remuneration and profitability resulting from
other products. Goldman Sachs may also benefit from equity,
profits or other interests in Advisors or arrangements in which
the Advisors agree to share their fees or allocations with
Goldman Sachs, Client/GS Accounts or related parties.
Goldman Sachs and its personnel may receive greater compensation
or greater profit in connection with the Company or the
Investment Funds than with an account advised by an unaffiliated
investment adviser. Differentials in compensation may be related
to the fact that Goldman Sachs may pay a portion of its advisory
fee to the unaffiliated investment adviser, or to other
compensation arrangements, including for portfolio management,
brokerage transactions or account servicing. Any differential in
compensation may create a financial incentive on the part of
Goldman Sachs and its personnel to recommend the Company or the
Investment Funds over other accounts or products managed by
unaffiliated investment advisers or to effect transactions
differently in the Company or the Investment Funds as compared
to other accounts or products.
Goldman Sachs may also have relationships with, and purchase,
distribute or sell services or products from or to,
distributors, consultants and others who recommend the Company,
the Investment Funds or the Advisors, or who engage in
transactions with or for the Company, the Investment Funds or
the Advisors. For example, Goldman Sachs regularly participates
in industry and consultant sponsored conferences and may
purchase educational, data related or other services from
consultants or other third parties that it deems to be of value
to its personnel and its business. The products and services
purchased from consultants may include, but are not limited to,
those that help Goldman Sachs understand the consultants
points of view on the investment management process. Consultants
and other third parties that provide consulting or other
services or provide service platforms for employee benefit plans
to potential investors in the Company or the Investment Funds
may receive fees from Goldman Sachs, the Company, the Investment
Funds or the Advisor Funds in connection with the distribution
of units or interests in the Investment
38
Funds, or other Goldman Sachs products. For example, Goldman
Sachs may enter into revenue or fee-sharing arrangements with
consultants, service providers, and other intermediaries
relating to investments in mutual funds, collective trusts, or
other products or services offered, sponsored, managed or
advised by the Managing Member. Goldman Sachs may also pay a fee
for membership in industry-wide or state and municipal
organizations or otherwise help sponsor conferences and
educational forums for investment industry participants
including, but not limited to, trustees, fiduciaries,
consultants, administrators, state and municipal personnel and
other clients. Goldman Sachs membership in such
organizations allows Goldman Sachs to participate in these
conferences and educational forums and helps Goldman Sachs
interact with conference participants and develop an
understanding of the points of view and challenges of the
conference participants. In addition, Goldman Sachs personnel,
including employees of the Managing Member, may have board,
advisory, brokerage or other relationships with issuers,
distributors, consultants and others that may have investments
with the Advisors or in the Company or Investment Funds or that
may recommend investments with the Advisors or distribute
Advisor Fund, Company or Investment Fund interests or engage in
transactions for the Advisors
and/or their
Advisor Funds, Portfolio Companies and Managed Accounts. In
addition, Goldman Sachs, including the Managing Member, may make
charitable contributions to institutions, including those that
have relationships with clients or personnel of clients.
Personnel of Goldman Sachs may also make political
contributions. As a result of the relationships and arrangements
described in this paragraph, consultants, distributors and other
parties may have conflicts associated with their promotion of
the Company, the Investment Funds or the Advisors, or other
dealings with the Company, the Investment Funds or the Advisors,
that create incentives for them to promote the Company, the
Investment Funds, the Advisors or certain portfolio transactions.
One or more divisions of Goldman Sachs may refer certain
investment opportunities to the Managing Member, or otherwise
provide services to, or enter into other arrangements with, the
Managing Member. In connection with such referrals, services or
other arrangements involving one or more divisions of Goldman
Sachs, such divisions may engage in sharing of fees or other
compensation received by the Managing Member from the Company or
the Investment Funds.
Goldman Sachs, the Company or the Investment Funds may make
payments to authorized dealers and other financial
intermediaries (each, an Intermediary and
collectively, Intermediaries) from time to time to
promote the Company, the Investment Funds, Client/GS Accounts
and other products. In addition to placement fees, sales loads
or similar distribution charges, such payments may be made out
of Goldman Sachs assets, or amounts payable to Goldman
Sachs rather than a separately identified charge to the Company,
the Investment Funds, Client/GS Accounts or other products. Such
payments may compensate Intermediaries for, among other things:
marketing the Company, the Investment Funds, Client/GS Accounts
and other products (which may consist of payments resulting in
or relating to the inclusion of the Company, the Investment
Funds, Client/GS Accounts and other products on preferred or
recommended fund lists or in certain sales programs from time to
time sponsored by the Intermediaries); access to the
Intermediaries registered representatives or salespersons,
including at conferences and other meetings; assistance in
training and education of personnel; finders or
referral fees for directing investors to the
Company, the Investment Funds, Client/GS Accounts and other
products; marketing support fees for providing assistance in
promoting the Company, the Investment Funds, Client/GS Accounts
and other products (which may include promotions in
communications with the Intermediaries customers,
registered representatives and salespersons);
and/or other
specified services intended to assist in the distribution and
marketing of the Company, the Investment Funds, Client/GS
Accounts and other products. Such payments may be a fixed dollar
amount; may be based on the number of customer accounts
maintained by an Intermediary; may be based on a percentage of
the value of interests sold to, or held by, customers of the
Intermediary involved; or may be calculated on another basis.
The payments may also, to the extent permitted by applicable
regulations, contribute to various non-cash and cash incentive
arrangements to promote certain products, as well as sponsor
various educational programs, sales contests
and/or
promotions. Furthermore, subject to applicable law, such
payments may also pay for the travel expenses, meals, lodging
and entertainment of Intermediaries and their salespersons and
guests in connection with educational, sales and promotional
programs. The additional payments by Goldman Sachs may also
compensate Intermediaries for subaccounting, administrative
and/or
shareholder processing or other investor services that are in
addition to the fees paid for these services by such products.
39
The payments made by Goldman Sachs, the Company or the
Investment Funds may be different for different Intermediaries.
The payments may be negotiated based on a range of factors,
including but not limited to, ability to attract and retain
assets, target markets, customer relationships, quality of
service and industry reputation. Payment arrangements may
include breakpoints in compensation which provide that the
percentage rate of compensation varies as the dollar value of
the amount sold or invested through an Intermediary increases.
The presence of these payments and the basis on which an
Intermediary compensates its registered representatives or
salespersons may create an incentive for a particular
Intermediary, registered representative or salesperson to
highlight, feature or recommend certain products based, at least
in part, on the level of compensation paid.
Potential
Conflicts Relating to the Allocation of Investment Opportunities
Among the Company or the Investment Funds and Other Goldman
Sachs Accounts
Goldman Sachs has potential conflicts in connection with the
allocation of investments or transaction decisions for the
Company and the Investment Funds, including in situations in
which Goldman Sachs or its personnel (including personnel of the
Managing Member) have interests or in situations where Goldman
Sachs may have an incentive to prefer certain funds or accounts
over others. For example, the Company or the Investment Funds
may be competing for investment opportunities with current or
future accounts or funds sponsored, managed or advised by
Goldman Sachs (including the Managing Member), including current
of future accounts or funds managed by the same portfolio
management team, or in which Goldman Sachs (including the
Managing Member) or its personnel have an interest (each a
Client/GS Account and collectively, the
Client/GS Accounts). In addition, certain Advisors
may have other commercial relationships with Goldman Sachs,
including being investors in Client/GS Accounts. These Client/GS
Accounts or accounts or funds may provide greater fees or other
compensation or other benefits (including performance-based
fees, equity, profit or other interests) to Goldman Sachs
(including the Managing Member) and potentially to Goldman Sachs
personnel (including personnel of the Managing Member).
Goldman Sachs may manage or advise Client/GS Accounts that have
investment objectives that are similar to those of the Company
or the Investment Funds
and/or may
seek to invest with Advisors with which the Company or the
Investment Funds invest or that would be an appropriate
investment for the Company or the Investment Funds or make
investments or sell investments in securities or other
instruments, sectors or strategies in which the Company or the
Investment Funds may invest. This may create potential conflicts
and potential differences among Client/GS Accounts (including
the Company or the Investment Funds), particularly where there
is limited availability or limited liquidity for those
investments or where Advisors limit the number of investors in
or the size of their Advisor Funds or the amount of assets that
they manage. For example, limited availability may exist,
without limitation, in emerging markets, high yield securities,
fixed income securities, regulated industries and initial public
offerings/new issues. Transactions in investments by multiple
Client/GS Accounts (including accounts in which Goldman Sachs
and its personnel have an interest), other clients of Goldman
Sachs or Goldman Sachs itself may have the effect of diluting or
otherwise negatively affecting the values, prices or investment
strategies associated with securities held by Client/GS Accounts
and the Advisor Funds, Portfolio Companies and Managed Accounts,
particularly, but not limited to, in small capitalization,
emerging market or less liquid strategies. In addition,
opportunities may arise to enter into economic arrangements with
Advisors in which the Advisors may agree to reduce or rebate
fees, allocations or other compensation to an investor, or agree
to pay or share some or all of the fees, allocations or other
compensation earned by the Advisor, or to take equity, profits
or other interests in Advisors or their businesses.
The Managing Member has developed policies and procedures that
provide that it will allocate investment opportunities and make
purchase and sale decisions among the Company, the Investment
Funds and other Client/GS Accounts in a manner that it
considers, in its sole discretion, to be reasonable. In certain
cases, these policies result in the pro rata allocation of
limited opportunities across Client/GS Accounts, but in certain
other cases the allocations reflect numerous other factors based
upon the Managing Members good faith assessment of the
best use of such limited opportunities relative to the
objectives, limitations and requirements of each Client/GS
Account and applying a variety of factors including those
described below. The Managing Member seeks to treat all clients
reasonably in light of all factors relevant to managing an
account, and in some cases it is possible that the application
of the factors described below may result in allocations in
which certain accounts may receive an allocation when
40
other accounts do not. Non-proportional allocations may occur
frequently in the fixed income portfolio management area, in
many instances because multiple appropriate or substantially
similar investments are available in fixed income strategies, as
well as due to differences in benchmark factors, hedging
strategies, or other reasons, but non-proportional allocations
could also occur in other areas. The application of these
factors as described below may result in allocations in which
Goldman Sachs and Goldman Sachs employees may receive an
allocation or an opportunity not allocated to other Clients/GS
Accounts (including the Company and the Investment Funds).
Allocations may be based on numerous factors and may not always
be pro rata based on assets managed.
The Managing Member may make allocation related decisions for
the Company, the Investment Funds and other Client/GS Accounts
with reference to numerous factors. These factors, which are
applied using the Managing Members reasonable judgment,
may include, without limitation, (i) account investment
horizons, investment objectives and guidelines;
(ii) different levels of investment for different
strategies including sector oriented, concentrated new
opportunities or other strategies; (iii) client-specific
investment guidelines and restrictions, including the ability to
hedge through short sales or other techniques; (iv) the
expected future capacity of applicable Client/GS Accounts;
(v) fully directed brokerage accounts; (vi) tax
sensitivity of accounts; (vii) suitability requirements and
the nature of the investment opportunity; (viii) account
turnover guidelines; (ix) cash and liquidity
considerations, including without limitation, availability of
cash for investment; (x) relative sizes and expected future
sizes of applicable accounts; (xi) availability of other
appropriate investment opportunities; (xii) regulatory
restrictions affecting certain accounts,
and/or
(xiii) minimum denomination, minimum increments, de minimis
threshold and round lot considerations. Suitability
considerations can include without limitation (i) relative
attractiveness of a strategy or Advisor to different accounts;
(ii) concentration of sector, sub-strategy or Advisor
positions in an account; (iii) appropriateness of a
security for the benchmark and benchmark sensitivity of an
account; (iv) an accounts risk tolerance and
parameters; (v) use of the opportunity as a replacement for
a security Goldman Sachs believes to be attractive for an
account; (vi) considerations related to hedging a position
in a pair trade;
and/or
(vii) considerations related to giving a subset of accounts
exposure to an industry. In addition, the fact that certain
Goldman Sachs personnel are dedicated to one or more funds,
accounts or clients may be a factor in determining the
allocation of opportunities sourced by such personnel.
Reputational matters and other such considerations may also be
considered. The application of these principles may cause
dispersion over time.
In addition to allocations of limited availability investments
and transactions, Goldman Sachs may, from time to time, develop
and implement new investment opportunities with Advisors
and/or
trading strategies, and these strategies may not be employed in
all accounts (including the Company or the Investment Funds) or
pro rata among the accounts where they are employed, even if the
strategy is consistent with the objectives of all accounts.
Goldman Sachs may make decisions based on such factors as
strategic fit and other portfolio management considerations,
including, without limitation, an accounts capacity for
such strategy, the liquidity of the strategy and its underlying
instruments, the accounts liquidity, the business risk of
the strategy relative to the accounts overall portfolio
make-up, and
the lack of efficacy of, or return expectations from, the
strategy for the account, and such other factors as Goldman
Sachs deems relevant in its sole discretion. For example, such a
determination may, but will not necessarily, include
consideration of the fact that a particular strategy will not
have a meaningful impact on an account given the overall size of
the account, the limited availability of opportunities in the
strategy and the availability of other strategies for the
account. The Company and the Investment Funds will not be
entitled to compensation in connection with investments that are
not allocated to the Company and the Investment Funds (or not
fully allocated to the Company and the Investment Funds) and are
allocated to other Client/GS Accounts.
During periods of unusual market conditions, GS HFS, in its
capacity as the Managing Member and managing member of the
Investment Funds, may deviate from its normal trade allocation
practices. For example, this may occur with respect to the
management of unlevered
and/or
long-only funds or accounts that are typically managed on a
side-by-side
basis with levered
and/or
long-short funds or accounts. During such periods, the Managing
Member will seek to exercise a disciplined process for
determining allocations (including to Advisor Funds or Portfolio
Companies in which Goldman Sachs or its personnel have an
interest), as it determines in its sole discretion.
Although allocating investment opportunities or orders with
Advisors among the Investment Funds and other Client/GS Accounts
may create potential conflicts of interest because of the
interests of Goldman Sachs
and/or its
personnel or because Goldman Sachs may receive greater fees or
compensation from one Client/GS Accounts
41
allocations relative to another, the Managing Member will not
make allocation decisions based on such interests or greater
fees or compensation.
Allocation decisions among accounts may be more or less
advantageous to any one account or group of accounts. As a
result of these allocation issues, the amount, timing,
structuring or terms of an investment by the Company or an
Investment Fund may differ from, and performance may be lower
than, investments and performance of other Client/GS Accounts.
Client/GS Accounts (including the Company) that do not receive
allocations that perform well may experience lower performance
as a result.
The Managing Member is currently the managing member of the HFP
U.S. Funds, and the investment manager of the HFP Ireland
Funds and HFP Institutional. The HFP Funds generally have
investment objectives and strategies similar to those of the
Company and the Investment Funds, except that HFP Institutional
is currently intended for investment by benefit plans and other
similar investors and the HFP Ireland Funds are generally open
only to
non-U.S. investors
and certain tax-exempt U.S. investors.
Certain of the HFP Funds allocate assets to Advisors that are
currently not accepting any new investments. Such Advisors may
manage a material portion of the total assets of the HFP Funds.
It is not anticipated that the Company, indirectly through the
Investment Funds, will generally allocate assets to such
Advisors. If at any time in the future these Advisors accept
additional investments, the HFP Funds that currently allocate
assets to such Advisors may be given priority over the
Investment Funds in the determination of how any such available
capacity is allocated.
Goldman Sachs, accounts sponsored, managed or advised by Goldman
Sachs or other investment funds sponsored, managed or advised by
Goldman Sachs, including accounts and investment funds which
have investment objectives and utilize investment strategies
similar to those of the Company, may invest in the Investment
Funds, Advisor Funds and Portfolio Companies. Such entities or
accounts may also seek to invest in funds managed by, or enter
into managed account agreements with, investment managers to
which it would be appropriate for the Company or the Investment
Funds to allocate assets.
Notwithstanding anything in the foregoing, the Company and the
Investment Funds may or may not receive, but in any event will
have no rights with respect to, opportunities sourced by Goldman
Sachs businesses and affiliates. Such opportunities or any
portion thereof may be offered to other GS/Client Accounts,
Goldman Sachs, all or certain investors in the Company or the
Investment Funds, or such other persons or entities as
determined by Goldman Sachs in its sole discretion. The Company
and the Investment Funds will have no rights and will not
receive any compensation related to such opportunities.
Other
Potential Conflicts Relating to the Management of the Company
and the Investment Funds by the Managing Member
|
|
|
Potential
Restrictions and Issues Relating to Information Held by Goldman
Sachs
|
As a result of informational barriers constructed between
different divisions of Goldman Sachs, the Managing Member will
generally not have access to information and personnel in other
areas of Goldman Sachs. Therefore, the Managing Member will
generally not be able to manage the portfolios of the Company or
the Investment Funds with the benefit of information held by
other divisions of Goldman Sachs. However, although it is under
no obligation to do so, the Managing Member may consult with
personnel in other areas of Goldman Sachs, or with persons
unaffiliated with Goldman Sachs, or may form investment policy
committees comprised of such personnel, and in certain
circumstances, personnel of affiliates of the Managing Member
may have input into, or make determinations regarding, portfolio
management transactions for the Company or the Investment Funds,
and may receive information regarding the Managing Members
proposed investment activities for the Company or the Investment
Funds that is not generally available to the public. There will
be no obligation on the part of such persons to make available
for use by the Company or the Investment Funds any information
or strategies known to them or developed in connection with
their own client, proprietary or other activities. In addition,
Goldman Sachs will be under no obligation to make available any
research or analysis prior to its public dissemination.
The Managing Member makes decisions for the Company and the
Investment Funds based on their respective investment programs.
The Managing Member from time to time may have access to certain
fundamental analysis
42
and proprietary technical models developed by Goldman Sachs and
its personnel. Goldman Sachs will not be under any obligation,
however, to effect transactions on behalf of the Company or the
Investment Funds in accordance with such analysis and models. In
addition, Goldman Sachs has no obligation to seek information or
to make available to or share with the Company or the Investment
Funds any information, investment strategies, opportunities or
ideas known to Goldman Sachs personnel or developed or used in
connection with other clients or activities. Goldman Sachs may
restrict transactions for itself, but not for the Company or the
Investment Funds or vice versa. Goldman Sachs and certain of its
personnel, including the Managing Members personnel or
other Goldman Sachs personnel advising or otherwise providing
services to the Company or the Investment Funds, may be in
possession of information not available to all Goldman Sachs
personnel, and such personnel may act on the basis of such
information in ways that have adverse effects on the Company or
the Investment Funds. The Company or the Investment Funds could
sustain losses during periods in which Goldman Sachs and other
Client/GS Accounts achieve significant profits in connection
with Goldman Sachs trading for proprietary or other
Client/GS Accounts.
From time to time, Goldman Sachs may come into possession of
material, non-public information or other information that could
limit the ability of an Investment Fund to invest with Advisors
or reduce Company or Investment Fund allocations made to
Advisors. The Investment Funds and, in turn, the
Companys investment flexibility may be constrained as a
consequence. The Managing Member and the Advisors are generally
not permitted to obtain or use material non-public information
in effecting purchases and sales in public securities
transactions for the Company or Investment Funds.
Goldman Sachs conducts extensive broker-dealer, banking and
other activities around the world and operates a business known
as Goldman Sachs Securities Services (GSS), which
provides prime brokerage, administrative and other services to
clients which may involve markets and securities in which the
Company or the Investment Funds invest. These businesses will
give GSS and many other parts of Goldman Sachs broad access to
the current status of certain markets, investments and funds,
and detailed knowledge about fund operators. In addition, given
Goldman Sachs scale of activity in the prime brokerage
market, Goldman Sachs may act as a prime broker to one or more
funds in which the Company or the Investment Funds may invest,
in which case Goldman Sachs will have direct knowledge
concerning the investments and transactions of such funds. As a
result of the activities described in this paragraph and the
access and knowledge arising from those activities, parts of
Goldman Sachs may be in possession of information in respect of
markets, investments and funds, which, if known to the Managing
Member, might cause the Managing Member to seek to dispose of,
retain or increase interests in investments held by the Company
or the Investment Funds or acquire certain positions on behalf
of the Company or the Investment Funds. Goldman Sachs will be
under no duty to make any such information available to the
Managing Member or in particular the personnel of the Managing
Member making investment decisions on behalf of the Company or
the Investment Funds. In some circumstances, Goldman Sachs
personnel may have input into, or make determinations regarding,
portfolio management transactions, however, Goldman Sachs is
under no duty to make such resources available to the Managing
Member.
Issues
Relating to the Valuation of Assets by the Managing Member
and/or Multiple Divisions or Units Within Goldman
Sachs
The Managing Member oversees the valuation of the investments of
the Company and the Investment Funds based on values provided by
the Advisors. Certain securities and other assets in which the
Company or the Investment Funds may directly or indirectly
invest may not have a readily ascertainable market value. Such
securities and other assets may constitute a substantial portion
of the investments of the Company and the Investment Funds.
Various divisions and units within Goldman Sachs are required to
value assets, including in connection with managing or advising
Client/GS Accounts and in their capacity as a broker-dealer.
These various divisions and units may share information
regarding valuation techniques and models or other information
relevant to the valuation of a specific asset or category of
assets. Goldman Sachs does not, however, have any obligation to
engage in such information sharing. The Managing Member will
value investments according to its valuation policies, and may
value an identical asset differently than another division or
unit of Goldman Sachs. This is particularly the case
43
when an asset does not have a readily ascertainable market price
and/or where
one division or unit of Goldman Sachs has more recent
and/or
accurate information about the asset being valued.
Potential
Conflicts Relating to Goldman Sachs Proprietary Activities
and Activities on Behalf of Other Accounts
The results of the investment activities of the Company and the
Investment Funds may differ significantly from the results
achieved by Goldman Sachs for its proprietary accounts and from
the results achieved by Goldman Sachs for other Client/GS
Accounts. The Managing Member will manage the Company, the
Investment Funds and the other Client/GS Accounts it manages in
accordance with their respective investment objectives and
guidelines. However, Goldman Sachs may give advice, and take
action, with respect to any current or future Client/GS Accounts
that may compete or conflict with the advice the Managing Member
may give to the Company or an Investment Fund, including with
respect to the return of the investment, the timing or nature of
action relating to the investment or the method of exiting the
investment.
Transactions undertaken by Goldman Sachs or Client/GS Accounts
may adversely impact the Company and the Investment Funds.
Goldman Sachs and one or more Client/GS Accounts may buy, sell
or hold positions while the Company or an Investment Fund,
Advisor Fund, Portfolio Company or Managed Account is
undertaking the same or a differing, including potentially
opposite, strategy, which could disadvantage the Advisor Fund,
Portfolio Company or Managed Account and, in turn, the relevant
Investment Fund and the Company. For example, the Company or an
Investment Fund, Advisor Fund, Portfolio Company or Managed
Account may buy a security and Goldman Sachs or Client/GS
Accounts may establish a short position in that same security.
The subsequent short sale may result in impairment of the price
of the security which the Company, Investment Fund, Advisor
Fund, Portfolio Company or Managed Account holds. Conversely,
the Company or an Investment Fund, Advisor Fund, Portfolio
Company or Managed Account may establish a short position in a
security and Goldman Sachs or other Client/GS Accounts may buy
that same security. The subsequent purchase may result in an
increase of the price of the underlying position in the short
sale exposure of the Company, Investment Fund, Advisor Fund,
Portfolio Company or Managed Account and such increase in price
would be to the detriment of the Advisor Fund, Portfolio Company
or Managed Account and, in turn, the relevant Investment Fund
and the Company.
Further, the Managing Member and other Goldman Sachs affiliates
may manage funds or accounts, and Goldman Sachs may be invested
in funds or accounts, that have similar investment objectives or
portfolios to that of the Company, the Investment Funds, the
Advisor Funds, Portfolio Companies or Managed Accounts, and
events occurring with respect to such funds or accounts could
affect the performance of the Company, the Investment Funds, the
Advisor Funds, Portfolio Companies or Managed Accounts. For
example, in the event that withdrawals of capital or performance
losses result in such a fund or account selling securities,
those sales could result in securities of the same issuer,
strategy or type held by the Company, the Investment Funds, the
Advisor Funds, Portfolio Companies or Managed Accounts falling
in value, which could have a material adverse effect on the
Company or the Investment Funds. The Company or the Investment
Funds may, to the extent permitted by applicable law, lend any
securities held by the Company or the Investment Funds to any
other Client/GS Account, and will be subject to the risk of the
default of any such Client/GS Account. Goldman Sachs will be
under no duty to compensate the Company or the Investment Funds
for any losses incurred as a result of such loans.
In the event that Goldman Sachs invests in the Company or the
Investment Funds, Goldman Sachs investment in the Company
may constitute a substantial percentage of the NAV of the
Company. Redemptions by Goldman Sachs from the Company may be
made at any time without notice to the Members in accordance
with the redemption procedures disclosed herein, even if the
amount of such redemption constitutes a material portion of the
Companys NAV. Goldman Sachs decision to make a
redemption from any such entity will be made based on factors it
deems relevant in its sole discretion without regard to its
effect on the Company.
Conflicts may also arise because portfolio decisions regarding
an Advisor Fund, Portfolio Company or Managed Account may
benefit other Client/GS Accounts. For example, the sale of a
long position or establishment of a short position by an Advisor
Fund, Portfolio Company or Managed Account may impair the price
of the same security sold short by (and therefore benefit)
Goldman Sachs or other Client/GS Accounts, and the purchase of a
security or covering of a short position in a security by an
Advisor Fund, Portfolio Company or Managed Account
44
may increase the price of the same security held by (and
therefore benefit) Goldman Sachs or other Client/GS Accounts.
In addition, transactions in investments by one or more
Client/GS Accounts and Goldman Sachs may have the effect of
diluting or otherwise negatively affecting the values, prices or
investment strategies of the Advisor Funds, Portfolio Companies
or Managed Accounts, particularly, but not limited to, in small
capitalization, emerging market, distressed or less liquid
strategies. For example, this may occur when portfolio decisions
regarding the Company or an Investment Fund, or for an Advisor
Fund, Portfolio Company or Managed Account, are based on
research or other information that is also used to support
portfolio decisions for other Client/GS Accounts. When Goldman
Sachs or a Client/GS Account implements a portfolio decision or
strategy ahead of, or contemporaneously with, similar portfolio
decisions or strategies for the Advisor Funds, Portfolio
Companies or Managed Accounts (whether or not the portfolio
decisions emanate from the same research analysis or other
information), market impact, liquidity constraints, or other
factors could result in the Advisor Funds, Portfolio Companies
or Managed Accounts receiving less favorable trading results and
the costs of implementing such portfolio decisions or strategies
could be increased or the Advisor Funds, Portfolio Companies or
Managed Accounts, and, in turn, the relevant Investment Fund and
the Company, could otherwise be disadvantaged. Goldman Sachs
may, in certain cases, elect to implement internal policies and
procedures reasonably designed to mitigate such consequences,
which may cause an Advisor Fund, Portfolio Company or Managed
Account to be unable to engage in certain activities, including
purchasing or disposing of securities, when it might otherwise
be desirable for it to do so.
The directors, officers and employees of Goldman Sachs,
including the Managing Member, may buy and sell securities or
other investments for their own accounts (including through
investment in funds sponsored, managed or advised by Goldman
Sachs, including the Managing Member). As a result of differing
trading and investment strategies or constraints, positions may
be taken by directors, officers and employees that are the same
as, different from or made at different times than positions
taken for the Company or an Investment Fund. To reduce the
possibility that the Company and the Investment Funds will be
materially adversely affected by the personal trading described
above, the Managing Member has established policies and
procedures that restrict securities trading in the personal
accounts of investment professionals and others who normally
come into possession of information regarding the Companys
and the Investment Funds portfolio transactions. The
Managing Member has adopted a code of ethics restriction
required by the Investment Advisers Act and monitoring
procedures relating to certain personal securities transactions
by Managing Member personnel that the Managing Member deems to
involve potential conflicts involving such personnel, Client/GS
Accounts managed by the Managing Member and the Company or the
Investment Funds. The code of ethics requires that Managing
Member personnel comply with all applicable U.S. federal
securities laws and with the fiduciary duties and anti-fraud
rules to which the Managing Member is subject.
Clients of Goldman Sachs (including Client/GS Accounts) may
have, as a result of receiving client reports or otherwise,
access to information regarding the Managing Members
transactions (and, when Goldman Sachs is a client of an Advisor,
transactions of such Advisor) or views which may affect such
clients transactions outside of accounts controlled by the
Managing Member, and such transactions may negatively impact the
performance of the Company, the Investment Funds or the assets
managed by the Advisors. The Company, the Investment Funds and
the assets managed by the Advisors may also be adversely
affected by cash flows and market movements arising from
purchase and sales transactions, as well as increases of capital
in, and withdrawals of capital from, other Client/GS Accounts.
These effects can be more pronounced in thinly traded and less
liquid markets.
An Advisors management of an Advisor Fund, Portfolio
Company or Managed Account may benefit Goldman Sachs. For
example, the Advisor Funds, Portfolio Companies and Managed
Accounts may, subject to applicable law, invest directly or
indirectly in the securities, bank loans or other obligations of
companies affiliated with Goldman Sachs (or a Client/GS Account)
or in which Goldman Sachs (or a Client/GS Account) has an
equity, debt or other interest. In addition, subject to
applicable law, the Advisor Funds, Portfolio Companies and
Managed Accounts may engage in investment transactions that may
result in other Client/GS Accounts being relieved of obligations
or otherwise divesting of investments or cause an Advisor Fund,
Portfolio Company or Managed Account to have to divest certain
investments. The purchase, holding and sale of investments by
the Advisor Funds, Portfolio Companies and Managed Accounts may
enhance the profitability of Goldman Sachs or other
Client/GS Accounts own investments in and its activities
with respect to such companies.
45
The Advisor Funds, the Portfolio Companies and the Managed
Accounts may invest in indebtedness of portfolio companies
affiliated with Goldman Sachs or in which Goldman Sachs
and/or funds
or accounts sponsored, managed or advised by Goldman Sachs have
an equity or other interest, and may acquire such indebtedness
either directly or indirectly through syndicate or secondary
market purchases. Such investments may benefit Goldman Sachs.
This may create conflicts, including in relation to exercising
rights as a creditor, and could adversely affect the
Companys and Investment Funds rights, interest and
activities. Goldman Sachs or funds or accounts which Goldman
Sachs manages or in which Goldman Sachs has an interest that
hold investments in different parts of the capital structure of
a company than the Company, an Investment Fund, Advisor Fund,
Portfolio Company or Managed Account, may take certain actions
that could be materially adverse to the Companys direct or
indirect investment in such company. Goldman Sachs will not be
obligated to take actions in those accounts in a manner
consistent or beneficial to the Company. There are also certain
risks involved in making investments in issuers that are or
become insolvent. See ITEM 1A. RISK
FACTORSRisks Related to Issuers of
SecuritiesInvestments in Issuers of Indebtedness May be
Adversely Affected in the Event of an Issuers
Insolvency, including the discussion on the avoidance of
certain payments on indebtedness as preferences in connection
with bankruptcy proceedings, which could be a more significant
issue for the Company and the Investment Funds in connection
with investments in companies affiliated with Goldman Sachs. In
addition, it is possible that in connection with an insolvency,
bankruptcy or similar proceeding the Company, the Investment
Funds, the Advisor Funds, the Portfolio Companies and the
Managed Accounts may be limited (by applicable law, courts or
otherwise) in the positions or actions they may be permitted to
take due to other interests held or actions or positions taken
by Goldman Sachs or funds or other accounts it manages or in
which it invests.
The Managing Member may, but is not required to, aggregate
purchase or sale orders for the Company and the Investment Funds
with trades for other funds or accounts sponsored, managed or
advised by Goldman Sachs, including Client/GS Accounts.
Aggregation of orders occurs when considered appropriate by the
Managing Member. These circumstances may include, without
limitation, aggregation among client accounts and accounts that
contain Goldman Sachs
and/or
employee interests; when consistent with the goal of aligning
advisor and client interests; in developing products that
demonstrate client experience track records; when managing
accounts in a commercially reasonable manner for clients (which
may be affiliates but are engaging the Managing Member to act as
an independent commercial money manager); or when aggregating
will have a de minimis effect on the performance of client
accounts (e.g., where client accounts size is larger than
the size of the seed account). When orders are aggregated for
execution, it is possible that Goldman Sachs and Goldman Sachs
employee interests will receive benefits from such transactions,
even in limited capacity situations. While the Managing Member
maintains policies and procedures that it believes are
reasonably designed to deal with conflicts of interest that may
arise in certain situations when purchase or sale orders for the
Company and the Investment Funds are aggregated for execution
with orders for Client/GS Accounts, in some cases the Managing
Member will make allocations to accounts in which Goldman Sachs
and/or
Goldman Sachs employees have an interest.
Goldman Sachs and one or more Client/GS Accounts (including the
Company, the Investment Funds, Advisor Funds, Portfolio
Companies and Managed Accounts) may also invest in different
classes of securities of the same issuer. As a result, one or
more Client/GS Accounts may pursue or enforce rights with
respect to a particular issuer in which an Advisor Fund,
Portfolio Company or Managed Account has invested, and those
activities may have an adverse effect on the Investment Funds
and, in turn, the Company. For example, if a Client/GS Account
holds debt securities of an issuer and an Advisor Fund,
Portfolio Company or Managed Account holds equity securities of
the same issuer, then if the issuer experiences financial or
operational challenges, the Client/GS Account which holds the
debt securities may seek a liquidation of the issuer, whereas
the Advisor Fund, Portfolio Company or Managed Account which
holds the equity securities may prefer a reorganization of the
issuer. In addition, Goldman Sachs and Client/GS Accounts may
pursue or enforce rights with respect to an Advisor with respect
to any economic arrangements with, or equity, profits or other
interests in, the Advisor. The Managing Member may also, in
certain circumstances, pursue or enforce rights with respect to
a particular issuer jointly on behalf of one or more Client/GS
Accounts (including the Company and the Investment Funds), or
Goldman Sachs employees may work together to pursue or enforce
such rights. As a result, prices, availability, liquidity and
terms of an Advisors investments on behalf of the Advisor
Funds, Portfolio Companies and Managed Accounts may be
negatively impacted by Goldman Sachs and other Client/GS
Accounts activities, and transactions of an Advisor may be
impaired or effected at prices or terms that may be less
favorable than would otherwise have been the case. In addition,
in certain instances
46
personnel of the Managing Member may obtain information about an
issuer that would be material to the management of other
Client/GS Accounts, which could limit the ability of personnel
of the Managing Member to make allocations to or reduce
allocations to certain Advisors.
Goldman Sachs (including its personnel or Client/GS Accounts)
may create, write, sell or issue, invest in, or act as placement
agent or distributor of, derivative instruments with respect to
the Company, the Investment Funds, Advisor Funds, Portfolio
Companies or Managed Accounts, with respect to underlying
securities, currencies or instruments of the Company, the
Investment Funds, Advisor Funds, Portfolio Companies or Managed
Accounts, or which may be otherwise based on or seek to
replicate or hedge the performance of the Company, the
Investment Funds, Advisor Funds, Portfolio Companies or Managed
Accounts (collectively referred to as Structured
Investment Products). The values of the Structured
Investment Products may be linked to the NAV of the Company, the
Investment Funds, Advisor Funds, Portfolio Companies or Managed
Accounts
and/or the
Companys, the Investment Funds, Advisor Funds,
Portfolio Companies or Managed Accounts investments.
In connection with the Structured Investment Products and for
hedging, re-balancing, investment trading and other purposes,
the Company
and/or
Goldman Sachs (including its personnel or Client/GS Accounts)
may (i) purchase or sell investments held by the Company,
the Investment Funds, Advisor Funds, Portfolio Companies or
Managed Accounts, (ii) purchase or sell units in the
Company or interests in the Investment Funds, Advisor Funds,
Portfolio Companies or Managed Accounts, or (iii) hold
synthetic positions that seek to replicate or hedge the
performance of the Company, the Investment Funds, Advisor Funds,
Portfolio Companies or Managed Accounts or the Companys,
the Investments Funds, Advisor Funds, Portfolio
Companies or Managed Accounts investments. Such
positions may be significant and may differ from
and/or be
adverse to the Companys, the Investment Funds,
Advisor Funds, Portfolio Companies or Managed
Accounts positions. Goldman Sachs (including its personnel
and Client/GS Accounts) reserves the right to make purchases and
sales of investments that may also be held by the Company, the
Investment Funds, Advisor Funds, Portfolio Companies
and/or
Managed Accounts and to make purchases and sales of units in the
Company or interests in the Investment Funds, Advisor Funds,
Portfolio Companies or Managed Accounts at any time and without
notice to investors in the Company. These derivative-related
activities, as well as such investment and redemption
activities, may have an adverse effect on the investment
management of the Company and the Companys positions,
flexibility, diversification strategies and on the amount of
fees, expenses and other costs incurred directly or indirectly
through the Company by the Members.
Goldman Sachs may enter into derivatives transactions with the
Company, the Investment Funds and Client/GS Accounts, and
Goldman Sachs may hedge such derivatives transactions. This
hedging activity may adversely affect the value of the
derivative transactions entered into with the Company or the
Investments Funds. Any such activity, or investment or sale of
positions, may occur as a result of Goldman Sachs deciding to
alter or sell positions or adjusting its assessments of an
investment or adviser at any time and for any other reason,
based on market information, consideration of issues with
respect to an adviser or otherwise, and Goldman Sachs will not
be under any obligation to provide the Company notice of such
adjustment in assessment or the reason behind such adjustment or
to effect transactions on behalf of the Company as a result of
such adjustments. Actions taken with respect to Goldman Sachs or
Client/GS Accounts may adversely impact the Company, and actions
taken by the Company may benefit Goldman Sachs or Client/GS
Accounts.
In addition, Goldman Sachs may make loans to Members or enter
into similar transactions that are secured by a pledge of, or
mortgage over, a Members units, which would provide
Goldman Sachs with the right to redeem such units in the event
that such Member defaults on its obligations. These transactions
and related redemptions may be significant and may be made
without notice to the Members. A Goldman Sachs investment may be
made in any class of units, including a class which is not
subject to any management fee or incentive allocation. The
structure or other characteristics of the derivative instruments
(including the Structured Investment Products) may have an
adverse effect on the Company, an Investment Fund, an Advisor
Fund or a Portfolio Company. For example, the derivative
instruments could represent leveraged investments in the
Company, an Investment Fund, an Advisor Fund or Portfolio
Company, and the leveraged characteristics of such investments
could make it more likely, due to events of default or
otherwise, that there would be significant redemptions of
interests from the Company, an Investment Fund, Advisor Fund or
Portfolio Company more quickly than might otherwise be the case.
Goldman Sachs, acting in commercial capacities in connection
with such derivative instruments, may in fact cause such a
redemption. This may have an adverse effect on the investment
management and positions, flexibility and
47
diversification strategies of the Company, Investment Fund,
Advisor Fund or Portfolio Company, as applicable, and on the
amount of fees, expenses and other costs incurred directly or
indirectly for the account of the Company.
The Managing Member, the Company and the Investment Funds may
receive research products and services in connection with the
brokerage services that brokers (including, without limitation,
Goldman Sachs entities) may provide to the Company, the
Investment Funds or one or more Client/GS Accounts. Such
products and services may disproportionately benefit other
Client/GS Accounts relative to the Company and the Investment
Funds based on the amount of brokerage commissions paid by the
Company and the Investment Funds and such other Client/GS
Accounts. For example, research or other services that are paid
for through one clients commissions may not be used in
managing that clients account. In addition, Client/GS
Accounts may receive the benefit, including disproportionate
benefits, of economies of scale or price discounts in connection
with products and services that may be provided to the Company,
the Investment Funds and to Client/GS Accounts.
The Company may also directly or indirectly enter into
asset-based or other credit facilities. Any credit facility of
the Company may be secured by all or any portion of the
Companys portfolio of assets, including any interests in
other funds. Actions taken by the Managing Member or Goldman
Sachs on behalf of Goldman Sachs proprietary accounts,
Client/GS Accounts or otherwise may result in adverse
performance or diminution in value of the Companys
portfolio, which could cause the Company to be in default, or to
take certain actions to avoid being in default, in connection
with a credit facility. This could have a material adverse
effect on the Company. Actions taken either by the applicable
lender (which may, to the extent permitted by applicable law, be
Goldman Sachs) or by the Managing Member on behalf of a
Client/GS Account or the Company arising out of credit facility
related issues may impact the value of the assets of the
Company, may cause the Company to be in default or take certain
actions to avoid being in default with respect to a credit
facility and may have a material adverse effect on the Company.
For example, an event of default or actions taken by the
Managing Member to avoid an event of default could cause the
Company to liquidate assets more rapidly (and therefore
potentially at significantly lower prices) than might otherwise
be desirable, which could have a material adverse effect on the
Companys portfolio. In addition, such a liquidation could
alter the constitution of the Companys portfolio,
resulting in a portfolio that is less diversified and less
liquid, and could otherwise limit the ability of the Company to
successfully implement its investment program. An example of
this would be where, to avoid an event of default, more liquid
securities are sold in advance of less liquid securities.
Similarly, if the Company is invested in another fund, the
consequences arising out of a default or potential default by
such fund in connection with a credit facility as described
above could adversely affect the Company, and such consequences
could be exacerbated by substantial redemptions from other
investors (including Goldman Sachs and the Managing Member on
behalf of Client/GS Accounts) in the defaulting or potentially
defaulting fund. Such redemptions could cause the liquidation of
additional portfolio assets of the Company at times that would
not otherwise be desirable, with the negative effects described
above. When Goldman Sachs acts as a lender to a fund or
Client/GS Account, it may take commercial steps in its own
interest, such as requiring repayment of all or part of a loan
at a time that may not be desirable for the Company, and such
actions may have a material adverse effect on the Company.
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Potential
Conflicts in Connection with Investments in Goldman Sachs Money
Market Funds
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To the extent permitted by applicable law, the Company and the
Investment Funds may invest all or some of their short-term cash
investments in any money market fund sponsored, managed or
advised by Goldman Sachs. In connection with any such
investments, the Company and the Investment Funds will pay all
advisory, administrative or
12b-1 fees
applicable to the investment and the fees or allocations from
the Company and the Investment Funds will not be reduced thereby
(i.e., there could be double fees involved in making
any such investment, which would not arise in connection with an
investors direct purchase of the underlying investments
because Goldman Sachs could receive fees with respect to both
the management of the Company or the Investment Funds and such
money market fund). In such circumstances, as well as in all
other circumstances in which Goldman Sachs receives any fees or
other compensation in any form relating to the provision of
services, no accounting or repayment to the Company or the
Investment Funds will be required.
48
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Potential
Conflicts in Connection with Investments in Affiliated
Funds
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The Managing Member may directly or indirectly allocate the
Companys assets to Advisor Funds, Portfolio Companies or
Managed Accounts managed by Goldman Sachs or to open-end
investment companies, unit investment trusts or other collective
investment funds, registered or non-registered, for which
Goldman Sachs serves as investment adviser (Affiliated
Funds). In such case, the Company may be required to pay
all advisory and other fees and expenses (including, but not
limited to, management fees, carried interest charges, incentive
fees and allocations, and offering, organizational and operating
expenses) applicable to such investment, and Goldman Sachs may
receive compensation from the Company in connection with acting
as an Advisor, and such compensation may not reduce any fees
payable directly to the Managing Member by the Company. Because
Goldman Sachs may receive fees in respect of both the Company
and the management of the Affiliated Funds, there may be
multiple fees involved in making any such
investment, which would not arise if clients invested directly
in the Affiliated Funds. In addition, the affiliated
Advisors personnel may receive compensation as a result of
such investments. Any such fees, allocations or other
compensation received by Goldman Sachs in connection with a
direct or indirect investment by the Company in an Affiliated
Fund will generally be retained by Goldman Sachs and will
generally not be shared with the Company or investors, provided,
however, that subject to applicable law, Goldman Sachs
(including the Managing Member) has the right, in its sole
discretion, to waive, reduce or rebate fees that would otherwise
be payable to Goldman Sachs in connection with the Managing
Members allocation of the Companys assets to
Affiliated Funds.
As the Managing Members allocations of Company assets to
Affiliated Funds may result in the Managing Member
and/or
Goldman Sachs receiving higher fees, compensation or other
benefits than if the Managing Member makes direct or indirect
allocations solely to Advisor Funds, Portfolio Companies or
Managed Accounts managed by third parties, the Managing Member
will have an incentive to make direct or indirect allocations to
Affiliated Funds. Furthermore, the Managing Member will have an
interest in allocating Company assets directly or indirectly to
Affiliated Funds that impose higher fees than those imposed by
other Affiliated Funds.
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Goldman
Sachs May In-Source or Outsource
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Subject to applicable law, Goldman Sachs, including the Managing
Member, may from time to time and without notice to investors
in-source or outsource certain processes or functions in
connection with a variety of services that it provides to the
Company and the Investment Funds in its administrative or other
capacities. Such in-sourcing or outsourcing may give rise to
additional conflicts of interest.
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Potential
Conflicts Pertaining to Advisor Fund Special Investments
and Designated Investments
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From time to time, the Company may, as part of its investment
program, invest in one or more Advisor Funds
and/or
Portfolio Companies that acquire or hold assets or securities
that its Advisor determines should, either at the time such
security or other asset is acquired or at a later date, be
segregated (or side pocketed) from the other assets
and securities of the Advisor Fund or Portfolio Company because
such assets cannot be readily liquidated or because the value of
such assets cannot be readily ascertained (each such investment,
together with certain related assets and liabilities and
investments related thereto which are also segregated, such as
hedge positions, a Portfolio Fund Special
Investment). Such assets typically retain their
designation as Portfolio Fund Special Investments until
they are realized or become marketable or until the occurrence
of such other specified event or circumstance as may be
determined by the Advisor. Investors that hold interests in side
pocketed assets generally will not be able to redeem their
indirect interests in such assets until the relevant
side-pocketed assets are liquidated or deemed realized by the
Advisor Funds or Portfolio Companies.
In addition, from time to time, the Company
and/or an
Advisor Fund or Portfolio Company in which the Fund has invested
or any other assets held by the Fund may become materially
impaired, including in situations where the Company, Advisor
Fund or Portfolio Company has limited, suspended or discontinued
redemptions of its interests or has suspended determination of
its net asset value. If the Managing Member, in its sole
discretion, determines that the Companys ability to redeem
or otherwise dispose of interests in or to value a particular
Advisor Fund, Portfolio Company or other asset held by the
Company has become materially impaired, the Managing Member, in
its sole discretion, may (but is not required to) designate the
Companys interests in such Advisor Fund, Portfolio Company
49
or other asset a Designated Investment. The Managing
Member may rescind the Designated Investment status when it
determines, in its sole discretion, that the Designated
Investment no longer suffers from a liquidity or valuation
impairment, including upon the Companys liquidation of the
Designated Investment.
At any time on or before a redemption date, the Managing Member
may determine as a result of the Companys aggregate
exposure to Portfolio Fund Special Investments and
Designated Investments, that fulfilling outstanding redemption
requests as of such redemption date solely in cash may have a
material adverse effect on the investment mix or future
liquidity of the Company for remaining investors. To attempt to
mitigate the effects of redemptions on the investment mix and
future liquidity of the Company, the Managing Member may have
the right to cause the Company to satisfy a redemption request
partly in cash (by disposing of liquid assets) and partly by
transferring the economic risks and benefits of the illiquid
assets to the redeeming investor through, among other means, a
distribution in kind or the issuance of interests in special
investment accounts to which the Managing Member, in its sole
discretion, may allocate interests in certain Portfolio
Fund Special Investments and Designated Investments
(Special Investment Accounts). Clients will retain
their interests in each Special Investment Account until the
last investment in such Special Investment Account is realized,
deemed realized or disposed of, or its Designated Investment
status has been rescinded by the Managing Member, in its sole
discretion. Throughout the time period that clients hold
interests in Special Investment Accounts, the Managing Member
shall determine the value of the Special Investment Accounts,
and clients that hold interests in Special Investment Accounts
may pay the Managing Member management fees and
performance-based fees that shall be calculated based on the
value of the clients investments in the Special Investment
Accounts.
The Managing Members ability to distribute illiquid assets
in kind or to allocate Portfolio Fund Investments and
Designated Investments to Special Investment Accounts and issue
interests in Special Investment Accounts raises conflicts of
interest. For example, the Managing Members determinations
with respect thereto may affect the amount of fees earned by the
Managing Member. The Managing Member may, therefore, be
incentivized to satisfy clients redemption requests
through a combination of cash and interests in Special
Investment Accounts in order to earn management and
performance-based fees that the Managing Member would otherwise
not be entitled to had clients redemption requests been
satisfied fully in cash. The Managing Member may also be
incentivized not to rescind a Designated Investments
status as such, because rescission of Designated
Investments status will reduce the value of the Special
Investment Accounts to which such Designated Investment has been
allocated, and this in turn will reduce the fees payable by
clients to the Managing Member in connection with such
clients interests in Special Investment Accounts.
Moreover, the Managing Member may have discretion over the
amount and identity of the Portfolio Fund Special
Investments and Designated Investments distributed in kind or
allocable to Special Investment Accounts. Depending on the
composition of the Portfolio Fund Special Investments and
Designated Investments that the Managing Member distributes in
kind or allocates to Special Investment Accounts in respect of a
particular redemption date (each a Special Investment
Account Series), one Special Investment Account Series may
outperform another Special Investment Account Series or may
outperform the Fund itself. Therefore, the composition of such
in-kind distribution or Special Investment Account may cause the
returns received by one client (including Goldman Sachs) to be
greater than those received by another client. In this regard,
while the Managing Member will have broad discretion as to
whether to designate Portfolio Fund Special Investments and
Designated Investments and as to the composition of any such
in-kind distribution or allocation to Special Investment
Accounts, the Managing Member may establish internal guidelines
as to the factors it will employ in making these determinations.
These internal guidelines will be subject to change in the sole
discretion of the Managing Member.
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Potential
Conflicts Related to the Valuation of Investments
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The valuation of investments made by the Company and the
Investment Funds is ordinarily determined based on valuations
provided directly or indirectly by the Advisors. Certain
securities in which the Company or the Investment Funds directly
or indirectly invest may not have a readily ascertainable market
price and will generally be valued by the Advisors. Such
securities and other assets may constitute a substantial portion
of the Companys direct or indirect investments. In this
regard, the Advisors may face a conflict of interest in valuing
the securities, as their value will affect the Advisors
compensation. Furthermore, the Managing Member may face a
conflict of
50
interest in overseeing the valuation of the investments of the
Company or an Investment Fund, as the value of such funds
investments will affect the Managing Members compensation.
In certain circumstances, the Managing Member may determine that
a valuation of the assets of the Company or an Investment Fund
is inaccurate or incomplete. In addition, certain assets of the
Company or an Investment Fund may not be valued by the Advisors,
including without limitation, fee or profit sharing arrangements
with an Advisor. In such events, the Managing Member may, in its
sole discretion, determine the fair value of such assets based
on information available to, and factors deemed relevant by, the
Managing Member at the time of such valuation. The Managing
Member may face a conflict of interest in making such
determination.
Potential
Conflicts That May Arise When Goldman Sachs Acts in a Capacity
Other than Managing Member to the Company or the Investment
Funds
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Potential
Conflicts Relating to Principal and Cross Transactions
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To the extent permitted by applicable law, the Managing Member,
on behalf of the Company or the Investment Funds, or an Advisor,
on behalf of an Advisor Fund, Portfolio Company or Managed
Account, may enter into transactions and invest in futures,
securities, currencies, swaps, options, forward contracts or
other instruments in which Goldman Sachs or an affiliate of the
Advisor, acting as principal or on a proprietary basis for its
customers, serves as the counterparty.
To the extent permitted by applicable law, the Company may also
enter into cross transactions (i.e., where the
Managing Member causes the Company to buy a security from, or
sell a security to, another client of the Managing Member or its
affiliates) and agency cross transactions (i.e.,
where Goldman Sachs acts as broker for, and receives a
commission from, both the Company on one side of the transaction
and a brokerage account on the other side of the transaction in
connection with the purchase or sale of securities). Goldman
Sachs may have a potentially conflicting division of loyalties
and responsibilities to both parties to a cross transaction or
agency cross transaction. For example, in a cross transaction,
the Managing Member or an affiliate will represent both the
Company on the one side of a transaction and another account on
the other side of the transaction (including an account in which
Goldman Sachs or its affiliates have a proprietary interest) in
connection with the purchase of a security by the Company. In
addition, in an agency cross transaction, Goldman Sachs will act
as broker and receive compensation or other payments from either
or both parties which could influence the decision of Goldman
Sachs to cause the Company to purchase such security. Cross
transactions and agency cross transactions are effected on
commercially reasonable terms. The Managing Member may also, to
the extent permitted by applicable law and subject to Goldman
Sachs allocation policies, transfer some or all of the
Companys interest in an Investment Fund, Advisor Fund,
Portfolio Company or Managed Account to other Client/GS Accounts
if the Managing Member deems it advisable in order to achieve
the investment objectives of the Company and such Client/GS
Account.
By virtue of entering into the Subscription Agreement, the
investor consents to the Company, Investment Funds, Advisor
Funds, Portfolio Companies and Managed Accounts entering into
principal transactions, agency cross transactions and cross
transactions to the fullest extent permitted under applicable
law. An investor may revoke such consent in the manner set forth
herein or in such other manner as the Company or the Managing
Member will notify the investor from time to time.
Pursuant to the Subscription Agreement and to the extent
permitted by applicable law, in respect of matters described in
the next sentence in which the Company may engage and which may
require approval on behalf of the Company or with respect to
which the Managing Member determines to seek approval, the
Company
and/or the
Managing Member is authorized without limitation (but is not in
any way required), to (i) consider and approve or
disapprove such transactions and other matters on behalf of the
Company and its investors, or (ii) select certain Members
or beneficial owners of units or one or more persons who are not
affiliated with the Company, including persons who may or may
not be affiliated with the Managing Member
and/or
Goldman Sachs, to serve on a committee, the purpose of which
will be to consider and approve or disapprove any such
transactions and other matters on behalf of the Company and the
Members that are presented to such committee by the Managing
Member in its sole discretion. Such transactions or other
matters may include the following, but in any event only with
respect to any particular transaction or other matter that the
Managing Member determines in its sole discretion to either, in
the case of (i) above, consider, or in the case of
(ii) above, present to the committee: (a) any
transaction in
51
which the Company proposes to purchase or sell securities and
which, as a result of participation (directly or indirectly) by
Goldman Sachs in respect of such transaction, requires consent
under the Investment Advisers Act, (b) any fee paid to
Goldman Sachs in respect of a transaction in which the Company
proposes to be an investor and which, as a result of the
participation by Goldman Sachs, requires consent under the
Investment Advisers Act, (c) any other transaction or
matter for which prior consent or other consent may be required
under the Investment Advisers Act, and (d) any other
transaction or matter which the Managing Member determines to
consider itself or present to the committee, which may include,
without limitation, transactions involving possible conflicts of
interest. For the avoidance of doubt, the Managing Member will
be under no obligation to form any such committee or present any
particular matter to any such committee, and the determination
to set up a committee or to present any matter for consideration
to the committee will in each case be made by the Managing
Member in its sole discretion.
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Potential
Conflicts That May Arise When Goldman Sachs Acts in Commercial
Capacities for the Company and the Investment Funds
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Goldman Sachs may act as broker, dealer, agent, lender or
advisor or in other commercial capacities for the Company and
the Investment Funds. It is anticipated that the commissions,
mark-ups,
mark-downs, financial advisory fees, underwriting and placement
fees, sales fees, financing and commitment fees, brokerage fees,
other fees, compensation or profits, rates, terms and conditions
charged by Goldman Sachs will be in its view commercially
reasonable, although Goldman Sachs, including its sales
personnel, will have an interest in obtaining fees and other
amounts that are favorable to Goldman Sachs and such sales
personnel. The Company and the Investment Funds may, to the
extent permitted by applicable law, borrow funds from Goldman
Sachs at rates and on other terms arranged with Goldman Sachs.
Goldman Sachs may be entitled to compensation when it acts in
capacities other than as the Managing Member or the managing
member of the Investment Funds, and the Company, the Investment
Funds, Advisor Funds, Portfolio Companies and Managed Accounts
will not be entitled to any such compensation.
When an Advisor chooses Goldman Sachs to act as broker, prime
broker, dealer, agent, lender, borrower or advisor or in other
commercial capacities in relation to an Advisor Fund, Portfolio
Company or Managed Account, Goldman Sachs may take commercial
steps in its own interests, which may have an adverse effect on
the Company, the relevant Investment Fund, and the Advisor Fund,
Portfolio Company or Managed Account, as applicable. For
example, in connection with prime brokerage or lending
arrangements involving Advisors on behalf of the Investment
Funds, Portfolio Companies or Managed Accounts, Goldman Sachs
may require repayment of all or part of a loan at any time or
from time to time.
The Company and each Investment Fund will be required to
establish business relationships with its counterparties based
on its own credit standing. Goldman Sachs, including the
Managing Member, will not have any obligation to allow its
credit to be used in connection with the Companys or any
Investment Funds establishment of its business
relationships, nor is it expected that the Companys or
such Investment Funds counterparties will rely on the
credit of Goldman Sachs in evaluating the Companys or any
Investment Funds creditworthiness.
Goldman Sachs may have ownership interests in trading networks,
securities or derivatives indices, trading tools, settlement
systems and other assets, and Goldman Sachs may benefit when the
Managing Member and Advisors use them in connection with the
Company or the Investment Funds.
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The Board
of Directors Lacks Independence
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The Managing Member is, and has historically been, responsible
for the management of the affairs of the Company. Effective
April 1, 2009, the Managing Member established a board of
directors of the Company, which supervises the affairs of the
Company in lieu of the supervision previously provided by the
Board of Directors of the Managing Member. The directors of the
Company are employees of Goldman Sachs and will not be
independent of the Managing Member and the Company, as
applicable. As a result, the directors of the Company may have
other considerations in addition to their responsibilities for
the Company, including as a result of their employment by
Goldman Sachs, which could result in potential conflicts of
interest.
52
Potential
Conflicts Relating to the Selection of Investments by the
Advisors
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An
Advisors Other Activities May Have an Impact on the
Advisor Funds, Portfolio Companies and Managed
Accounts
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Each Advisor may act as an investor, investment banker, research
provider, investment manager, financer, advisor, market maker,
proprietary trader, prime broker, lender, agent or principal,
and may have other direct and indirect interests, in the global
fixed income, currency, commodity, equity, bank loan and other
markets in which the Advisor trades. Thus, it is possible that
an Advisor will undertake transactions in securities in which it
makes a market or otherwise has direct or indirect interests.
These business relationships and the fees, compensation and
other benefits to the Advisor arising therefrom, may, in certain
cases, create an incentive for the Advisor to make certain
investments for the Company over other investments that might
also be appropriate.
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Potential
Conflicts Relating to the Allocation of Investment Opportunities
Among the Advisors Accounts
|
Advisors have potential conflicts in connection with the
allocation of investments or transaction decisions for Advisor
Funds, Portfolio Companies and Managed Accounts, including in
situations in which Advisors or their personnel have interests.
For example, an Advisor Fund may be competing for investment
opportunities with current or future accounts or funds
sponsored, managed or advised by the Advisor Funds
Advisor, including accounts or funds that may provide greater
fees or other compensation, including performance-based fees, to
the Advisor or in which the Advisor or its personnel have an
interest (each, a Client/Advisor Account and
collectively, the Client/Advisor Accounts) that have
investment objectives that are similar to those of an Advisor
Fund, Portfolio Company or Managed Account managed by such
Advisor. Economic arrangements which an Advisor may have entered
into, such as agreements to share or rebate fees or to grant
equity, profits or other interests, may also result in other
Client/Advisor Accounts of the Advisor providing greater
compensation to the Advisor than an Advisor Fund, Portfolio
Company or Managed Account.
An Advisor may manage or advise Client/Advisor Accounts that may
seek to make investments or sell investments in securities or
other instruments, sectors or strategies in which an Advisor
Fund, Portfolio Company or Managed Account may invest. This may
create potential conflicts and potential differences among an
Advisor Fund, Portfolio Company or Managed Account and other
Client/Advisor Accounts, particularly where there is limited
availability or limited liquidity for those investments. For
example, limited availability situations may exist, without
limitation, in emerging markets, high yield securities, fixed
income securities, regulated industries and initial public
offerings/new issues. Transactions in investments by multiple
Client/Advisor Accounts (including accounts in which an Advisor
and/or its
personnel have an interest), other clients of an Advisor or an
Advisor itself may have the effect of diluting or otherwise
negatively affecting the values, prices or investment strategies
associated with securities held by an Advisor Fund, Portfolio
Company or Managed Account, particularly, but not limited to, in
small capitalization, emerging market or less liquid strategies.
Each Advisor will allocate investment opportunities and make
purchase and sale decisions among the Advisor Fund, Portfolio
Company or Managed Account and other Client/Advisor Accounts in
a manner that it considers, in its sole discretion, to each
Client/Advisor Account, to be reasonable. Allocations may be
based on numerous factors and may not always be pro rata based
on assets managed.
Allocation decisions by Advisors among accounts may be more or
less advantageous to any one account or group of accounts. An
Advisor may determine that an investment opportunity or
particular purchases or sales are appropriate for one or more
Client/Advisor Accounts or for itself or an affiliate, but not
for the Advisor Fund, Portfolio Company or Managed Account
managed by such Advisor, or is appropriate for, or available to,
such Advisor Fund, Portfolio Company or Managed Account, but in
different sizes, terms or timing than is appropriate for other
Client/Advisor Accounts. As a result of these allocation issues,
the amount, timing, structuring or terms of an investment by an
Advisor Fund, Portfolio Company or Managed Account managed by an
Advisor may differ from, and performance may be lower than,
investments and performance of other Client/Advisor Accounts
managed by the same Advisor.
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Other
Potential Conflicts Relating to the Advisors Portfolio
Management Activities
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Potential
Restrictions and Issues Relating to Information Held by
Advisors
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As a result of informational barriers constructed between
different divisions of an Advisor, an Advisor will generally not
have access to information and personnel in other areas of the
Advisor. Therefore, an Advisor will generally not be able to
manage the Advisor Funds, Portfolio Companies or Managed
Accounts with the benefit of information held by its other
divisions. However, although they are under no obligation to do
so, personnel of an Advisor may consult with personnel in other
areas of the Advisor or personnel of unaffiliated firms, or may
form investment policy committees comprised of such personnel,
and in certain circumstances, personnel of affiliates of an
Advisor may have input into, or make determinations regarding,
portfolio management transactions for Advisor Funds, Portfolio
Companies or Managed Accounts and may receive information
regarding the proposed investment activities of the Advisor
Funds, Portfolio Companies or Managed Accounts managed by such
Advisor that is not generally available to the public. There
will be no obligation on the part of such persons to make
available for use by the Advisor Funds, Portfolio Companies or
Managed Accounts any information or strategies known to them or
developed in connection with their own client, proprietary or
other activities. In addition, Advisors will be under no
obligation to make available any research or analysis prior to
its public dissemination.
An Advisor from time to time may have access to certain
fundamental analysis and proprietary technical models developed
by it and its affiliates. The Advisor will not be under any
obligation to effect transactions on behalf of an Advisor Fund,
Portfolio Company or Managed Account that it manages in
accordance with such analysis and models. In addition, the
Advisor may have no obligation to seek information or to make
available to or share with the Advisor Fund, Portfolio Company
or Managed Account any information, investment strategies,
opportunities or ideas known to the Advisors personnel or
developed or used in connection with other Client/Advisor
Accounts or activities.
An Advisor and certain of its personnel may be in possession of
information not available to all Advisor personnel, including
the personnel advising or otherwise providing services to an
Advisor Fund, Portfolio Company or Managed Account advised by
such Advisor, and such personnel may act on the basis of such
information in ways that have adverse effects on such Advisor
Fund, Portfolio Company or Managed Account.
From time to time, an Advisor may come into possession of
material, non-public information or other information that could
limit the ability of an Advisor Fund, Portfolio Company or
Managed Account managed by such Advisor to buy and sell
investments. The investment flexibility of such Advisor Fund,
Portfolio Company or Managed Account may be constrained as a
consequence. Advisors are not generally permitted to obtain or
use material non-public information in effecting purchases and
sales in public securities transactions for an Advisor Fund,
Portfolio Company or Managed Account.
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Potential
Conflicts Relating to an Advisors Proprietary Activities
on Behalf of Other Accounts Managed by the Advisor
|
The results of the investment activities of an Advisor Fund,
Portfolio Company or Managed Account may differ significantly
from the results achieved by its Advisor for its proprietary
accounts and from the results achieved by the Advisor for other
Client/Advisor Accounts. An Advisor is expected to manage the
applicable Advisor Fund, Portfolio Company or Managed Account
and its other Client/Advisor Accounts in accordance with their
respective investment objectives and guidelines. However, the
Advisor may give advice, and take action, with respect to any
current or future Client/Advisor Accounts that may compete or
conflict with the advice the Advisor may give to an Advisor
Fund, Portfolio Company or Managed Account, including with
respect to the return of an investment, the timing or nature of
action relating to an investment or the method of exiting the
investment.
Transactions undertaken by Advisors or Client/Advisor Accounts
may adversely impact an Advisor Fund, Portfolio Company or
Managed Account. An Advisor and its Client/Advisor Accounts may
buy or sell positions while an Advisor Fund, Portfolio Company
or Managed Account managed by such Advisor is undertaking the
same or a differing, including potentially opposite, strategy,
which could disadvantage the Advisor Fund, Portfolio Company or
Managed Account. For example, an Advisor Fund may buy a security
and its Advisor or such Advisors Client/Advisor Accounts
may establish a short position in that same security. The
subsequent short sale may result
54
in impairment of the price of the security which the Advisor
Fund holds. Conversely, the Advisor Fund may establish a short
position in a security and the Advisor or its Client/Advisor
Accounts may buy that same security. The subsequent purchase may
result in an increase of the price of the underlying position in
the short sale exposure of the Advisor Fund and such increase in
price would be to the Advisor Funds detriment.
In addition, transactions in investments by one or more
Client/Advisor Accounts or the Advisors may have the effect of
diluting or otherwise negatively affecting the values, prices or
investment strategies of an Advisor Fund, Portfolio Company or
Managed Account, particularly, but not limited to, in small
capitalization, emerging market or less liquid strategies. This
may occur when portfolio decisions for an Advisor Fund,
Portfolio Company or Managed Account are based on research or
other information that is also used to support portfolio
decisions for other Client/Advisor Accounts managed by personnel
of an Advisor. When the Advisor or a Client/Advisor Account
implements a portfolio decision or strategy ahead of, or
contemporaneously with portfolio decisions or strategies for an
Advisor Fund, Portfolio Company or Managed Account (whether or
not the portfolio decisions emanate from the same research
analysis or other information), market impact, liquidity
constraints, or other factors could result in the Advisor Fund,
Portfolio Company or Managed Account receiving less favorable
trading results and the costs of implementing such portfolio
decisions or strategies could be increased or the Advisor Fund,
Portfolio Company or Managed Account could otherwise be
disadvantaged. The Advisor may, in certain cases, elect to
implement internal policies and procedures designed to limit
such consequences to the Client/Advisor Accounts as well as the
Advisor Funds, Portfolio Companies and Managed Accounts, which
may cause an Advisor Fund, Portfolio Company or Managed Account
to be unable to engage in certain activities, including
purchasing or disposing of securities, when it might otherwise
be desirable for it to do so.
Conflicts may also arise because portfolio decisions regarding
an Advisor Fund, Portfolio Company or Managed Account may
benefit other Client/Advisor Accounts. For example, the sale of
a long position or establishment of a short position by an
Advisor Fund may impair the price of the same security sold
short by (and therefore benefit) the Advisor or other
Client/Advisor Accounts, and the purchase of a security or
covering of a short position in a security by an Advisor Fund
may increase the price of the same security held by (and
therefore benefit) the Advisor or other Client/Advisor Accounts.
The directors, officers and employees of an Advisor may buy and
sell securities or other investments for their own accounts
(including through funds managed by the Advisor). As a result of
differing trading and investment strategies or constraints,
positions may be taken by directors, officers and employees of
an Advisor that are the same as, different from or made at
different times than positions taken for an Advisor Fund,
Portfolio Company or Managed Account managed by such Advisor. To
reduce the possibility that an Advisor Fund, Portfolio Company
or Managed Account will be materially adversely affected by the
personal trading described above, each Advisor may establish
policies and procedures that restrict securities trading in the
personal accounts of investment professionals and others who
normally come into possession of information regarding the
portfolio transactions of an Advisor Fund, Portfolio Company or
Managed Account that it manages. However, there can be no
assurance that such policies and procedures will avoid all
conflicts of interest.
Clients of an Advisor (including Client/Advisor Accounts) may
have, as a result of receiving client reports or otherwise,
access to information regarding the Advisors transactions
or views which may affect such clients transactions
outside of accounts controlled by the personnel providing advice
to an Advisor Fund, Portfolio Company or Managed Account managed
by such Advisor, and such transactions may negatively impact the
performance of such Advisor Fund, Portfolio Company or Managed
Account. An Advisor Fund, Portfolio Company or Managed Account
may also be adversely affected by cash flows and market
movements arising from purchase and sales transactions, as well
as increases of capital in, and withdrawals of capital from,
other Client/Advisor Accounts and Client/GS Accounts. These
effects can be more pronounced in thinly traded and less liquid
markets.
An Advisors management of the assets of an Advisor Fund,
Portfolio Company or Managed Account may benefit the Advisor.
For example, an Advisor Fund, Portfolio Company or Managed
Account may, subject to applicable law, invest directly or
indirectly in the securities, bank loans or other obligations of
companies affiliated with the Advisor or in which the Advisor
has an equity, debt or other interest. In addition, subject to
applicable law, an Advisor Fund, Portfolio Company or Managed
Account may engage in investment transactions which may result
55
in other Client/Advisor Accounts being relieved of obligations
or otherwise divesting of investments or cause an Advisor Fund,
Portfolio Company or Managed Account to have to divest certain
investments. The purchase, holding and sale of investments by an
Advisor Fund, Portfolio Company or Managed Account may enhance
the profitability of the Advisors or its Client/Advisor
Accounts own investments in and its activities with
respect to such companies.
An Advisor and its clients may also invest in different classes
of securities of the same issuer. As a result, one or more
Client/Advisor Accounts may pursue or enforce rights with
respect to a particular issuer in which an Advisor Fund,
Portfolio Company or Managed Account has invested, and those
activities may have an adverse effect on such Advisor Fund,
Portfolio Company or Managed Account. For example, if a
Client/Advisor Account holds debt securities of an issuer, and
an Advisor Fund, Portfolio Company or Managed Account holds
equity securities of the same issuer, then if the issuer
experiences financial or operational challenges, the
Client/Advisor Account which holds the debt securities may seek
a liquidation of the issuer, whereas the Advisor Fund, Portfolio
Company or Managed Account which holds the equity securities,
may prefer a reorganization of the issuer. An Advisor may also,
in certain circumstances, pursue or enforce rights with respect
to a particular issuer jointly on behalf of one or more
Client/Advisor Accounts, or the Advisors employees may
work together to pursue or enforce such rights. An Advisor Fund,
Portfolio Company or Managed Account may be negatively impacted
by the activities of the Advisor or its clients, and
transactions for an Advisor Fund, Portfolio Company or Managed
Account managed by such Advisor may be impaired or effected at
prices or terms that may be less favorable than would otherwise
have been the case had the Advisor and Client/Advisor Accounts
not pursued a particular course of action with respect to the
issuer of the securities. In addition, in certain instances
personnel of an Advisor may obtain information about an issuer
that would be material to the management of other Client/Advisor
Accounts which could limit the ability of personnel of the
Advisor to make or reduce investments for the Advisor Funds,
Portfolio Companies and Managed Accounts.
To the extent permitted by applicable law, an Advisor (including
its personnel or Client/Advisor Accounts) may create, write,
sell, issue, invest in or act as placement agent or distributor
of, derivative instruments (including the Structured Investment
Products). The structure or other characteristics of the
derivative instruments (including the Structured Investment
Products) may have an adverse effect on the Advisor Fund,
Portfolio Company or Managed Account. For example, the
derivative instruments could represent leveraged investments in
an Advisor Fund, and the leveraged characteristics of such
investments could make it more likely, due to events of default
or otherwise, that there would be significant redemptions of
interests from the Advisor Fund more quickly than might
otherwise be the case. The Advisor, acting in commercial
capacities in connection with such derivative instruments, may
in fact cause such a redemption. This may have an adverse effect
on the Advisor Funds investment management and positions,
flexibility, and diversification strategies and on the amount of
fees, expenses and other costs incurred directly or indirectly
for the account of such Advisor Fund. Similarly, an Advisor
(including its personnel or Client/Advisor Accounts) may invest
in an Advisor Fund, may hedge its derivative positions by buying
or selling interests in the Advisor Fund, and may reserve the
right to redeem some or all of its investments at any time.
These investments and redemptions may be made without notice to
the investors in such Advisor Funds, including the Investment
Funds and indirectly the Company.
The Advisors and the Advisor Funds, Portfolio Companies or
Managed Accounts may receive research products and services in
connection with the brokerage services that brokers (including,
without limitation, Goldman Sachs entities and Advisor
affiliated entities) may provide to the Advisor Funds, Portfolio
Companies or Managed Accounts or one or more Client/Advisor
Accounts. Such products and services may disproportionately
benefit other Client/Advisor Accounts relative to the Advisor
Funds, Portfolio Companies or Managed Accounts based on the
amount of brokerage commissions paid by the Advisor Funds,
Portfolio Companies or Managed Accounts and such other
Client/Advisor Accounts. For example, research or other services
that are paid for through one clients commissions may not
be used in managing that clients account. In addition,
Client/Advisor Accounts may receive the benefit, including
disproportionate benefits, of economies of scale or price
discounts in connection with products and services that may be
provided to the Advisor Funds, Portfolio Companies or Managed
Accounts and to Client/Advisor Accounts.
56
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Potential
Conflicts That May Arise When an Advisor Acts in a Capacity
Other Than Advisor to the Advisor Funds, Portfolio Companies or
Managed Accounts
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An Advisor may act as broker, dealer, agent, lender or advisor
or in other commercial capacities for an Advisor Fund, Portfolio
Company or Managed Account. It is anticipated that the
commissions,
mark-ups,
mark-downs, financial advisory fees, underwriting and placement
fees, sales fees, financing and commitment fees, brokerage fees,
other fees, compensation or profits, rates, terms and conditions
charged by the Advisor will be in its view commercially
reasonable, although the Advisor, including its sales personnel,
will have an interest in obtaining fees and other amounts that
are favorable to such Advisor and its sales personnel.
To the extent permitted by applicable law, an Advisor may enter
into transactions and invest in futures, securities, currencies,
swaps, options, forward contracts or other instruments on behalf
of an Advisor Fund, Portfolio Company or Managed Account in
which such Advisor, acting as principal or on a proprietary
basis for its customers, serves as the counterparty. An Advisor
Fund, Portfolio Company or Managed Account may also enter into
cross transactions in which its Advisor acts on behalf of such
Advisor Fund, Portfolio Company or Managed Account and for the
other party to the transaction. An Advisor may have a
potentially conflicting division of responsibilities to both
parties to a cross transaction.
When an Advisor acts as broker, dealer, agent, lender or advisor
or in other commercial capacities in relation to an Advisor
Fund, Portfolio Company or Managed Account, such Advisor may
take commercial steps in its own interests, which may have an
adverse effect on such Advisor Fund, Portfolio Company or
Managed Account. For example, in connection with prime brokerage
or lending arrangements involving an Advisor Fund, Portfolio
Company or Managed Account, an Advisor may require repayment of
all or part of a loan at any time or from time to time.
To the extent permitted by applicable law, an Advisor Fund,
Portfolio Company or Managed Account may invest all or some of
its short-term cash investments in any money market fund advised
or managed by its Advisor, and may invest in other products
advised or managed by its Advisor. In connection with any such
investment, the Advisor Fund, Portfolio Company or Managed
Account will pay all advisory, administrative or
12b-1 fees
applicable to the investment and the fees or allocations from
the Advisor Fund, Portfolio Company or Managed Account generally
will not be reduced thereby (i.e., there could be double
fees involved in making any such investment, which would
not arise in connection with an investors direct purchase
of underlying investments because its Advisor could receive fees
with respect to both the management of the Advisor Fund,
Portfolio Company or Managed Account and such investment). In
such circumstances, as well as in all other circumstances in
which the Advisor receives any fees or other compensation in any
form relating to the provision of services, no accounting or
repayment to the Company will be required.
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The
Advisors May In-Source or Outsource
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Subject to applicable law, Advisors may from time to time and
without notice to investors in-source or outsource certain
processes or functions in connection with a variety of services
that they provide to the Advisor Funds, Portfolio Companies or
Managed Accounts managed by them in their administrative or
other capacities. Such in-sourcing or outsourcing may give rise
to additional conflicts of interest.
Potential
Conflicts in Connection with Brokerage Transactions and Proxy
Voting by the Advisors
To the extent permitted by applicable law, purchases and sales
of securities for an Advisor Fund, Portfolio Company or Managed
Account may be bunched or aggregated with orders for other
Client/Advisor Accounts of the Advisor that manages such Advisor
Fund, Portfolio Company or Managed Account. An Advisor, however,
is not required to bunch or aggregate orders if portfolio
management decisions for different accounts are made separately,
if it determines that bunching or aggregating is not practicable
or required, or with respect to client-directed accounts.
Prevailing trading activity frequently may make impossible the
receipt of the same price or execution on the entire volume of
securities purchased or sold. When this occurs, the various
prices may be averaged, and the Advisor Fund, Portfolio Company
or Managed Account, as applicable, will be charged or credited
with the average
57
price. Thus, the effect of the aggregation may operate on some
occasions to the disadvantage of the Advisor Fund, Portfolio
Company or Managed Account. In addition, under certain
circumstances, an Advisor Fund, Portfolio Company or Managed
Account will not be charged the same commission or commission
equivalent rates in connection with a bunched or aggregated
order. Without limitation, time zone differences, separate
trading desks or portfolio management processes in a global
organization may, among other factors, result in separate,
non-aggregated executions.
An Advisor may select broker-dealers (including, without
limitation, affiliates of the Managing Member) that furnish the
Advisor, its affiliates or personnel, or its clients, including
Advisor Funds, Portfolio Companies and Managed Accounts, with
proprietary or other brokerage and research and other
appropriate products and services (collectively, brokerage
and research services) that provide, in the Advisors
view, appropriate assistance to the Advisor in the investment
decision-making process (including with respect to futures,
fixed-price offerings and over-the-counter transactions). Such
research may include, to the extent permitted by law, research
reports on companies, industries and securities; access to
broker-dealer analysts and corporate executives; economic,
market and financial data; financial publications; proxy
analysis; trade industry seminars; computer databases; order
routing and quotation services; and other brokerage and research
services. When selecting broker-dealers that provide research,
an Advisor may pay reasonable commissions (as
broadly defined by the SEC to include a markup, markdown,
commission equivalent or other fee in certain circumstances) to
broker-dealers in connection with such research, even though
another broker-dealer might be willing to execute the
transactions at a lower commission. An Advisors evaluation
of the brokerage and research services provided by a
broker-dealer may be a significant factor in selecting a
broker-dealer to execute transactions.
Arrangements under which an Advisor receives such research may
vary, including by product or strategy, account or applicable
law in the jurisdictions in which an Advisor conducts business.
An Advisor may enter into soft dollar arrangements with
U.S. and
non-U.S. broker-dealers.
An Advisor may receive research, including proprietary research
that is bundled with trade execution, clearing, or settlement
services provided by a particular broker-dealer. An Advisor may
also participate in so-called commission sharing
arrangements and client commission
arrangements under which the Advisor may execute
transactions through a broker-dealer and request that the
broker-dealer allocate a portion of the commissions or
commission credits to another firm that provides research to the
Advisor.
Commission sharing and client commission arrangements may be
subject to different legal requirements in the jurisdictions in
which an Advisor does business. Participating in commission
sharing and client commission arrangements may enable an Advisor
to consolidate payments for research through one or more
channels using accumulated client commissions or credits from
transactions executed through a particular broker-dealer to
obtain research provided by other firms. Such arrangements also
help to ensure the continued receipt of brokerage and research
services while facilitating best execution in the trading
process.
These arrangements may raise conflicts of interests. For
example, to the extent that an Advisor uses client commissions
to obtain research, it will not have to pay for research itself.
In addition, research or other services obtained in this manner
may be used in servicing any or all advisory clients of the
Advisor and may be used in connection with advisory accounts
other than those that pay commissions to the broker relating to
the research or other service arrangements. To the extent
permitted by applicable law, such products and services may
disproportionately benefit one account of the Advisor over
another based on the amount of brokerage commissions paid by
such accounts of the Advisor. For example, research or other
services that are paid for through one clients commissions
may not be used in managing that clients account, but may
be used in managing other client accounts.
An Advisor may from time to time choose not to engage in the
above-described arrangements to varying degrees. An Advisor may
also engage in such arrangements that may be broader and may
raise additional conflicts than the arrangements and conflicts
described above. For example, certain Advisors may engage in
soft dollar arrangements to obtain products or services (e.g.,
services that would normally be considered expenses of the
Advisor) that are not within the Section 28(e) definition
of brokerage and research services.
The Managing Member may select broker-dealers (including,
without limitation, affiliates of the Managing Member) to
provide prime brokerage services to funds that it manages.
Conflicts may arise with respect to the
58
Managing Members selection of prime brokers and its
negotiation of the brokerage, margin and other fees payable to
such parties. Prime brokerage firms may introduce prospective
clients or afford the Managing Member the opportunity to make a
presentation regarding its services to qualified investors. Such
capital introduction opportunities are generally provided at no
additional cost. In addition, prime brokerage firms may provide
certain other services (including, among others, clearance and
settlement of securities transactions, placement agent and
custody services, and extending margin credit) at favorable or
below market rates. Such capital introduction opportunities and
other services may create incentives for or provide benefits to
the Managing Member (and not the Client/GS Accounts) from the
selection of such prime brokerage firms. In addition, the
Managing Member may have an incentive to select prime brokers
that are clients of the Managing Member. The Managing Member
will select such firms only when consistent with obtaining
appropriate services for clients.
The Managing Member may receive brokerage and research services
from brokers-dealers that provide services to clients of the
Managing Member. These broker-dealers may execute transactions
directly for the Managing Members clients, or may execute
them indirectly through the Advisors. To date the Managing
Member has not received any such brokerage and research services.
When the Managing Member allocates Company assets to Advisors
(through Advisor Funds, Portfolio Companies or Managed
Accounts), such Advisors generally are responsible for taking
all action with respect to the underlying securities held in the
Advisor Funds, Portfolio Companies and Managed Accounts, and the
Managing Member is not responsible for taking any action with
respect to the securities held in the Advisor Funds, Portfolio
Companies and Managed Accounts.
However, the Managing Member may exercise voting rights with
respect to proposals presented by Advisor Funds, Portfolio
Companies and Managed Accounts to which the Company has made
allocations. In such instances, the Managing Member will take
appropriate action with respect to such proposals.
The Managing Member and the Advisors may adopt policies and
procedures designed to prevent conflicts of interest from
influencing proxy voting decisions that they make on behalf of
advisory clients, including the Company, Investment Funds,
Advisor Funds, Portfolio Companies
and/or
Managed Accounts that they manage, and to help ensure that such
decisions are made in accordance with their fiduciary
obligations to their clients. Nevertheless, notwithstanding such
proxy voting policies and procedures, actual proxy voting
decisions of the Managing Member or an Advisor may have the
effect of favoring the interests of other clients or businesses
of the Advisor
and/or its
affiliates, and of other divisions or units of Goldman Sachs
and/or their
affiliates, provided that each of the Managing Member
and/or the
Advisor believes such voting decisions to be in accordance with
its fiduciary obligations.
Potential
Regulatory Limitations and Restrictions on Investment
Opportunities and Activities of the Advisors and the
Company
From time to time, the activities of an Advisor Fund, Portfolio
Company or Managed Account may be restricted because of
regulatory or other requirements applicable to an Advisor
and/or its
internal policies designed to comply with, limit the
applicability of, or otherwise relate to such requirements. A
client not advised by an Advisor would not be subject to some of
those considerations. There may be periods when an Advisor may
not initiate or recommend certain types of transactions, or may
otherwise restrict or limit its advice in certain securities or
instruments issued by or related to companies for which the
Advisor is performing investment banking, market making or other
services or has proprietary positions. For example, when an
Advisor is engaged in an underwriting or other distribution of
securities of, or advisory services for, a company, an Advisor
Fund, Portfolio Company or Managed Account managed by such
Advisor may be prohibited from or limited in purchasing or
selling securities of that company. In addition, there may be
certain investment opportunities, investment strategies or
actions that an Advisor will not undertake on behalf of an
Advisor Fund, Portfolio Company or Managed Account in view of
the Advisors client or firm activities. For example, an
Advisor may determine that an Advisor Fund, Portfolio Company or
Managed Account may be precluded from exercising certain rights
that it may have as a creditor to a particular borrower. Certain
activities and actions may also be considered to result in
reputational risk or disadvantage for the management of the
Company, an Investment Fund, an Advisor Fund, Portfolio Company
or Managed Account as well as for Goldman Sachs
and/or an
Advisor. An Advisor Fund, Portfolio Company or
59
Managed Account may also be prohibited from participating in an
auction or from otherwise investing in or purchasing certain
assets, or from providing financing to a purchaser or potential
purchaser, if the Advisor of such Advisor Fund, Portfolio
Company or Managed Account is representing the seller or is
representing or providing financing to another potential
purchaser. Similar situations could arise if personnel of an
Advisor serve as directors of companies the securities of which
an Advisor Fund, Portfolio Company or Managed Account managed by
such Advisor wishes to purchase or sell. The larger an
Advisors investment advisory business and such
Advisors overall business, the larger the potential that
these restricted policies will impact investment transactions.
However, if permitted by applicable law, the Advisor Fund,
Portfolio Company or Managed Account may purchase securities or
instruments that are issued by such companies or are the subject
of an underwriting, distribution, or advisory assignment by its
Advisor, or in cases in which the Advisors personnel are
directors or officers of the issuer.
The investment activities of an Advisor for its proprietary
accounts and for Client/Advisor Accounts may also limit the
investment strategies and rights of the Advisor Fund, Portfolio
Company or Managed Account managed by such Advisor. For example,
in regulated industries, in certain emerging or international
markets, in corporate and regulatory ownership definitions, and
in certain futures and derivative transactions, there may be
limits on the aggregate amount of investment by affiliated
investors that may not be exceeded without the grant of a
license or other regulatory or corporate consent or, if
exceeded, may cause the Advisor, the Advisor Fund, Portfolio
Company or Managed Account or other Client/Advisor Accounts to
suffer disadvantages or business restrictions. If certain
aggregate ownership thresholds are reached or certain
transactions undertaken, the ability of the Advisor, on behalf
of an Advisor Fund, Portfolio Company or Managed Account, to
purchase or dispose of investments, or exercise rights or
undertake business transactions, may be restricted by regulation
or otherwise impaired. In addition, certain investments may be
considered to result in reputational risk or disadvantage. As a
result, an Advisor, on behalf of its clients (including an
Advisor Fund, Portfolio Company or Managed Account), may limit
purchases, sell existing investments, or otherwise restrict or
limit the exercise of rights (including voting rights) when the
Advisor, in its sole discretion, deems it appropriate.
Safeguards
Implemented by the Managing Member to Address Conflicts of
Interest
The Managing Member and its personnel will act in accordance
with their fiduciary duties to the Company and investors, and
conduct themselves in accordance with professional and ethical
standards. Because of the nature of the Managing Members
business and the businesses of its affiliates, potential
conflicts of interest may arise. To minimize the effect of
potential conflicts of interest, the Managing Member and the
Company have put in place policies and procedures and ethical
standards which are described below. In addition, the Managing
Member and the Company have disclosed potential conflicts in
this Annual Report and in the Memorandum sent to investors in
connection with their investment.
Below is a discussion of three general categories of conflicts
of interest that could affect the Company, and the general
safeguards that the Managing Member and the Company have put in
place to address them.
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Conflicts
Resulting From Other Business Dealings of the Managing Member
and its Affiliates
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The Managing Member is a subsidiary of The Goldman Sachs Group,
Inc. which is a bank holding company and a worldwide,
full-service investment banking, broker-dealer, asset management
and financial services organization. As a result, Goldman Sachs
is engaged in activities that may result in conflicts of
interest with those of the Company. For example, potential
conflicts of interests may arise if Goldman Sachs were to
provide brokerage or other services to an Advisor of an
Investment Fund or act as an Investment Funds prime
broker. In such circumstances, payments to Goldman Sachs
resulting from these relationships will generally increase as
the size of the assets of the Advisor increases. This may result
in the Managing Member having an incentive to select for
investment by the Company an Investment Fund whose Advisor has
established such a relationship with Goldman Sachs over another
Investment Fund that might also be appropriate for the Company.
In addition, in connection with prime brokerage or lending
arrangements involving Investment Funds, Goldman Sachs may
require repayment of all or part of a loan at any time or from
time to time.
To minimize the effect of any potential conflict of interest
resulting from Goldman Sachs other business operations,
Goldman Sachs, including the Managing Member, has established
policies and procedures addressing
60
potential conflicts of interest. Specifically, Goldman Sachs has
put in place information barriers, which are designed to
separate the various functions and business lines of Goldman
Sachs, including the asset management and brokerage businesses.
As a result, personnel of the Managing Member that make
investment and other decisions on behalf of the Company
generally perform their duties for the Company without knowledge
of other Goldman Sachs operations.
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Conflicting
Obligations to the Company and Other Advisory Accounts
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The Managing Member may have potential conflicts of interest in
connection with other accounts it manages (Advisory
Accounts). For example, there may be a conflict of
interest in connection with the Managing Members
allocation of investments or transaction decisions for the
Company and another Advisory Account that may provide the
Managing Member greater fees or other compensation than the
Company, particularly where there is limited availability or
limited liquidity for those investments. This has the potential
of providing the Managing Member with an incentive to allocate
investment opportunities in a manner that favors the other
Advisory Account over the Company.
To minimize the effect of any potential conflict of interest
resulting from the Managing Members conflicting
obligations to Advisory Accounts, including its allocation
practices, the Managing Member has developed policies and
procedures addressing these conflicts, which provide that a
portfolio manager will allocate investment opportunities and
make purchase and sale decisions among Advisory Accounts in a
manner that it considers, in its sole discretion, to be
reasonable. It is the policy of the Managing Member to allocate,
to the extent possible, investment opportunities to the Company
over a period of time in a manner that it considers, in its sole
discretion, to be reasonable. In certain cases, these policies
result in the pro rata allocation of limited opportunities among
the Company and the Advisory Accounts, but in certain other
cases the allocations reflect numerous other factors based upon
the Managing Members good faith assessment of the best use
of such limited opportunities relative to the objectives,
limitations and requirements of the Company and each of the
Advisory Accounts and applying a variety of factors including
those described below. The Managing Member seeks to treat all
clients reasonably in light of all factors relevant to managing
an account, and in some cases it is possible that the
application of the factors described below may result in
allocations in which certain accounts may receive an allocation
when other accounts do not. Non-proportional allocations may
occur frequently in the fixed income portfolio management area,
in many instances because multiple appropriate or substantially
similar investments are available in fixed income strategies, as
well as due to differences in benchmark factors, hedging
strategies, or other reasons, but non-proportional allocations
could also occur in other areas. The application of these
factors as described below may result in allocations in which
Goldman Sachs and Goldman Sachs employees may receive an
allocation or an opportunity not allocated to other Advisory
Accounts (including the Company). Allocations may be based on
numerous factors and may not always be pro rata based on assets
managed.
Personal
Interests of Advisory Personnel
Employees of the Managing Member may have conflicts of interest
in connection with performing their duties on behalf of the
Company. For example, employees of the Managing Member may come
into possession of material, non-public information or other
information as a result of their investment activities on behalf
of the Company or otherwise, and they may seek to improperly
benefit from such information by trading on the information for
their own personal benefit.
To minimize the effect of any such potential conflict of
interest, the Managing Member has adopted policies and
procedures that address conflicts of interest, information
barriers and the use of protected information. These policies
state, among other things, that protected information may only
be used in a manner consistent with the purposes for which it
was created, and may not be disclosed to any other person who
does not have a need to know the information in order to perform
his/her
duties and to carry out the purposes for which the information
was provided. Furthermore, the Managing Members policies
specifically address protected information relating to the
trading activity of Advisors. These policies state that any such
information with respect to Advisors may not be used by
employees of the Managing Member to make personal investments or
in the management of any other account of the Managing Member or
its affiliates.
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The Managing Member also has policies relating to personal
trading generally. Pursuant to these policies, employees must
effect personal securities transactions consistent with their
fiduciary duties and subject to professional and ethical
standards. Among other things, the policies and procedures of
the Managing Member require, subject to certain exceptions,
pre-clearance of personal securities transactions by Managing
Member employees and minimum holding periods for purchased
securities. Violations of these policies, like all Managing
Member policies, may result in disciplinary actions up to and
including termination, and may also result in the breaking of
specific trades. The personal trading of employees of the
Managing Member is subject to monitoring by a compliance
department to ensure compliance with these policies.
In addition, employees of the Managing Member are subject to a
code of business conduct and ethics that is applicable to The
Goldman Sachs Group, Inc. and its subsidiaries. Moreover, the
Managing Member has also adopted a Code of Ethics, which was
filed as an exhibit to the Companys
Form 10-K
for December 31, 2004 that requires persons acting as chief
executive and senior officers of the Company to promote honest
and ethical conduct, including the ethical handling of conflicts
of interests between personal and professional relationships.
Error and
Error Correction Policy
The policy described below applies to GS HFS as the Managing
Member of the Company. GS HFS applies similar policies in
connection with its role as managing member of the Investment
Funds.
Identification of Compensable Errors. Pursuant
to the Managing Members policies, an error is generally
compensable from the Managing Member to the Company when it is a
mistake (whether an action or inaction) in which the Managing
Member has, in the Managing Members reasonable view,
deviated from the applicable standard of care in managing the
Companys assets, subject to materiality and other policies
set forth below. The LLC Agreement and any contractual
obligations of the Company provide that the Managing Member and
its affiliates shall not be responsible for mistakes absent
willful misfeasance, bad faith, or gross negligence.
Consistent with the standard of care applicable to the Managing
Member, the Managing Members policies do not require
perfect implementation of investment management decisions,
trading, processing or other functions performed by the Managing
Member or its affiliates. Therefore, not all mistakes will be
considered compensable errors. For example, depending upon the
circumstances, without limitation, imperfection in the
implementation of investment, execution, cash flow rebalancing
or processing instructions may not be considered by the Managing
Member to be significant to the fundamental functions, purpose
or implementation of the strategies, programs, models and other
tools utilized as part of the investment process. As a result,
such imperfections, including, without limitation, mistakes in
amount, timing or direction of a trade, may not be compensable
errors. Mistakes may also occur in connection with other
activities that may be undertaken by the Managing Member and its
affiliates, such as net asset value calculation, transfer agent
activities (i.e., processing subscriptions and redemptions),
fund accounting, trade recording and settlement and other
matters that are non-advisory in nature. Such activities may not
fall within the Managing Members obligations as a managing
member.
Mistakes may result in gains as well as losses. The Managing
Member may determine that trading and other mistakes will be
treated as being for the Companys account (i.e., the
Company will bear the loss or benefit from the gain). In certain
circumstances, however, the Managing Member may determine that
it is appropriate to reallocate or remove gains from the
Companys account that are the result of a mistake.
Furthermore, the Managing Member expects to follow a materiality
policy with respect to the Company. Therefore, in certain
circumstances, mistakes that result in losses below a threshold
will not be compensable.
The Managing Member makes its determinations pursuant to its
error policies on a
case-by-case
basis, in its discretion, based on factors it considers
reasonable. Relevant facts and circumstances the Managing Member
may consider include, among others, specific applicable
contractual and legal restrictions and standards of care,
whether the Companys investment objective was contravened,
the nature of the Companys investment program, whether a
contractual guideline was violated, the nature and materiality
of the relevant circumstances and, if a compensable error
occurred, the materiality of the resulting losses.
No compensable errors have been identified for the years
December 31, 2009, 2008 and 2007.
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Waiver of Subscription and
Redemption Requirements. The Company may, in
the sole discretion of the Managing Member, approve waivers in
connection with the processing of subscription or redemption
requests of Members including, without limitation, with respect
to any notice periods,
lock-up
periods, minimum redemption and holding amounts, as applicable,
or other requirements. Such waivers may be granted by the
Company to any Member, including without limitation affiliates
of the Managing Member and persons who have a security interest
in the units of certain Members. Members, including Members who
purchase or sell units during periods in which any such waivers
are approved, may not be notified of such matters.
Compensation for Errors. When the Managing
Member determines that reimbursement by the Managing Member is
appropriate, the Company will be compensated as determined in
good faith by the Managing Member. Compensation will be
calculated in the Managing Members discretion. The
Managing Member will follow what it considers reasonable
guidelines regarding these matters in light of all of the facts
and circumstances related to an error. In general, compensation
is expected to be limited to direct and actual losses, which may
be calculated relative to comparable conforming investments,
market factors and benchmarks and with reference to other
factors the Managing Member considers relevant. Compensation
generally will not include any amounts or measures that the
Managing Member determines are uncertain, including potential
opportunity losses resulting from delayed investment or sale as
a result of correcting an error or other forms of consequential
or indirect losses. The Managing Member expects that, subject to
its discretion, losses will be netted with an accounts
gains relating to errors and will not exceed amounts in relation
to an appropriate replacement investment, benchmark or other
relevant product returns. In addition, losses may also be capped
at the value of the actual loss, particularly when the outcome
of a differing investment would in the Managing Members
view be uncertain or in light of reasonable equitable
considerations. As a result, error compensation is expected to
be limited to the lesser of actual losses or losses in relation
to comparables. The Managing Member may also consider whether it
is possible to adequately address a mistake through
cancellation, correction, reallocation of losses and gains or
other means. The Managing Member may face conflicts of interest
in making determinations and calculations with respect to
compensation for errors.
Notification of Compensable Errors. Members
will generally not be notified of the occurrence of a
compensable error or the resolution thereof.
Errors by Advisors. Advisors may also have
error and error correction policies regarding the implementation
of investment management decisions, trading or processing in
relation to the Advisors clients, including the Company.
The Advisors respective error and error correction
policies may vary materially from one another and each may
differ materially from the Managing Members policies
described herein. Also, there can be no assurance that an
Advisors actual practices regarding errors and error
correction will be in conformity with its policies, and the
Managing Member will have limited ability to monitor an
Advisors compliance with its policies. Although the
Managing Member will select and monitor the Advisors to which
the Company allocates assets, the Managing Member is not
responsible for the actions of, or any errors committed by, any
Advisor.
Reprocessing NAV Errors and Compensation of
Members. The Company follows materiality policies
to determine when individual Member accounts will be restated
(credited or debited) in respect of particular errors, and to
handle certain NAV-related errors that occur in the
Companys operation (including, without limitation, errors
made in the processing of subscriptions and redemptions). Under
these policies, when a compensable error by the Managing Member
occurs, the Managing Member may reimburse the Company in an
amount according to its policies without reprocessing individual
Member accounts. Reprocessing of individual Member accounts
generally will only occur when the error is of a size that
exceeds the Companys materiality threshold for
reprocessing. This means that an error below the materiality
threshold may disadvantage Members during the period the error
persists, but reimbursement may benefit Members at the time of
reimbursement and may not, in either event, be allocated to, or
in proportion to, the specific Members whose units were
negatively affected by the error. As described in
Identification of Compensable Errors, the
Company also expects to follow materiality policies with respect
to the resolution of errors that may limit or restrict when
compensation to the Company or Members will be paid.
Accordingly, Members who purchase or redeem units during periods
in which errors accrue or occur may not be recompensed in
connection with the resolution of the error. Similar
considerations may apply with respect to the error and error
correction policies of the Advisors.
63
Additional information about the Managing Members error
and error correction policies may be set forth in Part 2 of
the Managing Members Form ADV, which will be provided
to Members or prospective investors upon request. The Managing
Member may at any time, in its sole discretion and without
notice to Members, amend or supplement its error and error
correction policies.
COMPETITION
The market for hedge funds and hedge fund products is highly
competitive. The Company competes for investors with other hedge
funds, funds of funds, mutual funds, and money managers who
employ similar investment strategies and who offer similar hedge
fund products to investors. New entities, including other hedge
funds, funds of funds and money managers, regularly enter the
market, and there are limited barriers to entry. In addition,
new hedge fund products are regularly introduced into the market
by existing funds. The Company competes with its competitors on,
among other things, the basis of its reputation, its short-term
and long-term performance and track record, access to, and
ability to select, Advisors, fees, management and portfolio
teams, strategies, client services and its ability to manage
risk.
FISCAL
YEAR
The Companys fiscal year ends on December 31 of each
calendar year. The Managing Member, at its sole discretion, may
change the fiscal year-end of the Company.
EMPLOYEES
As of December 31, 2009, the Company had no employees.
However, the Company is managed by the Managing Member which as
of December 31, 2009, was supported by approximately
115 employees of the GS Group worldwide, of which
approximately 33 allocated at least a portion of their time to
the management of the Company and the Investees.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains certain forward-looking
statements regarding the operation of the Company and the
Companys investment objective, including, among other
things:
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investment strategies and allocations of assets;
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future performance;
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the Companys liquidity position; and
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trends in the Investment Sectors.
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Forward-looking statements are typically identified by the use
of terms such as may, will,
should, expect, intend,
plan, anticipate, estimate,
believe, continue, predict,
potential or the negative of such terms and other
comparable terminology. These statements are only predictions
and are not historical facts. Actual events or results may
differ materially.
The forward-looking statements included herein are based on the
Managing Member of the Companys current expectations,
plans, estimates and beliefs that involve numerous risks and
uncertainties. Assumptions relating to the foregoing involve
judgments with respect to, among other things, future economic,
competitive and market conditions and future business strategies
and decisions, all of which are difficult or impossible to
predict accurately and many of which are beyond the
Companys control. Any of the assumptions underlying the
forward-looking statements contained herein could be inaccurate
and, therefore, the Managing Member of the Company cannot assure
Members that the forward-looking statements included in this
Annual Report will prove to be accurate.
In light of the significant uncertainties inherent in the
forward-looking statements included in this Annual Report,
including, without limitation, the risks set forth under
ITEM 1A. RISK FACTORS, the inclusion of
such information should not be regarded as a representation by
the Company or the Managing Member that the
64
investment objective set forth in this Annual Report will be
achieved. The Company cautions Members that forward-looking
statements are not guarantees and that the actual results could
differ materially from those expressed or implied in the
forward-looking statements.
The Company or the Managing Member does not undertake to update
any forward-looking statement, whether written or oral, that may
be made from time to time by the Managing Member of the Company
or the Company or on their behalf.
References to market or composite indices, benchmarks or other
measures of relative market performance are provided for your
information only. Reference to an index does not imply that the
portfolio will achieve results similar (or dissimilar) to that
index.
65
ITEM 1A.
RISK
FACTORS
General
Risks
The following are risk factors that relate to the operation and
certain terms of the Company and the Investment Funds.
Risks
Related to the Company and the Investment Funds
Performance and Operation
Limited
Operating History of the Company; Past Performance of the
Company is not Indicative of Future Results
The Company has a limited operating history upon which
prospective investors can evaluate its likely performance.
Similarly, certain of the Investment Funds and the Advisors have
limited or no track records
and/or
operating histories. The past investment performance of the
Company or any of the Investment Funds or Advisors should not be
construed as an indication of the future results of such
Advisors, the Investment Funds, or of the Company. The results
of other investment funds or accounts managed by the Managing
Member which have or have had an investment objective similar to
or different from that of the Company or the Investment Funds,
are not indicative of the results that the Company or the
Investment Funds may achieve. The Investment Funds make
allocations in different portfolios of Advisors and securities
and, accordingly, their results and, in turn, the results of the
Company, are independent of the previous results obtained by
those funds and accounts. See Special Risks of
the Companys StructureRisks Associated with the
Company Investing in Other EntitiesPast Performance of
Affiliated Funds and Advisors are not Necessarily Indicative of
the Results that the Company and any Investment Fund May
Achieve or of Future Results. Further, the Company and
its method of operation may differ in several respects from
prior Goldman Sachs investment vehicles or accounts, including
as a result of different investment and return objectives and
investment allocation strategies. In addition, the Company and
the Investment Funds may utilize a different mix of Advisors
and, in certain cases, investment techniques. Similarly, the
past investment performance of any of the Advisors with which
the Company will directly or indirectly invest, or with which
other investment funds or accounts sponsored, managed, or
advised by Goldman Sachs invest should not be construed as an
indication of the future results of such Advisors or of the
Company. Potential investors that desire performance or related
information with respect to the other investment funds
sponsored, managed or advised by Goldman Sachs should contact
the Managing Member.
A
Substantial Portion of an Investment Funds Assets May be
Invested Utilizing Strategies That are Not Within its Investment
Sector; Most Advisors do not Provide Detailed Position
Information Regarding their Portfolios
Although the managing member of an Investment Fund intends to
allocate assets to Advisors whose principal investment
strategies are within one of the Investment Sectors described
under ITEM 1. BUSINESSPERFORMANCE OF THE
COMPANYDescription of the Investees and the Performance of
the Investees, a substantial portion of the Investment
Funds assets may be invested utilizing strategies within
other investment sectors. In addition, the sectors referenced
therein are subjective classifications made by the managing
member of the Investment Fund in its sole discretion. Such
classifications are based on information previously provided by
the Advisors to the managing member of the relevant Investment
Fund and may differ from classifications of similarly named
sectors made by other industry participants. The managing member
of each Investment Fund will rely on information previously
provided by each Advisor in determining in its sole discretion
that the principal investment strategies utilized by an Advisor
are within such Investment Funds specified Investment
Sector.
The managing member of an Investment Fund seeks to select
Advisors for the Investment Fund that exhibit certain
operational, management and risk control standards in the daily
investment of their portfolios. The managing member may request
historical performance and position data in order to evaluate
how Advisors behave in certain environments. However, some
Advisors have no operating history and therefore such
performance
66
and position data may not be available. The managing member also
may request that each Advisor provide guidelines about the size
of its typical positions and the amount of leverage that it will
use in managing assets. These risk and investment guidelines
serve as a framework for the managing member to conduct its
ongoing risk monitoring on behalf of each Investment Fund as it
believes that there is value in regularly monitoring each
Investment Funds Advisors to better understand the
Advisors risk and sources of return. The managing member
also conducts due diligence visits with the Advisors, which may
include representatives of its Advisor selection, risk and
quantitative analysis, compliance and operations areas.
Accordingly, the managing member seeks Advisors who are willing
to share information and market outlook and who agree to engage
in a regular dialogue and provide portfolio composition and
profit and loss information regularly, although the level of
detail will vary by Advisor. However, many Advisors are
unwilling to provide significant transparency, e.g., position
detail, because such information is proprietary to such
Advisors, particularly those Advisors operating in the event
driven and relative value sectors, but also those in the equity
long/short and tactical trading sectors and the Company may
still choose to invest with such Advisors because of their
historical returns and reputation. Moreover, due to changes in
the investment programs of certain Advisors over time or other
factors, it is possible that an Investment Funds assets
may be allocated to Advisors whose principal investment
strategies are not within the Investment Funds specified
Investment Sector for extended periods of time.
As is customary with funds of hedge funds, most of the Advisors
do not provide the managing member of the Investment Funds with
detailed position reports because such information is
proprietary to such Advisors. These Advisors would not likely
permit the Investment Funds to invest with them if such an
information requirement was a condition to investment. Also,
Advisors may not comply with their stated investment strategies.
Members of the Company assume the risk that the Advisors may not
provide accurate and timely information about their strategies,
performance and positions and that the information provided by
the Advisors will subsequently be proven or discovered to be
inaccurate
and/or
false. Reference in this Annual Report to information received
by Advisors includes information received directly from the
Advisors as well as information received from independent
administrators or other third party providers on behalf of such
Advisors.
There Can
Be No Assurance that the Managing Members Decisions
Regarding Allocations will be Successful; Inaccurate Information
Provided by the Advisors May Have a Material Adverse Effect on
Implementing the Companys Investment Objective
Since April 1, 2008, the Managing Member had the discretion
to make allocations among Investment Sectors without being
constrained by assumptions, based mainly on historical data,
regarding the long-term risk-return and correlation expectations
of the Investment Sectors. See ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKRisk Management. There is no assurance that
the Managing Members decisions regarding allocations of
assets will be successful. In addition, the Company will be
limited in its ability to make changes to allocations due to the
subscription and redemption provisions of the Investment Funds,
including notice periods and limited subscription and redemption
dates, and the ability of the Investment Funds to suspend and
postpone redemptions. In addition, any such allocations will be
made by the Company based on information previously provided by
the Advisors. If such information is inaccurate or incomplete,
it is possible that the Companys allocation to the
Investment Sectors may not reflect the Managing Members
intended allocations. This could have a material adverse effect
on the ability of the Managing Member to implement the
Companys investment objective.
Non-Diversified
Status; the Managing Member may Allocate to One or More Advisors
a Relatively Large Percentage of an Investment Funds
Assets
The Company is a non-diversified investment company.
Thus, there are no percentage limitations imposed by the
Investment Company Act of 1940, as amended (the Investment
Company Act) on the percentage of the Companys
assets that may be invested in the securities of any one issuer.
Generally, the Company will allocate its assets to Investment
Funds. Although the managing member of the Investment Funds
intends to follow a general policy of seeking to diversify each
Investment Funds capital among multiple Advisors, the
managing member may in its discretion depart from such policy
from time to time and one or more Advisors may be allocated a
relatively large percentage of an Investment Funds assets,
although the managing member of each of GTT and GELS
67
generally will not allocate more than 25% of the total assets of
the applicable Investment Fund to any single Advisor at the time
of investment in such Advisor. There are no restrictions on the
amount of assets of HFPO that its managing member can allocate
to any single Advisor, and, since April 1, 2008, there were
no restrictions on the amount of assets of GFS that its managing
member can allocate to any single Advisor. Consequently, losses
suffered by such Advisors of any of the Investment Funds could
result in a proportionately higher reduction in an Investment
Funds capital than if such capital had been more
proportionately allocated among a larger number of Advisors.
Dependence
on the Managing Member and the Advisors; the Managing Member
Generally Has Limited Access to Information on or Control over
Advisors Portfolios and Members Assume the Risk that
Advisors May Knowingly Misrepresent Information Which Could Have
a Material Negative Impact on the Company
Generally, the Managing Member invests assets of the Company in
the Investment Funds, which in turn invest their assets through
the Advisors. The managing member of each of the Investment
Funds, which currently is the Managing Member, has the sole
authority and responsibility for the selection of the Advisors
for that Investment Fund. The success of each Investment Fund
and, in turn, of the Company, depends upon, among other things,
the ability of the managing member of the Investment Funds and
each Investment Funds Advisors to develop and successfully
implement investment strategies that achieve their investment
objectives. No assurance can be given that the managing member
of the Investment Funds or any Advisor will be able to do so.
For example, an Advisors inability to effectively hedge an
investment strategy that it utilizes may cause the assets of an
Investment Fund allocated to such Advisor to significantly
decline in value and could result in substantial losses to such
Investment Fund and, in turn, to the Company. The Investment
Funds do not have any control over the Advisors. Moreover,
subjective decisions made by the Managing Member or the managing
member of an Investment Fund
and/or by
the Investment Funds Advisors (including with respect to
the utilization of leverage) may cause the Company or the
Investment Fund to incur losses or to miss profit opportunities
on which they may otherwise have capitalized. Members of the
Company will have no right or power to participate in the day to
day management or control of the Company, Investment Funds,
Portfolio Companies, Advisors or Advisor Funds, and will not
have an opportunity to evaluate in advance the specific
strategies used or investments made by the Company, Investment
Funds, Portfolio Companies, Advisors or Advisor Funds, or the
terms of any investments made by the Company, Investment Funds,
Portfolio Companies, Advisors or Advisor Funds.
While the managing member of an Investment Fund will select and
monitor the Advisors to which the Investment Fund allocates
assets, the managing member of an Investment Fund relies to a
great extent on information provided by the Advisors and will
generally have limited access to other information regarding the
Advisors portfolios and operations. Most Advisors consider
this information proprietary and would not provide this
information even if requested. If the Investment Funds only
invested in Advisors who provided complete access to their
information, the Investment Funds would not be able to access
many Advisors with which they might otherwise wish to invest
since many Advisors with strong track records
and/or
limited capacity will not agree to provide this access. Limiting
the Advisors that the Investment Funds would invest with would
have a material adverse impact on the Investment Funds and, in
turn, the Company and its Members. Accordingly, the Investment
Funds invest with many Advisors who do not provide any or all
such information, and Members who are not willing to assume this
risk should not retain their investment in the Company. There is
a risk that Advisors may knowingly, recklessly, negligently or
otherwise withhold or misrepresent information regarding
activities that could have a material negative impact on the
performance of an Investment Fund and the Company. Members of
the Company are assuming the risk that the Advisors will act in
such a manner. These activities, therefore, could occur without
the knowledge of the Managing Member, and could have a material
negative impact on the Companys performance and financial
statements, including, among other things, causing a restatement
of prior financial statements. Any such misrepresentation or
fraudulent or similar activities (each, a Fraudulent
Activity, and collectively, Fraudulent
Activities) by an Advisor would result in their position
being inaccurately reflected in an Investment Funds, and
therefore the Companys, financial statements. Once an
Investment Fund learns of any such Fraudulent Activities, it
will likely be too late for such Investment Fund to withdraw its
assets from such Advisor without incurring significant losses
due to its investment with such Advisor. The proper performance
of monitoring functions by the Managing Member of the Company or
the managing member of the Investment Funds would generally not
give the managing member the opportunity to discover such
situations prior to the time the
68
Advisor discloses (or there is public disclosure of) the
presence or effects of any Fraudulent Activities. Accordingly,
the managing member of the Investment Funds can offer no
assurances that an Advisor will not engage in Fraudulent
Activities and cannot guarantee that it will have the
opportunity or ability to protect the Investment Fund, and
consequently the Company, from suffering a loss because of an
Advisors Fraudulent Activities.
In the event of misrepresentation and fraud committed by those
Advisors or hedge funds in which the Investment Funds invest,
the Company or, more likely the Investment Funds, will have
remedies available under applicable state and federal securities
and anti-fraud laws. As a general matter, the Company does not
have contractual remedies available to it for misrepresentation
and fraud, however, in certain limited cases where the
Investment Funds invest through Managed Accounts or Portfolio
Companies, the Investment Funds may have certain contractual
protections. The Company or the Investment Funds intend to
pursue their potential legal remedies based on an evaluation of
litigation risks and costs involved in pursuing litigation. In
addition, in deciding on whether or not to pursue legal remedies
available to them, the Company or the Investment Funds will also
consider the costs involved in pursuing any remedy and the risk
that the underlying hedge fund may have insufficient assets to
comply with a successful outcome. Accordingly, even if a legal
remedy may be available to the Company or the Investment Funds,
it may choose not to pursue such remedy.
The Investment Funds may invest in Advisor Funds that are not
administered by an independent third party administrator.
Advisor Fund administrators generally are responsible for, among
other things, calculating (or assisting with the calculation of)
the NAV for the Advisor Funds that they administer, valuing (or
assisting in the valuation of) securities and other assets,
including securities which are not readily marketable, and
assisting in the preparation of financial statements. If an
Advisor Fund is not administered by an independent third party
administrator, the determinations of the Advisor with respect to
valuations generally will not be subject to review or oversight
by an independent party other than the Advisor Funds
auditor. Such an arrangement may have an adverse effect on the
Investment Fund and, in turn, the Company and the Members by,
among other things, reducing the likelihood that the managing
member of the Investment Fund will learn of any error,
miscalculation or misrepresentation in the valuation of the
Advisor Funds investments, whether intentional or
otherwise, or any Fraudulent Activity.
In connection with the managing member of the Investment
Funds ongoing review of Advisors, the managing member of
the Investment Funds may identify certain deficiencies with an
Advisor (including potentially significant deficiencies) that
should be addressed by the Advisor, including issues related to
operations, risk management, performance, personnel and
investments. The managing member of the Investment Funds may
raise such concerns with such Advisor and request that such
Adviser address such concerns. The managing member of the
Investment Funds may decide not to terminate an Advisor despite
the identification of such deficiencies for various reasons,
including without limitation, because the managing member of the
Investment Funds determines in its sole discretion that such
deficiencies are not significant or because the Advisor is
attempting to address such deficiencies. If the Advisor suffers
losses during this period, the Company could be materially
adversely affected. Alternatively, the managing member of the
Investment Fund may determine to redeem or attempt to redeem the
Companys assets from an Advisor as a result of such
deficiencies. Due to a number of factors including, without
limitation, minimum holding periods and restrictions on
redemptions imposed by the Advisors, it may take a significant
period of time for the managing member of the Investment Fund to
redeem the Companys assets from such Advisor, and if the
Advisor suffers losses before the Company is able to redeem
fully, the Company could suffer significantly greater losses
than if the Company had been able to redeem from such Advisor
without restriction.
The managing member of the Investment Funds may invest a
substantial portion of an Investment Funds assets with
Advisors that may have limited or no track records and Advisor
Funds with limited or no operating histories. Certain Advisors
may have limited or no experience managing certain of the
strategies expected to be deployed by them in their investment
programs. Certain strategies utilized may also be newly
developed and may not be widely used. The risks of such
strategies may be difficult to predict in various market
conditions. In such cases, the Advisors or individual members of
their management teams will each have had, in the opinion of the
managing member of the Investment Fund, sufficient relevant
experience in other contexts or trading in strategies similar to
those that the Advisor is expected to utilize.
69
The
Company Does Not Currently Intend to Participate in New Issues
Which May Limit Potential Gains
The Company does not currently intend to participate in
new issues, as such term is defined under Financial
Industry Regulatory Authority (FINRA)
Rule 5130, as amended, supplemented and interpreted from
time to time by FINRA or other rules and Interpretations of
FINRA with respect to new issues from time to time (FINRA
Rule 5130), although this intention could change at
any time as determined by the Managing Member in its sole
discretion. FINRA Rule 5130 limits the ability of FINRA
member firms to sell securities of new issues to certain classes
of restricted persons. Such securities sold in the
past have on occasion experienced initial, sometimes rapid,
increases in market value following such offerings. As a result
of not participating in new issues, the Company will not share
in any such increases.
If the Managing Member in the future determines that the Company
will directly or indirectly participate in new issues, the
Company will have the ability to permit only those investors who
are not restricted persons under FINRA
Rule 5130 to participate fully in such new issues, and
investors who are restricted persons under FINRA
Rule 5130 may either not receive an allocation of new
issues gains and losses, or receive a de minimis allocation of
new issues gains and losses, as permitted under FINRA
Rule 5130 and as determined by the Managing Member in its
sole discretion. In addition, if the Managing Member in the
future determines that the Company will participate in new
issues, it will have the ability to create one or more
additional classes of units that would be permitted to invest in
and have a participatory interest in such new issues. The
Company may, in its sole discretion and without prior notice to
or consent from an investor, exchange (by way of redemption and
issuance or otherwise) or otherwise convert units of any class
held by an investor for units of another class in order to
ensure that the Company complies with FINRA Rule 5130.
Should the Company elect to participate in new issues, Members
wishing to invest in or have a participatory interest in such
new issues will be required to establish to the satisfaction of
the Managing Member that they are eligible to hold such units.
Notwithstanding the foregoing, the Company may decline to
participate in new issues and may treat any investor as a
restricted person, notwithstanding a representation to the
contrary. Members participating in new issues may have returns
on their investment that are materially different from the
returns on investment obtained by Members that do not
participate in new issues.
Risks
Related to the Companys Regulatory Environment
Limited
Regulatory Oversight; Members not Afforded Protection of
Investment Company Act
The Company and each of the Investment Funds, in reliance upon
an exemption available to privately offered investment
companies, are not required to register as investment companies
and have not registered as such under the Investment Company
Act. Thus, the provisions of the Investment Company Act intended
to provide various protections to investors (which, among other
things, require investment companies to have a majority of
disinterested directors, provide limitations on leverage, limit
transactions between investment companies and their affiliates,
require securities of an investment company held in custody to
be individually segregated at all times from the securities of
any other person and marked to clearly identify such securities
as the property of such investment company and regulate the
relationship between the adviser and the investment company) are
not applicable. The Managing Member is registered as an adviser
under the Investment Advisers Act.
Moreover, the Advisor Funds and Portfolio Companies in which the
Investment Funds invest generally are not registered as
investment companies, and the Investment Funds and the Company,
in turn, are not provided the protections of the Investment
Company Act. In addition, the Advisors may not be registered as
investment advisers under the Investment Advisers Act.
Therefore, the Investment Funds and the Company, as investors
with such Advisors, will not have the benefit of certain of the
protections of the Investment Advisers Act.
The Advisor Funds and Portfolio Companies generally do not
maintain their securities and other assets in the custody of a
bank or a member of a securities exchange, as generally required
of registered investment companies, in accordance with certain
SEC rules. A registered investment company which places its
securities in the custody of a member of a securities exchange
is required to have a written custodian agreement, which
provides that securities held in custody will be at all times
individually segregated from the securities of any other person
and marked to clearly identify such securities as the property
of such investment company and which contains other provisions
designed to protect the assets of the registered investment
company. It is anticipated that the Advisors to which the
70
Investment Funds will allocate assets generally will maintain
custody of their assets with brokerage firms which do not
separately segregate such customer assets as would be required
in the case of registered investment companies. Under the
provisions of the Securities Investor Protection Act of 1970, as
amended, the bankruptcy or failure of any such brokerage firm
could have a greater adverse effect on an Investment Fund and,
in turn, on the Company, than would be the case if custody of
assets were maintained in accordance with the requirements
applicable to registered investment companies. There is also a
risk that an Investment Funds Advisor could convert to its
own use assets committed to it by an Investment Fund or that a
custodian could convert to its own use assets committed to it by
an Investment Funds Advisor. There can be no assurance
that the Advisors or the entities they manage will comply with
all applicable laws and that assets of the Investment Funds
entrusted to Advisors by the Investment Funds will be protected.
Furthermore, in accordance with U.S. Commodity Futures
Trading Commission (the CFTC) regulations, the
Managing Member is registered as a commodity trading advisor (a
CTA) and a commodity pool operator (a
CPO) under the U.S. Commodity Exchange Act, as
amended (the Commodity Exchange Act), and all of the
Advisors are either registered as CTAs or have indicated to the
managing member of the Investment Funds that they are exempt
from such registration. Because the units are being privately
offered under both U.S. federal and state securities laws
and units may be purchased only by persons who are
qualified purchasers under the Investment Company
Act, accredited investors under the Securities Act
of 1933, as amended (the Securities Act), and
qualified eligible persons or accredited
investors in accordance with Rule 4.13(a)(4) under
the Commodity Exchange Act, the Memorandum has not been filed
with or reviewed by the SEC, the CFTC, or any self-regulatory
authority. The Managing Member reserves the right to withdraw
any registrations relating to the Company in the future as
permitted by applicable law.
Although the Managing Member is registered with the CFTC under
the Commodity Exchange Act as a CPO with respect to other pools
that it operates, the Managing Member operates the Company as if
it were exempt from such registration pursuant to
Rule 4.13(a)(4) under the Commodity Exchange Act because
(i) the units are exempt from registration under the
Securities Act and are being offered and sold without marketing
to the public in the United States, and (ii) units may be
purchased only by natural persons who are qualified
eligible persons as defined in Rule 4.7(a)(2) under
the Commodity Exchange Act and non-natural persons that are
qualified eligible persons as defined in
Rule 4.7 under the Commodity Exchange Act or
accredited investors as defined in
Rule 501(a)(1)-(3),
(a)(7) or (a)(8) of Regulation D promulgated under the
Securities Act. Therefore, the Managing Member is not required
to deliver to Members certified annual reports and a disclosure
document that are required to be delivered pursuant to the
Commodity Exchange Act, which would contain certain disclosures
required thereby that may not be included herein or in the
reports to be provided to Members by the Company.
Notwithstanding the foregoing, the Company may be impacted by
the restrictions applicable to Goldman Sachs as a Bank Holding
Company (a BHC) under the Bank Holding Company Act
of 1956, as amended (the BHCA). See
Regulation as a Bank Holding Company.
Legal,
Tax and Regulatory Risks; Disclosure of Information Regarding
Members
Legal, tax and regulatory changes could occur during the term of
the Company and the Investment Funds that may materially
adversely affect the Company and the Investment Funds (including
changes under the Exchange Act). For example, the regulatory and
tax environment for derivative instruments in which an
Investment Fund or Advisors of an Investment Fund may
participate is evolving, and changes in the regulation or
taxation of derivative instruments may materially adversely
affect the value of derivative instruments directly or
indirectly held by such Investment Fund and, in turn, the value
of the Companys assets and the ability of the Advisors
with which such Investment Fund invests to pursue their trading
strategies. Members should note that recently proposed
legislation directed at certain non-US entities and entities
organized in tax haven jurisdictions would, and future
legislation could, if enacted, result in material tax or other
costs for some or all of the Portfolio Companies or Advisor
Funds through which the Company invests, or require a
significant restructuring of the manner in which some or all of
the Portfolio Companies or Advisor Funds through which the
Company invests are organized or operated. Similarly, the
regulatory environment for leveraged investors and for hedge
funds generally is evolving, and changes in the direct or
indirect regulation of leveraged investors or hedge funds may
materially adversely affect the ability of the Company, the
Investment Funds and the Advisors to pursue their respective
investment objectives or strategies. Likewise, the ability of
the Company and the Investment Funds to pursue their trading
strategies may be adversely
71
affected due to additional regulatory requirements or changes to
regulatory requirements applicable to the Company and the
Investment Funds, such as requirements that may be imposed due
to other activities of Goldman Sachs (including, without
limitation, as a result of Goldman Sachs electing to be
regulated as a BHC) or as a result of the investment in the
Company or the Investment Funds by certain investors or types of
investors (including, without limitation, investors subject to
ERISA). See Regulation as a Bank Holding
Company below.
Moreover, the Investment Funds, the Managing Member or its
affiliates
and/or
service providers or agents of the Company, the Investment Funds
or the Managing Member, may, from time to time, be required or
may, in their sole discretion, determine that it is advisable to
disclose certain information about the Company, the Investment
Funds and the Members, including, but not limited to,
investments held by the Company and the names and level of
beneficial ownership of Members, to (i) one or more
regulatory authorities of certain jurisdictions which have or
assert jurisdiction over the disclosing party or any Advisor
Fund, Managed Account or Portfolio Company in which the Company
directly or indirectly invests
and/or
(ii) one or more counterparties of, or service providers
to, the Managing Member or the Company. By virtue of the
entering into the Subscription Agreement, each Member will have
consented to any such disclosure relating to such Member.
Regulation
as a Bank Holding Company
Goldman Sachs has recently elected to be regulated as a BHC
under the BHCA. In addition, Goldman Sachs is in the process of
making an application to be treated as an FHC under the BHCA,
which is a status available to BHCs that meet certain criteria.
FHCs may engage in a broader range of activities than BHCs that
are not FHCs.
However, the activities of FHCs and their affiliates remain
subject to certain restrictions imposed by the BHCA and related
regulations. Because Goldman Sachs is deemed to
control the Company and the Investment Funds within
the meaning of the BHCA, these restrictions are expected to
apply to the Company and the Investment Funds as well.
Accordingly, the BHCA and other applicable banking laws, rules,
regulations and guidelines, and their interpretation and
administration by the appropriate regulatory agencies, may
restrict the transactions and relationships between the Managing
Member (in its capacity as managing member of the Company or the
Investment Funds, as applicable), Goldman Sachs and their
affiliates, on the one hand, and the Company and the Investment
Funds, on the other hand, and may restrict the investments and
transactions by, and the operations of, the Company and the
Investment Funds. For example, the BHCA regulations applicable
to Goldman Sachs, the Company and the Investment Funds may,
among other things, restrict the ability of the Company and the
Investment Funds to make certain investments or the size of
certain investments, impose a maximum holding period on some or
all of the Companys and the Investment Funds
investments, restrict the Managing Members ability to
participate in the management and operations of the companies in
which the Company and the Investment Funds invest, and restrict
the ability of Goldman Sachs to invest in the Company and the
Investment Funds. In addition, certain BHCA regulations may
require aggregation of the positions owned, held or controlled
by related entities. Thus, in certain circumstances positions
held by Goldman Sachs and its affiliates for client and
proprietary accounts may need to be aggregated with positions
held by the Company and the Investment Funds. In this case,
where BHCA regulations impose a cap on the amount of a position
that may be held, Goldman Sachs may utilize available capacity
to make investments for its proprietary accounts or for the
accounts of other clients, which may require the Company and the
Investment Funds to limit
and/or
liquidate certain investments. See Potential Conflicts
of Interest.
These restrictions may materially adversely affect the
Investment Funds and, in turn, the Company by, among other
things, affecting the Managing Members ability to pursue
certain strategies within the Investment Funds investment
programs or trade in certain securities. Moreover, Goldman
Sachs application to become a FHC may be denied, or
Goldman Sachs may cease in the future to qualify as an FHC,
which may subject the Company and the Investment Funds to
additional restrictions. Moreover, there can be no assurance
that the bank regulatory requirements applicable to Goldman
Sachs, the Company and the Investment Funds will not change, or
that any such change will not have a material adverse effect on
the Company and the Investment Funds.
72
Risks
Related to the Units, Liquidity of Units and the Offering of the
Units
Units
Will Not be Listed and Will Not be Marketable
The Company does not intend to list its units for trading on any
national securities exchange. There is no secondary trading
market for the units, and none is expected to develop. The units
are, therefore, not readily marketable. Units will not be
redeemable at the option of Members, other than, on each
January 1, April 1, July 1 or October 1 (occurring on
or after the first anniversary of the purchase of such units by
the Member) upon 91 days prior written notice to the
Managing Member (unless such notice is waived by the Managing
Member in its sole discretion), and such units will not be
exchangeable for interests of any other funds. See
The Company has Limited Liquidity and Limited Rights
for Redemption.
The
Company has Limited Liquidity and Limited Rights for
Redemption
The Company is a non-diversified management investment company
with limited liquidity designed primarily for long-term
investors and is not intended to be a trading vehicle. Members
should not retain their investment in this Company if they need
a liquid investment.
An investment in the Company provides limited liquidity since
the units are not freely transferable. Generally, a Member is
only permitted to redeem units upon written notice received by
the Managing Member at least 91 days prior to the Valuation
Date (as defined below) in respect of such redemption, as of the
time immediately prior to the opening of business on each
January 1, April 1, July 1 and October 1 occurring on
or after the first anniversary of the purchase of such units by
the Member, but such right may be limited or postponed under
certain circumstances. Additionally, the Managing Member may
limit redemptions of units to the extent that aggregate
redemption requests by Members exceed a specified threshold.
The same or similar limitations may also apply to the
Companys investment in the Investment Funds or an
Investment Funds investment with certain Advisors. For
example, certain Investment Funds and Advisor Funds in which the
Company directly or indirectly invests, may impose greater
restrictions on redemptions than those imposed by the Company,
including without limitation by offering less frequent
redemption dates than are offered by the Company to its Members,
or by restricting the amounts or percentage of interests that
may be redeemed on a redemption date to amounts or percentages
that are less than those permitted by the Company. In addition,
certain Investment Funds and Advisor Funds may impose redemption
fees under certain circumstances. Since the Company does not
charge a redemption fee on redeeming Members, any such
redemption fees charged directly or indirectly to the Company
will reduce the NAV of the Company and adversely affect all
Members (not just redeeming investors).
A significant portion of the Companys assets may be
directly or indirectly allocated to such relatively less liquid
Investment Funds and Advisor Funds. The Companys inability
to redeem its interests from such Investment Funds and Advisor
Funds may have a material adverse effect on the Companys
ability to reallocate assets. In addition, significant amounts
of redemption requests by investors in the Company that are not
offset by new subscriptions could result in the Company holding
a greater concentration of such less liquid interests than was
previously the case. This could have a material adverse effect
on the Companys investment mix, and could also cause the
Company to postpone or suspend future Member redemptions. This
could also result in the Company being required to liquidate
some or all of its assets at a time when it is not considered by
the Managing Member to be an optimal time to do so, which could
have a material adverse effect on the portfolio.
The investment manager of GFS recently created GFS Trust for the
benefit of its investors, including the Company. On
March 31, 2009, GFS transferred to GFS Trust its interest
in certain illiquid investments, including illiquid investments
made by Advisor Funds, as well as liquidating vehicles that the
Advisors formed as liquidity decreased for previously liquid
investments, such as certain credit instruments. GFS transferred
to GFS Trust the economic risks and benefits of its interests in
the assets. In connection with such transfer, each investor in
GFS, including the Company, was issued its pro-rata share of GFS
Trust interests based on its ownership in GFS as of the transfer
date. Distributions from GFS Trust in respect of GFS Trust
interests have been and will continue to be made to investors in
GFS, including the Company, as liquidity is received from the
Advisors. However, the actual timing of these distributions is
dependent on the Advisors ability to liquidate positions
as market conditions allow, and it may be a significant period
of time before such positions are realized or disposed of. The
Companys pro-rata share
73
of GFS Trust interests as of December 31, 2009 was an
amount equal to approximately 6% of the Companys
members equity.
The Company may be directly or indirectly invested in
derivatives, securities or other financial instruments or assets
that are illiquid
and/or not
publicly traded. Such investments may not be readily disposable,
may be difficult to value and, in some cases, may be subject to
contractual, statutory or regulatory prohibitions on disposition
for a specified period of time. In addition, from time to time,
Advisors may segregate from their portfolio of assets certain
illiquid or difficult-to-value securities or instruments (each,
a special investment) and hold them in special
investment accounts. If the Company holds direct or indirect
interests in special investments, substantial redemptions could
result in the Company holding a significantly greater
concentration of highly illiquid investments than was previously
the case. See Risks Related to Issuers of
SecuritiesAdvisor Special Investments below. An
investment in the Company is therefore suitable only for
sophisticated investors that will not be materially impacted by
postponements of the Companys normal redemption dates. The
market value of an Advisors investments may fluctuate
with, among other things, changes in prevailing interest rates,
general economic conditions, the condition of financial markets,
developments or trends in any particular industry and the
financial condition of the issuers of the securities in which
such Advisor invests. During periods of limited liquidity and
higher price volatility, an Advisors ability to acquire or
dispose of investments at a price and time that the Advisor
deems advantageous may be impaired. As a result, in periods of
rising market prices, an Advisor may be unable to participate in
price increases fully to the extent that it is unable to acquire
desired positions quickly; conversely, such Advisors
inability to dispose fully and promptly of positions in
declining markets will cause the NAV of an Advisor Fund,
Portfolio Company or Managed Account (and, consequently, the NAV
of an Investment Fund) to decline as the value of unsold
positions is marked to lower prices. These circumstances could
also impair an Advisors ability to make redemption
distributions to an Investment Fund in a timely manner and, as a
result, could impair the ability of the Investment Fund to make
timely distributions to a redeeming member, including the
Company. Further, the managing member of an Investment Fund may,
in its sole discretion, suspend redemptions, including, among
other reasons, because the Investment Fund is unable to withdraw
sufficient funds from Advisor Funds and Portfolio Companies or
otherwise to meet redemption requests, and in circumstances when
the disposal of part or all of such Investment Funds
assets to meet withdrawal requests would be prejudicial to its
members.
Investors in one or more of the Advisor Funds and Portfolio
Companies may be permitted to withdraw more of their interests
with greater frequency
and/or under
otherwise more favorable terms than an Investment Fund. This
could materially adversely affect the Investment Fund and, in
turn, the Company and the Members.
Redemptions
of Units are Subject to a Substantial Waiting Period and
Potentially Outdated Information
There will be a substantial period of time between the date as
of which Members must submit a request for redemption and the
date they can expect to receive full payment for their
redemption proceeds from the Company. Members whose units are
accepted for redemption bear the risk that the Companys
NAV may fluctuate significantly in the period between the date
by which redemption requests must be submitted and the date as
of which such units are valued for purposes of such redemption.
Members will have to decide whether to request that the Company
redeem their units without the benefit of having current
information regarding the value of units on a date proximate to
the date on which units are valued by the Company for purposes
of effecting such redemptions. In addition, under certain
circumstances, the Managing Member may find it necessary
(i) to suspend redemptions, including, among other reasons,
because the Company is unable to withdraw sufficient funds from
Investment Funds or otherwise to meet redemption requests, and
in circumstances when the disposal of part or all of the
Companys assets to meet such redemption requests would be
prejudicial to the Members; or (ii) to set up a reserve for
undetermined or contingent liabilities and withhold a certain
portion of redemption proceeds. The Managing Member may also
limit redemptions of units to the extent that aggregate
redemption requests by Members exceed a specified threshold. An
investment in the Company is suitable only for Members who can
bear the risks associated with the limited liquidity of the
units and the underlying investments of the Company.
In determining whether the Company should limit redemptions as
of any Company redemption date, the Managing Member will rely in
part on information provided by each Advisor, including with
respect to the Advisors liquidity. Due to sudden changes
in the liquidity profile of certain Advisors and other factors,
an Advisor may suspend, delay or otherwise limit redemptions as
of a redemption date. In certain cases, the Company may not
74
learn of such suspension, delay or other limitations until after
the Companys redemption date. As a result, the Company may
not be able to take action to limit redemptions as of such
redemption date. Therefore, any such delayed notice could
materially adversely affect the Company and its portfolio, could
result in the delay of redemption payments
and/or leave
non-redeeming Members with a less liquid portfolio than if the
Managing Member had received more timely notice regarding the
liquidity of the Advisor Funds.
Substantial
Redemptions Could Have a Material Adverse Effect on the
Company
Substantial requests for the Company or an Investment Fund to
redeem membership units of its members in a concentrated period
of time, including redemption requests by current and former
directors, partners or employees of the GS Group or from certain
investment vehicles organized by the Managing Member or its
affiliates, could require the Company or the Investment Fund to
liquidate certain of its investments more rapidly than otherwise
desirable in order to raise cash to fund the redemptions and
achieve a market position appropriately reflecting a smaller
asset base. In addition, certain Advisor Funds may impose
redemption fees, which the Company or the Investment Funds may
be required to pay in order to obtain required redemption
proceeds. The Company could experience disproportionately high
redemptions on any particular redemption date, which could have
a material adverse effect on the value of the units redeemed and
the units that remain outstanding. In addition, following
receipt of a redemption request, the Company may be required to
liquidate assets in advance of the applicable redemption date,
which may result in the Company holding cash or highly liquid
investments pending such redemption date. During any such
period, the ability of the Managing Member to successfully
implement the investment program of the Company may be impaired
and the Companys returns may be adversely affected as a
result.
If the Company holds direct or indirect interests in special
investments, substantial redemptions could result in the Company
holding a significantly greater concentration of highly illiquid
investments than was previously the case. See
Risks Related to Issuers of
SecuritiesAdvisor Special Investments below. In
addition, the Managing Member may be unable to redeem interests
in one or more Investment Funds as it otherwise deems advisable
in order to pay redemption requests, for among other reasons,
limits imposed by an Advisor Fund on redemptions by such
Investment Fund. As a result, the Managing Member may be
required to redeem interests from other more liquid Investment
Funds in order to meet redemption requests, which could have a
material adverse effect on the Companys, portfolio mix and
the liquidity for remaining Members. Moreover, regardless of the
time period over which substantial redemption requests are made,
the resulting reduction in the Companys NAV could make it
more difficult for the Company to generate profits or recover
losses. Members will not receive notification of substantial
redemption requests in respect of any particular
Redemption Date (as defined below) from the Company, and
therefore may not have the opportunity to redeem units prior to,
or at the same time as, the redeeming Members. The Company
funded the redemptions made in 2007, 2008, 2009 and January
2010, by making redemptions from the Investment Funds in
proportion to the then current weightings and through the use of
uninvested cash on hand. The Company also has used its Credit
Facility to fund past redemptions. The Managing Member expects
the Company to fund future redemptions in a similar manner.
However, the Managing Member may in its sole discretion decide
to change the weightings and the manner in which the Company
makes redemptions from the Investment Funds to fund these or any
other redemptions. The redemptions from the Investment Funds
made during 2009 to fund the redemptions made in the Company
during 2009 did not result in any costs, fees or payments of
premiums for the Company. The Company does not believe that the
Redemptions payable in January 2010 had a material adverse
effect on the value of the units or the performance of the
Company. See Special Risks of the Companys
StructureRisks Related to the Companys
StructureThe Investment Funds and the Advisors
Investments May not be Diversified and There can be no Assurance
that the Companys Allocation Methodologies will Achieve
the Companys Allocation Goals. The Company may
elect to borrow under the Credit Facility, including without
limitation, to fund redemptions, from time to time in the
future. As further described in Item 7, the Company entered
into the Credit Facility on June 30, 2006. For a
description of the Credit Facility, see ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONSLiquidity and Capital
Resources and Note 6 to the financial statements.
75
Certain
Classes of Units May Have No
Lock-Up
Period
Certain investment vehicles organized by the Managing Member or
its affiliates, including without limitation, investment
vehicles offered to third party investors (each, a GS
Investment Vehicle and collectively, GS Investment
Vehicles) may from time to time invest in the Company. In
the event that GS Investment Vehicles invest in the Company, it
is expected that such GS Investment Vehicles will be issued
units of a class that is not subject to any
lock-up
period. Since certain Investment Funds and Advisor Funds may
impose greater restrictions on redemptions (including
lock-ups)
than those imposed by the Company on such GS Investment
Vehicles, redemptions by such GS Investment Vehicles may
materially adversely affect other Members. The Company may
determine to meet a redemption request from such a GS Investment
Vehicle by redeeming from more liquid Investment Funds and
Advisor Funds or Investment Funds and Advisor Funds that impose
redemption fees. Since the Company does not charge a redemption
fee on redeeming Members, any such redemption fees charged to
the Company in connection with the redemption by a GS Investment
Vehicle will reduce the NAV of the Company and adversely affect
all Members (not just redeeming investors). In addition,
redemptions by such GS Investment Vehicles could result in the
Company holding a greater concentration of less liquid
Investment Funds and Advisor Funds than was previously the case.
This could have a material adverse effect on the Companys
investment mix, and could also cause the Company to postpone or
suspend future Member redemptions.
Redemption May
be in Cash or In-Kind Under the Sole Discretion of the Managing
Member; Members May Bear Risks Related to In-Kind Securities and
Pay Fees in Disposing of In-Kind Securities
The Company generally expects to pay redemption proceeds in
respect of redeemed units in cash. However, there can be no
assurance that the Company will have sufficient cash to pay for
units that are being redeemed or that it will be able to
liquidate investments at favorable prices to pay for redeemed
units. The Company may in certain circumstances distribute
securities or other assets as payment for redeemed units,
including, without limitation, if making a cash payment would
result in a material adverse effect on the Company or the
Members, or if the Company has received distributions from the
Investment Funds in the form of securities or other assets that
are transferable to the Members. An Investment Fund may
distribute redemption proceeds to the Company if the Investment
Fund receives distributions from its Advisors in the form of
securities or other assets. It is possible that, upon the
Companys withdrawal of all or a portion of its assets
invested in an Investment Fund, the Company may receive
securities or other assets that are illiquid or difficult to
value. In such circumstances, the Managing Member would seek to
dispose of these securities or other assets in a manner that is
in the best interests of the Company, which may include a
distribution in-kind to its Members. Assets that may be
distributed include without limitation, interests in Advisor
Funds the liquidity of which has become materially impaired or
interests in Advisor Fund special investments.
A distribution of securities to Members (including, without
limitation, a distribution of securities as payment for units)
may be made by the Company by, among other things
(i) distributing securities or other assets held by the
Company to Members, (ii) distributing to Members the right
to receive net proceeds ultimately realized on securities or
other assets held by the Company (e.g., through issuance of a
certificate or note or distribution of interests in a special
purpose vehicle) or (iii) otherwise providing Members with
an economic interest in securities or other assets held by the
Company. In the event that the Company makes such a distribution
of securities as payment for units, Members will bear any risks
of the distributed securities and may be required to pay a
brokerage commission or other costs in order to dispose of such
securities.
Such securities and other assets may not be readily marketable
or saleable and may have to be held by Members (or the special
purpose vehicle or liquidating trust created to hold such
assets) for an indefinite period of time. The risk of loss and
delay in liquidating these securities and other assets
(including any expenses involved in the organization and
maintenance of a special purpose vehicle or liquidating trust)
will be borne by the Member, pro rata in relationship to its
interest in a special purpose vehicle or liquidating trust if
such assets are held in a special purpose vehicle or liquidating
trust, with the result that such Member may receive less cash
than it would have otherwise received on the applicable
redemption date. Assets distributed in-kind will ordinarily be
valued as of the applicable redemption date, although the
Managing Member, in its sole discretion, may determine to value
such assets as of the date such distribution is made or as of
any other date. However, the value of any assets distributed in-
76
kind will fluctuate and the value assigned thereto for purposes
of such distribution may not reflect the actual amount that will
be realized in connection with a disposition (or, on the
eventual liquidation) of such assets.
Special
Considerations Applicable to the Continuous Offering of Units;
After the Initial Offering of Units Subsequent Purchasers of
Units May Suffer Losses Because of Previously Established Open
Positions
The Company may accept additional subscriptions for units from
time to time as determined by the Managing Member, in its sole
discretion, and in accordance with the Companys LLC
Agreement. Upon the approval of the Managing Member, a Member or
prospective Member may make additional subscriptions for units
on the first day of each calendar month or at such other times
as the Managing Member may determine in its sole discretion.
Historically, the Company has from time to time taken in funds
on a monthly basis. From July 2003 through September 2004, the
Company only took in investments from existing investors and
limited subscriptions from new qualified investors, however,
starting in October 2004, the Company began accepting additional
amounts of new subscriptions and the Company has continued to do
so through December 31, 2009.
Additional subscriptions will dilute the indirect interests of
existing Members in the Companys investment portfolio
prior to any such subscription, which could have an adverse
impact on the existing Members interest in the Company if
future Company investments underperform the prior investments.
The Investment Funds may be closed from time to time to
investments by new investors; however, the Investment Funds may
be reopened in the sole discretion of the managing member of
each Investment Fund. Each Investment Fund may also accept
additional subscriptions for membership units (as determined by
the managing member of each Investment Fund and in accordance
with such Investment Funds governing documents). Such
additional subscriptions will dilute the indirect interests of
the Investment Funds existing members, including the
Company, in the Investment Funds investment portfolio
prior to any such subscription, which could have an adverse
impact on the existing members interest in the Investment
Fund if such Investment Funds future investments
underperform its prior investments. In addition, it is expected
that certain Advisors of the Investment Funds will structure
performance-based compensation similarly to the Company, with
such compensation being paid only if gains exceed prior losses
(i.e., the NAV of the interest must first exceed a high
watermark attributable to a previously obtained NAV).
Appreciation in the net assets managed by an Advisor at any
given time will be shared pro rata by all of the members
of such Investment Fund at such time, including the Company, not
just those who were members at the time prior losses were
incurred. The Loss Carry-forward Value will not be taken into
account in determining the NAV of an Investment Fund. Therefore,
such Loss Carry-forward Value to existing members of an
Investment Fund, including the Company, will be diluted by new
subscriptions for units of such Investment Funds
membership units because the new membership units will
participate in any positive performance by the Advisor until its
gains exceed its prior losses without the Advisor being paid any
performance-based compensation.
In addition, unlike purchasers who purchased the initial units
offered by the Company, units acquired following the initial
offering of units will represent indirect interests in operating
funds, which may have significant open positions. Since these
units will, indirectly through the Companys investments in
each of the Investment Funds, share in each Investment
Funds open positions which may have been held for some
period of time prior to the issuance of the additional units,
the application of the relevant Advisors trading approach
to such positions may have a qualitatively different effect on
the performance of the additional units than it does on the
performance of previously issued units. For example, a number of
trading approaches may become more aggressive in terms of
willingness to tolerate losses in a position and increase the
size of a position after an open trade has generated a
substantial profit because subsequent losses (up to a certain
level) are perceived as being only a partial give-back of prior
profits, not an actual loss. As subsequent purchasers of units
in the continuous offering will not have received, indirectly
through the Companys investments in the Investment Funds,
the benefit of any profits on open positions prior to the date
on which they purchase the units, subsequent losses will
constitute an absolute loss to such holders, not only a partial
give-back of profits. In addition, certain trading approaches
may follow profit-taking strategies whereby they will liquidate
or partially liquidate a position after it has generated a
predetermined amount of profit. Since the new units will not,
indirectly through the Companys investments in the
Investment Funds, have had the benefit of any such profit prior
to the date on which they were issued, Members holding such
units may find themselves, indirectly through the Companys
investments in the Investment Funds, liquidated out of a
position
77
(which may have continued to generate substantial profits) due
to an Advisor taking profits, none of which had
inured to their benefit. Some approaches apply similar analyses
based on overall portfolio performance, not just the performance
of particular positions, with generally analogous effects.
From time to time, certain Advisor Funds may suspend, gate or
otherwise limit redemptions, side pocket assets, implement
holdbacks until after the completion of year-end or final
audits, make distributions in-kind in connection with redemption
requests or liquidate their portfolios. The timeframe for the
recovery of illiquid assets is typically unknown, and it may be
a significant period of time before the Company or the relevant
Investment Fund is able to liquidate such assets or to redeem
from such Advisor Funds. This could have a material adverse
effect on the Companys investment mix and could materially
adversely affect the ability of the Managing Member to
successfully implement the investment program of the Company,
including the Managing Members ability to rebalance the
Companys portfolio. New units will share in these less
liquid positions.
Investing
Prior to Receipt of Subscription Monies and Prior to the
Effective Date of Subscriptions
The Company may, in the sole discretion of the Managing Member,
begin making investments at any time prior to the effective date
of subscriptions for units on the basis of anticipated
subscriptions. In addition, without limiting the generality of
the foregoing, the Company may, in the sole discretion of the
Managing Member, begin making investments on or after the
effective date of a subscription on the basis of anticipated
receipt of funds with respect to the subscription even if such
funds were not received on such effective date. Pursuant to the
Subscription Agreement, an investor or prospective investor will
be liable for any losses or costs arising out of or relating to
the non-payment or late payment of subscription monies,
including any losses or costs incurred as a result of the
Company making investments on the basis of anticipated receipt
of such monies as of the effective date of a subscription. These
practices could have an adverse effect on the Company.
Non-payment or late payment of subscription monies may result in
direct or indirect losses and costs to the Company, and the
Company may not ultimately recoup such losses or costs from the
applicable investors or prospective investors. In addition, the
Managing Member may make investment or other portfolio decisions
in anticipation of subscriptions that would not have been made
were it known that the subscriptions would not be made or would
be made late, which could have an adverse effect on the
Companys portfolio.
Special
Risks of the Companys Structure
This section discusses certain risks related to the fact that
the Company has historically allocated its assets to Investment
Funds, which have historically allocated their assets to
Advisors.
Risks
Related to the Companys Structure
The
Investment Funds and the Advisors Investments May
not be Diversified and There can be no Assurance that the
Companys Allocation Methodologies will Achieve the
Companys Allocation Goals
The managing member of each of GTT and GELS generally will not
allocate more than 25% of the total assets of the applicable
fund to any single Advisor at the time of investment in such
Advisor. However, following the time of allocation, the
percentage of each such Investment Funds total assets
allocable to any single Advisor could exceed the 25% level due
to a number of factors, including redemptions from the
applicable Investment Fund and positive or negative performance
by an Advisor as compared to other Advisors. There are no
restrictions on the amount of assets of HFPO that its managing
member can allocate to any single Advisor, group of Advisors or
investment strategy, and as of April 1, 2008, there are no
restrictions on the amount of assets of GFS that its managing
member can allocate to any single Advisor. No assurance is given
as to any level of multiple Advisor diversification. Greater
concentration with any single Advisor may entail additional
risks.
While the managing member of the Investment Funds may seek
Advisors that utilize diversified investment strategies, there
can be no assurance that market or other events will not have an
adverse impact on the strategies employed by multiple Advisors.
Advisors may at certain times hold large positions in a
relatively limited number of investments. Advisors may target or
concentrate their investments in particular markets, sectors, or
industries.
78
Those Advisors that concentrate in a specific industry or target
a specific sector will also be subject to the risks of that
industry or sector, which may include, but are not limited to,
rapid obsolescence of technology, sensitivity to regulatory
changes, nationalization, expropriation, political or economic
conditions, minimal barriers to entry, and sensitivity to
overall market swings. As a result, the NAVs of such Advisors
may be subject to greater volatility than those of investment
vehicles that are subject to diversification requirements and
this may negatively impact the NAV of the Investment Funds and
the Company. In addition, greater concentration of Advisors
likely will increase the adverse effect on the Investment Funds
of any problems experienced by an underlying Advisor (including
without limitation any suspension of redemptions by such
Advisor), since such Advisor is more likely to make up a
significant portion of the Investment Funds assets.
The Managing Member establishes allocations among the Investment
Sectors in a manner consistent with the Companys
investment objective. Quantitative analysis is combined with
judgment to determine weightings and strategic return, risk and
correlation estimates inform the quantitative analysis. Judgment
is applied to both estimates and weights in an attempt to
achieve exposure to hedge funds while targeting attractive
risk-adjusted returns. The Managing Member may, from time to
time, vary or change materially the actual allocation of assets
made by the Company, as it deems appropriate in its sole
discretion. The Managing Member may at certain times be unable
to reallocate the Companys assets among the Investment
Funds as it determines is advisable in order to achieve the
Companys investment objective due to a number of factors,
including without limitation, minimum holding periods and
restrictions on redemptions imposed by the Investment Funds or
Advisors. If imbalances in the allocations occur because the
Company is unable to reallocate on a timely basis, losses
occurring as a result could cause the Company to suffer
significantly greater losses than would be the case if the
Companys allocation goals had been achieved.
The
Companys Financial Statements are, and in the Future Will
Ultimately be, Based on Estimates of Valuations Provided by
Third Party Advisors Which May not be Accurate or May Need to be
Adjusted in the Future
Generally, the managing member of the Investment Funds will have
no ability to assess the accuracy of the valuations or other
financial information received from each Investment Funds
Advisors with respect to allocations not made through Managed
Accounts or Portfolio Companies. In addition, the Investment
Funds may allocate assets to Advisors that invest in assets that
are difficult to value. The Companys NAV will be affected
by the valuations of these difficult-to-value assets. Although
the managing member of the Investment Funds may obtain
information provided by the Advisors about their NAVs, the
managing member of the Investment Funds generally does not, and
is not able to, confirm independently the accuracy of such
valuations (which are generally unaudited except at year-end)
except in the case of allocations made through Managed Accounts
and Portfolio Companies. Most Advisors treat their investment
positions as proprietary information and many of them will not
provide such information to their investors. Furthermore, the
NAVs received by the managing member of the Investment Funds
from Advisors will typically be based on estimated or unaudited
reports only, and such values generally will be used to
calculate NAVs and fee accruals for purposes of determining
amounts payable on redemption to the extent current audited
information is not then available. In some cases, Advisors do
not use independent administrators or other third party
providers to value and report their NAVs. In such cases, the
valuations used to determine the NAVs of these Advisors will be
dependent solely upon the Advisors for validation, and even when
third parties are involved, the Advisors may have primary
responsibility for determining the values of the portfolio
securities. The valuation reports will not be audited by third
parties in most cases except at year-end. Valuations provided by
each Investment Funds Advisors may be subject to later
adjustment based on valuation information available at that
time, including, for example, as a result of year-end audits or
other valuation reviews conducted by an Advisors auditors.
Furthermore, there is a risk that any valuation an Investment
Fund receives from an Advisor will be fraudulent or may
inadvertently contain material errors that the Investment Funds
and, in turn, the Company would not know when it prepares its
financial statements. Members should understand that the Company
cannot prevent this risk since neither the Company nor the
Investment Funds have access to the Advisors books and
records. Neither the Company nor the Investment Funds is a party
to any direct agreements with any Advisor providing the Company
or the Investment Funds with a specific contractual recourse in
the case where an Advisor has provided inaccurate or untimely
valuations. Additionally, an Advisor may through its investment
documents have sought to limit or eliminate its liability for
inaccurate or untimely valuations entirely in which case the
Company may not have any
79
recourse. The Company has not entered into any direct agreements
to indemnify any of the Advisors against such errors or
omissions. Any such adjustments resulting from wrong valuations
or errors in calculations may result in the Company restating
its NAV or having to restate its financial statements at the
time of such restatement, as well as for prior periods. Any such
restatement, whether increasing or decreasing the NAV of the
Company, could have a material impact on the NAV of
Members units. Members of the Company are assuming the
risk that valuations may be materially incorrect
and/or will
need to be adjusted and Members should not retain their
investment in the Company if they are unwilling to assume such
risks. See General RisksRisks Related to
the Company and the Investment Funds Performance and
OperationDependence on the Managing Member and the
Advisors; the Managing Member Generally Has Limited Access to
Information on or Control over Advisors Portfolios and
Members Assume the Risk that Advisors May Knowingly Misrepresent
Information Which Could Have a Material Negative Impact on the
Company and Risks Associated with the
Company Investing in Other EntitiesValuation of the
Investment Funds Investments Will be Determined Utilizing
Valuations Provided by the Advisors Which are Generally not
Audited; Uncertainties in Valuations Could Have a Material
Adverse Effect on the Companys Net Assets.
The Company follows materiality policies to handle certain
NAV-related errors that occur in the Companys and the
Investment Funds operation (including, without limitation,
errors made in the processing of subscriptions and redemptions).
Members who purchase or redeem units during periods in which
errors accrue or occur may not be recompensed in connection with
the resolution of the error. See ITEM 1.
BUSINESSTHE MANAGING MEMBERError and Error
Correction Policy.
If at any time the Managing Member determines, in its sole
discretion, that an incorrect number of units was issued to a
Member because the NAV of the Company or the applicable series
in effect on the date of issuance was materially incorrect, the
Managing Member will implement such arrangements as it
determines, in its sole discretion, are required for an
equitable treatment of such Member, which arrangements may
include redeeming a portion of such Members units for no
additional consideration or issuing new units to such Member for
no consideration, as appropriate, so that the number of units
held by such Member following such redemption or issuance, as
the case may be, is the number of units as would have been
issued at the correct NAV. In addition, if at any time after a
redemption of units (including in connection with any withdrawal
of a Member from the Company) the Managing Member determines, in
its sole discretion, that the amount paid to such Member or
former Member pursuant to such redemption was materially
incorrect (including because the NAV at which the Member or
former Member purchased such units or at which the redemption
was effected was materially incorrect), the Company will pay to
such Member or former Member any additional amount that it
determines such Member or former Member would have been entitled
to receive had the redemption been effected at the correct NAV,
or, in its sole discretion, seek payment from such Member or
former Member of (and such Member or former Member shall be
required to pay) the amount of any excess payment that the
Managing Member determines such Member or former Member received
(including, without limitation, by compulsorily redeeming
without consideration a number of units held by such Member
having a NAV equal to the amount of such excess payment), in
each case without interest. Further, the Managing Member may,
although is under no obligation to, make the foregoing
adjustments in the event that the amount paid was incorrect (but
not to a material extent). If such a determination is made after
a Member has had all of its units redeemed, or if the NAV of a
Members remaining units is insufficient to cover the
amount of any overpayment (including, without limitation, due to
a decrease in the Companys NAV), the Company may be
unable, or may, under the circumstances, elect not, to collect
the amount of any such excess payment, and any corresponding
restatement of and reduction in the NAV of the Company will
generally be borne by the remaining Members of the Company. If
the Company elects not to seek the payment of such amounts from
a Member or former Member or is unable to collect such amounts
from a Member or former Member, the NAV of the Company will be
less than it would have been had such amounts been collected.
The Company will be subject to similar adjustment provisions as
a member of the Investment Funds.
The Other
Business Activities and Relationships of Goldman Sachs and the
Companys Advisors May Create Conflicts of
Interest
Goldman Sachs, including its affiliates and personnel, is a bank
holding company and a worldwide, full-service investment
banking, broker-dealer, asset management and financial services
organization, and a major
80
participant in global financial markets. As a result, Goldman
Sachs is engaged in many businesses and has interests in the
global fixed income, currency, commodity, equity, bank loan and
other markets in addition to those related to the Company,
including as an investor, investment banker, research provider,
investment manager, financer, advisor, market maker, proprietary
trader, prime broker, lender, agent and principal. Such
additional businesses and interests may give rise to potential
conflicts of interest. In addition, the activities of the
Advisors and their respective affiliates, and their directors,
trustees, managers, members, partners, officers and employees,
for their own accounts and other accounts they manage, may give
rise to conflicts of interest that could disadvantage the
Company and its Members. A description of certain of such
potential conflicts of interest is set forth under ITEM 1.
BUSINESSPOTENTIAL CONFLICTS OF INTEREST.
Affiliates
of Goldman Sachs and Members of the Company May Market and Trade
Derivatives Linked to the Performance of the Company, Which May
Adversely Affect the NAV of the Company
Affiliates of Goldman Sachs and certain Members may market and
sell, from time to time, directly or indirectly, derivative
instruments, the return on which tracks or is related to the
economic performance of the Company. Sellers of such derivative
instruments, including affiliates of Goldman Sachs, may seek to
hedge the risk associated with their exposure thereunder by
purchasing or redeeming units from time to time, the NAV of
which may represent a significant percentage of the
Companys NAV at any given time. Such trading may adversely
affect the NAV of the Company. In particular, significant
purchases
and/or
redemptions of units over a concentrated period of time may
result in high transaction costs and other operating
inefficiencies in connection with the direct or indirect
investment of the Companys assets. Similar consequences
could occur in the case of derivative instruments that track the
performance of an Investment Fund.
The Company will be managed in accordance with its investment
program and objective and wholly independent of considerations
related to any such derivative instruments that are sold by any
Member. Accordingly, the identity of, and the relative
allocations of capital among, the Investment Funds and Advisors,
as well as the manner of any reallocation of the Companys
assets and other investment management decisions (including,
without limitation, in connection with the dissolution of the
Company), will not take into account, and may run counter to,
the terms or objectives of any such derivative instruments.
Special
Risks of the Fund of Funds Structure
The following are certain risks related to the fact that the
Company allocates assets to Investment Funds and Advisors.
Members
of the Company are Subject to Multiple Levels of Fees and
Expenses Because of the Companys Structure, and the Fee
Structure of the Company May Create Incentives for Advisors to
Make Risky Investments
Although in many cases investor access to the Advisors of the
Investment Funds may be limited or unavailable, an investor who
meets the conditions imposed by an Advisor may be able to invest
directly with the Advisor. By investing in Advisors indirectly
through the Company, via the Investment Funds, the investor
bears asset-based fees and performance-based allocations at the
Company level, in addition to any asset-based fees and
performance-based fees and allocations at the Advisor level.
Moreover, an investor in the Company bears a proportionate share
of the fees and expenses of the Company (including
organizational and offering expenses, operating costs, sales
charges, brokerage expenses, and administrative fees) and,
indirectly, similar expenses of the Investment Funds and the
Advisors. Thus, a Member of the Company will be subject to
higher operating expenses than if the Member invested with the
Advisors directly or in a fund that did not utilize a fund
of funds structure. See ITEM 1.
BUSINESSFEES AND EXPENSES.
In addition to the Incentive Allocation payable to the Managing
Member, the Investment Funds are subject to performance-based
fees or allocations from each Advisor to which assets are
allocated, irrespective of the performance of other Advisors,
the Investment Funds and the Company generally. Accordingly, an
Advisor with positive performance may receive performance-based
compensation from an Investment Fund, and thus indirectly from
the Members, even if such Investment Funds or the
Companys overall performance is negative.
81
Fixed fees, generally calculated and paid to Advisors monthly
based upon the NAV of the relevant Investment Funds
allocation to such Advisor, are currently expected to range (on
an annualized basis) from approximately 0% to 3%.
Performance-based fees or allocations of Advisors are currently
expected to range from 0% to 30% of the net capital appreciation
in each individual Advisors investments for the year.
However, each Investment Fund may, in the sole discretion of its
managing member, allocate assets to Advisors that receive fixed
fees, asset-based fees or performance-based fees
and/or
allocations or other compensation that materially exceed these
percentages or that structure their compensation in materially
different ways. The performance-based compensation received by
the Managing Member, the managing member of the Investment Funds
and an Advisor also may create an incentive for such managing
member or Advisor to make investments that are riskier or more
speculative than those that it might have made in the absence of
the performance-based compensation. Because the
performance-based compensation may in certain circumstances be
based on calculations of realized and unrealized gains as
determined by the person entitled to receive such compensation,
certain inherent conflicts of interests and consequent risks can
arise.
The
Company Could Indirectly Incur Duplicative Transaction Costs
Without Accomplishing a Net Investment Result
Investment decisions of the Advisors are generally made
independently of each other. As a result, at any particular
time, one Advisor may be purchasing securities of an issuer
whose securities are being sold by another Advisor.
Consequently, the Company and the Investment Funds could
indirectly incur transaction costs without accomplishing any net
investment result.
Compensation
Arrangements With the Managing Member and the Advisors of the
Investment Funds May Create Incentives for the Managing Member,
the Investment Funds or the Advisors to Make Riskier Investments
or to Inflate Returns
The Managing Member of the Company and the Investment Funds
receives an incentive allocation based upon the net capital
appreciation allocated to their members. In addition, the
Advisors of the Investment Funds may receive compensation based
on the performance of their investments, a pro rata share of
which will be borne by the Company as a member of each
Investment Fund. Accordingly, there often may be times when a
particular Advisor of an Investment Fund may receive incentive
compensation in respect of its portfolio for a period even
though such Investment Funds or the Companys overall
portfolio depreciated during such period. Incentive compensation
arrangements may also create an incentive for the managing
member of the Company and the Investment Funds or the Advisors
to make investments that are riskier or more speculative than
would be the case if such arrangements were not in effect. Such
incentives could also cause the Advisors to artificially or
fraudulently inflate the actual performance of their portfolio
or the valuation of specific positions. In addition, because
both the Managing Members Incentive Allocation and the
performance-based compensation of the managing member of the
Investment Funds and the Advisors are calculated on a basis
which includes unrealized appreciation of the Companys or
an Investment Funds assets or a portion thereof, as the
case may be, they may be greater than if such compensation were
based solely on realized gains and losses.
Transactions
Between and Among Funds May Be Undervalued and Negatively Affect
the Companys Performance
The managing member of the Investment Funds may determine that
it is advisable to reallocate some or all of the Investment
Funds assets away from one or more Advisor Funds in order
to achieve the Investment Funds investment objectives. In
certain cases, such Advisor Funds may be appropriate investments
for one or more other investment funds or accounts managed by
the managing member of the Investment Funds. Rather than
redeeming the Investment Funds direct or indirect
interests in such Advisor Funds, the managing member of the
Investment Funds may attempt to transfer such interests to one
or more investment funds or accounts managed by the managing
member of the Investment Funds. Any such transfer generally
would be effected at a price equal to the redemption price that
otherwise would have been payable to the Investment Funds in
respect of such Advisor Fund upon redemption of such interests
(or at a price equal to the reported value of such interests if
all or a portion of such interests are not redeemable on such
transfer date). The transfer price will not take into account
any value associated
82
with the transfer of the Investment Funds investment
holding period, if any, in an Advisor Fund, or the prior high
NAV associated with the transferred interests.
The Investment Funds may allocate assets, directly or
indirectly, to Advisor Funds that invest in assets that are
difficult to value. If the Investment Funds transfer interests
in such Advisor Funds, such interests generally will be valued
in accordance with the terms of the Advisor Funds
governing agreement, as such valuations are reported to the
Investment Funds. However, given the nature of such investments,
such valuations may not represent the actual amount that would
be realized by the Advisor Fund upon a disposition of such
investments. If such difficult-to-value assets are undervalued
by the Advisor Fund, any transfer of interests in such Advisor
Fund may adversely affect the Investment Funds and the
Companys performance.
Risks
Associated with the Company Investing in Other
Entities
Past
Performance of Affiliated Funds and Advisors are not Necessarily
Indicative of the Results that the Company and Any Investment
Fund May Achieve or of Future Results
The past performance of the Investment Funds and other
investment funds or accounts formed or managed by the GS Group,
including other investment funds or accounts managed by the GS
Group which have or have had investment objectives that are
similar to those of the Company or the Investment Funds, are not
necessarily indicative of the results that the Company or any
Investment Fund may achieve. The Company makes indirect
investments in a different portfolio of Advisors and securities
than other investment funds and, accordingly, its results are
independent of the previous results obtained by those funds. See
ITEM 1. BUSINESSPERFORMANCE OF THE
COMPANYCertain Considerations Relating to Limited Capacity
of Potential Advisors. Further, the Company and each
Investment Fund and their methods of operation may differ in
several respects from prior GS Group investment vehicles or
accounts; e.g., there are different investment and return
objectives and investment allocation strategies and the Company
and each Investment Fund utilizes a different mix of Advisors
and, in certain cases, investment techniques. Similarly, the
past investment performance of any of the Advisors with which
the Investment Funds will invest or with which other investment
funds or accounts managed by the GS Group invest should not be
construed as an indication of the future results of such
Advisors or of the Investment Funds. Potential investors that
desire performance or related information with respect to the
Company, Investment Funds or other investment funds formed or
managed by the GS Group should contact the Managing Member.
A
Members Investment in the Company will be Affected by the
Investment Policies and Decisions of Advisors Which are Outside
the Companys Control
Because the Company generally invests its assets in Investment
Funds, which in turn allocate assets to Advisors, a
Members investment in the Company will be affected by the
investment policies and decisions of the Advisors in direct
proportion to the amount of an Investment Funds assets
that are invested, directly or indirectly, with each Advisor.
The NAV of the assets allocated to Advisors, and as a result,
the NAV of the Investment Funds and, in turn, the Company, will
fluctuate in response to, among other things, investment
decisions made by the Advisor, various market and economic
factors related to the markets in which the Advisors invest and
the financial condition and prospects of issuers in which the
Advisors invest. These risks will be outside the control of the
Company. Certain risks related to the investment strategies and
techniques utilized by the Investment Funds and the Advisors are
described under Investment Related
Risks.
Limitations
on Ability to Invest in Advisors May Result in Assets Not Being
Used to Pursue Investment Objectives
In the event that the Investment Funds are able to allocate
assets to Advisors only at certain times, the Investment Funds
may hold cash or invest any portions of their assets that are
not invested in Advisors in cash equivalents, short-term
securities or money market securities pending allocation to
Advisors. During the time that the Companys assets are not
invested in Advisors, that portion of the Companys assets
will not be used to pursue the Investment Funds and, in
turn, the Companys investment objective.
83
Valuation
of the Investment Funds Investments Will be Determined
Utilizing Valuations Provided by the Advisors Which are
Generally not Audited; Uncertainties in Valuations Could Have a
Material Adverse Effect on the Companys Net
Assets
The valuation of an Investment Funds investments is
ordinarily determined utilizing monthly valuations provided by
the Advisors which are only audited annually. Many of the
securities or other assets in which Advisors invest may not have
a readily ascertainable market price and will be valued by the
Advisors without an independent third party valuation. In this
regard, an Advisor may face a conflict of interest in valuing
the securities, as their value will affect the Advisors
compensation. Valuations of the securities are very subjective
and could prove in hindsight to have been wrong, and at times by
significant amounts. Furthermore, the managing member of the
Investment Funds may face a conflict of interest in overseeing
the value of the Investment Funds investments, as the
value of the Investment Funds investments will affect such
managing members compensation. Although prior to investing
in any Advisor, the managing member of the Investment Funds
generally will seek to conduct a due diligence review of the
valuation methodology utilized by such Advisor, no assurances
can be given that the managing member of the Investment Funds
will be given access to necessary aspects of the Advisors
systems, that such due diligence review will ascertain whether
accurate valuations will be provided by such Advisors to the
Investment Funds, that the Advisors will comply with their own
internal policies or procedures for keeping records or making
valuations, or that the Advisors policies and procedures and
systems will not change without notice to the Investment Funds.
Moreover, the managing member of the Investment Funds will
generally not have sufficient information in order to be able to
confirm or review the accuracy of valuations provided by
Advisors to whom an Investment Fund allocates assets. See
General RisksRisks Related to the Company
and the Investment Funds Performance and
OperationDependence on the Managing Member and the
Advisors; the Managing Member Generally Has Limited Access to
Information on or Control over Advisors Portfolios and
Members Assume the Risk that Advisors May Knowingly Misrepresent
Information Which Could Have a Material Negative Impact on the
Company.
The NAV of any Advisor Fund, Portfolio Company or Managed
Account as of a particular date may be materially greater than
or less than the NAV of such Advisor Fund, Portfolio Company or
Managed Account that would be determined if its assets were to
be liquidated as of such date. For example, if an Advisor Fund,
Portfolio Company or Managed Account were required to sell a
certain asset or all or a substantial portion of its assets on a
particular date, the actual price that such Advisor Fund,
Portfolio Company or Managed Account would realize upon the
disposition of such asset or assets could be materially less
than the value of such asset or assets as reflected in the NAV
of the Advisor Fund, Portfolio Company or Managed Account.
Volatile market conditions could also cause reduced liquidity in
the market for certain assets, which could result in liquidation
values that are materially less than the values of such assets
as reflected in the NAV of the Advisor Fund, Portfolio Company
or Managed Account.
The managing member of an Investment Fund may allocate assets to
Advisors that invest in assets that lack a readily ascertainable
market value, and the NAV of the Investment Fund will be
affected by the valuations of any such assets (including,
without limitation, in connection with calculations of any
management fee or performance-based fee or allocation at the
Investment Fund level). In valuing assets that lack a readily
ascertainable market value, Advisors (or affiliated or
independent agents thereof) may utilize dealer supplied
quotations or pricing models developed by the Advisor,
affiliates of the Advisor
and/or third
parties, including GS HFS or affiliates of GS HFS). Such
methodologies may be based upon assumptions and estimates that
are subject to error. Given the uncertainty inherent in the
valuation of assets that lack a readily ascertainable market
value, the value of such assets as reflected in the NAV of an
Investment Fund, Advisor Fund, Portfolio Company or Managed
Account may differ materially from the prices at which the
applicable Advisor would be able to liquidate the assets.
The value of assets that lack a readily ascertainable market
value may be subject to later adjustment based on valuation
information available to the applicable Advisor at that time
including, for example, as a result of year-end audits. Any
adjustment to the value of such assets may result in an
adjustment to the NAV of an Investment Fund and in turn the
Company. See Risks Related to the Companys
StructureThe Companys Financial Statements are, and
in the Future Will Ultimately be, Based on Estimates of
Valuations Provided by Third Party Advisors Which May not be
Accurate or May Need to be Adjusted in the Future.
84
The NAVs or other valuation information received by the managing
member of the Investment Funds from an Advisor may require
estimations of the value of certain assets and liabilities, and
may be subject to later adjustment or revision by the Advisor,
which adjustment or revisions may be significant. Any such
adjustment or revision may result in either an increase or
decrease in the NAV of the Company at the time the Company is
provided with information regarding the adjustment, which
adjustment or revision may be significant. If an Advisors
valuations are consistently delayed or inaccurate, the managing
member of the Investment Funds will consider whether the Advisor
continues to be an appropriate manager of Investment Fund
assets. However, the managing member of the Investment Funds may
elect in its sole discretion to retain the Advisor. The
Advisors information could be inaccurate due to Fraudulent
Activities, misvaluation or inadvertent error. In any case, the
Investment Funds may not uncover errors for a significant period
of time. If this occurs in connection with an investment in an
Advisor Fund, the Investment Fund may be unable to sell
interests in an Advisor Fund quickly, and therefore could be
obligated to continue to hold such interests for an extended
period of time. In such a case, or in the event that the
managing member of the Investment Funds does not receive a
valuation from an Advisor Fund, or determines, in its sole
discretion, that a valuation is inaccurate or incomplete, the
managing member of the Investment Funds may, in its sole
discretion, determine the fair value of an Investment
Funds interests in the Advisor Fund independently of the
Advisors valuations based on information available to, and
factors deemed relevant by, the managing member of the
Investment Funds at the time of such valuation. Members should
be aware that situations involving uncertainties as to the
valuations by Advisors could have a material adverse effect on
the Companys net assets if the managing member of the
Investment Funds or the Advisors judgments regarding
valuations should prove incorrect. Members who are unwilling to
assume such risks should not retain their investment in the
Company. See Risks Related to the Companys
StructureThe Companys Financial Statements are, and
in the Future Will Ultimately be, Based on Estimates of
Valuations Provided by Third Party Advisors Which May not be
Accurate or May Need to be Adjusted in the Future.
Investment
Fund Allocations to Advisor Funds are Difficult to Monitor
and Control
Each Investment Fund may invest all or a substantial portion of
its assets in Advisor Funds, rather than allocating assets via
Portfolio Companies or directly to Advisors pursuant to Managed
Accounts. It is expected that the managing member of the
Investment Funds generally will have less ability to monitor
investments in the Advisor Funds, to obtain full and current
information and to exercise control rights over such investments
than with respect to allocations of assets to Portfolio
Companies or Managed Accounts. This could have an adverse effect
on the performance of such investments and, therefore, on the
performance of the Investment Funds and the Company.
Trading
in Investments May be Illiquid Which May Cause Substantial
Losses and May Negatively Impact the Ability to Make
Distributions to a Withdrawing or Redeeming Member
Some investment positions in which the Investment Funds have an
interest will be illiquid. The Advisors may invest in restricted
or non-publicly traded securities, securities on foreign
exchanges and futures. These positions may be illiquid because
certain exchanges limit fluctuations in certain securities and
futures contract prices during a single day by regulations
referred to as daily price fluctuation limits or
daily limits. Under such daily limits, during a
single trading day no trades may be executed at prices beyond
the daily limits. Once the price of a particular security or
futures contract has increased or decreased by an amount equal
to the daily limit, positions in that security or contract can
neither be taken nor liquidated unless traders are willing to
effect trades at or within the limit.
The market value of an Advisors investments may fluctuate
with, among other things, changes in prevailing interest rates,
general economic conditions, the condition of financial markets,
developments or trends in any particular industry and the
financial condition of the issuers of the securities in which
the Advisor invests. During periods of limited liquidity and
higher price volatility, the Advisors ability to acquire
or dispose of its investments at a price and time that the
Advisor deems advantageous may be impaired. As a result, in
periods of rising market prices, the Advisor may be unable to
participate in price increases fully to the extent that it is
unable to acquire desired positions quickly; conversely, the
Advisors inability to dispose fully and promptly of
positions in declining markets will cause its net asset value to
decline as the value of unsold positions is marked to lower
prices.
85
In addition, Advisors may invest a portion or all of the value
of their assets in restricted securities and other investments
that are illiquid. Restricted securities are securities that may
not be sold to the public without an effective registration
statement under the Securities Act or, if they are unregistered,
may be sold only in a privately negotiated transaction or
pursuant to an exemption from registration. These may include
restricted securities that can be offered and sold only to
qualified institutional buyers under Rule 144A
of the Securities Act. There may be no limit to the percentage
of an Advisors net assets that may be invested in illiquid
securities.
The above-described circumstances could prevent the Advisors of
an Investment Fund from liquidating unfavorable positions
promptly and subject such Investment Fund and, in turn, the
Company, to substantial losses. This could also impair the
Companys ability to redeem its membership units in an
Investment Fund in order to make distributions to a withdrawing
or redeeming Member in a timely manner.
Advisor
Redemption Holdbacks and Other Advisor Fund Liquidity
Restrictions May Adversely Affect Remaining Members
From time to time, the managing member of an Investment Fund may
be unable to liquidate the Investment Funds assets as it
otherwise deems advisable in order to pay redemption requests
made by the Company due to a number of factors including,
without limitation, minimum holding periods and restrictions on
redemptions imposed by the Advisor Funds or Advisors (including
but not limited to the use of longer notice periods and less
frequent redemption dates than those offered by the Company and
the Investment Funds, holdbacks, and the segregation of assets
by the Advisors through the use of side-pockets). At
any given time, assets of an Investment Fund that cannot be
redeemed to meet current redemption requests may constitute a
substantial portion of the Investment Funds portfolio. See
Risks Related to the Units, Liquidity of Units
and the Offering of the UnitsThe Company has Limited
Liquidity and Limited Rights for Redemption. As a
result, the managing member of an Investment Fund may be
required to redeem interests from more liquid Advisor Funds or
Portfolio Companies in order to meet redemption requests, which
could result in an Investment Fund holding a greater
concentration of less liquid assets than was previously the case
or in the Investment Fund incurring additional costs in
connection with the redemption. This could have an adverse
effect on the Investment Funds portfolio mix and liquidity
for remaining members which could potentially include the
Company. Significant amounts of redemption requests by investors
in an Investment Fund that are not offset by new subscriptions
could cause the Investment Fund to postpone or suspend
redemptions. The Investment Funds inability to liquidate
its interests in such less liquid assets may also have a
material adverse effect on the Investment Funds ability to
reallocate assets.
The Company will endeavor to pay redemption proceeds to a
redeeming Member within 45 days following the applicable
Redemption Date. For various reasons, however, including
the suspension or delay in payment of redemption proceeds by
Advisor Funds and the holdback of a portion of the redemption
proceeds otherwise payable to the Company until after the
applicable underlying Advisor Funds financial records have
been audited, the Company may not receive redemption proceeds
otherwise expected by it prior to the Companys payout of
proceeds to redeeming Members. Therefore, at the time the
Company pays redemption proceeds to a redeeming Member, the
Company may hold receivables that may not be paid to the Company
for a significant period of time, may not accrue any interest,
and ultimately may not be paid to the Company (as a result of
post-audit adjustments or for other reasons). During the time
that the Companys assets include such receivables, that
portion of the Companys assets cannot be used to pursue
the Companys investment objective. In addition, in cases
in which Investment Funds or Advisor Funds limit or reduce the
Companys redemption request, the Company may continue to
have investment exposure to Advisor Funds or Advisors that it
would otherwise have redeemed. This could have an adverse effect
on the performance of the Company.
The NAV used by the Company to determine the redemption price
payable to a redeeming Member generally will include the full
value of any receivables due the Company without any discount or
reduction, notwithstanding the fact that such receivables do not
accrue interest and may ultimately not be paid to the Company by
an Investment Fund. If an Investment Fund later determines that
a portion or all of such a receivable is no longer payable to
the Company or the value of the receivable is otherwise
impaired, the Company and the non-redeeming Members may be
adversely affected because the Company may be unable, or may
elect not, to collect the amount of any overpayment made to a
redeeming Member. See Risks Related to the
Companys StructureThe Companys Financial
Statements are, and in the Future Will Ultimately be, Based on
Estimates of Valuations Provided by Third
86
Party Advisors Which May not be Accurate or May Need to be
Adjusted in the Future. Any corresponding restatement
of and reduction in the NAV of the Company will be borne by the
non-redeeming Members.
Risks on
Liquidation
Distributions in liquidation of the Company will be made in
accordance with the Members respective capital account
balances. Timing of such liquidating distributions will be based
in large part on the Companys ability to withdraw from
underlying Investment Funds, which will in turn depend in large
part on the Investment Funds ability to withdraw from the
applicable Advisor Funds. Since certain Advisor Funds may impose
significant restrictions on withdrawal (including without
limitation, minimum holding periods, infrequent withdrawal
dates, holdbacks, and the segregation of assets by the Advisor
Funds through the use of side-pockets), and other Advisor Funds
may have suspended, delayed or otherwise limited redemptions,
Members may not receive final liquidating distributions for a
significant period of time following a determination to dissolve
the Company, potentially several years. In addition to
liquidation of the Company, the risks described above will also
apply if the Managing Member determines to cease the
Companys operations and the Company compulsorily redeems
Members.
Managed
Account Allocations Expose the Investment Funds to Liability
Exceeding Allocations
The Investment Funds may place assets with a number of Advisors
by opening Managed Accounts (either directly or via Portfolio
Companies). It is possible, given the leverage at which certain
of the Advisors of an Investment Fund will trade, that
allocations of an Investment Fund to an Advisor through a
Managed Account could result in losses that exceed the amount
the Investment Fund had allocated to such Advisor to invest.
Therefore, Managed Accounts expose the Investment Funds to
theoretically unlimited liability. This risk is also applicable
to allocations made by the Investment Funds to Portfolio
Companies because of the possibility that the limited liability
provided by Portfolio Companies could be successfully challenged
based on various legal theories which could be proffered.
An
Investment Fund May Not be Able to Vote or May Limit its
Voting Abilities
The managing member of an Investment Fund may determine, in its
sole discretion, to limit the Investment Funds voting
interest in certain Advisor Funds, including, without
limitation, in order to allow other investment vehicles managed
by the managing member or its affiliates to avoid becoming
subject to certain prohibitions under the Investment Company Act
with respect to affiliated transactions. To the extent the
Investment Fund holds non-voting interests, or contractually
forgoes the right to vote in respect of the voting securities of
an Advisor Fund, the Investment Fund will not be able to vote on
matters that require the approval of the interest-holders of the
Advisor Fund, including matters potentially adverse to the
interests of the Investment Fund and its members, including the
Company.
Lack of
Operating History of Certain Advisors; Past Performance of
Advisors is not Indicative of Future Results
Certain of the Advisors have short or limited or even no
operating histories. In addition, the information the managing
member of an Investment Fund has and will obtain about an
Advisor may be limited. As such, the ability of the managing
member of an Investment Fund to evaluate past performance or to
validate investment strategies of such Advisors will be limited.
Moreover, even to the extent an Advisor has a long operating
history, the past investment performance of any of the Advisors
should not be construed as an indication of the future results
of the Advisors or of the Investment Funds or the Company. In
addition, the investment professionals within the Advisors and
their strategies may change over time. This risk is related to,
and enhanced by, the risks created by the fact that the managing
member of an Investment Fund relies upon information provided to
it by the Advisors that is not, and cannot be, independently
verified.
Advisors
Invest Independently and May Hold Economically Offsetting
Positions
Each of the Advisors generally makes investment decisions wholly
independently of other Advisors and may at times hold, or cause
the Company
and/or the
Investment Funds to hold, economically offsetting positions. To
the
87
extent that the Advisors, the Company
and/or the
Investment Funds do, in fact, hold such positions, the
Companys portfolio, considered as a whole, may not achieve
any gain or loss despite incurring fees and expenses in
connection with such positions. In addition, an Advisor may be
compensated based on the performance of its portfolio.
Accordingly, there often may be times when a particular Advisor
may receive performance based compensation in respect of its
portfolio for a period even though an Investment Funds or
the Companys NAV may not have increased, or may even have
decreased, during such period. Furthermore, it is possible that,
from time to time, various Advisors may be competing with each
other for the same positions in one or more markets. There can
be no assurance that choosing a combination of Advisors for an
Investment Fund will prove to be any more successful than would
the selection of a single Advisor for such Investment Fund.
Advisors
May Have Limited Capacity to Manage Additional Investment Fund
Investments, Which Could Cause Dilution or Concentration of the
Companys Investments or Negatively Affect Allocation of
Investments
Certain Advisors trading approaches presently can
accommodate only a limited amount of capital. Accordingly, each
Advisor has the right to refuse to manage some or all of the
Investment Funds assets that the managing member of an
Investment Fund may wish to allocate to such Advisor. Further,
in the case of Advisors that limit the amount of additional
capital that they will accept from an Investment Fund, continued
sales of membership units of such Investment Fund and interests
of Advisor Funds in which such Investment Fund invests would
dilute the indirect participation of existing members of such
Investment Fund, including the Company, with such Advisors. See
ITEM 1. BUSINESSPERFORMANCE OF THE
COMPANYCertain Considerations Relating to Limited Capacity
of Potential Advisors. Due to the asset-based fees
that Advisors will normally be entitled to receive, Advisors may
have an incentive to accept additional capital and may do so
even where their respective investment programs cannot
accommodate such additional capital.
In determining capital allocations among Advisors, the managing
member of the Investment Funds may consider, among other
factors, constraints on an Advisors capital capacity. See
ITEM 1. BUSINESSPERFORMANCE OF THE
COMPANYCertain Considerations Relating to Limited Capacity
of Potential Advisors. Advisors may in their
discretion also limit the capacity available to the Company or
other investment funds or accounts managed by the Managing
Member or its affiliates after a specific date. In these cases,
the managing member of the Investment Funds, in order to provide
for long-term management of the Investment Funds, may determine
to increase the Investment Funds investments in an Advisor
more than would otherwise be the case. Such allocations may
result in the Investment Funds portfolio being more
concentrated from time to time and for substantial periods of
time. As a result of any such concentration, the Investment
Funds portfolio may be subject to more rapid changes in
value than would be the case if the Investment Funds
portfolio were less concentrated and the economic returns of the
Investment Funds and the Company may thereby be materially
adversely affected.
In determining how to allocate investment opportunities among
the Investment Funds and any other investment funds or accounts,
the managing member will take into account the investment
objectives of each such investment fund or account, the capital
capacity of the Advisors, and such other considerations as
deemed relevant in its sole discretion. Certain Advisors to
which the Investment Funds have previously allocated assets may
be closed to new investments or may otherwise limit
subscriptions (a Closed Advisor). The managing
member of the Investment Funds may determine, for various
reasons, including without limitation, strategic fit and other
portfolio construction considerations, that a Closed Advisor is
more appropriately included as part of the portfolio of another
of its investment funds or accounts rather than the Investment
Funds. In such event, the managing member of the Investment
Funds may cause the Investment Funds to transfer interests in
such Closed Advisor to another investment fund or account
managed by the managing member of the Investment Funds,
notwithstanding that such Closed Advisor may continue to be an
appropriate investment for the Investment Funds. Any such
transfer may give rise to potential conflicts of interest. Any
such transfer would be effected at a price equal to the
redemption price that otherwise would have been payable to the
Investment Fund in respect of such Closed Advisor upon
redemption of such interests. The transfer price will not take
into account any value associated with the transfer of the
Investment Funds investment holding period, if any, in a
Closed Advisor, or the prior high NAV associated with the
transferred interests.
88
Advisor
Funds Securities are Generally Illiquid Which May Increase
Costs and Limit Redemptions
The securities of the Advisor Funds in which the Investment
Funds (directly or through Advisors) invest or plan to invest
may be illiquid. Subscriptions to purchase the securities of
Advisor Funds are generally subject to restrictions or delays.
In addition, the Investment Funds may be limited in their
ability to make changes to allocations due to potential
redemption restrictions of the Advisor Funds, including notice
periods and limited redemption dates, the ability of the Advisor
Funds to suspend and postpone redemptions, and lockups on
redemptions of securities of the Advisor Funds. Further, the
Advisor may not be able to dispose of Advisor Fund securities
that it has purchased in a timely manner and, if adverse market
conditions were to develop during any period in which the
Advisor is unable to sell Advisor Fund securities, the Advisor
might obtain a significantly less favorable price than that
which prevailed when it decided to buy or sell such securities.
Frequent
Trading and Turnover Typically Result in High Transaction Costs
and the Investment Funds Have No Control Over This
Turnover
It is expected that Advisors will make frequent trades in
securities and other investments. Frequent trades typically
result in high transaction costs. In addition, the Advisors may
invest on the basis of short-term market considerations. The
turnover rate within the Advisors may be significant,
potentially involving substantial brokerage commissions and
fees. The Investment Funds and, in turn, the Company will have
no control over this turnover. As a result, it is anticipated
that a significant portion of the Companys income and
gains, if any, may be derived from ordinary income and
short-term capital gains. In addition, the withdrawal of an
Investment Fund from an Advisor could involve expenses to the
Investment Fund under the terms of the Investment Funds
investment with that Advisor.
Indemnification
of Advisors May Create Costs for the Company and the Investment
Funds
The Company and the Investment Funds may agree to indemnify
certain of the Advisors and their respective officers,
directors, and affiliates from any liability, damage, cost, or
expense arising out of or in connection with, among other
things, (i) acts or omissions relating to the offer or sale
of units by the Investment Funds and (ii) services provided
by the Advisors directly or indirectly on behalf of the Company.
In addition, Advisor Funds and Portfolio Companies in which the
Company and the Investment Funds invest may also agree to
indemnify Advisors and their respective officers, directors, and
affiliates. Any such indemnification obligations incurred
directly or indirectly by the Company may adversely affect the
Companys performance. Currently, neither the Company nor
the Investment Funds is a party to any direct indemnification
agreements with Advisors. Accordingly, the Company and the
Investment Funds are under no direct contractual obligation to
indemnify any of the Advisors against inaccurate or untimely
valuations of investments or NAV and although the Company and
the Investment Funds may, the Company and the Investment Funds
currently do not intend to, enter into any such direct
indemnification agreements with Advisors.
Allocation
of the Companys Assets May Not Protect the Company from
Exposure to Economic Downturns in Any Investment Fund or
Investment Sector
The Managing Member establishes allocations among the Investment
Sectors in a manner consistent with the Companys
investment objective. The identity of, and relative investments
of capital among, the Investment Sectors will be determined by
the Managing Member, in its sole discretion, based on factors
deemed relevant to the Managing Member, which may include the
amount of the Companys assets under management,
constraints on the capital capacity of the Investment Fund and
Advisors, the availability of attractive opportunities, and
other portfolio construction considerations. There is no
assurance that the Managing Members allocation decisions
will be successful. In addition, the Managing Members
ability to make ongoing changes to the allocation of the
Companys assets will be limited due to the redemption
provisions of the Investment Funds in which the Companys
assets are invested, including limited redemption dates, notice
periods, minimum holding periods, minimum holding amounts,
and/or the
possibility of postponement or suspension of redemptions. Any
such limitation may be significant. These factors could have an
adverse effect on the ability of the Company to successfully and
efficiently achieve its investment objective or a market
position appropriately reflecting its asset base.
89
Investment
Related Risks
Following is a discussion of certain of the investments and
strategies that are expected to be made or utilized by the
Advisors of the Investment Funds and certain of the principal
risks associated with such investments and strategies. It is
possible that an Advisor will make investments and utilize
strategies that are not described below, and any such investment
or strategy will be subject to its own particular risks.
Risks
Related to Investment and Trading
An
Investment in the Company Involves a High Degree of Risk That
the Entire Amount Invested May be Lost; Investment Results May
Vary Substantially over Time
An investment in the Company involves a high degree of risk,
including the risk that the entire amount invested may be lost.
The Advisors will invest in and actively trade financial
instruments using highly complex strategies and investment
techniques with significant risk characteristics, including
risks arising from the volatility of the fixed income,
commodity, currency and equity markets, risks of concentration,
risks of short sales, risks of leverage, risks arising from the
potential illiquidity of derivative instruments and the
potential illiquidity of certain emerging markets, the risk of
loss from counterparty and broker defaults, risk of inaccuracy
of information received from Advisors and the risk of borrowing
to meet redemption requests. No guarantee or representation is
made that the Companys, the Investment Funds or the
Advisors investment programs will be successful, that the
various investment strategies utilized or investments made will
have low correlation with each other or that the Companys
returns will exhibit low correlation with an investors
traditional investment portfolio. Each Advisors investment
program may utilize such investment techniques as margin
transactions, option transactions, short sales, forward
contracts and futures contracts, which involve substantial
volatility and can, in certain circumstances, substantially
increase the adverse impact to which the Investment Funds and
the Company may be subject. All investments made by the Company
risk the loss of capital. Investment results may vary
substantially over time. Certain Advisors may have no limits
with respect to the types and sizes of investments that they may
make. See ITEM 1. BUSINESSINVESTMENT
PROGRAM.
PAST RESULTS OF THE COMPANY, THE INVESTMENT FUNDS, AND THE
ADVISORS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.
NO ASSURANCE CAN BE MADE THAT PROFITS WILL BE ACHIEVED OR THAT
SUBSTANTIAL LOSSES WILL NOT BE INCURRED.
The
Advisors May be Unable to or May Choose not to Seek to Achieve
their Investment Goals; Advisors May Not be Able to Locate
Suitable Investment Opportunities
Many of the Advisors will, among other things, seek to utilize
specialized investment strategies, follow allocation
methodologies, apply investment models or assumptions, achieve a
certain level of performance relative to specified benchmarks,
and enter into hedging and other strategies intended, among
other things, to affect the Advisors performance, risk
levels,
and/or
market correlation. There can be no assurance that any Advisor
will have success in achieving any goal related to such
practices. The Advisors may be unable to, or may choose in their
judgment not to seek to, achieve such goals. In addition, there
is a risk that Advisors may invest outside their strategies,
which could have a negative impact on the Advisors
performance and in turn on the Company.
The success of an Advisors trading activities will depend
on, among other things, the Advisors ability to identify
overvalued and undervalued investment opportunities and to
exploit price discrepancies in the capital markets.
Identification and exploitation of the investment strategies to
be pursued by an Advisor involve a high degree of uncertainty.
No assurance can be given that the Advisors will be able to
locate suitable investment opportunities in which to deploy all
their capital. A decline in, or lack of volatility and pricing
inefficiency of, the markets in which an Advisor seeks to
invest, changing, evolving and maturing markets, the increased
number of market participants in competition with the strategies
deployed by Advisors, as well as other market factors, may
reduce the number and scope of an Advisors investment
opportunities available to an Advisor.
90
Competition
The Advisors compete with a large number of firms. Competitive
investment activity by other firms tends to reduce the
Advisors opportunities for profit by reducing the
magnitude as well as the duration of the market inefficiencies
which they seek to exploit.
The Use
of Leverage May Substantially Increase the Adverse Impact to
Which the Investment Funds Investment Portfolios May be
Subject
As described under ITEM 1.
BUSINESSPERFORMANCE OF THE COMPANYHedging,
Leverage and Other Strategies, it is expected that the
Investment Funds and the Advisors will incur leverage in various
forms. Such leverage may take the form of loans for borrowed
money, trading on margin or other forms of direct and indirect
borrowings, or derivative instruments that are inherently
leveraged, including, among others, forward contracts, futures
contracts, options, swaps and reverse repurchase agreements, and
other instruments and transactions that are inherently
leveraged. The utilization of leverage will increase the
volatility of the Companys investments. The managing
member of the Investment Funds may seek to adjust the degree of
leverage with which each Investment Fund as a whole invests by
taking the Advisors anticipated leverage use into account
when allocating and reallocating the Investment Funds
assets among the Advisors. However, the managing member of the
Investment Funds generally will not have any right to adjust the
amount of leverage utilized by any of the Advisors, and
generally does not exercise such right if available. In the
discretion of its managing member, an Investment Fund may make
an investment in an Advisor Fund through a swap, option or
otherwise in a manner structured to provide greater leverage
than a direct investment in the Advisor Fund, which may increase
the risks to the Investment Fund relative to a direct investment
in the Advisor Fund. In addition, the Advisors may buy and sell
securities on margin and otherwise utilize leverage, further
increasing the volatility of the Companys direct or
indirect investments.
The use of leverage by the Investment Funds, Advisor Funds,
Portfolio Companies or Advisors can substantially increase the
adverse impact to which the Companys investment portfolio
may be subject. Trading securities on margin results in interest
charges and, depending on the amount of trading activity, such
charges could be substantial. The amount of leverage or
borrowings which the Company, Investment Funds, Advisor Funds,
Portfolio Companies and Advisors may have outstanding at any one
time may be large in relation to their capital. Consequently,
the level of interest rates generally, and the rates at which
the Investment Funds, Advisor Funds, Portfolio Companies and
Advisors can borrow in particular, can affect the operating
results of the Company. The low margin deposits normally
required in futures and forward trading permit a high degree of
leverage; accordingly, a relatively small price movement in a
futures contract can result in immediate and substantial losses
to the investor. Such a high degree of leverage necessarily
entails a high degree of risk. In the event that an Investment
Fund or a Portfolio Company enters into an investment management
agreement with an Advisor that utilizes leverage in its
investment program, the Investment Fund or Portfolio Company may
become subject to claims by financial intermediaries that
extended margin loans to such Advisor in respect of
the applicable Managed Account. Such claims could exceed the
value of the assets allocated to such Advisor by the Investment
Fund or Portfolio Company. The risks involved in the use of
leverage are increased to the extent an Investment Fund
leverages its capital. The Company generally will not utilize
leverage directly, although it may borrow to, among other
things, fund redemptions and pay expenses.
The Company, Investment Funds, Advisor Funds and Portfolio
Companies will incur expenses, which may include, without
limitation, interest charges and commitment fees, in connection
with any leverage that it utilizes, which expenses could be
significant. In addition, the rights of any lenders to the
Company, Investment Funds, Advisor Funds and Portfolio Companies
to receive payments of interest or repayments of principal will
be senior to those of the Members or the investors in such
entities, and the terms of any borrowings may contain provisions
that limit certain activities of such entities or the Advisors,
including the ability to make distributions.
In lieu of, or in addition to, obtaining a revolving credit
line, the Company, Investment Funds, Advisor Funds and Portfolio
Companies may determine from time to time to attempt to borrow
funds as and when needed, as opposed to relying on committed
facilities, with respect to all or a portion of their borrowing
needs. Subject to applicable law, the Company, Investment Funds,
Advisor Funds and Portfolio Companies may make borrowings
91
from Goldman Sachs on this basis. Such borrowings would
therefore generally not involve the payment of any commitment
fees, but may result in a higher interest rate when borrowings
are made than would have been the case had a committed facility
been in place, and could leave the Company, Investment Funds,
Advisor Funds or Portfolio Companies at risk in situations where
no such financing is available, or is only available at high
rates. In addition, the terms of any such borrowings may provide
that such borrowings may be subject to repayment at any time
upon demand by the lender, which could occur at a time when
complying with such demand could have a material adverse effect
on the Investment Funds, Advisor Funds or Portfolio Companies
and, in turn, the Company. In addition, a lender may terminate
such borrowings upon the occurrence of certain events,
including, without limitation, events of default or termination
events. Any such event with respect to a borrowing could
materially adversely affect the Company. The Company will also
be subject to other risks related to the use of leverage, which
may have an adverse impact on the Company.
Depending upon the form of leverage utilized by the Company,
Investment Funds, Advisor Funds and Portfolio Companies, the
applicable lender may impose certain restrictions or
requirements on the operations of the Company, Investment Funds,
Advisor Funds or Portfolio Companies including, without
limitation, restrictions relating to the permitted investments
of the Company, Investment Funds, Advisor Funds or Portfolio
Companies and redemptions therefrom, and requirements with
respect to the valuation procedures of the Company, Investment
Funds, Advisor Funds and Portfolio Companies, the liquidity of
the Company, Investment Funds, Advisor Funds and Portfolio
Companies, and the performance or other reports or notices to be
provided to the relevant lender by the Company or the applicable
Investment Fund, Advisor Fund or Portfolio Company. From time to
time, a lender to the Company, Investment Funds, Advisor Funds
or Portfolio Companies may also require that such entity reduce
its leverage ratio. This may occur as a result of the decline in
the value of the assets of the Company or the applicable
Investment Fund, Advisor Fund or Portfolio Company or for other
reasons. If this occurs, the Company may be required to redeem
interests in Investment Funds or the Investment Funds may be
required to redeem interests in Advisor Funds when they
otherwise would not have done so.
Convergence
Risk May Result in Significant Losses of the Investment Funds
and the Company
Certain Advisors will take long positions in securities believed
to be undervalued and short positions in securities believed to
be overvalued. In the event that the perceived mispricings
underlying one or more Advisors trading positions were to
fail to converge toward, or were to diverge further from,
relationships expected by such Advisors, the Investment Funds
and the Company may incur significant losses.
Possible Effects of Speculative Position Limits Could
Adversely Affect the Operations and Profitability of the
Investment Funds and the Company
The CFTC, the U.S. commodities exchanges and certain
offshore commodity exchanges have established limits referred to
as speculative position limits or position
limits on the maximum net long or net short (or, for some
commodities, the gross) positions which any person or group of
persons may own, hold or control in certain futures or options
contracts. No such limits presently exist in the forward
contract markets or on most
non-U.S. exchanges.
Under currently applicable regulations, each of the Investment
Funds that allocates its assets to Advisors who, through Managed
Accounts or Portfolio Companies, trade in commodities on behalf
of the Investment Fund could be required to comply with position
limits as if it were a single trader, absent obtaining exemptive
relief therefrom. Many of the major U.S. exchanges have
eliminated speculative position limits and have substituted
position accountability rules that would permit Advisors of an
Investment Fund to trade without restriction as long as the
Advisor can demonstrate the positions acquired were not acquired
for the purpose of manipulating the market. To the extent a
single speculative position limit is not applicable to the
Advisors trading in any or all futures, the different
Advisors of an Investment Fund are able to acquire larger
positions on behalf of such Investment Fund. Absent such
exemptive relief or exchange rule changes, the position limits,
especially in certain markets, may be quite restrictive. There
can be no assurance that exemptive relief will continue to be
available. The modification of trading strategies or liquidation
of positions by the Advisors, if required to comply with
position limits, could adversely affect the operations and
profitability of the Investment Funds and therefore the Company.
92
The Commodity Exchange Act provides that trading done by persons
directly or indirectly under the same control or trading as one
pursuant to an expressed or implied agreement or understanding
will be aggregated for determining compliance with applicable
position limits. There is a possibility that the positions held
by some or all Advisors of an Investment Fund that, through
Managed Accounts or Portfolio Companies, trade in commodities on
behalf of the Investment Fund and their respective principals
could be aggregated under one of the foregoing principles or
applicable exchange regulations with those held by certain other
Advisors of such Investment Fund. If a commodity exchange or any
other regulatory body were to aggregate the positions held by
certain Advisors of an Investment Fund, it may have a material
adverse effect on the ability of each of the affected Advisors
to trade in such markets.
Short
Selling Creates the Risk of Significant Losses
Advisors may engage in short selling. Short selling involves
selling securities that may or may not be owned and borrowing
the same securities for delivery to the purchaser, with an
obligation to replace the borrowed securities at a later date.
Short selling allows the investor to profit from declines in the
value of securities. A short sale creates the risk of a
theoretically unlimited loss, in that the price of the
underlying security could theoretically increase without limit,
thus increasing the cost of buying those securities to cover the
short position. There can be no assurance that the security
necessary to cover a short position will be available for
purchase. Purchasing securities to close out the short position
can itself cause the price of the securities to rise further,
thereby exacerbating the loss.
Advisors may make short sales against-the-box, in
which they will sell short securities they own or have the right
to obtain without payment of additional consideration. If an
Advisor makes a short sale against-the-box, it will be required
to set aside securities equivalent in kind and amount to the
securities sold short (or securities convertible or exchangeable
into those securities) and will be required to hold those
securities while the short sale is outstanding. Advisors will
incur transaction costs, including interest expenses, in
connection with opening, maintaining and closing short sales
against-the-box.
Many jurisdictions have recently imposed restrictions and
reporting requirements on short selling. In particular, in the
fall of 2008, the SEC temporarily suspended short selling on
stocks of over 950 publicly traded companies. These restrictions
and reporting requirements may prevent the Advisors from
successfully implementing their investment strategies, including
without limitation as part of their long/short strategies or in
connection with hedging their investments, and achieving their
investment objective. In addition, reporting requirements
relating to short selling may provide transparency to the
Advisors competitors as to their short positions, which
may have an adverse effect on the Investment Funds and, in turn,
the Company.
The
Ability of an Investment Fund to Hedge Successfully will Depend
on the Particular Advisors Ability to Predict Pertinent
Market Movements Which Cannot be Assured
The Investment Funds, Advisors and Advisor Funds may or may not
employ hedging techniques. There can be no assurance that such
hedging techniques will be effective or that they will result in
more favorable returns than would have been the case had they
not been employed. Moreover, while such hedging techniques are
intended to protect investors from changes in the valuation of
the securities and other instruments in which the Company
invests, the Company will not generally benefit when the value
of such securities and other instruments increases.
Hedging techniques could involve a variety of derivative
transactions, including futures contracts, exchange-listed and
over-the-counter put and call options on securities, financial
indices, forward foreign currency contracts, and various
interest rate transactions (collectively, Hedging
Instruments). Hedging techniques involve risks different
from those of underlying investments. In particular, the
variable degree of correlation between price movements of
Hedging Instruments and price movements in the position being
hedged creates the possibility that losses on the hedge may be
greater than gains in the value of an Investment Funds
positions. In addition, certain Hedging Instruments and markets
may not be liquid in all circumstances. As a result, in volatile
markets, transactions in certain of these instruments may not be
able to be closed out without incurring losses substantially
greater than the initial deposit. Although the contemplated use
of these instruments should tend to minimize the risk of loss
due to a decline in the value of the hedged position, at the
same time they tend to limit any potential gain that might
result from an increase in the value of such position. The
ability of the Investment
93
Funds and the Advisors to hedge successfully will depend on the
ability of the Investment Funds and the Advisors to predict
pertinent market movements, which cannot be assured. There is
also a risk that an Investment Fund or an Advisor may over-hedge
or under-hedge a particular exposure because it has incomplete
information regarding the amount of such exposure to which its
investments are subject. The Investment Funds and Advisors are
not required to hedge and there can be no assurance that hedging
transactions will be available or, even if undertaken, will be
effective. In addition, it is not possible to hedge fully or
perfectly against currency fluctuations affecting the value of
securities denominated in
non-U.S. currencies
because the value of those securities is likely to fluctuate as
a result of independent factors not related to currency
fluctuations. Finally, the daily variation margin deposit
requirements in futures contracts that may be sold by the
Investment Funds Advisors or Advisor Funds would create an
ongoing greater potential financial risk than would options
transactions, where the exposure is limited to the cost of the
initial premium and transaction costs paid by the Advisor or
Advisor Funds.
Forward
Contracts May Entail Significant Risks and Uncertainties Which
Could Result in Substantial Losses to the Investment Funds and
the Company
Advisors may enter into forward contracts, which are the
purchase or sale of a specific quantity of a commodity,
government security, foreign currency, or other financial
instrument at the current or spot price, with delivery and
settlement at a specified future date. Because it is a completed
contract, a purchase forward contract can be a cover for the
sale of a futures contract. The Advisors may enter into forward
contracts for hedging purposes and non-hedging purposes
(i.e., to increase returns). Forward contracts are
transactions involving an Advisors obligation to purchase
or sell a specific instrument at a future date at a specified
price. Forward contracts may be used by the Advisors for hedging
purposes to protect against uncertainty in the level of future
foreign currency exchange rates, such as when an Advisor
anticipates purchasing or selling a
non-U.S. security.
For example, this technique would allow the Advisor to
lock in the U.S. dollar price of the security.
Forward contracts may also be used to attempt to protect the
value of an Advisors existing holdings of
non-U.S. securities.
There may be, however, an imperfect correlation between an
Advisors
non-U.S. securities
holdings and the forward contracts entered into with respect to
those holdings. Forward contracts may also be used for
non-hedging purposes to pursue an Advisors investment
objective, such as when an Advisor anticipates that particular
non-U.S. currencies
will appreciate or depreciate in value, even though securities
denominated in those currencies are not then held in the
Advisors portfolio. There is no general requirement that
the Advisors hedge all or any portion of their exposure to
foreign currency risks.
Forward contracts and options thereon, unlike futures contracts,
are not traded on exchanges and are not standardized; rather,
banks and dealers act as principals in these markets,
negotiating each transaction on an individual basis. Forward and
cash trading is substantially unregulated; there is
no limitation on daily price movements and speculative position
limits are not applicable. The principals who deal in the
forward markets are not required to continue to make markets in
the currencies or commodities they trade and these markets can
experience periods of illiquidity, sometimes of significant
duration. There have been periods during which certain
participants in these markets have refused to quote prices for
certain currencies or commodities or have quoted prices with an
unusually wide spread between the price at which they were
prepared to buy and that at which they were prepared to sell.
Disruptions can occur in any market traded by an Advisor due to
unusually high trading volume, political intervention or other
factors. Arrangements to trade forward contracts may be made
with only one or a few counterparties, and liquidity problems
therefore might be greater than if such arrangements were made
with numerous counterparties. Significant risks and
uncertainties exist in dealing with counterparties in forward
contracts. The imposition of controls by governmental
authorities might also limit such forward (and futures) trading
to less than that which the Advisors would otherwise recommend,
to the possible detriment of the Advisor and therefore the
applicable Investment Fund and the Company. Market illiquidity
or disruption could result in major losses to an Investment Fund
and the Company. In addition, Managed Accounts or Advisor Funds
in which an Investment Fund has a direct or indirect interest
may be exposed to credit risks with regard to counterparties
with whom the Advisors trade as well as risks relating to
settlement default. Such risks could result in substantial
losses to the Investment Funds and the Company.
94
Swap
Agreements May Increase or Decrease the Overall Volatility of an
Investment Funds Portfolio
Advisors and Advisor Funds may enter into equity, interest rate,
index, currency rate, total return, and other types of swap
agreements. The transactions are entered into in an attempt to
obtain a particular return without the need to actually purchase
the reference asset. Swap agreements can be individually
negotiated and structured to include exposure to a variety of
different types of investments or market factors. Depending on
their structure, swap agreements may increase or decrease an
Investment Funds exposure to long-term or short-term
interest rates (in the United States or abroad), foreign
currency values, mortgage securities, corporate borrowing rates,
or other factors such as security prices, baskets of securities,
or inflation rates. Swap agreements can take many different
forms. Advisors and Advisor Funds are not limited to any
particular form of swap agreement.
Swap agreements are two-party contracts entered into primarily
by institutional investors for periods ranging from a few weeks
to more than a year. In a standard swap transaction, two parties
agree to exchange the returns (or differentials in rates of
return) earned or realized on particular predetermined
investments or instruments, which may be adjusted for an
interest factor. The gross returns to be exchanged or
swapped between the parties are generally calculated
with respect to a notional amount (i.e., the
return on or increase in value of a particular U.S. dollar
amount invested at a particular interest rate, in a particular
foreign currency, or in a basket of securities
representing a particular index).
Swap agreements will tend to shift investment exposure from one
type of investment to another. For example, if an Advisor agrees
to exchange payments in U.S. dollars for payments in
foreign currency, the swap agreement would tend to decrease the
Companys exposure to U.S. interest rates and increase
its exposure to foreign currency and interest rates. Depending
on how they are used, swap agreements may increase or decrease
the overall volatility of an Investment Funds portfolio.
Most swap agreements entered into by an Advisor or Advisor Fund
would require the calculation of the obligations of the parties
to the agreements on a net basis. Consequently, an
Advisor or Advisor Funds current obligations (or rights)
under a swap agreement generally will be equal only to the net
amount to be paid or received under the agreement based on the
relative values of the positions held by each party to the
agreement (the net amount). The risk of loss with
respect to swaps is limited to the net amount of interest
payments that an Advisor or Advisor Fund is contractually
obligated to make. If the other party to a swap defaults, an
Investment Funds risk of loss consists of the net amount
of payments that the Advisor or Advisor Fund contractually is
entitled to receive. If a swap agreement calls for payments by
an Investment Fund, an Advisor Fund or Portfolio Company, such
entity must be prepared to make such payments when due. In
addition, if the counterpartys creditworthiness declined,
the value of a swap agreement would be likely to decline,
potentially resulting in losses to the Investment Fund and the
Company.
The
Prices of an Investment Funds Investments Can be Highly
Volatile and Influenced by External Factors Outside the Control
of Such Investment Fund
The prices of an Investment Funds investments, and
therefore the NAVs of the Investment Fund and the Company, can
be highly volatile. Price movements of forward contracts,
futures contracts and other derivative contracts in which an
Advisor may invest are influenced by, among other things,
interest rates, changing supply and demand relationships, trade,
fiscal, monetary and exchange control programs and policies of
governments, and national and international political and
economic events and policies. In addition, governments from time
to time intervene, directly and by regulation, in certain
markets, particularly those in currencies, financial instruments
and interest rate-related futures and options. Such intervention
often is intended directly to influence prices and may, together
with other factors, cause all of such markets to move rapidly in
the same direction because of, among other things, interest rate
fluctuations. Moreover, since internationally, including certain
of the markets in which the Advisors will invest there may be
less government supervision and regulation of worldwide stock
exchanges and clearinghouses than in the United States, Advisors
also are subject to the risk of the failure of the exchanges on
which their positions trade or of their clearinghouses, and
there may be a higher risk of financial irregularities
and/or lack
of appropriate risk monitoring and controls.
The Company and the Investment Funds may be adversely affected
by the recent deteriorations in the financial markets and
economic conditions throughout the world, some of which may
magnify the risks described herein and
95
have other adverse effects. Economic and financial market
conditions have continued to deteriorate since 2008 and have
resulted in increasing volatility and illiquidity in the global
credit, debt and equity markets generally. Market
participants initial concerns were focused primarily on
credit and valuation problems in the sub-prime mortgage market
and resultant volatility and illiquidity in the sub-prime
segment of the mortgage-backed securities market, but these
concerns have broadened to the global credit and interbank money
markets generally, and a wide range of financial institutions
and markets, asset classes and sectors, causing decreased risk
tolerance by investors and significantly tightened availability
of credit. As a result, certain securities have become less
liquid and more difficult to value, and thus harder to dispose
of. This deterioration has been exacerbated by, among other
things, uncertainty regarding the extent of the problems in the
mortgage industry and the degree of exposure of financial
institutions and other market participants, increased aversion
to risk, concerns over inflation, instability in energy costs,
complex geopolitical issues, the lack of availability and higher
cost of credit and the declining real estate and mortgage
markets in the United States and elsewhere. These factors,
combined with variable commodity pricing, declining business and
consumer confidence, increased unemployment and diminished
expectations for predictable global financial markets, have led
to a global economic slowdown and fears of a global recession.
The duration and ultimate effect of current market conditions
cannot be forecast, nor is it known whether or the degree to
which such conditions may worsen. The continuation or further
deterioration of current market conditions and continued
uncertainty regarding economic markets generally could result in
further declines in the market values of potential investments
or declines in market values. Such declines could lead to losses
and diminished investment opportunities for the Company and the
Investment Funds, could prevent the Company and the Investment
Funds from successfully meeting their investment objectives or
could require the Company and the Investment Funds to dispose of
investments at a loss while such unfavorable market conditions
prevail. While current market conditions persist, the Company
and the Investment Funds will also be subject to heightened
risks associated with the potential failure of brokers,
counterparties and exchanges, as well as increased systemic
risks associated with the potential failure of one or more
systemically important institutions. See Failure
of the Investment Funds Counterparties, Brokers, and
Exchanges Exposes Investment Funds to Credit Risks in Various
Forms.
Failure
of the Investment Funds Counterparties, Brokers, and
Exchanges Exposes Investment Funds to Credit Risks in Various
Forms
The Investment Funds will be exposed to the credit risk of the
counterparties with which, or the brokers, dealers and exchanges
through which, the Advisors deal, whether they engage in
exchange-traded or off-exchange transactions. More than one of
the Investment Funds at any time may be subject to the credit
risk of the same counterparty or broker-dealer. An
Advisors prime brokers or other parties may hold assets,
including assets held as collateral for margin loans or other
financing provided to such Advisor. Under the terms of such
arrangements and under applicable law, a secured party may be
permitted to rehypothecate such assets in connection with
securities lending or other transactions entered into by the
secured party. An Investment Fund may be subject to risk of loss
of its assets placed on deposit with a broker by an Advisor in
the event of the brokers bankruptcy, the bankruptcy of any
clearing broker through which the broker executes and clears
transactions on behalf of the Advisor, or the bankruptcy of an
exchange clearing house.
In addition, although the Commodity Exchange Act requires a
commodity broker to segregate the funds of its customers, if a
commodity broker fails to properly segregate customer funds, the
Advisor may be subject to a risk of loss of its funds on deposit
with such broker in the event of such brokers bankruptcy
or insolvency. An Investment Fund may also be subject to risk of
loss of its funds on deposit with
non-U.S. brokers
because
non-U.S. regulatory
bodies may not require such brokers to segregate customer funds.
An Advisor may be required to post margin for its foreign
exchange transactions either with the foreign exchange dealers
who are not required to segregate funds (although such funds are
generally maintained in separate accounts on the foreign
exchange dealers books and records in the name of the
Advisor). Under certain circumstances, such as the inability of
another customer of the commodity broker or foreign exchange
dealer or the commodity broker or foreign exchange dealer itself
to satisfy substantial deficiencies in such other
customers account, an Investment Fund may be subject to a
risk of loss of its funds placed on deposit with such broker or
dealer, even if such funds are properly segregated.
In the case of a bankruptcy of the counterparties with which, or
the brokers, dealers and exchanges through which, an Investment
Fund deals, or in the case of a customer loss as described in
the foregoing paragraph, the
96
Investment Fund might not be able to recover any of its assets
held, or amounts owed, by such person, even property
specifically traceable to the Investment Fund, and, to the
extent such assets or amounts are recoverable, the Investment
Fund might only be able to recover a portion of such amounts.
Further, even if the Investment Fund is able to recover a
portion of such assets or amounts, such recovery could take a
significant period of time. Prior to receiving the recoverable
amount of the Investment Funds property, the Investment
Fund may be unable to trade any positions held by such person,
or to transfer any positions and cash held by such person on
behalf of the Investment Fund. This could result in significant
losses to the Investment Fund and, in turn, the Company.
Many of the markets in which the Advisors effect their
transactions are over-the-counter or
interdealer markets. Participants in these markets
are typically not subject to credit evaluation and regulatory
oversight as are members of exchange based markets.
To the extent an Advisor invests in swaps, derivatives or
synthetic instruments, or other over-the-counter transactions in
these markets, the Advisor may take a credit risk with regard to
parties with which it trades and also may bear the risk of
settlement default. These risks may differ materially from those
involved in exchange-traded transactions, which generally are
characterized by clearing organization guarantees, daily
marking-to-market and settlement, and segregation and minimum
capital requirements applicable to intermediaries. Transactions
entered into directly between two counterparties generally do
not benefit from these protections, which, in turn, may subject
an Advisor to the risk that a counterparty will not settle a
transaction in accordance with agreed terms and conditions due
to, among other things, a dispute over the terms of the contract
or because of a credit or liquidity problem. Such
counterparty risk is increased for contracts with
longer maturities when events may intervene to prevent
settlement. The inability of the Advisors to transact business
with any one or any number of counterparties, the lack of any
independent evaluation of the counterparties or their financial
capabilities, and the absence of a regulated market to
facilitate settlement, may increase the potential for losses to
the Investment Funds and the Company.
In addition, the Advisors may engage in direct or indirect
trading of securities, currencies, forward contracts, options,
swaps and repurchase agreements on a principal basis. As such,
the Advisors as transferee or counterparty could experience both
delays in liquidating the underlying security, future or other
investment and losses, including: (a) the risk of the
inability or refusal to perform with respect to such
transactions on the part of the principals with which the
Advisor trades including, without limitation, the inability or
refusal to timely return collateral posted by the Advisor;
(b) possible decline in the value of any collateral during
the period in which the Advisor seeks to enforce its rights with
respect to such collateral; (c) the need to remargin or
repost collateral in respect of transferred, assigned or
replaced positions; (d) reduced levels of income and lack
of access to income during such period; (e) expenses of
enforcing its rights; and (f) legal uncertainty concerning
the enforceability of certain rights under swap agreements and
possible lack of priority against collateral posted under the
swap agreements. Any such failure or refusal, whether due to
insolvency, bankruptcy or other causes, could subject the
Advisor and, in turn, the Investment Fund and the Company, to
substantial losses. The Advisor will not be excused from
performance on any such transactions due to the default of third
parties in respect of other trades which in the Advisors
trading strategies were to have substantially offset such
contracts.
Third
Party Co-Investment with Advisor Funds
Advisors may co-invest or form joint ventures with third
parties, including affiliates of Goldman Sachs. There is a risk
that such a co-investor or co-venturer may default on its
participation in an investment or otherwise encounter financial
difficulty, may have or develop interests inconsistent with
those of the Advisor (or the Company), or may be in a position
to take action with respect to an investment that is not in the
best interests of the assets managed by such Advisor (or the
Company).
Reliance
on Technology
Certain Advisors may utilize quantitative portfolio models to
seek to allocate assets. These models, among other things, may
forecast relative returns for, risk levels and volatility of,
and correlations among, strategies and investments. However,
these models may, for a variety of reasons, fail to accurately
predict such factors, including because of scarcity of
historical data in respect of certain strategies and
investments, erroneous underlying assumptions or estimates in
respect of certain data or other defects in the models, or
because future events may not necessarily follow historical
norms. In particular, substantial components of the strategies
employed on behalf of
97
one or more of the Advisors may involve attempts at the analysis
of market phenomena for which there is limited or otherwise
unreliable historical data, and therefore, the risk of various
statistical or other errors may be considerably higher under
such circumstances. There can be no assurance that the
predictive models of an Advisor are adequate or that the models
will be adequately utilized by the Advisor. In addition, certain
Advisors may employ investment strategies that are dependent
upon various computer and telecommunications technologies. The
successful implementation and operation of these strategies
could be severely compromised by telecommunications failures,
power loss, software-related system crashes, fire or
water damage, or various other events or circumstances. Any such
event could result in, among other things, the inability of an
Advisor to establish, maintain, modify, liquidate or monitor its
investments, which could have a material adverse effect on an
Investment Fund, Advisor Fund or Portfolio Company and
consequently, the Company.
Third-Party
Use of Publicly Available Information or Similar Trading
Strategies
Certain positions and the prices and terms of certain
transactions undertaken by the Advisors may be required to be
made publicly available. Because certain trades made by the
Advisors may be based upon quantitative trading methods or other
proprietary information, there is a risk that market
participants may seek to reverse engineer the trading strategies
implemented by the Advisors using data required to be made
publicly available. The use of similar trading strategies by
other persons may have a material adverse effect on the assets
managed by such Advisors, and consequently the Company.
Risks
Related to International Investments
Trading
on Non-U.S.
Exchanges May Involve Higher Risk of Financial Irregularities
and/or Lack of Appropriate Risk Monitoring and
Controls
Advisors may trade, directly or indirectly, futures and
securities on exchanges located outside the United States. Some
non-U.S. exchanges,
in contrast to U.S. exchanges, are principals
markets in which performance is solely the individual
members responsibility with whom the Advisor has entered
into a commodity contract and not that of an exchange or its
clearinghouse, if any. In the case of trading on
non-U.S. exchanges,
the Advisors, and, in turn, the Investment Funds and the
Company, will be subject to the risk of the inability of, or
refusal by, the counterparty to perform with respect to
contracts. Moreover, since there is generally less government
supervision and regulation of
non-U.S. exchanges,
clearinghouses and clearing firms than in the United States,
Advisors and, consequently, the Investment Funds and the Company
are also subject to the risk of the failure of the exchanges on
which their positions trade or of their clearinghouses or
clearing firms, and there may be a higher risk of financial
irregularities
and/or lack
of appropriate risk monitoring and controls.
Non-U.S.
Investments Involve Special Risks not Usually Associated with
Investments in U.S. Securities
The Advisors may invest in securities of
non-U.S. issuers
and the governments of
non-U.S. countries,
including issuers in and governments of emerging market
countries. These investments involve special risks not usually
associated with investing in securities of U.S. companies
or the U.S. government, including political and economic
considerations, such as greater risks of expropriation and
nationalization, currency devaluation, debt default, regime
change confiscatory taxation, the potential difficulty of
repatriating funds, general social, political and economic
instability and adverse diplomatic developments; the small size
of the securities markets in such countries and the low volume
of trading, resulting in potential lack of liquidity and in
price volatility; fluctuations in the rate of exchange between
currencies and costs associated with currency conversion; and
certain government policies that may restrict an Investment
Funds and its Advisors investment opportunities. In
addition, because
non-U.S. entities
are not subject to uniform accounting, auditing, and financial
reporting standards, practices and requirements comparable with
those applicable to U.S. companies, there may be different
types of, and lower quality, information available about a
non-U.S. company
than a U.S. company. There is also less regulation,
generally, of the securities markets in many
non-U.S. countries
than there is in the United States, and such markets may not
provide the same protections available in the United States.
With respect to certain countries there may be the possibility
of political, economic or social instability, the imposition of
trading controls, import duties or other protectionist measures,
various laws enacted for the protection of creditors, greater
risks of nationalization or
98
diplomatic developments which could materially adversely affect
the Advisors investments in those countries. Furthermore,
individual economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment,
resource self-sufficiency, and balance of payments position. An
Advisors investment in
non-U.S. countries
may also be subject to withholding or other taxes, which may be
significant and may reduce the Advisors returns.
Brokerage commissions, custodial services and other costs
relating to investment in international securities markets
generally are more expensive than in the United States. In
addition, clearance and settlement procedures may be different
in
non-U.S. countries
and, in certain markets, such procedures have been unable to
keep pace with the volume of securities transactions, thus
making it difficult to conduct such transactions.
Investment in sovereign debt obligations of
non-U.S. governments
involves additional risks not present in debt obligations of
corporate issuers and the U.S. government. The issuer of
the debt or the governmental authorities that control the
repayment of the debt may be unable or unwilling to repay
principal or pay interest when due in accordance with the terms
of such debt, and an Advisor may have limited recourse to compel
payment in the event of a default. A sovereign debtors
willingness or ability to repay principal and to pay interest in
a timely manner may be affected by, among other factors, its
cash flow situation, the extent of its foreign currency
reserves, the availability of sufficient foreign exchange on the
date a payment is due, the relative size of the debt service
burden to the economy as a whole, the sovereign debtors
policy toward international lenders, and the political
constraints to which the sovereign debtor may be subject.
Periods of economic uncertainty may result in the volatility of
market prices of sovereign debt to a greater extent than the
volatility inherent in debt obligations of other types of issues.
Investment
in Emerging Markets Involves Significant Risks, Including
Inflation and Currency Devaluations
The Advisors may invest in securities of companies based in
emerging markets or issued by the governments of such countries.
Securities traded in certain emerging markets may be subject to
risks due to the inexperience of financial intermediaries, the
lack of modern technology, the lack of a sufficient capital base
to expand business operations, and the possibility of temporary
or permanent termination of trading. Political and economic
structures in many emerging markets may be undergoing
significant evolution and rapid development, and emerging
markets may lack the social, political and economic stability
characteristics of more developed countries.
As a result, the risks relating to investments in
non-U.S. securities
described above, including the possibility of nationalization or
expropriation, may be heightened. In addition, certain countries
may restrict or prohibit investment opportunities in issuers or
industries deemed important to national interests and there may
generally be a high degree of governmental involvement and
control over the economy. Governments may decide to discontinue
support for economic reform programs or impose centrally planned
economies. Such changes may affect the market price, liquidity
and rights of securities that may be purchased by Advisors.
Settlement mechanisms in emerging securities markets may be less
efficient and less reliable than in more developed markets, and
placing securities with a custodian or broker-dealer in an
emerging country may also present considerable risks. The small
size of securities markets in such countries and the low volume
of trading may result in a lack of liquidity and in
substantially greater price volatility. Many emerging market
countries have experienced substantial, and in some periods
extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates and corresponding currency
devaluations and fluctuations in the rate of exchange between
currencies and costs associated with currency conversion have
had, and may continue to have, negative effects on the economies
and securities markets of certain emerging market countries. In
addition, accounting, auditing and financial reporting standards
that prevail in certain of such countries are not equivalent to
standards in more developed countries and, consequently, less
information is available to investors in companies located in
such countries. Similarly, it may be more difficult to enforce
contractual obligations. Additional risks arise from social or
health issues including an increase in the prevalence of AIDS
and social and civil unrest, including terrorist attacks and
other acts of violence or war.
Many of the laws that govern private and foreign investment,
equity securities transactions and other contractual
relationships for sophisticated investors in certain countries,
particularly in emerging markets, are not yet fully established.
As a result, the Advisors may be subject to a number of unusual
risks, including limited
99
investor protection, contradictory legislation, incomplete,
unclear and changing laws, ignorance or breaches of regulations
on the part of other market participants, lack of established or
effective avenues for legal redress, lack of standard practices
and confidentiality customs characteristic of developed markets
and lack of enforcement of existing regulations. Furthermore, it
may be difficult to obtain and enforce a judgment in certain
countries. There can be no assurance that this difficulty in
protecting and enforcing rights will not have a material adverse
effect on the Advisors and consequently, the Company and its
operations. In addition, the income and gains of an Advisor and
consequently, the Company may directly or indirectly be subject
to withholding taxes imposed by foreign governments for which
the Company or the Members may not receive a full foreign tax
credit.
Privatizations
The Advisors may seek to invest in privatizations (i.e., foreign
government programs of selling interests in government-owned or
controlled enterprises). The ability of Advisors to participate
in privatizations may be limited by local law or the terms for
participation may be less advantageous than for local investors.
There can be no assurance that privatization programs will be
available or successful.
Foreign
Currency Transactions and Exchange Rate Risk Create Additional
Risks for Advisors Investing in Certain Financial
Instruments
Advisors may invest in equity and equity-related securities
denominated in
non-U.S. currencies
and in other financial instruments, the price of which is
determined with reference to such currencies. Advisors may
engage in foreign currency transactions for a variety of
purposes, including to lock in the U.S. dollar
price of the security, between the trade and the settlement
dates, the value of a security an Advisor has agreed to buy or
sell, or to hedge the U.S. dollar value of securities the
Advisor already owns. The Advisors may also engage in foreign
currency transactions for non-hedging purposes to generate
returns. The Investment Funds will, however, value their
investments and other assets in U.S. dollars. To the extent
unhedged, the value of each Investment Funds net assets
will fluctuate with U.S. dollar exchange rates as well as
with price changes of an Advisors investments in the
various local markets and currencies. Forward currency contracts
and options may be utilized by Advisors to hedge against
currency fluctuations, but the Advisors are not required to
utilize such techniques, and there can be no assurance that such
hedging transactions will be available or, even if undertaken,
effective.
Non-U.S.
Futures Transactions Afford Less Protection as Rules of a
Non-U.S.
Exchange May Not be Enforced by a U.S. Regulator
Non-U.S. futures
transactions involve executing and clearing trades on a
non-U.S. exchange.
This is the case even if the
non-U.S. exchange
is formally linked to a U.S. exchange, whereby
a trade executed on one exchange liquidates or establishes a
position on the other exchange. No U.S. organization
regulates the activities of a
non-U.S. exchange,
including the execution, delivery, and clearing of transactions
on such an exchange, and no U.S. regulator has the power to
compel enforcement of the rules of the
non-U.S. exchange
or the laws of the
non-U.S. country.
Moreover, such laws or regulations will vary depending on the
non-U.S. country
in which the transaction occurs. For these reasons, an
Investment Fund may not be afforded certain of the protections
that apply to U.S. transactions, including the right to use
U.S. alternative dispute resolution procedures. In
particular, funds received from customers to margin
non-U.S. futures
transactions may not be provided the same protections as funds
received to margin futures transactions on U.S. exchanges.
In addition, the price of any
non-U.S. futures
or option contract and, therefore, the potential profit and loss
resulting therefrom, may be affected by any fluctuation in the
foreign exchange rate between the time the order is placed and
the
non-U.S. futures
contract is liquidated or the
non-U.S. option
contract is liquidated or exercised.
100
Risks
Related to Securities and Other Instruments
Investing
in Derivative Instruments Involves Risk of Loss to the Advisors
That Could Materially Adversely Affect the Value of the
Companys Net Assets
Advisors may invest in, or enter into transactions involving,
derivative instruments. These are financial instruments that
derive their performance, at least in part, from the performance
of an underlying asset, index, or interest rate. Examples of
derivatives include, but are not limited to, futures contracts,
options contracts, and options on futures contracts. A futures
contract is an exchange-traded agreement between two parties, a
buyer and a seller, to exchange a particular commodity or
financial instrument at a specific price on a specific date in
the future. An option transaction generally involves a right,
which may or may not be exercised, to buy or sell a commodity or
financial instrument at a particular price on a specified future
date.
An Advisors use of derivatives involves risks different
from, or possibly greater than, the risks associated with
investing directly in securities or more traditional
investments, depending upon the characteristics of the
particular derivative and the Advisors portfolio as a
whole. Derivatives permit an Advisor to increase or decrease the
level of risk of its portfolio, or change the character of the
risk to which its portfolio is exposed, in much the same way as
the Advisor can increase or decrease the level of risk, or
change the character of the risk, of its portfolio by making
investments in specific securities. Certain swaps, options and
other derivative instruments may be subject to various types of
risks, including market risk, liquidity risk, counterparty
credit risk, legal risk and operations risk. In addition, swaps
and other derivatives can involve significant economic leverage
and may, in some cases, involve significant risk of loss.
Derivatives may entail investment exposures that are greater
than their cost would suggest, meaning that a small investment
in derivatives could have a large potential impact on an
Advisors performance. If an Advisor invests in derivatives
at inopportune times or judges market conditions incorrectly,
such investments may lower the Advisors return or result
in a loss. An Advisor also could experience losses if
derivatives are poorly correlated with its other investments, or
if an Advisor is unable to liquidate its position because of an
illiquid secondary market. The market for many derivatives is,
or suddenly can become, illiquid. Changes in liquidity may
result in significant, rapid, and unpredictable changes in the
prices for derivatives.
Engaging in these transactions involves risk of loss to the
Advisors that could materially adversely affect the value of the
Companys net assets. No assurance can be given that a
liquid market will exist for any particular futures contract at
any particular time.
The successful use of futures also is subject to the ability to
predict correctly movements in the direction of the relevant
market, and, to the extent the transaction is entered into for
hedging purposes, to ascertain the appropriate correlation
between the transaction being hedged and the price movements of
the futures contract.
Equity
Securities and Equity-Related Instruments May be Subject to
Various Types of Risk, Including Market Risk, Liquidity Risk,
Counterparty Credit Risk, Legal Risk and Operations
Risk
Advisors may invest long and short in equities and
equity-related instruments in their investment programs. Stocks,
options and other equity-related instruments may be subject to
various types of risk, including market risk, liquidity risk,
counterparty credit risk, legal risk and operations risk. In
addition, equity-related instruments can involve significant
economic leverage and may, in some cases, involve significant
risk of loss. Equity securities may include common
stocks, preferred stocks, interests in real estate investment
trusts, convertible debt obligations, convertible preferred
stocks, equity interests in trusts, partnerships, joint ventures
or limited liability companies and similar enterprises, warrants
and stock purchase rights. In general, stock values fluctuate in
response to the activities of individual companies and in
response to general market and economic conditions. Accordingly,
the value of the stocks and other securities and instruments
that the Investment Funds hold directly or indirectly may
decline over short or extended periods of time. The stock
markets tend to be cyclical, with periods when stock prices
generally rise and periods when stock prices generally decline.
The volatility of equity securities means that the value of an
investment in each of the Investment Funds and, in turn, the
Company may increase or decrease.
101
Fixed
Income Securities are Subject to Credit Risk and Price
Volatility
Advisors may invest in fixed income securities. Investment in
these securities may offer opportunities for income and capital
appreciation, and may also be used for temporary defensive
purposes and to maintain liquidity.
Fixed income securities are obligations of the
issuer to make payments of principal
and/or
interest on future dates, and include, among other securities:
bonds, notes, and debentures issued by corporations; debt
securities issued or guaranteed by the U.S. government or
one of its agencies or instrumentalities or by a
non-U.S. government;
municipal securities; and mortgage-backed and asset-backed
securities. These securities may pay fixed, variable, or
floating rates of interest, and may include zero coupon
obligations. Fixed income securities are subject to the risk of
the issuers or a guarantors inability to meet
principal and interest payments on its obligations (i.e., credit
risk) and are subject to price volatility due to such factors as
interest rate sensitivity, market perception of the
creditworthiness of the issuer, and general market liquidity
(i.e., market risk). In addition, mortgage-backed securities and
asset-backed securities may also be subject to call risk and
extension risk. For example, homeowners have the option to
prepay their mortgages. Therefore, the duration of a security
backed by home mortgages can either shorten (i.e., call risk) or
lengthen (i.e., extension risk). In general, if interest rates
on new mortgage loans fall sufficiently below the interest rates
on existing outstanding mortgage loans, the rate of prepayment
would be expected to increase. Conversely, if mortgage loan
interest rates rise above the interest rates on existing
outstanding mortgage loans, the rate of prepayment would be
expected to decrease. In either case, a change in the prepayment
rate can result in losses to investors. The same would be true
of asset-backed securities, such as securities backed by car
loans.
Generally, mortgage-backed securities on commercial (in contrast
to residential) properties are not subject to prepayment risk,
but are subject to other risks, including without limitation the
financial well being of large tenants, local or general business
climate, and ability to raise and collect rents. Mortgage loans
on commercial properties often are structured so that a
substantial portion of the loan principal is not amortized over
the loan term, but is payable at maturity. Therefore, repayment
of the loan principal often depends upon the future availability
of property financing from the lenders
and/or upon
the current value and salability of the property.
High
Yield Debt Investments are Subject to Significant Risks of
Default, Illiquidity and Volatility
High yield bonds (commonly known as junk bonds) and
other debt securities in which Advisors may invest on behalf of
certain of the Investment Funds will typically be junior to the
obligations of companies to senior creditors, trade creditors
and employees. The lower rating of high yield debt reflects a
greater possibility that adverse changes in the financial
condition of the issuer or in general economic, financial,
competitive, regulatory or other conditions may materially
impair the ability of the issuer to make payments of principal
and interest. High yield debt securities have historically
experienced greater default rates than investment grade
securities. The ability of holders of high yield debt to
influence a companys affairs, especially during periods of
financial distress or following an insolvency, will be
substantially less than that of senior creditors.
As with other investments, there may not be a liquid market for
certain high yield debt, which could result in an Advisor being
unable to sell such securities for an extended period of time,
if at all. In addition, as with other types of Advisor
investments, the market for high yield debt has historically
been subject to disruptions that have caused significant
illiquidity and substantial volatility in the prices of such
securities. Consolidation in the financial services industry has
resulted in fewer market makers for high yield debt, which may
result in further risk of illiquidity and volatility with
respect to high yield debt, and this trend may continue in the
future. Furthermore, high yield debt which is held by an Advisor
is often not registered under the Securities Act and, unless so
registered, will not be able to be sold except pursuant to an
exemption from registration under the Securities Act. This may
further limit the ability of an Advisor to sell high yield debt
or to obtain the desired price for high yield debt.
Other
Debt Instruments; CBOs and CLOs
Advisors may directly or indirectly invest in other debt
instruments (both investment-grade and non-investment grade) of
companies or other entities not affiliated with countries or
governments, including but not limited to, senior and
subordinated corporate debt; tranches of collateralized mortgage
obligations, collateralized bond obligations and collateralized
loan obligations; preferred stock; corporate securities; and
bank debt. Advisors
102
may acquire debt securities on a private placement basis and may
invest in loan participations. As with other investments made by
Advisors, there may not be a liquid market for these debt
instruments, which may limit the Advisors ability to sell
these debt instruments or to obtain the desired price.
Advisors may also invest in collateralized bond obligations
(CBOs) and collateralized loan obligations
(CLOs) and other similar securities. These may be
fixed pools or may be market value or managed pools
of collateral, including commercial loans, high yield debt,
structured securities and derivative instruments relating to
debt. The pools are typically separated into tranches
representing different degrees of credit quality, with lower
rated tranches being subordinate to senior tranches. The senior
tranches of CBOs and CLOs, which represent the highest credit
quality in the pool, have the greatest collateralization and pay
the lowest spreads over treasuries. Lower rated CBO and CLO
tranches represent lower degrees of credit quality and pay
higher spreads over treasuries to compensate for the attendant
risks. The bottom tranches specifically receive the residual
interest payments (i.e., money that is left over after the
higher tiers have been paid) rather than a fixed interest rate.
The returns on the junior tranches of CBOs and CLOs are
especially sensitive to the rate of defaults in the collateral
pool. In addition, the exercise of redemption rights, if any, by
more senior CBO and CLO tranches and certain other events could
result in an elimination, deferral or reduction in the funds
available to make interest or principal payments to the junior
tranches.
In addition, there can be no assurance that a liquid market will
exist in any CBO or CLO when an Advisor seeks to sell its
interest therein. Also, it is possible that an Advisors
investment in a CBO or CLO will be subject to certain
contractual limitations on transfer.
Structured
Securities May Present a Greater Degree of Market Risk and May
be More Volatile, Less Liquid and More Difficult to Price
Accurately Than Less Complex Securities
Advisors may invest in structured securities. Structured
securities are securities whose value is determined by reference
to changes in the value of specific currencies, interest rates,
commodities, indexes or other financial indicators (the
Reference) or the relative change in two or more
References. The interest rate or the principal amount payable
upon maturity or redemption may be increased or decreased
depending upon changes in the applicable Reference. Structured
securities may be positively or negatively indexed, so that
appreciation of the Reference may produce an increase or
decrease in the interest rate or value of the security at
maturity. In addition, changes in the interest rates or the
value of the security at maturity may be a multiple of changes
in the value of the Reference. Consequently, structured
securities may present a greater degree of market risk than
other types of securities and may be more volatile, less liquid
and more difficult to price accurately than less complex
securities.
Call
Options Involve Significant Risks for Buyers and
Sellers
Advisors may participate in, and there are risks associated
with, the purchase and sale of call options. The seller (writer)
of a call option which is covered (e.g., the writer holds the
underlying security) assumes the risk of a decline in the market
price of the underlying security below the purchase price of the
underlying security less the premium received, and gives up the
opportunity for gain on the underlying security above the
exercise price of the option. The seller of an uncovered call
option assumes the risk of a theoretically unlimited increase in
the market price of the underlying security above the exercise
price of the option.
The buyer of a call option assumes the risk of losing its entire
investment in the call option. If the buyer of the call sells
short the underlying security, the loss on the call will be
offset in whole or in part by any gain on the short sale of the
underlying security.
Put
Options Involve Significant Risks for Buyers and
Sellers
Advisors may participate in, and there are risks associated
with, the purchase and sale of put options. The seller (writer)
of a put option which is covered (e.g., the writer has a short
position in the underlying security) assumes the risk of an
increase in the market price of the underlying security above
the sales price (in establishing the short position) of the
underlying security plus the premium received, and gives up the
opportunity for gain on the underlying security below the
exercise price of the option. If the seller of the put option
owns a put option covering an equivalent number of shares with
an exercise price equal to or greater than the exercise price of
the put written,
103
the position is fully hedged if the option owned
expires at the same time or later than the option written. The
seller of an uncovered put option assumes the risk of a decline
in the market price of the underlying security below the
exercise price of the option.
The buyer of a put option assumes the risk of losing its entire
investment in the put option. If the buyer of the put holds the
underlying security, the loss on the put will be offset in whole
or in part by any gain on the underlying security.
Reverse
Repurchase Agreements May Increase the Volatility of an
Investment Funds and the Companys Investment
Portfolio
The Investment Funds or the Advisors may enter into reverse
repurchase agreements. A reverse repurchase agreement typically
involves the sale of a security by a party to a bank or
securities dealer and the selling partys simultaneous
agreement to repurchase that security for a fixed price
(reflecting a rate of interest) on a specific date, and may be
considered a form of borrowing for some purposes. These
transactions involve risks that the value of portfolio
securities being relinquished may decline below the price that
must be paid when the transaction closes or that the other party
to a reverse repurchase agreement will be unable or unwilling to
complete the transaction as scheduled, which may result in
losses to the applicable Investment Fund and the Company.
Reverse repurchase agreements are a form of leverage that may
also increase the volatility of an Investment Funds and
the Companys investment portfolio.
There are
Significant Risks Associated with When-Issued and Forward
Commitment Securities
Advisors may purchase securities on a when-issued
basis and may purchase or sell securities on a forward
commitment basis in order to hedge against anticipated
changes in interest rates and prices or for speculative
purposes. These transactions involve a commitment by an Advisor
to purchase or sell securities at a future date (ordinarily at
least one or two months later). The price of the underlying
securities, which is generally expressed in terms of yield, is
fixed at the time the commitment is made, but delivery and
payment for the securities takes place at a later date. No
income accrues on securities that have been purchased pursuant
to a forward commitment or on a when-issued basis prior to
delivery to the Advisor. When-issued securities and forward
commitments may be sold prior to the settlement date. If an
Advisor disposes of the right to acquire a when-issued security
prior to its acquisition or disposes of its right to deliver or
receive against a forward commitment, it may incur a gain or
loss. There is a risk that securities purchased on a when-issued
basis may not be delivered and that the purchaser of securities
sold by an Advisor on a forward basis will not honor its
purchase obligation. In such cases, the applicable Investment
Fund and, in turn, the Company, may incur a loss.
Derivatives
with Respect to High Yield and Other Indebtedness Expose
Advisors to Counterparty and Issuer Risk
In addition to the credit risks associated with holding high
yield debt securities, with respect to derivatives involving
high yield and other debt, an Advisor will usually have a
contractual relationship only with the counterparty of the
derivative, and not with the issuer of the indebtedness. An
Advisor generally will have no right to directly enforce
compliance by the issuer with the terms of the derivative nor
any rights of set-off against the issuer, nor have any voting
rights with respect to the indebtedness. An Advisor will not
directly benefit from the collateral supporting the underlying
indebtedness and will not have the benefit of the remedies that
would normally be available to a holder of the indebtedness. In
addition, in the event of the insolvency of the counterparty to
the derivative, the Advisor will be treated as a general
creditor of such counterparty, and will not have any claim with
respect to the underlying indebtedness. Consequently, the
Advisor will be subject to the credit risk of the counterparty
as well as that of the issuer of the indebtedness. As a result,
concentrations of such derivatives in any one counterparty
subject the Advisor, and, in turn, the applicable Investment
Fund, to an additional degree of risk with respect to defaults
by such counterparty as well as by the issuer of the underlying
indebtedness.
104
Credit
Default Swaps
Advisors may enter into credit derivative contracts. The typical
credit default swap contract requires the seller to pay to the
buyer, in the event that a particular reference entity
experiences specified credit events, the difference between the
notional amount of the contract and the value of a portfolio of
securities issued by the reference entity that the buyer
delivers to the seller. In return, the buyer typically agrees to
make periodic
and/or
upfront payments equal to a fixed percentage of the notional
amount of the contract. Advisors may also purchase or sell
credit default swaps on a basket of reference entities or an
index. In circumstances in which Advisors do not own the debt
securities that are deliverable under a credit default swap,
Advisors will be exposed to the risk that deliverable securities
will not be available in the market, or will be available only
at unfavorable prices, as would be the case in a so-called
short squeeze. In certain instances of issuer
defaults or restructurings, it has been unclear under the
standard industry documentation for credit default swaps whether
or not a credit event triggering the sellers
payment obligation had occurred. In either of these cases, an
Advisor would not be able to realize the full value of the
credit default swap upon a default by the reference entity. As
sellers of credit default swaps, Advisors incur leveraged
exposure to the credit of the reference entity and are subject
to many of the same risks they would incur if they were holding
debt securities issued by the reference entity. However,
Advisors will not have any legal recourse against the reference
entity and will not benefit from any collateral securing the
reference entitys debt obligations. In addition, the
credit default swap buyer will have broad discretion to select
which of the reference entitys debt obligations to deliver
to an Advisor following a credit event and will likely choose
the obligations with the lowest market value in order to
maximize the payment obligations of the Advisor. Given increases
in volume of credit derivatives trading in the market,
settlement of such contracts may also be delayed beyond the time
frame originally anticipated by counterparties. Such delays may
adversely impact the Advisors ability to otherwise
productively deploy any capital that is committed with respect
to such contracts.
Risks of
Spread Transactions
Where an Advisor enters into spread transactions, it is subject
to the risk that the prices of the currencies underlying the
positions comprising such spreads will not fluctuate in the same
direction or to the same extent during the period in which the
spread position is maintained. Under such circumstances, the
relevant Investment Fund or Advisor Fund could sustain losses on
one or both legs of the spread position.
The
Company May be Prevented From Achieving its Objective During any
Period in Which Assets are not Substantially Invested in
Accordance with Principal Investment Strategies
Advisors may invest, for defensive purposes or otherwise, some
or all of their assets in fixed income securities, money market
instruments, and money market mutual funds, or hold cash or cash
equivalents in such amounts as the Advisors deem appropriate
under the circumstances. Pending allocation of the offering
proceeds and thereafter, from time to time, the Company and the
Investment Funds also may invest in these instruments. Money
market instruments are short-term fixed income obligations,
which generally have remaining maturities of one year or less,
and may include U.S. government securities, commercial
paper, certificates of deposit, bankers acceptances issued
by U.S. branches of U.S. banks that are members of the
Federal Deposit Insurance Corporation, and repurchase
agreements. The Company and the Investment Funds may be
prevented from achieving their objectives during any period in
which the Companys and the Investment Funds assets
are not substantially invested in accordance with their
principal investment strategies.
Restricted
and Illiquid Investments May Prevent Prompt Liquidation of
Unfavorable Positions Resulting in Substantial Loss
The market value of an Advisors investments may fluctuate
with, among other things, changes in prevailing interest rates,
general economic conditions, the condition of financial markets,
developments or trends in any particular industry and the
financial condition of the issuers of the securities in which
the Advisor invests. During periods of limited liquidity and
higher price volatility, the Advisors ability to acquire
or dispose of its investments at a price and time that the
Advisor deems advantageous may be impaired. As a result, in
periods of rising market prices, the Advisor may be unable to
participate in price increases fully to the extent that it is
unable to acquire
105
desired positions quickly; conversely, the Advisors
inability to dispose fully and promptly of positions in
declining markets will cause its NAV to decline as the value of
unsold positions is marked to lower prices.
In addition, Advisors may invest a portion or all of the value
of their assets in restricted securities and other investments
that are illiquid. Restricted securities are securities that may
not be sold to the public without an effective registration
statement under the Securities Act or, if they are unregistered,
may be sold only in a privately negotiated transaction or
pursuant to an exemption from registration. These may include
restricted securities that can be offered and sold only to
qualified institutional buyers under Rule 144A
of the Securities Act. There may be no limit to the percentage
of an Advisors net assets that may be invested in illiquid
securities.
Positions in restricted or non-publicly traded securities,
securities on
non-U.S. exchanges
and certain futures contracts may be illiquid because certain
exchanges limit fluctuations in certain securities and futures
contract prices during a single day by regulations referred to
as daily price fluctuation limits or daily
limits. Under such daily limits, during a single trading
day no trades may be executed at prices beyond the daily limits.
Once the price of a particular security or futures contract has
increased or decreased by an amount equal to the daily limit,
positions in that security or contract can neither be taken nor
liquidated unless traders are willing to effect trades at or
within the limit. This constraint could prevent the Advisors
from promptly liquidating unfavorable positions and subject the
Investment Funds and, in turn, the Company to substantial
losses. This could also impair the Companys ability to
redeem its membership units from an Investment Fund in order to
redeem Members units in a timely manner. An investment in
the Company is therefore suitable only for certain sophisticated
investors that will not be materially impacted by postponement
of the Companys redemption dates.
Risks
Related to Issuers of Securities
The
Issuers of Securities Acquired by Advisors will Sometimes Face a
High Degree of Business and Financial Risk
The issuers of securities acquired by Advisors will sometimes
involve a high degree of business and financial risk. These
companies may be in an early stage of development, may not have
a proven operating history, may be operating at a loss or have
significant variations in operating results, may be engaged in a
rapidly changing business with products subject to a substantial
risk of obsolescence, may require substantial additional capital
to support their operations, to finance expansion or to maintain
their competitive position, or may otherwise have a weak
financial condition.
Issuers of securities acquired by Advisors may be highly
leveraged. Leverage may have important adverse consequences to
these companies and the Company as an indirect investor. These
companies may be subject to restrictive financial and operating
covenants. The leverage may impair these companies ability
to finance their future operations and capital needs. As a
result, these companies flexibility to respond to changing
business and economic conditions and to business opportunities
may be limited. A leveraged companys income and net assets
will tend to increase or decrease at a greater rate than if
borrowed money were not used.
In addition, such companies may face intense competition,
including competition from companies with greater financial
resources, more extensive development, manufacturing, marketing,
and other capabilities, and a larger number of qualified
managerial and technical personnel.
Expected
Transactions May not Take Place or may Result in Substantial
Losses
The Advisors of the Investment Funds, particularly those of GFS,
may engage in merger arbitrage transactions. Substantial
transaction failure risks exist with respect to companies that
are the subject of publicly disclosed mergers, takeover bids,
exchange offers, tender offers, spin-offs, liquidations,
corporate restructuring, and other similar transactions. Thus,
there can be no assurance that any expected transaction will
take place. Certain transactions are dependent on one or more
factors in order to become effective, such as market conditions
which may lead to unexpected positive or negative changes in a
company profile, shareholder approval, regulatory and various
other third party constraints, changes in earnings or business
lines or shareholder activism as well as many
106
other factors. No assurance can be given that the merger
arbitrage transactions entered into by the Advisors will be
profitable, and any such transaction may result in substantial
losses.
Investments
in Small Capitalization Companies are Speculative and May be
Difficult to Value
Advisors may invest in securities of small capitalization
companies and recently organized companies and, conversely, the
Advisors may establish significant short positions in such
securities. Historically, such securities have been more
volatile in price than those of larger capitalized, more
established companies. The securities of small capitalization
and recently organized companies pose greater investment risks
because such companies may have limited product lines,
distribution channels and financial and managerial resources. In
particular, small capitalization companies may be operating at a
loss or have significant variations in operating results; may be
engaged in a rapidly changing business with products subject to
substantial risk of obsolescence; may require substantial
additional capital to support their operations, to finance
expansion or to maintain their competitive position; and may
have substantial borrowings or may otherwise have a weak
financial condition. In addition, these companies may face
intense competition, including competition from companies with
greater financial resources, more extensive development,
manufacturing, marketing, and other capabilities, and a larger
number of qualified managerial and technical personnel. Further,
there is often less publicly available information concerning
such companies than for larger, more established businesses. The
equity securities of small capitalization companies are often
traded over-the-counter or on regional exchanges and may not be
traded in the volumes typical on a national securities exchange.
Consequently, the Advisors or entities in which the Advisors
invest may be required to dispose of such securities or cover a
short position over a longer (and potentially less favorable)
period of time than is required to dispose of or cover a short
position with respect to the securities of larger, more
established companies. Investments in small capitalization
companies may also be more difficult to value than other types
of securities because of the foregoing considerations as well as
lower trading volumes. Investments in companies with limited
operating histories are more speculative and entail greater risk
than do investments in companies with an established operating
record. Additionally, transaction costs for these types of
investments are often higher than those of larger capitalization
companies.
Investments
in Issuers of Indebtedness May be Adversely Affected in the
Event of an Issuers Insolvency
Various laws enacted for the protection of creditors may apply
to indebtedness in which the Advisors of the Investment Funds
invest. The information in this and the following paragraph is
applicable with respect to U.S. issuers subject to United
States federal bankruptcy law. Insolvency considerations may
differ with respect to other issuers. If a court in a lawsuit
brought by an unpaid creditor or representative of creditors of
an issuer of indebtedness, such as a trustee in bankruptcy, were
to find that the issuer did not receive fair consideration or
reasonably equivalent value for incurring the indebtedness and
that, after giving effect to such indebtedness, the issuer
(i) was insolvent, (ii) was engaged in a business for
which the remaining assets of such issuer constituted
unreasonably small capital or (iii) intended to incur, or
believed that it would incur, debts beyond its ability to pay
such debts as they mature, such court could determine to
invalidate, in whole or in part, such indebtedness as a
fraudulent conveyance, to subordinate such indebtedness to
existing or future creditors of such issuer, or to recover
amounts previously paid by such issuer in satisfaction of such
indebtedness. The measure of insolvency for purposes of the
foregoing will vary. Generally, an issuer would be considered
insolvent at a particular time if the sum of its debts was then
greater than all of its property at a fair valuation, or if the
present fair saleable value of its assets was then less than the
amount that would be required to pay its probable liabilities on
its existing debts as they became absolute and matured. There
can be no assurance as to what standard a court would apply in
order to determine whether the issuer was insolvent
after giving effect to the incurrence of the indebtedness in
which an Advisor invested or that, regardless of the method of
valuation, a court would not determine that the issuer was
insolvent upon giving effect to such incurrence. In
addition, in the event of the insolvency of an issuer of
indebtedness in which an Advisor invests, payments made on such
indebtedness could be subject to avoidance as a
preference if made within a certain period of time
(which may be as long as one year) before insolvency. In
general, if payments on indebtedness are avoidable, whether as
fraudulent conveyances or preferences, such payments can be
recaptured from the Advisor to which such payments were made.
107
The Company and the Investment Funds do not anticipate that the
Advisors will engage in conduct that would form the basis for a
successful cause of action based upon fraudulent conveyance,
preference or equitable subordination. There can be no
assurance, however, as to whether any lending institution or
other party from which the Advisor may acquire such indebtedness
engaged in any such conduct (or any other conduct that would
subject such indebtedness and any Investment Fund, the assets of
which such Advisor used to purchase such indebtedness, to
insolvency laws) and, if it did, as to whether such creditor
claims could be asserted in a U.S. court (or in the courts
of any other country) against such Investment Fund.
Indebtedness consisting of obligations of
non-U.S. issuers
or U.S. issuers with respect to their foreign obligations
may be subject to various laws enacted in the countries of their
issuance for the protection of creditors. These insolvency
considerations and the levels of protection provided will differ
depending on the country in which each issuer is located or
domiciled and may differ depending on whether the issuer is a
non-sovereign or a sovereign entity.
Purchases
of Securities and Other Obligations of Financially Distressed
Companies Create an Enhanced Risk of Substantial Loss or Loss of
Entire Investment
The Advisors may purchase securities and other obligations of
companies that are experiencing significant financial or
business distress, including companies involved in bankruptcy or
other reorganization and liquidation proceedings. Although such
purchases may result in significant returns, they involve a
substantial degree of risk and may not show any return for a
considerable period of time. In fact, many of these instruments
ordinarily remain unpaid unless and until the company
reorganizes
and/or
emerges from bankruptcy proceedings, and as a result may have to
be held for an extended period of time. The level of analytical
sophistication, both financial and legal, necessary for
successful investment in companies experiencing significant
business and financial distress is unusually high. There is no
assurance that the Advisors will correctly evaluate the nature
and magnitude of the various factors that could affect the
prospects for a successful reorganization or similar action. In
any reorganization or liquidation proceeding relating to a
company in which an Advisor invests, an Advisor may lose its
entire investment or may be required to accept cash or
securities with a value less than its original investment. Under
such circumstances, the returns generated from an Advisors
investments may not compensate investors adequately for the
risks assumed.
Investments
in Certain Multi-Advisor Structures
From time to time, the Managing Member may cause the Company or
the Investment Fund, as applicable, to allocate assets to an
Advisor that allocates assets to investment funds that retain
certain services and support from service providers retained by,
or affiliated with, such Advisor (a Multi-Advisor
Structure). As described under ITEM 1.
BUSINESSPERFORMANCE OF THE COMPANYOverview
of the Investment Process of the Investment Funds, the
Advisor selection process generally includes an examination of
the organizational infrastructure, including the quality of the
investment professionals and staff, the types and application of
internal controls, and any potential for conflicts of interest.
However, where funds are allocated to a Multi-Advisor Structure,
the Managing Member generally will have limited ability to
examine the organizational infrastructure of the underlying
managers and the investment funds in which the Company or the
Investment Fund indirectly invests. In addition, the Managing
Member will not be able to control the selection or removal of
underlying managers. The risks described under
Special Risks of the Fund of Funds
Structure are particularly applicable to investments
in Multi-Advisor Structures, including, without limitation, the
payment of multiple levels of fees. Any references in this
Annual Report to strategies or techniques utilized by the
Advisors include strategies or techniques utilized by investment
funds and their managers in which Multi-Advisor Structures
invest.
Additional
Investment Risks of Certain Advisor Funds
Certain Advisor Funds to which the Investment Funds may allocate
assets may invest in private equity investments, which involve a
high degree of business and financial risk. These investments
typically take many years to be realized or to become liquid.
Certain Advisor Funds may also invest in real estate
investments, which generally will be subject to the risks
incident to the ownership and operation of commercial real
estate and risks incident to the making of non-recourse mortgage
loans secured by real estate including risks associated with
108
U.S. and
non-U.S. general
economic climates, local real estate conditions, dependence on
cash flow and lack of liquidity.
Private equity and real estate investments may be difficult to
value. The Investment Funds will generally value interests in
Advisor Funds in accordance with the terms of the Advisor
Funds governing agreement, as such valuations are reported
to the Investment Fund. Such valuations will be, indirectly
through the Investment Funds, utilized by the Company in
calculating the NAV of the Company and the NAV per unit for
purposes of subscriptions and redemptions, as well as for
calculating the Management Fee, Incentive Allocation and
administration fee. These calculations will therefore be
directly affected by the valuations of any difficult-to-value
assets.
In addition, the Investment Funds may from time to time allocate
assets to Advisor Funds that require the Investment Funds to
make capital commitments, which will be drawn down over time
rather than paid at the time of the initial investment. If an
Investment Fund fails to make a required capital contribution,
the Investment Fund may be liable for costs incurred in
collecting or attempting to collect such late payment, and could
lose its entire investment in such an Advisor Fund. The Company,
as a member of an Investment Fund, will not be required to make
additional investments to fund capital contributions; these will
come solely from the Investment Funds existing assets.
Advisor
Special Investments
From time to time certain Advisor Funds may segregate from their
portfolio of assets certain illiquid or difficult-to-value
securities or instruments (each, a special
investment) and hold them in special investment accounts.
This practice is commonly referred to as
side-pocketing. Interests in special investment
accounts generally are allocated only to those investors that
were investors at the time the relevant special investment was
acquired or segregated and future investors in the Advisor Fund
generally will not participate in such special investment.
Investors (including the Investment Funds) that hold interests
in special investment accounts generally will not be able to
redeem their interests in such accounts until the relevant
special investments are liquidated, deemed realized (because,
for example, the special circumstances surrounding such
investment ceases) or otherwise disposed of. Therefore, an
Investment Fund may be required to hold its interest in a
special investment account for a significant period of time. An
Investment Funds inability to redeem its interests from
such special investment account may have a material adverse
effect on the Investment Funds ability to reallocate
assets. In addition, significant amounts of redemption requests
by investors in the Investment Fund that are not offset by new
subscriptions could result in the Investment Fund holding a
greater concentration of highly illiquid investments than was
previously the case. This could have a material adverse effect
on the Investment Funds investment mix, and could also
cause the Investment Fund to postpone or suspend future
redemptions.
Special investments generally are carried on the books of an
Advisor Fund at the applicable Advisors or a third
partys determination of fair value (which may, under the
relevant Advisor Funds organizational documents, be
presumed to be the cost of such special investment). However,
given the nature of special investments, such determinations may
not represent the actual amount that would be realized by the
Advisor Fund (and therefore the Investment Fund) upon the
eventual disposition of such special investment or that would,
in fact, be realized upon an immediate disposition of the
special investment. As discussed above, an Investment Fund will
generally value interests in Advisor Funds in accordance with
the terms and conditions of the Advisor Funds governing
agreement, as such valuations are reported to the Investment
Fund. Unlike a typical Advisor Fund, however, which generally
will not use the unrealized value of a special investment for
purposes of subscriptions, redemptions and calculating
performance-based fees or allocations, such valuations will be
utilized by the Investment Fund in calculating the NAV of units
in the Investment Fund for purposes of subscriptions and
redemptions, as well as for calculating the management fee,
incentive allocation and administration fees in respect thereof.
Accordingly, indirectly through the Investment Funds, the NAV of
the Company and the NAV per unit will be directly affected by
the valuations of any special investments as reported to the
Investment Funds. Valuations of special investments generally
will not be adjusted retroactively when such special investments
are sold or otherwise disposed of by an Advisor Fund.
Certain Advisor Funds may charge a performance-based incentive
fee or allocation (i) at the time a special investment is
designated
and/or
(ii) at the time a special investment is realized or deemed
realized based solely on the gains with respect to such special
investment, which could adversely affect investors in the
Advisor Fund,
109
including an Investment Fund and, indirectly, the Company. Other
Advisor Funds may have different procedures for calculating fees
or allocations with respect to special investments that also
could adversely affect the Company and its Members.
In the event of a cross transaction between an Investment Fund
and another client of the Managing Member that involves the
direct or indirect assignment of an interest in an Advisor Fund
special investment (whether such interest is assigned by itself
or together with a related interest in the relevant Advisor
Fund), the Investment Fund or the other party which is a client
of the Managing Member, as applicable, will receive an interest
in such assigned Advisor Fund special investment that it would
generally not have received had it made a new investment in the
applicable Advisor Fund rather than obtaining an interest
therein by means of a cross transaction. In the event of a cross
transaction involving an Advisor Fund special investment, it is
anticipated that the Advisor Fund special investment will
generally be assigned for a price equal to the last value
reported by the applicable Advisor to the holder of such Advisor
Fund special investment. Because Advisor Fund special
investments may be difficult to value, in any cross transaction
involving an Advisor Fund special investment an Investment Fund
will be exposed to the risk that it is paying more (in the event
that the Investment Fund is the transferee) or receiving less
(in the event that the Investment Fund is the transferor) for
such Advisor Fund special investment than the value at which
such Advisor Fund special investment might be realized if it
were realized at the time of the transfer or the value at which
such Advisor Fund special investment will ultimately be
realized. In addition, in the event that the Investment Fund
receives an interest in an Advisor Fund special investment
through a cross-transaction, the Investment Fund will generally
have a greater portion of its assets invested in Advisor Fund
special investments following such cross transaction than it did
beforehand, which will generally decrease the overall liquidity
of the Investment Funds underlying investments.
In addition, in the event that the managing member of an
Investment Fund determines to reduce the Investment Funds
exposure to Advisor Fund special investments generally or to a
particular Advisor Fund special investment, for liquidity
reasons or otherwise, the managing member may cause the
Investment Fund to sell its interest in one or more Advisor Fund
special investments to a third party or, to the extent permitted
by applicable law, to the managing member or an affiliate of the
managing member. Any such sale may be of the Advisor Fund
special investment by itself or together with the associated
interest in the relevant Advisor Fund and may be effected
through a broker or a matching or other service designed to
bring together buyers and sellers of Advisor Fund special
investments. In the event of a sale of an Advisor Fund special
investment or other interest in an Advisor Fund, the Investment
Fund will bear the associated brokerage and other expenses. Any
such transfer may be made at a price that represents a discount
to the last value reported by the applicable Advisor, and the
Investment Fund may receive significantly less than the value at
which such Advisor Fund special investment might be realized if
it were realized at the time of the transfer or the value at
which such Advisor Fund special investment will ultimately be
realized.
The same or similar risks may also apply to the Companys
direct investments in Investment Funds and Advisor Funds.
Changes
to the Trading and Investment Strategies Utilized by the
Advisors
Advisors may, from time to time, without prior notice to the
Managing Member, the Investment Funds or the Company, utilize
additional investment strategies and sub-strategies, including
investment strategies and sub-strategies that are not discussed
herein,
and/or
remove, substitute or modify their investment strategies and
sub-strategies or any of the types of investments then being
utilized. Any such addition or change may result in the Advisors
investing in other markets, securities and instruments than
those described herein. Any such decision may result in all or a
significant portion of an Advisors assets being allocated
to a single investment strategy or sub-strategy or type of
investment. There can be no assurance that an Advisors
decisions in this regard will be successful or will not
otherwise have an adverse effect on the assets managed by such
Advisor and, in turn, the Investment Funds and the Company. The
Company will not have an opportunity to evaluate such decisions
or an opportunity to redeem its interests in the applicable
Investment Fund prior to any such decision.
110
Limits of
Risk Disclosure
The
Company Should be Considered a Speculative Investment and
Members Should Retain Their Investment Only if They Can Sustain
a Complete Loss of their Investment
The above discussions relating to various risks associated with
the Company, the units, the Investment Funds and the Advisors
are not, and are not intended to be, a complete enumeration or
explanation of the risks involved in an investment in the
Company. Should the Managing Member invest the Companys
assets with Advisors other than through an investment in an
Investment Fund, the risks described herein with respect to the
Investment Funds will also apply to the Company. Members should
read this entire Annual Report and the Companys LLC
Agreement and should consult with their own advisers before
deciding whether to retain their investment in the Company. In
addition, as the Companys investment program or market
conditions change or develop over time, an investment in the
Company may be subject to risk factors not currently
contemplated or described in this Annual Report.
In view of the risks noted above, the Company should be
considered a speculative investment and Members should retain
their investment in the Company only if they can sustain a
complete loss of their investment.
No guarantee or representation is made that the investment
program of the Company, the Investment Funds or any Advisor will
be successful, that the Investment Funds or the various Advisors
selected by the Investment Funds will produce positive returns,
or that the Advisors selected by the Company or the Investment
Funds will provide complete or accurate information to the
Company or the Investment Funds, or that the Company, the
Investment Funds or the Advisors will achieve their investment
objectives.
Assets and liabilities of the Company may be attributable to
certain classes of units and not others. If, in the future, the
liabilities of a class of units exceed its assets, creditors of
the Company in respect of such class may have recourse to the
assets attributable to other classes.
From time to time, the Company may be subject to contingent
liabilities (including liabilities for taxes), known or unknown.
To the extent the Company is aware of these contingent
liabilities, the Company may be required by applicable
accounting standards, or may otherwise determine in its
discretion, to accrue amounts for such contingent liabilities
for U.S. GAAP or other purposes, including contingent
liabilities that may never become payable. The accrual of any
such liabilities will reduce the Companys NAV.
In certain circumstances the Company may not accrue amounts for
contingent liabilities, including because such accruals are not
required by U.S. GAAP, or because the potential facts
giving rise to such contingent liabilities are not known to the
Company, because the Company otherwise does not anticipate that
any payments relating to such contingencies will be required or
for other reasons in the Managing Members sole discretion.
In the event that the Company subsequently determines to accrue
amounts for such contingent liabilities
and/or is
required to pay amounts relating to such contingencies, such
accruals
and/or
payments will reduce the Companys NAV.
Members that invest in the Company at a time during which
contingent liabilities are not accrued (or for which there is
not a sufficient accrual) will invest in the Company at a higher
NAV than had such liabilities been accrued at the time of the
applicable investment. In addition, Members that redeem from the
Company at a time during which contingent liabilities are
accrued will redeem from the Company at a lower NAV than if such
liabilities had not been accrued at the time of the applicable
redemption. In the event that amounts associated with accrued
contingent liabilities do not subsequently become payable and
the amounts of the liabilities are reduced, causing the NAV of
the Company to increase, the benefits of such increased NAV will
accrue to Members who remain in the Company, and Members who
previously redeemed will not receive additional compensation or
otherwise share the benefit of such increase. Similarly, Members
in the Company at the time when a liability for which there is
no accrual becomes payable will bear the entire amount of such
liability (regardless of whether such liability occurred prior
to the Members subscription to the Company), and the
Company may be unable to, or may elect not to attempt to,
recover amounts from Members that redeemed from the Company
prior to the contingent liability becoming payable by the
Company. Similar consequences as those described above may also
occur when the Company under-accrues or over-accrues for such
contingent liabilities.
111
The Advisors and Advisor Funds will also be subject to
contingent liabilities, and the Company will be subject to
similar (or potentially greater) risks as those discussed above
through its investment in such Advisors and Advisor Funds.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
Not applicable.
The Company does not own or lease any physical properties. The
Company is operating at the Managing Members facility and
is not being charged rent except indirectly through the monthly
Management Fee.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
There are no material pending legal proceedings to which the
Company or the Managing Member is a party or to which any of
their assets are subject.
112
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
Information
Currently, there is no established public trading market for the
units. Other than transfers to the Company in redemption,
transfers of units are expressly prohibited by the
Companys LLC Agreement without the consent of the Managing
Member.
Units are subject to the restrictions on transfer contained in
the Companys LLC Agreement. Without the prior written
consent of the Managing Member, which may be withheld in its
sole discretion, a Member may not assign, pledge or otherwise
transfer its units in the Company in whole or in part, except by
operation of law pursuant to the death, adjudication of
incompetency, insolvency or bankruptcy of the Member, or
pursuant to the corporate reorganization or merger of the
Member, nor substitute any other person as a Member. No
transferee or assignee will be admitted as a Member without the
prior consent of the Managing Member, which may be withheld in
its sole discretion. A Member is permitted to redeem units upon
91 days prior written notice to the Managing Member
(unless such notice is waived by the Managing Member in its sole
discretion) as of the time immediately prior to the opening of
business on each January 1, April 1, July 1, and
October 1 occurring on or after the first anniversary of the
purchase of such units by the Member, but may be limited or
postponed under limited circumstances.
There are no outstanding options or warrants to purchase, or
securities convertible into, units of the Company.
The high and low NAV per Unit of the initial series of units for
Class A Series 1 of the Company during each quarterly
period from January 1, 2008 through December 31, 2009
are as follows:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
High
|
|
|
Low
|
|
|
|
3/31/08
|
|
|
$
|
153.37
|
|
|
$
|
150.25
|
|
|
6/30/08
|
|
|
$
|
154.91
|
|
|
$
|
152.11
|
|
|
9/30/08
|
|
|
$
|
150.92
|
|
|
$
|
141.06
|
|
|
12/31/08
|
|
|
$
|
135.68
|
|
|
$
|
131.92
|
|
|
3/31/09
|
|
|
$
|
133.05
|
|
|
$
|
132.78
|
|
|
6/30/09
|
|
|
$
|
136.59
|
|
|
$
|
133.78
|
|
|
9/30/09
|
|
|
$
|
142.06
|
|
|
$
|
138.14
|
|
|
12/31/09
|
|
|
$
|
143.89
|
|
|
$
|
141.81
|
|
The units have not been and will not be registered under the
Securities Act and may not be resold unless an exemption from
such registration is available. Members have no right to require
registration of the units and the Company does not intend to
register the units under the Securities Act or take any action
to cause an exemption (whether pursuant to Rule 144 of the
Securities Act or otherwise) to be available.
Record
Holders of Units of the Company
As of December 31, 2009, 4,736,483.29 units were held
by 591 Members.
Distributions
The Company has not made distributions from January 1, 2009
to December 31, 2009 other than distributions to facilitate
redemptions of individual Members. The Company does not
presently intend to make distributions to Members other than in
connection with redemptions of units.
Recent
Sales of Unregistered Units and Use of Proceeds
From January 1, 2009 to December 31, 2009, aggregate
subscriptions totaled $73,875,837. The Company previously
reported sales of unregistered units during the 2009 fiscal year
in the Companys Quarterly Reports on
Form 10-Q
and Current Reports on
Form 8-K.
In connection with each funding, the units were privately
offered and
113
old to accredited investors pursuant to Rule 506 of
Regulation D and the sales were exempt from registration
under the Securities Act. The Company has used substantially all
the proceeds to make investments in the Investment Funds.
Purchases
of Units by the Company and Affiliated Purchasers
Pursuant to the Companys LLC Agreement, holders of units
may redeem their units upon 91 days prior written
notice to the Managing Member (unless such notice is waived by
the Managing Member in its sole discretion), on each
January 1, April 1, July 1, or October 1
occurring on or after the first anniversary of the purchase of
such units by the Member (each, a
Redemption Date). Units of a particular series
will be redeemed at a per unit price based upon the NAV of such
series as of the close of business on the day (the
Valuation Date) immediately preceding the applicable
Redemption Date (taking into account the allocation of any
net appreciation or depreciation in the net assets of the
Company for the accounting period then ending), after reduction
for any Management Fee and Incentive Allocation (calculated as
if the applicable Valuation Date was the last day of the fiscal
year) and other liabilities of the Company to the extent accrued
or otherwise attributable to the units being redeemed.
The Company previously reported redemptions of units during 2009
in the Companys Quarterly Reports on
Form 10-Q.
There were 168,397.67 redemptions of units during the fourth
quarter ended December 31, 2009. Redemptions of $22,410,715
will be effective on January 1, 2010 and are reflected in
redemptions payable in the December 31, 2009 balance sheet.
See ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES.
Performance
Graph
The line graph below compares the cumulative total return on the
Companys units during the period from January 2005 through
December 31, 2009, with the return on the 3 Month LIBOR,
the Barclays U.S. Aggregate Index, the MSCI World Index and
the S&P 500 Index. These indices are unmanaged and the
figures for an index reflect the reinvestment of dividends but
do not reflect the deduction of any fees or expenses which would
reduce returns. The Members cannot invest directly in these
indices.
The Company has not paid any cash dividends in the past and does
not expect to pay any in the foreseeable future.
|
|
|
|
|
The performance of the Company is based on net returns for
Class A Series 1 Units. The performance of the units
shown in the graph is not necessarily indicative of future
performance.
|
114
|
|
|
|
|
General: References to market or composite indices,
benchmarks or other measures of relative market performance over
a specified period of time (for purposes of this section, each
an index) are provided for your information only.
Reference to an index does not imply that the portfolio will
achieve returns, volatility or other results similar to the
index. The composition of an index may not reflect the manner in
which a portfolio is constructed in relation to expected or
achieved returns, portfolio guidelines, restrictions, sectors,
correlations, concentrations, volatility or tracking error
targets, all of which are subject to change over time.
|
|
|
|
MSCI World Index: The Morgan Stanley Capital
International World Index is a price index of the total return
with dividends reinvested monthly net of dividend withholding
tax of a representative group of listed companies for each
region, with each component market weighted on the basis of
market capitalization relative to the total market
capitalization of the market being measured and adjusted for
changes in capital within the component firms.
|
|
|
|
S&P 500 Index: Standard & Poors
S&P 500 Index is an index based on the prices of the
securities of 500 different companies. Total returns are
calculated by adding the dividend income and price appreciation
for a given time period.
|
|
|
|
Barclays Aggregate Bond Index: Barclays Aggregate
Bond Index represents securities that are U.S. domestic,
taxable, and dollar denominated. The index covers the
U.S. investment grade fixed rate bond market, with index
components for government and corporate securities, mortgage
pass-through securities, and asset-backed securities. These
major sectors are subdivided into more specific indices that are
calculated and reported on a regular basis.
|
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
Set forth below is certain selected historical data for the
Company as of and for the years ended December 31, 2009,
2008, 2007, 2006 and 2005. The selected historical financial
data as of and for the years ended December 31, 2009, 2008,
2007, 2006 and 2005 were derived from the financial statements
of the Company, which were audited by Ernst & Young
LLP (E&Y). The information set forth below
should be read in conjunction with the financial statements and
notes thereto contained elsewhere in this Annual Report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Operations Data
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net trading gain/(loss)
|
|
$
|
60,555,634
|
|
|
$
|
(91,647,625
|
)
|
|
$
|
87,875,947
|
|
|
$
|
76,020,409
|
|
|
$
|
66,816,581
|
|
Total expenses
|
|
$
|
8,871,658
|
|
|
$
|
9,978,508
|
|
|
$
|
9,808,096
|
|
|
$
|
9,926,911
|
|
|
$
|
14,836,748
|
|
Net income/(loss)
|
|
$
|
51,843,963
|
|
|
$
|
(101,224,791
|
)
|
|
$
|
78,394,581
|
|
|
$
|
66,569,645
|
|
|
$
|
52,141,634
|
|
Less: Incentive allocation to the managing member
|
|
$
|
137,681
|
|
|
$
|
14,474
|
|
|
$
|
3,919,729
|
|
|
$
|
3,328,482
|
|
|
$
|
2,615,216
|
|
Net income/(loss) available for pro-rata allocation to members
|
|
$
|
51,706,282
|
|
|
$
|
(101,239,265
|
)
|
|
$
|
74,474,852
|
|
|
$
|
63,241,163
|
|
|
$
|
49,526,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Condition
|
|
Year Ended As of December 31,
|
|
Data
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Investments
|
|
$
|
586,435,496
|
|
|
$
|
614,788,663
|
|
|
$
|
702,436,288
|
|
|
$
|
686,250,341
|
|
|
$
|
1,124,329,933
|
|
Total assets
|
|
$
|
621,906,334
|
|
|
$
|
641,732,463
|
|
|
$
|
705,861,961
|
|
|
$
|
687,475,191
|
|
|
$
|
1,125,036,745
|
|
Total liabilities
|
|
$
|
24,208,299
|
|
|
$
|
31,796,392
|
|
|
$
|
25,077,879
|
|
|
$
|
25,400,717
|
|
|
$
|
350,437,862
|
|
Members equity
|
|
$
|
597,698,035
|
(1)
|
|
$
|
609,936,071
|
(2)
|
|
$
|
680,784,082
|
(3)
|
|
$
|
662,074,474
|
(4)
|
|
$
|
774,598,883
|
(5)
|
Ending NAV/Unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Series 1
|
|
$
|
143.89
|
|
|
$
|
131.92
|
|
|
$
|
152.88
|
|
|
$
|
137.10
|
|
|
$
|
125.75
|
|
|
|
|
(1) |
|
The reduction in members equity as of December 31,
2009 reflects redemptions payable in the amount of $22,410,715
at December 31, 2009. |
115
|
|
|
(2) |
|
The reduction in members equity as of December 31,
2008 reflects redemptions payable in the amount of $28,982,893
at December 31, 2008. |
|
(3) |
|
The reduction in members equity as of December 31,
2007 reflects redemptions payable in the amount of $22,708,145
at December 31, 2007. |
|
(4) |
|
The reduction in members equity as of December 31,
2006 reflects redemptions payable in the amount of $23,701,199
at December 31, 2006. |
|
(5) |
|
The reduction in members equity as of December 31,
2005 reflects redemptions payable in the amount of $347,523,596
at December 31, 2005. |
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The following discussion should be read in conjunction with the
audited financial statements of the Company and the related
notes thereto appearing elsewhere in this Annual Report,
ITEM 6. SELECTED FINANCIAL DATA, and
ITEM 1A. RISK FACTORSSpecial Risks of the
Companys StructureRisks Related to the
Companys StructureThe Companys Financial
Statements Are, and in the Future Will Ultimately be, Based on
Estimates of Valuations Provided by Third Party Advisors Which
May not be Accurate or May Need to be Adjusted in the
Future.
The Company is a Delaware limited liability company organized in
March 2002 to operate as an investment fund. It commenced
operations on April 1, 2002. GS HFS, a Delaware limited
liability company, serves as the Companys Managing Member.
As of December 31, 2009, the Company had total assets of
$621,906,334 compared with total assets of $641,732,463 as of
December 31, 2008. Total liabilities of the Company were
$24,208,299 as of December 31, 2009 compared with
$31,796,392 as of December 31, 2008. Members equity
of the Company was $597,698,035 as of December 31, 2009
compared with $609,936,071 as of December 31, 2008.
The Companys investment objective is to target attractive
long-term risk-adjusted returns across a variety of market
environments with volatility and correlation that are lower than
those of the broad equity markets. To achieve this objective,
the Company allocates all or substantially all of its assets
among investment funds managed by the Managing Member (such
funds and any successor funds thereto, individually, an
Investment Fund and collectively the
Investment Funds), each of which (directly or
through other entities) allocates its assets to, or invests in
entities managed by, independent investment managers
(collectively, the Advisors) that employ a broad
range of investment strategies primarily within one or more of
the following hedge fund sectors (each, an Investment
Sector and, collectively, the Investment
Sectors): the tactical trading sector, the equity
long/short sector, the relative value sector and the event
driven sector. Currently, substantially all of the
Companys assets are invested in four Investment Funds,
each of which is managed by the Managing Member. The current
Investment Funds are Goldman Sachs Global Tactical Trading, LLC
(GTT), which employs investment strategies in the
tactical trading sector; Goldman Sachs Global Equity Long/Short,
LLC (GELS), which employs investment strategies
within the equity long/short sector; Goldman Sachs Global
Fundamental Strategies, LLC (GFS), which employs
investment strategies within the event driven sector; and
Goldman Sachs HFP Opportunistic Fund, LLC (HFPO),
which employs investment strategies within one or more of the
Investment Sectors. The balance of the Companys assets are
invested in Goldman Sachs Global Fundamental Strategies Asset
Trust (GFS Trust), which is a trust containing
certain interests in illiquid assets transferred by GFS, and
Goldman Sachs Global Relative Value, LLC (GRV and
together with GFS Trust and the Investment Funds, the
Investees), which is in the process of liquidation.
In addition, the Company may, directly or indirectly, allocate
assets to Advisors whose principal investment strategies are not
within one of the hedge fund sectors referenced herein.
Performance of the Company in any period will be dependent upon
the performance in the relevant period by the Investees and the
weighted average percentage of the Companys assets in each
of the Investees during the
116
period. In addition, performance is determined by the allocation
by the Investment Funds of their assets with the various
Advisors and the performance of each of those Advisors.
While the Managing Member currently expects to allocate assets
to all the Investment Sectors through allocations to the
Investment Funds, since April 1, 2008, the Managing Member
has had no constraints with respect to the percentage of the
Companys assets to be allocated, directly or indirectly,
to any single Advisor, group of Advisors, Investment Fund, or
Investment Sector, or with respect to the number of Investment
Funds and Advisors to which, directly or indirectly, assets of
the Company are allocated at any time. The percentage of the
Companys assets to be allocated to any single Advisor,
group of Advisors, Investment Fund or Investment Sector, and the
number of Investment Funds and Advisors to which the Company
allocates assets from time to time will be determined by the
Managing Member in its sole discretion, based on factors deemed
relevant by the Managing Member at the time of such allocation,
which may include the amount of the Companys assets under
management, constraints on the capital capacity of the
Investment Funds and Advisors, the availability of attractive
opportunities, and other portfolio construction and portfolio
management considerations.
The performance described herein is based in part on estimates
of the recovery value of the Advisors claims against
Lehman Brothers Holdings, Inc. and for certain subsidiaries and
affiliates (Lehman), including cash claims involving
amounts owed to the Advisors by Lehman
and/or
proprietary claims involving the recovery of the Advisors
assets held by Lehman at the time of its insolvency. These
estimates are based on information received from the majority,
but not all of, the Advisors, and the Company has no way of
independently verifying or otherwise confirming the accuracy of
the information provided. As a result, there can be no guarantee
that such estimates are accurate. There is significant
uncertainty with respect to the ultimate outcome of the Lehman
insolvency proceedings, and therefore the amounts ultimately
recovered in respect of the Advisors claims against Lehman
could be materially different than such estimates. Based on the
information received, the gross indirect exposure to Lehman did
not materially affect the Companys Members Equity.
The managing member of GFS recently created GFS Trust, a
Delaware statutory trust, for the benefit of its investors,
including the Company. On March 31, 2009, GFS transferred
to GFS Trust its interest in certain illiquid investments,
including illiquid investments made by Advisor Funds, as well as
liquidating vehicles that Advisors formed as liquidity decreased
for previously liquid investments, such as certain credit
instruments. See Liquidity and Capital
Resources for a further discussion of GFS Trust.
GRV ceased trading activities effective July 1, 2009 and
will dissolve at the time all assets are liquidated, liabilities
are satisfied and liquidation proceeds are distributed through
payment of a liquidating distribution. Investors in GRV
(including the Company) will receive proceeds from the
liquidation over time as GRV receives redemption proceeds from
Advisors. The Company is reinvesting the liquidation proceeds it
receives from GRV in accordance with the Companys
investment program. See Liquidity and Capital
Resources and ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISKRisk
Management.
The Companys results depend on the Managing Member,
including in its capacity as managing member of each of the
Investment Funds, and the ability of the Managing Member to
recognize and capitalize on trends and other profit and
investment opportunities within the Investment Sectors. Unlike
many operating businesses, general economic or seasonal
conditions may not have any direct effect on the profit
potential of the Company due to the uncertain nature of the
Companys investments and since the Companys
investments in the Investment Funds are managed to seek to
eliminate or reduce the impact of general economic or seasonal
conditions. In addition, the Companys past performance is
not necessarily indicative of future results. Each Investment
Fund allocates assets to Advisors that invest in various markets
at different times and prior activity in a particular market
does not mean that such market will be invested in by the
Advisors or will be profitable in the future.
Results
of Operations
The following presents a summary of the operations for the years
ended December 31, 2009, 2008 and 2007, and a general
discussion of each Investees performance during those
periods. The Investees dealing net asset value
(NAV) and reported performance are prepared using
the latest information available from the Advisor Funds at the
time of such valuation in accordance with their Limited
Liability Company Agreement. The Investees investments in
the Advisor Funds are determined utilizing NAVs supplied by, or
on behalf of, the Advisors of each
117
Advisor Fund. Furthermore, NAVs received from the administrator
of the Advisor Funds may be estimates and such values will be
used to calculate the NAV of the Investees for purposes of
determining amounts payable on redemptions and reported
performance of the Investees. Such estimates provided by the
administrators of the Advisor Funds may be subject to subsequent
revisions which may not be reflected in the Investees
final month-end dealing NAV. The annual audited financial
statements may reflect adjustments for such subsequent revisions
which may result in a variance between the Investees total
return reported in their audited financial statements and the
reported performance based on the month-end dealing NAV.
2009
Performance
The Companys net trading gain/(loss) for the year ended
December 31, 2009 was $60,555,634 compared to the year
ended December 31, 2008 of $(91,647,625).
Overview
The Company is designed to be broadly exposed to the hedge fund
market by allocating its assets to the Investment Funds in the
Investment Sectors. As further described under ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKRisk Management, quantitative analysis is
combined with judgment to determine weightings and strategic
return, risk and correlation estimates to inform the
quantitative analysis. Judgment is applied to both estimates and
weights in an attempt to achieve exposure to hedge funds while
targeting attractive risk adjusted returns. The investment
markets experienced four distinct phases during 2009: As the
turmoil of 2008 spilled over into the early part of 2009,
investors attention during the first quarter of 2009
continued to focus on whether systemic financial and economic
disaster would be averted, and the unprecedented levels of
fiscal and monetary stimulus from policymakers. As these fears
showed signs of dissipating during the second quarter of 2009,
investors began to focus on whether the environment was
stabilizing in a robust and lasting manner. In this context, the
driving theme of the third quarter of 2009 was on building from
these steadier foundations to examine whether improved momentum
would actually translate into a sustainable economic recovery.
There were a number of positive signs and developments in this
regard during the third quarter of 2009, both in terms of
economic data as well as the performance of certain asset
classesparticularly equities and credit. However, as the
third quarter of 2009 drew to a close, there were signs that
momentumat least in some areaswas waning. As a
result during the fourth quarter of 2009, investors conducted a
nuanced examination of where the recovery flourished most and
where it looked most fragile, and the momentum in market rallies
showed signs of fading as a result.
Equity and credit markets rebounded strongly from their 2008
lows during 2009, helping many Advisors produce strong returns.
World equities (proxied by the MSCI AC World Index) returned
34.6% during 2009 (compared to a 42.2% loss in 2008the
biggest in its
40-year
history). However, the strong overall yearly performance hides a
significant intra-year shift: between January 1, 2009
and March 9, 2009, world equities dropped 22.9%, but
subsequently rallied 74.6% through the end of 2009. Similarly,
credit markets also rallied through much of 2009, as the Credit
Suisse High Yield Index rose 54.2% and the S&P Leveraged
Loan 100 Index rose 52.2% for 2009.
Many Advisors protected capital well in the first couple of
months of 2009 while equity markets were still falling, by being
defensively positioned coming into the year. However, a number
of Advisors took a cautious approach in increasing market
exposure as market conditions changed towards the end of the
first quarter, of 2009, and consequently their performance
lagged during the early part of these rallies. Through the rest
of 2009, Advisors selectively increased gross and net exposure
to participate more in the strong market direction. This
benefited strategies with greater exposure to equities and
credit markets, such as event driven and equity long/short
strategies. Trend following strategies found conditions more
difficult to navigate: for much of the year, this was due to
declining volatility and a lack of clear market trends. Towards
the end of the year, trends returned, but sharply reversed in
October and November, which also made conditions challenging.
The Company cannot predict which Investment Sector and
accordingly which Investee will perform best in the future. The
table below illustrates the portfolio weighting of each Investee
as of December 31, 2009, as well as each Investees
net return for the year ended December 31, 2009.
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
Portfolio Weight
|
|
|
Portfolio Weight
|
|
|
December 31,
|
|
|
|
as a % of
|
|
|
as a % of Adjusted
|
|
|
2009
|
|
Investee
|
|
Members
Equity (1)
|
|
|
Members
Equity (2)
|
|
|
Net Return (3)
|
|
|
GELS
|
|
|
39.40
|
%
|
|
|
37.98
|
%
|
|
|
13.37
|
%
|
GFS
|
|
|
22.17
|
%
|
|
|
21.36
|
%
|
|
|
19.10
|
%
|
GFS Trust
|
|
|
6.28
|
%
|
|
|
6.05
|
%
|
|
|
5.06
|
%(4)
|
GRV
|
|
|
0.82
|
%
|
|
|
0.79
|
%
|
|
|
6.70
|
%
|
GTT
|
|
|
25.97
|
%
|
|
|
25.03
|
%
|
|
|
6.35
|
%
|
HFPO
|
|
|
3.48
|
%
|
|
|
3.36
|
%
|
|
|
11.27
|
%
|
|
|
|
(1) |
|
Members equity, used in the calculation of the fair value
of the Investees as a percentage of members equity, is
reduced for member redemptions that are paid after the balance
sheet date according to ASC 480, Distinguishing
Liabilities from Equity. |
|
(2) |
|
Adjusted members equity, used in the calculation of the
fair value of the Investees as a percentage of adjusted
members equity, represents members equity excluding
Redemptions payable in the amount of $22,410,715 at
December 31, 2009. |
|
(3) |
|
These returns are based on the performance of Class C
Series 1 units for GELS, GFS, GRV and GTT and
Class A Series 1 units for HFPO and GFS Trust
interests for GFS Trust. The returns include administration
fees. No management fee or incentive allocation was charged by
the managing member of the Investment Funds with respect to the
Companys investment in any of the Investment Funds. Past
performance is not indicative of future results, which may vary. |
|
(4) |
|
GFS Trust commenced operations on March 31, 2009. The
return is for the period from March 31, 2009 to
December 31, 2009. |
For the year ended December 31, 2009, the Companys
Class A Series 1 units returned 9.07% net of fees
and incentive allocation.
The
Investees
Each of the Investees performance during the year ended
December 31, 2009 is described in the following.
Goldman
Sachs Global Equity Long/Short, LLC
As of December 31, 2009, GELS represented approximately 38%
of the Companys adjusted members equity, which
excluded redemptions paid after December 31, 2009. GELS
returned 13.37% for Class C Series 1 units for
the year ended December 31, 2009.
GELS Advisors started 2009 with a strong first quarter and, as a
group, GELS Advisors reported positive performance during the
first quarter and outperformed developed market equity indices.
In the first quarter of 2009, GELS Advisors largely continued to
operate with lower levels of gross and net exposure which helped
them preserve capital and limit portfolio volatility in the
challenging market environment of 2008. Throughout the first
quarter, equity markets experienced a wide dispersion of both
intra- and inter-sector performance which rewarded GELS Advisors
for strong security selection and low levels of net equity
exposure as they generated profits from the performance spread
between long and short positions. Several GELS Advisors in the
portfolio took advantage of the weakness in the cyclicals,
financials, industrials, and REIT sectors and generated
significant gains through short positions. Top performing GELS
Advisors also used the market volatility to their advantage by
actively trading individual positions and adjusting fund
exposures during the market sell-offs and rallies. In the first
quarter, underperforming GELS Advisors tended to have the
highest levels of net exposure, particularly in the financials,
energy, and industrials sectors.
Positive performance for the GELS Advisors continued in the
second quarter of 2009 as global equity markets experienced a
sustained rally in April and May. In April and May,
conservatively positioned GELS Advisors tended to underperform
those GELS Advisors with higher levels of net exposure and
exposure to more cyclical sectors
119
including consumer discretionary, industrials, and financials.
Short positions broadly detracted from performance and led to
losses by GELS Advisors. However, the equity rally slowed in
June and many of the sectors that had benefitted from the April
and May rally, such as industrials, metals and banks, traded
down during June. As a result, the more aggressively positioned
GELS Advisors with higher levels of net exposure to these
sectors realized losses and underperformed their more
conservatively positioned peers.
Equity markets continued their rally in the third quarter of
2009, with the performance of GELS Advisors very similar to that
of April and May. Throughout the third quarter, top performing
GELS Advisors included those with the highest levels of net
exposure, particularly in levered, early-cyclical high beta
sectors that benefited the most from the economic recovery. The
majority of GELS Advisors negative performance during the
third quarter 2009 was due to loss from short positions. More
conservatively positioned GELS Advisors with high levels of
short and long exposure concentrated in more defensive sectors
like healthcare, consumer staples, media/telecom, and utilities
were typically among the worst performers.
GELS Advisors finished 2009 with positive performance in the
fourth quarter, benefitting from the broad based rally in global
equity markets during November and December. As has been the
case for much of 2009, performance was largely dictated by GELS
Advisors levels of market exposure. In October, when
equity markets declined globally, GELS Advisors who positioned
their portfolios with some of the highest levels of net exposure
realized the largest losses, with long positions in the consumer
sector being particularly costly for select GELS Advisors. Top
performing GELS Advisors in October benefited from strong short
position performance, more neutral portfolio positioning, and
strong stock selection as quarterly earnings served as a
positive catalyst for specific names on both the long and short
sides. November and December were similar in that, broadly
speaking, GELS Advisors with higher gross and net exposure
performed strongly, particularly those GELS Advisors with long
exposure in technology, healthcare, consumer/retail, and
media/telecom sectors. In November, underperforming GELS
Advisors realized losses from short positions in the natural
resources, industrials, and materials sectors. In December,
weaker performance came from GELS Advisors who realized
significant losses from short positions in small cap and more
cyclical stocks. Meanwhile, GELS Advisors with long positioning
focused towards natural resources, industrials, and materials
tended to underperform relative to peers.
For the year, catalyst/activist focused GELS Advisors generated
strong returns as markets recovered from their lows. Key drivers
of returns included positions in the real estate, financials,
business services, and consumer sectors as such positions
reacted positively to the recovering market environments. Short
positions held by GELS Advisors detracted during 2009 as it was
challenging to find positions not buoyed by the general market
strength.
Trading-oriented GELS Advisors underperformed other GELS
Advisors as they maintained balanced net exposures in what
turned out to be a strong equity market. Generally, these GELS
Advisors maintained bearish portfolios coming into 2009 with
long exposure primarily to defensive names and short exposure to
what such GELS Advisors believed to be low quality names. This
positioning proved to be difficult as the strong rally in the
equity markets caused low quality stocks to outperform defensive
stocks.
Value focused GELS Advisors benefited from rising global equity
prices in 2009, as equity multiples from crisis level, short
positions held by GELS Advisors negatively impacted performance,
value focused GELS Advisors achieved gains from well timed short
positions in the financials and consumer sectors.
After building exposure throughout 2009, by the end of the year
many of the GELS Advisors were close to fully invested levels.
GELS Advisors noted that the strongly directional markets in
2008 and 2009 presented a challenging environment in which to
generate profits, and performance was driven largely by
portfolio positioning.
Goldman
Sachs Global Fundamental Strategies, LLC
As of December 31, 2009, GFS represented approximately 21%
of the Companys adjusted members equity, which
excluded redemptions paid after December 31, 2009. GFS
returned 19.10% for Class C Series 1 units for
the year ended December 31, 2009.
GFS Advisors performed reasonably well in a year marked by
strong rallies across the equity and credit markets.
Credit-oriented situations were the largest contributors to
performance during 2009 as the portfolio had ample exposure to
GFS Advisors dedicated to credit and multi-strategy managers who
allocated significantly to
120
credit-oriented situations. Within credit strategies, GFS
Advisors profited from a rebound in deeply discounted performing
leveraged loans, a strong rally in the high yield bond market
and a number of bankruptcy situations that were resolved during
2009. Distressed mortgage-backed securities and convertible
bonds also performed well as these markets experienced renewed
investor interest and benefited from substantially improved
liquidity conditions. Additionally, while the level of mergers
and acquisition activity was still below the peak levels
recorded in 2007, exposure to select merger arbitrage
transactions contributed meaningfully to return.
As noted, credit-oriented situations were the largest
contributors to performance throughout 2009 while single name
short positions and portfolio hedges detracted from returns. The
credit markets benefited from significant mutual fund inflows
into the high yield and leveraged loan markets during 2009. This
trend was helpful to several credit-oriented and multi-strategy
GFS Advisors who started the year with net long credit exposure.
Additionally, this accommodative backdrop for credit markets in
the first half of 2009 set the stage for major recapitalization
events in the second half of the year. For example, CIT Group,
Inc., Lear Corporation, and Charter Communications, Inc. were
each able to file for and exit from bankruptcy protection over
the course of the year, which is a testament to the
markets willingness to provide exit financing. Several GFS
Advisors held positions that benefited from the successful
restructuring of these companies. In some cases, GFS Advisors
were active participants in the restructuring process and
negotiations. Also, convertible bond strategies performed
particularly well during the year given a strong rally from
dislocated price levels from late 2008. Also, during 2009,
several GFS Advisors approached convertible bonds as distressed
opportunities rather than as a traditional arbitrage strategy.
Merger arbitrage was also a significant contributor to
performance in 2009. GFS Advisors were significantly invested in
major deals such as Rohm and Haas Company / The Dow Chemical
Company, Genentech, Inc. / Roche Holding, Ltd., Wyeth / Pfizer
Inc., Schering Plough Corporation / Merck & Co. Inc.
Multi-strategy GFS Advisors invested in these merger arbitrage
transactions with the view that broken deals were less likely
given the strategic nature of the transactions, the superior
credit quality of the acquirers and the attractiveness of
arbitrage spreads given a diminished amount of competing
capital. Overall, 2009 ended with the successful completion of
each of the major merger transactions highlighted above and no
major failed transactions.
Goldman
Sachs Global Fundamental Strategies Asset Trust
As of December 31, 2009, GFS Trust represented
approximately 6% of the Companys adjusted members
equity, which excluded redemptions paid after December 31,
2009. Performance information for GFS Trust for the year ended
December 31, 2009 cannot be provided because GFS Trust was
formed on March 31, 2009. GFS Trust returned 5.06% for the
period from March 31, 2009 to December 31, 2009. See
Liquidity and Capital Resources for a further
discussion of GFS Trust.
Goldman
Sachs Global Tactical Trading, LLC
As of December 31, 2009, GTT represented approximately 25%
of the Companys adjusted members equity, which
excluded redemptions paid after December 31, 2009. GTT
returned 6.35% for Class C Series 1 units for the
year ended December 31, 2009.
The tactical trading sector delivered positive performance in
2009, as a positive contribution from macro GTT Advisors was
only slightly offset by small losses from managed futures GTT
Advisors. During the first half of 2009, macro GTT Advisors
capitalized on opportunities across asset classes resulting in
strong gains despite small losses toward the end of the second
quarter of 2009. Managed futures GTT Advisors experienced
difficulty in the first half of the year, although risk remained
low through much of the second quarter. Strong gains in the
third quarter of 2009 prompted both macro and managed futures
GTT Advisors to increase risk over this period. This proved
difficult for managed futures GTT Advisors as there were sharp
trend reversals across asset classes during the fourth quarter
of 2009. Macro GTT Advisors also had a difficult time toward the
end of 2009 but held on to gains as discretionary risk reduction
proved to be prudent.
Macro GTT Advisors delivered strong performance in 2009,
profiting during each quarter of the year. During the first
quarter of 2009, macro GTT Advisors experienced mixed
performance, particularly around the mid-March announcement from
the U.S. Federal Reserve on quantitative easing. The second
quarter of 2009 experienced strong performance, particularly in
May as GTT Advisors benefited from global yield curve
steepeners, long gold
121
positions, and short U.S. Dollar positions. However, some
of Mays gains were given back in June trading. The third
quarter of 2009 experienced very strong performance for macro
GTT Advisors, posting gains in each month, although quieter
market activity in August caused gains to be more muted as
compared to July and September. In the third quarter of 2009,
macro GTT Advisors continued to profit from year-to-date trends
including long positions at the front-end of global yield
curves, long equity positions, long positions in commodity and
emerging market currencies compared to the U.S. Dollar, and
long gold positions. The fourth quarter of 2009 proved to be a
difficult trading environment due to increased asset class
correlations and acute market reversals. Macro GTT
Advisors focus on liquid markets allowed GTT Advisors
to be nimble with respect to risk reduction, which proved to be
prudent toward the end of the fourth quarter of 2009.
Managed futures GTT Advisors experienced difficulty trading in
2009 as volatility decreased over the year and markets
experienced sharp reversals. Managed futures GTT Advisors
found the environment through the first few quarters of 2009
difficult for trading due to the choppy nature of market trends.
Returns were fairly muted during January and February, but trend
reversals in March led to losses for the first quarter of 2009.
GTT Advisors experienced roughly flat performance during
the second quarter of 2009. Marchs losses led into April
and while May was an extremely strong month for managed futures
strategies, managed futures GTT Advisors gave back much of
Mays gains in June. The third quarter of 2009 was strong
as the strategy benefited from a continuation of trends within
select markets, particularly within the equity and currency
sectors. Managed futures strategies were positive over the third
quarter of 2009 after posting small losses in July. Generally,
longer-term trend-followers outperformed shorter-term strategies
as many markets experienced large trends over the third quarter
of 2009. While managed futures GTT Advisors profited from strong
trends in the third quarter of 2009, these trends proved highly
correlated, resulting in sharp swings in performance as many
risky assets declined in October, rose in November and declined
again in December. High correlations combined with increased
risk taking after a strong third quarter lead to losses in the
fourth quarter of 2009.
Goldman
Sachs HFP Opportunistic Fund, LLC
As of December 31, 2009, HFPO represented approximately 3%
of the Companys adjusted members equity, which
excluded redemptions paid after December 31, 2009. HFPO
returned 11.27% for Class A Series 1 units for
the year ended December 31, 2009.
The tactical trading HFPO Advisor contributed positively to
performance in 2009. This HFPO Advisors discretionary
macro trading was a key driver of returns, but all strategies
with the exception of the equity arbitrage strategy were
positive during 2009. The equity long/short HFPO Advisor
contributed positively to performance in 2009. This
HFPO Advisors exposure to the energy, industrials and
materials sectors were the key drivers of returns, but some
losses were generated from exposure to the utilities sector.
From a geographical standpoint, the vast majority of gains were
generated in North America.
Goldman
Sachs Global Relative Value, LLC
As of December 31, 2009, GRV represented approximately 1%
of the Companys adjusted members equity, which
excluded redemptions paid after December 31, 2009. GRV
returned 6.70% for Class C Series 1 units for the
year ended December 31, 2009. GRV ceased its trading
activities effective July 1, 2009 and will dissolve at the
time all assets are liquidated, liabilities are satisfied and
liquidation proceeds are distributed through payment of a
liquidation distribution. Investors in GRV (including the
Company) will receive proceeds from the liquidation over time as
GRV receives redemption proceeds from Advisor Funds. The Company
expects to reinvest the liquidation proceeds it receives from
GRV in accordance with the Companys investment program.
See Liquidity and Capital Resources for a
further discussion of GRV.
2008
Performance
The Companys net trading profit/(loss) for the year ended
December 31, 2008 was $(91,647,625) compared to the year
ended December 31, 2007 of $87,875,947.
122
Overview
Global markets experienced extraordinarily high volatility
during 2008 amidst numerous systemic shocks and doubts over the
stability of the financial system. During 2008, the Company
experienced the weakest equity markets since the Great
Depression and unprecedented credit market dislocations
including high yield spreads that reached more than double the
highs of the recession in 2002. While most hedge fund strategies
still significantly outperformed broad equity market indices,
hedge funds, including the Company, were not immune from these
events and experienced their most challenging year on record,
with most funds, including the Company, recording negative
returns.
During the first half of 2008, hedge funds were able to
outperform broader markets as managers successfully captured
thematic opportunities. Some of the successful trends and
strategies included long positions in commodities, short
positions in financials, long positions in emerging as compared
to developed markets, short positions in the U.S. dollar,
long positions in fixed income and yield curve trading. However,
even in the first half of 2008, adept risk management was key to
maintaining profits amidst major reversals including, for
example, following the bail out of Bear, Stearns & Co.
in mid-March. However, the second half of 2008 proved to be much
more challenging for hedge funds and the Company. Since mid
July, a number of trends abruptly reversed as markets focused
more on global economic weakness and risk aversion led to
repatriation of overseas investments and a flight to
safety that has benefited the U.S. dollar and hurt
investments globally. The table below illustrates the portfolio
weighting of each Investee as of December 31, 2008, as well
as each Investees net return for the year ended
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Weight
|
|
|
Portfolio Weight as
|
|
|
Year Ended
|
|
|
|
as a% of
|
|
|
a% of Adjusted
|
|
|
December 31, 2008
|
|
Investee
|
|
Members
Equity (1)
|
|
|
Members
Equity (2)
|
|
|
Net Return (3)
|
|
|
GELS
|
|
|
29.89
|
%
|
|
|
28.53
|
%
|
|
|
(16.75
|
)%
|
GFS
|
|
|
34.79
|
%
|
|
|
33.21
|
%
|
|
|
(19.18
|
)%
|
GRV
|
|
|
9.68
|
%
|
|
|
9.24
|
%
|
|
|
(9.37
|
)%
|
GTT
|
|
|
19.53
|
%
|
|
|
18.65
|
%
|
|
|
3.27
|
%
|
HFPO
|
|
|
6.91
|
%
|
|
|
6.59
|
%
|
|
|
(4.51
|
)%
|
|
|
|
(1) |
|
Members equity, used in the calculation of the fair value
of the Investees as a percentage of members equity, is
reduced for member redemptions that are paid after the balance
sheet date according to ASC 480, Distinguishing
Liabilities from Equity. |
|
(2) |
|
Adjusted members equity, used in the calculation of the
fair value of the Investees as a percentage of adjusted
members equity, represents members equity excluding
Redemptions payable in the amount of $28,982,893 at
December 31, 2008. |
|
(3) |
|
These returns are based on the performance of Class C
Series 1 units for GELS, GFS, GRV and GTT and
Class A Series 1 units for HFPO. The returns
include administration fees. No management fee or incentive
allocation was charged by the managing member of the Investees
with respect to the Companys investment in any of the
Investees. Past performance is not indicative of future results,
which may vary. |
For the year ended December 31, 2008, the Companys
Class A Series 1 units returned (13.71)% net of
fees and incentive allocation.
The
Investees
Each of the Investees performance during the year ended
December 31, 2008 is described in the following.
Goldman
Sachs Global Equity Long/Short, LLC
As of December 31, 2008, GELS represented approximately 29%
of the Companys adjusted members equity which
excluded redemptions paid after December 31, 2008. GELS
returned (16.75)% for Class C Series 1 units for
the year ended December 31, 2008.
123
For the first half of the year, despite very volatile global
equity markets, many GELS Advisors were able to outperform
global markets, with several achieving strong gains. Many GELS
Advisors entered the year with reduced risk levels given the
uncertainty. Lower risk levels benefited GELS Advisors as the
year had a difficult start as January experienced significant
intra-month volatility and a wide dispersion of performance by
GELS Advisors. January experienced broad-based selling globally,
led by sectors and markets which realized the largest gains in
2007, including energy, technology and emerging markets. In
February, markets continued downward, although many GELS
Advisors posted gains as a rise in commodity related equities
and short positions in the financials, telecom and technology
sectors benefited portfolios. March, much like January,
experienced significant intra-month volatility. GELS Advisors
accumulated losses due to a rally in the financials sector
during the second half of the month, while weakness in long
energy/commodity positions and long emerging market positions
also weighed on returns. GELS Advisors broadly benefited as
markets seemed to rebound in April and May. Top performing GELS
Advisors had long exposure to energy, basic materials and
technology equities, as well as short positions in financials.
However, the second quarter of 2008 ended much as it had begun.
In June, the equity markets reversed and gave back all of April
and Mays gains. Even so, many of the GELS Advisors
mitigated losses and a number of GELS Advisors finished the
second quarter in positive territory.
The second half of 2008 was one of the most difficult periods
for GELS Advisors on record because of extreme reversals in
themes that worked during the first quarter of 2008 and a
significant increase in equity market volatility globally. The
second half of 2008 was also impacted by short selling
restrictions across a variety of regions and sectors, negatively
affecting some GELS Advisors. The increase in volatility and
government regulation during the second half of 2008 negatively
impacted GELS Advisors, driving losses for the year. Over the
third quarter, GELS Advisors experienced an extreme reversal in
many of the key drivers of performance for the first half of the
year. In July, there was a sharp second half rally in the
financials sector and steep losses among energy and materials
stocks. Long positions in energy and materials names and short
positions in financials and real estate contributed to losses
for a number of the GELS Advisors. In September, equity markets
globally experienced unprecedented volatility as dramatic
developments in the financial sector, including the ban on short
selling in varying degrees globally, created a difficult
investing environment. Continued de-levering led to downward
pressure across all sectors, particularly the energy and
materials sectors as well as selected technology and telecom
companies. The rapidly changing environment in the financials
sector also led to increased volatility among financial firms
which led to both gains and losses for GELS Advisors.
The fourth quarter was one of the most difficult on record for
GELS Advisors as they faced historic levels of equity market
volatility and sharply declining equity prices. The equity
long/short investment sector ended the quarter and the year
negative. The fourth quarter had a difficult start in October as
continued de-levering led to downward pressure across all
sectors, particularly in energy, materials, agriculture,
consumer, financials and emerging markets equities. GELS
Advisors with the highest levels of net exposure declined the
most, particularly those with exposure to the hardest hit
sectors. Selected single stock short positions also detracted
from performance. Many of the challenges in October continued
into November, namely widespread selling of equities and
elevated volatility. Once again a small group of GELS Advisors
were responsible for the bulk of the losses. Exposure to
healthcare, materials, technology and consumer discretionary
spending accounted for the majority of losses. In October and
November, selected GELS Advisors were able to generate profits
from short positions in financial, consumer and real estate
sectors, while also profiting from short term opportunistic
trading. December experienced a small rebound in equity markets
and a decrease in volatility; however, this decrease in
volatility combined with GELS Advisors low risk levels led to
muted returns across the sector. Top performing GELS Advisors
benefited from net long exposure in consumer, healthcare and
technology positions, while bottom performing GELS Advisors
realized losses from short exposure in consumer
discretionary/retail and financials stocks, as well as long
exposure in energy. Despite steep losses in October and
November, GELS Advisors outperformed global equity indices
during the quarter as many GELS Advisors maintained low levels
of gross and net exposure and were able to avoid significant
long book losses and generate profits through short holdings.
There was a strong correlation between the GELS Advisors
exposures and their performance during the fourth
quarterGELS Advisors with higher levels of exposure and
more concentrated portfolios were more susceptible to the market
swings and tended to underperform their equity long/short peers.
124
Goldman
Sachs Global Fundamental Strategies, LLC
As of December 31, 2008, GFS represented approximately 33%
of the Companys adjusted members equity which
excluded redemptions paid after December 31, 2008. GFS
returned (19.18)% for Class C Series 1 units for
the year ended December 31, 2008.
Despite negative performance from global equity and credit
markets over the first half of the year, many GFS Advisors
performed reasonably well. Hedges and short positions were
meaningful contributors to performance as GFS Advisors entered
the year with a defensive stance. Hedges implemented through
subprime mortgage bonds, emerging/developed markets credit and
equity indices helped to dampen volatility. The second half of
2008 witnessed a significant increase in volatility across
equity and credit markets in addition to a drying up of
liquidity. Despite finishing the first half of 2008 in positive
territory, performance reversal in a number of commonly held
positions and concentrated sectors combined with the increase of
volatility and lower levels of liquidity significantly hurt GFS
Advisors erasing the first quarter gains and leading to large
losses for the sector for 2008. In the second half of the year,
GFS experienced a significant amount of volatility and negative
performance in what has been widely noted as the most difficult
period for hedge funds on record. GFS Advisors with exposure to
emerging markets and materials/commodity related companies
suffered disproportionately as these trades reversed.
Credit-oriented GFS Advisors also experienced significant losses
due to poor liquidity and broad declines in asset prices.
Credit-oriented GFS Advisors were the largest contributors to
performance for the first half of 2008. Short subprime exposures
drove profits in the first quarter. In the second quarter, most
credit-oriented GFS Advisors were able to protect capital as
many of them were positioned to have neutral to net short
exposure to the market given their cautious view on the broader
markets. Equity and credit market hedge positions proved to be
beneficial for GFS Advisors. In the second half of the year,
credit oriented GFS Advisors had difficulty as the bank debt and
high yield bond markets traded down on technical pressure and
became even more illiquid. Difficult conditions in the credit
markets were exacerbated by concerns about counterparty risk and
its effect on credit default swap positions.
Merger arbitrage was mixed in 2008. GFS Advisors experienced
losses in the first quarter as major deals such as Clear Channel
Communications, Inc., BCE Inc. and Alliance Data Systems
Corporation traded down on heightened concerns about financing.
However, the announcement that the leveraged buy-out of Clear
Channel Communications, Inc. came to a conclusion on
re-negotiated terms in the second quarter led to profits for
some GFS Advisors. This was slightly offset by the announcement
of the Hexion/Huntsman deal break. In the second half of 2008,
several GFS Advisors profited from Anheuser-Buschs
$52 billion announced acquisition by InBev while others
were hurt in September as merger spreads widened significantly.
Goldman
Sachs Global Relative Value, LLC
As of December 31, 2008, GRV represented approximately 9%
of the Companys adjusted members equity which
excluded redemptions paid after December 31, 2008. GRV
returned (9.37)% for Class C Series 1 units for
the year ended December 31, 2008.
The volatile environment continued to create opportunities
across most relative value strategies in the first half of the
year, although market volatility led to a wider dispersion of
returns among GRV Advisors. However, GRV Advisors struggled
during the third quarter and fourth quarters as markets
experienced extreme dislocations and poor liquidity and finished
with negative returns for the year.
Volatility trading strategies generated the strongest returns
with profits coming from single stock volatility positions.
Performance was very strong in January with more muted returns
for the remainder of the period. In the first quarter,
Asia-focused strategies led performance while
U.S.-focused
strategies outperformed for the remainder of the year.
Equity market neutral strategies were strong performers for the
first half of the year as value factors generated positive
returns across geographical regions. In the third quarter,
equity market neutral strategies detracted each month, but were
particularly hurt in September as global de-leveraging
negatively impacted portfolios. Equity
125
market neutral strategies reversed in the fourth quarter of 2008
and were generally positive contributors, but GRV Advisors
experienced a dispersion of returns across geographies and
strategies.
Despite a decline from March through May, emerging markets
strategies were strong in the first half of 2008. Short
positions performed well in January and February in local
markets due to market unrest. Market reversals in March caused
GRV Advisors to give back some returns and the difficult
performance persisted through May. However, GRV Advisors
short-biased positioning in emerging markets were profitable
when markets sold off in June and they finished the half in
positive territory. In the third quarter, emerging markets
strategies reversed as poor liquidity and high volatility led to
very difficult trading conditions and GRV Advisors were
negatively affected by country specific news. Generally,
commodity-rich countries underperformed in the second half of
the year, and the deleveraging and deteriorating fundamentals
negatively contributing to GRV Advisors performance.
Fixed income strategies experienced mixed results over the first
half of the year but finished in positive territory overall.
European yield curve trading contributed to performance, while
some credit strategies struggled in less liquid markets. In
March, sharp reversals led to difficulties, particularly in
Japan. The second quarter was a strong finish to the first half
of the year as several positions recovered following
mark-to-market losses in March. The third and fourth quarter
experienced muted returns as GRV Advisors have been running with
low exposures due to high volatility.
Multi-strategy GRV Advisors were also negatively impacted by the
poor market liquidity, particularly in strategies such as
convertible arbitrage in the second half of the year.
Goldman
Sachs Global Tactical Trading, LLC
As of December 31, 2008, GTT represented approximately 19%
of the Companys adjusted members equity which
excluded redemptions paid after December 31, 2008. GTT
returned 3.27% for Class C Series 1 units for the
year ended December 31, 2008.
The tactical trading sector delivered strong performance in
2008, with positive contribution from both discretionary GTT
Advisors and systematic trading GTT Advisors. GTT performed well
as diversification helped to improve the risk-adjusted return.
Performance was strong throughout the first half of the year
despite a dip as a number of markets reversed in later half of
March and GTT Advisors gave back some returns. In the third
quarter, GTT Advisors gave back more of their returns as
dramatic swings, multiple market reversals and significantly
worsening liquidity created extremely difficult trading
conditions. Both discretionary and systematic GTT Advisors had
mixed results through July and August, but by September, amid
high policy uncertainty, many GTT Advisors felt the markets were
becoming uninvestible and moved assets partially to the
sidelines, increasing already substantial cash positions.
Trend-followers, who only trade the most liquid markets, were
the only GTT Advisors to remain with more normal levels of risk.
These GTT Advisors gained from falling equity markets, with
their index future positions not directly affected by the short
selling bans, but suffered losses elsewhere as trend reversals
detracted. In the fourth quarter of 2008, trend-following GTT
Advisors generally profited from declines in equities and
commodities, although December market rallies reduced gains. GTT
Advisors finished 2008 with strong positive performance.
Commodities trading was a key driver of positive returns for the
first half of the year. Systematic trading GTT Advisors, broadly
long positioned, benefited from the strong commodity rallies for
much of the period. Despite March reversals in the markets, GTT
Advisors were able to sustain gains across grains, energy,
precious metals and soft metals. Discretionary commodity
managers posted mixed results. Agriculture-focused GTT Advisors
generally delivered strong returns, while GTT Advisors with
exposure to commodities-related equities had negative
performance. At the beginning of the third quarter, energy
markets reversed their long-standing uptrend. The reversal hurt
trend-followers, who had produced strong profits from the
uptrend; however, by September, many of these GTT Advisors were
profiting from short energy positions. Discretionary GTT
Advisors also suffered from the reversal and generally responded
by substantially reducing long exposures.
Fixed income trading experienced gains in the first half of the
year. Long exposures to global fixed income and yield curve
trading, particularly in the U.S., benefited GTT Advisors for
much of the second quarter. As markets reversed in March, GTT
Advisors experienced notable losses in both relative value and
directional trades. Macro
126
GTT Advisors experienced mixed performance in fixed income
trading over the second quarter while most commodity trading GTT
Advisors produced gains. Fixed income and foreign exchange
markets experienced extraordinary volatility during the second
half of the year. GTT Advisors generally profited from a long
bias in U.S. and global fixed income in 2008.
Foreign exchange trading posted profits over the first half of
the year. Short U.S. dollar positions realized gains with
the U.S. dollar declining to record levels against a number
of currencies. In addition, long bias to emerging market
currencies and long volatility trading in the major currencies
contributed to performance. Performance declined slightly
towards the end of the period as the U.S. dollar gained
some strength. The U.S. dollar began to rally strongly in
mid-July, hurting systematic GTT Advisors short positions; by
later in the quarter these positions had been reversed and GTT
Advisors had started to profit from long exposures to the
U.S. dollar. However, the rally reversed, with the euro
rallying 7% against the U.S. dollar in late September
before resuming its decline, making for challenging conditions
for directional trading.
Equities trading was flat for the period. Systematic GTT
Advisors profited from net short exposures to major indices,
while many discretionary GTT Advisors experienced losses in long
positions. In general, GTT Advisors reduced overall equity
exposure as the markets proved difficult to navigate over the
second quarter. An increase in equity volatility kept equity
exposures low during the second half of the year.
Goldman
Sachs HFP Opportunistic Fund, LLC
As of December 31, 2008, HFPO represented approximately 7%
of the Companys adjusted members equity which
excluded redemptions paid after December 31, 2008. HFPO
returned (4.51)% for Class A Series 1 units for
the year ended December 31, 2008.
HFPO Advisors focused on equity market neutral strategies
experienced positive returns for the first half of 2008 as value
factors generated positive returns across geographical regions.
Equity market neutral strategies generated strong returns in
every month of the first half of the year, with the exception of
March. Market reversals in March caused HFPO Advisors to give
back some returns. In the third quarter, global de-leveraging
negatively impacted these HFPO Advisors portfolios leading
to significant losses. HFPO redeemed its investment from equity
market neutral HFPO Advisors strategies effective
December 1, 2008.
Quantitative macro strategies were strong performers in the
first half of the year. One of the quantitative macro HFPO
Advisors experienced strong performance driven specifically by a
rise in commodities markets. Performance benefited from exposure
to all four asset classescommodities, fixed income,
foreign exchange and equities trading. However, the other
quantitative macro HFPO Advisors experienced negative
performance early in the year from U.S. equity exposures in
the consumer and technology sectors. This Advisor was redeemed
effective December 1, 2008. In the second half of the year,
HFPO Advisors focused on quantitative macro strategies
experienced mixed performance, driven by asset class and
discretionary trading. Overall, macro strategies contributed to
performance for the year.
One HFPO Advisor with long exposure to energy and commodities
experienced severe losses in the early part of the year and
reduced exposures prevented it from capturing the upswing in
commodities for the latter half of the period. This HFPO Advisor
benefited from lower risk levels and diversification in the
second half of the year.
One HFPO Advisor in particular experienced very significant
losses as natural gas exposures moved away from its positions.
This HFPO Advisors negative performance meaningfully
impacted the portfolio returns in the first nine months of the
year. However, this HFPO Advisor benefited from lower market
exposures and diversification across positions in the third
quarter. HFPO redeemed its investment from this HFPO Advisor at
the end of the third quarter of 2008.
2007
Performance
The Companys net trading profit/loss for the year ended
December 31, 2007 was $87,875,947 compared to the year
ended December 31, 2006 of $76,020,409.
127
Overview
For 2007, all four Investment Sectors posted positive returns,
with the strongest performance delivered by the event driven
sector. Short positions in credit, in particular short exposure
to bonds linked to sub-prime mortgages, were profitable. The
weakest performance came from the allocation to HFPO, which
finished the year in negative territory. Negative performance
was driven by exposure to quantitative equity market neutral
strategies which suffered from liquidity pressures as the
sub-prime mortgage crisis led to widespread liquidations in
August. The table below illustrates the portfolio weighting of
each Investee as of December 31, 2007, as well as each
Investees net return for the year ended December 31,
2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Weight
|
|
|
Portfolio Weight as
|
|
|
Year Ended
|
|
|
|
as a % of
|
|
|
a % of Adjusted
|
|
|
December 31, 2007
|
|
Investee
|
|
Members
Equity (1)
|
|
|
Members
Equity (2)
|
|
|
Net Return (3)
|
|
|
GELS
|
|
|
33.16
|
%
|
|
|
32.09
|
%
|
|
|
11.70
|
%
|
GFS
|
|
|
37.84
|
%
|
|
|
36.62
|
%
|
|
|
20.22
|
%
|
GRV
|
|
|
12.38
|
%
|
|
|
11.99
|
%
|
|
|
4.53
|
%
|
GTT
|
|
|
14.39
|
%
|
|
|
13.92
|
%
|
|
|
15.72
|
%
|
HFPO
|
|
|
5.41
|
%
|
|
|
5.23
|
%
|
|
|
(10.26
|
)%
|
|
|
|
(1) |
|
Members equity, used in the calculation of the fair value
of the Investees as a percentage of members equity, is
reduced for member redemptions that are paid after the balance
sheet date according to ASC 480, Distinguishing
Liabilities from Equity. |
|
(2) |
|
As a percentage of the Companys adjusted members
equity which represents members equity excluding
Redemptions payable in the amount of $22,708,145 that was
payable at December 31, 2007. |
|
(3) |
|
These returns are based on the performance of Class C
Series 1 units for GELS, GFS, GRV and GTT and
Class A Series 1 units for HFPO. The returns are
net of administration fees. No management fee or incentive
allocation was charged by the managing member of the Investees
with respect to the Companys investment in any of the
Investees. Past performance is not indicative of future results,
which may vary. |
For the year ended December 31, 2007, the Companys
Class A Series 1 Units returned 11.51% net of fees and
incentive allocation.
The
Investees
Each of the Investees performance during the year ended
December 31, 2007 is described in the following.
Goldman
Sachs Global Equity Long/Short, LLC
As of December 31, 2007, GELS represented approximately 32%
of the Companys adjusted members equity which
excluded redemptions paid after December 31, 2007. GELS
returned 11.70% for Class C Series 1 units for
the year ended December 31, 2007.
The annualized volatility of GELS returns for the year
ended December 31, 2007 was 5.73%. In comparison, the
S&P 500 Index had an annualized volatility of 9.66% and the
MSCI World Index (hedged to U.S. dollars) had an annualized
volatility of 8.80% for the same period.
During the year ended December 31, 2007, GELS Advisors
delivered positive performance in nine months (January,
February, March, April, May, June, September, October and
December) and negative performance in three months (July, August
and November). Notably, the performance of GELS Advisors in July
and August suffered as equity markets fell on concerns of a
global credit crunch, a slowing U.S. economy and continued
fallout in the sub-prime mortgage and structured finance spaces.
GELS Advisors with long exposure to financial and consumer
stocks underperformed during the second half of the year as
large write-downs from major banks and concerns of a slowdown in
consumer spending weighed on these sectors.
GELS Advisors performed well from January 2007 through May 2007,
with especially strong performance in April and May. During this
period, GELS Advisors benefited from a rally in global equity
markets, driven by global
128
economic growth, robust mergers and acquisitions activity and
abundant liquidity. September and October 2007 were positive
months for GELS Advisors, as global equity markets rallied from
the late summer sell-off as the U.S. Federal Reserve (the
Federal Reserve) cut interest rates. Top-performing
GELS Advisors benefited from an increase in volatility during
the second half of 2007 as strong stock pickers were able to
realize gains more quickly. Additionally, GELS Advisors who
reduced portfolio risk during the summer were able to better
preserve capital and realize gains from hedges and short
positions during the drawdown in the second half of the year.
Thirty-six out of 48 GELS Advisors delivered positive
performance for the year ended December 31, 2007. GELS
Advisors with long exposure to Asian market volatility, emerging
markets, energy/commodities and short exposure to financials
performed particularly well during 2007. The GELS Advisors that
posted losses had long exposure to value stocks, small- and
mid-cap stocks and Japanese equities.
Goldman
Sachs Global Fundamental Strategies, LLC
As of December 31, 2007, GFS represented approximately 37%
of the Companys adjusted members equity which
excluded redemptions paid after December 31, 2007. GFS
returned 20.22% for Class C Series 1 units for
the year ended December 31, 2007.
The annualized volatility of GFSs returns for the year
ended December 31, 2007 was 4.55%. In comparison, the
S&P 500 Index had an annualized volatility of 9.66% and the
MSCI World Index (hedged to U.S. dollars) had an annualized
volatility of 8.80% for the same period.
GFS generated solid returns in 2007, with substantially lower
volatility than global equity markets. In the first half of the
year, GFS Advisors performed well as the equity and credit
markets continued their positive performance from 2006. In the
first half of 2007, robust mergers and acquisitions activity,
idiosyncratic credit events and abundant corporate restructuring
activity contributed positively to some of the GFS
Advisors returns. In the second half of 2007, the market
experienced substantially more volatility and negative
performance as investors became concerned about the economic and
financial outlook.
Global announced mergers and acquisitions activity surpassed
$4.4 trillion in 2007, a new annual record; however this was not
without some unconsummated deals. In general, GFS Advisors were
able to take advantage of the robust environment in the first
half of 2007 through merger arbitrage and equity special
situations. In the second half of 2007, merger arbitrage spreads
proved to be a profitable area given the completion of several
bellwether deals. Equity markets experienced negative
performance as valuations were readjusted given lower mergers
and acquisitions and private equity activity, which negatively
impacted the performance of some GFS Advisors.
The credit asset class proved to be difficult in 2007 given the
broad re-pricing of risk across the asset class. In particular,
some GFS Advisors were hurt by long exposure to bank debt and
some high yield bonds. Hedges and directional short exposure to
credit generated substantial gains for some GFS Advisors in the
fund. In particular, short exposure to bonds linked to sub-prime
mortgages were profitable, as several of the multi-strategy and
credit GFS Advisors were able to put on exposure early.
Credit opportunities/distressed strategies returned 40.10% and
contributed 9.70% to GFSs gross income for the year ended
December 31, 2007. The multi-strategy component of the
portfolio returned 15.02% and contributed 9.86% to GFSs
gross income for the year ended December 31, 2007. Merger
arbitrage/special situations strategies returned 5.28% and
contributed 0.38% to GFSs gross income for the year ended
December 31, 2007.
Goldman
Sachs Global Relative Value, LLC
As of December 31, 2007, GRV represented approximately 12%
of the Companys adjusted members equity which
excluded redemptions paid after December 31, 2007. GRV
returned 4.53% for Class C Series 1 units for the
year ended December 31, 2007.
Following a fairly stable market environment in 2006, volatility
increased significantly in 2007 and, consequently, relative
value strategies experienced mixed results.
Overall, 2007 was a good year for GRV Advisors strategically
positioned to take advantage of long volatility, as market
participants became increasingly nervous due to the widening
impact of the sub-prime mortgage crisis and
129
the deteriorating state of the U.S. economy. Within the
volatility trading sector, the Asian-focused GRV Advisor
outperformed as it successfully captured the regions rise
in implied volatility, particularly in single-name stocks. Given
this GRV Advisors negative correlation with the markets,
the outsized results are particularly impressive considering the
bull market in Asia, where the MSCI Asia ex-Japan Index returned
33%, its best performance since 2003.
Credit spreads were re-priced in virtually every market (i.e.,
investment grade, high yield, loans, residential mortgage-backed
securities, commercial mortgage-backed securities, etc.) and
across all rating categories, benefiting GRV Advisors with short
biases and creating opportunities for relative value trading
around technical dislocations.
GRV Advisors with long credit exposures, particularly in
high-grade asset-backed securities, suffered losses as market
liquidity decreased significantly.
GRV Advisors implementing equity market neutral strategies
suffered from liquidity pressures as the sub-prime mortgage
crisis led to widespread liquidations in August. GRV Advisors
with longer-term models were particularly impacted. As a result,
GRV Advisors reduced leverage and focused research efforts on
minimizing correlation with other hedge funds.
Emerging markets fundamental strength continued due to
strong growth, high commodity prices, and increasing levels of
domestic reserves. The asset class grew during the year, with
new local issues from major economies, corporate issues and new
sovereign markets. Long external debt positions in Venezuela and
Russia, as well as long positions in Brazilian and Turkish local
markets, contributed to positive performance by GRV Advisors. In
addition, strategic short positions benefited GRV Advisors
returns in late 2007.
The opportunity set for relative value investments across the
fixed income universe broadened significantly in 2007. Turmoil
in the housing and credit markets resulted in increased
uncertainty and higher volatility levels, creating an
environment favorable for fixed income arbitrage.
Credit relative value strategies returned 9.67% and contributed
0.85% to GRVs gross income for the year ended
December 31, 2007. Equity market neutral strategies
returned (14.14)% and contributed (3.78)% to GRVs gross
income for the year ended December 31, 2007. Fixed income
arbitrage strategies returned 12.49% and contributed 2.34% to
GRVs gross income for the year ended December 31,
2007. Emerging markets relative value strategies returned 12.19%
and contributed 1.37% to GRVs gross income for the year
ended December 31, 2007.
Multi-strategies returned (2.68)% and contributed (0.24)% to
GRVs gross income for the year ended December 31,
2007. Volatility trading returned 42.52% and contributed 4.45%
to GRVs gross income for the year ended December 31,
2007.
Goldman
Sachs Global Tactical Trading, LLC
As of December 31, 2007, GTT represented approximately 14%
of the Companys adjusted members equity which
excluded redemptions paid after December 31, 2007. GTT
returned 15.72% for Class C Series 1 units for
the year ended December 31, 2007.
The first quarter of 2007 was moderately profitable for the
tactical trading sector. Short European fixed income positions
generated strong profits early in the first quarter for GTT
Advisors. However, a broad recovery in global bond markets in
February, followed by another reversal later in the first
quarter, led many GTT Advisors to give back prior gains.
Commodities trading posted gains, mainly due to long exposure to
grains. Foreign exchange trading detracted from performance for
the first quarter, with losses predominantly driven by
developed-market currency trading, and short Japanese yen
positions suffered material losses at February month-end, as
investors unwound their carry trades following the global equity
plunge. Equities trading finished the first quarter
approximately flat. After posting strong gains in the first half
of the first quarter, GTT Advisors who were positioned net long
gave back most profits when a sharp decline in Chinese markets
on February 27 triggered a global equity sell-off.
The tactical trading sector had a strong second quarter in 2007,
finishing the period profitable in all four asset classes. In
fixed income trading, the majority of gains by GTT Advisors were
generated from short European fixed
130
income exposures maintained throughout the second quarter.
Foreign exchange trading was also positive for the second
quarter, with short Japanese yen positions contributing the bulk
of gains. Short U.S. dollar positions against major
currencies proved more difficult for GTT Advisors, as choppy
markets resulted in weak performance. In equities trading, GTT
Advisors with broadly long exposure profited from the global
stock market rally, with the S&P nearing record levels and
major European indices moving consistently higher. Finally,
commodities trading was modestly profitable, with gains
attributable to select long positions in grains, particularly
soybeans. Soybeans soared mid-second quarter on speculation that
an increasing number of soybean acres will be rotated into corn
planting, resulting in a diminished supply.
Tactical trading delivered positive results in the third quarter
of 2007. Foreign exchange trading was positive for the third
quarter. Short U.S. dollar positions contributed most of
the gains as the U.S. dollar experienced notable declines
through the third quarter, dropping to a record low against the
euro in September. Equities trading from the long side proved
difficult for GTT Advisors during the first two months of the
third quarter. However, GTT Advisors with sustained long
exposures were able to profit from the market recovery in
September, which was largely driven by the widely anticipated
50 basis point cut in the federal funds rate. Fixed income
trading generated moderate losses for GTT Advisors for the third
quarter, as bond markets were centered on concerns about the
credit crisis in the U.S. Finally, GTT Advisors with broad
long exposures to commodities delivered strong results across
grains, metals and energy.
The tactical trading sector posted strong performance in the
fourth quarter of 2007. Commodities trading was a significant
contributor to performance by GTT Advisors during the fourth
quarter. Long positions in grains were particularly profitable
as wheat, corn and soybeans all surged substantially higher amid
concerns regarding weather and growing global supply. Fixed
income trading was also positive. Global government bonds
rallied during the fourth quarter as continued credit concerns
led to a flight-to-quality. As a result, GTT
Advisors with long exposures to U.S. Treasury bonds
produced strong returns. GTT Advisors with yield curve plays in
the U.S. and Europe also generated positive results.
Equities trading posted flat performance for the fourth quarter,
with the vast majority of GTT Advisors positioned net long. In
foreign exchange trading, GTT Advisors were generally short the
U.S. dollar, which led to notable profits during the first
half of the fourth quarter. As the U.S. dollar recovered
later in the fourth quarter, many GTT Advisors returned most
prior gains. Declines in high-yielding currencies during the
second half of the fourth quarter also added to losses.
Goldman
Sachs HFP Opportunistic Fund, LLC
On July 1, 2007, the Company made an investment in HFPO in
the aggregate amount of $26,100,000. The investment objective of
HFPO is to make opportunistic investments in underlying Advisors
in order to (a) increase the weighting of a particular
Advisor which had a low weighting in the Company due to a lower
target weight in one of the other Investment Funds or
(b) add an Advisor that is not currently represented in any
of the other Investment Funds. As of December 31, 2007, the
fair value of the Companys investment in HFPO was
$36,813,437. The change in value from July 1, 2007 through
December 31, 2007 reflects the return of the Companys
investment during the six month period ended December 31,
2007.
As of December 31, 2007, HFPO represented approximately 5%
of the Companys adjusted members equity which
excluded redemptions paid after December 31, 2007. HFPO
returned (10.26)% for Class A Series 1 units for
the period from commencement of HFPOs operations on
July 1, 2007 through December 31, 2007.
For the
period from July 1, 2007 (commencement of operations of
HFPO) through December 31, 2007
HFPO experienced negative performance during the period from
July 2007 through December 2007. The negative performance was
driven by exposure to equity market neutral strategies which
suffered from liquidity pressures as the sub-prime mortgage
crisis led to widespread liquidation in August. Managers with
value oriented models and longer-term models were particularly
impacted. Exposure to macro strategies slightly mitigated losses
as managers benefited from the higher volatility environment.
Commodities trading drove performance and fixed income trading
was also positive over the period. Equities trading was flat
from July 2007 through December 2007.
131
Comparison
of Selected Financial Information for the years ended
December 31, 2009, 2008 and 2007
Interest
and Dividend Income
Interest and dividend income for the years ended
December 31, 2009, 2008 and 2007 was $159,987, $401,342 and
$326,730, respectively. The Companys interest and dividend
income fluctuates with the level of cash available to invest.
Expenses
The management fee for the year ended December 31, 2009 was
$7,578,899 compared to the year ended December 31, 2008 of
$8,638,530 and the year ended December 31, 2007 of
$8,636,414. Because the management fee is calculated as a
percentage of the Companys net assets as of each month end
(equal to one-twelfth of 1.25% of the net assets of the Company
of the applicable month), the changes in the expense were due to
fluctuations in the Companys net assets for the year ended
December 31, 2009 compared to the year ended
December 31, 2008 and the year ended December 31, 2008
compared to the year ended December 31, 2007.
Interest expense for the year ended December 31, 2009 was
$81,111, compared to the year ended December 31, 2008 of
$81,333 and the year ended December 31, 2007 of $283,897.
The interest expense for the year ended December 31, 2009
compared to December 31, 2008 did not significantly change
as the Company did not borrow during either period. The decrease
in interest expense for the year ended December 31, 2008
compared to December 31, 2007 was due to reduced borrowings
under the Credit Facility (as defined below) and reduced
commitment fees under the Credit Facility as a result of a
decrease in the amount available for borrowings.
Professional fees for the year ended December 31, 2009 were
$1,049,718, compared to the year ended December 31, 2008 of
$1,059,248 and the year ended December 31, 2007 of
$632,679. The professional fees for the year ended
December 31, 2009 compared to the year ended
December 31, 2008 did not significantly change. The
increase in professional fees for the year ended
December 31, 2008 compared to the year ended
December 31, 2007 was primarily due to increased legal and
audit costs related to the ongoing operations as a publicly
registered company and the costs related to Sarbanes-Oxley 404
compliance.
Miscellaneous expenses for the year ended December 31, 2009
were $161,930 compared to the year ended December 31, 2008
of $199,397 and the year ended December 31, 2007 of
$255,106.
Incentive
Allocation
The Incentive Allocation for the year ended December 31,
2009 was $137,681, compared to the year ended December 31,
2008 of $14,474 and the year ended December 31, 2007 of
$3,919,729. The increase in Incentive Allocation for the year
ended December 31, 2009 from the year ended
December 31, 2008 was due to an increase in net income from
operations for the period for certain series of Class A
shares that were above their high watermark. The decrease in
Incentive Allocation for the year ended December 31, 2008
from the year ended December 31, 2007 was due to a decrease
in net income from operations for the period.
Other than the management fee, interest expense, professional
fees, miscellaneous expenses and incentive allocation, there are
no other fees directly borne by the Company.
Through its investments in the Investment Funds, the Company
bears a pro rata portion of the administration fee paid to the
administrator of the Investment Funds for services provided to
the Investment Funds and Portfolio Companies. The total
administration fee (which is approximate based on calculation),
comprised of the Companys aggregate pro rata portion for
services provided to the Investment Funds and the fee directly
payable by the Portfolio Companies based on an investment of
$1,000,000 in Class A Series 1 units as of
January 1, 2009, January 1, 2008 and January 1,
2007, was $526, $469, and $534, respectively. SEI is the
administrator of each Investment Fund and certain Portfolio
Companies. Throughout 2009, the administration fee rate ranged
between 0.05% and 0.06%. See ITEM 1.
BUSINESSFEES AND EXPENSES.
132
Liquidity
and Capital Resources
The Companys liquidity requirements consist of cash needed
to fund investments in the Investment Funds in accordance with
the Companys investment strategy, to fund quarterly
redemptions and to pay costs and expenses. The Company
periodically re-allocates its investments in the Investment
Funds based on the performance of the Investment Funds and other
factors. Redemptions are permitted on a quarterly basis and
written notices of redemption must be delivered to the Company
at least 91 days prior to the applicable valuation date,
which is the day immediately preceding the applicable redemption
date. Accordingly, the Company cannot predict the level of
redemptions in the Company for any quarterly period until
91 days prior to the redemption date. The Company endeavors
to pay redemption proceeds within 45 days following the
redemption date, without interest. If the Company faces a
liquidity problem, the redemptions may be limited or postponed
under certain limited circumstances. The Managing Members
ability to limit or postpone redemptions in the Company enables
the Company to control and to some extent avoid a liquidity
problem. However, substantial redemptions of units in the
Company could require the Company to liquidate certain of its
investments in the Investment Funds in order to raise cash to
fund the redemptions, which could have a material adverse effect
on the NAV of the units and the performance of the Company.
The Company can fund its liquidity requirements by liquidation
(through redemptions, or as otherwise permitted in the LLC
Agreements of the Investment Funds) of its investments in the
Investment Funds and from new investments from existing and new
investors. Neither GFS Trust nor GRV provide investors with a
voluntary redemption right. Redemptions can be made quarterly,
subject to certain limitations. During certain historic periods,
the Company only took in investments from existing investors and
limited subscriptions from new qualified investors; however, the
Company has been accepting additional amounts of new
subscriptions throughout 2009. The Company may close again at
any time without notice at the sole discretion of the Managing
Member. The acceptance of future subscriptions in the Company
and the continued growth of the Company will be determined by
the Managing Member in its sole discretion. Although the
Managing Member has been receiving new subscriptions, any
liquidity requirements in the near term may need to be funded
through the redemption of existing investments in the Investment
Funds to the extent new investments are not received in
sufficient amounts to cover redemptions. If the Company seeks to
redeem all or a portion of its investment positions in any of
the Investment Funds, the Investment Fund, to the extent it does
not have cash on hand to fund such redemption, will need to
liquidate some of its investments. Substantial redemptions of
membership units in an Investment Fund, including by the
Company, could require the Investment Fund to liquidate certain
of its investments more rapidly than otherwise desirable in
order to raise cash to fund the redemptions and achieve a market
position appropriately reflecting a smaller asset base. This
could have a material adverse effect on the value of the
membership units redeemed and the membership units that remain
outstanding and on the performance of the Investment Fund. Under
certain exceptional circumstances, such as force majeure, the
managing member of an Investment Fund (currently, the Managing
Member) may find it necessary (a) to postpone redemptions
if it determines that the liquidation of investments in the
Investment Fund to fund redemptions would adversely affect the
NAV per membership unit of the Investment Fund or (b) to
set up a reserve for undetermined or contingent liabilities and
withhold a certain portion of redemption proceeds. In such
circumstances, the Investment Fund would likely postpone any
redemptions.
Certain investment positions in which the Investment Funds have
a direct or indirect interest are illiquid. The Advisors may
invest in restricted or non-publicly traded securities,
securities on foreign exchanges and futures. These positions may
be illiquid because certain exchanges limit fluctuations in
certain securities and futures contract prices during a single
day by regulations referred to as daily price fluctuation
limits or daily limits. Under such daily
limits, during a single trading day no trades may be executed at
prices beyond the daily limits. Once the price of a particular
security or futures contract has increased or decreased by an
amount equal to the daily limit, positions in that security or
contract can neither be taken nor liquidated unless traders are
willing to effect trades at or within the limit.
In addition, certain of the investments held by the Investment
Funds are subject to various
lock-up
provisions. Additionally, the Advisors of the investments held
by the Investment Funds may, at their discretion, transfer a
portion of the Investment Funds investment into share
classes where liquidity terms are directed by the Advisor in
accordance with the respective investments private
placement memorandum, commonly referred to as side pocket share
classes (side pockets). These side pockets may have
restricted liquidity and prohibit the Investment Funds
133
from fully liquidating their investments without delay. The
managing member of each Investment Fund attempts to determine
each Advisors strategy on side pockets through its due
diligence process prior to making an allocation to the
investment managed by the Advisor. However, no assurance can be
given on whether or not the Advisor will implement side pockets
during the investment period. The Advisors of the investments
held by the Investment Funds may also, at their discretion,
suspend redemptions or implement other restrictions on liquidity
which could impact the Investment Funds ability to meet
redemptions submitted by the Company. As of December 31,
2009, approximately 2% of the Companys investments in the
Investees were considered illiquid due to restrictions
implemented by the Advisors of the investments held by
Investees, excluding contractual restrictions imposed by the
Advisors at the time of purchase, such as lock-ups. In addition,
as of December 31, 2009, approximately 7% of the
Companys members equity was considered illiquid due
to restrictions implemented by the Investees including the lack
of a voluntary redemption right from GFS Trust and GRV.
The managing member of GFS, GS HFS, recently created GFS Trust
for the benefit of its investors, including the Company. Goldman
Sachs Trust Company, a Delaware Corporation, is the trustee
of GFS Trust (the Trustee). The Trustee appointed GS
HFS as the Special Assets Direction Advisor,
responsible for, among other things, disposition of GFS Trust
assets. On March 31, 2009, GFS transferred to GFS Trust its
interest in certain illiquid investments, including illiquid
investments made by Advisor Funds, as well as liquidating
vehicles that the Advisors formed as liquidity decreased for
previously liquid investments, such as certain credit
instruments. GFS transferred to GFS Trust the economic risks and
benefits of its interests in the assets. In connection with such
transfer, each investor in GFS, including the Company, was
issued its pro-rata share of GFS Trust interests based on its
ownership in GFS as of the transfer date. The transfer was
accounted for as an in-kind transfer at a fair value of
$47,730,311, which resulted in a realized gain of $3,179,237. In
connection with the transfer, the historical cost of the
Companys investment in GFS of $44,551,074 was transferred
to GFS Trust including an unrealized gain of $3,179,237.
Distributions from GFS Trust in respect of GFS Trust interests
will be made to holders of GFS Trust interests, including the
Company, as amounts in respect of the assets transferred to GFS
Trust are received from the Advisors. However, the actual timing
of these distributions will be dependent on the Advisors
ability to liquidate positions as market conditions allow, and
it could be a significant period of time before such positions
are realized or disposed of. The Companys pro-rata share
of GFS Trust interests as of December 31, 2009 was an
amount equal to approximately 6% of the Companys
members equity. Such amount of the Companys pro-rata
share of GFS Trust interests is included in the percentage of
the Companys investments in the Investees that were
considered illiquid at December 31, 2009.
The managing member of GRV notified its investors (including the
Company), by letter dated June 15, 2009, that it had begun
the process of liquidating GRVs portfolio, and that
investors in GRV (including the Company), will receive proceeds
from the liquidation over time as GRV receives redemption
proceeds from Advisor Funds. As of December 31, 2009, GRV
represented approximately 1% of the Companys members
equity and the fair value of the Companys investments in
GRV was $4,887,674. The Company is reinvesting the liquidation
proceeds it receives from GRV in accordance with the
Companys investment program.
The Company received subscriptions from new and existing
investors of $73,875,837 during the year ended December 31,
2009, of $124,251,266 during the year ended December 31,
2008 and of $43,080,500 during the year ended December 31,
2007.
Demand from new and existing investors varies from period to
period based upon market conditions, the Companys returns
and other alternative investments available to investors. The
Company believes that in more recent periods investors
interest has decreased from earlier periods as investors have
sought to reduce overall portfolio exposure.
The Company paid out redemptions in the amount of $144,530,014
during the year ended December 31, 2009, $87,599,738 during
the year ended December 31, 2008 and $103,758,527 during
the year ended December 31, 2007. The Company had
Redemptions payable in the amount of $22,410,715 at
December 31, 2009, $28,982,893 at December 31, 2008
and $22,708,145 at December 31, 2007. The Company funded
the redemptions made in 2007, 2008 and 2009 by making
redemptions from the Investment Funds in proportion to the then
current weightings and through the use of uninvested cash on
hand. The Company also used its Credit Facility to
fund January 2007 and July 2007 redemptions. The Managing
Member expects the Company to fund future redemptions in a
similar
134
manner and does not believe that the Redemptions payable in
January 2010 had a material adverse effect on the value of the
units or the performance of the Company. As further described
below in this section, the Company entered into a Credit
Facility on June 30, 2006, which was amended as described
below. Although the Company may elect to borrow under its Credit
Facility, including, without limitation, to fund redemptions,
from time to time, in the future, it currently expects any such
borrowing would not result in long term debt of the Company and
does not expect the Companys risk position to change as a
result thereof.
Demand for redemptions varies from period to period based upon
market conditions, the Companys returns and other
alternative investments available to investors.
The Company and each Investment Fund may, but are not required
to, borrow from (including through direct borrowings, borrowings
through derivative instruments, or otherwise) the GS Group or
other parties, when deemed appropriate by its managing member,
including to make investments and distributions in respect of
redemptions of membership units, to pay expenses or for other
purposes.
On June 30, 2006, the Company entered into a committed
credit facility (as amended from time to time, the Credit
Facility) with Barclays Bank PLC (the Facility
Counterparty). On June 6, 2008, the Company extended
the maturity date of the Credit Facility for an additional
two-year period to, and including, June 5, 2010 and amended
certain terms of the Credit Facility. The Company further
amended certain terms of the Credit Facility on January 28,
2010. As of December 31, 2009, the Company had no
outstanding borrowings under the Credit Facility. Pursuant to
the Credit Facility, the Company may borrow up to an amount
equal to the lesser of (i) $33,700,000 which amount may be
subsequently increased to $100,000,000 subject to the approval
of the Facility Counterparty, and (ii) 14.25% of the
Companys NAV from time to time. If borrowings by the
Company exceed 14.25% of its NAV at any time, then the Company
is required to make mandatory prepayments to the extent
necessary so that borrowings (subject to adjustments for pending
redemptions by the Company) do not exceed 12.5% of the
Companys NAV, payable when it has received proceeds of
redemptions from the Investment Funds. The Company is also
required to prepay all borrowings if, after a five business day
remediation period, the Facility Counterparty notifies the
Company that its investments in funds continue to not meet
certain liquidity and diversification criteria set forth in the
Credit Facility, payable within ninety days of any such notice.
The Company may voluntarily borrow, repay and reborrow advances
on a revolving basis. The advances bear interest at a per annum
rate equal to (i) with respect to advances provided on less
than three business days notice, the overnight London
Interbank Offered Rate (LIBOR), for the initial day
of such advance and one-week LIBOR thereafter, and
(ii) with respect to all other advances, one-week LIBOR,
plus in each case 1.00%. The Company also pays a monthly
commitment fee to the Facility Counterparty at the rate of 0.29%
per annum of the average daily aggregate unused portion of the
commitment. If the Company terminates the Credit Facility prior
to the stated final maturity, it has agreed to pay a fee (except
in certain circumstances where no such fee will be payable)
equal to the product of 0.25% per annum times the commitment in
effect immediately prior to such optional termination times
M; where M equals the period commencing
on the date of such optional termination and ending on the
stated final maturity. The proceeds of the advances under the
Credit Facility will be used for liquidity management in
connection with subscriptions to the Company and redemptions of
the Companys investments in the Investment Funds and for
general purposes not prohibited by the Credit Facility or the
investment guidelines therein. The obligation of the Facility
Counterparty to make advances is subject to customary conditions
precedent, including the absence of defaults. The Credit
Facility contains customary representations and warranties,
affirmative covenants, including a covenant to deliver
information regarding the Companys NAV and negative
covenants, including restrictions on the Companys ability
to incur additional indebtedness (other than the advances or
fees and expenses incurred in the ordinary course of business),
grant liens, merge or sell all or substantially all of its
assets, pay dividends or make redemptions of the Companys
investors if advances would exceed the permitted borrowing
amount or there is an event of default regarding non-payment of
advances, failure to comply with investment guidelines, failure
to provide access to financial records, insolvency events or
change of control events, and enter into material amendments of
the Companys organizational documents or investment
management or fund administration agreements. The Credit
Facility contains customary events of default (subject to
thresholds, materiality qualifications and notice periods
specified therein), including: failure to make payments when
due, incorrectness of representations and warranties,
non-compliance with the Credit Facility and note, breach of
material agreements, insolvency events, judgments or orders to
pay money, a material adverse effect as defined in
the Credit Facility, change in the control of the
135
Managing Member, or its removal or resignation, violation of law
or suspension of licenses held by the Company or the Managing
Member and suspension in the redemption of the units. In
addition, the Credit Facility contains investment guidelines
setting forth certain requirements regarding permitted
instruments, strategy limits, leverage and borrowing, liquidity,
diversification and remediation. The Managing Member does not
expect that any of these investment guidelines, including, but
not limited to, the strategy limits, will have a limiting effect
on the operation of the Company or the Managing Members
investment strategy for the Company. Each Investment Fund,
except HFPO, has entered into a similar facility with a
different counterparty. See Note 7 to the financial
statements for a description of the Companys Credit
Facility.
As of December 31, 2009, the Company had cash and cash
equivalents on hand of $35,470,838. As of December 31,
2008, the Company had cash and cash equivalents on hand of
$26,943,800. The increase in cash and cash equivalents held by
the Company at December 31, 2009 was attributed to actions
taken by the Company to anticipate future liquidity requirements.
Investments as of December 31, 2009 were $586,435,496 as
compared to $614,788,663 as of December 31, 2008. The
decrease for the year ended December 31, 2009 compared to
the year ended December 31, 2008 was due to net redemptions
made by the Company from the Investment Funds during the year
ended December 31, 2009, partially offset by net trading
profit.
Due to managing member represents the management fees due to the
Managing Member. Due to managing member as of December 31,
2009 was $1,288,968 as compared to $2,017,653 as of
December 31, 2008. Because the management fee is calculated
as a percentage of the Companys net assets as of each
month end, the liability related to management fees will
fluctuate based on the fluctuation of the month end NAV of the
Company. The decrease in Due to managing member is due to the
amount and timing of the payment of the monthly management fee
to the Managing Member and fluctuations in the NAV.
The Company generally expects that its cash flow from
liquidating its investment positions in the Investment Funds to
the extent necessary and from new investments in the Company,
together with borrowings under the Credit Facility, are adequate
to fund its operations and liquidity requirements.
The value of the Companys directly held cash and financial
instruments is not expected to be materially affected by
inflation. At the Investee level, given that GFSs Advisors
seek to profit from price movements and can take both positive
and negative views on the drivers of such movements, their
outlooks may include a view on the direction of inflation, with
the outcome of their trades derived, at least in part, from the
accuracy of such a view. No first-order endemic effects from
inflation, as may exist in long-only bond portfolios, are
expected. Further, extended changes in inflation may be
associated with strong up or down trends in interest rates,
creating a favorable environment for GTTs Advisors, and
therefore contributing to the Companys profit potential.
However, unexpected changes in inflation can also give rise to
rapid reversals in interest rate markets, creating an
environment in which such Advisors, and the Company, potentially
may suffer losses. The impact of changes in inflation on equity
long/short strategies used by GELS Advisors is difficult
to predict and depends upon how large the change is in both
absolute terms and relative to expectations. A sharp increase in
inflation could hurt certain sectors, such as regional banks,
homebuilders, and autos, while sharp downward moves could be
beneficial for equities. If a downward move were too large,
however, it could give rise to concerns about deflation. In
addition, as HFPO employs a broad range of alternative
investment strategies primarily within one or more of the
Investment Sectors, HFPOs Advisors could experience
similar effects from changes in inflation depending on the
particular strategy employed. In all cases, however, the Company
endeavors to take inflation, and its possible effects on each of
the Investment Funds, into account when it develops its
investment strategies.
Recent
Accounting Pronouncements
Financial Accounting Standard Board (FASB)
Accounting Standards Codification
(ASC). In July 2009, the FASB
launched the FASB Accounting Standards Codification (the
Codification) as the single source of
U.S. GAAP. While the Codification did not change
U.S. GAAP, it introduced a new structure to the accounting
literature and changed references to accounting standards and
other authoritative accounting guidance. The Codification did
not have an effect on the Companys financial condition,
results of operations or cash flows.
136
Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly (ASC
820). In April 2009, the FASB issued amended
accounting principles related to determining fair value when the
volume and level of activity for the asset or liability have
significantly decreased and identifying transactions that are
not orderly. Specifically, these amended principles list factors
which should be evaluated to determine whether a transaction is
orderly, clarify that adjustments to transactions or quoted
prices may be necessary when the volume and level of activity
for an asset or liability have decreased significantly, and
provide guidance for determining the concurrent weighting of the
transaction price relative to fair value indications from other
valuation techniques when estimating fair value. The Company
adopted these amended accounting principles during the year
ended December 31, 2009. Since the Companys fair
value methodologies are consistent with these amended accounting
principles, adoption did not affect the Companys financial
condition, results of operations or cash flows.
Investments in Certain Entities That Calculate Net Asset
Value per Share (or Its Equivalent). In September
2009, the FASB issued Accounting Standards Update
(ASU)
No. 2009-12,
Investments in Certain Entities That Calculate Net Asset
Value per Share (or Its Equivalent). ASU
No. 2009-12
provides guidance about using net asset value to measure the
fair value of interests in certain Investees and requires
additional disclosures about interests in Investees. The Company
adopted ASU
No. 2009-12
during the year ended December 31, 2009. Since the
Companys current fair value measurement policies are
consistent with ASU
No. 2009-12,
adoption did not affect the Companys financial condition,
results of operations or cash flows.
Critical
Accounting Policies and Estimates
Use of
estimates
The discussion and analysis of the Companys financial
condition and results of operations are based on the
Companys financial statements, which have been prepared in
accordance with U.S. GAAP, which require the Managing
Member to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Actual results may differ from those estimates. The financial
statements are expressed in U.S. dollars. A summary of the
Companys significant accounting policies is set forth in
Note 2 to the Companys financial statements. In the
Managing Members view, the policy that involves the most
subjective judgment is set forth below.
Fair
value
The Companys investments in Investees are subject to the
terms and conditions of the operating agreements of the
respective Investees. These investments are carried at fair
value, based on the Companys attributable share of the net
assets of the respective Investee. The Company adopted ASC 820
on January 1, 2008, which establishes a fair value
hierarchy that prioritizes the inputs to valuation techniques
used to measure fair value. The objective of a fair value
measurement is to determine the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date
(an exit price). The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets
or liabilities (Level 1 measurement) and the lowest
priority to unobservable inputs (Level 3 measurements).
Assets and liabilities are classified in their entirety based on
the lowest level of input that is significant to the fair value
measurement. See Note 2 to the Companys financial
statements.
Fair values of interests in Investees are determined utilizing
NAV information supplied by each individual Investee that is net
of the Advisors management and incentive fees charged to
the Investees. The underlying investments of each Investee are
also accounted for at fair value. For investments of the
underlying Advisor Funds, market value normally is based on
quoted market prices or broker-dealer price quotations provided
to the Advisor Fund. In the absence of quoted market prices or
broker-dealer price quotations, underlying Advisor Fund
investments are valued at fair value as determined by the
Advisors or their administrator. Assets of the Company invested
directly in Advisor Funds will generally be valued based on the
net asset value reported by or on behalf of the applicable
Advisor.
137
For the fiscal years ended December 31, 2009 and
December 31, 2008, the fair value of the Companys
investments in the Investees was determined by the following
valuation techniques:
December 31,
2009
|
|
|
|
|
|
|
% of fair value
|
|
% of fair value
|
|
|
investments valued using
|
|
utilizing NAV provided by
|
Investee
|
|
quoted market prices
|
|
external advisors
|
|
|
|
|
GELS
|
|
0.07%
|
|
40.09%
|
GFS
|
|
%
|
|
21.59%
|
GFS Trust
|
|
%
|
|
6.40%
|
GRV
|
|
%
|
|
0.83%
|
GTT
|
|
0.57%
|
|
25.89%
|
HFPO
|
|
%
|
|
3.56%
|
|
|
|
|
|
Total
|
|
0.64%
|
|
99.36%
|
|
|
|
|
|
December 31,
2008
|
|
|
|
|
|
|
% of fair value
|
|
% of fair value
|
|
|
investments valued using
|
|
utilizing NAV provided by
|
Investee
|
|
quoted market prices
|
|
external advisors
|
|
|
|
|
GELS
|
|
0.10%
|
|
29.55%
|
GFS
|
|
%
|
|
34.51%
|
GRV
|
|
1.30%
|
|
8.31%
|
GTT
|
|
%
|
|
19.38%
|
HFPO
|
|
%
|
|
6.85%
|
|
|
|
|
|
Total
|
|
1.40%
|
|
98.60%
|
|
|
|
|
|
The change in percentages between December 31, 2009 and
December 31, 2008 was primarily due to assets being
allocated from investments valued using quoted market prices to
investments valued directly by external advisors.
Because of the inherent uncertainty of valuation, estimated fair
values may differ, at times significantly, from the values that
would have been used had a ready market existed. In particular,
the valuations generally are made based on information the
Company or the Investees, as applicable, receive from the
Advisors. This information is generally not audited, except at
year-end, and could prove to be inaccurate due to inadvertent
mistakes, negligence, recklessness or fraud by the Advisors. The
Company receives preliminary and final NAVs from each of the
Investees on a monthly basis. Historically, the Company has not
experienced any material variance between the preliminary and
final NAVs, which would have required adjustment to the
Companys financial statements. If the Managing Member
determines that any such valuation may be inaccurate or
incomplete, the Managing Member may determine the fair value of
the asset based on information available to, and factors deemed
relevant by, the Managing Member at the time of such valuation.
Generally, however, neither the Company nor the Investees will
receive independent valuations with respect to the assets
managed by Advisors and will not in many cases be able to
conduct any independent valuations on their own or to cause any
third parties to undertake such valuations. In addition,
valuations of illiquid securities and other investments are
inherently uncertain and may prove to be inaccurate in
hindsight. These risks are more fully described under
ITEM 1A. RISK FACTORSGeneral
RisksRisks Related to the Company and the Investment
Funds Performance and OperationDependence on the
Managing Member and the Advisors; the Managing Member Generally
Has Limited Access to Information on or Control over
Advisors Portfolios and Members Assume the Risk that
Advisors May Knowingly Misrepresent Information Which Could Have
a Material Negative Impact on the Company,
Special Risks of the Companys
StructureRisks Related to the Companys
StructureThe Companys Financial Statements are, and
in the Future Will Ultimately be, Based on Estimates of
Valuations Provided by Third Party Advisors Which May not be
Accurate or May Need to be Adjusted in the Future, and
Risks Associated with the Company Investing in Other
Entities
138
Valuation of the Investment Funds Investments Will be
Determined Utilizing Valuations Provided by the Advisors Which
are Generally not Audited; Uncertainties in Valuations Could
Have a Material Adverse Effect on the Companys Net
Assets.
The valuation provisions of the Companys LLC Agreement and
the LLC Agreements of the Investment Funds were revised as of
January 1, 2006 to provide the Managing Member with greater
flexibility to more accurately value the Companys assets
(for purposes of subscriptions, redemptions and fees) in
circumstances where the Managing Member has information
available to it indicating that a valuation may be inaccurate or
incomplete, although generally, as described above, the Managing
Member will not have access to independent valuations and will
rely on valuations provided by the Advisors. Valuations are
performed in a substantially similar manner for GFS Trust.
However, where such information does exist, the Managing Member
will be entitled to apply its authority to more accurately
reflect the Companys value. Accordingly, to the extent
that the Managing Member determines that a valuation provided by
an Advisor may be inaccurate or incomplete, the additional
flexibility on the Companys valuation practices is
designed to make the Companys valuations more accurate.
For example, to the extent an Advisor has allocated assets to an
Advisor Fund that has provided the Company with a valuation
report indicating a positive valuation, but the Managing Member
is aware that the Advisor Fund has filed for bankruptcy, the
Managing Member will be able to take the bankruptcy into account
to attempt to more accurately determine the fair value of such
assets.
During the periods contained in this Annual Report, the managing
member of an Investment Fund had adjusted the valuation provided
by an Advisor in which an Investment Fund had invested to
reflect what the managing member believes to be the appropriate
fair value of that investment. There has been no situation
during the periods contained in this Annual Report, where the
impact of an adjustment to a valuation provided by an Advisor or
independent investment manager at an Investment Fund was
material to the Company.
Off-Balance
Sheet Risk
In the normal course of business, the Advisors of the Advisor
Funds may trade various financial instruments and enter into
various investment transactions with off-balance sheet risk,
which include, but are not limited to securities sold short,
futures, forwards, swaps and written options. There are no
off-balance sheet or material contingent liabilities at the
Company or Investee levels.
Contractual
Obligations
The Company does not have any long-term debt obligations,
capital or operational lease obligations or other long-term debt
liabilities.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Quantitative
and Qualitative Disclosures About Market Risk
The following table lists the significant market risk sensitive
instruments held by the Company, through the Investees, as of
December 31, 2009 and as of December 31, 2008, as
indicated by the Fair Value/Value at Risk column and the Net
Trading Profit/(Loss) column from January 1, 2009 to
December 31, 2009 and from January 1, 2008 to
December 31, 2008. Because of the uncertain nature of the
investments that the Company engages in through the Investees,
the Managing Member believes the entire portfolio value of the
Company is at risk. The Managing Member is unable to track the
impact of market volatility, credit and interest rate risk on
the units because in many cases it does not receive information
on individual investments made by Advisors or their aggregate
holdings and so is not in a position to track such risks on an
aggregate basis.
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Trading
|
|
|
|
|
|
|
% of Members
|
|
|
% of Adjusted
|
|
|
Fair Value/Value
|
|
|
Profit/(Loss)
|
|
|
|
|
Investee
|
|
Equity (1)
|
|
|
Members
Equity (2)
|
|
|
at Risk
|
|
|
(In millions)
|
|
|
Liquidity
|
|
|
GELS
|
|
|
39.40
|
%
|
|
|
37.98
|
%
|
|
$
|
235,518,832
|
|
|
$
|
24.2
|
|
|
|
(3
|
)
|
GFS
|
|
|
22.17
|
%
|
|
|
21.36
|
%
|
|
$
|
132,477,127
|
|
|
$
|
22.5
|
|
|
|
(4
|
)
|
GFS Trust
|
|
|
6.28
|
%
|
|
|
6.05
|
%
|
|
$
|
37,532,758
|
|
|
$
|
2.2
|
|
|
|
(5
|
)
|
GRV
|
|
|
0.82
|
%
|
|
|
0.79
|
%
|
|
$
|
4,887,674
|
|
|
$
|
1.5
|
|
|
|
(6
|
)
|
GTT
|
|
|
25.97
|
%
|
|
|
25.03
|
%
|
|
$
|
155,217,816
|
|
|
$
|
8.1
|
|
|
|
(7
|
)
|
HFPO
|
|
|
3.48
|
%
|
|
|
3.36
|
%
|
|
$
|
20,801,289
|
|
|
$
|
2.1
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
98.12
|
% (9)
|
|
|
94.57
|
% (8)
|
|
$
|
586,435,496
|
|
|
$
|
60.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Trading
|
|
|
|
|
|
|
% of Members
|
|
|
% of Adjusted
|
|
|
Fair Value/Value
|
|
|
Profit/(Loss)
|
|
|
|
|
Investee
|
|
Equity (1)
|
|
|
Members
Equity (2)
|
|
|
at Risk
|
|
|
(In millions)
|
|
|
Liquidity
|
|
|
GELS
|
|
|
29.89
|
%
|
|
|
28.53
|
%
|
|
$
|
182,311,620
|
|
|
$
|
(37.4
|
)
|
|
|
(3
|
)
|
GFS
|
|
|
34.79
|
%
|
|
|
33.21
|
%
|
|
$
|
212,189,214
|
|
|
$
|
(49.4
|
)
|
|
|
(4
|
)
|
GRV
|
|
|
9.68
|
%
|
|
|
9.24
|
%
|
|
$
|
59,060,101
|
|
|
$
|
(6.3
|
)
|
|
|
(6
|
)
|
GTT
|
|
|
19.53
|
%
|
|
|
18.65
|
%
|
|
$
|
119,121,670
|
|
|
$
|
3.2
|
|
|
|
(7
|
)
|
HFPO
|
|
|
6.91
|
%
|
|
|
6.59
|
%
|
|
$
|
42,106,058
|
|
|
$
|
(1.7
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.80
|
% (10)
|
|
|
96.22
|
% (8)
|
|
$
|
614,788,663
|
|
|
$
|
(91.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Members equity, used in the calculation of the investments
as a percentage of members equity, is reduced for member
redemptions that are paid after the balance sheet date according
to ASC 480, Distinguishing Liabilities from Equity. |
|
(2) |
|
Adjusted members equity, used in the calculation of the
fair value of the Investees as a percentage of adjusted
members equity, represents members equity excluding
Redemptions payable in the amount of $22,410,715 at
December 31, 2009 and Redemptions payable in the amount of
$28,982,893 at December 31, 2008. |
|
(3) |
|
Redemptions can be made quarterly with 61 days
notice, or at the sole discretion of the Managing Member. |
|
(4) |
|
Redemptions can be made quarterly on or after the first
anniversary of the initial purchase of the units with at least
91 days notice, or at the sole discretion of the
Managing Member. |
|
(5) |
|
GFS Trust does not provide investors with a voluntary redemption
right. Pursuant to the terms of the trust agreement for GFS
Trust, distributions will be made to holders of interests in GFS
Trust as GFS Trust receives proceeds in respect of its Advisors. |
|
(6) |
|
Redemptions can be made quarterly with 91 days
notice, or at the sole discretion of the Managing Member. GRV
ceased its trading activities effective July 1, 2009 and
will dissolve at the time all assets are liquidated, liabilities
are satisfied and liquidation proceeds are distributed through
payment of a liquidating distribution. GRV suspended redemptions
pending the completion of the liquidation proceedings. |
|
(7) |
|
Redemptions can be made quarterly with 60 days
notice, or at the sole discretion of the Managing Member. |
|
(8) |
|
The total value of the Companys investment in the
Investees was less than 100% of adjusted members equity
because adjusted members equity reflected cash and cash
equivalents greater than total liabilities excluding Redemptions
payable in the amount of $28,982,893 that was payable at
December 31, 2008. |
|
(9) |
|
The total value of the Companys investment in the
Investees was less than 100% of members equity because
members equity reflected cash and cash equivalents greater
than total liabilities. |
|
(10) |
|
The total value of the Companys investment in the
Investees exceeded 100% of members equity because
members equity reflected certain accrued liabilities of
the Company, including fees and expenses, and also reflected
Redemptions payable on the balance sheet date. |
140
Risk
Management
In the ordinary course of business, the Managing Member,
including in its capacity as managing member of the Investment
Funds, attempts to manage a variety of risks, including market,
credit and operational risk. The Managing Member, including in
its capacity as managing member of the Investment Funds,
attempts to identify, measure and monitor risk through various
mechanisms including risk management strategies and credit
policies. These include monitoring risk guidelines and
diversifying exposures across a variety of instruments, markets
and counterparties.
Market risk is the risk of potential significant adverse changes
to the value of financial instruments because of changes in
market conditions such as interest rates, foreign exchange
rates, equity prices, credit spreads, liquidity and volatility
in commodity or security prices. The Managing Member, including
in its capacity as managing member of the Investment Funds,
monitors its exposure to market risk at both the Advisor and
portfolio level through various analytical techniques. At the
Advisor level, market risk is monitored on a regular basis.
Where position level detail is available, the Managing Member,
including in its capacity as managing member of the Investment
Funds, monitors its exposure to market risk through a variety of
analytical techniques, including
Value-at-Risk
(VaR) and scenario analysis (stress testing). VaR is
calculated for each Advisor using a Monte Carlo simulation with
a one-year look back period. The Managing Member looks at VaR
over a
one-day
horizon at the 95% and 99% confidence intervals. As of
December 31, 2009, the Managing Member had full position
level transparency for approximately 28% (as a percentage of
fair value investments) of the Advisors in which the Company
invests through the Investment Funds. For the first and second
quarters of 2008, the Companys calculation of the
percentage of Advisors for which it had position level
transparency was based on a list that excluded some Advisors who
provided position level details but did not provide pricing
information for those positions, resulting in a lower percentage
than had been reported prior to the first quarter of 2008, when
the Company had used a list containing some Advisors who did not
provide pricing information for their positions. Beginning in
the third quarter of 2008, the Company began using an updated
list containing all Advisors for whom the Company received
position level details, whether or not the Advisors also
provided pricing information for those positions. The Company
believes that knowing its transparency on the position level
details of its Advisors provides meaningful information about
its underlying investments in its Advisors whether or not the
Company also has transparency on the pricing information for
these positions and therefore will continue to use such
methodology for conveying information regarding the
Companys position level transparency in future quarters.
The Managing Member believes that the VaR assumptions it
utilizes are reasonable given that VaR is only one determinant
in the Managing Members overall risk management. Where
position level detail is unavailable, an Investment Fund relies
on risk reports provided by the Advisors as well as through open
communication channels with Advisors, which generally includes
site visits and monthly conference calls. The Companys
maximum risk of loss is limited to the Companys investment
in the Investment Funds. The risks involved are more fully
described under ITEM 1A. RISK FACTORSGeneral
RisksRisks Related to the Company and the Investment
Funds Performance and OperationA Substantial Portion
of an Investment Funds Assets May be Invested Utilizing
Strategies That are Not Within its Investment Sector; Most
Advisors do not Provide Detailed Position Information Regarding
their Portfolios and Dependence on the
Managing Member and the Advisors; the Managing Member Generally
Has Limited Access to Information on or Control over
Advisors Portfolios and Members Assume the Risk that
Advisors May Knowingly Misrepresent Information Which Could Have
a Material Negative Impact on the Company.
The managing member of the Investment Funds monitors Advisors to
prevent style drift. Style drift is defined as
Advisors changing their investment style from the Investment
Funds expectations. Where position level detail is
available, the managing member of the Investment Funds monitors
leverage against predetermined limits. Position sizing limits
are also monitored to ensure Advisors are properly diversified
and risk normally is not concentrated in one or relatively few
positions. In some cases, the managing member of the Investment
Funds also has the ability to monitor approved trading
instruments to ensure Advisors are not trading securities
outside their mandate. Where position level detail is not
available, the managing member of the Investment Funds relies on
both written and oral Advisor communications. The risks involved
are more fully described under ITEM 1A. RISK
FACTORSGeneral RisksRisks Related to the Company and
the Investment Funds Performance and OperationA
Substantial Portion of an Investment Funds Assets May be
Invested Utilizing Strategies That
141
are Not Within its Investment Sector; Most Advisors do not
Provide Detailed Position Information Regarding their
Portfolios and Dependence on the Managing
Member and the Advisors; the Managing Member Generally Has
Limited Access to Information on or Control over Advisors
Portfolios and Members Assume the Risk that Advisors May
Knowingly Misrepresent Information Which Could Have a Material
Negative Impact on the Company.
At the Companys portfolio level, the Companys
portfolio construction process is designed to provide for
adequate diversification. Each Investment Fund, other than HFPO
and GRV, is a portfolio of approximately
10-30
underlying Advisors and the managing member of each of the
Investment Funds regularly reviews portfolio statistics, such as
relative contribution to risk, to confirm that risk is not
concentrated in any single Advisor. However, as of April 1,
2008, GFS is no longer prohibited from allocating 25% or more of
its assets to any single Advisor. The managing member of GFS, in
its sole discretion, may determine from time to time the number
of Advisors with which GFS invests based on factors such as the
amount of GFSs assets under management, the availability
of attractive opportunities, and other portfolio construction
considerations. Any such greater concentration with any single
Advisor or in any single investment strategy may entail
additional risks. See Item 1A. RISK
FACTORSGeneral RisksRisks Related to the Company and
the Investment Funds Performance and
OperationNon-Diversified Status; the Managing Member may
Allocate to One or More Advisors a Relatively Large Percentage
of an Investment Funds Assets.
Quantitative analysis is combined with judgment to determine
weightings, strategic return, risk and correlation estimates to
inform the quantitative analysis. Judgment is applied to both
estimates and weights in an attempt to achieve exposure to hedge
funds while delivering attractive risk-adjusted returns. The
approximate weights of the Investees were 29% GELS, 33% GFS, 9%
GRV, 19% GTT and 7% HFPO as of December 31, 2008 as a
percentage of adjusted members equity which excluded
redemptions paid after December 31, 2008. The approximate
weights of the Investees were 38% GELS, 21% GFS, 6% GFS Trust,
1% GRV, 25% GTT and 3% HFPO as of December 31, 2009 as a
percentage of adjusted members equity. This portfolio
construction process is designed to create a diversified hedge
fund portfolio with attractive return and risk characteristics.
See ITEM 1. BUSINESSINVESTMENT
PROGRAMAllocation Among the Investment Funds.
The Managing Member may, from time to time, vary or change
materially the actual allocation of assets made by the Company,
as it deems appropriate in its sole discretion, including
without limitation by way of allocation of Company assets to any
new Investment Fund or Advisor, complete or partial withdrawal
of an allocation to any existing Investment Fund or Advisor, a
reallocation of assets among existing Investment Funds or
Advisors, or any combination of the foregoing. In carrying out
any reallocation of Company assets, the Managing Member will
have the sole discretion to determine the manner of such
reallocation, including from which Investment Funds or Advisors
to withdraw assets and to which Investment Funds or Advisors to
allocate assets. Any reallocation of Company assets, for
purposes of diversification, attempts to meet target allocations
or otherwise, may take a significant period of time to implement
due to the liquidity provisions and restrictions of the
Investment Funds and the Advisors and for other reasons. There
can be no assurance that market or other events will not have an
adverse impact on the strategies employed by multiple Investment
Funds and Advisors. Investment Funds and Advisors may at certain
times hold large positions in a relatively limited number of
investments. The Company could be subject to significant losses
if an Investment Fund or an Advisor holds a large position in a
particular investment that declines in value that cannot be
liquidated without adverse market reaction or is otherwise
adversely affected by changes in market conditions or
circumstances. While the Managing Member currently expects to
allocate assets to all the Investment Sectors (other than
relative value) through allocations to the Investment Funds,
since April 1, 2008, the Managing Member had no constraints
with respect to the percentage of the Companys assets to
be allocated, directly or indirectly, to any single Advisor,
group of Advisors, Investment Fund, or Investment Sector, or
with respect to the number of Investment Funds and Advisors to
which, directly or indirectly, assets of the Company are
allocated at any time. The percentage of the Companys
assets to be allocated to any single Advisor, group of Advisors,
Investment Fund or Investment Sector, and the number of
Investment Funds and Advisors to which the Company allocates
assets from time to time will be determined by the Managing
Member in its sole discretion, based on factors deemed relevant
by the Managing Member at the time of such allocation, which may
include the amount of the Companys assets under
management, constraints on the capital capacity of the
Investment Funds and Advisors, the availability of attractive
opportunities, and other portfolio construction and portfolio
management considerations.
142
As the GRV portfolio is liquidated over time, the weighting of
GRV as a percentage of the Companys adjusted members
equity will decrease. As of December 31, 2009, GRV
represented approximately 1% of the Companys adjusted
members equity and the fair value of the Companys
investments in GRV was $4,887,674. The Company is reinvesting
the liquidation proceeds it receives from GRV in accordance with
the Companys investment program.
The Company invests in the Investment Funds, and may from time
to time redeem its membership units of the Investment Funds.
Neither GFS Trust nor GRV provide investors with a voluntary
redemption right. The Investment Funds, in turn, maintain
relationships with counterparties that include the Advisors.
These relationships could result in concentrations of credit
risk. Credit risk arises from the potential inability of
counterparties to perform their obligations under the terms of
the contract, including, in the case of the Companys
investments in the Investment Funds, the potential inability of
an Investment Fund to satisfy its redemption obligations. The
managing member of the Investment Funds (currently, the Managing
Member) has formal credit-review policies to monitor
counterparty risk.
In addition to market risk and credit risk, the Managing Member,
including in its capacity as managing member of the Investment
Funds, allocates resources to mitigate operational risk.
Operational risk is the potential for loss caused by a
deficiency in information, communication, transaction
processing, settlement and accounting systems. The Managing
Member, including in its capacity as managing member of the
Investment Funds, maintains controls and procedures for the
purpose of mitigating its own operational risk but it does not
have control over the systems of the Advisors. In addition, the
Managing Member, including in its capacity as managing member of
the Investment Funds, deploys resources to assess control
systems, legal risk, compliance risk, operations and treasury
risk, credit risk, accounting risk and reputational risk.
Fraud and other business risks cannot be eliminated; however,
the Managing Member, including in its capacity as managing
member of the Investment Funds, seeks to significantly reduce
such risks. The portfolio risk management process includes an
effort to monitor and manage risk, but should not be confused
with and does not imply low risk. There can be no assurance that
the Managing Member, including in its capacity as managing
member of the Investment Funds, will be able to implement its
risk guidelines or that its risk monitoring strategies will be
successful.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
For the Companys financial statements, see the Financial
Statements beginning on
page F-1
of this Annual Report.
The following is a summary of unaudited quarterly results of
operations of the Company for the period from January 1,
2008 to December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended
|
|
|
|
Mar. 31,
|
|
|
June 30,
|
|
|
Sep. 30,
|
|
|
Dec. 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
Net Trading Profit/(Loss)
|
|
$
|
(7,642,197
|
)
|
|
$
|
22,542,434
|
|
|
$
|
(64,673,915
|
)
|
|
$
|
(41,873,947
|
)
|
Total Expenses
|
|
$
|
2,395,147
|
|
|
$
|
2,688,753
|
|
|
$
|
2,573,237
|
|
|
$
|
2,321,371
|
|
Net Income/(Loss)
|
|
$
|
(9,944,622
|
)
|
|
$
|
19,929,186
|
|
|
$
|
(67,148,220
|
)
|
|
$
|
(44,061,135
|
)
|
Net Income/(Loss) Available for pro rata
allocation to Members
|
|
$
|
(9,946,834
|
)
|
|
$
|
19,411,322
|
|
|
$
|
(66,642,618
|
)
|
|
$
|
(44,061,135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended
|
|
|
|
Mar. 31,
|
|
|
June 30,
|
|
|
Sep. 30,
|
|
|
Dec. 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
Net Trading Profit/(Loss)
|
|
$
|
6,140,299
|
|
|
$
|
18,620,945
|
|
|
$
|
25,706,878
|
|
|
$
|
10,087,512
|
|
Total Expenses
|
|
$
|
2,244,249
|
|
|
$
|
2,200,386
|
|
|
$
|
2,184,443
|
|
|
$
|
2,242,580
|
|
Net Income/(Loss)
|
|
$
|
3,976,409
|
|
|
$
|
16,474,468
|
|
|
$
|
23,537,710
|
|
|
$
|
7,855,376
|
|
Net Income/(Loss) Available for pro rata allocation to
Members
|
|
$
|
3,975,595
|
|
|
$
|
16,453,430
|
|
|
$
|
23,464,525
|
|
|
$
|
7,812,732
|
|
143
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
There have been no changes in, or disagreements with,
accountants on accounting and financial disclosure.
|
|
ITEM 9A(T).
|
CONTROLS
AND PROCEDURES
|
Disclosure
Controls and Procedures
As of the end of the period covered by this report, an
evaluation was carried out by the Managing Members
management, with the participation of its principal executive
officer and principal financial officer (or persons performing
similar functions), of the effectiveness of the design and
operation of the Companys disclosure controls and
procedures (as defined in
Rule 13a-15(e)
under the Exchange Act). Based on that evaluation, the
Companys principal executive officer and principal
financial officer (or persons performing similar functions)
concluded that the Companys disclosure controls and
procedures were effective as of the end of the period covered by
this report.
Managements
Report on Internal Control over Financial Reporting
The management of the Managing Member of the Company is
responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over
financial reporting is defined in
Rule 13a-15(f)
or 15d-15(f)
promulgated under the Exchange Act, as a process designed by, or
under the supervision of, the Managing Members principal
executive and principal financial officers (or persons
performing similar functions) and effected by the Managing
Members board of directors, management and other
personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
consolidated financial statements for the Company for external
purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that:
|
|
|
|
|
pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of the assets of the company;
|
|
|
|
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of consolidated financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and
|
|
|
|
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
companys assets that could have a material effect on the
consolidated financial statements.
|
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
The management of the Managing Member assessed the effectiveness
of the Companys internal control over financial reporting
as of December 31, 2009. In making this assessment, the
Managing Member used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in
Internal ControlIntegrated Framework.
Based on this assessment, the management of the Managing Member
believes that, as of December 31, 2009, the Companys
internal control over financial reporting is effective based on
those criteria.
This Annual Report does not include an Attestation Report of the
Companys registered public accounting firm regarding
internal control over financial reporting. The report of the
management of the Managing Member was not subject to attestation
by the Companys registered public accounting firm pursuant
to temporary rules of the SEC that permit the Company to provide
only the Managing Members managements report in this
Annual Report.
144
The information contained in this report shall not be deemed
to be filed for purposes of Section 18 of the Exchange Act
or otherwise subject to the liabilities of that section, nor
shall such information be incorporated by reference into any
future filing under the Securities Act or the Exchange Act.
Changes
in Internal Control Over Financial Reporting
In addition, no change in the Companys internal control
over financial reporting (as defined in
Rule 13a-15(f)
under the Exchange Act) occurred during the fourth quarter of
the Companys fiscal year ended December 31, 2009 that
has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial
reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
145
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS OF THE MANAGING MEMBER AND REGISTRANT AND
CORPORATE GOVERNANCE
|
The Company currently has directors but no executive officers,
and historically has had no directors, until April 1, 2009,
or executive officers. The Managing Member is, and has
historically been, responsible for the management and operations
of the Company. Information about the Managing Member and the GS
Group appears in ITEM 1. See ITEM 1.
BUSINESSTHE MANAGING MEMBER. On
April 1, 2009, the Managing Member established a board of
directors of the Company (the Board of Directors) to
supervise the affairs of the Company in lieu of the supervision
previously provided by the Board of Directors of the Managing
Member. The Managing Member, through its executive officers who
have responsibility for the Company, currently is and will
continue to be responsible for the operations of the Company.
The following table sets forth the executive officers of the
Managing Member who have responsibility for the Company and the
directors of the Company.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position(s)
|
|
Kent A. Clark
|
|
|
45
|
|
|
Managing Director and Chief Investment Officer of the Managing
Member
|
Jennifer Barbetta
|
|
|
37
|
|
|
Managing Director and Chief Financial Officer of the Managing
Member
|
Westley D. Chapman
|
|
|
43
|
|
|
Managing Director of the Managing Member
|
J. Christopher A. Kojima
|
|
|
40
|
|
|
Director of the Company
|
A. Charles Baillie
|
|
|
42
|
|
|
Director of the Company
|
Information about the executive officers of the Managing Member
and the directors of the Company is provided below.
Kent A. Clark is a Managing Director of Goldman
Sachs and Chairman of the Investment Committee of the Managing
Member. Mr. Clark is also the Chief Investment Officer of
the Managing Member, and performs the responsibilities of
principal executive officer of the Managing Member.
Mr. Clark joined GSAM in 1992 as a member of the
Quantitative Equity team, where he managed Global Equity
portfolios and equity market neutral trading strategies. In this
capacity, he also developed risk and return models.
Mr. Clarks research has been published in the Journal
of Financial and Quantitative Analysis and in Enhanced Indexing.
Mr. Clark serves on the Board of Governors of the Graduate
Faculty at the New School University, on the board of the
Managed Funds Association, and is a member of the Chicago
Quantitative Alliance. Formerly, he was president of the Society
of Quantitative Analysts. Mr. Clark joined Goldman Sachs
from the University of Chicago Graduate School of Business where
he completed all but dissertation in the Ph.D. program and
earned an M.B.A. He holds a Bachelor of Commerce degree from the
University of Calgary.
Jennifer Barbetta is a Managing Director of
Goldman Sachs and is the Chief Financial Officer of the Managing
Member and a Director of the Managing Member. Ms. Barbetta
is also the Chief Operating Officer for Goldman Sachs Asset
Managements Alternative Investments & Manager
Selection businesses, which include the Private Equity Group,
Hedge Fund Strategies and Global Manager Strategies.
Ms. Barbetta is responsible for client reporting, portfolio
monitoring and analytics, cash and credit management,
infrastructure development and overall administration of the
groups products. Ms. Barbetta joined Goldman Sachs in
1995 as an analyst in the Finance Division where she supported
the Real Estate Principal Investment Area, focusing on the
financial and tax reporting of the Whitehall Street Real Estate
Limited Partnerships. Ms. Barbetta joined the Private
Equity Group in 1997 and became head of its Portfolio Analytics
and Reporting team in 2003 and Chief Operating Officer in 2005,
prior to expanding her role within GSAM. Ms. Barbetta
earned a B.S. in Finance from Villanova University and was a
member of the Beta Gamma Sigma honor society.
Westley D. Chapman is a Managing Director of
Goldman Sachs and Head of Quantitative, Operational &
Business Due Diligence of the Managing Member. Prior to joining
the Managing Member, Mr. Chapman was the Chief Financial
Officer of the Investment Management Division where he led the
divisions financial management processes, including a
strategic review of the infrastructure systems and processes
supporting the Managing
146
Member. Prior to joining GSAM in 1997, Mr. Chapman was the
Director of Financial Planning & Analysis at Travelers
Group, focusing on their life insurance businesses, where he
participated in the integration and evaluation of business
acquisitions. Prior to joining Travelers Group in 1994,
Mr. Chapman supported IBM as an auditor at Price Waterhouse
where he led elements of the annual audit, performed control
reviews of various Corporate Treasury systems and processes, and
participated in a number of consulting projects. He obtained an
M.B.A. in Finance from New York University in 1993 and a B.A. in
Economics from Harvard College in 1989. Mr. Chapman is a
Certified Public Accountant.
J. Christopher A. Kojima has been a director
of the Company since April 1, 2009. Mr. Kojima is a
Managing Director of Goldman Sachs and co-head of the
Alternative Investments and Manager Selection businesses, which
oversees the Private Equity Group, Hedge Fund Strategies
Group, Global Manager Strategies Group and Portfolio Solutions
Group. Previously, Mr. Kojima was the co-head of the
Private Equity Group focusing on the private equity secondary
market. Prior to joining the Private Equity Group,
Mr. Kojima specialized in leveraged buyouts in the
Leveraged Finance Group. Mr. Kojima joined Goldman Sachs in
1995 in the Investment Banking Division. Mr. Kojima is a
trustee of The Juilliard School and The Asian Cultural Council,
and serves as adjunct professor at Columbia Business School.
Mr. Kojima earned a JD, cum laude, from Harvard Law School
and is a member of the New York Bar. Mr. Kojima received an
M.Phil. from The University of Cambridge, and a B.Comm. from The
University of Manitoba.
A. Charles Baillie has been a director of the
Company since April 1, 2009. Mr. Baillie is a Managing
Director of Goldman Sachs and co-head of the Alternative
Investments and Manager Selection businesses in the Investment
Management Division, which oversees the Private Equity Group,
Hedge Fund Strategies Group, Global Manager Strategies
Group and Petershill Group. Prior to joining the Private Equity
Group, Mr. Baillie worked in the Mergers &
Acquisitions Group in London where he focused on restructurings.
Mr. Baillie joined the firm as an analyst in 1991 in the
Corporate Finance Department of the Investment Banking Division.
Mr. Baillie received a BAH from Queens University,
Canada, an MA from the University of Oxford, and an MBA from the
Harvard Graduate School of Business Administration, where he
graduated as a Baker Scholar.
Compliance
with Section 16(a) of the Securities Exchange Act of
1934
Section 16(a) of the Exchange Act requires the officers and
directors of the Managing Member and persons who own more than
ten percent of the Companys units to file forms reporting
their affiliation with the Company and reports of ownership and
changes in ownership of the Companys units with the SEC.
These persons and entities are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms
they file. To the best of the Companys knowledge, based
solely on a review of the copies of such reports furnished to
the Company, during the year ended December 31, 2009 all
Section 16(a) filing requirements applicable to such
persons and entities were complied with for such year.
Code of
Ethics
The Managing Member has adopted a Code of Ethics for the Company
that applies to the Board of Directors and the persons acting as
chief executive officer and chief financial officer/chief
accounting officer of the Company. A copy of the Companys
Code of Ethics was filed as an exhibit to the Companys
Form 10-K
for December 31, 2004. If the Company makes any substantive
amendments to the Code of Ethics or grants any waiver, including
an implicit waiver, from a provision of the Code of Ethics as
applicable to the persons acting as chief executive officer and
chief financial officer/chief accounting officer of the Company,
the Company will disclose the nature of such amendment or waiver
in a report on
Form 8-K.
In addition, the Managing Member has adopted a Code of Ethics
for the Managing Member that applies to, among others, the chief
executive officer and chief financial officer/chief accounting
officer of the Managing Member. A copy of the Managing
Members Amended Code of Ethics was filed as an exhibit to
the Companys
Form 10-K,
filed April 2, 2007.
147
Corporate
Governance
Nominating
Committee and Compensation Committee
The Company is not a listed issuer as defined under
Section 10A-3
of the Exchange Act and is therefore not required to have a
nominating and compensation committee comprised of independent
directors. The Company currently does not have a standing
nominating or compensation committee and accordingly there are
no charters for such committees. The Board of Directors believes
that standing committees are not necessary and that the
directors of the Board of Directors collectively have the
requisite background, experience, and knowledge to fulfill any
limited duties and obligations that a nomination committee and a
compensation committee would have on behalf of the Company. In
addition, no direct compensation is paid to any employees of the
Company making a compensation committee not applicable.
Furthermore, the Board of Directors has the power to engage
experts or consultants as it deems appropriate to carry out its
responsibilities.
Audit
Committee and Audit Committee Financial Expert
The Company is not a listed issuer as defined under
Section 10A-3
of the Exchange Act and is therefore not required to have an
audit committee comprised of independent directors. The Company
currently does not have an audit committee, and accordingly
there is no charter for such committee, and the Board of
Directors which performs the functions of an audit committee on
behalf of the Company believes that the directors of the Company
collectively have the requisite financial background,
experience, and knowledge to fulfill the duties and obligations
that an audit committee would have including overseeing the
Companys accounting and financial reporting practices.
Therefore, the Board of Directors does not believe that it is
necessary at this time to search for a person who would qualify
as an audit committee financial expert. Furthermore, the Board
of Directors has the power to engage experts or consultants as
it deems appropriate to carry out its responsibilities.
The Board of Directors has:
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reviewed and discussed the financial statements with management
of the Managing Member responsible for the management and
operations of the Company;
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discussed with the independent auditors the matters required to
be discussed by the Statement of Auditing Standards
No. 114, as amended, as adopted by the Public Company
Accounting Oversight Board in Rule 3200T;
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received the written disclosures and the letters from the
independent accountants required by the Public Company
Accounting Oversight Board in Rule 3526, and has discussed
with the independent accountant, the independent
accountants independence; and based on the review and
discussions referred to above, the Board of Directors
recommended that the audited financial statements be included in
the Companys Annual Report for filing with the SEC.
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Advisory
Committee
In addition, pursuant to the Companys LLC Agreement, the
Managing Member is authorized to select one or more Members who
are not affiliated with the Managing Member to serve on a
committee, the purpose of which would be to, on behalf of the
Members, approve or disapprove, to the extent required by
applicable law, principal transactions and certain other related
party transactions.
Board
Meetings and Committees; Annual Meeting Attendance; Shareholder
Communications
The Board of Directors is responsible for the management and
operations of the Company. In 2009, the Board of Directors met
frequently, including at regularly scheduled quarterly meetings,
with employees of the Managing Member to discuss, among other
things, the Company. As discussed above, the Company does not
have standing audit, nominating and compensation committees.
The Company does not have a policy with regard to board
members attendance at annual meetings of Members. The
Company does not hold director elections and therefore does not
solicit proxies for the elections of directors from Members (or
by written consent) and the Company is not required under
Delaware law nor under its
148
LLC Agreement to hold annual meetings for its Members. The
Company did not hold an annual meeting for Members in 2009 and
accordingly no members of the Board of Directors attended.
Members wishing to communicate with the Board of Directors may
send communications to Ms. Kristin Olson, Goldman,
Sachs & Co., 200 West Street, New York, New York 10282
who will forward all appropriate communications directly to the
Board of Directors or to any individual director or directors,
depending upon the facts and circumstances outlined in the
communication. In addition, Members have the opportunity to
receive the Companys monthly report to Members which
provides for information as to how Members can contact a
designated contact person at the Managing Member with any
questions relating to the Members investment in the
Company and the Companys performance. Moreover, the
Memorandum provides for contact information for Members relating
to their investment in the Company. The Managing Member believes
that it is not necessary to have a more specific and detailed
process and that providing contact information for the Managing
Member provides for an appropriate means for communication for
Members with the Board of Directors or with respect to their
investment in the Company.
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ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The Company does not bear the costs of the annual compensation
of its directors or the executive officers of the Managing
Member. The Managing Member and its affiliates receive
compensation from the Company for services provided to the
Company and will not bear costs for the Companys
directors. Set forth below are the amounts of the different
types of fees paid or payable by the Company, or allocable to
the Managing Member and its affiliates during the year ended
December 31, 2009. Information about the terms and
conditions of the Management Fee and the Incentive Allocation
and other fees and expenses appear in ITEM 1. See
ITEM 1. BUSINESSFEES AND EXPENSES.
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Fee Type
|
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Fee Amount
|
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Management Fee paid or payable by the Company
|
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$
|
7,578,899
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Incentive Allocation paid or payable by the Company
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$
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137,681
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Placement Fee paid or payable by the Company to Goldman Sachs
|
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$
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ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
Security
Ownership of Certain Beneficial Owners
To the knowledge of the Company, no person beneficially owns
more than five percent of the units.
Security
Ownership of Management
GS HFS, the Managing Member of the Company, did not have a
beneficial interest in the Company as of December 31, 2009
other than the Incentive Allocation and other fees payable to it
by the Company.
The following table sets forth (i) the individual directors
and executive officers of the Managing Member and the directors
of the Company and (ii) all of the directors and executive
officers as a group who beneficially owned units of the Company
as of March 29, 2010.
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Percentage of All
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Investors
|
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Number of Units
|
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Name of Beneficial
Owner
|
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Interests
|
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0
|
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Kent A. Clark
|
|
|
|
|
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0
|
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Jennifer Barbetta
|
|
|
|
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|
0
|
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Westley D. Chapman
|
|
|
|
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0
|
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J. Christopher A. Kojima
|
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|
|
|
|
0
|
|
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A. Charles Baillie
|
|
|
|
|
|
0
|
|
|
Directors and executive officers as a group
|
|
|
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149
Changes
in Control
There are no arrangements, including pledges by any person of
units of the Company, the operation of which may at a subsequent
date result in a change of control of the Company.
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ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The Managing Member is an advisory affiliate of Goldman Sachs
and GSAM. Each of the Managing Member, Goldman Sachs and GSAM is
a wholly owned subsidiary of The Goldman Sachs Group, Inc. See
ITEM 1. BUSINESSPOTENTIAL CONFLICTS OF
INTEREST.
The Managing Member also manages a number of other investment
funds that have investment programs that are similar to those of
the Company. See ITEM 1. BUSINESSPOTENTIAL
CONFLICTS OF INTEREST.
From time to time certain qualified officers and employees of
the GS Group may invest in the Company. Neither the Investment
Funds Advisors nor any of their respective principals are
presently expected to purchase units or membership units in the
Investment Funds. See ITEM 1.
BUSINESSPOTENTIAL CONFLICTS OF INTEREST.
The Company may from time to time, in the sole discretion of the
Managing Member, invest in money market funds sponsored, managed
or advised by the GS Group, and the Company will not be
reimbursed for any fees accruing to any affiliate of the GS
Group in respect of any such investment. See ITEM 1.
BUSINESSINVESTMENT PROGRAMInvestment
Objective and Approach.
The Company pays the Managing Member a Management Fee. See
ITEM 1. BUSINESSFEES AND EXPENSES.
Some of the directors of the Company and executive officers of
the Managing Member also are or may become directors and
executive officers of Goldman Sachs which entities provided
services for the Company, other than as an underwriter, during
the year ended December 31, 2009 and are proposed to
provide such services in the current year.
No directors of the Company and executive officers of the
Managing Member, their spouses and entities owned or controlled
by them invested an amount in excess of $120,000 in the Company
during the year ended December 31, 2009. Certain directors
of the Company and executive officers of the Managing Member,
including their spouses and entities owned or controlled by
them, may from time to time invest in the Company. In addition,
certain of the directors of the Company and executive officers
of the Managing Member from time to time invest their personal
funds directly in other funds managed by the GS Group on the
same terms and conditions as the other investors in these funds,
who are not directors, executive officers or employees.
Under the Companys Related Party Transaction Policy, which
is a written policy adopted as of March 28, 2007, the Board
of Directors is required to review all related party
transactions for potential conflicts of interest. The Board of
Directors shall approve each such transaction if it is
consistent with the policy and is on terms, taken as a whole,
which the Board of Directors believes are no less favorable to
the Company than could be obtained in an arms-length transaction
with an unrelated third party, unless the Board of Directors
otherwise determines that the transaction is not in the
Companys best interests. The policy also provides for a
ratification process if it is not practical for the Board of
Directors to review the transaction in advance.
The types of related party transactions covered by the policy
are those that are required to be disclosed pursuant to SEC
Regulation S-K,
Item 404(a). There were no transactions required to be
reported under Item 404(a) since the beginning of the
Companys fiscal year where the Companys procedures
and policies did not require review or were not followed.
Pursuant to the LLC Agreement, the Managing Member is authorized
by the Members to select on behalf of the Members one or more
Members who are not affiliated with the Managing Member to serve
on a committee, the
150
purpose of which will be to consider and, on behalf of the
Members, approve or disapprove, to the extent required by the
applicable law, principal transactions and certain other related
party transactions.
Director
Independence
The Company is not a listed issuer as defined under
Section 10A-3
of the Exchange Act and is therefore not subject to a
requirement that a majority of the board of directors be
independent. The Managing Member is responsible for the
management and operations of the Company. All of the directors
of the Company are employees of Goldman Sachs and the Managing
Member. Accordingly, under the Independence Test of the
Corporate Governance Standards of the New York Stock Exchange
and other comparable stock exchange standards, none of the
directors of the Company are independent. Similarly, as
discussed further under Item 10, the Company is not subject
to the requirements under the Corporate Governance Standards of
the New York Stock Exchange that the audit, nominating and
compensation committees be comprised of independent directors
and the Managing Member does not currently have and the Company
is not expected to have separately designated audit, nominating
and compensation committees.
Brokerage
The Advisors of the Investment Funds, managing their assets
directly (including through Advisor Funds) or through Portfolio
Companies, have the authority to select brokers and dealers from
a list approved by the managing member of the Investment Funds,
through which to effect transactions on the basis of various
factors. The managing member of the Investment Funds requires
such Advisors to select executing brokers on a best execution
basis, taking into consideration such factors as price,
commissions and commission equivalents, other transaction costs,
quality of brokerage services, financing arrangements,
creditworthiness and financial stability, financial
responsibility, strength and clearance and settlement
capability. The Company does not have oversight over broker and
dealer selection by Investment Funds.
To the extent permitted under applicable law, the Advisors may,
in their sole discretion, execute transactions on behalf of the
Company and the Investment Funds, through Managed Accounts,
Portfolio Companies and Advisor Funds, and with or through
Goldman Sachs, and such transactions may, in some cases, be
executed together with transactions on behalf of Goldman Sachs.
The Advisors may also use Goldman Sachs for prime brokerage and
other services for the Managed Accounts, Portfolio Companies and
Advisor Funds, as well as their other clients.
Additionally, in selecting brokers and dealers to execute
transactions for any Portfolio Company or Advisor Fund, or the
Company or an Investment Fund through any Managed Account,
certain of the Advisors may have authority to and may consider
products or services provided, or expenses paid, by such brokers
and dealers to, or on behalf of, such Advisors. Products and
services generally include research items. In some
circumstances, the commissions paid on transactions with brokers
or dealers providing such services may exceed the amount another
broker would have charged for effecting that transaction.
Soft dollar payments or rebates of amounts paid to
brokers and dealers may arise from exchange traded agency
transactions, as well as over-the-counter principal
transactions. In addition, such payments or rebates may be made
by futures brokers in connection with futures transactions.
Research or other services obtained in this manner may be used
in servicing any or all advisory clients of the Advisors of the
Investment Funds, including each of the Investment Funds and the
Portfolio Companies, and may be used in connection with advisory
accounts other than those that pay commissions to the broker or
dealer relating to the research or other service arrangements.
GS Group may also receive products or services, including
research, from brokers and dealers that provide brokerage
services to its clients. The brokers and dealers providing such
products and services may include the brokers and dealers that
Advisors select to execute transactions on behalf of Portfolio
Companies and Advisor Funds, and the Company or an Investment
Fund through Managed Accounts. Research products and services
made available to GS Group through such brokers and dealers may
include: performance and other qualitative and quantitative data
relating to Advisors in general and certain Advisors in
particular; data relating to the historic performance of
categories of securities associated with particular investment
styles; quotation equipment; and related computer hardware and
software, all of which research products and services may be
used by the managing
151
member of the Investment Funds in connection with its selection
and monitoring of Advisors, the portfolio design of a mix of
investment styles appropriate to investment objectives of
clients, and the determination of overall portfolio strategies
including asset allocation models.
Placement
Agent
Goldman Sachs acts as placement agent for the Company (the
Placement Agent). The Placement Agent is entitled to
a fee (the Placement Fee) of up to a specified
amount of each Members subscription. Historically, Goldman
Sachs has not charged a Placement Fee, however, there can be no
assurance that Goldman Sachs will not charge a Placement Fee in
the future. Amounts paid in respect of the Placement Fee will
not constitute assets of the Company. The Placement Agent may
also receive compensation from the Managing Member that
represents a portion of the Management Fee. The Placement Agent
may enter into sub-placement agreements with affiliates and
unaffiliated third parties, and the Company may engage one or
more affiliated or unaffiliated successors or additional
placement agents or distributors. At the discretion of the
Placement Agent, all or a portion of the Placement Fee may be
allocated to such sub-placement agents. The Managing Member or
the Company may also pay certain expenses of the Placement Agent
and certain fees and expenses of other Intermediaries. The
Company may waive or impose different sales charges, or
otherwise modify its distribution arrangements, in connection
with the offering of units. Subject to applicable law, the
Placement Agent and Intermediaries, at their discretion (with
the approval of the Managing Member) may on a negotiated basis
enter into private arrangements with a Member or prospective
Member (or an agent thereof) under which the Placement Agent, an
Intermediary or the Managing Member makes payments to or for the
benefit of such Member which represent a rebate of all or part
of the fees paid by the Company to the Managing Member in
respect of such holders units. Consequently, the effective
net fees payable by a Member who is entitled to receive a rebate
under the arrangements described above may be lower than the
fees payable by a Member who does not participate in such
arrangements. Such arrangements reflect terms privately agreed
between parties other than the Company, and for the avoidance of
doubt, the Company cannot, and is under no duty to, enforce
equality of treatment between Members by other entities,
including those service providers of the Company that it has
appointed. The Placement Agent, an Intermediary or the Managing
Member shall be under no obligation to make arrangements
available on equal terms to other Members. Pursuant to an
agreement entered into between the Placement Agent and the
Company (the Placement Agent Agreement), the Company
has agreed to indemnify and hold harmless the Placement Agent,
its affiliates and any agent against any losses, claims, damages
or liabilities (or actions in respect thereof), joint or several
(the Covered Claims), to which the Placement Agent
may become subject, to the extent such Covered Claims arise out
of or are based upon (i) an untrue statement or alleged
untrue statement of a material fact contained in the Memorandum,
or (ii) the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make
the statement therein not misleading. The Placement Agent
Agreement provides that the Company will reimburse the Placement
Agent for any legal or other expenses reasonably incurred by the
Placement Agent in connection with investigating or defending
any such Covered Claims; provided, however, that the Company
will not be liable to indemnify or reimburse the Placement Agent
in any such case to the extent that any such Covered Claims
arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in the
Memorandum in reliance upon and in conformity with written
information furnished to the Company by the Placement Agent
expressly for use therein.
In addition, to the extent the indemnification provisions
described in the preceding paragraph are unavailable or
insufficient to hold harmless an indemnified party with respect
to any Covered Claims, the Placement Agent Agreement specifies
that the Company will contribute to the amount paid or payable
by such indemnified party as a result of such Covered Claims in
such proportion as is appropriate to reflect the relative
benefits received by the Company and the Placement Agent from
the offering of the units, unless otherwise provided by
applicable law or the Placement Agent Agreement.
Goldman Sachs also acts as the placement agent on behalf of the
Investment Funds. The Company will not be charged any placement
fee by the Investment Funds.
152
|
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ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
The following table presents fees for the professional audit
services rendered by E&Y for the audit of the
Companys annual financial statements for the years ended
December 31, 2009 and 2008 and fees billed for other
services rendered by E&Y during those periods.
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Year Ended
|
|
|
|
December 31
|
|
|
|
2009
|
|
|
2008
|
|
|
Audit Fees
|
|
$
|
179,473
|
|
|
$
|
148,000
|
|
Audit-Related Fees
|
|
$
|
|
|
|
$
|
|
|
Tax Fees(1)
|
|
$
|
81,500
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|
|
$
|
70,800
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|
All Other Fees
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
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$
|
260,973
|
|
|
$
|
218,800
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|
|
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(1) |
|
Tax services primarily involve assistance with the preparation
of tax returns and K-1s. |
The Board of Directors does not have an audit committee which is
responsible for the oversight of the Companys accounting
and financial reporting practices. As the Company does not have
a formal audit committee, the services described above were not
approved by the audit committee and the Company does not have
audit committee pre-approval policies and procedures. The Board
of Directors as a whole is responsible for the oversight of the
Companys accounting and financial reporting practices and
the Board of Directors is responsible for approving every
engagement of E&Y to perform audit or non-audit services
for the Company before E&Y is engaged to provide those
services. The Board of Directors considers whether the provision
of any non-audit provisions is compatible with maintaining
E&Ys independence.
153
PART IV
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ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a) Documents Filed as Part of this Annual Report:
1. Financial Statements.
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Page
|
|
Description of Financial
Statements
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|
Number
|
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|
Goldman Sachs Hedge Fund Partners, LLC Financial Statements
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|
Report of Independent Registered Public Accounting Firm
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F-2
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Schedule of Investments as of December 31, 2009 and
December 31, 2008
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F-3
|
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Balance Sheet as of December 31, 2009 and December 31,
2008
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F-4
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Statement of Operations for the years ended December 31,
2009, 2008 and 2007
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F-5
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Statement of Changes in Members Equity for the years ended
December 31, 2009, 2008 and 2007
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F-6
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Statement of Cash Flows for the years ended December 31,
2009, 2008 and 2007
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F-7
|
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Notes to Financial Statements
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F-8
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2.
|
Financial Statement Schedules.
|
Certain schedules are omitted because they are not applicable or
the required information is shown in the financial statements or
notes thereto.
See Index of Exhibits included on
page E-1.
154
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
(Registrant)
By: Goldman Sachs Hedge Fund Strategies LLC
Managing Member
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By:
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/s/ Jennifer
Barbetta
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Name: Jennifer Barbetta
Title: Managing Director and Principal Financial Officer
Date: March 30, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
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Signature
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Capacity
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Date
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|
/s/ J.
Christopher A. Kojima
J.
Christopher A. Kojima
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Director
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March 30, 2010
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/s/ A.
Charles Baillie
A.
Charles Baillie
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Director
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March 30, 2010
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155
INDEX
OF EXHIBITS
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Exhibit No.
|
|
Description
|
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|
3
|
*
|
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Copy of Amended and Restated Limited Liability Company Agreement
of Goldman Sachs Hedge Fund Partners, LLC dated
January 1, 2006 (Note: the Companys LLC Agreement
also defines the rights of the holders of units of the Company)
(filed as Exhibit 3 to the
Form 8-K,
filed January 6, 2006, and incorporated herein by
reference).
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10.1
|
*
|
|
Copy of Amended and Restated Limited Liability Company Agreement
of Goldman Sachs Global Tactical Trading, LLC, dated as of
January 1, 2006 (filed as Exhibit 10.1 to the
Form 8-K,
filed January 6, 2006, and incorporated herein by
reference).
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10.2
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*
|
|
Copy of Amended and Restated Limited Liability Company Agreement
of Goldman Sachs Global Equity Long/Short, LLC, dated as of
January 1, 2008 (filed as Exhibit 10.2 to the
Form 10-K
filed March 31, 2008, and incorporated herein by reference).
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10.3
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*
|
|
Copy of Amended and Restated Limited Liability Company Agreement
of Goldman Sachs Global Relative Value, LLC, dated as of
January 1, 2006 (filed as Exhibit 10.3 to the
Form 8-K,
filed January 6, 2006, and incorporated herein by
reference).
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10.4
|
*
|
|
Form of Amended and Restated Limited Liability Company Agreement
of Goldman Sachs Global Fundamental Strategies, LLC, to be dated
as of April 1, 2008 (filed as Exhibit 10.5 to the
Form 10-K,
filed March 31, 2008, and incorporated herein by reference).
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10.5
|
*
|
|
Copy of Limited Liability Company Agreement of Goldman Sachs HFP
Opportunistic Fund, LLC, dated as of June 25, 2007 (filed
as Exhibit 10.6 to the
Form 10-K,
filed March 31, 2008, and incorporated herein by reference).
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10.6
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*
|
|
Distribution Agreement between Goldman Sachs Hedge
Fund Partners, LLC and Goldman, Sachs & Co. dated
March 1, 2002 (filed as Exhibit 10.5 to the
Form 10, filed April 29, 2004, and incorporated herein
by reference).
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10.7
|
*
|
|
Administration Agreement between Goldman Sachs Hedge
Fund Partners, LLC and Goldman Sachs Hedge
Fund Strategies LLC (formerly Goldman Sachs Princeton
LLC) dated March 1, 2002 (filed as Exhibit 10.6
to the Form 10, filed April 29, 2004, and incorporated
herein by reference).
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10.8
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*
|
|
Administration Agreement between Goldman Sachs Hedge
Fund Partners, LLC and SEI Global Services, Inc. dated
February 9, 2007 (filed as Exhibit 10.7 to the
Form 10-K,
filed April 2, 2007, and incorporated herein by reference).
|
|
14.1
|
*
|
|
Code of Ethics for Goldman Sachs Hedge Fund Partners, LLC
(filed as Exhibit 14.1 to the
Form 10-K,
filed March 29, 2005, and incorporated herein by reference).
|
|
14.2
|
*
|
|
Amended Code of Ethics for Goldman Sachs Hedge
Fund Strategies LLC (filed as Exhibit 14.2 to the
Form 10-K,
filed April 2, 2007, and incorporated herein by reference).
|
|
31.1
|
|
|
Certification in the form prescribed by
Rule 13a-14(a)
or 15d-14(a) under the Securities Exchange Act of 1934.
|
|
31.2
|
|
|
Certification in the form prescribed by
Rule 13a-14(a)
or 15d-14(a) under the Securities Exchange Act of 1934.
|
|
32.1
|
|
|
Certification in the form prescribed by 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
E-1
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Members
Goldman Sachs Hedge Fund Partners, LLC
We have audited the accompanying balance sheet, including the
schedule of investments, of Goldman Sachs Hedge
Fund Partners, LLC (the Company) as of
December 31, 2009 and 2008, and the related statements of
operations, changes in members equity and cash flows for
each of the three years in the period ended December 31,
2009. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits 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 Companys 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, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Goldman Sachs Hedge Fund Partners, LLC at
December 31, 2009 and 2008, the results of its operations,
the changes in its members equity and its cash flows for
each of the three years in the period ended December 31,
2009, in conformity with U.S. generally accepted accounting
principles.
New York, New York
March 30, 2010
F-2
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
December 31,
2009 and December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
% of
|
|
|
% of adjusted
|
|
|
|
|
|
% of
|
|
|
% of adjusted
|
|
|
|
Fair
|
|
|
members
|
|
|
members
|
|
|
Fair
|
|
|
members
|
|
|
members
|
|
Affiliated Investee
|
|
value
|
|
|
equity(1)
|
|
|
equity(2)
|
|
|
value
|
|
|
equity(1)
|
|
|
equity(2)
|
|
|
Goldman Sachs Global Equity Long/Short, LLC
|
|
$
|
235,518,832
|
|
|
|
39.40
|
%
|
|
|
37.98
|
%
|
|
$
|
182,311,620
|
|
|
|
29.89
|
%
|
|
|
28.53
|
%
|
Goldman Sachs Global Fundamental Strategies, LLC
|
|
|
132,477,127
|
|
|
|
22.17
|
%
|
|
|
21.36
|
%
|
|
|
212,189,214
|
|
|
|
34.79
|
%
|
|
|
33.21
|
%
|
Goldman Sachs Global Fundamental Strategies Asset Trust
|
|
|
37,532,758
|
|
|
|
6.28
|
%
|
|
|
6.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Goldman Sachs Global Relative Value, LLC
|
|
|
4,887,674
|
|
|
|
0.82
|
%
|
|
|
0.79
|
%
|
|
|
59,060,101
|
|
|
|
9.68
|
%
|
|
|
9.24
|
%
|
Goldman Sachs Global Tactical Trading, LLC
|
|
|
155,217,816
|
|
|
|
25.97
|
%
|
|
|
25.03
|
%
|
|
|
119,121,670
|
|
|
|
19.53
|
%
|
|
|
18.65
|
%
|
Goldman Sachs HFP Opportunistic Fund, LLC
|
|
|
20,801,289
|
|
|
|
3.48
|
%
|
|
|
3.36
|
%
|
|
|
42,106,058
|
|
|
|
6.91
|
%
|
|
|
6.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments (cost $526,489,487 and $580,410,892,
respectively)
|
|
$
|
586,435,496
|
|
|
|
98.12
|
%
|
|
|
94.57
|
%
|
|
$
|
614,788,663
|
|
|
|
100.80
|
%
|
|
|
96.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys aggregate proportionate share of the
following underlying investments of the Investees represented
greater than 5% of the Companys members equity at
December 31, 2009 and December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
Proportionate
|
|
|
% of
|
|
|
Adjusted
|
|
|
|
Underlying
|
|
|
|
|
|
Share of
|
|
|
Members
|
|
|
Members
|
|
Affiliated Investee
|
|
Investment
|
|
|
Strategy
|
|
|
Fair Value
|
|
|
Equity(1)
|
|
|
Equity(2)
|
|
|
Goldman Sachs Tactical
Trading, LLC
|
|
|
GS Global Trading Advisors, LLC(4
|
)
|
|
|
Managed Futures
|
|
|
$
|
58,480,624
|
|
|
|
9.78
|
%
|
|
|
9.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
Proportionate
|
|
|
% of
|
|
|
Adjusted
|
|
|
|
Underlying
|
|
|
|
|
|
Share of
|
|
|
Members
|
|
|
Members
|
|
Affiliated Investee
|
|
Investment
|
|
|
Strategy
|
|
|
Fair Value
|
|
|
Equity(1)
|
|
|
Equity(2)
|
|
|
Goldman Sachs Global Fundamental Strategies, LLC
|
|
|
Eton Park Fund, L.P.(3
|
)
|
|
|
Multi-Strategy
|
|
|
$
|
34,543,108
|
|
|
|
5.66
|
%
|
|
|
5.41
|
%
|
Goldman Sachs Tactical Trading, LLC
|
|
|
GS Global Trading Advisors, LLC(4
|
)
|
|
|
Managed Futures
|
|
|
$
|
33,660,348
|
|
|
|
5.52
|
%
|
|
|
5.27
|
%
|
|
|
|
(1)
|
|
Members equity, used in the
calculation of the fair value of each of the investees and the
underlying investment as a percentage of members equity,
is reduced for member redemptions that are paid after the
balance sheet date according to Statement of Financial
Accounting Standards ASC 480, Distinguishing
Liabilities from Equity.
|
|
(2)
|
|
Adjusted members equity, used
in the calculation of the fair value of each of the investees
and the underlying investment as a percentage of adjusted
members equity represents members equity excluding
Redemptions payable in the amount of $22,410,715 at
December 31, 2009 and Redemptions payable in the amount of
$28,982,893 at December 31, 2008.
|
|
(3)
|
|
Liquidity term is as follows: 1/3
after a 3.5 year holding period, 1/3 after a 4.5 year
holding period, 1/3 after a 5.5 year holding period.
|
|
(4)
|
|
Affiliated investment fund with a
monthly liquidity term.
|
See accompanying notes.
F-3
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
BALANCE SHEET
December 31, 2009 and December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
Assets:
|
|
|
|
|
|
|
|
|
Investments in affiliated Investees, at fair value (cost
$526,489,487 and $580,410,892, respectively)
|
|
$
|
586,435,496
|
|
|
$
|
614,788,663
|
|
Cash and cash equivalents
|
|
|
35,470,838
|
|
|
|
26,943,800
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
621,906,334
|
|
|
$
|
641,732,463
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Redemptions payable
|
|
$
|
22,410,715
|
|
|
$
|
28,982,893
|
|
Due to managing member
|
|
|
1,288,968
|
|
|
|
2,017,653
|
|
Interest payable
|
|
|
13,556
|
|
|
|
6,889
|
|
Accrued expenses and other liabilities
|
|
|
495,060
|
|
|
|
788,957
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
24,208,299
|
|
|
|
31,796,392
|
|
Members equity (units outstanding 4,736,483.29 and
5,040,063.11, respectively)
|
|
|
597,698,035
|
|
|
|
609,936,071
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
$
|
621,906,334
|
|
|
$
|
641,732,463
|
|
|
|
|
|
|
|
|
|
|
Analysis of members equity:
|
|
|
|
|
|
|
|
|
Net capital contributions, accumulated net investment
income/(loss) and realized profit/(loss) on investments
|
|
$
|
537,752,026
|
|
|
$
|
575,558,300
|
|
Accumulated net unrealized profit/(loss) on investments
|
|
$
|
59,946,009
|
|
|
$
|
34,377,771
|
|
|
|
|
|
|
|
|
|
|
Total members equity*
|
|
$
|
597,698,035
|
|
|
$
|
609,936,071
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Refer to Note 8 for units outstanding and NAV per unit
amounts by series.
|
See accompanying notes.
F-4
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
STATEMENT OF OPERATIONS
For the years ended December 31, 2009, 2008 and
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Income from trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized and unrealized gain/(loss) on investments in affiliated
Investees:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gain/(loss)
|
|
$
|
38,166,633
|
|
|
$
|
43,741,004
|
|
|
$
|
49,362,879
|
|
Net change in unrealized gain/(loss)
|
|
|
22,389,001
|
|
|
|
(135,388,629
|
)
|
|
|
38,513,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net trading gain/(loss)
|
|
|
60,555,634
|
|
|
|
(91,647,625
|
)
|
|
|
87,875,947
|
|
Interest and dividend income
|
|
|
159,987
|
|
|
|
401,342
|
|
|
|
326,730
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee
|
|
|
7,578,899
|
|
|
|
8,638,530
|
|
|
|
8,636,414
|
|
Professional fees
|
|
|
1,049,718
|
|
|
|
1,059,248
|
|
|
|
632,679
|
|
Interest expense
|
|
|
81,111
|
|
|
|
81,333
|
|
|
|
283,897
|
|
Other expenses
|
|
|
161,930
|
|
|
|
199,397
|
|
|
|
255,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
8,871,658
|
|
|
|
9,978,508
|
|
|
|
9,808,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income/(loss)
|
|
|
(8,711,671
|
)
|
|
|
(9,577,166
|
)
|
|
|
(9,481,366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
|
51,843,963
|
|
|
|
(101,224,791
|
)
|
|
|
78,394,581
|
|
Less: Incentive allocation to the Managing Member
|
|
|
137,681
|
|
|
|
14,474
|
|
|
|
3,919,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) available for pro-rata allocation to members
|
|
$
|
51,706,282
|
|
|
$
|
(101,239,265
|
)
|
|
$
|
74,474,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managing
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
members
|
|
|
Members
|
|
|
Members
|
|
|
members
|
|
|
|
equity
|
|
|
units
|
|
|
equity
|
|
|
equity
|
|
|
Members equity at December 31, 2006
|
|
$
|
|
|
|
|
4,928,239.53
|
|
|
$
|
662,074,474
|
|
|
$
|
662,074,474
|
|
Subscriptions
|
|
|
|
|
|
|
430,805.00
|
|
|
|
43,080,500
|
|
|
|
43,080,500
|
|
Redemptions
|
|
|
(3,919,729
|
)
|
|
|
(671,424.67
|
)
|
|
|
(98,845,744
|
)
|
|
|
(102,765,473
|
)
|
Share class conversion
|
|
|
|
|
|
|
(99,115.71
|
)
|
|
|
|
|
|
|
|
|
Allocations of net income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive allocation
|
|
|
3,919,729
|
|
|
|
|
|
|
|
|
|
|
|
3,919,729
|
|
Pro-rata allocation
|
|
|
|
|
|
|
|
|
|
|
74,474,852
|
|
|
|
74,474,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members equity at December 31, 2007
|
|
|
|
|
|
|
4,588,504.15
|
|
|
|
680,784,082
|
|
|
|
680,784,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriptions
|
|
|
|
|
|
|
1,242,512.66
|
|
|
|
124,251,266
|
|
|
|
124,251,266
|
|
Redemptions
|
|
|
(14,474
|
)
|
|
|
(655,466.41
|
)
|
|
|
(93,860,012
|
)
|
|
|
(93,874,486
|
)
|
Share Class conversion
|
|
|
|
|
|
|
(135,487.29
|
)
|
|
|
|
|
|
|
|
|
Allocations of net income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive allocation
|
|
|
14,474
|
|
|
|
|
|
|
|
|
|
|
|
14,474
|
|
Pro-rata allocation
|
|
|
|
|
|
|
|
|
|
|
(101,239,265
|
)
|
|
|
(101,239,265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members equity at December 31, 2008
|
|
|
|
|
|
|
5,040,063.11
|
|
|
$
|
609,936,071
|
|
|
|
609,936,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriptions
|
|
|
|
|
|
|
738,758.37
|
|
|
|
73,875,837
|
|
|
|
73,875,837
|
|
Redemptions
|
|
|
(137,681
|
)
|
|
|
(1,042,338.19
|
)
|
|
|
(137,820,155
|
)
|
|
|
(137,957,836
|
)
|
Share Class conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocations of net income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive allocation
|
|
|
137,681
|
|
|
|
|
|
|
|
|
|
|
|
137,681
|
|
Pro-rata allocation
|
|
|
|
|
|
|
|
|
|
|
51,706,282
|
|
|
|
51,706,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members equity at December 31, 2009
|
|
$
|
|
|
|
|
4,736,483.29
|
|
|
$
|
597,698,035
|
|
|
$
|
597,698,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-6
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
STATEMENT OF CASH FLOWS
For the years ended December 31, 2009, 2008 and
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
51,843,963
|
|
|
$
|
(101,224,791
|
)
|
|
$
|
78,394,581
|
|
Adjustments to reconcile net income/(loss) to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription of investments in affiliated Investees
|
|
|
(142,600,000
|
)
|
|
|
(151,000,000
|
)
|
|
|
(100,310,000
|
)
|
Proceeds from redemptions of investments in affiliated Investees
|
|
|
231,508,801
|
|
|
|
147,000,000
|
|
|
|
172,000,000
|
|
Net realized gain/(loss) from investments in affiliated Investees
|
|
|
(38,166,633
|
)
|
|
|
(43,741,004
|
)
|
|
|
(49,362,879
|
)
|
Net change in unrealized gain/(loss) of investments in
affiliated Investees
|
|
|
(22,389,001
|
)
|
|
|
135,388,629
|
|
|
|
(38,513,068
|
)
|
Increase/(decrease) in operating liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to managing member
|
|
|
(728,685
|
)
|
|
|
(164,006
|
)
|
|
|
766,233
|
|
Accrued expenses and other liabilities
|
|
|
(293,897
|
)
|
|
|
607,771
|
|
|
|
(87,314
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
|
79,174,548
|
|
|
|
(13,133,401
|
)
|
|
|
62,887,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriptions
|
|
|
73,875,837
|
|
|
|
124,251,266
|
|
|
|
43,080,500
|
|
Redemptions
|
|
|
(144,530,014
|
)
|
|
|
(87,599,738
|
)
|
|
|
(103,758,527
|
)
|
Proceeds from loan
|
|
|
6,667
|
|
|
|
|
|
|
|
20,283,897
|
|
Repayments of loan
|
|
|
|
|
|
|
|
|
|
|
(20,292,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from financing activities
|
|
|
(70,647,510
|
)
|
|
|
36,651,528
|
|
|
|
(60,686,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
8,527,038
|
|
|
|
23,518,127
|
|
|
|
2,200,823
|
|
Cash and cash equivalents at beginning of year
|
|
|
26,943,800
|
|
|
|
3,425,673
|
|
|
|
1,224,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
35,470,838
|
|
|
$
|
26,943,800
|
|
|
$
|
3,425,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid by the Company during the year for interest
|
|
$
|
74,444
|
|
|
$
|
81,333
|
|
|
$
|
292,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-kind transfer from Goldman Sachs Global Fundamental
Strategies, LLC to Goldman Sachs Global Fundamental Strategies
Asset Trust (Refer to Note 3)
|
|
$
|
47,730,311
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-7
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS
December 31,
2009
Goldman Sachs Hedge Fund Partners, LLC (the
Company) was organized as a limited liability
company, pursuant to the laws of the State of Delaware, and
commenced operations on April 1, 2002 for the principal
purpose of investing in the equity long/short, event driven,
relative value and tactical trading hedge fund sectors (the
Investment Sectors). Currently, substantially all of
the Companys assets are allocated to Goldman Sachs Global
Equity Long/Short, LLC (GELS), Goldman Sachs Global
Fundamental Strategies, LLC (GFS), Goldman Sachs
Global Tactical Trading, LLC (GTT) and Goldman Sachs
HFP Opportunistic Fund, LLC (HFPO) (collectively,
the Investment Funds). The balance of the
Companys assets are invested in Goldman Sachs Global
Fundamental Strategies Asset Trust (GFS Trust) and
Goldman Sachs Global Relative Value, LLC (GRV and,
together with GFS Trust and the Investment Funds, the
Investees). Each of these Investees invests
indirectly through investment vehicles (Advisor
Funds) managed by such trading advisors (the
Advisors). In addition, the Company may, directly or
indirectly, allocate assets to Advisors whose principal
investment strategies are not within one of the Investment
Sectors. Goldman Sachs Hedge Fund Strategies LLC (GS
HFS), a wholly-owned subsidiary of The Goldman Sachs
Group, Inc., is the managing member (the Managing
Member) and commodity pool operator of the Company and a
registered investment adviser under the U.S. Investment
Advisers Act of 1940, as amended. SEI Global Services, Inc.
(SEI) serves as administrator of the Company.
|
|
Note 2
|
Significant
accounting policies
|
Basis of
presentation
The financial statements are prepared in accordance with
accounting principles generally accepted in the United States of
America (U.S. GAAP), and are expressed in
United States dollars.
Use of
estimates
The preparation of financial statements in conformity with
U.S. GAAP requires management to make estimates and
assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results could
differ from those estimates.
Recent
Accounting Developments
Financial Accounting Standard Board (FASB)
Accounting Standards Codification
(ASC). In July 2009, the FASB
launched the FASB Accounting Standards Codification (the
Codification) as the single source of
U.S. GAAP. While the Codification did not change
U.S. GAAP, it introduced a new structure to the accounting
literature and changed references to accounting standards and
other authoritative accounting guidance. The Codification did
not have an effect on the Companys financial condition,
results of operations or cash flows.
Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly (ASC
820). In April 2009, the FASB issued amended
accounting principles related to determining fair value when the
volume and level of activity for the asset or liability have
significantly decreased and identifying transactions that are
not orderly. Specifically, these amended principles list factors
which should be evaluated to determine whether a transaction is
orderly, clarify that adjustments to transactions or quoted
prices may be necessary when the volume and level of activity
for an asset or liability have decreased significantly, and
provide guidance for determining the concurrent weighting of the
transaction price relative to fair value indications from other
valuation techniques when estimating fair value. The Company
adopted these amended accounting principles during the year
ended December 31, 2009. Since the
F-8
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 2
|
Significant
accounting policies (continued)
|
Companys fair value methodologies are consistent with
these amended accounting principles, adoption did not affect the
Companys financial condition, results of operations or
cash flows.
Investments in Certain Entities That Calculate Net Asset
Value per Share (or Its Equivalent). In September
2009, the FASB issued Accounting Standards Update
(ASU)
No. 2009-12,
Investments in Certain Entities That Calculate Net Asset
Value per Share (or Its Equivalent). ASU
No. 2009-12
provides guidance about using net asset value to measure the
fair value of interests in certain Investees and requires
additional disclosures about interests in Investees. The Company
adopted ASU
No. 2009-12
during the year ended December 31, 2009. Since the
Companys current fair value measurement policies are
consistent with ASU
No. 2009-12,
adoption did not affect the Companys financial condition,
results of operations or cash flows.
Fair
value of Investments
The Company is an investment company for financial reporting
purposes and accordingly carries its financial assets and
liabilities at fair value. The fair value of the Companys
assets and liabilities that qualify as financial instruments
approximates the carrying amounts presented in the Balance Sheet.
ASC 820 Fair Value Measurements and
Disclosure Fair value hierarchy establishes a fair
value hierarchy and specifies that a valuation technique used to
measure fair value shall maximize the use of observable inputs
and minimize the use of unobservable inputs. The objective of a
fair value measurement is to determine the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date (an exit price). Accordingly, the fair value
hierarchy gives the highest priority to quoted prices
(unadjusted) in active markets for identical assets or
liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). The three levels of the fair
value hierarchy under ASC 820 are described below:
|
|
|
|
|
Level 1Unadjusted quoted prices in active markets
that are accessible at the measurement date for identical,
unrestricted assets or liabilities;
|
|
|
|
Level 2Quoted prices in markets that are not
considered to be active or financial instruments for which all
significant inputs are observable, either directly or
indirectly; and
|
|
|
|
Level 3Prices or valuations that require inputs that
are both significant to the fair value measurement and
unobservable.
|
As required by ASC 820, investments are classified within the
level of the lowest significant input considered in determining
fair value. In evaluating the level at which the Companys
investments have been classified, the Company has assessed
factors including, but not limited to, price transparency, the
ability to redeem at net asset value (NAV) at the
measurement date and the existence or absence of certain
restrictions at the measurement date. In accordance with
ASU 2009-12, if the Company has the ability to redeem from
the investment at the measurement date or in the near-term at
NAV, the investment would be classified as a Level 2 fair
value measurement. Alternatively, if the Company will never have
the ability to redeem from the investment or is restricted from
redeeming for an uncertain or extended period of time from the
measurement date, the investment would be classified as a
Level 3 fair value measurement. See
Note 3Investments in affiliated Investees
for further information.
Ownership
in Investees
During the years ended December 31, 2009 and 2008, the
Companys ownership percentage of certain Investees
exceeded 50%. This ownership percentage will fluctuate as a
result of the Companys investment strategy and
F-9
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 2
|
Significant
accounting policies (continued)
|
investor subscriptions and redemptions at the Company and
Investee levels. The Company does not consolidate the results of
the Investees in its financial statements because the Company
does not invest in such Investees for purposes of exercising
control; ownership in excess of 50% may be temporary; and the
consolidation of these balances would not enhance the usefulness
or understandability of information to the members. The Company
does not exercise control over majority owned Investees. The
following tables summarize the Companys ownership in the
Investees at December 31, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
% owned
|
|
|
Adjusted
|
|
|
Adjusted %
|
|
|
|
|
|
|
Investee
|
|
|
by the
|
|
|
Investee
|
|
|
owned by the
|
|
|
|
Company investment
|
|
|
equity(1)
|
|
|
Company(1)
|
|
|
equity(2)
|
|
|
Company(2)
|
|
|
GELS
|
|
$
|
235,518,832
|
|
|
$
|
406,728,241
|
|
|
|
57.91
|
%
|
|
$
|
464,593,167
|
|
|
|
50.69
|
%
|
GFS
|
|
|
132,477,127
|
|
|
|
275,465,080
|
|
|
|
48.09
|
%
|
|
|
357,336,116
|
|
|
|
37.07
|
%
|
GFS Trust
|
|
|
37,532,758
|
|
|
|
133,566,660
|
|
|
|
28.10
|
%
|
|
|
133,566,660
|
|
|
|
28.10
|
%
|
GRV
|
|
|
4,887,674
|
|
|
|
18,606,692
|
|
|
|
26.27
|
%
|
|
|
18,606,692
|
|
|
|
26.27
|
%
|
GTT
|
|
|
155,217,816
|
|
|
|
296,045,714
|
|
|
|
52.43
|
%
|
|
|
312,655,496
|
|
|
|
49.64
|
%
|
HFPO
|
|
|
20,801,289
|
|
|
|
35,033,537
|
|
|
|
59.38
|
%
|
|
|
35,033,537
|
|
|
|
59.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
586,435,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
% owned
|
|
|
Adjusted
|
|
|
Adjusted %
|
|
|
|
Company
|
|
|
Investee
|
|
|
by the
|
|
|
Investee
|
|
|
owned by the
|
|
|
|
investment
|
|
|
equity(1)
|
|
|
Company(1)
|
|
|
equity(2)
|
|
|
Company(2)
|
|
|
GELS
|
|
$
|
182,311,620
|
|
|
$
|
531,609,977
|
|
|
|
34.29
|
%
|
|
$
|
597,755,511
|
|
|
|
30.50
|
%
|
GFS
|
|
|
212,189,214
|
|
|
|
696,463,843
|
|
|
|
30.47
|
%
|
|
|
767,385,948
|
|
|
|
27.65
|
%
|
GRV
|
|
|
59,060,101
|
|
|
|
180,740,040
|
|
|
|
32.68
|
%
|
|
|
231,754,831
|
|
|
|
25.48
|
%
|
GTT
|
|
|
119,121,670
|
|
|
|
208,504,823
|
|
|
|
57.13
|
%
|
|
|
256,655,918
|
|
|
|
46.41
|
%
|
HFPO
|
|
|
42,106,058
|
|
|
|
30,841,896
|
|
|
|
136.52
|
%(3)
|
|
|
105,841,896
|
|
|
|
39.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
614,788,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Investees equity used in the calculation of the
percentage owned by the Company is reduced for member
redemptions from the Investees that are paid after the balance
sheet date according to ASC 480, Distinguishing
Liabilities from Equity. |
|
(2) |
|
The adjusted Investees equity used in the calculation of
the percentage owned by the Company represents Investees
equity excluding redemptions payable at December 31, 2008. |
|
(3) |
|
The fair value of the Companys investment in the Investee
exceeded 100% of the Investees members equity
because members equity reflected certain accrued
liabilities of the Investee, including fees and expenses, and,
in addition, also reflected redemptions payable at
December 31, 2008. On January 1, 2009, the Company
partially redeemed HFPO, reducing the percentage owned by the
Company to 39.25% based on the December 31, 2008
HFPOs equity. |
Realized
and unrealized gain/(loss) on investments in affiliated
Investees
Realized and unrealized gain/(loss) on investments in affiliated
Investees includes the change in fair value of each Investee.
Fair values are determined utilizing NAV information supplied by
each individual Investee, which includes realized and unrealized
gains/losses on underlying investments of the Investees as well
as management
F-10
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 2
|
Significant
accounting policies (continued)
|
fees and incentive fees charged by the Advisors, administration
fees and all other income/expenses of the Investees. See
Note 3Investments in affiliated Investees
for further information.
Cash and
cash equivalents
The Company considers all highly liquid investments with a
maturity of less than 90 days at the time of purchase,
which are not held for resale, to be cash equivalents. Cash
equivalents, consisting of investments in money market funds,
are held at financial institutions to which the Company is
exposed to credit risk. Money market funds are valued at net
asset value per share.
Allocation
of net income/(loss)
Net income/(loss) is allocated monthly to the capital account of
each member in the ratio that the balance of each such
members capital account bears to the total balance of all
members capital accounts. The Managing Member earns an
annual incentive allocation equal to 5.0% of any new net
appreciation in the NAV of each series. Any net depreciation in
the NAV of a series for a fiscal year must be recouped prior to
the Managing Member earning an incentive allocation in future
years.
Subscriptions
and redemptions
Subscriptions to the Company can be made as of the first day of
each calendar month or at the sole discretion of the Managing
Member. Redemptions from the Company can be made at the end of
each calendar quarter, upon 91 days prior written notice
after a twelve-month holding period or at such other times as
determined in the sole discretion of the Managing Member, as
provided for in the Companys limited liability company
agreement.
Income
taxes
The Company is taxed as a partnership for U.S. federal
income tax purposes. The members include their distributive
share of the Companys taxable income or loss on their
respective income tax returns. Accordingly, no income tax
liability or expense has been recorded in the financial
statements of the Company.
The Managing Member has reviewed the Companys tax
positions for the open tax years by major jurisdictions and has
concluded that no provision for taxes is required in the
Companys financial statements. Such open tax years vary by
jurisdiction and remain subject to examination by the foreign
taxing authorities. The tax liability is also subject to ongoing
interpretation of laws by taxing authorities.
Indemnifications
The Company enters into contracts that contain a variety of
indemnification arrangements. The indemnification arrangements
the Company has entered into with service providers include
provisions for the Company to indemnify and hold harmless such
service providers for certain liabilities. These indemnification
arrangements typically cover liabilities incurred by service
providers in connection with the services provided under the
contractual arrangements with the Company and are generally
entered into as part of a negotiated contractual arrangement
stipulating the furnishing of the delineated services. However,
under the terms of such contractual arrangements, the Company
will not be required to indemnify service providers in certain
situations to the extent that the liabilities incurred by the
service providers were caused by the gross negligence, willful
misconduct, bad faith, reckless disregard of duties, or similar
conduct on the part of the service provider. The Companys
maximum exposure under these arrangements is unknown. It is not
possible to estimate the maximum potential exposure under these
agreements, because the indemnification arrangements relate to
unforeseeable liabilities suffered as a result of
F-11
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 2
|
Significant
accounting policies (continued)
|
the conduct of the Company or other parties, which is presently
unknown or unforeseeable. However, the Company has not had prior
claims or losses pursuant to these indemnification arrangements
and expects the risk of material loss to be remote.
Certain reclassifications have been made to certain previously
reported amounts in the footnotes to reflect current year
presentation.
|
|
Note 3
|
Investments
in affiliated Investees
|
The Investees seek capital appreciation over time by investing
primarily within one of the following Investment Sectors: the
equity long/short sector, the event driven sector, the relative
value sector and the tactical trading sector. The Companys
investments in affiliated Investees are subject to terms and
conditions of the respective operating agreements. The
investments in affiliated Investees are carried at fair value.
Fair values are determined utilizing NAV information supplied by
each individual affiliated Investee. GS HFS is the managing
member of each of the Investment Funds. GS HFS does not
charge the Company any management fee or incentive allocation at
the Investee level. Realized gains/(losses) on the redemption of
investments in affiliated Investees are calculated using the
specific identification cost method. Because of the inherent
uncertainty of valuation, estimated fair values may differ, at
times significantly, from the values that would have been used
had a ready market existed.
Performance of the Company in any period will be dependent upon
the performance in the relevant period by the affiliated
Investees and the weighted average percentage of the
Companys assets in each of the affiliated Investees during
the period. In addition, performance is determined by the
allocation by the Investment Funds of their assets with the
various Advisors and the performance of each of their Advisor
Funds and interests held by GFS Trust and GRV. In the normal
course of business, the Advisor Funds may trade various
financial instruments and enter into various investment
transactions with off-balance sheet risk, which include, but are
not limited to, securities sold short, futures, forwards, swaps
and written options. The Managing Member generally has limited
access, if at all, to specific information regarding the Advisor
Funds portfolios and relies on NAV provided by the
Advisors. Generally, the NAV provided by the Advisors is only
audited on an annual basis and are not subject to independent
third party verification. Typically, audited financial
statements are not received before issuance of the
Companys financial statements. GS HFS, in its capacity as
managing member of the Company, performs additional procedures
including Advisor due diligence reviews and analytical
procedures with respect to the NAV provided by the Advisors to
ensure conformity with U.S. GAAP. The Managing Member has
assessed factors including, but not limited to, Advisors
compliance with ASC 820, price transparency and valuation
procedures in place, the ability to redeem at NAV at the
measurement date, and existence of certain redemption
restrictions at the measurement date. NAV provided by the
Advisors may differ from the audited values received subsequent
to the date of the Companys NAV determination. In such
cases, the Company will evaluate the materiality of any such
differences.
The following tables set forth by level within the fair value
hierarchy the Companys assets and liabilities by
investment strategy at fair value measured at December 31,
2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Investments by investment strategy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Long/Short
|
|
$
|
|
|
|
$
|
235,518,832
|
|
|
$
|
|
|
|
$
|
235,518,832
|
|
Event Driven
|
|
|
|
|
|
|
132,477,127
|
|
|
|
37,532,758
|
|
|
|
170,009,885
|
|
Relative Value
|
|
|
|
|
|
|
|
|
|
|
4,887,674
|
|
|
|
4,887,674
|
|
Tactical Trading
|
|
|
|
|
|
|
155,217,816
|
|
|
|
|
|
|
|
155,217,816
|
|
Multi-Strategy
|
|
|
|
|
|
|
20,801,289
|
|
|
|
|
|
|
|
20,801,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
544,015,064
|
|
|
$
|
42,420,432
|
|
|
$
|
586,435,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-12
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 3
|
Investments
in affiliated Investees (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Investments by investment strategy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Long/Short
|
|
$
|
|
|
|
$
|
182,311,620
|
|
|
$
|
|
|
|
$
|
182,311,620
|
|
Event Driven
|
|
|
|
|
|
|
212,189,214
|
|
|
|
|
|
|
|
212,189,214
|
|
Relative Value
|
|
|
|
|
|
|
59,060,101
|
|
|
|
|
|
|
|
59,060,101
|
|
Tactical Trading
|
|
|
|
|
|
|
119,121,670
|
|
|
|
|
|
|
|
119,121,670
|
|
Multi-Strategy
|
|
|
|
|
|
|
42,106,058
|
|
|
|
|
|
|
|
42,106,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
614,788,663
|
|
|
$
|
|
|
|
$
|
614,788,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in cash and cash equivalents on the Balance Sheet are
investments in money market funds with a fair value of
$35,440,838 and $26,924,486, which were classified as
Level 1 assets as of December 31, 2009 and
December 31, 2008, respectively.
The following table summarizes the changes in fair value of the
Companys Level 3 investments for the year ended
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investees by investment strategy
|
|
|
|
|
|
|
Event Driven
|
|
|
Relative Value
|
|
|
Total
|
|
|
Balance at January 1, 2009
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Net realized gain/(loss) on investments in affiliated investees
|
|
|
|
|
|
|
380,599
|
|
|
|
(1,417,919
|
)
|
|
|
(1,037,320
|
)
|
Net change in unrealized gain/(loss) on investments in
affiliated investees held at year-end
|
|
|
|
|
|
|
1,427,159
|
|
|
|
386,882
|
|
|
|
1,814,041
|
|
Net subscriptions/(redemptions)
|
|
|
|
|
|
|
35,725,000
|
|
|
|
(24,193,735
|
)
|
|
|
11,531,265
|
|
Net Level 3 transfers in/(out)
|
|
|
|
|
|
|
|
|
|
|
30,112,446
|
|
|
|
30,112,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
|
|
|
$
|
37,532,758
|
|
|
$
|
4,887,674
|
|
|
$
|
42,420,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the cost of the Companys
investments in the affiliated Investees at December 31,
2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Investee
|
|
2009
|
|
|
2008
|
|
|
GELS
|
|
$
|
211,430,047
|
|
|
$
|
173,053,312
|
|
GFS
|
|
|
122,004,423
|
|
|
|
195,942,328
|
|
GFS Trust
|
|
|
32,545,763
|
|
|
|
|
|
GRV
|
|
|
5,165,590
|
|
|
|
62,102,941
|
|
GTT
|
|
|
136,619,878
|
|
|
|
103,502,311
|
|
HFPO
|
|
|
18,723,786
|
|
|
|
45,810,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
526,489,487
|
|
|
$
|
580,410,892
|
|
|
|
|
|
|
|
|
|
|
F-13
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 3
|
Investments
in affiliated Investees (continued)
|
The following table summarizes the Companys Realized and
unrealized gain/(loss) on investments in affiliated Investees
for the years ended December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Investee
|
|
Liquidity
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
GELS
|
|
|
(1
|
)
|
|
$
|
24,207,212
|
|
|
$
|
(37,448,188
|
)
|
|
$
|
26,022,295
|
|
GFS
|
|
|
(2
|
)
|
|
|
22,529,461
|
|
|
|
(49,405,381
|
)
|
|
|
45,144,727
|
|
GFS Trust
|
|
|
(3
|
)
|
|
|
2,188,357
|
|
|
|
|
|
|
|
|
|
GRV
|
|
|
(4
|
)
|
|
|
1,439,227
|
|
|
|
(6,259,065
|
)
|
|
|
4,339,169
|
|
GTT
|
|
|
(5
|
)
|
|
|
8,096,147
|
|
|
|
3,172,388
|
|
|
|
14,366,319
|
|
HFPO
|
|
|
(2
|
)
|
|
|
2,095,230
|
|
|
|
(1,707,379
|
)
|
|
|
(1,996,563
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
60,555,634
|
|
|
$
|
(91,647,625
|
)
|
|
$
|
87,875,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Redemptions can be made quarterly with 61 days
notice, or at the sole discretion of its managing member. |
|
(2) |
|
Redemptions can be made quarterly on or after the first
anniversary of the initial purchase of the units with at least
91 days notice, or at the sole discretion of its
managing member. |
|
(3) |
|
GFS Trust does not provide investors with a voluntary redemption
right. Pursuant to the terms of the trust agreement for GFS
Trust, distributions will be made to holders of interests in GFS
Trust as GFS Trust receives proceeds in respect of its
underlying investments. The estimated remaining holding period
of its remaining underlying investments range from one to five
years. |
|
(4) |
|
Redemptions can be made quarterly with 91 days
notice, or at the sole discretion of its managing member. GRV
ceased its trading activities effective on July 1, 2009,
and will dissolve at the time all assets are liquidated,
liabilities are satisfied and liquidation proceeds are
distributed through payment of a liquidating distribution. GRV
suspended redemptions pending the completion of the liquidation
proceedings. The estimated remaining holding period of its
remaining underlying investments range from one to five years. |
|
(5) |
|
Redemptions can be made quarterly with 60 days
notice, or at the sole discretion of its managing member. |
The investment strategy for each Investment Fund is as follows:
Goldman
Sachs Global Equity Long/Short, LLC
GELS seeks risk-adjusted absolute returns with volatility lower
than the broad equity markets, primarily through long and short
investment opportunities in the global equity markets.
Strategies generally involve making long and short equity
investments, often based on the Advisors assessment of
fundamental value compared to market price, although Advisors
employ a wide range of styles. Strategies that may be utilized
in the equity long/short sector include catalystactivist,
consumer, diversified, energy, growth,
long-bias,
real estate, multi-strategy, short-term trading and value. Other
strategies may be employed as well.
Goldman
Sachs Global Fundamental Strategies, LLC
GFS seeks risk-adjusted absolute returns with volatility and
correlation lower than the broad equity markets by allocating
assets to Advisors that operate primarily in the global event
driven sector. Event driven strategies seek to identify security
price changes resulting from corporate events such as
restructurings, mergers, takeovers, spin-offs, and other special
situations. Corporate event arbitrageurs generally choose their
investments based on their perceptions of the likelihood that
the event or transaction will occur, the amount of time that the
process will take, and the perceived ratio of return to risk.
Strategies that may be utilized in the event driven sector
include
F-14
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 3
|
Investments
in affiliated Investees (continued)
|
catalyst-activist,
merger arbitrage/special situations, credit
opportunities/distressed securities and multi-strategy
investing. Other strategies may be employed as well.
Goldman
Sachs Global Fundamental Strategies Asset Trust
The managing member of GFS, GS HFS, recently created GFS Trust,
a Delaware statutory trust, for the benefit of its investors,
including the Company. Goldman Sachs Trust Company, a
Delaware Corporation, is the trustee of GFS Trust (the
Trustee). The Trustee appointed GS HFS as the
Special Assets Direction Advisor, responsible for,
among other duties, disposition of GFS Trust assets. On
March 31, 2009, GFS transferred to GFS Trust its interest
in certain illiquid investments, including illiquid investments
made by Advisor Funds, as well as liquidating vehicles that the
Advisors formed as liquidity decreased for previously liquid
investments, such as certain credit instruments. GFS transferred
to GFS Trust the economic risks and benefits of its interests in
such assets. In connection with such transfer, each investor in
GFS, including the Company, was issued its pro-rata share of GFS
Trust interests based on its ownership in GFS as of the transfer
date. The transfer was accounted for as an in-kind transfer at a
fair value of $47,730,311, which resulted in a realized gain of
$3,179,237. In connection with the transfer, the historical cost
of the Companys investment in GFS of $44,551,074 was
transferred to GFS Trust including an unrealized gain of
$3,179,237. Distributions from GFS Trust in respect of GFS Trust
interests will be made to holders of GFS Trust interests,
including the Company, as amounts in respect of the assets
transferred to GFS Trust are received from the Advisors.
However, the actual timing of these distributions will be
dependent on the Advisors ability to liquidate positions
as market conditions allow, and it could be a significant period
of time before such positions are realized or disposed of. The
Companys pro-rata share of GFS Trust interests as of
December 31, 2009 was an amount equal to approximately 6%
of the Companys adjusted members equity. Such amount
of the Companys pro-rata share of GFS Trust interests is
included in the percentage of the Companys investments in
the Investees that were considered illiquid at December 31,
2009.
Goldman
Sachs Global Relative Value, LLC
GRV ceased its trading activities effective July, 1 2009 and
will dissolve at the time all assets are liquidated, liabilities
are satisfied and liquidation proceeds are distributed through
payment of a liquidating distribution. Investors in GRV
(including the Company) will receive proceeds from the
liquidation over time as GRV receives redemption proceeds from
Advisor Funds. The Company is reinvesting the liquidation
proceeds it receives from GRV in accordance with the
Companys investment program.
GRV seeks risk-adjusted absolute returns with volatility and
correlation lower than the broad equity markets by allocating
assets to Advisors that operate primarily in the global relative
value sector. Relative value strategies seek to profit from the
mispricing of financial instruments, capturing spreads between
related securities that deviate from their fair value or
historical norms. Directional and market exposure is generally
held to a minimum or completely hedged. Strategies that may be
utilized in the relative value sector include convertible
arbitrage, equity arbitrage and fixed-income arbitrage. Other
strategies may be employed as well.
Goldman
Sachs Global Tactical Trading, LLC
GTT seeks long-term risk-adjusted returns by allocating its
assets to Advisors that employ strategies primarily within the
tactical trading sector. Tactical trading strategies are
directional trading strategies that generally fall into one of
the following two categories: managed futures strategies and
global macro strategies. Managed futures strategies involve
trading in the global futures and currencies markets, generally
using systematic or discretionary approaches. Global macro
strategies generally utilize analysis of macroeconomic,
geopolitical, and financial
F-15
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 3
|
Investments
in affiliated Investees (continued)
|
conditions to develop views on country, regional or broader
economic themes and then seek to capitalize on such views by
trading in securities, commodities, interest rates, currencies
and various financial instruments.
Goldman
Sachs HFP Opportunistic Fund, LLC
On July 1, 2007, the Company made an investment in HFPO
whose investment objective is to make opportunistic investments
in underlying Advisor Funds in order to (a) increase the
weighting of a particular Advisor Fund which had a low weighting
in the Company due to a lower target weight in one of the other
Investees or (b) add an Advisor Fund that is not currently
represented in any of the other Investees.
Management
fees and incentive allocations/fee
GS HFS does not charge the Company any management fee or
incentive allocation at the Investee level. The underlying
Advisor Funds held by the Investees charge management and
incentive allocations/fees to the Investees. The following table
reflects the contractual weighted average Advisors
management fees and incentive allocations/fee rates at the
Investee level for the years ended December 31, 2009, 2008
and 2007. The weighted average is based on the period-end fair
values of each investment in the Advisor Fund in proportion to
the Investees total investments. The fee rates used are
the contractual rates charged by each Advisor.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Management
|
|
|
Incentive
|
|
|
Management
|
|
|
Incentive
|
|
|
Management
|
|
|
Incentive
|
|
Investee
|
|
fees
|
|
|
fee
|
|
|
fees
|
|
|
fee
|
|
|
fees
|
|
|
fee
|
|
|
GELS
|
|
|
1.54
|
%
|
|
|
18.25
|
%
|
|
|
1.63
|
%
|
|
|
19.77
|
%
|
|
|
1.49
|
%
|
|
|
20.22
|
%
|
GFS
|
|
|
1.58
|
%
|
|
|
18.00
|
%
|
|
|
1.72
|
%
|
|
|
17.78
|
%
|
|
|
1.51
|
%
|
|
|
19.77
|
%
|
GFS Trust
|
|
|
1.42
|
%
|
|
|
16.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GRV
|
|
|
1.27
|
%
|
|
|
12.22
|
%
|
|
|
1.64
|
%
|
|
|
17.83
|
%
|
|
|
1.51
|
%
|
|
|
20.91
|
%
|
GTT
|
|
|
1.85
|
%
|
|
|
17.81
|
%
|
|
|
2.26
|
%
|
|
|
22.28
|
%
|
|
|
2.09
|
%
|
|
|
22.70
|
%
|
HFPO
|
|
|
1.99
|
%
|
|
|
19.86
|
%
|
|
|
2.35
|
%
|
|
|
23.49
|
%
|
|
|
1.56
|
%
|
|
|
20.18
|
%
|
The Advisors management fees and incentive
allocations/fees are not paid to the Managing Member.
The Company incurs a monthly management fee paid in arrears to
GS HFS equal to 1.25% per annum of the net assets of the Company
as of each month-end.
The Company incurs an indirect monthly administration fee to SEI
Global Services, Inc. (SEI) which ranges between
0.05% and 0.06% per annum of the net assets at the Investee
level, but such rate may be exceeded under certain circumstances
subject to a maximum of approximately 0.20% during the year
ended December 31, 2009. During the years ended
December 31, 2008 and 2007, the administration fee ranged
between 0.04% and 0.06% per annum of the net assets at the
Investee level. The administration fee is charged at the
Investee level and is included in realized and unrealized
gain/(loss) on investments in affiliated Investees in the
Statement of Operations. For the years ended December 31,
2009, 2008 and 2007, the Companys pro-rata indirect share
of the administration fee charged at the Investee level totaled
$295,484, $337,223 and $324,928, respectively.
The Investees investing activities and those of the
Advisor Funds in which they invest expose the Company to various
types of risks that are associated with the financial
investments and markets in which the Investees and such Advisor
Funds invest. In the ordinary course of business, GS HFS, in its
capacity as Managing Member of the
F-16
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 5
|
Risk
Management (continued)
|
Company and the Investees, attempts to manage a variety of
risks, including market, credit, operational and liquidity risk
and attempts to identify, measure and monitor risk through
various mechanisms including risk management strategies and
credit policies. GS HFS monitors risk guidelines and
diversifying exposures across a variety of instruments, markets
and counterparties.
Item 1A of Part I of this Annual Report on Form 10-K
provides details of these and other types of risks, some of
which are additional to the information provided in these
financial statements.
Asset allocation is determined by the Companys Managing
Member who manages the allocation of assets to achieve the
investment objectives. Achievement of the investment objectives
involves taking risks. The Managing Member exercises judgment
based on analysis, research and risk management techniques when
making investment decisions. Divergence from target asset
allocations and the composition of the Companys
investments is monitored by the Companys Managing Member.
Market
risk
The potential for changes in the fair value of the
Companys investment portfolio is referred to as market
risk. Commonly used categories of market risk include currency
risk, interest rate risk and price risk.
(i) Currency risk
The Advisor Funds may invest in financial investments and enter
into transactions denominated in currencies other than its
functional currency. Consequently, the Company, its Investees
and their Advisor Funds may be exposed to risks that the
exchange rate of its functional currency relative to other
foreign currencies may change in a manner that has an adverse
effect on the value of that portion of the Companys or
Investees assets or liabilities denominated in currencies
other than the functional currency.
(ii) Interest rate risk
The Advisor Funds may invest in fixed income securities and
derivatives. Any change to the interest rates relevant for
particular securities may result in the Advisors being unable to
secure similar returns on the expiration of contracts or the
sale of securities. In addition, changes to prevailing interest
rates or changes in expectations of future rates may result in
an increase or decrease in the value of the securities held. In
general, if interest rates rise, the value of the fixed income
securities and derivatives will decline. A decline in interest
rates will in general have the opposite effect.
(iii) Price risk
Price risk is the risk that the value of the Investees and
Advisor Funds financial investments will fluctuate as a
result of changes in market prices, other than those arising
from currency risk or interest rate risk whether caused by
factors specific to an individual investment, its issuer or any
factor affecting financial investments traded in the market.
As all of the Companys investments in Investees and the
Investees investments in Advisor Funds are carried at fair
value with changes in fair value recognized in the Statement of
Operations, all changes in market conditions will directly
affect net assets. The Companys maximum risk of loss is
limited to the Companys investment in the Investees. The
Investees maximum risk of loss is limited to the
Investees investment in the Advisor Funds.
The Investees investments in the Advisor Funds are
determined utilizing NAVs value supplied by, or on behalf of,
the Advisors of each Advisor Fund. Furthermore, NAVs received
from the administrator of the Advisor Funds may be estimates and
such values will be used to calculate the NAV of the Investees
for purposes of determining amounts
F-17
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 5
|
Risk
Management (continued)
|
payable on redemptions and reported performance of the
Investees. Such estimates provided by the administrators of the
Advisor Funds may be subject to subsequent revisions which may
not be reflected in the Investees final month-end NAV.
Credit
risk
Credit risk is the risk that one party to a financial investment
will cause a financial loss for the other party by failing to
discharge an obligation.
The Managing Member has adopted procedures to reduce credit risk
related to the Companys dealings with counterparties and
Advisor Funds. Before transacting with any counterparty or
Advisor Fund, the Managing Member or its affiliates evaluate
both creditworthiness and reputation by conducting a credit
analysis of the party, their business and reputation. The credit
risk of approved counterparties and Advisor Funds are then
monitored on an ongoing basis, including periodic reviews of
financial statements and interim financial reports as needed.
Some of the Investees investments in Advisor Funds may
have had credit exposure related to the bankruptcy of Lehman.
See Liquidity risk for further information related
to Lehman exposure.
Operational
risk
Operational risk is the potential for loss caused by a
deficiency in information, communications, transaction
processing and settlement and accounting systems. The
Companys service providers maintain controls and
procedures for the purpose of mitigating operational risk.
Reviews of the service levels of service providers are performed
on a regular basis. No assurance is given that these measures
will be 100% effective. Operational risk also exists at the
Investee and Advisor Fund level.
Liquidity
risk
Liquidity risk is the risk that the Company will encounter
difficulty in meeting obligations associated with financial
liabilities. The Company provides for the subscription and
redemption of units and it is therefore exposed to the liquidity
risk of meeting member redemptions.
In order to meet its obligations associated with financial
liabilities, the Company primarily redeems from the investments
in the Investment Funds. However, the Companys investments
in the Investment Funds may only be redeemed on a limited basis.
Neither GFS Trust nor GRV provide investors with a voluntary
redemption right as detailed in
Note 3Investments in affiliated
Investees. As a result, the Company may not be able to
liquidate quickly some of its investments in order to meet
liquidity requirements.
To mitigate some of the liquidity risks described above, the
Company currently maintains a committed credit facility with a
financial institution which may be used to meet member
redemptions. See Note 7Borrowing facility
for further information. Additionally, the Company has the
ability to suspend redemptions prior to the effectiveness of
redemption requests in the Managing Members sole
discretion.
Certain of the Advisor Funds held by the Investees may have
liquidity exposure related to the Advisors estimates of
the recovery value of these claims against Lehman Brothers
Holdings, Inc. and for certain of its subsidiaries and
affiliates (Lehman), including cash claims involving
amounts owed to the Advisors by Lehman
and/or
proprietary claims involving the recovery of Advisor Funds
assets held by Lehman at the time of its insolvency. These
estimates are based on information received from the majority,
but not all, of the Advisor Funds, and the Company has no
way of independently verifying or otherwise confirming the
accuracy of the information provided. As a
F-18
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 5
|
Risk
Management (continued)
|
result, there can be no guarantee that such estimates are
accurate. There is significant uncertainty with respect to the
ultimate outcome of the Lehman insolvency proceedings, and
therefore the amounts ultimately recovered in respect of the
Advisors claims against Lehman could be materially
different than such estimates. Based on the information
received, the gross indirect exposure to Lehman did not
materially affect the Companys net assets.
Certain of the Advisor Funds held by the Investees are subject
to various
lock-up
provisions. Additionally, an Advisor may, at its discretion,
transfer a portion of an Investees investment in the
Advisor Fund into share classes where liquidity terms are
directed by the Advisor in accordance with the Advisors
operating agreement, commonly referred to as side pocket share
classes (side pockets). These side pockets may have
restricted liquidity and prohibit the Investees from fully
liquidating their investments without delay. The managing member
of the Investees attempts to determine each Advisors
strategy on side pockets through its due diligence process prior
to making an allocation to the Advisor. However, no assurance
can be given on whether or not the Advisor will implement side
pockets during the investment period. The Advisors may also, at
their discretion, suspend redemptions or implement other
restrictions on liquidity which could impact the Investees
ability to meet redemptions submitted by the Company. As of
December 31, 2009, approximately 2% of the Companys
investments in the Investees were considered illiquid due to
restrictions implemented by the Advisors of the investments held
by Investees, excluding contractual restrictions imposed by the
Advisors at the time of purchase, such as
lock-ups. In
addition, as of December 31, 2009, approximately 7% of the
Companys members equity was considered illiquid due
to restrictions implemented by the Investees, including the lack
of a voluntary redemption right for GFS Trust and GRV.
To mitigate some of the liquidity risks above, the Company has
the ability to suspend redemptions prior to the effectiveness of
redemption requests should conditions warrant.
The due to managing member liability in the Balance Sheet
represents management fees due to GS HFS at December 31,
2009 and December 31, 2008.
Included in the redemptions payable on the Balance Sheet at
December 31, 2009 and December 31, 2008 were
redemptions due to the Managing Member of $137,240, and $0,
respectively.
For the year ended December 31, 2009, the Company earned
dividends of $159,987 from investments in Goldman Sachs
Financial Square Government Fund and Goldman Sachs Financial
Square Treasury Obligations Fund, money market funds managed by
Goldman Sachs Asset Management, L.P., an affiliate of GS HFS.
For the year ended December 31, 2008, the Company earned
dividends of $209,486 from Goldman Sachs Financial Square Prime
Obligation Fund, a money market fund managed by Goldman Sachs
Asset Management L.P. At December 31, 2009, the Company
held investments in Goldman Sachs Financial Square Government
Fund and Goldman Sachs Financial Square Treasury Obligations
Fund with fair values of $27,258,649 and $8,182,189
respectively. At December 31, 2008, the Company held an
investment in the Goldman Sachs Financial Square Prime
Obligations Fund with a fair value of $26,924,486.
Goldman, Sachs & Co. (GS & Co.),
an affiliate of the Managing Member, is one of several prime
brokers for certain of the Advisor Funds. Goldman Sachs
Administration Services, an affiliate of the Managing Member,
may serve as the administrator for one or more Advisor Funds.
Directors and executive officers of the Company and the Managing
Member owned less than 1% of the Companys equity at
December 31, 2009, 2008 and 2007. Employees of
GS & Co. owned approximately 2% of the Companys
equity at December 31, 2009, 2008 and 2007.
F-19
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 6
|
Related
parties (continued)
|
During the year ended December 31, 2009, members equity in
Class A Series 66 through Class A Series 73
of $19,139,514 was transferred into the Company from an
affiliated fund of the Company. The capital losses of these
series were carried forward to the Company, which will be
recovered before an incentive allocation is charged.
|
|
Note 7
|
Borrowing
facility
|
The following table summarizes the Companys committed
credit facility (as amended from time to time, the Credit
Facility) with Barclays Bank PLC (the Facility
Counterparty) between January 1, 2008 and
December 31, 2009:
|
|
|
|
|
|
|
|
|
Time periods(1)
|
|
Maximum amount(2)(3)
|
|
Interest rate(4)
|
|
Commitment fee
|
|
|
6/7/08-12/31/09
|
|
Lesser of $32,000,000
or 14.25% of the Companys NAV
|
|
LIBOR plus 1.00%
|
|
|
0.25
|
%
|
1/1/08-6/6/08
|
|
Lesser of $32,000,000
or 15% of the Companys NAV
|
|
LIBOR plus 0.65%
|
|
|
0.25
|
%
|
|
|
|
(1) |
|
The maturity date of the Credit Facility is June 5, 2010. |
|
(2) |
|
The Company also granted a security interest in the
Companys cash accounts and any other accounts that contain
any other investment property of the Company. |
|
(3) |
|
The Company further amended certain terms of the Credit Facility
on January 28, 2010. The maximum amount was increased to
$33,700,000 or 14.25% of the Companys NAV and the
commitment fee was increased to 0.29%. |
|
(4) |
|
London Interbank Offered Rate (LIBOR). |
The Company borrows from the Credit Facility to meet its
liquidity needs. As of December 31, 2009 and 2008, there
were no borrowings outstanding. Interest related to borrowing
and the commitment fees are included in Interest expense in the
Statement of Operations. Included in Interest payable in the
Balance Sheet are amounts owed for interest and commitment fees.
At December 31, 2009, December 31, 2008 and
December 31, 2007, the Company had Class A units
outstanding. Each series of Class A units is identical in
every regard except with respect to its individualized incentive
allocation base. Effective January 1, 2008, Class A
Series 33 through Class A Series 44 units
were converted into Class A Series 1 units. The
Managing Member does not own any units in the Company.
Transactions in units for non-managing members for the years
ended December 31, 2009, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
Year Ended December 31, 2008
|
|
|
Year Ended December 31, 2007
|
|
|
|
Units
|
|
|
Amount
|
|
|
Units
|
|
|
Amount
|
|
|
Units
|
|
|
Amount
|
|
|
Share Class Conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 1
|
|
|
|
|
|
$
|
|
|
|
|
295,317.71
|
|
|
$
|
45,148,615
|
|
|
|
319,714.29
|
|
|
$
|
43,832,922
|
|
Series 21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,000.00
|
)
|
|
|
(2,180,597
|
)
|
Series 22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(126,060.00
|
)
|
|
|
(13,362,621
|
)
|
Series 23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,500.00
|
)
|
|
|
(1,846,363
|
)
|
F-20
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 8
|
Members
equity (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
Year Ended December 31, 2008
|
|
|
Year Ended December 31, 2007
|
|
|
|
Units
|
|
|
Amount
|
|
|
Units
|
|
|
Amount
|
|
|
Units
|
|
|
Amount
|
|
|
Series 24
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
(16,500.00
|
)
|
|
$
|
(1,713,051
|
)
|
Series 25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,000.00
|
)
|
|
|
(2,660,197
|
)
|
Series 26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,000.00
|
)
|
|
|
(521,404
|
)
|
Series 27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,000.00
|
)
|
|
|
(1,990,075
|
)
|
Series 28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(79,750.00
|
)
|
|
|
(8,361,171
|
)
|
Series 29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,000.00
|
)
|
|
|
(2,081,244
|
)
|
Series 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,020.00
|
)
|
|
|
(630,689
|
)
|
Series 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,000.00
|
)
|
|
|
(4,025,172
|
)
|
Series 32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44,000.00
|
)
|
|
|
(4,460,338
|
)
|
Series 33
|
|
|
|
|
|
|
|
|
|
|
(10,000.00
|
)
|
|
|
(1,115,107
|
)
|
|
|
|
|
|
|
|
|
Series 34
|
|
|
|
|
|
|
|
|
|
|
(10,010.00
|
)
|
|
|
(1,098,794
|
)
|
|
|
|
|
|
|
|
|
Series 35
|
|
|
|
|
|
|
|
|
|
|
(27,595.00
|
)
|
|
|
(3,005,067
|
)
|
|
|
|
|
|
|
|
|
Series 36
|
|
|
|
|
|
|
|
|
|
|
(37,000.00
|
)
|
|
|
(3,993,991
|
)
|
|
|
|
|
|
|
|
|
Series 37
|
|
|
|
|
|
|
|
|
|
|
(34,000.00
|
)
|
|
|
(3,611,289
|
)
|
|
|
|
|
|
|
|
|
Series 38
|
|
|
|
|
|
|
|
|
|
|
(38,700.00
|
)
|
|
|
(4,022,981
|
)
|
|
|
|
|
|
|
|
|
Series 39
|
|
|
|
|
|
|
|
|
|
|
(31,750.00
|
)
|
|
|
(3,283,841
|
)
|
|
|
|
|
|
|
|
|
Series 40
|
|
|
|
|
|
|
|
|
|
|
(51,000.00
|
)
|
|
|
(5,280,566
|
)
|
|
|
|
|
|
|
|
|
Series 41
|
|
|
|
|
|
|
|
|
|
|
(75,000.00
|
)
|
|
|
(7,918,349
|
)
|
|
|
|
|
|
|
|
|
Series 42
|
|
|
|
|
|
|
|
|
|
|
(54,000.00
|
)
|
|
|
(5,608,852
|
)
|
|
|
|
|
|
|
|
|
Series 43
|
|
|
|
|
|
|
|
|
|
|
(27,750.00
|
)
|
|
|
(2,785,064
|
)
|
|
|
|
|
|
|
|
|
Series 44
|
|
|
|
|
|
|
|
|
|
|
(34,000.00
|
)
|
|
|
(3,424,714
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
(135,487.29
|
)
|
|
$
|
|
|
|
|
(99,115.71
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriptions Class A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 33
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
10,000.00
|
|
|
$
|
1,000,000
|
|
Series 34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,010.00
|
|
|
|
1,001,000
|
|
Series 35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,595.00
|
|
|
|
2,759,500
|
|
Series 36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,000.00
|
|
|
|
3,700,000
|
|
Series 37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,000.00
|
|
|
|
3,400,000
|
|
Series 38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,700.00
|
|
|
|
3,870,000
|
|
Series 39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,750.00
|
|
|
|
3,175,000
|
|
Series 40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,000.00
|
|
|
|
5,100,000
|
|
Series 41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,000.00
|
|
|
|
7,500,000
|
|
Series 42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,000.00
|
|
|
|
5,400,000
|
|
Series 43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,750.00
|
|
|
|
2,775,000
|
|
Series 44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,000.00
|
|
|
|
3,400,000
|
|
Series 45
|
|
|
|
|
|
|
|
|
|
|
77,622.13
|
|
|
|
7,762,213
|
|
|
|
|
|
|
|
|
|
Series 46
|
|
|
|
|
|
|
|
|
|
|
149,310.53
|
|
|
|
14,931,053
|
|
|
|
|
|
|
|
|
|
F-21
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 8
|
Members
equity (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
Year Ended December 31, 2008
|
|
|
Year Ended December 31, 2007
|
|
|
|
Units
|
|
|
Amount
|
|
|
Units
|
|
|
Amount
|
|
|
Units
|
|
|
Amount
|
|
|
Series 47
|
|
|
|
|
|
$
|
|
|
|
|
72,250.00
|
|
|
$
|
7,225,000
|
|
|
|
|
|
|
$
|
|
|
Series 48
|
|
|
|
|
|
|
|
|
|
|
126,500.00
|
|
|
|
12,650,000
|
|
|
|
|
|
|
|
|
|
Series 49
|
|
|
|
|
|
|
|
|
|
|
145,800.00
|
|
|
|
14,580,000
|
|
|
|
|
|
|
|
|
|
Series 50
|
|
|
|
|
|
|
|
|
|
|
222,080.00
|
|
|
|
22,208,000
|
|
|
|
|
|
|
|
|
|
Series 51
|
|
|
|
|
|
|
|
|
|
|
126,300.00
|
|
|
|
12,630,000
|
|
|
|
|
|
|
|
|
|
Series 52
|
|
|
|
|
|
|
|
|
|
|
108,750.00
|
|
|
|
10,875,000
|
|
|
|
|
|
|
|
|
|
Series 53
|
|
|
|
|
|
|
|
|
|
|
89,550.00
|
|
|
|
8,955,000
|
|
|
|
|
|
|
|
|
|
Series 54
|
|
|
|
|
|
|
|
|
|
|
81,850.00
|
|
|
|
8,185,000
|
|
|
|
|
|
|
|
|
|
Series 55
|
|
|
|
|
|
|
|
|
|
|
22,500.00
|
|
|
|
2,250,000
|
|
|
|
|
|
|
|
|
|
Series 56
|
|
|
|
|
|
|
|
|
|
|
20,000.00
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
Series 57
|
|
|
25,000.00
|
|
|
|
2,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 58
|
|
|
50,000.00
|
|
|
|
5,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 59
|
|
|
15,000.00
|
|
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 60
|
|
|
27,600.00
|
|
|
|
2,760,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 61
|
|
|
11,312.98
|
|
|
|
1,131,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 62
|
|
|
62,000.00
|
|
|
|
6,200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 63
|
|
|
66,712.98
|
|
|
|
6,671,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 64
|
|
|
36,650.00
|
|
|
|
3,665,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 65
|
|
|
54,137.27
|
|
|
|
5,413,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 66
|
|
|
95,580.88
|
|
|
|
9,558,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 67
|
|
|
1,367.32
|
|
|
|
136,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 68
|
|
|
57,080.94
|
|
|
|
5,708,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 69
|
|
|
20,861.87
|
|
|
|
2,086,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 70
|
|
|
6,848.67
|
|
|
|
684,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 71
|
|
|
1,403.93
|
|
|
|
140,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 72
|
|
|
6,915.70
|
|
|
|
691,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 73
|
|
|
1,335.83
|
|
|
|
133,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 74
|
|
|
83,000.00
|
|
|
|
8,300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 75
|
|
|
85,100.00
|
|
|
|
8,510,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 76
|
|
|
30,850.00
|
|
|
|
3,085,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
738,758.37
|
|
|
$
|
73,875,837
|
|
|
|
1,242,512.66
|
|
|
$
|
124,251,266
|
|
|
|
430,805.00
|
|
|
$
|
43,080,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemptions Class A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 1
|
|
|
918,434.94
|
|
|
$
|
126,197,094
|
|
|
|
649,166.41
|
|
|
$
|
93,316,375
|
|
|
|
671,424.67
|
|
|
$
|
98,845,744
|
|
Series 45
|
|
|
18,500.00
|
|
|
|
1,619,229
|
|
|
|
6,300.00
|
|
|
|
543,637
|
|
|
|
|
|
|
|
|
|
Series 46
|
|
|
28,057.64
|
|
|
|
2,537,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 48
|
|
|
5,000.00
|
|
|
|
453,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 49
|
|
|
5,000.00
|
|
|
|
472,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 8
|
Members
equity (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
Year Ended December 31, 2008
|
|
|
Year Ended December 31, 2007
|
|
|
|
Units
|
|
|
Amount
|
|
|
Units
|
|
|
Amount
|
|
|
Units
|
|
|
Amount
|
|
|
Series 50
|
|
|
13,613.61
|
|
|
$
|
1,240,823
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Series 51
|
|
|
3,232.00
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 52
|
|
|
12,000.00
|
|
|
|
1,138,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 53
|
|
|
16,000.00
|
|
|
|
1,525,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 54
|
|
|
12,500.00
|
|
|
|
1,258,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 56
|
|
|
10,000.00
|
|
|
|
1,076,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,042,338.19
|
|
|
$
|
137,820,155
|
|
|
|
655,466.41
|
|
|
$
|
93,860,012
|
|
|
|
671,424.67
|
|
|
$
|
98,845,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, 2008 and 2007, members equity
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Outstanding Units
|
|
|
Net Asset Value
|
|
|
Outstanding Units
|
|
|
Net Asset Value
|
|
|
Outstanding Units
|
|
|
Net Asset Value
|
|
|
Non-managing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
members
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 1
|
|
|
2,885,415.51
|
|
|
$
|
415,172,330
|
|
|
|
3,803,850.45
|
|
|
$
|
501,818,748
|
|
|
|
4,157,699.15
|
|
|
$
|
635,635,467
|
|
Series 33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000.00
|
|
|
|
1,115,107
|
|
Series 34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,010.00
|
|
|
|
1,098,794
|
|
Series 35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,595.00
|
|
|
|
3,005,067
|
|
Series 36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,000.00
|
|
|
|
3,993,991
|
|
Series 37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,000.00
|
|
|
|
3,611,289
|
|
Series 38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,700.00
|
|
|
|
4,022,981
|
|
Series 39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,750.00
|
|
|
|
3,283,841
|
|
Series 40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,000.00
|
|
|
|
5,280,566
|
|
Series 41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,000.00
|
|
|
|
7,918,349
|
|
Series 42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,000.00
|
|
|
|
5,608,852
|
|
Series 43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,750.00
|
|
|
|
2,785,064
|
|
Series 44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,000.00
|
|
|
|
3,424,714
|
|
Series 45
|
|
|
52,822.13
|
|
|
|
4,971,425
|
|
|
|
71,322.13
|
|
|
|
6,154,499
|
|
|
|
|
|
|
|
|
|
Series 46
|
|
|
121,252.89
|
|
|
|
11,612,001
|
|
|
|
149,310.53
|
|
|
|
13,110,185
|
|
|
|
|
|
|
|
|
|
Series 47
|
|
|
72,250.00
|
|
|
|
6,777,089
|
|
|
|
72,250.00
|
|
|
|
6,213,647
|
|
|
|
|
|
|
|
|
|
Series 48
|
|
|
121,500.00
|
|
|
|
11,601,290
|
|
|
|
126,500.00
|
|
|
|
11,074,495
|
|
|
|
|
|
|
|
|
|
Series 49
|
|
|
140,800.00
|
|
|
|
13,318,515
|
|
|
|
145,800.00
|
|
|
|
12,644,862
|
|
|
|
|
|
|
|
|
|
Series 50
|
|
|
208,466.39
|
|
|
|
19,361,580
|
|
|
|
222,080.00
|
|
|
|
18,911,135
|
|
|
|
|
|
|
|
|
|
Series 51
|
|
|
123,068.00
|
|
|
|
11,423,377
|
|
|
|
126,300.00
|
|
|
|
10,748,705
|
|
|
|
|
|
|
|
|
|
Series 52
|
|
|
96,750.00
|
|
|
|
9,224,038
|
|
|
|
108,750.00
|
|
|
|
9,506,109
|
|
|
|
|
|
|
|
|
|
Series 53
|
|
|
73,550.00
|
|
|
|
7,104,425
|
|
|
|
89,550.00
|
|
|
|
7,930,768
|
|
|
|
|
|
|
|
|
|
Series 54
|
|
|
69,350.00
|
|
|
|
7,066,804
|
|
|
|
81,850.00
|
|
|
|
7,654,640
|
|
|
|
|
|
|
|
|
|
Series 55
|
|
|
22,500.00
|
|
|
|
2,379,248
|
|
|
|
22,500.00
|
|
|
|
2,187,676
|
|
|
|
|
|
|
|
|
|
F-23
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 8
|
Members
equity (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Outstanding Units
|
|
|
Net Asset Value
|
|
|
Outstanding Units
|
|
|
Net Asset Value
|
|
|
Outstanding Units
|
|
|
Net Asset Value
|
|
|
Series 56
|
|
|
10,000.00
|
|
|
$
|
1,076,095
|
|
|
|
20,000.00
|
|
|
$
|
1,980,602
|
|
|
|
|
|
|
$
|
|
|
Series 57
|
|
|
25,000.00
|
|
|
|
2,715,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 58
|
|
|
50,000.00
|
|
|
|
5,386,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 59
|
|
|
15,000.00
|
|
|
|
1,618,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 60
|
|
|
27,600.00
|
|
|
|
2,979,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 61
|
|
|
11,312.98
|
|
|
|
1,212,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 62
|
|
|
62,000.00
|
|
|
|
6,519,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 63
|
|
|
66,712.98
|
|
|
|
7,009,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 64
|
|
|
36,650.00
|
|
|
|
3,809,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 65
|
|
|
54,137.27
|
|
|
|
5,558,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 66
|
|
|
95,580.88
|
|
|
|
9,827,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 67
|
|
|
1,367.32
|
|
|
|
140,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 68
|
|
|
57,080.94
|
|
|
|
5,869,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 69
|
|
|
20,861.87
|
|
|
|
2,145,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 70
|
|
|
6,848.67
|
|
|
|
704,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 71
|
|
|
1,403.93
|
|
|
|
144,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 72
|
|
|
6,915.70
|
|
|
|
711,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 73
|
|
|
1,335.83
|
|
|
|
137,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 74
|
|
|
83,000.00
|
|
|
|
8,401,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 75
|
|
|
85,100.00
|
|
|
|
8,628,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 76
|
|
|
30,850.00
|
|
|
|
3,089,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
4,736,483.29
|
|
|
$
|
597,698,035
|
|
|
|
5,040,063.11
|
|
|
$
|
609,936,071
|
|
|
|
4,588,504.15
|
|
|
$
|
680,784,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managing member
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total members equity
|
|
|
|
|
|
$
|
597,698,035
|
|
|
|
|
|
|
$
|
609,936,071
|
|
|
|
|
|
|
$
|
680,784,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
NAV per unit
|
|
|
NAV per unit
|
|
|
NAV per unit
|
|
|
Non-managing members
Class A
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 1
|
|
$
|
143.89
|
|
|
$
|
131.92
|
|
|
$
|
152.88
|
|
Series 33
|
|
|
|
|
|
|
|
|
|
|
111.51
|
|
Series 34
|
|
|
|
|
|
|
|
|
|
|
109.77
|
|
Series 35
|
|
|
|
|
|
|
|
|
|
|
108.90
|
|
Series 36
|
|
|
|
|
|
|
|
|
|
|
107.95
|
|
Series 37
|
|
|
|
|
|
|
|
|
|
|
106.21
|
|
Series 38
|
|
|
|
|
|
|
|
|
|
|
103.95
|
|
Series 39
|
|
|
|
|
|
|
|
|
|
|
103.43
|
|
F-24
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 8
|
Members
equity (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
NAV per unit
|
|
|
NAV per unit
|
|
|
NAV per unit
|
|
|
Series 40
|
|
$
|
|
|
|
$
|
|
|
|
$
|
103.54
|
|
Series 41
|
|
|
|
|
|
|
|
|
|
|
105.58
|
|
Series 42
|
|
|
|
|
|
|
|
|
|
|
103.87
|
|
Series 43
|
|
|
|
|
|
|
|
|
|
|
100.36
|
|
Series 44
|
|
|
|
|
|
|
|
|
|
|
100.73
|
|
Series 45
|
|
|
94.12
|
|
|
|
86.29
|
|
|
|
|
|
Series 46
|
|
|
95.77
|
|
|
|
87.80
|
|
|
|
|
|
Series 47
|
|
|
93.80
|
|
|
|
86.00
|
|
|
|
|
|
Series 48
|
|
|
95.48
|
|
|
|
87.55
|
|
|
|
|
|
Series 49
|
|
|
94.59
|
|
|
|
86.73
|
|
|
|
|
|
Series 50
|
|
|
92.88
|
|
|
|
85.15
|
|
|
|
|
|
Series 51
|
|
|
92.82
|
|
|
|
85.10
|
|
|
|
|
|
Series 52
|
|
|
95.34
|
|
|
|
87.41
|
|
|
|
|
|
Series 53
|
|
|
96.59
|
|
|
|
88.56
|
|
|
|
|
|
Series 54
|
|
|
101.90
|
|
|
|
93.52
|
|
|
|
|
|
Series 55
|
|
|
105.74
|
|
|
|
97.23
|
|
|
|
|
|
Series 56
|
|
|
107.61
|
|
|
|
99.03
|
|
|
|
|
|
Series 57
|
|
|
108.61
|
|
|
|
|
|
|
|
|
|
Series 58
|
|
|
107.74
|
|
|
|
|
|
|
|
|
|
Series 59
|
|
|
107.91
|
|
|
|
|
|
|
|
|
|
Series 60
|
|
|
107.94
|
|
|
|
|
|
|
|
|
|
Series 61
|
|
|
107.18
|
|
|
|
|
|
|
|
|
|
Series 62
|
|
|
105.15
|
|
|
|
|
|
|
|
|
|
Series 63
|
|
|
105.08
|
|
|
|
|
|
|
|
|
|
Series 64
|
|
|
103.95
|
|
|
|
|
|
|
|
|
|
Series 65
|
|
|
102.68
|
|
|
|
|
|
|
|
|
|
Series 66
|
|
|
102.82
|
|
|
|
|
|
|
|
|
|
Series 67
|
|
|
102.82
|
|
|
|
|
|
|
|
|
|
Series 68
|
|
|
102.82
|
|
|
|
|
|
|
|
|
|
Series 69
|
|
|
102.82
|
|
|
|
|
|
|
|
|
|
Series 70
|
|
|
102.82
|
|
|
|
|
|
|
|
|
|
Series 71
|
|
|
102.82
|
|
|
|
|
|
|
|
|
|
Series 72
|
|
|
102.82
|
|
|
|
|
|
|
|
|
|
Series 73
|
|
|
102.82
|
|
|
|
|
|
|
|
|
|
Series 74
|
|
|
101.22
|
|
|
|
|
|
|
|
|
|
Series 75
|
|
|
101.39
|
|
|
|
|
|
|
|
|
|
Series 76
|
|
|
100.16
|
|
|
|
|
|
|
|
|
|
F-25
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 9
|
Financial
Highlights
|
Financial highlights for the Company for the years ended
December 31, 2009, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Class A
|
|
|
Class A
|
|
|
Class A
|
|
|
|
Series 1
|
|
|
Series 1
|
|
|
Series 1
|
|
|
Per unit operating performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
131.92
|
|
|
$
|
152.88
|
|
|
$
|
137.10
|
|
Income from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net trading profit/(loss)
|
|
|
13.95
|
|
|
|
(18.92
|
)
|
|
|
18.63
|
|
Net investment income/(loss)(1)(2)
|
|
|
(1.98
|
)
|
|
|
(2.04
|
)
|
|
|
(2.85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income/(loss) from operations
|
|
|
11.97
|
|
|
|
(20.96
|
)
|
|
|
15.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
143.89
|
|
|
$
|
131.92
|
|
|
$
|
152.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to average members equity(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
1.46
|
%
|
|
|
1.44
|
%
|
|
|
1.42
|
%
|
Incentive allocation
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses and incentive allocation
|
|
|
1.46
|
%
|
|
|
1.44
|
%
|
|
|
1.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income/(loss)(2)
|
|
|
(1.44
|
)%
|
|
|
(1.39
|
)%
|
|
|
(1.95
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return (prior to incentive allocation)(4)
|
|
|
9.07
|
%
|
|
|
(13.71
|
)%
|
|
|
12.12
|
%
|
Incentive allocation
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
(0.61
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return
|
|
|
9.07
|
%
|
|
|
(13.71
|
)%
|
|
|
11.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net investment income/(loss) is calculated based on average
units outstanding during the period. |
|
(2) |
|
Includes incentive allocation. |
|
(3) |
|
The ratios of expenses and net investment income/(loss) to
average members equity are calculated by dividing total
expenses and net investment income/(loss), respectively, by the
month end average members equity for the period. The
ratios to average members equity calculated above do not
include the Companys proportionate share of the net
investment income and expenses of the Investees. The ratios to
average members equity for each member may vary based on
individualized incentive allocation bases and the timing of
capital transactions. |
|
(4) |
|
The components of total return are calculated by dividing the
change in the per unit value of each component for the period by
the NAV per unit at the beginning of the period. The total
return for Class A Series 1 units is calculated
taken as a whole. The total return for each member may vary
based on individualized incentive allocation bases and the
timing of capital transactions. |
The per unit operating performance, ratios to average net assets
and total return are calculated and presented for the initial
series.
F-26
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 10
|
Significant
Investees
|
The following is a summary of financial information for
Investees that represented more than 20% of the Companys
total assets
and/or
income as of
and/or for
the years ended December 31, 2009, December 31, 2008
and December 31, 2007 (the Significant
Investees):
Balance
Sheet
The balance sheets as of December 31, 2009 and
December 31, 2008, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
GELS
|
|
|
GFS
|
|
|
GTT
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in Investees, at fair value
|
|
$
|
422,198,049
|
|
|
$
|
303,788,708
|
|
|
$
|
106,086,018
|
|
Investments in affiliated Investees, at fair value
|
|
|
720,104
|
|
|
|
23,626,633
|
|
|
|
185,915,266
|
|
Cash and cash equivalents
|
|
|
18,030,775
|
|
|
|
25,410,020
|
|
|
|
8,723,057
|
|
Other assets
|
|
|
24,466,148
|
|
|
|
6,509,847
|
|
|
|
12,457,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
465,415,076
|
|
|
$
|
359,335,208
|
|
|
$
|
313,181,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemptions payable
|
|
$
|
57,864,926
|
|
|
$
|
81,871,036
|
|
|
$
|
16,609,782
|
|
Accrued expenses and other liabilities
|
|
|
821,909
|
|
|
|
1,999,092
|
|
|
|
526,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
58,686,835
|
|
|
|
83,870,128
|
|
|
|
17,136,059
|
|
Net assets
|
|
|
406,728,241
|
|
|
|
275,465,080
|
|
|
|
296,045,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and net assets
|
|
$
|
465,415,076
|
|
|
$
|
359,335,208
|
|
|
$
|
313,181,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
GELS
|
|
|
GFS
|
|
|
GTT
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in Investees, at fair value
|
|
$
|
507,375,746
|
|
|
$
|
651,881,468
|
|
|
$
|
115,983,452
|
|
Investments in affiliated Investees, at fair value
|
|
|
1,757,984
|
|
|
|
41,756,829
|
|
|
|
95,549,215
|
|
Cash and cash equivalents
|
|
|
86,798,258
|
|
|
|
48,995,300
|
|
|
|
45,129,030
|
|
Other assets
|
|
|
2,043,326
|
|
|
|
25,339,004
|
|
|
|
237,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
597,975,314
|
|
|
$
|
767,972,601
|
|
|
$
|
256,899,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemptions payable
|
|
$
|
66,145,534
|
|
|
$
|
70,922,105
|
|
|
$
|
48,151,095
|
|
Accrued expenses and other liabilities
|
|
|
219,803
|
|
|
|
586,653
|
|
|
|
243,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
66,365,337
|
|
|
|
71,508,758
|
|
|
|
48,394,194
|
|
Net assets
|
|
|
531,609,977
|
|
|
|
696,463,843
|
|
|
|
208,504,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and net assets
|
|
$
|
597,975,314
|
|
|
$
|
767,972,601
|
|
|
$
|
256,899,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-27
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 10
|
Significant
Investees (continued)
|
Statement
of Operations
For the years ended December 31, 2009, December 31,
2008 and December 31, 2007, the statements of operations
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
Income/(Loss)
|
|
GELS
|
|
|
GFS
|
|
|
GTT
|
|
|
Net realized gain/(loss) on Investees
|
|
$
|
(12,369,124
|
)
|
|
$
|
61,818,045
|
|
|
$
|
30,113,212
|
|
Net change in unrealized gain/(loss) on Investees
|
|
|
71,714,411
|
|
|
|
8,234,277
|
|
|
|
(13,300,462
|
)
|
Investment income
|
|
|
311,429
|
|
|
|
454,261
|
|
|
|
172,459
|
|
Expenses
|
|
|
(1,266,799
|
)
|
|
|
(2,128,662
|
)
|
|
|
(1,334,934
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) from operations
|
|
$
|
58,389,917
|
|
|
$
|
68,377,921
|
|
|
$
|
15,650,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
Income/(Loss)
|
|
GELS
|
|
|
GFS
|
|
|
GTT
|
|
|
Net realized gain/(loss) on Investees
|
|
$
|
59,529,257
|
|
|
$
|
147,794,327
|
|
|
$
|
11,377,950
|
|
Net change in unrealized gain/(loss) on Investees
|
|
|
(184,985,135
|
)
|
|
|
(332,763,998
|
)
|
|
|
(4,153,934
|
)
|
Investment income
|
|
|
753,825
|
|
|
|
709,613
|
|
|
|
692,883
|
|
Expenses
|
|
|
(1,552,959
|
)
|
|
|
(3,043,920
|
)
|
|
|
(962,708
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) from operations
|
|
$
|
(126,255,012
|
)
|
|
$
|
(187,303,978
|
)
|
|
$
|
6,954,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
Income/(Loss)
|
|
GELS
|
|
|
GFS
|
|
|
GTT
|
|
|
Net realized gain/(loss) on Investees
|
|
$
|
110,713,958
|
|
|
$
|
35,640,098
|
|
|
$
|
31,920,318
|
|
Net change in unrealized gain/(loss) on Investees
|
|
|
(14,893,541
|
)
|
|
|
149,147,801
|
|
|
|
3,547,627
|
|
Investment income
|
|
|
913,379
|
|
|
|
2,057,736
|
|
|
|
469,010
|
|
Expenses
|
|
|
(2,475,626
|
)
|
|
|
(3,549,586
|
)
|
|
|
(1,430,314
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) from operations
|
|
$
|
94,258,170
|
|
|
$
|
183,296,049
|
|
|
$
|
34,506,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-28
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 10
|
Significant
Investees (continued)
|
Statement
of Cash Flows
For the years ended December 31, 2009, December 31,
2008 and December 31, 2007, the statements of cash flows
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
GELS
|
|
|
GFS
|
|
|
GTT
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) from operations
|
|
$
|
58,389,917
|
|
|
$
|
68,377,921
|
|
|
$
|
15,650,275
|
|
Net increase/(decrease) in investments in investees(1)
|
|
|
86,215,577
|
|
|
|
208,956,990
|
|
|
|
(8,538,000
|
)
|
Net increase/(decrease) in operating assets and liabilities
|
|
|
(22,190,524
|
)
|
|
|
20,241,596
|
|
|
|
(11,986,473
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) operating activities
|
|
|
122,414,970
|
|
|
|
297,576,507
|
|
|
|
(4,874,198
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net subscriptions/(redemptions)(1)
|
|
|
(191,182,453
|
)
|
|
|
(321,161,787
|
)
|
|
|
(31,531,775
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) financing activities
|
|
|
(191,182,453
|
)
|
|
|
(321,161,787
|
)
|
|
|
(31,531,775
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(68,767,483
|
)
|
|
|
(23,585,280
|
)
|
|
|
(36,405,973
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
86,798,258
|
|
|
|
48,995,300
|
|
|
|
45,129,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
18,030,775
|
|
|
$
|
25,410,020
|
|
|
$
|
8,723,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
During the year ended December 31, 2009, GTT had an in-kind
subscription of $71,930,617 and GFS had an in-kind redemption of
$157,265,966. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
GELS
|
|
|
GFS
|
|
|
GTT
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) from operations
|
|
$
|
(126,255,012
|
)
|
|
$
|
(187,303,978
|
)
|
|
$
|
6,954,191
|
|
Net increase/(decrease) in investments in investees
|
|
|
330,388,001
|
|
|
|
393,838,578
|
|
|
|
18,142,713
|
|
Net increase/(decrease) in operating assets and liabilities
|
|
|
23,085,420
|
|
|
|
(25,653,047
|
)
|
|
|
(280,519
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) operating activities
|
|
|
227,218,409
|
|
|
|
180,881,553
|
|
|
|
24,816,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net subscriptions/(redemptions)
|
|
|
(119,744,804
|
)
|
|
|
(105,594,645
|
)
|
|
|
9,959,197
|
|
Net proceeds/(repayments) from loan
|
|
|
(23,896,658
|
)
|
|
|
(26,485,771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) financing activities
|
|
|
(143,641,462
|
)
|
|
|
(132,080,416
|
)
|
|
|
9,959,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
83,576,947
|
|
|
|
48,801,137
|
|
|
|
34,775,582
|
|
Cash and cash equivalents at beginning of year
|
|
|
3,221,311
|
|
|
|
194,163
|
|
|
|
10,353,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
86,798,258
|
|
|
$
|
48,995,300
|
|
|
$
|
45,129,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-29
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 10
|
Significant
Investees (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
GELS
|
|
|
GFS
|
|
|
GTT
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) from operations
|
|
$
|
94,258,170
|
|
|
$
|
183,296,049
|
|
|
$
|
34,506,641
|
|
Net increase/(decrease) in investments in investees
|
|
|
36,575,263
|
|
|
|
(174,799,663
|
)
|
|
|
59,220,253
|
|
Net increase/(decrease) in operating assets and liabilities
|
|
|
(32,604,644
|
)
|
|
|
(9,861,298
|
)
|
|
|
(6,668,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) operating activities
|
|
|
98,228,789
|
|
|
|
(1,364,912
|
)
|
|
|
87,058,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net subscriptions/(redemptions)
|
|
|
(136,268,832
|
)
|
|
|
(81,057,381
|
)
|
|
|
(82,147,096
|
)
|
Net proceeds/(repayments) from loan
|
|
|
24,004,697
|
|
|
|
26,460,437
|
|
|
|
(1,435,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) financing activities
|
|
|
(112,264,135
|
)
|
|
|
(54,596,944
|
)
|
|
|
(83,582,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(14,035,346
|
)
|
|
|
(55,961,856
|
)
|
|
|
3,475,982
|
|
Cash and cash equivalents at beginning of year
|
|
|
17,256,657
|
|
|
|
56,156,019
|
|
|
|
6,877,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
3,221,311
|
|
|
$
|
194,163
|
|
|
$
|
10,353,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-30
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 10
|
Significant
Investees (continued)
|
Condensed
Schedule of Investments
The condensed schedules of investments as of December 31,
2009 and December 31, 2008, are as follows:
GELS
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
Advisor Funds by Investment Strategy
|
|
Fair Value
|
|
|
Net Assets
|
|
|
Catalyst Activist (cost $15,808,963)
|
|
$
|
20,220,428
|
|
|
|
4.97
|
%
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
TE Hayground Cove Portfolio, Ltd. (cost $3,126,742)(1)
|
|
|
720,104
|
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
Diversified
|
|
|
|
|
|
|
|
|
Glenview Institutional Partners, L.P.
|
|
|
21,023,811
|
|
|
|
5.17
|
%
|
Karsch Capital II, L.P.
|
|
|
26,228,977
|
|
|
|
6.45
|
|
PFM Diversified Fund, L.P.
|
|
|
20,966,390
|
|
|
|
5.16
|
|
SCP Ocean Fund, L.P.
|
|
|
21,809,122
|
|
|
|
5.36
|
|
Viking Global Equities, L.P.
|
|
|
25,612,676
|
|
|
|
6.30
|
|
Other
|
|
|
187,274,286
|
|
|
|
46.04
|
|
|
|
|
|
|
|
|
|
|
Total Diversified (cost $265,634,005)
|
|
|
302,915,262
|
|
|
|
74.48
|
|
|
|
|
|
|
|
|
|
|
Energy (cost $11,500,000)
|
|
|
11,350,421
|
|
|
|
2.79
|
|
|
|
|
|
|
|
|
|
|
Growth
|
|
|
|
|
|
|
|
|
Conatus Capital Partners, L.P. (cost $19,910,770)
|
|
|
20,997,168
|
|
|
|
5.16
|
|
|
|
|
|
|
|
|
|
|
Multi-Strategy (cost $12,165,969)
|
|
|
8,787,164
|
|
|
|
2.16
|
|
|
|
|
|
|
|
|
|
|
Short-Term Trading (cost $16,500,000)
|
|
|
16,184,835
|
|
|
|
3.98
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
|
|
|
|
|
|
Skellig Partners, L.P.
|
|
|
26,492,494
|
|
|
|
6.51
|
|
Other
|
|
|
15,250,277
|
|
|
|
3.75
|
|
|
|
|
|
|
|
|
|
|
Total Value (cost $33,607,973)
|
|
|
41,742,771
|
|
|
|
10.26
|
|
|
|
|
|
|
|
|
|
|
Total Investments in Advisor Funds (cost $378,254,422)
|
|
$
|
422,918,153
|
|
|
|
103.98
|
%
|
|
|
|
|
|
|
|
|
|
F-31
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 10
|
Significant
Investees (continued)
|
GFS
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
Advisor Funds by Investment Strategy
|
|
Fair Value
|
|
|
Net Assets
|
|
|
Credit Opportunities Distressed Securities
|
|
|
|
|
|
|
|
|
Anchorage Capital Partners L.P.
|
|
$
|
30,096,559
|
|
|
|
10.93
|
%
|
Brigade Leveraged Capital Structures Fund, L.P.
|
|
|
21,107,054
|
|
|
|
7.66
|
|
Greywolf Capital Partners II, L.P.
|
|
|
43,058,240
|
|
|
|
15.63
|
|
Other
|
|
|
17,808,045
|
|
|
|
6.46
|
|
|
|
|
|
|
|
|
|
|
Total Credit Opportunities Distressed Securities
(cost $84,442,652)
|
|
|
112,069,898
|
|
|
|
40.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-Strategy
|
|
|
|
|
|
|
|
|
Empyrean Capital Fund L.P.
|
|
|
26,286,209
|
|
|
|
9.54
|
|
Eton Park Fund, L.P.
|
|
|
32,833,855
|
|
|
|
11.92
|
|
Goldman Sachs RP Partners, LLC (invested in Perry Partners,
L.P.)(1)
|
|
|
23,626,633
|
|
|
|
8.58
|
|
Halcyon Partners, L.P.
|
|
|
29,989,388
|
|
|
|
10.89
|
|
Manikay Master Fund, L.P.
|
|
|
12,557,334
|
|
|
|
4.56
|
|
Manikay Onshore Fund, L.P.
|
|
|
5,237,957
|
|
|
|
1.90
|
|
Orange Capital Domestic I, L.P.
|
|
|
26,201,521
|
|
|
|
9.51
|
|
OZ Domestic Partners II, L.P.
|
|
|
25,706,638
|
|
|
|
9.33
|
|
Taconic Capital Partners 1.5, L.P.
|
|
|
32,905,908
|
|
|
|
11.95
|
|
|
|
|
|
|
|
|
|
|
Total Multi-Strategy (cost $172,167,300)
|
|
|
215,345,443
|
|
|
|
78.18
|
|
|
|
|
|
|
|
|
|
|
Total Investments in Advisor Funds (cost $256,609,952)
|
|
$
|
327,415,341
|
|
|
|
118.86
|
%
|
|
|
|
|
|
|
|
|
|
F-32
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 10
|
Significant
Investees (continued)
|
GTT
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
Advisor Funds by Investment Strategy
|
|
Fair Value
|
|
|
Net Assets
|
|
|
Emerging Markets Relative Value (cost $1,748,911)
|
|
$
|
573,112
|
|
|
|
0.19
|
%
|
Global Macro
|
|
|
|
|
|
|
|
|
Bridgewater Pure Alpha II, LLC
|
|
|
17,600,097
|
|
|
|
5.95
|
|
D. E. Shaw Oculus Fund, LLC
|
|
|
18,099,787
|
|
|
|
6.11
|
|
Goldman Sachs BH Fund Onshore, LLC (invested in Brevon
Howard, L.P.)(1)
|
|
|
30,495,770
|
|
|
|
10.30
|
|
Goldman Sachs DeWorde Onshore, LLC (invested in Caxton Global
Investments (USA) LLC)(1)
|
|
|
26,294,707
|
|
|
|
8.88
|
|
Goldman Sachs Sherwood Fund, LLC(1)
|
|
|
11,244,080
|
|
|
|
3.80
|
|
Remington Investment Strategies, L.P.
|
|
|
21,226,289
|
|
|
|
7.17
|
|
Other
|
|
|
30,757,618
|
|
|
|
10.39
|
|
|
|
|
|
|
|
|
|
|
Total Global Macro (cost $134,540,323)
|
|
|
155,718,348
|
|
|
|
52.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Futures
|
|
|
|
|
|
|
|
|
Goldman Sachs Global Trading Advisors, LLC(1)
|
|
|
111,539,633
|
|
|
|
37.67
|
|
TE Jenkins Portfolio, Ltd.(1)
|
|
|
6,341,076
|
|
|
|
2.14
|
|
Other
|
|
|
17,829,115
|
|
|
|
6.03
|
|
|
|
|
|
|
|
|
|
|
Total Managed Futures (cost $130,289,377)
|
|
|
135,709,824
|
|
|
|
45.84
|
|
|
|
|
|
|
|
|
|
|
Total Investments in Advisor Funds (cost $266,578,611)
|
|
$
|
292,001,284
|
|
|
|
98.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Advisor Fund is affiliated with the Significant Investee and the
Company. |
The type and industry for each Advisor Fund is categorized as
hedge fund investment.
The Advisor Funds are primarily domiciled in the United States
of America.
Information about the underlying investments of Advisor Funds
other than affiliated Advisor Funds is generally not available
at December 31, 2009.
For all the investments in Advisor Funds that represent more
than 5% of the Significant Investees net assets at
December 31, 2009, the redemption periods ranged from
monthly to annually and there are no restrictions such as
lock-ups or
suspended redemptions in place with the exception of one Advisor
fund with a three year lock-up. Additionally, certain Advisor
Funds had notified the Significant Investees of certain
restrictions on liquidity such as side pocket investments.
See Note 3 Investments in affiliated
Investees for investment objectives of the Significant
Investees.
F-33
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 10
|
Significant
Investees (continued)
|
GELS
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
Advisor Funds by Investment Strategy
|
|
Fair Value
|
|
|
Net Assets
|
|
|
Catalyst Activist
|
|
|
|
|
|
|
|
|
Jana Partners Qualified L.P. (cost $27,442,323)
|
|
$
|
29,791,327
|
|
|
|
5.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
TE Hayground Cove Portfolio, Ltd.(1) (cost $3,126,742)
|
|
|
1,757,984
|
|
|
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diversified
|
|
|
|
|
|
|
|
|
Viking Global Equities L.P.
|
|
|
40,033,864
|
|
|
|
7.53
|
|
Other
|
|
|
315,970,718
|
|
|
|
59.43
|
|
|
|
|
|
|
|
|
|
|
Total Diversified (cost $370,190,725)
|
|
|
356,004,582
|
|
|
|
66.96
|
|
|
|
|
|
|
|
|
|
|
Long-Bias
|
|
|
|
|
|
|
|
|
Scout Capital Concentrated, L.P. (cost $46,500,960)
|
|
|
37,947,287
|
|
|
|
7.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-Strategy (cost $22,000,000)
|
|
|
19,871,957
|
|
|
|
3.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate (cost $12,000,000)
|
|
|
9,934,135
|
|
|
|
1.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value (cost $54,923,660)
|
|
|
53,826,458
|
|
|
|
10.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments in Advisor Funds (cost $536,184,410)
|
|
$
|
509,133,730
|
|
|
|
95.77
|
%
|
|
|
|
|
|
|
|
|
|
F-34
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 10
|
Significant
Investees (continued)
|
GFS
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
Advisor Funds by Investment Strategy
|
|
Fair Value
|
|
|
Net Assets
|
|
|
Catalyst Activist (cost $30,000,000)
|
|
$
|
20,070,165
|
|
|
|
2.88
|
%
|
Credit Opportunities Distressed Securities
|
|
|
|
|
|
|
|
|
Anchorage Capital Partners L.P.
|
|
|
46,728,641
|
|
|
|
6.71
|
|
Greywolf Capital Partners II, L.P.
|
|
|
39,169,176
|
|
|
|
5.62
|
|
Silver Point Capital Fund, L.P.
|
|
|
58,137,704
|
|
|
|
8.35
|
|
Trafalgar Merchant Fund
|
|
|
678,667
|
|
|
|
0.10
|
|
Trafalgar Recovery Fund
|
|
|
542,185
|
|
|
|
0.08
|
|
Other
|
|
|
29,499,300
|
|
|
|
4.23
|
|
|
|
|
|
|
|
|
|
|
Total Credit Opportunities Distressed Securities
(cost $145,850,425)
|
|
|
174,755,673
|
|
|
|
25.09
|
|
|
|
|
|
|
|
|
|
|
Multi Strategy
|
|
|
|
|
|
|
|
|
Canyon Value Realization Fund, L.P.
|
|
|
36,227,068
|
|
|
|
5.20
|
|
Empyrean Capital Fund L.P.
|
|
|
40,063,040
|
|
|
|
5.75
|
|
Eton Park Fund, L.P.
|
|
|
123,548,877
|
|
|
|
17.74
|
|
Eton Park Re LDC
|
|
|
86,655
|
|
|
|
0.01
|
|
Goldman Sachs RP Partners, LLC (invests in Perry Partners,
L.P.)(1)
|
|
|
41,756,829
|
|
|
|
6.00
|
|
OZ Domestic Partners, L.P.
|
|
|
16,194,011
|
|
|
|
2.33
|
|
OZ Domestic Partners II, L.P.
|
|
|
30,110,987
|
|
|
|
4.32
|
|
Taconic Capital Partners 1.5, L.P.
|
|
|
45,792,207
|
|
|
|
6.58
|
|
Trafalgar Catalyst Fund
|
|
|
41,047,579
|
|
|
|
5.89
|
|
Other
|
|
|
82,606,242
|
|
|
|
11.86
|
|
|
|
|
|
|
|
|
|
|
Total Multi Strategy (cost $400,345,662)
|
|
|
457,433,495
|
|
|
|
65.68
|
|
Risk Arbitrage Special Situation (cost
$54,871,098)
|
|
|
41,378,964
|
|
|
|
5.94
|
|
|
|
|
|
|
|
|
|
|
Total Investments in Advisor Funds (cost $631,067,185)
|
|
$
|
693,638,297
|
|
|
|
99.59
|
%
|
|
|
|
|
|
|
|
|
|
F-35
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 10
|
Significant
Investees (continued)
|
GTT
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
Advisor Funds by Investment Strategy
|
|
Fair Value
|
|
|
Net Assets
|
|
|
Global Macro
|
|
|
|
|
|
|
|
|
Brevan Howard, L.P.
|
|
$
|
29,489,564
|
|
|
|
14.14
|
%
|
Bridgewater Pure Alpha II, LLC
|
|
|
14,015,870
|
|
|
|
6.72
|
|
D. E. Shaw Oculus Fund, LLC
|
|
|
18,373,403
|
|
|
|
8.81
|
|
Drawbridge Global Macro Fund, L.P.
|
|
|
14,043,197
|
|
|
|
6.74
|
|
Goldman Sachs DeWorde Onshore, LLC (invests in Caxton Global
Investments (USA) LLC)(1)
|
|
|
23,025,655
|
|
|
|
11.04
|
|
Remington Investment Strategies, L.P.
|
|
|
19,162,801
|
|
|
|
9.19
|
|
Other
|
|
|
12,399,879
|
|
|
|
5.95
|
|
|
|
|
|
|
|
|
|
|
Total Global Macro (cost $109,472,426)
|
|
|
130,510,369
|
|
|
|
62.59
|
|
|
|
|
|
|
|
|
|
|
Managed Futures
|
|
|
|
|
|
|
|
|
Goldman Sachs Global Trading Advisors, LLC(1)
|
|
|
72,523,560
|
|
|
|
34.78
|
|
Other
|
|
|
8,498,738
|
|
|
|
4.08
|
|
|
|
|
|
|
|
|
|
|
Total Managed Futures (cost $63,337,106)
|
|
|
81,022,298
|
|
|
|
38.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments in Advisor Funds (cost $172,809,532)
|
|
$
|
211,532,667
|
|
|
|
101.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Advisor Fund is affiliated with the Significant Investee and the
Company. |
The type and industry for each Advisor Fund is categorized as
hedge fund investment.
The Advisor Funds are primarily domiciled in the United States
of America.
Information about the underlying investments of Advisor Funds
other than affiliated Advisor Funds is generally not available
at December 31, 2008.
For all the investments in Advisor Funds that represent more
than 5% of the Significant Investees net assets at
December 31, 2008, the redemption periods range from
monthly to annually and the remaining
lock-ups
were less than one year. Additionally, certain Advisor Funds had
notified the Significant Investees of certain restrictions on
liquidity which may include side pocket investments, suspended
redemptions, or other restrictions at December 31, 2008.
Such restrictions, except side pocket investments, have lapsed
since such date.
See Note 3 Investments in affiliated
Investees for investment objectives of the Significant
Investees.
F-36
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 10
|
Significant
Investees (continued)
|
Fair
Value Hierarchy
The following tables summarize by level within the fair value
hierarchy each Significant Investees investments at fair
value as of December 31, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
GELS
|
|
$
|
|
|
|
$
|
413,334,824
|
|
|
$
|
9,583,329
|
|
|
$
|
422,918,153
|
|
GFS
|
|
|
|
|
|
|
308,047,463
|
|
|
|
19,367,878
|
|
|
|
327,415,341
|
|
GTT
|
|
|
|
|
|
|
285,886,771
|
|
|
|
6,114,513
|
|
|
|
292,001,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
Assets
|
|
Level 1
|
|
|
Level 2(1)
|
|
|
Level 3(1)
|
|
|
Total
|
|
|
GELS
|
|
$
|
|
|
|
$
|
487,440,886
|
|
|
$
|
21,692,844
|
|
|
$
|
509,133,730
|
|
GFS
|
|
|
|
|
|
|
575,946,236
|
|
|
|
117,692,061
|
|
|
|
693,638,297
|
|
GTT
|
|
|
|
|
|
|
180,295,473
|
|
|
|
31,237,194
|
|
|
|
211,532,667
|
|
|
|
|
(1) |
|
The Level 2 and Level 3 fair value amounts were
reclassified at December 31, 2008 for comparative purposes
to such levels at December 31, 2009 due to additional
guidance related to liquidity provided by Advisor Funds in
leveling such assets as provided within ASU
No. 2009-12
Investment in Certain Entities That Calculate Net Asset
Value per Share (or Its Equivalent). |
See Note 2 Significant accounting
policies for disclosures regarding the fair value
hierarchy.
Liquidity
As of December 31, 2009 and December 31, 2008, certain
of the Advisor Funds of the Significant Investees were
considered illiquid due to restrictions such as side pocket
investments or suspended redemptions implemented by the Advisors
of such Advisor Funds. The Significant Investees have not
imposed any liquidity restrictions on the Company. The following
represents the percentage of the net assets of the Significant
Investees that were considered illiquid.
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
GELS
|
|
|
2
|
%
|
|
|
4
|
%
|
GFS
|
|
|
5
|
%
|
|
|
17
|
%
|
GTT
|
|
|
2
|
%
|
|
|
14
|
%
|
See Note 5 Risk management
Liquidity Risk for disclosures regarding illiquidity
related to the Significant Investees.
Each of the Significant Investees maintains a borrowing facility
with a financial institution in order to meet liquidity needs.
At December 31, 2009 and December 31, 2008, the
Significant Investees had borrowings outstanding of $0 and $0,
respectively.
Risk
Management
See Note 5 Risk Management for
information on risk information associated with the Significant
Investees.
F-37
GOLDMAN
SACHS HEDGE FUND PARTNERS, LLC
NOTES TO
FINANCIAL STATEMENTS (continued)
December 31,
2009
|
|
Note 10
|
Significant
Investees (continued)
|
Advisor
Funds Management Fees and Incentive
Allocations/Fees
See Note 3 Investments in affiliated
Investees for information on the contractual weighted
average Advisor Funds management fee and incentive
allocation/fee rates at the Significant Investee level.
Financial
Highlights
The financial highlights for the Significant Investees for the
years ended December 31, 2009, December 31, 2008 and
December 31, 2007 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
GELS
|
|
|
GFS
|
|
|
GTT
|
|
|
Ratios to average net assets(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
0.19
|
%
|
|
|
0.21
|
%
|
|
|
0.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income/(loss)
|
|
|
(0.12
|
)%
|
|
|
(0.11
|
)%
|
|
|
(0.16
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return(2)
|
|
|
13.37
|
%
|
|
|
19.10
|
%
|
|
|
6.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
GELS
|
|
|
GFS
|
|
|
GTT
|
|
|
Ratios to average net assets(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
0.15
|
%
|
|
|
0.12
|
%
|
|
|
0.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income/(loss)
|
|
|
(0.04
|
)%
|
|
|
(0.05
|
)%
|
|
|
0.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return(2)
|
|
|
(16.75
|
)%
|
|
|
(19.18
|
)%
|
|
|
3.27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
GELS
|
|
|
GFS
|
|
|
GTT
|
|
|
Ratios to average net assets(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
0.16
|
%
|
|
|
0.11
|
%
|
|
|
0.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income/(loss)
|
|
|
(0.06
|
)%
|
|
|
0.09
|
%
|
|
|
(0.03
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return(2)
|
|
|
11.70
|
%
|
|
|
20.22
|
%
|
|
|
15.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The ratios to average net assets are based on expenses and net
investment income/(loss) of Class C
Series 1 units for GELS, GFS and GTT. The ratios to
average net assets calculated above do not include each
Significant Investees proportionate share of the net
investment income/(loss) and expenses of their investments. |
|
(2) |
|
The total returns are based on the performance of Class C
Series 1 units for GELS, GFS, and GTT. The returns
include administration fees. No management fee or incentive
allocation was charged by the managing member of the Significant
Investees with respect to the Companys investment in any
of the Significant Investees. |
|
|
Note 11
|
Subsequent
Events
|
Effective January 1, 2010, Class A Series 55
through Class A Series 65 and Class A
Series 74 through Class A Series 76 units
were converted to Class A Series 54 units.
F-38