As filed with the U.S. Securities and Exchange Commission on
March 31, 2000
Investment Company Act File No. 811-_____
-----------------------------------------------------------------
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
| | Amendment No. __
-------------------------
J.P. Morgan Multi-Manager Strategies Fund II, 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 NO:
J.P. MORGAN MULTI-MANAGER
STRATEGIES FUND I, L.L.C.
J.P. MORGAN MULTI-MANAGER
STRATEGIES FUND II, L.L.C.
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.
JP MORGAN
<PAGE>
INTERESTS IN J.P. MORGAN MULTI-MANAGER STRATEGIES FUND I, L.L.C. ("FUND I") AND
J.P. MORGAN MULTI-MANAGER STRATEGIES FUND II, L.L.C. ("FUND II") (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.
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.
__________2000
<PAGE>
TABLE OF CONTENTS
PAGE
INTRODUCTION................................................................1
SUMMARY OF TERMS............................................................1
THE FUNDS..................................................................16
STRUCTURE..................................................................16
INVESTMENT PROGRAM.........................................................16
TYPES OF INVESTMENTS AND RELATED RISK FACTORS..............................22
ADDITIONAL RISK FACTORS....................................................34
PERFORMANCE INFORMATION....................................................38
THE DIRECTORS..............................................................38
THE ADVISER................................................................40
VOTING.....................................................................42
CONFLICTS OF INTEREST......................................................42
BROKERAGE..................................................................46
FEES AND EXPENSES..........................................................47
CAPITAL ACCOUNTS AND ALLOCATIONS...........................................49
ALLOCATION OF SPECIAL ITEMS--CERTAIN WITHHOLDING TAXES
AND OTHER EXPENDITURES.................................................52
APPLICATION FOR INTERESTS..................................................54
REDEMPTIONS, REPURCHASES OF INTERESTS AND TRANSFERS........................56
TAX ASPECTS................................................................60
ADDITIONAL INFORMATION AND SUMMARY OF LLC AGREEMENT........................72
APPENDIX A1--LIMITED LIABILITY COMPANY AGREEMENT OF J.P.
MORGAN MULTI-MANAGER STRATEGIES FUND I, L.L.C.........................A-1
APPENDIX A2--LIMITED LIABILITY COMPANY AGREEMENT OF J.P.
MORGAN MULTI-MANAGER STRATEGIES FUND II, L.L.C........................A-1
APPENDIX B--PERFORMANCE INFORMATION.......................................B-1
<PAGE>
INTRODUCTION
This Memorandum relates to the simultaneous offering of two separate Funds:
o J.P. Morgan Multi-Manager Strategies Fund I, L.L.C.
o J.P. Morgan Multi-Manager Strategies Fund II, L.L.C.
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 I will seek to achieve superior risk-adjusted returns with a
volatility level similar to 3 to 5 year U.S. bonds. Fund II 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 I's assets to Investment
Funds that employ the Event Driven and
Relative Value strategies and a higher
percentage of Fund II's assets to Investment
Funds that employ the Long/Short and Tactical
Traders strategies. Fund I will pursue
superior risk-adjusted returns with a
volatility level similar to 3 to 5 year U.S.
bonds. Fund II 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 discounts 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 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 more than 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 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. See
"TYPES OF INVESTMENTS AND RELATED RISK
FACTORS."
POTENTIAL BENEFITS OF An investment in a Fund enables investors to
INVESTING IN THE FUNDS: 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
vast 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 a 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 necessary 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 $348 billion as
of December 31, 1999.
PLACEMENT J.P. Morgan Securities Inc. ("JPM
AGENT: Securities"), an affiliate of J.P. Morgan,
acts as the placement agent for each Fund,
without special compensation from the 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 Fund, sub-placement agents.
See "CONFLICTS OF INTEREST--The Adviser."
CONFLICTS OF The investment activities of the Adviser,
INTEREST: 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 The Adviser provides certain management and
EXPENSES: 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
at the annual rate of 1.50% of the Fund's net
assets for the month, excluding assets
attributable to the Adviser's capital account
and the Special Advisory Account (the "Fee").
The Fee will be paid to the Adviser out of
the Fund's assets, and debited against the
Investors' capital accounts (including the
Adviser's capital account but excluding the
Special Advisory Account).
__________ (the "Administrator") performs
certain administration, accounting and
investor services for each Fund. In
consideration for these services, the Fund
will pay the Administrator an annual fee
calculated based upon its aggregate average
net assets[, subject to a minimum monthly
fee,] 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 each Fund, generally, at the end of
the 12-month period following the admission
of an Investor to the Fund, and at the end of
each fiscal year thereafter, an amount up to
10% of the net profits, if any, that exceeds
the amount the Investor would have earned if
it had received an annualized rate of return
of 5% during the relevant period on its
opening capital account balance
(appropriately adjusted for contributions and
withdrawals) for such period (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 (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. See "CAPITAL
ACCOUNTS AND ALLOCATIONS--Incentive
Allocation."
APPLICATION FOR Both initial and additional applications for
INTERESTS: 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,
and members of their immediate families, and,
in the sole discretion of the Board,
attorneys or other professional advisors
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 __________,
2000. The Fund, in its sole discretion, may
accelerate or postpone the closing date.
TRANSFER Interests in a Fund may be transferred only
RESTRICTIONS: by (i) 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 a
INTERESTS BY THE Fund to redeem the Investor's interest in
FUNDS: 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 opinion
TAXATION: 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 Retirement
OTHER TAX-EXEMPT Income Security Act of 1974, as amended,
ENTITIES: 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. Any
tax-exempt entity that desires to invest in a
Fund should contact John Garibaldi at [(212)
837-2862] or Jose Claxton at [(212)
837-2706].
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 of the Commodity
Exchange Act ("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 of the CEA.
<PAGE>
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 (___) ___-____. 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 Advisor generally will seek to
achieve and maintain the risk/return profiles of the Funds by allocating a
higher percentage of Fund I's assets to Investment Funds that employ the Event
Driven and Relative Value strategies and a higher percentage of Fund II's assets
to Investment Funds that employ the Long/Short and Tactical Traders strategies.
Fund I will pursue superior risk-adjusted returns with a volatility level
similar to 3 to 5 year U.S. bonds. Fund II 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 DISCOUNTS
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 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 investing in one
equity security while seeking to hedge the market risk with an offsetting
investment in another related security or instrument.
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 hedge out 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 is 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 more than 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. 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.
<PAGE>
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 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 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 AND FUTURES. The Investment Funds may invest in options and futures
contracts. 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
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 sell put options in respect of
specific securities, and may write and sell covered or uncovered call and put
options. A covered call option, which is a call option with respect to which an
Investment Fund owns the underlying security, that is sold by the Investment
Fund 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 with respect to which an
Investment Fund has segregated cash or liquid securities to fulfill the
obligation undertaken, that is sold by the Investment Fund exposes the
Investment Fund during the term of the option to a decline in price of the
underlying security while depriving the Investment Fund of the opportunity to
invest the segregated assets.
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.
The Investment Funds may enter into futures contracts in U.S. domestic markets
or on exchanges located outside the United States. Foreign markets may offer
advantages such as trading opportunities or arbitrage possibilities not
available in the United States. Foreign markets, however, may have greater risk
potential than domestic markets. For example, some foreign exchanges are
principal markets so that no common clearing facility exists and an investor may
look only to the broker for performance of the contract. In addition, any
profits 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.
Engaging in these transactions involves risk of loss to a Fund which could
adversely affect the value of the Fund's net assets. No assurance can be given
that a liquid market will exist for any particular futures contract at any
particular time. Many futures exchanges and boards of trade limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit or trading may be suspended for
specified periods during the trading day. Futures contract prices could move to
the limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and potentially
subjecting the Fund to substantial losses.
Successful use of 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.
Some or all of the Investment Funds may purchase and sell stock index futures
contracts. A stock index future obligates an Investment Fund to pay or receive
an amount of cash equal to a fixed dollar amount specified in the futures
contract multiplied by the difference between the settlement price of the
contract on the contract's last trading day and the value of the index based on
the stock prices of the securities that comprise it at the opening of trading in
such securities on the next business day.
Some or all of the Investment Funds may purchase and sell interest rate futures
contracts. An interest rate future obligates an Investment Fund to purchase or
sell an amount of a specific debt security at a future date at a specific price.
Some or all of the Investment Funds may purchase and sell currency futures. A
currency future obligates an Investment Fund to purchase or sell an amount of a
specific currency at a future date at a specific price.
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.
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
Subadvisers may purchase and sell foreign currency, options, futures
and forward contracts, including those related to indexes, and options
on indexes.
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 charge its Investment Fund 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 a 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
necessary 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
462 Lenox Avenue Company of New York, Inc. (since prior to 1993). Mr.
South Orange, New Jersey 07079 Bell also is a director or trustee of _____ other
Age 68 investment companies for which J.P. Morgan or its
affiliates serves as investment adviser.
John R. Rettberg Retired; Corporate Vice President and Treasurer,
1770 West Balboa Boulevard Northrop Grumman Corporation ("Northrop") (prior to
Newport Beach, California 92663 January 1995); Consultant, Northrop (since January
Age 62 1995); Director, Independent Colleges of 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 _____
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
1156 Ocean Forest Lane (prior to June 1993); Trustee, The Johns Hopkins
Seabrook Island, University (since prior to 1992); Director, Bethlehem
South Carolina 29455 Steel Corporation (since prior to 1990); Director,
Age 63 Wackenhut Corrections Corp. (since January 1997);
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 _____ other investment companies for which J.P.
Morgan or its affiliates serves as investment
adviser.
Kenneth Whipple, Jr. Retired; Executive Vice President, Ford Motor
555 Hupp Cross Road Company, President, Ford Financial Services Group,
Bloomfield Hills, Michigan 48301 and Chairman, Ford Motor Credit Company; Director
Age 65 and President, Ford Holdings, Inc. (since prior 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 _____ 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
of two-thirds of the Directors not subject to the removal vote or vote 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
$_____ and per meeting fees of $___, or $___ in the case of telephonic meetings,
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 $_____ during the coming year, and that, together
with compensation paid to them by other registered investment companies advised
by affiliates of the Adviser, Messrs. Bell, Rettberg, Ruffle and Whipple will
receive aggregate annual compensation from all such companies of approximately
$_______, $_______, $_______ and $______, respectively, 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 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 $348 billion as of December 31, 1999.
The offices of the Adviser are located at 522 Fifth Avenue, New York, New York
10036, and its telephone number is (___) ___-____. 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 schedule
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, without special
compensation from the 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 advisors, 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 at the annual rate of
1.50% of the Fund's net assets for the month, excluding assets attributable to
the Adviser's capital account and the Special Advisory Account (the "Fee"). 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 all Investors (except the Special Advisory Account) 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, the Fund will pay the
Administrator an annual fee of ___ % based on the average net assets of the
Fund, [subject to a minimum monthly fee of $______], 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 all costs and expenses associated with the organization of Investment
Funds managed by Subadvisers, if any, and with the selection of
Investment Funds, including due diligence and travel-related expenses;
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 fees and disbursements of any attorneys, accountants (including tax
preparation fees), auditors and other consultants and professionals
engaged on behalf of the Fund;
o the fees of custodians and other persons providing administrative
services to the Fund;
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 of preparing, setting in type, printing and
distributing reports and other communications to Investors;
o all expenses of computing the Fund's net asset value, including any
equipment or services obtained for the purpose of valuing the Fund's
investment portfolios including valuation services provided by third
parties;
o all charges for equipment or services used for communications between
the Fund and any custodian, or other agent engaged by 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 organizational and offering expenses are estimated at $_______.
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 those
expenses among the Investors, an amount equal to the 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 organizational costs will be made as of the first date
on which capital contributions of Investors are made. These allocations will
thereafter be adjusted as of each date, through and including ___________, 200_,
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. 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 10% 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 or 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" is the amount that an Investor would have earned for an "allocation
period" if it had received an annualized rate of return of 5% during the
relevant period on its opening capital account balance (appropriately adjusted
for contributions and withdrawals) for such period. The Hurdle is not cumulative
from year to year or allocation period to allocation period.
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 subsequent to an Investor 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
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 in the Fund (as the term is defined in the Fund's
LLC Agreement):
INVESTED CAPITAL INCENTIVE ALLOCATION
---------------- --------------------
Less than $100,000,000 10%
$100,000,000 or more 5%
The Adviser, in its sole discretion, may reduce or waive the Incentive
Allocation for Investors who are key employees or directors of the Adviser, and
its affiliates, and members of their immediate families, and attorneys or other
professional advisors engaged on behalf of a Fund, and members of their
immediate families (collectively, "Special Investors").
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, and members of their immediate
families, and, in the sole discretion of the Adviser, attorneys or other
professional advisors 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 ____________, 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 J.P. Morgan 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 J.P. Morgan
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 January 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.
<PAGE>
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.
<PAGE>
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) and the
recipient is an "eligible partner" within the meaning of Section
731(c)(3)(C)(iii). 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.(1)
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.
- -------------------
1 Generally, a conversion transaction is one of the 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 or (iv) any other
transaction specified in the Regulations.
<PAGE>
As indicated above, each Fund 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, or any currency forward 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.
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. Therefore, there is no assurance that a mixed
straddle account election by a Fund will be accepted by the Service.
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, 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.(2) 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.
- -----------
2 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.
<PAGE>
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.
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.(3) 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.
- ----------
3 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.
<PAGE>
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.
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 and to make
additional capital contributions up to, but in no event in excess of, 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
Each Fund's fiscal year ends on December 31st.
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
____________________ (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 _______________________________.
INQUIRIES
Inquiries concerning a Fund and interests in a Fund, including information
concerning purchase and redemption procedures, should be directed to:
J.P. Morgan Securities Inc.
522 Fifth Avenue
New York, New York 10036
Telephone: (___) ___-____
Telecopier: (___) ___-____
* * * * *
All potential Investors are encouraged to consult appropriate legal and tax
counsel.
<PAGE>
APPENDIX A1
J.P. MORGAN MULTI-MANAGER STRATEGIES FUND I, L.L.C.
LIMITED LIABILITY COMPANY AGREEMENT
[Intentionally Omitted]
<PAGE>
APPENDIX A2
J.P. MORGAN MULTI-MANAGER STRATEGIES FUND II, L.L.C.
LIMITED LIABILITY COMPANY AGREEMENT
[Intentionally Omitted]
<PAGE>
APPENDIX B
PERFORMANCE INFORMATION
This Appendix contains performance information for an offshore investment fund
advised by the Adviser with an investment program that is substantially similar
to Fund I's expected investment program ("Offshore Fund I") and an offshore fund
advised by the Adviser with an investment program that is substantially similar
to Fund II's expected investment program ("Offshore Fund II" and collectively
with Offshore Fund I, the "Offshore Funds"). The information on the Table
regarding the Offshore Funds reflects the deduction of pro-forma management fees
as if the Offshore Funds had incurred management fees similar to the management
fees charged 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 PRO-FORMA 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. FUTURE PERFORMANCE OF EACH FUND WILL DIFFER FROM THAT OF THE
OFFSHORE FUNDS.
<PAGE>
- -------------------------------------------------------------------------------
PRO-FORMA PERFORMANCE RECORD OF THE OFFSHORE FUNDS (a)
OFFSHORE FUND I(D) OFFSHORE FUND II(D) [INDEX TO COME]
------------------ ------------------- ---------------
1998 (b)
1999
2000 (c)
ANNUALIZED PRO-FORMA PERFORMANCE RECORD OF THE OFFSHORE FUNDS (a) (e)
OFFSHORE FUND I(D) OFFSHORE FUND II(D) [INDEX TO COME]
------------------ ------------------- ---------------
1 Year
3 Years
From 7/31/98
- -------------------------------------------------------------------------------
Notes:
a. The performance information shown for Offshore Fund I and Offshore Fund II
has been generated by applying an investment philosophy and methodology
that is similar to that which the Adviser expects to use to manage Fund I
and Fund II, 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.
b. Each Offshore Fund commenced operations on July 31, 1998. Pro-forma returns
for each Offshore Fund 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 __________,
2000.
d. The performance of each Offshore Fund has been computed on a pro-forma
basis to reflect the deduction of each Fund's management fee at the annual
rate of 1.50% of the Fund's net assets (the "Management Fee"). The
Management Fee for the annual returns and annualized return figures since
inception have been deducted on a quarterly basis in arrears. For all other
periods shown, the Management Fee has been deducted on a monthly basis.
Investors in each Fund will be charged a monthly management fee. See "FEES
AND EXPENSES." These performance returns reflect aggregate expenses that
are expected to be greater than the Funds' expenses. The performance
information does not reflect the payment of a placement fee and, if
reflected, the placement fee would reduce the performance quoted. At all
times under consideration, the assets of Offshore Fund I were between
$__________ and $__________ and the assets of Offshore Fund II were between
$__________ and $__________.
e. All returns are through __________, 2000.
<PAGE>
FORM N-2
J.P. Morgan Multi-Manager Strategies Fund II, 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.*
(3) Escrow Agreement.*
(l) Not Applicable.
(m) Not Applicable.
(n) Not Applicable.
(o) Not Applicable.
(p) Not Applicable.
(q) Not Applicable.
(r) Not Applicable.
--------------
* To be filed by amendment.
ITEM 25. MARKETING ARRANGEMENTS
Not Applicable.
<PAGE>
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
To be filed by amendment.
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"), which is to be filed by amendment. 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
To be filed by amendment.
ITEM 32. MANAGEMENT SERVICES
Not Applicable.
ITEM 33. UNDERTAKINGS
Not Applicable.
<PAGE>
FORM N-2
J.P. Morgan Multi-Manager Strategies Fund II, 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 31st day of March, 2000.
J.P. Morgan Multi-Manager Strategies Fund II, L.L.C.
By: /s/ John N. Bell
--------------------------------
JOHN N. BELL, DIRECTOR
By: /s/ John R. Rettberg
--------------------------------
JOHN R. RETTBERG, DIRECTOR
By: /s/ John F. Ruffle
--------------------------------
JOHN F. RUFFLE, DIRECTOR
By: /s/ Kenneth Whipple, Jr.
--------------------------------
KENNETH WHIPPLE, JR. DIRECTOR
<PAGE>
FORM N-2
J.P. Morgan Multi-Manager Strategies Fund II, L.L.C.
EXHIBIT INDEX
EXHIBIT NUMBER DOCUMENT DESCRIPTION
(a)(1) Certificate of Formation.
<PAGE>
EXHIBIT (a)(1)
CERTIFICATE OF FORMATION
OF
J.P. MORGAN MULTI-MANAGER STRATEGIES FUND II, L.L.C.
Under Section 18-201 of the Delaware
Limited Liability Company Act
The undersigned, being an authorized person under Section 18-201 of
the Limited Liability Company Act of the State of Delaware, hereby certifies:
FIRST: The name of the limited liability company is J.P. Morgan
Multi-Manager Strategies Fund II, L.L.C. (the "Company").
SECOND: The address of the Company's registered office in the State of
Delaware is Corporation Service Company, 1013 Centre Road, in the City of
Wilmington, County of New Castle (Zip Code 19805). The name of its registered
agent at such address is Corporation Service Company.
IN WITNESS WHEREOF, the undersigned has signed this Certificate on
this 30th day of March, 2000.
AUTHORIZED PERSON:
By: /s/ STEVEN M. GREENSPAN
-------------------------
Steven M. Greenspan
