ITEM 1. “BUSINESS-INVESTMENT PROGRAM-Allocation Among the Investment Sectors”.
The Managing Member may, from time to time, vary or change materially the actual allocation of assets made by the Company, as it deems appropriate in its sole discretion, including without limitation by way of
allocation of Company assets to any new Investment Fund or Advisor, complete or partial withdrawal of an allocation from any existing Investment Fund or Advisor, a reallocation of assets among existing Investment Funds or Advisors, or any combination of the foregoing. In carrying out any reallocation of Company assets, the Managing Member will have the sole discretion to determine the manner of such reallocation, including from which Investment Funds or Advisors to withdraw assets and to which Investment Funds or Advisors to allocate assets. Any reallocation of Company assets, for purposes of diversification, attempts to meet target allocations or otherwise, may take a significant period of time to implement due to the liquidity provisions and restrictions of the Investment Funds and the Advisors and for other reasons. There can be no assurance that market or other events will not have an adverse impact on the strategies employed by multiple Investment Funds and Advisors. Investment Funds and Advisors may at certain times hold large positions in a relatively limited number of investments. The Company could be subject to significant losses if an Investment Fund or an Advisor holds a large position in a particular investment that declines in value that cannot be liquidated without adverse market reaction or is otherwise adversely affected by changes in market conditions or circumstances. While the Managing Member currently expects to allocate assets to all the Investment Sectors (other than relative value) through allocations to the Investment Funds, the Managing Member has no constraints with respect to the percentage of the Company’s assets to be allocated, directly or indirectly, to any single Advisor, group of Advisors, Investment Fund, or Investment Sector, or with respect to the number of Investment Funds and Advisors to which, directly or indirectly, assets of the Company are allocated at any time. The percentage of the Company’s assets to be allocated to any single Advisor, group of Advisors, Investment Fund or Investment Sector, and the number of Investment Funds and Advisors to which the Company allocates assets from time to time will be determined by the Managing Member in its sole discretion, based on factors deemed relevant by the Managing Member at the time of such allocation, which may include the amount of the Company’s assets under management, constraints on the capital capacity of the Investment Funds and Advisors, the availability of attractive opportunities, and other portfolio construction and portfolio management considerations.
The Company invests in the Investment Funds, and may from time to time redeem its membership units of the Investment Funds. Neither the GFS Trust nor GRV provide investors with a voluntary redemption right. The Investment Funds, in turn, maintain relationships with counterparties that include the Advisors. These relationships could result in concentrations of credit risk. Credit risk arises from the potential inability of counterparties to perform their obligations under the terms of the contract, including, in the case of the Company’s investments in the Investment Funds, the potential inability of an Investment Fund to satisfy its redemption obligations. The managing member of the Investment Funds (currently, the Managing Member) has formal credit-review policies to monitor counterparty risk.
In addition to market risk and credit risk, the Managing Member, including in its capacity as managing member of the Investment Funds, allocates resources to mitigate operational risk. Operational risk is the potential for loss caused by a deficiency in information, communication, transaction processing, settlement and accounting systems. The Managing Member, including in its capacity as managing member of the Investment Funds, maintains controls and procedures for the purpose of mitigating its own operational risk but it does not have control over the systems of the Advisors. In addition, the Managing Member, including in its capacity as managing member of the Investment Funds, deploys resources to assess control systems, legal risk, compliance risk, operations and treasury risk, credit risk, accounting risk and reputational risk.
Fraud and other business risks cannot be eliminated; however, the Managing Member, including in its capacity as managing member of the Investment Funds, seeks to significantly reduce such risks. The portfolio risk management process includes an effort to monitor and manage risk, but should not be confused with and does not imply low risk. There can be no assurance that the Managing Member, including in its capacity as managing member of the Investment Funds, will be able to implement its risk guidelines or that its risk monitoring strategies will be successful.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For the Company’s financial statements, see the Financial Statements beginning on page of this Annual Report.
The following is a summary of unaudited quarterly results of operations of the Company for the period from January 1, 2010 to December 31, 2011.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in, or disagreements with, accountants on accounting and financial disclosure.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, an evaluation was carried out by the Managing Member’s management, with the participation of its principal executive officer and principal financial officer (or persons performing similar functions), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, the Company’s principal executive officer and principal financial officer (or persons performing similar functions) concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
Management’s Report on Internal Control over Financial Reporting
The management of the Managing Member of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act, as a process designed by, or under the supervision of, the Managing Member’s principal executive and principal financial officers (or persons performing similar functions) and effected by the management of the Managing Member, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for the Company for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
•
provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The management of the Managing Member assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011. In making this assessment, the Managing Member used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on this assessment, the management of the Managing Member believes that, as of December 31, 2011, the Company’s internal control over financial reporting is effective based on those criteria.
This Annual Report does not include an Attestation Report of the Company’s registered public accounting firm regarding internal control over financial reporting. The report of management of the Managing Member was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only the Managing Member’s management’s report in this Annual Report.
Changes in Internal Control Over Financial Reporting
In addition, no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the fourth quarter of the Company’s fiscal year ended December 31, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE MANAGING MEMBER AND REGISTRANT AND CORPORATE GOVERNANCE
The Company currently has a board of directors but no executive officers. The Managing Member is, and has historically been, responsible for the management and operations of the Company. Information about the Managing Member and the GS Group appears in ITEM 1. See ITEM 1. “BUSINESS-MANAGING MEMBER”. On April 1, 2009, the Managing Member established a board of directors of the Company (the “Board of Directors”) to supervise the affairs of the Company in lieu of the supervision previously provided by the board of directors of the Managing Member. The Managing Member, through its executive officers who have responsibility for the Company, currently is and will continue to be responsible for the operations of the Company. The following table sets forth the executive officers of the Managing Member who have responsibility for the Company and the directors of the Company.
Information about the executive officers of the Managing Member and the directors of the Company is provided below.
Kent A. Clark is a Managing Director of Goldman Sachs and Chairman of the Investment Committee of the Managing Member. Mr. Clark is also the Chief Investment Officer of the Managing Member, and performs the responsibilities of principal executive officer of the Managing Member. Mr. Clark joined GSAM in 1992 as a member of the Quantitative Equity team, where he managed Global Equity portfolios and equity market neutral trading strategies. In this capacity, he also developed risk and return models. Mr. Clark’s research has been published in the Journal of Financial and Quantitative Analysis and in Enhanced Indexing. Mr. Clark serves on the Board of Governors of the Graduate Faculty at the New School University, on the board of the Managed Funds Association, and is a member of the Chicago Quantitative Alliance. Formerly, he was president of the Society of Quantitative Analysts. Mr. Clark joined Goldman Sachs from the University of Chicago Graduate School of Business where he completed all but dissertation in the Ph.D. program and earned an M.B.A. He holds a Bachelor of Commerce degree from the University of Calgary.
Helen A. Crowley is a Managing Director of Goldman Sachs and is the Chief Financial Officer and Director of the Managing Member. Ms. Crowley is also the chief financial officer and chief operating officer of the Global Manager Strategies business within the Alternative Investments & Manager Selection Group. In this capacity, she is responsible for the overall infrastructure and administration of the businesses globally. Previously, Ms. Crowley was a member of the Hedge Fund Strategies product management team, where she focused on client implementation, client reporting and other strategic initiatives. Prior to that, she held various roles within the Investment Management Division and as a senior project manager in the Compliance Division. Ms. Crowley first joined Goldman Sachs in 1998 as a vice president and senior project manager in the Operations Division. She returned to the firm in 2003 as a vice president in the Compliance Division after working at Morgan Stanley as an executive director and global marketing head for the Private Wealth Management Group. Ms. Crowley was named managing director in 2010. Prior to joining the firm in 1998, Ms. Crowley worked at Christie’s Auction House as head of business development and client marketing. Ms. Crowley earned a B.A. in Art History from the College of the Holy Cross and an M.B.A. from Columbia University.
Westley D. Chapman is a Managing Director of Goldman Sachs and Head of Quantitative, Operational & Business Due Diligence of the Managing Member. Prior to joining the Managing Member, Mr. Chapman was the Chief Financial Officer of the Investment Management Division where he led the division’s financial management processes, including a strategic review of the infrastructure systems and processes supporting the Managing Member. Prior to joining GSAM in 1997, Mr. Chapman was the Director of Financial Planning & Analysis at Travelers Group, focusing on their life insurance businesses, where he participated in the integration
and evaluation of business acquisitions. Prior to joining Travelers Group in 1994, Mr. Chapman supported IBM as an auditor at Price Waterhouse where he led elements of the annual audit, performed control reviews of various Corporate Treasury systems and processes, and participated in a number of consulting projects. He obtained an M.B.A. in Finance from New York University in 1993 and a B.A. in Economics from Harvard College in 1989. Mr. Chapman is a Certified Public Accountant.
J. Christopher A. Kojima has been a director of the Company since April 1, 2009. Mr. Kojima is a Managing Director of Goldman Sachs and co-head of the Alternative Investments and Manager Selection businesses, which oversees the Private Equity Group, Hedge Fund Strategies Group, Global Manager Strategies Group and Portfolio Solutions Group. Previously, Mr. Kojima was the co-head of the Private Equity Group focusing on the private equity secondary market. Prior to joining the Private Equity Group, Mr. Kojima specialized in leveraged buyouts in the Leveraged Finance Group. Mr. Kojima joined Goldman Sachs in 1995 in the Investment Banking Division. Mr. Kojima is a trustee of The Juilliard School and The Asian Cultural Council, and serves as adjunct professor at Columbia Business School. Mr. Kojima earned a JD, cum laude, from Harvard Law School and is a member of the New York Bar. Mr. Kojima received an M.Phil. from The University of Cambridge, and a B.Comm. from The University of Manitoba.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires the officers and directors of the Managing Member and persons who own more than ten percent of the Company’s units to file forms reporting their affiliation with the Company and reports of ownership and changes in ownership of the Company’s units with the SEC. These persons and entities are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. To the best of the Company’s knowledge, based solely on a review of the copies of such reports furnished to the Company, during the year ended December 31, 2011 all Section 16(a) filing requirements applicable to such persons and entities were complied with for such year.
Code of Ethics
The Managing Member has adopted a Code of Ethics for the Company that applies to the Board of Directors and the persons acting as chief executive officer and chief financial officer/chief accounting officer of the Company. A copy of the Company’s Code of Ethics was filed as an exhibit to the Company’s Form 10-K for December 31, 2004. If the Company makes any substantive amendments to the Code of Ethics or grants any waiver, including an implicit waiver, from a provision of the Code of Ethics as applicable to the persons acting as chief executive officer and chief financial officer/chief accounting officer of the Company, the Company will disclose the nature of such amendment or waiver in a report on Form 8-K. In addition, the Managing Member has adopted a Code of Ethics for the Managing Member that applies to, among others, the chief executive officer and chief financial officer/chief accounting officer of the Managing Member. A copy of the Managing Member’s Amended Code of Ethics was filed as an exhibit to the Company’s Form 10-K for the year ended December 31, 2006.
Corporate Governance
Nominating Committee and Compensation Committee
The Company is not a “listed issuer” as defined under Section 10A-3 of the Exchange Act and is therefore not required to have a nominating and compensation committee comprised of independent directors. The Company currently does not have a standing nominating or compensation committee and accordingly there are no charters for such committees. The Board of Directors believes that standing committees are not necessary and that the directors of the Board of Directors collectively have the requisite background, experience, and knowledge to fulfill any limited duties and obligations that a nomination committee and a compensation committee would have on behalf of the Company. In addition, no direct compensation is paid to any employees of the Company making a compensation committee not applicable. Furthermore, the Board of Directors has the power to engage experts or consultants as it deems appropriate to carry out its responsibilities.
Audit Committee and Audit Committee Financial Expert
The Company is not a “listed issuer” as defined under Section 10A-3 of the Exchange Act and is therefore not required to have an audit committee comprised of independent directors. The Company currently does not
have an audit committee, and accordingly there is no charter for such committee, and the Board of Directors, which performs the functions of an audit committee on behalf of the Company, believes that the directors of the Company collectively have the requisite financial background, experience, and knowledge to fulfill the duties and obligations that an audit committee would have including overseeing the Company’s accounting and financial reporting practices. Therefore, the Board of Directors does not believe that it is necessary at this time to search for a person who would qualify as an audit committee financial expert. Furthermore, the Board of Directors has the power to engage experts or consultants as it deems appropriate to carry out its responsibilities.
The Board of Directors has:
•
reviewed and discussed the financial statements with management of the Managing Member responsible for the management and operations of the Company;
•
discussed with the independent auditors the matters required to be discussed by the Statement of Auditing Standards No. 114, as amended, as adopted by the Public Company Accounting Oversight Board in Rule 3200T;
•
received the written disclosures and the letters from the independent accountants required by the Public Company Accounting Oversight Board in Rule 3526, and has discussed with the independent accountant, the independent accountant’s independence; and based on the review and discussions referred to above, the Board of Directors recommended that the audited financial statements be included in the Company’s Annual Report for filing with the SEC.
Advisory Committee
In addition, pursuant to the Company’s LLC Agreement, the Managing Member is authorized to select one or more Members who are not affiliated with the Managing Member to serve on a committee, the purpose of which would be to, on behalf of the Members, approve or disapprove, to the extent required by applicable law, principal transactions and certain other related party transactions.
Board Meetings and Committees; Annual Meeting Attendance; Shareholder Communications
The Board of Directors is responsible for the management and operations of the Company. In 2011, the Board of Directors met frequently, including at regularly scheduled quarterly meetings, with employees of the Managing Member to discuss, among other things, the Company. As discussed above, the Company does not have standing audit, nominating and compensation committees.
The Company does not have a policy with regard to board members’ attendance at annual meetings of Members. The Company does not hold director elections and therefore does not solicit proxies for the elections of directors from Members (or by written consent) and the Company is not required under Delaware law nor under its LLC Agreement to hold annual meetings for its Members. The Company did not hold an annual meeting for Members in 2011 and accordingly no members of the Board of Directors attended.
Members wishing to communicate with the Board of Directors may send communications to Ms. Kristin Olson, Goldman, Sachs & Co., 200 West Street, New York, New York 10282 who will forward all appropriate communications directly to the Board of Directors or to any individual director or directors, depending upon the facts and circumstances outlined in the communication. In addition, Members have the opportunity to receive the Company’s monthly report to Members which provides for information as to how Members can contact a designated contact person at the Managing Member with any questions relating to the Member’s investment in the Company and the Company’s performance. Moreover, the Memorandum provides for contact information for Members relating to their investment in the Company. The Managing Member believes that it is not necessary to have a more specific and detailed process and that providing contact information for the Managing Member provides for an appropriate means for communication for Members with the Board of Directors or with respect to their investment in the Company.
ITEM 11. EXECUTIVE COMPENSATION
The Company does not bear the costs of the annual compensation of its directors or the executive officers of the Managing Member. The Managing Member and its affiliates receive compensation from the Company for
services provided to the Company and will not bear costs for the Company’s directors. Set forth below are the amounts of the different types of fees paid or payable by the Company, or allocable to the Managing Member and its affiliates during the year ended December 31, 2011. Information about the terms and conditions of the Management Fee and the Incentive Allocation and other fees and expenses appear in ITEM 1. See ITEM 1. “BUSINESS-FEES, EXPENSES AND ALLOCATIONS”.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners
To the knowledge of the Company, no person beneficially owns more than five percent of the units.
Security Ownership of Management
HFS, the Managing Member of the Company, did not have a beneficial interest in the Company as of December 31, 2011 other than the Incentive Allocation and other fees payable to it by the Company.
The following table sets forth (i) the individual directors and executive officers of the Managing Member and the directors of the Company and (ii) all of the directors and executive officers as a group who beneficially owned units of the Company as of March 28, 2012.
Changes in Control
There are no arrangements, including pledges by any person of units of the Company, the operation of which may at a subsequent date result in a change of control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The Managing Member is an advisory affiliate of Goldman Sachs. Each of the Managing Member, Goldman Sachs and GSAM is a wholly owned subsidiary of The Goldman Sachs Group, Inc. See ITEM 1. “BUSINESS-POTENTIAL CONFLICTS OF INTEREST”.
The Managing Member also manages a number of other investment funds that have investment programs that are similar to those of the Company. See ITEM 1. “BUSINESS-POTENTIAL CONFLICTS OF INTEREST”.
From time to time certain qualified officers and employees of the GS Group may invest in the Company. Neither the Investment Funds’ Advisors nor any of their respective principals are presently expected to purchase units or membership units in the Investment Funds. See ITEM 1. “BUSINESS-POTENTIAL CONFLICTS OF INTEREST”.
The Company may from time to time, in the sole discretion of the Managing Member, invest in money market funds sponsored, managed or advised by the GS Group, and the Company will not be reimbursed for any fees accruing to any affiliate of the GS Group in respect of any such investment. See ITEM 1. “BUSINESS-INVESTMENT PROGRAM-Investment Objective and Strategy”.
The Company pays the Managing Member a Management Fee. See ITEM 1. “BUSINESS-FEES, EXPENSES AND ALLOCATIONS”.
Some of the directors of the Company and executive officers of the Managing Member also are or may become directors and executive officers of Goldman Sachs which entities provided services for the Company, other than as an underwriter, during the year ended December 31, 2011 and are proposed to provide such services in the current year.
No directors of the Company and executive officers of the Managing Member, their spouses and entities owned or controlled by them invested an amount in excess of $120,000 in the Company during the year ended December 31, 2011. Certain directors of the Company and executive officers of the Managing Member, including their spouses and entities owned or controlled by them, may from time to time invest in the Company. In addition, certain of the directors of the Company and executive officers of the Managing Member from time to time invest their personal funds directly in other funds managed by the GS Group on the same terms and conditions as the other investors in these funds, who are not directors, executive officers or employees.
Under the Company’s Related Party Transaction Policy, which is a written policy adopted as of March 28, 2007, the Board of Directors is required to review all related party transactions for potential conflicts of interest. The Board of Directors shall approve each such transaction if it is consistent with the policy and is on terms, taken as a whole, which the Board of Directors believes are no less favorable to the Company than could be obtained in an arms-length transaction with an unrelated third party, unless the Board of Directors otherwise determines that the transaction is not in the Company’s best interests. The policy also provides for a ratification process if it is not practical for the Board of Directors to review the transaction in advance.
The types of related party transactions covered by the policy are those that are required to be disclosed pursuant to SEC Regulation S-K, Item 404(a). There were no transactions required to be reported under Item 404(a) since the beginning of the Company’s fiscal year where the Company’s procedures and policies did not require review or were not followed.
Pursuant to the LLC Agreement, the Managing Member is authorized by the Members to select on behalf of the Members one or more Members who are not affiliated with the Managing Member to serve on a committee, the purpose of which will be to consider and, on behalf of the Members, approve or disapprove, to the extent required by the applicable law, principal transactions and certain other related party transactions.
Director Independence
The Company is not a “listed issuer” as defined under Section 10A-3 of the Exchange Act and is therefore not subject to a requirement that a majority of the board of directors be independent. The Managing Member is responsible for the management and operations of the Company. All of the directors of the Company are employees of Goldman Sachs and the Managing Member. Accordingly, under the Independence Test of the Corporate Governance Standards of the New York Stock Exchange and other comparable stock exchange standards, none of the directors of the Company are independent. Similarly, as discussed further under Item 10, the Company is not subject to the requirements under the Corporate Governance Standards of the New York Stock Exchange that the audit, nominating and compensation committees be comprised of independent directors and the Company is not expected to have separately designated audit, nominating and compensation committees.
Brokerage
The Advisors, managing Investment Fund assets directly or through Managed Accounts and certain Alternative Investments will have the authority to select brokers and dealers from a list approved by the managing member of the Investment Funds, through which to effect transactions on the basis of various factors. The managing member of the Investment Funds requires such Advisors to select executing brokers on a best execution basis, taking into consideration such factors as price, commissions and commission equivalents, other transaction costs, quality of brokerage services, creditworthiness, financial stability, financial responsibility, strength and clearance and settlement capability. The Company does not have oversight over broker and dealer selection by Investment Funds.
To the extent permitted under applicable law, the Advisors may, in their sole discretion, execute transactions on behalf of the Company and the Investment Funds, through Managed Accounts or on behalf of Advisor Funds, and with or through Goldman Sachs, and such transactions may, in some cases, be executed together with transactions on behalf of Goldman Sachs. The Advisors may also use Goldman Sachs for prime brokerage and other services for the Company and Advisor Funds, as well as their other clients.
Additionally, in selecting brokers and dealers to execute transactions for any Advisor Fund, or for the Company or an Investment Fund through any Managed Account, certain of the Advisors may consider products or services provided, or expenses paid, by such brokers and dealers to, or on behalf of, such Advisors. Products and services generally include research items. In some circumstances, the commissions paid on transactions with brokers or dealers providing such services may exceed the amount another broker would have charged for effecting that transaction. “Soft dollar” payments or rebates of amounts paid to brokers and dealers may arise from exchange traded agency transactions, as well as over-the-counter principal transactions. In addition, such payments or rebates may be made by futures brokers in connection with futures transactions.
Research or other services obtained in this manner may be used in servicing any or all advisory clients of the Advisors, including the Investment Funds and the Advisor Funds, and may be used in connection with advisory accounts other than those that pay commissions to the broker or dealer relating to the research or other service arrangements.
GS Group may also receive products or services, including research, from brokers and dealers that provide brokerage services to its clients. The brokers and dealers providing such products and services may include the brokers and dealers that Advisors select to execute transactions on behalf of Advisor Funds, and the Company or an Investment Fund through Managed Accounts. Research products and services made available to GS Group through such brokers and dealers may include: performance and other qualitative and quantitative data relating to Advisors in general and certain Advisors in particular; data relating to the historic performance of categories of securities associated with particular investment styles; quotation equipment; and related computer hardware and software, all of which research products and services may be used by the Managing Member in connection with its selection and monitoring of Advisors, the portfolio design of a mix of investment styles appropriate to investment objectives of clients, and the determination of overall portfolio strategies including asset allocation models.
Placement Agent
Goldman Sachs acts as the Placement Agent for the Company. The Placement Agent may receive compensation (the “Placement Fee”) from the Managing Member that represents a portion of the Management Fee or the Incentive Allocation. The Placement Agent, from time to time in its sole discretion, may enter into sub-placement agreements with affiliates and unaffiliated third parties, and the Company may engage one or more affiliated or unaffiliated successors or additional placement agents or distributors, in each case including without limitation Goldman Sachs and unaffiliated entities, registered broker-dealers and trust companies and others, on such terms as the Managing Member or the Placement Agent may determine, in their sole discretion. At the sole discretion of the Placement Agent, all or a portion of the Placement Fee may be allocated to such sub-placement agents. The Managing Member or the Company may also pay certain expenses of the Placement Agent and fees and expenses of other dealers and other financial intermediaries (“Intermediaries”).
In connection with the retention of any such affiliated or unaffiliated placement agents, sub-placement agents or distributors, the Company may, in the sole discretion of the Managing Member, and without notice to the Members, issue one or more additional classes of units, including classes that are subject to higher fee and compensation arrangements than those of the classes of units being offered hereby or any class of units then outstanding. The placement fee in respect of any such class of units may be paid by the Managing Member out of the Management Fee or the Incentive Allocation in respect of such class of units, by the holders of such class of units pursuant to an agreement between such holders and the placement agent, or by the Company, in which case the Company, in its sole discretion, will make appropriate adjustments to the NAV of each class of units to ensure that any such placement fee is borne directly or indirectly only by holders of the class of units to which such placement fee relates. In the future, certain investors may enter into arrangements pursuant to which such investors bear a portion of the Placement Fee, which may be paid out of the assets of the Company and specially charged to the accounts of the applicable investors.
Subject to applicable law, the Placement Agents and Intermediaries, at their discretion (with the approval of the Managing Member) may on a negotiated basis enter into private arrangements with a Member (or an agent thereof) under which a Placement Agent, an Intermediary or the Managing Member makes payments to or for the benefit of such Member which represent a rebate of all or part of the fees paid by the Company to the Managing Member in respect of such holder’s units. Consequently, the effective net fees payable by a Member who is entitled to receive a rebate under the arrangements described above may be lower than the fees payable by a Member who does not participate in such arrangements. Such arrangements reflect terms privately agreed between parties other than the Company, and for the avoidance of doubt, the Company cannot, and is under no duty to, enforce equality of treatment between Members by other entities, including those service providers of the Company that it has appointed. The Placement Agent, an Intermediary or the Managing Member will be under no obligation to make arrangements available on equal terms to other Members.
Pursuant to an agreement entered into between the Placement Agent and the Fund (the “Placement Agent Agreement”), the Company has agreed to indemnify and hold harmless the Placement Agent, its affiliates and any agent against any losses, claims, damages or liabilities (or actions in respect thereof), joint or several (the “Covered Claims”), to which the Placement Agent may become subject, to the extent such Covered Claims arise out of or are based upon (i) an untrue statement or alleged untrue statement of a material fact contained in the Memorandum, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading. The Placement Agent Agreement provides that the Company will reimburse the Placement Agent for any legal or other expenses reasonably incurred by the Placement Agent in connection with investigating or defending any such Covered Claims; provided, however, that the Company will not be liable to indemnify or reimburse the Placement Agent in any such case to the extent that any such Covered Claims arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Memorandum in reliance upon and in conformity with written information furnished to the Company by the Placement Agent expressly for use therein.
In addition, to the extent the indemnification provisions described in the preceding paragraph are unavailable or insufficient to hold harmless an indemnified party with respect to any Covered Claims, the Placement Agent Agreement specifies that the Company will contribute to the amount paid or payable by such indemnified party as a result of such Covered Claims in such proportion as is appropriate to reflect the relative benefits received by the Company and the Placement Agent from the offering of the units, unless otherwise provided by applicable law or the Placement Agent Agreement.
Goldman Sachs also acts as the placement agent to the Investment Funds on similar terms as those described above. The Company will not be charged any placement fee by the Investment Funds.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table presents fees for the professional audit services rendered by E&Y for the audit of the Company’s annual financial statements for the years ended December 31, 2011 and 2010 and fees billed for other services rendered by E&Y during those periods.
(1) Tax services primarily involve assistance with the preparation of tax returns and K-1s. The change in tax fees relates to a scope increase for tax preparation work in new states.
(2) Other Fees primarily involve assistance with the Company’s regulatory filings in connection with XBRL requirements.
The Board of Directors does not have an audit committee which is responsible for the oversight of the Company’s accounting and financial reporting practices. As the Company does not have a formal audit committee, the services described above were not approved by the audit committee and the Company does not have audit committee pre-approval policies and procedures. The Board of Directors as a whole is responsible for the oversight of the Company’s accounting and financial reporting practices and the Board of Directors is responsible for approving every engagement of E&Y to perform audit or non-audit services for the Company before E&Y is engaged to provide those services. The Board of Directors considers whether the provision of any non-audit provisions is compatible with maintaining E&Y’s independence.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents Filed as Part of this Annual Report:
1. Financial Statements.
2. Financial Statement Schedules.
Certain schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
3. List of Exhibits.
See Index of Exhibits included on page E-1.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
(Registrant)
By: Goldman Sachs Hedge Fund Strategies LLC Managing Member
By:
/S/ HELEN A. CROWLEY
Name: Helen A. Crowley
Title: Managing Director and Principal Financial Officer
Date: March 28, 2012
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
INDEX OF EXHIBITS
* Previously filed
E-1
INDEX OF FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
The Board of Directors and Members
Goldman Sachs Hedge Fund Partners, LLC
We have audited the accompanying balance sheets, including the schedules of investments, of Goldman Sachs Hedge Fund Partners, LLC (the “Company”) as of December 31, 2011 and 2010, and the related statements of operations, changes in members’ equity and cash flows for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Goldman Sachs Hedge Fund Partners, LLC at December 31, 2011 and 2010, the results of its operations, the changes in its members’ equity and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
New York, New York
March 28, 2012
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
Schedule of Investments
December 31, 2011 and December 31, 2010
The Company’s aggregate proportionate share of the following underlying investments of the Investees represented greater than 5% of the Company’s members’ equity at December 31, 2011 and December 31, 2010.
(1) Members’ equity, used in the calculation of the fair value of each of the investees and the underlying investment as a percentage of members’ equity, is reduced for member redemptions that are paid after the balance sheet date according to Statement of Financial Accounting Standards ASC 480, “Distinguishing Liabilities from Equity.” Member redemptions are included in Redemptions payable in the Balance Sheet. Excluding Redemptions payable, total investments would represent 94.72% and 95.63% of members’ equity at December 31, 2011 and December 31, 2010, respectively.
(2) Affiliated investment fund with a monthly liquidity term.
See accompanying notes.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
BALANCE SHEET
December 31, 2011 and December 31, 2010
(1) Refer to Note 9 for units outstanding and NAV per unit amounts by series.
See accompanying notes.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
STATEMENT OF OPERATIONS
For the years ended December 31, 2011, 2010 and 2009
See accompanying notes.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
STATEMENT OF CHANGES IN MEMBERS’ EQUITY
For the years ended December 31, 2011, 2010 and 2009
See accompanying notes.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
STATEMENT OF CASH FLOWS
For the years ended December 31, 2011, 2010 and 2009
See accompanying notes.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
NOTES TO FINANCIAL STATEMENTS
December 31, 2011
Note 1 - Organization
Goldman Sachs Hedge Fund Partners, LLC (the “Company”) was organized as a limited liability company, pursuant to the laws of the State of Delaware, and commenced operations on April 1, 2002 for the principal purpose of investing in the equity long/short, event driven, relative value and tactical trading hedge fund sectors (the “Investment Sectors”). Currently, substantially all of the Company’s assets are allocated to Goldman Sachs Global Equity Long/Short, LLC (“GELS”), Goldman Sachs Global Fundamental Strategies, LLC (“GFS”) and Goldman Sachs Global Tactical Trading, LLC (“GTT”) (collectively, the “Investment Funds”). The balance of the Company’s assets are invested in Goldman Sachs Global Fundamental Strategies Asset Trust (the “GFS Trust”), Goldman Sachs Global Relative Value, LLC (“GRV”) and Goldman Sachs HFP Opportunistic Fund, LLC (“HFPO” and, together with the GFS Trust, GRV and the Investment Funds, the “Investees”). Each of these Investees invests indirectly through investment vehicles (“Advisor Funds”) managed by such trading advisors (the “Advisors”). In addition, the Company may, directly or indirectly, allocate assets to Advisors whose principal investment strategies are not within one of the Investment Sectors. Goldman Sachs Hedge Fund Strategies LLC (“HFS”), a wholly-owned subsidiary of The Goldman Sachs Group, Inc., is the managing member (the “Managing Member”) and commodity pool operator of the Company and a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended. SEI Global Services, Inc. (“SEI”) serves as administrator of the Company.
Note 2 - Significant accounting policies
Basis of presentation
The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and are expressed in United States dollars.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
Fair value of investments
The Company is an investment company for financial reporting purposes and accordingly carries its investments at fair value. The carrying value of the Company’s assets and liabilities not recorded at fair value that qualify as financial instruments approximates fair value.
Realized and unrealized gain/(loss) on investments in affiliated Investees
Realized and unrealized gain/(loss) on investments in affiliated Investees includes the change in fair value of each Investee. Fair values are determined utilizing net asset value (“NAV”) information supplied by each individual Investee, which includes realized and unrealized gains/(losses) on underlying investments of the Investees as well as management fees and incentive fees charged by the Advisors, administration fees and all other income/expenses of the Investees. See “Note 3-Investments in affiliated Investees” for further information.
Cash and cash equivalents
Cash and cash equivalents consist of deposits held at banks or money market funds. Cash equivalents, consisting of investments in money market funds, are held at financial institutions to which the Company is exposed to credit risk. Money market funds are valued at net asset value per share.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2011
Note 2 - Significant accounting policies (continued)
Allocation of net income/(loss)
Net income/(loss) is allocated monthly to the capital account of each member in the ratio that the balance of each member’s capital account bears to the total balance of all members’ capital accounts. The Managing Member earns an annual incentive allocation equal to 5.0% of any new net appreciation in the NAV of each series. Any net depreciation in the NAV of a series for a fiscal year must be recouped prior to the Managing Member earning an incentive allocation in future years.
Subscriptions and redemptions
Subscriptions to the Company can be made as of the first day of each calendar month or at the sole discretion of the Managing Member. Redemptions from the Company can be made at the end of each calendar quarter, upon 91 days prior written notice after a twelve-month holding period or at such other times as determined in the sole discretion of the Managing Member, as provided for in the Company’s limited liability company agreement.
Income taxes
The Company is taxed as a partnership for U.S. federal income tax purposes. The members include their distributive share of the Company’s taxable income or loss on their respective income tax returns. Accordingly, no U.S. federal income tax liability or expense has been recorded in the financial statements of the Company.
The Managing Member has reviewed the Company’s tax positions for the open tax years by major jurisdictions and has concluded that no provision for taxes is required in the Company’s financial statements. Such open tax years vary by jurisdiction and remain subject to examination by the foreign taxing authorities. The tax liability is also subject to ongoing interpretation of laws by taxing authorities.
Recent accounting pronouncements
Improving Disclosures about Fair Value Measurements (Accounting Standards Codification (“ASC”) 820). In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820)-Improving Disclosures about Fair Value Measurements.” ASU No. 2010-06 provides amended disclosure requirements related to fair value measurements. Certain disclosure requirements of ASU No. 2010-06 were effective for the Company beginning in the first quarter of 2010, while other disclosure requirements of the ASU are effective for financial statements issued for reporting periods beginning after December 15, 2010. Since these amended principles require only additional disclosures concerning fair value measurements, adoption did not affect the Company’s financial condition, results of operations or cash flows.
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”) (FASB ASC 820). In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurements and Disclosures (Topic 820)-Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” ASU No. 2011-04 clarifies the application of existing fair value measurement and disclosure requirements, changes certain principles related to measuring fair value, and requires additional disclosures about fair value measurements. ASU No. 2011-04 is effective for periods beginning after December 15, 2011. The adoption of ASU No. 2011-04 will not materially affect the Company’s financial condition, results of operations, or cash flows.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2011
Note 3 - Investments in affiliated Investees
The Investees seek capital appreciation over time by investing primarily within one of the following Investment Sectors: the equity long/short sector, the event driven sector, the relative value sector and the tactical trading sector. The Company’s investments in affiliated Investees are subject to the terms and conditions of the operating agreements of the respective affiliated Investees. The investments in affiliated Investees are carried at fair value. Fair values are determined utilizing NAV information supplied by each individual affiliated Investee. HFS is the managing member of each of the affiliated Investees. HFS does not charge the Company any management fee or incentive allocation at the Investee level. Realized gains/(losses) on the redemption of investments in affiliated Investees are calculated using the specific identification cost method.
Performance of the Company in any period will be dependent upon the performance in the relevant period by the affiliated Investees and the weighted average percentage of the Company’s assets in each of the affiliated Investees during the period. In addition, performance is determined by the Investment Funds’ asset allocation with the various Advisors and the performance of each of their Advisor Funds and interests held by the GFS Trust, GRV and HFPO. NAVs received by the Investees from, or on behalf of, the Advisor Funds are based on the fair value of the Advisor Funds’ underlying investments in accordance with policies established by each Advisor Fund. HFS, in its capacity as managing member of the Company, performs additional procedures including Advisor due diligence reviews and analytical procedures with respect to the NAV provided by the Advisors to ensure conformity with U.S. GAAP. The Managing Member has assessed factors including, but not limited to, Advisors’ compliance with U.S. GAAP applicable to fair value measurements and disclosures, price transparency and valuation procedures in place. NAV provided by the Advisors may differ from the audited values received subsequent to the date of the Company’s NAV determination. In such cases, the Company will evaluate the materiality of any such differences.
The following table summarizes the cost of the Company’s investments in the affiliated Investees at December 31, 2011 and December 31, 2010:
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2011
Note 3 - Investments in affiliated Investees (continued)
The following table summarizes the Company’s realized and unrealized gain/(loss) on investments in affiliated Investees for the years ended December 31, 2011, 2010 and 2009:
(1) Redemptions can be made quarterly with 61 days’ notice, or at the sole discretion of the Managing Member.
(2) Redemptions can be made quarterly on or after the first anniversary of the initial purchase of the units with at least 91 days’ notice, or at the sole discretion of the Managing Member.
(3) The GFS Trust does not provide investors with a voluntary redemption right. Pursuant to the terms of the trust agreement for the GFS Trust, distributions will be made to holders of interests in the GFS Trust as the GFS Trust receives proceeds in respect of its underlying investments. The estimated remaining holding period of its remaining underlying investments range from one to five years.
(4) GRV ceased its trading activities effective on July 1, 2009, and will dissolve at the time all assets are liquidated, liabilities are satisfied and liquidation proceeds are distributed through payment of a liquidating distribution. GRV suspended redemptions pending the completion of the liquidation proceedings. The estimated remaining holding period of its remaining underlying investments range from one to five years.
(5) Redemptions can be made quarterly with 60 days’ notice, or at the sole discretion of the Managing Member.
(6) HFPO’s current holdings consist solely of one illiquid investment in an Advisor Fund, which cannot be redeemed until the relevant Advisor liquidates such investment. The estimated remaining holding period of the illiquid investment is approximately five years.
The investment strategy for each Investee is as follows:
Goldman Sachs Global Equity Long/Short, LLC
GELS seeks risk-adjusted absolute returns with volatility lower than the broad equity markets, primarily through long and short investment opportunities in the global equity markets. Strategies generally involve making long and short equity investments, often based on the Advisor’s assessment of fundamental value compared to market price, although Advisors employ a wide range of styles. Strategies that may be utilized in the equity long/short sector include catalyst-activist, consumer, diversified, energy, growth, long-bias, real estate, multi-strategy, short-term trading and value. Other strategies may be employed as well.
Goldman Sachs Global Fundamental Strategies, LLC
GFS seeks risk-adjusted absolute returns with volatility and correlation lower than the broad equity markets by allocating assets to Advisors that operate primarily in the global event driven sector. Event driven strategies seek to identify security price changes resulting from corporate events such as restructurings, mergers, takeovers,
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2011
Note 3 - Investments in affiliated Investees (continued)
spin-offs, and other special situations. Corporate event arbitrageurs generally choose their investments based on their perceptions of the likelihood that the event or transaction will occur, the amount of time that the process will take, and the perceived ratio of return to risk. Strategies that may be utilized in the event driven sector include catalyst-activist, merger arbitrage/special situations, credit opportunities/distressed securities and multi-strategy investing. Other strategies may be employed as well.
Goldman Sachs Global Fundamental Strategies Asset Trust
HFS, the managing member of GFS, created the GFS Trust, a Delaware statutory trust, for the benefit of its investors, including the Company. Goldman Sachs Trust Company, a Delaware Corporation, is the trustee of the GFS Trust (the “Trustee”). The Trustee appointed HFS as the “Special Assets Direction Advisor,” responsible for, among other duties, disposition of GFS Trust assets. On March 31, 2009, GFS transferred to the GFS Trust its interest in certain illiquid investments, including illiquid investments made by Advisor Funds, as well as liquidating vehicles that the Advisors formed as liquidity decreased for previously liquid investments, such as certain credit instruments. GFS transferred to the GFS Trust the economic risks and benefits of its interests in such assets. In connection with such transfer, each investor in GFS, including the Company, was issued its pro-rata share of GFS Trust interests based on its ownership in GFS as of the transfer date. Distributions from the GFS Trust in respect of GFS Trust interests will be made to holders of GFS Trust interests, including the Company, as amounts in respect of the assets transferred to the GFS Trust are received from the Advisors. However, the actual timing of these distributions will be dependent on the Advisors’ ability to liquidate positions as market conditions allow, and it could be a significant period of time before such positions are realized or disposed of.
Goldman Sachs Global Relative Value, LLC
GRV ceased its trading activities effective July 1, 2009 and will dissolve at the time all assets are liquidated, liabilities are satisfied and liquidation proceeds are distributed through payment of a liquidating distribution. Investors in GRV (including the Company) will receive proceeds from the liquidation over time as GRV receives redemption proceeds from Advisor Funds.
Goldman Sachs Global Tactical Trading, LLC
GTT seeks long-term risk-adjusted returns by allocating its assets to Advisors that employ strategies primarily within the tactical trading sector. Tactical trading strategies are directional trading strategies that generally fall into one of the following two categories: managed futures strategies and global macro strategies. Managed futures strategies involve trading in the global futures and currencies markets, generally using systematic or discretionary approaches. Global macro strategies generally utilize analysis of macroeconomic, geopolitical and financial conditions to develop views on country, regional or broader economic themes and then seek to capitalize on such views by trading in securities, commodities, interest rates, currencies and various financial instruments.
Goldman Sachs HFP Opportunistic Fund, LLC
HFPO’s investment objective is to make opportunistic investments in underlying Advisor Funds in order to (a) increase the weighting of a particular Advisor Fund which had a low weighting in the Company due to a lower target weight in one of the other Investees or (b) add an Advisor Fund that is not currently represented in any of the other Investees.
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2011
Note 3 - Investments in affiliated Investees (continued)
Management fees and incentive allocation/fees
HFS does not charge the Company any management fee or incentive allocation at the Investee level. The underlying Advisor Funds held by the Investees charge management and incentive allocation/fees to the Investees. The following table reflects the contractual weighted average Advisors’ management fee and incentive allocation/fee rates at the Investee level for the years ended December 31, 2011, 2010 and 2009. The weighted average is based on the period-end fair values of each investment in the Advisor Fund in proportion to the Investee’s total investments. The fee rates used are the contractual rates charged by each Advisor. The Advisors’ management fee and incentive allocation/fee are not paid to the Managing Member.
(1) The sole Advisor Fund within HFPO is illiquid and the Advisor has elected to forego the management and incentive fees.
Note 4 - Fair Value Measurements
The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The Company uses NAV as its measure of fair value for investments in Investees when (i) the fund investment does not have a readily determinable fair value and (ii) the NAV of the investment fund is calculated in a manner consistent with the measurement principles of investment company accounting, including measurement of the underlying investments at fair value. In evaluating the level at which the fair value measurements of the Company’s investments have been classified, the Company has assessed factors including, but not limited to, price transparency, the ability to redeem at NAV at the measurement date and the existence or absence of certain restrictions at the measurement date. The three levels of the fair value hierarchy are described below:
•
Level 1-Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
•
Level 2-Quoted prices in markets that are not active or financial instruments for which significant inputs are observable (including investments in Investees that can be redeemed at the measurement date or in the near-term at NAV), either directly or indirectly; and
•
Level 3-Prices or valuations that require significant unobservable inputs (including investments in Investees that will never have the ability to be voluntarily redeemed or are restricted from redemption for an uncertain or extended period of time from the measurement date).
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2011
Note 4 - Fair Value Measurements (continued)
The following tables set forth by level within the fair value hierarchy the Company’s assets and liabilities by investment strategy at fair value measured at December 31, 2011 and December 31, 2010:
Included in cash and cash equivalents on the Balance Sheet are investments in money market funds with a fair value of $28,339,424 and $29,919,410, which were classified as Level 1 assets as of December 31, 2011 and December 31, 2010, respectively.
The following table summarizes the changes in fair value of the Company’s Level 3 investments for the year ended December 31, 2011:
GOLDMAN SACHS HEDGE FUND PARTNERS, LLC
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2011
Note 4 - Fair Value Measurements (continued)
The following table summarizes the changes in fair value of the Company’s Level 3 investments for the year ended December 31, 2010:
Transfers into and out of Level 3 are effective as of actual date of the event or circumstances that caused the transfer. Transfers into Level 3 are due to HFPO’s sole investment in an Advisor Fund which implemented restrictions on redemptions during the year.
Note 5 - Fees
The Company incurs a monthly management fee paid in arrears to HFS equal to 1.25% per annum of the net assets of the Company as of each month-end.
Effective August 1, 2010, the Company incurs a monthly administration fee payable to SEI equal to one twelfth of 0.02% of the net assets of the Company as of each month end which is included in administration fee in the Statement of Operations. The Company also incurs an indirect monthly administration fee payable to SEI at the Investee level which is included in realized and unrealized gain/(loss) on investments in affiliated Investees in the Statement of Operations. For the years ended December 31, 2011, 2010 and 2009, the Company’s pro-rata indirect share of the administration fee charged at the Investee level totaled $270,250, $324,908 and $295,484, respectively.
Note 6 - Risk Management
The Investees’ investing activities and those of the Advisor Funds in which they invest expose the Company to various types of risks that are associated with the financial investments and markets in which the Investees and such Advisor Funds invest. In the ordinary course of business, HFS, in its capacity as Managing Member of the Company and the Investees, attempts to manage a variety of risks, including market, operational, liquidity and credit risk and attempts to identify, measure and monitor risk through various mechanisms including risk management strategies and credit policies. HFS monitors risk guidelines and diversifies exposures across a variety of instruments, markets and counterparties.
Item 1A