As filed with the U.S. Securities and Exchange Commission on June 26, 2006
Securities Act File No. 333-111561
Investment Company Act File No. 811-21480
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
|X| REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
| | Pre-effective Amendment No.
|X| Post-effective Amendment No. 3
|X| REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
|X| Amendment No. 6
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The Topiary Fund for Benefit Plan Investors (BPI) LLC
(Exact name of Registrant as specified in Charter)
345 Park Avenue
New York, New York 10154
(Address of principal executive offices)
Registrant's Telephone Number, including Area Code:
(212) 454-3000
--------------------
Joshua Kestler
Vice President
c/o Topiary Fund Management
345 Park Avenue
New York, New York 10154
(Name and address of agent for service)
Copy to:
John A. MacKinnon, Esq. John H. Kim
Sidley Austin LLP Director and Senior Counsel
787 Seventh Avenue Deutsche Asset Management
New York, New York 10019 345 Park Avenue
New York, New York
--------------------
Approximate date of proposed public offering: As soon as practicable after the
effective date of this Registration Statement.
If any securities being registered on this form are to be offered on a delayed
or continuous basis in reliance on Rule 415 under the Securities Act of 1933, as
amended (the "Securities Act"), other than securities offered in connection with
dividend or interest reinvestment plans, check the following box. / X /
It is proposed that this filing will become effective when declared effective
pursuant to Section 8(c)
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment, which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
THE TOPIARY FUND FOR BENEFIT PLAN INVESTORS (BPI) LLC
Limited Liability Company Interests
The Topiary Fund for Benefit Plan Investors (BPI) LLC (the "Fund") is a Delaware
limited liability company registered under the Investment Company Act of 1940,
as amended ("1940 Act"), as a closed-end, non-diversified, management investment
company. This Fund is designed for investment primarily by tax-exempt and
tax-deferred investors.
The Fund invests substantially all of its investable assets into The Topiary
Offshore Fund for Benefit Plan Investors (BPI) LDC, a Cayman Islands limited
duration company with the same investment objectives as the Fund (the "Offshore
Fund"). The Offshore Fund in turn invests substantially all of its investable
assets in The Topiary Master Fund for Benefit Plan Investors (BPI) LLC, a
registered investment company with the same investment objectives as the Fund
and the Offshore Fund (the "Master Fund"). The Offshore Fund serves solely as an
intermediate entity through which the Fund invests in the Master Fund. The
Offshore Fund makes no independent investment decisions and has no investment or
other discretion over the investable assets. The Fund's investment objective is
to generate long-term capital appreciation by investing substantially all of its
assets, through its indirect investment in the Master Fund, in the securities of
privately placed investment vehicles, typically referred to as hedge funds
("Investment Funds"), managed pursuant to various alternative or non-traditional
investment strategies. The Investment Funds in which the Master Fund will invest
are subject to special risks. See "Principal Risk Factors, Types of Investments,
and Investment Strategies of the Investment Funds."
This Prospectus applies to the offering of limited liability company interests
("Interests") of the Fund. The Interests are offered in a continuous offering at
net asset value, plus any applicable sales charge, as described herein. The Fund
has registered $500,000,000 in Interests for sale under the registration
statement to which this Prospectus relates. No person who is admitted as a
member of the Fund ("Member") will have the right to require the Fund to redeem
any Interest.
------------------------------
If you purchase an Interest in the Fund, you will become bound by the terms and
conditions of the limited liability company operating agreement ("Operating
Agreement"). A copy of the Operating Agreement is attached as Appendix B to this
Prospectus.
INVESTMENTS IN THE FUND MAY BE MADE ONLY BY "ELIGIBLE INVESTORS" AS DEFINED
HEREIN. SEE "ELIGIBLE INVESTORS."
The Interests will not be listed on any securities exchange and it is not
anticipated that a secondary market for the Interests will develop. The
Interests are subject to substantial restrictions on transferability and resale
and may not be transferred or resold except as permitted under the Operating
Agreement of the Fund. Although the Fund may offer to repurchase Interests from
time to time, Interests will not be redeemable at an investor's option nor will
they be exchangeable for interests or shares of any other fund. As a result, an
investor may not be able to sell or otherwise liquidate his or her Interest. See
"Principal Risk Factors Relating to the Fund's Structure -- Closed-End Fund;
Limited Liquidity; Interests Not Listed; Repurchases of Interests." The
Interests are appropriate only for those investors who can tolerate a high
degree of risk and do not require a liquid investment.
This Prospectus provides information that you should know about the Fund before
investing. You are advised to read this Prospectus carefully and to retain it
for future reference. Additional information about the Fund, including the
Fund's statement of additional information ("SAI"), dated July [ ], 2006, has
been filed with the U.S. Securities and Exchange Commission ("SEC"). You can
request a copy of the SAI without charge by writing to DWS Scudder Distributors,
Inc., 222 South Riverside Plaza, Attn: Correspondence 27th Floor, Chicago, IL
60606-1048; or by calling DWS Scudder Distributors, Inc. at 1-888-262-0695. The
SAI is incorporated by reference into this Prospectus in its entirety. The table
of contents of the SAI appears on page 63 of this Prospectus. You can obtain the
SAI, and other information about the Fund, on the SEC's website
(http://www.sec.gov).
Neither the SEC nor any state securities commission has determined whether this
Prospectus is truthful or complete, nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
Total(1)
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Offering Amount (2)........................... $500,000,000
Sales Load(3)................................. $12,500,000
Proceeds to the Fund(4)....................... $487,500,000
-----------------------
The Fund's distributor is DWS Scudder Distributors, Inc.
The date of this Prospectus is July [ ], 2006.
(1) The Fund previously registered $500,000,000 of Interests, and no
additional Interests are being registered in connection with this
Prospectus. Consequently, the listed information relates to those
Interests already registered.
(2) DWS Scudder Distributors, Inc. acts as the distributor
("Distributor") of the Fund's Interests on a best-efforts basis,
subject to various conditions. The Fund may also distribute
Interests through other brokers or dealers. The Fund will sell
Interests only to investors who certify that they are "Eligible
Investors." See "Eligible Investors." The minimum initial
investment is $25,000, subject to waiver. Pending investment in the
Fund, the proceeds of the continuous offering will be placed in an
interest-bearing escrow account by PFPC Inc. ("PFPC"), the Fund's
escrow agent. After any closing, the balance in the escrow account,
including any interest earned, will be invested pursuant to the
Fund's investment policies. See "Subscription for Interests" and
"Use of Proceeds."
(3) Investments may be subject to a sales charge of up to 2.5%, subject
to waivers for certain types of investors. See "Subscription for
Interests." The Distributor retains the sales charge, and may
reallow to broker-dealers participating in the offering up to the
full applicable sales charge of 2.5%. The Distributor, DB
Investment Managers, Inc. ("DBIM" or the "Adviser"), or their
affiliates also may pay from their own resources additional
compensation to brokers or dealers in connection with the sale and
distribution of the Interests or servicing of investors.
(4) Assumes sale of all Interests currently registered at the net asset
value. The Interests are offered at the offering price (which is
net asset value), plus any applicable sales charge.
The Interests are not deposits or obligations of, or guaranteed or endorsed by,
any bank or other insured depository institution, and are not federally insured
by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other government agency.
Prospective investors should not construe the contents of this Prospectus as
legal, tax, financial, or other advice. Each prospective investor should
consult with his or her own professional advisers as to the legal, tax,
financial, or other matters relevant to the suitability of an investment in the
Fund.
These securities are subject to substantial restrictions on transferability and
resale and may not be transferred or resold except as permitted under the
Operating Agreement of the Fund.
------------------------------
TABLE OF CONTENTS
Page
SUMMARY......................................................................1
SUMMARY OF FUND EXPENSES....................................................11
FINANCIAL HIGHLIGHTS........................................................13
USE OF PROCEEDS.............................................................14
THE FUND'S STRUCTURE........................................................14
INVESTMENT OBJECTIVES, METHODOLOGY, AND POLICIES............................15
THE HEDGE FUND UNIVERSE.....................................................19
PRINCIPAL RISK FACTORS RELATING TO THE FUND'S STRUCTURE.....................23
PRINCIPAL RISK FACTORS, TYPES OF INVESTMENTS, AND INVESTMENT STRATEGIES
OF THE INVESTMENT FUNDS.....................................................29
INVESTOR SUITABILITY........................................................34
MANAGEMENT OF THE FUND......................................................35
FEES, ALLOCATIONS, AND EXPENSES.............................................37
PORTFOLIO TRANSACTIONS......................................................39
VOTING......................................................................40
CONFLICTS OF INTEREST.......................................................41
OUTSTANDING SECURITIES......................................................45
CONTROL PERSONS.............................................................45
ELIGIBLE INVESTORS..........................................................45
SUBSCRIPTION FOR INTERESTS..................................................45
REPURCHASES OF INTERESTS....................................................46
TRANSFERS OF INTERESTS......................................................49
NET ASSET VALUATION.........................................................50
CAPITAL ACCOUNTS AND ALLOCATIONS............................................52
TAXES.......................................................................53
INVESTMENT BY EMPLOYEE BENEFIT PLANS........................................59
SUMMARY OF THE OPERATING AGREEMENT..........................................60
GENERAL INFORMATION.........................................................62
TABLE OF CONTENTS OF SAI....................................................62
APPENDIX A - INVESTOR CERTIFICATION........................................A-1
APPENDIX B - SECOND AMENDED AND RESTATED LIMITED LIABILITY COMPANY
OPERATING AGREEMENT........................................................B-1
i
SUMMARY
This is only a summary and does not contain all of the information that a
prospective investor should consider before investing in the Fund. Before
investing, a prospective investor in the Fund should carefully read the more
detailed information appearing elsewhere in this Prospectus and the Fund's SAI
and the terms and conditions of the Operating Agreement, each of which should be
retained by any prospective investor.
The Fund The Fund is a Delaware limited liability company that is
registered under the 1940 Act as a closed-end,
non-diversified, management investment company. The
Fund's Interests are registered under the Securities Act
of 1933, as amended (the "Securities Act"), but are
subject to substantial limits on transferability and
resale.
The Fund invests substantially all of its investable
assets in The Topiary Offshore Fund for Benefit Plan
Investors (BPI) LDC, a Cayman Islands limited duration
company with the same investment objectives as the Fund
(the "Offshore Fund"). The Offshore Fund in turn
invests substantially all of its investable assets in
The Topiary Master Fund for Benefit Plan Investors (BPI)
LLC, a separate closed-end, non-diversified, management
investment company with the same investment objectives
as the Offshore Fund and the Fund (the "Master Fund").
DB Investment Managers, Inc. ("DBIM" or the "Adviser"),
an investment adviser registered with the Securities and
Exchange Commission (the "SEC") under the Investment
Advisers Act of 1940, as amended (the "Advisers Act"),
serves as investment adviser to the Master Fund
performing services as Topiary Fund Management. Topiary
Fund Management is the marketing name of the fund of
funds activities of DB Absolute Return Strategies. DB
Absolute Return Strategies is the brand name of the
overall fiduciary hedge fund management business of
Deutsche Bank AG.
The Master Fund is a "fund of funds" that provides a
means for investors to participate in investments in the
securities of Investment Funds that pursue a variety of
alternative or non-traditional investment strategies.
The Fund is intended to afford its members ("Members"),
through an indirect investment in the Master Fund,
access to a variety of Investment Funds, the benefits of
reduced risk through diversification, and the benefits
of professional portfolio managers. An investment in a
single professionally managed fund of funds eliminates
the need for investors to monitor or purchase securities
in individual hedge funds. The Fund is an appropriate
investment only for those investors who can tolerate a
high degree of risk and do not require a liquid
investment. The Fund is similar to a private investment
fund in that Interests in the Fund are sold only to
certain high net worth and sophisticated investors in
large denominations, and in that investors in the Fund
are subject to asset-based and performance-based fees.
However, unlike a private investment fund, the Fund has
registered under the 1940 Act to facilitate investment
by certain investors subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and
other "benefit plan investors" subject to ERISA and/or
Section 4975 of the Internal Revenue Code of 1986, as
amended (the "Internal Revenue Code" or the "Code").
The Fund is designed for investment primarily by
tax-exempt and tax-deferred investors.
The Offering Initial and subsequent purchases of Interests generally
are accepted monthly.
Use of Proceeds The Fund invests the proceeds of the offering in the
Offshore Fund, which in turn invests such proceeds in
the Master Fund, after each month-end closing of the
offering. The Master Fund invests such proceeds in
accordance with its investment objective and principal
strategies as soon as possible following receipt of such
proceeds. Pending the investment of the proceeds of the
offering pursuant to the Master Fund's investment
policies, a portion of the proceeds of the offering not
invested in the Investment Funds may be invested in
short-term, high quality debt securities, money market
funds, or other cash equivalents. In addition, the Fund
and the Master Fund may maintain a portion of the
proceeds of the offering in cash to meet operational
needs.
Investment The Fund's, the Offshore Fund's, and the Master Fund's
Objective and investment objective is to seek to generate long-term
Strategies capital appreciation. The Fund attempts to achieve this
objective by investing all or substantially all of its
investable assets, through the Offshore Fund, in the
Master Fund, which invests in the securities of
approximately 50 to 100 Investment Funds managed
pursuant to various alternative or non-traditional
investment strategies, which may be viewed as
encompassing four broadly defined primary categories:
Relative Value; Event Driven; Equity Long/Short; and
Global Macro. The actual number of Investment Funds is
determined in the absolute discretion of the Adviser.
The Master Fund may not allocate assets to all of the
primary categories or Management Strategies (as defined
herein).
Relative Value Category. Relative Value strategies
generally seek to produce returns without taking on
specific market exposures. Investment Funds employing
Relative Value strategies seek to achieve attractive
risk-adjusted returns through the use of both long and
short positions in fixed income and/or equity
instruments, attempting to exploit pricing
inefficiencies that occur in the markets from time to
time. Relative Value Investment Funds may employ
Convertible Arbitrage, Fixed Income Arbitrage, and
Quantitative Market Neutral Equity strategies.
Event Driven Category. Event Driven strategies
generally seek to produce returns based on anticipated
outcomes of company specific or transaction specific
situations, such as a corporate merger, corporate
restructuring, or pending bankruptcy. Event Driven
Investment Funds may employ Multi-Event (formerly
Merger/Risk Arbitrage), Bankruptcy/Distressed, and
Multi-Strategy/Rotational strategies.
Equity Long/Short Category. Equity Long/Short
strategies generally seek to produce returns from
investments in the global equity markets. These
strategies are generally focused on absolute returns and
trade based on the manager's beliefs about specific
equity markets, regions, sectors, and/or securities.
Although these strategies involve both long and short
positions, most managers will have a directional bias.
Equity Long/Short Investment Funds may employ
Opportunistic, Global-International, Sector Specific,
and Short-Biased strategies.
Global Macro. Global Macro strategies generally focus
on macro-economic opportunities across numerous markets
and instruments. Investments may be made in cash,
securities, futures contracts, derivative contracts, or
options in the equity, fixed income, currency, or
commodity markets. Global Macro Investment Funds may
employ Discretionary or Systematic strategies.
The Adviser employs a two-step process in structuring
the Master Fund's portfolio of Investment Funds. First,
the Adviser determines an allocation for the Master
Fund's assets across the universe of potential hedge
fund strategies, seeking to achieve a portfolio
composition that demonstrates volatility that is lower
than the broad-based equity market and returns that are
not correlated to either the broad-based equity or bond
markets. Using data categorizing and analyzing the
historical returns of select managers within each
strategy in each category discussed above, the Adviser
employs a number of quantitative modeling techniques in
conjunction with fundamental research analysis to
ascertain an optimized allocation of Master Fund assets
among primary categories and underlying strategies.
Second, the Adviser identifies and evaluates potential
investments based on specific quantitative, qualitative,
and due diligence criteria. Upon completion of its
review, the Adviser selects appropriate Investment
Funds. The Master Fund may invest in Investment Funds
either directly or indirectly by purchasing a structured
note or other derivative instrument linked to such
Investment Fund.
2
The Master Fund intends generally to limit investments
in any one Investment Fund in its portfolio to no more
than 10% of the Fund's assets.
There can be no assurance that the Fund or the Master
Fund will achieve its investment objective or avoid
substantial losses. The Fund's and the Master Fund's
investment objective may be changed by the Board without
the vote of a majority of the Fund's outstanding voting
securities. Notice will be provided to Members prior to
any such change.
Use of Leverage The Master Fund may, but does not currently intend to,
borrow money to leverage its investments in the
Investment Funds. The Master Fund is authorized to
borrow money to meet repurchase requests, for bridge
financing of investments in Investment Funds, and for
cash management purposes. The Fund is authorized to
borrow money to meet repurchase requests and for cash
management purposes, but does not expect to ordinarily
conduct such activities. Borrowings will be subject to
a 300% asset coverage requirement under the 1940 Act.
Borrowings by Investment Funds are not subject to this
requirement. See "Principal Risk Factors, Types of
Investments, and Investment Strategies of the Investment
Funds."
Risk Factors The Fund's and the Master Fund's investment program is
speculative and entails substantial risks. Each of the
Fund, the Offshore Fund, and the Master Fund is recently
formed and has a limited operating history. Interests
in the Fund will be subject to substantial restrictions
on transferability and resale. The Fund may offer to
repurchase Interests, but an Interest will not be
redeemable at a Member's option nor will it be
exchangeable for interests, units, or shares of any
other fund, because the Fund is a closed-end investment
company. The Fund may repurchase less than the full
amount of the Interest that a Member requests to be
repurchased. If the Fund does not repurchase a Member's
Interest, the Member may not be able to dispose of his
or her Interest, even during periods of Fund
underperformance, due to the substantial restrictions on
the transferability and resale of the Interests.
The Fund's performance depends upon the performance of
the Investment Funds in the Master Fund's portfolio and
the Adviser's ability to select, allocate, and
reallocate effectively the Master Fund's assets among
them. The Investment Funds generally are not registered
as investment companies under the 1940 Act, and,
therefore, the Master Fund is not entitled to the
protections of the 1940 Act with respect to the
Investment Funds. An investment adviser of an
Investment Fund may use investment strategies that
differ from its past practices and are not fully
disclosed to the Adviser, and that involve risks that
are not anticipated by the Adviser. Investment Funds
may have a limited operating history, and investment
advisers of the Investment Funds may have limited
experience in managing assets.
The value of the Master Fund's net assets (and,
accordingly, the value of the Fund's indirect investment
in the Master Fund) will fluctuate primarily based on
the fluctuation in the value of the Investment Funds in
which the Master Fund invests. To the extent that the
portfolio of an Investment Fund is concentrated in
securities of a single issuer or issuers in a single
industry or market, the risk of the Master Fund's
investment in that Investment Fund is increased.
Investment Funds may be more likely than other types of
funds to engage in the use of leverage, short sales, and
derivative transactions. An Investment Fund's use of
such transactions is likely to cause the value of the
Investment Fund's portfolio to appreciate or depreciate
at a greater rate than if such techniques were not
used. The investment environment in which the
Investment Funds invest may be influenced by, among
other things, interest rates, inflation, politics,
fiscal policy, current events, competition, productivity
gains and losses, and technological and regulatory
change.
3
The Fund values its investment in the Master Fund
through the Offshore Fund at the net asset value
provided by the Master Fund to the Offshore Fund and the
Fund. The Master Fund computes its net asset value
(total assets less total liabilities, including accrued
fees and expenses) as of the last "business day" of each
month. As used in this Prospectus, a "business day" is
any day, other than Saturday, Sunday, or a day on which
banking institutions are authorized or obliged by law or
regulation to close in New York. When the Master Fund
values its securities, market prices will not be readily
available for its investments in Investment Funds.
Securities for which market prices are not readily
available (i.e., as is expected with respect to the
Master Fund's investments in Investment Funds) are
valued by the Master Fund at fair value as determined in
good faith in accordance with procedures approved by the
Board. As the Adviser and the Board anticipate that
market prices will not be readily available for most
Investment Funds in which the Master Fund invests, the
Master Fund's valuation procedures provide that the fair
value of the Master Fund's investments in Investment
Funds ordinarily will be the value determined for each
Investment Fund in accordance with the Investment Fund's
valuation policies. Although the Master Fund receives
information from each Investment Fund regarding its
investment performance and investment strategy, the
Adviser may have little or no means of independently
verifying this information. Prospective investors
should be aware that situations involving uncertainties
as to the value of portfolio positions could have an
adverse effect on the Master Fund's net assets if the
judgments of the Board, the Adviser, or investment
advisers to the Investment Funds should prove
incorrect. Investment advisers to the Investment Funds
only provide determinations of the net asset value of
Investment Funds on a weekly or monthly basis, in which
event it will not be possible to determine the net asset
value of the Master Fund (and, therefore, the Fund) more
frequently.
The interests in the Investment Funds in which the
Master Fund invests or plans to invest are generally
illiquid. The Master Fund may not be able to dispose of
Investment Fund interests that it has purchased.
Each Investment Fund generally is charged or is subject
to an asset-based fee and may be subject to
performance-based allocations or fees payable or
allocated to the investment adviser of such Investment
Fund. By investing in Investment Funds indirectly
through the Fund, an investor in the Fund (as an
investor in the Master Fund through the Offshore Fund)
bears asset-based fees at the Master Fund level, in
addition to any asset-based and performance-based
management fees and allocations at the Investment Fund
level. Thus, an investor in the Fund may be subject to
higher operating expenses than if he or she invested in
another closed-end fund with a different investment
focus. The performance-based compensation received by
the Adviser and an investment adviser of an Investment
Fund also may create an incentive for the Adviser or
that investment adviser to make investments that are
riskier or more speculative than those that it might
have made in the absence of the performance-based
allocation. That compensation may be based on
calculations of realized and unrealized gains made by
the Adviser or the investment adviser without
independent oversight.
Investments by the Investment Funds in foreign financial
markets, including markets in developing countries,
present political, regulatory, economic, and other risks
that are significant and that may differ in kind and
degree from risks presented by investments in the United
States.
The investment activities of the Adviser, the investment
advisers of the Investment Funds, and their respective
affiliates, and their respective directors, trustees,
managers, members, partners, officers, and employees,
for their own accounts and other accounts they manage,
may give rise to conflicts of interest in relation to
the Fund. The Fund's operations may give rise to other
conflicts of interest.
4
To the extent the Master Fund purchases non-voting
securities of, or contractually forego the right to vote
its interests in, an Investment Fund, it will not be
able to vote on matters that require the approval of the
investors of the Investment Fund, including a matter
that could adversely affect the Master Fund's investment
in it.
The Offshore Fund is not registered under the 1940 Act,
and is not subject to the investor protections offered
by that Act. The Fund, by investing in the Offshore
Fund, does not have the protections offered to investors
in registered investment companies. The Fund, however,
controls the Offshore Fund, making it unlikely that the
Offshore Fund will take action contrary to the interests
of investors in the Fund.
If there are changes in the laws of the United States
and/or the Cayman Islands, under which the Fund and the
Offshore Fund, respectively, are organized, so as to
result in the inability of the Fund and/or the Offshore
Fund to operate as set forth in this Prospectus, there
may be a substantial effect on investors. For example,
if Cayman Islands law changes such that the Offshore
Fund must conduct business within the Cayman Islands, or
pay taxes, investors in the Fund would likely suffer
decreased investment returns. If Cayman Islands law,
which requires a limit for a limited duration company's
existence of thirty years, were to change such that, at
the end of thirty years, the Fund could not replace the
Offshore Fund with another identical limited duration
company, the structure of the Fund would be affected,
potentially adversely. Such changes also could result
in the inability of the Fund to operate on a
going-forward basis, resulting in the liquidation of the
Fund.
Special tax risks are associated with an investment in
the Fund. There can be no assurance that the positions
of the Fund relating to the consequences of its
investment transactions will be accepted by the tax
authorities. See "Taxes."
Management The Board has overall responsibility for the management
and supervision of the operations of the Fund and the
Master Fund. The Offshore Fund has two members -- the
Fund (to which responsibility for the day-to-day
management of the Offshore Fund has been delegated) and
the Adviser (which holds only a nominal, non-voting
interest) -- and is effectively controlled by the Board
of the Fund.
The Adviser Under the supervision of the Board and pursuant to an
investment management agreement (the "Investment
Management Agreement"), DBIM, an investment adviser
registered under the Advisers Act, serves as the
investment adviser for the Master Fund performing
services as Topiary Fund Management. Steven L. Bossi,
Director and Global Head of Topiary Fund Management for
DB Absolute Return Strategies, is primarily responsible
for the Master Fund's day-to-day portfolio management,
subject to oversight by the Board.
The Adviser is an indirect, wholly owned subsidiary of
Deutsche Bank AG ("Deutsche Bank"), an international
commercial and investment banking group. Deutsche Bank
is a major global banking institution that is engaged in
a wide range of financial services activities, including
investment management, mutual funds, retail, private,
and commercial banking, investment banking, and
insurance.
The PFPC, Inc. ("PFPC") serves as the administrator of the
Administrator; Fund, the Offshore Fund, and the Master Fund. The
the Transfer Master Fund compensates PFPC for providing
Agent administrative services (and the Fund as an indirect
investor in the Master Fund bears its pro rata share of
such compensation). The Fund and the Master Fund have
also retained PFPC to serve as transfer agent, and
compensate PFPC for providing investor services,
including services relating to transfer agency,
processing of subscriptions, and account-related
functions, among other services.
Fees, Incentive Investment Management Fee. The Master Fund pays to the
Allocation, and Adviser, and the Fund as an indirect investor in the
Expenses Master Fund bears, an investment management fee (the
"Investment Management Fee") at an annual rate equal to
1.0% of the Master Fund's month-end net
5
assets, including assets attributable to the Adviser (or
its affiliates). The Investment Management Fee accrues
monthly and is payable at the end of each quarter before
giving effect to any repurchases occurring on such
quarter-end. The Investment Management Fee is paid to the
Adviser out of the Master Fund's assets and debited
against Members' Capital Accounts.
Incentive Allocation. As of each March 31, upon any
repurchases of Interests (solely with respect to the
Interests repurchased), and upon termination of the Fund
(each, a "Performance Period"), a reallocation (the
"Incentive Allocation") will be made from the Capital
Account of each Member to the Capital Account of the
Adviser equal to 10% of the amount, if any, by which the
net profit allocated to such Member's Capital Account for
such Performance Period in excess of the Hurdle (based on
91-day U.S. Treasury bill rates) for such Performance
Period exceeds the positive balance of such Member's Loss
Carryforward Account (as defined herein).
The Incentive Allocation is applied on a "high water
mark" basis such that in the event a Capital Account
suffers a net loss in a particular Performance Period,
no Incentive Allocation will be made with respect to
such Performance Period or any subsequent Performance
Period, until such net loss is first recovered (taking
into account interim repurchases, if any).
Administrative Fee. PFPC provides certain administrative
services to the Fund, the Offshore Fund, and the Master
Fund. For its services to the Fund and the Master Fund,
the Master Fund pays PFPC, and the Fund as an indirect
investor in the Master Fund bears, an administrative fee
at an annual rate equal to 0.08% of the Master Fund's
month-end net assets. The Offshore Fund is expected to
have minimal expenses, and the Adviser, or an affiliate
of the Adviser, has agreed to bear all costs related to
the Offshore Fund.
Distribution Expenses. Investments may be subject to a
sales charge of up to 2.5% of the subscription amount.
The sales charge may be waived or adjusted at the sole
discretion of the placement agent, and, without limiting
the foregoing, is expected to be waived for institutional
investors and certain persons associated with the Adviser
and its affiliates.
Other Expenses. The Fund and the Master Fund each bear
their respective operational expenses, including, without
limitation: offering expenses associated with each
offering; research expenses; data processing costs and
expenses; quotation and news services; legal and
recording fees and expenses; professional fees
(including, without limitation, expenses of consultants
and experts) relating to investments; accounting,
auditing, administration, infrastructure, risk
monitoring, and tax preparation expenses; custodial
expenses; taxes; insurance; printing and mailing
expenses; costs and expenses related to exchange
listings; all investment expenses (i.e., expenses which
the Directors or the Adviser reasonably determines to be
directly related to the investment of the Fund's assets,
such as brokerage commissions, clearing and settlement
charges, bank service fees, spreads, interest expenses,
borrowing charges, short dividends, and other investment
expenses); pro rata costs and expenses of the Investment
Funds, including management fees to managers of
Investment Funds (generally ranging from 1% to 3% of
assets under management) and performance fees or
allocations to such managers (generally ranging from 10%
to 25% of net profits); costs and expenses of entering
into and utilizing credit facilities; the Administrator's
fees and expenses; and any extraordinary expenses (such
as litigation and indemnification of the Directors).
Included in the investment expenses borne by the Fund and
the Master Fund are the reasonable out-of-pocket expenses
of the Adviser, for example, travel expenses related to
due diligence investigations of existing and prospective
Investment Funds. The Adviser and the Administrator each
bear the costs of providing their respective services to
the Fund, the Master Fund, and the Offshore Fund,
including their general overhead, salary, and office
expenses. The Offshore Fund is expected to have minimal
expenses, and the Adviser, or an affiliate of the
Adviser, has agreed to bear all operating expenses of the
Offshore Fund.
6
The expenses of the offering of Interests were amortized
over a twelve month period beginning upon commencement
of the Fund's operations and ending on September 30,
2005. The organizational expenses of the Fund, the
Offshore Fund, and the Master Fund were paid by the
Adviser.
Expense Limitation Agreement. The Adviser has entered
into an agreement with the Fund and the Master Fund
whereby it has contractually agreed to waive its fees
and/or reimburse the Fund's expenses to the extent
necessary to ensure that the Fund's annualized expenses
will not exceed 1.75% (excluding the Incentive
Allocation, if any) ("Expense Limitation Agreement").
The initial term of the Expense Limitation Agreement
ended on March 31, 2005 and has subsequently been
renewed for additional one-year terms now ending on
March 31, 2007. Thereafter, the Expense Limitation
Agreement will be automatically renewed for each fiscal
year unless the Adviser provides written notice to the
Fund and the Master Fund of the termination of the
Expense Limitation Agreement at least 30 days prior to
the end of the then-current term.
For the fiscal year ended March 31, 2006, the Adviser
waived $113,973 of its management fees due from the
Master Fund. Pursuant to the Expense Limitation
Agreement, the Adviser reimbursed the Fund $322,273 of
certain of its expenses.
Repurchases of No Member will have the right to require the Fund to
Interests redeem its Interest in the Fund. The Fund from time to
time may offer to repurchase Interests. These
repurchases will be made at such times and on such terms
as may be determined by the Board from time to time in
its complete and absolute discretion. The Fund may
repurchase less than the full amount of Interests that
Members request to be repurchased. In determining
whether the Fund should repurchase Interests from
Members pursuant to repurchase requests, the Board will
consider, among other things, the recommendation of the
Adviser. The Adviser expects that it will recommend to
the Board that the Fund offer to repurchase Interests
from Members on a semi-annual basis. A Member who
tenders some but not all of the Member's Interest for
repurchase will be required to maintain a minimum
Capital Account balance of $25,000. The Fund reserves
the right to reduce the amount to be repurchased from a
Member so that the required Capital Account balance is
maintained.
The Fund's assets consist primarily of its interest in
the Master Fund, which is held through the Offshore
Fund. Therefore, in order to finance the repurchase of
Interests pursuant to tender offers, the Fund will have
to liquidate all or a portion of its interest in the
Master Fund. The Fund controls the Offshore Fund, and,
because interests in the Master Fund may not be
transferred, the Fund may withdraw a portion of its
interest only pursuant to repurchase offers by the
Master Fund made to the Offshore Fund, and a
distribution from the Offshore Fund to the Fund of the
proceeds. The Fund will not conduct a repurchase offer
for Interests unless the Master Fund simultaneously
conducts a repurchase offer for the Master Fund's
interests. The Master Fund's Board of Directors expects
that the Master Fund will conduct repurchase offers on a
semi-annual basis in order to permit the Fund to meet
its obligations under its repurchase offers. However,
there can be no assurance that the Master Fund's Board
will, in fact, decide to undertake a repurchase offer.
The Fund cannot make a repurchase offer larger than a
repurchase offer made by the Master Fund. The Master
Fund will make repurchase offers, if any, to all of its
investors, including the Fund (through the Offshore
Fund), on the same terms, which may affect the size of
the Master Fund's repurchase offers. Subject to the
Master Fund's investment restriction with respect to
borrowings, the Master Fund may borrow money or issue
debt obligations to finance its repurchase obligations
pursuant to any such repurchase offer.
Allocation of The net profits or net losses of the Fund (including,
Profit and Loss without limitation, net realized gain or loss and the
net change in unrealized appreciation or depreciation of
securities positions) are credited to or debited against
the Capital Accounts of Members at the end of each
fiscal period in accordance with their respective
investment percentages for the period. Each
7
Member's investment percentage is determined by dividing
as of the start of a fiscal period the balance of the
Member's Capital Account by the sum of the balances of
the Capital Accounts of all Members of the Fund.
Eligible Each prospective investor (and Members who subscribe for
Investors additional Interests) will be required to certify that
the Interest purchased is being acquired directly or
indirectly for the account of an "Eligible Investor" as
defined herein. An "Eligible Investor" includes, among
other investors, a person that is: (i) an "accredited
investor" as defined in Regulation D under the
Securities Act; and (ii) a "qualified client" as defined
in Rule 205-3 of the Advisers Act (except as otherwise
determined by the Fund). In addition, because the Fund
is designed for investment primarily by tax-exempt and
tax-deferred investors, investors must qualify as
tax-exempt or tax-deferred for U.S. federal income tax
purposes. The relevant investor qualifications are set
forth in the investor certification that each investor
must sign in order to invest in the Fund, a form of
which appears as Appendix A to this Prospectus.
Investor An investment in the Fund involves a considerable amount
Suitability of risk. It is possible that some or all of an
investor's investment may be lost. Before making an
investment decision, an investor should consider (among
other things): (i) the suitability of the investment
with respect to its investment objectives and personal
situation; and (ii) other factors, including its
personal net worth, income, age, risk tolerance, tax
situation, and liquidity needs. An investor should
invest in the Fund only money that it can afford to
lose, and it should not invest in the Fund money to
which it will need access in the short-term or on a
frequent basis. In addition, all investors should be
aware of how the Fund's investment strategies fit into
their overall investment portfolios because the Fund is
not designed to be, by itself, a well-balanced
investment for a particular investor.
Purchase of The Fund may accept both initial and additional
Interests applications by investors to purchase Interests at such
times as the Fund may determine, subject to the receipt
of cleared funds two business days prior to the
acceptance date set by the Fund. Pending investment in
the Fund, the proceeds of the continuous offering will
be placed in an interest-bearing escrow account by PFPC,
the Fund's escrow agent. After any closing, the balance
in the escrow account, including any interest earned,
will be invested pursuant to the Fund's investment
policies. Initial and subsequent purchases will
generally be accepted monthly. The Fund reserves the
right to reject in its complete and absolute discretion
any application for Interests in the Fund. The Fund
also reserves the right to suspend purchases of
Interests at any time. Generally, the minimum initial
investment in the Fund is $25,000.
Taxes The Fund and the Master Fund intend to operate so that
each will be treated as a partnership for Federal income
tax purposes and not as an association or a "publicly
traded partnership" taxable as a corporation for Federal
income tax purposes. Accordingly, neither the Fund nor
the Master Fund should be subject to federal income tax,
and each Member will be required to report on its own
annual tax return such Member's share of the Fund's
taxable income, gain, or loss. With respect to the
Fund's investments in Investment Funds, see "Taxes --
Investment by Qualified Retirement Plans and Other
Tax-Exempt Investors."
If it were determined that the Fund or the Master Fund
should be treated as an association or a publicly traded
partnership taxable as a corporation, the taxable income
of the Fund would be subject to corporate income tax and
any distributions of profits from the Fund would be
treated as dividends.
The Offshore Fund is classified as a corporation for
Federal income tax purposes.
The Offshore Fund is interposed between the Fund and the
Master Fund and serves as an intermediate entity so that
any unrelated business taxable income ("UBTI") generated
by certain investment activities of the Master Fund,
through the Investment Funds, is not
8
ultimately incurred by a Member. The Offshore Fund is
organized as a Cayman Islands limited duration company.
The Offshore Fund has two members: the Fund, which serves
as the managing member; and the Adviser, which holds only
a nominal, non-voting interest in the Offshore Fund. The
Fund and the Adviser have delegated all management of the
Offshore Fund to the Fund, and the Fund is the managing
member of the Offshore Fund. The Offshore Fund has no
independent investment discretion or other
decision-making capabilities and effectively is
controlled by the Board of the Fund. As a limited
duration company, the Offshore Fund offers its members
limited liability and is treated as a corporation under
the taxation laws of the Cayman Islands and the United
States. Any income received by the Offshore Fund will be
distributed to the Fund as dividend income. UBTI should
therefore not flow through the Offshore Fund to Members
of the Fund. Eligible Investors should therefore not
receive UBTI that would otherwise be taxable income
despite their tax-deferred or tax-exempt status. See
"Taxes."
ERISA Plans and Because the Master Fund, in which the Fund invests
Other Tax-Exempt substantially all of its investable assets through the
Entities Offshore Fund, and the Investment Funds may use
leverage, investors subject to ERISA, and other
tax-exempt entities, including individual retirement
accounts ("IRA") and Keogh Plans, ordinarily could incur
income tax liability to the extent that the Master
Fund's transactions are treated as giving rise to UBTI.
The Fund, however, because of its structure, should not
pass UBTI on to its investors. See "Taxes -- Investment
by Qualified Retirement Plans and Other Tax-Exempt
Investors." The Fund's assets will not be considered to
be "plan assets" for purposes of ERISA's fiduciary
responsibility and prohibited transaction rules or
similar provisions of Section 4975 of the Code.
Term The Fund's term is perpetual unless the Fund is
otherwise terminated under the terms of the Operating
Agreement.
Reports to The Fund will furnish to Members as soon as practicable
Members after the end of each taxable year such information as
is necessary for them to complete Federal and state
income tax or information returns along with any tax
information required by law. The Master Fund does not
expect to receive tax information from Investment Funds
in a sufficiently timely manner to enable the Master
Fund (and, therefore, the Fund) to prepare its
information returns in time for members to file their
returns without requesting an extension of the time to
file from the Internal Revenue Service ("IRS") (or state
taxing agencies). Accordingly, Members should be
prepared to obtain extensions of time to file their
income tax returns. Members are encouraged to consult
with their tax advisers concerning how such delayed
reporting may affect them. The Fund anticipates sending
Members an unaudited semi-annual report and an audited
annual report within 60 days after the close of the
period for which the report is being made, or as
required by the 1940 Act.
Fiscal Year For accounting purposes, the Fund's, the Master Fund's,
and the Offshore Fund's fiscal year is the period ending
on March 31. The Fund's, the Offshore Fund's, and the
Master Fund's taxable year is the period ending December
31.
No broker-dealer, salesperson, or other person is authorized to give an
investor any information or to represent anything not contained in this
Prospectus. As a prospective investor, you must not rely on any unauthorized
information or representations that anyone provides to you. This Prospectus is
an offer to sell or a solicitation of an offer to buy the securities it
describes, but only under the circumstances and in jurisdictions where and to
persons to which it is lawful to do so. The information contained in this
Prospectus is current only as of the date of this Prospectus.
The Investment Funds in which the Master Fund invests may pursue various
investment strategies and are subject to special risks. The Interests will not
be listed on any securities exchange and it is not anticipated that a secondary
market for the Interests will develop. The Interests will also be subject to
substantial restrictions on transferability and resale and may not be
transferred or resold except as permitted under the Operating Agreement of the
Fund and in compliance with federal and state securities laws. The Interests
will
9
not be redeemable at an investor's option nor will they be exchangeable for
interests of any other fund because the Fund is a closed-end investment
company. As a result, an investor may not be able to sell or otherwise
liquidate his or her Interest. The Interests are appropriate only for those
investors who can tolerate a high degree of risk and do not require a liquid
investment.
10
SUMMARY OF FUND EXPENSES
The following table summarizes the aggregate expenses of the Fund, the Offshore
Fund, and the Master Fund and is intended to assist Members and potential
Members in understanding the various costs and expenses that they will bear,
directly or indirectly, by investing in the Fund. Each figure below relates to a
percentage of the Fund's average net asset value at month-end over the course of
a year. The expenses associated with investing in a "fund of funds" such as the
Fund are generally higher than those of other types of funds that do not invest
primarily in other investment vehicles. This is because the members of a fund of
funds also indirectly pay a portion of the fees and expenses, including
performance-based compensation, charged at the underlying Investment Fund level.
These indirect items are not reflected in the following chart or the example
below. The fees associated with an Investment Fund will generally include an
investment management fee ranging from 1% to 3% (annualized) of the average net
asset value of the Master Fund's investment in such Investment Fund, plus
incentive allocations or fees generally ranging from 10% to 25% of net profits
earned by the Investment Fund.
Member Transaction Expenses
Maximum Sales Charge (Load) (as a percentage of 2.50%
the offering price)(1)............................................
Maximum Sales Charge on Reinvested Distributions.................. None
Maximum Early Withdrawal Charge................................... None
Annual Expenses (as a percentage of net assets attributable
to Interests)
Investment Management Fee(2)...................................... 1.00%
Administrative Fee(2)............................................. 0.08%
Other Expenses(3)(4).............................................. 1.26%
Total Annual Expenses............................................... 2.34%
Waivers/Reimbursement (5)........................................... (0.59%)
Net Annual Expenses................................................. 1.75%
Incentive Allocation (6)............................................ 0.82%
Net Annual Expenses and Incentive Allocation........................ 2.57%
---------------
(1) The sales charge is subject to waivers for certain types of
investors. See "Subscription for Interests."
(2) Although neither the Fund nor the Offshore Fund pay any direct
investment management or advisory fee, the Fund and the Offshore
Fund bear, as a result of their investment in the Master Fund,
their allocable portion of the 1.00% Investment Management Fee and
0.08% Administrative Fee charged to the Master Fund. See
"Management of the Fund" and "Fees, Allocations, and Expenses" for
additional information.
(3) Reflects all expected ordinary operating expenses of the Fund, and
the Fund's allocable portion of all expected ordinary expenses of
the Master Fund, other than the Investment Management Fee and the
Administrative Fee. The expenses of the offering of Interests were
amortized over a twelve month period beginning upon commencement of
the Fund's operations and ending September 30, 2005. The
organizational expenses of the Fund, the Offshore Fund, and the
Master Fund were paid by the Adviser. The Offshore Fund is expected
to have minimal expenses, and the Adviser, or an affiliate of the
Adviser, has agreed to bear all operating expenses of the Offshore
Fund.
(4) "Other Expenses" are based on estimated amounts for the current
fiscal year based on amounts incurred in the fiscal year of the
Fund ended March 31, 2006.
(5) Pursuant to the Expense Limitation Agreement, the Adviser has
contractually agreed to waive and/or reimburse the Fund's expenses
to the extent necessary to ensure that the Fund's annualized
11
expenses (excluding the Incentive Allocation, if any) will not
exceed 1.75%. The initial term of the Expense Limitation Agreement
ended on March 31, 2005 and has been renewed for additional
one-year terms now ending on March 31, 2007. Thereafter, the
Expense Limitation Agreement is automatically renewed for each
fiscal year thereafter unless the Adviser provides written notice
to the Fund and the Master Fund of the termination of the Expense
Limitation Agreement at least 30 days prior to the end of the
then-current term.
(6) An Incentive Allocation of 10% of the net profits in excess of the
Hurdle, if any, of the Capital Account of each Member will be made
to the Adviser in respect of such Capital Account with respect to
each Performance Period. The Incentive Allocation will be applied
on a "high water mark" basis such that in the event a Capital
Account incurs a net loss with respect to one Performance Period,
no Incentive Allocation will be made for any subsequent Performance
Period until such net loss is first recovered (taking into account
interim Repurchases, if any).
The following hypothetical example is intended to help you compare the cost of
investing in the Fund with the cost of investing in other funds. The example
assumes that all distributions are reinvested at net asset value and that the
percentage amounts listed under annual expenses remain the same in the years
shown. The tables and the assumption in the hypothetical example of a 5% annual
return are required by regulations of the SEC applicable to all investment
companies; the assumed 5% annual return is not a prediction of, and does not
represent, the projected or actual performance of the Interests. The examples
reflect allocation by the Fund to the Adviser of the Incentive Allocation, which
is calculated based on the assumed 5% annual return and an assumed 91-day
Treasury bill rate of 3.624%. The Incentive Allocation depends on the Fund's
future net capital appreciation exceeding the Hurdle. Given the uncertainty of
the Fund's future net capital appreciation and the fluctuating nature of the
Hurdle, the Fund could make an Incentive Allocation that is higher or lower than
the Incentive Allocation that has been calculated based on the foregoing
assumptions for the purpose of inclusion in the example below. See "Fees,
Allocations, and Expenses" for a more complete description of the Fund's costs
and expenses.
The following example should not be considered a representation of past or
future expenses, because actual expenses may be greater or less than those
shown.
Example
1 YEAR 3 YEARS(2) 5 YEARS(2) 10 YEARS(2)
------ ---------- ---------- -----------
You would pay the following expenses on a $1,000
investment, assuming a 5% annual return(1)..... $43 $80 $131 $273
(1) Actual expenses may be higher or lower than the amounts shown in the fee
table and, consequently, the actual expenses incurred by an investor may
be greater or less than the amounts shown in the Example.
(2) The expenses listed for the three-, five-, and ten-year periods are based
on the Fund's total operating expenses for the last fiscal year without
taking into account the Expense Limitation Agreement. There is no
guarantee that the Expense Limitation Agreement will remain in effect
during these periods. If the Expense Limitation Agreement remains in
effect, however, the actual expenses that will ultimately be borne by the
Fund during these periods will be lower than those listed in this Example
to the extent the Fund's expenses exceed the expense limitation then in
place.
12
FINANCIAL HIGHLIGHTS
The table below sets forth selected financial information that has been derived
from the financial statements in the Fund's Annual Report, for the fiscal year
ended March 31, 2006. The information in the table below has been audited by
PricewaterhouseCoopers LLP, independent registered public accounting firm. The
report of the independent registered public accounting firm for the year ended
March 31, 2006 is contained in the Fund's Annual Report dated as of March 31,
2006. A free copy of the Annual Report may be obtained by calling
1-888-262-0695.
Period From October 1, 2004
(commencement of operations)
Year Ended March 31, 2006 Through March 31, 2005
------------------------- ----------------------
Ratios to average net assets:
Net investment loss (a) (b) (c) (1.57%) (1.67%)
Net expenses (a) (b) (c) 1.75% 1.75%
Incentive allocation 0.82% 0.58%
----------------------------------------------------------------------
Net expenses and incentive allocation 2.57% 2.33%
Total return 11.18% 5.04%
Incentive allocation (0.70%) (0.20%)
----------------------------------------------------------------------
Total return net of incentive allocation 10.48% 4.84%
Portfolio turnover rate 39% 3%
Members' capital, end of period (thousands) $70,865 $29,173
(a) Annualized for periods of less than one year.
(b) The Adviser waived and/or reimbursed $322,273 of fees and expenses for
the fiscal year ended March 31, 2006. The net investment loss ratio would
have been 0.59% greater and the total expense ratio would have been 0.59%
greater had these fees and expenses not been waived and/or reimbursed by
the Adviser. The Adviser waived and/or reimbursed $349,691 of fees and
expenses for the six month period ended March 31, 2005. The net
investment loss ratio would have been 3.57% greater and the total expense
ratio would have been 3.57% grater had these fees and expenses not been
waived and/or reimbursed by the Adviser.
(c) Expense ratios for the underlying Investment Funds are not included in
the expense ratio.
The above ratios and total returns are calculated for all Members taken as a
whole. An individual investor's return may vary from these returns based on the
timing of capital contributions.
13
USE OF PROCEEDS
The proceeds of the offering, excluding the amount of any sales charges paid by
investors and net of the Fund's ongoing fees and expenses, will be invested by
the Fund in the Offshore Fund, and then by the Offshore Fund in the Master Fund,
and by the Master Fund in Investment Funds, in accordance with the Fund's, the
Offshore Fund's, and the Master Fund's investment objective and strategies as
soon as practicable after each month-end closing of the offering. Such proceeds
will be invested together with any interest earned in the Fund's escrow account
prior to such closing.
Pending the investment of the proceeds from the sale of Interests in Investment
Funds pursuant to the Fund's, the Offshore Fund's, and the Master Fund's
investment objective and strategies, the Master Fund may invest a portion of the
proceeds of the offering that is not invested in Investment Funds, which may be
a substantial portion of the proceeds of the offering, in short-term, high
quality debt securities, money market funds, or other cash equivalents. In
addition, the Fund and the Master Fund may maintain a portion of the proceeds in
cash to meet operational needs. The Master Fund may be prevented from achieving
its objective during any time in which the Master Fund's assets are not
substantially invested in accordance with its principal investment strategies.
THE FUND'S STRUCTURE
The Fund, a registered, closed-end, non-diversified, management investment
company, invests substantially all of its investable assets in the Offshore
Fund, which in turn invests substantially all of its assets in the Master Fund.
The Master Fund is a separate, registered, closed-end, non-diversified,
management investment company with the same investment objectives as the Fund
and the Offshore Fund. The Board does not believe that this multi-level
structure provides the Fund with any economic or administrative benefit.
However, the Board believes that the fees and expenses of the Fund incurred
under its current structure would be substantially the same whether the Fund
invested in the Master Fund via the Offshore Fund, invested in the Master Fund
directly, or invested directly into Investment Funds.
The Offshore Fund is not registered under the 1940 Act. The Offshore Fund serves
as a conduit entity through which the Fund invests in the Master Fund, and has
no investment or other discretion over its assets. The Offshore Fund serves as
an intermediate entity whereby UBTI generated by the investment activities of
the Master Fund (and the Investment Funds) should not be ultimately incurred by
a Member. The Offshore Fund is organized under the laws of the Cayman Islands as
a limited duration company, and, accordingly, may generally only carry on
activities in the Cayman Islands in furtherance of its non-Cayman Islands
activities. The Offshore Fund has a duration of 30 years and has two members:
the Fund, which serves as the managing member; and the Adviser, which holds only
a nominal voting interest in the Offshore Fund. All day-to-day management
responsibilities of the Offshore Fund are controlled by the Fund. Therefore, all
decisions involving the Offshore Fund are effectively controlled by the Fund's
Board.
The Fund may redeem all of its assets from the Offshore Fund and, therefore, the
Master Fund, if the Board determines it is in the best interests of the Fund to
do so. If the Fund so withdraws, the Board would consider what action might be
taken, including investing the assets in the Fund, via the Offshore Fund, into
another pooled investment entity, or retaining the Adviser to invest the Fund's
assets directly in accordance with its investment objectives.
The structure of the Fund is designed to permit certain sophisticated, high net
worth tax-exempt and tax-deferred investors to participate in the risks and
benefits of an investment in Investment Funds without requiring the high minimum
capital contribution requirements that are required by the Investment Funds
themselves. The Fund also provides such investors with access to the Master Fund
without incurring any UBTI, through the Fund's investment in the Offshore Fund.
Subject to obtaining any required regulatory approval, the Fund may determine to
invest its assets directly in non-U.S. Investment Funds that are classified as
"passive foreign investment companies" ("PFICs") for U.S. federal income tax
purposes. The Fund may pursue such an investment approach only if it believes
that it could avoid generating UBTI by making such investments and the approach
is approved by the Fund's Board of Directors. The Fund will provide Members with
at least 90 days' notice before implementing such a change.
14
INVESTMENT OBJECTIVES, METHODOLOGY, AND POLICIES
Investment Objectives
The Fund's, the Offshore Fund's, and the Master Fund's investment objective is
to generate long-term capital appreciation. The Fund attempts to achieve its
investment objective by investing substantially all of its investable assets in
the Offshore Fund, which has the same investment objectives as the Fund. The
Offshore Fund in turn invests all or substantially all of its investable assets
in the Master Fund, which in turn invests substantially all of its assets,
either directly or indirectly, in approximately 50 to 100 Investment Funds to be
managed pursuant to various alternative or non-traditional investment
strategies, which may be viewed as encompassing four broadly defined primary
categories: Relative Value; Event Driven; Equity Long/Short; and Global Macro.
The actual number of Investment Funds is determined in the absolute discretion
of the Adviser. There can be no assurance that the Fund will achieve its
investment objective or avoid substantial losses. The Fund's investment
objective may be changed by the Fund's Board without the vote of a majority of
the Fund's outstanding voting securities. Notice will be provided to Members
prior to any such change.
Investment Process in General
The Adviser employs a two-step process in structuring the Master Fund's
portfolio. First, the Adviser determines an allocation for the Master Fund's
assets across the universe of potential hedge fund strategies, seeking to
achieve a portfolio composition that demonstrates volatility that is lower than
the broad-based equity market, as measured by the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500"), and returns that show little
correlation to either the S&P 500 or the broad-based bond market, as measured by
the J.P. Morgan Global Bond Index, U.S. Traded Segment. The Adviser currently
views the universe of hedge fund strategies as encompassing the following four
primary categories: Relative Value; Event Driven; Equity Long/Short; and Global
Macro. Within these broad primary categories there are a number of underlying
investment management strategies ("Management Strategies"). See "The Hedge Fund
Universe." Using data categorizing and analyzing the historical returns of
select managers within each Management Strategy, the Adviser employs a number of
quantitative modeling techniques in conjunction with fundamental research
analysis to ascertain an optimized allocation of Master Fund assets among
primary categories and underlying Management Strategies.
Second, the Adviser identifies and evaluates potential investments based on
specific quantitative, qualitative, and due diligence criteria. Upon completion
of its review, the Adviser selects appropriate Investment Funds. The Master Fund
may invest in Investment Funds either directly or indirectly by purchasing a
structured note or other derivative instrument linked to such Investment Fund (a
"Structured Investment").
To the extent permitted by applicable regulations or as expressly provided in
this Prospectus, none of the name of the Fund, the Offshore Fund, or the Master
Fund, any aspect of the Fund's, the Offshore Fund's, or the Master Fund's
investment program, or the portfolio allocation range described below will be a
fundamental investment policy of the Fund, and each can be changed by the Fund's
Board without Member approval. In the event of such a change, Members would
receive prior notice. The Investment Funds in which the Master Fund invests may
pursue various investment strategies and are subject to special risks. See
"Principal Risk Factors, Types of Investments, and Investment Strategies of the
Investment Funds."
The Master Fund may seek exemptive relief from the SEC to the extent necessary
to permit it to pursue its investment program by investing in Investment Funds
through one or more investment vehicles that are affiliated with the Fund or the
Adviser. There can be no assurance that such relief will be granted.
Asset Allocation and Optimization
The Adviser's asset allocation and optimization process utilizes a number of
quantitative modeling techniques in conjunction with an in-depth fundamental
analysis of the historical returns and the outlook associated with each of the
Management Strategies. The Adviser considers the performance characteristics
associated with each Management Strategy and their relationship/correlation to
the broader markets. The Adviser utilizes this analysis to derive specific
assumptions regarding the persistency of the return, risk, and correlation
relationships that it
15
perceives to exist within the Management Strategies to develop an asset
allocation. These assumptions may, and likely will, change over time.
In addition to quantitative data, the Adviser's optimization process allows for
the consideration of a qualitative forecast of developing market trends. While
historical data plays a role in the asset allocation and optimization process,
the Adviser also considers forward-looking assessments of future return, risks,
and correlations between groups of assets. The Adviser's forward-looking
expectations with respect to return, risk, and correlation may result in changes
in the Master Fund's asset allocation. By considering developing market trends,
the Adviser's allocation process attempts to safeguard against the potential for
over-reliance on historical patterns and further attempts to produce allocations
that may be better suited to perform in changing market conditions.
The asset allocations to each Management Strategy are reviewed by the Adviser
with specific Investment Fund data to assess whether the actual performance
characteristics generated by the optimization process and the allocation
characteristics originally arrived at using the Management Strategies data are
comparable. While it is generally intended for the Master Fund to allocate
assets among all of the Management Strategies, the Master Fund may not
necessarily invest in each of the primary categories or Management Strategies.
There can be no assurance that actual results achieved by the Master Fund will
meet these objectives or otherwise conform to any anticipated results derived
from the optimization process.
Investment Fund Selection Process
The Adviser identifies and selects Investment Funds representative of the
Management Strategies in accordance with the Adviser's due diligence process.
The Adviser's quantitative consideration of potential investments undertakes a
variety of analyses to evaluate prospective Investment Funds. Quantitative
considerations may include an analysis of each Investment Fund's return, risk
(the standard deviation of the Investment Fund's return), drawdowns (any period
during which a prospective Investment Fund's value is below its previous highest
value; that is, any period during which it has suffered a loss), and
correlations (the statistical relationship between a prospective Investment
Fund's return and the return of other Investment Funds or certain markets) on
both an individual basis and relative to its Management Strategy and to the
broader markets. In addition, to the extent available, the Adviser considers
certain historical portfolio information (including performance attribution,
which is identifying the specific factors and positions that contributed to a
portfolio's performance) for each prospective Investment Fund. The Adviser uses
the results of each of its quantitative analyses to identify potential
Investment Fund candidates in each of the Management Strategies.
The potential Investment Funds identified through quantitative analysis are then
evaluated on the basis of certain qualitative and due diligence criteria.
Qualitative considerations include organizational profile, growth of assets
under management, quality and experience of key investment personnel, quality of
administrative systems, and quality of support staff, as well as a document
review and a consideration of various portfolio oversight mechanisms employed by
the Investment Fund.
Generally, an Investment Fund should (i) be generally representative of a
particular Management Strategy, (ii) be open for investment and meet certain
liquidity standards, (iii) have at least one year of performance history, (iv)
have annually audited returns, and (v) have at least $20 million in net assets.
The Adviser may waive or vary any of these guidelines in its discretion. For
example, if the Adviser determines that the manager of a potential Investment
Fund has comparable investment experience of more than one year with another
hedge fund, it may determine to invest the Master Fund's assets in such
Investment Fund regardless of the fact that such Investment Fund does not have
one year of audited performance history. To the extent the Adviser accesses an
Investment Fund through a Structured Investment, it may vary its liquidity
standards.
The Master Fund intends generally to limit investments in any one Investment
Fund in its portfolio to no more than 10% of the Master Fund's assets.
Prior to any investment by the Master Fund, the Adviser generally conducts an
on-site due diligence session with the principals and staff of the investment
manager of each Investment Fund with the objective of obtaining a better
understanding of the thought process being employed by the Investment Fund's
manager and ensuring that the manager's investment process is consistent with
the relevant Management Strategy. Topics discussed during an on-
16
site due diligence session generally include, but are not limited to: (1) the
investment background and philosophy of the investment manager's principals;
(2) the investment manager's rationale behind historical and current portfolio
positions; (3) an Investment Fund's service provider relationships; and (4) an
Investment Fund's audited financial statements, if available.
Investment Fund Investment Process
The Master Fund typically invests directly in an Investment Fund by subscribing
to purchase such Investment Fund's ownership interests. There are certain
instances, however, where an Investment Fund may not be open or available for
direct investment by the Master Fund. Such an instance may arise, for example,
where the Master Fund's proposed allocation does not meet an Investment Fund's
investment minimum or when an Investment Fund is closed to new investments. On
occasions where the Adviser determines that a Structured Investment is the most
effective or efficient means of gaining exposure to an Investment Fund, the
Master Fund may purchase such a Structured Investment, which may involve the
purchase by the Master Fund of a structured note or the entering into by the
Master Fund of a swap or other contract paying a return approximately equal to
the total return of an Investment Fund. In each case, a counterparty would agree
to pay the Master Fund a return determined by the return of the Investment Fund,
in return for consideration paid by the Master Fund equivalent to the cost of
purchasing an ownership interest in the Investment Fund. A structured note with
interest or principal payments indexed to the return of a referenced Investment
Fund would substitute a contractual commitment running from the counterparty to
the Master Fund for direct ownership by the Master Fund of a share of the
Investment Fund. Similarly, a swap structure could provide a return equivalent
to direct investment in an Investment Fund by establishing a contractual
obligation on the part of the counterparty to pay the Master Fund a return
equivalent to the return that would have been obtained by direct investment in
the Master Fund. Indirect investment through an indexed security, swap, or
similar contract in an Investment Fund carries with it the credit risk
associated with the counterparty.
Deutsche Bank AG and any affiliate investing in the Master Fund may be subject
to the provisions of the United States banking laws and regulations and various
other laws and regulations applicable to banks and bank holding companies
generally, including the Bank Holding Company Act of 1956, as amended. Such laws
and regulations, among other things, impose restrictions on the types and
amounts of investments that the Master Fund may make and on the type of
activities in which the Master Fund may engage. In order to comply with such
laws and regulations, the Master Fund may be required to structure its
investment in an Investment Fund in a manner that limits the Master Fund's
ownership for such Investment Fund's voting interests and non-voting equity
interests to prescribed levels.
Monitoring Investment Fund Performance
The Adviser maintains periodic contact with each Investment Fund in which the
Master Fund invests. The Adviser regularly monitors the returns of each
Investment Fund in its portfolio in an effort to evaluate whether its return
pattern is consistent with the expected return pattern for that Management
Strategy. The Adviser also uses various proprietary statistical techniques
developed by it in considering whether an Investment Fund's performance is
attributable to underlying market performance or represents the Investment Fund
portfolio manager's added-value. The expected return of each Investment Fund is
modeled as a function of performance data and Management Strategy. If any
Investment Fund's returns fall outside the confidence limits established by the
Adviser, a formal review of the Investment Fund will be carried out by the
Adviser. As a general matter, Investment Fund managers with statistical evidence
of consistent added-value are favored over portfolio managers whose records do
not provide such evidence. In addition, the Adviser may periodically, to the
extent that it deems necessary, examine each Investment Fund's actual holdings
(to the extent this information is available) in order to confirm that the
Investment Fund continues to conform to its particular Management Strategy.
In managing the Master Fund, the Adviser may utilize portfolio construction
models which consider various proposed attributes of the Master Fund, including
the Master Fund's investment objective, investment limitations, and other
factors, including a proposed number of Investment Funds in which the Adviser
would propose to invest the Master Fund's assets or the proposed allocation of
the Master Fund's assets among the Management Strategies or in any one
Investment Fund. The Master Fund may not be able to maintain any certain number
of Investment Funds in its portfolio at all times or any specific allocation of
its assets in any single Investment Fund. In particular, the proceeds from the
sale of Interests may not be invested in Investment Funds immediately upon
receipt of the
17
proceeds by the Master Fund. Pending each month-end closing, the proceeds will
be placed in an interest-bearing escrow account and will not be invested by the
Master Fund until after such closing.
Leverage
In effecting the Master Fund's investment strategies, the Master Fund may, but
does not currently intend to, leverage its investments in Investment Funds. In
addition, the Master Fund may engage in borrowing from a credit line or other
credit facility in order to meet repurchase requests, for bridge financings of
investments in Investment Funds, or for cash management purposes. The Master
Fund may choose to engage in such leveraging of its investment because it
believes it can generate greater returns on such borrowed funds than the cost of
borrowing. However, there is no assurance that returns from borrowed funds will
exceed interest expense. Borrowings will be subject to a 300% asset coverage
requirement under the 1940 Act. Borrowings by Investment Funds are not subject
to this requirement. Short-term borrowings for the purpose of meeting repurchase
requests, for bridge financing of investments in Investment Funds, or for cash
management purposes will not be considered the use of investment leverage, and
will not be subject to the above asset coverage requirement. Many Investment
Fund managers also use leverage in their investment activities through
purchasing securities on margin and through selling securities short. Investment
Fund managers may also use leverage by entering into total return swaps or other
derivative contracts as well as repurchase agreements whereby the Investment
Fund manager effectively borrows funds on a secured basis by "selling" portfolio
securities to a financial institution for cash and agreeing to "repurchase" such
securities at a specified future date for the sales price paid plus interest at
a negotiated rate. Certain Investment Fund managers also trade futures, which
generally involve greater leverage than other investment activities due to the
low margin requirements associated with futures trading.
Cash Reserves
The Adviser is not required to allocate all the Master Fund's assets to
Investment Funds and may maintain such cash reserves as it may from time to time
deem to be appropriate for defensive purposes, to fund future allocations, or to
pay operating costs. The Adviser may invest and manage such cash reserves in
Treasury securities, money market funds, bank deposits, and similar short-term
instruments or accounts. If the Adviser allocates some of the Master Fund's
assets to a money market fund or similar investment, the Master Fund will bear
the standard management fees and costs and expenses of such money market fund in
addition to the fees and expenses payable at the Master Fund level.
18
THE HEDGE FUND UNIVERSE
The following is an overview of the strategies that may used by the Investment
Funds in which the Master Fund may invest. The Adviser currently views the
universe of hedge funds as generally encompassing the following primary
categories: Relative Value; Event Driven; Equity Long/Short; and Global Macro.
Within each of these broad primary categories are a number of underlying
Management Strategies. The Master Fund may not allocate assets to all of the
primary categories or Management Strategies.
-----------------
| Hedge Fund |
| Universe |
| |
-----------------
|
|
|
--------------------------------------------------------------------------------------------------------------------
| | | |
| | | |
----------------- ----------------- | -----------------
| Relative Value | | Event Driven | ----------------- | Global Macro |
| Category | | | | Long/Short | | Category |
| | | | | Category | | |
----------------- ----------------- ----------------- -----------------
| - - | | |
| - - | | |
| - - | | |
-------------- - -------------- - -------------- --------------- ---------------
| Convertible | | Multi- | | Multi-Event | | | | |
| Arbitrage | | Strategy/ | | | | Opportunistic | | Discretionary |
| | | | --------------| | | | |
-------------- -------------- | --------------- ---------------
| | | |
| | | |
| | | |
--------------- --------------- --------------- ---------------
| Fixed | | Bankruptcy/ | | Global | | |
| Income | | Distressed | | International | | Systematic |
| Arbitrage | | | | | | |
--------------- --------------- --------------- ---------------
| |
| |
| |
--------------- ---------------
| Quantitative | | Short |
| Market Neutral| | Biased |
| Equity | | |
--------------- ---------------
|
|
|
---------------
| Sector |
| Specific |
| |
---------------
Relative Value Category
Relative Value strategies generally seek to produce returns without taking on
specific market exposures. Managers employing Relative Value strategies seek to
achieve attractive risk-adjusted returns through the use of both long and short
positions in fixed income and/or equity instruments, attempting to exploit
pricing inefficiencies that occur in the markets from time to time. Relative
Value strategies may or may not utilize leverage. The Relative Value category is
composed of the following Management Strategies: Convertible Arbitrage; Fixed
Income Arbitrage; and Quantitative Market Neutral Equity. In addition, certain
managers may utilize a multi-strategy approach as described below in "Event
Driven Category".
Convertible Arbitrage Strategies. Managers utilizing Convertible Arbitrage
strategies analyze convertible bonds and warrants across the globe to take
advantage of opportunities presented by market and information inefficiencies.
Convertible Arbitrage managers seek to monetize such opportunities through the
use of both fundamental analysis of the issuing companies and quantitative
option and security valuation techniques. Convertible Arbitrage managers
generally engage in short selling, options hedging, and other arbitrage
techniques to capture price differentials found in the convertible securities
and warrants in which they invest. As a general matter, these managers are long
the convertible bond and short a percentage (known as the delta amount) of the
underlying stock. While most
19
Convertible Arbitrage managers attempt to capture a perceived mispricing of the
option component of a convertible security, Convertible Arbitrage managers may
also look for mispricing of the underlying credit of the issuing company.
Convertible Arbitrage managers may periodically utilize a significant amount of
leverage.
Fixed Income Arbitrage Strategies. Managers utilizing Fixed Income Arbitrage
strategies analyze a variety of fixed income securities across several markets.
Fixed Income Arbitrage managers may look to capture changes in the shape of a
country's yield curve (the spread or difference in yield between different
maturities of an issuer; e.g., two-year U.S. Treasury Notes versus ten-year U.S.
Treasury Notes) or the relationship spread between the fixed income securities
of two different countries (e.g., yield curves on five-year German bonds versus
five-year U.S. Treasury Notes). Trading strategies also may be structured to
capture expected changes in credit spreads, such as the difference between the
yield on a specific company's debt and the yield on U.S. Treasury securities
(e.g., sell a company's bond and buy a Treasury security), or credit spreads
within a specific company's capital structure (e.g., buy a company's senior debt
and sell short its subordinated debt or equity). Fixed Income Arbitrage managers
may also focus on mortgage and mortgage-related securities. Fixed Income
Arbitrage managers tend to utilize significant amounts of leverage and take both
long and short positions and employ options, futures, and other derivative
strategies.
Quantitative Market Neutral Equity Strategies. Managers utilizing Quantitative
Market Neutral Equity strategies seek to generate capital appreciation and
absolute returns through a portfolio of investments that is generally
anticipated to be net flat or "market neutral." Quantitative Market Neutral
Equity strategies seek to exploit price discrepancies that a Quantitative Market
Neutral Equity manager believes exist between individual securities or sectors.
These managers primarily establish both long and short positions and tend to
utilize leverage. Under most circumstances, Quantitative Market Neutral Equity
managers will attempt to maintain a net zero exposure (i.e., gross long
positions less gross short positions equal zero); however, gross long and short
positions may be significantly large. In most cases, Quantitative Market Neutral
Equity managers have high portfolio turnover. The Quantitative Market Neutral
Equity strategy relies heavily on models that primarily seek to identify and
take advantage of the relative price movements between specific securities. Some
Quantitative Market Neutral Equity managers incorporate subjective investment
decisions that are based on fundamental analysis when selecting pairs of
securities to be held long and short. These opportunities may result from
changes in the valuations of specific companies or sectors. For example, if two
stocks with similar fundamentals in a given industry have diverged from their
historical price relationship, the manager may acquire long positions in the
underpriced stock and short the overpriced stock with the intention of unwinding
the positions when the historical price relationship returns.
Event Driven Category
Event Driven strategies generally seek to produce returns based on anticipated
outcomes of company specific or transaction specific situations. Investment Fund
managers employing Event Driven strategies attempt to capture an underlying
change in value based on a particular event, such as a corporate merger,
corporate restructuring, or pending bankruptcy. Event Driven managers typically
invest either long or short (or both), and tend to have a directional bias. The
Event Driven category is composed of two Management Strategies: Multi-Event
(formerly Merger/Risk Arbitrage) and Bankruptcy/Distressed. In addition, certain
managers may utilize a Multi-Strategy/Rotational Strategies approach, which
often combines Multi-Event, Bankruptcy/Distressed, event driven, Equity
Long/Short, and/or capital structure arbitrage strategies.
Multi-Event Strategies. Managers utilizing Multi-Event (formerly Merger/Risk
Arbitrage) strategies seek to profit by realizing price differentials that they
perceive exist between the current market price of a security and its expected
future value based upon the occurrence of a specific event. Multi-Event
transactions typically involve the purchases or sales of securities in
connection with announced corporate actions which may include, but are not
limited to, mergers, consolidations, acquisitions, transfers of assets, tender
offers, exchange offers, re-capitalizations, liquidations, divestitures,
spin-offs, and similar transactions. The portfolios are generally actively
traded and may exhibit a high rate of turnover. Multi-Event managers may
periodically utilize leverage and may enter into swaps and other similar
financial contracts in an effort to increase portfolio returns. Multi-Event
managers generally engage in short selling, options hedging, and other arbitrage
techniques to capture price differentials. Multi-Event managers may from time to
time take positions in the securities of companies not currently involved in
announced transactions, but that are believed to be undervalued and likely
candidates for future
20
corporate actions. Multi-Event managers may also invest in risk arbitrage,
distressed opportunities, equity restructurings, reorganizations, spin-offs,
and share class arbitrage.
Bankruptcy/Distressed Strategies. Managers utilizing Bankruptcy/Distressed
strategies generally invest in the securities of financially troubled companies
(companies involved in bankruptcies, exchange offers, workouts, financial
reorganizations, and other special credit event-related situations). These
investment strategies may seek to identify distressed securities in general or
focus on one particular segment of the market (such as the senior secured debt
sector or the equity portion of distressed companies). Investments may be
acquired passively in the secondary market, acquired through participation in
merger and acquisition activity, or acquired with a view toward actively
participating in a re-capitalization or restructuring plan.
Bankruptcy/Distressed managers may actively attempt to modify or improve a
restructuring plan with the intent of improving the value of such securities
upon consummation of a restructuring. Additionally, they may take an active role
and seek representation in management on a board of directors or a creditors'
committee. In order to achieve these objectives, the manager may purchase, sell,
exchange, or otherwise deal in and with restricted or marketable securities
including, without limitation, any type of debt security, preferred or common
stock, warrants, options, and hybrid instruments. A significant portion of a
Bankruptcy/Distressed manager's portfolio may be invested in restricted
securities that may not be registered and for which a market may not be readily
available, and therefore a significant portion of the portfolio may not be
freely traded. Investments may involve both U.S. and non-U.S. entities and may
utilize leverage. Information about specific investments may be limited, thereby
reducing the manager's ability to monitor the performance and to evaluate the
advisability of continued investments in specific situations.
Multi-Strategy/Rotational Strategies. Managers utilizing a
Multi-Strategy/Rotational Strategies approach generally engage in a broad range
of arbitrage strategies across three primary markets: (i) long and short
positions in equity markets; (ii) U.S. and international positions in investment
grade and non-investment grade fixed income securities; and (iii) special
situations arising from anomalies in the global securities markets. These
managers may also seek to take advantage of any number of different event driven
opportunities. In addition to corporate actions referenced above under
Multi-Event Strategies events may involve corporate actions, credit events,
political events, or other situations that may have an effect on the value of
the securities or financial instruments traded by the Multi-Strategy/Rotational
Strategies manager. Multi-Strategy/Rotational Strategies managers generally seek
to profit by realizing the price differentials that they perceive exist between
equivalent or nearly equivalent securities or between the current market price
of a security and its expected future value based on the occurrence of a
specified event. Investments may involve both U.S. and non-U.S. markets and may
utilize significant amounts of leverage. Multi-Strategy/Rotational Strategies
managers employ both long and short strategies, warrant and option arbitrage and
hedging strategies, inter- and intra-market spread trading, futures, options,
and currency trading.
Equity Long/Short Category
Equity Long/Short strategies generally seek to produce returns from investments
in the global equity markets. These strategies are generally focused on absolute
returns, and the trades implemented in the strategy generally capitalize on the
investment manager's views and outlooks for specific equity markets, regions,
sectors, and securities. While these strategies involve both long and short
positions in various equity securities, the strategies will generally represent
a specific directional view. However, unlike traditional equity funds, the
directional view relates less to the absolute direction of the market and more
toward the specific positions (longs versus shorts) held within a portfolio. In
addition to making shifts in markets, regions, sectors, and securities, managers
have the flexibility to shift from a net long to a net short position, but in
general will maintain net long exposure. An exception is for those managers that
are classified as Short-Biased, which will in general maintain a net short
exposure. The Equity Long/Short category is composed of four Management
Strategies: Opportunistic; Global-International; Sector Specific; and
Short-Biased.
Opportunistic Strategies. Managers utilizing Opportunistic strategies seek to
generate capital appreciation through a portfolio of investments representing a
variety of U.S. equity strategies. These managers primarily establish both long
and short positions in U.S. equity securities and may utilize leverage. Under
most circumstances, such managers will maintain net long market exposures. The
degree to which different managers maintain net long positions will vary. The
more opportunistic managers within the strategy generally maintain net long
positions of 20% to 80%; however, they may be net short from time to time. The
more long-biased managers within the strategy generally maintain net long
positions of 50% to 150%. In both cases, gross positions may be significantly
larger.
21
Managers within this strategy seek to profit by establishing both long and
short positions in specific equity situations with an objective of
outperforming the U.S. equity markets on a risk-adjusted and absolute basis.
These managers utilize the cash and derivatives markets, and may utilize
leverage when establishing positions. Their investments may be highly
concentrated and may lack liquidity. In most cases, Opportunistic managers tend
to trade positions within their portfolio actively, which results in high
levels of portfolio turnover.
Global-International Strategies. Managers utilizing Global-International
strategies seek to generate capital appreciation through a portfolio of
investments representing a variety of globally oriented strategies. These
strategies may include positions in the cash, futures, and forward markets.
These managers employ such approaches as long/short strategies, warrant and
option arbitrage, hedging strategies, inter- and intra-market equity spread
trading, futures, options, and currency trading, and emerging markets and other
special situation investing. Trading positions are generally held both long
and/or short in both U.S. and non-U.S. markets. Global-International managers
may assume aggressive investment postures with respect to position
concentrations, use of leverage, and various instruments used, and typically
have high levels of portfolio turnover.
Sector Specific Strategies. Managers utilizing Sector Specific strategies seek
to generate capital appreciation through a portfolio of investments representing
a specific market sector or sectors. For example, a manager may focus on
technology or bio-tech companies. Managers may define their specific strategy
more broadly, for example, healthcare and life sciences or "TMT" (technology,
media, and telecommunications). These managers may establish both long and short
positions in equity securities and may utilize leverage. Investments may be in
both U.S. and non-U.S. companies. Although these managers tend to maintain net
long market exposures, the degree to which different managers maintain net long
positions will vary, and managers may also be net short from time to time. These
managers utilize the cash and derivatives markets, and may utilize leverage when
establishing positions. Their investments may be highly concentrated and may
lack liquidity. In most cases, Sector Specific managers will tend to trade
positions within their portfolio actively, which results in high levels of
portfolio turnover.
Short-Biased Strategies. Managers utilizing Short-Biased strategies seek to
produce absolute returns from portfolios that are generally net short; however,
these managers may hold long positions as well. Positions may or may not involve
the use of leverage, and managers tend to have a high level of portfolio
turnover and may maintain concentrated positions. Short-Biased managers attempt
to capitalize from price declines in specific equity securities. Short-Biased
managers primarily focus on identifying overvalued securities that have either
deteriorating fundamentals or a catalyst that will result in a negative price
movement for the stock. These managers seek positive returns regardless of
market direction. Short-Biased managers tend to achieve better results in
bearish markets.
Global Macro Category
Global Macro strategies generally focus on macro-economic opportunities across
numerous markets and instruments. Investments may be either long or short in
cash securities, futures contracts, derivative contracts, or options, and may be
in equities, fixed income markets, currencies, or commodities (e.g.,
agricultural, metals, energy). This category is composed of two major Management
Strategies: Discretionary Strategies; and Systematic Strategies.
Discretionary Strategies. Managers utilizing Discretionary Global Macro
strategies seek to profit by capturing market moves throughout a broad universe
of investment opportunities. These opportunities include financial markets, such
as global equity, currency, and fixed income markets, as well as non-financial
markets, such as the energy, agricultural, and metals sectors. These managers
utilize a combination of fundamental market research and information in
conjunction with quantitative modeling to identify opportunities that exist
within the markets. While the markets they invest in may be diverse, these
managers may hold more concentrated positions in a limited number of markets at
any one time. Positions may be long and short in different markets, and the
managers tend to employ leverage.
Systematic Strategies. Managers utilizing Systematic Global Macro strategies
utilize proprietary models to identify opportunities that exist within a diverse
group of financial and non-financial markets and establish positions based on
the models. While subjective investment decisions occasionally can be made, such
decisions tend to be the result of a heavier reliance upon models than is the
case with discretionary strategies. Managers employing Systematic
22
strategies tend to hold positions in several markets at the same time, may be
both long and short, and tend to use margin when establishing positions.
PRINCIPAL RISK FACTORS RELATING TO THE FUND'S STRUCTURE
All investments involve the risk of the loss of capital. No guarantee or
representation is made that the Fund, the Offshore Fund, or the Master Fund will
achieve their investment objectives. The Investment Funds in which the Master
Fund may invest may purchase certain instruments or utilize certain investment
techniques that carry specific risks. Accordingly, an investment in the Fund
involves considerations and risk factors that prospective investors should
consider before investing.
THE PAST RESULTS OF THE FUND, THE MASTER FUND, AND THE INVESTMENT FUNDS SELECTED
FOR THE MASTER FUND ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. NO
ASSURANCE CAN BE MADE THAT PROFITS WILL BE ACHIEVED OR THAT SUBSTANTIAL LOSSES
WILL NOT BE INCURRED. THE FUND IS NOT A COMPLETE INVESTMENT PROGRAM AND SHOULD
REPRESENT ONLY A PORTION OF AN INVESTOR'S PORTFOLIO MANAGEMENT STRATEGY.
The following discussion of the principal risk factors does not purport to be an
exhaustive list or a complete explanation of all of the risks involved in an
investment in the Fund. An investment in the Fund should only be made after
consultation with independent qualified sources of investment and tax advice.
The following are the principal risk factors that relate to the operations and
structure of the Fund. The investments of the Investment Funds in which the
Master Fund invests are also subject to special risks.
Limited Operating History
Each of the Fund, the Offshore Fund, and the Master Fund is recently formed and
has a limited operating history. In any event, past performance is not
necessarily indicative of future results, and there can be no assurance that the
Fund, the Offshore Fund, or the Master Fund will meet their investment
objectives.
Closed-end Fund; Limited Liquidity; Interests Not Listed; Repurchases of
Interests
The Fund is a closed-end, non-diversified, management investment company
designed primarily for long-term investment and is not intended to be a trading
vehicle. Investors should not invest in the Fund if they need a liquid
investment. Closed-end funds differ from open-end management investment
companies (commonly known as mutual funds) in that investors in a closed-end
fund do not have the right to redeem their shares on a daily basis at a price
based on net asset value. In order to be able to meet daily redemption requests,
mutual funds are subject to more stringent liquidity requirements than
closed-end funds. In particular, a mutual fund generally may not invest more
than 15% of its net assets in illiquid securities. The Adviser believes that
unique investment opportunities exist in the market for Investment Funds.
However, these investments are illiquid, and an open-end fund's ability to make
such investments is limited. For this reason, among others, the Fund has been
organized as a closed-end fund.
The Fund does not intend to list its Interests for trading on any national
securities exchange. There is no secondary trading market for the Interests, and
none is expected to develop. The Interests are, therefore, not readily
marketable. Because the Fund is a closed-end investment company, its Interests
are not redeemable at the option of Members, and they are not exchangeable for
interests of any other fund. Although the Board, in its complete and absolute
discretion, may cause the Fund to offer to make repurchase offers for
outstanding Interests at their net asset value, the Interests are considerably
less liquid than shares of funds that trade on a stock exchange, or shares of
open-end investment companies. The amount that the Fund will offer to repurchase
during any repurchase offer is determined by the Board in its complete and
absolute discretion, and such repurchase amount may be a portion of the Fund's
outstanding Interests. In addition, in extreme cases, the Fund may not be able
to complete repurchases if the Master Fund is unable to repurchase a portion of
the Fund's interest in the Master Fund, held through the Offshore Fund, due to
the Master Fund's holding of illiquid investments. Members whose Interests are
accepted for repurchase will bear the risk that the Fund's net asset value may
fluctuate significantly between the time that they
23
submit their repurchase requests and the effective date of the repurchase
(i.e., the Full Repurchase Valuation Date). Further, repurchases of Interests,
if any, may be suspended or postponed in the complete and absolute discretion
of the Board. An investment in the Fund is suitable only for investors who can
bear the risks associated with the limited liquidity of the Interests and the
underlying investments of the Fund. See "Investor Suitability" and "Repurchases
of Interests." Also, because the Interests will not be listed on any securities
exchange, the Fund is not required, and does not intend, to hold annual
meetings of its Members.
Non-Diversified Status
The Fund and the Master Fund are "non-diversified" investment companies. Thus,
there are no limitations imposed by the 1940 Act on the percentage of the Fund's
or the Master Fund's assets that may be invested in the securities of any one
issuer. This may result in the Fund's investment portfolio being more
susceptible to a single economic, political, or regulatory occurrence than would
be the case if the Fund or the Master Fund were operated as a diversified
investment company. The Master Fund generally will not invest more than 10% of
its assets (measured at the time of purchase) in the securities of a single
Investment Fund.
Special Risks of the Offshore Fund
Investment in Offshore Fund. The Offshore Fund is not registered under the 1940
Act, and is not subject to the investor protections offered thereby. The Fund,
as an investor in the Offshore Fund, does not have the protections offered to
investors in registered investment companies. However, the Fund controls the
Offshore Fund, making it unlikely that the Offshore Fund will take any action
adverse to the interests of the Fund.
Changes in United States and/or Cayman Islands Law. If there are changes in the
laws of the United States and/or the Cayman Islands, under which the Fund and
the Offshore Fund, respectively, are organized, so as to result in the inability
of the Fund and/or the Offshore Fund to operate as set forth in this Prospectus,
there may be a substantial effect on investors. For example, if Cayman Islands
law changes such that the Offshore Fund must conduct business operations within
the Cayman Islands, or pay taxes, investors in the Fund would likely suffer
decreased investment returns. If Cayman Islands law, which requires a limit for
a limited duration company's existence of 30 years, were to change such that, at
the end of 30 years, the Fund could not replace the Offshore Fund with another
identical limited duration company, the structure of the Fund would be affected,
potentially adversely. Such changes could also result in the inability of the
Fund to operate on a going-forward basis, resulting in the Fund being
liquidated.
Regulatory Change. The Fund relies on a position taken by the staff of the SEC
with respect to a non-affiliated investment company allowing a structure whereby
the Fund invests in the Master Fund via the Offshore Fund. To the extent that
the views of the SEC staff, which do not represent the views of the SEC itself,
were to change, the structure of the Fund's investment in the Master Fund could
be adversely affected, possibly affecting the treatment of UBTI.
The Fund may determine to invest its assets directly in non-U.S. Investment
Funds that are classified as PFICs for U.S. federal income tax purposes. The
Fund may pursue such an investment approach only if it believes that it could
avoid generating UBTI by making such investments and the approach is approved by
the Fund's Board of Directors. The Fund will provide Members with at least 90
days' notice before implementing such a change.
Special Risks of Fund of Funds Structure, Including Investing in Unregistered
Funds
Multiple Investment Fund Managers. The Master Fund employs a multi-manager
strategy, and each Investment Fund trades independently of the others. There can
be no assurance that the use of a multi-manager approach will not effectively
result in losses by certain of the Investment Funds offsetting any profits
achieved by others. Such offsetting results could result in a significant
reduction in the Fund's assets, as incentive fees may be allocable to those
Investment Funds that recognized profits irrespective of the offsetting losses.
Various Investment Funds will from time to time compete with the others for the
same positions. Conversely, opposite positions held by the Investment Funds will
be economically offsetting. As long as Investment Funds hold positions that
offset those held by other Investment Funds, the Fund as a whole will be unable
to recognize any gain or loss on such open positions,
24
while at the same time incurring brokerage commissions in respect of each of
the offsetting positions and paying advisory fees.
Duplicative Transaction Costs. Investment decisions of the Investment Funds are
made by their investment advisers independently of each other. As a result, at
any particular time, one Investment Fund may be purchasing securities of an
issuer whose securities are being sold by another Investment Fund. Consequently,
the Fund could incur indirectly transaction costs without accomplishing any net
investment result.
Investment Funds Not Registered. The Investment Funds are not registered as
investment companies under the 1940 Act and, therefore, the Master Fund is not
entitled to the protections of the 1940 Act with respect to the Investment
Funds. For example, the Investment Funds are not required to, and may not, hold
custody of their assets in accordance with the requirements of the 1940 Act. As
a result, bankruptcy or fraud at institutions, such as brokerage firms, banks,
or administrators, into whose custody those Investment Funds have placed their
assets could impair the operational capabilities or the capital position of the
Investment Funds and may, in turn, have an adverse impact on the Fund. In
addition, the investment advisers to, or general partners of, the Investment
Funds often will not be registered as investment advisers under the Advisers
Act. Further, the Investment Funds in which the Master Fund invests are not
subject to the disclosure and other investor protection requirements that would
be applicable if their securities were registered or publicly traded.
Investment Fund Securities Generally Illiquid. The securities of the Investment
Funds in which the Master Fund invests are generally anticipated to be illiquid.
Subscriptions to purchase the securities of Investment Funds are generally
subject to restrictions or delays. Similarly, the Master Fund may not be able to
dispose of Investment Fund securities that it has purchased in a timely manner
and, if adverse market conditions were to develop during any period in which the
Master Fund is unable to sell Investment Fund securities, the Master Fund might
obtain a less favorable price than prevailed when it decided to buy or sell.
Certain Investment Funds may permit withdrawals only on a semi-annual, annual,
or less frequent basis or be subject to "lock-ups" (where investors are
prohibited from withdrawing their capital for a specified period following
investment in the Investment Fund) and/or "gates" (where withdrawal at any given
withdrawal date is restricted to a specified percentage of the Investment Fund's
assets). Further, some Investments Funds may limit withdrawal with respect to
"side pocket" investments (where an Investment Fund classified a particular
investment as "illiquid" or "designated" and investors generally can not
received their allocable share until such investment is liquidated or otherwise
realized). Each such investment will be accounted for by such Investment Fund
separately from all other investments of such Investment Fund, and will
generally be carried at cost until liquidated or marked-to-market. The Master
Fund, however, will not separately account for the portion of its assets
allocated -- indirectly through an Investment Fund -- to such "designated
investments," and profits and losses from such investments will be allocated to
Members at the time such investments are liquidated or marked-to-market by such
Investment Fund pro rata based on their respective net asset values at the time
of such liquidation or valuation. Accordingly, when subscribing for Interests
investors in the Fund bear the risk that such investments are overvalued (and
thus that the net asset value of the Fund is overstated). Conversely, Members
requesting repurchases of their Interests bear the risk that such investments
are undervalued (and thus that the net asset value of the Fund is understated).
An Investment Fund may hold "designated" or illiquid investments for several
years, if not longer, before such investments are able to be liquidated or
marked-to-market.
The Fund may be required to delay payment of a Member's repurchase request
proceeds if it is unable to liquidate sufficient interests in Investment Funds
to fund such repurchase request. In addition, the Master Fund might determine to
redeem the liquid portion of its portfolio to fund repurchase requests,
subjecting the remaining Members to additional risk as a result of its portfolio
being more concentrated in illiquid investments following such repurchase
requests. If such "designated investments" were to comprise a material portion
of the Master Fund's portfolio, the ability of the Fund to offer to repurchase
Interests from the Fund could be materially adversely affected, and the Fund
might be subject to the risk of its audit report being qualified due to the Fund
's inability to substantiate the "fair value" of its portfolio to the extent
required by generally accepted accounting principles.
Delayed Schedule K-1s. It is unlikely that the Fund will be able to provide
final Schedule K-1s to Members for any given taxable year until after April 15
of the following year. The Fund will endeavor to provide Members with estimates
of taxable income or loss allocated to their investment in the Fund on or before
such date, but final
25
Schedule K-1s may not be available until completion of the Fund's annual audit.
Members therefore may be required to obtain extensions of the filing date for
their income tax returns at the federal, state, and local level.
Second-Tier Fund Investments. One of the principal disadvantages and risks
inherent in a fund of funds structure is the restrictions imposed on the asset
allocation flexibility and risk control capability of the manager of the
top-tier fund as a result of the limited liquidity of the second-tier funds in
which the former invests. The Master Fund could be unable to withdraw its
capital from Investment Funds in which it invests for some months after the
Adviser has determined that the Investment Fund operating such entity has begun
to deviate from its announced trading policies and strategy. Certain entities in
which the Master Fund invests may suspend redemptions, especially during periods
of market disruption, preventing the Master Fund from withdrawing.
Investment Fund Manager Compensation. An Investment Fund typically provides for
a performance fee or allocation to its general partner, manager, or person
serving in an equivalent capacity over and above a basic asset-based advisory
fee. Performance-based fees or allocations could create an incentive for a
manager of an Investment Fund to choose riskier or more speculative underlying
investments than would otherwise be the case.
"Soft Dollar" Payments. In selecting brokers, banks, and dealers to effect
portfolio transactions, certain managers of Investment Funds may consider such
factors as price, the ability of brokers, banks, and dealers to effect
transactions, their facilities, reliability, and financial responsibility, as
well as any products or services provided, or expenses paid, by such brokers,
banks, and dealers. Products and services may include research items used by the
managers of Investment Funds in making investment decisions, and expenses may
include general overhead expenses of such manager. Such "soft dollar" benefits
may cause a manager of an Investment Fund to execute a transaction with a
specific broker, bank, or dealer even though it may not offer the lowest
transaction fees.
Investment Fund Operations Not Transparent. The Adviser will not be able to
control or monitor the activities of the Investment Funds on a continuous basis.
An Investment Fund may use investment strategies that differ from its past
practices and are not fully disclosed to the Adviser and that involve risks that
are not anticipated by the Adviser. Investment Funds may have limited operating
history and investment advisers of Investment Funds may have limited experience
in managing assets.
Valuation of the Fund's Investments. As market prices are not readily available
for all or most Investment Funds in which the Master Fund invests, the Master
Fund's valuation procedures provide that the fair value of the Master Fund's
investments in Investment Funds ordinarily will be the value determined for each
Investment Fund in accordance with the Investment Fund's valuation policies and
provided to the Master Fund. Although the Adviser reviews the valuation
procedures used by the investment advisers of the Investment Funds, the Adviser
and the Board have little or no means of independently verifying valuations
provided by such investment advisers. In calculating its net asset value,
although the Master Fund reviews other relevant factors, the Master Fund relies
significantly on values of Investment Funds that are reported by the Investment
Funds themselves. The Master Fund will not have information about the securities
in which the Investment Funds invest or their valuation. The Fund relies on the
net asset value reported by the Master Fund in determining its own net asset
value. For more information on the valuation of the Fund's investments,
including the valuation of the Master Fund's investments in Investment Funds,
and related risks, see "Net Asset Valuation."
As a general matter, the governing instruments of the Investment Funds provide
that any securities or investments that are illiquid, not traded on an exchange
or in an established market, or for which no value can be readily determined,
are assigned such fair value as the respective Investment Fund Managers may
determine in their judgment based on various factors. Such factors include, but
are not limited to, dealer quotes or independent appraisals. Such valuations may
not be indicative of what actual fair market value would be in an active,
liquid, or established market. An Investment Fund's investment adviser may face
a conflict of interest in valuing the Investment Fund's portfolio securities
because their values will affect the compensation of the Investment Fund's
investment adviser.
Other Accounts Advised by Investment Fund Managers. The managers of the
Investment Funds may manage other accounts (including other accounts in which
such managers may have an interest) which, together with accounts already being
managed, could increase the level of competition for the same trades the
relevant Investment Fund
26
might otherwise make, including the priorities of order entry. This could make
it difficult or impossible to take or liquidate a position in a particular
security or futures contract at a price indicated by a manager's strategy.
Litigation and Enforcement Risk. An Investment Fund's investment adviser might
accumulate substantial positions in the securities of a specific company and
engage in a proxy fight, become involved in litigation, or attempt to gain
control of a company. Under such circumstances, an Investment Fund's investment
adviser conceivably could be named as a defendant in a lawsuit or regulatory
action. There have been a number of widely reported instances of violations of
securities laws through the misuse of confidential information, diverting or
absconding with hedge fund assets, falsely reporting hedge fund values and
performance, and other violations of the securities laws. Such violations may
result in substantial liabilities for damages caused to others, for the
disgorgement of profits realized, and for penalties. Investigations and
enforcement proceedings are ongoing and it is possible that hedge funds may be
charged with involvement in such violations. If that were the case, the
performance records of the hedge funds would be misleading. Furthermore, if an
Investment Fund has engaged in such violations, the Master Fund could be exposed
to losses.
Possibility of Fraud and Other Misconduct. When the Master Fund allocates assets
to an Investment Fund, the Master Fund does not have custody of the assets or
control over their investment by the Investment Fund. An Investment Fund could
divert or abscond with the assets, fail to follow agreed-upon investment
strategies, provide false reports of operations, or engage in other misconduct.
Institutional Risk. Institutions, such as brokerage firms, banks, or limited
partnerships, generally have custody of the Fund's assets and the assets of the
Investment Funds. Often these assets are not registered in the name of the Fund
or the Investment Fund. Bankruptcy or fraud at one of these institutions could
impair the operational capabilities or the capital position of the Fund and/or
the Investment Fund. The Fund attempts to limit any direct investment
transactions to well-capitalized and established financial institutions and
brokerage firms in an effort to mitigate such risks.
Sole Principal Managers. Some of the Investment Funds to which the Master Fund
may allocate capital may be or consist of only one principal. If that individual
died or became incapacitated, the Fund might sustain losses.
Multiple Levels of Fees and Expenses. Although in many cases investor access to
the Investment Funds may be limited or unavailable, an investor who meets the
conditions imposed by an Investment Fund may be able to invest directly with the
Investment Fund. By investing in Investment Funds indirectly through the Fund as
an investor in the Master Fund, the investor bears asset-based management fees
at the Master Fund level, in addition to any asset-based management and
performance-based fees and allocations at the Investment Fund level and the
Incentive Allocation at the Fund level. Moreover, an investor in the Fund bears
a proportionate share of the fees and expenses of the Fund and the Master Fund
(including operating costs, distribution expenses, brokerage transaction
expenses, and administrative fees) and, indirectly, similar expenses of the
Investment Funds. Thus, an investor in the Fund may be subject to higher
operating expenses than if he or she invested in another closed-end fund with a
different investment focus. The Offshore Fund's expenses are expected to be
minimal and are borne by the Adviser or an affiliate of the Adviser.
Each Investment Fund generally is subject to a performance-based fee or
allocation, irrespective of the performance of other Investment Funds and the
Master Fund generally. Accordingly, an investment adviser to an Investment Fund
with positive performance may receive performance-based compensation from the
Investment Fund, and thus indirectly from the Fund and its Members, even if the
Fund's overall performance is negative. Generally, fees payable to investment
advisers of the Investment Funds range from 1% to 3% (annualized) of the average
net asset value of the Master Fund's investment, and incentive allocations or
fees generally range from 10% to 25% of an Investment Fund's net profits. The
performance-based compensation received by an investment adviser of an
Investment Fund also may create an incentive for that investment adviser to make
investments that are riskier or more speculative than those that it might have
made in the absence of the performance-based fee or allocation. That
compensation may be based on calculations of realized and unrealized gains made
by the investment adviser without independent oversight.
Estimates. The net asset values received by the Master Fund from Investment
Funds and used to calculate the Master Fund's net asset value (upon which the
Fund's Net Asset Value will be based), and therefore for the payment
27
of repurchase proceeds and the issuance of additional Interests, are only
estimates and may differ materially from actual valuations. The Master Fund
relies on these estimates in calculating the Master Fund's net asset value
(and, accordingly, the Fund's net asset value) for reporting, subscriptions,
repurchases, fees, and other purposes and generally will not make any
adjustments with respect to withdrawal payments or the issuance of Interests.
Turnover. The Master Fund's activities involve investment in the Investment
Funds, which may invest on the basis of short-term market considerations. The
turnover rate within the Investment Funds may be significant, potentially
involving substantial brokerage commissions and fees. The Master Fund has no
control over this turnover. As a result of this turnover, it is anticipated that
the Fund's income and gains, if any, will be primarily derived from ordinary
income and short-term capital gains. In addition, the withdrawal of the Master
Fund from an Investment Fund could involve expenses to the Master Fund under the
terms of the Master Fund's investment.
Changes in Investment Funds and Allocations. The Adviser may from time to time
select new or replacement Investment Funds and change the percentage of Master
Fund assets allocated to each Investment Fund. These changes will be made in the
Adviser's sole discretion, subject to the Investment Funds' liquidity
constraints. The Master Fund's success (and, therefore, the Fund's) depends to a
great extent on the Adviser's ability to identify and allocate assets
successfully among Investment Funds.
Other Trading Strategies. Certain of the Investment Funds may employ strategies
for which no specific "risk factors" are provided. Nevertheless, such strategies
should be considered to be speculative, volatile, and, in general, no less risky
than other strategies more fully described herein.
Inability to Vote or Exercise Control. The Master Fund may elect to hold
non-voting securities in Investment Funds or waive the right to vote in respect
of an Investment Fund. In such cases, the Master Fund will not be able to vote
on matters that require the approval of the interestholders of the Investment
Fund, including matters adverse to the Master Fund's interests. The Master Fund
does not intend to acquire a sufficient percentage of the economic interests in
any Investment Fund to cause the Master Fund to control the Investment Fund.
Applicable securities and banking rules and interpretations may limit the
percentage of voting or non-voting securities of any Investment Fund that may be
held by the Master Fund.
Inability to Invest in Investment Funds. In the event that the Master Fund is
able to make investments in Investment Funds only at certain times, the Master
Fund may invest any portion of its assets that is not invested in Investment
Funds in money market securities, or other liquid assets pending investment in
Investment Funds. During this time that the Master Fund's assets are not
invested in Investment Funds, that portion of the Master Fund's assets will not
be used to pursue the Master Fund's investment objective.
Indemnification of Investment Advisers. The Investment Funds may agree to
indemnify certain of their investment advisers from any liability, damage, cost,
or expense arising out of, among other things, certain acts or omissions. The
investment advisers of the Investment Funds often have broad limitations on
liability and indemnification rights.
Indirect Investment in Investment Funds. Any transaction by which the Master
Fund indirectly gains exposure to an Investment Fund by the purchase of a
structured note, swap, or other contract is subject to special risks The value
of such instruments depends largely upon price movements in the underlying
Investment Funds to which such instruments are linked. Therefore, many of the
risks applicable to the underlying asset (i.e., the Investment Funds themselves)
are also applicable to such instruments. The Master Fund's use of such
instruments can result in volatility, and each type of instrument is subject to
special risks. See "Principal Risk Factors, Types of Investments, and Investment
Strategies of the Investment Funds -- Special Investment Instruments and
Techniques, Including Derivative Instruments." Indirect investments will
generally be subject to transaction and other fees, which will reduce the value
of the Master Fund's investment. There can be no assurance that the Master
Fund's indirect investment in an Investment Fund will have the same or similar
results as a direct investment in the Investment Fund, and the Master Fund's
value may decrease as a result of such indirect investment. Also, the Master
Fund's indirect investment in an Investment Fund carries with it the credit risk
associated with the counterparty.
Investments in Foreign Markets. Certain of the Investment Funds may be organized
outside of the United States. In addition, investments by the Investment Funds
in foreign financial markets, including markets in developing
28
countries, present political, regulatory, and economic risks that are
significant and that may differ in kind and degree from risks presented by
investments in the United States and pose a range of potential risks that could
include, depending upon the country involved, expropriation, confiscatory
taxation, political or social instability, illiquidity, price volatility, and
market manipulation. In addition, less information may be available regarding
non-U.S. issuers, and non-U.S. companies may not be subject to accounting,
auditing, and financial reporting standards and requirements comparable to or
as uniform as those of U.S. companies. Further, non-U.S. securities may not be
as liquid as U.S. markets. Transaction costs of investing outside the U.S. are
generally higher than in the U.S. Higher costs result because of the cost of
converting a non-U.S. currency to dollars, the payment of fixed brokerage
commissions on some non-U.S. exchanges, and the imposition of transfer taxes or
transaction charges by non-U.S. exchanges. There is generally less government
supervision and regulation of exchanges, brokers, and issuers outside the U.S.
than there is in the U.S., and there is greater difficulty in taking
appropriate legal action in non-U.S. courts. Non-U.S. markets also have
different clearance and settlement procedures which in some markets have at
times failed to keep pace with the volume of transactions, thereby creating
substantial delays and settlement failures that could adversely affect the
Fund's performance.
Additional Government or Market Regulation. Market disruptions and the dramatic
increase in the capital allocated to alternative asset management during recent
years have led to increased governmental as well as self-regulatory organization
scrutiny of the "hedge fund" industry in general. The SEC adopted in 2004
regulations requiring substantially all "hedge fund" managers (including those
operating in the same or substantially similar manner as the Adviser and most
managers of the Investment Funds) to register with the SEC by February 2006 as
"investment advisers" under the Advisers Act. The Adviser is already registered
as an investment adviser under the Advisers Act. These regulations grant an
exemption from registration pursuant to which a "hedge fund" manager may avoid
registration in situations where it "locks up" (for a period of at least two
years) any capital contributed by investors on or after that date. A significant
number of Investment Funds utilized by the Master Fund rely or may rely on this
exemption from registration, which may not result in the Master Fund's portfolio
having significantly less liquidity than it did in the past. In addition,
certain legislation proposing greater regulation of the industry is periodically
considered by Congress, as well as by the governing bodies of non-U.S.
jurisdictions. It is impossible to predict what, if any, changes in the
regulations applicable to the Fund, the Offshore Fund, the Master Fund, the
Adviser, the Investment Funds, the Investment Fund managers, the markets in
which they trade and invest, or the counterparties with which they do business
may be instituted in the future. Any such regulation could have a material
adverse impact on the profit potential of the Fund, as well as require increased
transparency as to the identity of Members.
PRINCIPAL RISK FACTORS, TYPES OF INVESTMENTS, AND
INVESTMENT STRATEGIES OF THE INVESTMENT FUNDS
General
This section discusses the types of investments generally made by the Investment
Funds in which the Master Fund invests and the related risk factors with respect
to such investments. It is possible that an Investment Fund will make an
investment that is not described below, which would be subject to its own
particular risks. Unless expressly stated otherwise herein, an investor's
determination to invest in the Fund should not be based on a belief that the
Investment Funds will not make a certain type of investment. The impact of a
particular risk in an Investment Fund will, in turn, have a corresponding impact
on the Fund via its indirect investment in the Master Fund.
The Fund's investment program entails substantial risks. Investors should expect
the value of the Fund's net assets to fluctuate. Due to the types of investments
and investment strategies to be used by the Investment Funds, fluctuations in
the net asset value of the Fund may be more volatile than is typical for
traditional mutual funds. There can be no assurance that the Fund's or the
Investment Funds' investment objectives will be achieved or that their
investment programs will be successful. In particular, each Investment Fund's
use of leverage, short sales, and derivative transactions and limited
diversification can, in certain circumstances, cause the value of an Investment
Fund's portfolio to appreciate or depreciate at a greater rate than if such
techniques were not used, which, in turn, could result in significant losses to
the Fund.
All securities investments are subject to the risk of loss of capital. The value
of the Fund's net assets will fluctuate based on the fluctuation in the value of
the Investment Funds in which the Master Fund invests. To the extent that
29
the portfolio of an Investment Fund is concentrated in securities of a single
issuer or issuers in a single industry or market sector, the risk of the Fund's
indirect investment in that Investment Fund is increased.
The investment environment in which the Investment Funds invest may be
influenced by, among other things, interest rates, inflation, politics, fiscal
policy, current events, competition, productivity, and technological and
regulatory change. Investors should consider the Fund as a supplement to an
overall investment program and should invest only if they are willing to
undertake the risks involved. Investors may experience a significant decline in
the value of their investments and could lose money. Prospective investors
should consider the Fund a speculative investment, and should invest in the Fund
only if they can sustain a complete loss of their investment.
Equity Securities
Investment Funds' portfolios may include long and short positions in common
stocks, preferred stocks, and convertible securities of U.S. and foreign
issuers. Investment Funds also may invest directly in foreign securities or in
depositary receipts relating to foreign securities. See "Foreign Securities" and
"Principal Risk Factors Relating to the Fund's Structure -- Investment Risks --
Investments in Foreign Markets." Equity securities fluctuate in value, often
based on factors unrelated to the value of the issuer of the securities.
Investment Funds may invest in equity securities without restriction as to the
market capitalization of issuers, including securities of companies with market
capitalizations that are small compared to other publicly traded companies
(including micro-cap companies). Smaller companies may have limited product
lines, markets, or financial resources or may depend on a small inexperienced
management group. Securities of small companies may trade less frequently and in
lesser volume than more widely held securities, and their values may fluctuate
more abruptly or erratically than securities of larger companies. They may also
trade in the over-the-counter market or on a regional exchange, or may otherwise
have limited liquidity. These securities may therefore be more vulnerable to
adverse market developments than securities of larger companies. Also, there may
be less publicly available information about smaller companies or less market
interest in their securities as compared to larger companies, and it may take
longer for the prices of the securities to reflect the full value of a company's
earnings potential or assets.
Fixed Income Securities
Investment Funds may invest in fixed income securities. Investment in these
securities may offer opportunities for income and capital appreciation, and may
also be used for temporary defensive purposes and to maintain liquidity. Fixed
income securities are subject to the risk of the issuer's inability to meet
principal and interest payments on its obligations (i.e., credit risk) and are
subject to price volatility due to such factors as interest rate sensitivity,
market perception of the creditworthiness of the issuer, and general market
liquidity (i.e., market risk).
Foreign Securities
Investment Funds may invest in securities of foreign issuers and in depositary
receipts, such as American Depositary Receipts ("ADRs"), that represent indirect
interests in securities of foreign issuers. Investing in foreign securities
involves special risks and considerations not typically associated with
investing in U.S. securities. Foreign securities in which the Investment Funds
may invest may be listed on foreign securities exchanges or traded in foreign
over-the-counter markets. Foreign securities markets generally are not as
developed or efficient or as strictly regulated as securities markets in the
United States. Securities of some foreign issuers are less liquid and more
volatile than securities of comparable U.S. issuers. Similarly, volume and
liquidity in most foreign securities markets are lower than in the United
States, and at times, volatility of prices can be greater than in the United
States. Investment Funds will be subject to risks of possible adverse political
and economic developments, seizure or nationalization of foreign deposits, or
adoption of governmental restrictions that might adversely affect or restrict
the payment of principal and interest on foreign securities to investors located
outside the country of the issuer, whether from currency blockage or otherwise.
Since foreign securities often are purchased with and payable in currencies of
foreign countries, their value may be affected favorably or unfavorably by
changes in currency rates and exchange control regulations. These risks are
accentuated with respect to investments in emerging market countries.
30
To the extent that Investment Funds invest in emerging markets countries, the
political, regulatory, and economic risks inherent in such investments are
significant and may differ in kind and degree from the risks presented by
investments in major securities markets in developed countries. Additional risks
of emerging markets countries may include: greater social, economic, and
political uncertainty and instability; more substantial governmental involvement
in the economy; less governmental supervision and regulation; unavailability of
certain currency hedging techniques; companies that are newly organized and
small; differences in auditing and financial reporting standards, which may
result in unavailability of material information about issuers; and less
developed legal systems.
Investment income received by an Investment Fund from sources within foreign
countries may be subject to foreign income taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
entitle the Investment Fund to a reduced rate of such taxes or exemption from
taxes on such income. It is impossible to determine the effective rate of
foreign tax in advance since the amounts of the Investment Fund's assets to be
invested within various countries is not known.
Foreign Currency Transactions
The Investment Funds may engage in foreign currency transactions for a variety
of purposes, including to "lock in" the U.S. dollar price of the security,
between trade and settlement date, the value of a security an Investment Fund
has agreed to buy or sell, or to hedge the U.S. dollar value of securities the
Investment Fund already owns. The Investment Funds may also engage in foreign
currency transactions for non-hedging purposes to generate returns.
Foreign currency transactions may involve, for example, the purchase of foreign
currencies for U.S. dollars or the maintenance of short positions in foreign
currencies. Foreign currency transactions may involve an Investment Fund
agreeing to exchange an amount of a currency it does not currently own for
another currency at a future date. An Investment Fund would typically engage in
such a transaction in anticipation of a decline in the value of the currency it
sells relative to the currency that the Investment Fund has contracted to
receive in the exchange. An investment adviser's success in these transactions
will depend principally on its ability to predict accurately the future exchange
rates between foreign currencies and the U.S. dollar.
Concentration of Investments; Non-Diversified Portfolios
Investment Funds may target or concentrate their investments in particular
markets, sectors, or industries. Investment Funds also may be considered to be
non-diversified and invest without limit in a single issuer. As a result of any
such concentration of investments or non-diversified portfolios, the portfolios
of such Investment Funds are subject to greater volatility than if they had
non-concentrated and diversified portfolios. Those Investment Funds that
concentrate in a specific industry or target a specific sector will also be
subject to the risks of that industry or sector, which may include, but not be
limited to, rapid obsolescence of technology, sensitivity to regulatory changes,
minimal barriers to entry, and sensitivity to overall market swings.
Leverage
Some or all of the Investment Funds may borrow money from brokers and banks for
investment purposes. This practice, which is known as engaging in "leverage" or
making purchases on "margin," is speculative and involves certain risks.
Trading equity securities on margin involves an initial cash requirement
representing at least 50% of the underlying security's value with respect to
transactions in U.S. markets and varying (typically lower) percentages with
respect to transactions in foreign markets. Borrowings to purchase equity
securities typically will be secured by the pledge of those securities. The
financing of securities purchases may also be effected through reverse
repurchase agreements with banks, brokers, and other financial institutions.
Although leverage will increase investment return if an Investment Fund earns a
greater return on the investments purchased with borrowed funds than it pays for
the use of those funds, the use of leverage will decrease investment return if
an Investment Fund fails to earn as much on investments purchased with borrowed
funds as it pays for the
31
use of those funds. The use of leverage will therefore magnify the volatility
of changes in the value of the Fund's investment in the Investment Fund. In the
event that an Investment Fund's equity or debt instruments decline in value,
the Investment Fund could be subject to a "margin call" or "collateral call,"
pursuant to which the Investment Fund must either deposit additional collateral
with the lender or suffer mandatory liquidation of the pledged securities to
compensate for the decline in value. In the event of a sudden, precipitous drop
in value of an Investment Fund's net assets, the Investment Fund's investment
adviser might not be able to liquidate assets quickly enough to pay off the
Investment Fund's borrowing. Money borrowed for leveraging will be subject to
interest costs that may or may not be recovered by return on the securities
purchased. The Investment Fund also may be required to maintain minimum average
balances in connection with its borrowings or to pay a commitment or other fee
to maintain a line of credit, either of which requirements would increase the
cost of borrowing over the stated interest rate.
Investment Funds may not be subject to the same or similar asset coverage
requirements that the 1940 Act imposes in connection with borrowing. Therefore,
Investment Funds may be able to achieve greater levels of indebtedness and,
consequently, greater risk due to leveraging or high interest payments, than
would be permitted for a registered investment company.
In order to obtain "leveraged" market exposure in certain investments and to
increase overall returns, an Investment Fund may purchase options and other
synthetic instruments that do not constitute "indebtedness" for purposes of any
applicable or self-imposed asset coverage requirement. These instruments may
nevertheless involve significant economic leverage and therefore may, in some
cases, involve significant risks of loss.
Short Sales
Some or all of the Investment Funds may attempt to limit their exposure to a
possible market decline in the value of their portfolio securities through short
sales of securities that the Investment Funds believe possess volatility
characteristics similar to those being hedged. In addition, the Investment Funds
may use short sales for non-hedging purposes to pursue their investment
objectives. For example, an Investment Fund may "short" a security of a company
if, in its investment adviser's view, the security is over-valued in relation to
the issuer's prospects for earnings growth.
A short sale involves the sale of a security that is borrowed from a broker or
other institution to complete the sale. Short sales expose an Investment Fund to
the risk that it will be required to acquire, convert, or exchange securities to
replace the borrowed securities (also known as "covering" the short position) at
a time when the securities sold short have appreciated in value, thus resulting
in a loss to an Investment Fund. The risk of loss on a short sale is
theoretically unlimited.
Reverse Repurchase Agreements
Reverse repurchase agreements involve a sale of a security by an Investment Fund
to a bank or securities dealer and the Investment Fund's simultaneous agreement
to repurchase that security for a fixed price (reflecting a market rate of
interest) on a specific date. These transactions involve a risk that the other
party to a reverse repurchase agreement will be unable or unwilling to complete
the transaction as scheduled, which may result in losses to the Investment Fund.
Reverse repurchase transactions are a form of leverage that may also increase
the volatility of an Investment Fund's investment portfolio.
Purchasing Initial Public Offerings
Investment Funds may purchase securities of companies in initial public
offerings or shortly thereafter. Special risks associated with these securities
may include a limited number of shares available for trading, unseasoned
trading, lack of investor knowledge of the issuer, and limited operating
history. These factors may contribute to substantial price volatility for the
shares of these companies. Such volatility can affect the value of the Fund's
investment in Investment Funds that invest in such shares. The limited number of
shares available for trading in some initial public offerings may make it more
difficult for an Investment Fund to buy or sell significant amounts of shares
without having an unfavorable impact on prevailing market prices. In addition,
some companies in initial public
32
offerings are involved in relatively new industries or lines of business, which
may not be widely understood by investors. Some of these companies may be
undercapitalized or regarded as developmental stage companies, without revenues
or operating income, or the near-term prospects of achieving them.
Special Investment Instruments and Techniques, Including Derivative Instruments
Investment Funds may utilize a variety of special investment instruments and
techniques (described below) to hedge their portfolios against various risks
(such as changes in interest rates or other factors that affect security values)
or for non-hedging purposes to pursue their investment objectives. These
strategies may be executed through transactions in derivative instruments
("Derivatives"), as well as forward contracts, swap agreements, and when-issued
and forward commitment securities. The instruments the Investment Funds may use
and the particular manner in which they may be used can be expected to change
over time as new instruments and techniques are developed or regulatory changes
occur. Certain of the special investment instruments and techniques that the
Investment Funds may use are speculative and involve a high degree of risk,
particularly in the context of non-hedging transactions.
Lending Portfolio Securities
Some or all of the Investment Funds may lend securities from their portfolios to
brokers, dealers, and other financial institutions needing to borrow securities
to complete certain transactions. The lending portfolio continues to be entitled
to payments of amounts equal to the interest, dividends, or other distributions
payable on the loaned securities which affords it an opportunity to earn
interest on the amount of the loan and on the loaned securities' collateral.
Investment Funds may not be subject to the same borrowing limitations that apply
to registered investment companies. An Investment Fund might experience loss if
the institution with which it has engaged in a portfolio loan transaction
breaches its agreement with the Investment Fund.
Restricted and Illiquid Investments
Investment Funds may acquire securities through private placements, which may
have contractual restrictions on their resale, preventing their disposition by
the Fund at any time when such sale would be desirable. Investment Funds may
also acquire securities for which no liquid market exists. The market prices, if
any, of such investments tend to be more volatile, and it may be impossible to
sell such investments when desired or to realize their fair value in the event
of a sale. Moreover, securities in which Investment Funds may invest include
those that are not listed on a stock exchange or traded on an over-the-counter
market. As a result of the absence of a public trading market for these
securities, they may be less liquid than publicly traded securities. There may
be substantial delays in attempting to sell non-publicly traded securities.
Although these securities may be resold in privately negotiated transactions,
the prices realized from these sales could be less than those originally paid.
Further, companies whose securities are not registered or publicly traded are
not subject to the disclosure and other investor protection requirements which
would be applicable if their securities were registered or publicly traded.
Where registration is required to sell a security, an Investment Fund may be
obligated to pay all or part of the registration expenses, and a considerable
period may elapse between the decision to sell and the time the Investment Fund
may be permitted to sell a security under an effective registration statement.
If, during such period, adverse market conditions were to develop, the
Investment Fund might obtain a less favorable price than prevailed when it
decided to sell. Investment Funds may be unable to sell restricted and other
illiquid securities at the most opportune times or at prices approximating the
value at which they purchased such securities.
Investment Funds' Investment Strategies
Many of the Investment Funds in which the Master Fund invests seek, among other
things, to utilize specialized investment strategies, follow allocation
methodologies, apply investment models or assumptions, achieve a certain level
of performance relative to specified benchmarks, and enter into hedging and
other strategies intended, among other things, to affect the Investment Funds'
performance, risk levels, and/or market correlation. There can be no assurance
that any Investment Fund will have success in achieving any goal related to such
practices. The Investment Funds may be unable or may choose in their judgment
not to achieve such goals.
33
Limits on Hedged Strategies
While certain Investment Funds may use "market neutral" or "relative value"
hedging or arbitrage strategies, this in no respect should be taken to imply
that the Master Fund's investments with such Investment Funds are without risk.
Substantial losses may be recognized on "hedge" or "arbitrage" positions, and
illiquidity and default on one side of a position can effectively result in the
position being transformed into an outright speculation. Every market neutral or
relative value strategy involves exposure to some second order risk of the
market, such as the implied volatility in convertible bonds or warrants, the
yield spread between similar term government bonds, or the price spread between
different classes of stock for the same underlying firm. Further, many "market
neutral" Investment Funds employ limited directional strategies that expose such
Investment Funds to certain market risks.
Reliance on Corporate Management and Financial Reporting
Certain of the strategies implemented by the Investment Funds rely on the
financial information made available by the issuers in which the Investment
Funds place assets. Neither the Adviser nor the managers of the Investment Funds
have the ability to independently verify the financial information disseminated
by these issuers and are dependent upon the integrity of both the management of
these issuers and the financial reporting process in general. Recent events have
demonstrated the material losses which investors such as the Fund can incur as a
result of corporate mismanagement, fraud, and accounting irregularities.
Legal, Tax, and Regulatory Risks
Legal, tax, and regulatory changes affecting the Investment Funds could occur
during the term of the Fund which may materially adversely affect the Fund. For
example, the regulatory and tax environment for derivative instruments in which
an Investment Fund may participate is evolving, and changes in the regulation or
taxation of derivative instruments may materially adversely affect the value of
derivative instruments held by the Investment Fund, the ability of the
Investment Fund to pursue its trading strategies, and consequently, the Fund's
performance. Similarly, the regulatory environment for leveraged investors and
for hedge funds generally is evolving, and changes in the direct or indirect
regulation of leveraged investors or hedge funds may materially adversely affect
the ability of the Fund to pursue its investment objective or strategies.
Limits of Risk Disclosure
The above discussions and the discussions in the Fund's SAI on various risks
associated with the Fund, the Offshore Fund, the Master Fund, the Interests, and
the Investment Funds are not, and are not intended to be, a complete enumeration
or explanation of the risks involved in an investment in the Fund. Prospective
investors should read this entire Prospectus, the Fund's SAI, and the Operating
Agreement and consult with their own advisers before deciding whether to invest
in the Fund. In addition, as the Fund's investment program or market conditions
change or develop over time, an investment in the Fund may be subject to risk
factors not currently contemplated or described in this Prospectus.
INVESTOR SUITABILITY
An investment in the Fund involves a considerable amount of risk. It is possible
that an investor may lose some or all of its money. Before making an investment
decision, each prospective investor should, among other things: (i) consider the
suitability of the investment with respect to its investment objectives and
personal situation; and (ii) consider other factors including its personal net
worth, income, risk tolerance, tax situation, and liquidity needs. An investor
should invest in the Fund only money that it can afford to lose, and it should
not invest in the Fund money to which it will need access in the short-term or
on a frequent basis. In addition, prospective investors should be aware of how
the Fund's investment strategies fit into its overall investment portfolio
because the Fund is not designed to be, by itself, a well-balanced investment
for a particular investor.
34
MANAGEMENT OF THE FUND
The Board
The Board of the Fund and the Master Fund has overall responsibility to manage
and control the business operations of the Fund and the Master Fund on behalf of
the Members. At least a majority of the Board are and will be persons who are
not "interested persons," as defined in Section 2(a)(19) of the 1940 Act
("Independent Directors"). See "Directors and Officers" in the Fund's SAI for
identities of the Directors and executive officers of the Fund, brief
biographical information regarding each of them, and other information regarding
election of the Board and Board membership. The Offshore Fund has two members,
the Fund and the Adviser (which holds only a nominal, non-voting interest). The
Fund is the managing member of the Offshore Fund, and the members have delegated
the day-to-day management and general oversight responsibilities of the Offshore
Fund to the Fund. The Offshore Fund therefore is effectively controlled by the
Board of the Fund.
The Adviser
Under the supervision of the Board and pursuant to the Investment Management
Agreement, DBIM, a registered investment adviser with headquarters at 345 Park
Avenue, New York, New York 10154, provides investment supervisory services to
the Master Fund, including serving as investment adviser for the Master Fund.
DBIM is performing services as Topiary Fund Management. Topiary Fund Management
is the marketing name of the fund of funds activities of DB Absolute Return
Strategies. DB Absolute Return Strategies is the brand name of the overall
fiduciary hedge fund management business of Deutsche Bank AG. As the Master
Fund's investment adviser, DBIM makes the Master Fund's investment decisions.
DBIM buys and sells securities for the Master Fund and conducts the research
that leads to the purchase and sale decisions. As necessary, DBIM is also
responsible for selecting brokers and dealers and for negotiating brokerage
commissions and dealer charges or other transaction costs.
DBIM is an indirect, wholly owned subsidiary of Deutsche Bank, an international
commercial and investment banking group. Deutsche Bank is a major global banking
institution that is engaged in a wide range of financial services activities,
including investment management, mutual funds, retail, private, and commercial
banking, investment banking, and insurance.
DB Absolute Return Strategies is the marketing name for the absolute return
strategies activities of Deutsche Bank AG and certain of its subsidiaries,
including DBIM, Deutsche Asset Management, Inc., Deutsche Bank Trust Company
Americas, Deutsche Bank Securities Inc., Deutsche Asset Management
Investmentgesellschaft mbH Frankfurt am Main, Deutsche Asset Management
(Australia) Limited, and Deutsche Asset Management Limited. DBIM serves as
investment adviser to the Master Fund and other institutional and privately
managed accounts. As of April 1, 2006, DB Absolute Return Strategies (including
DBIM) had total assets of approximately US $7.3 billion under management. As of
December 31, 2005, Deutsche Bank had total assets of approximately U.S. $7.3
billion under management.
DBIM and its affiliates serve as investment adviser to other registered and/or
private investment funds that utilize investment programs similar to that of the
Master Fund, and DBIM and/or its affiliates may in the future serve as an
investment adviser or general partner of other registered and/or private
investment companies with similar investment programs.
Subject to the general supervision of the Board and in accordance with the
investment objective, policies, and restrictions of the Master Fund, DBIM
provides the Master Fund with ongoing investment guidance, policy direction, and
monitoring of the Master Fund pursuant to the Investment Management Agreement.
The Investment Management Agreement may be terminated by the Board, by a
majority vote of the Members, or by the Adviser.
Portfolio Manager
The Topiary Fund Management team ("Topiary") is primarily responsible for the
investment management of the Master Fund with respect to the Adviser. The
Topiary team is comprised of a group of dedicated analysts with responsibility
for performing due diligence and analysis on Investment Fund investments and for
the portfolio
35
management of the Master Fund. A senior analyst is responsible for the
day-to-day investment management of the Master Fund and is supported by a
back-up analyst. Mr. Steven L. Bossi is Global Head of Topiary Fund Management
for DB Absolute Return Strategies and is primarily responsible for management
of the Topiary team and the investment management and development of the
Adviser's multi-manager hedge fund products. Mr. Bossi also manages a DB
Absolute Return Strategies multi-strategy fund of funds and is lead analyst for
several relative value and event-driven strategies. Mr. Bossi joined the
Adviser in 2001 after nine years of experience as president and chief operating
officer of AI International Corporation, an investment advisory firm, where he
actively managed global investments in traditional and alternative markets,
including equity, fixed income, emerging markets, distressed securities, merger
arbitrage, convertible arbitrage, and private equity securities. Prior to that,
Mr. Bossi was a fixed income portfolio manager at Aetna Life & Casualty. Mr.
Bossi received a B.S. from the University of Connecticut and an M.B.A. from the
University of Chicago.
The Fund's SAI provides additional information about the portfolio managers'
investments in the Fund, a description of their compensation structure, and
information regarding other accounts they manage.
The Administrator
PFPC, whose principal business address is 400 Bellevue Parkway, Wilmington,
Delaware 19809, has responsibility for providing administrative services and
assisting the Fund, the Offshore Fund, and the Master Fund with operational
needs pursuant to separate administration agreements with each of the Fund, the
Offshore Fund, and the Master Fund (the "Administration Agreements"). Pursuant
to the Administration Agreements, PFPC provides the following services, among
others: journalizing investment, capital, and income and expense activities;
verifying investment instructions before directing cash flows and confirming
receipt of money at Investment Funds in accordance with PFPC's internal
procedures; maintaining individual ledgers for investment securities;
maintaining historical tax lots for each security; recording and reconciling
corporate action activity and all other capital changes; reconciling cash and
investment balances of the Fund and the Master Fund with the Fund's and the
Master Fund's custodian and providing information about available cash balances;
calculating contractual expenses, including Investment Management Fees and
Incentive Allocations; preparing financial statements; monitoring expense
accruals; controlling all disbursements and authorizing disbursements from the
Fund's and the Master Fund's account with the custodian; calculating capital
gains and losses; determining net investment income; assisting with the
preparation and distribution of portfolio management reports; obtaining net
asset values from Investment Funds and calculating net asset values in
accordance with this Prospectus and the Operating Agreement; and preparing
regulatory filings. In consideration for these services, the Master Fund pays,
and the Fund as an indirect investor in the Master Fund bears, PFPC a fee at the
annual rate of 0.08% of the Master Fund's month-end net assets.
PFPC also serves as the Fund's and the Master Fund's transfer and distribution
disbursing agent, and has agreed to provide the following services, among
others: maintaining the register of Members and entering on such register all
issues, transfers, and repurchases of Interests; calculating repurchase prices;
allocating income, expenses, gains, and losses to Members' Capital Accounts;
preparing and mailing tax forms; preparing and distributing interim tax reports;
mailing prospectuses; processing payments; and confirming account activity. The
Fund compensates PFPC for its services under the Administration Agreements based
on the Fund's proportional investment in the Master Fund.
PFPC is an affiliate of PFPC Trust Company, the Custodian.
The Fund and the Master Fund also have retained Investment Company Capital
Corporation ("ICCC"), an affiliate of DBIM, to provide board-related
administration services pursuant to a services agreement. Under this agreement,
ICCC, among other things: drafts board meeting agendas and resolutions; prepares
and mails board materials; communicates with the Directors; and attends board
meetings and drafts board meeting minutes. ICCC is compensated for its services
by the Adviser at no additional expense to the Fund.
The Custodian
PFPC Trust Company (the "Custodian"), whose principal business address is 8800
Tinicum Boulevard, 3rd Floor, Philadelphia, Pennsylvania 19153, serves as the
custodian of the Fund's, the Offshore Fund's, and the Master Fund's assets
pursuant to a custodian services agreement, under which the Custodian, among
other things: opens
36
and maintains separate accounts in the Fund's, the Offshore Fund's, and the
Master Fund's name; makes cash payments from the accounts for purposes set
forth in the agreement; holds securities in accounts; releases and delivers or
exchanges securities owned by the Fund, the Offshore Fund, and the Master Fund
as set forth in the agreement; collects and receives for the account of the
Fund, the Offshore Fund, and the Master Fund all income, property, and similar
items; settles purchased securities upon receipt; and furnishes to the Fund,
the Offshore Fund, and the Master Fund periodic and special reports,
statements, and other information. The Custodian is an affiliate of PFPC, the
Fund's, the Offshore Fund's, and the Master Fund's administrator and the Fund's
and the Master Fund's transfer and distribution disbursing agent.
FEES, ALLOCATIONS, AND EXPENSES
Investment Management Fee
The Master Fund pays to the Adviser, and the Fund as an indirect investor in the
Master Fund bears its allocable share of, an Investment Management Fee at an
annual rate equal to 1.0% of the Master Fund's month-end net assets, including
assets attributable to the Adviser (or its affiliates) and before giving effect
to any repurchases by the Master Fund of interests in the Master Fund. The
Investment Management Fee accrues monthly and is payable at the end of each
quarter. The Investment Management Fee is an expense payable out of the Master
Fund's assets, and is reflected in each Member's Capital Account (including
Capital Accounts of the Adviser and its affiliates, if any). Net assets means
the total value of all assets under management of the Master Fund, less all
accrued debts, liabilities, and obligations of the Master Fund, calculated
before giving effect to any repurchase of Interests on the date of calculation.
Incentive Allocation
The Operating Agreement provides that as of each March 31, upon any repurchase
of Interests (solely with respect to the Interests repurchased), and upon
termination of the Fund (each, a "Performance Period"), a reallocation (the
"Incentive Allocation") will be made from the Capital Account of each Member
(other than the Adviser) to the Capital Account of the Adviser. The Incentive
Allocation is equal to 10% of the amount, if any, by which (i) the net profit,
if any, initially allocated to such Member's Capital Account during such
Performance Period in excess of the Hurdle (as defined below) for such
Performance Period exceeds (ii) the positive balance, if any, as of the
beginning of such Performance Period in such Member's Loss Carryforward Account
(as defined below); provided, that the Hurdle will be adjusted appropriately for
additional Capital Contributions or repurchases made by the relevant Member
during such Performance Period. For the fiscal year ended March 31, 2006, the
Adviser earned an Incentive Allocation of $464,280.
The Hurdle Rate is calculated monthly and equals the average of the 91-day U.S.
Treasury bill rates as reported in Federal Reserve Bulletin H-15 (or other
available source) on the first business day of each week of that month. The
Hurdle is calculated for each Performance Period, is non-cumulative from
Performance Period to Performance Period, and is equal to the product of (i) the
average of the Hurdle Rates during such Performance Period and (ii) the Net
Assets of the relevant Capital Account at the beginning of such Performance
Period (adjusted for Capital Contributions and repurchases). For the fiscal year
ended March 31, 2006, the average Hurdle Rate was 3.624%.
The "Loss Carryforward Account" with respect to a Capital Account held by each
Member is a bookkeeping account which commences at zero and as of the first day
of each Performance Period is increased by the aggregate amount of net loss
allocated to such Member's Capital Account for the immediately prior Performance
Period, and decreased (but not below zero) by the aggregate amount of net profit
allocated to such Member's Capital Account for such prior Performance Period.
Further adjustments are made to the Loss Carryforward Account in the case of
repurchases of part but not all of a Member's Interest to reduce any positive
balance by the percentage that the amount of the Interest so repurchased is of
the total Capital Account balance before such repurchase. Thus, the Incentive
Allocation is applied on a "high water mark" basis such that in the event a
Capital Account suffers a net loss in a particular Performance Period, no
Incentive Allocation will be made to the Adviser in respect of such Capital
Account with respect to such Performance Period or any subsequent Performance
Period, until such net loss is first recovered (taking into account interim
repurchases of Interests, if any).
37
Distribution Expenses
Pursuant to an Underwriting and Distribution Services Agreement between the Fund
and the Distributor (the "Underwriting Agreement"), the Distributor bears all of
its expenses of providing distribution services as described under that
agreement. The Fund assumes and pays all charges not specifically assumed or
otherwise to be provided by the Distributor under the Underwriting Agreement.
The Fund pays (or will enter into arrangements providing that others will pay),
among other things: (i) all fees and expenses in connection with the
registration of the Fund and the Interests under the United States securities
laws and the registration and qualification of Interests for sale in the various
jurisdictions in which the Fund will determine it advisable to qualify such
Interests for sale; and (ii) the cost of preparing and printing of sufficient
copies of the Fund's Prospectus, SAI, and any other sales material (and any
supplements or amendments thereto).
The Distributor may enter into related selling group agreements with various
broker-dealers, including affiliates of the Distributor, that provide
distribution services to investors. The Distributor may also provide
distribution services. The Distributor may reallow to broker-dealers
participating in the offering up to the full applicable sale charge of 2.5%. The
Distributor, the Adviser, or their affiliates may pay from their own resources
additional compensation to brokers and dealers in connection with the sale and
distribution of the Interests or servicing of investors. For the fiscal year
ended March 31, 2006, the Adviser paid such compensation out of its own
resources amounting in the aggregate to $[ ] [DB to provide].
Sales Charges
Investments may be subject to a sales charge of up to 2.5%, subject to waiver or
adjustment in the sole discretion of the Distributor. Without limiting the
foregoing, the sales charge is expected to be waived for certain institutional
investors and certain persons associated with the Adviser or its affiliates. The
sales charge will be added to each prospective investor's purchase amount, and
will not constitute part of a Member's capital contribution to the Fund or part
of the assets of the Fund.
Administrative Fee
The Master Fund pays, and the Fund as an indirect investor in the Master Fund
bears its allocable share of, PFPC an administrative fee at an annual rate equal
to 0.08% of the Master Fund's month-end net assets, before giving effect to any
repurchases by the Master Fund of Interests.
Other Expenses
The Fund bears all of the Fund's or the Master Fund's operational expenses other
than those that the Adviser or an affiliate of the Adviser assumes, including,
without limitation: offering expenses associated with each offering; research
expenses; data processing costs and expenses; quotation and news services; legal
and recording fees and expenses; professional fees (including, without
limitation, expenses of consultants and experts) relating to investments;
accounting, auditing, administration, infrastructure, risk monitoring, and tax
preparation expenses; custodial expenses; taxes; insurance; printing and mailing
expenses; costs and expenses related to exchange listings; all investment
expenses (i.e., expenses which the Directors or the Adviser reasonably
determines to be directly related to the investment of the Fund's assets, such
as brokerage commissions, clearing and settlement charges, bank service fees,
spreads, interest expenses, borrowing charges, and short dividends, and other
investment expenses); pro rata costs and expenses of the Investment Funds
including management fees to managers of Investment Funds (generally ranging
from 1% to 3% of assets under management) and performance fees or allocations to
such managers (generally ranging from 10% to 25% of net profits); costs and
expenses of entering into and utilizing credit facilities; the Administrator's
fees and expenses; and any extraordinary expenses (such as litigation and
indemnification of the Directors). Included in the investment expenses borne by
the Fund and the Master Fund are the reasonable out-of-pocket expenses of the
Adviser, for example, travel expenses related to due diligence investigations of
existing and prospective Investment Funds. The Adviser and the Administrator
each bear the costs of providing their respective services to the Fund, the
Master Fund, and the Offshore Fund, including their general overhead, salary,
and office expenses. The Fund also bears, as an indirect investor in the Master
Fund, its allocable portion of the fees and expenses of the Master Fund. The
Fund may need to sell portfolio securities to pay fees and expenses, which could
cause the Fund to realize taxable gains.
38
The Fund's offering expenses were amortized over a twelve month period that
began upon commencement of the Fund's operations and ended on September 30,
2005. The organizational expenses of the Fund, the Offshore Fund, and the Master
Fund were paid by the Adviser.
The Offshore Fund is expected to have minimal expenses, and the Adviser, or an
affiliate of the Adviser, has agreed to bear all operating expenses of the
Offshore Fund.
The Investment Funds bear various fees and expenses in connection with their
operations. These fees and expenses are similar to those to be incurred by the
Fund. The Investment Funds pay asset-based fees to their investment advisers and
generally pay performance-based fees or allocations to the investment advisers,
which effectively reduce the investment returns of the Investment Funds. These
expenses, fees, and allocations are in addition to those incurred by the Fund
and/or the Master Fund itself. As an indirect investor in the Investment Funds,
the Fund bears a portion of the expenses and fees of the Investment Funds. Fees
payable to investment advisers of the Investment Funds generally range from 1%
to 3% (annualized) of the average net asset value of the Master Fund's
investment, and incentive allocations or fees generally range from 10% to 25% of
an Investment Fund's net profits.
Expense Limitation Agreement
Pursuant to the Expense Limitation Agreement, the Adviser has contractually
agreed to waive its fees and/or reimburse the Fund's expenses to the extent
necessary to ensure that the Fund's annualized expenses (excluding the Incentive
Allocation, if any) will not exceed 1.75%. The initial term of the Expense
Limitation Agreement ended on March 31, 2005 and has been renewed for additional
one-year terms now ending on March 31, 2007. Thereafter, the Expense Limitation
Agreement will be automatically renewed for each fiscal year thereafter unless
the Adviser provides written notice to the Fund and the Master Fund of the
termination of the Expense Limitation Agreement at least 30 days prior to the
end of the then-current term.
For the fiscal year ended March 31, 2006, the Adviser waived $113,973 of its
management fees due from the Master Fund. Pursuant to the Expense Limitation
Agreement, the Adviser reimbursed the Fund $322,273 of certain of its expenses.
PORTFOLIO TRANSACTIONS
The Master Fund
It is the policy of the Master Fund to obtain the best results in connection
with effecting its portfolio transactions taking into account certain factors as
set forth below. In most instances, the Master Fund purchases securities
directly from an Investment Fund, and such purchases by the Master Fund may be,
but are generally not, subject to transaction expenses. Nevertheless, the Master
Fund anticipates that some of its portfolio transactions may be subject to
expenses.
The Master Fund contemplates that, consistent with the policy of obtaining the
best net result, any brokerage transactions of the Master Fund may be conducted
through affiliates of the Adviser. The Board has adopted procedures in
conformity with Section 17(e) of the 1940 Act to ensure that all brokerage
commissions paid to affiliates are fair and reasonable. As discussed below, the
Investment Funds may also conduct brokerage transactions through affiliates of
the Adviser. Transactions for the Master Fund will not be effected on a
principal basis with the Adviser, any of its affiliates, or other affiliates of
the Fund or the Master Fund (unless, and in the manner, permitted under the 1940
Act). However, such entities may effect brokerage transactions for the Master
Fund. These transactions would be effected in accordance with procedures adopted
by the Master Fund pursuant to Section 17(e) of the 1940 Act and rules and
regulations promulgated thereunder. Among other things, Section 17(e) and those
procedures provide that, when acting as broker for the Master Fund in connection
with the sale of securities to or by the Master Fund, the Adviser, or their
affiliates may receive compensation not exceeding: (i) the usual and customary
broker's commission for transactions effected on a national securities exchange;
(ii) 2% of the sales price for secondary distributions of securities; and (iii)
1% of the sales price for other purchases or sales. Brokerage transactions
effected by the Investment Funds with the Adviser or any of its affiliates will
not be subject to the limitations imposed by Section 17(e) of the 1940 Act.
39
The Master Fund (and the Fund, as an indirect investor in the Master Fund) bears
any commissions or spreads in connection with its portfolio transactions. In
placing orders, it is the policy of the Master Fund to obtain the best results
taking into account the broker-dealer's general execution and operational
facilities, the type of transaction involved, and other factors such as the
broker-dealer's risk in positioning the securities involved. While the Adviser
generally seeks reasonably competitive spreads or commissions, the Master Fund
will not necessarily be paying the lowest spread or commission available. In
executing portfolio transactions and selecting brokers or dealers, the Adviser
will seek to obtain the best overall terms available for the Master Fund. In
assessing the best overall terms available for any transaction, the Adviser will
consider factors deemed relevant, including the breadth of the market in the
security, the price of the security, the financial condition and execution
capability of the broker or dealer, and the reasonableness of the commission, if
any, both for the specific transaction and on a continuing basis. The overall
reasonableness of brokerage commissions paid will be evaluated by the Adviser
based upon its knowledge of available information as to the general level of
commission paid by other institutional investors for comparable services.
Transactions on U.S. stock exchanges and on some foreign stock exchanges involve
the payment of negotiated brokerage commissions. On the great majority of
foreign stock exchanges, however, commissions are fixed. No stated commission is
generally applicable to securities traded in over-the-counter markets, but the
prices of those securities include undisclosed commissions or mark-ups.
The Investment Funds
The Investment Funds incur transaction expenses in the management of their
portfolios, which decrease the value of the Master Fund's investment in the
Investment Funds. In view of the fact that the investment program of certain of
the Investment Funds may include "trading" as well as "investments," short-term
market considerations will frequently be involved, and it is anticipated that
the turnover rates of the Investment Funds may be substantially greater than the
turnover rates of other types of investment vehicles. In addition, the order
execution practices of the Investment Funds may not be transparent to the Master
Fund. Each Investment Fund is responsible for placing orders for the execution
of its portfolio transactions and for the allocation of its brokerage. The
Adviser will have no direct or indirect control over the brokerage or portfolio
trading policies employed by the investment advisers of the Investment Funds.
The Adviser expects that each Investment Fund will generally select
broker-dealers to effect transactions on the Investment Fund's behalf
substantially in the manner set forth below.
Each Investment Fund will have a policy of generally seeking reasonably
competitive commission rates. However, an Investment Fund will not necessarily
pay the lowest commission available on each transaction, and may engage in
transactions with broker-dealers based on different criteria than those
considered by the Master Fund, and use "soft dollars" for payment of expenses
related to research and other services used by the investment adviser of the
Investment Fund. Investment Funds may not be subject to the same regulatory
restrictions on principal and agency transactions. It is anticipated that some
Investment Funds may effect principal or agency transactions through affiliates
of the Adviser. The Fund indirectly bears the commissions or spreads in
connection with the portfolio transactions of the Investment Funds.
No guarantee or assurance can be made that an Investment Fund's brokerage
transaction practices will be transparent or that the Investment Fund will
establish, adhere to, or comply with its stated practices. As the Investment
Funds are not investment companies registered under the 1940 Act, they may
select brokers on a basis other than that outlined above and may receive
benefits other than research or that benefit the Investment Fund's investment
adviser or its affiliates rather than the Investment Fund.
As with the Master Fund, Investment Funds may make investments directly in the
issuers of their underlying securities, and in some instances may not be subject
to transaction expenses.
VOTING
Each Member has the right to cast a number of votes based on the value of such
Member's Capital Account at any meeting of Members called by the (i) Directors
or (ii) Members holding at least a majority of the total number of votes
eligible to be cast by all Members. Members will be entitled to vote on any
matter on which shareholders of a registered investment company organized as a
corporation would be entitled to vote, including selection of Directors. Except
for the exercise of their voting privileges, Members will not be entitled to
participate in the management or control of the Fund's business, and may not act
for or bind the Fund.
40
Whenever the Fund as an investor in the Master Fund, through the Offshore Fund,
is requested to vote on matters pertaining to the Master Fund (other than the
termination of the Master Fund's business, which may be determined by the Board
of the Master Fund without investor approval), the Offshore Fund will pass
voting rights to the Fund, and the Fund will hold a meeting of the Members and
vote its interest in the Master Fund, through the Offshore Fund, for or against
such matters proportionately to the instructions to vote for or against such
matters received from the Members. Thus, the Offshore Fund will not vote on
Master Fund matters requiring a vote of Master Fund members without the
instruction of the Members of the Fund. The Fund will vote Interests for which
it receives no voting instructions in the same proportion as the Interests for
which it receives voting instructions.
CONFLICTS OF INTEREST
Certain conflicts of interest may arise in relation to the Fund, the Offshore
Fund, and the Master Fund.
The Adviser and its Affiliates
Other Ventures of the Adviser. The Adviser and its affiliates may organize or
become involved in other business ventures. None of the Fund, the Offshore Fund,
or the Master Fund will share in the risks or rewards of such other ventures.
However, such other ventures will compete with the Master Fund for the time and
attention of the Adviser and might create additional conflicts of interest. The
Investment Management Agreement does not require the Adviser to devote its full
time or any specified portion of its time to the Master Fund, although the
Adviser intends to dedicate a reasonable amount of time to the Master Fund and
its activities.
Other Products Offered by the Adviser. The Master Fund may utilize an investment
program similar to the investment program utilized by the Adviser for other
funds of funds it advises. Such other products may make continuous offerings of
securities contemporaneously with the offerings of the Fund, and the Adviser has
discretion as to whether investors are offered an interest in the Fund or such
other funds of funds. Even if such other funds of funds are generally closed to
new investment, such funds may accept subscriptions at any time to replace
amounts withdrawn.
Advisory Time. Although the officers and employees of the Adviser and the
Administrator devote as much time to the Fund, the Offshore Fund, and the Master
Fund as they believe is necessary to assist the Fund in achieving its investment
objectives and to administer the operations of such entities, they do not devote
substantially all or any specific portion of their working time to the affairs
of the Fund, the Offshore Fund, and the Master Fund as they must devote a
portion of their time to other funds and investments. The officers and key
employees of the Adviser and the Administrator may not have or may terminate
employment agreements and the loss of the services of one or more of them may
have a material adverse effect on the Fund.
Allocation of Investment Opportunities. The Adviser and its affiliates have
other investment advisory clients and investment vehicles and have discretion to
allocate investment opportunities and dispositions fairly among all clients or
vehicles. The Adviser may determine that an investment opportunity in an
Investment Fund is appropriate for a particular fund or account that it manages,
or for itself, but not for the Master Fund. Situations may arise in which
private investment funds managed by the Adviser or its affiliates have made
investments that would have been suitable for investment by the Master Fund but,
for various reasons, were not pursued by, or available to, the Master Fund. To
the extent that the Adviser, its affiliates, or another advisory client invest
in Investment Funds, the ability of the Master Fund to invest in the same
Investment Funds may be adversely affected by any limitation on availability of
the investment. In addition, the Adviser may be required to choose between the
Master Fund and other advisory clients in allocating investments in Investment
Funds and managed accounts. Decisions with regard to the allocation of
investment opportunities between the Master Fund and other clients of the
Adviser will be made in accordance with the allocation procedures of the Master
Fund, which have been approved by the Board.
Preferential Terms. The Adviser, its affiliates, or accounts other than the
Master Fund managed by the Adviser or its affiliates may invest in Investment
Funds on terms more favorable than those available to the Master Fund, and as
investors in such Investment Funds may act in ways adverse to the interests of
the Master Fund.
41
Cross Trades with other Adviser Clients. To the extent permitted under Section
17 of the 1940 Act, the Adviser may cause the Master Fund to purchase securities
from or sell securities and interests in Investment Funds to other clients or
vehicles when the Adviser believes such transactions are appropriate and in the
best interests of the Master Fund. In the event the Adviser wishes to reduce the
investment of one or more such funds in an Investment Fund and increase the
investment of other funds in such Investment Fund, it may effect such
transactions by directing the transfer of the interests between funds. Any
incremental costs and expenses associated with any such investment will be borne
by all such classes of such funds (including the Master Fund) on a pro rata
basis. In addition, the Adviser may recommend that the Master Fund purchase or
sell an investment that is being sold or purchased, respectively, at the same
time by the Adviser, an affiliate, or another advisory client.
Fees and Incentive Allocation. The Advisory Fee and Incentive Allocation have
not been negotiated at arm's-length and may be higher than advisory fees or
incentive allocations charged by or to others. The Board has determined the
level of such Advisory Fee and Incentive Allocation to be appropriate in light
of the services provided. The Incentive Allocation allocable to the Adviser is
based on net profits. This arrangement may create an incentive for the Adviser
to invest Master Fund assets in investments that are riskier or more speculative
than would be the case if the Adviser was compensated solely based on a flat
percentage of capital. In addition, the Incentive Allocation is determined on
the basis of the value of Capital Accounts, including value attributable to
unrealized appreciation. Any securities traded directly by the Master Fund for
which market quotations are not available may be valued by or at the direction
of the Adviser at such value as it may reasonably determine and may not be
independently valued or verified by a third party. The Adviser may have an
incentive to place the highest reasonable value on the Master Fund's
investments.
Structured Investments. To the extent permitted by Section 17 of the 1940 Act,
the Adviser or an affiliate thereof may serve as counterparty to the Master Fund
for certain Structured Investments and may earn additional revenues in
connection with structuring such transactions. Although such transactions will
only be undertaken when the Adviser believes they are in the best interest of
the Master Fund and the Board will review and approve such transactions, the
additional revenues available from Structured Investments may create an
incentive for the Adviser to purchase Structured Investments linked to the
return of Investment Funds rather than making direct investments.
Investment Fund Transactions with Affiliates. The Adviser and its affiliates,
including Deutsche Bank AG and its brokerage subsidiaries, may invest in and
have other relationships with the Investment Funds in which the Master Fund
invests that may give rise to potential conflicts. The Adviser and its
affiliates may, for example, enter into transactions, as principal, with any of
the Investment Funds, including derivative transactions, or perform routine
broker-dealer transactions. Other relationships may include, but are not limited
to, providing seed capital, lending transactions in which the affiliate provides
financing, serving as placement agent or prime broker, providing administrative
services, and providing general financial advisory services to an Investment
Fund. In addition, to the extent permitted by the 1940 Act, certain Deutsche
Bank affiliates may provide brokerage or other services from time to time to one
or more accounts or entities managed by the investment advisers of Investment
Funds or their affiliates. Deutsche Bank affiliates may provide prime brokerage
or other brokerage services to the Investment Funds in compliance with
applicable law. Accordingly, the Adviser may face a conflict of interest in
evaluating investments in and withdrawals from Investment Funds (e.g., a
withdrawal from an Investment Fund could adversely impact the business
relationships between Deutsche Bank AG or its affiliates and such Investment
Fund). In addition, situations may arise in which the Adviser or an affiliate
believes that, to protect its own commercial interests, it may be necessary to
take action with respect to an Investment Fund that may be detrimental to such
Investment Fund (e.g., terminating a trading facility or foreclosing on
collateral), and therefore inadvertently detrimental to the Fund. Deutsche Bank
AG or its affiliates may keep any profits, commissions, and fees accruing to it
in connection with its activities for itself and other clients, including such
Investment Funds, and the fees payable from the Master Fund to the Adviser will
not be reduced thereby.
Unaffiliated Consultants. The Adviser and/or its affiliates are also referred
advisory clients by unaffiliated consultants that are retained by clients or
prospective clients. The Adviser and/or its affiliates may make cash payments to
these consultants to participate in conferences sponsored by such consultants in
order to, among other things, obtain information about industry trends and
client investment needs. In addition, the Adviser and/or its affiliates may
purchase products or services from these consultants or their affiliates. Such
cash payments for conferences, products or services are not paid in connection
with any advisory client referral by the consultants.
42
Material Nonpublic Information. Due to the relationships described above,
affiliates of the Adviser may have access to material nonpublic information
regarding the Investment Funds in which the Master Fund invests. Investors
should be aware, however, that the Adviser will generally be unable to access
such information due to confidentiality, "Ethical Wall," or other legal
considerations. As a result, the Adviser may sometimes make investment decisions
different than those it would make if it had such access, and such decisions may
result in a material loss to the Fund. The Adviser's affiliates are not required
to afford the Adviser access to all relevant information they may possess.
However, in the event that the Adviser does receive such material nonpublic
information, it may be prohibited from effecting transactions in Investment
Funds that it would desire to effect and thus incur losses. Further, by reason
of the advisory, due diligence, committee participation, and other activities of
the Adviser and its affiliates, the Adviser or related persons may acquire
confidential or material nonpublic information or be restricted from initiating
transactions in certain securities. The Adviser and related persons will not be
free to divulge, or to act upon, any such confidential or material nonpublic
information and, due to these restrictions, the Adviser may not initiate a
transaction for the Master Fund's account that the Adviser otherwise might have
initiated, and the Master Fund may be frozen in an investment position that it
otherwise might have liquidated or closed out.
Underwriting. An Investment Fund may purchase investments that are issued, or
the subject of an underwriting or other distribution, by Deutsche Bank AG or an
affiliate. An Investment Fund may invest, directly or indirectly, in the
securities of companies affiliated with Deutsche Bank AG or in which Deutsche
Bank AG has an equity or participation interest. The purchase, holding, and sale
of such investments by an Investment Fund may enhance the profitability of
Deutsche Bank AG's own investments in such companies.
Proprietary Trading. Deutsche Bank AG and its affiliates are major participants
in the equity, fixed income, global currency, commodity, derivative, and other
markets. As such, Deutsche Bank AG and its affiliates, including the Adviser,
are actively engaged in transactions in the same securities and other
instruments in which the Investment Funds may invest. Deutsche Bank AG and its
affiliates are not under any obligation to share any investment opportunity,
idea, or strategy with the Master Fund or an Investment Fund. As a result,
Deutsche Bank AG and its affiliates may compete with the Master Fund and the
Investment Funds for appropriate investment opportunities. Deutsche Bank AG and
its affiliates may also have material nonpublic information about an issuer in
whose securities the Fund has invested and generally will not share such
information with the Master Fund or the Investment Funds.
The Adviser and its principals, affiliates, and employees may trade in the
securities and derivatives markets for their own accounts and the accounts of
their clients, and in doing so may take positions opposite to, or ahead of,
those held by the Master Fund or may be competing with the Master Fund for
positions in the marketplace. Such trading may result in competition for
investment opportunities or create other conflicts of interest on behalf of one
or more such persons in respect of their obligations to the Master Fund and the
Fund. Records of this trading will not be available for inspection by Members.
The proprietary activities or portfolio strategies of Deutsche Bank AG or its
affiliates or the activities or strategies used for accounts managed by Deutsche
Bank AG and its affiliates for other customer accounts could conflict with the
transactions and strategies employed by the Master Fund or an Investment Fund
and affect the prices and availability of the securities and instruments in
which the Master Fund or an Investment Fund invests. Issuers of securities held
by the Investment Funds may have publicly or privately traded securities in
which Deutsche Bank AG affiliates are investors or make a market. The trading
activities of Deutsche Bank AG affiliates generally are carried out without
reference to positions held directly or indirectly by the Investment Funds and
may have an effect on the value of the positions so held or may result in
Deutsche Bank AG affiliates having an interest in the issuer adverse to that of
the Investment Fund.
In particular, various affiliates of the Adviser may be significant investors in
Investment Funds for their proprietary accounts and to hedge derivative
transactions linked to such Investment Funds. Such affiliates' investments in
and withdrawals from Investment Funds will be made in their best interests and
without regard to the Master Fund's interests. The Adviser may share information
regarding Investment Funds with such affiliates and may receive referrals
regarding Investment Funds from such affiliates.
43
Selling Agents. As selling agents may receive ongoing compensation in respect of
selling Interests, they may have a conflict of interest in consulting with
investors as to the purchase and repurchase of Interests. Further, selling
agents may receive different amounts of compensation with respect to sales of
the Fund than from other products advised by the Adviser and/or its affiliates,
and therefore may have incentives to favor one or more products over others.
Investment Advisers to the Investment Funds
Other Clients Advised by Investment Advisers. Conflicts of interest may arise
from the fact that the investment advisers of the Investment Funds and their
affiliates generally will be carrying on substantial investment activities for
other clients, including other investment funds, in which the Master Fund will
have no interest. The investment advisers of the Investment Funds may have
financial incentives to favor certain of such accounts over the Investment
Funds. Any of their proprietary accounts and other customer accounts may compete
with the Investment Fund for specific trades, or may hold positions opposite to
positions maintained on behalf of the Investment Fund. The investment advisers
of the Investment Funds may give advice and recommend securities to, or buy or
sell securities for, an Investment Fund in which the Master Fund has invested,
which advice or securities may differ from advice given to, or securities
recommended or bought or sold for, other accounts and customers even though
their investment objectives may be the same as, or similar to, those of the
Investment Fund in which the Master Fund is invested.
Allocation of Investment Opportunities. Each investment adviser of an Investment
Fund will evaluate a variety of factors that may be relevant in determining
whether a particular investment opportunity or strategy is appropriate and
feasible for the relevant Investment Fund and accounts under management at a
particular time, including, but not limited to, the following: (i) the nature of
the investment opportunity taken in the context of the other investments at the
time; (ii) the liquidity of the investment relative to the needs of the
particular entity or account; (iii) the availability of the opportunity (i.e.,
size of obtainable position); (iv) the transaction costs involved; and (v) the
investment or regulatory limitations applicable to the particular entity or
account. Because these considerations may differ, the investment activities of
an Investment Fund, on the one hand, and other managed accounts, on the other
hand, may differ considerably from time to time. In addition, the fees and
expenses of the Investment Fund may differ from those of the other managed
accounts. Accordingly, prospective Members should note that the future
performance of an Investment Fund and its investment adviser's other accounts
will vary.
"Soft Dollar" Payments. The brokers utilized by the Investment Funds will be
selected by the managers of the Investment Funds. Any manager of a Investment
Fund may engage in "soft dollar" practices whether or not such practices fall
within the soft dollar safe harbor established by Section 28(e) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Thus, an
Investment Fund manager may receive "brokerage and related services" covered by
such safe harbor as well as office space, overhead expense reimbursement, and
similar benefits not covered by such safe harbor. In doing so, the Investment
Fund managers may pay higher commissions than those charged by brokers that do
not provide such services or benefits.
Aggregation of Orders. When an investment adviser of an Investment Fund
determines that it would be appropriate for an Investment Fund and one or more
of its other accounts to participate in an investment opportunity at the same
time, it may attempt to aggregate, place, and allocate orders on a basis that
the investment adviser of the Investment Fund believes to be fair and equitable,
consistent with its responsibilities under applicable law. Decisions in this
regard are necessarily subjective, and there is no requirement that the
Investment Fund participate, or participate to the same extent as the other
accounts, in all trades.
Situations may occur, however, where the Fund could be disadvantaged because of
the investment activities conducted by an investment adviser of an Investment
Fund for its other accounts. Such situations may be based on, among other
things, the following: (i) legal restrictions on the combined size of positions
that may be taken for an Investment Fund or the other accounts, thereby limiting
the size of the Investment Fund's position; (ii) the difficulty of liquidating
an investment for an Investment Fund or the other accounts where the market
cannot absorb the sale of the combined positions; and (iii) the determination
that a particular investment is warranted only if hedged with an option or other
instrument and there is a limited availability of such options or other
instruments.
Proprietary Trading. Each investment adviser of an Investment Fund, and its
principals, officers, employees, and affiliates, may buy and sell securities or
other investments for their own accounts and may have actual or potential
44
conflicts of interest with respect to investments made on behalf of the Fund or
an Investment Fund. As a result of differing trading and investment strategies
or constraints, positions may be taken by principals, officers, employees, and
affiliates of the investment adviser of the Investment Fund that are the same,
different, or made at a different time than positions taken for the Investment
Fund.
Performance-Based Compensation. The investment advisers of the Investment Funds
may receive incentive fees or allocations in the event that the relevant
Investment Fund generates net profits. The fact that such incentive fees or
allocations are payable or made only out of net profits may create an incentive
for the investment adviser of an Investment Fund to make investments that are
riskier or more speculative than would be the case if such investment adviser
were compensated solely based on a flat percentage of capital. In addition, the
investment adviser of an Investment Fund may receive increased compensation
because the incentive fee or allocation may be calculated on a basis that
includes unrealized appreciation as well as realized gains.
OUTSTANDING SECURITIES
Amount Outstanding as of
April 30, 2006 Exclusive
of Amount Shown Under
Amount Held by "Amount Held by Registrant
Title of Class Amount Authorized Registrant for its Account for its Account"
-------------- ----------------- -------------------------- ----------------
Interests Unlimited N/A $77,041,448.26
CONTROL PERSONS
As of April 30, 2005, DBAH Capital LLC ("DBAH"), an affiliate of the Adviser,
owned 44% of the Interests of the Master Fund and 0.31% of the Interests of the
Fund outstanding as of April 30, 2005 and accordingly was deemed to "control"
the Master Fund. As of April 30, 2006, DBAH owned 1.5232% of the interests of
the Master Fund and 0.1582% of the Interests of the Fund outstanding as of April
30, 2006 and is therefore no longer deemed to "control" the Master Fund.
ELIGIBLE INVESTORS
Each prospective investor (and each Member who makes an additional capital
contribution) will be required to certify that the Interest purchased is being
acquired directly or indirectly for the account of an "Eligible Investor." An
"Eligible Investor" includes, among other investors, a person who is (i) an
"accredited investor" as defined in Regulation D under the Securities Act, and
(ii) a "qualified client" as defined in Rule 205-3 of the Advisers Act, except
as otherwise determined by the Fund. In addition, investors must qualify as a
"tax-exempt investor" for U.S. federal income tax purposes. The relevant
investor qualifications are set forth in the investor certification that each
investor must sign in order to invest in the Fund, a form of which appears as
Appendix A to this Prospectus. Existing Members who make additional capital
contributions will be required to meet the Fund's eligibility criteria at the
time of the additional capital contribution. Any transferee of an Interest must
satisfy the Fund's eligibility criteria at the time of the transfer. See
"Transfers of Interests."
SUBSCRIPTION FOR INTERESTS
DWS Scudder Distributors, Inc., 222 South Riverside Plaza, Attn: Correspondence
27th Floor, Chicago, IL 60606-1048, is the distributor of the Interests pursuant
to an Underwriting Agreement between the Fund and the Distributor. The
Distributor will offer the Interests in a continuous offering at net asset
value, plus any applicable sales charges. Initial and subsequent purchases of
Interests generally are accepted monthly.
Investments may be subject to a sales charge of up to 2.5%, subject to waiver or
adjustment in the sole discretion of the placement agent. Without limiting the
foregoing, the sales charge is expected to be waived for certain institutional
investors and certain persons associated with the Adviser or its affiliates. The
sales charge will be
45
added to each prospective investor's purchase amount, and will not constitute
part of a Member's capital contribution to the Fund or part of the assets of
the Fund. All purchases are subject to the receipt of cleared funds two
business days prior to the acceptance date. Generally, the minimum required
initial purchase by each investor is $25,000, subject to the discretion of the
Board to accept lesser amounts. The Distributor, the Adviser, or their
affiliates may also pay from their own resources additional compensation to
brokers or dealers in connection with the sale and distribution of the
Interests or servicing of investors.
Both initial and additional purchases of Interests in the Fund may be accepted
from investors at such times as the Board may determine on the terms set forth
below. The Board may, in its discretion, suspend or discontinue the offering of
Interests at any time (e.g., to the extent required for purposes of compliance
with the securities laws, in response to market conditions in the securities
market(s), or otherwise) or permit purchases on a more frequent basis. The Board
reserves the right to reject any purchase of Interests in the Fund or to
repurchase all of the Interest held by a Member upon notice to such Member.
Except as otherwise permitted by the Board, initial and subsequent purchases of
Interests will be payable in cash. Each initial or subsequent purchase of
Interests is payable in one installment and is due at least two business days
prior to the proposed acceptance of the purchase, although the Board may accept,
in its discretion, purchases prior to its receipt of cleared funds.
By purchasing an Interest in the Fund, each new Member will be bound by all of
the terms of the Operating Agreement. Each prospective investor will also be
required to represent and warrant in a subscription agreement, among other
things, that the Investor is purchasing an Interest for its own account, and not
with a new to the distribution, assignment, transfer, or other disposition of
the Interest. The Fund has the sole right to accept subscriptions for Interests
and reserves the right to reject any subscription in whole or in part.
Pending investment in the Fund, the proceeds of the continuous offering will be
placed in an interest-bearing escrow account by PFPC, the Fund's escrow agent.
After any closing, the balance in the escrow account, including any interest
earned, will be invested pursuant to the Fund's investment policies.
REPURCHASES OF INTERESTS
No Right of Redemption
No Member will have the right to require the Fund to redeem its Interest. No
public market exists for the Interests, and none is expected to develop.
Consequently, Members will not be able to liquidate their investment other than
as a result of repurchases of Interests by the Fund, as described below.
Repurchases of Interests
The Board of the Fund, from time to time and in its complete and absolute
discretion, may determine to cause the Fund to offer to repurchase Interests
from Members, including affiliates of the Adviser, pursuant to written requests
by Members on such terms and conditions as it may determine. In determining
whether the Fund should offer to repurchase Interests from Members pursuant to
written requests, the Board will consider, among other things, the
recommendation of the Adviser. The repurchase amount will be determined by the
Board in its complete and absolute discretion, and such repurchase amount may be
a portion of the Fund's outstanding Interests. The Board expects that the Fund
will offer to repurchase Interests from Members twice a year, as of the last
business day of June and December. As used in this Prospectus, a "business day"
is any day, other than Saturday, Sunday, or a day on which banking institutions
are authorized or obliged by law or regulation to close in New York. The Board
of the Fund also will consider the following factors, among others, in making
such determination: (i) whether any Members have requested that the Fund
repurchase Interests; (ii) the liquidity of the Fund's assets; (iii) the
investment plans and working capital requirements of the Fund; (iv) the relative
economies of scale with respect to the size of the Fund; (v) the history of the
Fund in repurchasing Interests; (vi) the economic condition of the securities
markets; and (vii) the anticipated tax consequences of any proposed repurchases
of Interests.
46
The Fund's assets consist primarily of its interest in the Master Fund (held
through its investment in the Offshore Fund). Accordingly, the Fund will be
required to liquidate a portion of its interest in the Master Fund in order to
fund repurchases. In order to liquidate its interest in the Master Fund, the
Offshore Fund (which is effectively controlled by the Fund's Board) must accept
repurchase offers made by the Master Fund and distribute the proceeds of such
repurchases to the Fund. The Fund will not conduct repurchase offers unless the
Master Fund simultaneously conducts a repurchase offer for the Master Fund's
interests. The Board of the Master Fund expects that the Master Fund will
conduct repurchase offers twice a year, as of the last business day of June and
December. However, there are no assurances that the Board of the Master Fund
will determine to make such an offer. The Fund cannot make a repurchase offer
larger than the repurchase offer made by the Master Fund. The Master Fund will
make repurchase offers, if any, to all of its investors, including the Fund (via
the Offshore Fund), on the same terms, which may affect the size of the Master
Fund's offers. Subject to the Master Fund's restrictions on borrowings, the
Master Fund may borrow money or issue debt obligations to finance its repurchase
obligations pursuant to any such repurchase offer.
The Operating Agreement provides that the Fund will be dissolved if any Member
that has submitted a written request, in accordance with the terms of the
Operating Agreement, to tender all of such Member's Interest for repurchase by
the Fund has not been given the opportunity to so tender within a period of two
years after the request (whether in a single repurchase offer or multiple
consecutive offers within the two-year period). A Member who intends to cause
the Fund to be dissolved must so indicate in a separate written request
submitted within the applicable two-year period.
The Board will determine that the Fund will offer to repurchase Interests
pursuant to written requests only on terms that the Board determines to be fair
to the Fund and Members. When the Board determines that the Fund will offer to
repurchase Interests, written notice will be provided to Members that describes
the commencement date of the repurchase offer, specifies the date on which
repurchase requests must be received by the Fund (the "Repurchase Request
Deadline"), and contains other information Members should consider in deciding
whether and how to participate in such repurchase opportunity. The Repurchase
Request Deadline will be a date set by the Board occurring no sooner than 20
business days after the commencement date of the repurchase offer and such
Repurchase Request Deadline may be extended by the Board in its absolute
discretion. The Fund will not accept any repurchase request received by it or
its designated agent after the Repurchase Request Deadline.
Due to liquidity constraints associated with the Master Fund's investments in
Investment Funds and the fact that the Fund will have to effect withdrawals from
the Master Fund (via the Offshore Fund) to pay for Interests being repurchased,
and, in turn, the Master Fund will have to effect withdrawals from Investment
Funds in order to finance such withdrawal, it is presently expected that, under
the procedures applicable to the repurchase of Interests, for Members tendering
all of their Interests in the Fund, Interests will be valued for purposes of
determining their repurchase price as of a date approximately 65 days after the
Repurchase Request Deadline (the "Full Repurchase Valuation Date"). The amount
that a Member who is tendering all of its Interests in the Fund may expect to
receive on the repurchase of such Member's Interest will be the value of the
Member's Capital Account determined on the Full Repurchase Valuation Date and
based on the net asset value of the Fund's assets (based in part on oral or
written estimates of the value of the Master Fund's investments received from
Investment Funds) as of that date, after giving effect to all allocations to be
made as of that date to the Member's Capital Account. Therefore, such repurchase
payments may not reflect final net asset values for the Full Repurchase
Valuation Date calculated by the Investment Funds; however, the Fund will
generally not make any adjustments for final valuations from the Master Fund
based on adjustments received from the Investment Funds, and the withdrawing
Member (if such valuations are adjusted upwards) or the remaining Members (if
such valuations are adjusted downwards) will bear the risk of change of any such
valuations.
Members who tender a portion of their Interests in the Fund (defined as a
specific dollar value in their repurchase request), and which portion is
accepted for repurchase by the Fund, will receive such specified dollar amount.
For Members tendering all of their Interests in the Fund, the value of such
Interests being repurchased will be determined on the Full Repurchase Valuation
Date. Within five days of the Repurchase Request Deadline, each Member whose
Interest or portion thereof has been accepted for repurchase will be given a
non-interest bearing, non-transferable promissory note by the Fund entitling the
Member to be paid an amount equal to 100% of the unaudited net asset value such
Member's Capital Account (or portion thereof) being repurchased, determined as
of the Full Repurchase Valuation Date (after giving effect to all allocations to
be made as of that date to such
47
Member's Capital Account). The note will entitle the Member to be paid within
30 days after the Full Repurchase Valuation Date, or, if the Master Fund has
requested withdrawals of its capital from any Investment Funds in order to fund
the repurchase of Interests, ten business days after the Master Fund has
received at least 90% of the aggregate amount withdrawn by the Master Fund from
such Investment Funds, whichever is later (either such date, a "Payment Date").
Notwithstanding the foregoing, if a Member has requested the repurchase of 90%
or more of the Interest held by such Member, such Member shall receive (i) cash
or a non-interest bearing, non-transferable promissory note, which need not
bear interest, in an amount equal to 90% of the estimated unaudited net asset
value of such Member's Capital Account (or portion thereof) being repurchased,
determined as of the Full Repurchase Valuation Date (after giving effect to all
allocations to be made as of that date to such Member's Capital Account) (the
"Initial Payment"), which will be paid on or prior to the Payment Date; and
(ii) a promissory note entitling the holder thereof to the balance of the
proceeds, to be paid following the later of (x) 90 days following the
applicable Full Repurchase Valuation Date, so as to effectuate the orderly
liquidation of enough Investment Funds in which the Master Fund is invested or
otherwise, or (y) such longer period as the Board of Directors in its
discretion deems necessary to protect the interests of the remaining Members.
The Board in its discretion may also pay repurchase proceeds, in whole or in
part, in securities of equivalent value. The Fund does not expect that it will
distribute securities as payment for repurchased Interests except in unusual
circumstances, such as in the unlikely event that (i) making a cash payment
would result in a material adverse effect on the Fund or on Members not
requesting that their Interests be repurchased or (ii) that the Master Fund has
received distributions from Investment Funds in the form of securities that are
transferable to the Members. In the event that the Fund makes such a
distribution of securities as payment for Interests, Members will bear any risks
of the distributed securities and may be required to pay a brokerage commission
or other costs in order to dispose of such securities.
Under these procedures, Members tendering all of their Interests in the Fund
will have to decide whether to request that the Fund repurchase their Interests,
without the benefit of having current information regarding the value of
Interests on a date proximate to the Full Repurchase Valuation Date. In
addition, there will be a substantial period of time between the Repurchase
Request Deadline and the date they can expect to receive payment for their
Interests from the Fund. As noted above, Members whose Interests are accepted
for repurchase will bear the risk that the Fund's net asset value may fluctuate
significantly between the Repurchase Request Deadline and the Full Repurchase
Valuation Date. This period of time is intended, in part, to assist the Fund in
paying the amount due to Members on the Payment Date. The Fund's schedule with
respect to repurchases of Interests will be based on operational considerations
and various factors relating to the best interests of Members, including, but
not limited to, the intent that the Fund pay Members their repurchase proceeds,
to the extent practicable, based on redemption proceeds received by the Master
Fund from Investment Funds and to minimize the need for the Fund to maintain
cash or borrow money to meet repurchase requests. Payments for repurchased
Interests may be further delayed under circumstances where the Master Fund has
determined to redeem its interests in Investment Funds to make such payments,
but has experienced unusual delays in receiving payments from the Investment
Funds.
The Fund may suspend or postpone a repurchase offer in limited circumstances,
and only by a vote of a majority of the Board, including a majority of the
Independent Directors. These circumstances may include the following: (i) for
any period during which an emergency exists as a result of which it is not
reasonably practicable for the Fund to dispose of securities it owns or to
determine the value of the Fund's net assets; (ii) for any other periods that
the SEC permits by order for the protection of Members; or (iii) other unusual
circumstances as the Board deems advisable to the Fund and its Members.
If Members request that the Fund repurchase a greater number of Interests than
the repurchase offer amount as of the Repurchase Request Deadline, as determined
by the Board in its complete and absolute discretion, the Fund may repurchase an
additional amount of Interests not to exceed 2% of the Interests outstanding on
the Repurchase Request Deadline. If the Board determines not to repurchase more
than the repurchase offer amount or if Members request that the Fund repurchase
Interests in an amount exceeding the repurchase offer amount plus 2% of the
Interests outstanding on the Repurchase Request Deadline, the Fund shall
repurchase the Interests pursuant to repurchase requests on a pro rata basis,
disregarding fractions, according to the amount of Interests requested by each
Member to be repurchased as of the Repurchase Request Deadline.
48
Payment for repurchased Interests will require the Fund to withdraw from the
Offshore Fund, and the Offshore Fund from the Master Fund, which in turn may be
required to liquidate portfolio holdings in Investment Funds earlier than the
Adviser otherwise would liquidate such holdings, potentially resulting in
losses, and may increase the Master Fund's portfolio turnover. The Adviser
intends to take measures to attempt to avoid or minimize such potential losses
and turnover. The Master Fund may maintain cash or borrow money to meet
repurchase requests, which would increase the Master Fund's operating expenses
and would adversely impact the ability of the Fund to achieve its investment
objective.
The repurchase of Interests is subject to regulatory requirements imposed by the
SEC. The Fund's and the Master Fund's repurchase procedures are intended to
comply with such requirements. However, in the event that the Board determines
that modification of these repurchase procedures is required or appropriate, the
Board will adopt revised repurchase procedures as necessary to ensure the Fund's
compliance with applicable regulations or as the Board in its sole discretion
deems appropriate.
The Fund does not presently intend to impose any charges on the repurchase of
Interests, although the Fund may allocate to Members whose interests are
repurchased withdrawal or similar charges imposed by Investment Funds if the
Adviser determines to withdraw from one or more Investment Funds as a result of
Member repurchase requests and such charges are imposed on the Master Fund.
A Member who tenders some but not all of the Member's Interest for repurchase
will be required to maintain a minimum Capital Account balance of $25,000. The
Fund reserves the right to reduce the amount to be repurchased from a Member so
that the required Capital Account balance is maintained.
In accordance with the terms and conditions of the Fund's Operating Agreement,
the Fund may cause a mandatory redemption of all or a portion the Interest of a
Member or any person acquiring an Interest from or through a Member if the Board
or, on behalf of the Board, the Adviser determines or has reason to believe
that, among other things: (i) all or part of the Member's Interest has been
transferred, or the Interest has vested in any person, by operation of law as a
result of the death, dissolution, bankruptcy, or incompetency of a Member; (ii)
ownership of an Interest by such Member or other person will cause the Fund to
be in violation of, or subject the Fund or the Adviser to additional
registration or regulation under the securities, commodities, or other laws of
the United States or any other relevant jurisdiction; (iii) continued ownership
of such Interest may be harmful or injurious to the business or reputation of
the Fund or the Adviser, or may subject the Fund or any Members to an undue risk
of adverse tax or other fiscal consequences; (iv) any representation or warranty
made by a Member in connection with the acquisition of its Interest was not true
when made or has ceased to be true; or (v) it would be in the best interests of
the Fund for the Fund to cause a mandatory redemption of such Interest. Members
whose Interests are redeemed by the Fund will not be entitled to a return of any
amount of sales load that was charged in connection with the Member's purchase
of an Interest.
TRANSFERS OF INTERESTS
No person will become a substituted Member without the consent of the Board,
which consent may be withheld in its sole and absolute discretion. Interests
held by Members may be transferred only (i) by operation of law pursuant to the
death, divorce, bankruptcy, insolvency, or dissolution of a Member or (ii) under
extremely limited circumstances, with the written consent of the Board (which
may be withheld in its sole and absolute discretion). The Board generally will
not consider consenting to a transfer unless the transfer is (i) one in which
the tax basis of the Interest in the hands of the transferee is determined, in
whole or in part, by reference to its tax basis in the hands of the transferring
Member (e.g., certain gifts and contributions to family entities) or (ii) to
members of the transferring Member's immediate family (siblings, spouse,
parents, and children). Notice to the Fund of any proposed transfer must include
evidence satisfactory to the Board that the proposed transferee, at the time of
transfer, meets any requirements imposed by the Fund with respect to investor
eligibility and suitability. See "Eligible Investors." The Board may not consent
to a transfer of an Interest by a Member unless such transfer is to a single
transferee or after the transfer of the Interest, the balance of the Capital
Account of each of the transferee and transferor is not less than $25,000. The
Board has delegated authority to the Adviser to approve a transfer of Fund
Interests for purposes of facilitating the transfer of such Interests in
accordance with these limitations, for financial purposes, or in situations that
involve no change of beneficial ownership. All such transfers will be reported
to the Board on a quarterly basis. Each transferring Member and transferee must
agree to pay all expenses, including, but
49
not limited to, attorneys' and accountants' fees, incurred by the Fund in
connection with the transfer. If a Member transfers an Interest with the
approval of the Board, the Fund will promptly take all necessary actions so
that each transferee or successor to whom the Interest is transferred is
admitted to the Fund as a Member.
By subscribing for an Interest, each Member agrees to indemnify and hold
harmless the Fund, the Board, the Adviser, and each other Member, and any
affiliate of the foregoing against all losses, claims, damages, liabilities,
costs, and expenses (including legal or other expenses incurred in investigating
or defending against any losses, claims, damages, liabilities, costs, and
expenses or any judgments, fines, and amounts paid in settlement), joint or
several, to which such persons may become subject by reason of or arising from
any transfer made by that Member in violation of the Operating Agreement or any
misrepresentation made by that Member in connection with any such transfer.
NET ASSET VALUATION
The Fund and the Offshore Fund will compute their net asset value as of the last
business day of each fiscal period (as defined in "Capital Accounts and
Allocations"). In determining their net asset value, the Fund and the Offshore
Fund value their investments as of such fiscal period end. The net asset value
of the Fund and the Offshore Fund equal the value of the assets of the Fund and
the Offshore Fund, respectively, less all of each entity's respective
liabilities, including accrued fees and expenses. In computing its net asset
value, the Fund values its interest in the Offshore Fund at the value of the
Offshore Fund's interest in the Master Fund, and the Offshore Fund values its
interest in the Master Fund at the net asset value provided by the Master Fund
to the Offshore Fund and the Fund.
The net asset value of the Master Fund equals the value of the total assets of
the Master Fund less all of its liabilities, including accrued fees and
expenses. The Board has approved procedures pursuant to which the Master Fund
will value its investments in Investment Funds at fair value. In accordance with
these procedures, fair value as of each month-end ordinarily will be the value
determined as of such month-end for each Investment Fund in accordance with the
Investment Fund's valuation policies and reported at the time of the Master
Fund's valuation. As a general matter, the fair value of the Master Fund's
interest in an Investment Fund represents the amount that the Master Fund could
reasonably expect to receive from an Investment Fund if the Master Fund's
interest were redeemed at the time of valuation, based on information reasonably
available at the time the valuation is made and that the Master Fund believes to
be reliable. In the event that an Investment Fund does not report a month-end
value to the Master Fund on a timely basis, the Master Fund will determine the
fair value of such Investment Fund based on the most recent final or estimated
value reported by the Investment Fund, as well any other relevant information
available at the time the Master Fund values its portfolio. Using the
nomenclature of the hedge fund industry, any values reported as "estimated" or
"final" values will reasonably reflect market values of securities for which
market quotations are available or fair value as of the Master Fund's valuation
date.
Prior to investing in any Investment Fund, the Adviser conducts a due diligence
review of the valuation methodology utilized by the Investment Fund, which as a
general matter utilizes market values when available, and otherwise utilizes
principles of fair value that the Adviser reasonably believes to be consistent
with those used by the Master Fund for valuing its own investments. Although the
procedures approved by the Board provide that the Adviser will review the
valuations provided by the investment advisers to the Investment Funds, neither
the Adviser nor the Board will be able to confirm independently the accuracy of
valuations provided by such investment advisers (which are unaudited).
The Master Fund's valuation procedures require the Adviser to consider all
relevant information available at the time the Master Fund values its portfolio.
The Adviser and/or the Board will consider such information, and may conclude in
certain circumstances that the information provided by the investment adviser of
an Investment Fund does not represent the fair value of the Master Fund's
interests in the Investment Fund. Although redemptions of interests in
Investment Funds are subject to advance notice requirements, Investment Funds
typically make available net asset value information to holders which represent
the price at which, even in the absence of redemption activity, the Investment
Fund would have effected a redemption if any such requests had been timely made
or if, in accordance with the terms of the Investment Fund's governing
documents, it would be necessary to effect a mandatory redemption. Following
procedures adopted by the Board, in the absence of specific transaction activity
in interests in a particular Investment Fund, the Master Fund would consider
whether it was appropriate, in light of all relevant circumstances, to value
such a position at its net asset value as reported at the time of valuation, or
50
whether to adjust such value to reflect a premium or discount to net asset
value. In accordance with generally accepted accounting principles and industry
practice, the Master Fund may not always apply a discount in cases where there
was no contemporaneous redemption activity in a particular Investment Fund. In
other cases, as when an Investment Fund imposes extraordinary restrictions on
redemptions, or when there have been no recent transactions in Investment Fund
interests, the Master Fund may determine (but is not required to) that it is
appropriate to apply a discount to the net asset value of the Investment Fund.
Any such decision would be made in good faith, and subject to the review and
supervision of the Board.
The valuations reported by the investment advisers of the Investment Funds, upon
which the Master Fund calculates its month-end net asset value, may be subject
to later adjustment, based on information reasonably available at that time. For
example, fiscal year-end financial statements of the Investment Funds are
audited by their independent auditors and may be revised as a result of such
audits. Other adjustments may occur from time to time. Because such adjustments
or revisions, whether increasing or decreasing the net asset value of the Master
Fund at the time they occur, relate to information available only at the time of
the adjustment or revision, the adjustments or revisions will not affect the
amount of the repurchase proceeds of the Master Fund received by Members who had
their Interests repurchased prior to such adjustments and received their
repurchase proceeds. As a result, to the extent that such subsequently adjusted
valuations from the Investment Funds or revisions to net asset value of an
Investment Fund adversely affect the Master Fund's net asset value, the
outstanding Interests will be adversely affected by prior repurchases to the
benefit of Members who had their Interests repurchased at a net asset value
higher than the adjusted amount. Conversely, any increases in the net asset
value resulting from such subsequently adjusted valuations will be entirely for
the benefit of the outstanding Interests and to the detriment of Members who
previously had their Interests repurchased at a net asset value lower than the
adjusted amount. The same principles will apply to the purchase of Interests.
New Members may be affected in a similar way.
The procedures approved by the Board provide that, where deemed appropriate by
the Adviser and consistent with the 1940 Act, investments in Investment Funds
may be valued at cost. Cost would be used only when cost is determined to best
approximate the fair value of the particular security under consideration. For
example, cost may not be appropriate when the Master Fund is aware of sales of
similar securities to third parties at materially different prices or in other
circumstances where cost may not approximate fair value (which could include
situations where there are no sales to third parties). In such a situation, the
Master Fund's investment will be revalued in a manner that the Adviser, in
accordance with procedures approved by the Board, determines in good faith best
reflects approximate market value. The Board will be responsible for ensuring
that the valuation policies utilized by the Adviser are fair to the Master Fund
and consistent with applicable regulatory guidelines.
To the extent the Adviser invests the assets of the Master Fund in securities or
other instruments that are not investments in Investment Funds, the Master Fund
generally values such assets as described below. Securities traded on one or
more of the U.S. national securities exchanges or the OTC Bulletin Board are
valued at their last composite sale prices as reported at the close of trading
on the exchanges or markets where such securities are traded for the business
day as of which such value is being determined. Securities traded on the NASDAQ
stock market are valued at the NASDAQ Official Closing Price. Securities traded
on a foreign securities exchange are generally valued at their last sale prices
on the exchange where such securities are primarily traded. If no sales of
particular securities are reported on a particular day, the securities will be
valued based on their composite bid prices for securities held long, or their
composite ask prices for securities held short, as reported by the appropriate
exchange, dealer, or pricing service. Redeemable securities issued by a
registered open-end investment company are valued at the investment company's
net asset value per share. Other securities for which market quotations are
readily available are generally valued at their bid prices, or ask prices in the
case of securities held short, as obtained from the appropriate exchange,
dealer, or pricing service. If market quotations are not readily available,
securities and other assets will be valued at fair value as determined in good
faith in accordance with procedures approved by the Board.
In general, fair value represents a good faith approximation of the current
value of an asset and is used when there is no public market or possibly no
market at all for the asset. The fair values of one or more assets may not be
the prices at which those assets are ultimately sold. In such circumstances, the
Adviser and/or the Board will reevaluate its fair value methodology to
determine, what, if any, adjustments should be made to the methodology.
51
Debt securities will be valued in accordance with the Master Fund's valuation
procedures, which generally provide for using a third-party pricing system,
agent, or dealer selected by the Adviser, which may include the use of
valuations furnished by a pricing service that employs a matrix to determine
valuations for normal institutional size trading units. The Board periodically
monitors the reasonableness of valuations provided by any such pricing service.
Debt securities with remaining maturities of 60 days or less, absent unusual
circumstances, are valued at amortized cost, so long as such valuations are
determined by the Board to represent fair value.
Assets and liabilities initially expressed in foreign currencies will be
converted into U.S. dollars using foreign exchange rates provided by a pricing
service. Trading in foreign securities generally is completed, and the values of
such securities are determined, prior to the close of securities markets in the
United States. Foreign exchange rates are also determined prior to such close.
On occasion, the values of securities and exchange rates may be affected by
events occurring between the time as of which determination of such values or
exchange rates are made and the time as of which the net asset value of the
Master Fund is determined. When such events materially affect the values of
securities held by the Master Fund or its liabilities, such securities and
liabilities may be valued at fair value as determined in good faith in
accordance with procedures approved by the Board.
The Adviser or its affiliates act as investment adviser to other clients that
may invest in securities for which no public market price exists. Valuation
determinations by the Adviser or its affiliates for other clients may result in
different values than those ascribed to the same security owned by the Master
Fund. Consequently, the fees charged to the Master Fund and other clients may be
different, since the method of calculating the fees takes the value of all
assets, including assets carried at different valuations, into consideration.
Expenses of the Fund and the Master Fund (including the Adviser's Investment
Management Fee) and the costs of any borrowings, are accrued on a monthly basis
on the day net asset value is calculated and taken into account for the purpose
of determining net asset value.
Prospective investors should be aware that situations involving uncertainties as
to the value of portfolio positions could have an adverse effect on the Master
Fund's net asset value if the judgments of the Board, the Adviser, or investment
advisers to the Investment Funds should prove incorrect. Also, investment
advisers to the Investment Funds will only provide determinations of the net
asset value of Investment Funds on a weekly or monthly basis, in which event it
will not be possible to determine the net asset value of the Master Fund or the
Fund more frequently.
CAPITAL ACCOUNTS AND ALLOCATIONS
Capital Accounts
The Fund maintains a separate Capital Account for each Member (including the
Adviser in respect of its Incentive Allocation and the Adviser or its affiliates
in respect of any capital contribution to the Fund by the Adviser or an
affiliate, as a Member), which has an opening balance equal to the Member's
initial contribution to the capital of the Fund. Each Member's Capital Account
(other than the Capital Account of the Adviser in respect of its Incentive
Allocation) is increased by the sum of the amount of cash and the value of any
securities constituting additional contributions by the Member to the capital of
the Fund, plus any amounts credited to the Member's Capital Account as described
below. Similarly, each Member's Capital Account is reduced by the sum of the
amount of any repurchase by the Fund of the Interest of the Member, plus the
amount of any distributions to the Member that are not reinvested, plus any
amounts debited against the Member's Capital Account as described below.
Capital Accounts of Members are adjusted as of the close of business on the last
day of each fiscal period. Fiscal periods begin on the day after the last day of
the preceding fiscal period and end at the close of business on the first to
occur of the following: (i) the last day of a fiscal year; (ii) the day
preceding any day on which a contribution to the capital of the Fund is made;
(iii) any day on which the Fund repurchases any Interest of any Member; (iv) any
day in which there is any distribution to a Member; (v) any day on which any
amount is credited to or debited against the Capital Account of any Member other
than an amount to be credited to or debited against the Capital Accounts of all
Members in accordance with their respective investment percentages; or (vi) any
other date as established by the Board. An investment percentage is determined
for each Member as of the start of each fiscal period by dividing the balance of
the Member's Capital Account as of the commencement of the period by the sum
52
of the balances of all Capital Accounts of all Members as of that date, after
giving effect to additional contributions as of that date.
The Fund, in its complete and absolute discretion, may authorize the division or
combination of the Interests into a greater or lesser number without thereby
materially changing the value of a Member's Capital Account.
Allocation of Net Profits and Net Losses
Net profits or net losses of the Fund for each fiscal period are allocated among
and credited to or debited against the Capital Accounts of all Members as of the
last day of the fiscal period in accordance with Members' respective investment
percentages for such fiscal period. The Incentive Allocation is allocated
separately to the Adviser from each Member's Capital Account based on its share
of net profit as of the end of each Performance Period. Net profits or net
losses are measured as the change in the net asset value of the Fund (including
any net change in unrealized appreciation or depreciation of investments and
realized income and gains or losses and accrued expenses and any withholding or
other taxes applicable to the Offshore Fund), before giving effect to any
repurchase by the Fund of Interests, and excluding the amount of any items to be
allocated among the Capital Accounts of the Members other than in accordance
with the Members' respective investment percentages.
Allocations for Federal income tax purposes are generally made among the Members
so as to reflect equitably amounts credited or debited to each Member's Capital
Account for the current and prior fiscal years.
Withholding taxes or other tax obligations incurred by the Member that are
attributable to any Member are debited against the Capital Account of that
Member as of the close of the fiscal period during which the Fund paid those
obligations, and any amounts then or thereafter distributable to the Member are
reduced by the amount of those taxes. If the amount of those taxes is greater
than the distributable amounts, then the Member and any successor to the
Member's Interest is required to pay upon demand to the Fund, as a contribution
to the capital of the Fund, the amount of the excess. The Fund is not obligated
to apply for or obtain a reduction of or exemption from withholding tax on
behalf of any Member, although in the event that the Fund determines that a
Member is eligible for a refund of any withholding tax, it may, at the request
and expense of that Member, assist the Member in applying for the refund.
Reserves
Appropriate reserves may be created, accrued, and charged against net assets and
proportionately against the Capital Accounts of the Members for contingent
liabilities as of the date the contingent liabilities become known to the Fund.
Reserves will be in such amounts (subject to increase or reduction) that the
Fund may deem necessary or appropriate.
TAXES
The following is a summary of certain aspects of the income taxation of the Fund
and its Members that should be considered by a prospective Member. The Fund has
not sought a ruling from the Internal Revenue Service (the "IRS") or any other
federal, state, or local agency with respect to any of the tax issues affecting
the Fund, nor will it obtain an opinion of counsel with respect to any tax
issues, except as described below.
This summary of certain aspects of the federal income tax treatment of the Fund
is based upon the Code, judicial decisions, Treasury Regulations (the
"Regulations"), and rulings in existence on the date hereof, all of which are
subject to change. This summary does not attempt to discuss all the federal
income tax consequences of such an investment. Prospective Members should not
consider the contents of this Memorandum as legal or tax advice.
EACH PROSPECTIVE MEMBER SHOULD CONSULT WITH ITS OWN TAX ADVISER IN ORDER TO
UNDERSTAND FULLY THE FEDERAL, STATE, LOCAL, AND FOREIGN INCOME TAX CONSEQUENCES
OF AN INVESTMENT IN THE FUND.
53
In addition to the particular matters set forth in this section, tax-exempt
organizations should review carefully those sections of the Memorandum regarding
liquidity and other financial matters to ascertain whether the investment
objectives of the Fund are consistent with their overall investment plans. Each
prospective tax-exempt Member is urged to consult with its own counsel regarding
the acquisition of an Interest. See "Investment by Qualified Retirement Plans
and Other Tax-Exempt Investors" below and also "Investment by Employee Benefit
Plans."
Classification of the Fund and the Master Fund
The Fund and the Master Fund have each received an opinion of Sidley Austin LLP,
counsel to the Fund and the Master Fund, that, under the provisions of the Code
and the Regulations, as in effect on the date of the opinion, as well as under
the relevant authority interpreting the Code and the Regulations, and based upon
certain assumptions and representations of the Fund and the Master Fund, the
Fund and the Master Fund will each be treated as a partnership for Federal
income tax purposes and not as an association taxable as a corporation.
Under Section 7704 of the Code, "publicly traded partnerships" are generally
treated as corporations for federal income tax purposes. A publicly traded
partnership is any partnership the interests in which are traded on an
established securities market or which are readily tradable on a secondary
market (or the substantial equivalent thereof). Interests in the Fund and the
Master Fund will not be traded on an established securities market. Regulations
concerning the classification of partnerships as publicly traded partnerships
(the "Section 7704 Regulations") provide certain safe harbors under which
interests in a partnership will not be considered readily tradable on a
secondary market (or the substantial equivalent thereof). The Fund and/or the
Master Fund may not be eligible for any of those safe harbors. The Section 7704
Regulations specifically provide that the fact that a partnership does not
qualify for the safe harbors is disregarded for purposes of determining whether
interests in a partnership are readily tradable on a secondary market (or the
substantial equivalent thereof). Rather, in this event the partnership's status
is examined under a general facts and circumstances test. Sidley Austin LLP has
also rendered its opinion that, under this "facts and circumstances" test, and
based upon the anticipated operations of the Fund and the Master Fund as well as
the legislative history to Section 7704, the text of the Section 7704
Regulations, and certain representations of the Fund and the Master Fund, the
Interests in the Fund and the Master Fund will not be readily tradable on a
secondary market (or the substantial equivalent thereof) and, therefore, neither
the Fund nor the Master Fund will be treated as a publicly traded partnership
taxable as a corporation.
Neither of the opinions of counsel described above, however, is binding on the
IRS or the courts. If it were determined that the Fund or the Master Fund should
be treated as an association or a publicly traded partnership taxable as a
corporation for federal income tax purposes (as a result of a successful
challenge to such opinions by the IRS, changes in the Code, the Regulations, or
judicial interpretations thereof, a material adverse change in facts, or
otherwise), the taxable income of the Fund or the Master Fund would be subject
to corporate income tax when recognized by the Fund or the Master Fund. In
addition, distributions of such income, other than in certain repurchases of
Interests, would be treated as dividend income when received by the Members to
the extent of the current or accumulated earnings and profits of the Fund.
Classification of the Offshore Fund
The tax status of the Offshore Fund and its members under the tax laws of the
Cayman Islands and the United States is summarized below. The summary is based
on the assumption that the Offshore Fund is owned, managed, and operated as
contemplated, and that shares of the Offshore Fund will be held by the Fund, and
that Interests of the Fund will be held by tax-exempt investors. The summary is
considered to be a correct interpretation of existing laws as applied on the
date of this Prospectus but no representation is made or intended by the
Offshore Fund (i) that changes in such laws or their application or
interpretation will not be made in the future or (ii) that the IRS will agree
with the interpretation described below as applied to the method of operating
the Offshore Fund. Prospective investors should consult their own tax and legal
advisers with respect to the tax consequences, including the income tax
consequences, of the purchase, holding, redemption, sale, or transfer of
Interests.
The Offshore Fund will be classified as an association taxable as a corporation
for U.S. federal income tax purposes.
The Offshore Fund generally will not be subject to taxation by the United States
on its allocable share of the income or gain realized by the Master Fund from
its stock, securities, commodities, or derivatives trading for a taxable year,
54
provided that the Offshore Fund is not engaged or deemed to be engaged in a U.S.
trade or business during a taxable year to which such income, gain, or loss of
the Master Fund is treated as effectively connected. An investment in the Master
Fund should not, by itself, cause the Offshore Fund to be engaged in a U.S.
trade or business for the foregoing purposes, so long as (i) the Master Fund is
not considered a dealer in stock, securities, or commodities and does not
regularly offer to enter into, assume, offset, assign, or otherwise terminate
positions in derivatives with customers, (ii) the U.S. business activities of
the Master Fund consist solely of trading in stock, securities, commodities, and
derivatives for its own account (and, in the case of commodities, is limited to
trading in commodities of a kind customarily dealt in on an organized exchange
in transactions of a kind customarily consummated at such place), and (iii) any
entity treated as a partnership for U.S. federal income tax purposes in which
the Master Fund invests is not deemed to be engaged in a U.S. trade or business.
With respect to (iii) above, the Offshore Fund has no control over whether the
entities treated as partnerships for U.S. federal income tax purposes in which
the Master Fund invests are engaged or deemed to be engaged in a U.S. trade or
business. However, the Master Fund intends to use reasonable efforts to reduce
or eliminate the extent to which it allocates investment assets to entities
treated as partnerships for U.S. federal income tax purposes that are engaged or
deemed to be engaged in a U.S. trade or business.
In the event that the Master Fund were found to be engaged in a U.S. trade or
business, the Offshore Fund would be required to file a U.S. federal income tax
return for such year on IRS Form 1120-F and pay tax at full U.S. rates on the
portion of its income that is treated as effectively connected with such U.S.
trade or business, and an additional 30% branch profits tax would be imposed. In
addition, in such event, the Master Fund would be required to withhold taxes
from the income or gain allocable to the Offshore Fund under Section 1446 of the
Code.
Even assuming the Master Fund and the Offshore Fund are not engaged in a U.S.
trade or business, the Offshore Fund will be subject to withholding of federal
income tax at a 30% rate on its respective share of the Master Fund's U.S.
source dividend income, U.S. source interest income (unless such interest income
is either "portfolio interest" or received by the Master Fund on U.S. bank
deposits, certificates of deposit, or discount obligations with maturities (from
original issue) of 183 days or less), and any other U.S. source fixed or
determinable annual or periodic gains, profits, or income. In general,
"portfolio interest" is interest (other than certain contingent interest) on an
obligation issued after July 18, 1984 that (i) if in bearer form, is issued
under arrangements reasonably designed to ensure that such obligation will be
sold only to non-U.S. persons, is payable only outside the United States, and
bears a legend on its face that any U.S. person who holds such obligation is
subject to certain limitations under the U.S. income tax laws, or (ii) if in
registered form, the U.S. person responsible for paying interest received a
statement either from the beneficial owner of such obligation or from certain
qualifying agents of the beneficial owner of such obligation that such owner is
not a U.S. person. The Master Fund intends to provide such a statement as
required by applicable law to such U.S. persons and will obtain from the
Offshore Fund a statement documenting the Offshore Fund's foreign status on IRS
Form W-8BEN or its equivalent. The Master Fund will not qualify for the
portfolio interest exception with respect to a debt instrument issued by an
entity if the Master Fund owns 10% or more of the voting stock interest in or
capital and profits of such issuer.
The Offshore Fund does not expect to maintain cash reserves, but generally
intends to invest any cash reserves that may exist in a manner so as not to be
subject to 30% withholding.
Taxation of Members
As an entity taxed as a partnership, the Fund is not itself subject to Federal
income tax. The Fund will file an annual partnership information return with the
IRS that reports the results of operations. Each Member will be required to
report separately on its federal income tax return its share of the Fund's net
long-term capital gain or loss, net short-term capital gain or loss, and all
other items of ordinary income or loss. Each Member will be taxed on its share
of the Fund's taxable income and gain regardless of whether it has received or
will receive a distribution from the Fund. The Fund generally will have no power
to control the timing of cash distributions by the Investment Funds. In
addition, the Fund does not intend to make periodic distributions of its net
income or gains, if any, to Members. The amount and timing of any distributions
will be determined in the sole discretion of the Board. Accordingly, a Member's
share of taxable income from the Fund (as well as the taxes imposed on that
income) could exceed the distributions, if any, it receives from the Fund. As a
result, Members will be required each year to pay any applicable federal and
state taxes on their respective share of the Fund's taxable income or gains (if
the Fund has
55
any such income or gains), and any such taxes would have to paid by the Member
from other sources. As discussed below, Members will be furnished with a tax
information report annually stating each Member's respective share of the
Fund's tax items.
Allocation of Profits and Losses
Under the Operating Agreement, the Fund's net profit or net loss for each
accounting period is allocated among the Members and to their Capital Accounts
without regard to the amount of income or loss actually recognized by the Fund
for federal income tax purposes. It is expected that the Fund's income and
gains, if any, will be primarily derived from ordinary income.
The Operating Agreement provides that items of income, deduction, gain, loss, or
credit actually recognized by the Fund for each fiscal year generally are to be
allocated for federal income tax purposes among the Members pursuant to
Regulations issued under Section 704 of the Code, based upon amounts of the
Fund's net profit or net loss allocated to each Member's Capital Account for the
current and prior fiscal years.
Under the Operating Agreement, the Fund has the discretion to allocate specially
an amount of the Fund's capital gain and losses (including short-term and
long-term capital gain and losses) for Federal income tax purposes: (i) to a
withdrawing Member to the extent that the Member's Capital Account differs from
its federal income tax basis in its partnership interest or (ii) to the Adviser
in its capacity as Special Advisory Member to the extent that the receipt of an
Incentive Allocation causes such Special Advisory Member's Capital Account to
differ from its federal income tax basis in its partnership interest. There can
be no assurance that, if the Fund makes any such special allocation, the IRS
will accept such allocation. If such allocation is successfully challenged by
the IRS, the Fund's gains or losses allocable to the remaining Members would be
increased.
Distributions and Adjusted Basis
The receipt of a cash distribution from the Fund by a Member generally will not
result in the recognition of gain or loss for Federal income tax purposes. Cash
distributions in excess of a Member's adjusted tax basis for its Interest
(including any distributions in connection with a repurchase of Interests) will
generally result in the recognition by such Member of gain in the amount of such
excess.
A Member's tax basis for its Interest in the Fund will include the amount of
money the Member contributed to the Fund. A Member's tax basis will be increased
by the Member's respective share of the Fund's taxable income and gains, and
will be decreased by distributions from the Fund to the Member and by the
Member's respective share of any taxable losses.
Potential Foreign Investments
The Fund, the Master Fund, or the Investment Funds may make investments that may
involve additional foreign tax issues. The tax consequences to Members depend in
large part on the activities and investments of the Investment Funds in which
the Master Fund will invest, and such Investment Funds will not be controlled by
the Master Fund.
Fund Tax Returns and Tax Information
The Fund is required to use the accrual method of accounting and uses the
calendar year as its tax year for income tax purposes. Income or loss of an
Investment Fund that is taxed as a partnership using the calendar year or a
fiscal year other than the Fund's fiscal year will be treated as if distributed
to the Fund on the last day of the Investment Fund's fiscal year. The Fund does
not expect to receive tax information from Investment Funds (through the Master
Fund) in a sufficiently timely manner to enable the Fund to prepare its
information returns in time for Members to file their returns without requesting
an extension of the time to file from the IRS (or state taxing agencies).
Accordingly, Members should be prepared to obtain extensions of time to file
their income tax returns.
The investment advisers of the Investment Funds will not prepare income tax
information returns of the Investment Funds in which the Master Fund will
invest, which will be prepared by management and/or independent accountants
56
for each such Investment Fund. An audit of the Fund's or an Investment Fund's
information return may affect the tax consequences of an investment in the Fund
by a Member and may cause audits of the returns of the Member. The activities
of Investment Funds in which the Master Fund will invest may give rise to
additional tax issues, which in turn can affect the tax results of Members in
the Fund.
State and Local Taxes
In addition to the federal income tax consequences summarized above, prospective
investors should consider the potential state and local tax consequences of an
investment in the Fund. The Fund may become subject to income and other taxes in
states and localities based on the Fund's activities, including investments in
entities that conduct business in those jurisdictions. Members of the Fund are
generally taxable in their state of residence on their share of the Fund's
income. Members of the Fund may be subject to tax in other jurisdictions
depending on the Fund's activities and/or activities of the Investment Funds in
which the Master Fund will invest and the laws of those jurisdictions.
Additionally, Members of the Fund may be entitled to a credit in their state of
residence for taxes paid to other jurisdictions.
Investment by Qualified Retirement Plans and Other Tax-Exempt Investors
Qualified pension and profit-sharing plans (including Keogh or HR-l0 Plans),
IRAs, educational institutions, and other investors exempt from taxation under
Code Section 501 are generally exempt from federal income tax except to the
extent that they have UBTI. UBTI is income from an unrelated trade or business
regularly carried on, excluding various types of investment such as dividends,
interest, certain rental income, and capital gain, so long as not derived from
debt-financed property. If a tax-exempt organization is a partner in a
partnership that generates UBTI, the UBTI of the partnership will pass through
to the organization. In addition, income derived from debt-financed property;
that is, property as to which there is "acquisition indebtedness" is UBTI.
Acquisition indebtedness is the unpaid amount of any debt incurred directly or
indirectly to acquire or improve the property. During the period that any
acquisition indebtedness is outstanding, a pro rata share of the income from the
property will generally be UBTI based on the ratio of the average outstanding
principal balance of such debt to the average basis of the property during the
applicable tax year. To the extent the Offshore Fund holds debt-financed
property or property primarily for sale to customers or becomes actively
involved in trading securities, income attributable to such property or activity
may constitute UBTI. However, such UBTI should not be attributable to
shareholders of the Offshore Fund because the Offshore Fund is classified as a
corporation, and UBTI generally should not pass through or be deemed to pass
through a corporation to its U.S. tax-exempt investors.
Because all of the shares of the Offshore Fund will be held by the Fund, which
is a U.S. partnership for income tax purposes, the Offshore Fund will be
considered a controlled foreign corporation ("CFC") for U.S. income tax
purposes. Under current law applicable to U.S. tax-exempt entities, income
attributed from a CFC to a tax-exempt entity is taxable to a tax-exempt entity
only if the income attributed from the CFC is made taxable to the tax-exempt
entity under the Code and regulations relating to particular categories of UBTI
(for example, if the Offshore Fund were to generate certain insurance income as
defined in Section 512(b)(17) of the Code). The Offshore Fund does not expect to
generate UBTI of this type. The Fund has received an opinion of Sidley Austin
LLP, counsel to the Fund, that under the provisions of the Code and the
Regulations, as in effect on the date of the opinion, as well as under the
relevant authority interpreting the Code and the Regulations, and based upon
certain representations of the Board, income of the Fund allocable to tax-exempt
investors (subject to certain exceptions) should not constitute UBTI. The Fund
has not sought a ruling from the IRS with respect to any of the tax issues
affecting the Fund, but the Fund may decide in the future to seek a ruling with
respect to the question of whether or not any income allocable to a tax-exempt
investor in the Fund would be UBTI. The foregoing discussion is intended to
apply primarily to exempt organizations that are qualified plans. The UBTI of
certain other exempt organizations may be computed in accordance with special
rules. Further, certain types of tax-exempt entities under the Code, such as
"charitable remainder trusts" that are required to make taxable distributions
based upon income received from all sources, may be disadvantaged under the
rules relating to CFCs in a manner similar to taxable investors. Charitable
remainder trusts are generally required, under their trust instruments and for
purposes of qualifying under the Code for tax exemption, to make current
distributions of all or a significant portion of their income. As an investor in
a CFC, such a trust would be deemed to receive income each year from the CFC
whether or not the CFC currently distributes such income. For these reasons, the
Fund would not be an appropriate investment for charitable remainder trusts.
57
U.S. TAX-EXEMPT INVESTORS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS
CONCERNING THE U.S. TAX CONSEQUENCES TO THEM OF ANY INVESTMENT IN THE FUND,
INCLUDING THE POSSIBLE APPLICATION OF SECTION 269 OF THE CODE (OR OTHER ANTI-TAX
AVOIDANCE PROVISIONS).
Tax Shelter Regulations
The IRS has recently issued final regulations (the "Regulations") that may
require the Fund or Members to report their direct or indirect participation in
certain "reportable transactions" by filing IRS Form 8886 ("Reportable
Transaction Disclosure Statement").
A "reportable transaction" includes a transaction that results in a loss claimed
under Section 165 of the Code by a taxpayer (computed without taking into
account offsetting income or gain items, and without regard to limitations on
its deductibility) in excess of the thresholds described below, unless the
transaction has been exempted from reporting by the IRS. Disclosure is required
if the Fund incurs losses of at least $2 million in any single taxable year or
$4 million for the taxable year the transaction is entered into and the five
succeeding taxable years. Members that are individuals, S corporations, or
trusts similarly are required to disclose transactions if they individually
incur losses which are equal to the same thresholds. Note, however, that the
annual threshold applicable to losses from a "Section 988 transaction" (relating
to foreign currency transactions) allocable to a Member that is an individual or
trust is reduced to $50,000. For Members that are C corporations the thresholds
generally will be losses of at least $10 million in any single taxable year or
$20 million for the taxable year the transaction is entered into and the five
succeeding taxable years.
Published guidance from the IRS has exempted certain loss transactions from the
reporting requirements. A transaction will be exempt if the assets underlying
the transaction have a "qualifying basis," which includes, among others, an
asset purchased for cash; provided however that each of the following remains
subject to reporting requirements unless the loss generated in the transaction
arises from mark to market treatment under the Code: (i) a transaction involving
an asset that is, or was, part of a straddle (other than a mixed straddle), (ii)
a transaction involving certain "stripped" instruments, (iii) the disposition of
an interest in a pass-through entity (such as an Investment Fund), and (iv) a
foreign currency transaction which generates an ordinary loss.
At this time the Fund cannot predict whether any of its investments will require
it or any of the Members to file a Reportable Transaction Disclosure Statement.
If the Fund later determines that one or more investments require Members to
file a Reportable Transaction Disclosure Statement, the Fund will provide each
Member with the information required to complete and file the form. In addition,
if the Fund participates in a transaction that requires reporting to the IRS,
the Fund is required to maintain certain information including a list of Members
and a detailed description of the Fund, its activities and the expected U.S.
federal income tax consequences to Members. This information must be available
to the IRS for inspection upon its written request. The Fund does not anticipate
registering with the IRS as a tax shelter.
Other Taxes
The foregoing is a summary of some of the tax rules and considerations affecting
Members, the Fund, and the Fund's operations, and does not purport to be a
complete analysis of all relevant tax rules and considerations, nor does it
purport to be a complete listing of all potential tax risks inherent in making
an investment in the Fund. A Member may be subject to other taxes, including,
but not limited to, state and local taxes, estate and inheritance taxes, and
intangible taxes that may be imposed by various jurisdictions. The Fund also may
be subject to state, local, and foreign taxes that could reduce cash
distributions to Members. It is the responsibility of each Member to file all
appropriate tax returns that may be required. Each prospective Member is urged
to consult with his or her tax adviser with respect to any investment in the
Fund.
58
INVESTMENT BY EMPLOYEE BENEFIT PLANS
The following section sets forth certain consequences under ERISA and the Code
which a fiduciary of an "employee benefit plan" as defined in and subject to
ERISA (an "ERISA Plan") or of a "plan" as defined in and subject to Section 4975
of the Code who has investment discretion should consider before deciding to
invest the plan's assets in the Fund (such ERISA Plans and other "plans" being
referred to herein as "Plans," and such fiduciaries with investment discretion
being referred to herein as "Plan Fiduciaries"). The following summary is not
intended to be complete, but only to address certain questions under ERISA and
the Code which are likely to be raised by the Plan Fiduciary's own counsel.
In general, the terms "employee benefit plan" as defined in ERISA and "plan" as
defined in Section 4975 of the Code together refer to any plan or account of
various types which provides retirement benefits or welfare benefits to an
individual or to an employer's employees and their beneficiaries. Such plans and
accounts include, but are not limited to, corporate pension and profit-sharing
plans, "simplified employee pension plans," Keogh plans for self-employed
individuals (including partners), individual retirement accounts described in
Section 408 of the Code, and medical benefit plans.
Each Plan Fiduciary of an ERISA Plan must give appropriate consideration to the
facts and circumstances that are relevant to an investment in the Fund,
including the role an investment in the Fund plays in the ERISA Plan's
investment portfolio and the projected return of the ERISA Plan's total
portfolio relative to the Plan's funding objectives. Each Plan Fiduciary of an
ERISA Plan, before deciding to invest in the Fund, must be satisfied that
investment in the Fund is a prudent investment for the ERISA Plan, that the
investments of the ERISA Plan, including the investment in the Fund, are
diversified so as to minimize the risks of large losses and that an investment
in the Fund complies with the documents of the ERISA Plan and related trust. If
a Plan Fiduciary of an ERISA Plan breaches his or her fiduciary responsibilities
with regard to selecting an investment for an ERISA Plan, the Plan Fiduciary may
be held personally liable for losses incurred by the ERISA Plan as a result of
such breach.
Because the Fund will be registered as an investment company under the 1940 Act,
the underlying assets of the Fund will not be considered to be "plan assets" of
the Plans investing in the Fund for purposes of ERISA's fiduciary responsibility
and prohibited transaction rules or the prohibited transaction rules of Section
4975 of the Code. Thus, the Adviser will not be a fiduciary under ERISA or
Section 4975 of the Code. with respect to the assets of any Plan that becomes a
Member of the Fund, solely as a result of the Plan's investment in the Fund.
The Board will require a Plan proposing to invest in the Fund to represent that
it, and any fiduciaries responsible for the Plan's investments, are aware of and
understand the Fund's investment objective, policies, and strategies, that the
decision to invest plan assets in the Fund was made with appropriate
consideration of relevant investment factors with regard to the Plan, and, with
respect to an ERISA Plan, that the decision to invest plan assets in the Fund is
consistent with the duties and responsibilities imposed upon fiduciaries with
regard to their investment decisions under ERISA.
Certain prospective Plan investors may currently maintain relationships with the
Adviser or one or more investment advisers of Investment Funds in which the
Master Fund will invest, or with other entities that are affiliated with the
Adviser or such investment advisers. Each of such persons may be deemed to be a
party in interest to and/or a fiduciary of any Plan to which it provides
investment management, investment advisory, or other services. ERISA and Section
4975 of the Code prohibit Plan assets to be used for the benefit of a party in
interest and also prohibits a Plan Fiduciary from using its position to cause
the Plan to make an investment from which it or certain third parties in which
such Plan Fiduciary has an interest would receive a fee or other consideration.
Plan investors should consult with legal counsel to determine if participation
in the Fund is a transaction that is prohibited by ERISA or the Code, and will
be required to represent that the purchase of Interests in the Fund is not such
a prohibited transaction. Plan Fiduciaries also will be required to represent
that the decision to invest in the Fund was made by them as fiduciaries that are
independent of such affiliated persons, that are duly authorized to make such
investment decisions, and that have not relied on any individualized advice or
recommendation of such affiliated persons, as a primary basis for the decision
to invest in the Fund.
The foregoing statements regarding the consequences under ERISA and the Code of
an investment in the Fund are based on the provisions of the Code and ERISA as
currently in effect, and the existing administrative and judicial
59
interpretations thereunder. No assurance can be given that administrative,
judicial, or legislative changes will not occur that will not make the foregoing
statements incorrect or incomplete.
ACCEPTANCE OF SUBSCRIPTIONS ON BEHALF OF PLANS IS IN NO RESPECT A REPRESENTATION
BY THE BOARD, THE ADVISER, OR ANY OTHER PARTY RELATED TO THE FUND THAT THIS
INVESTMENT MEETS THE LEGAL REQUIREMENTS WITH RESPECT TO INVESTMENTS BY ANY
PARTICULAR PLAN OR THAT THIS INVESTMENT IS APPROPRIATE FOR ANY PARTICULAR PLAN.
THE PERSON WITH INVESTMENT DISCRETION SHOULD CONSULT WITH HIS OR HER ATTORNEY
AND FINANCIAL ADVISERS AS TO THE PROPRIETY OF AN INVESTMENT IN THE FUND IN LIGHT
OF THE CIRCUMSTANCES OF THE PARTICULAR PLAN.
SUMMARY OF THE OPERATING AGREEMENT
An investor in the Fund will be a Member of the Fund and its rights in the Fund
will be established and governed by the Operating Agreement that is included as
Appendix B to this Prospectus. An investor and his or her advisers should
carefully review the Operating Agreement, as each Member will agree to be bound
by its terms and conditions. The following is a summary description of
additional items and of select provisions of the Operating Agreement that may
not be described elsewhere in this Prospectus. The description of such items and
provisions is not definitive and reference should be made to the complete text
of the Operating Agreement.
Interests; Members
Persons who purchase Interests will be Members of the Fund. The Adviser and its
affiliates may contribute capital to and maintain an investment in the Fund, and
to that extent will be Members of the Fund. The Adviser is also the Special
Advisory Member with respect to the Capital Account established in respect of
its Incentive Allocation. The Adviser and its affiliates may, but are under no
obligation to, invest in the Fund, and may subscribe for Interests or have their
Interests repurchased by the Fund without notice to Members. Any purchase or
repurchase of Fund Interests by the Adviser or its affiliates will occur only on
the Fund's terms and conditions as set forth in this Prospectus.
The Fund reserves the right to issue additional classes of Interests in the
future subject to fees, charges, repurchase rights, and other characteristics
different from those of the Interests offered in this Prospectus.
Persons to whom Interests are transferred in accordance with the Operating
Agreement will be Members of the Fund, subject to such person meeting any
transferability requirements. The Interests are subject to substantial
restrictions on transferability and resale and may not be transferred or resold
except as permitted under the Operating Agreement. By subscribing for an
Interest, each Member agrees to indemnify and hold harmless the Fund, the Board,
the Adviser, each other Member, and any affiliate of the foregoing against all
losses, claims, damages, liabilities, costs, and expenses (including legal or
other expenses incurred in investigating or defending against any losses,
claims, damages, liabilities, costs, and expenses or any judgments, fines, and
amounts paid in settlement), joint or several, to which such persons may become
subject by reason of or arising from any transfer made by that Member in
violation of the Operating Agreement or any misrepresentation made by that
Member in connection with any such transfer.
Limited Liability of Members
Under Delaware law and the Operating Agreement, each Member will be liable for
the debts and obligations of the Fund only to the extent of any contributions to
the capital of the Fund (plus any accretions in value thereto prior to
withdrawal), and a Member, in the sole discretion of the Board, may be obligated
to return to the Fund amounts distributed to the Member in accordance with the
Operating Agreement in certain circumstances where after giving effect to the
distribution, certain liabilities of the Fund exceed the fair market value of
the Fund's assets.
60
Duty of Care
The Operating Agreement provides that the Board and the Adviser (including
certain of its affiliates, among others) will not be liable to the Fund or any
of the Members for any loss or damage occasioned by any act or omission in the
performance of their services as such in the absence of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of their office or as otherwise required by applicable law. The
Operating Agreement also contains provisions for the indemnification, to the
extent permitted by law, of the Board and the Adviser (including certain of its
affiliates, among others) by the Fund (but not by the Members individually)
against any liability and expense to which any of them may be liable that arise
in connection with the performance of their activities on behalf of the Fund.
None of these persons will be personally liable to any Member for the repayment
of any positive balance in the Member's Capital Account or for contributions by
the Member to the capital of the Fund or by reason of any change in the federal
or state income tax laws applicable to the Fund or its investors. The rights of
indemnification and exculpation provided under the Operating Agreement will not
be construed so as to limit liability or provide for indemnification of the
Board and the Adviser (including certain of its affiliates, among others) for
any liability (including liability under applicable federal or state securities
laws which, under certain circumstances, impose liability even on persons that
act in good faith), to the extent (but only to the extent) that such
indemnification or limitation on liability would be in violation of applicable
law, but will be construed so as to effectuate the applicable provisions of the
Operating Agreement to the fullest extent permitted by law.
Amendment of the Operating Agreement
The Operating Agreement may generally be amended, in whole or in part, with the
approval of the Board (including a majority of the Independent Directors, if
required by the 1940 Act) and without the approval of the Members unless the
approval of Members is required by the 1940 Act. However, certain amendments to
the Operating Agreement involving Capital Accounts and allocations thereto may
not be made without the written consent of any Member adversely affected thereby
or unless each Member has received written notice of the amendment and any
Member objecting to the amendment has been allowed a reasonable opportunity
(pursuant to any procedures as may be prescribed by the Board) to have all of
its Interest repurchased by the Fund.
Term, Dissolution, and Liquidation
The Fund will be dissolved: (i) upon the affirmative vote to dissolve the Fund
by (a) the Board or (b) Members holding at least two-thirds (2/3) of the total
number of votes eligible to be cast by all Members; (ii) if any Member that has
submitted a written request, in accordance with the terms of the Operating
Agreement, to tender all of such Member's Interest for repurchase by the Fund
has not been given the opportunity to so tender within a period of two years
after the request (whether in a single repurchase offer or multiple consecutive
offers within the two-year period); provided, however, that a Member who intends
to cause the Fund to be dissolved must so indicate in a separate written request
submitted within the applicable two-year period; (iii) as required by operation
of law; or (iv) as set forth in the Operating Agreement.
Upon the occurrence of any event of dissolution, the Board or the Adviser,
acting as liquidator under appointment by the Board (or another liquidator, if
the Board does not appoint the Adviser to act as liquidator or is unable to
perform this function) is charged with winding up the affairs of the Fund and
liquidating its assets. Net profits or net loss during the fiscal period
including the period of liquidation will be allocated as described in the
section titled "Capital Accounts and Allocations."
Upon the liquidation of the Fund, its assets will be distributed: (i) first to
satisfy the debts, liabilities, and obligations of the Fund (other than debts to
Members), including actual or anticipated liquidation expenses; (ii) next to
repay debts owing to the Members; and (iii) finally to the Members
proportionately in accordance with the balances in their respective Capital
Accounts. Assets may be distributed in kind on a pro rata basis if the Board or
liquidator determines that such a distribution would be in the interests of the
Members in facilitating an orderly liquidation.
61
Reports to Members
The Fund will furnish to Members as soon as practicable after the end of each
taxable year such information as is necessary for them to complete federal and
state income tax or information returns, along with any other tax information
required by law. However, a delay by the investment adviser of an Investment
Fund in providing this information could delay the Fund's preparation of tax
information for investors, which will require Members to seek extensions on the
time to file their tax returns, and could delay the preparation of the Fund's
annual report. Accordingly, Members should be prepared to obtain extensions of
time to file their income tax returns. The Fund anticipates sending to Members
an unaudited semi-annual and an audited annual report within 60 days after the
close of the period for which the report is being made, or as otherwise required
by the 1940 Act. Members also will be sent monthly reports regarding the Fund's
operations during each month. Any Member may request from the Adviser an
estimate, based on unaudited data, of the net asset value of the Fund as of the
end of any calendar month.
Fiscal Year
For accounting purposes, the Fund's, the Offshore Fund's, and the Master Fund's
fiscal year is the twelve-month period ending on March 31. The twelve-month
period ending December 31 of each year will be the taxable year of the Fund, the
Offshore Fund, and the Master Fund.
GENERAL INFORMATION
Description of the Fund
The Fund is registered under the 1940 Act as a closed-end, non-diversified,
management investment company. The Fund was established as a limited liability
company under the laws of the State of Delaware on December 8, 2003, and
commenced operations on October 1, 2004. The Fund's office is located at 345
Park Avenue, New York, New York 10154. The Fund's Prospectus and SAI are
available upon request and without charge by writing to PFPC, Inc., 400 Bellevue
Parkway, Wilmington, Delaware 19801. The telephone number of the Fund is
1-888-262-0695.
Liquidating Trust
The Board may, at its discretion if determined to be in the best interests of
Members, distribute the assets of the Fund into and through a liquidating trust
to effect the liquidation of, all or a portion of, the Fund. The use of a
liquidating trust would be subject to the regulatory requirements of the 1940
Act and applicable Delaware law, and could result in expenses that the Members
would bear indirectly. There are no current plans to liquidate the Fund.
Independent Registered Public Accounting Firm and Legal Counsel
The Board has selected PricewaterhouseCoopers LLP as the independent registered
public accounting firm of the Fund and the Master Fund. PricewaterhouseCoopers
LLP's principal business address is located at 300 Madison Avenue, New York, New
York 10017.
The law firm of Sidley Austin LLP, 787 Seventh Avenue, New York, New York 10019,
serves as legal counsel to the Fund and the Master Fund. Walkers, Walker House,
P.O. Box 265GT, Mary Street, George Town, Grand Cayman, Cayman Islands, acts as
legal counsel to the Offshore Fund.
62
TABLE OF CONTENTS OF SAI
ADDITIONAL INVESTMENT POLICIES...............................................3
ADDITIONAL INFORMATION ON INVESTMENT TECHNIQUES AND OPERATIONS OF THE
MASTER FUND AND RELATED RISKS................................................4
ADDITIONAL INFORMATION ON INVESTMENT TECHNIQUES OF INVESTMENT FUNDS
AND RELATED RISKS............................................................6
DIRECTORS AND OFFICERS......................................................14
LIQUIDITY REQUIREMENTS......................................................20
CODE OF ETHICS..............................................................22
PERFORMANCE INFORMATION.....................................................22
INVESTMENT MANAGEMENT AND OTHER SERVICES....................................22
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM...............................26
DISTRIBUTOR.................................................................26
EXPENSE LIMITATION AGREEMENT................................................27
CALCULATION OF FEES.........................................................27
LEGAL COUNSEL...............................................................27
PORTFOLIO TRANSACTIONS......................................................27
PROXY VOTING POLICIES AND PROCEDURES........................................27
PRIVACY STATEMENT...........................................................28
FINANCIAL STATEMENTS........................................................29
63
APPENDIX A
The Topiary Fund for Benefit Plan Investors (BPI) LLC
Form of Investor Certification
This certificate relates to The Topiary Fund for Benefit Plan Investors (BPI)
LLC (the "Fund") and is given to you with respect to a potential purchase of a
limited liability company interest (an "Interest") in the Fund. Please check the
box at the end of the applicable paragraph.
[For individual investors] I hereby certify that I either (i) have an individual
net worth, or joint net worth with my spouse, in excess of $1,500,000 or (ii)
have (or will have upon the acceptance of my capital contribution) at least
$750,000 under the management of DB Investment Managers, Inc. (the "Adviser")
(including any Interest in the Fund), and further certifies that (i) I either
(a) have a net worth,(1) or joint net worth with my spouse, in excess of
$1,000,000 or (b) I had an individual income (exclusive of any income
attributable to my spouse) of more than $200,000 for each of the past two years
or joint income with my spouse in excess of $300,000 for each of those years,
and I reasonably expect to reach the same income level, or the same joint income
level, in the current year. |_|
[For corporations, partnerships, or limited liability companies] I hereby
certify that the entity on behalf of which I am signing either (i) has total
assets in excess of $5,000,000, was not formed for the specific purpose of
investing in the Fund and is (a) a futures commission merchant registered
pursuant to Section 4(d) of the Commodity Exchange Act, (b) a registered
commodity trading advisor who has been registered and active as such for two
years or who provides commodity interest trading advice to commodity accounts
which, in the aggregate, have total assets in excess of $5,000,000 deposited at
one or more futures commission merchants, (c) a registered commodity pool
operator who has been registered and active as such for two years or who
operates pools which, in the aggregate, have total assets in excess of
$5,000,000, or (d) a broker or dealer registered pursuant to Section 15 of the
Securities Exchange Act of 1934; or (ii) has total assets in excess of
$5,000,000, was not formed for the specific purpose of investing in the Fund,
and its purchase of an Interest is directed by a sophisticated person within the
meaning of Regulation D promulgated under the Securities Act; or (iii) all of
the equity owners, unit owners, and participants of the undersigned are
accredited investors. |_|
[For trusts] I hereby certify that the trust on behalf of which I am signing
either (i) has total assets in excess of $5,000,000, was not formed for the
specific purpose of investing in the Fund, and its purchase of an Interest is
directed by sophisticated person within the meaning of Regulation D promulgated
under the Securities Act; (ii) is a bank as defined in Section 3(a)(2) of the
Securities Act, is acting in its fiduciary capacity as trustee, and is
subscribing for an Interest on behalf of a trust that qualifies as an accredited
investor(2); or (iii) is a revocable trust that may be amended or revoked at any
time by the grantors thereof, and all of the grantors are accredited investors.
|_|
[For all other entities] I hereby certify that the entity on behalf of which I
am signing (A) is not (i) an investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), (ii) an entity which would be
defined as an investment company under Section 3(a) of the 1940 Act (e.g., an
entity engaged primarily in investing, owning, holding, or trading in
securities) but for the exclusion from such definition provided by Section
3(c)(1) of the 1940 Act for entities that have not publicly offered their
securities and whose outstanding securities are beneficially owned by not more
than 100 persons, or (iii) a private business development company as defined in
Section 202(a)(11) of the Investment Advisers Act of 1940, as amended; and (B)
that such entity has a net worth in excess of $1,500,000 or (ii) has (or will
have upon the acceptance of its capital contribution) at least $750,000 under
the management of the Adviser (including any Interest in the Fund). I hereby
further certify that each equity owner of the entity on behalf of which I am
signing is either (i) a natural person with an individual net worth, or joint
net
------------------
(1) "Net worth" for these purposes means the excess of total assets at fair
market value, including home, home furnishings and automobiles, over total
liabilities.
(2) "Bank" is defined in Section 3(a)(2) of the Securities Act as "any national
bank, or any banking institution organized under the laws of any state,
territory, or the District of Columbia, the business of which is substantially
confined to banking and is supervised by the state or territorial banking
commission or similar official."
A-1
worth with his or her spouse, in excess of $1,500,000, (ii) a natural person
who has (or will have immediately after acceptance of this capital contribution)
at least $750,000 under management with the Adviser, whether in the Fund or
otherwise, (iii) an entity which is not described in sub-clauses (i), (ii), or
(iii) of clause (A) above which (a) has a net worth in excess of $1,500,000 or
(b) has (or will have upon acceptance of its capital contribution) at least
$750,000 under the management of the Adviser (including any Interest in the
Fund), or (iv) an entity described in sub-clause (i), (ii), or (iii) of clause
(A) above of which each and every equity owner is a person described in clauses
(i) through (iii) of this sentence.
|-|
I hereby further certify under penalty of perjury that: (i) the taxpayer
identification number contained on accompanying W-9 (or to be issued to me) is
true, correct, and complete; and (ii) I am either (a) exempt from taxation under
Section 501(a) of the Internal Revenue Code of 1986, as amended (the "Code"), or
(b) an individual retirement account (as defined in Section 408 of the Code).
In addition, I hereby confirm that I understand and agree that should I (or the
company) purchase an Interest, the following conditions will apply to the
ownership and transfer of the Interest:
(A) An Interest may be held only through a broker, dealer, or
other financial intermediary that has entered into an
agreement for the provision of shareholder services to the
Fund;
(B) An Interest (or portion thereof) may not be transferred,
including by bequest, except to a person who has a net worth
(if a natural person, together with assets held jointly with
spouse) of more than $1,500,000, who agrees to hold his, her
or its Interests through a broker, dealer, or other financial
intermediary that has entered into an agreement for the
provision of shareholder services to the Fund, and who agrees
not to transfer the Interest (or portion thereof) except to
another person who has a net worth (if a natural person,
together with assets held jointly with spouse) of more than
$1,500,000 and agrees to comply with the foregoing ownership
and transfer restrictions; and
(C) Upon any transfer of an Interest (or portion thereof) in
violation of the foregoing clauses (A) or (B), in addition to
any other remedy that it may have, the Fund will have the
right (but not the obligation) to repurchase all or a portion
of any such improperly transferred Interest.
I further certify that:
(A) I understand that it may be a violation of state and/or
Federal law for me to provide this certification if I know
that it is not true;
(B) I have read the Prospectus and the Statement of Additional
Information of the Fund, including the investor qualification
and investor eligibility provisions contained therein;
(C) I understand that an investment in the Fund involves a
considerable amount of risk and that some or all of my
investment may be lost;
(D) I understand that an investment in the Fund is suitable only
for investors who can bear the risks associated with the
limited liquidity of the investment and should be viewed as a
long-term investment;
(E) I am aware of the Fund's limited provisions for
transferability and withdrawal and have carefully read and
understand the "Repurchases of Interests" and "Transfers of
Interests" provisions in the Prospectus;
(F) I understand that the Fund, the Offshore Fund, the Master
Fund, the Adviser, and their respective affiliates are
relying on the certification and agreements made herein in
determining my qualification and suitability for an investor
in the Fund; and
A-2
(G) I understand that an investment in the Fund is not
appropriate for, and may not be acquired by, any person who
cannot make this certification, and agree to indemnify the
Adviser and its affiliates and hold harmless from any
liability that it may incur as a result of this certification
being untrue in any respect.
If I am acting on behalf of a "benefit plan investor" as defined in Department
of Labor Regulation ss. 2510.3-103(f)(2), I further certify, on my own behalf
and on behalf of the benefit plan investor, that:
(A) Each fiduciary (a "Plan Fiduciary") of the benefit plan
investor who has caused the benefit plan investor to acquire
an Interest in the Fund (i) is aware of and understands the
Fund's investment objective, policies, and strategies, (ii)
has considered an investment in the Fund for such benefit
plan investor in light of the risks relating thereto, as well
as all other relevant investment factors, and (iii) if the
benefit plan investor is subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), has
determined that, in view of such considerations, the
investment in the Fund for such benefit plan investor is
consistent with the Plan Fiduciary's responsibilities under
ERISA.
(B) The investment in the Fund by the benefit plan investor does
not violate and is not otherwise inconsistent with the terms
of any legal document constituting the benefit plan investor,
any trust agreement thereunder, or any other constituent
document.
(C) The benefit plan investor's investment in the Fund has been
duly authorized and approved by all necessary parties.
(D) None of the Adviser, any investment adviser of any Investment
Fund in which the Master Fund invests or will invest, any
member of the Board of Directors, PFPC, the Distributor, any
other selling agent, any of their respective affiliates, or
any of their respective agents or employees: (i) has
investment discretion with respect to the investment of
assets of the benefit plan investor used to purchase an
Interest in the Fund; (ii) has authority or responsibility to
or regularly gives investment advice with respect to the
assets of the benefit plan investor used to purchase an
Interest in the Fund for a fee and pursuant to an agreement
or understanding that such advice will serve as a primary
basis for investment decisions with respect to the benefit
plan investor and that such advice will be based on the
particular investment needs of the benefit plan investor; or
(iii) is an employer maintaining or contributing to the
benefit plan investor.
(E) The Plan Fiduciary (i) is authorized to make, and is
responsible for, the decision for the benefit plan investor
to invest in the Fund, including, if the benefit plan
investor is subject to ERISA, the determination that such
investment is consistent with the requirement imposed by
Section 404 of ERISA that plan investments be diversified so
as to minimize the risks of large losses, (ii) is independent
of the Adviser, each investment adviser of each Investment
Fund in which the Master Fund invests or will invest, each
member of the Board of Directors, PFPC, the Distributor, each
other selling agent, and each of their respective affiliates,
and (iii) is qualified to make such investment decision.
(F) The purchase and holding of an Interest in the Fund by the
benefit plan investor is not a prohibited transaction under
ERISA or Section 4975 of the Code because one of the
following is applicable: (i) a prohibited transaction
exemption applies to the purchase and holding of an Interest
in the Fund by the benefit plan investor; (ii) the benefit
plan investor is not subject to ERISA or Section 4975 of the
Code; or (iii) the Plan Fiduciary has determined that the
benefit plan investor has no relationship with the Adviser,
any investment adviser of any Investment Fund in which the
Master Fund invests or will invest, any member of the Board
of Directors, PFPC, the Distributor, any other selling agent,
DBAH Capital LLC, or any of their respective affiliates that
would make such purchase and holding a prohibited transaction
under ERISA or Section 4975 of the Code.
A-3
I hereby further certify that I agree to produce evidence to support the
foregoing certifications upon request.
Amount Invested:$ ______________
------------------------------- --------------------
Signature Date
A-4
APPENDIX B
THE TOPIARY FUND FOR BENEFIT PLAN INVESTORS (BPI) LLC
SECOND AMENDED AND RESTATED
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
THIS SECOND AMENDED AND RESTATED LIMITED LIABILITY COMPANY OPERATING
AGREEMENT of The Topiary Fund for Benefit Plan Investors (BPI) LLC (the "Fund")
is made effective as of June [o], 2005 by and among the Organizational Member,
the Investment Adviser, and each person hereinafter admitted to the Fund and
reflected on the books of the Fund as a Member.
W I T N E S S E T H :
WHEREAS, the Fund heretofore has been formed as a limited liability
company under the Delaware Act, pursuant to the Certificate dated as of
December 5, 2003 and filed with the Secretary of State of the State of Delaware
on December 8, 2003;
WHEREAS, the Fund was initially governed by the Limited Liability Company
Agreement dated as of December 8, 2003, which was subsequently amended and
restated in its entirety by the Amended and Restated Limited Liability Company
Operating Agreement dated July 21, 2004 (the "Existing Agreement"); and
WHEREAS, the Board desires to amend and restate the Existing Agreement to
amend and modify certain of the provisions hereof pursuant to the Board's
authority to do so under Section 8.1(a)(i) of the Existing Agreement and to set
forth the terms on which the Fund shall hereafter be governed; and
WHEREAS, the Board has approved the amendments contained in this
Agreement in accordance with the provisions of Section 8.1(a)(ii) and has
provided the Members with notice of such proposed amendments in accordance with
the provisions of Section 8.1(d);
NOW, THEREFORE, for and in consideration of the foregoing and the mutual
covenants hereinafter set forth, it is hereby agreed as follows:
-------------------------------------------
ARTICLE I
DEFINITIONS
-------------------------------------------
For purposes of this Agreement:
1.1 ADVISERS ACT means the Investment Advisers Act of 1940 and the rules,
regulations, and orders thereunder, as amended from time to time, or any
successor law.
1.2 AFFILIATE means affiliated person as such term is defined in the 1940
Act, as hereinafter defined.
1.3 AGREEMENT means this Second Amended and Restated Limited Liability
Company Operating Agreement, as amended and/or restated from time to time.
1.4 BOARD means the Board of Directors established pursuant to Section
2.6 and each Director on the Board shall be deemed a "Manager" of the Fund
within the meaning of the Delaware Act.
1.5 CAPITAL ACCOUNT means, with respect to each Member, the capital
account established and maintained on behalf of each Member pursuant to Section
5.3.
B-1
1.6 CAPITAL CONTRIBUTION means the contribution, if any, made, or to be
made, as the context requires, to the capital of the Fund by a Member.
1.7 CERTIFICATE means the Certificate of Formation of the Fund and any
amendments thereto as filed with the office of the Secretary of State of the
State of Delaware.
1.8 CLASS means any class of limited liability company interests
established by the Board from time to time.
1.9 CLOSING means the closing of a subscription to purchase an Interest.
1.10 CODE means the United States Internal Revenue Code of 1986, as
amended and as hereafter amended from time to time, or any successor law.
1.11 CONFIDENTIAL INFORMATION shall have the meaning as set forth in
Section 8.12(a).
1.12 DELAWARE ACT means the Delaware Limited Liability Company Act (6
DEL.C. ss.ss. 18-101, et seq.) as in effect on the date hereof and as amended
from time to time, or any successor law.
1.13 DIRECTOR means each person who initially serves on the Board
pursuant to Section 2.6 or who, from time to time, pursuant to this Agreement
shall serve on the Board as indicated in the records of the Fund. Each Director
shall be deemed a "Manager" of the Fund within the meaning of the Delaware Act.
1.14 EXPENSE ALLOCATION DATE means the initial Closing, and thereafter
each day, through and including the date which is twelve months after the
initial Closing, as of which a contribution to the capital of the Fund is made
pursuant to Section 5.1.
1.15 FISCAL PERIOD means the period commencing on the initial Closing,
and thereafter each period commencing on the day immediately following the last
day of the preceding Fiscal Period, and ending at the close of business on the
first to occur of the following dates:
(1) the last day of a Fiscal Year;
(2) the day preceding any day as of which a contribution to the
capital of the Fund is made pursuant to Section 5.1;
(3) the day as of which the Fund repurchases all or a portion of an
Interest of any Member pursuant to this Agreement;
(4) any day as of which there is any distribution to a Member
pursuant to Section 5.9;
(5) any other day as of which this Agreement provides for any
amount to be credited to or debited against the Capital Account of any
Member, other than an amount to be credited to or debited against the
Capital Accounts of all Members in accordance with their respective Fund
Percentages;
(6) the date as of which the Fund terminates; or
(7) any other date as established by the Board.
1.16 FISCAL YEAR, for accounting purposes, means the period commencing on
the initial Closing and ending on March 31 and thereafter each period
commencing on April 1 of each year and ending on March 31 of each year (or on
the date of a final distribution pursuant to Section 6.2 hereof), unless the
Directors shall designate another fiscal year for the Fund that is a
permissible taxable year under the Code. For tax purposes, the 12-month period
ending December 31 of each year will be the Fund's taxable year.
B-2
1.17 FORM N-2 means the Fund's Registration Statement on Form N-2 or any
successive form filed with the Securities and Exchange Commission ("SEC"), as
amended from time to time.
1.18 FUND means the limited liability company governed hereby, as such
limited liability company may from time to time be constituted.
1.19 FUND PERCENTAGE means a percentage established for each Member on
the Fund's books as of the first day of each Fiscal Period. The Fund Percentage
of a Member for a Fiscal Period shall be determined by dividing the balance of
the Member's Capital Account as of the commencement of such Fiscal Period by
the sum of the Capital Accounts of all of the Members as of the commencement of
such Fiscal Period. The sum of the Fund Percentages of all Members for each
Fiscal Period shall equal 100%.
1.20 INCENTIVE ALLOCATION means the incentive allocation made to the
Special Advisory Member with respect to each Member's Capital Account, in
respect of the Net Profit (if any) of such Capital Account in excess of the
Hurdle (as such term is defined in Section 5.5(a)) in accordance with Section
5.5 hereof.
1.21 INDEPENDENT DIRECTORS means those Directors who are not "interested
persons" of the Fund as such term is defined in the 1940 Act.
1.22 INTEREST means the entire limited liability company interest (as
defined in the Delaware Act) in the Fund at any particular time of a Member or
other person to whom an Interest or portion thereof has been transferred
pursuant to this Agreement, including the rights and obligations of such Member
or other person under this Agreement and the Delaware Act.
1.23 INVESTED CAPITAL means, with respect to any Member, the amount of
such Member's aggregate Net Capital Contributions to the Fund, subject to any
adjustments made and decreased by any repurchases or distributions.
1.24 INVESTMENT ADVISER means the person who at any particular time
serves as the investment adviser to the Master Fund pursuant to a written
agreement with the Master Fund.
1.25 INVESTMENT MANAGEMENT AGREEMENT means the separate written agreement
between the Master Fund and the Investment Adviser pursuant to which the
Investment Adviser performs certain investment advisory and supervisory
services to the Master Fund.
1.26 MANAGEMENT FEE means the management fee paid to the Investment
Adviser out of the Master Fund's assets pursuant to the Investment Management
Agreement.
1.27 MASTER FUND means The Topiary Master Fund for Benefit Plan Investors
(BPI) LLC, the "master fund" in which the Offshore Fund will invest all or
substantially all of its assets.
1.28 MEMBER means any person who shall have been admitted to the Fund as
a member or a substitute Member who is admitted to the Fund pursuant to this
Agreement, in such person's capacity as a Member until the Fund repurchases the
entire Interest of such person as a Member pursuant to Section 4.5 hereof or a
substituted Member or Members are admitted with respect to any such person's
entire Interest as a Member pursuant to Section 4.5 hereof. The Members shall
constitute a single class or group of members.
1.29 NEGATIVE BASIS shall have the meaning set forth in Section 5.8.
1.30 NEGATIVE BASIS MEMBER shall have the meaning as set forth in Section
5.8.
1.31 NET ASSET VALUE means the total value of all assets of the Fund as
valued pursuant to Section 7.3, less an amount equal to all accrued debts,
liabilities, and obligations of the Fund, calculated before giving effect to
any repurchase of Interests.
B-3
1.32 NET CAPITAL CONTRIBUTION means a Member's Capital Contribution minus
fees or expenses, if any.
1.33 NET PROFIT OR NET LOSS means the amount by which the Net Assets as
of the close of business on the last day of a Fiscal Period exceed (in the case
of Net Profit) or are less than (in the case of Net Loss) the Net Assets as of
the commencement of the same Fiscal Period, such amount to be adjusted to
exclude any items to be allocated among the Capital Accounts of the Members on
a basis that is not in accordance with the respective Fund Percentages of all
Members as of the commencement of such Fiscal Period pursuant to this
Agreement.
1.34 1940 ACT means the Investment Company Act of 1940 and the rules,
regulations, and orders thereunder, as amended from time to time, or any
successor law.
1.35 1934 ACT means the Securities Exchange Act of 1934 and the rules,
regulations, and orders thereunder, as amended from time to time, or any
successor law.
1.36 OFFERING EXPENSES means the expenses of offering Interests in the
Fund.
1.37 OFFSHORE FUND means a fund organized as a limited duration company
or similar entity in the Cayman Islands (or as a similar entity in a similar
non-United States jurisdiction) in which the Fund intends to invest
substantially all of its assets.
1.38 ORGANIZATIONAL EXPENSES means the expenses incurred by the Fund in
connection with its formation and initial registration as an investment company
under the 1940 Act.
1.39 ORGANIZATIONAL MEMBER means John T. Ferguson, Jr.
1.40 PERSON means any individual, entity, corporation, partnership,
association, limited liability company, joint-stock company, trust, estate,
joint venture, organization, or unincorporated organization.
1.41 POSITIVE BASIS shall have the meaning as set forth in Section 5.8.
1.42 POSITIVE BASIS MEMBER shall have the meaning as set forth in Section
5.8.
1.43 FULL REPURCHASE VALUATION DATE shall have the meaning set forth in
Section 4.5.
1.44 SECURITIES means securities (including, without limitation,
equities, debt obligations, options, and other "securities" as that term is
defined in Section 2(a)(36) of the 1940 Act) and any contracts for forward or
future delivery of any security, debt obligation, currency, or commodity, all
manner of derivative instruments and any contracts based on any index or group
of securities, debt obligations, currencies, or commodities, and any options
thereon.
1.45 SECURITIES ACT means the Securities Act of 1933, as amended and any
regulations promulgated thereunder.
1.46 SERIES means any series of limited liability company interests
established by the Board relating to a distinct portfolio and having separate
rights and powers with respect to the assets of the Fund allocated to such
Series.
1.47 SPECIAL ADVISORY MEMBER means the Investment Adviser in its capacity
as the investment adviser to the Master Fund, in which the Fund will invest
substantially all of its assets through the Offshore Fund and which will
therefore be responsible for the investment and trading of the assets of the
Fund.
1.48 TAX MATTERS MEMBER means the Member designated as "tax matters
member" of the Fund pursuant to Section 8.18 hereof.
B-4
1.49 TRANSFER means the assignment, transfer, sale, or other disposition
of all or any portion of an Interest, including any right to receive any
allocations and distributions attributable to an Interest.
1.50 VALUATION DATE means any date in which the Net Asset Value of the
Fund is computed.
-----------------------------------------
ARTICLE II
ORGANIZATION; ADMISSION OF MEMBERS; BOARD
-----------------------------------------
2.1 FORMATION OF LIMITED LIABILITY COMPANY. The Organizational Member and
any person designated by the Board hereby are designated as authorized persons,
within the meaning of the Delaware Act, to execute, deliver, and file all
certificates (and any amendments and/or restatements thereof) required or
permitted by the Delaware Act to be filed in the office of the Secretary of
State of the State of Delaware. The Board shall cause to be executed and filed
with applicable governmental authorities any other instruments, documents, and
certificates which, in the opinion of the Fund's legal counsel, may from time
to time be required by the laws of the United States of America, the State of
Delaware, or any other jurisdiction in which the Fund shall determine to do
business, or any political subdivision or agency thereof, or which such legal
counsel may deem necessary or appropriate to effectuate, implement, and
continue the valid existence and business of the Fund.
2.2 NAME. The name of the Fund shall be The Topiary Fund for Benefit Plan
Investors (BPI) LLC, pursuant to the Certificate dated as of December 5, 2003
and filed with the Secretary of State of the State of Delaware on December 8,
2003, and amended on July 21, 2004 pursuant to the Certificate of Amendment
filed with the Secretary of the State of Delaware, or such other name as the
Board hereafter may adopt upon: (i) causing an appropriate amendment to the
Certificate to be filed in accordance with the Delaware Act; and (ii) sending
notice thereof to each Member. The Fund's business may be conducted under the
name of the Fund or, to the fullest extent permitted by law, any other name or
names deemed advisable by the Board.
2.3 PRINCIPAL AND REGISTERED OFFICE. The Fund shall have its principal
office at the principal office of the Investment Adviser, or at such other
place designated from time to time by the Board.
The Fund shall have its registered office in the State of Delaware at
1209 Orange Street, Wilmington, New Castle County, Delaware 19801, and shall
have the Corporation Trust Company as its registered agent at such registered
office for service of process in the State of Delaware, unless a different
registered office or agent is designated from time to time by the Board in
accordance with the Delaware Act.
2.4 DURATION. The term of the Fund shall commence on the filing of the
Certificate with the Secretary of State of the State of Delaware and shall
continue perpetually unless and until the Fund is dissolved pursuant to Section
6.1 hereof.
2.5 BUSINESS OF THE FUND. The business of the Fund is, without
limitation, either directly or indirectly through one or more pooled investment
vehicles, to purchase, sell, invest, and trade in Securities on margin or
otherwise, to invest as a feeder fund, either directly or indirectly (including
via the Offshore Fund) in a master fund as part of a master-feeder structure,
including the Master Fund, and to engage in any financial or derivative
transactions relating thereto or otherwise and to engage in such other
activities and to exercise such rights and powers as permitted by limited
liability companies under the Delaware Act. On behalf of the Fund, the officers
of the Fund may execute, deliver, and perform all contracts, agreements, and
other undertakings and engage in all activities and transactions as may in the
opinion of the Board be necessary or advisable to carry out the Fund's business
and any amendments to any such contracts, agreements, and other undertakings,
all without any further act, vote, or approval of any other person,
notwithstanding any other provision of this Agreement.
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2.6 THE BOARD.
(a) The Organizational Member shall serve as the sole Director on the
initial Board as of December 8, 2003, until the proper designation of those
persons first listed on Schedule I who shall agree to be bound by all of the
terms of this Agreement to serve as Directors on the initial Board, which
agreement to be bound shall be effective as of the date of their acceptance of
their appointment as Director. The Board may, subject to the provisions of
paragraphs (a) and (b) of this Section 2.6 with respect to the number of and
vacancies in the position of Director and the provisions of Section 3.3 hereof
with respect to the election of Directors by Members, designate any person who
shall agree to be bound by all of the terms of this Agreement as a Director.
The names and mailing addresses of the Directors shall be set forth in the
books and records of the Fund. The number of Directors shall be fixed from time
to time by a written instrument signed by, or by resolution approved at a duly
constituted meeting by vote of, a majority of the Board, provided however that
the number of Directors shall at all times be at least one and no more than ten
as determined, from time to time, by the Directors pursuant to this Agreement.
(b) Each Director shall serve as a Director for the duration of the term
of the Fund, unless his or her status as a Director shall be sooner terminated
pursuant to Section 4.2 hereof. If any vacancy in the position of a Director
occurs, the remaining Directors may appoint a person to serve in such capacity,
provided such appointment is in accordance with the 1940 Act. The Directors may
call a meeting of Members to fill any vacancy in the position of Director, and
shall do so when required by the 1940 Act.
(c) In the event that no Director remains to continue the business of the
Fund, the Investment Adviser shall promptly call a meeting of the Members, to
be held within 60 days after the date on which the last Director ceased to act
in that capacity, for the purpose of determining whether to continue the
business of the Fund and, if the business shall be continued, of electing the
required number of Directors to the Board. If the Members shall determine at
such meeting not to continue the business of the Fund or if the required number
of Directors is not elected within 60 days after the date on which the last
Director ceased to act in that capacity, then the Fund shall be dissolved
pursuant to Section 6.1 hereof and the assets of the Fund shall be liquidated
and distributed pursuant to Section 6.2 hereof.
2.7 MEMBERS.
(a) The Board may admit one or more Members at such times as the Board
may determine. Members may be admitted to the Fund subject to the condition
that each such Member execute an appropriate signature page of this Agreement,
application, subscription agreement, or without such execution, if such Member
orally, in writing, or by other action, including, but not limited to payment
for an Interest, complies with the conditions for becoming a Member and
pursuant to which such Member agrees to be bound by all the terms and
provisions hereof. This Agreement shall not be unenforceable by reason of it
not having been signed by a person being admitted as a Member. The Board, in
its sole and absolute discretion, may reject applications or subscription
agreements for Interests in the Fund. The admission of any person as a Member
shall be effective upon the revision of the books and records of the Fund to
reflect the name and the contribution to the capital of the Fund of such
additional Member. The Organizational Member is hereby admitted as a Member on
the date hereof.
(b) If a Member is admitted to the Fund prior to the initial Closing, the
Invested Capital of such Member shall be adjusted by any Net Profit or Net Loss
allocable to such Member for the period through the initial Closing.
2.8 BOTH DIRECTORS AND MEMBERS. A Member may at the same time be a
Director, a Special Advisory Member, or an Investment Adviser and a Member in
which event such Member's rights and obligations in each capacity shall be
determined separately in accordance with the terms and provisions hereof and as
provided in the Delaware Act and the 1940 Act. A Director need not be a Member.
2.9 SPECIAL ADVISORY MEMBER. Upon signing this Agreement, the Investment
Adviser shall be admitted to the Fund as the Special Advisory Member, subject
to due approval, in accordance with the requirements of the 1940 Act, of the
Investment Management Agreement. The Interest of the Special Advisory Member
shall be non-voting. If at any time the Investment Management Agreement between
the Master Fund and the person then serving as Investment Adviser terminates,
the Board shall admit as a substitute Special Advisory
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Member, upon its signing this Agreement, such person as may be retained by the
Master Fund to provide investment advisory services pursuant to an Investment
Management Agreement, subject to the due approval of such Investment Management
Agreement in accordance with the requirements of the 1940 Act.
2.10 ORGANIZATIONAL MEMBER. John T. Ferguson shall be the Organizational
Member of the Fund.
2.11 LIMITED LIABILITY. To the fullest extent permitted under applicable
law, a Member (including, in its capacity as such, the Special Advisory Member)
shall not be liable for the Fund's debts, obligations, or liabilities in any
amount in excess of the Capital Account balance of such Member. To the fullest
extent permitted under applicable law, the Investment Adviser and Directors
shall not be liable for the Fund's debts, obligations, or liabilities.
2.12 SERIES. The Fund may create one or more Series and/or classes from
time to time. With respect to any Series established by the Fund, the following
provisions shall apply:
(a) separate and distinct records shall be maintained for each Series,
and the assets associated with any such Series shall be held and accounted for
separately from the other assets of the Fund or any other Series;
(b) the debts, liabilities, and obligations incurred, contracted for, or
otherwise existing with respect to a particular Series shall be enforceable
against the assets of such Series only, and not against the assets of the Fund
generally or any other Series;
(c) the Board, in its sole and absolute discretion, shall have authority
to restrict allocations or transfers of Member Capital Contributions to or from
any Series; and
(d) notwithstanding Section 18-215 of the Delaware Act, the failure of a
Series to have any Member associated with it shall not be the basis for the
dissolution of the Series and the winding up of its affairs unless in
accordance with the provisions of Article VI.
-------------------------------------------
ARTICLE III
MANAGEMENT
-------------------------------------------
3.1 MANAGEMENT AND CONTROL.
(a) Management and control of the business of the Fund shall be vested in
the Board, which shall have the right, power, and authority, on behalf of the
Fund and in its name, to exercise all rights, powers, and authority of
"managers" under the Delaware Act and to do all things necessary and proper to
carry out the objective and business of the Fund and its duties hereunder. No
Director shall have the authority individually to act on behalf of or to bind
the Fund except within the scope of such Director's authority as delegated by
the Board. The parties hereto intend that, except to the extent otherwise
expressly provided herein: (i) each Director shall be vested with the same
powers, authority, and responsibilities on behalf of the Fund as are
customarily vested in each director of a Delaware corporation; and (ii) each
Independent Director shall be vested with the same powers, authority, and
responsibilities on behalf of the Fund as are customarily vested in each
director of a closed-end management investment company registered under the
1940 Act that is organized as a Delaware corporation who is not an "interested
person" of such company as such term is defined in the 1940 Act. During any
period in which the Fund shall have no Directors, the Investment Adviser shall
continue to have the authority to manage the business and affairs of the Fund.
The Directors may make Capital Contributions and own Interests in the Fund.
(b) Each Member agrees not to treat, on his personal income tax return or
in any claim for a tax refund, any item of income, gain, loss, deduction, or
credit in a manner inconsistent with the treatment of such item
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by the Fund. The Board shall have the exclusive authority and discretion to
make any elections required or permitted to be made by the Fund under any
provisions of the Code or any other revenue laws.
(c) Members shall have no right to participate in and shall take no part
in the management or control of the Fund's business, except to the extent
specifically provided herein, and shall have no right, power, or authority to
act for or bind the Fund. Members shall have the right to vote on any matters
only as provided in this Agreement or on any matters that require the approval
of the holders of voting securities under the 1940 Act or as otherwise required
in the Delaware Act.
(d) The Board may delegate to any person, including officers of the Fund,
any rights, power, and authority vested by this Agreement in the Board to the
extent permissible under applicable law.
3.2 ACTIONS BY THE BOARD.
(a) Unless provided otherwise in this Agreement, the Board shall act
only: (i) by the affirmative vote of a majority of the Directors (which
majority shall include any requisite number of Independent Directors required
by the 1940 Act) present at a meeting duly called at which a quorum of the
Directors shall be present (in person, which may include any means of
communication that allows all Directors participating to hear each other
simultaneously during the meeting, as permitted by the SEC and/or the 1940 Act,
or, if in person attendance is not required by the 1940 Act, in person or by
telephone); or (ii) by unanimous written consent of all of the Directors
without a meeting, if permissible under the 1940 Act.
(b) The Board may designate from time to time a Chairperson who shall
preside at all meetings. Meetings of the Board may be called by the Chairperson
or any two Directors, and may be held on such date and at such time and place
as the Board shall determine. Each Director shall be entitled to receive
written notice of the date, time, and place of such meeting within a reasonable
time in advance of the meeting. Notice need not be given to any Director who
shall attend a meeting without objecting to the lack of notice or who shall
execute a written waiver of notice with respect to the meeting. Directors may
attend and participate in any meeting by telephone, except where in person
attendance at a meeting is required by the 1940 Act. A majority of the
Directors then in office shall constitute a quorum at any meeting.
(c) The Board may designate from time to time agents and employees of the
Fund, including without limitation employees of the Investment Adviser, who
shall have the same powers and duties on behalf of the Fund (including the
power to bind the Fund) as are customarily vested in officers of a Delaware
corporation, and designate them as officers of the Fund.
3.3 MEETINGS OF MEMBERS.
(a) Actions requiring the vote of the Members may be taken at any duly
constituted meeting of the Members at which a quorum is present. Meetings of
the Members may be called by the Board or by Members holding a majority of the
total number of votes eligible to be cast by all Members, and may be held at
such time, date, and place as the Board shall determine. The Board shall
arrange to provide written notice of the meeting, stating the date, time, and
place of the meeting and the record date therefor, to each Member entitled to
vote at the meeting within a reasonable time prior thereto. Failure to receive
notice of a meeting on the part of any Member shall not affect the validity of
any act or proceeding of the meeting, so long as a quorum shall be present at
the meeting. Only matters set forth in the notice of a meeting may be voted on
by the Members at a meeting. The presence in person or by proxy of Members
holding a majority of the total number of votes eligible to be cast by all
Members as of the record date shall constitute a quorum at any meeting. In the
absence of a quorum, a meeting of the Members may be adjourned by action of a
majority of the Members present in person or by proxy without additional notice
to the Members. Except as otherwise required by any provision of this Agreement
or of the 1940 Act: (i) those candidates receiving a plurality of the votes
cast at any meeting of Members shall be elected as Directors; and (ii) all
other actions of the Members taken at a meeting shall require the affirmative
vote of Members holding a majority of the total number of votes eligible to be
cast by those Members who are present in person or by proxy at such meeting.
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(b) Each Member (other than the Special Advisory Member) shall be
entitled to cast at any meeting of Members a number of votes equivalent to such
Member's Fund Percentage as of the record date for such meeting. The Board
shall establish a record date not less than 10 nor more than 60 days prior to
the date of any meeting of Members to determine eligibility to vote at such
meeting and the number of votes which each Member will be entitled to cast
thereat, and shall maintain for each such record date a list setting forth the
name of each Member and the number of votes that each Member will be entitled
to cast at the meeting.
(c) A Member may vote at any meeting of Members by a proxy properly
executed in writing by the Member and filed with the Fund before or at the time
of the meeting. A proxy may be suspended or revoked, as the case may be, by the
Member executing the proxy by a later writing delivered to the Fund at any time
prior to exercise of the proxy or if the Member executing the proxy shall be
present at the meeting and decide to vote in person. Any action of the Members
that is permitted to be taken at a meeting of the Members may be taken without
a meeting if consents in writing, setting forth the action taken, are signed by
Members holding a majority of the total number of votes eligible to be cast or
such greater percentage as may be required in order to approve such action.
3.4 CUSTODY OF ASSETS OF THE FUND. The physical possession of all funds,
Securities, or other property of the Fund shall at all times, be held,
controlled, and administered by one or more custodians retained by the Fund in
accordance with the requirements of the 1940 Act.
3.5 OTHER ACTIVITIES OF MEMBERS AND DIRECTORS.
(a) The Directors shall not be required to devote full time to the
affairs of the Fund, but shall devote such time as may reasonably be required
to perform their obligations under this Agreement.
(b) Any Member, Director, or Affiliate of the foregoing may engage in or
possess an interest in other business ventures or commercial dealings of every
kind and description, independently or with others, including, but not limited
to, acquisition and disposition of Securities, provision of investment advisory
or brokerage services, serving as directors, officers, employees, advisers, or
agents of other companies, partners of any partnership, members of any limited
liability company, or trustees of any trust, or entering into any other
commercial arrangements. No Member shall have any rights in or to such
activities of any other Member or Director, or any profits derived therefrom.
3.6 DUTY OF CARE.
(a) A Director shall not be liable to the Fund or to any of its Members
for any loss or damage occasioned by any act or omission in the performance of
the Director's services under this Agreement, unless it shall be determined by
final judicial decision in a court of competent jurisdiction on the merits from
which there is no further right to appeal that such loss is due to an act or
omission of such person constituting willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of such
Director's office or as otherwise required by law.
(b) A Member not in breach of any obligation hereunder or under any
agreement pursuant to which the Member subscribed for an Interest shall be
liable to the Fund, any other Member, or third parties only as required by the
Delaware Act or otherwise provided in this Agreement.
3.7 INDEMNIFICATION.
(a) To the fullest extent permitted by law, the Fund shall, subject to
Section 3.7(b) hereof, indemnify each Director (including for this purpose
their executors, heirs, assigns, successors, or other legal representatives),
the Investment Adviser and Tax Matters Member (including for this purpose each
affiliate, shareholder, partner, member, officer, director, principal,
employee, or agent of the Investment Adviser and the Tax Matters Member) and
the executors, heirs, assigns, successors, or other legal representatives of
each of the foregoing, and of any person who controls or is under common
control, or otherwise affiliated, with the Investment Adviser or the Tax
Matters Member (and their executors, heirs, assigns, successors, or other legal
representatives) against all losses, claims, damages, liabilities, costs, and
expenses, including, but not limited to, amounts paid in satisfaction of
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judgments, in compromise, or as fines or penalties, and reasonable counsel
fees, incurred in connection with the defense or disposition of any action,
suit, investigation, or other proceeding, whether civil or criminal, before any
judicial, arbitral, administrative, or legislative body, in which such
indemnitee may be or may have been involved as a party or otherwise, or with
which such indemnitee may be or may have been threatened, while in office or
thereafter, by reason of being or having been a Director, the Investment
Adviser, or the Tax Matters Member, as the case may be, of the Fund or the past
or present performance of services to the Fund by such indemnitee, except to
the extent such loss, claim, damage, liability, cost, or expense shall have
been finally determined in a decision on the merits in any such action, suit,
investigation, or other proceeding to have been incurred or suffered by such
indemnitee by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of such indemnitee's
office. The rights of indemnification provided under this Section 3.7 shall not
be construed so as to provide for indemnification of an indemnitee for any
liability (including liability under federal securities laws which, under
certain circumstances, impose liability even on persons that act in good faith)
to the extent (but only to the extent) that such indemnification would be in
violation of applicable law, but shall be construed so as to effectuate the
applicable provisions of this Section 3.7 to the fullest extent permitted by
law.
(b) Expenses, including reasonable counsel fees, so incurred by any such
indemnitee (but excluding amounts paid in satisfaction of judgments, in
compromise, or as fines or penalties), may be paid from time to time by the
Fund in advance of the final disposition of any such action, suit,
investigation, or proceeding upon receipt of an undertaking by or on behalf of
such indemnitee to repay to the Fund amounts so paid if it shall ultimately be
determined that indemnification of such expenses is not authorized under
Section 3.7(a) hereof; provided, however, that: (i) such indemnitee shall
provide security for such undertaking, (ii) the Fund shall be insured by or on
behalf of such indemnitee against losses arising by reason of such indemnitee's
failure to fulfill his or its undertaking; or (iii) a majority of the Directors
(excluding any Director who is seeking advancement of expenses hereunder or is
or has been a party to any action, suit, investigation, or proceeding involving
claims similar to those involved in the action, suit, investigation, or
proceeding giving rise to a claim for advancement of expenses hereunder) or
independent legal counsel in a written opinion shall determine based on a
review of readily available facts (as opposed to a full trial-type inquiry)
that there is reason to believe such indemnitee ultimately will be entitled to
indemnification.
(c) As to the disposition of any action, suit, investigation, or
proceeding (whether by a compromise payment, pursuant to a consent decree, or
otherwise) without an adjudication or a decision on the merits by a court of
competent jurisdiction, or by any other body before which the proceeding shall
have been brought, that an indemnitee is liable to the Fund or its Members by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of such indemnitee's office,
indemnification shall be provided pursuant to Section 3.7(a) hereof if: (i)
approved as in the best interests of the Fund by vote of a majority of the
Directors (excluding any Director who is seeking indemnification hereunder or
is or has been a party to any action, suit, investigation, or proceeding
involving claims similar to those involved in the action, suit, investigation,
or proceeding giving rise to a claim for advancement of expenses hereunder)
upon a determination based upon a review of readily available facts (as opposed
to a full trial-type inquiry) that such indemnitee acted in good faith and in
the reasonable belief that such actions were in the best interests of the Fund
and that such indemnitee is not liable to the Fund or its Members by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of such indemnitee's office; or (ii) the
Directors secure a written opinion of independent legal counsel based upon a
review of readily available facts (as opposed to a full trial-type inquiry) to
the effect that such indemnitee acted in good faith and in the reasonable
belief that such actions were in the best interests of the Fund and that such
indemnitee is not liable to the Fund or its Members by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of such indemnitee's office.
(d) Any indemnification or advancement of expenses made pursuant to this
Section 3.7 shall not prevent the recovery from any indemnitee of any such
amount if such indemnitee subsequently shall be determined in a final decision
on the merits in a court of competent jurisdiction in any action, suit,
investigation, or proceeding involving the liability or expense that gave rise
to such indemnification or advancement of expenses to be liable to the Fund or
its Members by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of such indemnitee's
office. In any suit brought by an indemnitee to enforce a right to
indemnification under this Section 3.7 it shall be a defense that, and in any
suit in the name of the Fund to recover any indemnification or advancement of
expenses made pursuant to this Section 3.7 the Fund shall be entitled to
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recover such expenses upon a final adjudication that, the indemnitee has not
met the applicable standard of conduct set forth in this Section 3.7. In any
such suit brought to enforce a right to indemnification or to recover any
indemnification or advancement of expenses made pursuant to this Section 3.7,
the burden of proving that the indemnitee is not entitled to be indemnified, or
to any indemnification or advancement of expenses, under this Section 3.7 shall
be on the Fund (or any Member acting derivatively or otherwise on behalf of the
Fund or its Members).
(e) An indemnitee may not satisfy any right of indemnification or
advancement of expenses granted in this Section 3.7 as to which he, she, or it
may otherwise be entitled except out of the assets of the Fund, and no Member
shall be personally liable with respect to any such claim for indemnification
or advancement of expenses.
(f) The rights of indemnification provided hereunder shall not be
exclusive of or affect any other rights to which any person may be entitled by
contract or otherwise under law. Nothing contained in this Section 3.7 shall
affect the power of the Fund to purchase and maintain liability insurance on
behalf of any Director or other person.
3.8 FEES, EXPENSES, AND REIMBURSEMENT.
(a) The Board may cause the Fund to compensate each Director for his or
her services hereunder. In addition, the Fund shall reimburse the Directors for
reasonable out-of-pocket expenses incurred by them in performing their duties
under this Agreement.
(b) The Fund shall bear all of its own operating expenses incurred in the
business of the Fund other than those specifically required to be borne by the
Investment Adviser or another party pursuant to a separate written agreement
with the Fund. Expenses to be borne by the Fund include, but shall not be
limited to: fees and expenses in connection with the organization of the Fund,
including offering expenses; brokerage commissions; interest and fees on any
borrowings by the Fund; fees and expenses of outside legal counsel (including
fees and expenses associated with review of documentation for prospective
investments by the Fund), including foreign legal counsel; independent
auditors' fees; fees and expenses in connection with repurchase offers and any
repurchases of Interests; taxes and governmental fees (including tax
preparation fees); administration and custody fees; expenses of preparing,
printing, and distributing offering memoranda and prospectuses, and any other
sales material (and any supplements or amendments thereto), reports, notices,
other communications to Members, and proxy materials; expenses of preparing,
printing, and filing reports and other documents with government agencies;
expenses of Members' meetings; expenses of corporate data processing and
related services; Member recordkeeping and Member account services, fees, and
disbursements; fees and expenses of the Directors not employed by the
Investment Adviser or its Affiliates, the Distributor, or their respective
affiliates; insurance premiums; extraordinary expenses such as litigation
expenses; and such other types of expenses as may be approved from time to time
by the Board. The Fund will also bear its allocable portion of the operating
expenses of any master fund in which it invests (directly or indirectly), which
expenses may include asset-based compensation payable to the Investment
Adviser.
(1) The Investment Adviser shall be entitled to reimbursement from
the Fund for any of the above expenses that it pays on behalf of the
Fund.
(c) Subject to procuring any required regulatory approvals, the Fund from
time to time, alone or in conjunction with other accounts for which the
Investment Adviser, or any Affiliate of the Investment Adviser, acts as general
partner, managing member, or investment adviser, may purchase insurance in such
amounts, from such insurers and on such terms as the Board shall determine.
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-----------------------------------
ARTICLE IV
TERMINATION OF STATUS OF INVESTMENT ADVISER AND DIRECTORS;
TRANSFERS, REPURCHASES, AND REDEMPTIONS
-----------------------------------
4.1 TERMINATION OF STATUS OF THE INVESTMENT ADVISER. The status of the
Investment Adviser shall terminate if the Investment Management Agreement with
the Investment Adviser terminates and the Master Fund does not enter into a new
Investment Management Agreement with the Investment Adviser, effective as of
the date of such termination.
4.2 TERMINATION OF STATUS OF A DIRECTOR. The status of a Director shall
terminate if the Director: (i) shall die; (ii) shall be adjudicated
incompetent; (iii) shall voluntarily withdraw as a Director (upon not less than
90 days' prior written notice to the other Directors, unless the other
Directors waive such notice); (iv) shall be removed; (v) shall be certified by
a physician to be mentally or physically unable to perform his or her duties
hereunder; (vi) shall be declared bankrupt by a court with appropriate
jurisdiction, file a petition commencing a voluntary case under any bankruptcy
law, or make an assignment for the benefit of creditors; or (vii) shall have a
receiver appointed to administer the property or affairs of such Director.
4.3 REMOVAL OF THE DIRECTORS. Any Director may be removed by: (i) the
vote or written consent of at least two-thirds (2/3) of the Directors not
subject to the removal or vote; or (ii) the vote or written consent of Members
holding not less than two-thirds (2/3) of the total number of votes eligible to
be cast by all Members.
4.4 TRANSFER OF INTERESTS OF MEMBERS.
(a) An Interest held by a Member may be transferred in whole or in part
only: (i) by operation of law pursuant to the death, divorce, bankruptcy,
insolvency, or dissolution of such Member; or (ii) under extremely limited
circumstances, with the written consent of the Board (which may be withheld for
any reason in its sole and absolute discretion). If any transferee does not
meet such investor eligibility requirements, the Fund reserves the right to
redeem its Interest. If the Board does not consent to a transfer by operation
of law, the Fund shall redeem the Interest from the Member's successor. Any
transfer must comply with the Securities Act. The Board generally will not
consent to a transfer unless the transfer is: (i) one in which the tax basis of
the Interest in the hands of the transferee is determined, in whole or in part,
by reference to its tax basis in the hands of the transferring Member (e.g.,.
certain gifts and contributions to family entities); or (ii) to members of the
transferring Member's immediate family (siblings, spouse, parents, and
children). The foregoing permitted transferees will not be allowed to become
substituted Members without the consent of the Board, which may be withheld in
its sole and absolute discretion. Each transferring Member and transferee
agrees to pay all expenses, including, but not limited, to attorneys' and
accountants' fees, incurred by the Fund in connection with any transfer.
(b) By subscribing for an Interest, each Member agrees to indemnify and
hold harmless the Fund, the Board, the Investment Adviser, or each other
Member, and any Affiliate of the foregoing against all losses, claims, damages,
liabilities, costs, and expenses (including legal or other expenses incurred in
investigating or defending against any losses, claims, damages, liabilities,
costs, and expenses or any judgments, fines, and amounts paid in settlement),
joint or several, to which such persons may become subject by reason of or
arising from any transfer made by that Member in violation of this Section 4.4
or any misrepresentation made by that Member in connection with any such
transfer.
(c) Each transferring Member shall indemnify and hold harmless the Fund,
the Board, the Investment Adviser, or each other Member and any Affiliate of
the foregoing against all losses, claims, damages, liabilities, costs, and
expenses (including legal or other expenses incurred in investigating or
defending against any such losses, claims, damages, liabilities, costs, and
expenses or any judgments, fines, and amounts paid in settlement), joint or
several, to which such persons may become subject by reason of or arising from:
(i) any transfer made by such
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Member in violation of this Section 4.4; and (ii) any misrepresentation by such
Member in connection with any such transfer.
(d) The Special Advisory Member may not transfer its Interest.
4.5 REPURCHASE OF INTERESTS.
(a) General. Except as otherwise provided in this Agreement, no Member or
other person holding an Interest or portion thereof shall have the right to
require the Fund to redeem its Interest. The Board of the Fund, from time to
time, and in its sole and absolute discretion, may determine to cause the Fund
to offer to repurchase Interests from Members, including the Investment
Adviser, on such terms and conditions as set forth in this Agreement. However,
the Fund shall not offer to repurchase Interests (including the Interest held
by the Special Advisory Member) on more than two occasions during any one
Fiscal Year unless it has been advised by counsel to the Fund to the effect
that more frequent offers would not cause any adverse tax consequences to the
Fund or its Members. In accordance with the terms and conditions as are set
forth in this Agreement, in determining whether to cause the Fund to repurchase
Interests pursuant to written requests by Members, the Board shall consider,
among other things, the recommendation of the Investment Adviser and shall also
consider the following factors, among others, in making such determination:
(1) whether any Members have requested that the Fund repurchase
their Interests;
(2) the liquidity of the Fund's assets;
(3) the investment plans and working capital requirements of the
Fund;
(4) the relative economies of scale with respect to the size of
the Fund;
(5) the history of the Fund in repurchasing Interests;
(6) the economic condition of the securities markets; or
(7) the anticipated tax consequences of any proposed repurchases
of Interests.
(b) Discretionary Repurchases. The Board shall cause the Fund to
repurchase Interests on terms fair to the Fund and to all Members or one or
more classes of Members (including persons holding Interests acquired from
Members), as applicable, in the following manner:
(1) The Board will provide written notice to Members when it has
determined, in its sole and absolute discretion, that the Fund will
repurchase Interests. Such notice will describe the terms of the
repurchase offer, including:
(i) the commencement date of the repurchase offer;
(ii) the date on which repurchase requests must be received
by the Fund (the "Repurchase Request Deadline"); and
(iii) other information that Members should consider in
deciding whether and how to participate in such repurchase
opportunity.
(2) Members must submit, in writing, requests for repurchase to the
Fund or its designated agent. The Repurchase Request Deadline will be a
date set by the Board occurring no sooner than 20 business days after the
commencement date of the repurchase offer and such Repurchase Request
Deadline may be extended by the Board in its sole and absolute
discretion. The Fund will not accept any repurchase request received by
it or its designated agent after the Repurchase Request Deadline.
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(3) Payment for Interests, accepted by the Fund for repurchase will
be made in whole or in part in accordance with Section 4.5(b)(6). The
amount due to any Member tendering all of its Interest in the Fund will
be equal to the value of the Member's Capital Account based on the
estimated unaudited net asset value of the Fund's assets as of the
effective date of repurchase (the "Full Repurchase Valuation Date"),
after giving effect to all allocations to be made to the Member's Capital
Account as of such date. The Full Repurchase Valuation Date will be
approximately 65 days after the Repurchase Request Deadline. Members who
tender a portion of their Interests in the Fund (defined as a specific
dollar value) in their repurchase request, and which portion is accepted
for repurchase by the Fund, shall receive such specified dollar amount.
(4) The Fund may suspend or postpone any repurchase offer, by vote
of a majority of the Board, including a majority of the Independent
Directors, including but not limited to:
(i) for any period during which an emergency exists as a
result of which it is not reasonably practicable for the Fund to
dispose of securities it owns or to determine the value of the
Fund's nets assets;
(ii) for any other periods that the SEC permits by order for
the protection of Members; or
(iii) under such other unusual circumstances as the Board
deems advisable for the benefit of the Fund and its Members.
(5) The Board, in its sole and absolute discretion, shall determine
the amount of Interests to be repurchased, if any. If a greater amount of
Interests is submitted for repurchase by Members as of the Repurchase
Request Deadline than the repurchase offer amount, as determined by the
Board in its sole and absolute discretion, the Fund may repurchase an
additional amount of Interests not to exceed 2% of the Interests
outstanding on the Repurchase Request Deadline. If the Board determines
not to repurchase more than the repurchase offer amount or if Members
submit for repurchase Interests in an amount exceeding the repurchase
offer amount plus 2% of the Interests outstanding on the Repurchase
Request Deadline, the Fund shall repurchase the Interests submitted for
repurchase on a pro rata basis, disregarding fractions, according to the
amount of Interests submitted for repurchase by each Member as of the
Repurchase Request Deadline; provided, however, that this provision shall
not prohibit the Fund from:
(i) accepting all Interests submitted for repurchase by
Members who own, beneficially or of record, an aggregate of not
more than a specified percentage of such Interest and who submit
for repurchase all their Interest, before prorating Interests
submitted for repurchase by other Members; or
(ii) accepting by lot Interests submitted for repurchase by
Members who offer all the Interest held by them or who, when
submitting for repurchase their Interest, elect to have either all
or none or at least a minimum amount or none accepted, if the Fund
first accepts all Interests submitted for repurchase by Members who
do not so elect.
(6) Repurchases of Interests or portions thereof by the Fund shall
be payable after the date of each such repurchase or, in the case of an
offer by the Fund to repurchase Interests, after the expiration date of
such repurchase offer in accordance with the terms of such offer. Payment
of the purchase price for an Interest (or portion thereof) shall be made
within five days of the relevant Repurchase Request Deadline, and shall
consist of cash or a promissory note, which need not bear interest, in an
amount equal to 100% of the unaudited net asset value of the portion of
the Interest redeemed. Notwithstanding the foregoing, if a Member has
requested the repurchase of 90% or more of the Interest held by such
Member, such Member shall receive: (i) cash or a promissory note, which
need not bear interest, in an amount equal to 90% of the estimated
unaudited net asset value of the Interest (or portion thereof)
repurchased by the Fund determined as of the Full Repurchase Valuation
Date (the "Initial Payment"); (ii) a promissory note entitling the holder
thereof to the balance of the proceeds, to be paid following the
expiration of the later of (x) 90 days following the applicable Full
Repurchase Valuation Date, so as to effectuate an orderly liquidation of
B-14
enough Investment Funds in which the Fund is invested or otherwise, or
(y) such longer period as the Board of Directors in its discretion deems
necessary to protect the interests of the remaining Members.
Notwithstanding anything in the foregoing to the contrary, the Board of
Directors, in its discretion, may pay any portion of the repurchase price
in Securities (or any combination of Securities and cash) having a value,
determined as of the Full Repurchase Valuation Date, equal to the amount
to be repurchased; provided that the Board of Directors, in its
discretion, may make payment of the purchase price for an Interest by
in-kind distribution of Securities held by the Fund. The purchase price
of an Interest will be determined as of the Full Repurchase Valuation
Date.
(7) The Board may, in its sole and absolute discretion, elect to
impose charges on Members or other persons who submit their Interests for
repurchase. The Board may also, in its sole and absolute discretion,
allocate to tendering Members withdrawal or similar charges imposed by
Investment Funds if the Fund has requested withdrawal of its capital from
any Investment Funds in order to fund the repurchase of Interests and
such charges were imposed on the Fund.
(8) A Member who submits for repurchase only a portion of such
Member's Interest shall be required to maintain a Capital Account balance
at least equal to $25,000.
(9) The Investment Adviser may submit for repurchase its Interest
as a Member under Section 4.5 hereof.
(10) If the Investment Adviser's status as a Special Advisory
Member is terminated, it (or its trustee or other legal representative)
may, by written notice to the Board within 60 days of the effective date
of such termination, tender to the Fund for repurchase all or any portion
of its Capital Account. Not later than 30 days after the receipt of such
notice, the Board shall cause the tendered portion of the Capital Account
to be repurchased by the Fund for cash.
(c) Mandatory Redemptions. The Board may cause the Fund to redeem the
Interest of a Member or of any person acquiring such an Interest from or
through a Member in the event that the Board determines or has reason to
believe that, among other things:
(1) such Interest has been transferred or such Interest has vested
in any person by operation of law as a result of the death, dissolution,
bankruptcy, or incompetency of a Member;
(2) ownership of such Interest by a Member or other person will
cause the Fund to be in violation of, or require registration of any
Interests, or subject the Fund or the Investment Adviser to additional
registration or regulation under, the securities, commodities, or other
laws of the United States or any other relevant jurisdiction;
(3) continued ownership of such Interest may be harmful or
injurious to the business or reputation of the Fund or the Investment
Adviser, or may subject the Fund or any of its Members to an undue risk
of adverse tax or other fiscal consequences;
(4) for any period during which an emergency exists as a result of
which it is not reasonably practicable for the Fund to dispose of
securities it owns or to determine the value of the Fund's net assets;
(5) any representation or warranty made by a Member in connection
with the acquisition of such Interest was not true when made or has
ceased to be true; or
(6) it would be in the best interests of the Fund, as determined by
the Board in its sole and absolute discretion, for the Fund to redeem
such Interest.
B-15
--------------------------------------
ARTICLE V
CAPITAL
--------------------------------------
5.1 CONTRIBUTIONS TO CAPITAL.
(a) The minimum Capital Contribution of each Member to the capital of the
Fund shall be such amount as the Board in its sole and absolute discretion may
determine from time to time. The amount of the initial Capital Contribution of
each Member shall be recorded on the books and records of the Fund upon
acceptance as a contribution to the capital of the Fund. The Directors shall
not be entitled to make voluntary contributions of capital to the Fund as
Directors of the Fund, but may make voluntary contributions to the capital of
the Fund as Members. The Investment Adviser may make voluntary contributions to
the capital of the Fund as a Member.
(b) If permitted by the Board, a Member and the Investment Adviser, as a
Member, may make additional Capital Contributions of the Fund, effective as of
such times as the Board in its discretion may permit, subject to the
limitations applicable to the admission of Members pursuant to this Agreement.
No Member shall be obligated to make any additional Capital Contribution except
to the extent provided in this Agreement.
(c) Except as otherwise permitted by the Board, initial and any
additional contributions to the capital of the Fund by any Member shall be
payable in cash.
(d) The minimum initial and additional Capital Contributions may be
increased or reduced by the Board.
(e) The Fund shall increase the Interest of any Member making an
additional Capital Contribution.
5.2 RIGHTS OF MEMBERS TO CAPITAL.
No Member shall be entitled to interest on his or its contribution to the
capital of the Fund, nor shall any Member be entitled to the return of any
capital of the Fund except as otherwise specifically provided herein. No Member
shall be liable for the return of any such amounts. No Member shall have the
right to require partition of the Fund's property or to compel any sale or
appraisal of the Fund's assets.
5.3 CAPITAL ACCOUNTS.
(a) The Fund shall maintain a separate Capital Account for each Member.
(b) Each Member's Capital Account shall have an initial balance equal to
the amount of cash constituting such Member's Net Capital Contribution.
(c) Each Member's Capital Account shall be increased by the sum of: (i)
the amount of cash constituting additional contributions by such Member to the
capital of the Fund permitted pursuant to Section 5.1; plus (ii) any amount
credited to such Member's Capital Account pursuant to this Article V.
(d) Each Member's Capital Account shall be reduced by the sum of: (i) the
amount of any repurchase of the Interest, or portion thereof, of such Member or
distributions to such Member pursuant to this Agreement; plus (ii) any amounts
debited against such Member's Capital Account pursuant to this Article V.
(e) If all or a portion of the Interest of a Member is transferred in
accordance with the terms of this Agreement, the transferee shall succeed to
the Capital Account of the transferor to the extent it relates to the
transferred Interest or relevant portion thereof.
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5.4 ALLOCATION OF NET PROFIT AND LOSS.
As of the last day of each Fiscal Period, any Net Profit or Net Loss for
the Fiscal Period shall be allocated among and credited to or debited against
the Capital Accounts of the Members (including the Capital Account of the
Special Advisory Member) in accordance with their respective Fund Percentages
for such Fiscal Period.
5.5 INCENTIVE ALLOCATION
(a) Subject to the provisions of the 1940 Act and the Advisers Act, at
the end of each Performance Period (as defined below), a reallocation (the
"Incentive Allocation") will be made from the Capital Account of each Member
(other than the Special Advisory Member) to the Capital Account of the Special
Advisory Member. The Incentive Allocation will be calculated separately with
respect to each Member's Capital Account and will be equal to 10% of the
amount, if any, by which (i) the Net Profit, if any, initially allocated to
such Member's Capital Account during such Performance Period in excess of the
Hurdle (as defined below) for such Performance Period exceeds (ii) the positive
balance, if any, as of the beginning of such Performance Period in such
Member's Loss Carryforward Account (as defined below). Each "Performance
Period" shall commence on either the initial Closing for such Interest and/or
the first day immediately following the end of the immediately preceding
Performance Period, as the case may be, and shall end on March 31 of each year
(beginning March 31, 2005), as of the date of any partial or complete
withdrawal of Interests with respect to the portion withdrawn and upon
termination of the Fund. The "Hurdle Rate" for any Performance Period with
respect to any Capital Account shall be calculated monthly and equals the
average of the weekly average 91-day U.S. Treasury bill rates for that month as
reported in the Federal Reserve Bulletin H-15 (or other available source)
during such month. The "Hurdle" shall be recalculated for each Performance
Period and shall be equal to the product of (x) the average of the Hurdle Rates
during such Performance Period and (y) the balance of such Capital Account at
the beginning of such Performance Period; provided, that the Hurdle shall be
adjusted appropriately for additional Capital Contributions or repurchases made
in respect of the relevant Member during such Performance Period.
(b) For purposes of calculating the Incentive Allocation, there shall be
established for each Capital Account a corresponding memorandum account each of
which shall be designated a "Loss Carryforward Account." Each Loss Carryforward
Account shall have an initial balance of zero and shall be adjusted as follows:
as of the last day of each time period described in Sec. 5.4, the balance of
such Loss Carryforward Account shall be increased by the aggregate amount of
Net Loss, if any, allocable to such Capital Account with respect to such time
period and shall be decreased (but not below zero) by the aggregate amount of
Net Profit, if any, allocable to such Capital Account with respect to such time
period. In the event of a withdrawal from or distribution to a Member from a
Capital Account, the corresponding Loss Carryforward Account shall be further
adjusted as of the date such withdrawal or distribution is effective by
decreasing any positive balance of such Loss Carryforward Account (but not
below zero) by an amount determined by multiplying (i) such positive balance by
(ii) a fraction, of which (y) the numerator is equal to the amount withdrawn or
distributed and (z) the denominator is equal to the balance of such Capital
Account immediately before giving effect to such withdrawal or distribution.
(c) For the purposes of calculating an Incentive Allocation or a Loss
Carryforward Account, Net Profit and Net Loss allocable to any Capital Account
for any Performance Period shall be calculated by taking into account the
amount of any Advisory Fee debited from such Member's Capital Account for such
Performance Period.
(d) The Manager shall have the right to amend, with the consent of the
Members, this Section 5.5 so that the Incentive Allocation conforms to any
applicable requirements of the SEC and other regulatory authorities; provided,
however, that no such amendment shall increase the Incentive Allocation
applicable to any Member at the time of such amendment.
5.6 ALLOCATION OF CERTAIN WITHHOLDING TAXES AND OTHER EXPENDITURES.
(a) If the Fund incurs a withholding tax or other tax obligation with
respect to the share of Fund income allocable to any Member, then the Board,
without limitation of any other rights of the Fund or the Board, shall cause
the amount of such obligation to be debited against the Capital Account of such
Member when the Fund pays such obligation, and any amounts then or thereafter
distributable to such Member shall be reduced by the
B-17
amount of such taxes. If the amount of such taxes is greater than any such
distributable amounts, then such Member and any successor to such Member's
Interest shall pay to the Fund as a contribution to the capital of the Fund,
upon demand of the Fund, the amount of such excess. The Fund shall not be
obligated to apply for or obtain a reduction of or exemption from withholding
tax on behalf of any Member that may be eligible for such reduction or
exemption; provided, that in the event that the Fund determines that a Member
is eligible for a refund of any withholding tax, the Fund may, at the request
and expense of such Member, assist such Member in applying for such refund.
(b) Except as otherwise provided for in this Agreement and unless
prohibited by the 1940 Act, any expenditures payable by the Fund, to the extent
determined by the Board to have been paid or withheld on behalf of, or by
reason of particular circumstances applicable to, one or more but fewer than
all of the Members, shall be charged to only those Members on whose behalf such
payments are made or whose particular circumstances gave rise to such payments.
Such charges shall be debited from the Capital Accounts of such Members as of
the close of the Fiscal Period during which any such items were paid or accrued
by the Fund.
5.7 RESERVES.
(a) Appropriate reserves may be created, accrued, and charged against Net
Assets and proportionately against the Capital Accounts of the Members for
contingent liabilities, if any, as of the date any such contingent liability
becomes known to the Investment Adviser or the Board, such reserves to be in
the amounts which the Board in its sole and absolute discretion deems necessary
or appropriate. The Board may increase or reduce any such reserves from time to
time by such amounts as it in its sole and absolute discretion deems necessary
or appropriate. The amount of any such reserve, or any increase or decrease
therein, may be proportionately charged or credited, as appropriate, to the
Members' Capital Accounts. The amount of any such reserve, or any increase or
decrease therein, may be proportionately charged or credited, as appropriate,
to the Capital Accounts of those parties who are Members at the time when such
reserve is created, increased, or decreased, as the case may be; provided,
however, that if any such individual reserve item, adjusted by any increase
therein, exceeds the lesser of $500,000 or 1% of the aggregate value of the
Capital Accounts of all such Members, the amount of such reserve, increase, or
decrease shall instead be charged or credited to those parties who were Members
at the time, as determined by the Board in its sole and absolute discretion, of
the act or omission giving rise to the contingent liability for which the
reserve was established, increased, or decreased in proportion to their Capital
Accounts at that time.
(b) To the extent permitted under applicable law, if at any time an
amount is paid or received by the Fund (other than contributions to the capital
of the Fund, distributions, or repurchases of Interests or portions thereof)
and such amount exceeds the lesser of $500,000 or 1% of the aggregate value of
the Capital Accounts of all Members at the time of payment or receipt and such
amount was not accrued or reserved for but would nevertheless, in accordance
with the Fund's accounting practices, be treated as applicable to one or more
prior Fiscal Periods, then such amount shall be proportionately charged or
credited, as appropriate, to those parties who were Members during such prior
Fiscal Period or Periods.
(c) To the extent permitted under applicable law, if any amount is
required by paragraph (a) or (b) of this Section 5.7 to be charged or credited
to a party who is no longer a Member, such amount shall be paid by or to such
party, as the case may be, in cash, with interest from the date on which the
Board determines that such charge or credit is required. In the case of a
charge, the former Member shall be obligated to pay the amount of the charge,
plus interest as provided above, to the Fund on demand; provided, however,
that: (i) in no event shall a former Member be obligated to make a payment
exceeding the amount of such Member's Capital Account at the time to which the
charge relates; and (ii) no such demand shall be made after the expiration of
three years since the date on which such party ceased to be a Member. To the
extent that a former Member fails to pay to the Fund, in full, any amount
required to be charged to such former Member pursuant to paragraph (a) or (b),
whether due to the expiration of the applicable limitation period or for any
other reason whatsoever, the deficiency shall be charged proportionately to the
Capital Accounts of the Members at the time of the act or omission giving rise
to the charge to the extent feasible, and otherwise proportionately to the
Capital Accounts of the current Members.
B-18
5.8 TAX ALLOCATIONS.
(a) For each Fiscal Year, items of income, deduction, gain, loss, or
credit shall be allocated for income tax purposes among the Members in such a
manner as to reflect equitably amounts credited or debited to each Member's
Capital Account for the current and prior Fiscal Years (or relevant portions
thereof). Allocations under this Section 5.8 shall be made pursuant to the
principles of Sections 704(b) and 704(c) of the Code, and in conformity with
Treasury Regulations Sections 1.704-1(b)(2)(iv)(f), 1.704-1(b)(4)(i), and
1.704-3(e) promulgated thereunder, as applicable, or the successor provisions
to such Section and Regulations. Notwithstanding anything to the contrary in
this Agreement, there shall be allocated to the Members such gains or income as
shall be necessary to satisfy the "qualified income offset" requirement of
Treasury Regulations Section 1.704-1(b)(2)(ii)(d).
(b) If the Fund realizes gains for Federal income tax purposes for any
Fiscal Year during or as of the end of which one or more Positive Basis Members
(as hereinafter defined) withdraws from the Fund pursuant to Articles IV or VI
hereof or, in the case of the Special Advisory Member, receives an Incentive
Allocation that creates a Positive Basis (as hereinafter defined), the Board,
in its sole and absolute discretion, may elect to allocate such gains as
follows: (i) to allocate such gains among such Positive Basis Members, pro rata
in proportion to the respective Positive Basis of each such Positive Basis
Member, until either the full amount of such gains shall have been so allocated
or the Positive Basis of each such Positive Basis Member shall have been
eliminated; and (ii) to allocate any gains not so allocated to Positive Basis
Members to the other Members in such manner as shall equitably reflect the
amounts credited to such Members' Capital Accounts pursuant to this Agreement.
(c) If the Fund realizes losses for Federal income tax purposes for any
Fiscal Year during or as of the end of which one or more Negative Basis Members
(as hereinafter defined) withdraws from the Fund pursuant to Articles IV or VI
hereof, the Board, in its sole and absolute discretion, may elect to allocate
such losses as follows: (i) to allocate losses among such Negative Basis
Members, pro rata in proportion to the respective Negative Basis (as
hereinafter defined) of each such Negative Basis Member, until either the full
amount of such losses have been so allocated or the Negative Basis of each such
Negative Basis Member shall have been eliminated; and (ii) to allocate losses
not so allocated to Negative Basis Members to the other Members in such manner
as shall equitably reflect the amounts credited to such Members' Capital
Accounts pursuant to this Agreement.
(d) As used herein: (i) the term "Positive Basis" shall mean, with
respect to any Member (including the Special Advisory Member) and as of any
time of calculation, the amount by which the total of such Member's Capital
Account as of such time exceeds its "adjusted tax basis," for Federal income
tax purposes, in its Interest as of such time (determined without regard to any
adjustments made to such "adjusted tax basis" by reason of any transfer or
assignment of such Interest, including by reason of death and without regard to
such Member's share of the liabilities of the Fund under Section 752 of the
Code); (ii) the term "Positive Basis Member" shall mean any Member who
withdraws from the Fund and who has a Positive Basis as of the effective date
of its withdrawal or, in the case of the Special Advisory Member, receives an
Incentive Allocation that creates a Positive Basis for such Special Advisory
Member as of the date of receipt of such Incentive Allocation, but such Member
shall cease to be a Positive Basis Member at such time as it shall have
received allocations pursuant to clause (i) of the Section 5.8(b) above equal
to its Positive Basis as of the effective date of its withdrawal, or, in the
case of the Special Advisory Member, as of the date of receipt of such
Incentive Allocation; (iii) the term "Negative Basis" shall mean, with respect
to any Member (including the Special Advisory Member) and as of any time of
calculation, the amount by which the total of such Member's Capital Account as
of such time is less than its "adjusted tax basis," for Federal income tax
purposes, in its Interest as of such time (determined without regard to any
adjustments made to such "adjusted tax basis" by reason of any transfer or
assignment of such Interest, including by reason of death and without regard to
such Member's share of the liabilities of the Fund under Section 752 of the
Code); and (iv) the term "Negative Basis Member" shall mean any Member who
withdraws from the Fund and who has a Negative Basis as of the effective date
of its withdrawal but such Member shall cease to be a Negative Basis Member at
such time as it shall have received allocations pursuant to clause (i) of
Section 5.8(c) above equal to its Negative Basis as of the effective date of
its withdrawal.
5.9 DISTRIBUTIONS.
(a) The Board, in its sole and absolute discretion, may authorize the
Fund to make distributions in cash at any time to all of the Members on a pro
rata basis in accordance with each Member's Fund Percentage.
B-19
(b) The Board may withhold and pay over to the Internal Revenue Service
(or any other relevant taxing authority) taxes from any distribution to any
Member to the extent required by the Code or any other applicable law. For
purposes of this Agreement, any taxes so withheld by the Fund with respect to
any amount distributed by the Fund to any Member shall be deemed to be a
distribution or payment to such Member, reducing the amount otherwise
distributable to such Member pursuant to this Agreement and, if appropriate,
reducing the Capital Account of such Member. If the amount of such taxes is
greater than any such distributable amounts, then such Member and any successor
to such Member's Interest shall pay to the Fund as a contribution to the
capital of the Fund, upon demand of the Board, the amount of such excess.
(c) The Board shall not be obligated to apply for or obtain a reduction
of or exemption from withholding tax on behalf of any Member that may be
eligible for such reduction or exemption. To the extent that a Member claims to
be entitled to a reduced rate of, or exemption from, a withholding tax pursuant
to an applicable income tax treaty, or otherwise, the Member shall furnish the
Board with such information and forms as such Member may be required to
complete where necessary to comply with any and all laws and regulations
governing the obligations of withholding tax agents. Each Member represents and
warrants that any such information and forms furnished by such Member shall be
true and accurate and agrees to indemnify the Fund and each of the Members from
any and all damages, costs, and expenses resulting from the filing of
inaccurate or incomplete information or forms relating to such withholding
taxes.
(d) Notwithstanding anything to the contrary contained herein, none of
the Directors or the Members, nor any other person on behalf of the Fund, shall
make a distribution to the Members on account of their interests in the Fund if
such distribution would violate the Delaware Act or other applicable law.
(e) The amount and times of any distributions will be determined in the
sole and absolute discretion of the Board.
5.10 ALLOCATION OF ORGANIZATIONAL, OFFERING, AND CERTAIN OTHER EXPENSES.
Organizational Expenses shall generally be amortized over a twelve month period
beginning upon commencement of the Fund's operations. Offering Expenses, and
any other expenses in connection with offering Interests of the Fund and/or any
expenses related to or in connection with any transfer of Interests and/or
repurchasing Interests pursuant to Section 4.5, shall generally be treated as
expenses of the Fund included in the computation of Net Profit and/or Net Loss
(except to the extent that the Investment Adviser or another party determines
in its discretion that it will assume, reimburse, and/or waive such expense).
The Board may alternatively choose to amortize such expenses over a period of
time to be determined by the Board. The Board may also allocate organizational
and offering expenses (on an Expense Allocation Date or on such other date
chosen by the Board) among the Members in a manner that allocates such expenses
to Members purchasing Interests in one or more offerings of Interests. The
Board may also allocate expenses of any transfer of Interests to either the
transferor and/or transferee and expenses of any repurchase of Interests may be
allocated to the Members whose Interests are repurchased.
-----------------------------------
ARTICLE VI
DISSOLUTION AND LIQUIDATION
-----------------------------------
6.1 DISSOLUTION.
(a) The Fund shall be dissolved at any time there are no Members, unless
the Fund is continued in accordance with the Delaware Act, or upon the
occurrence of any of the following events:
(i) upon the affirmative vote to dissolve the Fund by: (i) the
Board; or (ii) Members holding at least two-thirds (2/3) of the total
number of votes eligible to be cast by all Members;
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(ii) upon the failure of Members to elect a successor Board member
at a meeting called by the Investment Adviser in accordance with this
Agreement when no Board member remains to continue the business of the
Fund;
(iii) if any Member that has submitted a written request, in
accordance with the terms of the Operating Agreement, to tender all of
such Member's Interest for repurchase by the Fund has not been given the
opportunity to so tender within a period of two years after the request
(whether in a single repurchase offer or multiple consecutive offers
within the two-year period), provided, however, that a Member who intends
to cause the Fund to be dissolved must so indicate in a separate written
request submitted within the applicable two-year period; or
(iv) as required by operation of law.
(b) Dissolution of the Fund shall be effective on the day on which the
event giving rise to the dissolution shall occur or the conclusion of any
applicable 60 day period during which the Board and Members may elect to
continue the business of the Fund as provided herein, but the Fund shall not
terminate until the assets of the Fund have been liquidated in accordance with
Section 6.2 hereof and the Certificate has been canceled.
6.2 LIQUIDATION OF ASSETS.
(a) Upon the dissolution of the Fund as provided in Section 6.1 hereof,
the Board, acting directly or through a liquidator it selects, shall promptly
liquidate the business and administrative affairs of the Fund, except that if
the Board is unable to perform this function, a liquidator elected by Members
holding a majority of the total number of votes eligible to be cast by all
Members shall promptly liquidate the business and administrative affairs of the
Fund. Net Profit and Net Loss during the period of liquidation shall be
allocated pursuant to Article V. The proceeds from liquidation (after
establishment of appropriate reserves for contingencies in such amount as the
Board or liquidator shall deem appropriate in its sole and absolute discretion
as applicable) shall, subject to the Delaware Act, be distributed in the
following manner:
(i) in satisfaction (whether by payment or the making of
reasonable provision for payment thereof) of the debts and
liabilities of the Fund, including the expenses of liquidation
(including legal and accounting expenses incurred in connection
therewith), but not including debt and liabilities to Members, up
to and including the date that distribution of the Fund's assets to
the Members has been completed, shall first be paid on a pro rata
basis;
(ii) such debts, liabilities, or obligations as are owing to
the Members shall be paid next in their order of seniority and on a
pro rata basis;
(iii) the Special Advisory Member shall be paid next any
positive balance in its Capital Account after giving effect to the
Incentive Allocation, if any, to be made pursuant to Section 5.5(a)
hereof; and
(iv) the Members shall be paid next on a pro rata basis the
positive balances of their respective Capital Accounts after giving
effect to all allocations to be made to such Members' Capital
Accounts for the Fiscal Period ending on the date of the
distributions under this Section 6.2(a)(iv).
(b) Anything in this Section 6.2 to the contrary notwithstanding, but
subject to the priorities set forth in Section 6.2(a) above, upon dissolution
of the Fund, the Board or other liquidator may distribute ratably in kind any
assets of the Fund; provided, however, that if any in-kind distribution is to
be made: (i) the assets distributed in kind shall be valued pursuant to Section
7.3 as of the actual date of their distribution and charged as so valued and
distributed against amounts to be paid under Section 6.2(a) above; and (ii) any
profit or loss attributable to property distributed in-kind shall be included
in the Net Profit or Net Loss for the Fiscal Period ending on the date of such
distribution.
B-21
----------------------------------------
ARTICLE VII
ACCOUNTING, VALUATIONS, AND BOOKS AND RECORDS
----------------------------------------
7.1 ACCOUNTING AND REPORTS.
(a) The Fund shall adopt for tax accounting purposes any accounting
method that the Board shall decide in its sole and absolute discretion is in
the best interests of the Fund. The Fund's accounts shall be maintained in U.S.
currency.
(b) After the end of each taxable year, the Fund shall furnish to each
Member such information regarding the operation of the Fund and such Member's
Interest as is necessary for Members to complete Federal and state income tax
or information returns and any other tax information required by federal,
state, or local law.
(c) Except as otherwise required by the 1940 Act or as may otherwise be
permitted by rule, regulation, or order, within 60 days after the close of the
period for which a report required under this Section 7.1(c) is being made, the
Fund shall furnish to each Member a semi-annual report containing the
information required by the 1940 Act and an annual report containing the
information required by the 1940 Act. The Fund shall cause financial statements
contained in each annual report furnished hereunder to be accompanied by a
certificate of independent public accountants based upon an audit performed in
accordance with generally accepted accounting principles. The Fund may also
furnish to each Member such other periodic reports as it deems necessary or
appropriate in its discretion.
7.2 DETERMINATIONS BY THE BOARD.
(a) All matters concerning the determination and allocation among the
Members of the amounts to be determined and allocated pursuant to Article V
hereof, including any taxes thereon and accounting procedures applicable
thereto, shall be determined by the Board (either directly or by the Investment
Adviser pursuant to delegated authority) unless specifically and expressly
otherwise provided for by the provisions of this Agreement or as required by
law, and such determinations and allocations shall be final and binding on all
the Members.
(b) The Board may make such adjustments to the computation of Net Profit
or Net Loss or any components (withholding any items of income, gain, loss, or
deduction) comprising any of the foregoing as it considers appropriate to
reflect fairly and accurately the financial results of the Fund and the
intended allocation thereof among the Members.
7.3 VALUATION OF ASSETS.
(a) Valuation of Securities and other assets shall be made by the Board
in accordance with the requirements of the 1940 Act and the valuation
procedures adopted by the Board.
(b) The value of Securities and other assets of the Fund and the net
worth of the Fund as a whole and the Interests determined pursuant to this
Section 7.3 shall be conclusive and binding on all of the Members and all
parties claiming through or under them.
B-22
----------------------------------------------
ARTICLE VIII
MISCELLANEOUS PROVISIONS
----------------------------------------------
8.1 AMENDMENT OF LIMITED LIABILITY COMPANY OPERATING AGREEMENT.
(a) Except as otherwise provided in this Section 8.1, this Agreement may
be amended, in whole or in part, with the approval of: (i) the Board (including
the vote of a majority of the Independent Directors, if required by the 1940
Act); or (ii) a majority (as defined in the 1940 Act) of the outstanding voting
securities of the Fund.
(b) Any amendment that would:
(i) increase the obligation of a Member to make any
contribution to the capital of the Fund;
(ii) reduce the Capital Account of a Member other than in
accordance with Article V; or
(iii) modify the events causing the dissolution of the Fund
may be made only if: (i) the written consent of each Member adversely
affected thereby is obtained prior to the effectiveness thereof; or (ii)
such amendment does not become effective until (A) each Member has
received written notice of such amendment and (B) any Member objecting to
such amendment has been afforded a reasonable opportunity (pursuant to
such procedures as may be prescribed by the Board) to offer his or her
entire Interest for repurchase by the Fund.
(c) The power of the Board to amend this Agreement at any time without
the consent of the Members may include, but is not limited to:
(i) restate this Agreement together with any amendments
hereto that have been duly adopted in accordance with this
Agreement to incorporate such amendments in a single, integrated
document;
(ii) amend this Agreement (other than with respect to the
matters set forth in Section 8.1(b) hereof) to effect compliance
with any applicable law or regulation or to cure any ambiguity or
to correct or supplement any provision hereof that may be
inconsistent with any other provision hereof, provided that such
action does not adversely affect the rights of any Member in any
material respect; and
(iii) amend this Agreement to make such changes as may be
necessary or desirable, based on advice of legal counsel to the
Fund, to assure the Fund's continuing eligibility to be classified
for U.S. Federal income tax purposes as a partnership that is not
treated as a corporation under Section 7704(a) of the Code.
(d) The Board shall give written notice of any proposed amendment to this
Agreement (other than any amendment of the type contemplated by clause (i) of
Section 8.1(a) hereof) to each Member, which notice shall set forth: (i) the
text of the proposed amendment; or (ii) a summary thereof and a statement that
the text thereof will be furnished to any Member upon request.
B-23
8.2 SPECIAL POWER OF ATTORNEY.
(a) Each Member hereby irrevocably makes, constitutes, and appoints each
Director, acting severally, and any liquidator of the Fund's assets appointed
pursuant to Section 6.2 with full power of substitution, the true and lawful
representatives and attorneys-in-fact of, and in the name, place, and stead of,
such Member, with the power from time to time to make, execute, sign,
acknowledge, swear to, verify, deliver, record, file, and/or publish:
(i) any amendment to this Agreement that complies with the
provisions of this Agreement (including the provisions of Section
8.1 hereof);
(ii) any amendment to the Certificate required because this
Agreement is amended or as otherwise required by the Delaware Act;
and
(iii) all other such instruments, documents, and certificates
that, in the opinion of legal counsel to the Fund, from time to
time may be required by the laws of the United States of America,
the State of Delaware, or any other jurisdiction in which the Fund
shall determine to do business, or any political subdivision or
agency thereof, or that such legal counsel may deem necessary or
appropriate to effectuate, implement, and continue the valid
existence and business of the Fund as a limited liability company
under the Delaware Act.
(b) Each Member is aware that the terms of this Agreement permit certain
amendments to this Agreement to be effected and certain other actions to be
taken or omitted by or with respect to the Fund without such Member's consent.
If an amendment to the Certificate or this Agreement or any action by or with
respect to the Fund is taken in the manner contemplated by this Agreement, each
Member agrees that, notwithstanding any objection that such Member may assert
with respect to such action, the attorneys-in-fact appointed hereby are
authorized and empowered, with full power of substitution, to exercise the
authority granted above in any manner which may be necessary or appropriate to
permit such amendment to be made or action lawfully taken or omitted. Each
Member is fully aware that each Member will rely on the effectiveness of this
special power-of-attorney with a view to the orderly administration of the
affairs of the Fund.
(c) This power-of-attorney is a special power-of-attorney and is coupled
with an interest in favor of each Director, acting severally, and any
liquidator of the Fund's assets, appointed pursuant to Section 6.2 hereof, and
as such:
(i) shall be irrevocable and continue in full force and
effect notwithstanding the subsequent death or incapacity of any
party granting this power-of-attorney, regardless of whether the
Fund, the Board, or any liquidator shall have had notice thereof;
and
(ii) shall survive the delivery of a Transfer by a Member of
the whole or any portion of such Member's Interest, except that
where the transferee thereof has been approved by the Board for
admission to the Fund as a substituted Member, this
power-of-attorney given by the transferor shall survive the
delivery of such assignment for the sole purpose of enabling the
Board or any liquidator to execute, acknowledge, and file any
instrument necessary to effect such substitution.
8.3 NOTICES.
(a) Notices that may be or are required to be provided under this
Agreement shall be made, if to a Member, by regular postal mail, hand delivery,
registered or certified mail return receipt requested, commercial courier
service, telex, or telecopier, electronic mail, the internet, computer
interface, or any other electronic method or device of document transfer or
telegraphic or other written communication, or, if to the Fund, by regular
postal mail, hand delivery, registered or certified mail return receipt
requested, commercial courier service, telex, or telecopier, electronic mail,
the internet, computer interface, or any other electronic method or device of
document transfer or telegraphic or other written communication, and shall be
addressed to the respective parties hereto at their addresses as set forth on
the books and records of the Fund (or to such other addresses as may be
designated by any
B-24
party hereto by notice addressed to the Fund in the case of notice given to any
Member, and to each of the Members in the case of notice given to the Fund).
Notices shall be deemed to have been provided when delivered by hand, on the
date indicated as the date of receipt on a return receipt or when received if
sent by regular mail, commercial courier service, telex, telecopier,
telegraphic, electronic, or other means of written communication. A document
that is not a notice and that is required to be provided under this Agreement
by any party to another party may be delivered by any reasonable means.
(b) If any notice addressed to a Member at the address of that Member
appearing on the books and records of the Fund is returned to the Fund marked
to indicate that such notice is unable to be delivered to the Member at that
address, all future notices or reports shall be deemed to have been duly given
without further mailing if such future notices or reports shall be kept
available to the Member, upon written demand of the Member, at the principal
executive office of the Fund for a period of one year from the date of the
giving of the notice.
8.4 AGREEMENT BINDING UPON SUCCESSORS AND ASSIGNS. This Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective heirs, successors, assigns, executors, trustees, or other legal
representatives, but the rights and obligations of the parties hereunder may
not be Transferred or delegated except as provided in this Agreement and any
attempted Transfer or delegation thereof that is not made pursuant to the terms
of this Agreement shall be void.
8.5 APPLICABILITY OF 1940 ACT AND FORM N-2. The parties hereto
acknowledge that this Agreement is not intended to, and does not set forth the
substantive provisions contained in the 1940 Act and the Form N-2 which affect
numerous aspects of the conduct of the Fund's business and of the rights,
privileges, and obligations of the Members. Each provision of this Agreement
shall be subject to and interpreted in a manner consistent with the applicable
provisions of the 1940 Act and the Form N-2 subject to any exemptive relief
obtained thereunder relating to the Fund.
8.6 CHOICE OF LAW; ARBITRATION.
(a) Notwithstanding the place where this Agreement may be executed by any
of the parties hereto, the parties expressly agree that all the terms and
provisions hereof shall be construed under the laws of the State of Delaware,
including the Delaware Act, without regard to the conflict of law principles of
the State of Delaware.
(b) Unless otherwise agreed in writing, each Member agrees to submit all
controversies arising between or among Members or one or more Members and the
Fund in connection with the Fund or its businesses or concerning any
transaction, dispute, or the construction, performance, or breach of this or
any other agreement, whether entered into prior to, on, or subsequent to the
date hereof, to arbitration in accordance with the provisions set forth below.
Each Member understands that:
(i) Arbitration is final and binding on the parties;
(ii) The parties are waiving their rights to seek remedies in
court, including the right to jury trial;
(iii) Pre-arbitration discovery is generally more limited
than and different from court proceedings;
(iv) The arbitrator's award is not required to include
factual findings or legal reasoning and a party's right to appeal
or to seek modification of rulings by arbitrators is strictly
limited; and
(v) A panel of arbitrators will typically include a minority
of arbitrators who were or are affiliated with the securities
industry.
(c) All controversies that may arise among Members and one or more
Members or the Special Advisory Member and the Fund concerning this Agreement
shall be determined by arbitration in New York City in
B-25
accordance with the Federal Arbitration Act, to the fullest extent permitted by
law. Any arbitration under this Agreement shall be determined before and in
accordance with the rules then obtaining of either the New York Stock Exchange,
Inc. (the "NYSE") or the NASD Regulation, Inc. (the "NASDR"), as the Member or
entity instituting the arbitration may elect. If the NYSE or NASDR does not
accept the arbitration for consideration, the arbitration shall be submitted
to, and determined in accordance with the rules then obtaining of, the Center
for Public Resources, Inc. in New York City. Judgment on any award of any such
arbitration may be entered in the Supreme Court of the State of New York or in
any other court having jurisdiction of the person or persons against whom such
award is rendered. Any notice of such arbitration or for the confirmation of
any award in any arbitration shall be sufficient if given in accordance with
the provisions of this Agreement. Each Member agrees that the determination of
the arbitrators shall be binding and conclusive upon the Member.
(d) No Member shall bring a putative or certified class action to
arbitration, nor seek to enforce any pre-dispute arbitration agreement against
any person who has initiated in court a putative class action or who is a
Member of a putative class who has not opted out of the class with respect to
any claims encompassed by the putative class action unless and until: (i) the
class certification is denied; (ii) the class is decertified; or (iii) the
Member is excluded from the class by the court. The forbearance to enforce an
agreement to arbitrate shall not constitute a waiver of any rights under this
Agreement except to the extent stated herein.
8.7 NOT FOR BENEFIT OF CREDITORS. The provisions of this Agreement are
intended only for the regulation of relations among past, present, and future
Members (including the Special Advisory Member), Directors, and the Fund. This
Agreement is not intended for the benefit of non-Member creditors and no rights
are granted to non-Member creditors under this Agreement.
8.8 CONSENTS. Any and all consents, agreements, or approvals provided for
or permitted by this Agreement shall be in writing and a signed copy thereof
shall be filed and kept with the books of the Fund.
8.9 MERGER AND CONSOLIDATION.
(a) The Fund, as permitted by the 1940 Act, may merge or consolidate with
or into one or more limited liability companies formed under the Delaware Act
or other business entities (as defined in Section 18-209(a) of the Delaware
Act) pursuant to an agreement of merger or consolidation which has been
approved in the manner contemplated by Section 18-209(b) of the Delaware Act.
(b) Notwithstanding anything to the contrary contained elsewhere in this
Agreement, an agreement of merger or consolidation approved in accordance with
Section 18-209(b) of the Delaware Act may, to the extent permitted by Section
18-209(b) of the Delaware Act: (i) effect any amendment to this Agreement; (ii)
effect the adoption of a new limited liability company operating agreement for
the Fund if it is the surviving or resulting limited liability company in the
merger or consolidation; or (iii) provide that the limited liability company
operating agreement of any other constituent limited liability company to the
merger or consolidation (including a limited liability company formed for the
purpose of consummating the merger or consolidation) shall be the limited
liability company operating agreement of the surviving or resulting limited
liability company.
8.10 DIRECT INVESTMENT STRUCTURE. Subject to obtaining any required
regulatory approval, the Fund may determine to invest its assets directly in
non-U.S. Investment Funds that are classified as PFICs for U.S. federal income
tax purposes. The Fund may pursue such an investment approach only if it
believes that it could avoid generating UBTI by making such investments and the
approach is approved by the Fund's Board of Directors. The Fund will provide
Members with at least 90 days' notice before implementing such a change.
8.11 PRONOUNS. All pronouns shall be deemed to refer to the masculine,
feminine, neuter, singular, or plural, as the identity of the person or
persons, firm, or corporation may require in the context thereof.
8.12 CONFIDENTIALITY.
(a) A Member may obtain from the Fund, for any purpose reasonably related
to the Member's Interest, certain confidential information regarding the
business affairs or assets of the Fund as is just and reasonable
B-26
under the Delaware Act, subject to reasonable standards (including standards
governing what information and documents are to be furnished, at what time and
location, and at whose expense) established by the Board (the "Confidential
Information").
(b) Each Member covenants that, except as required by applicable law or
any regulatory body, it will not divulge, furnish, or make accessible to any
other person the name or address (whether business, residence, or mailing) of
any Member or any other Confidential Information without the prior written
consent of the Board, which consent may be withheld in its sole and absolute
discretion.
(c) Each Member recognizes that in the event that this Section 8.12 is
breached by any Member or any of its principals, partners, members, trustees,
officers, directors, employees, or agents or any of its affiliates, including
any of such affiliates' principals, partners, members, trustees, officers,
directors, employees, or agents, irreparable injury may result to the
non-breaching Members and the Fund. Accordingly, in addition to any and all
other remedies at law or in equity to which the non-breaching Members and the
Fund may be entitled, such Members also shall have the right to obtain
equitable relief, including, without limitation, injunctive relief, to prevent
any disclosure of Confidential Information, plus reasonable attorneys' fees and
other litigation expenses incurred in connection therewith. In the event that
any non-breaching Member or the Fund determines that any of the other Members
or any of its principals, partners, members, trustees, officers, directors,
employees, or agents or any of its affiliates, including any of such
affiliates' principals, partners, members, directors, officers, employees, or
agents should be enjoined from or required to take any action to prevent the
disclosure of Confidential Information, each of the other non-breaching Members
agrees to pursue in a court of appropriate jurisdiction such injunctive relief.
(d) The Fund shall have the right to keep confidential from the Members
for such period of time as it deems reasonable any information that the Board
reasonably believes to be in the nature of trade secrets or other information
the disclosure of which the Board in good faith believes is not in the best
interest of the Fund or could damage the Fund or its business or that the Fund
is required by law or by agreement with a third party to keep confidential.
8.13 CERTIFICATION OF NON-FOREIGN STATUS. Each Member or transferee of an
Interest from a Member that is admitted to the Fund in accordance with this
Agreement shall certify, upon admission to the Fund and at such other time
thereafter as the Board may request, whether he or she is a "United States
Person" within the meaning of Section 7701(a)(30) of the Code on forms to be
provided by the Fund, and shall notify the Fund within 30 days of any change in
such Member's status. Any Member who shall fail to provide such certification
when requested to do so by the Board may be treated as a non-United States
Person for purposes of U.S. Federal tax withholding.
8.14 SEVERABILITY. If any provision of this Agreement is determined by a
court of competent jurisdiction not to be enforceable in the manner set forth
in this Agreement, each Member agrees that it is the intention of the Members
that such provision should be enforceable to the maximum extent possible under
applicable law. If any provisions of this Agreement are held to be invalid or
unenforceable, such invalidation or unenforceability shall not affect the
validity or enforceability of any other provision of this Agreement (or portion
thereof).
8.15 ENTIRE AGREEMENT. This Agreement (including the Schedule attached
hereto which is incorporated herein) constitutes the entire agreement among the
parties hereto pertaining to the subject matter hereof and supersedes all prior
agreements and understandings pertaining thereto.
8.16 DISCRETION. To the fullest extent permitted by law, whenever in this
Agreement, a person is permitted or required to make a decision: (i) in its
"sole discretion" or "discretion" or under a grant of similar authority or
latitude, such person shall be entitled to consider only such interests and
factors as it desires, including its own interests, and shall have no duty or
obligation to give any consideration to any interest of or factors affecting
the Fund or the Members; or (ii) in its "good faith" or under another express
standard, then such person shall act under such express standard and shall not
be subject to any other or different standards imposed by this Agreement or any
other agreement contemplated herein or by relevant provisions of law or in
equity or otherwise.
B-27
8.17 COUNTERPARTS. This Agreement may be executed in several
counterparts, all of which together shall constitute one agreement binding on
all parties hereto, notwithstanding that all the parties have not signed the
same counterpart.
8.18 TAX MATTERS MEMBER. The Investment Adviser shall be the "tax matters
member" under the Code for the Fund unless another Member is so designated by
the Board.
THE UNDERSIGNED ACKNOWLEDGES HAVING READ THIS AGREEMENT IN ITS ENTIRETY
BEFORE SIGNING, INCLUDING THE PRE-DISPUTE ARBITRATION CLAUSES SET FORTH IN
SECTION 8.6 AND THE CONFIDENTIALITY CLAUSES SET FORTH IN SECTION 8.12.
B-28
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the day and year first above written.
DB INVESTMENT MANAGERS, INC., in its
capacity as Investment Adviser and Special
Advisory Member
By: ________________________ Date: _______
ADDITIONAL MEMBERS:
Each person who has signed or has had signed on its behalf a Member
Signature Page, which shall constitute a counterpart hereof.
B-29
SCHEDULE I
The undersigned understand and agree to the provisions of this Agreement
pertaining to the obligations of Directors.
Nolan T. Altman Signed: ______________________
c/o DB Absolute Return Strategies
345 Park Avenue Date: _____________________
New York, NY 10154
Louis S. Citron Signed: ______________________
c/o DB Absolute Return Strategies
345 Park Avenue Date: _____________________
New York, NY 10154
Edward T. Tokar Signed: ______________________
c/o DB Absolute Return Strategies
345 Park Avenue Date: _____________________
New York, NY 10154
B-30
STATEMENT OF ADDITIONAL INFORMATION
The Topiary Fund for Benefit Plan Investors (BPI) LLC
Limited Liability Company Interests
The telephone number of the Fund, including to request the Fund's
Prospectus, is 1-888-262-0695.
Limited liability company interests ("Interests") of the Fund are sold by
DWS Scudder Distributors, Inc. ("Distributor"), the Fund's distributor, to
clients and customers (including affiliates and correspondents) of DB
Investment Managers, Inc. ("DBIM" or "Adviser"), the investment adviser to the
Master Fund (as defined herein), and to clients and customers of other
organizations. The Fund's Prospectus, which is dated July [ ], 2006, provides
the basic information investors should know before investing. This Statement of
Additional Information ("SAI"), which is not a prospectus, is intended to
provide additional information regarding the activities and operations of the
Fund and should be read in conjunction with the Prospectus. You may request a
copy of the Prospectus or a paper copy of this SAI, if you have received it
electronically, free of charge by calling the Fund at the telephone number
listed above. This SAI is not an offer of the Fund for which an investor has
not received the Prospectus. Capitalized terms not otherwise defined in this
SAI have meanings accorded to them in the Fund's Prospectus.
The date of this SAI and the related Prospectus is July [ ], 2006.
1
TABLE OF CONTENTS
Page
ADDITIONAL INVESTMENT POLICIES................................................3
ADDITIONAL INFORMATION ON INVESTMENT TECHNIQUES AND OPERATIONS OF THE
MASTER FUND AND RELATED RISKS.................................................4
ADDITIONAL INFORMATION ON INVESTMENT TECHNIQUES OF INVESTMENT FUNDS AND
RELATED RISKS.................................................................6
DIRECTORS AND OFFICERS.......................................................14
LIQUIDITY REQUIREMENTS.......................................................20
CODE OF ETHICS...............................................................22
PERFORMANCE INFORMATION......................................................22
INVESTMENT MANAGEMENT AND OTHER SERVICES.....................................22
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM................................26
DISTRIBUTOR..................................................................26
EXPENSE LIMITATION AGREEMENT.................................................27
CALCULATION OF FEES..........................................................27
LEGAL COUNSEL................................................................27
PORTFOLIO TRANSACTIONS.......................................................27
PROXY VOTING POLICIES AND PROCEDURES.........................................27
PRIVACY STATEMENT............................................................28
FINANCIAL STATEMENTS.........................................................29
2
ADDITIONAL INVESTMENT POLICIES
The investment objective and principal investment strategies of the Fund and the
Master Fund, as well as the principal risks associated with the Fund's and the
Master Fund's investment strategies, are set forth in the Prospectus. Certain
additional investment information is provided below. The Investment Funds in
which the Master Fund invests are not subject to the Master Fund's investment
policies and may have different or contrary investment policies.
Percentage Limitations
Unless otherwise specified, percentage limitations on investments will be
applied at the time of investment. Therefore, these percentages could be
exceeded due to fluctuations in the value of the Fund's portfolio securities or
liquidation of portfolio securities to fulfill repurchase requests (which the
Board has, in its sole discretion, authorized) or to pay expenses. The Fund's
stated fundamental policies, listed below, may not be changed without a majority
vote of Members, which means the lesser of: (i) 67% of the Interests present at
a meeting at which holders of more than 50% of the outstanding Interests are
present in person or by proxy; or (ii) more than 50% of the outstanding
Interests. No other policy, including the Fund's investment objective, is a
fundamental policy of the Fund, except as expressly stated. Within the limits of
the Fund's fundamental policies, the Fund's management has reserved freedom of
action.
The Offshore Fund and the Master Fund have substantially the same fundamental
investment restrictions as the Fund; such restrictions cannot be changed without
the approval of the Board of the Fund, in the case of the Offshore Fund, and a
majority of the outstanding voting securities of the Master Fund, in the case of
the Master Fund. The Fund:
(1) May borrow money or issue any senior security, to the extent
permitted under the 1940 Act, and, as interpreted, modified, or
otherwise permitted by regulatory authority having jurisdiction,
from time to time.
(2) May not invest more than 25% of the value of its total assets
in the securities of a single industry, except that U.S. Government
securities may be purchased without limitation. For purposes of
this investment restriction, the Offshore Fund, the Master Fund,
and the Investment Funds will not be considered part of any
industry. The Master Fund may invest in Investment Funds that may
concentrate their assets in one or more industries.
(3) May not act as underwriter of securities of other issuers,
except that to the extent that in connection with the disposition
of portfolio securities, it may be deemed to be an underwriter
under the federal securities laws.
(4) May not purchase or sell real estate, although it may purchase
and sell securities secured by real estate or interests therein, or
securities issued by companies which invest in real estate, or
interests therein.
(5) May make loans only as permitted under the 1940 Act, and, as
interpreted, modified, or otherwise permitted by regulatory
authority having jurisdiction, from time to time.
(6) May not purchase or sell physical commodities and commodity
contracts, except that the Fund may: (i) enter into futures
contracts and options thereon in accordance with applicable law;
and (ii) purchase and sell physical commodities if acquired as a
result of ownership of securities or other instruments. The Fund
will not consider stock index, currency, and other financial
futures contracts, swaps, or hybrid instruments to be commodities
for purposes of this investment policy.
3
The Fund's investment policies and restrictions do not apply to the activities
and transactions of the Investment Funds in which the assets of the Fund are
invested through the Offshore Fund and the Master Fund, but do apply to
investments made by the Fund directly (or any account consisting solely of Fund
assets).
The Fund's, the Master Fund's, and the Offshore Fund's investment objective is
non-fundamental and may be changed by the Board.
As an additional fundamental policy, the Fund may pursue its investment program
through one or more subsidiary vehicles. The establishment of such vehicles and
the Fund's utilization thereof is wholly within the discretion of the Board.
Investment Funds Advised by the Adviser or its Affiliates
The Master Fund does not presently intend to invest in Investment Funds managed
by the Adviser or any of its affiliates. However, it may do so in the future,
subject to obtaining such exemptions from provisions of the 1940 Act as may be
necessary.
Futures and Options Transactions
Futures and related options transactions by the Fund must constitute permissible
transactions pursuant to the regulations promulgated by the Commodity Futures
Trading Commission ("CFTC"). The Fund operates pursuant to an exemption provided
by CFTC Rule 4.5 in order to avoid regulation by the CFTC as a commodity pool.
Pursuant to regulations and/or published positions of the SEC, the Fund may be
required to segregate cash or liquid securities in connection with its futures
and related options transactions in an amount generally equal to the entire
value of the underlying security.
The Fund May Change Its Investment Objective, Policies, Restrictions,
Strategies, and Techniques
Except as otherwise indicated, the Fund, the Master Fund, and the Offshore Fund
may change their investment objectives and any of their policies, restrictions,
strategies, and techniques if the Board believes doing so is in the best
interests of the Fund, the Offshore Fund, the Master Fund, and the Members. The
Fund's, the Offshore Fund's, and the Master Fund's investment objective is not a
fundamental policy and it may be changed by the Board without Member approval.
Notice will be provided to Members prior to any such change.
ADDITIONAL INFORMATION ON INVESTMENT TECHNIQUES AND OPERATIONS OF THE MASTER
FUND AND RELATED RISKS
Temporary Defensive Positions. In an attempt to respond to adverse market,
economic, political, or other conditions, the Master Fund may invest up to 100%
of its assets in cash or cash equivalents including, but not limited to,
securities of money market funds, prime commercial paper, bank certificates of
deposit, bankers' acceptances, or repurchase agreements for such securities, and
securities of the U.S. Government and its agencies and instrumentalities, as
well as cash and cash equivalents denominated in foreign currencies. The Master
Fund's investments in foreign cash equivalents will be limited to those that, in
the opinion of the Adviser, equate generally to the standards established for
U.S. cash equivalents. Investments in bank obligations will be limited at the
time of investment to the obligations of the 100 largest domestic banks in terms
of assets that are subject to regulatory supervision by the U.S. Government or
state governments, and the obligations of the 100 largest foreign banks in terms
of assets with branches or agencies in the United States. These investments may
result in a lower return than would have been obtained had the Fund adhered to
its standard investment policies.
Repurchase Agreements. The Master Fund may enter into repurchase agreements with
commercial banks and broker-dealers as a short-term cash management tool. A
repurchase agreement is an agreement under which the Master Fund acquires a
security, generally a U.S. Government obligation, subject to resale at an
agreed-upon price and date. The resale price reflects an agreed-upon interest
rate effective for the period of time the Master Fund holds the security and is
unrelated to the interest rate on the security. The Master Fund's repurchase
agreements will at all times be fully collateralized.
4
Repurchase agreements could involve certain risks in the event of bankruptcy or
other default by the seller. If a seller under a repurchase agreement were to
default on the agreement and be unable to repurchase the security subject to the
repurchase agreement, the Master Fund would look to the collateral underlying
the seller's repurchase
agreement, including the security subject to the repurchase agreement, for the
satisfaction of the seller's obligation to the Master Fund. In such an event,
the Master Fund may incur a loss if the value of the collateral declines and
may incur disposition costs in liquidating the collateral. In addition, the
Master Fund may be subject to possible delays or restrictions on its ability to
dispose of the underlying securities. Repurchase agreements are typically
entered into for periods of one week or less. The SEC staff currently takes the
position that repurchase agreements maturing in more than seven days are
illiquid securities.
Reverse Repurchase Agreements. The Master Fund may enter into reverse repurchase
agreements, subject to the Master Fund's limitations on borrowings. Reverse
repurchase agreements involve a sale of a security by the Master Fund to a bank
or securities dealer and the Master Fund's simultaneous agreement to repurchase
that security for a fixed price (reflecting a market rate of interest) on a
specific date. These transactions involve a risk that the other party to a
reverse repurchase agreement will be unable or unwilling to complete the
transaction as scheduled, which may result in losses to the Fund.
Illiquid Securities. The Master Fund may invest in illiquid securities,
including restricted securities (i.e., securities not readily marketable without
registration under the Securities Act of 1933, as amended (the "Securities
Act")) and other securities that are not readily marketable. These may include
restricted securities that can be offered and sold only to "qualified
institutional buyers" under Rule 144A of the Securities Act. There is no limit
to the percentage of the Master Fund's net assets that may be invested in
illiquid securities. The Board or its delegate may determine that securities
issued pursuant to Rule 144A under the Securities Act are marketable under
procedures approved by the Board.
The Fund's investment in the Master Fund through the Offshore Fund is itself
illiquid and subject to substantial restrictions on transfer. The Fund has only
limited rights to withdraw its investment in the Master Fund. The illiquidity of
these interests may adversely affect the Fund if it sold such interests at an
inopportune time. See "Repurchases of Interests" in the Fund's Prospectus.
Foreign Securities. The Master Fund may invest in securities of offshore
Investment Funds. Offshore Investment Funds may be subject to special risks as
foreign entities or as entities subject to foreign jurisdictions, including
risks due to economic, political, or regulatory change.
Securities Loans. The Master Fund may lend securities from its portfolio to
broker-dealers, institutional investors, or other persons, pursuant to
securities lending agreements. During the period of the loan, the Master Fund
will be entitled to payments of the interest, dividends, or other distributions
payable on the loaned securities. Additionally, the Master Fund will retain at
least a portion of the interest earned on the investment of the collateral or a
fee from the borrower or placing agent. However, the Master Fund generally will
pay certain administrative and custodial fees in connection with each loan. Any
loans of securities must be secured by collateral at least equal to 100% of the
value of the loaned securities, marked to market on a daily basis. The Master
Fund will generally receive collateral consisting of cash, U.S. government
securities, letters of credit, and other similar instruments. The Fund may
experience a risk of loss if the other party to the transaction breaches the
securities lending agreement with the Master Fund.
The risks in lending portfolio securities, as with other extensions of secured
credit, consist of possible delay in receiving additional collateral or in the
recovery of the loaned securities or the possible loss of rights in the
collateral should the borrower fail financially. In addition, the Master Fund is
responsible for any loss that might result from its investment of the borrower's
collateral. Loans will only be made to firms deemed by the Board to be of good
standing and will not be made unless, in the judgment of the Board, the
consideration to be earned from such loans would justify the risk. Subject to
applicable regulatory approval, cash collateral may be invested in a money
market fund managed by the Adviser or one of its affiliates, and the Adviser or
an affiliate of the Adviser may serve as the Master Fund's lending agent and may
share in revenue received from securities lending transactions as compensation
for this service.
Payment in Kind for Repurchased Interests. The Fund does not expect to
distribute securities as payment for repurchased Interests except in unusual
circumstances, such as in the unlikely event that making a cash payment would
result in a material adverse effect on the Fund or on Members not requesting
that their Interests be repurchased, or that the Fund has received distributions
from the Master Fund via the Offshore Fund consisting of
5
securities of Investment Funds or securities from such Investment Funds that
are transferable to the Members. In the event that the Fund makes such a
distribution of securities as payment for Interests, Members will bear any
risks of the distributed securities (see "Additional Information on Investment
Techniques of Investment Funds and Related Risks" below) and may be required to
pay a brokerage commission or other costs in order to dispose of such
securities.
Suspension of Offerings. Any offering of Interests may be suspended, in the
Board's sole and absolute discretion, to the extent required for purposes of
compliance with the securities laws or in response to market conditions in the
securities markets or otherwise.
ADDITIONAL INFORMATION ON INVESTMENT TECHNIQUES OF INVESTMENT FUNDS
AND RELATED RISKS
This section provides additional information about types of investments and
investment techniques of Investment Funds in which the Master Fund invests. Some
or all of the Investment Funds may make the investments described in this
section. As there is no limit on the types of investments the Investment Funds
may make, however, this cannot be a comprehensive description. Any decision to
invest in the Fund should take into account the possibility that the Investment
Funds may make virtually any kind of investment, and be subject to related
risks, which can be substantial.
Equity Securities. An Investment Fund's portfolio may include long and short
positions in common stocks, preferred stocks, and convertible securities of U.S.
and foreign issuers. An Investment Fund also may invest in depositary receipts
relating to foreign securities. Some of the specific risks related to
investments in foreign securities, depositary receipts relating to foreign
securities, or foreign currency transactions are described below in this section
under the sub-heading "Foreign Securities" or "Foreign Currency Transactions."
Equity securities fluctuate in value, often based on factors unrelated to the
issuer of the securities.
Common Stocks. Common stocks are shares of a corporation or other entity that
entitle the holder to a pro rata share of the profits, if any, of the entity
without preference over any other shareholder or claims of shareholders, after
making required payments to holders of the entity's preferred stock and other
senior equity. Common stock usually carries with it the right to vote and
frequently an exclusive right to do so.
Preferred Stocks. Preferred stock generally has a preference as to dividends
and, in the event of liquidation, to an issuer's assets, over the issuer's
common stock, but it ranks junior to debt securities in an issuer's capital
structure. Preferred stock generally pays dividends in cash or additional shares
of preferred stock at a defined rate but, unlike interest payments on debt
securities, preferred stock dividends are generally payable only if declared by
the issuer's board of directors. Dividends on preferred stock may be cumulative,
meaning that, in the event the issuer fails to make one or more dividend
payments on the preferred stock, no dividends may be paid on the issuer's common
stock until all unpaid preferred stock dividends have been paid. Preferred stock
may also be subject to optional or mandatory redemption provisions.
Convertible Securities. Convertible securities are bonds, debentures, notes,
preferred stocks, or other securities that may be converted into or exchanged
for a specified amount of common stock of the same or different issuer within a
specified period of time at a specified price or based on a specified formula. A
convertible security entitles the holder to receive interest that is generally
paid or accrued on debt or a dividend that is paid or accrued on preferred stock
until the convertible security matures or is redeemed, converted, or exchanged.
Convertible securities have unique investment characteristics in that they
generally: (i) have higher yields than common stocks, but lower yields than
comparable non-convertible securities; (ii) are less subject to fluctuation in
value than the underlying common stock due to their fixed income
characteristics; and (iii) provide the potential for capital appreciation if the
market price of the underlying common stock increases.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value typically
declining as interest rates increase and increasing as interest rates decline.
The credit standing of the issuer and
6
other factors may also increase or decrease the convertible security's
investment value. The conversion value of a convertible security is determined
by the market price of the underlying common stock. If the conversion value is
low relative to the investment value, the price of the convertible security is
governed principally by its investment value. Generally, the conversion value
decreases as the convertible security approaches maturity. To the extent the
market price of the underlying common stock approaches or exceeds the
conversion price, the price of the convertible security will be increasingly
influenced by its conversion value. A convertible security generally will sell
at a premium over its conversion value by the extent to which investors place
value on the right to acquire the underlying common stock while holding a fixed
income security.
A convertible security may be subject to redemption at the option of the issuer
at a price established in the convertible security's governing instrument. If a
convertible security held by an Investment Fund is called for redemption, the
Investment Fund will be required to permit the issuer to redeem the security,
convert it into the underlying common stock, or sell it to a third party. Any of
these actions could have an adverse effect on an Investment Fund's ability to
achieve its investment objective, which, in turn, could result in losses to the
Fund.
Fixed Income Securities. An Investment Fund may invest in fixed income
securities. Investment in these securities may offer opportunities for income
and capital appreciation, and may also be used for temporary defensive purposes
and to maintain liquidity.
Fixed income securities are obligations of the issuer to make payments of
principal and/or interest on future dates, and include, among other securities:
bonds, notes, and debentures issued by corporations; debt securities issued or
guaranteed by the U.S. Government or one of its agencies or instrumentalities or
by a foreign government; municipal securities; and mortgage-backed and
asset-backed securities. These securities may pay fixed, variable, or floating
rates of interest, and may include zero coupon obligations. Fixed income
securities are subject to the risk of the issuer's inability to meet principal
and interest payments on its obligations (i.e., credit risk) and are subject to
price volatility due to such factors as interest rate sensitivity, market
perception of the creditworthiness of the issuer, and general market liquidity
(i.e., market risk).
An Investment Fund may invest in both investment grade and non-investment grade
debt securities. Investment grade debt securities are securities that have
received a rating from at least one nationally recognized statistical rating
organization ("NRSRO") in one of the four highest rating categories or, if not
rated by any NRSRO, have been determined to be of comparable quality.
Non-investment grade debt securities (commonly referred to as "junk bonds") are
securities that have received a rating from a NRSRO of below investment grade or
have been given no rating, and are considered by the NRSRO to be predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal. Non-investment grade debt securities in the lowest rating categories
may involve a substantial risk of default or may be in default. Non-investment
grade debt securities generally offer a higher yield than available from
investment grade issues, but involve greater risk. The returns of non-investment
grade debt securities are also subject to: (i) adverse changes in general
economic conditions; (ii) changes in the financial condition of their issuers;
(iii) changes in interest rates; and (iv) changes in market liquidity. During
periods of economic downturns or rising interest rates, issuers of securities
rated below investment grade or comparable unrated securities may experience
financial stress that could adversely affect their ability to make payments of
principal and interest and increase the possibility of default. In addition, the
market for lower grade debt securities may be thinner and less active than for
higher grade debt securities. Non-investment grade debt securities have
historically experienced greater default rates than investment grade securities.
Foreign Securities. An Investment Fund may invest in commercial paper and
certificates of deposit issued by foreign banks and may invest either directly
or through American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs"), or Global Depositary Receipts ("GDRs") (collectively, "depositary
receipts") in other securities of foreign issuers. Depositary receipts are
instruments generally issued by domestic banks or trust companies that represent
the deposits of a security of a foreign issuer. ADRs, which are traded in U.S.
dollars on U.S. exchanges or over-the-counter, are issued by domestic banks and
evidence ownership of securities issued by foreign corporations. EDRs are
typically traded in Europe. GDRs are typically traded in both Europe and the
United States.
Investment income received by an Investment Fund from sources within foreign
countries may be subject to foreign income taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries
7
which entitle the Investment Fund to a reduced rate of such taxes or exemption
from taxes on such income. It is impossible to determine the effective rate of
foreign tax in advance since the amounts of the Investment Fund's assets to be
invested within various countries is not known.
Foreign Currency Transactions. A forward foreign currency exchange contract
("forward currency contract") is an agreement to purchase or sell a specific
currency at a future date and at a price set at the time the contract is entered
into. An Investment Fund might typically enter into forward currency contracts
to fix the U.S. dollar value of a security it has agreed to buy or sell for the
period between the date the trade was entered into and the date the security is
delivered and paid for, or to hedge the U.S. dollar value of securities it owns.
An Investment Fund may enter into a forward currency contract to sell or buy the
amount of a foreign currency it believes may experience a substantial movement
against the U.S. dollar. In this case, the forward currency contract would
approximate the value of some or all of the Investment Fund's portfolio
securities denominated in such foreign currency. The precise matching of the
forward currency contract amounts and the value of securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market involvement in the value of
those securities between the date the forward currency contract is entered into
and the date it matures. The projection of short-term currency market movement
is extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. At the maturity of a forward currency contract, an
Investment Fund may either sell the portfolio security and make delivery of the
foreign currency, or it may retain the security and terminate its contractual
obligation to deliver the foreign currency by purchasing an "offsetting"
contract obligating it to purchase, on the same maturity date, the same amount
of the foreign currency.
Because it is impossible to forecast with absolute precision the market value of
securities at the expiration of the forward currency contract, it may be
necessary for an Investment Fund to purchase additional foreign currency on the
spot market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Investment Fund is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency. Conversely, it may be necessary to sell on the
spot market some of the foreign currency received upon the sale of the portfolio
security if its market value exceeds the amount of foreign currency the
Investment Fund is obligated to deliver. If an Investment Fund retains the
portfolio security and engages in offsetting transactions, the Investment Fund
will incur a gain or a loss (as described below) to the extent that there has
been movement in forward contract prices. If the Investment Fund engages in an
offsetting transaction, it may subsequently enter into a new forward contract to
sell the foreign currency. Should forward prices decline during the period
between the Investment Fund entering into a forward currency contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Investment Fund will realize a
gain to the extent the price of the currency it has agreed to sell exceeds the
price of the currency it has agreed to purchase. Should forward prices increase,
the Investment Fund will suffer a loss to the extent the price of the currency
they have agreed to purchase exceeds the price of the currency it has agreed to
sell. This method of hedging against a decline in the value of a currency does
not eliminate fluctuations in the underlying prices of the securities, but
rather establishes a rate of exchange at a future date. Additionally, although
such contracts tend to minimize the risk of loss due to a decline in the value
of a hedged currency, they tend to limit any potential gain that might result
from an increase in the value of that currency. The cost of currency conversion
may adversely affect an Investment Fund's returns. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference ("spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Investment Fund at one rate, while offering a lesser rate of exchange
should the Investment Fund desire to resell that currency to the dealer.
Short Sales. An Investment Fund may attempt to limit its exposure to a possible
market decline in the value of its portfolio securities, or take advantage of an
anticipated market decline, through short sales of securities that the
Investment Fund believes possess volatility characteristics similar to those
being hedged. In addition, an Investment Fund may use short sales for
non-hedging purposes to pursue its investment objective. For example, an
Investment Fund may "short" a security of a company if, in its investment
adviser's view, the security is over-valued in relation to the issuer's
prospects for earnings growth. Certain Investment Funds may consider short
selling to be a significant part of their investment strategy.
8
To effect a short sale, an Investment Fund borrows a security from a brokerage
firm to make delivery to the buyer. The Investment Fund is then obligated to
replace the borrowed security by purchasing it at the market price at the time
of replacement. The price at such time may be more or less than the price at
which the security was sold by the Investment Fund, which would result in a loss
or gain, respectively. These techniques are speculative and, in certain
circumstances, can substantially increase the impact of adverse price movements
on the Investment Fund's portfolio, which, in turn, could result in losses to
the Fund. A short sale of a security involves the risk of an unlimited increase
in the market price of the security that could result in an inability to cover
the short position, and thus a theoretically unlimited loss. There can be no
assurance that securities necessary to cover a short position will be available
for purchase.
An Investment Fund may also make short sales against-the-box, in which it sells
short securities it owns or has the right to obtain without payment of
additional consideration. The Investment Fund will incur transaction costs,
including interest expenses, in connection with opening, maintaining, and
closing short sales against-the-box.
Derivatives. An Investment Fund may use financial instruments known as
derivatives. A derivative is generally defined as an instrument whose value is
derived from, or based upon, some underlying index, reference rate (such as
interest rates or currency exchange rates), security, commodity, or other asset.
The investment adviser of an Investment Fund may decide not to employ any of
these strategies, and there is no assurance that any derivatives strategy used
by the Investment Fund will succeed, or that a particular hedging instrument
will be available for use by the Investment Fund. Examples of derivatives
include, but are not limited to, options contracts, futures contracts, and
options on futures contracts. A futures contract is an exchange-traded agreement
between two parties, a buyer and a seller, to exchange a particular commodity or
financial instrument at a specific price on a specific date in the future.
An Investment Fund's use of derivatives involves risks different from, and
possibly greater than, the risks associated with investing directly in
securities or more traditional investments, depending upon the characteristics
of the particular derivative and the Investment Fund's portfolio as a whole.
Derivatives permit an Investment Fund to increase or decrease the level of risk
of its portfolio, or change the character of the risk to which its portfolio is
exposed, in much the same way as the Investment Fund can increase or decrease
the level of risk, or change the character of the risk, of its portfolio by
making investments in specific securities.
Derivatives may entail investment exposures that are greater than their cost
would suggest, meaning that a small investment in derivatives could have a large
potential impact on an Investment Fund's performance. If an Investment Fund
invests in derivatives at inopportune times or judges market conditions
incorrectly, such investments may lower the Investment Fund's return or result
in a loss. An Investment Fund also could experience losses if derivatives are
poorly correlated with its other investments, or if an Investment Fund is unable
to liquidate its position because of an illiquid secondary market. The market
for many derivatives is, or suddenly can become, illiquid. Changes in liquidity
may result in significant, rapid, and unpredictable changes in the prices for
derivatives.
Engaging in these transactions involves risk of loss to the Investment Funds
that could adversely affect the value of the Fund's net assets. No assurance can
be given that a liquid market will exist for any particular futures contract at
any particular time. Many futures exchanges and boards of trade limit the amount
of fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit or trading may be suspended for
specified periods during the trading day. Futures contract prices could move to
the limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and potentially
subjecting the Investment Funds to substantial losses.
Options and Futures. An Investment Fund may utilize options contracts, futures
contracts, and options on futures contracts. It also may use so-called
"synthetic" options or other derivative instruments written by broker-dealers or
other financial intermediaries. Options transactions may be effected on
securities exchanges or in the over-the-counter market. When options are
purchased over-the-counter, the Investment Fund's portfolio bears the risk that
the counterparty that wrote the option will be unable or unwilling to perform
its obligations under the option contract. Such options may also be illiquid
and, in such cases, an Investment Fund may have difficulty closing out its
position. Over-the-counter options purchased and sold by the Investment Fund
also may include options on baskets of specific securities.
9
An Investment Fund may purchase call and put options on specific securities, and
may write and sell covered or uncovered call and put options for hedging
purposes and non-hedging purposes to pursue its investment objective. A put
option gives the purchaser of the option the right to sell, and obligates the
writer to buy, the underlying security at a stated exercise price at any time
prior to the expiration of the option. Similarly, a call option gives the
purchaser of the option the right to buy, and obligates the writer to sell, the
underlying security at a stated exercise price at any time prior to the
expiration of the option. A covered call option is a call option with respect to
which an Investment Fund owns the underlying security. The sale of such an
option exposes the Investment Fund, during the term of the option, to possible
loss of opportunity to realize appreciation in the market price of the
underlying security or to possible continued holding of a security that might
otherwise have been sold to protect against depreciation in the market price of
the security. A covered put option is a put option with respect to which cash or
liquid securities have been placed in a segregated account on an Investment
Fund's books or with the Investment Fund's custodian or prime broker (or similar
arrangement) to fulfill the obligation undertaken. The sale of such an option
exposes the Investment Fund during the term of the option to a decline in price
of the underlying security while depriving the Investment Fund of the
opportunity to invest the segregated assets.
An Investment Fund may close out a position when writing options by purchasing
an option on the same security with the same exercise price and expiration date
as the option that it has previously written on the security. The Investment
Fund will realize a profit or loss if the amount paid to purchase an option is
less or more, as the case may be, than the amount received from the sale
thereof. To close out a position as a purchaser of an option, the Investment
Fund would ordinarily make a similar "closing sale transaction," which involves
liquidating its position by selling the option previously purchased, although
the Investment Fund would be entitled to exercise the option should it deem it
advantageous to do so.
An Investment Fund may enter into stock futures contracts, interest rate futures
contracts, and currency futures contracts in U.S. domestic markets or on
exchanges located outside the United States. Foreign markets may offer
advantages such as trading opportunities or arbitrage possibilities not
available in the United States. Foreign markets, however, may have greater risk
potential than domestic markets. For example, some foreign exchanges are
principal markets so that no common clearing facility exists and an investor may
look only to the broker for performance of the contract. In addition, any
profits the Investment Fund might realize in trading could be eliminated by
adverse changes in the exchange rate, or the Investment Fund could incur losses
as a result of those changes. Transactions on foreign exchanges may include both
commodities which are traded on domestic exchanges and those which are not.
Unlike trading on domestic commodity exchanges, trading on foreign commodity
exchanges is not regulated by the CFTC.
Successful use of futures also is subject to the ability to predict correctly
movements in the direction of the relevant market, and, to the extent the
transaction is entered into for hedging purposes, to ascertain the appropriate
correlation between the transaction being hedged and the price movements of the
futures contract.
The prices of commodities contracts and all derivative instruments, including
futures and options prices, are highly volatile. Price movements of forward
contracts, futures contracts, and other derivative contracts in which an
Investment Fund may invest are influenced by, among other things: interest
rates; changing supply and demand relationships; trade, fiscal, monetary, and
exchange control programs and policies of governments; and national and
international political and economic events and policies. In addition,
governments from time to time intervene, directly and by regulation, in certain
markets, particularly those of currencies and interest rate-related futures and
options. Such intervention often is intended directly to influence prices and
may, together with other factors, cause all of such markets to move rapidly in
the same direction because of, among other things, interest rate fluctuations.
The Investment Fund also is subject to the risk of the failure of any of the
exchanges on which their positions trade or of their clearinghouses.
A stock index future obligates an Investment Fund to pay or receive an amount of
cash equal to a fixed dollar amount specified in the futures contract multiplied
by the difference between the settlement price of the contract on the contract's
last trading day and the value of the index based on the stock prices of the
securities that comprise it at the opening of trading in such securities on the
next business day. A single stock future obligates an Investment Fund to
purchase or sell an amount of a specified equity security at a future date at a
specific price, or to pay or receive an amount of cash equal to a fixed dollar
amount specified in the futures contract multiplied by the difference between
the settlement price of the contract on the contract's last trading day and the
value of the stock at
10
the opening of trading on the next business day. An interest rate future
obligates an Investment Fund to purchase or sell an amount of a specific debt
security at a future date at a specific price. A currency future obligates an
Investment Fund to purchase or sell an amount of a specific currency at a
future date at a specific price.
Call and Put Options on Securities Indices. An Investment Fund may purchase and
sell call and put options on stock indices listed on national securities
exchanges or traded in the over-the-counter market for hedging purposes and
non-hedging purposes to pursue their investment objectives. A stock index
fluctuates with changes in the market values of the stocks included in the
index. Accordingly, successful use by an Investment Fund of options on stock
indexes will be subject to its investment adviser's ability to predict correctly
movements in the direction of the stock market generally or of a particular
industry or market segment. This requires different skills and techniques than
predicting changes in the price of individual stocks.
Rights and Warrants. An Investment Fund may invest in common stock rights and
warrants believed by the investment adviser to provide capital appreciation
opportunities. Common stock rights and warrants may be purchased separately or
may be received as part of a unit or attached to securities purchased. Warrants
are securities that give the holder the right, but not the obligation, to
purchase equity issues of the company issuing the warrants, or a related
company, at a fixed price either on a date certain or during a set period. At
the time of issue, the cost of a warrant is substantially less than the cost of
the underlying security itself, and price movements in the underlying security
are generally magnified in the price movements of the warrant. This effect would
enable an Investment Fund to gain exposure to the underlying security with a
relatively low capital investment but increases the Investment Fund's risk in
the event of a decline in the value of the underlying security and can result in
a complete loss of the amount invested in the warrant. In addition, the price of
a warrant tends to be more volatile than, and may not correlate exactly to, the
price of the underlying security. If the market price of the underlying security
is below the exercise price of the warrant on its expiration date, the warrant
will generally expire without value. The equity security underlying a warrant is
authorized at the time the warrant is issued or is issued together with the
warrant, which may result in losses to the Investment Fund. Investing in
warrants can provide a greater potential for profit or loss than an equivalent
investment in the underlying security, and, thus, can be a speculative
investment. The value of a warrant may decline because of a decline in the value
of the underlying security, the passage of time, changes in interest rates or in
the dividend or other policies of the company whose equity underlies the warrant
or a change in the perception as to the future price of the underlying security,
or any combination thereof. Warrants and rights do not carry with them the right
to dividends or voting rights with respect to the securities that they entitle
the holder to purchase, and they do not represent any rights in the assets of
the issuer.
Forward Contracts. An Investment Fund may enter into a forward contract, which
is a purchase or sale of a specific quantity of a commodity, government
security, foreign currency, or other financial instrument at the current or spot
price, with delivery and settlement at a specified future date. Because it is a
completed contract, a purchase forward contract can be a cover for the sale of a
futures contract.
An Investment Fund may enter into forward contracts for hedging purposes and
non-hedging purposes (i.e., to increase returns) to pursue its investment
objective. Forward contracts are transactions involving an Investment Fund's
obligation to purchase or sell a specific instrument at a future date at a
specified price. Forward contracts may be used by an Investment Fund for hedging
purposes to protect against uncertainty in the level of future foreign currency
exchange rates, such as when an investment adviser of an Investment Fund
anticipates purchasing or selling a foreign security. This technique would allow
the Investment Fund to "lock in" the U.S. dollar price of the security. Forward
contracts may also be used to attempt to protect the value of an Investment
Fund's existing holdings of foreign securities. There may be, however, imperfect
correlation between an Investment Fund's foreign securities holdings and the
forward contracts entered into with respect to those holdings. Forward contracts
may also be used for non-hedging purposes to pursue an Investment Fund's
investment objective, such as when an Investment Fund's investment adviser
anticipates that particular foreign currencies will appreciate or depreciate in
value, even though securities denominated in those currencies are not then held
in the Investment Fund's investment portfolio. There is no general requirement
that the Investment Funds hedge all or any portion of their exposure to foreign
currency risks.
When-Issued and Forward Commitment Securities. Some or all of the Investment
Funds may purchase securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" basis in order to hedge against anticipated
changes in interest rates and prices or for speculative purposes. These
transactions involve
11
a commitment by an Investment Fund to purchase or sell securities at a future
date (ordinarily one or two months later). The price of the underlying
securities, which is generally expressed in terms of yield, is fixed at the
time the commitment is made, but delivery and payment for the securities takes
place at a later date. No income accrues on securities that have been purchased
pursuant to a forward commitment or on a when-issued basis prior to delivery to
the Investment Fund. When-issued securities and forward commitments may be sold
prior to the settlement date. If an Investment Fund disposes of the right to
acquire a when-issued security prior to its acquisition or disposes of its
right to deliver or receive against a forward commitment, it may incur a gain
or loss. There is a risk that securities purchased on a when-issued basis may
not be delivered and that the purchaser of securities sold by an Investment
Fund on a forward basis will not honor its purchase obligation. In such cases,
an Investment Fund may incur a loss.
Bank Loans and Participations. An Investment Fund may invest, directly or
through a private investment fund, in bank loans or participations in bank loans
(collectively, "bank loans"), either of which may become non-performing for a
variety of reasons. Such non-performing bank loans may require substantial
workout negotiations or restructuring in the event of a default or bankruptcy,
which may entail, among other things, a substantial reduction in the interest
rate and a substantial write-down of the principal of the bank loan. In
addition, bank loans are generally subject to liquidity risks since bank loans
are traded in an "over-the-counter" market.
Bank loans, like most other debt obligations, are subject to the risk of
default. While all investments involve some amount of risk, bank loans generally
involve less risk than equity instruments of the same issuer because the payment
of principal of and interest on debt instruments is a contractual obligation of
the issuer that, in most instances, takes precedence over the payment of
dividends, or the return of capital, to the issuer's shareholders. However, in
the event of the bankruptcy, receivership, or other insolvency proceeding of a
borrower, an Investment Fund could experience delays or limitations with respect
to its ability to collect the principal of and interest on the bank loan and
with respect to its ability to realize the benefits of the collateral securing
the bank loan, if any.
Although an Investment Fund may invest in bank loans that will be fully
collateralized with assets with a market value that, at the time of acquisition,
equals or exceeds the principal amount of the bank loan, the value of the
collateral may decline below the principal amount of the bank loan subsequent to
the Investment Fund's investment in such bank loan. In addition, to the extent
that collateral consists of stock of the borrower or its subsidiaries or
affiliates, the Investment Fund will be subject to the risk that this stock may
decline in value, be relatively illiquid, or may lose all or substantially all
of its value, causing the bank loan to be undercollateralized. Bank loans are
also subject to the risk of default of scheduled interest or principal payments.
In the event of a failure to pay scheduled interest or principal payments on
bank loans held by an Investment Fund, the Investment Fund could experience a
reduction in its income, and would experience a decline in the market value of
the particular bank loan so affected, and may experience a decline in its net
asset value or the amount of its distributions, which may adversely affect the
performance of the Fund. An Investment Fund may invest in uncollateralized bank
loans, which may involve a greater risk of loss.
The risk of default will increase in the event of an economic downturn or a
substantial increase in interest rates. To the extent that an Investment Fund's
investment is in a bank loan acquired from another lender, the Investment Fund
may be subject to certain credit risks with respect to that lender. Further,
there is no assurance that the liquidation of the collateral (if any) underlying
a bank loan would satisfy the issuer's obligation to the Investment Fund in the
event of non-payment of scheduled interest or principal, or that collateral
could be readily liquidated. The risk of non-payment of interest and principal
also applies to other debt instruments in which the Investment Fund may invest.
There is no assurance that the sale of collateral would raise enough cash to
satisfy the borrower's payment obligation or that the collateral can or will be
liquidated. Some or all of the bank loans held by an Investment Fund may not be
secured by any collateral, and such bank loans entail greater risk than secured
bank loans.
Swaps. An Investment Fund may enter into equity, interest rate, index, currency
rate, and total return swap agreements. These transactions are entered into in
an attempt to obtain a particular return when it is considered desirable to do
so, possibly at a lower cost than if an Investment Fund had invested directly in
the asset that yielded the desired return. Swap agreements are two-party
contracts entered into primarily by institutional investors for periods ranging
from a few weeks to more than a year. In a standard swap transaction, two
parties agree to exchange the returns (or differentials in rates of return)
earned or realized on particular predetermined investments or instruments, which
may be adjusted for an interest factor. The gross returns to be exchanged or
"swapped" between the parties are generally calculated with respect to a
"notional amount" (i.e., the return on or increase in
12
value of a particular dollar amount invested at a particular interest rate, in
a particular foreign currency, or in a "basket" of securities representing a
particular index).
Interest Rate Swap. An Investment Fund may enter into interest rate swaps. Forms
of swap agreements include interest rate caps, under which, in return for a
premium, one party agrees to make payments to the other to the extent interest
rates exceed a specified rate or "cap"; interest rate floors, under which, in
return for a premium, one party agrees to make payments to the other to the
extent interest rates fall below a specified level or "floor"; and interest rate
collars, under which a party sells a cap and purchases a floor or vice versa in
an attempt to protect itself against interest rate movements exceeding given
minimum or maximum levels.
Equity Index Swaps. An Investment Fund may enter into equity index swaps. Equity
index swaps involve the exchange by an Investment Fund with another party of
cash flows based upon the performance of an index or a portion of an index of
securities which usually includes dividends. An Investment Fund may purchase
cash-settled options on equity index swaps. A cash-settled option on a swap
gives the purchaser the right, but not the obligation, in return for the premium
paid, to receive an amount of cash equal to the value of the underlying swap as
of the exercise date. These options typically are purchased in privately
negotiated transactions from financial institutions, including securities
brokerage firms.
Currency Swaps. An Investment Fund may enter into currency swaps for both
hedging and non-hedging purposes. Currency swaps involve the exchange of rights
to make or receive payments in specified foreign currencies. Since currency
swaps are individually negotiated, an Investment Fund would expect to achieve an
acceptable degree of correlation between its portfolio investments and its
currency swap positions. Currency swaps usually involve the delivery of the
entire principal value of one designated currency in exchange for another
designated currency. Therefore, the entire principal value of a currency swap is
subject to the risk that the other party to the swap will default on its
contractual delivery obligations. The use of currency swaps is a highly
specialized activity which involves special investment techniques and risks. If
its investment adviser is incorrect in its forecasts of market values and
currency exchange rates, the Investment Fund's performance will be adversely
affected. If there is a default by the other party to such a transaction, the
Investment Fund will have contractual remedies pursuant to the agreements
related to the transaction.
Total Return Swaps. An Investment Fund may invest in total return swaps with
appropriate counterparties. In a total return swap, one party pays a rate of
interest in exchange for the total rate of return on another investment. For
example, if an Investment Fund wished to invest in a senior loan, it could
instead enter into a total return swap and receive the total return of the
senior loan, less the "funding cost," which would be a floating interest rate
payment to the counterparty.
Certain swap agreements into which an Investment Fund enters may require the
calculation of the obligations of the parties to the agreements on a "net
basis." Consequently, the Investment Fund's current obligations (or rights)
under such swap agreements generally will be equal only to the net amount to be
paid or received under the agreement based on the relative values of the
positions held by each party to the agreement (the "net amount"). The risk of
loss with respect to swaps is limited to the net amount of interest payments
that the Investment Fund is contractually obligated to make. If the other party
to a swap defaults, the Investment Fund's risk of loss consists of the net
amount of payments that the Investment Fund contractually is entitled to
receive.
Distressed Credits. An Investment Fund may invest in securities of domestic and
foreign issuers in weak financial condition, experiencing poor operating
results, having substantial capital needs or negative net worth, facing special
competitive or product obsolescence problems, or that are involved in bankruptcy
or reorganization proceedings. Investments of this type may involve substantial
financial and business risks that can result in substantial or at times even
total losses. Among the risks inherent in investments in troubled entities is
the fact that it frequently may be difficult to obtain information as to the
true condition of such issuers. Such investments also may be adversely affected
by state and federal laws relating to, among other things, fraudulent transfers
and other voidable transfers or payments, lender liability, and the Bankruptcy
Court's power to disallow, reduce, subordinate, or disenfranchise particular
claims. The market prices of such securities are also subject to abrupt and
erratic market movements and above-average price volatility, and the spread
between the bid and asked prices of such securities may be greater than those
prevailing in other securities markets. It may take a number of years for the
market price of such securities to reflect their intrinsic value. In liquidation
(both in and out of bankruptcy) and other forms of corporate
13
reorganization, there exists the risk that the reorganization either will be
unsuccessful (due to, for example, failure to obtain requisite approvals), will
be delayed (for example, until various liabilities, actual or contingent, have
been satisfied), or will result in a distribution of cash or a new security the
value of which will be less than the purchase price to the Investment Fund of
the security in respect to which such distribution was made.
DIRECTORS AND OFFICERS
The Board of the Fund and the Board of the Master Fund (the "Master Fund's
Board") have overall responsibility to manage and control the business
operations of the Fund and the Master Fund, respectively, on behalf of their
respective members. At least a majority of the Board and the Master Fund's Board
are and will be persons who are not "interested persons," as defined in Section
2(a)(19) of the 1940 Act ("Independent Directors"). Subject to the provisions of
the Operating Agreement and Delaware law, the Directors have all powers
necessary and convenient to carry out this responsibility. The Offshore Fund has
two members: the Fund (which serves as its managing member); and the Adviser
(which holds only a nominal, non-voting interest). The members of the Offshore
Fund have delegated the day-to-day management, as well as general oversight
responsibilities of the Offshore Fund, to the Fund. The Board of the Fund
therefore effectively makes all decisions on behalf of the Offshore Fund.
The Directors and officers of the Fund and the Master Fund, their addresses,
their dates of birth, and descriptions of their principal occupations during the
past five years are listed below.
-----------------------------------------------------------------------------------------------------------------------------------
Term of Number of
Position(s) Office(1) Portfolios in
Held with and Length Fund Complex
Fund and of Time Principal Occupation(s) Overseen by Other Directorships
Name, Address, and Birth Date Master Fund Served( 2) During the Past 5 Years Director Held by Director
-----------------------------------------------------------------------------------------------------------------------------------
Independent Directors
-----------------------------------------------------------------------------------------------------------------------------------
Nolan T. Altman Director Since President, NTA 3 Director, State
c/o The Topiary Fund for Benefit inception Consulting (financial University of New
Plan Investors (BPI) LLC services consulting) York at Albany
345 Park Avenue (2001 to present). foundation (1998 to
New York, New York 10154 present); Director,
(9/18/55) Phinity Offshore
Fund, Ltd., Tiger
Asia Overseas Fund,
Ltd. Offshore Fund,
Tiger Consumer
Partners Offshore
Fund, Ltd. (2006 to
present), Tiger
Global Ltd., (2004
to present);
Director, TS I
Offshore Limited
(2004 to present) (3)
-----------------------------------------------------------------------------------------------------------------------------------
--------------------------
(1) Each Director serves for the duration of the Fund, or until his death,
resignation, termination, removal, or retirement.
(2) The Fund commenced operations on October 1, 2004.
(3) Since March 2003, Messrs. Altman and Citron have served as members of the
Conflicts Advisory Board of certain private investment funds managed by
DBIM or its affiliates. This Conflicts Advisory Board meets on an
intermittent basis to evaluate whether specific transactions involving
the private investment funds raise conflicts of interest with DBIM, its
affiliates, or accounts managed by DBIM or its affiliates.
14
-----------------------------------------------------------------------------------------------------------------------------------
Term of Number of
Position(s) Office(1) Portfolios in
Held with and Length Fund Complex
Fund and of Time Principal Occupation(s) Overseen by Other Directorships
Name, Address, and Birth Date Master Fund Served( 2) During the Past 5 Years Director Held by Director
-----------------------------------------------------------------------------------------------------------------------------------
Louis S. Citron Director Since General Counsel, New 3 None.(3)
c/o The Topiary Fund for Benefit inception Enterprise Associates
Plan Investors (BPI) LLC (venture capital firm)
345 Park Avenue (2001 to present).
New York, New York 10154
(1/31/65)
-----------------------------------------------------------------------------------------------------------------------------------
Edward T. Tokar Director Since Senior Managing Director 3 Director, Gabelli
c/o The Topiary Fund for Benefit inception of Investments, Beacon Dividend and Income
Plan Investors (BPI) LLC Trust Company (2004 to Trust (2003 to
345 Park Avenue present), Chief present), Trustee,
New York, New York 10154 Executive Officer - Levco Series Trust
(6/12/47) Investments, Allied Mutual Funds (2
Capital Management LLC portfolios)
(registered investment (Portfolio 1: 2001
adviser; wholly owned to present -
subsidiary of Honeywell) Portfolio 1
(1998 to 2004) and Vice liquidated as of May
President - Investments, 1, 2006 but not
Honeywell International, deregistered);
Inc. (advanced Portfolio 2: 2002 to
technology and 2003); Director,
manufacturer) (1977 to Allied Capital
2004). Management LLC (1998
to 2004). Formerly,
Trustee, Scudder MG
Investment Trust
(formerly Morgan
Grenfell Investment
Trust) (11
portfolios) (1994 to
2002).
-----------------------------------------------------------------------------------------------------------------------------------
Officers
-----------------------------------------------------------------------------------------------------------------------------------
Name, Address, and Birth Date Positions Held with Fund Principal Occupation(s) During the Last
and Master Fund Five Years
-----------------------------------------------------------------------------------------------------------------------------------
Pamela Kiernan President Chief Operating Officer, DB Absolute
DB Absolute Return Strategies Return Strategies (2005 to present).
345 Park Avenue, 24th Floor Formerly, Chief Operating Officer -
New York, New York 10154 Americas, DB Advisors LLC (2004); Chief
(9/16/68) Operations Officer - America, Deutsche
Bank Global Equities
-----------------------------------------------------------------------------------------------------------------------------------
15
-----------------------------------------------------------------------------------------------------------------------------------
Name, Address, and Birth Date Positions Held with Fund Principal Occupation(s) During the Last
and Master Fund Five Years
-----------------------------------------------------------------------------------------------------------------------------------
(2002 to 2004);
Business Management - Trading, Deutsche
Bank Global Equities (1997 to 2002).
-----------------------------------------------------------------------------------------------------------------------------------
Joshua Kestler Vice President Head of Product Structuring, DB Absolute
The Topiary Fund for Benefit Plan Investors Return Strategies (2004 to present);
(BPI) LLC Associate, Investment Management Group,
25 DeForest Ave. Schulte Roth & Zabel LLP (law firm)
Summit, NJ 07901 (2001-2004).
(4/27/75)
-----------------------------------------------------------------------------------------------------------------------------------
Marielena Glassman Treasurer, Principal Financial Officer
The Topiary Fund for Benefit Plan Investors and Accounting Officer Chief Administration Officer, DB
(BPI) LLC Absolute Return Strategies (2002 to
25 DeForest Ave. present). Formerly Global Head of
Summit, NJ 07901 Business Management, Deutsche Asset
(6/5/63) Management (1990 to 2002): Co-Head of
Global Portfolio Management product,
Bankers Trust Private Banking
(1996-1999).
-----------------------------------------------------------------------------------------------------------------------------------
Neil Novembre Assistant Treasurer Head of Funds Administration (2002 to
The Topiary Fund for Benefit Plan Investors present); Senior Associate/Manager,
(BPI) LLC PricewaterhouseCoopers (2000 to 2002);
25 DeForest Ave. Senior Accountant, Rothstein, Kass &
Summit, NJ 07901 Company (1996 to 2000)
(6/18/73)
-----------------------------------------------------------------------------------------------------------------------------------
Anthony Conte Assistant Treasurer Head of Compliance, DB Absolute Return
Deutsche Asset Management Strategies (2003 to present); Head of
345 Park Avenue Business Risk, DB Absolute Return
New York, NY 10154 Strategies (2001 to present); Head of
(3/28/69) Asset Management Compliance, CIBC World
Markets Corp. (1999 to 2001).
-----------------------------------------------------------------------------------------------------------------------------------
John H. Kim Secretary Director and Senior Counsel, Deutsche
Deutsche Asset Management Asset Management (asset management
345 Park Avenue, 16th Floor division of Deutsche Bank) (2001 to
New York, NY 10154 present); Sr. Associate, Wilkie Farr &
(1/9/71) Gallagher (law firm) (1995 to 2001).
-----------------------------------------------------------------------------------------------------------------------------------
John Millette Assistant Secretary Director, Deutsche Asset Management
Deutsche Asset Management (legal department) (2003 to present);
Two International Place Vice President, Deutsche Asset
Boston, MA 02110 Management (2000 to 2003).
(8/23/62)
-----------------------------------------------------------------------------------------------------------------------------------
Philip Gallo Chief Compliance Officer Managing Director (April 2003 to
Deutsche Asset Management present), Global Head of Asset
345 Park Avenue Management Compliance (January 2004 to
New York, NY 10154 present and formerly Head of Asset
(8/02/62) Management Compliance (April 2003 to
December 2004), Deutsche Asset
Management. Chief Compliance Officer,
DWS, Scudder Family of Funds (October
2004 to
-----------------------------------------------------------------------------------------------------------------------------------
16
-----------------------------------------------------------------------------------------------------------------------------------
Name, Address, and Birth Date Positions Held with Fund Principal Occupation(s) During the Last
and Master Fund Five Years
-----------------------------------------------------------------------------------------------------------------------------------
present). Prior to joining Deutsche Asset
Management, Vice President and Associate
General Counsel at Goldman Sachs until
March 2003.
-----------------------------------------------------------------------------------------------------------------------------------
Committees of the Board and the Master Fund's Board
Each of the Board and the Master Fund's Board has formed an Audit Committee that
is responsible for: overseeing the Fund's accounting and financial reporting
policies and practices, its internal controls, and, as appropriate, the internal
controls of certain service providers; overseeing the quality and objectivity of
the Fund's and the Master Fund's financial statements and the independent audit
of those financial statements; and acting as a liaison between the Fund's and
the Master Fund's independent auditors and the full Board or Master Fund's
Board. The Audit Committee recommends the selection, retention, or termination
of the Fund's and the Master Fund's auditors, evaluates their independence, and
reviews their fees. The Audit Committee currently consists of each of the Fund's
and the Master Fund's Independent Directors. During the Fund's fiscal year ended
March 31, 2006, the Audit Committee held 4 meetings.
Each of the Board and the Master Fund's Board has designated the valuation
committee of Topiary Fund Management, which is affiliated with the Adviser, to
serve as the valuation committee of the Fund and the Master Fund (the "Valuation
Committee"). The Valuation Committee's function, subject to the oversight of the
Board, is generally to review the Fund's and the Master Fund's valuation
methodologies, valuation determinations, and any information provided to the
Valuation Committee by the Adviser. The Valuation Committee has been assigned to
act in accordance with the Fund's valuation procedures as approved by the Board.
Changes in its membership are subject to Board notification. The Board reviews
matters arising from the Valuation Committee's considerations. During the Fund's
fiscal year ended March 31, 2006, the Valuation Committee held [ ] meetings [DB
to provide]. Members may request information about the members of the Valuation
Committee by written request to the Fund.
Each of the Board and the Master Fund's Board has formed a Nominating and
Corporate Governance Committee. The Nominating and Corporate Governance
Committee has the power to nominate directors of the Fund and the Master Fund's
who are not "interested persons" of the Fund or the Master Fund, as the case may
be, as that term is defined in the 1940 Act, and to nominate officers of the
Fund and the Master Fund's and appoint officers of the Fund and the Master Fund
to serve until the next meeting of the Board succeeding such action. The
Committee currently consists of each of the Fund's and the Master Fund's
Independent Directors. The Nominating Committee does not currently have a policy
regarding whether it will consider nominees recommended by Members. During the
Fund's fiscal year ended March 31, 2006, the Nominating and Corporate Governance
Committee held 4 meetings.
All actions taken by a committee of the Board or the Master Fund's Board will be
recorded and reported to the full Board or the Master Fund's Board at their next
meeting following such actions.
17
Director Ownership of Securities
The dollar range of equity securities owned by each Director is set forth
below.(1)
-----------------------------------------------------------------------------------------------------------------------------------
Aggregate Dollar Range of Equity
Securities in all Registered Investment
Companies Overseen by Director in Family
Name of Director Dollar Range of Equity Securities in the of Investment Companies as of December
Fund as of December 31, 2005(1) 31, 2005(1)
-----------------------------------------------------------------------------------------------------------------------------------
Independent Directors
-----------------------------------------------------------------------------------------------------------------------------------
Nolan T. Altman None None
-----------------------------------------------------------------------------------------------------------------------------------
Louis S. Citron None None
-----------------------------------------------------------------------------------------------------------------------------------
Edward T. Tokar None None
-----------------------------------------------------------------------------------------------------------------------------------
(1) The dollar ranges of equity securities reflected in the table above are
as follows: None; $1 to $10,000; $10,001 to $50,000; $50,001 to $100,000;
or over $100,000.
Independent Director Ownership of Securities
The table below provides information regarding the ownership by each Independent
Director (and his immediate family members) of securities of the Adviser or the
Distributor, and the ownership of securities in an entity controlling,
controlled by or under common control with the Adviser or the Distributor (not
including registered investment companies), as of March 31, 2006.
-----------------------------------------------------------------------------------------------------------------------------------
Name of Owners and
Relationship to Value of
Name of Director Director Company Title of Class Securities Percentage of Class
-----------------------------------------------------------------------------------------------------------------------------------
Nolan T. Altman N/A N/A N/A $0 N/A
-----------------------------------------------------------------------------------------------------------------------------------
Louis S. Citron N/A N/A N/A $0 N/A
-----------------------------------------------------------------------------------------------------------------------------------
Edward T. Tokar N/A N/A N/A $0 N/A
-----------------------------------------------------------------------------------------------------------------------------------
Director Compensation
The Fund pays each Independent Director a fee of $1,000 per Board meeting ($250
in the case of a telephonic Board meeting), plus an annual retainer of $8,000.
Mr. Altman, as chairman of the Audit Committee, will receive an additional
annual fee of $1,000. In addition, the Fund will reimburse each of the
Independent Directors for travel and other expenses incurred in connection with
attendance at such meetings. Each of the Independent Directors is a member of
the Audit Committee and/or Nominating and Corporate Governance Committee, and
receives a fee for each meeting attended. Other officers and Directors of the
Fund receive no compensation. The Master Fund pays the Independent Directors the
same fees as the Fund.
Directors and officers of the Fund also may be trustees/directors and officers
of some or all of the other investment companies managed by the Adviser or its
affiliates (the "Fund Complex"), including the Master Fund. Mr. Tokar previously
served as an independent trustee of various funds in the Fund Complex. He
resigned from these positions, effective July 30, 2002.
The following table summarizes the compensation paid to the Directors of
the Fund and the Master Fund, including Committee fees, for the fiscal year
ended March 31, 2006.
18
PENSION OR TOTAL COMPENSATION
RETIREMENT BENEFITS FROM FUND AND FUND
AGGREGATE COMPENSATION ACCRUED AS PART OF ESTIMATED ANNUAL COMPLEX PAID TO
NAME OF DIRECTOR FROM FUND FUND EXPENSES BENEFITS UPON RETIREMENT DIRECTOR(1)
---------------------------- ---------------------- ------------------- ------------------------ ------------------
Nolan T. Altman $13,000 N/A N/A $26,000
Louis S. Citron $12,000 N/A N/A $24,000
Edward T. Tokar $12,000 N/A N/A $24,000
------------
(1) The Fund Complex includes the Fund, the Master Fund, and the DB Hedge
Strategies Fund LLC.
Compensation of Portfolio Managers
The Adviser seeks to offer its investment professionals competitive short-term
and long-term compensation. Portfolio managers and research professionals are
paid (i) base salary, which is linked to job function, responsibilities, and
financial services industry peer compensation, and (ii) variable components,
which are linked to investment performance, individual contributions to the
team, and DB ARS's and Deutsche Bank's financial results. Variable compensation
may include a cash and/or stock bonus incentive and participation in a variety
of long-term equity programs (usually in the form of Deutsche Bank equity).
Bonus and long-term incentives comprise a greater proportion of compensation as
seniority and compensation levels increase. Top performing investment
professionals earn a total compensation package that is highly competitive and
may earn a bonus that is a multiple of their base salary. The amount of equity
awarded is generally based on the individual's total compensation package and
may comprise from 0% to 40% of the total compensation award. As incentive
compensation increases, the percentage of compensation awarded in Deutsche Bank
equity also increases. Certain senior investment professionals may be subject to
a mandatory deferral of a portion of their equity compensation into proprietary
mutual funds that they manage.
To evaluate its investment professionals, the Adviser uses a Performance
Management Process. Objectives are related to investment performance and
generally take into account appropriate peer group and benchmark-related data.
The ultimate goal of this process is to link the performance of investment
professionals with client investment objectives and to deliver investment
performance that meets or exceeds clients' risk and return objectives. When
determining total compensation, the Adviser considers a number of quantitative
and qualitative factors such as:
o DB ARS's performance and the performance of Deutsche Asset
Management;
o Quantitative measures which include actual pre-tax performance,
looking first against benchmarks over different time periods with a
focus on trailing one-, three-, and five-year performance. The
Adviser reviews performance for both alpha (a measure of
risk-adjusted performance) and risk versus pre-determined
benchmarks and fund peer groups. Additionally, the portfolio
manager's retail/institutional asset mix is weighted, as
appropriate, for evaluation purposes;
o Qualitative measures include adherence to the investment process
and individual contributions to the process, among other things. In
addition, the Adviser assesses compliance, risk management, and
teamwork skills.
19
o Other factors, including contributions made to the investment team
as well as adherence to compliance, risk management, and "living
the values" of the Adviser, are part of a discretionary component
which gives management the ability to reward these behaviors on a
subjective basis through bonus incentives.
For certain investment professionals, total compensation is determined with
regard to revenues generated by the funds they manage and not with regard to the
foregoing quantitative and qualitative factors.
In addition, the Adviser analyzes competitive compensation levels through the
use of extensive market data surveys. Portfolio manager compensation is reviewed
and may be modified each year as appropriate to reflect changes in the market,
as well as to adjust the factors used to determine overall compensation to
promote good sustained investment performance.
Fund Ownership of Portfolio Managers
The following table shows the dollar range of shares owned beneficially and of
record by each member of the Fund's portfolio management team in the Fund as
well as in all funds in the Fund Complex, including investments by their
immediate family members and amounts invested through retirement and deferred
compensation plans. This information is provided as of March 31, 2006.
-----------------------------------------------------------------------------------------------------------------------------------
Dollar Range of Equity Securities in the Dollar Range of All Fund Complex Shares
Name of Portfolio Manager Fund Owned
-----------------------------------------------------------------------------------------------------------------------------------
Steven L. Bossi None None
-----------------------------------------------------------------------------------------------------------------------------------
Portfolio Manager Conflicts of Interest
In addition to managing the assets of the Fund, the Fund's portfolio managers
may have responsibility for managing other client accounts of the Adviser. The
tables below show, for each portfolio manager, the number and asset size of (i)
SEC-registered investment companies (or series thereof) other than the Fund,
(ii) pooled investment vehicles that are not registered investment companies,
and (iii) other accounts (e.g., accounts managed for individuals or
organizations) managed by each portfolio manager. The tables also show the
number of performance-based fee accounts, as well as the total assets of the
accounts for which the advisory fee is based on the performance of the account.
This information is provided as of March 31, 2006.
Other SEC-Registered Investment Companies Managed
-----------------------------------------------------------------------------------------------------------------------------------
Name of Portfolio Manager Number of Registered Total Assets of Number of Investment Total Assets of
Investment Companies Registered Investment Company Accounts with Performance-Based Fee
Companies Performance-Based Fees Accounts
-----------------------------------------------------------------------------------------------------------------------------------
Steven L. Bossi 1 $9,694,042 None None
-----------------------------------------------------------------------------------------------------------------------------------
Other Pooled Investment Vehicles Managed
-----------------------------------------------------------------------------------------------------------------------------------
Name of Portfolio Manager Number of Pooled Total Assets of Pooled Number of Pooled Total Assets of
Investment Vehicles Investment Vehicles Investment Vehicles Performance-Based Fee
with Performance-Based Accounts
Fees
-----------------------------------------------------------------------------------------------------------------------------------
Steven L. Bossi 23 $5,014,662,136 22 $4,951,564,845
-----------------------------------------------------------------------------------------------------------------------------------
20
Other Accounts Managed
-----------------------------------------------------------------------------------------------------------------------------------
Name of Portfolio Manager Number of Other Accounts Total Assets of Other Number of Other Total Assets of
Accounts Accounts with Performance-Based Fee
Performance-Based Fees Accounts
-----------------------------------------------------------------------------------------------------------------------------------
Steven L. Bossi 5 $635,816,905 5 $635,816,905
-----------------------------------------------------------------------------------------------------------------------------------
The Adviser is owned by Deutsche Bank AG, a multi-national financial services
company. Therefore, the Adviser is affiliated with a variety of entities that
provide and/or engage in commercial banking, insurance, brokerage, investment
banking, financial advisory, broker-dealer activities (including sales and
trading), hedge funds, real estate, and private equity investing, in addition to
the provision of investment management services to institutional and individual
investors. Since Deutsche Bank AG, its affiliates, directors, officers, and
employees (the "Firm") are engaged in businesses and have interests other than
managing asset management accounts, such other activities involve real,
potential, or apparent conflicts of interest. These interests and activities
include potential advisory, transactional, and financial activities and other
interests in securities and companies that may be directly or indirectly
purchased or sold by the Firm for its clients' advisory accounts. These are
considerations of which advisory clients should be aware and which may cause
conflicts that could be to the disadvantage of the Adviser's advisory clients.
In addition, real, potential, or apparent conflicts of interests may arise when
a portfolio manager has day-to-day portfolio management responsibilities with
respect to more than one fund or account, including the following:
o Certain investments may be appropriate for the Fund and also for
other clients advised by the Adviser, including other client
accounts managed by the Fund's portfolio management team.
Investment decisions for the Fund and other clients are made with a
view to achieving their respective investment objectives and after
consideration of such factors as their current holdings,
availability of cash for investment, and the size of their
investments generally. Frequently, a particular security may be
bought or sold for only one client or in different amounts and at
different times for more than one but less than all clients.
Likewise, because clients of the Adviser may have differing
investment strategies, a particular security may be bought for one
or more clients when one or more other clients are selling the
security. The investment results for the Fund may differ from the
results achieved by the Firm and other clients of the Firm and
results among clients may differ. In addition, purchases or sales
of the same security may be made for two or more clients on the
same day. In such event, such transactions will be allocated among
the clients in a manner believed by the Adviser to be equitable to
each. The Adviser will not determine allocations based on whether
it receives a performance-based fee from the client. In some cases,
the allocation procedure could have an adverse effect on the price
or amount of the securities purchased or sold by the Fund. Purchase
and sale orders for the Fund may be combined with those of other
clients of the Adviser in the interest of achieving the most
favorable net results to the Fund.
o To the extent that the Fund's portfolio management team has
responsibilities for managing accounts in addition to the Fund, a
portfolio manager will need to divide his time and attention among
relevant accounts.
o In some cases, a real, potential, or apparent conflict may arise
where the Adviser may have an incentive, such as a
performance-based fee, in managing one account and not with respect
to other accounts it manages.
21
LIQUIDITY REQUIREMENTS
The Fund's portfolio is not subject to any minimum liquidity requirement.
CODE OF ETHICS
The Fund, the Master Fund, and the Adviser each has adopted a code of ethics as
required by applicable law, which is designed to prevent affiliated persons of
the Fund, the Master Fund, and the Adviser from engaging in deceptive,
manipulative, or fraudulent activities in connection with securities held or to
be acquired by the Fund or the Master Fund (which may also be held by persons
subject to a code of ethics). There can be no assurance that the codes of ethics
will be effective in preventing such activities. Each code of ethics may be
examined on the Internet from the SEC's website at www.sec.gov. In addition,
each code of ethics can be reviewed and copied at the SEC's Public Reference
Room in Washington, DC. Information on the operation of the Public Reference
Room may be obtained by calling the SEC at 1-202-942-8090. Copies of these codes
of ethics may be obtained, after paying a duplicating fee, by electronic request
at the following email address: publicinfo@sec.gov, or by writing the SEC's
Public Reference Section, Washington, DC 20549-0102.
The Adviser's code of ethics allows personnel to invest in securities for their
own account, but requires compliance with the code's pre-clearance requirements
and other restrictions including "blackout periods" and minimum holding periods,
subject to limited exceptions. The code of ethics prohibits purchases of
securities in initial public offerings (the prohibition is limited to U.S.
public offerings) and requires prior approval for purchases of securities in
private placements.
PERFORMANCE INFORMATION
Advertisements and sales literature relating to the Fund as well as reports to
Members may include quotations of investment performance. In these materials,
the Fund's performance will normally be portrayed as the net return to an
investor in the Fund during each month or quarter of the period for which the
investment performance is being shown. Cumulative performance and year-to-date
performance computed by aggregating quarterly or monthly return data may also be
used. Investment returns will be reported on a net basis, after all fees and
expenses. Other methods also may be used to portray the Fund's investment
performance.
The Fund's performance results will vary from time to time, and past results are
not necessarily indicative of future investment results.
Comparative performance information, as well as any published ratings, rankings
and analyses, reports and articles discussing the Fund, may also be used to
advertise or market the Fund, including data and materials prepared by
recognized sources of such information. Such information may include comparisons
of the Fund's investment performance to the performance of recognized market
indices and indices, including but not limited to the Standard & Poor's 500, the
Russell 2000, or other lesser known indices (including indices of other pooled
investment vehicles investing in hedge funds and private equity venture and
buyout funds, such as Hedge Fund Research Inc.'s HFRI Equity Hedge Index, or
Venture Economics' U.S. Private Equity Performance Index). Comparisons also may
be made to economic and financial trends and data that may be relevant for
investors to consider in determining whether to invest in the Fund.
INVESTMENT MANAGEMENT AND OTHER SERVICES
The Adviser. Under an investment management agreement (the "Investment
Management Agreement") with the Master Fund, DBIM, a registered investment
adviser, provides supervisory and administrative services to the Master Fund,
including supervision of the Master Fund's investment program. As the Master
Fund's investment adviser, DBIM makes the Master Fund's investment decisions,
performing services as Topiary Fund Management. Topiary Fund Management is the
marketing name of the fund of funds activities of the overall fiduciary hedge
fund management services of Deutsche Bank AG. DBIM's address is 345 Park Avenue,
New York, New York 10154. DBIM buys and sells securities for the Master Fund and
conducts the research that leads to the purchase and sale
22
decisions. As necessary, DBIM is also responsible for selecting brokers and
dealers and for negotiating brokerage commissions and dealer charges or other
transaction costs.
DBIM is an indirect, wholly owned subsidiary of Deutsche Bank, an international
commercial and investment banking group. Deutsche Bank is a major global banking
institution that is engaged in a wide range of financial services activities,
including investment management, mutual funds, retail, private, and commercial
banking, investment banking, and insurance.
DB Absolute Return Strategies is the marketing name for the absolute return
strategies activities of Deutsche Bank AG and certain of its subsidiaries,
including DBIM, Deutsche Asset Management, Inc., Deutsche Bank Trust Company
Americas, DB Investment Managers, Inc., Deutsche Bank Securities Inc., Deutsche
Asset Management Investmentgesellschaft mbH Frankfurt am Main, Deutsche Asset
Management (Australia) Limited, and Deutsche Asset Management Limited. DBIM
serves as investment adviser to this Fund and other institutional and privately
managed accounts. As of April 1, 2006, DB Absolute Return Strategies (including
DBIM) had total assets of approximately US $7.3 billion under management. As of
December 31, 2005, Deutsche Bank had total assets of approximately U.S. $7.3
billion under management.
DBIM and its affiliates serve as investment adviser to other registered and/or
private investment funds that utilize investment programs similar to that of the
Fund and the Master Fund, and DBIM and/or its affiliates may in the future serve
as an investment adviser or general partner of other registered and/or private
investment companies with similar investment programs.
Subject to the general supervision of the Board and in accordance with the
investment objective, policies, and restrictions of the Master Fund, DBIM
provides the Master Fund with ongoing investment guidance, policy direction, and
monitoring of the Master Fund pursuant to the Investment Management Agreement.
The Investment Management Agreement may be terminated by the Board, by a
majority vote of the members of the Master Fund, or by the Adviser.
The Investment Management Agreement. The Investment Management Agreement
provides that the Adviser will provide (either directly or through its delegate)
portfolio management services, place portfolio transactions in accordance with
the Master Fund's registration statement, assist the Master Fund generally in
the conduct of its business, maintain or cause to be maintained necessary books
and records of the Master Fund, furnish office space for the Master Fund's
officers and employees, and render services on behalf of the Master Fund (not
otherwise provided by third parties) necessary for the Master Fund's operating
as a closed-end investment company. Subject to the Board's oversight, the
Adviser has agreed, among other things, to: make investment decisions and
provide a program of continuous investment management for the Master Fund;
prepare, obtain, evaluate, and make available to the Master Fund research and
statistical data; obtain and evaluate information and advice relating to the
economy, securities markets, and securities; buy, retain, and sell investments,
securities, and cash; purchase and redeem securities of Investment Funds; select
brokers or dealers to execute transactions; provide on an ongoing basis an
evaluation of the Master Fund's portfolio; determine or recommend the extent to
which the Master Fund's portfolio should be invested, and what portion, if any,
should be held uninvested; and maintain or cause to be maintained for the Master
Fund all books, records, reports, and any other information required under the
1940 Act, to the extent that such books, records, and reports, and other
information are not maintained or furnished by another service provider of the
Master Fund.
Under the Investment Management Agreement, the Master Fund is responsible for
its expenses, including fees payable to the Adviser and to any consultants,
including an advisory board, if applicable; legal expenses; auditing and
accounting expenses; telephone, telex, facsimile, postage, and other
communications expenses; taxes and governmental fees; fees, dues, and expenses
incurred by the Master Fund or with respect to the Master Fund in connection
with membership in investment company trade organizations; costs of insurance
relating to fidelity coverage for the Master Fund's officers and employees; fees
and expenses of the Master Fund's administrator and any custodian, subcustodian,
transfer agent, and registrar, or distribution disbursing agent or any other
agent of the Master Fund; payment for portfolio pricing or valuation services to
pricing agents, accountants, bankers, and other specialists, if any; expenses of
preparing certificates and other expenses in connection with the issuance,
offering, distribution, sale, or underwriting of Interests issued by the Master
Fund; expenses of registering or qualifying Interests for sale; expenses
relating to investor and public relations; freight, insurance, and other charges
in
23
connection with the shipment of the Master Fund's portfolio securities;
brokerage commissions or other costs of acquiring or disposing of any portfolio
securities of the Master Fund or of entering into other transactions or
engaging in any investment practices with respect to the Master Fund; expenses
of preparing and distributing prospectuses, SAIs, reports, notices, and
distributions to Members; costs of stationery; costs of Members' and other
meetings; and litigation expenses.
The Adviser is responsible for the payment of the compensation and expenses of
all Directors, officers, and executive employees of the Fund and the Master Fund
(including the Fund's and the Master Fund's interest on payroll taxes, if any)
affiliated with the Adviser and making available, without expense to the Fund
and the Master Fund, the services of such Directors, officers, and employees as
may duly be elected officers of the Fund and the Master Fund, subject to their
individual consent to serve and to any limitations imposed by law, except that
the Fund and the Master Fund are responsible for the fees and expenses
(specifically including travel expenses relating to Fund and the Master Fund
business) of its Independent Directors.
The Investment Management Agreement further provides that the Adviser will not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Master Fund in connection with matters to which such agreement relates,
except a loss resulting from willful misfeasance, bad faith, or gross negligence
on the part of the Adviser in the performance of its duties or from reckless
disregard by the Adviser of its obligations and duties under such agreement. The
Investment Management Agreement also provides that purchase and sale
opportunities, which are suitable for more than one client of the Adviser, will
be allocated by the Adviser in a fair and equitable manner.
The Fund pays an asset-based fee to the Adviser for its management services at
an annual rate of 1.00% of the Fund's month-end net assets, including assets
attributable to the Adviser (or its affiliates) and before giving effect to any
repurchases by the Fund. The fee is accrued monthly and paid quarterly. For the
fiscal year ended March 31, 2006, the Fund paid the Adviser $680,393 for its
services under the Investment Management Agreement. The Adviser has
contractually agrees to a waiver of its fees and/or a reimbursement of the
Fund's expenses to the extent necessary to that the Fund's annualized expenses
do not exceed 1.75% during the period through March 31, 2006. For the period,
the Adviser waived management fees of $113,973 due from the Master Fund.
Pursuant to the Expense Limitation Agreement, the Adviser reimbursed the Fund
$322,273 of certain of its expenses.
In addition, the Operating Agreement provides that as of each March 31, upon any
repurchase of Interests (solely with respect to the Interests repurchased), and
upon termination of the Fund (each, a "Performance Period"), an Incentive
Allocation will be made from the Capital Account of each Member (other than the
Adviser) to the Capital Account of the Adviser. The Incentive Allocation is
equal to 10% of the amount, if any, by which (i) the net profit, if any,
initially allocated to such Member's Capital Account during such Performance
Period in excess of the Hurdle for such Performance Period exceeds (ii) the
positive balance, if any, as of the beginning of such Performance Period in such
Member's Loss Carryforward Account; provided, that the Hurdle will be adjusted
appropriately for additional Capital Contributions or repurchases made by the
relevant Member during such Performance Period. For the six-month period ended
March 31, 2006, the average Hurdle Rate was 3.624%. For the fiscal year ended
March 31, 2006, the Adviser received Incentive Allocations from Members' Capital
Accounts totaling, in the aggregate, $464,280.
The Investment Management Agreement will remain in effect for two years from its
date of execution, and will continue in effect from year to year thereafter, but
only so long as such continuance is specifically approved at least annually by
the affirmative vote of (i) a majority of the members of the Master Fund's Board
who are not parties to the Investment Management Agreement or interested persons
of any party to the Investment Management Agreement, or of any entity regularly
furnishing investment advisory services with respect to the Master Fund pursuant
to an agreement with any party to the Investment Management Agreement, cast in
person at a meeting called for the purpose of voting on such approval, and (ii)
a majority of the Master Fund's Board or the holders of a majority of the
outstanding voting securities of the Master Fund.
In considering the Investment Management Agreement, the Board considered several
factors it believed, in light of the legal advice furnished to it by counsel and
its own business judgment, to be relevant. The factors considered by the Board
in reviewing the Investment Management Agreement included, but were not limited
to the following: (i) the nature and quality of the services to be provided by
the Adviser; (ii) the fairness of the Investment Management Fee paid to the
Adviser under the Investment Management Agreement and the Incentive Allocation
to
24
be made to the Adviser under the Operating Agreement in light of the services
to be provided; (iii) the personnel, operations, financial condition, and
investment management capabilities, methodologies, and performance of the
Adviser; and (iv) the expenses to be borne by Members. In reviewing these
factors, the Board considered, among other things: comparative data with
respect to similar funds, including those for which the investment adviser
earns a performance-based fee; factors relating to the Fund's investments in
Investment Funds; the fact that the Master Fund is a closed-end fund that may
periodically repurchase interests from its members; and other factors bearing
on the quality of the services to be provided to the Master Fund and the cost
to members. The Board considered the appropriateness of the Incentive
Allocation in conjunction with its consideration of the Investment Management
Agreement. The Board discussed the fact that the Incentive Allocation, although
not paid as a term of the Investment Management Agreement, was a component of
the Adviser's compensation, and that accordingly, the Board could refuse to
approve such allocation. Based upon its review, the Board has determined that
the Investment Management Agreement (and the Incentive Allocation) is in the
interest of the Master Fund and its members. Accordingly, after consideration
of the factors described above, and such other factors and information it
considered relevant, the Board, including all of the Independent Directors,
approved the Investment Management Agreement (and the Incentive Allocation).
The Investment Management Agreement may be terminated at any time without
penalty, on sixty days' written notice, by the Master Fund's Board, by vote of
holders of a majority of the outstanding voting securities of the Master Fund,
or by the Adviser. The Investment Management Agreement will automatically be
terminated in the event of its assignment, as defined in the 1940 Act, provided
that an assignment to a corporate successor to all or substantially all of the
Adviser's business or to a wholly owned subsidiary of such corporate successor
which does not result in a change of actual control or management of the
Adviser's business will not be deemed to be an assignment for the purposes of
the Investment Management Agreement.
CONTROL PERSONS
As of April 30, 2005, DBAH Capital LLC ("DBAH"), an affiliate of the Adviser,
owned 44% of the Interests of the Master Fund and 0.31% of the Interests of the
Fund outstanding as of April 30, 2005 and accordingly was deemed to "control"
the Master Fund. As of April 30, 2006, DBAH owned 1.5232% of the interests of
the Master Fund and 0.1582% of the Interests of the Fund outstanding as of April
30, 2006 and is therefore no longer deemed to "control" the Master Fund.
CUSTODIAN AND ADMINISTRATOR
PFPC Trust Company (the "Custodian"), whose principal business address is 8800
Tinicum Boulevard, 3rd Floor, Philadelphia, Pennsylvania 19153, serves as the
custodian of the Fund's, the Offshore Fund's, and the Master Fund's assets
pursuant to a custodian services agreement, under which the Custodian, among
other things: opens and maintains separate accounts in the Fund's, the Offshore
Fund's, and the Master Fund's name; makes cash payments from the accounts for
purposes set forth in the agreement; holds securities in accounts; releases and
delivers or exchanges securities owned by the Fund, the Offshore Fund, and the
Master Fund as set forth in the agreement; collects and receives for the account
of the Fund, the Offshore Fund, and the Master Fund all income, property, and
similar items; settles purchased securities upon receipt; and furnishes to the
Fund, the Offshore Fund, and the Master Fund periodic and special reports,
statements, and other information. The Custodian is an affiliate of PFPC, the
Fund's, the Offshore Fund's, and the Master Fund's administrator and the Fund's
and the Master Fund's transfer and distribution disbursing agent.
PFPC, whose principal business address is 400 Bellevue Parkway, Wilmington,
Delaware 19809, has responsibility for providing administrative services and
assisting the Fund, the Offshore Fund, and the Master Fund with operational
needs pursuant to separate administration agreements with each of the Fund, the
Offshore Fund, and the Master Fund (the "Administration Agreements"). Pursuant
to the Administration Agreements, PFPC provides the following services, among
others: journalizing investment, capital, and income and expense activities;
verifying investment instructions before directing cash flows, and confirming
receipt of money at Investment Funds in accordance with PFPC's internal
procedures; maintaining individual ledgers for investment securities;
maintaining historical tax lots for each security; recording and reconciling
corporate action activity and all other capital changes; reconciling cash and
investment balances of the Fund and the Master Fund with the Fund's and the
Master Fund's custodian and providing information about available cash balances;
calculating contractual expenses, including
25
Investment Management Fees and Incentive Allocations; preparing financial
statements; monitoring expense accruals; controlling all disbursements and
authorizing disbursements from the Fund's and the Master Fund's account with
the custodian; calculating capital gains and losses; determining net investment
income; assisting with the preparation and distribution of portfolio management
reports; obtaining net asset values from Investment Funds and calculating net
asset values in accordance with this Prospectus and the Operating Agreement;
and preparing regulatory filings.
In consideration for these services, the Master Fund pays, and the Fund as an
indirect investor in the Master Fund bears, PFPC a fee at the annual rate of
0.08% of the Master Fund's month-end net assets. For the fiscal year ended March
31, 2006, the Fund paid PFPC $210,361 for its services under the Administration
Agreement.
PFPC also serves as the Fund's and the Master Fund's transfer and distribution
disbursing agent, and has agreed to provide the following services, among
others: maintaining the register of Members and entering on such register all
issues, transfers, and repurchases of Interests; calculating repurchase prices;
allocating income, expenses, gains, and losses to Members' Capital Accounts;
preparing and mailing tax forms; preparing and distributing interim tax reports;
mailing prospectuses; processing payments; and confirming account activity. The
Fund compensates PFPC for its services under the Administration Agreements based
on the Fund's proportional investment in the Master Fund.
The Fund and the Master Fund also have retained Investment Company Capital
Corporation ("ICCC"), an affiliate of DBIM, to provide board-related
administration services pursuant to a services agreement. Under this agreement,
ICCC, among other things: drafts board meeting agendas and resolutions; prepares
and mails board materials; communicates with the Directors; and attends board
meetings and drafts board meeting minutes. For the fiscal year ended March 31,
2006, the Fund paid ICCC $37,500 for its services under the services agreement.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP, whose principal business address is 300 Madison
Avenue, New York, New York 10017, has been selected as the independent
registered public accounting firm for the Fund and the Master Fund and in such
capacity will audit the Fund's and the Master Fund's annual financial statements
and financial highlights.
The Fund will furnish, without charge, a copy of its Annual and Semi-Annual
Reports to Members upon request to the Fund. Members may write to DWS Scudder
Distributors, Inc. at 222 South Riverside Plaza, Attn: Correspondence 27th
Floor, Chicago, IL 60606-1048, or call DWS Scudder Distributors, Inc. at
1-888-262-0695.
DISTRIBUTOR
The Distributor, DWS Scudder Distributors, Inc., 222 South Riverside Plaza,
Attn: Correspondence 27th Floor, Chicago, IL 60606-1048, will act as distributor
of the Interests during the continuous offering of the Interests pursuant to the
Underwriting Agreement. Pursuant to the Underwriting Agreement, the Distributor
bears all of its expenses of providing distribution services as described under
that agreement. The Fund will assume and pay all charges and expenses of its
operations not specifically assumed or otherwise to be provided by the
Distributor under the Underwriting Agreement. The Fund will pay (or will enter
into arrangements providing that others will pay), among other things: (i) all
fees and expenses in connection with the registration of the Fund and the
Interests under the United States securities laws and the registration and
qualification of Interests for sale in the various jurisdictions in which the
Fund shall determine it advisable to qualify such Interests for sale; and (ii)
the cost of preparing and printing of sufficient copies of the Fund's
prospectus, SAI, and any other sales material (and any supplements or amendments
thereto).
The Underwriting Agreement continues in effect for two years from the date of
its execution and from year to year thereafter, so long as such continuance is
approved at least annually by a vote of the Board, including the Independent
Directors who have no direct or indirect financial interest in the Underwriting
Agreement. The Underwriting Agreement may be terminated at any time without the
payment of any penalty on sixty days' written notice by the Distributor or by
the Fund by (i) a vote of a majority of the Board, and a majority of the
Independent Directors who have no direct or indirect financial interest in the
Underwriting Agreement, or (ii) a "majority of the
26
outstanding voting securities" of the Fund, as defined under the 1940 Act. The
Underwriting Agreement will automatically be terminated in the event of its
assignment, as defined in the 1940 Act, provided that an assignment to a
corporate successor to all or substantially all of the Distributor's business
or to a wholly owned subsidiary of such corporate successor which does not
result in a change of actual control or management of the Distributor's
business will not be deemed to be an assignment for the purposes of the
Underwriting Agreement.
EXPENSE LIMITATION AGREEMENT
The Adviser has entered into an agreement with the Fund and the Master Fund
whereby it has contractually agreed to waive and/or reimburse the Fund's
expenses to the extent necessary to ensure that the Fund's annualized expenses
(excluding the Incentive Allocation, if any) will not exceed 1.75%. The initial
term of the Expense Limitation Agreement ended on March 31, 2005 and has been
renewed for additional one-year terms now ending on March 31, 2007. Thereafter,
the Expense Limitation Agreement is automatically renewed for each fiscal year
unless the Adviser provides written notice to the Fund and the Master Fund of
the termination of the Expense Limitation Agreement at least 30 days prior to
the end of the then-current term.
For the fiscal year ended March 31, 2006, the Adviser waived $113,973 of its
management fees due from the Master Fund. Pursuant to the Expense Limitation
Agreement, the Adviser reimbursed the Fund $322,273 of certain of its expenses.
CALCULATION OF FEES
If, consistent with the provisions of the Operating Agreement and the Fund's
currently effective registration statement, the determination of net asset value
is suspended or net asset value is otherwise not calculated on a particular day,
then for purposes of calculating and accruing any fee payable by the Fund that
is based on the Fund's net asset value, such fee will be computed on the basis
of the value of the Fund's net assets as last calculated.
LEGAL COUNSEL
Sidley Austin LLP, 787 Seventh Avenue, New York, New York 10019, acts as legal
counsel to the Fund and the Master Fund. Walkers, Walker House, P.O. Box 265GT,
Mary Street, George Town, Grand Cayman, Cayman Islands, acts as legal counsel to
the Offshore Fund.
PORTFOLIO TRANSACTIONS
Many of the Master Fund's transactions are effected directly with Investment
Funds and such transactions may not be subject to brokerage commissions. In some
instances, however, the Master Fund may incur expenses in connection with
effecting its portfolio transactions, including the payment of brokerage
commissions or fees payable to Investment Funds or parties acting on behalf of
or at the direction of Investment Funds. Portfolio transaction orders may be
directed to any broker, including, to the extent and in the manner permitted by
applicable law, the Distributor or its affiliates, and other affiliates of the
Fund.
For the Master Fund's fiscal year ended March 31, 2006, the Master Fund did not
pay brokerage commissions.
PROXY VOTING POLICIES AND PROCEDURES
The Fund invests substantially all of its assets in the Offshore Fund, which in
turn invests in the Master Fund, which in turn invests in the securities of
Investment Funds, which are privately placed investment vehicles, typically
referred to as "hedge funds." These securities do not typically convey
traditional voting rights to the holder and the occurrence of corporate
governance or other notices for this type of investment is substantially less
than that encountered in connection with registered equity securities. On
occasion, however, the Adviser and/or the Master Fund may receive notices from
the Investment Funds seeking the consent of holders in order to materially
change certain rights within the structure of the security itself or change
material terms of the Investment Fund's articles of association, limited
partnership agreement, limited liability company operating agreement, or similar
agreement with investors. To the extent that the Master Fund receives notices or
proxies from Investment Funds (or receives proxy statements or similar notices
in connection with any other portfolio securities), the Master Fund has
delegated proxy
27
voting responsibilities with respect to the Master Fund's portfolio securities
to the Adviser, subject to the Board's general oversight and with the direction
that proxies should be voted consistent with the Master Fund's best economic
interests. The Adviser has adopted its own Proxy Voting Policies and Procedures
("Policies") for this purpose. The Policies address, among other things,
conflicts of interest that may arise between the interests of the Master Fund,
and the interests of the Adviser and its affiliates, including the Master
Fund's principal underwriter.
The Policies describe the way in which the Adviser resolves conflicts of
interest. To resolve conflicts, the Adviser, under normal circumstances, votes
proxies in accordance with its guidelines. If the Adviser departs from the
Policies with respect to a particular proxy or if the Policies do not
specifically address a certain proxy proposal, a committee established by the
Adviser will vote the proxy. Before voting any such proxy, however, the
committee will exclude from the voting discussions and determinations any member
who is involved in or aware of a material conflict of interest. If, after
excluding any and all such members, there are fewer than three voting members
remaining, the Adviser will engage an independent third party to vote the proxy
or follow the proxy voting recommendations of an independent third party.
Under certain circumstances, the Adviser may not be able to vote proxies or may
find that the expected economic costs from voting outweigh the benefits
associated with voting. For example, the Adviser may not vote proxies on certain
foreign securities due to local restrictions or customs. The Adviser generally
does not vote proxies on securities subject to share blocking restrictions.
Each of the Fund and the Master Fund files Form N-PX, with its complete proxy
voting record for the twelve months ended June 30, no later than August 31 of
each year. Once filed, the Fund's and the Master Fund's Form N-PX are available:
(i) without charge, upon request, by calling the Fund at 1-888-262-0695; or (ii)
by visiting the SEC's website at www.sec.gov.
PRIVACY STATEMENT
This privacy statement is issued by the Fund, the Master Fund, the Adviser, and
their affiliates. The Fund, the Master Fund, the Adviser, and their affiliates
consider privacy fundamental to their investor relationships and adhere to the
policies and practices described below to protect current and former investors'
information.
Internal policies are in place to protect confidentiality, while allowing
investor needs to be served. Only employees of Deutsche Bank who need to do so
in carrying out their job responsibilities may access investor information. The
Fund, the Master Fund, the Adviser, and their affiliates maintain physical,
electronic, and procedural safeguards that comply with federal standards to
protect confidentiality. These safeguards extend to all forms of interaction
with the Fund, the Master Fund, the Adviser, and their affiliates, including the
Internet. The Fund, the Master Fund, the Adviser, and their affiliates never
sell customer lists or individual client information.
In the normal course of business, investors give the Fund, the Master Fund, and
the Adviser nonpublic personal information on subscription documents and other
forms, on websites of the Fund, the Master Fund, or the Adviser, and through
transactions with affiliates. Examples of the nonpublic personal information
collected are name, address, social security number or taxpayer identification
number, transactions, and balance information. To be able to serve investors,
certain of this client information is shared with affiliated and nonaffiliated
third party service providers such as transfer agents, lawyers, custodians,
administrators, and broker-dealers, to assist in processing transactions,
servicing investor accounts, and operating the Fund and the Master Fund. The
Administrator may also share such information with the Adviser. The
organizations described above that receive client information may only use it
for the purpose designated by the Fund, the Master Fund, the Adviser, or their
affiliates.
The Fund, the Master Fund, the Adviser, and their affiliates may also disclose
nonpublic personal information about investors to other parties as required or
permitted by law. For example, the Fund, the Master Fund, the Adviser, and their
affiliates may provide or may be required to provide information to government
entities or regulatory bodies in response to requests for information or
subpoenas, to private litigants in certain circumstances, to law enforcement
authorities, or any time believed necessary to protect the firm.
Investors with questions on this policy may contact the Adviser at (212)
454-1879.
28
FINANCIAL STATEMENTS
The Financial Statements and the report of the independent registered public
accounting firm thereon, appearing in the Fund's Annual Report for the period
ended March 31, 2006 are incorporated by reference in this Statement of
Additional Information. The Fund's Annual and Semi-Annual Reports are available
upon request and free of charge by contacting DWS Scudder Distributors, Inc. at
222 South Riverside Plaza, Attn: Correspondence 27th Floor, Chicago, IL
60606-1048; or by calling DWS Scudder Distributors, Inc. at 1-888-295-0695.
29
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements:
Included in Part A: Consolidated Financial Highlights
Included in Part B: The following financial statements are
incorporated by reference to the Registrant's Annual report for the
period ending March 31, 2006, filed with the SEC on June 9, 2006.
(i) Report of Independent Registered Public Accounting Firm,
dated May 22, 2006;
(ii) Consolidated Statement of Assets, Liabilities and Member's
Capital, dated March 31, 2006;
(iii) Consolidated Statement of Operations, dated March 31, 2006;
(iv) Consolidated Statement of Changes in Member's Capital, dated
March 31, 2006;
(v) Consolidated Statement of Cash Flows, dated March 31, 2006;
and
(vi) Notes to Consolidated Financial Statements, dated March 31,
2006.
(2) Exhibits:
(a) (i) Amended Certificate of Formation of Limited Liability
Company.(1)
(ii) Form of Amended and Restated Limited Liability Company
Operating Agreement.(2)
(b) Not applicable.
(c) Not applicable.
(d) See Item 24 (2)(a)(2).
(e) Not applicable.
(f) Not applicable.
(g) (i) Not applicable.
(h) (i) Form of Underwriting and Distribution Services Agreement
between Scudder Distributors, Inc. and the Registrant.(3)
---------------------
(1) Previously filed as an Exhibit to the Registrant's Pre-Effective Amendment
No. 2 to the registration statement (Reg. Nos. 333-111561, 811-21480) on July
23, 2004.
(2) Included as Appendix B to the Prospectus, which is Part A of this
registration statement.
(3) Previously filed as an Exhibit to the Registrant's Pre-Effective Amendment
No. 3 to the registration statement
(ii) Form of Selling Group Agreement.(4)
(i) Not applicable.
(j) Form of Custody Agreement between PFPC Trust Company and the
Registrant.(4)
(i) a) Form of Administration and Accounting Services Agreement
between PFPC Inc. and the Registrant. (3)
(ii) Form of Services Agreement between Investment Company Capital
Corp. and the Registrant.(4)
(iii) Form of Escrow Agreement between PFPC, Inc. and the
Registrant.(4)
(iv) Form of Fee Waiver/Expense Reimbursement Agreement. (3)
(k) Opinion and Consent of Counsel. (3)
(l) Opinion and Consent of Tax Counsel. (3)
(m) Not applicable.
(n) Not applicable.
(o) Not applicable.
(p) Form of Subscription Agent Agreement for Initial Capital. (3)
(q) Not applicable.
(r) (i) Code of Ethics of the Registrant.(4)
(ii) Code of Ethics of the Adviser and Distributor.(4)
(iii) Code of Ethics for Senior Officers of the Registrant.(4)
ITEM 25. MARKETING ARRANGEMENTS
See the Underwriting and Distribution Services Agreement to be filed
as Exhibit (h)(1) to this Registration Statement.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Not applicable.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
-------------------------------------------------------------------------------
(Reg. Nos. 333-111561, 811-21480) on September 14, 2004 (the "Pre-Effective
Amendment No. 3").
(4) Previously filed as an Exhibit to the Registrant's initial registration
statement (Reg. Nos. 333-111561, 811-21480) on December 24, 2003 (the "Initial
Registration Statement").
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
As of March 31, 2006, the Fund had the following number of record
owners of Interests:
Title of Class Number of Record Holders
-------------- ------------------------
Limited Liability Company Interests 364
ITEM 29. INDEMNIFICATION
A policy of insurance covering DB Investment Managers, Inc. its
affiliates, and all of the registered investment companies advised by DB
Investment Managers, Inc. will be obtained to insure the Registrant's trustees
and officers and others against liability arising by reason of an alleged
breach of duty caused by any negligent act, error or accidental omission in the
scope of their duties. Article III, Section 3.7 of the Registrant's Operating
Agreement is as follows:
(a) To the fullest extent permitted by law, the Fund shall, subject to
Section 3.7(b) hereof, indemnify each Director (including for this
purpose their executors, heirs, assigns, successors, or other legal
representatives), the Investment Adviser and Tax Matters Member
(including for this purpose each affiliate, shareholder, partner, member,
officer, director, principal, employee, or agent of the Investment
Adviser and the Tax Matters Member) and the executors, heirs, assigns,
successors, or other legal representatives of each of the foregoing, and
of any person who controls or is under common control, or otherwise
affiliated, with the Investment Adviser or the Tax Matters Member (and
their executors, heirs, assigns, successors, or other legal
representatives) against all losses, claims, damages, liabilities, costs,
and expenses, including, but not limited to, amounts paid in satisfaction
of judgments, in compromise, or as fines or penalties, and reasonable
counsel fees, incurred in connection with the defense or disposition of
any action, suit, investigation, or other proceeding, whether civil or
criminal, before any judicial, arbitral, administrative, or legislative
body, in which such indemnitee may be or may have been involved as a
party or otherwise, or with which such indemnitee may be or may have been
threatened, while in office or thereafter, by reason of being or having
been a Director, Investment Adviser, or the Tax Matters Member, as the
case may be, of the Fund or the past or present performance of services
to the Fund by such indemnitee, except to the extent such loss, claim,
damage, liability, cost, or expense shall have been finally determined in
a decision on the merits in any such action, suit, investigation, or
other proceeding to have been incurred or suffered by such indemnitee by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of such indemnitee's
office. The rights of indemnification provided under this Section 3.7
shall not be construed so as to provide for indemnification of an
indemnitee for any liability (including liability under federal
securities laws which, under certain circumstances, impose liability even
on persons that act in good faith) to the extent (but only to the extent)
that such indemnification would be in violation of applicable law, but
shall be construed so as to effectuate the applicable provisions of this
Section 3.7 to the fullest extent permitted by law.
(b) Expenses, including reasonable counsel fees, so incurred by any such
indemnitee (but excluding amounts paid in satisfaction of judgments, in
compromise, or as fines or penalties), may be paid from time to time by
the Fund in advance of the final disposition of any such action, suit,
investigation, or proceeding upon receipt of an undertaking by or on
behalf of such indemnitee to repay to the Fund amounts so paid if it
shall ultimately be determined that indemnification of such expenses is
not authorized under Section 3.7(a) hereof; provided, however, that: (i)
such indemnitee shall provide security for such undertaking, (ii) the
Fund shall be insured by or on behalf of such indemnitee against losses
arising by reason of such
indemnitee's failure to fulfill his or its undertaking; or (iii) a
majority of the Directors (excluding any Director who is seeking
advancement of expenses hereunder or is or has been a party to any
action, suit, investigation, or proceeding involving claims similar to
those involved in the action, suit, investigation, or proceeding giving
rise to a claim for advancement of expenses hereunder) or independent
legal counsel in a written opinion shall determine based on a review of
readily available facts (as opposed to a full trial-type inquiry) that
there is reason to believe such indemnitee ultimately will be entitled to
indemnification.
(c) As to the disposition of any action, suit, investigation, or
proceeding (whether by a compromise payment, pursuant to a consent
decree, or otherwise) without an adjudication or a decision on the merits
by a court of competent jurisdiction, or by any other body before which
the proceeding shall have been brought, that an indemnitee is liable to
the Fund or its Members by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the
conduct of such indemnitee's office, indemnification shall be provided
pursuant to Section 3.7(a) hereof if: (i) approved as in the best
interests of the Fund by vote of a majority of the Directors (excluding
any Director who is seeking indemnification hereunder or is or has been a
party to any action, suit, investigation, or proceeding involving claims
similar to those involved in the action, suit, investigation, or
proceeding giving rise to a claim for advancement of expenses hereunder)
upon a determination based upon a review of readily available facts (as
opposed to a full trial-type inquiry) that such indemnitee acted in good
faith and in the reasonable belief that such actions were in the best
interests of the Fund and that such indemnitee is not liable to the Fund
or its Members by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct
of such indemnitee's office; or (ii) the Directors secure a written
opinion of independent legal counsel based upon a review of readily
available facts (as opposed to a full trial-type inquiry) to the effect
that such indemnitee acted in good faith and in the reasonable belief
that such actions were in the best interests of the Fund and that such
indemnitee is not liable to the Fund or its Members by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of such indemnitee's office.
(d) Any indemnification or advancement of expenses made pursuant to this
Section 3.7 shall not prevent the recovery from any indemnitee of any
such amount if such indemnitee subsequently shall be determined in a
final decision on the merits in a court of competent jurisdiction in any
action, suit, investigation, or proceeding involving the liability or
expense that gave rise to such indemnification or advancement of expenses
to be liable to the Fund or its Members by reason of willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties involved
in the conduct of such indemnitee's office. In any suit brought by an
indemnitee to enforce a right to indemnification under this Section 3.7
it shall be a defense that, and in any suit in the name of the Fund to
recover any indemnification or advancement of expenses made pursuant to
this Section 3.7 the Fund shall be entitled to recover such expenses upon
a final adjudication that, the indemnitee has not met the applicable
standard of conduct set forth in this Section 3.7. In any such suit
brought to enforce a right to indemnification or to recover any
indemnification or advancement of expenses made pursuant to this Section
3.7, the burden of proving that the indemnitee is not entitled to be
indemnified, or to any indemnification or advancement of expenses, under
this Section 3.7 shall be on the Fund (or any Member acting derivatively
or otherwise on behalf of the Fund or its Members).
(e) An indemnitee may not satisfy any right of indemnification or
advancement of expenses granted in this Section 3.7 as to which he, she,
or it may otherwise be entitled except out of the assets of the Fund, and
no Member shall be personally liable with respect to any such claim for
indemnification or advancement of expenses.
(f) The rights of indemnification provided hereunder shall not be
exclusive of or affect any other rights to which any person may be
entitled by contract or otherwise under law. Nothing contained in
this Section 3.7 shall affect the power of the Fund to purchase and
maintain liability insurance on behalf of any Director or other
person.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF THE ADVISER
a. DB Investment Managers, Inc. ("DBIM"), a registered investment
adviser, serves as the investment adviser to DB Hedge Strategies
Fund LLC and The Topiary Master Fund for Benefit Plan Investors
(BPI) LLC and other institutional and privately managed accounts.
b. Business and other connections of the directors and officers of
DBIM are set forth below.
Name and Current Position with DB Investment Managers, Inc. Business and Other Connections During the Past 2 Fiscal Years
Steven L. Bossi Head of Multi-Manager Hedge Fund Team, Portfolio Manager and
Managing Director Hedge Fund Analyst for Multi-Manager Funds, DB Absolute Return
Member of Investment Committee and Fund of Funds Investment Strategies; Formerly, President and Chief Investment Officer
Committee of a family office, where he actively managed hedge funds
Hans DeWitte Global Business Area Controller, DB Absolute Return
Director Strategies; Formerly, Financial Services Senior Manager, KPMG
Chief Financial Officer Consulting Inc.
Robert Dunleavy Head of Middle Office/Operations, DB Absolute Return Strategies
Managing Director
Tanya E. Ghaleb-Harter Hedge Fund Strategist and Asset Allocation Strategist for
Vice President Multi-Manager Funds, DB Absolute Return Strategies
Member of Fund of Funds Investment Committee
Marielena Glassman Treasurer, Principal Accounting Officer and Financial Officer,
Managing Director DB Hedge Strategies Fund LLC, The Topiary Fund for Benefit
Member of Investment Committee Plan Investors (BPI) LLC, The Topiary Master Fund for Benefit
Plan Investors (BPI) LLC; Global Chief Administrative Officer,
DB Absolute Return Strategies, International Equities Analyst
and Business Manager for Private Bank Asset Allocation
Products, Deutsche Asset Management
Anthony Conte Formerly, Manager for Capital Markets Regulatory Advisory
Chief Compliance Officer Services, PricewaterhouseCoopers LLP
John H. Kim Director, Deutsche Asset Management
Director
Senior Counsel
Dr. Ray M. Lamm, Jr. Employee, Deutsche Bank Trust Company - Americas; Chief
Member of Fund of Funds Investment Committee Investment Strategist, Deutsche Bank Private Banking
Raymond C. Nolte Director, DB Hedge Strategies Fund LLC, The Topiary Fund for
Consultant to DB Absolute Return Strategies and DB Investment Benefit Plan Investors (BPI) LLC, The Topiary Master Fund for
Managers, Inc. Benefit Plan Investors (BPI) LLC
Robert C. Parauda Portfolio Manager and Hedge Fund Analyst for Multi-Manager
Vice President Funds, DB Absolute Return Strategies
Member of Fund of Funds Investment Committee
Richard Goldsmith Global Head, DB Absolute Return Strategies
Managing Director and C.E.O.
Chairperson of Investment Committee
David Zobel Employee of Deutsche Asset Management
Managing Director Australia Limited; Asia Pacific Regional Head, DB Absolute
Member of Fund of Funds Investment Committee Return Strategies
ITEM 31 LOCATION OF ACCOUNTS AND RECORDS
Accounts and records of the Fund are maintained at the Fund's office at
345 Park Avenue, New York, New York, 10154, or at the offices of PFPC Inc., at
400 Bellevue Parkway, Wilmington, Delaware, 19809, in PFPC's capacity as
administrator, transfer agent, and dividend disbursing agent of the Fund.
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
1. Not applicable.
2. Not applicable.
3. Not applicable.
4. The Registrant undertakes
(a) To file during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933; (ii) to reflect in the prospectus any facts
or events arising after the effective date of the registration
statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental
change in the information set forth in the registration statement;
and (iii) to
include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(b). That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(c). To remove from registration by means of post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
5. Not applicable.
6. The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of an oral or written request, any Statement of Additional Information.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended
(the "Securities Act"), and the Investment Company Act of 1940, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and the State of New York on the 26th day of June, 2006.
THE TOPIARY FUND FOR BENEFIT PLAN
INVESTORS (BPI) LLC
By: /s/ Pamela Kiernan
-------------------------------
Name: Pamela Kiernan
Title: President
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following person in the capacities and on the
date indicated.
Signature Title Date
----------------------------------------- ------------------------------------------------------ -----------------
/s/ * President June 26, 2006
-----------------------------------------
Pamela Kiernan
/s/ ** Treasurer, Principal Financial Officer and Accounting June 26, 2006
----------------------------------------- Officer
Marielena Glassman
/s/ * Director June 26, 2006
-----------------------------------------
Raymond C. Nolte
/s/ * Director June 26, 2006
-----------------------------------------
Edward T. Tokar
/s/ * Director June 26, 2006
-----------------------------------------
Louis C. Citron
/s/ * Director June 26, 2006
-----------------------------------------
Nolan T. Altman
*and** By: /s/ John A. MacKinnon
---------------------
John A. MacKinnon,
as attorney-in-fact
--------------------
* Pursuant to power of attorney filed with the Securities and Exchange
Commission (the "SEC") on July 23, 2004 as part of the Registrant's
Pre-Effective Amendment No. 3 to the registration statement filed under the
1940 Act on Form N-2, as filed on July 23, 2004.
** Pursuant to power of attorney filed with the Securities and Exchange
Commission (the "SEC") on June 21, 2005 as part of the Registrant's
Post-Effective Amendment No. 1 to the registration statement filed under the
1940 Act on Form N-2, as filed on June 21, 2005.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended
(the "Securities Act"), and the Investment Company Act of 1940, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and the State of New York on the 26th day of June, 2006.
THE TOPIARY FUND FOR BENEFIT PLAN
INVESTORS (BPI) LLC
By: /s/ Pamela Kiernan
-------------------------------
Name: Pamela Kiernan
Title: President
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following person in the capacities and on the
date indicated.
Signature Title Date
----------------------------------------- ------------------------------------------------------ -----------------
/s/ * President June 26, 2006
-----------------------------------------
Pamela Kiernan
/s/ ** Treasurer, Principal Financial Officer and Accounting June 26, 2006
----------------------------------------- Officer
Marielena Glassman
/s/ * Director June 26, 2006
-----------------------------------------
Raymond C. Nolte
/s/ * Director June 26, 2006
-----------------------------------------
Edward T. Tokar
/s/ * Director June 26, 2006
-----------------------------------------
Louis C. Citron
/s/ * Director June 26, 2006
-----------------------------------------
Nolan T. Altman
*and** By: /s/ John A. MacKinnon
---------------------
John A. MacKinnon,
as attorney-in-fact
--------------------
* Pursuant to power of attorney filed with the Securities and Exchange
Commission (the "SEC") on July 23, 2004 as part of the Registrant's
Pre-Effective Amendment No. 3 to the registration statement filed under the
1940 Act on Form N-2, as filed on July 23, 2004.
** Pursuant to power of attorney filed with the Securities and Exchange
Commission (the "SEC") on June 21, 2005 as part of the Registrant's
Post-Effective Amendment No. 1 to the registration statement filed under the
1940 Act on Form N-2, as filed on June 21, 2005.