investment funds - us gaap illustrative financial statements

Investment fundsIllustrative US GAAP fi nancial statements

December 31, 2014

www.moorestephens.com PREC ISE . PROVEN . PERFORMANCE .

Illustrative financial statements – Investment funds

i

Introduction

The breadth and depth of the US capital markets have long attracted an appetite for

investment. However preparing financial statements for funds which meet the requirements

of US Generally Accepted Accounting Principles (US GAAP) and which are also engaging

and informative can be a challenge. Therefore we have developed the following illustrative

financial statements for US investment funds.

In order to ensure that these illustrative financial statements remain fully compliant and

up to date, we will review and revise them on an annual basis. We will incorporate

changes made to US GAAP by the Financial Accounting Standards Board. As part of our

review we will also consider any developments in best practice, evolving our accounts

presentation accordingly.

These US GAAP accounts follow on from our well-received illustrative accounts prepared

under International Financial Reporting Standards (IFRS), published for the first time in 2013.

Having advised international investment funds for many years, our professional teams at

Moore Stephens understand not only the content required by the differing accounting

regimes, but also how best to present it. In the future we intend to combine both sets of

illustrative financial statements in a single document, providing a handy point of reference

for anyone preparing investment fund accounts in line with IFRS, IFRS for SMEs or US GAAP.

If you would like to discuss any aspects of our approach in presenting these illustrative

accounts, please get in touch. We would be delighted to receive any feedback you have

to offer.

US GAAPFinancial statements for the year ended December 31, 2014

ii

Our team

Americas

Grand Cayman

Karl Jordan – Partner, Moore Stephens Decosimo Cayman [email protected]

New York

Barry Goodman – Partner, Grassi and [email protected]

San Francisco

Matt Armanino – [email protected]

Chicago

Timothy J. Quinn – Partner, Bansley and Kiener, [email protected]

Europe

London

Geoff Woodhouse – Partner, Moore Stephens [email protected]

Lorraine Bay – Partner, Moore Stephens [email protected]

Tim West – Partner, Moore Stephens [email protected]

Monaco

Andrew Gallagher – Partner, Moore Stephens [email protected]

Patricia Osborne – Partner, Moore Stephens [email protected]

Geneva

Jacques Grossen – Partner, Moore Stephens Refidar [email protected]

Dublin

Andy Quinn – Partner, Moore Stephens [email protected]

Cormac Reilly – Partner, Moore Stephens [email protected]

Jersey

Adrian Moll – Director, Moore Stephens Fund Administration [email protected]

Nicholas Solt – Partner, Moore Stephens [email protected]

Luxembourg

Anna Skornik – Partner, Moore Stephens Audit [email protected]

Holger Stölben – Partner, Moore Stephens Audit [email protected]

Far East

China

Liang Chun – Partner, Moore Stephens Dahua [email protected]

Zhou Long – Partner, Moore Stephens Dahua [email protected]

Singapore

Mei Leng Lao – Partner, Moore Stephens [email protected]

Mick Aw – Partner, Moore Stephens [email protected]

Middle East

Dubai

John Adcock – Partner, Moore [email protected]

Kuwait

Idris Atcha – Partner, Moore Stephens AL Saleh & [email protected]

Muscat

Prasad Inna – Director, Moore [email protected]


iii

Contents

US GAAP ................................................................................................................................1Statement of assets and liabilities ........................................................................................................................................................2

Statement of operations .....................................................................................................................................................................3

Statement of changes in partners’ capital1 ..........................................................................................................................................4

Statement of cash flows2 ....................................................................................................................................................................5

Condensed schedule of investments3 ..................................................................................................................................................6

Notes to the financial statements ......................................................................................................................................................11

1. Nature of organization ..................................................................................................................................................................11

2. Summary of significant accounting policies ..................................................................................................................................11

2.1 Basis of presentation .............................................................................................................................................................11

2.2 Use of estimates ...................................................................................................................................................................11

2.3 Cash and cash equivalents ....................................................................................................................................................11

2.4 Investment valuation ............................................................................................................................................................11

2.5 Foreign securities .................................................................................................................................................................11

2.6 Capital withdrawals payable .................................................................................................................................................12

2.7 Investment transactions and related income ..........................................................................................................................12

2.8 Income taxes .........................................................................................................................................................................12

3. Investment valuation and fair value measurements ........................................................................................................................13

3.1 Investments in securities and securities sold short, but not yet purchased (common, preferred stock and

exchange traded funds) .............................................................................................................................................................13

3.2 Corporate bonds ..................................................................................................................................................................14

3.3 Government bonds ...............................................................................................................................................................14

3.4 Derivative instruments ...........................................................................................................................................................14

3.4.1 Option contracts ..........................................................................................................................................................14

3.4.2 Futures contracts .........................................................................................................................................................14

3.4.3 Warrants ......................................................................................................................................................................14

3.4.4 Interest rate swaps .......................................................................................................................................................14

3.5 Investments in private operating companies ..........................................................................................................................15

3.6 Fair value – valuation processes .............................................................................................................................................16

4. Due from broker and custody concentrations ................................................................................................................................17

5. Securities sold, but not yet purchased ...........................................................................................................................................17

1 Supplementary information on partners’ capital account balances is not required.2 Statement of cash flows may not be required if the fund qualifies under FASB ASC 230 – Statement of Cash Flows.3 The schedule of investments can be either prepared as “condensed” or all investments may be disclosed.


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v

6. Derivative contracts .......................................................................................................................................................................17

6.1 Option contracts ...................................................................................................................................................................18

6.2 Warrants ...............................................................................................................................................................................18

6.3 Interest rate swaps ................................................................................................................................................................18

6.4 Futures contracts ..................................................................................................................................................................18

6.5 Volume of derivative activities: .............................................................................................................................................19

7. Partners’ capital ............................................................................................................................................................................20

7.1 Contributions .......................................................................................................................................................................20

7.2 Withdrawals .........................................................................................................................................................................20

8. Related party transactions ............................................................................................................................................................20

9. Administration .............................................................................................................................................................................21

10. New issues ..................................................................................................................................................................................21

11. Financial highlights .....................................................................................................................................................................21

12. Subsequent events ......................................................................................................................................................................21

About Moore Stephens .........................................................................................................22

Contents (continued)


vi


1

US GAAP

Investment funds Illustrative US GAAP financial statementsDecember 31, 2014

2


Statement of assets and liabilities

Reference:ASC 2104

ASC 9465

Statement of assets and liabilities(Stated in US Dollars, unless otherwise indicated)

2014

Assets

Assets

Investments in securities, at fair value (cost $99,062,000) 104,875,000

Investments in private operating companies, at fair value (cost $15,000,000) 18,000,000

Due from broker 3,775,000

Cash and cash equivalents 300,000

Dividends and interest receivable 50,000

Total assets 127,000,000

Liabilities and partners’ capital

Liabilities

Securities sold, but not yet purchased, at fair value (proceeds $800,000) 1,090,000

Dividends and interest payable 35,000

Capital contributions received in advance 3,020,000

Management fee payable 50,000

Capital withdrawals payable 100,000

Accrued expenses 30,000

Total liabilities 4,325,000

Partners’ capital 122,675,000

Total liabilities and partners’ capital 127,000,000

See accompanying notes to financial statements.

4 FASB ASC 210 – Balance Sheet.5 FASB ASC 946 – Financial Services: Investment Companies


3Statement of operations

Reference:ASC 2256

ASC 9467

Statement of operations(Stated in US Dollars, unless otherwise indicated)

2014

Investment income

Interest 100,000

Dividends (net of withholding taxes of $6,500) 1,200,000

Total investment income 1,300,000

Expenses

Interest 35,000

Dividends on securities sold, but not yet purchased 70,000

Management fee 1,040,000

Administrative fee 50,000

Professional fees and other 75,000

Total expenses 1,270,000

Net investment income 30,000

Realized and unrealized gain on investments

Net realized gain on securities 3,295,000

Net realized gain from derivative contracts 45,000

Net change in unrealized gain on securities 142,000

Net change in unrealized gain from derivative contracts 13,000

Net change in unrealized gain on investments in private operating companies 150,000

Total realized and unrealized gain on investments 3,645,000

Net income 3,675,000


6 FASB ASC 225 – Income Statement.7 FASB ASC 946 – Financial Services: Investment Companies.

4


Statement of changes in partners’ capital

Reference:ASC 2158

ASC 9469

Statement of changes in partners’ capital(Stated in US Dollars, unless otherwise indicated)

General partner

Limited partners

Total

Balance at January 1, 2014 10,000,000 90,000,000 100,000,000

– Capital contributions – 20,000,000 20,000,000

– Capital withdrawals – (1,000,000) (1,000,000)

Transfers of capital (1,000,000) 1,000,000 –

Allocation of net income

– Pro rata allocation 350,000 3,325,000 3,675,000

– Incentive reallocation 665,000 (665,000) –

Balance at December 31, 2014 10,015,000 112,660,000 122,675,000


8 FASB ASC 215 – Statement of Shareholders’ Equity.9 FASB ASC 946 – Financial Services: Investment Companies.


5Statement of cash flows

Reference:ASC 23010

Statement of cash flows(Stated in US Dollars, unless otherwise indicated)

2014

Cash flows from operating activities

Net income 3,675,000

Adjustments to reconcile net income to net cash used in operating activities:

– Purchases of investments in securities (13,500,000)

– Proceeds from sale of investments in securities 15,755,000

– Purchases of investments in private operating companies (5,000,000)

– Proceeds from sale of investments in private operating companies 2,625,000

– Net realized gain on securities (3,295,000)

– Net realized gain from derivative contracts (45,000)

– Net change in unrealized gain on securities (142,000)

– Net change in unrealized gain from derivative contracts (13,000)

– Net change in unrealized gain on investments in private operating companies (150,000)

Changes in assets and liabilities:

– Due from broker (525,000)

– Dividends and interest receivable 10,000

– Dividends and interest payable 300,000

– Capital contributions received in advance (25,000)

– Management fee payable (120,000)

– Accrued expenses (125,000)

Net cash used in operating activities (575,000)

Cash flows from financing activities

Capital contributions 20,000,000

Capital withdrawals (19,200,000)

Net cash provided by financing activities 800,000

Net changes in cash and cash equivalents 225,000

Cash and cash equivalents at January 1, 2014 75,000

Cash and cash equivalents at December 31, 2014 300,000

Supplemental disclosure of cash flow information

Cash paid during the year for interest 35,000

Supplemental disclosures of noncash financing activities

Capital withdrawals payable 100,000


10 FASB 230 – Statement of Cash Flows Statement of cash flows is required for hedge funds given liquidity constraints of certain types of investments.

6


Condensed schedule of investments

Reference:ASC 94611

Condensed schedule of investments(Stated in US Dollars, unless otherwise indicated)

Number of shares

% of partners’ capital

Fair value

Investments in securities

Common stock

• United States

– Consumer goods 8.27 10,150,000

– Defense 5.16 6,325,000

– Distribution 4.08 5,000,000

– Energy 6.11 7,500,000

– Financial services

- ABC Financial12 1,200 12.23 15,000,000

- Other 0.08 100,000

– Health care 1.63 2,000,000

– Manufacturing 2.45 3,000,000

– Media and entertainment 2.85 3,500,000

– Miscellaneous financial 2.04 2,500,000

– Real estate 2.04 2,500,000

– Service 8.52 10,450,000

– Technology 7.77 9,529,000

Total United States (cost $77,000,000) 63.23 77,554,000

• Korea

– Consumer products 1.63 2,000,000

– Industrials 0.82 1,000,000

Total Korea (cost $2,500,000) 2.45 3,000,000

• Japan


Total Japan (cost $1,500,000) 2.04 2,500,000

Total common stocks (cost $81,000,000) 67.72 83,054,000


11 FASB ASC 946-210-50 for specific disclosure requirements.12 Individual investment accounts for greater than 5% of partners’ capital should be disclosed separately.


7Condensed schedule of investments

Reference:ASC 94611

Condensed schedule of investments(Stated in US Dollars, unless otherwise indicated)

Principal amount/shares


Fair value


Corporate bonds

• United States

– Banking

- Banking Company 10.25%, 7/15/203112 12,000,000 11.41 14,000,000

- Other 0.16 200,000

– Manufacturing 0.49 600,000

Total United States (cost $12,000,000) 12.06 14,800,000

• United Kingdom


– Industrials 1.35 1,650,000

Total United Kingdom (cost $5,715,000) 5.43 6,650,000

Total corporate bonds (cost $17,715,000) 17.49 21,450,000

Government bonds

• United States

– US Treasury Bills, 4.75%, 4/1/2015 (cost $40,000) 0.04 50,000

Total government bonds (cost $40,000) 0.04 50,000

Preferred stocks

• United States

– Banking (cost $10,000) 0.01 13,000

Total preferred stocks (cost $10,000) 0.01 13,000

Exchange traded funds

• United States

– Real estate (cost $12,000) 0.01 8,000

Total exchange traded funds (cost $12,000) 0.01 8,000


8


Condensed schedule of investments

Reference: Condensed schedule of investments(Stated in US Dollars, unless otherwise indicated)

Expiration dates

Number of contracts


Fair value


Derivative contracts – assets

• Interest rate swaps

– United States

- Floating/fixed 0.02 25,000

- Fixed/floating 0.06 75,000

Total interest rate swaps (cost $95,000) 0.08 100,000

• Warrants purchased

– United States

- Financial 0.01 15,000

- Telecommunications 0.03 35,000

Total warrants purchased (cost $48,000) 0.04 50,000

• Futures contracts

– United States

- Indices

- S&P 500 Mar-May 2018 2,000 0.01 15,000

- Telecommunications 0.03 35,000

Total futures contracts (cost $48,000) 0.04 50,000

Option contracts purchased

• Call options purchased

– United States

- Healthcare 0.01 15,000

- Financial 0.03 35,000

Total call options purchased (cost $47,000) 0.04 50,000

• Put options purchased

– United States

- Healthcare 0.01 15,000

- Financial 0.03 35,000

Total put options purchased (cost $47,000) 0.04 50,000

Total option contracts purchased (cost $94,000) 1.00 100,000

Total derivative contracts – assets (cost $285,000) 3.00 300,000.00

Total investments in securities (cost $99,062,000) 85.51 104,875,000



9Condensed schedule of investments


Number of shares


Fair value

Investments in private operating companies

United States

• Financial

– ABC Company – Series A Preferred Stock 3,000,000 8.15 10,000,000

– Other 0.16 200,000

Total financial (cost $10,000,000) 8.31 10,200,000

• Technology

– DEF Company – Common Stock 500,000 5.95 7,300,000

– Other 0.41 500,000

Total technology (cost $5,000,000) 6.36 7,800,000

Total investments in private operating companies (cost $15,000,000)

14.67 18,000,000



10 Condensed schedule of investments


Number of shares


Fair value

Securities sold, but not yet purchased

Common stocks

• United States

– Consumer goods 0.07 80,000

– Defense 0.08 100,000

– Distribution 0.05 60,000

– Energy 0.03 40,000

– Health care 0.02 23,000

– Manufacturing 0.05 66,000

– Media and entertainment 0.07 84,000

– Miscellaneous financial 0.05 57,000

– Real estate 0.10 121,000

– Service 0.11 132,000

– Technology 0.03 33,000

Total United States (proceeds $600,000) 0.66 796,000

• Korea

– Consumer products 0.05 65,000

– Industrials 0.07 88,000

Total Korea (proceeds $100,000) 0.12 153,000

• Japan

– Consumer products 0.06 75,000

Total Japan (proceeds $50,000) 0.06 75,000

Total common stocks (proceeds $750,000) 0.84 1,024,000

Preferred stock

• United Kingdom

– Consumer goods 0.02 26,000

– Defense 0.03 40,000

Total preferred stocks (proceeds $50,000) 0.05 66,000

Total securities sold, not yet purchased, (proceeds $800,000) 0.89 1,090,000



11Notes to the financial statements

Reference: Notes to the financial statements(Stated in US Dollars, unless otherwise indicated)

ASC 27213

1. Nature of organizationFund L.P. (the “Partnership”), was organized in the State of Delaware as a limited partnership for the purpose of

trading and investing in securities. The Partnership shall continue until December 31, 2017 unless sooner

terminated or extended as provided for in the Partnership Agreement (the “Agreement”).

The investment objective of the Partnership is to invest in financial instruments traded in the United States and

other foreign markets. Management L.P. (the “General Partner”), serves as the general partner of the

Partnership. The Partnership’s investing activity is the responsibility of Advisers Inc. (“Investment Adviser”), which

is a registered investment adviser.

ASC 23514

ASC 275

2. Summary of significant accounting policies 2.1 Basis of presentationThe financial statements have been prepared in conformity with accounting principles generally accepted in the

United States of America (“US GAAP”).

2.2 Use of estimatesThe preparation of financial statements in conformity with US GAAP requires management to make estimates

and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets

and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during

the reporting period. Actual results could differ from these estimates and these differences could be material.

2.3 Cash and cash equivalentsCash and cash equivalents include short-term, highly liquid investments, such as certificates of deposit or money

market funds that are readily convertible to known amounts of cash and have original maturities of three

months or less.

2.4 Investment valuation As more fully described elsewhere in the notes to the financial statements, all investments are recorded at their

estimated fair value.

2.5 Foreign securities The values of securities and cash and cash equivalents which are denominated in foreign currencies are stated

using the exchange rate in effect as of the date of valuation.

13 FASB ASC 272-10-50-3 requires limited liability companies to disclose the following:

– a description of any limitation of its members’ liability;

– difference classes of members’ interest and respective rights; and

– if the limited liability company has a finite life/date cease to exist.14 FASB ASC 235 – Notes to Financial Statements.


12 Notes to the financial statements

ASC 48015

ASC 60516

ASC 74017

Purchases and sales of investments, interest and dividend income and expense which are denominated in

foreign currencies are recorded at the exchange rate as of the date of the transaction. For financial statement

purposes, the Partnership does not isolate that portion of the gain or loss on securities resulting from exchange

rate fluctuation. Such changes are combined with changes in market prices and included in realized or

unrealized gain/loss on investments, net, in the statement of operations.

2.6 Capital withdrawals payableWithdrawals are recognized as liabilities, net of expenses and performance allocation, if applicable, when the

amount requested in the withdrawal notice becomes fixed or determinable. This generally may occur either at

the time of the receipt of the notice, or on the last day of a fiscal period, depending on the nature of the

request. As a result, withdrawals paid after the end of the year, but based upon year-end capital balances, are

reflected as capital withdrawals payable as of December 31, 2014. Capital withdrawals payable may be treated

as capital for purposes of allocations of gains and losses until the close of business on the effective withdrawal

date, pursuant to the Agreement.

2.7 Investment transactions and related incomePurchases and sales of investments and investments in private operating companies are recorded on a trade-date

basis. Realized gains and losses are determined using costs calculated on a first-in, first-out method. Dividend

income is recognized on the ex-dividend date and interest income is recognized on the accrual basis.

Withholding taxes on foreign dividends have been provided for in accordance with the Partnership’s

understanding of the applicable countries’ tax rules and rates. Premiums and discounts on fixed income

securities are amortized over the lives of the related securities.

2.8 Income taxesNo provision for federal, state and local income taxes has been made in the accompanying financial statements,

as individual partners are responsible for their proportionate share of the Partnership’s taxable income. Interest,

dividends and other income realized by the Partnership from non-US sources and capital gains realized on the

sale of securities of non-US issuers may be subject to withholding and other taxes levied by the jurisdiction in

which the income is sourced.

The Partnership recognizes a tax benefit from an uncertain position only if it is more likely than not the position

is sustainable, based solely on its technical merits and consideration of the relevant taxing authority’s widely

understood administrative practices and precedents. If this threshold is met, the Partnership measures the tax

benefit as the largest amount of benefit that is greater than fifty percent likely being realized upon ultimate

settlement. The Partnership is subject to potential examination by taxing authorities in various jurisdictions. The

tax years that remain subject to examination by taxing authorities are 2010, 2011 and 2012. The Partnership

recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the

statement of operations. The Partnership determined that there are no uncertain tax positions which would

require adjustments or disclosures in the financial statements.

15 FASB ASC 480-10-25 – liabilities should be recognized when withdrawal requests have been approved by the General Partner.16 FASB ASC 605 – Revenue Recognition.17 FASB ASC 740 – Income Taxes.



ASC 82018

3. Investment valuation and fair value measurementsThe Partnership utilizes various methods to measure the fair value of its investments on a recurring basis. US

GAAP establishes a hierarchy that prioritizes the inputs to valuation methods. The three levels of input are:

Level 1

Inputs are based on unadjusted quoted prices in active markets that the Partnership has the ability to access for

identical assets or liabilities.

Level 2

Observable inputs other than quoted prices in active markets included in Level 1 that are observable for the

similar asset or liability, either directly or indirectly. These inputs may include quoted prices for the identical

instrument in an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk,

yield curves, default rates and similar data.

Level 3

Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available

representing the Partnership’s own assumptions about the assumptions a market participant would use in

valuing the asset or liability, based on the best information available.

The availability of observable inputs can vary from security to security and is affected by a wide variety of factors,

including, for example, the type of investment, whether the investment is new and not yet established in the

marketplace, the liquidity of markets, and other characteristics particular to the transaction. To the extent the

valuation is based on models or inputs that are less observable or unobservable in the market, the determination

of fair value requires more judgment. Because of the inherent uncertainty of valuation, those estimated values

may be materially higher or lower than the values that would have been used had a ready market for the

investments existed. Accordingly, the degree of judgment exercised by the Partnership in determining fair value

is greatest for instruments categorized in Level 3 of the fair value hierarchy.

The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for

disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its

entirety, is determined based on the lowest level input that is significant to the fair value measurement.

Transfers between levels are recognized at the end of the reporting period.

A description of the valuation techniques applied to the Partnership’s major categories of assets and liabilities

measured at fair value on a recurring basis are as follows:

3.1 Investments in securities and securities sold short, but not yet purchased (common, preferred stock and exchange traded funds) Investments in securities and securities sold, but not yet purchased which are traded on national securities

exchanges are valued at the last reported sales price as of the valuation date. Investments in securities and

securities sold, but not yet purchased which are traded in the over-the-counter (“OTC”) market are valued at the

last reported bid and asked prices, respectively. To the extent these securities are actively traded and valuation

adjustments are not applied, they are categorized in Level 1 of the fair value hierarchy. Securities traded in

inactive markets or valued by reference to similar instruments are generally categorized in Level 2 of the fair

value hierarchy.

18 FASB ASC 820 – Fair Value Measurements and Disclosures.



3.2 Corporate bonds The fair value of corporate bonds is estimated using recently executed transactions, market price quotations

(where observable), bond spreads, or credit default swap spreads. The spread data used is for the same maturity

as the bond. If the spread data does not reference the issuer, then data that references a comparable issuer is

used. When observable price quotations are not available, fair value is determined based on cash flow models

using yield curves, bond or single name credit default swap spreads, and recovery rates based on collateral

values as key inputs. Corporate bonds are generally categorized in Level 2 of the fair value hierarchy. In instances

where significant inputs are unobservable, they are categorized in Level 3 of the fair value hierarchy.

3.3 Government bondsThe fair value of sovereign government bonds is generally based on quoted prices in active markets. When

quoted prices are not available, fair value is determined based on a valuation model that uses inputs that include

interest rate yield curves, cross-currency basis index spreads, and sovereign credit spreads similar to the bond in

terms of issuer, maturity and seniority. Sovereign government bonds are generally categorized in Level 1 or Level

2 of the fair value hierarchy.

3.4 Derivative instruments3.4.1 Option contracts

The fair value of options which are listed on major securities exchanges are valued at their last reported sales

price as of the valuation date or based on the midpoint of the bid/asked spread at the close of business.

Depending on the frequency of trading, options are generally categorized in Level 1 or Level 2 of the fair value

hierarchy.

3.4.2 Futures contracts

Futures contracts which are listed on major securities exchanges are valued at their last reported sales price as of

the valuation date. Listed futures contracts are generally categorized in Level 1 of the fair value hierarchy.

3.4.3 Warrants

Warrants which are listed on major securities exchanges are valued at their last reported sales price as of the

valuation date. The fair value of OTC warrants is valued using the Black-Scholes option pricing model, a

valuation technique that follows the income approach. This pricing model takes into account the contract terms

(including maturity) as well as multiple inputs, including, time value, implied volatility, equity prices, interest rates

and currency rates. Warrants are generally categorized in Level 2 or Level 3 of the fair value hierarchy.

3.4.4 Interest rate swaps

Interest rate swaps that are traded on major securities exchanges are valued at their last reported sales price as

of the valuation date. These listed interest rate swaps are generally categorized in Level 1 or Level 2 of the fair

value hierarchy. Interest rate swaps are also traded on the OTC market. The fair value for interest rate swaps is

derived using a pricing model that is widely accepted by marketplace participants. The pricing model takes into

account the contract terms (including maturity) as well as multiple inputs, including, where applicable, interest

rates, prepayment speeds and currency rates. Many inputs into the model do not require material subjectivity as

they are observable in the OTC market. Interest rate swaps are generally categorized in Level 2 of the fair value

hierarchy.



3.5 Investments in private operating companiesInvestments in private operating companies consist of direct private common and preferred stock investments.

The transaction price, excluding transaction costs, is typically the Partnership’s best estimate of fair value at

inception. When evidence supports a change to the carrying value from the transaction price, adjustments are

made to reflect expected exit values in the investment’s principal market under current market conditions.

Ongoing reviews by the Partnership’s management are based on an assessment of trends in the performance of

each underlying investment from the inception date through the most recent valuation date.

These assessments typically incorporate valuation techniques using the income approach or the market

approach. The income approach measures the present worth of anticipated future economic benefits (i.e. net

cash flows). The net cash flows is forecast over the expected remaining economic life and discounted to present

value using an appropriate risk-adjusted discount rate. The market approach includes an analysis of valuation

metrics of comparable public companies and recent merger and acquisition transactions for the development of

multiples used in valuations. In certain instances, the Partnership may use multiple valuation techniques for a

particular investment and estimate its fair value based on a weighted average or a selected outcome within a

range of multiple valuation results. These investments in private operating companies are categorized in Level 3

of the fair value hierarchy.

Inputs relied upon by the income approach include annual projected cash flows for each investment through their

respective investment horizons. These cash flow assumptions may be probability-weighted to reflect the risks

associated with achieving expected performance levels across various business scenarios. Investments valued

using a market approach utilized valuation multiples times the annual earnings before interest, taxes, depreciation

and amortization (“EBITDA”), or another performance metric such as revenues or net earnings. The selected

valuation multiples were estimated through a comparative analysis of the performance and characteristics of each

investment within a range of comparable companies or transactions in the observable marketplace.

The following table summarizes the inputs used to value the Partnership’s assets and liabilities measured at fair

value as of December 31, 2014:

Level 1 Level 2 Level 3 Total

Assets

Description

• Common stocks 83,054,000 – 8,000,000 91,054,000

• Corporate bonds – 21,450,000 – 21,450,000

• Government bonds – 50,000 – 50,000

• Preferred stocks 13,000 – 10,000,000 10,013,000

• Exchange traded funds 8,000 – – 8,000

• Interest rate swaps – 100,000 – 100,000

• Options – 100,000 – 100,000

• Warrants – 50,000 – 50,000

• Futures 50,000 – – 50,000

Total assets

Level 1 Level 2 Level 3 Total

Liabilities

Description

• Common stocks 1,024,000 – – 1,024,000

• Preferred stocks 66,000 – – 66,000

Total liabilities 1,090,000 – – 1,090,000



The following is a reconciliation of the Partnership’s Level 3 investments for which significant unobservable

inputs were used to determine fair value.

Opening balance

January 1, 2014

Total gain or loss

(realized & unrealized)

Purchases SalesTransfers

into level 3

Transfers out of level 3

Closing balance

December 31, 2014

• Common stock

7,475,000 150,000 3,000,000 (2,625,000) – – 8,000,000

• Preferred stock

8,000,000 – 2,000,000 – – – 10,000,000

Total 15,475,000 150,000 5,000,000 (2,625,000) – – 18,000,000

The amount of gains/losses included in income attributable to the change in unrealized gains/losses

relating to assets still held at December 31, 2014

Common Stock 150,000

3.6 Fair value – valuation processesThe Partnership establishes valuation processes and procedures to ensure that the valuation techniques for

investments that are categorized within Level 3 of the fair value hierarchy are fair, consistent, and verifiable. The

Partnership designates a Valuation Committee (the “Committee”) to oversee the entire valuation process of the

Partnership’s Level 3 investments. The Committee comprises various Partnership personnel who are separate

from the Partnership’s portfolio management and trading functions, and the Committee reports to the

Partnership’s management. The Committee is responsible for developing the Partnership’s written valuation

processes and procedures, conducting periodic reviews of the valuation policies, and evaluating the overall

fairness and consistent application of the valuation policies.

The Committee meets on a monthly basis, or more frequently as needed, to determine the valuations of the

Partnership’s Level 3 investments. Valuations determined by the Committee are required to be supported by

market data, third-party pricing sources, industry accepted pricing models, counterparty prices, or other

methods the Committee deems to be appropriate, including the use of internal proprietary pricing models.

The Partnership periodically tests its valuations of Level 3 investments through performing back testing of the

sales of such investments by comparing the amounts realized against the most recent fair values reported, and if

necessary, uses the findings to recalibrate its valuation procedures. On an annual basis, the Partnership engages

the services of a nationally recognized third-party valuation firm to perform an independent review of the

valuation of the Partnership’s Level 3 investments, and may adjust its valuations based on the recommendations

from the valuation firm.

The following table summarizes the valuation techniques and significant unobservable inputs used for the

Partnership’s investments that are categorized within Level 3 of the fair value hierarchy as of December 31, 2014:



Fair value December 31,

2014

Valuation technique

Unobservable inputs

Range of inputs (weighted average)

Assets


• Common stock $8,000,000Market

comparable companies

EBITDA multiples 6x-10x (8x)

• Preferred stock $10,000,000Market

comparable companies

EBITDA multiples 8x-10x (9x)

ASC 82519

4. Due from broker and custody concentrationsThe amount due from broker in the statement of assets and liabilities includes cash held at the clearing broker

and collateral balances. Securities and cash held by the broker serve as collateral for securities sold short, but not

yet purchased.

In the normal course of business, the Partnership maintains its cash balances in financial institutions, which at

times may exceed federally insured limits. The Partnership is subject to credit risk to the extent any financial

institution with which it conducts business is unable to fulfill contractual obligations on its behalf. Management

monitors the financial condition of such financial institutions and does not participate any losses from these

counterparties.

5. Securities sold, but not yet purchasedThe Partnership is subject to certain inherent risks arising from its activities of selling securities short. The

ultimate cost to the Partnership to acquire these securities may exceed the liability reflected in the financial

statements.

ASC 81520

6. Derivative contractsIn the normal course of business, the Partnership enters into derivative contracts for investment purposes.

Typically, derivative instruments serve as components of the Partnership’s investment strategies and are utilized

primarily to structure the portfolio to economically match the investment strategies of the Partnership. These

instruments are subject to various risks, similar to non-derivative instruments, including market, credit, liquidity

and operational risks. The Partnership manages these risks on an aggregate basis along with the risks associated

with its investing activities as part of its overall risk management policy.

The Partnership’s derivative trading activities are primarily the purchase of futures contracts, warrants, options

and swaps. All derivatives are reported at fair value in the statement of assets and liabilities and changes in fair

value are reflected in the statement of operations. The amounts representing the fair value of derivative

contracts appearing on the condensed schedule of investments are shown based on whether the derivative is in

a net gain or loss position. These amounts are gross by product type and do not represent the credit risk of the

Partnership’s outstanding credit exposure.

19 FASB ASC 825-10-50-21 requires disclosure of the maximum amount of loss due to credit risks, based on the gross fair value of the financial instruments, that the entity would incur if the parties to the financial instruments that make up the concentration failed completely to perform, according to the terms of the contracts and the collateral or other security, if any, for the amount due proved to be of no value to the entity.

20 FASB ASC 815 – Derivatives and Hedging.



The Partnership traded in the following types of derivative instruments during the year ended December 31, 2014:

6.1 Option contractsThe Partnership may buy or sell short put and call options through listed exchanges and OTC markets. The buyer

has the right to purchase (in the case of a call option) or sell (in the case of a put option) a specified quantity of

a specific security or other underlying asset at a specified price prior to or on a specified expiration date. In

connection with selling options short, the Partnership is exposed to the risk of loss if the market price of the

underlying asset declines (in the case of a put option) or increases (in the case of a call option). The market and

credit risk associated with purchasing put and call options is limited to the amount originally paid.

Amounts paid on purchasing options are recorded as assets while proceeds received from selling options short

are recorded as liabilities on the statement of assets and liabilities, which are both subsequently adjusted to fair

value. The difference between the fair value of an option and the amount paid or proceeds received is treated as

unrealized gain/loss on investment, net.

6.2 WarrantsThe Partnership may receive warrants in connection with its investment in the debt or equity of certain

companies or may purchase warrants on the open market. A warrant is a security that entitles the holder to buy

stock of the company that issued it at a specified price with a pre-determined time period. The warrants provide

the Partnership with exposure and potential gains upon equity appreciation of the portfolio company’s share

price.

6.3 Interest rate swapsThe Partnership is exposed to interest rate risk when there is an unfavorable change in the value of investments

as a result of adverse movement in the market interest rates. The Partnership enters into interest rate swaps to

protect against such adverse movements in the interest rates. Interest rate swaps are contracts whereby

counterparties exchange different rates of interest on a specified notional amount netted against each other,

with the difference being paid by one party to the other. The differential to be paid or received on the interest

rate swap is recognized over the term of the agreement as a realized gain or loss with the payments made or

received on a net basis on the stated payment dates. Unrealized gains are reported as an asset and unrealized

losses are recorded as a liability in the statement of assets and liabilities.

6.4 Futures contractsThe Partnership may use futures to gain exposure to, or hedge against, changes in the value of equities and

commodities, interest rates or foreign currencies. A futures contract represents a commitment for the future

purchase or sale of an asset at a specified price on a specified date. Initial margin deposits, in either cash or

securities, are required to trade in the futures market. Futures contracts are marked to market daily and an

appropriate payable or receivable for the change in value (“variation margin”) is recorded by the Partnership.

Unrealized appreciation or depreciation on futures contracts is recognized to reflect the fair value of the

contracts and is included as a component of the net change in unrealized appreciation (depreciation) on

derivatives on the Partnership’s statement of operations. Variation margin is received or paid, depending on

whether unrealized appreciation or depreciation is incurred. When the contract is terminated, the Partnership

recognizes a realized gain or loss equal to the difference between the value of the contract at the time it was

entered into and the time it was closed.



The following tables summarize the fair value of derivative instruments on the statement of assets and liabilities

and the effect of derivative instruments on the statement of operations:

Asset derivative

Derivative Classification Fair value

Options Investments in Securities 100,000

Warrants Investments in Securities 50,000

Futures Investments in Securities 50,000

Interest Rate Swaps Investments in Securities 100,000

300,000

For additional detail on the above derivative instruments, see the accompanying condensed schedule of

investments.

Effect of trading activities on the statement of operations for the year ended December 31, 2014

Type of instrument Classification Trading revenue

Options Net realized gain 45,000

Warrants Net change in unrealized gain 13,000

6.5 Volume of derivative activities: At December 31, 2014, the volume of the Partnership’s derivative activities based on their notional amounts and

number of contracts, categorized by derivative, are as follows:

Long exposure

Derivative type Notional amounts (a) Number of contracts

• Equity price:

– Futures contracts 2,300,000 2,700

– Options contracts 1,500,000 675

– Equity swaps 500,000 575

– Warrants 1,000,000 725

• Interest rate:

– Interest rate swaps 5,000,000 1,000

Total 10,300,000

(a) Notional amounts are presented net of identical offsetting derivative contracts.

The Partnership frequently trades options throughout the year as an important part of their trading strategy. The

Partnership entered into $75,000 long and $30,000 short contracts during the year.



ASC 50521

7. Partners’ capitalIn accordance with the Agreement, profits and losses of the Partnership are allocated to partners according to

their respective interests in the Partnership. Subject to certain limitations, generally 20% of the net income

allocated to the limited partners is reallocated to the General Partner at the end of each calendar year. As

discussed in the Agreement, if there is a loss for an accounting period, the additional allocation will not apply to

future periods until the loss has been recovered.

Limited partners have redemption rights which contain certain restrictions with respect to rights of withdrawal

from the Partnership as specified in the Agreement. The early redemption fee represents the amount charged to

limited partners withdrawing capital prior to expiration of their agreed upon lock-up period. Refer to the

Agreement for more information.

7.1 Contributions Capital contributions to the Partnership may be accepted on the first day of each calendar quarter or on such

other days that the General Partner approves in advance in its sole discretion.

7.2 WithdrawalsA limited partner may, upon at least 30 calendar days’ prior written notice, withdraw all or any part of the

capital in its capital account on the last business day of each calendar quarter. Any limited partner who

withdraws capital prior to the first anniversary of the investment of such capital in the Partnership may, in the

discretion of the General Partner, be assessed a withdrawal fee up to 3% on such withdrawn amount, payable

to the Partnership. For the year ended December 31, 2014, there were no withdrawal fees assessed.

The General Partner may suspend or restrict the rights of limited partners to make withdrawals under certain

circumstances. In particular, if withdrawal requests are received for any withdrawal date aggregating more than

25% of the value of the capital accounts of the limited partners as of such date, the General Partner may, in its

sole discretion, reduce all such withdrawal requests pro rata in accordance with the respective values of the

withdrawing limited partners’ capital accounts so that only 25% of the value of the capital accounts of the

limited partners of the Partnership is withdrawn as of such date.

Capital withdrawals payable represent amounts due to partners based on withdrawals effective through

December 31, 2014. Capital withdrawals payable was $100,000 at December 31, 2014.

ASC 85022

8. Related party transactions Under the terms of the Agreement, the Partnership pays the General Partner a management fee at a rate of

0.25% of the net asset value of the limited partners’ capital at the end of each quarter (1% per annum). The

General Partner may waive or reduce the management fee for certain limited partners. For the year ended

December 31, 2014, the General Partner earned a management fee of $1,040,000, of which $50,000 remained

payable at December 31, 2014.

21 FASB ASC 505 – Equity.22 FASB ASC 850 – Related Party Disclosures.



9. Administration The Partnership has entered into an Administration Agreement with Administrator Inc (the “Administrator”).

Under this agreement, the Administrator is responsible for various administrative, registrar, and transfer agency

services, including calculation of the partners’ capital balances of the Partnership and the processing of

contributions, withdrawals, and transfers of the Partnership’s capital.

FINRA

Rule 5130

10. New issuesParticipation by partners in investments in “new issues” (defined, in part, as equity securities which are the

subject of a public distribution) are allocated to non-restricted partners and to the extent allowed, to restricted

partners in accordance with the Conduct Rules of the Financial Industry Regulatory Authority.

ASC 94623

11. Financial highlightsFinancial highlights for the year ended December 31, 2014 are as follows:

Ratio of expenses to average limited partners’ capital %

• Expenses 1.34

• Performance reallocation 0.70

Total expenses and performance reallocation 2.04

Net investment income 0.03

• Total return before performance reallocation 4.08

• Performance reallocation (0.70)

Total return 3.38

The expense and performance reallocation ratios, the net investment income ratio, and the total return

percentage are calculated for the limited partners taken as a whole. The computation of such ratios and return

based on the amount of expenses charged to, and performance fee reallocated from, any specific limited

partner may vary from the overall ratios presented in the financial statements as a result of such items as

differing management fee and performance reallocation arrangements, loss carryforwards, eligibility for new

issue income, and the timing of capital contributions and withdrawals. The net investment income ratio does

not reflect the effects of any performance reallocations.

ASC 85524

12. Subsequent eventsThe Partnership has evaluated all events or transactions that occurred after December 31, 2014 through the

date of these financial statements, which is the date that the financial statements were available to be issued.

Management has determined that there are no material events that would require adjustment to or disclosure in

the Partnership’s financial statements.

23 FASB ASC 946-205-50 – Non-Registered Investment Partnership – Financial Highlights.24 FASB ASC 855 – Subsequent events.

Disclose significant capital transactions occurring subsequent to year end.


22

About Moore Stephens

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We believe the information in this report to be correct at the time of going to press but we cannot accept any responsibility for any loss occasioned to any person acting or refraining from acting as a result of any item herein. The information contained in this report is the property of Moore Stephens LLP, and may not be reproduced in any format by anyone without prior written approval from Moore Stephens LLP. Printed and published by © Moore Stephens LLP, a member firm of Moore Stephens International Limited, a worldwide network of independent firms. MSIL and its member firms are legally distinct and separate entities. Moore Stephens LLP is registered to carry on audit work in the UK and Ireland by the Institute of Chartered Accountants in England and Wales. Authorised and regulated by the Financial Conduct Authority for investment business. DPS25307 September 2014

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