As filed with the U.S. Securities and Exchange Commission on
August 2, 2000
Investment Company Act File No. 811-09883
-----------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
|X| REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
|X| Amendment No. 1
-------------------------
J.P. Morgan Hedge Fund Series/core, L.L.C.
(Formerly, J.P. Morgan Multi-Manager Strategies Fund I, L.L.C.)
(Exact name of Registrant as specified in Charter)
c/o J.P. Morgan & Co., Incorporated
522 Fifth Avenue
New York, New York 10036
(Address of principal executive offices)
Registrant's Telephone Number, including Area Code:
(212) 483-2323
-------------------------
STEVEN M. GREENSPAN, ESQ.
c/o J.P. Morgan & Co., Incorporated
522 Fifth Avenue
New York, New York 10036
(Name and address of agent for service)
Copy to:
STUART H. COLEMAN, ESQ.
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038-4982
-------------------------
<PAGE>
Memorandum
Number:
-----------------------
Issued To:
-----------------------
-----------------------
===============================================================================
J.P. MORGAN HEDGE FUND SERIES/CORE, L.L.C.
J.P. MORGAN HEDGE FUND SERIES/ALPHA, L.L.C.
(Delaware Limited Liability Companies)
CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM
PURSUANT TO AN EXEMPTION FROM THE COMMODITY FUTURES TRADING COMMISSION IN
CONNECTION WITH POOLS WHOSE PARTICIPANTS ARE LIMITED TO QUALIFIED ELIGIBLE
PARTICIPANTS, AN OFFERING MEMORANDUM FOR THESE POOLS IS NOT REQUIRED TO BE, AND
HAS NOT BEEN, FILED WITH THE COMMISSION. THE COMMODITY FUTURES TRADING
COMMISSION DOES NOT PASS UPON THE MERITS OF PARTICIPATING IN A POOL OR UPON THE
ADEQUACY OR ACCURACY OF AN OFFERING MEMORANDUM. CONSEQUENTLY, THE COMMODITY
FUTURES TRADING COMMISSION HAS NOT REVIEWED OR APPROVED THIS OFFERING OR ANY
OFFERING MEMORANDUM FOR THESE POOLS.
INTERESTS IN J.P. MORGAN HEDGE FUND SERIES/CORE, L.L.C. ("FUND CORE") AND J.P.
MORGAN HEDGE FUND SERIES/ALPHA, L.L.C. ("FUND ALPHA") (EACH, A "FUND" AND
COLLECTIVELY, THE "FUNDS") ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY. INTERESTS ARE NOT DEPOSITS OR OTHER
OBLIGATIONS OF, AND ARE NOT GUARANTEED BY, MORGAN GUARANTY TRUST COMPANY OF NEW
YORK OR ANY OTHER BANK. INTERESTS ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF THE FULL AMOUNT INVESTED.
THE INTERESTS IN THE FUNDS WHICH ARE DESCRIBED IN THIS CONFIDENTIAL MEMORANDUM
("MEMORANDUM") HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "1933 ACT"), OR THE SECURITIES LAWS OF ANY OF THE
STATES OF THE UNITED STATES. THE OFFERING CONTEMPLATED BY THIS MEMORANDUM WILL
BE MADE IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
1933 ACT FOR OFFERS AND SALES OF SECURITIES WHICH DO NOT INVOLVE ANY PUBLIC
OFFERING, AND ANALOGOUS EXEMPTIONS UNDER STATE SECURITIES LAWS.
THIS MEMORANDUM SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY NOR SHALL THERE BE ANY SALE OF INTERESTS IN THE FUNDS IN ANY
JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE IS NOT AUTHORIZED OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER, SOLICITATION OR SALE. NO
PERSON HAS BEEN AUTHORIZED TO MAKE ANY REPRESENTATIONS CONCERNING THE FUNDS THAT
ARE INCONSISTENT WITH THOSE CONTAINED IN THIS MEMORANDUM. PROSPECTIVE INVESTORS
SHOULD NOT RELY ON ANY INFORMATION NOT CONTAINED IN THIS MEMORANDUM OR THE
APPENDICES HERETO.
THIS MEMORANDUM IS INTENDED SOLELY FOR THE USE OF THE PERSON TO WHOM IT HAS BEEN
DELIVERED FOR THE PURPOSE OF EVALUATING A POSSIBLE INVESTMENT BY THE RECIPIENT
IN INTERESTS IN THE FUNDS, AND IS NOT TO BE REPRODUCED OR DISTRIBUTED TO ANY
OTHER PERSONS (OTHER THAN PROFESSIONAL ADVISERS OF THE PROSPECTIVE INVESTOR
RECEIVING THIS DOCUMENT).
PROSPECTIVE INVESTORS SHOULD NOT CONSTRUE THE CONTENTS OF THIS MEMORANDUM AS
LEGAL, TAX OR FINANCIAL ADVICE. EACH PROSPECTIVE INVESTOR SHOULD CONSULT HIS OR
HER OWN PROFESSIONAL ADVISERS AS TO THE LEGAL, TAX, FINANCIAL OR OTHER MATTERS
RELEVANT TO THE SUITABILITY OF AN INVESTMENT IN THE FUNDS FOR SUCH INVESTOR.
THESE SECURITIES ARE SUBJECT TO SUBSTANTIAL RESTRICTIONS ON TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE
RESPECTIVE FUND'S LIMITED LIABILITY COMPANY AGREEMENT, THE 1933 ACT AND
APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM.
<PAGE>
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY UPON THEIR OWN EXAMINATION
OF THE FUNDS AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS
INVOLVED. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE FUNDS' INTERESTS OR PASSED
UPON THE ADEQUACY OF THE DISCLOSURE IN THIS MEMORANDUM. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
JULY 2000
<PAGE>
TABLE OF CONTENTS
PAGE
INTRODUCTION................................................................1
SUMMARY OF TERMS............................................................1
THE FUNDS..................................................................17
STRUCTURE..................................................................17
INVESTMENT PROGRAM.........................................................17
TYPES OF INVESTMENTS AND RELATED RISK FACTORS..............................22
ADDITIONAL RISK FACTORS....................................................35
PERFORMANCE INFORMATION....................................................39
THE DIRECTORS..............................................................39
THE ADVISER................................................................41
VOTING.....................................................................43
CONFLICTS OF INTEREST......................................................43
BROKERAGE..................................................................47
FEES AND EXPENSES..........................................................48
CAPITAL ACCOUNTS AND ALLOCATIONS...........................................50
ALLOCATION OF SPECIAL ITEMS--CERTAIN WITHHOLDING TAXES AND OTHER
EXPENDITURES..........................................................54
APPLICATION FOR INTERESTS..................................................55
REDEMPTIONS, REPURCHASES OF INTERESTS AND TRANSFERS........................57
TAX ASPECTS................................................................61
ADDITIONAL INFORMATION AND SUMMARY OF LLC AGREEMENT........................73
APPENDIX A1--LIMITED LIABILITY COMPANY AGREEMENT OF J.P. MORGAN HEDGE FUND
SERIES/CORE, L.L.C..................................................A1-1
APPENDIX A2--LIMITED LIABILITY COMPANY AGREEMENT OF J.P. MORGAN HEDGE
FUND SERIES/ALPHA, L.L.C............................................A2-1
APPENDIX B--PERFORMANCE INFORMATION.......................................B-1
<PAGE>
INTRODUCTION
This Memorandum relates to the simultaneous offering of two separate Funds:
O.................J.P. Morgan Hedge Fund Series/core, L.L.C. ("Fund Core").
O.................J.P. Morgan Hedge Fund Series/alpha, L.L.C. ("Fund Alpha").
The investment programs of the Funds will be substantially similar. The Funds
will differ with respect to their volatility of returns and performance over
time: Fund Core will seek to achieve superior risk-adjusted returns with a
volatility level similar to 3 to 5 year bonds. Fund Alpha will seek to achieve
superior risk-adjusted returns, but with an emphasis on higher returns and a
level of volatility similar to G7 equities. Prospective investors should
consider which levels of risk and potential returns are consistent with their
investment goals.
Each Fund's investment program is speculative and entails substantial risks.
These risks are summarized below in "SUMMARY OF TERMS--RISK FACTORS," "TYPES OF
INVESTMENTS AND RELATED RISK FACTORS" and "ADDITIONAL RISK FACTORS." Potential
investors should review these sections of this Memorandum, together with the
other portions of this Memorandum, carefully before investing.
SUMMARY OF TERMS
The following summary is qualified entirely by the detailed information
appearing elsewhere in this Memorandum and by the terms and conditions of the
respective Fund's Limited Liability Company Agreement (an "LLC Agreement"), each
of which should be read carefully and retained for future reference.
THE FUNDS: Each Fund is a newly formed Delaware
limited liability company registered under
the Investment Company Act of 1940, as
amended (the "1940 Act"), as a closed-end,
non-diversified, management investment
company.
Each Fund is a specialized investment
vehicle that may be referred to as a
registered private investment fund. It is
similar to an unregistered private
investment fund in that (i) its underlying
portfolio may be more aggressively managed
than other investment companies, (ii)
interests in the Fund will be sold in large
minimum denominations in private placements
solely to high net worth individual and
institutional investors ("Investors"), and
will be restricted as to transfer and (iii)
the Investors' capital accounts in the Fund
will be subject generally to both an
asset-based fee and an incentive-based
allocation.
INVESTMENT Each Fund's investment objective is capital
PROGRAM: appreciation.
Each Fund seeks to achieve its objective by
deploying its assets primarily among a
select group of unregistered investment
vehicles (each, an "Investment Fund")
advised by portfolio managers (the
"Investment Managers") who employ a variety
of alternative investment strategies in
pursuit of superior risk-adjusted returns.
At any one time, each Fund generally expects
to hold interests in 15 to 30 Investment
Funds.
J.P. Morgan Investment Management Inc. (the
"Adviser") is each Fund's investment
adviser. The Adviser generally will allocate
a portion of each Fund's assets among
Investment Funds with investment programs
that focus on one or a combination of the
investment styles described below. The
Adviser generally will seek to achieve and
maintain the risk/return profiles of the
Funds by allocating a higher percentage of
Fund Core's assets to Investment Funds that
employ traditionally lower volatility
strategies, such as the Event Driven and
Relative Value strategies, and a higher
percentage of Fund Alpha's assets to
Investment Funds that employ traditionally
higher return strategies, such as the
Long/Short and Tactical Traders strategies.
Fund Core will pursue superior risk-adjusted
returns with a volatility level similar to 3
to 5 year bonds. Fund Alpha will pursue
superior risk-adjusted returns, but with an
emphasis on higher returns and a level of
volatility similar to G7 equities. The
Adviser may identify other investment styles
which it believes will be consistent with a
Fund's investment objective and may invest
in Investment Funds with investment programs
that focus on those styles.
EVENT DRIVEN. This style is based on the
actual or anticipated occurrence of an
event, such as a merger transaction or a
bankruptcy. Investment returns are
relatively unaffected by the direction of
the equity and fixed income markets. Some
event driven investment strategies include
Merger Arbitrage and Distressed Investing.
RELATIVE VALUE. Investment Funds employing
this style seek to invest in securities
which their Investment Managers perceive to
be selling at a discount or premium to their
intrinsic or potential worth. These
securities may be out of favor or not
closely followed by analysts. Long-term
holding, patience and strong discipline
often are required before the market
recognizes the ultimate value of the
discounted or over-valued securities.
Positions generally are hedged using short
sales and options. It is broadly
opportunistic, and as such, generally
uncorrelated with benchmark indices. Some
relative value strategies include: Equity
Pairs Trading, Fixed Income Arbitrage, and
Convertible Arbitrage.
LONG/SHORT. This style combines long
investments with short sales and the pursuit
of opportunities in rising or declining
markets. Unlike relative value strategies,
long/short strategies generally may reduce
but do not eliminate market exposure and
risk. Some long/short strategies include
Equity Long/Short, Short Selling and Stock
Picking.
TACTICAL TRADERS. Investment Funds whose
investment programs are characterized by
this style tend to speculate on the
direction of the market. Some tactical
trading strategies include Macro Trading,
Discretionary Management, and Trend
Following and Systematic Trading.
See "INVESTMENT PROGRAM" and "TYPES OF
INVESTMENTS AND RELATED RISK FACTORS."
The Adviser's process for selecting
Investment Funds for each Fund consists
primarily of the following:
INVESTMENT FUND DISCOVERY. Since information
about private investment funds generally is
not advertised, the Adviser will obtain
information about investment opportunities
primarily through the J.P. Morgan & Co.
Incorporated ("J.P. Morgan") global
information network and other proprietary
sources, including its clients, hedge fund
managers and consultants and competitors.
Additionally, the Adviser will seek to
identify investment opportunities by
researching public databases and investment
publications.
INVESTMENT FUND AND INVESTMENT MANAGER
EVALUATIONS. The Adviser will select
Investment Funds based on, among other
things, the suitability and performance
potential of, and diversification benefits
for the Fund associated with, the Investment
Fund's investment strategy and style; the
Investment Manager's reputation, experience
and training; liquidity and other
limitations arising from the governing
agreement of the Investment Manager's
Investment Fund; and the quality and
stability of the Investment Manager's
organization, including internal and
external professional staff. The Adviser
generally seeks Investment Funds whose
Investment Managers have achieved, or the
Adviser believes are likely to achieve,
superior risk-adjusted returns and a level
of volatility consistent with its
risk/return profile during various time
periods and market cycles.
THEME GENERATION. The Adviser will analyze
current and anticipated market conditions
and seek to identify those investment themes
(across industries, geographical sectors and
financial markets) which may contribute to
the achievement of the Fund's investment
objective.
PORTFOLIO MANAGEMENT. Using both qualitative
and quantitative means, the Adviser will
develop and maintain an asset allocation
strategy for the Fund that it intends to
implement through the Investment Funds. From
time to time, the Adviser may reallocate a
Fund's assets. The Adviser may maintain a
Fund's allocation to an underperforming
Investment Fund if the overall portfolio
composition of the Fund or the current
market conditions support such decision.
RISK MANAGEMENT AND INVESTMENT MONITORING.
The Adviser will evaluate regularly each
Investment Fund to determine whether its
investment program is consistent with the
Fund's investment objective and whether its
investment performance is satisfactory.
The Adviser may reallocate a Fund's assets
among the Investment Funds and select
additional Investment Funds, subject to the
condition that selection of a new Investment
Fund advised by a Subadviser (defined below)
requires approval of a majority (as defined
in the 1940 Act) of the Fund's outstanding
voting securities, unless the Fund receives
an exemption from certain provisions of the
1940 Act.
To facilitate the efficient investment of a
Fund's assets, a separate investment vehicle
may be created for an Investment Manager in
which the Investment Manager serves as
general partner or managing member and the
Fund is the sole limited partner or only
other member. (Investment Managers for which
such an investment vehicle is formed are
collectively referred to as "Subadvisers"
and their investment vehicles also are
referred to as "Investment Funds.") The
Adviser anticipates that less than a
majority of each Fund's assets will be
invested in Investment Funds advised by
Subadvisers. In any event, the Adviser will
allocate no more than 40% of a Fund's assets
to any Investment Fund that is advised by a
Subadviser and will limit its investment in
any Investment Fund that is not advised by a
Subadviser to less than 5% of the Investment
Fund's voting securities. However, to permit
it to invest more of its assets in desirable
Investment Funds, each Fund may purchase
without limitation non-voting securities of
Investment Funds that are not advised by a
Subadviser or, as to these Investment Funds,
contractually forego its right to vote on
any matter that requires investor approval.
The Adviser anticipates that each Fund will
invest a substantial portion of its assets
in non-voting securities of the Investment
Funds. See "ADDITIONAL RISK FACTORS--Special
Risks of Multi-Manager Structure."
Unregistered investment funds typically
provide greater flexibility than traditional
investment funds (e.g., registered
investment companies) over the types of
securities that may be owned, the types of
trading strategies employed, and in some
cases, the amount of leverage that can be
used. The Adviser will select Investment
Funds that may invest and trade in a wide
range of instruments and markets, including,
but not limited to, domestic and foreign
equities and equity-related instruments, and
fixed income and other debt-related
instruments. Investment Managers will not be
limited in the markets (either by location
or type, such as large capitalization, small
capitalization or non-U.S. markets) in which
they invest or the investment discipline
that they may employ.
Each Investment Fund may use various
investment techniques for hedging and
non-hedging purposes. For example, some or
all of the Investment Funds may sell
securities short and purchase and sell
options and futures contracts and engage in
other derivative transactions, subject to
certain limitations described elsewhere in
this Memorandum. The use of these techniques
will be an integral part of their investment
programs, and involves certain risks to each
Fund. Some or all of the Investment Funds
may use leverage, which also entails risk.
From time to time, the Adviser may engage in
transactions designed to hedge the exposure
of a Fund's portfolio to market sectors or
currencies, which also entails risk. See
"TYPES OF INVESTMENTS AND RELATED RISK
FACTORS."
POTENTIAL BENEFITS OF An investment in a Fund enables investors
INVESTING IN THE FUNDS: to invest with Investment Managers whose
services generally are not available to the
investing public, whose Investment Funds may
be closed from time to time to new investors
or who otherwise may place stringent
restrictions on the number and type of
persons whose money they will manage. The
Adviser will have access to J.P. Morgan's
global network of investment professionals
to identify those private investment funds
that it believes are most capable of
achieving the Fund's investment objective.
Many individual and institutional investors
do not have the resources to do so.
An investment in a Fund also enables
investors to invest in a larger number of
Investment Funds without incurring the high
minimum investment requirements that
Investment Funds typically would impose on
investors.
In addition to benefiting from the
Investment Managers' individual investment
strategies, each Fund as a whole should
achieve the benefits of diversification by
allocating its assets among a carefully
selected group of Investment Funds. The
Adviser expects that by investing in
multiple Investment Funds, a Fund may reduce
the volatility inherent in a direct
investment with a single Investment Fund.
RISK FACTORS: Each Fund's investment program is
speculative and entails substantial risks.
There can be no assurance that each Fund's
or the Investment Funds' investment
objectives will be achieved or that their
investment programs will be successful. In
particular, each Investment Fund's use of
leverage, short sales and derivative
transactions, and limited diversification,
in certain circumstances, can result in or
contribute to significant losses to the
Fund. Investors should consider the Fund as
a supplement to an overall investment
program and should invest only if they are
willing to undertake the risks involved.
Investors could lose some or all of their
investment. See "TYPES OF INVESTMENTS AND
RELATED RISK FACTORS."
Each Fund's performance depends upon the
performance of the Investment Funds and the
Adviser's ability to select Investment Funds
and effectively allocate and reallocate the
Fund's assets among them.
Each Investment Manager generally will
charge its Investment Fund an asset-based
fee and some or all of the Investment
Managers will receive incentive-based
allocations (for purposes of sections of
this Memorandum describing risk factors of
investing in the Funds, the term
incentive-based allocations chargeable by an
Investment Manager also includes
incentive-based fees). The asset-based fees
of the Investment Managers are expected to
range from 1% to 2% of the value of the
relevant Investment Fund and the
incentive-based allocations of the
Investment Managers are expected to range
from 10% to 25% of net profits of the
relevant Investment Fund.
The incentive-based allocation received by
an Investment Manager may create an
incentive for the Investment Manager to make
investments that are riskier or more
speculative than those that might have been
made in the absence of the incentive-based
allocation. In addition, because the
incentive-based allocation is calculated on
a basis that includes unrealized
appreciation of an Investment Fund's assets,
the allocation may be greater than if it
were based solely on realized gains.
In addition, the Adviser will charge each
Fund an asset-based fee and will receive an
incentive-based allocation, which gives rise
to similar risks. See "SUMMARY OF
TERMS--Fees and Expenses" and "--Incentive
Allocation."
Each Fund is a newly formed entity and has
no operating history upon which investors
can evaluate the performance of the Fund.
The Adviser, however, has experience in
managing private investment funds and
separately managed client accounts that have
investment programs that are substantially
similar to the respective Fund's expected
investment program. See "APPENDIX
B-PERFORMANCE INFORMATION."
An investment in each Fund entails special
tax risks. See "SUMMARY OF TERMS--Summary of
Taxation."
Interests in a Fund will not be traded on
any securities exchange or other market and
are subject to substantial restrictions on
transfer. Although each Fund may offer to
repurchase interests from time to time, an
Investor may not be able to liquidate its
interest in the Fund for up to two years.
The Adviser expects that generally,
beginning in 2001, it will recommend to the
Fund's Board (as hereinafter defined) that
the Fund offer to repurchase interests from
Investors once each year, near December
31st. See "SUMMARY OF TERMS--Transfer
Restrictions" and "--Repurchases of
Interests by the Funds."
Since each Fund is a non-diversified
investment company, there are no percentage
limitations on the portion of the Fund's
assets that may be invested in the
securities of any one issuer. As a result,
each Fund's investment portfolio may be
subject to greater risk and volatility than
if investments had been made in the
securities of a broader range of issuers.
INVESTING IN FUNDS OF FUNDS, SUCH AS THE
FUNDS, INVOLVES ADDITIONAL SPECIAL RISKS,
INCLUDING THE FOLLOWING:
The Investment Funds will not be registered
as investment companies under the 1940 Act
and, therefore, neither Fund will be able to
avail itself of the protections of the 1940
Act with respect to the Investment Funds.
Although the Adviser will seek to receive
detailed information from each Investment
Manager regarding its or its Investment
Fund's historical performance and investment
strategy, in most cases the Adviser has
little or no means of independently
verifying this information. An Investment
Fund may use proprietary investment
strategies that are not fully disclosed to
the Adviser, which may involve risks under
some market conditions that are not
anticipated by the Adviser.
An Investor who met the conditions imposed
by the Investment Funds, including
investment minimums that may be considerably
higher than the Fund's minimum investment,
could invest directly in the Investment
Funds. By investing in the Investment Funds
indirectly through a Fund, the Investor
bears two layers of asset-based fees and
incentive-based allocations--one at the Fund
level and one at the Investment Fund level.
In addition, the Investor bears a
proportionate share of the fees and expenses
of the Fund (including operating costs,
distribution expenses and administrative
fees) and, indirectly, similar expenses of
the Investment Funds. In its determination
of whether an investment in the Investment
Fund would be consistent with a Fund's
investment objective, the Adviser will
consider the aggregate fees to which the
Fund may be subject.
Each Investment Manager will receive any
incentive-based allocations to which it is
entitled irrespective of the performance of
the other Investment Managers and the
relevant Fund generally. Accordingly, an
Investment Manager with positive performance
may receive compensation from an Investment
Fund, and thus indirectly from Investors,
even if the Fund's overall returns are
negative.
Investment decisions of the Investment Funds
are made by the Investment Managers
independently of each other. As a result, at
any particular time, one Investment Fund may
be purchasing shares of an issuer whose
shares are being sold by another Investment
Fund. Consequently, a Fund could incur
indirectly certain transaction costs without
accomplishing any net investment result. A
number of Investment Funds may take
substantial positions in the same security,
financial instrument or market sector at the
same time. This inadvertent concentration
could cause the Fund to experience greater
volatility or sustain larger losses.
Some Investment Funds in which a Fund may
invest may be newly organized and therefore
may have no, or only limited operating
histories (although the Adviser generally
will select Investment Funds or Investment
Managers which have had some operating or
trading history). In addition, Investment
Managers will have varying levels of
experience and may operate in teams which
are small relative to the assets under their
management. The Investment Managers also may
employ proprietary trading methods, policies
and strategies which may deviate from the
Adviser's expectations based on its research
and evaluations. Of course, past performance
achieved by such Investment Managers and
Investment Funds is not necessarily
indicative of future results. Therefore, the
results of any Investment Fund may differ
from those of other investment vehicles or
accounts operated by the Investment Manager
and from results the Adviser anticipated.
Since a Fund may make additional investments
in the Investment Funds only at certain
times pursuant to limitations set forth in
the governing agreements of the Investment
Funds, the Fund from time to time may have
to invest some of its assets temporarily in
money market securities.
To the extent a Fund purchases non-voting
securities of, or contractually foregoes the
right to vote in respect of, an Investment
Fund, the Fund will not be able to vote on
matters that require the approval of
investors in the Investment Fund, including
a matter that could adversely affect the
Fund's investment in it.
Like an investment in each Fund, investments
in the Investment Funds may be illiquid. The
governing instruments of many Investment
Funds will have provisions similar to those
of each Fund restricting both the
transferability of an investor's interest
and the ability of an investor to withdraw
its investment in certain circumstances.
Each Investment Fund is permitted to redeem
its securities in-kind. Thus, upon a Fund's
withdrawal of all or a portion of its
interest in an Investment Fund, the Fund may
receive securities that are illiquid or
difficult to value. In such circumstances,
the Adviser would seek to dispose of these
securities in a manner that it believes to
be in the best interests of the Fund. Each
Fund may be subject to compulsory cash
redemptions or in-kind redemptions by one or
more Investment Funds. In such
circumstances, the Fund may receive cash,
securities and/or limited partnership or
limited liability company interests that are
illiquid or difficult to value at an
inopportune time.
If financial reports used by any Investment
Fund to determine its net asset value are
incomplete, inaccurate or if the net asset
value does not adequately reflect the value
of the Investment Fund's holdings, the net
asset value of a Fund may be inaccurate.
Although the Adviser intends to select
Investment Funds that use reputable
administrators and accountants, neither Fund
will have control over the choice of
custodians, brokers or counterparties made
by these Investment Funds nor on the
valuation methods and accounting rules which
they may use. Each Fund's ability to
correctly assess the value of its Investment
Funds will be dependent upon the information
available with respect to them and their
investment operations.
An Investment Fund may have to suspend
temporarily the determination of its net
asset value. In such event, a Fund may be
unable to redeem or otherwise dispose of its
interests in such Investment Fund when it
otherwise would be advantageous to do so. In
such event, the Fund's ability to calculate
its net asset value accurately also might be
adversely affected.
MANAGEMENT: Investment advice regarding the selection
of Investment Funds will be provided to
each Fund by the Adviser, which also is
responsible for the Fund's day-to-day
management.
The Board of Directors (the "Board" and its
members, the "Directors") of each Fund has
overall responsibility to manage and control
the business affairs of the Fund, including
the exclusive authority to oversee and to
establish policies regarding the management,
conduct and operation of the Fund's
business. See "THE DIRECTORS."
ADVISER: The Adviser will serve as each Fund's
investment adviser. The Adviser is a
wholly-owned subsidiary of J.P. Morgan, and
is registered as an investment adviser under
the Investment Advisers Act of 1940, as
amended (the "Advisers Act"). The Adviser
holds a non-voting Special Advisory Member
interest (the "Special Advisory Account") in
each Fund solely for the purpose of
receiving a special performance-based
allocation with respect to each Investor.
Each Fund has entered into an investment
advisory agreement (the "Investment Advisory
Agreement") with the Adviser which is
effective for an initial term expiring March
21, 2002, and may be continued in effect
from year to year thereafter if its
continuation is approved annually by the
Board. The Board may terminate the
Investment Advisory Agreement on 60 days'
prior written notice to the Adviser.
The Adviser and its affiliates provide
investment advisory services to individuals,
governments, corporations, employee benefit
plans, mutual funds and other institutional
investors with combined assets under
management of approximately $369 billion as
of June 30, 2000.
COMMODITY POOL The Adviser will act as each Fund's
OPERATOR: Commodity Pool Operator,responsible for
futures-related activities and for
compliance with the Commodity Exchange Act
(the "CEA") and the regulations of the
Commodity Futures Trading Commission.
PLACEMENT AGENT: J.P. Morgan Securities Inc. ("JPM
Securities"), an affiliate of J.P. Morgan,
acts as the placement agent for each Fund,
and will bear its own costs associated with
its activities as placement agent. Investors
may be charged a sales commission in
connection with purchases of interests. See
"--Placement Fee" and "FEES AND
EXPENSES--Placement Fee." JPM Securities
from time to time may engage, at no cost to
the Fund, sub-placement agents. See
"CONFLICTS OF INTEREST--The Adviser."
CONFLICTS OF INTEREST: The investment activities of the Adviser,
the Investment Managers and their affiliates
for their own accounts and the other
accounts they manage may give rise to
conflicts of interest which may disadvantage
a Fund. Each Fund's operations may give rise
to other conflicts of interest. See
"CONFLICTS OF INTEREST."
FEES AND EXPENSES: The Adviser provides certain management and
administrative services to each Fund,
including, among other things, providing
office space and other support services to
the Fund. In consideration for these
services, each Fund will pay the Adviser a
management fee generally on a monthly basis
calculated at an annual rate based on its
net assets for the month, excluding assets
attributable to the Adviser's capital
account, the Special Advisory Account and
the capital account of certain offshore
funds (the "Fee"). The Fee will be 1.00% for
Fund Core and .75% for Fund Alpha. The Fee
will be paid to the Adviser out of the
Fund's assets, and debited against the
appropriate Investors' capital accounts.
PFPC Inc. (the "Administrator") performs
certain administration, accounting and
investor services for each Fund. In
consideration for these services, each Fund
will pay the Administrator an annual fee
based on assets and number of Investors and
will reimburse the Administrator for certain
of the Administrator's expenses.
Each Fund will bear all expenses incurred in
the business of the Fund, including: all
costs and expenses related to portfolio
transactions and positions for the Fund's
account; establishment of any Investment
Funds managed by the Subadvisers; legal
fees; accounting fees; tax return
preparation fees; costs of computing the
Fund's net asset value, including valuation
services provided by third parties; costs of
insurance; organizational and registration
expenses; certain offering costs; and
expenses of meetings of the Board and
Investors. These expenses will not be
charged to the Special Advisory Account.
The Investment Funds will bear all expenses
incurred in the business of the Investment
Funds, which are similar to those expenses
incurred by the Funds in the business of the
Funds. See "FEES AND EXPENSES."
PLACEMENT FEE: Investors purchasing interests in a Fund may
be charged a sales commission of up to 3% of
the Investor's capital contribution. The
placement fee will not constitute assets of
the relevant Fund. See "FEES AND
EXPENSES--Placement Fee."
ALLOCATION OF As to each Fund, the net profits or net
PROFIT AND LOSS: losses of the Fund (including, without
limitation, net realized gain or loss and
the net change in unrealized appreciation or
depreciation of securities positions) will
be credited to or debited against the
capital accounts of the Investors at the end
of each fiscal period in accordance with
their respective Fund percentages for such
period. Each Investor's Fund percentage will
be determined by dividing as of the start of
a fiscal period the balance of the
Investor's capital account by the sum of the
balances of the capital accounts of all
Investors of the Fund. See "CAPITAL ACCOUNTS
AND ALLOCATIONS--Allocation of Net Profits
and Net Losses."
INCENTIVE ALLOCATION: As to Fund Core, generally, at the end of
the 12-month period following the admission
of an Investor to Fund Core, and at the end
of each fiscal year thereafter, an amount up
to 8% of the net profits, if any, that
exceeds the amount the Investor would have
earned if it had received an annualized rate
of return during the relevant period on its
opening capital account balance
(appropriately adjusted for contributions
and withdrawals) for such period equal to
the "Hurdle Percentage" (such return being
referred to as the "Hurdle"), and that would
otherwise be credited to the Investor's
account for such period will instead be
credited to the Special Advisory Account.
The Hurdle Percentage will be 5.75% until
March 31, 2001. From and after April 1,
2001, the Hurdle Percentage will change as
described under "CAPITAL ACCOUNTS AND
ALLOCATIONS--Incentive Allocation."
As to Fund Alpha, generally, at the end of
the 12-month period following the admission
of an Investor to Fund Alpha, and at the end
of each fiscal year thereafter, an amount up
to 15% of the net profits, if any, that
exceeds the Hurdle and that would otherwise
be credited to the Investor's account for
such period will instead be credited to the
Special Advisory Account.
This allocation for each Fund (the
"Incentive Allocation") will be made only
with respect to net profits that exceed both
the Hurdle for the period and any net losses
previously debited to the account of such
Investor which have not been offset by any
net profits subsequently credited to the
account of the Investor. The Adviser may
withdraw any Incentive Allocation credited
to its Special Advisory Account by the last
business day of any month following the date
on which the Incentive Allocation was made.
As to each Fund, the Adviser has agreed that
the aggregate amount of the Fee and the
Incentive Allocation charged against an
Investor with respect to any "allocation
period" will not exceed 4% of the Investor's
capital account balance at the beginning of
such "allocation period" (appropriately
adjusted for contributions and withdrawals).
The Incentive Allocation may be waived or
reduced for certain Investors. Typically,
for each Investor, the second period during
which an Incentive Allocation will be
payable will be less than 12 months. Thus,
during this short second period (which is
designed to put all Investors on the same
schedule for the payment of Incentive
Allocations), the Adviser may be entitled to
receive Incentive Allocations twice in a 12
month period and possibly on performance
derived over one or a small number of
months. See "CAPITAL ACCOUNTS AND
ALLOCATIONS--Incentive Allocation."
APPLICATION FOR Both initial and additional applications
INTERESTS: for interests of a Fund by eligible
investors may be accepted at such times as
the Fund may determine, subject to the
receipt of cleared funds on or before the
acceptance date set by the Fund. After the
initial closing, initial applications and
additional capital contributions will
generally be accepted on the last day of
each calendar quarter. Each Fund reserves
the right to reject any application for
interests in the Fund. Generally, the
minimum initial investment in a Fund is
$100,000. For employees or directors of the
Adviser and its affiliates, Board members
(and, in each case, members of their
immediate families) and, in the sole
discretion of the Board, attorneys or other
professional advisers engaged on behalf of
the Fund, and members of their immediate
families, the minimum initial investment is
$10,000. Each Fund may vary the investment
minimums from time to time. Each Fund, in
its discretion, may suspend applications for
interests at any time. See "APPLICATION FOR
INTERESTS--Eligible Investors."
INITIAL CLOSING The initial closing date for applications
DATE: for interests in each Fund is September 30,
2000. The Fund, in its sole discretion,
may accelerate or postpone the closing date.
TRANSFER Interests in a Fund may be transferred only
RESTRICTIONS: (i) by operation of law pursuant to the
death, bankruptcy, insolvency or dissolution
of an Investor or (ii) with the written
consent of the Adviser, which may be
withheld in its sole and absolute discretion
and is expected to be granted, if at all,
only under extenuating circumstances, in
connection with a transfer to an entity that
does not result in a change of beneficial
ownership. The foregoing permitted
transferees will not be allowed to become
substituted Investors without the consent of
the Adviser, which may be withheld in its
sole and absolute discretion. See
"REDEMPTIONS, REPURCHASES OF INTERESTS AND
TRANSFERS--Transfers of Interests."
REPURCHASES OF No Investor will have the right to require
INTERESTS BY THE a Fund to redeem the Investor's interest
FUNDS: in the Fund. Each Fund from time to time
may offer to repurchase interests pursuant
to written tenders by Investors. These
repurchases will be made at such times and
on such terms as may be determined by the
Board of the relevant Fund in its complete
and exclusive discretion. The Adviser
expects that generally, beginning in 2001,
it will recommend to the Board that the Fund
offer to repurchase interests from Investors
once each year, near December 31st. In
addition, each Fund may repurchase an
interest in the Fund or portion thereof of
an Investor or any person acquiring an
interest or portion thereof from or through
an Investor if, among other reasons, the
Adviser determines that it would be in the
best interests of the Fund for the Fund to
repurchase such an interest or portion
thereof. See "REDEMPTIONS, REPURCHASES OF
INTERESTS AND TRANSFERS--No Right of
Redemption" and "--Repurchases of
Interests."
Each Fund's LLC Agreement provides that the
Fund shall be dissolved if the interest of
any Investor that has submitted a written
request, in accordance with the terms of the
LLC Agreement, to tender its entire interest
for repurchase by the Fund has not been
repurchased within a period of two years of
such request.
SUMMARY OF Counsel to each Fund has rendered its
TAXATION: opinion that the Fund will be treated as a
partnership and not as an association
taxable as a corporation for Federal income
tax purposes. Counsel to the Fund has
rendered its opinion that, under a "facts
and circumstances" test set forth in
regulations adopted by the U.S. Treasury
Department, the Fund will not be treated as
a "publicly traded partnership" taxable as a
corporation. Accordingly, each Fund should
not be subject to Federal income tax, and
each Investor will be required to report on
its own annual tax return its distributive
share of the Fund's taxable income or loss.
If it were determined that a Fund should be
treated as an association or a publicly
traded partnership taxable as a corporation,
as a result of a successful challenge to the
opinions rendered by counsel to the Fund or
otherwise, the taxable income of the Fund
would be subject to corporate income tax and
any distributions of profits from the Fund
would be treated as dividends.
For each Fund to complete its tax reporting
requirements, it must receive information on
a timely basis from the Investment Funds. An
Investment Fund's delay in providing this
information will delay the Fund's
preparation of tax information to investors,
which is likely to cause Investors to need
to seek extensions on the time to file their
tax returns.
ERISA PLANS AND Investors subject to the Employee
OTHER TAX-EXEMPT Retirement Income Security Act of 1974, as
ENTITIES: amended, and other tax-exempt entities,
including employee benefit plans, Individual
Retirement Accounts and 401(k) and Keogh
Plans are not permitted to invest directly
in the Fund, but may be able to invest
indirectly through an offshore vehicle. Any
tax-exempt entity that desires to invest in
a Fund should contact JPM Securities at
(212) 464-2036.
TERM: Each Fund's term is perpetual unless it is
otherwise dissolved under the terms of the
LLC Agreement. See "ADDITIONAL INFORMATION
AND SUMMARY OF LIMITED LIABILITY COMPANY
AGREEMENT--Term, Dissolution and
Liquidation."
REPORTS TO Each Fund will furnish to Investors as soon
INVESTORS: as practicable after the end of each
taxable year such information as is
necessary for Investors to complete Federal
and state income tax or information returns,
along with, any other tax information
required by law. See "ADDITIONAL RISK
FACTORS--Special Risks of Multi-Manager
Structure." Each Fund also will send to
Investors a semi-annual report containing
the information required by the 1940 Act and
an audited annual report containing the
information required by the 1940 Act and
Rule 4.7 promulgated under the CEA generally
within 60 days after the close of the period
for which the report is being made, or as
otherwise required by applicable law.
Quarterly reports from the Adviser regarding
each Fund's operations during each quarter
also will be sent to Investors within 30
days after the end of the quarter and in
compliance with Rule 4.7 promulgated under
the CEA.
FISCAL
YEAR For accounting purposes, each Fund's
fiscal year will be the 12-month period
ending March 31. Each Fund's first fiscal
year will commence on the date of the
initial closing and will end on March 31,
2001. For tax purposes, the 12-month period
ending December 31 of each year will be each
Fund's taxable year.
THE FUNDS
Each Fund is registered under the 1940 Act as a closed-end, non-diversified,
management investment company. Each Fund was formed as a limited liability
company under the laws of Delaware on March 30, 2000, and has no operating
history. Each Fund's principal office is located at 522 Fifth Avenue, New York,
New York 10036, and its telephone number is (212) 837-2300. The Adviser is each
Fund's investment adviser.
STRUCTURE
Each Fund is a specialized investment vehicle that combines many of the features
of a private investment fund with those of a closed-end investment company.
Private investment funds are unregistered, commingled asset pools that may be
leveraged, managed aggressively and offered in large minimum denominations,
often over $1 million, through private placements to a limited number of high
net worth individual and institutional investors. The general partners or
managing members of these entities typically are compensated through asset-based
fees and incentive-based allocations. Closed-end investment companies are 1940
Act registered pools typically organized as corporations or business trusts that
usually are managed more conservatively than most private investment funds,
subject to relatively modest minimum investment requirements (often less than
$2,000), and publicly offered to a broad range of investors. The advisers to
these companies typically are compensated through asset-based, but not
incentive-based, fees.
Each Fund is similar to a private investment fund in that its underlying
portfolio may be actively managed and Fund interests will be sold in
comparatively large minimum denominations in private placements solely to high
net worth individual and institutional investors. In addition, Investors will be
subject generally to asset-based fees and incentive-based allocations. However,
the Fund, like other closed-end investment companies, has registered under the
1940 Act to be able to offer its interests without limiting the number of
investors that can participate in its investment program. This structure permits
a larger number of investors that have a higher tolerance for investment risk to
participate in the Fund's investment program without making the more substantial
minimum capital commitment that is required by many private investment funds.
INVESTMENT PROGRAM
Each Fund's investment objective is capital appreciation.
Each Fund seeks to achieve its objective by deploying its assets primarily among
a select group of Investment Funds advised by Investment Managers who employ a
variety of alternative investment strategies in pursuit of superior
risk-adjusted returns. At any one time, each Fund generally expects to hold
interests in 15 to 30 Investment Funds.
The Adviser generally will allocate a portion of each Fund's assets among
Investment Funds with investment programs that focus on one or a combination of
the investment styles described below. The Adviser generally will seek to
achieve and maintain the risk/return profiles of the Funds by allocating a
higher percentage of Fund Core's assets to Investment Funds that employ the
Event Driven and Relative Value strategies and a higher percentage of Fund
Alpha's assets to Investment Funds that employ the Long/Short and Tactical
Traders strategies. Fund Core will pursue superior risk-adjusted returns with a
volatility level similar to 3 to 5 year bonds. Fund Alpha will pursue superior
risk-adjusted returns, but with an emphasis on higher returns and a level of
volatility similar to G7 equities. The Adviser may identify other investment
styles which it believes will be consistent with a Fund's investment objective
and may invest in Investment Funds with investment programs that focus on those
styles.
EVENT DRIVEN. THIS STYLE IS BASED ON THE ACTUAL OR ANTICIPATED OCCURRENCE OF AN
EVENT, SUCH AS A MERGER TRANSACTION OR A BANKRUPTCY. INVESTMENT RETURNS ARE
RELATIVELY UNAFFECTED BY THE DIRECTION OF THE EQUITY AND FIXED INCOME MARKETS.
SOME EVENT DRIVEN INVESTMENT STRATEGIES INCLUDE MERGER ARBITRAGE AND DISTRESSED
INVESTING.
MERGER ARBITRAGE. This strategy, sometimes also called "risk
arbitrage," consists of investing in event-driven situations of issuers in the
process of a corporate transaction, such as leveraged buy-outs, mergers and
hostile take-overs. Investors purchase stocks of the issuer being taken over and
sell short the stock of the acquiring company.
DISTRESSED INVESTING. Distressed securities investors buy, at
discounts, equities, debt or trade claims of companies that face financial
difficulties. Often, these companies are involved in bankruptcy proceedings,
with payment to debtholders and other claims under control of the bankruptcy
court. After the bankruptcy process, these investors may hold the equity
securities of the newly reorganized company. Profits are expected from the
market's lack of understanding of the intrinsic value of the discounted
securities and because many institutional investors cannot own below-investment
grade securities.
RELATIVE VALUE. INVESTMENT FUNDS EMPLOYING THIS STYLE SEEK TO INVEST IN
SECURITIES WHICH THEIR INVESTMENT MANAGERS PERCEIVE TO BE SELLING AT A DISCOUNT
OR PREMIUM TO THEIR INTRINSIC OR POTENTIAL WORTH. THESE SECURITIES MAY BE OUT OF
FAVOR OR NOT CLOSELY FOLLOWED BY ANALYSTS. LONG-TERM HOLDING, PATIENCE AND
STRONG DISCIPLINE OFTEN ARE REQUIRED BEFORE THE MARKET RECOGNIZES THE ULTIMATE
VALUE OF THE DISCOUNTED OR OVER-VALUED SECURITIES. POSITIONS GENERALLY ARE
HEDGED USING SHORT SALES AND OPTIONS. IT IS BROADLY OPPORTUNISTIC, AND AS SUCH,
GENERALLY UNCORRELATED WITH BENCHMARK INDICES. SOME RELATIVE VALUE STRATEGIES
INCLUDE EQUITY PAIRS TRADING, FIXED INCOME ARBITRAGE, AND CONVERTIBLE ARBITRAGE.
EQUITY PAIRS TRADING. This strategy consists of taking advantage of
pricing differences between related equity securities. It consists of buying an
under-valued equity security while simultaneously shorting a related security or
investment that is over-valued relative to the purchased security. These "pairs"
of long and short positions are typically structured to neutralize systematic
market risk.
FIXED INCOME ARBITRAGE. This strategy consists of taking advantage of
pricing differentials between related fixed income securities. The strategy
consists of investing in one fixed income security while seeking to hedge the
market risk with an offsetting investment in another related security.
CONVERTIBLE ARBITRAGE. This strategy involves investing in convertible
bonds that appear incorrectly valued relative to their theoretical value. The
strategy consists simultaneously of the purchase (or short sale) of a
convertible security coupled with the short sale (or purchase) of the underlying
security for which the convertible can be exchanged. These transactions seek to
hedge out the risk inherent in the stock. The remaining interest rate risk may
or may not be hedged. This strategy may include buying an undervalued warrant
and selling short an appropriate amount of the warrant issuer's stock.
LONG/SHORT. THIS STYLE COMBINES LONG INVESTMENTS WITH SHORT SALES AND THE
PURSUIT OF OPPORTUNITIES IN RISING OR DECLINING MARKETS. UNLIKE RELATIVE VALUE
STRATEGIES, LONG/SHORT STRATEGIES GENERALLY MAY REDUCE BUT DO NOT ELIMINATE
MARKET EXPOSURE AND RISK. SOME LONG/SHORT STRATEGIES INCLUDE EQUITY LONG/SHORT,
SHORT SELLING, AND STOCK PICKING.
EQUITY LONG/SHORT. Investment Funds employing this strategy buy
undervalued stocks and sell overvalued stocks to both generate alpha and hedge
out some portion of the general market risk. The stocks bought or sold short
typically are selected using quantitative and/or value-based models. The
Investment Managers of these Investment Funds may differ in the methods used,
and degree to which they seek, to eliminate market risk. Unlike Equity Pairs
Trading, long and short positions may be completely unrelated. This strategy can
be closely correlated to the performance of benchmark indices.
SHORT SELLING. Short selling is used by Investment Funds attempting to
profit from declining securities prices. To implement the strategy, Investment
Funds generally will seek to identify securities of companies their Investment
Managers deem overvalued. This strategy is not the opposite of purchasing long
securities. A short sale does not require any investment or borrowed money, but
it does require collateral. Unlike the holder of a long position, which may
enjoy dividend income, the short seller pays the dividend as a cost. On the
other hand, the proceeds of the short sale earn interest, known as a short
credit rebate, which floats with short-term interest rates. Unlike a long
investor, a short seller can lose his or her total net worth, as the price of a
stock can potentially rise infinitely.
STOCK PICKING. Stock pickers invest across a broad range of equity
securities on a global basis. Fundamental research plays an important role in
identifying securities in countries which have the greatest potential for
capital appreciation over the long-term.
TACTICAL TRADERS. INVESTMENT FUNDS WHOSE INVESTMENT PROGRAMS ARE CHARACTERIZED
BY THIS STYLE TEND TO SPECULATE ON THE DIRECTION OF THE MARKET. SOME TACTICAL
TRADING STRATEGIES INCLUDE MACRO TRADING, DISCRETIONARY MANAGEMENT, AND TREND
FOLLOWING AND SYSTEMATIC TRADING.
MACRO TRADING. Investment Funds employing this strategy aim to profit
from changes in global economies, typically caused by shifts in government
policy that affect interest rates, in turn affecting currency, stock and bond
markets. These Investment Funds may participate in all major markets, financial
instruments, currencies and commodities, though not always at the same time.
Leverage and derivatives may be used to accentuate the impact of market moves.
Hedging may be used, but leveraged directional positions tend to make the
largest impact on performance.
DISCRETIONARY MANAGEMENT. Investment Funds employing this strategy
often rely on a combination of fundamental and technical analysis. Some
Investment Funds using this strategy focus on specific regions or industries,
while others concentrate on more general factors such as macroeconomic
conditions.
TREND FOLLOWING AND SYSTEMATIC TRADING. This strategy involves using a
computerized trading system to generate buy and sell signals in the direction of
a defined trend, based on the assumption that a trend, once established, will
tend to continue. Little or no personal judgment is involved in the investment
process.
See "TYPES OF INVESTMENTS AND RELATED RISK FACTORS."
The Adviser's process for selecting Investment Funds for each Fund consists
primarily of the following:
INVESTMENT FUND DISCOVERY. Since information about private investment funds
generally is not advertised, the Adviser will obtain information about
investment opportunities primarily through the J.P. Morgan global information
network and other proprietary sources, including its clients, hedge fund
managers and consultants and competitors. Additionally, the Adviser will seek to
identify investment opportunities by researching public databases and investment
publications.
INVESTMENT FUND AND INVESTMENT MANAGER EVALUATIONS. The Adviser will select
Investment Funds based on, among other things, the suitability and performance
potential of, and diversification benefits for the Fund associated with, the
Investment Fund's investment strategy and style; the Investment Manager's
reputation, experience and training; liquidity and other limitations arising
from the governing agreement of the Investment Manager's Investment Fund; and
the quality and stability of the Investment Manager's organization, including
internal and external professional staff. The Adviser generally seeks Investment
Funds whose Investment Managers have achieved, or the Adviser believes are
likely to achieve, superior risk-adjusted returns and a level of volatility
consistent with its risk/return profile during various time periods and market
cycles. Where possible, the Adviser will seek to supplement its evaluation of
Investment Managers through interviews with their existing and former clients,
competitors and previous employees or colleagues, information from other
business units at J.P. Morgan and interviews with the Investment Manager's
administrators, prime brokers/custodians or auditors. In addition, the Adviser
also will seek to draw upon J.P. Morgan's internal resources to better
understand, assess and monitor the strategies used by Investment Managers. The
Adviser believes that a thorough due diligence effort may minimize the
investment risks of, and increase diversification for, the Fund.
THEME GENERATION. The Adviser will analyze current and anticipated market
conditions and seek to identify those investment themes (across industries,
geographical sectors and financial markets) which may contribute to the
achievement of the Fund's investment objective.
PORTFOLIO MANAGEMENT. Using both qualitative and quantitative means, the Adviser
will develop and maintain an asset allocation strategy for the Fund that it
intends to implement through the Investment Funds. From time to time, the
Adviser may reallocate a Fund's assets. The Adviser may maintain a Fund's
allocation to an underperforming Investment Fund if the overall portfolio
composition of the Fund or the current market conditions support such decision.
RISK MANAGEMENT AND INVESTMENT MONITORING. The Adviser will evaluate regularly
each Investment Fund to determine whether its investment program is consistent
with the Fund's investment objective and whether its investment performance is
satisfactory. As part of this ongoing evaluation, the Adviser will review each
Investment Manager's investment strategy in light of current and anticipated
market conditions, determine whether any changes to an Investment Manager's
investment strategy or organizational structure have occurred that would lead
the Adviser to alter its asset allocation and assess the need to allocate Fund
assets to new Investment Managers identified through its research efforts. The
Adviser will seek to determine, monitor and rebalance the exposure of the Fund
to risks of the financial markets and investment themes and strategies employed
by the Investment Managers.
The Adviser may reallocate a Fund's assets among the Investment Funds and select
additional Investment Funds, subject to the condition that selection of a new
Investment Fund advised by a Subadviser requires approval of a majority (as
defined in the 1940 Act) of the Fund's outstanding voting securities, unless the
Fund receives an exemption from certain provisions of the 1940 Act.
To facilitate the efficient investment of a Fund's assets, a separate investment
vehicle may be created for an Investment Manager in which the Investment Manager
or one of its affiliates serves as general partner, managing member, sole
director or investment adviser and the Fund is the sole limited partner or only
other member or investor. The Adviser anticipates that a majority of each Fund's
assets will be invested in Investment Funds not advised by Subadvisers. In any
event, the Adviser will allocate no more than 40% of a Fund's assets to any
Investment Fund that is advised by a Subadviser and will limit its investment in
any Investment Fund that is not advised by a Subadviser to less than 5% of the
Investment Fund's voting securities. However, to permit it to invest more of its
assets in desirable Investment Funds, each Fund may purchase without limitation
non-voting securities of Investment Funds that are not advised by a Subadviser
or, as to these Investment Funds, contractually forego its right to vote on any
matter that requires investor approval. The Adviser anticipates that each Fund
will invest a substantial portion of its assets in non-voting securities of the
Investment Funds.
See "ADDITIONAL RISK FACTORS--Special Risks of Multi-Manager Structure."
Unregistered investment funds typically provide greater flexibility than
traditional investment funds (e.g., registered investment companies) over the
types of securities that may be owned, the types of trading strategies employed,
and in some cases, the amount of leverage that can be used. The Adviser will
select Investment Funds that may invest and trade in a wide range of instruments
and markets, including, but not limited to, domestic and foreign equities and
equity-related instruments, and fixed income and other debt-related instruments.
Investment Funds will not be limited in the markets (either by location or type,
such as large capitalization, small capitalization or non-U.S. markets) in which
they invest or the investment discipline that they may employ.
Each Investment Fund may use various investment techniques for hedging and
non-hedging purposes. For example, some or all of the Investment Funds may sell
securities short and purchase and sell options and futures contracts and engage
in other derivative transactions, subject to certain limitations described
elsewhere in this Memorandum. The use of these techniques will be an integral
part of their investment programs, and involves certain risks to each Fund. Some
or all of the Investment Funds may use leverage, which also entails risk. From
time to time, the Adviser may engage in transactions designed to hedge the
exposure of a Fund's portfolio to market sectors or currencies, which also
entails risk. See "TYPES OF INVESTMENTS AND RELATED RISK FACTORS."
Each Investment Fund may invest, for defensive purposes or otherwise, some or
all of its assets in high quality fixed income securities and money market
instruments, or may hold cash or cash equivalents in such amounts as its
Investment Manager deems appropriate under the circumstances. Pending allocation
of the offering proceeds, and thereafter, from time to time, each Fund also may
invest in these instruments. See "TYPES OF INVESTMENTS AND RELATED RISK
FACTORS--Money Market Instruments."
Additional information about the types of investments that are expected to be
made by the Investment Funds, their investment practices and related risk
factors is provided below. Except as otherwise indicated, each Fund's investment
policies and restrictions are not fundamental and may be changed without a vote
of Investors. See "TYPES OF INVESTMENTS AND RELATED RISK FACTORS--Investment
Restrictions."
EACH FUND'S INVESTMENT PROGRAM IS SPECULATIVE AND ENTAILS SUBSTANTIAL RISKS.
THERE CAN BE NO ASSURANCE THAT THE FUNDS' OR THE INVESTMENT FUNDS' INVESTMENT
OBJECTIVES WILL BE ACHIEVED OR THAT THEIR INVESTMENT PROGRAMS WILL BE
SUCCESSFUL. IN PARTICULAR, EACH INVESTMENT FUND'S USE OF LEVERAGE, SHORT SALES
AND DERIVATIVE TRANSACTIONS, AND LIMITED DIVERSIFICATION, IN CERTAIN
CIRCUMSTANCES, CAN RESULT IN OR CONTRIBUTE TO SIGNIFICANT LOSSES TO THE FUND.
INVESTORS SHOULD CONSIDER THE FUND AS A SUPPLEMENT TO AN OVERALL INVESTMENT
PROGRAM AND SHOULD INVEST ONLY IF THEY ARE WILLING TO UNDERTAKE THE RISKS
INVOLVED. INVESTORS COULD LOSE SOME OR ALL OF THEIR INVESTMENT.
TYPES OF INVESTMENTS AND RELATED RISK FACTORS
GENERAL
All securities investments risk the loss of capital. The value of each Fund's
total net assets should be expected to fluctuate. An Investment Fund's use of
leverage is likely to cause the Fund's net assets to appreciate or depreciate at
a greater rate than if leverage were not used.
For purposes of a Fund's investment restrictions and certain investment
limitations under the 1940 Act, the Fund will look through the Investment Funds
managed by the Subadvisers, if any, to their underlying securities.
EQUITY SECURITIES
An Investment Fund's investment portfolio may include long and short positions
in common stocks, preferred stocks and convertible securities of U.S. and
foreign issuers. Investment Managers also may invest in depositary receipts
relating to foreign securities. See "--Foreign Securities" below. Equity
securities fluctuate in value in response to many factors, including the
activities and financial condition of individual companies, the business market
in which individual companies compete and general market and economic
conditions.
The Investment Funds generally may invest in equity securities without
restriction as to market capitalization, such as those issued by smaller
capitalization companies, including micro cap companies. The prices of the
securities of some of these smaller companies may be subject to more abrupt or
erratic market movements than larger, more established companies, because they
typically are traded in lower volume and the issuers typically are more subject
to changes in earnings and prospects. The Investment Funds may purchase
securities in all available securities trading markets, including initial public
offerings and the aftermarket.
The Investment Funds' investments in equity securities may include securities
that are listed on securities exchanges as well as unlisted securities that are
traded over-the-counter. Equity securities of companies traded over-the-counter
may not be traded in the volumes typically found on a national securities
exchange. Consequently, an Investment Fund may be required to dispose of these
securities over a longer (and potentially less favorable) period of time than is
required to dispose of the securities of listed companies.
COMMON STOCKS. Common stocks are shares of a corporation or other entity that
entitle the holder to a pro rata share of the profits, if any, of the entity
without preference over any other shareholder or claim of shareholders, after
making required payments to holders of such entity's preferred stock and other
senior equity. Common stock usually carries with it the right to vote and
frequently an exclusive right to do so.
PREFERRED STOCKS. Preferred stock generally has a preference as to dividends and
upon liquidation over an issuer's common stock, but ranks junior to debt
securities in an issuer's capital structure. Preferred stock generally pays
dividends in cash (or additional shares of preferred stock) at a defined rate,
but unlike interest payments on debt securities, preferred stock dividends are
payable only if declared by the issuer's board of directors. Dividends on
preferred stock may be cumulative, meaning that, if the issuer fails to make one
or more dividend payments on the preferred stock, no dividends may be paid on
the issuer's common stock until all unpaid preferred stock dividends have been
paid. Preferred stock also may be subject to optional or mandatory redemption
provisions.
CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures, notes,
preferred stock or other securities that may be converted into or exchanged for
a specified amount of common stock of the same or different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest that is generally paid or
accrued on debt or a dividend that is paid or accrued on preferred stock until
the convertible security matures or is redeemed, converted or exchanged.
Convertible securities have unique investment characteristics, in that they
generally (1) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (2) are less subject to fluctuation in
value than the underlying common stock due to their fixed-income characteristics
and (3) provide the potential for capital appreciation if the market price of
the underlying common stock increases.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value. Generally,
the conversion value decreases as the convertible security approaches maturity.
To the extent the market price of the underlying common stock approaches or
exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion value. A convertible security
generally will sell at a premium over its conversion value by the extent to
which investors place value on the right to acquire the underlying common stock
while holding a fixed-income security.
A convertible security may be subject to redemption at the option of the issuer
at a price established in the convertible security's governing instrument. If a
convertible security held by an Investment Fund is called for redemption, the
Investment Fund will be required to permit the issuer to redeem the security,
convert it into the underlying common stock or sell it to a third party. Any of
these actions could have an adverse effect on a Fund's ability to achieve its
investment objective.
FIXED-INCOME SECURITIES
The Investment Funds may invest in fixed-income securities of U.S. and foreign
issuers. The Investment Funds typically will invest in these securities when
their yield and potential for capital appreciation are considered sufficiently
attractive and also may invest in these securities, as part of an arbitrage
strategy, for defensive purposes and to maintain liquidity. These securities may
pay fixed, variable or floating rates of interest, and may include zero coupon
obligations. Fixed-income securities are subject to the risk of the issuer's
inability to meet principal and interest payments on its obligations (i.e.,
credit risk) and are subject to the risk of price volatility due to such factors
as interest rate sensitivity, market perception of the creditworthiness or
financial condition of the issuer and general market liquidity (i.e., market
risk).
The Investment Funds may invest in both investment grade and non-investment
grade debt securities, commonly referred to as "junk bonds," including those of
companies that are experiencing significant financial or business difficulties
(so-called "distressed securities"). Investment grade debt securities are
securities that have received a rating from at least one nationally recognized
statistical rating organization ("NRSRO") in one of the four highest generic
rating categories or, if not rated by any NRSRO, have been determined by the
Investment Fund's Investment Manager to be of comparable quality. Non-investment
grade debt securities are considered by the NRSRO to be predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal. Non-investment grade debt securities in the lowest rating categories
may involve a substantial risk of default or may be in default. Adverse changes
in economic conditions or developments regarding the individual issuer are more
likely to cause price volatility and weaken the capacity of the issuers of
non-investment grade debt securities to make principal and interest payments
than is the case for higher grade debt securities. In addition, the market for
lower grade debt securities may be thinner and less liquid than for higher grade
debt securities.
An Investment Fund's investments in distressed securities involve substantial
risks. Any one or all of the companies in which an Investment Fund may invest
may be unsuccessful or not show any return for a considerable period of time. In
any reorganization or liquidation proceeding relating to a portfolio company,
the Investment Fund may lose its entire investment or may be required to accept
cash or securities with a value less than the Investment Fund's original
investment. Under these circumstances, the returns generated from the Investment
Fund's investments may not compensate Investors adequately for the risks
assumed.
FOREIGN SECURITIES
The Investment Funds may invest in equity and fixed-income securities of foreign
issuers and in depositary receipts, such as American Depositary Receipts
("ADRs"), that represent indirect interests in securities of foreign issuers.
Foreign securities in which an Investment Fund may invest may be listed on
foreign securities exchanges or traded in foreign over-the-counter markets.
Foreign securities markets generally are not as developed or efficient as those
in the United States. Securities of some foreign issuers are less liquid and
more volatile than securities of comparable U.S. issuers. Similarly, volume and
liquidity in most foreign securities markets are less than in the United States
and, at times, volatility of price can be greater than in the United States.
Because evidences of ownership of such securities usually are held outside the
United States, each Fund will be subject to additional risks which include
possible adverse political and economic developments, seizure or nationalization
of foreign deposits or adoption of governmental restrictions which might
adversely affect or restrict the payment of principal and interest on the
foreign securities to investors located outside the country of the issuer,
whether from currency blockage or otherwise.
Since foreign securities often are purchased with and payable in currencies of
foreign countries, the value of these assets as measured in U.S. dollars may be
affected favorably or unfavorably by changes in currency rates and exchange
control regulations.
Developing countries have economic structures that are generally less diverse
and mature, and political systems that are less stable, than those of developed
countries. The markets of developing countries may be more volatile than the
markets of more mature economies; however, these markets may provide higher
rates of return to investors. Many developing countries providing investment
opportunities for the Investment Funds have experienced substantial, and in some
periods extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain of these countries.
FOREIGN CURRENCY TRANSACTIONS
An Investment Fund may engage in foreign currency transactions for a variety of
purposes, including for speculative purposes, or to lock in a fixed amount in
U.S. dollars, between trade and settlement date, the value of a security the
Investment Fund has agreed to buy or sell, or to hedge the U.S. dollar value of
cash the Investment Fund holds or securities the Investment Fund already owns,
particularly if it expects a decrease in the value of the currency in which the
foreign security is denominated. From time to time, each Fund may engage in
foreign currency transactions to hedge the U.S. dollar value of its interest in
an Investment Fund valued in a foreign currency or of foreign currency or
securities it may receive in connection with a redemption from an Investment
Fund.
Foreign currency transactions may involve, for example, the Investment Fund's
purchase of foreign currencies for U.S. dollars or the maintenance of short
positions in foreign currencies, which would involve the Investment Fund
agreeing to exchange an amount of a currency it did not currently own for
another currency at a future date in anticipation of a decline in the value of
the currency sold relative to the currency the Investment Fund contracted to
receive in the exchange. The Investment Fund's success in these transactions
will depend principally on its Investment Manager's ability to predict
accurately the future exchange rates between foreign currencies and the U.S.
dollar. In addition, the currency markets are affected by government regulation
of or intervention in them. This regulation or intervention could adversely
affect an Investment Fund's performance.
Foreign currency transactions may be effected in the spot, forward or futures
markets.
MONEY MARKET INSTRUMENTS
An Investment Fund may invest, for defensive purposes or otherwise, some or all
of its assets in high quality fixed-income securities, money market instruments,
and money market mutual funds, or hold cash or cash equivalents in such amounts
as its Investment Manager deems appropriate under the circumstances. Pending
allocation of the offering proceeds and thereafter, from time to time, each Fund
also may invest in these instruments. Money market instruments are high quality,
short-term fixed-income obligations, which generally have remaining maturities
of one year or less, and may include U.S. Government securities, commercial
paper, certificates of deposit and bankers' acceptances issued by domestic
branches of United States banks that are members of the Federal Deposit
Insurance Corporation, and repurchase agreements.
NON-DIVERSIFIED STATUS
The classification of each Fund as a "non-diversified" investment company means
that the percentage of the Fund's assets that may be invested in the securities
of a single issuer is not limited by the 1940 Act. A "diversified" investment
company is required by the 1940 Act generally, with respect to 75% of its total
assets, to invest not more than 5% of such assets in the securities of a single
issuer. Since a relatively high percentage of a Fund's assets may be invested in
the securities of a limited number of Investment Funds, some of which may be
investing in issuers within the same industry, the Fund's portfolio may be more
sensitive to changes in the market value of a single issuer and to events
affecting a particular industry or market segment.
LEVERAGE
Some or all of the Investment Funds may borrow money from brokers and banks for
investment purposes. Borrowing for investment purposes, which is known as
"leverage," is a speculative investment technique and involves certain risks.
Although leverage will increase investment return if an Investment Fund earns a
greater return on the investments purchased with borrowed funds than it pays for
the use of such funds, using leverage will decrease investment return if the
Investment Fund fails to earn as much on such investments as it pays for the use
of such funds. Using leverage, therefore, will magnify the volatility of the
value of the Investment Fund's investment portfolio. If the Investment Fund's
equity or debt instruments decline in value, the Investment Fund could be
required to deposit additional collateral with the lender or suffer mandatory
liquidation of the pledged securities to compensate for the decline in value. In
the event of a sudden, precipitous drop in an Investment Fund's assets, whether
resulting from changes in market value or from redemptions, the Investment Fund
might not be able to liquidate assets quickly enough to pay off its borrowing.
Money borrowed for leveraging will be subject to interest costs that may or may
not be recovered by return on the securities purchased. The Investment Fund also
may be required to maintain minimum average balances in connection with its
borrowings or to pay a commitment or other fee to maintain a line of credit;
either of these requirements would increase the cost of borrowing over the
stated interest rate.
The 1940 Act limits the amount an investment company can borrow by imposing an
asset coverage requirement of 300% of its indebtedness, including amounts
borrowed, measured at the time the investment company incurs the indebtedness
(the "Asset Coverage Requirement"). This means that the value of an investment
company's total indebtedness may not exceed one-third the value of its total
assets, including such indebtedness, measured at the time the investment company
incurs the indebtedness. These limits only apply to the Investment Funds that
are managed by Subadvisers and, therefore, the Fund's portfolio may be highly
leveraged and the volatility of the price of its interests may be great.
To obtain "leveraged" market exposure in certain investments and to increase
overall return, an Investment Fund may purchase options and other instruments
that do not constitute "indebtedness" for purposes of the Asset Coverage
Requirement. These instruments nevertheless may involve significant economic
leverage and therefore, in some cases, may involve significant risks of loss.
Each Fund may borrow money for temporary or emergency purposes, for investment
purposes in anticipation of receipt of cash flows or in connection with
repurchases of, or tenders for, the Fund's interests, which may result in
greater fluctuation in the Fund's net asset value until the borrowing is repaid.
PURCHASING INITIAL PUBLIC OFFERINGS
Some or all of the Investment Funds may purchase securities of companies in
initial public offerings or shortly thereafter. Special risks associated with
these securities may include a limited number of shares available for trading,
unseasoned trading, lack of investor knowledge of the company, and limited
operating history. These factors may contribute to substantial price volatility
for the shares of these companies and, thus, for a Fund's interests. The limited
number of shares available for trading in some initial public offerings may make
it more difficult for an Investment Fund to buy or sell significant amounts of
shares without an unfavorable impact on prevailing market prices. In addition,
some companies in initial public offerings are involved in relatively new
industries or lines of business, which may not be widely understood by
investors. Some of these companies may be undercapitalized or regarded as
developmental stage companies, without revenues or operating income, or the
near-term prospects of achieving them.
SHORT SALES
Some or all of the Investment Funds may attempt to limit exposure to a possible
market decline in the value of their portfolio securities through short sales of
securities that their Investment Managers believe possess volatility
characteristics similar to those being hedged. In addition, Investment Funds may
use short sales for non-hedging purposes to profit from anticipated declines in
prices of securities which in the view of their Investment Funds are overvalued
or are likely to be adversely affected by particular trends or events relating
to the issuer of those securities, the sector in which the issuer is engaged or
the general markets or economy. To effect a short sale, an Investment Fund will
borrow a security from a brokerage firm, or other permissible financial
intermediary, to make delivery to the buyer. The Investment Fund then is
obligated to replace the borrowed security by purchasing it at the market price
at the time of replacement. The price at such time may be more or less than the
price at which the security was sold by the Investment Fund, which would result
in a loss or gain, respectively. These techniques are speculative and, in
certain circumstances, can substantially increase the impact of adverse price
movements on an Investment Fund's portfolio. A short sale of a security involves
the theoretical risk of an unlimited increase in the market price of the
security which could result in an inability to cover the short position and thus
a theoretically unlimited loss. There can be no assurance that securities
necessary to cover the short position will be available for purchase.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements involve a sale of a security to a bank or
securities dealer and the Investment Fund's simultaneous agreement to repurchase
the security for a fixed price, reflecting a market rate of interest, on a
specific date. These transactions involve a risk that the other party to a
reverse repurchase agreement will be unable or unwilling to complete the
transaction as scheduled, which may result in losses to an Investment Fund.
Reverse repurchase agreements are a form of leverage which also may increase the
volatility of an Investment Fund's portfolio.
SPECIAL INVESTMENT TECHNIQUES
Some or all of the Investment Funds may use a variety of special investment
techniques to hedge against various risks or other factors that generally affect
the values of securities and for non-hedging purposes. These techniques may
involve the use of derivative transactions. The techniques the Investment
Managers may employ for their Investment Funds may change over time as new
instruments and techniques are introduced or as a result of regulatory
developments. Certain of these special investment techniques may be speculative
and involve a high degree of risk, particularly when used for non-hedging
purposes.
DERIVATIVES. Some or all of the Investment Funds may invest in, or enter into,
derivatives ("Derivatives"). These are financial instruments which derive their
performance, at least in part, from the performance of an underlying asset,
index or interest rate. Derivatives can be volatile and involve various types
and degrees of risk, depending upon the characteristics of the particular
Derivative and the portfolio as a whole. Derivatives permit an Investment Fund
to increase or decrease the level of risk, or change the character of the risk,
to which it is exposed.
Derivatives may entail investment exposures that are greater than their cost
would suggest, meaning that a small investment in Derivatives could have a large
potential impact on a Fund's performance.
If an Investment Fund invests in Derivatives at inopportune times or its
Investment Manager judges market conditions incorrectly, such investments may
lower the relevant Fund's return or result in a loss. A Fund also could
experience losses if the Investment Fund's Derivatives were poorly correlated
with its other investments, or if the Investment Fund were unable to liquidate
its position because of an illiquid secondary market. The market for many
Derivatives is, or suddenly can become, illiquid. Changes in liquidity may
result in significant, rapid and unpredictable changes in the prices for
Derivatives.
OPTIONS. The Investment Funds may invest in options. The Investment Funds also
may invest in so-called "synthetic" options or other derivative instruments
written by broker-dealers or other permissible financial intermediaries. Options
transactions may be effected on securities or commodities exchanges or in the
over-the-counter market. When options are purchased over-the-counter, a Fund
bears the risk that the counterparty that wrote the option will be unable or
unwilling to perform its obligations under the option contract. Such options may
also be illiquid and, in such cases, an Investment Fund may have difficulty
closing out its position. Over-the-counter options purchased and sold by the
Investment Fund also may include options on baskets of specific securities.
The Investment Funds may purchase call and put options in respect of specific
securities, and may write or sell covered or uncovered call and put options. A
covered call option, which is a call option that is sold by the Investment Fund
with respect to which the Investment Fund owns the underlying security, exposes
the Investment Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or to possible continued holding of a security that might otherwise
have been sold to protect against depreciation in the market price of the
security. A covered put option, which is a put option that is sold by the
Investment Fund with respect to which the Investment Fund has sold short the
underlying security, exposes the Investment Fund during the term of the option
to possible loss of opportunity to realize the gain from a decline in the market
price of the security or to the potentially infinite loss on the short security
position due to appreciation in the market price that might otherwise have been
avoided by re-purchase of the security to cover the short.
The Investment Funds may purchase and sell call and put options on stock
indexes, such as the Standard & Poor's 500 Composite Stock Price Index (the "S&P
500") and Standard & Poor's 100 Index, listed on national securities exchanges
or traded in the over-the-counter market for hedging purposes and to pursue its
investment objective. A stock index fluctuates with changes in the market values
of the stocks that comprise the index. Accordingly, successful use by the
Investment Fund of options on stock indexes will be subject to its Investment
Manager's ability to predict correctly movements in the direction of the stock
market generally or segments thereof and, to the extent the transaction is
entered into for hedging purposes, to ascertain the appropriate correlation
between the transaction being hedged and the price movements of the option. This
requires different skills and techniques than forecasting changes in the price
of individual stocks.
An Investment Fund may close out a position when writing options by purchasing
an option on the same security with the same exercise price and expiration date
as the option that it has previously written on such security. The Investment
Fund will realize a profit or loss if the amount paid to purchase an option is
less or more, as the case may be, than the amount received from the sale
thereof. To close out a position as a purchaser of an option, the Investment
Fund would ordinarily make a similar "closing sale transaction," which involves
liquidating the Investment Fund's position by selling the option previously
purchased, although the Investment Fund would be entitled to exercise the option
should it deem it advantageous to do so.
FUTURES AND OPTIONS ON FUTURES. Some or all of the Investment Funds may enter
into futures contracts or options on futures contracts for speculative and/or
for hedging purposes. Futures contracts are contracts made on a commodity
exchange which provide for the future delivery of various financial instruments,
foreign currencies, agricultural commodities and industrial commodities at a
specified date, time and place. The contractual obligations may be satisfied
either by taking or making physical delivery of an approved grade of the
commodity (or cash settlement in the case of certain futures contracts including
stock index contracts) or by entering into an offsetting contract to purchase or
sell the same commodity on the same exchange prior to the designated date of
delivery. Investment Funds may enter into futures or options on futures for any
underlying commodity such as stock indices, interest rates, foreign currencies,
government securities, precious and industrial metals and agricultural
commodities.
Futures transactions are highly leveraged and prices are highly volatile. Prices
are influenced by, among other things, changing supply and demand relationships,
government agricultural, commercial and trade programs and policies, national
and international political and economic events, weather and climate conditions,
insects and plant disease, purchases and sales by foreign countries and changing
interest rates. No assurance can be given that a liquid market will exist for
any particular futures contract at any particular time. Many futures exchanges
and boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit or trading may be suspended for specified periods during the
trading day. Futures contract prices could move to the limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of futures positions and potentially subjecting the Fund to
substantial losses.
The Investment Funds may enter into futures contracts in U.S. markets or on
exchanges located outside the United States. Foreign markets may offer
advantages such as trading opportunities or arbitrage possibilities not
available in the United States. Foreign markets, however, may have greater risk
potential than domestic markets. For example, some foreign exchanges are
principal markets so that no common clearing facility exists and an investor may
look only to the broker for performance of the contract. In addition, any
profits an Investment Fund might realize in trading could be eliminated by
adverse changes in the exchange rate, or a Fund could incur losses as a result
of those changes. Transactions on foreign exchanges may include both commodities
which are traded on domestic exchanges and those which are not. Unlike trading
on domestic commodity exchanges, trading on foreign commodity exchanges is not
regulated by the Commodity Futures Trading Commission.
The risks involved in trading commodity options on exchanges are similar to
those involved in trading futures contracts in that options are speculative and
highly leveraged. Specific market movements of the future contract underlying an
option cannot be predicted. Options are bought and sold on the trading floor of
a commodity exchange. The purchaser of an option pays a premium and may be
charged commissions and other fees. The writer of an option must make margin
deposits and may be charged commissions and other fees. Exchanges provide
trading mechanisms so that an option once purchased can later be sold and an
option once written can later be liquidated by an offsetting purchase. However,
there can be no assurance that a liquid offset market will exist for any
particular option or at any particular time. In such case, it might not be
possible to effect offsetting transactions in particular options. Thus in the
case of an option on a future, to realize any profit, a holder would have to
exercise his option and have to comply with margin requirements for the
underlying futures contract. A writer could not terminate its obligation until
the option expired or was assigned an exercise notice.
Successful use of futures or options on futures by an Investment Fund also is
subject to its Investment Manager's ability to predict correctly movements in
the direction of the relevant market, and, to the extent the transaction is
entered into for hedging purposes, to ascertain the appropriate correlation
between the transaction being hedged and the price movements of the futures
contract.
Pursuant to regulations and/or published positions of the Securities and
Exchange Commission ("SEC"), a Subadviser may be required to segregate
permissible liquid assets in connection with its commodities transactions in an
amount generally equal to the value of the underlying commodity. The segregation
of such assets will have the effect of limiting the Subadviser's ability
otherwise to invest those assets.
WARRANTS. Warrants are derivative instruments that permit, but do not obligate,
the holder to subscribe for other securities. Warrants do not carry with them
the right to dividends or voting rights with respect to the securities that they
entitle the holder to purchase, and they do not represent any rights in the
assets of the issuer. As a result, warrants may be considered more speculative
than certain other types of investments. In addition, the value of a warrant
does not necessarily change with the value of the underlying securities or
commodities, and a warrant ceases to have value if it is not exercised prior to
its expiration date.
SWAP AGREEMENTS. Some or all of the Investment Funds may enter into equity,
total return, interest rate, index and currency rate swap agreements on behalf
of the Investment Funds. These transactions are entered into in an attempt to
obtain a particular return when it is considered desirable to do so, possibly at
a lower cost than if the Investment Fund had invested directly in the asset that
yielded the desired return. Swap agreements are two-party contracts entered into
primarily by institutional investors for periods ranging from a few weeks to
more than a year. In a standard swap transaction, two parties agree to exchange
the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments, which may be adjusted for
an interest factor. The gross returns to be exchanged or "swapped" between the
parties are generally calculated with respect to a "notional amount," i.e., the
return on or increase in value of a particular dollar amount invested at a
particular interest rate, in a particular foreign currency, or in a "basket" of
securities representing a particular index.
The Investment Funds may purchase cash-settled options on swaps. A cash-settled
option on a swap gives the purchaser the right, but not the obligation, in
return for the premium paid, to receive an amount of cash equal to the value of
the underlying swap as of the exercise date. These options typically are
purchased in privately negotiated transactions from financial institutions,
including securities brokerage firms.
Most swap agreements entered into by an Investment Fund would calculate the
obligations of the parties to the agreement on a "net basis." Consequently, the
Investment Fund's current obligations (or rights) under a swap agreement
generally will be equal only to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to
the agreement (the "net amount"). The risk of loss with respect to swaps is
limited to the net amount of interest payments that the Investment Fund is
contractually obligated to make. If the other party to a swap defaults, the
Investment Fund's risk of loss consists of the net amount of payments that the
Investment Fund contractually is entitled to receive.
To achieve investment returns equivalent to those achieved by an investment
adviser in whose investment vehicles a Fund could not invest directly, perhaps
because of its investment minimum or its unavailability for direct investment,
the Fund may enter into swap agreements under which the Fund may agree, on a net
basis, to pay a return based on a floating interest rate, such as LIBOR, and to
receive the total return of the reference investment vehicle over a stated time
period. The Fund may seek to achieve the same investment result through the use
of other derivatives in similar circumstances.
LENDING PORTFOLIO SECURITIES
Some or all of the Investment Funds may lend securities from their portfolios to
brokers, dealers and other financial institutions needing to borrow securities
to complete certain transactions. The Investment Fund continues to be entitled
to payments in amounts equal to the interest, dividends or other distributions
payable on the loaned securities which affords the Investment Fund an
opportunity to earn interest on the amount of the loan and on the loaned
securities' collateral. Loans of portfolio securities by a Subadviser may not
exceed 33-1/3% of the value of a Fund's total assets, and, in respect of such
transactions, the Fund will receive collateral consisting of cash, U.S.
Government Securities or irrevocable letters of credit which will be maintained
at all times in an amount equal to at least 100% of the current market value of
the loaned securities. The Fund might experience risk of loss if the institution
with which the Investment Fund has engaged in a portfolio loan transaction
breaches its agreement with the Investment Fund.
WHEN-ISSUED, DELAYED DELIVERY AND FORWARD COMMITMENT SECURITIES
To reduce the risk of changes in interest rates and securities prices, some or
all of the Investment Funds may purchase securities on a forward commitment or
when-issued or delayed delivery basis, which means delivery and payment take
place a number of days after the date of the commitment to purchase. The payment
obligation and the interest rate receivable with respect to such purchase are
fixed when an Investment Fund enters into the commitment, but the Investment
Fund does not make payment until it receives delivery from the counterparty.
Securities purchased on a forward commitment or when-issued or delayed delivery
basis are subject to changes in value, generally changing in the same way, i.e.,
appreciating when interest rates decline and depreciating when interest rates
rise, based upon the public's perception of the creditworthiness of the issuer
and changes, real or anticipated, in the level of interest rates. Securities so
purchased may expose a Fund to risks because they may experience such
fluctuations prior to their actual delivery. Purchasing securities on a
when-issued or delayed delivery basis can involve the additional risk that the
yield available in the market when the delivery takes place actually may be
higher than that obtained in the transaction itself. Purchasing securities on a
forward commitment or when-issued or delayed delivery basis when an Investment
Fund is fully or almost fully invested may result in greater potential
fluctuation in the value of the Fund's net assets. In addition, there is a risk
that securities purchased on a when-issued or delayed delivery basis may not be
delivered and that the purchaser of securities sold by the Investment Fund on a
forward basis will not honor its purchase obligation. In such cases, the Fund
may incur a loss.
RESTRICTED AND ILLIQUID INVESTMENTS
Although each Investment Fund will invest primarily in publicly traded
securities, the Fund and each Investment Fund may invest without limitation in
restricted securities and other investments which are illiquid. Restricted
securities are securities that may not be sold to the public without an
effective registration statement under the 1933 Act, or, if they are
unregistered, may be sold only in a privately negotiated transaction or pursuant
to an exemption from registration under the 1933 Act.
Where registration is required to sell a security, an Investment Fund may be
obligated to pay all or part of the registration expenses, and a considerable
period may elapse between the decision to sell and the time the Investment Fund
may be permitted to sell a security under an effective registration statement.
If during such a period adverse market conditions were to develop, the
Investment Fund might obtain a less favorable price than the prevailing price
when it decided to sell. Restricted securities for which no market exists and
other illiquid investments are valued at fair value as determined in accordance
with procedures approved and periodically reviewed by the Directors. Investment
Funds may be unable to sell restricted and other illiquid securities at the most
opportune times or at prices approximating the value at which they purchased
such securities.
In addition, each Fund's interests in the Investment Funds are themselves
illiquid and subject to substantial restrictions on transfer. The Fund may
liquidate an interest and withdraw from an unregistered Investment Fund pursuant
to limited withdrawal rights. The illiquidity of these interests may adversely
affect the Fund were it to have to sell interests at an inopportune time.
ADVISER'S HEDGING ACTIVITIES
From time to time, the Adviser may engage in transactions in Derivatives and in
options, futures and foreign currencies and may enter into swap agreements for
purposes of hedging the portfolios of a Fund's exposure to market sectors or
currencies. These transactions and the related risks are described under "TYPES
OF INVESTMENTS AND RELATED RISK FACTORS."
INVESTMENT RESTRICTIONS
Each Fund has adopted the following investment restrictions as fundamental
policies, which cannot be changed without approval by holders of a majority (as
defined in the 1940 Act) of the Fund's outstanding voting securities. Neither
Fund may:
o Issue senior securities, except to the extent permitted by the 1940
Act.
o Underwrite securities of other issuers, except insofar as the Fund may
be deemed an underwriter under the 1933 Act in connection with the
disposition of its portfolio securities.
o Make loans, except through purchasing fixed-income securities, lending
portfolio securities or entering into repurchase agreements in a manner
consistent with the Fund's investment policies or as otherwise
permitted under the 1940 Act.
o Purchase, hold or deal in real estate, except that the Subadvisers may
invest in real estate and securities that are secured by real estate,
or securities issued by companies that invest or deal in real estate or
real estate investment trusts.
o Invest in commodities or commodity contracts, except that the Fund and
the Subadvisers may purchase and sell options, futures and forward
contracts, including those related to indexes and options on indexes,
to the extent provided in this Memorandum.
o Invest more than 25% of the value of its total assets in the securities
of issuers in any single industry, except that U.S. Government
Securities may be purchased without limitation. For purposes of this
Investment Restriction, the Investment Funds are not considered part of
an industry.
Under the 1940 Act, the vote of a majority of the outstanding voting securities
of an investment company, such as a Fund, means the vote, at the annual or a
special meeting of the security holders of such company duly called, (A) of 67%
or more of the voting securities present at such meeting, if the holders of more
than 50% of the outstanding voting securities of such company are present or
represented by proxy; or (B) of more than 50% of the outstanding voting
securities of such company, whichever is less.
With respect to these investment restrictions, and other policies described in
this Memorandum, a Fund will look through only its Investment Funds managed by
Subadvisers. If a percentage restriction is adhered to at the time of an
investment or transaction, a later change in percentage resulting from a change
in the values of investments or the value of the Fund's total assets, unless
otherwise stated, will not constitute a violation of such restriction or policy.
Each Fund's investment objective is fundamental and may not be changed without
the vote of a majority (as defined by the 1940 Act) of the Fund's outstanding
voting securities.
ADDITIONAL RISK FACTORS
ASSET-BASED FEES AND INCENTIVE-BASED ALLOCATIONS
Each Investment Fund generally will bear an asset-based fee and some or all of
the Investment Managers will receive incentive-based allocations. The
asset-based fees of the Investment Funds are expected to range from 1% to 2% of
the value of the relevant Investment Fund and the incentive-based allocations of
the Investment Managers are expected to range from 10% to 25% of net profits of
the relevant Investment Fund.
The incentive-based allocation that will be received by an Investment Manager
may create an incentive for the Investment Manager to make investments that are
riskier or more speculative than those that might have been made in the absence
of the incentive-based allocation. In addition, because the incentive-based
allocation is calculated on a basis that includes realized and unrealized
appreciation of an Investment Fund's assets, the allocation may be greater than
if it were based solely on realized gains. See "CAPITAL ACCOUNTS AND
ALLOCATIONS--Incentive Allocation."
In addition, the Adviser will charge each Fund an asset-based fee and will
receive an incentive-based allocation, which gives rise to similar risks. See
"FEES AND EXPENSES" and "CAPITAL ACCOUNTS AND ALLOCATIONS--Incentive
Allocation."
TAX RISKS
Counsel to each Fund has rendered an opinion that the Fund will be treated as a
partnership and not as an association taxable as a corporation for Federal
income tax purposes. Counsel to each Fund has rendered its opinion that, under a
"facts and circumstances" test set forth in regulations adopted by the U.S.
Treasury Department, the Fund will not be treated as a "publicly traded
partnership" taxable as a corporation. If it were determined that the Fund
should be treated as an association or publicly traded partnership taxable as a
corporation, as a result of a successful challenge to the opinions rendered by
counsel to the Fund or otherwise, the taxable income of the Fund would be
subject to corporate income tax and distributions of profits from the Fund would
be treated as dividends. See "TAX ASPECTS--Tax Treatment of Fund
Operations--Classification of the Funds."
LACK OF OPERATING HISTORY
Each Fund is a newly formed entity and has no operating history upon which
investors can evaluate the performance of the Fund. The Adviser, however, has
experience in managing private investment funds and separately managed client
accounts that have investment programs that are substantially similar to the
respective Fund's expected investment program. See "APPENDIX B--PERFORMANCE
INFORMATION."
LIQUIDITY RISKS
Interests in a Fund will not be traded on any securities exchange or other
market and are subject to substantial restrictions on transfer. Although each
Fund may offer to repurchase Investor interests from time to time, an Investor
may not be able to liquidate its interest in the Fund for up to two years. The
Adviser expects that generally, beginning in 2001, it will recommend to the
Fund's Board that the Fund offer to repurchase interests from Investors once
each year, near December 31st. See "REDEMPTIONS, REPURCHASES OF INTERESTS AND
TRANSFERS."
DISTRIBUTIONS TO INVESTORS AND PAYMENT OF TAX LIABILITY
Each Fund does not intend to make periodic distributions of its net income or
gains, if any, to Investors. Whether or not distributions are made, Investors
will be required each year to pay applicable Federal and state income taxes on
their respective shares of the Fund's taxable income, and will have to pay such
applicable taxes from sources other than Fund distributions. The amount and
times of any distributions will be determined in the sole discretion of the
Fund's Board.
SPECIAL RISKS OF THE FUNDS' STRUCTURE
The Investment Funds will not be registered as investment companies under the
1940 Act and, therefore, neither Fund will be able to avail itself of the
protections of the 1940 Act with respect to the Investment Funds. Although the
Adviser will seek to receive detailed information from each Investment Manager
regarding its or its Investment Fund's historical performance and investment
strategy, in most cases the Adviser has little or no means of independently
verifying this information. An Investment Fund may use proprietary investment
strategies that are not fully disclosed to the Adviser, which may involve risks
under some market conditions that are not anticipated by the Adviser.
An Investor who met the conditions imposed by the Investment Funds could invest
directly with the Investment Funds. These conditions include investment minimums
that may be considerably higher than the Fund's minimum investment. By investing
in the Investment Funds indirectly through a Fund, the Investor bears two layers
of asset-based fees and incentive-based allocations--one at the Fund level and
one at the Investment Fund level. In addition, the Investor bears a
proportionate share of the fees and expenses of the Fund (including operating
costs, distribution expenses and administrative fees) and, indirectly, similar
expenses of the Investment Funds. In its determination of whether an investment
in the Investment Fund would be consistent with a Fund's investment objective,
the Adviser will consider the aggregate fees to which the Fund may be subject.
Each Investment Manager will receive any incentive-based allocations to which it
is entitled irrespective of the performance of the other Investment Managers and
the relevant Fund generally. Accordingly, an Investment Manager with positive
performance may receive compensation from an Investment Fund, and thus
indirectly from Investors, even if the Fund's returns are negative. Investment
decisions of the Investment Funds are made by the Investment Managers entirely
independently of each other. As a result, at any particular time, one Investment
Fund may be purchasing shares of an issuer whose shares are being sold by
another Investment Fund. Consequently, a Fund could incur indirectly certain
transaction costs without accomplishing any net investment result. A number of
Investment Funds may take substantial positions in the same security, financial
instrument or market sector at the same time. This inadvertent concentration
could cause the Fund to experience greater volatility or sustain larger losses.
To the extent a Fund holds non-voting securities of, or contractually foregoes
the right to vote in respect of, an Investment Fund, the Fund will not be able
to vote on matters that require the approval of the investors in the Investment
Fund, including a matter that could adversely affect the Fund's investment in
it.
Some Investment Funds in which a Fund may invest may be newly organized and
therefore may have no, or only limited operating histories (although the Adviser
generally will select Investment Funds or Investment Managers which have had
some operating or trading history). In addition, Investment Managers will have
varying levels of experience and may operate in teams which are small relative
to the assets under their management. The Investment Managers also may employ
proprietary trading methods, policies and strategies which may deviate from the
Adviser's expectations based on its research and evaluations. Of course, past
performance achieved by such Investment Managers and Investment Funds is not
necessarily indicative of future results. Therefore, the results of any
Investment Fund may differ from those of other investment vehicles or accounts
operated by the Investment Manager and from results the Adviser anticipated.
Since a Fund may make additional investments in the Investment Funds only at
certain times pursuant to limitations set forth in the governing agreements of
the Investment Funds, the Fund from time to time may have to invest some of its
assets temporarily in money market securities.
Each Investment Fund is permitted to redeem its securities in-kind. Thus, upon a
Fund's withdrawal of all or a portion of its interest in an Investment Fund, the
Fund may receive securities that are illiquid or difficult to value. In such
circumstances, the Adviser would seek to dispose of these securities in a manner
that it believes to be in the best interests of the Fund. Each Fund may be
subject to compulsory cash redemption or in-kind redemptions by one or more
Investment Funds. In such circumstances, the Fund may receive cash, securities
and/or limited partnership or limited liability company interests that are
illiquid or difficult to value at an inopportune time.
If financial reports used by any Investment Fund to determine its net asset
value are incomplete, inaccurate or if the net asset value does not adequately
reflect the value of the Investment Fund's holdings, the net asset value of a
Fund may be inaccurate. Although the Adviser intends to select Investment Funds
that use reputable administrators and accountants, neither Fund will have
control over the choice of custodians, brokers or counterparties made by these
Investment Funds nor on the valuation methods and accounting rules which they
may use. Each Fund's ability to correctly assess the value of its Investment
Funds will be dependent upon the information available with respect to them and
their investment operations.
An Investment Fund may have to suspend temporarily the determination of its net
asset value. In such event, a Fund may be unable to redeem or otherwise dispose
of its interests in such Investment Fund when it otherwise would be advantageous
to do so. In such event, the Fund's ability to calculate its net asset value
accurately also might be adversely affected.
Like an investment in each Fund, investments in the Investment Funds may be
illiquid. The governing instruments of many Investment Funds will have
provisions similar to those of each Fund restricting both the transferability of
an investor's interest and the ability of an investor to withdraw its investment
in certain circumstances.
For each Fund to complete its tax reporting requirements, it must receive
information on a timely basis from the Investment Funds. An Investment Fund's
delay in providing this information will delay the Fund's preparation of tax
information to investors, which is likely to cause investors to need to seek
extensions on the time to file their tax returns.
A noncorporate investor's share of each Fund's investment expenses (including
the asset-based fees and incentive-based amounts, if any, at the Fund and
Investment Fund levels) may be subject to certain limitations on deductibility
for regular Federal income tax purposes and may be completely disallowed for
purposes of determining the noncorporate investor's alternative minimum tax
liability.
Each Fund may be required to indemnify certain of its Investment Funds and their
Investment Managers from any liability, damage, cost or expense arising out of,
among other things, certain acts or omissions relating to the offer or sale of
the Fund's interests.
PERFORMANCE INFORMATION
Appendix B contains performance information for two offshore funds of funds
advised by the Adviser with investment programs that are similar to the Funds'
expected investment programs. The future performance of the offshore funds may
vary from the future performance of the Funds. See "CONFLICTS OF
INTEREST--Participation in Investment Opportunities." PAST PERFORMANCE DOES NOT
GUARANTEE FUTURE RESULTS.
THE DIRECTORS
Each Fund's Board has overall responsibility to manage and control the business
affairs of the relevant Fund, including the complete and exclusive authority to
oversee and to establish policies regarding the management, conduct and
operation of the Fund's business. The Board exercises the same powers, authority
and responsibilities on behalf of the Fund as are customarily exercised by the
board of directors of a registered investment company organized as a
corporation. The Directors are managers of the Fund for purposes of Delaware's
Limited Liability Company Act.
The Directors are not required to contribute to the capital of a Fund or hold
interests in a Fund. A majority of each Fund's Directors are not "interested
persons" (as defined in the 1940 Act) of the Fund (collectively, the
"Independent Directors") and perform the same functions for the Fund as are
customarily exercised by the non-interested directors of a registered investment
company organized as a corporation.
The identity of each Fund's Directors and brief biographical information
regarding each Director is set forth below.
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
<S> <C>
John N. Bell Retired; Assistant Treasurer, Consolidated Edison Company of New
462 Lenox Avenue York, Inc. (since prior to 1993). Mr. Bell also is a director or
South Orange, New Jersey 07079 trustee of 13 other investment companies for which J.P. Morgan or
Age 69 its affiliates serves as investment adviser.
John R. Rettberg Retired; Corporate Vice President and Treasurer, Northrop Grumman
1770 West Balboa Boulevard Corporation ("Northrop") (prior to January 1995); Consultant,
Newport Beach, California 92663 Northrop (since January 1995); Director, Independent Colleges of
Age 62 Southern California (prior to 1994); Director, Junior Achievement
(prior to 1993); Director,
Pepperdine University (since
March 1997); Director Vari-Lite
International Corporation
(since April 1996); Mr.
Rettberg also is a director or
trustee of 13 other investment
companies for which J.P. Morgan
or its affiliates serves as
investment adviser.
John F. Ruffle Retired; Director and Vice Chairman, J.P. Morgan (prior to June
Pleasantville Road 1993); Trustee, The Johns Hopkins University (since July 1990);
New Vernon, Director, Bethlehem Steel Corporation (since September 1990);
New Jersey 07976 Director, Wackenhut Corrections Corp. (since January 1997);
Age 63 Director, Wackenhut Corporation (since April 1998); Director,
Trident Corp. (since November 1993); Director, American Shared
Hospital Services (since May 1995). Mr. Ruffle also is a
director or trustee of 13 other investment companies for which
J.P. Morgan or its affiliates serves as investment adviser.
Kenneth Whipple, Jr. Retired; Executive Vice President, Ford Motor Company, President,
1115 Country Club Drive Ford Financial Services Group, and Chairman, Ford Motor Credit
Bloomfield Hills, Michigan 48304 Company; Director and President, Ford Holdings, Inc. (since prior
Age 65 to 1992); Director, CMS Energy Corporation and Consumers Energy
Company (since January 1993); Chairman and Director, WTVS-TV
(since prior to 1992); Director, Galileo International (since
October 1997); Director, Associates First Capital Corp. (since
January 1999). Mr. Whipple also is a director or trustee of 13
other investment companies for which J.P. Morgan or its
affiliates serves as investment adviser.
</TABLE>
As to each Fund, the Directors serve on the Fund's Board for terms of indefinite
duration. A Director's position in that capacity will terminate if such Director
is removed, resigns or is subject to various disabling events such as death or
incapacity. A Director may resign upon 90 days' prior written notice to the
other Directors, subject to waiver of notice, and may be removed either by vote
or written consent of the Investors holding not less than two-thirds of the
total number of votes eligible to be cast by all Investors. In the event of any
vacancy in the position of a Director, the remaining Directors may appoint an
individual to serve as a Director, so long as immediately after such appointment
at least two-thirds of the Directors then serving would have been elected by the
Investors. The Directors may call a meeting of Investors to fill any vacancy in
the position of a Director, and must do so within 60 days after any date on
which Directors who were elected by the Investors cease to constitute a majority
of the Directors then serving. If no Director remains to manage the business of
the Fund, the Adviser may manage and control the Fund, but must convene a
meeting of Investors within 60 days for the purpose of either electing new
Directors or dissolving the Fund.
As to each Fund, the Independent Directors are each paid an annual retainer of
$5,000 and per meeting fees of $500 by the Fund. The other Directors receive no
annual or other fees from the Fund. All Directors are reimbursed by the Fund for
their reasonable out-of-pocket expenses. It is estimated that the aggregate
annual compensation paid by the Fund to each Director will be $7,000 during the
coming year, and that, together with compensation paid to them by other
registered investment companies advised by affiliates of the Adviser, each of
Messrs. Bell, Rettberg, Ruffle and Whipple will receive aggregate annual
compensation from all such companies of approximately $49,500 for such year. The
Directors do not receive any pension or retirement benefits from the Fund.
THE ADVISER
The Adviser serves as each Fund's investment adviser, subject to the ultimate
supervision of and subject to any policies established by the Fund's Directors,
pursuant to the terms of investment advisory agreements entered into between the
respective Funds and the Adviser dated as of March 21, 2000 (each, an
"Investment Advisory Agreement"). The Adviser will initially allocate each
Fund's assets and, thereafter, will evaluate regularly each Investment Fund to
determine whether its investment program is consistent with the Fund's
investment objective and whether its investment performance is satisfactory. The
Adviser may reallocate a Fund's assets among Investment Funds, eliminate
Investment Funds from the Fund's investment portfolio and select additional
Investment Funds, subject to the condition that selection of a new Investment
Fund advised by a Subadviser requires approval of a majority (as defined in the
1940 Act) of the Fund's outstanding voting securities, unless the Fund receives
an exemption from certain provisions of the 1940 Act. The Adviser, which was
formed as a Delaware corporation on February 7, 1984, is a wholly-owned
subsidiary of J.P. Morgan and is registered as an investment adviser under the
Advisers Act. The Adviser is registered under the CEA as a Commodity Pool
Operator and in such capacity is a member of the National Futures Association.
The Adviser will act as each Fund's Commodity Pool Operator, responsible for
futures-related activities and for compliance with the CEA and the regulations
of the Commodity Futures Trading Commission. The Adviser and its affiliates
provide investment advisory services to individuals, governments, corporations,
employee benefit plans, mutual funds and other institutional investors with
combined assets under management of approximately $369 billion as of June 30,
2000.
The offices of the Adviser are located at 522 Fifth Avenue, New York, New York
10036, and its telephone number is (212) 837-2300. The Adviser or its designee
maintains each Fund's accounts, books and other documents required to be
maintained under the 1940 Act and CEA at 522 Fifth Avenue, New York, New York
10036 or at such other place as designated by the Adviser.
Investment decisions for each Fund are made by a team of the Adviser's portfolio
managers, and no person is primarily responsible for making recommendations to
the team.
Pursuant to the Investment Advisory Agreement of each Fund, the Adviser is
responsible, subject to the supervision of the Directors, for formulating a
continuing investment program for the Fund. The Adviser will make all decisions
regarding the Fund's purchases and withdrawals of interests in Investment Funds
and advise the Directors regarding the selection of Subadvisers. The Investment
Advisory Agreement of each Fund was approved by the Fund's full Board and by the
Directors who are not "interested persons" (as defined by the 1940 Act), of the
Fund or the Adviser at a meeting held in person on March 21, 2000, and also was
approved on such date by the Fund's Organizational Member, as defined in the LLC
Agreement. The Investment Advisory Agreement of each Fund is terminable without
penalty, on 60 days' prior written notice by the Fund's Board, by vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of
the Fund; or by the Adviser. The initial term of the Investment Advisory
Agreement of each Fund expires on March 21, 2002. However, the Investment
Advisory Agreement may be continued in effect from year to year thereafter if
its continuance is approved annually by either the Fund's Board or the vote of a
majority (as defined by the 1940 Act) of the outstanding voting securities of
the Fund, provided that, in either event, the continuance also is approved by a
majority of the Directors who are not "interested persons" of the Fund or the
Adviser by vote cast in person at a meeting called for the purpose of voting on
such approval. The Investment Advisory Agreement of each Fund also provides that
it will terminate automatically in the event of its "assignment" (as defined in
the 1940 Act).
The Investment Advisory Agreement of each Fund provides that, in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of its
obligations to the Fund, the Adviser and any director, officer or employee
thereof, or any of their affiliates, executors, heirs, assigns, successors or
other legal representatives, will not be liable to the Fund for any error of
judgment, for any mistake of law or for any act or omission by such person in
connection with the performance of services to the Fund. The Investment Advisory
Agreement of each Fund also provides for indemnification, to the fullest extent
permitted by law, by the Fund of the Adviser, or any director, officer or
employee thereof, and any of their affiliates, executors, heirs, assigns,
successors or other legal representatives, against any liability or expense to
which such person may be liable which arises in connection with the performance
of services to the Fund, provided that the liability or expense is not incurred
by reason of the person's willful misfeasance, bad faith, gross negligence or
reckless disregard of its obligations to the Fund.
The Investment Advisory Agreement of each Fund provides that in consideration of
the services provided by the Adviser, the Adviser shall be entitled to be the
Special Advisory Member of the Fund. In such capacity, the Adviser is entitled
to receive the Incentive Allocation.
VOTING
Each Investor will have the right to cast a number of votes on a Fund matter
based on the value of such Investor's respective capital account in the Fund at
any meeting of Investors called by the Fund's Directors or Investors holding at
least a majority of the total number of votes eligible to be cast by all
Investors in the Fund. Investors will be entitled to vote on any matter on which
shareholders of a registered investment company organized as a corporation would
be entitled to vote, including selection of Directors and approval of the Fund's
auditors. The Fund does not expect to hold annual or other regularly scheduled
meetings of Investors. Except for the exercise of their voting privileges,
Investors will not be entitled to participate in the management or control of
the Fund's business, and may not act for or bind the Fund. The interest of the
Special Advisory Member is non-voting.
CONFLICTS OF INTEREST
THE ADVISER
The Adviser and its affiliates manage the assets of registered investment
companies, private investment funds and individual accounts (collectively, "JPM
Clients"). The Funds have no interest in these activities. In addition, the
Adviser, its affiliates, and any of their respective officers, directors,
partners, members or employees, may invest for their own accounts in various
investment opportunities, including in investment partnerships, private
investment companies or other investment vehicles in which the Funds will have
no interest.
The Adviser or its affiliates may determine that an investment opportunity in a
particular investment vehicle is appropriate for a particular JPM Client or for
itself or its officers, directors, partners, members or employees, but not for
the Funds. Situations may arise in which the Adviser, its affiliates or JPM
Clients have made investments which would have been suitable for investment by a
Fund but, for various reasons, were not pursued by, or available to, the Fund.
The investment activities of the Adviser, its affiliates and any of their
respective officers, directors, partners, members or employees may disadvantage
a Fund in certain situations, if, among other reasons, the investment activities
limit the Fund's ability to invest in an investment vehicle.
The officers or employees of the Adviser will be engaged in substantial
activities other than on behalf of the Funds and may have conflicts of interest
in allocating their time and activity between the Funds and other JPM Clients.
The Adviser and its officers and employees will devote so much of their time to
the affairs of each Fund as in their judgment is necessary and appropriate.
J.P. Morgan and its affiliates have, and continue to seek and develop, banking,
brokerage, trading and other financial and advisory relationships with numerous
clients and issuers (including Investment Funds and their Investment Managers).
J.P. Morgan and its affiliates also advise and represent potential buyers and
sellers of securities of such issuers worldwide. A Fund may be interested in
purchasing or selling, directly or indirectly, the securities of issuers with
which J.P. Morgan or an affiliate has a client relationship. While the Adviser
does not believe that the existence of these relationships will necessarily
preclude a purchase or sale of such issuers' securities by a Fund (or by an
Investment Fund), it is possible that the ability of the Fund to engage in
certain transactions may be restricted by legal requirements applicable to J.P.
Morgan.
In providing services to its various clients, some of which may be competitors
to issuers in which a Fund has invested, directly or indirectly, J.P. Morgan and
its affiliates may recommend activities that would compete with or otherwise
adversely affect these issuers or the value of the securities held by one or
more Investment Funds. While J.P. Morgan and its affiliates will consider the
implications of identified actual or potential conflicts arising from these
relationships, it should be recognized that such relationships may preclude a
Fund from engaging in certain transactions and may constrain the Fund's
investment flexibility.
As part of its regular business activities, J.P. Morgan or any of its affiliates
may be retained to provide advice, financing, brokerage, trading or other
financial services to, and will expect to receive customary compensation from,
an issuer (including any Investment Fund) in which a Fund has invested, directly
or indirectly. If J.P. Morgan or one of its affiliates is so retained, the terms
of such retainer will not be subject to notice to or approval by the Fund. Such
compensation could include financial, advisory, underwriting, placement,
financing, commitment or brokerage fees and will not be shared with the Funds.
Certain affiliates of J.P. Morgan also may trade financial derivative
instruments (such as forward currency contracts or equity derivatives) with some
of the Investment Funds in which a Fund may invest when permitted by applicable
law. (All Investment Funds and other accounts managed by the Investment Managers
or their affiliates, excluding the Funds, are referred to collectively as the
"Investment Manager Accounts.") These J.P. Morgan affiliates also may issue,
trade in or underwrite financial instruments or securities whose return or value
derives from or is linked to the value of the interests of a Fund or any
Investment Fund. The Adviser will not have access to confidential, non-public
trading, financial or business information which may be provided by issuers and
Investment Funds to other affiliates of J.P. Morgan, but may, when permitted by
applicable law, share due diligence information and research with these
affiliates. When J.P. Morgan or its affiliate provides or arranges financing to,
or has unsettled receivables from, a borrower in which an Investment Fund has
invested, J.P. Morgan or its affiliate may have, and in the event of the
borrower's default or insolvency, will have, interests substantially divergent
from those of the Investment Fund. Similarly, under certain circumstances, the
Investment Funds may invest in connection with a transaction in which J.P.
Morgan or an affiliate has already invested or is expected to participate and
the Fund and J.P. Morgan or its affiliate may have conflicting interests.
JPM Securities acts as the placement agent for each Fund and will bear its own
costs associated with its activities as placement agent. JPM Securities from
time to time may engage, at no cost to the Funds, sub-placement agents. The
Adviser and JPM Securities may compensate JPM Securities' or its affiliates'
financial advisers, as well as third-party securities dealers and other industry
professionals, for their ongoing servicing of clients with whom they have placed
interests in a Fund and such compensation will be based upon a formula that
takes into account the amount of client assets being serviced as well as the
investment results attributable to the clients' assets in the Fund.
Additionally, these entities, at their discretion, may charge Investors sales
commissions of up to 3% of the purchase price of Fund interests being purchased.
See "FEES AND EXPENSES" and "CAPITAL ACCOUNTS AND ALLOCATIONS--Incentive
Allocation."
PERTAINING TO SUBADVISERS
To the extent Subadvisers are engaged to manage a Fund's assets, the following
potential conflicts of interest may be relevant:
PARTICIPATION IN INVESTMENT OPPORTUNITIES. The Adviser anticipates that each
Subadviser will employ an investment program for its Investment Fund that is
substantially similar to the investment program that will be employed by the
Subadviser for certain of its Investment Manager Accounts. Accordingly, as a
general matter, the Subadviser will be expected to consider participation by the
Fund in all appropriate investment opportunities that are under consideration
for investment by the Subadviser for its Investment Manager Accounts. There may
be, however, circumstances under which a Subadviser will cause its Investment
Manager Accounts to commit a larger percentage of their respective assets to an
investment opportunity than to which the Subadviser will commit the Fund's
assets. There also may be circumstances under which a Subadviser will consider
participation by its Investment Manager Accounts in investment opportunities in
which the Subadviser does not intend to invest on behalf of the Fund, or vice
versa.
Each Subadviser will be expected to evaluate a variety of factors that may be
relevant in determining whether a particular investment opportunity or strategy
is appropriate and feasible for its respective Investment Fund or Investment
Manager Account at a particular time, including, but not limited to, the
following: (1) the nature of the investment opportunity taken in the context of
the other investments at the time; (2) the liquidity of the investment relative
to the needs of the particular entity or account; (3) the availability of the
opportunity (i.e., size of obtainable position); (4) the transaction costs
involved; and (5) the investment or regulatory limitations applicable to the
particular entity or account. Because these considerations may differ for the
Investment Fund and relevant Investment Manager Accounts in the context of any
particular investment opportunity, the investment activities of the Investment
Fund and Investment Manager Accounts may differ considerably from time to time.
In addition, the fees and expenses of the Investment Fund will differ from those
of the Investment Manager Accounts and the Fund. Accordingly, prospective
Investors should note that the future performance of the Subadviser and its
Investment Manager Accounts will vary.
When a Subadviser determines that it would be appropriate for its respective
Investment Fund and one or more of its Investment Manager Accounts to
participate in an investment opportunity at the same time, the Subadviser will
attempt to aggregate, place and allocate orders on a basis that it believes to
be fair and equitable, consistent with its responsibilities under applicable
law. Decisions in this regard are necessarily subjective and there is no
requirement that each Investment Fund participate, or participate to the same
extent as the Investment Manager Accounts, in all trades. The Adviser will seek
to invest in Subadvisers which will undertake that no participating entity or
account will receive preferential treatment over any other and the Subadviser
will take steps to ensure that no participating entity or account will be
systematically disadvantaged by the aggregation, placement and allocation of
orders.
Situations may occur, however, where the Fund could be disadvantaged because of
the investment activities conducted by the Subadvisers for the Investment
Manager Accounts. These situations may be based on, among other things: (1)
legal restrictions on the combined size of positions that may be taken for the
Investment Funds and the Investment Manager Accounts, thereby limiting the size
of the Fund's position; (2) the difficulty of liquidating an investment for the
Investment Funds and the Investment Manager Accounts where the market cannot
absorb the sale of the combined positions; and (3) the determination that a
particular investment is warranted only if hedged with an option or other
instrument and there is a limited availability of such options or other
instruments. In particular, each Subadviser may be legally restricted from
entering into a "joint transaction" (as defined in the 1940 Act) with its
Investment Fund or Investment Manager Accounts with respect to the securities of
an issuer without first obtaining exemptive relief from the SEC. See "CONFLICTS
OF INTEREST--Other Matters."
Each Investment Manager and its principals, officers, employees and affiliates,
may buy and sell securities or other investments for their own accounts and may
have actual or potential conflicts of interest with respect to investments made
on behalf of the Fund. As a result of differing trading and investment
strategies or constraints, positions may be taken by principals, officers,
employees and affiliates of the Investment Manager that are the same, different
or made at a different time than positions taken for the Fund.
OTHER MATTERS. Except in accordance with applicable law, no Subadviser is
permitted to buy securities or other property from, or sell securities or other
property to, its respective Investment Fund. However, the Investment Fund may
effect certain principal transactions in securities with one or more Investment
Manager Accounts, except for accounts in which the Subadviser or any affiliate
thereof serves as a general partner or in which it has a financial interest,
other than an interest that results solely from the Subadviser's appointment as
an investment adviser to the account. These transactions would be made in
circumstances where the Subadviser has determined it would be appropriate for
the Investment Fund to purchase and an Investment Manager Account to sell, or
the Investment Fund to sell and an Investment Manager Account to purchase, the
same security or instrument on the same day. Future investment activities of the
Investment Managers, or their affiliates, and the principals, partners,
directors, officers or employees of the foregoing may give rise to additional
conflicts of interest.
The Funds, the Adviser and JPM Securities each have adopted, and any new
Subadviser will adopt, a code of ethics under Rule 17j-1 of the 1940 Act that
permits its personnel, subject to the codes, to invest in securities, including
securities that may be purchased or held by a Fund. These codes of ethics can be
reviewed and copied at the SEC's Public Reference Room in Washington, D.C.
Information on the operation of the Public Reference Room may be obtained by
calling the SEC at 1-202-942-8090. These codes are available on the EDGAR
database on the SEC's Internet site at http://www.sec.gov, and also may be
obtained, after paying a duplicating fee, by electronic request at the following
E-mail address: [email protected], or by writing the SEC's Public Reference
Section, Washington, D.C. 20549-0102.
BROKERAGE
Each Investment Manager is directly responsible for the execution of its
portfolio investment transactions and the allocation of brokerage. Transactions
on U.S. stock exchanges and on some foreign stock exchanges involve the payment
of negotiated brokerage commissions. On the great majority of foreign stock
exchanges, commissions are fixed. No stated commission is generally applicable
to securities traded in over-the-counter markets, but the prices of those
securities include undisclosed commissions or mark-ups. The Adviser understands
that each Investment Manager will seek to obtain the best price and execution
for portfolio transactions and may allocate brokerage business to brokers that
provide it with supplemental research, reports and other market information in
the same manner and subject to the same requirements as a Subadviser as
described below.
To the extent Subadvisers are engaged to manage a Fund's assets, the following
paragraphs will be relevant:
In executing transactions on behalf of its Investment Fund, each Subadviser will
seek to obtain the best price and execution for the transactions, taking into
account factors such as price, size of order, difficulty of execution and
operational facilities of a brokerage firm, and in the case of transactions
effected by the Subadviser with unaffiliated brokers, the firm's risk in
positioning a block of securities. Although each Subadviser generally will seek
reasonably competitive commission rates, a Subadviser will not necessarily pay
the lowest commission available on each transaction. The Subadvisers generally
will have no obligation to deal with any broker or group of brokers in executing
transactions in portfolio securities.
Following the principle of seeking best price and execution, a Subadviser may
place brokerage business on behalf of the Fund with brokers that provide the
Subadviser and its affiliates with supplemental research, market and statistical
information, including advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities, and furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. The expenses of the
Subadviser are not necessarily reduced as a result of the receipt of this
supplemental information, which may be useful to the Subadviser or its
affiliates in providing services to clients other than the Investment Fund. In
addition, not all of the supplemental information is used by the Subadviser in
connection with the Investment Fund. Conversely, the information provided to the
Subadviser by brokers and dealers through which other clients of the Subadviser
and its affiliates effect securities transactions may be useful to the
Subadviser in providing services to the Investment Fund.
Each Investment Manager may execute portfolio brokerage transactions through its
affiliates and affiliates of the Adviser, in each case subject to compliance
with the 1940 Act.
FEES AND EXPENSES
The Adviser provides certain management and administrative services to each
Fund, including, among other things, providing office space and other support
services to the Fund. In consideration for these services, each Fund will pay
the Adviser a management fee generally on a monthly basis calculated at an
annual rate based on its net assets for the month, excluding assets attributable
to the Adviser's capital account, the Special Advisory Account and the capital
account of certain offshore funds (the "Fee"). The Fee will be 1.00% for Fund
Core and .75% for Fund Alpha. Net assets means the total value of all assets of
the Fund, less an amount equal to all accrued debts, liabilities and obligations
of the Fund, calculated before giving effect to any repurchases of interests.
The Fee will be computed as of the start of business on the first business day
of the period to which the Fee relates, after adjustment for any capital
contributions effective on such date, and will be payable in arrears. The Fee
will be charged in each period to the capital accounts of the appropriate
Investors in proportion to their capital accounts at the beginning of such
period.
The Administrator performs certain administration, accounting and investor
services for each Fund and, in consideration thereof, each Fund will pay the
Administrator an annual fee based on assets and number of Investors, and will
reimburse the Administrator for out-of-pocket expenses.
In addition, the capital accounts of Investors (except the Special Advisory
Account) may be subject to an Incentive Allocation depending upon the investment
performance of the Fund. See "CAPITAL ACCOUNTS AND ALLOCATIONS--Incentive
Allocation."
Each Fund will bear all expenses incurred in the business of the Fund other than
those specifically required to be borne by the Adviser. Expenses to be borne by
each Fund include:
o all costs and expenses directly related to portfolio transactions and
positions for the Fund's account, including, but not limited to,
brokerage commissions, research fees, interest and commitment fees on
loans and debit balances, borrowing charges on securities sold short,
dividends on securities sold short but not yet purchased, custodial
fees, margin fees, transfer taxes and premiums, taxes withheld on
foreign dividends, and indirect expenses from investments in Investment
Funds;
o all costs and expenses associated with the organization, operation and
registration of the Fund, certain offering costs and the costs of
compliance with any applicable Federal or state laws;
o the costs and expenses of holding meetings of the Board and any
meetings of Investors that are regularly scheduled, permitted or
required to be held under the terms of the LLC Agreement, the 1940 Act
or other applicable law;
o reasonable fees and disbursements of any attorneys, accountants
(including tax preparation fees), auditors and other consultants and
professionals engaged on behalf of the Fund to assist in connection
with its operations;
o the costs of a fidelity bond and any liability insurance obtained on
behalf of the Fund, the Adviser or the Directors;
o all costs and expenses associated with the organization of new
Investment Funds actually managed by Subadvisers, if any;
o all costs and expenses of preparing, setting in type, printing and
distributing reports and other communications to Investors;
o the fees of custodians and other persons providing administrative
services to the Fund; and
o such other types of expenses as may be approved from time to time by
the Board.
The Adviser will be reimbursed by a Fund for any of the above expenses that it
pays on behalf of the Fund.
Each Fund's offering costs and organizational expenses are estimated at
$185,000. Offering costs will be charged to capital as incurred. Before a recent
change to the guidelines followed by the American Institute of Certified Public
Accountants applicable to the Funds, a Fund would have been able to amortize the
organizational expenses over a 60-month period. Because of that change, however,
the organizational expenses now must be expensed as incurred. To achieve a more
equitable distribution of the impact of offering costs and organizational
expenses among the Investors, an amount equal to the offering costs and
organizational expenses incurred by a Fund will be allocated among and credited
to or debited against the capital accounts of all its Investors based on the
percentage that an Investor's contributed capital to the Fund bears to the total
capital contributed to the Fund by all its Investors as of the relevant
allocation date. An initial allocation of offering costs and organizational
expenses will be made as of the first date on which capital contributions of
Investors are made. As to each Fund, these allocations will thereafter be
adjusted as of each date, through and including the last day of the month during
which the first anniversary of the initial closing of sales of interests in the
Fund occurred, on which additional capital is contributed to the Fund by
Investors. Each Fund also will bear certain ongoing offering costs associated
with any periodic offers of Fund interests. For Federal income tax purposes,
offering costs cannot be deducted by the Fund or its Investors.
The Investment Funds will bear all expenses incurred in the business of the
Investment Funds, which are similar to those expenses incurred by the Funds in
the business of the Funds. The Investment Managers generally will charge an
asset-based fee to and receive incentive-based allocations from the Investment
Funds, which effectively will reduce total distributions from the Investment
Funds to the Funds.
PLACEMENT FEE
In connection with initial and additional purchases of Fund interests, Investors
may be charged by JPM Securities, as well as third party securities dealers and
other industry professionals, sales commissions of up to 3% of the Investor's
capital contribution, in their sole discretion. The placement fee will be added
to the purchase price and will not constitute assets of a Fund. See "APPLICATION
FOR INTERESTS--Application Terms."
CAPITAL ACCOUNTS AND ALLOCATIONS
CAPITAL ACCOUNTS
Each Fund will maintain a separate capital account for each of its Investors
(including the Adviser in respect of any capital contribution to the Fund made
by the Adviser as an Investor), which will have an opening balance equal to such
Investor's initial contribution to the capital of the Fund. Each Investor's
capital account will be increased by the sum of the amount of cash and the value
of any securities constituting additional contributions by such Investor to the
capital of the Fund, plus any amounts credited to such Investor's capital
account as described below. Similarly, each Investor's capital account will be
reduced by the sum of the amount of any repurchase by the Fund of the interest
or portion of the interest of such Investor, plus the amount of any
distributions to such Investor which are not reinvested, plus any amounts
debited against such Investor's capital account as described below. To the
extent that any debit would reduce the balance of the capital account of any
Investor below zero, that portion of any such debit will instead be allocated to
the capital account of the Adviser; any subsequent credits that would otherwise
be allocable to the capital account of any such Investor will instead be
allocated to the capital account of the Adviser in such amounts as are necessary
to offset all previous debits attributable to such Investor.
As to each Fund, capital accounts of Investors are adjusted as of the close of
business on the last day of each fiscal period. Fiscal periods begin on the day
after the last day of the preceding fiscal period and end at the close of
business on the first to occur of (1) the last day of the fiscal year of the
Fund, (2) the day preceding the date as of which a contribution to the capital
of the Fund is made, (3) the day as of which the Fund repurchases any interest
or portion of an interest of any Investor, (4) the day as of which the Fund
admits a substituted Investor to whom an interest or portion of an interest of
an Investor has been transferred (unless there is no change in beneficial
ownership) or (5) the day as of which any amount is credited to or debited from
the capital account of any Investor other than an amount to be credited to or
debited from the capital accounts of all Investors in accordance with their
respective Fund percentages. A Fund percentage will be determined for each
Investor as of the start of each fiscal period by dividing the balance of such
Investor's capital account as of the commencement of such period by the sum of
the balances of all capital accounts of all Investors as of such date.
Each Fund will maintain a Special Advisory Account for the Adviser solely for
the purpose of receiving the Incentive Allocation, as described below.
ALLOCATION OF NET PROFITS AND NET LOSSES
As to each Fund, net profits or net losses of the Fund for each fiscal period
will be allocated among and credited to or debited against the capital accounts
of all Investors (but not the Special Advisory Account) as of the last day of
each fiscal period in accordance with Investors' respective Fund percentages for
such fiscal period. Net profits or net losses will be measured as the net change
in the value of the net assets of the Fund, including any net change in
unrealized appreciation or depreciation of investments and realized income and
gains or losses and expenses during a fiscal period, before giving effect to any
repurchases by the Fund of interests or portions of interests, and adjusted to
exclude the amount of any "key man" insurance premiums or proceeds to be
allocated among the capital accounts of the Investors and any items to be
allocated among the capital accounts of the Investors other than in accordance
with the Investors' respective Fund percentages.
Allocations for Federal income tax purposes generally will be made among the
Investors so as to reflect equitably amounts credited or debited to each
Investor's capital account for the current and prior fiscal years.
INCENTIVE ALLOCATION
So long as the Adviser serves as the investment adviser of a Fund, the Adviser
will be entitled to be the Special Advisory Member of the Fund. In such
capacity, the Adviser will be entitled to receive an incentive-based allocation
(the "Incentive Allocation"), charged to the capital account of each Investor as
of the last day of each "allocation period," of up to 8% for Fund Core and up to
15% for Fund Alpha of the amount by which any "allocated gain" during an
"allocation period" with respect to such Investor exceeds the positive balance
in the Investor's "loss recovery account" and the Hurdle for such allocation
period. The Incentive Allocation will be credited to the Special Advisory
Account of the Adviser.
For purposes of calculating the Incentive Allocation, "allocated gain" means the
excess of the balance of the Investor's capital account at the end of an
"allocation period," after giving effect to allocations other than the Incentive
Allocation, but before giving effect to any distributions and repurchases of
interests by the Fund or debits to such capital account to reflect any item
(other than management fees) not chargeable ratably to all Investors, over the
balance of the Investor's capital account at the start of such "allocation
period." Consequently, any Incentive Allocation to be credited to the Adviser
will be increased by a portion of the amount of any net unrealized appreciation,
as well as net realized gains, allocable to an Investor.
An Incentive Allocation will be charged only with respect to any "allocated
gain" in excess of the positive balance of a "loss recovery account" maintained
for each Investor and the Hurdle. A "loss recovery account" is a memorandum
account maintained by a Fund for each of its Investors, which has an initial
balance of zero and is (1) increased after the close of each "allocation period"
by the amount of any negative performance for such Investor during such
"allocation period," and (2) decreased (but not below zero) after the close of
each "allocation period" by the amount of any allocated gain for such Investor
during such "allocation period." Any positive balance in an Investor's "loss
recovery account" would be reduced as the result of a repurchase or certain
transfers with respect to the Investor's interest in the Fund in proportion to
the reduction of the Investor's capital account attributable to the repurchase
or transfer.
The "Hurdle" for each Fund is the amount that an Investor would have earned for
an "allocation period" if it had received an annualized rate of return equal to
the Hurdle Percentage in effect on the last day of the relevant allocation
period on its opening capital account balance (appropriately adjusted for
contributions and withdrawals) for such allocation period. The Hurdle is not
cumulative from year to year or allocation period to allocation period.
The "Hurdle Percentage" for each Fund is based on the yield-to-maturity of
90-day U.S Government Treasury Bills for the last business day of the preceding
March as reported by the Federal Reserve Board in its Statistical Release H.15
(as reported on its website at
www.federalreserve.gov/releases/H15/data/wf/tbaa3m.txt). The Hurdle Percentage
will be reset annually as of April 1, commencing April 1, 2001, and, for the
period through March 31, 2001, will be 5.75%. If the Federal Reserve Board does
not publish this yield, the Fund will determine the yield by such means as the
Board shall deem appropriate and, if the Fund is unable to determine this yield
for any period, the Hurdle Percentage for such period will be the last one
determined.
An "allocation period" as to each Investor in a Fund is a period commencing on
the admission of such Investor to the Fund and ending at the close of business
on the first to occur of (1) the last day of the twelfth complete calendar month
since the admission of such Investor to the Fund, (2) the last day of a fiscal
year (March 31) subsequent to an Investor having been admitted to the Fund for
12 complete calendar months, and the last day of each fiscal year thereafter
(the operation of this clause may permit the Adviser to receive Incentive
Allocations twice in a single 12 month period and possibly on performance
derived over one or a small number of months), (3) the day as of which the Fund
repurchases any interest or portion of an interest of such Investor, (4) the day
as of which the Fund admits as a substitute Investor a person to whom the
interest or portion of the interest of such Investor has been transferred, (5)
the day as of which the Investment Advisory Agreement of the Fund terminates,
(6) the day preceding any day as of which such Investor becomes a Special
Investor (as defined below), or (7) the day on which such Investor ceases to be
a Special Investor. The measurement of any Incentive Allocation for an
"allocation period" must take into account any negative performance from a prior
allocation period to the extent reflected in the "loss recovery account."
Therefore, the Incentive Allocation for any allocation period after the initial
12-month period in effect is a reflection of the extent to which cumulative
performance achieved with respect to an Investor's account since such Investor's
admission to the Fund exceeds the highest previous level of performance achieved
through the close of any prior allocation period.
By the last business day of any month following the date on which an Incentive
Allocation is made, the Adviser may withdraw up to 100% of the Incentive
Allocation (computed on the basis of unaudited data) that was credited to the
Special Advisory Account and debited from the Member's capital account with
respect to the allocation period. Within 30 days after the completion of the
audit of a Fund's books, the Fund will pay to the Adviser any additional amount
determined to be owed to the Adviser based upon the audit, and the Adviser will
pay to the Fund (without interest) any excess amount determined to be owed to
the Fund.
As to each Fund, the Adviser will receive from each Investor an Incentive
Allocation equal to the percentage that corresponds below to the amount of the
Investor's Invested Capital (as the term is defined in the Fund's LLC Agreement)
in both Funds:
Fund Core
INVESTED CAPITAL INCENTIVE ALLOCATION
Less than $30,000,000 8%
$30,000,000 or more(1) None
Fund Alpha
INVESTED CAPITAL INCENTIVE ALLOCATION
Less than $30,000,000 15%
$30,000,000 or more(1) 10%
As to each Fund, the Adviser has agreed that the aggregate amount of the Fee and
the Incentive Allocation charged against an Investor with respect to any
"allocation period" will not exceed 4% of the Investor's capital account balance
at the beginning of such "allocation period" (appropriately adjusted for
contributions and withdrawals). For Fund Core, the effective limit on the Fee
and the Incentive Allocation for Investors with Invested Capital of $30 million
or more will be 1%.
The Adviser, in its sole discretion, may reduce or waive the Incentive
Allocation for Investors who are (i) employees or directors of the Adviser, and
its affiliates, and members of their immediate families, (ii) attorneys or other
professional advisers engaged on behalf of a Fund, and members of their
immediate families, (iii) Directors and (iv) the Adviser (collectively, "Special
Investors").
----------
1 The amounts of Invested Capital in each Fund will be aggregated.
ALLOCATION OF SPECIAL ITEMS--CERTAIN WITHHOLDING TAXES AND OTHER EXPENDITURES
Withholding taxes or other tax obligations incurred by a Fund which are
attributable to any Investor will be debited against the capital account of such
Investor as of the close of the fiscal period during which the Fund paid such
obligation, and any amounts then or thereafter distributable to such Investor
will be reduced by the amount of such taxes. If the amount of such taxes is
greater than any such distributable amounts, the Investor and any successor to
the Investor's interest is required to pay to the Fund, upon demand of the Fund,
the amount of such excess.
RESERVES
Appropriate reserves may be created, accrued and charged against net assets of a
Fund for contingent liabilities of the Fund as of the date any such contingent
liabilities become known to the Adviser or the Fund's Board. Reserves will be in
such amounts, subject to increase or reduction, which the Board or the Adviser
may deem necessary or appropriate. The amount of any reserve, or any increase or
decrease therein, will be proportionately charged or credited, as appropriate,
to the capital accounts of those investors who are Investors at the time when
such reserve is created, increased or decreased, as the case may be; provided,
however, that if any such reserve, or any increase or decrease therein, exceeds
the lesser of $500,000 or 1% of the aggregate value of the capital accounts of
all such Investors, the amount of such reserve, increase, or decrease shall
instead be charged or credited to those investors who, as determined by the
Board, were Investors at the time of the act or omission giving rise to the
contingent liability for which the reserve was established, increased or
decreased in proportion to their capital accounts at that time.
NET ASSET VALUATION
Net asset value of each Fund will be determined by or at the direction of the
Adviser as of the close of business at the end of any fiscal period in
accordance with the valuation principles set forth below or as may be determined
from time to time pursuant to policies established by the Fund's Directors.
Each Fund will value interests in Investment Funds not managed by the
Subadvisers at fair value, which ordinarily will be the value determined by
their Investment Managers in accordance with the policies established by the
relevant Investment Fund.
To the extent Subadvisers are engaged to manage a Fund's assets, the Fund will
value the portfolio securities of the Investments Funds managed by the
Subadvisers as described below:
Domestic exchange traded securities and securities included in the Nasdaq
National Market System will be valued at their last composite sale prices as
reported on the exchanges where such securities are traded. If no sales of such
securities are reported on a particular day, the securities will be valued based
upon their composite bid prices for securities held long, or their composite ask
prices for securities held short, as reported by such exchanges. Securities
traded on a foreign securities exchange will be valued at their last sale prices
on the exchange where such securities are primarily traded, or in the absence of
a reported sale on a particular day, at their bid prices, in the case of
securities held long, or ask prices, in the case of securities held short, as
reported by such exchange. Listed options or futures contracts will be valued
using last sales prices as reported by the exchange with the highest reported
daily volume for such options or futures contracts or, in the absence of any
sales on a particular day, at their bid prices as reported by the exchange with
the highest volume on the last day a trade was reported. Other securities for
which market quotations are readily available will be valued at their bid
prices, or ask prices in the case of securities held short, as obtained from one
or more dealers making markets for such securities. If market quotations are not
readily available, securities and other assets will be valued at fair value as
determined in good faith by, or under the supervision of, the Directors.
Debt securities will be valued in accordance with the procedures described
above, which with respect to such securities may include the use of valuations
furnished by a pricing service which employs a matrix to determine valuations
for normal institutional size trading units. The Directors will monitor
periodically the reasonableness of valuations provided by any such pricing
service. Debt securities with remaining maturities of 60 days or less, absent
unusual circumstances, will be valued at amortized cost, so long as such
valuation is determined by the Directors to represent fair value.
All assets and liabilities initially expressed in foreign currencies will be
converted into U.S. dollars using foreign exchange rates provided by a pricing
service compiled as of 4:00 p.m. London time. Trading in foreign securities
generally is completed, and the values of such securities are determined, before
the close of securities markets in the U.S. Foreign exchange rates also are
determined before such close. On occasion, the values of securities and exchange
rates may be affected by events occurring between the time as of which
determination of such values or exchange rates are made and the time as of which
the net asset value of the Fund is determined. When such events materially
affect the values of securities held by the Fund or its liabilities, these
securities and liabilities may be valued at fair value as determined in good
faith by, or under the supervision of, the Fund's Directors.
Prospective Investors should be aware that situations involving uncertainties as
to the valuation of portfolio positions could have an adverse effect on the
Fund's net assets if the Directors' judgment of the Fund's Board regarding
appropriate valuations should prove incorrect.
APPLICATION FOR INTERESTS
APPLICATION TERMS
Both initial and additional applications for interests in each Fund may be
accepted from eligible investors (as described below) at such times as the
Adviser may determine on the terms set forth below. Each Fund may, in its
discretion, suspend the offering of interests at any time or permit applications
on a more frequent basis. Each Fund reserves the right to reject any application
for interests in the Fund. After the initial closing, initial applications and
additional capital contributions generally will be accepted on the last day of
each calendar quarter. Generally, the minimum required initial contribution to
the capital of each Fund from each Investor is $100,000. For employees or
directors of the Adviser and its affiliates, Board members (and, in each case,
members of their immediate families) and, in the sole discretion of the Adviser,
attorneys or other professional advisers engaged on behalf of a Fund, and
members of their immediate families, the minimum required initial contribution
to the capital of the Fund is $10,000. Each Fund may vary the investment
minimums from time to time. Investors may be charged a placement fee. See "FEES
AND EXPENSES--Placement Fee." The initial closing date for applications for
interests in a Fund is September 30, 2000. Each Fund, in its sole discretion,
may accelerate or postpone the closing date.
Except as otherwise permitted by a Fund, initial and any additional
contributions to the capital of the Fund by any Investor will be payable in
cash, and all contributions must be transmitted by such time and in such manner
as is specified in the application of the Fund. Initial and any additional
contributions to the capital of the Fund will be payable in one installment and
will be due before the proposed acceptance of the contribution, although the
Fund may accept, in its discretion, an application before its receipt of cleared
funds.
Each new Investor in a Fund will be obligated to agree to be bound by all of the
terms of the Fund's LLC Agreement. Each potential Investor also will be
obligated to represent and warrant in the application, among other things, that
such investor is purchasing an interest for its own account, and not with a view
to the distribution, assignment, transfer or other disposition of such interest.
If and when a Fund determines to accept securities as a contribution to the
capital of the Fund, the Fund will charge each Investor making such contribution
an amount determined by the Directors and not exceeding 2% of the value of such
contribution in order to reimburse the Fund for any costs it incurs in
liquidating and accepting such securities. Any such charge will be due and
payable by the contributing Investor in full at the time the contribution to the
capital of the Fund to which such charge relates is due.
ELIGIBLE INVESTORS
Each prospective Investor in a Fund will be required to certify that the
interest being purchased is being acquired directly or indirectly for the
account of an "accredited investor" as defined in Regulation D under the 1933
Act and that such Investor, as well as each of the Investor's equity owners
under certain circumstances, (i) immediately after the time of purchase, has at
least $750,000 under the discretionary investment management of the Adviser and
its affiliates or subsidiaries, (ii) at the time of purchase, has a net worth of
more than $1.5 million, or (iii) at the time of purchase, is a "qualified
purchaser" as defined in Section 2(a)(51)(A) of the 1940 Act (a "Qualified
Purchaser"). Each prospective Investor also will be required to certify that the
interest being purchased is being acquired directly or indirectly for the
account of a "qualified eligible participant" within the meaning of Rule 4.7
under the CEA. Generally, for individuals, a "qualified eligible participant" is
a person who owns securities of issuers not affiliated with such person and
other investments with an aggregate market value of at least $2,000,000, and (i)
whose individual net worth, or joint net worth with the person's spouse, at the
time of purchase of an interest in the Fund exceeds $1,000,000 or (ii) who had
an individual income in excess of $200,000 in each of the two most recent years
or joint income with the person's spouse in excess of $300,000 in each of those
years and has a reasonable expectation of reaching the same income level in the
current year. Existing Investors who purchase additional interests in the Fund
and transferees of interests in the Fund may be required to represent that they
meet the foregoing eligibility criteria at the time of the additional purchase.
The relevant Investor qualifications will be set forth in an application to be
provided to prospective Investors, which must be completed by each prospective
Investor.
REDEMPTIONS, REPURCHASES OF INTERESTS AND TRANSFERS
NO RIGHT OF REDEMPTION
No Investor or other person holding an interest or a portion of an interest will
have the right to require a Fund to redeem the interest or portion thereof. No
public market exists for interests in the Funds, and none is expected to
develop. Consequently, Investors may not be able to liquidate their investment
other than as a result of repurchases of interests by a Fund, as described
below. The Adviser will have certain rights to withdraw amounts from its Special
Advisory Account.
REPURCHASES OF INTERESTS
Each Fund from time to time may offer to repurchase interests pursuant to
written tenders by its Investors (other than the Adviser in its capacity as the
Special Advisory Member). These repurchases will be made at such times and on
such terms as may be determined by the Board of the relevant Fund, in its
complete and exclusive discretion. In determining whether a Fund should
repurchase interests or portions thereof from Investors pursuant to written
tenders, its Board will consider the recommendation of the Adviser. The Adviser
expects that generally, beginning in 2001, it will recommend to the Board that
each Fund offer to repurchase interests from its Investors once each year, near
December 31st. As to each Fund, the Directors also will consider the following
factors, among others, in making such determination:
o whether any Investors have requested to tender interests or portions
thereof to the Fund;
o the liquidity of the Fund's assets;
o the investment plans and working capital requirements of the Fund;
o the relative economies of scale with respect to the size of the Fund;
o the history of the Fund in repurchasing interests or portions thereof;
o the condition of the securities markets; and
o the anticipated tax consequences of any proposed repurchases of
interests or portions thereof.
The Board will determine that a Fund repurchase interests or portions thereof
from Investors pursuant to written tenders only on terms they determine to be
fair to the Fund and to all Investors or persons holding interests acquired from
Investors, as applicable. When the Board determines that the Fund will
repurchase interests in the Fund or portions thereof, notice will be provided to
each Investor describing the terms thereof, and containing information Investors
should consider in deciding whether and how to participate in such repurchase
opportunity. Investors who are deciding whether to tender their interests or
portions thereof during the period that a repurchase offer is open may ascertain
an estimated net asset value of their interest in the Fund from the Adviser
during such period.
The LLC Agreement of each Fund provides that the Fund shall be dissolved if the
interest of any Investor that has submitted a written request to tender its
entire interest for repurchase by the Fund has not been repurchased within a
period of two years of such request.
Repurchases of interests or portions thereof from Investors by a Fund may be
made, in the complete and absolute discretion of its Board, and may be paid in
cash or by the distribution of securities in-kind, or partly in cash and partly
in-kind. However, each Fund does not expect to distribute securities in-kind
except in the unlikely event that making a cash payment would result in a
material adverse effect on the Fund or on its Investors not tendering interests
for repurchase. Repurchases will be effective after receipt and acceptance by a
Fund of all eligible written tenders of interests or portions thereof from
Investors. Any in-kind distribution of securities will consist of marketable
securities traded on an established securities exchange (valued in accordance
with the LLC Agreement), which will be distributed to all tendering Investors on
a PARI PASSU basis. Each Fund will not impose any charges in connection with
repurchases of interests or portion of interests.
Because of liquidity restraints associated with each Fund's investments in
Investment Funds and the fact that each Fund may have to effect withdrawals from
them to pay for interests being repurchased, the Fund expects that, under the
procedures applicable for the repurchase of interests, interests will be valued
for purposes of determining their repurchase price approximately one month after
the date by which Investors must submit a repurchase request and that the Fund
will pay at least 95% of the value of the interests or portions thereof
repurchased approximately 30 business days after the valuation date. Each Fund
anticipates that the procedures applicable to repurchases of interests will be
as follows:
The value of interests or portions thereof of a Fund being repurchased will be
determined on a specified date (the "Valuation Date") that will be approximately
one month after the date by which Investors must tender their interests for
repurchase (the "Expiration Date"). Promptly after the Expiration Date, each
Investor whose interest or portion thereof has been accepted for repurchase will
be given a non-interest bearing, non-transferable promissory note by the Fund
entitling the Investor to be paid an amount equal to the value, determined as of
the Valuation Date, of the interest or portion thereof being repurchased
(subject to adjustment upon completion of the next annual audit of the Fund's
financial statements). This amount will be the value of the Investor's capital
account (or the portion thereof being repurchased) determined as of the
Valuation Date and will be based upon the net asset value of the Fund's assets
as of that date, after giving effect to all allocations to be made as of that
date to the Investor's capital account. The promissory note will entitle the
Investor to receive an initial payment in an amount equal to at least 95% of the
estimated net asset value of the interest tendered, determined as of the
Valuation Date (the "Initial Payment"). Payment of this amount will be made 30
business days after the Valuation Date or, if the Fund has requested withdrawals
of its capital from any Investment Funds to fund the repurchase of interests, 10
business days after the Fund has received at least 95% of the aggregate amount
withdrawn by the Fund from such Investment Funds. The promissory note also will
entitle an Investor to receive a contingent payment (the "Contingent Payment")
equal to the excess, if any, of (a) the net asset value of the interest tendered
as of the Valuation Date, as it may be adjusted based upon the next annual audit
of the Fund's financial statements), over (b) the Initial Payment. The
Contingent Payment would be payable promptly after the completion of the Fund's
next annual audit. It is anticipated that the annual audit of the Fund's
financial statements will be completed within 60 days after the end of each
fiscal year of the Fund.
Repurchases of interests by a Fund are subject to certain regulatory
requirements imposed by SEC rules. Each Fund believes that the repurchase
procedures described above comply with these requirements. If modification of a
Fund's repurchase procedures is deemed necessary to comply with regulatory
requirements, the Fund's Board will seek to adopt revised procedures designed to
provide Investors substantially the same liquidity for interests as would be
available under the procedures described above.
Upon its acceptance of tendered interests for repurchase, a Fund will maintain
daily on its books a segregated account consisting of (i) cash, (ii) liquid
securities or (iii) interests in Investment Funds that the Fund has requested be
withdrawn (or any combination of the foregoing), in an amount equal to the
aggregate estimated unpaid dollar amount of the promissory notes issued to
Investors tendering interests.
Payment for repurchased interests may require a Fund to liquidate portfolio
holdings earlier or in larger increments than the Adviser otherwise would
liquidate such holdings, potentially resulting in losses, and may increase the
Fund's portfolio turnover and expense ratio. The Adviser intends to take
measures (subject to such policies as may be established by the Fund's Board) to
attempt to avoid or minimize potential losses and turnover resulting from the
repurchase of interests.
An Investor who tenders for repurchase only a portion of such Investor's
interest in the Fund will be required to maintain a capital account balance
equal to $100,000 in the Fund, net of the Incentive Allocation to which the
Adviser is entitled as a result of the repurchase of the Investor's interest or
portion thereof.
Each Fund may repurchase an interest in the Fund or portion of an interest of an
Investor or any person acquiring an interest or portion thereof from or through
an Investor if:
o such an interest or portion thereof has been transferred or such an
interest or portion thereof has vested in any person by operation of law as
the result of the death, dissolution, bankruptcy or incompetency of an
Investor;
o ownership of such an interest by an Investor or other person will cause the
Fund to be in violation of, or require registration of any interest or
portion thereof under, or subject the Fund to additional registration or
regulation under, the securities, commodities or other laws of the United
States or any other relevant jurisdiction;
o continued ownership of such an interest may be harmful or injurious to the
business or reputation of the Fund, the Fund's Board or the Adviser, or may
subject the Fund or any Investors to an undue risk of adverse tax or other
fiscal consequences;
o any of the representations and warranties made by an Investor in connection
with the acquisition of an interest in the Fund or portion thereof was not
true when made or has ceased to be true; or
o it would be in the best interests of the Fund for the Fund to
repurchase such an interest or portion thereof.
The Adviser may tender for repurchase in connection with any repurchase offer
made by a Fund any interests in its capital account that it holds in its
capacity as an Investor in the Fund. The Adviser also is entitled to withdraw
its interests from its Special Advisory Account at the times described under
"Capital Accounts and Allocations--Incentive Allocation."
TRANSFERS OF INTERESTS
No person may become a substituted Investor without the written consent of the
Adviser, which consent may be withheld for any reason in the Adviser's sole and
absolute discretion. Investor interests may be transferred only (i) by operation
of law pursuant to the death, bankruptcy, insolvency or dissolution of an
Investor or (ii) with the written consent of the Adviser, which may be withheld
in its sole and absolute discretion and is expected to be granted, if at all,
only in limited circumstances. Notice to a Fund of any proposed transfer must
include evidence satisfactory to the Fund that the proposed transfer is exempt
from registration under the 1933 Act, that the proposed transferee meets any
requirements imposed by the Fund with respect to investor eligibility and
suitability, including the requirement that any Investor, or Investor's equity
owners in certain circumstances, (i) immediately after the time of purchase, has
at least $750,000 under the discretionary investment management of the Adviser
and its affiliates or subsidiaries, (ii) at the time of purchase, has a net
worth of more than $1.5 million, or (iii) at the time of purchase, is a
Qualified Purchaser, and must be accompanied by a properly completed
application. Proposed transferees also will be required to be "qualified
eligible participants" within the meaning of Rule 4.7 of the CEA. See
"APPLICATIONS FOR INTERESTS--Eligible Investors." In addition to the foregoing,
no Investor will be permitted to transfer an interest or portion thereof unless
after such transfer the balance of the capital account of the transferee, and
any Investor transferring less than its entire interest, is at least equal to
the amount of the Investor's initial capital contribution.
Any transferee meeting the eligibility requirements that acquires an interest or
portion thereof in a Fund by operation of law as the result of the death,
dissolution, bankruptcy or incompetency of an Investor or otherwise, will be
entitled to the allocations and distributions allocable to the interest so
acquired and to transfer such interest in accordance with the terms of the
Fund's LLC Agreement, but will not be entitled to the other rights of an
Investor unless and until such transferee becomes a substituted Investor as
provided in the Fund's LLC Agreement. If an Investor transfers an interest or
portion thereof with the approval of the Adviser, under the policies established
by the Fund's Board, the Fund will promptly take all necessary actions to admit
such transferee or successor to the Fund as an Investor. Each Investor and
transferee is required to pay all expenses, including attorneys' and
accountants' fees, incurred by the Fund in connection with such transfer. If
such a transferee does not meet the investor eligibility requirements, the Fund
reserves the right to redeem its interest.
By purchasing an interest in a Fund, each Investor in the Fund has agreed to
indemnify and hold harmless the Fund, the Directors, the Adviser, each other
Investor and any affiliate of the foregoing against all losses, claims, damages,
liabilities, costs and expenses, including legal or other expenses incurred in
investigating or defending against any such losses, claims, damages,
liabilities, costs and expenses or any judgments, fines and amounts paid in
settlement, joint or several, to which such persons may become subject by reason
of or arising from any purchase or transfer made by such Investor in violation
of these provisions or any misrepresentation made by such Investor in connection
with any such purchase or transfer.
The Adviser may not transfer its interest as the Special Advisory Member.
TAX ASPECTS
The following is a summary of certain aspects of the income taxation of each
Fund and its Investors which should be considered by a prospective Investor.
Neither Fund has sought a ruling from the Internal Revenue Service (the
"Service") or any other Federal, state or local agency with respect to any of
the tax issues affecting the Fund, nor has either Fund obtained an opinion of
counsel with respect to any tax issues other than the characterization of the
Fund as a partnership which is not a "publicly traded partnership" for Federal
income tax purposes.
This summary of certain aspects of the Federal income tax treatment of each Fund
is based upon the Internal Revenue Code of 1986, as amended (the "Code"),
judicial decisions, Treasury Regulations (the "Regulations") and rulings in
existence on the date hereof, all of which are subject to change (possibly with
retroactive effect). Except as otherwise noted below, this summary does not
discuss the impact of various proposals to amend the Code which could change
certain of the tax consequences of an investment in a Fund. This summary also
does not discuss all of the tax consequences that may be relevant to a
particular investor, to investors that acquire interests in a Fund other than
for cash or to certain investors subject to special treatment under the Federal
income tax laws, such as insurance companies.
EACH PROSPECTIVE INVESTOR SHOULD CONSULT WITH ITS OWN TAX ADVISER IN ORDER FULLY
TO UNDERSTAND THE FEDERAL, STATE, LOCAL AND FOREIGN INCOME TAX CONSEQUENCES OF
AN INVESTMENT IN A FUND.
TAX TREATMENT OF FUND OPERATIONS
CLASSIFICATION OF THE FUNDS. Each Fund has received an opinion of Stroock &
Stroock & Lavan LLP, counsel to each Fund, that under the provisions of the Code
and the Regulations, as in effect on the date of the opinion, the Fund will be
treated as a partnership for Federal income tax purposes and not as an
association taxable as a corporation.
Under Section 7704 of the Code, "publicly traded partnerships" are generally
treated as corporations for Federal income tax purposes. A publicly traded
partnership is any partnership the interests in which are traded on an
established securities market or which are readily tradable on a secondary
market, or the substantial equivalent thereof. Interests in a Fund will not be
traded on an established securities market. Regulations concerning the
classification of partnerships as publicly traded partnerships provide certain
safe harbors under which interests in a partnership will not be considered
readily tradable on a secondary market, or the substantial equivalent thereof.
Neither Fund will be eligible for any of those safe harbors. In particular,
neither Fund will qualify under the private placement safe harbor set forth in
the Regulations if, as is anticipated, the Fund has more than 100 Investors.
The Regulations specifically provide that the fact that a partnership does not
qualify for the safe harbors is disregarded for purposes of determining whether
interests in a partnership are readily tradable on a secondary market, or the
substantial equivalent thereof. Rather, in this event the partnership's status
is examined under a general facts and circumstances test set forth in the
Regulations. Counsel to each Fund has rendered its opinion that, under this
"facts and circumstances" test, and based upon the anticipated operations of the
Fund as well as the legislative history to Section 7704 and the text of the
Regulations, interests in the Fund will not be readily tradable on a secondary
market, or the substantial equivalent thereof, and, therefore, the Fund will not
be treated as a publicly traded partnership taxable as a corporation.
The opinions of counsel described above, however, are not binding on the Service
or the courts. If it were determined that a Fund should be treated as an
association or a publicly traded partnership taxable as a corporation for
Federal income tax purposes, as a result of a successful challenge to such
opinions by the Service, changes in the Code, the Regulations or judicial
interpretations thereof, a material adverse change in facts, or otherwise, the
taxable income of the Fund would be subject to corporate income tax when
recognized by the Fund; distributions of such income, other than in certain
redemptions of Fund interests, would be treated as dividend income when received
by Investors to the extent of the Fund's current or accumulated earnings and
profits; and Investors would not be entitled to report profits or losses
realized by the Fund.
Unless otherwise indicated, references in the following discussion to the tax
consequences of Fund investments, activities, income, gain and loss, include the
direct investments, activities, income, gain and loss of a Fund, and those
indirectly attributable to a Fund as a result of it being a member of an
Investment Fund.
As an entity that is properly classified as a partnership, each Fund is not
itself subject to Federal income tax. For income tax purposes, each Investor in
a Fund will be treated as a partner of the Fund and, as such, will be taxed upon
its distributive share of each item of the Fund's income, gain, loss and
deductions for each taxable year of the Fund ending with or within the
Investor's taxable year. Each item will have the same character to an Investor,
and will generally have the same source (either United States or foreign), as
though the Investor realized the item directly. Investors must report these
items regardless of the extent to which, or whether, the Fund or Investors
receive cash distributions for such taxable year, and thus may incur income tax
liabilities unrelated to any distributions to or from the Fund.
ALLOCATION OF PROFITS AND LOSSES. Under each Fund's LLC Agreement, the Fund's
net capital appreciation or net capital depreciation for each fiscal period is
allocated among the Investors and to their capital accounts without regard to
the amount of income or loss actually recognized by the Fund for Federal income
tax purposes. Each Fund's LLC Agreement provides that items of income,
deduction, gain, loss or credit actually recognized by the Fund for each fiscal
year generally are to be allocated for income tax purposes among the Investors
pursuant to Regulations issued under Sections 704(b) and 704(c) of the Code,
based upon amounts of the Fund's net capital appreciation or net capital
depreciation allocated to each Investor's capital account for the current and
prior fiscal years.
Under each Fund's LLC Agreement, the Adviser has the discretion to allocate
specially an amount of the Fund's net capital gains, including short-term
capital gain, for Federal income tax purposes to the Special Advisory Member and
to a withdrawing Investor, in either case to the extent that its capital account
exceeds its Federal income tax basis in its interest in the Fund. There can be
no assurance that, if the Adviser makes such a special allocation, the Service
will accept such allocation. If such allocation is successfully challenged by
the Service, the Fund's gains allocable to the remaining Investors would be
increased.
An Investor admitted to a Fund other than as of April 1 of a fiscal year will be
allocated its distributive share of the Fund's tax items at the end of such
fiscal year based on its pro rata share of the Fund's capital. Such allocation
does not account for the possibility of a subsequent reallocation in the
following year to the Adviser in respect of the initial Incentive Allocation.
The Adviser, in its discretion, may attempt to minimize any negative tax
consequences which may result to an Investor from the foregoing, including by
utilizing special allocations of the Fund's tax items. However, there is no
assurance that any such attempt will successfully minimize any negative tax
consequence resulting to an Investor from the initial Incentive Allocation.
TAX ELECTIONS; RETURNS; TAX AUDITS. The Code provides for optional adjustments
to the basis of partnership property upon distributions of partnership property
to a partner and transfers of partnership interests, including by reason of
death, provided that a partnership election has been made pursuant to Section
754. Under each Fund's LLC Agreement, at the request of an Investor in the Fund,
the Adviser, in its sole discretion, may cause the Fund to make such an
election. Any such election, once made, cannot be revoked without the Service's
consent. As a result of the complexity and added expense of the tax accounting
required to implement such an election, the Adviser does not presently intend to
make such election.
The Adviser decides how to report a Fund's tax items on the Fund's tax returns,
and all Investors are required under the Code to treat the items consistently on
their own returns, unless they file a statement with the Service disclosing the
inconsistency. If the income tax returns of a Fund are audited by the Service,
the tax treatment of the Fund's income and deductions generally is determined at
the Fund level in a single proceeding rather than by individual audits of the
Investors. The Adviser is designated as each Fund's "Tax Matters Partner" in its
LLC Agreement. As such, it has considerable authority to make decisions
affecting the tax treatment and procedural rights of all Investors. In addition,
the Tax Matters Partner has the authority to bind certain Investors to
settlement agreements and the right on behalf of all Investors to extend the
statute of limitations relating to the Investors' tax liabilities with respect
to the Fund's tax items. In determining how to report the Fund's tax items on
its tax returns, the Adviser will rely on certain tax determinations made by the
Investment Funds.
TAX CONSEQUENCES TO A WITHDRAWING INVESTOR
An Investor receiving a cash liquidating distribution from a Fund, in connection
with a complete withdrawal from the Fund generally will recognize capital gain
or loss to the extent of the difference between the proceeds received by such
Investor and such Investor's adjusted tax basis in its interest in the Fund.
Such capital gain or loss will be short-term or long-term depending upon the
Investor's holding period for its interest in the Fund. However, a withdrawing
Investor will recognize ordinary income to the extent such Investor's allocable
share of the Fund's "unrealized receivables" exceeds the Investor's basis in
such unrealized receivables, as determined pursuant to the Regulations. For
these purposes, accrued but untaxed market discount, if any, on securities held
by the Fund will be treated as an unrealized receivable with respect to the
withdrawing Investor. An Investor receiving a cash nonliquidating distribution
will recognize income in a similar manner only to the extent that the amount of
the distribution exceeds such Investor's adjusted tax basis in its interest in
the Fund.
As discussed above, each Fund's LLC Agreement provides that the Adviser may
specially allocate items of Fund capital gain, including short-term capital
gain, to a withdrawing Investor to the extent its liquidating distribution would
otherwise exceed its adjusted tax basis in its Fund interest. Such a special
allocation may result in the withdrawing Investor recognizing capital gain,
which may include short-term gain, in the Investor's last taxable year in the
Fund, thereby reducing the amount of long-term capital gain recognized during
the taxable year in which it receives its liquidating distribution upon
withdrawal.
DISTRIBUTION OF PROPERTY
A partner's receipt of a distribution of property from a partnership is
generally not taxable. However, under Section 731 of the Code, a distribution
consisting of marketable securities generally is treated as a distribution of
cash (rather than property) unless the distributing partnership is an
"investment partnership" within the meaning of Section 731(c)(3)(C)(i) of the
Code and the recipient is an "eligible partner" within the meaning of Section
731(c)(3)(C)(iii) of the Code. Each Fund will determine at the appropriate time
whether it qualifies as an "investment partnership." Assuming it so qualifies,
if an Investor is an "eligible partner," which term should include an Investor
whose contributions to the Fund consisted solely of cash, the recharacterization
rule described above would not apply.
TAX TREATMENT OF FUND INVESTMENTS
IN GENERAL. Each Fund through the Investment Funds expects to act as a trader or
investor, and not as a dealer, with respect to its securities transactions. A
trader and an investor are persons who buy and sell securities for their own
accounts. A dealer, on the other hand, is a person who purchases securities for
resale to customers rather than for investment or speculation.
Generally, the gains and losses realized by a trader or investor on the sale of
securities are capital gains and losses. Thus, subject to the treatment of
certain currency exchange gains as ordinary income and certain other
transactions described below, each Fund expects that its gains and losses from
its securities transactions typically will be capital gains and capital losses.
See "Currency Fluctuations--'Section 988' Gains or Losses" below and certain
other transactions described below. These capital gains and losses may be
long-term or short-term depending, in general, upon the length of time a
particular investment position is maintained and, in some cases, upon the nature
of the transaction. Property held for more than one year generally will be
eligible for long-term capital gain or loss treatment. The application of
certain rules relating to short sales, to constructive sales, to constructive
ownership transactions, to so-called "straddle" and "wash sale" transactions and
to "Section 1256 contracts" may serve to alter the manner in which the holding
period for a security is determined or may otherwise affect the characterization
as long-term or short-term, and also the timing of the realization, of certain
gains or losses. Moreover, the straddle rules and short sale rules may require
the capitalization of certain related expenses.
The maximum ordinary Federal income tax rate for individuals is 39.6%, and the
maximum individual Federal income tax rate for long-term capital gains is 20%,
unless the taxpayer elects to be taxed at ordinary rates, although in any case
the actual rate may be higher due to the phase out of certain tax deductions and
exemptions. See "Limitation on Deductibility of Interest" below. The excess of
capital losses over capital gains may be offset against the ordinary income of
an individual taxpayer, subject to an annual deduction limitation of $3,000. For
corporate taxpayers, the maximum Federal income tax rate is 35%. Capital losses
of a corporate taxpayer may be offset only against capital gains, but unused
capital losses may be carried back three years, subject to certain limitations,
and carried forward five years.
Each Fund may realize ordinary income from accruals of interest and dividends on
securities. Each Fund through its Investment Funds may hold debt obligations
with "original issue discount." In such case, the Fund would be required to
include amounts in taxable income on a current basis even though receipt of such
amounts may occur in a subsequent year. Each Fund through its Investment Funds
also may acquire debt obligations with "market discount." Upon disposition of
such an obligation, the Fund generally would be required to treat gain realized
as interest income to the extent of the market discount which accrued during the
period the debt obligation was held. Each Fund may realize ordinary income or
loss with respect to its investments in partnerships engaged in a trade or
business. Income or loss from transactions involving derivative instruments,
such as swap transactions, entered into by a Fund also may constitute ordinary
income or loss. In addition, periodic amounts payable by the Investment Funds in
connection with equity swaps, interest rate swaps, caps, floors and collars
likely would be considered "miscellaneous itemized deductions" which, for a
noncorporate Investor, may be subject to restrictions on their deductibility.
See "Deductibility of Fund Investment Expenditures by Noncorporate Investors"
below. Moreover, gain recognized from certain "conversion transactions" will be
treated as ordinary income.2
CURRENCY FLUCTUATIONS--"SECTION 988" GAINS OR LOSSES. The amount of gain or loss
on securities denominated in a foreign currency frequently will be affected by
the fluctuation in the value of such foreign currencies relative to the value of
the dollar. Generally, gains or losses with respect to investments in common
stock of foreign issuers will be taxed as capital gains or losses at the time of
the disposition of such stock. However, under Section 988 of the Code, gains and
losses on the acquisition and disposition of foreign currency (e.g., the
purchase of foreign currency and subsequent use of the currency to acquire
stock) will be treated as ordinary income or loss. Moreover, under Section 988,
gains or losses on disposition of debt securities denominated in a foreign
currency to the extent attributable to fluctuation in the value of the foreign
currency between the date of acquisition of the debt security and the date of
disposition will be treated as ordinary income or loss. Similarly, gains or
losses attributable to fluctuations in exchange rates that occur between the
time the taxpayer accrues interest or other receivables or accrues expenses or
other liabilities denominated in a foreign currency and the time the taxpayer
actually collects such receivables or pays such liabilities may be treated as
ordinary income or ordinary loss.
As indicated above, each Fund, directly and through its Investment Funds, may
acquire foreign currency forward contracts, enter into foreign currency futures
contracts and acquire put and call options on foreign currencies. See "TYPES OF
INVESTMENTS AND RELATED RISK FACTORS - Foreign Currency Transactions."
Generally, foreign currency regulated future contracts and option contracts that
qualify as "Section 1256 Contracts" (see "Section 1256 Contracts" below), will
not be subject to ordinary income or loss treatment under Section 988. However,
if a Fund acquires currency futures contracts or option contracts that are not
Section 1256 Contracts, any gain or loss realized by the Fund with respect to
such instruments will be ordinary, unless (i) the contract is a capital asset in
the hands of the Fund and is not a part of a straddle transaction and (ii) the
Fund makes an election (by the close of the day the transaction is entered into)
to treat the gain or loss attributable to such contract as capital gain or loss.
---------------
2 Generally, a conversion transaction is one of several enumerated
transactions where substantially all of the taxpayer's return is
attributable to the time value of the net investment in the transaction.
The enumerated transactions are (i) the holding of any property, whether or
not actively traded, and entering into a contract to sell such property, or
substantially identical property, at a price determined in accordance with
such contract, but only if such property was acquired and such contract was
entered into on a substantially contemporaneous basis, (ii) certain
straddles, (iii) generally any other transaction that is marketed or sold
on the basis that it would have the economic characteristics of a loan but
the interest-like return would be taxed as capital gain or (iv) any other
transaction specified in the Regulations.
SECTION 1256 CONTRACTS. In the case of "Section 1256 Contracts," the Code
generally applies a "mark to market" system of taxing unrealized gains and
losses on such contracts and otherwise provides for special rules of taxation.
Under these rules, Section 1256 Contracts, which include certain regulated
futures contracts, certain foreign currency forward contracts and certain
options contracts, held at the end of each taxable year are treated for Federal
income tax purposes as if they were sold by the holder for their fair market
value on the last business day of such taxable year. The net gain or loss, if
any, resulting from such deemed sales, known as "marking to market," together
with any gain or loss resulting from actual sales of Section 1256 Contracts,
must be taken into account by the holder in computing its taxable income for
such year. If a Section 1256 Contract held at the end of a taxable year is sold
in the following year, the amount of any gain or loss realized on such sale will
be adjusted to reflect the gain or loss previously taken into account under the
"mark to market" rules.
Capital gains and losses from such Section 1256 contracts generally are
characterized as short-term capital gains or losses to the extent of 40% thereof
and as long-term capital gains or losses to the extent of 60% thereof. Such
gains and losses will be taxed under the general rules described above. Gains
and losses from certain foreign currency transactions will be treated as
ordinary income and losses. See 'Currency Fluctuations--'Section 988' Gains or
Losses." If an individual taxpayer incurs a net capital loss for a year, the
portion thereof, if any, which consists of a net loss on "Section 1256
Contracts" may, at the election of the taxpayer, be carried back three years.
Losses so carried back may be deducted only against net capital gain to the
extent that such gain includes gains on "Section 1256 Contracts."
MIXED STRADDLE ELECTION. The Code allows a taxpayer to elect to offset gains and
losses from positions which are part of a "mixed straddle." A "mixed straddle"
is any straddle in which one or more but not all positions are Section 1256
Contracts. Pursuant to Temporary Regulations, a Fund may be eligible to elect to
establish one or more mixed straddle accounts for certain of its mixed straddle
trading positions. The mixed straddle account rules require a daily "marking to
market" of all open positions in the account and a daily netting of gains and
losses from positions in the account. At the end of a taxable year, the annual
net gains or losses from the mixed straddle account are recognized for tax
purposes. The application of the Temporary Regulations' mixed straddle account
rules is not entirely clear.
SHORT SALES. Gain or loss from a short sale of property is generally considered
as capital gain or loss to the extent the property used to close the short sale
constitutes a capital asset in the taxpayer's hands. Except with respect to
certain situations where the property used to close a short sale has a long-term
holding period on the date of the short sale, special rules would generally
treat the gains on short sales as short-term capital gains. Moreover, a loss on
a short sale will be treated as a long-term capital loss if, on the date of the
short sale, "substantially identical property" has been held by the taxpayer for
more than one year. These rules may also terminate the running of the holding
period of "substantially identical property" held by the taxpayer.
Gain or loss on a short sale will generally not be realized until such time that
the short sale is closed. However, if a Fund holds a short sale position with
respect to stock, certain debt obligations or partnership interests that has
appreciated in value and then acquires property that is the same as or
substantially identical to the underlying property, the Fund generally will
recognize gain on the date it acquires such property as if the short sale were
closed on such date with such property. Similarly, if a Fund holds an
appreciated financial position with respect to stock, certain debt obligations
or partnership interests and then enters into a short sale with respect to the
same or substantially identical property, the Fund generally will recognize gain
as if the appreciated financial position were sold at its fair market value on
the date it enters into the short sale. The subsequent holding period for any
appreciated financial position that is subject to the constructive sale rules
will be determined as if such position were acquired on the date of the
constructive sale.
CONSTRUCTIVE OWNERSHIP TRANSACTIONS. If a Fund, directly or through an
Investment Fund, enters into certain derivatives (including forward contracts,
long positions under notional principal contracts, and related puts and calls)
with respect to equity interests in certain pass-thru entities, including
Investment Funds properly treated as partnerships for tax purposes, trusts, and
certain special status foreign corporations, including passive foreign
investment companies ("Constructive Ownership Transactions"), long-term capital
gain with respect to the derivative may be recharacterized as ordinary income to
the extent it exceeds the long-term capital gain that would have been realized
had the interest in the pass-thru entity been held directly by the Fund during
the term of the derivative contract. Any gain recharacterized as ordinary income
will be treated as accruing at a constant rate over the term of the derivative
contract and may be subject to an interest charge. The Treasury has authority to
issue regulations which could expand the application of these rules to
derivatives with respect to debt instruments and/or stock in corporations that
are not pass-thru entities. Investors should be aware that certain aspects of
the tax treatment of Constructive Ownership Transactions, apart from the
recharacterization of certain long-term capital gains as ordinary income (as
just described), are not clear.
EFFECT OF STRADDLE RULES ON INVESTORS' SECURITIES POSITIONS. The Service may
treat certain positions in securities held, directly or indirectly, by an
Investor and its indirect interest in similar securities held by a Fund as
"straddles" for Federal income tax purposes. The application of the "straddle"
rules in such a case could affect an Investor's holding period for the
securities involved and may defer the recognition of losses with respect to such
securities.
LIMITATION ON DEDUCTIBILITY OF INTEREST. For noncorporate taxpayers, Section
163(d) of the Code limits the deduction for "investment interest" (i.e.,
interest or short sale expenses for "indebtedness properly allocable to property
held for investment"). Investment interest is not deductible in the current year
to the extent that it exceeds the taxpayer's "net investment income," consisting
of net gain and ordinary income derived from investments in the current year
less certain directly connected expenses (other than interest or short sale
expenses). For this purpose, any long-term capital gain is excluded from net
investment income unless the taxpayer elects to pay tax on such amount at
ordinary income tax rates.
For purposes of this provision, a Fund's activities will be treated as giving
rise to investment income for an Investor, and the investment interest
limitation would apply to a noncorporate Investor's share of the interest and
short sale expenses attributable to the Fund's operation. In such case, a
noncorporate Investor would be denied a deduction for all or part of that
portion of its distributive share of a Fund's ordinary losses attributable to
interest and short sale expenses unless it had sufficient investment income from
all sources including the Fund. An Investor that could not deduct losses
currently as a result of the application of Section 163(d) would be entitled to
carry forward such losses to future years, subject to the same limitation. The
investment interest limitation would also apply to interest paid by a
noncorporate Investor on money borrowed to finance its investment in a Fund.
Potential Investors are advised to consult with their own tax advisers with
respect to the application of the investment interest limitation in their
particular tax situations.
DEDUCTIBILITY OF FUND INVESTMENT EXPENDITURES BY NONCORPORATE INVESTORS.
Investment expenses (e.g., investment advisory fees) of an individual, trust or
estate are deductible only to the extent that such expenses exceed 2% of
adjusted gross income.3 Further, in the case of an Investor that is a
partnership having 100 or more partners and which has elected to be treated as
an "electing large partnership," 70% of such deductions will be disallowed,
although the remaining deductions generally will be allowed at the partnership
level and will not be subject to the 2% floor that would otherwise be applicable
to individual Investors. In addition, the Code further restricts the ability of
an individual with an adjusted gross income in excess of a specified amount, for
2000, $128,950 or $64,475 for a married person filing a separate return, to
deduct such investment expenses. Under such provision, investment expenses in
excess of 2% of adjusted gross income may only be deducted to the extent such
excess expenses, along with certain other itemized deductions, exceed the lesser
of (i) 3% of the excess of the individual's adjusted gross income over the
specified amount or (ii) 80% of the amount of certain itemized deductions
otherwise allowable for the taxable year. Moreover, such investment expenses are
miscellaneous itemized deductions which are not deductible by a noncorporate
taxpayer in calculating its alternative minimum tax liability.
Pursuant to Temporary Regulations issued by the Treasury Department, these
limitations on deductibility should not apply to a noncorporate Investor's share
of the expenses of a Fund to the extent that such expenses are allocable to an
Investment Fund that is considered to be in a trade or business within the
meaning of the Code. These limitations will apply, however, to a noncorporate
Investor's share of the expenses of a Fund to the extent that such expenses are
allocable to an Investment Fund that is not considered to be in a trade or
business within the meaning of the Code. Although each Fund intends to treat the
trade or business related expenses and any incentive-based allocations as not
being subject to the foregoing limitations on deductibility, there can be no
assurance that the Service will not treat such items as investment expenses
which are subject to the limitations.
------------------
3 However, Section 67(e) of the Code provides that, in the case of a trust or
an estate, such limitation does not apply to deductions or costs which are
paid or incurred in connection with the administration of the estate or
trust and would not have been incurred if the property were not held in
such trust or estate. The Federal Court of Appeals for the Sixth Circuit,
reversing a Tax Court decision, has held that the investment advisory fees
incurred by a trust were exempt (under Section 67(e)) from the 2% of
adjusted gross income floor on deductibility. The Service, however, has
stated that it will not follow this decision outside of the Sixth Circuit.
Investors that are trusts or estates should consult their tax advisers as
to the applicability of this case to the investment expenses that are
allocated to them.
The consequences of these limitations will vary depending upon the particular
tax situation of each taxpayer. Accordingly, noncorporate Investors should
consult their tax advisers with respect to the application of these limitations.
APPLICATION OF RULES FOR INCOME AND LOSSES FROM PASSIVE ACTIVITIES. The Code
restricts the deductibility of losses from a "passive activity" against certain
income which is not derived from a passive activity. This restriction applies to
individuals, personal service corporations and certain closely held
corporations. Pursuant to Temporary Regulations issued by the Treasury
Department, income or loss from a Fund's securities trading activity generally
will not constitute income or loss from a passive activity. Therefore, passive
losses from other sources generally could not be deducted against an Investor's
share of income and gain from the Fund. Income or loss attributable to
investments in partnerships engaged in a trade or business may constitute
passive activity income or loss.
"PHANTOM INCOME" FROM CERTAIN FOREIGN EQUITY INVESTMENTS. Pursuant to various
"anti-deferral" provisions of the Code (the "Subpart F," "passive foreign
investment company" ("PFIC") and "foreign personal holding company" provisions),
investments, if any, by a Fund through its Investment Funds in certain foreign
corporations may cause an Investor to (i) recognize taxable income prior to the
Fund's receipt of distributable proceeds, (ii) pay an interest charge on
receipts that are deemed as having been deferred or (iii) recognize ordinary
income that, but for the "anti-deferral" provisions, would have been treated as
capital gain.
For example, if a Fund invests through an Investment Fund in a foreign
corporation that is a PFIC (generally, a corporation for which either (i) 75% of
its gross income is passive income, as that term is defined in the Code, or (ii)
50% or more of its assets, generally determined by average fair market value,
produce or are held for the production of passive income), certain excess
distributions with respect to, and gain upon the disposition of, the shares in
the PFIC generally will be ratably allocated over the holding period for the
shares in the PFIC. The amount allocated to the year of the distribution or
disposition will be treated as ordinary income, and the amounts allocated to
earlier years for which the corporation was a PFIC will be taxed at the highest
rate applicable to individuals or corporations, as the case may be, for the
taxable year to which the income is allocated. Further, the tax on an amount
allocated to an earlier year will be subject to an interest charge which accrues
from the due date of the return for that earlier year. The above rules relating
to distributions and dispositions generally will not apply if (i) the relevant
Investment Fund elects to treat the foreign corporation as a qualified electing
fund (a "QEF election"), or (ii) the shares of the foreign corporation are
"marketable stock" for which a mark-to-market election is made. If a QEF
election is made, an Investor in the Fund generally will pay tax currently on
its pro-rata share of the ordinary earnings and net capital gains of the foreign
corporation (at ordinary income and capital gains rates, respectively), even if
no dividends are actually paid by the foreign corporation. If the mark-to-market
election is made, Investors will generally account for changes in the value of
the foreign corporation stock on an annual basis as ordinary income or loss.
FOREIGN TAXES
It is possible that certain dividends and interest received from sources within
foreign countries will be subject to withholding taxes imposed by such
countries. In addition, some foreign countries may impose capital gains taxes on
certain securities transactions involving foreign issuers. Tax treaties between
certain countries and the United States may reduce or eliminate such taxes.
Each Fund will inform its Investors of their proportionate share of the foreign
taxes paid or incurred by the Fund that Investors will be required to include in
their income. The Investors generally will be entitled to claim either a credit
(subject, however, to various limitations on foreign tax credits), or, if they
itemize their deductions, a deduction (subject to the limitations generally
applicable to deductions) for their share of such foreign taxes in computing
their Federal income taxes.
LEGISLATIVE PROPOSALS
There have been proposals initiated by the Clinton Administration and Congress
that would affect the tax consequences described herein. It is not possible to
predict at this time the extent to which any of these proposals will be enacted
by Congress and, if enacted, what their final form and effective dates will be.
In addition, other proposals could be enacted that would change the tax
consequences described herein of an investment in a Fund. Prospective Investors
should consult their own tax advisers regarding the status of these proposed
changes and the effect, if any, on their investment in a Fund.
STATE AND LOCAL TAXATION
In addition to the Federal income tax consequences described above, prospective
Investors should consider potential state and local tax consequences of an
investment in a Fund. State and local tax laws differ in the treatment of
limited liability companies such as the Funds. A few jurisdictions may impose
entity level taxes on a limited liability company if it is found to have
sufficient contact with that jurisdiction. Such taxes are frequently based on
the income and capital of the entity that is allocated to the jurisdiction.
Although there can be no assurance, except as noted below, each Fund intends to
conduct its activities so that it will not be subject to entity level taxation
by any state or local jurisdiction.
State and local laws often differ from Federal income tax laws with respect to
the treatment of specific items of income, gain, loss, deduction and credit. An
Investor's distributive share of the taxable income or loss of a Fund generally
will be required to be included in determining its reportable income for state
and local tax purposes in the jurisdiction in which it is a resident. A
partnership in which a Fund acquires an interest may conduct business in a
jurisdiction which will subject to tax an Investor's share of the Fund's income
from that business. Prospective Investors should consult their tax advisers with
respect to the availability of a credit for such tax in the jurisdiction in
which that Investor is a resident.
Each Fund should not be subject to the New York City unincorporated business
tax, which is not imposed on an entity taxed as a partnership which purchases
and sells securities for its "own account." By reason of a similar "own account"
exemption, it is also expected that a nonresident individual Investor should not
be subject to New York State personal income tax with respect to his share of
income or gain realized directly by a Fund. A nonresident individual Investor
will not be subject to New York City earnings tax on nonresidents with respect
to his or her investment in a Fund.
Individual Investors who are residents of New York State and New York City
should be aware that the New York State and New York City personal income tax
laws limit the deductibility of itemized deductions for individual taxpayers at
certain income levels. This limitation would likely apply to an Investor's share
of some or all of a Fund's expenses. Prospective Investors are urged to consult
their tax advisers with respect to the impact of these provisions and the
Federal limitations on the deductibility of certain itemized deductions and
investment expenses on their New York State and New York City tax liability.
For purposes of the New York State corporate franchise tax and the New York City
general corporation tax, a corporation generally is treated as doing business in
New York State and New York City, respectively, and is subject to such corporate
taxes as a result of the ownership of a limited partnership interest in a
partnership which does business in New York State and New York City,
respectively.4 Each of the New York State and New York City corporate taxes are
imposed, in part, on the corporation's taxable income or capital allocable to
the relevant jurisdiction by application of the appropriate allocation
percentages. Moreover, a non-New York corporation which does business in New
York State may be subject to a New York State license fee. A corporation which
is subject to New York State corporate franchise tax solely as a result of being
a limited partner in a New York partnership may, under certain circumstances,
elect to compute its New York State corporate franchise tax by taking into
account only its distributive share of such partnership's income and loss. There
is currently no similar provision in effect for purposes of the New York City
general corporation tax.
Regulations under both the New York State corporate franchise tax and the New
York City general corporation tax, however, provide an exception to this general
rule in the case of a "portfolio investment partnership," which is defined,
generally, as a partnership which meets the gross income requirements of Section
851(b)(2) of the Code. New York State (but not New York City) has adopted
regulations that also include income and gains from commodity transactions
described in Section 864(b)(2)(B)(iii) as qualifying gross income for this
purpose. Each Fund's qualification as such a portfolio investment partnership
must be determined on an annual basis and with respect to a taxable year, the
Fund may not qualify as a portfolio investment partnership.
---------------
4 New York State, but not New York City, generally exempts from corporate
franchise tax a non-New York corporation which (i) does not actually or
constructively own a 1% or greater limited partnership interest in a
partnership doing business in New York and (ii) has a tax basis in such
limited partnership interest not greater than $1 million.
Each prospective corporate Investor should consult its tax adviser with regard
to the New York State and New York City tax consequences of an investment in a
Fund.
ADDITIONAL INFORMATION AND SUMMARY OF LLC AGREEMENT
The following is a summary description of additional items and of select
provisions of each Fund's LLC Agreement which are not described elsewhere in
this Memorandum. The description of such items and provisions is not definitive
and reference should be made to the complete text of each Fund's LLC Agreement
contained in Appendix A.
INVESTOR INTERESTS
Persons who purchase Interests in an offering being made hereby will be
Investors. The Adviser and its affiliates may contribute capital to and maintain
an investment in one or both Funds in an amount not exceeding 4.9% of the total
outstanding capital of each Fund, and to that extent may be an Investor. The
Adviser, or its successor as investment adviser of each Fund, also will be a
Special Advisory Member of each Fund. In that regard, each Fund has established
a Special Advisory Account solely for the purpose of receiving the Incentive
Allocation. The interest of the Special Advisory Member has no right to
participate in the income or gains of a Fund, no voting rights and no right to
receive a share of the assets of a Fund upon its liquidation, except to the
extent that the Special Advisory Member has received or is entitled to receive
the Incentive Allocation credited to the Special Advisory Account and all or a
portion of that allocation has not been withdrawn. The Adviser may not
contribute to a Fund as Special Advisory Member.
LIABILITY OF INVESTORS
Investors in each Fund will be members of a limited liability company as
provided under Delaware law. Under Delaware law and each Fund's LLC Agreement,
an Investor will not be liable for the debts, obligations or liabilities of the
Fund solely by reason of being an Investor, except that the Investor may be
obligated to make capital contributions to the Fund pursuant to the Fund's LLC
Agreement, to repay any funds wrongfully distributed to the Investor. However,
the Adviser may require an Investor to contribute to the Fund, whether before or
after the Fund's dissolution or after the Investor ceases to be an Investor,
such amounts as the Adviser deems necessary to meet the Fund's debts,
obligations or liabilities (not to exceed for any Investor, the aggregate amount
of any distributions, amounts in connection with a repurchase of all or a
portion of the Investor's interests and any other amounts received by the
Investor from the Fund during or after the fiscal year to which any debt,
obligation or liability of the Fund is incurred).
DUTY OF CARE OF THE BOARD AND ADVISER
Each Fund's LLC Agreement provides that neither the Fund's Directors nor its
Adviser (including certain of its affiliates, among others) shall be liable to
the Fund or any of its Investors for any loss or damage occasioned by any act or
omission in the performance of their respective services as such in the absence
of willful misfeasance, bad faith, gross negligence or reckless disregard of
their duties. Each Fund's LLC Agreement also contains provisions for the
indemnification, to the extent permitted by law, of the Fund's Directors and
Adviser (including certain of its affiliates, among others) by the Fund, but not
by its Investors individually, against any liability and expense to which any of
them may be liable which arises in connection with the performance of their
activities on behalf of the Fund. None of these persons will be personally
liable to any Investor for the repayment of any balance in such Investor's
capital account or for contributions by such Investor to the capital of the Fund
or by reason of any change in the Federal or state income tax laws applicable to
the Fund or its investors. The rights of indemnification and exculpation
provided under each Fund's LLC Agreement do not provide for indemnification of a
Fund's Director or its Adviser for any liability, including liability under
Federal securities laws which, under certain circumstances, impose liability
even on persons that act in good faith, to the extent, but only to the extent,
that such indemnification would be in violation of applicable law.
AMENDMENT OF THE LLC AGREEMENT
Each Fund's LLC Agreement may be amended with the approval of (i) the Fund's
Board, including a majority of its Independent Directors, if required by the
1940 Act, (ii) the Adviser or (iii) a majority, as defined in the 1940 Act, of
the outstanding voting securities of the Fund. Certain amendments involving
capital accounts, allocations thereto and the modification of events causing
dissolution of the Fund may not be made without the consent of any Investors
adversely affected thereby or unless each Investor has received notice of such
amendment and any Investor objecting to such amendment has been allowed a
reasonable opportunity to tender its entire interest for repurchase by the Fund.
POWER OF ATTORNEY
By purchasing an interest in a Fund, each Investor in the Fund will appoint the
Adviser and each of the Fund's Directors his or her attorney-in-fact for
purposes of filing required certificates and documents relating to the formation
and continuance of the Fund as a limited liability company under Delaware law or
signing all instruments effecting authorized changes in the Fund or the Fund's
LLC Agreement and conveyances and other instruments deemed necessary to effect
the dissolution or termination of the Fund.
The power-of-attorney granted in the Fund's LLC Agreement is a special
power-of-attorney coupled with an interest in favor of the Adviser and each of
the Fund's Directors and as such is irrevocable and continues in effect until
all of such Investor's interest in the Fund has been withdrawn pursuant to a
periodic tender or transferred to one or more transferees that have been
approved by the Fund's Board for admission to the Fund as substitute Investors.
TERM, DISSOLUTION AND LIQUIDATION
A Fund will be dissolved:
o upon the affirmative vote to dissolve the Fund by both (1) the Fund's
Board and (2) Investors holding at least two-thirds of the total
number of votes eligible to be cast by all Investors in the Fund;
o upon the expiration of any two-year period which commences on the date
on which any Investor has submitted to the Fund a written request in
accordance with the Fund's LLC Agreement, to tender its entire
interest for repurchase by the Fund if such Investor's interest has
not been repurchased during such period;
o upon the failure of Investors to elect successor Directors at a
meeting called by the Adviser when no Director remains; or
o as required by operation of law.
As to each Fund, upon the occurrence of any event of dissolution, the Adviser,
or a liquidator under appointment by the Fund's Board, is charged with winding
up the affairs of the Fund and liquidating its assets. Net profits or net loss
during the fiscal period including the period of liquidation will be allocated
as described in the section titled "CAPITAL ACCOUNTS AND ALLOCATIONS--Allocation
of Net Profits and Net Losses."
Upon the dissolution of a Fund, its assets are to be distributed (1) first to
satisfy the debts, liabilities and obligations of the Fund, other than debts to
Investors, including actual or anticipated liquidation expenses, (2) next to
satisfy debts owing to the Investors, and (3) finally to the Investors
proportionately in accordance with the balances in their respective capital
accounts. Assets may be distributed in-kind on a pro rata basis if the Fund's
Board or liquidator determines that such a distribution would be in the
interests of the Investors in facilitating an orderly liquidation.
REPORTS TO INVESTORS
Each Fund will furnish to its Investors as soon as practicable after the end of
each taxable year such information as is necessary for Investors to complete
Federal and state income tax or information returns, along with any other tax
information required by law. Each Fund also will send to its Investors a
semi-annual report containing the information required by the 1940 Act and an
audited annual report containing the information required by the 1940 Act and
Rule 4.7 of the CEA within 60 days after the close of the period for which the
report is being made, or as otherwise required by applicable law. Quarterly
reports from the Adviser regarding each Fund's operations during each quarter
also will be sent to Investors within 30 days after the end of the quarter and
in compliance with Rule 4.7 of the CEA.
FISCAL YEAR
For accounting purposes, each Fund's fiscal year will be the 12-month period
ending March 31. Each Fund's first fiscal year will commence on the date of the
initial closing and will end on March 31, 2001. For tax purposes, the 12-month
period ending December 31 of each year will be each Fund's taxable year.
ACCOUNTANTS AND LEGAL COUNSEL
PricewaterhouseCoopers LLP serves as the independent public accountants of each
Fund. Its principal business address is 1177 Avenue of the Americas, New York,
New York 10036.
Stroock & Stroock & Lavan LLP, New York, New York, acts as legal counsel to each
Fund.
CUSTODIAN
PFPC Trust Company (the "Custodian") serves as the primary custodian of the
assets of each Fund and the Investment Funds managed by its Subadvisers, and may
maintain custody of such assets with domestic and foreign subcustodians (which
may be banks, trust companies, securities depositories and clearing agencies)
approved by the Fund's Directors. Assets of each Fund and Investment Funds are
not held by the Adviser or Subadvisers, respectively, or commingled with the
assets of other accounts other than to the extent that securities are held in
the name of a custodian in a securities depository, clearing agency or omnibus
customer account of such custodian. The Custodian's principal business address
is Airport Business Center, International Court 2, 200 Stevens Drive, Lester,
Pennsylvania 19113.
INQUIRIES
Inquiries concerning a Fund and interests in a Fund, including information
concerning purchase and redemption procedures, should be directed to JPM
Securities at (212) 464-2036.
* * * * *
All potential Investors are encouraged to consult appropriate legal and
tax counsel.
<PAGE>
APPENDIX A1
J.P. MORGAN HEDGE FUND SERIES/CORE, L.L.C.
LIMITED LIABILITY COMPANY AGREEMENT
THIS LIMITED LIABILITY COMPANY AGREEMENT of J.P. Morgan Hedge
Fund Series/core, L.L.C. (the "Fund") is dated and effective as of July 11, 2000
by and among the Organizational Member, each Director, the Special Advisory
Member and each person hereinafter admitted to the Fund and reflected on the
books of the Fund as a Member.
W I T N E S S E T H :
WHEREAS, the Fund heretofore has been formed as a limited
liability company under the Delaware Limited Liability Company Act, pursuant to
the Certificate dated as of March 30, 2000 and filed with the Secretary of State
of the State of Delaware on March 31, 2000;
NOW, THEREFORE, for and in consideration of the foregoing and
the mutual covenants hereinafter set forth, it is hereby agreed as follows:
------------------------------------------------------------------------------
ARTICLE I
DEFINITIONS
------------------------------------------------------------------------------
For purposes of this Agreement:
ADVISER means JPMIM, or any person who may hereinafter serve as
the investment adviser to the Fund pursuant to an Investment Advisory Agreement.
ADVISERS ACT means the Investment Advisers Act of 1940 and the
rules, regulations and orders thereunder, as amended from time to time, or any
successor law.
AFFILIATE means affiliated person as such term is defined in the
1940 Act.
AGREEMENT means this Limited Liability Company Agreement, as
amended and/or restated from time to time.
ALLOCATION CHANGE means, with respect to each Member for each
Allocation Period, the difference between:
(1) the sum of (a) the balance of such Member's Capital
Account as of the close of the Allocation Period
(after giving effect to all allocations to be made to
such Member's Capital Account as of such date other
than any Incentive Allocation to be debited against
such Member's Capital Account), plus (b) any debits
to such Member's Capital Account during the
Allocation Period to reflect any actual or deemed
distributions or repurchases with respect to such
Member's Interest, plus (c) any debits to such
Member's Capital Account during the Allocation Period
to reflect any Insurance premiums allocable to such
Member, plus (d) any debits to such Member's Capital
Account during the Allocation Period to reflect any
items allocable to such Member's Capital Account
pursuant to Section 5.6 hereof other than Management
Fees; and
(2) the sum of (a) the balance of such Member's Capital
Account as of the commencement of the Allocation
Period, plus (b) any credits to such Member's Capital
Account during the Allocation Period to reflect any
contributions by such Member to the capital of the
Fund, plus (c) any credits to such Member's Capital
Account during the Allocation Period to reflect any
Insurance proceeds allocable to such Member.
If the amount specified in clause (1) exceeds the
amount specified in clause (2), such difference shall
be a POSITIVE ALLOCATION CHANGE, and if the amount
specified in clause (2) exceeds the amount specified
in clause (1), such difference shall be a NEGATIVE
ALLOCATION CHANGE.
ALLOCATION PERIOD means, with respect to each Member, the period
commencing as of the date of admission of such Member to the Fund and ending at
the close of business on the first to occur of the following:
(1) the last day of the twelfth complete calendar month since
the admission of such Member to the Fund;
(2) the last day of a Fiscal Year subsequent to a Member having
been admitted to the Fund for 12 complete calendar months,
and the last day of each Fiscal Year thereafter;
(3) the day as of which the Fund repurchases any Interest or
portion of an Interest of such Member;
(4) the day as of which the Fund admits as a substituted Member
a person to whom the Interest (or a portion thereof) of such
Member has been Transferred (unless there is no change in
beneficial ownership);
(5) the day as of which the Adviser's status as the Special
Advisory Member is terminated pursuant to Section 4.1
hereof;
(6) the day preceding any day as of which such Member becomes a
Special Member; or
(7) the day on which such Member ceases to be a Special Member.
BOARD means the Board of Directors established pursuant to
Section 2.6 hereof.
CAPITAL ACCOUNT means, with respect to each Member, the capital
account established and maintained on behalf of each Member pursuant to Section
5.3 hereof.
CAPITAL PERCENTAGE means a percentage established for each Member
as of each Expense Allocation Date. The Capital Percentage of a Member on an
Expense Allocation Date shall be determined by dividing the amount of capital
contributed to the Fund by the Member pursuant to Section 5.1 hereof by the sum
of the capital contributed to the Fund by each Member pursuant to Section 5.1
hereof on or prior to such Expense Allocation Date. The sum of the Capital
Percentages of all Members on each Expense Allocation Date shall equal 100%.
CAPITAL CONTRIBUTION means the contribution, if any, made, or to
be made, as the context requires, to the capital of the Fund by a Member.
CEA means Commodity Exchange Act and the rules, regulations and
orders thereunder, as amended from time to time, or any successor law.
CERTIFICATE means the Certificate of Formation of the Fund and
any amendments thereto as filed with the office of the Secretary of State of the
State of Delaware.
CLOSING DATE means the first date on or as of which a Member
other than the Organizational Member or the Special Advisory Member is admitted
to the Fund.
CODE means the United States Internal Revenue Code of 1986, as
amended and as hereafter amended from time to time, or any successor law.
DELAWARE ACT means the Delaware Limited Liability Company Act (6
DEL.C.ss.18-101, ET SEQ.) as in effect on the date hereof and as amended from
time to time, or any successor law.
DIRECTOR means each natural person listed on Schedule I hereto
who serves on the Board and any other natural person who, from time to time,
pursuant hereto shall serve on the Board. Each Director shall constitute a
"manager" of the Fund within the meaning of the Delaware Act.
EXPENSE ALLOCATION DATE means the Closing Date, and thereafter
each day, through and including the last day of the month during which the first
anniversary of the Closing Date occurs, as of which a contribution to the
capital of the Fund is made pursuant to Section 5.11 hereof.
FISCAL PERIOD means the period commencing on the Closing Date,
and thereafter each period commencing on the day immediately following the last
day of the preceding Fiscal Period, and ending at the close of business on the
first to occur of the following dates:
(1) the last day of a Fiscal Year;
(2) the day preceding any day as of which a contribution to the
capital of the Fund is made pursuant to Section 5.1;
(3) the day as of which the Fund repurchases any Interest or
portion of an Interest of any Member;
(4) the day as of which the Fund admits a substituted Member to
whom an Interest (or portion thereof) of a Member has been
Transferred (unless there is no change of beneficial
ownership); or
(5) any other day as of which this Agreement provides for any
amount to be credited to or debited against the Capital
Account of any Member, other than an amount to be credited
to or debited against the Capital Accounts of all Members in
accordance with their respective Fund Percentages.
FISCAL YEAR, for accounting purposes, means the period commencing
on the Closing Date and ending on the first March 31st following the Closing
Date, and thereafter each period commencing on April 1 of each year and ending
on March 31 of each year (or on the date of a final distribution pursuant to
Section 6.2 hereof), unless the Directors shall designate another fiscal year
for the Fund that is a permissible taxable year under the Code. For tax
purposes, the 12-month period ending December 31 of each year will be each
Fund's taxable year.
FORM N-2 means the Fund's Registration Statement on Form N-2
filed with the Securities and Exchange Commission, as amended from time to time.
FUND means the limited liability company governed hereby, as such
limited liability company may from time to time be constituted.
FUND PERCENTAGE means a percentage established for each Member on
the Fund's books as of the first day of each Fiscal Period. The Fund Percentage
of a Member for a Fiscal Period shall be determined by dividing the balance of
the Member's Capital Account as of the commencement of such Fiscal Period by the
sum of the Capital Accounts of all of the Members as of the commencement of such
Fiscal Period. The sum of the Fund Percentages of all Members for each Fiscal
Period shall equal 100%.
HURDLE means the amount that a Member would have earned for an
Allocation Period if it had received an annualized rate of return equal to the
Hurdle Percentage in effect on the last day of the relevant Allocation Period on
its opening Capital Account balance (appropriately adjusted for contributions
and withdrawals) for such Allocation Period. The Hurdle is not cumulative from
year to year or Allocation Period to Allocation Period.
HURDLE PERCENTAGE means the yield-to-maturity of 90-day U.S
Government Treasury Bills for the last business day of the preceding March as
reported by the Federal Reserve Board in its Statistical Release H.15 (as
reported on its website at www.federalreserve.gov/releases/H15/data/wf/
tbaa3m.txt). The Hurdle Percentage shall be reset annually as of April 1,
commencing April 1, 2001, and, for the period through March 31, 2001, shall be
5.75%. If the Federal Reserve Board shall not publish such yield, the Fund shall
determine such yield by such means as the Board shall deem appropriate and, if
the Fund shall be unable to determine such yield for any period, the Hurdle
Percentage for such period shall be the last one determined.
INCENTIVE ALLOCATION means, with respect to any Member, other
than a Special Member, the percentage set forth on Schedule II that corresponds
to the Member's Invested Capital (and, as respects a Special Member, such
percentage as the Adviser shall have agreed with such Special Member) of the
amount, determined as of the close of each Allocation Period with respect to
such Member, by which such Member's Positive Allocation Change for such
Allocation Period, if any, exceeds the sum of (i) such Member's Hurdle for such
Allocation Period and (ii) any positive balance in such Member's Loss Recovery
Account as of the most recent prior date as of which any adjustment has been
made thereto.
INDEPENDENT DIRECTORS means those Directors who are not
"interested persons" of the Fund as such term is defined in the 1940 Act.
INSURANCE means one or more "key man" insurance policies on the
life of any principal of the Adviser, the benefits of which are payable to the
Fund.
INTEREST means the entire ownership interest in the Fund at any
particular time of a Member or the Special Advisory Member, or other person to
whom an Interest or portion thereof has been transferred pursuant to Section 4.4
hereof, including the rights and obligations of such Member or other person
under this Agreement and the Delaware Act.
INVESTED CAPITAL means, with respect to any Member, the amount of
such Member's aggregate Capital Contributions to the Fund, decreased by any
withdrawals (through repurchases pursuant to Section 4.6 hereof) made by such
Member pursuant to Section 4.6 hereof other than withdrawals of aggregate Net
Capital Appreciation (for this purpose, any amounts withdrawn shall first be
applied against Net Capital Appreciation, if any).
INVESTMENT ADVISORY AGREEMENT means a separate written agreement
entered into by the Fund pursuant to which the Adviser provides investment
advisory services to the Fund.
INVESTMENT FUNDS means unregistered pooled investment vehicles
and registered investment companies that are advised by an Investment Manager or
Subadviser.
INVESTMENT MANAGERS means portfolio managers among which the Fund
deploys some or all of its assets.
JPMIM means J.P. Morgan Investment Management Inc., or any
successor thereto. JPMIM also shall constitute a "member" of the Fund within the
meaning of the Delaware Act and shall have an Interest.
JPMIM SERVICES means such management and administrative services
as JPMIM or its affiliates shall provide to the Fund pursuant to a separate
written agreement with the Fund as contemplated by Section 3.8(a) hereof.
LOSS RECOVERY ACCOUNT means a memorandum account to be recorded
in the books and records of the Fund with respect to each Member, which shall
have an initial balance of zero and which shall be adjusted as follows:
(1) As of the first day after the close of each Allocation
Period for such Member, the balance of the Loss Recovery
Account shall be increased by the amount, if any, of such
Member's Negative Allocation Change for such Allocation
Period and shall be reduced (but not below zero) by the
amount, if any, of such Member's Positive Allocation Change
for such Allocation Period.
(2) The balance of the Loss Recovery Account shall be reduced
(but not below zero) as of the first date as of which the
Capital Account balance of any Member is reduced as a result
of repurchase or transfer with respect to such Member's
Interest by an amount determined by multiplying (a) such
positive balance by (b) a fraction, (i) the numerator of
which is equal to the amount of the repurchase or transfer,
and (ii) the denominator of which is equal to the balance of
such Member's Capital Account immediately before giving
effect to such repurchase or transfer.
No transferee of any Interest shall succeed to any Loss Recovery
Account balance or portion thereof attributable to the transferor unless the
Transfer by which such transferee received such Interest did not involve a
change of beneficial ownership.
MANAGEMENT FEE means the fee paid to JPMIM out of the Fund's
assets, and debited against Members' Capital Accounts, for JPMIM Services.
MEMBER means any person who shall have been admitted to the Fund
as a member (including any person who is a Special Member) until the Fund
repurchases the entire Interest of such person pursuant to Section 4.6 hereof or
a substitute Member who is admitted to the Fund pursuant to Section 4.4 hereof,
in such person's capacity as a member of the Fund. For purposes of the Delaware
Act, the Members shall constitute a single class or group of members.
NEGATIVE ALLOCATION CHANGE has the meaning given such term in the
definition of Allocation Change.
NET ASSETS means the total value of all assets of the Fund, less
an amount equal to all accrued debts, liabilities and obligations of the Fund,
calculated before giving effect to any repurchases of Interests.
NET CAPITAL APPRECIATION means, with respect to any Member, the
excess, if any, of the aggregate amount credited to such Member's Capital
Account under clause (ii) of paragraph (c) of Section 5.3 hereof over the
aggregate amount debited to such Member's Capital Account under clause (ii) of
paragraph (d) of Section 5.3 hereof.
NET PROFIT OR NET LOSS means the amount by which the Net Assets
as of the close of business on the last day of a Fiscal Period exceed (in the
case of Net Profit) or are less than (in the case of Net Loss) the Net Assets as
of the commencement of the same Fiscal Period (or, with respect to the initial
Fiscal Period of the Fund, at the close of business on the Closing Date), such
amount to be adjusted to exclude:
(1) the amount of any Insurance premiums or proceeds to be
allocated among the Capital Accounts of the Members pursuant
to Section 5.5 hereof;
(2) any items to be allocated among the Capital Accounts of the
Members on a basis which is not in accordance with the
respective Fund Percentages of all Members as of the
commencement of such Fiscal Period pursuant to Sections 5.6
and 5.7 hereof; and
(3) Organizational Expenses allocated among the Capital Accounts
of the Members pursuant to Section 5.11 hereof.
1940 ACT means the Investment Company Act of 1940 and the rules,
regulations and orders thereunder, as amended from time to time, or any
successor law.
1934 ACT means the Securities Exchange Act of 1934 and the rules,
regulations and orders thereunder, as amended from time to time, or any
successor law.
ORGANIZATIONAL EXPENSES means the expenses incurred by the Fund
in connection with its formation, its initial registration as an investment
company under the 1940 Act, and the initial offering of Interests.
ORGANIZATIONAL MEMBER means Steven M. Greenspan.
PERSON means any individual, entity, corporation, partnership,
association, limited liability company, joint-stock company, trust, estate,
joint venture, organization or unincorporated organization.
POSITIVE ALLOCATION CHANGE has the meaning given such term in the
definition of Allocation Change.
SECURITIES means securities (including, without limitation,
equities, debt obligations, options, and other "securities" as that term is
defined in Section 2(a)(36) of the 1940 Act) and any contracts for forward or
future delivery of any security, debt obligation, currency or commodity, all
manner of derivative instruments and any contracts based on any index or group
of securities, debt obligations, currencies or commodities, and any options
thereon.
SPECIAL ADVISORY ACCOUNT means a Capital Account established and
maintained on behalf of the Special Advisory Member pursuant to Section 5.3
hereof solely for the purpose of receiving the Incentive Allocation.
SPECIAL ADVISORY MEMBER means the Adviser in its capacity as the
investment adviser to the Fund.
SPECIAL MEMBER means (i) Members that the Adviser shall determine
from time to time, in its sole discretion, to be employees, or directors of the
Adviser and its affiliates, and members of their immediate families, (ii)
attorneys or other professional advisers engaged on behalf of the Fund, and
members of their immediate families, (iii) Directors and (iv) the Adviser.
SUBADVISERS means those Investment Managers for which a separate
investment vehicle has been created in which the Investment Manager serves as
general partner or managing member and the Fund is the sole limited partner or
the only other member and those Investment Managers who manage the Fund's assets
directly through a separately managed account.
TAX MATTERS PARTNER means the Member designated as "tax matters
partner" of the Fund pursuant to Section 8.17 hereof.
TRANSFER means the assignment, transfer, sale or other
disposition of all or any portion of an Interest, including any right to receive
any allocations and distributions attributable to an Interest.
VOTING INTEREST means with respect to a Member the number of
votes equivalent to such Member's Fund Percentage as of the record date for a
meeting of Members.
------------------------------------------------------------------------------
ARTICLE II
ORGANIZATION; ADMISSION OF MEMBERS; BOARD
------------------------------------------------------------------------------
2.1 FORMATION OF LIMITED LIABILITY COMPANY.
The Organizational Member and any person designated by the
Board hereby are designated as authorized persons, within the meaning of the
Delaware Act, to execute, deliver and file all certificates (and any amendments
and/or restatements thereof) required or permitted by the Delaware Act to be
filed in the office of the Secretary of State of the State of Delaware. The
Board shall cause to be executed and filed with applicable governmental
authorities any other instruments, documents and certificates which, in the
opinion of the Fund's legal counsel, may from time to time be required by the
laws of the United States of America, the State of Delaware or any other
jurisdiction in which the Fund shall determine to do business, or any political
subdivision or agency thereof, or which such legal counsel may deem necessary or
appropriate to effectuate, implement and continue the valid existence and
business of the Fund.
2.2 NAME.
The name of the Fund shall be "J.P. Morgan Hedge Fund
Series/core, L.L.C." or such other name as the Board hereafter may adopt upon
(i) causing an appropriate amendment to the Certificate to be filed in
accordance with the Delaware Act and (ii) sending notice thereof to each Member.
The Fund's business may be conducted under the name of the Fund or, to the
fullest extent permitted by law, any other name or names deemed advisable by the
Board.
2.3 PRINCIPAL AND REGISTERED OFFICE.
The Fund shall have its principal office at the principal
office of the Adviser, or at such other place designated from time to time by
the Board.
The Fund shall have its registered office in the State of
Delaware at 1013 Center Road, Wilmington, New Castle County, Delaware
19805-1297, and shall have Corporation Service Company as its registered agent
at such registered office for service of process in the State of Delaware,
unless a different registered office or agent is designated from time to time by
the Board in accordance with the Delaware Act.
2.4 DURATION.
The term of the Fund commenced on the filing of the
Certificate with the Secretary of State of the State of Delaware and shall
continue until the Fund is dissolved pursuant to Section 6.1 hereof.
2.5 BUSINESS OF THE FUND.
(a) The business of the Fund is to purchase, sell (including
short sales), invest and trade in Securities, and to engage in any financial or
derivative transactions relating thereto or otherwise. Discrete portions of the
Fund's assets (which may constitute, in the aggregate, all of the Fund's assets)
may be invested in general or limited partnerships, limited liability companies
and other pooled investment vehicles which invest and trade in Securities, some
or all of which may be advised by one or more Subadvisers. The Fund may execute,
deliver and perform all contracts, agreements and other undertakings and engage
in all activities and transactions as may in the opinion of the Board be
necessary or advisable to carry out the Fund's business and any amendments to
any such contracts, agreements and other undertakings, all without any further
act, vote or approval of any other person, notwithstanding any other provision
of this Agreement.
(b) The Fund shall operate as a closed-end, management
investment company in accordance with the 1940 Act and subject to any
fundamental policies and investment restrictions set forth in the Form N-2.
2.6 THE BOARD.
(a) The Organizational Member hereby designates those persons
listed on Schedule I who shall agree to be bound by all of the terms of this
Agreement to serve as Directors on the initial Board. The Board may, subject to
the provisions of paragraphs (a) and (b) of this Section 2.6 with respect to the
number of and vacancies in the position of Director and the provisions of
Section 3.3 hereof with respect to the election of Directors by Members,
designate any person who shall agree to be bound by all of the terms of this
Agreement as a Director. The names and mailing addresses of the Directors shall
be set forth in the books and records of the Fund. The number of Directors shall
be fixed from time to time by the Directors but, at the Closing Date, shall not
be fewer than three.
(b) Each Director shall serve as a Director for the duration
of the term of the Fund, unless his or her status as a Director shall be sooner
terminated pursuant to Section 4.2 hereof. If any vacancy in the position of a
Director occurs, the remaining Directors may appoint a person to serve in such
capacity, so long as immediately after such appointment at least two-thirds of
the Directors then serving would have been elected by the Members. The Directors
may call a meeting of Members to fill any vacancy in the position of Director,
and shall do so within 60 days after any date on which Directors who were
elected by the Members cease to constitute a majority of the Directors then
serving as Directors.
(c) If no Director remains, the Adviser shall promptly call a
meeting of the Members, to be held within 60 days after the date on which the
last Director ceased to act in that capacity, for the purpose of determining
whether to continue the business of the Fund and, if the business shall be
continued, of electing the required number of Directors. If the Members shall
determine at such meeting not to continue the business of the Fund or if the
required number of Directors is not elected within 60 days after the date on
which the last Director ceased to act in that capacity, then the Fund shall be
dissolved pursuant to Section 6.1 hereof and the assets of the Fund shall be
liquidated and distributed pursuant to Section 6.2 hereof.
2.7 MEMBERS.
The Board may admit one or more Members as of the beginning of
each calendar month or at such other times as the Board may determine. Members
may be admitted to the Fund subject to the condition that each such Member shall
execute an appropriate signature page of this Agreement or of the Fund's
application pursuant to which such Member agrees to be bound by all the terms
and provisions hereof. The Board, in its absolute discretion, may reject
applications for Interests in the Fund. The admission of any person as a Member
shall be effective upon the revision of the books and records of the Fund to
reflect the name and the contribution to the capital of the Fund of such
additional Member. Each of JPMIM and the Organizational Member hereby is
admitted as a Member on the date hereof.
2.8 SPECIAL ADVISORY MEMBER.
Upon signing this Agreement, the Adviser shall be admitted to
the Fund as the Special Advisory Member, subject to due approval, in accordance
with the requirements of the 1940 Act, of the Investment Advisory Agreement. The
Interest of the Special Advisory Member shall be non-voting. If at anytime the
Investment Advisory Agreement between the Fund and the person then serving as
Adviser terminates, the Board shall admit as a substitute Special Advisory
Member, upon its signing this Agreement, such person as may be retained by the
Fund to provide investment advisory services pursuant to an Investment Advisory
Agreement, subject to the due approval of such Investment Advisory Agreement in
accordance with the requirements of the 1940 Act.
2.9 ORGANIZATIONAL MEMBER.
Upon the admission to the Fund of any additional Member
pursuant to Section 2.7, the Organizational Member shall withdraw from the Fund
as the Organizational Member and shall be entitled to the return of his Capital
Contribution, if any, without interest or deduction, and shall cease to be a
member of the Fund.
2.10 BOTH DIRECTORS AND MEMBERS.
A Member may at the same time be a Director and a Member, or a
Special Advisory Member and a Member, in which event such Member's rights and
obligations in each capacity shall be determined separately in accordance with
the terms and provisions hereof and as provided in the Delaware Act.
2.11 LIMITED LIABILITY.
Except as otherwise provided under applicable law, no Member
or Director or the Special Advisory Member shall be liable personally for the
Fund's debts, obligations or liabilities, whether arising in contract, tort or
otherwise, solely by reason of being a member or manager of the Fund, except
that a Member may be obligated to make capital contributions to the Fund
pursuant to this Agreement and to repay any funds wrongfully distributed to such
Member. Notwithstanding any other provision of this Agreement, the Adviser, in
its sole discretion, may require a Member to contribute to the Fund, at any time
or from time to time, whether before or after the dissolution of the Fund or
after such Member ceases to be a member of the Fund, such amounts as are
requested by the Manager to meet the Fund's debts, obligations or liabilities
(not to exceed for any Member the aggregate amount of any distributions, amounts
paid in connection with a repurchase of all or a portion of such Member's
Interest and any other amounts received by such Member from the Fund during or
after the Fiscal Year in which any debt, obligation or liability of the Fund
arose or was incurred); PROVIDED, HOWEVER, that each Member shall contribute
only his pro rata share of the aggregate amount requested based on such Member's
Invested Capital in the Fiscal Year in which the debt, obligation or liability
arose or was incurred as a percentage of the aggregate Invested Capital of the
Fund in such Fiscal Year; and PROVIDED FURTHER that the provisions of this
Section 2.10 shall not affect the obligations of Members under Section 18-607 of
the Delaware Act.
------------------------------------------------------------------------------
ARTICLE III
MANAGEMENT
------------------------------------------------------------------------------
3.1 MANAGEMENT AND CONTROL.
(a) Management and control of the business of the Fund shall
be vested in the Board, which shall have the right, power and authority, on
behalf of the Fund and in its name, to exercise all rights, powers and authority
of managers under the Delaware Act and to do all things necessary and proper to
carry out the objective and business of the Fund and its duties hereunder. No
Director shall have the authority individually to act on behalf of or to bind
the Fund except within the scope of such Director's authority as delegated by
the Board. The parties hereto intend that, except to the extent otherwise
expressly provided herein, (i) each Director shall be vested with the same
powers, authority and responsibilities on behalf of the Fund as are customarily
vested in each director of a Delaware corporation and (ii) each Independent
Director shall be vested with the same powers, authority and responsibilities on
behalf of the Fund as are customarily vested in each director of a closed-end
management investment company registered under the 1940 Act that is organized as
a Delaware corporation who is not an "interested person" of such company as such
term is defined in the 1940 Act. During any period in which the Fund shall have
no Directors, the Adviser shall continue to serve as investment adviser to the
Fund and JPMIM shall continue to provide JPMIM services to the Fund.
(b) Each Member agrees not to treat, on his personal return or
in any claim for a refund, any item of income, gain, loss, deduction or credit
in a manner inconsistent with the treatment of such item by the Fund. The Board
shall have the exclusive authority and discretion to make any elections required
or permitted to be made by the Fund under any provisions of the Code or any
other revenue laws.
(c) Members shall have no right to participate in and shall
take no part in the management or control of the Fund's business and shall have
no right, power or authority to act for or bind the Fund. Members shall have the
right to vote on any matters only as provided in this Agreement or on any
matters that require the approval of the holders of voting securities under the
1940 Act or as otherwise required in the Delaware Act.
(d) The Board may delegate to any person any rights, power and
authority vested by this Agreement in the Board to the extent permissible under
applicable law.
3.2 ACTIONS BY THE BOARD.
(a) Unless provided otherwise in this Agreement, the Board
shall act only: (i) by the affirmative vote of a majority of the Directors
(which majority shall include any requisite number of Independent Directors
required by the 1940 Act) present at a meeting duly called at which a quorum of
the Directors shall be present (in person or, if in person attendance is not
required by the 1940 Act, in person or by telephone) or (ii) by unanimous
written consent of all of the Directors without a meeting, if permissible under
the 1940 Act.
(b) The Board may designate from time to time a Chairman who
shall preside at all meetings. Meetings of the Board may be called by the
Chairman or any two Directors, and may be held on such date and at such time and
place as the Board shall determine. Each Director shall be entitled to receive
written notice of the date, time and place of such meeting within a reasonable
time in advance of the meeting. Notice need not be given to any Director who
shall attend a meeting without objecting to the lack of notice or who shall
execute a written waiver of notice with respect to the meeting. Directors may
attend and participate in any meeting by telephone, except where in person
attendance at a meeting is required by the 1940 Act. A majority of the Directors
then in office shall constitute a quorum at any meeting.
(c) The Board may designate from time to time agents and
employees of the Fund who shall have the same powers and duties on behalf of the
Fund (including the power to bind the Fund) as are customarily vested in
officers of a Delaware corporation, and designate them as officers of the Fund.
3.3 MEETINGS OF MEMBERS.
(a) Actions requiring the vote of the Members may be taken at
any duly constituted meeting of the Members at which a quorum is present.
Meetings of the Members may be called by the Board or by Members holding a
majority of the total number of votes eligible to be cast by all Members, and
may be held at such time, date and place as the Board shall determine. The Board
shall arrange to provide written notice of the meeting, stating the date, time
and place of the meeting and the record date therefor, to each Member entitled
to vote at the meeting within a reasonable time prior thereto. Failure to
receive notice of a meeting on the part of any Member shall not affect the
validity of any act or proceeding of the meeting, so long as a quorum shall be
present at the meeting. Only matters set forth in the notice of a meeting may be
voted on by the Members at a meeting. The presence in person or by proxy of
Members holding a majority of the total number of votes eligible to be cast by
all Members as of the record date shall constitute a quorum at any meeting. In
the absence of a quorum, a meeting of the Members may be adjourned by action of
a majority of the Members present in person or by proxy without additional
notice to the Members. Except as otherwise required by any provision of this
Agreement or of the 1940 Act, (i) those candidates receiving a plurality of the
votes cast at any meeting of Members shall be elected as Directors and (ii) all
other actions of the Members taken at a meeting shall require the affirmative
vote of Members holding a majority of the total number of votes eligible to be
cast by those Members who are present in person or by proxy at such meeting.
(b) Each Member shall be entitled to cast at any meeting of
Members a number of votes equivalent to such Member's Voting Interest. The Board
shall establish a record date not less than 10 nor more than 60 days prior to
the date of any meeting of Members to determine eligibility to vote at such
meeting and the number of votes which each Member will be entitled to cast
thereat, and shall maintain for each such record date a list setting forth the
name of each Member and the number of votes that each Member will be entitled to
cast at the meeting.
(c) A Member may vote at any meeting of Members by a proxy
properly executed in writing by the Member and filed with the Fund before or at
the time of the meeting. A proxy may be suspended or revoked, as the case may
be, by the Member executing the proxy by a later writing delivered to the Fund
at any time prior to exercise of the proxy or if the Member executing the proxy
shall be present at the meeting and decide to vote in person. Any action of the
Members that is permitted to be taken at a meeting of the Members may be taken
without a meeting if consents in writing, setting forth the action taken, are
signed by Members holding a majority of the total number of votes eligible to be
cast or such greater percentage as may be required in order to approve such
action.
3.4 CUSTODY OF ASSETS OF THE FUND.
The physical possession of all funds, Securities or other
property of the Fund shall at all times, be held, controlled and administered by
one or more custodians retained by the Fund in accordance with the requirements
of the 1940 Act.
3.5 OTHER ACTIVITIES OF MEMBERS AND DIRECTORS.
(a) The Directors shall not be required to devote full time to
the affairs of the Fund, but shall devote such time as may reasonably be
required to perform their obligations under this Agreement.
(b) Any Member or Director or Affiliate thereof may engage in
or possess an interest in other business ventures or commercial dealings of
every kind and description, independently or with others, including, but not
limited to, acquisition and disposition of Securities, provision of investment
advisory or brokerage services, serving as directors, officers, employees,
advisers or agents of other companies, partners of any partnership, members of
any limited liability company, or trustees of any trust, or entering into any
other commercial arrangements. No Member shall have any rights in or to such
activities of any other Member or Director, or any profits derived therefrom.
3.6 DUTY OF CARE.
(a) A Director shall not be liable to the Fund or to any of
its Members for any loss or damage occasioned by any act or omission in the
performance of the Director's services under this Agreement, unless it shall be
determined by final judicial decision on the merits from which there is no
further right to appeal that such loss is due to an act or omission of such
person constituting willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such Director's duties
hereunder.
(b) A Member not in breach of any obligation hereunder or
under any agreement pursuant to which the Member subscribed for an Interest
shall be liable to the Fund, any other Member or third parties only as required
by the Delaware Act or otherwise provided in this Agreement.
3.7 INDEMNIFICATION.
(a) To the fullest extent permitted by law, the Fund shall,
subject to Section 3.7(b) hereof, indemnify each Director (including for this
purpose their executors, heirs, assigns, successors or other legal
representatives), the Adviser (including for this purpose each affiliate,
officer, director, principal, employee or agent of the Adviser, and the
executors, heirs, assigns, successors or other legal representatives of each of
the foregoing, and of any person who controls or is under common control, or
otherwise affiliated, with the Adviser, and their executors, heirs, assigns,
successors or other legal representatives), and the Tax Matters Partner
(including for this purpose its successor) against all losses, claims, damages,
liabilities, costs and expenses, including, but not limited to, amounts paid in
satisfaction of judgments, in compromise, or as fines or penalties, and
reasonable counsel fees, incurred in connection with the defense or disposition
of any action, suit, investigation or other proceeding, whether civil or
criminal, before any judicial, arbitral, administrative or legislative body, in
which such indemnitee may be or may have been involved as a party or otherwise,
or with which such indemnitee may be or may have been threatened, while in
office or thereafter, by reason of being or having been a Director, Adviser or
the Tax Matters Partner, as the case may be, of the Fund or the past or present
performance of services to the Fund by such indemnitee, except to the extent
such loss, claim, damage, liability, cost or expense shall have been finally
determined in a decision on the merits in any such action, suit, investigation
or other proceeding to have been incurred or suffered by such indemnitee by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of such indemnitee's office. The
rights of indemnification provided under this Section 3.7 shall not be construed
so as to provide for indemnification of an indemnitee for any liability
(including liability under federal securities laws which, under certain
circumstances, impose liability even on persons that act in good faith) to the
extent (but only to the extent) that such indemnification would be in violation
of applicable law, but shall be construed so as to effectuate the applicable
provisions of this Section 3.7 to the fullest extent permitted by law.
(b) Expenses, including reasonable counsel fees, so incurred
by any such indemnitee (but excluding amounts paid in satisfaction of judgments,
in compromise, or as fines or penalties), may be paid from time to time by the
Fund in advance of the final disposition of any such action, suit, investigation
or proceeding upon receipt of an undertaking by or on behalf of such indemnitee
to repay to the Fund amounts so paid if it shall ultimately be determined that
indemnification of such expenses is not authorized under Section 3.7(a) hereof;
PROVIDED, HOWEVER, that (i) such indemnitee shall provide security for such
undertaking, (ii) the Fund shall be insured by or on behalf of such indemnitee
against losses arising by reason of such indemnitee's failure to fulfill his or
its undertaking, or (iii) a majority of the Directors (excluding any Director
who is seeking advancement of expenses hereunder) or independent legal counsel
in a written opinion shall determine based on a review of readily available
facts (as opposed to a full trial-type inquiry) that there is reason to believe
such indemnitee ultimately will be entitled to indemnification.
(c) As to the disposition of any action, suit, investigation
or proceeding (whether by a compromise payment, pursuant to a consent decree or
otherwise) without an adjudication or a decision on the merits by a court, or by
any other body before which the proceeding shall have been brought, that an
indemnitee is liable to the Fund or its Members by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of such indemnitee's office, indemnification shall be
provided pursuant to Section 3.7(a) hereof if (i) approved as in the best
interests of the Fund by a majority of the Directors (excluding any Director who
is seeking indemnification hereunder) upon a determination based upon a review
of readily available facts (as opposed to a full trial-type inquiry) that such
indemnitee acted in good faith and in the reasonable belief that such actions
were in the best interests of the Fund and that such indemnitee is not liable to
the Fund or its Members by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of such
indemnitee's office, or (ii) the Directors secure a written opinion of
independent legal counsel based upon a review of readily available facts (as
opposed to a full trial-type inquiry) to the effect that such indemnitee acted
in good faith and in the reasonable belief that such actions were in the best
interests of the Fund and that such indemnitee is not liable to the Fund or its
Members by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of such indemnitee's
office.
(d) Any indemnification or advancement of expenses made
pursuant to this Section 3.7 shall not prevent the recovery from any indemnitee
of any such amount if such indemnitee subsequently shall be determined in a
decision on the merits in any action, suit, investigation or proceeding
involving the liability or expense that gave rise to such indemnification or
advancement of expenses to be liable to the Fund or its Members by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of such indemnitee's office. In any suit brought
by an indemnitee to enforce a right to indemnification under this Section 3.7 it
shall be a defense that, and in any suit in the name of the Fund to recover any
indemnification or advancement of expenses made pursuant to this Section 3.7 the
Fund shall be entitled to recover such expenses upon a final adjudication that,
the indemnitee has not met the applicable standard of conduct set forth in this
Section 3.7. In any such suit brought to enforce a right to indemnification or
to recover any indemnification or advancement of expenses made pursuant to this
Section 3.7, the burden of proving that the indemnitee is not entitled to be
indemnified, or to any indemnification or advancement of expenses, under this
Section 3.7 shall be on the Fund (or any Member acting derivatively or otherwise
on behalf of the Fund or its Members).
(e) An indemnitee may not satisfy any right of indemnification
or advancement of expenses granted in this Section 3.7 or to which he, she or it
may otherwise be entitled except out of the assets of the Fund, and no Member
shall be personally liable with respect to any such claim for indemnification or
advancement of expenses.
(f) The rights of indemnification provided hereunder shall not
be exclusive of or affect any other rights to which any person may be entitled
by contract or otherwise under law. Nothing contained in this Section 3.7 shall
affect the power of the Fund to purchase and maintain liability insurance on
behalf of any Director or other person.
3.8 FEES, EXPENSES AND REIMBURSEMENT.
(a) So long as JPMIM (or its affiliates) provides JPMIM
Services to the Fund, it shall be entitled to receive such fees as may be agreed
to by JPMIM and the Fund pursuant to a separate written agreement, which,
notwithstanding anything in this Agreement to the contrary, may be entered into
by the Fund without any further act, vote or approval of any Member.
(b) The Board may cause the Fund to compensate each Director
for his or her services hereunder. In addition, the Fund shall reimburse the
Directors for reasonable out-of-pocket expenses incurred by them in performing
their duties under this Agreement.
(c) The Fund shall bear all expenses incurred in the business
of the Fund other than those specifically required to be borne by the Adviser
pursuant to the Investment Advisory Agreement or by JPMIM pursuant to a separate
written agreement with the Fund as contemplated by Section 3.8(a) hereof.
Expenses to be borne by the Fund include, but are not limited to, the following:
(1) all costs and expenses related to portfolio
transactions and positions for the Fund's account,
including, but not limited to, brokerage commissions,
research fees, interest and commitment fees on loans
and debit balances, borrowing charges on Securities
sold short, dividends on Securities sold short but not
yet purchased, custodial fees, margin fees, transfer
taxes and premiums and taxes withheld on foreign
dividends and indirect expenses from investments in
Investment Funds;
(2) all costs and expenses associated with the
organization, operation and registration of the Fund,
offering costs and the costs of compliance with any
applicable Federal or state laws;
(3) the costs and expenses of holding meetings of the Board
and any meetings of Members that are regularly
scheduled, permitted or are required to be held by this
Agreement, the 1940 Act or other applicable law;
(4) reasonable fees and disbursements of any attorneys,
accountants (including tax preparation fees), auditors
and other consultants and professionals engaged on
behalf of the Fund to assist in connection with its
operations;
(5) the costs of a fidelity bond and any liability
insurance obtained on behalf of the Fund, the Adviser
or the Directors;
(6) any fees payable to JPMIM or its affiliates for JPMIM
Services;
(7) all costs and expenses associated with the organization
of new Investment Funds actually managed by
Subadvisers, if any;
(8) all costs and expenses of preparing, setting in type,
printing and distributing reports and other
communications to Members;
(9) the fees of custodians and other persons providing
administrative services to the Fund; and
(10) such other types of expenses as may be approved from
time to time by the Board.
The Adviser shall be entitled to reimbursement from the Fund
for any of the above expenses that it pays on behalf of the Fund.
(d) The Fund from time to time, alone or in conjunction with
other accounts for which the Adviser, or any Affiliate of the Adviser, acts as
general partner, managing member or investment adviser, may purchase Insurance
in such amounts, from such insurers and on such terms as the Board shall
determine.
------------------------------------------------------------------------------
ARTICLE IV
TERMINATION OF STATUS OF ADVISER AND DIRECTORS;
TRANSFERS AND REPURCHASES
------------------------------------------------------------------------------
4.1 TERMINATION OF STATUS OF THE ADVISER.
The status of the Adviser as the Special Advisory Member shall
terminate if the Investment Advisory Agreement with the Adviser terminates and
the Fund does not enter into a new Investment Advisory Agreement with the
Adviser, effective as of the date of such termination.
4.2 TERMINATION OF STATUS OF A DIRECTOR.
The status of a Director shall terminate if the Director (i)
shall die; (ii) shall be adjudicated incompetent; (iii) shall voluntarily
withdraw as a Director (upon not less than 90 days' prior written notice to the
other Directors, unless the other Directors waive such notice); (iv) shall be
removed under Section 4.3; (v) shall be declared bankrupt by a court with
appropriate jurisdiction, file a petition commencing a voluntary case under any
bankruptcy law or make an assignment for the benefit of creditors; or (vi) shall
have a receiver appointed to administer the property or affairs of such
Director.
4.3 REMOVAL OF THE DIRECTORS.
Any Director may be removed by the vote or written consent of
Members holding not less than two-thirds of the total number of votes eligible
to be cast by all Members.
4.4 TRANSFER OF INTERESTS OF MEMBERS.
(a) An Interest or portion thereof of a Member may be
Transferred only (i) by operation of law pursuant to the death, bankruptcy,
insolvency or dissolution of such Member or (ii) with the written consent of the
Board (which may be withheld in its sole and absolute discretion). In addition,
the Board may not consent to a Transfer of an Interest or a portion thereof of a
Member unless (i) the person to whom such Interest is transferred (or each of
such person's equity owners if such a person is a "private investment company"
as defined in Rule 205-3(d)(3) under the Advisers Act, an investment company
registered under the 1940 Act, or a business development company as defined
under the Advisers Act) is a person whom the Board believes meets the
requirements of paragraph (d)(1) of Rule 205-3 under the Advisers Act or
successor rule thereto, or is otherwise exempt from such requirements, (ii) such
person is a "qualified eligible participant" under Rule 4.7 of the CEA, or any
successor rule thereto, and any interpretation thereof, or is otherwise exempt
from such requirements or (iii) the transfer of an Interest to such person would
be consistent with the requirements of National Futures Association Bylaw 1101
as applied to the commodity pool operator of the Fund. If any transferee does
not meet such investor eligibility requirements, the Fund reserves the right to
redeem its Interest. If the Board does not consent to a Transfer by operation of
law, the Fund shall redeem the Interest from the Member's successor. Any
permitted transferee shall be entitled to the allocations and distributions
allocable to the Interest so acquired and to Transfer such Interest in
accordance with the terms of this Agreement, but shall not be entitled to the
other rights of a Member unless and until such transferee becomes a substituted
Member. If a Member Transfers an Interest or portion thereof with the approval
of the Board, the Fund shall promptly take all necessary actions so that each
transferee or successor to whom such Interest or portion thereof is Transferred
is admitted to the Fund as a substituted Member. The admission of any transferee
as a substituted Member shall be effective upon the execution and delivery by,
or on behalf of, such substituted Member of either a counterpart of this
Agreement or an instrument that constitutes the execution and delivery of this
Agreement. Each transferring Member and transferee agrees to pay all expenses,
including attorneys' and accountants' fees, incurred by the Fund in connection
with such Transfer. Upon the Transfer to another person or persons of a Member's
entire Interest, such Member shall cease to be a member of the Fund.
(b) Each transferring Member shall indemnify and hold harmless
the Fund, the Directors, the Adviser, each other Member and any Affiliate of the
foregoing against all losses, claims, damages, liabilities, costs and expenses
(including legal or other expenses incurred in investigating or defending
against any such losses, claims, damages, liabilities, costs and expenses or any
judgments, fines and amounts paid in settlement), joint or several, to which
such persons may become subject by reason of or arising from (i) any Transfer
made by such Member in violation of this Section 4.4 and (ii) any
misrepresentation by such Member in connection with any such Transfer.
4.5 TRANSFER OF INTERESTS OF SPECIAL ADVISORY MEMBER.
The Adviser may not Transfer its Interest as the Special
Advisory Member.
4.6 REPURCHASE OF INTERESTS.
(a) Except as otherwise provided in this Agreement, no Member
or other person holding an Interest or portion thereof shall have the right to
withdraw or tender to the Fund for repurchase of that Interest or portion
thereof. The Board may from time to time, in its complete and exclusive
discretion and on such terms and conditions as it may determine, cause the Fund
to repurchase Interests or portions thereof pursuant to written tenders. In
determining whether to cause the Fund to repurchase Interests or portions
thereof pursuant to written tenders, the Board shall consider the following
factors, among others:
(1) whether any Members have requested to tender Interests
or portions thereof to the Fund;
(2) the liquidity of the Fund's assets;
(3) the investment plans and working capital requirements
of the Fund;
(4) the relative economies of scale with respect to the
size of the Fund;
(5) the history of the Fund in repurchasing Interests or
portions thereof;
(6) the condition of the securities markets; and
(7) the anticipated tax consequences of any proposed
repurchases of Interests or portions thereof.
The Board shall cause the Fund to repurchase Interests or
portions thereof pursuant to written tenders only on terms fair to the Fund and
to all Members (including persons holding Interests acquired from Members), as
applicable.
(b) The Adviser may tender its Interest or a portion thereof
as a Member or Special Advisory Member of the Fund under Section 4.6(a) hereof.
(c) If the Adviser's status as Special Advisory Member is
terminated pursuant to Section 4.1 hereof, it (or its trustee or other legal
representative) may, by written notice to the Board within 60 days of the
effective date of such termination, tender to the Fund for repurchase all or any
portion of its Special Advisory Account. Not later than 30 days after the
receipt of such notice, the Board shall cause such tendered portion of the
Special Advisory Account to be repurchased by the Fund for cash.
(d) The Board may cause the Fund to repurchase an Interest or
portion thereof of a Member or any person acquiring an Interest or portion
thereof from or through a Member if the Board determines or has reason to
believe that:
(1) such an Interest or portion thereof has been
transferred in violation of Section 4.4 hereof, or such
an Interest or portion thereof has vested in any person
by operation of law as the result of the death,
dissolution, bankruptcy or incompetency of a Member;
(2) ownership of such an Interest by a Member or other
person will cause the Fund to be in violation of, or
require registration of any Interest or portion thereof
under, or subject the Fund to additional registration
or regulation under, the securities, commodities or
other laws of the United States or any other relevant
jurisdiction;
(3) continued ownership of such an Interest may be harmful
or injurious to the business or reputation of the Fund,
the Adviser or the Directors, or may subject the Fund
or any of the Members to an undue risk of adverse tax
or other fiscal consequences;
(4) any of the representations and warranties made by a
Member in connection with the acquisition of an
Interest or portion thereof was not true when made or
has ceased to be true; or
(5) it would be in the best interests of the Fund, as
determined by the Board, for the Fund to repurchase
such an Interest or portion thereof.
(e) Repurchases of Interests or portions thereof by the Fund
shall be payable in cash or in part by promissory note, in each case without
interest, unless the Board, in its discretion, determines otherwise, or, in the
discretion of the Board, in Securities (or any combination of Securities and
cash) of equivalent value. All such repurchases shall be subject to any and all
conditions as the Board may impose and shall be effective as of a date set by
the Board after receipt by the Fund of all eligible written tenders of Interests
or portion thereof. The amount due to any Member whose Interest or portion
thereof is repurchased shall be equal to the value of such Member's Capital
Account or portion thereof as applicable as of the effective date of repurchase,
after giving effect to all allocations to be made to such Member's Capital
Account as of such date.
------------------------------------------------------------------------------
ARTICLE V
CAPITAL
------------------------------------------------------------------------------
5.1 CONTRIBUTIONS TO CAPITAL.
(a) The minimum initial contribution of each Member (other
than JPMIM) to the capital of the Fund shall be $100,000 ($10,000 for employees
or directors of JPMIM and its affiliates, and members of their immediate
families, and, in the sole discretion of the Board, attorneys or other
professional advisers engaged on behalf of the Fund, and members of their
immediate families) or such other amount as the Board may determine from time to
time. The amount of the initial contribution of each Member shall be recorded on
the books and records of the Fund upon acceptance as a contribution to the
capital of the Fund. The Directors shall not be entitled to make voluntary
contributions of capital to the Fund as Directors of the Fund, but may make
voluntary contributions to the capital of the Fund as Members.
(b) The Members may make additional contributions to the
capital of the Fund, effective as of such times as the Board in its discretion
may permit, but no Member shall be obligated to make any additional contribution
to the capital of the Fund except to the extent provided in Section 5.7 hereof.
(c) Except as otherwise permitted by the Board, (i) initial
and any additional contributions to the capital of the Fund by any Member shall
be payable in cash or in such Securities that the Board, in its absolute
discretion, may agree to accept on behalf of the Fund, and (ii) initial and any
additional contributions in cash shall be payable in readily available funds at
the date of the proposed acceptance of the contribution. The Fund shall charge
each Member making a contribution in Securities to the capital of the Fund such
amount as may be determined by the Board not exceeding 2% of the value of such
contribution in order to reimburse the Fund for any costs incurred by the Fund
by reason of accepting such Securities, and any such charge shall be due and
payable by the contributing Member in full at the time the contribution to the
capital of the Fund to which such charges relate is due. The value of
contributed Securities shall be determined in accordance with Section 7.3 hereof
as of the date of contribution.
5.2 RIGHTS OF MEMBERS TO CAPITAL.
No Member shall be entitled to interest on his or its
contribution to the capital of the Fund, nor shall any Member be entitled to the
return of any capital of the Fund except (i) upon the repurchase by the Fund of
a part or all of such Member's Interest pursuant to Section 4.6 hereof, (ii)
pursuant to the provisions of Section 5.7(c) hereof or (iii) upon the
liquidation of the Fund's assets pursuant to Section 6.2 hereof. No Member shall
be liable for the return of any such amounts. No Member shall have the right to
require partition of the Fund's property or to compel any sale or appraisal of
the Fund's assets.
5.3 CAPITAL ACCOUNTS.
(a) The Fund shall maintain a separate Capital Account
for each Member.
(b) Each Member's Capital Account shall have an initial
balance equal to the amount of cash and the value of any Securities (determined
in accordance with Section 7.3 hereof) constituting such Member's initial
contribution to the capital of the Fund.
(c) Each Member's Capital Account shall be increased by the
sum of (i) the amount of cash and the value of any Securities (determined in
accordance with Section 7.3 hereof) constituting additional contributions by
such Member to the capital of the Fund permitted pursuant to Section 5.1 hereof,
plus (ii) any amount credited to such Member's Capital Account pursuant to
Sections 5.4 through 5.7 or 5.11 hereof.
(d) Each Member's Capital Account shall be reduced by the sum
of (i) the amount of any repurchase of the Interest, or portion thereof, of such
Member or distributions to such Member pursuant to Sections 4.6, 5.10 or 6.2
hereof which are not reinvested, plus (ii) any amounts debited against such
Member's Capital Account pursuant to Sections 5.4 through 5.7 and 5.11 hereof.
(e) The Fund shall maintain a Special Advisory Account for the
Adviser in its capacity as Special Advisory Member solely for purposes of
receiving the Incentive Allocation pursuant to Section 5.8 hereof. The Special
Advisory Account shall have an initial balance of zero.
(f) If all or a portion of an Interest is transferred in
accordance with the terms of this Agreement, the transferee shall succeed to the
Capital Account of the transferor to the extent it relates to the transferred
Interest.
5.4 ALLOCATION OF NET PROFIT AND LOSS.
As of the last day of each Fiscal Period, any Net Profit or
Net Loss for the Fiscal Period shall be allocated among and credited to or
debited against the Capital Accounts of the Members in accordance with their
respective Fund Percentages for such Fiscal Period.
5.5 ALLOCATION OF INSURANCE PREMIUMS AND PROCEEDS.
(a) Any premiums payable by the Fund for Insurance purchased
pursuant to Section 3.7(d) hereof shall be apportioned evenly over each Fiscal
Period or portion thereof falling within the period to which such premiums
relate under the terms of such Insurance, and the portion of the premiums so
apportioned to any Fiscal Period shall be allocated among and debited against
the Capital Accounts of each Member who is a member of the Fund during such
Fiscal Period in accordance with such Member's Fund Percentage for such Fiscal
Period.
(b) Proceeds, if any, to which the Fund may become entitled
pursuant to such Insurance shall be allocated among and credited to the Capital
Accounts of each Member who is a member of the Fund during the Fiscal Period in
which the event which gives rise to recovery of proceeds occurs in accordance
with such Member's Fund Percentage for such Fiscal Period.
5.6 ALLOCATION OF CERTAIN WITHHOLDING TAXES AND OTHER
EXPENDITURES.
(a) If the Fund incurs a withholding tax or other tax
obligation with respect to the share of Fund income allocable to any Member,
then the Board, without limitation of any other rights of the Fund or the Board,
shall cause the amount of such obligation to be debited against the Capital
Account of such Member when the Fund pays such obligation, and any amounts then
or thereafter distributable to such Member shall be reduced by the amount of
such taxes. If the amount of such taxes is greater than any such distributable
amounts, then such Member and any successor to such Member's Interest shall pay
to the Fund as a contribution to the capital of the Fund, upon demand of the
Fund, the amount of such excess. The Fund shall not be obligated to apply for or
obtain a reduction of or exemption from withholding tax on behalf of any Member
that may be eligible for such reduction or exemption; provided, that in the
event that the Fund determines that a Member is eligible for a refund of any
withholding tax, the Fund may, at the request and expense of such Member, assist
such Member in applying for such refund.
(b) Except as otherwise provided for in this Agreement and
unless prohibited by the 1940 Act, any expenditures payable by the Fund, to the
extent determined by the Board to have been paid or withheld on behalf of, or by
reason of particular circumstances applicable to, one or more but fewer than all
of the Members, shall be charged to only those Members on whose behalf such
payments are made or whose particular circumstances gave rise to such payments.
Such charges shall be debited from the Capital Accounts of such Members as of
the close of the Fiscal Period during which any such items were paid or accrued
by the Fund.
5.7 RESERVES.
(a) Appropriate reserves may be created, accrued and charged
against Net Assets and proportionately against the Capital Accounts of the
Members for contingent liabilities, if any, as of the date any such contingent
liability becomes known to the Adviser or the Board, such reserves to be in the
amounts which the Board in its sole discretion deem necessary or appropriate.
The Board may increase or reduce any such reserves from time to time by such
amounts as it in its sole discretion deems necessary or appropriate. The amount
of any such reserve, or any increase or decrease therein, shall be
proportionately charged or credited, as appropriate, to the Capital Accounts of
those parties who are Members at the time when such reserve is created,
increased or decreased, as the case may be; PROVIDED, HOWEVER, that if any such
individual reserve item, adjusted by any increase therein, exceeds the lesser of
$500,000 or 1% of the aggregate value of the Capital Accounts of all such
Members, the amount of such reserve, increase, or decrease instead shall be
charged or credited to those parties who were Members at the time, as determined
by the Board in its sole discretion, of the act or omission giving rise to the
contingent liability for which the reserve was established, increased or
decreased in proportion to their Capital Accounts.
(b) If at any time an amount is paid or received by the Fund
(other than contributions to the capital of the Fund, distributions or
repurchases of Interests or portions thereof) and such amount exceeds the lesser
of $500,000 or 1% of the aggregate value of the Capital Accounts of all Members
at the time of payment or receipt and such amount was not accrued or reserved
for but would nevertheless, in accordance with the Fund's accounting practices,
be treated as applicable to one or more prior Fiscal Periods, then such amount
shall be proportionately charged or credited, as appropriate, to those parties
who were Members during such prior Fiscal Period or Periods.
(c) If any amount is required by paragraph (a) or (b) of this
Section 5.7 to be charged or credited to a party who is no longer a Member, such
amount shall be paid by or to such party, as the case may be, in cash, with
interest from the date on which the Board determines that such charge or credit
is required. In the case of a charge, the former Member shall be obligated to
pay the amount of the charge, plus interest as provided above, to the Fund on
demand; PROVIDED, HOWEVER, that (i) in no event shall a former Member be
obligated to make a payment exceeding the amount of such Member's Capital
Account at the time to which the charge relates; and (ii) no such demand shall
be made after the expiration of three years from the date on which such party
ceased to be a Member. To the extent that a former Member fails to pay to the
Fund, in full, any amount required to be charged to such former Member pursuant
to paragraph (a) or (b), whether due to the expiration of the applicable
limitation period or for any other reason whatsoever, the deficiency shall be
charged proportionately to the Capital Accounts of the Members at the time of
the act or omission giving rise to the charge to the extent feasible, and
otherwise proportionately to the Capital Accounts of the current Members.
5.8 INCENTIVE ALLOCATION.
(a) So long as the Adviser serves as the Special Advisory
Member of the Fund, the Incentive Allocation shall be debited against the
Capital Account of each Member (other than the Adviser) as of the last day of
each Allocation Period with respect to such Member and the amount so debited
shall be credited simultaneously to the Special Advisory Account, or, subject to
compliance with the 1940 Act and the Advisers Act, to the Capital Accounts of
such Members as have been designated in any written notice delivered by the
Adviser, to the Fund within 90 days after the close of such Allocation Period.
(b) By the last business day of the month following the date
on which an Incentive Allocation is made, the Special Advisory Member may
withdraw up to 100% of the Incentive Allocation (computed on the basis of
unaudited data) that was credited to the Special Advisory Account. Within 30
days after the completion of the audit of the Fund's books for the year in which
allocations to the Special Advisory Account are made, the Fund shall pay to the
Special Advisory Member any additional amount of Incentive Allocation determined
to be owed to the Special Advisory Member based on the audit, and the Special
Advisory Member shall pay to the Fund any excess amount of Incentive Allocation
determined to be owed to the Fund.
5.9 TAX ALLOCATIONS.
For each Fiscal Year, items of income, deduction, gain, loss
or credit shall be allocated for income tax purposes among the Members in such a
manner as to reflect equitably amounts credited or debited to each Member's
Capital Account for the current and prior Fiscal Years (or relevant portions
thereof). Allocations under this Section 5.9 shall be made pursuant to the
principles of Sections 704(b) and 704(c) of the Code, and in conformity with
Treasury Regulations Sections 1.704-1(b)(2)(iv)(f), 1.704-1(b)(4)(i) and
1.704-3(e) promulgated thereunder, as applicable, or the successor provisions to
such Section and Regulations. Notwithstanding anything to the contrary in this
Agreement, there shall be allocated to the Members such gains or income as shall
be necessary to satisfy the "qualified income offset" requirement of Treasury
Regulations Section 1.704-1(b)(2)(ii)(d).
If the Fund realizes capital gains (including short-term
capital gains) for Federal income tax purposes for any Fiscal Year during or as
of the end of which one or more Positive Basis Members (as hereinafter defined)
withdraw from the Fund pursuant to Articles IV or VI hereof, the Board may elect
to allocate such gains as follows: (i) to allocate such gains among such
Positive Basis Members, PRO RATA in proportion to the respective Positive Basis
(as hereinafter defined) of each such Positive Basis Member, until either the
full amount of such gains shall have been so allocated or the Positive Basis of
each such Positive Basis Member shall have been eliminated and (ii) to allocate
any gains not so allocated to Positive Basis Members to the other Members in
such manner as shall reflect equitably the amounts credited to such Members'
Capital Accounts.
As used herein, (i) the term "Positive Basis" shall mean, with
respect to any Member and as of any time of calculation, the amount by which the
total of such Member's Capital Account as of such time exceeds its "adjusted tax
basis," for Federal income tax purposes, in its Interest as of such time
(determined without regard to any adjustments made to such "adjusted tax basis"
by reason of any transfer or assignment of such Interest, including by reason of
death and without regard to such Member's share of the liabilities of the Fund
under Section 752 of the Code), and (ii) the term "Positive Basis Member" shall
mean any Member who withdraws from the Fund and who has a Positive Basis as of
the effective date of its withdrawal but such Member shall cease to be a
Positive Basis Member at such time as it shall have received allocations
pursuant to clause (i) of the preceding sentence equal to its Positive Basis as
of the effective date of its withdrawal.
Notwithstanding anything to the contrary in the foregoing, if
the Fund realizes taxable gains in any fiscal year with respect to which the
Special Advisory Member is entitled to an Incentive Allocation under Section 5.8
hereof, the Board (at the request of the Special Advisory Member) may specially
allocate such gains to the Special Advisory Member in an amount by which the
Incentive Allocation exceeds the Special Advisory Member's "adjusted tax basis"
(determined without regard to any allocation to be made pursuant to this
paragraph) in its interest in the Fund as of the time it withdraws such
Incentive Allocation. The Special Advisory Member's "adjusted tax basis" for
these purposes shall be increased by any amount of the Incentive Allocation
withdrawal which it elects to contribute as a Member to the Fund as of the date
of the withdrawal of the Incentive Allocation.
5.10 DISTRIBUTIONS.
(a) The Board, in its sole discretion, may authorize the Fund
to make distributions in cash or in kind at any time to all of the Members on a
PRO RATA basis in accordance with the Members' Fund Percentages. Notwithstanding
anything to the contrary in this Agreement, a Member may be compelled to accept
a distribution of any asset in kind from the Fund despite the fact that the
percentage of the asset distributed to the Member exceeds the percentage of that
asset which is equal to the percentage in which the Member shares in
distributions from the Fund.
(b) The Board may withhold taxes from any distribution to any
Member to the extent required by the Code or any other applicable law. For
purposes of this Agreement, any taxes so withheld by the Fund with respect to
any amount distributed by the Fund to any Member shall be deemed to be a
distribution or payment to such Member, reducing the amount otherwise
distributable to such Member pursuant to this Agreement and, if appropriate,
reducing the Capital Account of such Member.
(c) Notwithstanding anything to the contrary contained herein,
none of the Directors or the Members, nor any other person on behalf of the
Fund, shall make a distribution to the Members on account of their interest in
the Fund if such distribution would violate the Delaware Act or other applicable
law.
5.11 ALLOCATION OF ORGANIZATIONAL EXPENSES.
(a) As of the first Expense Allocation Date, Organizational
Expenses shall be allocated among and debited against the Capital Accounts of
the Members in accordance with their respective Capital Percentages on such
Expense Allocation Date.
(b) As of each Expense Allocation Date following the first
Expense Allocation Date, all amounts previously debited against the Capital
Account of a Member pursuant to this Section 5.11 on the preceding Expense
Allocation Date will be credited to the Capital Account of such Member, and
Organizational Expenses then shall be re-allocated among and debited against the
Capital Accounts of all Members in accordance with their respective Capital
Percentages on such Expense Allocation Date.
------------------------------------------------------------------------------
ARTICLE VI
DISSOLUTION AND LIQUIDATION
------------------------------------------------------------------------------
6.1 DISSOLUTION.
(a) The Fund shall be dissolved at any time there are no
Members, unless the Fund is continued in accordance with the Delaware Act, or
upon the occurrence of any of the following events:
(1) upon the affirmative vote to dissolve the Fund by
both (i) the Board and (ii) Members holding at least
two-thirds of the total number of Voting Interests
eligible to be cast by all Members;
(2) upon the failure of Members to approve of successor
Directors at a meeting called by the Adviser in
accordance with Section 2.6(c) hereof when no
Director remains to continue the business of the
Fund;
(3) upon the expiration of any two-year period which
commences on the date on which any Member has
submitted a written notice to the Fund requesting to
tender such Member's entire Interest for repurchase
by the Fund if such Member has not been permitted to
do so at any time during such period; or
(4) as required by operation of law.
Dissolution of the Fund shall be effective on the day on which
the event giving rise to the dissolution shall occur, but the Fund shall not
terminate until the assets of the Fund have been liquidated in accordance with
Section 6.2 hereof and the Certificate has been canceled.
6.2 LIQUIDATION OF ASSETS.
(a) Upon the dissolution of the Fund as provided in Section
6.1 hereof, the Board, acting directly or through a liquidator it selects, shall
promptly liquidate the business and administrative affairs of the Fund, except
that if the Board is unable to perform this function, a liquidator elected by
Members holding a majority of the total number of votes eligible to be cast by
all Members shall promptly liquidate the business and administrative affairs of
the Fund. Net Profit and Net Loss during the period of liquidation shall be
allocated pursuant to Article V hereof. The proceeds from liquidation shall,
subject to the Delaware Act, be distributed in the following manner:
(1) in satisfaction (whether by payment or the making of
reasonable provision for payment thereof) of the
debts and liabilities of the Fund, including the
expenses of liquidation (including legal and
accounting expenses incurred in connection
therewith), but not including debt and liabilities to
Members, up to and including the date that
distribution of the Fund's assets to the Members has
been completed, shall first be paid on a PRO RATA
basis;
(2) such debts, liabilities or obligations as are owing
to the Members shall be paid next in their order of
seniority and on a PRO RATA basis;
(3) the Special Advisory Member shall next be paid any
balance in the Special Advisory Account after giving
effect to the Incentive Allocation, if any, to be
made pursuant to Section 5.8 hereof; and
(4) the Members shall be paid next on a PRO RATA basis
the positive balances of their respective Capital
Accounts after giving effect to all allocations to be
made to such Members' Capital Accounts for the Fiscal
Period ending on the date of the distributions under
this Section 6.2(a)(4).
(b) Anything in this Section 6.2 to the contrary
notwithstanding, but subject to the priorities set forth in Section 6.2(a)
above, upon dissolution of the Fund, the Board or other liquidator may
distribute ratably in kind any assets of the Fund; PROVIDED, HOWEVER, that if
any in-kind distribution is to be made (i) the assets distributed in kind shall
be valued pursuant to Section 7.3 hereof as of the actual date of their
distribution and charged as so valued and distributed against amounts to be paid
under Section 6.2(a) above, and (ii) any profit or loss attributable to property
distributed in-kind shall be included in the Net Profit or Net Loss for the
Fiscal Period ending on the date of such distribution.
------------------------------------------------------------------------------
ARTICLE VII
ACCOUNTING, VALUATIONS AND BOOKS AND RECORDS
------------------------------------------------------------------------------
7.1 ACCOUNTING AND REPORTS.
(a) The Fund shall adopt for tax accounting purposes any
accounting method which the Board shall decide in its sole discretion is in the
best interests of the Fund. The Fund's accounts shall be maintained in U.S.
currency.
(b) After the end of each taxable year, the Fund shall furnish
to each Member such information regarding the operation of the Fund and such
Member's Interest as is necessary for Members to complete Federal and state
income tax or information returns and any other tax information required by
federal or state law.
(c) Except as otherwise required by the 1940 Act and Rule 4.7
of the CEA or as may otherwise be permitted by rule, regulation or order, within
60 days after the close of the period for which a report required under this
Section 7.1(c) is being made, the Fund shall furnish to each Member a
semi-annual report containing the information required by the 1940 Act and an
annual report containing the information required by the 1940 Act and Rule 4.7
of the CEA. The Fund shall cause financial statements contained in each annual
report furnished hereunder to be accompanied by a certificate of independent
public accountants based upon an audit performed in accordance with generally
accepted accounting principles. The Fund shall furnish to each Member no less
frequently than quarterly the reporting statement as required by Rule 4.7 of the
CEA and may furnish to each Member such other periodic reports as it deems
necessary or appropriate in its discretion.
7.2 DETERMINATIONS BY THE BOARD.
(a) All matters concerning the determination and allocation
among the Members of the amounts to be determined and allocated pursuant to
Article V hereof, including any taxes thereon and accounting procedures
applicable thereto, shall be determined by the Board (either directly or by the
Adviser pursuant to delegated authority) unless specifically and expressly
otherwise provided for by the provisions of this Agreement or as required by
law, and such determinations and allocations shall be final and binding on all
the Members.
(b) The Board may make such adjustments to the computation of
Net Profit or Net Loss or any components (withholding any items of income, gain,
loss or deduction) comprising any of the foregoing as it considers appropriate
to reflect fairly and accurately the financial results of the Fund and the
intended allocation thereof among the Members.
7.3 VALUATION OF ASSETS.
(a) Except as may be required by the 1940 Act, the Board shall
value or have valued any Securities or other assets and liabilities of the Fund
(other than assets invested in Investment Funds) as of the close of business on
the last day of each Fiscal Period or more frequently, in the discretion of the
Board, in accordance with such valuation procedures as shall be established from
time to time by the Board and which conform to the requirements of the 1940 Act.
Assets of the Fund that are invested in Investment Funds managed by the
Subadvisers shall be valued in accordance with the terms and conditions of the
respective agreements of the Investment Funds. Assets of the Fund invested in
Investment Funds not managed by the Subadvisers shall be valued at fair value,
which ordinarily will be the value determined by their Investment Managers in
accordance with the policies established by the relevant Investment Fund. In
determining the value of the assets of the Fund, no value shall be placed on the
goodwill or name of the Fund, or the office records, files, statistical data or
any similar intangible assets of the Fund not normally reflected in the Fund's
accounting records, but there shall be taken into consideration any items of
income earned but not received, expenses incurred but not yet paid, liabilities,
fixed or contingent, and any other prepaid expenses to the extent not otherwise
reflected in the books of account, and the value of options or commitments to
purchase or sell Securities or commodities pursuant to agreements entered into
prior to such valuation date.
(b) The value of Securities and other assets of the Fund and
the net worth of the Fund as a whole determined pursuant to this Section 7.3
shall be conclusive and binding on all of the Members and all parties claiming
through or under them.
-----------------------------------------------------------------------------
ARTICLE VIII
MISCELLANEOUS PROVISIONS
-----------------------------------------------------------------------------
8.1 AMENDMENT OF LIMITED LIABILITY COMPANY AGREEMENT.
(a) Except as otherwise provided in this Section 8.1, this
Agreement may be amended, in whole or in part, with the approval of (i) the
Board (including the vote of a majority of the Independent Directors, if
required by the 1940 Act) or (ii) a majority (as defined in the 1940 Act) of the
outstanding Voting Interests of the Fund.
(b) Any amendment that would:
(1) increase the obligation of a Member to make any
contribution to the capital of the Fund;
(2) reduce the Capital Account of a Member or the Special
Advisory Account other than in accordance with Article
V; or
(3) modify the events causing the dissolution of the Fund;
may be made only if (i) the written consent of each Member adversely affected
thereby is obtained prior to the effectiveness thereof or (ii) such amendment
does not become effective until (A) each Member has received written notice of
such amendment and (B) any Member objecting to such amendment has been afforded
a reasonable opportunity (pursuant to such procedures as may be prescribed by
the Board) to tender his or her entire Interest for repurchase by the Fund.
(c) By way of example only, the Board at any time
without the consent of the Members may:
(1) restate this Agreement together with any amendments
hereto which have been duly adopted in accordance
herewith to incorporate such amendments in a single,
integrated document;
(2) amend this Agreement (other than with respect to the
matters set forth in Section 8.1(b) hereof) to effect
compliance with any applicable law or regulation or to
cure any ambiguity or to correct or supplement any
provision hereof which may be inconsistent with any
other provision hereof, provided that such action does
not adversely affect the rights of any Member in any
material respect; and
(3) amend this Agreement to make such changes as may be
necessary or desirable, based on advice of legal
counsel to the Fund, to assure the Fund's continuing
eligibility to be classified for U.S. Federal income
tax purposes as a partnership which is not treated as a
corporation under Section 7704(a) of the Code.
(d) The Board shall give written notice of any proposed
amendment to this Agreement (other than any amendment of the type contemplated
by clause (1) of Section 8.1(a) hereof) to each Member, which notice shall set
forth (i) the text of the proposed amendment or (ii) a summary thereof and a
statement that the text thereof will be furnished to any Member upon request.
8.2 SPECIAL POWER OF ATTORNEY.
(a) Each Member hereby irrevocably makes, constitutes and
appoints each Director, acting severally, and any liquidator of the Fund's
assets appointed pursuant to Section 6.2 hereof with full power of substitution,
the true and lawful representatives and attorneys-in-fact of, and in the name,
place and stead of, such Member, with the power from time to time to make,
execute, sign, acknowledge, swear to, verify, deliver, record, file and/or
publish:
(1) any amendment to this Agreement which complies with the
provisions of this Agreement (including the provisions
of Section 8.1 hereof);
(2) any amendment to the Certificate required because this
Agreement is amended or as otherwise required by the
Delaware Act; and
(3) all other such instruments, documents and certificates
which, in the opinion of legal counsel to the Fund,
from time to time may be required by the laws of the
United States of America, the State of Delaware or any
other jurisdiction in which the Fund shall determine to
do business, or any political subdivision or agency
thereof, or which such legal counsel may deem necessary
or appropriate to effectuate, implement and continue
the valid existence and business of the Fund as a
limited liability company under the Delaware Act.
(b) Each Member is aware that the terms of this Agreement
permit certain amendments to this Agreement to be effected and certain other
actions to be taken or omitted by or with respect to the Fund without such
Member's consent. If an amendment to the Certificate or this Agreement or any
action by or with respect to the Fund is taken in the manner contemplated by
this Agreement, each Member agrees that, notwithstanding any objection which
such Member may assert with respect to such action, the attorneys-in-fact
appointed hereby are authorized and empowered, with full power of substitution,
to exercise the authority granted above in any manner which may be necessary or
appropriate to permit such amendment to be made or action lawfully taken or
omitted. Each Member is fully aware that each Member will rely on the
effectiveness of this special power-of-attorney with a view to the orderly
administration of the affairs of the Fund.
(c) This power-of-attorney is a special power-of-attorney and
is coupled with an interest in favor of each Director, acting severally, and any
liquidator of the Fund's assets, appointed pursuant to Section 6.2 hereof, and
as such:
(1) shall be irrevocable and continue in full force and
effect notwithstanding the subsequent death or
incapacity of any party granting this
power-of-attorney, regardless of whether the Fund,
the Board or any liquidator shall have had notice
thereof; and
(2) shall survive the delivery of a Transfer by a Member
of the whole or any portion of such Member's
Interest, except that where the transferee thereof
has been approved by the Board for admission to the
Fund as a substituted Member, this power-of-attorney
given by the transferor shall survive the delivery of
such assignment for the sole purpose of enabling the
Board or any liquidator to execute, acknowledge and
file any instrument necessary to effect such
substitution.
8.3 NOTICES.
Notices which may or are required to be provided under this
Agreement shall be made, if to a Member, by regular mail, hand delivery,
registered or certified mail return receipt requested, commercial courier
service, telex or telecopier, or, if to the Fund, by registered or certified
mail, return receipt requested, and shall be addressed to the respective parties
hereto at their addresses as set forth on the books and records of the Fund (or
to such other addresses as may be designated by any party hereto by notice
addressed to the Fund in the case of notice given to any Member, and to each of
the Members in the case of notice given to the Fund). Notices shall be deemed to
have been provided when delivered by hand, on the date indicated as the date of
receipt on a return receipt or when received if sent by regular mail, commercial
courier service, telex or telecopier. A document that is not a notice and that
is required to be provided under this Agreement by any party to another party
may be delivered by any reasonable means.
8.4 AGREEMENT BINDING UPON SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective heirs, successors, assigns,
executors, trustees or other legal representatives, but the rights and
obligations of the parties hereunder may not be Transferred or delegated except
as provided in this Agreement and any attempted Transfer or delegation thereof
which is not made pursuant to the terms of this Agreement shall be void.
8.5 APPLICABILITY OF 1940 ACT AND FORM N-2.
The parties hereto acknowledge that this Agreement is not
intended to, and does not set forth the substantive provisions contained in the
1940 Act and the Form N-2 which affect numerous aspects of the conduct of the
Fund's business and of the rights, privileges and obligations of the Members.
Each provision of this Agreement shall be subject to and interpreted in a manner
consistent with the applicable provisions of the 1940 Act and the Form N-2.
8.6 CHOICE OF LAW; ARBITRATION.
(a) Notwithstanding the place where this Agreement may be
executed by any of the parties hereto, the parties expressly agree that all the
terms and provisions hereof shall be construed under the laws of the State of
Delaware, including the Delaware Act, without regard to the conflict of law
principles of such State.
(B) EACH MEMBER AND THE SPECIAL ADVISORY MEMBER AGREE TO
SUBMIT ALL CONTROVERSIES ARISING BETWEEN OR AMONG MEMBERS OR ONE OR MORE MEMBERS
AND THE FUND IN CONNECTION WITH THE FUND OR ITS BUSINESSES OR CONCERNING ANY
TRANSACTION, DISPUTE OR THE CONSTRUCTION, PERFORMANCE OR BREACH OF THIS OR ANY
OTHER AGREEMENT, WHETHER ENTERED INTO PRIOR TO, ON OR SUBSEQUENT TO THE DATE
HEREOF, TO ARBITRATION IN ACCORDANCE WITH THE PROVISIONS SET FORTH BELOW. EACH
MEMBER UNDERSTANDS THAT:
(1) ARBITRATION IS FINAL AND BINDING ON THE PARTIES;
(2) THE PARTIES ARE WAIVING THEIR RIGHTS TO SEEK REMEDIES
IN COURT, INCLUDING THE RIGHT TO JURY TRIAL;
(3) PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED
THAN AND DIFFERENT FROM COURT PROCEEDINGS;
(4) THE ARBITRATOR'S AWARD IS NOT REQUIRED TO INCLUDE
FACTUAL FINDINGS OR LEGAL REASONING AND A PARTY'S RIGHT
TO APPEAL OR TO SEEK MODIFICATION OF RULINGS BY
ARBITRATORS IS STRICTLY LIMITED; AND
(5) A PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A
MINORITY OF ARBITRATORS WHO WERE OR ARE AFFILIATED WITH
THE SECURITIES INDUSTRY.
(C) CONTROVERSIES SHALL BE DETERMINED BY ARBITRATION BEFORE,
AND ONLY BEFORE, AN ARBITRATION PANEL CONVENED BY THE NEW YORK STOCK EXCHANGE,
INC. ("NYSE") OR THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. (THE
"NASD"), TO THE FULLEST EXTENT PERMITTED BY LAW. THE PARTIES MAY ALSO SELECT ANY
OTHER NATIONAL SECURITIES EXCHANGE'S ARBITRATION FORUM UPON WHICH A PARTY IS
LEGALLY REQUIRED TO ARBITRATE THE CONTROVERSY, TO THE FULLEST EXTENT PERMITTED
BY LAW. SUCH ARBITRATION SHALL BE GOVERNED BY THE RULES OF THE ORGANIZATION
CONVENING THE PANEL, TO THE FULLEST EXTENT PERMITTED BY LAW. JUDGMENT ON ANY
AWARD OF ANY SUCH ARBITRATION MAY BE ENTERED IN THE SUPREME COURT OF THE STATE
OF NEW YORK OR IN ANY OTHER COURT HAVING JURISDICTION OVER THE PARTY OR PARTIES
AGAINST WHOM SUCH AWARD IS RENDERED. EACH MEMBER AGREES THAT THE DETERMINATION
OF THE ARBITRATORS SHALL BE BINDING AND CONCLUSIVE UPON THEM.
(D) NO MEMBER SHALL BRING A PUTATIVE OR CERTIFIED CLASS ACTION
TO ARBITRATION, NOR SEEK TO ENFORCE ANY PRE-DISPUTE ARBITRATION AGREEMENT
AGAINST ANY PERSON WHO HAS INITIATED IN COURT A PUTATIVE CLASS ACTION OR WHO IS
A MEMBER OF A PUTATIVE CLASS WHO HAS NOT OPTED OUT OF THE CLASS WITH RESPECT TO
ANY CLAIMS ENCOMPASSED BY THE PUTATIVE CLASS ACTION UNLESS AND UNTIL: (I) THE
CLASS CERTIFICATION IS DENIED; OR (II) THE CLASS IS DECERTIFIED; OR (III) THE
MEMBER IS EXCLUDED FROM THE CLASS BY THE COURT. THE FORBEARANCE TO ENFORCE AN
AGREEMENT TO ARBITRATE SHALL NOT CONSTITUTE A WAIVER OF ANY RIGHTS UNDER THIS
AGREEMENT EXCEPT TO THE EXTENT STATED HEREIN.
8.7 NOT FOR BENEFIT OF CREDITORS.
The provisions of this Agreement are intended only for the
regulation of relations among past, present and future Members (including the
Adviser), Directors, the Special Advisory Member and the Fund. This Agreement is
not intended for the benefit of non-Member creditors and no rights are granted
to non-Member creditors under this Agreement.
8.8 CONSENTS.
Any and all consents, agreements or approvals provided for or
permitted by this Agreement shall be in writing and a signed copy thereof shall
be filed and kept with the books of the Fund.
8.9 MERGER AND CONSOLIDATION.
(a) The Fund may merge or consolidate with or into one or more
limited liability companies formed under the Delaware Act or other business
entities (as defined in Section 18-209(a) of the Delaware Act) pursuant to an
agreement of merger or consolidation which has been approved in the manner
contemplated by Section 18-209(b) of the Delaware Act.
(b) Notwithstanding anything to the contrary contained
elsewhere in this Agreement, an agreement of merger or consolidation approved in
accordance with Section 18-209(b) of the Delaware Act may, to the extent
permitted by Section 18-209(b) of the Delaware Act, (i) effect any amendment to
this Agreement, (ii) effect the adoption of a new limited liability company
agreement for the Fund if it is the surviving or resulting limited liability
company in the merger or consolidation, or (iii) provide that the limited
liability company agreement of any other constituent limited liability company
to the merger or consolidation (including a limited liability company formed for
the purpose of consummating the merger or consolidation) shall be the limited
liability company agreement of the surviving or resulting limited liability
company.
8.10 PRONOUNS.
All pronouns shall be deemed to refer to the masculine,
feminine, neuter, singular or plural, as the identity of the person or persons,
firm or corporation may require in the context thereof.
8.11 CONFIDENTIALITY.
(a) A Member may obtain from the Fund, for any purpose
reasonably related to the Member's Interest, such information regarding the
affairs of the Fund as is just and reasonable under the Delaware Act, subject to
reasonable standards (including standards governing what information and
documents are to be furnished, at what time and location and at whose expense)
established by the Board.
(b) Each Member covenants that, except as required by
applicable law or any regulatory body, it will not divulge, furnish or make
accessible to any other person the name or address (whether business, residence
or mailing) of any Member (collectively, "Confidential Information") without the
prior written consent of the Board, which consent may be withheld in its sole
discretion.
(c) Each Member recognizes that in the event that this Section
8.11 is breached by any Member or any of its principals, partners, members,
directors, officers, employees or agents or any of its affiliates, including any
of such affiliates' principals, partners, members, directors, officers,
employees or agents, irreparable injury may result to the non-breaching Members
and the Fund. Accordingly, in addition to any and all other remedies at law or
in equity to which the non-breaching Members and the Fund may be entitled, such
Members also shall have the right to obtain equitable relief, including, without
limitation, injunctive relief, to prevent any disclosure of Confidential
Information, plus reasonable attorneys' fees and other litigation expenses
incurred in connection therewith.
(d) The Fund shall have the right to keep confidential from
the Members for such period of time as it deems reasonable any information which
the Board reasonably believes to be in the nature of trade secrets or other
information the disclosure of which the Board in good faith believes is not in
the best interest of the Fund or could damage the Fund or its business or which
the Fund is required by law or by agreement with a third party to keep
confidential.
8.12 CERTIFICATION OF NON-FOREIGN STATUS.
Each Member or transferee of an Interest from a Member that is
admitted to the Fund in accordance with this Agreement shall certify, upon
admission to the Fund and at such other time thereafter as the Board may
request, whether he or she is a "United States Person" within the meaning of
Section 7701(a)(30) of the Code on forms to be provided by the Fund, and shall
notify the Fund within 30 days of any change in such Member's status. Any Member
who shall fail to provide such certification when requested to do so by the
Board may be treated as a non-United States Person for purposes of U.S. Federal
tax withholding.
8.13 SEVERABILITY.
If any provision of this Agreement is determined by a court of
competent jurisdiction not to be enforceable in the manner set forth in this
Agreement, each Member agrees that it is the intention of the Members that such
provision should be enforceable to the maximum extent possible under applicable
law. If any provisions of this Agreement are held to be invalid or
unenforceable, such invalidation or unenforceability shall not affect the
validity or enforceability of any other provision of this Agreement (or portion
thereof).
8.14 ENTIRE AGREEMENT.
This Agreement (including the Schedule attached hereto which
is incorporated herein) constitutes the entire agreement among the parties
hereto pertaining to the subject matter hereof and supersedes all prior
agreements and understandings pertaining thereto. It is hereby acknowledged and
agreed that the Board, without the approval of any Member may enter into written
agreements ("Other Agreements") with Members, executed contemporaneously with
the admission of such Members to the Fund, effecting the terms hereof or of any
application in order to meet certain requirements of such Members. The parties
hereto agree that any terms contained in an Other Agreement with a Member shall
govern with respect to such Member notwithstanding the provisions of this
Agreement or of any application.
8.15 DISCRETION.
To the fullest extent permitted by law, whenever in this
Agreement, a person is permitted or required to make a decision (i) in its "sole
discretion" or "discretion" or under a grant of similar authority or latitude,
such person shall be entitled to consider only such interests and factors as it
desires, including its own interests, and shall have no duty or obligation to
give any consideration to any interest of or factors affecting the Fund or the
Members, or (ii) in its "good faith" or under another express standard, then
such person shall act under such express standard and shall not be subject to
any other or different standards imposed by this Agreement or any other
agreement contemplated herein or by relevant provisions of law or in equity or
otherwise.
8.16 COUNTERPARTS.
This Agreement may be executed in several counterparts, all of
which together shall constitute one agreement binding on all parties hereto,
notwithstanding that all the parties have not signed the same counterpart.
8.17 TAX MATTERS PARTNER.
JPMIM hereby is designated as the "tax matters partner" under
the Code for the Fund.
8.18 COMMODITY POOL OPERATOR.
JPMIM agrees to serve as the Fund's commodity pool operator
(as defined under the Commodity Exchange Act). As commodity pool operator, JPMIM
will be responsible for the commodity-related activities of the Fund and for
compliance with U.S. commodities laws and regulations.
<PAGE>
THE UNDERSIGNED ACKNOWLEDGES HAVING READ THIS AGREEMENT IN ITS
ENTIRETY BEFORE SIGNING, INCLUDING THE PRE-DISPUTE ARBITRATION CLAUSES SET FORTH
IN SECTION 8.6 ON PAGES 34-35 AND THE CONFIDENTIALITY CLAUSES SET FORTH IN
SECTION 8.11 ON PAGES 36-37.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
ORGANIZATIONAL MEMBER:
/S/ STEVEN M. GREENSPAN
Steven M. Greenspan
SPECIAL ADVISORY MEMBER:
J.P. MORGAN INVESTMENT
MANAGEMENT INC.
By: /S/ CHRISTIAN FREI
Christian Frei, Vice President
ADDITIONAL MEMBERS:
Each person who has signed or has had signed on its behalf a Member Signature
Page, which shall constitute a counterpart hereof.
<PAGE>
The undersigned understand and agree to the provisions of this Agreement
pertaining to the obligations of Directors.
/S/ JOHN N. BELL
John N. Bell, Director
/S/ JOHN R. RETTBERG
John R. Rettberg, Director
/S/ JOHN F. RUFFLE
John F. Ruffle, Director
/S/ KENNETH WHIPPLE, JR.
Kenneth Whipple, Jr., Director
<PAGE>
SCHEDULE I
DIRECTORS
NAME AND ADDRESS
John N. Bell
462 Lenox Avenue
South Orange, New Jersey 07079
John R. Rettberg
1770 West Balboa Boulevard
Newport Beach, California 92663
John F. Ruffle
Pleasantville Road
New Vernon, New Jersey 07976
Kenneth Whipple, Jr.
1115 Country Club Drive
Bloomfield Hills, Michigan 48304
<PAGE>
SCHEDULE II
INCENTIVE ALLOCATION
INVESTED CAPITAL INCENTIVE ALLOCATION
Less than $30,000,000 8%
$30,000,000 or more* None
--------
* The amounts of Invested Capital in the Fund and the J.P. Morgan Hedge Fund
Series/alpha, L.L.C. will be aggregated.
<PAGE>
APPENDIX A2
J.P. MORGAN HEDGE FUND SERIES/ALPHA, L.L.C.
LIMITED LIABILITY COMPANY AGREEMENT
THIS LIMITED LIABILITY COMPANY AGREEMENT of J.P. Morgan Hedge
Fund Series/alpha, L.L.C. (the "Fund") is dated and effective as of July 11,
2000 by and among the Organizational Member, each Director, the Special Advisory
Member and each person hereinafter admitted to the Fund and reflected on the
books of the Fund as a Member.
W I T N E S S E T H :
WHEREAS, the Fund heretofore has been formed as a limited
liability company under the Delaware Limited Liability Company Act, pursuant to
the Certificate dated as of March 30, 2000 and filed with the Secretary of State
of the State of Delaware on March 31, 2000;
NOW, THEREFORE, for and in consideration of the foregoing and
the mutual covenants hereinafter set forth, it is hereby agreed as follows:
-------------------------------------------------------------------------------
ARTICLE I
DEFINITIONS
-------------------------------------------------------------------------------
For purposes of this Agreement:
ADVISER means JPMIM, or any person who may hereinafter serve
as the investment adviser to the Fund pursuant to an Investment Advisory
Agreement.
ADVISERS ACT means the Investment Advisers Act of 1940 and the
rules, regulations and orders thereunder, as amended from time to time, or any
successor law.
AFFILIATE means affiliated person as such term is defined in
the 1940 Act.
AGREEMENT means this Limited Liability Company Agreement, as
amended and/or restated from time to time.
ALLOCATION CHANGE means, with respect to each Member for each
Allocation Period, the difference between:
(1) the sum of (a) the balance of such Member's Capital
Account as of the close of the Allocation Period (after
giving effect to all allocations to be made to such
Member's Capital Account as of such date other than any
Incentive Allocation to be debited against such
Member's Capital Account), plus (b) any debits to such
Member's Capital Account during the Allocation Period
to reflect any actual or deemed distributions or
repurchases with respect to such Member's Interest,
plus (c) any debits to such Member's Capital Account
during the Allocation Period to reflect any Insurance
premiums allocable to such Member, plus (d) any debits
to such Member's Capital Account during the Allocation
Period to reflect any items allocable to such Member's
Capital Account pursuant to Section 5.6 hereof other
than Management Fees; and
(2) the sum of (a) the balance of such Member's Capital
Account as of the commencement of the Allocation
Period, plus (b) any credits to such Member's Capital
Account during the Allocation Period to reflect any
contributions by such Member to the capital of the
Fund, plus (c) any credits to such Member's Capital
Account during the Allocation Period to reflect any
Insurance proceeds allocable to such Member.
If the amount specified in clause (1) exceeds the
amount specified in clause (2), such difference shall
be a POSITIVE ALLOCATION CHANGE, and if the amount
specified in clause (2) exceeds the amount specified
in clause (1), such difference shall be a NEGATIVE
ALLOCATION CHANGE.
ALLOCATION PERIOD means, with respect to each Member, the
period commencing as of the date of admission of such Member to the Fund and
ending at the close of business on the first to occur of the following:
(1) the last day of the twelfth complete calendar month
since the admission of such Member to the Fund;
(2) the last day of a Fiscal Year subsequent to a Member
having been admitted to the Fund for 12 complete
calendar months, and the last day of each Fiscal Year
thereafter;
(3) the day as of which the Fund repurchases any Interest
or portion of an Interest of such Member;
(4) the day as of which the Fund admits as a substituted
Member a person to whom the Interest (or a portion
thereof) of such Member has been Transferred (unless
there is no change in beneficial ownership);
(5) the day as of which the Adviser's status as the Special
Advisory Member is terminated pursuant to Section 4.1
hereof;
(6) the day preceding any day as of which such Member
becomes a Special Member; or
(7) the day on which such Member ceases to be a Special
Member.
BOARD means the Board of Directors established pursuant to
Section 2.6 hereof.
CAPITAL ACCOUNT means, with respect to each Member, the
capital account established and maintained on behalf of each Member pursuant to
Section 5.3 hereof.
CAPITAL PERCENTAGE means a percentage established for each
Member as of each Expense Allocation Date. The Capital Percentage of a Member on
an Expense Allocation Date shall be determined by dividing the amount of capital
contributed to the Fund by the Member pursuant to Section 5.1 hereof by the sum
of the capital contributed to the Fund by each Member pursuant to Section 5.1
hereof on or prior to such Expense Allocation Date. The sum of the Capital
Percentages of all Members on each Expense Allocation Date shall equal 100%.
CAPITAL CONTRIBUTION means the contribution, if any, made, or
to be made, as the context requires, to the capital of the Fund by a Member.
CEA means Commodity Exchange Act and the rules, regulations
and orders thereunder, as amended from time to time, or any successor law.
CERTIFICATE means the Certificate of Formation of the Fund and
any amendments thereto as filed with the office of the Secretary of State of the
State of Delaware.
CLOSING DATE means the first date on or as of which a Member
other than the Organizational Member or the Special Advisory Member is admitted
to the Fund.
CODE means the United States Internal Revenue Code of 1986, as
amended and as hereafter amended from time to time, or any successor law.
DELAWARE ACT means the Delaware Limited Liability Company Act
(6 DEL.C.ss.18-101, ET SEQ.) as in effect on the date hereof and as amended from
time to time, or any successor law.
DIRECTOR means each natural person listed on Schedule I hereto
who serves on the Board and any other natural person who, from time to time,
pursuant hereto shall serve on the Board. Each Director shall constitute a
"manager" of the Fund within the meaning of the Delaware Act.
EXPENSE ALLOCATION DATE means the Closing Date, and thereafter
each day , through and including the last day of the month during which the
first anniversary of the Closing Date occurs, as of which a contribution to the
capital of the Fund is made pursuant to Section 5.11 hereof.
FISCAL PERIOD means the period commencing on the Closing Date,
and thereafter each period commencing on the day immediately following the last
day of the preceding Fiscal Period, and ending at the close of business on the
first to occur of the following dates:
(1) the last day of a Fiscal Year;
(2) the day preceding any day as of which a contribution to
the capital of the Fund is made pursuant to Section 5.1;
(3) the day as of which the Fund repurchases any Interest or
portion of an Interest of any Member;
(4) the day as of which the Fund admits a substituted Member
to whom an Interest (or portion thereof) of a Member has
been Transferred (unless there is no change of beneficial
ownership); or
(5) any other day as of which this Agreement provides for any
amount to be credited to or debited against the Capital
Account of any Member, other than an amount to be credited
to or debited against the Capital Accounts of all Members
in accordance with their respective Fund Percentages.
FISCAL YEAR, for accounting purposes, means the period
commencing on the Closing Date and ending on the first March 31st following the
Closing Date, and thereafter each period commencing on April 1 of each year and
ending on March 31 of each year (or on the date of a final distribution pursuant
to Section 6.2 hereof), unless the Directors shall designate another fiscal year
for the Fund that is a permissible taxable year under the Code. For tax
purposes, the 12-month period ending December 31 of each year will be each
Fund's taxable year.
FORM N-2 means the Fund's Registration Statement on Form N-2
filed with the Securities and Exchange Commission, as amended from time to time.
FUND means the limited liability company governed hereby, as
such limited liability company may from time to time be constituted.
FUND PERCENTAGE means a percentage established for each Member
on the Fund's books as of the first day of each Fiscal Period. The Fund
Percentage of a Member for a Fiscal Period shall be determined by dividing the
balance of the Member's Capital Account as of the commencement of such Fiscal
Period by the sum of the Capital Accounts of all of the Members as of the
commencement of such Fiscal Period. The sum of the Fund Percentages of all
Members for each Fiscal Period shall equal 100%.
HURDLE means the amount that a Member would have earned for an
Allocation Period if it had received an annualized rate of return equal to the
Hurdle Percentage in effect on the last day of the relevant Allocation Period on
its opening Capital Account balance (appropriately adjusted for contributions
and withdrawals) for such Allocation Period. The Hurdle is not cumulative from
year to year or Allocation Period to Allocation Period.
HURDLE PERCENTAGE means the yield-to-maturity of 90-day U.S
Government Treasury Bills for the last business day of the preceding March as
reported by the Federal Reserve Board in its Statistical Release H.15 (as
reported on its website at
www.federalreserve.gov/releases/H15/data/wf/tbaa3m.txt). The Hurdle Percentage
shall be reset annually as of April 1, commencing April 1, 2001, and, for the
period through March 31, 2001, shall be 5.75%. If the Federal Reserve Board
shall not publish such yield, the Fund shall determine such yield by such means
as the Board shall deem appropriate and, if the Fund shall be unable to
determine such yield for any period, the Hurdle Percentage for such period shall
be the last one determined.
INCENTIVE ALLOCATION means, with respect to any Member, other
than a Special Member, the percentage set forth on Schedule II that corresponds
to the Member's Invested Capital (and, as respects a Special Member, such
percentage as the Adviser shall have agreed with such Special Member) of the
amount, determined as of the close of each Allocation Period with respect to
such Member, by which such Member's Positive Allocation Change for such
Allocation Period, if any, exceeds the sum of (i) such Member's Hurdle for such
Allocation Period and (ii) any positive balance in such Member's Loss Recovery
Account as of the most recent prior date as of which any adjustment has been
made thereto.
INDEPENDENT DIRECTORS means those Directors who are not
"interested persons" of the Fund as such term is defined in the 1940 Act.
INSURANCE means one or more "key man" insurance policies on
the life of any principal of the Adviser, the benefits of which are payable to
the Fund.
INTEREST means the entire ownership interest in the Fund at
any particular time of a Member or the Special Advisory Member, or other person
to whom an Interest or portion thereof has been transferred pursuant to Section
4.4 hereof, including the rights and obligations of such Member or other person
under this Agreement and the Delaware Act.
INVESTED CAPITAL means, with respect to any Member, the amount
of such Member's aggregate Capital Contributions to the Fund, decreased by any
withdrawals (through repurchases pursuant to Section 4.6 hereof) made by such
Member pursuant to Section 4.6 hereof other than withdrawals of aggregate Net
Capital Appreciation (for this purpose, any amounts withdrawn shall first be
applied against Net Capital Appreciation, if any).
INVESTMENT ADVISORY AGREEMENT means a separate written
agreement entered into by the Fund pursuant to which the Adviser provides
investment advisory services to the Fund.
INVESTMENT FUNDS means unregistered pooled investment vehicles
and registered investment companies that are advised by an Investment Manager or
Subadviser.
INVESTMENT MANAGERS means portfolio managers among which the
Fund deploys some or all of its assets.
JPMIM means J.P. Morgan Investment Management Inc., or any
successor thereto. JPMIM also shall constitute a "member" of the Fund within the
meaning of the Delaware Act and shall have an Interest.
JPMIM SERVICES means such management and administrative
services as JPMIM or its affiliates shall provide to the Fund pursuant to a
separate written agreement with the Fund as contemplated by Section 3.8(a)
hereof.
LOSS RECOVERY ACCOUNT means a memorandum account to be
recorded in the books and records of the Fund with respect to each Member, which
shall have an initial balance of zero and which shall be adjusted as follows:
(1) As of the first day after the close of each Allocation
Period for such Member, the balance of the Loss Recovery
Account shall be increased by the amount, if any, of such
Member's Negative Allocation Change for such Allocation
Period and shall be reduced (but not below zero) by the
amount, if any, of such Member's Positive Allocation
Change for such Allocation Period.
(2) The balance of the Loss Recovery Account shall be reduced
(but not below zero) as of the first date as of which the
Capital Account balance of any Member is reduced as a
result of repurchase or transfer with respect to such
Member's Interest by an amount determined by multiplying
(a) such positive balance by (b) a fraction, (i) the
numerator of which is equal to the amount of the
repurchase or transfer, and (ii) the denominator of which
is equal to the balance of such Member's Capital Account
immediately before giving effect to such repurchase or
transfer.
No transferee of any Interest shall succeed to any Loss
Recovery Account balance or portion thereof attributable to the transferor
unless the Transfer by which such transferee received such Interest did not
involve a change of beneficial ownership.
MANAGEMENT FEE means the fee paid to JPMIM out of the Fund's
assets, and debited against Members' Capital Accounts, for JPMIM Services.
MEMBER means any person who shall have been admitted to the
Fund as a member (including any person who is a Special Member) until the Fund
repurchases the entire Interest of such person pursuant to Section 4.6 hereof or
a substitute Member who is admitted to the Fund pursuant to Section 4.4 hereof,
in such person's capacity as a member of the Fund. For purposes of the Delaware
Act, the Members shall constitute a single class or group of members.
NEGATIVE ALLOCATION CHANGE has the meaning given such term in
the definition of Allocation Change.
NET ASSETS means the total value of all assets of the Fund,
less an amount equal to all accrued debts, liabilities and obligations of the
Fund, calculated before giving effect to any repurchases of Interests.
NET CAPITAL APPRECIATION means, with respect to any Member,
the excess, if any, of the aggregate amount credited to such Member's Capital
Account under clause (ii) of paragraph (c) of Section 5.3 hereof over the
aggregate amount debited to such Member's Capital Account under clause (ii) of
paragraph (d) of Section 5.3 hereof.
NET PROFIT OR NET LOSS means the amount by which the Net
Assets as of the close of business on the last day of a Fiscal Period exceed (in
the case of Net Profit) or are less than (in the case of Net Loss) the Net
Assets as of the commencement of the same Fiscal Period (or, with respect to the
initial Fiscal Period of the Fund, at the close of business on the Closing
Date), such amount to be adjusted to exclude:
(1) the amount of any Insurance premiums or proceeds to be
allocated among the Capital Accounts of the Members
pursuant to Section 5.5 hereof;
(2) any items to be allocated among the Capital Accounts of
the Members on a basis which is not in accordance with the
respective Fund Percentages of all Members as of the
commencement of such Fiscal Period pursuant to Sections
5.6 and 5.7 hereof; and
(3) Organizational Expenses allocated among the Capital
Accounts of the Members pursuant to Section 5.11 hereof.
1940 ACT means the Investment Company Act of 1940 and the
rules, regulations and orders thereunder, as amended from time to time, or any
successor law.
1934 ACT means the Securities Exchange Act of 1934 and the
rules, regulations and orders thereunder, as amended from time to time, or any
successor law.
ORGANIZATIONAL EXPENSES means the expenses incurred by the
Fund in connection with its formation, its initial registration as an investment
company under the 1940 Act, and the initial offering of Interests.
ORGANIZATIONAL MEMBER means Steven M. Greenspan.
PERSON means any individual, entity, corporation, partnership,
association, limited liability company, joint-stock company, trust, estate,
joint venture, organization or unincorporated organization.
POSITIVE ALLOCATION CHANGE has the meaning given such term in
the definition of Allocation Change.
SECURITIES means securities (including, without limitation,
equities, debt obligations, options, and other "securities" as that term is
defined in Section 2(a)(36) of the 1940 Act) and any contracts for forward or
future delivery of any security, debt obligation, currency or commodity, all
manner of derivative instruments and any contracts based on any index or group
of securities, debt obligations, currencies or commodities, and any options
thereon.
SPECIAL ADVISORY ACCOUNT means a Capital Account established
and maintained on behalf of the Special Advisory Member pursuant to Section 5.3
hereof solely for the purpose of receiving the Incentive Allocation.
SPECIAL ADVISORY MEMBER means the Adviser in its capacity as
the investment adviser to the Fund.
SPECIAL MEMBER means (i) Members that the Adviser shall
determine from time to time, in its sole discretion, to be employees, or
directors of the Adviser and its affiliates, and members of their immediate
families, (ii) attorneys or other professional advisers engaged on behalf of the
Fund, and members of their immediate families, (iii) Directors and (iv) the
Adviser.
SUBADVISERS means those Investment Managers for which a
separate investment vehicle has been created in which the Investment Manager
serves as general partner or managing member and the Fund is the sole limited
partner or the only other member and those Investment Managers who manage the
Fund's assets directly through a separately managed account.
TAX MATTERS PARTNER means the Member designated as "tax
matters partner" of the Fund pursuant to Section 8.17 hereof.
TRANSFER means the assignment, transfer, sale or other
disposition of all or any portion of an Interest, including any right to receive
any allocations and distributions attributable to an Interest.
VOTING INTEREST means with respect to a Member the number of
votes equivalent to such Member's Fund Percentage as of the record date for a
meeting of Members.
------------------------------------------------------------------------------
ARTICLE II
ORGANIZATION; ADMISSION OF MEMBERS; BOARD
------------------------------------------------------------------------------
2.1 FORMATION OF LIMITED LIABILITY COMPANY.
The Organizational Member and any person designated by the
Board hereby are designated as authorized persons, within the meaning of the
Delaware Act, to execute, deliver and file all certificates (and any amendments
and/or restatements thereof) required or permitted by the Delaware Act to be
filed in the office of the Secretary of State of the State of Delaware. The
Board shall cause to be executed and filed with applicable governmental
authorities any other instruments, documents and certificates which, in the
opinion of the Fund's legal counsel, may from time to time be required by the
laws of the United States of America, the State of Delaware or any other
jurisdiction in which the Fund shall determine to do business, or any political
subdivision or agency thereof, or which such legal counsel may deem necessary or
appropriate to effectuate, implement and continue the valid existence and
business of the Fund.
2.2 NAME.
The name of the Fund shall be "J.P. Morgan Hedge Fund
Series/alpha, L.L.C." or such other name as the Board hereafter may adopt upon
(i) causing an appropriate amendment to the Certificate to be filed in
accordance with the Delaware Act and (ii) sending notice thereof to each Member.
The Fund's business may be conducted under the name of the Fund or, to the
fullest extent permitted by law, any other name or names deemed advisable by the
Board.
2.3 PRINCIPAL AND REGISTERED OFFICE.
The Fund shall have its principal office at the principal
office of the Adviser, or at such other place designated from time to time by
the Board.
The Fund shall have its registered office in the State of
Delaware at 1013 Center Road, Wilmington, New Castle County, Delaware
19805-1297, and shall have Corporation Service Company as its registered agent
at such registered office for service of process in the State of Delaware,
unless a different registered office or agent is designated from time to time by
the Board in accordance with the Delaware Act.
2.4 DURATION.
The term of the Fund commenced on the filing of the
Certificate with the Secretary of State of the State of Delaware and shall
continue until the Fund is dissolved pursuant to Section 6.1 hereof.
2.5 BUSINESS OF THE FUND.
(a) The business of the Fund is to purchase, sell (including
short sales), invest and trade in Securities, and to engage in any financial or
derivative transactions relating thereto or otherwise. Discrete portions of the
Fund's assets (which may constitute, in the aggregate, all of the Fund's assets)
may be invested in general or limited partnerships, limited liability companies
and other pooled investment vehicles which invest and trade in Securities, some
or all of which may be advised by one or more Subadvisers. The Fund may execute,
deliver and perform all contracts, agreements and other undertakings and engage
in all activities and transactions as may in the opinion of the Board be
necessary or advisable to carry out the Fund's business and any amendments to
any such contracts, agreements and other undertakings, all without any further
act, vote or approval of any other person, notwithstanding any other provision
of this Agreement.
(b) The Fund shall operate as a closed-end, management
investment company in accordance with the 1940 Act and subject to any
fundamental policies and investment restrictions set forth in the Form N-2.
2.6 THE BOARD.
(a) The Organizational Member hereby designates those persons
listed on Schedule I who shall agree to be bound by all of the terms of this
Agreement to serve as Directors on the initial Board. The Board may, subject to
the provisions of paragraphs (a) and (b) of this Section 2.6 with respect to the
number of and vacancies in the position of Director and the provisions of
Section 3.3 hereof with respect to the election of Directors by Members,
designate any person who shall agree to be bound by all of the terms of this
Agreement as a Director. The names and mailing addresses of the Directors shall
be set forth in the books and records of the Fund. The number of Directors shall
be fixed from time to time by the Directors but, at the Closing Date, shall not
be fewer than three.
(b) Each Director shall serve as a Director for the duration
of the term of the Fund, unless his or her status as a Director shall be sooner
terminated pursuant to Section 4.2 hereof. If any vacancy in the position of a
Director occurs, the remaining Directors may appoint a person to serve in such
capacity, so long as immediately after such appointment at least two-thirds of
the Directors then serving would have been elected by the Members. The Directors
may call a meeting of Members to fill any vacancy in the position of Director,
and shall do so within 60 days after any date on which Directors who were
elected by the Members cease to constitute a majority of the Directors then
serving as Directors.
(c) If no Director remains, the Adviser shall promptly call a
meeting of the Members, to be held within 60 days after the date on which the
last Director ceased to act in that capacity, for the purpose of determining
whether to continue the business of the Fund and, if the business shall be
continued, of electing the required number of Directors. If the Members shall
determine at such meeting not to continue the business of the Fund or if the
required number of Directors is not elected within 60 days after the date on
which the last Director ceased to act in that capacity, then the Fund shall be
dissolved pursuant to Section 6.1 hereof and the assets of the Fund shall be
liquidated and distributed pursuant to Section 6.2 hereof.
2.7 MEMBERS.
The Board may admit one or more Members as of the beginning of
each calendar month or at such other times as the Board may determine. Members
may be admitted to the Fund subject to the condition that each such Member shall
execute an appropriate signature page of this Agreement or of the Fund's
application pursuant to which such Member agrees to be bound by all the terms
and provisions hereof. The Board, in its absolute discretion, may reject
applications for Interests in the Fund. The admission of any person as a Member
shall be effective upon the revision of the books and records of the Fund to
reflect the name and the contribution to the capital of the Fund of such
additional Member. Each of JPMIM and the Organizational Member hereby is
admitted as a Member on the date hereof.
2.8 SPECIAL ADVISORY MEMBER.
Upon signing this Agreement, the Adviser shall be admitted to
the Fund as the Special Advisory Member, subject to due approval, in accordance
with the requirements of the 1940 Act, of the Investment Advisory Agreement. The
Interest of the Special Advisory Member shall be non-voting. If at anytime the
Investment Advisory Agreement between the Fund and the person then serving as
Adviser terminates, the Board shall admit as a substitute Special Advisory
Member, upon its signing this Agreement, such person as may be retained by the
Fund to provide investment advisory services pursuant to an Investment Advisory
Agreement, subject to the due approval of such Investment Advisory Agreement in
accordance with the requirements of the 1940 Act.
2.9 ORGANIZATIONAL MEMBER.
Upon the admission to the Fund of any additional Member
pursuant to Section 2.7, the Organizational Member shall withdraw from the Fund
as the Organizational Member and shall be entitled to the return of his Capital
Contribution, if any, without interest or deduction, and shall cease to be a
member of the Fund.
2.10 BOTH DIRECTORS AND MEMBERS.
A Member may at the same time be a Director and a Member, or a
Special Advisory Member and a Member, in which event such Member's rights and
obligations in each capacity shall be determined separately in accordance with
the terms and provisions hereof and as provided in the Delaware Act.
2.11 LIMITED LIABILITY.
Except as otherwise provided under applicable law, no Member
or Director or the Special Advisory Member shall be liable personally for the
Fund's debts, obligations or liabilities, whether arising in contract, tort or
otherwise, solely by reason of being a member or manager of the Fund, except
that a Member may be obligated to make capital contributions to the Fund
pursuant to this Agreement and to repay any funds wrongfully distributed to such
Member. Notwithstanding any other provision of this Agreement, the Adviser, in
its sole discretion, may require a Member to contribute to the Fund, at any time
or from time to time, whether before or after the dissolution of the Fund or
after such Member ceases to be a member of the Fund, such amounts as are
requested by the Manager to meet the Fund's debts, obligations or liabilities
(not to exceed for any Member the aggregate amount of any distributions, amounts
paid in connection with a repurchase of all or a portion of such Member's
Interest and any other amounts received by such Member from the Fund during or
after the Fiscal Year in which any debt, obligation or liability of the Fund
arose or was incurred); PROVIDED, HOWEVER, that each Member shall contribute
only his pro rata share of the aggregate amount requested based on such Member's
Invested Capital in the Fiscal Year in which the debt, obligation or liability
arose or was incurred as a percentage of the aggregate Invested Capital of the
Fund in such Fiscal Year; and PROVIDED FURTHER that the provisions of this
Section 2.10 shall not affect the obligations of Members under Section 18-607 of
the Delaware Act.
------------------------------------------------------------------------------
ARTICLE III
MANAGEMENT
------------------------------------------------------------------------------
3.1 MANAGEMENT AND CONTROL.
(a) Management and control of the business of the Fund shall
be vested in the Board, which shall have the right, power and authority, on
behalf of the Fund and in its name, to exercise all rights, powers and authority
of managers under the Delaware Act and to do all things necessary and proper to
carry out the objective and business of the Fund and its duties hereunder. No
Director shall have the authority individually to act on behalf of or to bind
the Fund except within the scope of such Director's authority as delegated by
the Board. The parties hereto intend that, except to the extent otherwise
expressly provided herein, (i) each Director shall be vested with the same
powers, authority and responsibilities on behalf of the Fund as are customarily
vested in each director of a Delaware corporation and (ii) each Independent
Director shall be vested with the same powers, authority and responsibilities on
behalf of the Fund as are customarily vested in each director of a closed-end
management investment company registered under the 1940 Act that is organized as
a Delaware corporation who is not an "interested person" of such company as such
term is defined in the 1940 Act. During any period in which the Fund shall have
no Directors, the Adviser shall continue to serve as investment adviser to the
Fund and JPMIM shall continue to provide JPMIM services to the Fund.
(b) Each Member agrees not to treat, on his personal return or
in any claim for a refund, any item of income, gain, loss, deduction or credit
in a manner inconsistent with the treatment of such item by the Fund. The Board
shall have the exclusive authority and discretion to make any elections required
or permitted to be made by the Fund under any provisions of the Code or any
other revenue laws.
(c) Members shall have no right to participate in and shall
take no part in the management or control of the Fund's business and shall have
no right, power or authority to act for or bind the Fund. Members shall have the
right to vote on any matters only as provided in this Agreement or on any
matters that require the approval of the holders of voting securities under the
1940 Act or as otherwise required in the Delaware Act.
(d) The Board may delegate to any person any rights, power and
authority vested by this Agreement in the Board to the extent permissible under
applicable law.
3.2 ACTIONS BY THE BOARD.
(a) Unless provided otherwise in this Agreement, the Board
shall act only: (i) by the affirmative vote of a majority of the Directors
(which majority shall include any requisite number of Independent Directors
required by the 1940 Act) present at a meeting duly called at which a quorum of
the Directors shall be present (in person or, if in person attendance is not
required by the 1940 Act, in person or by telephone) or (ii) by unanimous
written consent of all of the Directors without a meeting, if permissible under
the 1940 Act.
(b) The Board may designate from time to time a Chairman who
shall preside at all meetings. Meetings of the Board may be called by the
Chairman or any two Directors, and may be held on such date and at such time and
place as the Board shall determine. Each Director shall be entitled to receive
written notice of the date, time and place of such meeting within a reasonable
time in advance of the meeting. Notice need not be given to any Director who
shall attend a meeting without objecting to the lack of notice or who shall
execute a written waiver of notice with respect to the meeting. Directors may
attend and participate in any meeting by telephone, except where in person
attendance at a meeting is required by the 1940 Act. A majority of the Directors
then in office shall constitute a quorum at any meeting.
(c) The Board may designate from time to time agents and
employees of the Fund who shall have the same powers and duties on behalf of the
Fund (including the power to bind the Fund) as are customarily vested in
officers of a Delaware corporation, and designate them as officers of the Fund.
3.3 MEETINGS OF MEMBERS.
(a) Actions requiring the vote of the Members may be taken at
any duly constituted meeting of the Members at which a quorum is present.
Meetings of the Members may be called by the Board or by Members holding a
majority of the total number of votes eligible to be cast by all Members, and
may be held at such time, date and place as the Board shall determine. The Board
shall arrange to provide written notice of the meeting, stating the date, time
and place of the meeting and the record date therefor, to each Member entitled
to vote at the meeting within a reasonable time prior thereto. Failure to
receive notice of a meeting on the part of any Member shall not affect the
validity of any act or proceeding of the meeting, so long as a quorum shall be
present at the meeting. Only matters set forth in the notice of a meeting may be
voted on by the Members at a meeting. The presence in person or by proxy of
Members holding a majority of the total number of votes eligible to be cast by
all Members as of the record date shall constitute a quorum at any meeting. In
the absence of a quorum, a meeting of the Members may be adjourned by action of
a majority of the Members present in person or by proxy without additional
notice to the Members. Except as otherwise required by any provision of this
Agreement or of the 1940 Act, (i) those candidates receiving a plurality of the
votes cast at any meeting of Members shall be elected as Directors and (ii) all
other actions of the Members taken at a meeting shall require the affirmative
vote of Members holding a majority of the total number of votes eligible to be
cast by those Members who are present in person or by proxy at such meeting.
(b) Each Member shall be entitled to cast at any meeting of
Members a number of votes equivalent to such Member's Voting Interest. The Board
shall establish a record date not less than 10 nor more than 60 days prior to
the date of any meeting of Members to determine eligibility to vote at such
meeting and the number of votes which each Member will be entitled to cast
thereat, and shall maintain for each such record date a list setting forth the
name of each Member and the number of votes that each Member will be entitled to
cast at the meeting.
(c) A Member may vote at any meeting of Members by a proxy
properly executed in writing by the Member and filed with the Fund before or at
the time of the meeting. A proxy may be suspended or revoked, as the case may
be, by the Member executing the proxy by a later writing delivered to the Fund
at any time prior to exercise of the proxy or if the Member executing the proxy
shall be present at the meeting and decide to vote in person. Any action of the
Members that is permitted to be taken at a meeting of the Members may be taken
without a meeting if consents in writing, setting forth the action taken, are
signed by Members holding a majority of the total number of votes eligible to be
cast or such greater percentage as may be required in order to approve such
action.
3.4 CUSTODY OF ASSETS OF THE FUND.
The physical possession of all funds, Securities or other
property of the Fund shall at all times, be held, controlled and administered by
one or more custodians retained by the Fund in accordance with the requirements
of the 1940 Act.
3.5 OTHER ACTIVITIES OF MEMBERS AND DIRECTORS.
(a) The Directors shall not be required to devote full time to
the affairs of the Fund, but shall devote such time as may reasonably be
required to perform their obligations under this Agreement.
(b) Any Member or Director or Affiliate thereof may engage in
or possess an interest in other business ventures or commercial dealings of
every kind and description, independently or with others, including, but not
limited to, acquisition and disposition of Securities, provision of investment
advisory or brokerage services, serving as directors, officers, employees,
advisers or agents of other companies, partners of any partnership, members of
any limited liability company, or trustees of any trust, or entering into any
other commercial arrangements. No Member shall have any rights in or to such
activities of any other Member or Director, or any profits derived therefrom.
3.6 DUTY OF CARE.
(a) A Director shall not be liable to the Fund or to any of
its Members for any loss or damage occasioned by any act or omission in the
performance of the Director's services under this Agreement, unless it shall be
determined by final judicial decision on the merits from which there is no
further right to appeal that such loss is due to an act or omission of such
person constituting willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such Director's duties
hereunder.
(b) A Member not in breach of any obligation hereunder or
under any agreement pursuant to which the Member subscribed for an Interest
shall be liable to the Fund, any other Member or third parties only as required
by the Delaware Act or otherwise provided in this Agreement.
3.7 INDEMNIFICATION.
(a) To the fullest extent permitted by law, the Fund shall,
subject to Section 3.7(b) hereof, indemnify each Director (including for this
purpose their executors, heirs, assigns, successors or other legal
representatives), the Adviser (including for this purpose each affiliate,
officer, director, principal, employee or agent of the Adviser, and the
executors, heirs, assigns, successors or other legal representatives of each of
the foregoing, and of any person who controls or is under common control, or
otherwise affiliated, with the Adviser, and their executors, heirs, assigns,
successors or other legal representatives), and the Tax Matters Partner
(including for this purpose its successor) against all losses, claims, damages,
liabilities, costs and expenses, including, but not limited to, amounts paid in
satisfaction of judgments, in compromise, or as fines or penalties, and
reasonable counsel fees, incurred in connection with the defense or disposition
of any action, suit, investigation or other proceeding, whether civil or
criminal, before any judicial, arbitral, administrative or legislative body, in
which such indemnitee may be or may have been involved as a party or otherwise,
or with which such indemnitee may be or may have been threatened, while in
office or thereafter, by reason of being or having been a Director, Adviser or
the Tax Matters Partner, as the case may be, of the Fund or the past or present
performance of services to the Fund by such indemnitee, except to the extent
such loss, claim, damage, liability, cost or expense shall have been finally
determined in a decision on the merits in any such action, suit, investigation
or other proceeding to have been incurred or suffered by such indemnitee by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of such indemnitee's office. The
rights of indemnification provided under this Section 3.7 shall not be construed
so as to provide for indemnification of an indemnitee for any liability
(including liability under federal securities laws which, under certain
circumstances, impose liability even on persons that act in good faith) to the
extent (but only to the extent) that such indemnification would be in violation
of applicable law, but shall be construed so as to effectuate the applicable
provisions of this Section 3.7 to the fullest extent permitted by law.
(b) Expenses, including reasonable counsel fees, so incurred
by any such indemnitee (but excluding amounts paid in satisfaction of judgments,
in compromise, or as fines or penalties), may be paid from time to time by the
Fund in advance of the final disposition of any such action, suit, investigation
or proceeding upon receipt of an undertaking by or on behalf of such indemnitee
to repay to the Fund amounts so paid if it shall ultimately be determined that
indemnification of such expenses is not authorized under Section 3.7(a) hereof;
PROVIDED, HOWEVER, that (i) such indemnitee shall provide security for such
undertaking, (ii) the Fund shall be insured by or on behalf of such indemnitee
against losses arising by reason of such indemnitee's failure to fulfill his or
its undertaking, or (iii) a majority of the Directors (excluding any Director
who is seeking advancement of expenses hereunder) or independent legal counsel
in a written opinion shall determine based on a review of readily available
facts (as opposed to a full trial-type inquiry) that there is reason to believe
such indemnitee ultimately will be entitled to indemnification.
(c) As to the disposition of any action, suit, investigation
or proceeding (whether by a compromise payment, pursuant to a consent decree or
otherwise) without an adjudication or a decision on the merits by a court, or by
any other body before which the proceeding shall have been brought, that an
indemnitee is liable to the Fund or its Members by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of such indemnitee's office, indemnification shall be
provided pursuant to Section 3.7(a) hereof if (i) approved as in the best
interests of the Fund by a majority of the Directors (excluding any Director who
is seeking indemnification hereunder) upon a determination based upon a review
of readily available facts (as opposed to a full trial-type inquiry) that such
indemnitee acted in good faith and in the reasonable belief that such actions
were in the best interests of the Fund and that such indemnitee is not liable to
the Fund or its Members by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of such
indemnitee's office, or (ii) the Directors secure a written opinion of
independent legal counsel based upon a review of readily available facts (as
opposed to a full trial-type inquiry) to the effect that such indemnitee acted
in good faith and in the reasonable belief that such actions were in the best
interests of the Fund and that such indemnitee is not liable to the Fund or its
Members by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of such indemnitee's
office.
(d) Any indemnification or advancement of expenses made
pursuant to this Section 3.7 shall not prevent the recovery from any indemnitee
of any such amount if such indemnitee subsequently shall be determined in a
decision on the merits in any action, suit, investigation or proceeding
involving the liability or expense that gave rise to such indemnification or
advancement of expenses to be liable to the Fund or its Members by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of such indemnitee's office. In any suit brought
by an indemnitee to enforce a right to indemnification under this Section 3.7 it
shall be a defense that, and in any suit in the name of the Fund to recover any
indemnification or advancement of expenses made pursuant to this Section 3.7 the
Fund shall be entitled to recover such expenses upon a final adjudication that,
the indemnitee has not met the applicable standard of conduct set forth in this
Section 3.7. In any such suit brought to enforce a right to indemnification or
to recover any indemnification or advancement of expenses made pursuant to this
Section 3.7, the burden of proving that the indemnitee is not entitled to be
indemnified, or to any indemnification or advancement of expenses, under this
Section 3.7 shall be on the Fund (or any Member acting derivatively or otherwise
on behalf of the Fund or its Members).
(e) An indemnitee may not satisfy any right of indemnification
or advancement of expenses granted in this Section 3.7 or to which he, she or it
may otherwise be entitled except out of the assets of the Fund, and no Member
shall be personally liable with respect to any such claim for indemnification or
advancement of expenses.
(f) The rights of indemnification provided hereunder shall not
be exclusive of or affect any other rights to which any person may be entitled
by contract or otherwise under law. Nothing contained in this Section 3.7 shall
affect the power of the Fund to purchase and maintain liability insurance on
behalf of any Director or other person.
3.8 FEES, EXPENSES AND REIMBURSEMENT.
(a) So long as JPMIM (or its affiliates) provides JPMIM
Services to the Fund, it shall be entitled to receive such fees as may be agreed
to by JPMIM and the Fund pursuant to a separate written agreement, which,
notwithstanding anything in this Agreement to the contrary, may be entered into
by the Fund without any further act, vote or approval of any Member.
(b) The Board may cause the Fund to compensate each Director
for his or her services hereunder. In addition, the Fund shall reimburse the
Directors for reasonable out-of-pocket expenses incurred by them in performing
their duties under this Agreement.
(c) The Fund shall bear all expenses incurred in the business
of the Fund other than those specifically required to be borne by the Adviser
pursuant to the Investment Advisory Agreement or by JPMIM pursuant to a separate
written agreement with the Fund as contemplated by Section 3.8(a) hereof.
Expenses to be borne by the Fund include, but are not limited to, the following:
(1) all costs and expenses related to portfolio transactions
and positions for the Fund's account, including, but not
limited to, brokerage commissions, research fees, interest
and commitment fees on loans and debit balances, borrowing
charges on Securities sold short, dividends on Securities
sold short but not yet purchased, custodial fees, margin
fees, transfer taxes and premiums and taxes withheld on
foreign dividends and indirect expenses from investments
in Investment Funds;
(2) all costs and expenses associated with the organization,
operation and registration of the Fund, offering costs and
the costs of compliance with any applicable Federal or
state laws;
(3) the costs and expenses of holding meetings of the Board
and any meetings of Members that are regularly scheduled,
permitted or are required to be held by this Agreement,
the 1940 Act or other applicable law;
(4) reasonable fees and disbursements of any attorneys,
accountants (including tax preparation fees), auditors and
other consultants and professionals engaged on behalf of
the Fund to assist in connection with its operations;
(5) the costs of a fidelity bond and any liability insurance
obtained on behalf of the Fund, the Adviser or the
Directors;
(6) any fees payable to JPMIM or its affiliates for JPMIM
Services;
(7) all costs and expenses associated with the organization of
new Investment Funds actually managed by Subadvisers, if
any;
(8) all costs and expenses of preparing, setting in type,
printing and distributing reports and other communications
to Members;
(9) the fees of custodians and other persons providing
administrative services to the Fund; and
(10) such other types of expenses as may be approved from time
to time by the Board.
The Adviser shall be entitled to reimbursement from the Fund
for any of the above expenses that it pays on behalf of the Fund.
(d) The Fund from time to time, alone or in conjunction with
other accounts for which the Adviser, or any Affiliate of the Adviser, acts as
general partner, managing member or investment adviser, may purchase Insurance
in such amounts, from such insurers and on such terms as the Board shall
determine.
------------------------------------------------------------------------------
ARTICLE IV
TERMINATION OF STATUS OF ADVISER AND DIRECTORS;
TRANSFERS AND REPURCHASES
------------------------------------------------------------------------------
4.1 TERMINATION OF STATUS OF THE ADVISER.
The status of the Adviser as the Special Advisory Member shall
terminate if the Investment Advisory Agreement with the Adviser terminates and
the Fund does not enter into a new Investment Advisory Agreement with the
Adviser, effective as of the date of such termination.
4.2 TERMINATION OF STATUS OF A DIRECTOR.
The status of a Director shall terminate if the Director (i)
shall die; (ii) shall be adjudicated incompetent; (iii) shall voluntarily
withdraw as a Director (upon not less than 90 days' prior written notice to the
other Directors, unless the other Directors waive such notice); (iv) shall be
removed under Section 4.3; (v) shall be declared bankrupt by a court with
appropriate jurisdiction, file a petition commencing a voluntary case under any
bankruptcy law or make an assignment for the benefit of creditors; or (vi) shall
have a receiver appointed to administer the property or affairs of such
Director.
4.3 REMOVAL OF THE DIRECTORS.
Any Director may be removed by the vote or written consent of
Members holding not less than two-thirds of the total number of votes eligible
to be cast by all Members.
4.4 TRANSFER OF INTERESTS OF MEMBERS.
(a) An Interest or portion thereof of a Member may be
Transferred only (i) by operation of law pursuant to the death, bankruptcy,
insolvency or dissolution of such Member or (ii) with the written consent of the
Board (which may be withheld in its sole and absolute discretion). In addition,
the Board may not consent to a Transfer of an Interest or a portion thereof of a
Member unless (i) the person to whom such Interest is transferred (or each of
such person's equity owners if such a person is a "private investment company"
as defined in Rule 205-3(d)(3) under the Advisers Act, an investment company
registered under the 1940 Act, or a business development company as defined
under the Advisers Act) is a person whom the Board believes meets the
requirements of paragraph (d)(1) of Rule 205-3 under the Advisers Act or
successor rule thereto, or is otherwise exempt from such requirements, (ii) such
person is a "qualified eligible participant" under Rule 4.7 of the CEA, or any
successor rule thereto, and any interpretation thereof, or is otherwise exempt
from such requirements or (iii) the transfer of an Interest to such person would
be consistent with the requirements of National Futures Association Bylaw 1101
as applied to the commodity pool operator of the Fund. If any transferee does
not meet such investor eligibility requirements, the Fund reserves the right to
redeem its Interest. If the Board does not consent to a Transfer by operation of
law, the Fund shall redeem the Interest from the Member's successor. Any
permitted transferee shall be entitled to the allocations and distributions
allocable to the Interest so acquired and to Transfer such Interest in
accordance with the terms of this Agreement, but shall not be entitled to the
other rights of a Member unless and until such transferee becomes a substituted
Member. If a Member Transfers an Interest or portion thereof with the approval
of the Board, the Fund shall promptly take all necessary actions so that each
transferee or successor to whom such Interest or portion thereof is Transferred
is admitted to the Fund as a substituted Member. The admission of any transferee
as a substituted Member shall be effective upon the execution and delivery by,
or on behalf of, such substituted Member of either a counterpart of this
Agreement or an instrument that constitutes the execution and delivery of this
Agreement. Each transferring Member and transferee agrees to pay all expenses,
including attorneys' and accountants' fees, incurred by the Fund in connection
with such Transfer. Upon the Transfer to another person or persons of a Member's
entire Interest, such Member shall cease to be a member of the Fund.
(b) Each transferring Member shall indemnify and hold harmless
the Fund, the Directors, the Adviser, each other Member and any Affiliate of the
foregoing against all losses, claims, damages, liabilities, costs and expenses
(including legal or other expenses incurred in investigating or defending
against any such losses, claims, damages, liabilities, costs and expenses or any
judgments, fines and amounts paid in settlement), joint or several, to which
such persons may become subject by reason of or arising from (i) any Transfer
made by such Member in violation of this Section 4.4 and (ii) any
misrepresentation by such Member in connection with any such Transfer.
4.5 TRANSFER OF INTERESTS OF SPECIAL ADVISORY MEMBER.
The Adviser may not Transfer its Interest as the Special
Advisory Member.
4.6 REPURCHASE OF INTERESTS.
(a) Except as otherwise provided in this Agreement, no Member
or other person holding an Interest or portion thereof shall have the right to
withdraw or tender to the Fund for repurchase of that Interest or portion
thereof. The Board may from time to time, in its complete and exclusive
discretion and on such terms and conditions as it may determine, cause the Fund
to repurchase Interests or portions thereof pursuant to written tenders. In
determining whether to cause the Fund to repurchase Interests or portions
thereof pursuant to written tenders, the Board shall consider the following
factors, among others:
(1) whether any Members have requested to tender Interests or
portions thereof to the Fund;
(2) the liquidity of the Fund's assets;
(3) the investment plans and working capital requirements of
the Fund;
(4) the relative economies of scale with respect to the size
of the Fund;
(5) the history of the Fund in repurchasing Interests or
portions thereof;
(6) the condition of the securities markets; and
(7) the anticipated tax consequences of any proposed
repurchases of Interests or portions thereof.
The Board shall cause the Fund to repurchase Interests or
portions thereof pursuant to written tenders only on terms fair to the Fund and
to all Members (including persons holding Interests acquired from Members), as
applicable.
(b) The Adviser may tender its Interest or a portion thereof
as a Member or Special Advisory Member of the Fund under Section 4.6(a) hereof.
(c) If the Adviser's status as Special Advisory Member is
terminated pursuant to Section 4.1 hereof, it (or its trustee or other legal
representative) may, by written notice to the Board within 60 days of the
effective date of such termination, tender to the Fund for repurchase all or any
portion of its Special Advisory Account. Not later than 30 days after the
receipt of such notice, the Board shall cause such tendered portion of the
Special Advisory Account to be repurchased by the Fund for cash.
(d) The Board may cause the Fund to repurchase an Interest or
portion thereof of a Member or any person acquiring an Interest or portion
thereof from or through a Member if the Board determines or has reason to
believe that:
(1) such an Interest or portion thereof has been transferred
in violation of Section 4.4 hereof, or such an Interest or
portion thereof has vested in any person by operation of
law as the result of the death, dissolution, bankruptcy or
incompetency of a Member;
(2) ownership of such an Interest by a Member or other person
will cause the Fund to be in violation of, or require
registration of any Interest or portion thereof under, or
subject the Fund to additional registration or regulation
under, the securities, commodities or other laws of the
United States or any other relevant jurisdiction;
(3) continued ownership of such an Interest may be harmful or
injurious to the business or reputation of the Fund, the
Adviser or the Directors, or may subject the Fund or any
of the Members to an undue risk of adverse tax or other
fiscal consequences;
(4) any of the representations and warranties made by a Member
in connection with the acquisition of an Interest or
portion thereof was not true when made or has ceased to be
true; or
(5) it would be in the best interests of the Fund, as
determined by the Board, for the Fund to repurchase such
an Interest or portion thereof.
(e) Repurchases of Interests or portions thereof by the Fund
shall be payable in cash or in part by promissory note, in each case without
interest, unless the Board, in its discretion, determines otherwise, or, in the
discretion of the Board, in Securities (or any combination of Securities and
cash) of equivalent value. All such repurchases shall be subject to any and all
conditions as the Board may impose and shall be effective as of a date set by
the Board after receipt by the Fund of all eligible written tenders of Interests
or portion thereof. The amount due to any Member whose Interest or portion
thereof is repurchased shall be equal to the value of such Member's Capital
Account or portion thereof as applicable as of the effective date of repurchase,
after giving effect to all allocations to be made to such Member's Capital
Account as of such date.
------------------------------------------------------------------------------
ARTICLE V
CAPITAL
------------------------------------------------------------------------------
5.1 CONTRIBUTIONS TO CAPITAL.
(a) The minimum initial contribution of each Member (other
than JPMIM) to the capital of the Fund shall be $100,000 ($10,000 for employees
or directors of JPMIM and its affiliates, and members of their immediate
families, and, in the sole discretion of the Board, attorneys or other
professional advisers engaged on behalf of the Fund, and members of their
immediate families) or such other amount as the Board may determine from time to
time. The amount of the initial contribution of each Member shall be recorded on
the books and records of the Fund upon acceptance as a contribution to the
capital of the Fund. The Directors shall not be entitled to make voluntary
contributions of capital to the Fund as Directors of the Fund, but may make
voluntary contributions to the capital of the Fund as Members.
(b) The Members may make additional contributions to the
capital of the Fund, effective as of such times as the Board in its discretion
may permit, but no Member shall be obligated to make any additional contribution
to the capital of the Fund except to the extent provided in Section 5.7 hereof.
(c) Except as otherwise permitted by the Board, (i) initial
and any additional contributions to the capital of the Fund by any Member shall
be payable in cash or in such Securities that the Board, in its absolute
discretion, may agree to accept on behalf of the Fund, and (ii) initial and any
additional contributions in cash shall be payable in readily available funds at
the date of the proposed acceptance of the contribution. The Fund shall charge
each Member making a contribution in Securities to the capital of the Fund such
amount as may be determined by the Board not exceeding 2% of the value of such
contribution in order to reimburse the Fund for any costs incurred by the Fund
by reason of accepting such Securities, and any such charge shall be due and
payable by the contributing Member in full at the time the contribution to the
capital of the Fund to which such charges relate is due. The value of
contributed Securities shall be determined in accordance with Section 7.3 hereof
as of the date of contribution.
5.2 RIGHTS OF MEMBERS TO CAPITAL.
No Member shall be entitled to interest on his or its
contribution to the capital of the Fund, nor shall any Member be entitled to the
return of any capital of the Fund except (i) upon the repurchase by the Fund of
a part or all of such Member's Interest pursuant to Section 4.6 hereof, (ii)
pursuant to the provisions of Section 5.7(c) hereof or (iii) upon the
liquidation of the Fund's assets pursuant to Section 6.2 hereof. No Member shall
be liable for the return of any such amounts. No Member shall have the right to
require partition of the Fund's property or to compel any sale or appraisal of
the Fund's assets.
5.3 CAPITAL ACCOUNTS.
(a) The Fund shall maintain a separate Capital Account
for each Member.
(b) Each Member's Capital Account shall have an initial
balance equal to the amount of cash and the value of any Securities (determined
in accordance with Section 7.3 hereof) constituting such Member's initial
contribution to the capital of the Fund.
(c) Each Member's Capital Account shall be increased by the
sum of (i) the amount of cash and the value of any Securities (determined in
accordance with Section 7.3 hereof) constituting additional contributions by
such Member to the capital of the Fund permitted pursuant to Section 5.1 hereof,
plus (ii) any amount credited to such Member's Capital Account pursuant to
Sections 5.4 through 5.7 or 5.11 hereof.
(d) Each Member's Capital Account shall be reduced by the sum
of (i) the amount of any repurchase of the Interest, or portion thereof, of such
Member or distributions to such Member pursuant to Sections 4.6, 5.10 or 6.2
hereof which are not reinvested, plus (ii) any amounts debited against such
Member's Capital Account pursuant to Sections 5.4 through 5.7 and 5.11 hereof.
(e) The Fund shall maintain a Special Advisory Account for the
Adviser in its capacity as Special Advisory Member solely for purposes of
receiving the Incentive Allocation pursuant to Section 5.8 hereof. The Special
Advisory Account shall have an initial balance of zero.
(f) If all or a portion of an Interest is transferred in
accordance with the terms of this Agreement, the transferee shall succeed to the
Capital Account of the transferor to the extent it relates to the transferred
Interest.
5.4 ALLOCATION OF NET PROFIT AND LOSS.
As of the last day of each Fiscal Period, any Net Profit or
Net Loss for the Fiscal Period shall be allocated among and credited to or
debited against the Capital Accounts of the Members in accordance with their
respective Fund Percentages for such Fiscal Period.
5.5 ALLOCATION OF INSURANCE PREMIUMS AND PROCEEDS.
(a) Any premiums payable by the Fund for Insurance purchased
pursuant to Section 3.7(d) hereof shall be apportioned evenly over each Fiscal
Period or portion thereof falling within the period to which such premiums
relate under the terms of such Insurance, and the portion of the premiums so
apportioned to any Fiscal Period shall be allocated among and debited against
the Capital Accounts of each Member who is a member of the Fund during such
Fiscal Period in accordance with such Member's Fund Percentage for such Fiscal
Period.
(b) Proceeds, if any, to which the Fund may become entitled
pursuant to such Insurance shall be allocated among and credited to the Capital
Accounts of each Member who is a member of the Fund during the Fiscal Period in
which the event which gives rise to recovery of proceeds occurs in accordance
with such Member's Fund Percentage for such Fiscal Period.
5.6 ALLOCATION OF CERTAIN WITHHOLDING TAXES AND OTHER
EXPENDITURES.
(a) If the Fund incurs a withholding tax or other tax
obligation with respect to the share of Fund income allocable to any Member,
then the Board, without limitation of any other rights of the Fund or the Board,
shall cause the amount of such obligation to be debited against the Capital
Account of such Member when the Fund pays such obligation, and any amounts then
or thereafter distributable to such Member shall be reduced by the amount of
such taxes. If the amount of such taxes is greater than any such distributable
amounts, then such Member and any successor to such Member's Interest shall pay
to the Fund as a contribution to the capital of the Fund, upon demand of the
Fund, the amount of such excess. The Fund shall not be obligated to apply for or
obtain a reduction of or exemption from withholding tax on behalf of any Member
that may be eligible for such reduction or exemption; provided, that in the
event that the Fund determines that a Member is eligible for a refund of any
withholding tax, the Fund may, at the request and expense of such Member, assist
such Member in applying for such refund.
(b) Except as otherwise provided for in this Agreement and
unless prohibited by the 1940 Act, any expenditures payable by the Fund, to the
extent determined by the Board to have been paid or withheld on behalf of, or by
reason of particular circumstances applicable to, one or more but fewer than all
of the Members, shall be charged to only those Members on whose behalf such
payments are made or whose particular circumstances gave rise to such payments.
Such charges shall be debited from the Capital Accounts of such Members as of
the close of the Fiscal Period during which any such items were paid or accrued
by the Fund.
5.7 RESERVES.
(a) Appropriate reserves may be created, accrued and charged
against Net Assets and proportionately against the Capital Accounts of the
Members for contingent liabilities, if any, as of the date any such contingent
liability becomes known to the Adviser or the Board, such reserves to be in the
amounts which the Board in its sole discretion deem necessary or appropriate.
The Board may increase or reduce any such reserves from time to time by such
amounts as it in its sole discretion deems necessary or appropriate. The amount
of any such reserve, or any increase or decrease therein, shall be
proportionately charged or credited, as appropriate, to the Capital Accounts of
those parties who are Members at the time when such reserve is created,
increased or decreased, as the case may be; PROVIDED, HOWEVER, that if any such
individual reserve item, adjusted by any increase therein, exceeds the lesser of
$500,000 or 1% of the aggregate value of the Capital Accounts of all such
Members, the amount of such reserve, increase, or decrease instead shall be
charged or credited to those parties who were Members at the time, as determined
by the Board in its sole discretion, of the act or omission giving rise to the
contingent liability for which the reserve was established, increased or
decreased in proportion to their Capital Accounts.
(b) If at any time an amount is paid or received by the Fund
(other than contributions to the capital of the Fund, distributions or
repurchases of Interests or portions thereof) and such amount exceeds the lesser
of $500,000 or 1% of the aggregate value of the Capital Accounts of all Members
at the time of payment or receipt and such amount was not accrued or reserved
for but would nevertheless, in accordance with the Fund's accounting practices,
be treated as applicable to one or more prior Fiscal Periods, then such amount
shall be proportionately charged or credited, as appropriate, to those parties
who were Members during such prior Fiscal Period or Periods.
(c) If any amount is required by paragraph (a) or (b) of this
Section 5.7 to be charged or credited to a party who is no longer a Member, such
amount shall be paid by or to such party, as the case may be, in cash, with
interest from the date on which the Board determines that such charge or credit
is required. In the case of a charge, the former Member shall be obligated to
pay the amount of the charge, plus interest as provided above, to the Fund on
demand; PROVIDED, HOWEVER, that (i) in no event shall a former Member be
obligated to make a payment exceeding the amount of such Member's Capital
Account at the time to which the charge relates; and (ii) no such demand shall
be made after the expiration of three years from the date on which such party
ceased to be a Member. To the extent that a former Member fails to pay to the
Fund, in full, any amount required to be charged to such former Member pursuant
to paragraph (a) or (b), whether due to the expiration of the applicable
limitation period or for any other reason whatsoever, the deficiency shall be
charged proportionately to the Capital Accounts of the Members at the time of
the act or omission giving rise to the charge to the extent feasible, and
otherwise proportionately to the Capital Accounts of the current Members.
5.8 INCENTIVE ALLOCATION.
(a) So long as the Adviser serves as the Special Advisory
Member of the Fund, the Incentive Allocation shall be debited against the
Capital Account of each Member (other than the Adviser) as of the last day of
each Allocation Period with respect to such Member and the amount so debited
shall be credited simultaneously to the Special Advisory Account, or, subject to
compliance with the 1940 Act and the Advisers Act, to the Capital Accounts of
such Members as have been designated in any written notice delivered by the
Adviser, to the Fund within 90 days after the close of such Allocation Period.
(b) By the last business day of the month following the date
on which an Incentive Allocation is made, the Special Advisory Member may
withdraw up to 100% of the Incentive Allocation (computed on the basis of
unaudited data) that was credited to the Special Advisory Account. Within 30
days after the completion of the audit of the Fund's books for the year in which
allocations to the Special Advisory Account are made, the Fund shall pay to the
Special Advisory Member any additional amount of Incentive Allocation determined
to be owed to the Special Advisory Member based on the audit, and the Special
Advisory Member shall pay to the Fund any excess amount of Incentive Allocation
determined to be owed to the Fund.
5.9 TAX ALLOCATIONS.
For each Fiscal Year, items of income, deduction, gain, loss
or credit shall be allocated for income tax purposes among the Members in such a
manner as to reflect equitably amounts credited or debited to each Member's
Capital Account for the current and prior Fiscal Years (or relevant portions
thereof). Allocations under this Section 5.9 shall be made pursuant to the
principles of Sections 704(b) and 704(c) of the Code, and in conformity with
Treasury Regulations Sections 1.704-1(b)(2)(iv)(f), 1.704-1(b)(4)(i) and
1.704-3(e) promulgated thereunder, as applicable, or the successor provisions to
such Section and Regulations. Notwithstanding anything to the contrary in this
Agreement, there shall be allocated to the Members such gains or income as shall
be necessary to satisfy the "qualified income offset" requirement of Treasury
Regulations Section 1.704-1(b)(2)(ii)(d).
If the Fund realizes capital gains (including short-term
capital gains) for Federal income tax purposes for any Fiscal Year during or as
of the end of which one or more Positive Basis Members (as hereinafter defined)
withdraw from the Fund pursuant to Articles IV or VI hereof, the Board may elect
to allocate such gains as follows: (i) to allocate such gains among such
Positive Basis Members, PRO RATA in proportion to the respective Positive Basis
(as hereinafter defined) of each such Positive Basis Member, until either the
full amount of such gains shall have been so allocated or the Positive Basis of
each such Positive Basis Member shall have been eliminated and (ii) to allocate
any gains not so allocated to Positive Basis Members to the other Members in
such manner as shall reflect equitably the amounts credited to such Members'
Capital Accounts.
As used herein, (i) the term "Positive Basis" shall mean, with
respect to any Member and as of any time of calculation, the amount by which the
total of such Member's Capital Account as of such time exceeds its "adjusted tax
basis," for Federal income tax purposes, in its Interest as of such time
(determined without regard to any adjustments made to such "adjusted tax basis"
by reason of any transfer or assignment of such Interest, including by reason of
death and without regard to such Member's share of the liabilities of the Fund
under Section 752 of the Code), and (ii) the term "Positive Basis Member" shall
mean any Member who withdraws from the Fund and who has a Positive Basis as of
the effective date of its withdrawal but such Member shall cease to be a
Positive Basis Member at such time as it shall have received allocations
pursuant to clause (i) of the preceding sentence equal to its Positive Basis as
of the effective date of its withdrawal.
Notwithstanding anything to the contrary in the foregoing, if
the Fund realizes taxable gains in any fiscal year with respect to which the
Special Advisory Member is entitled to an Incentive Allocation under Section 5.8
hereof, the Board (at the request of the Special Advisory Member) may specially
allocate such gains to the Special Advisory Member in an amount by which the
Incentive Allocation exceeds the Special Advisory Member's "adjusted tax basis"
(determined without regard to any allocation to be made pursuant to this
paragraph) in its interest in the Fund as of the time it withdraws such
Incentive Allocation. The Special Advisory Member's "adjusted tax basis" for
these purposes shall be increased by any amount of the Incentive Allocation
withdrawal which it elects to contribute as a Member to the Fund as of the date
of the withdrawal of the Incentive Allocation.
5.10 DISTRIBUTIONS.
(a) The Board, in its sole discretion, may authorize the Fund
to make distributions in cash or in kind at any time to all of the Members on a
PRO RATA basis in accordance with the Members' Fund Percentages. Notwithstanding
anything to the contrary in this Agreement, a Member may be compelled to accept
a distribution of any asset in kind from the Fund despite the fact that the
percentage of the asset distributed to the Member exceeds the percentage of that
asset which is equal to the percentage in which the Member shares in
distributions from the Fund.
(b) The Board may withhold taxes from any distribution to any
Member to the extent required by the Code or any other applicable law. For
purposes of this Agreement, any taxes so withheld by the Fund with respect to
any amount distributed by the Fund to any Member shall be deemed to be a
distribution or payment to such Member, reducing the amount otherwise
distributable to such Member pursuant to this Agreement and, if appropriate,
reducing the Capital Account of such Member.
(c) Notwithstanding anything to the contrary contained herein,
none of the Directors or the Members, nor any other person on behalf of the
Fund, shall make a distribution to the Members on account of their interest in
the Fund if such distribution would violate the Delaware Act or other applicable
law.
5.11 ALLOCATION OF ORGANIZATIONAL EXPENSES.
(a) As of the first Expense Allocation Date, Organizational
Expenses shall be allocated among and debited against the Capital Accounts of
the Members in accordance with their respective Capital Percentages on such
Expense Allocation Date.
(b) As of each Expense Allocation Date following the first
Expense Allocation Date, all amounts previously debited against the Capital
Account of a Member pursuant to this Section 5.11 on the preceding Expense
Allocation Date will be credited to the Capital Account of such Member, and
Organizational Expenses then shall be re-allocated among and debited against the
Capital Accounts of all Members in accordance with their respective Capital
Percentages on such Expense Allocation Date.
------------------------------------------------------------------------------
ARTICLE VI
DISSOLUTION AND LIQUIDATION
------------------------------------------------------------------------------
6.1 DISSOLUTION.
(a) The Fund shall be dissolved at any time there are no
Members, unless the Fund is continued in accordance with the Delaware Act, or
upon the occurrence of any of the following events:
(1) upon the affirmative vote to dissolve the Fund by
both (i) the Board and (ii) Members holding at least
two-thirds of the total number of Voting Interests
eligible to be cast by all Members;
(2) upon the failure of Members to approve of successor
Directors at a meeting called by the Adviser in
accordance with Section 2.6(c) hereof when no
Director remains to continue the business of the
Fund;
(3) upon the expiration of any two-year period which
commences on the date on which any Member has
submitted a written notice to the Fund requesting to
tender such Member's entire Interest for repurchase
by the Fund if such Member has not been permitted to
do so at any time during such period; or
(4) as required by operation of law.
Dissolution of the Fund shall be effective on the day on which
the event giving rise to the dissolution shall occur, but the Fund shall not
terminate until the assets of the Fund have been liquidated in accordance with
Section 6.2 hereof and the Certificate has been canceled.
6.2 LIQUIDATION OF ASSETS.
(a) Upon the dissolution of the Fund as provided in Section
6.1 hereof, the Board, acting directly or through a liquidator it selects, shall
promptly liquidate the business and administrative affairs of the Fund, except
that if the Board is unable to perform this function, a liquidator elected by
Members holding a majority of the total number of votes eligible to be cast by
all Members shall promptly liquidate the business and administrative affairs of
the Fund. Net Profit and Net Loss during the period of liquidation shall be
allocated pursuant to Article V hereof. The proceeds from liquidation shall,
subject to the Delaware Act, be distributed in the following manner:
(1) in satisfaction (whether by payment or the making of
reasonable provision for payment thereof) of the debts and
liabilities of the Fund, including the expenses of
liquidation (including legal and accounting expenses
incurred in connection therewith), but not including debt
and liabilities to Members, up to and including the date
that distribution of the Fund's assets to the Members has
been completed, shall first be paid on a PRO RATA basis;
(2) such debts, liabilities or obligations as are owing to the
Members shall be paid next in their order of seniority and
on a PRO RATA basis;
(3) The Special Advisory Member shall next be paid any balance
in the Special Advisory Account after giving effect to the
Incentive Allocation, if any, to be made pursuant to
Section 5.8 hereof; and
(4) the Members shall be paid next on a PRO RATA basis the
positive balances of their respective Capital Accounts
after giving effect to all allocations to be made to such
Members' Capital Accounts for the Fiscal Period ending on
the date of the distributions under this Section
6.2(a)(4).
(b) Anything in this Section 6.2 to the contrary
notwithstanding, but subject to the priorities set forth in Section 6.2(a)
above, upon dissolution of the Fund, the Board or other liquidator may
distribute ratably in kind any assets of the Fund; PROVIDED, HOWEVER, that if
any in-kind distribution is to be made (i) the assets distributed in kind shall
be valued pursuant to Section 7.3 hereof as of the actual date of their
distribution and charged as so valued and distributed against amounts to be paid
under Section 6.2(a) above, and (ii) any profit or loss attributable to property
distributed in-kind shall be included in the Net Profit or Net Loss for the
Fiscal Period ending on the date of such distribution.
------------------------------------------------------------------------------
ARTICLE VII
ACCOUNTING, VALUATIONS AND BOOKS AND RECORDS
------------------------------------------------------------------------------
7.1 ACCOUNTING AND REPORTS.
(a) The Fund shall adopt for tax accounting purposes
any accounting method which the Board shall decide in its sole discretion is in
the best interests of the Fund. The Fund's accounts shall be maintained in
U.S. currency.
(b) After the end of each taxable year, the Fund shall furnish
to each Member such information regarding the operation of the Fund and such
Member's Interest as is necessary for Members to complete Federal and state
income tax or information returns and any other tax information required by
federal or state law.
(c) Except as otherwise required by the 1940 Act and Rule 4.7
of the CEA or as may otherwise be permitted by rule, regulation or order, within
60 days after the close of the period for which a report required under this
Section 7.1(c) is being made, the Fund shall furnish to each Member a
semi-annual report containing the information required by the 1940 Act and an
annual report containing the information required by the 1940 Act and Rule 4.7
of the CEA. The Fund shall cause financial statements contained in each annual
report furnished hereunder to be accompanied by a certificate of independent
public accountants based upon an audit performed in accordance with generally
accepted accounting principles. The Fund shall furnish to each Member no less
frequently than quarterly the reporting statement as required by Rule 4.7 of the
CEA and may furnish to each Member such other periodic reports as it deems
necessary or appropriate in its discretion.
7.2 DETERMINATIONS BY THE BOARD.
(a) All matters concerning the determination and allocation
among the Members of the amounts to be determined and allocated pursuant to
Article V hereof, including any taxes thereon and accounting procedures
applicable thereto, shall be determined by the Board (either directly or by the
Adviser pursuant to delegated authority) unless specifically and expressly
otherwise provided for by the provisions of this Agreement or as required by
law, and such determinations and allocations shall be final and binding on all
the Members.
(b) The Board may make such adjustments to the computation of
Net Profit or Net Loss or any components (withholding any items of income, gain,
loss or deduction) comprising any of the foregoing as it considers appropriate
to reflect fairly and accurately the financial results of the Fund and the
intended allocation thereof among the Members.
7.3 VALUATION OF ASSETS.
(a) Except as may be required by the 1940 Act, the Board shall
value or have valued any Securities or other assets and liabilities of the Fund
(other than assets invested in Investment Funds) as of the close of business on
the last day of each Fiscal Period or more frequently, in the discretion of the
Board, in accordance with such valuation procedures as shall be established from
time to time by the Board and which conform to the requirements of the 1940 Act.
Assets of the Fund that are invested in Investment Funds managed by the
Subadvisers shall be valued in accordance with the terms and conditions of the
respective agreements of the Investment Funds. Assets of the Fund invested in
Investment Funds not managed by the Subadvisers shall be valued at fair value,
which ordinarily will be the value determined by their Investment Managers in
accordance with the policies established by the relevant Investment Fund. In
determining the value of the assets of the Fund, no value shall be placed on the
goodwill or name of the Fund, or the office records, files, statistical data or
any similar intangible assets of the Fund not normally reflected in the Fund's
accounting records, but there shall be taken into consideration any items of
income earned but not received, expenses incurred but not yet paid, liabilities,
fixed or contingent, and any other prepaid expenses to the extent not otherwise
reflected in the books of account, and the value of options or commitments to
purchase or sell Securities or commodities pursuant to agreements entered into
prior to such valuation date.
(b) The value of Securities and other assets of the Fund and
the net worth of the Fund as a whole determined pursuant to this Section 7.3
shall be conclusive and binding on all of the Members and all parties claiming
through or under them.
------------------------------------------------------------------------------
ARTICLE VIII
MISCELLANEOUS PROVISIONS
------------------------------------------------------------------------------
8.1 AMENDMENT OF LIMITED LIABILITY COMPANY AGREEMENT.
(a) Except as otherwise provided in this Section 8.1, this
Agreement may be amended, in whole or in part, with the approval of (i) the
Board (including the vote of a majority of the Independent Directors, if
required by the 1940 Act) or (ii) a majority (as defined in the 1940 Act) of the
outstanding Voting Interests of the Fund.
(b) Any amendment that would:
(1) increase the obligation of a Member to make any
contribution to the capital of the Fund;
(2) reduce the Capital Account of a Member or the Special
Advisory Account other than in accordance with Article V;
or
(3) modify the events causing the dissolution of the Fund;
may be made only if (i) the written consent of each Member adversely affected
thereby is obtained prior to the effectiveness thereof or (ii) such amendment
does not become effective until (A) each Member has received written notice of
such amendment and (B) any Member objecting to such amendment has been afforded
a reasonable opportunity (pursuant to such procedures as may be prescribed by
the Board) to tender his or her entire Interest for repurchase by the Fund.
(c) By way of example only, the Board at any time
without the consent of the Members may:
(1) restate this Agreement together with any amendments
hereto which have been duly adopted in accordance
herewith to incorporate such amendments in a single,
integrated document;
(2) amend this Agreement (other than with respect to the
matters set forth in Section 8.1(b) hereof) to effect
compliance with any applicable law or regulation or
to cure any ambiguity or to correct or supplement any
provision hereof which may be inconsistent with any
other provision hereof, provided that such action
does not adversely affect the rights of any Member in
any material respect; and
(3) amend this Agreement to make such changes as may be
necessary or desirable, based on advice of legal
counsel to the Fund, to assure the Fund's continuing
eligibility to be classified for U.S. Federal income
tax purposes as a partnership which is not treated as
a corporation under Section 7704(a) of the Code.
(d) The Board shall give written notice of any proposed
amendment to this Agreement (other than any amendment of the type contemplated
by clause (1) of Section 8.1(a) hereof) to each Member, which notice shall set
forth (i) the text of the proposed amendment or (ii) a summary thereof and a
statement that the text thereof will be furnished to any Member upon request.
8.2 SPECIAL POWER OF ATTORNEY.
(a) Each Member hereby irrevocably makes, constitutes and
appoints each Director, acting severally, and any liquidator of the Fund's
assets appointed pursuant to Section 6.2 hereof with full power of substitution,
the true and lawful representatives and attorneys-in-fact of, and in the name,
place and stead of, such Member, with the power from time to time to make,
execute, sign, acknowledge, swear to, verify, deliver, record, file and/or
publish:
(1) any amendment to this Agreement which complies with the
provisions of this Agreement (including the provisions of
Section 8.1 hereof);
(2) any amendment to the Certificate required because this
Agreement is amended or as otherwise required by the
Delaware Act; and
(3) all other such instruments, documents and certificates
which, in the opinion of legal counsel to the Fund, from
time to time may be required by the laws of the United
States of America, the State of Delaware or any other
jurisdiction in which the Fund shall determine to do
business, or any political subdivision or agency thereof,
or which such legal counsel may deem necessary or
appropriate to effectuate, implement and continue the
valid existence and business of the Fund as a limited
liability company under the Delaware Act.
(b) Each Member is aware that the terms of this Agreement
permit certain amendments to this Agreement to be effected and certain other
actions to be taken or omitted by or with respect to the Fund without such
Member's consent. If an amendment to the Certificate or this Agreement or any
action by or with respect to the Fund is taken in the manner contemplated by
this Agreement, each Member agrees that, notwithstanding any objection which
such Member may assert with respect to such action, the attorneys-in-fact
appointed hereby are authorized and empowered, with full power of substitution,
to exercise the authority granted above in any manner which may be necessary or
appropriate to permit such amendment to be made or action lawfully taken or
omitted. Each Member is fully aware that each Member will rely on the
effectiveness of this special power-of-attorney with a view to the orderly
administration of the affairs of the Fund.
(c) This power-of-attorney is a special power-of-attorney and
is coupled with an interest in favor of each Director, acting severally, and any
liquidator of the Fund's assets, appointed pursuant to Section 6.2 hereof, and
as such:
(1) shall be irrevocable and continue in full force and
effect notwithstanding the subsequent death or
incapacity of any party granting this
power-of-attorney, regardless of whether the Fund,
the Board or any liquidator shall have had notice
thereof; and
(2) shall survive the delivery of a Transfer by a Member
of the whole or any portion of such Member's
Interest, except that where the transferee thereof
has been approved by the Board for admission to the
Fund as a substituted Member, this power-of-attorney
given by the transferor shall survive the delivery of
such assignment for the sole purpose of enabling the
Board or any liquidator to execute, acknowledge and
file any instrument necessary to effect such
substitution.
8.3 NOTICES.
Notices which may or are required to be provided under this
Agreement shall be made, if to a Member, by regular mail, hand delivery,
registered or certified mail return receipt requested, commercial courier
service, telex or telecopier, or, if to the Fund, by registered or certified
mail, return receipt requested, and shall be addressed to the respective parties
hereto at their addresses as set forth on the books and records of the Fund (or
to such other addresses as may be designated by any party hereto by notice
addressed to the Fund in the case of notice given to any Member, and to each of
the Members in the case of notice given to the Fund). Notices shall be deemed to
have been provided when delivered by hand, on the date indicated as the date of
receipt on a return receipt or when received if sent by regular mail, commercial
courier service, telex or telecopier. A document that is not a notice and that
is required to be provided under this Agreement by any party to another party
may be delivered by any reasonable means.
8.4 AGREEMENT BINDING UPON SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective heirs, successors, assigns,
executors, trustees or other legal representatives, but the rights and
obligations of the parties hereunder may not be Transferred or delegated except
as provided in this Agreement and any attempted Transfer or delegation thereof
which is not made pursuant to the terms of this Agreement shall be void.
8.5 APPLICABILITY OF 1940 ACT AND FORM N-2.
The parties hereto acknowledge that this Agreement is not
intended to, and does not set forth the substantive provisions contained in the
1940 Act and the Form N-2 which affect numerous aspects of the conduct of the
Fund's business and of the rights, privileges and obligations of the Members.
Each provision of this Agreement shall be subject to and interpreted in a manner
consistent with the applicable provisions of the 1940 Act and the Form N-2.
8.6 CHOICE OF LAW; ARBITRATION.
(a) Notwithstanding the place where this Agreement may be
executed by any of the parties hereto, the parties expressly agree that all the
terms and provisions hereof shall be construed under the laws of the State of
Delaware, including the Delaware Act, without regard to the conflict of law
principles of such State.
(B) EACH MEMBER AND THE SPECIAL ADVISORY MEMBER AGREE TO
SUBMIT ALL CONTROVERSIES ARISING BETWEEN OR AMONG MEMBERS OR ONE OR MORE MEMBERS
AND THE FUND IN CONNECTION WITH THE FUND OR ITS BUSINESSES OR CONCERNING ANY
TRANSACTION, DISPUTE OR THE CONSTRUCTION, PERFORMANCE OR BREACH OF THIS OR ANY
OTHER AGREEMENT, WHETHER ENTERED INTO PRIOR TO, ON OR SUBSEQUENT TO THE DATE
HEREOF, TO ARBITRATION IN ACCORDANCE WITH THE PROVISIONS SET FORTH BELOW. EACH
MEMBER UNDERSTANDS THAT:
(1) ARBITRATION IS FINAL AND BINDING ON THE PARTIES;
(2) THE PARTIES ARE WAIVING THEIR RIGHTS TO SEEK REMEDIES IN
COURT, INCLUDING THE RIGHT TO JURY TRIAL;
(3) PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN
AND DIFFERENT FROM COURT PROCEEDINGS;
(4) THE ARBITRATOR'S AWARD IS NOT REQUIRED TO INCLUDE FACTUAL
FINDINGS OR LEGAL REASONING AND A PARTY'S RIGHT TO APPEAL
OR TO SEEK MODIFICATION OF RULINGS BY ARBITRATORS IS
STRICTLY LIMITED; AND
(5) A PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY
OF ARBITRATORS WHO WERE OR ARE AFFILIATED WITH THE
SECURITIES INDUSTRY.
(C) CONTROVERSIES SHALL BE DETERMINED BY ARBITRATION BEFORE,
AND ONLY BEFORE, AN ARBITRATION PANEL CONVENED BY THE NEW YORK STOCK EXCHANGE,
INC. ("NYSE") OR THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. (THE
"NASD"), TO THE FULLEST EXTENT PERMITTED BY LAW. THE PARTIES MAY ALSO SELECT ANY
OTHER NATIONAL SECURITIES EXCHANGE'S ARBITRATION FORUM UPON WHICH A PARTY IS
LEGALLY REQUIRED TO ARBITRATE THE CONTROVERSY, TO THE FULLEST EXTENT PERMITTED
BY LAW. SUCH ARBITRATION SHALL BE GOVERNED BY THE RULES OF THE ORGANIZATION
CONVENING THE PANEL, TO THE FULLEST EXTENT PERMITTED BY LAW. JUDGMENT ON ANY
AWARD OF ANY SUCH ARBITRATION MAY BE ENTERED IN THE SUPREME COURT OF THE STATE
OF NEW YORK OR IN ANY OTHER COURT HAVING JURISDICTION OVER THE PARTY OR PARTIES
AGAINST WHOM SUCH AWARD IS RENDERED. EACH MEMBER AGREES THAT THE DETERMINATION
OF THE ARBITRATORS SHALL BE BINDING AND CONCLUSIVE UPON THEM.
(D) NO MEMBER SHALL BRING A PUTATIVE OR CERTIFIED CLASS ACTION
TO ARBITRATION, NOR SEEK TO ENFORCE ANY PRE-DISPUTE ARBITRATION AGREEMENT
AGAINST ANY PERSON WHO HAS INITIATED IN COURT A PUTATIVE CLASS ACTION OR WHO IS
A MEMBER OF A PUTATIVE CLASS WHO HAS NOT OPTED OUT OF THE CLASS WITH RESPECT TO
ANY CLAIMS ENCOMPASSED BY THE PUTATIVE CLASS ACTION UNLESS AND UNTIL: (I) THE
CLASS CERTIFICATION IS DENIED; OR (II) THE CLASS IS DECERTIFIED; OR (III) THE
MEMBER IS EXCLUDED FROM THE CLASS BY THE COURT. THE FORBEARANCE TO ENFORCE AN
AGREEMENT TO ARBITRATE SHALL NOT CONSTITUTE A WAIVER OF ANY RIGHTS UNDER THIS
AGREEMENT EXCEPT TO THE EXTENT STATED HEREIN.
8.7 NOT FOR BENEFIT OF CREDITORS.
The provisions of this Agreement are intended only for the
regulation of relations among past, present and future Members (including the
Adviser), Directors, the Special Advisory Member and the Fund. This Agreement is
not intended for the benefit of non-Member creditors and no rights are granted
to non-Member creditors under this Agreement.
8.8 CONSENTS.
Any and all consents, agreements or approvals provided for or
permitted by this Agreement shall be in writing and a signed copy thereof shall
be filed and kept with the books of the Fund.
8.9 MERGER AND CONSOLIDATION.
(a) The Fund may merge or consolidate with or into one or more
limited liability companies formed under the Delaware Act or other business
entities (as defined in Section 18-209(a) of the Delaware Act) pursuant to an
agreement of merger or consolidation which has been approved in the manner
contemplated by Section 18-209(b) of the Delaware Act.
(b) Notwithstanding anything to the contrary contained
elsewhere in this Agreement, an agreement of merger or consolidation approved in
accordance with Section 18-209(b) of the Delaware Act may, to the extent
permitted by Section 18-209(b) of the Delaware Act, (i) effect any amendment to
this Agreement, (ii) effect the adoption of a new limited liability company
agreement for the Fund if it is the surviving or resulting limited liability
company in the merger or consolidation, or (iii) provide that the limited
liability company agreement of any other constituent limited liability company
to the merger or consolidation (including a limited liability company formed for
the purpose of consummating the merger or consolidation) shall be the limited
liability company agreement of the surviving or resulting limited liability
company.
8.10 PRONOUNS.
All pronouns shall be deemed to refer to the masculine,
feminine, neuter, singular or plural, as the identity of the person or persons,
firm or corporation may require in the context thereof.
8.11 CONFIDENTIALITY.
(a) A Member may obtain from the Fund, for any purpose
reasonably related to the Member's Interest, such information regarding the
affairs of the Fund as is just and reasonable under the Delaware Act, subject to
reasonable standards (including standards governing what information and
documents are to be furnished, at what time and location and at whose expense)
established by the Board.
(b) Each Member covenants that, except as required by
applicable law or any regulatory body, it will not divulge, furnish or make
accessible to any other person the name or address (whether business, residence
or mailing) of any Member (collectively, "Confidential Information") without the
prior written consent of the Board, which consent may be withheld in its sole
discretion.
(c) Each Member recognizes that in the event that this Section
8.11 is breached by any Member or any of its principals, partners, members,
directors, officers, employees or agents or any of its affiliates, including any
of such affiliates' principals, partners, members, directors, officers,
employees or agents, irreparable injury may result to the non-breaching Members
and the Fund. Accordingly, in addition to any and all other remedies at law or
in equity to which the non-breaching Members and the Fund may be entitled, such
Members also shall have the right to obtain equitable relief, including, without
limitation, injunctive relief, to prevent any disclosure of Confidential
Information, plus reasonable attorneys' fees and other litigation expenses
incurred in connection therewith.
(d) The Fund shall have the right to keep confidential from
the Members for such period of time as it deems reasonable any information which
the Board reasonably believes to be in the nature of trade secrets or other
information the disclosure of which the Board in good faith believes is not in
the best interest of the Fund or could damage the Fund or its business or which
the Fund is required by law or by agreement with a third party to keep
confidential.
8.12 CERTIFICATION OF NON-FOREIGN STATUS.
Each Member or transferee of an Interest from a Member that is
admitted to the Fund in accordance with this Agreement shall certify, upon
admission to the Fund and at such other time thereafter as the Board may
request, whether he or she is a "United States Person" within the meaning of
Section 7701(a)(30) of the Code on forms to be provided by the Fund, and shall
notify the Fund within 30 days of any change in such Member's status. Any Member
who shall fail to provide such certification when requested to do so by the
Board may be treated as a non-United States Person for purposes of U.S. Federal
tax withholding.
8.13 SEVERABILITY.
If any provision of this Agreement is determined by a court of
competent jurisdiction not to be enforceable in the manner set forth in this
Agreement, each Member agrees that it is the intention of the Members that such
provision should be enforceable to the maximum extent possible under applicable
law. If any provisions of this Agreement are held to be invalid or
unenforceable, such invalidation or unenforceability shall not affect the
validity or enforceability of any other provision of this Agreement (or portion
thereof).
8.14 ENTIRE AGREEMENT.
This Agreement (including the Schedule attached hereto which
is incorporated herein) constitutes the entire agreement among the parties
hereto pertaining to the subject matter hereof and supersedes all prior
agreements and understandings pertaining thereto. It is hereby acknowledged and
agreed that the Board, without the approval of any Member may enter into written
agreements ("Other Agreements") with Members, executed contemporaneously with
the admission of such Members to the Fund, effecting the terms hereof or of any
application in order to meet certain requirements of such Members. The parties
hereto agree that any terms contained in an Other Agreement with a Member shall
govern with respect to such Member notwithstanding the provisions of this
Agreement or of any application.
8.15 DISCRETION.
To the fullest extent permitted by law, whenever in this
Agreement, a person is permitted or required to make a decision (i) in its "sole
discretion" or "discretion" or under a grant of similar authority or latitude,
such person shall be entitled to consider only such interests and factors as it
desires, including its own interests, and shall have no duty or obligation to
give any consideration to any interest of or factors affecting the Fund or the
Members, or (ii) in its "good faith" or under another express standard, then
such person shall act under such express standard and shall not be subject to
any other or different standards imposed by this Agreement or any other
agreement contemplated herein or by relevant provisions of law or in equity or
otherwise.
8.16 COUNTERPARTS.
This Agreement may be executed in several counterparts, all of
which together shall constitute one agreement binding on all parties hereto,
notwithstanding that all the parties have not signed the same counterpart.
8.17 TAX MATTERS PARTNER.
JPMIM hereby is designated as the "tax matters partner" under
the Code for the Fund.
8.18 COMMODITY POOL OPERATOR.
JPMIM agrees to serve as the Fund's commodity pool operator
(as defined under the Commodity Exchange Act). As commodity pool operator, JPMIM
will be responsible for the commodity-related activities of the Fund and for
compliance with U.S. commodities laws and regulations.
THE UNDERSIGNED ACKNOWLEDGES HAVING READ THIS AGREEMENT IN ITS
ENTIRETY BEFORE SIGNING, INCLUDING THE PRE-DISPUTE ARBITRATION CLAUSES SET FORTH
IN SECTION 8.6 ON PAGES 34-35 AND THE CONFIDENTIALITY CLAUSES SET FORTH IN
SECTION 8.11 ON PAGES 36-37.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
ORGANIZATIONAL MEMBER:
/S/ STEVEN M. GREENSPAN
Steven M. Greenspan
SPECIAL ADVISORY MEMBER:
J.P. MORGAN INVESTMENT
MANAGEMENT INC.
By: /S/ CHRISTIAN FREI
Christian Frei, Vice President
ADDITIONAL MEMBERS:
Each person who has signed or has had signed on its behalf a Member Signature
Page, which shall constitute a counterpart hereof.
The undersigned understand and agree to the provisions of this Agreement
pertaining to the obligations of Directors.
/S/ JOHN N. BELL
John N. Bell, Director
/S/ JOHN R. RETTBERG
John R. Rettberg, Director
/S/ JOHN F. RUFFLE
John F. Ruffle, Director
/S/ KENNETH WHIPPLE, JR.
Kenneth Whipple, Jr., Director
<PAGE>
SCHEDULE I
DIRECTORS
NAME AND ADDRESS
John N. Bell
462 Lenox Avenue
South Orange, New Jersey 07079
John R. Rettberg
1770 West Balboa Boulevard
Newport Beach, California 92663
John F. Ruffle
Pleasantville Road
New Vernon, New Jersey 07976
Kenneth Whipple, Jr.
1115 Country Club Drive
Bloomfield Hills, Michigan 48304
<PAGE>
SCHEDULE II
INCENTIVE ALLOCATION
INVESTED CAPITAL INCENTIVE ALLOCATION
Less than $30,000,000 15%
$30,000,000 or more(1) 10%
--------
* The amounts of Invested Capital in the Fund and the J.P. Morgan Hedge Fund
Series/core, L.L.C. will be aggregated.
<PAGE>
APPENDIX B
PERFORMANCE INFORMATION
This Appendix contains performance information for Class A and Class B shares of
an offshore investment fund advised by the Adviser with an investment program
that is substantially similar to Fund Core's expected investment program
("Offshore Fund Core") and Class A and Class B shares of an offshore fund
advised by the Adviser with an investment program that is substantially similar
to Fund Alpha's expected investment program ("Offshore Fund Alpha" and
collectively with Offshore Fund Core, the "Offshore Funds"). The information on
the Table regarding the Offshore Funds reflects the deduction of the historical
fees and expenses paid by the Offshore Funds and not those to be paid by the
Funds. The information in the Table does not reflect the payment of a placement
fee and, if reflected, the placement fee would reduce the performance quoted.
The performance information in the Table has not been audited and does not
comply with the standards established by the Association of Investment
Management and Research (AIMR).
Because of the similarity of investment programs, as a general matter, the
Adviser will consider participation by each Fund in all appropriate investment
opportunities that are under consideration for investment for the Offshore
Funds. The Adviser will evaluate for each Fund a variety of factors that may be
relevant in determining whether a particular investment opportunity or strategy
to be used for the Offshore Funds is appropriate and feasible for the Fund at
that time. Because these considerations may differ for each Fund and the
Offshore Funds in the context of any particular investment opportunity, the
investment activities of each Fund and the Offshore Funds may differ from time
to time. See "CONFLICTS OF INTEREST--Participation in Investment Opportunities."
THE TABLE SETS FORTH THE PERFORMANCE RECORD OF THE OFFSHORE FUNDS FOR THE
PERIODS INDICATED. THE TABLE SHOULD BE READ IN CONJUNCTION WITH THE NOTES
THERETO. INFORMATION HAS BEEN OBTAINED OR DERIVED FROM SOURCES BELIEVED TO BE
RELIABLE BUT IS NOT WARRANTED AS TO ACCURACY OR COMPLETENESS. PAST PERFORMANCE
IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. PROSPECTIVE INVESTORS SHOULD
RECOGNIZE THAT THERE ARE CERTAIN DIFFERENCES BETWEEN THE INVESTMENT POLICIES OF
EACH FUND AND THOSE OF THE OFFSHORE FUNDS AND THAT EACH FUND'S FEES AND EXPENSES
MAY BE HIGHER (AND THEREFORE ITS PERFORMANCE MAY BE LOWER). FUTURE PERFORMANCE
OF EACH FUND WILL DIFFER FROM THAT OF THE OFFSHORE FUNDS.
PERFORMANCE RECORD OF THE OFFSHORE FUNDS (a)
<TABLE>
<CAPTION>
LEHMAN
OFFSHORE FUND OFFSHORE FUND OFFSHORE FUND OFFSHORE FUND MSCI WORLD BROTHERS
-------------- -------------- -------------- -------------- ----------- --------
CORE CLASS A(D) CORE CLASS ALPHA CLASS ALPHA CLASS INDEX(F) AGGREGATE BOND
---- ---------- ---- ------ ----- ------ ----- ------ -------- --------------
B(E) A(D) B(E) INDEX(G)
---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
1998 (b) -5.88% -5.70% -5.94% -5.73% 6.21% 4.36%
1999 16.06% 17.76% 24.93% 27.80% 23.56% 0.83%
2000 (c) 5.15% 5.97% -1.42% -1.21% -6.12% 1.86%
</TABLE>
ANNUALIZED PERFORMANCE RECORD OF THE OFFSHORE FUNDS (a) (h)
<TABLE>
<CAPTION>
LEHMAN
OFFSHORE OFFSHORE FUND OFFSHORE FUND OFFSHORE FUND MSCI WORLD BROTHERS
--------- -------------- -------------- -------------- ----------- --------
FUND CORE CORE CLASS ALPHA CLASS ALPHA CLASS INDEX(F) AGGREGATE BOND
---------- ---- ------ ----- ------ ----- ------ -------- --------------
CLASS A(D) B(E) A(D) B(E) INDEX(G)
---------- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
1 Year 13.74% 15.95% 13.57% 15.94% 12.05% 2.11%
From 7.85% 9.29% 8.35% 9.96% 12.40% 3.90%
7/31/98
</TABLE>
Notes:
a. The performance information shown for Offshore Fund Core and Offshore Fund
Alpha has been generated by applying an investment philosophy and
methodology that is similar to that which the Adviser expects to use to
manage Fund Core and Fund Alpha, respectively. Future investments, however,
will be made under different economic conditions and may include different
Investment Funds. The performance information is limited and may not
reflect performance in different economic cycles. Investors should not
assume that they will experience returns in the future, if any, comparable
to those discussed herein. The returns for the indices presented above are
provided for comparison only; the Funds are not managed against either
index as a benchmark.
b. Each Offshore Fund commenced operations on July 31, 1998. Returns for each
Offshore Fund and index for 1998 are for the period July 31, 1998 through
December 31, 1998.
c. Returns for 2000 are for the period January 1, 2000 through May 31, 2000.
d. The performance of each Offshore Fund's Class A reflects the deduction of
the Offshore Fund's annual fixed fee of 1.50% of the average net assets of
the Offshore Fund's Class A (which comprises investment advisory fees, any
shareholder servicing fees and all operating and administrative expenses)
and a performance fee, if any, equal to 10% of any positive share class
return ("Class A Fees"). Class A Fees for the annual returns and annualized
return figures since inception have been deducted on a quarterly basis in
arrears. For all other periods shown, Class A Fees have been deducted on a
monthly basis. Investors in each Fund will be charged a monthly management
fee and will bear other operating expenses. See "FEES AND EXPENSES." The
performance information does not reflect the payment of any subscription
fee, which, if reflected, would reduce the performance quoted. At all times
under consideration, the assets of Class A of Offshore Fund Core were
between $16.7 million and $60.9 million and the assets of Class A of
Offshore Fund Alpha were between $26.6 million and $40.1 million.
e. The performance of each Offshore Fund's Class B reflects the deduction of
the Offshore Fund's investment advisory fee and operating and
administrative expenses at the annual rate of 1.00% of the average net
assets of the Offshore Fund's Class B ("Class B Fees"). No performance fees
are payable by Class B shares of the Offshore Funds. Class B Fees for the
annual returns and annualized return figures since inception have been
deducted on a quarterly basis in arrears. For all other periods shown,
Class B Fees have been deducted on a monthly basis. Investors in each Fund
will be charged a monthly management fee and will bear other operating
expenses. To the extent a Fund's expenses are higher than the comparable
Offshore Fund's expenses, its performance could be lower. See "FEES AND
EXPENSES." The performance information does not reflect the payment of any
subscription fee, which, if reflected, would reduce the performance quoted.
At all times under consideration, the assets of Class B of Offshore Fund
Core were between $33.2 million and $103.8 million and the assets of Class
B of Offshore Fund Alpha were between $30.4 million and $133.6 million.
f. The MSCI World Index is an unmanaged index representing market
value-weighted average returns of selected securities listed on the stock
exchanges of the United States, Europe, Canada, Australia, New Zealand and
the Far East. The performance data for the MSCI World Index assumes the
reinvestment of all dividends, but does not deduct any fees or expenses.
The Funds do not restrict their investments to securities included in the
MSCI World Index. The MSCI World Index was chosen because it includes
principally equity securities that the Investment Funds can purchase.
g. The Lehman Brothers Aggregate Bond Index is an unmanaged, market-weighted
index that represents the performance of U.S. Treasury and agency
securities, mortgage pass-through securities and corporate fixed-income
securities rated BBB- or better. The performance data for the Lehman
Brothers Aggregate Bond Index assumes the reinvestment of all dividends,
but does not deduct any fees or expenses. The Funds do not restrict their
investments to securities included in the Lehman Brothers Aggregate Bond
Index. The Lehman Brothers Aggregate Bond Index was chosen because it
includes principally fixed-income securities that the Investment Funds can
purchase.
h. All returns are through May 31, 2000.
<PAGE>
FORM N-2
J.P. Morgan Hedge Fund Series/core, L.L.C.
PART C - OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements:
Because the Registrant has no assets, financial statements are
omitted.
(2) Exhibits:
(a) (1) Certificate of Formation.*
(2) Limited Liability Company Agreement.**
(b) Not Applicable.
(c) Not Applicable.
(d) See Item 24(2)(a)(2).
(e) Not Applicable.
(f) Not Applicable.
(g) Investment Advisory Agreement.
(h) Not Applicable.
(i) Not Applicable.
(j) Custodian Services Agreement.***
(k) (1) Management and Administration Agreement.
(2) Administration, Accounting and Investor
Services Agreement.***
(l) Not Applicable.
(m) Not Applicable.
(n) Not Applicable.
(o) Not Applicable.
(p) Not Applicable.
(q) Not Applicable.
(r) Code of Ethics of the Fund, of J.P. Morgan
Investment Management Inc. and of J.P. Morgan
Securities Inc.
--------------
* Previously filed on March 31, 2000.
** See Appendix A1 of Confidential Offering Memorandum.
*** To be filed by amendment.
ITEM 25. MARKETING ARRANGEMENTS
Not Applicable.
<PAGE>
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Blue Sky fees and expenses (including Fees of Counsel)......$ 25,000
Legal and accounting fees and expenses......................$ 125,000
Printing, engraving and offering expenses...................$ 90,000
Miscellaneous...............................................$ 10,000
---------
$ 250,000
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
After completion of the private offering of interests, the Registrant
expects that no person will be directly or indirectly controlled by, or under
common control with, the Registrant.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
Title of Class Number of Record Holders
-------------- ------------------------
Interests 1 (The Registrant anticipates
that as a result of the private
offering of interests there will
be more than 100 record holders
of such interests in the future.)
ITEM 29. INDEMNIFICATION
Reference is made to Section 3.7 of the Registrant's Limited Liability
Company Agreement (the "LLC Agreement"). The Registrant hereby undertakes that
it will apply the indemnification provision of the LLC Agreement in a manner
consistent with Release 40-11330 of the Securities and Exchange Commission under
the Investment Company Act of 1940, as amended (the "1940 Act"), so long as the
interpretation therein of Sections 17(h) and 17(i) of the 1940 Act remains in
effect.
The Registrant, in conjunction with the Adviser, the Registrant's
directors and other registered management investment companies managed by the
Adviser or its affiliates, maintains insurance on behalf of any person who is or
was an independent director, officer, employee, or agent of the Registrant, or
who is or was serving at the request of the Registrant as an individual general
partner, director, officer, employee or agent of another managed investment
company, against certain liability asserted against and incurred by, or arising
out of, his or her position. However, in no event will the Registrant pay that
portion of the premium, if any, for insurance to indemnify any such person or
any act for which the Registrant itself is not permitted to indemnify.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
A description of any other business, profession, vocation, or
employment of a substantial nature in which the investment adviser of the
Registrant, and each member, director, executive officer, or partner of any such
investment adviser, is or has been, at any time during the past two fiscal
years, engaged in for his or her own account or in the capacity of member,
director, officer, employee, partner or trustee, is set forth in the
Registrant's Confidential Memorandum in the section entitled "THE ADVISER."
Information as to the directors and officers of J.P. Morgan Investment
Management Inc. is included in its Form ADV as filed with the Commission (File
No. 801-21011), and is incorporated herein by reference.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
PFPC Inc. maintains certain required accounting related and financial
books and records of the Registrant at PFPC Inc., 103 Bellevue Parkway, 4th
Floor, Wilmington, DE 19809. The other required books and records are
maintained by the Adviser c/o J.P. Morgan Investment Management Inc., 522 Fifth
Avenue, New York, New York 10036.
ITEM 32. MANAGEMENT SERVICES
Not Applicable.
ITEM 33. UNDERTAKINGS
Not Applicable.
<PAGE>
FORM N-2
J.P. Morgan Hedge Fund Series/core, L.L.C.
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940,
the Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York on the 2nd day of August, 2000.
J.P. Morgan Hedge Fund Series/core, L.L.C.
By: /s/ Joseph Bertini
--------------------------------
Name: Joseph Bertini
Title: Authorized Representative
<PAGE>
FORM N-2
J.P. Morgan Hedge Fund/core, L.L.C.
EXHIBIT INDEX
EXHIBIT NUMBER DOCUMENT DESCRIPTION
(g) Investment Advisory Agreement.
(k)(1) Management and Administration Agreement.
(r) Codes of Ethics.
