EFTA00295515.pdf

Item I: Cover Page CAS INVESTMENT PARTNERS, LLC PART 2A OF FORM ADV: FIRM BROCHURE 8 Wright Street, 1m Floor Westport, CT 06880 March 16, 2018 This brochure provides information about the qualifications and business practices of CAS Investment Partners, LLC ("CAS" or the "Firm"). If you have any questions about the contents of this brochure lease contact CAS's Chief Com liance Officer, Clifford Sosin, at or 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. Any reference to CAS as a registered investment adviser does not imply a certain level of skill or training. Additional information about CAS also is available on the SEC's website at www.adviserinfo.sec.gov. EFTA00295515 Item 2: Material Changes This is CAS' 2018 annual amendment to its Form ADV. There have been no material changes since CAS filed its last brochure on September 20, 2017. 2 EFTA00295516  Item 3: Table of Contents Page ITEM 1: COVER PAGE 1 ITEM 2: MATERIAL CHANGES 2 ITEM 3: 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 7 ITEM 7: TYPES OF CLIENTS 8 ITEM 8: METHODS OF ANALYSIS, INVESTMENT STRATEGIES AND RISK OF LOSS 8 ITEM 9: DISCIPLINARY INFORMATION 21 ITEM 10: OTHER FINANCIAL INDUSTRY ACTIVITIES AND AFFILIATIONS 21 ITEM II: CODE OF ETHICS, PARTICIPATION OR INTEREST IN CLIENT TRANSACTIONS AND PERSONAL TRADING 23 ITEM 12: BROKERAGE PRACTICES 23 ITEM 13: REVIEW OF ACCOUNTS 24 ITEM 14: CLIENT REFERRALS AND OTHER COMPENSATION 25 ITEM 15: CUSTODY 25 ITEM 16: INVESTMENT DISCRETION 25 ITEM 17: VOTING CLIENT SECURITIES 26 ITEM 18: FINANCIAL INFORMATION 27 3 EFTA00295517 Item 4: Advisory Business Item 4.A. CAS Investment Partners, LLC ("CAS", "Firm" or the "Adviser"), a Delaware limited liability company, was founded in October 2012 by Clifford Sosin, the principal owner of CAS Investment Partners, LLC. The Adviser filed to become a registered investment adviser with the SEC in September 2017. Item 4.B. CAS is an investment manager that offers discretionary investment management services to domestic privately offered pooled investment vehicles and managed accounts. Sosin Partners, LP ("Partnership or "Fund") is currently CAS's only client. It is intended for investment by certain investors that meet the definition of "Accredited Investor" as defined under Regulation D of the Securities Act of 1933, as amended, and qualified purchasers under Section 2(a) (51) of the Investment Company Act of 1940, as amended (the "Company Act") so as to comply with the exemptions under Section 3(c) (7) of the Company Act. CAS may also provide investment advisory services to clients in separately managed accounts ("SMAs") with similar investment objectives and strategies as the Fund. The Fund and the SMAs, if applicable, are herein referred to as the "Advisory Clients." CAS is delegated full responsibility for the investment decisions of the Partnership. The Partnership's General Partner is Sosin, LLC ("General Partner"). The Fund is formed to pool investment assets of its investors (each a "Limited Partner" and, collectively, "Limited Partners", and the Limited Partners, collectively with the General Partner, shall be referred to herein as the "Partners"). The General Partner is responsible for all management decisions on behalf of the Partnership and has discretionary trading authority over the Partnership's assets. As such, the General Partner delegates its responsibility for the Partnership's investment decisions to CAS Investment Partners, LLC (also referred to herein as the "Manager"). The Manager is also controlled by Mr. Sosin. Under the terms of an investment management agreement by and between the General Partner and the Manager, the Manager is responsible for the day-to-day management of the Partnership's investments. The Partnership is organized to serve as a fund through which the assets of its Partners may be utilized to purchase a concentrated portfolio of tradable credit and equity instruments (on a long and short basis) with the goal of outperforming the S&P 500 (as measured by a specific S&P 500 ETF) over time. The Manager does not seek to maintain any specific directional market bias or asset class bias. Instead, the Partnership's overall market and asset class exposure (i.e. long or short equities or long or short credit) is endogenous to the Manager's opinion of risks and expected returns of individual securities. For more information regarding the principal owner of CAS, please review Schedule A and Schedule B of Part IA of Form ADV. 4 EFTA00295518 Item 4.C. The Firm tailors its advisory services to each Fund it manages in accordance with the terms of the relevant offering memorandum or mandate for such Fund, as applicable. Investors in the Fund generally cannot obtain services tailored to their individual specific needs. Item 4.D. Not applicable. CAS does not participate in, nor does it sponsor, a wrap fee program. Item 4.E. CAS has $211,344,320 in regulatory assets under management on a discretionary basis as of the date of this Brochure. CAS does not manage client assets on a non-discretionary basis. Item 5: Fees and Compensation Item S.A. CAS is compensated for its advisory services based upon the amount of each Limited Partner's capital commitment in the Fund. The Partnership will pay the Manager (or, any other person or entity designated by the Manager) a management fee that accrues monthly and is payable quarterly. Payment of the Management Fee is due as of the last Business Day of each calendar quarter and is payable by the Partnership within ten (10) days thereafter. Details regarding CAS's management fees are set forth in the Fund's offering memorandum or LPA. Further details of other potential fees are detailed in S.C. The Firm may, in its sole discretion, elect to reduce or waive the Management Fee with respect to any investor. Management fees and expenses arrangements with respect to any SMA will be set forth and calculated in accordance with such SMA's investment advisory agreement. Please reference this paragraph relating to fees and expenses of SMAs in response to Items 5.B, 5.C, and S.D. below. Item S.B. Pursuant to the terms of the Fund's Offering Memorandum, the Firm is authorized to deduct management fees from each investor's capital account on a quarterly basis. Item S.C. Each Fund's offering memorandum and/or LPA contains information regarding the fees and expenses of the Fund managed by the Adviser. Each Fund shall also pay or reimburse the General Partner of the Fund, the Adviser and their respective affiliates for the following: Organizational and Offering Expenses. Organizational expenses of the Partnership include, but are not limited to, legal, accounting and government filing fees. Offering expenses include marketing expenses, printing of this Offering Memorandum and exhibits thereto and the admission of Limited Partners. The costs and expenses of the Partnership's organization and the initial offering and sale of Interests, which 5 EFTA00295519 were approximately $7,300 were paid by the General Partner. These organizational and offering expenses are being reimbursed by the Partnership over time and are being amortized over a period of up to 60 months. For any period in which the Partnership is amortizing organizational expenses, the General Partner may decide to (a) recognize the unamortized expenses or (b) make U.S. Generally Accepted Accounting Principles ("GAAP") conforming changes for financial reporting purposes but amortize expenses for purposes of calculating the Partnership's net asset value. If a Partner withdraws a portion of its Capital Account prior to the end of the period during which the Partnership is amortizing its organizational expenses, the General Partner may elect to accelerate a proportionate share of the unamortized expenses based on the portion of the Capital Account withdrawn and allocate such expense to that Capital Account (which shall reduce that Partner's withdrawal proceeds by the amount of such accelerated expenses). Ongoing Expenses. Certain of the Partnership's operating expenses will be paid by the Partnership. Operating expenses include, without limitation, (A) the Partnership's ongoing accounting, auditing, bookkeeping, due diligence, tax preparation, administration, trading and execution, legal, consulting and other professional fees and expenses; (B) all costs of communications with Limited Partners; (C) a portion of original and third-party research expenses not reimbursed or otherwise paid by broker dealers (including some or all of the costs associated with various data feeds (e.g. Bloomberg terminal, etc.) and subscriptions to professional journals and the like not to exceed 60bps annually (as measured by the Partnership's capital at the beginning of the year); (D) all investment-related expenses, (including all commissions, bid ask spreads, mark-ups, interest on margin borrowing, costs relating to short sales, transfer taxes, custodian fees, etc.); (E) all costs of protecting or preserving any investment held by the Partnership; (F) all losses, damages, charges, costs or expenses arising from the Partnership's indemnification obligations under the Partnership Agreement and other contracts to which the Partnership may become a party; (G) expenses incurred with regard to Special Situation Sub-Accounts; (H) regulatory and tax filing fees; (I) expenses incurred with respect to the preparation, duplication and distribution to Limited Partners and prospective Limited Partners of the offering documents, annual reports and other financial information; (.I) expenses of any third-party valuation agent(s); and (K) all costs associated with dissolution, winding up, liquidation or termination of the Partnership. The Manager may elect to pay for some or all of the Partnership's costs and expenses. Fees and expenses that are identifiable with a particular class of Interests may, in the General Partner's sole discretion, be charged against that class in computing its Net Asset Value. The General Partner and/or the Manager will pay, and shall not be reimbursed by the Partnership for, each of their own overhead expenses. These may include, without limitation, rent, employee salaries and benefits and insurance and research related travel (including travel and lodging incurred for the benefit of the Partnership). Administration Fee. The Administrator will be paid an administration fee, which such administration fee may be paid by the General Partner, the Manager and/or the Partnership, based upon the size of the Partnership, in accordance with the Administrator's standard schedule for providing similar services. Subscription Fees. Any fees or duties incurred by the Partnership in processing an investor's application for Interests may either be deducted from the investor's subscription proceeds, in which case the subscription proceeds net of the subscription charges shall be allocated to the investor's Capital Account, or the subscription charges may be charged in addition to the amount being subscribed. Brokerage Fees. The Partnership pays all fees and commissions associated with its brokerage. Brokerage fees include financing charges and transaction and administrative fees as more fully described in the brokerage agreements. Transaction costs vary depending on the country and the type of investment. The compensation provisions of such agreements may be amended from time to time as circumstances dictate. The Manager has complete discretion in deciding which brokers and dealers it uses and in negotiating the rates of compensation with respect to the management of the Partnership's assets and liabilities. 6 EFTA00295520 Brokerage is specifically discussed in Item 12 below. Item 5.D. Not Applicable. Fees are not paid in advance. The Manager, in its sole discretion, may waive, by rebate or otherwise, all or part of the Management Fee otherwise due with respect to any Partner's investment, including, without limitation, its affiliates, members and/or employees. Item 5.E. Not Applicable. Neither CAS, nor any of its supervised persons, are compensated for the sale of securities or other investment products. Item 6: Performance-Based Fees and Side-by-Side Management CAS will not charge a performance-based allocation to any Advisory Client or Investor that is not a qualified client, except as permitted by the SEC rule. Registered Investment Advisers may only charge performance-based fees to U.S. clients if, under SEC Rule 205-3, the client meets the definition of a "qualified client" contained in the rule. This definition includes requirements that the client be either an "accredited investor" or a "qualified purchaser" as defined in Section 2(a)(51)(A) of the Investment Company Act or have either (i) $1 million under management with the advisory firm, or (ii) a $2 million net worth. Generally, qualified purchasers include natural persons and family owned companies owning at least $5 million of investments, trusts whose trustees and asset contributors are all qualified purchasers described in the preceding clause, and institutional investors that own and invest at least $25 million of investments on a discretionary basis. If the client is a private investment company (e.g., a fund of funds) other than a Section 3(c) (7) fund (i.e., a fund all of whose participants are qualified purchasers), all participants in the fund must meet the $1 million/$2 million qualified client requirements. CAS may accept performance-based compensation from SMA clients, which constitute a fee on a share of net profits (including unrealized gains and losses) allocated to such SMA clients. Performance-based compensation may vary with respect to the Funds and SMA clients, which may create an incentive to favor clients that pay higher performance-based compensation in the allocation of investment opportunities. Performance-based compensation to be received by CAS and the Manager, as applicable, will be calculated on the basis of net profits, including unrealized gains and losses that may never materialize. CAS has established policies and procedures designed to address potential conflicts of interest relating to the side-by-side management of the Funds with any SMA client(s), including the allocation of investment and trading opportunities, and in circumstances where any client pays a different management fee and/or performance fee than another. The Firm reviews the portfolio holdings of each client to determine whether any patterns exist which indicate improper allocation, or whether there is any other indication of impropriety. In addition, the Firm's procedures relating to the allocation of investment opportunities require that clients participate in investment opportunities pro rata based on each Client's current assets under management (subject to the client's investment guidelines of restrictions, stage of capital deployment, available cash or other liquidity restraints, or other tax of legal reasons). Finally, the Finn's procedures also require fair and equitable treatment in light of the relevant circumstances for the allocation of limited opportunities among clients. 7 EFTA00295521 Item 7: Types of Clients CAS provides investment advice to clients that are qualified as an accredited investor (under Rule 501(a) of the Securities Act) or clients that are qualified as a qualified client (as defined under the Advisers Act). Generally, the minimum investment amount is $1,000,000. CAS may also provide investment advisory services to clients in separately managed accounts in accordance with the terms set forth in an investment advisory agreement between the Manager and the SMA client. While CAS will generally not require a minimum investment amount to open an SMA, CAS may, in its sole discretion, require a larger amount or accept a smaller amount of initial assets from a potential client depending on the complexity and nature of the advisory services provided. Item 8: Methods of Analysis, Investment Strategies and Risk of Loss Item 8.A. The investment objectives, method of analysis and investment strategies utilized by CAS are discussed in response to Item 4.B. above. Hedge funds typically focus excessively on generating uncorrelated performance and avoiding short-term market value losses. As a consequence of this focus, traditional hedge funds often generate low absolute level of returns. Low absolute returns combined with a typically high fee structure require that traditional hedge funds use excessive leverage in order to meet investors' return expectations. As a result, the Manager has concluded that traditional hedge funds present their investors a bad mix of low risk-adjusted returns and an unacceptably high risk of permanent loss. The Manager has also concluded that mutual funds are not much better. The typical mutual fund's large size and high degree of diversification often make it difficult to outperform over time. In addition, mutual fund managers generally are paid solely based on assets under management. This creates an incentive for them to build a portfolio that closely tracks their benchmark and thus prevents underperformance to a degree which could jeopardize their established asset base versus an incentive to maximize returns. The Manager established the Partnership in order to present a superior alternative to investors. The Partnership operates on three core beliefs: • Buying assets for substantially less than they are worth and/or selling assets for substantially more than they are worth can be expected to provide investors both higher returns over time and less risk of permanent capital loss. • It is necessary to act independently on the basis of sound facts and sound reasoning with little concern for short/ medium term market volatility. • Investment managers should be judged only for outperforming low-fee index-based products. With these core beliefs in mind, the Manager invests the Partnership's assets with the goal of outperforming the S&P 500 (as measured by a specific S&P 500 ETF) over time. The Manager invests in a tradable portfolio of credit and equity securities (on a long and short basis) which meet the following three criteria: 8 EFTA00295522  I) Understanding: The Manager seeks to understand what processes/dynamics are at work that allow an issuer to earn profits over time despite competitive forces and how changes to the competitive ecosystem might impact the asset's future performance. 2) Margin of Safety: Based on the Manager's expectations for the likely range of future outcomes, the expected return derived from the asset's cumulative future cash flows substantially exceeds the expected return derived from the cumulative future cash flows of a similar investment in the broader market. 3) Creative Risk Imagination: The Manager believes that it is often risks which have not materialized in the recent past which are the most menacing. The Manager takes great care to think creatively about things that might go wrong which could threaten the profitability of an investment and to avoid investments where reasonably likely scenarios could result in permanent capital loss even if those scenarios are not the most likely scenarios. The Manager believes that it is better to miss a potential for a profit when seemingly unlikely things don't occur than to take an excessive risk. No investment manager, including the Manager, can confidently and consistently predict the near term direction of the economy or the markets. Consequently, the Manager focuses on asset-specific considerations which he subjects to rigorous due diligence He believes thoughtful security selection resides at the core of successful investing, thus, due diligence and research will represent the Manager's primary use of time. In the short/ medium term market prices can diverge materially from fair prices. Cheap securities can trade for cheaper prices while expensive securities can trade for even more expensive prices. Even if perfectly applied, the Manager recognizes that this strategy may result in periods of months and sometimes a year or more during which the Partnership's investing performance may underperform the market. Investors should consider an investment in the Partnership a long term investment and should invest with the expectation of having down periods both on an absolute and relative to the broader market basis. The Manager expects to be judged based on its results on a multi-year basis. The Manager does not seek to maintain any specific directional market bias or asset class bias (e.g. market neutral, long only, or long credit). Instead, he evaluates each investment individually on its own merits. Thus the Partnership's overall market and asset class exposure (i.e. long or short equities or long or short credit) is endogenous to the Managers opinion of risks and expected returns of individual securities. As such, it is likely that the Partnership's mix of investments between equity and credit securities and between long and short positions will vary with market conditions and individual opportunities. There is no limit on the degree of concentration of the Partnership's investment portfolio. However, the Manager expects that the portfolio will typically include between five (5) and fifteen (15) investments. In normal market conditions, no single investment is expected to exceed twenty-five percent (25%) of the Partnership's invested capital (at cost). While it is not the focus of the Partnership, the Manager may use ETFs and other derivatives and make limited use of futures interests in order to make specific macro-economic bets when the Manager believes that such bets serve as hedges to reduce the macro-economic (currency, commodity, market) risk faced by other investments. On occasion the Manager may conclude that the expected outcomes of a specific investment opportunity is better expressed though options or other derivatives than through stocks or bonds. Usually in these situations the Manager is endeavoring to use options to take less risk by protecting against a low probability negative event or attempting to capture the profits from an event which the market has perceived as unlikely, but which the Manager believes is likely. 9 EFTA00295523 In keeping with the Manager's views that avoiding permanent capital loss is paramount, the Partnership will not use excessive margin to increase its purchasing power. However, the Partnership may use non- recourse leverage on specific investments and it may use margin as required to collateralize short sales. A portion of the Partnership's investment portfolio may consist of (i) privately offered securities and other similarly illiquid securities that, in the sole opinion of the Manager, are subject to regulatory, contractual or other restrictions on disposition; (ii) structured products and over-the- counter derivative transactions that, in the sole opinion of the Manager, cannot be replicated by other securities available in the market, thereby making it (in each case) difficult or impossible to value accurately such securities, products or transactions; and/or (iii) investments that become illiquid due to regulatory action, bankruptcy or insolvency of an issuer or counterparty, or otherwise (as defined herein) of their Capital Accounts (each such security, product, transaction or investment is referred to herein as a "Special Situation Investment"). The Partnership, in the discretion of the General Partner, may invest in or hold Special Situation Investments through separate or wholly-owned limited liability companies, limited partnerships, liquidating trusts or special purpose vehicles. Any investment in a Special Situation Investment by the Partnership will be subject to the deduction of Management Fees (as defined herein) and the allocation of the Performance Allocation (as defined herein) in the manner as provided herein. At all times, the Partnership will limit its trading of commodity interest positions to those imposed by the CFTC. Given the limitations imposed on the Partnership's trading of commodity interest positions, the Partnership should not be viewed as a vehicle for trading in the commodity futures or commodity options markets. There can be no assurance that the Manager will be successful in achieving the Partnership's investment objective or that the strategies set forth herein will be successful. Past results of the Partnership, the Manager and/or the principals or affiliates of the General Partner and/or the Manager in this or in other activities are not necessarily indicative of the future performance of the Partnership. Investments are speculative in nature and suitable only for sophisticated clients who are aware of the risks involved in an investment. Investors must have the ability and willingness to accept (i) the risk of the potential total loss of their investment, and (ii) the illiquid nature of an investment. There can be no assurance that CAS will achieve their investment objectives for their clients. Each prospective investor in the Funds should carefully review the Fund's offering documents and the agreements referred to therein prior to deciding to invest in the Fund. Items 8.B. and 8.C. The following summary identifies and provides a brief explanation of the material risks related to the Adviser's significant investment strategies and should be carefully evaluated before making an investment with the Adviser; however, the following does not intend to identify all possible risks of an investment with the Adviser or provide a full description of the identified risks of an investment in any of the Funds. Additional information regarding the material risks related to the Adviser's significant investment strategies is set forth in each Fund offering memoranda and/or LPA. Prospective investors should give careful consideration to the following risk factors in evaluating the merits and suitability of an investment in the Partnership as they relate specifically to Interests or to the Partnership in general, as the context requires. The following does not purport to be a comprehensive summary of all of the risks associated with an investment in the Partnership. Rather, the following are only certain risks to which the Partnership is subject and that the General Partner wishes to encourage prospective investors to discuss in detail with their professional advisors. 10 EFTA00295524 General Market Risk. As with any investment, there is a risk that the price of a security will rise or fall. There could be many reasons for a decline or increase in the price of a security. These include changing economic, political or market conditions and changes in interest rates. Investments in Securities Generally. Investments in securities and other financial instruments entail general investment risks that all investors face. Securities prices can be volatile. The markets for the securities the Partnership holds can experience periods of substantial illiquidity. Regulatory bodies can suspend the trading of securities. Securities prices are influenced by many unpredictable factors and the Partnership is competing for investment opportunities with other investors, many of which have greater investment research and other resources than the Manager. The Manager believes that its investment strategies and research techniques will moderate risk through careful securities selection. However, risk cannot be eliminated. No guarantee or representation is made that the Manager's investment programs will be successful or that the Partnership's investment objectives will be achieved. The Manager can never learn all relevant information regarding a company or a security. The Manager may misinterpret or incorrectly analyze the information that it has about a particular security. These and other factors may cause the Manager to (a) invest in securities at times that will lead to losses in the Partnership's portfolio and may cause a Limited Partner to lose a significant portion of its investment in the Partnership or (b) refrain from investing in particular securities at times that would have resulted in gains in the Partnership's portfolio if the Manager would have caused the Partnership to invest. Competition. The securities industry, and the varied strategies and techniques to be engaged in by the Manager, are extremely competitive. The Partnership will compete with firms, including many of the larger securities and investment banking firms, which have substantially greater financial resources and research staffs. Partnership's Investment Activities. The Partnership's investment activities involve a high degree of risk. The performance of any investment is subject to numerous factors which are neither within the control of, nor predictable by, the Manager. These factors include a wide range of economic, political, competitive and other conditions which may affect investments in general or specific industries or companies. In recent years, the securities markets have become increasingly volatile, which may adversely affect the ability of the Partnership to realize profits. As a result of the nature of the Partnership's investing activities, it is possible that the Partnership's financial performance may fluctuate substantially from period to period. Liquidity Risks. The Partnership may invest in securities that, while they are publicly traded, are relatively illiquid. That may be because a security is thinly traded or because the Partnership's position in a security is large in relation to the overall market for the security. The Partnership may own securities that are relatively liquid when acquired but that become illiquid after the Partnership invests. The Partnership may not be able to liquidate illiquid securities positions if the need were to arise; rapid sales of such securities could depress the market value of those securities, reducing the Partnership's profits, or increasing its losses, in the positions. The value assigned to illiquid securities (including thinly traded securities) and large blocks of securities for purposes of determining ownership percentages and determining profit and loss may differ from the value the Partnership is ultimately able to realize on those securities. Institutional Risk. The Manager may enter into contractual arrangements with various brokerage firms, banks and other institutions. There is a possibility that the institutions, including brokerage firms and banks, with which the Partnership does business will encounter financial difficulties that may substantially impair the operational capabilities or the capital position of the Partnership. Transactions entered into by the Partnership may be executed on various exchanges (domestic and foreign) and may be cleared and settled through various clearinghouses, custodians, depositories and brokers throughout the world. Although the Partnership will attempt to execute, clear and settle such 11 EFTA00295525 transactions through entities they believe to be sound, there can be no assurance that a failure by any such entity will not lead to a loss. To the extent possible, the Partnership's securities will be entrusted to a qualified custodian. The Partnership's obligations to that firm and any other custodian are secured by a first priority perfected security interest over all of the Partnership's assets held in custody by that custodian. A custodian may transfer to itself all rights, title and interest in and to those assets as collateral and may deal with, lend, dispose of, pledge or otherwise use all such collateral for its own purposes. If any such transfer occurs, the Partnership will rank as such custodian's (or affiliate's) unsecured creditor. If such custodian or affiliate becomes insolvent, the Partnership may not be able to recover such equivalent securities in full or any such recovery may be delayed. In addition, the Partnership's cash held by a custodian may not be segregated from such custodian's own cash and, if not so segregated, may be used by such custodian or affiliate in the course of its business and the Partnership will therefore rank as an unsecured creditor in relation thereto. Broad Discretionary Power to Choose Investments and Strategies. The Partnership Agreement gives the Manager broad discretionary power to decide what investments the Partnership will make and what strategies it will use. While the Manager currently intends to use the strategies described under Section 8A, it is not obligated to do so, and it may choose other investments and strategies that it believes are advisable. Concentration of Investments. The Partnership Agreement does not limit the amount of the Partnership's capital that may be committed to any single investment, industry or sector. The Manager will attempt to spread the Partnership's capital among a number of investments. From time to time, however, particularly when if Manager experiences swift changes in the Partnership's capital, the Partnership may hold a relatively small number of securities positions, each representing a relatively large portion of the Partnership's capital. Losses incurred in such positions could have a materially adverse effect on the Partnership's overall financial condition. Short Sales. The Partnership may sell securities short. A short sale results in a gain if the price of the securities sold short declines between the date of the short sale and the date on which securities are purchased to replace those borrowed. A short sale results in a loss if the price of the securities sold short increases. Any gain is decreased, and any loss is increased, by the amount of any payment, dividend or interest that the Partnership may be required to pay with respect to the borrowed securities, offset (wholly or partly) by short interest credits. In a generally rising market, the Partnership's short positions may be more likely to result in losses because securities sold short may be more likely to increase in value. A short sale involves a finite opportunity for appreciation, but a theoretically unlimited risk of loss. To make a short sale, the Partnership must borrow the securities being sold short. It may be impossible for the Partnership to borrow securities at the most desirable time to make a short sale, particularly in illiquid securities markets. If the prices of securities sold short increase, the Partnership may be required to provide additional funds or collateral to maintain the short positions. This could require the Partnership to liquidate other investments to provide additional collateral. Such liquidations might not be at favorable prices. Further, the lender can request the return of the borrowed securities and the Partnership may not be able to borrow those securities from other lenders. This would cause a "buy in" of the short position, which may be disadvantageous to the Partnership. Some market participants seek to exploit short-sellers such as the Partnership by identifying and buying large quantities of securities that are significantly shorted in an attempt to increase the value of the securities. If these so-called "short squeezes" are executed successfully, as described above, the Partnership may have to cover its short position at a disadvantageous time regardless of the Manager's view of the true value of the securities, thereby causing significant losses. 12 EFTA00295526 Them are other inherent difficulties and challenges in short selling. The general negative perceptions of short-sellers may limit the Manager's access to management of various issuers and hamper its research efforts. Management and other stakeholders of issuers may take legal action against shortsellers to prevent or discourage short sales of the issuer's securities to avoid depressing the value of its securities. The Manager and the Partnership could be subject to such private legal actions. The cost of and management time committed to defending any such action could be substantial. Gains from short sales of securities will generally be considered short-term capital gains, subject to less favorable tax rates. Short selling can occur only in a margin account. The Broker may not be able to accept the Partnership's order if the security it is attempting to sell short is not available to borrow. In certain situations, the Broker may borrow hard-to-borrow securities from sources external to the Broker, such as another brokerage firm; there is a fee for this which the Partnership must pay. If the lending firm requests the borrowed shares be returned, the Broker may buy-in the shares which the Partnership is short, close out the Partnership's short position, and deliver those borrowed shares back to the lending brokerage firm, regardless of the profit or loss to the Partnership. When the Partnership sells short, the Broker retains the proceeds of the sale, and industry regulations require the Partnership to make an initial deposit or have additional equity in the account based on the net proceeds of that sale. In addition, the Broker has minimum equity and maintenance requirements determined by share price. Leverage. The Partnership may use some leverage in its investment program when deemed appropriate by the Manager and subject to applicable regulations. At times, the amount of such leverage may be substantial. Leverage creates an opportunity for greater yield and total return, but at the same time increases exposure to capital risk and higher current expenses. If the Partnership purchases securities on margin and the value of those securities declines, the Partnership may be obligated to pay down the margin loans to avoid liquidation of the securities. If loans to the Partnership are collateralized with portfolio securities that decrease in value, the Partnership may be obligated to provide additional collateral to the lender in the form of cash or securities to avoid liquidation of the pledged securities. Any such liquidation could result in substantial losses. Moreover, counterparties of the Partnership, in their sole discretion, may change the leverage limits that they extend to the Partnership. Exchange Traded Funds (ETFs). The Partnership may invest an unspecified portion of the assets of the Partnership in exchange traded funds ("ETFs"). ETFs are a type of an investment company bought and sold on a securities exchange. An ETF represents a portfolio of securities designed to track groups of other securities, particular strategies, countries, industries, sectors, trends, commodities or market indices. The risks of owning an ETF generally reflect the risks of owning the underlying securities they are designed to track, although lack of liquidity in an ETF could result in it being more volatile. ETFs have management fees. Fixed Income Securities: In General. Fixed income securities are subject to credit and interest rate risks. Credit risk refers to the likelihood that an issuer will default on the payment of principal and/or interest on an instrument. Financial strength and solvency of an issuer are the primary factors influencing credit risk. In addition, lack or inadequacy of collateral or credit enhancement for a debt instrument may affect its credit risk. Credit risk may change over the life of an investment and securities which are rated by rating agencies are often reviewed and may be subject to downgrade. Interest rate risk refers to the risks associated with market changes in interest rates. Interest rate changes may affect the value of a debt instrument indirectly (especially in the case of fixed rate securities) and directly (especially m the case of instruments whose rates are adjustable). In general, rising interest rates will negatively impact the price of a fixed rate debt instrument and falling interest rates will have a positive effect on price. Adjustable rate instruments also react to interest rate changes in a similar manner although generally to a lesser degree (depending, however, on the characteristics of the reset terms, including the index chosen, frequency of reset and reset caps or floors, among other factors). Interest rate sensitivity is generally more pronounced and less predictable in instruments with uncertain payment or prepayment schedules. 13 EFTA00295527 Fixed Income Securities: Interest Rate Risks. The value of all bonds and other fixed income investments change as interest rates in general fluctuate. When interest rates decline, the value of bonds and other fixed income investments generally can be expected to rise. Conversely, when interest rates increase, the value of the bonds and other fixed income investments generally can be expected to decline. The results of the Partnership's investments in fixed income securities will depend to a large degree on the ability of the General Partner's skill and expertise in managing interest rate risk. Fixed Income Securities: Credit Risks. The Partnership is subject to the risk that issuers or insurers of instruments in which the Partnership invests and trades may default on their obligations under such instruments and that certain events may occur which have an immediate and significant adverse effect on the value of such instruments. There can be no assurance that an issuer of a security in which the Partnership invests will not default or that an event which has an immediate and significant adverse effect on the value of such instruments will not occur, and that the Partnership will not sustain a loss on a transaction as a result. Fixed Income Securities: Non-Investment Grade Debt Securities. The Partnership may invest in debt securities that are generally rated below investment grade (such as BB or lower by Standard & Poor's Corporation and/or Ba or lower by Moody's Investors Service, Inc. or not rated at all) or which are already in default. These securities are considered speculative and, while generally offering greater income than investments in higher quality securities, involve greater risk of loss of principal and income especially during periods of economic uncertainty or change. These lower quality bonds tend to be affected by economic changes, as well as public perception of those changes, to a greater extent than higher quality securities, which react primarily to fluctuations in the general level of interest rates. In addition, the market for lower-rated debt securities may be thinner and less active than that for higher- rated debt securities, which can adversely affect the prices at which the lower-rated debt securities are sold. If market quotations are not available, lower-rated debt securities will be valued by the general partner in its sole discretion. Judgment plays a greater role in valuing high yield corporate debt securities than is the case for securities for which more external sources for quotations and last sale information is available. Adverse publicity and changing investor perception may also affect the availability of outside pricing services to value lower-rated debt securities and the Partnership's ability to dispose of these securities. In addition, such securities generally present a higher degree of credit risk. Options Generally. The trading of options is highly speculative and may entail risks that are greater than those present when investing in other securities. Prices of options are generally more volatile than prices of other securities. The Partnership will be speculating on market fluctuations of securities and securities exchange indices while investing only a small percentage of the value of the securities underlying the option. A change in the market price of the underlying securities or underlying market index may cause a much greater change in the price of the option contract. In addition, to the extent that the Partnership purchases options that it does not sell or exercise, it will suffer the loss of the premium paid in such purchase. To the extent that the Partnership sells options and must deliver the underlying securities at the option price, the Partnership has a theoretically unlimited risk of loss if the price of such underlying securities increases. To the extent that the Partnership must buy the underlying securities, the Partnership risks the loss of the difference between the market price of the underlying securities and the option price. Any gain or loss derived from the sale or exercise of an option will be reduced or increased, respectively, by the amount of the premium paid. The expenses of option investing include commissions payable on the purchase and on the exercise or sale of an option. Stock or index options that may be purchased or sold by the Partnership include options not traded on a securities exchange. Options not traded on an exchange are not issued by the Options Clearing Corporation; therefore, the risk of nonperformance by the obligor on such an option may be greater and the ease with which the Partnership can dispose of such an option may be less than in the case of an exchange traded option issued by the Options Clearing Corporation. 14 EFTA00295528 Special risks are associated with the use of options. A decision as to whether, when and how to use options involves the exercise of skill and judgment which are different from those needed to select other portfolio securities, and even a well-conceived transaction may be unsuccessful to some degree because of market behavior, currency fluctuations or interest rate trends. If the General Partner is incorrect in its forecasts regarding market values or other relevant factors, the Partnership may be in a worse position than if the Partnership had not engaged in options transactions. The potential loss incurred by the Partnership in writing uncovered options is unlimited. When options are used as a hedging technique, there can be no guaranty of a correlation between price movements in the option and in the portfolio securities being hedged. A lack of correlation could result in a loss on both the hedged securities and the hedging vehicle, so that the Partnership's return might have been better had hedging not been attempted. Call Options. The Partnership will engage in sales or purchases of call options. The seller (writer) of a call option which is covered (e.g., the write