PROSPECTUS
Dated February 29, 1996, as
revised July 1, 1996
THE BAUPOST FUND
44 Brattle Street
Post Office Box 381288
Cambridge, MA 02238
(617) 497-6680
The Baupost Fund (the "Fund") is a no-load, non-diversified, open-end
management investment company. The Fund's principal investment objective is
capital appreciation, and its secondary objective is income. The Fund pursues
these objectives primarily through investments in foreign and domestic
securities, including common stocks, preferred stocks and debt securities, that
the Fund's investment adviser, The Baupost Group, Inc. ("Baupost" or the
"Adviser"), believes are available for purchase at prices less than their
intrinsic value. There is no assurance that the Fund will achieve its
objectives. THE FUND MAY INVEST UP TO 15% OF ITS ASSETS IN SECURITIES WHICH ARE
NOT READILY MARKETABLE; THIS COULD RESULT IN HIGHER TRANSACTION COSTS THAN
INVESTING IN PUBLICLY TRADED SECURITIES AND CAUSE TIME DELAYS AND COSTS AND
POSSIBLE LOSSES IN CONNECTION WITH THE SALE OF SUCH SECURITIES. See "How the
Fund Pursues its Objectives."
THE FUND MAY INVEST PREDOMINANTLY IN LOWER RATED BONDS, COMMONLY
REFERRED TO AS "JUNK BONDS." BONDS OF THIS TYPE ARE CONSIDERED TO BE SPECULATIVE
WITH REGARD TO THE PAYMENT OF INTEREST AND RETURN OF PRINCIPAL. PURCHASERS
SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND. See
"How the Fund Pursues its Objectives."
Shares of the Fund may be purchased in a continuous offering directly
from the Fund at net asset value without a sales charge or underwriting
commission on the last day of each month on which the New York Stock Exchange is
open for business. The minimum initial investment in the Fund is $50,000
($100,000 for California residents); the minimum additional investment is
$1,000. The Fund reserves the right at any time to reject an order to purchase
shares of the Fund. See "Purchase of Shares." Before investing in the Fund,
shareholders will be required to execute an agreement pursuant to which they
will agree not to transfer their shares, except as approved by the Fund.
This Prospectus sets forth concisely the information that a prospective
investor should know before investing in the Fund. Please retain this Prospectus
for future reference. A Statement of Additional Information, dated February 29,
1996, containing additional and more detailed information about the Fund has
been filed with the Securities and Exchange Commission and is incorporated
herein by reference. The Statement of Additional Information can be obtained
without charge by calling the Fund at (617) 497-6680, or writing to the Fund at
the above address.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
-------------------
INVESTMENT ADVISER
THE BAUPOST GROUP, INC.
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TABLE OF CONTENTS
Page
____
EXPENSE INFORMATION 1
FINANCIAL HIGHLIGHTS 2
THE FUND 3
THE FUND'S INVESTMENT OBJECTIVES 3
HOW THE FUND PURSUES ITS OBJECTIVES 3
OTHER INVESTMENT PRACTICES AND RISK CONSIDERATIONS 7
PORTFOLIO MANAGEMENT AND PORTFOLIO TURNOVER 9
RISK FACTORS 10
LIMITING INVESTMENT RISK 12
PURCHASE OF SHARES 12
REDEMPTION OF SHARES 13
DETERMINATION OF NET ASSET VALUE 13
DISTRIBUTIONS 14
TAXES 15
MANAGEMENT OF THE FUND 16
HOW THE FUND SHOWS PERFORMANCE 17
DESCRIPTION OF THE FUND AND OWNERSHIP OF SHARES 17
CUSTODIAN 18
TRANSFER AND DIVIDEND DISBURSING AGENT AND ADMINISTRATOR 18
REPORTS TO SHAREHOLDERS 18
SHAREHOLDER INQUIRIES 18
APPENDIX A - OPTIONS, FUTURES AND FOREIGN CURRENCY EXCHANGE TRANSACTIONS 19
APPENDIX B - DESCRIPTION OF DEBT RATINGS 32
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EXPENSE INFORMATION
The expenses of the Fund for the 1995 fiscal year are set forth in the
following table:
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases................................................ NONE
Maximum Sales Load Imposed on
Reinvested Dividends..................................... NONE
Deferred Sales Load...................................... NONE
Redemption Fee........................................... NONE
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee 1.00%
Administrative Fee .25%
Other Expenses .29%
Total Fund Operating Expenses 1.54%
EXAMPLE:
You would pay the following 1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
expenses on a $1,000 investment $16 $49 $84 $183
assuming (1) 5% annual return
and (2) redemption at the end
of each time period:
The purpose of the table is to assist you in understanding the various
costs and expenses of the Fund that are borne by shareholders of the Fund. The
Example is based on the Total Fund Operating Expenses for the Fund's last fiscal
year (1.54% of average net assets) and does not represent future expenses;
actual expenses incurred during the periods covered by the Example may be more
or less than shown. Federal regulations require the Example to assume a 5%
annual return, but actual annual return will vary. See "Management of the Fund"
for more information about operating expenses.
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THE BAUPOST FUND
FINANCIAL HIGHLIGHTS
The table below presents selected per share data, total returns, and ratios for
the life of the Fund for each share of beneficial interest. The information in
the table has been audited and reported on by Ernst & Young LLP, the Fund's
independent auditors, whose report appears in the Statement of Additional
Information. The Fund's Annual Report, which contains additional unaudited
performance information, is available upon request.
Year Ended Period Ended
October 31 October 31
---------------------------- ------------
1995 1994 1993 1992 1991(d)
---- ---- ---- ---- ------
SELECTED PER SHARE DATA (A)
Net Asset Value, beginning of period $14.33 $14.77 $12.56 $11.97 $10.04
----- ------ ----- ------ ------
Income from Investment Operations
Net investment income 0.25 0.22 0.28 0.24 0.47
Net realized and unrealized
gain (loss) 0.71 1.23 2.76 0.88 1.46
---- ---- ---- ---- ----
Total from investment operations 0.96 1.45 3.04 1.12 1.93
---- ---- ---- ---- -----
Less Distributions
From net investment income 0.25 0.46 0.22 0.53 -
In excess of net investment
income 0.08 - - - -
From net realized gain 1.49 1.43 0.61 - -
---- ---- ----- ----- ------
Total distributions 1.82 1.89 0.83 0.53 -
---- ---- ----- ----- ------
Net Asset Value, end of period $13.47 $14.33 $14.77 $12.56 $11.97
====== ====== ====== ====== ======
TOTAL RETURN 7.91% 11.06% 25.45% 9.51% 19.21%(b)
RATIOS AND SUPPLEMENTAL DATA
Net Assets, end of period
(in thousands) $89,439 $81,787 $75,378 $46,942 $ 35,054
Ratio of expenses to
average net assets 1.54% 1.53% 1.52% 1.50% 1.50%(c)
Total expenses to average
net assets 1.54% 1.55% 1.63% 1.72% 2.01%(c)
Ratio of net investment income
to average net assets 1.60% 1.32% 2.29% 2.07% 5.33%(c)
Ratio of net investment income
excluding waiver of management
fee to average net assets 1.60% 1.30% 2.17% 1.85% 4.82%(c)
Portfolio Turnover rate 106% 161% 183% 137% 144%
(a) All per share amounts reflect the effect of a ten-for-one share split as
of the close of business October 31, 1993.
(b) Total returns for periods of less than one year are not annualized.
(c) Annualized.
(d) For the period January 1, 1991 - October 31, 1991. For the period from June
29, 1990 (date of organization) to December 31, 1990, net income of $2,993, or
$1.50 per share, was distributed to the Fund's sole shareholder. Such
distributions represented the net income of the Fund prior to the date shares of
beneficial interest were issued.
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THE FUND
The Baupost Fund (the "Fund") is a no-load, non-diversified, open-end
management investment company registered under the Investment Company Act of
1940, as amended (the "1940 Act"). The Fund was established as a Massachusetts
business trust under an Agreement and Declaration of Trust dated June 29, 1990.
THE FUND'S INVESTMENT OBJECTIVES
The principal investment objective of the Fund is capital appreciation.
Income is a secondary objective. These objectives are not fundamental and the
Trustees of the Fund may change them without shareholder approval. The Fund is
not intended to be a complete investment program, and there is no assurance the
Fund will achieve its objectives.
HOW THE FUND PURSUES ITS OBJECTIVES
BASIC INVESTMENT STRATEGY. The Fund pursues its investment objectives
primarily through investments in common stocks, preferred stocks, debt
securities (such as bonds, debentures, notes, bank debt and claims) and
participations therein, and other securities which, in the opinion of The
Baupost Group, Inc. ("Baupost" or the "Adviser"), are available at prices less
than their intrinsic value, as determined by Baupost after analysis and
research, taking into account, among other factors, the relationship of the
market value of the securities to book value, cash flow, and earnings. These
factors are not applied formulaically, as the Adviser examines each security
separately; the Adviser has no general criteria as to asset size, earnings or
industry type which would make a security unsuitable for purchase by the Fund.
The Fund may invest in common stocks, preferred stocks and debt securities,
whether domestic or foreign, in such proportions as the Adviser deems advisable.
The preferred stocks and debt securities may be convertible. In addition, the
Fund may enter into repurchase agreements, enter into forward commitments,
purchase warrants, engage in options and futures transactions, hold its assets
in cash or in money market instruments, and engage in short sales of securities.
See "Investment Practices" below. The Fund may invest up to 25% of its total
assets in any one industry. The achievement of the Fund's investment objectives
will depend upon the Adviser's analytical and portfolio management skills. In
light of the types of securities in which the Fund may invest, the Fund is not
an appropriate investment for investors seeking short-term profits.
The Fund generally purchases securities for investment purposes and not for
the purpose of influencing or controlling management of the issuer. However, the
Fund may seek to influence or control management by investing in a potential
takeover, leveraged buyout or reorganization or by investing in other entities
that were organized in order to purchase securities for the purpose of
influencing or controlling management, if the Adviser believes that the possible
increase in the value of its investment will outweigh the risks and costs
associated with the investment. The Fund may also seek to influence or control
management by discussing informally with management different operating
strategies, proposing shareholder resolutions, engaging in a proxy contest or
serving as part of a creditors' committee established in connection with a
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company's insolvency. Neither the Fund nor the Adviser has any experience in
managing the types of companies in which the Fund will likely invest.
DEBT SECURITIES. The Fund may invest without limit in debt securities,
including obligations of the U.S. Treasury. The values of debt securities
generally fluctuate inversely with changes in interest rates. The Fund has
established no rating criteria for debt securities in which it may invest,
although securities ratings will be a factor in the Adviser's decision to
purchase debt securities. Other factors that may influence the Adviser's
decision include the financial position and credit history of the issuer, the
yield, maturity and liquidity of the particular debt security, and the Adviser's
forecasts of interest rate and market movements. The debt securities purchased
by the Fund may have remaining maturities in excess of 20 years. Some debt
securities in which the Fund may invest may be secured by assets of the debtor.
In order to enforce its rights in the event of a default under such securities,
the Fund may be required to take possession of and manage such assets, which may
increase the Fund's operating expenses and adversely affect the Fund's net asset
value. Neither the Fund nor the Adviser has any experience in managing such
assets. The Fund's intention to qualify as a "regulated investment company" for
federal income tax purposes may limit the extent to which the Fund may exercise
its rights by taking possession of such assets. For a discussion of the risks
associated with the Fund's investments in lower-rated debt securities, see "Risk
Factors--Lower-rated Securities".
The Fund may purchase indebtedness and participations therein of financially
troubled companies, which include companies that are in default under agreements
representing indebtedness, companies that have experienced a material adverse
change in their business or operations, or companies that are insolvent. The
Fund may invest without limit in such indebtedness and may invest in senior and
subordinated indebtedness. Like the purchase of other debt securities, the
purchase of indebtedness of such companies always involves a risk as to the
creditworthiness of the issuer and the possibility that the investment may be
lost, although these risks are heightened when the Fund invests in troubled
companies. While there are established markets for some of this indebtedness,
certain indebtedness will be less liquid than more heavily traded securities.
The Fund will not invest more than 15% of its net assets in illiquid securities.
Participations normally are made available only on a nonrecourse basis by
financial institutions. If an intermediary exists between the Fund and the
borrower, the Fund may only purchase loan participations when such intermediary
is a national or state chartered bank or a foreign bank. The Fund's ability to
receive payments of principal and interest in connection with participations
held by it will depend primarily on the financial condition of the borrowers,
although the Fund may in some cases be required to rely upon the lending
institution from which it purchased the participation to collect and pass on to
the Fund such payments and to enforce the Fund's rights under the loan. When the
Fund is required to rely upon a lending institution to pass on to the Fund
principal and interest, the Fund will evaluate the creditworthiness of such
lending institution. The Fund may have limited rights to enforce the terms of
the underlying loan and the liquidity of loan participations may be limited.
The Fund may also purchase claims against companies, including insolvent
companies. These claims are typically unsecured and generally represent money
due a supplier of goods or services to such
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company. Such claims are subject to certain risks, such as the risk that the
Fund may not be paid by the debtor on a timely basis, if at all, or if the Fund
does receive payment, it may be in an amount less than the value which the
Adviser had placed on the claim.
The Fund may also invest without limit in debt securities issued by states,
municipalities, local governments and their agencies and authorities, the
interest on which is exempt from Federal income taxes. In addition to the risks
associated with other types of debt securities, the prices of tax-exempt
securities may be affected by a variety of financial or political factors, such
as concern as to the fiscal integrity of the issuer, demographics, and pending
litigation or legislation that may affect future revenues of the issuer.
REORGANIZATION TRANSACTIONS. The Fund may invest without limit in the
securities of companies involved in mergers, consolidations, liquidations and
reorganizations or as to which there exist tender or exchange offers
(collectively, "Reorganization Transactions"). Because the expected gain on an
individual investment in a company involved in a Reorganization Transaction is
normally smaller than the possible loss if the transaction is unexpectedly
terminated, Fund assets will not be invested unless the proposed transaction
appears to the Adviser to have a substantial probability of success. The
expected completion of each transaction is also extremely important since the
length of time that the Fund's assets may be invested in securities of a company
involved in a Reorganization Transaction will affect the rate of return realized
by the Fund. The Fund will not invest its assets in a Reorganization Transaction
unless the Adviser determines that the probability of a timely and successful
completion of the transaction offsets any risks associated with possible delays
in its successful completion. The majority of mergers and acquisitions are
consummated in less than six months, while tender offers are normally completed
in less than two months. Liquidations and certain other types of corporate
reorganizations usually require more than six months to complete. The Adviser
may invest the Fund's assets in both negotiated, or "friendly," reorganizations
and non-negotiated, or "hostile," takeover attempts.
There can be no assurance that any Reorganization Transaction proposed at
the time the Fund makes its investment will be consummated or will be
consummated on the terms and within the time period contemplated.
FOREIGN INVESTMENTS. The Fund may invest without limit in foreign
securities, including securities issued by foreign governments. Securities of
foreign issuers, particularly non-governmental issuers, involve risks which are
not ordinarily associated with investing in domestic issuers. Since foreign
securities are normally denominated and traded in foreign currencies, the values
of the Fund's assets will be affected favorably or unfavorably by currency
exchange rates and exchange control regulations (which may include suspension of
the ability to transfer currency from a given country and repatriation of
investments) to the extent it invests in foreign securities. Exchange rates with
respect to certain currencies may be particularly volatile. In addition,
investments in foreign countries could be affected by other factors generally
not thought to be present in the United States, including the unavailability of
financial information or the difficulty of interpreting financial information
prepared under foreign accounting standards (which are generally not comparable
to U.S. standards), the possibility of expropriation, nationalization and
confiscatory or heavy taxation, the impact of political, social or diplomatic
developments, default in foreign government securities, limitations on the
removal of funds or other assets
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of the Fund, difficulties in invoking legal process abroad and enforcing
contractual obligations, and the difficulty of assessing economic trends in
foreign countries. Delays in settlement could result in temporary periods when
assets of the Fund are uninvested and no return is being earned thereon.
Inability to sell a portfolio security due to settlement problems could result
either in a loss to the Fund if the value of the portfolio security subsequently
declined or, if the Fund entered into a contract to sell the security, could
result in possible claims against the Fund. Foreign securities markets may be
less liquid and more volatile than U.S. markets. Foreign brokerage commissions
and other transaction costs and custodian fees are generally higher than in the
United States. The Adviser may engage in foreign currency exchange transactions
in connection with the purchase and sale of foreign securities and to protect
the value of specific portfolio positions, although appropriate hedging
transactions may not always be available. See "Appendix A - Options, Futures and
Foreign Currency Exchange Transactions." Special tax considerations also apply
to investments in foreign securities. See "Taxes."
Some countries in which the Fund may invest may have fixed or managed
currencies that are not free-floating against the U.S. dollar. Further, certain
currencies may not be traded internationally. Certain of these currencies have
experienced a steady devaluation relative to the U.S. dollar. Any devaluations
in the currencies in which the Fund's portfolio securities are denominated may
have a detrimental impact on the Fund. Many countries in which the Fund may
invest 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 negative effects on the economies and
securities markets of certain countries.
There are substantial risks involved in investing in securities issued by
issuers located in underdeveloped or developing countries, which are sometimes
referred to as "emerging markets." These risks are in addition to the usual
risks inherent in foreign investments described above. Because of greater risks
of adverse political developments, the lack of effective legal structures and
difficulties effecting securities transfers and settlements, the Fund risks the
loss of its entire investment when investing in securities issued by issuers
located in certain foreign countries. The Fund may invest without limit in
emerging markets.
INDEXED SECURITIES. The Fund may invest in indexed securities whose value is
linked to currencies, foreign or domestic securities, interest rates,
commodities, indices, or other financial indicators. Most indexed securities are
short to intermediate term fixed-income securities whose values at maturity or
interest rates rise or fall according to the change in one or more specified
underlying instruments. Indexed securities may be positively or negatively
indexed (i.e., their value may increase or decrease if the underlying instrument
appreciates), and may have return characteristics similar to direct investments
in the underlying instrument or to one or more options on the underlying
instrument. Indexed securities may be more volatile than the underlying
instrument itself. Because certain foreign markets may be closed for all
practical purposes to U.S. investors such as the Fund, the Fund may invest
indirectly in such markets through the purchase of indexed securities and would
therefore be subject to the risks described above with respect to investments in
foreign securities as well as being subject to the risk of relying upon the
issuer of the indexed security to fulfill its obligations under the terms of the
security.
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CASH AND SHORT-TERM OBLIGATIONS. Depending upon market conditions, part or
all of the Fund's assets may be invested in cash (including foreign currencies)
or high quality cash equivalent short-term obligations and unrated cash
equivalent short-term obligations that the Adviser determines as comparable in
quality to that of such rated obligations including, but not limited to,
commercial paper, notes, certificates of deposit, bankers' acceptances and other
obligations of banks, repurchase agreements and short-term obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities. It is
impossible to predict when, for how long, or to what extent the Fund will invest
its assets in cash and cash equivalent short-term obligations.
OTHER INVESTMENT COMPANIES. From time to time and subject to applicable law,
certain of the Fund's investments may include investments in other investment
companies, including investment companies not registered under the Investment
Company Act of 1940. When the Fund invests in other investment companies,
shareholders may in effect pay multiple levels of management fees (i.e., the
Fund's management fees and the management fees of the other investment
companies).
OTHER INVESTMENT PRACTICES AND RISK CONSIDERATIONS
The Fund may from time to time engage in the investment practices described
below. In addition, the Fund may buy and sell (i.e., write) call and put options
on individual securities or on securities indices, buy and sell futures
contracts and related options, engage in spread and straddle transactions, and
engage in foreign currency exchange transactions (including buying and selling
options on foreign currencies and engaging in foreign currency futures
transactions and options thereon). Some of the options which the Fund may
purchase or sell may be traded over-the-counter. EACH OF THESE PRACTICES
INVOLVES CERTAIN SPECIAL RISKS. FOR INFORMATION ON OPTIONS AND FUTURES
TRANSACTIONS AND FOREIGN CURRENCY EXCHANGE TRANSACTIONS, INCLUDING LIMITATIONS
DESIGNED TO REDUCE THE RISKS ASSOCIATED WITH THESE PRACTICES, SEE "APPENDIX A -
OPTIONS, FUTURES AND FOREIGN CURRENCY EXCHANGE TRANSACTIONS." Certain provisions
of the Internal Revenue Code may limit the Fund's ability to engage in options,
futures and forward transactions. See "Tax Status" in the Statement of
Additional Information for more information about these limitations. In
addition, because of the investment leverage involved in options and futures
transactions, the Fund's obligations under its options and futures transactions
could require the Fund to deliver or take delivery of investments with a value
equal to or greater than the entire amount of its assets.
SHORT SALES. The Fund may make short sales of securities. A short sale is a
transaction in which the Fund sells a security it does not own in anticipation
that the market price of that security will decline. When the Fund makes a short
sale, it must borrow the security sold short and deliver it to the other party
to the transaction. Short sales involve certain expenses and entail risks. The
Fund may have to pay a fee to borrow particular securities and is often
obligated to pay over any payments received on such borrowed securities. The net
proceeds of the short sale will be retained by the broker to the extent
necessary to meet margin requirements, until the short position is closed out.
If the price of the security sold short increases between the time of the short
sale and the time the Fund replaces the borrowed security, the Fund will incur a
loss; conversely, if the price declines, the Fund will realize a gain. Any gain
will be decreased, and any loss increased, by the transaction costs described
above. ALTHOUGH THE FUND'S GAIN IS LIMITED TO
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THE PRICE AT WHICH IT SOLD THE SECURITY SHORT, ITS POTENTIAL LOSS IS UNLIMITED
IF THE FUND DOES NOT OWN THE SECURITY.
The staff of the Securities and Exchange Commission is of the opinion that a
short sale involves the creation of a senior security and is, therefore, subject
to the limitations of Section 18 of the 1940 Act. The staff has taken the
position that in order to comply with the provisions of Section 18, the Fund
must put in a segregated account (not with the broker) an amount of cash or
United States Government securities equal to the difference between: (a) the
market value of the securities sold short at the time they were sold short, and
(b) any cash or United States Government securities required to be deposited as
collateral with the broker in connection with the short sale (not including the
proceeds from the short sale). In addition, until the Fund replaces the borrowed
security, it must daily maintain the segregated account at such a level that the
amount deposited in it plus the amount deposited with the broker as collateral
will equal the current market value of the securities sold short. It is
currently expected that no more than 25% of the Fund's net assets will be used
as collateral or deposited in a segregated account in connection with short
sales.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements on up
to 25% of its total assets with member banks of the Federal Reserve System or
securities dealers in order to earn income. A repurchase agreement is a contract
pursuant to which the Fund agrees to purchase a security and simultaneously
agrees to resell it to such bank or dealer at an agreed-upon time and price,
thereby determining the yield during the Fund's holding period. The Fund will
normally limit its investments in repurchase agreements to those agreements
maturing in seven days or less. Repurchase agreements maturing in more than
seven days, together with any other illiquid assets of the Fund, will not exceed
15% of the value of the Fund's total net assets. The securities underlying
repurchase agreements will be limited to securities in which the Fund could
invest directly pursuant to the Fund's investment policies. Repurchase
agreements are considered by the staff of the Securities and Exchange Commission
to be loans by the Fund to the bank or dealer involved, with the underlying
securities constituting collateral for the loans. The Adviser will monitor such
transactions to ensure that the value of the underlying securities will be at
least equal at all times to the total amount of the repurchase obligation,
including the interest factor. If the seller defaults, the Fund could realize a
loss on the sale of the underlying security to the extent the proceeds of the
sale, including accrued interest, are less than the resale price provided in the
agreement, including interest. In addition, if the seller should be involved in
bankruptcy or insolvency proceedings, the Fund may incur delay and costs in
selling the underlying security or may suffer a loss of principal and interest
if the Fund is treated as an unsecured creditor and is required to return the
underlying collateral to the seller's estate. The Fund's investments in
repurchase agreements will be limited to transactions with financial
institutions which are determined by the Adviser to present minimal credit
risks. The Adviser will monitor the creditworthiness of such financial
institutions.
FORWARD COMMITMENTS. The Fund may enter into contracts to purchase
securities for a fixed price at a specified future date beyond customary
settlement time ("forward commitments"). If the Fund does so, it will maintain
cash or liquid, high-grade debt obligations in a segregated account having a
value at all times sufficient to meet the purchase price or will enter into
offsetting contracts for the forward sale of other securities it owns. Forward
commitments involve a risk of loss if the value of the security to be purchased
declines prior to the settlement date, which risk is in addition to the risk of
decline in value of
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the Fund's other assets. Although the Fund will generally enter into forward
commitments with the intention of acquiring securities for its portfolio, it may
dispose of a commitment prior to settlement if the Adviser deems it appropriate
to do so. The Fund may realize gains or losses upon the sale of forward
commitments. The Adviser will monitor the creditworthiness of the parties to
such forward commitments. The Fund will not invest more than 25% of its total
assets in forward commitments.
WARRANTS. The Fund may from time to time purchase warrants; however, not
more than 5% of its net assets (at the time of purchase) will be invested in
warrants other than warrants acquired in units or attached to other securities.
Of such 5%, not more than 2% of the Fund's net assets at the time of purchase
may be invested in warrants that are not listed on the New York Stock Exchange
or the American Stock Exchange. Warrants represent the right to purchase
securities of an issuer at a specific price for a specific period of time. They
do not represent ownership of such securities, but only the right to buy them.
Warrants have no voting rights, pay no dividends and have no rights with respect
to the assets of the corporation issuing them. The prices of warrants do not
necessarily correlate with the prices of the underlying securities.
REAL ESTATE AND RELATED SECURITIES. The Fund may invest in real
estate-related securities. These securities include securities that are backed
by, represent interests in or are secured by real estate, as well as securities
issued by companies or limited partnerships that invest in real estate or
interests in real estate. Investments in these securities entail certain risks
due to a variety of factors, including uncertainties surrounding the underlying
real estate ventures. Factors affecting the performance of real estate ventures
may include satisfactory completion of construction, excess supply of real
estate in certain markets, prudent management of insurance risks, sufficient
level of occupancy, adequacy of financing available in capital markets,
competent management, adequate rent to cover operating expenses, local and
regional markets for competing assets, changes in applicable laws and
governmental regulations (including taxes), and social and economic trends.
To the extent permitted by its investment restrictions, the Fund may also
purchase and sell real estate in order to protect its investment in such
securities. Certain real estate-related securities in which the Fund may invest
may not be readily marketable. Investments in real estate and in real
estate-related securities that are not readily marketable entail additional
risks, such as difficulty in pricing the real estate or security for purposes of
determining the Fund's net asset value and the possibility that the Fund would
be unable to sell the real estate or security at a price approximating its
market value when it decides to sell the real estate or security. If the Fund
has rental income or income from the direct disposition of real property, the
receipt of such income may adversely affect its ability to retain its status as
a regulated investment company. See "Taxes."
PORTFOLIO MANAGEMENT AND PORTFOLIO TURNOVER
While it is a policy of the Fund generally not to engage in trading for
short-term gains, portfolio changes will be made without regard to the length of
time a security has been held or whether a sale would result in a profit or
loss, if in the Adviser's judgment such transactions are advisable. A change in
the securities owned by the Fund is known as "portfolio turnover." For purposes
of calculating portfolio
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turnover, all securities whose maturity or expiration date is one year or less
at the time of acquisition are excluded from the calculation. As a result of the
Fund's investment policies, under certain market conditions, the Fund's
portfolio turnover rate may be higher than that of other mutual funds. To the
extent the Fund's portfolio turnover rate equals or exceeds 100%, the Fund will
generally incur high transaction costs. Portfolio turnover may subject the
Fund's shareholders to taxes on realized capital gains. The portfolio turnover
rate for the life of the Fund is shown in the section "Financial Highlights."
The purchase and sale of portfolio securities for the Fund and for the other
investment advisory clients of the Adviser are made by the Adviser with a view
to achieving their respective investment objectives. For example, a particular
security may be bought or sold only for certain clients of the Adviser even
though it could have been bought or sold for other clients at the same time.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In some instances, therefore,
one client may sell indirectly a particular security to another client. It also
happens that two or more clients may simultaneously buy or sell the same
security, in which event purchases or sales are effected pro rata on the basis
of cash available or another equitable basis so as to avoid any one account's
being preferred over any other account.
RISK FACTORS
NON-DIVERSIFICATION. The Fund is a "non-diversified" fund and as such is not
required to meet any diversification requirements under the 1940 Act.
Nevertheless, the Fund must meet certain diversification standards to qualify as
a "regulated investment company" for federal income tax purposes. See "Tax
Status" in the Statement of Additional Information. As a non-diversified fund,
the Fund may invest a relatively high percentage of its assets in the securities
of a relatively few issuers that the Adviser deems to be attractive investments,
rather than invest in the securities of a large number of issuers merely to
satisfy diversification requirements. Such policy will increase the risk of loss
to the Fund should there be a decline in the market value of any security in
which the Fund has invested a large percentage of its assets. Investment in a
non-diversified fund such as the Fund will generally entail greater risks than
investment in a "diversified" fund.
LOWER-RATED SECURITIES. Debt securities in which the Fund invests may or may
not be rated by rating agencies such as Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's ("S&P"), and, if rated, such rating may range
from the very highest to the very lowest, currently C for Moody's and D for S&P.
Securities rated below investment grade (below Baa if rated by Moody's and below
BBB if rated by S&P) normally provide a yield or yield to maturity that is
significantly higher than that of investment grade issues, but are predominately
speculative with respect to capacity to pay interest and repay principal. The
lower-rated categories include debt securities that are in default and debt
securities of issuers who are insolvent. The rating assigned to a security by
Moody's or S&P does not reflect an assessment of the volatility of the
security's market value or the liquidity of an investment in the security.
The values of lower-rated securities (including unrated securities of
comparable quality) fluctuate more than those of higher-rated securities,
although they may be less sensitive to interest rate changes. In addition, the
lower rating reflects a greater possibility that the financial condition of the
issuer, or adverse
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changes in general economic conditions, or both, or an unanticipated rise in
interest rates, may impair the ability of the issuer to make payments of
principal and income. The inability (or perceived inability) of issuers to make
timely payment of interest and principal would likely make the values of
securities held by the Fund more volatile and could limit the Fund's ability to
sell its securities at prices approximating the values the Fund had placed on
such securities. In addition, the market price of lower-rated securities is
likely to be more volatile because: (i) an economic downturn or increased
interest rates may have a significant effect on the yield, price and potential
for default; (ii) the market may at times become less liquid or respond to
adverse publicity or investor perceptions, increasing the difficulty in
disposing of the securities or in valuing them for purposes of determining the
Fund's net asset value; and (iii) past legislation has limited (and future
legislation may further limit) investment by certain institutions in lower-rated
securities or the tax deductibility of the interest by the issuer, which may
adversely affect the value of such securities. The Fund will not necessarily
dispose of a security when its rating is reduced below its rating at the time of
purchase, although the Adviser will monitor the investment to determine whether
continued investment in the security will assist in meeting the Fund's
investment objectives. Because the Fund may invest without limit in such
lower-rated securities, the Fund's achievement of its investment objectives is
more heavily dependent on the Adviser's credit analysis. For a more complete
description of the ratings of debt securities, see "Appendix B - Description of
Debt Ratings."
At times, a substantial portion of the Fund's assets may be invested in
securities as to which the Fund, by itself or together with other funds and
accounts managed by the Adviser and its affiliates, holds a major portion or all
of such securities. Although the Adviser generally considers such securities to
be liquid because of the availability of an institutional market for such
securities, it is possible that, under adverse market or economic conditions or
in the event of adverse changes in the financial condition of the issuer, the
Fund could find it more difficult to sell such securities when the Adviser
believes it advisable to do so or may be able to sell such securities only at
prices lower than if such securities were more widely held. Under such
circumstances, it may also be more difficult to determine the fair value of such
securities for purposes of computing the Fund's net asset value.
Certain securities held by the Fund may permit the issuer at its option to
"call," or redeem, its securities. If an issuer were to redeem securities held
by the Fund during a time of declining interest rates, the Fund may not be able
to reinvest the proceeds in securities providing the same investment return as
the securities redeemed.
The Fund may at times invest in so-called "zero-coupon" bonds and
"payment-in-kind" bonds. Zero-coupon bonds do not pay interest for their entire
lives and are issued at a discount from their principal amount in lieu of paying
interest periodically. Payment-in-kind bonds allow the issuer, at its option, to
make current interest payments on the bonds either in cash or in additional
bonds. Such investments may experience greater fluctuation in market value in
response to changes in market interest rates than bonds which pay interest in
cash currently. Both zero-coupon and payment-in-kind bonds allow an issuer to
avoid the need to generate cash to meet current interest payments, but may also
require a higher rate of return to attract investors who are willing to defer
receipt of such cash. Accordingly, such bonds involve greater credit risk than
bonds paying interest in cash currently. Even though such bonds may not pay
current interest in cash, the Fund is nonetheless required to accrue interest
income on such investments and to
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distribute such amounts at least annually to shareholders. Thus, the Fund could
be required at times to liquidate other investments in order to satisfy its
distribution requirements.
The amount of information about the financial condition of an issuer of
tax-exempt securities may not be as extensive as that which is made available by
corporations whose securities are publicly traded. Therefore, to the extent the
Fund invests in lower-rated tax-exempt securities, the achievement of the Fund's
goals is more dependent on the Adviser's investment analysis than would be the
case if the Fund were investing in higher-rated securities.
During fiscal 1995, the Fund invested 9.2% of its net assets in debt
securities that were in default. The Adviser believes that such securities
provide attractive investment opportunities due in part to the discount from par
at which they are typically purchased. In addition to these securities, the Fund
also invested 2.9% of its net assets in securities rated B by Moody's, 0.2% of
its net assets in securities rated C by Moody's and 3.5% of its net assets in
unrated debt securities which, if rated, the Adviser believes would have been
rated C by Moody's.
LIMITING INVESTMENT RISK
Specific investment restrictions help the Fund attempt to limit investment
risks for its shareholders. See the Statement of Additional Information. Except
for investment restrictions designated as fundamental in the Statement of
Additional Information, the investment policies described in this Prospectus and
in the Statement of Additional Information are not fundamental policies. The
Trustees may change any non-fundamental investment policies without shareholder
approval.
PURCHASE OF SHARES
Shares of the Fund may be purchased in a continuous offering for cash
without a sales charge or underwriting commission directly from the Fund on the
last day of each month on which the New York Stock Exchange is open for business
(a "Purchase Date"). The purchase price of shares of the Fund is the net asset
value as of the close of the Exchange on the relevant Purchase Date. The minimum
initial purchase of Fund shares is $50,000 ($100,000 for California residents).
The minimum purchase for any subsequent investment is $1,000. The Fund may waive
these minimums at its discretion. Investors should call the offices of the Fund
before attempting to place an order for Fund shares. The Fund reserves the right
at any time to reject an order.
Before investing in the Fund, shareholders will be required to execute an
agreement pursuant to which they will agree not to transfer their shares, except
as approved by the Fund. For these purposes, redemptions of Fund shares are not
considered transfers, but pledges of Fund shares are.
Before an order to purchase shares will be accepted, all required forms must
be in proper order and received by Baupost no later than the business day
preceding the Purchase Date, although the Fund requests that orders be sent so
that they are received by Baupost no later than five business days before such
Purchase Date. Unless otherwise approved by the Fund, all payments for purchases
must be made by
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wire transfer to the account designated by the Fund's Custodian. The deadline
for wire transfers is 10:00 a.m., Eastern time on the Purchase Date. When the
consideration is received by the Fund after the deadline, the purchase order
will be rejected and will have to be resubmitted to the Fund on the next
Purchase Date.
Purchases will be made in full and fractional shares of the Fund calculated
to three decimal places. Shareholders will be sent a statement of shares owned
subsequent to each transaction.
REDEMPTION OF SHARES
Shares of the Fund may be redeemed on any day the New York Stock Exchange is
open for business. The redemption price is the net asset value per share next
determined after receipt by Baupost of the redemption request in "good order."
Shares of the Fund will generally be redeemed by a distribution in cash;
however, the Fund reserves the right to redeem shares by a distribution in kind
of securities held by the Fund.
Securities used to redeem Fund shares in kind will be valued in accordance
with the Fund's procedures for valuation described under "Determination of Net
Asset Value." Securities distributed by the Fund in kind will be selected by the
Adviser in light of the Fund's investment objectives and will not generally
represent a pro rata distribution of each security held in the Fund's portfolio.
Shareholders who receive a distribution in kind should expect to incur
transaction costs when converting such securities to cash.
Payment on redemption will be made as promptly as possible and in any event
within seven days after the requested date provided that the request is in "good
order." A redemption request is in "good order" if it includes the exact name in
which shares are registered and the number of shares or the dollar amount of
shares to be redeemed and if it is signed exactly in accordance with the form of
registration. Persons acting in a fiduciary capacity, or on behalf of a
corporation, partnership or trust, must specify, in full, the capacity in which
they are acting. When opening an account with the Fund, shareholders may be
required to designate the account(s) to which funds may be transferred upon
redemption.
The Fund may suspend the right of redemption and may postpone payment for
more than seven days when the New York Stock Exchange is closed for other than
weekends or holidays, or if permitted by the rules of the Securities and
Exchange Commission, during periods when trading on the New York Stock Exchange
is restricted or during an emergency which makes it impracticable for the Fund
to dispose of its securities or to fairly determine the value of its net assets,
or during any other period permitted by the Securities and Exchange Commission
for the protection of investors.
DETERMINATION OF NET ASSET VALUE
The net asset value of a share is determined for the Fund as of the close of
trading on the New York Stock Exchange (normally 4:00 p.m. Eastern time) once on
each day on which the Exchange is open (other than a day on which no shares of
the Fund were tendered for redemption and no order to purchase shares was
accepted by the Fund, but at least as frequently as the last business day of
each month). The net asset
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value per share for the Fund is determined by dividing the total value of the
Fund's portfolio investments and other assets, less any liabilities, by the
total outstanding shares of the Fund. Portfolio securities, options and futures
contracts for which market quotations are available and which are traded on an
exchange or on NASDAQ are valued at the last quoted sale price, or, if there is
no such reported sale that day, at the closing bid price. Securities, options
and forward contracts traded in the over-the-counter market (other than those
traded on NASDAQ) and other unlisted securities are valued at the most recent
bid price as obtained from one or more dealers that make markets in the
securities. Portfolio securities which are traded both in the over-the-counter
market and on one or more stock exchanges are valued according to the broadest
and most representative market. To the extent the Fund engages in "naked" short
sales (i.e., it does not own the underlying security or a security convertible
into the underlying security without the payment of any further consideration),
the Fund will value such short positions as described above, except that the
valuation, where necessary, will be based on the asked price instead of the bid
price. Other assets for which no quotations are readily available are valued at
fair value as determined in good faith in accordance with procedures adopted by
the Trustees of the Fund. Determination of fair value will be based upon such
factors as are deemed relevant under the circumstances, including the financial
condition and operating results of the issuer, recent third party transactions
(actual or proposed) relating to such securities and, in extreme cases, the
liquidation value of the issuer.
Because of time zone differences, foreign exchanges and securities markets
will usually be closed prior to the time of the closing of the New York Stock
Exchange and values of foreign options and foreign securities will be determined
as of the closing of such exchanges and securities markets. However, events
affecting the values of such foreign securities may occasionally occur between
the closings of such exchanges and securities markets and the time the Fund
determines its net asset value which will not be reflected in the computation of
such net asset value. If an event materially affecting the value of such foreign
securities occurs during such period, then such securities will be valued at
fair value as determined in good faith in accordance with procedures adopted by
the Trustees.
Because foreign securities (including options and futures contracts with
respect to foreign securities and currencies) are quoted in foreign currencies,
fluctuations in the value of such securities in relation to the U.S. dollar will
affect the net asset value of shares of the Fund even though there has not been
any change in the values of such securities measured in terms of the foreign
currencies in which they are denominated. The value of foreign securities is
converted into U.S. dollars at the rate of exchange prevailing at the time of
determination of net asset value.
DISTRIBUTIONS
The Fund intends to pay out as dividends substantially all of its ordinary
income (which principally consists of any dividends and interest it receives
from its investments, less accrued expenses). The Fund also intends to
distribute substantially all of its capital gain net income, if any, after
giving effect to any available capital loss carryover. The Fund's policy is to
declare and pay distributions of its ordinary income annually, generally in
December, although it may do so more frequently as determined by the Trustees of
the Fund. The Fund's policy is to distribute capital gain net income annually,
generally in
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<PAGE>
December, although it may do so more frequently as determined by the Trustees of
the Fund and to the extent permitted by applicable regulations.
All dividends and/or distributions will be paid in shares of the Fund at net
asset value unless the shareholder elects to receive cash. Shareholders may make
or change this election by indicating their choice on the Shareholder
Information Sheet provided when an account is opened or by writing to the
Transfer Agent.
TAXES
The Fund intends to qualify as a "regulated investment company" for federal
income tax purposes and to meet all other requirements that are necessary for it
to be relieved of federal taxes on income and gains paid to shareholders in the
form of dividends. In order to accomplish this goal, the Fund must distribute
substantially all of its ordinary income and capital gain net income on a
current basis and maintain a portfolio of investments which satisfies certain
investment and diversification criteria.
All Fund distributions will be taxable to shareholders as ordinary income,
except distributions of any long-term capital gains are currently taxable as
such regardless of how long a shareholder may have owned shares in the Fund.
Distributions will be taxed whether received in cash or in additional shares of
the Fund. For federal income tax purposes, a distribution paid to shareholders
by the Fund in January of a year generally is deemed to have been paid by the
Fund and received by shareholders on December 31 of the preceding year, if the
distribution was declared and payable to shareholders of record on a date in
October, November or December of that preceding year. The Fund will provide
federal tax information annually, including information about dividends and
other distributions paid during the preceding year.
Fund transactions in foreign currencies and hedging activities may give rise
to ordinary income or loss to the extent such income or loss results from
fluctuations in value of the foreign currency concerned. In addition, such
activities will likely produce a difference between book income and taxable
income. This difference may cause a portion of the Fund's income distributions
to constitute a return of capital for tax purposes or require the Fund to make
distributions exceeding book income to qualify as a regulated investment company
for tax purposes.
Fund investments in foreign securities may be subject to withholding taxes
at the source on dividend or interest payments. In that case, the Fund's yield
on those securities would be decreased. If at the end of the Fund's fiscal year
more than 50% of the value of the Fund's total assets represents securities of
foreign corporations, the Fund intends to make an election permitted by the
Internal Revenue Code to treat any foreign taxes it paid as paid by its
shareholders. In this case, shareholders who are U.S. citizens, U.S.
corporations and, in some cases, U.S. residents generally will be required to
include in U.S. taxable income their pro rata share of such taxes, but may then
generally be entitled to claim a foreign tax credit or deduction (but not both)
for their share of such taxes.
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Investment in an entity that qualifies as a "passive foreign investment
company" under the Code could subject the Fund to a U.S. federal income tax or
other charge on certain "excess distributions" with respect to the investment,
and on the proceeds from disposition of the investment.
Under the "backup withholding" rules, the Fund may be required to withhold
for the payment of Federal income tax 31% of a non-corporate shareholder's
taxable distributions and redemption proceeds if such shareholder fails to
provide the Fund with a correct taxpayer identification number or to make
required certifications, or if a shareholder has been notified by the Internal
Revenue Service that he is otherwise subject to backup withholding. The taxpayer
identification number of an individual is his social security number.
The foregoing is a general summary of the Federal income tax consequences
for shareholders who are U.S. citizens or residents or U.S. corporations.
Shareholders should consult their own tax advisors about the federal tax
consequences of an investment in the Fund in light of each shareholder's
particular tax situation. Shareholders should also consult their own tax
advisors about consequences under foreign, state, local or other applicable tax
laws. See the Statement of Additional Information for more information about
taxes.
MANAGEMENT OF THE FUND
The Fund is advised and managed by The Baupost Group, Inc., a Massachusetts
corporation. Seth A. Klarman, President of Baupost and the Fund, owns in excess
of 50% of the outstanding stock of Baupost. Mr. Klarman has also had primary
responsibility for the day-to-day management of the Fund's portfolio since the
Fund's inception in January, 1991. Mr. Klarman has been with Baupost since its
founding in April, 1982. In addition to the Fund, Baupost manages financial
assets for approximately 30 client families. Assets under management totaled
approximately $722 million on December 31, 1995.
Under the Management Contract with the Fund, the Adviser, subject to such
policies as the Trustees may determine, selects and reviews the Fund's
investments and provides executive and other personnel for the management of the
Fund. Subject to the authority of the Trustees, the Adviser also manages the
Fund's other affairs and business. In the event that the Adviser ceases to be
the investment adviser to the Fund, the right of the Fund to use the identifying
name "Baupost" with respect to the Fund may be withdrawn.
The Fund pays the Adviser a quarterly management fee at the annual rate of
1.00% of the Fund's average net assets. Under the Management Contract, for the
purposes of determining the applicable management fee, "average net assets" is
determined at regular intervals throughout the year. The Adviser has agreed with
the Fund to reduce its management fee by up to .75% to the extent that the
Fund's total annual expenses (including the management fee and the
administrative fee (as described below under "Transfer and Dividend Disbursing
Agent and Administrator") and certain other expenses, but excluding brokerage
commissions, transfer taxes, interest and expenses relating to preserving the
value of the Fund's
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investments) would otherwise exceed 1.50% of the Fund's average net assets. The
Adviser's fee under the Management Contract for services rendered to the Fund is
higher than that paid by most other mutual funds.
In addition, the Fund will pay all expenses incurred in connection with the
organization and operation of the Fund, including but not limited to brokerage
commissions and transfer taxes in connection with its portfolio transactions,
all applicable taxes and filing fees, the fees and expenses for registration or
qualification of its shares under the federal or state securities laws, the
compensation of certain Trustees, interest charges, charges of custodians,
administrative and transfer agency expenses, auditing and legal expenses,
expenses of meetings of shareholders, expenses of printing and mailing
prospectuses, proxy statements and proxies to existing shareholders, insurance
premiums and professional association dues or assessments.
HOW THE FUND SHOWS PERFORMANCE
From time to time the Fund may include in its communications to current or
prospective shareholders figures reflecting total return over various time
periods. "Total return" is the rate of return on an amount invested in the Fund
from the beginning until the end of the stated period. "Average annual total
return" is the annual compounded percentage change in the value of an amount
invested in the Fund from the beginning until the end of the stated period. Both
rates of return assume the reinvestment of all dividends and distributions. The
Fund does not have a sales load or other charges paid by all shareholders that
affect its calculation of total return or average annual total return. Any
quotation of total return or average annual total return for any period when an
expense limitation was in effect will be greater than if the limitation had not
been in effect.
All data is based on the Fund's past investment results and does not predict
future performance. Investment performance, which will vary, is based on many
factors, including market conditions, the composition of the Fund's portfolio,
and the Fund's operating expenses. Investment performance also often reflects
the risks associated with the Fund's investment objectives and policies. These
factors should be considered when comparing the Fund's investment results to
those of other mutual funds and other investment vehicles.
DESCRIPTION OF THE FUND AND OWNERSHIP OF SHARES
The Fund is a no-load, non-diversified open-end registered management
investment company organized as a Massachusetts business trust under the laws of
The Commonwealth of Massachusetts by an Agreement and Declaration of Trust (the
"Declaration of Trust") dated June 29, 1990.
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest which presently constitute
a single series, the Fund. Each share of the Fund represents an equal
proportionate interest with each other share. The Declaration of Trust also
permits the Trustees, without shareholder approval, to subdivide any series of
shares into two or more classes of
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shares, with such preferences and other rights and privileges as the Trustees
may designate. The Fund's shares are not currently divided into classes. The
Trustees may also, without shareholder approval, establish one or more
additional separate portfolios for investments in the Fund or merge two or more
existing portfolios. Shareholders' investments in such a portfolio would be
evidenced by a separate series of shares.
Fund shares are entitled to dividends as declared by the Trustees and, in
liquidation of the Fund, are entitled to receive the net assets of the Fund.
Fund shares are entitled to vote at any meetings of shareholders. Although the
Fund is not required to hold annual meetings of shareholders, shareholders have
the right to call a meeting to remove Trustees. See the Statement of Additional
Information.
The Declaration of Trust provides for the perpetual existence of the Fund.
The Fund may, however, be terminated at any time by vote of at least two-thirds
of the outstanding shares of the Fund. The Declaration of Trust further provides
that the Trustees may also terminate the Fund upon written notice to the
shareholders.
CUSTODIAN
Chase Manhattan Bank, N.A. acts as the Fund's Custodian. The Custodian has
no part in determining the Fund's investment policies or which securities are
to be purchased or sold for the Fund.
TRANSFER AND DIVIDEND
DISBURSING AGENT AND ADMINISTRATOR
Baupost acts as the Fund's transfer and dividend disbursing agent and
administrator under a Transfer Agency and Administrative Services Agreement.
Under the agreement with the Fund, Baupost provides customary transfer agency
services, furnishes pricing and bookkeeping services to the Fund and determines
the net asset value of the Fund's shares. For these services, the Fund pays
Baupost a quarterly fee at the annual rate of .25% of the Fund's average net
asset value.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on October 31 of each year. The Fund will
send to its shareholders a semi-annual report containing unaudited financial
statements and an annual report containing audited financial statements.
SHAREHOLDER INQUIRIES
Shareholders may direct inquiries to the Fund c/o The Baupost Group, Inc.,
44 Brattle Street, Post Office Box 381288, Cambridge, Massachusetts 02238.
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APPENDIX A - OPTIONS, FUTURES AND FOREIGN CURRENCY EXCHANGE
TRANSACTIONS
The Fund may engage in options and futures transactions and certain foreign
currency exchange transactions. These investment practices may be used to
attempt to reduce fluctuations in the Fund's net asset value or for other
purposes permitted by applicable law. There can be no assurance that such
practices will be successful. Expenses and losses resulting from these
activities will reduce the Fund's current income and net asset value.
In connection with transactions in futures contracts and related options
written by the Fund, the Fund will be required to deposit with its custodian or
broker as "initial margin" an amount of cash and/or securities. Thereafter,
subsequent payments (referred to as "variation margin") are made to and from the
broker to reflect changes in the values of the futures contracts or options.
Because of the investment leverage involved in these transactions, the Fund's
obligations under its futures contracts or options could require the Fund to
deliver or take delivery of investments with a value equal to or greater than
the entire amount of its assets. Certain provisions of the Internal Revenue Code
may also limit the Fund's ability to engage in these transactions. See "Tax
Status" in the Statement of Additional Information for more information about
these limitations.
OPTIONS ON SECURITIES
Writing Covered Options. The Fund may write covered call options and covered
put options on securities when, in the opinion of the Adviser, such transactions
are consistent with the Fund's investment objectives and policies. Call options
written by the Fund give the purchaser the right to buy the underlying
securities from the Fund at a stated exercise price; put options give the
purchaser the right to sell the underlying securities to the Fund at a stated
price. The aggregate value of the securities underlying put options written by
the Fund may not exceed 50% of the Fund's total assets.
The Fund may write only covered options, which means that, so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges) or will segregate cash and/or liquid,
high-grade short-term debt obligations equal to the value of the securities to
be delivered if the option were exercised. In the case of put options, the Fund
will segregate cash and/or liquid, high-grade short-term debt obligations equal
to the price to be paid if the option is exercised. In addition, the Fund will
be considered to have covered a put or call option if and to the extent that it
holds an option that offsets some or all of the risk of the option it has
written. For more information about cover and segregation requirements, see
"Regulatory Requirements" below. The Fund may write combinations of covered puts
and calls on the same underlying security. See "Spread and Straddle
Transactions" below.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's return in the event the option expires unexercised or is
closed out at a profit. The amount of the premium reflects, among other things,
the relationship between the exercise price and the current market value of the
underlying security, the volatility of the underlying security, the amount of
time remaining until
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expiration, current interest rates, and the effect of supply and demand in the
options market and in the market for the underlying security. By writing a call
option, the Fund, to the extent it owns the underlying security, limits its
opportunity to profit from any increase in the market value of the underlying
security above the exercise price of the option but continues to bear the risk
of a decline in the value of the underlying security. By writing a put option,
the Fund assumes the risk that it may be required to purchase the underlying
security for an exercise price higher than its then-current market value,
resulting in a potential capital loss unless the security subsequently
appreciates in value.
The Fund may terminate an option that it has written prior to the expiration
by entering into a closing purchase transaction in which it purchases an
offsetting option. The Fund realizes a profit or loss from a closing transaction
if the cost of the transaction (option premium plus transaction costs) is less
or more than the premium received from writing the option. Because increases in
the market price of a call option generally reflect increases in the market
price of the security underlying the option, any loss resulting from a closing
purchase transaction may be offset in whole or in part by unrealized
appreciation of the underlying security owned by the Fund.
In connection with certain options that the Fund may write, the Fund may be
required to deposit cash or securities as "margin," or collateral for its
obligation to buy or sell the underlying security. As the value of the
underlying security varies, the Fund may have to deposit additional margin.
Margin requirements are complex and are fixed by individual brokers, subject to
minimum requirements currently imposed by the Federal Reserve Board and by stock
exchanges and other self-regulatory organizations.
Purchasing Put Options. The Fund may purchase put options to protect its
portfolio holdings in an underlying security against a decline in market value.
Such protection is provided during the life of the put option since the Fund, as
holder of the option, is able to sell the underlying security at the put
exercise price regardless of any decline in the underlying security's market
price. In order for a put option to be profitable, the market price of the
underlying security must decline sufficiently below the exercise price to cover
the premium and transaction costs. By using put options in this manner, the Fund
will reduce any profit it might otherwise have realized from appreciation of the
underlying security by the premium paid for the put option and by transaction
costs. There is no limit on the amount of the Fund's assets that can be used to
purchase put options.
Purchasing Call Options. The Fund may purchase call options to hedge against
an increase in the price of securities that the Fund wants ultimately to buy.
Such hedge protection is provided during the life of the call option since the
Fund, as holder of the call option, is able to buy the underlying security at
the exercise price regardless of any increase in the underlying security's
market price. In order for a call option to be profitable, the market price of
the underlying security must rise sufficiently above the exercise price to cover
the premium and transaction costs. There is no limit on the amount of the Fund's
assets that can be used to purchase call options.
Spread and Straddle Transactions. In addition to the options strategies
described above, the Fund may engage in "spread" transactions in which it
purchases and writes a put or call option on the same underlying security, with
the options having different exercise prices and/or expiration dates. The Fund
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may also engage in so-called "straddles," in which it purchases or sells
combinations of put and call options on the same security. When it engages in
spread and straddle transactions, the Fund seeks to profit from differentials in
the option premiums paid and received by it and in the market prices of the
related options positions when they are closed out or sold. Spread and straddle
transactions require the Fund to purchase and/or write more than one option
simultaneously. Accordingly, the Fund's ability to enter into such transactions
and to liquidate its positions when necessary or deemed advisable may be more
limited than if the Fund were to purchase or sell a single option. Similarly,
costs incurred by the Fund in connection with these transactions will in many
cases be greater than if the Fund were to purchase or sell a single option.
RISK FACTORS IN OPTIONS TRANSACTIONS
The successful use of the Fund's options strategies depends on the ability
of the Adviser to forecast interest rate and market movements correctly. For
example, if the Fund were to write a call option based on the Adviser's
expectation that the price of the underlying security would fall, but the price
were to rise instead, the Fund could be required to sell the security upon
exercise at a price below the current market price. Similarly, if the Fund were
to write a put option based on the Adviser's expectation that the price of the
underlying security would rise, but the price were to fall instead, the Fund
could be required to purchase the security upon exercise at a price higher than
the current market price.
When it purchases an option, the Fund runs the risk that it will lose its
entire investment in the option in a relatively short period of time, unless the
Fund exercises the option or enters into a closing transaction with respect to
the option during the life of the option. If the price of the underlying
security does not rise (in the case of a call) or fall (in the case of a put) to
an extent sufficient to cover the option premium and transaction costs, the Fund
will lose part or all of its investment in the option. This contrasts with an
investment by the Fund in the underlying security, since the Fund will not lose
any of its investment in such security if the price does not change.
The effective use of options also depends on the Fund's ability to terminate
option positions at times when the Adviser deems it desirable to do so. There is
no assurance that the Fund will be able to effect closing transactions at any
particular time or at an acceptable price.
If a secondary trading market in options were to become unavailable, the
Fund could no longer engage in closing transactions. Lack of investor interest
might adversely affect the liquidity of the market for particular options or
series of options. A market may discontinue trading of a particular option or
options generally. In addition, a market could become temporarily unavailable if
unusual events -- such as volume in excess of trading or clearing capability --
were to interrupt its normal operations.
A market may at times find it necessary to impose restrictions on particular
types of options transactions, such as opening transactions. For example, if an
underlying security ceases to meet qualifications imposed by the market or the
Options Clearing Corporation, new series of options on that security will no
longer be opened to replace expiring series, and opening transactions in
existing series may be prohibited. If an options market were to become
unavailable, the Fund as a holder of an option would
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be able to realize profits or limit losses only by exercising the option, and
the Fund, as option writer, would remain obligated under the option until
expiration or exercise.
Disruptions in the markets for the securities underlying options purchased
or sold by the Fund could result in losses on the options. If trading is
interrupted in an underlying security, the trading of options on that security
is normally halted as well. As a result, the Fund as purchaser or writer of an
option will be unable to close out its positions until options trading resumes,
and it may be faced with considerable losses if trading in the security reopens
at a substantially different price. In addition, the Options Clearing
Corporation or other options markets may impose exercise restrictions. If a
prohibition on exercise is imposed at the time when trading in the option has
also been halted, the Fund as purchaser or writer of an option will be locked
into its position until one of the two restrictions has been lifted. If the
Options Clearing Corporation were to determine that the available supply of an
underlying security appears insufficient to permit delivery by the writers of
all outstanding calls in the event of exercise, it may prohibit indefinitely the
exercise of put options. The Fund, as holder of such a put option, could, under
certain circumstances, lose its entire investment.
Special risks are presented by internationally-traded options. Because of
time differences between the United States and the various foreign countries,
and because different holidays are observed in different countries, foreign
options markets may be open for trading during hours or on days when U.S.
markets are closed. As a result, option premiums may not reflect the current
prices of the underlying interest in the United States.
FUTURES CONTRACTS AND RELATED OPTIONS
A financial futures contract sale creates an obligation by the seller to
deliver the type of financial instrument called for in the contract in a
specified delivery month for a stated price. A futures contract purchase creates
an obligation by the purchaser to take delivery of the type of financial
instrument called for in the contract in a specified delivery month at a stated
price. The specific instruments delivered or taken, respectively, at settlement
date are not determined until on or near that date. The determination is made in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made. Futures contracts are traded in the United States only on
commodity exchanges or boards of trade --known as "contract markets" -- approved
for such trading by the Commodity Futures Trading Commission (the "CFTC"), and
must be executed through a futures commission merchant or brokerage firm which
is a member of the relevant contract market.
Although futures contracts by their terms call for actual delivery or
acceptance of commodities or securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out a futures contract sale is effected by purchasing a futures contract for the
same aggregate amount of the specific type of financial instrument or commodity
with the same delivery date. If the price of the initial sale of the futures
contract exceeds the price of the offsetting purchase, the seller is paid the
difference and realizes a gain. Conversely, if the price of the offsetting
purchase exceeds the price of the initial sale, the seller realizes a loss.
Similarly, the closing out of a futures contract purchase is effected by the
purchaser's entering into a futures contract sale. If the offsetting sale price
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exceeds the purchase price, the purchaser realizes a gain, and if the purchase
price exceeds the offsetting sale price, he realizes a loss.
Unlike when the Fund purchases or sells a security, no price is paid or
received by the Fund upon the purchase or sale of a futures contract. Upon
entering into a contract, the Fund is required to deposit with its custodian in
a segregated account in the name of the futures broker an amount of cash and/or
U.S. Government securities. This amount is known as "initial margin." The nature
of initial margin in futures transactions is different from that of margin in
security transactions in that futures contract margin does not involve the
borrowing of funds to finance the transactions. Rather, initial margin is
similar to a performance bond or good faith deposit which is returned to the
Fund upon termination of the futures contract, assuming all contractual
obligations have been satisfied. Futures contracts also involve brokerage costs.
Subsequent payments, called "variation margin," to and from the broker (or
the custodian) are made on a daily basis as the price of the underlying security
or commodity fluctuates, making the long and short positions in the futures
contract more or less valuable, a process know as "marking to the market." For
example, when the Fund has purchased a futures contract on a security and the
price of the underlying security has risen, that position will have increased in
value and the Fund will receive from the broker a variation margin payment based
on that increase in value. Conversely, when the Fund has purchased a futures
contract on a security and the price of the underlying security has declined,
the position would be less valuable and the Fund would be required to make a
variation margin payment to the broker.
The Fund may elect to close some or all of its futures positions at any time
prior to their expiration in order to reduce or eliminate a position then
currently held by the Fund. The Fund may close its position by taking opposite
positions which will operate to terminate the Fund's position in the futures
contracts. Final determinations of variation margin are then made, additional
cash is required to be paid by or released to the Fund, and the Fund realizes a
loss or a gain. Such closing transactions involve additional commission costs.
Options On Futures Contracts. The Fund may purchase and write call and put
options on futures contracts it may buy or sell and enter into closing
transactions with respect to such options to terminate existing positions. A put
option on a futures contract gives the Fund the right to assume a short position
in the futures contract until expiration of the option. A call option on a
futures contract gives the Fund the right to assume a long position in the
futures contract until the expiration of the option. The Fund may use options on
futures contracts in lieu of writing or buying options directly on the
underlying securities or purchasing and selling the underlying futures
contracts. For example, to hedge against a possible decrease in the value of its
portfolio securities, the Fund may purchase put options or write call options on
futures contracts rather than selling futures contracts. Similarly, the Fund may
purchase call options or write put options on futures contracts as a substitute
for the purchase of futures contracts to hedge against a possible increase in
the price of securities which the Fund expects to purchase. Such options
generally operate in the same manner as options purchased or written directly on
the underlying investments.
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As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an offsetting option. There is
no guarantee that such closing transactions can be effected.
The Fund will be required to deposit initial margin and maintenance margin
with respect to put and call options on futures contracts written by it pursuant
to brokers' requirements similar to those described above.
Risks of Transactions In Futures Contracts and Related Options. Certain
risks arise because of the possibility of imperfect correlation between
movements in the prices of futures contracts and options and movements in the
prices of the underlying stock index, currency or security or of the securities
or currencies that are the subject of the hedge. Successful use of futures
contracts by the Fund is subject to the Adviser's ability to predict movements
in the direction of interest rates and other factors affecting securities and
currency markets. For example, if the Fund has hedged against the possibility of
decline in the values of its investments and the values of its investments
increase instead, the Fund will lose part or all of the benefit of the increase
through payments of daily maintenance margin. The Fund may have to sell
investments at a time when it may be disadvantageous to do so in order to meet
margin requirements.
Compared to the purchase or sale of futures contracts, the purchase of call
or put options on futures contracts involves less potential risk to the Fund
because the maximum amount at risk is the premium paid for the options (plus
transaction costs). However, there may be circumstances when the purchase of a
call or put option on a futures contract would result in a loss to the Fund when
the purchase or sale of a futures contract would not, such as when there is no
movement in the prices of the hedged investments. The writing of an option on a
futures contract involves risks similar to those risks relating to the sale of
futures contracts.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain market clearing facilities
inadequate, and thereby result in the institution by exchanges of special
procedures which may interfere with the timely execution of customer orders.
To reduce or eliminate a position held by the Fund, the Fund may seek to
close out a position. The ability to establish and close out positions will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop or continue to exist for a particular
futures contract or option. Reasons for the absence of a liquid secondary market
on an exchange include the following: (i) there may be insufficient trading
interest in certain contracts or options; (ii) restrictions may be imposed by an
exchange on opening transactions or closing transactions, or both; (iii) trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of contracts or options, or underlying securities;
(iv) unusual or unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or a clearing corporation may not at
all times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of contracts or options (or a particular
class or series of contracts or options), in which event the secondary market on
that exchange for such contracts or options (or in the class or series of
contracts or options) would cease to exist, although
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outstanding contracts or options on the exchange that had been issued by a
clearing corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
U.S. Treasury Security Futures Contracts and Options. The Fund may purchase
and sell futures contracts and related options on U.S. Treasury securities when,
in the opinion of the Adviser, price movements in Treasury security futures and
related options will correlate closely with price movements in the securities
which are the subject of the hedge. U.S. Treasury security futures contracts
require the seller to deliver, or the purchaser to take delivery of, the type of
U.S. Treasury security called for in the contract at a specified date and price.
Options on U.S. Treasury security futures contracts give the purchaser the right
in return for the premium paid to assume a position in a U.S. Treasury security
futures contract at the specified option exercise price at any time during the
period of the option.
Successful use of U.S. Treasury security futures contracts by the Fund is
subject to the Adviser's ability to predict movements in the direction of
interest rates and other factors affecting markets for debt securities. For
example, if the Fund has sold U.S. Treasury security futures contracts in order
to hedge against the possibility of an increase in interest rates which would
adversely affect securities held in its portfolio, and the prices of the Fund's
securities increase instead as a result of a decline in interest rates, the Fund
will lose part or all of the benefit of the increased value of its securities
which it has hedged because it will have offsetting losses in its futures
positions. In addition, in such situations, if the Fund has insufficient cash,
it may have to sell securities to meet daily maintenance margin requirements at
a time when it may be disadvantageous to do so.
There is also a risk that price movements in U.S. Treasury security futures
contracts and related options will not correlate closely with price movements in
markets for the securities that are the subject of the hedge. For example, if
the Fund has hedged against a decline in the values of securities held by it by
selling Treasury security futures and the values of Treasury securities
subsequently increase while the values of its securities decrease, the Fund
would incur losses on both the Treasury security futures contracts written by it
and the securities held in its portfolio.
Index Futures Contracts. An index futures contract is a contract to buy or
sell units of an index at a specified future date at a price agreed upon when
the contract is made. Entering into a contract to buy units of an index is
commonly referred to as buying or purchasing a contract or holding a long
position in the index. Entering into a contract to sell units of an index is
commonly referred to as selling a contract or holding a short position. A unit
is the current value of the index. The Fund may enter into stock index futures
contracts, debt index futures contracts, or other index futures contracts
appropriate to its objectives.
The Fund may also purchase and sell options on index futures contracts.
For example, the Standard & Poor's Composite 500 Stock Price Index ("S&P
500") is composed of 500 selected common stocks, most of which are listed on the
New York Stock Exchange. The S&P 500 assigns relative weightings to the common
stocks included in the Index, and the value fluctuates with changes in the
market values of those common stocks. In the case of the S&P 500, contracts are
to buy or sell 500 units. Thus, if the value of the S&P 500 were $150, one
contract would be worth $75,000 (500 units x $150). The stock index futures
contract specifies that no delivery of the actual stocks making up
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the index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the stock index at the expiration of
the contract. For example, if the Fund enters into a futures contract to buy 500
units of the S&P 500 at a specified future date at a contract price of $150 and
the S&P 500 is at $154 on that future date, the Fund will gain $2,000 (500 units
x gain of $4). If the Fund enters into a futures contract to sell 500 units of
the stock index at a specified future date at a contract price of $150 and the
S&P 500 is at $152 on that future date, the Fund will lose $1,000 (500 units x
loss of $2).
There are several risks in connection with the use by the Fund of index
futures. One risk arises because of the imperfect correlation between movements
in the prices of the index futures and movements in the prices of securities
which are the subject of the hedge.
Successful use of index futures by the Fund is also subject to the Adviser's
ability to predict movements in the direction of the market. For example, it is
possible that, where the Fund has sold futures to hedge its portfolio against a
decline in the market, the index on which the futures are written may advance
and the value of securities held in the Fund's portfolio may decline. If this
occurred, the Fund would lose money on the futures and also experience a decline
in value in its portfolio securities. It is also possible that, if the Fund has
hedged against the possibility of a decline in the market adversely affecting
securities held in its portfolio and securities prices increase instead, the
Fund will lose part or all of the benefit of the increased value of those
securities it has hedged because it will have offsetting losses in its futures
positions. In addition, in such situations, if the Fund has insufficient cash,
it may have to sell securities to meet daily variation margin requirements at a
time when it is disadvantageous to do so.
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the index futures and the portion
of the portfolio being hedged, the prices of index futures may not correlate
perfectly with movements in the underlying index due to certain market
distortions. Due to the possibility of imperfect correlation between movements
in the index and movements in the prices of index futures, even a correct
forecast of general market trends by the Adviser may still not result in a
successful hedging transaction.
Options on Stock Index Futures. Options on index futures are similar to
options on securities except that options on index futures give the purchaser
the right, in return for the premium paid, to assume a position in an index
futures contract (a long position if the option is a call and a short position
if the option is a put), at a specified exercise price at any time during the
period of the option. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
index futures contract, at exercise, exceeds (in the case of a call) or is less
than (in the case of a put) the exercise price of the option on the index
future. If an option is exercised on the last trading day prior to its
expiration date, the settlement will be made entirely in cash equal to the
difference between the exercise price of the option and the closing level of the
index on which the future is based on the expiration date. Purchasers of options
who fail to exercise their options prior to the exercise date suffer a loss of
the premium paid.
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OPTIONS ON INDICES
As an alternative to purchasing and selling call and put options on index
futures, the Fund may purchase and sell call and put options on the underlying
indices themselves. Such options would be used in a manner identical to the use
of options on index futures.
FOREIGN CURRENCY TRANSACTIONS
The Fund may engage in currency exchange transactions to protect against
uncertainty in the level of future currency exchange rates. In addition, the
Fund may write covered call and put options on foreign currencies for the
purpose of increasing its current return.
Generally, the Fund may engage in both "transaction hedging" and "position
hedging." When it engages in transaction hedging, the Fund enters into foreign
currency transactions with respect to specific receivables or payables,
generally arising in connection with the purchase or sale of portfolio
securities. The Fund will engage in transaction hedging when it desires to "lock
in" the U.S. dollar price of a security it has agreed to purchase or sell, or
the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. By transaction hedging the Fund will attempt to protect itself against
a possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the applicable foreign currency during the period between the
date on which the security is purchased or sold, or on which the dividend or
interest payment is declared, and the date on which such payments are made or
received.
The Fund may purchase or sell a foreign currency on a spot (or cash) basis
at the prevailing spot rate in connection with the settlement of transactions in
portfolio securities denominated in that foreign currency. The Fund may also
enter into contracts to purchase or sell foreign currencies at a future date
("forward contracts") and purchase and sell foreign currency futures contracts.
For transaction hedging purposes the Fund may also purchase exchange-listed
and over-the-counter call and put options on foreign currency futures contracts
and on foreign currencies. A put option on a futures contract gives the Fund the
right to assume a short position in the futures contract until expiration of the
option. A put option on currency gives the Fund the right to sell a currency at
an exercise price until the expiration of the option. A call option on a futures
contract gives the Fund the right to assume a long position in the futures
contract until the expiration of the option. A call option on currency gives the
Fund the right to purchase a currency at the exercise price until the expiration
of the option.
When it engages in position hedging, the Fund enters into foreign currency
exchange transactions to protect against a decline in the values of the foreign
currencies in which its portfolio securities are denominated (or an increase in
the value of currency for securities which the Fund expects to purchase, when
the Fund holds cash or short-term investments). In connection with position
hedging, the Fund may purchase put or call options on foreign currency and
foreign currency futures contracts and buy and sell forward contracts and
foreign currency futures contracts. The Fund may also purchase or sell foreign
currency on a spot basis.
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It is impossible to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, it may be necessary for the Fund to purchase additional foreign
currency on the spot market (and bear the expense of such purchase) if the
market value of the security or securities being hedged is less than the amount
of foreign currency the Fund is obligated to deliver and a decision is made to
sell the security or securities and make delivery of the foreign currency.
Conversely, it may be necessary to sell on the spot market some of the foreign
currency received upon the sale of the portfolio security or securities if the
market value of such security or securities exceeds the amount of foreign
currency the Fund is obligated to deliver.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Fund owns or intends to purchase
or sell. They simply establish a rate of exchange which one can achieve at some
future point in time. Additionally, although these techniques tend to minimize
the risk of loss due to a decline in the value of the hedged currency, they tend
to limit any potential gain which might result from the increase in value of
such currency.
The Fund may seek to increase its current return or to offset some of the
costs of hedging against fluctuations in current exchange rates by writing
covered call options and covered put options on foreign currencies. The Fund
receives a premium from writing a call or put option, which increases the Fund's
current return if the option expires unexercised or is closed out at a net
profit. The Fund may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an option having the same terms as the option written.
The Fund's currency hedging transactions may call for the delivery of one
foreign currency in exchange for another foreign currency and may at times not
involve currencies in which its portfolio securities are then denominated. In
addition to the other risks described above, these cross hedging transactions by
the Fund involve the risk of imperfect correlation between changes in the values
of the currencies to which such transactions relate and changes in the value of
the currency or other asset or liability which is the subject of the hedge.
Currency forward and futures contracts. A forward foreign currency contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract as agreed by
the parties, at a price set at the time of the contract. In the case of a
cancellable forward contract, the holder has the unilateral right to cancel the
contract at maturity by paying a specified fee. The contracts are traded in the
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for trades. A
foreign currency futures contract is a standardized contract for the future
delivery of a specified amount of a foreign currency at a future date at a price
set at the time of the contract. Foreign currency futures contracts traded in
the United States are designed by and traded on exchanges regulated by the CFTC,
such as the New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. For example, the maturity date of a
forward contract may be any fixed number of days from the
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date of the contract agreed upon by the parties, rather than a predetermined
date in a given month. Forward contracts may be in any amounts agreed upon by
the parties rather than predetermined amounts. Also, forward foreign exchange
contracts are traded directly between currency traders so that no intermediary
is required. A forward contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Fund may either accept
or make delivery of the currency specified in the contract, or at or prior to
maturity enter into a closing transaction involving the purchase or sale of an
offsetting contract. Closing transactions with respect to forward contracts are
usually effected with the currency trader who is a party to the original forward
contract. Closing transactions with respect to futures contracts are effected on
a commodities exchange; a clearing corporation associated with the exchange
assumes responsibility for closing out such contracts.
Positions in the foreign currency futures contracts may be closed out only
on an exchange or board of trade which provides a secondary market in such
contracts. Although the Fund intends to purchase or sell foreign currency
futures contracts only on exchanges or boards of trade where there appears to be
an active secondary market, there is no assurance that a secondary market on an
exchange or board of trade will exist for any particular contract or at any
particular time. In such event, it may not be possible to close a futures
position and, in the event of adverse price movements, the Fund would continue
to be required to make daily cash payments of variation margin. Foreign currency
futures contracts share many of the same risks described above with respect to
other futures contracts.
Foreign currency options. In general, options on foreign currencies operate
similarly to options on securities and are subject to many similar risks.
Foreign currency options are traded primarily in the over-the-counter market,
although options on foreign currencies have recently been listed on several
exchanges. Options are traded not only on the currencies of individual nations,
but also on the European Currency Unit ("ECU"). The ECU is composed of amounts
of a number of currencies, and is the official medium of exchange of the
European Community's European Monetary System.
The Fund will only purchase or write foreign currency options when the
Adviser believes that a liquid secondary market exists for such options. There
can be no assurance that a liquid secondary market will exist for a particular
option at any specific time. Options on foreign currencies are affected by all
of those factors which influence foreign exchange rates and investments
generally.
The value of any currency, including U.S. dollars and foreign currencies,
may be affected by complex political and economic factors applicable to the
issuing country. In addition, the exchange rates of foreign currencies (and
therefore the values of foreign currency options) may be significantly affected,
fixed, or supported directly or indirectly by U.S. and foreign governmental
actions. Government intervention may increase risks involved in purchasing or
selling foreign currency options, since exchange rates may not be free to
fluctuate in response to other market forces.
The value of a foreign currency option reflects the value of an exchange
rate, which in turn reflects the relative values of the relevant currencies.
Because foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the exercise of
foreign
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currency options, investors may be disadvantaged by having to deal in an odd-lot
market for the underlying foreign currencies in connection with options at
prices that are less favorable than for round-lots. Foreign governmental
restrictions or taxes could result in adverse changes in the cost of acquiring
or disposing of foreign currencies.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
round-lot transactions in the interbank market and thus may not reflect exchange
rates for smaller odd-lot transactions (less than $1 million) where rates may be
less favorable. The interbank market in foreign currencies is a global,
around-the-clock market. To the extent that options markets are closed while the
markets for the underlying currencies remain open, significant price and rate
movements may take place in the underlying markets that cannot be reflected in
the options markets.
Settlement procedures. Settlement procedures relating to the Fund's
investments in foreign securities and to the Fund's foreign currency exchange
transactions may be more complex than settlements with respect to investments in
debt or equity securities of U.S. issuers, and may involve certain risks not
present in the Fund's domestic investments. For example, settlement of trades of
foreign securities or of foreign currency option exercises may occur within a
foreign country, and the Fund may be required to accept or make delivery of the
underlying securities or foreign currency in conformity with any applicable U.S.
or foreign restrictions or regulations, and may be required to pay any fees,
taxes or charges associated with such delivery. Such investments may also
involve the risk that an entity involved in the settlement may not meet its
obligations.
Foreign currency conversion. Although foreign exchange dealers do not charge
a fee for currency conversion, they do realize a profit based on the difference
(the "spread") between prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer.
OVER-THE-COUNTER OPTIONS
Certain options are traded "over-the-counter" ("OTC") rather than on an
exchange. This means that the Fund will enter into such option contracts with
particular securities dealers who make markets in these options. The Fund's
ability to terminate option positions in the OTC market will be more limited
than for exchange-traded options and may also involve the risk that securities
dealers participating in such transactions would fail to meet their obligations
to the Fund. To the extent required by applicable pronouncements by the Staff of
the Division of Investment Management of the Securities and Exchange Commission,
the Fund may treat OTC options purchased by the Fund and assets held to cover
OTC options written by the Fund as illiquid securities.
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REGULATORY REQUIREMENTS
Current regulatory requirements impose limitations on how the Fund may
engage in options, futures and forward transactions. To the extent necessary,
the Fund will comply with these regulations when engaging in options, futures
and forward transactions (including options on securities, securities indices
and currencies). In general, these regulations require that the Fund either
"cover" its position or place cash or certain liquid, high grade, short-term
debt obligations in a segregated account in an amount equal to the Fund's
obligation. The methods of cover and the types of securities required to be
segregated may vary depending on the type of financial instrument and the
particular transaction.
FUTURE DEVELOPMENTS
The Fund may take advantage of hedging opportunities and other derivative
strategies which are not presently contemplated for use by the Fund or which are
not currently available but which may be developed, to the extent such
opportunities are both consistent with the Fund's investment objectives and
legally permissible for the Fund. Such opportunities, if they arise, may involve
risks which exceed those involved in the activities described above.
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APPENDIX B - DESCRIPTION OF DEBT RATINGS
Moody's Investors Service, Inc. describes classifications of bonds as
follows:
AAA - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interests and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA - Bonds which are rated Ca represent obligations which are speculative in
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
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Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Standard & Poor's describes classifications of corporate bonds as follows:
AAA - Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A - Debt rated 'A' has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB - Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
SPECULATIVE GRADE
Debt rated 'BB', 'B', 'CCC', 'CC', and 'C' is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. 'BB' indicates the least degree of speculation and
'C' the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
BB - Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B - Debt rated 'B' has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The 'B' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'BB' or 'BB-' rating.
CCC - Debt rated 'CCC' has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial, or economic conditions, it is not likely
to have the
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capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.
CC - The rating 'CC' typically is applied to debt subordinated to senior
debt that is assigned an actual or implied 'CCC' rating.
C - The rating 'C' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC-' rating. The 'C' rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI - The rating 'CI' is reserved for income bonds on which no interest is
being paid.
D - Debt rated 'D' is in payment default. The 'D' rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The 'D'
rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
PLUS (+) or MINUS (-) Ratings from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
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THE BAUPOST FUND
P.O. Box 381288
44 Brattle Street
Cambridge, MA 02238
ADVISER, TRANSFER AND DIVIDEND PAYING
AGENT AND ADMINISTRATOR
The Baupost Group, Inc.
P.O. Box 381288
44 Brattle Street
Cambridge, MA 02238
CUSTODIAN
Chase Manhattan Bank, N.A.
One Chase Manhattan Plaza
New York, NY 10081
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116-5072
LEGAL COUNSEL
Ropes & Gray
One International Place
Boston, MA 02110-2624
PROSPECTUS
February 29, 1996, as
revised July 1, 1996
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