As filed with the U.S. Securities and Exchange Commission on July 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. 4
|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
25, 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 26, 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......................................................10
FINANCIAL HIGHLIGHTS..........................................................12
USE OF PROCEEDS...............................................................13
THE FUND'S STRUCTURE..........................................................13
INVESTMENT OBJECTIVES, METHODOLOGY, AND POLICIES..............................14
THE HEDGE FUND UNIVERSE.......................................................18
PRINCIPAL RISK FACTORS RELATING TO THE FUND'S STRUCTURE.......................22
PRINCIPAL RISK FACTORS, TYPES OF INVESTMENTS, AND INVESTMENT STRATEGIES OF
THE INVESTMENT FUNDS..........................................................28
INVESTOR SUITABILITY..........................................................33
MANAGEMENT OF THE FUND........................................................34
FEES, ALLOCATIONS, AND EXPENSES...............................................36
PORTFOLIO TRANSACTIONS........................................................38
VOTING........................................................................39
CONFLICTS OF INTEREST.........................................................40
OUTSTANDING SECURITIES........................................................44
CONTROL PERSONS...............................................................44
ELIGIBLE INVESTORS............................................................44
SUBSCRIPTION FOR INTERESTS....................................................44
REPURCHASES OF INTERESTS......................................................45
TRANSFERS OF INTERESTS........................................................48
NET ASSET VALUATION...........................................................49
CAPITAL ACCOUNTS AND ALLOCATIONS..............................................51
TAXES.........................................................................52
INVESTMENT BY EMPLOYEE BENEFIT PLANS..........................................58
SUMMARY OF THE OPERATING AGREEMENT............................................59
GENERAL INFORMATION...........................................................61
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 Objective The Fund's, the Offshore Fund's, and the Master Fund's
and Strategies investment objective is to seek to generate long-term
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 Administrator; the PFPC, Inc. ("PFPC") serves as the administrator of the
Transfer Agent Fund, the Offshore Fund, and the Master Fund. The
Master Fund compensates PFPC for providing
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 assets,
including assets attributable to the Adviser (or its
affiliates). The Investment
5
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 No Member will have the right to require the Fund to
of 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 Profit The net profits or net losses of the Fund (including,
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 Member's
investment percentage is determined by dividing as of
the start of a fiscal period
7
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 Investors Each prospective investor (and Members who subscribe
for 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 Suitability An investment in the Fund involves a considerable
amount 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 Interests The Fund may accept both initial and additional
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
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
8
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 Other Because the Master Fund, in which the Fund invests
Tax-Exempt Entities substantially all of its investable assets through the
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 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 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 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.
9
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
10
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)..... $42 $91 $142 $282
(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.
11
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) (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; however expenses of the Master Fund are included.
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.
12
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.
13
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
14
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-
15
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
16
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.
17
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 |
| | | | | Long/Short | | |
| | | | | Equity | | |
----------------- ----------------- ----------------- -----------------
| | | |
| | | |
| | | |
-------------- -------------- --------------- ---------------
| Convertible | | Multi-Event | | | | |
| Arbitrage | | | | Opportunistic | | Discretionary |
| | --------------| | | | |
-------------- | --------------- ---------------
| -------------- | | |
|--------->| Multi- |<----------| | |
| | Stragegy | | | |
--------------- --------------| --------------- --------------- ---------------
| 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
18
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
19
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.
20
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
21
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
22
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,
23
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
24
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
25
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
26
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
27
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
28
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.
29
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
30
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
31
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.
32
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.
33
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
34
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
35
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).
36
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 $178,419.
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.
37
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.
38
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.
39
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.
40
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.
41
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.
42
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
43
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
44
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.
45
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
46
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.
47
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
48
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
49
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.
50
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
51
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.
52
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,
53
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
54
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
55
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.
56
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.
57
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
58
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.
59
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.
60
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.
61
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
62
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.
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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
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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.
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-----------------------------------
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.
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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;
B-20
(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.
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-----------------------------------
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 26, 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 26, 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.
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).
3
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.
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
4
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.
---------------------------------- -------------- ------------ ------------------------ -------------- ---------------------
Number of
Term of Portfolios
Position(s) Office(1) in Fund
Held with and Length Principal Complex
Fund and of Time Occupation(s) During Overseen by Other Directorships
Name, Address, and Birth Date Master Fund Served(2) 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
---------------------------------- -------------- ------------ ------------------------ -------------- ---------------------
Number of
Term of Portfolios
Position(s) Office(1) in Fund
Held with and Length Principal Complex
Fund and of Time Occupation(s) During Overseen by Other Directorships
Name, Address, and Birth Date Master Fund Served(2) 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 3 Director, Gabelli
c/o The Topiary Fund for Benefit inception Director of Dividend and Income
Plan Investors (BPI) LLC Investments, Beacon Trust (2003 to
345 Park Avenue Trust Company (2004 to present), Trustee,
New York, New York 10154 present), Chief Levco Series Trust
(6/12/47) Executive Officer - Mutual Funds (2
Investments, Allied portfolios)
Capital Management LLC (Portfolio 1: 2001
(registered investment to present -
adviser; wholly owned Portfolio 1
subsidiary of liquidated as of
Honeywell) (1998 to May 1, 2006 but not
2004) and Vice deregistered);
President - Portfolio 2: 2002
Investments, Honeywell to 2003);
International, Inc. Director, Allied
(advanced technology Capital Management
and manufacturer) LLC (1998 to 2004).
(1977 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
and Master Fund Last Five Years
---------------------------------------- -------------------------------------- --------------------------------------
Pamela Kiernan President Chief Operating Officer, DB Absolute
DB Absolute Return Strategies Return Strategies (2005 to
345 Park Avenue, 24th Floor present). Formerly, Chief Operating
New York, New York 10154 Officer - Americas, DB Advisors LLC
(9/16/68) (2004); Chief Operations Officer -
America, Deutsche Bank Global Equities
(2002 to 2004); Business Management -
Trading, Deutsche Bank Global Equities
---------------------------------------- -------------------------------------- --------------------------------------
15
---------------------------------------- -------------------------------------- --------------------------------------
Name, Address, and Birth Date Positions Held with Fund Principal Occupation(s) During the
and Master Fund Last Five Years
---------------------------------------- -------------------------------------- --------------------------------------
(1997 to 2002).
---------------------------------------- -------------------------------------- --------------------------------------
Joshua Kestler Vice President Head of Product Structuring, DB
The Topiary Fund for Benefit Plan Absolute Return Strategies (2004 to
Investors (BPI) LLC present); Associate, Investment
25 DeForest Ave. Management Group, Schulte Roth &
Summit, NJ 07901 Zabel LLP (law firm) (2001-2004).
(4/27/75)
---------------------------------------- -------------------------------------- --------------------------------------
Marielena Glassman Treasurer, Principal Financial Chief Administration Officer, DB
The Topiary Fund for Benefit Plan Officer and Accounting Officer Absolute Return Strategies (2002 to
Investors (BPI) LLC present). Formerly Global Head of
25 DeForest Ave. Business Management, Deutsche Asset
Summit, NJ 07901 Management (1990 to 2002): Co-Head
(6/5/63) of Global Portfolio Management
product, Bankers Trust Private
Banking (1996-1999).
---------------------------------------- -------------------------------------- --------------------------------------
Neil Novembre Assistant Treasurer Head of Funds Administration (2002
The Topiary Fund for Benefit Plan to present); Senior
Investors (BPI) LLC Associate/Manager,
25 DeForest Ave. PricewaterhouseCoopers (2000 to
Summit, NJ 07901 2002); Senior Accountant, Rothstein,
(6/18/73) Kass & Company (1996 to 2000)
---------------------------------------- -------------------------------------- --------------------------------------
Anthony Conte Assistant Treasurer Head of Compliance, DB Absolute
Deutsche Asset Management Return Strategies (2003 to present);
345 Park Avenue Head of Business Risk, DB Absolute
New York, NY 10154 Return Strategies (2001 to present);
(3/28/69) Head of Asset Management Compliance,
CIBC World Markets Corp. (1999 to
2001).
---------------------------------------- -------------------------------------- --------------------------------------
John H. Kim Secretary Director and Senior Counsel,
Deutsche Asset Management Deutsche Asset Management (asset
345 Park Avenue, 16th Floor management division of Deutsche
New York, NY 10154 Bank) (2001 to present); Sr.
(1/9/71) Associate, Wilkie Farr & Gallagher
(law firm) (1995 to 2001).
---------------------------------------- -------------------------------------- --------------------------------------
John Millette Assistant Secretary Director, Deutsche Asset Management
Deutsche Asset Management (legal department) (2003 to
Two International Place present); Vice President, Deutsche
Boston, MA 02110 Asset 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
New York, NY 10154 to present and formerly Head of
(8/02/62) Asset 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
and Master Fund Last 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 14 meetings. 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
Name of Director Dollar Range of Equity Securities in Investment Companies Overseen by
the Fund as of December 31, 2005(1) Director in Family of Investment
Companies as of December 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
Name of Director and Company Title of Class Value of Percentage of
Relationship to Securities Class
Director
------------------------- ----------------- ------------------ ------------------ ------------------ -----------------
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 ESTIMATED ANNUAL FROM FUND AND FUND
AGGREGATE ACCRUED AS PART OF BENEFITS UPON COMPLEX PAID TO
NAME OF DIRECTOR COMPENSATION FROM FUND FUND EXPENSES 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.
---------------------------------------- -------------------------------------- --------------------------------------
Name of Portfolio Manager Dollar Range of Equity Securities in Dollar Range of All Fund Complex
the Fund Shares 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 Number of Registered Total Assets of Number of Investment Total Assets of
Manager Investment Companies Registered Investment Company Accounts Performance-Based
Companies with Fee Accounts
Performance-Based
Fees
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Steven L. Bossi 1 $9,694,042 None None
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Other Pooled Investment Vehicles Managed
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Name of Portfolio Number of Pooled Total Assets of Number of Pooled Total Assets of
Manager Investment Vehicles Pooled Investment Investment Vehicles Performance-Based
Vehicles with Fee Accounts
Performance-Based
Fees
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Steven L. Bossi 23 $5,014,662,136 22 $4,951,564,845
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
20
Other Accounts Managed
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Name of Portfolio Number of Other Total Assets of Other Number of Other Total Assets of
Manager Accounts Accounts Accounts with Performance-Based
Performance-Based Fee Accounts
Fees
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
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 $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.
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
27
statements or similar notices in connection with any other portfolio
securities), the Master Fund has delegated proxy 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.
28
Investors with questions on this policy may contact the Adviser at (212)
454-1879.
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) Consent of Independent Registered Public Accounting Firm.
(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 Business and Other Connections During the
Managers, Inc. Past 2 Fiscal Years
Pamela Kiernan Managing Director and Chief Operating Officer, DB
Director Absolute Return Strategies; Formerly, Chief Operating
Officer - Americas, DB Advisors LLC
Steven L. Bossi Head of Multi-Manager Hedge Fund Team, Portfolio
Managing Director Manager and Hedge Fund Analyst for Multi-Manager Funds,
Member of Investment Committee and Fund of Funds DB Absolute Return Strategies; Formerly, President and
Investment Committee Chief Investment Officer 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
Chief Financial Officer Manager, KPMG Consulting Inc.
Sergio Bienstock Managing Director, DB Absolute Return Strategies
Director
Adam Joffe Director, DB Absolute Return Strategies
Vice President
James Fraser Director, Deutsche Asset Management Group Credit Office
Vice President
Katherine Gallo Vice President, Deutsche Asset Management Group Credit
Vice President Office
Tanya E. Ghaleb-Harter Hedge Fund Strategist and Asset Allocation Strategist
Member of Fund of Funds Investment Committee for Multi-Manager Funds, DB Absolute Return Strategies
Marielena Glassman Treasurer, Principal Accounting Officer and Financial
Managing Director Officer, DB Hedge Strategies Fund LLC, The Topiary Fund
for Benefit Plan Investors (BPI)
Member of Investment Committee 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
Chief Compliance Officer Advisory Services, PricewaterhouseCoopers LLP
John H. Kim Director, Deutsche Asset Management
Director
Senior Counsel
Secretary
Robert C. Parauda Portfolio Manager and Hedge Fund Analyst for
Member of Fund of Funds Investment Committee Multi-Manager Funds, DB Absolute Return Strategies
Richard Goldsmith Global Head and C.E.O., DB Absolute Return Strategies
President, Managing Director and C.E.O.
Chairperson of Investment Committee
Antonio Reina Deutsche Asset Management
Assistant Secretary
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 July, 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 July 26, 2006
-------------------------------------------
Pamela Kiernan
/s/ ** Treasurer, Principal Financial July 26, 2006
------------------------------------------- Officer and Accounting Officer
Marielena Glassman
/s/ *** Director July 26, 2006
-------------------------------------------
Edward T. Tokar
/s/ *** Director July 26, 2006
-------------------------------------------
Louis C. Citron
/s/ *** Director July 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 26, 2006 as part of the Registrant's
Pre-Effective Amendment No. 6 to the registration statement filed under the 1940
Act on Form N-2, as filed on July 26, 2006.
** Pursuant to power of attorney filed with 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.
*** Pursuant to power of attorney filed with 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.
SIGNATURES
The Topiary Master Fund for Benefit Plan Investors (BPI) LLC has duly
caused this Registration Statement of The Topiary Fund for Benefit Plan
Investors (BPI) LLC 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 July, 2006.
THE TOPIARY MASTER 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 July 26, 2006
-------------------------------------------
Pamela Kiernan
/s/ ** Treasurer, Principal Financial July 26, 2006
------------------------------------------- Officer and Accounting Officer
Marielena Glassman
/s/ *** Director July 26, 2006
-------------------------------------------
Edward T. Tokar
/s/ *** Director July 26, 2006
-------------------------------------------
Louis C. Citron
/s/ *** Director July 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 SEC on July 26, 2006 as part of
the Registrant's registration statement filed under the 1940 Act on Form N-2, as
filed on July 26, 2006.
** Pursuant to power of attorney filed with the SEC on June 21, 2005 as part of
the Registrant's registration statement filed under the 1940 Act on Form N-2, as
filed on June 21, 2005.
** * Pursuant to power of attorney filed with the SEC on July 23, 2004 as part
of the Registrant's registration statement filed under the 1940 Act on Form N-2,
as filed on July 23, 2004.
THE TOPIARY FUND FOR BENEFIT PLAN INVESTORS (BPI) LLC
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that, PAMELA KIERNAN, whose
signature appears below, does hereby constitute and appoint Joshua Kestler, John
H. Kim, John MacKinnon, Carla Teodoro, and Rebecca Leamon, and each of them
singly, her true and lawful attorney-in-fact and agent, with full power of
substitution or resubstitution, to do any and all acts and things and to execute
any and all instruments, in her name, place and stead, which said
attorney-in-fact and agent may deem necessary or advisable or which may be
required to enable The Topiary Fund for Benefit Plan Investors (BPI) LLC (the
"Fund") to comply with the Securities Act of 1933, as amended (the "1933 Act")
and the Investment Company Act of 1940, as amended (the "1940 Act"), and any
rules, regulations, or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the Fund's Registration Statement on Form
N-2 pursuant to the 1933 Act and the 1940 Act, together with any and all pre-
and post-effective amendments thereto, including specifically, but without
limiting the generality of the foregoing, the power and authority to sign in the
name and on behalf of the undersigned as the President of the Fund such
Registration Statement and any and all such pre- and post-effective amendments
filed with the Securities and Exchange Commission under the 1933 Act and the
1940 Act, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney-in-fact and
agent, or either of them or their substitute or substitutes, shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set her hand and seal as of the
date set forth below.
/s/ Pamela Kiernan
---------------------------------
PAMELA KIERNAN
DATE: July 25, 2006
THE TOPIARY MASTER FUND FOR BENEFIT PLAN INVESTORS (BPI) LLC
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that, PAMELA KIERNAN, whose
signature appears below, does hereby constitute and appoint Joshua Kestler, John
H. Kim, John MacKinnon, Carla Teodoro, and Rebecca Leamon, and each of them
singly, her true and lawful attorney-in-fact and agent, with full power of
substitution or resubstitution, to do any and all acts and things and to execute
any and all instruments, in her name, place and stead, which said
attorney-in-fact and agent may deem necessary or advisable or which may be
required to enable The Topiary Master Fund for Benefit Plan Investors (BPI) LLC
(the "Fund") to comply with the Securities Act of 1933, as amended (the "1933
Act") and the Investment Company Act of 1940, as amended (the "1940 Act"), and
any rules, regulations, or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the Fund's Registration
Statement on Form N-2 pursuant to the 1933 Act and the 1940 Act, together with
any and all pre- and post-effective amendments thereto, including specifically,
but without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as the President of the Fund
such Registration Statement and any and all such pre- and post-effective
amendments filed with the Securities and Exchange Commission under the 1933 Act
and the 1940 Act, and any other instruments or documents related thereto, and
the undersigned does hereby ratify and confirm all that said attorney-in-fact
and agent, or either of them or their substitute or substitutes, shall lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set her hand and seal as of the
date set forth below.
/s/ Pamela Kiernan
--------------------------------
PAMELA KIERNAN
DATE: July 25, 2006
EXHIBITS
--------
Exhibit Number Description
-------------- -----------
2(n) Consent of Independent Registered Public Accounting Firm