Form ADV
`Part 2A Brochure
`
`
`
`2101 Cedar Springs Road
`Suite 1400
`Dallas, Texas 75201
`
`
`
`Updated: June 1, 2015
`
`
`
`This brochure provides information about the qualifications and business practices of Hayman
`Capital Management, L.P. (“Hayman” or the “Adviser”). If you have any questions about the
`contents of this brochure, please contact us at 214-347-8050. The information in this brochure
`has not been approved or verified by the United States Securities and Exchange Commission
`(“SEC”) or by any state securities authority.
`
`This brochure does not constitute an offer, solicitation or recommendation to sell or an offer to
`buy any securities or investment products. Such an offer many only be made to eligible persons
`by means of delivery of offering memoranda and/or other similar materials that contain a
`description of the material terms related to such investment.
`
`Hayman is registered with the SEC as an investment adviser. Being a “registered investment
`adviser” or describing ourselves as being “registered” does not imply a certain level of skill or
`training.
`
`information about Hayman
`Additional
`www.adviserinfo.sec.gov.
`
`is also available on
`
`
`the SEC’s website at:
`
`
`
`Page 1 of 19
`
`Biogen Exhibit 2001
`Coalition v. Biogen
`IPR2015-01136
`
`

`
`Item 2 – Material Changes
`
`Since our last annual update on March 30, 2015, reporting information as of December
`31, 2014, we have made material changes to our Form ADV Part 2A (the “Brochure”).
`All information in this Brochure is current as of May 31, 2015.
`
`This Brochure includes additional information about recent settlement with the CME
`Group, Inc. (“CME”), an SRO, concerning certain commodities futures contract positions
`held by the Hayman Funds. This Brochure also provides information about our new
`pooled investment vehicles. In the first quarter of 2015, Hayman launched two new
`private fund complexes, the Hayman Credes Funds and Hayman Orange Fund SPC, a
`segregated portfolio company. Additionally, we are providing disclosures about side
`letter arrangements related to certain of our pooled funds.
`
`
`
`
`
`
`
`2
`
`
`
`Page 2 of 19
`
`

`
`
`
`
`
`Table of Contents
`
`
`Brochure
`
`Table of Contents ....................................................................................... 3
`Item 4 - Advisory Business ......................................................................... 4
`Item 5 - Fees and Compensation ................................................................ 5
`Item 6 - Performance Based Fees and Side-by-Side Management ............. 8
`Item 7 - Types of Clients ............................................................................. 8
`Item 8 - Methods of Analysis, Investment Strategies and Risk of Loss ....... 9
`Item 9 - Disciplinary Information ................................................................ 13
`Item 10 - Other Financial Industry Activities and Affiliations ...................... 13
`Item 11 – Side Letters ............................................................................... 14
`Item 12 - Code of Ethics, Participation or Interest in Client Transactions and
`Personal Trading ........................................................................ 14
`Item 13 - Brokerage Practices ................................................................... 15
`Item 14 - Review of Accounts ................................................................... 17
`Item 15 - Client Referrals and Other Compensation .................................. 17
`Item 16 - Custody ..................................................................................... 18
`Item 17 - Investment Discretion ................................................................ 18
`Item 18 - Voting Client Securities .............................................................. 18
`Item 19 - Financial Information .................................................................. 19
`
`
`
`3
`
`
`
`Page 3 of 19
`
`

`
`Item 4 - Advisory Business
`Hayman, a Delaware limited partnership with its principal place of business in Dallas,
`Texas, was founded in December 2005 and is wholly owned, directly or indirectly, by J
`Kyle Bass. Hayman has been registered with the Securities and Exchange Commission
`(“SEC” or “Commission”) as an investment adviser since April 2008. As of December
`31, 2015, Hayman managed approximately $2.1 billion in assets under management on
`a discretionary basis on behalf of its clients.
`
`Hayman provides investment management services to private pooled investment
`vehicles (individually, a “Fund” and collectively, the “Funds”) and Separate Accounts (as
`defined below) (collectively with the Funds, “Clients”).
`
`Investors in the Funds are typically institutions, funds-of-funds, family offices, and high-
`net-worth individuals. The investment mandates and restrictions of the Funds are
`described in their respective offering documents. Investors are not permitted to impose
`their own investment restrictions on the Funds.
`
`The Hayman Funds
`Hayman is the general partner of Hayman Capital Partners, L.P., a Delaware limited
`partnership (“HCP” or the “Hayman Onshore Fund”) and is the managing general
`partner of Hayman Capital Master Fund, L.P., a Cayman Islands exempted limited
`partnership (the “Hayman Master Fund”). Hayman Offshore Management, Inc., a
`Cayman Islands exempted company (“HOM”) and affiliate of the Adviser, serves as the
`general partner of Hayman Capital Offshore Partners, L.P., an exempted limited
`partnership organized under the laws of the Cayman Islands (“HCOP” or the “Hayman
`Offshore Fund”) and the Hayman Master Fund. The Adviser serves as investment
`manager to HCP, HCOP, and the Hayman Master Fund (collectively, the “Hayman
`Funds”). HCP and HCOP invest substantially all of their assets in, and conduct
`substantially all of their investments and trading activities through, the Hayman Master
`Fund. The primary purpose of the Hayman Master Fund is to achieve a superior risk-
`adjusted return by investing primarily in event-driven situations or securities which will
`be influenced by macro-economic trends.
`
`The Japan Funds
`Hayman is the general partner of Japan Macro Opportunities Partners, L.P., a Delaware
`limited partnership (“JMOP” or the “Japan Onshore Fund”) and is the managing general
`partner of Japan Macro Opportunities Master Fund, L.P., a Cayman Islands exempted
`limited partnership (“JMOMF” or the “Japan Master Fund”). HOM serves as the general
`partner of Japan Macro Opportunities Offshore Partners, L.P., an exempted limited
`partnership organized under the laws of the Cayman Islands (“JMOOP” or the “Japan
`Offshore Fund”) and the Japan Master Fund. The Adviser serves as investment
`manager to JMOP, JMOOP and the Japan Master Fund (collectively, the “Japan
`Funds”). The Japan Onshore Fund and Japan Offshore Fund invest substantially all of
`their assets in, and conduct substantially all of their investments and trading activities
`through, the Japan Hayman Master Fund. The primary purpose of the Japan Master
`
`
`
`4
`
`
`
`Page 4 of 19
`
`

`
`Fund is to make investments in the Japanese foreign currency and interest rate
`markets.
`
`The investments received from investors in the Japan Funds at each closing are
`maintained in a special memorandum account on the books and records of the Japan
`Master Fund, each referred to as a “tranche”. An investor is only entitled to the assets
`of the Japan Funds attributable to the tranche(s) in which it invests.
`
`The Credes Funds
`Hayman is the general partner of Hayman Credes Fund, L.P., a Delaware limited
`partnership (“HCF” or the “Credes Onshore Fund”) and is the managing general partner
`of Hayman Credes Master Fund, L.P., a Cayman Islands exempted limited partnership
`(the “Credes Master Fund”). HOM serves as the general partner of Hayman Credes
`Offshore Fund, L.P., an exempted limited partnership organized under the laws of the
`Cayman Islands (“HCOF” or the “Credes Offshore Fund”) and the Credes Master Fund.
`The Adviser serves as investment manager to HCF, HCOF, and the Credes Master
`Fund (collectively, the “Credes Funds”). HCF and HCOF invest substantially all of their
`assets in, and conduct substantially all of their investments and trading activities
`through, the Credes Master Fund. The primary purpose of the Credes Master Fund is
`to generate superior risk-adjusted returns with moderate volatility and low correlation
`through long or short position related to Hayman’s view with regard to selected
`companies, primarily in the pharmaceuticals sector.
`
`The Orange Fund
`Hayman Orange Fund SPC, a Cayman Islands segregated portfolio company (the
`“Company” or “Hayman Orange”). Currently, the Company offers one portfolio:
`Segregated Portfolio A (“Portfolio A”). The Company may establish and offer additional
`portfolios. Each segregated portfolio has separate assets and liabilities and may have
`different investment objectives and strategies. Hayman serves as investment manager
`to Hayman Orange. Portfolio A pursues an investment strategy that is substantially
`similar to that of the Credes Funds.
`
`Separate Accounts
`Hayman provides investment management services to separately managed accounts,
`including “funds of one” (collectively, “Separate Accounts”). The investment mandates
`and other terms of Separate Accounts are negotiated with each client.
`
`Item 5 - Fees and Compensation
`
`Investors in the Funds and the owners of the Separate Accounts are subject to the fees
`and expenses described below. Hayman has the authority to negotiate these fees and
`expenses at its discretion. Hayman has waived or negotiated lower fees or expenses
`for certain clients and/or employees and their family members.
`
`The management fee is prorated for investments made in the middle of a billing period.
`In the event that the advisory services of the Adviser are terminated prior to the end of
`any calendar quarter, a proportionate amount of the applicable management fee will be
`
`
`
`5
`
`
`
`Page 5 of 19
`
`

`
`refunded to such client or investor, as applicable. As described below, certain
`investments may be subject to withdrawals fees. The following is illustrative of fees that
`investors can typically expect. Investors in the Funds should consult the offering
`documents for the relevant Fund for a detailed description of the fees and expenses
`applicable to their investment.
`
`The Hayman Funds
`The minimum aggregate investment that must be contributed and maintained to obtain
`Class I Interests in the Hayman Funds is $150 million. Limited partners that do not
`have an aggregate investment of $150 million will obtain Class A Interests. At any time
`a limited partner’s aggregate investment falls below the Class I Interest threshold (as a
`result of withdrawals or redemptions, but not performance), the entire balance of their
`capital accounts associated with the Class I Limited Partner will be automatically
`converted to Class A Interests.
`
`Investors in the Hayman Onshore Fund and the Hayman Offshore Fund are subject to
`the following fee schedule:
`
`
`Quarterly Management Fee:
`
`
`
`Class A: 0.4625% (1.85% per annum)
`
`Class I: 0.375% (1.5% per annum); both
`payable in advance
`
`20% of net profits, subject to high water
`mark
`
`
`The Japan Funds
`Investors in the Japan Onshore Fund and the Japan Offshore Fund are subject to the
`following fee schedule:
`
`
`Annual Performance Allocation:
`
`
`Withdrawal Fee:
`
`Quarterly Management Fee:
`
`Performance Distribution:
`
`6% for withdrawals within first year,
`payable to the Master Fund
`
`0.3125% (1.25% per annum), payable in
`advance
`
`initial
`20% of distributions after return of
`capital, 35% after a 10X return on initial capital
`
`
`Investors are subject to a 5% withdrawal penalty, payable to the relevant tranche, for
`withdrawals within three years of the respective capital contribution. This penalty does
`not apply to tranches held by a single Limited Partner.
`
`The Credes Funds
`The Credes Funds offer three classes of limited partnership interests. The minimum
`capital contribution needed to attain each class interests are as follows:
`
`
`Class A:
`$1 million to $99.9 million
`
`
`Class I:
`$100 million to $249.9 million
`6
`
`
`
`
`Page 6 of 19
`
`

`
`
`
`Management fees, performance allocations and withdrawals are computed using the
`partnership’s internal basis of reporting which may differ from GAAP due to the
`accounting treatment (expense vs. amortization) of certain expenses unique to the
`Credes Funds. Investors in the Credes Funds should consult the offering document for
`a detailed description of the fees and expenses applicable to their investment.
`
`Investors in the Credes Onshore Fund and the Credes Offshore Fund are subject to the
`following fee schedule:
`
`
`
`
`Class Q:
`
`$250 million or greater
`
`Quarterly Management Fee:
`
`
`
`
`Class A: 0.25% (1.0% per annum)
`Class I: 0.25% (1.0% per annum)
`Class Q: 0.25% (1.0% per annum)
`All are payable in advance.
`
`to aggregate
`
`Redemption Fee:
`
`Annual Performance Allocation: Percentages are applied
`increases in net profits.
`Class A: 20%
`Class I: 18%
`Class Q: 15%
`
`5% for withdrawals within first year, payable to
`the Credes Master Fund.
`
`
`The Orange Fund
`As a segregated portfolio company, Hayman Orange may establish and offer additional
`segregated portfolios. Currently, the Company offers one portfolio: Portfolio A.
`
`Portfolio A investors are subject to the following fee schedule:
`
`
`
`
`
`
`
`Quarterly Management Fee:
`
`0.25% (1.0% per annum), payable in advance
`
`Annual Performance Fee:
`
`Redemption Fee:
`
`Percentages are applied to aggregate increase
`in the NAV of each Series of Shares.
`
`20%; If shareholders aggregate net
`subscriptions are less than $100 million;
`
`18%; If shareholders’ aggregate net
`subscriptions exceed $100 million
`but are less than $250 million; and
`
`15%; If shareholders’ aggregate net
`subscriptions exceed $250 million.
`
`5% for withdrawals within first year, payable to
`the fund.
`
`
`
`7
`
`
`
`Page 7 of 19
`
`

`
`
`Hayman does not bill the investors in the Funds for management fees or performance
`allocations/distributions. Rather, management fees are deducted from the assets of the
`applicable Funds on a quarterly basis, generally at the beginning of each calendar
`quarter. Each Fund charges its applicable management fee to the capital accounts or
`shares, as applicable, of each investor in such Fund accordingly. Similarly, the
`performance allocations for the Hayman Funds are made within the applicable Funds
`generally at the end of each year, or sooner with respect to any investments withdrawn
`or redeemed from a Fund at any time other than at the end of a fiscal year.
`Performance distributions from the Japan Funds are payable at the time of distribution
`to the limited partners and withheld from distribution proceeds.
`
`Separate Accounts
`Hayman does not maintain a fee schedule for Separate Accounts. Fees and expenses
`applicable to each account are negotiated separately.
`
`Expenses
`Clients of Hayman, including the Funds, will generally bear costs associated with
`management of their accounts, including (a) broker’s commissions, exchange fees,
`interest expenses, withholding and other taxes, custodial fees, clearing fees and
`account fees; (b) securities lending fees and expenses; (c) interest on margin accounts
`and other indebtedness, (d) regulatory costs and expenses, (e) expenses related to
`third-party research, publications, data and data services, including real-time pricing and
`market information (such as Bloomberg and Reuters services) and historical pricing and
`other data; (f) outside professional fees and expenses, including those of attorneys,
`accountants, consultants, administrators and independent advisors; (g) travel expenses
`incurred in connection with evaluating, negotiating, managing, or disposing of
`investments; and (h) indemnification payments, insurance costs and extraordinary
`expenses (including, but not limited to, litigation expenses). Please see the Brokerage
`Practices section of this brochure for further information regarding commissions and
`other transaction costs incurred by clients.
`Item 6 - Performance Based Fees and Side-by-Side
`Management
`
`As described above, Hayman receives performance-based fees or allocations from all
`of its clients. Management of accounts that do not pay performance-based
`compensation side-by-side with accounts that do pay such compensation may create an
`incentive for an adviser to favor the accounts with performance compensation. In order
`to mitigate this potential conflict, the Adviser does not manage accounts that pay
`performance-based compensation side-by-side with accounts following a similar
`strategy that do not pay such compensation.
`Item 7 - Types of Clients
`
`Hayman provides investment management services to private pooled investment
`vehicles and separate accounts. Investors in the Funds are typically institutions, funds-
`8
`
`
`
`
`Page 8 of 19
`
`

`
`of-funds, family offices, and high-net-worth individuals. The minimum initial capital
`contribution for the Hayman Funds is $5 million. The minimum initial capital contribution
`for the Japan Funds is currently (i) $10 million for a single limited partner to establish its
`own tranche and (ii) $250,000 for a multi-investor tranche. The minimum initial capital
`contribution for the Credes Funds is currently $1 million. The minimum initial capital
`contribution for the Orange Fund is currently $1 million. The general partner to the
`Funds may grant exceptions to these minimums. Hayman shall determine from time to
`time the minimum investment for each Separate Account.
`
`Investors in each of the U.S. Funds and U.S. investors in the each of the offshore Funds
`must each be (i) an “accredited investor” as defined in Regulation D under the U.S.
`Securities Act of 1933, as amended, and (ii) a “qualified purchaser” as that term is
`defined in Section 2(a)(51) of the U.S. Investment Company Act of 1940, as amended
`(the “1940 Act”).
`Item 8 - Methods of Analysis, Investment Strategies and Risk
`of Loss
`
`Hayman’s investment process generally begins with idea generation driven by its
`Investment Team members’ monitoring of a defined set of sovereign actions, corporate
`events, global market conditions, and internal and external sources. Once an idea is
`generated, a preliminary evaluation of intrinsic value and risk/reward characteristics is
`conducted by the broader Investment Team. Potential investments are subject to
`further evaluation, generally including a fundamental analysis of government and/or
`company economics and an assessment of pricing discrepancies and identified
`catalysts. Country risk(s) (government, GDP, capital account, political situation, and
`currency assessment) are also assessed by the Investment Team.
`
`Based on this process, Kyle Bass, as the Chief Investment Officer (“CIO”) makes the
`final decision whether to proceed with an investment idea and position sizing (subject to
`any limitations in the agreements for the Separate Accounts). Capital is allocated on a
`position-by-position basis, depending on the specific opportunity and risk/return profile
`of a potential investment. However, concentration of exposures to certain industries or
`product types is monitored closely by the CIO, Chief Risk Officer, and the Investment
`Team, who help formulate portfolio construction.
`
`Hayman’s primary investment strategy focuses on the use of special situation and
`event-driven investments. Depending on the investment mandate of the specific client,
`the Adviser may invest in any type of asset, including swaps, options, futures,
`commodities, currencies, distressed debt, and other types of equity and fixed-income
`securities. Hayman generally does not invest directly in real estate.
`
`The risks involved with the Hayman’s investment strategies and techniques are
`discussed below. All of these investments involve a risk of loss of invested capital,
`which clients and investors should be prepared to bear.
`
`Special Situation Companies/Distressed Investments. The Adviser may invest in
`securities of issuers in weak financial condition, experiencing poor operating results,
`9
`
`
`
`
`Page 9 of 19
`
`

`
`having substantial financial 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 involve substantial financial business risks that
`can result in substantial or total losses. Among the problems involved in assessing and
`making investments in troubled issuers is that it may be difficult to obtain information as
`to the condition of such issuer. The market prices of the securities of such issuers 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 normally expected. It may take a number of years for the market prices of such
`securities to reflect their intrinsic values. Some securities may not be widely traded and
`the Adviser’s positions in such securities may be substantial in relation to the overall
`market for such securities.
`
`These types of securities require active monitoring and, at times, may require
`participating in bankruptcy or reorganization proceedings by the Adviser. To the extent
`that the Adviser becomes involved in such proceedings, client accounts may have a
`more active participation in the affairs of the issuer than originally contemplated. In
`addition, the Adviser’s participation in such proceedings may restrict or limit clients’
`ability to trade securities of the subject company.
`
`Risk Arbitrage Transactions. The Adviser may engage in risk arbitrage transactions
`where it purchases securities at prices slightly below the anticipated value of the cash,
`securities or other consideration to be paid or exchanged for such securities in a
`proposed merger, exchange offer, tender offer or other similar transaction. Such
`purchase price may be substantially in excess of the market price of the securities prior
`to the announcement of the merger, exchange offer, tender offer or other similar
`transaction. If the proposed merger, exchange offer, tender offer or other similar
`transaction later appears likely not to be consummated or it is not consummated or is
`delayed, the market price of the security purchased by the Adviser may decline sharply
`and result in losses if such securities are sold, transferred or exchanged for securities or
`cash, the value of which is less than the purchase price. In certain transactions, the
`position may not be “hedged” against market fluctuations. Even if the proposed
`transaction is consummated, this can result in losses. In addition, a security to be
`issued in a merger or exchange offer may be sold short by the Adviser in the
`expectation that the short position will be covered by delivery of such security when
`issued. If the merger or exchange offer is not consummated, the Adviser may be forced
`to cover its short position at a higher price than its short sale price, resulting in a loss.
`
`Concentration. Although the Adviser generally intends to diversify investments made by
`its clients, investments may at times be concentrated in a limited number of companies
`or industries. If such an investment performs poorly, this concentration could cause a
`proportionately greater loss than if a larger number of investments were made, and if
`such proportionately greater loss occurs, it may adversely impact the overall return on
`investment realized by clients.
`
`Illiquid Investments. Certain investments may not be able to be sold except pursuant to
`a registration statement filed under the Securities Act of 1933 (the “Securities Act”) or in
`accordance with Rule 144 or another exemption under the Securities Act. Furthermore,
`
`
`
`10
`
`
`
`Page 10 of 19
`
`

`
`because of the speculative and non-public nature of some investments, the Adviser
`may, from time to time, sell or otherwise dispose of investments that later prove to be
`more valuable than anticipated at the time of such disposition. Any premature sales or
`dispositions may prevent clients from realizing the same overall return on investment as
`may have been realized if such sales or dispositions had been made at a later date.
`
`
`Certain securities may be difficult or impossible to sell at the time and price that the
`Adviser desires. The Adviser may have to lower the price, sell other securities instead
`or forego an investment opportunity, any of which could have a negative effect on the
`performance of the affected client accounts.
`
`Leverage. When permitted, leverage increases the account’s exposure to losses.
`Moreover, if an account’s revenues were not sufficient to pay the principal of and
`interest on the debt when due, the client could sustain a total loss of investment.
`
`
`Counterparty Creditworthiness. When the Adviser engages in certain transactions,
`including, but not limited to, swap transactions, forward foreign currency transactions
`and bonds and other fixed-income securities, the Adviser relies on the creditworthiness
`of its counterparty. In certain instances, counterparty risk or credit risk is affected by the
`lack of a central clearinghouse.
`
`In times of market distress consistent with current economic conditions, a counterparty
`may default rapidly and without notice to the Adviser, and the Adviser may be unable to
`take action to cover its exposure, either because it lacks the contractual ability or
`because market conditions make it difficult to take effective action in a timely manner. In
`the event of a counterparty default, the affected accounts could incur significant losses.
`In the event that one of the counterparties becomes insolvent or files for bankruptcy, the
`ability to eventually recover any losses suffered as a result of that counterparty’s default
`may be limited by the liquidity of the counterparty or the applicable legal regime
`governing the bankruptcy proceeding. Concerns about, or a default by, one large
`participant could lead to significant liquidity problems for other participants, which may
`in turn expose affected accounts to significant losses. In the event of a counterparty
`default, particularly a default by a major investment bank, affected clients could incur
`material losses.
`
`Off-Balance Sheet Risk. In the normal course of business, the Adviser may invest in
`financial instruments with off-balance sheet risk. These instruments include forward
`contracts, swaps and securities and options contracts sold short. An off-balance sheet
`risk is associated with a financial instrument if such instrument exposes the investor to
`an accounting and economic loss in excess of the investor’s recognized asset carrying
`value in such financial instrument, if any; or if the ultimate liability associated with the
`financial instrument has the potential to exceed the amount that the investor recognizes
`as a liability in the investor’s statement of assets and liabilities. Additionally, in the
`normal course of business, the Adviser may purchase long positions in option contracts
`that do not have off-balance sheet-risk.
`
`Short Sales. The Adviser may effect short sales. Short selling is the practice of selling
`securities that are not owned by the seller, generally when the seller anticipates a
`
`
`
`11
`
`
`
`Page 11 of 19
`
`

`
`decline in the price of the securities or for hedging purposes. To complete a short sale,
`an account generally must borrow the securities from a third party in order to make
`delivery to the buyer. The account generally is required to pay a brokerage commission
`that will increase the cost of selling such securities. The proceeds of the short sale plus
`additional cash or securities must be deposited as collateral with the lender of the
`securities to the extent necessary to meet margin requirements. The amount of the
`required deposit will be adjusted periodically to reflect any change in the market price of
`the securities that the account is required to return to the lender. The account is
`obligated to return securities equivalent to those borrowed at any time on demand of the
`lender of the securities borrower by purchasing them at the market price at the time of
`replacement. An increase in the value of any security that is the subject of short selling
`by an account may, as a result of the foregoing, have a material adverse effect on the
`assets of the account.
`
`
`Options. Both the purchasing and selling of call and put options entail risks. Although
`an option buyer’s risk is limited to the amount of the original investment for the purchase
`of the option, an investment in an option may be subject to greater fluctuation than is an
`investment in the underlying securities. In theory, an uncovered call writer’s loss is
`potentially unlimited, but in practice the loss is limited by the term of existence of the
`call. The risk for a writer of a put option is that the price of the underlying security may
`fall below the exercise price.
`
`Futures Contracts. The Adviser may invest in commodities futures contracts, options on
`futures contracts and in other products that may be traded on commodities exchanges
`regulated by the U.S. Commodity Futures Trading Commission or international
`exchanges or in the over-the-counter markets. Futures prices generally are extremely
`volatile. Because of the low margin deposits normally required in futures trading, an
`extremely high degree of leverage is common in a futures trading account. As a result,
`a relatively small price movement in a futures contract may result in substantial losses.
`Similar to other leveraged investments, any purchase or sale of a futures contract may
`result in losses in excess of the amount invested. In addition, futures trading may be
`illiquid and frequently involves high transaction costs.
`
`Index Contracts. The Adviser may invest in customized instruments to seek to hedge
`against the risk of changes in the level of prices of broad market averages or indices, as
`well as narrower indices or baskets of securities, foreign currencies or commodity
`prices. These hedging strategies may be executed by the Adviser through the use of
`exchange-traded equity index options, standardized or individually negotiated over-the-
`counter contracts or other forms of derivative contracts (collectively, “index contracts”)
`structured by investment banking institutions.
`
`Index contracts generally have substantial risks associated with them, including
`possible default by the counterparty to the transaction, illiquidity and, to the extent the
`Adviser’s view as to certain market movements is incorrect, the risk that the use of such
`index contracts could result in losses greater than if they had not been used. In
`addition, certain over-the-counter index contracts may have no markets. As a result,
`the Adviser might not be able to close a transaction without incurring substantial losses,
`if at all.
`
`
`
`12
`
`
`
`Page 12 of 19
`
`

`
`
`Foreign Securities. The Adviser may invest in securities of companies domiciled or
`operating in one or more foreign countries. Investing in foreign securities involves
`considerations and possible risks not typically involved in investing in securities of
`companies domiciled and operating in the United States, including instability of some
`foreign governments, the possibility of expropriation, limitations on the use or removal of
`funds or other assets, foreign currency risk, changes in governmental administration or
`economic or monetary policy (in the United States or abroad) or changed circumstances
`in dealings between nations. The application of foreign tax laws (e.g., the imposition of
`withholding taxes on dividend or interest payments) or confiscatory taxation may also
`affect investment in foreign securities. Higher expenses may result from investment in
`foreign securities than would from investment in domestic securities because of the
`costs that must be incurred in connection with conversion between various currencies
`and foreign brokerage commissions that may be higher than in the United States.
`Foreign securities markets also may be less liquid, more volatile and subject to less
`governmental supervision than in the Unites States, inclu