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EX-31.2 - EX-31.2 - Hedge Fund Managers (Diversified) LLCy92665exv31w2.htm
EX-32.1 - EX-32.1 - Hedge Fund Managers (Diversified) LLCy92665exv32w1.htm
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
Form 10-Q
 
 
 
     
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
     
    For the quarterly period ended September 30, 2011
     
    or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the transition period from          to          
 
Commission file number: 000-50723
 
 
 
 
 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
(Exact name of registrant as specified in its charter)
 
 
     
Delaware
  04-3638229
(State or other jurisdiction
of incorporation)
  (I.R.S. Employer
Identification No.)
     
200 West Street
New York, New York
(Address of principal executive offices)
  10282
(Zip Code)
 
Registrant’s telephone number, including area code: (212) 902-1000
 
 
 
 
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 for 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 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):
 
Large accelerated filer o     Accelerated filer o     Non-accelerated filer þ      Smaller reporting company o
 
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 Registrant’s Units of Limited Liability Company Interests are not traded on any market and, accordingly, have no aggregate market value. The Registrant had 4,532,895.54 Units of Limited Liability Company Interests outstanding as of November 14, 2011.
 


 

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
QUARTERLY REPORT ON FORM 10-Q
 
INDEX
 
         
       
    1  
    2  
    3  
    4  
    5  
    6  
    29  
    48  
    51  
       
       
    51  
    51  
    51  
    52  
    52  
    52  
    55  
    56  
    57  
EX-31.1: CERTIFICATION
       
EX-31.2: CERTIFICATION
       
EX-32.1: CERTIFICATION
       
 EX-31.1
 EX-31.2
 EX-32.1
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT


Table of Contents

 
PART I — FINANCIAL INFORMATION
 
Item 1.   Financial Statements
 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
September 30, 2011 and December 31, 2010
 
                                 
    (Unaudited)
    (Audited)
 
    September 30, 2011     December 31, 2010  
          % of
          % of
 
    Fair
    members’
    Fair
    members’
 
Affiliated Investee   value     equity(1)     value     equity(1)  
 
Goldman Sachs Global Equity Long/Short, LLC   $ 212,222,540       39.29 %   $ 248,593,542       39.98 %
Goldman Sachs Global Fundamental Strategies, LLC     136,347,003       25.25 %     157,347,212       25.30 %
Goldman Sachs Global Fundamental Strategies Asset Trust     17,167,960       3.18 %     23,188,415       3.73 %
Goldman Sachs Global Relative Value, LLC     1,245,229       0.23 %     1,649,094       0.27 %
Goldman Sachs Global Tactical Trading, LLC     169,959,496       31.47 %     181,173,125       29.14 %
Goldman Sachs HFP Opportunistic Fund, LLC     707,297       0.13 %     735,686       0.12 %
                                 
Total investments (cost $491,222,899 and $529,138,634, respectively)   $ 537,649,525       99.55 %   $ 612,687,074       98.54 %
                                 
 
The Company’s aggregate proportionate share of the following underlying investments of the Investees represented greater than 5% of the Company’s member’s equity at September 30, 2011 and December 31, 2010.
 
                         
    September 30, 2011 (Unaudited)  
            Proportionate
    % of
 
    Underlying
      share of
    members’
 
Investee   investment   Strategy   fair value     equity(1)  
 
Goldman Sachs Global Tactical Trading, LLC
  GS Global Trading Advisors, LLC(2)   Managed Futures   $ 42,818,945       7.93%  
 
                         
    December 31, 2010 (Audited)  
            Proportionate
    % of
 
    Underlying
      share of
    members’
 
Investee   investment   Strategy   fair value     equity(1)  
 
Goldman Sachs Global Tactical Trading, LLC
  GS Global Trading Advisors, LLC(2)   Managed Futures   $ 47,508,604       7.64%  
 
 
(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 based on the members’ equity per the Balance Sheet and in accordance with Statement of Financial Accounting Standards ASC 480, “Distinguishing Liabilities from Equity.” Excluding redemptions payable per the Balance Sheet, total investments would represent 94.61% and 95.63% of members’ equity at September 30, 2011 and December 31, 2010, respectively.
 
(2) Affiliated investment fund with a monthly liquidity term.
 
See accompanying notes.


1


Table of Contents

GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
BALANCE SHEET

September 30, 2011 and December 31, 2010
 
                 
    (Unaudited)
    (Audited)
 
    September 30, 2011     December 31, 2010  
 
ASSETS
Assets:
               
Investments in affiliated Investees, at fair value (cost $491,222,899 and $529,138,634, respectively)
  $ 537,649,525     $ 612,687,074  
Cash and cash equivalents
    33,241,310       29,949,410  
                 
Total assets
  $ 570,890,835     $ 642,636,484  
                 
 
LIABILITIES AND MEMBERS’ EQUITY
Liabilities:
               
Redemptions payable
  $ 28,190,214     $ 18,895,114  
Management fee payable
    1,808,099       1,322,217  
Accrued expenses and other liabilities
    826,278       625,160  
                 
Total liabilities
    30,824,591       20,842,491  
Members’ equity:
               
Members’ equity (units outstanding 4,482,895.54 and 4,849,206.06, respectively)
    540,066,244       621,793,993  
                 
Total liabilities and members’ equity
  $ 570,890,835     $ 642,636,484  
                 
Analysis of members’ equity:
               
Net capital contributions, accumulated net investment income/(loss) and realized gain/(loss) on investments
  $ 493,639,618     $ 538,245,553  
Accumulated net unrealized gain/(loss) on investments
    46,426,626       83,548,440  
                 
Total members’ equity(1)
  $ 540,066,244     $ 621,793,993  
                 
 
 
(1) Refer to Note 9 for units outstanding and NAV per unit amounts by series.
 
See accompanying notes.


2


Table of Contents

 
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
(Unaudited)
 
For the three and nine months ended September 30, 2011 and September 30, 2010
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2011     2010     2011     2010  
 
Dividend income
  $ 684     $ 7,398     $ 6,037     $ 15,669  
Expenses:
                               
Management fee
    1,808,099       1,938,587       5,709,730       5,814,568  
Professional fees
    366,246       121,990       631,271       636,418  
Administration fee
    35,805       26,320       111,983       26,320  
Interest expense
          86,122             153,105  
Miscellaneous expenses
    45,773       43,331       139,281       120,198  
                                 
Total expenses
    2,255,923       2,216,350       6,592,265       6,750,609  
                                 
Net investment income/(loss)
    (2,255,239 )     (2,208,952 )     (6,586,228 )     (6,734,940 )
                                 
Realized and unrealized gain/(loss) on investments in affiliated Investees:
                               
Net realized gain/(loss)
    5,265,038       6,539,149       18,363,541       29,255,725  
Net change in unrealized gain/(loss)
    (25,273,027 )     14,350,441       (37,121,814 )     (13,041,663 )
                                 
Net realized and unrealized gain/(loss)
    (20,007,989 )     20,889,590       (18,758,273 )     16,214,062  
                                 
Net income/(loss)
  $ (22,263,228 )   $ 18,680,638     $ (25,344,501 )   $ 9,479,122  
                                 
 
See accompanying notes.


3


Table of Contents

GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
STATEMENT OF CHANGES IN MEMBERS’ EQUITY
 
For the nine months ended September 30, 2011 (Unaudited)
and the year ended December 31, 2010 (Audited)
 
 
                         
    Managing
          Total
 
    member’s
    Members’
    members’
 
    equity     equity     equity  
 
Members’ equity at December 31, 2009
  $     $ 597,698,035     $ 597,698,035  
Subscriptions
          64,918,041       64,918,041  
Redemptions
    (283,319 )     (69,624,119 )     (69,907,438 )
Allocations of net income/(loss):
                       
Incentive allocation
    283,319       (283,319 )      
Pro-rata allocation
          29,085,355       29,085,355  
                         
Members’ equity at December 31, 2010
          621,793,993       621,793,993  
Subscriptions
          22,970,000       22,970,000  
Redemptions
    (5,323 )     (79,347,925 )     (79,353,248 )
Allocations of net income/(loss):
                       
Incentive allocation
    5,323       (5,323 )      
Pro-rata allocation
          (25,344,501 )     (25,344,501 )
                         
Members’ equity at September 30, 2011
  $     $ 540,066,244     $ 540,066,244  
                         
 
See accompanying notes.


4


Table of Contents

GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
 
 
(Unaudited)
For the nine months ended September 30, 2011 and September 30, 2010
 
                 
    2011     2010  
 
Cash flows from operating activities
               
Net income/(loss)
  $ (25,344,501 )   $ 9,479,122  
Adjustments to reconcile net income/(loss) to net cash provided by (used in) operating activities:
               
Purchases of investments in affiliated Investees
    (9,602,658 )     (133,455,226 )
Proceeds from sales of investments in affiliated Investees
    65,881,934       135,478,297  
Net realized (gain)/loss from investments in affiliated Investees
    (18,363,541 )     (29,255,725 )
Net change in unrealized (gain)/loss of investments in affiliated Investees
    37,121,814       13,041,663  
Increase/(decrease) in operating liabilities:
               
Management fee payable
    485,882       649,619  
Interest payable
          13,591  
Accrued expenses and other liabilities
    201,118       296,169  
                 
Net cash from operating activities
    50,380,048       (3,752,490 )
                 
Cash flows from financing activities
               
Subscriptions
    22,970,000       59,298,042  
Redemptions
    (70,058,148 )     (57,445,038 )
                 
Net cash from financing activities
    (47,088,148 )     1,853,004  
                 
Net change in cash and cash equivalents
    3,291,900       (1,899,486 )
Cash and cash equivalents at beginning of period
    29,949,410       35,470,838  
                 
Cash and cash equivalents at end of period
  $ 33,241,310     $ 33,571,352  
                 
Supplemental disclosure of cash flow information
               
Cash paid by the Company during the period for interest
  $     $ 139,514  
                 
 
See accompanying notes.


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Table of Contents

 
Note 1 – Organization
 
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 Company’s assets are allocated to Goldman Sachs Global Equity Long/Short, LLC (“GELS”), Goldman Sachs Global Fundamental Strategies, LLC (“GFS”), and Goldman Sachs Global Tactical Trading, LLC (“GTT”) (collectively, the “Investment Funds”). The balance of the Company’s assets are invested in Goldman Sachs Global Fundamental Strategies Asset Trust (“GFS Trust”), Goldman Sachs Global Relative Value, LLC (“GRV”) and Goldman Sachs HFP Opportunistic Fund, LLC (“HFPO” and, together with GFS Trust, GRV 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.
 
Fair value of investments
 
The Company is an investment company for financial reporting purposes and accordingly carries its investments at fair value. The carrying value of the Company’s assets and liabilities not recorded at fair value that qualify as financial instruments approximates fair value.
 
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 net asset value (“NAV”) information supplied by each individual Investee, which includes realized and unrealized gains/losses on underlying investments of the Investees as well as management fees and incentive fees charged by the Advisors, administration fees and all other income/expenses of the Investees. See “Note 3 — Investments in affiliated Investees” for further information.
 
Cash and cash equivalents
 
Cash and cash equivalents consist of deposits held at banks or money market funds. 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.


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Table of Contents

GOLDMAN SACHS HEDGE FUND PARTNERS, LLC

NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
September 30, 2011
 
Note 2 – Significant accounting policies (continued)
 
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 member’s 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 Company’s 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 Company’s taxable income or loss on their respective income tax returns. Accordingly, no U.S. federal income tax liability or expense has been recorded in the financial statements of the Company.
 
The Managing Member has reviewed the Company’s tax positions for the open tax years by major jurisdictions and has concluded that no provision for taxes is required in the Company’s 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.
 
Recent accounting pronouncements
 
Improving Disclosures about Fair Value Measurements (Accounting Standards Codification (“ASC”) 820).  In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements.” ASU No. 2010-06 provides amended disclosure requirements related to fair value measurements. Certain disclosure requirements of ASU No. 2010-06 were effective for the Company beginning in the first quarter of 2010, while other disclosure requirements of the ASU are effective for financial statements issued for reporting periods beginning after December 15, 2010. Since these amended principles require only additional disclosures concerning fair value measurements, adoption did not affect the Company’s financial condition, results of operations or cash flows.
 
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”) (FASB ASC 820).  In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurements and Disclosures (Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” ASU No. 2011-04 clarifies the application of existing fair value measurement and disclosure requirements, changes certain principles related to measuring fair value, and requires additional disclosures about fair value measurements. ASU No. 2011-04 is effective for periods beginning after December 15, 2011. The Company is currently evaluating the impact of adoption.


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Table of Contents

GOLDMAN SACHS HEDGE FUND PARTNERS, LLC

NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
September 30, 2011
 
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 Company’s investments in affiliated Investees are subject to the 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 Investees. 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.
 
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 Company’s assets in each of the affiliated Investees during the period. In addition, performance is determined by the Investment Funds’ asset allocation with the various Advisors and the performance of each of their Advisor Funds and interests held by GFS Trust, GRV and HFPO. NAVs received by the Investees from, or on behalf of, the Advisor Funds are based on the fair value of the Advisor Funds’ underlying investments in accordance with policies established by each Advisor Fund. 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 U.S. GAAP applicable to fair value measurements and disclosures, price transparency and valuation procedures in place. NAV provided by the Advisors may differ from the audited values received subsequent to the date of the Company’s NAV determination. In such cases, the Company will evaluate the materiality of any such differences.
 
The following table summarizes the cost of the Company’s investments in the affiliated Investees at September 30, 2011 and December 31, 2010:
 
                 
Investee   September 30, 2011     December 31, 2010  
 
GELS
  $ 204,000,514     $ 218,989,189  
GFS
    129,421,692       138,846,103  
GFS Trust
    15,808,023       20,402,700  
GRV
    1,471,822       1,686,248  
GTT
    139,811,721       148,505,266  
HFPO
    709,127       709,128  
                 
Total
  $ 491,222,899     $ 529,138,634  
                 


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GOLDMAN SACHS HEDGE FUND PARTNERS, LLC

NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
September 30, 2011
 
Note 3 – Investments in affiliated Investees (continued)
 
The following table summarizes the Company’s realized and unrealized gain/(loss) on investments in affiliated Investees for the three and nine months ended September 30, 2011 and September 30, 2010:
 
                                         
          Three Months Ended September 30,     Nine Months Ended September 30,  
Investee   Liquidity     2011     2010     2011     2010  
 
GELS
    (1 )   $ (15,544,898 )   $ 9,169,385     $ (15,371,002 )   $ (1,449,667 )
GFS
    (2 )     (6,445,643 )     3,205,456       (5,102,866 )     8,780,168  
GFS Trust
    (3 )     (548,857 )     (117,601 )     (849,983 )     (659,818 )
GRV
    (4 )     (55,540 )     7,474       (192,404 )     138,349  
GTT
    (5 )     2,596,234       8,668,647       2,786,371       9,494,167  
HFPO
    (6 )     (9,285 )     (43,771 )     (28,389 )     (89,137 )
                                         
Total
          $ (20,007,989 )   $ 20,889,590     $ (18,758,273 )   $ 16,214,062  
                                         
 
 
(1) Redemptions can be made quarterly with 61 days’ notice, or at the sole discretion of the 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 the 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 six years.
 
(4) 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 six years.
 
(5) Redemptions can be made quarterly with 60 days’ notice, or at the sole discretion of the Managing Member.
 
(6) HFPO’s current holdings consist solely of one illiquid investment in an Advisor Fund, which cannot be redeemed until the relevant Advisor liquidates such investment. The estimated remaining holding period of the illiquid investment is approximately two to five years.
 
The investment strategy for each Investee 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 Advisor’s 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 catalyst-activist, 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 catalyst-activist, merger arbitrage/special situations, credit opportunities/distressed securities and multi-strategy investing. Other strategies may be employed as well.


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GOLDMAN SACHS HEDGE FUND PARTNERS, LLC

NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
September 30, 2011
 
Note 3 – Investments in affiliated Investees (continued)
 
Goldman Sachs Global Fundamental Strategies Asset Trust
 
GS HFS, the managing member of GFS, 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. 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.
 
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.
 
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 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
 
HFPO’s 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.


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GOLDMAN SACHS HEDGE FUND PARTNERS, LLC

NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
September 30, 2011
 
Note 3 – Investments in affiliated Investees (continued)
 
 
Management fees and incentive allocation/fees
 
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 allocation/fees to the Investees. The following table reflects the contractual weighted average Advisors’ management fee and incentive allocation/fee rates at the Investee level for the nine months ended September 30, 2011 and September 30, 2010. The weighted average is based on the period-end fair values of each investment in the Advisor Fund in proportion to the Investee’s total investments. The fee rates used are the contractual rates charged by each Advisor. The Advisors’ management fee and incentive allocation/fee are not paid to the Managing Member.
 
                                 
    September 30, 2011     September 30, 2010  
    Management
    Incentive
    Management
    Incentive
 
Investee   fees     allocation/fees     fees     allocation/fees  
 
GELS
    1.65 %     20.26 %     1.61 %     19.97 %
GFS
    1.66 %     18.50 %     1.64 %     18.58 %
GFS Trust
    1.52 %     17.74 %     1.29 %     14.74 %
GRV
    1.61 %     12.44 %     1.04 %     9.31 %
GTT
    2.12 %     21.51 %     1.95 %     19.38 %
HFPO
    %(1)     %(1)     1.98 %     19.76 %
 
 
(1) The sole Advisor Fund within HFPO is illiquid and the Advisor has elected to forego the management and incentive fees.
 
Note 4 – Fair Value Measurements
 
The fair value of a financial instrument is the amount 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.
 
The Company uses NAV as its measure of fair value for investments in Investees when (i) the fund investment does not have a readily determinable fair value and (ii) the NAV of the investment fund is calculated in a manner consistent with the measurement principles of investment company accounting, including measurement of the underlying investments at fair value. In evaluating the level at which the fair value measurements of the Company’s investments have been classified, the Company has assessed factors including, but not limited to, price transparency, the ability to redeem at NAV at the measurement date and the existence or absence of certain restrictions at the measurement date. The three levels of the fair value hierarchy are described below:
 
  •  Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
 
  •  Level 2 — Quoted prices in markets that are not active or financial instruments for which significant inputs are observable (including investments in Investees that can be redeemed at the measurement date or in the near-term at NAV), either directly or indirectly; and
 
  •  Level 3 — Prices or valuations that require significant unobservable inputs (including investments in Investees that will never have the ability to be voluntarily redeemed or are restricted from redemption for an uncertain or extended period of time from the measurement date).


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GOLDMAN SACHS HEDGE FUND PARTNERS, LLC

NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
September 30, 2011
 
Note 4 – Fair Value Measurements (continued)
 
 
The following tables set forth by level within the fair value hierarchy the Company’s assets and liabilities by investment strategy at fair value measured at September 30, 2011 and December 31, 2010:
 
                                 
    September 30, 2011 (Unaudited)  
Assets   Level 1     Level 2     Level 3     Total  
 
Investees by investment strategy:
                               
Equity Long/Short
  $     $ 212,222,540     $     $ 212,222,540  
Event Driven
          136,347,003       17,167,960       153,514,963  
Tactical Trading
          169,959,496             169,959,496  
Multi-Sector
                707,297       707,297  
Relative Value
                1,245,229       1,245,229  
                                 
Total
  $     $ 518,529,039     $ 19,120,486     $ 537,649,525  
                                 
 
                                 
    December 31, 2010 (Audited)  
Assets   Level 1     Level 2     Level 3     Total  
 
Investees by investment strategy:
                               
Equity Long/Short
  $     $ 248,593,542     $     $ 248,593,542  
Event Driven
          157,347,212       23,188,415       180,535,627  
Tactical Trading
          181,173,125             181,173,125  
Multi-Sector
                735,686       735,686  
Relative Value
                1,649,094       1,649,094  
                                 
Total
  $     $ 587,113,879     $ 25,573,195     $ 612,687,074  
                                 
 
Included in cash and cash equivalents on the Balance Sheet are investments in money market funds with a fair value of $33,211,310 and $29,919,410, which were classified as Level 1 assets as of September 30, 2011 and December 31, 2010, respectively.
 
The following tables summarize the changes in fair value of the Company’s Level 3 investments for the quarter ended September 30, 2011 and September 30, 2010, respectively:
 
                                 
    Event Driven     Multi-Sector     Relative Value     Total  
 
Balance as at July 1, 2011
  $ 18,784,632     $ 716,582     $ 1,300,769     $ 20,801,983  
Net realized gain/(loss) from investments
    (1,195 )                 (1,195 )
Net change in unrealized gain/(loss) on investments still held at September 30, 2011
    (547,662 )     (9,285 )     (55,540 )     (612,487 )
Sales
    (1,067,815 )                 (1,067,815 )
                                 
Balance at September 30, 2011
  $ 17,167,960     $ 707,297     $ 1,245,229     $ 19,120,486  
                                 
 


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GOLDMAN SACHS HEDGE FUND PARTNERS, LLC

NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
September 30, 2011
 
Note 4 – Fair Value Measurements (continued)
 
                                 
    Event Driven     Multi-Sector     Relative Value     Total  
 
Balance as at July 1, 2010
  $ 28,644,724     $ 787,989     $ 2,598,182     $ 32,030,895  
Net realized gain/(loss) from investments
    (1,003 )           (1,292 )     (2,295 )
Net change in unrealized gain/(loss) on investments still held at September 30, 2010
    (116,598 )     (43,771 )     8,766       (151,603 )
Sales
    (455,227 )           (288,953 )     (744,180 )
                                 
Balance at September 30, 2010
  $ 28,071,896     $ 744,218     $ 2,316,703     $ 31,132,817  
                                 
 
The following tables summarize the changes in fair value of the Company’s Level 3 investments for the nine months ended September 30, 2011 and September 30, 2010, respectively:
 
                                 
    Event Driven     Multi-Sector     Relative Value     Total  
 
Balance as at January 1, 2011
  $ 23,188,415     $ 735,686     $ 1,649,094     $ 25,573,195  
Net realized gain/(loss) from investments
    (51,546 )           1,759       (49,787 )
Net change in unrealized gain/(loss) on investments still held at September 30, 2011
    (798,437 )     (28,389 )     (194,163 )     (1,020,989 )
Sales
    (5,170,472 )           (211,461 )     (5,381,933 )
                                 
Balance at September 30, 2011
  $ 17,167,960     $ 707,297     $ 1,245,229     $ 19,120,486  
                                 
 
                                 
    Event Driven     Multi-Sector     Relative Value     Total  
 
Balance as at January 1, 2010
  $ 37,532,758     $     $ 4,887,674     $ 42,420,432  
Net realized gain/(loss) from investments
    (7,676 )           47,943       40,267  
Net change in unrealized gain/(loss) on investments still held at September 30, 2010
    (652,142 )     (49,831 )     90,406       (611,567 )
Sales
    (8,801,044 )           (2,709,320 )     (11,510,364 )
Level 3 transfers in
          794,049             794,049  
                                 
Balance at September 30, 2010
  $ 28,071,896     $ 744,218     $ 2,316,703     $ 31,132,817  
                                 
 
Transfers into and out of Level 3 are effective as of actual date of the event or circumstances that caused the transfer.
 
Note 5 – Fees
 
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.

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GOLDMAN SACHS HEDGE FUND PARTNERS, LLC

NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
September 30, 2011
 
Note 5 – Fees (continued)
 
 
Effective August 1, 2010, the Company incurs a monthly administration fee payable to SEI equal to one twelfth of 0.02% of the net assets of the Company as of each month end which is included in Administration fee in the Statement of Operations. The Company also incurs an indirect monthly administration fee to SEI at the Investee level which is included in Realized and unrealized gain/(loss) on investments in affiliated Investees in the Statement of Operations. For the three months ended September 30, 2011 and September 30, 2010, the Company’s pro-rata indirect share of the administration fee charged at the Investee level totaled $65,367 and $88,215, respectively. For the nine months ended September 30, 2011 and September 30, 2010, the Company’s pro-rata indirect share of the administration fee charged at the Investee level totaled $206,333 and $244,632, respectively.
 
Note 6 – Risk Management
 
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 Company and the Investees, attempts to manage a variety of risks, including market, operational, liquidity and credit 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 diversifies exposures across a variety of instruments, markets and counterparties.
 
Item 1A of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 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 Company’s 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 Company’s investments is monitored by the Company’s Managing Member.
 
Market risk
 
The potential for changes in the fair value of the Company’s 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 Company’s or Investees’ assets or liabilities denominated in currencies other than the functional currency.


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GOLDMAN SACHS HEDGE FUND PARTNERS, LLC

NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
September 30, 2011
 
Note 6 – Risk Management (continued)
 
 
(ii) Interest rate risk
 
The Advisor Funds may invest in fixed income securities and derivatives. Any change to market 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 Company’s 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 Company’s maximum risk of loss is limited to the Company’s 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 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 NAV.
 
Operational risk
 
Operational risk is the potential for loss caused by a deficiency in information, communications, transaction processing and settlement and accounting systems. The Company’s 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 Investees. However, the Company’s investments in the Investees may only be redeemed on a limited basis. As detailed in “Note 3 — Investments in affiliated Investees”, neither GFS Trust nor GRV provide investors with a voluntary redemption right and HFPO’s current holdings consist solely of one illiquid investment in an Advisor Fund, which cannot be redeemed until the relevant Advisor liquidates such investment. As a result, the Company may not be able to quickly liquidate some of its investments in order to meet liquidity requirements.


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GOLDMAN SACHS HEDGE FUND PARTNERS, LLC

NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
September 30, 2011
 
Note 6 – Risk Management (continued)
 
 
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 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 Company’s 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 Investee’s investment in the Advisor Fund into share classes where liquidity terms are directed by the Advisor in accordance with the Advisor’s 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 Advisor’s 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 September 30, 2011 and December 31, 2010, approximately 2% of the Company’s 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 September 30, 2011 and December 31, 2010, approximately 3% and 4%, respectively, of the Company’s 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 at the Managing Member’s sole discretion should conditions warrant.
 
Credit risk
 
Credit risk is the risk that one party to a contract 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 Company’s 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.


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GOLDMAN SACHS HEDGE FUND PARTNERS, LLC

NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
September 30, 2011
 
Note 6 – Risk Management (continued)
 
 
Investment in Investees risk
 
The Managing Member generally has limited access, if at all, to specific information regarding the Advisors’ portfolios held by the Investees and relies on valuations provided by, or on behalf of, the Advisors. Shareholders will be affected by the Advisors’ investment policies and decisions in direct proportion to the amount of the Company’s assets that are invested with each Investee. The NAV of the Advisors’ assets will fluctuate in response to, among other things, various market and economic prospects of investments that the Advisors make, and as a result, the NAV of the Investees and the Company will be impacted. Generally, the NAVs provided by, or on behalf of, the Advisors are 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 Company’s financial statements.
 
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 will have limited ability to monitor such investments, to obtain full and current information and to exercise control rights over such investments. This could have an adverse effect on the performance of such investments and, therefore, on the performance of the Investees and the Company. In order to manage this risk, the Managing Member performs due diligence reviews with respect to the Advisors’ valuation policies and procedures and performs certain analytical procedures with respect to the NAV information received. The review and procedures performed by the Managing Member support its ability to rely on the NAVs supplied by, or on behalf of, the Advisors.
 
Note 7 – Related parties
 
The management fee payable in the Balance Sheet represents management fees due to GS HFS at September 30, 2011 and December 31, 2010, respectively.
 
Included in the redemptions payable on the Balance Sheet at September 30, 2011 and December 31, 2010 were redemptions due to the Managing Member of $5,323 and $283,319, respectively.
 
For the nine months ended September 30, 2011, the Company earned dividends of $6,037 from an investment in Goldman Sachs Financial Square Government Fund, a money market fund managed by Goldman Sachs Asset Management, L.P., an affiliate of GS HFS. For the nine months ended September 30, 2010, the Company earned dividends of $14,546 from an investment 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. At September 30, 2011 and December 31, 2010, the fair values of such money market investments was $33,211,310 and $29,919,410, respectively. The Company will bear its proportionate share of all fees, including investment advisory fees, paid by the money market funds.
 
The Advisor Funds may have executed investment transactions with various affiliates of the Managing Member.
 
Directors and executive officers of the Company and the Managing Member owned less than 1% of the Company’s equity at September 30, 2011 and December 31, 2010. Employees of Goldman, Sachs & Co. owned approximately 2% of the Company’s equity at September 30, 2011 and December 31, 2010.


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GOLDMAN SACHS HEDGE FUND PARTNERS, LLC

NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
September 30, 2011
 
Note 8 – Borrowing facility
 
The following table summarizes the Company’s credit facility (as amended from time to time, the “Credit Facility”) with Barclays Bank PLC (the “Facility Counterparty”) between January 1, 2010 and November 1, 2010:
 
                 
            Facility fee/
 
Time periods(1)(2)   Maximum amount(2)   Interest rate(3)   Commitment fee  
 
September 1, 2010 through November 1, 2010(4)
  Lesser of $33,700,000 or 14.25%
of the Company’s NAV
  LIBOR plus 5.00%     1.00%  
June 1, 2010 through August 31, 2010
  Lesser of $33,700,000 or 14.25%
of the Company’s NAV
  LIBOR plus 1.50%     1.00%  
January 28, 2010 through May 31, 2010
  Lesser of $33,700,000 or
14.25% of the Company’s NAV
  LIBOR plus 1.00%     0.29%  
January 1, 2010 through January 27, 2010
  Lesser of $32,000,000 or
14.25% of the Company’s NAV
  LIBOR plus 1.00%     0.25%  
 
 
(1) The Credit Facility matured on November 1, 2010 and was not renewed.
 
(2) The Company also granted a security interest in the Company’s cash accounts and any other accounts that contain any other investment property of the Company.
 
(3) London Interbank Offered Rate (“LIBOR”).
 
(4) Effective September 1, 2010, the Credit Facility was extended to November 1, 2010 and converted to an uncommitted facility. Additionally, the commitment fee terminated, and the Company commenced paying a monthly facility fee to the Facility Counterparty at the rate of 1% per annum of the average Credit Facility through the termination date of November 1, 2010.
 
The proceeds of the advances under the Credit Facility were used for liquidity management in connection with subscriptions to the Company and redemption of the Company’s investments in the Investment Funds and for general purposes not prohibited by the Credit Facility or the investment guidelines therein. Interest related to borrowing and the commitment/facility fee is included in interest expense in the Statement of Operations. Effective November 1, 2010, the Credit Facility matured and was not renewed.
 
Note 9 – Members’ equity
 
At September 30, 2011 and December 31, 2010, 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, 2011, Class A Series 48, Class A Series 53, Class A Series 54, Class A Series 77 through Series 81 and Class A Series 84 through Series 90 units were converted into Class A Series 46 units. The Managing Member does not own any units in the Company.


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GOLDMAN SACHS HEDGE FUND PARTNERS, LLC

NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
September 30, 2011
 
Note 9 – Members’ equity (continued)
 
The Company’s unit activity for the nine month period ended September 30, 2011 is as follows:
 
                                         
    December 31,
    Unit
                September 30,
 
    2010     conversion     Subscriptions     Redemptions     2011  
 
Class A:
                                       
Series 1
    2,560,820.36                   (298,882.07 )     2,261,938.29  
Series 45
    45,322.13                   (11,026.05 )     34,296.08  
Series 46
    89,711.22       1,435,142.41             (211,421.18 )     1,313,432.45  
Series 47
    55,000.00                   (8,000.00 )     47,000.00  
Series 48
    101,345.88       (101,345.88 )                  
Series 49
    140,800.00                   (35,777.27 )     105,022.73  
Series 50
    194,430.21                   (41,077.05 )     153,353.16  
Series 51
    101,300.00                   (37,500.00 )     63,800.00  
Series 52
    86,750.00                         86,750.00  
Series 53
    55,451.17       (55,451.17 )                  
Series 54
    589,036.01       (589,036.01 )                  
Series 66
    84,244.41                   (4,063.88 )     80,180.53  
Series 67
    1,367.32                         1,367.32  
Series 68
    57,080.94                         57,080.94  
Series 69
    20,861.87                         20,861.87  
Series 70
    6,848.67                         6,848.67  
Series 71
    1,403.93                         1,403.93  
Series 72
    6,915.70                         6,915.70  
Series 73
    1,335.83                         1,335.83  
Series 77
    76,950.00       (76,950.00 )                  
Series 78
    62,345.96       (62,345.96 )                  
Series 79
    71,456.60       (71,456.60 )                  
Series 80
    56,950.00       (56,950.00 )                  
Series 81
    201,150.00       (201,150.00 )                  
Series 82
    12,294.48                   (6,147.24 )     6,147.24  
Series 83
    5,460.80                         5,460.80  
Series 84
    34,000.00       (34,000.00 )                  
Series 85
    16,500.00       (16,500.00 )                  
Series 86
    21,942.57       (21,942.57 )                  
Series 87
    33,930.00       (33,930.00 )                  
Series 88
    1,000.00       (1,000.00 )                  
Series 89
    43,250.00       (43,250.00 )                  
Series 90
    11,950.00       (11,950.00 )                  
Series 91
                39,500.00             39,500.00  
Series 92
                26,500.00             26,500.00  
Series 93
                18,250.00             18,250.00  
Series 94
                39,200.00             39,200.00  
Series 95
                46,500.00             46,500.00  
Series 96
                21,000.00             21,000.00  
Series 97
                17,000.00             17,000.00  
Series 98
                11,250.00             11,250.00  
Series 99
                10,500.00             10,500.00  
                                         
Total
    4,849,206.06       57,884.22       229,700.00       (653,894.74 )     4,482,895.54  
                                         


19


Table of Contents

GOLDMAN SACHS HEDGE FUND PARTNERS, LLC

NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
September 30, 2011
 
Note 9 – Members’ equity (continued)
 
The Company’s unit activity for the year ended December 31, 2010 is as follows:
 
                                                         
    December 31,
    Unit
                December 31,
             
    2009     conversion     Subscriptions     Redemptions     2010              
 
Class A:
                                                       
Series 1
    2,885,415.51                   (324,595.15 )     2,560,820.36                  
Series 45
    52,822.13                   (7,500.00 )     45,322.13                  
Series 46
    121,252.89                   (31,541.67 )     89,711.22                  
Series 47
    72,250.00                   (17,250.00 )     55,000.00                  
Series 48
    121,500.00                   (20,154.12 )     101,345.88                  
Series 49
    140,800.00                         140,800.00                  
Series 50
    208,466.39                   (14,036.18 )     194,430.21                  
Series 51
    123,068.00                   (21,768.00 )     101,300.00                  
Series 52
    96,750.00                   (10,000.00 )     86,750.00                  
Series 53
    73,550.00                   (18,098.83 )     55,451.17                  
Series 54
    69,350.00       592,596.98             (72,910.97 )     589,036.01                  
Series 55
    22,500.00       (22,500.00 )                                  
Series 56
    10,000.00       (10,000.00 )                                  
Series 57
    25,000.00       (25,000.00 )                                  
Series 58
    50,000.00       (50,000.00 )                                  
Series 59
    15,000.00       (15,000.00 )                                  
Series 60
    27,600.00       (27,600.00 )                                  
Series 61
    11,312.98       (11,312.98 )                                  
Series 62
    62,000.00       (62,000.00 )                                  
Series 63
    66,712.98       (66,712.98 )                                  
Series 64
    36,650.00       (36,650.00 )                                  
Series 65
    54,137.27       (54,137.27 )                                  
Series 66
    95,580.88                   (11,336.47 )     84,244.41                  
Series 67
    1,367.32                         1,367.32                  
Series 68
    57,080.94                         57,080.94                  
Series 69
    20,861.87                         20,861.87                  
Series 70
    6,848.67                         6,848.67                  
Series 71
    1,403.93                         1,403.93                  
Series 72
    6,915.70                         6,915.70                  
Series 73
    1,335.83                         1,335.83                  
Series 74
    83,000.00       (83,000.00 )                                  
Series 75
    85,100.00       (85,100.00 )                                  
Series 76
    30,850.00       (30,850.00 )                                  
Series 77
                76,950.00             76,950.00                  
Series 78
                62,345.96             62,345.96                  
Series 79
                71,456.60             71,456.60                  
Series 80
                56,950.00             56,950.00                  
Series 81
                201,150.00             201,150.00                  
Series 82
                12,294.48             12,294.48                  
Series 83
                5,460.80             5,460.80                  
Series 84
                34,000.00             34,000.00                  
Series 85
                16,500.00             16,500.00                  
Series 86
                21,942.57             21,942.57                  
Series 87
                33,930.00             33,930.00                  
Series 88
                1,000.00             1,000.00                  
Series 89
                43,250.00             43,250.00                  
Series 90
                11,950.00             11,950.00                  
                                                         
Total
    4,736,483.29       12,733.75       649,180.41       (549,191.39 )     4,849,206.06                  
                                                         


20


Table of Contents

GOLDMAN SACHS HEDGE FUND PARTNERS, LLC

NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
September 30, 2011
 
Note 9 – Members’ equity (continued)
 
The Company’s members’ capital activity for the nine months ended September 30, 2011 is as follows:
 
                                                         
    December 31,
    Equity
                Net
    September 30,
    NAV
 
    2010     conversion     Subscriptions     Redemptions     income/(loss)     2011     per unit  
 
Managing Member
  $     $     $     $ (5,323 )   $ 5,323     $          
Class A:
                                                       
Series 1
    386,220,632                   (44,325,069 )     (15,336,331 )     326,559,232     $ 144.37  
Series 45
    4,471,072                   (1,082,062 )     (150,310 )     3,238,700       94.43  
Series 46
    9,003,589       144,033,620             (21,068,131 )     (5,785,897 )     126,183,181       96.07  
Series 47
    5,407,597                   (782,461 )     (201,653 )     4,423,483       94.12  
Series 48
    10,142,713       (10,142,713 )                              
Series 49
    13,960,216                   (3,471,113 )     (521,341 )     9,967,762       94.91  
Series 50
    18,928,004                   (3,942,839 )     (694,296 )     14,290,869       93.19  
Series 51
    9,855,874                   (3,600,617 )     (313,276 )     5,941,981       93.13  
Series 52
    8,669,138                         (370,616 )     8,298,522       95.66  
Series 53
    5,610,812       (5,610,812 )                              
Series 54
    62,770,502       (62,770,502 )                              
Series 66
    9,079,321                   (442,358 )     (365,049 )     8,271,914       103.17  
Series 67
    147,361                         (6,299 )     141,062       103.17  
Series 68
    6,151,816                         (262,997 )     5,888,819       103.17  
Series 69
    2,248,358                         (96,120 )     2,152,238       103.17  
Series 70
    738,106                         (31,555 )     706,551       103.17  
Series 71
    151,306                         (6,468 )     144,838       103.17  
Series 72
    745,329                         (31,864 )     713,465       103.17  
Series 73
    143,967                         (6,154 )     137,813       103.17  
Series 77
    8,047,216       (8,047,216 )                              
Series 78
    6,529,247       (6,529,247 )                              
Series 79
    7,466,991       (7,466,991 )                              
Series 80
    5,883,928       (5,883,928 )                              
Series 81
    20,682,620       (20,682,620 )                              
Series 82
    1,273,182                   (633,275 )     (30,531 )     609,376       99.13  
Series 83
    565,505                         (24,176 )     541,329       99.13  
Series 84
    3,566,739       (3,566,739 )                              
Series 85
    1,749,127       (1,749,127 )                              
Series 86
    2,311,363       (2,311,363 )                              
Series 87
    3,557,487       (3,557,487 )                              
Series 88
    103,011       (103,011 )                              
Series 89
    4,394,876       (4,394,876 )                              
Series 90
    1,216,988       (1,216,988 )                              
Series 91
                3,950,000             (168,867 )     3,781,133       95.72  
Series 92
                2,650,000             (117,759 )     2,532,241       95.56  
Series 93
                1,825,000             (98,670 )     1,726,330       94.59  
Series 94
                3,920,000             (204,727 )     3,715,273       94.78  
Series 95
                4,650,000             (290,758 )     4,359,242       93.75  
Series 96
                2,100,000             (109,059 )     1,990,941       94.81  
Series 97
                1,700,000             (64,153 )     1,635,847       96.23  
Series 98
                1,125,000             (41,595 )     1,083,405       96.30  
Series 99
                1,050,000             (19,303 )     1,030,697       98.16  
                                                         
Subtotal:
    621,793,993             22,970,000       (79,347,925 )     (25,349,824 )     540,066,244          
                                                         
Total
  $ 621,793,993     $     $ 22,970,000     $ (79,353,248 )   $ (25,344,501 )   $ 540,066,244          
                                                         


21


Table of Contents

GOLDMAN SACHS HEDGE FUND PARTNERS, LLC

NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
September 30, 2011
 
Note 9 – Members’ equity (continued)
 
The Company’s members’ capital activity for the year ended December 31, 2010 is as follows:
 
                                                         
    December 31,
    Equity
                Net
    December 31,
    NAV
 
    2009     conversion     Subscriptions     Redemptions     income/(loss)     2010     per unit  
 
Managing Member
  $     $     $     $ (283,319 )   $ 283,319     $          
Class A:
                                                       
Series 1
    415,172,330                   (47,275,206 )     18,323,508       386,220,632     $ 150.82  
Series 45
    4,971,425                   (716,408 )     216,055       4,471,072       98.65  
Series 46
    11,612,001                   (3,068,917 )     460,505       9,003,589       100.36  
Series 47
    6,777,089                   (1,680,917 )     311,425       5,407,597       98.32  
Series 48
    11,601,290                   (1,950,610 )     492,033       10,142,713       100.08  
Series 49
    13,318,515                         641,701       13,960,216       99.15  
Series 50
    19,361,580                   (1,321,802 )     888,226       18,928,004       97.35  
Series 51
    11,423,377                   (2,033,895 )     466,392       9,855,874       97.29  
Series 52
    9,224,038                   (969,605 )     414,705       8,669,138       99.93  
Series 53
    7,104,425                   (1,805,063 )     311,450       5,610,812       101.18  
Series 54
    7,066,804       60,385,988             (7,592,307 )     2,910,017       62,770,502       106.56  
Series 55
    2,379,248       (2,379,248 )                              
Series 56
    1,076,095       (1,076,095 )                              
Series 57
    2,715,361       (2,715,361 )                              
Series 58
    5,386,946       (5,386,946 )                              
Series 59
    1,618,719       (1,618,719 )                              
Series 60
    2,979,262       (2,979,262 )                              
Series 61
    1,212,471       (1,212,471 )                              
Series 62
    6,519,496       (6,519,496 )                              
Series 63
    7,009,995       (7,009,995 )                              
Series 64
    3,809,919       (3,809,919 )                              
Series 65
    5,558,740       (5,558,740 )                              
Series 66
    9,827,589                   (1,209,389 )     461,121       9,079,321       107.77  
Series 67
    140,588                         6,773       147,361       107.77  
Series 68
    5,869,039                         282,777       6,151,816       107.77  
Series 69
    2,145,009                         103,349       2,248,358       107.77  
Series 70
    704,178                         33,928       738,106       107.77  
Series 71
    144,351                         6,955       151,306       107.77  
Series 72
    711,069                         34,260       745,329       107.77  
Series 73
    137,350                         6,617       143,967       107.77  
Series 74
    8,401,415       (8,401,415 )                              
Series 75
    8,628,531       (8,628,531 )                              
Series 76
    3,089,790       (3,089,790 )                              
Series 77
                7,695,000             352,216       8,047,216       104.58  
Series 78
                6,234,596             294,651       6,529,247       104.73  
Series 79
                7,145,660             321,331       7,466,991       104.50  
Series 80
                5,695,000             188,928       5,883,928       103.32  
Series 81
                20,115,000             567,620       20,682,620       102.82  
Series 82
                1,229,448             43,734       1,273,182       103.56  
Series 83
                546,080             19,425       565,505       103.56  
Series 84
                3,400,000             166,739       3,566,739       104.90  
Series 85
                1,650,000             99,127       1,749,127       106.01  
Series 86
                2,194,257             117,106       2,311,363       105.34  
Series 87
                3,393,000             164,487       3,557,487       104.85  
Series 88
                100,000             3,011       103,011       103.01  
Series 89
                4,325,000             69,876       4,394,876       101.62  
Series 90
                1,195,000             21,988       1,216,988       101.84  
                                                         
Subtotal:
  $ 597,698,035     $     $ 64,918,041     $ (69,624,119 )   $ 28,802,036     $ 621,793,993          
                                                         
Total
  $ 597,698,035     $     $ 64,918,041     $ (69,907,438 )   $ 29,085,355     $ 621,793,993          
                                                         


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GOLDMAN SACHS HEDGE FUND PARTNERS, LLC

NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
September 30, 2011
 
Note 10 – Ownership in Investees
 
During the nine months ended September 30, 2011 and the year ended December 31, 2010, the Company’s ownership percentage of certain Investees exceeded 50%. This ownership percentage will fluctuate as a result of the Company’s investment strategy and 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 Company’s ownership in the Investees at September 30, 2011 and December 31, 2010:
 
                         
    September 30, 2011 (Unaudited)  
                % owned
 
    Company
    Investee
    by the
 
    investment     equity(1)     Company(1)  
 
GELS
  $ 212,222,540     $ 449,449,965       47.22 %
GFS
    136,347,003       339,218,047       40.19 %
GFS Trust
    17,167,960       61,095,085       28.10 %
GRV
    1,245,229       4,740,413       26.27 %
GTT
    169,959,496       472,144,358       36.00 %
HFPO
    707,297       1,191,230       59.38 %
                         
Total
  $ 537,649,525                  
                         
 
                         
    December 31, 2010 (Audited)  
                % owned
 
    Company
    Investee
    by the
 
    investment     equity(1)     Company(1)  
 
GELS
  $ 248,593,542     $ 511,245,480       48.63 %
GFS
    157,347,212       381,734,121       41.22 %
GFS Trust
    23,188,415       82,519,893       28.10 %
GRV
    1,649,094       6,277,870       26.27 %
GTT
    181,173,125       397,291,003       45.60 %
HFPO
    735,686       1,239,043       59.38 %
                         
Total
  $ 612,687,074                  
                         
 
 
(1) The Investees’ equity used in the calculation of the percentage owned by the Company is based on the net assets per the Investee’s Balance Sheet and in accordance with ASC 480, “Distinguishing Liabilities from Equity.”


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GOLDMAN SACHS HEDGE FUND PARTNERS, LLC

NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
September 30, 2011
 
Note 11 – 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 Company’s 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 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


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GOLDMAN SACHS HEDGE FUND PARTNERS, LLC

NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
September 30, 2011
 
Note 12 – Financial highlights
 
Financial highlights for the Company for the three and nine months ended September 30, 2011 and 2010 are as follows:
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2011     2010     2011     2010  
    Class A
    Class A
    Class A
    Class A
 
    Series 1     Series 1     Series 1     Series 1  
 
Per unit operating performance:
                               
Net asset value, beginning of period
  $ 150.03     $ 141.85     $ 150.82     $ 143.89  
Income from operations:
                               
Net realized and unrealized gain/(loss)
    (5.09 )     4.85       (4.82 )     3.87  
Net investment income/(loss)(1)(2)
    (0.57 )     (0.51 )     (1.63 )     (1.57 )
                                 
Total income/(loss) from operations
    (5.66 )     4.34       (6.45 )     2.30  
                                 
Net asset value, end of period
  $ 144.37     $ 146.19     $ 144.37     $ 146.19  
                                 
Ratios to average members’ equity(3)
                               
Expenses
    1.55 %     1.42 %     1.45 %     1.46 %
Incentive allocation
    0.00 %     0.00 %     0.00 %     0.00 %
                                 
Total expenses and incentive allocation
    1.55 %     1.42 %     1.45 %     1.46 %
                                 
Net investment income/(loss)(2)
    (1.55 )%     (1.41 )%     (1.45 )%     (1.45 )%
                                 
Total return (prior to incentive allocation)(4)
    (3.77 )%     3.06 %     (4.28 )%     1.60 %
Incentive allocation
    (0.00 )%     (0.00 )%     (0.00 )%     (0.00 )%
                                 
Total return
    (3.77 )%     3.06 %     (4.28 )%     1.60 %
                                 
 
 
(1) Net investment income/(loss) is calculated based on average units outstanding during the period.
 
(2) Includes incentive allocation, if applicable.
 
(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 Company’s 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.


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GOLDMAN SACHS HEDGE FUND PARTNERS, LLC

NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
September 30, 2011
 
Note 13 – Significant Investees
 
The following is a summary of financial information for Investees that represented more than 20% of the Company’s total assets and/or income as of and/or for the nine months ended September 30, 2011 (the “Significant Investees”):
 
Balance Sheet
 
The balance sheets as of September 30, 2011 and December 31, 2010, are summarized as follows:
 
                         
    September 30, 2011 (Unaudited)  
    GELS     GFS     GTT  
 
Assets
Investments in Investees, at fair value
  $ 452,006,042     $ 317,972,650     $ 250,511,361  
Investments in affiliated Investees, at fair value
          22,986,988       214,201,216  
Cash and cash equivalents
    10,178,545       19,938,675       1,070,793  
Other assets
    131,626       3,141       15,000,000  
                         
Total assets
  $ 462,316,213     $ 360,901,454     $ 480,783,370  
                         
 
Liabilities and Net Assets
Liabilities
                       
Redemptions payable
  $ 12,005,255     $ 21,112,346     $ 6,947,509  
Accrued expenses and other liabilities
    860,993       571,061       1,691,503  
                         
Total liabilities
    12,866,248       21,683,407       8,639,012  
Net assets
    449,449,965       339,218,047       472,144,358  
                         
Total liabilities and net assets
  $ 462,316,213     $ 360,901,454     $ 480,783,370  
                         
 
                         
    December 31, 2010 (Audited)  
    GELS     GFS     GTT  
 
Assets
Investments in Investees, at fair value
  $ 502,195,620     $ 351,240,904     $ 195,143,057  
Investments in affiliated Investees, at fair value
          27,393,668       195,355,421  
Cash and cash equivalents
    36,020,084       8,819,210       13,003,556  
Other assets
    3,495,222       6,067,742       8,500,000  
                         
Total assets
  $ 541,710,926     $ 393,521,524     $ 412,002,034  
                         
 
Liabilities and Net Assets
Liabilities
                       
Redemptions payable
  $ 6,558,606     $ 11,292,278     $ 11,183,178  
Subscriptions received in advance
    20,000,000             2,990,000  
Loan Payable
    3,100,000              
Accrued expenses and other liabilities
    806,840       495,125       537,853  
                         
Total liabilities
    30,465,446       11,787,403       14,711,031  
Net assets
    511,245,480       381,734,121       397,291,003  
                         
Total liabilities and net assets
  $ 541,710,926     $ 393,521,524     $ 412,002,034  
                         


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GOLDMAN SACHS HEDGE FUND PARTNERS, LLC

NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
September 30, 2011
 
Note 13 – Significant Investees (continued)
 
Statement of Operations
 
For the three months ended September 30, 2011 and September 30, 2010, the statements of operations are summarized as follows:
 
                         
    September 30, 2011 (Unaudited)  
Income/(Loss)   GELS     GFS     GTT  
 
Net realized gain/(loss) on Investees
  $ 2,997,811     $ 5,826,501     $ 7,821,860  
Net change in unrealized gain/(loss) on Investees
    (36,465,416 )     (22,562,363 )     (672,767 )
Investment income
    581       336       269  
Expenses
    (525,432 )     (567,169 )     (1,035,961 )
                         
Net income/(loss) from operations
  $ (33,992,456 )   $ (17,302,695 )   $ 6,113,401  
                         
 
                         
    September 30, 2010 (Unaudited)  
Income/(Loss)   GELS     GFS     GTT  
 
Net realized gain/(loss) on Investees
  $ 287,736     $ 6,278,553     $ (1,477,259 )
Net change in unrealized gain/(loss) on Investees
    18,765,103       2,151,421       20,086,295  
Investment income
    1,595       1,795       1,233  
Expenses
    (486,675 )     (534,272 )     (576,072 )
                         
Net income/(loss) from operations
  $ 18,567,759     $ 7,897,497     $ 18,034,197  
                         
 
For the nine months ended September 30, 2011 and September 30, 2010, the statements of operations are summarized as follows:
 
                         
    September 30, 2011 (Unaudited)  
Income/(Loss)   GELS     GFS     GTT  
 
Net realized gain/(loss) on Investees
  $ 5,199,281     $ 25,552,810     $ 8,836,726  
Net change in unrealized gain/(loss) on Investees
    (37,600,542 )     (38,200,872 )     (1,509,133 )
Investment income
    3,360       2,107       2,861  
Expenses
    (1,736,957 )     (1,792,051 )     (2,898,166 )
                         
Net income/(loss) from operations
  $ (34,134,858 )   $ (14,438,006 )   $ 4,432,288  
                         
 
                         
    September 30, 2010 (Unaudited)  
Income/(Loss)   GELS     GFS     GTT  
 
Net realized gain/(loss) on Investees
  $ 1,884,146     $ 16,844,064     $ 2,029,662  
Net change in unrealized gain/(loss) on Investees
    (3,532,786 )     7,086,086       18,668,598  
Investment income
    5,169       5,257       2,968  
Expenses
    (1,164,605 )     (1,415,709 )     (1,458,101 )
                         
Net income/(loss) from operations
  $ (2,808,076 )   $ 22,519,698     $ 19,243,127  
                         


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GOLDMAN SACHS HEDGE FUND PARTNERS, LLC

NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
September 30, 2011
 
Note 13 – Significant Investees (continued)
 
Statement of Cash Flows
 
For the nine months ended September 30, 2011 and September 30, 2010, the statements of cash flows are summarized as follows:
 
                         
    September 30, 2011 (Unaudited)  
    GELS     GFS     GTT  
 
Cash flows from operating activities
                       
Net income/(loss) from operations
  $ (34,134,858 )   $ (14,438,006 )   $ 4,432,288  
Net change in investments in investees
    50,189,578       37,674,934       (74,214,099 )
Net change in operating assets and liabilities
    3,417,749       6,140,537       (5,346,350 )
                         
Net cash provided by/(used in) operating activities
    19,472,469       29,377,465       (75,128,161 )
                         
Cash flows from financing activities
                       
Net subscriptions/(redemptions)
    (42,214,008 )     (18,258,000 )     63,195,398  
Proceeds/(repayments) from loan
    (3,100,000 )            
                         
Net cash provided by/(used in) financing activities
    (45,314,008 )     (18,258,000 )     63,195,398  
                         
Net change in cash and cash equivalents
    (25,841,539 )     11,119,465       (11,932,763 )
Cash and cash equivalents at beginning of period
    36,020,084       8,819,210       13,003,556  
                         
Cash and cash equivalents at end of period
  $ 10,178,545     $ 19,938,675     $ 1,070,793  
                         
 
                         
    September 30, 2010 (Unaudited)  
    GELS     GFS     GTT  
 
Cash flows from operating activities
                       
Net income/(loss) from operations
  $ (2,808,076 )   $ 22,519,698     $ 19,243,127  
Net change in investments in investees
    (64,554,689 )     (37,963,364 )     (74,359,654 )
Net change in operating assets and liabilities
    (3,066,746 )     2,403,040       12,534,216  
                         
Net cash provided by/(used in) operating activities
    (70,429,511 )     (13,040,626 )     (42,582,311 )
                         
Cash flows from financing activities
                       
Net subscriptions/(redemptions)
    36,151,282       2,909,784       42,884,919  
Proceeds/(repayments) from loan
    16,600,000              
                         
Net cash provided by/(used in) financing activities
    52,751,282       2,909,784       42,844,919  
                         
Net change in cash and cash equivalents
    (17,678,229 )     (10,130,842 )     302,608  
Cash and cash equivalents at beginning of period
    18,030,775       25,410,020       8,723,057  
                         
Cash and cash equivalents at end of period
  $ 352,546     $ 15,279,178     $ 9,025,665  
                         


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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
 
The following discussion should be read in conjunction with the financial statements of Goldman Sachs Hedge Fund Partners, LLC (the “Company”) and the related notes thereto.
 
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 Company’s managing member (the “Managing Member”).
 
As of September 30, 2011, the Company had total assets of $570,890,835 compared with total assets of $642,636,484 as of December 31, 2010. Total liabilities of the Company were $30,824,591 as of September 30, 2011 compared with $20,842,491 as of December 31, 2010. Member’s equity of the Company was $540,066,244 as of September 30, 2011 compared with $621,793,993 as of December 31, 2010.
 
The Company’s 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 event driven sector and the relative value sector. Currently, substantially all of the Company’s assets are invested in three Investment Funds, each of which is managed by the Managing Member. The current Investment Funds are 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 Global Tactical Trading, LLC (“GTT”), which employs investment strategies in the tactical trading sector. The balance of the Company’s 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”), which are both in the process of liquidation; and Goldman Sachs HFP Opportunistic Fund, LLC (“HFPO” and together with GFS Trust, GRV and the Investment Funds, the “Investees”), which employs investment strategies within one or more of the Investment Sectors. In addition, the Company may, directly or indirectly, allocate assets to Advisors whose principal investment strategies are not within one of the Investment 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 Company’s assets in each of the 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 those Advisors.
 
While the Managing Member currently expects to allocate assets to all the Investment Sectors through allocations to the Investment Funds, the Managing Member has no constraints with respect to the percentage of the Company’s 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 Company’s 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 Company’s 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.


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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 Advisor’s 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 Company’s Members’ Equity.
 
The managing member of GFS 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. See “— Liquidity and Capital Resources” and ITEM 3. “QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK — Risk Management.”
 
The Company’s 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 Company’s investments and since the Company’s investments in the Investment Funds are managed to seek to eliminate or reduce the impact of general economic or seasonal conditions. In addition, the Company’s 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 for the Three and Nine Months Ended September 30, 2011 and September 30, 2010
 
The following presents a summary of the operations for the three and nine months ended September 30, 2011 and September 30, 2010 and a general discussion of each material 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 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.
 
Performance for the Three and Nine Months Ended September 30, 2011
 
The Company’s net realized and unrealized gain/(loss) for the three and nine months ended September 30, 2011 was $(20,007,989) and $(18,758,273), respectively, compared to the Company’s net realized and unrealized gain/(loss) for the three and nine months ended September 30, 2010 of $20,889,590 and $16,214,062, respectively.


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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 3. “QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK — Risk Management,” 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 targeting attractive risk adjusted returns.
 
Worries about long-term sovereign debt trajectories and European bank solvency negatively impacted market sentiment during the third quarter of 2011. Markets reflected increasing investor concern as signs of a potential global growth slow-down resurfaced. After averaging 18 for the first seven months of 2011, the VIX index averaged 35 and did not dip below 23 during the month of August, reaching a yearly high of 48 on August 8. World equities (proxied by the MSCI AC World TR Index) finished down 7.3% in August and then down 9.4% in September, bringing the year-to-date return to -17.4%. Headlines dictated market sentiment in the credit space as well, albeit with less volatility than equity positions. High yield bonds returned -5.1% for the third quarter and -0.5% for the full year 2011 (proxied by the Credit Suisse High Yield Index) and leveraged loans (proxied by the S&P Leveraged Loan Index) returned -3.4% for the third quarter and -1.3% for the full year 2011. Credit flows were negative for the third quarter, with August recording the largest and second largest outflows on record for leveraged loans and high yield bonds, respectively. In August and early September, fears of debt contagion in the Eurozone led to higher credit default swap (“CDS”) spreads across the region, with formerly overlooked EU members such as France under increased scrutiny. The year’s steady downward trend for 5-year and 10-year yields was accelerated by these developments throughout the third quarter. Overall, yields on US and European 10-year bonds dropped an additional 124 bps and 114 bps, respectively, over the quarter (proxied by the US and Euro Generic Government Bond 10-Year Yields). In currencies, the US Dollar reversed its recent trend of depreciation as risk selloffs in September and August sparked a flight to perceived quality. There were a few notable exceptions: EUR/USD experienced limited movement in either direction throughout most of the summer, and Asian and commodity-related currencies alternately gained and lost ground versus the US dollar throughout the summer until the Federal Reserve announcement of “Operation Twist” on September 22 saw the US dollar appreciate, finishing the quarter up 5.7% (proxied by the Dollar Index). Gold continued to rally with spot prices up 22% from June 1 to reach a record high of $1,888.7 per ounce on August 22 until price pullbacks during the mid-September sell-off threatened its perceived status as a safe haven asset. Commodities trended upwards early in the third quarter but sold off sharply in August, returning -11.7% for the quarter and -9.3% for the year (proxied by the S&P GSCI TR Index). HFP Advisors generally maintained more cautious positioning and as a result outperformed in both the third quarter and for the full year 2011. GELS Advisors experienced the weakest performance, as stock and sector selection were overwhelmed by macro concerns during equity market declines. GFS broadly saw negative returns throughout the summer and into early September, as credit was also negatively impacted by macro headwinds. The Company’s outperformance was attributable to the large allocation to GTT Advisors, who were able to capture correlated and sustained moves in the direction of longer-term trends across many markets.
 
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 material Investee as of September 30, 2011, as well as each material Investee’s net return for the three and nine months ended September 30, 2011.
 
                         
    Portfolio Weight
    Three Months Ended
    Nine Months Ended
 
    as a % of
    September 30, 2011
    September 30, 2011
 
Investee   Members’ Equity(1)     Net Return(2)     Net Return(2)  
 
GELS
    39.29 %     (6.82 )%     (6.81 )%
GFS
    25.25 %     (4.51 )%     (3.63 )%
GTT
    31.47 %     1.55 %     1.63 %
 
 
(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) These 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 Investment Funds with respect to the Company’s investment in any of the Investment Funds. Past performance is not indicative of future results, which may vary.


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For the three and nine months ended September 30, 2011, the Company’s Class A Series 1 units returned (3.77)% and (4.28)%, respectively, net of fees and incentive allocation.
 
The Investees
 
The material Investees’ performance during the three and nine months ended September 30, 2011 is described in the following.
 
Goldman Sachs Global Equity Long/Short, LLC
 
As of September 30, 2011, GELS represented approximately 39% of the Company’s members’ equity. GELS returned (6.82)% and (6.81)%, respectively, for Class C Series 1 units for the three and nine months ended September 30, 2011.
 
For the Three Months Ended September 30, 2011
 
GELS Advisors generated broadly negative performance in the third quarter of 2011, with performance driven by the steep declines in global equity markets in July, August, and September.
 
GELS Advisors realized losses in all three months of the quarter, most notably August and September, although in the aggregate, performed better than equity markets with much lower volatility. In the third quarter, there was a wide dispersion of performance, with the magnitude of performance driven largely by gross and net exposure levels, and to a lesser extent, sector selection and single-stock exposures. GELS Advisors with long exposure concentrated in financials or cyclical sectors such as energy, industrials, materials, consumer cyclical and technology underperformed during this period, while losses were more limited for GELS Advisors with long exposures concentrated in defensive sectors. Stock and sector selection were somewhat marginalized by the continued dominance of macro factors on equity markets in September and August, although this came after what had proven to be a more fruitful period for stock-picking in early July, as a strong earnings season generally rewarded investors who judged company fundamentals effectively.
 
GELS Advisors’ returns were broadly in line with net exposure levels, which decreased throughout the quarter. GELS Advisors with high levels of portfolio net exposure were unable to avoid the large market decline and realized some of the largest losses in the quarter. Certain GELS Advisors with more moderate net exposure combined with high levels of gross exposure and large underlying sector, geography, and style biases also realized challenging performance. Those GELS Advisors with more neutrally or net short positioned portfolios and those who adopted more cautious positioning in late July and early August generally outperformed peers.
 
GELS Advisors exited the third quarter with substantially lower levels of gross and net exposure compared to those at the start, although risk levels were still well above the levels seen during the financial crisis in 2008. With correlations and volatility remaining high through the end of August and into September, most GELS Advisors held exposure to the lower end of their internal risk spectrums, awaiting a sustained period of calm and greater macro certainty before meaningfully increasing risk to take advantage of enticing valuations following sell-offs. This has led GELS Advisors to reduce position sizes, concentrate portfolios in their highest conviction positions, and increase portfolio hedging, often leading to a decrease in both gross and net exposure.
 
For the Nine Months Ended September 30, 2011
 
GELS Advisors finished the first nine months of 2011 with negative performance as gains generated during the first quarter were erased by losses in the second and third quarters.


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GELS Advisors had positive performance in the first quarter of 2011 with positive performance in January and February and more muted performance in March. In January, GELS Advisors who had higher levels of long exposure to the U.S., energy, industrials, and technology sectors outperformed GELS Advisors with long exposure to Asia and emerging markets, long positions in the consumer sector, and short positions in European financials. In February, GELS Advisors generally extended their January gains supported by developed market equity performance. Underperforming GELS Advisors generally had exposure to Asia and emerging markets, as concerns about inflation tempered the returns of emerging market equities. In March, U.S. and emerging market focused GELS Advisors realized gains from long exposure to cyclically-oriented sectors such as energy, industrials and materials, while GELS Advisors with exposure to Europe and Asia underperformed.
 
GELS Advisors generated negative performance in the second quarter, as volatile markets and macroeconomic concerns created a challenging environment for stock picking. GELS Advisors added to their first quarter gains in April, as long exposures in cyclically orientated sectors underperformed relative to more stable sectors. In May, GELS Advisors who underperformed generally had a growth bias to their portfolios and overweight long exposure to commodities and industrials sectors, while top performing GELS Advisors had long exposure to large cap equities and defensive sectors such as healthcare and consumer staples. GELS Advisors losses continued into June as underperforming GELS Advisors significantly reduced exposures due to losses during the first half of the month, causing them to have more limited participation in the strong equity rally at the end of June.
 
In the third quarter, GELS Advisors realized losses in all three months, most notably August and September, although in the aggregate, performed better than equity markets with much lower volatility. There was a wide dispersion of performance, with the magnitude of performance driven largely by gross and net exposure levels, and to a lesser extent, sector selection and single-stock exposures. GELS Advisors with long exposure concentrated in financials or cyclical sectors such as energy, industrials, materials, consumer cyclical and technology underperformed during this period, while losses were more limited for GELS Advisors with long exposures concentrated in defensive sectors. GELS Advisors’ returns were broadly in line with net exposure levels, which decreased throughout the quarter. GELS Advisors with high levels of portfolio net exposure were unable to avoid the large market decline and realized some of the largest losses in the quarter. Those GELS Advisors with more neutrally or net short positioned portfolios and those who adopted more cautious positioning in late July and early August generally outperformed peers.
 
Goldman Sachs Global Fundamental Strategies, LLC
 
As of September 30, 2011, GFS represented approximately 25% of the Company’s members’ equity. GFS returned (4.51)% and (3.63)%, respectively, for Class C Series 1 units for the three and nine months ended September 30, 2011.
 
For the Three Months Ended September 30, 2011
 
GFS Advisors experienced negative performance during the third quarter of 2011, collectively realizing negative performance in all three months of the quarter.


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The third quarter was marked by significant volatility and negative performance, driven by macro uncertainty largely centered in Europe. During July, most multi-strategy GFS Advisors experienced losses while the performance of credit-focused GFS Advisors was mixed. The GFS Advisors who had maintained relatively balanced positioning or shifted to a more neutral portfolio typically fared better. Equity exposure, particularly post-reorganization equities, contributed to sizable losses. Bearish views on Europe generated positive returns via short sovereign or single name European financial CDS. In August, concerns about the solvency of European sovereigns and banks along with a more muted global growth outlook weighed on risk assets. Multi-strategy GFS Advisors experienced losses, generally driven by their overall level of directional exposure, with special situation equity positions with high hedge fund ownership the biggest detractors. Credit focused GFS Advisors largely generated negative performance in August as well, with large markdowns in individual positions. Detractors once again included post-reorganization equity positions. Additionally, exposure to some large, distressed capital structures detracted from performance as market participants looking to reduce risk sold down exposures in these more liquid names. Both multi-strategy and credit focused GFS Advisors benefited from portfolio hedges, which offset some losses. Despite a more muted start to performance in September and intermittent relief rallies during the month, both credit and equity markets were again impacted by broad risk aversion, experiencing significant losses over the course of the month. In September, credit focused GFS Advisors experienced losses, although those with more balanced exposures and a trading-oriented style fared better. Multi-strategy GFS Advisors experienced losses across both credit and equity positions during September despite general risk reduction in August. Some GFS Advisors attempted to further hedge equity market exposure, but many of these positions still resulted in losses during September. Conversely, merger arbitrage exposure was generally a small contributor in September as some deal spreads tightened modestly following losses in August. Through the end of the third quarter, GFS Advisors were generally more cautious than they had been throughout most of the first half of 2011.
 
For the Nine Months Ended September 30, 2011
 
GFS Advisors finished the first nine months of 2011 with negative performance as gains generated during the first quarter were offset by negative performance in the second and third quarters.
 
The first quarter of 2011 began as a continuation of 2010 for GFS Advisors and their portfolios, with the market environment generally supportive of long positions in both equity and credit markets. High yield and leveraged loan assets both finished the first quarter in positive territory, and distressed credit positions also largely performed well. Merger arbitrage positions contributed to performance with increased activity throughout the first quarter. Additionally, special situation equities continued to generate positive returns due to a combination of idiosyncratic developments and the supportive market backdrop. In contrast, hedges were notable detractors over the first quarter, although GFS Advisors with more balanced positioning generally avoided significant losses in the middle of March when volatility spiked. Overall, GFS Advisors collectively realized positive performance in January and February, while March saw high dispersion in performance of underlying GFS Advisors given heightened market volatility.
 
The second quarter began with continued positive performance from the first quarter. However, as negative data points on global market conditions came to light, the positive backdrop for GFS Advisors reversed in May, causing several GFS Advisors to report negative performance during May and most GFS Advisors to report negative performance during June. Losses in May were largely driven by equity exposures, in contrast to credit exposures which were generally more resilient to negative risk sentiment during the month. In June, however, credit markets experienced significant declines and equity markets continued to sell off. While GFS Advisors experienced some recovery during the last week of June given the sharp turnaround in the equity markets, both equity and credit exposure contributed to losses in June, leading to collectively negative performance from GFS Advisors during the month and for the second quarter.


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The third quarter was marked by significant volatility and negative performance, driven by macro uncertainty largely centered in Europe. GFS Advisors collectively realized negative performance in all three months of the third quarter, generally driven by their overall level of directional exposure. The GFS Advisors who had maintained relatively balanced positioning or shifted to a more neutral portfolio typically fared better over the quarter. Equity exposure, particularly special situation equity positions with high hedge fund ownership were the biggest detractors. Post re-organized and levered equities also contributed to sizable losses. Credit contributed to losses as well, with large mark downs in individual positions despite somewhat limited trading volume. Particularly, exposure to some large, distressed capital structures detracted from performance as market participants looking to reduce risk sold down exposures in these more liquid names. Both multi-strategy and credit focused GFS Advisors benefited from portfolio hedges, which offset some losses. Bearish views on Europe generated positive returns via short sovereign or single name European financial CDS. Through the end of the third quarter, GFS Advisors were generally more cautious than they had been through most of the first half of 2011. Despite the cautious posture of many portfolios, GFS Advisors’ highlighted the increased opportunity set stemming from the recent market dislocation. While the risk-reward trade-off had improved for a number of investment opportunities, during the third quarter, GFS Advisors were cognizant that markets remained vulnerable to further selling pressure as broader market volatility and macro uncertainty remained high.
 
Goldman Sachs Global Tactical Trading, LLC
 
As of September 30, 2011, GTT represented approximately 31% of the Company’s members’ equity. GTT returned 1.55% and 1.63%, respectively, for Class C Series 1 units for the three and nine months ended September 30, 2011.
 
For the Three Months Ended September 30, 2011
 
Tactical Trading strategies generated positive performance in the third quarter. Both macro GTT Advisors and managed futures GTT Advisors exhibited fairly high dispersion through the quarter, but overall contributed positively to performance. In the aggregate, macro GTT Advisors outperformed managed futures GTT Advisors, or commodity trading advisor (“CTA”) strategies, as sharp trend reversals across key markets during the quarter led to more significant declines for CTAs than for macro GTT Advisors, which more tactically adjusted positioning. In July, performance was positive as both macro GTT Advisors and CTAs captured correlated and sustained moves in the direction of longer-term trends across many markets, most notably in the U.S. Dollar versus Asia and commodity-related currencies, precious metals and fixed income markets. Trading in equities, however, led to mixed performance in the month, as GTT Advisors’ positioning was more varied. In August, macro GTT Advisors and CTA strategies continued to benefit from trends in fixed income as long positions in U.S. and non-peripheral European government bonds benefited from a decline in yields. Trading in precious metals also contributed gains, while CTA strategies, and to a lesser extent macro GTT Advisors, suffered in currency trading following the strengthening of the U.S. Dollar. GTT Advisors experienced mixed performance in September as losses from CTAs were offset by gains from macro GTT Advisors. Most of September was again characterized by an elevated level of investor risk aversion. The U.S. Dollar continued to strengthen against emerging market currencies, which led to losses for many GTT Advisors. However, both macro GTT Advisors and CTAs largely offset these losses through gains in fixed income trading, as yields continued to decline in U.S. and non-peripheral European government bonds. Commodities also detracted from performance, notably in energies and precious metals, while performance in equities was mixed. GTT Advisors generally continued to have long positioning in fixed income, but became generally net short in equities in September. GTT Advisors broadly have more mixed positioning in both currencies and commodities. Risk levels for macro GTT Advisors remained low to moderate, but generally increased over the quarter, while risk levels for CTAs saw greater dispersion but generally decreased through the quarter.
 
For the Nine Months Ended September 30, 2011
 
Tactical trading strategies generated positive performance in the first nine months of 2011 as positive returns generated by macro GTT Advisors offset mixed, but overall negative returns experienced by managed futures GTT Advisors.


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GTT Advisors focused on macro trading generated positive returns in the first nine months of 2011, as positive performance from fixed income and to a lesser extent commodities trading offset mixed performance in foreign exchange and equities. Trading in fixed income contributed positively for nearly all macro GTT Advisors, with profits generated largely in the first and third quarters. With the exception of relatively sharp fixed income reversals in the second quarter, yields on U.S. and German government bonds have fairly steadily declined over the period. In commodities, macro GTT Advisors have benefited primarily from long precious metals and energy commodity positions held consistently throughout the period. However, many macro GTT Advisors gave up the majority of commodity gains in the third quarter, following a strong sell-off across most commodity markets. Foreign exchange positions have led to mixed and muted results in the first nine months of 2011, as prior gains from long positioning in non-Japan Asia, emerging market and commodity-related currency positions sharply reversed in August and September, while trading in other developed market currencies, notably the Swiss Franc and Japanese Yen, has been difficult for macro GTT Advisors over the period. GTT Advisors focused on macro trading generally held low risk in equities over the period, which led to muted and mixed performance.
 
During the first nine months of 2011, managed futures GTT Advisors’ losses were driven by trading in currencies and equities. Performance in emerging market and commodity-related currencies was particularly challenging for managed futures GTT Advisors. Trading in commodities resulted in mixed performance for managed futures GTT Advisors, as risk exposure in the asset class was lighter and positioning more mixed. Fixed income has been the largest positive contributor for GTT Advisors focused on managed futures, primarily due to strong performance in the third quarter as long fixed income positioning benefited from declining yields in both U.S. and non-peripheral European government bonds.
 
Performance for the Three and Nine Months Ended September 30, 2010
 
The Company’s net realized and unrealized gain/(loss) for the three and nine months ended September 30, 2010 was $20,889,590 and $16,214,062, respectively, compared to the Company’s net realized and unrealized gain/(loss) for the three and nine months ended September 30, 2009 of $25,706,878 and $50,468,122, respectively.
 
Overview
 
Global markets broadly had a strong third quarter in 2010, as risk assets rallied in July and September, more than offsetting a softer month in August. This improvement came after a challenging second quarter dominated by sovereign debt concerns and weak economic data, as market sentiment was buoyed by tentative signs of macro-economic improvement and strong indications from the U.S. Federal Reserve that it would embark on a second round of quantitative easing. The S&P 500 Index rose 10.7% over the third quarter, bringing its 2010 year-to-date performance to 2.3%. In Europe, the FTSE EuroFirst 300 Index rose 6.8% over the third quarter and also edged into positive territory year-to-date, up 1.5%. Fixed income markets continued to rally following gains earlier in 2010, while in currency markets the U.S. Dollar was particularly weak, declining 11.4% against the Euro and 5.2% against the British Pound. Credit markets performed relatively well after the difficult second quarter of 2010, as the Credit Suisse High Yield Index rose 6.0% and the S&P Leveraged Loan 100 Index rose 4.1%, bringing year-to-date gains to 10.9% and 5.7% respectively. Commodity markets were choppy, but during the third quarter of 2010 the S&P GSCI Total Return Index rose 8.3%, recovering some earlier losses but remaining in negative territory for 2010, down 3.9%. Volatility levels picked up in August, but for the third quarter were down markedly from levels seen in May and June, as the VIX Index finished September at 23.7. Amid all this, HFP Advisors generally performed well, generating gains in July and September in particular to end the third quarter in positive territory. However, high levels of correlation both between and within asset classes and a choppy market environment continued to make conditions challenging. Having been more defensively positioned in the second quarter, many HFP Advisors cautiously increased risk through the third quarter as these conditions showed some signs of improvement, in many cases ending the third quarter with positive returns on a year-to-date basis.


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The table below illustrates the portfolio weighting of each Investee as of September 30, 2010 as well as each Investee’s net return for the three and nine months ended September 30, 2010.
 
                         
    Portfolio Weight
    Three Months Ended
    Nine Months Ended
 
    as a % of
    September 30, 2010
    September 30, 2010
 
Investee   Members’ Equity(1)     Net Return(2)     Net Return(2)  
 
GELS
    39.49 %     3.94 %     (0.50 )%
GFS
    24.33 %     2.19 %     6.76 %
GFS Trust
    4.56 %     (0.41 )%     (2.27 )%
GTT
    28.71 %     5.16 %     5.74 %
 
 
(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) These returns are based on the performance of Class C Series 1 units for GELS, GFS, and GTT 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 Company’s investment in any of the Investees. Past performance is not indicative of future results, which may vary.
 
For the three and nine months ended September 30, 2010, the Company’s Class A Series 1 units returned 3.06% and 1.60%, respectively, net of fees and incentive allocation.
 
The Investees
 
The material Investees’ performance during the three and nine months ended September 30, 2010 is described in the following.
 
Goldman Sachs Global Equity Long/Short, LLC
 
As of September 30, 2010, GELS represented approximately 39% of the Company’s members’ equity. GELS returned 3.94% and (0.50)%, respectively, for Class C Series 1 units for the three and nine months ended September 30, 2010.
 
For the Three Months Ended September 30, 2010
 
GELS Advisors experienced positive performance during the third quarter of 2010, producing positive performance in July and September, while realizing a small loss in August.
 
In July and September, GELS Advisors generated gains as they benefited from broad based rallies in global equities. GELS Advisors realized the largest gains from long exposure to the sectors most sensitive to global growth, which included the industrials, materials, commodities/energy, and consumer discretionary sectors. Short exposure in nearly all sectors and general market hedges were responsible for the majority of losses. During the July and September rallies, GELS Advisors generally underperformed relative to equity market indices as they had adopted more conservative positioning entering the third quarter in response to the market declines of May and June and the increase in macroeconomic uncertainty. Top performing GELS Advisors generally had the most aggressive net exposure positioning, while select GELS Advisors also outperformed due to strong stock picking. However, a number of GELS Advisors found alpha generation difficult as they were overweight less economically sensitive sectors such as healthcare and consumer staples which underperformed and underweight more economically sensitive sectors such as consumer discretionary and industrials which outperformed. Additionally, historically high levels of stock correlations created a challenging environment for stock picking.
 
During August, GELS Advisors’ conservative positioning proved beneficial and the GELS Advisors who underperformed in July and September generally outperformed peers. While, as a group, GELS Advisors experienced negative performance in August, the loss was only a fraction of the declines of global equity indices as GELS Advisors were able to generate alpha relative to equity indices from both long exposure and short exposure. GELS Advisors who outperformed in August had more neutral exposure positioning and generated attractive long/short performance spreads by limiting losses from long exposure and generating gains from short exposure in the consumer discretionary, retail, technology, and financial sectors.


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GELS Advisors had broadly adopted conservative positioning in anticipation of an economic slowdown in the second half of 2010 and 2011. As a result GELS Advisors had increased short exposure to economically sensitive sectors such as consumer and technology, focused their long portfolios in high conviction names with stable, visible earnings outlooks, and maintained more conservative balance sheets. Additionally, GELS Advisors maintained liquid portfolios so they could actively manage exposure as new macroeconomic data emerges and market sentiment changes.
 
For the Nine Months Ended September 30, 2010
 
GELS Advisors finished the first nine months of 2010 with negative performance as gains generated during the third quarter, particularly in July and September, were not able to recoup the losses from May and June.
 
During the first quarter of 2010, GELS Advisors realized roughly flat performance as losses in January were offset by gains in February and March. In January equity markets declined globally and GELS Advisors with higher levels of net and long exposure concentrated in emerging markets, technology, media/telecom, and select financials and resources/energy positions experienced some of the largest declines. Conversely, during February and March global equity markets appreciated which guided GELS Advisors towards positive performance. In particular, GELS Advisors benefited from relatively net long positioning and long exposure to a broad range of sectors including financials, consumer discretionary, industrials/materials, energy, technology, and healthcare.
 
The strong positive trend of equity markets at the end of the first quarter of 2010 reversed in the second quarter of 2010, leading to losses for GELS Advisors. GELS Advisors realized slight negative performance in April as gains from long exposure in a number of sectors, including the consumer, industrials, energy, financials, and technology sectors, were offset by losses from long exposure in the healthcare and materials sectors, while short positions also proved costly, particularly those in higher beta/more cyclical sectors. During May and June, unsurprisingly GELS Advisors’ losses were largely from long positions, with the greatest losses coming from higher beta names in sectors such as resources, industrials, materials, technology, financials, and consumer discretionary. Short positions and hedges were broadly the only source of gains and partially offset long book losses.
 
In the third quarter GELS Advisors realized positive performance; however, they failed to fully capture the strong performance of equity markets as they had reduced risk levels following the increase in volatility and macroeconomic uncertainty in May and June. In July and September GELS Advisors generated gains as they benefited from broad based rallies in global equities, realizing the largest gains from long exposure to the industrials, materials, commodities/energy, and consumer discretionary sectors. Short exposure in nearly all sectors and general market hedges were responsible for the majority of losses. During August, GELS Advisors’ conservative positioning proved beneficial as GELS Advisors experienced a loss that was only a fraction of the declines of global equity indices. GELS Advisors who outperformed in August had more neutral exposure positioning and generated attractive long/short performance spreads by limiting losses from long exposure and generating gains from short exposure in the consumer discretionary, retail, technology, and financial sectors.
 
Goldman Sachs Global Fundamental Strategies, LLC
 
As of September 30, 2010, GFS represented approximately 24% of the Company’s members’ equity. GFS returned 2.19% and 6.76%, respectively, for Class C Series 1 units for the three and nine months ended September 30, 2010.


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For the Three Months Ended September 30, 2010
 
GFS Advisors experienced positive performance during the third quarter of 2010, with positive performance in July, August, and September.
 
The third quarter of 2010 began with thematic extensions of the second quarter, as GFS Advisors continued to produce a wide dispersion of returns, driven by their portfolio positioning and exposure management. The market backdrop improved as clarity on the European sovereign debt situation and U.S. financial regulatory reform emerged. Throughout the third quarter, GFS Advisors maintained defensive portfolio postures through the use of cash, short positions and portfolio hedges. The market volatility during the summer months provided GFS Advisors with opportunities to take profits on long positions, close out short positions at a profit and establish new entry points in securities that sold-off during market downdrafts. Throughout the third quarter, high yield issuance remained strong and was met with equally strong demand from yield-seeking investors.
 
Credit-focused GFS Advisors generated modest returns during the third quarter as prices continued to appreciate. GFS Advisors with higher allocations to event-oriented or post-reorganization equities generated positive performance in July and September, but underperformed in August. During the third quarter, GFS Advisors running more balanced portfolios generated consistently positive but more muted returns relative to those with a higher allocation to equities. Multi-strategy GFS Advisors broadly generated positive performance throughout the third quarter, driven largely by investments in special situation equities. Short investments and market overlay hedges were net detractors of performance over the third quarter, although those positions helped offset losses during August.
 
With increases in clarity around policy-making and the likelihood of a second round of quantitative easing (QE2), market volatility and risk aversion abated incrementally toward the end of the third quarter. Additionally, with the resurgence of activity in mergers and acquisitions, multi-strategy GFS Advisors began to redeploy capital toward merger arbitrage while continuing to reduce high yield credit exposure.
 
For the Nine Months Ended September 30, 2010
 
GFS Advisors experienced positive performance in the first nine months of 2010.
 
GFS Advisors produced positive returns over the course of the first quarter of 2010, despite some volatility driven by the push for financial reform in Washington and deteriorating economic conditions in Europe. GFS Advisors benefitted not only from strength in the broader markets, but also from returns driven by developments in company specific, event-driven situations. For multi-strategy GFS Advisors, while credit continued to be a source of positive attribution, activities in merger arbitrage and special situation equity investing proved accretive to returns for many. Throughout the first quarter, while portfolio hedges minimized return volatility relative to the broader credit and equity markets, they generally detracted from performance as markets moved higher.
 
The second quarter of 2010 initially began as a continuation of positive performance from the first quarter, driven by credit investments benefitting from a strong technical backdrop as well as several positive company-specific developments. However, as global market conditions continued to deteriorate, the positive backdrop for GFS Advisors began to reverse in May, causing several GFS Advisors to report negative performance during May and June. Additionally, multi-strategy GFS Advisors throughout the first six months of 2010 had been slowly deploying capital away from high yield credit names and toward special situations equities. As such, multi-strategy GFS Advisors generally reported negative returns over the second quarter given the volatility and underperformance of equity markets. However, some multi-strategy GFS Advisors generated small gains as they positioned their portfolios with various hedges that contributed meaningfully to positive attribution throughout the second quarter.


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Similarly, the third quarter of 2010 began with thematic extensions of the second quarter, as GFS Advisors continued to produce a wide dispersion of returns, driven by their portfolio positioning and exposure management. The market backdrop improved as clarity on the European sovereign debt situation and U.S. financial regulatory reform emerged. Throughout the third quarter, GFS Advisors maintained defensive portfolio postures through the use of cash, short positions and portfolio hedges. The market volatility during the summer months provided GFS Advisors with opportunities to take profits on long positions, close out short positions at a profit and establish new entry points in securities that sold-off during market downdrafts. GFS Advisors with higher allocations to event-oriented or post-reorganization equities generated positive performance in July and September, but underperformed in August. During the third quarter, GFS Advisors running more balanced portfolios generated consistently positive but more muted returns relative to those with a higher allocation to equities. Multi-strategy GFS Advisors broadly generated positive performance throughout the third quarter, driven largely by investments in special situation equities. Short investments and market overlay hedges were net detractors of performance over the third quarter, although those positions helped offset losses during August.
 
Goldman Sachs Global Fundamental Strategies Asset Trust
 
As of September 30, 2010, GFS Trust represented approximately 5% of the Company’s members’ equity. GFS Trust returned (0.41)% and (2.27)%, respectively, for GFS Trust interests for the three and nine months ended September 30, 2010.
 
On March 31, 2009, GFS transferred to GFS Trust its interests 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 2. “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Liquidity and Capital Resources”.
 
Goldman Sachs Global Tactical Trading, LLC
 
As of September 30, 2010, GTT represented approximately 29% of the Company’s members’ equity. GTT returned 5.16% and 5.74%, respectively, for Class C Series 1 units for the three and nine months ended September 30, 2010.
 
For the Three Months Ended September 30, 2010
 
Tactical trading strategies experienced positive performance in the third quarter of 2010 as both managed futures and macro strategies generated gains. After negative performance in July, performance was positive in both August and September despite the differing market environments. Long fixed income exposures across macro and managed futures GTT Advisors drove positive performance in the third quarter, with consistently positive performance in July and August. Fixed income positions detracted from returns in early September, but then made back some of their losses as bonds rallied into the September month-end in anticipation of further quantitative easing from the Fed. Currency trading generated mixed results during the third quarter, as short Euro positions detracted early in the quarter, but by the end of the third quarter a consensus short U.S. Dollar position contributed to performance. The U.S. Dollar index declined 8.5% during the third quarter. Long positions in Asian and other emerging market currencies also contributed to performance. Equity positioning was relatively limited in macro strategies at the start of the third quarter, but a general long bias across macro and managed futures strategies contributed positively to performance in September after detracting in August. Trading in commodities was challenging at the beginning of the third quarter, but by September trading activity had increased and positions were profitable. Notably, long gold positions contributed as the precious metal increased 5.0% during the third quarter. Also, several GTT Advisors benefited from large moves in agricultural commodities, as the price of wheat increased 45.0% during the third quarter and the price of corn increased 39.9% during the same period.


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For the Nine Months Ended September 30, 2010
 
Tactical trading strategies experienced positive performance in the first nine months of 2010 as both macro GTT Advisors and managed futures GTT Advisors contributed positively to performance.
 
GTT Advisors trading macro strategies generated gains that were roughly split between fixed income and currencies, with a slightly positive contribution from commodities and modest losses from equities. Trading in fixed income continued to contribute to macro GTT Advisors’ performance as yields generally moved lower during the period. Currency trading also contributed to performance, helped by short Euro positions during the first six months of 2010 and also by short U.S. Dollar positions during the third quarter. After detracting during the first six months of the year, trading in equities produced mixed results for macro GTT Advisors in the third quarter, as discretionary macro GTT Advisors generally continued to struggle but systematic macro GTT Advisors profited from a sustained long bias. In commodities, macro GTT Advisors’ long gold positions benefited as the yellow metal gained close to 20% during the first nine months of the year.
 
GTT Advisors trading managed futures strategies experienced mixed, but overall positive performance, with a high degree of dispersion across GTT Advisors. Generally, fixed income and currencies were strong contributors while equities and commodities detracted from managed futures GTT Advisors. Trading in interest rates drove positive performance in managed futures GTT Advisors during the first nine months of the year, as long positions benefited from declining interest rates. Currency trading also contributed as managed futures GTT Advisors benefited from the Euro’s move lower and the Australian Dollar’s moves higher. Trading in equities generated mixed results in the first nine months of 2010, as longer-term trend followers struggled but short-term managed futures GTT Advisors saw more success in the asset class. Trading in commodities detracted from returns during the first nine months of the year, especially in the energy complex. Some commodities-focused managed futures GTT Advisors generated strong performance from long positions in the grains complex.
 
Comparison of Selected Financial Information for the Three and Nine Months ended September 30, 2011 and September 30, 2010
 
Dividend Income
 
Dividend income for the three and nine months ended September 30, 2011 was $684 and $6,037, respectively, compared to dividend income for the three and nine months ended September 30, 2010 of $7,398 and $15,669. The Company’s dividend income fluctuates with the level of cash available to invest.
 
Expenses
 
The management fee for the three and nine months ended September 30, 2011 was $1,808,099 and $5,709,730, respectively, compared to the management fee for the three and nine months ended September 30, 2010 of $1,938,587 and $5,814,568, respectively. Because the management fee is calculated as a percentage of the Company’s 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 Company’s net assets for the period ended September 30, 2011 compared to the same period in 2010.
 
Effective November 1, 2010, the Company’s credit facility matured and was not renewed. The Company had no interest expense for the three and nine months ended September 30, 2011. Interest expense for the three and nine months ended September 30, 2010 was $86,122 and $153,105, respectively.
 
Professional fees for the three and nine months ended September 30, 2011 were $366,246 and $631,271, respectively, compared to professional fees for the three and nine months ended September 30, 2010 of $121,990 and $636,418, respectively. The increase in professional fees for the three months ended September 30, 2011 was primarily due to increased costs related to the additional regulatory filing requirement of adopting Extensible Business Reporting Language (“XBRL”). The professional fees for the nine months ended September 30, 2011 remain relatively unchanged from the nine months ended September 30, 2010 as professional fees had decreased in the first half of 2011 from the prior year.


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Effective August 1, 2010, the Company incurs a monthly administration fee payable to SEI equal to one twelfth of 0.02% of the net assets of the Company as of each month end. The administration fee for the three and nine months ended September 30, 2011 was $35,805 and $111,983, respectively.
 
Miscellaneous expenses for the three and nine months ended September 30, 2011 were $45,773 and $139,281, respectively, compared to miscellaneous expenses for the three and nine months ended September 30, 2010 of $43,331 and $120,198, respectively.
 
Incentive Allocation
 
Incentive allocation for the three and nine months ended September 30, 2011 was $0 and $5,323, respectively, compared to incentive allocation for the three and nine months ended September 30, 2010 of $80,979 and $82,592. The change in incentive allocation for the three and nine months ended September 30, 2011 from the three and nine months ended September 30, 2011 was due to the fluctuation in net income from operations for the period for certain series of class A shares that were above their high water mark.
 
Other than the management fee, interest expense, professional fees, administration fee, miscellaneous expenses and incentive allocation, there are no other fees directly borne by the Company.
 
Liquidity and Capital Resources
 
The Company’s liquidity requirements consist of cash needed to fund investments in the Investment Funds in accordance with the Company’s 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 Member’s 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.


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The Company can fund its liquidity requirements by liquidation (through redemptions, or as otherwise permitted in the limited liability company 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 the first three quarters of 2011. The Company may close again and stop accepting subscriptions 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 investment’s 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 from fully liquidating their investments without delay. The managing member of each Investment Fund attempts to determine each Advisor’s 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 September 30, 2011, approximately 2% of the Company’s 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 September 30, 2011, approximately 3% of the Company’s 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.


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GS HFS, the managing member of GFS, 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. 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 Company received subscriptions from new and existing investors of $3,875,000 and $22,970,000, respectively during the three and nine months ended September 30, 2011 and of $7,237,258 and $59,298,042, respectively, during the three and nine months ended September 30, 2010.
 
Demand from new and existing investors varies from period to period based upon market conditions, the Company’s 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 decrease overall portfolio exposure.
 
The Company paid out redemptions in the amount of $22,053,852 and $70,058,148, respectively, during the three and nine months ended September 30, 2011 and $18,974,200 and $57,445,038, respectively, during the three and nine months ended September 30, 2010. The Company had redemptions payable in the amount of $28,190,214 at September 30, 2011 and $18,895,114 at December 31, 2010. The Company funded the redemptions made in 2010 and in January, April and July 2011 by making redemptions from the Investment Funds in proportion to the then current weightings and through the use of uninvested cash on hand. The Managing Member expects the Company to fund future redemptions in a similar manner and does not believe that the Redemptions payable in October 2011 had a material adverse effect on the value of the units or the performance of the Company.
 
Demand for redemptions varies from period to period based upon market conditions, the Company’s 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 Goldman Sachs Group, Inc. or its affiliates, including Goldman, Sachs & Co. (collectively referred to herein, together with their affiliates, directors, partners, trustees, managers, members, officers and employees, as 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.
 
As of September 30, 2011, the Company had cash and cash equivalents on hand of 33,241,310. As of December 31, 2010, the Company had cash and cash equivalents on hand of $29,949,410.
 
Investments as of September 30, 2011 were $537,649,525 as compared to $612,687,074 as of December 31, 2010. The decrease was primarily due to net redemptions made by the Company from the Investment Funds and net realized and unrealized losses on Investments in affiliated Investees during the nine months ended September 30, 2011.
 
Management fee payable represents the management fees due to the Managing Member. Management fee payable as of September 30, 2011 was $1,808,099 as compared to $1,322,217 as of December 31, 2010. Because the management fee is calculated as a percentage of the Company’s 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 increase in Management fee payable is due to the amount and timing of the payment of the monthly management fee to the Managing Member and fluctuations in the NAV.


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The Company generally expects that its cash flows from liquidating its investment positions in the Investment Funds, to the extent necessary, and from new subscriptions into the Company are adequate to fund its operations and liquidity requirements.
 
The value of the Company’s directly held cash and financial instruments is not expected to be materially affected by inflation. At the Investee level, given that GFS’s 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 GTT’s Advisors, and therefore contributing to the Company’s 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 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
 
Improving Disclosures about Fair Value Measurements (Accounting Standards Codification (“ASC”) 820).  In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements.” ASU No. 2010-06 provides amended disclosure requirements related to fair value measurements. Certain disclosure requirements of ASU No. 2010-06 were effective for the Company beginning in the first quarter of 2010, while other disclosure requirements of the ASU are effective for financial statements issued for reporting periods beginning after December 15, 2010. Since these amended principles require only additional disclosures concerning fair value measurements, adoption did not and will not affect the Company’s financial condition, results of operations or cash flows.
 
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”) (FASB ASC 820). In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurements and Disclosures (Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” ASU No. 2011-04 clarifies the application of existing fair value measurement and disclosure requirements, changes certain principles related to measuring fair value, and requires additional disclosures about fair value measurements. ASU No. 2011-04 is effective for periods beginning after December 15, 2011. The Company is currently evaluating the impact of adoption.
 
Critical Accounting Policies and Estimates
 
Use of estimates
 
The discussion and analysis of the Company’s financial condition and results of operations are based on the Company’s 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 Company’s significant accounting policies is set forth in Note 2 to the Company’s financial statements. In the Managing Member’s view, the policy that involves the most subjective judgment is set forth below.


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Fair value of investments
 
The Company’s 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 Company’s attributable share of the net assets of the respective Investee. The fair value of a financial instrument is the amount 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.
 
U.S. GAAP has a three-level fair value hierarchy for disclosure of fair value measurements. The fair value hierarchy prioritizes inputs to the valuation techniques used to measure fair value, giving the highest priority to Level 1 inputs and the lowest to Level 3 inputs. A financial instrument’s level in the fair value hierarchy is based on the lowest level of any input that is significant to its fair value measurement.
 
The Company uses NAV as its measure of fair value for investments in Investees. In evaluating the level at which the fair value measurements of the Company’s investments have been classified, the Company has assessed factors including, but not limited to, price transparency, the ability to redeem at NAV at the measurement date and the existence or absence of certain restrictions at the measurement date. See Note 4 to the Company’s financial statements.
 
At September 30, 2011 and December 31, 2010, approximately 99% of the fair value of the Company’s pro-rata share of investments in the Investees was determined predominantly from utilizing NAVs provided by external advisors. At September 30, 2011 and December 31, 2010, investments valued using quoted market prices represented approximately 1% of the fair value of the Company’s pro-rata share of investments in the Investees. GTT was the only Investee that held investments that utilized quoted market prices to determine fair value.
 
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 Company’s 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 in the Company’s Form 10-K for the year ended December 31, 2010 (the “Form 10-K”).
 
The valuation provisions of the Company’s limited liability company agreement and the limited liability company agreements of the Investment Funds provide the Managing Member with greater flexibility to more accurately value the Company’s 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 Company’s 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 Company’s valuation practices is designed to make the Company’s 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.


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There has been no situation during the periods contained in this Quarterly Report on Form 10-Q where the impact of an adjustment to a valuation provided by an Advisor or independent investment manager at an Investee was material to the Company in which one of the Investees had invested was not complete or was inaccurate.
 
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 includes, 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.


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Item 3.   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 September 30, 2011 and as of December 31, 2010, as indicated by the Fair Value/Value at Risk column, and the Net Realized and Unrealized Gain/(Loss) from January 1, 2011 to September 30, 2011 and from January 1, 2010 to December 31, 2010. 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.
 
                                 
    Nine Months Ended September 30, 2011  
                Net Realized
       
    % of
          and Unrealized
       
    Members’
    Fair Value/Value
    Gain/(Loss)
       
Investee   Equity(1)     at Risk     (In millions)     Liquidity  
 
GELS
    39.29 %   $ 212,222,540     $ (15.4 )     (2 )
GFS
    25.25 %     136,347,003       (5.1 )     (3 )
GFS Trust
    3.18 %     17,167,960       (0.9 )     (4 )
GTT
    31.47 %     169,959,496       2.8       (5 )
GRV
    0.23 %     1,245,229       (0.2 )     (6 )
HFPO
    0.13 %     707,297       (0.0 )     (7 )
                                 
Total
    99.55 %(8)   $ 537,649,525     $ (18.8 )        
                                 
 
                                 
    Year Ended December 30, 2010  
                Net Realized
       
    % of
          and Unrealized
       
    Members’
    Fair Value/Value
    Gain/(Loss)
       
Investee   Equity(1)     at Risk     (In millions)     Liquidity  
 
GELS
    39.98 %   $ 248,593,542     $ 9.1       (2 )
GFS
    25.30 %     157,347,212       12.8       (3 )
GFS Trust
    3.73 %     23,188,415       0.1       (4 )
GTT
    29.14 %     181,173,125       15.9       (5 )
GRV
    0.27 %     1,649,094       0.1       (6 )
HFPO
    0.12 %     735,686       (0.1 )     (7 )
                                 
Total
    98.54 %(8)   $ 612,687,074     $ 37.9          
                                 
 
 
(1) Members’ equity, used in the calculation of the investments as a percentage of members’ equity, is based on the members’ equity per the Balance Sheet and in accordance with ASC 480, “Distinguishing Liabilities from Equity.”
 
(2) Redemptions can be made quarterly with 61 days’ notice, or at the sole discretion of the Managing Member.
 
(3) 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.
 
(4) 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. The estimated remaining holding period of its remaining underlying investments range from one to six years.
 
(5) Redemptions can be made quarterly with 60 days’ notice, or at the sole discretion of the Managing Member.
 
(6) 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 six years.
 
(7) HFPO’s current holdings consist solely of one illiquid investment in an Advisor Fund, which cannot be redeemed until the relevant Advisor liquidates such investment. The estimated remaining holding period of the illiquid investment is approximately two to five years.
 
(8) The total value of the Company’s investment in the Investees was less than 100% of members’ equity because members’ equity reflected cash and cash equivalents greater than total liabilities.


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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 September 30, 2011, the Managing Member had full position level transparency for approximately 51% (as a percentage of fair value investments) of the Advisors in which the Company invests through the Investment Funds. To determine position level transparency, the Company uses a 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 Company’s 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 Member’s 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 Company’s maximum risk of loss is limited to the Company’s investment in the Investment Funds. The risks involved are more fully described in the Company’s Form 10-K.
 
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 Fund’s 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 in the Company’s Form 10-K.
 
At the Company’s portfolio level, the Company’s portfolio construction process is designed to provide for adequate diversification. Each Investment Fund 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. 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 GFS’s 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. The risks involved are more fully described in the Company’s Form 10-K.


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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 material Investees were 39% GELS, 25% GFS and 31% GTT as of September 30, 2011 as a percentage of members’ equity. The approximate weights of the material Investees were 40% GELS, 25% GFS and 29% GTT as of December 31, 2010 as a percentage of members’ equity. This portfolio construction process is designed to create a diversified hedge fund portfolio with attractive return and risk characteristics.
 
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 from 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, the Managing Member has no constraints with respect to the percentage of the Company’s 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 Company’s 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 Company’s 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 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 Company’s 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.


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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 4.   Controls and Procedures
 
As of the end of the period covered by this report, an evaluation was carried out by the board of directors of the Company, with the participation of the principal executive officer and principal financial officer (or persons performing similar functions) of the Managing Member, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, the Company’s principal executive officer and principal financial officer (or persons performing similar functions) concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report. In addition, no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
PART II — OTHER INFORMATION
 
Item 1.   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.
 
Item 1A.   Risk Factors
 
None.
 
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
 
From January 1, 2011 to September 30, 2011, aggregate subscriptions totaled $22,970,000. Details of the sale of the series of units are as follows:
 
                                 
    Class and
                Total
 
    Series of
    Number of
    Number of
    Subscription
 
Date of Sale   Units     Units Sold     Investors     Amount  
 
January 1, 2011
    Class A Series 91       39,500.00       8     $ 3,950,000  
February 1, 2011
    Class A Series 92       26,500.00       8       2,650,000  
March 1, 2011
    Class A Series 93       18,250.00       5       1,825,000  
April 1, 2011
    Class A Series 94       39,200.00       7       3,920,000  
May 1, 2011
    Class A Series 95       46,500.00       10       4,650,000  
June 1, 2011
    Class A Series 96       21,000.00       5       2,100,000  
July 1, 2011
    Class A Series 97       17,000.00       3       1,700,000  
August 1, 2011
    Class A Series 98       11,250.00       4       1,125,000  
September 1, 2011
    Class A Series 99       10,500.00       4       1,050,000  
                                 
Total
            229,700.00       54     $ 22,970,000  
                                 
 
The units were sold at $100.00 per unit. The sale was not subject to any underwriting discount or commission. The units were privately offered and sold to accredited investors pursuant to Rule 506 of Regulation D and the sales were exempt from registration under the Securities Act of 1933.


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Pursuant to the Company’s limited liability company 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 holder (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 immediately preceding the 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 fee and other liabilities to the extent accrued or otherwise attributable to the units being redeemed. The Company paid out redemptions of $22,053,852 during the three months ended September 30, 2011.
 
Item 3.   Defaults Upon Senior Securities
 
Not applicable.
 
Item 4.   Reserved
 
Item 5.   Other Information
 
On November 8, 2011, Jennifer Barbetta notified the Company that, effective November 15, 2011 she will no longer serve as Chief Financial Officer of the Managing Member. Ms. Barbetta will remain a Managing Director of the Managing Member and will continue to support the Managing Member in a variety of capacities. On November 8, 2011, Helen Crowley was appointed Chief Financial Officer of the Managing Member by the board of directors of the Managing Member, effective November 15, 2011.
 
This Form 10-Q contains certain “forward-looking statements” regarding the operation of the Company and the Company’s investment objective, including, among other things:
 
  •  investment strategies and allocations of assets;
 
  •  future performance;
 
  •  the Company’s liquidity position; and
 
  •  trends in the Investment Sectors.
 
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’s 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 Company’s 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 Form 10-Q will prove to be accurate.
 
In light of the significant uncertainties inherent in the forward-looking statements included in this Form 10-Q, the inclusion of such information should not be regarded as a representation by the Company or the Managing Member that the investment objective set forth in this Form 10-Q 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.


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In addition to the risks identified in our Form 10-K, which is incorporated herein by reference, the following list indicates some of the risks that could impact the likelihood that any forward-looking statements will come true:
 
  •  There can be no assurance that the Managing Member’s decisions regarding risk allocations will be successful; inaccurate information provided by the Advisors may have a material adverse effect on implementing the Company’s investment objective;
 
  •  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 materially;
 
  •  The Company faces legal, tax and regulatory risks that may adversely affect the Company;
 
  •  Units will not be listed and will not be marketable; the Company is a closed-end fund with limited liquidity and limited rights for redemption; substantial redemptions could have a material adverse effect on the Company;
 
  •  The fee structure of the Company, including 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;
 
  •  Past performance of affiliated funds and of Advisors are not necessarily indicative of the results that the Company and any Investee may achieve or of future results;
 
  •  Valuation of the Investees’ investments will be based upon valuations provided by the Advisors which are generally not audited; uncertainties in valuations could have a material adverse effect on the Company’s net assets;
 
  •  Advisor redemption holdbacks and other Advisor liquidity restrictions may adversely affect the Investment Funds’ ability to redeem interests in order to meet redemption requests, which could have an adverse effect on the Company’s portfolio mix and liquidity for remaining Members;
 
  •  Frequent trading and turnover typically result in high transaction costs and the Investment Funds have no control over this turnover;
 
  •  Allocation of the Company’s assets may not protect the Company from exposure to economic downturns in any Investment Fund or Investment Sector;
 
  •  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;
 
  •  A Member’s investment in the Company will be affected by the investment policies and decisions of Advisors which are outside the Company’s control; 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;
 
  •  Certain Advisors may invest in private equity investments and real estate investments which involve a high degree of business and financial risk and may be difficult to value;
 
  •  Transactions between and among funds may be undervalued and negatively affect the Company’s performance;
 
  •  The ability of an Investment Fund to hedge successfully will depend on the particular Advisor’s ability to predict pertinent market movements which cannot be assured;
 
  •  The prices of an Investee’s investments can be highly volatile and influenced by external factors outside the control of such Investee;
 
  •  International investments may involve special risks not usually associated with investments in U.S. securities, including higher risk of financial irregularities and/or lack of appropriate risk monitoring and controls;


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  •  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; and
 
  •  The issuers of securities acquired by Advisors will sometimes face a high degree of business and financial risk.
 
The foregoing list of factors is not exhaustive. Investors should carefully consider the foregoing factors and the other uncertainties and potential events described in the Form 10-K. 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 Investor’s information only. Reference to an index does not imply that the portfolio will achieve results similar (or dissimilar) to that index.


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Item 6.   Exhibits
 
         
Number   Description
 
  31 .1   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31 .2   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32 .1   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


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Signatures
 
Pursuant to the requirements 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
 
  By: 
/s/  Jennifer Barbetta
Name:     Jennifer Barbetta
  Title:  Chief Financial Officer, Managing Director
 
Date: November 14, 2011


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Index to Exhibits
 
         
Number   Description
 
  31 .1   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31 .2   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32 .1   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


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